- A bank invested in people.®
 |
|
|
|
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
HUNTINGTON BANCSHARES REPORTS:
COLUMBUS, Ohio – July 21, 2006 – Huntington Bancshares Incorporated (NASDAQ: HBAN; www.huntington.com) reported 2006 second quarter earnings of $111.6 million, or $0.46 per common share, up 5% and 2%, respectively, from $106.4 million, or $0.45 per common share, in the year-ago quarter. The lower percentage increase in earnings per common share compared to net income reflected the impact of the Unizan merger. Earnings in the 2006 first quarter were $104.5 million, or $0.45 per common share.
Earnings for the first six months of 2006 were $216.1 million, or $0.90 per common share, up 6% and 5%, respectively, from $202.9 million, or $0.86 per common share, in 2005.
Highlights compared with 2006 first quarter included:
“Second quarter net income and earnings per share were slightly above our expectations,” said Thomas E. Hoaglin, chairman, president, and chief executive officer. “The closing of the merger with Unizan Financial Corp. on March 1, 2006 favorably impacted reported growth rates of certain balance sheet and income statement items since this was the first full quarter after the merger. Yet, even excluding any impacts from the merger, we saw strength in some important areas.”
“We were especially pleased that our net interest margin continued its trend of stability,” he noted. “Over the last 10 quarters, our net interest margin has remained within a narrow range of 3.29%-3.38%. This reflected our focus on disciplined loan and deposit pricing, as well as effective interest rate risk management. The strong merger-adjusted 11% annualized growth in average total commercial loans was also noteworthy, reflecting an almost two percentage point improvement in loan commitment utilization from the prior quarter. The continuation of a tough competitive environment made growing consumer loans and deposits a challenge. Average total core deposits on a merger-adjusted basis declined slightly as deposit pricing in our markets remained aggressive and we continued to exercise pricing discipline.”
“We were also quite pleased with the linked-quarter merger-adjusted growth in important fee income categories. On a merger-adjusted basis, we saw 13% growth in mortgage banking income and 12% growth in service charges on deposit accounts, as well as in other service charges and fees. While merger-adjusted expenses increased, this was mostly in marketing, related to the timing of a television media campaign, as well as equipment expense, representing investments in growing and managing our business. We were also pleased that we generated positive operating leverage compared with the year-ago quarter.”
“Underlying credit quality trends were strong,” he said. “Net charge-offs declined to 0.21%. With our provision for credit losses exceeding net charge-offs by $1.8 million, our allowance for loan losses ratio remained unchanged at 1.09%. Our 90-day delinquency ratio and NPLs remained stable. Though other real estate owned increased, this primarily reflected the reclassification of U.S. government guaranteed foreclosed loans from 90-day delinquent loans.”
“ Capital levels remained strong. As expected, our period end tangible common equity ratio declined, ending the quarter at 6.46%, due to the repurchase of 8.1 million common shares. This is at the high end of our 6.25%-6.50% targeted range. Our internal capital generation rate was 7%, and the expectation is that we will continue to generate excess capital in the second half of the year.”
“A particular highlight was the completion of our very successful integration of Unizan’s 110,000 customer accounts to our technology platforms and the conversion of their banking offices to the Huntington brand.”
“In sum, we continue to be quite pleased with our overall performance and remain optimistic about our prospects for the rest of the year. With earnings per share of $0.90 for the first half of the year, we are narrowing our full-year GAAP earnings targeted range to $1.80-$1.83 per share,” he concluded.
SECOND QUARTER PERFORMANCE DISCUSSION
Significant Factors Influencing Financial Performance Comparisons
In addition to the first full quarter Unizan impact on results, other specific significant items impacting 2006 second quarter performance included (see Table 1 below):
Net Interest Income, Net Interest Margin, Loans and Leases, and Investment Securities
2006 Second Quarter versus 2005 Second Quarter
Fully taxable equivalent net interest income increased $21.3 million, or 9% ($3.6 million, or 1% merger-adjusted), from the year-ago quarter, reflecting the favorable impact of a $2.7 billion, or 9%, increase in average earning assets, as the fully taxable equivalent net interest margin declined two basis points to 3.34%. Average total loans and leases increased $1.7 billion, or 7%. On a merger-adjusted basis, average total loans and leases were essentially unchanged from the year-ago quarter. This primarily reflected growth in commercial loans, residential mortgages, and home equity loans, mostly offset by a decline in total average automobile loans and leases as the program to sell of a portion of that production continued.
Average total commercial loans increased $1.2 billion, or 12% (4% merger-adjusted), from the year-ago quarter. The $1.2 billion growth reflected a $0.6 billion, or 11%, increase in average middle market C&I loans, a $0.5 billion, or 13%, increase in average commercial real estate loans, and a $0.2 billion, or 10%, increase in average small business loans.
Average residential mortgages increased $0.5 billion, or 13% (3% merger-adjusted), and average home equity loans increased $0.2 billion, or 5% (<1% merger-adjusted).
Compared with the year-ago quarter, average total automobile loans and leases decreased $0.4 billion, or 9%, with Unizan having no material impact. The decrease reflected the combination of two factors, (1) the continuation of historically low production levels over this period due to low consumer demand and competitive pricing, and (2) the sale of automobile loans as the company’s program of selling a portion of current loan production continued. Average operating lease assets declined $0.3 billion, or 63%, as this portfolio continued to run off. Total automobile loan and lease exposure at quarter end was 16%, down from 19% a year ago.
Average total investment securities increased $1.1 billion from the 2005 second quarter, attributed in part to the securities purchased in the 2006 first quarter related to Unizan.
2006 Second Quarter versus 2006 First Quarter
Compared with the 2006 first quarter, fully taxable equivalent net interest income increased $18.7 million, or 8% ($6.9 million, or 3% merger-adjusted). This reflected a 6% increase in average total earnings assets, the benefit of one additional day in the current quarter, as well as a two basis point increase in the net interest margin to 3.34% from 3.32%. The prior quarter’s net interest margin was negatively impacted by about 3 basis points in that period related to an adjustment for annual fees related to home equity loans.
Average total loans and leases increased $1.3 billion, or 5%, from the 2006 first quarter, including a $1.1 billion positive impact from the Unizan merger.
Average total commercial loans increased $0.8 billion, or 7% (3% merger-adjusted), from the 2006 first quarter. The $0.8 billion increase reflected a $0.3 billion, or 6%, increase in average middle market C&I loans, a $0.3 billion, or 16%, increase in average small business loans, and a $0.2 billion, or 4%, increase in average commercial real estate loans.
Average residential mortgages increased $0.3 billion, or 8% (1% merger-adjusted), and average home equity loans increased $0.2 billion, or 4% (1% merger-adjusted). The sluggish merger-adjusted growth in average residential mortgages and home equity loans reflected a decline in broker-originated activity, as well as credit underwriting and pricing discipline.
Compared with the 2006 first quarter, average total automobile loans and leases declined 2%, with the Unizan merger having no material impact. The decline reflected a combination of factors including low demand for leases, as well as the company’s program of selling a portion of automobile loan and lease production. Average direct financing leases declined $0.1 billion, or 6%. Though direct financing lease production increased 47% from the prior quarter, the absolute level of production over the last several quarters has remained at historically low levels due to continued low consumer demand and competitive pricing. In contrast, average automobile loans increased 3%. Automobile loan production increased 12% from the prior quarter and represented the second highest level of quarterly production in the last nine quarters. Average operating lease assets declined slightly as this portfolio continued to run off.
Average investment securities increased $0.4 billion from the 2006 first quarter, primarily merger-related.
Deposits
2006 Second Quarter versus 2005 Second Quarter
Average total core deposits in the 2006 second quarter increased $1.9 billion, or 11%, from the year-ago quarter. Most of the $1.9 billion increase reflected a $1.7 billion increase in average certificates of deposit less than $100,000, with average non-interest bearing and interest bearing demand deposits up $0.2 billion and $0.1 billion, respectively. Average savings and other domestic time deposits declined $0.1 billion.
On a merger-adjusted basis, average total core deposits increased $0.4 billion, or 2%, from the year-ago quarter, reflecting a $1.1 billion increase in average certificates of deposit less than $100,000, partially offset by a $0.6 billion decline in average savings and other domestic time deposits, and a $0.1 billion decline in average interest bearing demand deposits. This transfer of funds into certificates of deposit less than $100,000 and out of other deposit accounts reflected the continuation of customer preference for higher fixed rate term deposit accounts.
2006 Second Quarter versus 2006 First Quarter
Average total core deposits in the 2006 second quarter increased $1.0 billion, or 5%, with most of the increase reflecting a $0.6 billion increase in average certificates of deposit less than $100,000. Average interest bearing and non-interest bearing demand deposits each increased $0.2 billion, or 3% and 5%, respectively. Average savings and other domestic time deposits were essentially flat. On a merger-adjusted basis, average total core deposits declined slightly, reflecting a $0.3 billion decrease in average savings and other domestic time deposits that was essentially offset by a $0.2 billion increase in certificates of deposit less than $100,000. This transfer of funds into certificates of deposit less than $100,000 and out of savings and other time deposits reflected the same factors impacting comparisons to the year-ago quarter noted above. Merger-adjusted average interest bearing and non-interest bearing demand deposits both increased slightly. Initiatives have been implemented targeted at growing these deposits.
Non-Interest Income
2006 Second Quarter versus 2005 Second Quarter
Non-interest income increased $6.8 million, or 4%, from the year-ago quarter, despite a $23.2 million decline in operating lease income. That portfolio continued to run off since no automobile operating leases have been originated since April 2002. Non-interest income before operating lease income increased $30.1 million, or 25% ($7.2 million merger-related). The drivers of the $30.1 million increase included:
Partially offset by:
Table 2 – Non-interest Income Analysis
2006 Second Quarter versus 2006 First Quarter
Non-interest income increased $3.5 million, or 2%, from the 2006 first quarter. However, excluding the impact of a $4.5 million decline in operating lease income as that portfolio continued to run off, non-interest income before operating lease income increased $8.0 million, or 6% ($4.8 million merger-related). Contributing to the $8.0 million increase were:
Partially offset by:
Table 3 – Non-interest Income Analysis
Non-Interest Expense
2006 Second Quarter versus 2005 Second Quarter
Non-interest expense increased $4.2 million, or 2%, from the year-ago quarter, despite an $18.1 million decline in operating lease expense as that portfolio continued to run off. Non-interest expense before operating lease expense increased $22.3 million, or 10%, from the year-ago quarter, with $20.6 million attributable to Unizan ($18.0 merger-related plus $2.6 million of merger costs). The primary drivers of the $22.3 million increase were:
Partially offset by:
Discerning underlying non-interest expense performance requires adjusting reported non-interest expense so expenses in different periods can be analyzed on a comparable basis. Excluding 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 stock options that began in 2006, adds expenses that previously did not exist and may leave the opposite impression.
Table 4 shows that when second quarter reported total non-interest expense is adjusted to exclude operating lease expense, stock option expense, Unizan expenses including the increase in intangible amortization resulting from the merger, as well as merger-related expenses, underlying non-interest expense decreased 1% from the year-ago quarter.
Table 4 – Non-interest Expense Analysis
2006 Second Quarter versus 2006 First Quarter
Non-interest expense increased $13.9 million, or 6%, from the 2006 first quarter despite a $3.8 million decline in operating lease expense as that portfolio continued to run off. Non-interest expense before operating lease expense increased $17.7 million, or 8%, with $13.6 million attributable to Unizan ($12.0 million merger-related and $1.6 million of merger-costs). The primary drivers of the $17.7 million increase included:
Table 5 shows that when 2006 first and second quarter reported total non-interest expense is adjusted to exclude operating lease expense and Unizan merger-related expenses, including the increase in intangible amortization resulting from current-period merger-related expenses, non-interest expense increased 2% from the 2006 first quarter.
Table 5 – Non-interest Expense Analysis
Operating Leverage
Reported total revenues in the 2006 second quarter increased 7% from the year-ago quarter with reported total non-interest expense increasing 2%, resulting in reported positive operating leverage of 5%. This overstates operating leverage performance between these two periods because of the impact of operating lease accounting and other large items that affect comparability (see Table 6). After adjusting for operating lease accounting and such items, adjusted total revenue grew 12% with adjusted total expenses increasing at 10%, resulting in positive 2% operating leverage.
Income Taxes
The company’s effective tax rate was 29.0% in the 2006 second quarter, up from 22.3% in the year-ago quarter, and 28.1% in the 2006 first quarter. As previously disclosed, the effective tax rate in each quarter of 2005 included the positive impact on net income due to a federal tax loss carry back.
Credit Quality
Total net charge-offs for the 2006 second quarter were $14.0 million, or an annualized 0.21% of average total loans and leases. This was down from $16.3 million, or an annualized 0.27%, in the year-ago quarter. It was also down from $24.2 million, or an annualized 0.39%, of average total loans and leases in the 2006 first quarter, with 11 basis points of the decrease in the net charge-off ratio, or $6.5 million, related to the 2006 first quarter resolution of certain commercial loans that were classified as NPLs. Reserves were established for these commercial loans in the 2005 fourth quarter.
Total commercial net charge-offs in the second quarter were $3.4 million, or an annualized 0.12%, down $2.1 million from $5.6 million, or an annualized 0.21%, in the year-ago quarter. Compared with the 2006 first quarter, current period total commercial net charge-offs decreased $7.1 million, reflecting the resolution of $6.5 million of loans classified as NPLs in the 2005 fourth quarter noted above.
Total consumer net charge-offs in the current quarter were $10.5 million, or an annualized 0.30% of average related loans, down slightly from $10.7 million, or 0.31%, in the year-ago quarter. Compared with the 2006 first quarter, total consumer net charge-offs decreased $3.1 million from $13.7 million, or an annualized 0.40% of average related loans.
NPAs were $171.1 million at June 30, 2006 , and represented 0.65% of related assets, up $73.7 million from $97.4 million, or 0.40% of related assets, at the end of the year-ago quarter, and up $16.2 million from $154.9 million, or 0.59% of related assets, at March 31, 2006 . The increase from March 31, 2006 , reflected a $16.4 million increase in other real estate owned (OREO) and included $12.6 million due to a reclassification of foreclosed mortgage loans fully guaranteed by the U.S. government from over 90-day delinquent but still accruing loans. Huntington services mortgage loans for GNMA. When loans sold to GNMA become 120 days delinquent, Huntington may repurchase them and begin foreclosure. In accordance with FAS 140, such loans that are eligible for repurchase are recorded as loans on the balance sheet. When those loans are foreclosed, such loans are then recorded as OREO. This change in the reporting for GNMA-guaranteed OREO also accounted for the $12.5 million increase in total NPAs guaranteed by the U.S. government from the end of the 2006 first quarter to $30.7 million from $18.3 million at March 31, 2006 .
NPLs, which exclude OREO, increased $51.4 million from the year-earlier period to $135.3 million at June 30, 2006 , with $32.8 million representing NPLs acquired in the Unizan merger. NPLs declined slightly from March 31, 2006 . NPLs expressed as a percent of total loans and leases were 0.51% at June 30, 2006, up from 0.34% a year earlier, but down slightly from 0.52% at March 31, 2006.
The over 90-day delinquent but still accruing, ratio was 0.19% at June 30, 2006, down from 0.22% at the end of the year-ago quarter, and from 0.20% at March 31, 2006, with these declines reflecting the reclassification of GNMA-guaranteed foreclosed OREO noted above. Over the last five quarters, the 90-day delinquency ratio has been relatively stable and remained at a low relative level compared with the last five-year period.
Allowances for Credit Losses (ACL) and Loan Loss Provision
We maintain two reserves, both of which are available to absorb possible credit losses: the allowance for loan and lease losses (ALLL) and the allowance for unfunded loan commitments (AULC). When summed together, these reserves constitute the total allowances for credit losses (ACL).
The June 30, 2006, ALLL was $287.5 million, $32.7 million higher than $254.8 million a year earlier, and $3.7 million higher than $283.8 million at March 31, 2006. Expressed as a percent of period-end loans and leases, the ALLL ratio at June 30, 2006, was 1.09%, up from 1.04% a year ago, but unchanged from March 31, 2006. Table 7 shows the change in the ALLL ratio and each reserve component for the 2006 first and second quarters, as well as the 2005 second quarter.
The ALLL as a percent of NPLs was 213% at June 30, 2006 , down from 304% a year ago, but up from 209% at March 31, 2006 . The ALLL as a percent of NPAs was 168% at June 30, 2006 , down from 262% a year ago, and from 183% at March 31, 2006 .
At June 30, 2006 , the AULC was $38.9 million, up from $37.5 million at the end of the year-ago quarter, but down slightly from March 31, 2006 .
On a combined basis, the ACL as a percent of total loans and leases at June 30, 2006 , was 1.24%, up from 1.19% a year ago, but unchanged from March 31, 2006 . The ACL as a percent of NPAs was 191% at June 30, 2006 , down from 300% a year earlier and 209% at March 31, 2006 .
The provision for credit losses in the 2006 second quarter was $15.7 million, and exceeded net charge-offs by $1.8 million. The current quarter provision for credit losses was up $2.9 million from the year-ago quarter, but was down $3.8 million from the 2006 first quarter.
Capital
At June 30, 2006 , the tangible equity to assets ratio was 6.46%, down from 7.36% a year ago and from 6.97% at March 31, 2006 . At June 30, 2006 , the tangible equity to risk-weighted assets ratio was 7.29%, down from 8.05% at the end of the year-ago quarter and from 7.80% at March 31, 2006 . The decrease in the tangible equity to assets ratio from the year-ago period reflected approximately two basis points related to the issuance of capital for the Unizan merger, as well as 138 basis points, due to the impact of share repurchases. The decrease in the tangible equity to assets ratio from March 31, 2006 reflected approximately 53 basis points related to the impact of the share repurchases. During the quarter, 8.1 million shares of common stock were repurchased in the open market, leaving 6.9 million shares available for purchase under the 15 million share repurchase authorization announced April 20, 2006 . 2006 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 unusual or one-time items, as well as selected items where the timing and financial impact is uncertain, until such time as the impact can be reasonably forecasted.
Below is a list of more specific 2006 full-year performance assumptions, none of which have changed from prior guidance in April 2006:
(1) Excluding operating lease accounting impact.
Within this type of environment, and given actual six-month 2006 GAAP earnings of $0.90 per share, targeted full-year 2006 GAAP earnings is being narrowed to $1.80-$1.83 per share.
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 1973909. 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 July 31, 2006 at 800-642-1687; conference ID 1973909.
Forward-looking Statement This press release contains certain forward-looking statements, including certain plans, expectations, goals, and projections, which are subject to numerous assumptions, risks, and uncertainties. A number of 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 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. 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.
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.
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. When comparing post-merger period results to pre-merger periods, the term “merger-adjusted” refers to amounts and percentage changes that represent reported results adjusted to exclude the impact of the merger. The term “merger-related” refers to amounts and percentage changes representing the impact attributable to the merger. “Merger costs” represent expenses associated with merger integration activities. Management believes these distinctions are helpful in better discerning underlying growth rates and in analyzing performance trends compared to prior periods. The following methodology has been implemented to estimate the approximate effect of the Unizan merger used to determine “merger-adjusted” and “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. For example, 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 were developed using this same pro-rata methodology. This methodology assumes acquired balances will remain constant over time.
The following tables reconcile selected GAAP/reported results to results adjusted for the impact of the Unizan merger using this methodology:
2006 Second Quarter versus 2005 Second Quarter
2006 Second Quarter versus 2006 First Quarter
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 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 2005 reported results. The one exception to this methodology relates to the amortization of intangibles expense where the actual post-merger amount was used.
The following tables reconcile selected GAAP/reported results to results adjusted for the impact of the Unizan merger using this methodology:
2006 Second Quarter versus 2005 Second Quarter
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
