US Bank 2009 Annual Report Download - page 134

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.
Acts or threats of terrorism and political or military actions
taken by the United States or other governments could
adversely affect general economic or industry conditions
Geopolitical conditions may also affect the Company’s
earnings. Acts or threats of terrorism and political or
military actions taken by the United States or other
governments in response to terrorism, or similar activity,
could adversely affect general economic or industry
conditions.
Company Risk Factors
The Company’s allowance for loan losses may not be
adequate to cover actual losses Like all financial
institutions, the Company maintains an allowance for loan
losses to provide for loan defaults and non-performance.
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. 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 continue to materially and adversely affect its financial
results.
The Company may continue to 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 often 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 experience higher credit losses, to the extent its loans are
concentrated by loan type, industry segment, borrower type,
or location of the borrower or collateral. For example, the
Company’s credit risk and credit losses can increase if
borrowers who engage in similar activities are uniquely or
disproportionately affected by economic or market
conditions, or by regulation, such as regulation related to
climate change. Continued deterioration of real estate values
in states or regions where the Company has relatively larger
concentrations of residential or commercial real estate could
result in significantly higher credit costs.
Changes in interest rates can reduce the value of the
Company’s mortgage servicing rights and mortgages held
for sale, and can make its mortgage banking revenue
volatile from quarter to quarter, which can negatively affect
its earnings. The Company has a portfolio of mortgage
servicing rights (“MSRs”), which is the right to service a
mortgage loan for a fee. The Company initially carries its
MSRs using a fair value measurement of the present value of
the estimated future net servicing income, which includes
assumptions about the likelihood of prepayment by
borrowers. Changes in interest rates can affect prepayment
assumptions and thus fair value. As interest rates fall,
prepayments tend to increase as borrowers refinance, and
the fair value of MSR’s can decrease, which in turn reduces
the Company’s earnings.
An increase in interest rates tends to lead to a decrease
in demand for mortgage loans, reducing the Company’s
income from loan originations. Although revenue from the
Company’s MSRs may increase at the same time through
increases in fair value, this offsetting revenue effect, or
“natural hedge,” is not perfectly correlated in amount or
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