Huntington Bancshares Inc. (HBAN) came up with better-than-expected results in the second quarter of 2012. The company reported earnings per share of 17 cents, 2 cents above the Zacks Consensus Estimate. Results were flat sequentially on a per-share basis and slightly ahead of the 16 cents earned in the year-ago quarter.
Huntington's results reflected a better-than-expected revenue figure, though that number was slightly down sequentially. Average loans and core deposits also grew in the quarter. Also, a fall in expenses from the prior quarter level aided its profit level.
Huntington reported net income of $152.7 million in the reported quarter, slightly below the prior quarter net income of 153.3 million. However, net income moved up 5% year over year.
For the reported quarter, Huntington's total revenue on a fully-taxable-equivalent (FTE) basis was $688.5 million, down 3% from the prior quarter. However, the revenue figure surpassed the Zacks Consensus Estimate of $677 million. The sequential decline reflected a fall in non-interest income.
Quarter in Detail
Huntington's net interest income (NII) grew 3% sequentially to $429.0 million, primarily due to increase in average earning assets and net interest margin (NIM).
NIM expanded 2 basis points sequentially to 3.42% in the reported quarter. Increase in NIM reflected a fall in the cost of total interest-bearing liabilities and growth in average noninterest bearing deposits. However, the positives were partly offset by the negative impact from the mix and yield of earning assets and other items.
Huntington's non-interest income slipped 11% sequentially at $253.8 million. The decrease was driven by a fall in loan sales and a reduction in other income, as the prior quarter included a bargain purchase gain from the FDIC-assisted acquisition of Fidelity Bank. Also, mortgage banking income fell in the quarter.
Non-interest expenses at Huntington fell 4% sequentially to $444.3 million. The decrease resulted from a reduction in other expenses as the prior quarter included an addition to litigation reserves.
Moreover, deposit and other insurance expense as well as net occupancy declined in the quarter. However, these declines were partly offset by an uptick in outside data processing and other services, marketing costs and an increase in professional services costs.
Credit quality was mix bag in the reported quarter. Huntington's net charge-offs (NCOs) were up 2% sequentially but fell 14% year over year to $84.2 million. NCOs were 0.82% of average loans and leases, down from 0.85% in the prior quarter and 1.01% in the year-ago quarter. Provision for credit losses was $36.5 million, up 6% sequentially, reflecting an increase in charge-offs.
Total non-performing assets (NPA) at Huntington fell 1% sequentially and 20% year over year to $523.3 million. The NPA ratio was 1.31% in the reported quarter, slightly up from 1.29% in the prior quarter but down from 1.67% a year earlier.
Average loans and leases at Huntington increased 5% sequentially. The uptick was contributed by growth in average total commercial and industrial (C&I) loans and automobile loans. Commercial real estate (CRE) also reported an increase due to Fidelity Bank-related loans, partially offset by the wind-down of the noncore portfolio.
Average total core deposits increased 3% sequentially. This reflected growth in all deposit categories, including deposits associated with Fidelity Bank.
Huntington's capital ratios were mixed in the quarter. As of June 30, 2012, Tier 1 common risk-based capital ratio was 10.08%, down from 10.15% as of March 31, 2012, while tangible common equity ratio moved up to 8.41% from 8.33% over the same time frame. The regulatory Tier 1 risk-based capital ratio came at 11.93%, down from 12.22% as of March 31, 2012.
Increase in risk-weighted assets as a result of balance sheet growth and the capital moves carried out throughout the quarter, led to this decline. The capital actions included redemption of $80 million of trust preferred securities as well as 6.4 million share buybacks at an average price of $6.26.
According to Huntington's management, though improving trends in the Midwest region is being seen, the uncertainties in the broader economy compels the company to be cautious. The management, therefore, continues to focus on strategic measures and plans to launch more products and services across the company's enhanced customer base.
In the rest of 2012, average net interest income is projected to exhibit a modest improvement from the second quarter level, reflecting an increase in total loans excluding any impacts of future loan securitizations. Such benefits are likely to be offset by the downward pressure on NIM.
Regarding loans, managment expects its C&I portfolio to continue to exhibit meaningful growth. Automobile loan balances are likely to grow from period-end balances while residential mortgages and home equity loans are anticipated to be comparatively flat.
However, CRE loans are likely to experience low levels of decreases from current levels. Excluding any possible future automobile loan securitizations, an increase in total loans is likely to modestly surpass growth in total deposits.
Noninterest income is expected to show a modest increase from second-quarter levels after excluding the impact of any future automobile loan securitization gains and any net mortgage servicing right impact.
Huntington's expenses are expected to increase slightly. However, with the benefit of revenue growth, management anticipates positive operating leverage and a modest improvement in the expense efficiency ratio. Regulatory costs and expenses related to strategic actions would result in an increase in expenses.
A continued improvement in the credit quality of Huntington is anticipated for the rest of the year. However, given the uncertain and uneven nature of the economic recovery, there could be some quarterly volatility in the credit metrics.
Capital Deployment Update
Concurrent with the earnings release, Huntington's Board of Directors declared a quarterly cash dividend of 4 cents per share on its common stock. The dividend is payable on October 1, 2012, to shareholders of record on September 17, 2012.
During the reported quarter, the company bought back 6.4 million shares at an average price of $6.26.
Huntington has a solid franchise in the Midwest. The company is focused on capitalizing its growth opportunities and its strategic efforts are right on track. The Fidelity Bank acquisition and the in-store banking deal augur well going forward. Share buyback authorization following the Fed's approval inspires investor confidence in the stock.
However, a tepid economic recovery, low interest rate environment and regulatory issues will likely restrict any robust development in earnings in the upcoming quarters. Moreover, with a growing expense base, we remain somewhat skeptical regarding the company's ability to substantially grow its earnings in the quarters ahead.
Notably, one of Huntington's peers, Commerce Bancshares Inc. (CBSH) reported earnings of 80 cents per share, significantly outpacing the Zacks Consensus Estimate of 72 cents. After considering loan recoveries and interest income on non-performing commercial loans as well as an early pay-off of a commercial real estate loan, the company reported earnings of 84 cents.
Commerce Bancshares' year-over-year results benefited from higher net interest income and a decrease in operating expenses, partially offset by a lower fee income. Moreover, credit quality and capital ratios continued to show improvements.
Huntington currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we have a long-term Neutral recommendation on the stock.