DBRS Comments on Huntington’s 3Q10 Results – Senior at BBB, Trend Negative

DBRS has today commented on the 3Q10 results of Huntington Bancshares Inc. (Huntington or the Company). Huntington’s Issuer & Senior Debt rating is “BBB” with a Negative trend. In light of stabilizing credit costs, Huntington reported net income applicable to common shareholders of $71 million for 3Q10, up from $19 million for 2Q10. On a linked-quarter basis, earnings benefited from a 38% decrease in provisions for loan loss reserves and a 1% increase in total revenues, partially offset by a 3% expansion in noninterest expense. Higher total revenues were attributed to a 3% increase in net interest income, mostly offset by a 1% decline in noninterest income.

Stabilizing credit quality, as indicated by positively trending metrics, resulted in lower provisions for loan loss reserves. Higher net interest income reflected a 2% increase in total earning assets, partially offset by a 1 basis point narrowing of net interest margin (NIM) to 3.45%. The increase in average earning assets reflected a 6% increase in securities along with a modest 0.3% increase in loans. Loan growth was driven by a higher level of auto loans and to far lesser extent increases in commercial and industrial and home equity loans. Conversely, commercial real estate loans decreased during the quarter. The narrower NIM reflected the sale of Franklin related loans, partially offset by favorable shift in deposit mix and pricing, and one more day in 3Q10. Lower noninterest income reflected a decline in service charges on deposit accounts, due to the impact of Reg E and Huntington’s “Fair Play” overdraft initiative. Higher noninterest expense reflected an increase in personnel, OREO and foreclosure costs. DBRS anticipates that Huntington’s future earnings will be impacted by lower credit costs, lower deposit related revenues, due to Reg E and the “Fair Play” initiative and modest loan growth, especially given continuing macroeconomic headwinds.

Despite the protracted economic downturn, Huntington’s credit quality improved. During 3Q10, levels of net charge-offs (NCOs) and nonperforming assets (NPAs) declined. Lower linked-quarter NPAs mostly reflected the resolution of the Franklin related exposure, payments, losses and loans returning to accrual status. Commercial real estate loans reflected the bulk of the decrease in NPAs. NPAs declined 30% to $1.1 billion and represented 2.94% of total loans and leases at September 30, 2010, down from 4.24% at June 30, 2010. Meanwhile, Huntington’s 3Q10 NCOs contracted and represented 1.98% of average loans, down from 3.01% for 2Q10. Of note and on a linked-quarter basis, Huntington’s accruing restructured loans increased $43 million, or 9% to $519 million. DBRS comments that Huntington’s loan loss reserves were adequate at 136% of nonaccrual loans, especially given its current loss rate. Specifically, Huntington’s allowance for loan loss reserves represents 7.2 quarters of 3Q10 NCOs. Over the intermediate term, DBRS anticipates that the Company’s asset quality will likely remain pressured by macroeconomic headwinds.

During 3Q10, Huntington’s capital increased, reflecting the quarter’s earnings. At September 30, 2010 the Company’s tangible common equity, estimated Tier 1 common, Tier 1 and Total risk based capital ratios were 6.20%, 7.36%, 12.76% and 15.02%, respectively. DBRS notes that Huntington’s regulatory capital position includes $1.4 billion of TARP funds.

The Company’s liquidity profile remains sound and is underpinned by a core deposit base that accounts for 102% (at June 30, 2010) of net loans. At September 30, 2010, Huntington’s securities portfolio represented 18% of total assets and consisted mostly of good quality agencies, CMOs and MBS. However, there are higher risk securities within the portfolio, including $296 million (book value) of private label CMOs with a fair value of $276 million, $237 million (book value) of pooled trust preferred securities, with a fair value of $100 million and $112 million (book value) of Alt-A mortgage-backed securities, with a fair value of $98 million. DBRS notes the possibility of future losses related to these securities. Rounding out its liquidity profile, the Company has access to the Federal Home Loan Bank and the Federal Reserve.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.