US Bank 2012 Annual Report Download - page 153

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 United States 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. As with any
such assessments, there is also the possibility that the
Company will fail to identify the proper factors or to
accurately estimate the impacts of the factors that the
Company does identify. 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 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, 2012, 21.8 percent of the Company’s
commercial real estate loans and 13.7 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
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