Huntington Bancshares Incorporated — Q2 2018 Form 10-Q
Business context and period. Regional bank holding company headquartered in Columbus, Ohio, operating 968 branches and private-client offices across eight states. This unaudited filing covers the quarter and six months ended June 30, 2018; comparisons are primarily with Q2 and the first half of 2017.
Financial results and position
| Metric | Q2 2018 | Comparison |
|---|---|---|
| Net income | $355 million | Up from $272 million in Q2 2017 |
| Diluted EPS | $0.30 | Up from $0.23 |
| Net interest income | $784 million GAAP; $791 million FTE | GAAP up $39 million; FTE up $34 million, or 4% |
| Net interest margin | 3.29% FTE | Down 2 basis points year over year |
| Provision for credit losses | $56 million | Up $31 million year over year |
| Net charge-offs | $28 million; 0.16% annualized of average loans | Down from $36 million and 0.21% in Q2 2017 |
| Noninterest income | $336 million | Up $11 million, or 3% |
| Noninterest expense | $652 million | Down $42 million, or 6%; prior-year quarter included $50 million of acquisition-related items |
| Efficiency ratio | 56.6% | Improved from 62.9% in Q2 2017 |
For the first six months, net income was $681 million, up 42%; diluted EPS was $0.58 versus $0.40. FTE revenue increased 4% to $2.218 billion. Net interest income grew 5%, while noninterest income rose 2% and reported noninterest expense fell 8%; the expense comparison benefited from $124 million of acquisition-related costs in the 2017 period. The effective tax rate was 13.8% for Q2 and 14.6% year to date, versus 22.4% and 22.3%, respectively, in 2017, primarily reflecting the Tax Cuts and Jobs Act.
Balance sheet and funding at June 30: Total assets were $105.4 billion, loans and leases $72.4 billion, and deposits $79.6 billion. Versus December 31, 2017, loans increased $2.3 billion and deposits increased $2.5 billion. Short-term borrowings declined to $2.4 billion from $5.1 billion; long-term debt increased to $9.7 billion from $9.2 billion. Shareholders’ equity was $11.5 billion. First-half operating cash flow was $602 million, investing cash use was $1.458 billion, and financing cash provided was $718 million; cash and cash equivalents declined $138 million to $1.382 billion.
Capital and liquidity: Consolidated CET1 was 10.53%, Tier 1 risk-based capital 11.99%, and total risk-based capital 13.97%; management reported capital above well-capitalized standards. Core deposits were 96% of deposits, and unpledged securities totaled $15.2 billion. The Bank reported compliance with the Liquidity Coverage Ratio requirement and management said liquidity was sufficient for foreseeable cash obligations.
Material changes and management commentary
- Average earning assets grew 5% year over year, including 7% growth in average loans. Residential mortgages rose 21%, auto loans 8%, and RV/marine finance 31% on average. Average funding costs rose 44 basis points, exceeding the 32-basis-point increase in earning-asset yields; deposit costs rose 28 basis points.
- Credit-loss provision increased with loan growth and risk-rating migration in commercial lending. The allowance for loan and lease losses was $741 million, or 1.02% of loans, and total credit allowance was $834 million, or 1.15% of loans. Nonperforming assets were $412 million, 0.57% of loans and related assets.
- Noninterest income benefited from trust and investment management fees, up 14% in Q2, and ongoing customer relationship acquisition. Other income was affected by a $3 million unfavorable Visa Class B derivative fair-value adjustment. Mortgage banking income declined 13% year over year in Q2.
- There were no Significant Items in Q2 2018; Q2 2017 included $50 million of FirstMerit acquisition-related expense. Reported cost reductions therefore overstate underlying year-over-year expense improvement: adjusted expense was up 1% for Q2 and 1% year to date.
- The first-half segment results showed net income increases in Consumer and Business Banking ($213 million, up 38%), Commercial Banking ($245 million, up 13%), Vehicle Finance ($85 million, up 10%), and RBHPCG ($52 million, up 53%). Vehicle Finance margin fell 34 basis points, partly due to runoff of acquired portfolios and purchase-accounting effects.
Outlook, risks, contingencies, and subsequent events
- Management described its footprint economies as performing well and cited steady pipelines, strong customer sentiment, and an expectation of continued loan and deposit growth. It cautioned that trade agreements and tariffs could dampen economic growth. No specific earnings or financial metric guidance was provided.
- Interest-rate sensitivity indicated an asset-sensitive balance sheet: modeled net interest income increased 2.9% under a +100-basis-point scenario and 5.9% under +200 basis points over 12 months. Management noted rising deposit and borrowing costs, and Q2 hedge-related effects on funding costs.
- Key stated risks include economic and market conditions, interest rates, competition, regulatory changes, credit quality, operational and cyber risks, and execution of business strategies. Management reported no material cyber losses to date. Actual credit losses could differ from estimates; credit-reserve judgments depend on economic conditions and portfolio assumptions.
- Legal matters: management estimated an aggregate possible loss range of $0–$30 million in excess of accrued liabilities for matters where a range could be estimated; it said this was not the maximum exposure. The Cyberco litigation settlement became final and was paid in May 2018 within the existing reserve.
- After quarter-end, the board declared a $0.14 quarterly common dividend, a 27% increase, and authorized up to $1.068 billion in share repurchases over four quarters. On July 27, 2018, Huntington entered an accelerated share repurchase agreement for approximately $400 million. These actions are subject to board and regulatory considerations as applicable.
- Other notable items: Huntington issued $500 million of parent senior notes due 2025 at 4.00% and the Bank issued $750 million of senior notes due 2021 at 3.25%. The company also converted its Series A preferred stock into common shares and issued $500 million of Series E preferred stock in Q1.
Most important facts for investors to verify
- Whether loan growth and higher asset yields continue to offset faster deposit, short-term borrowing, and debt costs, and how this affects NIM.
- Whether increased commercial risk-rating migration and reserve balances translate into higher future provisions or charge-offs; monitor NPA trends and allowance coverage.
- Underlying expense trajectory excluding 2017 acquisition costs, including personnel, technology, and marketing spending.
- Execution and funding impact of the announced dividend increase and repurchase authorization, including the accelerated $400 million repurchase.
- Exposure to interest-rate and securities valuation movements, including accumulated other comprehensive losses and hedging effectiveness.
- Updates to legal contingencies, regulatory matters, and the potential economic effects of tariffs and trade uncertainty.