Huntington Bancshares Incorporated — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; the filing also compares fourth-quarter 2012 with fourth-quarter 2011. Huntington is a regional bank holding company headquartered in Columbus, Ohio, with banking operations across six Midwestern and Appalachian states and four principal business segments.
Key financial results
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Net income | $641.0 million | $542.6 million | +18% |
| Diluted earnings per common share | $0.71 | $0.59 | +$0.12 |
| Net interest income | $1,710.5 million | $1,629.2 million | +5% |
| Net interest margin, FTE | 3.41% | 3.38% | +3 bps |
| Noninterest income | $1,097.9 million | $980.6 million | +12% |
| Noninterest expense | $1,835.9 million | $1,728.5 million | +6% |
| Provision for credit losses | $147.4 million | $174.1 million | -15% |
| Return on average assets | 1.15% | 1.01% | +14 bps |
| Efficiency ratio | 63.4% | 63.7% | -30 bps |
Fully taxable-equivalent (FTE) revenue was $2.829 billion, up 8%. Net income applicable to common shareholders was $609.0 million. The filing attributes higher earnings mainly to stronger fee income and net interest income, partly offset by higher expenses.
Fourth quarter: Net income was $167.3 million, or $0.19 per diluted common share, versus $126.9 million, or $0.14, a year earlier. Net interest income was $434.1 million; FTE net interest margin was 3.45%, versus 3.38% a year earlier. Noninterest income rose 30% to $297.7 million, while noninterest expense rose 9% to $470.6 million.
Balance sheet, capital, and liquidity
- At year-end, total assets were $56.15 billion, up from $54.45 billion; loans and leases were $40.73 billion, up 5%; deposits were $46.25 billion, up 7%.
- Shareholders’ equity was $5.79 billion, compared with $5.42 billion. Consolidated regulatory capital ratios were 10.48% Tier 1 common, 12.02% Tier 1 risk-based, 14.50% total risk-based, and 10.36% Tier 1 leverage. The company and Bank exceeded well-capitalized thresholds.
- Cash and cash equivalents were $1.263 billion. Core deposits were 95% of deposits; management reported $10.3 billion of unused Federal Reserve and FHLB borrowing capacity. Wholesale funding was $5.2 billion, down from $6.6 billion.
- Year-end borrowings included $589.8 million of short-term borrowings, $1.009 billion of FHLB advances, $158.8 million of other long-term debt, and $1.197 billion of subordinated notes. Selected data report total long-term debt of $1.365 billion, excluding $1.0 billion of short-term FHLB advances.
- Cash-flow statement: operating cash flow was $1.002 billion, investing cash outflow was $1.083 billion, financing cash inflow was $228 million, and cash and cash equivalents increased $147 million.
Material changes versus 2011
- Net interest income benefited from 4% growth in average earning assets and lower deposit costs; the decline in asset yields partly offset those benefits. Average core deposits increased 8%.
- Noninterest income growth was led by mortgage banking income, up $107.7 million, and loan-sale gains, up $26.2 million. Electronic banking income fell $29.4 million; the Durbin Amendment reduced 2012 electronic banking income by more than $55 million versus 2011.
- Personnel costs rose $95.7 million, reflecting more employees and higher compensation; total employees increased 5% to 11,806. The Fidelity Bank acquisition, completed March 30, 2012, contributed an $11.2 million bargain-purchase gain and $14.1 million of expenses.
- Credit indicators improved: nonaccrual loans fell 25% to $407.6 million; net charge-offs declined to $342.5 million, or 0.85% of average loans, from $437.1 million, or 1.12%. Nonperforming assets fell 24% to $445.8 million.
- The allowance for credit losses declined to $809.7 million from $1.013 billion; its ratio to loans fell to 1.99% from 2.60%, while coverage of nonaccrual loans rose to 199% from 187%.
- Commercial and industrial loans grew, while commercial real estate loans continued to run off. The company sold or securitized $2.5 billion of automobile loans during 2012. Total common shares repurchased were 23.3 million at a weighted-average $6.36 per share; no shares were repurchased in 2011.
Outlook, risks, and unusual items
- 2013 outlook: Management expected net interest income to grow modestly after the usual first-quarter seasonal decline, with loan growth partly offset by margin pressure. It expected NIM to remain above the mid-3.30% range, C&I growth weighted toward the second half, and CRE balances of approximately $5.0–$5.5 billion. Management anticipated two automobile securitizations, improvement in credit quality, and net charge-offs approaching normalized levels by year-end.
- Management expected noninterest income, excluding specified mortgage-servicing-rights and loan-sale effects and seasonality, to remain relatively stable. It moderated planned investment spending to pursue positive operating leverage. The expected 2013 effective tax rate was approximately 35% of pretax income less $75–$90 million of permanent differences.
- Significant 2012 items included a $21.3 million after-tax release of a state deferred-tax valuation allowance (+$0.02 per share), an $11.2 million bargain-purchase gain (+$0.01 per share), and $23.5 million of additions to litigation reserves (-$0.02 per share).
- New regulatory treatment of certain non-reaffirmed Chapter 7 consumer debts added $34.6 million to 2012 net charge-offs and $60.1 million to nonaccrual loans; related TDR balances increased $79.5 million. The filing says many affected borrowers had previously been current.
- The Bank’s undivided profits were in deficit, so it could not pay dividends to the holding company without regulatory approval. Management did not anticipate Bank dividends to the parent in 2013, apart from specified subsidiary distributions. The parent declared a $0.04 quarterly common dividend; future capital distributions remain subject to regulatory review.
- Proposed Basel III capital rules were estimated to reduce the Basel I Tier 1 common ratio by about 150 bps using June 2012 balance-sheet data; management expected capital to remain above well-capitalized minimums under Basel III. The company’s 2013 capital plan was pending Federal Reserve review.
- Material risk areas include credit deterioration—especially residential real estate, home equity, and noncore CRE—interest-rate and mortgage-servicing-rights sensitivity, funding-market access, regulatory changes, operational and cyber risks, and litigation. Management estimated reasonably possible litigation losses above accrued amounts at $0–$130 million, while noting some matters could not be estimated.
- In the Cyberco/Teleservices matter, the bankruptcy court recommended a judgment against the Bank of approximately $71.8 million plus $8.8 million of interest through July 27, 2012; district-court review remained pending. Huntington also disclosed an appeal in related litigation. The filing warns an unfavorable resolution could materially affect a particular reporting period.
Most important facts for investors to verify
- Whether loan growth and deposit repricing offset continued pressure on asset yields and net interest margin in 2013.
- Whether credit improvement continues, particularly in home equity, residential mortgage, and noncore CRE; assess the effect of the Chapter 7 accounting change on comparability.
- Whether elevated personnel and investment costs translate into improved revenue growth and operating leverage.
- Federal Reserve decisions on the capital plan, dividends, repurchases, and the timing and final impact of Basel III requirements.
- Developments in Cyberco/Teleservices and other litigation, including potential losses beyond booked reserves.
- Mortgage banking, MSR valuation and hedging results, and the sustainability of loan-sale and securitization gains.
- Cash-flow detail and the maturity, cost, and availability of funding; also monitor the Bank’s dividend restriction and the parent company’s reliance on upstream funds.
The filing reports unqualified audit opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2012. Several capital and tangible-equity measures are non-GAAP or regulatory measures and may not be directly comparable across companies.