Note: FLASH REPORT; more details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.
Reason for Report: FLASH UPDATE: 2Q13 Earnings
Previous Edition: Minor Changes,Jul 5, 2013
Flash Update (earnings update to follow)
On Jul 18, 2013,Huntington Bancshares declared its 2Q13 earnings results. Earnings came in at $0.17 per share, beating the Zacks Consensus Estimate by $0.01. However, results were stable compared with the prior-year quarter’s earnings.
Huntington’s results reflected improvement in provision for credit losses. However, declining revenues due to a drop in both net interest income and non-interest income was the headwind.
The company reported net income applicable to shareholders of $150.7 million in the reported quarter, down 1% from $152.7 in the year-ago quarter.
Performance in Detail
Huntington’s total revenue on a fully taxable-equivalent (FTE) basis was $680.2 million, down 1% year over year. Moreover, the revenue figure was below the Zacks Consensus Estimate of $690 million.
Huntington’s net interest income (NII) on FTE basis dipped 1% from the prior-year quarter to $431.5 million. This reflected the impact of a 4-basis point decrease in fully taxable equivalent net interest margin (NIM).
NIM dropped 4 basis points year over year to 3.38% 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 2% year over year to $248.7 million. The decline was primarily due to a decrease in both other non-interest income and lower mortgage banking income.
Further, non-interest expenses at Huntington nudged up 0.4% year over year to $445.9 million. The rise was mainly due to an increase in personnel costs as well as the number of full-time equivalent employees.
Credit Quality
Credit quality metrics improved in the reported quarter. Huntington’s provision for credit losses decreased 32% from the prior-year quarter to $24.7 million. This reflected a decrease in net charge-offs (NCOs), which were $34.8 million or an annualized 0.34% of average total loans and leases in the reported quarter, down 59% from $84.2 million or an annualized 0.82% in the prior-year quarter.
Moreover, the quarter-end allowance for credit losses (ACL), as a percentage of total loans and leases, decreased to 1.86% from 2.28% in the prior-year quarter.
Total non-performing assets (NPAs), including non-accrual loans and leases at Huntington were $396.7 million as of Jun 30, 2013 and represented 0.95% of related assets. This reflected a 24% decrease from $523.3 million or 1.31% of related assets at the prior year quarter-end.
Balance Sheet
Average loans and leases at Huntington increased 0.2% year over year to $41.3 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.
Average total core deposits increased 3% year over year to $46.2 billion. This reflected growth in money market deposits and average non-interest bearing demand deposits, partially offset by a decrease in average core certificates of deposit and other deposits.
Capital Ratios
Huntington’s capital ratios were mixed in the quarter. As of Jun 30, 2013, the tangible common equity to tangible assets ratio was 8.78%, up 37 basis points year over year. Tier 1 common risk-based capital ratio at the quarter-end was 10.71%, up 63 basis points from the prior-year quarter.
However, regulatory Tier 1 risk-based capital ratio as of Jun 30, 2013 was 12.24%, up from 11.93% as of Jun 30, 2012, reflecting an increase in retained earnings, partially offset by the redemption of qualifying trust preferred securities worth $150 million.
Outlook
According to Huntington’s management, in spite of an improving trend in the Midwest region, customers on the whole, are affected by uncertainties in the larger economy.
For 2013, average net interest income is projected to rise modestly. An increase in total loans will be partially offset by a reduction in total securities as the portfolio’s cash flow is not reinvested into additional securities. However, these benefits to net interest income will likely be offset by persistent NIM pressure.
During 2013, NIM is not expected to fall below the mid-3.30% range due to continued deposit re-pricing and mix shift opportunities, even with the company’s disciplined approach to loan pricing.
Regarding loans, management expects its C&I portfolio to continue growth in 2013, with an anticipated increase in customer activity. Moreover, the company expects no automobile loan securitization to occur in the second half of 2013.
Residential mortgages and home equity loan balances are projected to modestly increase, while CRE loans are likely to remain in the $5.0 billion range. Excluding any possible future automobile loan securitizations, an increase in total loans is likely to surpass growth in total deposits, attributable to the company’s consistent focus on the overall cost of funds, continued shift toward low and no-cost demand deposits and money market deposit accounts.
Recently, Huntington’s board of directors approved a curtailment of the company’s pension plan effective Dec 31, 2013. Due to the accounting treatment for the unamortized prior service pension cost and change in the projected benefit obligation, a one-time non-cash gain is expected in the third quarter of 2013.
During 2013, non-interest income is projected to modestly decrease and then remain stable, after excluding the impact of any automobile loan sale or security gains, any net mortgage servicing right impact and the aforementioned gain related to the curtailment of the company’s pension plan. The anticipated slowdown in mortgage banking activity is expected to be offset by continued growth in new customers, increased contribution from higher cross-sell, and the continued maturation of our previous strategic investments.
Huntington’s expenses for the third quarter of 2013 will likely rise due to an increase in commission expense, occupancy expense and equipments related to continued in-store expansion. Expenses are expected to be as projected, with a possible slight increase related to the pension related expense. However, Huntington remains committed to posting positive operating leverage in 2013 as growth in total revenue is expected to outpace total expense growth.
Moreover, at Huntington, NPAs are expected to improve. NCOs are projected to be in the range of 35 to 55 basis points. The provision for credit losses is expected to be persistently volatile.
Management anticipates an effective tax rate for the rest of 2013 to be in the range of 25% to 28%, primarily reflecting the combined 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 $0.05 per share on its common stock. The dividend will be paid on Oct 1, 2013, to shareholders of record on Sep 17.
In the reported quarter, Huntington repurchased 10.0 million shares at an average price of $7.50 per share.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON HBAN.
Portfolio Manager Executive Summary[Note: Only highlighted material has been changed.]
Huntington Bancshares Incorporated (HBAN) is a multi-state diversified regional bank holding company headquartered in Columbus, Ohio. Huntington has branches in Ind., Ky., Mich., Ohio, Pa., and W. Va., and offers traditional retail and commercial banking products and personal financial services. It is also one of the largest providers of auto lending/leases.
Trend of Broker Opinions: Broker sentiment on the stock is skewed toward the neutral side with 68.4% of the firms in the Digest group rating the stock neutral, 26.3% rating it positive, while only 5.3% rendered negative ratings. Target prices provided by the firms range from a low of $7.00 to a high of $9.00 per share. The average came in at $7.51, implying a negative return of 11.6%.
Chief Investment Considerations:
- Well-capitalized balance sheet
- Strategic initiatives
- Improving credit quality
- Ability to return capital to its shareholders
- Limited top-line growth opportunities
- NIM Compression
- Tempered economic outlook
- Regulatory issues
Neutral or equivalent outlook – 13 firms or 68.4%: According to these firms, the strategic efforts to increase revenues, improve credit quality and strengthen capital levels along with healthy capital deployment efforts aid Huntington to achieve a solid foothold across its geographic footprints. The innovation and extensive R&D on the company’s forefront re-establishes its urge to offer improved financial services and products to its customers. However, given the fiercely competitive market structure, rivals will follow a similar trait of offering service oriented products which will consequently nullify the market share gains. The pressure on net interest margin (NIM) is expected to be partially mitigated by modest loan growth and a reduction in asset yield pressure. Conversely, this modest loan growth attributable to an increase in commercial and industrial loans will be partially neutralized by CRE run-off and a downturn in mortgage lending. However the downturn in CRE will be at a much slower pace as compared to the preceding quarters. Additionally, a low interest rate environment also poses a major concern and may act as a dampener with respect to the long term targeted range of 3.30%–3.75% for NIM. The company expects to maintain a positive operating leverage in 2013; however, chances of achieving the same seem challenging given a fall in mortgage banking revenues. Therefore, the firms expect the stock to remain range-bound in the absence of any positive catalyst for the top line.
Positive or equivalent outlook–5 firms or 26.3%: According to the firms with a bullish outlook, Huntington is a leading Midwest banking franchise. It boasts a well-capitalized balance sheet and is actively making efforts to reduce its problem assets. With an economic rebound, these firms expect the company to outperform its peers on the back of solid loan growth, particularly in Commercial and Industrial (C&I). This growth is expected to gather momentum in 2H13. The company is also expected to benefit from lower deposit costs. However, the customer oriented services and strategies as adopted by the bank are yet to produce considerable results due to a dampening interest rate environment. It has also been noted that the borrowers have started drawing down their deposit accounts primarily to support investments, indicating the onset of an economic revival. Hence, the long-term growth prospect appears quite lucrative and is expected to be driven by a widespread rise in fee income, loans and deposits. With solid capital levels, the company is well poised to return value to its shareholders through share buybacks and dividend hikes.
July 5, 2013
Overview[Note: Only highlighted material has been changed.]
Headquartered in Columbus, Ohio, Huntington Bancshares Incorporated (HBAN) is a multi-state diversified regional bank holding company. Through its subsidiaries, including its banking subsidiary Huntington National Bank, the company provides full-service commercial and consumer banking services, mortgage banking services, equipment leasing, investment management, trust services, brokerage services, customized insurance service program and other financial products and services.
Huntington has over 140 years of experience of serving the financial needs of its customers. It conducts business through more than 700 traditional branches in Ind., Ky., Mich., Ohio, Pa., and W. Va. The company also offers retail and commercial financial services online through its 24-hour telephone bank and through its network of over 1,400 ATMs. Additionally, selected financial services and other activities are also conducted in various other states. International banking services are available through the headquarters in Columbus and a limited purpose office located in both the Cayman Islands and Hong Kong. As of Mar 31, 2013, Huntington had total assets of $55.7 billion with loans and leases of $40.9 billion. Total deposits were $46.0 billion.
Huntington has 4 major business segments and Treasury/Other function. The segments are:
- Retail and Business Banking (13.9% of total net income in 2012) – The segment provides traditional banking products and services to consumers and small business customers located within its primary banking markets consisting of five areas covering the six states of Ohio, Mich., Pa., Ind., W.Va., and Ky. Its products include individual and small business checking accounts, savings accounts, money market accounts, certificates of deposit, consumer loans, and small business loans and leases. Other financial services available to consumers and small business customers include investments, insurance services, interest rate risk protection products, foreign exchange hedging, and treasury management services.
- Regional and Commercial Banking (20.1%) – The segment provides a variety of products and services to the middle market and large corporate client base located primarily within its core geographic banking markets. Products and services are delivered through a relationship banking model and comprises commercial lending, as well as depository and liquidity management products. The segment delivers complex and customized treasury management solutions, equipment and technology leasing, international services, capital markets services such as interest rate risk protection products, foreign exchange hedging and sales, trading of securities, mezzanine investment capabilities, and employee benefit programs.
- Automobile Finance and Commercial Real Estate (31.4%) – The segment serves automotive dealerships and professional real estate developers or other customers with real estate project financing needs within its primary banking markets. Products and services include loans for the purchase of automobiles by customers of automotive dealerships; loans for the purchase of new and used vehicle inventory by automotive dealerships; and loans for land, buildings, and other commercial real estate owned or constructed by real estate developers, automobile dealerships, or other customers with real estate project financing needs.
- Wealth Advisors, Government Finance, and Home Lending (14.6%) – The segment primarily consists of fee-based businesses including home lending, wealth management, and government finance within primary banking markets.
In addition to these, the Treasury/Other Group (20.0%) includes insurance brokerage business, which specializes in commercial property/casualty, employee benefits, personal lines, life and disability, and specialty lines. It also provides brokerage and agency services for residential and commercial title insurance and excess and surplus product lines. It also includes technology and operations, other unallocated assets, liabilities, revenue, and expense.
Brokerage firms identified the following factors for evaluating investment merits of Huntington Bancshares:
Key Positive Arguments / Key Negative ArgumentsFundamentals
- Management is focused on improving operating fundamentals and core fee income
- Positive operating leverage is expected in the upcoming quarters
- Huntington’s provisioning policies are expected to keep the company well poised to face credit headwinds
- The company is expected to maintain a solid capital level
- It is also likely to benefit from recent acquisitions
- Growth is threatened by the profound economic weakness in its Midwest footprint.
- Regulatory changes, limited corporate loan demand and problem portfolio run-off issues would weigh on the stock
- Significant exposure to commercial real estate and residential markets
- Though credit metrics showed signs of improvement, they are still at elevated levels
- Dilutive and out-of-footprint acquisition might dampen the stock price valuation.
- Regulatory issues, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, could depress the stock price of the company.
- Adverse impact on net interest margin from the low interest rate environment
For further information, please visit its website
Huntington operates on a calendar year basis.
May 1, 2013
Long-Term Growth[Note: Only highlighted material has been changed.]
The positive factor that instills confidence in the stock is the turnaround story of Huntington. The company has made fundamental progress since Jan 2009. Huntington has reorganized its business model, started a 3-year strategic planning process and strengthened its management team to drive growth. The business model has shifted to product-specific businesses from a geographical approach to better align its business. Other strategic actions include deposit growth emphasis, loan/deposit pricing discipline and de-risking of the balance sheet.
However, the company operates in geographical markets with below-average long-term growth demographic characteristics that have been experiencing challenging economic conditions. The firms believe that the combination of these 2 factors impacted the company’s results and the valuation of its stock in the recent years. Nevertheless, the initiatives to improve the risk profile are encouraging and the firms expect such measures to support its results in the long term.
The firms believe that Huntington will become a premier Midwest-based banking institution based on its strategic efforts. Its Fair Play strategy has been successful in increasing new checking households. Further, the initiatives in the commercial banking business have expanded its product range and increased penetration as well as customer relationships. Hence, with an eventual improvement in the economy, the company is expected to benefit from such measures and experience enhanced profitability in the long term.
Huntington is positioned to make further acquisitions in the Mid-West, and is targeting institutions within the company's current footprint. More specifically, it seeks to consummate acquisitions of the companies that will enable Huntington to build market share in the existing markets, enhance its deposit mix, as well as leverage its technology expertise.