US Bank 2010 Annual Report Download - page 78

under the modified terms and conditions if the borrower has
demonstrated repayment performance at a level
commensurate with the modified terms over several payment
cycles. Purchased credit impaired loans are not reported as
impaired loans as long as they continue to perform at least
as well as expected at acquisition.
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 OREO is included in other assets, and 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 along with holding costs, such as
taxes and insurance, 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 are carried at the lower-of-cost-or-fair value as
determined on an aggregate basis by type of loan with the
exception of loans for which the Company has elected fair
value accounting, which are carried at fair value. The credit
component of any writedowns upon the transfer of loans to
LHFS is reflected in loan 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 and are
designated 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”), 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”), or a hedge of the volatility of an
investment in foreign operations driven by changes in
foreign currency exchange rates (“net investment 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
performs an assessment, both at the inception of a hedge
and, at a minimum, on a quarterly basis thereafter, to
determine whether derivatives designated as hedging
instruments are highly effective in offsetting changes in the
value of the hedged items.
If a derivative designated as a cash flow hedge is
terminated or ceases to be highly effective, the gain or loss
in accumulated other comprehensive income (loss) is
amortized to earnings over the period the forecasted hedged
transactions impact earnings. If a hedged forecasted
transaction is no longer probable, hedge accounting is ceased
and any gain or loss included in accumulated other
76 U.S. BANCORP