Huntington National Bank 2005 Annual Report Download - page 57

MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
In commercial lending, ongoing credit management is dependent on the type and nature of the loan. In general, quarterly
monitoring is normal for all significant exposures. The internal risk ratings are revised and updated with each periodic
monitoring event. There is also extensive macro portfolio management analysis on an ongoing basis to continually update default
probabilities and to estimate future losses.
In addition to the initial credit analysis initiated by the portfolio manager during the underwriting process, the loan review group
performs independent credit reviews. The loan review group reviews individual loans and credit processes and conducts a
portfolio review at each of the regions on a 15-month cycle, and the loan review group validates the risk grades on a minimum
of 50% of the portfolio exposure. During the previous 15 months, 61% of the total commercial portfolio was reviewed by our
independent loan review function.
Borrower exposures may be designated as ‘‘watch list’’ accounts when warranted by individual company performance, or by
industry and environmental factors. Such accounts are subjected to additional quarterly reviews by the business line Management,
the loan review group, and credit administration in order to adequately assess the borrower’s credit status and to take appropriate
action.
A specialized credit workout group manages problem credits and handles commercial recoveries, workouts, and problem loan
sales, as well as the day-to-day management of relationships rated substandard or lower. The group is responsible for developing
an action plan, assessing the risk rating, and determining the adequacy of the reserve, the accrual status, and the ultimate
collectibility of the credits managed.
Consumer Credit
Consumer credit approvals are based on, among other factors, the financial strength of the borrower, type of exposure, and the
transaction structure. Consumer credit decisions are generally made in a centralized environment utilizing decision models. There
is also individual credit authority granted to certain individuals on a regional basis to preserve our local decision-making focus.
Each credit extension is assigned a specific probability-of-default and loss-in-event-of-default. The probability-of-default is
generally a function of the borrower’s credit bureau score, while the loss-in-event-of-default is related to the type of collateral and
the loan-to-value ratio associated with the credit extension.
In consumer lending, credit risk is managed from a loan type and vintage performance analysis. All portfolio segments are
continuously monitored for changes in delinquency trends and other asset quality indicators. We make extensive use of portfolio
assessment models to continuously monitor the quality of the portfolio and identify under-performing segments. This
information is then incorporated into future origination strategies. The independent risk management group has a consumer
process review component to ensure the effectiveness and efficiency of the consumer credit processes.
Collection action is initiated on an ‘‘as needed’’ basis through a centrally managed collection and recovery function. The
collection group employs a series of collection methodologies designed to maintain a high level of effectiveness while maximizing
efficiency. In addition to the retained consumer loan portfolio, the collection group is responsible for collection activity on all
sold and securitized consumer loans and leases.
Non-Performing Assets (NPAs)
(This section should be read in conjunction with Significant Factor 4.)
NPAs consist of loans and leases that are no longer accruing interest, loans and leases that have been renegotiated to below
market rates based upon financial difficulties of the borrower, and real estate acquired through foreclosure. C&I, CRE, and small
business loans are generally placed on non-accrual status when collection of principal or interest is in doubt or when the loan is
90 days past due. When interest accruals are suspended, accrued interest income is reversed with current year accruals charged to
earnings and prior-year amounts generally charged-off as a credit loss. Consumer loans and leases, excluding residential
mortgages and home equity lines and leases, are not placed on non-accrual status but are charged-off in accordance with
regulatory statutes, which is generally no more than 120 days past due. Residential mortgages and home equity lines and leases,
while highly secured, are placed on non-accrual status within 180 days past due as to principal and 210 days past due as to
interest, regardless of collateral. When we believe the borrower’s ability and intent to make periodic interest and principal
payments resume and collectibility is no longer in doubt, the loan is returned to accrual status. A charge-off on a residential
mortgage loan is recorded when the loan has been foreclosed and the loan balance exceeds the fair value of the real estate. The
fair value of the collateral, less the cost to sell, is then recorded as real estate owned.
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