Huntington Bancshares Incorporated — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; fourth-quarter results are also summarized. Huntington is a regional bank holding company headquartered in Columbus, Ohio, operating across six Midwestern states through its bank subsidiary and related financial businesses. The financial statements received an unqualified audit opinion; management and its auditor reported effective internal control over financial reporting.
Financial performance and condition
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net income | $693 million | $632 million | Up 10% |
| Diluted earnings per common share | $0.81 | $0.72 | Up 13% |
| FTE net interest income | $1.983 billion | $1.865 billion | Up 6% |
| Net interest margin | 3.15% | 3.23% | Down 8 basis points |
| Noninterest income | $1.039 billion | $979 million | Up 6% |
| Noninterest expense | $1.976 billion | $1.882 billion | Up 5% |
| Efficiency ratio | 64.5% | 65.1% | Improved |
Return on average assets was 1.01%, unchanged from 2014; return on average tangible common equity was 12.4%, up from 11.8%. Higher earning-asset volumes drove net interest income growth, while lower asset yields and higher funding costs compressed the margin. Fee growth was led by card and payment processing and mortgage banking. Expense growth primarily reflected personnel, technology investment and Huntington Technology Finance.
Balance sheet and capital: Total assets were $71.0 billion, up from $66.3 billion. Loans and leases rose 6% to $50.3 billion, led by commercial and auto lending. Deposits increased 7% to $55.3 billion. Long-term debt rose to $7.1 billion from $4.3 billion, reflecting bank-level debt issuance and debt assumed in the equipment-finance acquisition. Basel III CET1, tier 1 risk-based and total risk-based capital ratios were 9.79%, 10.53% and 12.64%, respectively; the company reported capital above well-capitalized requirements. The tangible common equity-to-tangible assets ratio was 7.81%, down 36 basis points.
Cash flow and liquidity: Operating activities provided $1.03 billion; investing activities used $4.93 billion; financing activities provided $3.52 billion. Cash and cash equivalents ended the year at $847 million, down from $1.22 billion. Core deposits funded 73% of total assets, and unused Federal Reserve and FHLB borrowing capacity was $13.6 billion. Huntington said it believed the Bank had sufficient liquidity; the modified liquidity coverage ratio requirement began phasing in during January 2016.
Material changes versus 2014
- Provision for credit losses increased 23% to $100 million, although net charge-offs declined 30% to $88 million, or 0.18% of average loans.
- Nonaccrual loans increased 24% to $372 million, and nonperforming assets increased 18% to $399 million. The increase was concentrated in commercial and industrial energy exposures, including several oil and gas exploration and production borrowers.
- The allowance for credit losses was $670 million, or 1.33% of loans and leases, versus $666 million and 1.40% a year earlier. Coverage of nonaccrual loans declined to 180% from 222%.
- Noninterest income benefited from stronger card, mortgage and loan-sale revenue; securities gains fell substantially from 2014. The company sold Huntington Asset Advisors, Huntington Asset Services and Unified in the fourth quarter.
- Huntington acquired Macquarie Equipment Finance, rebranded Huntington Technology Finance, for $458 million in March 2015, adding approximately $1.1 billion of assets and $617 million of debt and other liabilities.
- The company repurchased 23.0 million shares during 2015 for approximately $252 million and raised the quarterly common dividend to $0.07 in the fourth quarter. It subsequently said it no longer intended to repurchase shares under the current authorization.
Fourth-quarter results, outlook and notable items
Fourth-quarter 2015 net income was $178 million, or $0.21 per diluted share, compared with $164 million and $0.19 a year earlier. FTE net interest income rose 5%, while the quarterly net interest margin declined 9 basis points year over year to 3.09%. The provision for credit losses was $36 million versus $2 million, including approximately $10 million related to oil and gas exploration and production firms. Noninterest income rose 17%; noninterest expense rose 3% as reported and 5% excluding significant items.
- Management’s 2016 expectations: Budgeting for unchanged interest rates; revenue growth of 4%–6% excluding significant items and net mortgage servicing rights activity; asset quality near current levels with some quarterly volatility; and net charge-offs below its long-term normalized range of 35–55 basis points. The expected effective tax rate was 25%–28%. Management also planned continued investment in technology and customer growth while managing expenses.
- FirstMerit transaction: On January 26, 2016, Huntington announced an agreement to acquire FirstMerit in a stock-and-cash transaction valued at approximately $3.4 billion. FirstMerit shareholders are to receive 1.72 Huntington shares and $5.00 cash per share. Closing was expected in the third quarter of 2016, subject to shareholder and regulatory approvals and other conditions.
- Unusual items: 2015 included $38 million of net additions to litigation reserves, $9 million of net acquisition-related expense and $8 million of franchise-repositioning expense. The Cyberco litigation judgment was $72 million plus costs and interest; Huntington appealed and increased its reserve by approximately $38 million to fully accrue the judgment amount.
Risks, contingencies and investor checks
Key disclosed risks include credit deterioration—particularly in energy-related commercial lending—interest-rate and margin sensitivity, deposit competition and funding costs, regulatory capital and liquidity constraints, cyber and operational threats, and litigation. Management estimated reasonably possible legal losses beyond accrued amounts at $0–$80 million; it could not reasonably estimate losses for certain other matters. The filing also identifies potential acquisition integration, approval, execution and dilution risks.
Most important facts to verify
- Track oil and gas borrower performance, commercial nonaccrual loans and reserve coverage, including the disclosed 0.5% E&P share of total loans.
- Review subsequent credit costs and margin trends against management’s 2016 outlook, especially funding costs and loan yields.
- Confirm FirstMerit approval, closing, integration costs, expected benefits, financing and shareholder dilution.
- Monitor the Cyberco appeal and other litigation outcomes against accrued reserves and the disclosed range of possible additional losses.
- Assess capital, dividends, repurchases and liquidity after the FirstMerit announcement and as modified LCR requirements phase in.