US Bank 2012 Annual Report Download - page 86

principal balance at the date of acquisition are recorded in
interest income over the life of the loans.
Covered Assets Loans covered under loss sharing or similar
credit protection agreements with the Federal Deposit
Insurance Corporation (“FDIC”) are reported in loans along
with the related indemnification asset. Foreclosed real estate
covered under similar agreements is recorded in other assets.
In accordance with applicable authoritative accounting
guidance effective for the Company beginning January 1,
2009, all purchased loans and related indemnification assets
are recorded at fair value at date of purchase.
In October 2012, the Financial Accounting Standards
Board issued accounting guidance, which the Company will
adopt January 1, 2013, applicable to indemnification assets
related to FDIC loss-sharing agreements. The guidance
requires any reduction in expected cash flows from the FDIC
resulting from increases in expected cash flows of the covered
assets (when there are no previous valuation allowances to
reverse) to be amortized over the shorter of the remaining
contractual term of the indemnification agreements or the
remaining life of the covered assets. Prior to the 2013
adoption of this guidance, the Company has amortized
decreases in expected cash flows from the FDIC over the
expected life of the covered assets. The Company does not
expect adopting this guidance will materially affect its
financial statements.
Commitments to Extend Credit Unfunded commitments for
residential mortgage loans intended to be held for sale 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 not considered
derivatives. For loans purchased after January 1, 2009, the
fair value of the unfunded credit commitments is considered in
the determination of the fair value of the loans recorded at the
date of acquisition. Reserves for credit exposure on all other
unfunded credit commitments are recorded in other liabilities.
Allowance for Credit Losses The allowance for credit losses
reserves for probable and estimable losses incurred in the
Company’s loan and lease portfolio and includes certain
amounts that do not represent loss exposure to the Company
because those losses are recoverable under loss sharing
agreements with the FDIC. The allowance for credit losses is
increased through provisions charged to operating earnings
and reduced by net charge-offs. Management evaluates the
allowance each quarter to ensure it appropriately reserves for
incurred losses.
The allowance recorded for loans in the commercial
lending segment is based on reviews of individual credit
relationships and considers the migration analysis of
commercial lending segment loans and actual loss experience.
The Company currently uses a 12-year period of historical
losses in considering actual loss experience, because it believes
that period best reflects the losses incurred in the portfolio.
This timeframe and the results of the analysis are evaluated
quarterly to determine if they are appropriate. The allowance
recorded for impaired loans greater than $5 million in the
commercial lending segment is based on an individual loan
analysis utilizing expected cash flows discounted using the
original effective interest rate, the observable market price, or
the fair value of the collateral for collateral-dependent loans.
The allowance recorded for all other commercial lending
segment loans is determined on a homogenous pool basis and
includes consideration of product mix, risk characteristics of
the portfolio, bankruptcy experience, and historical losses,
adjusted for current trends. The Company also considers the
impacts of any loan modifications made to commercial
lending segment loans and any subsequent payment defaults
to its expectations of cash flows, principal balance, and
current expectations about the borrower’s ability to pay in
determining the allowance for credit losses.
The allowance recorded for purchased impaired and
Troubled Debt Restructuring (“TDR”) loans in the consumer
lending segment is determined on a homogenous pool basis
utilizing expected cash flows discounted using the original
effective interest rate of the pool. The allowance for collateral-
dependent loans in the consumer lending segment is
determined based on the fair value of the collateral. The
allowance recorded for all other consumer lending segment
loans is determined on a homogenous pool basis and includes
consideration of product mix, risk characteristics of the
portfolio, bankruptcy experience, delinquency status,
refreshed loan-to-value ratios when possible, portfolio growth
and historical losses, adjusted for current trends. The
Company also considers any modifications made to consumer
lending segment loans including the impacts of any
subsequent payment defaults since modification in
determining the allowance for credit losses, such as the
borrower’s ability to pay under the restructured terms, and
the timing and amount of payments.
The allowance for the covered loan segment is evaluated
each quarter in a manner similar to that described for non-
covered loans and represents any decreases in expected cash
flows of those loans after the acquisition date. The provision
for credit losses for covered loans considers the
indemnification provided by the FDIC.
In addition, subsequent payment defaults on loan
modifications considered TDRs are considered in the
underlying factors used in the determination of the
appropriateness of the allowance for credit losses. For each
loan segment, the Company estimates future loan charge-offs
through a variety of analysis, trends and underlying
assumptions. With respect to the commercial lending segment,
TDRs may be collectively evaluated for impairment where
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