US Bank 2012 Annual Report Download - page 52

The following table provides an analysis of net charge-offs as a
percent of average loans outstanding for residential mortgages
and home equity and second mortgages by borrower type:
Year Ended December 31
(Dollars in Millions)
Average Loans Percent of Average Loans
2012 2011 2012 2011
Residential Mortgages
Prime borrowers . . . $32,811 $26,642 .95% 1.34%
Sub-prime
borrowers ....... 1,725 1,975 6.43 6.18
Other borrowers .... 745 555 1.88 1.80
Loans purchased
from GNMA
mortgage pools (a) 5,009 4,539 .04 –
Total ............. $40,290 $33,711 1.09 1.45
Home Equity and
Second Mortgages
Prime borrowers . . . $16,622 $17,646 1.53% 1.45%
Sub-prime
borrowers ....... 407 491 8.85 9.16
Other borrowers .... 422 418 2.37 1.91
Total ............. $17,451 $18,555 1.72 1.66
(a) Represents loans purchased from GNMA mortgage pools whose payments are primarily
insured by the Federal Housing Administration or guaranteed by the Department of
Veterans Affairs.
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. The allowance for
credit losses is increased through provisions charged to operating
earnings and reduced by net charge-offs. 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, 2012, the allowance for credit losses was
$4.7 billion (2.12 percent of total loans and 2.15 percent of
loans excluding covered loans), compared with an allowance of
$5.0 billion (2.39 percent of total loans and 2.52 percent of
loans excluding covered loans) at December 31, 2011. The ratio
of the allowance for credit losses to nonperforming loans was
228 percent (269 percent excluding covered loans) at December
31, 2012, compared with 163 percent (228 percent excluding
covered loans) at December 31, 2011. The ratio of the
allowance for credit losses to annual loan net charge-offs at
December 31, 2012, was 226 percent, compared with 176
percent at December 31, 2011, as net charge-offs continue to
decline due to stabilizing economic conditions. Management
determined the allowance for credit losses was appropriate at
December 31, 2012.
The allowance recorded for loans in the commercial lending
segment is based on reviews of individual credit relationships
and considers the migration analysis of commercial lending
segment loans and actual loss experience. The Company
currently uses a 12-year period of historical losses in considering
actual loss experience, because it believes that period best reflects
the losses incurred in the portfolio. This timeframe and the
results of the analysis are evaluated quarterly to determine if
they are appropriate. The allowance recorded for impaired loans
greater than $5 million in the commercial lending segment is
based on an individual loan analysis utilizing expected cash
flows discounted using the original effective interest rate, the
observable market price, or the fair value of the collateral for
collateral-dependent loans. The allowance recorded for all other
commercial lending segment loans is determined on a
homogenous pool basis and includes consideration of product
mix, risk characteristics of the portfolio, bankruptcy experience,
and historical losses, adjusted for current trends. The allowance
established for commercial lending segment loans, was
$1.9 billion at December 31, 2012, compared with $2.2 billion
at December 31, 2011. The decrease in the allowance for
commercial lending segment loans of $256 million at
December 31, 2012, compared with December 31, 2011,
reflected the impact of efforts by the Company to resolve and
reduce exposure to problem assets in the commercial real estate
portfolios and overall improvement in economic conditions
affecting incurred losses, partially offset by growth in the
portfolios.
The allowance recorded for purchased impaired and TDR
loans in the consumer lending segment is determined on a
homogenous pool basis utilizing expected cash flows discounted
using the original effective interest rate of the pool. The
allowance for collateral-dependent loans in the consumer
lending segment is determined based on the fair value of the
collateral. The allowance recorded for all other consumer
lending segment loans is determined on a homogenous pool
basis and includes consideration of product mix, risk
characteristics of the portfolio, bankruptcy experience,
delinquency status, refreshed LTV ratios when possible,
portfolio growth and historical losses, adjusted for current
trends. Credit card and other retail loans 90 days or more past
due are generally not placed on nonaccrual status because of the
relatively short period of time to charge-off and, therefore, are
excluded from nonperforming loans and measures that include
nonperforming loans as part of the calculation.
When evaluating the appropriateness of the allowance for
credit losses for any loans and lines in a junior lien position,
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