Goodwill impairment is such an arcane termsounding almost like a euphemism for diminished kindly feelings toward othersthat it likely holds little significance for those not well-versed in financial lingo.
Yet, it has exacted a heavy toll from two prominent publicly traded Spokane-based banks recently, equating to write-downs totaling in the hundreds of millions of dollars, and financial industry experts here say you'll likely hear it used more frequently in coming months.
"It's all over our radar screen," says Steve Coleman, a senior manager at LeMaster Daniels PLLC, one of Spokane's largest accounting firms.
Goodwill, in this context, refers to intangible assets on a company's balance sheet, and goodwill impairment refers to the mandated process of reducing the "carrying" value of those assets, when necessary, to match their fair market value.
Intangible assets, largely subjective, can refer to things such as a strong brand name or market presence, good customer relations, valuable intellectual property, and proprietary technology, as well as to the amount above book value that one company pays to acquire another.
Under accounting-standard changes adopted a number of years ago, businesses no longer can amortize goodwill over a period of up to 40 years, but rather must perform goodwill-impairment reviews annually, or more frequently if events or circumstances warrant it. The recession is just such an event, having depressed market values in virtually all industries and thus forcing sizable goodwill impairment charge-offs for businesses across the country, with more yet to come.
Some national observers contend balance sheets became bloated with goodwill during the economic run-up, when many public companies overpaid for assets. Puffed-up financial statements thwart analysis of those companies by investors and distort stock prices, they say.
Coleman says the potential for all businesses to show goodwill impairment obviously is much higher now than in years when the economy was stronger, and thus the value of companies' intangible assets is coming under greater scrutiny.
As LeMaster Daniels does auditing work for its clients, he says, "If they've got goodwill or intangibles, we're looking at, 'Is the asset impaired? What is the cash flow that could be generated?'" He emphasizes, though, that the ultimate responsibility of determining goodwill impairment lies with a business's managers.
AmericanWest Bancorp., the Spokane-based parent of AmericanWest Bank, sent out a shock wave here several months ago when it posted a third-quarter loss of $96.9 million, the bulk of which$82 millionwas a goodwill-impairment charge based on an analysis of its holdings by an independent valuation firm in light of weakened market conditions. That was on top of an earlier reported first-quarter loss of $31.6 million, which included a goodwill-impairment charge of $27 million.
Sterling Financial Corp., the Spokane-based bank-holding company that owns Sterling Savings Bank, topped that earlier this month when it said it would take a noncash goodwill impairment charge of $275 million to $325 million for the 2008 fourth quarter in an earnings report that was to be released earlier this week.
AmericanWest's struggles have contributed heavily to a more than 90 percent drop in its stock value over the last year, as its share price has plummeted from more than $15 a share in January 2008 to less than 90 cents last week. Sterling's share price has fallen almost as precipitously, from nearly $20 a share to around $2.60, over that period.
Those banks' charge-offs, though, pale in comparison to some announced recently. For example, Regions Financial Corp., of Birmingham, Ala., last week announced a $6.24 billion loss that includes a $6 billion goodwill-impairment charge, and United Rentals Inc., of Greenwich, Conn., said it expects to take a $1.1 billion impairment charge for the fourth quarter. Other large companies have been reporting impairment charges in the upper hundreds of millions of dollars.
Coleman says goodwill impairment is occurring across all business sectors, but perhaps has been most apparent in the financial sector because that industry in particular has seen a lot of acquisitions in recent years and thus, "Their goodwill is pretty fresh on their books."
AmericanWest President and CEO Patrick J. Rusnak said in an interview late last year that most of the bank's recent problems stem from its exposure to residential construction and development loans, mostly in Utah, where the real estate market crashed after an extended hot stretch. AmericanWest inherited some of the problem loans from Far West Bancorporation, of Provo, Utah, which it acquired in April 2007, but many also were loans AmericanWest had made in Utah prior to that acquisition.
Rusnak said the $150 million that AmericanWest paid for Far West was three times that company's book value, but defended the acquisition in the context of the bubbling economy at that time, saying Far West was a "very profitable bank" with "a great core deposit base."
He contended that AmericanWest has been more aggressive than some financial institutions in identifying problem loans and promptly declaring goodwill impairments, or charge-offs, despite the adverse publicity that has generated.
Coleman says LeMaster Daniels doesn't do audit work for any publicly traded companies, adding, "I do have clients that do have goodwill on their books that will be impaired, but it won't be public." Noting that impairment write-downs are technical entries that affect a company's balance sheet and income statement, he says, "It's an equity hit, but not a cash hit."
"You can have impairment and still have a profitable company," he says, but it nevertheless is concerning because "it shows that the asset that they purchased is not going to generate the cash flows that they had anticipated."
Nick Knapton, a supervisor at McDirmid, Mikkelsen & Secrest PS, also one of Spokane's largest accounting firms, says, "When I look out there, I think it's going to be an ugly quarter," with more goodwill impairment write-offs coming. Most, he says, will involve businesses that were acquired or that have been acquiring others.
"You're going to see it in industries where there is a lot of value associated to things other than hard assets," says Knapton, who is an attorney as well as a CPA. "It's not going to be low-margin businesses. It's going to be companies that have had a higher return on assets historically."
Paul Bridge, an audit partner in the Spokane office of big accounting and financial consulting company BDO Seidman LLP, says goodwill impairment "became very high profile" starting in mid September, "when stock prices just got so low that it was very difficult to reconcile what you had on the books and what the market was doing."
"What's happening nowwe're going to see it coming over the next several monthsis that people are no longer able to support that goodwill value on their books," he says, adding, "If you can't support it, you've got to write it off or down. The interesting thing about the rule is you can't write goodwill back up (such as if the stock market were to improve dramatically). Once you write it down, it's permanent."
Bridge says that, even with the benefit of hindsight, it's hard to fault businesses for making the acquisitions they did during an economic growth period that extended over many years. Of the factors that led to the end of that run-up and to the current recession, he says, "It was almost like the perfect storm of things coming all at once."
He says he expects to see "a lot" of goodwill impairment recognized in 2008 year-end reports and more at least through the first quarter or two this year. He adds, "I think 2009 is the year of goodwill, and after that it really should settle down, but what an impact it has had."
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