Huntington National Bank 2003 Annual Report Download - page 105

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Two residual value insurance policies cover all vehicles leased prior to May 2002, and have associated total
payment caps of $120 million and $50 million, respectively. Management reviews expected future residual value losses to determine the
need to either (a) establish a reserve for losses in excess of both insurance policy caps or (b) reduce the expected residual value and,
therefore, increase the rate of depreciation. A third policy (the New Policy) provides similar coverage as the first two, but does not have
a cap on losses payable under the policy. Leases covered by the New Policy qualify for the direct financing method of accounting.
Leases covered by the earlier policies are accounted for using the operating lease method of accounting and are recorded as operating
lease assets in Huntington’s consolidated balance sheet. At December 31, 2003, Huntington had a valuation reserve of $2.1 million for
expected residual value impairment that is not covered by residual value insurance.
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 non-interest income. 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 Black Book valuations. This insurance, however, does not cover residual losses below 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 of Financial Accounting Standards (Statement) No. 114, Accounting by Creditors for Impairment of a Loan. 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. All loans and leases considered impaired are included in non-performing assets.
Consumer loans and leases, excluding residential mortgage 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 statement of financial condition.
Huntington uses the cost recovery method of accounting for cash received on non-performing loans and leases. Under this method,
cash receipts are applied entirely against principal until the loan or lease has been collected in full, after which time any additional cash
receipts are recognized as interest income. When, in management’s judgment, the borrower’s ability to make periodic interest and
principal payments resumes and collectibility is no longer in doubt, the loan or lease is returned to accrual status. When interest
accruals are suspended, accrued interest income is reversed with current year accruals charged to earnings and prior year amounts
generally charged off as a credit loss.
Sold and Securitized Loans: Loans that are sold or securitized are accounted for in accordance with Statement No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which was adopted by Huntington in 2001. Asset
securitization involves the sale of a pool of loan receivables, generally to a trust, in exchange for funding collaterized by these loans.
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