Huntington Bancshares Incorporated — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Huntington is a diversified regional bank headquartered in Columbus, Ohio, with 730 branches across six states. The unaudited filing reports results under U.S. GAAP; certain revenue and margin measures are presented on a fully taxable-equivalent (FTE) basis.
Financial performance and condition
- Q2 earnings: Net income was $164.6 million, or $0.19 diluted EPS, versus $151.0 million and $0.17 a year earlier. FTE total revenue was $716.8 million, up 5% year over year. Return on average assets was 1.07% and return on average common equity was 10.8%.
- First-half results: Net income rose 3% to $313.8 million; diluted EPS increased 6% to $0.36. FTE total revenue rose 3% to $1.409 billion.
- Net interest income and margin: Q2 FTE net interest income was $466.7 million, up 8% year over year, supported by average earning-asset growth of 12%, average loans and leases growth of 9%, and securities growth of 28%. NIM was 3.28%, down 10 basis points year over year. An acquired commercial real estate loan payoff added $5.1 million to quarterly net interest income and 4 basis points to NIM.
- Fees and expenses: Q2 noninterest income was $250.1 million, down 1%; mortgage banking income fell 33% to $22.7 million, partly offset by stronger deposit fees and other income. Noninterest expense increased 3% to $458.6 million. The efficiency ratio improved to 62.7% from 63.7% a year earlier.
- Credit: Q2 provision for credit losses was $29.4 million, up 19% year over year. Net charge-offs were $28.6 million, down 18%, or 0.25% of average loans on an annualized basis, versus 0.34%. Nonperforming assets were $362.1 million, with a 0.79% NPA ratio. The allowance for credit losses was $692.0 million, equal to 1.50% of loans and leases; management described coverage as strong.
- Balance sheet and liquidity: At June 30, total assets were $63.8 billion, loans and leases $46.1 billion, deposits $48.7 billion, and shareholders’ equity $6.24 billion. Cash and cash equivalents were $1.22 billion. Core deposits were 94% of deposits and funded 72% of total assets, according to management. Unused FHLB borrowing capacity was $3.2 billion.
- Debt and funding: Period-end short-term borrowings were $1.25 billion, FHLB advances $2.88 billion, other long-term debt $2.60 billion, and subordinated notes $0.98 billion. Wholesale funding totaled $10.5 billion, up from $7.0 billion at year-end 2013. The increase reflected higher borrowings and FHLB advances. The Bank issued $1.25 billion of senior notes during the first half.
- Capital: Consolidated Tier 1 common risk-based capital was 10.26%, Tier 1 risk-based capital 11.56%, total risk-based capital 13.67%, and tangible common equity to tangible assets 8.38%. Capital ratios were affected by balance-sheet growth and share repurchases.
- Cash flow: For the six months, operating cash flow was $382.6 million, investing cash flow was negative $3.35 billion, and financing cash flow was positive $3.18 billion. Cash and cash equivalents increased $217.3 million to $1.22 billion.
Material changes versus comparable periods
- Q2 net income and FTE net interest income grew year over year, while NIM declined amid continued asset-yield pressure. Average loans expanded, led by auto and commercial lending.
- Mortgage banking weakened substantially: Q2 income declined 33% year over year; first-half income fell 42%, reflecting lower origination volumes and compressed gain-on-sale margins.
- Credit trends improved overall: Q2 charge-offs declined year over year, and NPAs were below the prior-year level. However, first-half accruing troubled debt restructurings increased to $849 million from $745 million a year earlier, and total TDRs reached $989 million.
- First-half noninterest expense rose 3% to $918.8 million. Comparisons included Q1 Camco acquisition costs, a $9.0 million litigation-reserve addition, and a $3.0 million goodwill impairment; the filing identifies these as significant items.
- Shareholders’ equity increased from $6.09 billion at December 31, 2013, to $6.24 billion. During the first half, the company repurchased 26.7 million shares for approximately $247 million.
Outlook, commentary, risks, and unusual items
- 2014 outlook: Management expected modestly higher net interest income, with moderate loan growth and modest securities growth partly offset by continued NIM pressure. Noninterest income, excluding net MSR activity, was expected near the Q2 level; noninterest expense, excluding one-time items, was also expected near the Q2 reported level.
- Management expected asset-quality metrics and NPAs to improve, while allowing for quarterly volatility. It expected net charge-offs within or below its long-term normalized range of 35–55 basis points. The expected effective tax rate for the rest of 2014 was 25%–28%.
- A previously announced consumer deposit-service-charge change, effective in July, was expected to reduce quarterly revenue by approximately $6 million, partly offset by relationship growth and the planned Michigan branch acquisition.
- On July 30, 2014, the company announced organizational actions expected to generate $30–$35 million of annualized savings, with $15–$20 million of restructuring charges in Q3 and $3–$5 million in Q4. Management said some savings would be reinvested.
- The filing cites a challenging competitive and regulatory environment, interest-rate and margin sensitivity, credit and economic risks, operational and compliance risks, and uncertainty in litigation and regulatory outcomes. In a rising-rate scenario, modeled one-year net interest income sensitivity was modest; economic value of equity was projected to decline 3.2% at +100 basis points and 8.4% at +200 basis points.
- Contingencies: Management estimated reasonably possible legal losses above accrued amounts at $0–$130 million, while noting some matters could not be reasonably estimated. A Cyberco/Teleservices bankruptcy matter had a recommended judgment of $71.8 million plus interest; district-court review was scheduled for September 22, 2014. The company also disclosed IRS tax examinations and appeals; management said an unfavorable resolution could materially affect results in the period incurred.
- Other notable items: The Camco Financial acquisition closed March 1 for $109.5 million and added $559 million of loans; it contributed $64.2 million of goodwill. Management also reported a planned purchase of deposits associated with 24 Michigan branches, targeted to close in September 2014.
Most important facts for investors to verify
- Whether loan growth—particularly auto and C&I—can continue to offset NIM compression and competitive pricing pressure.
- Whether mortgage banking income stabilizes, and how the announced deposit-fee change affects quarterly revenue.
- Credit performance in growing portfolios, including auto and C&I, and the trajectory of TDRs, NPAs, and reserve coverage.
- Actual restructuring charges and realized savings, including any reinvestment that limits net expense reductions.
- Capital and funding trends after share repurchases, the increase in wholesale funding, and completion of the Michigan branch transaction.
- Developments in the Cyberco/Teleservices litigation, other legal proceedings, and outstanding tax examinations and appeals.