Huntington National Bank 2005 Annual Report Download - page 108

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
Models and analyses are updated frequently to capture the recent behavioral characteristics of the subject portfolios, as
well as any changes in loss mitigation or credit origination strategies. Adjustments to the reserve factors are made as
needed based on observed results of the portfolio analytics.
Economic Reserve
Changes in the economic environment are a significant judgmental factor Management considers in determining the
appropriate level of the ACL. The economic reserve incorporates Management’s determination of the impact on the
portfolio of risks associated with the general economic environment. 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 ACL calculation, Management developed a revised methodology for
calculating the economic reserve portion of the ACL 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 are 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. Other intangible assets are amortized on a straight-line basis over their estimated useful
lives through 2011. Goodwill is not amortized, but is evaluated for impairment on an annual basis at September 30th of each
year.
–M ORTGAGE B ANKING A CTIVITIES — Loans held for sale include 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.
–O
PERATING L EASE A SSETS — Operating lease assets consist of automobiles leased to consumers and equipment leased to
business customers. These assets are reported at cost, including net deferred origination fees or costs, less accumulated
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