US Bank 2013 Annual Report Download - page 84

including lines of credit and credit cards loans, and leases
are excluded from purchased impaired loans accounting.
For purchased loans acquired after January 1, 2009 that
are not deemed impaired at acquisition, credit discounts
representing the principal losses expected over the life of the
loan are a component of the initial fair value. Subsequent to
the purchase date, the methods utilized to estimate the
required allowance for credit losses for these loans is similar
to originated loans; however, the Company records a
provision for credit losses only when the required allowance
exceeds any remaining credit discounts. The remaining
differences between the purchase price and the unpaid
principal balance at the date of acquisition are recorded in
interest income over the life of the loans.
Covered Assets Loans covered under loss sharing or
similar credit protection agreements with the Federal Deposit
Insurance Corporation (“FDIC”) are reported in loans along
with the related indemnification asset. Foreclosed real estate
covered under similar agreements is recorded in other
assets. In accordance with applicable authoritative
accounting guidance effective for the Company beginning
January 1, 2009, all purchased loans and related
indemnification assets are recorded at fair value at the date
of purchase.
Effective January 1, 2013, the Company adopted new
indemnification asset accounting guidance applicable to
FDIC loss-sharing agreements. The guidance requires any
reduction in expected cash flows from the FDIC resulting
from increases in expected cash flows from the covered
assets (when there are no previous valuation allowances to
reverse) to be amortized over the shorter of the remaining
contractual term of the indemnification agreements or the
remaining life of the covered assets. Prior to adoption of this
guidance, the Company considered such increases in
expected cash flows of purchased loans and decreases in
expected cash flows of the FDIC indemnification assets
together and recognized them over the remaining life of the
loans. The adoption of this guidance did not materially affect
the Company’s financial statements.
Commitments to Extend Credit Unfunded commitments
for residential mortgage loans intended to be held for sale
are considered derivatives and recorded on the balance
sheet at fair value with changes in fair value recorded in
income. All other unfunded loan commitments are not
considered derivatives and are not reported on the balance
sheet. For loans purchased after January 1, 2009, the fair
value of the unfunded credit commitments is considered in
the determination of the fair value of the loans recorded at
the date of acquisition. Reserves for credit exposure on all
other unfunded credit commitments are recorded in other
liabilities.
Allowance for Credit Losses The allowance for credit
losses reserves for probable and estimable losses incurred
in the Company’s loan and lease portfolio, including
unfunded credit commitments, and includes certain amounts
that do not represent loss exposure to the Company
because those losses are recoverable under loss sharing
agreements with the FDIC. The allowance for credit losses is
increased through provisions charged to operating earnings
and reduced by net charge-offs. Management evaluates the
allowance each quarter to ensure it appropriately reserves
for incurred losses.
The allowance recorded for loans in the commercial
lending segment is based on reviews of individual credit
relationships and considers the migration analysis of
commercial lending segment loans and actual loss
experience. In the migration analysis applied to risk rated loan
portfolios, the Company currently examines up to a 13-year
period of loss experience. For each loan type, this historical
loss experience is adjusted as necessary to consider any
relevant changes in portfolio composition, lending policies,
underwriting standards, risk management practices or
economic conditions. The results of the analysis are evaluated
quarterly to confirm an appropriate historical time frame is
selected for each commercial loan type. The allowance
recorded for impaired loans greater than $5 million in the
commercial lending segment is based on an individual loan
analysis utilizing expected cash flows discounted using the
original effective interest rate, the observable market price of
the loan, or the fair value of the collateral for collateral-
dependent loans, rather than the migration analysis. The
allowance recorded for all other commercial lending segment
loans is determined on a homogenous pool basis and
includes consideration of product mix, risk characteristics of
the portfolio, bankruptcy experience, portfolio growth and
historical losses, adjusted for current trends. The Company
also considers the impacts of any loan modifications made to
commercial lending segment loans and any subsequent
payment defaults to its expectations of cash flows, principal
balance, and current expectations about the borrower’s ability
to pay in determining the allowance for credit losses.
The allowance recorded for Troubled Debt Restructuring
(“TDR”) loans and purchased impaired loans in the
consumer lending segment is determined on a homogenous
pool basis utilizing expected cash flows discounted using
the original effective interest rate of the pool, or the prior
quarter effective rate, respectively. The allowance for
collateral-dependent loans in the consumer lending segment
is determined based on the fair value of the collateral less
costs to sell. The allowance recorded for all other consumer
lending segment loans is determined on a homogenous pool
basis and includes consideration of product mix, risk
characteristics of the portfolio, bankruptcy experience,
82 U.S. BANCORP