Huntington National Bank 2003 Annual Report Download - page 43

MANAGEMENT’S DISCUSSION AND ANALYSIS
8. A UTOMOBILE L EASES O RIGINATED T HROUGH A PRIL 2002 A CCOUNTED FOR AS O PERATING L EASES .Automobile leases originated
before May 2002 are accounted for using the operating method of accounting because they do not qualify as direct financing leases.
One of the criteria to qualify for the direct financing method of lease accounting is to have the present value of the future minimum
lease payments and the guaranteed residual value be 90% or more of fair value of the asset being leased (90% test). This test can be
met through the purchase of residual value insurance from a third party. 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. The existence of caps in both
policies, and the relative size of the insured residual values compared with the caps in each policy make these insurance policies
insufficient to meet the 90% test and qualify the leases for the direct financing method of accounting.
In May 2002, Huntington purchased a third residual value insurance policy for new automobiles leased after April 2002. Under this
policy, the residual value of each lease is insured up to Automotive Lease Guide (ALG) Black Book value and has no cap on insured
losses. However, leases with residual gains were netted with leases with residual losses when claims were settled. The netting
provision of the third policy precluded Huntington from determining the amount of the guaranteed residual of any leased asset
within the portfolio at lease inception. Consequently, these leases also failed to qualify as direct financing leases. Subsequent to an
announcement made by the SEC observer to the Financial Accounting Standards Board’s Emerging Issues Task Force, Huntington
amended its third residual value insurance policy, retroactive to April 2002, by adding an endorsement that adds a level of insurance
sufficient to meet the 90% test, on a lease-by-lease basis, with no netting provisions. Accordingly, residual values covered under this
policy qualify for the direct financing method of accounting. This program is subject to renewal in May 2005.
Operating leases are a non-interest earning asset with the related rental income, other revenue, and credit recoveries reflected as
operating lease income, a component of non-interest income. Under this accounting method, depreciation expenses, as well as other
costs and charge-offs, are reflected as operating lease expense, a component of non-interest expense. Given that no new operating
leases have been originated since April 2002, the operating lease assets are rapidly decreasing and will eventually run-off, along with
their related operating lease income and expense. Since operating lease income and expense represent a significant percentage of
total non-interest income and expense, respectively, in 2001-2003 their downward trend influences total non-interest income and
non-interest expense trends.
All automobile leases originated since April 2002 are accounted for as direct financing leases, an interest-earning asset component of
total loans and leases. Given the relative newness of this portfolio, coupled with very few maturing or paid-off leases during the first
few years following origination, this is a rapidly growing portfolio which results in higher reported automobile lease growth rates
than in a more mature portfolio. As the direct financing lease portfolio matures, its growth rate is expected to slow. To better
understand overall trends in automobile lease exposure it is helpful to compare trends of the combined total of automobile leases
plus operating leases.
9. A
DOPTION OF S TATEMENT OF F INANCIAL A CCOUNTING S TANDARDS (S TATEMENT )N O . 142, G OODWILL AND O THER I NTANGIBLES .
Effective January 1, 2002, the company adopted Statement No. 142 and, accordingly, ceased the amortization of its goodwill and
began evaluating this goodwill annually for impairment. In 2001, amortization of goodwill totaled $40.4 million, most of which
related to the Florida banking operations’ component of the company’s Regional Banking line of business. No amortization expense
for goodwill was recorded in 2003 or 2002. The adoption of this new accounting standard in 2002 affects comparisons of non-
interest expense in 2003 and 2002 with non-interest expense in periods prior to 2002.
HUNTINGTON BANCSHARES INCORPORATED 41