Huntington National Bank 2003 Annual Report Download - page 106

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The trust then sells undivided interests in the trust to investors, while Huntington retains the remaining undivided interests, referred
to as retained interest. While the loans are removed from the balance sheet at the time of sale, this retained interest is recorded as an
asset based on its estimated fair value. The sale of loans does not involve retained interests. For both loan sales and loan
securitizations, an asset is also established for the servicing of the loans sold, which is retained at the time of sale, based on the
relative fair value of the servicing rights. Gains and losses on the loans sold, retained interest, if any, and servicing rights associated
with loan sales or securitizations are determined when the related loans are sold to the trust or third party. Fair values of the retained
interests and servicing rights are based on the present value of expected future cash flows from the underlying loans, net of payments
to security holders. The present value of expected future cash flows is determined using assumptions for market interest rates, loan
losses, servicing costs, and prepayment rates. Management also uses these assumptions to assess the retained interests and servicing
rights for impairment periodically. The retained interest is included in securities available for sale and the servicing rights are
recorded in other assets in the consolidated balance sheets. Servicing revenues, net of the amortization of servicing rights, are
included in other non-interest income.
Allowance for Loan and Lease Losses: The allowance for loan and lease losses reflects management’s judgment as to the level
considered appropriate to absorb inherent credit losses in the loan and lease portfolio. 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 allowance is determined subjectively, requiring 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 provision that is
charged to earnings, based on management’s quarterly evaluation of the factors previously mentioned, and is reduced by charge-offs,
net of recoveries, and the allowance associated with securitized or sold loans.
The allowance for loan and lease losses consists of a component for individual loan impairment and a component of collective loan
impairment recognized and measured pursuant to Statement No. 114, and Statement No. 5, Accounting for Contingencies, respectively.
The component for individual loan impairment reflects expected losses resulting from quantitative analyses developed through
historical loss experience and specific credit allocations at the individual loan level for commercial and industrial loans and commercial
real estate loans. The specific credit allocations are based on a continuous analysis of all loans and leases by internal credit rating. The
historical loss element is determined using a loss migration analysis that examines both the probability of default and the loss in the
event of default by loan and lease category and internal credit rating. The loss migration analysis is performed periodically, and loss
factors are updated regularly based on actual experience. The component for collective loan impairment is determined by applying
specific probability of default and loss in the event of default factors to homogeneous segments of the consumer loan and lease
portfolio. Management’s determination of the amounts necessary for concentrations and changes in portfolio mix are also included in
the allowance.
Resell and Repurchase Agreements: Securities purchased under agreements to resell and securities sold under agreements to
repurchase are generally treated as collateralized financing transactions and are recorded at the amounts at which the securities were
acquired or sold plus accrued interest. The fair value of collateral either received from or provided to a third party is continually
monitored and additional collateral is obtained or is requested to be returned to Huntington as deemed appropriate.
Goodwill and Other Intangible Assets: Under the purchase method of accounting, the net assets of entities acquired by Huntington
were recorded at their estimated fair value at the date of acquisition. The excess of cost over the fair value of net assets acquired is
recorded as goodwill. Prior to 2002, goodwill was amortized over periods generally up to 25 years. Effective January 1, 2002, in
accordance with Statement No. 142, goodwill is no longer amortized but is reviewed by management, along with other intangible assets
arising from business combinations, for impairment as of September 30 each year, or whenever a significant event occurs that adversely
affects operations, or when changes in circumstances indicate that the carrying value may not be recoverable. Other intangible assets
are amortized on a straight-line basis over their estimated useful lives through 2011.
Mortgage Banking Activities: Loans held for sale are primarily composed of performing 1-to-4-family residential mortgage loans
originated for resale and are carried at the lower of cost (net of purchase discounts or premiums and effects of hedge accounting) or
104 HUNTINGTON BANCSHARES INCORPORATED