Huntington Bancshares Incorporated — Q1 2012 Form 10-Q
Business context and reporting period. Huntington is a regional bank holding company headquartered in Columbus, Ohio, operating more than 650 banking offices across six states. This unaudited filing covers the three months ended March 31, 2012; balance-sheet comparisons are principally with December 31, 2011 and March 31, 2011.
Key financial metrics
| Metric | Q1 2012 | Comparison / context |
|---|---|---|
| Net income | $153.3 million | $126.4 million in Q1 2011; $126.9 million in Q4 2011 |
| Diluted earnings per share | $0.17 | $0.14 in Q1 2011 and Q4 2011 |
| Total revenue, FTE | $706.5 million | Up 9% year over year; $647.9 million in Q4 2011 |
| Net interest income, FTE | $421.1 million | Up 3% year over year and 1% from Q4 2011 |
| Net interest margin, FTE | 3.40% | 3.42% in Q1 2011; 3.38% in Q4 2011 |
| Provision for credit losses | $34.4 million | Down 30% year over year and 24% from Q4 2011 |
| Noninterest income / expense | $285.3 million / $462.7 million | Income up 20% and expense up 7% year over year |
| Efficiency ratio | 63.8% | 64.7% in Q1 2011; 64.0% in Q4 2011 |
| Total assets / loans and leases | $55.9 billion / $40.7 billion | At March 31, 2012; loans up 5% from year-end |
| Deposits / shareholders’ equity | $45.0 billion / $5.55 billion | At March 31, 2012 |
| Cash flows | Operating $277 million; investing $(803) million; financing $521 million | Cash and cash equivalents declined $4.8 million during the quarter |
| Capital | Tier 1 common ratio 10.15%; tangible common equity ratio 8.33% | 10.00% and 8.30%, respectively, at December 31, 2011 |
Period-end reported debt included $1.50 billion of short-term borrowings, $57 million of FHLB advances, $1.06 billion of other long-term debt and $1.49 billion of subordinated notes. Core deposits were 95% of deposits. The Bank reported $11.3 billion of unused Federal Reserve and FHLB borrowing capacity; management said liquidity was sufficient for foreseeable needs.
Material changes versus comparable periods
- Year-over-year earnings improved as lower credit-loss provision and higher noninterest income more than offset higher expenses and slightly lower net interest margin. Diluted EPS rose to $0.17 from $0.14.
- Compared with Q4 2011, net income increased $26.4 million. Revenue benefited from an auto-loan securitization gain, stronger mortgage banking income and the Fidelity Bank bargain-purchase gain. Expenses rose, notably due to litigation reserves and the absence of the prior quarter’s debt-extinguishment gain.
- Credit indicators improved: nonaccrual loans fell to $467.6 million from $541.1 million at year-end, and nonperforming assets declined 11% to $527.1 million. Net charge-offs were $83.0 million, or 0.85% annualized, essentially unchanged from Q4 and down from $165.1 million in Q1 2011.
- The allowance for credit losses was $964.0 million, or 2.37% of loans, down from $1.01 billion and 2.60% at year-end. Coverage of nonaccrual loans increased to 206% from 187%.
- Average C&I loans rose 13% year over year, while average CRE loans fell 10% and auto loans fell 20%, reflecting planned CRE runoff and auto securitizations. Average core deposits increased 5%, led by noninterest-bearing demand accounts.
Outlook, commentary, risks and unusual items
- Outlook: Management expected 2012 net interest income to be modestly above Q1, with loan and low-cost deposit growth partly offset by later-year margin pressure from asset mix and low reinvestment yields. It expected modest noninterest-income growth excluding unusual Q1 items, positive operating leverage, and modest full-year efficiency improvement. Nonaccrual loans and net charge-offs were expected to decline from Q1 levels; provision expense could be volatile. Expected 2012 effective tax rate: 24%–26%.
- Capital actions: The Federal Reserve did not object to the submitted capital plan, allowing the current common dividend to continue through Q1 2013 and permitting potential repurchases of up to $182 million, subject to conditions. No shares were repurchased in Q1. After quarter-end, Huntington announced plans to redeem $80 million of trust-preferred securities.
- Unusual items: Q1 included a $23.0 million gain from the sale of $1.3 billion of auto loans, an $11.4 million Fidelity Bank bargain-purchase gain, and a $23.5 million addition to litigation reserves. Mortgage banking income rose materially, including gains from MSR hedging. These items affect comparability.
- Acquisition: On March 30, Huntington acquired selected Fidelity Bank assets and liabilities from the FDIC, including about $520.6 million of loans and $713.4 million of deposits. Assets and liabilities were recorded at estimated fair value; review of acquired loans for purchased-impaired treatment remained underway for Q2.
- Key risks and contingencies: Management cited continued residential-property weakness, strategic defaults and second-lien home-equity losses, economic and interest-rate uncertainty, regulatory and capital requirements, and mortgage-servicing valuation sensitivity. Litigation losses reasonably possible above amounts accrued were estimated at $0–$150 million; some matters could not be reasonably estimated. In the Cyberco/Teleservices bankruptcy litigation, a bankruptcy court found the Bank liable for approximately $73 million, subject to further District Court review and other unresolved issues. IRS appeals concerning 2006–2007 tax adjustments could affect results in the period resolved.
Most important facts for investors to verify
- How much reported earnings growth persists after excluding the auto securitization gain, Fidelity bargain-purchase gain, MSR impacts and litigation-reserve charge.
- Whether credit quality continues to improve, especially in second-lien home equity and residential mortgage portfolios, and whether the lower allowance remains adequate.
- The final fair-value and credit classification of Fidelity Bank’s acquired loans, and the acquisition’s subsequent contribution to earnings and expenses.
- Developments in the Cyberco/Teleservices and other litigation, including any change to the estimated loss range or accrued reserves.
- Progress toward the stated outlook for loan and deposit growth, margin, expenses, capital returns and the projected 24%–26% tax rate.
- Changes in capital-plan permissions, regulatory requirements, liquidity sources and interest-rate exposure.