US Bank 2013 Annual Report Download - page 38

Management also provides various risk-related reporting
to the Risk Management Committee of the Board of
Directors. The Risk Management Committee discusses with
management the Company’s risk management performance
quarterly, covering the status of existing matters, areas of
potential future concern, and specific information on certain
types of loss events. The discussion also covers quarterly
reports by management assessing the Company’s
performance relative to the risk appetite statement and the
associated risk tolerance limits, including:
• Qualitative considerations, such as macroeconomic
environment, regulatory and compliance changes,
litigation developments, and technology and
cybersecurity;
• Capital ratios and regulatory projections, including
regulatory measures and stressed scenarios;
• Credit measures, including adversely rated and
nonperforming loans, leveraged transactions, credit
concentrations and lending limits;
• Market risk, including interest rate risk, market value and
net income simulation, and trading-related Value at Risk;
and
• Operational risk, including operational losses, system
availability performance, and various regulatory
compliances measures.
Credit Risk Management The Company’s strategy for
credit risk management includes well-defined, centralized
credit policies, uniform underwriting criteria, and ongoing
risk monitoring and review processes for all commercial and
consumer credit exposures. The strategy also emphasizes
diversification on a geographic, industry and customer level,
regular credit examinations and management reviews of
loans exhibiting deterioration of credit quality. The Risk
Management Committee of the Company’s Board of
Directors oversees the Company’s credit risk management
process.
In addition, credit quality ratings as defined by the
Company, are an important part of the Company’s overall
credit risk management and evaluation of its allowance for
credit losses. Loans with a pass rating represent those not
classified on the Company’s rating scale for problem credits,
as minimal risk has been identified. Loans with a special
mention or classified rating, including all of the Company’s
loans that are 90 days or more past due and still accruing,
nonaccrual loans, those considered troubled debt
restructurings (“TDRs”), and loans in a junior lien position
that are current but are behind a modified or delinquent loan
in a first lien position, encompass all loans held by the
Company that it considers to have a potential or well-defined
weakness that may put full collection of contractual cash
flows at risk. The Company’s internal credit quality ratings for
consumer loans are primarily based on delinquency and
nonperforming status, except for a limited population of
larger loans within those portfolios that are individually
evaluated. For this limited population, the determination of
the internal credit quality rating may also consider collateral
value and customer cash flows. The Company obtains
recent collateral value estimates for the majority of its
residential mortgage and home equity and second mortgage
portfolios, which allows the Company to compute estimated
loan-to-value (“LTV”) ratios reflecting current market
conditions. These individual refreshed LTV ratios are
considered in the determination of the appropriate allowance
for credit losses. However, the underwriting criteria the
Company employs consider the relevant income and credit
characteristics of the borrower, such that the collateral is not
the primary source of repayment. The Company strives to
identify potential problem loans early, record any necessary
charge-offs promptly and maintain appropriate allowance
levels for probable incurred loan losses. Refer to Notes 1
and 5 in the Notes to Consolidated Financial Statements for
further information of the Company’s loan portfolios including
internal credit quality ratings.
The Company categorizes its loan portfolio into three
segments, which is the level at which it develops and
documents a systematic methodology to determine the
allowance for credit losses. The Company’s three loan
portfolio segments are commercial lending, consumer
lending and covered loans. The commercial lending
segment includes loans and leases made to small business,
middle market, large corporate, commercial real estate,
financial institution, non-profit and public sector customers.
Key risk characteristics relevant to commercial lending
segment loans include the industry and geography of the
borrower’s business, purpose of the loan, repayment source,
borrower’s debt capacity and financial flexibility, loan
covenants, and nature of pledged collateral, if any. These
risk characteristics, among others, are considered in
determining estimates about the likelihood of default by the
borrowers and the severity of loss in the event of default. The
Company considers these risk characteristics in assigning
internal risk ratings to, or forecasting losses on, these loans
which are the significant factors in determining the allowance
for credit losses for loans in the commercial lending
segment.
The consumer lending segment represents loans and
leases made to consumer customers including residential
mortgages, credit card loans, and other retail loans such as
revolving consumer lines, auto loans and leases, student
loans, and home equity loans and lines. Home equity or
36 U.S. BANCORP