US Bank 2001 Annual Report Download - page 38

Financial Statements for accounting policies related to the timing and degree of changes in residual values that may
allowance for credit losses. impact Ñnancial results over the next several quarters.
At December 31, 2001, the commercial leasing
Residual Risk Management The Company manages its portfolio had $984.6 million of residuals. At year-end 2001,
risk to changes in the value of lease residual assets through lease residuals related to railcars were 16.2 percent. Trucks
disciplined residual setting and valuation at the inception of and other transportation equipment represented
a lease, diversiÑcation of its vehicles, a focus on longer term 30.2 percent of the aggregate portfolio while aircraft and
vehicle leases, eÅective end-of-term marketing of oÅ-leased manufacturing were 14.9 percent and 12.7 percent,
vehicles, regular asset valuation reviews and monitoring of respectively. No other signiÑcant concentrations of more
residual value gains or losses upon the disposition of assets. than 10 percent existed at December 31, 2001. During
To reduce the Ñnancial impact of potential changes in 2001, reduced airline travel and higher fuel costs adversely
vehicle residuals, the Company maintains residual value risk impacted aircraft and transportation equipment lease
insurance. Also, equipment lease originations are subject to residual values. Although impairment of equipment lease
the same stringent underwriting standards referred to in the residuals was not signiÑcant in 2001, continuing economic
segment captioned ""Credit Risk Management''. stress in certain industries may further impact used
Included in the retail leasing portfolio was equipment values into next year.
approximately $2.8 billion of retail leasing residuals at
December 31, 2001, compared with $2.4 billion at Interest Rate Risk Management In the banking industry,
December 31, 2000. The Company monitors concentrations a major risk exposure is changing interest rates. To
of leases by manufacturer, vehicle ""make'' and vehicle type. minimize the volatility of net interest income and exposure
At year-end 2001, no vehicle-type concentration exceeded to economic losses, the Company manages its exposure to
Ñve percent of the aggregate portfolio. Because retail changes in interest rates through asset and liability
residual valuations tend to be less volatile for longer-term management activities within guidelines established by its
leases, relative to the estimated residual at inception of the Asset Liability Policy Committee (""ALPC'') and approved
lease, management actively manages lease origination by the Board of Directors. ALPC has the responsibility for
production to achieve a longer-term portfolio. At approving and ensuring compliance with asset/liability
December 31, 2001, the weighted-average term of the management policies, including interest rate risk exposure,
portfolio was 51 months. Since 1998, the used vehicle oÅ-balance sheet activity and the investment portfolio. The
market has experienced a decline in used car prices. Several Company uses three methods for measuring and analyzing
factors have contributed to this deÖationary cycle. consolidated interest rate risk: Net Interest Income
Aggressive leasing programs by automobile manufacturers Simulation Analysis, Market Value of Equity Modeling and
and competitors within the banking industry included a Repricing Mismatch Analysis.
marketing focus on monthly lease payments, enhanced
Net Interest Income Simulation Analysis One of the
residuals at lease inception, shorter-term leases and low primary tools used to measure interest rate risk and the
mileage leases. These practices have created a cyclical eÅect of interest rate changes on net interest income and
oversupply of certain oÅ-lease vehicles. Recently, net interest margin is simulation analysis. The monthly
automobile manufacturers and others have retreated from analysis incorporates substantially all of the Company's
these marketing programs or begun to exit the leasing assets and liabilities and oÅ-balance sheet instruments,
business. Another factor impacting the used vehicle market together with forecasted changes in the balance sheet and
has been the trend in new vehicle prices that decreased in assumptions that reÖect the current interest rate
the late 1990's. This trend has been driven by surplus environment. Through these simulations, management
automobile manufacturing capacity and related production estimates the impact on net interest income of a 300 basis
and highly competitive Internet sales programs. point upward or downward gradual change of market
Recessionary factors are expected to moderate new car interest rates over a one year period. The simulations also
production during the next several quarters. Also, many estimate the eÅect of immediate and sustained parallel shifts
Internet marketers failed or transformed into distribution in the yield curve of 50 basis points as well as the eÅect of
channels of dealers rather than direct competitors. These immediate and sustained Öattening or steepening of the
recent trends are expected to abate the deÖationary pricing yield curve. These simulations include assumptions about
pressures of the past few years. In response to factors how the balance sheet is likely to change with changes in
impacting used vehicle prices, the Company recognized a loan and deposit growth. Assumptions are made to project
retail lease impairment of $40.0 million in 2001. Given the rates for new loans and deposits based on historical
current economic environment, it is diÇcult to assess the analysis, management's outlook and repricing strategies.
Loan prepayment and other options risks are developed
U.S. Bancorp
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