Huntington National Bank 2015 Annual Report Download - page 119

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Allowance for Credit Losses — Huntington maintains two reserves, both of which reflect management’s judgment regarding
the appropriate level necessary to absorb credit losses inherent in our loan and lease portfolio: the ALLL and the AULC. Combined,
these reserves comprise the total ACL. The determination of the ACL requires significant estimates, including the timing and amounts
of expected future cash flows on impaired loans and leases, consideration of current economic conditions, and historical loss
experience pertaining to pools of homogeneous loans and leases, all of which may be susceptible to change.
The appropriateness of the ACL is based on management’s current judgments about the credit quality of the loan portfolio.
These judgments consider 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. Further, management evaluates 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 appropriateness of our ACL at each reporting date. In addition to general
economic conditions and the other factors described above, additional factors also considered include: the impact of increasing or
decreasing residential real estate values; the diversification of CRE loans; the development of new or expanded Commercial business
segments such as healthcare, ABL, leveraged lending, and energy, and the overall condition of the manufacturing industry. Also, the
ACL assessment includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks to current
performance.
The ALLL consists of two components: (1) the transaction reserve, which includes a loan level allocation, 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 where obligor
balance is greater than $1.0 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 regularly 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.
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. 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 borrower’s past and current payment performance,
and this information is used to estimate expected losses over the emergence period. The performance of first-lien loans ahead of our
junior-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 required.
The general reserve consists of various risk-profile reserve components. 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 recorded in Accrued expenses and other liabilities in the Consolidated Balance Sheets.
Nonaccrual and Past Due Loans — Loans are considered past due when the contractual amounts due with respect to principal
and interest are not received within 30 days of the contractual due date.
Any loan in any portfolio may be placed on nonaccrual status prior to the policies described below when collection of principal
or interest is in doubt. When a borrower with debt is discharged in a Chapter 7 bankruptcy and not reaffirmed by the borrower, the
loan is determined to be collateral dependent and placed on nonaccrual status, unless there is a co-borrower.
All classes within the C&I and CRE portfolios (except for purchased credit-impaired loans) are placed on nonaccrual status at
90-days past due. First-lien home equity loans are placed on nonaccrual status at 150-days past due. Junior-lien home equity loans are
placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified as nonaccrual.
Automobile and other consumer loans are generally charged-off when the loan is 120-days past due. Residential mortgage loans are
placed on nonaccrual status at 150-days past due, with the exception of residential mortgages guaranteed by government agencies