US Bank 2009 Annual Report Download - page 49

Regardless of the extent of the Company’s analysis of
customer performance, portfolio trends or risk management
processes, certain incurred but undetected losses are
probable within the loan portfolios. This is due to several
factors, including inherent delays in obtaining information
regarding a customer’s financial condition or changes in its
unique business conditions, the judgmental nature of
individual loan evaluations, collateral assessments and the
interpretation of economic trends. Volatility of economic or
customer-specific conditions affecting the identification and
estimation of losses from larger non-homogeneous credits
and the sensitivity of assumptions utilized to establish
allowances for homogeneous groups of loans, loan portfolio
concentrations, and additional subjective considerations are
among other factors. Because of these subjective factors, the
process utilized to determine each element of the allowance
for credit losses by specific loan category has some
imprecision. As such, the Company estimates a range of
incurred losses in the portfolio based on statistical analyses
and management judgment. A statistical analysis attempts to
measure the extent of imprecision and other uncertainty by
determining the volatility of losses over time, across loan
categories. Also, management judgmentally considers loan
concentrations, risks associated with specific industries, the
stage of the business cycle, economic conditions and other
qualitative factors. Beginning in 2007, the Company
assigned this element of the allowance to each portfolio type
to better reflect the Company’s risk in the specific portfolios.
In years prior to 2007, this element of the allowance was
separately categorized as “available for other factors”.
The allowance recorded for commercial and commercial
real estate loans is based, in part, on a regular review of
individual credit relationships. The Company’s risk rating
process is an integral component of the methodology utilized
to determine these elements of the allowance for credit
losses. An allowance for credit losses is established for pools
of commercial and commercial real estate loans and
unfunded commitments based on the risk ratings assigned.
An analysis of the migration of commercial and commercial
real estate loans and actual loss experience is conducted
quarterly to assess the exposure for credits with similar risk
characteristics. In addition to its risk rating process, the
Company separately analyzes the carrying value of impaired
loans to determine whether the carrying value is less than or
equal to the appraised collateral value or the present value
of expected cash flows. Based on this analysis, an allowance
for credit losses may be specifically established for impaired
loans. The allowance established for commercial and
commercial real estate loan portfolios, including impaired
commercial and commercial real estate loans, was
$2.2 billion at December 31, 2009, compared with
$1.4 billion at December 31, 2008, and $1.3 billion at
December 31, 2007. The increase in the allowance for
commercial and commercial real estate loans of
U.S. BANCORP 47
Table 17 Elements of the Allowance for Credit Losses
December 31 (Dollars in Millions) 2009 2008 2007 2006 2005 2009 2008 2007 2006 2005
Allowance Amount Allowance as a Percent of Loans
Commercial
Commercial . . . . . . . . . . . . . . . . . . $1,026 $ 782 $ 860 $ 665 $ 656 2.43% 1.57% 1.92% 1.64% 1.73%
Lease financing . . . . . . . . . . . . . . . . 182 208 146 90 105 2.78 3.03 2.34 1.62 2.06
Total commercial . . . . . . . . . . . . . 1,208 990 1,006 755 761 2.48 1.75 1.97 1.63 1.77
Commercial Real Estate
Commercial mortgages . . . . . . . . . . . 548 258 150 126 115 2.17 1.10 .74 .64 .57
Construction and development . . . . . . 453 191 108 74 53 5.16 1.95 1.19 .83 .65
Total commercial real estate . . . . . . 1,001 449 258 200 168 2.94 1.35 .88 .70 .59
Residential Mortgages .......... 672 524 131 58 39 2.58 2.22 .58 .27 .19
Retail
Credit card . . . . . . . . . . . . . . . . . . . 1,495 926 487 298 284 8.89 6.85 4.45 3.44 3.98
Retail leasing . . . . . . . . . . . . . . . . . 30 49 17 15 24 .66 .96 .28 .22 .33
Home equity and second mortgages . . 374 255 114 52 62 1.92 1.33 .69 .33 .41
Other retail . . . . . . . . . . . . . . . . . . . 467 372 247 177 188 2.02 1.65 1.42 1.08 1.26
Total retail . . . . . . . . . . . . . . . . . . 2,366 1,602 865 542 558 3.70 2.65 1.70 1.14 1.26
Covered Assets ............... 17 74 – – – .08 .65 – – –
Total allocated allowance . . . . . . . . 5,264 3,639 2,260 1,555 1,526 2.69 1.96 1.47 1.08 1.12
Available for other factors. . . . . . . . – – – 701 725 – – – .49 .53
Total allowance . . . . . . . . . . . . . . . . . . $5,264 $3,639 $2,260 $2,256 $2,251 2.69% 1.96% 1.47% 1.57% 1.65%