US Bank 2012 Annual Report Download - page 151

Further downgrades in the U.S. government’s sovereign credit
rating could result in risks to the Company and general
economic conditions that the Company is not able to predict
Recently, certain ratings agencies downgraded their sovereign
credit rating, or negatively revised their outlook, of the U.S.
government, and have indicated that they will continue to
assess fiscal projections, as well as the medium-term economic
outlook for the United States. Because of these developments,
there continues to be the perceived risk of a sovereign credit
ratings downgrade of the U.S. government, including the
ratings of U.S. Treasury securities. If such a downgrade were
to occur, the ratings and perceived creditworthiness of
instruments issued, insured or guaranteed by institutions,
agencies or instrumentalities directly linked to the U.S.
government could also be correspondingly affected. A
downgrade might adversely affect the market value of such
instruments. Instruments of this nature are often held by
financial institutions, including the Company, for investment,
liquidity planning and collateral purposes. A downgrade of
the sovereign credit ratings of the U.S. government and
perceived creditworthiness of U.S. government-related
obligations could impact the Company’s liquidity.
The Company’s lending businesses and the value of the loans
and debt securities it holds may be adversely affected by
economic conditions, including a reversal or slowing of the
current moderate recovery. Downward valuation of debt
securities could also negatively impact the Company’s capital
position Given the high percentage of the Company’s assets
represented directly or indirectly by loans, and the importance
of lending to its overall business, weak economic conditions
are likely to have a negative impact on the Company’s
business and results of operations. This could adversely
impact loan utilization rates as well as delinquencies, defaults
and customer ability to meet obligations under the loans. This
is particularly the case during the period in which the
aftermath of recessionary conditions continues and the
positive effects of economic recovery appear to be slow to
materialize and unevenly spread among the Company’s
customers.
Further, weak economic conditions would likely have a
negative impact on the Company’s business, its ability to serve
its customers, and its results of operations. Such conditions
are likely to lead to increases in the number of borrowers who
become delinquent or default or otherwise demonstrate a
decreased ability to meet their obligations under their loans.
This would result in higher levels of nonperforming loans, net
charge-offs, provision for credit losses and valuation
adjustments on loans held for sale. The value to the Company
of other assets such as investment securities, most of which
are debt securities or other financial instruments supported by
loans, similarly would be negatively impacted by widespread
decreases in credit quality resulting from a weakening of the
economy.
The Company is subject to liquidity risk The Company’s
liquidity is essential for the operation of its business. Market
conditions or other events could negatively affect the
Company’s level or cost of funding. Although the Company
has implemented strategies to maintain sufficient and diverse
sources of funding to accommodate planned, as well as
unanticipated, changes in assets and liabilities under both
normal and adverse conditions, any substantial, unexpected or
prolonged changes in the level or cost of liquidity could
adversely affect the Company’s business.
The Company’s credit ratings affect its liquidity The
Company’s credit ratings are important to its liquidity. A
reduction in the Company’s credit ratings could adversely
affect its liquidity and competitive position, increase its
funding costs or limit its access to the capital markets. The
Company’s credit ratings are subject to ongoing review by the
rating agencies which consider a number of factors, including
the Company’s own financial strength, performance,
prospects and operations, as well as factors not within the
control of the Company, including conditions affecting the
financial services industry generally. There can be no
assurance that the Company will maintain its current ratings.
Loss of customer deposits could increase the Company’s
funding costs The Company relies on bank deposits to be a
low cost and stable source of funding. The Company
competes with banks and other financial services companies
for deposits. If the Company’s competitors raise the rates they
pay on deposits, the Company’s funding costs may increase,
either because the Company raises its rates to avoid losing
deposits or because the Company loses deposits and must rely
on more expensive sources of funding. Higher funding costs
reduce the Company’s net interest margin and net interest
income. In addition, the Company’s bank customers could
take their money out of the bank and put it in alternative
investments. Checking and savings account balances and other
forms of customer deposits may decrease when customers
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