Huntington National Bank 2014 Annual Report Download - page 63

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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
updated 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.
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.
2014 versus 2013
NCOs decreased $64.0 million, or 34%, in 2014, primarily as a result of continued credit quality. This improvement was partially
offset by an increase in C&I primarily relating to large losses associated with a small number of credit relationships.
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.
Interest Rate Risk
OVERVIEW
Huntington actively manages interest rate risk, as changes in market interest rates can have a significant impact on reported
earnings. The interest rate risk process is designed to compare income simulations in market scenarios designed to alter the direction,
magnitude, and speed of interest rate changes, as well as the slope of the yield curve. These scenarios are designed to illustrate the
embedded optionality in the balance sheet from, among other things, faster or slower mortgage prepayments and changes in deposit
mix.
During the 2014 fourth quarter, we updated various assumptions associated with the modeling of non-maturity deposit behavior
as interest rates change. The most significant change was the removal of a stress component that caused forecasted deposit balances to
be lower than actual deposit balances. The new assumptions better align the behavior of our non-maturity deposits with our experience
and expectations. The assumption changes primarily impacted EVE at Risk by making the +100 and +200 shock scenarios less
liability sensitive. The assumption changes did not materially impact the NII at Risk. The results are further discussed below.
INCOME SIMULATION AND ECONOMIC VALUE ANALYSIS
Interest rate risk measurement is calculated and reported to the ALCO monthly and ROC at least quarterly. The information
reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and
the action plan and timeline for resolution, mitigation, or assumption of the risk.
Huntington uses two approaches to model interest rate risk: Net Interest Income at Risk (NII at Risk) and Economic Value of
Equity (EVE). Under NII at Risk, net interest income is modeled utilizing various assumptions for assets, liabilities, and derivative
positions under various interest rate scenarios over a one-year time horizon. EVE measures the period end market value of assets
minus the market value of liabilities and the change in this value as rates change. EVE is a period end measurement.