US Bank 2003 Annual Report Download - page 44

compared with $34.2 million and $21.9 million at rating categories, levels of nonperforming loans, and the
December 31, 2002 and 2001, respectively. The slight timing of charge-offs and recoveries. In 2001, management
decrease in the allowance for the residential mortgage conducted extensive reviews of its portfolios and enhanced
portfolio year-over-year was primarily due to lower its commercial migration methods to better differentiate and
expected loss severity resulting from the more uniform weight loss severity ratios by risk rating category to reflect
underwriting processes and standards associated with the the adverse impact of loss experienced in 2001. The
portfolio, partially offset by losses due to incremental $326.1 million decrease in the allowance for other factors
growth in the first lien home equity portfolio during 2003. in 2001 reflected the impact of that change in loss severity
The allowance established for retail loans was ratios, which led the Company to increase the allowance
$650.3 million at December 31, 2003, compared with established for commercial loans. In 2002, the Company
$699.7 million and $705.3 million at December 31, 2002 reduced the level of higher risk commercial credits and net
and 2001, respectively. The decline in the allowance for the charge-off ratios improved by 20 basis points from 2001.
retail portfolio in 2003 reflected improved credit quality As a result, loss severity rates determined through historical
and delinquency trends, partially offset by the impact of migration analysis had improved somewhat relative to
portfolio growth and unemployment rates that continue to 2001. This led the Company to reduce the level of the
lag other economic indicators. allowance specifically allocated to commercial loans;
Regardless of the extent of the Company’s analysis of however, nonperforming assets continued to remain at
customer performance, portfolio trends or risk management elevated levels, economic growth continued to be soft and
processes, certain inherent but undetected losses are the ability to further reduce higher risk credits had
probable within the loan portfolios. This is due to several diminished as refinancing opportunities had tightened.
factors, including inherent delays in obtaining information As such, volatility of loss rates remained higher relative to
regarding a customer’s financial condition or changes in prior periods and management increased the level of the
their unique business conditions, the judgmental nature of allowance for other factors. At December 31, 2003,
individual loan evaluations, collateral assessments and the quantifiable factors supporting the level of the allowance for
interpretation of economic trends. Volatility of economic or other factors included $23.3 million related to imprecision
customer-specific conditions affecting the identification and in risk ratings, $184.6 million for volatility of commercial
estimation of losses from larger non-homogeneous credits loss rates and $199.1 million for volatility of retail loss
and the sensitivity of assumptions utilized to establish forecasts. The remaining allowance for other factors of
allowances for homogeneous groups of loans, loan portfolio $263.0 million was related to uncertainty in the economy
concentrations, and other subjective considerations are from lagging unemployment rates, concentration risk,
among other factors. Because of the imprecision including risks associated with the sluggish airline industry
surrounding these factors, the Company estimates a range and highly leveraged enterprise-value credits, and other
of inherent losses based on statistical analyses and qualitative factors.
management judgment, and maintains an ‘‘allowance Although the Company determines the amount of each
available for other factors’’ that is not allocated to a specific element of the allowance separately and this process is an
loan category. The amount of the allowance available for important credit management tool, the entire allowance for
other factors was $670.0 million at December 31, 2003, credit losses is available for the entire loan portfolio. The
compared with $597.7 million at December 31, 2002, and actual amount of losses incurred can vary significantly from
$301.5 million at December 31, 2001. the recorded amounts. The Company’s methodology
Given the many subjective factors affecting the credit included several factors intended to minimize the differences
portfolio, changes in the allowance for other factors may in recorded and actual losses. These factors allowed the
not directly coincide with changes in the risk ratings of the Company to adjust its estimate of losses based on the most
credit portfolio reflected in the risk rating process. This is, recent information available. Refer to Note 1 of the Notes
in part, due to a lagging effect between changes in the to Consolidated Financial Statements for accounting policies
business cycle, the exposure and mix of loans within risk related to the allowance for credit losses.
42 U.S. Bancorp