DBRS Comments on Q2 Earnings of Huntington Bancshares Inc. – Senior Debt at A (low) with Negative Ratings Trend

DBRS has today commented on the Q2 2008 earnings of Huntington Bancshares Inc. (Huntington or the Company) in light of continued turmoil in the residential mortgage and home construction sectors and a weakening economy. Huntington reported net income of $101 million, down from $127 million for Q1 2008, but up from $80 million in Q2 2007.

On a sequential quarter basis, the decrease in earnings was due to higher credit costs and, to a lesser degree, merger/restructuring expenses that were somewhat offset by an increase in net interest and non-interest income. Heightened levels of net interest income were spurred by widening net interest margin (NIM), which expanded by six basis points to 3.29%, and moderate loan growth. Non-interest income growth reflected increases in mortgage banking and deposit service-related revenues. From a year ago, net income for Q2 2008 benefited from the additional earnings generation related to the July 1, 2007, acquisition of Sky Financial Group, Inc. (Sky). Notwithstanding the Company’s strained credit fundamentals, Huntington’s ratings, with A (low) for senior obligations and a Negative trend, are unaffected by the Q2 results.

During Q2 2008, Huntington removed $762 million of its $1.2 billion Franklin Credit Management (Franklin) related restructured loans from non-performing asset (NPA) status. This significantly reduced Huntington’s NPAs, which shrunk to 2.41% of loans, down from 4.08% at March 31, 2008. That said, NPAs still remain outsized and well above the median of the Company’s similarly rated peers. During Q2 2008, Huntington’s non-accruals – the bulk of which are middle market commercial real estate loans – evidenced a material increase, particularly within the single family, home builder segment, as well as among commercial and industrial customers linked to home building activities. The Company’s Q2 2008 net charge-offs (NCOs) to average loans increased to 0.64%, up from 0.48% of loans for the first quarter. Although the majority of NCOs were consumer, most of the increase was related to commercial loans. DBRS believes that further erosion in Huntington’s asset quality is likely, given the unrelenting turmoil in the mortgage sector and a geographic footprint that includes the economically challenged eastern Michigan and northern Ohio markets. That said, Company management anticipates that 2008 NCOs will range between 0.65% and 0.70%.

DBRS comments that Huntington’s recent $569 million preferred stock issuance, in combination with retained earnings and a reduction in risk-weighted assets, boosted its Total and Tier 1 risk-based capital ratios to 12.31% and 9.03%, respectively, from 10.87% and 7.56%, respectively, at March 31, 2008. The additional capital should substantially offset the potential loss content of Huntington’s stressed Franklin exposure. DBRS notes that Huntington’s tangible common equity-to-tangible asset ratio continues to lie in the bottom quartile of its similarly rated peers. Huntington’s liquidity remains adequate, as core deposits account for roughly 75% of net loans at March 31, 2008, combined with ample unused secured borrowing capacity from the Federal Home Loan Bank.

On May 23, 2008, DBRS confirmed all of Huntington’s ratings and changed the ratings trend to Negative. The Negative ratings trend indicates the potential for future negative rating actions, which could be triggered by material asset quality erosion, lack of consistent and sustainable revenue generation or the invasion of capital. The Negative trend also reflects DBRS’s concern over Huntington’s performance metrics, which have migrated to the bottom of its rated peer group over the past two years. Conversely, the restoration of Huntington’s asset quality and an improvement in core profitability could result in a return to Stable trend.

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