US Bank 2015 Annual Report Download - page 57

the impact of improving economic conditions over the past
year. Management determined the allowance for credit losses
was appropriate at December 31, 2015.
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. In the migration analysis applied
to risk rated loan portfolios, the Company currently examines up
to a 15-year period of historical loss experience. For each loan
type, this historical loss experience is adjusted as necessary to
consider any relevant changes in portfolio composition, lending
policies, underwriting standards, risk management practices or
economic conditions. The results of the analysis are evaluated
quarterly to confirm an appropriate historical timeframe is
selected for each commercial loan type. 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 of the loan, or the fair
value of the collateral, less selling costs, for collateral-dependent
loans, rather than the migration analysis. 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
$2.0 billion at December 31, 2015, compared with $1.9 billion at
December 31, 2014, reflecting growth in the portfolios and the
uncertain outlook for commodity prices. At December 31, 2015
the Company had credit reserves of approximately 5 percent of
total energy loan balances.
The allowance recorded for TDR loans and purchased
impaired 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, or
the prior quarter effective rate, respectively. The allowance for
collateral-dependent loans in the consumer lending segment is
determined based on the fair value of the collateral less costs to
sell. 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, the
Company considers the delinquency and modification status of
the first lien. At December 31, 2015, the Company serviced the
first lien on 39 percent of the home equity loans and lines in a
junior lien position. The Company also considers information
received from its primary regulator on the status of the first liens
that are serviced by other large servicers in the industry and the
status of first lien mortgage accounts reported on customer credit
bureau files. Regardless of whether or not the Company services
the first lien, an assessment is made of economic conditions,
problem loans, recent loss experience and other factors in
determining the allowance for credit losses. Based on the
available information, the Company estimated $291 million or 1.8
percent of the total home equity portfolio at December 31, 2015,
represented non-delinquent junior liens where the first lien was
delinquent or modified.
The Company uses historical loss experience on the loans
and lines in a junior lien position where the first lien is serviced by
the Company, or can be identified in credit bureau data, to
establish loss estimates for junior lien loans and lines the
Company services that are current, but the first lien is delinquent
or modified. Historically, the number of junior lien defaults in any
period has been a small percentage of the total portfolio (for
example, only 0.7 percent forthetwelvemonthsended
December 31, 2015), and the long-term average loss rate on
the small percentage of loans that default has been
approximately 80 percent. In addition, the Company obtains
updated credit scores on its home equity portfolio each quarter,
and in some cases more frequently, and uses this information to
qualitatively supplement its loss estimation methods. Credit
score distributions for the portfolio are monitored monthly and
any changes in the distribution are one of the factors considered
in assessing the Company’s loss estimates. In its evaluation of
the allowance for credit losses, the Company also considers the
increased risk of loss associated with home equity lines that are
contractually scheduled to convert from a revolving status to a
fully amortizing payment and with residential lines and loans that
have a balloon payoff provision.
The allowance established for consumer lending segment
loans was $2.3 billion at December 31, 2015, compared with
$2.4 billion at December 31, 2014. The $181 million (7.4
percent) decrease in the allowance for consumer lending
segment loans at December 31, 2015, compared with
December 31, 2014, reflected the impact of more stable
economic conditions during 2015, partially offset by portfolio
growth.
The allowance for the covered loan segment is evaluated
each quarter in a manner similar to that described for non-
covered loans, and represents any decreases in expected cash
flows on those loans after the acquisition date. The provision for
credit losses for covered loans considers the indemnification
provided by the FDIC. The allowance established for covered
loans was $38 million at December 31, 2015, compared with
$65 million at December 31, 2014, reflecting expected credit
losses in excess of initial fair value adjustments, including $2
million and $16 million at December 31, 2015 and 2014,
respectively, to be reimbursed by the FDIC.
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