Huntington National Bank 2007 Annual Report Download - page 45

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migration models that track historical movements of loans between loan ratings over time and a combination of long-term average
loss experience of our own portfolio and external industry data. In the case of more homogeneous portfolios, such as consumer
loans and leases, the determination of the transaction reserve is based on reserve factors that include the use of forecasting models
to measure inherent loss in these portfolios. We update the models and analyses frequently to capture the recent behavioral
characteristics of the subject portfolios, as well as any changes in the loss mitigation or credit origination strategies. Adjustments to
the reserve factors are made, as needed, based on observed results of the portfolio analytics.
The economic reserve incorporates our determination of the impact of risks associated with the general economic environment on
the portfolio. The economic reserve is designed to address economic uncertainties and is determined based on economic indices as
well as a variety of other economic factors that are correlated to the historical performance of the loan portfolio. Currently, two
national and two regionally focused indices are utilized. The two national indices are: (1) Real Consumer Spending, and
(2) Consumer Confidence. The two regionally focused indices are: (1) Institute for Supply Management Manufacturing, and
(2) Non-agriculture Job Creation. Because of this more quantitative approach to recognizing risks in the general economy, the
economic reserve may fluctuate from period to period, subject to a minimum level specified by policy.
The table below presents the components of the ACL expressed as a percent of total period-end loans and leases at the end of the
past five years:
Table 19 — ACL as a Percent of Total Period End Loans and Leases
2007 2006 2005 2004 2003
At December 31,
Transaction reserve 1.27% 0.86% 0.89% 0.83% 1.02%
Economic reserve 0.17 0.18 0.21 0.32 0.40
Total ALLL 1.44 1.04 1.10 1.15 1.42
Total AULC 0.17 0.15 0.15 0.14 0.17
Total ACL 1.61% 1.19% 1.25% 1.29% 1.59%
The increase in the ACL at December 31, 2007, compared with the prior year-end, is primarily related to the increase in the
transaction reserve component of the ALLL due to the Franklin relationship. Another factor in the ACL increase was the declining
credit quality in the residential real estate development portfolio.
A change in the transaction reserve component of the ALLL is a direct indicator of the direction of credit risk in the portfolio. The
increase in the transaction reserve component at December 31, 2007, compared with the prior year-end, reflected the impact of
increasing monitored credits during 2007, primarily resulting from softness in the residential and commercial real estate markets in
the Midwest, and the impact of the Sky Financial acquisition. The economic reserve is a calculated addition to the transaction
reserve to capture potential volatility associated with the economic environment. With the acquisition of Sky Financial, we adjusted
our methodology to calculate the economic reserve component of the ALLL. While we continue to utilize the same primary
economic indicators, after the acquisition of Sky Financial, we now apply the resulting factor to the exposure associated with the
loan and lease portfolio instead of relating it to the calculated transaction reserve component. The Sky Financial reserve
methodology included an unallocated portion, which we combined into our existing economic reserve. As the economic
environment changes in future periods, the economic reserve will directly be affected by such changes. We believe that this new
calculation is a better measure of the macro-economic environment’s impact on the credit performance of our portfolio.
Given the expectation of continued stress in commercial real estate markets, as well as weak performance of the eastern Michigan
and northern Ohio economies, we expect modest increases in the ALLL ratio during 2008.
43
MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED