Huntington Bancshares Incorporated — Q3 2015 Form 10-Q
Business context and reporting period
Regional bank holding company headquartered in Columbus, Ohio, with 756 branches across six Midwestern and Appalachian states. This unaudited filing covers the quarter and nine months ended September 30, 2015; comparisons are primarily with Q3 and the first nine months of 2014. Total assets were $70.2 billion at quarter-end.
Financial performance and position
- Q3 earnings: Net income was $152.6 million, or $0.18 per diluted share, versus $155.0 million and $0.18 a year earlier. Income before tax declined to $199.6 million from $208.9 million.
- Year-to-date earnings: Nine-month net income rose 10% to $514.6 million; diluted EPS increased 13% to $0.60 from $0.53.
- Revenue and margin: Q3 fully taxable-equivalent (FTE) net interest income was $503.6 million, up 6%; FTE total revenue was $756.7 million, up 5%. Net interest margin was 3.16%, down 4 basis points year over year. Average earning assets grew 8%, including 6% growth in average loans and leases.
- Fees and expenses: Noninterest income was $253.1 million, up 2% year over year. Reported noninterest expense rose 10% to $526.5 million, largely reflecting a $38.2 million litigation-reserve addition and Huntington Technology Finance expenses. Excluding disclosed significant items, expense increased 6% to $483.5 million. The reported efficiency ratio was 69.1%, versus 65.3%.
- Credit costs: Q3 provision for credit losses was $22.5 million, down 8% year over year. Net charge-offs were $16.2 million, or 0.13% of average loans, versus $30.0 million and 0.26%; recoveries in commercial portfolios contributed to the improvement. Nine-month net charge-offs fell to $66.0 million from $101.7 million.
- Loans and asset quality: Period-end loans and leases were $49.7 billion, up $2.0 billion from year-end 2014, with growth in C&I and automobile lending. Nonperforming assets were $381.4 million, down 4% sequentially but up from $337.7 million at year-end. C&I nonaccrual loans increased to $157.9 million from $72.0 million at year-end.
- Deposits, debt, and liquidity: Deposits totaled $54.2 billion, including $50.7 billion of core deposits. Short-term borrowings were $1.45 billion and long-term debt $6.36 billion, compared with $2.40 billion and $4.34 billion, respectively, at year-end. Management said the Bank had sufficient liquidity for foreseeable needs and expected to meet the Modified LCR transition requirements.
- Cash flow: For the first nine months, operating activities provided $400.8 million, versus $629.2 million in 2014; investing activities used $3.26 billion and financing activities provided $2.66 billion. Cash and due from banks ended at $1.02 billion, compared with $1.22 billion at year-end 2014.
- Capital and shareholder returns: At September 30, the Basel III CET1 ratio was 9.72%, tier 1 risk-based capital 10.49%, and total risk-based capital 12.70%; tangible common equity to tangible assets was 7.89%. The company repurchased 20.5 million shares in the first nine months. Approximately $194.9 million remained under its current repurchase authorization. A $0.07 quarterly common dividend was declared for payment in January 2016.
Material changes and unusual items
- Q3 included a $38.2 million addition to litigation reserves, reducing EPS by approximately $0.03. The company recorded a federal court judgment in the Cyberco/Teleservices matter of $71.8 million plus costs and pre- and post-judgment interest, and said it planned to appeal.
- The March 2015 acquisition of Macquarie Equipment Finance, rebranded Huntington Technology Finance, added approximately $1.1 billion of assets and $616.6 million of debt, securitizations, and other liabilities; acquisition-related expenses and operating-lease income and expense affected comparisons.
- Q3 included $2.44 million of impairment losses on pooled trust-preferred securities. The remaining private-label CMO portfolio was sold during the quarter.
- During Q3, $96.8 million of home-equity TDRs were transferred to loans held for sale in anticipation of sale. Management reported that C&I problem loans had begun increasing as that portfolio expanded, while noting quarter-to-quarter volatility at low overall problem-credit levels.
Outlook, management commentary, and risks
Management remained committed to positive operating leverage for full-year 2015 and expected modest improvement in Q4. It forecast 2%–4% annual noninterest-expense growth excluding significant items and recurring Huntington Technology Finance expenses, and expected adjusted Q4 expenses to remain consistent with adjusted Q2 and Q3 levels. Asset-quality metrics were expected to remain near current levels, with NCOs within or below the long-term normalized range of 35–55 basis points. The expected effective tax rate for the remainder of 2015 was 24%–27%.
Key risks include litigation outcomes, changes in credit quality (particularly commercial credits), interest-rate and competitive pricing pressures, mortgage servicing-rights valuation and hedging variability, and regulatory requirements. Huntington stated that it had achieved Volcker Rule conformance and expected to provide the required attestation by March 31, 2016. The filing also disclosed that the reasonably possible loss range for current legal proceedings, in excess of amounts accrued, was $0–$80 million; for certain matters, management could not estimate possible loss. The mortgage representation-and-warranty exposure range was also not estimable. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Developments in the Cyberco appeal, the judgment and related interest and costs, and whether the litigation reserve remains adequate relative to the disclosed potential exposure.
- Whether rising C&I nonaccruals and criticized credits lead to higher provisions or charge-offs, and how asset quality performs absent unusually large recoveries.
- Whether loan and deposit growth can sustain FTE net interest income as margin pressures and funding costs evolve.
- Expense trends excluding significant items, including technology investment and Huntington Technology Finance costs, against management’s operating-leverage and expense outlook.
- Capital and liquidity after share repurchases, debt issuance, and implementation of the Modified LCR requirement.