Huntington Bancshares Incorporated — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018, with fourth-quarter results compared primarily with Q4 2017. Huntington is a regional bank holding company headquartered in Columbus, Ohio, with consumer, commercial, vehicle finance, and private-client banking businesses.
Financial performance
| Metric | FY 2018 | Change vs. FY 2017 |
|---|---|---|
| Net interest income (GAAP) | $3.189 billion | Up 6% |
| Net interest income (FTE) | $3.219 billion | Up 5% |
| Total revenue (FTE) | $4.540 billion | Up 4% |
| Net income | $1.393 billion | Up 17% |
| Diluted EPS | $1.20 | Up 20% |
| Provision for credit losses | $235 million | Up 17% |
| Noninterest income | $1.321 billion | Up 1% |
| Noninterest expense | $2.647 billion | Down 2% |
| Net interest margin (FTE) | 3.33% | Up 3 basis points |
| Efficiency ratio | 56.9% | Improved from 60.9% |
| Return on average assets | 1.33% | Up from 1.17% |
| Return on average common equity | 13.4% | Up from 11.6% |
FTE means fully taxable equivalent; it is a non-GAAP measure. FY 2018’s net interest income growth reflected 4% average earning-asset growth and higher asset yields, partly offset by increased funding costs. Loan growth included commercial and industrial, residential mortgage, and RV/marine lending. Fee gains in card processing, trust services, and capital markets were partly offset by lower mortgage banking income and securities losses.
Q4 2018 and balance sheet
- Q4 net income was $334 million and diluted EPS was $0.29, versus $432 million and $0.37 a year earlier. The comparison is affected by a $123 million tax-reform benefit included in Q4 2017; Q4 2018’s effective tax rate was 14.6%.
- Q4 FTE net interest income rose 8% year over year to $841 million, and FTE net interest margin increased 11 basis points to 3.41%. Q4 noninterest expense increased 12% to $711 million, including $28 million of branch and facility consolidation costs.
- At year-end, total assets were $108.8 billion, loans and leases were $74.9 billion (up 7%), and deposits were $84.8 billion (up 10%). Long-term debt was $8.6 billion, down from $9.2 billion; short-term borrowings fell to $2.0 billion from $5.1 billion.
- FY operating cash flow was $1.7 billion, investing cash outflow was $3.7 billion, and financing cash inflow was $3.1 billion. Cash and cash equivalents ended the year at $2.7 billion, versus $1.5 billion at year-end 2017.
- Core deposits were 96% of deposits; unpledged investment securities totaled $17.5 billion. Parent-company cash and cash equivalents were $2.4 billion.
- Consolidated regulatory capital ratios were 9.65% CET1, 11.06% Tier 1, 12.98% total risk-based capital, and 9.10% Tier 1 leverage. Ratios remained above applicable well-capitalized standards, although CET1 declined from 10.01% in 2017.
Material changes, outlook, and risks
- Credit indicators were generally favorable: annual net charge-offs were $145 million, or 0.20% of average loans, versus 0.23% in 2017. Nonperforming assets were $387 million, or 0.52% of loans and related assets. The allowance for credit losses was $868 million; the allowance for loan and lease losses was 1.03% of loans.
- Reported expense fell year over year partly because 2017 included $154 million of FirstMerit acquisition-related costs. In 2018, personnel expense rose 2%; branch and facility consolidation costs were incurred. The FDIC surcharge ended in Q4, reducing deposit insurance expense.
- Huntington completed a $1.1 billion securities portfolio repositioning in Q4, recording $19 million of quarterly securities losses. It acquired HSE on October 1, 2018. The company also announced the sale of its Wisconsin branch operations; closing was expected in the first half of 2019.
- Management described local economic fundamentals as positive, loan pipelines as steady, and credit metrics as strong. For 2019, it maintained its balance-sheet growth outlook but, amid market volatility, assumed no interest-rate hikes in its revenue expectation and adjusted its expense expectation. The filing gives no specific quantified 2019 earnings or revenue guidance.
- Key risks include credit deterioration, deposit competition and rising funding costs, interest-rate and securities valuation sensitivity, economic exposure to manufacturing and industrial markets, cyber and third-party operational risks, litigation, regulatory change, and the transition from LIBOR. Huntington planned to adopt the current expected credit loss standard in 2020 and anticipated a one-time opening adjustment, the amount of which was not specified.
- For pending legal and regulatory matters, management estimated an aggregate possible loss range of $0–$30 million above accrued liabilities where estimable, but noted this is not maximum exposure and outcomes could affect a particular reporting period.
- The auditor issued an unqualified opinion on the financial statements and internal controls; management concluded internal control over financial reporting was effective at year-end.
Investor verification priorities
- Assess whether loan and deposit growth can continue while deposit costs rise and margin performance holds up.
- Review the Q4 earnings comparison excluding the prior-year tax benefit, and distinguish recurring expense trends from consolidation costs.
- Monitor credit quality and reserve adequacy as loans grow, especially consumer charge-offs and commercial problem loans.
- Verify the completed status and financial effects of the Wisconsin branch sale, the HSE acquisition, and the securities repositioning.
- Track capital distributions, capital ratios, and the eventual CECL transition impact; review the full notes for legal contingencies and LIBOR-related exposures.