Huntington National Bank 2007 Annual Report Download - page 22

DISCUSSION OF RESULTS OF OPERATIONS
This section provides a review of financial performance from a consolidated perspective. It also includes a Significant
Items 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, please read this section in conjunction
with the Lines of Business Discussion.
Summary
2007 VERSUS 2006
We reported 2007 net income of $75.2 million and earnings per common share of $0.25. These results compared unfavorably with
net income of $461.2 million and earnings per common share of $1.92 in 2006. Comparisons with the prior year were significantly
impacted by: (a) our acquisition of Sky Financial, which closed on July 1, 2007, as well as the credit deterioration of the Franklin
relationship that was also acquired with Sky Financial, (b) a 2006 reduction in the provision for income taxes as a result of the
favorable resolution to certain federal income tax audits and (c) balance sheet restructuring charges taken in 2006 (see “Significant
Items”). The Sky Financial acquisition solidified our position in Ohio, greatly expanded our presence in the central Indiana market,
and established western Pennsylvania as a new market.
While the acquisition of Sky Financial had a positive impact to 2007 in many areas, the credit deterioration of the Franklin
relationship late in 2007, acquired as part of the Sky Financial merger, was the largest setback to 2007 performance. A negative
impact of $423.6 million pretax ($275.4 million after-tax, or $0.91 per common share based upon the annual average outstanding
diluted common shares) related to this relationship. Although disappointing, and while we can give no further assurances, this
charge represents our best estimate of the inherent loss within this credit relationship.
Other factors negatively impacting our 2007 performance included: (a) the need to build non-Franklin-related allowance for loan
losses due to the continued weakness in the residential real estate development markets and (b) the volatility of the financial
markets resulting in net market-related losses.
Despite the factors discussed above, 2007 showed positive signs. Expense control was a major highlight for the year. Non-merger-
related expenses declined $47.5 million, or 4%, and represented the realization of most of the merger efficiencies that were targeted
from the acquisition. Also, commercial loans showed good non-merger-related growth, and there was also strong non-merger-
related growth in several key non-interest income activities, including deposit service charges, trust services, and other service
charges.
Net interest income for 2007 increased $282.3 million, or 28%, from 2006. The current year included six months of net interest
income attributable to the acquisition of Sky Financial, which added $13.3 billion of loans and $12.9 billion of deposits at July 1,
2007. As stated earlier, we saw good non-merger-related growth in total average commercial loans. However, total average
automobile loans and leases continued to decline, as expected, due to lower consumer demand and competitive pricing.
Additionally, the non-merger-related declines in total average residential mortgages, as well as the lack of growth in non-merger-
related total average home equity loans, reflected the continued softness in the real estate markets. Growth in non-merger-related
average total deposits was good in 2007, driven by strong growth in interest-bearing demand deposits. Our net interest margin
increased seven basis points to 3.36% from 3.29% in 2006.
In addition to the Franklin credit deterioration discussed previously, credit quality generally weakened in 2007 compared with
2006. The ALLL increased to 1.44% in 2007 from 1.04% in the prior year. The ALLL coverage of nonaccruing loans (NALs)
decreased to 181% at December 31, 2007, from 189% at December 31, 2006. Nonperforming assets (NPAs) also increased from the
prior year, including the NPAs acquired from Sky Financial. The deterioration of all of these measures reflected the continued
economic weakness in our Midwest markets, most notably among our borrowers in eastern Michigan and northern Ohio, and
within the residential real estate development portfolio.
2006 VERSUS 2005
2006 net income was $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 provision for income taxes as the effective tax rate for 2006 was 10.3%, down from 24.2% in 2005.
The lower 2006 provision for income taxes 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
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MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED