Huntington National Bank 2005 Annual Report Download - page 72

MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
Capital
Capital is managed both at the Bank and on a consolidated basis. Capital levels are maintained based on regulatory capital
requirements and the economic capital required to support credit, market, liquidity, and operational risks inherent in our
business, and to provide the flexibility needed for future growth and new business opportunities. We place significant emphasis
on the maintenance of a strong capital position, which promotes investor confidence, provides access to the national markets
under favorable terms, and enhances business growth and acquisition opportunities. The importance of managing capital is also
recognized, and we continually strive to maintain an appropriate balance between capital adequacy and providing attractive
returns to shareholders.
Shareholders’ equity totaled $2.6 billion at December 31, 2005. This balance represented a $19.9 million increase during 2005.
Growth in shareholders’ equity primarily reflected a $218.2 million increase from the retention of net income after the
declaration of dividends and a $39.2 million increase from stock option exercises during 2005. These increases were partially
offset by the repurchase of 9.6 million shares during 2005, which reduced shareholders’ equity by $231.7 million.
At December 31, 2005, we had unused authority to repurchase up to 9.8 million common shares. All purchases under the current
authorization are expected to be made from time to time in the open market or through privately negotiated transactions,
depending on market conditions.
On April 27, 2005, the quarterly common stock dividend was increased 7.5% to $0.215 per share, up from $0.20 per share. Total
dividends declared on our common stock in 2005 were $0.845 per common share, up 12.7% from total dividends declared in
2004 of $0.75 per share. On January 18, 2006, the quarterly common stock dividend was increased 16.3% to $0.25 per share, up
from $0.215 per share. The increase, assuming it is maintained throughout 2006, would result in a dividend payout ratio above
our long-term targeted payout range of 40%-50%, but we believe this is warranted in the current, slow growth environment.
We evaluate several measures of capital, along with the customary three primary regulatory ratios: Tier 1 Risk-based Capital, Total
Risk-based Capital, and Tier 1 Leverage. The Federal Reserve Board, which supervises and regulates us, sets minimum capital
requirements for each of these regulatory capital ratios. In the calculation of these risk-based capital ratios, risk weightings are
assigned to certain asset and off-balance sheet items such as interest rate swaps, loan commitments, and securitizations. Our
Tier 1 Risk-based Capital, Total Risk-based Capital, Tier 1 Leverage ratios, and risk-adjusted assets for five years are shown in
Table 28 and are well in excess of minimum levels established for ‘‘well capitalized’’ institutions. The Bank is primarily supervised
and regulated by the OCC which establishes regulatory capital guidelines for banks similar to those established for bank holding
companies by the Federal Reserve Board. At December 31, 2005, the Bank had regulatory capital ratios in excess of ‘‘well
capitalized’’ regulatory minimums.
Table 28 — Capital Adequacy
‘‘Well- At December 31,
Capitalized’’
(in millions of dollars) Minimums 2005 2004 2003 2002 2001
Total risk-weighted assets $ 29,599 $29,542 $28,164 $27,030 $27,736
Ratios:
Tier 1 leverage ratio 5.00% 8.34% 8.42% 7.98% 8.51% 7.16%
Tier 1 risk-based capital ratio 6.00 9.13 9.08 8.53 8.34 7.02
Total risk-based capital ratio 10.00 12.42 12.48 11.95 11.25 10.07
Tangible equity ratio / asset ratio 7.19 7.18 6.79 7.22 5.86
Tangible equity / risk-weighted assets ratio 7.91 7.86 7.31 7.29 5.86
Our tangible equity ratio at December 31, 2005, was 7.19%, up from 7.18% at the end of 2004. This improvement in tangible
equity was largely due to the retention of earnings in excess of dividends paid to shareholders, offset partially by the impact of a
$0.2 billion increase in period-end assets and share repurchases. We have targeted a longer-term tangible common equity to asset
ratio of 6.25%-6.50%, given the current portfolio risk profile.
Another measure of capital adequacy favored by one of the rating agencies is tangible common equity to risk-weighted assets.
This measurement utilizes risk-weighted assets, as defined in the regulatory capital ratio. The tangible common equity to risk-
weighted assets ratio at December 31, 2005, was 7.91%, up from 7.86% at the end of 2004. The ratio was favorably impacted by
the addition of lower risk-weighted assets during the year, e.g., residential mortgages, home equity loans, and investment
securities, partially offset by the impact of share repurchases.
70