Bad loans are the bane of every bank. In fact, they aren't really good news for anyone.
A nonaccrual loan, as its called if we want to get technical, means someone is losing their house or business, some bank is losing income, and (if it gets really bad) you are losing money as an investor.
So how come Huntington Bancshares (NASDAQ:HBAN) isn't missing the $2 billion dollars in nonaccrual loans it racked up at the height of the financial crisis? Let's take a look:
On any given day, Huntington has about $40 billion in loans spread across its six-state, Midwestern footprint.
On lending emphasis, Huntington is pretty middle of the road, keeping a rather even split between commercial and consumer loans.
Its a rather conservative lender as well. Assets-to-Equity, a quick measure of the riskiness of a bank's balance sheet, has hovered around 9.5 for about the last decade. In general, anything under 10 is good for a bank.
Being able to maintain this conservative rating through the financial crisis was largely the result of quickly dealing with its nonaccrual loans. So, lets finally talk about that $2 billion.
The financial crisis
To put it into perspective, never being able to collect $2 billion on $40 billion is like you loaning out $1,000 and not getting back $50.
Not the end of the world, but still something to be upset about. And someone did get upset -- namely shareholders.
During 2009, as Huntington's nonaccruals hit 5% of total loans, its share price sank to an all time low of $1.46. Keep in mind, this type of movement was going on industrywide, and relatively speaking Huntington's nonaccrual loan percentage was on the low side of the 5.6% industry average.
Like the rest of the financial industry, the majority of these troubled loans were based in consumer real estate. As more loans were marked as nonaccrual, stronger commercial loans began taking up more of the overall portfolio by way of default, eventually making up 60% of the portfolio and throwing off Huntington's carefully crafted loan mix.
The year culminated with the $2 billion in nonaccruals attributing to the bulk of a $3 billion loss for the company.
Getting back to normal
Last year marked the first time that the balance sheet really started to reflect a normal operating Huntington.
For the first time since 2007, the percentage of nonaccrual loans dropped below the acceptable level of 1% and the bank has positioned itself comfortably for any increase in that number in the future. Its coverage of bad loans, an allowance banks set aside as a cushion for nonaccrual loans, is at a nice-looking 201%.
Additionally, the relatively even split between commercial and consumer loans has returned, indicating that the bank has gotten a grip on the loan strategy that has made it money in the past.
Bye, bye billion
Huntington's $2 billion dollar nonaccrual nightmare was needed to get its balance sheet back to where it used to be. With that deadweight off the books, Huntington has been able to grow its total loans by over $3 billion since 2009.
With a more regular looking balance sheet and added protection, Huntington doesn't look like it will be losing another billion anytime soon.