Huntington National Bank 2011 Annual Report Download - page 124

Critical Accounting Policies and Use of Significant Estimates
Our Consolidated Financial Statements are prepared in accordance with GAAP. The preparation of financial
statements in conformity with GAAP requires us to establish accounting policies and make estimates that affect
amounts reported in our Consolidated Financial Statements. Note 1 of the Notes to Consolidated Financial
Statements, which is incorporated by reference into this MD&A, describes the significant accounting policies we
use in our Consolidated Financial Statements.
An accounting estimate requires assumptions and judgments about uncertain matters that could have a
material effect on the Consolidated Financial Statements. Estimates are made under facts and circumstances at a
point in time, and changes in those facts and circumstances could produce results substantially different from
those estimates. The most significant accounting policies and estimates and their related application are discussed
below.
Total Allowance for Credit Losses
Our ACL of $1.0 billion at December 31, 2011, represents our estimate of probable credit losses inherent in
our loan and lease portfolio and our unfunded loan commitments and letters of credit. We regularly review our
ACL for appropriateness by performing on-going evaluations of the loan and lease portfolio. In doing so, we
consider factors such as the differing economic risk associated with each loan category, the financial condition of
specific borrowers, the level of delinquent loans, the value of any collateral and, where applicable, the existence
of any guarantees or other documented support. We also evaluate the impact of changes in interest rates and
overall economic conditions on the ability of borrowers to meet their financial obligations when quantifying our
exposure to credit losses and assessing the appropriateness of our ACL at each reporting date. There is no
certainty that our ACL will be appropriate over time to cover losses in the portfolio because of unanticipated
adverse changes in the economy, market conditions, or events adversely affecting specific customers, industries,
or markets. If the credit quality of our customer base materially deteriorates, the risk profile of a market,
industry, or group of customers changes materially, or if the ACL is not appropriate, our net income and capital
could be materially adversely affected which, in turn, could have a material negative adverse effect on our
financial condition and results of operations.
In addition, bank regulators periodically review our ACL and may require us to increase our provision for
loan and lease losses or loan charge-offs. Any increase in our ACL or loan charge-offs as required by these
regulatory authorities could have a material adverse effect on our financial condition and results of operations.
Fair Value Measurements
(This section should be read in conjunction with Note 19 of the Notes to Consolidated Financial Statements.)
Huntington follows the fair value accounting guidance under ASC 820 and ASC 825.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. A three-level valuation hierarchy was established for
disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
• Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or
liabilities in active markets.
• Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for
substantially the full term of the financial instrument.
• Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value
measurement.
110