Huntington National Bank 2003 Annual Report Download - page 83

MANAGEMENT’S DISCUSSION AND ANALYSIS
P RIVATE F INANCIAL G ROUP
The Private Financial Group (PFG) provides products and services designed to meet the needs of the company’s higher net worth
customers. Revenue is derived through trust, asset management, investment advisory, brokerage, insurance, and private banking
products and services. The trust division provides fiduciary services to more than 11,000 accounts with assets totaling $37.5 billion,
including $8.4 billion managed by PFG. In addition, PFG has over $500 million in assets managed by Haberer Registered Investment
Advisor, which provides investment management services to nearly 400 customers.
PFG provides investment management and custodial services to the company’s 24 proprietary mutual funds, including six variable
annuity funds, which represented nearly $3 billion in total assets under management at December 31, 2003. The Huntington
Investment Company offers brokerage and investment advisory services to both Regional Banking and PFG customers through more
than 100 licensed investment sales representatives and nearly 700 licensed personal bankers. This customer base has over $4 billion in
mutual fund and annuity assets. PFG’s insurance entities provide a complete array of insurance products including individual life
insurance products ranging from basic term life insurance, to estate planning, group life and health insurance, property and casualty
insurance, mortgage title insurance, and reinsurance for payment protection products. PFG has more than 15,000 retail life insurance
policies in force. Income and related expenses from the sale of brokerage and insurance products is shared with the line of business that
generated the sale or provided the customer referral, most notably Regional Banking.
2003 versus 2002 Performance
The Private Financial Group (PFG) contributed $26.0 million of the company’s net operating earnings in 2003, up 5% from $24.8
million in 2002. Revenue growth was largely offset by increased non-interest expense and increased provision for loan losses.
Net interest income increased 17% from the prior year as average loan balances increased 32%, to $1.2 billion, and average deposit
balances increased 24%, to $1.0 billion. Most of the loan growth occurred in home equity loans and lines and residential real estate
loans largely due to the favorable mortgage rate environment. Most of the deposit growth occurred in interest bearing demand
deposits, resulting from a combination of new business and a customer shift from the Huntington Funds money market funds to
money market deposit accounts, due to favorable pricing. The net interest margin was 3.35%, down from 3.73%, reflecting an 11 basis
point narrowing in loan spreads and an 18 basis point decline in deposit spreads. The decline in loan spreads was driven by strong
growth in lower margin residential mortgage loans, which accounted for 66% of the growth in average loans in 2003. The decline in
deposit spreads reflected the low absolute level of interest rates during the year and resultant compressed deposit margins.
Provision expense increased 38% from the prior year primarily due to provision expense related to loan growth and, to a lesser degree,
higher net charge-offs. Although the absolute level of net charge-offs increased by $197,000, the net charge-off ratio decreased to 0.17%
from 0.20%, in 2002.
Non-interest income, net of fees shared with other business units, declined 1% from 2002, resulting from increased brokerage and
insurance revenue allocated to Regional Banking due to a change in allocation methodology. Brokerage income from retail investment
sales was essentially unchanged from 2002, excluding the impact of the change in allocation methodology. Insurance revenue increased
5%, reflecting higher title insurance revenue due to increased mortgage refinancing activity combined with revenue from sales of a new
wealth transfer insurance product.
Trust income was essentially flat with the prior year, as increased personal and institutional trust income was offset by reduced revenue
from proprietary mutual fund fees. The increase in personal trust revenue was mainly due to the full year impact of the April 2002
acquisition of Haberer Registered Investment Advisor. While assets under management in the Huntington Funds increased 9%, from
$2.7 billion to $2.9 billion at year end, fees declined due to increased money market fund fee waivers implemented to maintain
minimum customer yields. Significant growth also occurred in institutional trust assets as a result of the acquisition of a major
custodial account, which also produced $260,000 of additional revenue in 2003.
Other revenue increased 44%, primarily due to a $1.0 million increase in inter-company fees combined with increased revenue from
commercial loan swaps and market value gains realized on the sale of temporary investments.
Non-interest expense increased 2.0% from the prior year primarily due to the full year impact of the Haberer acquisition and, to a
lesser degree, an increase in allocated corporate, indirect, and product-related expenses.
PFG ended the year with $8.9 billion of assets under management, up 6%, including $4.9 billion of personal trust assets, up 7%, and
$2.9 billion in Huntington mutual funds, up 9%. During 2003, each of Huntington’s equity funds produced double-digit returns and
HUNTINGTON BANCSHARES INCORPORATED 81