Bank chief sees hope: Huntington exec talks of industry crisis's past and present, plus future

Nov 02, 2008 (The Columbus Dispatch - McClatchy-Tribune Information Services via COMTEX) -- HBAN | Quote | Chart | News | PowerRating -- Huntington Bancshares boss Thomas Hoaglin said in March that "banking is pretty challenged right now."

"Challenged" turned out to be an understatement. The past several months have been filled with volatility and carnage -- 17 banks have failed this year -- and a $700 billion government rescue package might not stave off a lengthy and devastating recession.

"There is no playbook for this; we're kind of feeling our way along," said Hoaglin, the chairman, president and chief executive of Huntington. The Columbus-based bank is the nation's 26{+t}{+h} largest, with $37.1 billion in deposits, according to the Federal Deposit Insurance Corp.

In an interview with The Dispatch, Hoaglin discussed the causes of the economic meltdown, his bank's recent problems and what he terms a promising future, and the government's rescue plan and Huntington's $1.4 billion portion, which he said will be used to help ease the credit crunch. He also talked about National City Corp.'s sale, predicted a gloomy 2009 and did not discount the possibility that the lessons learned this year might eventually fade and greed could again create another crisis.

Q. What happened? How did things get so bad so fast?

A. I suppose the beginnings were in subprime mortgages ... there was a lot of money on the sidelines that wanted higher yields, and you had a public policy to promote homeownership, so mortgage brokers -- who were generally unregulated -- began to think of new types of loans that could stimulate their business and get more people into homes, and Wall Street (bought) these loans from mortgage brokers, packaged them up (and sold) them to investors around the world at attractive yields. As long as Wall Street would buy the loans, who cares if they were carefully underwritten, just generate the product and sell it. There was no sense of what the long-term implications would be if it didn't work.

Q. When did the problems begin?

A. Most banks did not participate (in subprime lending); Huntington did not make any subprime loans ... so we weren't looking at it. It wasn't until February 2007, when a mortgage-originating firm, New Century Financial, filed for bankruptcy, that there was a sense something is wrong with the model. The loans started to go bad ... and there was a snowball effect.

Q. But you were involved in subprime through your purchase of Sky.

(In July 2007, Huntington purchased Sky Financial Group of Bowling Green for $3.3 billion and inherited about $1.5 billion in toxic subprime loans through Sky's long-term relationship with Franklin Credit Management Corp. of New Jersey.)

A. For many years, Sky was a lender to Franklin ... and Franklin did two things: They originated subprime mortgage loans ... but what they did mostly was buy loans that were so called scratch-and-dent loans, because something was wrong with them.

Q. They bought them thinking they would be paid back?

A. Or people could get them refinanced, because you had ever-rising property values for 16 or 17 years. That's what happened; these loans always got paid back because they were being refinanced. Franklin got paid, Sky got paid.

Q. It sounds like a pyramid scheme.

A. Then the (housing) bubble (burst) ... the refinancing stopped, and what Franklin was left with was having to collect the loans, and that's where the whole business model started to break down. At this point in time, the fall of 2007, we looked at the reserves we had put up ... and realized we were going to be short.

(Huntington wrote off about $425 million in bad debt from Franklin in the fourth quarter of 2007, which led to a $239 million loss and shattered confidence in the bank.)

Ironically, Franklin always met its debt-service obligation to Sky and Huntington.

Q. Other than this one quarter and one issue, Huntington has had slow growth and stable profits, over $100 million a quarter for the past three quarters. Why was there such a panic?

A. Clearly, the biggest issue overhanging Huntington stock the last year has been this lending relationship with Franklin.

Q. If you could go back in time, knowing what you now know about Franklin, would you have still purchased Sky?

A. In the fall of 2006, when we were having serious discussions with Sky, we weren't interested in this relationship (with Franklin), but thought we'd be able to get rid of it, sell it. We erred by thinking we could sell all or most of the relationship with Franklin after we had control.

Q. What happened to National City? Why was it so much worse for them?

(National City is being bought by PNC Financial Services Group of Pittsburgh for more than $5 billion.)

A. I don't pretend to know all the ins and outs, but as opposed to lending money to a subprime lending company, which is what Sky did, National City bought a company, ironically called First Franklin, that made subprime loans to individuals. And (National City) also developed a nationwide business of home-equity lending. National City and a lot of others were exposed to very weak housing geographies.

Q. If the housing bubble didn't burst, could National City have made it?

A. Yes.

Q. Why did you request $1.4 billion from the federal government as part of the $700 billion bailout?

A. With the passage of time, it became clear to us that there was going to be a real positive for the banks that participated. The government was basically saying this program is confined to healthy banks ... you're healthy, you're going to win, and investors are likely to say, "These are the banks we're going to invest in," and conversely, if you're not participating, "We don't want anything to do with you."

Q. Are you concerned that the government is basically deciding which banks succeed and fail?

A. In general, it is a concern, but we didn't have that concern. The government was faced with a real freeze in the credit markets -- lending, everything had ground to a halt in their eyes. So, if you've convinced Congress to support your plan in a big way, which they did, where will you put the money so it would do the most good to reinvigorate lending and ensure you get the money back? You put it into healthy banks.

Q. National City applied and was rejected.

A. Yes, and that ultimately seems to be the final straw, and my heart goes out to National City.

Q. The primary purpose of the bailout is to get banks lending -- is that what you'll use the $1.4 billion for?

A. We have remained an active lender through all this ... but we've tried to limit our lending to how much we could grow in the way of deposits. We've been growing (deposits), 4 percent in the third quarter (of 2008), but that served as a gating or limiting factor on how much we grew loans, and as it turned out, we had stronger loan demand. So really what this ($1.4 billion) purchase of capital by government will allow us to do is to become an even more active lender.

Q. Who will you loan to?

A. The loan demand isn't in housing -- that's clearly weak -- and it's not in residential development. We are seeing loan demand by many of our commercial clients, from some commercial real-estate developers who are not focused on residential development, but focused on warehouses or multifamily developments or, in some cases, retail space or offices. We have a number of businesses that want and need lines of credit to operate their businesses, and in some cases, they have expansion opportunities.

Q. When will the credit crunch ease?

A. Not weeks, but months, and I think in 2009 at some point in time, we will return to normalcy in the credit markets ... but (we also will see) a crisis that was previously centered in the housing-related sector of the economy spread throughout the economy. The automobile industry is really on its back ... because consumers hurt by housing issues are just not confident about spending. They're hunkered down -- that's a ripple affect.

Q. Banks and financial institutions were the first to be bailed out. Is the auto industry next?

A. That's above my pay grade, but the situation with GM and Chrysler ... is complicated, and if GM and Chrysler were to fail, that's a huge burden on the government's pension-benefit guarantee fund and will affect what all the other corporations in the country operating pension funds will have to pay into the fund.

Q. How will the bailout help the average central Ohio resident?

A. I'd like to think what will happen in central Ohio and other markets, for Huntington and other participating banks, is that they will not be limited in resources available for lending .... which will be a positive for people locally -- and I'd like to think depositors will feel really good about the safety and soundness of the banks.

Q. But the government is already concerned that banks aren't using the money for lending.

A. Yes, I've read comments in media ... and I think it is important to stick to the original intent. That's what was sold to Congress and what Congress signed off on and what the economy needs.

Q. So you won't use the money to acquire other banks?

A. I will say we're not likely to be out looking for troubled banks to acquire. If, on the other hand, a bank regulator comes to us and says, "We need your help with an institution that happened to be in our footprint," yes, we'd be interested and willing to consider that. But that is not our primary objective.

Q. Have you been approached about taking over a troubled bank?

A. No, we are on and have been on the list that the (FDIC) keeps of banks to call if a bank is in danger of failing. What they try to do is interest a number of banks in bidding on a troubled bank's deposits, but by and large, they have not been within our footprint.

Q. What have the past two years taught you?

A. The lesson learned (in the Sky purchase) is when doing due diligence ... and you run across a line of business that just doesn't fit with your own approach, don't ever assume you'll be able to get rid of it. I also learned that it's too great a risk to chase growth in geographies that are new to you or with products that you really don't understand.

Q. Will the bank industry really learn this lesson?

A. Our industry has had a real knack over several decades of forgetting, and so for a while, I suspect, there will be lessons learned and caution, but eventually I wouldn't bet against a repetition, although it will be a different product. Someone will find something that will be a hot topic, and investors will respond to that, and unfortunately, there will be a temptation for many banks who shouldn't get involved to get involved.

Q. Will Huntington?

A. We'll have the discipline of staying with what we know. Our message to investors is we're probably not going to grow as rapidly as others based upon our geography and plain-vanilla business (model), but if we can give you decent growth and less risk, than maybe we're something you should consider.

swartenberg@dispatch.com

"I think in 2009 at some point in time, we will return to normalcy in the credit markets."

Thomas Hoaglin

chairman, president and chief executive of Huntington Bancshares

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