US Bank 2008 Annual Report Download - page 78

eliminate recognition at the acquisition date of an allowance
for loan losses on acquired loans; rather, credit related
factors will be incorporated directly into the fair value of the
loans. Other significant changes include recognizing
transaction costs and most restructuring costs as expenses
when incurred. The accounting requirements of SFAS 141R
are applied on a prospective basis for all transactions
completed after the effective date and early adoption is not
permitted.
Noncontrolling Interests In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 160
(“SFAS 160”), “Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51”,
effective for the Company beginning on January 1, 2009.
SFAS 160 will change the accounting and reporting for
minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of
equity, separate from U.S. Bancorp’s own equity, in the
consolidated balance sheet. SFAS 160 also requires the
amount of net income attributable to the entity and to the
noncontrolling interests be shown separately on the
consolidated statement of income, and requires expanded
disclosures.
The Company expects to reclassify $733 million in
noncontrolling interests from other liabilities to equity upon
adoption of SFAS 160. Noncontrolling interests’ share of net
income was $69 million in 2008, $81 million in 2007 and
$58 million in 2006.
Note 3 BUSINESS COMBINATIONS
On November 21, 2008, the Company acquired the banking
operations of Downey Savings & Loan Association, F.A., the
primary subsidiary of Downey Financial Corp., and PFF
Bank & Trust (“Downey” and “PFF”, respectively), from
the FDIC. The Company acquired $13.7 billion of Downey’s
assets and assumed $12.3 billion of its liabilities, and
acquired $3.7 billion of PFF’s assets and assumed
$3.5 billion of its liabilities. In connection with these
acquisitions, the Company entered into loss sharing
agreements with the FDIC (“Loss Sharing Agreements”)
providing for specified credit loss and asset yield protection
for all single family residential mortgages and a significant
portion of commercial and commercial real estate loans and
foreclosed real estate (“covered assets”). At the acquisition
date, the Company estimated the covered assets would incur
approximately $4.7 billion of cumulative credit losses,
including the present value of expected interest rate
decreases on loans the Company expects to modify. These
losses, if incurred, will be offset by an estimated $2.4 billion
benefit to be received by the Company from the FDIC under
the Loss Sharing Agreements. Under the terms of the Loss
Sharing Agreements, the Company will incur the first
$1.6 billion of specified losses (“First Loss Position”) on the
covered assets, which was approximately the predecessors’
carrying amount of the net assets acquired. The Company
acquired these net assets for a nominal amount of
consideration. After the First Loss Position, the Company
will incur 20 percent of the next $3.1 billion of specified
losses and only 5 percent of specified losses beyond that
amount. The Company estimates that its share of those
losses will be approximately $.7 billion.
The Company identified the acquired non-revolving
loans experiencing credit deterioration, representing the
majority of assets acquired, and recorded these assets in the
financial statements at their estimated fair value, reflecting
expected credit losses and the estimated impact of the Loss
Sharing Agreements. The Company recorded all other loans
at the predecessors’ carrying amount, net of fair value
adjustments for any interest rate related discount or
premium, and an allowance for credit losses. At
December 31, 2008, $11.5 billion of the Company’s assets
were covered by the Loss Sharing Agreements. The Company
recorded $61 million of interest income on covered loans
acquired for the year ended December 31, 2008.
Note 4 RESTRICTIONS ON CASH AND DUE
FROM BANKS
The Federal Reserve Bank requires bank subsidiaries to
maintain minimum average reserve balances. Those reserve
balances were $.9 billion at December 31, 2008.
76 U.S. BANCORP