Huntington National Bank 2006 Annual Report Download - page 38

Download and view the complete annual report

Please find page 38 of the 2006 Huntington National Bank annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 130

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130

MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
or the sale of loans. The AULC is determined by applying the transaction reserve process to the unfunded portion of the
portfolio adjusted by an applicable funding percentage.
We have an established process to determine the adequacy of the ACL that relies on a number of analytical tools and
benchmarks. No single statistic or measurement, in itself, determines the adequacy of the allowance. The allowance is comprised
of two components: the transaction reserve and the economic reserve.
The transaction reserve component of the ACL includes both (a) an estimate of loss based on pools of commercial and consumer
loans and leases with similar characteristics and (b) an estimate of loss based on an impairment review of each loan greater than
$500,000 that is considered to be impaired. For commercial loans, the estimate of loss based on pools of loans and leases with
similar characteristics is made through the use of a standardized loan grading system that is applied on an individual loan level
and updated on a continuous basis. The reserve factors applied to these portfolios were developed based on internal credit
migration models that track historical movements of loans between loan ratings over time and a combination of long-term
average loss experience of our own portfolio and external industry data. In the case of more homogeneous portfolios, such as
consumer loans and leases, the determination of the transaction reserve is based on reserve factors that include the use of
forecasting models to measure inherent loss in these portfolios. We update the models and analyses frequently to capture the
recent behavioral characteristics of the subject portfolios, as well as any changes in the loss mitigation or credit origination
strategies. Adjustments to the reserve factors are made, as needed, based on observed results of the portfolio analytics.
The economic reserve incorporates our 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 economic
indices as well as a variety of other economic factors that are correlated to the historical performance of the loan portfolio.
Currently, two national and two regionally focused indices are utilized. The two national indices are: (1) the Real Consumer
Spending, and (2) Consumer Confidence. The two regionally focused indices are: (1) the Institute for Supply Management
Manufacturing, and (2) Non-agriculture Job Creation. Because of this more quantitative approach to recognizing risks in the
general economy, the economic reserve may fluctuate from period-to-period, subject to a minimum level specified by policy.
This methodology allows for a more meaningful discussion of our view of the current economic conditions and the potential
impact on 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.
The table below presents the components of the ACL expressed as a percent of total period end loans and leases at the end of the
most recent five years:
Table 16 — ACL as a Percent of Total Period End Loans and Leases
At December 31,
2006 2005 2004 2003 2002
Transaction reserve 0.86% 0.89% 0.83% N.A. N.A.
Economic reserve 0.18 0.21 0.32 N.A. N.A.
Total ALLL 1.04 1.10 1.15 1.42% 1.62%
Total AULC 0.15 0.15 0.14 0.17 0.19
Total ACL 1.19% 1.25% 1.29% 1.59% 1.81%
N.A., not applicable.
A change in the transaction reserve component of the ACL is a direct indicator of the direction of credit risk in the portfolio.
The decline in 2006 from 0.89% to 0.86% is consistent with our general assessment that there is less inherent credit risk in the
portfolio today than in the prior period. The economic reserve is a calculated multiplier to the transaction reserve to capture
potential volatility associated with the economic environment. The general improvement in the economy, combined with
Huntington’s very consistent loss levels result in the lowering of the economic reserve component.
36