Huntington Bancshares Incorporated
Condensed Consolidated Balance Sheets
(Unaudited)              

   2012   2011 
(dollar amounts in thousands, except number of shares)   June 30,    December 31, 
Assets          
Cash and due from banks  $1,218,588   $1,115,968 
Interest-bearing deposits in banks   88,825    90,943 
Trading account securities   53,837    45,899 
Loans held for sale (includes $570,189 and $343,588 respectively, measured at fair value) (1)   2,123,371    1,618,391 
Available-for-sale and other securities   8,666,778    8,078,014 
Held-to-maturity securities   598,385    640,551 
Loans and leases (includes $210,031 and $296,250 respectively, measured at fair value) (2)   39,959,180    38,923,783 
Allowance for loan and lease losses   (859,646)   (964,828)
Net loans and leases   39,099,534    37,958,955 
Bank owned life insurance   1,573,891    1,549,783 
Premises and equipment   583,057    564,429 
Goodwill   444,268    444,268 
Other intangible assets   159,195    175,302 
Accrued income and other assets   2,013,230    2,168,149 
Total assets  $56,622,959   $54,450,652 
Liabilities and shareholders' equity          
Liabilities          
Deposits  $46,076,075   $43,279,625 
Short-term borrowings   1,205,995    1,441,092 
Federal Home Loan Bank advances   835,653    362,972 
Other long-term debt (includes $32,794 and $123,039 respectively, measured at fair value) (2)   310,043    1,231,517 
Subordinated notes   1,418,216    1,503,368 
Accrued expenses and other liabilities   1,127,746    1,213,978 
Total liabilities   50,973,728    49,032,552 
Shareholders' equity          
Preferred stock - authorized 6,617,808 shares:          
           
Series A, 8.50% fixed rate, non-cumulative perpetual convertible preferred stock, par value of $0.01, and liquidation value per share of $1,000   362,507    362,507 
           
Series B, floating rate, non-voting, non-cumulative perpetual preferred stock, par value of $0.01, and liquidation value per share of $1,000   23,785    23,785 
Common stock   8,596    8,656 
Capital surplus   7,569,481    7,596,809 
Less treasury shares, at cost   (10,393)   (10,255)
Accumulated other comprehensive loss   (135,977)   (173,763)
Retained (deficit) earnings   (2,168,768)   (2,389,639)
Total shareholders' equity   5,649,231    5,418,100 
Total liabilities and shareholders' equity  $56,622,959   $54,450,652 
Common shares authorized (par value of $0.01)   1,500,000,000    1,500,000,000 
Common shares issued   859,597,015    865,584,517 
Common shares outstanding   858,401,176    864,406,152 
Treasury shares outstanding   1,195,839    1,178,365 
Preferred shares issued   1,967,071    1,967,071 
Preferred shares outstanding   398,007    398,007 

 

(1) Amounts represent loans for which Huntington has elected the fair value option.

(2) Amounts represent certain assets and liabilities of a consolidated VIE for which Huntington has elected the fair value option.

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

1
 

 

Huntington Bancshares Incorporated                
Condensed Consolidated Statements of Income                
(Unaudited)  Three Months Ended   Six Months Ended 
   June 30,   June 30, 
(dollar amounts in thousands, except per share amounts)   2012    2011    2012    2011 
Interest and fee income:                    
Loans and leases  $428,859   $431,294   $840,907   $867,958 
Available-for-sale and other securities                    
Taxable   48,244    54,603    97,068    112,254 
Tax-exempt   2,124    2,320    4,323    5,196 
Held-to-maturity securities - taxable   4,538    1,287    9,252    1,287 
Other   3,779    2,633    15,931    7,319 
Total interest income   487,544    492,137    967,481    994,014 
Interest expense                    
Deposits   41,790    68,304    85,570    144,100 
Short-term borrowings   558    856    1,141    1,805 
Federal Home Loan Bank advances   333    215    555    435 
Subordinated notes and other long-term debt   15,901    19,425    34,044    40,007 
Total interest expense   58,582    88,800    121,310    186,347 
Net interest income   428,962    403,337    846,171    807,667 
Provision for credit losses   36,520    35,797    70,926    85,182 
Net interest income after provision for credit losses   392,442    367,540    775,245    722,485 
Service charges on deposit accounts   65,998    60,675    126,290    114,999 
Trust services   29,914    30,392    60,820    61,134 
Electronic banking   20,514    31,728    39,144    60,514 
Mortgage banking   38,349    23,835    84,767    46,519 
Brokerage   19,025    20,819    38,285    41,330 
Insurance   17,384    16,399    36,259    34,344 
Bank owned life insurance   13,967    17,602    27,904    32,421 
Capital markets fees   13,455    8,537    23,437    15,473 
Gain on sale of loans   4,131    2,756    30,901    9,963 
Automobile operating lease income   2,877    7,307    6,652    16,154 
Securities gains/(losses)   603    1,689    1,227    5,894 
Impairment losses recognized in earnings on available-for-sale securities   (253)   (182)   (1,490)   (4,347)
Other income   27,855    34,210    64,943    58,314 
Total noninterest income   253,819    255,767    539,139    492,712 
Personnel costs   243,034    218,570    486,532    437,598 
Outside data processing and other services   48,149    43,889    90,207    84,171 
Net occupancy   25,474    26,885    54,553    55,321 
Equipment   24,872    21,921    50,417    44,398 
Deposit and other insurance expense   15,731    23,823    36,469    41,719 
Marketing   21,365    20,102    38,141    36,997 
Professional services   15,458    20,080    26,688    33,545 
Amortization of intangibles   11,940    13,386    23,471    26,756 
Automobile operating lease expense   2,183    5,434    5,037    12,270 
OREO and foreclosure expense   4,106    4,398    9,056    8,329 
Gain on extinguishment of debt   (2,580)       (2,580)    
Other expense   34,537    29,921    88,954    78,004 
Total noninterest expense   444,269    428,409    906,945    859,108 
Income before income taxes   201,992    194,898    407,439    356,089 
Provision for income taxes   49,286    48,980    101,463    83,725 
Net income   152,706    145,918    305,976    272,364 
Dividends on preferred shares   7,984    7,704    16,033    15,407 
Net income applicable to common shares  $144,722   $138,214   $289,943   $256,957 
Average common shares - basic   862,261    863,358    863,380    863,358 
Average common shares - diluted   867,551    867,469    868,357    867,353 
Per common share:                    
Net income - basic  $0.17   $0.16   $0.34   $0.30 
Net income - diluted   0.17    0.16    0.33    0.30 
Cash dividends declared   0.04    0.01    0.08    0.02 
                     
OTTI losses for the periods presented:                    
                     
Total OTTI losses  $(2,245)  $(1,812)  $(1,721)  $(4,347)
Noncredit-related portion of loss recognized in OCI   1,992    1,630    231     
Impairment losses recognized in earnings on available-for-sale securities  $(253)  $(182)  $(1,490)  $(4,347)

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

2
 

 

Huntington Bancshares Incorporated                
Condensed Consolidated Statements of Comprehensive Income                
(Unaudited)  Three Months Ended   Six Months Ended 
   June 30,   June 30, 
(dollar amounts in thousands)  2012   2011   2012   2011 
                     
Net income  $152,706   $145,918   $305,976   $272,364 
                     
Other comprehensive income, net of tax:                    
Unrealized gains on available-for-sale and other securities:                    
Non-credit-related impairment recoveries (losses) on debt securities not expected to be sold   (463)   910    4,064    10,037 
Unrealized net gains (losses) on available-for-sale and other securities arising during the period, net of reclassification for net realized gains   2,716    61,234    20,562    57,504 
Total unrealized gains on available-for-sale and other securities   2,253    62,144    24,626    67,541 
                     
Unrealized gains (losses) on cash flow hedging derivatives   16,343    16,634    6,674    2,212 
                     
Change in accumulated unrealized losses for pension and other post-retirement obligations   3,243    2,600    6,486    5,200 
Other comprehensive income (loss)   21,839    81,378    37,786    74,953 
Comprehensive income  $174,545   $227,296   $343,762   $347,317 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

3
 

 

Huntington Bancshares Incorporated 

Condensed Consolidated Statements of Changes in Shareholders' Equity 

(Unaudited) 

 

   Preferred Stock                       Accumulated         
           Series B                       Other   Retained     
(All amounts in thousands,  Series A   Floating Rate   Common Stock   Capital   Treasury Stock   Comprehensive   Earnings     
except for per share amounts)  Shares   Amount   Shares   Amount   Shares   Amount   Surplus   Shares   Amount   Loss   (Deficit)   Total 
Six Months Ended June 30, 2011                                                             
Balance, beginning of period   363  362,507       $    864,195   $8,642   $7,630,093    (876)  $(8,771)  $(197,496)  $(2,814,433)  $4,980,542 
Net income                                                     272,364    272,364 
Other comprehensive income (loss)                                                74,953         74,953 
Repurchase of warrants convertible to common stock                                 (49,100)                       (49,100)
Cash dividends declared: Common ($0.02 per share)                                                     (17,269)   (17,269)
Preferred Series A ($42.50 per share)                                                     (15,407)   (15,407)
Recognition of the fair value of share-based compensation                                 7,523                        7,523 
Other share-based compensation activity                       115    1    56                   (40)   17 
Other                                 (324)   (111)   (586)        (70)   (980)
Balance, end of period   363   $362,507       $    864,310   $8,643   $7,588,248    (987)  $(9,357)  $(122,543)  $(2,574,855)  $5,252,643 
Six Months Ended June 30, 2012                                                             
Balance, beginning of period   363  362,507    35   $23,785    865,585   $8,656   $7,596,809    (1,178)  $(10,255)  $(173,763)  $(2,389,639)  $5,418,100 
Net income                                                     305,976    305,976 
Other comprehensive income (loss)                                                37,786         37,786 
Repurchases of common stock                       (6,426)   (64)   (40,166)                       (40,230)
Cash dividends declared:                                                            
Common ($0.08 per share)                                                     (68,923)   (68,923)
Preferred Series A ($42.50 per share)                                                     (15,407)   (15,407)
Preferred Series B ($17.64 per share)                                                     (626)   (626)
Recognition of the fair value of share-based compensation                                 12,820                        12,820 
Other share-based compensation activity                       438    4    13                   (41)   (24)
Other                                 5    (18)   (138)        (108)   (241)
Balance, end of period   363   $362,507    35   $23,785    859,597   $8,596   $7,569,481    (1,196)  $(10,393)  $(135,977)  $(2,168,768)  $5,649,231 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

4
 

 

Huntington Bancshares Incorporated        
Condensed Consolidated Statements of Cash Flows        
(Unaudited)  Six Months Ended 
   June 30, 
(dollar amounts in thousands)   2012    2011 
Operating activities          
Net income  $305,976   $272,364 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for credit losses   70,926    85,182 
Depreciation and amortization   138,876    142,800 
Change in current and deferred income taxes   96,760    40,889 
Net sales (purchases) of trading account securities   (7,938)   86,633 
Originations of loans held for sale   (1,915,289)   (1,093,814)
Principal payments on and proceeds from loans held for sale   1,836,963    1,612,097 
Gain on early extinguishment of debt   (2,580)    
Bargain purchase gain   (11,409)    
Securities (gains) losses   (1,227)   (5,894)
Impairment losses recognized in earnings on available-for-sale securities   1,490    4,347 
Other, net   48,227    45,751 
Net cash provided by (used for) operating activities   560,775    1,190,355 
Investing activities          
Increase (decrease) in interest bearing deposits in banks   67,714    9,471 
Net cash received from acquisition   40,310     
Proceeds from:          
Maturities and calls of available-for-sale and other securities   949,026    1,054,306 
Maturities of held-to-maturity securities   40,852    2,738 
Sales of available-for-sale and other securities   307,160    2,697,629 
Purchases of available-for-sale and other securities   (1,779,203)   (2,342,790)
Purchases of held-to-maturity securities       (204,040)
Net proceeds from sales of loans   1,527,739    305,950 
Net loan and lease activity, excluding sales   (2,248,763)   (1,602,756)
Proceeds from sale of operating lease assets   16,784    36,184 
Purchases of premises and equipment   (55,477)   (71,827)
Proceeds from sales of other real estate   20,684    40,060 
Purchases of loans and leases   (393,191)    
Other, net   2,205    122 
Net cash provided by (used for) investing activities   (1,504,160)   (74,953)
Financing activities          
Increase (decrease) in deposits   2,084,321    (456,356)
Increase (decrease) in short-term borrowings   (331,381)   17,698 
Maturity/redemption of subordinated notes   (88,600)   (5,000)
Proceeds from Federal Home Loan Bank advances   815,000    200,000 
Maturity/redemption of Federal Home Loan Bank advances   (387,548)   (152,397)
Maturity/redemption of long-term debt   (919,814)   (501,575)
Repurchase of Warrant to the Treasury       (49,100)
Dividends paid on preferred stock   (15,752)   (15,407)
Dividends paid on common stock   (69,117)   (17,244)
Repurchase of common stock   (40,230)    
Other, net   (874)   (27)
Net cash provided by (used for) financing activities   1,046,005    (979,408)
Increase (decrease) in cash and cash equivalents   102,620    135,994 
Cash and cash equivalents at beginning of period   1,115,968    847,888 
Cash and cash equivalents at end of period  $1,218,588   $983,882 
Supplemental disclosures:          
Income taxes paid (refunded)  $4,703   $42,817 
Interest paid   128,425    221,191 
Non-cash activities          
Loans transferred to loans held for sale   1,656,486    6,084 
Dividends accrued, paid in subsequent quarter   47,859    15,941 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

5
 

 

Huntington Bancshares Incorporated

Notes to Unaudited Condensed Consolidated Financial Statements

 

1. BASIS OF PRESENTATION

 

The accompanying Unaudited Condensed Consolidated Financial Statements of Huntington reflect all adjustments consisting of normal recurring accruals which are, in the opinion of Management, necessary for a fair presentation of the consolidated financial position, the results of operations, and cash flows for the periods presented. These Unaudited Condensed Consolidated Financial Statements have been prepared according to the rules and regulations of the SEC and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted. The Notes to Consolidated Financial Statements appearing in Huntington’s 2011 Form 10-K, which include descriptions of significant accounting policies, as updated by the information contained in this report, should be read in conjunction with these interim financial statements.

 

For statement of cash flows purposes, cash and cash equivalents are defined as the sum of “Cash and due from banks” which includes amounts on deposit with the Federal Reserve and “Federal funds sold and securities purchased under resale agreements.”

 

In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the Unaudited Condensed Consolidated Financial Statements or disclosed in the Notes to Unaudited Condensed Consolidated Financial Statements.

 

2. ACCOUNTING STANDARDS UPDATE

 

ASU 2011-04 — Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The ASU amends Topic 820 to add both additional clarifications to existing fair value measurement and disclosure requirements and changes to existing principles and disclosure guidance. Clarifications were made to the relevancy of the highest and best use valuation concept, measurement of an instrument classified in an entity’s shareholders’ equity and disclosure of quantitative information about the unobservable inputs for level 3 fair value measurements. Changes to existing principles and disclosures included measurement of financial instruments managed within a portfolio, the application of premiums and discounts in fair value measurement, and additional disclosures related to fair value measurements. The updated guidance and requirements are effective for financial statements issued for the first interim or annual period beginning after December 15, 2011, and should be applied prospectively (See Note 13). The amendments did not have a material impact on Huntington’s Unaudited Condensed Consolidated Financial Statements.

 

ASU 2011-05 — Other Comprehensive Income (Topic 220), Presentation of Comprehensive Income. The ASU amends Topic 220 to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. An entity is also required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments do not change items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income, only the format for presentation. The updated guidance and requirements are effective for financial statements issued for the fiscal years, and the interim periods within those years, beginning after December 15, 2011. The amendments should be applied retrospectively. On October 21, 2011, the FASB exposed a proposed deferral of the requirement that companies present reclassification adjustments for each component of OCI in both net income and OCI on the face of the financial statements. See the Unaudited Condensed Consolidated Statements of Comprehensive Income. The amendment did not have a material impact on Huntington’s Unaudited Condensed Consolidated Financial Statements.

 

ASU 2011-10 — Property, Plant, and Equipment (Topic 360): Derecognition of In-Substance Real Estate. The ASU amends Topic 360 to clarify that when a reporting entity ceases to have a controlling financial interest (as described in ASC 810 “Consolidation”) in a subsidiary that is in-substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20 to determine whether it should derecognize the in-substance real estate. The clarification is meant to eliminate diversity in practice. The amendments are effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. Early adoption is permitted. Management is currently evaluating the impact of the guidance on Huntington’s Unaudited Condensed Consolidated Financial Statements.

 

ASU 2011-11 — Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The ASU amends Topic 210 by requiring additional improved information to be disclosed regarding financial instruments and derivative instruments that are offset in accordance with the conditions under ASC 210-20-45 or ASC 810-10-45 or subject to an enforceable master netting arrangement or similar agreement. The amendments are effective for annual and interim reporting periods beginning on or after January 1, 2013. The disclosures required by the amendments should be applied retrospectively for all comparative periods presented. Management does not believe the amendments will have a material impact on Huntington’s Unaudited Condensed Consolidated Financial Statements. .

 

6
 

 

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 subject to fair value requirements, 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 June 30, 2012, and December 31, 2011, the aggregate amount of these net unamortized deferred loan origination fees and costs and net unearned income was $294.3 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 June 30, 2012, and December 31, 2011:

 

   June 30,   December 31, 
(dollar amounts in thousands)  2012   2011 
Loans and leases:          
Commercial and industrial  $16,321,850   $14,699,371 
Commercial real estate   5,907,709    5,825,709 
Automobile   3,807,680    4,457,446 
Home equity   8,343,830    8,215,413 
Residential mortgage   5,123,027    5,228,276 
Other consumer   455,084    497,568 
Loans and leases   39,959,180    38,923,783 
Allowance for loan and lease losses   (859,646)   (964,828)
Net loans and leases  $39,099,534   $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).

 

7
 

 

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, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”, 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. Based on the timing of the Fidelity Bank acquisition occurring on the last business day of the 2012 first quarter, the assessment to determine if any of these loans were acquired with deteriorated credit quality in accordance with ASC 310-30 was not completed until the 2012 second quarter.

 

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 following table reflects the contractually required payments receivable, cash flows expected to be collected, and fair value of the loans at the acquisition date of March 30, 2012:

 

(in thousands)    
Contractually required payments including interest  $348,547 
Less: nonaccretable difference   (119,011)
Cash flows expected to be collected   229,536 
Less: accretable yield   (27,586)
Fair value of loans acquired  $201,950 

 

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 from the beginning of the period to the end of the period:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
(dollar amounts in thousands)   2012    2012 
Balance, beginning of period  $27,586   $ 
Impact of acquisition/purchase on March 30, 2012       27,586 
Accretion   (2,825)   (2,825)
Balance, end of period  $24,761   $24,761 

 

At June 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 June 30, 2012:

 

8
 

 

   June 30, 2012 
(in thousands)  Ending
Balance
   Unpaid Balance 
Commercial and industrial  $57,875   $84,966 
Commercial real estate   135,638    229,124 
Residential mortgage   2,355    4,338 
Other consumer   632    1,189 
Total  $196,500   $319,617 

 

Loan and Lease Purchases and Sales

 

The following table summarizes significant portfolio loan and lease purchase and sale activity for the three-month and six-month periods ended June 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 June 30, 2012  $   $   $   $   $   $   $ 
Six-month period ended June 30, 2012  $477,501   $378,122   $   $13,025   $62,324   $85   $931,057 
                                    
Three-month period ended June 30, 2011  $   $   $   $   $   $   $ 
Six-month period ended June 30, 2011                            
                                    
Portfolio loans and leases sold or transferred to loans held for sale during the:                                   
Three-month period ended June 30, 2012  $71,718   $26,273   $1,483,748   $   $179,621   $   $1,761,360 
Six-month period ended June 30, 2012  $125,165   $47,742   $2,783,748   $   $179,621       $3,136,276 
                                    
Three-month period ended June 30, 2011  $69,483   $8,330   $   $   $87,215   $   $165,028 
Six-month period ended June 30, 2011  $155,482   $56,123   $   $   $170,757   $   $382,362 

 

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. 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.

 

9
 

 

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 June 30, 2012, and December 31, 2011:

 

   2012   2011 
(dollar amounts in thousands)  June 30,   December 31, 
         
Commercial and industrial:          
Owner occupied  $71,335   $88,415 
Purchased impaired        
Other commercial and industrial   62,343    113,431 
Total commercial and industrial  $133,678   $201,846 
           
Commercial real estate:          
Retail properties  $64,425   $58,415 
Multi family   29,883    39,921 
Office   22,123    33,202 
Industrial and warehouse   17,246    30,119 
Purchased impaired        
Other commercial real estate   85,740    68,232 
Total commercial real estate  $219,417   $229,889 
           
Automobile  $   $ 
           
Home equity:          
Secured by first-lien  $18,632   $20,012 
Secured by junior-lien   27,391    20,675 
Total home equity  $46,023   $40,687 
           
Residential mortgage:          
Residential mortgage  $75,048   $68,658 
Purchased impaired        
Total residential mortgages  $75,048   $68,658 
           
Other consumer          
Other consumer  $   $ 
Purchased impaired        
Total other consumer  $   $ 
Total nonaccrual loans (1)  $474,166   $541,080 

 

(1) All loans acquired as part of the FDIC-assisted Fidelity Bank acquisition accrue interest as performing loans or as purchased impaired loans in accordance with ASC 310-30; therefore, none of the acquired loans were reported as nonaccrual at June 30, 2012.

 

10
 

 

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

 

June 30, 2012
(dollar amounts in thousands)  Past Due       Total Loans   90 or more
days past due
 
   30-59 Days   60-89 Days   90 or more days   Total   Current   and Leases   and accruing 
                               
Commercial and industrial:                                     
Owner occupied  $11,700   $4,124   $47,421   $63,245   $4,123,480   $4,186,725   $1,846   
Purchased impaired   2,802    1,541    17,071    21,414    36,461    57,875    17,071   
Other commercial and industrial   22,168    3,776    25,873    51,817    12,025,433    12,077,250    341   
Total commercial and industrial  $36,670   $9,441   $90,365   $136,476   $16,185,374   $16,321,850    $  19,258 (2)
                                      
Commercial real estate:                                     
Retail properties  $2,938   $628   $36,797   $40,363   $1,587,004   $1,627,367   $   
Multi family   5,210    3,040    19,893    28,143    944,178    972,321       
Office   18,163    2,815    19,409    40,387    977,783    1,018,170       
Industrial and warehouse   3,397    1,126    4,234    8,757    682,813    691,570       
Purchased impaired   8,807    1,381    38,054    48,242    87,396    135,638    38,125   
Other commercial real estate   6,074    19,250    28,279    53,603    1,409,040    1,462,643       
Total commercial real estate  $44,589   $28,240   $146,666   $219,495   $5,688,214   $5,907,709   $ 38,125 (2)
                                      
Automobile  $29,410    6,355   $3,338   $39,103   $3,768,577   $3,807,680   $3,338   
                                      
Home equity:                                     
Secured by first-lien  $18,105   $8,720   $30,008   $56,833   $4,093,850   $4,150,683   $11,375   
Secured by junior-lien   27,648    13,334    26,630    67,612    4,125,535    4,193,147    6,801   
Total home equity  $45,753   $22,054   $56,638   $124,445   $8,219,385   $8,343,830   $18,176   
                                      
Residential mortgage:                                     
Residential mortgage  $143,368   $48,264   $168,835   $360,467   $4,760,205   $5,120,672   $ 99,641 (3)
Purchased impaired   220    402    1,494    2,116    239    2,355    1,494   
Total residential mortgage  $143,588   $48,666   $170,329   $362,583   $4,760,444   $5,123,027   $101,135   
                                      
Other consumer:                                     
Other consumer  $6,547   $1,997   $913   $9,457   $444,995   $454,452   $913   
Purchased impaired       112    288    400    232    632    288   
Total other consumer  $6,547   $2,109   $1,201   $9,857   $445,227   $455,084   $1,201   

  

December 31, 2011
(dollar amounts in thousands)  Past Due       Total Loans   90 or more
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 

  

(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 $85,678 thousand guaranteed by the U.S. government.
(4)Includes $96,703 thousand guaranteed by the U.S. government.

 

11
 

 

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 under ASC 310-10, specific reserves related to loans considered to be impaired, and loans involved in troubled debt restructurings allocated under 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, however, the estimate of loss is based on pools of loans and leases with similar characteristics. The PD factor considers current credit scores unless the account is delinquent, in which case a higher PD factor is used. The credit score provides a basis for understanding the borrowers past and current payment performance, and this information is used to estimate expected losses over the 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 needed.

 

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.

 

12
 

 

The following table presents ALLL and AULC activity by portfolio segment for the three-month and six-month periods ended June 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 June 30, 2012: (1)                            
                             
ALLL balance, beginning of period  $246,026   $339,494   $36,552   $168,898   $89,129   $32,970   $913,069 
Loan charge-offs   (23,718)   (35,747)   (4,999)   (23,083)   (11,903)   (8,642)   (108,092)
Recoveries of loans previously charged-off   8,040    6,569    4,550    2,038    1,117    1,533    23,847 
Provision for loan and lease losses   50,200    (4,925)   (1,446)   (12,291)   886    4,052    36,476 
Allowance for loans sold or transferred to loans held for sale           (4,440)       (1,214)       (5,654)
                                    
ALLL balance, end of period  $280,548   $305,391   $30,217   $135,562   $78,015   $29,913   $859,646 
AULC balance, beginning of period  $42,276   $5,780   $   $2,108   $1   $769   $50,934 
Provision for unfunded loan commitments and letters of credit   568    (555)       82    3    (54)   44 
                                    
AULC balance, end of period  $42,844   $5,225   $   $2,190   $4   $715   $50,978 
                                    
ACL balance, end of period  $323,392   $310,616   $30,217   $137,752   $78,019   $30,628   $910,624 
                                    
Six-month period ended June 30, 2012: (1)                                   
                                    
ALLL balance, beginning of period  $275,367   $388,706   $38,282   $143,873   $87,194   $31,406   $964,828 
Loan charge-offs   (57,224)   (57,149)   (12,609)   (48,348)   (23,648)   (17,074)   (216,052)
Recoveries of loans previously charged-off   13,051    17,465    9,082    3,574    2,292    3,351    48,815 
Provision for loan and lease losses   49,354    (43,631)   597    36,463    13,391    12,230    68,404 
Allowance for loans sold or transferred to loans held for sale           (5,135)       (1,214)       (6,349)
                                    
ALLL balance, end of period  $280,548   $305,391   $30,217   $135,562   $78,015   $29,913   $859,646 
                                    
AULC balance, beginning of period  $39,658   $5,852   $   $2,134   $1   $811   $48,456 
Provision for unfunded loan commitments and letters of credit   3,186    (627)       56    3    (96)   2,522 
                                    
AULC balance, end of period  $42,844   $5,225   $   $2,190   $4   $715   $50,978 
                                    
ACL balance, end of period  $323,392   $310,616   $30,217   $137,752   $78,019   $30,628   $910,624 

 

(1)In accordance with ASC 805, no allowance for credit losses was recorded for the loans acquired in the FDIC-assisted Fidelity Bank acquisition.

 

13
 

 

   Commercial   Commercial       Home   Residential   Other     
   and Industrial   Real Estate   Automobile   Equity   Mortgage   Consumer   Total 
(dollar amounts in thousands)                            
                             
Three-month period ended June 30, 2011:                                   
                                    
ALLL balance, beginning of period  $299,563   $511,068   $50,862   $149,371   $96,741   $25,621   $1,133,226 
Loan charge-offs   (28,230)   (40,723)   (6,877)   (27,359)   (17,330)   (8,182)   (128,701)
Recoveries of loans previously charged-off   9,526    13,128    4,622    1,918    875    1,098    31,167 
Provision for loan and lease losses   157    (19,599)   6,821    22,514    20,220    6,835    36,948 
Allowance for loans sold or transferred to loans held for sale                   (1,514)       (1,514)
                                    
ALLL balance, end of period  $281,016   $463,874   $55,428   $146,444   $98,992   $25,372   $1,071,126 
                                    
AULC balance, beginning of period  $30,706   $8,433   $   $2,241   $1   $830   $42,211 
Provision for unfunded loan commitments and letters of credit   635    (1,801)       8        7    (1,151)
                                    
AULC balance, end of period  $31,341   $6,632   $   $2,249   $1   $837   $41,060 
                                    
ACL balance, end of period  $312,357   $470,506   $55,428   $148,693   $98,993   $26,209   $1,112,186 
                                    
Six-month period ended June 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   (81,965)   (117,371)   (16,852)   (55,682)   (40,351)   (15,487)   (327,708)
Recoveries of loans previously charged-off   21,070    22,093    9,885    3,526    4,964    3,553    65,091 
Provision for loan and lease losses   1,297    (29,099)   12,907    47,970    42,604    10,570    86,249 
Allowance for loans sold or transferred to loans held for sale                   (1,514)       (1,514)
                                    
ALLL balance, end of period  $281,016   $463,874   $55,428   $146,444   $98,992   $25,372   $1,071,126 
                                    
AULC balance, beginning of period  $32,726   $6,158   $   $2,348   $1   $894   $42,127 
Provision for unfunded loan commitments and letters of credit   (1,385)   474        (99)       (57)   (1,067)
                                    
AULC balance, end of period  $31,341   $6,632   $   $2,249   $1   $837   $41,060 
                                    
ACL balance, end of period  $312,357   $470,506   $55,428   $148,693   $98,993   $26,209   $1,112,186 

  

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.

 

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.

 

14
 

 

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 = Potentially weak loans. 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 inadequately protect Huntington’s position in the future.

 

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 generally 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 lower credit risk.

 

15
 

  

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

 

   June 30, 2012 
   Credit Risk Profile by UCS classification 
(dollar amounts in thousands)  Pass   OLEM   Substandard   Doubtful   Total 
Commercial and industrial:                         
Owner occupied  $3,822,996   $102,504   $260,205   $1,020   $4,186,725 
Purchased impaired   1,051    15,967    40,830    27    57,875 
Other commercial and industrial   11,475,884    166,148    432,578    2,640    12,077,250 
Total commercial and industrial  $15,299,931   $284,619   $733,613   $3,687   $16,321,850 
                          
Commercial real estate:                         
Retail properties  $1,300,320   $54,694   $272,353   $   $1,627,367 
Multi family   869,938    34,528    67,693    162    972,321 
Office   888,164    35,844    94,158    4    1,018,170 
Industrial and warehouse   622,314    7,486    61,770        691,570 
Purchased impaired   5,507    45,926    84,076    129    135,638 
Other commercial real estate   1,188,881    64,241    209,405    116    1,462,643 
Total commercial real estate  $4,875,124   $242,719   $789,455   $411   $5,907,709 

 

   Credit Risk Profile by FICO score (1) 
   750+   650-749   <650   Other (2)   Total 
Automobile  $2,487,741   $2,084,794   $634,529   $84,365   $5,291,429(3)
                          
Home equity:                         
Secured by first-lien  $2,427,346   $1,387,435   $317,207   $18,695   $4,150,683 
Secured by junior-lien   2,034,628    1,580,078    575,773    2,668    4,193,147 
Total home equity  $4,461,974   $2,967,513   $892,980   $21,363   $8,343,830 
                          
Residential mortgage:                         
Residential mortgage  $2,641,238   $1,805,850   $708,150   $110,001   $5,265,239 
Purchased impaired   357    1,357    475    166    2,355 
Total residential mortgage  $2,641,595   $1,807,207   $708,625   $110,167   $5,267,594(4)
                          
Other consumer:                         
Other consumer  $174,380   $185,857   $70,368   $23,847   $454,452 
Purchased impaired   -    232    300    100    632 
Total other consumer  $174,380   $186,089   $70,668   $23,947   $455,084 

 

   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 

 

16
 

 

   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(5)
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 $1,483,749 thousand of loans reflected as loans held for sale.  
(4) Includes $144,567 thousand of loans reflected as loans held for sale.  
(5) Includes $1,250,000 thousand of loans reflected as loans held for sale.  

 

17
 

  

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 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 June 30, 2012, and December 31, 2011:

 

18
 

 

   Commercial   Commercial           Residential   Other     
   and Industrial   Real Estate   Automobile   Home Equity   Mortgage   Consumer   Total 
                             
ALLL at June 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   17,797    49,200    937    1,239    12,347    341    81,861 
Attributable to loans collectively evaluated for impairment   262,751    256,191    29,280    134,323    65,668    29,572    777,785 
Total ALLL balance  $280,548   $305,391   $30,217   $135,562   $78,015   $29,913   $859,646 
                                    
Loans and Leases at June 30, 2012:                                   
(dollar amounts in thousands)                                   
                                    
Portion of ending balance:                                   
                                    
Attributable to loans purchased with deteriorated credit quality  $57,875   $135,638   $   $   $2,355   $632   $196,500 
Attributable to loans individually evaluated for impairment   119,650    355,920    34,460    67,371    327,300    3,151    907,852 
Attributable to loans collectively evaluated for impairment   16,144,325    5,416,151    3,773,220    8,276,459    4,793,372    451,301    38,854,828 
Total loans evaluated for impairment (1)  $16,321,850   $5,907,709   $3,807,680   $8,343,830   $5,123,027   $455,084   $39,959,180 

 

19
 

 

   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 

 

20
 

 

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   Six Months Ended 
   June 30, 2012   June 30, 2012   June 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  $5,240   $16,451   $   $8,038   $36   $5,614   $60 
Purchased impaired   57,875    82,114        70,641    832    70,641    832 
Other commercial and industrial   4,981    4,983        11,114    162    8,196    255 
Total commercial and industrial  $68,096   $103,548   $   $89,793   $1,030   $84,451   $1,147 
                                    
Commercial real estate:                                   
Retail properties  $51,090   $54,559   $   $54,861   $722   $51,532   $1,476 
Multi family   5,946    6,089        6,033    96    6,112    193 
Office   9,670    14,943        4,010    27    2,598    52 
Industrial and warehouse   6,395    7,495        6,799    100    7,178    206 
Purchased impaired   135,638    211,667        174,299    1,950    174,299    1,950 
Other commercial real estate   18,628    38,015        16,113    125    18,067    273 
Total commercial real estate  $227,367   $332,768   $   $262,115   $3,020   $259,786   $4,150 
                                    
Home equity:                                   
Secured by first-lien  $   $   $   $   $   $   $ 
Secured by junior-lien                            
Total home equity  $   $   $   $   $   $   $ 
                                    
Residential mortgage:                                   
Residential mortgage  $   $   $   $   $   $   $ 
Purchased impaired   2,355    4,338        4,805    34    4,805    34 
Total residential mortgage  $2,355   $4,338   $   $4,805   $34   $4,805   $34 
                                    
Other consumer                                   
Other consumer  $   $   $   $   $   $   $ 
Purchased impaired   632    935        864    9    864    9 
Total other consumer  $632   $935   $   $864   $9   $864   $9 
                                    
With an allowance recorded:                                   
Commercial and industrial: (3)                                   
Owner occupied  $35,386   $45,480   $5,504   $33,400   $293   $38,411   $695 
Purchased impaired                            
Other commercial and industrial   74,043    98,632    12,293    86,688    627    87,909    1,482 
Total commercial and industrial  $109,429   $144,112   $17,797   $120,088   $920   $126,320   $2,177 
                                    
Commercial real estate: (4)                                   
Retail properties  $127,718   $157,655   $28,871   $118,628   $906   $121,163   $3,185 
Multi family   28,160    33,756    4,681    25,288    206    31,312    828 
Office   7,840    8,734    1,683    17,218    51    20,167    158 
Industrial and warehouse   23,013    31,289    2,282    22,596    74    24,547    353 
Purchased impaired                            
Other commercial real estate   77,460    91,743    11,683    75,986    456    77,907    1,618 
Total commercial real estate  $264,191   $323,177   $49,200   $259,716   $1,693   $275,096   $6,142 
                                    
Automobile  $34,460   $34,460   $937   $34,991   $794   $35,518   $1,616 
                                    
Home equity:                                   
Secured by first-lien  $51,238   $51,238   $527   $47,568   $561   $43,659   $1,040 
Secured by junior-lien   16,133    16,133    712    15,919    222    16,196    437 
Total home equity  $67,371   $67,371   $1,239   $63,487   $783   $59,855   $1,477 
                                    
Residential mortgage (6):                                   
Residential mortgage  $327,300   $355,214   $12,347   $325,842   $2,866   $329,151   $5,803 
Purchased impaired                            
Total residential mortgage  $327,300   $355,214   $12,347   $325,842   $2,866   $329,151   $5,803 
                                    
Other consumer:                                   
Other consumer  $3,151   $3,151   $341   $3,748   $26   $4,572   $59 
Purchased impaired                            
Total other consumer  $3,151   $3,151   $341   $3,748   $26   $4,572   $59 

 

21
 

 

   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 June 30, 2012, $40,280 thousand of the $109,429 thousand commercial and industrial loans with an allowance recorded were considered impaired due to their status as a TDR.
(4)At June 30, 2012, $33,105 thousand of the $264,191 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 June 30, 2012, $16,946 thousand of the $327,300 thousand residential mortgages loans with an allowance recorded were guaranteed by the U.S. government.

 

22
 

 

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:

 

(1)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.
(2)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.
(3)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.

 

·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 ended June 30, 2012, 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. 

 

23
 

 

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.

 

TDR concessions and classification may reduce the ALLL within certain classes, specifically the C&I and CRE portfolios. The reduction is derived from the type of concessions given to the borrowers and the resulting application of the transaction reserve calculation within the ALLL.  Our TDRs may include multiple concessions and the disclosure classifications are based on the primary concession provided to the borrower. The majority of our concessions for C&I and CRE loans during the period are situations in which we extended the maturity date which is normally coupled with an increase in the interest rate (in these cases, the primary concession is the maturity date extension).

 

The transaction reserve for non-TDR 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 transaction reserve is measured based on the estimation of the probable discounted future cash flows expected to be collected on the modified loan in accordance with ASC 310-10.  The resulting TDR ALLL calculation often results in a minimal or zero ALLL amount because (1) it is probable all cash flows will be collected and, (2) due to the 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.

 

However, TDR concessions and classification may increase the ALLL to certain loans, such as consumer loans.  The concessions made to these loans 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 probable discounted cash flows expected to be collected on the modified loan in accordance with ASC 310-10. The resulting TDR ALLL calculation often results in a higher ALLL amount because (1) it may not be probable all cash flows will be collected and, (2) due to the rate decrease, the discounting of the cash flows on the modified loan, using the pre-modification interest rate, indicates it is not probable that all cash flows will be collected.

 

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 aggr