Huntington National Bank 2007 Annual Report Download - page 81

impairment are further evaluated to determine the likelihood of a significant adverse effect on the fair value and amount of the
impairment as necessary.
–LOANS AND LEASES — Loans and direct financing leases for which Huntington has the intent and ability to hold for the foreseeable
future, or until maturity or payoff, are classified in the balance sheet as loans and leases. Loans and leases are carried 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 using the interest method based on unpaid principal balances. Huntington
defers the fees it receives from the origination of loans and leases, as well as the direct costs of those activities. Huntington also
acquires loans at a premium and at a discount to their contractual values. Huntington amortizes loan discounts, loan premiums
and net loan origination fees and costs on a level-yield basis over the estimated lives of the related loans. Management evaluates
direct financing leases individually for impairment.
Loans that Huntington has the intent to sell or securitize are classified as held for sale. Loans held for sale are carried at the
lower of cost or fair value. Fair value is determined based on collateral value and prevailing market prices for loans with similar
characteristics. Subsequent declines in fair value are recognized either as a charge-off or as non-interest income, depending on
the length of time the loan has been recorded as held for sale. When a decision is made to sell a loan that was not originated or
initially acquired with the intent to sell, the loan is reclassified into held for sale. Such reclassifications may occur, and have
occurred in the past several years, due to a change in strategy in managing the balance sheet. See Note 5 for further information
on recent securitization activities.
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. One residual value insurance policy covers all
vehicles leased between October 1, 2000 and April 30, 2002, and has an associated total payment cap of $50 million. Any losses
above the cap result in additional depreciation expense. A second policy covers all originations from May 1, 2002 through
June 30, 2005, and does not have a cap. A third policy, similar in structure to the referenced second policy, was in effect until
October 9, 2007, and covered all originations since June 30, 2005. Leases covered by the last two policies qualify for the direct
financing method of accounting. Leases covered by the first policy are accounted for using the operating lease method of
accounting and are recorded as operating lease assets in Huntington’s consolidated balance sheet.
Automobile leases originated after October 9, 2007 are not covered by a third party residual value insurance policy. The absence
of insurance on these automobile leases requires them to be recorded as operating leases (see operating lease assets below).
Residual values on leased automobiles and equipment are evaluated quarterly 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 other non-interest expense.
Residual value losses arise if the fair value at the end of the lease term is less than the residual value embedded in the original
lease contract. For leased automobiles, 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 ALG Black Book valuations. This insurance, however,
does not cover residual losses that occur when the automobile is sold for a value below ALG Black Book value at the time of
sale, which may arise when the automobile has excess wear and tear and/or excess mileage, not reimbursed by the lessee. In any
event, the insurance provides a minimum level of coverage of residual value such that the net present value of the minimum
lease payments plus the portion of the residual value that is guaranteed exceeds 90 percent of the fair value of the automobile at
the inception of the lease.
For leased equipment, the residual component of a direct financing lease represents the estimated fair value of the leased
equipment at the end of the lease term. Huntington uses industry data, historical experience, and independent appraisals to
establish these residual value estimates. Additional information regarding product life cycle, product upgrades, as well as insight
into competing products are obtained through relationships with industry contacts and are factored into residual value estimates
where applicable.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED