US Bank 2007 Annual Report Download - page 76

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