Huntington National Bank 2007 Annual Report Download - page 85

For those derivatives to which hedge accounting is applied, Huntington formally documents the hedging relationship and the
risk management objective and strategy for undertaking the hedge. This documentation identifies the hedging instrument, the
hedged item or transaction, the nature of the risk being hedged, and, unless the hedge meets all of the criteria to assume there is
no ineffectiveness, the method that will be used to assess the effectiveness of the hedging instrument and how ineffectiveness will
be measured. The methods utilized to assess retrospective hedge effectiveness, as well as the frequency of testing, vary based on
the type of item being hedged and the designated hedge period. For specifically designated fair value hedges of certain fixed-rate
debt, Huntington utilizes the short-cut method when all the criteria of paragraph 68 of Statement No. 133 are met. For other
fair value hedges of fixed-rate debt including certificates of deposit, Huntington utilizes the dollar offset or the regression
method to evaluate hedge effectiveness on a quarterly basis. For fair value hedges of portfolio loans and mortgage loans held for
sale, the regression method is used to evaluate effectiveness on a daily basis. For cash flow hedges, the dollar offset method is
applied on a quarterly basis. For hedging relationships that are designated as fair value hedges, changes in the fair value of the
derivative are, to the extent that the hedging relationship is effective, recorded through earnings and offset against changes in the
fair value of the hedged item. For cash flow hedges, changes in the fair value of the derivative are, to the extent that the hedging
relationship is effective, recorded as other comprehensive income and subsequently recognized in earnings at the same time that
the hedged item is recognized in earnings. Any portion of a hedge that is ineffective is recognized immediately as other non-
interest income. When a cash flow hedge is discontinued because the originally forecasted transaction is not probable of
occurring, any net gain or loss in accumulated other comprehensive income is recognized immediately as other non-interest
income.
Like other financial instruments, derivatives contain an element of credit risk, which is the possibility that Huntington will incur
a loss because a counterparty fails to meet its contractual obligations. Notional values of interest rate swaps and other off-
balance sheet financial instruments significantly exceed the credit risk associated with these instruments and represent contractual
balances on which calculations of amounts to be exchanged are based. Credit exposure is limited to the sum of the aggregate fair
value of positions that have become favorable to Huntington, including any accrued interest receivable due from counterparties.
Potential credit losses are mitigated through careful evaluation of counterparty credit standing, selection of counterparties from
a limited group of high quality institutions, collateral agreements, and other contract provisions. In accordance with FASB Staff
Position (FSP) FIN 39-1, Huntington considers the value of collateral held and collateral provided in determining the net
carrying value of it derivatives.
–ADVERTISING COSTS — Advertising costs are expensed as incurred and recorded as a marketing expense, a component of non-
interest expense.
–INCOME TAXES — Income taxes are accounted for under the asset and liability method. Accordingly, deferred tax assets and
liabilities are recognized for the future book and tax consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
determined using enacted tax rates expected to apply in the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income at the time
of enactment of such change in tax rates. Any interest or penalties due for payment of income taxes are included in the
provision for income taxes.
–TREASURY STOCK — Acquisitions of treasury stock are recorded at cost. The reissuance of shares in treasury for acquisitions, stock
option exercises, or for other corporate purposes, is recorded at weighted-average cost.
–SHARE-BASED COMPENSATION — On January 1, 2006, Huntington adopted the fair value recognition provisions of FASB Statement
No. 123 (revised 2004), Share-Based Payment (Statement No. 123R), relating to its share-based compensation plans. Prior to
January 1, 2006, Huntington had accounted for share-based compensation plans under the intrinsic value method promulgated
by Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees (APB 25), and related
interpretations. In accordance with APB 25, compensation expense for employee stock options was generally not recognized for
options granted that had an exercise price equal to the market value of the underlying common stock on the date of grant.
Under the modified prospective method of Statement No. 123R, compensation expense is recognized during the years ended
December 31, 2007 and 2006, for all unvested stock options outstanding at January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of Statement No. 123, Accounting for Stock-Based Compensation (Statement
No. 123), and for all share-based payments granted after January 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of Statement No. 123R. Share-based compensation expense is recorded in personnel costs in the
consolidated statements of income. Huntington’s financial results for the prior periods have not been restated (See Note 16 for
further information.)
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED