Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. HUNTINGTON BANCSHARES INC/MD (49196) 10-Q published on Apr 29, 2019 at 5:29 pm
Reporting Period: Mar 30, 2019
Average earning assets for the 2019 first quarter increased $3.8 billion, or 4%, from the year-ago quarter, primarily reflecting a $4.3 billion, or 6%, increase in average loans and leases. Average C&I loans increased $2.3 billion, or 8%, reflecting growth in corporate banking, asset finance, dealer floorplan, and middle market banking. Average residential mortgage loans increased $1.6 billion, or 18%, driven by the successful expansion of our home lending business over the past two years. Average RV and marine loans increased $0.8 billion, or 33%, primarily reflecting the success of the geographic expansion over the past two years, while maintaining our commitment to super prime originations. Held-for-sale and other earning assets increased $0.7 billion, or 131%, primarily due to the inclusion of deposits in Federal Reserve Bank balances. These balances were treated as non-earning assets prior to the fourth quarter 2018. As of March 31, 2019, approximately $126 million of loans were included in held-for-sale related to the previously announced sale of our Wisconsin branches, which is expected to close in the 2019 second quarter. Average securities decreased $1.2 billion, or 5%, primarily due to runoff in the portfolio in 2018.
Commercial Banking reported net income of $123 million in the first three-month period of 2019, a decrease of $41 million, or 25%, compared to the year-ago period. Provision for credit losses increased $22 million, or 105%, primarily due to net charge offs of $27 million compared to a net recovery of $1 million in the prior year. Segment net interest income decreased $12 million, or 4%, primarily due to a 31 basis point decrease in net interest margin driven by an increase in loan funding costs and deposit rates, partially offset by a 5% growth in average loans. Noninterest income increased $5 million, or 7%, largely driven by an increase in the gain on sale of loans and leases as well as an increase in loan commitment and other fees partially offset with lower capital market fees as a result of an unfavorable commodities derivative mark-to-market adjustment related to a customer default. Noninterest expense increased $24 million, or 20%, primarily due to allocated overhead and personnel expense, which was driven by the acquisition of Hutchinson, Shockey, and Erly & Co. on October 1, 2018, and other taxes related to the adoption of the new lease accounting standard, partially offset by lower FDIC insurance expense.
Huntington leases equipment to customers, and substantially all such arrangements are classified as either sales-type or direct financing leases, which are included in C&I loans. These leases are reported at the aggregate of lease payments receivable and estimated residual values, net of unearned and deferred income, and any initial direct costs incurred to originate these leases. Renewal options for leases are at the option of the lessee, and are not included in the measurement of lease receivables as they are not considered reasonably certain of exercise. Purchase options are typically at fair value, and as such those options are not considered in the measurement of lease receivables or in lease classification.
At March 31, 2019, Huntington and its subsidiaries were obligated under noncancelable leases for branch and office space. These leases are all classified as operating due to the amount of time such spaces are occupied relative to the underlying assets useful lives. Many of these leases contain renewal options, most of which are not included in measurement of the right-of-use asset as they are not considered reasonably certain of exercise (i.e., Huntington does not currently have a significant economic incentive to exercise these options). Some leases contain escalation clauses calling for rentals to be adjusted for increased real estate taxes and other operating expenses or proportionately adjusted for increases in the consumer or other price indices.
Occasionally, Huntington will sublease the land and buildings for which it has obtained the right to use; substantially all of those sublease arrangements are classified as operating, with sublease income recognized on a straight-line basis over the contractual term of the arrangement. Huntington has elected not to include non-lease components in the measurement of right-of-use assets, and as such allocates the costs attributable to such components, where those costs are not separately identifiable, via per-square-foot costing analysis developed by the entity for owned and leased spaces. Huntington uses a portfolio approach to develop discount rates as its lease portfolio is comprised of substantially all branch space and office space used in the entity’s operations. That rate, an input used in the measurement of the entity’s right-of-use assets, leverages an incremental borrowing rate of appropriate tenor and collateralization.
During the first quarter of 2019, Huntington purchased $2.8 billion of interest rate floors and designated them as cash flow hedges for variable rate commercial loans indexed to LIBOR. These interest rate floors will reduce the potential adverse effect of interest rate decreases on future interest income. Huntington will receive interest payments when the interest rate indexed to LIBOR falls below the strike price mentioned in the contracts. The contracts are measured at fair value with any change in fair value related to intrinsic value recognized in OCI and reclassified into earnings when the cash flows related to the hedged item impact earnings. Any change in fair value related to time value is recognized in OCI. The initial premium paid for these contracts represents the time value of the contracts and is not included in the measurement of hedge effectiveness. The premium is amortized on straight line basis as a reduction to interest income over the contractual life of these contracts.
Gains and losses on derivatives instruments related to loans and investment securities are recorded in interest income and interest expense, respectively.