US Bank 2015 Annual Report Download - page 46

forecasting losses on, these loans which are the significant
factors in determining the allowance for credit losses for loans
in the commercial lending segment.
The consumer lending segment represents loans and
leases made to consumer customers including residential
mortgages, credit card loans, and other retail loans such as
revolving consumer lines, auto loans and leases, student
loans, and home equity loans and lines. Home equity or
second mortgage loans are junior lien closed-end accounts
fully disbursed at origination. These loans typically are fixed
rate loans, secured by residential real estate, with a 10- or 15-
year fixed payment amortization schedule. Home equity lines
are revolving accounts giving the borrower the ability to draw
and repay balances repeatedly, up to a maximum
commitment, and are secured by residential real estate.
These include accounts in either a first or junior lien position.
Typical terms on home equity lines in the portfolio are variable
rates benchmarked to the prime rate, with a 10- or 15-year
draw period during which a minimum payment is equivalent to
the monthly interest, followed by a 20- or 10-year
amortization period, respectively. At December 31, 2015,
substantially all of the Company’s home equity lines were in
the draw period. Approximately $920 million, or 6 percent, of
the outstanding home equity line balances at December 31,
2015, will enter the amortization period within the next 36
months. Key risk characteristics relevant to consumer lending
segment loans primarily relate to the borrowers’ capacity and
willingness to repay and include unemployment rates and
other economic factors, customer payment history and in
some cases, updated LTV information on real estate based
loans. These risk characteristics, among others, are reflected
in forecasts of delinquency levels, bankruptcies and losses
which are the primary factors in determining the allowance for
credit losses for the consumer lending segment.
The covered loan segment represents loans acquired in
FDIC-assisted transactions that are covered by loss sharing
agreements with the FDIC that greatly reduce the risk of
future credit losses to the Company. Key risk characteristics
for covered segment loans are consistent with the segment
they would otherwise be included in had the loss share
coverage not been in place, but consider the indemnification
provided by the FDIC.
The Company further disaggregates its loan portfolio
segments into various classes based on their underlying risk
characteristics. The two classes within the commercial
lending segment are commercial loans and commercial real
estate loans. The three classes within the consumer lending
segment are residential mortgages, credit card loans and
other retail loans. The covered loan segment consists of only
one class.
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. The
Company also engages in non-lending activities that may give
rise to credit risk, including derivative transactions for balance
sheet hedging purposes, foreign exchange transactions,
deposit overdrafts and interest rate swap contracts for
customers, investments in securities and other financial
assets, and settlement risk, including Automated Clearing
House transactions and the processing of credit card
transactions for merchants. These activities are subject to
credit review, analysis and approval processes.
Economic and Other Factors In evaluating its credit risk,
the Company considers changes, if any, in underwriting
activities, the loan portfolio composition (including product mix
and geographic, industry or customer-specific
concentrations), collateral values, trends in loan performance
and macroeconomic factors, such as changes in
unemployment rates, gross domestic product and consumer
bankruptcy filings.
Beginning in late 2007, financial markets suffered
significant disruptions, leading to and exacerbated by
declining real estate values and subsequent economic
challenges, both domestically and globally. Median home
prices declined across most domestic markets, which had a
significant adverse impact on the collectability of residential
mortgage loans. Residential mortgage delinquencies
increased throughout 2008 and 2009. High unemployment
levels beginning in 2009, further increased losses in prime-
based residential portfolios and credit cards.
Although economic conditions generally have stabilized
from the dramatic downturn experienced in 2008 and 2009,
and employment levels, median home prices and the financial
markets have slowly improved, business activities across
certain industries and regions continue to face challenges due
to slow global economic growth. If commodity prices inclusive
of energy, remain depressed for an extended period of time,
the industry and the overall economy could be negatively
impacted.
Credit costs peaked for the Company in late 2009 and
have trended downward thereafter. The provision for credit
losses was lower than net charge-offs by $40 million in 2015,
$105 million in 2014 and $125 million in 2013. The $97 million
(7.9 percent) decrease in the provision for credit losses in
2015, compared with 2014, reflected improving credit trends
and the underlying risk profile of the loan portfolio as
economic conditions continued to slowly improve throughout
2015, partially offset by portfolio growth and deterioration in
certain loans to customers in energy-related businesses.
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