Huntington National Bank 2007 Annual Report Download - page 82

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Commercial and industrial loans and commercial real estate loans are generally placed on non-accrual status and stop accruing
interest when principal or interest payments are 90 days or more past due or the borrower’s creditworthiness is in doubt. A loan
may remain in accruing status when it is sufficiently collateralized, which means the collateral covers the full repayment of
principal and interest, and is in the process of active collection.
Commercial and industrial and commercial real estate loans are evaluated quarterly for impairment in accordance with the
provisions of Statement No. 114, Accounting by Creditors for Impairment of a Loan, as amended. This Statement requires an
allowance to be established as a component of the allowance for loan and lease losses when it is probable that all amounts due
pursuant to the contractual terms of the loan or lease will not be collected and the recorded investment in the loan or lease
exceeds its fair value. Fair value is measured using either the present value of expected future cash flows discounted at the loan’s
or lease’s effective interest rate, the observable market price of the loan or lease, or the fair value of the collateral if the loan or
lease is collateral dependent. When the present value of expected future cash flows is used, the effective interest rate is the
contractual interest rate of the loan adjusted for any premium or discount. When the contractual interest rate is variable, the
effective interest rate of the loan changes over time. Interest income is recognized on impaired loans using a cost recovery
method unless the receipt of principal and interest as they become contractually due is not in doubt, such as in a troubled debt
restructuring (TDR). For TDRs of impaired loans, interest is accrued in accordance with the restructured terms.
Consumer loans and leases, excluding residential mortgage and home equity loans, are subject to mandatory charge-off at a
specified delinquency date and are not classified as non-performing prior to being charged off. These loans and leases are
generally charged off in full no later than when the loan or lease becomes 120 days past due. Residential mortgage loans are
placed on non-accrual status when principal payments are 180 days past due or interest payments are 210 days past due. A
charge-off on a residential mortgage loan is recorded when the loan has been foreclosed and the loan balance exceeds the fair
value of the collateral. The fair value of the collateral is then recorded as real estate owned and is reflected in other assets in the
consolidated balance sheet. (See Note 5 for further information.) A home equity charge-off occurs when it is determined that
there is not sufficient equity in the loan to cover Huntington’s position. A write down in value occurs as determined by
Huntington’s internal processes, with subsequent losses incurred upon final disposition. In the event the first mortgage is
purchased to protect Huntington’s interests, the charge-off process is the same as residential mortgage loans described above.
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.
–SOLD LOANS AND LEASES — Loans or direct financing leases 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 or lease sales with servicing
retained, an asset is also recorded for the right to service the loans sold, based on the fair value of the servicing rights.
Gains and losses on the loans and leases sold and servicing rights associated with loan and lease sales are determined when the
related loans or leases 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 automobile loan 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 are included in mortgage banking income and other non-interest income, respectively.
–ALLOWANCE FOR CREDIT LOSSES — 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 determination of the allowance requires 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
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED