Huntington National Bank 2003 Annual Report Download - page 73

MANAGEMENT’S DISCUSSION AND ANALYSIS
Similar to the Florida banking and insurance operations, the Merchant Services business crossed multiple business segments. When
this business was restructured in 2002, the resulting gain was recorded in Treasury/Other to isolate its impact from run-rate earnings in
the other business segments. The 2002 operating earnings for Treasury/Other excluded the $16.0 million after-tax gain.
R
EGIONAL B ANKING
Regional Banking provides products and services to retail, business banking, and commercial customers. These products and services
are offered in seven operating regions within the five states of Ohio, Michigan, West Virginia, Indiana, and Kentucky through the
company’s traditional banking network. Each region is further divided into Retail and Commercial Banking units. Retail products and
services include home equity loans and lines of credit, first mortgage loans, direct installment loans, business loans, personal and
business deposit products, as well as sales of investment and insurance services. Retail products and services comprise 51% and 84%, of
total regional banking loans and deposits, respectively. These products and services are delivered to customers through banking offices,
ATMs, Direct Bank—Huntington’s customer service center, and Web Bank at huntington.com. Commercial banking products include
middle-market and large commercial banking relationships, which use a variety of banking products and services including, but not
limited to, commercial loans, international trade, cash management, leasing, interest rate protection products, capital market
alternatives, 401(k) plans, and mezzanine investment capabilities.
2003 versus 2002 Performance
Regional Banking contributed $172.8 million of the company’s net operating earnings in 2003, up 53% from $113.2 million in 2002.
This increase reflected a 10% growth in revenue compared with a 6% growth in non-interest expense, as well as $40 million lower
provision for loan and lease losses.
Revenue growth reflected a 5% increase in net interest income driven by an 8% increase in average loans and a 4% increase in average
deposits. Strong growth in consumer loans and CRE loans contributed to higher net interest income, though lower margins on deposit
accounts offset the majority of this benefit. The level of Regional Banking deposits typically exceeds the level of loans. As such, the FTP
provides a credit for this excess funding, which is used by other organizational units that do not generate excess funds. As interest rates
decline, this credit is reduced commensurately. The FTP credit paid on the excess funds in 2003 was lower due to the low interest rate
environment. De facto deposit pricing floors also contributed to lower net interest income as FTP credits paid on deposit accounts
declined commensurate with the decline in interest rates, though interest rates paid to deposit customers remained relatively flat, to
slightly down, for most of the year. This was the primary contributing factor in the decline in Regional Banking’s net interest margin to
4.39% in 2003 from 4.56% in 2002.
The decrease in average C&I loans reflected a combination of factors. First, the demand for C&I loans was weak, as companies reacted
to the initial strengthening of the economy by drawing down their cash balances, rather than borrowing. Second, consistent with
Management’s strategic plan, exposures to large, individual credits were reduced, especially those outside the geographic footprint. The
reduction in shared national credit exposure reflected this effort. Partially offsetting these factors was the increase in small business
loans reflecting success in growing this targeted segment. Consumer loan growth reflected favorable interest rates. All regions increased
loans with each targeted customer segment growing. In addition, non-interest bearing and interest bearing demand deposits increased
9% and 24%, respectively, reflecting deeper customer relationships. The number of on-line banking customers ended the year at over
163,000 and represented 31% penetration of retail banking households. However, the number of retail households was essentially flat
throughout 2003, though the 90-day cross sell ratio improved from 1.7 in the first quarter to 2.2 in the fourth quarter. Improving the
performance of these metrics is a key objective.
Non-interest income increased 20% reflecting significantly higher mortgage banking income, a 13% increase in service charges on
deposits, and a 52% increase in brokerage and insurance income. The increase in mortgage banking income reflected a $29.1 million
benefit as 2003 results included a MSR impairment net recovery of $15.0 million, versus a temporary impairment charge of $14.1
million in 2002 (see non-interest income discussion.) The increase in service charges on deposits reflected a combination of growth in
deposits, as well as higher NSF and overdraft fees on deposit accounts. The increase in brokerage and insurance revenue reflected
mostly higher title insurance fees, commensurate with the increase in home mortgage refinancing activity, and a higher sharing of
revenue generated by the Private Financial Group due to a change in allocation methodology.
Non-interest expense increased 6% and included a 13% increase in personnel costs. The growth in personnel costs was largely
attributable to higher salaries and incentive based compensation, particularly in support of growth in mortgage banking activities, and
growth in loan and deposit programs, as well as higher medical and pension benefit expenses. The increase in expenses also reflected
HUNTINGTON BANCSHARES INCORPORATED 71