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Huntington Bancshares

(HBAN) - Get Report

CEO Stephen Steinour said the company is staying focused on growing its market share, setting up an eventual revenue payoff when interest rates finally begin to rise.

The Columbus, Ohio, lender reported Wednesday first-quarter net income of $151.8 million, or 17 cents a share, beating the consensus EPS estimate of 16 cents among analysts polled by Thomson Reuters. In comparison, the company earned $167.3 million, or 19 cents a share, in the fourth quarter, and $153.3 million, or 17 cents a share, in the first quarter of 2012.

Huntington CEO Stephen Steinour

Huntington's net interest income was $430.1 million, declining from $429.5 million the previous quarter, but increasing from $421.1 million a year earlier. The sequential decrease in net interest income mainly resulted from a lower number of days in the quarter, although the net interest margin narrowed to 3.42% in the fourth quarter from 3.45% in the fourth quarter. The margin was unchanged from a year earlier.

The year-over-year net interest income growth reflects 4% growth in in average loans and leases, with coveted commercial and industrial loans growing 14% to $17 billion in the first quarter. Meanwhile, average interest-bearing liabilities were down slightly year-over-year. Average noninterest bearing checking account grew 8% year-over year to $12.2 billion, although they were down 7% from the fourth quarter, because of the bank's "effort to reduce collateralized deposits," and because of "a recent uptick among our business customers of drawing down cash balances to support working capital needs," according to Steinour.

Huntington's first-quarter noninterest income totaled $252.2 million, declining from $297.7 million in the fourth quarter, and $285.3 million in the first quarter of 2012.

Typical quarter-over-quarter and year-over-year comparisons of Huntington's earnings don't tell the entire story. For example, the company booked $14.1 million in gains on an auto loan securitization during the fourth quarter, and $23 million in gains from a similar securitization in the first quarter of 2012. Huntington didn't conduct an auto loan securitization in the first quarter, and has no plans to do so until the second half of 2013.

Huntington's first-quarter mortgage banking income totaled $45.2 million, declining from $61.7 million in the fourth quarter, and $46.4 million in the first quarter of 2012. Lower mortgage income was expected, after it peaked during the fourth quarter, in line with the overall industry. During the first quarter, most banks saw a significant reduction in mortgage application flow, and a decline in gain-on-sale margins.

A Long-Term Wallet-Share Play

Steinour said Huntington's "theme is customer growth, with annualized growth in consumer deposits of 11.8% in the first quarter. We continue to take market share. In this low-rate environment it has not translated to significant revenue yet, but it will."


Federal Reserve

has kept the short-term federal funds rate in a range of zero to 0.25% since late 2008. The central bank also continues to expand its balance sheet with monthly purchases of $85 billion in long-term securities, in an effort to hold long-term rates down. This means most banks have already enjoyed all the benefit of lower funding costs, while seeing their net interest margins continue to narrow as assets reprice.

According to Steinour, a focus at this time on deposit customer growth "is like building a revenue annuity that has much better economics in the medium and long term, than it does in the short term."

"This is compounding double-digit growth year in and year out," he said, adding that "our business activities are based on our local footprint. The more market share we get, the stronger our revenue foundation."

When discussing the local economic recovery, Steinour said "the natural gas play is continuing to build our economic growth both directly and indirectly. There is a lot of housing activity here. Our forecast for 2013 does not have a strong recovery in housing, but this first quarter has been a positive surprise."

Despite the industry-wide decline in mortgage activity in the first quarter, Steinour remains upbeat on this revenue source, saying "the combination of the housing recovery, combined with the

extension of HARP

, should make mortgage business stronger over the next couple of years than we had thought a quarter ago."

HARP stands for Home Affordable Refinance Program. The program was put in place by the Federal Housing Finance Agency and expanded by President Obama last year to enable qualified borrowers with mortgage loans held by Fannie Mae and Freddie Mac to refinance their entire loan balances, no matter how much the value of the collateral home has declined.

Huntington's shares were up 1% in premarket trading to $7.26.

The stock closed at $7.22 Tuesday, returning 14% this year, following a 19% return during 2012. The shares trade for 1.2 times their reported March 31 tangible book value of $5.91, and for 10.5 times the consensus 2014 EPS estimate of 69 cents. The consensus 2013 EPS estimate is 67 cents.

The company increased its quarterly payout to 5 cents a share, for a dividend yield of 2.77%. Huntington's board has authorized share buybacks of up to $227 million. The company's share repurchases during the first quarter totaled 4.7 million shares during the first quarter, at an average price of $7.07.

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-- Written by Philip van Doorn in Jupiter, Fla.

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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.