Huntington National Bank 2004 Annual Report Download - page 79

MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
Private Financial Group (PFG)
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. As of December 31, 2004, the trust division provides fiduciary services to more than 11,000 accounts with
assets totaling $42.8 billion, with $9.8 billion managed by PFG, including approximately $600 million in assets managed by Haberer
Registered Investment Advisor, which provides investment management services to nearly 400 customers.
PFG also provides investment management and custodial services to the Company’s 29 proprietary mutual funds, including ten
variable annuity funds, which represented more than $3 billion in total assets under management at December 31, 2004. 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. 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. 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.
2004 versus 2003 Performance
PFG contributed $27.5 million to the Company’s net operating earnings for 2004, up 6% from 2003. The increase reflected the
benefits of a 6% increase in revenue and 52% reduction in the provision for credit losses, partially offset by an 8% increase in non-
interest expense.
Net interest income increased $4.7 million, or 11%, reflecting 16% growth in average loan balances and 6% growth in average total
deposits. Loan growth was primarily driven by growth in residential mortgages and home equity loans of 22% and 17%, respectively.
Average C&I loans increased 11%. The deposit growth reflected growth in interest-bearing and noninterest-bearing deposits aided by
promotional rate offerings and a redirection of sweep account balances from money market mutual fund accounts. The net interest
margin declined to 3.21% mainly due the fact that loan growth significantly exceeded deposit growth, as well as reflecting the lower
margins on personal credit lines as customer rate adjustments lagged prime rate increases.
Provision for credit losses decreased $2.5 million in 2004 despite an increase in net charge-offs as many of the current year’s net
charge-offs resulted in an offsetting release of reserves established in 2003. Credit quality remained strong with total NPAs
representing only 0.40% of total outstanding loans at year-end 2004.
Non-interest income, net of fees shared with other business units, increased $3.7 million, or 3%, due to higher trust income. Trust
income increased 9%, with double-digit growth in personal trust, institutional trust, and Huntington Funds revenue. Total trust assets
were $42.8 billion at December 31, 2004, up 14% from a year earlier, reflecting strong new business development. Institutional trust
revenue related to 401(k) plan sales also increased. Revenue earned from services provided to Huntington’s proprietary mutual funds
also increased significantly as total fund assets increased 7%.
Non-interest expense increased 8% primarily due to the 12% increase in personnel costs. The higher personnel costs reflected an
increase in the number of private banking relationship managers, new trust sales executives to strengthen the PFG presence in the
Florida markets, higher trust and investment management sales commissions from increased new business development, and higher
benefit costs. In addition, other expenses increased by $1.2 million due mostly to an increase in allocated corporate overhead and
product support expenses.
PFG ended the year with $9.8 billion of assets under management, up 10%, including $5.3 billion of personal trust assets, up 8%, and
$3.1 billion in Huntington mutual funds, up 7%. During 2004, eight of the nine Huntington’s equity funds produced double-digit
returns and each taxable or tax-free bond fund produced positive returns. Mutual fund and annuity sales expressed as a percent of the
Company’s retail deposits were 5.3% in 2004, down from 6.2% in 2003, reflecting a combination of factors including lower annuity
returns, negative impact of various mutual fund industry problems, and increased emphasis in Regional Banking on growing deposits.
The return on average assets and return on average equity for PFG, were 1.79% and 23.1%, respectively, down from 1.94% and 24.5%
in 2003.
2003 versus 2002 Performance
PFG contributed $25.9 million of the Company’s net operating earnings in 2003, up 5% from $24.8 million in 2002.
Net interest income increased 17% from the prior year as average loan balances increased 33% and average deposit balances
increased 24%.
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