US Bank 2014 Annual Report Download - page 77

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.
RefertoNote22oftheNotestoConsolidatedFinancial
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 the 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. The Company
records MSRs at fair value. 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. Refer to Notes 10
and 22 of the Notes to Consolidated Financial Statements for
additional information on the assumptions used in
determining the fair value of MSRs and an analysis of the
sensitivity to changes in interest rates of the fair value of the
MSRs portfolio and the related derivative instruments used
to mitigate the valuation risk.
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 unit 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.
In assessing the fair value of reporting units, the
Company considers the stage of the current business cycle
and potential changes in market conditions in estimating the
timing and extent of future cash flows. Also, management
often utilizes other information to validate the
reasonableness of its valuations, including public market
comparables, and multiples of recent mergers and
U.S. BANCORP The power of potential
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