US Bank 2014 Annual Report Download - page 76

an analysis with respect to the accuracy of risk ratings and
the volatility of inherent losses, and utilizes this analysis
along with qualitative factors that can affect the precision of
credit loss estimates, including economic conditions, such as
changes in unemployment or bankruptcy rates, and
concentration risks, such as risks associated with specific
industries, the housing market, and loans to highly leveraged
enterprises, in determining the overall level of the allowance
for credit losses. The Company’s determination of the
allowance for commercial lending segment loans is sensitive
to the assigned credit risk ratings and inherent loss rates at
December 31, 2014. In the event 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
$222 million at December 31, 2014. 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 $142 million at
December 31, 2014. 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 $201 million at
December 31, 2014. 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
theallowanceforcreditlosses.Theyareintendedtoprovide
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 investment 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
aforcedorliquidationsale.Fairvalueisbasedonquoted
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. Imprecisioninestimatingthesefactorscan
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 5 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
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