Huntington National Bank 2008 Annual Report Download - page 25

lease income, and a 9% increase in brokerage and insurance income reflecting growth in annuity sales. These increases were
partially offset by a 7% decline in trust services income reflecting the impact of lower market values on asset management
revenues.
Expenses were well controlled, with our efficiency ratio improving to 57.0% in 2008 compared with 62.5% in 2007. Noninterest
expense in 2008 increased $165.5 million, or 13%, compared with 2007. Comparisons with the prior year were affected by:
(a) $62.4 million of net lower expenses resulting from Significant Items (see “Significant Items” discussion), and (b) $208.1 million
increase resulting from the Sky Financial acquisition, including the impact of restructuring and merger costs. Considering the
impact of both of these items, the remaining components of noninterest expense increased $20.4 million, or 1%. The increase
primarily reflected increased collection and OREO expenses as the economy continues to weaken, as well as increased insurance
expense and automobile operating lease expense. These increases are partially offset by a decline in personnel expense, as well as
other expense categories, due to merger/restructuring efficiencies.
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.
The credit deterioration of the Franklin relationship late in 2007 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. Other factors negatively impacting our 2007 performance included: (a) the building of
the non-Franklin-related allowance for loan losses due to continued weakness in the residential real estate development markets
and (b) the volatility of the financial markets resulting in net market-related losses.
The negative factors discussed above were partially offset by the $47.5 million, or 4%, decline in non-merger-related expenses,
representing 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 noninterest income
activities, including deposit service charges, trust services, and electronic banking income.
Fully taxable net interest income for 2007 increased $285.6 million, or 28%, from 2006. Six months of net interest income
attributable to the acquisition of Sky Financial was included in 2007. There was good non-merger-related growth in total average
commercial loans. However, total average automobile loans and leases declined, 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, as well as
loan sales. 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 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.
Significant Items
DEFINITION OF SIGNIFICANT ITEMS
Certain components of the income statement are naturally subject to more volatility than others. As a result, readers of this report
may view such items differently in their assessment of “underlying” or “core” earnings performance compared with their
expectations and/or any implications resulting from them on their assessment of future performance trends.
Therefore, we believe the disclosure of certain “Significant Items” affecting current and prior period results aids readers of this
report in better understanding corporate performance so that they can ascertain for themselves what, if any, items they may wish
to include or exclude from their analysis of performance, within the context of determining how that performance differed from
their expectations, as well as how, if at all, to adjust their estimates of future performance accordingly.
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Management’s Discussion and Analysis Huntington Bancshares Incorporated