US Bank 2015 Annual Report Download - page 79

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 methods including discounted cash
flow analysis and independent third party appraisals. Factors
that may significantly affect the initial valuation include, among
others, market-based and industry data related to expected
changes in interest rates, assumptions related to probability
and severity of credit losses, estimated timing of credit losses
including the foreclosure and liquidation of collateral,
expected prepayment rates, required or anticipated loan
modifications, unfunded loan commitments, the specific
terms and provisions of any loss sharing agreements, and
specific industry and market conditions that may impact
discount rates and independent third party appraisals.
On an ongoing basis, the accounting for purchased loans
and related indemnification assets follows applicable
authoritative accounting guidance for purchased non-
impaired loans and purchased impaired loans. Refer to
Notes 1 and 6 of the Notes to Consolidated Financial
Statements for additional information. In addition, refer to the
“Analysis and 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. The Company records
MSRs at fair value. 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. Refer to Notes 10 and
22 of the Notes to Consolidated Financial Statements for
additional information on the assumptions used in determining
the fair value of MSRs and an analysis of the sensitivity to
changes in interest rates of the fair value of the MSRs portfolio
and the related derivative instruments used 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
unit 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
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