Huntington Bancshares Inc. HBAN reported third-quarter 2015 earnings per share of 18 cents, which lagged the Zacks Consensus Estimate of 20 cents. However, the bottom line remained stable year over year.
Our proven model predicted that Huntington was not likely to post an earnings beat as it did not have the right combination of two key ingredients – positive Earnings ESP and a Zacks Rank #3 (Hold) or better. Though it had a Zacks Rank #3, the Earnings ESP was -10.00%.
Results were affected by an increase in expenses, partially offset by top-line growth and lower provisions for credit losses. The quarter also witnessed continued growth in both loan and deposit balances along with improvement in credit quality.
Net income decreased 2% year over to $152.6 million. Notably the reported quarter includes litigation reserve amount of $24.8 million and merger and acquisition-related net expenses of $3.1 million. The prior-year quarter also included certain one-time items.
Performance in Detail
Huntington's total revenue was $748.6 million, lagging the Zacks Consensus Estimate of $768.4 million. However, it compared favorably with the year-ago number of $713.6 million. The year-over-year rise was primarily driven by increase in both net interest income (NII) and non-interest income.
On a fully taxable-equivalent FTE basis, total revenues of $756.7 million increased 5% year over year.
NII came in at $503.6 million on a FTE basis, up 6% from the prior-year quarter. The rise was driven by an increase in average earnings assets, partially offset by a 4 basis points (bps) decline in net interest margin NIM to 3.16%.
Further, non-interest income rose 2% year over year to $253.1 million. The rise reflected increase in service charges on deposit accounts, electronic banking revenue, capital markets fees and other income. These were, however, partially offset by decrease in several categories including mortgage banking, bank owned life insurance income and trust services income.
Total non-interest expenses increased 10% year over year to 526.6 million. Excluding the impact of significant items, non-interest expenses increased 6% year over year to $483.7 million.
The rise reflected increase in personnel costs, equipment costs, outside data processing and marketing expense. These factors were partly offset by lower expenses related to professional services and amortization of intangibles.
As of Sep 30, 2015, average loans and leases at Huntington increased 6% year over year to $49.0 billion, driven by increase in both commercial and consumer loan portfolios. Also, average deposits rose 11% to $54.3 billion.
Credit Quality
Credit quality metrics showed improvement in the reported quarter. Net charge-offs (NCOs) were $16.1 million or an annualized 0.13% of average total loans and leases in the reported quarter, down from $30.0 million or an annualized 0.26% 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 1.32% from 1.47% in the prior-year quarter. Additionally, provision for credit losses decreased 8% year over to $22.5 million.
However, total non-performing assets (NPAs), came at $381.4 million as of Sep 30, 2015, up 5% year over year.
Capital Position
Huntington became subject to the Basel III capital rules beginning first-quarter 2015. As of Sep 30, 2015, common equity tier 1 risk-based capital ratio and regulatory Tier 1 risk-based capital ratio were 9.72% and 10.49%, respectively.
Capital Deployment
Concurrent with the release, Huntington Bancshares declared a 17% increase in its quarterly cash dividend on common stock to 7 cents per share. The dividend will be paid on Jan 4, 2016, to shareholders of record on Dec 21, 2015.
During the quarter, Huntington repurchased 6.8 million shares of common stock at an average price of $10.66 per share. The share buyback was under the share repurchase authorization of up to $366 million of common shares.
Outlook
Management remains committed to achieve positive operating leverage in 2015.
Excluding significant items and the recurring expense tied to Huntington Technology Finance, non interest expense growth is expected in the range of 2–4% for 2015.
Non-interest expense in the fourth quarter is expected to remain stable with the second and third quarter 2015 adjusted non-interest expense levels.
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 bps.
Our Viewpoint
Huntington's results reflect a decent 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. Additionally, the latest dividend increase certainly boosts investors' confidence in the stock.
However, escalating costs, a persistent low interest rate environment and a stringent regulatory scenario remain headwinds for the company's financials.
Other Midwest Banks
Commerce Bancshares, Inc. CBSH reported earnings of 66 cents per share for third-quarter 2015, which considerably lagged the Zacks Consensus Estimate of 71 cents. Moreover, the bottom line was down 4.3% from the year-ago tally of 69 cents.
Associated Banc-Corp ASB delivered a positive earnings surprise in the third quarter of 2015. The company's earnings per share of 31 cents beat the Zacks Consensus Estimate of 30 cents, but remained flat year over year.
Old National Bancorp. ONB is slated to report third-quarter results on Oct 26.
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