Huntington National Bank 2003 Annual Report Download - page 56

MANAGEMENT’S DISCUSSION AND ANALYSIS
(see Balance Sheet discussion and Table 6). The sales of automobile loans (see Significant Factor item 3) are another example of the
proactive management of concentration risk.
The checks and balances in the credit process and the independence of the credit administration and risk management functions are
designed to minimize problems and to facilitate the early recognition of problems when they do occur.
C
OMMERCIAL C REDIT
Commercial credit approvals are based on, among other factors, the financial strength of the borrower, assessment of the borrower’s
management, industry sector trends, type of exposure, transaction structure, and the general economic outlook. There are two
processes for approving credit risk exposures. The first involves a centralized loan approval process for the standard products and
structures utilized in small business lending, where individual credit authority is granted to certain individuals on a regional basis to
preserve the company’s local decision-making focus. The second, and more prevalent approach, involves individual approval of
exposures. These approvals are consistent with the authority delegated to officers located in the geographic regions who are
experienced in the industries and loan structures over which they have responsibility.
All C&I and CRE credit extensions are assigned internal risk ratings reflecting the borrower’s probability-of-default and loss-in-event-
of-default. This two-dimensional rating methodology, which has 180 individual loan grades, was implemented in 2003 and has
provided the company with improved granularity in the portfolio management process. The probability-of-default is rated on a scale
of 1-12 and is applied at the borrower level. The loss-in-event-of-default is rated on a 1-15 scale and is associated with each individual
credit exposure based on the type of credit extension and the underlying collateral.
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, credit processes, and conducts a portfolio review
at each of the regions on a regular basis. During 2003, approximately 60% of the total amount of the C&I and CRE portfolio was
reviewed by the 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.
The company has also established a credit workout group composed of highly skilled and experienced lenders to manage problem
credits. The group handles commercial recoveries, workouts, and problem loan sales, as well as the day-to-day management of
relationships rated substandard or worse. 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.
C
ONSUMER C REDIT
Consumer credit approvals are based on, among other factors, the financial strength of the borrower, type of exposure, transaction
structure, and the general economic outlook. 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 the company’s
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. Management makes 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 technologically advanced collection methodologies designed to maintain a high level of effectiveness while
54 HUNTINGTON BANCSHARES INCORPORATED