US Bank 2013 Annual Report Download - page 70

that 10 percent of period ending loan balances (including
unfunded commitments) within each risk category of this
segment of the loan portfolio experienced downgrades of
two risk categories, the allowance for credit losses would
increase by approximately $220 million at December 31,
2013. The Company believes the allowance for credit losses
appropriately considers the imprecision in estimating credit
losses based on credit risk ratings and inherent loss rates
but actual losses may differ from those estimates. In the
event that inherent loss or estimated loss rates for
commercial lending segment loans increased by 10 percent,
the allowance for credit losses would increase by
approximately $138 million at December 31, 2013. The
Company’s determination of the allowance for consumer
lending segment loans is sensitive to changes in estimated
loss rates and estimated impairments on restructured loans.
In the event that estimated losses for this segment of the loan
portfolio increased by 10 percent, the allowance for credit
losses would increase by approximately $211 million at
December 31, 2013. Because several quantitative and
qualitative factors are considered in determining the
allowance for credit losses, these sensitivity analyses do not
necessarily reflect the nature and extent of future changes in
the allowance for credit losses. They are intended to provide
insights into the impact of adverse changes in risk rating and
inherent losses and do not imply any expectation of future
deterioration in the risk rating or loss rates. Given current
processes employed by the Company, management
believes the risk ratings and inherent loss rates currently
assigned are appropriate. It is possible that others, given the
same information, may at any point in time reach different
reasonable conclusions that could be significant to the
Company’s financial statements. Refer to the “Analysis and
Determination of the Allowance for Credit Losses” section for
further information.
Fair Value Estimates A portion of the Company’s assets
and liabilities are carried at fair value on the Consolidated
Balance Sheet, with changes in fair value recorded either
through earnings or other comprehensive income (loss) in
accordance with applicable accounting principles generally
accepted in the United States. These include all of the
Company’s available-for-sale securities, derivatives and
other trading instruments, MSRs and mortgage loans held for
sale. The estimation of fair value also affects other loans held
for sale, which are recorded at the lower-of-cost-or-fair value.
The determination of fair value is important for certain other
assets that are periodically evaluated for impairment using
fair value estimates including goodwill and other intangible
assets, impaired loans, other real estate owned and other
repossessed assets.
Fair value is generally defined as the exit price at which
an asset or liability could be exchanged in a current
transaction between willing, unrelated parties, other than in a
forced or liquidation sale. Fair value is based on quoted
market prices in an active market, or if market prices are not
available, is estimated using models employing techniques
such as matrix pricing or discounting expected cash flows.
The significant assumptions used in the models, which
include assumptions for interest rates, discount rates,
prepayments and credit losses, are independently verified
against observable market data where possible. Where
observable market data is not available, the estimate of fair
value becomes more subjective and involves a high degree
of judgment. In this circumstance, fair value is estimated
based on management’s judgment regarding the value that
market participants would assign to the asset or liability. This
valuation process takes into consideration factors such as
market illiquidity. Imprecision in estimating these factors can
impact the amount recorded on the balance sheet for a
particular asset or liability with related impacts to earnings or
other comprehensive income (loss).
When available, trading and available-for-sale securities
are valued based on quoted market prices. However, certain
securities are traded less actively and therefore, quoted
market prices may not be available. The determination of fair
value may require benchmarking to similar instruments or
performing a discounted cash flow analysis using estimates
of future cash flows and prepayment, interest and default
rates. An example is non-agency residential mortgage-
backed securities. For more information on investment
securities, refer to Note 4 of the Notes to Consolidated
Financial Statements.
As few derivative contracts are listed on an exchange,
the majority of the Company’s derivative positions are valued
using valuation techniques that use readily observable
market inputs. Certain derivatives, however, must be valued
using techniques that include unobservable inputs. For these
instruments, the significant assumptions must be estimated
and therefore, are subject to judgment. Note 19 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 arising from loss-sharing
arrangements with the FDIC 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
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