Huntington National Bank 2011 Annual Report Download - page 65

CRE PORTFOLIO
We manage the risks inherent in this portfolio specific to CRE lending, focusing on the quality of the
developer, and the specifics associated with each project. Generally, we: (1) limit our loans to 80% of the
appraised value of the commercial real estate, (2) require net operating cash flows to be 125% of required interest
and principal payments, and (3) if the commercial real estate is nonowner occupied, require that at least 50% of
the space of the project be preleased. Additionally, we established a limit to our CRE exposure of no more than
our amount of Tier 1 risk-based capital plus the ACL. We have been actively reducing our CRE exposure during
the past three years, and our CRE exposure met this established limit at December 31, 2011. We actively monitor
both geographic and project-type concentrations and performance metrics of all CRE loan types, with a focus on
higher risk classes. Both macro-level and loan-level stress-test scenarios based on existing and forecast market
conditions are part of the on-going portfolio management process for the CRE portfolio.
Dedicated real estate professionals originated the majority of the portfolio, with the remainder obtained
from prior bank acquisitions. Appraisals are obtained from approved vendors, and are reviewed by an internal
appraisal review group comprised of certified appraisers to ensure the quality of the valuation used in the
underwriting process. The portfolio is diversified by project type and loan size, and this diversification represents
a significant portion of the credit risk management strategies employed for this portfolio. Subsequent to the
origination of the loan, the Credit Review group performs testing to provide an independent review and
assessment of the quality of the underwriting and/or risk of new loan originations.
Appraisal values are obtained in conjunction with all originations and renewals, and on an as needed basis,
in compliance with regulatory requirements. We continue to perform on-going portfolio level reviews within the
CRE portfolio. These reviews generate action plans based on occupancy levels or sales volume associated with
the projects being reviewed. Property values are updated using appraisals on a regular basis to ensure appropriate
decisions regarding the on-going management of the portfolio reflect the changing market conditions. This
highly individualized process requires working closely with all of our borrowers, as well as an in-depth
knowledge of CRE project lending and the market environment.
Each CRE loan is classified as either core or noncore. We separated the CRE portfolio into these categories
in order to provide more clarity around our portfolio management strategies and to provide additional clarity for
us and our investors. We believe segregating the noncore CRE from core CRE improves our ability to understand
the nature, performance prospects, and problem resolution opportunities of these segments, thus allowing us to
continue to deal proactively with any emerging credit issues.
A CRE loan is generally considered core when the borrower is an experienced, well-capitalized developer in
our Midwest footprint, and has either an established meaningful relationship with us that generates an acceptable
return on capital or demonstrates the prospect of becoming one. The core CRE portfolio was $4.0 billion at
December 31, 2011, representing 68% of total CRE loans. The performance of the core portfolio met our
expectations based on the consistency of the asset quality metrics within the portfolio. Based on our extensive
project level assessment process, including forward-looking collateral valuations, we continue to believe the
credit quality of the core portfolio is stable. Loans are not reclassified between the core and noncore segments
based on performance, and as such, we do not anticipate an elevated level of problem loans in the core portfolio.
A CRE loan is generally considered noncore based on the lack of a substantive relationship outside of the loan
product, with no immediate prospects for meeting the core relationship criteria. The noncore CRE portfolio declined
from $2.6 billion at December 31, 2010, to $1.8 billion at December 31, 2011, and represented 32% of total CRE
loans. Of the loans in the noncore portfolio at December 31, 2011, 67% were classified as Pass, 95% had
guarantors, nearly 100% were secured, and 90% were located within our geographic footprint. However, it is within
the noncore portfolio where most of the credit quality challenges exist. For example, $0.2 billion, or 11%, of related
outstanding balances, are classified as NALs. We expect to exit the majority of noncore CRE relationships over
time through normal repayments and refinancings, possible sales should economically attractive opportunities arise,
or the reclassification to a core CRE relationship if it expands to meet the core criteria.
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