Huntington National Bank 2004 Annual Report Download - page 75

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MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
as Central and Southeast Florida. Partially offsetting these two factors was the $0.5 billion average impact of the sale of $2.1 billion of
automobile loans.
Average automobile direct financing leases increased $1.0 billion and reflected $1.3 billion of automobile direct financing lease
originations, up 12% from 2002. The very large increase in average direct financing leases from 2002 reflected the fact that this was a
young portfolio consisting only of leases originated since April 2002. This growth contrasts with the $0.9 billion reduction in average
operating lease assets, a more mature portfolio, consisting of all automobile leases originated prior to May 2002.
Also contributing to the growth in total loans and leases was a 22% increase in average C&I loans, primarily dealer floor plan loans.
The net interest margin was also favorably impacted by the run-off of operating lease assets due to the fact that all of the funding cost
associated with these assets is reflected in interest expense, whereas the income is reflected in non-interest income.
The provision for loan and lease losses increased 28% reflecting the growth in loans and direct financing leases and, to a lesser degree,
a $5.3 million increase in net charge-offs. Net charge-offs were concentrated in automobile loans and leases. The net charge-off ratio
for automobile loans was 1.24% in 2003, down from 1.40% in 2002, and reflected the continued upward trend in the credit quality of
loans originated. Charge-off of direct financing leases in 2003 represented 0.40% of average balances outstanding, up slightly from
0.32% the prior year, both relatively low levels reflecting the less seasoned nature of this portfolio. Until the direct financing lease
portfolio matures, related net charge-offs are also expected to increase.
Non-interest income decreased 23%, all driven by the decline in operating lease income as that portfolio continued to run-off.
Similarly, non-interest expense decreased 21% reflecting the decline in operating lease expense, also due to run-off of the operating
lease portfolio. Other non-interest expense declined 6% primarily due to lower residual value insurance costs, while personnel costs
increased 9% primarily due to higher benefits costs and production-related salary costs.
The return on average assets and return on average equity for Dealer Sales, were 0.80% and 13.3%, respectively, up from 0.29% and
8.5% in 2002.
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