Huntington National Bank 2010 Annual Report Download - page 133

25%, respectively, to arrive at the final calculation of fair value. As market capitalization declined across the
banking industry, we believed that a heavier weighting on the income approach was more representative of a
market participant’s view. For the Insurance reporting unit, Management utilized a market approach to
determine fair value. The aggregate fair market values were compared with market capitalization as an
assessment of the appropriateness of the fair value measurements. As our stock price fluctuated greatly during
the valuation period, we used our average stock price for the 30 days preceding the valuation date to determine
market capitalization. The aggregate fair market values of the reporting units compared with market
capitalization indicated an implied premium of 27%. A control premium analysis indicated that the implied
premium was within range of overall premiums observed in the market place. Neither the Regional Banking
nor Insurance reporting units 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.
To determine the implied fair value of goodwill, the fair value of Regional Banking and Insurance (as
determined in Step 1) was allocated to all assets and liabilities of the reporting units including any recognized
or unrecognized intangible assets. The allocation was done as if the reporting unit was acquired in a business
combination, and the fair value of the reporting unit was the price paid to acquire the reporting unit. This
allocation process is only performed for purposes of testing goodwill for impairment. The carrying values of
recognized assets or liabilities (other than goodwill, as appropriate) were not adjusted nor were any new
intangible assets recorded. Key valuations were the assessment of core deposit intangibles, the mark-to-fair-
value of outstanding debt and deposits, and mark-to-fair-value on the loan portfolio. Core deposits were valued
using a 15% discount rate. The marks on our outstanding debt and deposits were based upon observable trades
or modeled prices using then current yield curves and market spreads. The valuation of the loan portfolio
indicated discounts in the ranges of 9%-24%, depending upon the loan type. The estimated fair value of these
loan portfolios was based on an exit price, and the assumptions used were intended to approximate those that
a market participant would have used in valuing the loans in an orderly transaction, including a market
liquidity discount. The significant market risk premium that is a consequence of the current distressed market
conditions was a significant contributor to the valuation discounts associated with these loans. We believed
these discounts were consistent with transactions currently occurring in the marketplace.
Upon completion of Step 2, we determined that the Regional Banking and Insurance reporting units’
goodwill carrying values exceeded their implied fair values of goodwill by $2,573.8 million and $28.9 million,
respectively. As a result, we recorded a noncash pretax impairment charge of $2,602.7 million in the 2009 first
quarter.
2009 Other Interim and Annual Impairment Testing
We recorded an impairment charge of $4.2 million in the 2009 second quarter related to the sale of a
small payments-related business completed in July 2009. No other goodwill impairment was required during
the remainder of 2009.
FRANKLIN LOANS RESTRUCTURING TRANSACTION
(This section should be read in conjunction with Note 3 of the Notes to Consolidated Financial Statements).
Franklin is a specialty consumer finance company primarily engaged in servicing performing, reperform-
ing, and nonperforming residential mortgage loans. Prior to March 31, 2009, Franklin owned a portfolio of
loans secured by first-lien and second-lien loans secured by residential properties. These loans generally fell
outside the underwriting standards of Fannie Mae or Freddie Mac, and involved elevated credit risk as a result
of the nature or absence of income documentation, limited credit histories, higher levels of consumer debt,
and / or past credit difficulties (nonprime loans). At December 31, 2008, our total commercial loans
outstanding to Franklin were $650.2 million, all of which were placed on nonaccrual status. Additionally, the
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