Huntington National Bank 2005 Annual Report Download - page 34

MANAGEMENT’S DISCUSSION AND ANALYSIS 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
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