Huntington National Bank 2007 Annual Report Download - page 37

RISK MANAGEMENT AND CAPITAL
Risk identification and monitoring are key elements in overall risk management. We believe our primary risk exposures are credit,
market, liquidity, and operational risk. Credit risk is the risk of loss due to adverse changes in the borrower’s ability to meet its
financial obligations under agreed upon terms. Market risk represents the risk of loss due to changes in the market value of assets
and liabilities due to changes in interest rates, exchange rates, and equity prices. Liquidity risk arises from the possibility that funds
may not be available to satisfy current or future commitments based on external macro market issues, investor perception of
financial strength, and events unrelated to the company such as war, terrorism, or financial institution market specific issues.
Operational risk arises from the inherent day-to-day operations of the company that could result in losses due to human error,
inadequate or failed internal systems and controls, and external events.
We follow a formal policy to identify, measure, and document the key risks facing the company, how those risks can be controlled
or mitigated, and how we monitor the controls to ensure that they are effective. Our chief risk officer is responsible for ensuring
that appropriate systems of controls are in place for managing and monitoring risk across the company. Potential risk concerns are
shared with the board of directors, as appropriate. Our internal audit department performs ongoing independent reviews of the
risk management process and ensures the adequacy of documentation. The results of these reviews are reported regularly to the
audit committee of the board of directors.
Some of the more significant processes used to manage and control credit, market, liquidity, and operational risks are described in
the following paragraphs.
Credit Risk
Credit risk is the risk of loss due to adverse changes in a borrower’s ability to meet its financial obligations under agreed upon
terms. We are subject to credit risk in lending, trading, and investment activities. The nature and degree of credit risk is a function
of the types of transactions, the structure of those transactions, and the parties involved. The majority of our credit risk is
associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. Credit risk is
incidental to trading activities and represents a limited portion of the total risks associated with the investment portfolio. Credit
risk is mitigated through a combination of credit policies and processes and portfolio diversification.
The maximum level of credit exposure to individual commercial borrowers is limited by policy guidelines based on the risk of
default associated with the credit facilities extended to each borrower or related group of borrowers. All authority to grant
commitments is delegated through the independent credit administration function and is monitored and regularly updated.
Concentration risk is managed via limits on loan type, geography, industry, loan quality factors, and country limits. We continue
to focus on extending credit to commercial customers with existing or expandable relationships within our primary banking
markets. Also, we continue to focus on expanding existing relationships with our retail customers and adding new borrowers that
meet our risk profile.
The checks and balances in the credit process and the independence of the credit administration and risk management functions
are designed to assess the level of credit risk being accepted, facilitate the early recognition of credit problems when they do occur,
and to provide for effective problem asset management and resolution.
CREDIT EXPOSURE MIX
(This section should be read in conjunction with Significant Items 1, 2, and 3.)
As shown in Table 13, at December 31, 2007, our largest credit exposure was total commercial loans, which totaled $22.3 billion
and represented 56% of total credit exposure. This portfolio was diversified among middle-market C&I loans, middle-market CRE
loans, and small business loans (see “Commercial Credit” discussion below).
Total consumer loans were $17.7 billion at December 31, 2007, and represented 44% of total credit exposure. The consumer
portfolio was diversified among home equity loans, residential mortgages, and automobile loans and leases (see “Consumer Credit”
discussion below).
As a result of the Sky Financial acquisition in 2007, our mix of loans and leases between total commercial loans and total
consumer loans changed, resulting in a higher percentage of total commercial loans than in prior years. We anticipate this higher
percentage of total commercial loans to continue in the near-term. Also resulting from the Sky Financial acquisition were increases
in total loans and leases across substantially all business segments.
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MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED