Huntington National Bank 2003 Annual Report Download - page 38

MANAGEMENT’S DISCUSSION AND ANALYSIS
financial reporting practices, including the recognition of automobile loan and lease origination fees and costs, as well as certain year-
end reserves. The investigation is ongoing and Huntington continues to cooperate fully with the SEC. To the best of its knowledge,
Management believes that the actions it has taken to date have addressed all known accounting issues.
C RITICAL A CCOUNTING P OLICIES AND U SE OF S IGNIFICANT E STIMATES
Huntington’s financial statements are prepared in accordance with accounting principles generally accepted in the United States
(GAAP). The preparation of financial statements in conformity with GAAP requires Management to establish critical accounting
policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in its financial
statements. Note 1 of the Notes to Consolidated Financial Statements included in this report lists significant accounting policies used
by Management in the development and presentation of Huntington’s financial statements. This discussion and analysis, the
significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and
quantitative factors that are necessary for an understanding and evaluation of the organization and its financial position, results of
operations, and cash flows.
An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements if a
different amount within a range of estimates were used or if estimates changed from period to period. Readers of this report should
understand that estimates are made under facts and circumstances at a point in time, and changes in those facts and circumstances
could produce actual results that differ from when those estimates were made. Management has identified the following as the most
significant accounting estimates and their related application. This analysis is included to emphasize that estimates are used in
connection with the critical and other accounting policies and to illustrate the potential effect on the financial statements if the actual
amount were different from the estimated amount.
•Allowance for loan and lease losses – At December 31, 2003, the allowance for loan and lease losses (ALLL) was $335.3 million. The
ALLL represents Management’s estimate as to the level of a reserve considered appropriate to absorb inherent credit losses in the
loan and lease portfolio. Many factors affect the ALLL, some quantitative, some subjective. Management believes the process for
determining the ALLL considers the potential factors that could result in credit losses. However, the process includes judgmental
elements and may be subject to significant change. To the extent actual outcomes differ from Management estimates, additional
provision for credit losses could be required, which could adversely affect earnings or financial performance in future periods. A
discussion about the process used to estimate the ALLL is presented in the Credit Risk section of Management’s Discussion and
Analysis in this report.
•Loan servicing rights – At December 31, 2003, there were $71.1 million of mortgage servicing rights and $17.7 million of automobile
servicing rights included in other assets. No active market exists for Management to observe market prices for these financial
instruments. To estimate fair values, Management estimates future prepayments on the loans serviced for others, future ancillary
revenue, future costs to service these assets, and the appropriate discount rate to use. Note 7 of the Notes to Consolidated Financial
Statements contains an analysis of the impact to the fair value of mortgage servicing rights to changes in the estimates used by
Management. A discussion about the process used to estimate the fair value of mortgage servicing rights is presented in the non-
interest income section of Management’s Discussion and Analysis in this report.
•Lease residual values underlying operating leases – At December 31, 2003, there were $814.1 million of residual values related to
operating lease assets reflected as a component of operating lease assets on the balance sheet. In March 2001, Huntington purchased
two residual value insurance policies to mitigate the risk of declines in residual values. The first policy provides first dollar loss
coverage on the portfolio of existing automobile leases at October 1, 2000 and has a cap on insured losses of $120 million. The
second policy insures losses on new lease originations from October 2000 through April 2002 and has a cap of $50 million. On a
quarterly basis, Management reviews the expected future residual value losses for leased automobiles covered by these two insurance
policies taking into consideration the insurance policy caps on insured losses. As a result of that review, Management determines
how much impairment, if any, needs to be recognized on these operating leases and whether the residual value should be adjusted
prospectively. At December 31, 2003, Management believed the residual values of its leases properly reflected expected residual value
losses. However, due to the existence of caps on insured losses within these two insurance policies, future increases in residual value
losses in excess of these caps could negatively impact Huntington’s results from operations. Specifically, any residual losses exceeding
the cap amounts would result in higher operating lease depreciation expense being recognized over the remaining life of the related
leases. Further discussion about the process used to estimate the risk of residual value losses on operating leases is presented in the
Market Risk section of Management’s Discussion and Analysis in this report. Notes 1 and 9 to the Notes of the Consolidated
Financial Statements included in this report explain the accounting for operating lease assets in more detail.
36 HUNTINGTON BANCSHARES INCORPORATED