US Bank 2015 Annual Report Download - page 162

the difference between interest income from loans and
investments and interest expense on deposits and
borrowings. 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 financial position 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.
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 higher
provisions 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 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. 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 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. 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 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.
Deterioration in economic conditions or real estate values in
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