US Bank 2010 Annual Report Download - page 77

other liabilities. Because business processes and credit risks
associated with unfunded credit commitments are essentially
the same as for loans, the Company utilizes similar processes
to estimate its liability for unfunded credit commitments.
Nonaccrual Loans and Loan Charge-Offs 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. Commercial loans
are generally fully or partially charged down to the fair
value of collateral securing the loan, less costs to sell, when
the loan is deemed to be uncollectible, repayment is deemed
beyond reasonable time frames, the borrower has filed for
bankruptcy, or the loan is unsecured and greater than six
months past due. Loans secured by 1-4 family properties are
generally charged down to fair value, less costs to sell, at
180 days past due, and placed on nonaccrual status in
instances where a partial charge-off occurs. Revolving
consumer lines and credit cards are charged off at 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, purchased impaired loans 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 interest income
is not recognized until the timing and amount of the future
cash flows can be reasonably estimated.
Restructured Loans In certain circumstances, the Company
may modify the terms of a loan to maximize the collection
of amounts due when a borrower is experiencing financial
difficulties or is expected to experience difficulties in the
near-term. In most cases the modification is either a
concessionary reduction in interest rate, extension of the
maturity date or reduction in the principal balance that
would otherwise not be considered. Concessionary
modifications are classified as TDRs unless the modification
is short-term, or results in only an insignificant delay or
shortfall in the payments to be received. Many of the
Company’s TDRs are determined on a case-by-case basis in
connection with ongoing loan collection processes. However,
the Company has also implemented certain restructuring
programs that may result in TDRs. The consumer finance
division has a mortgage loan restructuring program where
certain qualifying borrowers facing an interest rate reset who
are current in their repayment status, are allowed to retain
the lower of their existing interest rate or the market interest
rate as of their interest reset date. The Company also
participates in the U.S. Department of the Treasury Home
Affordable Modification Program (“HAMP”). HAMP gives
qualifying homeowners an opportunity to refinance into
more affordable monthly payments, with the
U.S. Department of the Treasury compensating the Company
for a portion of the reduction in monthly amounts due from
borrowers participating in this program. 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 TDRs is determined by
discounting the restructured cash flows at the original
effective rate of the loan before modification. 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 are excluded from TDR disclosures in years
subsequent to the restructuring if the borrowers are in
compliance with the modified terms.
Generally, a nonaccrual loan that is restructured
remains on nonaccrual for a period of six months after the
restructuring date 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 in rare circumstances
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.
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 as
TDRs as a concession to borrowers experiencing financial
difficulties. Interest income is recognized on impaired loans
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