Huntington Bancshares Incorporated — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Financial statements are unaudited. Huntington is a regional bank holding company headquartered in Columbus, Ohio, serving customers across six Midwestern and Appalachian states through more than 700 banking offices.
Financial performance and position
| Metric | Q3 2013 / September 30, 2013 | Comparison |
|---|---|---|
| Net income | $178.5 million; diluted EPS $0.20 | $167.8 million and $0.19 a year earlier; $150.7 million and $0.17 in Q2 2013 |
| FTE net interest income | $431.5 million | Flat quarter over quarter; down about 1% year over year |
| Net interest margin | 3.34% | Down 4 basis points quarter over quarter and year over year |
| Total revenue, FTE | $682.0 million | $680.2 million in Q2 2013; $696.6 million a year earlier |
| Noninterest income / expense | $250.5 million / $423.3 million | Income up 1% and expense down 5% versus Q2; year-over-year expense down 8%, including significant items |
| Provision for credit losses | $11.4 million | Down 54% versus Q2 and 69% year over year |
| Net charge-offs | $55.7 million; 0.53% annualized of average loans | 0.34% in Q2; within management’s stated normalized range of 0.35%–0.55% |
| Loans and deposits | $42.6 billion and $46.6 billion | Loans up 4% from December 31, 2012; deposits up $311 million |
| Nonaccrual loans / nonperforming assets | $333.1 million / $374.3 million; NAL ratio 0.78%, NPA ratio 0.88% | NALs down 8% quarter over quarter; NPAs down 16% from year-end 2012 |
| Allowance for credit losses | $732.9 million; 1.72% of loans and 220% of NALs | 1.86% of loans and 214% of NALs in Q2 |
| Capital | Tier 1 common ratio 10.85%; Tier 1 risk-based 12.36%; total risk-based 14.67%; tangible common equity/assets 9.02% | Ratios improved from Q2; company and Bank reported as well-capitalized |
For the first nine months, net income was $480.9 million, up 2% year over year, and diluted EPS was $0.54 versus $0.52. FTE revenue declined 2% to $2.044 billion; provision fell 39% to $65.7 million, while noninterest expense fell 4% to $1.312 billion.
Nine-month cash flows were $813.3 million from operating activities, $(1.213) billion from investing activities, and $244.3 million from financing activities. Cash and cash equivalents ended the period at $1.108 billion, down from $1.263 billion at year-end 2012. Total assets were $56.6 billion. Deposits funded 79% of total assets; the Bank reported $11.2 billion of unused Federal Reserve and FHLB borrowing capacity. The company and Bank issued $400 million and $350 million of senior notes, respectively, during August.
Material changes and notable items
- Quarterly earnings rose from Q2, helped by lower credit-loss provision and expenses. The 4-basis-point NIM decline offset the benefit of higher average earning assets.
- Year over year, average loans grew 5%, including 49% growth in auto loans and 4% in C&I; CRE balances declined 14%. Core deposits shifted toward noninterest-bearing demand and money market accounts, while core certificates of deposit declined 32% on average.
- Q3 noninterest expense included a $33.9 million noncash pension curtailment gain and $16.6 million of franchise repositioning expense. Management expects the pension curtailment to take effect December 31, 2013.
- Management enhanced its commercial risk-rating and allowance methodology. It also identified $13.1 million of Chapter 7 bankruptcy-related consumer losses, primarily in home equity, and increased the allowance by $6.0 million; review was ongoing for completion in Q4.
- CRE net charge-offs increased from Q2, principally due to one relationship. The noncore CRE portfolio continued to run off; total CRE loans were down 10% from year-end 2012.
Outlook, risks and contingencies
- Management expected net interest income to grow modestly over the next several quarters, with loan and securities growth partly offset by continued NIM pressure. Full-year 2013 NIM was not expected to fall below the mid-3.30% range.
- Management expected noninterest income to be relatively flat, excluding specified auto loan sales, net MSR activity, and seasonal effects. Expenses, excluding $17 million of significant items, were expected to rise modestly; an additional $6 million of branch consolidation expense was expected in Q4. Management reiterated its full-year positive operating leverage objective.
- Management expected NPAs to continue improving, while noting provision volatility. The 2013 effective tax rate was expected at 25%–27%.
- Basel III capital requirements begin phasing in for Huntington in 2015 and are fully phased in by 2019. Management estimated an approximately 60-basis-point reduction to its Basel I Tier 1 common ratio based on June 2013 balance-sheet composition, and expected capital to remain above well-capitalized minimums. Approximately $50 million of Tier 1 capital was HPCI preferred securities that may cease to qualify under Basel III.
- Management cited yield-curve pressure, regulatory changes, economic and political uncertainty, competition, credit performance, and mortgage-related litigation as risks. The filing estimates reasonably possible legal losses above accrued amounts at $0–$125 million, while stating some matters cannot be reasonably estimated. In the Cyberco/Teleservices bankruptcy matter, a recommended judgment included $71.8 million principal plus interest; review by the District Court remained pending.
- On October 10, 2013, Huntington announced its proposed acquisition of Camco Financial for approximately $97 million in cash and stock. Completion was expected in the first half of 2014, subject to approvals and other closing conditions.
Most important facts for investors to verify
- Whether the Q4 Chapter 7 review changes reported consumer losses, reserves, or representations-and-warranties exposure.
- Whether credit costs remain within management’s normalized range, particularly following the Q3 CRE charge-off and as the allowance ratio declines.
- Whether NIM and net interest income meet management’s outlook amid yield pressure and the cost of newly issued debt.
- Capital effects and implementation plans for Basel III, including the treatment or possible redemption of HPCI preferred securities and Federal Reserve review of capital actions.
- Developments in the Cyberco/Teleservices and other legal matters, including any change to the estimated range of reasonably possible losses.
- Camco transaction approvals, timing, integration assumptions, and expected earnings contribution.