Huntington Beats Q3 Earnings Estimates - Analyst Blog

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Huntington Bancshares Inc. ( HBAN ) reported earnings per share of 20 cents in third-quarter 2013, beating the Zacks Consensus Estimate of 17 cents. Further, results surpassed the prior-year quarter figure by a penny.

Huntington's results were driven by lower-than-expected provision for credit losses and decrease in expenses. However, decline in revenues due to fall in both net interest income and non-interest income was the headwind.

The company reported net income applicable to shareholders of $178.5 million in the reported quarter, up 6% from the year-ago quarter.

Performance in Detail

Huntington's total revenue on a fully taxable-equivalent (FTE) basis was $682.0 million, down 2% year over year. Moreover, the revenue figure was surpassed the Zacks Consensus Estimate of $680.0 million of $690 million.

Huntington's net interest income (NII) dipped 1% from the prior-year quarter to $431.5 million on FTE basis. This reflected the impact of a 4-basis point decrease in fully taxable equivalent net interest margin (NIM).

NIM fell 4 basis points (bps) year over year to 3.34% due to the negative impact from the mix and yield of earning assets, primarily reflecting a decrease in consumer loan yields. This was partly offset by a positive impact from the mix and yield of deposits, reflecting the strategic focus on changing the funding sources to no-cost demand deposits and low cost money market deposits.

Huntington's non-interest income fell 4% year over year to $250.5 million. The decline was primarily due to a decrease in both security gains and mortgage banking income.

Further, non-interest expenses at Huntington fell 8% year over year to $423.3 million. The decline was mainly due to fall in personnel costs, other expense, professional services expenses, marketing expenses, deposit and other insurance expenses as well as OREO and foreclosure expense. These factors were partly offset by higher net occupancy costs.

Credit Quality

Credit quality metrics improved in the reported quarter. Huntington's provision for credit losses decreased 69% from the prior-year quarter to $24.7 million, due to the continued decline in classified, criticized and nonaccrual loans. Net charge-offs (NCOs) were $55.7 million or an annualized 0.53% of average total loans and leases in the reported quarter, down from $105.1 million or an annualized 1.05% in the prior-year quarter.

Moreover, the quarter-end allowance for credit losses (ACL) as a percentage of total loans and leases, decreased to 1.72% from 2.09% in the prior-year quarter.

Total non-performing assets (NPAs), including non-accrual loans and leases at Huntington were $374.3 million as of Sep 30, 2013 and represented 0.88% of related assets. This compared favorably with $509.7 million or 1.26% of related assets at the prior year quarter-end.

Balance Sheet

Average loans and leases at Huntington increased 5% year over year to $42.0 billion. The rise reflected growth in average commercial and industrial (C&I) loans and average automobile loans, partially mitigated by lower average commercial real estate (CRE) loans.

However, average total core deposits dropped 1% year over year to $46.0 billion. This reflected decrease in average core certificates of deposit, partly offset by growth in money market deposits and average non-interest bearing demand deposits.

Capital Ratios

Huntington's capital ratios were a mixed bag in the quarter. As of Sep 30, 2013, the tangible common equity to tangible assets ratio was 9.02%, up 28 bps year over year. Tier 1 common risk-based capital ratio at the quarter-end was 10.85%, up 57 bps from the prior-year quarter.

However, regulatory Tier 1 risk-based capital ratio as of Sep 30, 2013 was 12.36%, up from 11.88% as of Sep 30, 2012, due to an increase in retained earnings, partially offset by the redemption of qualifying trust preferred securities worth $36 million.

Outlook

According to management, in spite of an improving trend in the Midwest region, customers on the whole are affected by uncertainties in the larger economy.

Net interest income is projected to grow modestly over the coming quarters, owing to the expected increase in earning assets (as total loans will likely grow modestly and investment securities will increase).

However, the benefits to net interest income are expected to be mostly offset by persistent pressure on NIM till the short end of the yield curve begins to move higher. Nevertheless, management does not expect full-year 2013 NIM to fall below the mid 3.30%'s. While the company maintains a disciplined approach to loan pricing, asset yields remain under pressure. This is partially offset by opportunities in deposit repricing and mix shift.

The C&I portfolio is expected to witness growth as customer activity will likely increase and the company's pipeline is expected to remain robust. Moreover, automobile loan originations remain strong, and the company presently does not anticipate any automobile securitizations in the near future. Residential mortgages, home equity, and CRE loan balances are expected to increase modestly.

The company anticipates the increase in total loans to outpace growth in total deposits. This will be owing to the focus on overall cost of funds, the continued shift toward low and no-cost demand deposits and money market deposit accounts.

Non-interest income is expected to be relatively flat from the prior quarters, excluding the impact of any automobile loan sales, any net MSR activity, and first-quarter seasonality.

Expenses, excluding the one-time items, are expected to modestly increase due to rise in depreciation, personnel, occupancy, and equipment expense, given the continuous investments. The company continues to seek additional cost saving opportunities, but an added $6 million of branch consolidation expense is expected in the 2013 fourth quarter from previously announced actions. Huntington remains committed to posting positive operating leverage for the 2013 full year.

NPAs are expected to improve. NCOs are expected to be in the range of 35 to 55 basis points. The level of provision for credit losses are expected to be volatile on a quarter-to-quarter basis.

The effective tax rate for 2013 is expected to be in the range of 25% to 27%, primarily due to the impact of tax-exempt income, tax-advantaged investments and general business credits.

Capital Deployment Update

Along with the earnings release, Huntington's board of directors declared a quarterly cash dividend of 5 cents per share on its common stock. The dividend will be paid on Jan 2, 2014, to shareholders of record on Dec 19, 2013.

In the reported quarter, Huntington repurchased 2.0 million shares at an average price of $8.18 per share.

Our Viewpoint

Huntington has a solid franchise in the Midwest and is focused on capitalizing on growth opportunities. The Fidelity Bank acquisition and in-store banking deal bode well for the future. The company's capital deployment initiatives are also commendable.

However, a tepid economic recovery, low interest rate environment and a stringent regulatory environment are headwinds for revenue growth. Further, with expectations of an expanding expense base, we remain somewhat skeptical about Huntington's ability to drive earnings in the quarters ahead.

Huntington currently carries a Zacks Rank #3 (Hold).

According to our model, the following Midwest bank is likely to beat earnings this quarter as these have the right combination of elements: Lakeland Financial Corp. ( LKFN ) has an earnings ESP of +1.70% and carries a Zacks Rank #2 (Buy). It is expected to report third-quarter results on Oct 25.

Additionally, Park National Corp. ( PRK ) is expected to release its earnings results on Oct 28 while Enterprise Financial Services Corp. ( EFSC ) will report on Oct 24.



ENTERPRISE FINL (EFSC): Free Stock Analysis Report

HUNTINGTON BANC (HBAN): Free Stock Analysis Report

LAKELAND FINL (LKFN): Free Stock Analysis Report

PARK NATIONAL (PRK): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: EFSC , HBAN , LKFN , NIM , PRK

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