Huntington National Bank 2013 Annual Report Download - page 62

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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.
Our overall NCOs are returning to pre-recession levels, however, we anticipate NCO levels for both the residential mortgage and
home equity portfolios will remain at elevated levels in the near future. The home equity portfolio will continue to be impacted by
borrowers that are seeking to refinance, but are in a negative equity position because of the junior-lien loan. Right-sizing and debt
forgiveness associated with these situations are becoming more frequent as borrowers realize the impact to their credit is minor, and
that a default on a junior-lien loan is not likely to cause borrowers to lose their home.
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.
2013 versus 2012
C&I NCOs decreased $47.9 million, or 74%, primarily reflecting credit quality improvement in the underlying portfolio, as well
as our on-going proactive credit management practices. Also, 2013 included significant recoveries from prior year charge-offs.
CRE NCOs decreased $53.6 million, or 68%, reflecting both a reduction in loss events and significant recoveries during 2013.
This performance is consistent with our expectations for the portfolio, as some degree of quarterly volatility is expected given the low
absolute levels of NCOs in the portfolio. There was no concentration in either geography or project type.
Automobile NCOs increased $1.1 million, or 12%. The relatively low levels of NCOs reflected the continued high credit quality
of originations and a strong resale market for used vehicles. The slight increasing trend was expected given the absolute low levels
achieved in 2012.
Home equity NCOs decreased $34.1 million, or 29%, primarily reflecting improved delinquency rates and fewer significant dollar
size losses compared to the prior year. The impact from the Chapter 7 bankruptcy treatment decision inflated the 2012 results, with an
additional lesser impact in 2013. Absent the Chapter 7 bankruptcy impact, the improvement would have been 15% year over year.
Residential mortgage NCOs declined $20.8 million, or 43%, and reflected improvement in the overall housing market compared
to the prior year.
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.