US Bank 2006 Annual Report Download - page 36

have declined since that timeframe. With respect to Company monitors and manages the portfolio
residential homes, inventory levels approximated a 7 month diversification by industry, customer and geography. Table 6
supply at the end of 2006, up from 4.5 months in the third provides information with respect to the overall product
quarter of 2005. Median home prices, which peaked in diversification and changes in the mix during 2006.
mid-2006, have declined somewhat across most domestic The commercial portfolio reflects the Company’s focus
markets with more severe price reductions in the Northeast on serving small business customers, middle market and
and Southeast regions. Since the second quarter of 2006, larger corporate businesses throughout its 24-state banking
retail sales have slowed somewhat and industrial production region, as well as large national customers. Table 7 provides
declined moderately in the fourth quarter of 2006. a summary of the significant industry groups and
Beginning in the third quarter of 2006, the Federal Reserve geographic locations of commercial loans outstanding at
Bank paused from its approach of increasing interest rates December 31, 2006 and 2005. The commercial loan
and tightening the money supply as growth in inflationary portfolio is diversified among various industries with
indices began to moderate. somewhat higher concentrations in consumer products and
In addition to economic factors, changes in regulations services, financial services, commercial services and supplies,
and legislation can have an impact on the credit capital goods (including manufacturing and commercial
performance of the loan portfolios. Beginning in 2005, the construction-related businesses), property management and
Company implemented higher minimum balance payment development and agricultural industries. Additionally, the
requirements for its credit card customers in response to commercial portfolio is diversified across the Company’s
industry guidance issued by the banking regulatory agencies. geographical markets with 79.2 percent of total commercial
This industry guidance was provided to minimize the loans within the 24-state banking region. Credit
likelihood that minimum balance payments would not be relationships outside of the Company’s banking region are
sufficient to cover interest, fees and a portion of the reflected within the corporate banking, mortgage banking,
principal balance of a credit card loan resulting in negative auto dealer and leasing businesses focusing on large
amortization, or increasing account balances. Also, new national customers and specifically targeted industries.
bankruptcy legislation was enacted in October 2005, Loans to mortgage banking customers are primarily
making it more difficult for borrowers to have their debts warehouse lines which are collateralized with the underlying
forgiven during bankruptcy proceedings. As a result of the mortgages. The Company regularly monitors its mortgage
changes in bankruptcy laws, the levels of consumer and collateral position to manage its risk exposure.
business bankruptcy filings increased dramatically in the The commercial real estate portfolio reflects the
fourth quarter of 2005 and declined in early 2006 to levels Company’s focus on serving business owners within its
that were a third of average bankruptcy filings during 2004 footprint as well as regional and national investment-based
and early 2005. While consumer bankruptcies have begun real estate. At December 31, 2006, the Company had
to increase somewhat, bankruptcy filings in the fourth commercial real estate loans of $28.6 billion, or
quarter of 2006 approximated only fifty percent of pre- 19.9 percent of total loans, compared with $28.5 billion at
2005 levels. Going forward, the lending industry may December 31, 2005. Within commercial real estate loans,
experience increasing levels of nonperforming loans, different property types have varying degrees of credit risk.
restructured loans and delinquencies due to changing Table 8 provides a summary of the significant property
collections strategies for consumer credit. types and geographical locations of commercial real estate
loans outstanding at December 31, 2006 and 2005. At
Credit Diversification The Company manages its credit risk, December 31, 2006, approximately 35.0 percent of the
in part, through diversification of its loan portfolio. As part commercial real estate loan portfolio represented business
of its normal business activities, it offers a broad array of owner-occupied properties that tend to exhibit credit risk
traditional commercial lending products and specialized characteristics similar to the middle market commercial loan
products such as asset-based lending, commercial lease portfolio. Generally, the investment-based real estate
financing, agricultural credit, warehouse mortgage lending, mortgages are diversified among various property types with
commercial real estate, health care and correspondent somewhat higher concentrations in office and retail
banking. The Company also offers an array of retail lending properties. While investment-based commercial real estate
products including credit cards, retail leases, home equity, continues to perform with relatively strong occupancy levels
revolving credit, lending to students and other consumer and cash flows, these categories of loans can be adversely
loans. These retail credit products are primarily offered impacted during a rising rate environment. During the year,
through the branch office network, home mortgage and the Company began to reduce the level of its construction
loan production offices, indirect distribution channels, such financing of condominium projects given the deterioration
as automobile dealers and a consumer finance division. The in unit pricing in several regions of the country. Included in
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