Huntington National Bank 2004 Annual Report Download - page 105

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
loans when it is determined that the calculated transaction reserve component is insufficient to cover the estimated losses.
Individual non-performing and substandard loans over $250,000 are analyzed for impairment and possible assignment of a
specific reserve. The impairment tests are done in accordance with applicable accounting standards and regulations.
Economic Reserve
Changes in the economic environment are a significant judgmental factor management considers in determining the
appropriate level of the ALLL. The economic reserve incorporates Management’s determination of the impact of risks
associated with the general economic environment on the portfolio. The economic reserve is designed to address economic
uncertainties and is determined based on a variety of economic factors that are correlated to the historical performance of
the loan portfolio. Because of this more quantitative approach to recognizing risks in the general economy, the economic
reserve may fluctuate from period to period.
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 consists of the U.S. Index of Leading Economic Indicators, U.S. Profits Index, U.S. Unemployment Index, and
the University of Michigan Current Consumer Confidence Index. Beginning in 2004, the calculated economic reserve was
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 has the capability to judgmentally adjust the calculated
economic reserve amount by a maximum of +/– 20% to reflect, among other factors, differences in local versus national
economic conditions. This adjustment capability is deemed necessary given the newness of the model and the continuing
uncertainty of forecasting economic environment changes.
–R ESELL AND R EPURCHASE A GREEMENTS — 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.
–G OODWILL AND O THER I NTANGIBLE A SSETS — 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 and Other Intangible Assets, 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.
–M ORTGAGE B ANKING A CTIVITIES — 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 fair value as determined on an aggregate basis. Fair value is determined using available secondary market prices for
loans with similar coupons, maturities, and credit quality.
Huntington recognizes the rights to service mortgage loans as separate assets, which are included in other assets in the consolidated
balance sheets, only when purchased or when servicing is contractually separated from the underlying mortgage loans by sale or
securitization of the loans with servicing rights retained. The carrying value of loans sold or securitized is allocated between loans
and servicing rights based on the relative fair values of each. Purchased mortgage servicing rights are initially recorded at cost. All
servicing rights are subsequently carried at the lower of the initial carrying value, adjusted for amortization, or fair value, and are
included in other assets.
–P REMISES AND E QUIPMENT — Premises and equipment are stated at cost, less accumulated depreciation and amortization.
Depreciation is computed principally by the straight-line method over the estimated useful lives of the related assets. Buildings and
building improvements are depreciated over an average of 30 to 40 years and 10 to 20 years, respectively. Land improvements and
furniture and fixtures are depreciated over 10 years, while equipment is depreciated over a range of three to seven years. Leasehold
improvements are amortized over the lesser of the asset life or term of the related leases. Maintenance and repairs are charged to
expense as incurred, while improvements that extend the useful life of an asset are capitalized and depreciated over the remaining
useful life.
103