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Huntington Bancshares Inc. (HBAN - Analyst Report) reported earnings of 19 cents per share in the fourth quarter of 2012, beating the Zacks Consensus Estimate by 2 cents. Results also compared favorably with the prior-year’s earnings of 14 cents.

For the full year 2012, the company reported earnings per share of 71 cents, outpacing the Zacks Consensus Estimate by 3 cents. Earnings increased 20% year over year from 59 cents per share.

Huntington’s results reflected growth in revenue. The company experienced an increase in mortgage banking revenue and average earning assets, though the continued pressure on net interest margin partly offset that benefit. Moreover, expenses increased in the quarter.

Huntington reported net income applicable to shareholders of $159.3 million in the reported quarter that surged 34% year over year. For the full year 2012, net income applicable to shareholders was $609 million, up 19% year over year.

Performance in Detail

For the reported quarter, Huntington’s total revenues on a fully-taxable-equivalent (FTE) basis were $737.2 million, up 14% from the year-ago quarter. Moreover, the revenue figure surpassed the Zacks Consensus Estimate of $702 million.

For full year 2012, the company reported revenues of $2.8 billion, up 8% year over year. However, results were in line with the Zacks Consensus Estimate.

Huntington’s net interest income (NII) grew 5% from the prior-year quarter to $439.5 million on FTE basis in the reported quarter. Results reflect the impact of growth in average earning assets and rise in net interest margin (NIM).
NIM ascended 7 basis points year over year to 3.45% in the reported quarter as a result of the decline in total deposit costs. This was partially mitigated by a dip in the yield on earnings assets.

Huntington’s non-interest income moved ahead 30% year over year to $297.7 million. The increase was driven by significant growth in mortgage banking income, rise in securities gains as well as gain on sale of loans. These positives were partly offset by a decrease in other income.

However, non-interest expenses at Huntington ascended 9% year over year to $470.6 million. The company experienced an escalation in personnel costs mainly due to higher salaries and benefits along with an increase in professional services.

Credit Quality

Credit quality metrics improved in the reported quarter. Huntington’s provision for credit losses decreased 13% from the prior-year quarter to $39.5 million. This reflected a decrease in net charge-offs (NCOs) which were $70.1 million, or an annualized 0.69% of average total loans and leases in the reported quarter, down 16%, from $83.9 million, or an annualized 0.85%, in the prior-year quarter.

Moreover, the quarter-end allowance for credit losses (ACL) as a percentage of total loans and leases decreased to 1.99% from 2.60% in the prior-year quarter.

Total non-performing assets (NPAs), including nonaccrual loans and leases at Huntington were $445.8 million as of Dec 31, 2012 and represented 1.09% of related assets. This reflected a 24% decrease from $590.3 million, or 1.51% of related assets, at the end of the prior-year quarter.

Balance Sheet

Average loans and leases at Huntington increased 2% year over year. The rise reflected growth in average commercial and industrial (C&I) loans, partially mitigated by decrease in average automobile loans and average commercial real estate (CRE) loans.

Average total core deposits increased 7% year over year. This reflected growth in money market deposits and average non-interest bearing demand deposits, partially offset by decrease in average core certificates of deposit.

Capital Ratios

Huntington’s capital ratios were mixed in the quarter. As of Dec 31, 2012, the tangible common equity to tangible assets ratio was 8.76%, up 46 basis points year over year. Tier 1 common risk-based capital ratio at quarter end was 10.47%, inching ahead of the 10.00% reported at the end of the prior-year quarter.

However, the regulatory Tier 1 risk-based capital ratio as of Dec 31, 2012 was 12.01%, down from 12.11% as of Dec 31, 2012, mainly due to the redemption of $230 million in trust preferred securities and the buying back of 23.3 million shares during the year 2012.

Outlook

According to Huntington’s management, though improving trends in the Midwest region is being witnessed, customers are more concerned owing to the uncertainties in the broader economy.

During the course of 2013, average net interest income is projected to be modestly up, after recording first quarter seasonal decline. An increase in total loans excluding any impact of future loan securitizations is also expected. Such benefits are likely to be offset by the downward pressure on NIM.

Regarding loans, management expects its C&I portfolio to continue to exhibit growth in 2013. However, growth is expected to increase significantly in the second half of the year.

Residential mortgages and home equity loan balances are anticipated to increase modestly while CRE loans would likely experience declines from the current levels, though these are expected to remain in the $5.0 – $5.5 billion range. Excluding any possible future automobile loan securitizations, an increase in total loans is likely to modestly surpass growth in total deposits.

During 2013, non-interest income is projected to be relatively stable at current levels, after excluding the impact of any automobile loan sale or security gains and any net mortgage servicing right impact and first quarter seasonality.

Huntington’s expenses are expected to escalate above long-term expectations, in relation to revenue. However, management continues to expect positive operating leverage in 2013.

Moreover, a continued improvement in the credit quality of Huntington is anticipated, with expectation of NCOs to reach normalized levels by the end of 2013. However, with the level of provision for credit losses in 2012 being at the lower end of management’s long-term expectation, given the uncertain and uneven nature of the economic recovery and the absolute low level of the provision for credit losses, they expect some quarterly volatility.

Capital Deployment Update

Concurrent with the earnings release, Huntington’s board of directors declared a quarterly cash dividend of 4 cents per share on its common stock. The dividend will be paid on Apr 1, 2013, to shareholders of record on Mar 18, 2013.

During 2012, the company bought back 23.3 million shares at an average price of $6.36. Notably, in the quarter under review, the company repurchased 13.2 million shares at an average price of $6.33.

Our Viewpoint

Huntington has a solid franchise in the Midwest and is focused on capitalizing on its growth opportunities. The Fidelity Bank acquisition and the in-store banking deal augur well going forward. Capital deployment initiatives are encouraging.

Yet, revenue headwinds are a concern amidst a tepid economic recovery, low interest rate and a tough regulatory environment. Further, with an expanding expense base, we remain somewhat skeptical about its ability to augment earnings in the quarters ahead.

Notably, one of Huntington’s peers, TCF Financial Corporation (TCB - Analyst Report) is scheduled to report its earnings on Jan 30.

Huntington currently retains a Zacks Rank #2 (Buy). We believe such strong results might lead to positive earnings estimate revisions.

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