US Bank 2002 Annual Report Download - page 38

consumer loan portfolios, renegotiating a credit card co- 2001. The commercial loan portfolio is diversified among
branding relationship and discontinuing an unsecured small various industries with somewhat higher concentrations in
business product that did not align with the product consumer products and services, capital goods (including
offerings of the combined company. The Company also manufacturing and commercial construction-related
implemented accelerated loan workout strategies for certain businesses), and consumer staple industries. Additionally,
commercial credits. By the end of the second quarter of the commercial portfolio is diversified across the Company’s
2001, economic stimulus by the FRB as well as geographical markets with 86.2 percent of total commercial
management’s actions appeared to have reduced the rate of loans within the 24 state banking region. Credit
credit quality deterioration. However, world events during relationships outside of the Company’s banking region are
the third quarter of 2001 had a profound impact on typically niche businesses including the mortgage banking
consumer confidence and related spending, governmental and the leasing businesses. Loans to mortgage banking
priorities and business activities. As a result of these events, customers are primarily warehouse lines which are
the Company expected the economic slowdown to collateralized with the underlying mortgages. The Company
accelerate or be more prolonged than it had originally regularly monitors its mortgage collateral position to
estimated. Accordingly, the Company conducted a review of manage its risk exposure.
its credit portfolios and recognized the need to address the Certain industry segments within the commercial loan
impact that these events would have. In response to this portfolio, including communications, transportation and
evaluation, the Company increased the provision for credit manufacturing sectors, as well as highly leveraged enterprise
losses by approximately $1,025 million in the third quarter value financings, have experienced economic stress in 2002.
of 2001 beyond expected levels. Since 2001, the communications sector has been adversely
By the end of 2002, economic conditions had stabilized impacted by excess capacity and represented only 1.2 percent
somewhat although the banking sector continued to of the commercial loan portfolio at December 31, 2002. At
experience elevated levels of nonperforming assets and net December 31, 2002, the transportation sector represented
charge-offs, especially with respect to certain industry 5.3 percent of the total commercial loan portfolio. It has been
segments. Unemployment rates had increased slightly from a impacted by reduced airline travel, slower economic activity
year ago and consumer spending and confidence levels had and higher fuel costs that adversely impacted the trucking
declined since 2001. businesses. At year-end 2002, the Company’s transportation
portfolio consisted of airline and airfreight businesses
Credit Diversification The Company manages its credit risk, (28.1 percent of the sector), trucking businesses (52.9 percent
in part, through diversification of its loan portfolio. As part of the sector) and the remainder in the railroad and shipping
of its normal business activities, it offers a broad array of businesses (19.0 percent of the sector). Capital goods
traditional commercial lending products and specialized represented 13.1 percent of the total commercial portfolio at
products such as asset-based lending, commercial lease December 31, 2002. Included in this sector
financing, agricultural credit, warehouse mortgage lending, were approximately 34.0 percent of loans related to
commercial real estate, health care and correspondent building products while engineering and construction
banking. The Company also offers an array of retail lending equipment and machinery businesses were 31.6 percent and
products including credit cards, retail leases, home equity, 21.6 percent, respectively. Manufacturing production levels
revolving credit, lending to students and other consumer and inventory reductions continues to cause financial stress in
loans. These retail credit products are primarily offered these portfolios.
through the branch office network, specialized trust, home Within its commercial lending business, the Company
mortgage and loan production offices, indirect distribution also provides financing to enable customers to grow their
channels, such as automobile dealers and a consumer businesses through acquisitions of existing businesses,
finance company. The Company monitors and manages the buyouts or other recapitalizations. During a business cycle
portfolio diversification by industry, customer and with slower economic growth, businesses with leveraged
geography. Table 7 provides information with respect to the capital structures may experience insufficient cash flows to
overall product diversification and changes in mix in 2002. service their debt. The Company manages leveraged
The commercial portfolio reflects the Company’s focus enterprise-value financings by maintaining well-defined
on serving small business customers, middle market and underwriting standards, portfolio diversification and actively
larger corporate businesses throughout its 24-state banking managing the customer relationship. Regardless of these
region and national customers and within certain niche actions, leveraged enterprise-value financings often exhibit
industry groups. Table 8 provides a summary of the stress during a recession or period of slow economic
significant industry groups and geographic locations of growth. Given this risk profile, the Company began to
commercial loans outstanding at December 31, 2002 and significantly de-emphasize and reduce the size of this
36 U.S. Bancorp