Huntington National Bank 2008 Annual Report Download - page 93

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life. Premises and Equipment is evaluated for impairment whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable.
–BANK OWNED LIFE INSURANCE — Huntington’s bank owned life insurance policies are carried at their cash surrender value.
Huntington recognizes tax-exempt income from the periodic increases in the cash surrender value of these policies and from
death benefits. A portion of cash surrender value is supported by holdings in separate accounts. Huntington has also purchased
insurance for these policies to provide protection of the value of the holdings within these separate accounts. The cash surrender
value of the policies exceeds the value of the underlying holdings in the separate accounts covered by these insurance policies by
approximately $27 million at December 31, 2008.
–DERIVATIVE FINANCIAL INSTRUMENTS — A variety of derivative financial instruments, principally interest rate swaps, are used in
asset and liability management activities to protect against the risk of adverse price or interest rate movements. These
instruments provide flexibility in adjusting Huntington’s sensitivity to changes in interest rates without exposure to loss of
principal and higher funding requirements.
Derivative financial instruments are accounted for in accordance with Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities (Statement No. 133), as amended. This Statement requires derivative instruments to be recorded in the
consolidated balance sheet as either an asset or a liability (in other assets or other liabilities, respectively) and measured at fair
value, with changes to fair value recorded through earnings unless specific criteria are met to account for the derivative using
hedge accounting.
Huntington also uses derivatives, principally loan sale commitments, in hedging its mortgage loan interest rate lock
commitments and its mortgage loans held for sale. Mortgage loan sale commitments and the related interest rate lock
commitments are carried at fair value on the consolidated balance sheet with changes in fair value reflected in mortgage banking
revenue. Huntington also uses certain derivative financial instruments to offset changes in value of its residential mortgage loan
servicing assets. These derivatives consist primarily of forward interest rate agreements, and forward mortgage securities. The
derivative instruments used are not designated as hedges under Statement No. 133. Accordingly, such derivatives are recorded at
fair value with changes in fair value reflected in mortgage banking income.
For those derivatives to which hedge accounting is applied, Huntington formally documents the hedging relationship and the risk
management objective and strategy for undertaking the hedge. This documentation identifies the hedging instrument, the hedged
item or transaction, the nature of the risk being hedged, and, unless the hedge meets all of the criteria to assume there is no
ineffectiveness, the method that will be used to assess the effectiveness of the hedging instrument and how ineffectiveness will be
measured. The methods utilized to assess retrospective hedge effectiveness, as well as the frequency of testing, vary based on the
type of item being hedged and the designated hedge period. For specifically designated fair value hedges of certain fixed-rate debt,
Huntington utilizes the short-cut method when all the criteria of paragraph 68 of Statement No. 133 are met. For other fair value
hedges of fixed-rate debt, including certificates of deposit, Huntington utilizes the cumulative dollar offset or the regression method
to evaluate hedge effectiveness on a quarterly basis. For fair value hedges of portfolio loans, the regression method is used to
evaluate effectiveness on a daily basis. For cash flow hedges, the cumulative dollar offset method is applied on a quarterly basis. For
hedging relationships that are designated as fair value hedges, changes in the fair value of the derivative are, to the extent that the
hedging relationship is effective, recorded through earnings and offset against changes in the fair value of the hedged item. For cash
flow hedges, changes in the fair value of the derivative are, to the extent that the hedging relationship is effective, recorded as other
comprehensive income and subsequently recognized in earnings at the same time that the hedged item is recognized in earnings.
Any portion of a hedge that is ineffective is recognized immediately as other non-interest income. When a cash flow hedge is
discontinued because the originally forecasted transaction is not probable of occurring, any net gain or loss in accumulated other
comprehensive income is recognized immediately as other non-interest income.
Like other financial instruments, derivatives contain an element of credit risk, which is the possibility that Huntington will incur
a loss because a counterparty fails to meet its contractual obligations. Notional values of interest rate swaps and other off-
balance sheet financial instruments significantly exceed the credit risk associated with these instruments and represent contractual
balances on which calculations of amounts to be exchanged are based. Credit exposure is limited to the sum of the aggregate fair
value of positions that have become favorable to Huntington, including any accrued interest receivable due from counterparties.
Potential credit losses are mitigated through careful evaluation of counterparty credit standing, selection of counterparties from
a limited group of high quality institutions, collateral agreements, and other contract provisions. In accordance with FASB Staff
Position (FSP) FIN 39-1, Huntington considers the value of collateral held and collateral provided in determining the net
carrying value of it derivatives.
–ADVERTISING COSTS — Advertising costs are expensed as incurred and recorded as a marketing expense, a component of non-
interest expense.
–INCOME TAXES — 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
91
Notes to Consolidated Financial Statements Huntington Bancshares Incorporated