Huntington National Bank 2004 Annual Report Download - page 107

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
–T REASURY S TOCK — Acquisitions of treasury stock are recorded at cost. Reissuance of shares in treasury for acquisitions, stock
option exercises, or for other corporate purposes, is recorded at their weighted-average cost.
–S TOCK -B ASED C OMPENSATION — Huntington’s stock-based compensation plans are accounted for based on the intrinsic value
method promulgated by Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations. Compensation expense for employee stock options is generally not recognized if the exercise price of the option
equals or exceeds the fair value of the stock on the date of grant.
The following pro forma disclosures for net income and earnings per diluted common share is presented as if Huntington had applied
the fair value method of accounting of Statement No. 123, Accounting for Stock-Based Compensation, in measuring compensation costs
for stock options. The fair values of the stock options granted were estimated using the Black-Scholes option-pricing model. This
model assumes that the estimated fair value of the options is amortized over the options’ vesting periods and the compensation costs
would be included in personnel costs in the consolidated income statement. The following table also includes the weighted-average
assumptions that were used in the option-pricing model for options granted in each of the last three years:
Year Ended December 31,
(in millions of dollars, except per share amounts) 2004 2003 2002
Assumptions
Risk-free interest rate 3.78% 4.45% 4.12%
Expected dividend yield 3.20 3.11 3.34
Expected volatility of Huntington’s common stock 30.9 33.8 33.8
Pro Forma Results
Net income, as reported $398.9 $372.4 $323.7
Less pro forma expense related to options granted (14.4) (10.9) (10.0)
Pro Forma Net Income $384.5 $361.5 $313.7
Net Income Per Common Share:
Basic, as reported $ 1.74 $ 1.62 $ 1.34
Basic, pro forma 1.67 1.58 1.29
Diluted, as reported 1.71 1.61 1.33
Diluted, pro forma 1.64 1.56 1.29
–S EGMENT R ESULTS — Accounting policies for the lines of business are the same as those used in the preparation of the consolidated
financial statements with respect to activities specifically attributable to each business line. However, the preparation of business
line results requires management to establish methodologies to allocate funding costs and benefits, expenses, and other financial
elements to each line of business. Changes are made in these methodologies utilized for certain balance sheet and income statement
allocations performed by Huntington’s management reporting system, as appropriate.
–S TATEMENT OF C ASH F LOWS — Cash and cash equivalents are defined as ‘‘Cash and due from banks’’ and ‘‘Federal funds sold and
securities purchased under resale agreements.’’ The statement of cash flows for the year ended December 31, 2003, has been restated
to properly reflect the sale of branch offices during the third quarter of 2003. (See Note 30 of the Notes to Consolidated
Financial Statements.)
2. NEW ACCOUNTING STANDARDS
–E
MERGING I SSUES T ASK F ORCE I SSUE N O . 03-1, The Meaning of Other-Than-Temporary Impairments and Its Application to
Certain Investments
(EITF 03-1) — The Emerging Issues Task Force reached a consensus about the criteria that should be used to
determine when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of
an impairment loss. EITF 03-1 also included accounting considerations subsequent to the recognition of an other-than-temporary
impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary
impairments. On September 30, 2004, the FASB issued FSP EITF 03-1-1 which delayed the effective date for the measurement and
recognition guidance contained in paragraphs 10–20 of Issue 03-1. See Note 3 for more information.
–SEC S TAFF A CCOUNTING B ULLETIN N O . 105, Application of Accounting Principles to Loan Commitments (SAB 105) —On
March 9, 2004, the SEC issued SAB 105, which summarizes the views of the SEC staff regarding the application of generally accepted
accounting principles to loan commitments accounted for as derivative instruments. Specifically, SAB 105 indicated that the fair value
of loan commitments that are required to follow derivative accounting under Statement 133, Accounting for Derivative Instruments and
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