DBRS Comments on Q3 2009 Results of Huntington Bancshares Inc. – Senior at BBB, Negative Trend

DBRS has today commented that the ratings of Huntington Bancshares Inc. (Huntington or the Company), including its Issuer & Senior Debt rating of BBB are unaffected by the Company’s Q3 2009 results. All ratings were placed on Negative trend on July 28, 2009.

In light of the severe economic downturn, Huntington continues to struggle with deteriorating asset quality, steep credit costs and lack of profitability. Indeed, Huntington reported a net loss available to common shareholders of $195 million for the quarter, worse than a net loss of $183 million for the prior quarter and net income of $63 million for Q3 2008.

On a sequential quarterly basis, Huntington’s Q3 2009 loss reflected material increases in provisions for loan loss reserves and noninterest expenses, partially offset by a modest increase in revenues and a significant decrease in dividend payment on preferred shares. During Q3 2009, the Company’s provisions for loan loss reserves totaled $475 million, which represents roughly 2 times its quarterly pre-tax pre-provision income and reflects the significant gap that needs to be bridged. Higher revenues reflected a moderate increase in the company’s net interest income, driven by a 10 basis points (bps) widening of net interest margin (NIM) to 3.20%. Noninterest income contracted somewhat, mostly reflecting a substantial decline in other revenues and mortgage banking income, partially offset by higher service charges on deposits and electronic banking fees. The decline in other income reflected the Company’s Q2 2009 $31 million gain on the sale of Visa stock, somewhat offset by the Q3 2009 $23 million benefit representing the change in fair value of Huntington’s derivatives that did not qualify for hedge accounting. The material increase in noninterest expenses reflected higher other expenses and OREO and foreclosure related expenses. The increase in other expenses, reflected the reduction of the previous quarters’ expense by a $67 million debt redemption related gain, somewhat offset by the Company’s Q2 2009 $24 million FDIC special assessment fee.

Huntington’s asset quality remains under significant stress, as evidenced by its steepening level of nonperforming assets (NPAs) and higher net charge-offs (NCOs). Specifically, at September 30, 2009, NPAs represented a high 6.26% of loans versus 5.18% at June 30, 2009. Meanwhile, NCOs increased to a high 3.76% of average loans, from 3.43% for the prior quarter. DBRS comments that the sizeable linked-quarter increase in non-performing assets, in part reflects Huntington’s aggressive approach to troubled loans, which is focused on expeditiously identifying, and resolving its troubled exposures. Indeed, roughly 55% of the Q3 2009 commercial loans placed on nonaccrual status were less than thirty days past due.

The bulk of Huntington’s Q3 2009 increase in nonaccruals was related to commercial real estate (CRE) and commercial and industrial loans (C&I). The heightened CRE nonaccruals reflect the steep decline in the housing market and pressured retail sales. Meanwhile, the increase in C&I nonaccruals reflects economic stress on the home building industry, contractors and automotive suppliers. The Company’s Q3 2009 NCOs were primarily from CRE loans and to a lesser extent C&I and residential mortgages. DBRS comments that the Company’s reserves to NPAs were moderate at 44%. DBRS perceives that significant amounts of potential losses remain embedded in Huntington’s loan portfolio and notes that sustained steepening levels of asset quality erosion will likely pressure ratings.

The Company’s revenues were positively influenced by the 10 bps widening of NIM to 3.20%. The higher NIM reflected solid core deposit growth, lower deposit pricing and flat average earning assets.

Positively, and since the beginning of the year, Huntington augmented its Tier 1 common equity position by $1.6 billion, the bulk of which came from common stock offerings, discretionary equity issuances, a gain related to the Franklin restructuring and the conversion of preferred stock to common stock. DBRS notes that the sizeable increase in capital provides additional loss absorption capacity. At September 30, 2009, the Company’s Tier 1 and Total risk based capital ratios were solid at 13.04% and 16.23%, respectively, up from 11.85% and 14.94%, at June 30, 2009. Additionally, Huntington’s tangible common equity ratio increased to 6.46% from 5.68% at June 30, 2009.

The Company’s liquidity profile is solid and underpinned by a core deposit base that accounts for approximately 96% (at September 30, 2009) of net loans. At September 30, 2009, Huntington’s securities portfolio represented 16% of total assets and consisted of mostly good quality mortgage-backed securities. However, there is the potential for OTTI related charges over the intermediate-term, as the Company holds $562 million (amortized cost) of private label CMOs with a fair value of $475 million, $253 million (amortized cost) of pooled trust preferred securities, with a fair value of $118 million, and $186 million (amortized cost) of Alt-A mortgage-backed securities, with a fair value of $166 million. Rounding out its liquidity profile, the Company has access to the Federal Home Loan Bank and the Federal Reserve Discount Window.

Note:
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.