Huntington National Bank 2012 Annual Report Download - page 48

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We believe our primary risk exposures are credit, market, liquidity, operational, and compliance oriented. Credit risk is the risk
of loss due to adverse changes in a counterparty’s ability to meet their 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
resulting from external macro market issues, investor and customer perception of financial strength, and events unrelated to us, such as
war, terrorism, or financial institution market specific issues. In addition, the mix and maturity structure of Huntington’s balance
sheet, amount of on-hand cash and unencumbered securities and the availability of contingent sources of funding, can have an impact
on Huntington’s ability to satisfy current or future funding commitments. We manage liquidity risk at both the Bank and the parent
company. Operational risk arises from our inherent day-to-day operations that could result in losses due to human error, inadequate or
failed internal systems and controls, and external events. Compliance risk exposes us to money penalties, enforcement actions or
other sanctions as a result of nonconformance with laws, rules, and regulations that apply to the financial services industry.
Some of the more significant processes used to manage and control credit, market, liquidity, operational, and compliance risks are
described in the following paragraphs.
Credit Risk
Credit risk is the risk of financial loss if a counterparty is not able to meet the agreed upon terms of the financial obligation. The
majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable
lending. We also have credit risk associated with our AFS securities portfolio (see Note 4 of the Notes to Consolidated Financial
Statements). We engage with other financial counterparties for a variety of purposes including investing, asset and liability
management, mortgage banking, and for trading activities. While there is credit risk associated with derivative activity, we believe
this exposure is minimal.
We continue to focus on the identification, monitoring, and managing of our credit risk. In addition to the traditional credit risk
mitigation strategies of credit policies and processes, market risk management activities, and portfolio diversification, we use
additional quantitative measurement capabilities utilizing external data sources, enhanced use of modeling technology, and internal
stress testing processes. Our portfolio management resources demonstrate our commitment to maintaining an aggregate moderate-to-
low risk profile. In our efforts to continue to identify risk mitigation techniques, we have focused on product design features,
origination policies, and treatment strategies for delinquent or stressed borrowers.
The maximum level of credit exposure to individual credit borrowers is limited by policy guidelines based on the perceived risk
of each borrower or related group of borrowers. All authority to grant commitments is delegated through the independent credit
administration function and is closely monitored and regularly updated. Concentration risk is managed through limits on loan type,
geography, industry, and loan quality factors. We focus predominantly on extending credit to retail and commercial customers with
existing or expandable relationships within our primary banking markets, although we will consider lending opportunities outside our
primary markets if we believe the associated risks are acceptable and aligned with strategic initiatives. Although we offer a broad set
of products, we continue to develop new lending products and opportunities. Each of these new products and opportunities goes
through a rigorous development and approval process prior to implementation to ensure our overall objective of maintaining an
aggregate moderate-to-low risk portfolio profile.
The checks and balances in the credit process and the independence of the credit administration and risk management functions
are designed to appropriately assess and sanction the level of credit risk being accepted, facilitate the early recognition of credit
problems when they occur, and to provide for effective problem asset management and resolution. For example, we do not extend
additional credit to delinquent borrowers except in certain circumstances that substantially improve our overall repayment or collateral
coverage position. To that end, we continue to expand resources in our risk management areas.
Although credit quality improved in 2012, the weak residential real estate market and U.S. economy continued to negatively
impact us and the financial services industry as a whole. We continued to experience higher than historical levels of delinquencies and
NCOs in our loan portfolios. The performance metrics associated with the CRE, residential mortgage, and home equity portfolios
continued to be the most significantly impacted portfolios as real estate prices remain substantially lower than pre-2008. Additionally,
continued high unemployment, along with other economic conditions, throughout 2010-2012 slowed full recovery from the 2008-
2009 U.S. recession.
Loan and Lease Credit Exposure Mix
At December 31, 2012, our loans and leases totaled $40.7 billion, representing a $1.8 billion, or 5%, increase compared to $38.9
billion at December 31, 2011, primarily reflecting growth in the C&I portfolio, partially offset by a decline in the CRE portfolio
reflecting the continued runoff in the noncore portfolio. The C&I loan increase included the impacts related to a continuation of the
growth in high quality loans originated over recent quarters and the purchase of a portfolio of high quality municipal equipment
leases. Additionally, the FDIC-assisted Fidelity acquisition resulted in the addition of $523.9 million of loans.