Huntington Bancshares Inc. (HBAN) reported second quarter 2011 earnings of 16 per share, beating the Zacks Consensus Estimate by a penny. Results also compare favorably with 14 cents earned in the prior quarter and 3 cents in the year-ago quarter.
Better-than-expected results reflected a significant improvement in credit quality with a drop in loan loss provisions. The company also posted an increase in net interest income. Huntingtonalso declared an increase in its dividend to 4 cents per share from 1 cent paid in the prior quarter.
However, net-interest income remained subdued. Going forward, only a modest expansion in revenue is projected by management in the presence of several top-line headwinds. Yet, Huntington’s strategic efforts, cost containment initiatives and further improvement in credit quality are likely to support its earnings growth.
Performance in Detail
For the reported quarter, Huntington’s total revenue on a fully-taxable-equivalent (FTE) basis was $662.9 million, up 3% from the prior quarter, driven by an 8% rise in non-interest income. The revenue figure also surpassed the Zacks Consensus Estimate of $652.0 million.
Net interest income (FTE) dipped 0.2% sequentially to $403.3 million, primarily due to a 1% decline in average earning assets and 2 basis point (bps) decline in the fully-taxable equivalent net interest margin to 3.40%.
Reduction in the derivatives income and lower loan yields resulted in margin contraction. The impact was partially offset by increases in low cost deposits and improved deposit pricing.
Average loans and leases at Huntington increased 1% sequentially, reflecting a rise in commercial and industrial loans (C&I), automobiles loans, and leases. These were partly offset by lower commercial real estate loans, primarily as a result of the ongoing strategy to reduce exposure to the commercial real estate market.
Average deposits decreased 1% from the prior quarter as a result of a decline in average core deposits, primarily due to a fall in average money market deposits and average core certificates of deposit. However, Huntington achieved an increase in both average noninterest-bearing and interest-bearing demand deposits.
Huntington’s non-interest income was up 8% sequentially at $255.8 million, reflecting increases in services charges on deposit accounts and electronic banking income, primarily aided by seasonal factors. The company also benefited from higher market-related gains and capital markets income.
Non-interest expenses in the reported quarter declined 1% sequentially to $428.4 million. This reflected a decrease in other expenses, primarily due to the prior quarter’s $17.0 million addition to litigation reserves. However, this benefit was partially offset by an increase in professional services, deposit and other insurance expenses, outside data processing and other services as well as marketing costs.
Credit Quality
Credit quality continued to show improvement at Huntington. The company experienced an upswing in the overall loan portfolio related to net charge-off activity, as well as some improvement in delinquency trends. The level of criticized commercial loans also reported a drop.
Net charge-offs were down 41% sequentially and 65% year over year at $97.5 million. Net charge-offs were 1.01% of average loans and leases, down from 1.73% in the prior quarter and 3.01% in the year-ago quarter. Provision for credit losses was $35.8 million, down 28% sequentially and 81% year over year.
Total non-performing assets (NPA) also dropped 5% sequentially and 59% year over year to $652.9 million. The NPA ratio improved to 1.67% from 1.80% reported in the prior quarter and 4.24% a year earlier. Huntington could achieve an 11% decline in the level of criticized commercial loans from the prior quarter.
Capital Ratios
Huntington continued to improve its capital levels. Its tangible common equity-to-asset ratio as of June 30, 2011 was 8.22%, up from 7.81% at the end of the prior quarter. The Tier 1 common risk-based capital ratio as of June 30, was 9.92%, up from 9.75% at the end of the prior quarter. Regulatory Tier 1 and Total risk-based capital ratios were 12.14% and 14.89%, respectively, up from 12.04% and 14.85%, at the end of the prior quarter.
Outlook 2011
Huntington’s management expects a number of revenue headwinds going forward. This includes the absence of prospects for meaningful economic improvement, wider spreads between short- and long-term interest rates, weak borrower and consumer confidence level as well as the pending reduction in debit card interchange fees, which will result in a reduction of fee income. Therefore, a modest overall improvement in earnings is projected for the rest of the year.
Huntington’s management expects growth in net income from the second quarter level throughout the remainder of the year, primarily reflecting a moderate revenue expansion and disciplined expense control.
The momentum in loan and low cost deposit growth will likely continue and this combined with a stable net interest margin is expected to generate modest growth in net interest income.
Particularly, the strategic initiatives of Huntington are expected to aid in C&I loan growth. Also, continued growth in consumer households and business relationships should uplift total core deposits. Shift toward lower-cost noninterest-bearing and interest-bearing demand deposit accounts will likely continue.
In the second half of 2011, non-interest income is anticipated to expand modestly, with the primary driver being service charge income, reflecting benefits of its “Fair Play” banking philosophy. An increase in earnings contribution from other key fee income activities including capital markets, treasury management services, and brokerage business is also anticipated by Huntington’s management.
A relatively stable level of expenses is projected while nonaccrual loans and net charge-offs are expected to continue to decline throughout the year.
Peer Performance
One of the closest peers of Huntington, Northern Trust Corporation (NTRS), reported second-quarter 2011 earnings of 70 cents per share, which outpaced the Zacks Consensus Estimate by a penny. The increase was marked by higher net interest income, growth in assets under management and an improved client network.
Improvement in credit quality and a consequent reduction in loan losses have been a trend this quarter. Similar to Huntington, other companies such as U.S. Bancorp (USB), JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC) and Citigroup Inc. (C) have benefited from credit quality improvement and their results exceeded market expectations.
Our Take
Huntington remains focused on capitalizing on growth opportunities. Strategic initiatives are right on track, and the company is poised to benefit from an economic rebound. By making active efforts to reduce its problem assets, the company has lowered the level of its criticized commercial loans.
Additionally, the company is exhibiting growth in its loan portfolio, which is encouraging. Disciplined expense control augurs well. The dividend increase also inspires investors’ confidence on the stock.
Though issues related to a sluggish economic recovery along its footprints and regulatory concerns remain, its solid capital position and tactical efforts are expected to reduce those impacts.
Huntingtonshares are maintaining a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.
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