US Bank 2012 Annual Report Download - page 87

observed performance history, including defaults, is a primary
driver of the loss allocation. For commercial TDRs individually
evaluated for impairment, attributes of the borrower are the
primary factors in determining the allowance for credit losses.
However, incorporation of loss history is factored into the
allowance methodology applied to this category of loans. With
respect to the consumer lending segment, performance of the
portfolio, including defaults on TDRs, is considered when
estimating future cash flows.
The Company’s methodology for determining the
appropriate allowance for credit losses for all the loan
segments also considers the imprecision inherent in the
methodologies used. As a result, in addition to the amounts
determined under the methodologies described above,
management also considers the potential impact of other
qualitative factors which include, but are not limited to,
economic factors; geographic and other concentration risks;
delinquency and nonaccrual trends; current business
conditions; changes in lending policy, underwriting standards,
internal review and other relevant business practices; and the
regulatory environment. The consideration of these items
results in adjustments to allowance amounts included in the
Company’s allowance for credit losses for each of the above
loan segments.
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.
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.
Credit Quality The quality of the Company’s loan portfolios is
assessed as a function of net credit losses, levels of
nonperforming assets and delinquencies, and credit quality
ratings as defined by the Company.
For all loan classes, loans are considered past due based
on the number of days delinquent except for monthly
amortizing loans which are classified delinquent based upon
the number of contractually required payments not made (for
example, two missed payments is considered 30 days
delinquent).
Commercial lending segment loans are generally placed on
nonaccrual status when the collection of principal and interest
has become 90 days past due or is otherwise considered
doubtful. When a loan is placed on nonaccrual status, unpaid
accrued interest is reversed. Commercial lending segment loans
are generally fully or partially charged down to the fair value
of the collateral securing the loan, less costs to sell, when the
loan is considered uncollectible.
Consumer lending segment loans are generally charged-off
at a specific number of days or payments past due. Residential
mortgages and other retail loans secured by 1-4 family
properties are generally charged down to the fair value of the
collateral securing the loan, less costs to sell, at 180 days past
due, and placed on nonaccrual status in instances where a
partial charge-off occurs unless the loan is well secured and in
the process of collection. Loans and lines in a junior lien
position secured by 1-4 family properties are placed on
nonaccrual status at 120 days past due or when behind a first
lien that has become 180 days or greater past due or placed on
nonaccrual status. Any secured consumer lending segment loan
whose borrower has had debt discharged through bankruptcy,
for which the loan amount exceeds the fair value of the
collateral, is charged down to the fair value of the related
collateral and the remaining balance is placed on nonaccrual
status. Credit card loans continue to accrue interest until the
account is charged off. Credit cards are charged off at
180 days past due. Other retail loans not secured by 1-4 family
properties are charged-off at 120 days past due; and revolving
consumer lines are charged off at 180 days past due. Similar to
credit cards, other retail loans are generally not placed on
nonaccrual status because of the relative short period of time
to charge-off. 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.
For all loan classes, interest payments received on
nonaccrual loans are generally recorded as a reduction to the
loan carrying amount. Interest payments are generally recorded
as reductions to a loan’s carrying amount while a loan is on
nonaccrual and are recognized as interest income upon payoff
of the loan. Interest income may be recognized for interest
payments if the remaining carrying amount of the loan is
believed to be collectible. In certain circumstances, loans in any
class may be restored to accrual status, such as when a loan
has demonstrated sustained repayment performance or no
amounts are past due and prospects for future payment are no
longer in doubt; or the loan becomes well secured and is in the
process of collection. Loans where there has been a partial
charge-off may be returned to accrual status if all principal and
interest (including amounts previously charged-off) is expected
to be collected and the loan is current.
Covered loans not considered to be purchased impaired
are evaluated for delinquency, nonaccrual status and charge-
off consistent with the class of loan they would be included in
had the loss share coverage not been in place. 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.
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