Huntington National Bank 2006 Annual Report Download - page 18

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MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
DISCUSSION OF RESULTS OF OPERATIONS
This section provides a review of financial performance from a consolidated perspective. It also includes a Significant Factors
Influencing Financial Performance Comparisons section that summarizes key issues important for a complete understanding of
performance trends. Key consolidated balance sheet and income statement trends are discussed in this section. All earnings per
share data are reported on a diluted basis. For additional insight on financial performance, this section should be read in
conjunction with the Lines of Business discussion.
Summary
2006 versus 2005
Earnings for full-year 2006 were $461.2 million, or $1.92 per common share, up 12% and 8%, respectively, compared with
$412.1 million, or $1.77 per common share, in 2005. The $49.1 million increase in net income primarily reflected:
– $78.6 million decline in income tax expense as the effective tax rate for 2006 was 10.3%, down from 24.2% in 2005. The
lower 2006 income tax expense reflected the favorable impact of an $84.5 million reduction related to the resolution of a
federal income tax audit covering tax years 2002 and 2003 that resulted in the release of federal income tax reserves, as
well as the recognition of federal tax loss carry backs. The 2005 effective tax rate of 24.2% was favorably impacted by a
combination of factors including the benefit of a federal tax loss carry back, partially offset by the net impact of
repatriating foreign earnings.
– $56.8 million, or 6%, increase in net interest income, reflecting a 7% increase in average earning assets, as the net interest
margin of 3.29% declined 4 basis points from 3.33% in the prior year. The increase in average earning assets reflected 7%
growth in average total loans and leases, including 12% growth in average total commercial loans and 3% growth in
average total consumer loans, and a 15% increase in average investment securities. Growth in earning assets was positively
impact by the acquisition of Unizan Financial Corp. (‘‘Unizan’’) on March 1, 2006.
– A $16.1 million decline in provision for credit losses, reflecting overall net improvement in our credit risk performance as
reflected in a decline in our allowance for credit losses as a percent of period end loans and leases to 1.04% at
December 31, 2006, from 1.10% at the end of 2005.
Partially offset by:
– $71.2 million, or 11%, decline in non-interest income. Contributing to the decrease was an $89.9 million expected decline
in operating lease income, and a $65.1 million increase in securities losses, reflecting the impact of a balance sheet
restructuring in late 2006. Partially offsetting these negative factors were increases in several other components of non-
interest income, primarily due to the Unizan acquisition, including a $23.1 million increase in other income, a
$17.9 million increase in service charges on deposit accounts, a $13.2 million increase in mortgage banking income, a
$12.6 million increase in trust services income, a $7.0 million increase in other service charges and fees, a $5.2 million
increase in brokerage and insurance income, and a $1.9 million increase in gains on sales of automobile loans.
– $31.2 million, or 3%, increase in non-interest expense, reflecting increases in several components of non-interest expense,
primarily related to the acquisition of Unizan, including a $59.6 million increase in personnel costs, a $24.1 million
increase in other expense, a $9.1 million increase in amortization of intangibles, a $6.8 million increase in equipment
expense, a $5.4 million increase in marketing expense, and a $4.1 million increase in outside data processing and other
services, partially offset by a $72.6 million expected decrease in operating lease expense and a $7.5 million decline in
professional services.
Compared with 2005, the ROA for 2006 was 1.31%, up from 1.26%, and the ROE was 15.7%, down slightly from 16.0%.
Full-year 2006 earnings were impacted by a number of significant items, the largest of which were (1) the acquisition of Unizan
Financial Corp. on March 1, 2006, (2) a reduction in federal income tax expense, and (3) a balance sheet restructuring,
undertaken to utilize the excess capital resulting from the reduction of federal income tax expense. The details of these impacts
can be found in the detailed discussions that follow and are critical to understanding 2006 performance.
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