Huntington Bancshares Incorporated — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Huntington is a regional bank holding company headquartered in Columbus, Ohio, operating primarily across eight Midwest and Appalachian states.
Financial results and position
- Earnings: Net income was $358 million, up 10% from $326 million in Q1 2018. Diluted EPS was $0.32 versus $0.28. Net income applicable to common shareholders was $339 million.
- Revenue and margin: GAAP net interest income was $822 million, up $52 million year over year; fully taxable-equivalent (FTE) net interest income was $829 million. FTE total revenue was $1.148 billion versus $1.091 billion. FTE net interest margin was 3.39%, up 9 basis points year over year. Average earning assets rose 4% to $99.2 billion, including 6% growth in average loans and leases.
- Credit costs: Provision for credit losses was $67 million, versus $66 million a year earlier. Net charge-offs were $71 million, or 0.38% of average loans annualized, compared with $38 million and 0.21% in Q1 2018. Management attributed higher commercial losses mainly to two credit relationships.
- Other income and expenses: Noninterest income was $319 million, up 2%; noninterest expense was $653 million, up 3%. Personnel costs rose 5% and data processing and other services rose 11%, partly reflecting strategic hiring and technology investment. Deposit and other insurance expense fell 56%, primarily because the FDIC surcharge ended in Q4 2018. The efficiency ratio was 55.8%, versus 56.8%.
- Balance sheet and funding: At March 31, total assets were $108.2 billion, loans and leases $75.1 billion, and deposits $82.2 billion. Period-end deposits were down from $84.8 billion at year-end, while average deposits increased 8% year over year. Short-term borrowings were $2.9 billion and long-term debt $9.4 billion; both were higher than at year-end. Core deposits were 96% of deposits. Unpledged investment securities available as a liquidity source totaled $18.9 billion.
- Cash flow: Operating cash flow was $497 million, investing cash flow was negative $515 million, and financing cash flow was negative $1.318 billion. Cash and cash equivalents ended the quarter at $1.336 billion, down $1.336 billion during the quarter.
- Capital and returns: Consolidated CET1 ratio was 9.84%, versus 10.45% a year earlier; total risk-based capital ratio was 13.11%. Management said regulatory capital exceeded well-capitalized standards. The company repurchased $25 million of stock in Q1; $152 million of authorization remained. Tangible common equity to tangible assets was 7.57%, down 13 basis points year over year.
Material changes and business segments
- Year-over-year earnings growth reflected higher net interest income and lower expense growth, partly offset by higher credit losses and preferred dividends. The average diluted share count declined to 1.066 billion from 1.125 billion.
- Consumer and Business Banking net income rose 12% to $157 million. Commercial Banking fell 25% to $123 million, reflecting higher credit provision and expenses. Vehicle Finance declined 9% to $39 million; Regional Banking and The Huntington Private Client Group declined 24% to $31 million. Treasury/Other reported $8 million of income versus a $62 million loss, in part reflecting segment allocation and tax effects.
- The company adopted the new lease accounting standard on January 1, 2019, recognizing approximately $200 million of right-of-use assets and $250 million of lease liabilities; the income-statement effect was not material. Segment prior-period figures were restated for an updated funds-transfer-pricing methodology.
Outlook, risks, and contingencies
- Management said 2019 balance-sheet growth expectations were unchanged, commercial loan pipelines were steady, and consumer pipelines showed normal seasonal growth. It described the footprint’s economic outlook as favorable and said it did not foresee a near-term recession. These are management views, not quantified earnings guidance.
- Management cited strong competition for loans and deposits, rising funding costs, interest-rate changes, economic conditions, regulatory developments, and execution of business strategies among factors that could affect results. The company described its overall risk appetite as moderate to low.
- Credit quality weakened on certain measures: nonperforming assets rose 19% sequentially to $461 million, or 0.61% of loans, largely due to the same two commercial relationships. The allowance for loan and lease losses was $764 million; total allowance for credit losses, including unfunded commitments, was $864 million.
- A previously announced Wisconsin branch sale was expected to close in Q2 2019. At quarter-end, approximately $126 million of loans and $845 million of deposits related to the sale were classified as held for sale.
- For pending litigation and regulatory matters where a range could be estimated, management reported aggregate possible loss of $0–$25 million in excess of any related accrual. The range is not the maximum exposure; management said an adverse outcome could materially affect results in a particular period, though it did not expect pending matters to materially affect consolidated financial position.
- Interest-rate sensitivity remained within Board policy limits. Management reported that the balance sheet was asset sensitive; the company also purchased interest-rate floors to reduce exposure to falling rates.
Important facts for investors to verify
- Whether the elevated commercial charge-offs and nonperforming assets remain concentrated in the two identified relationships or spread to other borrowers.
- Deposit trends, deposit pricing, and the impact of funding costs on net interest margin and earnings.
- Progress and final financial effects of the Wisconsin branch sale expected in Q2 2019.
- Capital ratios and remaining buyback authorization as the company balances repurchases, dividends, and balance-sheet growth.
- Updates to litigation exposures, the estimated loss range, and implementation of the expected-credit-loss accounting standard planned for January 2020.