Huntington National Bank 2003 Annual Report Download - page 109

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment Results: Accounting policies for the lines of business are the same as those used in the preparation of the consolidated
financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line
results requires management to establish methodologies to allocate funding costs and benefits, expenses, and other financial elements
to each line of business. Changes are made in these methodologies utilized for certain balance sheet and income statement allocations
performed by Huntington’s management reporting system, as appropriate. Prior periods are not restated for these changes.
Statement of Cash Flows: Cash and cash equivalents are defined as “Cash and due from banks” and “Federal funds sold and securities
purchased under resale agreements.”
2. New Accounting Standards
Anticipated SEC Staff Accounting Bulletin on Mortgage Loan Commitments: In a speech on December 11, 2003, the SEC staff
announced its intention to release a Staff Accounting Bulletin that would require registrants to account for mortgage loan interest rate
lock commitments related to loans held for sale as written options, effective no later than for commitments entered into after March
31, 2004. Huntington enters into such commitments with customers in connection with residential mortgage loan applications and at
December 31, 2003, had approximately $134.0 million in notional amount of these commitments outstanding. The proposed Staff
Accounting Bulletin would require Huntington to recognize a liability for the fair value of the mortgage loan commitment at the time
it is made and would affect the timing of related revenue recognition. Huntington is currently assessing the impact of this pending
guidance on its results of operations and financial position.
Early Adoption of FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46): In January 2003, the FASB issued
FIN 46. This Interpretation of Accounting Research Bulletin No. 51 (ARB 51), Consolidated Financial Statements, as amended,
addresses consolidation by business enterprises where ownership interests in an entity may vary over time or, in many cases, of special-
purpose entities (SPEs). To be consolidated for financial reporting, these entities must have certain characteristics. ARB 51 requires
that an enterprise’s consolidated financial statements include subsidiaries in which the enterprise has a controlling financial interest.
FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among parties involved. An enterprise that holds significant variable interests in such an entity, but is not the
primary beneficiary, is required to disclose certain information regarding its interests in that entity. FIN 46 applies in the first fiscal
year or interim period ending after December 15, 2003, to variable interest entities in which an enterprise holds an interest that it
acquired before February 1, 2003. It also applies immediately to variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. FIN 46 may be applied (1) prospectively with a cumulative-
effect adjustment as of the date on which it is first applied, or (2) by restating previously issued financial statements for one or more
years with a cumulative-effect adjustment as of the beginning of the first year restated.
Effective July 1, 2003, Huntington adopted FIN 46. This was an early adoption applied on a prospective basis resulting in the
consolidation of one of the securitization trusts formed in 2000. The consolidation of this trust involved recognition of the trust’s
assets and liabilities, elimination of the related retained interest and servicing asset, recognition of other related assets, and
establishment of an allowance for loan and lease losses equal to 1.01% of the loan balances. The trust’s assets and liabilities consisted of
$1,038.1 million in automobile loan principal and interest receivables, $110.0 million in cash ($51.5 million of which was on deposit at
Huntington’s bank subsidiary), and approximately $960.0 million in notes payable and minority interests. The combined retained
interests at market value, a component of securities available for sale, servicing, and other assets of $212.9 million were eliminated in
the consolidation. The reversal of the excess of the market value of the retained interest over its cost reduced other comprehensive
income by $9.9 million. Additionally, a $10.3 million reserve for loan losses was recognized and deferred income taxes and other
liabilities totaling $12.1 million were reversed.
Reflecting these impacts, the adoption of FIN 46 resulted in a cumulative effect charge of $13.3 million, or $0.06 per share, in the third
quarter, which is reflected in Huntington’s statements of income. This adoption also resulted in an overall reduction of the ALLL by
approximately 3 basis points and lowered the tangible common equity ratio by 29 basis points. Regulatory capital was minimally
impacted since these related assets were already included in regulatory risk-based assets.
This adoption also required the deconsolidation of two unrelated business trusts that had been formed in 1997 and 1998 to issue trust
preferred securities, which qualified as Tier 1 capital for regulatory capital purposes. The related borrowings by the parent company are
now reported in the consolidated balance sheet under the caption “Subordinated notes” and currently qualify as Tier 1 capital. There
was no cumulative effect on retained earnings or Huntington’s capital ratios as a result of this deconsolidation.
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