US Bank 2015 Annual Report Download - page 47

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 2015.
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 64.3 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, 2015 and 2014. At
December 31, 2015, approximately $3.2 billion of the
commercial loans outstanding were to customers in energy-
related businesses, compared with $3.1 billion at
December 31, 2014. The decline in energy prices over the
past year has resulted in deterioration of a portion of these
loans; however, the impact of this deterioration was not
significant to the Company during 2015. A further decline in
energy prices, or if prices remain at current levels for an
extended period of time, could result in an increase in the
Company’s loan charge-offs and provision for credit losses.
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, 2015 and 2014. At December 31, 2015,
approximately 26.6 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, office and retail
properties. From a geographical perspective, the Company’s
commercial real estate loan class is generally well diversified.
However, at December 31, 2015, 24.8 percent of the
Company’s commercial real estate loans were secured by
collateral in California, which has historically experienced
higher delinquency levels and credit quality deterioration in
recessionary periods due to excess inventory levels and
declining valuations. Included in commercial real estate at
year-end 2015 was approximately $681 million in loans
related to land held for development and $676 million 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 83.4 percent of total commercial real estate loans
outstanding at December 31, 2015, within the Company’s
Consumer and Small Business Banking region.
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 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 balance sheet or
sell the loans into the secondary market while retaining the
servicing rights and customer relationships. Utilizing the
secondary markets enables the Company to effectively
reduce its credit and other asset/liability risks. For residential
mortgages that are retained in the Company’s portfolio and
for home equity and second mortgages, credit risk is also
diversified by geography and managed by adherence to LTV
and borrower credit criteria during the underwriting process.
The Company estimates updated LTV information on its
outstanding residential mortgages quarterly, based on a
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