Huntington National Bank 2007 Annual Report Download - page 39

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Commercial Credit
(This section should be read in conjunction with Significant Items 1, 2, and 3.)
Table 14 — Commercial & Industrial and Commercial Real Estate Loan and Lease Detail
(in millions of dollars) 2007 2006 2005 2004 2003
At December 31,
Commercial and industrial loans
(1)
$ 8,468 $ 4,743 $ 3,998 $ 3,632 $3,463
Dealer floor plan loans 795 631 615 645 635
Equipment direct financing leases 895 587 471 389 318
Middle market commercial and industrial loans and leases 10,158 5,961 5,084 4,666 4,416
Small business commercial and industrial loans 2,968 1,889 1,725 1,164 898
Commercial and industrial loans and leases 13,126 7,850 6,809 5,830 5,314
Middle market commercial real estate loans 7,804 3,951 3,537 3,519 3,183
Small business commercial real estate loans 1,379 553 499 954 989
Commercial real estate loans 9,183 4,504 4,036 4,473 4,172
Total commercial loans and leases $22,309 $12,354 $10,845 $10,303 $9,486
(1) 2007 includes loans to Franklin.
Commercial credit approvals are based on, among other factors, the financial strength of the borrower, assessment of the
borrower’s management capabilities, industry sector trends, type of exposure, transaction structure, and the general economic
outlook. While these are the primary factors considered, there are a number of other factors that may be considered in the decision
process. 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 banking. In this centralized decision environment, individual credit
authority is granted to certain individuals on a regional basis to preserve our 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 commercial credit extensions are assigned internal risk ratings reflecting the borrower’s probability-of-default and loss-given-
default. This two-dimensional rating methodology, which results in 192 individual loan grades, provides 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-
given-default is rated on a 1-16 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. We continually review and adjust our risk
rating criteria based on actual experience, which may result in further changes to such criteria, in future periods. Accordingly, in
2007, we changed our reserve methodology for small business loans to utilize a small business credit score, consistent with that
used for the consumer loan portfolio, as the primary driver of the reserve for commercial loans less than $500 thousand, rather
than reserving based on probability-of-default and loss-given-default. The change did not result in a significant change to the
allowance for loan and lease losses for these commercial loans.
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 and credit processes and conducts a portfolio
review at each of the regions on a 15-month cycle. The loan review group validates the risk grades to approximately 50% of the
portfolio exposure each calendar year.
Borrower exposures may be designated as monitored credits 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.
A specialized credit workout group is involved in the management of all monitored credits, and handles commercial recoveries,
workouts, and problem loan sales, as well as the day-to-day management of relationships rated substandard or lower. The group is
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MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED