US Bank 2002 Annual Report Download - page 37

alternative funding sources. The decrease in short-term monitoring and review processes for all commercial and
borrowings reflected the impact of funding earning assets consumer credit exposures. The strategy also emphasizes
primarily through growth in deposits and, to a lesser extent, diversification on a geographic, industry and customer level,
a shift toward longer-term funding sources. regular credit examinations and management reviews of
Long-term debt was $28.6 billion at December 31, loans experiencing deterioration of credit quality. The
2002, up from $25.7 billion at December 31, 2001. The Company strives to identify potential problem loans early,
$2.9 billion (11.2 percent) increase in long-term debt take any necessary charge-offs promptly and maintain
included the issuance of $1.0 billion of fixed-rate adequate reserve levels for probable loan losses.
subordinated notes in February 2002, the issuance of Commercial banking operations rely on a strong credit
$6.5 billion of medium-term notes and bank notes and the culture that combines prudent credit policies and individual
issuance of $3.1 billion of long-term Federal Home Loan lender accountability. The Company utilizes a credit risk
Bank advances in 2002. The issuance of long-term debt was rating system to measure the credit quality of individual
partially offset by repayments and maturities of $8.4 billion commercial loan transactions and regularly forecasts
in 2002, including the repurchase on August 6, 2002, of potential changes in risk ratings and nonperforming status.
approximately $1.1 billion accreted value of the Company’s The risk rating system is intended to identify and measure
convertible senior notes (the ‘‘CZARS’’) due to mature in the credit quality of lending relationships. In the Company’s
2021. Refer to Note 14 of the Notes to Consolidated retail banking operations, standard credit scoring systems
Financial Statements for additional information regarding are used to assess consumer credit risks and to price
long-term debt and the ‘‘Liquidity Risk Management’’ consumer products accordingly. The Company also engages
section for discussion of liquidity management of in non-lending activities that may give rise to credit risk,
the Company. including interest rate swap contracts for balance sheet
hedging purposes, foreign exchange transactions and interest
CORPORATE RISK PROFILE rate swap contracts for customers, settlement risk and the
processing of credit card transactions for merchants. These
Overview Managing risks is an essential part of successfully activities are also subject to credit review, analysis and
operating a financial services company. The most prominent approval processes.
risk exposures are credit, residual, operational, interest rate, In evaluating its credit risk, the Company considers
market and liquidity. Credit risk is the risk of not collecting changes, if any, in underwriting activities, the loan portfolio
the interest and/or the principal balance of a loan or composition (including product mix and geographic,
investment when it is due. Residual risk is the potential industry or customer-specific concentrations), trends in loan
reduction in the end-of-term value of leased assets or the performance, the level of allowance coverage and
residual cash flows related to asset securitization and other macroeconomic factors. The domestic economy has
off-balance sheet structures. Operational risk includes risks experienced slower growth since late 2000. During 2001,
related to fraud, legal and compliance risk, processing corporate earnings weakened and credit quality indicators
errors, technology and breaches of internal controls. Interest among certain industry sectors deteriorated. Large corporate
rate risk is the potential reduction of net interest income as and middle market commercial businesses announced or
a result of changes in interest rates. Rate movements can continued to implement restructuring activities in an effort
affect the repricing of assets and liabilities differently, as to improve operating margins. The stagnant economic
well as their market value. Market risk arises from growth was evidenced by the Federal Reserve Board’s
fluctuations in interest rates, foreign exchange rates, and (‘‘FRB’’) actions to stimulate economic growth through a
equity prices that may result in changes in the values of series of interest rate reductions over the past 24 to
financial instruments, such as trading and available-for-sale 30 months. In response to declining economic conditions,
securities that are accounted for on a mark-to-market basis. company-specific portfolio trends, and the Firstar/USBM
Liquidity risk is the possible inability to fund obligations to merger, the Company undertook an extensive review of its
depositors, investors or borrowers. In addition, corporate commercial and consumer loan portfolios in early 2001. As
strategic decisions, as well as the risks described above, a result of this review, the Company initiated several
could give rise to reputation risk. Reputation risk is the risk actions during the first six months of 2001 including
that negative publicity or press, whether true or not, could aligning the risk management practices and charge-off
result in costly litigation or cause a decline in the policies of the companies and restructuring and disposing of
Company’s stock value, customer base or revenue. certain portfolios that did not align with the credit risk
Credit Risk Management The Company’s strategy for credit profile of the combined company. Credit portfolio
risk management includes well defined, centralized credit restructuring activities included a specific segment of the
policies, uniform underwriting criteria, and ongoing risk Company’s health care portfolio, selling certain USBM
U.S. Bancorp 35