Huntington National Bank 2012 Annual Report Download - page 104

96
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 2012 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.
Due to potential economic uncertainties, it is possible that our estimates and assumptions may adversely change in the future. If
our market capitalization decreases, we may be required to record goodwill impairment losses in future periods, whether in connection
with our next annual impairment testing or prior to that time, if any changes constitute a triggering event.
Valuation of Financial Instruments
Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. Assets measured at
fair value include mortgage loans held for sale, available-for-sale and trading securities, certain securitized automobile loans,
derivatives, and certain securitization trust notes payable. At December 31, 2012, approximately $8.4 billion of our assets and $0.2
billion of our liabilities were recorded at fair value. In addition to the above mentioned on-going fair value measurements, fair value
is also the unit of measure for recording business combinations.
At the end of each quarter, we assess the valuation hierarchy for each asset or liability measured at fair value. As necessary,
assets or liabilities may be transferred within fair value hierarchy levels due to changes in availability of observable market inputs to
measure fair value at the measurement date.
Where available, we use quoted market prices to determine fair value. If quoted market prices are not available, fair value is
determined, using either internally developed or independent third party valuation models, based on inputs that are either directly
observable or derived from market data. These inputs include, but are not limited to, interest rate yield curves, option volatilities, or
option adjusted spreads. Where neither quoted market prices nor observable market data are available, fair value is determined using
valuation models that feature one or more significant unobservable inputs based on management’s expectation that market participants
would use in determining the fair value of the asset or liability. The determination of appropriate unobservable inputs requires exercise
of management judgment. A significant portion of our assets and liabilities that are reported at fair value are measured based on
quoted market prices and observable market or independent inputs.
The following is a description of the significant estimates used in the valuation of financial assets and liabilities
for which quoted market prices and observable market parameters are not available.
Mortgage-backed and Asset-backed securities
Our Alt-A, private label CMO and pooled-trust-preferred securities portfolios are classified as Level 3 and as such use significant
estimates to determine the fair value of these securities which results in greater subjectivity. The Alt-A and private label CMO
securities portfolios are subjected to a monthly review of the projected cash flows, while the cash flows of our pooled-trust-preferred
securities portfolio are reviewed quarterly. These reviews are supported with analysis from independent third parties, and are used as a
basis for impairment analysis.
Alt-A mortgage-backed and private-label CMO securities are collateralized by first-lien residential mortgage loans. The securities
valuation methodology incorporates values obtained from a third party pricing specialist using a discounted cash flow approach and a
proprietary pricing model and includes assumptions management believes market participants would use to value the securities under
current market conditions. The model uses inputs such as estimated prepayment speeds, losses, recoveries, default rates that are
implied by the underlying performance of collateral in the structure or similar structures, house price depreciation / appreciation rates
that are based upon macroeconomic forecasts and discount rates that are implied by market prices for similar securities with similar
collateral structures.
Pooled-trust-preferred securities are CDOs backed by a pool of debt securities issued by financial institutions. The collateral
generally consists of trust-preferred securities and subordinated debt securities issued by banks, bank holding companies, and
insurance companies. A full cash flow analysis is used to estimate fair values and assess impairment for each security within this
portfolio. We engage a third party pricing specialist with direct industry experience in pooled-trust-preferred securities valuations to
provide assistance in estimating the fair value and expected cash flows for each security in this portfolio. The PD of each issuer and
the market discount rate are the most significant inputs in determining fair value. Management evaluates the PD assumptions