Huntington Bancshares, which hasn’t made a trip to the securitization market since June of last year, will be offering $2.6 billion in bonds backed by auto and commercial loan receivables during the fourth quarter.

The transactions, disclosed in its third quarter earnings report Wednesday, are intended to improve the regional bank’s capital ratios by culling balance-sheet exposure to risk-weighted assets.

Huntington, based in Columbus, Ohio, reported a rise in revenue but a drop in profits of 17% due to costs from its recently completed merger with Akron-based FirstMerit Bank.

The bulk of the loans to be securitized, $1.5 billion, are indirect prime and super-prime auto loans issued through partnering dealers.

Huntington chief financial officer Howell D. McCullough said that as the bank “continued to evaluate opportunities to optimize the balance sheet,” it moved the $2.6 billion in loans into a held-for-sale bucket at the end of the third quarter. (Huntington held $60.7 billion in total loan assets – of which $29.4 billion were consumer – on its books at the end of the third quarter. Those loans encompassed consumer auto, commercial, CRE, home equity, residential mortgage and RV/marine finance borrowings).  

 “We remain steadfast to our commitment to our auto finance business, including our well-established strategy which is built upon deep, long-term relationships with our core dealer customers and our focus on prime and super-prime indirect lending,” McCollough said.

The auto loans to be securitized equal almost the entirety of the $1.6 billion auto loan servicing portfolio that shifted over from FirstMerit following the completion of the merger, though Huntington officials did not indicate whether any (or all) were originated by FirstMerit.

Huntington last entered the securitization market in June 2015 with a $750 million auto loan transaction; that followed on the heels of a $1.2 billion deal in May 2015. Prior to that, the company hadn’t issued auto loan ABS since 2012.

The earnings release shows $11.4 billion in outstanding consumer auto loans for the combined Huntington operations as of September 30.

Executives emphasized the decision to unload the auto loans was not related to the performance of the collateral, regulatory pressure or concerns about rising delinquencies in the broader auto loan market.

In fact, auto loans was among the “significant drivers of organic loan growth” of approximately 8% for year-over-year Huntington operations in the third quarter – and should be a resource for continued securitizations in the future, the company stated.

“We've commented on the past that we observe what's going on in the marketplace, but it really doesn't impact our business model or our performance. So we have not changed our view on the auto portfolio at all,” said Daniel J. Neumeyer, the company’s chief credit officer.

“We don't have a change in our go-forward view of what we believe we're going to experience,” he said. “So, while there may be activities going out in the market that are of concern, because of our prime, super-prime focus, because of our strong origination scores, absence of risk layering, we have not changed our view at all with regard to the quality of the portfolio.

Rather, the disposals are aimed at reducing Huntington’s exposure to this asset class. Prior to its announced merger with FirstMerit, the bank raised its cap on auto lending to 175% of capital in, but will now be moving it down to 150% with the loan sell-off. Huntington has adopted an operating guideline to further reduce that cap to 125% of capital, according to McCullough.

“Given the larger capital base of the new combined organization, we cannot foresee any circumstance in which we would grow our indirect auto portfolio anywhere close to the 175% of capital,” McCullough told analysts, according to the call transcript. At the 125% limit, Huntington expects to regularly place securitizations “on an annual basis going forward,” he added.

The loans are being replaced with unspecified “zero” risk-weighted securities.

With the addition of FirstMerit operations, the total level of risk-weighted assets at the combined institution jumped to $80.5 billion in the third from $60.7 billion in the second quarter that was confined to Huntington’s footprint.

Huntington has already filed placeholder plans for the auto loan securitization with the U.S. Securities and Exchange Commission.

The securitization of approximately $1.1 billion in non-relationship commercial/industrial and commercial real estate loans will raise funds to retire debt.

Huntington Bancorp's profits took a hit in the third quarter from $159 million in merger and integration costs tied to its acquisition of FirstMerit.

Profits fell 17% from a year earlier to $127 million, but revenue rose 24% to $938 million.

The acquisition, completed in August, has presented cost challenges much of the year. Merger expenses led to an 11% year-over-year decline in profits during the second quarter. In the first nine months of the year Huntington reported net income of $426 million, down 13% from the same period in 2015.

According to Huntington's chairman and chief executive, Steve Steinour, the integration of FirstMerit — which held earning assets of $23.7 billion when the deal closed — is proceeding smoothly.

"We remain confident we will complete the majority of system conversions during the first quarter of 2017, swiftly moving toward our target of realizing $255 million of annualized cost savings," Steinour said in a press release Wednesday.

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