Huntington National Bank 2005 Annual Report Download - page 106

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
impairment. This determination requires significant judgment. In making this judgment, Management evaluates, among other
factors, the duration and extent to which the fair value of an investment is less than its cost and intent and ability to hold the
investment. Investments with an indicator are further evaluated to determine the likelihood of a significant adverse effect on
the fair value and amount of the impairment as necessary. If market or economic conditions change, future impairments may
occur.
–L OANS AND L EASES — Loans are stated at the principal amount outstanding, net of unamortized deferred loan origination fees
and costs and net of unearned income. Direct financing leases are reported at the aggregate of lease payments receivable and
estimated residual values, net of unearned and deferred income. Interest income is accrued as earned based on unpaid
principal balances. Huntington defers the fees it receives from the origination of loans and leases, as well as the direct costs of
those activities, and amortizes these fees and costs on a level-yield basis over the estimated lives of the related loans.
Automobile loans and leases include loans secured by automobiles and leases of automobiles that qualify for the direct
financing method of accounting. Substantially all of the direct financing leases that qualify for that accounting method do so
because the present value of the lease payments and the guaranteed residual value are at least 90% of the cost of the vehicle.
Huntington records the residual values of its leases based on estimated future market values of the automobiles as published in
the Automotive Lease Guide (ALG), an authoritative industry source. Beginning in October 2000, Huntington purchased
residual value insurance for its entire automobile lease portfolio to mitigate the risk of declines in residual values. Residual
value insurance provides for the recovery of the vehicle residual value specified by the ALG at the inception of the lease. As a
result, the risk associated with market driven declines in used car values is mitigated. Currently, Huntington has three distinct
residual value insurance policies in place to address the residual risk in the portfolio. One residual value insurance policy
covers all vehicles leased between October 1, 2000 and April 30, 2002, and has an associated total payment cap of $50 million.
Any losses above the cap result in additional depreciation expense. A second policy covers all originations from May 2002
through June 2005, and does not have a cap. A third policy, similar in structure to the referenced second policy, went into
effect July 1, 2005, and covers all originations for a period of one year. Leases covered by the last two policies qualify for the
direct financing method of accounting. Leases covered by the first policy are accounted for using the operating lease method of
accounting and are recorded as operating lease assets in Huntington’s consolidated balance sheet.
Residual values on leased automobiles and equipment are evaluated periodically for impairment. Impairment of the residual
values of direct financing leases is recognized by writing the leases down to fair value with a charge to other non-interest
expense. Residual value losses arise if the market value at the end of the lease term is less than the residual value embedded in
the original lease contract. Residual value insurance covers the difference between the recorded residual value and the fair value
of the automobile at the end of the lease term as evidenced by ALG Black Book valuations. This insurance, however, does not
cover residual losses below ALG Black Book value, which may arise when the automobile has excess wear and tear and/or
excess mileage, not reimbursed by the lessee.
Commercial and industrial loans and commercial real estate loans are generally placed on non-accrual status and stop accruing
interest when principal or interest payments are 90 days or more past due or the borrower’s creditworthiness is in doubt. A
loan may remain in accruing status when it is sufficiently collateralized, which means the collateral covers the full repayment of
principal and interest, and is in the process of active collection.
Commercial and industrial and commercial real estate loans are evaluated for impairment in accordance with the provisions of
Statement No. 114, Accounting by Creditors for Impairment of a Loan, as amended. This Statement requires an allowance to be
established as a component of the allowance for loan and lease losses when it is probable that all amounts due pursuant to the
contractual terms of the loan or lease will not be collected and the recorded investment in the loan or lease exceeds its fair
value. Fair value is measured using either the present value of expected future cash flows discounted at the loan’s or lease’s
effective interest rate, the observable market price of the loan or lease, or the fair value of the collateral if the loan or lease is
collateral dependent.
Consumer loans and leases, excluding residential mortgage and home equity loans, are subject to mandatory charge-off at a
specified delinquency date and are not classified as non-performing prior to being charged off. These loans and leases are
generally charged off in full no later than when the loan or lease becomes 120 days past due. Residential mortgage loans are
placed on non-accrual status when principal payments are 180 days past due or interest payments are 210 days past due. A
charge-off on a residential mortgage loan is recorded when the loan has been foreclosed and the loan balance exceeds the fair
value of the collateral. The fair value of the collateral is then recorded as real estate owned and is reflected in other assets in
the consolidated balance sheet. (See Note 4 for further information.)
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