Huntington Bancshares Q2 Earnings Beat as Revenues Rise

Riding on higher revenues, Huntington Bancshares Incorporated HBAN delivered a positive earnings surprise of 15% in second-quarter 2015. Earnings per share of 23 cents outpaced the Zacks Consensus Estimate of 20 cents. Also, the figure came in above the prior-year quarter earnings of 19 cents.

Our proven model predicted that Huntington was likely to post an earnings beat as it did have the right combination of two key ingredients – positive Earnings ESP and a Zacks Rank #3 (Hold) or better. It had a Zacks Rank #2 (Buy) and an Earnings ESP of +5.00%.

Impressive results were aided by revenue growth and lower provision for credit losses, partially offset by elevated expenses.  Notably, the reported quarter benefited from the acquisition of Macquarie Equipment Finance that was rebranded as Huntington Technology Finance HTF. The quarter also witnessed continued growth in both loans and deposits balances along with improvement in credit quality.

Net income increased 19% year over to $196.2 million.

Performance in Detail

Huntington's total revenue was $772.5 million in the quarter, surpassing the Zacks Consensus Estimate of $735 million. Also, total revenue was up 9% year over year, driven by rise in both net interest income and non-interest income.

On a fully taxable-equivalent FTE basis, total revenues of $780.4 million increased 9% year over year.

Huntington's net interest income (NII) came at $498.6 million on a FTE basis, up 7% from the prior-year quarter. The rise was driven by an increase in average earnings assets, partially offset by an 8 basis points (bps) decline in net interest margin NIM to 3.20%.

Further, non-interest income rose 13% year over year to $281.8 million. The rise reflected significant increase in mortgage banking income along with increase in capital markets fees, income from electronic banking, insurance and gain on loans sales. These were however, partially offset by lower service charges on deposit accounts and trust services.

Non-interest expense of $491.8 million increased 7% from the prior-year quarter figure. The rise reflected costs related to HTF along with increase in personnel costs, equipment costs, outside data processing and other services costs, marketing and deposit and other insurance expense. These factors were partly offset by lower expenses related to professional services.

As of Jun 30, 2015, average loans and leases at Huntington increased 6% year over year to $47.9 billion. Also average deposits rose 9% to $52.6 billion.

Credit Quality

Credit quality metrics showed improvement in the reported quarter.  Net charge-offs (NCOs) were $25.4 million or an annualized 0.21% of average total loans and leases in the reported quarter, down from $28.6 million or an annualized 0.25% 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 1.34% from 1.50% in the prior-year quarter. Additionally, provision for credit losses decreased 31% year over to $20.4 million.

However, total non-performing assets (NPAs), came at $396.0 million as of Jun 30, 2015, up 9% year over year.

Capital Position

Huntington became subject to the Basel III capital rules beginning first-quarter 2015. Common equity tier 1 risk-based capital ratio and regulatory Tier 1 risk-based capital ratio were 9.65% and 10.41%, respectively.

Share Repurchase

During the quarter, Huntington repurchased 8.8 million shares of common stock at an average price of $11.20. The share buyback was under with the share repurchase authorization of up to $366 million of common shares.

Outlook for 2015

Excluding significant items and net MSR activity, it expects positive operating leverage. Management intends to balance investment in the businesses for the long term that includes digital technology, data analytics, and in-store branches.

Excluding significant items and the recurring expense tied to HTF, non interest expense growth is expected in the range of 2–4%. Quarterly noninterest expense is expected to remain near the second-quarter 2015 level for the remainder of 2015.

Overall, credit quality is expected to remain at the current levels. However, given the reduced level of problem assets and credit costs, management expects moderate quarterly volatility. NCOs will be within or below the company's long-term expected normalized range of 35–55 basis points.

Management also remains committed to loan growth.

Our Viewpoint

Huntington's results reflect a strong performance. 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 low interest rate environment and stringent regulatory scenario remain headwinds for the company's financials.

Other Midwest Banks

Commerce Bancshares, Inc. CBSH delivered positive earnings surprises on both the top and bottom lines in the second quarter. Earnings per share of 75 cents beat the Zacks Consensus Estimate of 67 cents. Moreover, the figure came 13.6% ahead of the year-ago quarter tally.

Associated Banc-Corp's ASB second-quarter 2015 earnings per share of 31 cents came in line with the Zacks Consensus Estimate. Moreover, earnings were 10.7% above the year-ago quarter figure.

Old National Bancorp. ONB is slated to report results on Jul 27.

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