HBAN

HUNTINGTON BANCSHARES INC - 10-Q Summary (Q2 2005)

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2005. Huntington Bancshares Incorporated is a multi-state diversified financial holding company headquartered in Columbus, Ohio, operating primarily in Ohio, Michigan, West Virginia, Indiana, and Kentucky. The company provides commercial and consumer banking, mortgage banking, automobile financing, equipment leasing, and investment management services.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline: Net income decreased 3% in Q2 and 5% year-to-date compared to the prior year. The decline was primarily driven by a significant drop in non-interest income.
• Non-Interest Income: Decreased 28% in Q2 and 27% YTD. The primary driver was an 82.7 million dollar decline in operating lease income as the portfolio continues to run off (no new operating leases originated since April 2002). Additionally, mortgage banking income declined due to a $10.2 million temporary impairment of mortgage servicing rights (MSR) in Q2, compared to a recovery in the prior year.
• Non-Interest Expense: Decreased 12% in Q2 and 11% YTD, largely due to a $66.4 million decline in operating lease expenses offsetting the income decline.
• Net Interest Income: Increased 9% in Q2 and 7% YTD, driven by a 12% growth in average loans and leases and a slight expansion in the net interest margin.
• Provision for Credit Losses: Increased 155% in Q2 and 7% YTD. The Q2 increase was due to the absence of a $9.7 million one-time commercial loan recovery recorded in Q2 2004.

Guidance, Outlook, Risks, and Unusual Items

• SEC Settlement: On June 2, 2005, Huntington settled a formal SEC investigation regarding financial accounting matters from fiscal years 2002 and earlier. The company consented to pay a $7.5 million civil penalty (reserved in 2004, no 2005 financial impact). Former executives also agreed to penalties and restrictions.
• Regulatory Agreements: In March 2005, Huntington entered into formal written agreements with the Federal Reserve and the OCC to enhance corporate governance, internal audit, and risk management. These agreements remain in effect until terminated by regulators.
• Unusual Items:
  • MSR Impairment: A $10.2 million temporary impairment of mortgage servicing rights negatively impacted Q2 mortgage banking income.
  • Severance Costs: Q2 included $3.6 million in severance and consolidation expenses.
  • Equity Write-off: Q2 included a $2.1 million write-off of an equity investment.
• Outlook: Management expects the effective tax rate to remain lower in 2005 due to federal tax loss carrybacks but anticipates it will rise to slightly below 30% in 2006. The operating lease portfolio is expected to decline to a point of diminished materiality by 2006.

Key Facts for Investor Verification

• Operating Lease Run-off: Verify the trajectory of the operating lease portfolio run-off and its impact on future non-interest income and expense trends.
• Regulatory Compliance: Monitor the status of the formal regulatory agreements with the Federal Reserve and OCC and the timeline for their termination.
• MSR Volatility: Assess the sensitivity of mortgage banking income to interest rate fluctuations and potential future MSR impairments.
• Loan Growth vs. Sales: Review the strategy of selling automobile loans to reduce credit exposure and its impact on net interest income and non-interest income (gains on sales).
• Capital Ratios: Confirm that capital ratios remain well above "well capitalized" regulatory minimums despite the recent regulatory scrutiny.