US Bank 2014 Annual Report Download - page 161

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 In the past, 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. As a
result, 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 create uncertainty in the U.S. and global
financial markets and negatively impact the Company’s
liquidity.
CREDIT AND MORTGAGE BUSINESS RISK
Heightened credit risk could require the Company to
increase its provision for loan losses, which could have a
material adverse effect on the Company’s results of
operations and financial condition When the Company
lends money, or commits to lend money, it incurs credit risk,
or the risk of losses if its borrowers do not repay their loans.
As one of the largest lenders in the United States, the credit
performance of the Company’s loan portfolios significantly
affects its financial results and condition. The Company
incurred high levels of losses on loans during the most
recent financial crisis and recovery period, and if the current
economic environment were to deteriorate, more of its
customers may have difficulty in repaying their loans or other
obligations, which could result in a higher level of credit
losses and provision for credit losses. The Company reserves
for credit losses by establishing an allowance through a
charge to earnings to provide for loan defaults and
nonperformance. The amount of the Company’s allowance
forloanlossesisbasedonitshistoricallossexperienceas
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.
These economic predictions and their impact may no longer
be capable of accurate estimation, which may, in turn, impact
the reliability of the process. As with any such assessments,
the Company may 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
whenitisheldandservicedbyathirdpartyandthismay
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. 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.
A concentration of credit and market risk in the
Company’s loan portfolio could increase the potential for
significant losses TheCompanymayhavehighercreditrisk,
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. 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 higher credit costs. In particular,
deterioration in real estate values and underlying economic
conditions in California could result in significantly higher
credit losses to the Company.
U.S. BANCORP The power of potential
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