US Bank 2008 Annual Report Download - page 74

including amounts of future cash collections expected on
nonaccrual loans, which may be susceptible to significant
change. The allowance for credit losses relating to impaired
loans is based on expected cash flows discounted using the
original effective interest rate, the observable market price,
or the fair value of the collateral for certain collateral-
dependent loans.
The Company determines the amount of the allowance
required for certain sectors based on relative risk
characteristics of the loan portfolio. The allowance recorded
for commercial loans is based on quarterly reviews of
individual credit relationships and an analysis of the
migration of commercial loans and actual loss experience.
The allowance recorded for homogeneous consumer loans is
based on an analysis of product mix, risk characteristics of
the portfolio, bankruptcy experiences, and historical losses,
adjusted for current trends, for each homogenous category
or group of loans. The allowance is increased through
provisions charged to operating earnings and reduced by net
charge-offs.
The Company also assesses the credit risk associated
with off-balance sheet loan commitments, letters of credit,
and derivatives. Credit risk associated with derivatives is
reflected in the fair values recorded for those positions. The
liability for off-balance sheet credit exposure related to loan
commitments and other credit guarantees is included in
other liabilities.
Nonaccrual Loans Generally, commercial loans (including
impaired loans) are placed on nonaccrual status when the
collection of interest or principal has become 90 days past
due or is otherwise considered doubtful. When a loan is
placed on nonaccrual status, unpaid accrued interest is
reversed. Future interest payments are generally applied
against principal. Revolving consumer lines and credit cards
are charged off by 180 days past due and closed-end
consumer loans other than loans secured by 1-4 family
properties are charged off at 120 days past due and are,
therefore, generally not placed on nonaccrual status. Certain
retail customers having financial difficulties may have the
terms of their credit card and other loan agreements
modified to require only principal payments and, as such,
are reported as nonaccrual.
Generally, all loans accounted for under SOP 03-3 are
considered accruing loans. However, the timing and amount
of future cash flows for some loans is not reasonably
estimable. Those loans are classified as nonaccrual loans and
the purchase price discount on those loans is not recorded as
interest income until the timing and amount of the future
cash flows can be reasonably estimated.
Impaired Loans A loan is considered to be impaired when,
based on current information and events, it is probable the
Company will be unable to collect all amounts due (both
interest and principal) according to the contractual terms of
the loan agreement.
Impaired loans include certain nonaccrual commercial
loans and loans for which a charge-off has been recorded
based upon the fair value of the underlying collateral.
Impaired loans also include loans that have been modified in
troubled debt restructurings as a concession to borrowers
experiencing financial difficulties. Purchased credit impaired
loans are not required to be reported as impaired loans as
long as they continue to perform at least as well as expected
at acquisition.
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. Modifications may include
rate reductions, principal forgiveness, forbearance and other
actions intended to minimize the economic loss and to avoid
foreclosure or repossession of collateral. For credit card loan
agreements, such modifications may include canceling the
customer’s available line of credit on the credit card,
reducing the interest rate on the card, and placing the
customer on a fixed payment plan not exceeding 60 months.
The allowance for credit losses on restructured loans is
determined by discounting the restructured cash flows by the
original effective rate. 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 loan disclosures in 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 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’s lease portfolio consists of both direct
financing and leveraged leases. 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 recorded in 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
72 U.S. BANCORP