US Bank 2011 Annual Report Download - page 67

on investment securities, refer to Note 5 of the Notes to
Consolidated Financial Statements.
As few derivative contracts are listed on an exchange, the
majority of the Company’s derivative positions are valued
using valuation techniques that use readily observable market
inputs. Certain derivatives, however, must be valued using
techniques that include unobservable inputs. For these
instruments, the significant assumptions must be estimated
and therefore, are subject to judgment. Note 20 of the Notes
to Consolidated Financial Statements provides a summary of
the Company’s derivative positions.
Refer to Note 21 of the Notes to Consolidated Financial
Statements for additional information regarding estimations
of fair value.
Purchased Loans and Related Indemnification Assets In
accordance with applicable authoritative accounting guidance
effective for the Company beginning January 1, 2009, all
purchased loans and related indemnification assets arising
from loss-sharing arrangements with FDIC are recorded at
fair value at date of purchase. The initial valuation of these
loans and the related indemnification assets requires
management to make subjective judgments concerning
estimates about how the acquired loans will perform in the
future using valuation methods including discounted cash
flow analysis and independent third party appraisals. Factors
that may significantly affect the initial valuation include,
among others, market-based and industry data related to
expected changes in interest rates, assumptions related to
probability and severity of credit losses, estimated timing of
credit losses including the foreclosure and liquidation of
collateral, expected prepayment rates, required or anticipated
loan modifications, unfunded loan commitments, the specific
terms and provisions of any loss sharing agreements, and
specific industry and market conditions that may impact
discount rates and independent third party appraisals.
On an ongoing basis, the accounting for purchased loans
and related indemnification assets follows applicable
authoritative accounting guidance for purchased non-impaired
loans and purchased impaired loans. Refer to Note 1 and
Note 6 of the Notes to Consolidated Financial Statements for
additional information. In addition, refer to the “Analysis and
Determination of the Allowance for Credit Losses” section for
information on the determination of the required allowance
for credit losses, if any, for these loans.
Mortgage Servicing Rights MSRs are capitalized as separate
assets when loans are sold and servicing is retained, or may be
purchased from others. MSRs are initially recorded at fair
value and remeasured at each subsequent reporting date.
Because MSRs do not trade in an active market with readily
observable prices, the Company determines the fair value by
estimating the present value of the asset’s future cash flows
utilizing market-based prepayment rates, discount rates, and
other assumptions validated through comparison to trade
information, industry surveys and independent third party
valuations. Changes in the fair value of MSRs are recorded in
earnings during the period in which they occur. Risks inherent
in the MSRs’ valuation include higher than expected
prepayment rates and/or delayed receipt of cash flows. The
Company may utilize derivatives, including interest rate
swaps, forward commitments to buy TBAs, and futures and
options contracts, to mitigate the valuation risk. The
estimated sensitivity to changes in interest rates of the fair
value of the MSRs portfolio and the related derivative
instruments at December 31, 2011, to an immediate 25 and
50 bps downward movement in interest rates would be an
increase of approximately $6 million and $21 million,
respectively. An upward movement in interest rates at
December 31, 2011, of 25 and 50 bps would have no impact
to and increase the value of the MSRs and related derivative
instruments by approximately $6 million, respectively. Refer
to Note 10 of the Notes to Consolidated Financial Statements
for additional information regarding MSRs.
Goodwill and Other Intangibles The Company records all
assets and liabilities acquired in purchase acquisitions,
including goodwill and other intangibles, at fair value.
Goodwill is not amortized but is subject, at a minimum, to
annual tests for impairment. In certain situations, interim
impairment tests may be required if events occur or
circumstances change that would more likely than not reduce
the fair value of a reporting segment below its carrying
amount. Other intangible assets are amortized over their
estimated useful lives using straight-line and accelerated
methods and are subject to impairment if events or
circumstances indicate a possible inability to realize the
carrying amount.
The initial recognition of goodwill and other intangible
assets and subsequent impairment analysis require
management to make subjective judgments concerning
estimates of how the acquired assets will perform in the future
using valuation methods including discounted cash flow
analysis. Additionally, estimated cash flows may extend
beyond ten years and, by their nature, are difficult to
determine over an extended timeframe. Events and factors
that may significantly affect the estimates include, among
others, competitive forces, customer behaviors and attrition,
changes in revenue growth trends, cost structures, technology,
changes in discount rates and specific industry and market
conditions. In determining the reasonableness of cash flow
estimates, the Company reviews historical performance of the
underlying assets or similar assets in an effort to assess and
validate assumptions utilized in its estimates.
U.S. BANCORP 65