US Bank 2001 Annual Report Download - page 31

2001. The downturn in equity capital markets in 2001 and residual valuations and ongoing operational activities. Credit
the current interest rate environment have prompted many risk is the risk of not collecting interest and/or the
customers to increase their liquidity in accessible deposits. principal balance of a loan or investment when it is due.
Time certiÑcates of deposit less than $100,000 declined Interest rate risk is the potential reduction of net interest
$5.1 billion (19.6 percent) during the year. Large income as a result of changes in interest rates. Rate
denomination deposits, both domestic and foreign, movements can aÅect the repricing of assets and liabilities
decreased $6.2 billion (41.9 percent). These deposits are diÅerently, as well as their market value. Market risk arises
largely viewed as purchased funds and are managed to from Öuctuations in interest rates, foreign exchange rates,
levels deemed appropriate given alternative funding sources. and equity prices that may result in changes in the values of
Average time certiÑcates of deposit less than $100,000 Ñnancial instruments, such as trading account and available-
declined $2.5 billion (9.8 percent) and average large for-sale securities that are accounted for on a mark-to-
denomination deposits were essentially Öat compared with market basis. Liquidity risk is the possible inability to fund
2000. The decline in average time certiÑcates of deposit less obligations to depositors, investors and borrowers. Residual
than $100,000 reÖected the net impact of bank acquisitions risk is the potential reduction in the ""end-of-term'' value of
and branch divestitures and management's pricing decisions leased assets or the residual cash Öows related to asset
to change the mix of funding toward lower rate wholesale securitization and other oÅ-balance sheet structures.
funding sources. Operational risk represents the possibility that transactions
Table 12 provides a summary of total deposits by type are processed erroneously and that material errors are not
of deposit. detected by the systems of internal accounting controls.
Borrowings The Company utilizes both short-term and Credit Risk Management The Company's strategy for
long-term borrowings to fund growth of earning assets in credit risk management includes stringent, centralized credit
excess of deposit growth. Short-term borrowings, which policies and uniform underwriting criteria for all loans,
include federal funds purchased, securities sold under including specialized lending categories such as mortgage
agreements to repurchase and other short-term borrowings, banking, energy, commercial real estate and real estate
were $14.7 billion at December 31, 2001, up $2.8 billion construction, leveraged Ñnancing and consumer credit. The
(24.0 percent) from $11.8 billion at year-end 2000. Short- strategy also emphasizes diversiÑcation on a geographic,
term funding is managed to levels deemed appropriate given industry and customer level, regular credit examinations,
alternative funding sources. and quarterly management reviews of large loans and loans
Long-term debt was $25.7 billion at December 31, experiencing deterioration of credit quality. The Company
2001, up from $21.9 billion at December 31, 2000. The strives to identify potential problem loans early, take any
increase in long-term funding reÖects favorable funding necessary charge-oÅs promptly, and maintain adequate
costs during the declining rate environment relative to rate reserve levels. Commercial banking operations rely on a
reductions for shorter-term borrowings or large strong credit culture that combines prudent credit policies
denomination deposits. During 2001, the Company issued and individual lender accountability. In addition, the
$1.1 billion of senior contingent convertible debt as well as commercial lenders generally focus on middle market
$1.5 billion of ""Company-obligated Mandatorily companies within their regions or niche national markets.
Redeemable Preferred Securities of Subsidiary Trusts The Company utilizes a credit risk rating system in order to
Holding Solely the Junior Subordinated Debentures of the measure the credit quality of individual commercial loan
Parent Company'' commonly referred to as ""Trust Preferred transactions and regularly forecasts potential changes in risk
Securities''. The Company's subsidiary U.S. Bank National ratings and nonperforming status. The risk rating system is
Association issued $1.5 billion of Ñxed-rate subordinated intended to identify and measure the credit quality of
notes. In addition, the Company's bank subsidiaries lending relationships. In the Company's retail banking
obtained $5.3 billion of long-term Federal Home Loan operations, standard credit scoring systems are used to
Bank advances in 2001. Refer to ""Liquidity Risk assess consumer credit risks and to price consumer products
Management'' on pages 38 through 40 for discussion of accordingly. The Company also engages in non-lending
liquidity management of the Company. activities that may give rise to credit risk, including interest
rate swap contracts for customers or balance sheet hedging
CORPORATE RISK PROFILE purposes, foreign exchange transactions, and the processing
of credit card transactions for merchants. These activities
Overview Managing risks is an essential part of successfully
are subject to the similar credit review, analysis and
operating a Ñnancial services company. The most prominent
approval processes as those applied to commercial loans.
risk exposures are credit, interest rate, market and liquidity.
The Company also has exposure related to changes in
U.S. Bancorp 29