Huntington Bancshares Posts Profit - Analyst Blog

Huntington Bancshares Inc. (HBAN) reported fourth quarter 2010 profit of $122.9 million or 5 cents per share. The results included a one-time reduction of 7 cents per share for the deemed dividend resulting from the repurchase of $1.4 billion in TARP capital in December.

The Zacks Consensus Estimate was 8 cents per share. The company had earned $100.9 million or 10 cents per share in the prior quarter and incurred a loss of $369.7 million or 56 cents per share in the year-ago quarter.

Quarterly results reflect a significant reduction in loan loss provisions and better-than-expected growth in revenue. Nonperforming assets and net charge-offs continued to decline.

Huntington repurchased the preferred shares it issued to the Treasury as a part of Troubled Asset Relief Program in December. The company also bought back the warranties it had issued to the Treasury. This is a definite positive for the company.

Overall, Huntington expects the economic environment to improve in 2011. The company's strategic initiatives intended to grow its business are likely to raise expenses. Credit quality improvements would continue while regulatory issues would remain an overhang for the fee income.

For full-year 2010, Huntington reported net income of $312.3 million or 19 cents per share compared with a net loss of $3.1 billion or $6.14 per share for 2009. While 2010 results included an 8 cent impact for the deemed dividend due to the repurchase of the TARP capital, the year-ago results included a $2.6 billion pre tax or $4.89 per share goodwill impairment charge. However, the results were below the Zacks Consensus Estimate of 22 cents per share.

Total revenue for the fourth quarter was $683.2 million, up 1% from the prior quarter, driven by a 2% increase in fully taxable equivalent net interest income. The revenue figure also came in 2.6% ahead of the Zacks Consensus Estimate of $666 million.

Credit Quality

Credit metrics continued to show improvement at Huntington. The company also experienced a decline in the level of criticized commercial loans reflecting significant levels of restructures, upgrades, and payment activity.

Net charge-offs were down 7% sequentially and 61% year over year at $172.3 million. Net charge-offs were 1.82% of average loans and leases, down from 1.98% in the prior quarter and 4.80% in the year-ago quarter.

Total non-performing assets also dropped 24% sequentially and 59% year over year to $844.8 million. The NPA ratio improved to 2.21% from 2.94% reported in the prior quarter and 5.57% a year earlier. Provision for credit losses was $87.0 million, down 27% sequentially and 90% from the year-ago quarter. Total criticized commercial loans at quarter end were $3.1 billion, down 15% from $3.6 billion as of September 30, 2010.

Behind the Headline Numbers

Huntington's fully taxable equivalent net interest income increased 1% sequentially to $415.3 million, primarily driven by a 4% increase in average earning assets that resulted from an increase in average investment securities and average total loans and leases.

However, net interest margin declined 8 basis points sequentially to 3.37% due to the impact of stronger deposit growth funding investment security purchases at a lower incremental spread.

Average loans and leases at Huntington increased 2% sequentially reflecting a rise in consumer loans and commercial loans. However, the economic environment led many customers to maintain a lower leverage position. Average core deposits increased 3% from the prior quarter as a result of an increase in average money market deposits and average non-interest bearing demand deposits, partially offset by a decline in average core certificates of deposit.

Huntington's non-interest income was $264.2 million, down 1% sequentially, reflecting a decrease in service charges on deposit accounts. The decline 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 trust services income and bank-owned life insurance income.

Also, non-interest expenses grew 2% sequentially to $434.6 million. The increase primarily reflects an increase in personnel costs, rise in repurchase reserves associated with representations and warranties losses made on mortgage loans sold and fraud losses and a rise in outside data processing and other services, partially offset by a decrease in marketing expense.

Capital Ratios

Huntingtoncontinued to improve its capital levels. The company issued $920.0 million of common stock and $300.0 million of subordinated debt during the quarter. The proceeds were used to repay the TARP loan. Huntington repurchased all $1.4 billion of the Series B Fixed Rate Cumulative Perpetual Preferred Stock that were issued to the Treasury under TARP.

The company also 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 impacted by these actions of the company.

Huntington's tangible common equity-to-asset ratio as of December 31, 2010, was 7.56%, up from 6.20% at the end of the prior quarter. Regulatory Tier 1 and Total risk-based capital ratios were 11.50% and 14.39%, respectively, down from 12.82% and 15.08%, respectively, at the end of the prior quarter.

Outlook 2011

Huntingtonexpects the economy to remain relatively stable in 2011 with an expectation 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 may reduce mortgage banking revenue. Additionally, continued investments in business growth initiatives would represent challenges to earnings growth.

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 flat to up slightly from the fourth quarter level. The company expects to benefit from lower deposit pricing. Moreover, growth on an absolute basis in loans compared with deposits is anticipated to be more comparable, thereby reducing the absolute growth in lower yield investment securities.

Considering loans, Huntington expects growth in automobile loan portfolio and 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.

Regarding expenses, the company projects a modest increase in the early part of 2011 though the rate may increase further in the latter half due to the continued investments in business growth initiatives.

Our Take

Similar to Huntington, several of the Wall Street biggies such as JPMorgan and Chase Company (JPM) and Wells Fargo & Co. (WFC) have experienced an improvement in the credit quality. This in fact is a positive sign reflecting an overall improvement in the economy.

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.

However, the legislative actions are posing challenges for fee income growth. Also, we do not expect any substantial improvement in the top line in the first half of the year as economic growth is still in its nascent stage.

Huntingtonshares 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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