Huntington Bancshares Incorporated — 2019 Third-Quarter Form 10-Q
Reporting period: Quarter ended September 30, 2019; comparisons are primarily with the third quarter and first nine months of 2018. Huntington is a diversified regional bank headquartered in Columbus, Ohio, with 868 full-service branches and private-client offices across seven states. Financial statements are unaudited.
Financial performance and condition
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Net income | $372 million | $378 million | Down $6 million |
| Diluted EPS | $0.34 | $0.33 | Up $0.01 |
| Net interest income, GAAP | $799 million | $802 million | Down $3 million |
| Net interest income, FTE | $805 million | $810 million | Down $5 million, or 1% |
| Net interest margin | 3.20% | 3.32% | Down 12 basis points |
| Noninterest income | $389 million | $342 million | Up $47 million, or 14% |
| Noninterest expense | $667 million | $651 million | Up $16 million, or 2% |
| Provision for credit losses | $82 million | $53 million | Up $29 million |
| Efficiency ratio | 54.7% | 55.3% | Improved 0.6 percentage point |
Average earning assets rose 3% year over year to $99.7 billion, including average loans and leases up 3% to $75.1 billion. FTE revenue was $1.194 billion, versus $1.152 billion. Higher mortgage banking and capital-markets income supported revenue; higher funding costs pressured net interest income and margin.
For the first nine months, net income was $1.094 billion, up 3%; diluted EPS was $0.98, up 9%. FTE revenue increased 5% to $3.535 billion. Provision expense rose 19% to $208 million and noninterest expense rose 4% to $2.020 billion.
At September 30, total assets were $108.7 billion, loans and leases $74.9 billion, deposits $82.4 billion, and shareholders’ equity $11.9 billion. Long-term debt was $9.9 billion, up from $8.6 billion at year-end 2018; short-term borrowings were $2.2 billion. The company issued $800 million of five-year senior notes in August at a 2.625% coupon.
Nine-month operating cash flow was $898 million, versus $1.144 billion in 2018; investing cash outflow was $763 million and financing cash outflow was $1.171 billion. Cash and cash equivalents ended the period at $1.636 billion. Core deposits were 97% of total deposits; unpledged securities totaled $19.0 billion. The Bank reported compliance with liquidity coverage requirements and sufficient liquidity for foreseeable obligations.
Consolidated CET1 and Tier 1 risk-based capital ratios were 10.02% and 11.41%, respectively; the total risk-based capital ratio was 13.29%. Capital ratios remained above well-capitalized regulatory standards. Shareholders’ equity increased $0.8 billion from year-end.
Material changes and notable drivers
- Credit costs increased: third-quarter net charge-offs were $73 million, or 0.39% of average loans, versus $29 million and 0.16% a year earlier. Management attributed much of the commercial deterioration to two energy relationships, which accounted for nearly three-fourths of commercial net charge-offs.
- Year-to-date net charge-offs rose to $192 million from $95 million, largely reflecting C&I energy credits; the prior-year commercial figure included substantial recoveries. Nonperforming assets were $482 million, 0.64% of loans and related assets, versus $403 million and 0.55% a year earlier.
- The allowance for loan and lease losses was $783 million, or 1.05% of loans, compared with $761 million and 1.04% a year earlier. Total credit allowance, including unfunded commitments, was $884 million.
- Third-quarter noninterest income gains included mortgage banking income up $23 million, primarily from improved sale spreads and $8 million of net mortgage-servicing-rights risk-management income; capital-markets fees rose $10 million, partly reflecting the Hutchinson, Shockey, Erley & Co. acquisition.
- Expense increases included personnel costs and technology-related data-processing costs. Lower FDIC insurance expense and lower other expense partly offset them.
- The Wisconsin retail-branch sale generated a $15 million gain in Q2 2019. It also affected year-to-date other income and investing cash flow; do not treat the gain as recurring operating revenue.
Outlook, risks and contingencies
- Management described consumer confidence and consumer performance as strong, with home-lending and auto-finance originations active. It cited slower-growth signals, trade and tariff uncertainty, and a more measured medium-term outlook for commercial loan growth. Management did not foresee a near-term recession.
- No formal earnings or revenue guidance is provided in the supplied filing text. Management emphasized organic growth, investment in technology and risk management, positive operating leverage, a moderate-to-low risk appetite, and disciplined capital management.
- Management estimated that adoption of CECL on January 1, 2020 could increase the allowance by 40%–50% from then-current levels, chiefly due to consumer loans’ longer asset duration. The estimate is subject to economic forecasts and portfolio mix at adoption.
- Interest-rate exposure remained within Board limits. A gradual 100-basis-point rate decrease was estimated to reduce next-12-month net interest income by 1.4%; increases of 100 and 200 basis points were estimated to raise it by 0.8% and 2.0%, respectively. Results depend on assumptions and are not a forecast.
- For pending legal and regulatory matters where a loss range could be estimated, management disclosed aggregate possible losses of $0–$20 million in excess of accrued liabilities. The estimate is not a maximum exposure; an adverse outcome could materially affect a particular period’s results.
- The company adopted the new lease standard in January 2019, recognizing approximately $200 million of right-of-use assets and $250 million of lease liabilities; the adoption’s income-statement effect was not material.
- The Board authorized up to $513 million of common-stock repurchases through Q2 2020. Huntington repurchased 5.2 million shares in Q3 at a weighted-average $13.02. The quarterly common dividend increased 7% to $0.15 per share.
Investor verification priorities
- Track further losses and credit migration in the energy and broader C&I portfolios, including charge-offs, nonaccrual loans, criticized loans, and reserve coverage.
- Verify the final CECL adoption impact against the disclosed 40%–50% allowance-increase estimate and its effect on capital and earnings.
- Assess whether lower interest rates and continued deposit-cost competition further pressure net interest margin and funding costs.
- Separate recurring mortgage-banking and fee income from MSR hedge effects, acquisition-related activity, and the Wisconsin branch-sale gain.
- Monitor the effect of buybacks and higher dividends on capital ratios, liquidity, and per-share earnings, alongside rising long-term debt.
- Review the status and potential outcomes of legal and regulatory matters; the disclosed $0–$20 million range is not a maximum-loss estimate.