Huntington Bancshares CEO Sees Upside From 'Toxic' Loans
April 01 2009 - 2:37PM
Dow Jones News
Huntington Bancshares Inc. (HBAN) decided to take on its balance
sheet exactly the kinds of loans other bankers are expected to
sell.
Huntington's Chairman and Chief Executive Stephen Steinour said
a deal announced Tuesday night to take on troubled mortgage loans
from Franklin Credit Management Corp. (FCMC), a mortgage company,
will benefit his bank. Huntington, of Columbus, Ohio, got the loans
at what it calls a discount to face value, and it will get some of
the profits Franklin expected to generate.
Getting the loans dissolves a loan Huntington made to Franklin
that had long created headaches. Steinour said Huntington also
benefits from the cash flow of the mortgages and can directly help
delinquent borrowers working out their debt.
It's not often these days that the CEO of a sizable bank answers
a "How are you?" with an emphatic, "I am great," as Steinour did in
an interview with Dow Jones Newswires.
Investors apparently share his sentiment, sending Huntington's
shares up about 14%, to over $1.90, in a rising market.
Huntington said it would take on $494 million in loans
previously held by Franklin, resolving a $615 million in loans
Huntington made to Franklin. Franklin was not making the required
payments on the loans from Huntington.
Steinour's enthusiasm for the deal illustrates that what might
be toxic waste to some could be attractive assets to others. Of the
$427 million loans, only $127 million are current but even those
were written down by about 18%. The loans are so-called Alt-A
mortgages, made to borrowers with less documentation than Fannie
Mae (FNM) and Freddie Mac (FRE) standards require. However, the
portfolio had an average FICO score of about 700 at origination,
well above subprime levels.
Huntington's move illustrates a problem facing the Treasury
Department's Public-Private Investment Program. Bankers who sell
the toxic assets would lose the cash flow the mortgages might be
generating, such as partial payments from borrowers. And bankers
would lose out if the loans eventually rise in value when the
economy improves. Such concerns might, for bankers, outweigh the
benefit of ridding of troubled loans that hurt capital and
earnings.
During a conference call with investors, Steinour said his bank
"would consider" participating in PPIP, but "we need to understand
that program a lot better than at least I do today."
Steinour said in the interview he feels no pressure from
shareholders, the public, or regulators to rid the bank of troubled
loans. And he reiterated what several bankers said last week: He
would only sell at a price that would reflect the potential upside
in the loans.
Taking on the Franklin loans will also help Huntington's
capital, in part because it can reverse the $130 million it set
aside for the potential loss of its loan to Franklin. The
transaction would add 26 basis points to tangible common equity,
raising it to about 4.6%, but it slices 8 cents per share off first
quarter earnings.
According to Thomson Reuters, analysts on average expect
Huntington to report a first quarter loss of 7 cents.
Analyst Andrew Marquardt of Fox-Pitt Kelton Cochran Caronia
Waller wrote in a research report, "Capital levels still look
strained when we consider remaining credit costs and pre-tax
pre-provision earnings power."
The relationship between Huntington and Franklin was
"fundamentally misaligned," Steinour said. For example, Huntington
sees a benefit from mortgage borrowers prepaying their loan and
would waive the prepayment fee, something that was not in
Franklin's economic interest.
Indeed, Steinour said Franklin was all but insolvent; the loans
could have ended up on Huntington's balance sheet anyway. But in
restructuring Franklin rather than letting it collapse, Huntington
guaranteed itself a slice of the mortgage servicer's profit; 70% of
which will be shared by three banks that extended loans to
Franklin. Franklin has not originated or bought any loans since
late 2007, but it is planing to service loans other banks might
sell, including transactions under the Treasury's PPIP.
Franklin did not immediately return a phone call seeking
comment.
-By Matthias Rieker, Dow Jones Newswires; 201-938-5936;
matthias.rieker@dowjones.com