US Bank 2002 Annual Report Download - page 42

Residential mortgages 30 to 89 days or more past due were changes in the risk profile of the portfolios, extent of loan
2.85 percent of the total residential mortgage portfolio at net charge-offs during the period, the increasing trend in
December 31, 2002, compared with 3.40 percent at nonperforming assets, the slight decline in accruing loans
December 31, 2001, and 2.93 percent at December 31, 90 days past due and the improvement in retail
2000. Residential mortgages 90 days or more past due delinquencies. Management also considered changes in
totaled 1.44 percent at December 31, 2002, compared with economic trends including corporate earnings,
1.79 percent at December 31, 2001, and 1.23 percent at unemployment rates, bankruptcies and economic growth
December 31, 2000. The improvement in 2002 reflects, in since December 31, 2001. The increase in the allowance for
part, the mix of first-lien home equity loans originated credit losses in 2001 reflected the impact of continued
through the Company’s consumer finance division. Retail weakening of the economy and related deterioration in
loans 30 to 89 days or more past due were 2.46 percent of
certain sectors of the Company’s credit portfolio. During
the total retail portfolio at December 31, 2002, compared
2001, the allowance for credit losses was impacted by
with 3.30 percent at December 31, 2001, and 2.96 percent
several factors, including merger and restructuring-related
at December 31, 2000. The percentage of retail loans
90 days or more past due was .79 percent of total retail credit actions and management’s extensive review of the
loans at December 31, 2002, compared with 1.03 percent at commercial loan portfolio in light of economic conditions.
December 31, 2001, and .83 percent at December 31, 2000. The level of the allowance was also impacted by risk rating
The improvement in retail loan delinquencies from changes by regulators of shared national credits agented by
December 31, 2001, to December 31, 2002, primarily other banks, Company-specific portfolio trends discussed
reflected the risk management actions, stabilization and previously, and the transfer of the unsecured small business
improvement in collection efforts resulting from the product portfolio to loans held for sale. It also reflected
successful completion of the integration efforts. The increase management’s recognition that the economic slowdown had
in retail loan delinquencies from December 31, 2000, to accelerated and may be more prolonged as a result of world
December 31, 2001, was primarily related to the credit events that occurred in the third quarter of 2001.
card, home equity and revolving credit line portfolios and Management determines the amount of allowance that
reflected the economic slowdown and unemployment trends is required for specific loan categories based on relative risk
during 2001. characteristics of the loan portfolio. Table 16 shows the
Analysis and Determination of the Allowance for Credit amount of the allowance for credit losses by loan category.
Losses The allowance for credit losses provides coverage The allowance recorded for commercial loans is based on a
for probable and estimable losses inherent in the Company’s regular review of individual credit relationships. The
loan and lease portfolio. Management evaluates the Company’s risk rating process is an integral component of
allowance each quarter to determine that it is adequate to the methodology utilized in determining the allowance for
cover inherent losses. The evaluation of each element and credit losses. An analysis of the migration of commercial
the overall allowance is based on a continuing assessment of and commercial real estate loans and actual loss experience
problem loans and related off-balance sheet items, recent throughout the business cycle is also conducted quarterly to
loss experience and other factors, including regulatory assess reserves established for credits with similar risk
guidance and economic conditions. characteristics. An allowance is established for pools of
At December 31, 2002, the allowance for credit losses commercial and commercial real estate loans based on the
was $2.4 billion (2.08 percent of loans). This compares risk ratings assigned. The amount is supported by the
with an allowance of $2.5 billion (2.15 percent of loans) at results of the migration analysis that considers historical
December 31, 2001, and $1.8 billion (1.46 percent of loans) loss experience by risk rating, as well as current and
at December 31, 2000. The ratio of the allowance for credit historical economic conditions and industry risk factors.
losses to nonperforming loans was 196 percent at year-end The Company separately analyzes the carrying value of
2002, compared with 245 percent at year-end 2001 and impaired loans to determine whether the carrying value is
233 percent at year-end 2000. The ratio of the allowance less than or equal to the appraised collateral value or the
for credit losses to loan net charge-offs was 176 percent at present value of expected cash flows. Based on this analysis,
year-end 2002, compared with 159 percent at year-end an allowance for credit losses may be specifically established
2001 and 216 percent at year-end 2000. for impaired loans. The allowance established for
Management determined that the allowance for credit commercial and commercial real estate loan portfolios,
losses was adequate at December 31, 2002. including impaired commercial and commercial real estate
Several factors were taken into consideration in loans, was $1,090.4 million at December 31, 2002,
evaluating the 2002 allowance for credit losses, including compared with $1,428.6 million and $496.9 million at
40 U.S. Bancorp