Huntington National Bank 2004 Annual Report Download - page 41

MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
the impact of rising interest rates. The net interest margin stabilized in the second half of the year as automobile loan sales diminished
and lower cost deposit growth was strong.
2003 versus 2002 Performance
Fully taxable equivalent net interest income increased $103.9 million, or 14%, in 2003 from 2002. This reflected the benefit of an 18%
increase in average earning assets, partially offset by the negative impact of an effective 4% decline in the net interest margin to 3.49%
from 3.62%.
The decline in the net interest margin reflected the impact of declining loan portfolio rates due to lower rates on variable-rate loan
products, as well as prepayments and repayments of fixed-rate loans, most notably mortgages. The rate on the securities portfolio also
declined, reflecting the same prepayments and repayments of mortgage-related securities, with resultant reinvestment at lower market
rates. Deposit rates declined to a lesser degree than loan or securities rates reflecting competitive pressures in the deposit markets. Two
other factors contributing to a lower net interest margin were the growth of lower-yielding investment securities and the shift to
lower-yield, but lower-risk, loans.
Balance Sheet
(This section should be read in conjunction with Significant Factors 1-6.)
T
OTAL C REDIT E XPOSURE P ORTFOLIO M IX
An overall corporate objective is to maintain a relative balance between the various credit portfolios so as to avoid undue
concentrations. As shown in Table 6, at December 31, 2004, total credit exposure was $24.1 billion. Of this amount, $13.3 billion, or
55%, represented total consumer loans, $10.3 billion, or 43%, total commercial loans, and $0.6 billion, or 2%, operating lease assets.
Related to the overall corporate objective, a specific objective has been to reduce the relative level of total automobile exposure (the
sum of automobile loans, automobile leases, and operating lease assets) from its 33% level at the end of 2002. As shown in Table 6, the
total automobile exposure at December 31, 2004 was 21%.
In contrast, another related specific objective was to increase the relative level of lower-risk residential mortgages and home equity
loans. Progress was made on this objective as well. At December 31, 2004, such loans represented 35% of total credit exposure, up
from 22% at the end of 2002.
Since the end of 2002, the level of total commercial loans and leases has remained relatively constant at 42%-43% of total credit
exposure. However, C&I loans declined to 19% at year end 2004 from 22% at December 31, 2002, reflecting weak demand, but also a
specific objective to reduce exposure to large individual credits, as well as a strategy to focus commercial lending to customers with
existing or potential relationships within the Company’s primary markets. Conversely, since the end of 2002, small business loans
increased to 9% from 8%, reflecting strategies to grow this important targeted business segment. (See Table 6.)
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