Huntington National Bank 2004 Annual Report Download - page 103

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
likelihood of a significant adverse effect on the fair value and amount of the impairment as necessary. If market or economic
conditions change, we may incur future impairments.
–L OANS AND L EASES — Loans are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and
costs and net of unearned income. Direct financing leases are reported at the aggregate of lease payments receivable and estimated
residual values, net of unearned and deferred income. Interest income is accrued as earned based on unpaid principal balances.
Huntington defers the fees it receives from the origination of loans and leases, as well as the costs of those activities, and amortizes
these fees and costs on a level-yield basis over the estimated lives of the related loans.
Automobile loans and leases include loans secured by automobiles and leases of automobiles that qualify for the direct financing
method of accounting. Substantially all of the direct financing leases that qualify for that accounting method do so because the
present value of the lease payments and the guaranteed residual value are at least 90% of the cost of the vehicle. Huntington records
the residual values of its leases based on estimated future market values of the automobiles as published in the Automotive Lease
Guide (ALG), an authoritative industry source. Beginning in October 2000, Huntington purchased residual value insurance for its
entire automobile lease portfolio to mitigate the risk of declines in residual values. Residual value insurance provides for the
recovery of the vehicle residual value specified by the ALG at the inception of the lease. As a result, the risk associated with market
driven declines in used car values is mitigated. Currently Huntington has three distinct residual value insurance policies in place to
address the residual risk in the portfolio. Two residual value insurance policies cover all vehicles leased prior to May 2002, and have
associated total payment caps of $120 million and $50 million, respectively. Management reviews expected future residual value
losses to determine the need to either (a) establish a reserve for losses in excess of both insurance policy caps or (b) reduce the
expected residual value and, therefore, increase the rate of depreciation. A third policy (the New Policy) provides similar coverage as
the first two, but does not have a cap on losses payable under the policy. Leases covered by the New Policy qualify for the direct
financing method of accounting. Leases covered by the earlier policies are accounted for using the operating lease method of
accounting and are recorded as operating lease assets in Huntington’s consolidated balance sheet.
Residual values on leased automobiles and equipment are evaluated periodically for impairment. Impairment of the residual values
of direct financing leases is recognized by writing the leases down to fair value with a charge to non-interest expense. Residual value
losses arise if the market value at the end of the lease term is less than the residual value embedded in the original lease contract.
Residual value insurance covers the difference between the recorded residual value and the fair value of the automobile at the end of
the lease term as evidenced by Black Book valuations. This insurance, however, does not cover residual losses below Black Book
value, which may arise when the automobile has excess wear and tear and/or excess mileage, not reimbursed by the lessee.
Commercial and industrial loans and commercial real estate loans are generally placed on non-accrual status and stop accruing
interest when principal or interest payments are 90 days or more past due or the borrower’s creditworthiness is in doubt. A loan
may remain in accruing status when it is sufficiently collateralized, which means the collateral covers the full repayment of principal
and interest, and is in the process of active collection.
Commercial and industrial and commercial real estate loans are evaluated for impairment in accordance with the provisions of
Statement of Financial Accounting Standards (Statement) No. 114, Accounting by Creditors for Impairment of a Loan, as amended.
This Statement requires an allowance to be established as a component of the allowance for loan and lease losses when it is probable
that all amounts due pursuant to the contractual terms of the loan or lease will not be collected and the recorded investment in the
loan or lease exceeds its fair value. Fair value is measured using either the present value of expected future cash flows discounted at
the loan’s or lease’s effective interest rate, the observable market price of the loan or lease, or the fair value of the collateral if the
loan or lease is collateral dependent.
Consumer loans and leases, excluding residential mortgage and home equity loans, are subject to mandatory charge-off at a
specified delinquency date and are not classified as non-performing prior to being charged off. These loans and leases are generally
charged off in full no later than when the loan or lease becomes 120 days past due. Residential mortgage loans are placed on non-
accrual status when principal payments are 180 days past due or interest payments are 210 days past due. A charge-off on a
residential mortgage loan is recorded when the loan has been foreclosed and the loan balance exceeds the fair value of the collateral.
The fair value of the collateral is then recorded as real estate owned and is reflected in other assets in the consolidated balance sheet.
At September 30, 2004, Huntington adopted a new policy of placing home equity loans and lines on non-accrual status when they
exceed 180 days past due. Such loans were previously classified as accruing loans and leases past due 90 days or more. This policy
change conforms the home equity loans and lines classification to that of other consumer loans secured by residential real estate.
The new policy did not have a material impact on total non-performing assets, the allowances for credit losses, or net income.
(See Note 4 for further information.)
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