US Bank 2010 Annual Report Download - page 37

The decline in residential home values has had a significant
adverse impact on residential mortgage loans. Residential
mortgage delinquencies, which increased dramatically in
2007 for sub-prime borrowers, also increased throughout
2008 and 2009 for other classes of borrowers. High
unemployment levels throughout 2009 and 2010 further
increased losses in prime-based residential portfolios and
credit cards.
Economic conditions began to stabilize in late 2009 and
throughout 2010, though unemployment and under-
employment continue to be elevated, consumer confidence
and spending remain lower, and many borrowers continue to
have difficulty meeting their commitments. Credit costs
peaked for the Company in late 2009 and trended
downward thereafter, but remain at elevated levels. The
Company recorded provision for credit losses in excess of
net charge-offs during 2010, 2009 and 2008 of
$175 million, $1.7 billion and $1.3 billion, respectively, as
the result of these economic and environmental factors. The
decrease in the provision for credit losses in excess of net
charge-offs for 2010, compared with 2009, reflected the
stabilization of economic conditions throughout 2010 and
the improving underlying risk profile of the loan portfolio.
Credit Diversification The Company manages its credit risk,
in part, through diversification of its loan portfolio and limit
setting by product type criteria and concentrations. As part
of its normal business activities, the Company 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 residential mortgages,
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 2010.
The commercial portfolio reflects the Company’s focus on
serving small business customers, middle market and larger
corporate businesses throughout its Consumer and Small
Business Banking markets, 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, healthcare, 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 69.2 percent of total
commercial loans, excluding covered loans, within the
Company’s Consumer and Small Business Banking markets.
Credit relationships outside of the Company’s Consumer and
Small Business Banking markets 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
7 provides a summary of significant industry groups and
geographical locations of commercial loans outstanding at
December 31, 2010 and 2009.
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 and builders. At
December 31, 2010, the Company had commercial real estate
loans of $34.7 billion, or 17.6 percent of total loans,
compared with $34.1 billion at December 31, 2009. Within
commercial real estate loans, different property types have
varying degrees of credit risk. Table 8 provides a summary of
the significant property types and geographical locations of
commercial real estate loans outstanding at December 31,
2010 and 2009. At December 31, 2010, approximately
32.9 percent of the commercial real estate loan portfolio
represented business owner-occupied properties that tend to
exhibit credit risk characteristics similar to the middle market
commercial loan portfolio. Generally, the investment-based
real estate mortgages are diversified among various property
types with somewhat higher concentrations in office and retail
properties. During 2010, the Company continued to reduce
its level of exposure to homebuilders, given the stress in the
homebuilding industry sector. From a geographical
perspective, the Company’s commercial real estate portfolio is
generally well diversified. However, at December 31, 2010,
21.6 percent of the Company’s commercial real estate
portfolio, excluding covered assets, was secured by collateral
in California, which has experienced higher delinquency levels
and credit quality deterioration due to excess home inventory
levels and declining valuations. During 2010, the Company
recorded $845 million of net charge-offs in the total
commercial real estate portfolio. Included in commercial real
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