COLUMBUS, Ohio — Along with offering forecasts about how it might fare later in the year, Huntington Bancshares recently revealed that it opened 2011 with a 13-percent jump in auto loans year-over-year, helping its first-quarter net income total climb to $126.4 million or 14 cents per common share.

Huntington reported total commercial auto loans came in at $5.7 billion for the first quarter, compared to $5.5 billlion in the fourth quarter of last year.

Consumer loans across the board for the company came in at $18.5 billion, compared to $18.2 billion in the previous quarter.

Discussing loan growth, officials pointed out, "There was modest loan growth (during the period). There was strong automobile loan growth, meaningful C&I loan growth and modest growth in home equity and residential mortgages, partially offset by continued declines in CRE."

While the current quarter included a reduction of 1 cent per common share related to additions to litigation reserves, Huntington pointed out quarter-over-quarter improvement.  The company generated $122.9 million or 5 cents per common share in net income during the closing quarter of 2010.

Officials also mentioned the prior quarter included a reduction of 7 cents per common share for the deemed dividend resulting from that quarter's repurchase of TARP capital. 

The year-over-year net income comparison showed a much greater improvement. Huntington recounted that its net income during the first quarter of 2010 was $39.7 million or 1 cent per common share.

"First quarter results were consistent with our expectations and set the stage for continued earnings growth throughout this year," stated Stephen Steinour, Huntington's chairman, president and chief executive.

"Throughout last year and continuing into this year, we are taking advantage of what we view as a moment in time to make significant investments in strategic initiatives to position us for more profitable and sustainable long-term growth," Steinour continued. "Reflecting these factors and the reality of certain near-term revenue headwinds, we previously noted that the primary driver of earnings growth in early 2011 would be lower provision for credit losses as credit quality continued to improve.  As such, we are very pleased with this quarter's continued, significant improvement in our credit quality. 

"Nonaccrual and criticized loans again saw significant declines. Net charge-offs improved. As a result, our provision for credit losses declined," he added. "Nevertheless, our allowance for credit losses relative to the level of nonaccrual loans strengthened further."

Huntington determined its provision for credit losses declined $37.6 million or 43 percent from the fourth quarter. The company thinks this drop reflected an 18-percent decline in nonaccrual loans from the end of the prior quarter, commensurate with a 19-percent decrease in the level of new nonaccrual loans.

Executives determined total criticized commercial loans declined 13 percent during the quarter and reflected a 41-percent decrease in new criticized commercial loans.

While the period end allowance for credit losses (ACL) as a percentage of total loans and leases declined to 3.07 percent from 3.39 percent, Huntington said the ACL as a percentage of total nonaccrual loans (NALs) increased to 185 percent from 166 percent.

Elsewhere, the company noted net charge-offs were $165.1 million or an annualized 1.73 percent of average total loans and leases, down from $172.3 million or 1.82 percent from the fourth quarter.

Moving on, Huntington calculated its first-quarter net interest income declined $11.0 million or 3 percent from the fourth quarter. The company believes the dip reflected a 2-percent (8-percent annualized) decrease in average earning assets partially offset by a 5-basis-point increase in the fully taxable equivalent net interest margin to 3.42 percent from 3.37 percent.

Executives went on to share that the decrease in average earning assets reflected a combination of factors including a $0.6-billion, or 6-percent (25-percent annualized) decrease in average available-for-sale and other securities. They surmised what contributed to this decline were sales of $0.2 billion of investment securities that partially funded the fourth-quarter repurchase of TARP capital. 

"The linked-quarter decline in net interest income reflected the impact of fewer days and a decline in average available-for-sale and other securities as the fully-taxable equivalent net interest margin increased," Steinour explained.

"We are optimistic that net interest income will increase in coming quarters as we expect loan and core deposits to continue to grow with our net interest margin remaining relatively stable," he continued. "We are especially pleased with this quarter's increase in our net interest margin as this primarily reflected the benefit of continued growth in low cost noninterest bearing demand deposits. These deposits are our most profitable and represent the primary customer banking relationship. 

"During the quarter, consumer checking account households grew at a 9-percent annualized rate, reflecting the traction we are gaining with customers in our markets as they increasingly embrace the benefits offered through our ‘Fair Play' banking philosophy with programs such as 24-Hour Grace on overdrafts," Steinour went on to highlight.

In other segments of its financial statement, Huntington indicated its first-quarter total noninterest income declined $27.3 million or 10 percent. The company determined the drop reflected a $30.5-million or 57-percent decline in mortgage banking income from the fourth quarter primarily related to a 49-percent decline in mortgage originations.

Huntington added first-quarter trust services income increased 5 percent and brokerage income grew 21 percent from the fourth quarter.

"The decline in noninterest income was driven by the anticipated decrease in mortgage banking income due to expected lower originations as mortgage interest rates increased late in the fourth quarter and mortgage originations slowed," Steinour stressed.

"Given recent origination data, we believe mortgage banking income will likely stabilize at the first quarter's run rate," he elaborated. "Aside from mortgage banking, we are encouraged by the growth in trust services and brokerage income, two areas in which we have been making strategic investments."

In other parts of its balance sheet, Huntington said its total first-quarter noninterest expenses declined $3.9 million or 1 percent, reflecting drops in legal costs as collection activities declined, consulting expenses, OREO and foreclosure costs and a number of other expense categories.

The company conceded that what partially offset those declines was $17.0 million in additions to litigation reserves, seasonal increase in certain expenses, most notably personnel costs related to the annual FICA and other benefit expense resets, as well as March's annual merit increases for nonexecutives.

"We were very pleased to see a reduction in noninterest expense despite additions to litigation reserves, the usual seasonal increases and expenses related to making strategic investments," Steinour interjected.

Back on Jan. 19, Huntington recapped that it repurchased for $49.1 million the warrant to purchase 23.6 million common shares issued to the U.S. Department of the Treasury in connection with the Capital Purchase Program under the Troubled Asset Relief Program.  While the repurchase of this warrant had the positive effect of removing any possible future share dilutive impact, the company said it negatively impacted its capital ratios.

"For example, the warrant repurchase negatively impacted our tangible common equity ratio by 9 basis points," officials explained. "Nevertheless, due to the first quarter's earnings growth our March 31 capital ratios increased from the end of last year."

Steinour delved deeper into the topic, stating, "The repurchase of this warrant closed our relationship with the U.S. Department of the Treasury with regard to the TARP capital.

"Our strong capital ratios and expectation for continued growth in earnings and capital positions us to actively explore capital management opportunities, including raising the dividend," he added.

Huntington's Expectations

In discussing its first-quarter report, Huntington emphasized that it remains optimistic about prospects for continued earnings growth for the remainder of the year, especially in regard to vehicle financing.

"Growth in automobile loans is expected to remain strong, aided by our expansion into new markets," company officials declared.

Overall however, Huntington didn't take an overly aggressive view of what could be ahead.

"Borrower and consumer confidence and the sustainability of the slow economic recovery remain major factors impacting growth opportunities for the rest of 2011," Huntington executives stressed. "Unfortunately, during the 2011 first quarter a number of issues have emerged, however, that could negatively impact the recovery. These include the continued instability in the Middle East with its ramifications on the cost of oil, and the crisis in Japan that could negatively impact the production of consumer goods and services, most notably the electronics and auto sectors.

"For now, we continue to believe that the economy will remain relatively stable throughout the coming year, with the potential for improvement in the latter half," they added.

The company said net income is expected to grow from the first quarter level throughout the rest of the year as pre-tax, pre-provision income rebounds from this quarter's level.

"We believe the momentum we are seeing in loan and deposit growth, coupled with a stable net interest margin, will contribute to growth in net interest income," Huntington officials asserted.

"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 continued.

"Home equity and residential mortgages are likely to show only modest growth until there is more consumer confidence in the sustainability of the economic recovery," they added.  

Huntington anticipates core deposits will continue to grow, reflecting growth in consumer households and business relationships.

"Further, we expect the shift toward lower-cost noninterest bearing demand deposit accounts will continue," executives added.

From a fee income perspective, Huntington surmised its first-quarter results reflected for the most part the negative run rate impacts from the decline in mortgage banking income and deposit service charges.

"Mortgage banking income will likely show only modest, if any, growth throughout the rest of this year," Huntington predicted.

"Service charge income should begin to show modest growth later in this year as the benefits from our ‘Fair Play' banking philosophy continue to gain momentum commensurate with consumer household growth and increased product penetration," executives went on to say.

Huntington cautioned that its electronic banking income in the second half of the year could be negatively impacted by as much as $45 million if the Federal Reserve's currently proposed interchange fee structure is implemented July 21 as planned.

"There are some Congressional movements to block or postpone the implementation, but any outcome is uncertain at this time," company officials indicated "We also expect to see continued growth in the earnings contribution from other key fee income activities including capital markets, treasury management services, and brokerage, reflecting the impact of our cross-sell and product penetration initiatives throughout the company, as well as the positive impact from strategic initiatives."

Finally, Huntington thinks its expense levels are expected to remain relatively stable with declines resulting from continued low credit costs and improved expense efficiencies, offset by continued investments in strategic initiatives.

"Nonaccrual loans are expected to continue to decline meaningfully throughout the year," Huntington projected.

"We anticipate the effective tax rate for the remainder of the year to approximate 35 percent of income before income taxes less approximately $60.0 million of permanent tax differences over the remainder of 2011 primarily related to tax-exempt income, tax-advantaged investments, and general business credits," company officials concluded.