US Bank 2004 Annual Report Download - page 46
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Please find page 46 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.lease, diversification of its leased assets, regular asset business cycle. Aggressive leasing programs by automobile
valuation reviews and monitoring of residual value gains or manufacturers and competitors within the banking industry
losses upon the disposition of assets. Commercial lease included a marketing focus on monthly lease payments,
originations are subject to the same well-defined enhanced residuals at lease inception, shorter-term leases
underwriting standards referred to in the ‘‘Credit Risk and low mileage leases. These practices created a cyclical
Management’’ section which includes an evaluation of the oversupply of certain off-lease vehicles causing significant
residual risk. Retail lease residual risk is mitigated further declines in used vehicle prices during that period. Since late
by originating longer-term vehicle leases and effective 2002, residual values for used cars have improved.
end-of-term marketing of off-lease vehicles. Also, to reduce Economic pressures during 2001 and 2002 moderated new
the financial risk of potential changes in vehicle residual car sales volumes to some degree. As a result, production
values, the Company maintains residual value insurance. levels declined from record levels in 2000, reducing the
The catastrophic insurance maintained by the Company supply of newer model years. Another factor that has
provides for the potential recovery of losses on individual affected residual values is the growth of ‘‘certified’’ used car
vehicle sales in an amount equal to the difference between: programs. Certified cars are low mileage, newer model
(a) 105 percent or 110 percent of the average wholesale vehicles that have been inspected, reconditioned, and
auction price for the vehicle at the time of sale and (b) the usually have a warranty program. The Company’s exposure
vehicle residual value specified by the Automotive Lease to residual values has benefited from certified car programs
Guide (an authoritative industry source) at the inception of that receive premium pricing from dealers at auction. In
the lease. The potential recovery is calculated for each addition, competition within the new car market continues
individual vehicle sold in a particular policy year and is to cause manufacturers to offer a record number of
reduced by any gains realized on vehicles sold during the different makes and models in an attempt to target smaller
same period. The Company will receive claim proceeds segments of the consumer market. Also, consumers are
under this insurance program if, in the aggregate, there is a purchasing vehicles with more content as former optional
net loss for such period. In addition, the Company obtains equipment becomes standard on more vehicles. These trends
separate residual value insurance for all vehicles at lease tend to favorably impact vehicle prices. Within the new car
inception where end of lease term settlement is based solely market, higher levels of incentive spending continue to exist.
on the residual value of the individual leased vehicles. While this supports higher sales volumes, certain vehicle
Under this program, the potential recovery is computed for models will continue to see some downward pressure on the
each individual vehicle sold and does not allow the initial residual values of new leases, reducing the risk of
insurance carrier to offset individual determined losses with end-of-term residual valuation losses as lessees purchase off-
gains from other leases. This individual vehicle coverage is lease vehicles. Within vehicle categories, residual values for
included in the calculation of minimum lease payments automobiles have performed better than trucks,
when making the capital lease assessment. To reduce the experiencing an increase in average wholesale prices of
risk associated with collecting insurance claims, the 5.2% during 2004, while trucks have seen a decline of
Company monitors the financial viability of the insurance 1.6%. The decline in truck values is attributed to a market
carrier based on insurance industry ratings and available decline in demand for full size sport utility vehicles. These
financial information. models have experienced price declines due to increased
Included in the retail leasing portfolio was competition in the segment as well as the impact of higher
approximately $4.0 billion of retail leasing residuals at gas prices on consumer buying patterns. These factors,
December 31, 2004, compared with $3.3 billion at along with the mix of the Company’s lease residual
December 31, 2003. The Company monitors concentrations portfolio have reduced the exposure to retail lease residual
of leases by manufacturer and vehicle ‘‘make and model.’’ impairments relative to a year ago.
At year-end 2004, no vehicle-type concentration exceeded At December 31, 2004, the commercial leasing
five percent of the aggregate portfolio. Because retail portfolio had $769 million of residuals, compared with
residual valuations tend to be less volatile for longer-term $816 million at December 31, 2003. At year-end 2004,
leases, relative to the estimated residual at inception of the lease residuals related to trucks and other transportation
lease, the Company actively manages lease origination equipment were 29.8 percent of the total residual portfolio.
production to achieve a longer-term portfolio. At Railcars represented 16.5 percent of the aggregate portfolio,
December 31, 2004, the weighted-average origination term while aircraft and business and office equipment were
of the portfolio was 52 months. During the period from 16.3 percent and 12.7 percent, respectively. No other
1998 through 2002, the used vehicle market experienced significant concentrations of more than 10 percent existed
pricing stress that adversely impacted lease residual at December 31, 2004. In 2004, reduced airline travel and
valuations. Several factors contributed to this competitive
44 U.S. BANCORP