US Bank 2004 Annual Report Download - page 45
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Please find page 45 of the 2004 US Bank annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.reducing inherent loss rates for commercial real estate and factors, including inherent delays in obtaining information
traditional corporate lending. On a composite basis, regarding a customer’s financial condition or changes in
inherent loss rates for commercial credit facilities increased their unique business conditions, the judgmental nature of
slightly for most risk rating categories relative to a year ago. individual loan evaluations, collateral assessments and the
In addition to its risk rating process, the Company interpretation of economic trends. Volatility of economic or
separately analyzes the carrying value of impaired loans to customer-specific conditions affecting the identification and
determine whether the carrying value is less than or equal estimation of losses from larger non-homogeneous credits
to the appraised collateral value or the present value of and the sensitivity of assumptions utilized to establish
expected cash flows. Based on this analysis, an allowance allowances for homogeneous groups of loans, loan portfolio
for credit losses may be specifically established for impaired concentrations, and other subjective considerations are
loans. The allowance established for commercial and among other factors. Because of these subjective factors, the
commercial real estate loan portfolios, including impaired process utilized to determine each element of the allowance
commercial and commercial real estate loans, was for credit losses by specific loan category has some
$940.7 million at December 31, 2004, compared with imprecision. As such, the Company estimates a range of
$1,015.0 million and $1,090.4 million at December 31, inherent losses in the portfolio based on statistical analyses
2003 and 2002, respectively. The decline in the allowance and management judgment, and maintains an ‘‘allowance
for commercial and commercial real estate loans of available for other factors’’ that is not allocated to a specific
$74.3 million reflected a $143.1 million reduction due to loan category. The statistical analysis attempts to measure
improvements in the risk classifications, offset somewhat by the extent of imprecision by determining the volatility of
the impact of growth in the portfolios and a $68.8 million losses over time across loan categories. Also, management
increase related to changes in loss severity rates. The judgmentally considers loan concentrations, risks associated
increase in loss severity rates is driven by enhancements to with specific industries, the stage of the business cycle,
the Company’s migration analysis offset somewhat by economic conditions and other qualitative factors. Based on
recent loss experience. this process, the amount of the allowance available for
The allowance recorded for the residential mortgages other factors was $685.2 million at December 31, 2004
and retail loan portfolios is based on an analysis of product compared with $670.0 million at December 31, 2003 and
mix, credit scoring and risk composition of the portfolio, $597.7 million at December 31, 2002. At December 31,
loss and bankruptcy experiences, economic conditions and 2004, approximately $500 million was related to estimated
historical and expected delinquency and charge-off statistics imprecision as described above. Of this amount, commercial
for each homogenous group of loans. Based on this and commercial real estate represented approximately
information and analysis, an allowance was established 72 percent while residential and retail loans represented
approximating a rolling twelve-month estimate of net approximately 28 percent. The remaining allowance
charge-offs. The allowance established for residential available for other factors of $185 million was related to
mortgages was $33.1 million at December 31, 2004, concentration risk, including risks associated with the
compared with $33.3 million and $34.2 million at sluggish airline industry, relative size of the consumer
December 31, 2003 and 2002, respectively. The slight finance and commercial real estate portfolios and highly
decrease in the allowance for the residential mortgage leveraged enterprise-value credits and other qualitative
portfolio year-over-year was primarily due to lower factors. Given the many subjective factors affecting the
expected loss severity resulting from the more uniform credit portfolio, changes in the allowance for other factors
underwriting processes and standards associated with the may not directly coincide with changes in the risk ratings or
portfolio, partially offset by inherent losses due to growth the credit portfolio.
in the first lien home equity portfolio during 2004. The Although the Company determines the amount of each
allowance established for retail loans was $610.3 million at element of the allowance separately and this process is an
December 31, 2004, compared with $650.3 million and important credit management tool, the entire allowance for
$699.7 million at December 31, 2003 and 2002, credit losses is available for the entire loan portfolio. The
respectively. The decline in the allowance for the retail actual amount of losses incurred can vary significantly from
portfolio in 2004 reflected improved credit quality favorably the estimated amounts. Refer to Note 1 of the Notes to
impacting inherent loss ratios and declining delinquency Consolidated Financial Statements for accounting policies
trends, partially offset by the impact of portfolio growth. related to the allowance for credit losses.
Regardless of the extent of the Company’s analysis of Residual Risk Management The Company manages its risk
customer performance, portfolio trends or risk management to changes in the residual value of leased assets through
processes, certain inherent but undetected losses are disciplined residual valuation setting at the inception of a
probable within the loan portfolios. This is due to several
U.S. BANCORP 43