Quarterly report pursuant to Section 13 or 15(d)

Loans and Leases and Allowance for Credit Losses

v2.4.0.8
Loans and Leases and Allowance for Credit Losses
3 Months Ended
Mar. 31, 2014
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, 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 March 31, 2014, and December 31, 2013, the aggregate amount of these net unamortized deferred loan origination fees and costs and net unearned income was $182.7 million and $192.9 million, respectively.

 

Loan and Lease Portfolio Composition

 

The following table provides a detailed listing of Huntington's loan and lease portfolio at March 31, 2014 and December 31, 2013:

 

          March 31,     December 31,
(dollar amounts in thousands)   2014     2013
                 
Loans and leases:          
    Commercial and industrial $ 18,045,856   $ 17,594,276
    Commercial real estate   5,031,778     4,850,094
    Automobile   6,998,792     6,638,713
    Home equity   8,373,382     8,336,318
    Residential mortgage   5,542,166     5,321,088
    Other consumer   361,934     380,011
  Loans and leases   44,353,908     43,120,500
  Allowance for loan and lease losses   (631,918)     (647,870)
Net loans and leases $ 43,721,990   $ 42,472,630

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

Camco Financial acquisition

 

On March 1, 2014, Huntington completed its acquisition of Camco Financial in a stock and cash transaction valued at $109.5 million. Loans with a fair value of $559.4 million were transferred to Huntington. These loans were recorded at fair value in accordance with applicable accounting guidance, ASC 805. 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.

 

Purchased Credit-Impaired Loans

 

Purchased loans with evidence of deterioration in credit quality since origination for which it is probable at acquisition that we will be unable to collect all contractually required payments are considered to be credit impaired. Purchased credit-impaired loans are initially recorded at fair value, which is estimated by discounting the cash flows expected to be collected at the acquisition date. Because the estimate of expected cash flows reflects an estimate of future credit losses expected to be incurred over the life of the loans, an allowance for credit losses is not recorded at the acquisition date. The excess of cash flows expected at acquisition over the estimated fair value, referred to as the accretable yield, is recognized in interest income over the remaining life of the loan, or pool of loans, on a level-yield basis. The difference between the contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. A subsequent decrease in the estimate of cash flows expected to be received on purchased credit-impaired loans generally results in the recognition of an allowance for credit 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 subsequently recognized. The measurement of cash flows involves assumptions and judgments for interest rates, prepayments, default rates, loss severity, 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 following table reflects the contractually required payments receivable, cash flows expected to be collected, and fair value of the credit impaired Camco Financial loans at acquisition date:

    March 1,
(dollar amounts in thousands)   2014
Contractually required payments including interest $ 14,363
Less: nonaccretable difference   (11,234)
Cash flows expected to be collected   3,129
Less: accretable yield   (143)
Fair value of loans acquired $ 2,986

The following table presents a rollforward of the accretable yield for purchased credit impaired loans by acquisition for three-month periods ended March 31, 2014 and 2013:

             
    Three Months Ended March 31,
(dollar amounts in thousands)   2014   2013
             
Camco Financial            
Balance, beginning of period   $ ---   $ ---
Impact of acquisition/purchase on March 1, 2014     143     ---
Additions     ---     ---
Accretion     (9)     ---
Reclassification from nonaccretable difference     ---     ---
Balance, end of period   $ 134   $ ---
             
Fidelity Bank            
Balance, beginning of period   $ 27,995   $ 23,251
Additions     ---     ---
Accretion     (4,004)     (3,319)
Reclassification from nonaccretable difference     767     15,228
Balance, end of period   $ 24,758   $ 35,160

The allowance for loan losses recorded on the purchased credit-impaired loan portfolio at March 31, 2014 and December 31, 2013 was $1.6 million and $2.4 million, respectively. The decrease is attributed to a reduction in the C&I component of the purchased credit-impaired loan portfolio. The following table reflects the ending and unpaid balances of all contractually required payments and carrying amounts of the acquired loans by acquisition at March 31, 2014 and December 31, 2013:

           
  March 31, 2014   December 31, 2013
(dollar amounts in thousands)   Ending Balance     Unpaid Balance     Ending Balance     Unpaid Balance
                       
Camco Financial                      
Commercial and industrial $ 709   $ 1,717   $ ---   $ ---
Commercial real estate   2,286     11,820     ---     ---
Total $ 2,995   $ 13,537   $ ---   $ ---
                       
Fidelity Bank                      
Commercial and industrial $ 35,688   $ 50,876   $ 35,526   $ 50,798
Commercial real estate   74,434     144,676     82,073     154,869
Residential mortgage   2,258     3,197     2,498     3,681
Other consumer   128     213     129     219
Total $ 112,508   $ 198,962   $ 120,226   $ 209,567

Loan Purchases and Sales

 

The following table summarizes significant portfolio loan purchase and sale activity for the three-month periods ended March 31, 2014 and 2013

      Commercial and Industrial Commercial Real Estate Automobile Home Equity Residential Mortgage Other Consumer Total
               
                                 
  (dollar amounts in thousands)                            
                                 
  Portfolio loans and leases purchased during the:
    Three-month period ended March 31, 2014 $ 40,121 $ --- $ --- $ --- $ --- $ --- $ 40,121
                                 
    Three-month period ended March 31, 2013 $ 21,541 $ --- $ --- $ --- $ --- $ --- $ 21,541
                                 
  Portfolio loans and leases sold or transferred to loans held for sale during the:
    Three-month period ended March 31, 2014 $ 54,258 $ 39 $ --- $ --- $ --- $ --- $ 54,297
                                 
    Three-month period ended March 31, 2013 $ 27,602 $ 3,903 $ --- $ --- $ 4,391 $ --- $ 35,896

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. 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.

 

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. 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 at the rate guaranteed by the government agency. 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.

 

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. However, for secured non-reaffirmed debt in a Chapter 7 bankruptcy, payments are applied to principal and interest when the borrower has demonstrated a capacity to continue payment of the debt and collection of the debt is reasonably assured. For unsecured non-reaffirmed debt in a Chapter 7 bankruptcy where the carrying value has been fully charged-off, payments are recorded as loan recoveries.

 

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 March 31, 2014 and December 31, 2013:

 

    2014   2013
(dollar amounts in thousands) March 31,   December 31,
             
Commercial and industrial:          
  Owner occupied $ 35,971   $ 38,321
  Other commercial and industrial   21,082     18,294
Total commercial and industrial $ 57,053   $ 56,615
             
Commercial real estate:          
  Retail properties $ 29,638   $ 27,328
  Multi family   12,884     9,289
  Office   13,130     18,995
  Industrial and warehouse   4,063     6,310
  Other commercial real estate   11,629     11,495
Total commercial real estate $ 71,344   $ 73,417
             
Automobile $ 6,218   $ 6,303
             
Home equity:          
  Secured by first-lien $ 39,267   $ 36,288
  Secured by junior-lien   31,595     29,901
Total home equity $ 70,862   $ 66,189
             
Residential mortgage:          
Residential mortgage $ 121,681   $ 119,532
Total residential mortgages $ 121,681   $ 119,532
             
Other consumer          
Other consumer $ ---   $ ---
Total nonaccrual loans $ 327,158   $ 322,056
             

The following table presents an aging analysis of loans and leases, including past due loans, by loan class at March 31, 2014 and December 31, 2013: (1)

March 31, 2014
                              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 $ 11,167 $ 1,355 $ 24,523 $ 37,045   $ 4,364,856 $ 4,401,901   $ ---
  Purchased credit-impaired   2,799   163   11,554   14,516     21,881   36,397     11,554
  Other commercial and industrial   21,666   1,487   12,266   35,419     13,572,139   13,607,558     ---
Total commercial and industrial $ 35,632 $ 3,005 $ 48,343 $ 86,980   $ 17,958,876 $ 18,045,856   $ 11,554(2)
                                   
Commercial real estate:                                
  Retail properties $ 2,317 $ 2,523 $ 8,098 $ 12,938   $ 1,402,485 $ 1,415,423   $ ---
  Multi family   2,509   3,977   6,464   12,950     1,039,757   1,052,707     ---
  Office   2,532   62   5,801   8,395     944,575   952,970     ---
  Industrial and warehouse   211   225   1,012   1,448     486,567   488,015     ---
  Purchased credit-impaired   1,817   2,231   36,711   40,759     35,961   76,720     36,711
  Other commercial real estate   6,247   331   6,584   13,162     1,032,781   1,045,943     ---
Total commercial real estate $ 15,633 $ 9,349 $ 64,670 $ 89,652   $ 4,942,126 $ 5,031,778   $ 36,711(2)
                                   
Automobile $ 34,281 $ 5,993 $ 4,347 $ 44,621   $ 6,954,171 $ 6,998,792   $ 4,252
                                   
Home equity:                                
  Secured by first-lien $ 16,346 $ 8,098 $ 32,357 $ 56,801   $ 4,829,556 $ 4,886,357   $ 7,778
  Secured by junior-lien   31,693   13,261   31,969   76,923     3,410,102   3,487,025     7,716
Total home equity $ 48,039 $ 21,359 $ 64,326 $ 133,724   $ 8,239,658 $ 8,373,382   $ 15,494
                                   
Residential mortgage:                                
  Residential mortgage $ 107,113 $ 45,789 $ 154,607 $ 307,509   $ 5,232,399 $ 5,539,908   $ 85,901(3)
  Purchased credit-impaired   125   ---   117   242     2,016   2,258     117
Total residential mortgage $ 107,238 $ 45,789 $ 154,724 $ 307,751   $ 5,234,415 $ 5,542,166   $ 86,018
                                   
Other consumer:                                
  Other consumer $ 4,757 $ 793 $ 867 $ 6,417   $ 355,389 $ 361,806   $ 867
  Purchased credit-impaired   69   ---   ---   69     59   128     ---
Total other consumer $ 4,826 $ 793 $ 867 $ 6,486   $ 355,448 $ 361,934   $ 867
                                   
Total loans and leases $ 245,649 $ 86,288 $ 337,277 $ 669,214   $ 43,684,694 $ 44,353,908   $ 154,896
                                   
December 31, 2013
                              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 $ 5,935 $ 1,879 $ 25,658 $ 33,472   $ 4,314,400 $ 4,347,872   $ ---
  Purchased credit-impaired   241   433   14,562   15,236     20,290   35,526     14,562
  Other commercial and industrial   10,342   3,075   11,210   24,627     13,186,251   13,210,878     ---
Total commercial and industrial $ 16,518 $ 5,387 $ 51,430 $ 73,335   $ 17,520,941 $ 17,594,276   $ 14,562(2)
                                   
Commercial real estate:                                
  Retail properties $ 19,372 $ 1,228 $ 5,252 $ 25,852   $ 1,237,717 $ 1,263,569   $ ---
  Multi family   2,425   943   6,726   10,094     1,015,497   1,025,591     ---
  Office   1,635   545   12,700   14,880     927,413   942,293     ---
  Industrial and warehouse   465   3,714   4,395   8,574     464,319   472,893     ---
  Purchased credit-impaired   1,311   ---   39,142   40,453     41,620   82,073     39,142
  Other commercial real estate   5,922   1,134   7,192   14,248     1,049,427   1,063,675     ---
Total commercial real estate $ 31,130 $ 7,564 $ 75,407 $ 114,101   $ 4,735,993 $ 4,850,094   $ 39,142(2)
                                   
Automobile $ 45,174 $ 8,863 $ 5,140 $ 59,177   $ 6,579,536 $ 6,638,713   $ 5,055
                                   
Home equity                                
  Secured by first-lien $ 20,551 $ 8,746 $ 28,472 $ 57,769   $ 4,784,375 $ 4,842,144   $ 6,338
  Secured by junior-lien   28,965   13,071   31,392   73,428     3,420,746   3,494,174     7,645
Total home equity $ 49,516 $ 21,817 $ 59,864 $ 131,197   $ 8,205,121 $ 8,336,318   $ 13,983
                                   
Residential mortgage                                
  Residential mortgage $ 101,584 $ 41,784 $ 158,956 $ 302,324   $ 5,016,266 $ 5,318,590   $ 90,115(4)
  Purchased credit-impaired   194   ---   339   533     1,965   2,498     339
Total residential mortgage $ 101,778 $ 41,784 $ 159,295 $ 302,857   $ 5,018,231 $ 5,321,088   $ 90,454
                                   
Other consumer                                
  Other consumer $ 6,465 $ 1,276 $ 998 $ 8,739   $ 371,143 $ 379,882   $ 998
  Purchased credit-impaired   69   ---   ---   69     60   129     ---
Total other consumer $ 6,534 $ 1,276 $ 998 $ 8,808   $ 371,203 $ 380,011   $ 998
                                   
Total loans and leases $ 250,650 $ 86,691 $ 352,134 $ 689,475   $ 42,431,025 $ 43,120,500   $ 164,194
                                   
(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 acquisitions. Under the applicable accounting guidance (ASC 310-30), the loans were recorded at fair value upon acquisition and remain in accruing status.
(3) Includes $56,484 thousand guaranteed by the U.S. government.
(4) Includes $87,985 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 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, 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, 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 $1.0 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 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 borrower's 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. 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 following table presents ALLL and AULC activity by portfolio segment for the three-month periods ended March 31, 2014 and 2013:

      Commercial Commercial   Home Residential Other    
  and Industrial Real Estate Automobile Equity Mortgage Consumer Total
(dollar amounts in thousands)                            
                                 
Three-month period ended March 31, 2014:
                                 
  ALLL balance, beginning of period $ 265,801 $ 162,557 $ 31,053 $ 111,131 $ 39,577 $ 37,751 $ 647,870
    Loan charge-offs   (16,337)   (10,110)   (8,044)   (21,059)   (8,986)   (8,475)   (73,011)
    Recoveries of loans previously charged-off   7,731   11,097   3,402   5,372   1,127   1,296   30,025
    Provision for loan and lease losses   9,784   (3,238)   (1,233)   17,733   7,350   (2,235)   28,161
    Allowance for loans sold or transferred to loans held for sale   ---   ---   ---   ---   ---   (1,127)   (1,127)
  ALLL balance, end of period $ 266,979 $ 160,306 $ 25,178 $ 113,177 $ 39,068 $ 27,210 $ 631,918
                                 
  AULC balance, beginning of period $ 49,596 $ 9,891 $ --- $ 1,763 $ 9 $ 1,640 $ 62,899
    Provision for unfunded loan commitments and letters of credit   (3,280)   (764)   ---   28   (1)   486   (3,531)
  AULC balance, end of period $ 46,316 $ 9,127 $ --- $ 1,791 $ 8 $ 2,126 $ 59,368
                                 
  ACL balance, end of period $ 313,295 $ 169,433 $ 25,178 $ 114,968 $ 39,076 $ 29,336 $ 691,286

      Commercial Commercial   Home Residential Other    
  and Industrial Real Estate Automobile Equity Mortgage Consumer Total
(dollar amounts in thousands)                            
                                 
Three-month period ended March 31, 2013:
                                 
  ALLL balance, beginning of period $ 241,051 $ 285,369 $ 34,979 $ 118,764 $ 61,658 $ 27,254 $ 769,075
    Loan charge-offs   (13,013)   (22,368)   (5,688)   (26,531)   (7,901)   (8,641)   (84,142)
    Recoveries of loans previously charged-off   9,696   9,590   3,094   6,549   1,753   1,773   32,455
    Provision for loan and lease losses   364   (5,155)   3,588   17,076   7,559   5,956   29,388
    Allowance for loans sold or transferred to loans held for sale   ---   ---   ---   ---   (7)   ---   (7)
  ALLL balance, end of period $ 238,098 $ 267,436 $ 35,973 $ 115,858 $ 63,062 $ 26,342 $ 746,769
                                 
  AULC balance, beginning of period $ 33,868 $ 4,740 $ --- $ 1,356 $ 3 $ 684 $ 40,651
    Provision for unfunded loan commitments and letters of credit   (33)   (336)   ---   556   3   14   204
  AULC balance, end of period $ 33,835 $ 4,404 $ --- $ 1,912 $ 6 $ 698 $ 40,855
                                 
  ACL balance, end of period $ 271,933 $ 271,840 $ 35,973 $ 117,770 $ 63,068 $ 27,040 $ 787,624
                                 

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 also shows an increase in FICO scores less than 650 for the automobile portfolio. This increase is proportional to growth in the portfolio and does not reflect a deterioration in asset quality for the portfolio, 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 March 31, 2014 and December 31, 2013:

    March 31, 2014  
  Credit Risk Profile by UCS classification  
(dollar amounts in thousands) Pass OLEM Substandard Doubtful Total  
Commercial and industrial:                      
  Owner occupied $ 4,118,040 $ 107,617 $ 170,600 $ 5,644 $ 4,401,901  
  Purchased credit-impaired   4,933   642   27,420   3,402   36,397  
  Other commercial and industrial   13,045,701   216,139   341,836   3,882   13,607,558  
Total commercial and industrial $ 17,168,674 $ 324,398 $ 539,856 $ 12,928 $ 18,045,856  
                         
Commercial real estate:                      
  Retail properties $ 1,310,593 $ 13,185 $ 91,455 $ 190 $ 1,415,423  
  Multi family   987,389   23,051   42,150   117   1,052,707  
  Office   849,428   6,137   95,257   2,148   952,970  
  Industrial and warehouse   447,762   14,368   25,885   ---   488,015  
  Purchased credit-impaired   8,378   1,088   64,561   2,693   76,720  
  Other commercial real estate   960,169   15,491   69,695   588   1,045,943  
Total commercial real estate $ 4,563,719 $ 73,320 $ 389,003 $ 5,736 $ 5,031,778  
                         
    Credit Risk Profile by FICO score (1)  
    750+ 650-749 <650 Other (2) Total  
Automobile $ 3,186,518 $ 2,664,896 $ 948,010 $ 199,368 $ 6,998,792  
                         
Home equity:                      
  Secured by first-lien $ 3,047,848 $ 1,412,622 $ 285,738 $ 140,149 $ 4,886,357  
  Secured by junior-lien   1,802,250   1,169,131   413,056   102,588   3,487,025  
Total home equity $ 4,850,098 $ 2,581,753 $ 698,794 $ 242,737 $ 8,373,382  
                         
Residential mortgage:                      
  Residential mortgage $ 2,999,267 $ 1,781,821 $ 701,108 $ 57,712 $ 5,539,908  
  Purchased credit-impaired   630   1,034   594   ---   2,258  
Total residential mortgage $ 2,999,897 $ 1,782,855 $ 701,702 $ 57,712 $ 5,542,166  
                         
Other consumer:                      
  Other consumer $ 159,113 $ 161,376 $ 41,007 $ 310 $ 361,806  
  Purchased credit-impaired   ---   59   69   ---   128  
Total other consumer $ 159,113 $ 161,435 $ 41,076 $ 310 $ 361,934  
                         
                         
    December 31, 2013  
  Credit Risk Profile by UCS classification  
(dollar amounts in thousands) Pass OLEM Substandard Doubtful Total  
Commercial and industrial:                      
  Owner occupied $ 4,052,579 $ 130,645 $ 155,994 $ 8,654 $ 4,347,872  
  Purchased credit-impaired   5,015   661   27,693   2,157   35,526  
  Other commercial and industrial   12,630,512   211,860   364,343   4,163   13,210,878  
Total commercial and industrial $ 16,688,106 $ 343,166 $ 548,030 $ 14,974 $ 17,594,276  
                         
Commercial real estate:                      
  Retail properties $ 1,153,747 $ 16,003 $ 93,819 $ --- $ 1,263,569  
  Multi family   972,526   16,540   36,411   114   1,025,591  
  Office   847,411   4,866   87,722   2,294   942,293  
  Industrial and warehouse   431,057   14,138   27,698   ---   472,893  
  Purchased credit-impaired   13,127   3,586   62,577   2,783   82,073  
  Other commercial real estate   977,987   16,270   68,653   765   1,063,675  
Total commercial real estate $ 4,395,855 $ 71,403 $ 376,880 $ 5,956 $ 4,850,094  
                         
    Credit Risk Profile by FICO score (1)  
    750+ 650-749 <650 Other (2) Total  
Automobile $ 2,987,323 $ 2,517,756 $ 945,604 $ 188,030 $ 6,638,713 (3)
                         
Home equity:                      
  Secured by first-lien $ 3,018,784 $ 1,412,445 $ 299,681 $ 111,234 $ 4,842,144  
  Secured by junior-lien   1,811,102   1,213,024   413,695   56,353   3,494,174  
Total home equity $ 4,829,886 $ 2,625,469 $ 713,376 $ 167,587 $ 8,336,318  
                         
Residential mortgage                      
  Residential mortgage $ 2,837,590 $ 1,710,183 $ 699,541 $ 71,276 $ 5,318,590  
  Purchased credit-impaired   588   989   921   ---   2,498  
Total residential mortgage $ 2,838,178 $ 1,711,172 $ 700,462 $ 71,276 $ 5,321,088  
                         
Other consumer                      
  Other consumer $ 161,858 $ 157,675 $ 45,370 $ 14,979 $ 379,882  
  Purchased credit-impaired   ---   60   69   ---   129  
Total other consumer $ 161,858 $ 157,735 $ 45,439 $ 14,979 $ 380,011  
                         
(1) Reflects currently updated customer credit scores.  
(2) Reflects deferred fees and costs, loans in process, loans to legal entities, etc.  
(3) Included $0.3 billion of loans reflected as loans held for sale related to an automobile securitization expected to be completed in 2013. During the 2013 second quarter, this amount was transferred from loans held for sale to the automobile portfolio based on Management's intent and ability to hold these loans for the foreseeable future.  

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. 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 March 31, 2014 and December 31, 2013:

                                 
      Commercial Commercial     Residential Other  
(dollar amounts in thousands) and Industrial Real Estate Automobile Home Equity Mortgage Consumer Total
                                 
ALLL at March 31, 2014:
                                 
  Portion of ALLL balance:
                                 
    Attributable to purchased credit-impaired loans $ 1,517 $ --- $ --- $ --- $ 119 $ --- $ 1,636
    Attributable to loans individually evaluated for impairment   11,985   32,673   597   8,209   9,876   34   63,374
    Attributable to loans collectively evaluated for impairment   253,477   127,633   24,581   104,968   29,073   27,176   566,908
  Total ALLL balance $ 266,979 $ 160,306 $ 25,178 $ 113,177 $ 39,068 $ 27,210 $ 631,918
                                 
                                 
Loan and Lease Ending Balances at March 31, 2014:
                                 
  Portion of loan and lease ending balance:
                                 
    Attributable to purchased credit-impaired loans $ 36,397 $ 76,720 $ --- $ --- $ 2,258 $ 128 $ 115,503
    Individually evaluated for impairment   125,398   268,949   33,068   223,037   368,636   1,846   1,020,934
    Collectively evaluated for impairment   17,884,061   4,686,109   6,965,724   8,150,345   5,171,272   359,960   43,217,471
  Total loans and leases evaluated for impairment $ 18,045,856 $ 5,031,778 $ 6,998,792 $ 8,373,382 $ 5,542,166 $ 361,934 $ 44,353,908
                                 
                                 

                                 
                   
(dollar amounts in thousands) Commercial and Industrial Commercial Real Estate Automobile Home Equity Residential Mortgage Other Consumer Total
                                 
ALLL at December 31, 2013
                                 
  Portion of ALLL balance:
                                 
    Attributable to purchased credit-impaired loans $ 2,404 $ --- $ --- $ --- $ 36 $ --- $ 2,440
    Attributable to loans individually evaluated for impairment   6,129   34,935   682   8,003   10,555   136   60,440
    Attributable to loans collectively evaluated for impairment   257,268   127,622   30,371   103,128   28,986   37,615   584,990
  Total ALLL balance: $ 265,801 $ 162,557 $ 31,053 $ 111,131 $ 39,577 $ 37,751 $ 647,870
                                 
Loan and Lease Ending Balances at December 31, 2013
                                 
  Portion of loan and lease ending balances:
                                 
    Attributable to purchased credit-impaired loans $ 35,526 $ 82,073 $ --- $ --- $ 2,498 $ 129 $ 120,226
    Individually evaluated for impairment   108,316   268,362   37,084   208,981   387,937   1,041   1,011,721
    Collectively evaluated for impairment   17,450,434   4,499,659   6,601,629   8,127,337   4,930,653   378,841   41,988,553
  Total loans and leases evaluated for impairment $ 17,594,276 $ 4,850,094 $ 6,638,713 $ 8,336,318 $ 5,321,088 $ 380,011 $ 43,120,500
                                 

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 and purchased credit-impaired loans: (1), (2)

                      Three Months Ended
    March 31, 2014   March 31, 2014
            Unpaid           Interest
        Ending Principal Related   Average Income
(dollar amounts in thousands)   Balance Balance (5) Allowance   Balance Recognized
                             
With no related allowance recorded:                        
  Commercial and industrial:                        
    Owner occupied   $ 4,108 $ 4,403 $ ---   $ 4,906 $ 49
    Purchased credit-impaired     ---   ---   ---     ---   ---
    Other commercial and industrial     8,548   16,944   ---     7,610   97
  Total commercial and industrial   $ 12,656 $ 21,347 $ ---   $ 12,516 $ 146
                             
  Commercial real estate:                        
    Retail properties   $ 59,637 $ 71,718 $ ---   $ 54,290 $ 605
    Multi family     ---   ---   ---     ---   ---
    Office     1,167   3,647   ---     6,406   189
    Industrial and warehouse     7,990   8,070   ---     9,087   108
    Purchased credit-impaired     76,720   156,497   ---     79,396   2,666
    Other commercial real estate     5,650   5,715   ---     5,827   57
  Total commercial real estate   $ 151,164 $ 245,647 $ ---   $ 155,006 $ 3,625
                             
  Automobile   $ --- $ --- $ ---   $ --- $ ---
                             
  Home equity:                        
    Secured by first-lien   $ --- $ --- $ ---   $ --- $ ---
    Secured by junior-lien     ---   ---   ---     ---   ---
  Total home equity   $ --- $ --- $ ---   $ --- $ ---
                             
  Residential mortgage:                        
    Residential mortgage   $ --- $ --- $ ---   $ --- $ ---
    Purchased credit-impaired     ---   ---   ---     ---   ---
  Total residential mortgage   $ --- $ --- $ ---   $ --- $ ---
                             
  Other consumer                        
    Other consumer   $ --- $ --- $ ---   $ --- $ ---
    Purchased credit-impaired     128   213   ---     128   4
  Total other consumer   $ 128 $ 213 $ ---   $ 128 $ 4
                             
With an allowance recorded:                        
  Commercial and industrial: (3)                        
    Owner occupied   $ 41,046 $ 45,658 $ 3,811   $ 39,229 $ 399
    Purchased credit-impaired     36,397   52,593   1,517     35,961   1,265
    Other commercial and industrial     71,696   79,269   8,174     51,532   592
  Total commercial and industrial   $ 149,139 $ 177,520 $ 13,502   $ 126,722 $ 2,256
                             
  Commercial real estate: (4)                        
    Retail properties   $ 62,338 $ 81,106 $ 5,740   $ 68,637 $ 577
    Multi family     17,113   22,958   2,142     14,739   152
    Office     56,148   58,645   13,192     51,189   536
    Industrial and warehouse     8,875   10,320   763     9,196   48
    Purchased credit-impaired     ---   ---   ---     ---   ---
    Other commercial real estate     50,031   61,614   10,836     44,090   474
  Total commercial real estate   $ 194,505 $ 234,643 $ 32,673   $ 187,851 $ 1,787
                             
  Automobile   $ 33,068 $ 34,797 $ 597   $ 35,076 $ 683
                             
  Home equity:                        
    Secured by first-lien   $ 114,817 $ 122,197 $ 2,457   $ 112,420 $ 1,239
    Secured by junior-lien     108,220   151,006   5,752     103,589   1,314
  Total home equity   $ 223,037 $ 273,203 $ 8,209   $ 216,009 $ 2,553
                             
  Residential mortgage (6):                        
    Residential mortgage   $ 368,636 $ 408,589 $ 9,876   $ 378,287 $ 2,864
    Purchased credit-impaired     2,258   3,197   119     2,378   78
  Total residential mortgage   $ 370,894 $ 411,786 $ 9,995   $ 380,665 $ 2,942
                             
  Other consumer:                        
    Other consumer   $ 1,846 $ 1,908 $ 34   $ 1,444 $ 33
    Purchased credit-impaired     ---   ---   ---     ---   ---
  Total other consumer   $ 1,846 $ 1,908 $ 34   $ 1,444 $ 33

                      Three Months Ended
    December 31, 2013   March 31, 2013
            Unpaid           Interest
        Ending Principal Related   Average Income
(dollar amounts in thousands)   Balance Balance (5) Allowance   Balance Recognized
                             
With no related allowance recorded:                        
  Commercial and industrial:                        
    Owner occupied   $ 5,332 $ 5,373 $ ---   $ 3,741 $ 42
    Purchased credit-impaired     ---   ---   ---     53,900   1,017
    Other commercial and industrial     11,884   15,031   ---     16,310   234
  Total commercial and industrial   $ 17,216 $ 20,404 $ ---   $ 73,951 $ 1,293
                             
  Commercial real estate:                        
    Retail properties   $ 55,773 $ 64,780 $ ---   $ 54,237 $ 704
    Multi family     ---   ---   ---     5,642   88
    Office     9,069   13,721   ---     17,849   220
    Industrial and warehouse     9,682   10,803   ---     14,496   197
    Purchased credit-impaired     82,073   154,869   ---     122,528   2,254
    Other commercial real estate     6,002   6,924   ---     10,277   97
  Total commercial real estate   $ 162,599 $ 251,097 $ ---   $ 225,029 $ 3,560
                             
                             
  Home equity:                        
    Secured by first-lien   $ --- $ --- $ ---   $ --- $ ---
    Secured by junior-lien     ---   ---   ---     ---   ---
  Total home equity   $ --- $ --- $ ---   $ --- $ ---
                             
  Residential mortgage:                        
    Residential mortgage   $ --- $ --- $ ---   $ --- $ ---
    Purchased credit-impaired     ---   ---   ---     ---   ---
  Total residential mortgage   $ --- $ --- $ ---   $ --- $ ---
                             
  Other consumer                        
    Other consumer   $ --- $ --- $ ---   $ --- $ ---
    Purchased credit-impaired     129   219   ---     148   3
  Total other consumer   $ 129 $ 219 $ ---   $ 148 $ 3
                             
With an allowance recorded:                        
  Commercial and industrial: (3)                        
    Owner occupied   $ 40,271 $ 52,810 $ 3,421   $ 44,251 $ 351
    Purchased credit-impaired     35,526   50,798   2,404     ---   ---
    Other commercial and industrial     50,829   64,497   2,708     51,313   658
  Total commercial and industrial   $ 126,626 $ 168,105 $ 8,533   $ 95,564 $ 1,009
                             
  Commercial real estate: (4)                        
    Retail properties   $ 72,339 $ 93,395 $ 5,984   $ 55,818 $ 456
    Multi family     13,484   15,408   1,944     17,103   177
    Office     50,307   54,921   9,927     41,787   384
    Industrial and warehouse     9,162   10,561   808     20,166   186
    Purchased credit-impaired     ---   ---   ---     ---   ---
    Other commercial real estate     42,544   50,960   16,272     44,980   379
  Total commercial real estate   $ 187,836 $ 225,245 $ 34,935   $ 179,854 $ 1,582
                             
  Automobile   $ 37,084 $ 38,758 $ 682   $ 42,378 $ 437
                             
  Home equity:                        
    Secured by first-lien   $ 110,024 $ 116,846 $ 2,396   $ 94,494 $ 942
    Secured by junior-lien     98,957   143,967   5,607     50,933   592
  Total home equity   $ 208,981 $ 260,813 $ 8,003   $ 145,427 $ 1,534
                             
  Residential mortgage (6):                        
    Residential mortgage   $ 387,937 $ 427,924 $ 10,555   $ 373,441 $ 2,872
    Purchased credit-impaired     2,498   3,681   36     2,296   45
  Total residential mortgage   $ 390,435 $ 431,605 $ 10,591   $ 375,737 $ 2,917
                             
  Other consumer:                        
    Other consumer   $ 1,041 $ 1,041 $ 136   $ 2,585 $ 23
    Purchased credit-impaired     ---   ---   ---     ---   ---
  Total other consumer   $ 1,041 $ 1,041 $ 136   $ 2,585 $ 23

                                     
(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 March 31, 2014, $48,212 thousand of the $149,139 thousand commercial and industrial loans with an allowance recorded were considered impaired due to their status as a TDR. At December 31, 2013, $43,805 thousand of the $126,626 thousand commercial and industrial loans with an allowance recorded were considered impaired due to their status as a TDR.          
(4) At March 31, 2014, $25,749 thousand of the $194,505 thousand commercial real estate loans with an allowance recorded were considered impaired due to their status as a TDR. At December 31, 2013, $24,805 thousand of the $187,836 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 March 31, 2014, $32,251 thousand of the $370,894 thousand residential mortgages loans with an allowance recorded were guaranteed by the U.S. government. At December 31, 2013, $49,225 thousand of the $390,435 thousand residential mortgage 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. All commercial 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 and increases the amount of the balloon payment at the end of the term of the loan. This concession also reduces the minimum monthly payment. 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 periods ended March 31, 2014 and 2013, was not significant.

 

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 subsequent refinancing or modification of a loan may occur 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. 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 determined 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. Upon the occurrence of a TDR in our C&I and CRE portfolios, the reserve is measured based on discounted expected cash flows or collateral value, less anticipated selling costs, 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 or collateral value, less anticipated selling costs, 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 or collateral value, less anticipated selling costs, 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 or collateral value, less anticipated selling costs, 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 or collateral value, less anticipated selling costs. 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 while the TDR is in nonaccrual status.

 

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 periods ended March 31, 2014 and 2013:

    New Troubled Debt Restructurings During The Three-Month Period Ended(1)
    March 31, 2014   March 31, 2013
      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:                      
  Interest rate reduction 6 $ 924 $ (1)   9 $ 4,668 $ (465)
  Amortization or maturity date change 18   4,609   4   11   4,853   (25)
  Other 2   840   (1)   5   1,673   (1)
Total C&I - Owner occupied 26 $ 6,373 $ 2   25 $ 11,194 $ (491)
                         
C&I - Other commercial and industrial:                      
  Interest rate reduction 10 $ 27,994 $ (147)   5 $ 17,569 $ 1
  Amortization or maturity date change 54   32,600   937   35   22,060   2,705
  Other 4   4,366   23   7   5,039   211