Huntington Bancshares Inc.
) reported earnings of 19 cents per share in the third quarter of
2012. Results included a state deferred tax valuation allowance
benefit of 2 cents per share.
Excluding that benefit, the results were in line with the
Zacks Consensus Estimate of 17 cents per share. The company had
earned 17 cents per share in the prior quarter and 16 cents per
share in the year-ago quarter.
Huntington's results reflected a growth in revenue though that
number was slightly below the Zacks Consensus Estimate. The
company experienced growth in mortgage banking revenue and in
average earning assets, though the continued pressure on net
interest margin partly offset that benefit. Moreover, expenses
increased in the quarter.
Huntington reported net income of $167.8 million in the reported
quarter that surged 10% sequentially and 17% year over year.
For the reported quarter, Huntington's total revenue on a
fully-taxable-equivalent (FTE) basis was $696.6 million, up 1%
from the prior quarter and 4% from the year-ago quarter. However,
the revenue figure missed the Zacks Consensus Estimate of $701
Quarter in Detail
Huntington's net interest income (NII) grew slightly by 0.3% from
the prior quarter to $430.3 million in the reported quarter.
Results reflect the impact of growth in average earning assets,
which were mostly offset by a fall in net interest margin (NIM).
NIM descended 4 basis points sequentially to 3.38% in the
reported quarter as a result of the decline in the yield on
earnings assets, mainly the yield on loans. This was partially
mitigated by the benefit from the reduction in total funding
Huntington's non-interest income moved ahead 3% sequentially to
$261.1 million. The increase was driven by a growth in mortgage
banking income, rise in securities gains as well as gain on sale
of loans. These positive impacts were partly offset by a decrease
in other income since the prior quarter comprised a gain on the
sale of affordable housing investments.
However, non-interest expenses at Huntington ascended 3%
sequentially to $458.3 million. The company experienced an
escalation in personnel costs mainly due to higher healthcare
expenses and an increase in the cost associated with early
extinguishment of debt including the trust preferred securities
(TruPS) that were redeemed during the quarter.
Notably, non-interest expense in the quarter under review
included $4.5 million of expense related to the development of
infrastructure and systems to support the Federal Reserve CCAR
Credit quality metrics in the reported quarter bore the impact
related to revised treatment of Chapter 7 bankruptcy consumer
Huntington's provision for credit losses increased 1% from the
prior quarter to $37.0 million. This reflected an increase in net
charge-offs (NCOs) which were $105.1 million, or an annualized
1.05% of average total loans and leases in the reported quarter,
up $20.9 million, or 25%, from $84.2 million, or an annualized
0.82%, in the prior quarter. Of the current quarter's NCOs, $33.0
million were related to Chapter 7 bankruptcy consumer loans.
However, criticized commercial loans fell $223 million or 11% in
the quarter and specific reserves associated with impaired
commercial loans also declined.
Total non-performing assets (NPA) at Huntington were $509.7
million as of September 30, 2012 and represented 1.26% of related
assets. This reflected a 3% decrease from $523.3 million, or
1.31% of related assets, at the end of the prior quarter.
Notably, NPAs included $63.0 million of Chapter 7 bankruptcy
Average loans and leases at Huntington decreased 3% sequentially.
The dip reflected a drop in average automobile loans and average
commercial real estate (CRE) loans. This was partially mitigated
by a growth in average commercial and industrial (C&I) loans.
Average total core deposits increased 3% sequentially. This
reflected growth in money market deposits and average
non-interest bearing demand deposits, partially offset by
decrease in average core certificates of deposit.
Huntington's capital ratios were mixed in the quarter. As of
September 30, 2012, the tangible common equity to tangible asset
ratio was 8.74%, up 33 basis points from the prior quarter. Tier
1 common risk-based capital ratio at quarter end was 10.28%,
inching ahead of the 10.08% reported at the end of the prior
However, the regulatory Tier 1 risk-based capital ratio as of
September 30, 2012 was 11.88%, down from 11.93% as of June 30,
2012, mainly due to the redemption of $114.3 million in trust
preferred securities and the buying back of 3.7 million shares.
According to Huntington's management, though improving trends in
the Midwest region is being witnessed, customers are more
concerned owing to the uncertainties in the broader economy.
For the next several quarters, average net interest income is
projected to be relatively stable from the third quarter level,
reflecting an increase in total loans excluding any impact of
future loan securitizations. Such benefits are likely to be
offset by the downward pressure on NIM.
Regarding loans, management expects its C&I portfolio to
continue to exhibit growth. But growth in the near-term is likely
to be slower compared to the solid growth witnessed earlier this
year, given the most recent trend.
Residential mortgages and home equity loan balances are
anticipated to be comparatively stable while CRE loans would
likely experience declines from the current levels. Excluding any
possible future automobile loan securitizations, an increase in
total loans is likely to modestly surpass growth in total
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Noninterest income is projected to be relatively stable at
current levels, after excluding the impact of any automobile loan
sale or security gains and any net mortgage servicing right
Huntington's expenses are expected to escalate modestly above the
third quarter 2012 level. However, for the full year, management
continues to expect positive operating leverage and modest
improvement in the expense efficiency ratio. While regulatory
costs and expenses related to strategic actions would result in
an augmentation in expenses, it is projected to be partly
mitigated by the impact of the company's expense efficiencies
Moreover, a continued improvement in the credit quality of
Huntington is anticipated. However, with the level of provision
for credit losses in the first three quarters of the year being
at the lower end of management's long-term expectation and given
the uncertain and uneven nature of the economic recovery, there
could be some quarterly volatility given the absolute low level
of the provision for credit losses.
Capital Deployment Update
Concurrent with the earnings release, Huntington's Board of
Directors declared a quarterly cash dividend of 4 cents per share
on its common stock. The dividend is payable on January 2, 2013,
to shareholders of record on December 18, 2012.
During the reported quarter, the company bought back 3.7 million
shares at an average price of $6.68.
Huntington has a solid franchise in the Midwest and is focused on
capitalizing its growth opportunities. The Fidelity Bank
acquisition and the in-store banking deal augur well going
forward. Capital deployment initiatives are encouraging.
Yet, a tepid economic recovery, low interest rate environment and
regulatory issues will likely restrict any robust development in
earnings of Huntington in the upcoming quarters. Moreover,
with an aggrandizing expense base, we remain somewhat skeptical
regarding the company's ability to substantially bolster its
earnings in the quarters ahead.
Notably, one of Huntington's peers,
TCF Financial Corporation
) is scheduled to report its earnings tomorrow.
Huntington currently retains a Zacks #2 Rank, which translates
into a short-term Buy rating. Considering the fundamentals, we
have a long-term Neutral recommendation on the stock.