Huntington Puts Brakes on Home Loans Following Fed Rules

  • Third-quarter EPS of 19 cents, beating the consensus estimate of 17 cents.
  • Deferred tax valuation benefit of $19.5 million.
  • Net interest margin narrows slightly, to 3.38%, expects continued "downward NIM pressure."
  • While overall loans declined, "C&I sales pipeline remains robust."
  • $4.5 million in additional quarterly expenses from Federal Reserve stress tests.

Updated with afternoon market action, and comment from Stifel Nicolaus analyst Christopher Mutascio.

NEW YORK ( TheStreet) -- Huntington Bancshares ( HBAN) CEO Stephen Steinour says that following the Federal Reserve's proposal of rules to implement the Basel III capital standards, "we decided to slow down on the mortgage lending side, until we see what the new rules are," when they are finalized.

The new rules "are possibly very impactful on home lending. They changed the weightings of assets and they have additional capital requirements... applicable for loans made in prior periods. It's like changing the rules in the middle of the game."

Steinour is "optimistic that there will be adjustments," to the Fed's proposed capital requirements, "but you never know in this environment."

Huntington on Thursday reported a 10% sequential earnings increase, mainly from a third-quarter deferred tax valuation (DTA) benefit of $19.5 million.

The Columbus, Ohio, lender reported third-quarter net income of $167.8 million, or 19 cents a share, beating the 17-cent consensus estimate among analysts polled by Thomson Reuters, with earnings increasing from $152.7, or 17 cents a share, during the second quarter, and $143.4 million, or 16 cents a share, during the third quarter of 2011.

The company's shares were down 4% in afternoon trading, to $6.72.

Huntington's third quarter net interest income was $430.3 million, increasing from $429.0 million the previous quarter, and $406.5 million a year earlier. The company's tax-adjusted net interest margin (NIM) -- the difference between the average yield on loans and investments and the average cost for deposits and borrowings -- was 3.38%, narrowing slightly from 3.42% the previous quarter, and 3.34% a year earlier.

Most banks are facing pressure on their net interest margins, with the Fed keeping its target federal funds rate in a range of zero to 0.25% since the end of 2008, while the central bank in September significantly increased its purchases of long-term mortgage-backed securities, in an effort to keep long-term rates at historically low levels.

Huntington said that "For the next several quarters, average net interest income is expected to be relatively stable from the third quarter's level," because of continued loan growth, however, "benefits to net interest income are expected to be mostly offset, however, by downward NIM pressure due to the anticipated competitive pressures on loan pricing, as well as lower rate securities through reinvestment, and declining positive impacts from deposit repricing."

The bank also expects commercial and industrial loan growth to continue, as the "C&I sales pipeline remains robust with much of this reflecting the positive impact from our strategic initiatives, focused OCR sales process, and continued support of middle market and small business lending in the Midwest."

Average loans and leases totaled $40.1 billion as of Sept. 30, declining 3% from the previous quarter, although they increased from 2% from a year earlier. Average commercial and industrial loans increased 2% sequentially and 20% year-over-year, to $16.3 billion. Contributing to the decline if the loan portfolio was a "$0.9 billion decrease in average automobile loans, reflecting the prior quarter's reclassification of $1.3 billion of automobile loans into held for sale, and a $0.4 billion decrease in commercial real estate loans."

The company completed a securitization of auto loans in October, which will boost its fourth-quarter results.

The bank's focus continues to be on building its core deposits, particularly noninterest bearing checking account deposits, which grew 2% during the third quarter and 41% year-over-year, to $12.3 billion.

Steinour says that "we've added more than 250,000 households in the last two years, which puts us at a rate to double in roughly eight years without acquisitions. Importantly, the total household base every month is buying more products and services from us."

In the company's earnings release, Steinour said that "not only are we gaining customers, we are selling deeper with 76% of consumer checking account households and 33% of commercial relationships now with 4 or more products or services."

Huntington's noninterest expenses increased to $458.3 million during the third quarter, from $444.3 million the previous quarter, and $439.1 million a year earlier. The company said that the sequential increase in expenses reflected "higher healthcare costs and a $4.4 million increase in the cost associated with early extinguishment of debt including the trust preferred securities" redeemed during the third quarter, and also "$4.5 million of expense related to the development of infrastructure and systems to support the Federal Reserve CCAR process."

CCAR stands Comprehensive Capital Analysis and Review, which is the Federal Reserve's annual stress test process.

Huntington repurchased 3.7 million shares during the third quarter, at an average price of $6.68 a share. The company's Tier 1 common risk-based capital ratio was 10.28% as of Sept. 30, increasing from 10.08% the previous quarter.

Stifel Nicolaus analyst Christopher Mutascio said that "while 3Q12 results reflected a somewhat disappointing deceleration following the 5.3% growth reported in the second quarter, the result was consistent with what we have seen thus far in 3Q12 from other large cap banks and largely reflects slowing economic conditions that occurred over the summer."

Mutascio estimated that "that core EPS was roughly $0.17 for the quarter," excluding the tax benefit, and said the company missed his operating EPS estimate of 18 cents mainly because of "timing/size of expected auto loan securitizations. "

Stifel Nicolaus rates Huntington a "Hold."

Huntington's shares returned 31% year-to-date, through Wednesday's close at $7.05.

The shares trade for 1.2 times their reported Sept. 30 tangible book value of $5.71, and for 10.5 times the consensus 2013 EPS estimate of 67 cents. Based on a quarterly payout of four cents, the shares have a dividend yield of 2.27%.

HBAN Chart HBAN data by YCharts

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

>Contact by Email.

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 TheStreet.com 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.

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