Huntington CEO Discusses Credit Card Play and 'Very Strong' Q3 (Update 1)

  • Third-quarter EPS of 20 cents.
  • EPS incudes 3-cent benefit from pension curtailment, 1 cent extraordinary expenses
  • Operating EPS of 18 cents beats consensus estimate of 17 cents
  • 22 branches consolidated during Q3
  • Net interest income flat
  • Mortgage revenue down 30% from Q2, following industry trend
  • Average loans grow 2% from Q2, 5% year-over-year

Updated from 7:52 a.m. ET with early market action and comment from Jefferies analyst Ken Usdin.

NEW YORK ( TheStreet) -- Huntington Bancshares ( HBAN) made the best of a transitional third quarter, which included a 30% sequential drop in mortgage income, by taking some major steps to lower its expenses.

The Columbus, Ohio, lender Thursday reported third-quarter earnings of $178.5 million, or 20 cents a share, increasing from $150.7 million, or 17 cents a share, in the second quarter, and $167.8 million, or 19 cents a share, during the third quarter of 2012.

The third-quarter results included a one-time gain of $34 million, or 3 cents a share, "related to pension curtailment," as well as a charge of $17 million, or a penny a share, related to the consolidation of 22 branches.

Excluding those items, Huntington's third-quarter operating earnings 18 cents a share beat the consensus estimate of 17 cents, among analysts polled by Thomson Reuters.
Huntington CEO Stephen Steinour

Huntington's third-quarter net interest income came to $424.9 million, unchanged from the previous quarter, but down slightly from $430.3 million a year earlier. The net interest margin narrowed to 3.34% in the third quarter from 3.38% in the second quarter and 3.38% in the third quarter of 2013.

Average loans grew 2% to $41.999 billion from $41.280 billion in the second quarter, and were up 5% from $40.120 billion in the third quarter of 2012. Commercial and industrial loans were flat sequentially but up 4% year-over-year, to $17.0 billion. With the company not conducting any auto loan securitizations this year, auto loans were up 15% quarter-over-quarter and 49% year-over-year, to $6.1 billion. Huntington CEO Stephen Steinour says the bank has no plans to do an auto loan securitization because "automobile loan yields are relatively more attractive than similar duration securities and because of the recent decline in estimated securitization gains."

Other large regional lenders with Midwest footprints showed solid third-quarter loan growth. U.S. Bancorp ( USB) of Minneapolis on Wednesday reported core loan growth of 2.2% during the third quarter from the second quarter, with average loans growing 7.5% year-over-year.

KeyCorp ( KEY) of Cleveland on Wednesday reported a 1% increase in average loans during the third quarter, with average loans growing 5% from a year earlier.

Huntington rolled out a consumer credit card during the third quarter, which Steinour says "has two market leading options, revolving around choice of rewards and a very low interest rate. The bank has also applied its "24-Hour Grace" policy to the new card product, in not penalizing customers who make loan payments one day late.

The new card is called the "voice card," and if a customer forgoes rewards, the annual percentage rate is 3% lower than the rewards rate. The lowest available rate for the nonrewards option is currently 6.99%.

Third-quarter noninterest income totaled $250.5 million, which includes the one-time $34 million gain from pension curtailment. In comparison, non-interest income totaled $248.7 million in the second quarter and $261.1 million in the third quarter of 2013.

Mortgage banking income for the third quarter declined 30% to $23.6 million from $33.7 million in the second quarter, and was down 47% from $44.6 million in the third quarter of 2012. This follows the industry trend, as the wave of U.S. mortgage loan refinancing applications has been curtailed, as long-term interest rates have risen.

Huntington said its "broad-based growth" had offset more than half of the decline in mortgage income. Service charges on deposit accounts -- "mostly commercial fees," according to Steinour -- were up 7% sequentially and 8% year-over-year, to $72.9 million in the third quarter. The "other income" line item was up 31% sequential and year-over-year to $33.7 million, which Steinour says was mainly commercial loan fees.

The bank's core deposit growth was flat, as maturing CDs offset growth in money market deposit accounts. Huntington saw noninterest bearing demand deposits continue to increase, by 2% quarter-over-quarter and 6% year-over-year, to an average of $13.1 billion in the third quarter.

Steinour says the company "had expected a $10 million increase in expenses for the third quarter, but the increase was actually $2 million."

"The combination of driving revenue growth and actively managing the expenses resulted in a very strong quarter for us."

When asked about the branch closings, Steinour says "Like any good retailer, we always look at our distribution. We will have more branches open this year than we will close, so there will be a net increase in branches."

Huntington's shares closed at $8.60 Wednesday, returning 37% this year. The shares trade for 12.1 times the consensus 2014 EPS estimate of 71 cents.

The shares were down slightly in early morning trading, to $8.56.

Jefferies analyst Ken Usdin in a note following the earnings release attributed Huntington's earnings beat to "a larger than expected reserve release."

Huntington's loan loss reserves declined by $67 million during the third quarter. The company's provision for credit losses -- the amount added to reserves, which directly lowers pretax earnings -- declined to $11.4 million in the third quarter, from $24.7 million the previous quarter and $37.0 million a year earlier.

According to Usdin "The company noted that the provision was below its long-term expectations and we would expect this to normalize going forward," which will hurt earnings.

The analyst rates Huntington a "buy," with a $9 price target.

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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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