US Bank 2005 Annual Report Download - page 44

December 31, 2005, compared with $685 million at
Regardless of the extent of the Company’s analysis of December 31, 2004, and $670 million at December 31,
customer performance, portfolio trends or risk management 2003. At December 31, 2005, approximately $592 million
processes, certain inherent but undetected losses are was related to estimated imprecision as described above. Of
probable within the loan portfolios. This is due to several this amount, commercial and commercial real estate
factors, including inherent delays in obtaining information represented approximately 68 percent while residential and
regarding a customer’s financial condition or changes in retail loans represented approximately 32 percent. The
their unique business conditions, the judgmental nature of remaining allowance available for other factors of
individual loan evaluations, collateral assessments and the $133 million was related to concentration risk, including
interpretation of economic trends. Volatility of economic or risks associated with the sluggish airline industry, relative
customer-specific conditions affecting the identification and size of the consumer finance and commercial real estate
estimation of losses from larger non-homogeneous credits portfolios, highly leveraged enterprise-value credits,
and the sensitivity of assumptions utilized to establish uncertainty regarding credit card losses during the transition
allowances for homogeneous groups of loans, loan portfolio to higher minimum balance payments and other qualitative
concentrations, and other subjective considerations are factors. Given the many subjective factors affecting the
among other factors. Because of these subjective factors, the credit portfolio, changes in the allowance for other factors
process utilized to determine each element of the allowance may not directly coincide with changes in the risk ratings or
for credit losses by specific loan category has some the credit portfolio.
imprecision. As such, the Company estimates a range of Although the Company determines the amount of each
inherent losses in the portfolio based on statistical analyses element of the allowance separately and this process is an
and management judgment, and maintains an ‘‘allowance important credit management tool, the entire allowance for
available for other factors’’ that is related to but not credit losses is available for the entire loan portfolio. The
allocated to a specific loan category. A statistical analysis actual amount of losses incurred can vary significantly from
attempts to measure the extent of imprecision by the estimated amounts. Refer to Note 1 of the Notes to
determining the volatility of losses over time across loan Consolidated Financial Statements for accounting policies
categories. Also, management judgmentally considers loan related to the allowance for credit losses.
concentrations, risks associated with specific industries, the
Residual Risk Management The Company manages its risk
stage of the business cycle, economic conditions and other
to changes in the residual value of leased assets through
qualitative factors. Based on this process, the amount of the
disciplined residual valuation setting at the inception of a
allowance available for other factors was $725 million at
ELEMENTS OF THE ALLOWANCE FOR CREDIT LOSSES
Allowance Amount Allowance as a Percent of Loans
December 31 (Dollars in Millions) 2005 2004 2003 2002 2001 2005 2004 2003 2002 2001
Commercial
Commercial ********************* $ 656 $ 664 $ 696 $ 776 $1,068 1.73% 1.89% 2.08% 2.12% 2.64%
Lease financing ****************** 105 106 90 108 108 2.06 2.14 1.80 2.01 1.84
Total commercial************** 761 770 786 884 1,176 1.77 1.92 2.04 2.11 2.54
Commercial real estate
Commercial mortgages *********** 115 131 170 153 177 .57 .64 .82 .75 .94
Construction and development***** 53 40 59 53 76 .65 .55 .89 .81 1.15
Total commercial real estate **** 168 171 229 206 253 .59 .62 .84 .77 1.00
Residential mortgages*********** 39 33 33 34 22 .19 .21 .25 .35 .28
Retail
Credit card ********************** 284 283 268 272 295 3.98 4.29 4.52 4.80 5.01
Retail leasing ******************** 24 44 47 44 39 .33 .61 .78 .77 .79
Home equity and second
mortgages ******************* 62 88 101 115 88 .41 .59 .76 .85 .72
Other retail ********************** 188 195 235 269 283 1.16 1.34 1.70 2.11 2.39
Total retail******************** 558 610 651 700 705 1.22 1.41 1.67 1.86 2.02
Total allocated allowance******* 1,526 1,584 1,699 1,824 2,156 1.11 1.26 1.43 1.57 1.89
Available for other factors ****** 725 685 670 598 301 .52 .54 .57 .51 .26
Total allowance ********************* $2,251 $2,269 $2,369 $2,422 $2,457 1.63% 1.80% 2.00% 2.08% 2.15%
42 U.S. BANCORP
Table 17