Huntington National Bank 2005 Annual Report Download - page 47

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MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
Provision for Credit Losses
(This section should be read in conjunction with Significant Factor 4 and the Credit Risk section.)
The provision for credit losses is the expense necessary to maintain the ALLL and the AULC at a level adequate to absorb our
estimate of probable inherent credit losses in the loan and lease portfolio and the portfolio of unfunded loan commitments.
Provision expense for 2005 was $81.3 million, up $26.2 million, or 48%, from 2004. The increase in 2005 reflected a combination
of factors including loan growth and higher levels of problem assets, most notably downgrades in certain commercial credits late
in the fourth quarter. Given our highly quantitative loan loss reserve methodology, these downgrades required a meaningful
increase in our ALLL. We believe these downgrades reflect weakness in certain credit situations rather than the beginning of a
trend of material weakening in general credit quality.
Provision expense for 2004 was $55.1 million, down $108.9 million, or 66%, from the prior year. This reflected significant
improvement in overall credit quality as reflected by a combination of factors, including lower net charge-offs and a single C&I
recovery of $11.1 million in 2004, as well as the overall lower risk inherent in the loan and lease portfolio resulting from
strategies to lower the overall risk profile of the balance sheet, partially offset by additional provision expense related to loan
growth.
Non-Interest Income
(This section should be read in conjunction with Significant Factors 1, 2, 3, and 7.)
Non-interest income for the three years ended December 31, 2005, was as follows:
Table 6 — Non-Interest Income
Year Ended December 31,
Change from 2004 Change from 2003
(in thousands of dollars) 2005 Amount % 2004 Amount % 2003
Service charges on deposit accounts $167,834 $ (3,281) (1.9)% $171,115 $ 3,275 2.0% $ 167,840
Trust services 77,405 9,995 14.8 67,410 5,761 9.3 61,649
Brokerage and insurance income 53,619 (1,180) (2.2) 54,799 (3,045) (5.3) 57,844
Other service charges and fees 44,348 2,774 6.7 41,574 128 0.3 41,446
Mortgage banking 41,710 9,414 29.1 32,296 (25,884) (44.5) 58,180
Bank owned life insurance income 40,736 (1,561) (3.7) 42,297 (731) (1.7) 43,028
Securities gains (losses) (8,055) (23,818) N.M. 15,763 10,505 N.M. 5,258
Other 75,041 (17,006) (18.5) 92,047 988 1.1 91,059
Sub-total before operating lease income 492,638 (24,663) (4.8) 517,301 (9,003) (1.7) 526,304
Operating lease income 138,433 (148,658) (51.8) 287,091 (202,607) (41.4) 489,698
Sub-total including operating lease income 631,071 (173,321) (21.5) 804,392 (211,610) (20.8) 1,016,002
Gain on sales of automobile loans 1,211 (12,995) (91.5) 14,206 (25,833) (64.5) 40,039
Gain on sale of branch offices ——— — (13,112) N.M. 13,112
Total non-interest income $ 632,282 $ (186,316) (22.8)% $818,598 $(250,555) (23.4)% $1,069,153
N.M., not a meaningful value.
Table 7 details mortgage banking income and the net impact of MSR hedging activity. We record MSR temporary impairment
valuation changes in mortgage banking income, whereas MSR hedge-related trading activity is recorded in other non-interest
income, as well as in net interest income. Striking a mortgage banking income sub-total before MSR recoveries or impairments,
provides a clearer understanding of the underlying trends in mortgage banking income associated with the primary business
activities of origination, sales, and servicing. The net impact of MSR hedging analysis presents all of the MSR impairment
valuation changes and related hedging activity.
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