US Bank 2003 Annual Report Download - page 37

purposes, foreign exchange transactions and interest rate Credit Diversification The Company manages its credit risk,
swap contracts for customers, settlement risk, including in part, through diversification of its loan portfolio. As part
Automated Clearing House transactions, and the processing of its normal business activities, it offers a broad array of
of credit card transactions for merchants. These activities traditional commercial lending products and specialized
are also subject to credit review, analysis and approval products such as asset-based lending, commercial lease
processes. financing, agricultural credit, warehouse mortgage lending,
commercial real estate, health care and correspondent
Economic Overview In evaluating its credit risk, the banking. The Company also offers an array of retail lending
Company considers changes, if any, in underwriting products including credit cards, retail leases, home equity,
activities, the loan portfolio composition (including product revolving credit, lending to students and other consumer
mix and geographic, industry or customer-specific loans. These retail credit products are primarily offered
concentrations), trends in loan performance, the level of through the branch office network, specialized trust, home
allowance coverage and macroeconomic factors. Since late mortgage and loan production offices, indirect distribution
2000, the domestic economy experienced slower growth. channels, such as automobile dealers and a consumer
During 2001, corporate earnings weakened and credit finance division. The Company monitors and manages the
quality indicators among certain industry sectors portfolio diversification by industry, customer and
deteriorated. The stagnant economic growth was evidenced geography. Table 6 provides information with respect to the
by the Federal Reserve Board’s (‘‘FRB’’) actions to stimulate overall product diversification and changes in the mix
economic growth through a series of interest rate reductions during 2003.
from mid-2001 through late 2002. In addition, events of The commercial portfolio reflects the Company’s focus
September 11, 2001, had a profound impact on credit on serving small business customers, middle market and
quality due to changes in consumer confidence and related larger corporate businesses throughout its 24-state banking
spending, governmental priorities and business activities. In region and large national customers within certain niche
response to declining economic conditions, company-specific industry groups. Table 7 provides a summary of the
portfolio trends, and the Firstar/USBM merger, the significant industry groups and geographic locations of
Company initiated several actions during 2001 including commercial loans outstanding at December 31, 2003 and
aligning the risk management practices and charge-off 2002. The commercial loan portfolio is diversified among
policies of the companies and restructuring and disposing of various industries with somewhat higher concentrations in
certain portfolios that did not align with the credit risk consumer products and services, capital goods (including
profile of the combined company. The Company also manufacturing and commercial construction-related
implemented accelerated loan workout strategies for certain businesses), financial services, commercial services and
commercial credits and increased the provision for credit supplies, and agricultural industries. Additionally, the
losses above anticipated levels by approximately commercial portfolio is diversified across the Company’s
$1,025 million in the third quarter of 2001. geographical markets with 87.4 percent of total commercial
By the end of 2002, economic conditions had stabilized loans within the 24-state banking region. Credit
somewhat, although the banking sector continued to relationships outside of the Company’s banking region are
experience elevated levels of nonperforming assets and net typically niche businesses including the mortgage banking
charge-offs, especially with respect to certain industry and the leasing businesses. Loans to mortgage banking
segments. Unemployment rates had increased slightly and customers are primarily warehouse lines which are
consumer spending and confidence levels had declined collateralized with the underlying mortgages. The Company
during that year. Economic conditions began to improve in regularly monitors its mortgage collateral position to
early to mid-2003 as evidenced by stronger earnings across manage its risk exposure.
many corporate sectors, higher equity valuations, stronger Certain industry segments within the commercial loan
retail sales and consumer spending, and improving portfolio, including telecommunications, transportation and
economic indicators. While the economy has begun to manufacturing experienced economic stress since 2001.
strengthen relative to a year ago, the banking industry Additionally, highly leveraged enterprise-value financings
continues to have elevated levels of nonperforming assets have under-performed. Over the past several years, the
and net charge-offs compared with the late 1990’s. telecommunications sector has been adversely impacted by
Conditions within certain industries, including excess capacity. As a result of credit workout initiatives, the
manufacturing and airline transportation sectors, continue Company’s outstandings to this industry declined in 2003
to lag behind the growth in the broader economy. In to only .7 percent of the commercial loan portfolio at
addition, certain segments within the agricultural industry December 31, 2003. At December 31, 2003, the
have experienced deterioration since late 2002. transportation sector represented 4.6 percent of the total
U.S. Bancorp 35