Huntington Bancshares ( HBAN) surged 11% after the Midwest bank seized collateral on one of its most troubled commercial loan relationships. The Columbus, Ohio-based bank said Wednesday that it has restructured its relationship with Franklin Credit Management and has "eliminated" $615 million of existing non-accrual commercial loans. It also eliminated $130 million in allowance for credit losses associated with Franklin, it said. Huntington will take control of 30,000 first- and second-lien mortgages worth roughly $494 million and $80 million in other real estate owned assets that previously served as collateral to the Franklin Commercial Credit. The move will add 29 basis points to Huntington's tangible common equity ratio and results in a one-time, $160 million after-tax benefit, it said. Huntington's tangible common equity was 4.04% at the end of the fourth quarter, according to Fox-Pitt Kelton Cochran Caronia Waller analysts. "This restructuring is a very positive development for Huntington's shareholders," Huntington Chairman and CEO Stephen Steinour said in a statement. "Importantly, we can accelerate the resolution and recovery of the value embedded in these assets as this relieves Franklin from the ownership of these assets. In addition, Franklin can devote more of their attention to developing their servicing business." Huntington also retains the ability to be repaid out of a significant percentage of future profit generated from Franklin's ongoing loan servicing business activities, it said. The company is in the process of refinancing roughly $25 million worth of loans, it said. It expects to dispose the other real-estate owned assets over the next several quarters.
"Unfortunately, the restructuring does not seem to do much to reduce
Huntington's actual exposure to deteriorating nonconforming mortgage loans in an environment characterized by falling home prices and rising unemployment," Sandler O'Neill & Partners analyst Scott Siefers writes in an initial note regarding the restructuring. "The main difference is that now the individual mortgages are directly on Huntington's balance sheet as opposed to one step removed in the form of collateral. Time, coupled with the depth of the current housing crisis, will tell how much of a burden these assets prove to be." Siefers also notes that while the transaction does improve Huntington's tangible common equity ratio, the improvement comes from the creation of a deferred tax asset. "Unfortunately, many investors are hesitant to include a deferred tax asset in their calculation of TCE/TA," he writes. "So it is not yet clear whether Huntington's valuation will receive the benefit of the TCE boost from the creation of this asset." Shares recently were up 10.8% to $1.84.