US Bank 2014 Annual Report Download - page 90

prospectively. The present value of any decreases in expected
cash flows, other than from decreases in variable interest
rates, after the purchase date is recognized by recording an
allowance for credit losses. Revolving loans, 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 amortizes any
reductioninexpectedcashflowsfromtheFDICresulting
from increases in expected cash flows from the covered
assets (when there are no previous valuation allowances to
reverse) over the shorter of the remaining contractual term
of the indemnification agreements or the remaining life of
the covered assets. Prior to January 1, 2013, 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.
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
theFDIC.Theallowanceforcreditlossesisincreased
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 14-
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
88