US Bank 2010 Annual Report Download - page 36

of net interest income as a result of changes in interest rates,
which can affect the re-pricing of assets and liabilities
differently. Market risk arises from fluctuations in interest
rates, foreign exchange rates, and security prices that may
result in changes in the values of financial instruments, such
as trading and available-for-sale securities and derivatives that
are accounted for on a fair value basis. Liquidity risk is the
possible inability to fund obligations to depositors, investors
or borrowers. In addition, corporate strategic decisions, as
well as the risks described above, 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
classifies commercial loans by credit quality ratings that it
defines, including: pass, special mention and classified, and
utilizes a credit risk rating system to measure the credit
quality of individual commercial loans. This risk rating
system includes estimates about the likelihood of default by
borrowers and the severity of loss in the event of default.
The Company uses the risk rating system for on-going
management of the portfolio, 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. The Company classifies loans by
the same credit quality ratings in its retail banking
operations, primarily driven by delinquency status. In
addition, 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.
Beginning in late 2007, financial markets suffered
significant disruptions, leading to and exacerbated by
declining real estate values and subsequent economic
challenges, both domestically and globally. Median home
prices, which peaked in 2006, declined across most domestic
markets with severe price reductions in California and some
parts of the Southwest, Northeast and Southeast regions.
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