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Huntington puts focus on cost control amid softness in commercial lending

Huntington Bancshares Inc. said it has taken steps to rein in expense growth as it becomes more cautious on the outlook for commercial lending in 2020.

The Columbus, Ohio-based bank recently completed an internal reorganization that included eliminating about 200 jobs. It is also evaluating its branches and other real estate, CFO Howell McCullough III said on a conference call to discuss third-quarter results.

Huntington does not expect a recession in the near term, and Chairman, President and CEO Stephen Steinour reviewed a number of signs of continuing consumer strength across its market areas.

But tariffs, trade uncertainties and other global risks are weighing on business activity, and the bank has "seen a slowdown in commercial loan activity, consistent with a more measured tone for some of our commercial customers, primarily in the manufacturing sector," Steinour said.

Huntington's average commercial and industrial loans of $30.6 billion in the third quarter were flat with the second quarter and up 6% from the year prior. Its commercial real estate loans were also flat with the previous quarter at $6.9 billion, and down 3% from the year prior.

Like other banks recently, Huntington expressed wariness about CRE lending. McCullough said the year-over-year decrease reflected "pay-downs as well as our strategic tightening of CRE lending to ensure appropriate returns on capital and to manage risk."

Overall, Huntington projected that its average loans would increase about 4% in 2019 from 2018, with growth tilted toward the consumer business. That forecast is on the lower end of the guidance it gave in its earnings report for the second quarter.

The bank forecast that noninterest expenses would increase 2% to 2.5% in 2019, also on the high end of its previous guidance. The projection includes about $15 million to $20 million in unusual expenses related to its reorganization.

Huntington expects to deliver positive operating leverage in 2020, meaning that it anticipates that its revenues will grow faster than its expenses. McCullough said the bank has room to maneuver depending on how economic conditions evolve and impact revenue.

"We still have some flexibility," he said, describing various planning options the bank develops each year. "Once we get some confidence around a range of revenue expectations, then we decide what we can do from an expense perspective, including investment back into the franchise," he said.

Huntington's net charge-offs to average loans increased 14 basis points from the previous quarter to 0.39% in the third quarter, driven by problems with two energy credits. Its criticized asset ratio increased 19 basis points to 3.62% over the same period. Chief Credit Officer Richard Pohle said the bank had a similar level of criticized assets in 2016 and 2017.

Executives said Huntington's energy portfolio represents less than 2% of its loans. "That really is where the problems have been centered," McCullough said. "Outside of that, we really don't see anything of concern."

"We're not going to put questionable assets on the balance sheet at this point in the cycle," he added.