After reporting an in line result in the prior quarter, Huntington Bancshares Inc. (HBAN) came up with better-than-expected results in the first quarter of 2012. The company reported earnings per share of 17 cents, 3 cents above the Zacks Consensus Estimate. Results also compared favorably with earnings of 14 cents per share both in the prior quarter and the year-ago period.
Results in the reported quarter includes one cent per share gain related to the recently announced Federal Deposit Insurance Corporation (:FDIC)-assisted purchase of Fidelity Bank in Dearborn, Michigan. Moreover, it incorporates a negative impact of 2 cents per share for addition to its litigation reserves. Excluding such items, the company reported 18 cents per share in the quarter.
Huntington’s earnings were marked by an improvement in its revenue, primarily driven by an expansion of its non-interest income. Credit quality also continued to improve. However, increase in expenses partly offset the positives.
Huntington reported net income of $153.3 million in the reported quarter, up 21% both sequentially and year over year.
For the reported quarter, Huntington’s total revenue on a fully-taxable-equivalent (FTE) basis was $706.5 million, up 9% from the prior quarter. The revenue figure also surpassed the Zacks Consensus Estimate of $657.0 million. The uptick was driven primarily by a rise in non-interest income.
Quarter in Detail
Net interest income (:NII) grew 1% sequentially to $417.2 million, primarily due to increase in average earning assets and net interest margin (NIM).
NIM expanded 2 basis points sequentially to 3.40% in the reported quarter, mainly due to improved deposit pricing and the addition of low cost funding. However, the positives were partly offset by lower earning asset yields and a shift to lower-yield, higher quality credits as well as other items.
Huntington’s non-interest income advanced 24% sequentially at $285.3 million. The increase resulted from higher gain on loan sales, increase in mortgage banking income and bargain purchase gain associated with the Fidelity Bank acquisition.
Yet, non-interest expenses at Huntington inched up 8% sequentially to $462.7 million. The increase was driven by an increase in litigation reserves, higher personnel costs and gain on the early extinguishment of debt. The increases were partially offset by decrease in outside data processing and other services and decline in professional services.
Credit quality continued to improve in the reported quarter. Net charge-offs (NCOs) at Huntington were down 1% sequentially and 50% year over year to $83.0 million. NCOs were 0.85% of average loans and leases, unchanged from the prior quarter and down from 1.73% in the year-ago quarter.
Total non-performing assets (:NPA) also dropped 11% sequentially and 24% year over year to $527.1 million. The NPA ratio improved to 1.29% from 1.51% reported in the prior quarter and 1.80% a year earlier.
Provision for credit losses was $34.4 million, down 24% sequentially. Results were marked by lower provision for unfunded commitments and a reduced level of NCOs.
Average loans and leases at Huntington decreased 1% sequentially, primarily reflecting a fall in average automobile loans, partially offset by growth in average commercial and industrial (C&I) loans.
Average deposits were nearly flat sequentially. Decrease in average money market deposits and core certificates of deposits were mostly offset by increase in total demand deposits.
Huntington’s capital levels continued to be strong. As of March 31, 2012, Tier 1 common risk-based capital ratio was 10.15%, up from 10.00% as of December 31, 2011, while tangible common equity to asset ratio advanced 3 basis points over this same period to 8.33%.
Further, the regulatory Tier 1 capital ratio was 12.22%, up from 12.11% at the end of the prior quarter, while Total risk-based capital ratio was 14.76%, down slightly from 14.77% at the end of last year. An increase in risk-weighted assets due to balance sheet growth resulted in the decline.
While uncertainty and volatility surrounding the economy continues, Huntington’s management remains encouraged with some of the positive signals. Revenue headwinds will continue, yet management expects to combat that with strategic efforts and operating efficiencies.
Over 2012, net interest income is likely to show modest improvement from the first quarter level. Though momentum in loan and low cost deposit growth will likely persist, it is expected to be mostly offset earlier in the year by a downward pressure on the net interest margin due to the anticipated continued mix shift to lower-rate higher quality loans and lower securities reinvestment rates given the low absolute level of interest rates and shape of the yield curve.
Excluding potential future automobile loan securitizations, the company anticipates the increase in total loans to modestly outpace growth in total deposits. Particularly, the strategic initiatives of Huntington are expected to aid in C&I loan growth. Residential mortgages and home equity loans are anticipated to show modest growth, with commercial real estate loans likely to experience slowing decreases.
Reflecting the impact of Huntington’s cross-sell and product penetration initiatives throughout the company, non-interest income is expected to show a modest increase throughout 2012 from the first quarter levels, driven by increased contribution from key fee income categories. The modest increase, however, will exclude the impacts of the automobile loan securitization gain, the Fidelity Bank related bargain purchase gain, and any net mortgage servicing rights impact.
Huntington’s expenses are expected to increase slightly. However, with the benefit of revenue growth, the company anticipates positive operating leverage and 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 is anticipated throughout 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 $0.04 per share on its common stock. The dividend is payable on July 2, 2012, to shareholders of record on June 18, 2012.
Notably, in March 2012, Huntington announced that its capital plan got Fed’s approval. This allowed the company to maintain its dividend level through the first quarter of 2013 and make share buybacks of up to $182 million of common stock.
Similar to Huntington, Northern Trust Corporation’s (NTRS) first-quarter 2012 earnings of 67 cents per share surpassed the Zacks Consensus Estimate by a penny. Overall, results were marked by higher non-interest income, strong new business and improved equity markets.
Moreover, decline in non-interest expenses and improved credit quality were the positives for the quarter. The fall in net interest income acted as a headwind for the company.
The other company in its peer group, TCF Financial Corporation (TCB) will be releasing its earnings on April 19.
Huntingtonhas a solid franchise in the Midwest. The company is focused on capitalizing its growth opportunities. Moreover, its strategic efforts are right on track.
Recently, in an effort to expand its footprint in Southeast Michigan, Huntingtonhas acquired Fidelity Bank in a Federal Deposit Insurance Corporation (:FDIC) assisted deal. The transaction adds over Fidelity Bank 18,000 customers to Huntington. Though a smaller one, the Fidelity Bank acquisition augurs well going forward.
The share buyback authorization following the Fed’s approval inspires investors’ confidence in the stock. However, a sluggish economic recovery, low interest rate environment and regulatory issues will likely restrict any robust development in earnings in the upcoming quarters.
Huntingtoncurrently retains a Zacks #2 Rank, which translates into a short-term Buy rating. However, considering the fundamentals, we have a long-term Neutral recommendation on the stock.
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