Huntington National Bank 2014 Annual Report Download - page 52

46
In addition to the initial credit analysis conducted during the approval process, our Credit Review group performs testing to
provide an independent review and assessment of the quality and risk of new loan originations. This group is part of our Risk
Management area, and conducts portfolio reviews on a risk-based cycle to evaluate individual loans, validate risk ratings, as well as
test the consistency of credit processes.
Our standardized loan grading system considers many components that directly correlate to loan quality and likelihood of
repayment, one of which is guarantor support. On an annual basis, or more frequently if warranted, we consider, among other things,
the guarantor’s reputation and creditworthiness, along with various key financial metrics such as liquidity and net worth, assuming
such information is available. Our assessment of the guarantor’s credit strength, or lack thereof, is reflected in our risk ratings for
such loans, which is directly tied to, and an integral component of, our ACL methodology. When a loan goes to impaired status,
viable guarantor support is considered in the determination of a credit loss.
If our assessment of the guarantor’s credit strength yields an inherent capacity to perform, we will seek repayment from the
guarantor as part of the collection process and have done so successfully. However, we do not formally track the repayment success
from guarantors.
Substantially all loans categorized as Classified (see Note 3 of Notes to Consolidated Financial Statements) are managed by our
Special Assets Department (SAD). The SAD group is a specialized group of credit professionals that handle the day-to-day
management of workouts, commercial recoveries, and problem loan sales. Its responsibilities include developing and implementing
action plans, assessing risk ratings, and determining the appropriateness of the allowance, the accrual status, and the ultimate
collectability of the Classified loan portfolio.
C&I PORTFOLIO
The C&I portfolio is comprised of loans to businesses where the source of repayment is associated with the on-going operations
of the business. Generally, the loans are secured by the borrower’s assets, such as equipment, accounts receivable, and/or inventory.
In many cases, the loans are secured by real estate, although the operation, sale, or refinancing of the real estate is not a primary source
of repayment for the loan. For loans secured by real estate, appropriate appraisals are obtained at origination and updated on an as
needed basis in compliance with regulatory requirements.
Currently, higher-risk segments of the C&I portfolio include loans to borrowers supporting the home building industry,
contractors, and leveraged lending. We manage the risks inherent in this portfolio through origination policies, a defined loan
concentration policy with established limits, on-going loan level reviews and portfolio level reviews, recourse requirements, and
continuous portfolio risk management activities. Our origination policies for this portfolio include loan product-type specific policies
such as LTV and debt service coverage ratios, as applicable.
The C&I portfolio continues to have strong origination activity as evidenced by the growth over the past 12 months. The credit
quality of the portfolio remains strong as we maintain a focus on high quality originations. Problem loans have trended downward
over the last several years, reflecting a combination of proactive risk identification and effective workout strategies implemented by
the SAD. We continue to maintain a proactive approach to identifying borrowers that may be facing financial difficulty in order to
maximize the potential solutions.
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 at
origination, (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. We actively monitor both geographic
and project-type concentrations and performance metrics of all CRE loan types, with a focus on loans identified as higher risk based
on the risk rating methodology. 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 originate and manage the majority of the portfolio, with the remainder obtained from prior
bank acquisitions. 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
provides an independent review and assessment of the quality of the underwriting and risk of new loan originations.