Huntington National Bank 2004 Annual Report Download - page 49

MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
was significantly impacted by the effect of the strategic refocusing and related sale of the Florida banking and insurance operations.
The $60.7 million decrease in income tax expense in 2003 compared with 2002 reflecting the fact that most of the goodwill relating to
the Florida banking operations sold in 2002 was non-deductible for income tax purposes.
The cost of investments in low income housing partnerships, along with the related tax credit, is recognized in the financial statements
as a component of income taxes under the effective yield method. The cost of the investment in historic property partnerships is
reported in non-interest expense and the related tax credit is recognized in the financial statements as a component of income taxes.
In accordance with FAS 109, Accounting for Income Taxes, no deferred taxes are to be recorded when a company intends to
permanently reinvest its earnings from a foreign activity. As of December 31, 2004, the Company intended to permanently reinvest
the earnings from its foreign asset securitization activities of approximately $89.0 million. (See Note 2 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 advised the Company that the audit of the consolidated federal income tax returns was completed through tax year
2001. The Company was advised in December 2004 that the audit of the consolidated federal income tax returns for tax years 2002
and 2003 would begin in March 2005.
Management expects the 2005 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 17 of the Notes to Consolidated Financial Statements.)
RISK MANAGEMENT
Risk identification and monitoring are key elements in the overall risk management of Huntington. Management believes the primary
risk exposures are credit, market, and liquidity risk. Credit risk is the risk of loss due to adverse changes in the borrower’s ability to
meet its financial obligations under agreed upon terms. Market risk represents the risk of loss due to changes in the market value
of assets and liabilities due to changes in interest rates, exchange rates, residual values and equity prices. Liquidity risk arises from
the possibility that funds may not be available to satisfy current or future commitments based on external macro market issues,
investor perception of financial strength, and events unrelated to the Company such as war, terrorism, or financial institution market
specific issues.
Management follows a formal policy to identify, measure, and document the key risks facing the Company, how those risks can be
controlled or mitigated, and how Management monitors the controls to ensure that they are effective. Huntington’s Internal Audit
department performs ongoing independent reviews of the risk management process and ensures the adequacy of documentation. The
results of these reviews are reported regularly to the Audit Committee of the Board of Directors. Huntington’s Chief Risk Officer is
responsible for ensuring that appropriate systems of controls are in place for managing and monitoring risk across the Company.
Some of the more significant processes used to manage and control credit, market and liquidity risks are described in the following
paragraphs.
Credit Risk
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
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