Huntington National Bank 2015 Annual Report Download - page 57

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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.
Substantially all loans categorized as Classified (see Note 3 of Notes to Consolidated Financial Statements) are managed by our
Special Assets Division. SAD 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.
We manage the risks inherent in the C&I 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 the C&I portfolio include loan product-type specific policies such as LTV and debt
service coverage ratios, as applicable. Currently, a higher-risk segment of the C&I portfolio is loans to borrowers supporting oil and
gas exploration and production and is further described below.
The C&I portfolio continues to have solid origination activity as evidenced by its growth over the past 12 months and we
maintain a focus on high quality originations. Problem loans had trended downward over the last several years, reflecting a
combination of proactive risk identification and effective workout strategies implemented by the SAD. However, over the past year,
C&I problem loans began to increase, primarily as a result of the oil and gas exploration and production customers and the increase in
overall portfolio size. We continue to maintain a proactive approach to identifying borrowers that may be facing financial difficulty in
order to maximize the potential solutions. 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.
We have a dedicated energy lending group that focuses on upstream companies (exploration and production or E&P firms) as
well as midstream (pipeline transportation) companies. This lending group is comprised of colleagues with many years of experience
in this area of specialized lending, through several economic cycles. The exposure to the E&P companies is centered in broadly
syndicated reserve-based loans and is 0.5% of our total loans. All of these loans are secured and in a first-lien position. The customer
base consists of larger firms that generally have had access to the capital markets and/or are backed by private equity firms. This
lending group has no exposure to oil field services companies. However, we have a few legacy oil field services customers for which
the remaining aggregate credit exposure is negligible.
The significant reduction in oil and gas prices over the past year has had a negative impact on the energy industry, particularly
exploration and production companies as well as the oil field services providers. The impact of low prices for an extended period of
time has had some level of adverse impact on most, if not all, borrowers in this segment. Most of these borrowers have, therefore, had
recent downward adjustments to their risk ratings, which has increased our loan loss reserve.
We have other energy related exposures, including gas stations, wholesale distributors, mining, and utilities. We continue to
monitor these exposures closely. However, these exposures have different factors affecting their performance, and we have not seen
the same level of volatility in performance or risk rating migration.
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 non-owner 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