US Bank 2014 Annual Report Download - page 44

activities that may give rise to credit risk, including derivative
transactions for balance sheet hedging purposes, foreign
exchange transactions, deposit overdrafts and interest rate
swap contracts for customers, investments in securities and
other financial assets, and settlement risk, including
Automated Clearing House transactions and the processing
of credit card transactions for merchants. These activities
are subject to credit review, analysis and approval processes.
Economic and Other Factors In evaluating its credit risk, the
Company considers changes, if any, in underwriting activities,
the loan portfolio composition (including product mix and
geographic, industry or customer-specific concentrations),
trends in loan performance and macroeconomic factors,
such as changes in unemployment rates, gross domestic
product and consumer bankruptcy filings.
Beginning in late 2007, financial markets suffered
significant disruptions, leading to and exacerbated by
declining real estate values and subsequent economic
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 employment levels and the financial markets have slowly
improved, business activities across a range of industries
continue to face challenges due to slow global economic
growth, and continued stress in the residential mortgage
market. In addition, if the recent trend in falling energy prices
would continue for an extended period of time, the energy
industry and the overall economies in energy-dominant
regions could be negatively impacted.
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 $105 million in
2014, $125 million in 2013 and $215 million in 2012. The $111
million (8.3 percent) decrease in the provision for credit
losses in 2014, compared with 2013, 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, auto
loans, retail leases, home equity, revolving credit 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 auto 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 2014.
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 65.3 percent of total commercial loans within
the Company’s Consumer and Small Business Banking
region. Credit relationships outside of the Company’s
Consumer and Small Business Banking region 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, 2014 and
2013. At December 31, 2014, approximately $3.1 billion of the
commercial loans outstanding were to customers in energy-
related businesses. The recent decline in energy prices has
resulted in deterioration to some of these loans; however, its
impact is not material to the Company.
Thecommercialrealestateloanclassreflectsthe
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, 2014 and 2013. At December 31, 2014,
approximately 26.9 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
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