DBRS Comments on Huntington Bancshares 2Q13 Results: Ratings Unchanged – Sr. at BBB, Positive 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 2Q13 results. The trend on all ratings is Positive. For 2Q13, Huntington reported net income applicable to common shareholders of $142.7 million, down slightly from $143.8 million for 1Q13 and $144.7 million for 2Q12. Overall, the sequential decline in quarterly earnings reflected lower mortgage banking income, the non-recurrence of a 1Q13 gain, and higher personnel costs, partially offset by lower provisions for loan loss reserves. Specifically, lower linked-quarter earnings reflected a 0.7% increase in non-interest expense and a 0.4% decrease in total revenues, partially offset by a 16.4% decrease in provisions for loan loss reserves.

Importantly, Huntington’s balance sheet fundamentals remain sound. During 2Q13, the Company reported sustained loan growth, improved asset quality and the maintenance of a solid capital position.

Higher sequential non-interest expense mostly reflected a $5.0 million, or 1.9%, increase in personnel cost and a $3.3 million, or 29.8%, increase in marketing expense. The increase in personnel cost was attributable to an increase in commissions. Meanwhile, the higher marketing expenses were seasonal.

Lower linked-quarter revenues were attributable to a 1.4% decrease in non-interest income, partially offset by a 0.2% increase in net interest income. The decrease in non-interest income reflected an $11.6 million, or 25.6%, decrease in mortgage banking income and the non-recurrence of the Company’s 1Q13 $7.6 million gain on the sale of low-income housing tax credit investments. The sizable decrease in mortgage banking income was due to a $7.9 million increase in net trading loss related to MRS hedging and a $3.7 million decline in MSR valuation adjustment. Of note, Huntington’s QoQ fee income benefited from a $7.1 million, or 11.7% increase, in deposit service charges and a $4.4 million, or 56.1%, increase in capital market fees. Higher deposit service charges reflected seasonal trends in customer activity and growth in consumer checking households.

During 2Q13, average loans increased by 1.0% sequentially, and contributed to the 0.4% increase in average earning assets. DBRS notes that the reduction in the number of automobile loan securitizations benefited 2Q13 loan growth. Specifically, the sequential increase in average loans reflected higher levels of automobile loans (up $450 million, or 9.3%), residential mortgages (up $247 million, or 5.0%) and commercial & industrial loans (up $79 million, or 0.5%). Higher average earning assets and one additional day in 2Q12 drove the modest QoQ increase in net interest income, despite a 4 basis point narrowing of NIM to 3.38%.

Despite the difficult operating environment, Huntington’s asset quality remained sound and credit metrics improved in 2Q13. During the quarter, levels of net charge-offs (NCOs), non-performing assets (NPAs) and troubled debt restructurings declined. At June 30, 2013, the Company’s NPAs represented a manageable 0.95% of loans and OREO, down from 1.01% at March 31, 2013. Meanwhile, NCOs decreased by a material 32.7% QoQ to $34.8 million and represented a relatively low 0.34% of average loans for 2Q13. Finally, DBRS views Huntington’s loan loss reserves as adequate at 1.76% of total loans and 185% of NPAs.

The Company’s solid funding profile is underpinned by a sizable core deposit base that fully funds loans. During 2Q13, average deposits increased 0.4% and the mix improved, as demand deposits increased by 3.7%, and core time deposits contracted by 10.6%. Huntington’s securities portfolio, which represents 16.0% 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 June 30, 2013, Huntington’s tangible common equity ratio was 8.78%, and estimated risk-based capital ratios were Tier 1 common at 10.71%, Tier 1 at 12.24% and Total at 14.57%.

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

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