Huntington Bancshares Incorporated — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; fourth-quarter comparisons are also summarized below. Huntington is a regional bank holding company headquartered in Columbus, Ohio, operating primarily in six Midwestern and Appalachian states.
Financial performance and condition
- Profit: Net income was $542.6 million ($0.59 per diluted common share), up from $312.3 million ($0.19) in 2010. Net income applicable to common shares was $511.8 million, compared with $140.3 million.
- Revenue and margins: Fully taxable-equivalent (FTE) revenue was $2.625 billion, down 2%. FTE net interest income rose 1% to $1.644 billion; net interest margin fell 6 basis points to 3.38%. Noninterest income declined 6% to $980.6 million, while noninterest expense increased 3% to $1.729 billion. The efficiency ratio increased to 63.7% from 60.4%.
- Credit costs: Provision for credit losses fell 73% to $174.1 million. Net charge-offs were $437.1 million, or 1.12% of average loans, versus $874.5 million, or 2.35%, in 2010. Nonperforming assets declined 30% to $590.3 million (1.51% of related assets); nonaccrual loans fell 30% to $541.1 million.
- Loans and reserves: Period-end loans and leases were $38.9 billion, up 2%. The allowance for credit losses was $1.013 billion, or 2.60% of loans, compared with $1.291 billion, or 3.39%, a year earlier. Coverage of nonaccrual loans improved to 187% from 166%.
- Cash flow: Operating activities provided $1.595 billion; investing activities used $1.305 billion; financing activities used $22.0 million. Cash and cash equivalents ended the year at $1.116 billion, up from $847.9 million. These cash-flow figures reflect bank balance-sheet activity and are not equivalent to unrestricted parent-company cash.
- Debt, deposits, and liquidity: Total assets were $54.45 billion and deposits were $43.28 billion. Period-end long-term debt, as defined in selected financial data, was $3.098 billion, down from $3.814 billion. Core deposits were $41.2 billion, 95% of deposits. Wholesale funding was $6.6 billion, down from $8.4 billion; unused Federal Reserve and FHLB borrowing capacity was $10.5 billion. Parent-company cash and cash equivalents were $918.0 million.
- Capital and returns: Consolidated Tier 1 common risk-based capital ratio was 10.00%, up from 9.29%; total risk-based capital ratio was 14.77%. Return on average assets was 1.01%, versus 0.59%. Tangible common equity to tangible assets was 8.30%, versus 7.56% (non-GAAP measure).
Fourth-quarter and year-over-year changes
- Fourth-quarter net income was $126.9 million, or $0.14 per diluted share, compared with $122.9 million, or $0.05, in fourth-quarter 2010. The prior-year quarter included substantially higher preferred-stock dividends, affecting common-share earnings.
- Fourth-quarter net interest income was $415.0 million; FTE net interest margin was 3.38%, versus 3.37% a year earlier. Average loans rose 5% year over year, while average deposits rose 5%.
- Fourth-quarter noninterest income fell 13% year over year to $229.4 million, driven principally by lower mortgage banking income and the Durbin Amendment’s debit-interchange fee cap. Fourth-quarter noninterest expense declined 1% to $430.3 million, including a $9.7 million debt-extinguishment gain.
- The annual earnings improvement was driven mainly by sharply lower credit-loss provisions. This was partly offset by reduced mortgage banking and deposit-service-charge income and higher personnel and technology costs. Mortgage originations fell 28% for the year; service charges on deposit accounts declined 9%.
Outlook, risks, contingencies, and notable items
- 2012 outlook: Management expected net interest income to improve modestly from the fourth-quarter 2011 level, with loan and low-cost deposit growth continuing. It anticipated modestly higher noninterest income, further credit-quality improvement, and progress on efficiency, while warning that expenses and regulatory costs could rise. Management expected the effective tax rate to be approximately 35% of pretax income less $65–$75 million of specified permanent tax differences.
- Credit and economic risks: Management cited continued weakness in housing, unemployment, commercial real-estate stress, and uncertain economic conditions. The $1.8 billion noncore CRE portfolio contained most CRE credit challenges; $204 million of it was nonaccrual at year-end. Home-equity and residential-mortgage exposures remain sensitive to property values and borrower performance.
- Rates, funding, and regulation: Prolonged low rates could compress margins; rate changes can affect asset values, mortgage servicing rights, and credit performance. Dodd-Frank, prospective Basel-related capital rules, Federal Reserve capital-plan review, and stress-testing requirements may affect costs and capital distributions. The Durbin fee change reduced fourth-quarter electronic banking income by $17.3 million versus the prior quarter.
- Dividends and capital actions: The Bank could not pay dividends to the parent without regulatory approval at year-end, and the company did not expect Bank-to-parent dividends in 2012. The quarterly common dividend was raised to $0.04 per share during 2011; no common shares were repurchased. In fourth-quarter 2011, Huntington exchanged $35.5 million of trust preferred securities for Series B preferred stock and expected to complete the remaining $3.0 million exchange in early 2012.
- Contingencies and unusual items: Management estimated reasonably possible legal losses in excess of accruals at $0–$140 million, while noting some matters could not be reasonably estimated. Mortgage-loan representation-and-warranty exposure remained uncertain; the filing says a reasonable loss range could not be estimated. The IRS was examining 2008–2009 returns, and proposed adjustments relating to earlier years remained under appeal. Other notable items included a $17.0 million first-quarter litigation-reserve addition, a $6.4 million Visa-related derivative loss, and a $9.7 million pretax gain from early extinguishment of debt.
- Controls and audit: Management and Deloitte & Touche reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether credit improvement continues and the reduced reserve remains adequate as the allowance-to-loan ratio declined to 2.60%.
- Whether mortgage banking income stabilizes, and the subsequent performance and valuation of mortgage servicing rights.
- Whether the planned first-half 2012 automobile-loan securitization is completed on expected terms, including treatment of the $1.3 billion transferred to loans held for sale.
- Whether regulatory approval permits future capital distributions, and how capital-plan review and changing capital rules affect dividends or buybacks.
- Developments in the disclosed litigation, mortgage repurchase claims, and IRS examinations, including outcomes beyond current accruals or estimates.