Huntington Bancshares Incorporated — Q3 2011 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2011. Huntington is a regional bank holding company headquartered in Columbus, Ohio, with banking operations across six states and businesses spanning consumer and commercial banking, auto finance, mortgage banking, wealth management, and related services.
Financial performance and position
| Metric | Q3 2011 / September 30, 2011 | Comparison |
|---|---|---|
| Net income | $143.4 million; diluted EPS $0.16 | Q3 2010: $100.9 million and $0.10 per diluted share; Q2 2011: $145.9 million and $0.16 |
| Net interest income | $406.5 million GAAP; $410.1 million fully taxable equivalent (FTE) | GAAP Q3 2010: $410.0 million; FTE margin was 3.34%, down 11 basis points year over year and 6 basis points sequentially |
| Revenue and expenses | $668.7 million FTE revenue; $258.6 million noninterest income; $439.1 million noninterest expense | FTE revenue was down 1.6% year over year; noninterest expense rose 2.8% |
| Credit costs and quality | $43.6 million provision; $90.6 million net charge-offs, or 0.92% annualized; nonaccrual loans $565.0 million | Provision was $119.2 million and net charge-offs $184.5 million in Q3 2010. Nonaccrual loans fell 8% sequentially |
| Loans, deposits, and assets | $39.0 billion loans and leases; $43.2 billion deposits; $55.0 billion total assets | Loans were up 2% from year-end 2010; deposits were up 3% |
| Allowance and capital | Total allowance for credit losses $1.06 billion, or 2.71% of loans; Tier 1 common risk-based ratio 10.17% | Allowance coverage of nonaccrual loans was 187%; Tier 1 common ratio was 9.29% at year-end 2010 |
Cash flow and funding. For the first nine months, operating cash flow was $1.39 billion, investing cash flow was a use of $618 million, and financing cash flow was $574 million. Cash and cash equivalents ended September at $2.19 billion. Core deposits were 94% of deposits and funded 74% of total assets. The company reported $9.8 billion of unused Federal Reserve and FHLB borrowing capacity. At period-end, short-term borrowings were $2.22 billion, FHLB advances $14 million, other long-term debt $1.42 billion, and subordinated notes $1.54 billion. Shareholders’ equity was $5.40 billion.
Material changes versus comparable periods
- For the first nine months, net income increased to $415.8 million from $189.4 million. The largest driver was a 76% reduction in provision for credit losses, to $128.8 million from $547.6 million. The comparison also reflects significant prior-year Franklin-related credit costs and tax benefits; it is not solely an underlying earnings trend.
- Year-to-date net interest income rose 1%, while FTE net interest margin declined to 3.39% from 3.46%. Average loans grew 4%; growth in C&I and auto lending offset a 15% decline in average CRE loans.
- Year-to-date noninterest income declined 3%, chiefly as mortgage banking income fell 52% and deposit service charges fell 15%. Noninterest expense rose 5%, including higher personnel and data-processing costs and a $17.0 million first-quarter litigation reserve addition.
- Credit performance improved: year-to-date net charge-offs declined to $353.2 million from $702.2 million, and nonperforming assets declined 27% from December 31, 2010. However, the filing cautions that credit measures remained elevated against historical levels, and total troubled debt restructurings increased to $811.0 million from $666.9 million at year-end.
Outlook, commentary, and risks
- Management expected net interest income to improve only modestly from Q3; continued low rates, lower reinvestment yields, and mix shifts could pressure margin. If the rate environment persisted through 2012, margin could fall modestly below the stated long-term range of 3.30%–3.75%.
- Management anticipated a modest Q4 decline in noninterest income, including an approximately $16 million, or 50%, reduction in electronic banking income following the October 1 debit interchange rule. It expected modestly lower expenses in coming quarters, continued declines in nonaccrual loans and charge-offs, and provision expense near current levels, with possible volatility. Expected effective tax rate was 24%–27%.
- Management cited weak economic growth, fragile business and consumer confidence, high unemployment, housing-market stress, and fiscal uncertainty. It planned to grow C&I and auto lending while reducing CRE exposure, particularly noncore CRE.
- Mortgage risks include MSR valuation volatility and possible higher servicing costs. The MSR valuation decline materially reduced Q3 mortgage banking income. PMI stopped writing new commitments and later moved to a 50% partial claims-payment plan; Huntington said its exposure was not expected to materially affect results or financial position.
- The reserve for mortgage loan representations and warranties was $23.9 million. Management said it could not reasonably estimate the range of possible losses for this exposure. For current legal proceedings, it estimated reasonably possible losses in excess of accruals at $0–$160 million, while noting some matters could not be estimated and unfavorable outcomes could be material in a particular period. IRS examinations and proposed tax adjustments also remain open; management said resolution was not expected to materially harm consolidated financial position.
- Capital ratios were above regulatory “well-capitalized” thresholds, but the company noted potential additional scrutiny as an institution with more than $50 billion in assets. The Bank could not pay a dividend to the parent at quarter-end without regulatory approval. Management said liquidity was sufficient for the foreseeable future.
Important facts for investors to verify
- Whether credit-quality improvement continues, particularly in noncore CRE, residential mortgages, and home equity, and whether allowance coverage remains adequate.
- Whether net interest margin and FTE net interest income meet management’s outlook under sustained low rates and changing asset and deposit mix.
- The actual Q4 effect of the debit interchange rule, including whether the expected $16 million electronic-banking income decline is realized.
- Subsequent MSR valuations, mortgage repurchase claims, and developments in foreclosure oversight and PMI-related exposure.
- Developments in litigation, including the Cyberco-related proceedings, and in IRS examinations and other tax contingencies.
- Capital and liquidity developments, including regulatory dividend constraints, planned capital distributions, and the outcome of the company’s first CCAR review.