US Bank 2002 Annual Report Download - page 45

interpretation of economic trends. Volatility of economic or management increased the level of the allowance for other
customer-specific conditions affecting the identification and factors. At December 31, 2002, quantifiable factors
estimation of losses from larger non-homogeneous credits supporting the level of the allowance for other factors
and the sensitivity of assumptions utilized to establish included $15 million related to imprecision in risk ratings,
allowances for homogeneous groups of loans, loan portfolio $290 million for volatility of commercial loss rates,
concentrations, and other subjective considerations are $100 million for volatility of retail loss forecasts and
among other factors. Because of the imprecision $30 million for uncollectible interest and fees on credit card
surrounding these factors, the Company estimates a range receivables. The remaining allowance for other factors was
of inherent losses based on statistical analyses and primarily related to uncertainty in the economic outlook,
management judgment, and maintains an ‘‘allowance for concentration risk, and other qualitative factors.
other factors’’ that is not allocated to a specific loan Although the Company determines the amount of each
category. The amount of the allowance available for other element of the allowance separately and this process is an
factors was $597.7 million at December 31, 2002, important credit management tool, the entire allowance for
compared with $301.5 million at December 31, 2001, and credit losses is available for the entire loan portfolio. The
$627.6 million at December 31, 2000. actual amount of losses incurred can vary significantly from
Given the many subjective factors affecting the credit the recorded amounts. The Company’s methodology
portfolio, changes in the allowance for other factors may included several factors intended to minimize the differences
not directly coincide with changes in the risk ratings of the in recorded and actual losses. These factors allowed the
credit portfolio reflected in the risk rating process. This is, Company to adjust its estimate of losses based on the most
in part, due to a lagging effect between changes in the recent information available. Refer to Note 1 of the Notes
business cycle, the exposure and mix of loans within risk to Consolidated Financial Statements for accounting policies
rating categories, levels of nonperforming loans, and the related to the allowance for credit losses.
timing of charge-offs and recoveries. In late 2000, Residual Risk Management The Company manages its risk
management identified a slowdown in the business cycle, to changes in the value of lease residual assets through
deteriorating portfolio trends and other adverse factors disciplined residual setting and valuation at the inception of
relative to credit quality. At the beginning of a downward a lease, diversification of its leased assets, regular asset
business cycle, the accuracy of risk ratings, migration loss valuation reviews and monitoring of residual value gains or
ratios and available information of customers often does losses upon the disposition of assets. Commercial lease
not fully reflect the impact of various leading economic originations are subject to the same well-defined
indicators. In 2001, management conducted extensive underwriting standards referred to in the ‘‘Credit Risk
reviews of its portfolios and enhanced its commercial Management’’ section which includes an evaluation of the
migration methods to better differentiate and weight loss residual risk. Retail lease residual risk is mitigated further
severity ratios by risk rating category to reflect the adverse by originating longer term vehicle leases and effective end-
impact of loss experienced in 2001. The $326.1 million of-term marketing of off-lease vehicles. Also, to reduce the
decrease in the allowance for other factors in 2001 reflected financial risk of potential changes in vehicle residual values,
the impact of that change in loss severity ratios, which led the Company maintains residual value insurance. The
the Company to increase the allowance established for catastrophic insurance maintained by the Company provides
commercial loans. In 2002, the Company reduced the level for the potential recovery of losses on individual vehicle
of higher risk commercial credits and net charge-off ratios sales in an amount equal to the difference between: a)
improved by 20 basis points from a year ago. As a result, 105 percent or 110 percent of the average wholesale
loss severity rates determined through historical migration auction price for the vehicle at the time of sale; and, b) the
analysis had improved somewhat relative to 2001. This led vehicle residual value specified by the Automotive Lease
the Company to reduce the level of the allowance Guide (an authoritative industry source) at the inception of
specifically allocated to commercial loans; however, the lease. The potential recovery is calculated for each
nonperforming assets continued to remain at elevated levels, individual vehicle sold in a particular policy year and is
economic growth continued to be soft and the ability to reduced by any gains realized on vehicles sold during the
further reduce higher risk credits had diminished as same period. The Company will receive claim proceeds if, in
refinancing opportunities had tightened. As such, volatility the aggregate, there is a net loss for such period. To reduce
of loss rates remained higher relative to prior periods and the risk associated with collecting insurance claims, the
U.S. Bancorp 43