Huntington National Bank 2012 Annual Report Download - page 103

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Critical Accounting Policies and Use of Significant Estimates
Our Consolidated Financial Statements are prepared in accordance with GAAP. The preparation of financial statements in
conformity with GAAP requires us to establish accounting policies and make estimates that affect amounts reported in our
Consolidated Financial Statements. Note 1 of the Notes to Consolidated Financial Statements, which is incorporated by reference into
this MD&A, describes the significant accounting policies we use in our Consolidated Financial Statements.
An accounting estimate requires assumptions and judgments about uncertain matters that could have a material effect on the
Consolidated Financial Statements. Estimates are made under facts and circumstances at a point in time, and changes in those facts
and circumstances could produce results substantially different from those estimates. The most significant accounting policies and
estimates and their related application are discussed below.
Allowance for Credit Losses
Our ACL of $0.8 billion at December 31, 2012, represents our estimate of probable credit losses inherent in our loan and lease
portfolio and our unfunded loan commitments and letters of credit. We regularly review our ACL for appropriateness by performing
on-going evaluations of the loan and lease portfolio. In doing so, we consider factors such as the differing economic risk associated
with each loan category, the financial condition of specific borrowers, the level of delinquent loans, the value of any collateral and,
where applicable, the existence of any guarantees or other documented support. We also evaluate the impact of changes in interest
rates and overall economic conditions on the ability of borrowers to meet their financial obligations when quantifying our exposure to
credit losses and assessing the appropriateness of our ACL at each reporting date. There is no certainty that our ACL will be
appropriate over time to cover losses in the portfolio because of unanticipated adverse changes in the economy, market conditions, or
events adversely affecting specific customers, industries, or markets. If the credit quality of our customer base materially deteriorates,
the risk profile of a market, industry, or group of customers changes materially, or if the ACL is not appropriate, our net income and
capital could be materially adversely affected which, in turn, could have a material adverse effect on our financial condition and
results of operations.
In addition, bank regulators periodically review our ACL and may require us to increase our provision for loan and lease losses or
loan charge-offs. Any increase in our ACL or loan charge-offs as required by these regulatory authorities could have a material
adverse effect on our financial condition and results of operations.
Goodwill Impairment
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 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 each 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 2012, 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 6% at September 30, 2012. 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.