Huntington Bancshares Incorporated — Q1 2015 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2014, unless otherwise noted. Huntington is a regional bank holding company headquartered in Columbus, Ohio, operating 733 branches across six Midwestern states and offering consumer and commercial banking, mortgage, auto finance, equipment finance, wealth management, and related services.
Financial performance and condition
- Earnings: Net income was $165.9 million, up 11% from $149.1 million in Q1 2014. Diluted EPS rose to $0.19 from $0.17. Return on average assets was 1.02% versus 1.01%; return on average common equity was 10.6% versus 9.9%.
- Revenue and margins: GAAP net interest income was $467.7 million, up 7% year over year; fully taxable-equivalent (FTE) net interest income was $475.2 million. FTE total revenue was $706.9 million, up 2%. Net interest margin was 3.15%, down 12 basis points year over year and 3 basis points sequentially. The efficiency ratio improved to 63.5% from 66.4%.
- Credit costs: Provision for credit losses was $20.6 million, down $4.0 million year over year. Net charge-offs were $24.4 million, or 0.20% of average loans, versus $43.0 million and 0.40% a year earlier. The total allowance for credit losses was $659.9 million, or 1.38% of loans, compared with 1.40% at year-end.
- Asset quality: Nonperforming assets increased 19% from year-end to $400.8 million, primarily due to one large C&I relationship moving to nonaccrual. C&I criticized loans rose for a fourth consecutive quarter; management cited continued improvement in overall credit quality but noted possible quarterly volatility.
- Balance sheet: Total assets were $68.0 billion, loans and leases $47.7 billion, deposits $52.8 billion, and shareholders’ equity $6.5 billion. Total deposits increased 2% from year-end; core deposits were 94% of deposits. Average earning assets rose 11% year over year, including 10% growth in average loans and leases.
- Debt and capital: Quarter-end short-term borrowings were $2.0 billion and long-term debt $5.2 billion. Under transitional Basel III, CET1 was 9.51%, Tier 1 risk-based capital 10.22%, and total risk-based capital 12.48%. Tangible common equity to tangible assets was 7.95%, down from 8.63% a year earlier. The filing cautions that 2015 regulatory capital ratios use Basel III, while earlier comparisons use Basel I.
- Cash flow and liquidity: Operating cash flow was negative $18.3 million, investing cash flow negative $1.17 billion, and financing cash flow positive $866.4 million; cash and cash equivalents ended at $899.9 million. Investing outflows included the $457.8 million Macquarie acquisition and loan growth. Management said the Bank and parent had sufficient liquidity for foreseeable obligations; core deposits funded 73% of total assets.
Material changes versus comparable periods
- FTE net interest income benefited from balance-sheet expansion, but margin compression partly offset the growth. Management attributed the year-over-year margin decline mainly to earning-asset mix and yields, partly offset by lower funding costs.
- Noninterest income fell 7% year over year, primarily because Q1 2014 included $17.0 million of securities gains and Q1 2015 had none. Capital markets fees and electronic banking income increased; deposit service charges declined.
- Reported noninterest expense declined slightly year over year, but adjusted expense excluding Significant Items increased 4% to $455.5 million, reflecting personnel, technology, and franchise investment. Prior-year comparisons included litigation reserves and Camco acquisition costs.
- Average automobile loans grew 29% year over year, while approximately $1.0 billion of auto loans was transferred to held-for-sale at quarter-end in anticipation of a future securitization. The reported quarter-end auto portfolio therefore declined from year-end.
- Macquarie Equipment Finance was acquired for $457.8 million on March 31. Huntington added approximately $1.1 billion of assets and assumed $616.6 million of debt and other liabilities, including $838.6 million of lease receivables. The acquisition added $155.8 million of goodwill.
Outlook, commentary, risks, and unusual items
- Management said its 2015 plan assumes a flat interest-rate environment and is not dependent on a rate increase. It expects positive full-year operating leverage excluding Significant Items and net MSR activity, with and without Macquarie’s run-rate impact.
- Management expects 2015 noninterest expense growth of 2%–4%, excluding Significant Items and recurring Macquarie-related expense; an effective tax rate of 24%–27%; and net charge-offs within or below its normalized 35–55 basis-point range. Asset-quality measures are expected to remain near current levels, with moderate quarterly volatility.
- Management expects Macquarie to generate approximately $500 million in annual lease originations and $75 million–$85 million in annualized revenue. These are expectations, not reported Q1 results.
- On April 21, 2015, the board declared a $0.06 common dividend payable July 1 and authorized up to $366 million of common-stock repurchases through Q2 2016. The approved capital plan also contemplated a $0.07 quarterly dividend beginning in Q4 2015. Q1 repurchases of 4.9 million shares at an average $10.45 completed the prior authorization.
- Legal contingencies include an estimated $0–$110 million range of reasonably possible losses above amounts accrued. A Cyberco/Teleservices bankruptcy proceeding includes a bankruptcy-court recommendation for $71.8 million plus interest; the District Court was conducting de novo review and had not ruled. Management considered existing legal accruals adequate, while noting an unfavorable resolution could be material in a particular period.
- Other notable exposures include mortgage representation-and-warranty claims, interest-rate and MSR valuation sensitivity, and less-liquid Level 3 securities. The filing says it cannot estimate a reasonably possible loss range for mortgage representation-and-warranty exposure. Unrecognized tax benefits were $24.3 million; the IRS examination of 2010–2011 returns and certain state examinations remained relevant.
Important facts for investors to verify
- Whether the large C&I exposure driving the increase in nonaccrual loans and nonperforming assets stabilizes, and how criticized loans and credit costs trend.
- Whether loan and deposit growth can sustain net interest income despite margin pressure, particularly in the flat-rate environment described by management.
- Macquarie’s integration, recurring costs, realized revenue, lease originations, and contribution to operating leverage.
- Progress and outcomes in the Cyberco/Teleservices litigation, other legal matters, mortgage repurchase exposure, and tax examinations.
- Capital and liquidity after share repurchases, dividends, acquisition funding, and phased-in Basel III requirements; also verify the timing and execution of the announced buyback and dividend plans.
- Cash-flow movements and the effect of the auto-loan transfer and any subsequent securitization on reported loan balances and funding needs.