Huntington Bancshares Inc. unveiled a restructuring Tuesday that its chief executive said should cure its biggest headache: an unprofitable relationship with a troubled Jersey City subprime lender.
Analysts applauded the move, which essentially quarantined the $54 billion-asset Columbus, Ohio, company's remaining exposure to Franklin Credit Management Corp., but they said Huntington still has a host of other issues to address, including potentially mounting loan losses that could further hamper its financial strength.
Stephen Steinour, who took over Huntington in January, said the restructuring has positioned it to tackle other problems. It eliminated $615 million of commercial loans owed to Franklin.
Huntington wiped out the loans by bringing their collateral — about $575 million of home mortgages and foreclosed properties — on to its balance sheet.
Analysts had been expecting the restructuring, which eliminated $130 million of loan-loss provisions and $249 million of nonaccrual loans.
It also created a $160 million deferred tax asset and added 29 basis points to Huntington's tangible common equity ratio, bringing it to the still relatively low figure of about 4.59%.
Steinour said Huntington plans to sell off or refinance the Franklin assets, including 30,000 home mortgages and $80 million of foreclosed real estate.
"Initially, we are going to work them out," he said. "If a market develops," perhaps through the Treasury Department's Public-Private Investment Program, "we may sell strips of them."
Huntington has not severed its ties with Franklin completely. Franklin will continue to service Huntington's new mortgages and properties.
In addition, Huntington has a deal to take up to 70% of the profits Franklin generates by offering its loan servicing business to other parties.
Franklin has been a drag on Huntington's performance since it inherited the relationship from the 2007 acquisition of Sky Financial Group. That purchase left Huntington on the hook for about $1.5 billion of loans to Franklin.
As the housing market collapsed over the last two years, Huntington wrote down the value of those loans by about 60%. It charged off $423.3 million of Franklin loans in the fourth quarter alone.
Jeff Davis, director of research at Howe Barnes Hoefer & Arnett Inc., said bringing the loans on to the balance sheet should make it easier for Huntington to sell them. "These are mortgage loans that one would assume would be a likely candidate to sell into that program."
Andrew Marquardt, an analyst with Fox-Pitt Kelton Cochran Caronia Waller LLC, said these types of mortgages and foreclosed properties are worth virtually nothing in the secondary market.
So far Huntington has marked the Franklin assets down to about 25 cents to 30 cents of their face value, he said. "But Huntington always has the option of holding these and working them out, which they probably will."
Investors applauded the restructuring. Huntington's shares rose 24 cents Wednesday, to $1.90.
However, analysts said the restructuring does not mitigate the main risks hovering over the company — particularly the possibility of more loan losses.
Huntington's $41 billion loan portfolio is highly sensitive to changes in the troubled Ohio and Michigan markets, where the company does most of its commercial banking. Last year its nonaccrual loans not related to Franklin rose 166%, to $851.9 million at yearend.
"Outside of Franklin Credit, their loan book isn't terrible. It's probably better than your average Midwest bank," Marquardt said. "The problem is that everything is getting worse. They are going to have deteriorating credit in the core book, just like everybody else."
Steinour said his company, which received $1.4 billion of federal aid in November, has no plans to raise more capital from the government or other sources.
