Huntington National Bank 2004 Annual Report Download - page 84

MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
Treasury / Other
The Treasury/Other segment includes revenue and expense related to assets, liabilities, and equity that are not directly assigned or
allocated to one of the other three business segments. Assets included in this segment include investment securities, bank owned life
insurance, and mezzanine loans originated through Huntington Capital Markets.
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 net interest income related to Huntington Capital Markets loan
activity, as well as 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 fee income related to Huntington Capital Markets activities and miscellaneous non-interest income not
allocated to other business segments, including bank owned life insurance income. Fee income also includes MSR temporary
impairment valuation recoveries or impairments, as well as any investment securities and/or trading assets gains or losses, which are
used to mitigate MSR valuation changes. Prior to 2004, changes in MSR temporary impairment valuations were reflected in the
Regional Banking business segment, whereas investment securities and/or trading assets gains or loss were reflected in the Treasury/
Other segment. Since investment securities and/or trading account gains or losses are used to mitigate MSR valuation changes, and
since this risk is managed centrally, for 2004 reporting both MSR valuation changes, as well as investment securities and/or trading
assets gains or losses, are reflected in Treasury/Other results.
Non-interest expense includes expenses associated with Huntington Capital Markets activities, as well as 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 the
Company’s overall effective tax rate is lower. As a result, the provision for income taxes in Treasury/Other includes the difference
between the actual effective tax rate and the statutory tax rate used to allocate income taxes to the other segments.
2004 versus 2003 Performance
Treasury/Other contributed $66.2 million to the Company’s net operating earnings for 2004, down 32% from 2003 reflecting the
negative impacts of higher non-interest expense and lower net interest income, partially offset by the benefit of higher non-interest
income and lower provision for credit losses.
Net interest income decreased $21.1 million, or 22%, from the prior year due to a $37.4 million increase in wholesale funding costs,
partially offset by a $20.2 million increase in interest income as average securities increased 28% reflecting the impact of investing a
portion of the proceeds from the gains on sold automobile loans. (See the Balance Sheet section.)
The provision for credit losses declined $5.2 million from a year-ago, primarily reflecting the $9 million decline in NPLs, partially
through higher 2004 net charge-offs.
Non-interest income was $0.8 million higher than the prior year. Comparisons to 2003 were impacted by a change in the 2004
reporting for MSR temporary impairment valuation changes and resultant hedge-related activity. Beginning in 2004, such activity was
reflected in Treasury/Other, whereas in 2003 it was reflected in Regional Banking results. This change in methodology accounted for
the declines in mortgage banking income and other income between years, as well as the increase in investment securities gains. Also
contributing to the decline in other income was the $13.1 million gain on the sale of the West Virginia banking offices in 2003. (See
Significant Factors 3 and 9.)
Non-interest expense for operational, administrative, and support groups not specifically allocated to other business segments
increased 35% from a year ago reflecting costs associated with the SEC formal investigation, Unizan-related systems integration
expenses, and a property lease impairment from the annual fourth quarter property valuation review, as well as higher personnel and
benefits costs. (See Significant Factors 10, 11, and 12, as well as Non-Interest Expense section.)
The income tax benefit increased $8.7 million, due to lower pre-tax income, partially offset by a 1.4% higher overall corporate
effective tax rate (27.8% in 2004 vs. 26.4% in 2003).
2003 versus 2002 Performance
Treasury/Other reported earnings of $97.9 million in 2003, down 17% from $117.8 million in 2002.
Net interest income was $94.5 million in 2003, down $20.2 million from 2002. The components of net interest income and items
driving this variance were higher wholesale funding and debt costs of $8.9 million and lower net FTP credits of $20.0 million from the
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