CNBC Stock Blog

Regional Banks Get Loan Pleasure, Durbin Pain

Philip van Doorn|Bank Analyst
Huntington BancsharesBB&T Federal Reserve's Durbin Amendment

Huntington reported fourth-quarter earnings applicable to common shareholders of $119.2 million, or 14 cents a share, declining from $135.7 million, or 16 cents a share, the previous quarter, but increasing from $39.1 million a year earlier, mainly from a decline in credit expenses.

The Columbus, Ohio, lender's fourth-quarter results met the analyst consensus EPS estimate of 14 cents, according to Zacks.

Huntington's earnings declined from the third quarter reflected an 11 percent decline in noninterest income, with electronic banking revenue declining 44 percent to $18.2 million as the Durbin Amendment's limitations to interchange fee revenue from debit card purchase transactions took effect.

The decline in noninterest income also reflected $19.1 million in gains on the sale of loans in the third quarter, when Huntington securitized $1 billion in automobile loan, for a $15.5 million gain. Fourth-quarter gains on loan sales totaled $2.9 million.

On Dec. 31, Huntington reclassified $1.3 billion of automobile loans to loans held for sale in anticipation of completing another securitization in the first half of 2012.

Huntington CEO Stephen Steinour said the company would be doing auto loan securitizations "once or twice a year," as part of its strategy to "have a limited exposure, frankly, to everything," adding that auto loan securitization "generates a significant return for us, and it comes with a very low cost of funding right now."

Partially offsetting the noninterest income decline in the fourth quarter was an increase in mortgage banking income to $24.1 million from $12.8 million in the third quarter, although it was still way down from $53.2 million in the fourth quarter of 2010. Bottom-line results for the fourth quarter were boosted by a $45 million release of loan loss reserves.

Huntington's net interest margin — the difference between a bank's average yield on loans and investments and its average cost for deposits and wholesale borrowings — expanded to 3.38 percent during the fourth quarter from 3.34 percent in the third quarter and 3.37 percent in the fourth quarter of 2010, which Stienour said reflected a "continued focus on fundamentally changing our deposit mix and driving down the overall cost of funds."

The CEO added that Huntington's auto loan originations had expanded into Minnesota and Wisconsin.

"We have auto loan operations in 16 states, mostly contiguous, except for new England," Steinour said, "and 2011 was a record year with $3.65 billion dollars in origination, and the quality of our origination is highly desired, which is why the execution is so good for us."

Steinour also said that "commercial growth" in core deposits "is really the story for us in the fourth quarter. We have had 10 quarters in a row now of commercial loan growth, with our best quarter yet in the fourth quarter."

Average commercial and industrial loan balances grew 4 percent during the fourth quarter, to $14.2 billion, while average residential mortgages grew 5 percent to $5 billion, and home equity loans grew by 2 percent to $8.1 billion.

Steinour said that in Huntington's market area, "there is a large amount of manufacturing doing quite well with exports," and that the "auto sector is very strong and has rebounded incredibly." He added that "our health-care lending business has become a specialty business, with good results in the fourth quarter."

Huntington continued to aggressively pursue deposit growth, with average noninterest bearing demand deposits growing by a very strong 23 percent in the third quarter, to $10.7 billion, while core certificates of deposit declined by 11 percent, to $6.8 billion. Total deposits grew by 3 percent to $43.6 billion.

Steinour said, "Our fundamental strategies are working and we get a setback like Durbin or the Fed flattening the yield curve, we just continue executing our strategy and our results will overcome the setback in a reasonably short period because of our strong growth."

Huntington said its return on average assets (ROA) for the fourth-quarter was 0.92 percent. The ROA has ranged between 0.91 percent and 1.11 percent over the past five quarters, according to SNL Financial.

Out of 20 analysts covering Huntington Bancshares, seven rate the stock a buy, 11 have neutral ratings, and two analysts recommend selling.

BB&T reported fourth-quarter net income available to common shareholders of $391 million, or 55 cents a share, increasing from $366 million, or 52 cents a share in the third quarter, and $208 million, or 30 cents a share, in the fourth quarter of 2010.

Fourth-quarter noninterest income totaled $922 million, increasing from $690 million the previous quarter, but declining from $964 million a year earlier. The third-quarter results included $104 million in expenses related to Federal Deposit Insurance Corp.

loss-sharing agreements, "due primarily to improved performance from covered loans," and posted $39 million in securities losses that quarter.

The company also booked $16 million in merger related expenses during the fourth quarter, "due primarily to charges associated with management's expense optimization efforts and costs related to the BankAtlantic acquisition."

BB&T expects to complete its purchase of BankAtlantic Bancorp's main thrift subsidiary by the end of the first quarter, paying a premium of $301 million to acquire 78 South Florida branches.

During the fourth quarter, BB&T reported $46 million in expenses related to FDIC loss-share, and securities gains of $103 million. Checkcard fees declined sharply to $42 million, from $78 million the previous quarter, as the Durbin Amendment took its toll.

Average loans held for investment — excluding loans covered by FDIC loss-sharing agreements — grew 2 percent during the fourth quarter, to $100.7 million. Average residential mortgage loans grew 7 percent to $20.1 billion, and commercial and industrial loans grew by 3 percent to 35.2 billion.

BB&T's fourth-quarter net interest margin was a tax-adjusted 4.02 percent, declining from 4.09 percent the previous quarter and 4.04 percent a year earlier.

Maintaining a net interest margin over 4 percent in the current environment is quite difficult for a diversified lender, and BB&T CEO Kelly King said the company "had another strong quarter growing deposits and improving our deposit mix," as "average deposits increased 24 percent on an annualized basis compared to the third quarter, and noninterest-bearing deposits and interest checking increased 31 percent and 10 percent, respectively."

King also said that BB&T "made further progress on our strategy to reduce the cost of interest-bearing deposits. The cost this quarter was 0.56 percent compared with 0.65 percent last quarter."

Average noninterest bearing checking account balances increased 8 percent during the fourth quarter, to $25.2 billion, while total deposits were up 15 percent, to $121.9 billion. The company's fourth-quarter earnings included a $135 million release of loan loss reserves. BB&T reported a fourth-quarter ROA of 0.93 percent, for its highest return over the past five quarters.

Out of 29 analysts covering BB&T, eight rate the shares a "buy," 19 have "neutral" ratings, and two analysts recommend selling the shares.

Like the two regional banks, Bank of America's fourth-quarter earnings reflected a similar painful hit from the Durbin Amendment, which "reduced revenue by $430 million," according to the company.

Bank of America met earnings expectations with a 15-cent quarterly profit, including a $2.12 billion profit for the company's mortgage banking unit.

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