Huntington National Bank 2003 Annual Report Download - page 59

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MANAGEMENT’S DISCUSSION AND ANALYSIS
2002 and 2003 fourth quarters (see Significant Factors item 7 and Table 12). As a result, the 0.41% NPA ratio at the end of 2003
represented the lowest level in many years. Management expects NPAs in 2004 to be comparable with year-end 2003 levels.
Table 12—Non-Performing Asset Activity
(in thousands) 2003 2002 2001 2000 1999
Beginning of Period $ 136,723 $ 227,493 $ 105,397 $ 98,241 $ 96,099
New non-performing assets 222,043 260,229 329,882 112,319 106,014
Returns to accruing status (16,632) (17,124) (2,767) (5,914) (5,744)
Loan and lease losses (109,905) (152,616) (67,491) (18,052) (19,547)
Payments (83,886) (136,774) (106,889) (67,431) (67,682)
Sales (1) (60,957) (44,485) (30,639) (13,766) (10,899)
End of Period $ 87,386 $ 136,723 $ 227,493 $105,397 $ 98,241
(1) 2002 Includes $6.5 million related to the sale of the Florida operations and $21.4 million related to the fourth quarter special credit actions. 2003 includes $26.6 million
related to fourth quarter credit actions.
A
LLOWANCE FOR
L
OAN AND
L
EASE
L
OSSES
The allowance for loan and lease losses (ALLL) represents the estimate of probable losses inherent in the loan portfolio at the balance
sheet date. Allocation of the ALLL is made for analytical purposes only, and the entire allowance is available to absorb probable and
estimable credit losses inherent in the portfolio. Additions to the ALLL result from recording provision expense for loan losses or loan
recoveries, while reductions reflect charge-offs, or the sale of loans.
P
ROCESS TO
D
ETERMINE THE
A
DEQUACY OF THE
ALLL
Management has an established process to determine the adequacy of the ALLL that relies on a number of analytical tools and
benchmarks. No single statistic or measurement, in itself, determines the adequacy of the allowance. For analytical purposes, the
allowance is comprised of two components, the transaction reserve and the economic reserve. The transaction and economic
components represent the total allowance for loan losses to cover estimated losses inherent in the loan portfolio.
The credit administration group is responsible for determining the adequacy of the ALLL.
T
RANSACTION
R
ESERVE
The transaction reserve is the sum of: (1) expected losses associated with loans or leases in each portfolio and (2) specific reserves that
are judgmentally determined for lower-rated credits in the C&I and CRE portfolios. For C&I and CRE loans, the calculation involves
the use of a continuous and standardized loan grading system in combination with a review of larger individual, higher-risk loans. Loss
factors used for this analysis are derived in two ways: (1) migration models are used to estimate loss factors by tracking historical
movements of loans between loan ratings over time; and (2) in the case of loans without identified credit weaknesses, loss factors are
estimated using a combination of long-term average loss experience of the company’s own portfolio and external industry data. In
addition, individual non-performing and substandard loans over $250,000 are analyzed for impairment using a cash flow or collateral-
based methodology. Calculated reserve shortfalls are included in the transaction reserve as specific reserves.
In the case of homogeneous portfolios, such as consumer loans and leases, residential mortgage loans, and some segments of small
business loans, the determination of the transaction component is conducted at an aggregate, or pooled, level. For such portfolios, the
risk assessment process includes the use of forecasting models to measure inherent loss in these portfolios. Such analyses are updated
frequently to capture the recent behavioral characteristics of the subject portfolios, as well as any changes in the loss mitigation or
customer solicitation strategies. Adjustments to the expected loss factors and reserve are made on an as needed basis as observed in the
results of the portfolio analytics.
E
CONOMIC
R
ESERVE
To mitigate imprecision and incorporate the range of probable outcomes inherent in the estimates of expected credit losses, the ALLL
contains an economic reserve component. The economic reserve incorporates Management’s determination of risks inherent in
portfolio composition and economic uncertainties. The economic reserve is determined based on a variety of economic factors that are
HUNTINGTON BANCSHARES INCORPORATED 57