HUNTINGTON BANCSHARES INC quarterly report, Q3 FY2012

完整文档

Huntington Bancshares Incorporated — 2012 Q3 Form 10-Q

Business context and period. Unaudited quarterly report for the three and nine months ended September 30, 2012. Huntington is a regional bank holding company headquartered in Columbus, Ohio, with more than 690 banking offices across six Midwest and Appalachian states. It provides consumer and commercial banking, mortgage, auto finance, wealth, trust, and related services. The quarter included the effects of the March 2012 FDIC-assisted acquisition of Fidelity Bank.

Financial performance and condition

  • Q3 earnings and revenue: Net income was $167.8 million, or $0.19 per diluted share, versus $143.4 million and $0.16 a year earlier. Total revenue on a fully taxable-equivalent (FTE) basis was $696.6 million versus $668.7 million. Net interest income was $430.3 million GAAP and $435.6 million FTE; noninterest income was $261.1 million.
  • Margins and expenses: FTE net interest margin was 3.38%, up 4 basis points year over year but down 4 basis points from Q2 2012. Noninterest expense was $458.3 million, up 4% year over year; the efficiency ratio was 64.5% versus 63.5%.
  • Credit costs and asset quality: Q3 provision for credit losses was $37.0 million, down 15% year over year. Net charge-offs were $105.1 million, or 1.05% annualized of average loans, versus $90.6 million and 0.92% a year earlier. Nonaccrual loans were $445.0 million, 1.11% of loans, down from $565.0 million a year earlier. The allowance for credit losses (including unfunded commitments) was $842.7 million, or 2.09% of loans; coverage of nonaccrual loans was 189%.
  • Nine-month results: Net income increased 14% to $473.7 million; diluted EPS rose 16% to $0.52. FTE revenue increased 6% to $2.092 billion, net interest income increased 5%, noninterest income increased 7%, and noninterest expense increased 5%. Provision for credit losses declined 16% to $107.9 million. Net charge-offs decreased to $272.3 million from $353.2 million.
  • Balance sheet and funding: At September 30, total assets were $56.4 billion, loans and leases $40.3 billion, deposits $46.7 billion, and shareholders’ equity $5.8 billion. Core deposits were 95% of deposits and funded 78% of total assets. Wholesale funding was $5.2 billion, down from $6.6 billion at year-end 2011. Unused Federal Reserve and FHLB borrowing capacity was $11.0 billion. Management said bank and parent liquidity were sufficient for foreseeable needs.
  • Debt and capital: Balance-sheet short-term borrowings were $1.26 billion, FHLB advances $9.4 million, other long-term debt $185.6 million, and subordinated notes $1.31 billion. The company redeemed $194.3 million of trust preferred securities during the first nine months; management reported $300 million remained. Tier 1 common risk-based capital was 10.28% and tangible common equity to tangible assets was 8.74% at quarter-end. The common dividend was $0.04 per share per quarter.
  • Cash flow: For the first nine months, operating cash flow was $674.7 million, investing cash flow was negative $1.61 billion, and financing cash flow was positive $619.5 million. Cash and cash equivalents ended the period at $797.6 million, down from $1.12 billion at year-end 2011.

Material changes versus comparable periods

  • Q3 net income rose 17% year over year and 10% from Q2. The year-over-year improvement reflected higher net interest income and mortgage banking income, lower provision expense, and a lower tax provision. The Q3 tax benefit included a $19.5 million release of a state deferred-tax valuation allowance, contributing approximately $0.02 per share.
  • FTE net interest income increased year over year as average earning assets grew 5% and funding costs fell; however, asset yields and the margin faced pressure. Average C&I loans grew 20% year over year, while average auto loans declined 35%, largely reflecting securitizations and loans held for sale.
  • Noninterest income increased 1% year over year. Higher mortgage banking income and service charges were partly offset by lower electronic banking income, including the Durbin Amendment impact, and lower auto loan sale gains versus a prior-year securitization gain.
  • Credit quality generally improved: nonaccrual loans and nonperforming assets declined year over year, as did commercial criticized/classified exposures. However, reported Q3 charge-offs and consumer nonaccruals rose because of a change in treatment for certain Chapter 7 bankruptcy loans.
  • Deposits increased 8% from year-end 2011, with growth in noninterest-bearing demand accounts; average core certificates of deposit fell 20% year over year as the company reduced funding costs. Capital ratios reflected earnings retention as well as share repurchases, dividends, and trust preferred redemptions.

Outlook, commentary, risks, and unusual items

  • Management outlook: Average net interest income was expected to remain relatively stable over the next several quarters. Loan growth was expected to modestly outpace deposit growth, excluding future auto securitizations; margin pressure was anticipated from competitive loan pricing, reinvestment at lower securities yields, and diminishing deposit repricing benefits. C&I growth was expected to continue but at a slower near-term pace, CRE balances to decline, and residential mortgage and home equity balances to remain relatively stable.
  • Noninterest income, excluding auto loan sales, securities gains, and net MSR effects, was expected to remain relatively stable; noninterest expense was expected to increase modestly from Q3. Management continued to expect positive full-year operating leverage and modest efficiency-ratio improvement. Credit quality was expected to improve, though quarterly provision volatility was anticipated. Q4 effective tax rate guidance was approximately 24%–26%.
  • Post-quarter event: On October 11, 2012, Huntington completed a $1.0 billion auto loan securitization and reported an approximately $17 million gain. The filing says the securitization was accounted for as a sale.
  • Unusual credit-accounting change: New application of regulatory guidance to certain discharged, non-reaffirmed Chapter 7 consumer loans led to $33.0 million of Q3 charge-offs and increases of $63.0 million in nonaccrual loans and $71.0 million in TDRs. Huntington said approximately 90% of the affected borrowers continued to pay as scheduled; it was still evaluating accounting for subsequent payments.
  • Other unusual items: The first nine months included an $11.4 million bargain-purchase gain from the Fidelity Bank acquisition and $23.5 million of litigation-reserve additions. Q3 expense included $4.5 million for CCAR infrastructure and systems and costs related to trust preferred redemptions. The $19.5 million tax valuation-allowance release was a favorable Q3 item.
  • Regulatory and market risks: Proposed Basel III rules were estimated to reduce the Basel I Tier 1 common risk-based capital ratio by about 150 basis points if adopted as proposed; Huntington expected to remain above well-capitalized minimums on a Basel III basis. Low rates, loan-pricing competition, economic and budget uncertainty, housing weakness, and regulatory changes could affect earnings, credit, and capital. The company’s modeled interest-rate sensitivity was within board limits.
  • Contingencies: Management estimated reasonably possible legal losses above recorded accruals at $0–$150 million, while noting some matters could not be reasonably estimated. In the Cyberco/Teleservices litigation, the bankruptcy court recommended approximately $72 million of liability before prejudgment interest, subject to district court de novo review; other related claims remained in appeal. Ohio counties also brought a putative class action concerning mortgage recording and MERS. IRS disputes involving 2006–2007 returns could be material to a particular period if resolved unfavorably, though management did not expect a material adverse effect on consolidated financial position overall.
  • The Federal Reserve had not objected to the 2012 capital plan, which contemplated up to $182 million in common share repurchases and continuation of the current common dividend through Q1 2013. Future dividends and repurchases remained subject to regulatory review and capital requirements.

Most important facts for investors to verify

  1. How much of reported Q3 earnings growth depended on the $19.5 million tax valuation-allowance release and other nonrecurring items.
  2. Whether Chapter 7 loan treatment, borrower payment behavior, and related charge-offs, TDRs, and nonaccrual balances affect future credit costs or reserve adequacy.
  3. Whether core loan and deposit trends support management’s expectations for stable net interest income, slower C&I growth, and modest margin pressure.
  4. Execution and economics of auto securitizations, including the October transaction’s gain, servicing exposure, and effects on on-balance-sheet loan growth and liquidity.
  5. Final Basel III capital requirements, regulatory constraints on capital distributions, and the sustainability of the stated capital ratios and dividends.
  6. Developments in Cyberco/Teleservices and other litigation, the potential loss range, and the adequacy of recorded reserves.