Business context and reporting period
Huntington Bancshares Incorporated is a regional bank holding company headquartered in Columbus, Ohio, operating 753 branches across six states and offering commercial and consumer banking, mortgage, auto finance, wealth, and related services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2014; comparisons below are to the third quarter or nine-month period of 2013 unless otherwise noted.
Financial performance and condition
| Metric | 2014 Q3 / September 30 | Comparison |
|---|---|---|
| Net income | $155.0 million; diluted EPS $0.18 | $178.8 million; diluted EPS $0.20 in Q3 2013 |
| Net interest income | $466.3 million GAAP; $473.8 million fully taxable-equivalent (FTE) | FTE increased 10% year over year |
| Net interest margin | 3.20% FTE | 3.34% in Q3 2013; 3.28% in Q2 2014 |
| Noninterest income | $247.3 million | Down 3% year over year |
| Noninterest expense | $480.3 million reported; $457.5 million adjusted | Reported up 13%; adjusted, excluding Significant Items, up 4% year over year |
| Credit costs | $24.5 million provision; $30.0 million net charge-offs (NCOs), or 0.26% annualized | NCOs down 46% year over year; provision up 115% |
| Assets and loans | Total assets $64.3 billion; loans and leases $46.7 billion | At year-end 2013: $59.5 billion and $43.1 billion, respectively |
| Deposits and allowance | Deposits $50.1 billion; allowance for credit losses (ACL) $686.5 million, 1.47% of loans | Deposits were $47.5 billion and ACL ratio 1.65% at year-end 2013 |
| Capital | Tier 1 common risk-based ratio 10.31%; Tier 1 risk-based ratio 11.61%; total risk-based ratio 13.72%; tangible common equity/tangible assets 8.35% | Tier 1 common ratio was 10.85% and tangible common equity ratio 9.00% a year earlier |
For the first nine months, net income was $468.8 million, down 3%; diluted EPS was $0.53 versus $0.54. FTE revenue rose 4% to $2.13 billion, while net interest margin averaged 3.25%, down from 3.38%. Mortgage banking income fell 31% for the nine months, principally due to lower refinancing and originations; noninterest expense rose 7% as reported and 2% excluding Significant Items.
Cash flows for the nine months included $629.2 million provided by operating activities, $3.53 billion used in investing activities, and $2.78 billion provided by financing activities. Cash and cash equivalents declined $121.3 million to $879.9 million. These consolidated cash-flow amounts reflect substantial loan and securities activity.
Material changes versus comparable periods
- Average earning assets increased 15% year over year to $58.7 billion, including 10% average loan growth and 38% average securities growth. This supported higher net interest income, but asset mix and yields compressed margin.
- Average core deposits grew 5% year over year. The company reported greater use of borrowings to fund balance-sheet growth; wholesale funding was $9.7 billion at quarter-end, up from $7.0 billion at year-end 2013.
- Q3 reported expenses included $19.3 million of franchise repositioning costs and $3.5 million of acquisition-related expense. Q3 2013 included $16.6 million of repositioning expense and a $33.9 million pension curtailment gain, complicating reported expense and earnings comparisons.
- Credit quality improved on several measures: Q3 NCOs declined to $30.0 million from $55.7 million, and the nonperforming asset ratio fell to 0.78% from 0.88% a year earlier. However, total nonperforming assets of $364.5 million were slightly above Q2, and commercial-and-industrial nonaccruals increased to $90.3 million from $75.3 million in Q2.
- Loans and leases increased 8% from year-end 2013, led by auto and C&I lending; the balance includes $559 million of loans acquired with Camco. Huntington acquired 24 Bank of America branches in Michigan in September, adding approximately $745 million of deposits.
Outlook, management commentary, risks and unusual items
- Management expected Q4 2014 net interest income to increase slightly as loans and securities grew, partly offset by continued margin pressure. Noninterest income, excluding net mortgage servicing rights (MSR) activity, was expected near Q3 levels; adjusted noninterest expense was also expected near the Q3 adjusted level.
- Management anticipated approximately $10 million of Q4 Significant Items for announced franchise repositioning, and reiterated its aim of positive operating leverage in 2014 and 2015. The expected effective tax rate for the remainder of 2014 was 25%–28%.
- Management expected asset quality to remain near current levels, with quarterly volatility possible, and NCOs within or below its long-term normalized range of 35–55 basis points. Q3’s annualized NCO rate was 26 basis points.
- Interest-rate exposure: management’s one-year net interest income sensitivity was limited in modeled scenarios; economic value of equity declined 2.8% under an immediate 100-basis-point rate increase and 7.5% under a 200-basis-point increase. Continued low rates, competitive pricing and deposit migration remain relevant risks.
- Liquidity: core deposits funded 73% of total assets at quarter-end. Management said the Bank and parent had sufficient liquidity. The Modified Liquidity Coverage Ratio transition begins in 2016; Huntington expected to meet the requirement within the prescribed transition period.
- Capital ratios declined year over year amid balance-sheet growth and share repurchases. The company repurchased 5.4 million shares in Q3 at an average $9.70 and had approximately $86 million remaining under its authorization. Management estimated Basel III rules would reduce Tier 1 common capital by about 40 basis points on a fully phased-in basis.
- Contingencies include income-tax examinations and appeals; management said an unfavorable resolution could materially affect results in the period of resolution. For current legal proceedings, management estimated reasonably possible losses beyond accruals of $0–$130 million, while noting some matters could not be estimated. A Cyberco/Teleservices bankruptcy matter had a recommended judgment of $71.8 million plus interest pending District Court review. Management stated its recorded legal accrual was adequate, but unfavorable developments could be material in a particular period.
- Other notable exposures include mortgage representation-and-warranty repurchase risk, with the company stating it could not estimate the reasonably possible loss range, and investment securities with unrealized losses. CDO and private-label mortgage securities were identified as higher-risk portfolio segments; management reported no required additional other-than-temporary impairment at quarter-end.
Important facts for investors to verify
- Whether loan and deposit growth can offset further net interest margin compression, and whether the Q4 outlook was achieved.
- Reported versus adjusted expenses, the nature and recurrence of repositioning costs, and progress in delivering positive operating leverage.
- Credit trends by portfolio, especially rising C&I nonaccruals, TDR balances, and the adequacy of the ACL as the allowance ratio declines.
- Funding mix and borrowing levels, capital-ratio trajectory, share repurchases, and readiness for Basel III and Modified LCR requirements.
- Developments in the Cyberco/Teleservices litigation, tax audits, mortgage repurchase exposure, and valuations or losses on higher-risk securities.