NEW YORK — Huntington Bancshares Inc. laid out plans to raise $1.2 billion in stock and debt to pay back government rescue funds, a sign of confidence for the regional bank that may come at an expensive price for shareholders.

Huntington had said it wouldn't pay back the government until it had confidence in the economy and enough capital. Monday it said it had "gained sufficient comfort" due to a "relatively stable economy."

But in announcing a large sale of common stock, plus the sale of additional debt, Huntington also disappointed investors who had hoped the Ohio bank wouldn't need to raise quite so much capital to help pay back the $1.4 billion it got from the Troubled Asset Relief Program.

Monday's plan calls for the sale of $920 million in common stock and $300 million in debt. Huntington has a market capitalization of about $4.8 billion.

Shares fell 4.6% to $6.53 in recent trading, and led a decline across regional bank shares. The shares are still up about 79% year-to-date and 12% this month.

After the announcement, Fitch Ratings upgraded Huntington by a notch to BBB+ from BBB, putting it three steps above junk territory. Fitch's outlook on the company's ratings is stable. The firm also noted the bank's recent improved performance as contributing to the upgrade.

"For most of 2010, core profitability has trended positively, including growth in pre-provision net revenues compared to 2009," Fitch said. "Operating performance has also benefited from improved credit trends, which has reduced provisioning needs."

Regional banks remain the biggest holders of Tarp funds after large banks sprinted to pay back the loans to free themselves from increased regulation. Paybacks are expected to increase next year.

In total, the Treasury Department program, launched at the height of the banking crisis in 2008, still had about $49 billion outstanding in loans, to 593 banking institutions, according to a Dec. 3 report from Keefe Bruyette & Woods. The program initially lent out $205 billion to 707 institutions, and the government had so far earned about $21 billion from dividends and interest while posting losses of $2.6 billion, KBW said.

For Huntington, the equity sale alone was 66% of the Tarp funds it owed, when most regional banks had hoped to raise only about half the funds owed.

In contrast, First Horizon National Corp. said Monday it was selling at least $250 million in stock, along with $400 million in debt, to pay back the $867 million it has outstanding under Tarp and redeem another $103 million in debt. The Tennessee bank, therefore, is raising only 29% of its Tarp funds in new equity, highlighting its improved balance sheet and raising the possibility it could pay dividends sooner. That sent its shares up 4.7% to $11.02 in recent trading, bucking the trend in regional banks.

Jefferies analyst Ken Usdin said in a research report that Huntington's capital raise was slightly larger than expected but the stock gains this month and this year would help offset some dilution. On the positive side, Usdin said the higher capital levels as a result of the equity raise could lead Huntington to boost its dividend in the first half of 2011.

Standard & Poor's Equity Research analyst Erik Oja cut his recommendation on Huntington to hold from buy, estimating the offering would add 135 million shares, a 19% increase, though he viewed the freedom from Tarp positively.

Other Ohio and Midwest regional banks have hinted recently they also hoped to pay back Tarp funds.

KeyCorp's departing Chairman and Chief Executive Henry Meyer had said last month the Cleveland bank shouldn't have to raise the full $2.5 billion it owes the government. Meyer said the bank was in active discussions but couldn't confirm the funds would be repaid before his retirement on May 1.

KeyCorp shares were down 0.4% to $8.35 recently.

Meanwhile, Cincinnati's Fifth Third Bancorp wasn't expected to need to raise the full $3.41 billion it owes, one of the highest amounts outstanding on the government program. Its shares fell 1.2% to $14.39 in recent action.

SunTrust Banks Inc., Regions Financial Corp., Marshall & Ilsley Corp. and Zions Bancorp all owe more than $1 billion to the government and also fell in Monday trading.

SunTrust slipped 0.6%, Regions lost 1.4%, Marshall & Ilsley slid 0.4% and Zions lost 1.7%.

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