Huntington National Bank 2003 Annual Report Download - page 88

MANAGEMENT’S DISCUSSION AND ANALYSIS
T REASURY /O THER
The Treasury/Other segment includes revenue and expense related to assets, liabilities, and equity that are not directly assigned or
allocated to one of the three business segments. Assets included in this segment include bank owned life insurance, investment
securities, and mezzanine loans originated through Huntington Capital Markets.
Since a match-funded transfer pricing methodology is used to attribute appropriate funding interest income and expense to other
business segments, the Treasury/Other segment results include the net impact of any over or under allocation arising from centralized
management of interest rate and liquidity risk. This includes the net impact of derivatives used to hedge interest rate sensitivity.
Furthermore, this segment’s results include the net impact of administering Huntington’s investment securities and debt portfolios as
part of overall liquidity management.
Income tax expense for each of the other business segments is calculated at a statutory 35% tax rate. However, Huntington’s overall
effective tax rate is lower and, as a result, income tax expense in Treasury/Other represents the reconciliation to the statutory tax rate
used in the other segments.
2003 versus 2002 Performance
Treasury/Other reported earnings of $98.0 million in 2003, down 17% from $117.8 million in 2002.
Net interest income was $94.5 million in 2003, down $29.2 million from 2002. The components of net interest income and items
driving this variance were higher wholesale funding and debt costs of $8.9 million and lower net FTP credits of $20.0 million from the
segments, primarily reflecting interest rate and liquidity management revenue, partially offset by a $3.5 million improvement in the
Capital Markets Group margin, $7.7 million of higher interest income on securities, and $6.0 million of derivatives income.
Provision expense, attributable to Capital Markets lending activity, was nearly flat year over year.
Non-interest income was higher, reflecting gains recognized on Capital Markets Group investments.
Non-interest expense for operational, administrative, and support groups not specifically allocated to the other business segments,
increased $10.8 million from 2002, including a $2.9 million increase in performance incentive compensation in the Capital Markets
Group.
2002 versus 2001 Performance
Treasury/Other reported earnings of $117.8 million, up 57% from $75.2 million in 2001. The largest contributor to this improvement
was a $97.6 million improvement in net interest income over 2001. This reflected a reduction in transfer pricing credits allocated to
Regional Banking and Private Financial for deposits, the maturity in late 2001 of $2 billion of interest rate swaps that had significantly
negative spreads, and the benefit of lower short-term interest rates.
Non-interest income for 2002 was $60.8 million compared with $65.9 million for 2001, reflecting higher gains from securities
transactions in 2002, increased bank owned life insurance income, and revenue from trading activities, more than offset by the impact
of a new methodology that redistributed some capital markets revenue, net of related costs, back to other business segments. Non-
interest expense for 2002 declined $28.9 million from 2001. This reflected a decline in the amortization of intangibles arising from the
implementation of Statement No. 142 and lower unallocated personnel costs, offset by higher unallocated outside services and
processing, equipment and occupancy, and telecommunication expenses.
86 HUNTINGTON BANCSHARES INCORPORATED