Huntington National Bank 2003 Annual Report Download - page 46

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MANAGEMENT’S DISCUSSION AND ANALYSIS
N
ET
I
NTEREST
I
NCOME
The company’s primary source of revenue is net interest income, which is the difference between interest income on earning assets,
primarily loans, direct financing leases, and securities, and interest expense on funding sources, including interest-bearing deposits and
borrowings. Net interest income is impacted by earning asset balances and related funding, as well as changes in the levels of interest
rates. Changes in net interest income are measured through the net interest spread and the net interest margin. The difference between
the yield on earning assets and the rate paid for interest-bearing liabilities is the interest spread. Non-interest bearing sources of funds,
such as demand deposits and shareholders’ equity, also support earning assets. The impact of the non-interest bearing sources of funds
is captured in the net interest margin, which is calculated as net interest income divided by average earnings assets. Reflecting the no-
cost nature of these non-interest cost of funds, the net interest margin is always higher than the net interest spread. Both the net
interest spread and net interest margin are presented on a fully taxable equivalent basis, which means that tax-free interest income is
adjusted to pre-tax equivalent income.
Table 4 shows the average annual balance sheets and the net interest margin analysis for the recent five years. It details the average
annual balances for total assets and liabilities, as well as shareholders’ equity, and their various components, most notably loans and
leases, deposits, and borrowings. It also shows the corresponding interest income or interest expense associated with each earning asset
and interest-bearing liability category along with the average rate with the difference resulting in the net interest spread. The net
interest spread plus the positive impact from the non-interest bearing funds represent the net interest margin.
Table 5 shows changes in fully taxable equivalent interest income, interest expense, and net interest income due to volume and rate
variances for major categories of earning assets and interest-bearing liabilities. The change in interest income or expense not solely due
to changes in volume or rates has been allocated in proportion to the absolute dollar amount of the change in volume and rate.
Table 5—Change in Net Interest Income Due to Changes in Average Volume and Interest Rates
2003 2002
Increase (Decrease) From
Previous Year Due To:
Increase (Decrease) From
Previous Year Due To:
Fully Taxable Equivalent Basis (1)
(in millions of dollars) Volume
Yield/
Rate Total Volume
Yield/
Rate Total
Loans and direct financing leases $152.4 $(145.3) $ 7.1 $(50.5) $(267.1) $(317.6)
Securities 49.8 (49.8) — (20.9) (15.9) (36.8)
Other Earning Assets 14.0 (3.9) 10.1 (3.9) (4.4) (8.3)
Total Earning Assets 216.2 (199.0) 17.2 (75.3) (287.4) (362.7)
Deposits (12.4) (85.0) (97.4) (89.8) (178.6) (268.4)
Short-term borrowings (3.6) (9.7) (13.3) (10.0) (56.8) (66.8)
Federal Home Loan Bank advances 19.0 (0.2) 18.8 5.8 (1.4) 4.4
Subordinated notes and other long-term debt,
including capital securities 38.7 (33.5) 5.2 (4.1) (61.0) (65.1)
Total Interest-Bearing Liabilities 41.7 (128.4) (86.7) (98.1) (297.8) (395.9)
Net Interest Income $174.5 $ (70.6) $103.9 $ 22.8 $ 10.4 $ 33.2
(1) Calculated assuming a 35% tax rate.
2003 versus 2002 Performance
Fully taxable equivalent net interest income was $858.7 million in 2003, up $103.9 million, or 14%, from 2002. This reflected a $3.7
billion, or 18%, increase in average earning assets, partially offset by a 13 basis point, or an effective 4%, decrease in the net interest
margin to 3.49% from 3.62%.
Average loans and leases increased $2.6 billion, or 15%, and reflected growth in automobile loans and leases, residential mortgages,
home equity loans and lines, and CRE loans, partially offset by a decline in C&I loans (see Table 4 and Balance Sheet discussion).
The 13 basis point decline in the net interest margin reflected the impact of historically low interest rates during the year. Rates on the
loan portfolio declined, reflecting lower rates on variable-rate loan products, such as C&I, CRE, and home equity lines of credit, as well
as prepayments and repayments of fixed-rate loans, such as auto and residential mortgage loans. The rate on the securities portfolio
44 HUNTINGTON BANCSHARES INCORPORATED