Huntington National Bank 2003 Annual Report Download - page 108

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Huntington to formally document, designate, and assess the effectiveness of transactions for which hedge accounting is applied.
Depending on the nature of the hedge and the extent to which it is effective, the changes in fair value of the derivative recorded
through earnings will either be offset against the change in the fair value of the hedged item in earnings, or recorded in comprehensive
income and subsequently recognized in earnings in the period the hedged item affects earnings. The portion of a hedge that is
ineffective and all changes in the fair value of derivatives not designated as hedges, referred to as trading instruments, are recognized
immediately in earnings. Deferred gains or losses from derivatives that are terminated are amortized over the shorter of the original
remaining term of the derivative or the remaining life of the underlying asset or liability. Trading instruments are carried at fair value
with changes in fair value included in other Non-interest income. Trading instruments are executed primarily with Huntington’s
customers to fulfill their needs. Derivative instruments used for trading purposes include interest rate swaps, including callable swaps,
interest rate caps and floors, and interest rate and foreign exchange futures, forwards and options.
Upon adoption in 2001 of Statement No. 133, as amended, Huntington designated its portfolio of derivative financial instruments used
for risk management purposes as fair value or cash flow hedges. Derivatives used to hedge changes in fair value of assets and liabilities
due to changes in interest rates or other factors were designated as fair value hedges and those used to hedge changes in forecasted cash
flows, due generally to interest rate risk, were designated as cash flow hedges. The after-tax transition adjustment of adopting
Statement No. 133, as amended, was immaterial to net income and reduced other comprehensive income (OCI) $9.1 million in 2001.
Advertising Costs: Advertising costs are generally expensed as incurred 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.
Treasury Stock: 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.
Stock-Based Compensation: 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 expense on 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:
(in millions of dollars, except per share amounts) 2003 2002 2001
Assumptions
Risk-free interest rate 4.45% 4.12% 5.05%
Expected dividend yield 3.11 3.34 4.99
Expected volatility of Huntington’s common stock 33.8 33.8 41.0
Pro Forma Results
Net income, as reported $372.4 $323.7 $134.8
Less pro forma expense related to options granted (12.7) (12.7) (12.1)
Pro Forma Net Income $359.7 $311.0 $122.7
Net Income Per Common Share:
Basic, as reported $ 1.62 $ 1.34 $ 0.54
Basic, pro forma 1.57 1.28 0.49
Diluted, as reported 1.61 1.33 0.54
Diluted, pro forma 1.55 1.27 0.49
106 HUNTINGTON BANCSHARES INCORPORATED