US BANCORP \DE\ - Quarter Report: 2016 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended June 30, 2016

OR

For the transition period from (not applicable)

Commission file number 1-6880

U.S. BANCORP

(Exact name of registrant as specified in its charter)

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):

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.

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Table of Contents and Form 10-Q Cross Reference Index

“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 (which could result, in part, from the United Kingdom’s withdrawal from the European Union); 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, 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, 2015, 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, including the “Risk Factors” section of this report. 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.

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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 second quarter of 2016, or $0.83 per diluted common share, compared with $1.5 billion, or $0.80 per diluted common share, for the second quarter of 2015. Return on average assets and return on average common equity were 1.43 percent and 13.8 percent, respectively, for the second quarter of 2016, compared with 1.46 percent and 14.3 percent, respectively, for the second quarter of 2015. The results for the second quarter of 2016 included $180 million of equity investment income, primarily the result of the Company’s membership in Visa Europe Limited (“Visa Europe”) which was sold to Visa, Inc. on June 21, 2016, and a $110 million increase in reserves related to legal and regulatory matters along with a $40 million charitable contribution. Combined, these notable items increased the second quarter of 2016 diluted earnings per common share by $0.01.

Total net revenue, on a taxable-equivalent basis, for the second quarter of 2016 was $406 million (8.1 percent) higher than the second quarter of 2015, reflecting a 4.5 percent increase in net interest income and a 12.3 percent increase in noninterest income. The increase in net interest income from the second quarter of 2015 was mainly a result of loan growth. The noninterest income increase was primarily driven by the impact of the Visa Europe sale, along with growth in credit and debit card revenue, commercial products revenue, and trust and investment management fees.

Noninterest expense in the second quarter of 2016 was $310 million (11.6 percent) higher than the second quarter of 2015, the result of the second quarter 2016 increase in reserves related to legal and regulatory matters and a charitable contribution, as well as higher compensation expense related to the impact of merit increases and higher variable compensation expense, increased compliance costs, higher marketing expense as a result of brand advertising, higher technology and communications expense, and higher postage, printing and supplies expense.

The provision for credit losses for the second quarter of 2016 of $327 million was $46 million (16.4 percent) higher than the second quarter of 2015. Net charge-offs in the second quarter of 2016 were $317 million, compared with $296 million in the second quarter of 2015. 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 six months of 2016 was $2.9 billion, or $1.59 per diluted common share, compared with $2.9 billion, or $1.56 per diluted common share, for the first six months of 2015. Return on average assets and return on average common equity were 1.38 percent and 13.4 percent, respectively, for the first six months of 2016, compared with 1.45 percent and 14.2 percent, respectively, for the first six months of 2015.

Total net revenue, on a taxable-equivalent basis, for the first six months of 2016 was $537 million (5.4 percent) higher than the first six months of 2015, reflecting a 4.7 percent increase in net interest income and a 6.2 percent increase in noninterest income. The increase in net interest income from a year ago was mainly the result of loan growth. The increase in noninterest income was primarily driven by the impact of the Visa Europe sale, along with growth in credit and debit card revenue, trust and investment management fees, merchant processing services revenue and commercial products revenue, partially offset by lower mortgage banking revenue.

Noninterest expense in the first six months of 2016 was $394 million (7.4 percent) higher than the first six months of 2015, the result of the second quarter 2016 increase in reserves related to legal and regulatory matters and a charitable contribution, as well as higher compensation expense related to the impact of merit increases and higher variable compensation expense, increased compliance costs, higher marketing expense as a result of brand advertising, higher technology and communications expense, and higher postage, printing and supplies expense.

The provision for credit losses for the first six months of 2016 of $657 million was $112 million (20.6 percent) higher than the first six months of 2015. Net charge-offs in the first six months of 2016 were $632 million, compared with $575 million in the first six months of 2015. 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.

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STATEMENT OF INCOME ANALYSIS

Net Interest Income Net interest income, on a taxable-equivalent basis, was $2.9 billion in the second quarter and $5.8 billion in the first six months of 2016, representing increases of $126 million (4.5 percent) and $262 million (4.7 percent), respectively, over the same periods of 2015. The increases were driven by loan growth and higher rates, partially offset by the loan portfolio mix. Average earning assets were $18.9 billion (5.2 percent) higher in the second quarter and $18.1 billion (5.0 percent) higher in the first six months of 2016, compared with the same periods of 2015, driven by increases in loans and in investment securities. The net interest margin, on a taxable-equivalent basis, in the second quarter and first six months of 2016 was 3.02 percent and 3.04 percent, respectively, compared with 3.03 percent and 3.05 percent in the second quarter and first six months of 2015, respectively. The decreases in the net interest margin from the same periods of the prior year were principally due to securities purchases at lower average rates and lower reinvestment rates on maturing securities, partially offset by higher rates on new loans. Refer to the “Consolidated Daily Average Balance Sheet and Related Yields and Rates” tables for further information on net interest income.

Average investment securities in the second quarter and first six months of 2016 were $4.7 billion (4.6 percent) and $5.0 billion (4.9 percent) higher, respectively, than the same periods of 2015, primarily due to purchases of U.S. Treasury and U.S. government agency-backed securities, net of prepayments and maturities, to support regulatory liquidity coverage ratio requirements.

Average total loans in the second quarter and first six months of 2016 were $20.0 billion (8.1 percent) and $17.2 billion (6.9 percent) higher, respectively, than the same periods of 2015, due to growth in commercial loans, credit card loans, residential mortgages and other retail loans. The increases were driven by higher demand for loans from new and existing customers. In addition, at the end of the fourth quarter of 2015, the Company acquired a credit card portfolio which increased average credit card loans by approximately $1.5 billion for both the second quarter and first six months of 2016. These increases were partially offset by a decline in loans acquired in Federal Deposit Insurance Corporation (“FDIC”) assisted transactions that are covered by loss sharing agreements with the FDIC (“covered” loans), a run-off portfolio.

Average total deposits for the second quarter and first six months of 2016 were $21.6 billion (7.6 percent) and $19.5 billion (6.9 percent) higher, respectively, than the same periods of 2015. Average noninterest-bearing deposits for the second quarter and first six months of 2016 increased $1.8 billion (2.4 percent) and $2.9 billion (3.9 percent), respectively, over the same periods of the prior year, mainly in Consumer and Small Business Banking and Wholesale Banking and Commercial Real Estate, partially offset by declines in balances in Wealth Management and Securities Services. Average total savings deposits for the second quarter and first six months of 2016 were $21.8 billion (12.7 percent) and $20.4 billion (12.1 percent) higher, respectively, over the same periods of the prior year, the result of growth across all business lines. Growth in Consumer and Small Business Banking total savings deposits included net new account growth of 2.8 percent in both the second quarter and first six months of 2016. Average time deposits for the second quarter and first six months of 2016 were $2.0 billion (5.6 percent) and $3.8 billion (10.2 percent) lower, respectively, compared with the same periods of 2015. The decreases were primarily due to lower Consumer and Small Business Banking balances driven by maturities, as well as declines related to those deposits managed as an alternative to other funding sources such as wholesale borrowing, based largely on relative pricing and liquidity characteristics.

Provision for Credit Losses The provision for credit losses for the second quarter and first six months of 2016 increased $46 million (16.4 percent) and $112 million (20.6 percent), respectively, compared with the same periods of 2015. The provision for credit losses was higher than net charge-offs by $10 million in the second quarter and higher than net charge-offs by $25 million in the first six months of 2016, compared with lower than net charge-offs by $15 million in the second quarter and lower than net charge-offs by $30 million in the first six months of 2015. The increase in the allowance for credit losses during the second quarter of 2016 was driven by loan portfolio growth, partially offset by reduced energy portfolio exposure and continued residential mortgage and home equity loans and lines credit quality improvement. The increase in the allowance for credit losses during the first six months of 2016 reflected loan portfolio growth and an increase in energy portfolio credit reserves in the first quarter, partially offset by residential mortgage and home equity loans and lines credit quality improvement. Net charge-offs increased $21 million (7.1 percent) and $57 million (9.9 percent) in the second quarter and first six months of 2016, respectively, compared with the same periods of the prior year, primarily due to higher commercial loan net charge-offs, partially offset by lower charge-offs related to residential mortgages and home equity loans. Refer to “Corporate Risk Profile” for further information on the

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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 $2.6 billion in the second quarter and $4.7 billion in the first six months of 2016, representing increases of $280 million (12.3 percent) and $275 million (6.2 percent), respectively, compared with the same periods of 2015. The increases from a year ago were primarily due to higher other revenue, reflecting the second quarter 2016 Visa Europe sale, as well as higher credit and debit card revenue, trust and investment management fees, commercial product revenue and merchant processing services revenue. Credit and debit card revenue increased, reflecting higher transaction volumes including acquired portfolios. Trust and investment management fees increased, reflecting lower money market fee waivers. Commercial products revenue increased, driven by higher bond underwriting fees, as well as foreign currency customer activity and other capital markets activity resulting from market volatility. Merchant processing services revenue increased 2.0 percent in the second quarter and 2.9 percent in the first six months of 2016, compared with the same periods of 2015, as a result of higher transaction volumes. The increase in merchant processing services revenue for the first six months of 2016 over the same period of the prior year was also the result of higher 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 3.0 percent and 4.6 percent, respectively. Mortgage banking revenue and retail leasing revenue decreased for the first six months of 2016, compared with the same period of the prior year. The decrease in mortgage banking revenue was primarily due to lower origination and sales revenue driven by lower volume and lower pricing as a result of market competition. The decrease in retail leasing revenue was due to lower end-of-term gains on auto leases driven by lower used car values.

Noninterest Expense Noninterest expense was $3.0 billion in the second quarter and $5.7 billion in the first six months of 2016, representing increases of $310 million (11.6 percent) and $394 million (7.4 percent), respectively, compared with the same periods of 2015. The increases from a year ago were primarily due to higher compensation expense, marketing and business development expense, professional services expense, technology and communications expense and other noninterest expense, partially offset by lower employee benefits expense. Compensation expense increased principally due to the impact of merit increases, along with higher variable compensation including performance-based incentives. Marketing and business development expense increased reflecting the second quarter 2016 charitable contribution and higher marketing expense as a result of brand advertising. Professional services expense increased primarily due to compliance-related matters, while technology and communications expense increased as a result of acquired portfolio conversion costs and business initiatives across most business lines. In addition, postage, printing and supplies expense increased reflecting the impact of a prior year reimbursement from a business partner and other noninterest expense increased primarily due to the second quarter 2016 increase in reserves related to legal and regulatory matters. Offsetting these increases were lower employee benefits expense mainly due to lower pension costs.

Income Tax Expense The provision for income taxes was $542 million (an effective rate of 26.1 percent) for the second quarter and $1.0 billion (an effective rate of 26.3 percent) for the first six months of 2016, compared with $528 million (an effective rate of 26.1 percent) and $1.0 billion (an effective rate of 25.5 percent) for the same periods of 2015. For further information on income taxes, refer to Note 11 of the Notes to Consolidated Financial Statements.

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BALANCE SHEET ANALYSIS

Loans The Company’s loan portfolio was $268.5 billion at June 30, 2016, compared with $260.8 billion at December 31, 2015, an increase of $7.7 billion (2.9 percent). The increase was driven primarily by higher commercial loans, residential mortgages, commercial real estate loans and other retail loans, partially offset by lower credit card loans and covered loans.

Commercial loans and commercial real estate loans increased $4.1 billion (4.7 percent) and $1.2 billion (2.7 percent), respectively, at June 30, 2016, compared with December 31, 2015, reflecting higher demand from new and existing customers.

Residential mortgages held in the loan portfolio increased $2.4 billion (4.5 percent), reflecting origination activity in the first half of 2016. 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.

Other retail loans increased $802 million (1.6 percent) at June 30, 2016, compared with December 31, 2015, driven by higher installment, auto, retail leasing and home equity and second mortgage loan balances, partially offset by decreases in revolving credit and student loan balances.

Credit card loans decreased $441 million (2.1 percent) at June 30, 2016, compared with December 31, 2015, 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, it is transferred to loans held for sale.

Loans Held for Sale Loans held for sale, consisting primarily of residential mortgages to be sold in the secondary market, were $4.3 billion at June 30, 2016, compared with $3.2 billion at December 31, 2015. The increase in loans held for sale was principally due to a higher level of mortgage loan closings in the second quarter of 2016. 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 (“GSEs”).

Investment Securities Investment securities totaled $108.5 billion at June 30, 2016, compared with $105.6 billion at December 31, 2015. The $2.9 billion (2.8 percent) increase reflected $2.2 billion of net investment purchases and an $814 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 June 30, 2016, the Company’s net unrealized gains on available-for-sale securities were $994 million, compared with $180 million at December 31, 2015. The favorable change in net unrealized gains (losses) was primarily due to increases in the fair value of agency mortgage-backed securities as a result of changes in interest rates. Gross unrealized losses on available-for-sale securities totaled $142 million at June 30, 2016, compared with $480 million at December 31, 2015. At June 30, 2016, the Company had no plans to sell securities with unrealized losses, and believes it is more likely than not that it

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would not be required to sell such securities before recovery of their amortized cost.

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 $317.6 billion at June 30, 2016, compared with $300.4 billion at December 31, 2015, the result of increases in total savings deposits, noninterest-bearing deposits and time deposits. Money market deposit balances increased $10.3 billion (12.0 percent) at June 30, 2016, compared with December 31, 2015, primarily due to higher Wholesale Banking and Commercial Real Estate, corporate trust and broker-dealer balances. Savings account balances increased $1.9 billion (4.9 percent), primarily due to higher Consumer and Small Business Banking balances. Interest checking balances increased $1.8 billion (3.0 percent) primarily due to higher Wholesale Banking and Commercial Real Estate balances, partially offset by lower broker-dealer, corporate trust and Consumer and Small Business Banking balances. Noninterest-bearing deposits increased $2.8 billion (3.3 percent) at June 30, 2016, compared with December 31, 2015, primarily due to higher corporate trust and mortgage escrow-related balances, partially offset by lower Wholesale Banking and Commercial Real Estate balances. Time deposits increased $368 million (1.1 percent) at June 30, 2016, compared with December 31, 2015, primarily related to increases in those deposits managed as an alternative to other funding sources such as wholesale borrowing, based largely on relative pricing and liquidity characteristics, partially offset by lower Consumer and Small Business Banking balances due to maturities.

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 $18.4 billion at June 30, 2016, compared with $27.9 billion at December 31, 2015. The $9.5 billion (33.9 percent) decrease in short-term borrowings was primarily driven by lower commercial paper balances. Long-term debt was $36.9 billion at June 30, 2016, compared with $32.1 billion at December 31, 2015. The $4.8 billion (15.2 percent) increase was primarily due to the issuances of $4.4 billion of bank notes, $1.2 billion of medium-term notes and $1.0 billion of subordinated notes, and a $1.2 billion increase in Federal Home Loan Bank (“FHLB”) advances, partially offset by $3.1 billion of bank note and subordinated note repayments and maturities. Refer to the “Liquidity Risk Management” section for discussion of liquidity management of the Company.

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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, primarily 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 (“MLHFS”), mortgage servicing rights (“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 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, offer new services or continue serving 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, 2015, and Item 1A of Part II of this report 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:

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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), collateral values, 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 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, 2015, 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.

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Included within the commercial lending segment are energy loans, which represented 1.1 percent of the Company’s total loans outstanding at June 30, 2016. Continued low energy prices during 2016 has resulted in further deterioration of a portion of these loans, which has led to an increase in criticized commitments and nonperforming loans at June 30, 2016, compared with December 31, 2015.

The following table provides a summary of amounts outstanding and credit quality statistics for the Company’s energy loans:

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, home equity loans and lines, and student loans, a run-off portfolio. 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 June 30, 2016, substantially all of the Company’s home equity lines were in the draw period. Approximately $1.0 billion, or 7 percent, of the outstanding home equity line balances at June 30, 2016, 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.

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, on-line banking, 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 on its outstanding residential mortgages 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.

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The following tables provide summary information for the LTVs of residential mortgages and home equity and second mortgages by borrower type at June 30, 2016:

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 June 30, 2016 and December 31, 2015. 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 $16.5 billion at June 30, 2016, compared with $16.4 billion at December 31, 2015, and included $5.0 billion of home equity lines in a first lien position and $11.5 billion of home equity and second mortgage loans and lines in a junior lien position. Loans and lines in a junior lien position at June 30, 2016, included approximately $4.6 billion of loans and lines for which the Company also serviced the related first lien loan, and approximately $6.9 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.

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The following table provides a summary of delinquency statistics and other credit quality indicators for the Company’s junior lien positions at June 30, 2016:

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.

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 $724 million ($478 million excluding covered loans) at June 30, 2016, compared with $831 million ($541 million excluding covered loans) at December 31, 2015. 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, as well as student loans guaranteed by the federal government. 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 0.27 percent (0.18 percent excluding covered loans) at June 30, 2016, compared with 0.32 percent (0.21 percent excluding covered loans) at December 31, 2015.

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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:

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:

The following table provides summary delinquency information for covered loans: