Huntington National Bank 2005 Annual Report Download - page 107

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
Huntington uses the cost recovery method of accounting for cash received on non-performing loans and leases. Under this
method, cash receipts are applied entirely against principal until the loan or lease has been collected in full, after which time
any additional cash receipts are recognized as interest income. When, in management’s judgment, the borrower’s ability to
make periodic interest and principal payments resumes and collectibility is no longer in doubt, the loan or lease is returned to
accrual status. When interest accruals are suspended, accrued interest income is reversed with current year accruals charged to
earnings and prior year amounts generally charged off as a credit loss.
–S OLD L OANS — Loans that are sold are accounted for in accordance with Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. For loan sales with servicing retained, an asset is also recorded
for the right to service the loans sold, based on the relative fair value of the servicing rights.
Gains and losses on the loans sold and servicing rights associated with loan sales are determined when the related loans are
sold to the trust or third party. Fair values of the servicing rights are based on the present value of expected future cash flows
from servicing the underlying loans, net of adequate compensation to service the loans. The present value of expected future
cash flows is determined using assumptions for market interest rates, ancillary fees, and prepayment rates. Management also
uses these assumptions to assess the servicing rights for impairment periodically. The servicing rights are recorded in other
assets in the consolidated balance sheets. Servicing revenues on mortgage and automobile loans, net of the amortization of
servicing rights, are included in mortgage banking income and other non-interest income, respectively.
–A LLOWANCE FOR C REDIT L OSSES — The allowance for credit losses (ACL) reflects Management’s judgment as to the level of the
ACL considered appropriate to absorb probable inherent credit losses. This judgment is based on the size and current risk
characteristics of the portfolio, a review of individual loans and leases, historical and anticipated loss experience, and a review
of individual relationships where applicable. External influences such as general economic conditions, economic conditions in
the relevant geographic areas and specific industries, regulatory guidelines, and other factors are also assessed in determining
the level of the allowance.
The allowance is determined subjectively, requiring significant estimates, including the timing and amounts of expected future
cash flows on impaired loans and leases, consideration of current economic conditions, and historical loss experience
pertaining to pools of homogeneous loans and leases, all of which may be susceptible to change. The allowance is increased
through a provision that is charged to earnings, based on Management’s quarterly evaluation of the factors previously
mentioned, and is reduced by charge-offs, net of recoveries, and the allowance associated with securitized or sold loans.
The ACL consists of two components, the transaction reserve, which includes a specific reserve in accordance with Statement
No. 114, and the economic reserve. Loan and lease losses related to the transaction reserve are recognized and measured
pursuant to Statement No. 5, Accounting for Contingencies, and Statement No. 114, while losses related to the economic reserve
are recognized and measured pursuant to Statement No. 5. The two components are more fully described below.
Transaction Reserve
The transaction reserve component of the ACL includes both (a) an estimate of loss based on characteristics of each
commercial and consumer loan, lease, or loan commitment in the portfolio and (b) an estimate of loss based on an
impairment review of each loan greater than $500,000 that is considered to be impaired.
For middle market commercial and industrial, middle market commercial real estate, and small business loans, the
estimate of loss is based on characteristics of each loan through the use of a standardized loan grading system, which is
applied on an individual loan level and updated on a continuous basis. The reserve factors applied to these portfolios
were developed based on internal credit migration models that track historical movements of loans between loan ratings
over time and a combination of long-term average loss experience of the Company’s own portfolio and external
industry data.
Management analyzes each middle market commercial and industrial, middle market commercial real estate, or small
business loan over $500,000 for impairment when the loan is non-performing or has a grade of substandard or lower.
The impairment tests are done in accordance with applicable accounting standards and regulations. For loans
determined to be impaired, an estimate of loss is reserved for the amount of the impairment.
In the case of more homogeneous portfolios, such as consumer loans and leases, and residential mortgage loans, the
determination of the transaction reserve is conducted at an aggregate, or pooled, level. For such portfolios, the
development of the reserve factors includes the use of forecasting models to measure inherent loss in these portfolios.
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