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Huntington's MSR Problem Nips Income

Huntington Bancshares here saw its earnings slip in the first quarter, with a negative adjustment to the value of its mortgage servicing rights playing a role in the decline.

Huntington said a negative adjustment to its MSR valuation, net of hedges, trimmed earnings per share by one penny in the first quarter.

But that wasn't the only issue putting pressure on Huntington. Losses on equity investments and litigation expenses also had an impact.

The $2 million pretax adjustment to the MSR valuation contributed to a 29% decline in mortgage banking income during the first quarter. In the first quarter of 2006, Huntington had posted a gain from a $5.1 million upward adjustment in the value of its MSR asset.

On the positive side, Huntington posted higher gains from the sale of home loans in the first quarter of 2007 compared with the year-earlier period. Secondary market gains and higher origination fee income contributed to an increase in non-interest income from mortgage banking in this year's first quarter.

Overall, Huntington reported first-quarter net income of $95.7 million, or $0.40 per common share, down from $104.5 million, or $0.45 per share, in the first quarter of last year.

Huntington said the volume of residential mortgage loans on its books declined at an annualized rate of 12% in the first quarter, contributing to an overall decline in the bank's consumer loan portfolio.

On the positive side, Huntington saw its net interest margin improve from the fourth quarter.

In the company's earnings release, CEO Thomas Hoaglin said the bank was pleased with its performance in a number of areas, even though earnings fell short of expectations.

"Compared with the 2006 fourth quarter our net interest margin expanded 8 basis points to 3.36%, the highest level since the 2005 second quarter. Balance-sheet growth mirrored expectations as average commercial loans grew at an annualized 5% rate, with softness in the real estate markets contributing to declines in average real estate mortgages and home-equity loans," he said.

Mr. Hoaglin also said Huntington is making "good progress" in its pending merger with Sky Financial Group. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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