Top-Line Growth Drives Huntington Beat - Analyst Blog

Huntington Bancshares Incorporated HBAN reported adjusted earnings per share of 19 cents in first-quarter 2014, beating the Zacks Consensus Estimate of 17 cents. Notably, the figure came in line with the prior-year quarter earnings.

Huntington's results were driven by top-line growth and lower provision for credit losses. Further, loan and deposit balances exhibited growth. However, the quarter witnessed higher expenses.

Net income for the quarter came in at $149.4 million, down 3% year over year.  Notably, the reported net income included $14.0 million on an after-tax basis owing to the acquisition of Camco Financial and increased litigation reserves.

Quarter in Detail

Huntington's total revenue on a fully taxable-equivalent FTE basis was $691.9 million, surpassing the Zacks Consensus Estimate of $677.0 million. Further, total revenue was up 1% year over year.

Huntington's net interest income (NII) stood at $443.4 million on a FTE basis, up 3% from the prior-year quarter. The rise reflected increase in other earnings assets, partially offset by a 17-basis points (bps) decline in net interest margin NIM to 3.27%.

Huntington's non-interest income fell 3% year over year to $248.5 million. The decline was primarily due to a significant drop in mortgage banking income and lower other income. These were partly offset by increased service charges on deposit accounts and electronic banking income.

Further, non-interest expense at Huntington was up 4% year over year to $460.1 million. The rise was mainly due to increased costs related to equipment, net occupancy, professional services and other expenses. These factors were partly offset by fall in personnel costs and lower deposit and other insurance expenses as well as amortization of intangibles. Notably, including certain non-recurring items, the non-interest expenses fell $4 million year over year.

As of Mar 31, 2014, total loans and leases at Huntington increased 7% year over year to $44.4 billion, while total deposits rose 5% to $49.3 billion.

Credit Quality

Credit quality metrics improved on the whole in the reported quarter. Huntington's provision for credit losses decreased 17% from the prior-year quarter to $24.6 million due to the continued decline in classified, criticized and non-accrual loans.

Net charge-offs (NCOs) were $43.0 million or an annualized 0.40% of average total loans and leases in the reported quarter, down from $51.7 million or an annualized 0.51% in the prior-year quarter.

Moreover, the quarter-end allowance for credit losses (ACL) as a percentage of total loans and leases, declined to 1.56% from 1.91% in the prior-year quarter.

Total non-performing assets (NPAs), including non-accrual loans and leases at Huntington were $365.3 million as of Mar 31, 2014 and compared favorably with $415.5 million at the prior-year quarter end.

Capital Ratio

Huntington's capital ratios remained strong. As of Mar 31, 2014, Tier 1 common risk-based capital ratio was 10.63%, compared with 10.62% in the prior-year quarter.  

Tier 1 risk-based capital ratio stood at 11.99%, compared with 12.16% in the prior-year quarter. Tangible common equity to tangible assets ratio was 8.63%, versus 8.91% in the prior-year quarter.

Capital Deployment

In the first quarter 2014, the company repurchased 14.6 million common stock at an average price of $9.32.

During the quarter, the company successfully cleared the stress test and subsequently its capital plan got approved by the Federal Reserve under the 2014 Comprehensive Capital Analysis and Review (CCAR).

Under its 2014 capital plan, Huntington is allowed to hike its quarterly common stock dividend by 20% to 6 cents per share. Notably, on Fed's approval, Huntington's board of directors announced the share repurchase of up to $250 million of its common stock, to be carried through first-quarter 2015..

Outlook

With the improvement in the economy of the Midwest region, management expects loan growth to be strong in the upcoming quarters, though it remains cautious owing to uncertainties in the larger economy.

Net interest income is projected to grow modestly over the coming quarters owing to the expected rise in earning assets (as total loans are likely to grow modestly while investment securities are expected to remain at current levels).

However, the benefits to net interest income are expected to be mostly offset by persistent pressure on NIM. While the company maintains a disciplined approach to loan pricing, it expects asset yields to remain stressed.

Non-interest income is expected to increase slightly, excluding the impact of any net MSR activity and securities gains. Further, owing to change in consumer checking accounts from Jul 2014, service charges on deposits are expected to be negatively impacted by $6 million per quarter.

Expenses, excluding one-time items, are expected to be relatively higher compared to the current levels. Huntington remains committed to posting positive operating leverage for the full-year 2014.

NPAs are expected to exhibit continued improvement. NCOs will be in the expected normalized range of 35 to 55 basis points. The level of provision for credit losses are expected to be volatile on a quarter-to-quarter basis.

Our Viewpoint

Huntington started 2014 on a positive note. Though it remains a matter of time to see whether the bank will report positive earnings surprises in all 4 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 improving its asset quality. Further, its capital deployment initiatives are also commendable that enhances investors' confidence.

However, a tepid economic recovery, low interest rate environment and a stringent regulatory environment are headwinds for the company's financials. Further, with expectations of an expanding expense base, we remain somewhat skeptical about Huntington's ability to drive earnings in the quarters ahead.

Huntington currently carries a Zacks Rank #3 (Hold).

Other Midwest Banks

Commerce Bancshares, Inc.'s CBSH first-quarter 2014 earnings per share of 67 cents missed the Zacks Consensus Estimate by a penny. Results reflected higher operating expenses, partially offset by a slight rise in revenues. However, growth in loans and deposits as well as strong capital and profitability ratios acted as the tailwinds.

Among other Midwest banks, PrivateBancorp, Inc. PVTB is scheduled to report its first-quarter 2014 results on Apr 17, while UMB Financial Corp. UMBF is proposed to release on Apr 23.