Huntington Bancshares Inc.'s fourth-quarter credit cleanup demonstrates that a review of credit quality and loan standards over the past two years is making progress, its chief said.
In an interview Tuesday, Thomas E. Hoaglin, Huntington's chairman, chief executive, and president, said that the $51 million in charges announced Monday - which included new losses from selling or writing off troubled corporate loans - also indicate that the company has more work to do.
In 2001, Huntington hired a new head of loan review to scour the portfolio for loan troubles, then assembled a new loan workout group in mid-2002 to sell or refinance loans or negotiate new payment schedules to bring loans back into performing status.
"We're seeing the real positive results of those efforts," Mr. Hoaglin said.
But Mr. Hoaglin, who has been leading the turnaround for the past year, said the job is not yet finished. "I'd say that for the most part, what is left [in non-performing asset status] is workable," he said. "That doesn't mean to say that resolution would come quickly. … We do believe there is opportunity in the remaining $137 million for improvement, either by helping companies back to good health, refinancing, or long-term workouts. We feel good about our ability to keep making inroads."
On Monday, Huntington said it will take a fourth-quarter charge of $21 million to cover losses incurred when it sold $47 million of nonperforming corporate loans during the quarter. The Columbus, Ohio, company also said it is taking a $30 million charge to write off 100% of a loan to an unnamed health care finance company. Huntington had disclosed that problem in a securities filing Nov. 13, saying it put the loan on nonperforming status because of "irregularities in the public securitizations" of the company.
Huntington said it would pay for the losses with existing reserves, so the cleanup will have no effect on fourth-quarter earnings. And analysts currently expect the company to earn 35 cents a share, up from 30 cents a year earlier, when it announces fourth-quarter and full-year earnings Jan. 16.
Earlier on Tuesday in a conference call with analysts, Mr. Hoaglin said the $47 million in loans sold represented credits to 22 customers spread out geographically across the company's Midwest territory, primarily in manufacturing, services, and commercial real estate. About $14 million of the loans were national syndicated loans, he said.
The actions will raise fourth-quarter chargeoffs to $95 million, compared to $44 million in the third quarter and higher than what most analysts had expected. But Mr. Hoaglin see signs of progress overall in another effect of the write-offs: a further reduction in nonperforming assets.
Huntington said Monday, that fourth-quarter nonperforming assets would total $137 million, down $77 million from the third quarter. Besides the loans written off or sold, the lower figure includes another $30 million in loans that were resolved during the quarter.
Altogether, "That's a pretty big decline in a quarter period," Mr. Hoaglin said. "We had some modest declines over the previous couple of quarters."
Meanwhile, the writeoffs and loan sales improved Huntington's ratio of reserves to nonperforming assets, from 191% on Sept. 30 to 269% at yearend, which ranks the company third among peers.
However, Monday's actions cut Huntington's ratio of loan-loss reserves to loans from 2% on Sept. 30 to 1.76% at yearend, which worries some analysts.
"After building the loan reserve over the past two years…the company is diluting the reserves at a time when I think the momentum of an economic recovery is still uncertain," said Steve Alexopoulos, an analyst at National Bank of Canada's Putnam Lovell Securities Inc.
Mr. Hoaglin told analysts Tuesday that he is "very comfortable" with the 1.76% ratio because the quality of the remaining portfolio has improved considerably this year as a result of loan sales and improved underwriting.
The reserve-to-loan ratio had dipped as low as 1.45% in March 2001, but rose to 2%, which ranked third among the midsized regional banks that Huntington compares itself to. At 1.76%, Huntington slips only to fifth in that group, Mr. Hoaglin said.
Mr. Alexopoulos said losses from the collection of loans it sold as well as the bad loan to the health-care company were "on the high side." The $21 million chargeoff equaled about 45% of the loans sold, while the health-care loan was a total loss, he noted.
Mr. Alexopoulos, who rates Huntington's stock "underperform," also said he is "less comfortable" with the high proportion of auto loans in Huntington's portfolio (about 37%), which tend to carry heavier risk.
Mr. Hoaglin said that over the past 18 months, the company has been more careful about writing auto loans and leases, as well as home loans. For example, credit scores and loan-to-value ratios for auto loans and leases have risen. He thinks the company's reserves remain high enough to cover "a much stronger portfolio."
