Huntington National Bank 2003 Annual Report Download - page 55

MANAGEMENT’S DISCUSSION AND ANALYSIS
• $36.2 million decline in personnel costs including a $62.2 million decline associated with the sale of the Florida banking and
insurance operations, which had $11.5 million and $73.7 million of such costs in 2002 and 2001, respectively. This decline was
partially offset by a $26.0 million increase in salaries, incentive-based compensation, and pension and benefit costs. Higher salaries
reflected the expansion of management and employee talent at all levels, including the credit workout group. In addition, and given
a renewed focus on sales, incentive-based compensation increased throughout the company, most notably in mortgage banking.
Higher medical and pension costs were partially offset by gains related to stock received from the demutualization of certain
insurance companies where the company owned related insurance policies.
• $16.9 million decline in net occupancy expense including $15.5 million associated with the sold Florida banking and insurance
operations, which had $2.6 million and $18.1 million of such costs in 2002 and 2001, respectively.
• $12.2 million decline in equipment expense including $8.6 million associated with the sale of the Florida banking and insurance
operations, which had $1.4 million and $10.0 million of such costs in 2002 and 2001, respectively.
Total non-interest expense associated with the sold Florida banking and insurance operations was $20.2 million and $162.9 million in
2002 and 2001, respectively.
I
NCOME T AXES
Income taxes were $138.3 million in 2003 and $199.0 million in 2002 compared with an income tax benefit of $39.3 million in 2001.
Tax expense in 2002 and 2001 was significantly impacted by the effect of the strategic refocusing and related sale of the Florida banking
and insurance operations, the restructuring charges, and other items. The effective tax rate was 26.4%, 38.1%, and (41.2)% in 2003,
2002, and 2001, respectively. The $60.7 million decrease in income tax expense in 2003 compared with 2002 reflected the fact that most
of the goodwill relating to the Florida banking operations sold in 2002 was non-deductible for income tax purposes.
The effective tax rate in 2001, and to a lesser degree 2002, reflected a combination of factors including the loss from Florida operations,
restructuring charges, and higher loan loss provision expense. In addition, in 2001, there was a $32.5 million reduction in income tax
expense related to the issuance of $400.0 million of real estate investment trust (REIT) subsidiary preferred stock, of which $50.0
million was sold to the public.
Management expects the 2004 effective tax rate to remain below 30% as the level of tax-exempt income, general business credits, and
asset securitization activities remain consistent with prior years (see Note 24 of the Notes to Consolidated Financial Statements).
In the ordinary course of business, the company operates in various taxing jurisdictions and is subject to income and non-income
taxes. The effective tax rate is based in part on Management’s interpretation of the relevant current tax laws. Management believes the
aggregate liabilities related to taxes are appropriately reflected in the consolidated financial statements. During 2003, the Internal
Revenue Service (IRS) advised the company that the audit of the consolidated federal income tax returns was complete through the tax
year 2001.
Credit Risk
C
REDIT R ISK M ANAGEMENT
Credit risk is the risk of loss due to adverse changes in a borrower’s ability to meet its financial obligations under agreed upon terms.
The company is subject to credit risk in lending, trading, and investment activities. The nature and degree of credit risk is a function of
the types of transactions, the structure of those transactions, and the parties involved. The majority of the company’s credit risk is
associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. Credit risk is
incidental to trading activities and represents a limited portion of the total risks associated with the investment portfolio. Credit risk is
mitigated through a combination of credit policies and processes and portfolio diversification. These include origination/underwriting
criteria, portfolio monitoring processes, and effective problem asset management.
The maximum level of credit exposure to individual commercial borrowers is limited by policy guidelines based on the default
probabilities associated with the credit facilities extended to each borrower or related group of borrowers. All authority to grant
commitments is delegated through the independent credit administration function, and is monitored and regularly updated in a
centralized database.
Concentration risk is managed with limits on loan type, geographic and industry diversification, country limits, and loan quality
factors. In 2003, the company increased its emphasis on extending credit to commercial customers with existing or expandable
relationships within the company’s primary markets. As a result, shared national credit exposure declined significantly over this period
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