Huntington National Bank 2004 Annual Report Download - page 65

MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
Parent Company Liquidity
The parent company’s funding requirements consist primarily of dividends to shareholders, income taxes, funding of non-bank
subsidiaries, repurchases of the Company’s stock, debt service, and operating expenses. The parent company obtains funding to meet
its obligations from dividends received from its direct subsidiaries, net taxes collected from its subsidiaries included in the Federal
consolidated tax return, fees for services provided to subsidiaries, and the issuance of debt securities.
Management intends to maintain the Bank’s risk-based capital ratios at levels at which the Bank would be considered to be ‘‘well
capitalized’’ by its regulators. As a result, the amount of dividends that can be paid to the parent company depends on the Bank’s
capital needs. At December 31, 2004, the bank was ‘‘well capitalized’’ according to guidelines established by the Bank’s primary
regulator, the OCC. At December 31, 2004, the Bank could declare and pay dividends to the parent company of $25.5 million and still
be considered ‘‘well capitalized.’’ The Bank could declare an additional $248.8 million of dividends without regulatory approval at
December 31, 2004, although such dividends would take the Bank below ‘‘well capitalized’’ levels.
At December 31, 2004, the parent company had $100 million debt outstanding under its medium-term note program, with
$195 million available for future funding needs. As mentioned earlier, the parent company shares a $2.0 billion Euronote program
with the Bank. Availability of funding through the Euronote program amounted to $1.7 billion at December 31, 2004.
At December 31, 2004, the parent company had $630 million in cash or cash equivalents. Management believes that the parent
company has sufficient liquidity to meet its cash flow obligations in 2005, including its anticipated annual dividend payments, without
relying upon the capital markets for financing.
Off-Balance Sheet Arrangements
In the normal course of business, the Company enters into various off-balance sheet arrangements. These arrangements include
financial guarantees contained in standby letters of credit issued by the Bank and commitments by the Bank to sell mortgage loans.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These
guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing,
and similar transactions. Most of these arrangements mature within two years. Approximately 47% of standby letters of credit are
collateralized and nearly 97% are expected to expire without being drawn upon. There were $945 million and $961 million of
outstanding standby letters of credit at December 31, 2004 and 2003, respectively. Non-interest income was recognized from the
issuance of these standby letters of credit of $11.3 million and $7.7 million in 2004 and 2003, respectively. The carrying amount of
deferred revenue related to standby letters of credit at December 31, 2004, was $4.1 million. Standby letters of credit are included in
the determination of the amount of risk-based capital that the Company and the Bank are required to hold.
The Bank enters into forward contracts relating to its mortgage banking business. At December 31, 2004 and 2003, commitments to
sell residential real estate loans totaled $311.3 million and $276.9 million, respectively. These contracts mature in less than one year.
The parent company and/or the Bank may also have liabilities under certain contractual agreements contingent upon the occurrence
of certain events. A discussion of significant contractual arrangements under which the parent company and/or the Bank may be held
contingently liable, including guarantee arrangements, is included in Note 21 of the Notes to Consolidated Financial Statements.
Through its credit process, Management monitors the credit risks of outstanding standby letters of credit. When it is probable that a
standby letter of credit will be drawn and not repaid in full, losses are recognized in provision for credit losses. Management does not
believe that its off-balance sheet arrangements will have a material impact on its liquidity or capital resources.
Capital
Capital is managed both at the parent and the Bank levels. Capital levels are maintained based on regulatory capital requirements and
the economic capital required to support credit, market, and operation risks inherent in the Company’s business and to provide the
flexibility needed for future growth and new business opportunities. Management places 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 Management
continually strives to maintain an appropriate balance between capital adequacy and providing attractive returns to shareholders.
Shareholders’ equity totaled $2.5 billion at December 31, 2004. This balance represented a $262.6 million increase during 2004. The
growth in shareholders’ equity resulted from the retention of net income after dividends to shareholders of $226.2 million, an increase
of $47.2 million as a result of stock options exercised, offset slightly by a reduction in accumulated other comprehensive income of
$13.6 million. The decline in accumulated other comprehensive income resulted from a decline in the market value of securities
available for sale at December 31, 2004, compared with December 31, 2003.
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