Huntington National Bank 2012 Annual Report Download - page 143

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Commercial nonaccrual TDRs result from either: (1) an accruing commercial TDR being placed on nonaccrual
status, or (2) a workout where an existing commercial NAL is restructured and a concession was given. At times,
these workouts restructure the NAL so that two or more new notes are created. The primary note is underwritten
based upon our normal underwriting standards and is sized so projected cash flows are sufficient to repay contractual
principal and interest. The terms on the secondary note(s) vary by situation, and may include notes that defer principal
and interest payments until after the primary note is repaid. Creating two or more notes often allows the borrower to
continue a project or weather a temporary economic downturn and allows Huntington to right-size a loan based upon
the current expectations for a borrower’s or project’s performance.
Our strategy involving TDR borrowers includes working with these borrowers to allow them to refinance elsewhere, as well
as allow them time to improve their financial position and remain our customer through refinancing their notes according to
market terms and conditions in the future. A refinancing or modification of a loan occurs when either the loan matures according
to the terms of the TDR-modified agreement or the borrower requests a change to the loan agreements. At that time, the loan is
evaluated to determine if it is creditworthy. It is subjected to the normal underwriting standards and processes for other similar
credit extensions, both new and existing.
In accordance with ASC 310-20-35, the refinanced note is evaluated to determine if it is considered a new loan or a
continuation of the prior loan. A new loan is considered for removal of the TDR designation, whereas a continuation of the prior
note requires a continuation of the TDR designation. In order for a TDR designation to be removed, the borrower must no longer
be experiencing financial difficulties and the terms of the refinanced loan must not represent a concession.
Residential Mortgage loan TDRs – Residential mortgage TDRs represent loan modifications associated with traditional first-lien
mortgage loans in which a concession has been provided to the borrower. The primary concessions given to residential mortgage
borrowers are amortization or maturity date changes and interest rate reductions. Residential mortgages identified as TDRs
involve borrowers unable to refinance their mortgages through the Company’s normal mortgage origination channels or through
other independent sources. Some, but not all, of the loans may be delinquent.
Automobile, Home Equity, and Other Consumer loan TDRs – The Company may make similar interest rate, term, and
principal concessions as with residential mortgage loan TDRs.
TDR Impact on Credit Quality
Huntington’s ALLL is largely driven by updated risk ratings assigned to commercial loans, updated borrower credit scores on
consumer loans, and borrower delinquency history in both the commercial and consumer portfolios. These updated risk ratings and
credit scores consider the default history of the borrower, including payment redefaults. As such, the provision for credit losses is
impacted primarily by changes in borrower payment performance rather than the TDR classification. TDRs can be classified as either
accrual or nonaccrual loans. Nonaccrual TDRs are included in NALs whereas accruing TDRs are excluded from NALs as it is
probable that all contractual principal and interest due under the restructured terms will be collected.
Our TDRs may include multiple concessions and the disclosure classifications are presented based on the primary concession
provided to the borrower. The majority of our concessions for the C&I and CRE portfolios are the extension of the maturity date
coupled with an increase in the interest rate. In these instances, the primary concession is the maturity date extension.
TDR concessions may also result in the reduction of the ALLL within the C&I and CRE portfolios. This reduction is derived
from payments and the resulting application of the reserve calculation within the ALLL. The transaction reserve for non-TDR C&I
and CRE loans is calculated based upon several estimated probability factors, such as PD and LGD, both of which were previously
discussed above. Upon the occurrence of a TDR in our C&I and CRE portfolios, the reserve is measured based on discounted
expected cash flows or collateral value, less selling costs, of the modified loan in accordance with ASC 310-10. The resulting TDR
ALLL calculation often results in a lower ALLL amount because (1) the discounted expected cash flows or collateral value, less
selling costs, indicate a lower estimated loss, (2) if the modification includes a rate increase, the discounting of the cash flows on the
modified loan, using the pre-modification interest rate, exceeds the carrying value of the loan, or (3) payments may occur as part of
the modification. The ALLL for C&I and CRE loans may increase as a result of the modification, as the discounted cash flow
analysis may indicate additional reserves are required.
TDR concessions on consumer loans may increase the ALLL. The concessions made to these borrowers often include interest
rate reductions, and therefore, the TDR ALLL calculation results in a greater ALLL compared with the non-TDR calculation as the
reserve is measured based on the estimation of the discounted expected cash flows or collateral value, less selling costs, on the
modified loan in accordance with ASC 310-10. The resulting TDR ALLL calculation often results in a higher ALLL amount because
(1) the discounted expected cash flows or collateral value, less selling costs, indicate a higher estimated loss or, (2) due to the rate
decrease, the discounting of the cash flows on the modified loan, using the pre-modification interest rate, indicates a reduction in the