Huntington Bancshares Inc. (HBAN) reported third quarter 2011 earnings of 16 per share, missing the Zacks Consensus Estimate by a penny. Results were flat sequentially and significantly ahead of prior-year quarter’s earnings of 10 cents.
Though Huntington’s earnings were positively impacted by higher net-interest and non-interest revenues, rise in operating expenses subdued the results. Also, despite modest rise in provision for loan losses, the company’s over-all credit quality continued to improve.
Huntington reported net income of $143.4 million compared with $145.9 million in the prior quarter and $100.9 million in the prior-year quarter.
For the reported quarter, Huntington’s total revenue on a fully-taxable-equivalent (FTE) basis was $668.7 million, up 1% from the prior quarter, driven by rise in both net interest and non-interest incomes. The revenue figure also surpassed the Zacks Consensus Estimate of $666.0 million.
Performance in Detail
Net interest income (NII) grew 1.0% sequentially to $406.5 million, primarily due to increase in average earning assets.
Net interest margin (NIM) was 3.34%, down 6 basis point (bps) sequentially mainly due to negative impact from lower loan and securities yields, elevated level of balance sheet liquidity and a shift to lower yield, higher quality credits. However, these were partly offset by improved deposit pricing and the addition of low cost deposits.
Huntington’s non-interest income was up 1% sequentially at $258.6 million, reflecting increases in services charges on deposit accounts, insurance income and electronic banking income, primarily aided by seasonal factors. However, these positives were partially mitigated by lower mortgage banking income and significant securities losses.
Non-interest expenses in the reported quarter increased 2% sequentially to $439.1 million. This reflected a hike in professional services costs, outside data processing and other services along with marketing expenses. However, these negatives were partially offset by reduction in deposit and other insurance expense as well as automobile operating lease expense.
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 (NCOs) were down 7% sequentially and 50.9% year over year at $90.6 million. NCOs were 0.92% of average loans and leases, down from 1.01% in the prior quarter and 1.98% in the year-ago quarter.
Provision for credit losses was $43.6 million, up 22% sequentially resulting from the combination of strong loan growth and the expectation of a weaker and prolonged economic recovery.
Total non-performing assets (NPA) also dropped 6% sequentially and 44.4% year over year to $514.0 million. The NPA ratio improved to 1.57% from 1.67% reported in the prior quarter and 2.94% a year earlier.
Balance Sheet
Average loans and leases at Huntington increased 2% sequentially, reflecting a rise in commercial and industrial loans (C&I), automobiles loans and residential mortgages. These were partly offset by lower commercial real estate (CRE) loans.
Average deposits increased 2% from the prior quarter as a result of a rise in demand deposits and average money market deposits, partially mitigated by decrease in core certificates of deposits. Huntington also achieved an increase in average non-interest-bearing demand deposits.
Capital Ratios
Huntington continued to improve its capital levels. Its tangible common equity-to-asset ratio as of September 30, 2011 was 8.22%, flat compared with the prior quarter. The Tier 1 common risk-based capital ratio as of September 30, 2011 was 10.17%, up from 9.92% at the end of the prior quarter.
Regulatory Tier 1 and Total risk-based capital ratios were 12.37% and 15.11%, respectively, up from 12.14% and 14.89%, at the end of the prior quarter.
Outlook for 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. Therefore, a modest overall improvement in earnings is projected for the rest of the year.
Huntington’s management expects momentum in loan and low cost deposit growth will likely continue and this combined with a stable NIM is expected to generate modest growth in NII.
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 non-interest-bearing and interest-bearing demand deposit accounts will likely continue.
In the fourth quarter of 2011, non-interest income is expected to show a modest decline, primarily due to an anticipated 50% decline in electronic banking income from the third quarter, given the newly mandated lower interchange fee structure implemented on October 1, 2011.
However, 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 non-accrual loans and net charge-offs are expected to continue to decline throughout the year.
Dividend Update
Concurrent with the earnings release, Huntington’s board of directors declared a quarterly cash dividend of 4 cents per share on its stock. The dividend is payable January 3, 2012, to shareholders of record on December 20, 2011.
Peer Performance
One of the closest peers of Huntington, Northern Trust Corporation (NTRS), reported third-quarter 2011 earnings of 71 cents per share, a penny ahead of the Zacks Consensus Estimate. The increase was marked by higher net interest income and an improved client network.
Another competitor, Commerce Bancshares Inc. (CBSH) reported third quarter 2011 earnings of 76 cents per share, a penny below the Zacks Consensus Estimate. Results in the quarter were affected by lower top line. Further, average loans declined on a lower line of credit usage. However, improving credit quality, capital ratios and nearly flat operating expenses were the positives.
Our Viewpoint
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.
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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