DBRS Ratings on Huntington Bancshares Unchanged after 3Q12 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 3Q12 results. The trend on all ratings is Stable. Huntington reported net income applicable to common shareholders of $159.8 million for 3Q12, up from $144.7 million for 2Q12.

Higher linked-quarter earnings, albeit noisy, were mostly driven by a decrease in provisions for income taxes, higher gains on securities and an increase in mortgage banking income. DBRS notes that the Company’s lower 3Q12 taxes reflected a $19.5 million state deferred tax valuation allowance benefit, which drove down its effective tax rate to 14.4% for 3Q12, from 24.4% for 2Q12. For the quarter, total revenues were up 1.2%, driven by a 2.9% increase in noninterest income and a 0.3% increase in net interest income. Somewhat offsetting, Huntington’s linked-quarter noninterest expense expanded by 3.1%, while provisions for loan loss reserves were up 1.3%.

Despite the difficult operating environment, Huntington exhibited some positive balance sheet fundamentals during 3Q12. Specifically, period-end loans increased 0.75%, during the quarter, reflecting higher levels of automobile and commercial & industrial loans. Meanwhile deposits (period-end) grew by 1.4%, benefitting from higher levels of money market and non-interest bearing demand deposits. Finally, Huntington’s asset quality continues to trend positively, as nonperforming assets (NPA) and commercial criticized loans contracted, quarter-over-quarter (QoQ).

Improved noninterest income on a QoQ basis mostly reflected a sizable $6.2 million, or 16.3% increase in mortgage banking income, a $3.8 million increase in investment securities gains and a $2.4 million increase in gain on loan sales. Positively, most other fee income line items were up from 2Q12. DBRS notes that the higher level of mortgage banking income reflected an increase in origination and secondary marketing income, partially offset by a decline in net trading gains related to mortgage servicing rights hedging.

Higher QoQ spread income reflected 0.5% increase in average earning assets, somewhat offset by a 4 basis points narrowing of net interest margin (NIM) to a still solid 3.38%. Higher average earning assets were driven by increases in loans held for sale and commercial & industrial loans, partially offset by lower levels of automobile loans, commercial real estate loans and securities. The decline in automobile loans reflected the 2Q12 reclassification of $1.3 billion of these loans into the held for sale category. Meanwhile, the narrower NIM was driven by declining earning asset yields outpacing decreasing funding costs.

Higher QoQ expenses reflected a $4.7 million or 1.9% increase in personnel costs and a $4.4 million increase in costs associated with the early repayment of debt, including trust preferreds that were redeemed during the quarter. The increase in personnel costs was primarily driven by higher healthcare expense. Finally, noninterest expense included $4.5 million of cost associated with the infrastructure and support needed to support the Federal Reserve CCAR process.

Despite the difficult operating environment and new regulatory guidance, Huntington’s asset quality remains sound. As with many banks, new OCC guidance, related to customers who have gone through Chapter 7 bankruptcy, negatively impacted the Company’s reported net charge-offs and NPAs. Specifically, the new guidance resulted in an additional $33 million of consumer loan net charge-offs (approximately 90% of which continue to make payments as scheduled). Overall, total net charge-offs for the Company increased 25% to $105.1 million and represented 1.05% of average loans for 3Q12. Meanwhile, Huntington’s NPAs declined and represented 1.26% of loans, at September 30, 2012, down from 1.31% at June 30, 2012. DBRS notes that nonaccrual loans were down in most categories, except for residential mortgages and home equity loans, which were negatively impacted by the new OCC guidance. Finally, DBRS views Huntington’s loan loss reserves as adequate at 1.96% of total loans and leases and 155% of NPAs.

Huntington maintains a solid funding profile, which is underpinned by a sizable core deposit base that fully funds its loans. Average deposits increased 3.2%, QoQ, reflecting solid growth in non-interest bearing demand and money market deposits. Huntington’s securities portfolio, which represents 16.6% of total assets, and access to the Federal Home Loan Bank and the Federal Reserve round out its liquidity profile.

The Company’s capital position remains sound and provides solid loss absorption capacity, as well as opportunity for growth. At September 30, 2012, the Company’s tangible common equity ratio was a high 8.74%, and estimated risk-based capital ratios were Tier 1 common at 10.28%, Tier 1 at 11.88% and Total at 14.36%.

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, Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments, and Rating Bank Preferred Shares and Equivalent Hybrids. All 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 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.