US Bank 2005 Annual Report Download - page 70

equal to or greater than that of a new loan with With respect to homogeneous loans, the amount of
comparable risk at the time the contract is modified may be ‘‘probable’’ credit loss determined in accordance with
excluded from restructured loans in the calendar years Statement of Financial Accounting Standards No. 5,
subsequent to the restructuring if they are in compliance ‘‘Accounting for Contingencies,’’ methodologies utilized to
with the modified terms. determine the specific allowance allocation for the portfolio
Generally, a nonaccrual loan that is restructured is also included in charge-offs. Any incremental loss
remains on nonaccrual for a period of six months to determined in accordance with MTM accounting, that
demonstrate that the borrower can meet the restructured includes consideration of other factors such as estimates of
terms. However, performance prior to the restructuring, or inherent losses, is reported separately from charge-offs as a
significant events that coincide with the restructuring, are reduction to the allowance for credit losses. Subsequent
considered in assessing whether the borrower can meet the decreases in fair value are recognized in noninterest income.
new terms and may result in the loan being returned to Other Real Estate Other real estate (‘‘ORE’’), which is
accrual status at the time of restructuring or after a shorter included in other assets, is property acquired through
performance period. If the borrower’s ability to meet the foreclosure or other proceedings. ORE is carried at fair
revised payment schedule is not reasonably assured, the value, less estimated selling costs. The property is evaluated
loan remains classified as a nonaccrual loan. regularly and any decreases in the carrying amount are
Leases The Company engages in both direct and leveraged included in noninterest expense.
lease financing. The net investment in direct financing leases
DERIVATIVE FINANCIAL INSTRUMENTS
is the sum of all minimum lease payments and estimated
residual values, less unearned income. Unearned income is In the ordinary course of business, the Company enters into
added to interest income over the terms of the leases to derivative transactions to manage its interest rate, foreign
produce a level yield. currency and prepayment risk and to accommodate the
The investment in leveraged leases is the sum of all business requirements of its customers. All derivative
lease payments (less nonrecourse debt payments) plus instruments are recorded as either other assets, other
estimated residual values, less unearned income. Income liabilities or short-term borrowings at fair value. Subsequent
from leveraged leases is recognized over the term of the changes in a derivative’s fair value are recognized currently
leases based on the unrecovered equity investment. in earnings unless specific hedge accounting criteria are met.
Residual values on leased assets are reviewed regularly All derivative instruments that qualify for hedge
for other-than-temporary impairment. Residual valuations accounting are recorded at fair value and classified either as
for retail automobile leases are based on independent a hedge of the fair value of a recognized asset or liability
assessments of expected used car sale prices at the end-of- (‘‘fair value’’ hedge) or as a hedge of the variability of cash
term. Impairment tests are conducted based on these flows to be received or paid related to a recognized asset or
valuations considering the probability of the lessee returning liability or a forecasted transaction (‘‘cash flow’’ hedge).
the asset to the Company, re-marketing efforts, insurance Changes in the fair value of a derivative that is highly
coverage and ancillary fees and costs. Valuations for effective and designated as a fair value hedge and the
commercial leases are based upon external or internal offsetting changes in the fair value of the hedged item are
management appraisals. When there is other than recorded in income. Changes in the fair value of a
temporary impairment in the estimated fair value of the derivative that is highly effective and designated as a cash
Company’s interest in the residual value of a leased asset, flow hedge are recognized in other comprehensive income
the carrying value is reduced to the estimated fair value until income from the cash flows of the hedged item is
with the writedown recognized in the current period. recognized. The Company performs an assessment, both at
the inception of the hedge and on a quarterly basis
Loans Held for Sale Loans held for sale (‘‘LHFS’’) represent
thereafter, when required, to determine whether these
mortgage loan originations intended to be sold in the
derivatives are highly effective in offsetting changes in the
secondary market and other loans that management has an
value of the hedged items. Any change in fair value
active plan to sell. LHFS are carried at the lower of cost or
resulting from hedge ineffectiveness is immediately recorded
market value as determined on an aggregate basis by type
in noninterest income.
of loan. In the event management decides to sell loans
If a derivative designated as a hedge is terminated or
receivable, the loans are transferred at the lower of cost or
ceases to be highly effective, the gain or loss is amortized to
fair value. Loans transferred to LHFS are marked-to-market
earnings over the remaining life of the hedged asset or
(‘‘MTM’’) at the time of transfer. MTM losses related to
liability (fair value hedge) or over the same period(s) that
the sale/transfer of non-homogeneous loans that are
the forecasted hedged transactions impact earnings (cash
predominantly credit-related are reflected in charge-offs.
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