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Huntington Meets Expectations

Zacks Equity Research

Huntington Bancshares Inc. (HBAN) 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 million.

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 costs.

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 process.

Credit Quality

Credit quality metrics in the reported quarter bore the impact related to revised treatment of Chapter 7 bankruptcy consumer loans.

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 consumer loans.

Balance Sheet

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.

Capital Ratios

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 quarter.

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 deposits.

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 impact.

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 measures.  

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.

Our Take

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 (TCB) 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.

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