DBRS Comments on Huntington’s 1Q11 Results – Senior at BBB, Trend Stable

DBRS Inc. (DBRS) has today commented on the 1Q11 results of Huntington Bancshares Inc. (Huntington or the Company). Huntington’s Issuer & Senior Debt rating is “BBB” with a Stable trend. In light of stabilizing credit costs and a sizable decrease in dividends on preferred shares, partially offset by lower mortgage banking income, Huntington reported net income applicable to common shareholders of $118.7 million for 1Q11, up from $39.1 million for 4Q10. On a linked-quarter basis, higher earnings benefited from the non-recurrence of approximately $76.0 million of TARP related preferred stock and accretion of remaining issuance discount, a 43% decrease in provisions for loan loss reserves and a 0.9% decline in non-interest expense. Somewhat offsetting was a sizable 5.6% contraction in total revenues.

Huntington’s stabilizing credit costs reflected improved asset quality as nonperforming assets (NPAs) and net charge-offs (NCOs) continue to contract. Lower linked-quarter total revenues were mostly attributed to a 10.3% decrease in non-interest income and to a lesser degree a 2.6% decline in net interest income. The bulk of the decrease in non-interest income was driven by lower mortgage banking income, pressured by lower residential mortgage refinancings, due to higher interest rates. To a lesser degree, lower fee revenues reflected declines in automobile operating lease income, BOLI, insurance income and service charges on deposit accounts.

Lower net interest income was driven by a 1.9% contraction in average earning assets, partially offset by a five basis point widening of net interest margin (NIM) to 3.42%. The wider NIM reflected declining liability costs outpacing decreasing earning asset yields. Specifically, the wider NIM was attributed to higher levels of lower cost deposits and a higher day count, somewhat offset by lower loan yields and the issuance of subordinated debt. The decline in earning assets reflected lower levels of securities, as the Company utilized cash flows from securities sales to help fund the completion of its repayment of TARP during 4Q10. Moreover, loans held for sale declined, due to lower residential mortgage originations. Positively, Huntington continued to have some success in growing commercial & industrial and automobile loans during the quarter. Finally, the modest decline in non-interest expense was mostly due to lower credit related expenses, including professional service fees, OREO and foreclosure expense.

Despite slow and uneven economic growth, Huntington’s credit quality metrics continue to improve. Specifically, 1Q11 results reflected the sixth consecutive quarterly decline in NPAs and the third sequential quarter decrease in NCOs. Commercial real estate loans still represent the largest component of NPAs. During 1Q11, NPAs declined 18% to $691 million and represented 1.80% of loans and leases at March 31, 2011, down from 2.21% at December 31, 2010. Meanwhile, Huntington’s 1Q11 NCOs contracted and represented 1.73% of average loans, down from 1.82% for 4Q10. Pointing to continued credit quality improvement, nonaccrual loan inflows were down 19% and criticized commercial loan inflows declined by 41%, during 1Q11.

At March 31, 2011, Huntington’s allowance for loan losses was ample at 178% of nonaccrual loans and 2.96% of total loans and leases. Moreover, the allowance for loan loss reserves represented a solid 6.9 quarters of 1Q11 NCOs. Over the intermediate term, DBRS anticipates that Huntington’s asset quality will continue to stabilize, yet remain pressured by prolonged macroeconomic headwinds.

The Company’s liquidity profile remains sound and is underpinned by a sizable core deposit base that accounts for 104% (at December 31, 2010) of net loans. During 1Q11, Huntington’s average deposits remained relatively flat q-o-q, yet reflected a better mix, as CDs and brokered deposits declined and money markets, demand and savings deposits expanded. At March 31, 2011, Huntington’s securities portfolio represented 18% of total assets and consisted mostly of good quality agency CMOs and MBS. However, there are higher risk securities within the portfolio, including $124 million (book value) of private label CMOs with a market value of $116 million, $229 million (book value) of pooled trust preferred securities, with a market value of $107 million, and $65 million (book value) of Alt-A mortgage-backed securities, with a market value of $58 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.

The Company’s capital position is solid. During 4Q10, Huntington issued common stock and debt to repurchase its $1.4 billion in TARP funds. On January 19, 2011, the Company repurchased the related warrants issued to the U.S. Department of the Treasury. At March 31, 2011, Huntington’s tangible common equity ratio was 7.81%, and estimated risk based capital ratios were Tier 1 common at 9.75%, Tier 1 at 12.04% and Total at 14.85%.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating includes publicly available information of the issuer, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This is an unsolicited rating. This rating is based solely on publicly available information.

Lead Analyst: Mark Nolan
Approver: Roger Lister
Initial Rating Date: 13 March 2006
Most Recent Rating Update: 17 February 2011

For additional information on this rating, please refer to the linking document below.