Huntington National Bank 2005 Annual Report Download - page 53

MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
As noted in our 2004 Form 10-K, the American Jobs Creation Act of 2004 introduced a special one-time dividends received
deduction of 85% on the repatriation of certain foreign earnings to a U.S. taxpayer. During 2005, we had $109.4 million of
foreign earnings eligible for repatriation, and in the third quarter of 2005, we received cash dividends in the amount of these
previously undistributed foreign earnings. During the third quarter of 2005, our board of directors resolved to adopt our
Domestic Reinvestment Plan, signed by our chairman, president, and chief executive officer. In the third quarter of 2005, income
tax expense of $5.7 million, associated with the repatriation, was recorded. We have reinvested in the United States the cash
dividend received through expenditures on infrastructure and capital investments with respect to the opening of new branches,
qualified pension and 401(k) contributions, and funding of worker hiring, training, and other compensation.
The cost of qualifying 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 the ordinary course of business, we operate in various taxing jurisdictions and are subject to income and non-income taxes.
The effective tax rate is based in part on our interpretation of the relevant current tax laws. We believe the aggregate liabilities
related to taxes are appropriately reflected in the consolidated financial statements. We review the appropriate tax treatment of all
transactions taking into consideration statutory, judicial, and regulatory guidance in the context of our tax positions. In addition,
we rely on various tax opinions, recent tax audits, and historical experience.
During the first quarter of 2005, the Internal Revenue Service commenced an audit of our consolidated federal income tax
returns for tax years 2002 and 2003.
We expect the 2006 effective tax rate to increase to a more typical rate just below 30%. (See Note 18 of the Notes to Consolidated
Financial Statements.)
RISK MANAGEMENT AND CAPITAL
Risk identification and monitoring are key elements in overall risk management. We believe the primary risk exposures are credit,
market, liquidity, and operational risk. Credit risk is the risk of loss due to adverse changes in borrowers’ ability to meet their
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. Operational risk arises from the inherent day-to-day operations of the company that could result in losses
due to human error, inadequate or failed internal systems and controls, and external events.
We follow a formal policy to identify, measure, and document the key risks facing the company, how those risks can be
controlled or mitigated, and how we monitor the controls to ensure that they are effective. Our chief risk officer is responsible
for ensuring that appropriate systems of controls are in place for managing and monitoring risk across the company. Potential
risk concerns are shared with the board of directors, as appropriate. Our 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.
Some of the more significant processes used to manage and control credit, market, liquidity, and operational risks are described
in the following paragraphs.
Credit Risk
Credit risk is the risk of loss due to adverse changes in borrowers’ ability to meet their financial obligations under agreed upon
terms. We are 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 our 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.
The maximum level of credit exposure to individual commercial borrowers is limited by policy guidelines based on the risk of
default associated with the credit facilities extended to each borrower or related group of borrowers. All authority to grant
51