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Huntington Bancshares Inc. (HBAN - Analyst Report) reported earnings of 17 cents per share in second-quarter 2013, beating the Zacks Consensus Estimate of 16 cents. 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) 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 dropped 4 basis points (bps) 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 bps year over year. Tier 1 common risk-based capital ratio at the quarter-end was 10.71%, up 63 bps 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 bps.  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 5 cents 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.

Our Viewpoint

Huntington has a solid franchise in the Midwest and is focused on capitalizing on its growth opportunities. The Fidelity Bank acquisition and the in-store banking deal augur well going forward. The company’s capital deployment initiatives are also encouraging.

However, revenue headwinds are a concern amid a tepid economic recovery, low interest rate and a tough regulatory environment. Further, with the anticipation of an expanding expense base, we remain somewhat skeptical about Huntington’s ability to augment earnings in the quarters ahead.

Among other Midwest banks, First Financial Bancorp. (FFBC - Snapshot Report), First Merchants Corporation (FRME - Snapshot Report) and Enterprise Financial Services Corp. (EFSC - Snapshot Report) will report on Jul 25.

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

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