DBRS Comments on Huntington Bancshares 1Q13 Results – Senior at BBB, Stable Trend

DBRS, Inc. (DBRS) has today commented on Huntington Bancshares Inc.’s (Huntington or the Company), 1Q13 financial results. Huntington has an Issuer & Senior Debt rating of BBB. All ratings of the Company have a Stable trend. Huntington reported net income applicable to common shareholders of $143.8 million for 1Q13, down 9.7% from $159.3 million for 4Q12.

Importantly, balance sheet fundamentals were sound in 1Q13, despite macroeconomic headwinds. In particular, the Company reported modest loan growth, continued improvement in asset quality and solid capital, which DBRS views positively.

Lower QoQ earnings mostly reflected the non-recurrence of the Company’s 4Q12 automobile securitization gains, lower mortgage banking income, and two fewer days in the quarter, which pressured spread income. Specifically, the QoQ decrease in earnings was driven by a 7.6% decline in total revenues that was partially offset by a 5.9% decrease in non-interest expense and a 25.0% decline in provisions for loan loss reserves. Lower provisions were due to continued improvement in asset quality.

Overall, the decrease in QoQ revenues was attributable to a 15.3% decline in non-interest income and a 2.3% decrease in net interest income. Lower non-interest income mostly reflected the non-recurrence of the Company’s 4Q12 $17.3 million automobile securitization gain, a 26.7% decrease in mortgage banking income, and a 10.6% decline in deposit service charges. During the quarter, lower mortgage banking income reflected reduced origination volume and a narrower sales margin, while the decrease in deposit service charges was driven by seasonality, lower commercial customer transactions, and the implementation of a new posting order for consumer transaction accounts. Meanwhile, lower spread income was primarily driven by two fewer days in the quarter.

On a linked-quarter basis, expenses were positively impacted by a decline in temporary and regulatory-related expenses, as well as lower marketing, litigation and travel costs. For 2Q13, management anticipates the quarterly expense run-rate to be $10 to $20 million higher than 1Q13, due to higher commission expense, annual merit increases, higher marketing costs, and an increase in equipment, which is related to in-store expansion.

During 1Q13, average earning assets grew by $278 million, or 0.5%, sequentially, reflecting a 1.2% increase in loans and a 0.6% decrease in securities. Higher average loans reflected a 2.7% increase in commercial and industrial loans and a 7.7% increase in automobile loans.

Despite the difficult operating environment, Huntington’s asset quality remains sound, evidencing continuing improvement. At March 31, 2013, the Company’s non-performing assets represented 1.01% of loans and OREO, down from 1.09% at December 31, 2012. Meanwhile, net charge-offs for the Company declined 26% to $51.7 million and represented a manageable 0.51% of average loans for 1Q13. Finally, DBRS views Huntington’s loan loss reserves as adequate at 1.81% of total loans and 180% of NPAs.

Huntington maintains a solid funding profile, which is underpinned by a sizable core deposit base that fully funds its loans. During 1Q13, average deposits decreased 1.6%, driven by a 7.3% decline in non-interest bearing demand deposits and a 4.5% contraction in time deposits. During the quarter, the Company managed down its collateralized deposits. Huntington’s securities portfolio, which represents 16.4% 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 solid and provides sound loss absorption capacity, as well as opportunity for growth. At March 31, 2013, Huntington’s tangible common equity ratio was 8.92%, and estimated risk-based capital ratios were Tier 1 common at 10.62%, Tier 1 at 12.16% and Total at 14.55%. DBRS notes that the Company received a non-objection from the Federal Reserve for its 2013 annual capital plan, which included a 25% increase to its common dividend of $0.05 per share and for the repurchase of common shares totaling $227 million.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]