- A bank invested in people.®
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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:
“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 Specific significant items impacting 2006 fourth quarter performance included (see Table 1 below):
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:
Partially offset by:
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
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:
Partially offset by:
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
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:
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
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:
Partially offset by:
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
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.
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.
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):
Partially offset by:
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.”
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.
(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:
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:
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:
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 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
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