Huntington Bancshares Inc. (HBAN - Analyst Report) reported earnings per share of 18 cents in fourth-quarter 2013, which beat the Zacks Consensus Estimate by a penny. However, results were below the prior-year quarter figure of 19 cents.
For 2013, Huntington reported earnings per share of 72 cents, which came ahead of both the Zacks Consensus Estimate and the prior-year figure of 71 cents.
However, the marginal earnings beat did little to gain investors’ confidence as the stock slipped 2% in the pre-trading session. A stagnation in the top line growth due to low rates and weak consumer confidence in the Midwest is the main concern.
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 net interest income and non-interest income was the headwind.
The company reported net income applicable to shareholders of $157.8 million in the reported quarter, down 6% from the year-ago quarter. For 2013, the company reported net income applicable to shareholders of $638.7 million, dropping 0.4 % year over year.
Performance in Detail
Huntington’s total revenue on a fully taxable-equivalent (FTE) basis was $685.5 million, down 7% year over year. However, the revenue figure surpassed the Zacks Consensus Estimate of $679.0 million.
For 2013, Huntington’s total revenue on FTE basis was $2.7 billion, down 3% year over year. Moreover, the revenue figure surpassed the Zacks Consensus Estimate of $2,713.0 million.
Huntington’s net interest income (NII) dipped 0.2% from the prior-year quarter to $438.8 million on FTE basis. This reflected the impact of a 17-basis point decrease in net interest margin (NIM).
Huntington’s non-interest income fell 17% year over year to $246.6 million. The decline was primarily due to a decrease in security gains as well as gain on sale of loans and mortgage banking income. These were partly offset by increase in service charges on deposit accounts and electronic banking income.
However, non-interest expenses at Huntington fell 5% year over year to $446.0 million. The decline was mainly due to fall in other expense, professional services expenses, marketing expenses, litigation expense, mortgage repurchases and warranty expense, deposit and other insurance expenses as well as OREO and foreclosure expense. These factors were partly offset by rise in personnel costs and net occupancy costs.
Average loans and leases at Huntington increased 7% year over year to $43.1 billion. However, average total deposits remained stable at $46.8 billion.
Credit quality metrics generally improved in the reported quarter. Huntington’s provision for credit losses decreased 38% from the prior-year quarter to $24.3 million due to the continued decline in classified, criticized and nonaccrual loans.
Net charge-offs (NCOs) were $46.4 million or an annualized 0.43% of average total loans and leases in the reported quarter, down from $70.1 million or an annualized 0.69% in the prior-year quarter.
Moreover, the quarter-end allowance for credit losses (ACL) as a percentage of total loans and leases, decreased to 1.65% from 1.99% in the prior-year quarter.
Total non-performing assets (NPAs), including non-accrual loans and leases at Huntington were $352.2 million as of Dec 31, 2013 and represented 0.82% of related assets. This compared favorably with $445.8 million or 1.09% of related assets at the prior year quarter-end.
Huntington’s capital ratios were a mixed bag in the quarter. As of Dec 31, 2013, the tangible common equity to tangible assets ratio was 8.83%, up 7 bps year over year. Tier 1 common risk-based capital ratio at the quarter-end was 10.90%, up 42 bps from the prior-year quarter.
However, regulatory Tier 1 risk-based capital ratio as of Dec 31, 2013 was 12.28%, up from 12.02% as of Dec 31, 2012, due to an increase in retained earnings, partially offset by the redemption of qualifying trust preferred securities worth $50 million and growth in risk-weighted assets.
According to management, 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. While the company maintains a disciplined approach to loan pricing, asset yields remain under pressure.
Non-interest income is expected to slightly decrease, excluding the impact of any net MSR activity, due to the anticipated decline in mortgage banking revenues and the continued refinement of products under our Fair Play initiative.
Expenses, excluding the one-time items, are expected to remain stable compared to current levels. Huntington remains committed to posting positive operating leverage for the full year2014.
NPAs are expected to improve. NCOs are expected to be in the mid-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.
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).
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