Huntington National Bank 2004 Annual Report Download - page 67

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MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
LINES OF BUSINESS DISCUSSION
This section reviews financial performance from a line of business perspective and should be read in conjunction with the Discussion
of Results and other sections for a full understanding of consolidated financial performance.
Huntington has three distinct lines of business: Regional Banking, Dealer Sales, and the Private Financial Group (PFG). A fourth
segment includes the Company’s Treasury function and other unallocated assets, liabilities, revenue, and expense. Lines of business
results are determined based upon the Company’s management reporting system, which assigns balance sheet and income statement
items to each of the business segments. The process is designed around Huntington’s organizational and management structure and,
accordingly, the results below are not necessarily comparable with similar information published by other financial institutions. An
overview of this system is provided below, along with a description of each segment and discussion of financial results.
F
UNDS
T
RANSFER
P
RICING
The Company uses a centralized funds transfer pricing (FTP) methodology to attribute appropriate net interest income to the
business segments. The Treasury/Other business segment charges (credits) an internal cost of funds for assets held in (or pays for
funding provided by) each line of business. The FTP rate is based on prevailing market interest rates for comparable duration assets
(or liabilities). Deposits of an indeterminate maturity receive an FTP credit based on vintage-based pool rate. Other assets, liabilities,
and capital are charged (credited) with a four-year moving average FTP rate. The intent of the FTP methodology is to eliminate all
interest rate risk from the lines of business by providing matched duration funding of assets and liabilities. The result is to centralize
the financial impact of interest rate and liquidity risk for the Company in Treasury/Other.
The FTP methodology also provides for a charge (credit) to the line of business when a fixed-rate loan is sold and the internal funding
associated with the loan is extinguished. The charge (credit) to the line of business represents the cost (or benefit) to Treasury/Other
of the early extinguishment of the internal fixed-rate funding. This charge (credit) has no impact on consolidated financial results.
A
LLOCATION OF THE
ALLL
Beginning January 1, 2003, changes were also made in the methodology of allocating the ALLL to loan balances within each business
segment. Prior to 2003, the Company maintained an unallocated component of its ALLL. The unallocated component was eliminated
in 2003 with the adoption of the more granular risk rating system with most of the prior unallocated reserve absorbed into the
transaction reserve. With the adoption of the new risk grading system, Management has determined that an unallocated component is
no longer necessary.
Specific loan loss reserve rates were established for each loan type and a related reserve was established in the affected business
segment. As a result, the ALLL for each business segment was higher in 2003 versus 2002, with a corresponding decline in the ALLL in
the Treasury/Other business segment.
U
SE OF
O
PERATING
E
ARNINGS
Management uses earnings on an operating basis, rather than on a GAAP basis, to measure underlying performance trends for each
business segment. Operating earnings represent GAAP earnings adjusted to exclude the impact of certain items discussed in the
Significant Factors Influencing Financial Performance Comparisons section and Table 3. (In addition to this discussion and Table 3, see
Note 28 of the Notes to Consolidated Financial Statements.) Analyzing earnings on an operating basis is very helpful in assessing
underlying performance trends, a critical factor used by Management to determine the success of strategies and future earnings
capabilities. In Table 23, operating earnings represents the GAAP results adjusted to exclude the impact of restructuring releases and
gains on sales of automobile loans.
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