Huntington Bancshares Incorporated — 2014 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2014; fourth-quarter results are also summarized below. Huntington is a Columbus-based regional bank holding company serving primarily Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. Its businesses include consumer and commercial banking, automobile finance, commercial real estate, wealth management, and home lending. The filing was signed February 13, 2015. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Financial performance and condition
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net interest income, GAAP | $1.837 billion | $1.705 billion | +8% |
| Net interest margin, FTE | 3.23% | 3.36% | Down 13 basis points |
| Noninterest income | $979.2 million | $1.012 billion | Down 3% |
| Noninterest expense | $1.882 billion | $1.758 billion | Up 7% |
| Net income | $632.4 million | $641.3 million | Down 1% |
| Diluted EPS | $0.72 | $0.72 | Unchanged |
| Total assets, year-end | $66.3 billion | $59.5 billion | Up 11% |
| Total loans and leases, year-end | $47.7 billion | $43.1 billion | Up 11% |
| Total deposits, year-end | $51.7 billion | $47.5 billion | Up 9% |
| Long-term debt, year-end | $4.336 billion | $2.458 billion | Up $1.878 billion |
- FTE net interest income was $1.865 billion, up 8%. Average earning assets grew 12% to $57.7 billion, led by automobile loans and securities; the benefit was partly offset by margin compression and growth in interest-bearing liabilities.
- Reported revenue on an FTE basis was $2.844 billion, up 4%. Mortgage banking income fell 33% to $84.9 million, reflecting lower originations, compressed sale margins, and negative MSR hedging results. Electronic banking income rose 14% to $105.4 million.
- Noninterest expense included $65.5 million of significant items, principally franchise repositioning, acquisition costs, and litigation-reserve additions. Adjusted noninterest expense, a non-GAAP measure, rose 3% to $1.817 billion.
- Net cash provided by operating activities was $888.8 million, versus $1.013 billion in 2013. Investing activities used $5.005 billion, including loan growth and securities purchases; financing activities provided $4.335 billion. Cash and cash equivalents ended the year at $1.221 billion.
- Core deposits were 94% of deposits and funded 73% of total assets. Parent-company cash and cash equivalents were $662.8 million, compared with $966.1 million in 2013. Management stated that the Bank and parent had sufficient liquidity for foreseeable obligations. Wholesale funding increased to $9.9 billion from $7.0 billion.
- Year-end consolidated regulatory capital remained above well-capitalized thresholds: Tier 1 leverage 9.74%, Tier 1 risk-based 11.50%, and total risk-based 13.56%. These were down from 10.67%, 12.28%, and 14.57%, respectively, in 2013. Tangible common equity to tangible assets was 8.17%, down from 8.82%.
Fourth-quarter snapshot
Fourth-quarter net income was $163.6 million, up 3% from $158.2 million a year earlier; diluted EPS was $0.19 versus $0.18. FTE net interest income increased 10%, while the FTE margin declined 10 basis points to 3.18%. Noninterest income declined 7% to $233.3 million and noninterest expense rose 8% to $483.3 million. The quarter included $11.9 million of litigation-reserve additions and $8.6 million of franchise repositioning expense.
Material changes and credit quality
- Credit quality improved overall: net charge-offs fell 34% to $124.6 million, or 0.27% of average loans, from $188.7 million, or 0.45%. Nonaccrual loans declined 7% to $300.2 million; nonperforming assets declined 4% to $337.7 million.
- The allowance for credit losses was $666.0 million, down from $710.8 million; coverage was 1.40% of loans versus 1.65%. Management considered the allowance appropriate. However, criticized and classified loans increased $95.1 million, or 7%, and troubled debt restructurings increased to $987.4 million from $954.8 million.
- Loan growth was concentrated in automobile and C&I lending. Automobile loans rose to $8.69 billion from $6.64 billion; C&I loans rose to $19.03 billion from $17.59 billion. Commercial real estate loans were $5.20 billion, up from $4.85 billion.
- Huntington acquired Camco Financial for $109.5 million and acquired 24 Bank of America branches in Michigan. The acquisitions contributed to balance-sheet growth and included issuance of 8.7 million common shares for Camco.
- During 2014, Huntington repurchased 35.7 million common shares at an average $9.37 per share, versus 16.7 million at $7.46 in 2013. Approximately $51.7 million remained under the then-current authorization.
Outlook, risks, contingencies, and unusual items
- For 2015, management expected positive operating leverage, excluding significant items and net MSR hedging activity, with revenue growth exceeding expense growth of 2%–4%. The plan assumed no change in interest rates. Management expected asset-quality measures near current levels, with net charge-offs within or below its normalized range of 35–55 basis points, and an effective tax rate of 25%–28%.
- Management cited strong customer activity, stable pipelines, improving local-market fundamentals, and continued investment in the business, alongside disciplined expense control. These are forward-looking expectations, not guarantees.
- Basel III requirements began affecting the company in first-quarter 2015 and phase in through 2019. Management estimated an approximately 40-basis-point reduction in the Tier 1 common risk-based ratio on a fully phased-in basis. The modified liquidity coverage ratio requirement phases in from 2016; Huntington expected to comply. The Federal Reserve’s review of the 2015 capital plan was pending, and capital distributions may be restricted if the plan is objected to.
- Cyberco-related litigation remained a material uncertainty. The Bank faced a recommended judgment of approximately $71.8 million plus interest; the District Court was conducting de novo review and had not ruled. Across current legal proceedings, management estimated reasonably possible losses beyond accrued amounts of $0–$130 million, while noting some exposures could not be reasonably estimated. The mortgage representation-and-warranty reserve was $12.7 million, and the filing said the possible loss range could not be estimated.
- Other key risks include interest-rate and margin sensitivity, credit deterioration in a regional economy reliant on manufacturing, deposit confidence and market-funding access, evolving consumer and fair-lending regulation, operational and cybersecurity threats, and model and valuation uncertainty. Management said it had experienced denial-of-service attacks that affected website access, but none had resulted in a customer-data breach to date.
- Significant 2014 items included $28.0 million of branch-repositioning expense, $20.9 million of net litigation-reserve additions, $15.8 million of acquisition-related expense, and a $3.0 million Home Lending goodwill impairment. The annual results also reflected higher technology, professional-services, and other operating costs.
Important facts for investors to verify
- Whether loan and deposit growth can sustain net interest income while the net interest margin continues to contract.
- Whether credit quality remains sound as criticized loans and TDRs rise, and whether the $666.0 million allowance remains adequate.
- The outcome and potential financial effect of the Cyberco litigation and other legal matters, including losses above recorded reserves.
- Progress against the 2015 positive-operating-leverage outlook and the assumptions underlying the 2%–4% expense-growth range.
- Capital-plan approval, Basel III effects, the modified LCR transition, and the implications of capital distributions and share repurchases for capital ratios.
- Liquidity and funding mix, including the increase in long-term debt and wholesale funding, and the continued availability and cost of core deposits.