Huntington National Bank 2014 Annual Report Download - page 115

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Loans Held for Sale — Loans and loan commitments in which Huntington does not have the intent and ability to hold for the
foreseeable future are classified as loans held for sale. Loans held for sale (excluding loans originated or acquired with the intent to
sell, which are carried at fair value) are carried at the lower of cost or fair value less cost to sell. The fair value option is generally
elected for mortgage loans held for sale to facilitate hedging of the loans. Fair value is determined based on collateral value and
prevailing market prices for loans with similar characteristics. Nonmortgage loans held for sale are measured on an aggregate asset
basis.
Allowance for Credit Losses — Huntington maintains two reserves, both of which reflect Management’s judgment regarding the
appropriate level necessary to absorb credit losses inherent in our loan and lease portfolio: the ALLL and the AULC. Combined, these
reserves comprise the total ACL. The determination of the ACL requires significant estimates, including the timing and amounts of
expected future cash flows on impaired loans and leases, consideration of current economic conditions, and historical loss experience
pertaining to pools of homogeneous loans and leases, all of which may be susceptible to change.
The appropriateness of the ACL is based on Management’s current judgments about the credit quality of the loan portfolio. These
judgments consider on-going evaluations of the loan and lease portfolio, including such factors as the differing economic risks
associated with each loan category, the financial condition of specific borrowers, the level of delinquent loans, the value of any
collateral and, where applicable, the existence of any guarantees or other documented support. Further, Management evaluates the
impact of changes in interest rates and overall economic conditions on the ability of borrowers to meet their financial obligations when
quantifying our exposure to credit losses and assessing the appropriateness of our ACL at each reporting date. In addition to general
economic conditions and the other factors described above, additional factors also considered include: the impact of increasing or
decreasing residential real estate values; the diversification of CRE loans; the development of new or expanded Commercial business
segments such as healthcare, ABL, and energy, and the overall condition of the manufacturing industry. Also, the ACL assessment
includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks to current performance.
Management’s determinations regarding the appropriateness of the ACL are reviewed and approved by the Company’s Audit and Risk
Oversight Committees.
The ALLL consists of two components: (1) the transaction reserve, which includes a loan level allocation, specific reserves
related to loans considered to be impaired, and loans involved in troubled debt restructurings, and (2) the general reserve. The
transaction reserve component includes both (1) an estimate of loss based on pools of commercial and consumer loans and leases with
similar characteristics and (2) an estimate of loss based on an impairment review of each impaired C&I and CRE loan greater than
$1.0 million. For the C&I and CRE portfolios, the estimate of loss based on pools of loans and leases with similar characteristics is
made by applying a PD factor and a LGD factor to each individual loan based on a regularly updated loan grade, using a standardized
loan grading system. The PD factor and an LGD factor are determined for each loan grade using statistical models based on historical
performance data. The PD factor considers on-going reviews of the financial performance of the specific borrower, including cash
flow, debt-service coverage ratio, earnings power, debt level, and equity position, in conjunction with an assessment of the borrower’s
industry and future prospects. The LGD factor considers analysis of the type of collateral and the relative LTV ratio. These reserve
factors are developed based on 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 using a 24-month emergence period.
In the case of more homogeneous portfolios, such as automobile loans, home equity loans, and residential mortgage loans, the
determination of the transaction reserve also incorporates PD and LGD factors. The estimate of loss is based on pools of loans and
leases with similar characteristics. The PD factor considers current credit scores unless the account is delinquent, in which case a
higher PD factor is used. The credit score provides a basis for understanding the borrower’s past and current payment performance,
and this information is used to estimate expected losses over the 12-month emergence period. The performance of first-lien loans
ahead of our junior-lien loans is available to use as part of our updated score process. The LGD factor considers analysis of the type
of collateral and the relative LTV ratio. Credit scores, models, analyses, and other factors used to determine both the PD and LGD
factors 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, and adjustments to the reserve factors are made as required. Models utilized in the ALLL
estimation process are subject to the Company’s model validation policies.
The general reserve consists of the economic reserve and risk-profile reserve components. The economic reserve component
considers the impact of changing market and economic conditions on portfolio performance. The risk-profile component considers
items unique to our structure, policies, processes, and portfolio composition, as well as qualitative measurements and assessments of
the loan portfolios including, but not limited to, management quality, concentrations, portfolio composition, industry comparisons, and
internal review functions.
The estimate for the AULC is determined using the same procedures and methodologies as used for the ALLL. The loss factors
used in the AULC are the same as the loss factors used in the ALLL while also considering a historical utilization of unused
commitments. The AULC is recorded in accrued expenses and other liabilities in the Consolidated Balance Sheets.