US Bank 2011 Annual Report Download - page 139

technological change affecting the financial services industry
could negatively affect the Company’s revenue and profit.
Improvements in economic indicators disproportionately
affecting the financial services industry may lag
improvements in the general economy Should the
stabilization of the U.S. economy continue, the improvement of
certain economic indicators, such as unemployment and real
estate asset values and rents, may nevertheless continue to lag
behind the overall economy. These economic indicators typically
affect certain industries, such as real estate and financial services,
more significantly. Furthermore, financial services companies
with a substantial lending business, like the Company’s, are
dependent upon the ability of their borrowers to make debt
service payments on loans. Should unemployment or real estate
asset values fail to recover for an extended period of time, the
Company could be adversely affected.
Changes in consumer use of banks and changes in
consumer spending and saving habits could adversely
affect the Company’s financial results Technology and
other changes now allow many consumers to complete
financial transactions without using banks. For example,
consumers can pay bills and transfer funds directly without
going through a bank. This process of eliminating banks as
intermediaries, known as “disintermediation,” could result in
the loss of fee income, as well as the loss of customer deposits
and income generated from those deposits. In addition,
changes in consumer spending and saving habits could
adversely affect the Company’s operations, and the Company
may be unable to timely develop competitive new products
and services in response to these changes that are accepted by
new and existing customers.
Changes in interest rates could reduce the Company’s net
interest income The operations of financial institutions such
as the Company are dependent to a large degree on net interest
income, which is the difference between interest income from
loans and investments and interest expense on deposits and
borrowings. An institution’s net interest income is significantly
affected by market rates of interest, which in turn are affected
by prevailing economic conditions, by the fiscal and monetary
policies of the federal government and by the policies of
various regulatory agencies. Like all financial institutions, the
Company’s balance sheet is affected by fluctuations in interest
rates. Volatility in interest rates can also result in the flow of
funds away from financial institutions into direct investments.
Direct investments, such as U.S. Government and corporate
securities and other investment vehicles (including mutual
funds) generally pay higher rates of return than financial
institutions, because of the absence of federal insurance
premiums and reserve requirements.
Company Risk Factors
The Company’s allowance for loan losses may not cover
actual losses When the Company loans money, or commits to
loan money, it incurs credit risk, or the risk of losses if its
borrowers do not repay their loans. Like all financial
institutions, the Company reserves for credit losses by
establishing an allowance through a charge to earnings to
provide for loan defaults and non-performance. The amount of
the Company’s allowance for loan losses is based on its
historical loss experience as well as an evaluation of the risks
associated with its loan portfolio, including the size and
composition of the loan portfolio, current economic conditions
and geographic concentrations within the portfolio. The stress
on the United States economy and the local economies in which
the Company does business may be greater or last longer than
expected, resulting in, among other things, greater than expected
deterioration in credit quality of the loan portfolio, or in the
value of collateral securing those loans. In addition, the process
the Company uses to estimate losses inherent in its credit
exposure requires difficult, subjective, and complex judgments,
including forecasts of economic conditions and how these
economic predictions might impair the ability of its borrowers to
repay their loans, which may no longer be capable of accurate
estimation which may, in turn, impact the reliability of the
process. The Company also makes loans to borrowers where it
does not have or service the loan with the first lien on the
property securing its loan. For loans in a junior lien position, the
Company may not have access to information on the position or
performance of the first lien when it is held and serviced by a
third party and this may adversely affect the accuracy of the loss
estimates for loans of these types. Increases in the Company’s
allowance for loan losses may not be adequate to cover actual
loan losses, and future provisions for loan losses could
materially and adversely affect its financial results.
The Company may suffer increased losses in its loan
portfolio despite its underwriting practices The Company
seeks to mitigate the risks inherent in its loan portfolio by
adhering to specific underwriting practices. These practices
generally include: analysis of a borrower’s credit history,
financial statements, tax returns and cash flow projections;
valuation of collateral based on reports of independent
appraisers; and verification of liquid assets. Although the
Company believes that its underwriting criteria are, and
historically have been, appropriate for the various kinds of loans
it makes, the Company has already incurred high levels of losses
on loans that have met these criteria, and may continue to
experience higher than expected losses depending on economic
factors and consumer behavior. In addition, the Company’s
ability to assess the creditworthiness of its customers may be
impaired if the models and approaches it uses to select, manage,
and underwrite its customers become less predictive of future
behaviors. Finally, the Company may have higher credit risk, or
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