US Bank 2013 Annual Report Download - page 52

no allowance for credit losses is recorded at the purchase
date. Credit discounts representing the principal losses
expected over the life of the loans are a component of the
initial fair value. Subsequent to the purchase date, the
methods utilized to estimate the required allowance for credit
losses for these loans is similar to originated loans; however,
the Company records a provision for credit losses only when
the required allowance, net of any expected reimbursement
under any loss sharing agreements with the FDIC, exceeds
any remaining credit discounts.
The evaluation of the appropriate allowance for credit
losses for purchased impaired loans in the various loan
segments considers the expected cash flows to be collected
from the borrower. These loans are initially recorded at fair
value and therefore no allowance for credit losses is
recorded at the purchase date.
Subsequent to the purchase date, the expected cash
flows of purchased loans are subject to evaluation. Decreases
in the present value of expected cash flows are recognized by
recording an allowance for credit losses with the related
provision for credit losses reduced for the amount
reimbursable by the FDIC, where applicable. If the expected
cash flows on the purchased loans increase such that a
previously recorded impairment allowance can be reversed,
the Company records a reduction in the allowance with a
related reduction in losses reimbursable by the FDIC, where
applicable. Increases in expected cash flows of purchased
loans, when there are no reversals of previous impairment
allowances, are recognized over the remaining life of the loans
and resulting decreases in expected cash flows of the FDIC
indemnification assets are amortized over the shorter of the
remaining contractual term of the indemnification agreements
or the remaining life of the loans. Refer to Note 1 of the Notes
to Consolidated Financial Statements, for more information.
The Company’s methodology for determining the
appropriate allowance for credit losses for all the loan
segments also considers the imprecision inherent in the
methodologies used. As a result, in addition to the amounts
determined under the methodologies described above,
management also considers the potential impact of other
qualitative factors which include, but are not limited to,
economic factors; geographic and other concentration risks;
delinquency and nonaccrual trends; current business
conditions; changes in lending policy, underwriting
standards, internal review and other relevant business
practices; and the regulatory environment. The consideration
of these items results in adjustments to allowance amounts
included in the Company’s allowance for credit losses for
each of the above loan segments. Table 19 shows the
amount of the allowance for credit losses by loan segment,
class and underlying portfolio category.
Although the Company determines the amount of each
element of the allowance separately and considers this
process to be an important credit management tool, the
entire allowance for credit losses is available for the entire
loan portfolio. The actual amount of losses incurred can vary
significantly from the estimated amounts.
Residual Value Risk Management The Company
manages its risk to changes in the residual value of leased
assets through disciplined residual valuation setting at the
inception of a lease, diversification of its leased assets,
regular residual asset valuation reviews and monitoring of
residual value gains or losses upon the disposition of assets.
Commercial lease originations are subject to the same well-
defined underwriting standards referred to in the “Credit Risk
Management” section which includes an evaluation of the
residual value risk. Retail lease residual value risk is
mitigated further by originating longer-term vehicle leases
and effective end-of-term marketing of off-lease vehicles.
Included in the retail leasing portfolio was approximately
$4.6 billion of retail leasing residuals at December 31, 2013,
compared with $3.8 billion at December 31, 2012. The
Company monitors concentrations of leases by manufacturer
and vehicle “make and model.” As of December 31, 2013,
vehicle lease residuals related to sport utility vehicles were
56.4 percent of the portfolio, while upscale and mid-range
vehicle classes represented approximately 15.5 percent and
13.9 percent of the portfolio, respectively. At year-end 2013,
the largest vehicle-type concentration represented
8.9 percent of the aggregate residual value of the vehicles in
the portfolio. At December 31, 2013, the weighted-average
origination term of the portfolio was 40 months, compared
with 41 months at December 31, 2012.
At December 31, 2013, the commercial leasing portfolio
had $542 million of residuals, compared with $567 million at
December 31, 2012. At year-end 2013, lease residuals
related to trucks and other transportation equipment were
33.8 percent of the total residual portfolio. Business and
office equipment represented 26.5 percent of the aggregate
portfolio, while railcars represented 12.1 percent and
manufacturing equipment represented 11.0 percent. No
other concentrations of more than 10 percent existed at
December 31, 2013.
Operational Risk Management Operational risk
represents the risk of loss resulting from the Company’s
operations, including, but not limited to, the risk of fraud by
employees or persons outside the Company, unauthorized
access to its computer systems, the execution of
unauthorized transactions by employees, errors relating to
transaction processing and technology, breaches of internal
controls and in data security, compliance requirements, and
business continuation and disaster recovery. Operational risk
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