10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

þ  

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

OR

 

¨  

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from (not applicable)

Commission file number 1-6880

U.S. BANCORP

(Exact name of registrant as specified in its charter)

 

Delaware   41-0255900

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

800 Nicollet Mall

Minneapolis, Minnesota 55402

(Address of principal executive offices, including zip code)

651-466-3000

(Registrant’s telephone number, including area code)

(not applicable)

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

YES þ    NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES þ    NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer þ    Accelerated filer ¨

Non-accelerated filer ¨

(Do not check if a smaller reporting company)

   Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨    NO þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class   Outstanding as of October 31, 2015
Common Stock, $0.01 Par Value   1,749,177,062 shares

 

 

 


Table of Contents

Table of Contents and Form 10-Q Cross Reference Index

 

Part I — Financial Information

    

1) Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2)

       3   

a) Overview

       3   

b) Statement of Income Analysis

       4   

c) Balance Sheet Analysis

       6   

d) Non-GAAP Financial Measures

       34   

e) Critical Accounting Policies

       35   

f) Controls and Procedures (Item 4)

       35   

2) Quantitative and Qualitative Disclosures About Market Risk/Corporate Risk Profile (Item 3)

       8   

a) Overview

       8   

b) Credit Risk Management

       9   

c) Residual Value Risk Management

       23   

d) Operational Risk Management

       23   

e) Compliance Risk Management

       23   

f) Interest Rate Risk Management

       23   

g) Market Risk Management

       24   

h) Liquidity Risk Management

       25   

i) Capital Management

       27   

3) Line of Business Financial Review

       29   

4) Financial Statements (Item 1)

       36   

Part II — Other Information

    

1) Legal Proceedings (Item 1)

       80   

2) Risk Factors (Item 1A)

       80   

3) Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)

       80   

4) Exhibits (Item 6)

       80   

5) Signature

       81   

6) Exhibits

       82   

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995.

This quarterly report on Form 10-Q contains forward-looking statements about U.S. Bancorp. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements and are based on the information available to, and assumptions and estimates made by, management as of the date hereof. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future plans and prospects of U.S. Bancorp. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated. A reversal or slowing of the current economic recovery or another severe contraction could adversely affect U.S. Bancorp’s revenues and the values of its assets and liabilities. Global financial markets could experience a recurrence of significant turbulence, which could reduce the availability of funding to certain financial institutions and lead to a tightening of credit, a reduction of business activity, and increased market volatility. Stress in the commercial real estate markets, as well as a downturn in the residential real estate markets could cause credit losses and deterioration in asset values. In addition, U.S. Bancorp’s business and financial performance is likely to be negatively impacted by recently enacted and future legislation and regulation. U.S. Bancorp’s results could also be adversely affected by deterioration in general business and economic conditions; changes in interest rates; deterioration in the credit quality of its loan portfolios or in the value of the collateral securing those loans; deterioration in the value of securities held in its investment securities portfolio; legal and regulatory developments; litigation; increased competition from both banks and non-banks; changes in customer behavior and preferences; breaches in data security; effects of mergers and acquisitions and related integration; effects of critical accounting policies and judgments; and management’s ability to effectively manage credit risk, residual value risk, market risk, operational risk, compliance risk, strategic risk, interest rate risk, liquidity risk and reputational risk.

For discussion of these and other risks that may cause actual results to differ from expectations, refer to U.S. Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2014, on file with the Securities and Exchange Commission, including the sections entitled “Risk Factors” and “Corporate Risk Profile” contained in Exhibit 13, and all subsequent filings with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934. However, factors other than these also could adversely affect U.S. Bancorp’s results, and the reader should not consider these factors to be a complete set of all potential risks or uncertainties. Forward-looking statements speak only as of the date hereof, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.

 

U.S. Bancorp    1


Table of Contents
 Table 1  Selected Financial Data

 

   

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

 
(Dollars and Shares in Millions, Except Per Share Data)   2015     2014     Percent
Change
     2015     2014     Percent
Change
 

Condensed Income Statement

              

Net interest income (taxable-equivalent basis) (a)

  $ 2,821      $ 2,748        2.7    $ 8,343      $ 8,198        1.8

Noninterest income

    2,327        2,245        3.7         6,753        6,792        (.6

Securities gains (losses), net

    (1     (3     66.7         (1     2        *   

Total net revenue

    5,147        4,990        3.1         15,095        14,992        .7   

Noninterest expense

    2,775        2,614        6.2         8,122        7,911        2.7   

Provision for credit losses

    282        311        (9.3      827        941        (12.1

Income before taxes

    2,090        2,065        1.2         6,146        6,140        .1   

Taxable-equivalent adjustment

    53        56        (5.4      161        167        (3.6

Applicable income taxes

    534        523        2.1         1,541        1,566        (1.6

Net income

    1,503        1,486        1.1         4,444        4,407        .8   

Net (income) loss attributable to noncontrolling interests

    (14     (15     6.7         (41     (44     6.8   

Net income attributable to U.S. Bancorp

  $ 1,489      $ 1,471        1.2       $ 4,403      $ 4,363        .9   

Net income applicable to U.S. Bancorp common shareholders

  $ 1,422      $ 1,405        1.2       $ 4,204      $ 4,163        1.0   

Per Common Share

              

Earnings per share

  $ .81      $ .78        3.8    $ 2.38      $ 2.30        3.5

Diluted earnings per share

    .81        .78        3.8         2.36        2.29        3.1   

Dividends declared per share

    .255        .245        4.1         .755        .720        4.9   

Book value per share

    22.99        21.38        7.5          

Market value per share

    41.01        41.83        (2.0       

Average common shares outstanding

    1,758        1,798        (2.2      1,770        1,809        (2.2

Average diluted common shares outstanding

    1,766        1,807        (2.3      1,778        1,819        (2.3

Financial Ratios

              

Return on average assets

    1.44     1.51          1.45     1.56  

Return on average common equity

    14.1        14.5             14.1        14.7     

Net interest margin (taxable-equivalent basis) (a)

    3.04        3.16             3.05        3.26     

Efficiency ratio (b)

    53.9        52.4             53.8        52.8     

Net charge-offs as a percent of average loans outstanding

    .46        .55             .47        .57     

Average Balances

              

Loans

  $ 250,536      $ 243,867        2.7    $   248,358      $   240,098        3.4

Loans held for sale

    6,835        3,552        92.4         6,370        2,811        *   

Investment securities (c)

    103,943        93,141        11.6         102,361        87,687        16.7   

Earning assets

    369,265        346,422        6.6         365,543        336,287        8.7   

Assets

    410,439        385,823        6.4         406,757        375,047        8.5   

Noninterest-bearing deposits

    80,940        74,126        9.2         77,623        72,274        7.4   

Deposits

    289,692        271,008        6.9         284,673        263,662        8.0   

Short-term borrowings

    27,525        30,961        (11.1      28,252        30,362        (6.9

Long-term debt

    33,202        26,658        24.5         34,015        24,864        36.8   

Total U.S. Bancorp shareholders’ equity

    44,867        43,132        4.0         44,489        42,498        4.7   
 
    September 30,
2015
    December 31,
2014
                          

Period End Balances

              

Loans

  $   254,791      $   247,851        2.8       

Investment securities

    105,086        101,043        4.0          

Assets

    415,943        402,529        3.3          

Deposits

    295,264        282,733        4.4          

Long-term debt

    32,504        32,260        .8          

Total U.S. Bancorp shareholders’ equity

    45,075        43,479        3.7          

Asset Quality

              

Nonperforming assets

  $ 1,567      $ 1,808        (13.3 )%        

Allowance for credit losses

    4,306        4,375        (1.6       

Allowance for credit losses as a percentage of period-end loans

    1.69     1.77           

Capital Ratios

              

Basel III transitional standardized approach:

              

Common equity tier 1 capital

    9.6     9.7           

Tier 1 capital

    11.1        11.3              

Total risk-based capital

    13.1        13.6              

Leverage

    9.3        9.3              

Common equity tier 1 capital to risk-weighted assets for the Basel III transitional advanced approaches

    13.0        12.4              

Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented standardized approach (d)

    9.2        9.0              

Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented advanced approaches (d)

    12.4        11.8              

Tangible common equity to tangible assets (d)

    7.7        7.5              

Tangible common equity to risk-weighted assets (d)

    9.3        9.3                                    

 

   * Not meaningful
(a) Presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding net securities gains (losses).
(c) Excludes unrealized gains and losses on available-for-sale investment securities and any premiums or discounts recorded related to the transfer of investment securities at fair value from available-for-sale to held-to-maturity.
(d) See Non-GAAP Financial Measures on page 34.

 

2    U.S. Bancorp


Table of Contents

Management’s Discussion and Analysis

 

OVERVIEW

Earnings Summary U.S. Bancorp and its subsidiaries (the “Company”) reported net income attributable to U.S. Bancorp of $1.5 billion for the third quarter of 2015, or $0.81 per diluted common share, compared with $1.5 billion, or $0.78 per diluted common share, for the third quarter of 2014. Return on average assets and return on average common equity were 1.44 percent and 14.1 percent, respectively, for the third quarter of 2015, compared with 1.51 percent and 14.5 percent, respectively, for the third quarter of 2014. The results for the third quarter of 2015 included a gain from the sale of Visa Inc. Class B common stock of approximately $135 million (“Visa sale”), and a $58 million market valuation adjustment to write down the value of student loans previously held for sale prior to transferring them back to held for investment, as a result of a recent disruption in the student loan securitization market (“student loan market adjustment”).

Total net revenue, on a taxable-equivalent basis, for the third quarter of 2015 was $157 million (3.1 percent) higher than the third quarter of 2014, reflecting a 2.7 percent increase in net interest income and a 3.7 percent increase in noninterest income. The increase in net interest income from the third quarter of 2014 was the result of an increase in average earning assets. The increase in noninterest income was primarily due to increases in commercial products, payments and trust and investment management fee revenue.

Noninterest expense in the third quarter of 2015 was $161 million (6.2 percent) higher than the third quarter of 2014, primarily due to increases in compensation and employee benefits expenses and other costs related to risk and compliance activities.

The provision for credit losses for the third quarter of 2015 of $282 million was $29 million (9.3 percent) lower than the third quarter of 2014. Net charge-offs in the third quarter of 2015 were $292 million, compared with $336 million in the third quarter of 2014. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

Net income attributable to U.S. Bancorp for the first nine months of 2015 was $4.4 billion, or $2.36 per diluted common share, compared with $4.4 billion, or $2.29 per diluted common share, for the first nine months of 2014. Return on average assets and return on average common equity were 1.45 percent and 14.1 percent, respectively, for the first nine months of 2015, compared with 1.56 percent and 14.7 percent, respectively, for the first nine months of 2014.

Total net revenue, on a taxable-equivalent basis, for the first nine months of 2015 was $103 million (0.7 percent) higher than the first nine months of 2014, reflecting a 1.8 percent increase in net interest income, partially offset by a 0.6 percent decrease in noninterest income. The increase in net interest income was the result of an increase in average earning assets and continued growth in lower cost core deposit funding, partially offset by a decrease in the net interest margin. The decrease in noninterest income from a year ago was primarily due to lower gains from 2014 and 2015 sales of shares of Visa Inc. Class B common stock, the 2015 student loan market adjustment and lower mortgage banking revenue, partially offset by higher revenue in most other fee businesses.

Noninterest expense in the first nine months of 2015 was $211 million (2.7 percent) higher than the first nine months of 2014, primarily due to higher compensation and employee benefits expenses, including the impact of the June 2014 acquisition of the Chicago-area branch banking operations of the Charter One Bank franchise (“Charter One”), and higher costs related to risk and compliance activities, partially offset by a settlement relating to the Federal Housing Administration’s insurance program (“FHA DOJ settlement”) recorded in the second quarter of 2014.

The provision for credit losses for the first nine months of 2015 of $827 million was $114 million (12.1 percent) lower than the first nine months of 2014. Net charge-offs in the first nine months of 2015 were $867 million, compared with $1.0 billion in the first nine months of 2014. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

 

 

U.S. Bancorp    3


Table of Contents

STATEMENT OF INCOME ANALYSIS

Net Interest Income Net interest income, on a taxable-equivalent basis, was $2.8 billion in the third quarter and $8.3 billion in the first nine months of 2015, representing increases of $73 million (2.7 percent) and $145 million (1.8 percent), respectively, over the same periods of 2014. The increases were principally the result of growth in average earning assets, partially offset by a continued shift in loan portfolio mix and lower reinvestment rates on investment securities. The increase in the first nine months of 2015 was further offset by lower loan fees due to the wind down of the short-term, small-dollar deposit advance product, Checking Account Advance (“CAA”). Average earning assets were $22.8 billion (6.6 percent) higher in the third quarter and $29.3 billion (8.7 percent) higher in the first nine months of 2015, compared with the same periods of 2014, driven by increases in investment securities and loans. The net interest margin, on a taxable-equivalent basis, in the third quarter and first nine months of 2015 was 3.04 percent and 3.05 percent, respectively, compared with 3.16 percent and 3.26 percent in the third quarter and first nine months of 2014, respectively. The decreases in the net interest margin from the same periods of the prior year primarily reflected a change in the loan portfolio mix as well as growth in the investment portfolio at lower average rates and lower reinvestment rates on investment securities. In addition, the decrease in the net interest margin for the first nine months of 2015, compared with the same period of the prior year, reflected lower loan fees due to the CAA product wind down. Refer to the “Consolidated Daily Average Balance Sheet and Related Yields and Rates” tables for further information on net interest income.

Average investment securities for the third quarter and first nine months of 2015 were $10.8 billion (11.6 percent) and $14.7 billion (16.7 percent) higher, respectively, than the same periods of 2014, primarily due to purchases of U.S. government and agency-backed securities, net of prepayments and maturities, to support regulatory liquidity coverage ratio requirements.

Average total loans for the third quarter and first nine months of 2015 were $6.7 billion (2.7 percent) and $8.3 billion (3.4 percent) higher, respectively, than the same periods of 2014, driven by growth in commercial loans, commercial real estate loans, credit card loans and other retail loans. The increases were driven by higher demand for loans from new and existing customers. The increases were partially offset by declines in residential mortgages and loans covered by loss sharing agreements with the Federal Deposit Insurance Corporation (“FDIC”), a run-off portfolio. Average loans acquired in FDIC-assisted transactions that are covered by loss sharing agreements with the FDIC (“covered” loans) decreased $2.3 billion (32.4 percent) in the third quarter and $2.7 billion (35.2 percent) in the first nine months of 2015, compared with the same periods of 2014. The decreases were primarily the result of the expiration of the loss sharing agreements on commercial and commercial real estate assets at the end of 2014.

Average total deposits for the third quarter and first nine months of 2015 were $18.7 billion (6.9 percent) and $21.0 billion (8.0 percent) higher, respectively, than the same periods of 2014. Average noninterest-bearing deposits for the third quarter and first nine months of 2015 increased $6.8 billion (9.2 percent) and $5.3 billion (7.4 percent), respectively, over the same periods of the prior year, mainly in Wholesale Banking and Commercial Real Estate and Consumer and Small Business Banking. Average total savings deposits for the third quarter and first nine months of 2015 were $19.4 billion (12.5 percent) and $21.3 billion (14.3 percent) higher, respectively, than the same periods of 2014, the result of growth in Consumer and Small Business Banking, including the impact of the Charter One branch acquisitions, corporate trust, and Wholesale Banking and Commercial Real Estate balances. The growth in Consumer and Small Business Banking deposits included net new account growth of 3.1 percent for the third quarter and 3.9 percent for the first nine months of 2015, compared with the same periods of 2014. Average time deposits less than $100,000 for the third quarter and first nine months of 2015 were $1.5 billion (13.5 percent) and $1.2 billion (10.7 percent) lower, respectively, than the same periods of the prior year, due to maturities. Average time deposits greater than $100,000 for the third quarter and first nine months of 2015 were $6.0 billion (19.7 percent) and $4.5 billion (14.5 percent) lower, respectively, than the same periods of the prior year, primarily due to declines in Wholesale Banking and Commercial Real Estate, corporate trust and Consumer and Small Business Banking balances. Time deposits greater than $100,000 are primarily managed as an alternative to other funding sources, such as wholesale borrowing, based largely on funding needs and relative pricing.

Provision for Credit Losses The provision for credit losses for the third quarter and first nine months of 2015 decreased $29 million (9.3 percent) and $114 million (12.1 percent), respectively, compared with the same periods of 2014. Net charge-offs decreased $44 million (13.1 percent) and $159 million (15.5 percent) in the third quarter and first nine months of 2015, respectively, compared with the same periods of the prior year, reflecting improvements in other retail, residential mortgages, and construction and development loans. The

 

4    U.S. Bancorp


Table of Contents
 Table 2  Noninterest Income

 

    Three Months Ended
September 30,
          Nine Months Ended
September 30,
 
(Dollars in Millions)   2015     2014     Percent
Change
          2015     2014      Percent
Change
 

Credit and debit card revenue

  $ 269      $ 251        7.2        $ 776      $ 749         3.6

Corporate payment products revenue

    190        195        (2.6          538        550         (2.2

Merchant processing services

    400        387        3.4             1,154        1,127         2.4   

ATM processing services

    81        81                    239        241         (.8

Trust and investment management fees

    329        315        4.4             985        930         5.9   

Deposit service charges

    185        185                    520        513         1.4   

Treasury management fees

    143        136        5.1             422        409         3.2   

Commercial products revenue

    231        209        10.5             645        635         1.6   

Mortgage banking revenue

    224        260        (13.8          695        774         (10.2

Investment products fees

    46        49        (6.1          141        142         (.7

Securities gains (losses), net

    (1     (3     66.7             (1     2         *   

Other

    229        177        29.4             638        722         (11.6

Total noninterest income

  $ 2,326      $ 2,242        3.7        $ 6,752      $ 6,794         (.6 )% 

 

* Not meaningful.

 

provision for credit losses was lower than net charge-offs by $10 million in the third quarter and $40 million in the first nine months of 2015, compared with $25 million in the third quarter and $85 million in the first nine months of 2014. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

Noninterest Income Noninterest income was $2.3 billion in the third quarter and $6.8 billion in the first nine months of 2015, representing an increase of $84 million (3.7 percent) and a decrease of $42 million (0.6 percent), respectively, compared with the same periods of 2014. The increase in the third quarter of 2015, compared with the third quarter of 2014, was primarily due to the third quarter 2015 Visa sale and increases in the majority of fee revenue categories, partially offset by the student loan market adjustment and lower mortgage banking revenue. The decrease in the first nine months of 2015, compared with the same period of the prior year, reflected lower other income from 2014 and 2015 Visa stock sales and the third quarter 2015 student loan market adjustment, as well as lower mortgage banking revenue, partially offset by increases in the majority of other fee revenue categories. The decreases in mortgage banking revenue were primarily due to unfavorable changes in the valuation of mortgage servicing rights (“MSRs”), net of hedging activities, partially offset by increases in mortgage production revenue. Commercial products revenue increased due to higher volumes of tax-advantaged project fees and increases in bond underwriting fees, partially offset by lower letter of credit fees. Credit and debit card revenue increased due to higher transaction volumes. Merchant processing services increased 3.4 percent in the third quarter and 2.4 percent in the first nine months of 2015, compared with the same periods of 2014, as a result of higher transaction volumes, account growth and equipment sales to merchants related to new chip card technology requirements. Adjusted for the impact of foreign currency rate changes, the increases would have been approximately 8.5 percent and 7.1 percent, respectively. In addition, trust and investment management fees increased reflecting the benefits of the Company’s investments in corporate trust and fund services businesses, as well as account growth and improved market conditions.

Noninterest Expense Noninterest expense of $2.8 billion in the third quarter and $8.1 billion in the first nine months of 2015 was $161 million (6.2 percent) and $211 million (2.7 percent) higher, respectively, than the same periods of 2014, reflecting higher compensation, employee benefits and other costs related to compliance activities in the current year. The increases in compensation expense primarily reflected the impact of merit increases and higher staffing for risk and compliance activities. In addition, the increase in compensation expense for the first nine months of 2015, compared with the same period of the prior year, reflected the impact of the Charter One branch acquisitions. The increases in employee benefits expense were primarily driven by higher pension costs. The increase in marketing and development expense in the third quarter of 2015, compared with the same period of the prior year, was primarily due to various marketing programs in Payment Services and Consumer and Small Business Banking. Offsetting the increases in noninterest expense in the first nine months of 2015, compared with the same period of the prior year, was the second quarter 2014 FHA DOJ settlement included in other expense.

 

U.S. Bancorp    5


Table of Contents
 Table 3  Noninterest Expense

 

    Three Months Ended
September 30,
          Nine Months Ended
September 30,
 
(Dollars in Millions)   2015     2014     Percent
Change
          2015     2014     Percent
Change
 

Compensation

  $ 1,225      $ 1,132        8.2        $ 3,600      $ 3,372        6.8

Employee benefits

    285        250        14.0             895        796        12.4   

Net occupancy and equipment

    251        249        .8             745        739        .8   

Professional services

    115        102        12.7             298        282        5.7   

Marketing and business development

    99        78        26.9             265        253        4.7   

Technology and communications

    222        219        1.4             657        644        2.0   

Postage, printing and supplies

    77        81        (4.9          223        242        (7.9

Other intangibles

    42        51        (17.6          128        148        (13.5

Other

    459        452        1.5             1,311        1,435        (8.6

Total noninterest expense

  $ 2,775      $ 2,614        6.2        $ 8,122      $ 7,911        2.7

Efficiency ratio (a)

    53.9     52.4                  53.8     52.8        

 

(a) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding net securities gains (losses).

 

Income Tax Expense The provision for income taxes was $534 million (an effective rate of 26.2 percent) for the third quarter and $1.5 billion (an effective rate of 25.7 percent) for the first nine months of 2015, compared with $523 million (an effective rate of 26.0 percent) and $1.6 billion (an effective rate of 26.2 percent) for the same periods of 2014. For further information on income taxes, refer to Note 11 of the Notes to Consolidated Financial Statements.

BALANCE SHEET ANALYSIS

Loans The Company’s loan portfolio was $254.8 billion at September 30, 2015, compared with $247.9 billion at December 31, 2014, an increase of $6.9 billion (2.8 percent). The increase was driven primarily by higher commercial loans, residential mortgages and other retail loans, partially offset by lower commercial real estate loans and covered loans.

Commercial loans increased $5.2 billion (6.4 percent) at September 30, 2015, compared with December 31, 2014, reflecting higher demand from new and existing customers. In addition, other retail loans increased $1.8 billion (3.6 percent) at September 30, 2015, compared with December 31, 2014. The increase was driven primarily by higher auto and installment loan balances, partially offset by lower retail leasing and student loan balances.

Residential mortgages held in the loan portfolio increased $730 million (1.4 percent) at September 30, 2015, compared with December 31, 2014, reflecting higher origination and refinancing activity during 2015. Residential mortgages originated and placed in the Company’s loan portfolio include well-secured jumbo mortgages and branch-originated first lien home equity loans to borrowers with high credit quality.

Credit card loans increased $68 million (0.4 percent) at September 30, 2015, compared with December 31, 2014, including the acquisition of a credit card portfolio late in the third quarter of 2015, partially offset by customers seasonally paying down balances.

Commercial real estate loans decreased $317 million (0.7 percent) at September 30, 2015, compared with December 31, 2014, primarily the result of customers paying down balances.

The Company generally retains portfolio loans through maturity; however, the Company’s intent may change over time based upon various factors such as ongoing asset/liability management activities, assessment of product profitability, credit risk, liquidity needs, and capital implications. If the Company’s intent or ability to hold an existing portfolio loan changes, the loan is transferred to loans held for sale.

Loans Held for Sale Loans held for sale, consisting of residential mortgages and other loans to be sold in the secondary market, were $4.5 billion at September 30, 2015, compared with $4.8 billion at December 31, 2014. Almost all of the residential mortgage loans the Company originates or purchases for sale follow guidelines that allow the loans to be sold into existing, highly liquid secondary markets; in particular in government agency transactions and to government-sponsored enterprises.

Investment Securities Investment securities totaled $105.1 billion at September 30, 2015, compared with $101.0 billion at December 31, 2014. The $4.0 billion (4.0 percent) increase reflected $4.0 billion of net investment purchases, as well as a $55 million favorable change in net unrealized gains (losses) on available-for-sale investment securities.

The Company’s available-for-sale securities are carried at fair value with changes in fair value reflected in other comprehensive income (loss) unless a security is deemed to be other-than-temporarily impaired. At September 30, 2015, the Company’s net unrealized gains on available-for-sale securities were $692 million,

 

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 Table 4  Investment Securities

 

    Available-for-Sale           Held-to-Maturity  

At September 30, 2015

(Dollars in Millions)

  Amortized
Cost
    

Fair

Value

     Weighted-
Average
Maturity in
Years
     Weighted-
Average
Yield (e)
          Amortized
Cost
    

Fair

Value

     Weighted-
Average
Maturity in
Years
     Weighted-
Average
Yield (e)
 

U.S. Treasury and Agencies

                          

Maturing in one year or less

  $ 374       $ 375         .4         2.52        $       $                

Maturing after one year through five years

    1,488         1,509         2.8         1.42             1,098         1,114         2.9         1.42   

Maturing after five years through ten years

    972         989         6.9         2.28             1,783         1,805         7.0         2.15   

Maturing after ten years

    1         1         11.9         4.15             56         56         10.1         1.78   

Total

  $ 2,835       $ 2,874         3.9         1.86        $ 2,937       $ 2,975         5.5         1.87

Mortgage-Backed Securities (a)

                          

Maturing in one year or less

  $ 836       $ 840         .7         1.68        $ 349       $ 350         .7         1.69

Maturing after one year through five years

    38,148         38,531         4.0         1.83             36,027         36,296         3.7         1.96   

Maturing after five years through ten years

    10,540         10,625         5.7         1.43             5,161         5,206         5.6         1.21   

Maturing after ten years

    558         560         12.8         1.25             168         168         11.3         1.22   

Total

  $ 50,082       $ 50,556         4.4         1.73        $ 41,705       $ 42,020         3.9         1.86

Asset-Backed Securities (a)

                          

Maturing in one year or less

  $ 52       $ 53         .5         .18        $       $ 1         .2         .82

Maturing after one year through five years

    199         205         3.5         3.00             5         8         2.4         .86   

Maturing after five years through ten years

    354         361         6.2         2.16             4         4         5.8         .92   

Maturing after ten years

                                        1         7         11.9         .95   

Total

  $ 605       $ 619         4.8         2.26        $ 10       $ 20         4.7         .89

Obligations of State and Political Subdivisions (b) (c)

                          

Maturing in one year or less

  $ 1,581       $ 1,614         .6         7.01        $       $         .2         9.50

Maturing after one year through five years

    2,753         2,891         1.8         6.91             1         1         2.7         7.93   

Maturing after five years through ten years

    635         639         7.2         5.40             1         2         8.0         7.78   

Maturing after ten years

    152         158         16.6         6.81             6         5         10.6         1.73   

Total

  $ 5,121       $ 5,302         2.5         6.75        $ 8       $ 8         9.0         3.72

Other Debt Securities

                          

Maturing in one year or less

  $       $                        $ 1       $ 1         .8         1.39

Maturing after one year through five years

                                        8         8         1.6         1.50   

Maturing after five years through ten years

                                        21         19         5.1         1.05   

Maturing after ten years

    677         616         17.8         2.55                                       

Total

  $ 677       $ 616         17.8         2.55        $ 30       $ 28         4.0         1.18

Other Investments

  $ 384       $ 429         11.6         2.41        $       $                

Total investment securities (d)

  $ 59,704       $ 60,396         4.4         2.19        $ 44,690       $ 45,051         4.0         1.86

 

(a) Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities anticipating future prepayments.
(b) Information related to obligations of state and political subdivisions is presented based upon yield to first optional call date if the security is purchased at a premium, yield to maturity if purchased at par or a discount.
(c) Maturity calculations for obligations of state and political subdivisions are based on the first optional call date for securities with a fair value above par and contractual maturity for securities with a fair value equal to or below par.
(d) The weighted-average maturity of the available-for-sale investment securities was 4.3 years at December 31, 2014, with a corresponding weighted-average yield of 2.32 percent. The weighted-average maturity of the held-to-maturity investment securities was 4.0 years at December 31, 2014, with a corresponding weighted-average yield of 1.92 percent.
(e) Average yields are presented on a fully-taxable equivalent basis under a tax rate of 35 percent. Yields on available-for-sale and held-to-maturity investment securities are computed based on amortized cost balances, excluding any premiums or discounts recorded related to the transfer of investment securities at fair value from available-for-sale to held-to-maturity. Average yield and maturity calculations exclude equity securities that have no stated yield or maturity.

 

    September 30, 2015           December 31, 2014  
(Dollars in Millions)   Amortized
Cost
     Percent
of Total
          Amortized
Cost
     Percent
of Total
 

U.S. Treasury and agencies

  $ 5,772         5.5        $ 5,339         5.3

Mortgage-backed securities

    91,787         87.9             87,645         87.3   

Asset-backed securities

    615         .6             638         .6   

Obligations of state and political subdivisions

    5,129         4.9             5,613         5.6   

Other debt securities and investments

    1,091         1.1             1,171         1.2   

Total investment securities

  $ 104,394         100.0        $ 100,406         100.0

 

compared with $637 million at December 31, 2014. Gross unrealized losses on available-for-sale securities totaled $218 million at September 30, 2015, compared with $343 million at December 31, 2014. At September 30, 2015, the Company had no plans to sell securities with unrealized losses, and believes it is more likely than not that it would not be required to sell such securities before recovery of their amortized cost.

 

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In December 2013, U.S. banking regulators approved final rules that prohibit banks from holding certain types of investments, such as investments in hedge and certain private equity funds. The Company does not anticipate the implementation of these final rules will require any significant liquidation of securities held or impairment charges. Refer to Notes 3 and 14 in the Notes to Consolidated Financial Statements for further information on investment securities.

Deposits Total deposits were $295.3 billion at September 30, 2015, compared with $282.7 billion at December 31, 2014, the result of increases in total savings deposits and noninterest-bearing deposits, partially offset by a decrease in time deposits. Money market savings account balances increased $4.6 billion (6.0 percent) primarily due to higher Wholesale Banking and Commercial Real Estate and broker dealer balances. Interest checking balances increased $2.8 billion (5.0 percent) primarily due to higher corporate trust, Consumer and Small Business Banking, and Wholesale Banking and Commercial Real Estate balances, partially offset by lower broker dealer balances. Savings account balances increased $2.3 billion (6.6 percent), primarily due to higher Consumer and Small Business Banking balances. Noninterest-bearing deposits increased $6.2 billion (8.1 percent) at September 30, 2015, compared with December 31, 2014, primarily due to higher Wholesale Banking and Commercial Real Estate, Consumer and Small Business Banking, and corporate trust balances. Time deposits less than $100,000 decreased $1.2 billion (11.8 percent) at September 30, 2015, compared with December 31, 2014, primarily due to lower Consumer and Small Business Banking balances resulting from maturities. Time deposits greater than $100,000 decreased $2.1 billion (7.5 percent) at September 30, 2015, compared with December 31, 2014. Time deposits greater than $100,000 are primarily managed as an alternative to other funding sources, such as wholesale borrowing, based largely on funding needs and relative pricing.

Borrowings The Company utilizes both short-term and long-term borrowings as part of its asset/liability management and funding strategies. Short-term borrowings, which include federal funds purchased, commercial paper, repurchase agreements, borrowings secured by high-grade assets and other short-term borrowings, were $26.9 billion at September 30, 2015, compared with $29.9 billion at December 31, 2014. The $3.0 billion (10.0 percent) decrease in short-term borrowings was primarily due to decreases in short-term Federal Home Loan Bank (“FHLB”) advances and other short-term borrowings balances. Long-term debt was $32.5 billion at September 30, 2015, compared with $32.3 billion at December 31, 2014. The $244 million (0.8 percent) increase reflected the issuance of $2.3 billion of bank notes and a $1.9 billion increase in long-term FHLB advances, offset by $1.4 billion of bank note repayments, and $2.7 billion of medium-term note and subordinated bank note maturities. Refer to the “Liquidity Risk Management” section for discussion of liquidity management of the Company.

CORPORATE RISK PROFILE

Overview Managing risks is an essential part of successfully operating a financial services company. The Company’s Board of Directors has approved a risk management framework which establishes governance and risk management requirements for all risk-taking activities. This framework includes Company and business line risk appetite statements which set boundaries for the types and amount of risk that may be undertaken in pursuing business objectives and initiatives. The Board of Directors, through its Risk Management Committee, oversees performance relative to the risk management framework, risk appetite statements, and other policy requirements.

The Executive Risk Committee (“ERC”), which is chaired by the Chief Risk Officer and includes the Chief Executive Officer and other members of the executive management team, oversees execution against the risk management framework and risk appetite statements. The ERC focuses on current and emerging risks, including strategic and reputational risks, by directing timely and comprehensive actions. Senior operating committees have also been established, each responsible for overseeing a specified category of risk.

The Company’s most prominent risk exposures are credit, interest rate, market, liquidity, operational, compliance, strategic, and reputational. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan, investment or derivative contract when it is due. Interest rate risk is the potential reduction of net interest income or market valuations as a result of changes in interest rates. Market risk arises from fluctuations in interest rates, foreign exchange rates, and security prices that may result in changes in the values of financial instruments, such as trading and available-for-sale securities, mortgage loans held for sale, MSRs and derivatives that are accounted for on a fair value basis. Liquidity risk is the possible inability to fund obligations or new business at a reasonable cost and in a timely manner. Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, or systems, or from external events, including the risk of

 

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loss resulting from breaches in data security. Operational risk can also include failures by third parties with which the Company does business. Compliance risk is the risk of loss arising from violations of, or nonconformance with, laws, rules, regulations, prescribed practices, internal policies, and procedures, or ethical standards, potentially exposing the Company to fines, civil money penalties, payment of damages, and the voiding of contracts. Compliance risk also arises in situations where the laws or rules governing certain Company products or activities of the Company’s customers may be ambiguous or untested. Strategic risk is the risk to earnings or capital arising from adverse business decisions or improper implementation of those decisions. Reputational risk is the risk to current or anticipated earnings, capital, or franchise or enterprise value arising from negative public opinion. This risk may impair the Company’s competitiveness by affecting its ability to establish new relationships or services, or continue servicing existing relationships. In addition to the risks identified above, other risk factors exist that may impact the Company. Refer to “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, for a detailed discussion of these factors.

The Company’s Board and management-level governance committees are supported by a “three lines of defense” model for establishing effective checks and balances. The first line of defense, the business lines, manages risks in conformity with established limits and policy requirements. In turn, business leaders and their risk officers establish programs to ensure conformity with these limits and policy requirements. The second line of defense, which includes the Chief Risk Officer’s organization as well as policy and oversight activities of corporate support functions, translates risk appetite and strategy into actionable risk limits and policies. The second line of defense monitors first line of defense conformity with limits and policies, and provides reporting and escalation of emerging risks and other concerns to senior management and the Risk Management Committee of the Board of Directors. The third line of defense, internal audit, is responsible for providing the Audit Committee of the Board of Directors and senior management with independent assessment and assurance regarding the effectiveness of the Company’s governance, risk management, and control processes.

Management provides various risk reports to the Risk Management Committee of the Board of Directors. The Risk Management Committee discusses with management the Company’s risk management performance, and provides a summary of key risks to the entire Board of Directors, covering the status of existing matters, areas of potential future concern, and specific information on certain types of loss events. The Risk Management Committee considers quarterly reports by management assessing the Company’s performance relative to the risk appetite statements and the associated risk limits, including:

  Qualitative considerations, such as the macroeconomic environment, regulatory and compliance changes, litigation developments, and technology and cybersecurity;
  Capital ratios and projections, including regulatory measures and stressed scenarios;
  Credit measures, including adversely rated and nonperforming loans, leveraged transactions, credit concentrations and lending limits;
  Interest rate and market risk, including market value and net income simulation, and trading-related Value at Risk;
  Liquidity risk, including funding projections under various stressed scenarios;
  Operational and compliance risk, including losses stemming from events such as fraud, processing errors, control breaches, breaches in data security, or adverse business decisions, as well as reporting on technology performance, and various legal and regulatory compliance measures; and
  Reputational and strategic risk considerations, impacts and responses.

Credit Risk Management The Company’s strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance and macroeconomic factors, such as changes in unemployment rates, gross domestic product and consumer bankruptcy filings. The Risk Management Committee oversees the Company’s credit risk management process.

In addition, credit quality ratings, as defined by the Company, are an important part of the Company’s overall credit risk management and evaluation of its allowance for credit losses. Loans with a pass rating represent those loans not classified on the Company’s rating scale for problem credits, as minimal risk has been identified. Loans with a special mention or classified rating, including loans that are 90 days or more past due and still accruing, nonaccrual loans, those considered troubled debt restructurings (“TDRs”), and loans in a junior lien position that are current but are behind a modified or delinquent loan in a first lien position, encompass all loans held by the Company that it

 

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considers to have a potential or well-defined weakness that may put full collection of contractual cash flows at risk. The Company’s internal credit quality ratings for consumer loans are primarily based on delinquency and nonperforming status, except for a limited population of larger loans within those portfolios that are individually evaluated. For this limited population, the determination of the internal credit quality rating may also consider collateral value and customer cash flows. The Company obtains recent collateral value estimates for the majority of its residential mortgage and home equity and second mortgage portfolios, which allows the Company to compute estimated loan-to-value (“LTV”) ratios reflecting current market conditions. These individual refreshed LTV ratios are considered in the determination of the appropriate allowance for credit losses. However, the underwriting criteria the Company employs consider the relevant income and credit characteristics of the borrower, such that the collateral is not the primary source of repayment. Refer to Note 4 in the Notes to Consolidated Financial Statements for further discussion of the Company’s loan portfolios including internal credit quality ratings. In addition, refer to “Management’s Discussion and Analysis — Credit Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, for a more detailed discussion on credit risk management processes.

The Company manages its credit risk, in part, through diversification of its loan portfolio and limit setting by product type criteria and concentrations. As part of its normal business activities, the Company offers a broad array of lending products. The Company categorizes its loan portfolio into three segments, which is the level at which it develops and documents a systematic methodology to determine the allowance for credit losses. The Company’s three loan portfolio segments are commercial lending, consumer lending and covered loans. The commercial lending segment includes loans and leases made to small business, middle market, large corporate, commercial real estate, financial institution, non-profit and public sector customers. Key risk characteristics relevant to commercial lending segment loans include the industry and geography of the borrower’s business, purpose of the loan, repayment source, borrower’s debt capacity and financial flexibility, loan covenants, and nature of pledged collateral, if any. These risk characteristics, among others, are considered in determining estimates about the likelihood of default by the borrowers and the severity of loss in the event of default. The Company considers these risk characteristics in assigning internal risk ratings to, or forecasting losses on, these loans which are the significant factors in determining the allowance for credit losses for loans in the commercial lending segment. At September 30, 2015, approximately $3.2 billion of the commercial loans outstanding were to customers in energy-related businesses, compared with $3.1 billion at December 31, 2014. The recent decline in energy prices has resulted in deterioration to some of these loans; however, its impact has not been material to the Company.

The consumer lending segment represents loans and leases made to consumer customers including residential mortgages, credit card loans, and other retail loans such as revolving consumer lines, auto loans and leases, student loans, and home equity loans and lines. Home equity or second mortgage loans are junior lien closed-end accounts fully disbursed at origination. These loans typically are fixed rate loans, secured by residential real estate, with a 10- or 15-year fixed payment amortization schedule. Home equity lines are revolving accounts giving the borrower the ability to draw and repay balances repeatedly, up to a maximum commitment, and are secured by residential real estate. These include accounts in either a first or junior lien position. Typical terms on home equity lines in the portfolio are variable rates benchmarked to the prime rate, with a 10- or 15-year draw period during which a minimum payment is equivalent to the monthly interest, followed by a 20- or 10-year amortization period, respectively. At September 30, 2015, substantially all of the Company’s home equity lines were in the draw period. Approximately $895 million, or 6 percent, of the outstanding home equity line balances at September 30, 2015, will enter the amortization period within the next 36 months. Key risk characteristics relevant to consumer lending segment loans primarily relate to the borrowers’ capacity and willingness to repay and include unemployment rates and other economic factors, customer payment history and in some cases, updated LTV information on real estate based loans. These risk characteristics, among others, are reflected in forecasts of delinquency levels, bankruptcies and losses which are the primary factors in determining the allowance for credit losses for the consumer lending segment.

The covered loan segment represents loans acquired in FDIC-assisted transactions that are covered by loss sharing agreements with the FDIC that greatly reduce the risk of future credit losses to the Company. Key risk characteristics for covered segment loans are consistent with the segment they would otherwise be included in had the loss share coverage not been in place, but consider the indemnification provided by the FDIC.

 

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The Company further disaggregates its loan portfolio segments into various classes based on their underlying risk characteristics. The two classes within the commercial lending segment are commercial loans and commercial real estate loans. The three classes within the consumer lending segment are residential mortgages, credit card loans and other retail loans. The covered loan segment consists of only one class.

The Company’s consumer lending segment utilizes several distinct business processes and channels to originate consumer credit, including traditional branch lending, indirect lending, portfolio acquisitions, correspondent banks and loan brokers. Each distinct underwriting and origination activity manages unique credit risk characteristics and prices its loan production commensurate with the differing risk profiles.

Residential mortgages are originated through the Company’s branches, loan production offices and a wholesale network of originators. The Company may retain residential mortgage loans it originates on its balance sheet or sell the loans into the secondary market while retaining the servicing rights and customer relationships. Utilizing the secondary markets enables the Company to effectively reduce its credit and other asset/liability risks. For residential mortgages that are retained in the Company’s portfolio and for home equity and second mortgages, credit risk is also diversified by geography and managed by adherence to LTV and borrower credit criteria during the underwriting process.

The Company estimates updated LTV information quarterly, based on a method that combines automated valuation model updates and relevant home price indices. LTV is the ratio of the loan’s outstanding principal balance to the current estimate of property value. For home equity and second mortgages, combined loan-to-value (“CLTV”) is the combination of the first mortgage original principal balance and the second lien outstanding principal balance, relative to the current estimate of property value. Certain loans do not have a LTV or CLTV, primarily due to lack of availability of relevant automated valuation model and/or home price indices values, or lack of necessary valuation data on acquired loans.

The following tables provide summary information for the LTVs of residential mortgages and home equity and second mortgages by borrower type at September 30, 2015:

 

Residential mortgages

(Dollars in Millions)

  Interest
Only
    Amortizing     Total     Percent
of Total
 

Prime Borrowers

       

Less than or equal to 80%

  $ 1,780      $ 39,166      $ 40,946        89.6

Over 80% through 90%

    91        2,509        2,600        5.7   

Over 90% through 100%

    69        961        1,030        2.2   

Over 100%

    75        960        1,035        2.3   

No LTV available

           80        80        .2   

Total

  $ 2,015      $ 43,676      $ 45,691        100.0

Sub-Prime Borrowers

       

Less than or equal to 80%

  $      $ 585      $ 585        52.7

Over 80% through 90%

           180        180        16.2   

Over 90% through 100%

           148        148        13.3   

Over 100%

           198        198        17.8   

No LTV available

                           

Total

  $      $ 1,111      $ 1,111        100.0

Other Borrowers

       

Less than or equal to 80%

  $ 2      $ 406      $ 408        60.7

Over 80% through 90%

           97        97        14.4   

Over 90% through 100%

           55        55        8.2   

Over 100%

           112        112        16.7   

No LTV available

                           

Total

  $ 2      $ 670      $ 672        100.0

Loans Purchased From GNMA Mortgage Pools (a)

  $      $ 4,875      $ 4,875        100.0

Total

       

Less than or equal to 80%

  $ 1,782      $ 40,157      $ 41,939        80.1

Over 80% through 90%

    91        2,786        2,877        5.5   

Over 90% through 100%

    69        1,164        1,233        2.4   

Over 100%

    75        1,270        1,345        2.6   

No LTV available

           80        80        .1   

Loans purchased from GNMA mortgage pools (a)

           4,875        4,875        9.3   

Total

  $ 2,017      $ 50,332      $ 52,349        100.0

 

(a) Represents loans purchased from Government National Mortgage Association (“GNMA”) mortgage pools whose payments are primarily insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.

 

Home equity and second mortgages
(Dollars in Millions)
  Lines     Loans     Total     Percent
of Total
 

Prime Borrowers

       

Less than or equal to 80%

  $ 10,548      $ 537      $ 11,085        71.3

Over 80% through 90%

    2,228        361        2,589        16.7   

Over 90% through 100%

    742        104        846        5.4   

Over 100%

    805        141        946        6.1   

No LTV/CLTV available

    52        29        81        .5   

Total

  $ 14,375      $ 1,172      $ 15,547        100.0

Sub-Prime Borrowers

       

Less than or equal to 80%

  $ 37      $ 24      $ 61        29.9

Over 80% through 90%

    11        20        31        15.2   

Over 90% through 100%

    9        21        30        14.7   

Over 100%

    17        59        76        37.3   

No LTV/CLTV available

    1        5        6        2.9   

Total

  $ 75      $ 129      $ 204        100.0

Other Borrowers

       

Less than or equal to 80%

  $ 339      $ 14      $ 353        80.8

Over 80% through 90%

    51        4        55        12.6   

Over 90% through 100%

    12        2        14        3.2   

Over 100%

    12        2        14        3.2   

No LTV/CLTV available

    1               1        .2   

Total

  $ 415      $ 22      $ 437        100.0

Total

       

Less than or equal to 80%

  $ 10,924      $ 575      $ 11,499        71.0

Over 80% through 90%

    2,290        385        2,675        16.5   

Over 90% through 100%

    763        127        890        5.5   

Over 100%

    834        202        1,036        6.4   

No LTV/CLTV available

    54        34        88        .6   

Total

  $ 14,865      $ 1,323      $ 16,188        100.0

 

U.S. Bancorp    11


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At September 30, 2015, approximately $1.1 billion of residential mortgages were to customers that may be defined as sub-prime borrowers based on credit scores from independent agencies at loan origination, compared with $1.2 billion at December 31, 2014. In addition to residential mortgages, at September 30, 2015, $204 million of home equity and second mortgage loans were to customers that may be defined as sub-prime borrowers, compared with $238 million at December 31, 2014. The total amount of consumer lending segment residential mortgage, home equity and second mortgage loans to customers that may be defined as sub-prime borrowers represented only 0.3 percent of total assets at September 30, 2015, compared with 0.4 percent at December 31, 2014. The Company considers sub-prime loans to be those made to borrowers with a risk of default significantly higher than those approved for prime lending programs, as reflected in credit scores obtained from independent agencies at loan origination, in addition to other credit underwriting criteria. Sub-prime portfolios include only loans originated according to the Company’s underwriting programs specifically designed to serve customers with weakened credit histories. The sub-prime designation indicators have been and will continue to be subject to re-evaluation over time as borrower characteristics, payment performance and economic conditions change. The sub-prime loans originated during periods from June 2009 and after are with borrowers who met the Company’s program guidelines and have a credit score that generally is at or below a threshold of 620 to 650 depending on the program. Sub-prime loans originated during periods prior to June 2009 were based upon program level guidelines without regard to credit score.

Home equity and second mortgages were $16.2 billion at September 30, 2015, compared with $15.9 billion at December 31, 2014, and included $5.0 billion of home equity lines in a first lien position and $11.2 billion of home equity and second mortgage loans and lines in a junior lien position. Loans and lines in a junior lien position at September 30, 2015, included approximately $4.4 billion of loans and lines for which the Company also serviced the related first lien loan, and approximately $6.8 billion where the Company did not service the related first lien loan. The Company was able to determine the status of the related first liens using information the Company has as the servicer of the first lien or information reported on customer credit bureau files. The Company also evaluates other indicators of credit risk for these junior lien loans and lines including delinquency, estimated average CLTV ratios and updated weighted-average credit scores in making its assessment of credit risk, related loss estimates and determining the allowance for credit losses.

The following table provides a summary of delinquency statistics and other credit quality indicators for the Company’s junior lien positions at September 30, 2015:

 

    Junior Liens Behind        
(Dollars in Millions)  

Company Owned
or Serviced

First Lien

    Third Party
First Lien
    Total  

Total

  $ 4,373      $ 6,809      $ 11,182   

Percent 30-89 days past due

    .25     .42     .36

Percent 90 days or more past due

    .05     .10     .08

Weighted-average CLTV

    74     71     72

Weighted-average credit score

    772        765        768   

See the Analysis and Determination of the Allowance for Credit Losses section for additional information on how the Company determines the allowance for credit losses for loans in a junior lien position.

 

12    U.S. Bancorp


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 Table 5  Delinquent Loan Ratios as a Percent of Ending Loan Balances

 

90 days or more past due excluding nonperforming loans   September 30,
2015
    December 31,
2014
 

Commercial

   

Commercial

    .05     .05

Lease financing

             

Total commercial

    .05        .05   

Commercial Real Estate

   

Commercial mortgages

    .01        .02   

Construction and development

    .16        .14   

Total commercial real estate

    .05        .05   

Residential Mortgages (a)

    .33        .40   

Credit Card

    1.10        1.13   

Other Retail

   

Retail leasing

    .02        .02   

Home equity and second mortgages

    .25        .26   

Other

    .10        .12   

Total other retail (b)

    .14        .15   

Total loans, excluding covered loans

    .20        .23   

Covered Loans

    6.57        7.48   

Total loans

    .32     .38
90 days or more past due including nonperforming loans   September 30,
2015
    December 31,
2014
 

Commercial

    .25     .19

Commercial real estate

    .39        .65   

Residential mortgages (a)

    1.73        2.07   

Credit card

    1.16        1.30   

Other retail (b)

    .47        .53   

Total loans, excluding covered loans

    .70        .83   

Covered loans

    6.80        7.74   

Total loans

    .81     .97

 

(a) Delinquent loan ratios exclude $2.9 billion at September 30, 2015, and $3.1 billion at December 31, 2014, of loans purchased from GNMA mortgage pools whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. Including these loans, the ratio of residential mortgages 90 days or more past due including all nonperforming loans was 7.26 percent at September 30, 2015, and 8.02 percent at December 31, 2014.
(b) Delinquent loan ratios exclude student loans that are guaranteed by the federal government. Including these loans, the ratio of total other retail loans 90 days or more past due including all nonperforming loans was ..71 percent at September 30, 2015, and .84 percent at December 31, 2014.

 

Loan Delinquencies Trends in delinquency ratios are an indicator, among other considerations, of credit risk within the Company’s loan portfolios. The Company measures delinquencies, both including and excluding nonperforming loans, to enable comparability with other companies. Accruing loans 90 days or more past due totaled $825 million ($510 million excluding covered loans) at September 30, 2015, compared with $945 million ($550 million excluding covered loans) at December 31, 2014. These balances exclude loans purchased from Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. Accruing loans 90 days or more past due are not included in nonperforming assets and continue to accrue interest because they are adequately secured by collateral, are in the process of collection and are reasonably expected to result in repayment or restoration to current status, or are managed in homogeneous portfolios with specified charge-off timeframes adhering to regulatory guidelines. The ratio of accruing loans 90 days or more past due to total loans was 0.32 percent (0.20 percent excluding covered loans) at September 30, 2015, compared with 0.38 percent (0.23 percent excluding covered loans) at December 31, 2014.

 

U.S. Bancorp    13


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The following table provides summary delinquency information for residential mortgages, credit card and other retail loans included in the consumer lending segment:

 

    Amount           

As a Percent of Ending

Loan Balances

 
(Dollars in Millions)   September 30,
2015
     December 31,
2014
           September 30,
2015
    December 31,
2014
 

Residential Mortgages (a)

              

30-89 days

  $ 181       $ 221              .35     .43

90 days or more

    171         204              .33        .40   

Nonperforming

    735         864              1.40        1.67   

Total

  $ 1,087       $ 1,289              2.08     2.50

Credit Card

              

30-89 days

  $ 235       $ 229              1.27     1.24

90 days or more

    204         210              1.10        1.13   

Nonperforming

    12         30              .06        .16   

Total

  $ 451       $ 469              2.43     2.53

Other Retail

              

Retail Leasing

              

30-89 days

  $ 10       $ 11              .18     .18

90 days or more

    1         1              .02        .02   

Nonperforming

    2         1              .04        .02   

Total

  $ 13       $ 13              .24     .22

Home Equity and Second Mortgages

              

30-89 days

  $ 57       $ 85              .36     .54

90 days or more

    41         42              .25        .26   

Nonperforming

    148         170              .91        1.07   

Total

  $ 246       $ 297              1.52     1.87

Other (b)

              

30-89 days

  $ 135       $ 142              .46     .51

90 days or more

    29         32              .10        .12   

Nonperforming

    21         16              .07        .06   

Total

  $ 185       $ 190              .63     .69

 

(a) Excludes $337 million of loans 30-89 days past due and $2.9 billion of loans 90 days or more past due at September 30, 2015, purchased from GNMA mortgage pools that continue to accrue interest, compared with $431 million and $3.1 billion at December 31, 2014, respectively.
(b) Includes revolving credit, installment, automobile and student loans.

 

The following tables provide further information on residential mortgages and home equity and second mortgages as a percent of ending loan balances by borrower type:

 

Residential mortgages (a)   September 30,
2015
    December 31,
2014
 

Prime Borrowers

   

30-89 days

    .29     .33

90 days or more

    .30        .35   

Nonperforming

    1.18        1.42   

Total

    1.77     2.10

Sub-Prime Borrowers

   

30-89 days

    3.42     5.12

90 days or more

    2.61        3.41   

Nonperforming

    15.21        16.73   

Total

    21.24     25.26

Other Borrowers

   

30-89 days

    1.34     1.37

90 days or more

    1.04        1.13   

Nonperforming

    3.87        3.50   

Total

    6.25     6.00

 

(a) Excludes delinquent and nonperforming information on loans purchased from GNMA mortgage pools as their repayments are primarily insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.

 

Home equity and second mortgages   September 30,
2015
    December 31,
2014
 

Prime Borrowers

   

30-89 days

    .30     .47

90 days or more

    .22        .24   

Nonperforming

    .82        .95   

Total

    1.34     1.66

Sub-Prime Borrowers

   

30-89 days

    1.96     3.36

90 days or more

    .98        1.26   

Nonperforming

    4.90        5.88   

Total

    7.84     10.50

Other Borrowers

   

30-89 days

    1.37     1.18

90 days or more

    .92        .40   

Nonperforming

    2.52        2.36   

Total

    4.81     3.94

The following table provides summary delinquency information for covered loans:

 

    Amount         

As a Percent of Ending

Loan Balances

 
(Dollars in Millions)   September 30,
2015
    December 31,
2014
         September 30,
2015
    December 31,
2014
 

30-89 days

  $ 61      $ 68            1.28     1.28

90 days or more

    315        395            6.57        7.48   

Nonperforming

    11        14            .23        .27   

Total

  $ 387      $ 477            8.08     9.03

 

14    U.S. Bancorp


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Restructured Loans In certain circumstances, the Company may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term. In most cases the modification is either a concessionary reduction in interest rate, extension of the maturity date or reduction in the principal balance that would otherwise not be considered.

Troubled Debt Restructurings Concessionary modifications are classified as TDRs unless the modification results in only an insignificant delay in the payments to be received. TDRs accrue interest if the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles, which is generally six months or greater. At September 30, 2015, performing TDRs were $4.8 billion, compared with $5.1 billion at December 31, 2014. Loans classified as TDRs are considered impaired loans for reporting and measurement purposes.

The Company continues to work with customers to modify loans for borrowers who are experiencing financial difficulties, including those acquired through FDIC-assisted acquisitions. Many of the Company’s TDRs are determined on a case-by-case basis in connection with ongoing loan collection processes. The modifications vary within each of the Company’s loan classes. Commercial lending segment TDRs generally include extensions of the maturity date and may be accompanied by an increase or decrease to the interest rate. The Company may also work with the borrower to make other changes to the loan to mitigate losses, such as obtaining additional collateral and/or guarantees to support the loan.

The Company has also implemented certain residential mortgage loan restructuring programs that may result in TDRs. The Company participates in the U.S. Department of the Treasury Home Affordable Modification Program (“HAMP”). HAMP gives qualifying homeowners an opportunity to permanently modify their loan and achieve more affordable monthly payments, with the U.S. Department of the Treasury compensating the Company for a portion of the reduction in monthly amounts due from borrowers participating in this program. The Company also modifies residential mortgage loans under Federal Housing Administration, Department of Veterans Affairs, and its own internal programs. Under these programs, the Company provides concessions to qualifying borrowers experiencing financial difficulties. The concessions may include adjustments to interest rates, conversion of adjustable rates to fixed rates, extensions of maturity dates or deferrals of payments, capitalization of accrued interest and/or outstanding advances, or in limited situations, partial forgiveness of loan principal. In most instances, participation in residential mortgage loan restructuring programs requires the customer to complete a short-term trial period. A permanent loan modification is contingent on the customer successfully completing the trial period arrangement and the loan documents are not modified until that time. The Company reports loans in a trial period arrangement as TDRs and continues to report them as TDRs after the trial period.

Credit card and other retail loan TDRs are generally part of distinct restructuring programs providing customers modification solutions over a specified time period, generally up to 60 months.

In accordance with regulatory guidance, the Company considers secured consumer loans that have had debt discharged through bankruptcy where the borrower has not reaffirmed the debt to be TDRs. If the loan amount exceeds the collateral value, the loan is charged down to collateral value and the remaining amount is reported as nonperforming.

Modifications to loans in the covered segment are similar in nature to that described above for non-covered loans, and the evaluation and determination of TDR status is similar, except that acquired loans restructured after acquisition are not considered TDRs for purposes of the Company’s accounting and disclosure if the loans evidenced credit deterioration as of the acquisition date and are accounted for in pools. Losses associated with modifications on covered loans, including the economic impact of interest rate reductions, are generally eligible for reimbursement under the loss sharing agreements.

 

U.S. Bancorp    15


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The following table provides a summary of TDRs by loan class, including the delinquency status for TDRs that continue to accrue interest and TDRs included in nonperforming assets:

 

           As a Percent of Performing TDRs              

At September 30, 2015

(Dollars in Millions)

  Performing
TDRs
     30-89 Days
Past Due
    90 Days or More
Past Due
    Nonperforming
TDRs
    Total
TDRs
 

Commercial

  $ 270         2.8     1.1   $ 110 (a)    $ 380   

Commercial real estate

    218         .1        5.5        74 (b)      292   

Residential mortgages

    1,903         3.5        3.2        484        2,387 (d) 

Credit card

    202         10.2        6.1        12 (c)      214   

Other retail

    153         5.1        4.3        66 (c)      219 (e) 

TDRs, excluding GNMA and covered loans

    2,746         3.7        3.4        746        3,492   

Loans purchased from GNMA mortgage pools

    2,000         5.8        63.7               2,000 (f) 

Covered loans

    31         2.9        7.8        4        35   

Total

  $ 4,777         4.6     28.7   $ 750      $ 5,527   

 

(a) Primarily represents loans less than six months from the modification date that have not met the performance period required to return to accrual status (generally six months) and small business credit cards with a modified rate equal to 0 percent.
(b) Primarily represents loans less than six months from the modification date that have not met the performance period required to return to accrual status (generally six months).
(c) Primarily represents loans with a modified rate equal to 0 percent.
(d) Includes $313 million of residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $84 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.
(e) Includes $110 million of other retail loans to borrowers that have had debt discharged through bankruptcy and $18 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.
(f) Includes $478 million of Federal Housing Administration and Department of Veterans Affairs residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $606 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

 

Short-term Modifications The Company makes short-term modifications that it does not consider to be TDRs, in limited circumstances, to assist borrowers experiencing temporary hardships. Consumer lending programs include payment reductions, deferrals of up to three past due payments, and the ability to return to current status if the borrower makes required payments. The Company may also make short-term modifications to commercial lending loans, with the most common modification being an extension of the maturity date of three months or less. Such extensions generally are used when the maturity date is imminent and the borrower is experiencing some level of financial stress, but the Company believes the borrower will pay all contractual amounts owed. Short-term modified loans were not material at September 30, 2015.

 

16    U.S. Bancorp


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 Table 6  Nonperforming Assets (a)

 

(Dollars in Millions)   September 30,
2015
    December 31,
2014
 

Commercial

   

Commercial

  $ 157      $ 99   

Lease financing

    12        13   

Total commercial

    169        112   

Commercial Real Estate

   

Commercial mortgages

    105        175   

Construction and development

    39        84   

Total commercial real estate

    144        259   

Residential Mortgages (b)

    735        864   

Credit Card

    12        30   

Other Retail

   

Retail leasing

    2        1   

Home equity and second mortgages

    148        170   

Other

    21        16   

Total other retail

    171        187   

Total nonperforming loans, excluding covered loans

    1,231        1,452   

Covered Loans

    11        14   

Total nonperforming loans

    1,242        1,466   

Other Real Estate (c)(d)

    276        288   

Covered Other Real Estate (d)

    31        37   

Other Assets

    18        17   

Total nonperforming assets

  $ 1,567      $ 1,808   

Total nonperforming assets, excluding covered assets

  $ 1,525      $ 1,757   

Excluding covered assets

   

Accruing loans 90 days or more past due (b)

  $ 510      $ 550   

Nonperforming loans to total loans

    .49     .60

Nonperforming assets to total loans plus other real estate (c)

    .61     .72

Including covered assets

   

Accruing loans 90 days or more past due (b)

  $ 825      $ 945   

Nonperforming loans to total loans

    .49     .59

Nonperforming assets to total loans plus other real estate (c)

    .61     .73

Changes in Nonperforming Assets

 

(Dollars in Millions)   Commercial and
Commercial
Real Estate
    Residential
Mortgages,
Credit Card and
Other Retail
    Covered
Assets
    Total  

Balance December 31, 2014

  $ 431      $ 1,326      $ 51      $ 1,808   

Additions to nonperforming assets

       

New nonaccrual loans and foreclosed properties

    290        362        18        670   

Advances on loans

    37                      37   

Total additions

    327        362        18        707   

Reductions in nonperforming assets

       

Paydowns, payoffs

    (210     (197     (6     (413

Net sales

    (37     (93     (20     (150

Return to performing status

    (5     (142            (147

Charge-offs (e)

    (152     (85     (1     (238

Total reductions

    (404     (517     (27     (948

Net additions to (reductions in) nonperforming assets

    (77     (155     (9     (241

Balance September 30, 2015

  $ 354      $ 1,171      $ 42      $ 1,567   

 

(a) Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due.
(b) Excludes $2.9 billion and $3.1 billion at September 30, 2015, and December 31, 2014, respectively, of loans purchased from GNMA mortgage pools that are 90 days or more past due that continue to accrue interest, as their repayments are primarily insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.
(c) Foreclosed GNMA loans of $648 million and $641 million at September 30, 2015, and December 31, 2014, respectively, continue to accrue interest and are recorded as other assets and excluded from nonperforming assets because they are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.
(d) Includes equity investments in entities whose principal assets are other real estate owned.
(e) Charge-offs exclude actions for certain card products and loan sales that were not classified as nonperforming at the time the charge-off occurred.

 

U.S. Bancorp    17


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Nonperforming Assets The level of nonperforming assets represents another indicator of the potential for future credit losses. Nonperforming assets include nonaccrual loans, restructured loans not performing in accordance with modified terms and not accruing interest, restructured loans that have not met the performance period required to return to accrual status, other real estate owned and other nonperforming assets owned by the Company. Nonperforming assets are generally either originated by the Company or acquired under FDIC loss sharing agreements that substantially reduce the risk of credit losses to the Company. Interest payments collected from assets on nonaccrual status are generally applied against the principal balance and not recorded as income. However, interest income may be recognized for interest payments if the remaining carrying amount of the loan is believed to be collectible.

At September 30, 2015, total nonperforming assets were $1.6 billion, compared with $1.8 billion at December 31, 2014. The $241 million (13.3 percent) decrease in nonperforming assets was primarily driven by reductions in commercial real estate loans, residential mortgages and home equity and second mortgage balances, as economic conditions continued to slowly improve. Nonperforming covered assets at September 30, 2015, were $42 million, compared with $51 million at December 31, 2014. The ratio of total nonperforming assets to total loans and other real estate was 0.61 percent at September 30, 2015, compared with 0.73 percent at December 31, 2014.

Other real estate owned, excluding covered assets, was $276 million at September 30, 2015, compared with $288 million at December 31, 2014, and was related to foreclosed properties that previously secured loan balances. These balances exclude foreclosed GNMA loans whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.

The following table provides an analysis of other real estate owned, excluding covered assets, as a percent of their related loan balances, including geographical location detail for residential (residential mortgage, home equity and second mortgage) and commercial (commercial and commercial real estate) loan balances:

 

    Amount         

As a Percent of Ending

Loan Balances

 
(Dollars in Millions)   September 30,
2015
    December 31,
2014
         September 30,
2015
    December 31,
2014
 

Residential

           

Minnesota

  $ 19      $ 16            .30     .26

Florida

    18        17            1.18        1.06   

Illinois

    17        16            .40        .37   

Ohio

    15        13            .49        .42   

Wisconsin

    12        10            .54        .44   

All other states

    159        161            .31        .32   

Total residential

    240        233            .35        .35   

Commercial

           

California

    12        11            .06        .05   

Illinois

    7        12            .11        .19   

Indiana

    3        3            .20        .20   

South Carolina

    2        2            .46        .44   

Virginia

    1        3            .06        .18   

All other states

    11        24            .01        .03   

Total commercial

    36        55            .03        .04   

Total

  $ 276      $ 288            .11     .12

Analysis of Loan Net Charge-Offs Total loan net charge-offs were $292 million for the third quarter and $867 million for the first nine months of 2015, compared with $336 million and $1.0 billion for the same periods of 2014. The ratio of total loan net charge-offs to average loans outstanding on an annualized basis for the third quarter and first nine months of 2015 was 0.46 percent and 0.47 percent, respectively, compared with

 

 Table 7  Net Charge-offs as a Percent of Average Loans Outstanding

 

    Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
     2015     2014          2015     2014  

Commercial

           

Commercial

    .34     .29         .25     .27

Lease financing

    .23        .46            .23        .29   

Total commercial

    .33        .30            .25        .27   

Commercial Real Estate

           

Commercial mortgages

           .01            .01        (.03

Construction and development

    (.43     .13            (.42     .05   

Total commercial real estate

    (.10     .04            (.09     (.01

Residential Mortgages

    .19        .32            .24        .40   

Credit Card

    3.38        3.53            3.64        3.80   

Other Retail

           

Retail leasing

    .14                   .09        .02   

Home equity and second mortgages

    .17        .61            .27        .67   

Other

    .65        .72            .62        .70   

Total other retail

    .44        .59            .44        .61   

Total loans, excluding covered loans

    .47        .56            .48        .59   

Covered Loans

           .05                   .14   

Total loans

    .46     .55         .47     .57

 

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0.55 percent and 0.57 percent for the same periods of 2014. The year-over-year decreases in total net charge-offs reflected the improvement in economic conditions.

Commercial and commercial real estate loan net charge-offs for the third quarter of 2015 were $60 million (0.19 percent of average loans outstanding on an annualized basis), compared with $62 million (0.21 percent of average loans outstanding on an annualized basis) for the third quarter of 2014. Commercial and commercial real estate loan net charge-offs for the first nine months of 2015 were $128 million (0.14 percent of average loans outstanding on an annualized basis), compared with $146 million (0.17 percent of average loans outstanding on an annualized basis) for the first nine months of 2014.

Residential mortgage loan net charge-offs for the third quarter of 2015 were $25 million (0.19 percent of average loans outstanding on an annualized basis), compared with $42 million (0.32 percent of average loans outstanding on an annualized basis) for the third quarter of 2014. Residential mortgage loan net charge-offs for the first nine months of 2015 were $93 million (0.24 percent of average loans outstanding on an annualized basis), compared with $156 million (0.40 percent of average loans outstanding on an annualized basis) for the first nine months of 2014. Credit card loan net charge-offs for the third quarter of 2015 were $153 million (3.38 percent of average loans outstanding on an annualized basis), compared with $158 million (3.53 percent of average loans outstanding on an annualized basis) for the third quarter of 2014. Credit card loan net charge-offs for the first nine months of 2015 were $485 million (3.64 percent of average loans outstanding on an annualized basis), compared with $498 million (3.80 percent of average loans outstanding on an annualized basis) for the first nine months of 2014. Other retail loan net charge-offs for the third quarter of 2015 were $54 million (0.44 percent of average loans outstanding on an annualized basis), compared with $73 million (0.59 percent of average loans outstanding on an annualized basis) for the third quarter of 2014. Other retail loan net charge-offs for the first nine months of 2015 were $161 million (0.44 percent of average loans outstanding on an annualized basis), compared with $218 million (0.61 percent of average loans outstanding on an annualized basis) for the first nine months of 2014. The decrease in total residential mortgage, credit card and other retail loan net charge-offs reflected the improvement in economic conditions.

 

The following table provides an analysis of net charge-offs as a percent of average loans outstanding for residential mortgages and home equity and second mortgages by borrower type:

 

    Three Months Ended September 30,    Nine Months Ended September 30,  
    Average Loans      Percent of
Average Loans
          Average Loans      Percent of
Average Loans
 
(Dollars in Millions)   2015      2014      2015     2014           2015      2014      2015     2014  

Residential Mortgages

                        

Prime borrowers

  $ 45,108       $ 44,247         .13     .26        $ 44,501       $ 43,844         .17     .32

Sub-prime borrowers

    1,124         1,284         2.82        3.40             1,164         1,322         2.99        4.35   

Other borrowers

    689         845         1.15        .94             739         873         1.09        .92   

Loans purchased from GNMA mortgage pools (a)

    4,910         5,618                            5,054         5,760         .08        .07   

Total

  $ 51,831       $ 51,994         .19     .32        $ 51,458       $ 51,799         .24     .40

Home Equity and Second Mortgages

                        

Prime borrowers

  $ 15,428       $ 14,949         .13     .50        $ 15,286       $ 14,703         .22     .58

Sub-prime borrowers

    207         255         1.92        6.22             219         269         2.44        5.46   

Other borrowers

    448         500         .89        .79             475         495         .84        .81   

Total

  $ 16,083       $ 15,704         .17     .61        $ 15,980       $ 15,467         .27     .67

 

(a) Represents loans purchased from GNMA mortgage pools whose payments are primarily insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.

 

 

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Analysis and Determination of the Allowance for Credit Losses The allowance for credit losses reserves for probable and estimable losses incurred in the Company’s loan and lease portfolio, including unfunded credit commitments, and includes certain amounts that do not represent loss exposure to the Company because those losses are recoverable under loss sharing agreements with the FDIC. The allowance for credit losses is increased through provisions charged to operating earnings and reduced by net charge-offs. Management evaluates the allowance each quarter to ensure it appropriately reserves for incurred losses.

The allowance recorded for loans in the commercial lending segment is based on reviews of individual credit relationships and considers the migration analysis of commercial lending segment loans and actual loss experience. In the migration analysis applied to risk rated loan portfolios, the Company currently examines up to a 14-year period of historical loss experience. For each loan type, this historical loss experience is adjusted as necessary to consider any relevant changes in portfolio composition, lending policies, underwriting standards, risk management practices or economic conditions. The results of the analysis are evaluated quarterly to confirm an appropriate historical timeframe is selected for each commercial loan type. The allowance recorded for impaired loans greater than $5 million in the commercial lending segment is based on an individual loan analysis utilizing expected cash flows discounted using the original effective interest rate, the observable market price of the loan, or the fair value of the collateral for collateral-dependent loans, rather than the migration analysis. The allowance recorded for all other commercial lending segment loans is determined on a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, and historical losses, adjusted for current trends.

The allowance recorded for TDR loans and purchased impaired loans in the consumer lending segment is determined on a homogenous pool basis utilizing expected cash flows discounted using the original effective interest rate of the pool, or the prior quarter effective rate, respectively. The allowance for collateral-dependent loans in the consumer lending segment is determined based on the fair value of the collateral less costs to sell. The allowance recorded for all other consumer lending segment loans is determined on a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, delinquency status, refreshed LTV ratios when possible, portfolio growth and historical losses, adjusted for current trends. Credit card and other retail loans 90 days or more past due are generally not placed on nonaccrual status because of the relatively short period of time to charge-off and, therefore, are excluded from nonperforming loans and measures that include nonperforming loans as part of the calculation.

When evaluating the appropriateness of the allowance for credit losses for any loans and lines in a junior lien position, the Company considers the delinquency and modification status of the first lien. At September 30, 2015, the Company serviced the first lien on 39 percent of the home equity loans and lines in a junior lien position. The Company also considers information received from its primary regulator on the status of the first liens that are serviced by other large servicers in the industry and the status of first lien mortgage accounts reported on customer credit bureau files. Regardless of whether or not the Company services the first lien, an assessment is made of economic conditions, problem loans, recent loss experience and other factors in determining the allowance for credit losses. Based on the available information, the Company estimated $296 million or 1.8 percent of the total home equity portfolio at September 30, 2015, represented junior liens where the first lien was delinquent or modified.

The Company uses historical loss experience on the loans and lines in a junior lien position where the first lien is serviced by the Company, or can be identified in credit bureau data, to establish loss estimates for junior lien loans and lines the Company services that are current, but the first lien is delinquent or modified. Historically, the number of junior lien defaults in any period has been a small percentage of the total portfolio (for example, only 0.7 percent for the twelve months ended September 30, 2015), and the long-term average loss rate on the small percentage of loans that default has been approximately 80 percent. In addition, the Company obtains updated credit scores on its home equity portfolio each quarter, and in some cases more frequently, and uses this information to qualitatively supplement its loss estimation methods. Credit score distributions for the portfolio are monitored monthly and any changes in the distribution are one of the factors considered in assessing the Company’s loss estimates. In its evaluation of the allowance for credit losses, the Company also considers the increased risk of loss associated with home equity lines that are contractually scheduled to convert from a revolving status to a fully amortizing payment and with residential lines and loans that have a balloon payoff provision.

The allowance for the covered loan segment is evaluated each quarter in a manner similar to that

 

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described for non-covered loans, and represents any decreases in expected cash flows on those loans after the acquisition date. The provision for credit losses for covered loans considers the indemnification provided by the FDIC.

In addition, the evaluation of the appropriate allowance for credit losses for purchased non-impaired loans acquired after January 1, 2009, in the various loan segments considers credit discounts recorded as a part of the initial determination of the fair value of the loans. For these loans, no allowance for credit losses is recorded at the purchase date. Credit discounts representing the principal losses expected over the life of the loans are a component of the initial fair value. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Company records a provision for credit losses only when the required allowance, net of any expected reimbursement under any loss sharing agreements with the FDIC, exceeds any remaining credit discounts.

The evaluation of the appropriate allowance for credit losses for purchased impaired loans in the various loan segments considers the expected cash flows to be collected from the borrower. These loans are initially recorded at fair value and therefore no allowance for credit losses is recorded at the purchase date.

Subsequent to the purchase date, the expected cash flows of purchased loans are subject to evaluation. Decreases in expected cash flows are recognized by recording an allowance for credit losses with the related provision for credit losses reduced for the amount reimbursable by the FDIC, where applicable. If the expected cash flows on the purchased loans increase such that a previously recorded impairment allowance can be reversed, the Company records a reduction in the allowance with a related reduction in losses reimbursable by the FDIC, where applicable. Increases in expected cash flows of purchased loans, when there are no reversals of previous impairment allowances, are recognized over the remaining life of the loans and resulting decreases in expected cash flows of the FDIC indemnification assets are amortized over the shorter of the remaining contractual term of the indemnification agreements or the remaining life of the loans.

The Company’s methodology for determining the appropriate allowance for credit losses for all the loan segments also considers the imprecision inherent in the methodologies used. As a result, in addition to the amounts determined under the methodologies described above, management also considers the potential impact of other qualitative factors which include, but are not limited to, economic factors; geographic and other concentration risks; delinquency and nonaccrual trends; current business conditions; changes in lending policy, underwriting standards, internal review and other relevant business practices; and the regulatory environment. The consideration of these items results in adjustments to allowance amounts included in the Company’s allowance for credit losses for each of the above loan segments.

Refer to “Management’s Discussion and Analysis — Analysis of the Allowance for Credit Losses” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, for further discussion on the analysis and determination of the allowance for credit losses.

At September 30, 2015, the allowance for credit losses was $4.3 billion (1.69 percent of period-end loans), compared with $4.4 billion (1.77 percent of period-end loans) at December 31, 2014. The ratio of the allowance for credit losses to nonperforming loans was 347 percent at September 30, 2015, compared with 298 percent at December 31, 2014. The ratio of the allowance for credit losses to annualized loan net charge-offs was 372 percent at September 30, 2015, compared with 328 percent of full year 2014 net charge-offs at December 31, 2014, reflecting the impact of improving economic conditions over the past year.

 

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 Table 8  Summary of Allowance for Credit Losses

 

    Three Months Ended
September 30,
          Nine Months Ended
September 30,
 
(Dollars in Millions)        2015          2014                2015          2014  

Balance at beginning of period

  $ 4,326      $ 4,449           $ 4,375      $ 4,537   

Charge-Offs

            

Commercial

            

Commercial

    85        71             212        197   

Lease financing

    6        9             18        22   

Total commercial

    91        80             230        219   

Commercial real estate

            

Commercial mortgages

    2        5             15        15   

Construction and development

           5             1        12   

Total commercial real estate

    2        10             16        27   

Residential mortgages

    31        48             113        171   

Credit card

    171        174             543        546   

Other retail

            

Retail leasing

    3        1             6        4   

Home equity and second mortgages

    16        31             57        98   

Other

    58        64             170        189   

Total other retail

    77        96             233        291   

Covered loans (a)

           2                    10   

Total charge-offs

    372        410             1,135        1,264   

Recoveries

            

Commercial

            

Commercial

    17        19             65        59   

Lease financing

    3        3             9        11   

Total commercial

    20        22             74        70   

Commercial real estate

            

Commercial mortgages

    2        4             12        21   

Construction and development

    11        2             32        9   

Total commercial real estate

    13        6             44        30   

Residential mortgages

    6        6             20        15   

Credit card

    18        16             58        48   

Other retail

            

Retail leasing

    1        1             2        3   

Home equity and second mortgages

    9        7             25        20   

Other

    13        15             45        50   

Total other retail

    23        23             72        73   

Covered loans (a)

           1                    2   

Total recoveries

    80        74             268        238   

Net Charge-Offs

            

Commercial

            

Commercial

    68        52             147        138   

Lease financing

    3        6             9        11   

Total commercial

    71        58             156        149   

Commercial real estate

            

Commercial mortgages

           1             3        (6

Construction and development

    (11     3             (31     3   

Total commercial real estate

    (11     4             (28     (3

Residential mortgages

    25        42             93        156   

Credit card

    153        158             485        498   

Other retail

            

Retail leasing

    2                    4        1   

Home equity and second mortgages

    7        24             32        78   

Other

    45        49             125        139   

Total other retail

    54        73             161        218   

Covered loans (a)

           1                    8   

Total net charge-offs

    292        336             867        1,026   

Provision for credit losses

    282        311             827        941   

Other changes (b)

    (10     (10          (29     (38

Balance at end of period (c)

  $ 4,306      $ 4,414           $ 4,306      $ 4,414   

Components

            

Allowance for loan losses

  $ 3,965      $ 4,065            

Liability for unfunded credit commitments

    341        349            

Total allowance for credit losses

  $ 4,306      $ 4,414            

Allowance for Credit Losses as a Percentage of

            

Period-end loans, excluding covered loans

    1.71     1.81         

Nonperforming loans, excluding covered loans

    347        291            

Nonperforming and accruing loans 90 days or more past due, excluding covered loans

    245        214            

Nonperforming assets, excluding covered assets

    280        245            

Annualized net charge-offs, excluding covered loans

    368        324            

Period-end loans

    1.69     1.80         

Nonperforming loans

    347        282            

Nonperforming and accruing loans 90 days or more past due

    208        175            

Nonperforming assets

    275        230            

Annualized net charge-offs

    372        331                        

 

(a) Relates to covered loan charge-offs and recoveries not reimbursable by the FDIC.
(b) Includes net changes in credit losses to be reimbursed by the FDIC and reductions in the allowance for covered loans where the reversal of a previously recorded allowance was offset by an associated decrease in the indemnification asset, and the impact of any loan sales.
(c) At September 30, 2015 and 2014, $1.6 billion and $1.7 billion, respectively, of the total allowance for credit losses related to incurred losses on credit card and other retail loans.

 

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Residual Value Risk Management The Company manages its risk to changes in the residual value of leased assets through disciplined residual valuation setting at the inception of a lease, diversification of its leased assets, regular residual asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. As of September 30, 2015, no significant change in the amount of residual values or concentration of the portfolios had occurred since December 31, 2014. Refer to “Management’s Discussion and Analysis — Residual Value Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, for further discussion on residual value risk management.

Operational Risk Management Operational risk is inherent in all business activities, and the management of this risk is important to the achievement of the Company’s objectives. Business lines have direct and primary responsibility and accountability for identifying, controlling, and monitoring operational risks embedded in their business activities. The Company maintains a system of controls with the objective of providing proper transaction authorization and execution, proper system operations, proper oversight of third parties with whom they do business, safeguarding of assets from misuse or theft, and ensuring the reliability and security of financial and other data. Refer to “Management’s Discussion and Analysis — Operational Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, for further discussion on operational risk management.

Compliance Risk Management The Company may suffer legal or regulatory sanctions, material financial loss, or damage to reputation through failure to comply with laws, regulations, rules, standards of good practice, and codes of conduct. The Company has controls and processes in place for the assessment, identification, monitoring, management and reporting of compliance risks and issues. Refer to “Management’s Discussion and Analysis — Compliance Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, for further discussion on compliance risk management.

Interest Rate Risk Management In the banking industry, changes in interest rates are a significant risk that can impact earnings, market valuations and the safety and soundness of an entity. To manage the impact on net interest income and the market value of assets and liabilities, the Company manages its exposure to changes in interest rates through asset and liability management activities within guidelines established by its Asset Liability Committee (“ALCO”) and approved by the Board of Directors. The ALCO has the responsibility for approving and ensuring compliance with the ALCO management policies, including interest rate risk exposure. The Company uses net interest income simulation analysis and market value of equity modeling for measuring and analyzing consolidated interest rate risk.

Net Interest Income Simulation Analysis Management estimates the impact on net interest income of changes in market interest rates under a number of scenarios, including gradual shifts, immediate and sustained parallel shifts, and flattening or steepening of the yield curve. Table 9 summarizes the projected impact to net interest income over the next 12 months of various potential interest rate changes. The ALCO policy limits the estimated change in net interest income in a gradual 200 basis point (“bps”) rate change scenario to a 4.0 percent decline of forecasted net interest income over the next 12 months. At September 30, 2015, and December 31, 2014, the Company was within policy. Refer to “Management’s Discussion and Analysis — Net Interest Income Simulation Analysis” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, for further discussion on net interest income simulation analysis.

Market Value of Equity Modeling The Company also manages interest rate sensitivity by utilizing market value of equity modeling, which measures the degree to which the market values of the Company’s assets and liabilities and off-balance sheet instruments will change given a change in interest rates. Management measures the impact of changes in market interest rates under a number of scenarios, including immediate and sustained parallel shifts, and flattening or steepening of the yield curve. The ALCO policy limits the change in market value of equity in a 200 bps parallel rate shock to a 15.0 percent decline. A 200 bps increase would have resulted in a 6.4 percent decrease in the market value of equity at September 30, 2015, compared with a 6.7 percent decrease at December 31, 2014. A 200 bps

 

 Table 9  Sensitivity of Net Interest Income

 

    September 30, 2015           December 31, 2014  
     Down 50 bps
Immediate
     Up 50 bps
Immediate
    Down 200 bps
Gradual
     Up 200 bps
Gradual
          Down 50 bps
Immediate
     Up 50 bps
Immediate
    Down 200 bps
Gradual
     Up 200 bps
Gradual
 

Net interest income

    *         1.72     *         2.39          *         1.38     *         1.68

 

* Given the current level of interest rates, a downward rate scenario can not be computed.

 

U.S. Bancorp    23


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decrease, where possible given current rates, would have resulted in a 7.2 percent decrease in the market value of equity at September 30, 2015, compared with a 7.1 percent decrease at December 31, 2014. Refer to “Management’s Discussion and Analysis — Market Value of Equity Modeling” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, for further discussion on market value of equity modeling.

Use of Derivatives to Manage Interest Rate and Other Risks To manage the sensitivity of earnings and capital to interest rate, prepayment, credit, price and foreign currency fluctuations (asset and liability management positions), the Company enters into derivative transactions. The Company uses derivatives for asset and liability management purposes primarily in the following ways:

  To convert fixed-rate debt from fixed-rate payments to floating-rate payments;
  To convert the cash flows associated with floating-rate loans and debt from floating-rate payments to fixed-rate payments;
  To mitigate changes in value of the Company’s mortgage origination pipeline, funded mortgage loans held for sale and MSRs;
  To mitigate remeasurement volatility of foreign currency denominated balances; and
  To mitigate the volatility of the Company’s investment in foreign operations driven by fluctuations in foreign currency exchange rates.

The Company may enter into derivative contracts that are either exchange-traded, centrally cleared through clearinghouses or over-the-counter. In addition, the Company enters into interest rate and foreign exchange derivative contracts to support the business requirements of its customers (customer-related positions). The Company minimizes the market and liquidity risks of customer-related positions by either entering into similar offsetting positions with broker-dealers, or on a portfolio basis by entering into other derivative or non-derivative financial instruments that partially or fully offset the exposure from these customer-related positions. The Company does not utilize derivatives for speculative purposes.

The Company does not designate all of the derivatives that it enters into for risk management purposes as accounting hedges because of the inefficiency of applying the accounting requirements and may instead elect fair value accounting for the related hedged items. In particular, the Company enters into interest rate swaps, forward commitments to buy to-be-announced securities (“TBAs”), U.S. Treasury futures and options on U.S. Treasury futures to mitigate fluctuations in the value of its MSRs, but does not designate those derivatives as accounting hedges.

Additionally, the Company uses forward commitments to sell TBAs and other commitments to sell residential mortgage loans at specified prices to economically hedge the interest rate risk in its residential mortgage loan production activities. At September 30, 2015, the Company had $6.8 billion of forward commitments to sell, hedging $3.0 billion of mortgage loans held for sale and $4.9 billion of unfunded mortgage loan commitments. The forward commitments to sell and the unfunded mortgage loan commitments on loans intended to be sold are considered derivatives under the accounting guidance related to accounting for derivative instruments and hedging activities. The Company has elected the fair value option for the mortgage loans held for sale.

Derivatives are subject to credit risk associated with counterparties to the contracts. Credit risk associated with derivatives is measured by the Company based on the probability of counterparty default. The Company manages the credit risk of its derivative positions by diversifying its positions among various counterparties, by entering into master netting arrangements, and, where possible by requiring collateral arrangements. The Company may also transfer counterparty credit risk related to interest rate swaps to third parties through the use of risk participation agreements. In addition, certain interest rate swaps and forwards and credit contracts are required to be centrally cleared through clearinghouses to further mitigate counterparty credit risk.

For additional information on derivatives and hedging activities, refer to Notes 12 and 13 in the Notes to Consolidated Financial Statements.

Market Risk Management In addition to interest rate risk, the Company is exposed to other forms of market risk, principally related to trading activities which support customers’ strategies to manage their own foreign currency, interest rate risk and funding activities. For purposes of its internal capital adequacy assessment process, the Company considers risk arising from its trading activities employing methodologies consistent with the requirements of regulatory rules for market risk. The Company’s Market Risk Committee (“MRC”), within the framework of the ALCO, oversees market risk management. The MRC monitors and reviews the Company’s trading positions and establishes policies for market risk management, including exposure limits for each portfolio. The Company uses a Value at Risk (“VaR”) approach to measure general market risk. Theoretically, VaR represents the statistical risk of loss the Company has to adverse market movements over a one-day time horizon. The Company uses the Historical Simulation method to calculate VaR for its trading businesses measured at the ninety-ninth percentile using a

 

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one-year look-back period for distributions derived from past market data. The market factors used in the calculations include those pertinent to market risks inherent in the underlying trading portfolios, principally those that affect its corporate bond trading business, foreign currency transaction business, client derivatives business, loan trading business and municipal securities business. On average, the Company expects the one-day VaR to be exceeded by actual losses two to three times per year for its trading businesses. The Company monitors the effectiveness of its risk programs by back-testing the performance of its VaR models, regularly updating the historical data used by the VaR models and stress testing. If the Company were to experience market losses in excess of the estimated VaR more often than expected, the VaR models and associated assumptions would be analyzed and adjusted.

The average, high, low and period-end one-day VaR amounts for the Company’s trading positions were as follows:

 

Nine Months Ended September 30,

(Dollars in Millions)

  2015      2014  

Average

  $  1       $ 1   

High

    2         2   

Low

    1         1   

Period-end

    1         1   

The Company did not experience any actual trading losses for its combined trading businesses that exceeded VaR during the nine months ended September 30, 2015 and 2014. The Company stress tests its market risk measurements to provide management with perspectives on market events that may not be captured by its VaR models, including worst case historical market movement combinations that have not necessarily occurred on the same date.

The Company calculates Stressed VaR using the same underlying methodology and model as VaR, except that a historical continuous one-year look-back period is utilized that reflects a period of significant financial stress appropriate to the Company’s trading portfolio. The period selected by the Company includes the significant market volatility of the last four months of 2008.

The average, high, low and period-end one-day Stressed VaR amounts for the Company’s trading positions were as follows:

 

Nine Months Ended September 30,

(Dollars in Millions)

  2015      2014  

Average

  $  4       $ 4   

High

    8         8   

Low

    2         2   

Period-end

    3         5   

Valuations of positions in the client derivatives and foreign currency transaction businesses are based on standard cash flow or other valuation techniques using market-based assumptions. These valuations are compared to third party quotes or other market prices to determine if there are significant variances. Significant variances are approved by the Company’s market risk management department. Valuation of positions in the corporate bond trading, loan trading and municipal securities businesses are based on trader marks. These trader marks are evaluated against third party prices, with significant variances approved by the Company’s risk management department.

The Company also measures the market risk of its hedging activities related to residential mortgage loans held for sale and MSRs using the Historical Simulation method. The VaRs are measured at the ninety-ninth percentile and employ factors pertinent to the market risks inherent in the valuation of the assets and hedges. The Company monitors the effectiveness of the models through back-testing, updating the data and regular validations. A three-year look-back period is used to obtain past market data for the models.

The average, high and low one-day VaR amounts for the residential mortgage loans held for sale and related hedges and the MSRs and related hedges were as follows:

 

Nine Months Ended September 30,

(Dollars in Millions)

  2015      2014  

Residential Mortgage Loans Held For Sale and Related Hedges

    

Average

  $  1       $ 1   

High

    2         2   

Low

              

Mortgage Servicing Rights and Related Hedges

    

Average

  $ 6       $ 3   

High

    8         8   

Low

    4         2   

The Company did not experience any actual losses on its residential mortgage loans held for sale and MSRs activities, including their related hedges, that exceeded VaR during the nine months ended September 30, 2015 and 2014.

Liquidity Risk Management The Company’s liquidity risk management process is designed to identify, measure, and manage the Company’s funding and liquidity risk to meet its daily funding needs and to address expected and unexpected changes in its funding requirements. The Company engages in various activities to manage its liquidity risk. These activities include diversifying its funding sources, stress testing, and holding readily-marketable assets which can be used as a source of liquidity if needed. In addition, the Company’s profitable operations, sound credit quality and strong capital position have enabled it to develop a large and reliable base of core deposit funding within its market areas and in domestic and global capital markets.

The Company’s Board of Directors approves the Company’s liquidity policy. The Risk Management

 

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Committee of the Company’s Board of Directors oversees the Company’s liquidity risk management process and approves the contingency funding plan. The ALCO reviews the Company’s liquidity policy and guidelines, and regularly assesses the Company’s ability to meet funding requirements arising from adverse company-specific or market events.

The Company regularly projects its funding needs under various stress scenarios and maintains a contingency funding plan consistent with the Company’s access to diversified sources of contingent funding. The Company maintains a substantial level of total available liquidity in the form of on-balance sheet and off-balance sheet funding sources. These include cash at the Federal Reserve Bank, unencumbered liquid assets, and capacity to borrow at the FHLB and the Federal Reserve Bank’s Discount Window. At September 30, 2015, the fair value of unencumbered available-for-sale and held-to-maturity investment securities totaled $90.4 billion, compared with $86.9 billion at December 31, 2014. Refer to Table 4 and “Balance Sheet Analysis” for further information on investment securities maturities and trends. Asset liquidity is further enhanced by the Company’s ability to pledge loans to access secured borrowing facilities through the FHLB and Federal Reserve Bank. At September 30, 2015, the Company could have borrowed an additional $78.2 billion at the FHLB and Federal Reserve Bank based on collateral available for additional borrowings.

The Company’s diversified deposit base provides a sizeable source of relatively stable and low-cost funding, while reducing the Company’s reliance on the wholesale markets. Total deposits were $295.3 billion at September 30, 2015, compared with $282.7 billion at December 31, 2014. Refer to “Balance Sheet Analysis” for further information on the Company’s deposits.

Additional funding is provided by long-term debt and short-term borrowings. Long-term debt was $32.5 billion at September 30, 2015, and is an important funding source because of its multi-year borrowing structure. Short-term borrowings were $26.9 billion at September 30, 2015, and supplement the Company’s other funding sources. Refer to “Balance Sheet Analysis” for further information on the Company’s long-term debt and short-term borrowings.

In addition to assessing liquidity risk on a consolidated basis, the Company monitors the parent company’s liquidity. The Company maintains sufficient funding to meet expected parent company obligations, without access to the wholesale funding markets or dividends from subsidiaries, for 12 months when forecasted payments of common stock dividends are included, and 24 months assuming dividends were reduced to zero. The parent company currently has available funds considerably greater than the amounts required to satisfy these conditions.

At September 30, 2015, parent company long-term debt outstanding was $11.5 billion, compared with $13.2 billion at December 31, 2014. The decrease was primarily due to the maturity of $1.7 billion of medium-term notes. As of September 30, 2015, there was no parent company debt scheduled to mature in the remainder of 2015.

During 2014, U.S. banking regulators approved a final regulatory Liquidity Coverage Ratio (“LCR”), requiring banks to maintain an adequate level of unencumbered high quality liquid assets to meet estimated liquidity needs over a 30-day stressed period. The LCR requirement became effective for the Company January 1, 2015, subject to certain transition provisions over the following two years to full implementation by January 1, 2017. At September 30, 2015, the Company was compliant with the fully implemented LCR requirement based on its interpretation of the final U.S. LCR rule.

Refer to “Management’s Discussion and Analysis — Liquidity Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, for further discussion on liquidity risk management.

European Exposures Certain European countries have experienced severe credit deterioration. The Company does not hold sovereign debt of any European country, but may have indirect exposure to sovereign debt through its investments in, and transactions with, European banks. At September 30, 2015, the Company had investments in perpetual preferred stock issued by European banks with an amortized cost totaling $22 million and unrealized losses totaling $2 million, compared with an amortized cost totaling $66 million and unrealized losses totaling $2 million, at December 31, 2014. The Company also transacts with various European banks as counterparties to interest rate and foreign currency derivatives for its hedging and customer-related activities; however, none of these banks are domiciled in the countries currently experiencing the most significant credit deterioration. These derivatives are subject to master netting arrangements. In addition, interest rate and foreign currency derivative transactions are subject to collateral arrangements which significantly limit the Company’s exposure to loss as they generally require daily posting of collateral. At September 30, 2015, the Company was in a net receivable position with five banks in Europe, totaling $3 million. The Company was in a net payable position to each of the other European banks.

 

26    U.S. Bancorp


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 Table 10  Regulatory Capital Ratios

 

(Dollars in Millions)   September 30,
2015
    December 31,
2014
 

Basel III transitional standardized approach:

   

Common equity tier 1 capital

  $ 32,124      $ 30,856   

Tier 1 capital

    37,197        36,020   

Total risk-based capital

    44,015        43,208   

Risk-weighted assets

    336,227        317,398   

Common equity tier 1 capital as a percent of risk-weighted assets

    9.6     9.7

Tier 1 capital as a percent of risk-weighted assets

    11.1        11.3   

Total risk-based capital as a percent of risk-weighted assets

    13.1        13.6   

Tier 1 capital as a percent of adjusted quarterly average assets (leverage ratio)

    9.3        9.3   

Basel III transitional advanced approaches:

   

Common equity tier 1 capital

  $ 32,124      $ 30,856   

Tier 1 capital

    37,197        36,020   

Total risk-based capital

    41,021        40,475   

Risk-weighted assets

    248,048        248,596   

Common equity tier 1 capital as a percent of risk-weighted assets

    13.0     12.4

Tier 1 capital as a percent of risk-weighted assets

    15.0        14.5   

Total risk-based capital as a percent of risk-weighted assets

    16.5        16.3   

 

The Company has not bought or sold credit protection on the debt of any European country or any company domiciled in Europe, nor does it provide retail lending services in Europe. While the Company does not offer commercial lending services in Europe, it does provide financing to domestic multinational corporations that generate revenue from customers in European countries and provides a limited number of corporate credit cards in Europe to existing Company customers. While further deterioration in economic conditions in Europe could have a negative impact on these customers’ revenues, it is unlikely that any effect on the overall credit-worthiness of these multinational corporations would be material to the Company.

The Company provides merchant processing and corporate trust services in Europe either directly or through banking affiliations in Europe. Operating cash for these businesses is deposited on a short-term basis with certain European banks. However, exposure is mitigated by the Company placing deposits at multiple banks and managing the amounts on deposit at any bank based on institution-specific deposit limits. At September 30, 2015, the Company had an aggregate amount on deposit with European banks of approximately $1.0 billion, predominately with the Central Bank of Ireland.

The money market funds managed by a subsidiary of the Company do not have any investments in European sovereign debt, other than approximately $434 million at September 30, 2015 guaranteed by the country of Germany. Other than investments in banks in the countries of the Netherlands, France and Germany, those funds do not have any unsecured investments in banks domiciled in the Eurozone.

Off-Balance Sheet Arrangements Off-balance sheet arrangements include any contractual arrangements to which an unconsolidated entity is a party, under which the Company has an obligation to provide credit or liquidity enhancements or market risk support. In the ordinary course of business, the Company enters into an array of commitments to extend credit, letters of credit and various forms of guarantees that may be considered off-balance sheet arrangements. Refer to Note 15 of the Notes to Consolidated Financial Statements for further information on these arrangements. The Company has not utilized private label asset securitizations as a source of funding. Off-balance sheet arrangements also include any obligation related to a variable interest held in an unconsolidated entity that provides financing, liquidity, credit enhancement or market risk support. Refer to Note 5 of the Notes to Consolidated Financial Statements for further information related to the Company’s interests in variable interest entities.

Capital Management The Company is committed to managing capital to maintain strong protection for depositors and creditors and for maximum shareholder benefit. The Company also manages its capital to exceed regulatory capital requirements for well-capitalized bank holding companies. Beginning January 1, 2014, the regulatory capital requirements effective for the Company follow Basel III, subject to certain transition provisions from Basel I over the following four years to full implementation by January 1, 2018. Basel III includes two comprehensive methodologies for calculating risk-weighted assets: a general standardized approach and more risk-sensitive advanced approaches, with the Company’s capital adequacy being evaluated against the methodology that is most restrictive. Table 10 provides a summary of statutory regulatory capital ratios in effect for the Company at September 30, 2015 and December 31, 2014. All regulatory ratios exceeded regulatory “well-capitalized” requirements.

 

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During 2014, U.S. banking regulators approved a final regulatory Supplementary Leverage Ratio (“SLR”) requirement for banks calculating capital adequacy using advanced approaches under Basel III. The SLR is defined as tier 1 capital divided by total leverage exposure, which includes both on- and off-balance sheet exposures. At September 30, 2015, the Company’s SLR exceeds the applicable minimum SLR requirement effective January 1, 2018.

Total U.S. Bancorp shareholders’ equity was $45.1 billion at September 30, 2015, compared with $43.5 billion at December 31, 2014. The increase was primarily the result of corporate earnings, partially offset by dividends and common share repurchases.

The Company believes certain capital ratios in addition to statutory regulatory capital ratios are useful in evaluating its capital adequacy. The Company’s tangible common equity, as a percent of tangible assets and as a percent of risk-weighted assets calculated under the transitional standardized approach, was 7.7 percent and 9.3 percent, respectively, at September 30, 2015, compared with 7.5 percent and 9.3 percent, respectively, at December 31, 2014. The Company’s common equity tier 1 to risk-weighted assets ratio using the Basel III standardized approach as if fully implemented was 9.2 percent at September 30, 2015, compared with 9.0 percent at December 31, 2014. The Company’s common equity tier 1 to risk-weighted assets ratio using the Basel III advanced approaches as if fully implemented was 12.4 percent at September 30, 2015, compared with 11.8 percent at December 31, 2014. Refer to “Non-GAAP Financial Measures” for further information regarding the calculation of these ratios.

On March 11, 2015, the Company announced its Board of Directors had approved an authorization to repurchase up to $3.022 billion of its common stock, from April 1, 2015 through June 30, 2016.

The following table provides a detailed analysis of all shares purchased by the Company or any affiliated purchaser during the third quarter of 2015:

 

Period

(Dollars in Millions,
Except Per Share Data)

  Total Number
of Shares
Purchased
    Average
Price Paid
Per Share
    

Total Number
of Shares
Purchased

as Part of
Publicly
Announced
Program (a)

    

Approximate
Dollar Value
of Shares
that May

Yet Be
Purchased
Under the
Program

 

July

    7,568,242       $ 45.46         7,568,242       $ 2,054   

August

    6,308,097  (b)      43.48         6,208,097         1,784   

September

    1,867,190  (c)      41.16         1,792,190         1,710   

Total

    15,743,529  (d)    $ 44.16         15,568,529       $ 1,710   

 

(a) All shares were purchased under the stock repurchase program announced on March 11, 2015.
(b) Includes 100,000 shares of common stock purchased, at an average price per share of $40.73, in open-market transactions by U.S. Bank National Association, the Company’s principal banking subsidiary, in its capacity as trustee of the Company’s Employee Retirement Savings Plan (the “401(k) Plan”).
(c) Includes 75,000 shares of common stock purchased, at an average price per share of $41.33, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the Company’s 401(k) Plan.
(d) Includes 175,000 shares of common stock purchased, at an average price per share of $40.99, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the Company’s 401(k) Plan.

On June 16, 2015, the Company announced its Board of Directors had approved a 4.1 percent increase in the Company’s dividend rate per common share, from $0.245 per quarter to $0.255 per quarter.

Refer to “Management’s Discussion and Analysis —Capital Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, for further discussion on capital management.

 

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LINE OF BUSINESS FINANCIAL REVIEW

The Company’s major lines of business are Wholesale Banking and Commercial Real Estate, Consumer and Small Business Banking, Wealth Management and Securities Services, Payment Services, and Treasury and Corporate Support. These operating segments are components of the Company about which financial information is prepared and is evaluated regularly by management in deciding how to allocate resources and assess performance.

Basis for Financial Presentation Business line results are derived from the Company’s business unit profitability reporting systems by specifically attributing managed balance sheet assets, deposits and other liabilities and their related income or expense. The allowance for credit losses and related provision expense are allocated to the lines of business based on the related loan balances managed. Refer to “Management’s Discussion and Analysis — Line of Business Financial Review” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, for further discussion on the business lines’ basis for financial presentation.

Designations, assignments and allocations change from time to time as management systems are enhanced, methods of evaluating performance or product lines change or business segments are realigned to better respond to the Company’s diverse customer base. During 2015, certain organization and methodology changes were made and, accordingly, 2014 results were restated and presented on a comparable basis.

Wholesale Banking and Commercial Real Estate Wholesale Banking and Commercial Real Estate offers lending, equipment finance and small-ticket leasing, depository services, treasury management, capital markets, international trade services and other financial services to middle market, large corporate, commercial real estate, financial institution, non-profit and public sector clients. Wholesale Banking and Commercial Real Estate contributed $210 million of the Company’s net income in the third quarter and $666 million in the first nine months of 2015, or decreases of $48 million (18.6 percent) and $147 million (18.1 percent), respectively, compared with the same periods of 2014. The decreases were primarily driven by higher noninterest expense and provision for credit losses year-over-year.

Net revenue increased $2 million (0.3 percent) in the third quarter and decreased $53 million (2.4 percent) in the first nine months of 2015, compared with the same periods of 2014. Net interest income, on a taxable-equivalent basis, increased $12 million (2.4 percent) in the third quarter and $11 million (0.7 percent) in the first nine months of 2015, compared with the same periods of 2014. The increases were primarily driven by higher average loans and deposits, offset by lower rates and fees on loans. Noninterest income decreased $10 million (4.3 percent) in the third quarter and $64 million (8.8 percent) in the first nine months of 2015, compared with the same periods of 2014, driven by higher loan-related charges, partially offset by higher loan syndication and bond underwriting fees, as well as higher wholesale transaction activity.

Noninterest expense increased $28 million (9.2 percent) in the third quarter and $60 million (6.5 percent) in the first nine months of 2015, compared with the same periods of 2014, primarily due to higher compensation expense due to higher variable compensation and merit increases, higher benefits expense due to increased pension costs, as well as higher net shared services expense and increases in the FDIC insurance assessment allocation based on the level of commitments. The provision for credit losses increased $49 million in the third quarter and $118 million in the first nine months of 2015, compared with the same periods of 2014. The increases were due to unfavorable changes in the reserve allocation and higher net charge-offs. Nonperforming assets were $174 million at September 30, 2015, $118 million at June 30, 2015, and $252 million at September 30, 2014. Nonperforming assets as a percentage of period-end loans were 0.20 percent at September 30, 2015, 0.14 percent at June 30, 2015, and 0.32 percent at September 30, 2014. Refer to the “Corporate Risk Profile” section for further information on factors impacting the credit quality of the loan portfolios.

Consumer and Small Business Banking Consumer and Small Business Banking delivers products and services through banking offices, telephone servicing and sales, on-line services, direct mail, ATM processing and mobile devices, such as mobile phones and tablet computers. It encompasses community banking, metropolitan banking and indirect lending (collectively, the retail banking division), as well as mortgage banking. Consumer and Small Business Banking contributed $310 million of the Company’s net income in the third quarter and $980 million in the first nine months of 2015, or decreases of $65 million (17.3 percent) and $134 million (12.0 percent), respectively, compared with the same periods of 2014. The decreases were due to lower net revenue and higher noninterest expense, partially offset by decreases in the provision for credit losses. Within Consumer and Small Business Banking, the retail banking division contributed $222 million of the total net income in the third quarter and $715 million in the first nine months of 2015, or decreases of $11 million (4.7 percent) and $8

 

U.S. Bancorp    29


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 Table 11  Line of Business Financial Performance

 

   

Wholesale Banking and

Commercial Real Estate

         

Consumer and Small

Business Banking

 

Three Months Ended September 30,

(Dollars in Millions)

  2015      2014      Percent
Change
          2015      2014      Percent
Change
 

Condensed Income Statement

                      

Net interest income (taxable-equivalent basis)

  $ 516       $ 504         2.4        $ 1,161       $ 1,174         (1.1 )% 

Noninterest income

    223         233         (4.3          634         668         (5.1

Securities gains (losses), net

                                                  

Total net revenue

    739         737         .3             1,795         1,842         (2.6

Noninterest expense

    330         302         9.3             1,264         1,162         8.8   

Other intangibles

    1         1                     10         12         (16.7

Total noninterest expense

    331         303         9.2             1,274         1,174         8.5   

Income before provision and income taxes

    408         434         (6.0          521         668         (22.0

Provision for credit losses

    78         29         *             33         79         (58.2

Income before income taxes

    330         405         (18.5          488         589         (17.1

Income taxes and taxable-equivalent adjustment

    120         147         (18.4          178         214         (16.8

Net income

    210         258         (18.6          310         375         (17.3

Net (income) loss attributable to noncontrolling interests

                                                  

Net income attributable to U.S. Bancorp

  $ 210       $ 258         (18.6        $ 310       $ 375         (17.3

Average Balance Sheet

                      

Commercial

  $ 64,769       $ 58,913         9.9        $ 10,221       $ 9,437         8.3

Commercial real estate

    19,541         18,674         4.6             18,901         18,888         .1   

Residential mortgages

    8         11         (27.3          49,924         50,536         (1.2

Credit card

                                                  

Other retail

    2         4         (50.0          46,717         46,591         .3   

Total loans, excluding covered loans

    84,320         77,602         8.7             125,763         125,452         .2   

Covered loans

            174         *             4,839         5,689         (14.9

Total loans

    84,320         77,776         8.4             130,602         131,141         (.4

Goodwill

    1,647         1,648         (.1          3,682         3,680         .1   

Other intangible assets

    20         21         (4.8          2,661         2,664         (.1

Assets

    92,501         84,883         9.0             148,519         145,578         2.0   

Noninterest-bearing deposits

    36,587         32,307         13.2             26,834         24,668         8.8   

Interest checking

    7,518         11,228         (33.0          40,033         36,871         8.6   

Savings products

    28,807         18,733         53.8             54,257         51,182         6.0   

Time deposits

    13,826         17,954         (23.0          15,440         17,816         (13.3

Total deposits

    86,738         80,222         8.1             136,564         130,537         4.6   

Total U.S. Bancorp shareholders’ equity

    8,440         7,591         11.2             10,690         11,504         (7.1

 

   

Wholesale Banking and

Commercial Real Estate

         

Consumer and Small

Business Banking

 

Nine Months Ended September 30,

(Dollars in Millions)

  2015      2014      Percent
Change
          2015      2014      Percent
Change
 

Condensed Income Statement

                      

Net interest income (taxable-equivalent basis)

  $ 1,520       $ 1,509         .7        $ 3,447       $ 3,550         (2.9 )% 

Noninterest income

    667         731         (8.8          1,887         1,966         (4.0

Securities gains (losses), net

                                                  

Total net revenue

    2,187         2,240         (2.4          5,334         5,516         (3.3

Noninterest expense

    986         926         6.5             3,666         3,405         7.7   

Other intangibles

    3         3                     30         28         7.1   

Total noninterest expense

    989         929         6.5             3,696         3,433         7.7   

Income before provision and income taxes

    1,198         1,311         (8.6          1,638         2,083         (21.4

Provision for credit losses

    152         34         *             96         332         (71.1

Income before income taxes

    1,046         1,277         (18.1          1,542         1,751         (11.9

Income taxes and taxable-equivalent adjustment

    380         464         (18.1          562         637         (11.8

Net income

    666         813         (18.1          980         1,114         (12.0

Net (income) loss attributable to noncontrolling interests

                                                  

Net income attributable to U.S. Bancorp

  $ 666       $ 813         (18.1        $ 980       $ 1,114         (12.0

Average Balance Sheet

                      

Commercial

  $ 63,609       $ 56,896         11.8        $ 10,060       $ 8,901         13.0

Commercial real estate

    19,416         18,360         5.8             19,003         18,758         1.3   

Residential mortgages

    8         12         (33.3          49,678         50,436         (1.5

Credit card

                                                  

Other retail

    3         4         (25.0          46,301         45,960         .7   

Total loans, excluding covered loans

    83,036         75,272         10.3             125,042         124,055         .8   

Covered loans

            205         *             5,006         5,872         (14.7

Total loans

    83,036         75,477         10.0             130,048         129,927         .1   

Goodwill

    1,647         1,620         1.7             3,682         3,577         2.9   

Other intangible assets

    21         21                     2,573         2,698         (4.6

Assets

    91,562         82,599         10.9             147,507         143,308         2.9   

Noninterest-bearing deposits

    35,425         31,710         11.7             25,835         23,191         11.4   

Interest checking

    7,555         10,997         (31.3          39,699         35,826         10.8   

Savings products

    27,151         17,587         54.4             53,463         49,461         8.1   

Time deposits

    15,465         18,210         (15.1          16,131         18,078         (10.8

Total deposits

    85,596         78,504         9.0             135,128         126,556         6.8   

Total U.S. Bancorp shareholders’ equity

    8,203         7,478         9.7             11,007         11,480         (4.1

 

* Not meaningful

 

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Wealth Management and

Securities Services

         

Payment

Services

         

Treasury and

Corporate Support

         

Consolidated

Company

 
     2015      2014      Percent
Change
          2015      2014      Percent
Change
          2015      2014      Percent
Change
          2015      2014      Percent
Change
 
                                                
    $ 98       $ 96         2.1        $ 484       $ 444         9.0        $ 562       $ 530         6.0        $ 2,821       $ 2,748         2.7
      366         353         3.7             874         842         3.8             230         149         54.4             2,327         2,245         3.7   
                                                              (1      (3      66.7             (1      (3      66.7   
      464         449         3.3             1,358         1,286         5.6             791         676         17.0             5,147         4,990         3.1   
      355         335         6.0             630         571         10.3             154         193         (20.2          2,733         2,563         6.6   
      7         8         (12.5          24         30         (20.0                                      42         51         (17.6
      362         343         5.5             654         601         8.8             154         193         (20.2          2,775         2,614         6.2   
      102         106         (3.8          704         685         2.8             637         483         31.9             2,372         2,376         (.2
      1         6         (83.3          180         190         (5.3          (10      7         *             282         311         (9.3
      101         100         1.0             524         495         5.9             647         476         35.9             2,090         2,065         1.2   
      37         36         2.8             191         180         6.1             61         2         *             587         579         1.4   
      64         64                     333         315         5.7             586         474         23.6             1,503         1,486         1.1   
                                  (8      (9      11.1             (6      (6                  (14      (15      6.7   
    $ 64       $ 64                   $ 325       $ 306         6.2           $ 580       $ 468         23.9           $ 1,489       $ 1,471         1.2   
                                                
    $ 2,211       $ 1,972         12.1        $ 7,239       $ 6,681         8.4        $ 264       $ 342         (22.8 )%         $ 84,704       $ 77,345         9.5
      572         595         (3.9                                      3,302         2,682         23.1             42,316         40,839         3.6   
      1,887         1,438         31.2                                         12         9         33.3             51,831         51,994         (.3
                                  17,944         17,753         1.1                                         17,944         17,753         1.1   
      1,544         1,439         7.3             586         664         (11.7                                      48,849         48,698         .3   
      6,214         5,444         14.1             25,769         25,098         2.7             3,578         3,033         18.0             245,644         236,629         3.8   
      1         4         (75.0                  5         *             52         1,366         (96.2          4,892         7,238         (32.4
      6,215         5,448         14.1             25,769         25,103         2.7             3,630         4,399         (17.5          250,536         243,867         2.7   
      1,567         1,572         (.3          2,475         2,517         (1.7                                      9,371         9,417         (.5
      123         155         (20.6          381         483         (21.1                                      3,185         3,323         (4.2
      9,053         8,691         4.2             31,584         31,405         .6             128,782         115,266         11.7             410,439         385,823         6.4   
      14,997         14,947         .3             851         702         21.2             1,671         1,502         11.3             80,940         74,126         9.2   
      8,688         5,743         51.3             618         573         7.9             31         39         (20.5          56,888         54,454         4.5   
      34,182         30,436         12.3             92         81         13.6             480         433         10.9             117,818         100,865         16.8   
      3,775         3,940         (4.2                                      1,005         1,853         (45.8          34,046         41,563         (18.1
      61,642         55,066         11.9             1,561         1,356         15.1             3,187         3,827         (16.7          289,692         271,008         6.9   
      2,304         2,268         1.6             5,829         5,690         2.4             17,604         16,079         9.5             44,867         43,132         4.0   

 

    

Wealth Management and

Securities Services

         

Payment

Services

         

Treasury and

Corporate Support

         

Consolidated

Company

 
     2015      2014      Percent
Change
          2015      2014      Percent
Change
          2015      2014      Percent
Change
          2015      2014      Percent
Change
 
                                                
    $ 276       $ 288         (4.2 )%         $ 1,410       $ 1,278         10.3        $ 1,690       $ 1,573         7.4        $ 8,343       $ 8,198         1.8
      1,094         1,039         5.3             2,501         2,449         2.1             604         607         (.5          6,753         6,792         (.6
                                                              (1      2         *             (1      2         *   
      1,370         1,327         3.2             3,911         3,727         4.9             2,293         2,182         5.1             15,095         14,992         .7   
      1,055         1,000         5.5             1,876         1,712         9.6             411         720         (42.9          7,994         7,763         3.0   
      21         25         (16.0          74         92         (19.6                                      128         148         (13.5
      1,076         1,025         5.0             1,950         1,804         8.1             411         720         (42.9          8,122         7,911         2.7   
      294         302         (2.6          1,961         1,923         2.0             1,882         1,462         28.7             6,973         7,081         (1.5
              8         *             585         573         2.1             (6      (6                  827         941         (12.1
      294         294                     1,376         1,350         1.9             1,888         1,468         28.6             6,146         6,140         .1   
      107         106         .9             501         492         1.8             152         34         *             1,702         1,733         (1.8
      187         188         (.5          875         858         2.0             1,736         1,434         21.1             4,444         4,407         .8   
                                  (24      (27      11.1             (17      (17                  (41      (44      6.8   
    $ 187       $ 188         (.5        $ 851       $ 831         2.4           $ 1,719       $ 1,417         21.3           $ 4,403       $ 4,363         .9   
                                                
    $ 2,253       $ 1,914         17.7        $ 6,975       $ 6,403         8.9        $ 270       $ 310         (12.9 )%         $ 83,167       $ 74,424         11.7
      571         603         (5.3                                      3,486         2,744         27.0             42,476         40,465         5.0   
      1,760         1,342         31.1                                         12         9         33.3             51,458         51,799         (.7
                                  17,794         17,516         1.6                                         17,794         17,516         1.6   
      1,502         1,454         3.3             605         680         (11.0                                      48,411         48,098         .7   
      6,086         5,313         14.5             25,374         24,599         3.2             3,768         3,063         23.0             243,306         232,302         4.7   
      1         6         (83.3                  5         *             45         1,708         (97.4          5,052         7,796         (35.2
      6,087         5,319         14.4             25,374         24,604         3.1             3,813         4,771         (20.1          248,358         240,098         3.4   
      1,567         1,568         (.1          2,476         2,519         (1.7                                      9,372         9,284         .9   
      130         163         (20.2          403         494         (18.4                                      3,127         3,376         (7.4
      9,080         8,421         7.8             31,364         30,901         1.5             127,244         109,818         15.9             406,757         375,047         8.5   
      13,853         15,126         (8.4          875         704         24.3             1,635         1,543         6.0             77,623         72,274         7.4   
      7,705         5,507         39.9             602         559         7.7             31         39         (20.5          55,592         52,928         5.0   
      33,748         28,699         17.6             90         76         18.4             479         431         11.1             114,931         96,254         19.4   
      3,427         4,113         (16.7                                      1,504         1,805         (16.7          36,527         42,206         (13.5
      58,733         53,445         9.9             1,567         1,339         17.0             3,649         3,818         (4.4          284,673         263,662         8.0   
      2,302         2,283         .8             5,809         5,675         2.4             17,168         15,582         10.2             44,489         42,498         4.7   

 

U.S. Bancorp    31


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million (1.1 percent), respectively, compared with the same periods of 2014, principally due to lower net revenue and increases in noninterest expense, partially offset by decreases in the provision for credit losses. Mortgage banking contributed $88 million of Consumer and Small Business Banking’s net income in the third quarter and $265 million in the first nine months of 2015, or decreases of $54 million (38.0 percent) and $126 million (32.2 percent), respectively, compared with the same periods of 2014, reflecting decreases in net revenue and increases in noninterest expense.

Net revenue decreased $47 million (2.6 percent) in the third quarter and $182 million (3.3 percent) in the first nine months of 2015, compared with the same periods of 2014. Net interest income, on a taxable-equivalent basis, decreased $13 million (1.1 percent) in the third quarter and $103 million (2.9 percent) in the first nine months of 2015, compared with the same periods of 2014. The decreases in net interest income were primarily due to lower rates on loans, partially offset by higher average loan, deposit and loans held for sale balances. The decrease for the first nine months of 2015 also reflected lower loan fees due to the wind down of the CAA product. Noninterest income decreased $34 million (5.1 percent) in the third quarter and $79 million (4.0 percent) in the first nine months of 2015, compared with the same periods of 2014, primarily the result of lower mortgage banking revenue. The decreases in mortgage banking revenue in the third quarter and first nine months of 2015, compared with the same periods of 2014, were primarily due to unfavorable changes in the valuation of MSRs, net of hedging activities, partially offset by increases in mortgage production revenue.

Noninterest expense increased $100 million (8.5 percent) in the third quarter and $263 million (7.7 percent) in the first nine months of 2015, compared with the same periods of 2014, primarily due to the third quarter 2015 allocation to the business line of a previously reserved legal matter and higher compensation, employee benefits and mortgage servicing-related expenses. The provision for credit losses decreased $46 million (58.2 percent) in the third quarter and $236 million (71.1 percent) in the first nine months of 2015, compared with the same periods of 2014. The decreases were due to lower net charge-offs and favorable changes in the reserve allocation. As a percentage of average loans outstanding on an annualized basis, net charge-offs decreased to 0.25 percent in the third quarter of 2015, compared with 0.35 percent in the third quarter of 2014. Nonperforming assets were $1.3 billion at September 30, 2015, $1.3 billion at June 30, 2015, and $1.4 billion at September 30, 2014. Nonperforming assets as a percentage of period-end loans were 0.96 percent at September 30, 2015, 1.03 percent at June 30, 2015 and 1.10 percent at September 30, 2014. Refer to the “Corporate Risk Profile” section for further information on factors impacting the credit quality of the loan portfolios.

Wealth Management and Securities Services Wealth Management and Securities Services provides private banking, financial advisory services, investment management, retail brokerage services, insurance, trust, custody and fund servicing through five businesses: Wealth Management, Corporate Trust Services, U.S. Bancorp Asset Management, Institutional Trust & Custody and Fund Services. Wealth Management and Securities Services contributed $64 million of the Company’s net income in the third quarter and $187 million in the first nine months of 2015. The business line’s contribution was essentially flat in the third quarter and first nine months of 2015, compared with the same periods of 2014, reflecting increases in net revenue and decreases in the provision for credit losses, offset by increases in noninterest expense.

Net revenue increased $15 million (3.3 percent) in the third quarter and $43 million (3.2 percent) in the first nine months of 2015, compared with the same periods of 2014. The increases were driven by higher noninterest income of $13 million (3.7 percent) in the third quarter and $55 million (5.3 percent) in the first nine months of 2015, compared with the same periods of 2014, reflecting the impact of account growth and improved market conditions. Net interest income, on a taxable-equivalent basis, increased $2 million (2.1 percent) in the third quarter principally due to higher average deposit balances and decreased $12 million (4.2 percent) in the first nine months of 2015 principally due to a decrease in the margin benefit from corporate trust deposit balances, compared with the same periods of 2014.

Noninterest expense increased $19 million (5.5 percent) in the third quarter and $51 million (5.0 percent) in the first nine months of 2015, compared with the same periods of 2014. The increases were primarily due to higher net shared services expense and higher compensation and employee benefits expenses primarily due to merit increases and increased pension costs, respectively.

Payment Services Payment Services includes consumer and business credit cards, stored-value cards, debit cards, corporate, government and purchasing card services, consumer lines of credit and merchant processing. Payment Services contributed $325 million of the Company’s net income in the third quarter and $851 million in the first nine months of 2015, or increases of

 

32    U.S. Bancorp


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$19 million (6.2 percent) and $20 million (2.4 percent), respectively, compared with the same periods of 2014. The increases were primarily due to higher net revenue, offset by higher noninterest expense.

Net revenue increased $72 million (5.6 percent) in the third quarter and $184 million (4.9 percent) in the first nine months of 2015, compared with the same periods of 2014. Net interest income, on a taxable-equivalent basis, increased $40 million (9.0 percent) in the third quarter and $132 million (10.3 percent) in the first nine months of 2015, compared with the same periods of 2014, primarily driven by improved loan rates and higher average loan balances and fees. Noninterest income increased $32 million (3.8 percent) in the third quarter and $52 million (2.1 percent) in the first nine months of 2015, compared with the same periods of 2014, primarily due to increases in credit and debit card revenue on higher transaction volumes, along with higher merchant processing services revenue driven by increased transaction volumes and product fees and equipment sales to merchants related to new chip card technology requirements, partially offset by the impact of foreign currency rate changes.

Noninterest expense increased $53 million (8.8 percent) in the third quarter of 2015, compared with the third quarter of 2014, driven by higher net shared services, compensation and marketing expenses. Noninterest expense increased $146 million (8.1 percent) in the first nine months of 2015, compared with the same period of 2014, primarily due to a second quarter 2015 allocation to the business line of a previously reserved regulatory item, as well as higher net shared services and compensation expenses. The provision for credit losses decreased $10 million (5.3 percent) in the third quarter of 2015, compared with the third quarter of 2014, due to a favorable change in the reserve allocation and lower net charge-offs. The provision for credit losses increased $12 million (2.1 percent) in the first nine months of 2015, compared with the same period of 2014, primarily due to an unfavorable change in the reserve allocation, partially offset by lower net charge-offs. As a percentage of average loans outstanding, net charge-offs were 2.82 percent in the third quarter of 2015, compared with 2.94 percent in the third quarter of 2014.

Treasury and Corporate Support Treasury and Corporate Support includes the Company’s investment portfolios, most covered commercial and commercial real estate loans and related other real estate owned, funding, capital management, interest rate risk management, income taxes not allocated to business lines, including most investments in tax-advantaged projects, and the residual aggregate of those expenses associated with corporate activities that are managed on a consolidated basis. Treasury and Corporate Support recorded net income of $580 million in the third quarter and $1.7 billion in the first nine months of 2015, compared with $468 million and $1.4 billion in the same periods of 2014, respectively.

Net revenue increased $115 million (17.0 percent) in the third quarter and $111 million (5.1 percent) in the first nine months of 2015, compared with the same periods of 2014. Net interest income, on a taxable-equivalent basis, increased $32 million (6.0 percent) in the third quarter and $117 million (7.4 percent) in the first nine months of 2015, compared with the same periods of 2014, principally due to growth in the investment portfolio. Noninterest income increased $83 million (56.8 percent) in the third quarter of 2015, compared with the third quarter of 2014, mainly due to the third quarter 2015 Visa sale, partially offset by the student loan market adjustment. Noninterest income decreased $6 million (1.0 percent) in the first nine months of 2015, compared with the first nine months of 2014, primarily due to lower other income from 2014 and 2015 Visa stock sales and the student loan market adjustment, offset by higher commercial products revenue.

Noninterest expense decreased $39 million (20.2 percent) in the third quarter and $309 million (42.9 percent) in the first nine months of 2015, compared with the same periods of 2014, principally due to a reduction of reserves for losses allocated to business lines and lower costs related to investments in tax-advantaged projects, partially offset by higher compensation expense, reflecting the impact of merit increases and staffing for risk and compliance activities, and higher employee benefits expense, reflecting higher pension costs. In addition, the decrease for the first nine months of 2015, compared with the same period of the prior year, was due to the second quarter 2014 FHA DOJ settlement and insurance recoveries in the current year. The provision for credit losses decreased $17 million in the third quarter of 2015, compared with the third quarter of 2014, due to lower net charge-offs and a favorable change in the reserve allocation.

Income taxes are assessed to each line of business at a managerial tax rate of 36.4 percent with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support.

 

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NON-GAAP FINANCIAL MEASURES

In addition to capital ratios defined by banking regulators, the Company considers various other measures when evaluating capital utilization and adequacy, including:

  Tangible common equity to tangible assets,
  Tangible common equity to risk-weighted assets,
  Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented standardized approach, and
  Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented advanced approaches.

These measures are viewed by management as useful additional methods of reflecting the level of capital available to withstand unexpected market or economic conditions. Additionally, presentation of these measures allows investors, analysts and banking regulators to assess the Company’s capital position relative to other financial services companies. These measures differ from currently effective capital ratios defined by banking regulations principally in that the numerator includes unrealized gains and losses related to available-for-sale securities and excludes preferred securities, including preferred stock, the nature and extent of which varies among different financial services companies. These measures are not defined in generally accepted accounting principles (“GAAP”), or are not currently effective or defined in federal banking regulations. As a result, these measures disclosed by the Company may be considered non-GAAP financial measures.

There may be limits in the usefulness of these measures to investors. As a result, the Company encourages readers to consider the consolidated financial statements and other financial information contained in this report in their entirety, and not to rely on any single financial measure.

The following table shows the Company’s calculation of these non-GAAP financial measures:

 

(Dollars in Millions)   September 30,
2015
    December 31,
2014
 

Total equity

  $ 45,767      $ 44,168   

Preferred stock

    (4,756     (4,756

Noncontrolling interests

    (692     (689

Goodwill (net of deferred tax liability) (1)

    (8,324     (8,403

Intangible assets, other than mortgage servicing rights

    (779     (824

Tangible common equity (a)

    31,216        29,496   

Tangible common equity (as calculated above)

    31,216        29,496   

Adjustments (2)

    118        172   

Common equity tier 1 capital estimated for the Basel III fully implemented standardized and advanced approaches (b)

    31,334        29,668   

Total assets

    415,943        402,529   

Goodwill (net of deferred tax liability) (1)

    (8,324     (8,403

Intangible assets, other than mortgage servicing rights

    (779     (824

Tangible assets (c)

    406,840        393,302   

Risk-weighted assets, determined in accordance with prescribed transitional standardized approach regulatory requirements (d)

    336,227        317,398   

Adjustments (3)

    3,532        11,110   

Risk-weighted assets estimated for the Basel III fully implemented standardized approach (e)

    339,759        328,508   

Risk-weighted assets, determined in accordance with prescribed transitional advanced approaches regulatory requirements

    248,048        248,596   

Adjustments (4)

    3,723        3,270   

Risk-weighted assets estimated for the Basel III fully implemented advanced approaches (f)

    251,771        251,866   

Ratios

   

Tangible common equity to tangible assets (a)/(c)

    7.7     7.5

Tangible common equity to risk-weighted assets (a)/(d)

    9.3        9.3   

Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented standardized approach (b)/(e)

    9.2        9.0   

Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented advanced approaches (b)/(f)

    12.4        11.8   

 

(1) Includes goodwill related to certain investments in unconsolidated financial institutions per prescribed regulatory requirements.
(2) Includes net losses on cash flow hedges included in accumulated other comprehensive income (loss) and other adjustments.
(3) Includes higher risk-weighting for unfunded loan commitments, investment securities, residential mortgages, MSRs and other adjustments.
(4) Primarily reflects higher risk-weighting for MSRs.

 

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CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company comply with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. The Company’s financial position and results of operations can be affected by these estimates and assumptions, which are integral to understanding the Company’s financial statements. Critical accounting policies are those policies management believes are the most important to the portrayal of the Company’s financial condition and results, and require management to make estimates that are difficult, subjective or complex. Most accounting policies are not considered by management to be critical accounting policies. Those policies considered to be critical accounting policies relate to the allowance for credit losses, fair value estimates, purchased loans and related indemnification assets, MSRs, goodwill and other intangibles and income taxes. Management has discussed the development and the selection of critical accounting policies with the Company’s Audit Committee. These accounting policies are discussed in detail in “Management’s Discussion and Analysis — Critical Accounting Policies” and the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December  31, 2014.

CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon this evaluation, the principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.

During the most recently completed fiscal quarter, there was no change made in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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U.S. Bancorp

Consolidated Balance Sheet

 

(Dollars in Millions)   September 30,
2015
    December 31,
2014
 
    (Unaudited)        

Assets

   

Cash and due from banks

  $ 10,450      $ 10,654   

Investment securities

   

Held-to-maturity (fair value $45,051 and $45,140, respectively; including $788 and $526 at fair value pledged as collateral, respectively) (a)

    44,690        44,974   

Available-for-sale (including $320 and $330 pledged as collateral, respectively) (a)

    60,396        56,069   

Loans held for sale (including $4,429 and $4,774 of mortgage loans carried at fair value, respectively)

    4,472        4,792   

Loans

   

Commercial

    85,539        80,377   

Commercial real estate

    42,478        42,795   

Residential mortgages

    52,349        51,619   

Credit card

    18,583        18,515   

Other retail

    51,051        49,264   

Total loans, excluding covered loans

    250,000        242,570   

Covered loans

    4,791        5,281   

Total loans

    254,791        247,851   

Less allowance for loan losses

    (3,965     (4,039

Net loans

    250,826        243,812   

Premises and equipment

    2,515        2,618   

Goodwill

    9,368        9,389   

Other intangible assets

    3,176        3,162   

Other assets (including $59 and $157 of trading securities at fair value pledged as collateral, respectively) (a)

    30,050        27,059   

Total assets

  $ 415,943      $ 402,529   

Liabilities and Shareholders’ Equity

   

Deposits

   

Noninterest-bearing

  $ 83,549      $ 77,323   

Interest-bearing

    185,861        177,452   

Time deposits greater than $100,000 (b)

    25,854        27,958   

Total deposits

    295,264        282,733   

Short-term borrowings

    26,915        29,893   

Long-term debt

    32,504        32,260   

Other liabilities

    15,493        13,475   

Total liabilities

    370,176        358,361   

Shareholders’ equity

   

Preferred stock

    4,756        4,756   

Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares; issued: 9/30/15 and 12/31/14 — 2,125,725,742 shares

    21        21   

Capital surplus

    8,362        8,313   

Retained earnings

    45,413        42,530   

Less cost of common stock in treasury: 9/30/15 — 372,131,113 shares; 12/31/14 — 339,859,034 shares

    (12,756     (11,245

Accumulated other comprehensive income (loss)

    (721     (896

Total U.S. Bancorp shareholders’ equity

    45,075        43,479   

Noncontrolling interests

    692        689   

Total equity

    45,767        44,168   

Total liabilities and equity

  $ 415,943      $ 402,529   

 

(a) Includes only collateral pledged by the Company where counterparties have the right to sell or pledge the collateral.
(b) Includes domestic time deposit balances greater than $250,000 of $3.5 billion and $5.0 billion at September 30, 2015, and December 31, 2014, respectively.

See Notes to Consolidated Financial Statements.

 

36    U.S. Bancorp


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U.S. Bancorp

Consolidated Statement of Income

 

    Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(Dollars and Shares in Millions, Except Per Share Data)

(Unaudited)

  2015     2014      2015     2014  

Interest Income

          

Loans

  $ 2,520      $ 2,518       $ 7,476      $ 7,572   

Loans held for sale

    60        36         166        87   

Investment securities

    502        476         1,502        1,378   

Other interest income

    35        27         102        89   

Total interest income

    3,117        3,057         9,246        9,126   

Interest Expense

          

Deposits

    113        115         344        348   

Short-term borrowings

    66        72         189        204   

Long-term debt

    170        178         531        543   

Total interest expense

    349        365         1,064        1,095   

Net interest income

    2,768        2,692         8,182        8,031   

Provision for credit losses

    282        311         827        941   

Net interest income after provision for credit losses

    2,486        2,381         7,355        7,090   

Noninterest Income

          

Credit and debit card revenue

    269        251         776        749   

Corporate payment products revenue

    190        195         538        550   

Merchant processing services

    400        387         1,154        1,127   

ATM processing services

    81        81         239        241   

Trust and investment management fees

    329        315         985        930   

Deposit service charges

    185        185         520        513   

Treasury management fees

    143        136         422        409   

Commercial products revenue

    231        209         645        635   

Mortgage banking revenue

    224        260         695        774   

Investment products fees

    46        49         141        142   

Securities gains (losses), net

          

Realized gains (losses), net

                          8   

Total other-than-temporary impairment

    (1     (3      (1     (5

Portion of other-than-temporary impairment recognized in other comprehensive income

                          (1

Total securities gains (losses), net

    (1     (3      (1     2   

Other

    229        177         638        722   

Total noninterest income

    2,326        2,242         6,752        6,794   

Noninterest Expense

          

Compensation

    1,225        1,132         3,600        3,372   

Employee benefits

    285        250         895        796   

Net occupancy and equipment

    251        249         745        739   

Professional services

    115        102         298        282   

Marketing and business development

    99        78         265        253   

Technology and communications

    222        219         657        644   

Postage, printing and supplies

    77        81         223        242   

Other intangibles

    42        51         128        148   

Other

    459        452         1,311        1,435   

Total noninterest expense

    2,775        2,614         8,122        7,911   

Income before income taxes

    2,037        2,009         5,985        5,973   

Applicable income taxes

    534        523         1,541        1,566   

Net income

    1,503        1,486         4,444        4,407   

Net (income) loss attributable to noncontrolling interests

    (14     (15      (41     (44

Net income attributable to U.S. Bancorp

  $ 1,489      $ 1,471       $ 4,403      $ 4,363   

Net income applicable to U.S. Bancorp common shareholders

  $ 1,422      $ 1,405       $ 4,204      $ 4,163   

Earnings per common share

  $ .81      $ .78       $ 2.38      $ 2.30   

Diluted earnings per common share

  $ .81      $ .78       $ 2.36      $ 2.29   

Dividends declared per common share

  $ .255      $ .245       $ .755      $ .720   

Average common shares outstanding

    1,758        1,798         1,770        1,809   

Average diluted common shares outstanding

    1,766        1,807         1,778        1,819   

See Notes to Consolidated Financial Statements.

 

U.S. Bancorp    37


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U.S. Bancorp

Consolidated Statement of Comprehensive Income

 

    Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(Dollars in Millions)

(Unaudited)

  2015     2014      2015     2014  

Net income

  $ 1,503      $ 1,486       $ 4,444      $ 4,407   

Other Comprehensive Income (Loss)

          

Changes in unrealized gains and losses on securities available-for-sale

    202        (21      54        486   

Other-than-temporary impairment not recognized in earnings on securities available-for-sale

                          1   

Changes in unrealized gains and losses on derivative hedges

    (38     16         (61     (19

Foreign currency translation

    (28     4         (3     18   

Reclassification to earnings of realized gains and losses

    98        76         295        221   

Income taxes related to other comprehensive income

    (90     (29      (110     (272

Total other comprehensive income (loss)

    144        46         175        435   

Comprehensive income

    1,647        1,532         4,619        4,842   

Comprehensive (income) loss attributable to noncontrolling interests

    (14     (15      (41     (44

Comprehensive income attributable to U.S. Bancorp

  $ 1,633      $ 1,517       $ 4,578      $ 4,798   

See Notes to Consolidated Financial Statements.

 

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U.S. Bancorp

Consolidated Statement of Shareholders’ Equity

 

    U.S. Bancorp Shareholders              

(Dollars and Shares in Millions)

(Unaudited)

  Common Shares
Outstanding
    Preferred
Stock
    Common
Stock
    Capital
Surplus
    Retained
Earnings
    Treasury
Stock
   

Accumulated
Other

Comprehensive

Income (Loss)

   

Total

U.S. Bancorp
Shareholders’
Equity

    Noncontrolling
Interests
    Total
Equity
 

Balance December 31, 2013

    1,825      $ 4,756      $ 21      $ 8,216      $ 38,667      $ (9,476   $ (1,071   $ 41,113      $ 694      $ 41,807   

Net income (loss)

            4,363            4,363        44        4,407   

Other comprehensive income (loss)

                435        435          435   

Preferred stock dividends

            (181         (181       (181

Common stock dividends

            (1,306         (1,306       (1,306

Issuance of common and treasury stock

    13            (10       407          397          397   

Purchase of treasury stock

    (43             (1,767       (1,767       (1,767

Distributions to noncontrolling interests

                         (44     (44

Net other changes in noncontrolling interests

                         (6     (6

Stock option and restricted stock grants

                            87                                87                87   

Balance September 30, 2014

    1,795      $ 4,756      $ 21      $ 8,293      $ 41,543      $ (10,836   $ (636   $ 43,141      $ 688      $ 43,829   

Balance December 31, 2014

    1,786      $ 4,756      $ 21      $ 8,313      $ 42,530      $ (11,245   $ (896   $ 43,479      $ 689      $ 44,168   

Net income (loss)

            4,403            4,403        41        4,444   

Other comprehensive income (loss)

                175        175          175   

Preferred stock dividends

            (182         (182       (182

Common stock dividends

            (1,338         (1,338       (1,338

Issuance of common and treasury stock

    10            (45       319          274          274   

Purchase of treasury stock

    (42             (1,830       (1,830       (1,830

Distributions to noncontrolling interests

                         (41     (41

Net other changes in noncontrolling interests

                         3        3   

Stock option and restricted stock grants

                            94                                94                94   

Balance September 30, 2015

    1,754      $ 4,756      $ 21      $ 8,362      $ 45,413      $ (12,756   $ (721   $ 45,075      $ 692      $ 45,767   

See Notes to Consolidated Financial Statements.

 

U.S. Bancorp    39


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U.S. Bancorp

Consolidated Statement of Cash Flows

 

    Nine Months Ended
September 30,
 

Dollars in Millions

(Unaudited)

  2015     2014  

Operating Activities

   

Net income attributable to U.S. Bancorp

  $ 4,403      $ 4,363   

Adjustments to reconcile net income to net cash provided by operating activities

   

Provision for credit losses

    827        941   

Depreciation and amortization of premises and equipment

    230        225   

Amortization of intangibles

    128        148   

(Gain) loss on sale of loans held for sale

    (753     (565

(Gain) loss on sale of securities and other assets

    (319     (383

Loans originated for sale in the secondary market, net of repayments

    (33,784     (21,374

Proceeds from sales of loans held for sale

    34,343        21,160   

Other, net

    1,176        (49

Net cash provided by operating activities

    6,251        4,466   

Investing Activities

   

Proceeds from sales of available-for-sale investment securities

    282        401   

Proceeds from maturities of held-to-maturity investment securities

    8,238        7,215   

Proceeds from maturities of available-for-sale investment securities

    10,354        4,944   

Purchases of held-to-maturity investment securities

    (7,990     (12,571

Purchases of available-for-sale investment securities

    (14,931     (16,627

Net increase in loans outstanding

    (7,242     (10,043

Proceeds from sales of loans

    1,372        1,165   

Purchases of loans

    (2,196     (1,703

Acquisitions, net of cash acquired

           3,436   

Other, net

    (998     411   

Net cash used in investing activities

    (13,111     (23,372

Financing Activities

   

Net increase in deposits

    12,531        6,186   

Net (decrease) increase in short-term borrowings

    (2,978     2,437   

Proceeds from issuance of long-term debt

    4,915        12,978   

Principal payments or redemption of long-term debt

    (4,782     (2,196

Proceeds from issuance of common stock

    262        377   

Repurchase of common stock

    (1,781     (1,704

Cash dividends paid on preferred stock

    (182     (181

Cash dividends paid on common stock

    (1,329     (1,285

Net cash provided by financing activities

    6,656        16,612   

Change in cash and due from banks

    (204     (2,294

Cash and due from banks at beginning of period

    10,654        8,477   

Cash and due from banks at end of period

  $ 10,450      $ 6,183   

See Notes to Consolidated Financial Statements.

 

40    U.S. Bancorp


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Notes to Consolidated Financial Statements

(Unaudited)

 

 Note 1  Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States. In the opinion of management of U.S. Bancorp (the “Company”), all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of results for the interim periods have been made. These financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Certain amounts in prior periods have been reclassified to conform to the current presentation.

Accounting policies for the lines of business are generally the same as those used in preparation of the consolidated financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs, expenses and other financial elements to each line of business. Table 11 “Line of Business Financial Performance” included in Management’s Discussion and Analysis provides details of segment results. This information is incorporated by reference into these Notes to Consolidated Financial Statements.

 

 Note 2  Accounting Changes

Revenue Recognition In May 2014, the Financial Accounting Standards Board (“FASB”) issued accounting guidance, originally effective for the Company on January 1, 2017, related to revenue recognition from contracts with customers. In August 2015, the FASB delayed the effective date of this guidance by one year, resulting in it becoming effective for the Company on January 1, 2018.

This guidance amends certain currently existing revenue recognition accounting guidance and allows for either retrospective application to all periods presented or a modified retrospective approach where the guidance would only be applied to existing contracts in effect at the adoption date and new contracts going forward. The Company is currently evaluating the impact of this guidance under the modified retrospective approach and expects the adoption will not be material to its financial statements.

Consolidation In February 2015, the FASB issued accounting guidance, effective for the Company on January 1, 2016, with early adoption permitted, related to the analysis required by organizations to evaluate whether they should consolidate certain legal entities. The Company expects the adoption of this guidance will not be material to its financial statements.

 

U.S. Bancorp    41


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 Note 3  Investment Securities

The amortized cost, other-than-temporary impairment recorded in other comprehensive income (loss), gross unrealized holding gains and losses, and fair value of held-to-maturity and available-for-sale investment securities were as follows:

 

    September 30, 2015          December 31, 2014  
                Unrealized Losses                            Unrealized Losses        
(Dollars in Millions)   Amortized
Cost
    Unrealized
Gains
    Other-than-
Temporary (e)
    Other (f)     Fair
Value
         Amortized
Cost
    Unrealized
Gains
    Other-than-
Temporary (e)
    Other (f)     Fair
Value
 

Held-to-maturity (a)

                       

U.S. Treasury and agencies

  $ 2,937      $ 40      $      $ (2   $ 2,975          $ 2,717      $ 15      $      $ (18   $ 2,714   

Mortgage-backed securities

                       

Residential

                       

Agency

    41,704        403               (88     42,019            42,204        335               (176     42,363   

Non-agency non-prime (d)

    1                             1            1                             1   

Asset-backed securities

                       

Collateralized debt obligations/Collateralized loan obligations

           7                      7                   7                      7   

Other

    10        4        (1            13            13        4                      17   

Obligations of state and political subdivisions

    8        1               (1     8            9        1               (1     9   

Obligations of foreign governments

    9                             9            9                             9   

Other debt securities

    21                      (2     19            21                      (1     20   

Total held-to-maturity

  $ 44,690      $ 455      $ (1   $ (93   $ 45,051          $ 44,974      $ 362      $      $ (196   $ 45,140   

Available-for-sale (b)

                       

U.S. Treasury and agencies

  $ 2,835      $ 40      $      $ (1   $ 2,874          $ 2,622      $ 14      $      $ (4   $ 2,632   

Mortgage-backed securities

                       

Residential

                       

Agency

    49,446        582               (133     49,895            44,668        593               (244     45,017   

Non-agency

                       

Prime (c)

    334        7        (2     (1     338            399        9        (2     (1     405   

Non-prime (d)

    231        21        (1            251            261        20        (1            280   

Commercial agency

    71        1                      72            112        3                      115   

Asset-backed securities

                       

Collateralized debt obligations/Collateralized loan obligations

    17        3                      20            18        4                      22   

Other

    588        12               (1     599            607        13               (1     619   

Obligations of state and political subdivisions

    5,121        187               (6     5,302            5,604        265               (1     5,868   

Obligations of foreign governments

                                           6                             6   

Corporate debt securities

    677        1               (62     616            690        3               (79     614   

Perpetual preferred securities

    156        26               (11     171            200        27               (10     217   

Other investments

    228        30                      258            245        29                      274   

Total available-for-sale

  $ 59,704      $ 910      $ (3   $ (215   $ 60,396          $ 55,432      $ 980      $ (3   $ (340   $ 56,069   

 

(a) Held-to-maturity investment securities are carried at historical cost or at fair value at the time of transfer from the available-for-sale to held-to-maturity category, adjusted for amortization of premiums and accretion of discounts and credit-related other-than-temporary impairment.
(b) Available-for-sale investment securities are carried at fair value with unrealized net gains or losses reported within accumulated other comprehensive income (loss) in shareholders’ equity.
(c) Prime securities are those designated as such by the issuer at origination. When an issuer designation is unavailable, the Company determines at acquisition date the categorization based on asset pool characteristics (such as weighted-average credit score, loan-to-value, loan type, prevalence of low documentation loans) and deal performance (such as pool delinquencies and security market spreads). When the Company determines the designation, prime securities typically have a weighted average credit score of 725 or higher and a loan-to-value of 80 percent or lower; however, other pool characteristics may result in designations that deviate from these credit score and loan-to-value thresholds.
(d) Includes all securities not meeting the conditions to be designated as prime.
(e) Represents impairment not related to credit for those investment securities that have been determined to be other-than-temporarily impaired.
(f) Represents unrealized losses on investment securities that have not been determined to be other-than-temporarily impaired.

The weighted-average maturity of the available-for-sale investment securities was 4.4 years at September 30, 2015, compared with 4.3 years at December 31, 2014. The corresponding weighted-average yields were 2.19 percent and 2.32 percent, respectively. The weighted-average maturity of the held-to-maturity investment securities was 4.0 years at September 30, 2015 and December 31, 2014. The corresponding weighted-average yields were 1.86 percent and 1.92 percent, respectively.

For amortized cost, fair value and yield by maturity date of held-to-maturity and available-for-sale investment securities outstanding at September 30, 2015, refer to Table 4 included in Management’s Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements.

Investment securities with a fair value of $13.5 billion at September 30, 2015, and $12.6 billion at December 31, 2014, were pledged to secure public, private and trust deposits, repurchase agreements and for other purposes required by contractual obligation or law. Included in these amounts were securities where the Company and certain counterparties have agreements granting the counterparties the right to sell or pledge the securities. Investment securities delivered under these types of arrangements had a fair value of $1.1 billion at September 30, 2015, and $856 million at December 31, 2014.

 

42    U.S. Bancorp


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The following table provides information about the amount of interest income from taxable and non-taxable investment securities:

 

    Three Months Ended
September 30,
           Nine Months Ended
September 30,
 
(Dollars in Millions)           2015              2014                    2015              2014  

Taxable

  $ 448       $ 419            $ 1,333       $ 1,203   

Non-taxable

    54         57              169         175   

Total interest income from investment securities

  $ 502       $ 476            $ 1,502       $ 1,378   

The following table provides information about the amount of gross gains and losses realized through the sales of available-for-sale investment securities:

 

    Three Months Ended
September 30,
           Nine Months Ended
September 30,
 
(Dollars in Millions)           2015              2014                    2015             2014  

Realized gains

  $       $            $ 1      $ 8   

Realized losses

                         (1       

Net realized gains (losses)

  $       $            $      $ 8   

Income tax (benefit) on net realized gains (losses)

  $       $            $      $ 3   

The Company conducts a regular assessment of its investment securities with unrealized losses to determine whether investment securities are other-than-temporarily impaired considering, among other factors, the nature of the investment securities, credit ratings or financial condition of the issuer, the extent and duration of the unrealized loss, expected cash flows of underlying collateral, the existence of any government or agency guarantees, market conditions and whether the Company intends to sell or it is more likely than not the Company will be required to sell the investment securities. The Company determines other-than-temporary impairment recorded in earnings for debt securities not intended to be sold by estimating the future cash flows of each individual investment security, using market information where available, and discounting the cash flows at the original effective rate of the investment security. Other-than-temporary impairment recorded in other comprehensive income (loss) is measured as the difference between that discounted amount and the fair value of each investment security. The total amount of other-than-temporary impairment recorded was immaterial for the three and nine months ended September 30, 2015 and 2014.

Changes in the credit losses on debt securities are summarized as follows:

 

    Three Months Ended
September 30,
          Nine Months Ended
September 30,
 
(Dollars in Millions)           2015             2014                   2015             2014  

Balance at beginning of period

  $ 91      $ 111           $ 101      $ 116   

Additions to Credit Losses Due to Other-than-temporary Impairments

            

Decreases in expected cash flows on securities for which other-than-temporary impairment was previously recognized

                              3   

Total other-than-temporary impairment on debt securities

                              3   

Other Changes in Credit Losses

            

Increases in expected cash flows

           (2          (2     (4

Realized losses (a)

    (3     (4          (11     (10

Balance at end of period

  $ 88      $ 105           $ 88      $ 105   

 

(a) Primarily represents principal losses allocated to mortgage and asset-backed securities in the Company’s portfolio under the terms of the securitization transaction documents.

 

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At September 30, 2015, certain investment securities had a fair value below amortized cost. The following table shows the gross unrealized losses and fair value of the Company’s investment securities with unrealized losses, aggregated by investment category and length of time the individual investment securities have been in continuous unrealized loss positions, at September 30, 2015:

 

    Less Than 12 Months    12 Months or Greater           Total  
(Dollars in Millions)   Fair
Value
     Unrealized
Losses
          Fair
Value
     Unrealized
Losses
         

Fair

Value

     Unrealized
Losses
 

Held-to-maturity

                        

U.S. Treasury and agencies

  $ 339       $ (1        $ 64       $ (1        $ 403       $ (2

Residential agency mortgage-backed securities

    4,715         (22          4,449         (66          9,164         (88

Other asset-backed securities

                        6         (1          6         (1

Obligations of state and political subdivisions

    2         (1                              2         (1

Other debt securities

                        20         (2          20         (2

Total held-to-maturity

  $ 5,056       $ (24        $ 4,539       $ (70        $ 9,595       $ (94

Available-for-sale

                        

U.S. Treasury and agencies

  $ 202       $ (1        $ 8       $           $ 210       $ (1

Residential mortgage-backed securities

                        

Agency

    6,276         (27          6,589         (106          12,865         (133

Non-agency (a)

                        

Prime (b)

    64                     75         (3          139         (3

Non-prime (c)

    10                     18         (1          28         (1

Other asset-backed securities

    24         (1          2                     26         (1

Obligations of state and political subdivisions

    285         (6                              285         (6

Corporate debt securities

                        432         (62          432         (62

Perpetual preferred securities

                        73         (11          73         (11

Other investments

    1                                         1           

Total available-for-sale

  $ 6,862       $ (35        $ 7,197       $ (183        $ 14,059       $ (218

 

(a) The Company had $4 million of unrealized losses on residential non-agency mortgage-backed securities. Credit-related other-than-temporary impairment on these securities may occur if there is further deterioration in the underlying collateral pool performance. Borrower defaults may increase if economic conditions worsen. Additionally, deterioration in home prices may increase the severity of projected losses.
(b) Prime securities are those designated as such by the issuer at origination. When an issuer designation is unavailable, the Company determines at acquisition date the categorization based on asset pool characteristics (such as weighted-average credit score, loan-to-value, loan type, prevalence of low documentation loans) and deal performance (such as pool delinquencies and security market spreads).
(c) Includes all securities not meeting the conditions to be designated as prime.

The Company does not consider these unrealized losses to be credit-related. These unrealized losses primarily relate to changes in interest rates and market spreads subsequent to purchase. A substantial portion of investment securities that have unrealized losses are either corporate debt issued with high investment grade credit ratings or agency mortgage-backed securities. In general, the issuers of the investment securities are contractually prohibited from prepayment at less than par, and the Company did not pay significant purchase premiums for these investment securities. At September 30, 2015, the Company had no plans to sell investment securities with unrealized losses, and believes it is more likely than not it would not be required to sell such investment securities before recovery of their amortized cost.

 

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 Note 4  Loans and Allowance for Credit Losses

The composition of the loan portfolio, disaggregated by class and underlying specific portfolio type, was as follows:

 

    September 30, 2015           December 31, 2014  
(Dollars in Millions)   Amount      Percent
of Total
          Amount      Percent
of Total
 

Commercial

              

Commercial

  $ 80,313         31.5        $ 74,996         30.2

Lease financing

    5,226         2.1             5,381         2.2   

Total commercial

    85,539         33.6             80,377         32.4   

Commercial Real Estate

              

Commercial mortgages

    32,089         12.6             33,360         13.5   

Construction and development

    10,389         4.1             9,435         3.8   

Total commercial real estate

    42,478         16.7             42,795         17.3   

Residential Mortgages

              

Residential mortgages

    39,341         15.4             38,598         15.6   

Home equity loans, first liens

    13,008         5.1             13,021         5.2   

Total residential mortgages

    52,349         20.5             51,619         20.8   

Credit Card

    18,583         7.3             18,515         7.5   

Other Retail

              

Retail leasing

    5,387         2.1             5,871         2.4   

Home equity and second mortgages

    16,188         6.3             15,916         6.4   

Revolving credit

    3,334         1.3             3,309         1.3   

Installment

    6,949         2.7             6,242         2.5   

Automobile

    16,484         6.5             14,822         6.0   

Student

    2,709         1.1             3,104         1.3   

Total other retail

    51,051         20.0             49,264         19.9   

Total loans, excluding covered loans

    250,000         98.1             242,570         97.9   

Covered Loans

    4,791         1.9             5,281         2.1   

Total loans

  $ 254,791         100.0        $ 247,851         100.0

The Company had loans of $78.5 billion at September 30, 2015, and $79.8 billion at December 31, 2014, pledged at the Federal Home Loan Bank, and loans of $62.8 billion at September 30, 2015, and $61.8 billion at December 31, 2014, pledged at the Federal Reserve Bank.

Originated loans are reported at the principal amount outstanding, net of unearned interest and deferred fees and costs. Net unearned interest and deferred fees and costs amounted to $559 million at September 30, 2015, and $574 million at December 31, 2014. All purchased loans and related indemnification assets are recorded at fair value at the date of purchase. The Company evaluates purchased loans for impairment at the date of purchase in accordance with applicable authoritative accounting guidance. Purchased loans with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are considered “purchased impaired loans.” All other purchased loans are considered “purchased nonimpaired loans.”

Changes in the accretable balance for purchased impaired loans were as follows:

 

    Three Months Ended
September 30,
          Nine Months Ended
September 30,
 
(Dollars in Millions)   2015     2014           2015     2014  

Balance at beginning of period

  $ 1,076      $ 1,487           $ 1,309      $ 1,655   

Accretion

    (91     (105          (289     (336

Disposals

    (32     (34          (102     (103

Reclassifications from nonaccretable difference (a)

    120        38             157        172   

Other

    1                    (1     (2

Balance at end of period

  $ 1,074      $ 1,386           $ 1,074      $ 1,386   

 

(a) Primarily relates to changes in expected credit performance.

 

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Allowance for Credit Losses The allowance for credit losses reserves for probable and estimable losses incurred in the Company’s loan and lease portfolio, including unfunded credit commitments, and includes certain amounts that do not represent loss exposure to the Company because those losses are recoverable under loss sharing agreements with the Federal Deposit Insurance Corporation (“FDIC”). The allowance for credit losses is increased through provisions charged to operating earnings and reduced by net charge-offs. Management evaluates the allowance each quarter to ensure it appropriately reserves for incurred losses.

The allowance recorded for loans in the commercial lending segment is based on reviews of individual credit relationships and considers the migration analysis of commercial lending segment loans and actual loss experience. In the migration analysis applied to risk rated loan portfolios, the Company currently examines up to a 14-year period of loss experience. For each loan type, this historical loss experience is adjusted as necessary to consider any relevant changes in portfolio composition, lending policies, underwriting standards, risk management practices or economic conditions. The results of the analysis are evaluated quarterly to confirm an appropriate historical time frame is selected for each commercial loan type. The allowance recorded for impaired loans greater than $5 million in the commercial lending segment is based on an individual loan analysis utilizing expected cash flows discounted using the original effective interest rate, the observable market price of the loan, or the fair value of the collateral for collateral-dependent loans, rather than the migration analysis. The allowance recorded for all other commercial lending segment loans is determined on a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, portfolio growth and historical losses, adjusted for current trends. The Company also considers the impacts of any loan modifications made to commercial lending segment loans and any subsequent payment defaults to its expectations of cash flows, principal balance, and current expectations about the borrower’s ability to pay in determining the allowance for credit losses.

The allowance recorded for Troubled Debt Restructuring (“TDR”) loans and purchased impaired loans in the consumer lending segment is determined on a homogenous pool basis utilizing expected cash flows discounted using the original effective interest rate of the pool, or the prior quarter effective rate, respectively. The allowance for collateral-dependent loans in the consumer lending segment is determined based on the fair value of the collateral less costs to sell. The allowance recorded for all other consumer lending segment loans is determined on a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, delinquency status, refreshed loan-to-value ratios when possible, portfolio growth and historical losses, adjusted for current trends. The Company also considers any modifications made to consumer lending segment loans including the impacts of any subsequent payment defaults since modification in determining the allowance for credit losses, such as the borrower’s ability to pay under the restructured terms, and the timing and amount of payments.

The allowance for the covered loan segment is evaluated each quarter in a manner similar to that described for non-covered loans and reflects decreases in expected cash flows of those loans after the acquisition date. The provision for credit losses for covered loans considers the indemnification provided by the FDIC.

In addition, subsequent payment defaults on loan modifications considered TDRs are considered in the underlying factors used in the determination of the appropriateness of the allowance for credit losses. For each loan segment, the Company estimates future loan charge-offs through a variety of analysis, trends and underlying assumptions. With respect to the commercial lending segment, TDRs may be collectively evaluated for impairment where observed performance history, including defaults, is a primary driver of the loss allocation. For commercial TDRs individually evaluated for impairment, attributes of the borrower are the primary factors in determining the allowance for credit losses. However, historical loss experience is also incorporated into the allowance methodology applied to this category of loans. With respect to the consumer lending segment, performance of the portfolio, including defaults on TDRs, is considered when estimating future cash flows.

The Company’s methodology for determining the appropriate allowance for credit losses for all the loan segments also considers the imprecision inherent in the methodologies used. As a result, in addition to the amounts determined under the methodologies described above, management also considers the potential impact of other qualitative factors which include, but are not limited to, economic factors; geographic and other concentration risks; delinquency and nonaccrual trends; current business conditions; changes in lending policy, underwriting standards, internal review and other relevant business practices; and the regulatory environment. The consideration of these items results in adjustments to allowance amounts included in the Company’s allowance for credit losses for each of the above loan segments.

The Company also assesses the credit risk associated with off-balance sheet loan commitments, letters of credit, and derivatives. Credit risk associated with derivatives is reflected in the fair values recorded for those positions. The

 

46    U.S. Bancorp


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liability for off-balance sheet credit exposure related to loan commitments and other credit guarantees is included in other liabilities. Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments.

Activity in the allowance for credit losses by portfolio class was as follows:

 

Three Months Ended September 30,

(Dollars in Millions)

  Commercial     Commercial
Real Estate
    Residential
Mortgages
    Credit
Card
    Other
Retail
    Total Loans,
Excluding
Covered Loans
    Covered
Loans
    Total
Loans
 

2015

               

Balance at beginning of period

  $ 1,180      $ 735      $ 737      $ 873      $ 752      $ 4,277      $ 49      $ 4,326   

Add

               

Provision for credit losses

    114        (10     (24     156        46        282               282   

Deduct

               

Loans charged off

    91        2        31        171        77        372               372   

Less recoveries of loans charged off

    (20     (13     (6     (18     (23     (80            (80

Net loans charged off

    71        (11     25        153        54        292               292   

Other changes (a)

                                              (10     (10

Balance at end of period

  $ 1,223      $ 736      $ 688      $ 876      $ 744      $ 4,267      $ 39      $ 4,306   

2014

               

Balance at beginning of period

  $ 1,111      $ 725      $ 848      $ 874      $ 779      $ 4,337      $ 112      $ 4,449   

Add

               

Provision for credit losses

    83        (6     (13     162        84        310        1        311   

Deduct

               

Loans charged off

    80        10        48        174        96        408        2        410   

Less recoveries of loans charged off

    (22     (6     (6     (16     (23     (73     (1     (74

Net loans charged off

    58        4        42        158        73        335        1        336   

Other changes (a)

                                              (10     (10

Balance at end of period

  $ 1,136      $ 715      $ 793      $ 878      $ 790      $ 4,312      $ 102      $ 4,414   

 

(a) Includes net changes in credit losses to be reimbursed by the FDIC and reductions in the allowance for covered loans where the reversal of a previously recorded allowance was offset by an associated decrease in the indemnification asset, and the impact of any loan sales.

 

Nine Months Ended September 30,

(Dollars in Millions)

  Commercial     Commercial
Real Estate
    Residential
Mortgages
    Credit
Card
    Other
Retail
    Total Loans,
Excluding
Covered Loans
    Covered
Loans
    Total
Loans
 

2015

               

Balance at beginning of period

  $ 1,146      $ 726      $ 787      $ 880      $ 771      $ 4,310      $ 65      $ 4,375   

Add

               

Provision for credit losses

    234        (18     (6     481        134        825        2        827   

Deduct

               

Loans charged off

    230        16        113        543        233        1,135               1,135   

Less recoveries of loans charged off

    (74     (44     (20     (58     (72     (268            (268

Net loans charged off

    156        (28     93        485        161        867               867   

Other changes (a)

    (1                                 (1     (28     (29

Balance at end of period

  $ 1,223      $ 736      $ 688      $ 876      $ 744      $ 4,267      $ 39      $ 4,306   

2014

               

Balance at beginning of period

  $ 1,075      $ 776      $ 875      $ 884      $ 781      $ 4,391      $ 146      $ 4,537   

Add

               

Provision for credit losses

    210        (64     74        495        227        942        (1     941   

Deduct

               

Loans charged off

    219        27        171        546        291        1,254        10        1,264   

Less recoveries of loans charged off

    (70     (30     (15     (48     (73     (236     (2     (238

Net loans charged off

    149        (3     156        498        218        1,018        8        1,026   

Other changes (a)

                         (3            (3     (35     (38

Balance at end of period

  $ 1,136      $ 715      $ 793      $ 878      $ 790      $ 4,312      $ 102      $ 4,414   

 

(a) Includes net changes in credit losses to be reimbursed by the FDIC and reductions in the allowance for covered loans where the reversal of a previously recorded allowance was offset by an associated decrease in the indemnification asset, and the impact of any loan sales.

 

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Additional detail of the allowance for credit losses by portfolio class was as follows:

 

(Dollars in Millions)   Commercial      Commercial
Real Estate
     Residential
Mortgages
     Credit
Card
     Other
Retail
     Total Loans,
Excluding
Covered Loans
     Covered
Loans
     Total
Loans
 

Allowance Balance at September 30, 2015 Related to

                      

Loans individually evaluated for impairment (a)

  $ 8       $ 1       $       $       $       $ 9       $       $ 9   

TDRs collectively evaluated for impairment

    8         11         280         56         36         391         2         393   

Other loans collectively evaluated for impairment

    1,207         710         408         820         708         3,853         1         3,854   

Loans acquired with deteriorated credit quality

            14                                 14         36         50   

Total allowance for credit losses

  $ 1,223       $ 736       $ 688       $ 876       $ 744       $ 4,267       $ 39       $ 4,306   

Allowance Balance at December 31, 2014 Related to

                      

Loans individually evaluated for impairment (a)

  $ 5       $ 4       $       $       $       $ 9       $       $ 9   

TDRs collectively evaluated for impairment

    12         12         319         61         41         445         4         449   

Other loans collectively evaluated for impairment

    1,129         678         468         819         730         3,824         1         3,825   

Loans acquired with deteriorated credit quality

            32                                 32         60         92   

Total allowance for credit losses

  $ 1,146       $ 726       $ 787       $ 880       $ 771       $ 4,310       $ 65       $ 4,375   

 

(a) Represents the allowance for credit losses related to loans greater than $5 million classified as nonperforming or TDRs.

Additional detail of loan balances by portfolio class was as follows:

 

(Dollars in Millions)   Commercial      Commercial
Real Estate
     Residential
Mortgages
     Credit
Card
     Other
Retail
     Total Loans,
Excluding
Covered Loans
     Covered
Loans (b)
     Total
Loans
 

September 30, 2015

                      

Loans individually evaluated for impairment (a)

  $ 267       $ 42       $ 13       $       $       $ 322       $       $ 322   

TDRs collectively evaluated for impairment

    136         250         4,387         214         219         5,206         35         5,241   

Other loans collectively evaluated for impairment

    85,135         41,873         47,948         18,369         50,832         244,157         2,176         246,333   

Loans acquired with deteriorated credit quality

    1         313         1                         315         2,580         2,895   

Total loans

  $ 85,539       $ 42,478       $ 52,349       $ 18,583       $ 51,051       $ 250,000       $ 4,791       $ 254,791   

December 31, 2014

                      

Loans individually evaluated for impairment (a)

  $ 159       $ 128       $ 12       $       $       $ 299       $       $ 299   

TDRs collectively evaluated for impairment

    124         393         4,653         240         237         5,647         34         5,681   

Other loans collectively evaluated for impairment

    80,093         41,744         46,953         18,275         49,027         236,092         2,463         238,555   

Loans acquired with deteriorated credit quality

    1         530         1                         532         2,784         3,316   

Total loans

  $ 80,377       $ 42,795       $ 51,619       $ 18,515       $ 49,264       $ 242,570       $ 5,281       $ 247,851   

 

(a) Represents loans greater than $5 million classified as nonperforming or TDRs.
(b) Includes expected reimbursements from the FDIC under loss sharing agreements.

Credit Quality The quality of the Company’s loan portfolios is assessed as a function of net credit losses, levels of nonperforming assets and delinquencies, and credit quality ratings as defined by the Company.

For all loan classes, loans are considered past due based on the number of days delinquent except for monthly amortizing loans which are classified delinquent based upon the number of contractually required payments not made (for example, two missed payments is considered 30 days delinquent). When a loan is placed on nonaccrual status, unpaid accrued interest is reversed.

Commercial lending segment loans are generally placed on nonaccrual status when the collection of principal and interest has become 90 days past due or is otherwise considered doubtful. Commercial lending segment loans are generally fully or partially charged down to the fair value of the collateral securing the loan, less costs to sell, when the loan is considered uncollectible.

Consumer lending segment loans are generally charged-off at a specific number of days or payments past due. Residential mortgages and other retail loans secured by 1-4 family properties are generally charged down to the fair value of the collateral securing the loan, less costs to sell, at 180 days past due, and placed on nonaccrual status in instances where a partial charge-off occurs unless the loan is well secured and in the process of collection. Loans and lines in a junior lien position secured by 1-4 family properties are placed on nonaccrual status at 120 days past due or when behind a first lien that has become 180 days or greater past due or placed on nonaccrual status. Any secured consumer lending segment loan whose borrower has had debt discharged through bankruptcy, for which the loan amount exceeds the fair value of the collateral, is charged down to the fair value of the related collateral and the remaining balance is placed on nonaccrual status. Credit card loans continue to accrue interest until the account is charged off. Credit cards are charged off at 180 days past due. Other retail loans not secured by 1-4 family properties are charged-off at 120 days past due; and revolving consumer lines are charged off at 180 days past due. Similar to credit cards, other retail loans are generally not placed on nonaccrual status because of the relative short period of time to charge-off. Certain retail customers having financial difficulties may have the terms of their credit card and other loan agreements modified to require only principal payments and, as such, are reported as nonaccrual.

 

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For all loan classes, interest payments received on nonaccrual loans are generally recorded as a reduction to a loan’s carrying amount while a loan is on nonaccrual and are recognized as interest income upon payoff of the loan. However, interest income may be recognized for interest payments if the remaining carrying amount of the loan is believed to be collectible. In certain circumstances, loans in any class may be restored to accrual status, such as when a loan has demonstrated sustained repayment performance or no amounts are past due and prospects for future payment are no longer in doubt; or when the loan becomes well secured and is in the process of collection. Loans where there has been a partial charge-off may be returned to accrual status if all principal and interest (including amounts previously charged-off) is expected to be collected and the loan is current.

Covered loans not considered to be purchased impaired are evaluated for delinquency, nonaccrual status and charge-off consistent with the class of loan they would be included in had the loss share coverage not been in place. Generally, purchased impaired loans are considered accruing loans. However, the timing and amount of future cash flows for some loans is not reasonably estimable, and those loans are classified as nonaccrual loans with interest income not recognized until the timing and amount of the future cash flows can be reasonably estimated.

The following table provides a summary of loans by portfolio class, including the delinquency status of those that continue to accrue interest, and those that are nonperforming:

 

    Accruing                
(Dollars in Millions)   Current      30-89 Days
Past Due
     90 Days or
More Past Due
     Nonperforming      Total  

September 30, 2015

             

Commercial

  $ 85,119       $ 207       $ 44       $ 169       $ 85,539   

Commercial real estate

    42,252         62         20         144         42,478   

Residential mortgages (a)

    51,262         181         171         735         52,349   

Credit card

    18,132         235         204         12         18,583   

Other retail

    50,607         202         71         171         51,051   

Total loans, excluding covered loans

    247,372         887         510         1,231         250,000   

Covered loans

    4,404         61         315         11         4,791   

Total loans

  $ 251,776       $ 948       $ 825       $ 1,242       $ 254,791   

December 31, 2014

             

Commercial

  $ 79,977       $ 247       $ 41       $ 112       $ 80,377   

Commercial real estate

    42,406         110         20         259         42,795   

Residential mortgages (a)

    50,330         221         204         864         51,619   

Credit card

    18,046         229         210         30         18,515   

Other retail

    48,764         238         75         187         49,264   

Total loans, excluding covered loans

    239,523         1,045         550         1,452         242,570   

Covered loans

    4,804         68         395         14         5,281   

Total loans

  $ 244,327       $ 1,113       $ 945       $ 1,466       $ 247,851   

 

(a) At September 30, 2015, $337 million of loans 30–89 days past due and $2.9 billion of loans 90 days or more past due purchased from Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs, were classified as current, compared with $431 million and $3.1 billion at December 31, 2014, respectively.

At September 30, 2015, the amount of foreclosed residential real estate held by the Company, and included in other real estate owned, was $271 million ($240 million excluding covered assets), compared with $270 million ($233 million excluding covered assets) at December 31, 2014. This excludes $648 million and $641 million at September 30, 2015 and December 31, 2014, respectively, of foreclosed residential real estate related to mortgage loans whose payments are primarily insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. In addition, the amount of residential mortgage loans secured by residential real estate in the process of foreclosure at September 30, 2015 and December 31, 2014, was $2.8 billion and $2.9 billion, respectively, of which $2.0 billion and $2.1 billion, respectively, related to loans purchased from Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.

The Company classifies its loan portfolios using internal credit quality ratings on a quarterly basis. These ratings include: pass, special mention and classified, and are an important part of the Company’s overall credit risk management process and evaluation of the allowance for credit losses. Loans with a pass rating represent those not classified on the Company’s rating scale for problem credits, as minimal credit risk has been identified. Special mention loans are those that have a potential weakness deserving management’s close attention. Classified loans are those where a well-defined weakness has been identified that may put full collection of contractual cash flows at risk. It is possible that others, given the same information, may reach different reasonable conclusions regarding the credit quality rating classification of specific loans.

 

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The following table provides a summary of loans by portfolio class and the Company’s internal credit quality rating:

 

           Criticized         
(Dollars in Millions)   Pass      Special
Mention
     Classified (a)      Total
Criticized
     Total  

September 30, 2015

             

Commercial (b)

  $ 82,468       $ 1,803       $ 1,268       $ 3,071       $ 85,539   

Commercial real estate

    41,411         324         743         1,067         42,478   

Residential mortgages (c)

    51,375         7         967         974         52,349   

Credit card

    18,367                 216         216         18,583   

Other retail

    50,749         5         297         302         51,051   

Total loans, excluding covered loans

    244,370         2,139         3,491         5,630         250,000   

Covered loans

    4,696                 95         95         4,791   

Total loans

  $ 249,066       $ 2,139       $ 3,586       $ 5,725       $ 254,791   

Total outstanding commitments

  $ 523,370       $ 3,820       $ 4,229       $ 8,049       $ 531,419   

December 31, 2014

             

Commercial (b)

  $ 78,409       $ 1,204       $ 764       $ 1,968       $ 80,377   

Commercial real estate

    41,322         451         1,022         1,473         42,795   

Residential mortgages (c)

    50,479         5         1,135         1,140         51,619   

Credit card

    18,275                 240         240         18,515   

Other retail

    48,932         20         312         332         49,264   

Total loans, excluding covered loans

    237,417         1,680         3,473         5,153         242,570   

Covered loans

    5,164                 117         117         5,281   

Total loans

  $ 242,581       $ 1,680       $ 3,590       $ 5,270       $ 247,851   

Total outstanding commitments

  $ 501,535       $ 2,964       $ 4,179       $ 7,143       $ 508,678   

 

(a) Classified rating on consumer loans primarily based on delinquency status.
(b) At September 30, 2015, $917 million of loans to customers in energy-related businesses had a special mention or classified rating, compared with $122 million at December 31, 2014.
(c) At September 30, 2015, $2.9 billion of GNMA loans 90 days or more past due and $2.0 billion of restructured GNMA loans whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs were classified with a pass rating, compared with $3.1 billion and $2.2 billion at December 31, 2014, respectively.

For all loan classes, a loan is considered to be impaired when, based on current events or information, it is probable the Company will be unable to collect all amounts due per the contractual terms of the loan agreement. Impaired loans include all nonaccrual and TDR loans. For all loan classes, interest income on TDR loans is recognized under the modified terms and conditions if the borrower has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles. Interest income is generally not recognized on other impaired loans until the loan is paid off. However, interest income may be recognized for interest payments if the remaining carrying amount of the loan is believed to be collectible.

Factors used by the Company in determining whether all principal and interest payments due on commercial and commercial real estate loans will be collected and therefore whether those loans are impaired include, but are not limited to, the financial condition of the borrower, collateral and/or guarantees on the loan, and the borrower’s estimated future ability to pay based on industry, geographic location and certain financial ratios. The evaluation of impairment on residential mortgages, credit card loans and other retail loans is primarily driven by delinquency status of individual loans or whether a loan has been modified, and considers any government guarantee where applicable. Individual covered loans, whose future losses are covered by loss sharing agreements with the FDIC that substantially reduce the risk of credit losses to the Company, are evaluated for impairment and accounted for in a manner consistent with the class of loan they would have been included in had the loss sharing coverage not been in place.

 

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A summary of impaired loans, which include all nonaccrual and TDR loans, by portfolio class was as follows:

 

(Dollars in Millions)   Period-end
Recorded
Investment (a)
     Unpaid
Principal
Balance
     Valuation
Allowance
     Commitments
to Lend
Additional
Funds
 

September 30, 2015

          

Commercial

  $ 439       $ 1,002       $ 19       $ 100   

Commercial real estate

    362         921         16         2   

Residential mortgages

    2,638         3,345         239           

Credit card

    214         214         56           

Other retail

    324         523         39         4   

Total impaired loans, excluding GNMA and covered loans

    3,977         6,005         369         106   

Loans purchased from GNMA mortgage pools

    2,000         2,000         44           

Covered loans

    42         46         2         1   

Total

  $ 6,019       $ 8,051       $ 415       $ 107   

December 31, 2014

          

Commercial

  $ 329       $ 769       $ 21       $ 51   

Commercial real estate

    624         1,250         23         18   

Residential mortgages

    2,730         3,495         273           

Credit card

    240         240         61           

Other retail

    361         570         44         4   

Total impaired loans, excluding GNMA and covered loans

    4,284         6,324         422         73   

Loans purchased from GNMA mortgage pools

    2,244         2,244         50           

Covered loans

    43         55         4         1   

Total

  $ 6,571       $ 8,623       $ 476       $ 74   

 

(a) Substantially all loans classified as impaired at September 30, 2015 and December 31, 2014, had an associated allowance for credit losses.

Additional information on impaired loans follows:

 

    2015            2014  
(Dollars in Millions)   Average
Recorded
Investment
     Interest
Income
Recognized
           Average
Recorded
Investment
     Interest
Income
Recognized
 

Three Months Ended September 30

               

Commercial

  $ 408       $ 3            $ 425       $ 4   

Commercial real estate

    388         3              541         4   

Residential mortgages

    2,669         31              2,740         33   

Credit card

    216         1              264         1   

Other retail

    329         3              373         5   

Total impaired loans, excluding GNMA and covered loans

    4,010         41              4,343         47   

Loans purchased from GNMA mortgage pools

    2,040         24              2,647         29   

Covered loans

    42                      335         5   

Total

  $ 6,092       $ 65            $ 7,325       $ 81   

Nine Months Ended September 30

               

Commercial

  $ 351       $ 9            $ 430       $ 8   

Commercial real estate

    461         13              598         17   

Residential mortgages

    2,687         97              2,744         105   

Credit card

    224         4              281         7   

Other retail

    342         10              381         13   

Total impaired loans, excluding GNMA and covered loans

    4,065         133              4,434         150   

Loans purchased from GNMA mortgage pools

    2,120         74              2,691         95   

Covered loans

    42                      389         15   

Total

  $ 6,227       $ 207            $ 7,514       $ 260   

Troubled Debt Restructurings In certain circumstances, the Company may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term. Concessionary modifications are classified as TDRs unless the modification results in only an insignificant delay in payments to be received. The Company recognizes interest on TDRs if the borrower complies with the revised terms and conditions as agreed upon with the Company and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles, which is generally six months or greater. To the extent a previous restructuring was insignificant, the Company considers the cumulative effect of past restructurings related to the receivable when determining whether a current restructuring is a TDR. Loans classified as TDRs are considered impaired loans for reporting and measurement purposes.

 

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The following table provides a summary of loans modified as TDRs during the periods presented by portfolio class:

 

    2015            2014  
(Dollars in Millions)   Number
of Loans
    

Pre-Modification
Outstanding
Loan

Balance

    

Post-Modification
Outstanding
Loan

Balance

           Number
of Loans
    

Pre-Modification
Outstanding
Loan

Balance

    

Post-Modification
Outstanding
Loan

Balance

 

Three Months Ended September 30

                     

Commercial

    381       $ 111       $ 102              448       $ 28       $ 26   

Commercial real estate

    35         24         23              27         14         13   

Residential mortgages

    381         48         47              525         71         70   

Credit card

    7,289         35         36              6,708         35         36   

Other retail

    690         19         19              810         18         18   

Total loans, excluding GNMA and covered loans

    8,776         237         227              8,518         166         163   

Loans purchased from GNMA mortgage pools

    1,986         244         245              2,273         278         278   

Covered loans

    4         1         1              18         3         3   

Total loans

    10,766       $ 482       $ 473              10,809       $ 447       $ 444   

Nine Months Ended September 30

                     

Commercial

    1,170       $ 227       $ 223              1,633       $ 181       $ 169   

Commercial real estate

    89         64         62              54         33         28   

Residential mortgages

    1,820         234         232              1,732         232         231   

Credit card

    19,978         100         101              20,040         111         112   

Other retail

    1,974         42         42              2,246         52         52   

Total loans, excluding GNMA and covered loans

    25,031         667         660              25,705         609         592   

Loans purchased from GNMA mortgage pools

    5,960         732         731              7,198         816         803   

Covered loans

    13         4         4              38         14         13   

Total loans

    31,004       $ 1,403       $ 1,395              32,941       $ 1,439       $ 1,408   

Residential mortgages, home equity and second mortgages, and loans purchased from GNMA mortgage pools in the table above include trial period arrangements offered to customers during the periods presented. The post-modification balances for these loans reflect the current outstanding balance until a permanent modification is made. In addition, the post-modification balances typically include capitalization of unpaid accrued interest and/or fees under the various modification programs. For those loans modified as TDRs during the third quarter of 2015, at September 30, 2015, 205 residential mortgages, 102 home equity and second mortgage loans and 1,726 loans purchased from GNMA mortgage pools with outstanding balances of $25 million, $9 million and $226 million, respectively, were in a trial period and have estimated post-modification balances of $31 million, $10 million and $230 million, respectively, assuming permanent modification occurs at the end of the trial period.

The Company has implemented certain restructuring programs that may result in TDRs. However, many of the Company’s TDRs are also determined on a case-by-case basis in connection with ongoing loan collection processes.

For the commercial lending segment, modifications generally result in the Company working with borrowers on a case-by-case basis. Commercial and commercial real estate modifications generally include extensions of the maturity date and may be accompanied by an increase or decrease to the interest rate, which may not be deemed a market rate of interest. In addition, the Company may work with the borrower in identifying other changes that mitigate loss to the Company, which may include additional collateral or guarantees to support the loan. To a lesser extent, the Company may waive contractual principal. The Company classifies all of the above concessions as TDRs to the extent the Company determines that the borrower is experiencing financial difficulty.

Modifications for the consumer lending segment are generally part of programs the Company has initiated. The Company participates in the U.S. Department of Treasury Home Affordable Modification Program (“HAMP”). HAMP gives qualifying homeowners an opportunity to permanently modify residential mortgage loans and achieve more affordable monthly payments, with the U.S. Department of Treasury compensating the Company for a portion of the reduction in monthly amounts due from borrowers participating in this program. The Company also modifies residential mortgage loans under Federal Housing Administration, Department of Veterans Affairs, or its own internal programs. Under these programs, the Company provides concessions to qualifying borrowers experiencing financial difficulties. The concessions may include adjustments to interest rates, conversion of adjustable rates to fixed rates, extension of maturity dates or deferrals of payments, capitalization of accrued interest and/or outstanding advances, or in limited situations, partial forgiveness of loan principal. In most instances, participation in residential mortgage loan restructuring programs requires the customer to complete a short-term trial period. A permanent loan modification is contingent on the customer successfully completing the trial period arrangement and the loan documents are not modified until that time. The Company reports loans in a trial period arrangement as TDRs and continues to report them as TDRs after the trial period.

 

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Credit card and other retail loan TDRs are generally part of distinct restructuring programs providing customers experiencing financial difficulty with modifications whereby balances may be amortized up to 60 months, and generally include waiver of fees and reduced interest rates.

In addition, the Company considers secured loans to consumer borrowers that have debt discharged through bankruptcy where the borrower has not reaffirmed the debt to be TDRs.

Modifications to loans in the covered segment are similar in nature to that described above for non-covered loans, and the evaluation and determination of TDR status is similar, except that acquired loans restructured after acquisition are not considered TDRs for accounting and disclosure purposes if the loans evidenced credit deterioration as of the acquisition date and are accounted for in pools. Losses associated with the modification on covered loans, including the economic impact of interest rate reductions, are generally eligible for reimbursement under loss sharing agreements with the FDIC.

The following table provides a summary of TDR loans that defaulted (fully or partially charged-off or became 90 days or more past due) during the periods presented that were modified as TDRs within 12 months previous to default:

 

    2015            2014  
(Dollars in Millions)   Number
of Loans
     Amount
Defaulted
           Number
of Loans
     Amount
Defaulted
 

Three Months Ended September 30

               

Commercial

    95       $ 1              161       $ 34   

Commercial real estate

    5         5              4           

Residential mortgages

    42         5              147         22   

Credit card

    1,576         7              1,665         9   

Other retail

    123         2              146         5   

Total loans, excluding GNMA and covered loans

    1,841         20              2,123         70   

Loans purchased from GNMA mortgage pools

    143         16              366         41   

Covered loans

    4         1              4         1   

Total loans

    1,988       $ 37              2,493       $ 112   

Nine Months Ended September 30

               

Commercial

    408       $ 20              456       $ 42   

Commercial real estate

    13         8              16         10   

Residential mortgages

    228         30              424         61   

Credit card

    4,597         22              4,586         25   

Other retail

    491         9              489         15   

Total loans, excluding GNMA and covered loans

    5,737         89              5,971         153   

Loans purchased from GNMA mortgage pools

    511         64              542         63   

Covered loans

    4         1              14         5   

Total loans

    6,252       $ 154              6,527       $ 221   

In addition to the defaults in the table above, for the three and nine months ended September 30, 2015, the Company had a total of 402 and 1,556 residential mortgage loans, home equity and second mortgage loans and loans purchased from GNMA mortgage pools with aggregate outstanding balances of $55 million and $207 million, respectively, where borrowers did not successfully complete the trial period arrangement and therefore are no longer eligible for a permanent modification under the applicable modification program.

Covered Assets Covered assets represent loans and other assets acquired from the FDIC, subject to loss sharing agreements, and include expected reimbursements from the FDIC. The carrying amount of the covered assets consisted of purchased impaired loans, purchased nonimpaired loans and other assets as shown in the following table:

 

    September 30, 2015            December 31, 2014  
(Dollars in Millions)   Purchased
Impaired
Loans
     Purchased
Nonimpaired
Loans
     Other
Assets
     Total            Purchased
Impaired
Loans
     Purchased
Nonimpaired
Loans
     Other
Assets
     Total  

Residential mortgage loans

  $ 2,580       $ 644       $       $ 3,224            $ 2,784       $ 738       $       $ 3,522   

Other retail loans

            486                 486                      584                 584   

Losses reimbursable by the FDIC (a)

                    696         696                              717         717   

Unamortized changes in FDIC asset (b)

                    385         385                              458         458   

Covered loans

    2,580         1,130         1,081         4,791              2,784         1,322         1,175         5,281   

Foreclosed real estate

                    31         31                              37         37   

Total covered assets

  $ 2,580       $ 1,130       $ 1,112       $ 4,822            $ 2,784       $ 1,322       $ 1,212       $ 5,318   

 

(a) Relates to loss sharing agreements with remaining terms up to four years.
(b) Represents decreases in expected reimbursements by the FDIC as a result of decreases in expected losses on the covered loans. These amounts are amortized as a reduction in interest income on covered loans over the shorter of the expected life of the respective covered loans or the remaining contractual term of the indemnification agreements.

 

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Interest income is recognized on purchased impaired loans through accretion of the difference between the carrying amount of those loans and their expected cash flows. The initial determination of the fair value of the purchased loans includes the impact of expected credit losses and, therefore, no allowance for credit losses is recorded at the purchase date. To the extent credit deterioration occurs after the date of acquisition, the Company records an allowance for credit losses.

 

 Note 5  Accounting for Transfers and Servicing of Financial Assets and Variable Interest Entities

The Company transfers financial assets in the normal course of business. The majority of the Company’s financial asset transfers are residential mortgage loan sales primarily to government-sponsored enterprises (“GSEs”), transfers of tax-advantaged investments, commercial loan sales through participation agreements, and other individual or portfolio loan and securities sales. In accordance with the accounting guidance for asset transfers, the Company considers any ongoing involvement with transferred assets in determining whether the assets can be derecognized from the balance sheet. Guarantees provided to certain third parties in connection with the transfer of assets are further discussed in Note 15.

For loans sold under participation agreements, the Company also considers whether the terms of the loan participation agreement meet the accounting definition of a participating interest. With the exception of servicing and certain performance-based guarantees, the Company’s continuing involvement with financial assets sold is minimal and generally limited to market customary representation and warranty clauses. Any gain or loss on sale depends on the previous carrying amount of the transferred financial assets, the consideration received, and any liabilities incurred in exchange for the transferred assets. Upon transfer, any servicing assets and other interests that continue to be held by the Company are initially recognized at fair value. For further information on mortgage servicing rights (“MSRs”), refer to Note 6. On a limited basis, the Company may acquire and package high-grade corporate bonds for select corporate customers, in which the Company generally has no continuing involvement with these transactions. Additionally, the Company is an authorized GNMA issuer and issues GNMA securities on a regular basis. The Company has no other asset securitizations or similar asset-backed financing arrangements that are off-balance sheet.

The Company is involved in various entities that are considered to be variable interest entities (“VIEs”). The Company’s investments in VIEs are primarily related to investments promoting affordable housing, community development and renewable energy sources. Some of these tax-advantaged investments support the Company’s regulatory compliance with the Community Reinvestment Act. The Company’s investments in these entities generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. These tax credits are recognized as a reduction of tax expense or, for investments qualifying as investment tax credits, as a reduction to the related investment asset. The Company recognized federal and state income tax credits related to its affordable housing and other tax-advantaged investments in tax expense of $174 million and $189 million for the three months ended September 30, 2015 and 2014, respectively, and $512 million and $546 million for the nine months ended September 30, 2015 and 2014, respectively. The Company also recognized $340 million and $262 million of investment tax credits for the three months ended September 30, 2015 and 2014, respectively, and $624 million and $582 million for the nine months ended September 30, 2015 and 2014, respectively. The Company recognized $169 million and $187 million of expenses related to all of these investments for the three months ended September 30, 2015 and 2014, respectively, of which $67 million and $60 million, respectively, was included in tax expense and the remainder was included in noninterest expense. The Company recognized $471 million and $517 million of expenses related to all of these investments for the nine months ended September 30, 2015 and 2014, respectively, of which $198 million and $190 million, respectively, was included in tax expense and the remainder was included in noninterest expense.

The Company is not required to consolidate VIEs in which it has concluded it does not have a controlling financial interest, and thus is not the primary beneficiary. In such cases, the Company does not have both the power to direct the entities’ most significant activities and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIEs.

The Company’s investments in these unconsolidated VIEs are carried in other assets on the Consolidated Balance Sheet. The Company’s unfunded capital and other commitments related to these unconsolidated VIEs are generally carried in other liabilities on the Consolidated Balance Sheet. The Company’s maximum exposure to loss from these unconsolidated VIEs include the investment recorded on the Company’s Consolidated Balance Sheet, net of unfunded

 

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capital commitments, and previously recorded tax credits which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level. While the Company believes potential losses from these investments are remote, the maximum exposure was determined by assuming a scenario where the community-based business and housing projects completely fail and do not meet certain government compliance requirements resulting in recapture of the related tax credits.

The following table provides a summary of investments in community development and tax-advantaged VIEs that the Company has not consolidated:

 

(Dollars in Millions)   September 30,
2015
     December 31,
2014
 

Investment carrying amount

  $ 5,056       $ 4,259   

Unfunded capital and other commitments

    2,396         1,743   

Maximum exposure to loss

    8,862         8,393   

The Company also has noncontrolling financial investments in private investment funds and partnerships considered to be VIEs, which are not consolidated. The Company’s recorded investment in these entities, carried in other assets on the Consolidated Balance Sheet, was approximately $81 million at September 30, 2015, compared with $97 million at December 31, 2014. The maximum exposure to loss related to these VIEs was $96 million at September 30, 2015 and $105 million at December 31, 2014, representing the Company’s investment balance and its unfunded commitments to invest additional amounts.

The Company’s individual net investments in unconsolidated VIEs, which exclude any unfunded capital commitments, ranged from less than $1 million to $52 million at September 30, 2015, compared with less than $1 million to $53 million at December 31, 2014.

The Company is required to consolidate VIEs in which it has concluded it has a controlling financial interest. The Company sponsors entities to which it transfers its interests in tax-advantaged investments to third parties. At September 30, 2015, approximately $3.0 billion of the Company’s assets and $2.3 billion of its liabilities included on the Consolidated Balance Sheet were related to community development and tax-advantaged investment VIEs which the Company has consolidated, primarily related to these transfers. These amounts compared to $2.7 billion and $2.0 billion, respectively, at December 31, 2014. The majority of the assets of these consolidated VIEs are reported in other assets, and the liabilities are reported in long-term debt and other liabilities. The assets of a particular VIE are the primary source of funds to settle its obligations. The creditors of the VIEs do not have recourse to the general credit of the Company. The Company’s exposure to the consolidated VIEs is generally limited to the carrying value of its variable interests plus any related tax credits previously recognized or transferred to others with a guarantee.

The Company also sponsors a conduit to which it previously transferred high-grade investment securities. The Company consolidates the conduit because of its ability to manage the activities of the conduit. At September 30, 2015, $32 million of the held- to-maturity investment securities on the Company’s Consolidated Balance Sheet were related to the conduit, compared with $35 million at December 31, 2014.

In addition, the Company sponsors a municipal bond securities tender option bond program. The Company controls the activities of the program’s entities, is entitled to the residual returns and provides credit, liquidity and remarketing arrangements to the program. As a result, the Company has consolidated the program’s entities. At September 30, 2015, $2.3 billion of available-for-sale investment securities and $2.2 billion of short-term borrowings on the Consolidated Balance Sheet were related to the tender option bond program, compared with $2.9 billion of available-for-sale investment securities and $2.7 billion of short-term borrowings at December 31, 2014.

 

 Note 6  Mortgage Servicing Rights

The Company serviced $229.3 billion of residential mortgage loans for others at September 30, 2015, and $225.0 billion at December 31, 2014, which included subserviced mortgages with no corresponding MSRs asset. The net impact included in mortgage banking revenue of fair value changes of MSRs due to changes in valuation assumptions and derivatives used to economically hedge MSRs were net gains of $12 million and $49 million for the three months ended September 30, 2015 and 2014, respectively, and net gains of $18 million and $200 million (of which $44 million related to excess servicing rights sold during the second quarter of 2014) for the nine months ended September 30, 2015 and 2014, respectively. Loan servicing fees, not including valuation changes, included in mortgage banking revenue, were $182 million and $178 million for the three months ended September 30, 2015 and 2014, respectively, and $539 million and $551 million for the nine months ended September 30, 2015 and 2014, respectively.

 

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Changes in fair value of capitalized MSRs are summarized as follows:

 

    Three Months Ended
September 30,
          Nine Months Ended
September 30,
 
(Dollars in Millions)   2015     2014           2015     2014  

Balance at beginning of period

  $ 2,481      $ 2,412           $ 2,338      $ 2,680   

Rights purchased

    7        1             22        3   

Rights capitalized

    182        109             491        264   

Rights sold

                              (141

Changes in fair value of MSRs

            

Due to fluctuations in market interest rates (a)

    (168     29             (127     (129

Due to revised assumptions or models (b)

    7        15             9        71   

Other changes in fair value (c)

    (112     (105          (336     (287

Balance at end of period

  $ 2,397      $ 2,461           $ 2,397      $ 2,461   

 

(a) Includes changes in MSR value associated with changes in market interest rates, including estimated prepayment rates and anticipated earnings on escrow deposits.
(b) Includes changes in MSR value not caused by changes in market interest rates, such as changes in cost to service, ancillary income, and discount rate, as well as the impact of any model changes.
(c) Primarily represents changes due to realization of expected cash flows over time (decay).

The estimated sensitivity to changes in market interest rates of the fair value of the MSRs portfolio and the related derivative instruments was as follows:

 

    September 30, 2015           December 31, 2014  
(Dollars in Millions)   Down
100 bps
    Down
50 bps
    Down
25 bps
   

Up

25 bps

   

Up

50 bps

    Up
100 bps
          Down
100 bps
    Down
50 bps
    Down
25 bps
   

Up

25 bps

   

Up

50 bps

    Up
100 bps
 

MSR portfolio

  $ (585   $ (272   $ (129   $ 108      $ 200      $ 375           $ (540   $ (242   $ (114   $ 100      $ 185      $ 346   

Derivative instrument hedges

    496        247        121        (108     (203     (368          441        223        109        (102     (197     (375

Net sensitivity

  $ (89   $ (25   $ (8   $      $ (3   $ 7           $ (99   $ (19   $ (5   $ (2   $ (12   $ (29

The fair value of MSRs and their sensitivity to changes in interest rates is influenced by the mix of the servicing portfolio and characteristics of each segment of the portfolio. The Company’s servicing portfolio consists of the distinct portfolios of government-insured mortgages, conventional mortgages and Housing Finance Agency (“HFA”) mortgages. The servicing portfolios are predominantly comprised of fixed-rate agency loans with limited adjustable-rate or jumbo mortgage loans. The HFA division specializes in servicing loans made under state and local housing authority programs. These programs provide mortgages to low-income and moderate-income borrowers and are generally government-insured programs with a favorable rate subsidy, down payment and/or closing cost assistance.

A summary of the Company’s MSRs and related characteristics by portfolio was as follows:

 

    September 30, 2015          December 31, 2014  
(Dollars in Millions)   HFA     Government     Conventional (b)     Total          HFA     Government     Conventional (b)     Total  

Servicing portfolio

  $ 23,843      $ 40,362      $ 162,730      $ 226,935          $ 19,706      $ 40,471      $ 162,620      $ 222,797   

Fair value

  $ 265      $ 433      $ 1,699      $ 2,397          $ 213      $ 426      $ 1,699      $ 2,338   

Value (bps) (a)

    111        107        104        106            108        105        104        105   

Weighted-average servicing fees (bps)

    36        33        27        29            37        33        27        29   

Multiple (value/servicing fees)

    3.08        3.24        3.85        3.66            2.92        3.18        3.85        3.62   

Weighted-average note rate

    4.47     4.09     4.09     4.13         4.58     4.18     4.14     4.19

Weighted-average age (in years)

    3.3        3.5        3.4        3.4            3.6        3.2        3.1        3.2   

Weighted-average expected prepayment (constant prepayment rate)

    12.7     15.1     11.4     12.2         12.8     14.8     11.4     12.1

Weighted-average expected life (in years)

    6.1        5.4        6.3        6.1            6.2        5.5        6.5        6.3   

Weighted-average discount rate

    11.8     11.2     9.5     10.0         11.9     11.2     9.6     10.1

 

(a) Value is calculated as fair value divided by the servicing portfolio.
(b) Represents loans sold primarily to GSEs.

 

56    U.S. Bancorp


Table of Contents
 Note 7  Preferred Stock

At September 30, 2015 and December 31, 2014, the Company had authority to issue 50 million shares of preferred stock. The number of shares issued and outstanding and the carrying amount of each outstanding series of the Company’s preferred stock were as follows:

 

    September 30, 2015            December 31, 2014  
(Dollars in Millions)   Shares
Issued and
Outstanding
     Liquidation
Preference
     Discount      Carrying
Amount
           Shares
Issued and
Outstanding
     Liquidation
Preference
     Discount      Carrying
Amount
 

Series A

    12,510       $ 1,251       $ 145       $ 1,106              12,510       $ 1,251       $ 145       $ 1,106   

Series B

    40,000         1,000                 1,000              40,000         1,000                 1,000   

Series F

    44,000         1,100         12         1,088              44,000         1,100         12         1,088   

Series G

    43,400         1,085         10         1,075              43,400         1,085         10         1,075   

Series H

    20,000         500         13         487              20,000         500         13         487   

Total preferred stock (a)

    159,910       $ 4,936       $ 180       $ 4,756              159,910       $ 4,936       $ 180       $ 4,756   

 

(a) The par value of all shares issued and outstanding at September 30, 2015 and December 31, 2014, was $1.00 per share.

 

 Note 8  Accumulated Other Comprehensive Income (Loss)

Shareholders’ equity is affected by transactions and valuations of asset and liability positions that require adjustments to accumulated other comprehensive income (loss). The reconciliation of the transactions affecting accumulated other comprehensive income (loss) included in shareholders’ equity is as follows:

 

Three Months Ended September 30,

(Dollars in Millions)

  Unrealized Gains
(Losses) on
Securities
Available-For-
Sale
    Unrealized Gains
(Losses) on
Securities
Transferred From
Available-For-Sale
to Held-To-
Maturity
    Unrealized Gains
(Losses) on
Derivative Hedges
    Unrealized Gains
(Losses) on
Retirement Plans
    Foreign
Currency
Translation
    Total  

2015

           

Balance at beginning of period

  $ 301      $ 43      $ (125   $ (1,037   $ (47   $ (865

Changes in unrealized gains and losses

    202               (38                   164   

Foreign currency translation adjustment (a)

                                (28     (28

Reclassification to earnings of realized gains and losses

    1        (6     48        55               98   

Applicable income taxes

    (78     2        (4     (21     11        (90

Balance at end of period

  $ 426      $ 39      $ (119   $ (1,003   $ (64   $ (721

2014

           

Balance at beginning of period

  $ 233      $ 60      $ (225   $ (699   $ (51   $ (682

Changes in unrealized gains and losses

    (21            16                      (5

Foreign currency translation adjustment (a)

                                4        4   

Reclassification to earnings of realized gains and losses

    3        (7     45        35               76   

Applicable income taxes

    7        3        (23     (14     (2     (29

Balance at end of period

  $ 222      $ 56      $ (187   $ (678   $ (49   $ (636

 

(a) Represents the impact of changes in foreign currency exchange rates on the Company’s investment in foreign operations and related hedges.

 

Nine Months Ended September 30,

(Dollars in Millions)

 

Unrealized Gains

(Losses) on
Securities
Available-For-
Sale

    Unrealized Gains
(Losses) on
Securities
Transferred  From
Available-For-Sale
to Held-To-
Maturity
    Unrealized Gains
(Losses) on
Derivative Hedges
    Unrealized Gains
(Losses) on
Retirement Plans
    Foreign
Currency
Translation
    Total  

2015

           

Balance at beginning of period

  $ 392      $ 52      $ (172   $ (1,106   $ (62   $ (896

Changes in unrealized gains and losses

    54               (61                   (7

Foreign currency translation adjustment (a)

                                (3     (3

Reclassification to earnings of realized gains and losses

    1        (20     147        167               295   

Applicable income taxes

    (21     7        (33     (64     1        (110

Balance at end of period

  $ 426      $ 39      $ (119   $ (1,003   $ (64   $ (721

2014

           

Balance at beginning of period

  $ (77   $ 70      $ (261   $ (743   $ (60   $ (1,071

Changes in unrealized gains and losses

    486               (19                   467   

Other-than-temporary impairment not recognized in earnings on securities available-for-sale

    1                                    1   

Foreign currency translation adjustment (a)

                                18        18   

Reclassification to earnings of realized gains and losses

    (2     (23     139        107               221   

Applicable income taxes

    (186     9        (46     (42     (7     (272

Balance at end of period

  $ 222      $ 56      $ (187   $ (678   $ (49   $ (636

 

(a) Represents the impact of changes in foreign currency exchange rates on the Company’s investment in foreign operations and related hedges.

 

U.S. Bancorp    57


Table of Contents

Additional detail about the impact to net income for items reclassified out of accumulated other comprehensive income (loss) and into earnings, is as follows:

 

    Impact to Net Income    

Affected Line Item in the
Consolidated Statement of Income

    Three Months Ended September 30,           Nine Months Ended September 30,     
(Dollars in Millions)   2015     2014           2015     2014    

Unrealized gains (losses) on securities available-for-sale

              

Realized gains (losses) on sale of securities

  $      $           $      $ 8      Total securities gains (losses), net

Other-than-temporary impairment recognized in earnings

    (1     (3          (1     (6  
    (1     (3          (1     2      Total before tax
           1                    (1   Applicable income taxes
    (1     (2          (1     1      Net-of-tax

Unrealized gains (losses) on securities transferred from available-for-sale to held-to-maturity

              

Amortization of unrealized gains

    6        7             20        23      Interest income
    (2     (3          (7     (9   Applicable income taxes
    4        4             13        14      Net-of-tax

Unrealized gains (losses) on derivative hedges

              

Realized gains (losses) on derivative hedges

    (48     (45          (147     (139   Net interest income
    19        17             57        53      Applicable income taxes
    (29     (28          (90     (86   Net-of-tax

Unrealized gains (losses) on retirement plans

              

Actuarial gains (losses) and prior service cost (credit) amortization

    (55     (35          (167     (107   Employee benefits expense
    21        14             64        42      Applicable income taxes
    (34     (21          (103     (65   Net-of-tax

Total impact to net income

  $ (60   $ (47        $ (181   $ (136    

 

 Note 9  Earnings Per Share

The components of earnings per share were:

 

    

Three Months Ended

September 30,

          Nine Months Ended
September 30,
 
(Dollars and Shares in Millions, Except Per Share Data)        2015         2014               2015         2014  

Net income attributable to U.S. Bancorp

   $ 1,489      $ 1,471           $ 4,403      $ 4,363   

Preferred dividends

     (62     (60          (182     (181

Earnings allocated to participating stock awards

     (5     (6          (17     (19

Net income applicable to U.S. Bancorp common shareholders

   $ 1,422      $ 1,405           $ 4,204      $ 4,163   

Average common shares outstanding

     1,758        1,798             1,770        1,809   

Net effect of the exercise and assumed purchase of stock awards

     8        9             8        10   

Average diluted common shares outstanding

     1,766        1,807             1,778        1,819   

Earnings per common share

   $ .81      $ .78           $ 2.38      $ 2.30   

Diluted earnings per common share

   $ .81      $ .78           $ 2.36      $ 2.29   

Options outstanding at September 30, 2015, to purchase 1 million common shares were not included in the computation of diluted earnings per share for both the three months and nine months ended September 30, 2015, because they were antidilutive.

 

 Note 10  Employee Benefits

The components of net periodic benefit cost for the Company’s retirement plans were:

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    Pension Plans     Postretirement
Welfare Plan
    Pension Plans     Postretirement
Welfare Plan
 
(Dollars in Millions)   2015       2014       2015       2014       2015       2014       2015       2014  

Service cost

  $ 47      $ 38      $      $      $ 141      $ 114      $      $   

Interest cost

    49        50        1        1        146        148        3        3   

Expected return on plan assets

    (56     (51            (1     (167     (155     (1     (1

Prior service cost (credit) amortization

    (2     (2     (1     (1     (4     (4     (2     (3

Actuarial loss (gain) amortization

    59        39        (1     (1     176        118        (3     (4

Net periodic benefit cost

  $ 97      $ 74      $ (1   $ (2   $ 292      $ 221      $ (3   $ (5

 

58    U.S. Bancorp


Table of Contents
 Note 11  Income Taxes

The components of income tax expense were:

 

    Three Months Ended
September 30,
          Nine Months Ended
September 30,
 
(Dollars in Millions)       2015         2014               2015         2014  

Federal

            

Current

  $ 556      $ 423           $ 1,355      $ 1,334   

Deferred

    (114     10             (81     (19

Federal income tax

    442        433             1,274        1,315   

State

            

Current

    103        101             283        268   

Deferred

    (11     (11          (16     (17

State income tax

    92        90             267        251   

Total income tax provision

  $ 534      $ 523           $ 1,541      $ 1,566   

A reconciliation of expected income tax expense at the federal statutory rate of 35 percent to the Company’s applicable income tax expense follows:

 

    Three Months Ended
September 30,
          Nine Months Ended
September 30,
 
(Dollars in Millions)       2015         2014               2015         2014  

Tax at statutory rate

  $ 713      $ 704           $ 2,095      $ 2,091   

State income tax, at statutory rates, net of federal tax benefit

    60        62             174        163   

Tax effect of

            

Tax credits and benefits, net of related expenses

    (177     (186          (523     (535

Tax-exempt income

    (51     (51          (154     (154

Noncontrolling interests

    (5     (5          (15     (15

Other items (a)

    (6     (1          (36     16   

Applicable income taxes

  $ 534      $ 523           $ 1,541      $ 1,566   

 

(a) Includes the resolution of certain tax matters with taxing authorities in the first quarter of 2015.

The Company’s income tax returns are subject to review and examination by federal, state, local and foreign government authorities. On an ongoing basis, numerous federal, state, local and foreign examinations are in progress and cover multiple tax years. As of September 30, 2015, the federal taxing authority has completed its examination of the Company through the fiscal year ended December 31, 2010. The years open to examination by foreign, state and local government authorities vary by jurisdiction.

The Company’s net deferred tax liability was $1.7 billion at September 30, 2015 and December 31, 2014.

 

 Note 12  Derivative Instruments

In the ordinary course of business, the Company enters into derivative transactions to manage various risks and to accommodate the business requirements of its customers. The Company recognizes all derivatives on the Consolidated Balance Sheet at fair value in other assets or in other liabilities. On the date the Company enters into a derivative contract, the derivative is designated as either a hedge of the fair value of a recognized asset or liability (“fair value hedge”); a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”); a hedge of the volatility of an investment in foreign operations driven by changes in foreign currency exchange rates (“net investment hedge”); or a designation is not made as it is a customer-related transaction, an economic hedge for asset/liability risk management purposes or another stand-alone derivative created through the Company’s operations (“free-standing derivative”). When a derivative is designated as a fair value, cash flow or net investment hedge, the Company performs an assessment, at inception and, at a minimum, quarterly thereafter, to determine the effectiveness of the derivative in offsetting changes in the value or cash flows of the hedged item(s).

Fair Value Hedges These derivatives are interest rate swaps the Company uses to hedge the change in fair value related to interest rate changes of its underlying fixed-rate debt. Changes in the fair value of derivatives designated as fair value hedges, and changes in the fair value of the hedged items, are recorded in earnings. All fair value hedges were highly effective for the three and nine months ended September 30, 2015, and the change in fair value attributed to hedge ineffectiveness was not material.

 

U.S. Bancorp    59


Table of Contents

Cash Flow Hedges These derivatives are interest rate swaps the Company uses to hedge the forecasted cash flows from its underlying variable-rate loans and debt. Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) until the cash flows of the hedged items are realized. If a derivative designated as a cash flow hedge is terminated or ceases to be highly effective, the gain or loss in other comprehensive income (loss) is amortized to earnings over the period the forecasted hedged transactions impact earnings. If a hedged forecasted transaction is no longer probable, hedge accounting is ceased and any gain or loss included in other comprehensive income (loss) is reported in earnings immediately, unless the forecasted transaction is at least reasonably possible of occurring, whereby the amounts remain within other comprehensive income (loss). At September 30, 2015, the Company had $119 million (net-of-tax) of realized and unrealized losses on derivatives classified as cash flow hedges recorded in other comprehensive income (loss), compared with $172 million (net-of-tax) at December 31, 2014. The estimated amount to be reclassified from other comprehensive income (loss) into earnings during the remainder of 2015 and the next 12 months are losses of $30 million (net-of-tax) and $94 million (net-of-tax), respectively. This amount includes gains and losses related to hedges that were terminated early for which the forecasted transactions are still probable. All cash flow hedges were highly effective for the three and nine months ended September 30, 2015, and the change in fair value attributed to hedge ineffectiveness was not material.

Net Investment Hedges The Company uses forward commitments to sell specified amounts of certain foreign currencies, and occasionally non-derivative debt instruments, to hedge the volatility of its investment in foreign operations driven by fluctuations in foreign currency exchange rates. The ineffectiveness on all net investment hedges was not material for the three and nine months ended September 30, 2015. There were no non-derivative debt instruments designated as net investment hedges at September 30, 2015 or December 31, 2014.

Other Derivative Positions The Company enters into free-standing derivatives to mitigate interest rate risk and for other risk management purposes. These derivatives include forward commitments to sell to-be-announced securities (“TBAs”) and other commitments to sell residential mortgage loans, which are used to economically hedge the interest rate risk related to residential mortgage loans held for sale (“MLHFS”) and unfunded mortgage loan commitments. The Company also enters into interest rate swaps, forward commitments to buy TBAs, U.S. Treasury and Eurodollar futures and options on U.S. Treasury futures to economically hedge the change in the fair value of the Company’s MSRs. The Company also enters into foreign currency forwards to economically hedge remeasurement gains and losses the Company recognizes on foreign currency denominated assets and liabilities. In addition, the Company acts as a seller and buyer of interest rate derivatives and foreign exchange contracts for its customers. The Company mitigates the market and liquidity risk associated with these customer derivatives by entering into similar offsetting positions with broker-dealers, or on a portfolio basis by entering into other derivative or non-derivative financial instruments that partially or fully offset the exposure from these customer-related positions. The Company’s customer derivatives and related hedges are monitored and reviewed by the Company’s Market Risk Committee, which establishes policies for market risk management, including exposure limits for each portfolio. The Company also has derivative contracts that are created through its operations, including commitments to originate MLHFS and swap agreements related to the sale of a portion of its Class B common shares of Visa Inc. Refer to Note 14 for further information on these swap agreements.

For additional information on the Company’s purpose for entering into derivative transactions and its overall risk management strategies, refer to “Management Discussion and Analysis — Use of Derivatives to Manage Interest Rate and Other Risks” which is incorporated by reference into these Notes to Consolidated Financial Statements.

 

60    U.S. Bancorp


Table of Contents

The following table summarizes the asset and liability management derivative positions of the Company:

 

    Asset Derivatives            Liability Derivatives  
(Dollars in Millions)   Notional
Value
     Fair
Value
     Weighted-
Average
Remaining
Maturity
In Years
           Notional
Value
     Fair
Value
     Weighted-
Average
Remaining
Maturity
In Years
 

September 30, 2015

                     

Fair value hedges

                     

Interest rate contracts

                     

Receive fixed/pay floating swaps

  $ 3,050       $ 104         4.68            $       $           

Cash flow hedges

                     

Interest rate contracts

                     

Pay fixed/receive floating swaps

    32                 7.13              6,915         222         3.40   

Net investment hedges

                     

Foreign exchange forward contracts

    1,015         8         .04                                

Other economic hedges

                     

Interest rate contracts

                     

Futures and forwards

                     

Buy

    6,045         48         .11              51         1         .05   

Sell

    694         5         1.64              6,618         66         .11   

Options

                     

Purchased

    3,075                 .07                                

Written

    2,377         38         .09              8         1         .08   

Receive fixed/pay floating swaps

    3,962         79         10.22                                

Pay fixed/receive floating swaps

                                 77         2         9.45   

Foreign exchange forward contracts

    3,673         9         .01              3,240         14         .03   

Equity contracts

                                 87         2         .54   

Credit contracts

    1,199         2         2.44              2,833         4         2.86   

Other (a)

    111         1         .02              682         63         2.52   

Total

  $ 25,233       $ 294               $ 20,511       $ 375      

December 31, 2014

                     

Fair value hedges

                     

Interest rate contracts

                     

Receive fixed/pay floating swaps

  $ 2,750       $ 65         5.69            $       $           

Cash flow hedges

                     

Interest rate contracts

                     

Pay fixed/receive floating swaps

    272         6         7.76              5,748         315         1.94   

Receive fixed/pay floating swaps

    250                 .16                                

Net investment hedges

                     

Foreign exchange forward contracts

    1,047         31         .04                                

Other economic hedges

                     

Interest rate contracts

                     

Futures and forwards

                     

Buy

    4,839         45         .07              60                 .08   

Sell

    448         10         .13              6,713         62         .09   

Options

                     

Purchased

    2,500                 .06                                

Written

    2,643         31         .08              4                 .11   

Receive fixed/pay floating swaps

    3,552         14         10.22              250         1         10.22   

Pay fixed/receive floating swaps

    15                 10.22                                

Foreign exchange forward contracts

    510         3         .03              6,176         41         .02   

Equity contracts

    86         3         .60                                

Credit contracts

    1,247         3         3.29              2,282         5         2.85   

Other (a)

    58         4         .03              390         48         3.20   

Total

  $ 20,217       $ 215                     $ 21,623       $ 472            

 

(a) Includes short-term underwriting purchase and sale commitments with total asset and liability notional values of $111 million and $58 million at September 30, 2015 and December 31, 2014, respectively, and derivative liability swap agreements related to the sale of a portion of the Company’s Class B common shares of Visa Inc. The Visa swap agreements had a total notional value, fair value and weighted average remaining maturity of $571 million, $62 million and 3.01 years at September 30, 2015, respectively, compared to $332 million, $44 million and 3.75 years at December 31, 2014, respectively.

 

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The following table summarizes the customer-related derivative positions of the Company:

 

    Asset Derivatives            Liability Derivatives  
(Dollars in Millions)   Notional
Value
     Fair
Value
    

Weighted-
Average
Remaining
Maturity

In Years

           Notional
Value
     Fair
Value
    

Weighted-
Average
Remaining
Maturity

In Years

 

September 30, 2015

                     

Interest rate contracts

                     

Receive fixed/pay floating swaps

  $ 39,413       $ 1,395         5.29            $ 2,325       $ 6         7.11   

Pay fixed/receive floating swaps

    1,560         4         7.28              38,952         1,458         5.36   

Options

                     

Purchased

    7,642         8         2.31              386         3         17.21   

Written

    147         4         2.48              7,658         7         2.99   

Futures

                     

Buy

    2,933         2         1.04                                

Sell

                                 87                 1.22   

Foreign exchange rate contracts

                     

Forwards, spots and swaps

    21,126         980         .53              18,430         930         .60   

Options

                     

Purchased

    1,341         43         1.41                                

Written

                                 1,341         43         1.41   

Total

  $ 74,162       $ 2,436               $ 69,179       $ 2,447      

December 31, 2014

                     

Interest rate contracts

                     

Receive fixed/pay floating swaps

  $ 21,724       $ 888         6.09            $ 5,880       $ 24         3.79   

Pay fixed/receive floating swaps

    4,622         26         3.27              21,821         892         6.08   

Options

                     

Purchased

    4,409         10         3.79              24                 2.42   

Written

    24                 2.42              4,375         10         3.79   

Futures

                     

Buy

    1,811                 .22              226                 .45   

Sell

    152                 1.08              46                 1.73   

Foreign exchange rate contracts

                     

Forwards, spots and swaps

    17,062         890         .52              14,645         752         .59   

Options

                     

Purchased

    976         39         .44                                

Written

                                 976         39         .44   

Total

  $ 50,780       $ 1,853                     $ 47,993       $ 1,717            

The table below shows the effective portion of the gains (losses) recognized in other comprehensive income (loss) and the gains (losses) reclassified from other comprehensive income (loss) into earnings (net-of-tax):

 

    Three Months Ended September 30,           Nine Months Ended September 30,  
   

Gains (Losses)
Recognized in
Other
Comprehensive
Income

(Loss)

    

Gains (Losses)
Reclassified from
Other
Comprehensive
Income

(Loss) into Earnings

         

Gains (Losses)
Recognized in
Other
Comprehensive
Income

(Loss)

   

Gains (Losses)
Reclassified from
Other
Comprehensive
Income

(Loss) into Earnings

 
(Dollars in Millions)   2015     2014      2015     2014           2015     2014     2015     2014  

Asset and Liability Management Positions

                     

Cash flow hedges

                     

Interest rate contracts (a)

  $ (24   $ 10       $ (30   $ (28        $ (38   $ (12   $ (91   $ (86

Net investment hedges

                     

Foreign exchange forward contracts

    (1     84                            79        93                 

 

Note: Ineffectiveness on cash flow and net investment hedges was not material for the three and nine months ended September 30, 2015 and 2014.
(a) Gains (Losses) reclassified from other comprehensive income (loss) into interest income on loans and interest expense on long-term debt.

 

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The table below shows the gains (losses) recognized in earnings for fair value hedges, other economic hedges and the customer-related positions:

 

   

Location of

Gains (Losses)

Recognized in Earnings

   Three Months
Ended September 30,
     Nine Months
Ended September 30,
 
(Dollars in Millions)      2015     2014          2015         2014  

Asset and Liability Management Positions

             

Fair value hedges (a)

             

Interest rate contracts

  Other noninterest income    $ 52      $ (19    $ 44      $ (13

Other economic hedges

             

Interest rate contracts

             

Futures and forwards

  Mortgage banking revenue      (55     6         133        (69

Purchased and written options

  Mortgage banking revenue      99        64         181        210   

Receive fixed/pay floating swaps

  Mortgage banking revenue      173        17         152        238   

Pay fixed/receive floating swaps

  Mortgage banking revenue      (4             (3       

Foreign exchange forward contracts

  Commercial products revenue      17        (24      103        (41

Equity contracts

  Compensation expense      (1             (2     1   

Credit contracts

  Other noninterest income                     1          

Other

  Other noninterest income             1                (42

Customer-Related Positions

             

Interest rate contracts

             

Receive fixed/pay floating swaps

  Other noninterest income      540        (20      640        329   

Pay fixed/receive floating swaps

  Other noninterest income      (534     28         (615     (307

Purchased and written options

  Other noninterest income      1                2          

Futures

  Other noninterest income      2                3          

Foreign exchange rate contracts

             

Forwards, spots and swaps

  Commercial products revenue      19        13         56        45   

Purchased and written options

  Commercial products revenue                     1          

 

(a) Gains (Losses) on items hedged by interest rate contracts included in noninterest income (expense), were $(50) million and $19 million for the three months ended September 30, 2015 and 2014, respectively, and $(43) million and $13 million for the nine months ended September 30, 2015 and 2014, respectively. The ineffective portion was immaterial for the three and nine months ended September 30, 2015 and 2014.

Derivatives are subject to credit risk associated with counterparties to the derivative contracts. The Company measures that credit risk using a credit valuation adjustment and includes it within the fair value of the derivative. The Company manages counterparty credit risk through diversification of its derivative positions among various counterparties, by entering into master netting arrangements and, where possible, by requiring collateral arrangements. A master netting arrangement allows two counterparties, who have multiple derivative contracts with each other, the ability to net settle amounts under all contracts, including any related collateral, through a single payment and in a single currency. Collateral arrangements require the counterparty to deliver collateral (typically cash or U.S. Treasury and agency securities) equal to the Company’s net derivative receivable, subject to minimum transfer and credit rating requirements.

The Company’s collateral arrangements are predominately bilateral and, therefore, contain provisions that require collateralization of the Company’s net liability derivative positions. Required collateral coverage is based on certain net liability thresholds and contingent upon the Company’s credit rating from two of the nationally recognized statistical rating organizations. If the Company’s credit rating were to fall below credit ratings thresholds established in the collateral arrangements, the counterparties to the derivatives could request immediate additional collateral coverage up to and including full collateral coverage for derivatives in a net liability position. The aggregate fair value of all derivatives under collateral arrangements that were in a net liability position at September 30, 2015, was $1.1 billion. At September 30, 2015, the Company had $925 million of cash and investment securities posted as collateral against this net liability position.

 

 Note 13  Netting Arrangements for Certain Financial Instruments and Securities Financing Activities

The majority of the Company’s derivative portfolio consists of bilateral over-the-counter trades. However, current regulations require that certain interest rate swaps and forwards and credit contracts need to be centrally cleared through clearinghouses. In addition, a portion of the Company’s derivative positions are exchange-traded. These are predominately U.S. Treasury futures or options on U.S. Treasury futures. Of the Company’s $189.1 billion total notional amount of derivative positions at September 30, 2015, $56.8 billion related to those centrally cleared through clearinghouses and $5.8 billion related to those that were exchange-traded. Irrespective of how derivatives are traded, the Company’s derivative contracts include offsetting rights (referred to as netting arrangements), and depending on expected volume, credit risk, and counterparty preference, collateral maintenance may be required. For all derivatives under collateral support arrangements, fair value is determined daily and, depending on the collateral maintenance requirements, the Company and a counterparty may receive or deliver collateral, based upon the net fair value of all

 

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derivative positions between the Company and the counterparty. Collateral is typically cash, but securities may be allowed under collateral arrangements with certain counterparties. Receivables and payables related to cash collateral are included in other assets and other liabilities on the Consolidated Balance Sheet, along with the related derivative asset and liability fair values. Any securities pledged to counterparties as collateral remain on the Consolidated Balance Sheet. Securities received from counterparties as collateral are not recognized on the Consolidated Balance Sheet, unless the counterparty defaults. In general, securities used as collateral can be sold, repledged or otherwise used by the party in possession. No restrictions exist on the use of cash collateral by either party. Refer to Note 12 for further discussion of the Company’s derivatives, including collateral arrangements.

As part of the Company’s treasury and broker-dealer operations, the Company executes transactions that are treated as securities sold under agreements to repurchase or securities purchased under agreements to resell, both of which are accounted for as collateralized financings. Securities sold under agreements to repurchase include repurchase agreements and securities loaned transactions. Securities purchased under agreements to resell include reverse repurchase agreements and securities borrowed transactions. For securities sold under agreements to repurchase, the Company records a liability for the cash received, which is included in short-term borrowings on the Consolidated Balance Sheet. For securities purchased under agreements to resell, the Company records a receivable for the cash paid, which is included in other assets on the Consolidated Balance Sheet.

Securities transferred to counterparties under repurchase agreements and securities loaned transactions continue to be recognized on the Consolidated Balance Sheet, are measured at fair value, and are included in investment securities or other assets. Securities received from counterparties under reverse repurchase agreements and securities borrowed transactions are not recognized on the Consolidated Balance Sheet unless the counterparty defaults. The securities transferred under repurchase and reverse repurchase transactions typically are U.S. Treasury and agency securities or residential agency mortgage-backed securities. The securities loaned or borrowed typically are corporate debt securities traded by the Company’s broker-dealer. In general, the securities transferred can be sold, repledged or otherwise used by the party in possession. No restrictions exist on the use of cash collateral by either party. Repurchase/reverse repurchase and securities loaned/borrowed transactions expose the Company to counterparty risk. The Company manages this risk by performing assessments, independent of business line managers, and establishing concentration limits on each counterparty. Additionally, these transactions include collateral arrangements that require the fair values of the underlying securities to be determined daily, resulting in cash being obtained or refunded to counterparties to maintain specified collateral levels.

The following table summarizes the maturities by category of collateral pledged for repurchase agreements and securities loaned transactions at September 30, 2015:

 

(Dollars in Millions)   Overnight and
Continuous
     Less Than
30 Days
     Total  

Repurchase Agreements

       

U.S. Treasury and agencies

  $ 43       $ 10       $ 53   

Residential agency mortgage-backed securities

    661         410         1,071   

Total repurchase agreements

    704         420         1,124   

Securities Loaned

       

Corporate debt securities

    17                 17   

Total securities loaned

    17                 17   

Gross amount of recognized liabilities for repurchase agreements and securities loaned

  $ 721       $ 420       $ 1,141   

The Company executes its derivative, repurchase/reverse repurchase and securities loaned/borrowed transactions under the respective industry standard agreements. These agreements include master netting arrangements that allow for multiple contracts executed with the same counterparty to be viewed as a single arrangement. This allows for net settlement of a single amount on a daily basis. In the event of default, the master netting arrangement provides for close-out netting, which allows all of these positions with the defaulting counterparty to be terminated and net settled with a single payment amount.

The Company has elected to offset the assets and liabilities under netting arrangements for the balance sheet presentation of the majority of its derivative counterparties, excluding centrally cleared derivative contracts due to current uncertainty about the legal enforceability of netting arrangements with the clearinghouses. The netting occurs at the counterparty level, and includes all assets and liabilities related to the derivative contracts, including those associated with cash collateral received or delivered. The Company has not elected to offset the assets and liabilities under netting arrangements for the balance sheet presentation of repurchase/reverse repurchase and securities loaned/borrowed transactions.

 

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The following tables provide information on the Company’s netting adjustments, and items not offset on the Consolidated Balance Sheet but available for offset in the event of default:

 

   

Gross

Recognized
Assets

    

Gross Amounts
Offset on the

Consolidated
Balance Sheet (a)

   

Net Amounts
Presented on the

Consolidated
Balance Sheet

     Gross Amounts Not Offset on the
Consolidated Balance Sheet
   

 

Net Amount

 
(Dollars in Millions)           Financial
Instruments (b)
    Collateral
Received (c)
   

September 30, 2015

                                                 

Derivative assets (d)

  $ 2,174       $ (932   $ 1,242       $ (115   $      $ 1,127   

Reverse repurchase agreements

    133                133         (42     (91       

Securities borrowed

    717                717                (696     21   

Total

  $ 3,024       $ (932   $ 2,092       $ (157   $ (787   $ 1,148   

December 31, 2014

             

Derivative assets (d)

  $ 1,847       $ (870   $ 977       $ (58   $      $ 919   

Reverse repurchase agreements

    40                40         (40              

Securities borrowed

    638                638                (620     18   

Total

  $ 2,525       $ (870   $ 1,655       $ (98   $ (620   $ 937   

 

(a) Includes $246 million and $258 million of cash collateral related payables that were netted against derivative assets at September 30, 2015 and December 31, 2014, respectively.
(b) For derivative assets this includes any derivative liability fair values that could be offset in the event of counterparty default; for reverse repurchase agreements this includes any repurchase agreement payables that could be offset in the event of counterparty default; for securities borrowed this includes any securities loaned payables that could be offset in the event of counterparty default.
(c) Includes the fair value of securities received by the Company from the counterparty. These securities are not included on the Consolidated Balance Sheet unless the counterparty defaults.
(d) Excludes $556 million and $221 million of derivative assets centrally cleared or otherwise not subject to netting arrangements at September 30, 2015 and December 31, 2014, respectively.

 

   

Gross

Recognized
Liabilities

    

Gross Amounts
Offset on the

Consolidated
Balance Sheet (a)

   

Net Amounts
Presented on the

Consolidated
Balance Sheet

     Gross Amounts Not Offset on the
Consolidated Balance Sheet
   

Net Amount

 
(Dollars in Millions)           Financial
Instruments (b)
    Collateral
Pledged (c)
   

September 30, 2015

                                                 

Derivative liabilities (d)

  $ 2,111       $ (1,445   $ 666       $ (115   $      $ 551   

Repurchase agreements

    1,124                1,124         (42     (1,082       

Securities loaned

    17                17                (17       

Total

  $ 3,252       $ (1,445   $ 1,807       $ (157   $ (1,099   $ 551   

December 31, 2014

             

Derivative liabilities (d)

  $ 1,847       $ (1,317   $ 530       $ (58   $      $ 472   

Repurchase agreements

    948                948         (40     (908       

Securities loaned

    47                47                (46     1   

Total

  $ 2,842       $ (1,317   $ 1,525       $ (98   $ (954   $ 473   

 

(a) Includes $758 million and $705 million of cash collateral related receivables that were netted against derivative liabilities at September 30, 2015 and December 31, 2014, respectively.
(b) For derivative liabilities this includes any derivative asset fair values that could be offset in the event of counterparty default; for repurchase agreements this includes any reverse repurchase agreement receivables that could be offset in the event of counterparty default; for securities loaned this includes any securities borrowed receivables that could be offset in the event of counterparty default.
(c) Includes the fair value of securities pledged by the Company to the counterparty. These securities are included on the Consolidated Balance Sheet unless the Company defaults.
(d) Excludes $711 million and $342 million of derivative liabilities centrally cleared or otherwise not subject to netting arrangements at September 30, 2015 and December 31, 2014, respectively.

 

 Note 14  Fair Values of Assets and Liabilities

The Company uses fair value measurements for the initial recording of certain assets and liabilities, periodic remeasurement of certain assets and liabilities, and disclosures. Derivatives, trading and available-for-sale investment securities, MSRs and substantially all MLHFS are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-fair value accounting or impairment write-downs of individual assets.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value measurement reflects all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance.

 

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The Company groups its assets and liabilities measured at fair value into a three-level hierarchy for valuation techniques used to measure financial assets and financial liabilities at fair value. This hierarchy is based on whether the valuation inputs are observable or unobservable. These levels are:

    Level 1 — Quoted prices in active markets for identical assets or liabilities. Level 1 includes U.S. Treasury securities, as well as exchange-traded instruments, including certain perpetual preferred and corporate debt securities.
    Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 includes debt securities that are traded less frequently than exchange-traded instruments and which are typically valued using third party pricing services; derivative contracts and other assets and liabilities, including securities, whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data; and MLHFS whose values are determined using quoted prices for similar assets or pricing models with inputs that are observable in the market or can be corroborated by observable market data.
    Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category includes MSRs, certain debt securities and certain derivative contracts.

When the Company changes its valuation inputs for measuring financial assets and financial liabilities at fair value, either due to changes in current market conditions or other factors, it may need to transfer those assets or liabilities to another level in the hierarchy based on the new inputs used. The Company recognizes these transfers at the end of the reporting period in which the transfers occur. During the nine months ended September 30, 2015 and 2014, there were no transfers of financial assets or financial liabilities between the hierarchy levels.

The Company has processes and controls in place to increase the reliability of estimates it makes in determining fair value measurements. Items quoted on an exchange are verified to the quoted price. Items provided by a third party pricing service are subject to price verification procedures as described in more detail in the specific valuation discussions below. For fair value measurements modeled internally, the Company’s valuation models are subject to the Company’s Model Risk Governance Policy and Program, as maintained by the Company’s risk management department. The purpose of model validation is to assess the accuracy of the models’ input, processing, and reporting components. All models are required to be independently reviewed and approved prior to being placed in use, and are subject to formal change control procedures. Under the Company’s Model Risk Governance Policy, models are required to be reviewed at least annually to ensure they are operating as intended. Inputs into the models are market observable inputs whenever available. When market observable inputs are not available, the inputs are developed based upon analysis of historical experience and evaluation of other relevant market data. Significant unobservable model inputs are subject to review by senior management in corporate functions, who are independent from the modeling. Significant unobservable model inputs are also compared to actual results, typically on a quarterly basis. Significant Level 3 fair value measurements are also subject to corporate-level review and are benchmarked to market transactions or other market data, when available. Additional discussion of processes and controls are provided in the valuation methodologies section that follows.

The following section describes the valuation methodologies used by the Company to measure financial assets and liabilities at fair value and for estimating fair value for financial instruments not recorded at fair value as required under disclosure guidance related to the fair value of financial instruments. In addition, the following section includes an indication of the level of the fair value hierarchy in which the assets or liabilities are classified. Where appropriate, the description includes information about the valuation models and key inputs to those models. During the nine months ended September 30, 2015 and 2014, there were no significant changes to the valuation techniques used by the Company to measure fair value.

Cash and Due From Banks The carrying value of cash and due from banks approximate fair value and are classified within Level 1. Fair value is provided for disclosure purposes only.

Federal Funds Sold and Securities Purchased Under Resale Agreements The carrying value of federal funds sold and securities purchased under resale agreements approximate fair value because of the relatively short time between the origination of the instrument and its expected realization and are classified within Level 2. Fair value is provided for disclosure purposes only.

 

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Investment Securities When quoted market prices for identical securities are available in an active market, these prices are used to determine fair value and these securities are classified within Level 1 of the fair value hierarchy. Level 1 investment securities include U.S. Treasury and exchange-traded securities.

For other securities, quoted market prices may not be readily available for the specific securities. When possible, the Company determines fair value based on market observable information, including quoted market prices for similar securities, inactive transaction prices, and broker quotes. These securities are classified within Level 2 of the fair value hierarchy. Level 2 valuations are generally provided by a third party pricing service. The Company reviews the valuation methodologies utilized by the pricing service and, on a quarterly basis, reviews the security level prices provided by the pricing service against management’s expectation of fair value, based on changes in various benchmarks and market knowledge from recent trading activity. Additionally, each quarter, the Company validates the fair value provided by the pricing service by comparing them to recent observable market trades (where available), broker provided quotes, or other independent secondary pricing sources. Prices obtained from the pricing service are adjusted if they are found to be inconsistent with observable market data. Level 2 investment securities are predominantly agency mortgage-backed securities, certain other asset-backed securities, municipal securities, corporate debt securities, agency debt securities and certain perpetual preferred securities.

The fair value of securities for which there are no market trades, or where trading is inactive as compared to normal market activity, are classified within Level 3 of the fair value hierarchy. The Company determines the fair value of these securities by using a discounted cash flow methodology and incorporating observable market information, where available. These valuations are modeled by a unit within the Company’s treasury department. The valuations use assumptions regarding housing prices, interest rates and borrower performance. Inputs are refined and updated at least quarterly to reflect market developments and actual performance. The primary valuation drivers of these securities are the prepayment rates, default rates and default severities associated with the underlying collateral, as well as the discount rate used to calculate the present value of the projected cash flows. Level 3 fair values, including the assumptions used, are subject to review by senior management in corporate functions, who are independent from the modeling. The fair value measurements are also compared to fair values provided by third party pricing services, where available. Securities classified within Level 3 include non-agency mortgage-backed securities, non-agency commercial mortgage-backed securities, certain asset-backed securities, certain collateralized debt obligations and collateralized loan obligations and certain corporate debt securities.

Mortgage Loans Held For Sale MLHFS measured at fair value, for which an active secondary market and readily available market prices exist, are initially valued at the transaction price and are subsequently valued by comparison to instruments with similar collateral and risk profiles. MLHFS are classified within Level 2. Included in mortgage banking revenue was a $61 million and a $4 million net gain for the three months ended September 30, 2015 and 2014, respectively, and a $27 million and a $102 million net gain for the nine months ended September 30, 2015 and 2014, respectively, from the changes to fair value of these MLHFS under fair value option accounting guidance. Changes in fair value due to instrument specific credit risk were immaterial. Interest income for MLHFS is measured based on contractual interest rates and reported as interest income on the Consolidated Statement of Income. Electing to measure MLHFS at fair value reduces certain timing differences and better matches changes in fair value of these assets with changes in the value of the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting.

Loans The loan portfolio includes adjustable and fixed-rate loans, the fair value of which is estimated using discounted cash flow analyses and other valuation techniques. The expected cash flows of loans consider historical prepayment experiences and estimated credit losses and are discounted using current rates offered to borrowers with similar credit characteristics. Generally, loan fair values reflect Level 3 information. Fair value is provided for disclosure purposes only, with the exception of impaired collateral-based loans that are measured at fair value on a non-recurring basis utilizing the underlying collateral fair value.

Mortgage Servicing Rights MSRs are valued using a discounted cash flow methodology, and are classified within Level 3. The Company determines fair value by estimating the present value of the asset’s future cash flows using prepayment rates, discount rates, and other assumptions. The MSR valuations, as well as the assumptions used, are developed by the mortgage banking division and are subject to review by senior management in corporate functions, who are independent from the modeling. The MSR valuations and assumptions are validated through comparison to trade information, publicly available data and industry surveys when available, and are also compared to independent third party valuations each quarter. Risks inherent in MSR valuation include higher than expected prepayment rates

 

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and/or delayed receipt of cash flows. There is minimal observable market activity for MSRs on comparable portfolios, and, therefore the determination of fair value requires significant management judgment. Refer to Note 6 for further information on MSR valuation assumptions.

Derivatives The majority of derivatives held by the Company are executed over-the-counter and are valued using standard cash flow, Black-Derman-Toy and Monte Carlo valuation techniques. The models incorporate inputs, depending on the type of derivative, including interest rate curves, foreign exchange rates and volatility. In addition, all derivative values incorporate an assessment of the risk of counterparty nonperformance, measured based on the Company’s evaluation of credit risk as well as external assessments of credit risk, where available. The Company monitors and manages its nonperformance risk by considering its ability to net derivative positions under master netting arrangements, as well as collateral received or provided under collateral arrangements. Accordingly, the Company has elected to measure the fair value of derivatives, at a counterparty level, on a net basis. The majority of the derivatives are classified within Level 2 of the fair value hierarchy, as the significant inputs to the models, including nonperformance risk, are observable. However, certain derivative transactions are with counterparties where risk of nonperformance cannot be observed in the market, and therefore the credit valuation adjustments result in these derivatives being classified within Level 3 of the fair value hierarchy. The credit valuation adjustments for nonperformance risk are determined by the Company’s treasury department using credit assumptions provided by the risk management department. The credit assumptions are compared to actual results quarterly and are recalibrated as appropriate.

The Company also has other derivative contracts that are created through its operations, including commitments to purchase and originate mortgage loans and swap agreements executed in conjunction with the sale of a portion of its Class B common shares of Visa Inc. (“the Visa swaps”). The mortgage loan commitments are valued by pricing models that include market observable and unobservable inputs, which result in the commitments being classified within Level 3 of the fair value hierarchy. The unobservable inputs include assumptions about the percentage of commitments that actually become a closed loan and the MSR value that is inherent in the underlying loan value, both of which are developed by the Company’s mortgage banking division. The closed loan percentages for the mortgage loan commitments are monitored on an on-going basis, as these percentages are also used for the Company’s economic hedging activities. The inherent MSR value for the commitments are generated by the same models used for the Company’s MSRs and thus are subject to the same processes and controls as described for the MSRs above. The Visa swaps require payments by either the Company or the purchaser of the Visa Inc. Class B common shares when there are changes in the conversion rate of the Visa Inc. Class B common shares to Visa Inc. Class A common shares, as well as quarterly payments to the purchaser based on specified terms of the agreements. Management reviews and updates the Visa swaps fair value in conjunction with its review of Visa related litigation contingencies, and the associated escrow funding. The fair value of the Visa swaps are calculated by the Company’s corporate development department using a discounted cash flow methodology which includes unobservable inputs about the timing and settlement amounts related to the resolution of certain Visa related litigation. The expected litigation resolution impacts the Visa Inc. Class B common share to Visa Inc. Class A common share conversion rate, as well as the ultimate termination date for the Visa swaps. Accordingly, the Visa swaps are classified within Level 3. Refer to Note 15 for further information on the Visa restructuring and related card association litigation.

Other Financial Instruments Other financial instruments include cost method equity investments and certain community development and tax-advantaged related assets and liabilities. The majority of the Company’s cost method equity investments are in Federal Home Loan Bank and Federal Reserve Bank stock, for which the carrying amounts approximate fair value and are classified within Level 2. Investments in other equity and limited partnership funds are estimated using fund provided net asset values. These equity investments are classified within Level 3. The community development and tax-advantaged related asset balances primarily represent the underlying assets of consolidated community development and tax-advantaged entities. The community development and tax-advantaged related liabilities represent the underlying liabilities of the consolidated entities (included in long-term debt) and liabilities related to other third party interests (included in other liabilities). The carrying value of the community development and tax-advantaged related asset and other liability balances are a reasonable estimate of fair value and are classified within Level 3. Refer to Note 5 for further information on community development and tax-advantaged related assets and liabilities. Fair value is provided for disclosure purposes only.

 

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Deposit Liabilities The fair value of demand deposits, savings accounts and certain money market deposits is equal to the amount payable on demand. The fair value of fixed-rate certificates of deposit was estimated by discounting the contractual cash flow using current market rates. Deposit liabilities are classified within Level 2. Fair value is provided for disclosure purposes only.

Short-term Borrowings Federal funds purchased, securities sold under agreements to repurchase, commercial paper and other short-term funds borrowed have floating rates or short-term maturities. The fair value of short-term borrowings was determined by discounting contractual cash flows using current market rates. Short-term borrowings are classified within Level 2. Included in short-term borrowings is the Company’s obligation on securities sold short, which is required to be accounted for at fair value per applicable accounting guidance. Fair value for other short-term borrowings is provided for disclosure purposes only.

Long-term Debt The fair value for most long-term debt was determined by discounting contractual cash flows using current market rates. Junior subordinated debt instruments were valued using market quotes. Long-term debt is classified within Level 2. Fair value is provided for disclosure purposes only.

Loan Commitments, Letters of Credit and Guarantees The fair value of commitments, letters of credit and guarantees represents the estimated costs to terminate or otherwise settle the obligations with a third party. Other loan commitments, letters of credit and guarantees are not actively traded, and the Company estimates their fair value based on the related amount of unamortized deferred commitment fees adjusted for the probable losses for these arrangements. These arrangements are classified within Level 3. Fair value is provided for disclosure purposes only.

Significant Unobservable Inputs of Level 3 Assets and Liabilities

The following section provides information on the significant inputs used by the Company to determine the fair value measurements of Level 3 assets and liabilities recorded at fair value on the Consolidated Balance Sheet. In addition, the following section includes a discussion of the sensitivity of the fair value measurements to changes in the significant inputs and a description of any interrelationships between these inputs for Level 3 assets and liabilities recorded at fair value on a recurring basis. The discussion below excludes nonrecurring fair value measurements of collateral value used for impairment measures for loans and other real estate owned. These valuations utilize third party appraisal or broker price opinions, and are classified as Level 3 due to the significant judgment involved.

Available-For-Sale Investment Securities The significant unobservable inputs used in the fair value measurement of the Company’s modeled Level 3 available-for-sale investment securities are prepayment rates, probability of default and loss severities associated with the underlying collateral, as well as the discount margin used to calculate the present value of the projected cash flows. Increases in prepayment rates for Level 3 securities will typically result in higher fair values, as increased prepayment rates accelerate the receipt of expected cash flows and reduce exposure to credit losses. Increases in the probability of default and loss severities will result in lower fair values, as these increases reduce expected cash flows. Discount margin is the Company’s estimate of the current market spread above the respective benchmark rate. Higher discount margin will result in lower fair values, as it reduces the present value of the expected cash flows.

Prepayment rates generally move in the opposite direction of market interest rates. In the current environment, an increase in the probability of default will generally be accompanied with an increase in loss severity, as both are impacted by underlying collateral values. Discount margins are influenced by market expectations about the security’s collateral performance, and therefore may directionally move with probability and severity of default; however, discount margins are also impacted by broader market forces, such as competing investment yields, sector liquidity, economic news, and other macroeconomic factors.

 

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The following table shows the significant valuation assumption ranges for Level 3 available-for-sale investment securities at September 30, 2015:

 

     Minimum     Maximum     Average  

Residential Prime Non-Agency Mortgage-Backed Securities (a)

     

Estimated lifetime prepayment rates

    5     20     14

Lifetime probability of default rates

           7        4   

Lifetime loss severity rates

    15        60        33   

Discount margin

    1        5        3   

Residential Non-Prime Non-Agency Mortgage-Backed Securities (b)

     

Estimated lifetime prepayment rates

    3     12     7

Lifetime probability of default rates

    4        12        7   

Lifetime loss severity rates

    20        75        53   

Discount margin

    1        6        2   

Other Asset-Backed Securities

     

Estimated lifetime prepayment rates

    6     6     6

Lifetime probability of default rates

    5        5        5   

Lifetime loss severity rates

    40        40        40   

Discount margin

    6        6        6   

 

(a) Prime securities are those designated as such by the issuer at origination. When an issuer designation is unavailable, the Company determines at acquisition date the categorization based on asset pool characteristics (such as weighted-average credit score, loan-to-value, loan type, prevalence of low documentation loans) and deal performance (such as pool delinquencies and security market spreads).
(b) Includes all securities not meeting the conditions to be designated as prime.

Mortgage Servicing Rights The significant unobservable inputs used in the fair value measurement of the Company’s MSRs are expected prepayments and the discount rate used to calculate the present value of the projected cash flows. Significant increases in either of these inputs in isolation would result in a significantly lower fair value measurement. Significant decreases in either of these inputs in isolation would result in a significantly higher fair value measurement. There is no direct interrelationship between prepayments and discount rate. Prepayment rates generally move in the opposite direction of market interest rates. Discount rates are generally impacted by changes in market return requirements.

The following table shows the significant valuation assumption ranges for MSRs at September 30, 2015:

 

     Minimum     Maximum     Average  

Expected prepayment

    11     20     12

Discount rate

    9        13        10   

Derivatives The Company has two distinct Level 3 derivative portfolios: (i) the Company’s commitments to purchase and originate mortgage loans that meet the requirements of a derivative and (ii) the Company’s asset/liability and customer-related derivatives that are Level 3 due to unobservable inputs related to measurement of risk of nonperformance by the counterparty. In addition, the Company’s Visa swaps are classified within Level 3.

The significant unobservable inputs used in the fair value measurement of the Company’s derivative commitments to purchase and originate mortgage loans are the percentage of commitments that actually become a closed loan and the MSR value that is inherent in the underlying loan value. A significant increase in the rate of loans that close would result in a larger derivative asset or liability. A significant increase in the inherent MSR value would result in an increase in the derivative asset or a reduction in the derivative liability. Expected loan close rates and the inherent MSR values are directly impacted by changes in market rates and will generally move in the same direction as interest rates.

The following table shows the significant valuation assumption ranges for the Company’s derivative commitments to purchase and originate mortgage loans at September 30, 2015:

 

     Minimum     Maximum     Average  

Expected loan close rate

    25     100     75

Inherent MSR value (basis points per loan)

    47        193        116   

The significant unobservable input used in the fair value measurement of certain of the Company’s asset/liability and customer-related derivatives is the credit valuation adjustment related to the risk of counterparty nonperformance. A significant increase in the credit valuation adjustment would result in a lower fair value measurement. A significant decrease in the credit valuation adjustment would result in a higher fair value measurement. The credit valuation adjustment is impacted by changes in the Company’s assessment of the counterparty’s credit position. At September 30, 2015, the minimum, maximum and average credit valuation adjustment as a percentage of the derivative contract fair value prior to adjustment was 0 percent, 97 percent and 4 percent, respectively.

 

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The significant unobservable inputs used in the fair value measurement of the Visa swaps are management’s estimate of the probability of certain litigation scenarios, and the timing of the resolution of the related litigation loss estimates in excess, or shortfall, of the Company’s proportional share of escrow funds. An increase in the loss estimate or a delay in the resolution of the related litigation would result in an increase in the derivative liability. A decrease in the loss estimate or an acceleration of the resolution of the related litigation would result in a decrease in the derivative liability.

The following table summarizes the balances of assets and liabilities measured at fair value on a recurring basis:

 

(Dollars in Millions)   Level 1      Level 2      Level 3      Netting     Total  

September 30, 2015

            

Available-for-sale securities

            

U.S. Treasury and agencies

  $ 1,971       $ 903       $       $      $ 2,874   

Mortgage-backed securities

            

Residential

            

Agency

            49,895                        49,895   

Non-agency

            

Prime (a)

                    338                338   

Non-prime (b)

                    251                251   

Commercial

            

Agency

            72                        72   

Asset-backed securities

            

Collateralized debt obligations/Collateralized loan obligations

            20                        20   

Other

            543         56                599   

Obligations of state and political subdivisions

            5,302                        5,302   

Corporate debt securities

    101         506         9                616   

Perpetual preferred securities

    55         116                        171   

Other investments

    233         25                        258   

Total available-for-sale

    2,360         57,382         654                60,396   

Mortgage loans held for sale

            4,429                        4,429   

Mortgage servicing rights

                    2,397                2,397   

Derivative assets

    2         1,921         807         (932     1,798   

Other assets

    109         785                        894   

Total

  $ 2,471       $ 64,517       $ 3,858       $ (932   $ 69,914   

Derivative liabilities

  $       $ 2,698       $ 124       $ (1,445   $ 1,377   

Short-term borrowings (c)

    154         692                        846   

Total

  $ 154       $ 3,390       $ 124       $ (1,445   $ 2,223   

December 31, 2014

            

Available-for-sale securities

            

U.S. Treasury and agencies

  $ 1,351       $ 1,281       $       $      $ 2,632   

Mortgage-backed securities

            

Residential

            

Agency

            45,017                        45,017   

Non-agency

            

Prime (a)

                    405                405   

Non-prime (b)

                    280                280   

Commercial

            

Agency

            115                        115   

Asset-backed securities

            

Collateralized debt obligations/Collateralized loan obligations

            22                        22   

Other

            557         62                619   

Obligations of state and political subdivisions

            5,868                        5,868   

Obligations of foreign governments

            6                        6   

Corporate debt securities

    101         504         9                614   

Perpetual preferred securities

    55         162                        217   

Other investments

    251         23                        274   

Total available-for-sale

    1,758         53,555         756                56,069   

Mortgage loans held for sale

            4,774                        4,774   

Mortgage servicing rights

                    2,338                2,338   

Derivative assets

            1,408         660         (870     1,198   

Other assets

    231         641                        872   

Total

  $ 1,989       $ 60,378       $ 3,754       $ (870   $ 65,251   

Derivative liabilities

  $       $ 2,103       $ 86       $ (1,317   $ 872   

Short-term borrowings (c)

    101         608                        709   

Total

  $ 101       $ 2,711       $ 86       $ (1,317   $ 1,581   
(a) Prime securities are those designated as such by the issuer at origination. When an issuer designation is unavailable, the Company determines at acquisition date the categorization based on asset pool characteristics (such as weighted-average credit score, loan-to-value, loan type, prevalence of low documentation loans) and deal performance (such as pool delinquencies and security market spreads).
(b) Includes all securities not meeting the conditions to be designated as prime.
(c) Represents the Company’s obligation on securities sold short required to be accounted for at fair value per applicable accounting guidance.

 

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The following table presents the changes in fair value for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended September 30:

 

(Dollars in Millions)  

Beginning

of Period

Balance

   

Net Gains

(Losses)

Included in

Net Income

   

Net Gains

(Losses)

Included in

Other

Comprehensive

Income (Loss)

    Purchases     Sales    

Principal

Payments

    Issuances     Settlements    

End

of Period

Balance

   

Net Change in
Unrealized

Gains (Losses)

Relating to Assets
and Liabilities Still
Held at End of Period

 

2015

                   

Available-for-sale securities

                   

Mortgage-backed securities

                   

Residential non-agency

                   

Prime (a)

  $ 363      $      $      $      $      $ (25   $      $      $ 338      $   

Non-prime (b)

    262        (1     1                      (11                   251        1   

Asset-backed securities

                   

Other

    58        2        (1                   (3                   56        (1

Corporate debt securities

    9                                                         9          

Total available-for-sale

    692        1  (c)       (f)                    (39                   654          

Mortgage servicing rights

    2,481        (273 ) (d)             7                      182  (g)             2,397        (273 ) (d) 

Net derivative assets and liabilities

    478        426  (e)                    (2                   (219     683        231  (h) 

2014

                   

Available-for-sale securities

                   

Mortgage-backed securities

                   

Residential non-agency

                   

Prime (a)

  $ 447      $      $ 2      $      $      $ (23   $      $      $ 426      $ 2   

Non-prime (b)

    286               6                      (8                   284        6   

Asset-backed securities

                   

Other

    66                                    (2                   64          

Corporate debt securities

    9                                                         9          

Total available-for-sale

    808               8  (f)                    (33                   783        8   

Mortgage servicing rights

    2,412        (61 ) (d)             1                      109  (g)             2,461        (61 ) (d) 

Net derivative assets and liabilities

    558        95  (i)                    (1                   (187     465        (15 ) (j) 

 

(a) Prime securities are those designated as such by the issuer at origination. When an issuer designation is unavailable, the Company determines at acquisition date the categorization based on asset pool characteristics (such as weighted-average credit score, loan-to-value, loan type, prevalence of low documentation loans) and deal performance (such as pool delinquencies and security market spreads).
(b) Includes all securities not meeting the conditions to be designated as prime.
(c) Included in interest income.
(d) Included in mortgage banking revenue.
(e) Approximately $274 million included in other noninterest income and $152 million included in mortgage banking revenue.
(f) Included in changes in unrealized gains and losses on securities available-for-sale.
(g) Represents MSRs capitalized during the period.
(h) Approximately $159 million included in other noninterest income and $72 million included in mortgage banking revenue.
(i) Approximately $7 million included in other noninterest income and $88 million included in mortgage banking revenue.
(j) Approximately $(65) million included in other noninterest income and $50 million included in mortgage banking revenue.

 

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The following table presents the changes in fair value for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30:

 

(Dollars in Millions)  

Beginning

of Period

Balance

   

Net Gains

(Losses)

Included in

Net Income

   

Net Gains

(Losses)

Included in

Other

Comprehensive

Income (Loss)

    Purchases     Sales    

Principal

Payments

    Issuances     Settlements    

End

of Period

Balance

   

Net Change in
Unrealized

Gains (Losses)

Relating to Assets
and Liabilities Still
Held at End of Period

 

2015

                   

Available-for-sale securities

                   

Mortgage-backed securities

                   

Residential non-agency

                   

Prime (a)

  $ 405      $      $ (2   $      $      $ (65   $      $      $ 338      $ (2

Non-prime (b)

    280        (1     1                      (29                   251        1   

Asset-backed securities

                   

Other

    62        4        (1                   (9                   56        (1

Corporate debt securities

    9                                                         9          

Total available-for-sale

    756        3  (c)      (2 ) (f)                    (103                   654        (2

Mortgage servicing rights

    2,338        (454 ) (d)             22                      491  (g)             2,397        (454 ) (d) 

Net derivative assets and liabilities

    574        725  (e)                    (7                   (609     683        203  (h) 

2014

                   

Available-for-sale securities

                   

Mortgage-backed securities

                   

Residential non-agency

                   

Prime (a)

  $ 478      $      $ 14      $      $      $ (66   $      $      $ 426      $ 14   

Non-prime (b)

    297        (4     14                      (23                   284        14   

Asset-backed securities

                   

Other

    63        2        1        4               (6                   64        1   

Corporate debt securities

    9                                                         9          

Total available-for-sale

    847        (2 ) (i)      29  (f)      4               (95                   783        29   

Mortgage servicing rights

    2,680        (345 ) (d)             3        (141            264  (g)             2,461        (345 ) (d) 

Net derivative assets and liabilities

    445        568  (j)             1        (1                   (548     465        80  (k) 

 

(a) Prime securities are those designated as such by the issuer at origination. When an issuer designation is unavailable, the Company determines at acquisition date the categorization based on asset pool characteristics (such as weighted-average credit score, loan-to-value, loan type, prevalence of low documentation loans) and deal performance (such as pool delinquencies and security market spreads).
(b) Includes all securities not meeting the conditions to be designated as prime.
(c) Included in interest income.
(d) Included in mortgage banking revenue.
(e) Approximately $360 million included in other noninterest income and $365 million included in mortgage banking revenue.
(f) Included in changes in unrealized gains and losses on securities available-for-sale.
(g) Represents MSRs capitalized during the period.
(h) Approximately $131 million included in other noninterest income and $72 million included in mortgage banking revenue.
(i) Included in securities gains (losses).
(j) Approximately $215 million included in other noninterest income and $353 million included in mortgage banking revenue.
(k) Approximately $30 million included in other noninterest income and $50 million included in mortgage banking revenue.

The Company is also required periodically to measure certain other financial assets at fair value on a nonrecurring basis. These measurements of fair value usually result from the application of lower-of-cost-or-fair value accounting or write-downs of individual assets.

The following table summarizes the balances as of the measurement date of assets measured at fair value on a nonrecurring basis, and still held as of the reporting date:

 

    September 30, 2015            December 31, 2014  
(Dollars in Millions)   Level 1      Level 2      Level 3      Total            Level1      Level 2      Level 3      Total  

Loans (a)

  $       $       $ 112       $ 112            $       $       $ 77       $ 77   

Other assets (b)

                    47         47                              90         90   

 

(a) Represents the carrying value of loans for which adjustments were based on the fair value of the collateral, excluding loans fully charged-off.
(b) Primarily represents the fair value of foreclosed properties that were measured at fair value based on an appraisal or broker price opinion of the collateral subsequent to their initial acquisition.

The following table summarizes losses recognized related to nonrecurring fair value measurements of individual assets or portfolios:

 

    Three Months Ended
September 30,
           Nine Months Ended
September 30,
 
(Dollars in Millions)   2015      2014            2015      2014  

Loans (a)

  $ 99       $ 21            $ 139       $ 68   

Other assets (b)

    10         17              29         51   

 

(a) Represents write-downs of student loans held for sale based on non-binding quoted prices received for the portfolio, that were subsequently transferred to loans, and write-downs of loans which were based on the fair value of the collateral, excluding loans fully charged-off.
(b) Primarily represents related losses of foreclosed properties that were measured at fair value subsequent to their initial acquisition.

 

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Fair Value Option

The following table summarizes the differences between the aggregate fair value carrying amount of MLHFS for which the fair value option has been elected and the aggregate unpaid principal amount that the Company is contractually obligated to receive at maturity:

 

    September 30, 2015           December 31, 2014  
(Dollars in Millions)   Fair Value
Carrying
Amount
     Aggregate
Unpaid
Principal
     Carrying
Amount Over
(Under) Unpaid
Principal
          Fair Value
Carrying
Amount
     Aggregate
Unpaid
Principal
     Carrying
Amount Over
(Under) Unpaid
Principal
 

Total loans

  $ 4,429       $ 4,266       $ 163           $ 4,774       $ 4,582       $ 192   

Nonaccrual loans

    5         8         (3          6         9         (3

Loans 90 days or more past due

    1         1                     1         1           

Disclosures About Fair Value of Financial Instruments

The following table summarizes the estimated fair value for financial instruments as of September 30, 2015 and December 31, 2014, and includes financial instruments that are not accounted for at fair value. In accordance with disclosure guidance related to fair values of financial instruments, the Company did not include assets and liabilities that are not financial instruments, such as the value of goodwill, long-term relationships with deposit, credit card, merchant processing and trust customers, other purchased intangibles, premises and equipment, deferred taxes and other liabilities. Additionally, in accordance with the disclosure guidance, insurance contracts and investments accounted for under the equity method are excluded.

The estimated fair values of the Company’s financial instruments are shown in the table below:

 

    September 30, 2015   December 31, 2014  
   

Carrying

Amount

        Fair Value         

Carrying

Amount

        Fair Value  
(Dollars in Millions)       Level 1     Level 2     Level 3     Total              Level 1     Level 2     Level 3     Total  

Financial Assets

                                                                                           

Cash and due from banks

  $ 10,450        $ 10,450      $      $      $ 10,450          $ 10,654        $ 10,654      $      $      $ 10,654   

Federal funds sold and securities purchased under resale agreements

    233                 233               233            118                 118               118   

Investment securities held-to-maturity

    44,690          2,312        42,658        81        45,051            44,974          1,928        43,124        88        45,140   

Loans held for sale (a)

    43                        43        43            18                        18        18   

Loans (b)

    250,714                        252,464        252,464            243,735                        245,424        245,424   

Other financial instruments

    2,262                 921        1,349        2,270            2,187                 924        1,269        2,193   

Financial Liabilities

                           

Deposits

    295,264                 295,235               295,235            282,733                 282,708               282,708   

Short-term borrowings (c)

    26,069                 25,851               25,851            29,184                 28,973               28,973   

Long-term debt

    32,504                 33,021               33,021            32,260                 32,659               32,659   

Other liabilities

    1,442                          1,442        1,442            1,231                          1,231        1,231   

 

(a) Excludes mortgages held for sale for which the fair value option under applicable accounting guidance was elected.
(b) Excludes loans measured at fair value on a nonrecurring basis.
(c) Excludes the Company’s obligation on securities sold short required to be accounted for at fair value per applicable accounting guidance.

The fair value of unfunded commitments, deferred non-yield related loans fees, standby letters of credit and other guarantees is approximately equal to their carrying value. The carrying value of unfunded commitments, deferred non-yield related loan fees and standby letters of credit was $411 million and $413 million at September 30, 2015 and December 31, 2014, respectively. The carrying value of other guarantees was $196 million and $211 million at September 30, 2015 and December 31, 2014, respectively.

 

 Note 15  Guarantees and Contingent Liabilities

Visa Restructuring and Card Association Litigation The Company’s payment services business issues and acquires credit and debit card transactions through the Visa U.S.A. Inc. card association or its affiliates (collectively “Visa”). In 2007, Visa completed a restructuring and issued shares of Visa Inc. common stock to its financial institution members in contemplation of its initial public offering (“IPO”) completed in the first quarter of 2008 (the “Visa Reorganization”). As a part of the Visa Reorganization, the Company received its proportionate number of shares of Visa Inc. common stock, which were subsequently converted to Class B shares of Visa Inc. (“Class B shares”). Visa U.S.A. Inc. (“Visa U.S.A.”) and MasterCard International (collectively, the “Card Associations”) are defendants in antitrust lawsuits

 

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challenging the practices of the Card Associations (the “Visa Litigation”). Visa U.S.A. member banks have a contingent obligation to indemnify Visa Inc. under the Visa U.S.A. bylaws (which were modified at the time of the restructuring in October 2007) for potential losses arising from the Visa Litigation. The indemnification by the Visa U.S.A. member banks has no specific maximum amount.

Using proceeds from its IPO and through reductions to the conversion ratio applicable to the Class B shares held by Visa U.S.A. member banks, Visa Inc. has funded an escrow account for the benefit of member financial institutions to fund their indemnification obligations associated with the Visa Litigation. The receivable related to the escrow account is classified in other liabilities as a direct offset to the related Visa Litigation contingent liability. On October 19, 2012, Visa signed a settlement agreement to resolve class action claims associated with the multi-district interchange litigation, the largest of the remaining Visa Litigation matters. The settlement has been approved by the court, but has been challenged by some class members and is being appealed. In addition, a number of class members opted out of the settlement and have filed actions against the Card Associations. At September 30, 2015, the carrying amount of the Company’s liability related to the Visa Litigation matters, net of its share of the escrow fundings, was $19 million. During the three and nine months ended September 30, 2015, the Company sold 1.3 million and 2.1 million, respectively, of its Class B shares. These sales, and any previous sales of its Class B shares, do not impact the Company’s liability for the Visa Litigation matters or the receivable related to the escrow account. The remaining 6.8 million Class B shares held by the Company will be eligible for conversion to Class A shares of Visa Inc., and thereby become marketable, upon final settlement of the Visa Litigation. These shares are excluded from the Company’s financial instruments disclosures included in Note 14.

Other Guarantees and Contingent Liabilities

The following table is a summary of other guarantees and contingent liabilities of the Company at September 30, 2015:

 

(Dollars in Millions)   Collateral
Held
     Carrying
Amount
     Maximum
Potential
Future
Payments
 

Standby letters of credit

  $       $ 54       $ 13,336   

Third party borrowing arrangements

                    12   

Securities lending indemnifications

    5,980                 5,877   

Asset sales

            133         4,908  (a) 

Merchant processing

    545         59         100,063   

Contingent consideration arrangements

            2         2   

Tender option bond program guarantee

    2,276                 2,184   

Minimum revenue guarantees

            2         12   

Other

                    769   

 

(a) The maximum potential future payments do not include loan sales where the Company provides standard representation and warranties to the buyer against losses related to loan underwriting documentation defects that may have existed at the time of sale that generally are identified after the occurrence of a triggering event such as delinquency. For these types of loan sales, the maximum potential future payments is generally the unpaid principal balance of loans sold measured at the end of the current reporting period. Actual losses will be significantly less than the maximum exposure, as only a fraction of loans sold will have a representation and warranty breach, and any losses on repurchase would generally be mitigated by any collateral held against the loans.

Merchant Processing The Company, through its subsidiaries, provides merchant processing services. Under the rules of credit card associations, a merchant processor retains a contingent liability for credit card transactions processed. This contingent liability arises in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor. In this situation, the transaction is “charged-back” to the merchant and the disputed amount is credited or otherwise refunded to the cardholder. If the Company is unable to collect this amount from the merchant, it bears the loss for the amount of the refund paid to the cardholder.

The Company currently processes card transactions in the United States, Canada, Europe, Mexico and Brazil through wholly-owned subsidiaries and joint ventures with other financial institutions. In the event a merchant was unable to fulfill product or services subject to delayed delivery, such as airline tickets, the Company could become financially liable for refunding tickets purchased through the credit card associations under the charge-back provisions. Charge-back risk related to these merchants is evaluated in a manner similar to credit risk assessments and, as such, merchant processing contracts contain various provisions to protect the Company in the event of default. At September 30, 2015, the value of airline tickets purchased to be delivered at a future date was $8.0 billion. The Company held collateral of $433 million in escrow deposits, letters of credit and indemnities from financial institutions, and liens on various assets.

 

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Asset Sales The Company regularly sells loans to GSEs as part of its mortgage banking activities. The Company provides customary representations and warranties to the GSEs in conjunction with these sales. These representations and warranties generally require the Company to repurchase assets if it is subsequently determined that a loan did not meet specified criteria, such as a documentation deficiency or rescission of mortgage insurance. If the Company is unable to cure or refute a repurchase request, the Company is generally obligated to repurchase the loan or otherwise reimburse the counterparty for losses. At September 30, 2015, the Company had reserved $37 million for potential losses from representation and warranty obligations, compared with $46 million at December 31, 2014. The Company’s reserve reflects management’s best estimate of losses for representation and warranty obligations. The Company’s repurchase reserve is modeled at the loan level, taking into consideration the individual credit quality and borrower activity that has transpired since origination. The model applies credit quality and economic risk factors to derive a probability of default and potential repurchase that are based on the Company’s historical loss experience, and estimates loss severity based on expected collateral value. The Company also considers qualitative factors that may result in anticipated losses differing from historical loss trends.

The following table is a rollforward of the Company’s representation and warranty reserve:

 

    Three Months Ended
September 30,
          Nine Months Ended
September 30,
 
(Dollars in Millions)   2015     2014           2015     2014  

Balance at beginning of period

  $ 40      $ 69           $ 46      $ 83   

Net realized losses

    (1     (1          (5     (13

Change in reserve

    (2     (6          (4     (8

Balance at end of period

  $ 37      $ 62           $ 37      $ 62   

As of September 30, 2015 and December 31, 2014, the Company had $12 million and $19 million, respectively, of unresolved representation and warranty claims from the GSEs. The Company does not have a significant amount of unresolved claims from investors other than the GSEs.

Litigation and Regulatory Matters The Company is subject to various litigation and regulatory matters that arise in the ordinary course of its business. The Company establishes reserves for such matters when potential losses become probable and can be reasonably estimated. The Company believes the ultimate resolution of existing legal and regulatory matters will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. However, changes in circumstances or additional information could result in additional accruals or resolution in excess of established accruals, which could adversely affect the Company’s results from operations, potentially materially.

Litigation Matters In the last several years, the Company and other large financial institutions have been sued in their capacity as trustee for residential mortgage–backed securities trusts. Among these lawsuits are actions originally brought in June 2014 by a group of institutional investors, including BlackRock and PIMCO funds, against six bank trustees, including the Company. These actions are currently pending in the Supreme Court of the State of New York, New York County, and in the United States District Court for the Southern District of New York. In these lawsuits, the investors allege that U.S. Bank National Association as trustee caused them to incur losses by failing to enforce loan repurchase obligations and failing to abide by appropriate standards of care after events of default allegedly occurred. The plaintiffs seek monetary damages in an unspecified amount and also seek equitable relief.

Regulatory Matters The Company is currently subject to examinations, inquiries and investigations by government agencies and bank regulators concerning mortgage-related practices, including those related to compliance with selling guidelines relating to residential home loans sold to GSEs, foreclosure-related expenses submitted to the Federal Housing Administration or GSEs for reimbursement, lender-placed insurance, and notices and filings in bankruptcy cases. The Company is also subject to ongoing examinations, inquiries and investigations by government agencies, bank regulators and law enforcement with respect to Bank Secrecy Act/anti-money laundering and Office of Foreign Assets Control requirements and compliance program adequacy and effectiveness. On October 23, 2015, the Company entered into a Consent Order with the Office of the Comptroller of the Currency (the “OCC”) concerning deficiencies in its Bank Secrecy Act/anti-money laundering compliance program, and requiring an ongoing review of that program. Some of the compliance program enhancements and other actions required by the Consent Order have already been, or are currently in the process of being, implemented, and are not expected to be material to the Company. The Company

 

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is also continually subject to examinations, inquiries and investigations in areas of increasing regulatory scrutiny, such as compliance, risk management, third party risk management and consumer protection.

The Company is cooperating fully with all pending examinations, inquiries and investigations, any of which could lead to administrative or legal proceedings or settlements. Remedies in these proceedings or settlements may include fines, penalties, restitution or alterations in the Company’s business practices (which may increase the Company’s operating expenses and decrease its revenue).

Certain federal and state governmental authorities reached settlement agreements in 2012 and 2013 with other major financial institutions regarding their mortgage origination, servicing, and foreclosure activities. Those governmental authorities have had settlement discussions with other financial institutions, including the Company. The Company has not agreed to any settlement; however, if a settlement were reached it would likely include an agreement to comply with specified servicing standards, and settlement payments to governmental authorities as well as a monetary commitment that could be satisfied under various loan modification programs (in addition to the programs the Company already has in place).

In April 2011, the Company and certain other large financial institutions entered into Consent Orders with the OCC and the Board of Governors of the Federal Reserve System relating to residential mortgage servicing and foreclosure practices. In June 2015, the Company entered into an agreement to amend the 2011 Consent Order it has with the OCC. Under the amended Consent Order, the Company is required to complete an action plan to resolve outstanding issues under the 2011 Consent Order and obtain approval from the OCC before taking certain actions related to residential mortgage servicing. Depending on the Company’s execution of the requirements of the action plan and the Company’s progress toward addressing the requirements of the 2011 Consent Order, the Company may be released or be required to enter into further orders and settlements, pay additional fines or penalties, make restitution or further modify the Company’s business practices (which may increase the Company’s operating expenses and decrease its revenue).

Outlook Due to their complex nature, it can be years before litigation and regulatory matters are resolved. For those litigation and regulatory matters where the Company has information to develop an estimate or range of loss, the Company believes the upper end of reasonably possible losses in aggregate, in excess of any reserves established for matters where a loss is considered probable, will not be material to its financial condition, results of operations or cash flows. The Company’s estimates are subject to significant judgment and uncertainties, and the matters underlying the estimates will change from time to time. Actual results may vary significantly from the current estimates.

For additional information on the nature of the Company’s guarantees and contingent liabilities, refer to Note 23 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

 Note 16  Subsequent Events

The Company has evaluated the impact of events that have occurred subsequent to September 30, 2015 through the date the consolidated financial statements were filed with the United States Securities and Exchange Commission. Based on this evaluation, the Company has determined none of these events were required to be recognized or disclosed in the consolidated financial statements and related notes.

 

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U.S. Bancorp

Consolidated Daily Average Balance Sheet and Related Yields and Rates (a)

 

        For the Three Months Ended September 30,           
    2015    2014             

(Dollars in Millions)

(Unaudited)

  Average
Balances
         Interest           Yields
and
Rates
          Average
Balances
         Interest           Yields
and
Rates
               % Change
Average
Balances
 

Assets

                                     

Investment securities

  $ 103,943        $ 531           2.04        $ 93,141        $ 508           2.18            11.6

Loans held for sale

    6,835          60           3.54             3,552          36           4.08               92.4   

Loans (b)

                                     

Commercial

    84,704          574           2.69             77,345          564           2.89               9.5   

Commercial real estate

    42,316          407           3.82             40,839          397           3.86               3.6   

Residential mortgages

    51,831          493           3.80             51,994          502           3.86               (.3

Credit card

    17,944          498           11.02             17,753          467           10.45               1.1   

Other retail

    48,849            504           4.09             48,698            517           4.22               .3   

Total loans, excluding covered loans

    245,644          2,476           4.01             236,629          2,447           4.11               3.8   

Covered loans

    4,892            68           5.54             7,238            96           5.31               (32.4

Total loans

    250,536          2,544           4.04             243,867          2,543           4.15               2.7   

Other earning assets

    7,951            36           1.76             5,862            27           1.86               35.6   

Total earning assets

    369,265          3,171           3.42             346,422          3,114           3.58               6.6   

Allowance for loan losses

    (4,031                   (4,161                     3.1   

Unrealized gain (loss) on investment securities

    607                      463                        31.1   

Other assets

    44,598                      43,099                        3.5   

Total assets

  $ 410,439                    $ 385,823                        6.4   

Liabilities and Shareholders’ Equity

                                     

Noninterest-bearing deposits

  $ 80,940                    $ 74,126                        9.2

Interest-bearing deposits

                                     

Interest checking

    56,888          8           .05             54,454          9           .07               4.5   

Money market savings

    80,338          50           .25             66,250          31           .19               21.3   

Savings accounts

    37,480          9           .10             34,615          11           .13               8.3   

Time deposits less than $100,000

    9,549          21           .86             11,045          29           1.02               (13.5

Time deposits greater than $100,000

    24,497            25           .41             30,518            35           .45               (19.7

Total interest-bearing deposits

    208,752          113           .21             196,882          115           .23               6.0   

Short-term borrowings

    27,525          67           .97             30,961          73           .94               (11.1

Long-term debt

    33,202            170           2.04             26,658            178           2.67               24.5   

Total interest-bearing liabilities

    269,479          350           .52             254,501          366           .57               5.9   

Other liabilities

    14,463                      13,379                        8.1   

Shareholders’ equity

                                     

Preferred equity

    4,756                      4,756                          

Common equity

    40,111                      38,376                        4.5   

Total U.S. Bancorp shareholders’ equity

    44,867                      43,132                        4.0   

Noncontrolling interests

    690                      685                        .7   

Total equity

    45,557                      43,817                        4.0   

Total liabilities and equity

  $ 410,439                    $ 385,823                        6.4   

Net interest income

      $ 2,821                    $ 2,748                 

Gross interest margin

             2.90                   3.01         

Gross interest margin without taxable-equivalent increments

             2.84                   2.95         

Percent of Earning Assets

                                   

Interest income

             3.42                   3.58         

Interest expense

             .38                      .42            

Net interest margin

             3.04                   3.16         

Net interest margin without taxable-equivalent increments

                             2.98                                   3.10         

 

(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances.

 

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U.S. Bancorp

Consolidated Daily Average Balance Sheet and Related Yields and Rates (a)

 

        For the Nine Months Ended September 30,           
    2015    2014             

(Dollars in Millions)

(Unaudited)

  Average
Balances
         Interest           Yields
and
Rates
          Average
Balances
         Interest           Yields
and
Rates
               % Change
Average
Balances
 

Assets

                                     

Investment securities

  $ 102,361        $ 1,592           2.07        $ 87,687        $ 1,473           2.24            16.7

Loans held for sale

    6,370          166           3.48             2,811          87           4.13               *   

Loans (b)

                                     

Commercial

    83,167          1,696           2.73             74,424          1,651           2.96               11.7   

Commercial real estate

    42,476          1,233           3.88             40,465          1,180           3.90               5.0   

Residential mortgages

    51,458          1,465           3.80             51,799          1,504           3.88               (.7

Credit card

    17,794          1,444           10.85             17,516          1,338           10.21               1.6   

Other retail

    48,411            1,495           4.13             48,098            1,622           4.51               .7   

Total loans, excluding covered loans

    243,306          7,333           4.03             232,302          7,295           4.20               4.7   

Covered loans

    5,052            216           5.69             7,796            352           6.03               (35.2

Total loans

    248,358          7,549           4.06             240,098          7,647           4.26               3.4   

Other earning assets

    8,454            103           1.62             5,691            89           2.10               48.6   

Total earning assets

    365,543          9,410           3.44             336,287          9,296           3.69               8.7   

Allowance for loan losses

    (4,057                   (4,212                     3.7   

Unrealized gain (loss) on investment securities

    767                      388                        97.7   

Other assets

    44,504                      42,584                        4.5   

Total assets

  $ 406,757                    $ 375,047                        8.5   

Liabilities and Shareholders’ Equity

                                     

Noninterest-bearing deposits

  $ 77,623                    $ 72,274                        7.4

Interest-bearing deposits

                                     

Interest checking

    55,592          23           .05             52,928          26           .07               5.0   

Money market savings

    78,065          139           .24             62,314          81           .17               25.3   

Savings accounts

    36,866          32           .12             33,940          35           .14               8.6   

Time deposits less than $100,000

    9,961          67           .90             11,151          93           1.12               (10.7

Time deposits greater than $100,000

    26,566            83           .42             31,055            113           .48               (14.5

Total interest-bearing deposits

    207,050          344           .22             191,388          348           .24               8.2   

Short-term borrowings

    28,252          192           .91             30,362          207           .91               (6.9

Long-term debt

    34,015            531           2.09             24,864            543           2.92               36.8   

Total interest-bearing liabilities

    269,317          1,067           .53             246,614          1,098           .60               9.2   

Other liabilities

    14,639                      12,974                        12.8   

Shareholders’ equity

                                     

Preferred equity

    4,756                      4,756                          

Common equity

    39,733                      37,742                        5.3   

Total U.S. Bancorp shareholders’ equity

    44,489                      42,498                        4.7   

Noncontrolling interests

    689                      687                        .3   

Total equity

    45,178                      43,185                        4.6   

Total liabilities and equity

  $ 406,757                    $ 375,047                        8.5   

Net interest income

      $ 8,343                    $ 8,198                 

Gross interest margin

             2.91                   3.09         

Gross interest margin without taxable-equivalent increments

             2.85                   3.02         

Percent of Earning Assets

                                   

Interest income

             3.44                   3.69         

Interest expense

             .39                      .43            

Net interest margin

             3.05                   3.26         

Net interest margin without taxable-equivalent increments

                             2.99                                   3.19         

 

* Not meaningful
(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances.

 

U.S. Bancorp    79


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Part II — Other Information

Item 1. Legal Proceedings — See the information set forth in Note 15 in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Report, which is incorporated herein by reference.

Item 1A. Risk Factors — There are a number of factors that may adversely affect the Company’s business, financial results or stock price. Refer to “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, for discussion of these risks.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds — Refer to the “Capital Management” section within Management’s Discussion and Analysis in Part I for information regarding shares repurchased by the Company during the third quarter of 2015.

Item 6. Exhibits

 

    12 Computation of Ratio of Earnings to Fixed Charges
    31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
    31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
    32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
  101 Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2015, formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheet, (ii) the Consolidated Statement of Income, (iii) the Consolidated Statement of Comprehensive Income, (iv) the Consolidated Statement of Shareholders’ Equity, (v) the Consolidated Statement of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

 

80    U.S. Bancorp


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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    U.S. BANCORP
    By:   /S/    CRAIG E. GIFFORD
   

 

Dated: November 4, 2015      

Craig E. Gifford

Controller

(Principal Accounting Officer and Duly Authorized Officer)

 

U.S. Bancorp    81


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EXHIBIT 12

Computation of Ratio of Earnings to Fixed Charges

 

(Dollars in Millions)    Three Months Ended
September 30, 2015
     Nine Months Ended
September 30, 2015
 

Earnings

     

  1.

 

Net income attributable to U.S. Bancorp

   $ 1,489       $ 4,403   

  2.

 

Applicable income taxes, including expense related to unrecognized tax positions

     534         1,541   

  3.

 

Net income attributable to U.S. Bancorp before income taxes (1 + 2)

   $ 2,023       $ 5,944   

  4.

 

Fixed charges:

     
  a.  

Interest expense excluding interest on deposits*

   $ 236       $ 720   
  b.  

Portion of rents representative of interest and amortization of debt expense

     27         82   
  c.  

Fixed charges excluding interest on deposits (4a + 4b)

     263         802   
  d.  

Interest on deposits

     113         344   
  e.  

Fixed charges including interest on deposits (4c + 4d)

   $ 376       $ 1,146   

  5.

 

Amortization of interest capitalized

   $       $   

  6.

 

Earnings excluding interest on deposits (3 + 4c + 5)

     2,286         6,746   

  7.

 

Earnings including interest on deposits (3 + 4e + 5)

     2,399         7,090   

  8.

 

Fixed charges excluding interest on deposits (4c)

     263         802   

  9.

 

Fixed charges including interest on deposits (4e)

     376         1,146   

Ratio of Earnings to Fixed Charges

     

10.

 

Excluding interest on deposits (line 6/line 8)

     8.69         8.41   

11.

 

Including interest on deposits (line 7/line 9)

     6.38         6.19   

 

* Excludes interest expense related to unrecognized tax positions

 

82    U.S. Bancorp


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EXHIBIT 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, Richard K. Davis, certify that:

 

(1) I have reviewed this Quarterly Report on Form 10-Q of U.S. Bancorp;

 

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

(5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

/S/    RICHARD K. DAVIS

Richard K. Davis

Chief Executive Officer

Dated: November 4, 2015

 

U.S. Bancorp    83


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EXHIBIT 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, Kathleen A. Rogers, certify that:

 

(1) I have reviewed this Quarterly Report on Form 10-Q of U.S. Bancorp;

 

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

(5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

/S/    KATHLEEN A. ROGERS

Kathleen A. Rogers

Chief Financial Officer

Dated: November 4, 2015

 

84    U.S. Bancorp


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EXHIBIT 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Chief Executive Officer and Chief Financial Officer of U.S. Bancorp, a Delaware corporation (the “Company”), do hereby certify that:

 

(1) The Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/S/    RICHARD K. DAVIS     /S/    KATHLEEN A. ROGERS

Richard K. Davis

Chief Executive Officer

 

Dated: November 4, 2015

   

Kathleen A. Rogers

Chief Financial Officer

 

U.S. Bancorp    85


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Corporate Information

Executive Offices

U.S. Bancorp

800 Nicollet Mall

Minneapolis, MN 55402

Common Stock Transfer Agent and Registrar

Computershare acts as our transfer agent and registrar, dividend paying agent and dividend reinvestment plan administrator, and maintains all shareholder records for the corporation. Inquiries related to shareholder records, stock transfers, changes of ownership, lost stock certificates, changes of address and dividend payment should be directed to the transfer agent at:

Computershare

P.O. Box 30170

College Station, TX 77842-3170

Phone: 888-778-1311 or 201-680-6578 (international calls)

Internet: www.computershare.com/investor

Registered or Certified Mail:

Computershare

211 Quality Circle, Suite 210

College Station, TX 77845

Telephone representatives are available weekdays from 8:00 a.m. to 6:00 p.m. Central Time, and automated support is available 24 hours a day, 7 days a week. Specific information about your account is available on Computershare’s Investor CentreTM website.

Independent Auditor

Ernst & Young LLP serves as the independent auditor for U.S. Bancorp’s financial statements.

Common Stock Listing and Trading

U.S. Bancorp common stock is listed and traded on the New York Stock Exchange under the ticker symbol USB.

Dividends and Reinvestment Plan

U.S. Bancorp currently pays quarterly dividends on our common stock on or about the 15th day of January, April, July and October, subject to approval by our Board of Directors. U.S. Bancorp shareholders can choose to participate in a plan that provides automatic reinvestment of dividends and/or optional cash purchase of additional shares of U.S. Bancorp common stock. For more information, please contact our transfer agent, Computershare.

Investor Relations Contact

Sean C. O’Connor, CFA

Senior Vice President, Investor Relations

sean.oconnor@usbank.com

Phone: 612-303-0778 or 866-775-9668

Financial Information

U.S. Bancorp news and financial results are available through our website and by mail.

Website For information about U.S. Bancorp, including news, financial results, annual reports and other documents filed with the Securities and Exchange Commission, access our home page on the internet at usbank.com, click on About U.S. Bank.

Mail At your request, we will mail to you our quarterly earnings, news releases, quarterly financial data reported on Form 10-Q, Form 10-K and additional copies of our annual reports. Please contact:

U.S. Bancorp Investor Relations

800 Nicollet Mall

Minneapolis, MN 55402

investorrelations@usbank.com

Phone: 866-775-9668

Media Requests

Dana E. Ripley

Senior Vice President, Corporate Communications

dana.ripley@usbank.com

Phone: 612-303-3167

Privacy

U.S. Bancorp is committed to respecting the privacy of our customers and safeguarding the financial and personal information provided to us. To learn more about the U.S. Bancorp commitment to protecting privacy, visit usbank.com and click on Privacy.

Code of Ethics

At U.S. Bancorp, our commitment to high ethical standards guides everything we do. Demonstrating this commitment through our words and actions is how each of us does the right thing every day for our customers, shareholders, communities and each other. Our style of ethical leadership is part of the reason why we were named a World’s Most Ethical Company® in 2015 by the Ethisphere Institute.

Each year, every employee certifies compliance with the letter and spirit of our Code of Ethics and Business Conduct. For details about our Code of Ethics and Business Conduct, visit usbank.com and click on About U.S. Bank and then Investor Relations.

Diversity and Inclusion

At U.S. Bancorp, embracing diversity and fostering inclusion are business imperatives. We view everything we do through a diversity and inclusion lens to deepen our relationships with our stakeholders, employees, customers, shareholders and communities.

We respect and value each other’s differences, strengths and perspectives, and we strive to reflect the communities we serve. This makes us stronger, more innovative and more responsive to our diverse customers’ needs.

Equal Opportunity and Affirmative Action

U.S. Bancorp and our subsidiaries are committed to providing Equal Employment Opportunity to all employees and applicants for employment. In keeping with this commitment, employment decisions are made based on abilities, not race, color, religion, national origin or ancestry, gender, age, disability, veteran status, sexual orientation, marital status, gender identity or expression, genetic information or any other factors protected by law. The corporation complies with municipal, state and federal fair employment laws, including regulations applying to federal contractors.

U.S. Bancorp, including each of our subsidiaries, is an Equal Opportunity Employer committed to creating a diverse workforce.

Accessibility

U.S. Bancorp is committed to providing ready access to our products and services so all of our customers, including people with disabilities, can succeed financially. To learn more, visit usbank.com and click on Accessibility.

 

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