Huntington National Bank 2010 Annual Report Download - page 63

We believe our primary risk exposures are credit, market, liquidity, operational, and compliance risk.
Credit risk is the risk of loss due to adverse changes in our borrowers’ 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 obligations resulting from
external macro market issues, investor perception of financial strength, and events unrelated to us such as war,
terrorism, or financial institution market specific issues. 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 significant credit risk associated with
our investment securities portfolio (see Investment Securities Portfolio discussion). While there is credit risk
associated with derivative activity, we believe this exposure is minimal. The significant change in the
economic conditions and the resulting changes in borrower behavior over the past several years resulted in our
focusing significant resources to 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 added more quantitative measurement capabilities utilizing external
data sources, enhanced use of modeling technology, and internal stress testing processes.
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 continue to 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. We continue to add new borrowers that meet our targeted risk and profitability
profile. 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 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.
Asset quality metrics improved significantly in 2010, reflecting our proactive portfolio management
initiatives as well as some stabilization in a still relatively weak economy. The improvements in the asset
quality metrics, including lower levels of NPAs, Criticized and Classified assets, and delinquencies have all
been achieved through these policies and commitments. Our portfolio management policies demonstrate our
commitment to maintaining an aggregate moderate-to-low risk profile. To that end, we continue to expand
resources in our risk management areas.
The weak residential real estate market and U.S. economy continued to have significant impact on the
financial services industry as a whole, and specifically on our financial results. A pronounced downturn in the
residential real estate market that began in early 2007 has resulted in significantly lower residential real estate
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