What drove the sharp decline in Huntington's 2007 earnings?

The main driver was the credit deterioration of the Franklin Credit Management relationship, acquired with Sky Financial. The restructuring produced a $423.6 million pretax negative impact. The provision for credit losses rose to $643.6 million from $65.2 million in 2006, and net income fell to $75.2 million from $461.2 million.

How large is Huntington's exposure to Franklin Credit Management?

At December 31, 2007, following the troubled debt restructuring, Huntington had $1.2 billion of loans to Franklin, net of amounts charged off. An additional $0.3 billion of loans were held by other participating banks with no recourse to Huntington. The restructuring included $280 million of debt forgiveness charged off by Huntington, plus a $117 million charge-off on a fixed-rate term loan.

How did the Sky Financial acquisition affect the balance sheet?

Sky Financial, acquired July 1, 2007, had assets of $16.8 billion, including $13.3 billion of loans, and total deposits of $12.9 billion at closing. Total assets grew to $54.70 billion at year-end 2007 from $35.33 billion, and goodwill increased to $3.06 billion. The filing reports net merger costs of $85.1 million for 2007.

Is Huntington's capital position adequate despite the losses?

The filing states that regulatory capital ratios were in excess of well-capitalized levels throughout 2007. The Tier 1 leverage ratio was 6.77% and the Tier 1 risk-based capital ratio was 7.51%, both down from 2006. Shareholders' equity rose to $5.95 billion, mostly merger-related. Management said it believes sufficient liquidity exists to meet the funding needs of the Bank and parent company.

What legal and rating risks does the filing disclose?

Two putative securities class actions, a shareholder derivative action, and an ERISA class action were filed between December 2007 and February 2008, related to Franklin and related disclosures. Management said it cannot yet assess the probability of an adverse outcome, but believes the eventual outcome will not have a material adverse effect on consolidated financial position or results of operations. Moody's confirmed Huntington's ratings on February 22, 2008, but the outlook remains negative.

HBAN 10-K FY2007 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 26, 2008. Cited figures are marked; the original filing is the authoritative source.

Huntington Bancshares Incorporated, a multi-state diversified financial holding company headquartered in Columbus, Ohio, reported a sharply lower 2007 result.

Net income fell to $75.2 million^a, or $0.25 per diluted share, compared with $461.2 million, or $1.92 per share, in 2006. The decline was driven primarily by the Franklin Credit Management relationship, acquired with Sky Financial, which produced a $423.6 million pretax ($275.4 million after-tax, $0.91 per share) negative impact after a December 28, 2007 restructuring. The provision for credit losses rose to $643.6 million from $65.2 million in 2006.

Total assets reached $54.70 billion^b at December 31, 2007, up from $35.33 billion, following the July 1, 2007 Sky Financial acquisition, which was valued at approximately $3.5 billion. Beyond Franklin, the filing describes broader credit deterioration in the Midwest, particularly eastern Michigan and northern Ohio, and within residential real estate development. Nonperforming assets were $1.66 billion, or 4.13% of related assets, compared with $193.6 million, or 0.74%, a year earlier.

Restructured Franklin loans of $1.2 billion^c are classified as nonperforming but were current and accruing. Expense control was a bright spot, with non-merger-related non-interest expense declining $47.5 million, or 4%. Shareholders' equity rose to $5.95 billion, mostly merger-related, and the Tier 1 risk-based capital ratio was 7.51%.

The Bank remained well capitalized. The filing also notes that Moody's, S&P and Fitch moved outlooks to negative in November 2007, that Fitch downgraded senior unsecured and subordinated notes by one grade, and that Moody's confirmed ratings on February 22, 2008.

Several putative class actions and a shareholder derivative action relate to the Franklin transactions and disclosures. Management states it does not expect them to have a material adverse effect, though the outcome cannot yet be assessed.

02—Key points

Key Highlights

Net income of $75.2 million, or $0.25 per diluted share, versus $461.2 million, or $1.92 per share, in 2006.
Franklin Credit relationship restructuring reduced 2007 performance by $423.6 million pretax ($0.91 per share after tax), with a $405.8 million provision for credit losses.
Sky Financial acquisition closed July 1, 2007, at a value of approximately $3.5 billion, lifting total assets to $54.70 billion and loans to $40.05 billion.
Nonperforming assets rose to $1.66 billion (4.13% of related assets) from $193.6 million (0.74%), including $1.2 billion of accruing restructured Franklin loans.
Net interest margin improved to 3.36% from 3.29%, and non-merger-related non-interest expense fell $47.5 million, or 4%.
Credit ratings outlooks were revised to negative by all three major agencies, and Fitch downgraded senior and subordinated notes by one grade.
Tier 1 risk-based capital ratio of 7.51% and total risk-based capital ratio of 10.85% at December 31, 2007, with the Bank well capitalized.

03—Questions

Frequently Asked Questions

What drove the sharp decline in Huntington's 2007 earnings?
The main driver was the credit deterioration of the Franklin Credit Management relationship, acquired with Sky Financial. The restructuring produced a $423.6 million pretax negative impact. The provision for credit losses rose to $643.6 million from $65.2 million in 2006, and net income fell to $75.2 million from $461.2 million.
How large is Huntington's exposure to Franklin Credit Management?
At December 31, 2007, following the troubled debt restructuring, Huntington had $1.2 billion of loans to Franklin, net of amounts charged off. An additional $0.3 billion of loans were held by other participating banks with no recourse to Huntington. The restructuring included $280 million of debt forgiveness charged off by Huntington, plus a $117 million charge-off on a fixed-rate term loan.
How did the Sky Financial acquisition affect the balance sheet?
Sky Financial, acquired July 1, 2007, had assets of $16.8 billion, including $13.3 billion of loans, and total deposits of $12.9 billion at closing. Total assets grew to $54.70 billion at year-end 2007 from $35.33 billion, and goodwill increased to $3.06 billion. The filing reports net merger costs of $85.1 million for 2007.
Is Huntington's capital position adequate despite the losses?
The filing states that regulatory capital ratios were in excess of well-capitalized levels throughout 2007. The Tier 1 leverage ratio was 6.77% and the Tier 1 risk-based capital ratio was 7.51%, both down from 2006. Shareholders' equity rose to $5.95 billion, mostly merger-related. Management said it believes sufficient liquidity exists to meet the funding needs of the Bank and parent company.
What legal and rating risks does the filing disclose?
Two putative securities class actions, a shareholder derivative action, and an ERISA class action were filed between December 2007 and February 2008, related to Franklin and related disclosures. Management said it cannot yet assess the probability of an adverse outcome, but believes the eventual outcome will not have a material adverse effect on consolidated financial position or results of operations. Moody's confirmed Huntington's ratings on February 22, 2008, but the outlook remains negative.

04—Continue

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