Business context and reporting period
Huntington Bancshares Incorporated is a regional bank holding company headquartered in Columbus, Ohio, with 695 branches across six states at December 31, 2013. Its businesses span consumer and commercial banking, auto finance, commercial real estate, mortgage banking, wealth management and related services. This summary covers the fiscal year and fourth quarter ended December 31, 2013; the 10-K was filed February 14, 2014.
Financial performance and condition
| Metric | 2013 | 2012 / comparison |
|---|---|---|
| Net income | $638.7 million; diluted EPS $0.72 | $641.0 million; $0.71 diluted EPS |
| Net interest income | $1.705 billion GAAP; $1.732 billion fully taxable-equivalent (FTE) | $1.711 billion GAAP; $1.731 billion FTE |
| Net interest margin | 3.36% FTE | 3.41% |
| Noninterest income | $998.0 million | $1.098 billion |
| Noninterest expense | $1.758 billion | $1.836 billion |
| Provision for credit losses | $90.0 million | $147.4 million |
| Return on average assets; efficiency ratio | 1.13%; 62.9% | 1.15%; 63.4% |
- Fourth quarter: Net income was $157.8 million, or $0.18 diluted EPS, down 6% from $167.3 million, or $0.19, a year earlier. FTE net interest income was $438.8 million, roughly flat year over year; noninterest income fell 17% to $246.6 million, while expenses fell 5% to $446.0 million and credit provision fell 38% to $24.3 million.
- Balance sheet: Total assets were $59.5 billion, up from $56.2 billion; loans and leases were $43.1 billion, up 6%; deposits were $47.5 billion, up 3%. Shareholders’ equity was $6.1 billion.
- Credit: Net charge-offs were $188.7 million, or 0.45% of average loans, versus $342.5 million and 0.85% in 2012. Nonaccrual loans declined 21% to $322.1 million; nonperforming assets declined 21% to $352.2 million. The allowance for credit losses was $710.8 million, 1.65% of loans, with coverage of nonaccrual loans at 221%.
- Capital and liquidity: At year-end, consolidated Tier 1 common risk-based capital was 10.90%, Tier 1 risk-based capital 12.28%, and total risk-based capital 14.57%; both the company and bank exceeded regulatory well-capitalized thresholds. Core deposits were $45.3 billion, 95% of deposits. The company reported $1.0 billion in cash and cash equivalents; management said bank and parent liquidity were sufficient for the foreseeable future.
- Debt and cash flow: Long-term debt was $2.46 billion, up from $1.36 billion; short-term borrowings were $552 million and FHLB advances $1.81 billion. Operating cash flow was $1.01 billion, investing cash flow was negative $4.24 billion, and financing cash flow was positive $2.97 billion. Year-end cash and cash equivalents were $1.00 billion, down from $1.26 billion.
Material changes versus prior comparable periods
- Annual net income was nearly unchanged, while diluted EPS increased from $0.71 to $0.72. Lower credit provision and operating expenses were offset by weaker fee income and slightly lower FTE net interest income.
- Noninterest income declined 9%, primarily due to lower mortgage banking income and no auto-loan securitizations in 2013. Mortgage banking income fell 34%; gains on loan sales fell 69%.
- Noninterest expense declined 4%, including lower litigation, mortgage repurchase and warranty, insurance, professional-services, and marketing expenses. The efficiency ratio improved by 0.5 percentage point.
- Average loans grew 4%, led by commercial and industrial and auto lending; commercial real estate continued to run off. The NIM declined 5 basis points amid asset-yield pressure.
- Credit quality improved substantially, particularly in C&I and CRE. However, accruing troubled debt restructurings increased to $813.7 million from $724.4 million, and total TDRs reached $954.8 million.
- Quarterly net income decreased year over year as lower mortgage banking income and the absence of a prior-year auto securitization gain outweighed lower expenses and credit provision.
Outlook, commentary, risks and unusual items
- 2014 outlook: Management expected net interest income to increase moderately, with loan growth and securities levels near current levels largely offset by continued NIM pressure. Noninterest income, excluding net MSR activity, was expected to be slightly below recent levels; noninterest expense, excluding a net $10 million benefit from 2013 significant items, was expected to remain around current levels. Management targeted positive operating leverage and further NPA improvement. The expected effective tax rate was 25%–28%; normalized net charge-offs were expected in a 35–55 basis-point range, with quarterly provision volatility anticipated.
- Management cited business momentum entering 2014, growth in consumer checking households and commercial relationships, and disciplined expense management. It also noted the 2013 economic, interest-rate and political environment was more challenging than anticipated.
- Significant items: 2013 included a $33.9 million pretax pension curtailment gain and $23.5 million of franchise-repositioning expenses. A review identified additional Chapter 7 bankruptcy loans requiring nonaccrual treatment and write-downs, producing $22.8 million of additional 2013 net charge-offs, mostly in junior-lien home equity.
- Regulatory and capital considerations: The 2014 capital plan and bank stress-test results had been submitted, but Federal Reserve review was pending at filing. Basel III requirements were scheduled to begin phasing in for Huntington in 2015. Management estimated an approximately 60-basis-point reduction to its Basel I Tier 1 common ratio based on June 2013 balance-sheet composition. Regulatory approval and bank dividend capacity affect capital returns; management anticipated bank dividends to the parent could resume during the first half of 2014.
- Legal and other contingencies: Management estimated reasonably possible legal losses in excess of accrued amounts at $0–$120 million. In the Cyberco/Teleservices matter, a bankruptcy court recommended a judgment of approximately $71.8 million plus interest; district-court review was ongoing. The company stated it could not reasonably estimate the possible loss range for mortgage loan representations-and-warranties exposure. Tax examinations and appeals could also produce a material impact in the period resolved.
- Key risks include credit deterioration, interest-rate and securities valuation changes, deposit or market funding constraints, cybersecurity and operational failures, litigation, consumer-protection requirements, and changes in regulation. The company reported no material cyber-attack losses to date. Independent auditors gave unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Track whether loan growth and deposit funding support the 2014 net-interest-income outlook despite continued margin pressure.
- Verify whether mortgage banking and other fee income stabilize after the sharp 2013 declines.
- Monitor credit trends in home equity and residential mortgages, Chapter 7-related losses, rising TDR balances, and the adequacy of the allowance.
- Confirm the Federal Reserve’s 2014 capital-plan decision, Basel III effects, and the timing and capacity for bank dividends, share repurchases and other capital returns.
- Review developments and reserve adequacy in the Cyberco litigation, mortgage representations-and-warranties exposure, and tax disputes.
- Assess the impact of the announced executive reorganization on segment reporting, strategy execution and expense discipline.