US Bank 2003 Annual Report Download - page 62

analysis and historical performance, the amount of the interest rates and the related impact on mortgage loan
allowance for commercial and commercial real estate loans prepayment speeds and the payment performance of the
might decline. However, it is likely that management would underlying loans. If the carrying value is greater than fair
maintain an adequate allowance for credit losses by value, impairment is recognized through a valuation
increasing the allowance for other factors at a stage in the allowance for each impaired stratum and recorded as
business cycle that is uncertain and when nonperforming amortization of intangible assets. The changes in the fair
asset levels remain elevated. value of MSRs at December 31, 2003, to immediate 25 and
Sensitivity analysis to the many factors impacting the 50 basis point adverse changes in interest rates would be
allowance for credit losses is difficult. Some factors are approximately $78 million and $127 million, respectively.
quantifiable while other factors require qualitative An upward movement in interest rates at December 31,
judgment. Management conducts analysis with respect to 2003, of 25 and 50 basis points would increase the value of
the accuracy of risk ratings and the volatility of inherent the MSRs by approximately $75 million and $133 million,
loss rates applied to risk categories and utilizes the results respectively. Refer to Note 11 of the Notes to Consolidated
of this analysis to determine retail loss projections. This Financial Statements for additional information regarding
analysis is then considered in determining the level of the MSRs.
allowance for credit losses. Refer to the ‘‘Analysis and Goodwill and Other Intangibles The Company records all
Determination of the Allowance for Credit Losses’’ section assets and liabilities acquired in purchase acquisitions,
for further information. including goodwill and other intangibles, at fair value as
Asset Impairment In the ordinary course of business, the required by Statement of Financial Accounting Standards
Company evaluates the carrying value of its assets for No. 141, ‘‘Goodwill and Other Intangible Assets.’’
potential impairment. Generally, potential impairment is Goodwill and indefinite-lived assets are no longer amortized
determined based on a comparison of fair value to the but are subject, at a minimum, to annual tests for
carrying value. The determination of fair value can be impairment. Under certain situations, interim impairment
highly subjective, especially for assets that are not actively tests may be required if events occur or circumstances
traded or when market-based prices are not available. The change that would more likely than not reduce the fair
Company estimates fair value based on the present value of value of a reporting segment below its carrying amount.
estimated future cash flows. The initial valuation and Other intangible assets are amortized over their estimated
subsequent impairment tests may require the use of useful lives using straight-line and accelerated methods and
significant management estimates. Additionally, determining are subject to impairment if events or circumstances indicate
the amount, if any, of an impairment may require an a possible inability to realize the carrying amount.
assessment of whether or not a decline in an asset’s The initial recognition of goodwill and other intangible
estimated fair value below the recorded value is temporary assets and subsequent impairment analysis require
in nature. While impairment assessments impact most asset management to make subjective judgments concerning
categories, the following areas are considered to be critical estimates of how the acquired assets will perform in the
accounting matters in relation to the financial statements. future using valuation methods including discounted cash
flow analysis. Additionally, estimated cash flows may
Mortgage Servicing Rights MSRs are capitalized as separate extend beyond ten years and, by their nature, are difficult
assets when loans are sold and servicing is retained. The to determine over an extended timeframe. Events and
total cost of loans sold is allocated between the loans sold factors that may significantly affect the estimates include,
and the servicing assets retained based on their relative fair among others, competitive forces, customer behaviors and
values. MSRs that are purchased from others are initially attrition, changes in revenue growth trends, cost structures
recorded at cost. The carrying value of the MSRs is and technology, changes in discount rates and specific
amortized in proportion to and over the period of estimated industry and market conditions. In determining the
net servicing revenue and recorded in noninterest expense as reasonableness of cash flow estimates, the Company reviews
amortization of intangible assets. The carrying value of historical performance of the underlying assets or similar
these assets is periodically reviewed for impairment using a assets in an effort to assess and validate assumptions
lower of carrying value or fair value methodology. For utilized in its estimates.
purposes of measuring impairment, the servicing rights are In assessing the fair value of reporting units, the
stratified based on the underlying loan type and note rate Company may consider the stage of the current business
and the carrying value for each stratum is compared to fair cycle and potential changes in market conditions in
value based on a discounted cash flow analysis, utilizing estimating the timing and extent of future cash flows. Also,
current prepayment speeds and discount rates. Events that management often utilizes other information to validate the
may significantly affect the estimates used are changes in
60 U.S. Bancorp