Huntington National Bank 2004 Annual Report Download - page 69

MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
Regional Banking
Regional Banking provides products and services to consumer, small business, 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 banking network of 334 branches, over 700 ATMs, plus Internet and telephone banking channels. 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 59% and 80%, of total regional banking loans and deposits, respectively.
Commercial Banking serves 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.
2004 versus 2003 Performance
Regional Banking contributed $229.8 million of the Company’s net operating earnings in 2004, up $57.0 million, or 33%, from 2003.
This increase primarily reflected an $86.4 million, or 92%, reduction in provision for credit losses.
Revenue increased $26.0 million, or 3%. This reflected a 6% increase in net interest income driven by a 15% increase in average loans
and a 6% increase in average deposits, partially offset by a 23 basis point decline in net interest margin to 4.17% from 4.40% a
year ago.
The growth in average total loans and leases reflected strong growth in residential mortgages, home equity loans, CRE, and small
business loans, partially offset by an 11% decline in average C&I loans. The strong growth in residential mortgage, home equity, CRE,
and small business loans reflected a combination of factors. These included an attractive borrowing environment, as interest rates
remained near historically low levels, and a more effective sales process, particularly as related to residential mortgage, home equity
loan, and small business loan growth. The decline in C&I loans reflected a focus on serving targeted clients, as well as continued weak
demand throughout most of 2004, though there was positive growth in the 2004 fourth quarter. (See Significant Factors 2, 3, and 4 and
the Balance Sheet section.) Also supporting the growth were improvements in the consumer and small business 90-day cross-sell ratios
of 21% and 19%, respectively.
The 6% increase in average total deposits reflected strong growth in average interest-bearing and noninterest-bearing deposits of 18%
and 4%, respectively, partially offset by a 7% decline in retail CDs. Supporting the growth in deposits and evidence of improved sales
efforts, was a 12,007, or 2%, increase in period-end demand deposit account (DDA) household relationships, the largest increase in
recent years, as well as a 4,243, or 9%, increase in small business DDA relationships. The DDA is viewed as the primary banking
relationship account as most additional services are cross-sold to customers after first establishing a DDA account.
Loan and deposit growth also reflected continued focus on customer service and delivery channel optimization. During the year, five
banking offices were opened while four were closed. The number of on-line banking customers ended the year at over 211,000, a 29%
increase, and represented a relatively high 40% penetration of retail banking households.
The 23 basis points, or an effective 5%, decline in the net interest margin to 4.17% reflected several factors, most notably a higher
proportion of lower-margin and higher credit quality, consumer residential and home equity loans. In addition, the margin was
negatively impacted by a decrease in the amount of mortgage loans that were held for sale as a result of the 31% decline in closed loan
volume. Margins on deposits were essentially flat compared to 2003, but increased in the second half of 2004 as interest rates
increased.
The decline in the provision for credit losses reflected significantly improved credit quality performance as represented by a 73%
decline in net charge-offs and a 7% decline in year-end NPAs.
Non-interest income decreased $10.6 million, or 3%, due to the $21.1 million, or 37%, decline in mortgage banking income. The
decline in mortgage banking income was due in large part to a change in reporting methodology for MSR temporary impairment
valuations. For 2004, MSR temporary impairments and/or recoveries are reflected in the Treasury/Other business segment, whereas in
2003 they were reflected in the Regional Banking business segment. Excluding MSR temporary impairment valuation changes between
years, mortgage banking income declined $6.1 million from 2003. This was driven by a 31% decline in closed loan volume and a 62%
decline in mortgages sold, partially offset by improved earnings on the servicing portfolio. The negative impact from mortgage
banking was partially offset by increases in other income, service charges on deposit accounts, and operating lease income. (See the
Non-Interest Income section.) The increase in other income primarily reflected higher commercial-based fee income. The increase in
operating lease income represented a growing equipment lease portfolio, a portfolio separate and distinct from automobile operating
lease assets, which comprised the majority of total operating lease assets.
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