Huntington Bancshares has announced plans to issue up to $150 million in stock, in what could be a burgeoning model for capital-hungry banks looking to avoid overly diluting their shares.
Though Huntington executives stressed that this sale would bring to a close the capital-raising efforts it began in May, some analysts said the Columbus, Ohio, company might be testing the market for a series of bite-size, common stock offerings to bolster its still relatively weak capital levels.
"The economy could recover terrifically. Credit losses could drop suddenly. But if that doesn't happen, they are going to want or need another billion dollars," said Tom Mitchell, a senior analyst who covers financial stocks for Miller Tabak & Co. LLC. "I think this will probably end up being a perpetual offer — $150 million is, I think, a drop in the bucket."
Trying to raise $1 billion in a single common stock offering — with the potential for massive dilution — would be bad for the company and its investors, especially when its shares are trading at such a low price, he said.
Mitchell said this deal could be part of an emerging trend; it closely resembles a $250 million stock offering Zions Bancorp. closed in late August. This transaction, like the Zions deal, is relatively small, he said. It is also structured in a way that lets the sales agent in both — Goldman Sachs & Co. — unload shares in deals over several weeks to avoid flooding the market in a single offering.
"This is a procedure they could repeat if they found it had been attractive," Mitchell said. "I would bet that this kind of approach would be attractive to many banks that have low stock prices … but have a legitimate need for capital and are not close to going under."
For their part, Huntington executives said that the offering would complete plans to increase the company's common equity by $675 million in the capital-raising initiative it announced May 20. It had raised only $585 million. This offer will close that gap, according to Jay Gould, Huntington's director of investor relations.
"All it will give us is a little more cushion," he said.
He declined to comment on whether Huntington might have to raise more capital.
Stephen Steinour, Huntington's chairman and chief executive, sounded an upbeat note about the latest offering.
"Today's action sets the stage for fully achieving our capital objectives," Steinour said in a press release.
"Huntington intends to use net proceeds of sales under the program for general corporate purposes, including the possible repurchase of outstanding debt."
Some analysts are skeptical that the company has enough capital to weather the rest of the recession, though there are signs that it is climbing back from the brink after suffering massive losses through its relationship with Franklin Credit Management Corp., a subprime lender.
Huntington lost $125.1 million in the second quarter, down substantially from a net loss of $2.43 billion in the prior quarter that was largely due to a $2.6 billion impairment charge.
The company also showed promising earnings potential, with its pretax, preprovision earnings rising about 2%, to $212 million in the second quarter. Analysts and investors viewed that modest increase favorably, given the depth of the downturn.
Still, Andrew Marquardt, a banking analyst at Fox-Pitt Kelton Cochran Caronia Waller LLC, said Huntington remains undercapitalized compared with its peers.
Also, its earnings remain under pressure and troubled loans continue to mount.
Loss provisions rose a surprising 42% in the second quarter, to $413.7 million.
"The bottom line is that [this action] is basically catching up on the fact that their last capital raise was short by $90 million," he said. "But on the other hand, it doesn't necessarily put the capital situation at complete rest, in my view."
Marquardt said the company has "below average" earnings power and that its tangible common equity level will still be about "100 basis points below the average Midwest" bank, should it issue the full $150 million in common stock.
That would put its tangible common equity ratio at about 5.96%, up from 5.68%, Marquardt said.
KeyCorp, another large Ohio banking company but based in Cleveland, had a tangible common equity ratio of 7.35% at June 30, according to regulatory filings.
Terry McEvoy, an analyst at Oppenheimer & Co. Inc., said it is not clear whether Huntington's capital will be sufficient during the next two quarters, especially when one considers that as many as one-third of publicly traded regional banking companies are expected to remain unprofitable through yearend.
"On paper, yes, they do have pro forma capital ratios below their larger Ohio competitors," he said. "I think we're still in an environment where more is better, more capital is better.
"Some in the market feel they will need to raise more on the assumption that the losses will be greater than the consensus view."
