US Bank 2011 Annual Report Download - page 140

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 in economic conditions or 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. For example, at
December 31, 2011, 21.3 percent of the Company’s commercial
real estate loans and 11.7 percent of its residential mortgages
were secured by collateral in California. Continued deterioration
in real estate values and underlying economic conditions in
California could result in significantly higher credit losses to the
Company.
The Company faces increased risk arising out of its
mortgage lending and servicing businesses During 2011,
the Company and its two primary banking subsidiaries,
entered into consent orders with various regulatory authorities
as a result of an interagency horizontal review of the
foreclosure practices of the 14 largest mortgage servicers in
the United States. The consent orders mandated certain
changes to the Company’s mortgage servicing and foreclosure
processes. The Company has made significant progress in
complying with the consent orders. In addition to the
interagency examination by U.S. federal banking regulators,
the Company has received inquiries from other governmental,
legislative and regulatory authorities on this topic, has
cooperated, and continues to cooperate, with these inquiries.
These inquiries may lead to other administrative, civil or
criminal proceedings, possibly resulting in remedies including
fines, penalties, restitution, or alterations in the Company’s
business practices. Additionally, reputational damage arising
from the consent orders or from other inquiries and industry-
wide publicity could also have an adverse effect upon the
Company’s existing mortgage business and could reduce
future business opportunities.
In addition to governmental or regulatory investigations,
the Company, like other companies with residential mortgage
origination and servicing operations, faces the risk of class
actions and other litigation arising out of these operations.
The Company has reserved for these matters, but the ultimate
resolution could exceed those reserves.
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 reduce its
earnings The Company has a portfolio of MSRs, which is the
right to service a mortgage loan–collect principal, interest and
escrow amounts–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
timing. The Company typically uses derivatives and other
instruments to hedge its mortgage banking interest rate risk,
but this hedging activity may not always be successful. The
Company could incur significant losses from its hedging
activities, and there may be periods where it elects not to
hedge its mortgage banking interest rate risk. As a result of
these factors, mortgage banking revenue can experience
significant volatility.
Maintaining or increasing the Company’s market share
may depend on lowering prices and market acceptance of
new products and services The Company’s success depends,
in part, on its ability to adapt its products and services to
evolving industry standards. There is increasing pressure to
provide products and services at lower prices. Lower prices
can reduce the Company’s net interest margin and revenues
from its fee-based products and services. In addition, the
widespread adoption of new technologies, including internet
services, could require the Company to make substantial
expenditures to modify or adapt the Company’s existing
products and services. Also, these and other capital
investments in the Company’s businesses may not produce
expected growth in earnings anticipated at the time of the
expenditure. The Company might not be successful in
introducing new products and services, achieving market
acceptance of its products and services, or developing and
maintaining loyal customers.
The Company relies on its employees, systems and
certain counterparties, and certain failures could
materially adversely affect its operations The Company
operates in many different businesses in diverse markets and
relies on the ability of its employees and systems to process a
138 U.S. BANCORP