US Bank 2010 Annual Report Download - page 65

actively. Note 20 of the Notes to Consolidated Financial
Statements provides a summary of the Company’s derivative
positions.
Refer to Note 21 of the Notes to Consolidated
Financial 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
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. MSRs are initially recorded at fair
value and remeasured at each subsequent reporting date.
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 residential
mortgage loans, and futures and options contracts, to
mitigate the valuation risk. The estimated sensitivity to
changes in interest rates of the fair value of the MSRs
portfolio and the related derivative instruments at
December 31, 2010, to an immediate 25 and 50 bps
downward movement in interest rates would be a decrease
of approximately $5 million and an increase of
approximately $6 million, respectively. An upward
movement in interest rates at December 31, 2010, of 25 and
50 bps would increase the value of the MSRs and related
derivative instruments by approximately $5 million and
$1 million, respectively. Refer to Note 10 of the Notes to
Consolidated Financial Statements for additional
information regarding MSRs.
Goodwill and Other Intangibles The Company records all
assets and liabilities acquired in purchase acquisitions,
including goodwill and other intangibles, at fair value.
Goodwill and indefinite-lived assets are not amortized but
are 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
segment 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
U.S. BANCORP 63