Huntington Bancshares Inc. (HBAN) reported yet another impressive quarter with adjusted earnings per share of 20 cents in third-quarter 2014, marginally beating the Zacks Consensus Estimate of 19 cents. Also, the figure came in above the prior-year quarter adjusted earnings of 18 cents.
Including an impact of $23 million of expense-related significant items, Huntington reported net income of $155 million or 18 cents per share. Significant items in the reported quarter included repositioning costs pertaining to the consolidation of 26 branches and the company’s previously announced organizational actions, the net expenses related to acquisition of the 24 Bank of America branches and Camco Financial. In the prior-year quarter, including certain significant items, net income was $179 million or 20 cents per share.
Huntington’s results were driven by top-line growth, partially offset by higher expenses and increased provision for credit losses. The quarter witnessed growth in both loan and deposit balance.
Quarter in Detail
Huntington’s total revenue on a fully taxable-equivalent (FTE) basis was $721.2 million, surpassing the Zacks Consensus Estimate of $716.0 million. Further, total revenue was up 5% year over year.
Huntington’s net interest income (NII) stood at $473.8 million on a FTE basis, up 10% from the prior-year quarter. The rise was driven by an increase in average earnings assets, partially offset by a 14-basis points (bps) decline in net interest margin (NIM) to 3.20%.
Huntington’s non-interest income fell 3% year over year to $247.3 million. The decline was primarily due to lower capital market fees, service charges on deposit accounts and other income as well. These were partly offset by increased gain on sale of loans and higher income from electronic banking.
Including certain non-recurring items, non-interest expense increased 13% year over year to $480.3 million. The rise was mainly due to increased personnel costs, professional services costs, equipment and outside data processing and other services. These factors were partly offset by lower net occupancy costs and as well as amortization of intangibles.
As of Sep 30, 2014, average loans and leases at Huntington increased 10% year over year to $46.1 billion and average deposits rose 7% to $49.0 billion.
Credit Quality
Credit quality metrics remained a mixed bag in the reported quarter. Total non-performing assets (NPAs), including non-accrual loans and leases stood at $364.5 million as of Sep 30, 2014, down from $374.3 million as of Sep 30, 2013.
Net charge-offs (NCOs) were $30.0 million or an annualized 0.26% of average total loans and leases in the reported quarter, down from $55.7 million or an annualized 0.53% of average total loans and leases in the prior-year quarter.
Moreover, the quarter-end allowance for credit losses (ACL) as a percentage of total loans and leases, declined to 1.47% from 1.72% in the prior-year quarter.
However, provision for credit losses increased significantly to $24.5 million from 11.4 million in the prior-year quarter. The quarter reflects prior year’s implementation of enhancements to the company’s allowance for loan and lease losses (ALLL) model.
Capital Ratios
Huntington’s capital position deteriorated during the quarter. As of Sep 30, 2014, Tier 1 common risk-based capital ratio was 10.31%, compared with 10.85% in the prior-year quarter.
Tier 1 risk-based capital ratio stood at 11.61%, compared with 12.36% in the prior-year quarter. Tangible common equity to tangible assets ratio was 8.35%, versus 9.01% in the prior-year quarter.
The decline in the capital ratios resulted from balance-sheet growth and share buybacks in the last four quarters including the second quarter, which was partially offset by retained earnings and the stock issued in the Camco Financial acquisition.
Dividend Hike
Huntington declared a 20% hike in its quarterly cash dividend to 6 cents per share. The dividend will be paid on Jan 2, 2015, to shareholders of record Dec 19, 2014.
Share Repurchase Update
In the reported quarter, the company repurchased 5.4 million shares of common stock at an average price of $9.70.
Outlook for 4Q14
With the improvement in the economy of the Midwest region, management expects to deliver positive operating leverage in 2014, and remains focused on delivering positive operating leverage in 2015 as well.
Net interest income is projected to grow modestly in the fourth quarter owing to the expected rise in earning assets (as total loans are likely to show modest growth while investment securities are also expected to improve moderately).However, the benefits to net interest income are expected to be partially offset by persistent pressure on NIM.
Non-interest income is expected to remain at current levels, excluding the impact of any net MSR activity.
Expenses, excluding one-time items, are expected to remain at the current levels in the fourth quarter. Management expects fourth quarter to include significant items of $10 million related to the already announced franchise repositioning activities.
Overall, credit quality is expected to improve with some volatility on a quarterly basis. NCOs will be within or below the company’s long-term expected normalized range of 35–55 bps.
Our Viewpoint
Huntington’s results reflect a decent performance. Though it remains a matter of time to see whether the bank can deliver positive earnings surprises in all four quarters of 2014 as it did in 2013, we remain encouraged owing to a number of positive traits.
Huntington has a solid franchise in the Midwest and is focused on capitalizing on growth opportunities. Further, the company exhibits continued efforts in increasing loan and deposit balances and improving asset quality. Also, we remain encouraged by the company’s several strategic actions including acquisitions and consolidation of branches.
However, a tepid economic recovery, low interest rate environment and a stringent regulatory environment are headwinds for the company’s financials.
Huntington currently carries a Zacks Rank #3 (Hold).
Other Midwest Banks
Among other Midwest banks, Commerce Bancshares, Inc. (CBSH) reported third-quarter earnings per share of 72 cents, beating the Zacks Consensus Estimate by a penny.
Old National Bancorp. (ONB) and Chemical Financial Corp. (CHFC) are scheduled to report on Oct 27.
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