US Bank 2012 Annual Report Download - page 42

challenges, both domestically and globally. Median home
prices declined across most domestic markets, which had a
significant adverse impact on the collectability of residential
mortgage loans. Residential mortgage delinquencies increased
throughout 2008 and 2009. High unemployment levels
beginning in 2009, further increased losses in prime-based
residential portfolios and credit cards.
Although economic conditions generally have stabilized
from the dramatic downturn experienced in 2008 and 2009,
and the financial markets have generally improved, business
activities across a range of industries continue to face
difficulties due to lower consumer confidence and spending,
continued elevated unemployment and under-employment, and
continued stress in the residential mortgage portfolio. Credit
costs peaked for the Company in late 2009 and have trended
downward thereafter. The provision for credit losses was lower
than net charge-offs by $215 million in 2012 and $500 million
in 2011, and exceeded net charge-offs by $175 million in
2010. The $461 million (19.7 percent) decrease in the
provision for credit losses in 2012, compared with 2011,
reflected improving credit trends and the underlying risk
profile of the loan portfolio as economic conditions continued
to slowly improve, partially offset by portfolio growth.
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, small business lending, commercial real estate, health
care and correspondent banking. The Company also offers an
array of consumer lending products, including residential
mortgages, credit card loans, automobile loans, retail leases,
home equity, revolving credit, lending to students and other
consumer loans. These consumer lending products are
primarily offered through the branch office network, home
mortgage and loan production offices and indirect distribution
channels, such as automobile dealers. 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 2012.
The commercial loan class is diversified among various
industries with somewhat higher concentrations in
manufacturing, finance and insurance, wholesale trade, and
real estate, rental and leasing. Additionally, the commercial
loan class is diversified across the Company’s geographical
markets with 66.0 percent of total commercial loans within
the Company’s Consumer and Small Business Banking
markets. Credit relationships outside of the Company’s
Consumer and Small Business Banking markets relate to 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, 2012 and 2011.
The commercial real estate loan class 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. Within the
commercial real estate loan class, 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,
2012 and 2011. At December 31, 2012, approximately
30.9 percent of the commercial real estate loans represented
business owner-occupied properties that tend to exhibit less
credit risk than non owner-occupied properties. The
investment-based real estate mortgages are diversified among
various property types with somewhat higher concentrations in
multi-family and retail properties. From a geographical
perspective, the Company’s commercial real estate loan class is
generally well diversified. However, at December 31, 2012,
21.8 percent of the Company’s commercial real estate loans
were secured by collateral in California, which has experienced
higher delinquency levels and credit quality deterioration due
to excess home inventory levels and declining valuations.
Included in commercial real estate at year-end 2012 was
approximately $804 million in loans related to land held for
development and $1.4 billion of loans related to residential
and commercial acquisition and development properties. These
loans are subject to quarterly monitoring for changes in local
market conditions due to a higher credit risk profile. The
commercial real estate loan class is diversified across the
Company’s geographical markets with 87.0 percent of total
commercial real estate loans outstanding at December 31,
2012, within the Company’s Consumer and Small Business
Banking markets.
The Company’s consumer lending segment utilizes several
distinct business processes and channels to originate consumer
credit, including traditional branch lending, indirect lending,
portfolio acquisitions, correspondent banks and loan brokers.
Each distinct underwriting and origination activity manages
unique credit risk characteristics and prices its loan
production commensurate with the differing risk profiles.
Residential mortgages represent an important financial
product for consumer customers of the Company and are
originated through the Company’s branches, loan production
offices and a wholesale network of originators. The Company
may retain residential mortgage loans it originates on its
38 U.S. BANCORP