US Bank 2008 Annual Report Download - page 73

Held-to-maturity Securities Debt securities for which the
Company has the positive intent and ability to hold to
maturity are reported at historical cost adjusted for
amortization of premiums and accretion of discounts.
Declines in fair value considered other-than-temporary, if
any, are reported in noninterest income.
Securities Purchased Under Agreements to Resell and
Securities Sold Under Agreements to Repurchase Securities
purchased under agreements to resell and securities sold
under agreements to repurchase are generally accounted for
as collateralized financing transactions and are recorded at
the amounts at which the securities were acquired or sold,
plus accrued interest. The fair value of collateral received is
continually monitored and additional collateral is obtained
or requested to be returned to the Company as deemed
appropriate.
EQUITY INVESTMENTS IN OPERATING ENTITIES
Equity investments in public entities in which the Company’s
ownership is less than 20 percent are accounted for as
available-for-sale securities and carried at fair value. Similar
investments in private entities are accounted for using the
cost method. Investments in entities where the Company has
a significant influence (generally between 20 percent and
50 percent ownership) but does not control the entity are
accounted for using the equity method. Limited partnerships
and limited liability companies where the Company’s
ownership interest is greater than 5 percent are accounted
for using the equity method. All equity investments are
evaluated for impairment at least annually and more
frequently if certain criteria are met.
LOANS
The Company’s accounting methods for loans differ
depending on whether the loans are originated or purchased,
and for purchased loans, whether the loans were acquired at
a discount related to evidence of credit deterioration since
date of origination.
Originated Loans Held for Investment Loans the Company
originates are reported at the principal amount outstanding,
net of unearned income, net deferred loan fees or costs, and
any direct principal charge-offs. Interest income is accrued
on the unpaid principal balances as earned. Loan and
commitment fees and certain direct loan origination costs
are deferred and recognized over the life of the loan and/or
commitment period as yield adjustments.
Purchased Loans Loans acquired at a discount for which it
is probable all contractual payments will not be received are
accounted for under AICPA Statement of Position 03-3
(“SOP 03-3”), “Accounting for Certain Loans or Debt
Securities Acquired in a Transfer”. Under SOP 03-3, those
loans are recorded at fair value at acquisition. Credit
discounts are included in the determination of fair value,
therefore, an allowance for loan losses is not recorded at the
purchase date. Revolving loans, including lines of credit and
credit cards loans, and leases are excluded from SOP 03-3
accounting.
In determining the acquisition date fair value of loans
subject to SOP 03-3, and in subsequent accounting, the
Company generally aggregates purchased consumer loans
into pools of loans with common risk characteristics, while
accounting for commercial loans individually. Expected cash
flows at the purchase date in excess of the fair value of loans
are recorded as interest income over the life of the loans if
the timing and amount of the future cash flows is reasonably
estimable. Subsequent to the purchase date, increases in cash
flows over those expected at the purchase date are
recognized as interest income prospectively. Decreases in
expected cash flows after the purchase date are recognized
by recording an allowance for credit losses.
For purchased loans not subject to SOP 03-3,
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 loan. Incurred credit
losses are recorded at the purchase date through an
allowance for credit losses. Decreases in expected cash flows
after the purchase date are recognized by recording an
additional allowance for credit losses.
Covered Assets Assets covered under loss sharing or similar
credit protection agreements with the Federal Deposit
Insurance Corporation (“FDIC”) are reported in loans
inclusive of the fair value of expected reimbursement cash
flows the Company expects to receive from the FDIC under
those agreements. Similarly, credit losses on those assets are
determined net of the expected reimbursement from the
FDIC.
Commitments to Extend Credit Unfunded residential
mortgage loan commitments entered into in connection with
mortgage banking activities 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 generally related to providing credit
facilities to customers of the Company and are not
considered derivatives. Reserves for credit exposure on
unfunded credit commitments are recorded in other
liabilities.
Allowance for Credit Losses Management determines the
adequacy of the allowance based on evaluations of credit
relationships, the loan portfolio, recent loss experience, and
other pertinent factors, including economic conditions. This
evaluation is inherently subjective as it requires estimates,
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