Huntington National Bank 2005 Annual Report Download - page 109

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
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, are 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 one of its residual value insurance
policies and whether it expects aggregate claims under such policies to exceed the cap. 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.
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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