Huntington National Bank 2004 Annual Report Download - page 106

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
–O PERATING L EASE A SSETS — Operating lease assets consist of automobiles leased to consumers and equipment leased to business
customers. These assets are reported at cost, including net deferred origination fees or costs, less accumulated depreciation. For
automobile operating leases, net deferred origination fees or costs include the referral payments Huntington makes to automobile
dealers, which are deferred and amortized on a straight-line basis over the life of the lease.
Lease payments are recorded as rental income, a component of operating lease income in non-interest income. Net deferred
origination fees or costs are amortized over the life of the lease to operating lease income. Depreciation expense is recorded on a
straight-line basis over the term of the lease. Leased assets are depreciated to the estimated residual value at the end of the lease
term. Depreciation expense is included in operating lease expense in the non-interest expense section of the consolidated income
statement. Impairment of residual values of operating leases is evaluated under Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Under that Statement, when the future cash flows from the operating lease, including the expected
realizable fair value of the automobile or equipment at the end of the lease, is less than the book value of the lease, an immediate
impairment write-down is recognized. Otherwise, reductions in the expected residual value result in additional depreciation of the
leased asset over the remaining term of the lease. Upon disposition, a gain or loss is recorded for any difference between the net
book value of the lease and the proceeds from the disposition of the asset, including any insurance proceeds.
On a quarterly basis, Management evaluates the amount of residual value losses that it anticipates will result from the estimated fair
value of a leased vehicle being less than the residual value inherent in the lease. Also as part of its quarterly analysis, Management
evaluates automobile leases individually for impairment. Fair value includes estimated net proceeds from the sale of the leased
vehicle plus expected residual value insurance proceeds and amounts expected to be collected from the lessee for excess mileage and
other items that are billable under terms of the lease contract. When estimating the amount of expected insurance proceeds,
Management takes into consideration policy caps that exist in two of the three residual value insurance policies and whether it
expects aggregate claims under such policies to exceed these caps. Residual value losses exceeding any insurance policy cap are
reflected in higher depreciation expense over the remaining life of the affected automobile lease.
Credit losses, included in operating lease expense, occur when a lease is terminated early because the lessee cannot make the
required lease payments. These credit-generated terminations result in Huntington taking possession of the automobile earlier than
expected. When this occurs, the market value of the automobile may be less than Huntington’s book value, resulting in a loss upon
sale. Rental income payments accrued, but not received, are written off when they reach 120 days past due and at that time the asset
is evaluated for impairment.
–B ANK O WNED L IFE I NSURANCE — Huntington’s bank owned life insurance policies are carried at their cash surrender value.
Periodically, management confirms this cash surrender value with the insurance carriers that have issued each respective insurance
policy. Huntington recognizes tax-free income from the periodic increases in the cash surrender value of these policies and from
death benefits.
–D ERIVATIVE F INANCIAL I NSTRUMENTS — Derivative financial instruments, primarily interest rate swaps, are accounted for in
accordance with Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. This Statement requires
every derivative instrument to be recorded in the consolidated balance sheet as either an asset or liability measured at its fair value and
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 other
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.
–A DVERTISING C OSTS — Advertising costs are expensed as incurred as a marketing expense, a component of non-interest expense.
–I NCOME T AXES — 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.
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