US Bank 2014 Annual Report Download - page 110

NOTE 8 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 23.
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 10.
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 affordable
housing, community development and renewable energy
sources. Some of these tax-advantaged investments support
the Company’s regulatory compliance with the Community
Reinvestment Act. The Company’s investments in these
entities generate a return primarily through the realization of
federal and state income tax credits, and other tax benefits,
such as tax deductions from operating losses of the
investments, over specified time periods. These tax credits
are recognized as a reduction of tax expense or, for
investments qualifying as investment tax credits, as a
reduction to the related investment asset. In January 2014,
the Financial Accounting Standards Board issued accounting
guidance for qualified affordable housing projects. This new
guidance permits the Company to present the expense on
certain qualified affordable housing investments in tax
expense rather than noninterest expense. The Company
adopted this guidance January 1, 2014, on a prospective
basis, because the impact on prior financial statements was
not material. The Company recognized federal and state
income tax credits related to its affordable housing and other
tax-advantaged investments in tax expense of $773 million,
$758 million and $683 million for the years ended
December 31, 2014, 2013 and 2012, respectively. The
Company also recognized $937 million, $780 million and
$200 million of investment tax credits for the years ended
December 31, 2014, 2013 and 2012, respectively. The
Company recognized $771 million, $934 million and $805
million of expenses related to all of these investments for the
years ended December 31, 2014, 2013 and 2012, respectively,
of which $258 million, $297 million and $282 million,
respectively, was included in tax expense and the remainder
was included in noninterest expense.
The Company is not required to consolidate VIEs in
which it has concluded it does not have a controlling financial
interest, and thus is not the primary beneficiary. In such
cases, the Company does not have both the power to direct
the entities’ most significant activities and the obligation to
absorb losses or the right to receive benefits that could
potentially be significant to the VIEs.
The Company’s investments in these unconsolidated
VIEs, are carried in other assets on the Consolidated Balance
Sheet. The Company’s unfunded capital and other
commitments related to these unconsolidated VIEs are
generally carried in other liabilities on the Consolidated
Balance Sheet. The Company’s maximum exposure to loss
from these unconsolidated VIEs include the investment
recorded on the Company’s Consolidated Balance Sheet, net
of unfunded capital commitments, and previously recorded
tax credits which remain subject to recapture by taxing
authorities based on compliance features required to be met
at the project level. While the Company believes potential
losses from these investments are remote, the maximum
exposure was determined by assuming a scenario where the
community-based business and housing projects completely
fail and do not meet certain government compliance
requirements resulting in recapture of the related tax
credits.
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