Huntington National Bank 2003 Annual Report Download - page 52

MANAGEMENT’S DISCUSSION AND ANALYSIS
P ROVISION FOR L OAN AND L EASE L OSSES
The provision for loan and lease losses is the expense necessary to maintain the allowance for loan and lease losses (ALLL) at a level
adequate to absorb management’s estimate of inherent losses in the loan and lease portfolio (see Credit Risk for further discussion).
Provision expense for 2003 was $164.0 million, down $30.4 million, or 16%, from 2002. This decline reflected lower net charge-offs,
partially offset by additional provision expense related to loan growth. The provision expense for 2002 was $194.4 million, down $62.9
million, or 24%, from $257.3 million in 2001, with $9.9 million of the decline reflecting the sale of the Florida banking operations.
N
ON -I NTEREST I NCOME
Non-interest income for the recent three years ended December 31, 2003 was as follows:
Table 8—Non-Interest Income
Change from 2002 Change from 2001
(in thousands of dollars) 2003 Amount % 2002 Amount % 2001
Service charges on deposit accounts $ 167,840 $ 14,276 9.3% $ 153,564 $(11,448) (6.9)% $ 165,012
Trust services 61,649 (402) (0.6) 62,051 1,753 2.9 60,298
Brokerage and insurance 57,844 (4,265) (6.9) 62,109 (12,904) (17.2) 75,013
Mortgage banking 58,180 26,147 81.6 32,033 (22,485) (41.2) 54,518
Bank owned life insurance 43,028 (95) (0.2) 43,123 2,000 4.9 41,123
Other service charges and fees 41,446 (1,442) (3.4) 42,888 (5,329) (11.1) 48,217
Securities gains 5,258 356 7.3 4,902 4,179 NM 723
Other 91,059 14,119 18.4 76,940 13,635 21.5 63,305
Sub-total before operating lease income 526,304 48,694 10.2 477,610 (30,599) (6.0) 508,209
Operating lease income 489,698 (167,376) (25.5) 657,074 (34,659) (5.0) 691,733
Sub-total including operating lease
income 1,016,002 (118,682) (10.5) 1,134,684 (65,258) (5.4) 1,199,942
Gain on sales of automobile loans 40,039 40,039 NM — — — —
Gain on sale of branch offices 13,112 13,112 NM — — — —
Gain on sale of Florida operations — (182,470) NM 182,470 182,470 NM —
Merchant Services gain — (24,550) NM 24,550 24,550 NM —
Total Non-Interest Income $1,069,153 $(272,551) (20.3)% $1,341,704 $141,762 11.8% $1,199,942
NM, not a meaningful value.
2003 versus 2002 Performance
Non-interest income for 2003 was down $272.6 million, or 20%, from 2002. As shown in Table 8, $321.2 million of the decline was
attributable to the 2003 impact of the gain on sales of automobile loans and banking offices, the impact on 2002 results of the gain
from the sale of the Florida banking operation and the Merchant Services restructuring, and the impact of the decline in operating
lease income as this portfolio continues to run-off, with the remaining components of non-interest income up $48.7 million from 2002
(see Significant Factors items 2, 3 and 4).
Contributing to this $48.7 million increase were:
• $26.1 million increase in mortgage banking income, including $29.1 million related to mortgage servicing rights (MSR) valuation.
All mortgage loan originations not retained on the balance sheet are sold in the secondary market with servicing retained. This
servicing asset, referred to as a mortgage servicing right (MSR), is an interest only strip, typically 0.25%-0.35% of the loan balance
that the mortgage servicer is paid to service the loans. The MSR asset is valued quarterly at the lower of cost or market, with
impairment of the asset, or recovery of prior temporary impairment, recorded in mortgage banking income. The MSR is inversely
related to, and significantly sensitive to, mortgage prepayment rates, which are, in turn, sensitive to changes in interest rates. In a
rising interest rate environment, as prepayments of the underlying mortgage loans slow, the average life of the asset increases, as do
associated cash flows and the value of the asset. Conversely, as interest rates decline, mortgage prepayments accelerate
commensurate with increased refinancing activity, thus shortening the average life of the MSR asset and reducing its present value.
In 2002, the decline in mortgage interest rates resulted in a decline, or temporary impairment, in the value of the MSR asset,
50 HUNTINGTON BANCSHARES INCORPORATED