Regional Bank Earnings Round-Up

Huntington Bancshares ( HBAN) shares closed up more than 10% Thursday, after beating Wall Street's profit estimates for the third quarter.

Huntington's stock added 10.2% to $9.48, the best performance among several regional banks reporting quarterly results in a volatile day of trading. The Dow Jones Industrial Average swung more than 800 points on the day, finishing up more than 400 points.

BB&T Corp. ( BBT) and PNC Financial Services ( PNC) both reported earnings declines both year-over-year and on a sequential basis. BB&T shares closed up 3.4% to $33.26 and PNC was shares were off fractionally at $61.40.

Huntington's Earnings Improve

Huntington Bancshares reported net income of $115.2 million, or 28 cents per common share for the third quarter. This beat the Thomson Reuters consensus estimate of 24 cents, and compared to net income of $101.4 million last quarter and $138.2 million in the third quarter of 2007.

The improved earnings came despite an increase in the company's quarterly provision for loan loss reserves to $154 million, from $121 million last quarter. Huntington's returns on average assets and equity for the third quarter were 0.84% and 7.29%, compared to 0.73% and 6.39% last quarter and 1.02% and 8.91% in the third quarter of 2007.

The $55 billion Columbus, Ohio, holding company reported a 5% increase in nonperforming assets (NPA) from the second quarter. However, like most holding companies, Huntington excludes loans past due 90 or more days, but still accruing interest, from its NPA. These loans increased 40% during the third quarter, to $192 million.

Here's a full breakdown of Huntington's NPA:

Huntington Bancshares - Asset Quality ($Mil)
  Sep. 2008 June 2008 Sep. 2007
Nonaccural loans and leases $586 $535 $249
"Performing" loans past due 90 days or more $192 $137 $116
Restructured loans (Franklin Credit) $365 $368 $0
Impaired loans held for sale $14 $15 $100
Other nonperforming assets $2 $3 $16
Repossessed Real Estate $73 $72 $69
Total Nonperforming Assets $1,232 $1,130 $551
 
Total Assets $54,671 $55,334 $36,422
 
% Nonperforming Assets 2.25 2.04 1.51
Source: Huntington Bancshares Filings

The company's total nonperforming assets ratio as of Sept. 30 was 2.25%. Nonperformers included $365 million in restructured loans left over from Franklin Credit, a relationship Huntington inherited when it acquired Sky Financial in the third quarter of 2007. The restructured loans were made through Franklin Credit Management Corp., which specializes in acquiring and servicing loans that fall outside of Fannie Mae ( FNM) and Freddie Mac ( FRE) guidelines, because of limited documentation, higher levels of borrower debt when the loans are originated, or problems with borrowers' credit histories.

Huntington's credit exposure to Franklin totaled $1.1 billion as of Sept. 30. The holding company moved $762 million of the Franklin loans out of nonperforming status during the second quarter, since there were no charge-offs for any of the loans during the first half of 2008. This trend continued, with no charge-offs on Franklin loans during the third quarter.

The $125 million in third-quarter loan loss provisions stayed ahead of Huntington's $83.8 million in net loan charge-offs. A comparison of total reserve coverage to the rate of charge-offs was also favorable, with reserves covering 1.75% of total loans and leases, while the annualized ratio of net charge-offs to average loans and leases for the third quarter was 0.82%.

Another piece of good news for Huntington was that the company's capital ratios continued to improve. The company's Tier-1 leverage ratio was 8.05% as of Sept. 30, improving from 7.88% last quarter and 7.57% in September 2008. The risk-based capital ratio was 12.09%, up from 12.05% in the second quarter and 11.58% a year earlier.

BB&T Meets Earnings Estimates

BB&T, headquartered in Winston-Salem, N.C. with $137 billion in total assets, met the consensus earnings estimate with $358 million in net income for the third quarter, or 65 cents per diluted share.

This compared to earnings of $428 million last quarter and $458 million in the third quarter of 2007. Even the reduced earnings produced returns on average assets and equity of 1.03% and 10.74% -- respectable figures for a large bank in the current environment.

The decline in earnings from last quarter reflected an increased provision for loan loss reserves and a moderate decline in noninterest income. The third quarter provision for loan losses was $364 million, increasing from $323 million in the second quarter, and staying well ahead of BB&T's $242 million in net loan charge-offs.

CEO John Allison pointed out that "pre-tax pre-provision operating earnings" had increased 12% year over year, "indicating that we are growing our client base and that our underlying businesses are performing well." He also emphasized that the company's net interest margin had improved for four straight quarters.

BB&T reported its net yield on earning assets as 3.66% for the third quarter, up from 3.65% last quarter and 3.45% in the third quarter of 2008.

Nonperforming assets (again with the loans past due 90 days but still accruing interest added in) totaled $1.9 billion, or 1.41% as of Sept. 30, increasing from 1.16% in June and 53 cents in September 2007. Nonaccrual commercial loans and foreclosed real estate comprised the majority of the 22% increase in NPA from last quarter.

Loan loss reserves covered 1.42% of total loans and leases as of Sept. 30, while the annualized ratio of net charge-offs to average loans and leases for the third quarter was 1.00%.

BB&T's capital ratios remained strong, with a leverage ratio of 7.6% and its risk-based capital ratio was 14.4% as of Sept. 30.

PNC Falls Short

PNC Financial Services Group, of Pittsburgh, reported $248 million in net income for the third quarter, or 71 cents per diluted share, coming in below analysts' expectation of 88 cents. Earnings were down from $505 million in the second quarter and $407 million in the third quarter of 2008.

The $146 billion holding company attributed most of the earnings decline to "the impact of valuation losses resulting from a lack of market liquidity." These valuation adjustments included a $51 million dollar charge related to its investment in BlackRock ( BLK) and that company's long-term incentive and retention plan.

Valuation adjustments also included $82 million in write-downs on commercial mortgages held for sale, $54 million in trading losses and $24 million in equity management losses.

During the company's earnings conference call, when asked about PNC's continued trading difficulties, CEO James Rohr said "We have taken that risk down now by 75% and in this environment, trading is an extraordinarily difficult opportunity."

On a more positive note, PNC's net interest margin has improved over the past year. The margin was 3.46%, compared to 3.47% last quarter and 3.00% in September 2007.

Turning to asset quality, PNC did not provide a dollar amount for loans past due 90 days but still accruing, although it did include a figure of 0.46% of total loans. Using the back of the envelope, if we add $346 million in loans past due 90 days to the company's $875 million in nonperforming assets, including nonaccrual loans and repossessed real estate, we come up with total nonperforming assets of $1.2 billion, or a ratio of nonperforming assets to total assets 0.84% as of Sept. 30. This compares to NPA ratios of 0.69% in June 2008 and 0.30% in September 2007, as provided by Highline Financial.

Loan loss reserves covered 1.40% of total loans as of Sept. 30, which compared well with an annualized ratio of net charge-offs to average loans of 0.66% for the third quarter.

PNC's management expressed confidence in the company's capital levels. The leverage ratio was 7.2% and the risk-based capital ratio was 11.9% as of Sept. 30. These ratios are considerably higher than the levels of a year earlier, however, there was considerable discussion during the conference call about PNC's reported tangible common equity ratio, which was 3.6% as of Sept. 30, down from 4.3% in June and 5.2% in September 2007. This ratio subtracts goodwill and other intangible assets from common equity.

Rohr didn't rule out participating in the federal government's plan to invest equity in individual banks.

"We think it is obviously a very attractive plan they have put together and we are considering it very seriously."

Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, 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.

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