Huntington National Bank 2007 Annual Report Download - page 44

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NPAs were $1.7 billion at December 31, 2007, and represented 4.13% of related assets with most of the NPA increase related to the
Sky Financial acquisition. This compared with $193.6 million, or 0.74%, at December 31, 2006. The $1.5 billion increase reflected:
– $1.2 billion of restructured loans relating to the Franklin relationship acquired in the Sky Financial merger. Although
classified as NPAs, these restructured loans were current and accruing interest, and are expected to continue to perform per
terms of the restructuring agreement.
– $175.6 million increase to NALs ($32.7 million Sky Financial merger-related). (See below).
– $73.5 million, net of sales, of Sky Financial acquired commercial loans which were reclassified as impaired loans held-for-
sale and written down to their net realizable fair value.
– $25.8 million increase to OREO ($11.3 million Sky Financial merger-related).
NALs were $319.8 million at December 31, 2007, compared with $144.1 million at December 31, 2006. The increase of
$175.6 million primarily reflected:
– $97.3 million increase in middle market CRE NALs, reflecting the continued weakness in the residential real estate
development markets, particularly among our borrowers in eastern Michigan and northern Ohio.
– $27.0 million increase in residential mortgage NALs, and $26.3 million increase in small business C&I and CRE NALs
reflecting the continued overall economic weakness in our markets.
– $15.0 million related to one northern Ohio commercial credit in the 2007 second quarter.
NPA activity for each of the past five years was as follows:
Table 18 — Nonperforming Asset Activity
(in thousands of dollars) 2007 2006 2005 2004 2003
Year Ended December 31,
Nonperforming assets, beginning of year $ 193,620 $117,155 $108,568 $ 87,386 $ 136,723
New nonperforming assets
(1)
468,056 222,043 171,150 137,359 222,043
Restructured loans, accruing
(2)
1,187,368 ——— —
Acquired nonperforming assets 144,492 33,843 — — —
Returns to accruing status (24,952) (43,999) (7,547) (3,795) (16,632)
Loan and lease losses (126,754) (46,191) (38,819) (37,337) (109,905)
Payments (86,093) (59,469) (64,861) (43,319) (83,886)
Sales (95,467) (29,762) (51,336) (31,726) (60,957)
Nonperforming assets, end of year $1,660,270 $193,620 $117,155 $108,568 $ 87,386
(1) Beginning in 2006, OREO includes balances of loans in foreclosure, which are fully guaranteed by the U.S. Government, that were reported in 90 day past due loans and leases in prior periods.
(2) Restructured loans are net of loan losses and payments.
Allowances for Credit Losses (ACL)
(This section should be read in conjunction with Significant Items 1, 2, and 3.)
We maintain two reserves, both of which are available to absorb credit losses: the ALLL and the AULC. When summed together,
these reserves constitute the total ACL. Our credit administration group is responsible for developing the methodology and
determining the adequacy of the ACL.
The ALLL represents the estimate of probable losses inherent in the loan portfolio at the balance sheet date. Additions to the ALLL
result from recording provision expense for loan losses or recoveries, while reductions reflect charge-offs, net of recoveries, or the
sale of loans. The AULC is determined by applying the transaction reserve process, which is described later in this section, to the
unfunded portion of the portfolio adjusted by an applicable funding expectation.
We have an established monthly process to determine the adequacy of the ACL that relies on a number of analytical tools and
benchmarks. No single statistic or measurement, in itself, determines the adequacy of the allowance. The allowance is comprised of
two components: the transaction reserve and the economic reserve.
The transaction reserve component of the ACL includes both (a) an estimate of loss based on pools of commercial and consumer
loans and leases with similar characteristics, 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 commercial loans, the estimate of loss based on pools of loans and leases with
similar characteristics is made through the use of a standardized loan grading system that 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
42
MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED