Huntington Bancshares Incorporated — 2010 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2010, with separate fourth-quarter comparisons. Huntington is a regional bank holding company headquartered in Columbus, Ohio, operating primarily in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. Its businesses include retail and commercial banking, auto finance, commercial real estate, mortgage banking, and wealth and government services. The company reorganized its business segments late in 2010.
Financial performance and position
| Metric | 2010 | Prior comparable period / context |
|---|---|---|
| Net income | $312.3 million; diluted EPS $0.19 | 2009 net loss of $3.094 billion; diluted loss per share $6.14 |
| Fourth-quarter net income | $122.9 million; diluted EPS $0.05 | Fourth-quarter 2009 net loss of $369.7 million; diluted loss per share $0.56 |
| Revenue, fully taxable equivalent (FTE) | $2.672 billion, up 9% | 2010 versus 2009 |
| Net interest income / margin | $1.619 billion; margin 3.44% | Net interest income up 14%; margin was 3.11% in 2009 |
| Noninterest income | $1.042 billion, up 4% | Mortgage banking growth was partly offset by lower deposit service charges |
| Noninterest expense | $1.674 billion | Down 59% as 2009 included $2.607 billion of goodwill impairment; excluding that impairment, 2010 expense increased $247.3 million |
| Provision for credit losses | $634.5 million | Down from $2.075 billion in 2009 |
| Net charge-offs (NCOs) | $874.5 million; 2.35% of average loans | Down from $1.477 billion and 3.82% in 2009 |
| Nonperforming assets (NPAs) | $844.8 million; 2.21% ratio | Down from $2.058 billion and 5.57% at year-end 2009 |
| Allowance for credit losses (ACL) | $1.291 billion; 3.39% of loans; 166% of nonaccrual loans | ACL was $1.531 billion, 4.16% of loans, and 80% of nonaccrual loans at year-end 2009 |
| Deposits and liquidity | Period-end deposits $41.854 billion; core deposits were 93% of deposits. Cash and due from banks: $847.9 million | Core deposits grew 9% on an average-balance basis; unused Federal Reserve and FHLB borrowing capacity was $8.8 billion |
| Debt and equity | Long-term debt $3.814 billion; shareholders’ equity $4.981 billion. Tangible common equity ratio 7.56% | Equity was $5.336 billion and tangible common equity ratio 5.92% at year-end 2009 |
| Regulatory capital | Consolidated Tier 1 risk-based ratio 11.55%; total risk-based ratio 14.46%; leverage ratio 9.41% | Above well-capitalized thresholds; Bank ratios were 8.51%, 12.82%, and 6.97%, respectively |
| Cash flows | Operating +$840.8 million; investing −$2.777 billion; financing +$1.263 billion; cash and cash equivalents declined $673.5 million | Year ended December 31, 2010 |
Material changes versus the prior comparable period
- The return to annual profitability primarily reflects much lower credit-loss provisioning and the absence of the 2009 goodwill impairment charge. The 2009 impairment was noncash and related mainly to prior acquisitions.
- Credit indicators improved substantially: NCOs fell 41%, NPAs fell 59%, and criticized commercial loans declined 38%. Management cautioned that credit costs remained above historical levels and the economic recovery was fragile.
- Net interest income improved as the margin widened, supported by lower deposit pricing and a shift from time deposits toward transaction accounts. Average core deposits rose $3.1 billion, or 9%; average loans and leases declined 4%, including a 21% decline in average CRE loans.
- Auto lending expanded: 2010 originations were $3.4 billion, up $1.8 billion from 2009. Average auto loans and leases also benefited from consolidating a previously off-balance-sheet securitization under new accounting guidance.
- Mortgage banking income increased 57% to $175.8 million, while deposit service charges declined 12% to $267.0 million, partly reflecting Regulation E changes and the company’s voluntary fee reductions and 24-Hour Grace program.
- In December, Huntington issued $920 million of common stock and $300 million of subordinated debt and used the proceeds and other funds to repurchase $1.4 billion of TARP preferred capital. The issuance increased common shares substantially; the related deemed dividend reduced 2010 earnings per common share by $0.08. The company repurchased the Treasury warrant for $49.1 million in January 2011.
Outlook, management commentary, risks and unusual items
- 2011 outlook: Management expected a relatively stable economy, with possible improvement in the second half. It anticipated net income growth from the fourth-quarter 2010 level, primarily from continued lower credit costs, and expected NCOs, NPAs, and criticized loans to continue declining. Pre-tax, pre-provision income was expected to remain in line with second-half 2010 performance.
- Management expected net interest margin to be flat or slightly higher than fourth-quarter 2010, continued core-deposit growth, ongoing auto and C&I loan growth, modest home-equity and residential mortgage growth, and further but slower CRE runoff. Fee income faced expected pressure from lower interchange fees and weaker mortgage banking revenue if rates rose; expenses were expected to rise modestly early in 2011 and increase later with business investment.
- The Dodd-Frank Act created uncertainty around implementation, capital rules, consumer fees, and interchange rates. Management estimated interchange fees at about $90 million annually and said the Federal Reserve’s proposed rate limits could reduce them by approximately 75%–85%, depending on the final cap. Trust-preferred securities totaled $569.9 million; their potential exclusion from Tier 1 capital was estimated to reduce the Tier 1 risk-based ratio by about 130 basis points.
- Key credit risks include continued weakness in Midwest employment and real estate, CRE retail-property exposure, declining collateral values, and possible further loan losses. Home equity and residential real estate together remain material exposures. Management noted that noncore CRE continued to carry most CRE credit challenges.
- Investment securities with elevated valuation risk—Alt-A, pooled-trust-preferred, and private-label CMO securities—had a combined fair value of $284.6 million at year-end. Huntington recorded $13.7 million of credit-related other-than-temporary impairment losses in 2010 and said further losses were possible.
- Other matters include $20.2 million reserved for mortgage-loan representations and warranties; proposed tax-return adjustments under dispute; and litigation, including an ERISA class action settlement of $1.45 million subject to court approval. Management reported no significant foreclosure “robo-signing” issue after its review, while noting process enhancements were underway.
- Dividend capacity is constrained: the Bank could not pay dividends to the parent without regulatory approval at year-end 2010, and management did not anticipate requesting approval in the near term. Common dividends declared were $0.04 per share for 2010. The filing reports no standalone 2011 earnings guidance.
Important facts for investors to verify
- Whether credit improvement continued after year-end, particularly in CRE, residential mortgages, and home equity; compare subsequent NCOs, NPAs, criticized loans, and reserve coverage.
- Whether the $1.291 billion ACL remains adequate as loan quality, collateral values, and economic conditions change.
- The final and realized impact of Dodd-Frank interchange rules, capital requirements, and related compliance costs on revenue and capital ratios.
- How much of reported earnings improvement is sustainable after separating lower credit costs and unusual items from underlying operating trends; note the 2010 TARP-related deemed dividend and the 2009 goodwill impairment and debt-extinguishment gain.
- Common-share dilution and capital structure following the 146 million-share offering, TARP preferred repurchase, subordinated-debt issuance, and January 2011 warrant repurchase.
- Parent-company liquidity and dividend flexibility given the Bank’s restriction on dividends without regulatory approval.
- Final outcomes and potential financial effects of tax examinations, mortgage representations-and-warranties claims, and pending litigation.
The independent auditor issued unqualified opinions on the 2010 consolidated financial statements and internal control over financial reporting.