Huntington Loss Driven by Goodwill Charge

Huntington Bancshares Inc. ( HBAN) on Tuesday reported a $2.4 billion first-quarter net loss driven by a big charge, but shares rallied anyway along with the wider market.

Huntington's noncash goodwill impairment charge of $2.6 billion stems from its purchase of Sky Financial Group and Unizan Financial Corp. The first quarter results compared to a fourth-quarter net loss of $417 million and net income of $127 million in the first quarter of 2008.

After $59 million in dividends paid to preferred shareholders during the quarter, the net loss available to common shareholders was $2.5 billion, or $6.79 per share. Excluding the charge, Huntington lost 6 cents a share, which compared to the Thomson Reuters analyst consensus estimate of a 10 cent-per-share loss for the first quarter. Analyst estimates typically exclude one-time charges like the goodwill writedown.

Shares fell as much as 26% in early trading, but more recently were rebounding with the wider market and were up 2.9% to $3.20.

In addition to the $1.3 billion in preferred stock purchased by the government through the Troubled Assets Relief Program in November, Huntington Bancshares had $455 million in non-cumulative convertible preferred shares outstanding (Series A), with a coupon of 8.5%, issued in April 2008. This was a reduction from $569 million at the end of 2008, since 114,109 shares of the Series A preferred were converted to common shares during the first quarter.

Excluding the goodwill impairment charges, the Columbus, Ohio bank holding company reported first-quarter net income, before taxes and provisions for loan losses, of $224.6 million, up from $25 million in the fourth quarter.

Like most holding companies that received TARP money, Huntington's capital ratios were strong, with an estimated Tier 1 capital ratio of 11.03% and a total risk-based capital ratio of 14.19% as of March 31. For banks, these ratios generally need to be at least 6% and 10% for an institution to be considered well-capitalized.

Here's a quick snapshot of Huntington's asset quality numbers:

Huntington Bankshares Inc.
- Asset Quality ($millions)
Huntington Bancshares Inc.

Net charge-offs (actual loan losses) totaled $341 million for the first quarter, down from $561 million in the fourth quarter and up from $48 million in March 2008. This mainly reflected the restructuring of the company's credit relationship with Franklin Credit Management Corp., a specialist in servicing troubled mortgage loans.

In the fourth quarter, Huntington charged-off $423 million of its $1.1 billion in loans outstanding to Franklin. The loans to Franklin were secured by about 30,000 residential mortgages, as well as repossessed real estate. At the end of March, Huntington restructured its relationship with Franklin, wiping out most of the remaining loans to the mortgage servicer, while taking over $494 million in mortgage loans and $80 million in repossessed real estate. This resulted in an after-tax benefit of $160 million.

Accounting for the acquired mortgages "at fair value" is, in essence an "embedded reserve," which means that if the loans were written down aggressively enough, Huntington won't have to make significant provisions for loan loss reserves for the acquired loans.

CEO Stephen Steinour called the transaction "a very positive development for Huntington's shareholders," since it would allow Huntington to dispose of the repossessed real estate itself, while also having flexibility in resolving nonperforming mortgage loans in a way that maximized the value ultimately recovered by the company.

Huntington's provision for loan losses in the first quarter was less than the amount of its net loan charge-offs, however, reserves appeared more than adequate, since they covered 104.47% of nonperforming loans as of March. 31.

Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.

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