Huntington National Bank 2006 Annual Report Download - page 36

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MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
2006. Interest only loans are underwritten to specific standards including minimum FICO credit scores, stressed debt-to-income
ratios, and extensive collateral evaluation.
Collection action is initiated on an ‘‘as needed’’ basis through a centrally managed collection and recovery function. The
collection group employs a series of collection methodologies designed to maintain a high level of effectiveness while maximizing
efficiency. In addition to the retained consumer loan portfolio, the collection group is responsible for collection activity on all
sold and securitized consumer loans and leases. (See the Non-performing Assets section of Credit Risk, for further information
regarding when consumer loans are placed on non-accrual status and when the balances are charged-off to the allowance for loan and
lease losses.)
Non-Performing Assets (NPAs)
NPAs consist of loans and leases that are no longer accruing interest, loans and leases that have been renegotiated to below
market rates based upon financial difficulties of the borrower, and real estate acquired through foreclosure. Middle-market
commercial and industrial (C&I), middle market commercial real-estate (CRE), and small business loans are generally placed on
non-accrual status when collection of principal or interest is in doubt or when the loan is 90-days past due. When interest
accruals are suspended, accrued interest income is reversed with current year accruals charged to earnings and prior-year
amounts generally charged-off as a credit loss.
Consumer loans and leases, excluding residential mortgages and home equity lines and leases, are not placed on non-accrual
status but are charged-off in accordance with regulatory statutes, which is generally no more than 120-days past due. Residential
mortgages and home equity loans and lines, while highly secured, are placed on non-accrual status within 180-days past due as to
principal or 210-days past due as to interest, regardless of collateral. A charge-off on a residential mortgage loan is recorded when
the loan has been foreclosed and the loan balance exceeds the fair value of the real estate. The fair value of the collateral, less the
cost to sell, is then recorded as other real estate owned (OREO).
When we believe the borrower’s ability and intent to make periodic interest and principal payments resume and collectibility is
no longer in doubt, the loan is returned to accrual status.
Non-performing loans (NPLs) increased during 2006 across most of our product lines. A significant portion of the increase
($33.8 million) was a result of the inclusion of the Unizan portfolio in 2006. It is important to note that the Unizan portfolio
included $12 million of NPLs guaranteed by the Small Business Administration. We anticipate that the government guarantees
will result in full repayment of principal and interest of the related loans. We have seen an increase in NPLs in the residential real
estate portfolio as a result of the general economy and the housing environment in our markets.
The 2006 increase in OREO was entirely a function of the residential loan portfolio, and includes a $16.2 million impact for an
accounting reclassification, from residential mortgage loans, associated with assets insured by the Department of Housing and
Urban Development (HUD). HUD insures 100% of the unpaid principal balance of the loan and reimburses the lender for
interest and expenses in accordance with HUD regulations. In previous periods, these 100% government insured loans were not
considered OREO assets. All OREO assets are written down to a net realizable value at transfer to OREO.
While the level of our NPAs was higher at the end of 2006 than a year earlier, the absolute dollar amount of future risk
associated with NPAs was not materially different as a result of the improved asset mix and greater relative amount of
government guaranteed assets. Of the 2006 increase, 83% consisted of residential real estate and government guaranteed loans.
Non-performing asset activity for the past five years was as follows:
34