HUNTINGTON BANCSHARES INC - 10-Q Summary (Q1 2007)
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2007. Huntington Bancshares Incorporated is a multi-state diversified financial holding company headquartered in Columbus, Ohio. The company operates through three primary segments: Regional Banking, Dealer Sales, and the Private Financial and Capital Markets Group (PFCMG). A significant pending transaction is the acquisition of Sky Financial Group, Inc., valued at approximately $3.5 billion, expected to close in the third quarter of 2007.
Key Financial Metrics
| Metric | Q1 2007 | Q1 2006 |
|---|---|---|
| Net Income | $95.7 million | $104.5 million |
| Diluted EPS | $0.40 | $0.45 |
| Total Assets | $34.98 billion | $35.67 billion |
| Net Interest Income | $255.6 million | $243.7 million |
| Non-Interest Income | $145.2 million | $159.5 million |
| Non-Interest Expense | $242.1 million | $238.4 million |
| Provision for Credit Losses | $29.4 million | $19.5 million |
| Net Interest Margin (FTE) | 3.36% | 3.32% |
| Return on Average Assets (ROA) | 1.11% | 1.26% |
| Return on Average Equity (ROE) | 12.9% | 15.5% |
| Shareholders' Equity | $3.05 billion | $3.08 billion |
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased $8.7 million (8.3%) year-over-year. This was primarily driven by a $14.4 million decline in non-interest income and a $9.9 million increase in the provision for credit losses.
- Non-Interest Income: Decreased 9% due to an $8.5 million loss on equity investments (hedge funds), a $14.2 million decline in automobile operating lease income (portfolio runoff), and negative mortgage servicing rights (MSR) valuation adjustments.
- Provision for Credit Losses: Increased 51% to $29.4 million, reflecting higher transaction reserves due to softness in residential and commercial real estate markets and increased "watch list" credits.
- Net Interest Income: Increased 5% to $255.6 million, supported by a 4 basis point increase in net interest margin and growth in average earning assets, partially offset by the Unizan merger impact in the prior year.
- Non-Interest Expense: Increased 2% to $242.1 million, driven by higher personnel costs and amortization of intangibles, partially offset by a $10.6 million decline in automobile operating lease expense.
Guidance, Outlook, and Risks
- Acquisition Outlook: The company anticipates closing the Sky Financial acquisition in Q3 2007. Share repurchases have been suspended pending shareholder approval of this merger.
- Capital Position: The company maintains a "well-capitalized" status. Tangible equity to assets ratio was 7.06% at March 31, 2007. The parent company has sufficient liquidity to meet obligations, including the anticipated $350 million cash payment for the Sky Financial acquisition.
- Credit Risk: Non-performing assets (NPAs) increased to $206.7 million (0.79% of related assets), up from $154.9 million a year ago. This increase was largely due to a reporting change regarding U.S. government-guaranteed loans in foreclosure. Net charge-offs were $18.1 million (0.28% annualized), remaining below the long-term target range.
- Market Risk: Interest rate risk is managed within board policy limits. Economic Value of Equity (EVE) analysis showed a -10.5% impact under a +200 basis point parallel rate shift scenario.
- Unusual Items: The $8.5 million equity investment loss and MSR valuation adjustments were significant negative factors. Conversely, the prior year included a $2.6 million gain on the sale of MasterCard stock and a $5.1 million positive impact from adopting FAS 156 for MSRs.
Investor Verification Checklist
- Equity Investment Losses: Verify the composition and valuation of the $25.9 million hedge fund portfolio that generated the $8.5 million loss.
- Credit Quality Trends: Monitor the "watch list" credits in residential and commercial real estate sectors driving the increased provision for credit losses.
- MSR Valuation: Review the sensitivity of Mortgage Servicing Rights to interest rate changes and prepayment speeds, given the negative mark-to-market impact.
- Sky Financial Integration: Assess the timeline and regulatory approval status for the $3.5 billion Sky Financial acquisition and its impact on future dilution and synergies.
- Automobile Lease Runoff: Confirm the trajectory of the automobile operating lease portfolio runoff and its impact on future non-interest income and expense.