Huntington National Bank 2010 Annual Report Download - page 81

ACL
(This section should be read in conjunction with Significant Item 3, and Notes 1 and 6 of the Notes to the
Consolidated Financial Statements.)
We maintain two reserves, both of which in our judgment are adequate to absorb credit losses inherent in
our loan and lease portfolio: the ALLL and the AULC. Combined, these reserves comprise the total ACL. Our
credit administration group is responsible for developing the methodology assumptions and estimates used in
the calculation, as well as determining the adequacy of the ACL. The ALLL represents the estimate of
probable losses inherent in the loan portfolio at the reported date. Additions to the ALLL result from recording
provision expense for loan losses or increased risk levels resulting from loan risk-rating downgrades, while
reductions reflect charge-offs, recoveries, decreased risk levels resulting from loan risk-rating upgrades, or the
sale of loans. The AULC is determined by applying the transaction reserve process to the unfunded portion of
the loan exposures adjusted by an applicable funding expectation.
A provision for credit losses is recorded to adjust the ACL to the level we have determined to be
adequate to absorb credit losses inherent in our loan and lease portfolio. The provision for credit losses in
2010 was $634.5 million, compared with $2,074.7 million in 2009, primarily reflecting significantly lower
NCOs in 2010 compared with 2009, and improved credit quality metrics. While credit quality metrics have
significantly improved during 2010, provision expense since 2007 has been higher than historical levels,
reflecting the pronounced downturn in the U.S. economy, as well as significant deterioration in the residential
real estate market that began in early 2007. Declining real estate valuations and higher levels of delinquencies
and NCOs have negatively affected the quality of our loans secured by real estate. Portions of the residential
portfolio, as well as the single family home builder and developer loans in the commercial portfolio,
experienced the majority of the credit issues related to the residential real estate market.
We regularly assess the adequacy of the ACL by performing 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. We evaluate 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 adequacy of our ACL at each reporting date.
In addition to general economic conditions and the other factors described above, we also consider the impact
of declining residential real estate values and the diversification of CRE loans, particularly loans secured by
retail properties.
Our ACL assessment process includes the on-going assessment of credit quality metrics, and a compar-
ison of certain ACL adequacy benchmarks to current performance. While the total ACL balance declined in
2010 compared with 2009, all of the relevant benchmarks improved as a result of the asset quality
improvement. The coverage ratios of NALs, Criticized and Classified loans all showed significant improve-
ment in 2010 despite the decline in the ACL level.
Table 25 reflects activity in the ALLL and ACL for each of the last five years. Table 26 displays the
Franklin-related impacts to the ALLL and ACL for each of the last five years. There were not any Franklin-
related impacts to either the ALLL or ACL at December 31, 2010 or 2006.
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