Huntington Bancshares Inc.(HBAN) reported first quarter 2011 earnings of 15 cents, beating the Zacks Consensus Estimate of 12 cents.
However, after including a one-time addition to litigation reserves, Huntington reported a profit of $ 126.4 million or 14 cents per share. This compares favorably with $ 122.9 million or 5 cents per share earned in the prior quarter and $ 39.7 million or 1 cent per share in the year-ago quarter.
Huntington’s better-than-expected results reflected a significant improvement in credit quality, a modest growth in loans and deposits, increase in net interest margin and low levels of non-interest expenses. However, the company’s top line declined during the quarter.
Performance in Detail
For the reported quarter, total revenue on fully taxable equivalent (FTE) basis was $ 645.9 million, down 6.0% from the prior quarter, driven by a 10% fall in non-interest income. The revenue figure also missed the Zacks Consensus Estimate of $ 665.0 million.
Huntington’s net interest income (FTE) decreased 3% sequentially to $ 408.3 million, primarily owing to a 2% decline in average earning assets that resulted from a fall in average investment securities and loans held for sale, partially offset by increase in average total loans and leases.
However, net interest margin increased 5 basis points sequentially to 3.42% due to the impact of augmented low cost deposits and improved deposit pricing. These positives were partially mitigated by the reduction in swap income, lower loan yields, and the issuance of subordinated debt.
Huntington’s non-interest income was down 10% sequentially to $ 236.9 million, reflecting a significant decrease in mortgage banking income. The decrease was partially offset by an increase in trust services income and brokerage income.
Non-interest expenses in the reported quarter declined 1% sequentially to $ 430.7 million. The decrease primarily reflected fall in professional services, deposit and other insurance expense, as well as other real estate owned (OREO) and foreclosure expense. These were partially mitigated by an increase in personnel costs and net occupancy expenses.
Credit Quality
Credit quality continued to show improvement at Huntington. The company experienced a decline in the level of criticized commercial loans, reflecting significant levels of restructures, upgrades, and payment activity.
Net charge-offs were down 4.2% sequentially and 30.8% year over year at $ 165.1 million. Net charge-offs were 1.73% of average loans and leases, down from 1.82% in the prior quarter and 2.58% in the year-ago quarter.
Total non-performing assets (NPA) also dropped 18.2% sequentially and 64.0% year over year to $ 690.9 million. The NPA ratio improved to 1.80% from 2.21% reported in the prior quarter and 5.17% a year earlier.
Provision for credit losses stood at $ 49.4 million, down 43% sequentially and 79% year over year. Total criticized commercial loans at quarter end were $ 2.7 billion, down 13% from $ 3.1 billion as of December 31, 2010.
Balance Sheet
Average loans and leases at Huntington increased 1% sequentially, reflecting a rise in commercial and industrial loans, automobiles loans, and leases. These were partly offset by lower commercial real estate loans.
Average core deposits increased 1% from the prior quarter as a result of an increase in average money market deposits and average non-interest bearing demand deposits, partially mitigated by a decline in average core certificates of deposit.
Capital Ratios
Huntington continued to improve its capital levels despite the negative impact from repurchase of warrants from the U.S. Treasury.
During the quarter, Huntington repurchased the warrants that were issued to the U.S. Treasury as part of TARP for $ 49.1 million. The warrant had entitled the Treasury to purchase 23.6 million common shares. Hence, the capital ratios were negatively impacted by 9 basis points as a result of this action.
Huntington’s tangible common equity-to-asset ratio as of December 31, 2010 was 7.81%, up from 7.56% at the end of the prior quarter. Regulatory Tier 1 and Total risk-based capital ratios were 12.04% and 14.85% respectively, up from 11.55% and 14.46% respectively, at the end of the prior quarter.
Outlook for 2011
Huntington expects the economy to remain relatively stable in 2011, with expectations for improvement in the second half of the year. However, revenue headwinds due to regulatory and legislative actions, combined with higher interest rates in 2011, might reduce mortgage banking revenue.
Huntington projects its pre-tax, pre-provision income levels to remain in line with 2010 second-half performance. The company, however, expects an increase in net income from the current level, driven by reduction in credit costs. Absolute levels of net charge-offs, NPAs, and criticized loans will continue to decline, thereby reducing provision expense.
Net interest margin is anticipated to be relatively stable. The company expects to benefit from lower deposit pricing.
Regarding loans, Huntington expects growth in automobile loan portfolio as well as commercial and industrial loans but continued declines in commercial real estate loans, though at a tardy rate. Modest growth is projected in home equity and residential mortgages. On the other hand, core deposits are anticipated to grow. Also, a shift toward the lower-cost demand deposit accounts is expected to continue.
On the flip side, fee income is anticipated to be negatively impacted by lower interchange fees and a decline in mortgage banking revenues due to continued weak market conditions. However, the company’s cross-sell initiatives and other strategic efforts are expected to support other fee income categories.
As far as expenses are concerned, the company anticipates these to be relatively stable, with declines resulting from continued low credit costs and improved expense efficiencies, offset by continued investments in strategic initiatives.
Peer Performance
One of the closest peers of Huntington, Northern Trust Corporation (NTRS), reported first quarter earnings of 59 cents per share, which was below the Zacks Consensus Estimate of 65 cents. The decrease was attributable to a persistently low interest rate environment, which in turn, negatively affected net interest margin.
Our Take
We believe that the turnaround story at Huntington is right on track and the company is progressing well. The strategic initiatives to derisk its balance sheet, strengthen its capital levels, and reorganize its business should help the company navigate the current credit cycle and support earnings growth going forward.The company’s strategic initiatives, intended to grow its business, are likely to raise expenses.
However, the legislative actions are posing challenges to fee income growth. Also, we do not expect any substantial improvement in the top line during the first half of the year as economic growth is still at its nascent stage.
Huntington shares are maintaining a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation. However, considering the fundamentals, we have a long-term “Underperform” recommendation on the stock.
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