US Bank 2005 Annual Report Download - page 43

Analysis and Determination of the Allowance for Credit The allowance recorded for commercial and
Losses The allowance for loan losses provides coverage for commercial real estate loans is based on a regular review of
probable and estimable losses inherent in the Company’s individual credit relationships. The Company’s risk rating
loan and lease portfolio. Management evaluates the process is an integral component of the methodology
allowance each quarter to determine that it is adequate to utilized to determine these elements of the allowance for
cover these inherent losses. The evaluation of each element credit losses. An allowance for credit losses is established
and the overall allowance is based on a continuing for pools of commercial and commercial real estate loans
assessment of problem loans, recent loss experience and and unfunded commitments based on the risk ratings
other factors, including regulatory guidance and economic assigned. An analysis of the migration of commercial and
conditions. Because business processes and credit risks commercial real estate loans and actual loss experience
associated with unfunded credit commitments are essentially throughout the business cycle is also conducted quarterly to
the same as for loans, the Company utilizes similar assess the exposure for credits with similar risk
processes to estimate its liability for unfunded credit characteristics. In addition to its risk rating process, the
commitments, which is included in other liabilities in the Company separately analyzes the carrying value of impaired
Consolidated Balance Sheet. Both the allowance for loan loans to determine whether the carrying value is less than or
losses and the liability for unfunded credit commitments are equal to the appraised collateral value or the present value
included in the Company’s analysis of credit losses. of expected cash flows. Based on this analysis, an allowance
At December 31, 2005, the allowance for credit losses for credit losses may be specifically established for impaired
was $2,251 million (1.63 percent of loans). This compares loans. The allowance established for commercial and
with an allowance of $2,269 million (1.80 percent of loans) commercial real estate loan portfolios, including impaired
at December 31, 2004, and $2,369 million (2.00 percent of commercial and commercial real estate loans, was
loans) at December 31, 2003. The ratio of the allowance $929 million at December 31, 2005, compared with
for credit losses to nonperforming loans was 414 percent at $941 million and $1,015 million at December 31, 2004 and
year-end 2005, compared with 355 percent at year-end 2003, respectively. The decline in the allowance for
2004 and 232 percent at year-end 2003. The ratio of the commercial and commercial real estate loans of $12 million
allowance for credit losses to loan net charge-offs was at December 31, 2005, compared with December 31, 2004,
329 percent at year-end 2005, compared with 296 percent reflected a $21 million reduction related to changes in loss
at year-end 2004 and 189 percent at year-end 2003. severity rates, offset somewhat by the impact of growth in
Management determined that the allowance for credit losses the portfolios and a $9 million increase related to changes
was adequate at December 31, 2005. in risk classifications.
Several factors were taken into consideration in The allowance recorded for the residential mortgages
evaluating the allowance for credit losses at December 31, and retail loan portfolios is based on an analysis of product
2005, including the risk profile of the portfolios and loan mix, credit scoring and risk composition of the portfolio,
net charge-offs during the period, the level of loss and bankruptcy experiences, economic conditions and
nonperforming assets, accruing loans 90 days or more past historical and expected delinquency and charge-off statistics
due and delinquency ratios compared with December 31, for each homogenous group of loans. Based on this
2004. Management also considered the uncertainty related information and analysis, an allowance was established
to certain industry sectors, including the airline industry, approximating a rolling twelve-month estimate of net
and the extent of credit exposure to other borrowers within charge-offs. The allowance established for residential
the portfolio. In addition, concentration risks associated mortgages was $39 million at December 31, 2005,
with commercial real estate and the mix of loans, including compared with $33 million at December 31, 2004 and
credit cards, loans originated through the consumer finance 2003, respectively. The increase in the allowance for the
division and residential mortgages balances, and their residential mortgage portfolio year-over-year was primarily
relative credit risks were evaluated. Finally, the Company due to growth of the portfolio during 2005. The allowance
considered current economic conditions that might impact established for retail loans was $558 million at
the portfolio. Management determines the allowance that is December 31, 2005, compared with $610 million and
required for specific loan categories based on relative risk $651 million at December 31, 2004 and 2003, respectively.
characteristics of the loan portfolio. On an ongoing basis, The decline in the allowance for the retail portfolio in 2005
management evaluates its methods for determining the reflected improved credit quality favorably impacting
allowance for each element of the portfolio and makes inherent loss ratios and declining delinquency trends,
enhancements considered appropriate. Table 17 shows the partially offset by the impact of portfolio growth.
amount of the allowance for credit losses by portfolio
category.
U.S. BANCORP 41