Huntington National Bank 2005 Annual Report Download - page 46

MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
A VERAGE B ALANCE S HEET —L OANS , L EASES , AND O THER E ARNING A SSETS
2005 versus 2004 Performance
Average total loans and leases increased $2.2 billion, or 10%, from 2004, reflecting growth in consumer loans and, to a lesser
degree, growth in commercial loans. Average total consumer loans increased $1.4 billion, or 11%, from 2004 primarily due to a
$0.9 billion, or 27%, increase in average residential mortgages as mortgage loan rates remained at attractive levels. Average home
equity loans increased $0.4 billion, or 11%. Growth in both residential mortgages and home equity loans slowed over the second
half of the year as rising short-term interest rates dampened customer demand.
Average total automobile loans decreased $0.2 billion, or 11%, from 2004 reflecting the sale of automobile loans, loan pay downs,
and slowing production. Partially offsetting the decline in automobile loans was $0.2 billion, or 10%, growth in direct financing
leases due to the continued migration from operating lease assets, which have not been originated since April 2002.
Average total commercial loans increased $0.8 billion, or 8%, from 2004. This reflected a $0.4 billion, or 8%, increase in middle
market commercial and industrial (C&I) loans, a $0.2 billion, or 7%, increase in middle market commercial real estate
(CRE) loans, and a $0.2 billion, or 11%, increase in average small business C&I and CRE loans.
Average total investment securities declined $0.7 billion, or 14%, from 2004. This decline reflected a combination of factors
including lowering the level of excess liquidity, a decision to sell selected lower yielding securities, and partially funding loan
growth with the proceeds from the sale of securities. We also made a decision in the fourth quarter of 2005 to reposition a
segment of the portfolio to replace lower yield securities with higher yield securities. This resulted in $8.8 million of securities
losses in the fourth quarter, but should position the portfolio for better future performance.
2004 versus 2003 Performance
Growth in average total loans and leases accounted for most of the 13% increase in earning assets, though investment securities
also increased as a portion of the proceeds from automobile loan sales was reinvested.
Average total loans and leases increased 11% from the prior year. Most of this reflected growth in average total consumer loans
where the strong growth in residential mortgage and home equity loans was only partially offset by a decline in automobile
loans, reflecting the sale of $1.5 billion of automobile loans in 2004. Average total commercial loans increased 4%, reflecting
growth in middle market CRE and small business loans, partially offset by a decline in average middle market C&I loans.
A VERAGE B ALANCE S HEET —D EPOSITS AND O THER F UNDING
2005 versus 2004 Performance
Average total core deposits in 2005 were $17.1 billion, up $0.9 billion, or 5%, from 2004, reflecting a $0.5 billion, or 22%,
increase in certificates of deposit less than $100,000, a $0.5 billion, or 6%, increase in average interest bearing demand deposit
accounts, primarily money market accounts, and a $0.1 billion, or 5%, increase in non-interest bearing deposits. These increases
were partially offset by a $0.3 billion, or 8%, decline in savings and other domestic time deposits. With interest rates rising
throughout the year, demand for certificates of deposit less than $100,000 increased as customers transferred funds from lower-
rate savings and other domestic time deposits into higher fixed-rate term deposit accounts.
We use the non-core funding ratio (total liabilities less core deposits and accrued expenses and other liabilities divided by total
assets) to measure the extent to which funding is dependent on wholesale deposits and borrowing sources. For 2005, the average
non-core funding ratio was 35%, down from 36% in 2004. The average non-core funding ratio reached a peak of 38% in the first
quarter of 2004 as strong loan growth outpaced core deposit growth. Subsequent loan sales, as well as successful core deposit
growth initiatives, reduced average non-core funding requirements to 35% by the 2004 fourth quarter.
2004 versus 2003 Performance
Average total deposits in 2004 increased 7% from the prior year, primarily reflecting 5% growth in average core deposits. Growth
in interest bearing demand deposits, and to a lesser degree non-interest bearing deposits, accounted for virtually all of the growth
in average core deposits, as average certificates of deposit (CDs) less than $100,000 declined. With interest rates near historical
low levels, demand for CDs less than $100,000 greatly diminished in the first half of 2004. However, CDs less than $100,000 grew
in the second half of the year as interest rates and customer demand for CDs less than $100,000 increased. In addition to growth
in average core deposits, the increase in average total deposits also reflected a 29% increase in brokered time deposits and
negotiable CDs, which, in comparison with rates on CDs less than $100,000, remained a relatively low cost of funds.
For 2004, the average non-core funding ratio was 36%, up from 35% in 2003.
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