US Bank 2014 Annual Report Download - page 91

lending segment is determined based on the fair value of the
collateral less costs to sell. 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.
Theallowanceforthecoveredloansegmentis
evaluated each quarter in a manner similar to that described
for non-covered loans and reflects 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 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, historical loss
experience is also incorporated 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
essentiallythesameasforloans,theCompanyutilizes
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
ratingsasdefinedbytheCompany.
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). When a loan is placed on nonaccrual status,
unpaid accrued interest is reversed.
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. 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
U.S. BANCORP The power of potential
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