Huntington National Bank 2010 Annual Report Download - page 132

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.
In 2010, we performed interim evaluations of our goodwill balances at March 31 and June 30, as well as
our annual goodwill impairment assessment as of October 1. The annual assessment was based on our
reporting units at that time. No impairment was recorded in 2010. The 2010 interim and annual assessments
were performed in a manner consistent with the 2009 process as described in the next section. All assumptions
were updated to reflect correct market conditions. Due to the current economic environment and other
uncertainties, it is possible that our estimates and assumptions may adversely change in the future. If our
market capitalization decreases or the liquidity discount on our loan portfolio improves significantly without a
concurrent increase in market capitalization, 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.
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.
2009 First Quarter Impairment Testing
During the 2009 first quarter, our stock price declined 78%, from $7.66 per common share at
December 31, 2008, to $1.66 per common share at March 31, 2009. Many peer banks also experienced similar
significant declines in market capitalization during this same period. This decline primarily reflected the
continuing economic slowdown and increased market concern surrounding financial institutions’ credit risks
and capital positions, as well as uncertainty related to increased regulatory supervision and intervention. We
determined that these changes would more-likely-than-not reduce the fair value of certain reporting units
below their carrying amounts. Therefore, we performed an interim goodwill impairment test during the 2009
first quarter. An independent third party was engaged to assist with the impairment assessment.
The first step (Step 1) of impairment testing required a comparison of each reporting unit’s fair value to
carrying value to identify potential impairment. For our impairment testing conducted during the 2009 first
quarter, we identified four reporting units: Regional Banking, Private Financial Group (PFG), Insurance, and
Automobile Finance and Dealer Services (AFDS).
Although Insurance was included within PFG for business segment reporting at that time, it was evaluated
as a separate reporting unit for goodwill impairment testing because it had its own separately allocated
goodwill resulting from prior acquisitions. The fair value of PFG (determined using the market approach as
described below), excluding Insurance, exceeded its carrying value, and goodwill was determined to not be
impaired for this reporting unit. There was no goodwill associated with AFDS and, therefore, it was not
subject to impairment testing.
For Regional Banking, we utilized both the income and market approaches to determine fair value. 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. The long-term growth rate used in determining the terminal value
was estimated at 2.5%. The discount rate of 14% was 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 the
Regional Banking unit’s applicable metrics such as book and tangible book values. A 20% control premium
was used in the market approach. The results of the income and market approaches were weighted 75% and
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