Huntington Bancshares Incorporated — Form 10-Q Summary
Business context and reporting period
Huntington is a regional bank holding company headquartered in Columbus, Ohio, operating 868 full-service branches across seven states. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019; comparisons are primarily with the second quarter and first six months of 2018.
Financial performance and condition
| Metric | Q2 2019 | Comparable period / change |
|---|---|---|
| Net income | $364 million | $355 million in Q2 2018, up 3% |
| Diluted earnings per common share | $0.33 | $0.30 in Q2 2018 |
| Net interest income, GAAP | $812 million | $784 million, up 4% |
| Net interest income, FTE | $819 million | $791 million, up 4% |
| Total revenue, FTE | $1.193 billion | $1.127 billion, up 6% |
| Noninterest income | $374 million | $336 million, up 11% |
| Noninterest expense | $700 million | $652 million, up 7% |
| Net interest margin, FTE | 3.31% | 3.29% a year earlier; down 8 basis points from Q1 2019 |
| Provision for credit losses | $59 million | $56 million in Q2 2018 |
- For the first six months, net income was $722 million, up 6%; diluted EPS was $0.64, up 10%. FTE revenue rose 6% to $2.341 billion.
- At June 30, total assets were $108.2 billion, loans and leases $75.0 billion, deposits $80.9 billion, and shareholders’ equity $11.7 billion. Loans were little changed from year-end; average loans were up 4% year over year in Q2.
- Cash and cash equivalents ended the six-month period at $1.598 billion, down $1.074 billion. Operating cash flow was $852 million; investing cash outflow was $579 million and financing cash outflow was $1.347 billion. Cash-flow results reflect, among other items, a $555 million net cash payment related to the branch disposition.
- Short-term borrowings were $4.161 billion and long-term debt was $8.973 billion. Core deposits were 97% of total deposits; unpledged investment securities were $19.1 billion. Management stated the Bank had sufficient liquidity to meet obligations and comply with liquidity coverage requirements.
- Consolidated CET1 capital ratio was 9.88%, compared with 10.53% a year earlier; total risk-based capital ratio was 13.13%. Tangible common equity to tangible assets was 7.80%. Management considered capital levels adequate. Share repurchases over the preceding four quarters affected capital ratios.
Material changes versus prior comparable periods
- Q2 FTE net interest income benefited from 3% growth in average earning assets and a 2-basis-point year-over-year increase in margin. Higher asset yields were partly offset by higher deposit and other funding costs. Sequentially, margin fell 8 basis points as loan and securities yields declined and funding costs rose.
- Q2 noninterest income growth included the Wisconsin retail branch sale and a mark-to-market adjustment on economic hedges; capital markets, card-processing, and mortgage banking income also increased. YTD noninterest income rose 7%.
- Expense growth reflected higher personnel costs and technology investment, as well as a Columbus Foundation donation and lease-accounting-related costs. YTD expenses rose 5%. Lower FDIC surcharge expense partly offset increases.
- Q2 net charge-offs were $48 million, or 0.25% of average loans annualized, versus $28 million and 0.16% a year earlier. For the first six months, charge-offs rose to $119 million from $66 million, mainly due to commercial C&I losses. The allowance for loan and lease losses was $774 million, 1.03% of loans.
- Nonperforming assets were $460 million, or 0.61% of loans and related assets, versus $412 million and 0.57% a year earlier. C&I nonaccrual loans increased to $281 million from $207 million.
- Common shares repurchased during Q2 totaled 11.3 million for $152 million, completing the prior authorization. The Board subsequently authorized repurchases of up to $513 million through June 30, 2020, subject to its approval of capital actions.
Outlook, commentary, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management described economic conditions in its footprint as favorable, with positive business customers, steady loan pipelines, rational competition, and strong credit metrics; it did not foresee a near-term recession, while noting preparedness for economic headwinds and interest-rate changes.
- Management’s stated priorities include organic growth, investment in technology and risk management, positive operating leverage, moderate-to-low risk appetite, and disciplined capital management. It announced a planned 7% increase in the quarterly common dividend to $0.15 beginning in Q3 2019; the Board declared that dividend on July 17, 2019.
- Interest-rate risk remains material. Management reported that modeled net interest income and economic-value-of-equity sensitivities were within Board limits and that the balance sheet remained asset-sensitive. It held $2.2 billion of interest-rate floors to hedge potential rate declines.
- Unusual or period-specific items included the Wisconsin branch sale and associated transaction expense, hedge valuation impacts, the Columbus Foundation donation, and costs related to the Hutchinson, Shockey, Erley & Co. acquisition. The filing does not provide a single quantified net earnings impact for these items.
- Management planned to adopt CECL on January 1, 2020 and reported that model development was substantially complete, with implementation and validation expected to be substantially completed in Q3 2019. It did not quantify an overall adoption impact; it expected no material impact from purchased-credit-deteriorated assets or the securities allowance.
- Pending legal and regulatory matters had an estimated aggregate possible loss range of $0 to $25 million in excess of any related accrual, where estimable. Management said the range is not the maximum exposure and that an adverse outcome could materially affect results for a particular period.
- Other cited risks include interest-rate and market movements, competition, regulatory developments, credit deterioration, operational and cybersecurity risks, and uncertainty in litigation. Management reported no material cyber losses to date.
Important facts for investors to verify
- Whether rising commercial charge-offs and C&I nonaccruals persist, and whether the allowance remains adequate as credit conditions change.
- Whether deposit pricing and funding mix continue to pressure net interest margin, particularly under changing interest-rate conditions.
- How much reported revenue growth depends on branch-sale proceeds, hedge marks, and other nonrecurring or volatile items.
- Whether higher personnel and technology spending produces the expected revenue growth and operating leverage.
- The eventual CECL transition effect, including the retained-earnings adjustment and related allowance changes.
- Execution and regulatory or Board status of the announced dividend increase and $513 million repurchase authorization, alongside capital-ratio trends.
- Developments in legal and regulatory matters, including potential losses beyond amounts accrued and the disclosed estimable range.