Huntington National Bank 2006 Annual Report Download - page 19

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MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
2005 versus 2004
Earnings for 2005 were $412.1 million, or $1.77 per common share, up 3% and 4%, respectively, from $398.9 million, or
$1.71 per common share, in 2004. The $13.2 million increase in net income primarily reflected:
– $152.4 million, or 14%, decline in non-interest expense, primarily reflecting a $131.2 million decline in operating lease
expenses, a $9.9 million decline in SEC-related expenses, a $4.8 million decline in net occupancy expense, a $4.1 million
decline in personnel costs, and a $2.9 million decline in Unizan system conversion expenses.
– $51.0 million, or 6%, increase in net interest income, reflecting a 6% increase in average earning assets, as the net interest
margin of 3.33% was unchanged from the prior year. The increase in average earning assets reflected 10% growth in
average total loans and leases, including 11% growth in average total consumer loans and 8% growth in average total
commercial loans, partially offset by a 14% decline in average investment securities.
– $22.3 million decline in income tax expense as the effective tax rate for 2005 was 24.2%, down from 27.8% in 2004. The
lower 2005 income tax expense reflected a combination of factors including the benefit of a federal tax loss carry back,
partially offset by the net impact of repatriating foreign earnings.
Partially offset by:
– $186.3 million, or 23%, decline in non-interest income. Contributing to the decrease were a $152.4 million decline in
operating lease income, a $23.8 million decline in securities gains as the current year had $8.1 million of securities losses
and the prior year had $15.8 million of securities gains, a $13.0 million decline in gains on sales of automobile loans, a
$5.4 million decline in other income, and a $3.3 million decline in service charges on deposit accounts. These declines
were partially offset by a $10.0 million increase in trust services income and a $2.8 million increase in other service
charges and fees.
– $26.2 million, or 48%, increase in the provision for credit losses, reflecting higher levels of non-performing assets and
problem credits, as well as growth in the loan portfolio.
The ROA and ROE for 2005 were 1.26% and 16.0%, respectively, down slightly from 1.27% and 16.8%, respectively, in 2004.
Results of Operations
Significant Factors Influencing Financial Performance Comparisons
Earnings comparisons from 2004 through 2006 were impacted by a number of factors; some related to changes in the economic
and competitive environment, while others reflected specific management strategies or changes in accounting practices. Those key
factors are summarized below.
1. U
NIZAN ACQUISITION
.— The merger with Unizan Financial Corp. (Unizan) was completed on March 1, 2006. At the
time of acquisition, Unizan had assets of $2.5 billion, including $1.6 billion of loans and core deposits of $1.5 billion.
Unizan results were only in consolidated results for 10 months of 2006. As a result, performance comparisons between
2006 and 2005 are affected, as Unizan results were not in 2005 results. Comparisons of 2006 reported results compared
with 2005 pre-merger results are impacted as follows:
– Increased certain reported period-end balance sheet and credit quality items (e.g., non-performing loans).
– Increased reported average balance sheet, revenue, expense, and credit quality results (e.g., net charge-offs).
– Increased reported non-interest expense items as a result of costs incurred as part of merger-integration activities,
most notably employee retention bonuses, outside programming services related to systems conversions, and
marketing expenses related to customer retention initiatives. Merger costs were $3.7 million for 2006, $0.7 million
for 2005, and $3.6 million for 2004.
Given the impact of the merger on reported 2006 results, we believe that an understanding of the impacts of the merger
is necessary to understand better underlying performance trends. When comparing post-merger period results to pre-
merger periods, two terms relating to the impact of the Unizan merger on reported results are used:
– ‘‘Merger-related’’ refers to amounts and percentage changes representing the impact attributable to the merger.
– ‘‘Merger costs’’ represent expenses associated with merger integration activities.
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