Huntington National Bank 2011 Annual Report Download - page 151

The ALLL consists of two components: (1) the transaction reserve, which includes 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 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 continuously 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, however, 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 borrowers past and current payment performance, and this information is used to
estimate expected losses over the subsequent 12-month period. The performance of first-lien loans ahead of our
second-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 needed.
The general reserve consists of economic reserve and risk-profile reserve components. The economic
reserve component considers the potential 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 reflected in accrued expenses and other
liabilities in the Consolidated Balance Sheets.
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