Huntington Bancshares Incorporated — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet figures are as of March 31, 2018. Huntington is a diversified regional bank holding company headquartered in Columbus, Ohio, operating 966 branches across eight states.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net income | $326 million | $208 million |
| Diluted EPS | $0.28 | $0.17 |
| Net interest income, FTE | $777 million | $743 million |
| Net interest margin, FTE | 3.30% | 3.30% |
| Noninterest income | $314 million | $312 million |
| Noninterest expense | $633 million | $707 million |
| Provision for credit losses | $66 million | $68 million |
| Net charge-offs | $38 million; 0.21% annualized | $39 million; 0.24% annualized |
FTE net interest income increased 5% year over year, mainly reflecting 5% growth in average earning assets, including 5% growth in average loans and leases. Higher asset yields and the benefit of noninterest-bearing funds were offset by higher funding costs. Average earning assets were $95.4 billion. Total revenue on an FTE basis was $1.091 billion, up 3% year over year.
Net income growth also reflects comparison effects: Q1 2017 included $73 million of acquisition-related expenses, while Q1 2018 had no Significant Items. The 2017 fourth quarter included a separate $123 million tax benefit from federal tax reform; it did not recur in Q1 2018. Q1 2018’s effective tax rate was 15.3%, versus 22.2% in Q1 2017.
Balance sheet, funding and capital
- Total assets were $104.2 billion, essentially unchanged from year-end 2017. Loans and leases were $71.2 billion, up from $70.1 billion at year-end; deposits were $79.5 billion, up from $77.0 billion.
- Cash and cash equivalents ended the quarter at $1.069 billion, down from $1.520 billion at year-end. Operating cash flow was $294 million; investing cash outflow was $776 million and financing cash inflow was $31 million.
- Short-term borrowings were $2.9 billion and long-term debt was $8.6 billion, compared with $5.1 billion and $9.2 billion, respectively, at year-end. Core deposits were 95% of total deposits; unpledged investment securities totaled $13.2 billion. The Bank reported compliance with liquidity coverage requirements and management said liquidity was sufficient for foreseeable obligations.
- Consolidated CET1 ratio was 10.52%, up from 10.01% at year-end 2017 and 9.74% a year earlier; total risk-based capital ratio was 13.99%. Tangible common equity to tangible assets was 7.70%.
- Accumulated other comprehensive loss increased to $677 million from $528 million at year-end, principally reflecting unrealized losses on available-for-sale securities. Comprehensive income was $178 million, below net income of $326 million.
Material changes and operating trends
- Noninterest income rose 1% year over year. Higher card and payment-processing, trust-management and capital-markets fees largely offset lower mortgage-banking income and gains on loan sales.
- Reported noninterest expense fell 10%, but adjusted expense was effectively flat at $633 million versus $633 million. The reported decline primarily reflects the prior-year FirstMerit acquisition expenses.
- Total loans grew 6% from March 2017. Growth was notable in residential mortgages (+18%), RV and marine finance (+32%) and auto loans (+9%). Consumer loans represented 49% of period-end loans.
- Credit indicators remained generally favorable, though nonperforming assets rose 8% sequentially to $420 million, principally due to three C&I credits in unrelated industries. The NPA ratio was 0.59%; the allowance for loan and lease losses was $721 million, or 1.01% of loans, and total credit reserves were $806 million, or 1.13%.
- Segment net income increased year over year: Consumer and Business Banking $100 million (up 54%), Commercial Banking $117 million (up 17%), Vehicle Finance $42 million (up 5%), and RBHPCG $30 million (up 76%). Treasury/Other reported $37 million versus a $14 million loss.
Outlook, risks and unusual items
Management cited supportive local economies, customer confidence, solid loan pipelines and prospects for growth from new and expanded customer relationships. The filing provides no quantified earnings or revenue guidance. Management’s stated priorities include organic revenue growth, investment in technology and risk management, positive operating leverage, and capital and liquidity management.
- Interest-rate sensitivity analysis showed the balance sheet was asset sensitive: modeled net interest income increased 2.6% under a gradual +100-basis-point scenario and 5.2% under +200 basis points. Actual results could differ from model assumptions.
- Key risks include credit quality, interest-rate and securities-price changes, liquidity and funding conditions, regulatory and compliance developments, operational and cyber threats, competition, and economic or market disruption. Management reported no material cyber losses to date.
- Pending legal and regulatory matters: management estimated an aggregate possible loss range of $0–$30 million in excess of accrued liabilities, where estimable. It said accrued amounts were adequate and did not expect a material adverse effect on consolidated financial position, while noting an adverse outcome could materially affect results in a particular period.
- Capital actions included converting $363 million of Series A preferred equity into common shares and issuing $500 million of 5.7% Series E preferred stock. The company completed its $308 million common-stock repurchase authorization, including $48 million in Q1 at an average $15.83 per share. The board declared a $0.11 common dividend payable in July 2018.
- Accounting changes included adoption of the new revenue-recognition standard, with no material impact described. The company reclassified securities between available-for-sale and held-to-maturity portfolios under new hedge-accounting guidance; securities-related unrealized losses contributed to the quarter’s OCI decline.
Important facts for investors to verify
- Whether loan growth and revenue momentum can continue while funding costs rise and the net interest margin remains flat.
- Whether the sequential increase in C&I nonperforming assets and criticized/classified loans leads to higher provisions or charge-offs.
- How much of the year-over-year earnings improvement is sustainable after excluding the prior-year acquisition expenses and tax-reform effects.
- Whether liquidity, capital ratios and deposit mix remain resilient as rates and funding competition change.
- The potential financial impact and resolution timing of legal contingencies, and the sensitivity of securities and mortgage-servicing valuations to interest rates.