US Bank 2015 Annual Report Download - page 78

qualitative factors that can affect the precision of credit loss
estimates, including economic conditions, such as changes in
unemployment or bankruptcy rates, and concentration risks,
such as risks associated with specific industries, the housing
market, and loans to highly leveraged enterprises, in
determining the overall level of the allowance for credit losses.
The Company’s determination of the allowance for
commercial lending segment loans is sensitive to the
assigned credit risk ratings and inherent loss rates at
December 31, 2015. In the event that 10 percent of period
ending loan balances (including unfunded commitments)
within each risk category of this segment of the loan portfolio
experienced downgrades of two risk categories, the
allowance for credit losses would increase by approximately
$236 million at December 31, 2015. The Company believes
the allowance for credit losses appropriately considers the
imprecision in estimating credit losses based on credit risk
ratings and inherent loss rates but actual losses may differ
from those estimates. In the event that inherent loss or
estimated loss rates for commercial lending segment loans
increased by 10 percent, the allowance for credit losses
would increase by approximately $158 million at
December 31, 2015. The Company’s determination of the
allowance for consumer lending segment loans is sensitive to
changes in estimated loss rates and estimated impairments
on restructured loans. In the event that estimated losses for
this segment of the loan portfolio increased by 10 percent, the
allowance for credit losses would increase by approximately
$183 million at December 31, 2015. Because several
quantitative and qualitative factors are considered in
determining the allowance for credit losses, these sensitivity
analyses do not necessarily reflect the nature and extent of
future changes in the allowance for credit losses. They are
intended to provide insights into the impact of adverse
changes in risk rating and inherent losses and do not imply
any expectation of future deterioration in the risk rating or loss
rates. Given current processes employed by the Company,
management believes the risk ratings and inherent loss rates
currently assigned are appropriate. It is possible that others,
given the same information, may at any point in time reach
different reasonable conclusions that could be significant to
the Company’s financial statements. Refer to the “Analysis
and Determination of the Allowance for Credit Losses” section
for further information.
Fair Value Estimates A portion of the Company’s assets
and liabilities are carried at fair value on the Consolidated
Balance Sheet, with changes in fair value recorded either
through earnings or other comprehensive income (loss) in
accordance with applicable accounting principles generally
accepted in the United States. These include all of the
Company’s available-for-sale investment securities,
derivatives and other trading instruments, MSRs and MLHFS.
The estimation of fair value also affects other loans held for
sale, which are recorded at the lower-of-cost-or-fair value.
The determination of fair value is important for certain other
assets that are periodically evaluated for impairment using fair
value estimates including goodwill and other intangible assets,
impaired loans, OREO and other repossessed assets.
Fair value is generally defined as the exit price at which an
asset or liability could be exchanged in a current transaction
between willing, unrelated parties, other than in a forced or
liquidation sale. Fair value is based on quoted market prices in
an active market, or if market prices are not available, is
estimated using models employing techniques such as matrix
pricing or discounting expected cash flows. The significant
assumptions used in the models, which include assumptions
for interest rates, discount rates, prepayments and credit
losses, are independently verified against observable market
data where possible. Where observable market data is not
available, the estimate of fair value becomes more subjective
and involves a high degree of judgment. In this circumstance,
fair value is estimated based on management’s judgment
regarding the value that market participants would assign to
the asset or liability. This valuation process takes into
consideration factors such as market illiquidity. Imprecision in
estimating these factors can impact the amount recorded on
the balance sheet for a particular asset or liability with related
impacts to earnings or other comprehensive income (loss).
When available, trading and available-for-sale securities are
valued based on quoted market prices. However, certain
securities are traded less actively and therefore, quoted
market prices may not be available. The determination of fair
value may require benchmarking to similar instruments or
performing a discounted cash flow analysis using estimates of
future cash flows and prepayment, interest and default rates.
An example is non-agency residential mortgage-backed
securities. For more information 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 22 of the Notes to Consolidated Financial
Statements for additional information regarding estimations of
fair value.
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