Huntington National Bank 2011 Annual Report Download - page 126

Certain other assets and liabilities which are not financial instruments also involve fair value measurements.
A description of these assets and liabilities, and the methodologies utilized to determine fair value are discussed
below:
GOODWILL
Goodwill is an intangible asset representing the difference between the purchase price of an asset and its fair
market value and is created when a company pays a premium to acquire the assets of another company. We test
goodwill for impairment annually, as of October 1, using a two-step process that begins with an estimation of the
fair value of a reporting unit. Goodwill impairment exists when a reporting unit’s carrying value of goodwill
exceeds its implied fair value. Goodwill is also tested for impairment on an interim basis, using the same
two-step process as the annual testing, if an event occurs or circumstances change between annual tests that
would more likely than not reduce the fair value of the reporting unit below its carrying amount.
The first step (Step 1) of impairment testing requires comparing the fair value of each reporting unit with
goodwill to its carrying value to identify potential impairment. For our annual impairment testing conducted
during 2011, we identified four reporting units with goodwill: Retail and Business Banking, Regional and
Commercial Banking, Wealth Advisors, Government Finance, and Home Lending (WGH), and Insurance. Auto
Finance and Commercial Real Estate was not subject to impairment testing as it had no goodwill associated with
the unit. In addition, although Insurance is included within Treasury/Other for business segment reporting, it was
evaluated as a separate reporting unit for goodwill impairment testing because it had its own separately allocated
goodwill resulting from prior acquisitions.
For all four reporting units identified in the above paragraph, we utilized both income and market
approaches to determine the fair value for each reporting unit. The income approach was based on discounted
cash flows derived from assumptions of balance sheet and income statement activity. An internal forecast was
developed by considering several long-term key business drivers such as anticipated loan and deposit growth, net
interest margins, and efficiency ratios. Long-term growth rates were estimated to assist in determining the
terminal values. The discount rates were estimated based on the Capital Asset Pricing Model, which considered
the risk-free interest rate (20-year Treasury Bonds), market-risk premium, equity-risk premium, and a company-
specific risk factor. The company-specific risk factor was used to address the uncertainty of growth estimates and
earnings projections of Management. For the market approach, revenue, earnings and market capitalization
multiples of comparable public companies were selected and applied to each reporting unit’s applicable metrics
such as book and tangible book values. The results of the income and market approaches are combined to arrive
at the final calculation of fair value. The aggregate fair market value of the reporting units compared with market
capitalization indicated an implied premium of 29% at September 30, 2011. A control premium analysis
indicated that the implied premium was within range of overall premiums observed in the market place. All four
of the reporting units tested passed Step 1.
The second step (Step 2) of impairment testing is necessary only if the reporting unit does not pass Step 1.
Step 2 compares the implied fair value of the reporting unit goodwill with the carrying amount of the goodwill
for the reporting unit. The implied fair value of goodwill is determined in the same manner as goodwill that is
recognized in a business combination. Significant judgment and estimates are involved in estimating the fair
value of the assets and liabilities of the reporting unit. As none of the reporting units failed step 1, step 2 was not
applicable during 2011 testing.
Significant judgment is applied when goodwill is assessed for impairment. This judgment includes
developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables,
incorporating general economic and market conditions, and selecting an appropriate control premium. The
selection and weighting of the various fair value techniques may result in a higher or lower fair value. Judgment
is applied in determining the weightings that are most representative of fair value.
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