US Bank 2007 Annual Report Download - page 81

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Included in available-for-sale, asset-backed investment
securities, are structured investment securities which were
purchased in the fourth quarter of 2007 from certain money
market funds managed by FAF Advisors, Inc., an affiliate of
the Company. Some of these securities evidenced credit
deterioration subsequent to origination, but prior to
acquisition by the Company. Statement of Position No. 03-3
(“SOP 03-3”), “Accounting for Certain Loans or Debt
Securities Acquired in a Transfer”, requires the difference
between the total expected cash flows for these securities
and the initial recorded investment to be recognized in
earnings over the life of the securities, using a level yield. If
subsequent decreases in the fair value of these securities are
accompanied by an adverse change in the expected cash
flows, an other-than-temporary impairment will be recorded
through earnings. Subsequent increases in the expected cash
flows will be recognized as income prospectively over the
remaining life of the security by increasing the level yield.
At December 31, 2007, the gross undiscounted cash
flows that were due under the contractual terms of the
purchased securities subject to SOP 03-3, were $2.5 billion,
which included payments receivable of $33 million.
Changes in the carrying amount and accretable yield for the year ended December 31, 2007, are as follows:
(Dollars in Millions)
Accretable
Yield
Carrying
Amount
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ – $ –
Purchases (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 2,445
Payments received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – (20)
Accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) 2
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $105 $2,427
(a) The Carrying amount of purchases represents the fair value of the securities on that date.
The Company conducts a regular assessment of its
investment portfolios to determine whether any securities are
other-than-temporarily impaired considering, among other
factors, the nature of the securities, credit ratings or
financial condition of the issuer, the extent and duration of
the unrealized loss, expected cash flows of underlying
collateral, market conditions and the Company’s ability to
hold the securities through the anticipated recovery period.
At December 31, 2007, certain investment securities
included in the held-to-maturity and available-for-sale
categories had a fair value that was below their amortized
cost.
The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that
are not deemed to be other-than-temporarily impaired based on the period the investments have been in a continuous unrealized
loss position:
(Dollars in Millions)
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Less Than 12 Months 12 Months or Greater Total
Held-to-maturity
Obligations of state and political subdivisions . . ................. $ 10 $ – $ 1 $ – $ 11 $ –
Total ........................................... $ 10 $ – $ 1 $ – $ 11 $ –
Available-for-sale
U.S. Treasury and agencies .............................. $ 23 $ – $ 230 $ (3) $ 253 $ (3)
Mortgage-backed securities .............................. 3,238 (63) 23,524 (682) 26,762 (745)
Asset-backed securities . ................................ 5 – – – 5 –
Obligations of state and political subdivisions . . ................. 4,853 (89) 197 (5) 5,050 (94)
Other securities and investments . . ......................... 1,573 (277) 198 (23) 1,771 (300)
Total ........................................... $9,692 $(429) $24,149 $(713) $33,841 $(1,142)
Generally, the unrealized losses within each investment
category have occurred due to rising interest rates over the
past few years. The substantial portion of securities that
have unrealized losses are either government securities,
issued by government-backed agencies or privately issued
securities with high investment grade credit ratings.
Unrealized losses within other securities and investments are
also the result of a modest widening of credit spreads since
the initial purchase date. In general, the issuers of the
investment securities do not have the contractual ability to
pay them off at less than par at maturity or any earlier call
date. As of the reporting date, the Company expects to
U.S. BANCORP 79