Huntington National Bank 2005 Annual Report Download - page 40

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MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
result, changes in interest rate levels that impacted MSR valuations also resulted in securities or trading gains or
losses. As such, in quarters where an MSR impairment was recognized, investment securities and/or trading account
assets were sold, typically resulting in a gain on sale or trading income, and vice versa. Investment securities gains
or losses are reflected in the income statement in a single non-interest income line item, whereas trading gains or
losses are a component of other non-interest income on the income statement (see Tables 3 and 7).
3. T
HE SALE OF AUTOMOBILE LOANS
.— Beginning in 2003, a key strategy has been to lower our credit exposure to
automobile loans and leases to 20% or less of total credit exposure, primarily by selling automobile loans. This objective
was achieved during the 2005 first quarter. These sales of loans impacted results in a number of ways including: lower
growth rates in automobile, total consumer, and total loans; and lower net interest income than otherwise would be the
case if the loans were not sold. In addition, during 2004 such sales resulted in the generation of significant gains as large
pools of automobile loans were sold in order to achieve the objective, with such gains reflected in non-interest income.
In the 2005 second quarter, we entered into an arrangement to sell 50%-75% of automobile loan production to a third
party on an on-going basis and retain the loan servicing as part of a strategy to maintain automobile loans and leases
total credit exposure. While this flow-sale program resulted in modest gains in 2005, we view such gains as recurring
given their on-going nature (see Table 3).
4. S
IGNIFICANT
C&I
AND
CRE
CHARGE
-
OFFS AND RECOVERIES
.— A single commercial credit recovery in the 2004 second
quarter on a loan previously charged off in the 2002 fourth quarter, favorably impacted the 2004 second quarter and full
year provision expense (see Table 17), as well as middle-market commercial and industrial, total commercial, and total
net charge-offs for the 2004 second quarter and full year period (see Table 19). In addition, in the 2005 first quarter, a
single large commercial credit was charged-off. This impacted 2005 first quarter and full year period total net charge-offs
and provision expense (see Tables 3, 17, and 19).
5. E
XPENSES AND ACCRUALS ASSOCIATED WITH THE
SEC
FORMAL INVESTIGATION AND BANKING REGULATORY FORMAL WRITTEN
AGREEMENTS
.— On June 26, 2003, we announced that the SEC staff was conducting a formal investigation into certain
financial accounting matters, relating to fiscal years 2002 and earlier, and certain related disclosure matters. In addition,
on March 1, 2005, we announced entering into a formal written agreement with the FRBC, as well as the Bank entering
into a formal written agreement with the OCC, providing for a comprehensive action plan designed to enhance
corporate governance, internal audit, risk management, accounting policies and procedures, and financial and regulatory
reporting. On June 2, 2005, we announced that the SEC approved the settlement of their formal investigation. As a part
of the settlement, we consented to pay a penalty of $7.5 million. This civil money penalty had no impact on our 2005
financial results, as reserves for this amount were established and expensed in 2004. These matters resulted in certain
expenses and accruals as detailed below:
(in millions of dollars) 2005 2004 2003
First quarter $ 2.0 $ 0.7 $ —
Second quarter 1.7 0.9 0.4
Third quarter —5.5 4.7
Fourth quarter —6.5 1.8
Full year $ 3.7 $13.6 $6.9
6. E
FFECTIVE TAX RATE
.— In each quarter of 2005, the effective tax rate included the after-tax positive impact on net
income due to a federal tax loss carry back, tax exempt income, bank owned life insurance, asset securitization activities,
and general business credits from investment in low income housing and historic property partnerships. In addition, the
2005 third quarter and full-year effective tax rates reflected a $5.0 million after-tax negative net impact, primarily in
increased income tax expense, resulting from the repatriation of foreign earnings. In 2006, the effective tax rate is
anticipated to increase to a more typical rate just below 30%.
38