US Bank 2009 Annual Report Download - page 37

could give rise to reputation risk. Reputation risk is the risk
that negative publicity or press, whether true or not, could
result in costly litigation or cause a decline in the Company’s
stock value, customer base, funding sources or revenue.
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 credit
risk management strategy also includes a credit risk
assessment process, independent of business line managers,
that performs assessments of compliance with commercial
and consumer credit policies, risk ratings, and other critical
credit information. The Company strives to identify
potential problem loans early, record any necessary charge-
offs promptly and maintain appropriate reserve levels for
probable incurred loan losses. Commercial banking
operations rely on prudent credit policies and procedures
and individual lender and business line manager
accountability. Lenders are assigned lending authority based
on their level of experience and customer service
requirements. Credit officers reporting to an independent
credit administration function have higher levels of lending
authority and support the business units in their credit
decision process. Loan decisions are documented with
respect to the borrower’s business, purpose of the loan,
evaluation of the repayment source and the associated risks,
evaluation of collateral, covenants and monitoring
requirements, and risk rating rationale. The Company
utilizes a credit risk rating system to measure the credit
quality of individual commercial loans, including the
probability of default of an obligor and the loss given
default of credit facilities. The Company uses the risk rating
system for regulatory reporting, determining the frequency
of review of the credit exposures, and evaluation and
determination of the specific allowance for commercial
credit losses. The Company regularly forecasts potential
changes in risk ratings, nonperforming status and potential
for loss and the estimated impact on the allowance for credit
losses. In the Company’s retail banking operations, standard
credit scoring systems are used to assess credit risks of
consumer, small business and small-ticket leasing customers
and to price products accordingly. The Company conducts
the underwriting and collections of its retail products in loan
underwriting and servicing centers specializing in certain
retail products. Forecasts of delinquency levels, bankruptcies
and losses in conjunction with projection of estimated losses
by delinquency categories and vintage information are
regularly prepared and are used to evaluate underwriting
and collection and determine the specific allowance for
credit losses for these products. Because business processes
and credit risks associated with unfunded credit
commitments are essentially the same as for loans, the
Company utilizes similar processes to estimate its liability
for unfunded credit commitments. The Company also
engages in non-lending activities that may give rise to credit
risk, including interest rate swap and option contracts for
balance sheet hedging purposes, foreign exchange
transactions, deposit overdrafts and interest rate swap
contracts for customers, and settlement risk, including
Automated Clearing House transactions, and the processing
of credit card transactions for merchants. These activities are
also subject to credit review, analysis and approval
processes.
Economic and Other Factors In evaluating its credit risk, the
Company considers changes, if any, in underwriting
activities, the loan portfolio composition (including product
mix and geographic, industry or customer-specific
concentrations), trends in loan performance, the level of
allowance coverage relative to similar banking institutions
and macroeconomic factors, such as changes in
unemployment rates, gross domestic product and consumer
bankruptcy filings.
For several years prior to mid-2007, economic
conditions were strong, with relatively low unemployment,
expanding retail sales, and favorable trends related to
corporate profits and consumer spending for retail goods
and services. Since mid-2007, corporate profit levels have
weakened, unemployment rates have risen, vehicle and retail
sales have declined and credit quality indicators have
deteriorated substantially. In addition, the mortgage lending
and homebuilding industries have experienced significant
stress. Residential home inventory levels approximated a
8.1 month supply at the end of 2009. Median home prices,
which peaked in mid-2006, have declined across most
domestic markets with severe price reductions in California
and some parts of the Southwest, Northeast and Southeast
regions.
The decline in residential home values has had a
significant adverse impact on residential mortgage loans.
Residential mortgage delinquencies, which increased
dramatically in 2007 for sub-prime borrowers, have also
increased throughout 2008 and 2009 for other classes of
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