COLUMBUS, Ohio — As Huntington Bancshares watched its second-quarter net income shoot up 15 percent from the first quarter of the year, officials explained Thursday how their auto loan portfolio significantly aided that progress.

Huntington determined its average auto loan portfolio came in at $6.0 billion at the close of the second quarter. That figure presented a $1.3-billion or 28-percent year-over-year rise. It was also up $0.3 billion or 4 percent from the opening quarter of this year.

The company reiterated that automobile lending is a core competency and continues to be an area of growth. Huntington noted growth from the year-ago quarter exhibited further penetration within its historical geographic footprint as well as the positive impacts of expansion into eastern Pennsylvania and five New England states.

Officials also noted origination quality remained high as measured by all of their internal quality metrics.

"We continued to originate very high quality loans with attractive returns," Huntington executives said. "We focus on larger, multi-franchised, well-capitalized dealers that are rarely reliant on the success of one franchise to generate profitability.

"While the used-car market remained very strong, we increased our originations of new-vehicle loans, which reflected the discontinuance by the captive finance companies of aggressive incentive programs due to supply concerns," they added.

Also connected to vehicle contracts, Huntington reported that its automobile loan and lease net charge-offs were $2.3 million or an annualized 0.15 percent of related average balances. These marks were down 52 percent from $4.7 million or an annualized 0.33 percent in the first quarter of this year.

"The decline reflected lower delinquency levels during the current quarter, the continued high credit quality of originations and a very strong resale market for used vehicles," Huntington pointed out.

Overall 2Q Performance

Turning to its overall second-quarter performance, Huntington calculated its net income came in at $145.9 million. That amount was $19.5 million or 15 percent higher than what the company generated in the first quarter, which was $126.4 million.

Officials said second quarter earnings per common share were 16 cents, up 2 cents per share or 14 percent from 14 cents per common share in the prior quarter.

For reference, Huntington pointed out its net income in the year-ago quarter was $48.8 million or 3 cents per common share.

For the first six months of this year, Huntington indicated its net income was $272.4 million or 30 cents per common share. These figures are both higher than the comparable year-ago period when the company posted net income of $88.5 million or 4 cents per common share.

In other general announcements that came out Thursday, Huntington's board of directors declared a quarterly cash dividend on its common stock of 4 cents per common share. The dividend is payable Oct 3 to shareholders of record on Sept. 19.

Huntington's Top Executive Reacts to 2Q Financials

Stephen Steinour, Huntington's chairman, president, and chief executive officer, began his assessment of the company's second quarter by stating, "We are pleased that second quarter results represented our sixth consecutive quarterly increase in earnings and it shows the progress we are making on a number of fronts.

"This improvement reflected the benefits from a combination of factors such as our conservative view toward addressing credit quality early in the financial downturn, the increasing contribution from strategic investments, improving customer product penetration, and aspects of our ‘Fair Play' banking philosophy that are gaining traction every day," Steinhour continued.

The Huntington boss emphasized that generating an appropriate return for shareholders is a key objective.

"As such, we are very pleased that our financial strength and performance have improved to the point that enables us to raise our common stock dividend," Steinour stressed.

"The 4-cent per share dividend on an annualized basis equates to a dividend yield of 2.5-percent based on yesterday's closing stock price of $6.31," he calculated Thursday.

"Disciplined management of capital is important with dividends being just one component," Steinhour went on to say. "We have established a common stock dividend payout targeted range of 20 to 30 percent, and this declared dividend falls within the middle of that range. This is especially good news for our many retail shareholders who depend on the dividend for income."

Huntington also computed that its return on average assets was 1.11 percent in the second quarter, the highest level since the first quarter of 2007.

More importantly according to the executives, they have now reached the lower end of their long-term target of 1.10 to 1.35 percent.

"Our return on average common tangible common equity increased to 13.3 percent, also our highest level in several years," Steinhour interjected.

"This is evidence that we are making very good progress on improving the overall earnings power of the company and generating better shareholder returns," he insisted.

"Nevertheless, we can and expect to do better," Steinour acknowledged. "Our pre-tax, preprovision income was below our expectations. Earning assets did not expand as envisioned, which resulted in net interest income falling below expectations. Also, noninterest expense did not decline as much as anticipated."

Huntington's leader then delved back into other core elements of the company's service offering.

"Our emphasis on cross sell, coupled with customers increasingly being attracted by the benefits offered through our ‘Fair Play' banking philosophy with programs such as 24-Hour Grace on overdrafts and more recently the launch of Asterisk-Free Checking, are clearly having a very positive effect," Steinour noted.

"The percent of consumer households with over four products at the end of the second quarter was 71.3 percent, up from 69.4 percent at the end of last year. And for the first half of this year, consumer checking account households grew at a 9.9 percent annualized rate, up from 6.8 percent for full year 2010," he shared.

Elsewhere, Steinhour also conceded that Huntington's net interest income — which accounted for about 61 percent of the second quarter total revenue figure of $662.9 million — did not grow as much as the company thought it would from the first quarter level.

"Part of the reason was lower interest rates," Steinhour reasoned. "A decline in short-term LIBOR rates in the second quarter resulted in lower commercial loan income without a commensurate decline in deposit and borrowing costs.

"While we had strong growth in lower-cost deposits, there were few alternatives to invest these funds at an attractive risk-adjusted spread," he explained. "As a result, we let other higher cost deposits run off rather than retain these deposits and invest these funds in low-return investment securities. This negatively impacted current quarter income. We viewed this as a good tradeoff between generating short-term revenue and maintaining balance sheet and risk discipline.

"Further during the second quarter, interest income from hedging derivatives decreased, which negatively impacted current quarter income," Steinhour went on to say. "However, our balance sheet remains asset sensitive and is expected to benefit from any upward movement in interest rates. The net effect of all this was a level of earning assets that was over $1 billion lower than we had envisioned at the end of the first quarter."

Deeper Discussion of Credit Performance

Huntington determined its provision for credit losses declined $13.6 million or 28 percent from the first quarter of the year. The company indicated this dip reflected a 3-percnt decline in nonaccrual loans from the end of the prior quarter.

Executives said their total criticized commercial loans declined 11 percent during the quarter. They noted the period end allowance for credit losses (ACL) as a percentage of total loans and leases declined to 2.84 percent from 3.07 percent.

"And while the ACL as a percentage of period end total nonaccrual loans (NALs) declined slightly to 181 percent from 185 percent, it remains very strong from an historical perspective," Huntington noted.

The company also revealed second-quarter net charge-offs were $97.5 million or an annualized 1.01 percent of average total loans and leases, down 41 percent from $165.1 million or 1.73 percent from the first quarter.

To put 2011 second-quarter credit quality related performance metrics into perspective, Huntington referenced these facts:

—$35.8 million of provision for credit losses: lowest level since the first quarter of 2007.

—Net charge-offs of $97.5 million or an annualized 1.01 percent: lowest absolute and relative levels since the third quarter of 2008.

—1.57 percent level of nonaccrual loans as a percent of total loans: lowest since the third quarter of 2008

Commenting on credit quality trends, Steinour offered, "Credit quality continued its improvement. This was as expected and reflects well on the actions we took over the last two years to address credit-related issues in our loan portfolio.

"Even so, these performance metrics remain elevated compared with historical performance," he continued. "As such, we expect to see continued declines in nonaccrual loans and net charge-offs with several credit-related performance metrics returning to more normal levels around the middle of next year."

Huntington reported its second quarter total noninterest expense declined $2.3 million or 1 percent, reflecting an $18.2 million decline in other expense. The company mentioned the first quarter included $17.0 million in additions to litigation reserves.

Executives believe the benefit of this decline was partially offset by increases in professional services ($6.6 million), deposit and other insurance expense ($5.9 million), outside data processing and other services ($3.6 million), and marketing costs ($3.2 million).

"We remain focused on managing expenses from two perspectives," Steinhour stressed.

"First, we are committed to continuing to make investments in our strategic initiatives designed to grow long-term revenue. The results of investments over the last two years are positively impacting results," he noted.

"Second, we are always looking for ways to do business faster, more efficiently, and better for customers in order to free up resources for continued investments and improve overall operating efficiency. This is also important in an environment of increasing regulatory-related costs," Steinhour continued.

"Our long-term objective is an efficiency ratio in the low-to-mid 50 percent range," he went on to say. "Our efficiency ratio in the 2011 second quarter was 63 percent. So there are opportunities ahead of us to improve our expense performance."

Huntington Reveals Future Expectations

The company acknowledged the lack of prospects for meaningful economic improvement, higher interest rates and wider spreads between short-term and long-term interest rates over the remainder of this year is a challenge.

"Further, borrower and consumer confidence remain fragile," officials pointed out.

"And while we now have clarity on the amount and timing of the pending reduction in debit card interchange fees, this nevertheless represents a reduction in fee income," Huntington also noted. "All of these combined represent meaningful revenue growth headwinds. Nevertheless, net income is expected to grow from the second quarter level throughout the rest of the year, primarily reflecting modest revenue growth and disciplined expense control.

Elsewhere, Huntington thinks the momentum the company is seeing in loan and low cost deposit growth will continue.

"This, coupled with a stable net interest margin, should contribute to modest growth in net interest income," officials projected.

"Our C&I portfolio is expected to continue to show meaningful growth with much of this reflecting the positive impact from strategic initiatives to expand our commercial lending expertise into areas like specialty banking, asset based lending, and equipment financing, in addition to our long-standing continued support of small business lending," they also predicted.

"We believe period-end balances in our C&I and auto portfolios position us for continued growth in average balances for these portfolios as we head into the third quarter," Huntington officials went on to emphasize.

The company also anticipates its total core deposits will increase, reflecting continued growth in consumer households and business relationships. Further, the company expects the shift toward lower-cost noninterest-bearing and interest-bearing demand deposit accounts will continue.

Moving along, Huntington also suspects noninterest income should show modest growth in the second half of this year. The company contends the primary driver should be service charge income as the benefits from its "Fair Play" banking philosophy continue to gain momentum commensurate with consumer household growth and increased product penetration.

"Mortgage banking income will likely show only modest, if any, growth throughout the second half of the year," officials projected. "Electronic banking income in the third quarter is expected to improve from the second-quarter levels, though fourth-quarter levels will decline about 50 percent from second quarter levels as the new interchange fee structure will be implemented Oct. 1."

Furthermore, Huntington forecasted continued growth in the earnings contribution from other key fee income activities including capital markets, treasury management services and brokerage, reflecting the impact of cross-sell and product penetration initiatives throughout the company as well as the positive impact from strategic initiatives.

Officials believe expense levels are expected to remain relatively stable while nonaccrual loans and net charge-offs are expected to continue to decline throughout the year.

"We anticipate the effective tax rate for the remainder of the year to approximate 35 percent of income before income taxes, less approximately $40.0 million of permanent tax differences over the remainder of 2011 primarily related to tax-exempt income, tax-advantaged investments and general business credits," Huntington executives concluded.