DBRS Ratings on Huntington Bancshares Unchanged after 2Q12 Results – Senior at BBB, Stable Trend

DBRS, Inc. (DBRS) has today commented that its ratings for Huntington Bancshares Inc. (Huntington or the Company), including its BBB Issuer & Senior Debt rating, are unchanged following the release of 2Q12 results. The trend on all ratings is Stable. Huntington reported net income applicable to common shareholders of $144.7 million for 2Q12, slightly down from $145.2 million for 1Q12, yet up moderately from $138.2 million for 2Q11.

Despite the slight decline in QoQ earnings, the Company’s earning generation reflects its solid balance sheet fundamentals, including loan and deposit growth along with sound asset quality. Specifically, modestly lower QoQ earnings reflected a 2.8% decrease in total revenues and a 6.1% increase in provisions for loan loss reserves, somewhat offset by a 4.0% decline in noninterest expense.

On a QoQ basis, Huntington’s net interest income increased 2.8% to $429.0 million, driven by a 2 basis point widening of net interest margin (NIM: FTE basis) to 3.42% and a 2.6% increase in average earning assets. The wider NIM was mostly attributable to lower interest bearing liability costs and an increase in noninterest bearing deposits. Higher earning assets (on an average basis) reflected a 5.2% increase in loans and a 0.8% increase in securities. In addition to organic growth, the loan portfolio was bolstered by the FDIC-assisted Fidelity Bank acquisition (acquired March 30, 2012) and the purchase of a municipal equipment lease portfolio. Overall, Huntington reported an 8.6% increase in commercial & industrial loans, a 3.8% increase in commercial real estate loans and a 2.9% increase in consumer loan, the bulk of which was in auto. Of note, the Company’s loans held for sale declined by $855 million, QoQ. Most of the Company’s loans in the held for sale category represent auto loans awaiting sale and securitization. The Company’s auto securitizations provide the Company with fee income gains and reduce concentration risk in the loan portfolio.

Meanwhile, linked-quarter noninterest income decreased by 11.0% to $254 million, mostly driven by an 84.5% decrease in gains on loan sales, a 24.9% decrease in other income and a 17.3% decline in mortgage banking income. The sizable decreases in gains on loans and other income mostly reflected the non-recurrence of the Company’s 1Q12 $23.0 million automobile loan securitization gain, and its $11.4 million bargain purchase gain associated with its Fidelity Bank acquisition, respectively. Finally, lower QoQ mortgage revenue was attributable to a sizable $28.9 million decline in the MSR valuation.

Expenses declined 4.0%, QoQ, mostly driven by the non-recurrence of the $23.5 million addition to litigation reserves in 1Q12. Partially offsetting this, the company reported a $6 million increase (up 14.5%) in outside data processing cost, a $4.6 million increase (up 27.3%) in marketing expense, and a $4.2 million increase (up 37.6%) in professional services expense. Roughly 40% of the increase in data processing and professional services expenses were one-time events and were related to the Fidelity Bank acquisition. Positively, personnel cost, which represents the bulk of the expense base (55%), was down slightly QoQ.

Despite the slow growth economic environment, Huntington’s credit quality remains sound. NPAs declined by 0.7% to $523.2 million and represented 1.31% of loans, at June 30, 2012, up modestly from 1.29% at March 31, 2012. Meanwhile, Huntington’s NCOs, on an absolute basis, increased by just over $1 million, QoQ, but represented 0.82% of average loans for 2Q12, down from 0.85% for 1Q12. Although the Company continues to release reserves, its loan loss reserves remain adequate at 2.15% of total loans and leases and 164% of NPAs.

Huntington has ample liquidity, which is underpinned by a sizable core deposit base that fully funds its loans. Reflecting both organic growth and the Fidelity Bank acquisition, average deposits increased 3.2%, QoQ, reflecting solid growth in transaction and savings accounts. DBRS notes that noninterest bearing demand deposits were up a strong 7.0% sequentially. Huntington’s securities portfolio, which represents 17% of total assets, and access to the Federal Home Loan Bank and the Federal Reserve round out its liquidity profile.

Despite the 2Q12 redemption of $80 million of trust preferred securities, and repurchase of 6.4 million common shares, Huntington’s capital position remains sound and provides a solid level of loss absorption capacity, as well as opportunity for growth. At June 30, 2012, the Company’s tangible common equity ratio was a high 8.4%, and estimated risk-based capital ratios were Tier 1 common at 10.08%, Tier 1 at 11.93% and Total at 14.41%. Finally, the Company estimates that its Tier 1 common ratio under the recent Federal Reserve’s notice of proposed rulemaking would be negatively impacted by roughly 150 bps, a large decline, but would leave the Company in Basel III compliance.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria – 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 company documents, 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Mark Nolan
Approver: Roger Lister
Initial Rating Date: 13 March 2006
Most Recent Rating Update: 4 April 2012

For additional information on this rating, please refer to the linking document under Related Research.