Huntington National Bank 2006 Annual Report Download - page 32

MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
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 in a
centralized database. Concentration risk is managed via limits on loan type, geography, industry, loan quality factors, and
country limits. We have focused on extending credit to commercial customers with existing or expandable relationships within
our primary banking markets.
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 Factors 1 and 3.)
An overall corporate objective is to avoid undue portfolio concentrations. As shown in Table 10, at December 31, 2006, total
credit exposure was $26.2 billion. Of this amount, $13.8 billion, or 53%, represented total consumer loans and leases, and
$12.4 billion, or 47%, total commercial loans and leases.
A specific portfolio concentration objective has been to reduce the relative level of total automobile exposure (the sum of
automobile loans, automobile leases, securitized and operating lease assets) from its 33% level at the end of 2002. As shown in
Table 10, such exposure was 15% at December 31, 2006.
In contrast, another specific portfolio concentration objective has been to increase the relative level of lower-risk residential
mortgages and home equity loans. At December 31, 2006, such loans represented 36% of total credit exposure, up from 22% at
the end of 2002.
From 2002 through 2005, the level of total commercial loans and leases has remained relatively constant at 42%-44% of total
credit exposure. However, at the end of 2006, the level had increased to 47%, reflecting growth in commercial loans, as well as
lower relative levels of consumer automobile leases. Middle market C&I loans declined to 19% at year-end 2004 from 22% at
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