HUNTINGTON BANCSHARES INC - 10-Q Summary (Q3 2008)
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2008. Huntington Bancshares Incorporated is a multi-state diversified financial holding company headquartered in Columbus, Ohio, operating primarily in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. The company provides commercial and consumer banking, mortgage banking, auto financing, and investment management services. The reporting period is heavily influenced by the ongoing financial crisis, the 2007 acquisition of Sky Financial, and the restructuring of the Franklin Credit Management relationship.
Key Financial Metrics
| Metric | Q3 2008 | Q2 2008 | Q3 2007 |
|---|---|---|---|
| Net Income | $75.1 million | $101.4 million | $138.2 million |
| Diluted EPS | $0.17 | $0.25 | $0.38 |
| Net Interest Income (FTE) | $394.1 million | $395.5 million | $415.3 million |
| Net Interest Margin (FTE) | 3.29% | 3.29% | 3.52% |
| Provision for Credit Losses | $125.4 million | $120.8 million | $42.0 million |
| Non-Interest Income | $167.9 million | $236.4 million | $204.7 million |
| Non-Interest Expense | $339.0 million | $377.8 million | $385.6 million |
| Efficiency Ratio | 50.3% | 56.9% | 57.7% |
| Total Assets | $54.7 billion | $55.5 billion | $55.3 billion |
| Total Loans & Leases | $41.2 billion | $41.0 billion | $40.0 billion |
| Allowance for Credit Losses (ACL) | $782.4 million (1.90% of loans) | $740.7 million (1.80% of loans) | $513.0 million (1.28% of loans) |
| Tangible Equity Ratio | 5.98% | 5.90% | 5.70% |
Material Changes vs. Prior Periods
- Earnings Decline: Net income decreased 26% from Q2 2008 and 46% from Q3 2007. The decline was driven by a significant increase in the provision for credit losses and a sharp drop in non-interest income due to market-related losses.
- Credit Quality Deterioration: Nonaccrual loans (NALs) increased by $50.9 million (10%) to $585.9 million, primarily in commercial real estate (CRE) and commercial and industrial (C&I) portfolios linked to residential development. Net charge-offs for the quarter were $83.8 million, an annualized 0.82% of average loans.
- Securities Impairment: The company recognized an other-than-temporary impairment (OTTI) of $76.6 million in its Alt-A mortgage loan-backed portfolio. Total unrealized losses on asset-backed securities reached $209.2 million.
- Non-Interest Income Volatility: Non-interest income fell 29% from the prior quarter, largely due to a $58.5 million net charge from significant items, including securities losses and mortgage servicing rights (MSR) hedging results.
- Expense Management: Non-interest expense decreased 10% from the prior quarter, aided by reduced merger/restructuring costs and significant item adjustments, resulting in an improved efficiency ratio of 50.3%.
Guidance, Outlook, and Risks
- TARP Participation: On October 27, 2008, the company announced preliminary approval to participate in the Treasury's Troubled Asset Relief Program (TARP). Huntington is approved for approximately $1.4 billion in capital in the form of non-voting cumulative preferred stock (5% dividend for 5 years, then 9%) and warrants. This is expected to increase capital ratios by approximately three percentage points.
- Economic Outlook: Management expects the economy to remain under stress with no improvement seen until well into 2009. Credit quality performance is expected to remain challenged, particularly in the single-family home builder segment.
- FDIC Assessments: The company anticipates a full-year 2009 deposit insurance premium expense increase of approximately $44 million compared to 2008, following the consumption of a one-time assessment credit and proposed rate hikes.
- Capital Position: Despite the earnings decline, the company maintains strong capital levels. The tangible equity ratio improved to 5.98%, near the targeted range of 6.00%-6.25%. Liquidity is described as strong at both the parent and bank levels.
- Franklin Relationship: The restructured loan relationship with Franklin Credit Management continues to perform with interest accruing and cash flows exceeding debt service requirements. Exposure declined to $1.095 billion.
Investor Verification Checklist
- TARP Terms: Verify the final closing terms of the $1.4 billion TARP capital injection, including the specific warrant exercise price and dilution impact on common shareholders.
- Alt-A Portfolio Exposure: Review the remaining exposure to Alt-A mortgage-backed securities and the potential for further OTTI charges given the $209.2 million in unrealized losses.
- CRE Concentration: Assess the specific exposure to single-family home builders within the Commercial Real Estate portfolio, which drove a significant portion of the increase in nonaccrual loans.
- FDIC Cost Impact: Confirm the final impact of the proposed FDIC assessment rate increases on 2009 profitability.
- Franklin Cash Flows: Monitor the cash flow performance of the Franklin restructuring to ensure it continues to cover debt service requirements as the economic environment weakens.