US Bank 2013 Annual Report Download - page 104

NOTE 7 Accounting for Transfers and Servicing of Financial Assets and Variable Interest Entities
The Company transfers financial assets in the normal course
of business. The majority of the Company’s financial asset
transfers are residential mortgage loan sales primarily to
government-sponsored enterprises (“GSEs”), transfers of
tax-advantaged investments, commercial loan sales through
participation agreements, and other individual or portfolio
loan and securities sales. In accordance with the accounting
guidance for asset transfers, the Company considers any
ongoing involvement with transferred assets in determining
whether the assets can be derecognized from the balance
sheet. Guarantees provided to certain third-parties in
connection with the transfer of assets are further discussed
in Note 22.
For loans sold under participation agreements, the
Company also considers whether the terms of the loan
participation agreement meet the accounting definition of a
participating interest. With the exception of servicing and
certain performance-based guarantees, the Company’s
continuing involvement with financial assets sold is minimal
and generally limited to market customary representation
and warranty clauses. Any gain or loss on sale depends on
the previous carrying amount of the transferred financial
assets, the consideration received, and any liabilities
incurred in exchange for the transferred assets. Upon
transfer, any servicing assets and other interests that
continue to be held by the Company are initially recognized
at fair value. For further information on MSRs, refer to Note 9.
On a limited basis, the Company may acquire and package
high-grade corporate bonds for select corporate customers,
in which the Company generally has no continuing
involvement with these transactions. Additionally, the
Company is an authorized GNMA issuer and issues GNMA
securities on a regular basis. The Company has no other
asset securitizations or similar asset-backed financing
arrangements that are off-balance sheet.
The Company is involved in various entities that are
considered to be VIEs. The Company’s investments in VIEs
are primarily related to investments promoting the
development of affordable housing, community development
and renewable energy sources. Some of these investments
support the Company’s regulatory compliance with the
Community Reinvestment Act. The Company’s investments
in these entities are designed to generate a return primarily
through the realization of federal and state income tax
credits, and other tax benefits, over specified time periods.
The Company realized federal and state income tax credits
related to these investments of $1.5 billion, $883 million and
$756 million for the years ended December 31, 2013, 2012
and 2011, respectively. These tax credits are recognized as
a reduction of tax expense or, for certain investments, as a
reduction to the related investment asset. The Company also
recognized, in its Consolidated Statement of Income, $1.2
billion, $1.0 billion and $806 million of costs related to these
investments for the years ended December 31, 2013, 2012
and 2011, respectively, of which $604 million, $482 million
and $278 million, respectively, was included in tax expense
and the remainder was included in noninterest expense.
During 2013, the Company transferred its control over
the most significant activities of certain community
development and tax-advantaged investment VIEs to a third
party manager. The third party manager provides a
guarantee to these VIEs related to the occurrence of certain
tax credit recapture events and, therefore, has an obligation
to absorb certain losses that could potentially be significant
to the VIEs. Previously, the Company consolidated these
VIEs because it had a controlling financial interest in the
entities. After the transfer of control to the third party
manager, the Company no longer had a controlling financial
interest and deconsolidated the VIEs. The deconsolidation
resulted in a decrease in both assets and liabilities, primarily
other assets and long-term debt, respectively, of
approximately $4.6 billion. The deconsolidation, and
remeasurement of the Company’s investment in these
unconsolidated VIEs to fair value, did not materially impact
the Company’s Consolidated Statement of Income. The total
amount of the Company’s investment in the VIEs was $957
million at December 31, 2013 and is reported in other assets.
In addition, the Company sponsors entities to which it
transfers tax-advantaged investments. At December 31,
2013, approximately $2.5 billion of the Company’s assets
and $1.8 billion of its liabilities included on the Consolidated
Balance Sheet were related to community development and
tax-advantaged investment VIEs which the Company has
consolidated, primarily related to these transfers. These
amounts compared to $7.1 billion and $5.2 billion,
respectively, at December 31, 2012, which included VIEs
related to these asset transfers and, also, the VIEs for which
control transferred in 2013. The majority of the assets of
these consolidated VIEs are reported in other assets, and the
liabilities are reported in long-term debt and other liabilities.
The assets of a particular VIE are the primary source of funds
to settle its obligations. The creditors of the VIEs do not have
recourse to the general credit of the Company. The
Company’s exposure to the consolidated VIEs is generally
limited to the carrying value of its variable interests plus any
related tax credits previously recognized or sold to others
with a guarantee.
In addition, the Company sponsors a conduit to which it
previously transferred high-grade investment securities. The
Company consolidates the conduit because of its ability to
manage the activities of the conduit. At December 31, 2013,
$116 million of the held-to-maturity investment securities on the
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