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Huntington Bancshares Delivers Surprise Profit

The Columbus, Ohio lender earned 3 cents a share during the second quarter as it moved aggressively to remove credit risk.



) -- Shares of

Huntington Bancshares

(CMA) - Get Comerica Incorporated Report

rose Thursday after the bank posted a surprise profit for the second quarter and demonstrated progress in bringing down credit costs.

In a press release before the opening bell, the bank reported second-quarter net income applicable to common shareholders of $19.3 million, or 3 cents a share. The average estimate of analysts polled by

Thomson Reuters

was for a loss of less than a penny per share in the June period.

The latest earnings improved from the first quarter, when net income applicable to common shareholders was $10.4 million, or a penny a share. For the second quarter of 2009, when the company was aggressively building loan loss reserves, Huntington reported a net loss of $182.5 million or 40 cents a share, on the same basis.

Earnings applicable to common shareholders exclude $29.4 million in dividends on preferred shares, which include $1.4 billion held by the Treasury for bailout money received through the Troubled Assets Relief Program.

A major event during the second quarter was Huntington's transfer to held-for-sale of $398 million in loans originated by

Franklin Credit Management

, a subprime lender the company took on as part of its acquisition of Sky Financial in 2007. Huntington has been winding down the Franklin portfolio. The transfer resulted in $75.5 million in net charge-offs and was followed up with the sale of $274 million in Franklin mortgages on July 20.

CEO Stephen Steinour told


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that it was a "transformational quarter for us, in terms of credit," adding that the company's "really good core activity reduced the (credit) metrics."

Huntington Bancshares had $51.7 billion in total assets as of June 30. Nonperforming assets -- including nonaccrual loans portfolio loans, impaired Franklin loans held for sale and repossessed real estate -- totaled $1.6 billion as of June 30, down from $2.3 billion the previous quarter and $2.4 billion a year earlier. The non-performing assets ratio including the above items was 3.10% at the end of the second quarter, declining from 4.38% in March and 4.65% in June 2009.

Net charge-offs -- loan losses less recoveries, including the Franklin write-downs -- for the second quarter totaled $279 million, increasing from $239 million during the first quarter and $334 million a year earlier. The second-quarter provision for loan loss reserves was $193.4 million, down from $235 million in the first quarter and $423 million in the second quarter of 2009.

Since loan losses exceeded the provision for loan losses, Huntington "released" $86 million in loan loss reserves during the quarter. The allowance for credit losses totaled $1.4 billion, covering 3.90% of total loans and leases, well ahead of the ratio of net charge-offs to average loans, which was 3.00% for the second quarter.

Steinour said "we expect our asset quality to improve and we've foreshadowed that," adding the company is being "prudent and cautious."

Improving asset quality and declining loan loss reserves were a significant earnings driver for the second-quarter earnings at the largest U.S. banks including


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, which added $3.6 billion to loan loss reserves while net loan charge-offs totaled $6.5 billion, releasing $2.6 billion in reserves and boosting operating earnings by that amount.

Bank of America

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released 1.45 billion in loan loss reserves during the second quarter, and

JPMorgan Chase

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released $2.8 billion in loan loss reserves. For

Wells Fargo

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, the reserve release was $1.1 billion.

Another positive development for Huntington, mirroring some of the other regional banks, was an 18% year-over-year increase in non-interest-bearing demand deposits, which totaled $6.8 billion as of June 30. Following the industry trend, the bank's net interest margin -- essentially the average yield on earning assets less the average cost of funds -- increased to 3.46% for the second quarter, from 3.10% a year earlier.

The company was in a strong capital position as of June 30, with a regulatory Tier 1 capital ratio of 12.47% and a total risk-based capital ratio of 14.73%, greatly exceeding the 6% and 10% required for most banks to be considered well-capitalized.

When asked whether the company was considering repaying TARP in the near future, in light of Huntington's profitability and improving capital position Steinour told


that "we have, no pressures from regulators to repay, so it's not something we spend a lot of time thinking about."

Based on Wednesday's close at $5.67, Huntington's stock was up 60% year-to-date. The shares were rising 4.6% to $5.90 in recent trades.


Written by Philip van Doorn in Jupiter Fla.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.