Huntington National Bank 2005 Annual Report Download - page 89

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MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
Treasury/Other
(See Significant Factors 2, 5, 6, and 7.)
Objectives, Strategies and Priorities
The Treasury/Other line of business includes revenue and expense related to assets, liabilities, and equity not directly assigned or
allocated to one of the other three business segments. Assets in this segment include investment securities and bank owned life
insurance.
Net interest income includes the net impact of administering Huntington’s investment securities portfolios as part of overall
liquidity management. A match-funded transfer pricing system is used to attribute appropriate funding interest income and
interest expense to other business segments. As such, net interest income includes the net impact of any over or under allocations
arising from centralized management of interest rate risk. Furthermore, net interest income includes the net impact of derivatives
used to hedge interest rate sensitivity.
Non-interest income includes miscellaneous fee income not allocated to other business segments, including bank owned life
insurance income. Fee income also includes asset revaluations not allocated to other business segments including MSR temporary
impairments or recoveries, as well as any investment securities and trading assets gains or losses used to mitigate the earnings
impact of MSR valuation changes.
Non-interest expense includes certain corporate administrative and other miscellaneous expenses not allocated to other business
segments. The provision for income taxes for each of the other business segments is calculated at a statutory 35% tax rate,
though our overall effective tax rate is lower. As a result, we reflect a credit for income taxes representing the difference between
the actual effective tax rate and the statutory tax rate used to allocate income taxes to the other segments.
2005 versus 2004 Performance
Net income for Treasury/Other declined $21.2 million to $7.1 million for 2005. This comprised only 2% of our net operating
earnings, down from 7% in the prior year. The decline in net income resulted from a $61.9 million decline in income before
taxes, offset by a $40.8 million higher benefit from income taxes. Net income for 2005 benefited from a lower effective tax rate
resulting from a federal tax loss carry back in 2005, partly offset by the impact of repatriation of foreign earnings.
The decline in income before taxes was largely related to changes in net interest income and to changes in net securities gains. In
2005, Treasury/Other had net interest expense of $36.1 million compared with net interest income of $21.5 million in 2004. This
$57.7 million decline resulted from an increase, attributable to market rates, in the credit provided to other lines of business for
their non-interest bearing sources of funding and an 18% decline in average investment securities balances.
Net securities gains declined by $23.1 million, driven by a current year net securities losses of $8.1 million, primarily related to
$8.8 million of securities losses due to the fourth quarter restructuring of a part of the securities portfolio, and $15.0 million of
net securities gains in the prior year, related to the use of securities to offset changes in the temporary impairment of MSRs.
The $21.3 million decline in non-interest expense was due largely to higher SEC/regulatory-related expenses in the prior year.
Additionally, expenses of certain historical tax credit investments impacted the prior year, as we expensed these investments in the
same period that we recognized the tax benefits.
2004 versus 2003 Performance
The net operating earnings for Treasury/Other declined $65.3 million, or 70%, to $28.3 million for 2004. Treasury/Other’s net
operating earnings comprised only 7% of our total net operating earnings, down from 26% in 2003. The decline in net operating
earnings resulted from a $64.3 million decline in net interest income and a $20.6 million increase in non-interest expense,
partially offset by a $26.9 million higher benefit from income taxes. The decline in net interest income resulted from a reduction
in the funding needs of other lines of business, due to strong deposit growth and loan sales in other lines of business. Non-
interest expense increased due to SEC/regulatory-related expenses, Unizan integration expenses, and a property lease impairment.
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