Huntington Bancshares Incorporated (HBAN) reported a third quarter 2010 profit of $100.9 million or 10 cents per share, ahead of the Zacks Consensus Estimate of 6 cents. This also compares favorably with earnings of $48.8 million or 3 cents a share in the prior quarter and a net loss of $166.2 million or 33 cents in the year-ago quarter.
The better-than-expected results were primarily driven by a significant reduction in loan loss provisions and better-than-expected growth in revenue. Nonperforming assets and net charge-offs declined while capital ratios also strengthened.
Total revenue was $679.7 million, up 1% from the prior quarter and ahead of the Zacks Consensus Estimate of $656 million reflecting increase in fully-taxable equivalent net interest income.
Credit Quality
Credit metrics continued to show improvements at Huntington. The company also experienced a decline in the level of criticized commercial loans reflecting significant upgrade and payment activity.
Net charge-offs were down 34% sequentially and 48% year over year to $184.5 million. Net charge-offs were 1.98% of average loans and leases, down from 3.01% in the prior quarter and 3.76% in the year-ago quarter.
Total non-performing assets also reported a drop of 30% sequentially and 53% year over year to $1.1 billion. The NPA ratio improved to 2.94% from 4.24% reported in the prior quarter and 6.26% a year earlier. Provision for credit losses was $119.2 million, down 38% sequentially and 75% from the year-ago quarter.
Huntington sold Franklin-related residential mortgages and home equity loans at the book value during the reported quarter. As of September 30, 2010, the only Franklin-related assets remaining were $15.3 million of other real estate owned, which has been written down to current fair value.
Behind the Headline Numbers
Huntington’s fully-taxable equivalent net interest income increased 3% sequentially to $410.0 million, primarily driven by an annualized 8% increase in average earning assets that resulted from an increase in average investment securities and strong mortgage originations.
However, net interest margin declined only by 1 basis point to 3.45% as favorable trends in the mix and pricing of deposits were offset by reduced contribution on Franklin-related loans and lower contribution from asset/liability management strategies implemented in the first three quarters.
Average loans and leases at Huntington remained unchanged sequentially as increase in consumer loans was offset by a decline in commercial loans. The economic environment led many customers to lower their leverage position. However, average deposits increased 1%, from the prior quarter as a result of an increase in average money market deposits, partially offset by a decline in average interest bearing demand deposits and a drop in average core certificates of deposit.
Huntington’s non-interest income was $267.1 million, down 1% sequentially. The decrease was a result of the implementation of Regulation E amendments and the voluntary reduction in certain overdraft fee practices as part of the company’s “Fair Play” strategic initiative. The decrease was partially offset by an increase in mortgage banking income.
Non-interest expenses increased 3% sequentially to $427.3 million, primarily reflecting an increase in personnel costs as the company strengthened its workforce for supporting its strategic moves, a rise in expenses related to other real estate owned and foreclosures and marketing expenses.
Capital Ratios
Capital ratios improved in the quarter. Huntington’s tangible common equity-to-asset ratio as of September 30, 2010, was 6.20%, up from 6.12% at the end of the prior quarter. Regulatory Tier 1 and Total risk-based capital ratios were 12.76% and 15.02%, respectively, up from 12.51% and 14.79%, respectively, at the end of the prior quarter.
Outlook
Huntington expects the economy to remain relatively stable in the remainder of the year, though the implementation of the Reg E amendments and certain voluntary actions to reduce certain fees as part of the company’s strategic initiatives would remain revenue headwinds.
Huntington continues to focus on net income growth and expects this to be achieved in the near term through the favorable impacts of lower provision expense and growth in net interest income. The company expects pre-tax, pre-provision income levels to be in line with the reported quarter’s performance. Net interest margin is anticipated to be flat to down slightly, primarily due to the impact of the flatter, low yield curve, but supported by the disciplined loan and deposit pricing.
Huntington projects modest growth in C&I loans but continued declines in commercial real estate loans. Automobile loan portfolio is expected to continue to grow strongly though home equity and residential mortgages are likely to remain relatively flat. While core deposits are anticipated to grow, the rate of growth is expected to be slow driven by the lack of options to reinvest at desirable spreads.
However, Huntington expects fee income to continue to be negatively impacted by lower service charges on deposit accounts and lower mortgage banking revenues, though other categories of fee income are expected to benefit from the cross-sale initiatives throughout the company. While expenses are expected to be in line with the reported quarter levels, credit quality trends are expected to improve with a drop in net charge-offs, nonperforming assets and provision for credit losses.
Our Take
Similar to Huntington, JPMorgan and Chase Company (JPM), Bank of America Corporation (BAC), Citigroup Inc. (C) and U.S. Bancorp (USB) have all reported better-than-expected earnings in the second quarter, primarily driven by an improvement in credit quality as a result of a moderation in the challenging economic condition.
We believe that the turnaround story at Huntington is right on track and the company is progressing well. The strategic initiatives to de-risk 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.
However, the lack of growth in loans is expected to continue given the sluggish economic recovery. Additionally, the recent legislative actions are posing challenges for the fee income to grow.
Nevertheless, the earnings beat is welcomed by the investors and the Huntington stock is trading at a premium in today’s pre-market session on the NASDAQ.
Huntington shares are maintaining a Zacks #3 Rank, which translates into a short-term Hold recommendation. We have a long-term Neutral recommendation on the stock.
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