US Bank 2013 Annual Report Download - page 86

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.
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.
The Company has implemented certain restructuring
programs that may result in TDRs. However, many of the
Company’s TDRs are also determined on a case-by-case
basis in connection with ongoing loan collection processes.
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 its own
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.
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