Huntington National Bank 2010 Annual Report Download - page 74

transactions. We update values as we believe appropriate, and in compliance with applicable regulations, for
loans identified as higher risk. Loans are identified as higher risk based on performance indicators and the
updated values are utilized to facilitate our portfolio management, as well as our workout and loss mitigation
functions.
We continue to make origination policy adjustments based on our assessment of an appropriate risk
profile, as well as industry actions. In addition to origination policy adjustments, we take actions, as necessary,
to manage the risk profile of this portfolio.
Residential Mortgages Portfolio
We focus on higher-quality borrowers and underwrite all applications centrally, often through the use of
an automated underwriting system. We do not originate residential mortgage loans that allow negative
amortization or allow the borrower multiple payment options.
All residential mortgage loans are originated based on a completed appraisal during the credit underwrit-
ing process. Additionally, we supplement our underwriting with a third party fraud detection system to limit
our exposure to “flipping” and outright fraudulent transactions. We update values on a regular basis in
compliance with applicable regulations to facilitate our portfolio management, as well as our workout and loss
mitigation functions.
Also, it is important to note the recent issuance of new regulatory guidelines regarding real estate
valuations, the intent of which is to ensure there is complete independence in the requesting and review of real
estate valuations associated with loan decisions. We have been committed to appropriate valuations for all of
our real estate lending, and do not anticipate significant impacts to our loan decision process as a result of
these new guidelines.
Several government actions were enacted that impacted the residential mortgage portfolio, including
various refinance programs which positively affected the availability of credit for the industry. We are utilizing
these programs to enhance our existing strategies of working closely with our customers.
Credit Quality
We believe the most meaningful way to assess overall credit quality performance for 2010 is through an
analysis of credit quality performance ratios. This approach forms the basis of most of the discussion in the
sections immediately following: NPAs and NALs, TDRs, ACL, and NCOs. In addition, we utilize delinquency
rates, risk distribution and migration patterns, and product segmentation in the analysis of our credit quality
performance.
Credit quality performance in 2010 improved significantly compared with 2009. While NCOs remain
elevated compared with long-term expectations, 2010 continued to show improvement across the portfolio, and
delinquency trends improved as well. OREO also declined significantly in 2010. We do not believe there will
be a meaningful improvement in property values in the near term, and believe it prudent to dispose of the
OREO properties instead of incurring the on-going expenses associated with maintaining the properties. As
such, the decrease in the OREO balances resulted from an active selling strategy, as well as a lower level of
inflows associated with residential properties due to our active loss mitigation and short-sale strategies.
The economic environment remained challenging. Yet, reflecting the benefit of our focused credit actions
of 2009 and 2010, we experienced declines in total NPAs, new NPAs, and commercial Criticized loans. Our
ACL declined $240.2 million to $1,291.1 million, or 3.39% of period-end loans and leases from
$1,531.4 million, or 4.16% at 2009. Importantly, our ACL as a percent of period-end NALs increased to 166%
from 80%, and coverage ratios associated with NPAs and Criticized assets also increased. These improved
coverage ratios indicated a strengthening of our reserve position relative to troubled assets from the prior year
end. These coverage ratios are a key component of our internal adequacy assessment process and provide an
important consideration in the determination of the adequacy of the ACL.
60