Huntington National Bank 2012 Annual Report Download - page 122

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Once a loan has been identified for an assessment of impairment, the loan is considered impaired when, based on current
information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be
collected. This determination requires significant judgment and use of estimates, and the eventual outcome may differ significantly
from those estimates.
When a loan in any class has been determined to be impaired, the amount of the impairment is measured using the present value
of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, the observable market price of
the loan, or the fair value of the collateral, less anticipated selling costs, if the loan is collateral dependent. When the present value of
expected future cash flows is used, the effective interest rate is the original 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. A
specific reserve is established as a component of the ALLL when a loan has been determined to be impaired. Subsequent to the initial
measurement of impairment, if there is a significant change to the impaired loan's expected future cash flows, or if actual cash flows
are significantly different from the cash flows previously estimated, Huntington recalculates the impairment and appropriately adjusts
the specific reserve. Similarly, if Huntington measures impairment based on the observable market price of an impaired loan or the
fair value of the collateral of an impaired collateral dependent loan, Huntington will adjust the specific reserve.
When a loan within any class is impaired, the accrual of interest income is discontinued unless the receipt of principal and interest
is no longer in doubt. Interest income on TDRs is accrued when all principal and interest is expected to be collected under the post-
modification terms. Cash receipts received on nonaccruing impaired loans within any class are generally applied entirely against
principal until the loan has been collected in full, after which time any additional cash receipts are recognized as interest income.
Cash receipts received on accruing impaired loans within any class are applied in the same manner as accruing loans that are not
considered impaired.
Purchased Credit-Impaired Loans — Purchased loans with evidence of deterioration in credit quality since origination for
which it is probable at acquisition that we will be unable to collect all contractually required payments are considered to be credit
impaired. Purchased credit-impaired loans are initially recorded at fair value, which is estimated by discounting the cash flows
expected to be collected at the acquisition date. Because the estimate of expected cash flows reflects an estimate of future credit losses
expected to be incurred over the life of the loans, an allowance for credit losses is not recorded at the acquisition date. The excess of
cash flows expected at acquisition over the estimated fair value, referred to as the accretable yield, is recognized in interest income
over the remaining life of the loan, or pool of loans, on a level-yield basis. The difference between the contractually required payments
at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. A subsequent
decrease in the estimate of cash flows expected to be received on purchased credit-impaired loans generally results in the recognition
of an allowance for credit losses. Subsequent increases in cash flows result in reversal of any nonaccretable difference (or allowance
for loan and lease losses to the extent any has been recorded) with a positive impact on interest income subsequently recognized. The
measurement of cash flows involves assumptions and judgments for interest rates, prepayments, default rates, loss severity, and
collateral values. All of these factors are inherently subjective and significant changes in the cash flow estimates over the life of the
loan can result.
Transfers of Financial Assets and Securitizations — Transfers of financial assets in which we have surrendered control over
the transferred assets are accounted for as sales. In assessing whether control has been surrendered, we consider whether the transferee
would be a consolidated affiliate, the existence and extent of any continuing involvement in the transferred financial assets, and the
impact of all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not
entered into at the time of transfer. Control is generally considered to have been surrendered when (i) the transferred assets have been
legally isolated from us or any of our consolidated affiliates, even in bankruptcy or other receivership, (ii) the transferee (or, if the
transferee is an entity whose sole purpose is to engage in securitization or asset-backed financing that is constrained from pledging or
exchanging the assets it receives, each third-party holder of its beneficial interests) has the right to pledge or exchange the assets (or
beneficial interests) it received without any constraints that provide more than a trivial benefit to us, and (iii) neither we nor our
consolidated affiliates and agents have (a) both the right and obligation under any agreement to repurchase or redeem the transferred
assets before their maturity, (b) the unilateral ability to cause the holder to return specific financial assets that also provides us with a
more-than-trivial benefit (other than through a cleanup call) or (c) an agreement that permits the transferee to require us to repurchase
the transferred assets at a price so favorable that it is probable that it will require us to repurchase them.
If the sale criteria are met, the transferred financial assets are removed from our balance sheet and a gain or loss on sale is
recognized. If the sale criteria are not met, the transfer is recorded as a secured borrowing in which the assets remain on our balance
sheet and the proceeds from the transaction are recognized as a liability. For the majority of financial asset transfers, it is clear whether
or not we have surrendered control. For other transfers, such as in connection with complex transactions or where we have continuing
involvement, we generally obtain a legal opinion as to whether the transfer results in a true sale by law.
We have historically securitized certain automobile receivables. 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 either a securitization trust or third
party. For loan or lease sales with servicing retained, a servicing asset is recorded at fair value for the right to service the loans sold.