Huntington National Bank 2007 Annual Report Download - page 24

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and because it was acquired in the Sky Financial merger and thus it is not representative of our typical underwriting criteria. By
disclosing such items, analysts/investors can better assess how, if at all, to adjust their estimates of future performance.
PROVISION FOR CREDIT LOSSES
While the provision for credit losses may vary significantly among periods, and often exceeds $0.01 per share, we typically exclude
it from the list of “Significant Items” unless, in our view, there is a significant, specific credit (or multiple significant, specific
credits) affecting comparability among periods. In determining whether any portion of the provision for credit losses should be
included as a significant item, we consider, among other things, that the provision is a major income statement caption rather
than a component of another caption and, therefore, the period-to-period variance can be readily determined. We also consider
the additional historical volatility of the provision for credit losses.
OTHER EXCLUSIONS
“Significant Items” for any particular period are not intended to be a complete list of items that may significantly impact future
periods. A number of factors, including those described in Huntington’s 2007 Annual Report on Form 10-K and other factors
described from time to time in Huntington’s other filings with the SEC, could also significantly impact future periods.
Significant Items Influencing Financial Performance Comparisons
Earnings comparisons among the three years ended December 31, 2007 were impacted by a number of significant items
summarized below.
1. SKY FINANCIAL ACQUISITION.— The merger with Sky Financial was completed on July 1, 2007. At the time of acquisition,
Sky Financial had assets of $16.8 billion, including $13.3 billion of loans, and total deposits of $12.9 billion. Sky Financial
results are reflected in our consolidated results for six months of 2007. The impacts on the 2007 reported results compared
with premerger reporting periods are as follows:
– Increased the absolute level of 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. These net merger costs were $85.1 million in 2007. This
included $13.4 million severance expense relating to the retirement of Sky Financial’s former chairman, president,
and chief executive officer, who was appointed Huntington’s president and chief operating officer at the time of the
acquisition, but subsequently retired on December 31, 2007.
2. FRANKLIN RELATIONSHIP RESTRUCTURING.— Performance for 2007 included a $423.6 million ($275.4 million after-tax, or
$0.91 per common share based upon the annual average outstanding diluted common shares) negative impact related to
our Franklin relationship acquired in the Sky Financial acquisition. On December 28, 2007, the loans associated with
Franklin were restructured, resulting in a $405.8 million provision for credit losses and a $17.9 million reduction of net
interest income. The net interest income reduction reflected the placement of the Franklin loans on nonaccrual status from
November 16, 2007, until December 28, 2007.
At December 31, 2007, following the troubled debt restructuring of our loans to Franklin, we had $1.2 billion of loans to
Franklin (net of amounts charged off). An additional $0.3 billion of loans were held by other banks. These other
participating banks have no recourse to Huntington. Franklin is a specialty consumer finance company primarily engaged
in the servicing and resolution of performing, reperforming, and nonperforming residential mortgage loans. Franklin’s
portfolio consists of loans secured by 1-4 family residential real estate that generally fall outside the underwriting standards
of Fannie Mae and Freddie Mac and involve elevated credit risk as a result of the nature or absence of income
documentation, limited credit histories, higher levels of consumer debt or past credit difficulties. Franklin purchased these
loan portfolios at a discount to the unpaid principal balance and originated loans with interest rates and fees calculated to
provide a rate of return adjusted to reflect the elevated credit risk inherent in these types of loans. Franklin originated
nonprime loans through its wholly-owned subsidiary, Tribeca Lending Corp., and has generally held for investment the
loans acquired and a significant portion of the loans originated. Franklin does not have significant exposure to repurchase
22
MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED