US Bank 2015 Annual Report Download - page 45

Directors. The third line of defense, internal audit, is responsible
for providing the Audit Committee of the Board of Directors and
senior management with independent assessment and
assurance regarding the effectiveness of the Company’s
governance, risk management, and control processes.
Management provides various risk reports to the Risk
Management Committee of the Board of Directors. The Risk
Management Committee discusses with management the
Company’s risk management performance, and provides a
summary of key risks to the entire Board of Directors,
covering the status of existing matters, areas of potential
future concern, and specific information on certain types of
loss events. The Risk Management Committee considers
quarterly reports by management assessing the Company’s
performance relative to the risk appetite statements and the
associated risk limits, including:
– Qualitative considerations, such as the macroeconomic
environment, regulatory and compliance changes, litigation
developments, and technology and cybersecurity;
– Capital ratios and projections, including regulatory measures
and stressed scenarios;
– Credit measures, including adversely rated and
nonperforming loans, leveraged transactions, credit
concentrations and lending limits;
– Interest rate and market risk, including market value and net
income simulation, and trading-related Value at Risk;
– Liquidity risk, including funding projections under various
stressed scenarios;
– Operational and compliance risk, including losses stemming
from events such as fraud, processing errors, control
breaches, breaches in data security, or adverse business
decisions, as well as reporting on technology performance,
and various legal and regulatory compliance measures; and
– Reputational and strategic risk considerations, impacts and
responses.
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 Risk
Management Committee oversees the Company’s credit risk
management process.
In addition, credit quality ratings as defined by the
Company, are an important part of the Company’s overall
credit risk management and evaluation of its allowance for
credit losses. Loans with a pass rating represent those loans
not classified on the Company’s rating scale for problem
credits, as minimal risk has been identified. Loans with a
special mention or classified rating, including loans that are
90 days or more past due and still accruing, nonaccrual
loans, those considered troubled debt restructurings
(“TDRs”), and loans in a junior lien position that are current but
are behind a modified or delinquent loan in a first lien position,
encompass all loans held by the Company that it considers to
have a potential or well-defined weakness that may put full
collection of contractual cash flows at risk. The Company’s
internal credit quality ratings for consumer loans are primarily
based on delinquency and nonperforming status, except for a
limited population of larger loans within those portfolios that
are individually evaluated. For this limited population, the
determination of the internal credit quality rating may also
consider collateral value and customer cash flows. The
Company obtains recent collateral value estimates for the
majority of its residential mortgage and home equity and
second mortgage portfolios, which allows the Company to
compute estimated loan-to-value (“LTV”) ratios reflecting
current market conditions. These individual refreshed LTV
ratios are considered in the determination of the appropriate
allowance for credit losses. However, the underwriting criteria
the Company employs consider the relevant income and
credit characteristics of the borrower, such that the collateral
is not the primary source of repayment. The Company strives
to identify potential problem loans early, record any necessary
charge-offs promptly and maintain appropriate allowance
levels for probable incurred loan losses. Refer to Notes 1 and
6 in the Notes to Consolidated Financial Statements for
further discussion of the Company’s loan portfolios including
internal credit quality ratings.
The Company categorizes its loan portfolio into three
segments, which is the level at which it develops and
documents a systematic methodology to determine the
allowance for credit losses. The Company’s three loan
portfolio segments are commercial lending, consumer lending
and covered loans. The commercial lending segment includes
loans and leases made to small business, middle market,
large corporate, commercial real estate, financial institution,
non-profit and public sector customers. Key risk
characteristics relevant to commercial lending segment loans
include the industry and geography of the borrower’s
business, purpose of the loan, repayment source, borrower’s
debt capacity and financial flexibility, loan covenants, and
nature of pledged collateral, if any. These risk characteristics,
among others, are considered in determining estimates about
the likelihood of default by the borrowers and the severity of
loss in the event of default. The Company considers these risk
characteristics in assigning internal risk ratings to, or
—43 —