US Bank 2015 Annual Report Download - page 163

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.
Changes in interest rates can impact 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 MSRs can decrease, which in turn reduces the
Company’s earnings. Futher, it is possible that, because of
economic conditions and/or a weak or deteriorating housing
market, even if interest rates were to fall or remain low,
mortgage originations may also fall or any increase in
mortgage originations may not be enough to offset the
decrease in the MSRs’ value caused by the lower rates.
A decline in the soundness of other financial institutions
could adversely affect the Company’s results of
operations The Company’s ability to engage in routine
funding or settlement transactions could be adversely affected
by the actions and commercial soundness of other domestic
or foreign financial institutions. Financial services institutions
are interrelated as a result of trading, clearing, counterparty or
other relationships. The Company has exposure to many
different counterparties, and the Company routinely executes
and settles transactions with counterparties in the financial
services industry, including brokers and dealers, commercial
banks, investment banks, mutual and hedge funds, and other
institutional clients. As a result, defaults by, or even rumors or
questions about, the soundness of one or more financial
services institutions, or the financial services industry
generally, could lead to losses or defaults by the Company or
by other institutions and impact the Company’s
predominately United States–based businesses or the less
significant merchant processing, corporate trust and fund
administration services businesses it operates in foreign
countries. Many of these transactions expose the Company
to credit risk in the event of a default by a counterparty or
client. In addition, the Company’s credit risk may be further
increased when the collateral held by the Company cannot be
realized upon or is liquidated at prices not sufficient to recover
the full amount of the financial instrument exposure due the
Company. There is no assurance that any such losses would
not adversely affect the Company’s results of operations.
Change in residual value of leased assets may have an
adverse impact on the Company’s financial results The
Company engages in leasing activities and is subject to the
risk that the residual value of the property under lease will be
less than the Company’s recorded asset value. Adverse
changes in the residual value of leased assets can have a
negative impact on the Company’s financial results. The risk of
changes in the realized value of the leased assets compared to
recorded residual values depends on many factors outside of
the Company’s control, including supply and demand for the
assets, condition of the assets at the end of the lease term,
and other economic factors.
OPERATIONS AND BUSINESS RISK
A breach in the security of the Company’s systems could
disrupt its businesses, result in the disclosure of
confidential information, damage its reputation and
create significant financial and legal exposure Although the
Company devotes significant resources to maintain and regularly
upgrade its systems and processes that are designed to protect
the security of the Company’s computer systems, software,
networks and other technology assets, as well as its intellectual
property, and the confidentiality, integrity and availability of
information belonging to the Company and its customers, the
Company’s security measures do not provide absolute security.
Many financial services institutions, retailers and other
companies engaged in data processing have reported breaches
in the security of their websites or other systems, some of which
have involved sophisticated and targeted attacks intended to
obtain unauthorized access to confidential information, destroy
data, disable or degrade service, or sabotage systems, often
through the introduction of computer viruses or malware, cyber
attacks and other means. The Company and certain other large
financial institutions in the United States have experienced
several well-publicized series of apparently related attacks from
technically sophisticated and well resourced third parties that
were intended to disrupt normal business activities by making
internet banking systems inaccessible to customers for
extended periods. These “denial-of-service” attacks have not
breached the Company’s data security systems, but require
substantial resources to defend, and may affect customer
satisfaction and behavior. Furthermore, even if not directed at
the Company, attacks on financial or other institutions important
to the overall functioning of the financial system could adversely
affect, directly or indirectly, aspects of the Company’s
businesses.
Third parties with which the Company does business or
that facilitate its business activities, including exchanges,
clearinghouses, payment and ATM networks, financial
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