Huntington National Bank 2003 Annual Report Download - page 60

MANAGEMENT’S DISCUSSION AND ANALYSIS
correlated to the historical performance of the loan portfolio. Therefore, the ratio of the economic reserve to the transaction reserve
component may fluctuate from period to period.
Prior to 2003, the company maintained an unallocated component of its ALLL, as did many banks. The unallocated component was
eliminated in 2003 with the adoption of the more granular risk rating system with most of the prior unallocated reserve absorbed into
the transaction reserve. With the adoption of the new risk grading system, Management has determined that an unallocated
component is no longer necessary.
In an effort to be as quantitative as possible in the ALLL calculation, Management developed a revised methodology for calculating the
economic reserve portion of the ALLL for implementation in 2004. The revised methodology is specifically tied to economic indices
that have a high correlation to the company’s historic charge-off variability. The indices currently in the model include U.S. index of
leading economic indicators, U.S. profits, U.S. unemployment, and current consumer confidence. Beginning in 2004, the calculated
economic reserve will be determined based upon the variability of credit losses over a credit cycle. The indices and time frame may be
adjusted as actual portfolio performance changes over time. Management will have the capability to judgmentally adjust the calculated
economic reserve amount by a maximum of 20%. This adjustment capability is deemed necessary given the newness of the model and
the continuing uncertainty of the economic environment.
This change in methodology will allow for a more meaningful discussion of Management’s view of the current economic conditions
and the potential impact on the company’s credit losses. The continued use of quantitative methodologies for the transaction reserve
and the introduction of the quantitative methodology for the economic component may have the impact of more period-to-period
fluctuation in the absolute and relative level of the reserve than exhibited in prior-period results.
S
UMMARY
The determination of the level of the ALLL and, correspondingly, the provision for loan and lease losses reflects prior loss experiences
as well as various judgments and assumptions, including (1) Management’s evaluation of credit risk related to both individual
borrowers and pools of loans, (2) observations derived from Management’s ongoing internal review and examination processes, (3)
loan portfolio composition, and (4) general economic conditions. Given the more quantitative methodologies to determine the level of
the ALLL employed in 2003, and those that will be employed in 2004, the resultant absolute level of the ALLL, as well as the related
measures and ratios, may be subject to increased period-to-period fluctuation.
Table 13—Allocation of Allowance for Loan and Lease Losses(1)
(in thousands of dollars) 2003 2002 2001 2000 1999
C&I $156,721 25.2% $155,577 30.2% $174,713 34.9% $104,968 37.7% $ 94,978 35.2%
CRE 74,571 19.8 48,395 20.0 55,862 20.6 46,505 19.6 46,936 18.3
Total Commercial 231,292 45.0 203,972 50.2 230,575 55.5 151,473 57.3 141,914 53.5
Consumer:
Automobile loans and leases 58,375 23.2 51,621 21.1 38,799 16.0 28,877 14.9 40,043 20.2
Home equity 27,211 18.0 18,621 17.2 24,054 19.4 19,246 12.3 17,089 9.5
Residential mortgage 11,124 12.0 8,566 9.4 6,013 6.1 4,421 6.0 5,393 8.4
Other loans 7,252 1.8 8,085 2.1 19,757 3.0 22,516 9.5 21,523 8.4
Total Consumer 103,962 55.0 86,893 49.8 88,623 44.5 75,060 42.7 84,048 46.5
Unallocated — — 45,783 — 50,134 — 38,396 — 47,969 —
Total Allowance for Loan and
Lease Losses $335,254 100.0% $336,648 100.0% $369,332 100.0% $264,929 100.0% $273,931 100.0%
(1) Percent represents percentage of loan and lease category to total loans and leases.
The ALLL was $335.3 million at December 31, 2003, down slightly from $336.6 million at December 31, 2002, and down from $369.3
million at the end of 2001. This represented 1.59% of total loans and leases at year-end 2003, 1.81% at year-end 2002, and 2.00% for
2001 (see Tables 13 and 14). This decrease in the relative percentage of the ALLL compared with loans and leases reflected the release of
reserves associated with the sold loans over this period (see Significant Factors item 7). At the end of 2003, the ALLL represented 384%
of NPAs, up from 246% at year-end 2002 and up from 162% at the end of 2001 (see Table 11). Given all of the characteristics in the
loan and lease portfolio, Management believes the ALLL is sufficient to absorb the credit losses inherent in the portfolio. The following
table shows the activity the ALLL, along with selected credit quality indicators.
58 HUNTINGTON BANCSHARES INCORPORATED