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considered the uncertainty related to certain industry conditions and industry risk factors. The Company
sectors, including the airline transportation sector, the separately analyzes the carrying value of impaired loans to
extent of credit exposure to highly leveraged enterprise- determine whether the carrying value is less than or equal
value arrangements within the portfolio and the fact that to the appraised collateral value or the present value of
nonperforming assets remain at elevated levels despite recent expected cash flows. Based on this analysis, an allowance
improvements. Finally, the Company considered improving for credit losses may be specifically established for impaired
but somewhat mixed economic trends including improving loans. The allowance established for commercial and
corporate earnings, lagging unemployment rates, the level of commercial real estate loan portfolios, including impaired
bankruptcies and general economic indicators. commercial and commercial real estate loans, was
Management determines the allowance that is required $1,015.0 million at December 31, 2003, compared with
for specific loan categories based on relative risk $1,090.4 million and $1,428.6 million at December 31,
characteristics of the loan portfolio. Table 15 shows the 2002 and 2001, respectively. The decline in the allowance
amount of the allowance for credit losses by loan category. for commercial and commercial real estate loans of
The allowance recorded for commercial and commercial $75.4 million reflected improvement in the risk
real estate loans is based on a regular review of individual classifications of commercial and commercial real estate
credit relationships. The Company’s risk rating process is an portfolios, partially offset by higher loss severity rates from
integral component of the methodology utilized in the Company’s historical migration analysis.
determining the allowance for credit losses. An analysis of The allowance recorded for the residential mortgages
the migration of commercial and commercial real estate and retail loan portfolios is based on an analysis of product
loans and actual loss experience throughout the business mix, credit scoring and risk composition of the portfolio,
cycle is also conducted quarterly to assess reserves loss and bankruptcy experiences, economic conditions and
established for credits with similar risk characteristics. An historical and expected delinquency and charge-off statistics
allowance is established for pools of commercial and for each homogenous group of loans. Based on this
commercial real estate loans based on the risk ratings information and analysis, an allowance was established
assigned. The amount is supported by the results of the approximating a rolling twelve-month estimate of net
migration analysis that considers historical loss experience charge-offs. The allowance established for residential
by risk rating, as well as current and historical economic mortgages was $33.3 million at December 31, 2003,
Elements of the Allowance for Credit Losses (a)
Allowance Amount Allowance as a Percent of Loans
December 31 (Dollars in Millions) 2003 2002 2001 2000 1999 2003 2002 2001 2000 1999
Commercial
Commercial****************************** $ 696.1 $ 776.4 $1,068.1 $ 418.8 $ 408.3 2.08% 2.12% 2.64% .89% .97%
Lease financing ************************** 90.4 107.6 107.5 17.7 20.2 1.81 2.01 1.84 .31 .53
Total commercial ********************** 786.5 884.0 1,175.6 436.5 428.5 2.04 2.11 2.54 .83 .93
Commercial real estate
Commercial mortgages ******************* 169.7 152.9 176.6 42.7 110.4 .82 .75 .94 .22 .59
Construction and development ************* 58.8 53.5 76.4 17.7 22.5 .89 .82 1.16 .25 .35
Total commercial real estate ************ 228.5 206.4 253.0 60.4 132.9 .84 .77 1.00 .23 .53
Residential mortgages ******************* 33.3 34.2 21.9 11.6 18.6 .25 .35 .28 .12 .15
Retail
Credit card ****************************** 267.9 272.4 295.2 265.6 320.8 4.52 4.81 5.01 4.42 6.41
Retail leasing **************************** 47.1 44.0 38.7 27.2 18.6 .78 .77 .79 .65 .88
Home equity and second mortgages******** 100.5 114.7 88.6 107.7 * .76 .85 .72 .90 *
Other retail ****************************** 234.8 268.6 282.8 250.3 389.2 1.70 2.10 2.39 2.16 1.74
Total retail ************************* 650.3 699.7 705.3 650.8 728.6 1.67 1.86 2.02 1.93 2.47
Total allocated allowance************ 1,698.6 1,824.3 2,155.8 1,159.3 1,308.6 1.43 1.57 1.89 .95 1.16
Available for other factors *********** 670.0 597.7 301.5 627.6 401.7 .57 .51 .26 .51 .35
Total allowance ****************************** $2,368.6 $2,422.0 $2,457.3 $1,786.9 $1,710.3 2.00% 2.08% 2.15% 1.46% 1.51%
(a) During 2001, the Company changed its methodology for determining the specific allowance for elements of the loan portfolio. Table 15 has been restated for 2000. Due to the
Company’s inability to gather historical loss data on a combined basis for 1999, the methodologies and amounts assigned to each element of the loan portfolio for that year has not
been conformed. Utilizing the prior methods, the total assigned to the allocated allowance for 2000 was $1,397.3 million and the allowance available for other factors portion was
$389.6 million.
* Information not available
U.S. Bancorp 41
Table 15