US Bank 2009 Annual Report Download - page 79

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 loan agreement 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
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 impairment 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.
Other Real Estate Other real estate (“OREO”), which is
included in other assets, is property acquired through
foreclosure or other proceedings on defaulted loans. OREO
is initially recorded at fair value, less estimated selling costs.
OREO is evaluated regularly and any decreases in value are
reported in noninterest expense.
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 may be carried at the lower of cost or fair value as
determined on an aggregate basis by type of loan or carried
at fair value where the Company has elected fair value
accounting. The credit component of any writedowns upon
transfer of loans to LHFS is reflected in charge-offs.
Where an election is made to subsequently carry the
LHFS at fair value, any further decreases or subsequent
increases in fair value are recognized in noninterest income.
Where an election is made to subsequently carry LHFS at
lower of cost or fair value, any further decreases are
recognized in noninterest income and increases in fair value
are not recognized until the loans are sold.
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.
Derivative instruments are reported in other assets or other
liabilities at fair value. 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. Effective changes in the fair value of a
derivative designated as a cash flow hedge are recorded in
accumulated other comprehensive income (loss) until cash
flows of the hedged item are recognized in income. Any
change in fair value resulting from hedge ineffectiveness is
immediately recorded in noninterest income. The Company
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