Huntington Bancshares Reports:
* 2006 Fourth Quarter Net Income of $87.7 Million and Earnings Per Common Share of $0.37
* Includes $0.10 per common share negative impact from significant items including the net impact of completing the balance sheet restructuring begun after the end of the 2006 third quarter ($0.05 per common share) and a contribution to the Huntington Foundation ($0.03 per common share)
* 2006 Full-Year Net Income of $461.2 Million And Earnings Per Common Share of $1.92
* 2007 Full-Year GAAP Earnings Target of $1.87-$1.92 Per Share
* 6% Increase in Quarterly Cash Dividend Declared on its Common Stock
COLUMBUS, Ohio, Jan. 18 /PRNewswire-FirstCall/ -- Huntington Bancshares Incorporated (Nasdaq: HBAN)(www.huntington.com) reported 2006 fourth quarter earnings of $87.7 million, or $0.37 per common share. Results in the year-ago fourth quarter were $100.6 million, or $0.44 per common share.
Earnings for full-year 2006 were $461.2 million, or $1.92 per common share, compared with $412.1 million, or $1.77 per common share, in 2005.
Highlights compared with the 2006 third quarter included:
* $0.37 earnings per common share, down from $0.65 per common share in
the prior quarter.
* Current quarter results were negatively impacted by $0.10 per common
share from significant items including the net impact of completing
the balance sheet restructuring begun after the end of the 2006
third quarter ($0.05 per common share) and a contribution to the
Huntington Foundation ($0.03 per common share).
* Third quarter 2006 results included an $0.18 per common share net
positive impact due to a reduction of federal income tax expense
($0.35 per common share), partially offset by an investment
securities impairment ($0.16 per common share) reflecting a decision
to reposition that portfolio to better future performance, and the
negative impact ($0.01 per common share) related to the write down
of equity method investments.
* 3.28% net interest margin, up from 3.22%.
* 9% annualized growth in average total commercial loans.
* 8% annualized decline in average total consumer loans.
* 10% annualized decline in average total automobile loans and
leases reflecting a decline in automobile leases and little growth
in automobile loans given the on-going program of selling a
portion of related loan production.
* 5% annualized decline in average home equity loans.
* 10% annualized decline in average residential mortgages,
reflecting the sale of $120 million of loans at the end of the
2006 third quarter.
* 1% annualized decline in average total core deposits.
* Mixed performance in core fee income categories. Good growth in
trust services and other service charges and fees, partially offset
by declines in mortgage banking, service charges on deposit
accounts, and brokerage and insurance income.
* 0.35% annualized net charge-offs, up 3 basis points.
* 1.04% period-end allowance for loan and lease losses (ALLL) ratio,
down from 1.06%.
* 0.76% period-end non-performing asset (NPA) ratio, up from 0.65% at
September 30, 2006, with 60% of total period end NPAs secured by
residential real estate assets and assets guaranteed by the U.S.
Government.
* 6.87% period-end tangible common equity ratio, down from 7.13%.
"Underlying fourth quarter performance was generally in line with our expectations," said Thomas E. Hoaglin, chairman, president, and chief executive officer. "By utilizing a portion of the excess capital remaining from the third quarter's reduction of federal income taxes, we completed our balance sheet restructuring and made a sizable contribution to the Huntington Foundation. While completing the balance sheet restructuring negatively impacted reported fourth quarter results, it had the desired result of contributing to the 6 basis point increase in our net interest margin, and positions our margin for better performance as we head into 2007."
"On a financial performance basis, we were very pleased with the growth in average commercial loans. Average residential mortgages declined, reflecting portfolio sales. However, we were disappointed, though not surprised, by the decline in home equity loans, given softness in the residential real estate markets," he said. "Continued growth in trust services and other service charges and fees were plusses. Importantly, expenses were well contained after taking into consideration the donation to the Huntington Foundation and severance and consolidation expenses primarily associated with a Regional Banking staff reduction initiative. On the credit side, we were pleased that our net charge-off experience of 35 basis points was at the low end of our long-term net charge-off range. Although we were disappointed with the 17% increase in NPAs, a significant portion related to residential real estate. While the credit environment is softening, we do not anticipate much change in the relative level of NPAs during 2007. In sum, though the environment is challenging as we go into 2007, we are comfortable that we will continue to grow our businesses and earnings."
Fourth Quarter Performance Discussion
Significant Factors Influencing Financial Performance Comparisons
Specific significant items impacting 2006 fourth quarter performance
included (see Table 1 below):
* $20.2 million pre-tax ($13.1 million after tax or $0.05 per common
share) negative impact related to costs associated with the completion
of the balance sheet restructuring announced in the 2006 third
quarter. This consisted of $15.8 million pre-tax of investment
securities losses, including $6.8 million of additional impairment on
certain asset-backed securities not included in the third quarter
restructuring, and $4.4 million pre-tax of other balance sheet
restructuring expenses, most notably FHLB funding refinancing costs.
As previously announced, 2006 third quarter results included an $84.5
million after-tax favorable impact related to the resolution of a
federal income tax audit covering tax years 2002 and 2003, which
resulted in the release of previously established federal income tax
reserves, as well as the recognition of federal tax loss carry backs.
Concurrently, a decision was made to reposition the investment
securities portfolio to improve its performance. As a result, 2006
third quarter results included a $57.5 million pre-tax securities
impairment estimate.
* $10.0 million pre-tax ($6.5 million after tax or $0.03 per common
share) contribution to the Huntington Foundation.
* $5.2 million pre-tax ($3.4 million after tax or $0.01 per common
share) increase in automobile lease residual value losses. This
increase reflected higher relative losses on vehicles sold at auction,
most notably high-line imports and larger sport utility vehicles.
During the quarter, a further review was completed which resulted in
additions to residual value reserves.
* $4.5 million pre-tax ($2.9 million after tax or $0.01 per common
share) in severance and consolidation expenses. This reflected
severance-related expenses associated with a reduction of 75 Regional
Banking staff positions, as well as costs associated with the
previously announced retirements of a vice chairman and an executive
vice president.
* $3.3 million pre-tax ($2.1 million after tax or $0.01 per common
share) in equity investment gains.
* $2.5 million pre-tax ($1.6 million after tax or $0.01 per common
share) negative impact reflecting a mortgage servicing rights (MSR)
mark-to-market net of hedge-related trading activity.
* $2.5 million pre-tax ($1.7 million after tax or $0.01 per common
share) gain related to the sale of MasterCard(R) stock.
Table 1 - Significant Items Impacting
Earnings Performance Comparisons (1)
Three Months Ended Impact (2)
(in millions, except per share) Pre-tax EPS
December 31, 2006 - GAAP earnings $87.7 (3) $ 0.37
* Equity investment gains 3.3 0.01
* Gain on sale of MasterCard(R) stock 2.5 0.01
* Completion of balance sheet
restructuring (20.2) (0.05)
* Huntington Foundation contribution (10.0) (0.03)
* Automobile lease residual value losses (5.2) (0.01)
* Severance and consolidation expenses (4.5) (0.01)
* MSR mark-to-market net of hedge-related
trading activity (2.5) (0.01)
September 30, 2006 - GAAP earnings $157.4 (3) $ 0.65
* Reduction to federal
income tax expense 84.5 (3) 0.35
* Investment securities impairment (57.5) (0.16)
* Adjustment for equity method investments (2.1) (0.01)
December 31, 2005 - GAAP earnings $100.6 (3) $0.44
* Net impact of federal tax loss
carry back 7.0 (3) 0.03
* Securities losses plus MSR recovery
of temporary impairment net of
hedge-related trading activity (10.4) (0.03)
(1) Includes significant items with $0.01 EPS impact or greater
(2) Favorable (unfavorable) impact on GAAP earnings; pre-tax unless
otherwise noted
(3) After-tax
Balance Sheet Restructuring
Subsequent to the end of the 2006 third quarter, the company initiated a review of its investment securities portfolio. The objective of this review was to reposition the portfolio to optimize performance in light of changing economic conditions and other factors. Such repositioning resulted in the sale of securities and the reinvestment into securities expected to improve the predictability of cash flows and reduce credit risk. A total of $2.1 billion of securities, primarily consisting of U.S. Treasury and Agency securities as well as certain other asset-backed securities, were identified for sale. At September 30, 2006, these securities had total unrealized losses of $57.5 million ($37.4 million after tax, or $0.16 per common share), which was recognized in the 2006 third quarter results.
During the 2006 fourth quarter, this investment securities portfolio restructuring was completed. In addition, a decision was made to broaden the balance sheet restructuring and include refinancing a portion of FHLB funding, and to a much lesser degree, the sale of approximately $100 million of mortgage loans. As a result, 2006 fourth quarter results included $15.8 million pre-tax of investment securities losses, including $6.8 million other than temporary impairment recognized on certain securities backed by cash flows from pools of securitized sub-prime mortgages, and $4.4 million pre-tax of other balance sheet restructuring costs. This restructuring is expected to improve the net interest margin by 8-9 basis points, of which 7 were reflected in the fourth quarter.
Net Interest Income, Net Interest Margin, Loans and Leases, Investment
Securities, and Deposits
2006 Fourth Quarter versus 2005 Fourth Quarter
Fully taxable equivalent net interest income increased $14.6 million, or 6% ($17.7 million merger-related), from the year-ago quarter, reflecting the favorable impact of a $2.3 billion, or 8%, increase in average earning assets, as the fully taxable equivalent net interest margin declined 6 basis points to 3.28%. Average total loans and leases increased $1.8 billion, or 7% ($1.7 billion merger-related). The remaining non-merger related increase in average total loans and leases was $0.1 billion, up less than 1% from the year-ago quarter, which primarily reflected growth in commercial loans and residential mortgages, mostly offset by a decline in total average automobile loans and leases as we continued to sell a portion of that production.
Average total commercial loans increased $1.5 billion, or 14% ($0.8 billion merger-related). This growth reflected a $0.9 billion, or 18%, increase in average middle market C&I loans, a $0.3 billion, or 9%, increase in average commercial real estate loans, and a $0.3 billion, or 14%, increase in average small business loans.
Average residential mortgages increased $0.5 billion, or 11% ($0.4 billion merger-related). Average home equity loans increased $0.2 billion, or 4%, but would have declined slightly were it not for the Unizan merger.
Compared with the year-ago quarter, average total automobile loans and leases decreased $0.4 billion, or 9%, with the Unizan merger having no significant impact. The decrease reflected the combination of two factors: (1) continued softness in loan and lease production levels over this period from low consumer demand and competitive pricing, and (2) little growth in automobile loans as we continued a program of selling a portion of current loan production. Average automobile operating lease assets declined $0.2 billion, or 81%, as this portfolio continued to run off. Total automobile loan and lease exposure at quarter end was 15%, down from 18% a year earlier.
Average total investment securities increased 2% from the 2005 fourth quarter.
Average total core deposits in the 2006 fourth quarter increased $1.8 billion, or 10% ($1.5 billion merger-related), from the year-ago quarter. Most of the increase reflected higher average core certificates of deposit, which increased $1.5 billion ($0.6 billion merger-related) resulting from continued customer demand for higher, fixed rate deposit products. Average interest bearing demand deposits increased $0.3 billion ($0.2 billion merger-related) and average non-interest bearing deposits increased $0.1 billion ($0.2 billion merger-related). Average savings and other domestic time deposits declined $0.1 billion, despite $0.5 billion of growth related to the Unizan merger.
2006 Fourth Quarter versus 2006 Third Quarter
Compared with the 2006 third quarter, fully taxable equivalent net interest income increased $2.7 million, or 1%. This reflected the positive impact of a 6 basis point increase in the net interest margin to 3.28% as average total earning assets remained essentially flat. The increase in the net interest margin reflected a combination of factors, but primarily the positive impact of the restructuring of the investment securities portfolio and a shift in the loan portfolio mix to a higher percentage of higher yield commercial loans, partially offset by higher rates on deposit accounts, reflecting the continued movement of lower cost deposits into higher cost certificates of deposits. While market place loan and deposit pricing remained aggressive, pricing pressure was less intense than in the prior quarter.
Average total loans and leases were essentially unchanged from the 2006 third quarter, reflecting growth in average total commercial loans and offset by a decline in average total consumer loans.
Average total commercial loans increased $0.3 billion, or 2%. Average middle market C&I loans increased $0.2 billion, or 4%, from the prior quarter. Average middle market CRE loans increased 1%, with average small business loans up slightly.
Average residential mortgages decreased $0.1 billion, or 2%, reflecting the sale of $120 million of mortgage loans at the end of the 2006 third quarter. Average home equity loans declined 1%.
Compared with the 2006 third quarter, average total automobile loans and leases declined 3%. The decline reflected a combination of factors including low demand for leases, as well as the sale of a portion of automobile loan and production. Average automobile loans increased 2% and direct financing leases declined 7%. Automobile loan and lease productions levels continued to decline with loan and lease production down 17% and 24%, respectively, from the third quarter.
Average investment securities decreased $0.6 billion, or 11%, from the 2006 third quarter, reflecting the decision to sell certain investment securities.
Average total core deposits in the 2006 fourth quarter declined slightly, reflecting a decline in average total consumer core deposits, partially offset by growth in average total commercial core deposits. Average core certificates of deposit increased 1%, reflecting the continued preference of customers for higher fixed rate certificates of deposit compared with lower rate savings and other time deposits, which declined 3%. This shift reflected the same factors impacting comparisons to the year-ago quarter noted above. Average non-interest bearing demand deposits increased 2%, whereas average interest bearing demand deposits declined 1%.
Provision for Credit Losses
The provision for credit losses in the 2006 fourth quarter was $15.7 million, down $15.1 million from the year-ago quarter, but up $1.6 million from the 2006 third quarter. This quarter's provision for credit losses reflected the impact of the resolution of two larger commercial real estate relationships and the benefit of slightly improved economic conditions. (See Credit Quality Discussion).
Non-Interest Income
2006 Fourth Quarter versus 2005 Fourth Quarter
Non-interest income decreased $6.7 million from the year-ago quarter, including a $17.2 million decline in automobile operating lease income. That portfolio continued to run off since no automobile operating leases have been originated since April 2002. Non-interest income before automobile operating lease income increased $10.5 million, or 8% ($7.2 million merger-related), reflecting:
* $6.5 million, or 15% ($1.6 million merger-related), increase in service
charges on deposit accounts, reflecting a $4.0 million, or 14%, increase
in personal service charges, primarily NSF/OD, and a $2.4 million, or
17%, increase in commercial service charge income.
* $5.6 million increase in other income ($2.1 million merger-related),
reflecting $2.8 million in higher equity investment gains, and the $2.5
million gain on sale of MasterCard(R) stock.
* $3.1 million, or 15% ($1.7 million merger-related), increase in trust
services income, reflecting (1) a $1.6 million increase in higher
personal trust income, mostly merger-related, and (2) a $1.0 million
increase in fees from Huntington Funds, reflecting 12% fund asset
growth.
* $2.3 million, or 20% ($0.3 million merger-related), increase in other
service charges and fees, primarily reflecting a $1.5 million, or 18%,
increase in fees generated by higher debit card volume.
* $1.5 million, or 11% ($0.5 million merger-related), increase in
brokerage and insurance income, reflecting the continued focus on both
brokerage and insurance sales in our retail banking offices.
Partially offset by:
* $2.6 million, or 30%, decline in mortgage banking income, reflecting a
$2.5 million negative impact of MSR valuation adjustments net of hedge-
related losses in the current quarter compared with a negative $1.7
million in the year-ago quarter. The current quarter also included $1.1
million of lower secondary marketing income, as well as an $0.9 million
loss on the sale of certain mortgage loans.
* $15.8 million of investment securities losses in the current quarter
reflecting the completion of the investment portfolio restructuring
noted above (see Significant Items), compared with $8.8 million of
securities losses in the year-ago quarter.
Table 2 shows that on a reported basis non-interest income declined 5% from the year-ago period. However, when fourth quarter reported total non- interest income for both years are adjusted to exclude automobile operating lease income, investment securities losses, the 2006 fourth quarter impact of the mortgage loan sale loss, and Unizan merger-related non-interest income, non-interest income increased 8% from the year-ago quarter. Management views this adjusted measure as more indicative of underlying non-interest income performance and is used for measuring the effectiveness of strategies to grow fee income.
Table 2 - Non-interest Income Analysis
(in millions) 4Q06 Better/(Worse) 4Q05
Amount Percent
Total
non-interest
income - reported $140.6 (6.7) (5)% $147.3
Less:
Automobile operating
lease income 5.3 22.5
Sub-total 135.3 10.5 8 124.8
Add: Investment
securities
portfolio
losses 15.8 8.8
Mortgage loan
sale loss 0.9 N/A
Less: Unizan
merger-related (1) 7.2 N/A
Total non-interest
income - adjusted $144.7 $11.2 8% 133.6
(1) Estimated period impact
2006 Fourth Quarter versus 2006 Third Quarter
Non-interest income increased $42.7 million from the 2006 third quarter including the impact of a $3.2 million decline in automobile operating lease income as that portfolio continued to run off. Non-interest income before automobile operating lease income increased $45.9 million, reflecting:
* $41.5 million positive change as the current quarter included $15.8
million of investment securities losses, which compared favorably to the
$57.5 million of investment securities impairment recognized in the 2006
third quarter (see Significant Items).
* $6.1 million increase in other income, primarily reflecting the $2.5
million gain on the sale of MasterCard(R) stock and $3.3 million in
equity investment gains.
* $1.0 million, or 5%, increase in trust services income.
Partially offset by:
* $2.3 million decline in mortgage banking income, primarily reflecting
the $0.9 million loss on sale of mortgage loans in the current quarter
compared to a $1.3 million gain in the third quarter.
* $1.3 million decrease in bank owned life insurance income.
Table 3 shows that on a reported basis non-interest income increased 44% from the 2006 third quarter. However, when 2006 fourth and third quarter reported total non-interest income are adjusted to exclude (1) automobile operating lease income and (2) the impact of the balance sheet restructuring consisting of investment securities losses and a mortgage loan sale loss, non- interest income increased 4%. Management views this adjusted measure as more indicative of underlying non-interest income performance for the 2006 fourth quarter compared with the prior quarter.
Table 3 - Non-interest Income Analysis
(in millions) 4Q06 Better/(Worse) 3Q06
Amount Percent
Total non-interest
income - reported $140.6 $42.7 44% $97.9
Less: Automobile
operating lease income 5.3 8.6
Sub-total 135.3 45.9 51 89.3
Add: Investment securities
portfolio
losses / impairment 15.8 57.5
Mortgage loan
sale loss (gain) 0.9 (1.3)
Total non-interest
income - adjusted $151.9 $6.4 4% $145.5
Non-Interest Expense
2006 Fourth Quarter versus 2005 Fourth Quarter
Non-interest expense increased $37.4 million, or 16%, from the year-ago quarter, despite a $13.2 million decline in automobile operating lease expense as that portfolio continued to run off. Non-interest expense before automobile operating lease expense increased $50.6 million, or 24%, from the year-ago quarter, with an estimated $18.0 million attributable to Unizan. The primary drivers of the $50.6 million increase were:
* $22.4 million increase in other expense, including $3.0 million of
merger-related expense, a $10.0 million contribution to the Huntington
Foundation, the effect of which will be to reduce contributions in
future periods, $5.2 million of higher residual value losses on
automobile leases, and $3.5 million related to the restructuring of FHLB
advances.
* $21.8 million, or 19%, increase in personnel expense, with Unizan
contributing $7.7 million of the increase. The remaining $14.1 million
increase included $4.5 million of severance and consolidation costs
associated with a reduction of 75 staff positions in Regional Banking
and costs associated with the previously announced retirements of a vice
chairman and an executive vice president. The staff reductions in
Regional Banking are expected to reduce annualized personnel costs by
approximately $6 million. The increase from the prior quarter also
reflected $5.1 million of share-based compensation expense, reflecting
the stock option expensing begun in 2006.
* $2.8 million increase in the amortization of intangibles, substantially
all merger-related.
* $2.1 million, or 13%, increase in equipment expense ($0.5 million
merger-related), reflecting higher depreciation associated with recent
technology investments.
* $1.5 million, or 20%, increase in professional services expenses, all
merger-related.
* $1.0 million, or 5%, increase in outside data processing and other
services ($0.5 million merger-related).
Discerning underlying non-interest expense performance trends requires adjusting reported non-interest expense so expenses in different periods can be analyzed on a comparable basis. Excluding automobile operating lease expense is helpful because its decline may overstate the impact of expense control efforts. Conversely, the merger with Unizan, as well as the expensing of share-based compensation that began in 2006, adds significant on-going expenses that did not exist in the 2005 fourth quarter and their inclusion may understate the impact of expense control efforts.
Table 4 shows that when 2006 and 2005 fourth quarter reported total non- interest expense are adjusted to exclude automobile operating lease expense, merger-related expenses including the increase in intangible amortization resulting from the merger; the 2005 fourth quarter is adjusted to reflect the effect of share-based compensation expense, which is included in reported 2006 fourth quarter expense but not in the prior-year quarter; and the 2006 fourth quarter is further adjusted to exclude the Huntington Foundation contribution, severance and consolidation costs, and the FHLB funding restructuring costs, underlying non-interest expense increased 5% from the year-ago quarter.
Table 4 - Non-interest Expense Analysis
(in millions) 4Q06 Better/(Worse) 4Q05
Amount Percent
Total non-interest
expense - reported $267.8 $(37.4) (16)% $230.4
Less: Automobile
operating lease expense 4.0 17.2
Sub-total 263.8 (50.6) (24) 213.2
Add: Share-based
compensation N/A 4.8
Less: Unizan
merger-related (1) 18.0 N/A
Huntington Foundation
contribution 10.0 N/A
Severance
and consolidation
expenses 4.4 N/A
FHLB funding
restructuring/
other losses 3.5 N/A
Total non-interest
expense - adjusted $227.9 $(9.9) (5)% $218.0
(1) Includes estimated period impact plus increased intangible
amortization
2006 Fourth Quarter versus 2006 Third Quarter
Non-interest expense increased $25.4 million from the 2006 third quarter, despite a $2.0 million decline in automobile operating lease expense as that portfolio continued to run off. Non-interest expense before automobile operating lease expense increased $27.4 million, or 12%, reflecting:
* $20.2 million increase in other expense, reflecting the $10.0 million
contribution to the Huntington Foundation, $5.2 million of higher
residual value losses on automobile leases, and $3.5 million related
to the restructuring of FHLB advances.
* $4.1 million, or 3%, increase in personnel costs, reflecting the
current quarter's $4.5 million of severance and consolidation costs.
* $2.5 million, or 39%, increase in professional services, reflecting
higher expenses associated with collection activities, as well as
costs related to revenue initiatives.
* $2.0 million, or 11%, increase in outside data processing and other
services expense.
Partially offset by:
* $1.6 million, or 21%, decline in marketing expense due to timing of
campaigns.
Table 5 shows that when 2006 fourth and third quarter reported total non- interest expense are adjusted to exclude automobile operating lease expense and Unizan merger-related integration costs in the prior period, and 2006 fourth quarter expenses are further adjusted to exclude the impact of the Huntington Foundation contribution, severance and consolidation costs, and the FHLB component of the balance sheet restructuring, non-interest expense increased 4% from the 2006 third quarter. Roughly, half of this increase was attributed to the increase in reserves for automobile lease residual value losses.
Table 5 - Non-interest Expense Analysis
(in millions) 4Q06 Better/(Worse) 3Q06
Amount Percent
Total non-interest
expense - reported $267.8 ($25.4) (10)% $242.4
Less: Automobile operating
lease expense 4.0 6.0
Sub-total 263.8 (27.4) (12) 236.4
Less: Huntington
Foundation
contribution 10.0 N/A
Severance and
consolidation expenses 4.5 N/A
FHLB funding
restructuring/other
losses 3.5 N/A
Unizan merger costs (0.4) 0.5
Total non-interest
expense - adjusted $246.2 ($10.3) (4)% $235.9
Operating Leverage
A long-term objective of Management is to increase earnings primarily by growing revenues faster than expenses. Operating leverage measures the difference between these two growth rates. However, over any given measurement period, certain items may occur that distort reported revenue or expense trends. As such, reported revenue and expenses are adjusted so that the two measurement periods are on as much of a comparable basis as possible. Management believes this permits a clearer analysis of the ability to achieve the long-term objective of generating positive operating leverage (see Basis of Presentation - Operating Leverage for a full discussion of the adjustment criteria methodology).
While operating leverage is measured quarterly, the corporate objective is to create positive operating leverage annually. On a reported basis, full- year revenue declined less than one percent, with reported expenses increasing 3%. This resulted in 4% negative operating leverage on a reported basis. However, on an adjusted basis, revenues increased 8% and expenses rose 7%, resulting in 1% positive operating leverage on an adjusted basis for full-year 2006.
Table 6 - Operating Leverage Analysis (1)
Better /(Worse)
(in millions) 12 Mo. 2006 12 Mo. 2005 Amount Percent
Revenue FTE - reported (2) $1,596.3 $1,608.1 $(11.8) (1)%
* Automobile operating
lease expense (31.3) (103.9)
* Securities losses 73.2 8.1
* MSR FAS 156
accounting change (5.1) --
* Gain on sale of
MasterCard(R) stock (3.3) --
* Adjustment to defer
home equity annual fees 2.4 --
* Adjustment for equity
method investments 3.2 --
* Loss on sale of
mortgage loans 0.9 --
Revenue FTE - adjusted $1,636.2 $1,512.3 $123.9 8%
Non-interest
expense - reported $1,001.0 $969.8 ($31.2) (3)%
* Automobile operating
lease expense (31.3) (103.9)
* Amortization of
intangibles (10.0) (0.8)
* Huntington Foundation
contribution (10.0) --
* FHLB funding
restructuring/other
losses (3.5) --
* SEC and
regulatory-related expenses -- (5.1)
* Severance and consolidation
expenses (4.5) (3.6)
* Unizan merger costs (3.7) (0.7)
* Share-based compensation NA 18.3
Non-interest
expense - adjusted $937.9 $874.1 $(63.9) (7)%
Operating leverage - reported (4)%
Operating leverage - adjusted 1%
Efficiency ratio (3) - reported 59.4% 60.0%
Efficiency ratio (3) - adjusted 57.3% 57.8%
(1) See Basis of Presentation - Operating Leverage for a discussion of
adjustment criteria methodology
(2) Fully taxable equivalent net interest income + non-interest income
(3) Non-interest expense less amortization of intangibles, divided by net
interest income (FTE) and non-interest income excluding securities
gains (losses)
Income Taxes
The provision for income taxes in the 2006 fourth quarter was $27.3 million with an effective tax rate of 23.8%. For the full year, the effective tax rate was 10.3%, reflecting the $84.5 million reduction of federal income tax expense related to the resolution of a federal income tax audit covering tax years 2002 and 2003 that resulted in the release of previously established federal income tax reserves, as well as the recognition of federal tax loss carry backs. The effective tax rate for 2007 is expected to increase to a more typical rate just below 30%. Following the anticipated merger of Sky Financial Group, the effective tax rate is expected to approximate 30%.
Credit Quality
Total net charge-offs for the 2006 fourth quarter were $23.0 million, or an annualized 0.35% of average total loans and leases. This performance remained at the low end of the long-term targeted range of 0.35%-0.45%, but was higher than $17.6 million, or an annualized 0.29%, in the year-ago quarter and $21.2 million, or an annualized 0.32%, of average total loans and leases in the 2006 third quarter.
Total commercial net charge-offs in the fourth quarter were $6.8 million, or an annualized 0.22%, up $3.2 million from $3.6 million, or an annualized 0.13%, in the year-ago quarter. Compared with the 2006 third quarter, the increase in total commercial net charge-offs reflected the negative impact of higher middle market CRE net charge offs, partially offset by the benefit of net middle market C&I recoveries due to the recovery on one large credit charged off in 2002. The increase in middle market CRE net charge-offs was influenced by the continued stress in the housing market, and a charge-off associated with the strategic exit of a relationship with a major Ohio-based homebuilder.
Total consumer net charge-offs in the current quarter were $16.2 million, up $2.2 million from $14.0 million in the year-ago quarter. When expressed as an annualized percentage, total consumer net charge-offs in the 2006 fourth quarter were 0.46% of average related loans, up from 0.41% in the year-ago quarter. Compared with the 2006 third quarter, total consumer net charge-offs increased $1.8 million from $14.4 million, with a 6 basis point increase in the annualized net charge-off ratio to 0.46% from 0.40% of average related loans, reflecting a $1.2 million increase in automobile loan and lease net charge-offs and a $1.4 million increase in residential mortgage net charge- offs. The increase in automobile loan and lease net charge-offs was somewhat seasonal, but also reflected softer used car markets. Overall, the automobile loan and lease portfolios continued to perform well within expectations. The higher residential mortgage net charge-offs reflected a level of larger-dollar losses that is not expected to continue.
Home equity net charge-offs in the 2006 fourth quarter were $5.8 million, or an annualized 0.47%, up from $4.5 million, or an annualized 0.38%, in the year-ago quarter, but down from $6.7 million, or an annualized 0.53%, in the prior quarter.
Despite this quarter's increase in real estate-related problem credits, and unless housing market conditions materially worsen, the company's conservative underwriting standards of the last several years, as well as on- going loss mitigation strategies are expected to result in only a modest, if any, increase in NPAs and net charge-offs in coming quarters. While the increase in NPAs was significant, net charge-offs associated with OREO are more a reflection of current period net charge-offs as the assets are revalued, than necessarily an indicator of higher future net charge-offs.
NPAs were $199.6 million at December 31, 2006, and represented 0.76% of related assets. This represented an $82.4 million, or 70%, increase from $117.2 million, or 0.48% of related assets, at the end of the year-ago quarter, and a $28.4 million, or 17%, increase from $171.2 million, or 0.65% of related assets, at September 30, 2006.
Contributing to the $82.4 million increase in NPAs from the year-ago period were $33.8 million acquired at the time of the Unizan merger, as well as a $34.2 million increase in other real estate owned (OREO). The increase in OREO reflected foreclosed mortgage loans fully guaranteed by the U.S. government, which prior to the 2006 second quarter were previously reported as over 90-day delinquent but still accruing loans. This change in reporting also contributed to the $26.5 million increase in assets guaranteed by the U.S. government, from $7.3 million at the end of the 2005 fourth quarter to $33.9 million at December 31, 2006. At December 31, 2006, 60% of total NPAs were secured by residential real estate assets or were guaranteed by the U.S. Government, which have shown low loss experience historically. This compared favorably with the 42% level of such NPAs at the end of the year-ago quarter, and 59% at September 30, 2006.
NPLs, which exclude OREO, increased $48.2 million, or 47%, from the year- earlier period to $150.1 million at December 31, 2006, with $32.8 million of the increase represented by NPLs acquired in the Unizan merger. NPLs increased $20.8 million, or 16%, from September 30, 2006, primarily due to softness in residential real estate markets. This resulted in an increase in middle market CRE NPLs, primarily related to two relationships, as well as broader- based increases in residential mortgage and home equity NPLs. The increase in small business banking NPLs was also broad-based, with no specific region contributing a disproportional amount of the increase. For residential real estate secured portfolios, as assets are transferred to NPL or OREO status, their values are written down to market values, with a resulting increase in related current period net charge-offs. This revaluation of the assets mitigates to some degree the potential for further net charge-offs associated with these assets in coming periods. NPLs expressed as a percent of total loans and leases were 0.57% at December 31, 2006, up from 0.42% a year earlier and from 0.49% at September 30, 2006.
The over 90-day delinquent, but still accruing, ratio was 0.23% at December 31, 2006, unchanged from the end of the year-ago quarter, and down from 0.24% at September 30, 2006.
Allowances for Credit Losses (ACL) and Loan Loss Provision
We maintain two reserves, both of which are available to absorb probable credit losses: the allowance for loan and lease losses (ALLL) and the allowance for unfunded loan commitments and letters of credit (AULC). When summed together, these reserves constitute the total ACL.
At December 31, 2006, the ALLL was $272.1 million, which was $3.7 million higher than $268.3 million a year earlier, but $8.1 million lower than $280.2 million at September 30, 2006. Expressed as a percent of period-end loans and leases, the ALLL ratio at December 31, 2006, was 1.04%, down from 1.10% a year ago and from 1.06% at September 30, 2006. The level of required loan loss reserves is determined using a highly quantitative methodology, which determines the required levels for both the transaction reserve and economic reserve components. Table 7 shows the change in the ALLL ratio and each reserve component for the 2006 third and fourth quarters, as well as the 2005 fourth quarter.
Table 7 - Components of ALLL as Percent of Total Loans and Leases
4Q06 change
from
4Q06 3Q06 4Q05 3Q06 4Q05
Transaction
reserve (1) 0.86% 0.86% 0.89% --% (0.03)%
Economic
reserve 0.18 0.20 0.21 (0.02) (0.03)
Total ALLL 1.04% 1.06% 1.10% (0.02)% (0.06)%
(1) Includes specific reserve
The decline in the economic reserve component at December 31, 2006, from the end of the third quarter primarily reflected improvements in consumer confidence and consumer spending, as well as the consistently low loss level experience of the past three years.
The ALLL as a percent of NPLs was 181% at December 31, 2006, down from 263% a year ago and from 217% at September 30, 2006. The ALLL as a percent of NPAs was 136% at December 31, 2006, down from 229% a year ago and from 164% at September 30, 2006. At December 31, 2006, the AULC was $40.2 million, up from $37.0 million at the end of the year-ago quarter, and from $39.3 million at September 30, 2006.
On a combined basis, the ACL as a percent of total loans and leases at December 31, 2006, was 1.19%, down from 1.25% a year ago and from 1.21% at September 30, 2006. The ACL as a percent of NPAs was 156% at December 31, 2006, down from 261% a year earlier and 187% at September 30, 2006. The decline in the NPA coverage ratio reflected (1) that a higher percentage of NPAs were secured by residential real estate or guaranteed by the U.S. Government, which have an inherently lower potential for loss, and (2) a reporting change in 2006 to include in NPAs foreclosed loans guaranteed by GNMA and serviced by Huntington, that had been previously reported as 90-day past due loans.
Capital
At December 31, 2006, the tangible equity to assets ratio was 6.87%, down from 7.19% a year ago and from 7.13% at September 30, 2006. At December 31, 2006, the tangible equity to risk-weighted assets ratio was 7.61%, down from 7.91% at the end of the year-ago quarter and from 7.97% at September 30, 2006.
Contributing to the decline in capital ratios was the implementation of FASB Statement No. 158, Employer's Accounting for Defined Benefit Pension and Other Postretirement Plans. This decreased equity by $83.0 million but had no effect on reported net income. This implementation contributed 24 basis points of the 26 basis point reduction in the tangible equity ratio from the end of the third quarter, and 24 basis points of the 32 basis point reduction from the end of last year. The decline in capital ratios from the year-ago period also reflected the repurchase of 16.0 million shares over this 12-month period, including 3.1 million shares repurchased in the fourth quarter. There are currently 3.9 million shares remaining available under the current share repurchase authorization announced April 20, 2006. The company may make additional share purchases from time-to-time in the open market or through privately negotiated transactions depending on market conditions. Partially offsetting these negative impacts was the positive impact from retained earnings.
Full Year Performance Discussion
Earnings for full-year 2006 were $461.2 million, or $1.92 per common share, compared with $412.1 million, or $1.77 per common share, in 2005.
Full-year 2006 results of $1.92 per common share included a net $0.10 per common share positive impact reflecting (See Table 8 below):
* $0.35 per common share positive impact due to a reduction of federal
income tax expense in the 2006 third quarter,
Partially offset by:
* $0.21 per common share negative impact of subsequent balance sheet
restructuring consisting of the third quarter's investment securities
impairment ($0.16 per common share) and the completion of the balance
sheet restructuring during the 2006 fourth quarter ($0.05 per common
share),
* $0.03 per common share negative impact resulting from a fourth
quarter contribution to the Huntington Foundation, and
Full-year 2005 results of $1.77 per common share included a net $0.01 per common share positive impact, primarily reflecting $0.12 per common share related to a positive impact of a federal tax loss carry back, mostly offset by a number of other significant items (See Table 8 below).
Adjusting for these significant items in both years, adjusted full-year earnings in 2006 were $1.82 per common share, up $0.06, or 3%, from the prior year.
Commenting on full-year performance, Hoaglin said, "Full-year earnings on an adjusted basis were in line with our expectations and represented another record year for Huntington. This past year we clearly demonstrated continued improvement in our underlying performance. We also made progress in setting the stage for future earnings growth. Strategically, this reflected two events. First was the completion of the acquisition of Unizan Financial Corp. on March 1, 2006 and its subsequent successful integration. Second was the agreement we announced late in the fourth quarter to acquire Sky Financial Group. Both of these transactions will broaden our customer base, increase our market share, and provide growth opportunities. Huntington ended the year positioned to be a much more formidable competitor within our Midwest markets."
"From a financial performance perspective, we made progress in a number of areas that gives us confidence as we move into 2007. Even after taking into account the impact of the Unizan merger, average commercial loans increased, particularly gaining some momentum late in the year. On this same basis, and though we saw growth in average residential real estate and home equity loans, momentum in the second half of the year suffered as the residential real estate market entered a period of softness. We were pleased that our average margin was relatively stable, declining only 4 basis points during a difficult interest rate environment and a period of highly competitive loan and deposit pricing. Importantly, the capital resulting from the significant tax refund benefit helped facilitate the fourth quarter balance sheet restructuring that had the desired impact of increasing the fourth quarter net interest margin and sets the stage for margin stability going into 2007."
"Trends in core fee income activities were positive," he continued. "Even after taking into account the positive impact from the Unizan merger, we saw very good increases in mortgage banking income, service charges on deposit accounts, trust services, other service charges and fees, and brokerage and insurance income. On the expense side, and after taking into account the significant items noted in Table 8 and the initiation of expensing for stock options this year, expenses were well contained. Year-end capital ratios were strong."
"Overall, reported revenues declined 1% while expenses increased 3%, resulting in a negative reported operating leverage of 4%. However, after adjusting for operating lease accounting and other large items that impact comparability between years (see Table 6), adjusted revenue grew 8% and expenses increased 7%, resulting in 1% positive operating leverage."
"Credit quality performance was in line with expectations with our 0.32% net charge-off ratio remaining below our targeted 0.35%-0.45% range. Yet, continued softness in some of our markets, and especially the residential real estate markets, resulted in a 70% increase in NPAs at year end. About 40% of this increase reflected the Unizan merger, with most of the remaining increase reflecting foreclosed mortgage loans fully guaranteed by the U.S. government, which prior to the 2006 third quarter were reported as over 90-day delinquent but still accruing loans. While higher on an absolute basis, it is important to note that 60% of our year-end NPAs were secured by residential real estate assets or were guaranteed by the U.S. Government. As we head into 2007, we do not see much change from where we ended the year."
Table 8 - Significant Items Impacting Earnings
Performance Comparisons (1)
Twelve Months Ended
Impact (2)
(in millions, except per share) Pre-tax EPS
December 31, 2006 - GAAP earnings $461.2(3) $1.92
* Reduction to federal income tax expense 84.5(3) 0.35
* Equity investment gains 7.4 0.02
* MSR FAS 156 accounting change 5.1 0.01
* Gain on sale of MasterCard(R) stock 3.3 0.01
* 3Q investment securities impairment (57.5) (0.16)
* 4Q completion of balance sheet restructuring (20.2) (0.05)
* Huntington Foundation contribution (10.0) (0.03)
* Automobile lease residual value losses (5.5) (0.01)
* Severance and consolidation expenses (4.5) (0.01)
* Unizan merger costs (3.7) (0.01)
* Adjustment for equity method investments (3.2) (0.01)
* Adjustment to defer home equity annual fees (2.4) (0.01)
December 31, 2005 - GAAP earnings $412.1(3) $1.77
* Net impact of federal tax loss carry back 26.9(3) 0.12
* Securities losses (8.1) (0.02)
* MSR mark-to-market net of hedge-related
trading activity (9.0) (0.02)
* Single C&I charge-off impact, net of allocated
reserves (6.4) (0.02)
* Net impact of repatriating foreign earnings (5.0)(3) (0.02)
* Severance and consolidation expenses (5.1) (0.01)
* SEC and regulatory-related expenses (3.7) (0.01)
* Write-off of equity investment (2.6) (0.01)
(1) Includes significant items with $0.01 EPS
impact or greater
(2) Favorable (unfavorable) impact on GAAP
earnings; after-tax unless otherwise noted
(3) After-tax
2007 OUTLOOK
When earnings guidance is given, it is the company's practice to do so on a GAAP basis, unless otherwise noted. Such guidance includes the expected results of all significant forecasted activities. However, guidance typically excludes potential unusual, one-time items, or selected items where the timing and financial impact is uncertain until the impact can be reasonably forecasted.
Overall, the 2007 economic environment is expected to be little changed from 2006. Weakness in the automotive manufacturing and supplier sector is expected to continue. Though our exposure is modest, how much this weakness impacts other banking activities is unknown. Our assumption is that this will remain modest and mostly concentrated in our East Michigan and Northern Ohio regions. Interest rates are expected to remain relatively stable and it is anticipated that the yield curve will continue to remain flat to slightly inverted. We will continue to target our interest rate risk position at our customary neutral position.
On December 20, the company announced its pending merger with Sky Financial Group. This merger is subject to approval by Huntington and Sky Financial shareholders, regulatory approvals, and other customary closing conditions. As previously announced, the merger is expected to close early in the 2007 third quarter and is estimated to be accretive to 2007 GAAP earnings by $0.01 per share, excluding merger charges. The following list of assumptions is for Huntington excluding any impact from Sky Financial Group. The 2007 full year GAAP earnings per share guidance includes this targeted accretion.
* Revenue growth in the low- to mid-single digit range reflecting: (1)
* Full year net interest margin relatively consistent with that of the
2006 fourth quarter level.
* Average total loan growth in the mid-single digit range, with total
commercial loans in the mid- to upper-single digit range and total
consumer loans being flat, reflecting continued softness in
residential mortgages and home equity loans.
* Core deposit growth in the low- to mid-single digit range.
* Non-interest income growth in the mid- to higher-single digit range.
* Non-interest expense growth in the low single-digit range.
* Revenue that grows faster than expenses, resulting in positive operating
leverage in the low single digit range and continued improvement in the
efficiency ratio.
* A net charge-off ratio at the lower end of the company's 0.35%-0.45%
targeted range.
* Relatively stable NPA and allowance for loan and lease loss ratios
compared with levels at December 31, 2006.
* No sizable stock repurchase activity.
(1) Excluding automobile operating lease accounting impact.
Within this type of environment, targeted full-year 2007 GAAP earnings are $1.87-$1.92 per common share, inclusive of an estimated $0.01 earnings per share accretion impact from the Sky Financial Group merger.
6% Increase In Quarterly Cash Dividend Declared
Huntington Bancshares Incorporated today announced that the board of directors has declared a quarterly cash dividend on its common stock of $0.265 per common share, a 6.0% increase from the current quarterly dividend of $0.25 per common share. The dividend is payable April 2, 2007, to shareholders of record on March 15, 2007.
"The board is pleased to announce this increase in our common stock dividend," said Hoaglin. "It is made possible by our financial performance and reflects our optimism for continued progress. We have a very strong capital base and expect to continue to generate excess capital. Our board recognizes the importance of dividends and dividend growth to our shareholders. The increase announced today continues a dividend payout ratio of approximately 55%, which we believe is warranted in the current, slower growth environment."
Conference Call / Webcast Information
Huntington's senior management will host an earnings conference call today at 1:00 p.m. (Eastern Time). The call may be accessed via a live Internet webcast at huntington-ir.com or through a dial-in telephone number at 800-223- 1238; conference ID 3326818. Slides will be available at huntington-ir.com just prior to 1:00 p.m. (Eastern Time) today for review during the call. A replay of the webcast will be archived in the Investor Relations section of Huntington's web site huntington-ir.com. A telephone replay will be available approximately two hours after the completion of the call through January 31, 2007 at 800-642-1687; conference ID 3326818.
Forward-looking Statement
This press release contains certain forward-looking statements, including certain plans, expectations, goals, and projections, and including statements about the benefits of the merger between Huntington and Sky Financial Group, which are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those contained or implied by such statements for a variety of factors including: the businesses of Huntington and Sky Financial Group may not be integrated successfully or such integration may take longer to accomplish than expected; the expected cost savings and any revenue synergies from the merger may not be fully realized within the expected timeframes; disruption from the merger may make it more difficult to maintain relationships with clients, associates, or suppliers; the required governmental approvals of the merger may not be obtained on the proposed terms and schedule; Huntington and/or Sky Financial Group's stockholders may not approve the merger; changes in economic conditions; movements in interest rates; competitive pressures on product pricing and services; success and timing of other business strategies; the nature, extent, and timing of governmental actions and reforms; and extended disruption of vital infrastructure; and other factors including but not limited to those set forth under the heading "Risk Factors" included in Item 1A of Huntington's Annual Report on Form 10-K/A for the year ended December 31, 2005, and other factors described from time to time in Huntington's other filings with the Securities and Exchange Commission, could cause actual conditions, events, or results to differ significantly from those described in the forward-looking statements described in Huntington's 2005 Annual Report on Form 10-K/A and documents subsequently filed by Huntington with the Securities and Exchange Commission. All forward-looking statements included in this news release are based on information available at the time of the release. Huntington assumes no obligation to update any forward-looking statement.
Additional Information About the Merger and Where to Find It
In connection with the proposed merger between Huntington and Sky Financial Group, Huntington and Sky Financial will be filing relevant documents concerning the transaction with the Securities and Exchange Commission, including a registration statement on Form S-4, which will include a proxy statement/prospectus. Stockholders will be able to obtain a free copy of the proxy statement/prospectus, as well as other filings containing information about Huntington and Sky Financial Group, at the Securities and Exchange Commission's internet site (http://www.sec.gov). Copies of the proxy statement/prospectus and the filings with the Securities and Exchange Commission that will be incorporated by reference in the proxy statement/prospectus can also be obtained, without charge, by directing a request to Huntington Bancshares Incorporated, Huntington Center, 41 South High Street, Columbus, Ohio 43287, Attention: Investor Relations, 614-480- 5676, or Sky Financial Group, 221 South Church Street, Bowling Green, Ohio, 43402. The final proxy statement / prospectus will be mailed to stockholders of Huntington and Sky Financial Group.
Stockholders are urged to read the proxy statement/prospectus, and other relevant documents filed with the Securities and Exchange Commission regarding the proposed transaction when they become available, because they will contain important information.
The directors and executive officers of Huntington and Sky Financial Group and other persons may be deemed to be participants in the solicitation of proxies in respect of the proposed merger. Information regarding Huntington's directors and executive officers is available in its proxy statement filed with the SEC by Huntington on March 8, 2006. Information regarding Sky Financial Group's directors and executive officers is available in its proxy statement filed with the SEC by Sky Financial Group on February 23, 2006. Other information regarding the participants in the proxy solicitation and a description of their direct and indirect interests, by security holdings or otherwise, will be contained in the proxy statement/prospectus and other relevant materials to be filed with the SEC when they become available.
Basis of Presentation
Use of Non-GAAP Financial Measures
This earnings release contains GAAP financial measures and non-GAAP financial measures where management believes it to be helpful in understanding Huntington's results of operations or financial position. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found in this release or in the Quarterly Financial Review supplement to this earnings release, which can be found on Huntington's website at huntington-ir.com.
Operating Leverage
A long-term objective of Management is to increase earnings by growing revenues faster than expenses over a certain measured period, typically annually. Operating leverage measures the difference between the two growth rates; e.g., if revenues grow 6% and expenses grow 4%, 2% positive operating leverage is generated. However, over any given measurement period, certain items may occur that distort reported revenue or expense trends. For example, the introduction of a new accounting standard might distort the current period's reported revenue growth rate. Similarly, an acquisition may result in certain reported merger-related charges that distort longer-term underlying expense performance trends. Therefore, to determine a clearer picture of underlying trends in operating leverage, Management adjusts reported revenues and/or expenses to remove the impact of such items that affect comparability and distort underlying operating leverage performance. This results in an adjusted operating leverage measurement, which helps Management and investors better understand core performance trends.
Specific adjustments we consider include:
1. Reducing reported revenues by the amount of automobile operating
lease expense. Doing so more closely mirrors the revenue reporting \
methodology of direct finance lease accounting. This is important in
assessing the company's on-going revenue trends in that, since April
2002, direct financing lease accounting has been used for all new
automobile leases originations, and the existing operating lease
portfolio has continued to run-off.
2. Excluding the impact of investment securities gains (losses). It is
our practice to exclude these from revenue and efficiency ratio
calculations to provide better comparability of performance relative
to peers. This is because such gains (losses) may fluctuate
significantly between periods, and between companies, thus distorting
underlying revenue trends for both the company, and in the context of
peer performance comparisons.
3. Excluding the impact from the amortization of intangible expense. It
is our practice to exclude this from efficiency ratio calculations.
Amortization of intangible expense typically arises from acquisition
transactions, and results in a significant expense increase in
periods soon after the acquisition. However, such amortization
typically declines in later periods, thus distorting expense trends.
4. Excluding or otherwise adjusting for the impact of significant
revenues or expenses that are judged to be one-time or short-term in
nature. Examples would be (1) expenses that arise from specific
management initiatives such as severance and/or consolidation
expenses, (2) gains or losses associated with the disposition of
assets, (3) Huntington Foundation contributions, and (4) merger-
related integration costs as they typically impact expenses for only
a few quarters during the period of transition; e.g. restructuring
charge, asset valuation adjustments, etc.
5. Excluding changes due to new accounting standards that affect
comparability of revenue or expenses between reported periods; e.g.,
stock-based compensation expensing. When a new accounting standard
results in the restatement of historical period revenues and
expenses, no adjustment is made. If there is no historical
restatement, but it is possible to make a reasonable estimate of what
the impact would have been, the prior period will be adjusted as if
the standard had been in place; e.g. share-based compensation that
began in 2006. However, if there is no historical restatement and it
is not possible to estimate an historical period's comparable amount,
the current period is adjusted to exclude the impact from the
operating leverage calculation until both periods being compared
include its impact.
Estimating the Impact on Balance Sheet and Income Statement Results Due to the Unizan Merger
The merger with Unizan Financial Corp. (Unizan) was completed on March 1, 2006. At the time of acquisition, Unizan had assets of $2.5 billion, including $1.6 billion of loans, and core deposits of $1.5 billion. Unizan results were only in consolidated results for a partial quarter in the 2006 first quarter, but fully impact all quarters thereafter. As a result, performance comparisons between 2006 fourth quarter and year-to-date periods with comparable 2005 periods are affected, as Unizan results were not in the prior period. In contrast, comparisons between the 2006 fourth and third quarter results are not affected given Unizan fully impacted both of these quarters. Comparisons of the 2006 fourth quarter and year-to-date reported
results compared with 2005 pre-merger reporting periods are impacted as follows:
* Increased certain reported period-end balance sheet and credit quality
items (e.g., non-performing loans).
* Increased reported average balance sheet, revenue, expense, and credit
quality results (e.g., net charge-offs).
* Increased reported non-interest expense items as a result of costs
incurred as part of merger-integration activities, most notably employee
retention bonuses, outside programming services related to systems
conversions, and marketing expenses related to customer retention
initiatives. These net merger costs were $1.0 million in the 2006 first
quarter, $2.6 million in the 2006 second quarter, $0.5 million in the
2006 third quarter, and a negative $0.4 million in the 2006 fourth
quarter, resulting in $3.7 million of merger costs for full year 2006.
Given the impact of the merger on reported 2006 results, management believes that an understanding of the impacts of the merger is necessary to understand better underlying performance trends. When comparing post-merger period results to pre-merger periods, two terms relating to the impact of the Unizan merger on reported results are used:
* "Merger-related" refers to amounts and percentage changes representing
the impact attributable to the merger.
* "Merger costs" represent expenses associated with merger integration
activities.
The following methodology has been implemented to estimate the approximate effect of the Unizan merger used to determine "merger-related" impacts.
Balance Sheet Items
For loans and leases, as well as core deposits, balances as of the acquisition date are pro-rated to the post-merger period being used in the comparison. To estimate the impact on 2006 first quarter average balances, one-third of the closing date balance was used as those balances were in reported results for only one month of the quarter. Full quarter and year-to- date estimated impacts for subsequent periods were developed using this same pro-rata methodology. This methodology assumes acquired balances will remain constant over time.
Income Statement Items
For income statement line items, Unizan's actual full year results for 2005 were used for pro-rating the impact on post-merger periods. For example, to estimate the 2006 first quarter impact of the merger on personnel costs, one-twelfth of Unizan's full-year 2005 personnel costs was used. Full quarter and year-to-date estimated impacts for subsequent periods were developed using this same pro-rata methodology. This results in an approximate impact since the methodology does not adjust for any unusual items or seasonal factors in Unizan's 2005 reported results, or synergies realized since the merger date. The one exception to this methodology relates to the amortization of intangibles expense where the actual post-merger amount was used.
Table 9 below provides detail of changes to selected reported results to quantify the impact of the Unizan merger and the impact of all other factors using this methodology:
Table 9 - Estimated Impact of Unizan Merger
2006 Fourth Quarter versus 2005 Fourth Quarter
Unizan
Average Loans and Deposits Fourth Quarter Change Merger
(in millions) 2006 2005 Amount Percent Related
Loans
Middle-market C&I $5,831 $4,946 $885 17.9 % $70
Middle-market CRE 3,938 3,598 340 9.4 723
Small business 2,543 2,230 313 14.0 -
Total commercial 12,312 10,774 1,538 14.3 793
Automobile loans and leases 3,949 4,355 (406) (9.3) 71
Home equity 4,973 4,781 192 4.0 223
Residential mortgage 4,635 4,165 470 11.3 409
Other consumer 430 393 37 9.4 167
Total consumer 13,987 13,694 293 2.1 870
Total loans $26,299 $24,468 $1,831 7.5 % $1,663
Deposits
Demand deposits -
non-interest bearing $3,580 $3,444 $136 3.9 % $173
Demand deposits - interest
bearing 7,767 7,496 271 3.6 243
Savings and other domestic
time deposits 2,849 2,984 (135) (4.5) 511
Core certificates of deposit 5,380 3,891 1,489 38.3 620
Total core deposits 19,576 17,815 1,761 9.9 1,547
Other deposits 5,132 4,627 505 10.9 180
Total deposits $24,708 $22,442 $2,266 10.1 % $1,727
Other
Average Loans and Deposits
(in millions) Amount Percent
Loans
Middle-market C&I $815 16.5 %
Middle-market CRE (383) (10.6)
Small business 313 14.0
Total commercial 745 6.9
Automobile loans and leases (477) (11.0)
Home equity (31) (0.6)
Residential mortgage 61 1.5
Other consumer (130) (33.1)
Total consumer (577) (4.2)
Total loans $168 0.7 %
Deposits
Demand deposits - non-interest
bearing $(37) (1.1)%
Demand deposits - interest bearing 28 0.4
Savings and other domestic time
deposits (646) (21.6)
Core certificates of deposit 869 22.3
Total core deposits 214 1.2
Other deposits 325 7.0
Total deposits $539 2.4 %
Selected Income Statement Categories Fourth Quarter Change
(in thousands) 2006 2005 Amount Percent
Net interest income - FTE $262,104 $247,513 $14,591 5.9 %
Service charges on deposit accounts $48,548 $42,083 $6,465 15.4 %
Trust services 23,511 20,425 3,086 15.1
Brokerage and insurance income 14,600 13,101 1,499 11.4
Bank owned life insurance income 10,804 10,389 415 4.0
Other service charges and fees 13,784 11,488 2,296 20.0
Mortgage banking income (loss) 6,169 8,818 (2,649) (30.0)
Securities gains (losses) (15,804) (8,770) (7,034) 80.2
Gains on sales of automobile loans 1,252 455 797 N.M.
Other income 32,398 26,799 5,599 20.9
Sub-total before automobile
operating lease income 135,262 124,788 10,474 8.4
Automobile operating lease income 5,344 22,534 (17,190) (76.3)
Total non-interest income $140,606 $147,322 $(6,716) (4.6)%
Personnel costs $137,944 $116,111 $21,833 18.8 %
Net occupancy 17,279 17,940 (661) (3.7)
Outside data processing and other
services 20,695 19,693 1,002 5.1
Equipment 18,151 16,093 2,058 12.8
Professional services 8,958 7,440 1,518 20.4
Marketing 6,207 7,145 (938) (13.1)
Telecommunications 4,619 4,453 166 3.7
Printing and supplies 3,610 3,084 526 17.1
Amortization of intangibles 2,993 218 2,775 N.M.
Other expense 43,365 20,995 22,370 N.M.
Sub-total before automobile
operating lease expense 263,821 213,172 50,649 23.8
Automobile operating lease expense 3,969 17,183 (13,214) (76.9)
Total non-interest expense $267,790 $230,355 $37,435 16.3 %
Unizan Other
Selected Income Statement Categories Merger Merger
(in thousands) Related Costs Amount Percent
Net interest income - FTE $17,694 $- $(3,103) (1.3)%
Service charges on deposit accounts $1,578 $- $4,887 11.6 %
Trust services 1,653 - 1,433 7.0
Brokerage and insurance income 456 - 1,043 8.0
Bank owned life insurance income 786 - (371) (3.6)
Other service charges and fees 309 - 1,987 17.3
Mortgage banking income (loss) 258 - (2,907) (33.0)
Securities gains (losses) - - (7,034) 80.2
Gains on sales of automobile loans - - 797 N.M.
Other income 2,136 - 3,463 12.9
Sub-total before automobile operating
lease income 7,176 - 3,298 2.6
Automobile operating lease income - - (17,190) (76.3)
Total non-interest income $7,176 $- $(13,892) (9.4)%
Personnel costs $7,725 $(373) $14,481 12.5 %
Net occupancy 1,290 - (1,951) (10.9)
Outside data processing and other
services 501 (82) 583 3.0
Equipment 516 - 1,542 9.6
Professional services 1,473 24 21 0.3
Marketing 267 - (1,205) (16.9)
Telecommunications 366 - (200) (4.5)
Printing and supplies - 1 525 17.0
Amortization of intangibles 2,786 - (11) (5.0)
Other expense 3,027 1 19,342 92.1
Sub-total before automobile operating
lease expense 17,951 (429) 33,127 15.5
Automobile operating lease expense - - (13,214) (76.9)
Total non-interest expense $17,951 $(429) $19,913 8.6 %
Twelve Months Ended Unizan
Average Loans and Deposits December 31, Change Merger
(in millions) 2006 2005 Amount Percent Related
Loans
Middle-market C&I $5,501 $4,817 $684 14.2 % $58
Middle-market CRE 3,950 3,586 364 10.2 603
Small business 2,414 2,224 190 8.5 -
Total commercial 11,865 10,627 1,238 11.6 661
Automobile loans and leases 4,088 4,465 (377) (8.4) 59
Home equity 4,970 4,752 218 4.6 186
Residential mortgage 4,581 4,081 500 12.3 340
Other consumer 439 383 56 14.6 140
Total consumer 14,078 13,681 397 2.9 725
Total loans $25,943 $24,308 $1,635 6.7 % $1,386
Deposits
Demand deposits - non-interest
bearing $3,530 $3,379 $151 4.5 % $144
Demand deposits - interest
bearing 7,742 7,658 84 1.1 202
Savings and other domestic
time deposits 2,992 3,156 (164) (5.2) 426
Core certificates of deposit 5,050 3,334 1,716 51.5 517
Total core deposits 19,314 17,527 1,787 10.2 1,289
Other deposits 4,870 4,485 385 8.6 150
Total deposits $24,184 $22,012 $2,172 9.9 % $1,439
Other
Average Loans and Deposits
(in millions) Amount Percent
Loans
Middle-market C&I $626 13.0 %
Middle-market CRE (239) (6.7)
Small business 190 8.5
Total commercial 577 5.4
Automobile loans and leases (436) (9.8)
Home equity 32 0.7
Residential mortgage 160 3.9
Other consumer (84) (21.9)
Total consumer (328) (2.4)
Total loans $249 1.0 %
Deposits
Demand deposits - non-interest
bearing $7 0.2 %
Demand deposits - interest bearing (118) (1.5)
Savings and other domestic time
deposits (590) (18.7)
Core certificates of deposit 1,199 36.0
Total core deposits 498 2.8
Other deposits 235 5.2
Total deposits $733 3.3 %
Selected Income Statement Twelve Months Ended
Categories December 31, Change
(in thousands) 2006 2005 Amount Percent
Net interest income - FTE $1,035,202 $975,804 $59,398 6.1 %
Service charges on deposit
accounts $185,713 $167,834 $17,879 10.7 %
Trust services 89,955 77,405 12,550 16.2
Brokerage and insurance income 58,835 53,619 5,216 9.7
Bank owned life insurance income 43,775 40,736 3,039 7.5
Other service charges and fees 51,354 44,348 7,006 15.8
Mortgage banking income (loss) 41,491 28,333 13,158 46.4
Securities gains (losses) (73,191) (8,055) (65,136) N.M.
Gains on sales of automobile
loans 3,095 1,211 1,884 N.M.
Other income 116,927 93,836 23,091 24.6
Sub-total before automobile
operating lease income 517,954 499,267 18,687 3.7
Automobile operating lease income 43,115 133,015 (89,900) (67.6)
Total non-interest income $561,069 $632,282 $(71,213) (11.3)%
Personnel costs $541,228 $481,658 $59,570 12.4 %
Net occupancy 71,281 71,092 189 0.3
Outside data processing and
other services 78,779 74,638 4,141 5.5
Equipment 69,912 63,124 6,788 10.8
Professional services 27,053 34,569 (7,516) (21.7)
Marketing 31,728 26,279 5,449 20.7
Telecommunications 19,252 18,648 604 3.2
Printing and supplies 13,864 12,573 1,291 10.3
Amortization of intangibles 9,962 829 9,133 N.M.
Other expense 106,649 82,560 24,089 29.2
Sub-total before automobile
operating lease expense 969,708 865,970 103,738 12.0
Automobile operating lease
expense 31,286 103,850 (72,564) (69.9)
Total non-interest expense $1,000,994 $969,820 $31,174 3.2 %
Unizan Other
Selected Income Statement Categories Merger Merger
(in thousands) Related Costs Amount Percent
Net interest income - FTE $58,980 $- $418 0.0 %
Service charges on deposit
accounts $5,260 $- $12,619 7.5 %
Trust services 5,510 - 7,040 9.1
Brokerage and insurance income 1,520 - 3,696 6.9
Bank owned life insurance income 2,620 - 419 1.0
Other service charges and fees 1,030 - 5,976 13.5
Mortgage banking income (loss) 860 - 12,298 43.4
Securities gains (losses) - - (65,136) N.M.
Gains on sales of automobile loans - - 1,884 N.M.
Other income 7,120 - 15,971 17.0
Sub-total before automobile operating
lease income 23,920 - (5,233) (1.0)
Automobile operating lease income - - (89,900) (67.6)
Total non-interest income $23,920 $- $(95,133) (15.0)%
Personnel costs $25,750 $695 $33,125 6.9 %
Net occupancy 4,300 260 (4,371) (6.1)
Outside data processing and other
services 1,670 1,531 940 1.3
Equipment 1,720 45 5,023 8.0
Professional services 4,910 137 (12,563) (36.3)
Marketing 890 734 3,825 14.6
Telecommunications 1,220 148 (764) (4.1)
Printing and supplies - 159 1,132 9.0
Amortization of intangibles 9,134 - (1) (0.1)
Other expense 10,090 40 13,959 16.9
Sub-total before automobile operating
lease expense 59,684 3,749 40,305 4.7
Automobile operating lease expense - - (72,564) (69.9)
Total non-interest expense $59,684 $3,749 $(32,259) (3.3)%
Annualized data
Certain returns, yields, performance ratios, or quarterly growth rates are "annualized" in this presentation to represent an annual time period. This is done for analytical and decision-making purposes to better discern underlying performance trends when compared to full-year or year-over-year amounts. For example, loan growth rates are most often expressed in terms of an annual rate like 8%. As such, a 2% growth rate for a quarter would represent an annualized 8% growth rate.
Fully taxable equivalent interest income and net interest margin
Income from tax-exempt earnings assets is increased by an amount equivalent to the taxes that would have been paid if this income had been taxable at statutory rates. This adjustment puts all earning assets, most notably tax-exempt municipal securities and certain lease assets, on a common basis that facilitates comparison of results to results of competitors.
Earnings per share equivalent data
Significant and/or one-time income or expense items may be expressed on a per common share basis. This is done for analytical and decision-making purposes to better discern underlying trends in total corporate earnings per share performance excluding the impact of such items. Investors may also find this information helpful in their evaluation of the company's financial performance against published earnings per share mean estimate amounts, which typically exclude the impact of significant and/or one-time items. Earnings per share equivalents are usually calculated by applying a 35% effective tax rate to a pre-tax amount to derive an after-tax amount, which is divided by the average shares outstanding during the respective reporting period. Occasionally, when the item involves special tax treatment, the after-tax amount is separately disclosed, with this then being the amount used to calculate the earnings per share equivalent.
NM or nm
Percent changes of 100% or more are shown as "nm" or "not meaningful". Such large percent changes typically reflect the impact of one-time items within the measured periods. Since the primary purpose of showing a percent change is for discerning underlying performance trends, such large percent changes are "not meaningful" for this purpose.
About Huntington
Huntington Bancshares Incorporated is a $35 billion regional bank holding company headquartered in Columbus, Ohio. Through its affiliated companies, Huntington has more than 140 years of serving the financial needs of its customers. Huntington provides innovative retail and commercial financial products and services through over 380 regional banking offices in Indiana, Kentucky, Michigan, Ohio, and West Virginia. Huntington also offers retail and commercial financial services online at huntington.com; through its technologically advanced, 24-hour telephone bank; and through its network of nearly 1,000 ATMs. Selected financial service activities are also conducted in other states including: Dealer Sales offices in Arizona, Florida, Georgia, North Carolina, New Jersey, Pennsylvania, South Carolina, and Tennessee; Private Financial and Capital Markets Group offices in Florida; and Mortgage Banking offices in Florida, Maryland, and New Jersey. International banking services are made available through the headquarters office in Columbus and an office located in the Cayman Islands and an office located in Hong Kong.
SOURCE Huntington Bancshares Incorporated
Released January 18, 2007