Huntington National Bank 2012 Annual Report Download - page 65

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In assessing NCO trends, it is helpful to understand the process of how commercial loans are treated as they deteriorate over time.
The ALLL established is consistent with the level of risk associated with the original underwriting. As a part of our normal portfolio
management process for commercial loans, the loan is periodically reviewed and the ALLL is increased or decreased based on the
revised risk rating. In certain cases, the standard ALLL is determined to not be appropriate, and a specific reserve is established based
on the projected cash flow or collateral value of the specific loan. Charge-offs, if necessary, are generally recognized in a period after
the specific ALLL was established. If the previously established ALLL exceeds that necessary to satisfactorily resolve the problem
loan, a reduction in the overall level of the ALLL could be recognized. Consumer loans are treated in much the same manner as
commercial loans, with increasing reserve factors applied based on the risk characteristics of the loan, although specific reserves are
not identified for consumer loans. In summary, if loan quality deteriorates, the typical credit sequence would be periods of reserve
building, followed by periods of higher NCOs as the previously established ALLL is utilized. Additionally, an increase in the ALLL
either precedes or is in conjunction with increases in NALs. When a loan is classified as NAL, it is evaluated for specific ALLL or
charge-off. As a result, an increase in NALs does not necessarily result in an increase in the ALLL or an expectation of higher future
NCOs.
We anticipate a continuation of the pattern established over the last year of residential mortgage portfolio NCO annualized
percentages being lower than the home equity portfolio NCO annualized percentages. As we have focused on originating high-quality
home equity loans, we believe the PD risk is lower in the home equity portfolio. However, the LGD component is significantly higher
than the residential mortgage portfolio, which results in our projection for lower NCOs in the residential mortgage portfolio relative to
the home equity portfolio in the future. Therefore, we believe the residential mortgage NCO annualized percentage will remain lower
compared to the home equity portfolio as a result of the entire first-lien composition of the residential mortgage portfolio, as well as
the result of previous credit actions improving the underlying quality of these portfolios.
Both the home equity and residential mortgage portfolio NCO levels are anticipated to remain at elevated levels in the near
future. The home equity portfolio will continue to be impacted by borrowers that are seeking to refinance, but are in a negative equity
position because of the junior-lien loan. Right-sizing and debt forgiveness associated with these situations are becoming more
frequent as borrowers realize the impact to their credit is minor, and that a default on a junior-lien loan is not likely to cause borrowers
to lose their home.
All residential mortgage loans greater than 150-days past due are charged-down to the estimated value of the collateral, less
anticipated selling costs. The remaining balance is in delinquent status until a modification can be completed, or the loan goes
through the foreclosure process. For the home equity portfolio, virtually all of the defaults represent full charge-offs as there is no
remaining equity, creating a lower delinquency rate but a higher NCO impact.
2012 versus 2011
C&I NCOs decreased $25.5 million, or 28%, primarily reflecting credit quality improvement in the underlying portfolio as well as
our on-going proactive credit management practices. There was not any concentration in either geography or project type.
CRE NCOs decreased $69.7 million, or 47%, primarily reflecting credit quality improvement in the underlying portfolio as well
as our on-going proactive credit management practices. There was no concentration in either geography or project type. The
performance of the portfolio was consistent with our expectations.
Automobile NCOs decreased $5.6 million, or 37%, despite the $1.3 million impact of Chapter 7 bankruptcy NCOs in 2012. The
relatively low levels of NCOs reflected the continued high credit quality of originations and a strong resale market for used vehicles.
Home equity NCOs increased $14.6 million, or 14%, and included $25.4 million of Chapter 7 bankruptcy NCOs. Excluding the
impact of the Chapter 7 bankruptcy loans, the decline in the remaining portion of the portfolio is consistent with our expectations. We
continue to manage the default rate through focused delinquency monitoring as essentially all defaults for junior-lien home equity
loans incur significant losses reflecting the reduction of equity associated with the collateral property.
Residential mortgage NCOs declined $8.8 million, or 15%, despite $7.9 million of Chapter 7 bankruptcy NCOs. The decline
reflects improvement in the overall economy compared to the year-ago period.
Market Risk
Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the
normal course of business through exposures to market interest rates, foreign exchange rates, equity prices, and credit spreads. We
have identified two primary sources of market risk: interest rate risk and price risk.