Huntington National Bank 2004 Annual Report Download - page 30

MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
risk that loan and lease customers or other counter parties will be unable to perform their contractual obligations, (2) market risk,
which is the risk that changes in market rates and prices will adversely affect Huntington’s financial condition or results of operation,
(3) liquidity risk, which is the risk that Huntington 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
from external events. More information on risk is set forth under the heading ‘‘Business Risks’’ included in Item 1 of Huntington’s Annual
Report on Form 10-K for the year ended December 31, 2004. The description of Huntington’s business contained in Item 1 of its Annual
Report on Form 10-K, while not all-inclusive, discusses a number of business risks that, in addition to the other information in this report,
readers should carefully consider.
Securities and Exchange Commission Formal Investigation and Formal Regulatory Supervisory Agreements
SEC F
ORMAL I NVESTIGATION
On June 26, 2003, Huntington announced that the Securities and Exchange Commission (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 August 9, 2004, Huntington announced the Company was in negotiations with the staff of the SEC regarding a settlement of the
formal investigation and disclosed that it expected that a settlement of this matter, which is subject to approval by the SEC, would
involve the entry of an order requiring, among other possible matters, Huntington to comply with various provisions of the Securities
Exchange Act of 1934 and the Securities Act of 1933, along with the imposition of a civil money penalty. At December 31, 2004, the
Company had reserves related to the expectation of the imposition of a civil money penalty, which the Company viewed as sufficient
given negotiations with the SEC. However, no assurances can be made that any assessed penalty may not exceed this amount.
Management continues to have ongoing discussions with the staff of the SEC regarding resolution of this matter. The final results of
the investigation, however, are not known at the time of this filing and therefore, the impact to Huntington’s financial condition,
results of operations, and cash flows is not known.
F ORMAL R EGULATORY S UPERVISORY A GREEMENTS
On March 1, 2005, Huntington announced that it had entered into formal written agreements with its banking regulators, the Federal
Reserve Bank of Cleveland (FRBC) and the Office of the Comptroller of the Currency (OCC), providing for a comprehensive action
plan designed to enhance its corporate governance, internal audit, risk management, accounting policies and procedures, and
financial and regulatory reporting. They call for independent third-party reviews, as well as the submission of written plans and
progress reports by management. These written agreements remain in effect until terminated by the banking regulators.
Management has been working with its banking regulators over the past several months and has been taking actions and devoting
significant resources to address all of the issues raised. Management believes that the changes that it has already made, and is in the
process of making, will address these issues fully and comprehensively. No assurances, however, can be provided as to the ultimate
timing or outcome of these matters.
Critical Accounting Policies and Use of Significant Estimates
Huntington’s 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 Management to establish critical accounting
policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in its financial
statements. Note 1 of the Notes to Consolidated Financial Statements included in this report lists significant accounting policies used
by Management in the development and presentation of Huntington’s 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 that are necessary for an understanding and evaluation of the organization and its 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. Readers of this report 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. Management has identified the following as the most
significant accounting estimates and their related application. This analysis is included to emphasize that estimates are used in
connection with the critical and other accounting policies and to illustrate the potential effect on the financial statements if the actual
amount were different from the estimated amount.
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OTAL ALLOWANCES FOR CREDIT LOSSES — At December 31, 2004, the allowances for credit losses (ACL) totaled $304.4 million and
represented the sum of the allowance for loan and lease losses (ALLL) and the allowance for unfunded loan commitments and
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