US Bank 2012 Annual Report Download - page 154

mortgage servicing and foreclosure processes. 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 high number of
transactions. Operational risk is the risk of loss resulting from
the Company’s operations, including, but not limited to, the
risk of fraud by employees or persons outside of the
Company, unauthorized access to its computer systems, the
execution of unauthorized transactions by employees, errors
relating to transaction processing and technology, breaches of
the internal control system and compliance requirements and
business continuation and disaster recovery. This risk of loss
also includes the potential legal actions that could arise as a
result of an operational deficiency or as a result of
noncompliance with applicable regulatory standards, adverse
business decisions or their implementation, and customer
attrition due to potential negative publicity. Third parties with
which the Company does business could also be sources of
operational risk to the Company, including risks relating to
breakdowns or failures of those parties’ systems or employees.
In the event of a breakdown in the internal control system,
improper operation of systems or improper employee actions,
the Company could suffer financial loss, face regulatory
action and suffer damage to its reputation.
If personal, confidential or proprietary information of
customers or clients in the Company’s possession were to be
mishandled or misused, the Company could suffer significant
regulatory consequences, reputational damage and financial
loss. This mishandling or misuse could include, for example,
situations in which the information is erroneously provided to
parties who are not permitted to have the information, either
by fault of the Company’s systems, employees, or
counterparties, or where the information is intercepted or
otherwise inappropriately taken by third parties.
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