HUNTINGTON BANCSHARES INC - 10-Q Summary (Q1 2009)
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2009. Huntington Bancshares Incorporated is a multi-state diversified financial holding company headquartered in Columbus, Ohio, operating through its bank subsidiary, The Huntington National Bank. The company provides commercial and consumer banking, mortgage banking, automobile financing, and investment management services across Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky.
Key Financial Metrics
- Net Loss: $2,433.2 million ($6.79 per diluted share), compared to a net loss of $417.3 million in Q4 2008 and net income of $127.1 million in Q1 2008.
- Revenue (FTE): Total revenue was $580.2 million, a decrease from $618.1 million in Q1 2008.
- Net Interest Income (FTE): $341.1 million, down 10% from the prior quarter due to a 21 basis point decline in net interest margin to 2.97%.
- Provision for Credit Losses: $291.8 million, significantly lower than the $722.6 million recorded in Q4 2008 (which included a large Franklin-related charge).
- Noninterest Income: $239.1 million, up $172.0 million from the prior quarter, driven by improved mortgage banking income and securities gains.
- Noninterest Expense: $2,969.8 million, heavily inflated by a $2,602.7 million goodwill impairment charge. Excluding this charge, expenses decreased $23 million from the prior quarter.
- Capital Ratios: Tangible Common Equity (TCE) ratio improved to 4.65% from 4.04% in Q4 2008. The company remains "well-capitalized" under regulatory standards.
- Liquidity: Cash and due from banks increased to $2.3 billion. Core deposits grew by $1.2 billion compared to the prior quarter.
Material Changes vs. Prior Period
- Goodwill Impairment: A noncash charge of $2,602.7 million ($7.09 per share) was recorded due to a 78% decline in stock price, triggering an interim impairment test. Goodwill balance dropped from $3.1 billion to $0.5 billion.
- Franklin Restructuring: The company restructured its relationship with Franklin Credit Management. This resulted in a $159.9 million nonrecurring tax benefit ($0.44 per share) and the replacement of a $650 million nonaccrual commercial loan with $494 million of fair value mortgage loans and $80 million of OREO properties.
- Credit Quality: Nonperforming assets (NPAs) increased to $1.78 billion (4.46% of related assets) from $1.64 billion in Q4 2008. Nonaccrual loans (NALs) rose to $1.55 billion. Excluding Franklin impacts, non-Franklin NCOs increased to $213.2 million from $137.3 million in the prior quarter.
- Dividend Reduction: The quarterly common stock dividend was cut to $0.01 per share to preserve capital.
Guidance, Outlook, and Risks
- Outlook: Management expects the economy to remain under stress with no improvement seen through the end of 2009. NPAs and NCOs are expected to remain elevated, particularly in Commercial & Industrial (C&I) and Commercial Real Estate (CRE) portfolios.
- Capital Strategy: The company is actively managing capital levels, having converted $114.1 million of Series A Preferred Stock to common stock and sold assets to shrink the balance sheet. They may raise additional capital if required by regulators or market conditions.
- Risks:
- Credit Risk: Continued deterioration in real estate values and higher unemployment rates in Midwest markets.
- Regulatory Risk: Potential requirements to raise additional capital under the Capital Assistance Program (CAP) or stress tests.
- Franklin Contingency: While the restructuring provides flexibility, the deferred tax asset recognized could be challenged.
- Market Risk: Sensitivity to interest rate changes and valuation of investment securities (Alt-A, CMOs).
Investor Verification Checklist
- Verify the adequacy of the Allowance for Loan and Lease Losses (ALLL) given the rising nonaccrual loans in the CRE and C&I portfolios.
- Monitor the impact of the Franklin restructuring on future cash flows and the potential for additional credit losses on the acquired mortgage assets.
- Assess the company's ability to maintain its "well-capitalized" status without further dilutive equity issuances.
- Track the net interest margin trend as the company shifts its balance sheet composition to improve liquidity.
- Review the status of the $159.9 million deferred tax asset related to the Franklin transaction for potential future adjustments.