01—Abstract
Summary
Summary of the 10-K filed March 3, 2005. Cited figures are marked; the original filing is the authoritative source.
Huntington Bancshares Incorporated, a multi-state diversified financial holding company headquartered in Columbus, Ohio, reported 2004 net income of $398.9 milliona, or $1.71 per diluted common share, up 7% and 6%, respectively, from 2003.
Return on average shareholders' equity was 16.8% and return on average assets was 1.27% for 2004. Net interest income rose to $911.4 million, while total non-interest income fell to $818.6 millionb, largely because operating lease income declined as the legacy automobile operating lease portfolio runs off. Provision for credit losses dropped to $55.1 million from $164.0 million in 2003, and net charge-offs fell to 0.35% of average loans from 0.81%.
The filing highlights significant regulatory and legal overhang. Huntington is under a formal SEC investigation into accounting matters for 2002 and earlier, with reserves recorded for an expected civil money penalty, though final results are not known. On March 1, 2005, the company entered into formal written agreements with the Federal Reserve Bank of Cleveland and the Office of the Comptroller of the Currency calling for governance, internal audit, risk management and reporting enhancements, and the company has lost the GLB Act financial holding company procedures and powers pending corrective action within 180 days.
Credit ratings were lowered to negative outlooks by Standard & Poor's and Fitch, and Moody's downgraded several ratings on February 8, 2005. The pending Unizan Financial Corp. acquisition has been extended to January 27, 2006, and the company repurchased no shares in 2004 under its 7.5 million share program.
Total assets grew to $32.57 billion and shareholders' equity to $2.54 billionc, with a tangible equity ratio of 7.18%. Management reported that internal controls over financial reporting were effective as of December 31, 2004.
02—Key points
Key Highlights
- Net income of $398.9 million, or $1.71 per diluted share, up 7% and 6% from 2003, with ROE of 16.8% and ROA of 1.27%.
- Net interest income increased to $911.4 million, and net interest margin was 3.33%, down from 3.49%.
- Non-interest income declined to $818.6 million from $1,069.2 million, driven by a $202.6 million decline in operating lease income as the legacy auto lease portfolio runs off.
- Provision for credit losses fell to $55.1 million from $164.0 million, with net charge-offs at 0.35% of average loans versus 0.81% in 2003.
- Formal written agreements with the Federal Reserve Bank of Cleveland and the OCC were entered into on March 1, 2005, requiring a comprehensive corrective action plan; the company also no longer meets financial holding company requirements for GLB Act powers.
- An ongoing SEC formal investigation into accounting matters for 2002 and earlier remains unresolved, with reserves recorded for a possible civil money penalty.
- Total assets reached $32.57 billion and shareholders' equity $2.54 billion; the 2004 dividend was $0.75 per share, and the pending Unizan merger was extended to January 27, 2006.
03—Questions
Frequently Asked Questions
Why did reported non-interest income and expense decline so sharply in 2004?
The decline mainly reflects the run-off of automobile operating leases originated before May 2002. Operating lease income fell $202.6 million, or 41%, to $287.1 million, and operating lease expense fell $156.8 million, or 40%, to $236.5 million. Leases originated after April 2002 are accounted for as direct financing leases, with income recorded in net interest income.
What regulatory actions is Huntington facing?
On March 1, 2005, Huntington entered into formal written agreements with the Federal Reserve Bank of Cleveland and the Office of the Comptroller of the Currency. The agreements call for enhancements to corporate governance, internal audit, risk management, accounting, and regulatory reporting, along with independent third-party reviews and progress reports. The company also has been advised it no longer satisfies financial holding company requirements for GLB Act procedures and powers and has agreed to corrective actions within 180 days, and it must obtain OCC approval before hiring new senior executive officers.
What is the status of the SEC investigation?
The SEC staff has been conducting a formal investigation into certain financial accounting matters for fiscal 2002 and earlier. Huntington has been negotiating a settlement that would likely involve an order to comply with securities laws and a civil money penalty. Reserves were recorded at December 31, 2004, which the company viewed as sufficient, but no assurance can be given that the penalty will not exceed that amount, and final results are not known.
How did credit quality change in 2004?
Credit quality improved. Provision for credit losses fell to $55.1 million from $164.0 million, and net charge-offs fell to $78.5 million, or 0.35% of average loans, from $161.8 million, or 0.81%. Non-performing assets were $108.6 million at year end, up from $87.4 million, mainly due to a $35.7 million increase in other real estate tied to a mezzanine loan workout. The allowance for credit losses was 1.29% of total loans and leases.
What do the credit rating changes mean for Huntington?
Moody's reaffirmed a negative outlook and placed ratings on review for possible downgrade, and on February 8, 2005, it lowered the parent's senior unsecured rating from A2 to A3 and subordinated notes from A3 to Baa1. Standard & Poor's and Fitch moved their outlooks to Negative. The filing states that these actions have had no adverse impact on rating triggers to date, though a downgrade could raise funding costs and affect access to funding sources, and it could trigger early amortization in the largest securitization if the Bank's unsecured senior debt falls below BBB- or Baa3.
04—Continue