Maryland | 31-0724920 | |
(State or other jurisdiction of | ||
incorporation or organization) | (I.R.S. Employer Identification No.) | |
41 S. High Street, Columbus, OH | 43287 | |
(Address of principal executive offices) | (Zip Code) |
Large accelerated filer T | Accelerated filer £ | Non-accelerated filer £ |
INDEX | ||||||
|
||||||
Business | 3 | |||||
|
||||||
Risk Factors | 10 | |||||
|
||||||
Unresolved Staff Comments | 17 | |||||
|
||||||
Properties | 17 | |||||
|
||||||
Legal Proceedings | 17 | |||||
|
||||||
Submission of Matters to a Vote of Security Holders | 17 | |||||
|
||||||
|
||||||
Market for Registrants Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities | 17 | |||||
|
||||||
Selected Financial Data | 18 | |||||
|
||||||
Managements Discussion and Analysis of Financial Condition and Results of Operations | 18 | |||||
|
||||||
Quantitative and Qualitative Disclosures About Market Risk | 18 | |||||
|
||||||
Financial Statements and Supplementary Data | 18 | |||||
|
||||||
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 18 | |||||
|
||||||
Controls and Procedures | 18 | |||||
|
||||||
Other Information | 19 | |||||
|
||||||
|
||||||
Directors and Executive Officers of the Registrant | 19 | |||||
|
||||||
Executive Compensation | 19 | |||||
|
||||||
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 19 | |||||
|
||||||
Certain Relationships and Related Transactions | 20 | |||||
|
||||||
Principal Accounting Fees and Services | 20 | |||||
|
||||||
|
||||||
Exhibits and Financial Statement Schedules | 20 | |||||
|
||||||
21 |
|
165 banking offices in Ohio | | 12 banking offices in Kentucky | |||
|
113 banking offices in Michigan | | 5 private banking offices in Florida | |||
|
26 banking offices in West Virginia | | one foreign office in the Cayman Islands | |||
|
23 banking offices in Indiana | | one foreign office in Hong Kong |
3
| 10% of the subsidiary banks capital and surplus for transfers to its parent corporation or to any individual non-bank subsidiary of the parent, and | ||
| an aggregate of 20% of the subsidiary banks capital and surplus for transfers to such parent together with all such non-bank subsidiaries of the parent. |
4
| emphasizes risk management, |
| introduces a framework for analyzing and rating financial factors, and |
| provides a framework for assessing and rating the potential impact of non-depository entities of a holding company on its subsidiary depository institution(s). |
5
| makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, |
| takes off-balance sheet exposures into explicit account in assessing capital adequacy, and |
| minimizes disincentives to holding liquid, low-risk assets. |
| Tier 1, or core capital, includes common equity, non-cumulative perpetual preferred stock (excluding auction rate issues), and minority interests in equity accounts of consolidated subsidiaries, less both goodwill and, with certain limited exceptions, all other intangible assets. Bank holding companies, however, may include up to a limit of 25% of cumulative preferred stock in their Tier 1 capital. |
| Tier 2, or supplementary capital, includes, among other things, cumulative and limited-life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations. |
| Total capital is Tier 1 plus Tier 2 capital. |
6
| well-capitalized if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or greater and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure; |
| adequately-capitalized if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater, and, generally, a Tier 1 leverage ratio of 4% or greater and the institution does not meet the definition of a well-capitalized institution; |
| under-capitalized if it does not meet one or more of the adequately-capitalized tests; |
| significantly under-capitalized if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3%, or a Tier 1 leverage ratio that is less than 3%; and |
| critically under-capitalized if it has a ratio of tangible equity, as defined in the regulations, to total assets that is equal to or less than 2%. |
7
| underwriting insurance or annuities; | ||
| providing financial or investment advice; | ||
| underwriting, dealing in, or making markets in securities; | ||
| merchant banking, subject to significant limitations; | ||
| insurance company portfolio investing, subject to significant limitations; and | ||
| any activities previously found by the Federal Reserve to be closely related to banking. |
| provide notice to our customers regarding privacy policies and practices, | ||
| inform our customers regarding the conditions under which their non-public personal information may be disclosed to non-affiliated third parties, and | ||
| give our customers an option to prevent disclosure of such information to non-affiliated third parties. |
8
| increasing the number of risk-weight categories, | ||
| expanding the use of external ratings for credit risk, | ||
| expanding the range of collateral and guarantors to qualify for a lower risk weight, and | ||
| basing residential mortgage risk ratings on loan-to-value ratios. |
9
10
11
12
13
14
15
16
17
Total | Total Number of Shares | Maximum Number of | ||||||||||||||
Number of | Average | Purchased as Part of | Shares that May Yet Be | |||||||||||||
Shares | Price Paid | Publicly Announced | Purchased Under the | |||||||||||||
Period | Purchased | Per Share | Plansor Programs (1) | Plans or Programs (1) | ||||||||||||
October 1, 2005 to October 31, 2005
|
900,000 | $ | 22.59 | 900,000 | 14,100,000 | |||||||||||
November 1, 2005 to November 30, 2005
|
2,775,000 | 23.92 | 3,675,000 | 11,325,000 | ||||||||||||
December 1, 2005 to December 31,
2005
|
1,500,000 | 24.18 | 5,175,000 | 9,825,000 | ||||||||||||
Total
|
5,175,000 | $ | 23.76 | 5,175,000 | 9,825,000 | |||||||||||
18
Number of | ||||||||||||
securities | ||||||||||||
remaining available | ||||||||||||
Number of | for future issuance | |||||||||||
securities to be | under equity | |||||||||||
issued upon | Weighted-average | compensation plans | ||||||||||
exercise of | exercise price of | (excluding | ||||||||||
outstanding | outstanding | securities | ||||||||||
options, warrants, | options, warrants, | reflected in column | ||||||||||
and rights | and rights | (a)) | ||||||||||
Plan category | (a) | (b) | (c) | |||||||||
Equity compensation
plans approved by
security holders
|
18,767,650 | $ | 21.32 | 5,698,420 | ||||||||
Equity compensation
not approved by
security holders
(1) (2)
|
2,236,931 | 19.32 | | |||||||||
|
||||||||||||
Total
|
21,004,581 | $ | 21.11 | 5,698,420 |
19
(1) | The report of independent registered public accounting firm and consolidated financial statements appearing in our 2005 Annual Report on the pages indicated below are incorporated by reference in Item 8. |
Annual | ||
Report Page | ||
Report of Independent Registered Public Accounting Firm
|
98 | |
|
||
Consolidated Balance Sheets as of December 31, 2005 and 2004
|
99 | |
|
||
Consolidated Statements of Income for the years ended
December 31, 2005, 2004 and 2003
|
100 | |
|
||
Consolidated Statements of Changes in Shareholders Equity
For the years ended December 31, 2005, 2004 and 2003
|
101 | |
|
||
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003
|
102 | |
|
||
Notes to Consolidated Financial Statements
|
103 -- 138 |
(2) | We are not filing separately financial statement schedules because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or the related notes. |
(3) | The exhibits required by this item are listed in the Exhibit Index of this Form 10-K. The management contracts and compensation plans or arrangements required to be filed as exhibits to this Form 10-K are listed as Exhibits 10(a) through 10(v) in the Exhibit Index. |
20
By:
|
/s/ Thomas E. Hoaglin | By: | /s/ Donald R. Kimble | |||
|
||||||
|
Thomas E. Hoaglin | Donald R. Kimble | ||||
|
Chairman, President, Chief Executive | Chief Financial Officer and Controller | ||||
|
Officer, and Director (Principal Executive | (Principal Financial and Accounting Officer) | ||||
|
Officer) |
Raymond J. Biggs *
|
David L. Porteous * | |
|
||
Raymond J. Biggs
|
David L. Porteous | |
Director
|
Director | |
|
||
Don M. Casto III *
|
Kathleen H. Ransier * | |
|
||
Don M. Casto III
Director
|
Kathleen H. Ransier Director | |
|
||
Michael J. Endres *
|
||
|
||
Michael J. Endres
|
Robert H. Schottenstein | |
Director
|
Director | |
|
||
Karen A. Holbrook *
|
||
|
||
Karen A. Holbrook
|
||
Director
|
||
|
||
John B. Gerlach, Jr. *
|
||
|
||
John B. Gerlach, Jr.
|
||
Director
|
||
|
||
David P. Lauer *
|
||
|
||
David P. Lauer
|
||
Director
|
||
|
||
Wm. J. Lhota *
|
||
|
||
Wm. J. Lhota
Director |
||
|
||
* /s/ Donald R. Kimble
|
||
|
||
Donald R. Kimble
|
||
Attorney-in-fact for each of
the persons indicated
|
21
2.(a).
|
Agreement and Plan of Merger, dated January 27, 2004, by and between Unizan Financial Corp. and Huntington | |||
|
Bancshares Incorporated -- previously filed as Exhibit 2 to Annual Report on Form 10-K for the year ended December | |||
|
31, 2003, and incorporated herein by reference. | |||
|
||||
(b).
|
Amendment No. 1 to the Agreement and Plan of Merger, dated November 12, 2004, by and between Unizan Financial Corp. | |||
|
and Huntington Bancshares Incorporated -- previously filed as Exhibit 99.1 to Current Report on Form 8-K dated | |||
|
November 12, 2004, and incorporated herein by reference. | |||
|
||||
3(i)(a).
|
Articles of Restatement of Charter, Articles of Amendment to Articles of Restatement of Charter, and Articles | |||
|
Supplementary -- previously filed as Exhibit 3(i) to Annual Report on Form 10-K for the year ended December 31, | |||
|
1993, and incorporated herein by reference. | |||
|
||||
(i)(b).
|
Articles of Amendment to Articles of Restatement of Charter -- previously filed as Exhibit 3(i)(c) to Quarterly | |||
|
Report on Form 10-Q for the quarter ended March 31, 1998, and incorporated herein by reference. | |||
|
||||
(ii).
|
Amended and Restated Bylaws as of July 16, 2002 -- previously filed as Exhibit 3(ii) to Quarterly Report on Form | |||
|
10-Q for the quarter ended June 30, 2003, and incorporated herein by reference. | |||
|
||||
4.
|
Instruments defining the Rights of Security Holders -- reference is made to Articles Fifth, Eighth, and Tenth of | |||
|
Articles of Restatement of Charter, as amended and supplemented. Instruments defining the rights of holders of | |||
|
long-term debt will be furnished to the Securities and Exchange Commission upon request. | |||
|
||||
10.
|
Material contracts: | |||
|
||||
(a).
|
* | Form of Executive Agreement for certain executive officers -- previously filed as Exhibit 99.1 to Current | ||
|
Report on Form 8-K dated November 21, 2005, and incorporated herein by reference. | |||
|
||||
(b).
|
* | Form of Executive Agreement for certain executive officers -- previously filed as Exhibit 99.2 to Current | ||
|
Report on Form 8-K dated November 21, 2005, and incorporated herein by reference. | |||
|
||||
(c).
|
* | Form of Executive Agreement for certain executive officers -- previously filed as Exhibit 99.3 to Current | ||
|
Report on Form 8-K dated November 21, 2005, and incorporated herein by reference. | |||
|
||||
(d).
|
* | Huntington Bancshares Incorporated Management Incentive Plan, as amended and restated effective for plan years | ||
|
beginning on or after January 1, 2004 -- previously filed as Exhibit 10(a) to Quarterly Report on Form 10-Q for the | |||
|
quarter ended June 30, 2004, and incorporated herein by reference. |
22
|
||||
(e).
|
* | Restated Huntington Supplemental Retirement Income Plan -- previously filed as Exhibit 10(n) to Annual Report on | ||
|
Form 10-K for the year ended December 31, 1999, and incorporated herein by reference. | |||
|
||||
(f).
|
* | Deferred Compensation Plan and Trust for Directors -- reference is made to Exhibit 4(a) of Post-Effective Amendment | ||
|
No. 2 to Registration Statement on Form S-8, Registration No. 33-10546, filed with the Securities and Exchange | |||
|
Commission on January 28, 1991, and incorporated herein by reference. | |||
|
||||
(g)(1).
|
* | Deferred Compensation Plan and Trust for Huntington Bancshares Incorporated Directors -- reference is made to | ||
|
Exhibit 4(a) of Registration Statement on Form S-8, Registration No. 33-41774, filed with the Securities and | |||
|
Exchange Commission on July 19, 1991, and incorporated herein by reference. | |||
|
||||
(g)(2).
|
* | First Amendment to Huntington Bancshares Incorporated Deferred Compensation Plan and Trust for Huntington Bancshares | ||
|
Incorporated Directors -- previously filed as Exhibit 10(q) to Quarterly Report 10-Q for the quarter ended March 31, | |||
|
2001, and incorporated herein by reference. | |||
|
||||
(h).
|
* | Executive Deferred Compensation Plan, as amended and restated on February 18, 2004 -- previously filed as Exhibit | ||
|
10(c) to Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, and incorporated herein by reference. | |||
|
||||
(i)(1).
|
* | The Huntington Supplemental Stock Purchase and Tax Savings Plan and Trust (as amended and restated as of February 9, | ||
|
1990) -- previously filed as Exhibit 4(a) to Registration Statement on Form S-8, Registration No. 33-44208, filed | |||
|
with the Securities and Exchange Commission on November 26, 1991, and incorporated herein by reference. | |||
|
||||
(i)(2).
|
* | First Amendment to The Huntington Supplemental Stock Purchase and Tax Savings Plan and Trust Plan -- previously | ||
|
filed as Exhibit 10(o)(2) to Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated | |||
|
herein by reference. | |||
|
||||
(j)(1).
|
* | 1990 Stock Option Plan -- reference is made to Exhibit 4(a) of Registration Statement on Form S-8, Registration No. | ||
|
33-37373, filed with the Securities and Exchange Commission on October 18, 1990, and incorporated herein by | |||
|
reference. | |||
|
||||
(j)(2).
|
* | First Amendment to Huntington Bancshares Incorporated 1990 Stock Option Plan -- previously filed as Exhibit 10(q)(2) | ||
|
to Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference. | |||
|
||||
(j)(3).
|
* | Second Amendment to Huntington Bancshares Incorporated 1990 Stock Option Plan -- previously filed as Exhibit | ||
|
10(n)(3) to Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. | |||
(j)(4).
|
* | Third Amendment to Huntington Bancshares Incorporated 1990 Stock Option Plan -- previously filed as Exhibit 10(b) to | ||
|
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by reference. | |||
|
||||
(j)(5).
|
* | Fourth Amendment to Huntington Bancshares Incorporated 1990 Stock Option Plan -- previously filed as Exhibit 10(a) | ||
|
to Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, and incorporated herein by reference. | |||
|
||||
(j)(6).
|
* | Fifth Amendment to Huntington Bancshares Incorporated 1990 Stock Option Plan -- previously filed as Exhibit 10(b) to | ||
|
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, and incorporated herein by reference. |
23
(k)(1).
|
* | Amended and Restated 1994 Stock Option Plan -- previously filed as Exhibit 10(r) to Annual Report on Form 10-K for | ||
|
the year ended December 31, 1996, and incorporated herein by reference. | |||
|
||||
(k)(2).
|
* | First Amendment to Huntington Bancshares Incorporated 1994 Stock Option Plan -- previously filed as Exhibit 10(a) to | ||
|
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by reference. | |||
|
||||
(k)(3).
|
* | First Amendment to Huntington Bancshares Incorporated Amended and Restated 1994 Stock Option Plan -- previously | ||
|
filed as Exhibit 10(c) to Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, and incorporated | |||
|
herein by reference. | |||
|
||||
(k)(4).
|
* | Second Amendment to Huntington Bancshares Incorporated Amended and Restated 1994 Stock Option Plan -- previously | ||
|
filed as Exhibit 10(d) to Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, and incorporated | |||
|
herein by reference. | |||
|
||||
(k)(5).
|
* | Third Amendment to Huntington Bancshares Incorporated Amended and Restated 1994 Stock Option Plan -- previously | ||
|
filed as Exhibit 10(e) to Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, and incorporated | |||
|
herein by reference. | |||
|
||||
(l)(1).
|
* | Huntington Bancshares Incorporated 2001 Stock and Long-Term Incentive Plan -- previously filed as Exhibit 10(r) to | ||
|
Quarterly Report 10-Q for the quarter ended March 31, 2001, and incorporated herein by reference. | |||
|
||||
(l)(2).
|
* | First Amendment to the Huntington Bancshares Incorporated 2001 Stock and Long-Term Incentive Plan -- previously | ||
|
filed as Exhibit 10(h) to Quarterly Report 10-Q for the quarter ended March 31, 2002, and incorporated herein by | |||
|
reference. | |||
|
||||
(l)(3).
|
* | Second Amendment to the Huntington Bancshares Incorporated 2001 Stock and Long-Term Incentive Plan -- previously | ||
|
filed as Exhibit 10(i) to Quarterly Report 10-Q for the quarter ended March 31, 2002, and incorporated herein by | |||
|
reference. | |||
|
||||
(m).
|
* | Huntington Bancshares Incorporated 2004 Stock and Long-Term Incentive Plan -- previously filed as Exhibit 10(b) to | ||
|
Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, and incorporated herein by reference. | |||
|
||||
(n)(1).
|
* | Huntington Bancshares Incorporated Employee Stock Incentive Plan (incorporating changes made by first amendment to | ||
|
Plan) -- reference is made to Exhibit 4(a) of Registration Statement on Form S-8, Registration 333-75032, previously | |||
|
filed with the Securities and Exchange Commission on December 13, 2001, and incorporated herein by reference. | |||
|
||||
(n)(2).
|
* | Second Amendment to Huntington Bancshares Incorporated Employee Stock Incentive Plan -- previously filed as Exhibit | ||
|
10(s) to Annual Report on Form 10-K for the year ended December 31, 2002, and incorporated herein by reference. | |||
|
||||
(o).
|
* | Performance criteria and potential awards for executive officers for fiscal year 2005 under the Management Incentive | ||
|
Plan and for a long-term incentive award cycle beginning on January 1, 2005 and ending on December 31, 2007 under | |||
|
the 2004 Stock and Long-Term Incentive Plan, as set forth in a Current Report on Form 8-K dated February 15, 2005, | |||
|
and incorporated herein by reference. |
24
(p).
|
* | Compensation Schedule for Non-Employee Directors of Huntington Bancshares Incorporated, effective July 19, 2005 - | ||
|
previously filed as Exhibit 99.1 to Current Report on Form 8-K dated July 19, 2005, and incorporated herein by reference. | |||
|
||||
(q).
|
* | Employment Agreement, dated February 15, 2004, between Huntington Bancshares Incorporated and Thomas E. Hoaglin - previously filed as Exhibit 10(n) to Annual Report on Form 10-K for the year ended December 31, 2003, and incorporated herein by reference. | ||
|
||||
(r).
|
* | Letter Agreement between Huntington Bancshares Incorporated and James W. Nelson, acknowledged and agreed to by Mr. Nelson on February 14, 2005 - previously filed as Exhibit 99.2 to Current Report on Form 8-K dated February 14, 2005, and incorporated herein by reference. | ||
|
||||
(s).
|
* | Letter Agreement between Huntington Bancshares Incorporated and Mahesh Sankaran, acknowledged and agreed to by Mr. Sankaran on January 28, 2005 - previously filed as Exhibit 10(b) to Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, and incorporated herein by reference. | ||
|
||||
(t).
|
* | Letter Agreement between Huntington Bancshares Incorporated and Raymond J. Biggs, acknowledged and agreed to by Mr. Biggs on May 1, 1995. | ||
|
||||
(u).
|
* | Schedule identifying material details of Executive Agreements. | ||
|
||||
(v).
|
* | Performance criteria and potential awards for executive officers for fiscal year 2006 under the Management Incentive Plan and for a long-term incentive award cycle beginning on January 1, 2006 and ending on December 31, 2008 under the 2004 Stock and Long-Term Incentive Plan, as set forth in a Current Report on Form 8-K dated February 21, 2006, and incorporated herein by reference. | ||
|
||||
12.
|
Ratio of Earnings to Fixed Charges. | |||
|
||||
13.
|
Portions of our 2005 Annual Report to shareholders. | |||
|
||||
14.
|
Code of Business Conduct and Ethics dated January 14, 2003 and revised on February 14, 2006 and Financial Code of Ethics for Chief Executive Officer and Senior Financial Officers, adopted January 18, 2003 and revised on April 19, 2005, are available on our web site at http://www.investquest.com/iq/h/hban/main/cg/cg.htm. | |||
|
||||
21.
|
Subsidiaries of the Registrant. | |||
|
||||
23.(a).
|
Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm. | |||
|
||||
23.(b).
|
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. | |||
|
||||
24.
|
Power of Attorney. | |||
|
||||
31.(a).
|
Rule 13a-14(a) Certification -- Chief Executive Officer. | |||
|
||||
31.(b).
|
Rule 13a-14(a) Certification -- Chief Financial Officer. | |||
|
||||
32.(a).
|
Section 1350 Certification -- Chief Executive Officer. | |||
|
||||
32.(b).
|
Section 1350 Certification -- Chief Financial Officer. | |||
|
||||
99.(a).
|
Opinion of Ernst & Young LLP, Independent Registered Public Accounting Firm. | |||
|
||||
99.(b).
|
Written Agreement between Huntington Bancshares Incorporated and the Federal Reserve Bank of Cleveland dated | |||
|
February 28, 2005, as set forth in a Current Report on Form 8-K dated March 2, 2005, and incorporated herein by | |||
|
reference. |
* | Denotes management contract or compensatory plan or arrangement. |
25
A
|
The employment agreement dated January 1, 1990, between Huntington Bancshares Michigan, Inc. and Raymond J. Biggs is terminated in its entirety. | |
|
||
B
|
The Supplemental Retirement Income Plan/Agreement between First Macomb Corporation and Raymond J. Biggs dated January 1, 1985, as amended by Amendment to Supplement Retirement Income Plan/Agreement dated December 17, 1987, is terminated in its entirety. I have incorporated the retirement benefits below. | |
|
||
C
|
Commencing August 1, 2002, and for each month thereafter for a term of fifteen (15) years, Huntington shall cause to be paid to you the sum of $13,142.20 per month. In the event of your death subsequent to commencement of such benefits payments, but prior to the expiration of the fifteen year period, Huntington shall continue to make such payments during the remainder of the fifteen year term to your beneficiary. In the event of your death, prior to the commencement of such payments, Huntington shall thereafter pay to your beneficiary the sum of $13,142.20 per month for a term of fifteen years commencing on the first day of the month immediately following the date of death. | |
|
||
D
|
Effective February 7, 1990, you assigned and transferred all of your right, title and ownership interests in New England Mutual Life Insurance Policy No. 6539543 to: | |
|
||
|
First Macomb Bank | |
|
||
|
You have not acquired any interest in said policy. | |
|
||
|
Commencing May 1, 1995, and on May 1 of each succeeding year through and including May 1, 2009, when the final installment shall be due and payable, Huntington shall cause to be paid to you the sum of $15,159.00. In the event of your death prior to payment of the May 1, 2009 installment, Huntington shall continue to make such payments during the remainder of the term to your beneficiary. | |
|
||
E
|
For purposes of Paragraphs C and D of this letter, references to the term beneficiary shall mean Raymond J. Biggs Family Trust, revocable intervivos trust, previously executed by Raymond J. Biggs as settlor on September 18, 1986 as the same may be amended prior to death. You reserve the right to change the designation of beneficiary by notifying Huntington Bancshares Incorporated in a signed and dated notice of such change. |
F
|
Attached hereto as Exhibit A is a summary of additional Huntington benefits available to you at retirement. | |
|
||
G
|
Huntington will continue through June 30, 1997, to provide executive office space and a part-time secretary for your use. During this period you agree not to engage in the banking business as a director, officer, employee or agent of any other financial institution located in the Detroit Primary Metropolitan Statistical Area without the prior written consent of Huntington Bancshares Incorporated. |
The terms stated above accurately reflect our agreement this 1st day of May, 1995.
|
||||
/s/ Ryamond J. Biggs | ||||
Raymond J. Biggs | ||||
I. | Retiree Health Care | |
You elected to receive retiree health care for both yourself and your spouse. Your monthly subsidy from the Huntington for this benefit is $260.00. | ||
II. | Huntington Stock Purchase and Tax Savings Plan (Stock Plan) | |
As of February 28, 1995, you have 6357.3315 shares of Huntington Bancshares Incorporated common stock (HBI Stock) and $72,960.01 in the Alternative Investment Fund in your account in the Stock Plan. You have not yet requested distribution of your account in the Stock Plan. | ||
III. | Huntington Supplemental Stock Purchase and Tax Savings Plan (Supplemental Plan) | |
As of February 28, 1995, you have 1,439.518 shares of HBI Stock in your account in the Supplemental Plan. Huntington Trust Company is currently processing your distribution from the Supplemental Plan. | ||
IV. | Huntington Bancshares Retirement Plan (Pension Plan) | |
Your early retirement benefit (as of January 1, 1995) under the Pension Plan was $857.54, payable monthly in the form of a life annuity. You had a variety of optional forms of benefit available. All optional forms were the actuarial equivalent of the life annuity amount | ||
You have not yet elected to commence receipt of your accrued benefit under the Pension Plan. Your accrued benefit, payable at your normal retirement date of August 1, 2002, is $1,208.83, payable monthly in the form of a life annuity. At the time you notify the Huntington, in writing, that you are electing to commence receipt of your benefits under the Pension Plan, your accrued benefit and available optional forms of distribution will be determined and communicated to you. | ||
V. | Life Insurance | |
You have life insurance coverage in the amount of $27,300. |
Name
|
Effective Date | |
|
||
Ronald C. Baldwin
|
January 1, 2006 | |
Thomas E. Hoaglin
|
January 1, 2006 |
Name
|
Effective Date | |
|
||
Daniel B. Benhase
|
January 1, 2006 | |
Richard A. Cheap
|
January 1, 2006 | |
Donald R. Kimble
|
January 1, 2006 | |
Mary W. Navarro
|
January 1, 2006 | |
Nicholas G. Stanutz
|
January 1, 2006 |
Name
|
Effective Date | |
|
||
James W. Nelson
|
January 1, 2006 | |
Mahesh Sankaran
|
January 1, 2006 |
Year Ended December 31,
(in thousands of dollars)
2005
2004
2003
2002
2001
$
543,574
$
552,666
$
523,987
$
522,705
$
95,477
243,239
191,648
179,903
169,788
299,872
786,813
744,314
703,890
692,493
395,349
446,919
257,099
288,271
385,733
654,056
$
1,233,732
$
1,001,413
$
992,161
$
1,078,226
$
1,049,405
$
232,435
$
178,842
$
168,499
$
157,888
$
285,445
10,804
12,806
11,404
11,900
14,427
243,239
191,648
179,903
169,788
299,872
446,919
257,099
288,271
385,733
654,056
$
690,158
$
448,747
$
468,174
$
555,521
$
953,928
3.23x
3.88x
3.91x
4.08x
1.32x
1.79x
2.23x
2.12x
1.94x
1.10x
Exhibit 13
Table 1 Selected
Financial Data
S
ELECTED
F
INANCIAL
D
ATA
HUNTINGTON BANCSHARES INCORPORATED
Year Ended December 31,
(in thousands of dollars, except per share amounts)
2005
2004
2003
2002
2001
$
1,641,765
$
1,347,315
$
1,305,756
$
1,293,195
$
1,654,789
679,354
435,941
456,770
543,621
939,501
962,411
911,374
848,986
749,574
715,288
81,299
55,062
163,993
194,426
257,326
881,112
856,312
684,993
555,148
457,962
167,834
171,115
167,840
153,564
165,012
138,433
287,091
489,698
657,074
691,733
1,211
14,206
40,039
13,112
182,470
24,550
(8,055
)
15,763
5,258
4,902
723
332,859
330,423
353,206
319,144
342,474
632,282
818,598
1,069,153
1,341,704
1,199,942
481,658
485,806
447,263
418,037
454,210
108,376
236,478
393,270
518,970
558,626
(1,151
)
(6,666
)
48,973
79,957
15,250
379,786
401,111
381,042
388,167
469,634
969,820
1,122,244
1,230,159
1,374,147
1,562,427
543,574
552,666
523,987
522,705
95,477
131,483
153,741
138,294
198,974
(39,319
)
(5)
412,091
398,925
385,693
323,731
134,796
(13,330
)
$
412,091
$
398,925
$
372,363
$
323,731
$
134,796
principle per common share basic
$ 1.79
$ 1.74
$ 1.68
$ 1.34
$ 0.54
1.79
1.74
1.62
1.34
0.54
principle per common share diluted
1.77
1.71
1.67
1.33
0.54
1.77
1.71
1.61
1.33
0.54
0.845
0.750
0.670
0.640
0.720
$
32,764,805
$
32,565,497
$
30,519,326
$
27,539,753
$
28,458,769
4,597,437
6,326,885
6,807,979
4,246,801
2,739,332
2,557,501
2,537,638
2,275,002
2,189,793
2,341,897
5,168,959
6,650,367
5,816,660
3,613,527
3,429,480
2,582,721
2,374,137
2,196,348
2,238,761
2,330,968
32,639,011
31,432,746
28,971,701
26,063,281
28,126,386
5.65
%
4.89
%
5.35
%
6.23
%
7.58
%
2.32
1.56
1.86
2.61
4.29
3.33
%
3.33
%
3.49
%
3.62
%
3.29
%
1.26
%
1.27
%
1.29
%
1.24
%
0.48
%
16.0
16.8
17.0
14.5
5.8
60.0
65.0
63.9
65.6
79.2
47.7
43.9
41.6
48.1
133.3
7.91
7.55
7.58
8.59
8.29
24.2
27.8
26.4
38.1
(41.2
)
(5)
7.19
7.18
6.79
7.22
5.86
8.34
8.42
7.98
8.51
7.16
9.13
9.08
8.53
8.34
7.02
12.42
12.48
11.95
11.25
10.07
7,602
7,812
7,983
8,177
9,743
344
342
338
343
481
(1) | Due to the adoption of FASB Interpretation No. 46 Consolidation of Variable Interest Entities . |
(2) | Includes Federal Home Loan Bank advances, other long-term debt, and subordinated notes. |
(3) | On a fully taxable equivalent (FTE) basis assuming a 35% tax rate. |
(4) | Non-interest expense less amortization of intangibles divided by the sum of FTE net interest income and non-interest income excluding securities gains. |
(5) | Reflects a $32.5 million reduction related to the issuance of $400 million REIT subsidiary preferred stock, of which $50 million was sold to the public. |
(6) | Total equity minus intangible assets divided by total assets minus intangible assets. |
30
M ANAGEMENTS D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION | HUNTINGTON BANCSHARES INCORPORATED |
INTRODUCTION
Huntington Bancshares Incorporated (we or our) is a multi-state diversified financial holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through our subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, private mortgage insurance; reinsure credit life and disability insurance; and sell other insurance and financial products and services. Our banking offices are located in Ohio, Michigan, West Virginia, Indiana, and Kentucky. Certain activities are also conducted in Arizona, Florida, Georgia, Maryland, Nevada, New Jersey, North Carolina, Pennsylvania, South Carolina, and Tennessee. We have a foreign office in the Cayman Islands and another in Hong Kong. The Huntington National Bank (the Bank), organized in 1866, is our only bank subsidiary.
The following discussion and analysis provides you with information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows and should be read in conjunction with the financial statements, notes, and other information contained in this report.
You should note the following discussion is divided into key segments:
| INTRODUCTION Provides overview comments on important matters including risk factors, the now settled Securities and Exchange Commission (SEC) investigation, any bank regulatory agreements, and critical accounting policies and the use of significant estimates. These are essential for understanding our performance and prospects. | |
| DISCUSSION OF RESULTS OF OPERATIONS Reviews financial performance from a consolidated company perspective. It also includes a Significant Factors Influencing Financial Performance Comparisons section that summarizes key issues helpful for understanding performance trends. Key consolidated balance sheet and income statement trends are also discussed in this section. | |
| RISK MANAGEMENT AND CAPITAL Discusses credit, market, liquidity, and operational risks, including how these are managed, as well as performance trends. It also includes a discussion of liquidity policies, how we fund ourselves, and related performance. In addition, there is a discussion of guarantees and/or commitments made for items such as standby letters of credit and commitments to sell loans, and a discussion that reviews the adequacy of capital including regulatory capital requirements. | |
| LINES OF BUSINESS DISCUSSION Provides an overview of financial performance for each of our major lines of business and provides additional discussion of trends underlying consolidated financial performance. | |
| RESULTS FOR THE FOURTH QUARTER Provides a discussion of results for the 2005 fourth quarter compared with the year-earlier quarter. |
A reading of each section is important for you to understand fully the nature of our financial performance and prospects.
Forward-Looking Statements
This report, including Managements Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements. These include descriptions of products or services, plans or objectives for future operations, including any pending acquisitions, and forecasts of revenues, earnings, cash flows, or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts.
By their nature, forward-looking statements are subject to numerous assumptions, risks, and uncertainties. A number of factors could cause actual conditions, events, or results to differ significantly from those described in the forward-looking statements. These factors include, but are not limited to, those set forth under Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2005, and other factors described in this report and from time to time in our other filings with the SEC.
You should understand forward-looking statements to be strategic objectives and not absolute forecasts of future performance. Forward-looking statements speak only as of the date they are made. We assume no obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events.
Risk Factors
We, like other financial companies, are subject to a number of risks, many of which are outside of our direct control, though efforts are made to manage those risks while optimizing returns. Among the risks assumed are: (1) credit risk , which is the risk that loan and lease customers or other counterparties will be unable to perform their contractual obligations, (2) market risk ,
31
M ANAGEMENTS D ISCUSSION AND A NALYSIS | HUNTINGTON BANCSHARES INCORPORATED |
which is the risk that changes in market rates and prices will adversely affect our financial condition or results of operation, (3) liquidity risk , which is the risk that the parent company and/or the Bank will have insufficient cash or access to cash to meet operating needs, and (4) operational risk , which is the risk of loss resulting from inadequate or failed internal processes, people and systems, or external events. More information on risks is set forth in Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2005.
Securities and Exchange Commission Formal Investigation
On June 26, 2003, we announced that the SEC staff was conducting a formal investigation into certain financial accounting matters, relating to fiscal years 2002 and earlier, and certain related disclosure matters.
On June 2, 2005, we announced that the SEC approved the settlement of their formal investigation. As a part of the settlement, the SEC instituted a cease and desist administrative proceeding and entered a cease and desist order, as well as filed a civil action in federal district court pursuant to which, without admitting or denying the allegations in the complaint, we, our chief executive officer, former chief financial officer, and former controller, consented to pay civil money penalties. We consented to pay a penalty of $7.5 million, which may be distributed pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002. This civil money penalty had no impact on our 2005 financial results, as reserves for this amount were established and expensed in 2004.
Formal Regulatory Supervisory Agreements and Pending Acquisition
On March 1, 2005, we announced entering into a formal written agreement with the Federal Reserve Bank of Cleveland (FRBC), as well as the Bank entering into a formal written agreement with the Office of the Comptroller of the Currency (OCC), providing for a comprehensive action plan designed to enhance corporate governance, internal audit, risk management, accounting policies and procedures, and financial and regulatory reporting. The agreements called for independent third-party reviews, as well as the submission of written plans and progress reports by Management, and would remain in effect until terminated by the banking regulators.
On October 6, 2005, we announced that the OCC had terminated its formal written agreement with the Bank dated February 28, 2005, and that the FRBC written agreement remained in effect. We were verbally advised that we were in full compliance with the financial holding company and financial subsidiary requirements under the Gramm-Leach-Bliley Act (GLB Act). This notification reflected that we and the Bank met both the well-capitalized and well-managed criteria under the GLB Act. We believe that the changes we have already made, and are in the process of making, will address the FRBC issues fully and comprehensively.
On January 27, 2004, we announced the signing of a definitive agreement to acquire Unizan Financial Corp. (Unizan), a financial holding company based in Canton, Ohio. On November 12, 2004, the companies jointly announced entering into an amendment to our January 26, 2004 merger agreement extending the term of the agreement for one year from January 27, 2005 to January 27, 2006. On the same date, we also announced that we withdrew our application with the FRBC to acquire Unizan. On October 24, 2005, we announced that, after consultation with the FRBC, we had re-filed our application to acquire Unizan. On January 26, 2006, we announced that the Federal Reserve Board had approved our merger application. The merger is scheduled to close March 1, 2006.
Critical Accounting Policies and Use of Significant Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of financial statements in conformity with GAAP requires us to establish critical accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in our financial statements. Note 1 of the Notes to Consolidated Financial Statements included in this report lists significant accounting policies we use in the development and presentation of our financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors necessary for an understanding and evaluation of our company, financial position, results of operations, and cash flows.
An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements if a different amount within a range of estimates were used or if estimates changed from period to period. You should understand that estimates are made under facts and circumstances at a point in time, and changes in those facts and circumstances could produce actual results that differ from when those estimates were made. The most significant accounting estimates and their related application are discussed below. This analysis is included to emphasize that estimates are used in
32
M ANAGEMENTS D ISCUSSION AND A NALYSIS | HUNTINGTON BANCSHARES INCORPORATED |
connection with the critical and other accounting policies and to illustrate the potential effect on the financial statements if the actual amount were different from the estimated amount.
| TOTAL ALLOWANCES FOR CREDIT LOSSES At December 31, 2005, the total allowances for credit losses (ACL) was $305.3 million and represented the sum of the allowance for loan and lease losses (ALLL) and the allowance for unfunded loan commitments and letters of credit (AULC). The amount of the ACL was determined by our judgments regarding the quality of the loan portfolio, including loan commitments. All known relevant internal and external factors that affected loan collectibility were considered. The ACL represents the estimate of the level of reserves appropriate to absorb inherent credit losses. We believe the process for determining the ACL considers all of the significant potential factors that could result in credit losses. However, the process includes judgmental and quantitative elements that may be subject to significant change. To the extent actual outcomes differ from our estimates, additional provision for credit losses could be required, which could adversely affect earnings or financial performance in future periods. At December 31, 2005, the ACL as a percent of total loans and leases was 1.25%. Based on the December 31, 2005 balance sheet, a 10 basis point increase in this ratio to 1.35% would require $25.1 million in additional reserves funded by additional provision for credit losses, which would have negatively impacted 2005 net income by approximately $16.3 million, or $0.07 per share. A discussion about the process used to estimate the ACL is presented in the Credit Risk section of Managements Discussion and Analysis in this report. |
| FAIR VALUE OF FINANCIAL INSTRUMENTS A significant portion of our assets is carried at fair value, including securities, derivatives, and trading assets. Additionally, a smaller portion is carried at the lower of fair value or cost, including held-for-sale loans and mortgage servicing rights (MSRs). At December 31, 2005, approximately $4.9 billion of our assets were recorded at either fair value or at the lower of fair value or cost. |
The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The majority of assets reported at fair value are based on quoted market prices or on internally developed models that utilize independently sourced market parameters, including interest rate yield curves, option volatilities, and currency rates. | |
We estimate the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When observable market prices do not exist, we estimate fair value. Our valuation methods consider factors such as liquidity and concentration concerns and, for the derivatives portfolio, counterparty credit risk. Other factors such as model assumptions, market dislocations, and unexpected correlations can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of revenue or loss recorded for a particular position. |
Trading securities and securities available-for-sale | |
Substantially all of our securities are valued based on quoted market prices. However, certain securities are less actively traded. These securities do not always have quoted market prices. The determination of their fair value, therefore, requires judgment, as this determination may require benchmarking to similar instruments or analyzing default and recovery rates. Examples include certain collateralized mortgage and debt obligations and high-yield debt securities. | |
Our securities available-for-sale are valued using quoted market prices. Our derivative positions are valued using internally developed models based on observable market parameters that is, parameters that are actively quoted and can be validated to external sources, including industry-pricing services. | |
Loans held-for-sale | |
The fair value of loans in the held-for-sale portfolio is generally based on observable market prices of similar instruments. If market prices are not available, fair value is based on the estimated cash flows, adjusted for credit risk. The credit risk adjustment is discounted using a rate that is appropriate for each maturity and incorporates the effects of interest rate changes. | |
MSRs and other servicing rights | |
MSRs and certain other servicing rights do not trade in an active, open market with readily observable prices. While sales of MSRs occur, the precise terms and conditions are typically not readily available. Therefore, we estimate the fair value of MSRs and certain other servicing rights using a discounted future cash flow model. For MSRs and certain other servicing rights, the model considers portfolio characteristics, contractually specified servicing fees and assumptions related to prepayments, delinquency rates, late charges, other ancillary revenues, costs to service, and other economic factors. Changes in the assumptions used may have a significant impact on the valuation of these financial instruments. We believe that the fair values and related assumptions used in the models are comparable to those used by other market participants. Note 5 of |
33
M ANAGEMENTS D ISCUSSION AND A NALYSIS | HUNTINGTON BANCSHARES INCORPORATED |
the Notes to Consolidated Financial Statements contains an analysis of the impact to the fair value of MSRs resulting from changes in the estimates used by Management. |
| INCOME TAXES The calculation of our periodic provision for income taxes is complex and requires the use of estimates and judgments. We have two accruals for income taxes: our accrued income taxes represent the net estimated amount currently due or to be received from taxing jurisdictions, including any reserve for potential examination issues, and is reported as a component of accrued expenses and other liabilities in our consolidated balance sheet; and our deferred income tax liability represents the estimated impact of temporary differences between how we recognize our assets and liabilities under GAAP, and how such assets and liabilities are recognized under the federal tax code. |
From time to time, we engage in business transactions that may have an effect on our tax liabilities. Where appropriate, we have obtained opinions of outside experts and have assessed the relative merits and risks of the appropriate tax treatment of business transactions taking into account statutory, judicial, and regulatory guidance in the context of our tax position. However, changes to our estimates of accrued taxes can occur due to changes in tax rates, implementation of new business strategies, resolution of issues with taxing authorities regarding previously taken tax positions and newly enacted statutory, judicial, and regulatory guidance. Such changes could affect the amount of our accrued taxes and could be material to our results of operations. |
34
Table 2 Selected
Annual Income Statements
M
ANAGEMENTS
D
ISCUSSION AND
A
NALYSIS
HUNTINGTON BANCSHARES INCORPORATED
Year Ended December 31,
Change from 2004
Change from 2003
(in thousands, except per share amounts)
2005
Amount
%
2004
Amount
%
2003
2002
2001
$
1,641,765
$
294,450
21.9
%
$
1,347,315
$
41,559
3.2
%
$
1,305,756
$
1,293,195
$
1,654,789
679,354
243,413
55.8
435,941
(20,829
)
(4.6
)
456,770
543,621
939,501
962,411
51,037
5.6
911,374
62,388
7.3
848,986
749,574
715,288
81,299
26,237
47.7
55,062
(108,931
)
(66.4
)
163,993
194,426
257,326
881,112
24,800
2.9
856,312
171,319
25.0
684,993
555,148
457,962
167,834
(3,281
)
(1.9
)
171,115
3,275
2.0
167,840
153,564
165,012
138,433
(148,658
)
(51.8
)
287,091
(202,607
)
(41.4
)
489,698
657,074
691,733
77,405
9,995
14.8
67,410
5,761
9.3
61,649
62,051
60,298
53,619
(1,180
)
(2.2
)
54,799
(3,045
)
(5.3
)
57,844
62,109
75,013
44,348
2,774
6.7
41,574
128
0.3
41,446
42,888
48,217
41,710
9,414
29.1
32,296
(25,884
)
(44.5
)
58,180
32,033
54,518
40,736
(1,561
)
(3.7
)
42,297
(731
)
(1.7
)
43,028
43,123
41,123
1,211
(12,995
)
(91.5
)
14,206
(25,833
)
(64.5
)
40,039
(13,112
)
N.M.
13,112
182,470
24,550
(8,055
)
(23,818
)
N.M.
15,763
10,505
N.M.
5,258
4,902
723
75,041
(17,006
)
(18.5
)
92,047
988
1.1
91,059
76,940
63,305
632,282
(186,316
)
(22.8
)
818,598
(250,555
)
(23.4
)
1,069,153
1,341,704
1,199,942
481,658
(4,148
)
(0.9
)
485,806
38,543
8.6
447,263
418,037
454,210
108,376
(128,102
)
(54.2
)
236,478
(156,792
)
(39.9
)
393,270
518,970
558,626
74,638
2,523
3.5
72,115
5,997
9.1
66,118
67,368
69,692
71,092
(4,849
)
(6.4
)
75,941
13,460
21.5
62,481
59,539
76,449
63,124
(218
)
(0.3
)
63,342
(2,579
)
(3.9
)
65,921
68,323
80,560
34,569
(2,307
)
(6.3
)
36,876
(5,572
)
(13.1
)
42,448
33,085
32,862
28,077
1,588
6.0
26,489
(1,001
)
(3.6
)
27,490
27,911
31,057
18,648
(1,139
)
(5.8
)
19,787
(2,192
)
(10.0
)
21,979
22,661
27,984
12,573
110
0.9
12,463
(546
)
(4.2
)
13,009
15,198
18,367
829
12
1.5
817
1
0.1
816
2,019
41,225
1,151
N.M.
(1,151
)
5,515
(82.7
)
(6,666
)
48,973
79,957
(15,250
)
N.M.
15,250
76,236
(17,045
)
(18.3
)
93,281
12,501
15.5
80,780
92,063
91,438
969,820
(152,424
)
(13.6
)
1,122,244
(107,915
)
(8.8
)
1,230,159
1,374,147
1,562,427
543,574
(9,092
)
(1.6
)
552,666
28,679
5.5
523,987
522,705
95,477
131,483
(22,258
)
(14.5
)
153,741
15,447
11.2
138,294
198,974
(39,319
)
412,091
13,166
3.3
398,925
13,232
3.4
385,693
323,731
134,796
13,330
N.M.
(13,330
)
$
412,091
$
13,166
3.3
%
$
398,925
$
26,562
7.1
%
$
372,363
$
323,731
$
134,796
230,142
229
0.1
%
229,913
512
0.2
%
229,401
242,279
251,078
233,475
(381
)
(0.2
)
233,856
2,274
1.0
231,582
244,012
251,716
$ 1.79
$ 0.05
2.9
%
$ 1.74
$ 0.06
3.6
%
$ 1.68
$ 1.34
$ 0.54
1.79
0.05
2.9
1.74
0.12
7.4
1.62
1.34
0.54
1.77
0.06
3.5
1.71
0.04
2.4
1.67
1.33
0.54
1.77
0.06
3.5
1.71
0.10
6.2
1.61
1.33
0.54
0.845
0.10
12.7
0.750
0.08
11.9
0.670
0.640
0.720
Revenue fully taxable equivalent
(FTE)
Net interest income
$
962,411
$
51,037
5.6
%
$
911,374
$
62,388
7.3
%
$
848,986
$
749,574
$
715,288
FTE adjustment
13,393
1,740
14.9
11,653
1,969
20.3
9,684
5,205
6,352
975,804
52,777
5.7
923,027
64,357
7.5
858,670
754,779
721,640
632,282
(186,316
)
(22.8
)
818,598
(250,555
)
(23.4
)
1,069,153
1,341,704
1,199,942
$
1,608,086
$
(133,539
)
(7.7
)%
$
1,741,625
$
(186,198
)
(9.7
)%
$
1,927,823
$
2,096,483
$
1,921,582
N.M., not a meaningful value.
(1) | Due to adoption of FASB Interpretation No. 46 for variable interest entities. |
(2) | Calculated assuming a 35% tax rate. |
(3) | 2001 reflects a $32.5 million reduction related to the issuance of $400 million REIT subsidiary preferred stock, of which $50 million was sold to the public. |
35
M ANAGEMENTS D ISCUSSION AND A NALYSIS | HUNTINGTON BANCSHARES INCORPORATED |
DISCUSSION OF RESULTS OF OPERATIONS
This section provides a review of financial performance from a consolidated perspective. It also includes a Significant Factors Influencing Financial Performance Comparisons section that summarizes key issues important for a complete understanding of performance trends. Key consolidated balance sheet and income statement trends are discussed in this section. All earnings per share data are reported on a diluted basis. For additional insight on financial performance, this section should be read in conjunction with the Lines of Business Discussion.
Summary
2005 versus 2004
Earnings for 2005 were $412.1 million, or $1.77 per common share, up 3% and 4%, respectively, from $398.9 million, or $1.71 per common share, in 2004. The $13.2 million increase in net income primarily reflected:
| $152.4 million, or 14%, decline in non-interest expense, primarily reflecting a $128.1 million decline in operating lease expenses, a $9.9 million decline in SEC-related expenses, a $4.8 million decline in net occupancy expense, a $4.1 million decline in personnel costs, and a $2.9 million decline in Unizan system conversion expenses. | |
| $51.0 million, or 6%, increase in net interest income, reflecting a 6% increase in average earning assets, as the net interest margin of 3.33% was unchanged from the prior year. The increase in average earning assets reflected 10% growth in average total loans and leases, including 11% growth in average total consumer loans and 8% growth in average total commercial loans, partially offset by a 14% decline in average investment securities. | |
| $22.3 million decline in income tax expense as the effective tax rate for 2005 was 24.2%, down from 27.8% in 2004. The lower 2005 income tax expense reflected a combination of factors including the benefit of a federal tax loss carry back, partially offset by the net impact of repatriating foreign earnings. |
Partially offset by:
| $186.3 million, or 23%, decline in non-interest income. Contributing to the decrease were a $148.7 million decline in operating lease income, a $23.8 million decline in securities gains as the current year had $8.1 million of securities losses and the prior year had $15.8 million of securities gains, a $13.0 million decline in gains on sales of automobile loans, a $17.0 million decline in other income reflecting primarily MSR-hedge related trading losses, and a $3.3 million decline in service charges on deposit accounts. These declines were partially offset by a $10.0 million increase in trust services income, a $9.4 million increase in mortgage banking income, and a $2.8 million increase in other service charges and fees. | |
| $26.2 million, or 48%, increase in the provision for credit losses, reflecting higher levels of non-performing assets and problem credits, as well as growth in the loan portfolio. |
The ROA and ROE for 2005 were 1.26% and 16.0%, respectively, down slightly from 1.27% and 16.8%, respectively, in 2004.
2004 versus 2003
Earnings for 2004 were $398.9 million, or $1.71 per common share, up 7% and 6%, respectively, from $372.4 million, or $1.61 per common share, in 2003. The $26.6 million increase in net income primarily reflected:
| $108.9 million, or 66%, decline in the provision for credit losses, reflecting lower levels of non-performing assets and problem credits, only partially offset by the impact of loan growth. | |
| $107.9 million, or 9%, decline in non-interest expense, primarily reflecting a $156.8 million decline in operating lease expenses, a $15.3 million loss on early extinguishment of debt expense in 2003, a $5.6 million decline in professional services, and declines in equipment, marketing, telecommunications, and printing and supplies. These declines were partially offset by a $38.5 million increase in personnel costs, a $13.5 million increase in net occupancy expense, a $6.7 million increase in SEC/regulatory-related expenses, and $3.6 million of Unizan system conversion expenses, as the prior year did not have these expenses. | |
| $62.4 million, or 7%, increase in net interest income, reflecting a 13% increase in average earning assets, partially offset by the negative impact of a 16 basis point, or an effective 5%, decline in the net interest margin to 3.33% from 3.49%. The increase in average earning assets reflected 11% growth in average total loans and leases, including 16% growth in average total consumer loans, 4% growth in average total commercial loans, and a 25% increase in average investment securities. |
36
M ANAGEMENTS D ISCUSSION AND A NALYSIS | HUNTINGTON BANCSHARES INCORPORATED |
Partially offset by:
| $250.6 million, or 23%, decline in non-interest income. Contributing to the decrease were a $202.6 million decline in operating lease income, a $25.9 million decline in mortgage banking income, a $25.8 million decline in gains on sales of automobile loans, and the fact that 2003 benefited from a $13.1 million gain on sale of branch offices. Partially offsetting these declines were $10.5 million of higher securities gains, a $5.8 million increase in trust income, and a $3.3 million increase in service charges on deposits. | |
| $15.4 million increase in income tax expense as the effective tax rate for 2004 was 27.8%, up from 26.4% in 2003. |
The ROA and ROE for 2004 were 1.27% and 16.8%, respectively, down from 1.29% and 17.0%, respectively, in 2003.
Results Of Operations
Significant Factors Influencing Financial Performance Comparisons
Earnings comparisons from 2003 through 2005 were impacted by a number of factors, some related to changes in the economic and competitive environment, while others reflected specific management strategies or changes in accounting practices. Those key factors are summarized below.
1. | AUTOMOBILE LEASES ORIGINATED THROUGH APRIL 2002 ARE ACCOUNTED FOR AS OPERATING LEASES. Automobile leases originated before May 2002 are accounted for using the operating lease method of accounting because they do not qualify as direct financing leases. Operating leases are carried in other assets with the related rental income, other revenue, and credit recoveries reflected as operating lease income, a component of non-interest income. Under this accounting method, depreciation expenses, as well as other costs and charge-offs, are reflected as operating lease expense, a component of non-interest expense. With no new operating leases originated since April 2002, the operating lease assets have declined rapidly. It is anticipated that the level of operating lease assets and related operating lease income and expense will decline to a point of diminished materiality sometime in 2006. However, until that point is reached, and since operating lease income and expense represented a significant percentage of total non-interest income and expense, respectively, throughout these reporting periods, their downward trend influenced total revenue, total non-interest income, and total non-interest expense trends. |
In contrast, automobile leases originated since April 2002 are accounted for as direct financing leases, an interest earning asset included in total loans and leases with the related income reflected as interest income and included in the calculation of the net interest margin. Credit charge-offs and recoveries are reflected in the ALLL, with related changes in the ALLL reflected in the provision for credit losses. The relative newness and rapid growth of the direct financing lease portfolio resulted in higher reported automobile lease growth rates than in a more mature portfolio, especially in 2002 through 2004. To better understand overall trends in automobile lease exposure, it is helpful to compare trends in the combined total of direct financing leases plus operating leases. |
2. | MORTGAGE SERVICING RIGHTS (MSRS) AND RELATED HEDGING. Interest rate levels throughout this period have remained low by historical standards, though they have generally been rising in 2004 and 2005. They have also been volatile, with increases in one quarter followed by declines in another and vice versa. This has impacted the valuation of MSRs, which can be volatile when rates change. |
| Since the second quarter of 2002, we have generally retained the servicing on mortgage loans we originate and sell. MSR values are very sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly reduced by prepayments. Prepayments usually increase when mortgage interest rates decline and decrease when mortgage interest rates rise. Thus, as interest rates decline, less future income is expected and the value of MSRs declines. We recognize impairment when the valuation is less than the recorded book value. We recognize temporary impairment due to changes in interest rates through a valuation reserve and record a direct write-down of the book value of MSRs for other-than-temporary declines in valuation. Changes and fluctuations in interest rate levels between quarters resulted in some quarters reporting an MSR temporary impairment, with others reporting a recovery of previously recognized MSR temporary impairment. Such swings in MSR valuations have significantly impacted quarterly mortgage banking income trends throughout this period. | |
| Prior to 2004, we used investment securities as the primary method of offsetting MSR temporary valuation changes. Beginning in 2004, we have used trading account assets. The valuations of trading and investment securities generally react to interest rate changes in an opposite direction compared with changes in MSR valuations. As a |
37
M ANAGEMENTS D ISCUSSION AND A NALYSIS | HUNTINGTON BANCSHARES INCORPORATED |
result, changes in interest rate levels that impacted MSR valuations also resulted in securities or trading gains or losses. As such, in quarters where an MSR impairment was recognized, investment securities and/or trading account assets were sold, typically resulting in a gain on sale or trading income, and vice versa. Investment securities gains or losses are reflected in the income statement in a single non-interest income line item, whereas trading gains or losses are a component of other non-interest income on the income statement ( see Tables 3 and 7) . |
3. | THE SALE OF AUTOMOBILE LOANS. Beginning in 2003, a key strategy has been to lower our credit exposure to automobile loans and leases to 20% or less of total credit exposure, primarily by selling automobile loans. This objective was achieved during the 2005 first quarter. These sales of loans impacted results in a number of ways including: lower growth rates in automobile, total consumer, and total loans; and lower net interest income than otherwise would be the case if the loans were not sold. In addition, during 2004 such sales resulted in the generation of significant gains as large pools of automobile loans were sold in order to achieve the objective, with such gains reflected in non-interest income. In the 2005 second quarter, we entered into an arrangement to sell 50%-75% of automobile loan production to a third party on an on-going basis and retain the loan servicing as part of a strategy to maintain automobile loans and leases total credit exposure. While this flow-sale program resulted in modest gains in 2005, we view such gains as recurring given their on-going nature (see Table 3) . | |
4. | SIGNIFICANT C&I AND CRE CHARGE-OFFS AND RECOVERIES. A single commercial credit recovery in the 2004 second quarter on a loan previously charged off in the 2002 fourth quarter, favorably impacted the 2004 second quarter and full year provision expense (see Table 17) , as well as middle-market commercial and industrial, total commercial, and total net charge-offs for the 2004 second quarter and full year period (see Table 19). In addition, in the 2005 first quarter, a single large commercial credit was charged-off. This impacted 2005 first quarter and full year period total net charge-offs and provision expense (see Tables 3, 17, and 19). | |
5. | EXPENSES AND ACCRUALS ASSOCIATED WITH THE SEC FORMAL INVESTIGATION AND BANKING REGULATORY FORMAL WRITTEN AGREEMENTS. On June 26, 2003, we announced that the SEC staff was conducting a formal investigation into certain financial accounting matters, relating to fiscal years 2002 and earlier, and certain related disclosure matters. In addition, on March 1, 2005, we announced entering into a formal written agreement with the FRBC, as well as the Bank entering into a formal written agreement with the OCC, providing for a comprehensive action plan designed to enhance corporate governance, internal audit, risk management, accounting policies and procedures, and financial and regulatory reporting. On June 2, 2005, we announced that the SEC approved the settlement of their formal investigation. As a part of the settlement, we consented to pay a penalty of $7.5 million. This civil money penalty had no impact on our 2005 financial results, as reserves for this amount were established and expensed in 2004. These matters resulted in certain expenses and accruals as detailed below: |
|
|||||||||||||
(in millions of dollars) | 2005 | 2004 | 2003 | ||||||||||
|
|||||||||||||
First quarter
|
$ | 2.0 | $ | 0.7 | $ | | |||||||
Second quarter
|
1.7 | 0.9 | 0.4 | ||||||||||
Third quarter
|
| 5.5 | 4.7 | ||||||||||
Fourth quarter
|
| 6.5 | 1.8 | ||||||||||
|
|||||||||||||
Full year
|
$ | 3.7 | $ | 13.6 | $ | 6.9 | |||||||
|
6. | EFFECTIVE TAX RATE. In each quarter of 2005, the effective tax rate included the after-tax positive impact on net income due to a federal tax loss carry back, tax exempt income, bank owned life insurance, asset securitization activities, and general business credits from investment in low income housing and historic property partnerships. In addition, the 2005 third quarter and full-year effective tax rates reflected a $5.0 million after-tax negative net impact, primarily in increased income tax expense, resulting from the repatriation of foreign earnings. In 2006, the effective tax rate is anticipated to increase to a more typical rate just below 30%. |
38
M ANAGEMENTS D ISCUSSION AND A NALYSIS | HUNTINGTON BANCSHARES INCORPORATED |
7. | OTHER SIGNIFICANT ITEMS INFLUENCING EARNINGS PERFORMANCE COMPARISONS. From the first quarter of 2003 through the fourth quarter of 2005, and in addition to other items discussed separately in this section, a number of significant items impacted financial results. These included: |
2005 |
| $8.1 million pre-tax of investment securities losses related to a decision made during the 2005 fourth quarter to restructure a portion of the investment portfolio to replace lower rate securities with higher rate securities. This item lowered non-interest income. | |
| $5.1 million pre-tax of severance and consolidation expenses associated with the consolidation of certain operations functions, including the closing of an item-processing center in Michigan. This item increased non-interest expense. | |
| $2.1 million pre-tax write-off of an equity investment in the 2005 second quarter. This item lowered non-interest income. |
2004 |
| $7.8 million pre-tax of property lease impairments. This item increased non-interest expense. | |
| $3.6 million pre-tax of Unizan system conversion expense. This item increased non-interest expense. | |
| $3.7 million pre-tax one-time funding cost adjustment for a securitization structure consolidated in a prior period, which lowered interest expense and increased net interest income, as well as the net interest margin. | |
| $1.2 million pre-tax restructuring reserve release related to reserves established in conjunction with the 2002 sale of the Florida banking and insurance operations that were no longer needed. This item lowered non-interest expense. |
2003 |
| $15.3 million pre-tax non-interest expense due to the early termination of long-term debt. This item increased non-interest expense. | |
| $13.1 million pre-tax gain from the sale of our Martinsburg, West Virginia area branches. This item increased non-interest income. | |
| $13.3 million after-tax cumulative effect of adopting FASB Interpretation No. 46, Consolidation of Variable Interest Entities . This item lowered net income. | |
| $6.7 million pre-tax restructuring reserve release related to reserves that were no longer needed, which were established in conjunction with the sale of the Florida banking and insurance operations. This item lowered non-interest expense. |
39
Table 3
Significant Items Influencing Earnings Performance
Comparison
(1)
N.M., not a meaningful value.
M
ANAGEMENTS
D
ISCUSSION AND
A
NALYSIS
HUNTINGTON BANCSHARES INCORPORATED
2005
2004
2003
(in thousands of dollars)
After-tax
EPS
After-tax
EPS
After-tax
EPS
$
412,091
$
398,925
$
372,363
$
1.77
$
1.71
$
1.61
0.06
0.10
0.28
3.5
%
6.2
%
21.1
%
Earnings
(3
)
EPS
Earnings
(3
)
EPS
Earnings
(3
)
EPS
$
(7,318
)
$
(0.02
)
$
(7,174
)
$
(0.02
)
$
14,957
$
0.04
14,206
0.04
40,039
0.11
(6,449
)
(0.02
)
11,095
0.03
(3,715
)
(0.01
)
(13,597
)
(0.05
)
(6,859
)
(0.02
)
26,936
0.12
(8,055
)
(0.02
)
15,763
0.04
5,258
0.01
(5,040
)
(0.02
)
(5,064
)
(0.01
)
(2,098
)
(0.01
)
(7,846
)
(0.02
)
3,682
0.01
(3,610
)
(0.01
)
1,151
N.M.
6,666
0.02
N/A
(0.06
)
13,112
0.04
(15,250
)
(0.04
)
N/A, not applicable.
(1) See Significant Factors Influencing Financial Performance discussion.
(2) Only reflected in the income statement on an after tax basis of $13.3 million.
(3) Pre-tax unless otherwise noted.
(4) After-tax.
Net Interest Income
(This section should be read in conjunction with Significant Factors 1-3 and 7.)
Our primary source of revenue is net interest income, which is the difference between interest income on earning assets (primarily loans, direct financing leases, and securities) and interest expense on funding sources (including interest bearing deposits and borrowings.) Earning asset balances and related funding, as well as changes in the levels of interest rates, impact net interest income. The difference between the average yield on earning assets and the average rate paid for interest bearing liabilities is the net interest spread. Non-interest bearing sources of funds, such as demand deposits and shareholders equity, also support earning assets. The impact of the non-interest bearing sources of funds, often referred to as free funds, is captured in the net interest margin, which is calculated as net interest income divided by average earning assets. Given the free nature of non-interest bearing sources of funds, the net interest margin is generally higher than the net interest spread. Both the net interest spread and net interest margin are presented on a fully taxable equivalent basis, which means that tax-free interest income has been adjusted to a pre-tax equivalent income, assuming a 35% tax rate.
Table 4 shows changes in fully taxable equivalent interest income, interest expense, and net interest income due to volume and rate variances for major categories of earning assets and interest bearing liabilities. The change in interest income or expense not solely due to changes in volume or rates has been allocated in proportion to the absolute dollar amount of the change in volume and rate.
40
Table 4 Change in
Net Interest Income Due to Changes in Average Volume and
Interest Rates
(1)
M
ANAGEMENTS
D
ISCUSSION AND
A
NALYSIS
HUNTINGTON BANCSHARES INCORPORATED
2005
2004
Increase (Decrease) From
Increase (Decrease) From
Previous Year Due To
Previous Year Due To
Fully tax equivalent basis
(2)
Yield/
Yield/
(in millions of dollars)
Volume
Rate
Total
Volume
Rate
Total
$
118.6
$
177.7
$
296.3
$
110.8
$
(75.7
)
$
35.1
(29.8
)
19.9
(9.9
)
42.1
(24.7
)
17.4
3.8
6.2
10.0
1.4
(10.5
)
(9.1
)
92.6
203.8
296.4
154.3
(110.9
)
43.4
41.7
148.1
189.8
21.5
(52.7
)
(31.2
)
(0.3
)
21.6
21.3
(1.8
)
(0.9
)
(2.7
)
(4.7
)
6.1
1.4
0.3
8.6
8.9
(39.0
)
66.4
27.4
21.6
(13.9
)
7.7
(2.3
)
242.2
239.9
41.6
(58.9
)
(17.3
)
94.9
(38.4
)
56.5
112.7
(52.0
)
60.7
(3.7
)
(3.7
)
3.7
3.7
$
94.9
$
(42.1
)
$
52.8
$
112.7
$
(48.3
)
$
64.4
(1) | The change in interest rates due to both rate and volume has been allocated between the factors in proportion to the relationship of the absolute dollar amounts of the change in each. |
(2) | Calculated assuming a 35% tax rate. |
2005 versus 2004 Performance
The stability of the net interest margin reflected a combination of factors including the benefit of a shift in the earning asset mix from lower-yielding investments to higher-yielding loans as a result of decreasing the level of excess liquidity and redirecting part of the proceeds of securities sales to fund loan growth. In addition, the margin also benefited from an increase in non-interest bearing funds. These benefits were partially offset by the negative impact of intense loan and deposit price competition and share repurchases.
2004 versus 2003 Performance
The net interest margin declined in the first half of 2004, primarily reflecting the sale of higher-margin automobile loans. Such sales totaled $1.4 billion in the first half of 2004 but only $0.2 billion in the second half of 2004. The decline in the net interest margin in the first half of the year also reflected, to a lesser degree, the growth in lower-margin investment securities, as well as the impact of rising interest rates. The net interest margin stabilized in the second half of the year as automobile loan sales diminished and lower cost deposit growth was strong.
AVERAGE BALANCE SHEET
Table 5 shows average annual balance sheets and net interest margin analysis for the last five years. It details average balances for total assets and liabilities, as well as shareholders equity, and their various components, most notably loans and leases, deposits, and borrowings. It also shows the corresponding interest income or interest expense associated with each earning asset and interest bearing liability category along with the average rate, with the difference resulting in the net interest spread. The net interest spread plus the positive impact from the non-interest bearing funds represent the net interest margin.
41
Table 5
Consolidated Average Balance Sheet and Net Interest Margin
Analysis
M
ANAGEMENTS
D
ISCUSSION AND
A
NALYSIS
HUNTINGTON BANCSHARES INCORPORATED
Average Balances
Change from 2004
Change from 2003
Fully taxable equivalent basis
(1)
(in millions of dollars)
2005
Amount
%
2004
Amount
%
2003
2002
2001
$
53
$
(13
)
(19.7
)%
$
66
$
29
78.4
%
$
37
$
33
$
7
207
102
97.1
105
91
N.M.
14
7
25
262
(57
)
(17.9
)
319
232
N.M.
87
72
107
318
75
30.9
243
(321
)
(56.9
)
564
322
360
3,683
(742
)
(16.8
)
4,425
892
25.2
3,533
2,859
3,144
475
63
15.3
412
78
23.4
334
135
174
4,158
(679
)
(14.0
)
4,837
970
25.1
3,867
2,994
3,318
4,817
361
8.1
4,456
(177
)
(3.8
)
4,633
4,810
5,075
1,678
258
18.2
1,420
201
16.5
1,219
1,151
1,040
1,908
(14
)
(0.7
)
1,922
122
6.8
1,800
1,670
1,522
3,586
244
7.3
3,342
323
10.7
3,019
2,821
2,562
2,224
221
11.0
2,003
216
12.1
1,787
1,642
2,574
10,627
826
8.4
9,801
362
3.8
9,439
9,273
10,211
2,043
(242
)
(10.6
)
2,285
(975
)
(29.9
)
3,260
2,744
N.M.
2,422
230
10.5
2,192
769
54.0
1,423
452
N.M.
4,465
(12
)
(0.3
)
4,477
(206
)
(4.4
)
4,683
3,196
2,839
4,636
449
10.7
4,187
746
21.7
3,441
3,029
3,334
4,081
869
27.1
3,212
1,186
58.5
2,026
1,438
1,048
501
51
11.3
450
15
3.4
435
481
654
13,683
1,357
11.0
12,326
1,741
16.4
10,585
8,144
7,875
24,310
2,183
9.9
22,127
2,103
10.5
20,024
17,417
18,086
(268
)
30
(10.1
)
(298
)
32
(9.7
)
(330
)
(344
)
(286
)
24,042
2,213
10.1
21,829
2,135
10.8
19,694
17,073
17,800
29,308
1,611
5.8
27,697
3,104
12.6
24,593
20,845
21,903
372
(525
)
(58.5
)
897
(800
)
(47.1
)
1,697
2,602
2,970
845
2
0.2
843
69
8.9
774
757
912
218
2
0.9
216
(2
)
(0.9
)
218
293
736
2,164
86
4.1
2,078
58
2.9
2,020
1,910
1,891
$
32,639
$
1,206
3.8
%
$
31,433
$
2,461
8.5
%
$
28,972
$
26,063
$
28,126
Deposits:
$
3,379
$
149
4.6
%
$
3,230
$
150
4.9
%
$
3,080
$
2,902
$
3,304
7,658
451
6.3
7,207
1,014
16.4
6,193
5,161
5,005
3,155
(276
)
(8.0
)
3,431
(31
)
(0.9
)
3,462
3,583
4,381
2,952
535
22.1
2,417
(285
)
(10.5
)
2,702
3,619
4,980
17,144
859
5.3
16,285
848
5.5
15,437
15,265
17,670
1,292
427
49.4
865
63
7.9
802
851
1,280
3,119
1,282
69.8
1,837
418
29.5
1,419
731
128
457
(51
)
(10.0
)
508
8
1.6
500
337
283
22,012
2,517
12.9
19,495
1,337
7.4
18,158
17,184
19,361
1,379
(31
)
(2.2
)
1,410
(190
)
(11.9
)
1,600
1,856
2,099
1,105
(166
)
(13.1
)
1,271
13
1.0
1,258
279
19
4,064
(1,315
)
(24.4
)
5,379
820
18.0
4,559
3,335
3,411
25,181
856
3.5
24,325
1,830
8.1
22,495
19,752
21,586
1,496
(8
)
(0.5
)
1,504
303
25.2
1,201
1,170
905
2,583
209
8.8
2,374
178
8.1
2,196
2,239
2,331
$
32,639
$
1,206
3.8
%
$
31,433
$
2,461
8.5
%
$
28,972
$
26,063
$
28,126
N.M., not a meaningful value.
(1) | Fully taxable equivalent (FTE) yields are calculated assuming a 35% tax rate. |
(2) | Loan and lease and deposit average rates include impact of applicable derivatives and non-deferrable fees. |
(3) | For purposes of this analysis non-accrual loans are reflected in the average balances of loans. |
(4) | 2005 reflects a net reclassification of $500 million from middle market commercial real estate to middle market commercial and industrial, on November 1, 2005. |
42
M ANAGEMENTS D ISCUSSION AND A NALYSIS | HUNTINGTON BANCSHARES INCORPORATED |
Interest Income/Expense
Average Rate
(2)
2005
2004
2003
2002
2001
2005
2004
2003
2002
2001
$
1.1
$
0.7
$
0.6
$
0.8
$
0.2
2.16
%
1.05
%
1.53
%
2.38
%
3.43
%
8.5
4.4
0.6
0.3
1.3
4.08
4.15
4.02
4.11
5.13
6.0
5.5
1.6
1.1
4.5
2.91
1.73
1.80
1.56
4.19
17.9
13.0
30.0
20.5
25.0
5.64
5.35
5.32
6.35
6.95
158.7
171.7
159.6
173.0
206.9
4.24
3.88
4.52
6.06
6.58
31.9
28.8
23.5
10.1
13.0
6.71
6.98
7.04
7.42
7.49
190.6
200.5
183.1
183.1
219.9
4.52
4.14
4.73
6.12
6.63
279.0
196.5
224.1
262.0
353.4
5.79
4.41
4.95
5.45
6.96
101.0
58.0
52.1
52.6
72.7
6.01
4.09
4.09
4.57
6.99
110.6
85.3
88.0
98.7
113.3
5.79
4.44
4.84
5.91
7.44
211.6
143.3
140.1
151.3
186.0
5.90
4.29
4.54
5.36
7.26
137.5
110.3
105.6
110.6
204.8
6.18
5.50
5.91
6.73
7.96
628.1
450.1
469.8
523.9
744.2
5.91
4.59
5.00
5.65
7.29
133.3
165.1
242.1
237.9
253.8
6.52
7.22
7.38
8.67
N.M
119.6
109.6
72.8
23.2
1.2
4.94
5.00
5.09
5.14
N.M
252.9
274.7
314.9
261.1
255.0
5.66
6.14
6.68
8.17
8.94
297.2
205.4
174.1
180.6
274.5
6.41
4.91
5.14
5.96
8.23
222.3
175.9
111.4
91.4
81.6
5.45
5.48
5.85
6.55
8.19
30.6
28.7
29.5
35.6
54.9
6.13
6.38
6.71
7.40
8.40
803.0
684.7
629.9
568.7
666.0
5.87
5.56
5.93
6.98
8.44
1,431.1
1,134.8
1,099.7
1,092.6
1,410.2
5.89
5.11
5.49
6.27
7.79
1,655.2
1,358.9
1,315.6
1,298.4
1,661.1
5.65
4.89
5.35
6.23
7.58
135.5
74.1
73.0
88.9
133.5
1.77
1.03
1.18
1.71
2.64
42.9
44.1
67.7
80.2
154.9
1.36
1.28
1.94
2.24
3.54
105.0
81.2
100.4
165.6
281.5
3.56
3.36
3.68
4.58
5.65
283.4
199.4
241.1
334.7
569.9
2.06
1.53
1.94
2.70
3.95
44.5
20.5
18.5
28.8
66.8
3.44
2.37
2.50
3.39
5.22
109.4
33.1
24.1
17.3
6.6
3.51
1.80
1.70
2.36
5.12
9.6
4.1
4.6
4.9
10.8
2.10
0.82
0.92
1.47
3.82
446.9
257.1
288.3
385.7
654.1
2.40
1.58
1.91
2.69
4.06
34.3
13.0
15.7
29.0
95.8
2.49
0.93
0.98
1.56
4.57
34.7
33.3
24.4
5.6
1.2
3.13
2.57
1.94
2.00
6.17
163.5
132.5
128.5
123.3
188.4
4.02
2.46
2.82
3.70
5.52
679.4
435.9
456.9
543.6
939.5
2.70
1.79
2.03
2.75
4.34
$
975.8
$
923.0
$
858.7
$
754.8
$
721.6
2.95
3.10
3.32
3.48
3.24
0.38
0.23
0.17
0.14
0.05
3.33
%
3.33
%
3.49
%
3.62
%
3.29
%
43
M ANAGEMENTS D ISCUSSION AND A NALYSIS | HUNTINGTON BANCSHARES INCORPORATED |
AVERAGE BALANCE SHEET LOANS, LEASES, AND OTHER EARNING ASSETS
2005 versus 2004 Performance
Average total automobile loans decreased $0.2 billion, or 11%, from 2004 reflecting the sale of automobile loans, loan pay downs, and slowing production. Partially offsetting the decline in automobile loans was $0.2 billion, or 10%, growth in direct financing leases due to the continued migration from operating lease assets, which have not been originated since April 2002.
Average total commercial loans increased $0.8 billion, or 8%, from 2004. This reflected a $0.4 billion, or 8%, increase in middle market commercial and industrial (C&I) loans, a $0.2 billion, or 7%, increase in middle market commercial real estate (CRE) loans, and a $0.2 billion, or 11%, increase in average small business C&I and CRE loans.
Average total investment securities declined $0.7 billion, or 14%, from 2004. This decline reflected a combination of factors including lowering the level of excess liquidity, a decision to sell selected lower yielding securities, and partially funding loan growth with the proceeds from the sale of securities. We also made a decision in the fourth quarter of 2005 to reposition a segment of the portfolio to replace lower yield securities with higher yield securities. This resulted in $8.8 million of securities losses in the fourth quarter, but should position the portfolio for better future performance.
2004 versus 2003 Performance
Average total loans and leases increased 11% from the prior year. Most of this reflected growth in average total consumer loans where the strong growth in residential mortgage and home equity loans was only partially offset by a decline in automobile loans, reflecting the sale of $1.5 billion of automobile loans in 2004. Average total commercial loans increased 4%, reflecting growth in middle market CRE and small business loans, partially offset by a decline in average middle market C&I loans.
AVERAGE BALANCE SHEET DEPOSITS AND OTHER FUNDING
2005 versus 2004 Performance
We use the non-core funding ratio (total liabilities less core deposits and accrued expenses and other liabilities divided by total assets) to measure the extent to which funding is dependent on wholesale deposits and borrowing sources. For 2005, the average non-core funding ratio was 35%, down from 36% in 2004. The average non-core funding ratio reached a peak of 38% in the first quarter of 2004 as strong loan growth outpaced core deposit growth. Subsequent loan sales, as well as successful core deposit growth initiatives, reduced average non-core funding requirements to 35% by the 2004 fourth quarter.
2004 versus 2003 Performance
For 2004, the average non-core funding ratio was 36%, up from 35% in 2003.
44
M ANAGEMENTS D ISCUSSION AND A NALYSIS | HUNTINGTON BANCSHARES INCORPORATED |
Provision for Credit Losses
(This section should be read in conjunction with Significant Factor 4 and the Credit Risk section.)
The provision for credit losses is the expense necessary to maintain the ALLL and the AULC at a level adequate to absorb our estimate of probable inherent credit losses in the loan and lease portfolio and the portfolio of unfunded loan commitments.
Provision expense for 2005 was $81.3 million, up $26.2 million, or 48%, from 2004. The increase in 2005 reflected a combination of factors including loan growth and higher levels of problem assets, most notably downgrades in certain commercial credits late in the fourth quarter. Given our highly quantitative loan loss reserve methodology, these downgrades required a meaningful increase in our ALLL. We believe these downgrades reflect weakness in certain credit situations rather than the beginning of a trend of material weakening in general credit quality.
Provision expense for 2004 was $55.1 million, down $108.9 million, or 66%, from the prior year. This reflected significant improvement in overall credit quality as reflected by a combination of factors, including lower net charge-offs and a single C&I recovery of $11.1 million in 2004, as well as the overall lower risk inherent in the loan and lease portfolio resulting from strategies to lower the overall risk profile of the balance sheet, partially offset by additional provision expense related to loan growth.
Non-Interest Income
(This section should be read in conjunction with Significant Factors 1, 2, 3, and 7.)
Non-interest income for the three years ended December 31, 2005, was as follows:
Table 6 Non-Interest Income
N.M., not a meaningful value.
Table 7 details mortgage banking income and the net impact of MSR hedging activity. We record MSR temporary impairment valuation changes in mortgage banking income, whereas MSR hedge-related trading activity is recorded in other non-interest income, as well as in net interest income. Striking a mortgage banking income sub-total before MSR recoveries or impairments, provides a clearer understanding of the underlying trends in mortgage banking income associated with the primary business activities of origination, sales, and servicing. The net impact of MSR hedging analysis presents all of the MSR impairment valuation changes and related hedging activity.
45
M ANAGEMENTS D ISCUSSION AND A NALYSIS | HUNTINGTON BANCSHARES INCORPORATED |
Mortgage banking income and the net impact of MSR
hedging activities for the three years ended December 31,
2005, was as follows:
Table 7 Mortgage
Banking Income and Net Impact of MSR Hedging
N.M., not a meaningful value.
Year Ended December 31,
Change from 2004
Change from 2003
(in thousands of dollars)
2005
Amount
%
2004
Amount
%
2003
$
10,781
$
(1,596
)
(12.9
)%
$
12,377
$
(4,895
)
(28.3
)%
$
17,272
10,986
2,646
31.7
8,340
(15,267
)
(64.7
)
23,607
22,181
485
2.2
21,696
4,790
28.3
16,906
(18,359
)
660
(3.5
)
(19,019
)
6,947
(26.8
)
(25,966
)
11,750
4,226
56.2
7,524
(3,880
)
(34.0
)
11,404
37,339
6,421
20.8
30,918
(12,305
)
(28.5
)
43,223
4,371
2,993
N.M.
1,378
(13,579
)
(90.8
)
14,957
$
41,710
$
9,414
29.1
%
$
32,296
$
(25,884
)
(44.5
)%
$
58,180
$
91,259
$
14,152
18.4
%
$
77,107
$
6,020
8.5
%
$
71,087
(404
)
4,371
(91.5
)
(4,775
)
1,378
(22.4
)
(6,153
)
7,276,000
415,000
6.0
6,861,000
467,000
7.3
6,394,000
$
4,371
$
2,993
N.M.
%
$
1,378
$
(13,579
)
(90.8
)%
$
14,957
(13,377
)
(7,867
)
N.M.
(5,510
)
(5,510
)
N.M.
1,688
238
16.4
1,450
1,450
N.M.
4,492
N.M.
(4,492
)
(4,492
)
N.M.
$
(7,318
)
$
(144
)
2.0
%
$
(7,174
)
$
(22,131
)
N.M.
%
$
14,957
(1) | At period end. |
(2) | Included in other non-interest income. |
(3) | The tables above exclude securities gains or losses related to the investment securities portfolio. |
(4) | Included in other mortgage banking income. |
2005 versus 2004 Performance
| $23.8 million decline in net securities gains, as the current year reflected $8.1 million of securities losses, primarily related to $8.8 million of securities losses due to the fourth quarter restructuring of a part of the securities portfolio, compared with $15.8 million of gains in 2004 taken to mitigate the net impact of the MSR impairment. | |
| $17.0 million, or 18%, decline in other income reflected a combination of factors including an increase in MSR hedge- related trading losses, lower income from automobile lease terminations, the $2.1 million write-off of an equity investment in the 2005 second quarter, lower investment banking income, and lower equity investment gains. | |
| $13.0 million decline in gains on sale of automobile loans as the year-ago period included $14.2 million of such gains. | |
| $3.3 million, or 2%, decline in service charges on deposit accounts, all driven by a decline in commercial service charges, reflecting a combination of lower activity and a preference by commercial customers to pay for services with higher compensating balances rather than fees as interest rates increased. Consumer service charges increased slightly reflecting higher activity-related personal service charges, mostly offset by lower maintenance fees on deposit accounts, as well as lower personal NSF and overdraft service charges. | |
| $1.6 million, or 4%, decline in bank owned life insurance income. | |
| $1.2 million, or 2%, decline in brokerage and insurance income, reflecting lower annuity sales. |
Partially offset by:
| $10.0 million, or 15%, increase in trust services due to higher personal trust and mutual fund fees, reflecting a combination of higher market value of assets, as well as increased activity. |
46
M ANAGEMENTS D ISCUSSION AND A NALYSIS | HUNTINGTON BANCSHARES INCORPORATED |
| $9.4 million, or 29%, increase in mortgage banking income, reflecting a $6.9 million increase in secondary marketing and other mortgage banking income, as well as a $3.0 million increase in MSR temporary impairment recoveries. | |
| $2.8 million, or 7%, increase in other service charges and fees, due to higher debit card fees, partially offset by lower bill pay fees as a result of a decision to eliminate fees for this service beginning in the 2004 fourth quarter. |
2004 versus 2003 Performance
| $25.9 million decline in mortgage banking income reflected a combination of factors, all basically related to the lower level of mortgage originations as interest rates increased during 2004. Such factors included lower net secondary marketing revenue, as sales declined, and a 91% reduction in MSR recovery. | |
| $25.8 million decline in gains on the sale of automobile loans, reflecting both a decline in loan sales ($1.5 billion in 2004, $2.1 billion in 2003), as well as lower relative gains on the sales as the loans sold in 2003 were older and originated at higher rates. | |
| $13.1 million decline in gains on sale of branch offices, reflecting no such sales in 2004. | |
| $3.0 million decline in brokerage and insurance income primarily due to lower title insurance-related fees and reduced credit life insurance revenue, as well as a decline in annuity fee income due to a 7% decline in annuity sales volume. |
Partially offset by:
| $10.5 million increase in securities gains primarily related to MSR temporary impairment hedging activity. | |
| $5.8 million increase in trust services income primarily due to higher personal trust income and proprietary mutual fund fees. | |
| $3.3 million increase in service charges on deposit accounts, reflecting higher NSF and overdraft fees, partially offset by lower personal and commercial account maintenance charges. |
47
M ANAGEMENTS D ISCUSSION AND A NALYSIS | HUNTINGTON BANCSHARES INCORPORATED |
Non-Interest Expense
(This section should be read in conjunction with Significant Factors 1, 5, and 7.)
Non-interest expense for the three years ended December 31, 2005 was as follows:
Table 8 Non-Interest Expense
N.M., not a meaningful value.
2005 versus 2004 Performance
| $17.0 million, or 18%, decrease in other expense, reflecting $7.5 million of SEC/regulatory-related expenses in 2004, $5.8 million of costs related to investments in partnerships generating tax benefits in the year-ago period, and lower litigation related expense accruals and lower insurance costs in the current period. | |
| $4.8 million, or 6%, decline in net occupancy expense, as 2004 included a $7.8 million loss caused by property lease impairments, partially offset by lower rental income and higher depreciation expense in 2005. | |
| $4.1 million, or 1%, decline in personnel costs, mainly due to lower commission and benefit expense, partially offset by higher salaries and severance. | |
| $2.3 million, or 6%, decline in professional services, reflecting lower SEC/regulatory-related expense. |
Partially offset by:
| $2.5 million, or 3%, increase in outside data processing and other services, reflecting mostly higher debit card processing expense and system conversion expense. | |
| $1.6 million, or 6%, increase in marketing expense. | |
| $1.2 million increase in the restructuring reserve charges line item, reflecting a restructuring reserve release in 2004 with no release in 2005. |
SEC-related expenses and accruals, as well as expenses related to Unizan integration planning and systems conversions, contributed to the change in expense from 2004. Specifically, SEC/regulatory-related expenses and accruals totaled $3.7 million in 2005, down from $13.6 million in 2004. These expenses and accruals impacted the professional services and other expense categories. Unizan integration planning and systems conversion expenses totaled $0.7 million in 2005, down from $3.6 million in
48
M ANAGEMENTS D ISCUSSION AND A NALYSIS | HUNTINGTON BANCSHARES INCORPORATED |
2004. In addition to impacting the data processing and other services expense category, a portion of these expenses was also spread across various other expense categories.
2004 versus 2003 Performance
| $38.5 million increase in personnel costs primarily related to higher retirement and insurance benefit expenses, and to a lesser degree, higher salaries. | |
| $13.5 million increase in net occupancy expense, reflecting a $7.8 million property lease impairment, as well as higher depreciation and lower rental income. | |
| $12.5 million increase in other expense impacted by SEC-related expenses and accruals. (See discussion below.) | |
| $6.0 million increase in outside data processing expenses, including Unizan-related expenses. (See discussion below.) | |
| $5.5 million decline in restructuring reserve releases, as such releases totaled $1.2 million in 2004, down from $6.7 million in 2003. |
Partially offset by:
| $15.3 million related to the loss on the early extinguishment of debt in 2003. | |
| $5.6 million decline in professional services, primarily reflecting lower consulting expenses. |
SEC-related expenses and accruals, as well as expenses related to Unizan integration planning and systems conversions, contributed to the change in expense from 2003. Specifically, SEC-related expenses and accruals totaled $13.6 million in 2004 compared with $6.9 million in 2003. These expenses and accruals impacted the professional services and other expense categories. Unizan integration planning and systems conversion expenses totaled $3.6 million in 2004. In addition to impacting the data processing and other services expense category, a portion of these expenses was also spread across various other expense categories.
Operating Lease Assets
(This section should be read in conjunction with Significant Factor 1 and the Market Risk section.)
Operating lease assets represent automobile leases originated before May 2002. This operating lease portfolio is running-off over time since all automobile lease originations after April 2002 have been recorded as direct financing leases and are reported in the automobile loan and lease category in earning assets. As a result, the non-interest income and non-interest expenses associated with the operating lease portfolio has declined.
49
M ANAGEMENTS D ISCUSSION AND A NALYSIS | HUNTINGTON BANCSHARES INCORPORATED |
Operating lease assets performance for the five
years ended December 31, 2005, was as follows:
Table 9 Operating
Lease Performance
Year Ended December 31,
(in thousands of dollars)
2005
2004
2003
2002
2001
$
372,132
$
896,773
$
1,696,535
$
2,601,666
$
2,969,902
$
126,519
$
267,202
$
458,644
$
615,453
$
654,625
6,531
13,457
21,623
28,542
27,573
5,383
6,432
9,431
13,079
9,535
138,433
287,091
489,698
657,074
691,733
99,342
216,445
350,550
463,783
506,267
9,034
20,033
42,720
55,187
52,359
108,376
236,478
393,270
518,970
558,626
$
30,057
$
50,613
$
96,428
$
138,104
$
133,107
34.0
%
29.8
%
27.0
%
23.7
%
22.0
%
26.7
24.1
20.7
17.8
17.0
(1) | As a percent of average operating lease assets. |
2005 versus 2004 Performance
The net earnings contribution from operating leases was $30.1 million in 2005, down 41% from $50.6 million in 2004. Operating lease income, which totaled $138.4 million in 2005, and represented 22% of non-interest income, declined 52% from 2004, reflecting the decline in average operating leases. The majority of this decline was reflected in lower net rental income, down 53% from 2004. Lower fees and recoveries from early terminations also contributed to the decline in total operating lease income, but to a much lesser degree. Operating lease expense totaled $108.4 million for 2005, down 54% from a year ago, also reflecting the continued decline in operating lease assets, with the decline related to lower depreciation and residual losses at termination expenses.
The ratio of operating lease credit losses, net of recoveries, to average operating lease assets was 0.98% in 2005, down from 1.52% in 2004.
2004 versus 2003 Performance
The ratio of operating lease asset credit losses to average operating lease assets, net of recoveries, was 1.52% in 2004, down from 1.96% in 2003.
Provision for Income Taxes
The provision for income taxes was $131.5 million in 2005, $153.7 million in 2004, and $138.3 million in 2003. The effective tax rate was 24.2%, 27.8%, and 26.4% in 2005, 2004, and 2003, respectively. The lower effective tax rate in 2005 compared with 2004 reflected an increasing benefit from tax-exempt income and a federal tax loss carryback, partially offset by the effect of the repatriation of foreign earnings. The higher effective tax rate in 2004 compared with 2003 reflected a reduction in tax benefits (credits) from investments in partnerships and the impact of higher non-deductible expenses.
50
M ANAGEMENTS D ISCUSSION AND A NALYSIS | HUNTINGTON BANCSHARES INCORPORATED |
As noted in our 2004 Form 10-K, the American Jobs Creation Act of 2004 introduced a special one-time dividends received deduction of 85% on the repatriation of certain foreign earnings to a U.S. taxpayer. During 2005, we had $109.4 million of foreign earnings eligible for repatriation, and in the third quarter of 2005, we received cash dividends in the amount of these previously undistributed foreign earnings. During the third quarter of 2005, our board of directors resolved to adopt our Domestic Reinvestment Plan, signed by our chairman, president, and chief executive officer. In the third quarter of 2005, income tax expense of $5.7 million, associated with the repatriation, was recorded. We have reinvested in the United States the cash dividend received through expenditures on infrastructure and capital investments with respect to the opening of new branches, qualified pension and 401(k) contributions, and funding of worker hiring, training, and other compensation.
The cost of qualifying investments in low income housing partnerships, along with the related tax credit, is recognized in the financial statements as a component of income taxes under the effective yield method. The cost of the investment in historic property partnerships is reported in non-interest expense and the related tax credit is recognized in the financial statements as a component of income taxes.
In the ordinary course of business, we operate in various taxing jurisdictions and are subject to income and non-income taxes. The effective tax rate is based in part on our interpretation of the relevant current tax laws. We believe the aggregate liabilities related to taxes are appropriately reflected in the consolidated financial statements. We review the appropriate tax treatment of all transactions taking into consideration statutory, judicial, and regulatory guidance in the context of our tax positions. In addition, we rely on various tax opinions, recent tax audits, and historical experience.
During the first quarter of 2005, the Internal Revenue Service commenced an audit of our consolidated federal income tax returns for tax years 2002 and 2003.
We expect the 2006 effective tax rate to increase to a more typical rate just below 30%. (See Note 18 of the Notes to Consolidated Financial Statements.)
RISK MANAGEMENT AND CAPITAL
Risk identification and monitoring are key elements in overall risk management. We believe the primary risk exposures are credit, market, liquidity, and operational risk. Credit risk is the risk of loss due to adverse changes in borrowers ability to meet their financial obligations under agreed upon terms. Market risk represents the risk of loss due to changes in the market value of assets and liabilities due to changes in interest rates, exchange rates, residual values, and equity prices. Liquidity risk arises from the possibility that funds may not be available to satisfy current or future commitments based on external macro market issues, investor perception of financial strength, and events unrelated to the company such as war, terrorism, or financial institution market specific issues. Operational risk arises from the inherent day-to-day operations of the company that could result in losses due to human error, inadequate or failed internal systems and controls, and external events.
We follow a formal policy to identify, measure, and document the key risks facing the company, how those risks can be controlled or mitigated, and how we monitor the controls to ensure that they are effective. Our chief risk officer is responsible for ensuring that appropriate systems of controls are in place for managing and monitoring risk across the company. Potential risk concerns are shared with the board of directors, as appropriate. Our internal audit department performs ongoing independent reviews of the risk management process and ensures the adequacy of documentation. The results of these reviews are reported regularly to the audit committee of the board of directors.
Some of the more significant processes used to manage and control credit, market, liquidity, and operational risks are described in the following paragraphs.
Credit Risk
Credit risk is the risk of loss due to adverse changes in borrowers ability to meet their financial obligations under agreed upon terms. We are subject to credit risk in lending, trading, and investment activities. The nature and degree of credit risk is a function of the types of transactions, the structure of those transactions, and the parties involved. The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. Credit risk is incidental to trading activities and represents a limited portion of the total risks associated with the investment portfolio. Credit risk is mitigated through a combination of credit policies and processes, and portfolio diversification.
The maximum level of credit exposure to individual commercial borrowers is limited by policy guidelines based on the risk of default associated with the credit facilities extended to each borrower or related group of borrowers. All authority to grant
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M ANAGEMENTS D ISCUSSION AND A NALYSIS | HUNTINGTON BANCSHARES INCORPORATED |
commitments is delegated through the independent credit administration function and is monitored and regularly updated in a centralized database.
Concentration risk is managed via limits on loan type, geography, industry, loan quality factors, and country limits. We have focused on extending credit to commercial customers with existing or expandable relationships within our primary markets. As a result, shared national credit exposure declined in 2002 and 2003. The on-going sale of automobile loans is an example of the proactive management of concentration risk.
The checks and balances in the credit process and the independence of the credit administration and risk management functions are designed to accurately assess the level of credit risk being accepted, facilitate the early recognition of credit problems when they do occur, and to provide for effective problem asset management and resolution.
Credit Exposure Mix
(This section should be read in conjunction with Significant Factors 1 and 3.)
An overall corporate objective is to avoid undue portfolio concentrations. As shown in Table 10, at December 31, 2005, total credit exposure from the loan and lease portfolio was $24.7 billion. Of this amount, $13.6 billion, or 55%, represented total consumer loans and leases, $10.8 billion, or 44%, total commercial loans and leases, and $0.2 billion, or 1%, operating lease assets.
A specific portfolio concentration objective has been to reduce the relative level of total automobile exposure (the sum of automobile loans, automobile leases, securitized automobile loans, and operating lease assets) from 33% at the end of 2002. As shown in Table 10, such exposure was 18% at December 31, 2005.
In contrast, another specific portfolio concentration objective has been to increase the relative level of lower-risk residential mortgages and home equity loans. At December 31, 2005, such loans represented 36% of total credit exposure, up from 22% at the end of 2002.
Since the end of 2002, the level of total commercial loans and leases has remained relatively constant at 42%-44% of total credit exposure. However, middle market C&I loans declined to 19% at year-end 2004 from 22% at December 31, 2002, reflecting weak demand, but also a specific objective to reduce exposure to large individual credits, as well as a strategy to focus on commercial lending to customers with existing or potential relationships within our primary markets. During 2005, that concentration increased to 21%, reflecting increased customer demand. Conversely, since the end of 2002, small business loans increased to 9% from 8%, reflecting strategies to grow this important targeted business segment. (See Table 10.)
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Table 10 Loan and
Lease Portfolio Composition
M
ANAGEMENTS
D
ISCUSSION AND
A
NALYSIS
HUNTINGTON BANCSHARES INCORPORATED
At December 31,
(in millions of dollars)
2005
2004
2003
2002
2001
$
5,084
20.6
%
$
4,666
19.3
%
$
4,416
19.7
%
$
4,757
21.7
%
$
4,922
21.7
%
1,522
6.2
1,602
6.6
1,264
5.7