Huntington National Bank 2004 Annual Report Download - page 43

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MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
customer demand for retail CDs increased. In addition to growth in average core deposits, the increase in average total deposits also
reflected a 29% increase in brokered time deposits and negotiable CDs, which, in comparison with rates on retail CDs, remained a
relatively lower cost of funds.
Management uses the non-core funding ratio (total liabilities less core deposits and accrued expenses and other liabilities divided by
total assets) to measure the extent to which funding is dependent on wholesale deposits and borrowing sources. For 2004, the average
non-core funding ratio was 36%, up from 35% in 2003. The average non-core funding ratio reached a peak of 38% in the first quarter
of 2004 as strong loan growth outpaced core deposit growth. Subsequent loan sales, as well as successful core deposit growth
initiatives, reduced average non-core funding requirements to 34% by the 2004 fourth quarter.
2003 versus 2002 Performance
Average total deposits in 2003 increased 6% from the prior year, primarily reflecting 94% growth in average brokered time deposits
and negotiable CDs, which were relatively lower in cost compared with retail CDs. Average total core deposits increased only 1%,
reflecting 20% growth in average interest-bearing demand deposits virtually offset by a 25% decline in average retail CDs, which
became a relatively expensive source of funds, especially in the first half of 2003. Reflecting this, interest-bearing demand deposits were
emphasized in deposit growth initiatives, whereas retail CDs were de-emphasized.
For 2003, the average non-core funding ratio was 35%, up from 28% in 2002. This reflected the fact that balance sheet growth during
2003 exceeded that of core deposits and, therefore, required funding through brokered CDs, Federal Home Loan Bank
(FHLB) advances, and other long-term debt. Though it had no significant impact on average balances, $250 million of secured long-
term debt was extinguished in the fourth quarter of 2003.
Provision for Credit Losses
(This section should be read in conjunction with Significant Factor 4 and the Credit Risk section.)
The provision for credit losses is the expense necessary to maintain the ALLL and the AULC at a level adequate to absorb
Management’s estimate of probable inherent credit losses in the loan and lease portfolio and the portfolio of unfunded loan
commitments.
Provision expense for 2004 was $55.1 million, down $108.9 million, or 66%, from $164.0 million in 2003, which in turn declined
$30.4 million, or 16%, from 2002. The declines in both years reflected the significant improvement in overall credit quality as reflected
by a combination of factors including lower net charge-offs, including a recovery of $11.1 million in 2004 and lower levels of non-
performing assets (NPAs), as well as the overall lower risk inherent in the loan and lease portfolio resulting from strategies to lower
the overall risk profile of the balance sheet, partially offset by additional provision expense related to loan growth.
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