US Bank 2006 Annual Report Download - page 61

estimated loss rates for these portfolios increased by Goodwill and Other Intangibles The Company records all
10 percent, the allowance determined for commercial and assets and liabilities acquired in purchase acquisitions,
commercial real estate would increase by approximately including goodwill and other intangibles, at fair value as
$93 million at December 31, 2006. The Company’s required by Statement of Financial Accounting Standards
determination of the allowance for residential and retail No. 141, ‘‘Goodwill and Other Intangible Assets.’’
loans is sensitive to changes in estimated loss rates. In the Goodwill and indefinite-lived assets are no longer amortized
event that estimated loss rates increased by 10 percent, the but are subject, at a minimum, to annual tests for
allowance for residential mortgages and retail loans would impairment. Under certain situations, interim impairment
increase by approximately $60 million at December 31, tests may be required if events occur or circumstances
2006. Because several quantitative and qualitative factors change that would more likely than not reduce the fair
are considered in determining the allowance for credit value of a reporting segment below its carrying amount.
losses, these sensitivity analyses do not necessarily reflect the Other intangible assets are amortized over their estimated
nature and extent of future changes in the allowance for useful lives using straight-line and accelerated methods and
credit losses. They are intended to provide insights into the are subject to impairment if events or circumstances indicate
impact of adverse changes in risk rating and inherent losses a possible inability to realize the carrying amount.
and do not imply any expectation of future deterioration in The initial recognition of goodwill and other intangible
the risk rating or loss rates. Given current processes assets and subsequent impairment analysis require
employed by the Company, management believes the risk management to make subjective judgments concerning
ratings and inherent loss rates currently assigned are estimates of how the acquired assets will perform in the
appropriate. It is possible that others, given the same future using valuation methods including discounted cash
information, may at any point in time reach different flow analysis. Additionally, estimated cash flows may
reasonable conclusions that could be significant to the extend beyond ten years and, by their nature, are difficult
Company’s financial statements. Refer to the ‘‘Analysis and to determine over an extended timeframe. Events and
Determination of the Allowance for Credit Losses’’ section factors that may significantly affect the estimates include,
for further information. among others, competitive forces, customer behaviors and
attrition, changes in revenue growth trends, cost structures,
Mortgage Servicing Rights MSRs are capitalized as separate technology, changes in discount rates and specific industry
assets when loans are sold and servicing is retained or may and market conditions. In determining the reasonableness of
be purchased from others. MSRs are initially recorded at cash flow estimates, the Company reviews historical
fair value, if practicable, and at each subsequent reporting performance of the underlying assets or similar assets in an
date. The Company determines the fair value by estimating effort to assess and validate assumptions utilized in
the present value of the asset’s future cash flows utilizing its estimates.
market-based prepayment rates, discount rates, and other In assessing the fair value of reporting units, the
assumptions validated through comparison to trade Company may consider the stage of the current business
information, industry surveys and independent third party cycle and potential changes in market conditions in
appraisals. Changes in the fair value of MSRs are recorded estimating the timing and extent of future cash flows. Also,
in earnings during the period in which they occur. Risks management often utilizes other information to validate the
inherent in the MSRs valuation include higher than reasonableness of its valuations including public market
expected prepayment rates and/or delayed receipt of cash comparables, and multiples of recent mergers and
flows. The Company utilizes futures and options contracts acquisitions of similar businesses. Valuation multiples may
to mitigate the valuation risk. The estimated sensitivity to be based on revenue, price-to-earnings and tangible capital
changes in interest rates of the fair value of the MSRs ratios of comparable public companies and business
portfolio and the related derivative instruments at segments. These multiples may be adjusted to consider
December 31, 2006, to an immediate 25 and 50 basis point competitive differences including size, operating leverage
downward movement in interest rates would be a decrease and other factors. The carrying amount of a reporting unit
of approximately $18 million and $50 million, respectively. is determined based on the capital required to support the
An upward movement in interest rates at December 31, reporting unit’s activities including its tangible and
2006, of 25 and 50 basis points would decrease the value intangible assets. The determination of a reporting unit’s
of the MSRs and related derivative instruments by capital allocation requires management judgment and
approximately $3 million and $36 million, respectively. considers many factors including the regulatory capital
Refer to Note 9 of the Notes to Consolidated Financial regulations and capital characteristics of comparable public
Statements for additional information regarding MSRs.
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