Huntington Beats Estimates, Continues Strong C&I Growth

NEW YORK (TheStreet) -- Huntington Bancshares (HBAN) on Thursday reported a sequential decline in earnings as its net interest margin narrowed significantly, but the company continued to show solid growth in coveted commercial and industrial (C&I) loans.

The company, headquartered in Columbus, Ohio, reported fourth-quarter earnings of $157.8 million, or 18 cents a share, beating consensus EPS estimate by a penny.  Quarterly earnings were down from $178.5 million, or 20 cents a share, the previous quarter, and $167.3 million, or 19 cents a share, during the fourth quarter of 2012.

For all of 2013, Huntington earned $639 million, or 72 cents a share, compared to $641 million, or 71 cents a share, during 2012.  The higher EPS reflected a 2% decline in average shares outstanding, brought about by the repurchase of 17 million common shares during 2013.

Huntington's net interest income for the fourth quarter totaled $438.8 million on a tax-adjusted basis, rising from $431.5 million the previous quarter and declining slightly from $439.5 million a year earlier.  This reflected the bank's loan growth and continued growth in lower-cost deposits in a difficult interest rate environment.  The net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- narrowed to 3.28% during the fourth quarter from 3.34% in the third quarter and 3.45% in the fourth quarter of 2012.

Fourth-quarter noninterest income totaled $246.6 million, declining from $250.5 million in the third quarter and $297.7 million in the fourth quarter of 2012.  The sequential decline reflected lower brokerage and insurance income, as well as a decline in service charges on deposit accounts.  The year-over-year decline mainly resulted from lower mortgage banking income, following the industry trend as rising long-term interest rates curtailed mortgage refinancing application volume.  Mortgage income totaled $24.3 million during the fourth quarter, up from $23.6 million the previous quarter, but down from $61.7 million a year earlier.

Noninterest expense totaled $446.0 million during the fourth quarter, rising from $423.3 million in the third quarter, but declining from $470.6 million during the fourth quarter of 2012.  For all of 2013, noninterest expense declined 4% to $1.758 billion. This reduction resulted from lower litigation expense and lower expenses tied to nonperforming loans, as well as lower fees on marketing and consulting services, and a decline in insurance expenses.

Huntington's average loans grew 3% during the fourth quarter and 4% year-over-year.  Average C&I loans were up 4% sequentially and 8% year-over-year.  With the company putting its securitizations of auto loans on hold -- preferring to keep these loans on the balance sheet because of their attractive yields -- average auto loans grew by 7% sequentially and 25% year-over-year, to $6.5 billion during the fourth quarter.

"We have strong commercial pipelines going into the new year," Huntington CEO Stephen Steinour says.  "With sequestration and the later government shutdown, last year was pretty much a 10-month year for us.  But the momentum heading into 2014 paints a better picture for us."

Steinour adds that the  "artificial 'QE3'  pressure by the Federal Reserve will put continued pressure on us and others who lend short-term.  This is nothing new, but the consequence continues to build."  The rise in long-term rates over the second half of 2013 didn't do much for most banks' net interest margins, because certain loan types, including home equity loans and equipment leases keep repricing lower, because the federal funds rate remains in a range of zero to 0.25%.

"So the Fed's been using its powers to provide economic stimulation, and we've had three or four years where we have had an unnatural yield curve.  Banks generally aren't lending on the long end of the curve," Steinour says. 

The CEO emphasizes that Huntington's C&I growth "is a good sign of confidence and economic recovery.  Our specialty lending verticles are doing well."

The company continues to focus on building deposit relationships and developing multiple relationships with each customer.  "Our thrust since 2009 has been to create primary bank customers, measured at the household level, and business units, not just at the account level.  Last year we went from four-plus products per household, with a goal of six-plus, with material improvement so that just under 50% of customer households had six products," Steinour says.

Huntington's shares were up 0.6% in premarket trading to $9.90.

The following chart shows the performance of Huntington's stock against the KBW Bank Index (I:BKX) and the  S&P 500 since the end of 2011:

HBAN Chart data by YCharts



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

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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