US Bank 2009 Annual Report Download - page 47

other consumer loan balances, as well as the adverse impact
of weak economic conditions on consumers.
The following table provides an analysis of net charge-offs
as a percent of average loans outstanding managed by the
consumer finance division, compared with other retail loans:
Year Ended December 31
(Dollars in Millions) 2009 2008 2009 2008
Average Loans
Percent of
Average
Loans
Consumer Finance (a)
Residential mortgages . . . $ 9,973 $ 9,923 3.80% 1.96%
Home equity and second
mortgages. . . ....... 2,457 2,050 6.43 5.71
Other retail ........... 571 461 5.78 5.86
Other Retail
Residential mortgages . . . $14,508 $13,334 .76% .30%
Home equity and second
mortgages. . . ....... 16,878 15,500 1.07 .39
Other retail ........... 22,285 20,210 1.75 1.29
Total Company
Residential mortgages . . . $24,481 $23,257 2.00% 1.01%
Home equity and second
mortgages. . . ....... 19,335 17,550 1.75 1.01
Other retail ........... 22,856 20,671 1.85 1.39
(a) Consumer finance category included credit originated and managed by the consumer
finance division, as well as the majority of home equity and second mortgages with a
loan-to-value greater than 100 percent that were originated in the branches.
The following table provides further information on net
charge-offs as a percent of average loans outstanding for the
consumer finance division:
Year Ended December 31
(Dollars in Millions) 2009 2008 2009 2008
Average Loans
Percent of
Average Loans
Residential mortgages
Sub-prime borrowers .... $2,674 $3,101 6.02% 3.51%
Other borrowers ....... 7,299 6,822 2.99 1.25
Total ............. $9,973 $9,923 3.80% 1.96%
Home equity and second
mortgages
Sub-prime borrowers .... $ 670 $ 799 11.79% 10.01%
Other borrowers ....... 1,787 1,251 4.42 2.96
Total ............. $2,457 $2,050 6.43% 5.71%
Analysis and Determination of the Allowance for Credit
Losses The allowance for loan losses reserves for probable
and estimable losses incurred in the Company’s loan and
lease portfolio, and considers credit loss protection from loss
sharing agreements with the FDIC. Management evaluates
the allowance each quarter to ensure it appropriately
reserves for incurred losses. The evaluation of each element
and the overall allowance is based on a continuing
assessment of problem loans, recent loss experience and
other factors, including regulatory guidance and economic
conditions. Because business processes and credit risks
associated with unfunded credit commitments are essentially
the same as for loans, the Company utilizes similar processes
to estimate its liability for unfunded credit commitments,
which is included in other liabilities in the Consolidated
Balance Sheet. Both the allowance for loan losses and the
liability for unfunded credit commitments are included in the
Company’s analysis of credit losses and reported reserve
ratios.
At December 31, 2009, the allowance for credit losses
was $5.3 billion (2.69 percent of total loans and
3.04 percent of loans excluding covered assets), compared
with an allowance of $3.6 billion (1.96 percent of total
loans and 2.09 percent of loans excluding covered assets) at
December 31, 2008, and $2.3 billion (1.47 percent of total
loans) at December 31, 2007. The ratio of the allowance for
credit losses to nonperforming loans was 97 percent
(153 percent excluding covered assets) at December 31,
2009, compared with 151 percent (206 percent excluding
covered assets) and 406 percent at December 31, 2008 and
2007, respectively. The ratio of the allowance for credit
losses to loan net charge-offs at December 31, 2009, was
136 percent (both including and excluding covered assets),
compared with 200 percent (201 percent excluding covered
assets) and 285 percent at December 31, 2008 and 2007,
respectively. Management determined the allowance for
credit losses was appropriate at December 31, 2009.
Several factors were taken into consideration in
evaluating the allowance for credit losses at December 31,
2009, including the risk profile of the portfolios, loan net
charge-offs during the period, the level of nonperforming
assets, accruing loans 90 days or more past due, delinquency
ratios and changes in restructured loan balances.
Management also considered the uncertainty related to
certain industry sectors, and the extent of credit exposure to
specific borrowers within the portfolio. In addition,
concentration risks associated with commercial real estate
and the mix of loans, including credit cards, loans originated
through the consumer finance division and residential
mortgages balances, and their relative credit risks, were
evaluated. Finally, the Company considered current
economic conditions that might impact the portfolio.
Management determines the allowance that is required for
specific loan categories based on relative risk characteristics
of the loan portfolio. On an ongoing basis, management
evaluates its methods for determining the allowance for each
element of the portfolio and makes enhancements considered
appropriate. Table 17 shows the amount of the allowance
for credit losses by portfolio category.
U.S. BANCORP 45