US Bank 2005 Annual Report Download - page 34

Interest-bearing time deposits at December 31, 2005, errors, technology, breaches of internal controls and
increased $5.1 billion (16.6 percent), compared with business continuation and disaster recovery risk. Interest
December 31, 2004. The increase was driven by increases of rate risk is the potential reduction of net interest income as
$4.4 billion (24.5 percent) and $.7 billion (5.3 percent) in a result of changes in interest rates. Rate movements can
time deposits greater than $100,000 and time certificates of affect the repricing of assets and liabilities differently, as
deposits less than $100,000, respectively. Changes in these well as their market value. Market risk arises from
deposit categories were principally due to pricing decisions fluctuations in interest rates, foreign exchange rates, and
based on the relative cost of funding. Average time deposits equity prices that may result in changes in the values of
greater than $100,000 increased $7.0 billion (51.0 percent) financial instruments, such as trading and available-for-sale
and average time certificates of deposit less than $100,000 securities that are accounted for on a mark-to-market basis.
increased $125 million (1.0 percent) in 2005, compared Liquidity risk is the possible inability to fund obligations to
with 2004. Time deposits greater than $100,000 are largely depositors, investors or borrowers. In addition, corporate
viewed as purchased funds and are managed to levels strategic decisions, as well as the risks described above,
deemed appropriate given alternative funding sources. could give rise to reputation risk. Reputation risk is the risk
that negative publicity or press, whether true or not, could
Borrowings The Company utilizes both short-term and result in costly litigation or cause a decline in the
long-term borrowings to fund growth of earning assets in Company’s stock value, customer base or revenue.
excess of deposit growth. Short-term borrowings, which
include federal funds purchased, securities sold under Credit Risk Management The Company’s strategy for credit
agreements to repurchase and other short-term borrowings, risk management includes well-defined, centralized credit
were $20.2 billion at December 31, 2005, compared with policies, uniform underwriting criteria, and ongoing risk
$13.1 billion at December 31, 2004. Short-term funding is monitoring and review processes for all commercial and
managed, within approved liquidity policies, to levels consumer credit exposures. The strategy also emphasizes
deemed appropriate given alternative funding sources. The diversification on a geographic, industry and customer level,
increase of $7.1 billion in short-term borrowings reflected regular credit examinations and management reviews of
wholesale funding associated with the Company’s earning loans experiencing deterioration of credit quality. The credit
asset growth and asset/liability management activities. risk management strategy also includes a credit risk
Long-term debt was $37.1 billion at December 31, assessment process, independent of business line managers,
2005, compared with $34.7 billion at December 31, 2004, that performs assessments of compliance with commercial
reflecting the issuances of $5.5 billion of bank notes, $4.5 and consumer credit policies, risk ratings, and other critical
billion of convertible senior debentures, $.5 billion of credit information. The Company strives to identify
medium-term notes, $.9 billion of subordinated debt, potential problem loans early, take any necessary charge-
$1.0 billion of junior subordinated debentures and the offs promptly and maintain adequate reserve levels for
addition of $3.1 billion of Federal Home Loan Bank probable loan losses inherent in the portfolio. Commercial
(‘‘FHLB’’) advances, offset by long-term debt maturities, banking operations rely on prudent credit policies and
repayments and the impact of the tender offer completed procedures and individual lender and business line manager
during 2005. Refer to Note 14 of the Notes to accountability. Lenders are assigned lending authority based
Consolidated Financial Statements for additional on their level of experience and customer service
information regarding long-term debt and the ‘‘Liquidity requirements. Credit officers reporting to an independent
Risk Management’’ section for discussion of liquidity credit administration function have higher levels of lending
management of the Company. authority and support the business units in their credit
decision process. Loan decisions are documented as to the
CORPORATE RISK PROFILE borrower’s business, purpose of the loan, evaluation of the
repayment source and the associated risks, evaluation of
Overview Managing risks is an essential part of successfully collateral, covenants and monitoring requirements, and risk
operating a financial services company. The most prominent rating rationale. The Company utilizes a credit risk rating
risk exposures are credit, residual, operational, interest rate, system to measure the credit quality of individual
market and liquidity risk. Credit risk is the risk of not commercial loan transactions. The Company uses the risk
collecting the interest and/or the principal balance of a loan rating system for regulatory reporting, determining the
or investment when it is due. Residual risk is the potential frequency of review of the credit exposures, and evaluation
reduction in the end-of-term value of leased assets or the and determination of the specific allowance for commercial
residual cash flows related to asset securitization and other credit losses. The Company regularly forecasts potential
off-balance sheet structures. Operational risk includes risks changes in risk ratings, nonperforming status and potential
related to fraud, legal and compliance risk, processing
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