DBRS Downgrades Huntington Bancshares Inc. to BBB; Trend Negative

DBRS has today downgraded the ratings of Huntington Bancshares Inc. (Huntington or the Company) and its related entities, including Huntington’s Issuer & Senior Debt rating to BBB from BBB (high). At the same time, DBRS has downgraded Huntington’s banking subsidiary’s Deposit & Senior debt rating to BBB (high) from A (low). All ratings were placed on Negative trend.

The downgrade reflects Huntington’s struggle with steepening asset quality erosion over the past year, and DBRS’s expectation of sustained elevated credit costs going forward. Even excluding the Company’s goodwill impairment charges, earnings have been severely pressured by high credit costs, mostly related to the Company’s Franklin Credit Management (Franklin) relationship and the Company’s commercial real estate (CRE) and commercial & industrial (C&I) loan lending.

The Negative ratings trend reflects DBRS’s perception that material amounts of potential losses remain embedded in the Company’s loan portfolios, especially given increasing unemployment and declining real estate valuations. Furthermore, the extremely difficult operating environment, including the weakened economy within Huntington’s footprint is likely to continue to constrain revenue growth and pressure expenses, limiting improvement in core earnings (income before provisions and taxes). DBRS comments that sustained elevated credit costs and/or significant securities valuation and impairment charges may likely result in negative rating actions. Today’s ratings actions conclude a review with Negative Implications initiated by DBRS in April 2009.

The Company’s ratings are underpinned by a solid Midwest franchise, reflecting diversified revenue sources, adequate liquidity, which is underscored by a solid core deposit base, and improved capital. The ratings also take into consideration Huntington’s strained asset quality, which has been severely pressured by its Franklin related exposure, and it’s stressed CRE and C&I portfolios.

These rating actions follow Huntington’s release of Q2 2009 results, which included a $182.5 million loss applicable to common shareholders. The loss reflected a $414 million provision for loan loss reserves, of which 19% was for reserve build, a $23.6 million FDIC special assessment fee, $7.3 million in securities losses, and a $4.2 million goodwill impairment charge related to the sale of a small payments-related business. Partially offsetting these headwinds was a 13 basis points (bps) widening of net interest margin (NIM) to 3.10%, a $67.4 million gain (pre-tax) on tender of trust preferred securities, a $31.4 million gain (pre-tax) related to the sale of Visa stock, and increased levels of service charges on deposit accounts, along with increases in trust services, electronic banking and bank owned life insurance fees, versus the prior quarter. The Company paid $57 million in dividends to preferred stock holders.

Huntington’s asset quality remains under significant stress. The bulk of the increase in nonaccrual loans was related to the CRE portfolio, most of which were retail projects, which were negatively impacted by lower retail sales and downward pressure on rents, and to a lesser extent C&I loans, mostly represented by exposures to contractors, auto suppliers, restaurants and home builder-related industries. DBRS notes that CRE loans represented the largest component (47% of total) of nonaccruals. Positively, during Q1 2009, Huntington restructured its Franklin exposure, by taking ownership of the underlying residential mortgages and control of collections strategies and processes, which gives it greater flexibility in working through this troubled exposure. At June 30, 2009, Huntington’s non-performing assets (NPAs) represented a high 5.18% of loans versus 4.46% at March 31, 2009. Meanwhile, net charge-offs (NCOs) increased to 3.43% of average loans, from 3.34% for the prior quarter. CRE and C&I represented 52% and 29% of total NCOs, respectively. DBRS comments that the Company’s reserves to NPAs were moderate at 46%. DBRS perceives that significant amounts of potential losses remain embedded in Huntington’s loan portfolio.

Positively, Huntington augmented its capital position, with $705 million in capital actions. During Q2 2009, the Company completed two discretionary equity issuances, which resulted in $192 million in proceeds, a $356.4 million common stock offering, and the conversion of preferred stock into $92 million of common stock. At June 30, 2009, the Company’s estimated Tier 1 and Total risk based capital ratios were solid at 11.86% and 14.95%, respectively. Additionally, Huntington’s tangible common equity ratio increased to 5.68% from 4.65% at March 31, 2009.

The Company’s liquidity profile remains acceptable and is underpinned by a core deposit base that accounts for approximately 81% (at March 31, 2009) of net loans. At June 30, 2009, Huntington’s securities portfolio represented 11.5% of total assets and consisted mostly of mortgage-backed securities. However, within the portfolio is a moderate amount of Alt-A mortgage-backed securities ($286 million book value), pooled trust preferred securities ($268 million), and private label CMOs ($603 million), which may likely experience future OTTI-related charges, given the declining economy. Access to the Federal Home Loan Bank and the Federal Reserve Discount Window round out Huntington’s liquidity profile.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.