DBRS: Huntington Bancshares Ratings Unchanged after 2Q11 Results – Senior at BBB, Trend Stable

DBRS Inc. (DBRS) has commented today that its ratings for Huntington Bancshares Inc. (Huntington or the Company), including it “BBB” Issuer & Senior Debt rating with a Stable trend are unchanged following the release of 2Q11 results. Huntington reported net income applicable to common shareholders of $138.2 million for 2Q11, up from $118.7 million for 1Q11. Despite prolonged macroeconomic headwinds, DBRS perceives Huntington’s earnings as improved, reflecting stabilizing credit costs and higher gains and fee related revenues. Specifically, on a linked-quarter basis, higher 2Q11 earnings were attributable to a 28% contraction in provisions for loan loss reserves, a 2.8% increase in total revenues and a modest 0.5% decrease in non-interest expense.

During 2Q11, Huntington’s credit costs continued to contract, spurred by improved asset quality. The Company’s nonperforming assets (NPAs) and net charge-offs (NCOs) continued to trend lower, which likely indicates future reserve releases, in DBRS’s opinion.

Higher quarter-over-quarter (q-o-q) revenues reflected a sizable 7.9% increase in non-interest income, partially offset by a 0.25% decrease in net interest income. The increase in non-interest income mostly reflected higher market-related gains and capital markets income, deposit service fees and to a lesser extent, electronic banking income and BOLI.

Spread income remains pressured by the low interest rate environment. The modest decline in linked-quarter net interest income was driven by a two basis point (bps) narrowing of net interest margin (NIM) to 3.40% and a 0.7% decrease in average earning assets. The narrower NIM reflected decreasing earning asset yields slightly outpacing declining liability costs. Lower earning asset yields were led by a sizable 26 bps contraction in commercial & industrial (C&I) loan yield, which was primarily driven by the impact of associated swaps. The decline in average earning assets reflected lower levels of securities, mostly offset by a modest increase in loans. The lack of attractive securities spreads led to the contraction in the investment portfolio. Meanwhile, despite the expected continued decrease in commercial real estate (CRE) loans, Huntington had some success in growing C&I and automobile loans and to a lesser extent home equity and residential mortgage loans.

The moderate q-o-q decline in non-interest expense mostly reflected the 1Q11 $17.0 million contribution to litigation reserves, mostly offset by higher professional services expense, insurance, data processing and marketing expense. DBRS notes that the implementation of strategic initiatives designed to accelerate customer and revenue growth heightened non-interest expense during the quarter.

Despite the protracted slow growing economy, Huntington’s credit quality metrics continued to improve. Specifically, 2Q11 NPAs declined 5.4% to $653 million and represented a moderate 1.67% of loans and leases at June 30, 2011, down from 1.80% at March 31, 2011. The bulk of the decline in NPAs reflected lower C&I and CRE nonaccrual loans Meanwhile, Huntington’s 2Q11 NCOs significantly contracted and represented 1.01% of average loans, down from 1.73% for 1Q11. Moreover, criticized commercial loans decreased by 11% from the prior quarter, pointing to continued credit quality improvement within the portfolio. Finally, Huntington’s allowance for loan loss reserves remains adequate at 174% of nonaccrual loans and 2.74% of total loans and leases.

The Company’s liquidity position remains ample and is underpinned by a sizable core deposit base that accounts for 103% (at March 31, 2011) of net loans. During 2Q11, Huntington’s average deposits contracted by 1% yet reflected a better mix, as certificates of deposits declined by 3.7% and noninterest bearing deposits expanded by 6.4%. At June 30, 2011, Huntington’s securities portfolio represented 17% of total assets and consisted mostly of good quality agency CMOs and MBS. However, there are higher risk securities within the portfolio, including $98 million (book value) of private label CMOs with a market value of $89 million, $229 million (book value) of single issuer and pooled trust preferred securities, with a market value of $110 million, and $62 million (book value) of Alt-A mortgage-backed securities, with a market value of $55 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.

Capital remains adequate and provides a solid level of loss absorption capacity, especially given current loss rates. At June 30, 2011, Huntington’s tangible common equity ratio was a high 8.22%, and estimated risk based capital ratios were Tier 1 common at 9.92%, Tier 1 at 12.14% and Total at 14.89%.

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: Steven Picarillo
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.