US Bank 2012 Annual Report Download - page 73

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 TBAs, and futures and
options contracts, to mitigate the valuation risk.
Goodwill and Other Intangibles The Company records all assets
and liabilities acquired in purchase acquisitions, including
goodwill and other intangibles, at fair value. Goodwill is not
amortized but is 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 effort to assess and
validate assumptions utilized in its estimates.
In assessing the fair value of reporting units, the
Company considers the stage of the current business cycle and
potential changes in market conditions in estimating the
timing and extent of future cash flows. Also, management
often utilizes other information to validate the reasonableness
of its valuations, including public market comparables, and
multiples of recent mergers and acquisitions of similar
businesses. Valuation multiples may be based on revenue,
price-to-earnings and tangible capital ratios of comparable
public companies and business segments. These multiples may
be adjusted to consider competitive differences, including size,
operating leverage and other factors. The carrying amount of
a reporting unit is determined based on the amount of equity
required for the reporting unit’s activities, considering the
specific assets and liabilities of the reporting unit. The
Company determines the amount of equity for each reporting
unit on a risk-adjusted basis considering economic and
regulatory capital requirements, and includes deductions and
limitations related to certain types of assets including MSRs,
purchased credit card relationship intangibles, and capital
markets activity in the Company’s Wholesale Banking and
Commercial Real Estate segment. The Company does not
assign corporate assets and liabilities to reporting units that
do not relate to the operations of the reporting unit or are not
considered in determining the fair value of the reporting unit.
These assets and liabilities primarily relate to the Company’s
investment securities portfolio and other investments
(including direct equity investments, bank-owned life
insurance and tax-advantaged investments) and corporate
debt and other funding liabilities. In the most recent goodwill
impairment test, the portion of the Company’s total equity
allocated to the Treasury and Corporate Support operating
segment included approximately $3 billion in excess of the
economic and regulatory capital requirements of that segment.
The Company’s annual assessment of potential goodwill
impairment was completed during the second quarter of 2012.
Based on the results of this assessment, no goodwill
impairment was recognized. Because of current economic
conditions the Company continues to monitor goodwill and
other intangible assets for impairment indicators throughout
the year.
Income Taxes The Company estimates income tax expense
based on amounts expected to be owed to various tax
jurisdictions. Currently, the Company files tax returns in
approximately 235 federal, state and local domestic
jurisdictions and 14 foreign jurisdictions. The estimated
income tax expense is reported in the Consolidated Statement
of Income. Accrued taxes represent the net estimated amount
due to or to be received from taxing jurisdictions either
currently or in the future and are reported in other assets or
other liabilities on the Consolidated Balance Sheet. In
estimating accrued taxes, the Company assesses the relative
merits and risks of the appropriate tax treatment considering
statutory, judicial and regulatory guidance in the context of
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