US Bank 2006 Annual Report Download - page 44

$929 million and $941 million at December 31, 2005 and Regardless of the extent of the Company’s analysis of
2004, respectively. The increase in the allowance for customer performance, portfolio trends or risk management
commercial and commercial real estate loans of $26 million processes, certain inherent but undetected losses are
at December 31, 2006, compared with December 31, 2005, probable within the loan portfolios. This is due to several
reflected the impact of growth in the portfolios and a factors, including inherent delays in obtaining information
$81 million increase related to changes in risk regarding a customer’s financial condition or changes in
classifications, offset somewhat by a $55 million reduction their unique business conditions, the judgmental nature of
related to changes in loss severity rates. individual loan evaluations, collateral assessments and the
The allowance recorded for the residential mortgages interpretation of economic trends. Volatility of economic or
and retail loan portfolios is based on an analysis of product customer-specific conditions affecting the identification and
mix, credit scoring and risk composition of the portfolio, estimation of losses from larger non-homogeneous credits
loss and bankruptcy experiences, economic conditions and and the sensitivity of assumptions utilized to establish
historical and expected delinquency and charge-off statistics allowances for homogeneous groups of loans, loan portfolio
for each homogenous group of loans. Based on this concentrations, and other subjective considerations are
information and analysis, an allowance was established among other factors. Because of these subjective factors, the
approximating a rolling twelve-month estimate of net process utilized to determine each element of the allowance
charge-offs. The allowance established for residential for credit losses by specific loan category has some
mortgages was $58 million at December 31, 2006, imprecision. As such, the Company estimates a range of
compared with $39 million and $33 million at inherent losses in the portfolio based on statistical analyses
December 31, 2005 and 2004, respectively. The increase in and management judgment, and maintains an ‘‘allowance
the allowance for the residential mortgage portfolio year- available for other factors’’ that is related to but not
over-year was primarily due to higher loss rates, higher allocated to a specific loan category. A statistical analysis
delinquencies and the seasoning of the portfolio during attempts to measure the extent of imprecision and other
2006. The allowance established for retail loans was uncertainty by determining the volatility of losses over time
$542 million at December 31, 2006, compared with across loan categories. Also, management judgmentally
$558 million and $610 million at December 31, 2005 and considers loan concentrations, risks associated with specific
2004, respectively. The decline in the allowance for the industries, the stage of the business cycle, economic
retail portfolio in 2006 reflected improved credit quality conditions and other qualitative factors. Based on this
favorably impacting inherent loss ratios and declining process, the amount of the allowance available for other
delinquency trends, partially offset by the impact of factors was $701 million at December 31, 2006, compared
portfolio growth. with $725 million at December 31, 2005, and $685 million
ELEMENTS OF THE ALLOWANCE FOR CREDIT LOSSES
Allowance Amount Allowance as a Percent of Ending Loan Balances
December 31 (Dollars in Millions) 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002
COMMERCIAL
Commercial ********************** $ 665 $ 656 $ 664 $ 696 $ 776 1.64% 1.73% 1.89% 2.08% 2.12%
Lease financing ******************* 90 105 106 90 108 1.62 2.06 2.14 1.80 2.01
Total commercial*************** 755 761 770 786 884 1.63 1.77 1.92 2.04 2.11
COMMERCIAL REAL ESTATE
Commercial mortgages ************* 126 115 131 170 153 .64 .57 .64 .82 .75
Construction and development ******* 74 53 40 59 53 .83 .65 .55 .89 .81
Total commercial real estate****** 200 168 171 229 206 .70 .59 .62 .84 .77
RESIDENTIAL MORTGAGES ******* 58 39 33 33 34 .27 .19 .21 .25 .35
RETAIL
Credit card*********************** 298 284 283 268 272 3.44 3.98 4.29 4.52 4.80
Retail leasing ********************* 15 24 44 47 44 .22 .33 .61 .78 .77
Home equity and second mortgages ** 52 62 88 101 115 .33 .41 .59 .76 .85
Other retail*********************** 177 188 195 235 269 1.08 1.26 1.48 1.89 2.35
Total retail ******************** 542 558 610 651 700 1.14 1.26 1.46 1.73 1.93
Total allocated allowance ******** 1,555 1,526 1,584 1,699 1,824 1.08 1.12 1.27 1.46 1.59
Available for other factors ******* 701 725 685 670 598 .49 .53 .55 .57 .52
Total allowance ********************** $2,256 $2,251 $2,269 $2,369 $2,422 1.57% 1.65% 1.82% 2.03% 2.11%
42 U.S. BANCORP
Table 17