Income Expert "Prefers" These Regional Banks

09/30/2020 5:00 am EST

Focus: FINANCIALS

Martin Fridson, CFA

Publisher, Income Securities Investor

Marty Fridson is a leading income expert, specializing in a variety of dividend vehicles including convertibles, preferreds and income funds. In Forbes/Fridson Income Securities he highlights two preferred stocks issued by regional banks.

First Horizon National Corp. (FHN) is a mid-size Southeast regional banking company based in Memphis, Tennessee with almost $50 billion in total assets.

Through its various subsidiary operations, FHN provides a broad range of financial services, including commercial banking, retail banking, mortgage banking, capital markets, and transaction processing. The company has a network of approximately 250 bank and branch locations across the Southeast region.

FHN’s capital markets businesses are conducted through nearly 30 offices throughout the nation. This 6.50% fixed rate preferred issue is callable at par on10/10/25 or any time thereafter.

The bank reported 2Q 2020 adjusted net income of $64.0 million or $0.20 per share, as coronavirus-related loan loss provisions remained elevated. Results missed analysts’ estimates by a penny.

Core pre-provision operating earnings reflected improved deposit balances and strong fee-based revenue growth. Non-interest income surged 31% from a year earlier, fueled by fixed income, mortgage origination, and bank-owned life insurance sales. Overall, core profitability improved from the 1Q 2020 level.

First Horizon National Corp. 6.50% Fixed Rate Perpetual (FHN-E) has a par value $25.00 and a current indicated yield of 5.84%. The call date is 10/10/25 with a yield to call of 4.91%.

This preferred investment is taxed at the 15%-20% rate and is suitable for medium-risk taxable portfolios. Buy up to $27.30 for a 5.95% annualized yield and a 4.49% yield to call.

Huntington Bancshares (HBAN) is a regional bank holding company, based in Ohio, with approximately $114 billion in total assets. HBAN operates across Ohio, Illinois, Indiana, Kentucky, Michigan, Pennsylvania, and West Virginia.

The company offers commercial and consumer banking services, mortgage banking, equipment leasing, treasury management, wealth management, and investment management services.

HBAN reported 2Q 2020 net income of $150.0 million, down 59% from a year earlier. This was the result of higher provisions for loss, based on expectations of increased credit losses due to the pandemic.

Earnings per share of $0.13 topped analysts’ $0.06 estimates. Mixed economic conditions are likely to weigh on earnings for the remainder of 2020. Look for gradual improvement during the course of 2021.

Huntington Bancshare 6.25% Fixed Rate, Series D Non-Cumulative Perpetual (HBANO) has a par value of $25.00 and a current annualized yield of 6.09%. The issue has a call date of 04/15/21 with a yield to call of 2.04%.

This preferred is callable in the next seven months but the probability of a redemption is only 50-50 in our opinion, given present refinancing levels. This preferred offers investors a reasonable yield to call for just seven months, should the issue be redeemed.

This issue is suitable for medium-risk taxable portfolios. Dividends are qualified and taxed at the 15%- 20% level. Buy up to $25.80 for a 6.06% annualized yield and a 1.10% yield to call.

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