Huntington National Bank 2007 Annual Report Download - page 83

provision that is charged to earnings, based on Management’s quarterly evaluation of the factors previously mentioned, and is
reduced by charge-offs, net of recoveries, and the allowance associated with securitized or sold loans.
The ACL consists of two components, the transaction reserve, which includes a specific reserve in accordance with Statement
No. 114, and the economic reserve. Loan and lease losses related to the transaction reserve are recognized and measured
pursuant to Statement No. 5, Accounting for Contingencies, and Statement No. 114, while losses related to the economic reserve
are recognized and measured pursuant to Statement No. 5. The two components are more fully described below.
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. 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.
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) Real Consumer
Spending, and (2) Consumer Confidence. The two regionally focused indices are: (1) the Institute for Supply Management
Manufacturing Index, 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.
–OTHER REAL ESTATE OWNED — Other real estate owned (OREO) is comprised principally of commercial and residential real estate
properties obtained in partial or total satisfaction of loan obligations. Beginning in 2006, OREO also included government
insured loans in the process of foreclosure. OREO obtained in satisfaction of a loan is recorded at the estimated fair value less
anticipated selling costs based upon the property’s appraised value at the date of transfer, with any difference between the fair
value of the property and the carrying value of the loan charged to the allowance for loan losses. Subsequent changes in value
are reported as adjustments to the carrying amount, not to exceed the initial carrying value of the assets at the time of transfer.
Changes in value subsequent to transfer are recorded in non-interest expense. Gains or losses not previously recognized resulting
from the sale of OREO are recognized in non-interest expense on the date of sale.
–RESELL AND REPURCHASE AGREEMENTS — 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.
–GOODWILL AND OTHER INTANGIBLE ASSETS — 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 cost of the acquisition over the fair
value of net assets acquired is recorded as goodwill. Other intangible assets are amortized either on an accelerated or straight-
line basis over their estimated useful lives. Goodwill and other intangible assets are evaluated for impairment on an annual basis
at October 1st of each year or whenever events or changes in circumstances indicate that the carrying value may not be
recoverable.
–MORTGAGE BANKING ACTIVITIES — 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. Servicing rights are
initially recorded at fair value. All mortgage servicing rights are subsequently carried at fair value, and are included in other
assets.
To determine the fair value of MSRs, Huntington uses a static discounted cash flow methodology incorporating current market
interest rates. A static model does not attempt to forecast or predict the future direction of interest rates; rather it estimates the
amount and timing of future servicing cash flows using current market interest rates. The current mortgage interest rate
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED