US Bank 2007 Annual Report Download - page 37

addition, the mortgage lending and homebuilding industries
continued to experience increased levels of stress. With respect
to residential homes, inventory levels approximated a 9.5
month supply at the end of 2007, up from 4.5 months in the
third quarter of 2005. Median home prices, which peaked in
mid-2006, have declined across most domestic markets with
more severe price reductions in California and the Northeast
and Southeast regions.
The decline in residential home values and rising
interest rates through September 2007 began to have a
significant adverse impact on residential mortgage loans.
While residential mortgage delinquencies have been
increasing, these adverse market conditions particularly
affected sub-prime borrowers. In August 2007, the
securitization markets began to experience significant
liquidity disruptions as investor confidence in the credit
quality of asset-backed securitization programs began to
decline. During the fourth quarter of 2007, certain asset-
backed commercial paper programs and other structured
investment vehicles have been unable to remarket their
commercial paper creating further deterioration in the
capital markets. In response to these economic factors, the
Federal Reserve Bank’s monetary policies changed in
September 2007. Since that time, the Federal Reserve Bank
has decreased the target Federal Funds interest rate several
times from its high of 5.25 percent to a rate of 3.00 percent
at January 31, 2008, in an effort to improve liquidity in the
capital markets and investor confidence. Currently, there is
heightened concern that the domestic economy may
experience a recession over the next several quarters. As a
result of this expectation, the equity markets have
experienced significant volatility.
In addition to economic factors, changes in regulations
and legislation can have an impact on the credit
performance of the loan portfolios. Beginning in 2005, the
Company implemented higher minimum balance payment
requirements for its credit card customers in response to
industry guidance issued by the banking regulatory agencies.
This industry guidance was provided to minimize the
likelihood that minimum balance payments would not be
sufficient to cover interest, fees and a portion of the
principal balance of a credit card loan resulting in negative
amortization, or increasing account balances. Also, new
bankruptcy legislation was enacted in October 2005, making
it more difficult for borrowers to have their debts forgiven
during bankruptcy proceedings. As a result of the changes in
bankruptcy laws, the levels of consumer and business
bankruptcy filings increased dramatically in the fourth
quarter of 2005 and declined in early 2006 to levels that
were a third of average bankruptcy filings during 2004 and
early 2005. While consumer bankruptcies have increased
since early 2006, bankruptcy filings in the fourth quarter of
2007 approximated only 50 percent to 60 percent of pre-
2005 levels. In response to the recent sub-prime lending and
market disruption issues, regulators and legislators have
encouraged mortgage servicers to implement restructuring
programs to enable borrowers to continue loan repayments
and dampen the impact of interest rates on homeowners.
Credit Diversification The Company manages its credit risk,
in part, through diversification of its loan portfolio. As part
of its normal business activities, it offers a broad array of
traditional commercial lending products and specialized
products such as asset-based lending, commercial lease
financing, agricultural credit, warehouse mortgage lending,
commercial real estate, health care and correspondent
banking. The Company also offers an array of retail lending
products including credit cards, retail leases, home equity,
revolving credit, lending to students and other consumer
loans. These retail credit products are primarily offered
through the branch office network, home mortgage and loan
production offices, indirect distribution channels, such as
automobile dealers, and a consumer finance division. The
Company monitors and manages the portfolio diversification
by industry, customer and geography. Table 6 provides
information with respect to the overall product
diversification and changes in the mix during 2007.
The commercial portfolio reflects the Company’s focus
on serving small business customers, middle market and
larger corporate businesses throughout its 24-state banking
region, as well as large national customers. The commercial
loan portfolio is diversified among various industries with
somewhat higher concentrations in consumer products and
services, financial services, commercial services and supplies,
capital goods (including manufacturing and commercial
construction-related businesses), property management and
development and agricultural industries. Additionally, the
commercial portfolio is diversified across the Company’s
geographical markets with 74.2 percent of total commercial
loans within the 24-state banking region. Credit relationships
outside of the Company’s banking region are reflected within
the corporate banking, mortgage banking, auto dealer and
leasing businesses focusing on large national customers and
specifically targeted industries. Loans to mortgage banking
customers are primarily warehouse lines which are
collateralized with the underlying mortgages. The Company
regularly monitors its mortgage collateral position to manage
its risk exposure. Table 8 provides a summary of significant
industry groups and geographic locations of commercial loans
outstanding at December 31, 2007 and 2006.
The commercial real estate portfolio reflects the
Company’s focus on serving business owners within its
geographic footprint as well as regional and national
investment-based real estate owners. At December 31, 2007,
the Company had commercial real estate loans of
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