US Bank 2001 Annual Report Download - page 36

in repayment or restoration to current status. Retail loans result of world events occurring in the third quarter of
30 days to 89 days or more past due were 3.11 percent of 2001.
the total retail portfolio at December 31, 2001, compared Management determines the amount of allowance that
with 2.82 percent of the total retail portfolio at is required for certain loan categories based on relative risk
December 31, 2000. Retail loans 90 days or more past due characteristics of the loan portfolio. Table 16 shows the
totaled .98 percent of the total retail loan portfolio at amount of the allowance for credit losses by loan category.
December 31, 2001, compared with .79 percent of the total During 2001, the Company, in connection with the merger
retail loan portfolio at December 31, 2000, and .59 percent of Firstar and USBM, conformed its methodology for
at December 31, 1999. The increase in retail loan determining speciÑc allowances for the elements of the loan
delinquencies was primarily related to the credit card, home portfolio. While both predecessor companies utilized credit
equity and revolving credit line portfolios and reÖects the risk rating processes, migration analysis and historical loss
economic slowdown and unemployment trends during 2001. experience to determine each element of its allowance for
credit losses, Firstar speciÑcally determined its commercial
Analysis and Determination of Allowance for Credit Losses
allowance based on its net loss experience, while USBM
The allowance for credit losses provides coverage for utilized its gross loss experience. Although diversity exists in
probable losses inherent in the Company's loan portfolio. practice, the Company has adopted a net loss experience
Management evaluates the allowance each quarter to methodology in determining the allowance for commercial
determine that it is adequate to cover inherent losses. The credit losses. Adopting the net loss experience methodology
evaluation of each element and the overall allowance is is based, in part, on regulatory guidelines promulgated with
based on a continuing assessment of problem loans and respect to evaluating the allowance for credit losses. In
related oÅ-balance sheet items, recent loss experience, and addition to adopting a net loss experience method, the
other factors, including regulatory guidance and economic Company enhanced its commercial migration methods for
conditions. Management has determined that the allowance higher quality commercial loan categories to better
for credit losses is adequate. diÅerentiate historical loss factors within those categories.
At December 31, 2001, the allowance was $2.5 billion Also, given the current business cycle, historical loss factors
(2.15 percent of loans). This compares with an allowance utilized in determining the allowance for commercial loans
of $1.8 billion (1.46 percent of loans), at year-end 2000, were weighted to reÖect the adverse impact of recent losses.
and $1.7 billion (1.51 percent of loans), at December 31, Table 16 shows the determination of each element of the
1999. The ratio of the allowance for credit losses to allowance for credit losses on a consistent basis for 2001
nonperforming loans was 245 percent at December 31, and 2000. Due to the Company's inability to gather
2001, compared with 233 percent at year-end 2000 and historical loss data on a combined basis for 1997 through
329 percent at year-end 1999. The ratio of the allowance 1999, the methodologies and amounts assigned to each
for credit losses to net charge-oÅs was 159 percent at element of the loan portfolio for these years have not been
December 31, 2001, compared with 216 percent at year-end conformed.
2000 and 254 percent at year-end 1999. The Company The allowance recorded for commercial loans is based
considers historical charge-oÅ levels in addition to existing on a quarterly review of individual credit relationships. The
conditions, among other factors, when establishing the Company's regular risk rating process is an integral
allowance for credit losses. component of the methodology utilized in determining the
Several factors impacted the allowance for credit losses allowance for credit losses. An analysis of the migration of
during 2001, including merger and restructuring-related commercial and commercial real estate loans and actual loss
credit actions and management's extensive review of the experience throughout the business cycle is also conducted
commercial loan portfolio in light of current economic quarterly to assess reserves established for credits with
conditions. The level of the allowance was also impacted similar risk characteristics. An allowance is established for
by risk rating changes by regulators of shared national pools of commercial and commercial real estate loans based
credits agented by other banks, Company-speciÑc portfolio on the risk ratings assigned. The amount is supported by
trends discussed previously, and the transfer of the the results of the migration analysis that considers historical
unsecured small business product portfolio to loans held loss experience by risk rating, as well as current and
for sale. The increase in the allowance for credit losses historical economic conditions and industry risk factors.
reÖects the impact of changes in the economy since The Company separately analyzes the carrying value of
December 31, 2000, and related deterioration in certain impaired loans to determine whether the carrying value is
sectors of the Company's credit portfolio. It also reÖects less than or equal to the appraised collateral value or the
management's recognition that the current economic present value of expected cash Öows. Based on this analysis,
slowdown has accelerated and may be more prolonged as a an allowance for credit losses may be speciÑcally established
U.S. Bancorp
34