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Huntington Bancshares

(HBAN) - Get Huntington Bancshares Incorporated Report

on Thursday reported fourth-quarter earnings that missed estimates by three cents after repaying a government bailout.

The bank reported fourth-quarter net income of $122.9 million, or 5 cents a share, missing the consensus estimate of 8 cents a share among analysts polled by Thomson Reuters.

The earnings miss resulted from a one-time reduction in retained earnings of $56.3 million, or 7 cents a share, after the company's repurchase of $1.4 billion preferred stock held by the U.S. Treasury in order to repay money received through the Troubled Assets Relief Program, or TARP. The repayment followed a $920 million common stock offering completed by the company in mid-December.

Huntington announced Wednesday it had completed its exit from TARP, by repurchasing a warrant issued to the government in November 2008, which was valued at $49.1 million.

The fourth-quarter results compared to net income applicable to common shareholders of $71.5 million, or 10 cents a share, in the third quarter and a net loss of $369.7 million, or 56 cents a share, in the fourth quarter of 2009.

For the full year, Huntington reported net income to common shareholders of $312.3 million, or 19 cents a share, compared to a 2009 net loss of $3.1 billion, or $6.14 a share .

Earnings continued to be driven by a reduction in the provision for loan loss reserves, which was $87 million in the fourth quarter, declining from $119.2 million the previous quarter and $894 million in the fourth quarter of 2010.

Fourth-quarter net charge-offs - loan losses less recoveries - totaled $172.3 million and exceeded the provision for credit losses by $85.3 million. This reserve release boosted Huntington's bottom line and followed the continuing trend of many large banks, including


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, which reported a net release of allowance for loan losses and unfunded lending commitments was $2.3 billion,

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, which saw a $1.9 billion decline in loan loss reserves.

The ratio of nonperforming assets - including nonaccrual loans and repossessed real estate - to total assets was 1.57% as of December 31, improving from 2.10% in September and 3.99% at the end of 2009.

Loan loss reserves covered 3.28% of total loans as of December 31, staying ahead of the pace of charge-offs, despite the reserve release.

Fourth-quarter mortgage banking income totaled 53.2 million, increasing slightly from compared to $52 million during the third quarter, but more than doubling from $24.6 million in the fourth quarter of 2009.

Noninterest expenses increased to $436.4 million in the fourth quarter from $427.3 million the previous quarter and $322.6 million during the fourth quarter of 2009. The year-over-year increase in expenses reflected a $73.6 million reduction in expenses during the fourth quarter of 2009, when the Huntington recorded a gain on the early retirement of debt, and a $31.5 million increase in personnel costs, "primarily reflecting a 10% increase in full-time equivalent staff in support of strategic initiatives," higher commissions and the reinstatement of the company's 401-K matching contributions.

The company's fourth-quarter net interest margin - essentially the difference between its average yield on loans and securities investments and its average cost of deposits and borrowings - was 3.37%, compared to 3.45% in the third quarter, and 3.19% a year earlier.

In a conversation with


, CEO Stephen Steinour said "core deposits grew more quickly than we thought," and were invested in short-term securities yielding between 1.5% and 2%, "pulling the net interest margin down." He added that "as we replace those investments with loans, that will help restore, at least in part, the net interest margin." Steinour said the bank was expecting the margin to be "flat to up" in coming quarters.

Total loans were $37.8 billion as of December 31, a 2% increase year-over-year, as strong growth in automobile loans and leases more than offset Huntington's planed trimming of its commercial real estate loan portfolio. Total CRE loans were $6.8 billion as of December 31, a decrease of 20% from a year earlier.

After a noisy fourth quarter, Huntington's capital position remained strong, as the common equity raise offset most of the TARP repayment. As of December 31, Huntington's Tier 1 common risk-based capital ratio was 9.25%, increasing from 7.39% in September. The regulatory total risk-based capital ratio was 14.39%, down from 15.08% in September, reflecting the TARP repayment.

Huntington's shares closed at $7.00 Wednesday, returning 64% over the previous year. Out of 20 analysts covering the company, 10 rate the shares a buy, seven have hold ratings and three recommend investors sell the shares.

Steinour was upbeat about the company's "fair play" philosophy on deposit services, and said Huntington was receiving good feedback from customers on its 24-hour Grace program, which he discussed in detail with


in an

exclusive Q&A

in December.

"We grew out household checking accounts by 6.5% year-over-year, which was better than we expected," Steinour said, adding that his firm was better-positioned than many banks to aggressively grow deposits by charging lower fees than competitors, many of whom will be struggling to replace lost fee income has new regulations limit overdraft and interchange fees. "I have never seen the industry so ripe for a breakout positioning," he said.


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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.