Huntington National Bank 2005 Annual Report Download - page 73

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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 of Operations and other sections for a full understanding of consolidated financial performance.
We have three distinct lines of business: Regional Banking, Dealer Sales, and the Private Financial and Capital Markets Group
(PFCMG). A fourth segment includes our Treasury function and other unallocated assets, liabilities, revenue, and expense. Lines
of business results are determined based upon our management reporting system, which assigns balance sheet and income
statement items to each of the business segments. The process is designed around our organizational and management structure
and, accordingly, the results below are not necessarily comparable with similar information published by other financial
institutions. During the second quarter of 2005, the Capital Markets Group was removed from the Treasury/Other segment and
combined with the Private Financial Group to form the Private Financial and Capital Markets Group segment. Since the Capital
Markets Group is now managed through the Private Financial Group, combining these two segments better reflects the
management accountability and decision making structure. Prior periods reflect this change. 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
We use 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 and management of interest rate and liquidity risk in Treasury/Other where it can be monitored
and managed.
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.
U
SE OF
O
PERATING
E
ARNINGS
We use 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, Table 3, and Table 29. (Also, see Note 26 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 to determine the success of strategies and future earnings capabilities.
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