Huntington National Bank 2003 Annual Report Download - page 107

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fair value as determined on an aggregate basis. Fair value is determined using available secondary market prices for loans with similar
coupons, maturities, and credit quality.
Huntington recognizes the rights to service mortgage loans as separate assets, which are included in other assets in the consolidated
balance sheets, only when purchased or when servicing is contractually separated from the underlying mortgage loans by sale or
securitization of the loans with servicing rights retained. The carrying value of loans sold or securitized is allocated between loans and
servicing rights based on the relative fair values of each. Purchased mortgage servicing rights are initially recorded at cost. All servicing
rights are subsequently carried at the lower of the initial carrying value, adjusted for amortization, or fair value, and are included in
other assets.
Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is
computed principally by the straight-line method over the estimated useful lives of the related assets. Buildings and building
improvements are depreciated over an average of 30 to 40 years and 10 to 20 years, respectively. Land improvements and furniture and
fixtures are depreciated over 10 years, while equipment is depreciated over a range of 3 to 7 years. Leasehold improvements are
amortized over the lesser of the asset life or term of the related leases. Maintenance and repairs are charged to expense as incurred,
while improvements that extend the useful life of an asset are capitalized and depreciated over the remaining useful life.
Operating Lease Assets: Operating lease assets consist of automobiles leased to consumers and equipment leased to business
customers. These assets are reported at cost, including net deferred origination fees or costs, less accumulated depreciation. For
automobile operating leases, net deferred origination fees or costs include the referral payments Huntington makes to automobile
dealers, which are deferred and amortized on a straight-line basis over the life of the lease.
Lease payments are recorded as rental income, a component of operating lease income in non-interest income. Net deferred
origination fees or costs are amortized over the life of the lease to operating lease income. Depreciation expense is recorded on a
straight-line basis over the term of the lease. Leased assets are depreciated to the estimated residual value at the end of the lease term.
Depreciation expense is included in operating lease expense in the non-interest expense section of the consolidated income statement.
Impairment of residual values of operating leases is evaluated under Statement No. 144. Under that Statement, when the future cash
flows from the operating lease, including the expected realizable fair value of the automobile or equipment at the end of the lease, is
less than the book value of the lease, an immediate impairment write-down is recognized. Otherwise, reductions in the expected
residual value result in additional depreciation of the leased asset over the remaining term of the lease. Upon disposition, a gain or loss
is recorded for any difference between the net book value of the lease and the proceeds from the disposition of the asset, including any
insurance proceeds.
To mitigate its exposure to residual value risk on automobile leases, Huntington purchased residual value insurance, beginning in
October 2000. The insurance coverage for automobile leases existing as of October 1, 2000, has a cap on insured losses of $120 million.
The insurance coverage for automobile leases originated from October 1, 2000 through April 30, 2002, has a cap on insured losses of
$50 million. At December 31, 2003, claims submitted to the insurance carrier under both policies that have not been paid totaled $62.0
million. Huntington has established a reserve of $4.4 million against this receivable. The net receivable of $57.6 million is reflected in
other assets. Huntington continues to monitor the expected losses on covered leases to determine how much of an impairment write-
down, if any, needs to be recognized on these leases, all of which are operating leases.
Credit losses, included in operating lease expense, occur when a lease is terminated early because the lessee cannot make the required
lease payments. These credit-generated terminations result in Huntington taking possession of the automobile earlier than expected.
When this occurs, the market value of the automobile may be less than Huntington’s book value, resulting in a loss upon sale. Rental
income payments accrued, but not received, are written off when they reach 120 days past due and at that time the asset is evaluated for
impairment.
Bank Owned Life Insurance: Huntington’s bank owned life insurance policies are carried at their cash surrender value. Periodically,
management confirms this cash surrender value with the insurance carriers that have issued each respective insurance policy.
Huntington recognizes tax-free income from the periodic increases in the cash surrender value of these policies and from death
benefits.
Derivative Financial Instruments: Derivative financial instruments, primarily interest rate swaps, are accounted for in accordance with
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. This Statement requires every derivative
instrument to be recorded in the consolidated balance sheet as either an asset or liability measured at its fair value and
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