US Bank 2012 Annual Report Download - page 88

The Company classifies its loan portfolios using internal
credit quality ratings on a quarterly basis. These ratings
include: pass, special mention and classified, and are an
important part of the Company’s overall credit risk
management process and evaluation of the allowance for
credit losses. Loans with a pass rating represent those not
classified on the Company’s rating scale for problem credits,
as minimal credit risk has been identified. Special mention
loans are those that have a potential weakness deserving
management’s close attention. Classified loans are those
where a well-defined weakness has been identified that may
put full collection of contractual cash flows at risk. It is
possible that others, given the same information, may reach
different reasonable conclusions regarding the credit quality
rating classification of specific loans.
Troubled Debt Restructurings 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. Concessionary modifications are classified as
TDRs unless the modification results in only an insignificant
delay in payments to be received. The Company recognizes
interest on TDRs if the borrower complies with the revised
terms and conditions as agreed upon with the Company and
has demonstrated repayment performance at a level
commensurate with the modified terms over several payment
cycles. To the extent a previous restructuring was
insignificant, the Company considers the cumulative effect of
past restructurings related to the receivable when determining
whether a current restructuring is a TDR. Loans classified as
TDRs are considered impaired loans for reporting and
measurement purposes.
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.
For the commercial lending segment, modifications
generally result in the Company working with borrowers on a
case-by-case basis. Commercial and commercial real estate
modifications generally include extensions of the maturity date
and may be accompanied by an increase or decrease to the
interest rate, which may not be deemed a market rate of interest.
In addition, the Company may work with the borrower in
identifying other changes that mitigate loss to the Company,
which may include additional collateral or guarantees to support
the loan. To a lesser extent, the Company may waive
contractual principal. The Company classifies these concessions
as TDRs to the extent the Company determines that the
borrower is experiencing financial difficulty.
Modifications for the consumer lending segment are
generally part of programs the Company has initiated. The
Company participates in the U.S. Department of Treasury
Home Affordable Modification Program (“HAMP”). HAMP
gives qualifying homeowners an opportunity to permanently
modify residential mortgage loans and achieve more affordable
monthly payments, with the U.S. Department of Treasury
compensating the Company for a portion of the reduction in
monthly amounts due from borrowers participating in this
program. The Company also modifies residential mortgage
loans under Federal Housing Administration, Department of
Veterans Affairs, or other internal programs. Under these
programs, the Company provides concessions to qualifying
borrowers experiencing financial difficulties. The concessions
may include adjustments to interest rates, conversion of
adjustable rates to fixed rates, extension of maturity dates or
deferrals of payments, capitalization of accrued interest and/or
outstanding advances, or in limited situations, partial
forgiveness of loan principal. In most instances, participation
in residential mortgage loan restructuring programs requires
the customer to complete a short-term trial period. A
permanent loan modification is contingent on the customer
successfully completing the trial period arrangement and the
loan documents are not modified until that time. The
Company reports loans in a trial period arrangement as TDRs.
Credit card and other retail loan modifications are generally
part of two distinct restructuring programs. The Company offers
workout programs providing customers experiencing financial
difficulty with modifications whereby balances may be
amortized up to 60 months, and generally include waiver of fees
and reduced interest rates. The Company also provides
modification programs to qualifying customers experiencing a
temporary financial hardship in which reductions are made to
monthly required minimum payments for up to 12 months.
Balances related to these programs are generally frozen,
however, accounts may be reopened upon successful exit of the
program, in which account privileges may be restored.
In addition, the Company considers secured loans to
consumer borrowers that have debt discharged through
bankruptcy where the borrower has not reaffirmed the debt to
be TDRs.
Modifications to loans in the covered segment are similar
in nature to that described above for non-covered loans, and
the evaluation and determination of TDR status is similar,
except that acquired loans restructured after acquisition are
not considered TDRs for purposes of the Company’s
accounting and disclosure if the loans evidenced credit
deterioration as of the acquisition date and are accounted for
in pools. Losses associated with the modification on covered
loans, including the economic impact of interest rate
reductions, are generally eligible for reimbursement under loss
sharing agreements with the FDIC.
Impaired Loans For all loan classes, a loan is considered to be
impaired when, based on current events or information, it is
probable the Company will be unable to collect all amounts
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