US Bank 2010 Annual Report Download - page 46

Analysis of Loan Net Charge-Offs Total loan net charge-offs
were $4.2 billion in 2010, compared with $3.9 billion in
2009 and $1.8 billion in 2008. The ratio of total loan net
charge-offs to average loans was 2.17 percent in 2010,
compared with 2.08 percent in 2009 and 1.10 percent in
2008. The increase in total net charge-offs in 2010,
compared with 2009, and the increase in 2009, compared
with 2008, was driven by the weakening economy and rising
unemployment affecting the residential housing markets,
including homebuilding and related industries, commercial
real estate properties and credit card and other consumer
and commercial loans. Total net charge-offs peaked for the
Company in the first quarter of 2010 and have since trended
lower as the economy has begun to stabilize. The Company
expects the level of net charge-offs to continue to trend
lower in the first quarter of 2011.
Commercial and commercial real estate loan net charge-
offs for 2010 were $1.7 billion (2.06 percent of average
loans outstanding), compared with $1.5 billion (1.78 percent
of average loans outstanding) in 2009 and $514 million
(.60 percent of average loans outstanding) in 2008. The
increase in net charge-offs in 2010, compared with 2009 and
the increase in 2009, compared with 2008, reflected the
weakening economy and rising unemployment throughout
most of 2009, affecting the residential housing markets,
including homebuilding and related industries, commercial
real estate properties and other commercial loans.
Residential mortgage loan net charge-offs for 2010 were
$546 million (1.97 percent of average loans outstanding),
compared with $489 million (2.00 percent of average loans
outstanding) in 2009 and $234 million (1.01 percent of
average loans outstanding) in 2008. Retail loan net charge-
offs for 2010 were $1.9 billion (3.03 percent of average
loans outstanding), compared with $1.8 billion (2.95 percent
of average loans outstanding) in 2009 and $1.1 billion
(1.92 percent of average loans outstanding) in 2008. The
retail loan net charge-offs percentage was impacted by credit
card portfolio purchases recorded at fair value beginning in
the second quarter of 2009. The increases in residential
mortgage and retail loan net charge-offs in 2010, compared
with 2009 and the increases in 2009, compared with 2008,
reflected the adverse impact of economic conditions on
consumers, as higher unemployment levels increased losses
in the prime-based residential mortgage and credit card
portfolios.
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) 2010 2009 2010 2009
Average Loans
Percent of
Average Loans
Consumer Finance (a)
Residential mortgages . . $10,739 $ 9,973 3.63% 3.80%
Home equity and second
mortgages . . ...... 2,479 2,457 5.28 6.43
Other retail.......... 603 571 3.65 5.78
Other Retail
Residential mortgages . . $16,965 $14,508 .92% .76%
Home equity and second
mortgages . . ...... 16,806 16,878 1.19 1.07
Other retail.......... 23,393 22,285 1.62 1.75
Total Company
Residential mortgages . . $27,704 $24,481 1.97% 2.00%
Home equity and second
mortgages . . ...... 19,285 19,335 1.72 1.75
Other retail.......... 23,996 22,856 1.68 1.85
(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) 2010 2009 2010 2009
Average Loans
Percent of
Average Loans
Residential mortgages
Sub-prime borrowers . . . $ 2,300 $ 2,674 6.39% 6.02%
Other borrowers ...... 8,439 7,299 2.88 2.99
Tot al ........... $10,739 $ 9,973 3.63% 3.80%
Home equity and
second mortgages
Sub-prime borrowers . . . $ 575 $ 670 10.26% 11.79%
Other borrowers ...... 1,904 1,787 3.78 4.42
Tot al ........... $ 2,479 $ 2,457 5.28% 6.43%
Analysis and Determination of the Allowance for Credit
Losses The allowance for credit losses reserves for probable
and estimable losses incurred in the Company’s loan and
lease portfolio, and includes certain amounts that do not
represent loss exposure to the Company because those losses
are recoverable under 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
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