US Bank 2006 Annual Report Download - page 35

differently, as well as their market value. Market risk arises small business and small-ticket leasing customers and to
from fluctuations in interest rates, foreign exchange rates, price consumer products accordingly. The Company
and equity prices that may result in changes in the values of conducts the underwriting and collections of its retail
financial instruments, such as trading and available-for-sale products in loan underwriting and servicing centers
securities that are accounted for on a mark-to-market basis. specializing in certain retail products. Forecasts of
Liquidity risk is the possible inability to fund obligations to delinquency levels, bankruptcies and losses in conjunction
depositors, investors or borrowers. In addition, corporate with projection of estimated losses by delinquency
strategic decisions, as well as the risks described above, categories and vintage information are regularly prepared
could give rise to reputation risk. Reputation risk is the risk and are used to evaluate underwriting and collection and
that negative publicity or press, whether true or not, could determine the specific allowance for credit losses for these
result in costly litigation or cause a decline in the products. Because business processes and credit risks
Company’s stock value, customer base or revenue. associated with unfunded credit commitments are essentially
the same as for loans, the Company utilizes similar
Credit Risk Management The Company’s strategy for credit processes to estimate its liability for unfunded credit
risk management includes well-defined, centralized credit commitments. The Company also engages in non-lending
policies, uniform underwriting criteria, and ongoing risk activities that may give rise to credit risk, including interest
monitoring and review processes for all commercial and rate swap and option contracts for balance sheet hedging
consumer credit exposures. The strategy also emphasizes purposes, foreign exchange transactions, deposit overdrafts
diversification on a geographic, industry and customer level, and interest rate swap contracts for customers, and
regular credit examinations and management reviews of settlement risk, including Automated Clearing House
loans exhibiting deterioration of credit quality. The credit transactions, and the processing of credit card transactions
risk management strategy also includes a credit risk for merchants. These activities are also subject to credit
assessment process, independent of business line managers, review, analysis and approval processes.
that performs assessments of compliance with commercial
and consumer credit policies, risk ratings, and other critical Economic and Other Factors In evaluating its credit risk, the
credit information. The Company strives to identify Company considers changes, if any, in underwriting
potential problem loans early, record any necessary charge- activities, the loan portfolio composition (including product
offs promptly and maintain adequate reserve levels for mix and geographic, industry or customer-specific
probable loan losses inherent in the portfolio. Commercial concentrations), trends in loan performance, the level of
banking operations rely on prudent credit policies and allowance coverage relative to similar banking institutions
procedures and individual lender and business line manager and macroeconomic factors.
accountability. Lenders are assigned lending authority based Since mid-2003, economic conditions have steadily
on their level of experience and customer service improved as evidenced by stronger earnings across many
requirements. Credit officers reporting to an independent corporate sectors, higher equity valuations, and stronger
credit administration function have higher levels of lending retail sales and consumer spending. In late 2003,
authority and support the business units in their credit unemployment rates stabilized and began to decline from a
decision process. Loan decisions are documented as to the high of 6.13 percent in the third quarter of that year.
borrower’s business, purpose of the loan, evaluation of the However, the banking industry continued to have elevated
repayment source and the associated risks, evaluation of levels of nonperforming assets and net charge-offs in 2003
collateral, covenants and monitoring requirements, and risk compared with the late 1990’s.
rating rationale. The Company utilizes a credit risk rating Economic conditions have steadily improved during the
system to measure the credit quality of individual timeframe from 2004 through 2006, as reflected in strong
commercial loans including the probability of default of an expansion of the gross domestic product index, lower
obligor and the loss given default of credit facilities. The unemployment rates, expanding retail sales levels, favorable
Company uses the risk rating system for regulatory trends related to corporate profits and consumer spending
reporting, determining the frequency of review of the credit for retail goods and services. Beginning in mid-2004
exposures, and evaluation and determination of the specific through the second quarter of 2006, the Federal Reserve
allowance for commercial credit losses. The Company Bank pursued a measured approach to increasing short-term
regularly forecasts potential changes in risk ratings, rates in an effort to prevent an acceleration of inflation and
nonperforming status and potential for loss and the maintain a moderate rate of economic growth. The rising
estimated impact on the allowance for credit losses. In the interest rate environment has caused some softening of
Company’s retail banking operations, standard credit residential home and condominium sales. Nationwide sales
scoring systems are used to assess credit risks of consumer, of condominium units reached a peak in mid-2005 and
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