Quarterly report pursuant to Section 13 or 15(d)

Loans and Leases and Allowance for Credit Losses

v2.4.0.6
Loans and Leases and Allowance for Credit Losses
3 Months Ended
Sep. 30, 2012
Loans / Leases and Allowance for Credit Losses [Abstract]  
Loans / Leases AND ALLOWANCE FOR CREDIT LOSSES

3. Loans / Leases AND ALLOWANCE FOR CREDIT LOSSES

 

Loans and leases for which Huntington has the intent and ability to hold for the foreseeable future (at least 12 months), or until maturity or payoff, are classified in the Unaudited Condensed Consolidated Balance Sheets as loans and leases. Except for loans which are accounted for at fair value, loans and leases are carried at the principal amount outstanding, net of unamortized deferred loan origination fees and costs and net of unearned income. At September 30, 2012, and December 31, 2011, the aggregate amount of these net unamortized deferred loan origination fees and costs and net unearned income was $288.7 million and $122.5 million, respectively.

 

Loan and Lease Portfolio Composition

 

The following table provides a detailed listing of Huntington's loan and lease portfolio at September 30, 2012, and December 31, 2011:

 

          September 30,     December 31,
(dollar amounts in thousands)   2012     2011
                 
Loans and leases:          
    Commercial and industrial $ 16,478,008   $ 14,699,371
    Commercial real estate   5,497,157     5,825,709
    Automobile   4,275,754     4,457,446
    Home equity   8,380,542     8,215,413
    Residential mortgage   5,192,241     5,228,276
    Other consumer   436,715     497,568
  Loans and leases   40,260,417     38,923,783
  Allowance for loan and lease losses   (789,142)     (964,828)
Net loans and leases $ 39,471,275   $ 37,958,955

 

As shown in the table above, the primary loan and lease portfolios are: C&I, CRE, automobile, home equity, residential mortgage, and other consumer. For ACL purposes, these portfolios are further disaggregated into classes. The classes within each portfolio are as follows:

 

Portfolio Class
   
Commercial and industrial Owner occupied
  Purchased impaired
  Other commercial and industrial
   
Commercial real estate Retail properties
  Multi family
  Office
  Industrial and warehouse
  Purchased impaired
  Other commercial real estate
   
Automobile NA (1)
   
Home equity Secured by first-lien
  Secured by junior-lien
   
Residential mortgage Residential mortgage
  Purchased impaired
   
Other consumer Other consumer
  Purchased impaired
   
(1) Not applicable. The automobile loan portfolio is not further segregated into classes.

Fidelity Bank acquisition

(See Note 19 for additional information regarding the Fidelity Bank acquisition).

 

On March 30, 2012, Huntington acquired the loans of Fidelity Bank located in Dearborn, Michigan from the FDIC. Under the agreement, approximately $520.6 million of loans were transferred to Huntington.  These loans were recorded at fair value in accordance with ASC 805, “Business Combinations”. The fair values for the loans were estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms (Level 3), and reflected an estimate of probable losses and the credit risk associated with the loans.

 

Loans Acquired With Deteriorated Credit Quality

 

ASC 310-30, “Loans and Debt Securities Acquired With Deteriorated Credit Quality”, provides guidance for accounting for acquired loans that have experienced a deterioration of credit quality at the time of acquisition for which it is probable that the investor will be unable to collect all contractually required payments. The excess of cash flows expected at acquisition over the initial investment in the loan is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan, or pool of loans, in situations where there is a reasonable expectation about the timing and amount of cash flows expected to be collected. The difference between the contractually required payments at acquisition and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference. Subsequent decreases to the expected cash flows will generally result in an increase to the allowance for loan and lease losses. Subsequent increases in cash flows result in reversal of any nonaccretable difference (or allowance for loan and lease losses to the extent any has been recorded) with a positive impact on interest income. The measurement of undiscounted cash flows involves assumptions and judgments for credit risk, interest rate risk, prepayment risk, default rates, loss severity, payment speeds, and collateral values. All of these factors are inherently subjective and significant changes in the cash flow estimates over the life of the loan can result.

 

The fair values for loans were estimated using discounted cash flow analyses, including prepayment assumptions and using interest rates currently being offered for loans with similar terms (Level 3). This value was reduced by an estimate of probable losses and the credit risk associated with the loans.

 

The following table presents a rollforward of the accretable yield for three-month and nine-month periods ended September 30, 2012:

 

               
  Three Months Ended   Nine Months Ended
(dollar amounts in thousands) September 30, 2012   September 30, 2012
Balance, beginning of period $ 24,761     $ ---  
Impact of acquisition/purchase on March 30, 2012   ---       27,586  
Accretion   (2,982)       (5,807)  
Balance, end of period $ 21,779     $ 21,779  

At September 30, 2012, there was no allowance for loan losses recorded on the purchased impaired loan portfolio and no adjustment to either the accretable or nonaccretable yield was required. The following table reflects the outstanding balance of all contractually required payments and carrying amounts of the acquired loans at September 30, 2012:

     
  September 30, 2012
(in thousands)   Ending Balance     Unpaid Balance
Commercial and industrial $ 62,253   $ 90,527
Commercial real estate   133,406     224,607
Residential mortgage   2,231     4,160
Other consumer   619     922
Total $ 198,509   $ 320,216

Loan and Lease Purchases and Sales

 

The following table summarizes significant portfolio loan and lease purchase and sale activity for the three-month and nine-month periods ended September 30, 2012 and 2011:

 

                                 
      Commercial Commercial   Home Residential Other  
  and Industrial Real Estate Automobile Equity Mortgage Consumer Total
  (dollar amounts in thousands)                            
                                 
  Portfolio loans and leases purchased during the:                            
    Three-month period ended September 30, 2012 $ 58,638 $ --- $ --- $ --- $ --- $ --- $ 58,638
    Nine-month period ended September 30, 2012 $ 536,139 $ 378,122 $ --- $ 13,025 $ 62,324 $ 85 $ 989,695
                                 
    Three-month period ended September 30, 2011 $ --- $ --- $ 59,578(1) $ --- $ --- $ --- $ 59,578
    Nine-month period ended September 30, 2011 $ --- $ --- $ 59,578(1) $ --- $ --- $ --- $ 59,578
                                 
  Portfolio loans and leases sold or transferred to loans held for sale during the:                            
    Three-month period ended September 30, 2012 $ 65,768 $ 4,812 $ --- $ --- $ --- $ --- $ 70,580
    Nine-month period ended September 30, 2012 $ 190,933 $ 52,554 $ 2,783,748 $ --- $ 179,621   --- $ 3,206,856
                                 
    Three-month period ended September 30, 2011 $ 48,530 $ --- $ 1,000,033 $ --- $ --- $ --- $ 1,048,563
    Nine-month period ended September 30, 2011 $ 204,012 $ 56,123 $ 1,000,033 $ --- $ 170,757 $ --- $ 1,430,925
                                 
  (1) Reflected the purchase of $59.6 million of automobile loans as a result of exercising a clean-up call option related to loans previously sold under Huntington's automobile loan sale program.

NALs 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.

 

All classes within the C&I and CRE portfolios are placed on nonaccrual status at 90-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 organizations which continue to accrue interest. 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 not placed on nonaccrual status, but are generally charged-off when the loan is 120-days past due. However, when a borrower with discharged non-reaffirmed debt in a Chapter 7 bankruptcy is identified and the loan is determined to be collateral dependent, the consumer loan is placed on nonaccrual status.

 

For all classes within all loan portfolios, when a loan is placed on nonaccrual status, any accrued interest income is reversed with current year accruals charged to interest income, and prior year amounts charged-off as a credit loss.

 

For all classes within all loan portfolios, cash receipts received on NALs are applied entirely against principal until the loan or lease has been collected in full, after which time any additional cash receipts are recognized as interest income.

 

Regarding all classes within the C&I and CRE portfolios, the determination of a borrower's ability to make the required principal and interest payments is based on an examination of the borrower's current financial statements, industry, management capabilities, and other qualitative measures. For all classes within the consumer loan portfolio, the determination of a borrower's ability to make the required principal and interest payments is based on multiple factors, including number of days past due and, in some instances, an evaluation of the borrower's financial condition. When, in Management's judgment, the borrower's ability to make required principal and interest payments resumes and collectability is no longer in doubt, the loan or lease is returned to accrual status. For these loans that have been returned to accrual status, cash receipts are applied according to the contractual terms of the loan.

 

The following table presents NALs by loan class at September 30, 2012, and December 31, 2011 (1):

 

    2012   2011
(dollar amounts in thousands) September 30,   December 31,
             
Commercial and industrial:          
  Owner occupied $ 60,939   $ 88,415
  Purchased impaired   ---     ---
  Other commercial and industrial   48,513     113,431
Total commercial and industrial $ 109,452   $ 201,846
             
Commercial real estate:          
  Retail properties $ 43,564   $ 58,415
  Multi family   24,045     39,921
  Office   23,279     33,202
  Industrial and warehouse   10,286     30,119
  Purchased impaired   ---     ---
  Other commercial real estate   47,812     68,232
Total commercial real estate $ 148,986   $ 229,889
             
Automobile $ 11,814   $ ---
             
Home equity:          
  Secured by first-lien $ 24,424   $ 20,012
  Secured by junior-lien   27,230     20,675
Total home equity $ 51,654   $ 40,687
             
Residential mortgage:          
  Residential mortgage $ 123,140   $ 68,658
  Purchased impaired   ---     ---
Total residential mortgages $ 123,140   $ 68,658
             
Other consumer          
  Other consumer $ ---   $ ---
  Purchased impaired   ---     ---
Total other consumer $ ---   $ ---
Total nonaccrual loans $ 445,046   $ 541,080
             
(1) September 30, 2012, figures include $63.0 million related to Chapter 7 bankruptcy loans.

The following table presents an aging analysis of loans and leases, including past due loans, by loan class at September 30, 2012, and December 31, 2011: (1)

 

September 30, 2012
                              90 or more
(dollar amounts in thousands) Past Due       Total Loans   days past due
  30-59 Days 60-89 Days 90 or more days Total   Current and Leases   and accruing
                                   
Commercial and industrial:                                
  Owner occupied $ 10,816 $ 5,476 $ 41,253 $ 57,545   $ 4,210,843 $ 4,268,388   $ ---
  Purchased impaired   2,069   4,899   26,117   33,085     29,168   62,253     26,117
  Other commercial and industrial   15,764   4,749   22,131   42,644     12,104,723   12,147,367     ---
Total commercial and industrial $ 28,649 $ 15,124 $ 89,501 $ 133,274   $ 16,344,734 $ 16,478,008   $ 26,117(2)
                                   
Commercial real estate:                                
  Retail properties $ 5,769 $ 3,491 $ 22,999 $ 32,259   $ 1,511,252 $ 1,543,511   $ ---
  Multi family   2,682   925   17,114   20,721     952,947   973,668     ---
  Office   12,265   3,275   17,733   33,273     928,377   961,650     ---
  Industrial and warehouse   1,557   858   4,568   6,983     621,379   628,362     ---
  Purchased impaired   4,741   9,741   45,131   59,613     73,793   133,406     45,131
  Other commercial real estate   948   8,609   27,860   37,417     1,219,143   1,256,560     ---
Total commercial real estate $ 27,962 $ 26,899 $ 135,405 $ 190,266   $ 5,306,891 $ 5,497,157   $ 45,131(2)
                                   
Automobile $ 31,731   6,730 $ 3,857 $ 42,318   $ 4,233,436 $ 4,275,754   $ 3,857
                                   
Home equity:                                
  Secured by first-lien $ 19,696 $ 9,488 $ 32,911 $ 62,095   $ 4,151,610 $ 4,213,705   $ 9,424
  Secured by junior-lien   30,085   13,065   27,248   70,398     4,096,439   4,166,837     11,919
Total home equity $ 49,781 $ 22,553 $ 60,159 $ 132,493   $ 8,248,049 $ 8,380,542   $ 21,343
                                   
Residential mortgage:                                
  Residential mortgage $ 145,713 $ 46,646 $ 168,782 $ 361,141   $ 4,828,869 $ 5,190,010   $ 97,752(3)
  Purchased impaired   198   37   398   633     1,598   2,231     398
Total residential mortgage $ 145,911 $ 46,683 $ 169,180 $ 361,774   $ 4,830,467 $ 5,192,241   $ 98,150
                                   
Other consumer:                                
  Other consumer $ 7,050 $ 1,356 $ 695 $ 9,101   $ 426,995 $ 436,096   $ 695
  Purchased impaired   40   -   389   429     190   619     389
Total other consumer $ 7,090 $ 1,356 $ 1,084 $ 9,530   $ 427,185 $ 436,715   $ 1,084
                                   
Total loans and leases $ 291,122 $ 119,345 $ 459,185 $ 869,652   $ 39,390,766 $ 40,260,417   $ 195,682
                                   
December 31, 2011
                              90 or more
(dollar amounts in thousands) Past Due       Total Loans   days past due
  30-59 Days 60-89 Days 90 or more days Total   Current and Leases   and accruing
                                   
Commercial and industrial:                                
  Owner occupied $ 10,607 $ 7,433 $ 58,513 $ 76,553   $ 3,936,203 $ 4,012,756   $ ---
  Other commercial and industrial   32,962   7,579   60,833   101,374     10,585,241   10,686,615     ---
Total commercial and industrial $ 43,569 $ 15,012 $ 119,346 $ 177,927   $ 14,521,444 $ 14,699,371   $ ---
                                   
Commercial real estate:                                
  Retail properties $ 3,090 $ 823 $ 33,952 $ 37,865   $ 1,547,618 $ 1,585,483   $ ---
  Multi family   5,022   1,768   28,317   35,107     908,438   943,545     ---
  Office   3,134   792   30,041   33,967     990,897   1,024,864     ---
  Industrial and warehouse   2,834   115   18,203   21,152     708,390   729,542     ---
  Other commercial real estate   6,894   3,625   48,739   59,258     1,483,017   1,542,275     ---
Total commercial real estate $ 20,974 $ 7,123 $ 159,252 $ 187,349   $ 5,638,360 $ 5,825,709   $ ---
                                   
Automobile $ 42,162 $ 9,046 $ 6,265 $ 57,473   $ 4,399,973 $ 4,457,446   $ 6,265
Home equity:                                
  Secured by first-lien   17,260   8,822   29,259   55,341     3,760,238   3,815,579     9,247
  Secured by junior-lien   32,334   18,357   31,626   82,317     4,317,517   4,399,834     10,951
Residential mortgage   134,228   45,774   204,648   384,650     4,843,626   5,228,276     141,901(4)
Other consumer   7,655   1,502   1,988   11,145     486,423   497,568     1,988
                                   
Total loans and leases $ 298,182 $ 105,636 $ 552,384 $ 956,202   $ 37,967,581 $ 38,923,783   $ 170,352
                                   
                                   
(1) NALs are included in this aging analysis based on the loan's past due status.
(2) All amounts represent accruing purchased impaired loans related to the FDIC-assisted Fidelity Bank acquisition. Under the applicable accounting guidance (ASC 310-30), the loans were recorded at fair value upon acquisition and remain in accruing status.
(3) Includes $87,463 thousand guaranteed by the U.S. government.
(4) Includes $96,703 thousand guaranteed by the U.S. government.

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 declining residential real estate values; the diversification of CRE loans; the development of new or expanded Commercial business segments such as Healthcare, Asset Based 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. Management's determinations regarding the appropriateness of the ACL are reviewed and approved by the Company's board of directors.

 

The ALLL consists of two components: (1) the transaction reserve, which includes a loan level allocation per ASC 310-10, specific reserves related to loans considered to be impaired, and loans involved in troubled debt restructurings allocated per ASC 310-40, 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 $1.0 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 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. 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 12-month 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. Models utilized in the ALLL estimation process are subject to the Company's model validation policies.

 

The general reserve consists of the 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 Unaudited Condensed Consolidated Balance Sheet.

 

The ACL is increased through a provision for credit losses that is charged to earnings, based on Management's quarterly evaluation of the factors previously mentioned, and is reduced by charge-offs, net of recoveries, and the ACL associated with securitized or sold loans. Management did not substantially change any material aspect of the overall approach in the determination of either the ALLL or AULC, and there were no material changes in assumptions or estimation techniques compared with prior periods that impacted the determination of the current period's ALLL and AULC. The impact of the Chapter 7 bankruptcy loans was primarily associated with NALs and NCOs, with minimal impact to the ALLL.

 

The following table presents ALLL and AULC activity by portfolio segment for the three-month and nine-month periods ended September 30, 2012 and 2011: (1)

 

      Commercial Commercial   Home Residential Other    
  and Industrial Real Estate Automobile Equity Mortgage Consumer Total
(dollar amounts in thousands)                            
                                 
Three-month period ended September 30, 2012:                            
                                 
  ALLL balance, beginning of period $ 280,548 $ 305,391 $ 30,217 $ 135,562 $ 78,015 $ 29,913 $ 859,646
    Loan charge-offs   (22,522)   (26,513)   (7,925)   (48,710)   (17,644)   (8,872)   (132,186)
    Recoveries of loans previously charged-off   9,499   9,139   3,906   2,114   764   1,669   27,091
    Provision for loan and lease losses   (10,444)   (7,641)   7,187   33,639   5,809   5,869   34,419
    Allowance for loans sold or transferred to loans held for sale   ---   ---   (104)   ---   276   ---   172
  ALLL balance, end of period $ 257,081 $ 280,376 $ 33,281 $ 122,605 $ 67,220 $ 28,579 $ 789,142
                                 
  AULC balance, beginning of period $ 42,844 $ 5,225 $ --- $ 2,190 $ 4 $ 715 $ 50,978
    Provision for unfunded loan commitments and letters of credit   3,263   (125)   ---   (513)   (1)   (39)   2,585
  AULC balance, end of period $ 46,107 $ 5,100 $ --- $ 1,677 $ 3 $ 676 $ 53,563
                                 
  ACL balance, end of period $ 303,188 $ 285,476 $ 33,281 $ 124,282 $ 67,223 $ 29,255 $ 842,705
                                 
Nine-month period ended September 30, 2012:                            
                                 
  ALLL balance, beginning of period $ 275,367 $ 388,706 $ 38,282 $ 143,873 $ 87,194 $ 31,406 $ 964,828
    Loan charge-offs   (79,746)   (83,662)   (20,534)   (97,058)   (41,292)   (25,946)   (348,238)
    Recoveries of loans previously charged-off   22,550   26,604   12,988   5,688   3,056   5,020   75,906
    Provision for loan and lease losses   38,910   (51,272)   7,784   70,102   19,200   18,099   102,823
    Allowance for loans sold or transferred to loans held for sale   ---   ---   (5,239)   ---   (938)   ---   (6,177)
  ALLL balance, end of period $ 257,081 $ 280,376 $ 33,281 $ 122,605 $ 67,220 $ 28,579 $ 789,142
                                 
  AULC balance, beginning of period $ 39,658 $ 5,852 $ --- $ 2,134 $ 1 $ 811 $ 48,456
    Provision for unfunded loan commitments and letters of credit   6,449   (752)   ---   (457)   2   (135)   5,107
  AULC balance, end of period $ 46,107 $ 5,100 $ --- $ 1,677 $ 3 $ 676 $ 53,563
                                 
  ACL balance, end of period $ 303,188 $ 285,476 $ 33,281 $ 124,282 $ 67,223 $ 29,255 $ 842,705

      Commercial Commercial   Home Residential Other    
  and Industrial Real Estate Automobile Equity Mortgage Consumer Total
(dollar amounts in thousands)                            
                                 
Three-month period ended September 30, 2011:                            
                                 
  ALLL balance, beginning of period $ 281,016 $ 463,874 $ 55,428 $ 146,444 $ 98,992 $ 25,372 $ 1,071,126
    Loan charge-offs   (28,624)   (29,621)   (8,087)   (27,916)   (13,422)   (8,229)   (115,899)
    Recoveries of loans previously charged-off   10,733   5,181   4,224   1,694   1,860   1,652   25,344
    Provision for loan and lease losses   22,129   (20,539)   4,565   19,394   11,544   8,774   45,867
    Allowance for loans sold or transferred to loans held for sale   ---   ---   (6,728)   ---   ---   ---   (6,728)
  ALLL balance, end of period $ 285,254 $ 418,895 $ 49,402 $ 139,616 $ 98,974 $ 27,569 $ 1,019,710
                                 
  AULC balance, beginning of period $ 31,341 $ 6,632 $ --- $ 2,249 $ 1 $ 837 $ 41,060
    Provision for unfunded loan commitments and letters of credit   (882)   (1,316)   ---   (67)   ---   (16)   (2,281)
  AULC balance, end of period $ 30,459 $ 5,316 $ --- $ 2,182 $ 1 $ 821 $ 38,779
                                 
  ACL balance, end of period $ 315,713 $ 424,211 $ 49,402 $ 141,798 $ 98,975 $ 28,390 $ 1,058,489
                                 
Nine-month period ended September 30, 2011:                            
                                 
  ALLL balance, beginning of period $ 340,614 $ 588,251 $ 49,488 $ 150,630 $ 93,289 $ 26,736 $ 1,249,008
    Loan charge-offs   (110,590)   (146,991)   (24,939)   (83,598)   (53,773)   (23,716)   (443,607)
    Recoveries of loans previously charged-off   31,804   27,273   14,109   5,220   6,824   5,205   90,435
    Provision for loan and lease losses   23,426   (49,638)   17,472   67,364   54,148   19,344   132,116
    Allowance for loans sold or transferred to loans held for sale   ---   ---   (6,728)   ---   (1,514)   ---   (8,242)
  ALLL balance, end of period $ 285,254 $ 418,895 $ 49,402 $ 139,616 $ 98,974 $ 27,569 $ 1,019,710
                                 
  AULC balance, beginning of period $ 32,726 $ 6,158 $ --- $ 2,348 $ 1 $ 894 $ 42,127
    Provision for unfunded loan commitments and letters of credit   (2,267)   (842)   ---   (166)   ---   (73)   (3,348)
  AULC balance, end of period $ 30,459 $ 5,316 $ --- $ 2,182 $ 1 $ 821 $ 38,779
                                 
  ACL balance, end of period $ 315,713 $ 424,211 $ 49,402 $ 141,798 $ 98,975 $ 28,390 $ 1,058,489

Any loan in any portfolio may be charged-off prior to the policies described below if a loss confirming event has occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of repayment. Additionally, discharged, collateral dependent non-reaffirmed debt in Chapter 7 bankruptcy filings will result in a charge-off to estimated collateral value, less anticipated selling costs.

 

C&I and CRE loans are either charged-off or written down to net realizable value at 90-days past due. Automobile loans and other consumer loans are charged-off at 120-days past due. First-lien and junior-lien home equity loans are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due and 120-days past due, respectively. Residential mortgages are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due.

 

Credit Quality Indicators

 

To facilitate the monitoring of credit quality for C&I and CRE loans, and for purposes of determining an appropriate ACL level for these loans, Huntington utilizes the following categories of credit grades:

 

Pass = Higher quality loans that do not fit any of the other categories described below.

 

OLEM = The credit risk may be relatively minor yet represent a risk given certain specific circumstances. If the potential weaknesses are not monitored or mitigated, the loan may weaken or the collateral may be inadequate to protect Huntington's position in the future. For these reasons, Huntington considers the loans to be potential problem loans.

 

Substandard = Inadequately protected loans by the borrower's ability to repay, equity, and/or the collateral pledged to secure the loan. These loans have identified weaknesses that could hinder normal repayment or collection of the debt. It is likely Huntington will sustain some loss if any identified weaknesses are not mitigated.

 

Doubtful = Loans that have all of the weaknesses inherent in those loans classified as Substandard, with the added elements of the full collection of the loan is improbable and that the possibility of loss is high.

 

The categories above, which are derived from standard regulatory rating definitions, are assigned upon initial approval of the loan or lease and subsequently updated as appropriate.

 

Commercial loans categorized as OLEM, Substandard, or Doubtful are considered Criticized loans. Commercial loans categorized as Substandard or Doubtful are also considered Classified loans.

 

For all classes within all consumer loan portfolios, each loan is assigned a specific PD factor that is partially based on the borrower's most recent credit bureau score (FICO), which we update quarterly. A FICO credit bureau score is a credit score developed by Fair Isaac Corporation based on data provided by the credit bureaus. The FICO credit bureau score is widely accepted as the standard measure of consumer credit risk used by lenders, regulators, rating agencies, and consumers. The higher the FICO credit bureau score, the higher likelihood of repayment and therefore, an indicator of higher credit quality.

 

Huntington assesses the risk in the loan portfolio by utilizing numerous risk characteristics.  The classifications described above, and also presented in the table below, represent one of those characteristics that are closely monitored in the overall credit risk management processes.  The table below shows increases in FICO scores <650 for both the automobile and first-lien home equity portfolios.  These increases do not reflect a deterioration in asset quality for the portfolios, as other risk characteristics mitigate any increased level of risk associated with the FICO score distribution.

The following table presents each loan and lease class by credit quality indicator at September 30, 2012, and December 31, 2011:

 

    September 30, 2012  
  Credit Risk Profile by UCS classification  
(dollar amounts in thousands) Pass OLEM Substandard Doubtful Total  
Commercial and industrial:                      
  Owner occupied $ 3,945,489 $ 104,330 $ 217,574 $ 995 $ 4,268,388  
  Purchased impaired   1,283   6,956   54,014   -   62,253  
  Other commercial and industrial   11,543,754   196,823   405,027   1,763   12,147,367  
Total commercial and industrial $ 15,490,526 $ 308,109 $ 676,615 $ 2,758 $ 16,478,008  
                         
Commercial real estate:                      
  Retail properties $ 1,306,360 $ 30,514 $ 206,637 $ --- $ 1,543,511  
  Multi family   867,939   41,777   63,814   138   973,668  
  Office   838,877   33,442   89,331   -   961,650  
  Industrial and warehouse   569,313   11,705   47,344   ---   628,362  
  Purchased impaired   4,830   29,993   98,510   73   133,406  
  Other commercial real estate   1,072,876   43,709   139,877   98   1,256,560  
Total commercial real estate $ 4,660,195 $ 191,140 $ 645,513 $ 309 $ 5,497,157  
                         
    Credit Risk Profile by FICO score (1)  
    750+ 650-749 <650 Other (2) Total  
Automobile $ 2,553,258 $ 2,182,389 $ 735,651 $ 104,456 $ 5,575,754 (3)
                         
Home equity:                      
  Secured by first-lien $ 2,441,087 $ 1,404,312 $ 348,109 $ 20,197 $ 4,213,705  
  Secured by junior-lien   1,943,216   1,530,622   569,785   123,214   4,166,837  
Total home equity $ 4,384,303 $ 2,934,934 $ 917,894 $ 143,411 $ 8,380,542  
                         
Residential mortgage:                      
  Residential mortgage $ 2,577,715 $ 1,795,920 $ 696,414 $ 119,961 $ 5,190,010  
  Purchased impaired   349   1,347   468   67   2,231  
Total residential mortgage $ 2,578,064 $ 1,797,267 $ 696,882 $ 120,028 $ 5,192,241  
                         
Other consumer:                      
  Other consumer $ 163,538 $ 180,968 $ 65,480 $ 26,110 $ 436,096  
  Purchased impaired   -   231   289   99   619  
Total other consumer $ 163,538 $ 181,199 $ 65,769 $ 26,209 $ 436,715  
                         
                         
    December 31, 2011  
  Credit Risk Profile by UCS classification  
(dollar amounts in thousands) Pass OLEM Substandard Doubtful Total  
Commercial and industrial:                      
  Owner occupied $ 3,624,103 $ 101,897 $ 285,561 $ 1,195 $ 4,012,756  
  Other commercial and industrial   10,108,946   145,963   425,882   5,824   10,686,615  
Total commercial and industrial $ 13,733,049 $ 247,860 $ 711,443 $ 7,019 $ 14,699,371  
                         
Commercial real estate:                      
  Retail properties $ 1,191,471 $ 122,337 $ 271,675 $ --- $ 1,585,483  
  Multi family   801,717   48,094   93,449   285   943,545  
  Office   896,230   67,050   61,476   108   1,024,864  
  Industrial and warehouse   649,165   9,688   70,621   68   729,542  
  Other commercial real estate   1,112,751   110,276   318,479   769   1,542,275  
Total commercial real estate $ 4,651,334 $ 357,445 $ 815,700 $ 1,230 $ 5,825,709  
                         
    Credit Risk Profile by FICO score (1)  
    750+ 650-749 <650 Other (2) Total  
Automobile $ 2,635,082 $ 2,276,990 $ 707,141 $ 88,233 $ 5,707,446 (4)
Home equity:                      
  Secured by first-lien   2,196,566   1,287,444   329,670   1,899   3,815,579  
  Secured by junior-lien   2,119,292   1,646,117   625,298   9,127   4,399,834  
Residential mortgage   2,454,401   1,752,409   723,377   298,089   5,228,276  
Other consumer   185,333   206,749   83,431   22,055   497,568  
                         
                         
(1) Reflects currently updated customer credit scores.  
(2) Reflects deferred fees and costs, loans in process, loans to legal entities, etc.  
(3) Includes $1,300,000 thousand of loans reflected as loans held for sale.  
(4) Includes $1,250,000 thousand of loans reflected as loans held for sale.  

Impaired Loans

 

For all classes within the C&I and CRE portfolios, all loans with an outstanding balance of $1.0 million or greater are evaluated on a quarterly basis for impairment. Generally, consumer loans within any class are not individually evaluated on a regular basis for impairment. All TDRs, regardless of the outstanding balance amount, are also considered to be impaired. Also, loans acquired with evidence of deterioration of credit quality since origination for which it is probable, at acquisition, that all contractually required payments will not be collected are also considered to be impaired.

 

Once a loan has been identified for an assessment of impairment, the loan is considered impaired when, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. This determination requires significant judgment and use of estimates, and the eventual outcome may differ significantly from those estimates.

 

When a loan in any class has been determined to be impaired, the amount of the impairment is measured using the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, the observable market price of the loan, or the fair value of the collateral, less anticipated selling costs, if the loan is collateral dependent. When the present value of expected future cash flows is used, the effective interest rate is the original contractual interest rate of the loan adjusted for any premium or discount. When the contractual interest rate is variable, the effective interest rate of the loan changes over time. A specific reserve is established as a component of the ALLL when a loan has been determined to be impaired. Subsequent to the initial measurement of impairment, if there is a significant change to the impaired loan's expected future cash flows, or if actual cash flows are significantly different from the cash flows previously estimated, Huntington recalculates the impairment and appropriately adjusts the specific reserve. Similarly, if Huntington measures impairment based on the observable market price of an impaired loan or the fair value of the collateral of an impaired collateral dependent loan, Huntington will adjust the specific reserve.

 

When a loan within any class is impaired, the accrual of interest income is discontinued unless the receipt of principal and interest is no longer in doubt. Interest income on TDRs is accrued when all principal and interest is expected to be collected under the post-modification terms. Cash receipts received on nonaccruing impaired loans within any class are generally applied entirely against principal until the loan has been collected in full, after which time any additional cash receipts are recognized as interest income. Cash receipts received on accruing impaired loans within any class are applied in the same manner as accruing loans that are not considered impaired.

 

The following tables present the balance of the ALLL attributable to loans by portfolio segment individually and collectively evaluated for impairment and the related loan and lease balance at September 30, 2012, and December 31, 2011:

                                 
      Commercial Commercial     Residential Other  
  and Industrial Real Estate Automobile Home Equity Mortgage Consumer Total
                                 
ALLL at September 30, 2012:                            
(dollar amounts in thousands)                            
                                 
  Portion of ending balance:                            
                                 
    Attributable to loans purchased with deteriorated credit quality $ --- $ --- $ --- $ --- $ --- $ --- $ ---
    Attributable to loans individually evaluated for impairment   22,023   36,689   1,196   3,635   14,134   245   77,922
    Attributable to loans collectively evaluated for impairment   235,058   243,687   32,085   118,970   53,086   28,334   711,220
  Total ALLL balance $ 257,081 $ 280,376 $ 33,281 $ 122,605 $ 67,220 $ 28,579 $ 789,142
                                 
                                 
Loans and Leases at September 30, 2012:                            
(dollar amounts in thousands)                            
                                 
  Portion of ending balance:                            
                                 
    Attributable to loans purchased with deteriorated credit quality $ 62,253 $ 133,406 $ --- $ --- $ 2,231 $ 619 $ 198,509
    Attributable to loans individually evaluated for impairment   106,554   322,277   45,533   100,519   364,053   2,757   941,693
    Attributable to loans collectively evaluated for impairment   16,309,201   5,041,474   4,230,221   8,280,023   4,825,957   433,339   39,120,215
  Total loans evaluated for impairment $ 16,478,008 $ 5,497,157 $ 4,275,754 $ 8,380,542 $ 5,192,241 $ 436,715 $ 40,260,417
                                 
                                 

                                 
                   
  Commercial and Industrial Commercial Real Estate Automobile Home Equity Residential Mortgage Other Consumer Total
                                 
ALLL at December 31, 2011                            
(dollar amounts in thousands)                            
                                 
  Portion of ending balance:                            
                                 
    Attributable to loans individually evaluated for impairment $ 30,613 $ 55,306 $ 1,393 $ 1,619 $ 16,091 $ 530 $ 105,552
    Attributable to loans collectively evaluated for impairment   244,754   333,400   36,889   142,254   71,103   30,876   859,276
  Total ALLL balance: $ 275,367 $ 388,706 $ 38,282 $ 143,873 $ 87,194 $ 31,406 $ 964,828
                                 
                                 
Loans and Leases at December 31, 2011:                            
(dollar amounts in thousands)                            
                                 
  Portion of ending balance:                            
                                 
    Attributable to loans individually evaluated for impairment $ 153,724 $ 387,402 $ 36,574 $ 52,593 $ 335,768 $ 6,220 $ 972,281
    Attributable to loans collectively evaluated for impairment   14,545,647   5,438,307   4,420,872   8,162,820   4,892,508   491,348   37,951,502
  Total loans evaluated for impairment $ 14,699,371 $ 5,825,709 $ 4,457,446 $ 8,215,413 $ 5,228,276 $ 497,568 $ 38,923,783
                                 
                                 

The following tables present by class the ending, unpaid principal balance, and the related ALLL, along with the average balance and interest income recognized only for loans and leases individually evaluated for impairment: (1), (2)

                    Three Months Ended   Nine Months Ended
  September 30, 2012   September 30, 2012   September 30, 2012
          Unpaid           Interest       Interest
      Ending Principal Related   Average Income   Average Income
(dollar amounts in thousands) Balance Balance (5) Allowance   Balance Recognized   Balance Recognized
                                     
With no related allowance recorded:                                
  Commercial and industrial:                                
    Owner occupied $ 3,652 $ 10,099 $ ---   $ 4,702 $ 1   $ 5,310 $ 61
    Purchased impaired   62,253   90,527   ---     62,740   935     64,627   1,767
    Other commercial and industrial   17,886   37,036   ---     9,274   88     8,556   343
  Total commercial and industrial $ 83,791 $ 137,662 $ ---   $ 76,716 $ 1,024   $ 78,493 $ 2,171
                                     
  Commercial real estate:                                
    Retail properties $ 58,095 $ 63,479 $ ---   $ 53,317 $ 531   $ 52,127 $ 2,007
    Multi family   4,483   5,170   ---     5,413   85     5,879   278
    Office   8,256   10,415   ---     8,695   138     4,631   191
    Industrial and warehouse   16,651   19,609   ---     9,779   106     8,045   312
    Purchased impaired   133,406   224,607   ---     134,279   2,004     138,858   3,954
    Other commercial real estate   14,408   15,374   ---     15,070   140     17,068   412
  Total commercial real estate $ 235,299 $ 338,654 $ ---   $ 226,553 $ 3,004   $ 226,608 $ 7,154
                                     
                                     
  Home equity:                                
    Secured by first-lien $ --- $ --- $ ---   $ --- $ ---   $ --- $ ---
    Secured by junior-lien   ---   ---   ---     ---   ---     ---   ---
  Total home equity $ --- $ --- $ ---   $ --- $ ---   $ --- $ ---
                                     
  Residential mortgage:                                
    Residential mortgage $ --- $ --- $ ---   $ --- $ ---   $ --- $ ---
    Purchased impaired   2,231   4,160   ---     2,293   34     3,947   68
  Total residential mortgage $ 2,231 $ 4,160 $ ---   $ 2,293 $ 34   $ 3,947 $ 68
                                     
  Other consumer                                
    Other consumer $ --- $ --- $ ---   $ --- $ ---   $ --- $ ---
    Purchased impaired   619   922   ---     626   9     782   18
  Total other consumer $ 619 $ 922 $ ---   $ 626 $ 9   $ 782 $ 18
                                     
With an allowance recorded:                                
  Commercial and industrial: (3)                                
    Owner occupied $ 41,476 $ 46,462 $ 5,678   $ 39,339 $ 303   $ 38,927 $ 998
    Purchased impaired   ---   ---   ---     ---   ---     ---   ---
    Other commercial and industrial   43,540   54,747   16,345     56,377   424     77,289   1,906
  Total commercial and industrial $ 85,016 $ 101,209 $ 22,023   $ 95,716 $ 727   $ 116,216 $ 2,904
                                     
  Commercial real estate: (4)                                
    Retail properties $ 96,085 $ 104,001 $ 16,468   $ 109,146 $ 848   $ 117,069 $ 4,032
    Multi family   22,918   27,550   3,546     26,375   280     29,734   1,108
    Office   16,918   22,154   3,118     10,394   52     16,954   210
    Industrial and warehouse   26,402   27,972   3,180     23,854   151     24,205   504
    Purchased impaired   ---   ---   ---     ---   ---     ---   ---
    Other commercial real estate   58,061   75,883   10,377     66,999   455     74,020   2,032
  Total commercial real estate $ 220,384 $ 257,560 $ 36,689   $ 236,768 $ 1,786   $ 261,982 $ 7,886
                                     
  Automobile $ 45,533 $ 47,525 $ 1,196   $ 39,996 $ 782   $ 38,022 $ 2,398
                                     
  Home equity:                                
    Secured by first-lien $ 67,256 $ 76,166 $ 1,736   $ 59,247 $ 730   $ 49,559 $ 1,769
    Secured by junior-lien   33,263   48,123   1,899     24,698   368     20,463   804
  Total home equity $ 100,519 $ 124,289 $ 3,635   $ 83,945 $ 1,098   $ 70,022 $ 2,573
                                     
  Residential mortgage (6):                                
    Residential mortgage $ 364,053 $ 402,182 $ 14,134   $ 345,677 $ 2,722   $ 337,876 $ 8,525
    Purchased impaired   ---   ---   ---     ---   ---     ---   ---
  Total residential mortgage $ 364,053 $ 402,182 $ 14,134   $ 345,677 $ 2,722   $ 337,876 $ 8,525
                                     
  Other consumer:                                
    Other consumer $ 2,757 $ 2,757 $ 245   $ 2,954 $ 19   $ 4,118 $ 78
    Purchased impaired   ---   ---   ---     ---   ---     ---   ---
  Total other consumer $ 2,757 $ 2,757 $ 245   $ 2,954 $ 19   $ 4,118 $ 78

                 
  December 31, 2011
          Unpaid    
      Ending Principal Related
(dollar amounts in thousands) Balance Balance (5) Allowance
                 
With no related allowance recorded:            
  Commercial and industrial:            
    Owner occupied $ --- $ --- $ ---
    Other commercial and industrial   ---   ---   ---
  Total commercial and industrial $ --- $ --- $ ---
                 
  Commercial real estate:            
    Retail properties $ 43,970 $ 45,192 $ ---
    Multi family   6,292   6,435   ---
    Office   1,191   1,261   ---
    Industrial and warehouse   8,163   9,945   ---
    Other commercial real estate   22,396   38,401   ---
  Total commercial real estate $ 82,012 $ 101,234 $ ---
                 
With an allowance recorded:            
  Commercial and industrial:            
    Owner occupied $ 53,613 $ 77,205 $ 7,377
    Other commercial and industrial   100,111   117,469   23,236
  Total commercial and industrial $ 153,724 $ 194,674 $ 30,613
                 
  Commercial real estate:            
    Retail properties $ 129,396 $ 161,596 $ 30,363
    Multi family   38,154   45,138   4,753
    Office   23,568   42,287   2,832
    Industrial and warehouse   29,435   47,373   3,136
    Other commercial real estate   84,837   119,212   14,222
  Total commercial real estate $ 305,390 $ 415,606 $ 55,306
                 
  Automobile $ 36,574 $ 36,574 $ 1,393
  Home equity:            
    Secured by first-lien   35,842   35,842   626
    Secured by junior-lien   16,751   16,751   993
  Residential mortgage   335,768   361,161   16,091
  Other consumer   6,220   6,220   530

                                     
(1) These tables do not include loans fully charged-off.          
(2) All automobile, home equity, residential mortgage, and other consumer impaired loans included in these tables are considered impaired due to their status as a TDR.          
(3) At September 30, 2012, $43,795 thousand of the $85,016 thousand commercial and industrial loans with an allowance recorded were considered impaired due to their status as a TDR.          
(4) At September 30, 2012, $36,922 thousand of the $220,384 thousand commercial real estate loans with an allowance recorded were considered impaired due to their status as a TDR.          
(5) The differences between the ending balance and unpaid principal balance amounts represent partial charge-offs.          
(6) At September 30, 2012, $17,445 thousand of the $364,053 thousand residential mortgages loans with an allowance recorded were guaranteed by the U.S. government.          

TDR Loans

 

TDRs are modified loans where a concession was provided to a borrower experiencing financial difficulties. Loan modifications are considered TDRs when the concessions provided are not available to the borrower through either normal channels or other sources. However, not all loan modifications are TDRs.

 

TDR Concession Types

 

The Company's standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower's specific circumstances at a point in time. Commercial loan modifications, including those classified as TDRs, are reviewed and approved by our SAD. The types of concessions provided to borrowers include:

 

  • Interest rate reduction: A reduction of the stated interest rate to a nonmarket rate for the remaining original life of the debt.

     

  • Amortization or maturity date change beyond what the collateral supports, including any of the following:

     

  • Lengthens the amortization period of the amortized principal beyond market terms. This concession reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.
  • Reduces the amount of loan principal to be amortized. This concession also reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.
  • Extends the maturity date or dates of the debt beyond what the collateral supports. This concession generally applies to loans without a balloon payment at the end of the term of the loan.

 

  • Chapter 7 bankruptcy: A bankruptcy court's discharge of a borrower's debt is considered a concession when the borrower does not reaffirm the discharged debt.

 

  • Other: A concession that is not categorized as one of the concessions described above. These concessions include, but are not limited to: principal forgiveness, collateral concessions, covenant concessions, and reduction of accrued interest. Principal forgiveness may result from any TDR modification of any concession type. However, the aggregate amount of principal forgiven as a result of loans modified as TDRs during the three-month and nine-month periods ended September 30, 2012 and 2011, was not significant.

 

TDRs by Loan Type

 

Following is a description of TDRs by the different loan types:

 

Commercial loan TDRs – Commercial accruing TDRs often result from loans receiving a concession with terms that are not considered a market transaction to Huntington. The TDR remains in accruing status as long as the customer is less than 90-days past due on payments per the restructured loan terms and no loss is expected.

 

Commercial nonaccrual TDRs result from either: (1) an accruing commercial TDR being placed on nonaccrual status, or (2) a workout where an existing commercial NAL is restructured and a concession was given. At times, these workouts restructure the NAL so that two or more new notes are created. The primary note is underwritten based upon our normal underwriting standards and is sized so projected cash flows are sufficient to repay contractual principal and interest. The terms on the secondary note(s) vary by situation, and may include notes that defer principal and interest payments until after the primary note is repaid. Creating two or more notes often allows the borrower to continue a project or weather a temporary economic downturn and allows Huntington to right-size a loan based upon the current expectations for a borrower's or project's performance.

 

Our strategy involving TDR borrowers includes working with these borrowers to allow them to refinance elsewhere, as well as allow them time to improve their financial position and remain our customer through refinancing their notes according to market terms and conditions in the future.  A refinancing or modification of a loan occurs when either the loan matures according to the terms of the TDR-modified agreement or the borrower requests a change to the loan agreements. At that time, the loan is evaluated to determine if it is creditworthy. It is subjected to the normal underwriting standards and processes for other similar credit extensions, both new and existing.

 

In accordance with ASC 310-20-35, the refinanced note is evaluated to determine if it is considered a new loan or a continuation of the prior loan.  A new loan is considered for removal of the TDR designation, whereas a continuation of the prior note requires a continuation of the TDR designation.  In order for a TDR designation to be removed, the borrower must no longer be experiencing financial difficulties and the terms of the refinanced loan must not represent a concession. 

 

Residential Mortgage loan TDRs – Residential mortgage TDRs represent loan modifications associated with traditional first-lien mortgage loans in which a concession has been provided to the borrower. The primary concessions given to residential mortgage borrowers are amortization or maturity date changes and interest rate reductions. Residential mortgages identified as TDRs involve borrowers unable to refinance their mortgages through the Company's normal mortgage origination channels or through other independent sources. Some, but not all, of the loans may be delinquent.

 

Automobile, Home Equity, and Other Consumer loan TDRs The Company may make similar interest rate, term, and principal concessions as with residential mortgage loan TDRs.

 

TDR Impact on Credit Quality

 

Huntington's ALLL is largely driven by updated risk ratings assigned to commercial loans, updated borrower credit scores on consumer loans, and borrower delinquency history in both the commercial and consumer portfolios. These updated risk ratings and credit scores consider the default history of the borrower, including payment redefaults. As such, the provision for credit losses is impacted primarily by changes in borrower payment performance rather than the TDR classification. TDRs can be classified as either accrual or nonaccrual loans. Nonaccrual TDRs are included in NALs whereas accruing TDRs are excluded from NALs as it is probable that all contractual principal and interest due under the restructured terms will be collected.

 

Our TDRs may include multiple concessions and the disclosure classifications are presented based on the primary concession provided to the borrower. The majority of our concessions for the C&I and CRE portfolios are the extension of the maturity date coupled with an increase in the interest rate. In these instances, the primary concession is the maturity date extension.

 

TDR concessions may also result in the reduction of the ALLL within the C&I and CRE portfolios. This reduction is derived from payments and the resulting application of the reserve calculation within the ALLL The transaction reserve for non-TDR C&I and CRE loans is calculated based upon several estimated probability factors, such as PD and LGD, both of which were previously discussed above.  Upon the occurrence of a TDR in our C&I and CRE portfolios, the reserve is measured based on discounted expected cash flows of the modified loan in accordance with ASC 310-10.  The resulting TDR ALLL calculation often results in a lower ALLL amount because (1) the discounted expected cash flows indicate a lower estimated loss, (2) if the modification includes a rate increase, the discounting of the cash flows on the modified loan, using the pre-modification interest rate, exceeds the carrying value of the loan, or (3) payments may occur as part of the modification. The ALLL for C&I and CRE loans may increase as a result of the modification, as the discounted cash flow analysis may indicate additional reserves are required.

 

TDR concessions on consumer loans may increase the ALLL.  The concessions made to these borrowers often include interest rate reductions, and therefore, the TDR ALLL calculation results in a greater ALLL compared with the non-TDR calculation as the reserve is measured based on the estimation of the discounted expected cash flows on the modified loan in accordance with ASC 310-10. The resulting TDR ALLL calculation often results in a higher ALLL amount because (1) the discounted expected cash flows indicate a higher estimated loss or, (2) due to the rate decrease, the discounting of the cash flows on the modified loan, using the pre-modification interest rate, indicates a reduction in the expected cash flows. In certain instances, the ALLL may decrease as a result of payments made in connection with the modification.

 

Commercial loan TDRs In instances where the bank substantiates that it will collect its outstanding balance in full, the note is considered for return to accrual status upon the borrower sustaining sufficient cash flows for a six-month period of time. This six-month period could extend before or after the restructure date. If a charge-off was taken as part of the restructuring, any interest or principal payments received on that note are applied to first reduce the bank's outstanding book balance and then to recoveries of charged-off principal, unpaid interest, and/or fee expenses.

 

Residential Mortgage, Automobile, Home Equity, and Other Consumer loan TDRs – Modified loans identified as TDRs are aggregated into pools for analysis. Cash flows and weighted average interest rates are used to calculate impairment at the pooled-loan level. Once the loans are aggregated into the pool, they continue to be classified as TDRs until contractually repaid or charged-off.

 

Residential mortgage loans not guaranteed by a U.S. government agency such as the FHA, VA, and the USDA, including TDR loans, are reported as accrual or nonaccrual based upon delinquency status. Nonaccrual TDRs are those that are greater than 150-days contractually past due. Loans guaranteed by U.S. government organizations continue to accrue interest upon delinquency.

 

The following tables present by class and by the reason for the modification, the number of contracts, post-modification outstanding balance, and the financial effects of the modification for the three-month and nine-month periods ended September 30, 2012 and 2011:

      New Troubled Debt Restructurings During The Three-Month Period Ended (1)
      September 30, 2012   September 30, 2011
        Post-modification           Post-modification      
        Outstanding         Outstanding      
(dollar amounts in thousands)   Number of Ending Financial effects     Number of Ending Financial effects    
    Contracts Balance of modification(2)     Contracts Balance of modification (2)  
                                 
C&I - Owner occupied:  (3)                            
                                 
  Interest rate reduction   7 $ 4,292 $ 13     3 $ 638 $ (70)    
  Amortization or maturity date change