Annual Statements Open main menu

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

10-Q
Table of Contents

LOGO


Table of Contents

 

 

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 March 31, 2016

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 April 30, 2016
Common Stock, $0.01 Par Value   1,726,403,089 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

       3   

c) Balance Sheet Analysis

       5   

d) Non-GAAP Financial Measures

       30   

e) Critical Accounting Policies

       32   

f) Controls and Procedures (Item 4)

       32   

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

       7   

a) Overview

       7   

b) Credit Risk Management

       8   

c) Residual Value Risk Management

       22   

d) Operational Risk Management

       22   

e) Compliance Risk Management

       22   

f) Interest Rate Risk Management

       22   

g) Market Risk Management

       23   

h) Liquidity Risk Management

       24   

i) Capital Management

       26   

3) Line of Business Financial Review

       27   

4) Financial Statements (Item 1)

       33   

Part II — Other Information

    

1) Legal Proceedings (Item 1)

       74   

2) Risk Factors (Item 1A)

       74   

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

       74   

4) Exhibits (Item 6)

       74   

5) Signature

       75   

6) Exhibits

      
76
  

“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, 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. 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

March 31,

 
(Dollars and Shares in Millions, Except Per Share Data)   2016     2015     Percent
Change
 

Condensed Income Statement

     

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

  $ 2,888      $ 2,752        4.9

Noninterest income

    2,146        2,154        (.4

Securities gains (losses), net

    3               *   

Total net revenue

    5,037        4,906        2.7   

Noninterest expense

    2,749        2,665        3.2   

Provision for credit losses

    330        264        25.0   

Income before taxes

    1,958        1,977        (1.0

Taxable-equivalent adjustment

    53        54        (1.9

Applicable income taxes

    504        479        5.2   

Net income

    1,401        1,444        (3.0

Net (income) loss attributable to noncontrolling interests

    (15     (13     (15.4

Net income attributable to U.S. Bancorp

  $ 1,386      $ 1,431        (3.1

Net income applicable to U.S. Bancorp common shareholders

  $ 1,329      $ 1,365        (2.6

Per Common Share

     

Earnings per share

  $ .77      $ .77       

Diluted earnings per share

    .76        .76          

Dividends declared per share

    .255        .245        4.1   

Book value per share

    23.82        22.20        7.3   

Market value per share

    40.59        43.67        (7.1

Average common shares outstanding

    1,737        1,781        (2.5

Average diluted common shares outstanding

    1,743        1,789        (2.6

Financial Ratios

     

Return on average assets

    1.32     1.44  

Return on average common equity

    13.0        14.1     

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

    3.06        3.08     

Efficiency ratio (b)

    54.6        54.3     

Net charge-offs as a percent of average loans outstanding

    .48        .46     

Average Balances

     

Loans

  $ 262,281      $ 247,950        5.8

Loans held for sale

    3,167        4,338        (27.0

Investment securities (c)

    106,031        100,712        5.3   

Earning assets

    378,208        360,841        4.8   

Assets

    421,557        401,836        4.9   

Noninterest-bearing deposits

    78,569        74,511        5.4   

Deposits

    295,878        278,460        6.3   

Short-term borrowings

    27,399        29,497        (7.1

Long-term debt

    34,808        34,436        1.1   

Total U.S. Bancorp shareholders’ equity

    46,738        44,078        6.0   
    March 31,
2016
    December 31,
2015
       

Period End Balances

     

Loans

  $   264,522      $   260,849        1.4

Investment securities

    107,025        105,587        1.4   

Assets

    428,638        421,853        1.6   

Deposits

    306,348        300,400        2.0   

Long-term debt

    34,872        32,078        8.7   

Total U.S. Bancorp shareholders’ equity

    46,755        46,131        1.4   

Asset Quality

     

Nonperforming assets

  $ 1,719      $ 1,523        12.9

Allowance for credit losses

    4,320        4,306        .3   

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

    1.63     1.65  

Capital Ratios

     

Basel III transitional standardized approach:

     

Common equity tier 1 capital

    9.5     9.6  

Tier 1 capital

    11.1        11.3     

Total risk-based capital

    13.1        13.3     

Leverage

    9.3        9.5     

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

    12.3        12.5     

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

    9.2        9.1     

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

    11.9        11.9     

Tangible common equity to tangible assets (d)

    7.7        7.6     

Tangible common equity to risk-weighted assets (d)

    9.3        9.2           

 

   * 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 beginning on page 30.

 

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 $1.4 billion for the first quarter of 2016, or $0.76 per diluted common share, both equal to the first quarter of 2015. Return on average assets and return on average common equity were 1.32 percent and 13.0 percent, respectively, for the first quarter of 2016, compared with 1.44 percent and 14.1 percent, respectively, for the first quarter of 2015.

Total net revenue, on a taxable-equivalent basis, for the first quarter of 2016 was $131 million (2.7 percent) higher than the first quarter of 2015, reflecting a 4.9 percent increase in net interest income, partially offset by a 0.2 percent decrease in noninterest income. The increase in net interest income from the first quarter of 2015 was driven by loan growth and higher rates, partially offset by the impact of a continued shift in loan portfolio mix. The noninterest income decrease was primarily due to lower mortgage banking revenue resulting from lower production.

Noninterest expense in the first quarter of 2016 was $84 million (3.2 percent) higher than the first quarter of 2015, driven by higher compensation expense related to the impact of merit increases and higher variable compensation expense, as well as expenses attributed to compliance-related matters.

The provision for credit losses for the first quarter of 2016 of $330 million was $66 million (25.0 percent) higher than the first quarter of 2015. Net charge-offs in the first quarter of 2016 were $315 million, compared with $279 million in the first 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.

STATEMENT OF INCOME ANALYSIS

Net Interest Income Net interest income, on a taxable-equivalent basis, in the first quarter of 2016 was $2.9 billion, an increase of $136 million (4.9 percent) over the first quarter of 2015. The increase was driven by loan growth and higher rates, partially offset by the impact of a continued shift in loan portfolio mix. Average earning assets were $17.4 billion (4.8 percent) higher than the first quarter of 2015, driven by increases of $14.3 billion (5.8 percent) in loans and $5.3 billion (5.3 percent) in investment securities. The net interest margin, on a taxable-equivalent basis, in the first quarter of 2016 was 3.06 percent, compared with 3.08 percent in the first quarter of 2015. The decrease in the net interest margin from the first quarter of 2015 primarily reflected the impact of higher rates offset by a continued shift in loan portfolio mix, as well as lower average rates on new securities purchases and lower reinvestment rates on maturing securities. Refer to the “Consolidated Daily Average Balance Sheet and Related Yields and Rates” table for further information on net interest income.

Average investment securities in the first quarter of 2016 were $5.3 billion (5.3 percent) higher than the first quarter of 2015, primarily due to purchases of U.S. Treasury securities, net of prepayments and maturities, to support regulatory liquidity coverage ratio requirements.

Average total loans were $14.3 billion (5.8 percent) higher in the first quarter of 2016 than the first quarter of 2015, due to growth in commercial loans (10.2 percent), credit card loans (13.6 percent), residential mortgages (5.4 percent) and other retail loans (3.6 percent). 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 first quarter of 2016 average credit card loans by approximately $1.5 billion. These increases were partially offset by a decline in commercial real estate loans (0.6 percent) and loans covered by loss sharing agreements with the Federal Deposit Insurance Corporation (“FDIC”) (13.3 percent), a run-off portfolio. Average loans acquired in FDIC-assisted transactions that are covered by loss sharing agreements with the FDIC (“covered” loans) decreased to $4.5 billion in the first quarter of 2016, compared with $5.2 billion in the same period of 2015.

Average total deposits for the first quarter of 2016 were $17.4 billion (6.3 percent) higher than the first quarter of 2015. Average noninterest-bearing deposits increased $4.1 billion (5.4 percent) over the prior year, mainly in Wholesale Banking and Commercial Real Estate and Consumer and Small Business Banking. Average total savings deposits were $19.0 billion

 

U.S. Bancorp    3


Table of Contents
 Table 2  Noninterest Income

 

   

Three Months Ended

March 31,

 
(Dollars in Millions)   2016      2015      Percent
Change
 

Credit and debit card revenue

  $ 266       $ 241         10.4

Corporate payment products revenue

    170         170           

Merchant processing services

    373         359         3.9   

ATM processing services

    80         78         2.6   

Trust and investment management fees

    339         322         5.3   

Deposit service charges

    168         161         4.3   

Treasury management fees

    142         137         3.6   

Commercial products revenue

    197         200         (1.5

Mortgage banking revenue

    187         240         (22.1

Investment products fees

    40         47         (14.9

Securities gains (losses), net

    3                 *   

Other

    184         199         (7.5

Total noninterest income

  $ 2,149       $ 2,154         (.2 )% 

 

* Not meaningful.

 

(11.6 percent) higher, the result of growth in Wholesale Banking and Commercial Real Estate, Consumer and Small Business Banking, and Wealth Management and Securities Services. Growth in Consumer and Small Business Banking total savings deposits included net new account growth of 3.2 percent. Average time deposits were $5.7 billion (14.4 percent) lower in the first quarter of 2016, compared with the same period of 2015. Changes in time deposits are largely related to those deposits managed as an alternative to other wholesale funding sources, based on funding needs and relative pricing.

Provision for Credit Losses The provision for credit losses for the first quarter of 2016 was $330 million, which was $66 million (25.0 percent) higher than the first quarter of 2015. The increase was driven by deterioration in the Company’s energy-related commercial loan portfolio, reflected by increases in criticized and nonperforming loans. Credit quality, excluding the energy-related loan portfolio, was relatively stable. The provision for credit losses was $15 million higher than net-charge-offs in the first quarter of 2016, compared with $15 million lower than net charge-offs in the first quarter of 2015. The first quarter of 2016 provision reflected an increase in energy-related credit reserves, partially offset by lower reserves related to the Company’s retail portfolios. Net charge-offs increased $36 million (12.9 percent) in the first quarter of 2016, compared with the same period of the prior year, primarily due to higher commercial loan net charge-offs mainly related to the energy portfolio, partially offset by lower charge-offs related to residential mortgages and home equity loans. 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 in the first quarter of 2016 was $2.1 billion, a decrease of $5 million (0.2 percent), compared with the first quarter of 2015. The decrease from a year ago was primarily due to a decrease in mortgage banking revenue, partially offset by increases in credit and debit card revenue, trust and investment management fees, and merchant processing services revenue. Mortgage banking revenue decreased $53 million (22.1 percent) primarily due to lower origination and sales revenue driven by lower volume (a 10 percent decline) and lower pricing as a result of market competition. Credit and debit card revenue increased $25 million (10.4 percent) over the first quarter of 2015, reflecting higher transaction volumes including acquired portfolios. Trust and investment management fees increased $17 million (5.3 percent), reflecting lower fee waivers. Merchant processing services revenue increased $14 million (3.9 percent) as a result of higher transaction volumes and equipment sales to merchants related to new chip card technology requirements. Adjusted for the approximate $9 million impact of foreign currency rate changes, year-over-year merchant processing services growth would have been approximately 6.4 percent.

Noninterest Expense Noninterest expense in the first quarter of 2016 was $2.7 billion, an increase of $84 million (3.2 percent), compared with the first quarter of 2015. The increase from a year ago was primarily due to increased compensation expense, professional services expense, and technology and communications expense, partially offset by lower employee benefits and other noninterest expense. Compensation expense increased $70 million (5.9 percent), principally due to the impact of merit increases and one additional day in the first quarter of 2016, along with higher variable compensation including performance-based incentives and stock-based compensation, which included a one-time all-employee grant of the Company’s common stock. Professional services expense increased $21 million

 

4    U.S. Bancorp


Table of Contents
 Table 3  Noninterest Expense

 

   

Three Months Ended

March 31,

 
(Dollars in Millions)   2016     2015     Percent
Change
 

Compensation

  $ 1,249      $ 1,179        5.9

Employee benefits

    300        317        (5.4

Net occupancy and equipment

    248        247        .4   

Professional services

    98        77        27.3   

Marketing and business development

    77        70        10.0   

Technology and communications

    233        214        8.9   

Postage, printing and supplies

    79        82        (3.7

Other intangibles

    45        43        4.7   

Other

    420        436        (3.7

Total noninterest expense

  $ 2,749      $ 2,665        3.2

Efficiency ratio (a)

    54.6     54.3        

 

(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).

 

(27.3 percent) primarily due to compliance-related matters, while technology and communications expense increased $19 million (8.9 percent) reflecting acquisition conversion costs. Offsetting these increases were lower employee benefits expense of $17 million (5.4 percent), mainly due to lower pension costs, and a $16 million (3.7 percent) decrease in other noninterest expense, primarily reflecting the impact of lower mortgage servicing-related expenses as well as proceeds from an insurance recovery recognized during the first quarter of 2016.

Income Tax Expense The provision for income taxes was $504 million (an effective rate of 26.5 percent) for the first quarter of 2016, compared with $479 million (an effective rate of 24.9 percent) for the first quarter of 2015. The increase was the result of resolution of certain tax matters in the first quarter of 2015. 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 $264.5 billion at March 31, 2016, compared with $260.8 billion at December 31, 2015, an increase of $3.7 billion (1.4 percent). The increase was driven primarily by higher commercial loans, residential mortgages and commercial real estate loans, partially offset by lower credit card loans, other retail loans and covered loans.

Commercial loans and commercial real estate loans increased $2.9 billion (3.3 percent) and $606 million (1.4 percent), respectively, at March 31, 2016, compared with December 31, 2015, reflecting higher demand from new and existing customers.

Residential mortgages held in the loan portfolio increased $1.5 billion (2.7 percent), reflecting higher origination activity in the first quarter 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.

Credit card loans decreased $1.1 billion (5.0 percent) at March 31, 2016, compared with December 31, 2015, primarily the result of customers seasonally paying down balances.

Other retail loans decreased $45 million (0.1 percent) at March 31, 2016, compared with December 31, 2015, primarily driven by lower revolving credit and student loans, partially offset by increases in installment and auto loans.

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 $4.0 billion at March 31, 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 first 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 $107.0 billion at March 31, 2016, compared with $105.6 billion at December 31, 2015. The $1.4 billion (1.4 percent) increase reflected $978 million of net investment purchases and a $483 million favorable change in net unrealized gains (losses) on available-for-sale investment securities.

 

U.S. Bancorp    5


Table of Contents
 Table 4  Investment Securities

 

    Available-for-Sale           Held-to-Maturity  

At March 31, 2016

(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

  $ 375       $ 375         .7         2.46        $       $                

Maturing after one year through five years

    3,392         3,422         2.8         1.27             1,098         1,115         2.4         1.42   

Maturing after five years through ten years

    3,894         3,970         6.6         1.94             1,810         1,850         6.7         2.14   

Maturing after ten years

    1         2         11.4         4.15                                       

Total

  $ 7,662       $ 7,769         4.6         1.67        $ 2,908       $ 2,965         5.1         1.87

Mortgage-Backed Securities (a)

                          

Maturing in one year or less

  $ 793       $ 795         .6         1.82        $ 465       $ 467         .7         1.92

Maturing after one year through five years

    45,011         45,424         3.9         1.81             36,473         36,799         3.6         1.99   

Maturing after five years through ten years

    4,002         4,036         6.2         1.71             2,173         2,189         5.9         1.31   

Maturing after ten years

    355         352         12.3         1.49             50         49         12.2         1.31   

Total

  $ 50,161       $ 50,607         4.1         1.80        $ 39,161       $ 39,504         3.7         1.95

Asset-Backed Securities (a)

                          

Maturing in one year or less

  $ 15       $ 18         .7         6.88        $       $ 1         .2         1.05

Maturing after one year through five years

    171         173         3.5         3.08             6         8         3.4         1.08   

Maturing after five years through ten years

    354         360         5.7         2.87             2         2         5.8         1.22   

Maturing after ten years

                                        1         7         11.9         1.19   

Total

  $ 540       $ 551         4.9         3.05        $ 9       $ 18         5.1         1.13

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

                          

Maturing in one year or less

  $ 2,204       $ 2,240         .5         7.03        $       $         .5         9.09

Maturing after one year through five years

    1,587         1,667         1.8         6.83             1         1         2.7         8.19   

Maturing after five years through ten years

    1,125         1,157         7.7         5.53             3         3         8.6         3.90   

Maturing after ten years

    126         133         12.1         6.65             4         4         10.2         2.33   

Total

  $ 5,042       $ 5,197         2.8         6.62        $ 8       $ 8         8.9         3.46

Other Debt Securities

                          

Maturing in one year or less

  $       $                        $ 3       $ 3         .6         1.67

Maturing after one year through five years

                                        24         23         3.7         1.44   

Maturing after five years through ten years

                                                                  

Maturing after ten years

    678         586         17.3         2.79                                       

Total

  $ 678       $ 586         17.3         2.79        $ 27       $ 26         3.4         1.47

Other Investments

  $ 166       $ 202         28.9         4.95        $       $                

Total investment securities (d)

  $ 64,249       $ 64,912         4.3         2.19        $ 42,113       $ 42,521         3.8         1.94

 

(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 4.7 years at December 31, 2015, with a corresponding weighted-average yield of 2.21 percent. The weighted-average maturity of the held-to-maturity investment securities was 4.2 years at December 31, 2015, with a corresponding weighted-average yield of 1.92 percent.
(e) Weighted-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. Weighted-average yield and maturity calculations exclude equity securities that have no stated yield or maturity.

 

    March 31, 2016           December 31, 2015  
(Dollars in Millions)   Amortized
Cost
     Percent
of Total
          Amortized
Cost
     Percent
of Total
 

U.S. Treasury and agencies

  $ 10,570         9.9        $ 7,536         7.2

Mortgage-backed securities

    89,322         84.0             91,265         86.6   

Asset-backed securities

    549         .5             558         .5   

Obligations of state and political subdivisions

    5,050         4.8             5,157         4.9   

Other debt securities and investments

    871         .8             891         .8   

Total investment securities

  $ 106,362         100.0        $ 105,407         100.0

 

6    U.S. Bancorp


Table of Contents

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 March 31, 2016, the Company’s net unrealized gains on available-for-sale securities were $663 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 $225 million at March 31, 2016, compared with $480 million at December 31, 2015. At March 31, 2016, 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.

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 $306.3 billion at March 31, 2016, compared with $300.4 billion at December 31, 2015, the result of an increase in total savings deposits, partially offset by decreases in noninterest-bearing deposits and time deposits. Money market deposit balances increased $6.3 billion (7.3 percent) at March 31, 2016, compared with December 31, 2015, primarily due to higher Wholesale Banking and Commercial Real Estate, and broker-dealer balances. Savings account balances increased $1.8 billion (4.6 percent), primarily due to higher Consumer and Small Business Banking balances. Interest checking balances increased $1.4 billion (2.4 percent) primarily due to higher Wholesale Banking and Commercial Real Estate, broker-dealer and Consumer and Small Business Banking balances, partially offset by lower corporate trust balances. Noninterest-bearing deposits decreased $3.4 billion (4.0 percent) at March 31, 2016, compared with December 31, 2015, primarily due to lower Wealth Management and Securities Services and Wholesale Banking and Commercial Real Estate balances, partially offset by seasonally higher mortgage escrow-related balances. Time deposits decreased $169 million (0.5 percent) at March 31, 2016, compared with December 31, 2015.

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 $23.8 billion at March 31, 2016, compared with $27.9 billion at December 31, 2015. The $4.1 billion (14.7 percent) decrease in short-term borrowings was primarily due to lower commercial paper and other short-term borrowings balances. Long-term debt was $34.9 billion at March 31, 2016, compared with $32.1 billion at December 31, 2015. The $2.8 billion (8.7 percent) increase was primarily due to the issuances of $2.9 billion of bank notes and $1.2 billion of medium-term notes, and a $1.7 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.

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

 

U.S. Bancorp    7


Table of Contents

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, 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), collateral values, trends in loan performance and macroeconomic factors, such as changes in unemployment rates, gross domestic

 

8    U.S. Bancorp


Table of Contents

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.

Included within the commercial lending segment are commercial loans to energy-related businesses, which represented 1.3 percent of the Company’s total loans outstanding at March 31, 2016. The continued decline in energy prices has resulted in further deterioration of a portion of these loans, which has led to an increase in criticized commitments and nonperforming loans at March 31, 2016, compared with December 31, 2015.

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

 

(Dollars in Millions)   March 31,
2016
    December 31,
2015
 

Loans outstanding

  $ 3,417      $ 3,183   

Total commitments outstanding

    11,931        12,118   

Total criticized commitments outstanding

    4,167        1,886   

Nonperforming assets

    276        19   

Allowance for credit losses as a percentage of loans outstanding

    9.1     5.4

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

 

U.S. Bancorp    9


Table of Contents

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 March 31, 2016, substantially all of the Company’s home equity lines were in the draw period. Approximately $979 million, or 7 percent, of the outstanding home equity line balances at March 31, 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, 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.

The following tables provide summary information for the LTVs of residential mortgages and home equity and second mortgages by borrower type at March 31, 2016:

 

Residential mortgages

(Dollars in Millions)

  Interest
Only
    Amortizing     Total     Percent
of Total
 

Prime Borrowers

       

Less than or equal to 80%

  $ 1,668      $ 41,471      $ 43,139        88.8

Over 80% through 90%

    43        3,084        3,127        6.4   

Over 90% through 100%

    22        1,058        1,080        2.2   

Over 100%

    32        1,114        1,146        2.4   

No LTV available

    2        111        113        .2   

Total

  $ 1,767      $ 46,838      $ 48,605        100.0

Sub-Prime Borrowers

       

Less than or equal to 80%

  $      $ 566      $ 566        54.7

Over 80% through 90%

           166        166        16.0   

Over 90% through 100%

           136        136        13.2   

Over 100%

           166        166        16.0   

No LTV available

           1        1        .1   

Total

  $      $ 1,035      $ 1,035        100.0

Other Borrowers

       

Less than or equal to 80%

  $ 1      $ 360      $ 361        61.1

Over 80% through 90%

           79        79        13.4   

Over 90% through 100%

           48        48        8.1   

Over 100%

           103        103        17.4   

No LTV available

                           

Total

  $ 1      $ 590      $ 591        100.0

Loans Purchased From GNMA Mortgage Pools (a)

  $      $ 4,724      $ 4,724        100.0

Total

       

Less than or equal to 80%

  $ 1,669      $ 42,397      $ 44,066        80.2

Over 80% through 90%

    43        3,329        3,372        6.1   

Over 90% through 100%

    22        1,242        1,264        2.3   

Over 100%

    32        1,383        1,415        2.6   

No LTV available

    2        112        114        .2   

Loans purchased from GNMA mortgage pools (a)

           4,724        4,724        8.6   

Total

  $ 1,768      $ 53,187      $ 54,955        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.

 

10    U.S. Bancorp


Table of Contents

Home equity and second mortgages

(Dollars in Millions)

  Lines     Loans     Total     Percent
of Total
 

Prime Borrowers

       

Less than or equal to 80%

  $ 10,493      $ 529      $ 11,022        69.9

Over 80% through 90%

    2,340        373        2,713        17.2   

Over 90% through 100%

    949        136        1,085        6.9   

Over 100%

    736        121        857        5.4   

No LTV/CLTV available

    58        27        85        .6   

Total

  $ 14,576      $ 1,186      $ 15,762        100.0

Sub-Prime Borrowers

       

Less than or equal to 80%

  $ 36      $ 24      $ 60        32.3

Over 80% through 90%

    9        17        26        14.0   

Over 90% through 100%

    8        20        28        15.0   

Over 100%

    17        54        71        38.2   

No LTV/CLTV available

           1        1        .5   

Total

  $ 70      $ 116      $ 186        100.0

Other Borrowers

       

Less than or equal to 80%

  $ 225      $ 11      $ 236        61.5

Over 80% through 90%

    35        4        39        10.2   

Over 90% through 100%

    11        1        12        3.1   

Over 100%

    12        2        14        3.6   

No LTV/CLTV available

    83               83        21.6   

Total

  $ 366      $ 18      $ 384        100.0

Total

       

Less than or equal to 80%

  $ 10,754      $ 564      $ 11,318        69.3

Over 80% through 90%

    2,384        394        2,778        17.0   

Over 90% through 100%

    968        157        1,125        6.9   

Over 100%

    765        177        942        5.8   

No LTV/CLTV available

    141        28        169        1.0   

Total

  $ 15,012      $ 1,320      $ 16,332        100.0

At March 31, 2016, approximately $1.0 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 $1.1 billion at December 31, 2015. In addition to residential mortgages, at March 31, 2016, $186 million of home equity and second mortgage loans were to customers that may be defined as sub-prime borrowers, compared with $195 million at December 31, 2015. 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 March 31, 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 $16.3 billion at March 31, 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 $11.3 billion of home equity and second mortgage loans and lines in a junior lien position. Loans and lines in a junior lien position at March 31, 2016, included approximately $4.5 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 March 31, 2016:

 

    Junior Liens Behind        
(Dollars in Millions)   Company Owned
or Serviced
First Lien
    Third Party
First Lien
    Total  

Total

  $ 4,517      $ 6,847      $ 11,364   

Percent 30 - 89 days past due

    .28     .44     .37

Percent 90 days or more past due

    .14     .10     .12

Weighted-average CLTV

    75     72     73

Weighted-average credit score

    773        766        769   

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.

 

U.S. Bancorp    11


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

 

90 days or more past due excluding nonperforming loans   March 31,
2016
    December 31,
2015
 

Commercial

   

Commercial

    .06     .06

Lease financing

             

Total commercial

    .05        .05   

Commercial Real Estate

   

Commercial mortgages

    .01          

Construction and development

    .13        .13   

Total commercial real estate

    .04        .03   

Residential Mortgages (a)

    .31        .33   

Credit Card

    1.10        1.09   

Other Retail

   

Retail leasing

    .02        .02   

Home equity and second mortgages

    .26        .25   

Other

    .10        .11   

Total other retail (b)

    .15        .15   

Total loans, excluding covered loans

    .20        .21   

Covered Loans

    6.23        6.31   

Total loans

    .30     .32
90 days or more past due including nonperforming loans   March 31,
2016
    December 31,
2015
 

Commercial

    .57     .25

Commercial real estate

    .28        .33   

Residential mortgages (a)

    1.54        1.66   

Credit card

    1.14        1.13   

Other retail (b)

    .45        .46   

Total loans, excluding covered loans

    .75        .67   

Covered loans

    6.39        6.48   

Total loans

    .84     .78

 

(a) Delinquent loan ratios exclude $2.8 billion at March 31, 2016, and $2.9 billion at December 31, 2015, 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 6.64 percent at March 31, 2016, and 7.15 percent at December 31, 2015.
(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 .66 percent at March 31, 2016, and .75 percent at December 31, 2015.

 

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 $804 million ($528 million excluding covered loans) at March 31, 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 0.30 percent (0.20 percent excluding covered loans) at March 31, 2016, compared with 0.32 percent (0.21 percent excluding covered loans) at December 31, 2015.

 

12    U.S. Bancorp


Table of Contents

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)   March 31,
2016
     December 31,
2015
           March 31,
2016
    December 31,
2015
 

Residential Mortgages (a)

              

30-89 days

  $ 134       $ 170              .24     .32

90 days or more

    169         176              .31        .33   

Nonperforming

    677         712              1.23        1.33   

Total

  $ 980       $ 1,058              1.78     1.98

Credit Card

              

30-89 days

  $ 219       $ 243              1.09     1.15

90 days or more

    220         228              1.10        1.09   

Nonperforming

    7         9              .04        .04   

Total

  $ 446       $ 480              2.23     2.28

Other Retail

              

Retail Leasing

              

30-89 days

  $ 9       $ 11              .17     .21

90 days or more

    1         1              .02        .02   

Nonperforming

    2         3              .04        .06   

Total

  $ 12       $ 15              .23     .29

Home Equity and Second Mortgages

              

30-89 days

  $ 63       $ 59              .39     .36

90 days or more

    43         41              .26        .25   

Nonperforming

    131         136              .80        .83   

Total

  $ 237       $ 236              1.45     1.44

Other (b)

              

30-89 days

  $ 123       $ 154              .42     .52

90 days or more

    31         33              .10        .11   

Nonperforming

    24         23              .08        .08   

Total

  $ 178       $ 210              .60     .71

 

(a) Excludes $271 million of loans 30-89 days past due and $2.8 billion of loans 90 days or more past due at March 31, 2016, purchased from GNMA mortgage pools that continue to accrue interest, compared with $320 million and $2.9 billion at December 31, 2015, 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)   March 31,
2016
    December 31,
2015
 

Prime Borrowers

   

30-89 days

    .21     .25

90 days or more

    .27        .30   

Nonperforming

    1.03        1.12   

Total

    1.51     1.67

Sub-Prime Borrowers

   

30-89 days

    2.41     3.92

90 days or more

    2.90        2.52   

Nonperforming

    14.69        15.30   

Total

    20.00     21.74

Other Borrowers

   

30-89 days

    1.19     1.60

90 days or more

    1.35        1.12   

Nonperforming

    4.06        4.00   

Total

    6.60     6.72

 

(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   March 31,
2016
    December 31,
2015
 

Prime Borrowers

   

30-89 days

    .35     .31

90 days or more

    .23        .23   

Nonperforming

    .72        .74   

Total

    1.30     1.28

Sub-Prime Borrowers

   

30-89 days

    1.61     2.56

90 days or more

    1.08        1.03   

Nonperforming

    4.84        4.62   

Total

    7.53     8.21

Other Borrowers

   

30-89 days

    1.30     1.23

90 days or more

    1.04        .74   

Nonperforming

    2.35        2.45   

Total

    4.69     4.42

The following table provides summary delinquency information for covered loans:

 

    Amount           As a Percent of Ending
Loan Balances
 
(Dollars in Millions)   March 31,
2016
     December 31,
2015
          March 31,
2016
    December 31,
2015
 

30-89 days

  $ 60       $ 62             1.35     1.35

90 days or more

    276         290             6.23        6.31   

Nonperforming

    7         8             .16        .17   

Total

  $ 343       $ 360             7.74     7.83

 

U.S. Bancorp    13


Table of Contents

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 March 31, 2016, performing TDRs were $4.6 billion, compared with $4.7 billion at December 31, 2015. 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.

 

14    U.S. Bancorp


Table of Contents

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 March 31, 2016

(Dollars in Millions)

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

Commercial

  $ 347         5.8     1.1   $ 179 (a)    $ 526   

Commercial real estate

    212         3.0        4.3        36 (b)      248   

Residential mortgages

    1,827         2.6        3.4        446        2,273 (d) 

Credit card

    205         9.7        6.9        7 (c)      212   

Other retail

    144         3.8        4.9        60 (c)      204 (e) 

TDRs, excluding GNMA and covered loans

    2,735         3.6        3.5        728        3,463   

Loans purchased from GNMA mortgage pools

    1,820         4.2        66.7               1,820 (f) 

Covered loans

    31         3.2        5.7        4        35   

Total

  $ 4,586         3.9     28.6   $ 732      $ 5,318   

 

(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 $298 million of residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $65 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.
(e) Includes $100 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 $465 million of Federal Housing Administration and Department of Veterans Affairs residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $613 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 March 31, 2016.

 

U.S. Bancorp    15


Table of Contents
 Table 6  Nonperforming Assets (a)

 

(Dollars in Millions)   March 31,
2016
    December 31,
2015
 

Commercial

   

Commercial

  $ 457      $ 160   

Lease financing

    16        14   

Total commercial

    473        174   

Commercial Real Estate

   

Commercial mortgages

    94        92   

Construction and development

    10        35   

Total commercial real estate

    104        127   

Residential Mortgages (b)

    677        712   

Credit Card

    7        9   

Other Retail

   

Retail leasing

    2        3   

Home equity and second mortgages

    131        136   

Other

    24        23   

Total other retail

    157        162   

Total nonperforming loans, excluding covered loans

    1,418        1,184   

Covered Loans

    7        8   

Total nonperforming loans

    1,425        1,192   

Other Real Estate (c)(d)

    242        280   

Covered Other Real Estate (d)

    33        32   

Other Assets

    19        19   

Total nonperforming assets

  $ 1,719      $ 1,523   

Total nonperforming assets, excluding covered assets

  $ 1,679      $ 1,483   

Excluding covered assets

   

Accruing loans 90 days or more past due (b)

  $ 528      $ 541   

Nonperforming loans to total loans

    .55     .46

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

    .64     .58

Including covered assets

   

Accruing loans 90 days or more past due (b)

  $ 804      $ 831   

Nonperforming loans to total loans

    .54     .46

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

    .65     .58

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, 2015

   $ 336      $ 1,147      $ 40      $ 1,523   

Additions to nonperforming assets

        

New nonaccrual loans and foreclosed properties

     404        94        5        503   

Advances on loans

     14                      14   

Total additions

     418        94        5        517   

Reductions in nonperforming assets

        

Paydowns, payoffs

     (7     (70     (1     (78

Net sales

     (43     (40     (4     (87

Return to performing status

     (22     (29            (51

Charge-offs (e)

     (81     (24            (105

Total reductions

     (153     (163     (5     (321

Net additions to (reductions in) nonperforming assets

     265        (69            196   

Balance March 31, 2016

   $ 601      $ 1,078      $ 40      $ 1,719   

 

(a) Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due.
(b) Excludes $2.8 billion and $2.9 billion at March 31, 2016, and December 31, 2015, 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 $477 million and $535 million at March 31, 2016, and December 31, 2015, 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.

 

16    U.S. Bancorp


Table of Contents

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 (“OREO”) 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 March 31, 2016, total nonperforming assets were $1.7 billion, compared with $1.5 billion at December 31, 2015. The $196 million (12.9 percent) increase in nonperforming assets was primarily driven by a $257 million increase in nonperforming commercial loans to energy-related businesses, partially offset by improvements in the Company’s residential and commercial real estate portfolios. Excluding energy-related loans, nonperforming assets decreased 4.1 percent at March 31, 2016, compared with December 31, 2015. Nonperforming covered assets were $40 million at March 31, 2016 and December 31, 2015. The ratio of total nonperforming assets to total loans and other real estate was 0.65 percent at March 31, 2016, compared with 0.58 percent at December 31, 2015.

OREO, excluding covered assets, was $242 million at March 31, 2016, compared with $280 million at December 31, 2015, 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 OREO, 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)   March 31,
2016
    December 31,
2015
         March 31,
2016
    December 31,
2015
 

Residential

           

Minnesota

  $ 19      $ 23            .31     .37

Illinois

    18        18            .42        .42   

Wisconsin

    13        11            .57        .49   

Ohio

    12        17            .39        .56   

Florida

    12        17            .77        1.12   

All other states

    150        164            .28        .31   

Total residential

    224        250            .31        .36   

Commercial

           

California

    5        11            .02        .05   

Illinois

    2        5            .03        .08   

Indiana

    2        2            .13        .13   

Tennessee

    1        1            .04        .04   

Iowa

    1        1            .04        .04   

All other states

    7        10            .01        .01   

Total commercial

    18        30            .01        .02   

Total

  $ 242      $ 280            .09     .11

Analysis of Loan Net Charge-Offs Total loan net charge-offs were $315 million for the first quarter of 2016, compared with $279 million for the first quarter of 2015. The ratio of total loan net charge-offs to average loans

 

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

 

    Three Months Ended
March 31,
 
     2016     2015  

Commercial

   

Commercial

    .37     .21

Lease financing

    .38        .23   

Total commercial

    .37        .21   

Commercial Real Estate

   

Commercial mortgages

    (.03     (.01

Construction and development

    (.11     (.72

Total commercial real estate

    (.05     (.17

Residential Mortgages

    .14        .28   

Credit Card

    3.26        3.71   

Other Retail

   

Retail leasing

    .08        .07   

Home equity and second mortgages

    .05        .36   

Other

    .69        .60   

Total other retail

    .43        .46   

Total loans, excluding covered loans

    .49        .47   

Covered Loans

             

Total loans

    .48     .46

 

U.S. Bancorp    17


Table of Contents

outstanding on an annualized basis for the first quarter of 2016 was 0.48 percent, compared with 0.46 percent for the first quarter of 2015. The increase in net charge-offs for the first quarter of 2016, compared with the first quarter of 2015, reflected higher commercial loan net charge-offs mainly related to the energy portfolio, partially offset by lower charge-offs related to residential mortgages and home equity loans.

Commercial and commercial real estate loan net charge-offs for the first quarter of 2016 were $78 million (0.24 percent of average loans outstanding on an annualized basis), compared with $25 million (0.08 percent of average loans outstanding on an annualized basis) for the first quarter of 2015, reflecting an increase in energy portfolio net charge-offs.

Residential mortgage loan net charge-offs for the first quarter of 2016 were $19 million (0.14 percent of average loans outstanding on an annualized basis), compared with $35 million (0.28 percent of average loans outstanding on an annualized basis) for the first quarter of 2015. Credit card loan net charge-offs for the first quarter of 2016 were $164 million (3.26 percent of average loans outstanding on an annualized basis), compared with $163 million (3.71 percent of average loans outstanding on an annualized basis) for the first quarter of 2015. Other retail loan net charge-offs for the first quarter of 2016 were $54 million (0.43 percent of average loans outstanding on an annualized basis), compared with $56 million (0.46 percent of average loans outstanding on an annualized basis) for the first quarter of 2015. The decrease in total residential mortgage, credit card and other retail loan net charge-offs reflected the continued 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 March 31,  
    Average Loans           Percent of
Average Loans
 
(Dollars in Millions)   2016      2015           2016     2015  

Residential Mortgages

             

Prime borrowers

  $ 47,789       $ 44,233             .12     .19

Sub-prime borrowers

    1,048         1,205             1.54        3.37   

Other borrowers

    604         787             .67        1.03   

Loans purchased from GNMA mortgage pools (a)

    4,767         5,201                    .16   

Total

  $ 54,208       $ 51,426             .14     .28

Home Equity and Second Mortgages

             

Prime borrowers

  $ 15,785       $ 15,163             .05     .29

Sub-prime borrowers

    189         231                    3.51   

Other borrowers

    394         503                    .81   

Total

  $ 16,368       $ 15,897             .05     .36

 

(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.

 

 

18    U.S. Bancorp


Table of Contents

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 15-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, less selling costs, 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 March 31, 2016, the Company serviced the first lien on 40 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 $293 million or 1.8 percent of the total home equity portfolio at March 31, 2016, represented non-delinquent 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 0.6 percent for the twelve months ended March 31, 2016), 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 described for non-covered loans, and represents any

 

U.S. Bancorp    19


Table of Contents

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, 2015, for further discussion on the analysis and determination of the allowance for credit losses.

At March 31, 2016, the allowance for credit losses was $4.3 billion (1.63 percent of period-end loans), compared with an allowance of $4.3 billion (1.65 percent of period-end loans) at December 31, 2015. The ratio of the allowance for credit losses to nonperforming loans was 303 percent at March 31, 2016, compared with 361 percent at December 31, 2015. The ratio of the allowance for credit losses to annualized loan net charge-offs was 341 percent at March 31, 2016, compared with 367 percent of full year 2015 net charge-offs at December 31, 2015, reflecting the deterioration in the energy-related commercial loan portfolio.

 

20    U.S. Bancorp


Table of Contents
 Table 8  Summary of Allowance for Credit Losses

 

    Three Months
Ended March 31,
 
(Dollars in Millions)        2016          2015  

Balance at beginning of period

  $ 4,306      $ 4,375   

Charge-Offs

   

Commercial

   

Commercial

    104        68   

Lease financing

    7        6   

Total commercial

    111        74   

Commercial real estate

   

Commercial mortgages

    1        4   

Construction and development

    2        1   

Total commercial real estate

    3        5   

Residential mortgages

    23        41   

Credit card

    188        182   

Other retail

   

Retail leasing

    2        2   

Home equity and second mortgages

    9        21   

Other

    69        58   

Total other retail

    80        81   

Covered loans (a)

             

Total charge-offs

    405        383   

Recoveries

   

Commercial

   

Commercial

    26        28   

Lease financing

    2        3   

Total commercial

    28        31   

Commercial real estate

   

Commercial mortgages

    3        5   

Construction and development

    5        18   

Total commercial real estate

    8        23   

Residential mortgages

    4        6   

Credit card

    24        19   

Other retail

   

Retail leasing

    1        1   

Home equity and second mortgages

    7        7   

Other

    18        17   

Total other retail

    26        25   

Covered loans (a)

             

Total recoveries

    90        104   

Net Charge-Offs

   

Commercial

   

Commercial

    78        40   

Lease financing

    5        3   

Total commercial

    83        43   

Commercial real estate

   

Commercial mortgages

    (2     (1

Construction and development

    (3     (17

Total commercial real estate

    (5     (18

Residential mortgages

    19        35   

Credit card

    164        163   

Other retail

   

Retail leasing

    1        1   

Home equity and second mortgages

    2        14   

Other

    51        41   

Total other retail

    54        56   

Covered loans (a)

             

Total net charge-offs

    315        279   

Provision for credit losses

    330        264   

Other changes (b)

    (1     (9

Balance at end of period (c)

  $ 4,320      $ 4,351   

Components

   

Allowance for loan losses

  $ 3,853      $ 4,023   

Liability for unfunded credit commitments

    467        328   

Total allowance for credit losses

  $ 4,320      $ 4,351   

Allowance for Credit Losses as a Percentage of

   

Period-end loans, excluding covered loans

    1.65     1.79

Nonperforming loans, excluding covered loans

    302        321   

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

    220        231   

Nonperforming assets, excluding covered assets

    255        261   

Annualized net charge-offs, excluding covered loans

    338        379   

Period-end loans

    1.63     1.77

Nonperforming loans

    303        322   

Nonperforming and accruing loans 90 days or more past due

    194        195   

Nonperforming assets

    251        257   

Annualized net charge-offs

    341        385   

 

(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 March 31, 2016 and 2015, $1.6 billion of the total allowance for credit losses related to incurred losses on credit card and other retail loans.

 

U.S. Bancorp    21


Table of Contents

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 March 31, 2016, no significant change in the amount of residual values or concentration of the portfolios had occurred since December 31, 2015. 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, 2015, 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, 2015, 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, including those related to compliance with Bank Secrecy Act/anti-money laundering requirements, sanctions compliance requirements as administered by the Office of Foreign Assets Control, and other requirements. 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, 2015, 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 March 31, 2016, and December 31, 2015, 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, 2015, 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

 

 Table 9  Sensitivity of Net Interest Income

 

    March 31, 2016           December 31, 2015  
     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

    *         2.05     *         2.82          *         1.78     *         2.69

 

* Given the current level of interest rates, downward rate scenario is not computed.

 

22    U.S. Bancorp


Table of Contents

15.0 percent decline. A 200 bps increase would have resulted in a 5.1 percent decrease in the market value of equity at March 31, 2016, compared with a 5.8 percent decrease at December 31, 2015. A 200 bps decrease, where possible given current rates, would have resulted in a 9.4 percent decrease in the market value of equity at March 31, 2016, compared with a 7.0 percent decrease at December 31, 2015. The change in the market value of equity sensitivity to an immediate 200 bps decrease in the yield curve at March 31, 2016, as compared with December 31, 2015, was primarily due to assuming deposit rates do not decrease below zero, combined with lower rates on the long end of the yield curve. 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, 2015, 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 debt from floating-rate payments to fixed-rate payments;
  To mitigate changes in value of the Company’s mortgage origination pipeline, funded MLHFS and MSRs;
  To mitigate remeasurement volatility of foreign currency denominated balances; and
  To mitigate the volatility of the Company’s investment in foreign businesses 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 and Eurodollar 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 March 31, 2016, the Company had $6.1 billion of forward commitments to sell, hedging $2.3 billion of MLHFS and $5.0 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 MLHFS.

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

 

U.S. Bancorp    23


Table of Contents

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 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:

 

Three Months Ended March 31,

(Dollars in Millions)

  2016      2015  

Average

  $ 1       $ 1   

High

    1         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 three months ended March 31, 2016 and 2015. 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:

 

Three Months Ended March 31,

(Dollars in Millions)

  2016      2015  

Average

  $ 4       $ 5   

High

    5         8   

Low

    3         2   

Period-end

    4         6   

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 MLHFS 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 VaR amounts for the residential MLHFS and related hedges and the MSRs and related hedges were as follows:

 

Three Months Ended March 31,

(Dollars in Millions)

  2016      2015  

Residential Mortgage Loans Held For Sale and Related Hedges

    

Average

  $       $ 1   

High

    2         2   

Low

              

Mortgage Servicing Rights and Related Hedges

    

Average

  $ 7       $ 7   

High

    8         8   

Low

    4         6   

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 Committee of the Company’s Board of Directors oversees

 

24    U.S. Bancorp


Table of Contents

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 March 31, 2016, the fair value of unencumbered available-for-sale and held-to-maturity investment securities totaled $94.9 billion, compared with $92.4 billion at December 31, 2015. 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 March 31, 2016, the Company could have borrowed an additional $79.1 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 $306.3 billion at March 31, 2016, compared with $300.4 billion at December 31, 2015. 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 $34.9 billion at March 31, 2016, and is an important funding source because of its multi-year borrowing structure. Short-term borrowings were $23.8 billion at March 31, 2016, 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 March 31, 2016, parent company long-term debt outstanding was $12.0 billion, compared with $11.5 billion at December 31, 2015. The increase was primarily due to the issuance of $1.2 billion of medium-term notes, partially offset by $500 million of subordinated note maturities. As of March 31, 2016, there was $1.3 billion of parent company debt scheduled to mature in the remainder of 2016.

Effective January 1, 2015, the Company became subject to a regulatory Liquidity Coverage Ratio (“LCR”) requirement. Certain transition provisions apply until full implementation by January 1, 2017. The LCR rule requires banks to maintain an adequate level of unencumbered high quality liquid assets to meet estimated liquidity needs over a 30-day stressed period. At March 31, 2016, 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, 2015, 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 March 31, 2016 and December 31, 2015, the Company had investments in perpetual preferred stock issued by a European bank with an amortized cost totaling $22 million and unrealized losses totaling $1 million. 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 March 31, 2016, the Company was in a net receivable position with four banks in Europe, totaling $11 million. The Company was in a net payable position to each of the other European banks.

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

 

U.S. Bancorp    25


Table of Contents

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 significant 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 March 31, 2016, the Company had an aggregate amount on deposit with European banks of approximately $1.5 billion, predominately with the Central Bank of Ireland and Bank of England.

The money market funds managed by a subsidiary of the Company do not have any investments in European sovereign debt, other than approximately $254 million guaranteed by the country of Germany at March 31, 2016. Other than investments in banks located in the Netherlands, France and Germany, these 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 banking organizations. 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 March 31, 2016 and December 31, 2015. All regulatory ratios exceeded regulatory “well-capitalized” requirements.

Effective January 1, 2018, the Company will be subject to a 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 exposures, which includes both on- and off-balance sheet exposures. At March 31, 2016, the Company’s SLR exceeds the applicable minimum SLR requirement.

Total U.S. Bancorp shareholders’ equity was $46.8 billion at March 31, 2016, compared with $46.1 billion at December 31, 2015. The increase was primarily the result of corporate earnings and changes in unrealized gains and losses on available-for-sale investment securities included in other comprehensive income (loss), 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 March 31, 2016, compared with 7.6 percent and 9.2 percent, respectively, at December 31, 2015. 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 March 31, 2016, compared with 9.1 percent at December 31, 2015. The Company’s common equity tier 1 to risk-weighted assets ratio using the Basel III advanced approaches as if fully implemented was 11.9 percent at March 31, 2016 and December 31, 2015. Refer to “Non-GAAP Financial Measures” for further information regarding the calculation of these ratios.

 

26    U.S. Bancorp


Table of Contents
 Table 10  Regulatory Capital Ratios

 

(Dollars in Millions)   March 31,
2016
    December 31,
2015
 

Basel III transitional standardized approach:

   

Common equity tier 1 capital

  $ 32,827      $ 32,612   

Tier 1 capital

    38,532        38,431   

Total risk-based capital

    45,412        45,313   

Risk-weighted assets

    346,227        341,360   

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

    9.5     9.6

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        13.3   

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

    9.3        9.5   

Basel III transitional advanced approaches:

   

Common equity tier 1 capital

  $ 32,827      $ 32,612   

Tier 1 capital

    38,532        38,431   

Total risk-based capital

    42,318        42,262   

Risk-weighted assets

    267,309        261,668   

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

    12.3     12.5

Tier 1 capital as a percent of risk-weighted assets

    14.4        14.7   

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

    15.8        16.2   

 

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 first quarter of 2016:

 

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
 

January

    8,350,859  (b)    $ 39.14         8,150,859       $ 975   

February

    5,983,021  (c)      39.34         5,783,021         747   

March

    1,970,017  (d)      40.79         1,920,017         669   

Total

    16,303,897  (e)    $ 39.41         15,853,897       $ 669   

 

(a) All shares were purchased under the stock repurchase program announced on March 11, 2015.
(b) Includes 200,000 shares of common stock purchased, at an average price per share of $39.13, in open-market transactions by U.S. Bank National Association, the Company’s banking subsidiary, in its capacity as trustee of the Company’s Employee Retirement Savings Plan (the “401(k) Plan”).
(c) Includes 200,000 shares of common stock purchased, at an average price per share of $39.08, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the Company’s 401(k) Plan.
(d) Includes 50,000 shares of common stock purchased, at an average price per share of $39.40, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the Company’s 401(k) Plan.
(e) Includes 450,000 shares of common stock purchased, at an average price per share of $39.14, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the Company’s 401(k) Plan.

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, 2015, for further discussion on capital management.

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, 2015, 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 2016, certain organization and methodology changes were made and, accordingly, 2015 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 $118 million of the Company’s net income in the first quarter of 2016, or a decrease of $82 million (41.0 percent) compared with the first

 

U.S. Bancorp    27


Table of Contents
 Table 11  Line of Business Financial Performance

 

   

Wholesale Banking and

Commercial Real Estate

         

Consumer and Small

Business Banking

 

Three Months Ended March 31,

(Dollars in Millions)

  2016      2015      Percent
Change
          2016      2015      Percent
Change
 

Condensed Income Statement

                      

Net interest income (taxable-equivalent basis)

  $ 520       $ 480         8.3        $ 1,167       $ 1,139         2.5

Noninterest income

    206         220         (6.4          552         620         (11.0

Securities gains (losses), net

                                                  

Total net revenue

    726         700         3.7             1,719         1,759         (2.3

Noninterest expense

    338         327         3.4             1,198         1,174         2.0   

Other intangibles

    1         1                     8         10         (20.0

Total noninterest expense

    339         328         3.4             1,206         1,184         1.9   

Income before provision and income taxes

    387         372         4.0             513         575         (10.8

Provision for credit losses

    201         57         *             (65      12         *   

Income before income taxes

    186         315         (41.0          578         563         2.7   

Income taxes and taxable-equivalent adjustment

    68         115         (40.9          210         205         2.4   

Net income

    118         200         (41.0          368         358         2.8   

Net (income) loss attributable to noncontrolling interests

                                                  

Net income attributable to U.S. Bancorp

  $ 118       $ 200         (41.0        $ 368       $ 358         2.8   

Average Balance Sheet

                      

Commercial

  $ 69,353       $ 62,714         10.6        $ 10,192       $ 9,642         5.7

Commercial real estate

    19,471         19,247         1.2             19,197         19,183         .1   

Residential mortgages

    6         9         (33.3          52,126         49,771         4.7   

Credit card

                                                  

Other retail

    2         3         (33.3          49,004         47,239         3.7   

Total loans, excluding covered loans

    88,832         81,973         8.4             130,519         125,835         3.7   

Covered loans

                                4,466         5,163         (13.5

Total loans

    88,832         81,973         8.4             134,985         130,998         3.0   

Goodwill

    1,647         1,648         (.1          3,681         3,680           

Other intangible assets

    18         21         (14.3          2,513         2,493         .8   

Assets

    97,255         90,501         7.5             149,320         146,503         1.9   

Noninterest-bearing deposits

    36,352         34,428         5.6             26,303         24,819         6.0   

Interest checking

    6,850         7,674         (10.7          42,180         39,013         8.1   

Savings products

    35,774         25,486         40.4             56,211         52,472         7.1   

Time deposits

    12,118         17,142         (29.3          14,651         16,952         (13.6

Total deposits

    91,094         84,730         7.5             139,345         133,256         4.6   

Total U.S. Bancorp shareholders’ equity

    8,755         8,049         8.8             11,084         11,529         (3.9

 

* Not meaningful

 

quarter of 2015. The decrease was primarily due to increases in the provision for credit losses and noninterest expense, partially offset by an increase in net revenue.

Net revenue increased $26 million (3.7 percent) in the first quarter of 2016, compared with the first quarter of 2015. Net interest income, on a taxable-equivalent basis, increased $40 million (8.3 percent) in the first quarter of 2016, compared with the first quarter of 2015. The increase was primarily due to higher average loans, partially offset by lower rates and fees on loans. Noninterest income decreased $14 million (6.4 percent) in the first quarter of 2016, compared with the first quarter of 2015, driven by higher loan-related charges, partially offset by higher commercial leasing revenue.

Noninterest expense increased $11 million (3.4 percent) in the first quarter of 2016, compared with the first quarter of 2015, primarily due to an increase in variable costs allocated to manage the business. The provision for credit losses increased $144 million in the first quarter of 2016, compared with the first quarter of

2015, due to an unfavorable change in the reserve allocation driven by a decline in energy prices and an increase in net charge-offs.

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, as well as mortgage banking. Consumer and Small Business Banking contributed $368 million of the Company’s net income in the first quarter of 2016, or an increase of $10 million (2.8 percent) compared with the first quarter of 2015. The increase was due to a decrease in the provision for credit losses, partially offset by lower net revenue and higher noninterest expense.

Net revenue decreased $40 million (2.3 percent) in the first quarter of 2016, compared with the first quarter of 2015. Noninterest income decreased $68 million (11.0

 

28    U.S. Bancorp


Table of Contents

 

    

Wealth Management and

Securities Services

         

Payment

Services

         

Treasury and

Corporate Support

         

Consolidated

Company

 
     2016      2015      Percent
Change
          2016      2015      Percent
Change
          2016      2015      Percent
Change
          2016      2015      Percent
Change
 
                                                
    $ 117       $ 80         46.3        $ 527       $ 467         12.8        $ 557       $ 586         (4.9 )%         $ 2,888       $ 2,752         4.9
      379         358         5.9             816         777         5.0             193         179         7.8             2,146         2,154         (.4
                                                              3                 *             3                 *   
      496         438         13.2             1,343         1,244         8.0             753         765         (1.6          5,037         4,906         2.7   
      368         353         4.2             647         598         8.2             153         170         (10.0          2,704         2,622         3.1   
      6         7         (14.3          30         25         20.0                                         45         43         4.7   
      374         360         3.9             677         623         8.7             153         170         (10.0          2,749         2,665         3.2   
      122         78         56.4             666         621         7.2             600         595         .8             2,288         2,241         2.1   
      (4      (2      *             192         197         (2.5          6                 *             330         264         25.0   
      126         80         57.5             474         424         11.8             594         595         (.2          1,958         1,977         (1.0
      46         29         58.6             172         154         11.7             61         30         *             557         533         4.5   
      80         51         56.9             302         270         11.9             533         565         (5.7          1,401         1,444         (3.0
                                  (9      (8      (12.5          (6      (5      (20.0          (15      (13      (15.4
    $ 80       $ 51         56.9           $ 293       $ 262         11.8           $ 527       $ 560         (5.9        $ 1,386       $ 1,431         (3.1
                                                
    $ 2,893       $ 2,292         26.2        $ 7,022       $ 6,595         6.5        $ 360       $ 265         35.8        $ 89,820       $ 81,508         10.2
      535         586         (8.7                                      3,198         3,655         (12.5          42,401         42,671         (.6
      2,076         1,634         27.1                                                 12         *             54,208         51,426         5.4   
                                  20,244         17,823         13.6                                         20,244         17,823         13.6   
      1,540         1,451         6.1             551         627         (12.1                                      51,097         49,320         3.6   
      7,044         5,963         18.1             27,817         25,045         11.1             3,558         3,932         (9.5          257,770         242,748         6.2   
              1         *                                         45         38         18.4             4,511         5,202         (13.3
      7,044         5,964         18.1             27,817         25,045         11.1             3,603         3,970         (9.2          262,281         247,950         5.8   
      1,567         1,568         (.1          2,464         2,482         (.7                                      9,359         9,378         (.2
      109         137         (20.4          508         425         19.5                                         3,148         3,076         2.3   
      10,172         9,201         10.6             33,999         30,988         9.7             130,811         124,643         4.9             421,557         401,836         4.9   
      12,959         12,750         1.6             961         892         7.7             1,994         1,622         22.9             78,569         74,511         5.4   
      8,840         7,354         20.2                     587         *             40         30         33.3             57,910         54,658         5.9   
      33,144         31,399         5.6             95         87         9.2             488         478         2.1             125,712         109,922         14.4   
      3,545         2,997         18.3                                         3,373         2,278         48.1             33,687         39,369         (14.4
      58,488         54,500         7.3             1,056         1,566         (32.6          5,895         4,408         33.7             295,878         278,460         6.3   
      2,371         2,299         3.1             6,326         5,780         9.4             18,202         16,421         10.8             46,738         44,078         6.0   

 

percent) in the first quarter of 2016, compared with the first quarter of 2015, driven by lower mortgage banking revenue, reflecting the impact of lower origination and sales revenue, and lower retail leasing revenue due to lower end-of-term gains on auto leases driven by lower used car values. Net interest income, on a taxable-equivalent basis, increased $28 million (2.5 percent) in the first quarter of 2016, compared with the first quarter of 2015. The increase in net interest income was primarily due to higher average loan and deposit balances, partially offset by lower rates.

Noninterest expense increased $22 million (1.9 percent) in the first quarter of 2016, compared with the first quarter of 2015, primarily due to higher professional services expense principally due to compliance-related matters, along with higher compensation expense reflecting the impact of merit increases, one additional day in the first quarter of 2016 and higher variable compensation. The provision for credit losses decreased $77 million in the first quarter of 2016, compared with the first quarter of 2015. The decrease was primarily due to a favorable change in the reserve allocation driven by improvements in the mortgage portfolio.

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 $80 million of the Company’s net income in the first quarter of 2016, or an increase of $29 million (56.9 percent) compared with the first quarter of 2015. The increase was primarily due to higher net revenue, partially offset by higher noninterest expense.

Net revenue increased $58 million (13.2 percent) in the first quarter of 2016, compared with the first quarter of 2015. The increase was driven by higher net interest

 

U.S. Bancorp    29


Table of Contents

income, on a taxable-equivalent basis, of $37 million (46.3 percent), principally due to the impact of higher rates on the margin benefit from deposits and higher average deposit balances, along with a $21 million (5.9 percent) increase in noninterest income, reflecting the impact of lower fee waivers.

Noninterest expense increased $14 million (3.9 percent) in the first quarter of 2016, compared with the first quarter of 2015. The increase was primarily due to higher compensation, reflecting the impact of merit increases, one additional day in the first quarter of 2016 and higher variable compensation.

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 $293 million of the Company’s net income in the first quarter of 2016, or an increase of $31 million (11.8 percent) compared with the first quarter of 2015. The increase was due to higher net revenue and a decrease in the provision for credit losses, partially offset by higher noninterest expense.

Net revenue increased $99 million (8.0 percent) in the first quarter of 2016, compared with the first quarter of 2015. Net interest income, on a taxable-equivalent basis, increased $60 million (12.8 percent) in the first quarter of 2016, compared with the first quarter of 2015, primarily due to higher average loan balances and fees. Noninterest income increased $39 million (5.0 percent) in the first quarter of 2016, compared with the first quarter of 2015, due to an increase 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 $54 million (8.7 percent) in the first quarter of 2016, compared with the first quarter of 2015, driven by higher compensation expense and increased technology and communications expense, which was impacted by portfolio acquisitions, along with higher net shared services expense. The provision for credit losses decreased $5 million (2.5 percent) in the first quarter of 2016, compared with the first quarter of 2015, due to a favorable change in the reserve allocation and lower net charge-offs.

Treasury and Corporate Support Treasury and Corporate Support includes the Company’s investment portfolios, funding, capital management, interest rate risk management, income taxes not allocated to the 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 $527 million in the first quarter of 2016, compared with $560 million in the first quarter of 2015. The $33 million (5.9 percent) decrease in the first quarter of 2016 from the same period of the prior year was due to a decrease in net revenue and increases in the provision for credit losses and income tax expense, partially offset by a decrease in noninterest expense.

Net revenue decreased $12 million (1.6 percent) in the first quarter of 2016, compared with the first quarter of 2015. Net interest income, on a taxable-equivalent basis, decreased $29 million (4.9 percent) in the first quarter of 2016, compared with the first quarter of 2015, principally due to the impact of higher rates credited to the business lines on deposits, partially offset by growth in the investment portfolio. Noninterest income increased $17 million (9.5 percent) in the first quarter of 2016, compared with the first quarter of 2015, mainly due to higher loan-related charges.

Noninterest expense decreased $17 million (10.0 percent) in the first quarter of 2016, compared with the first quarter of 2015, principally due to lower employee benefits expense, driven by lower pension costs, partially offset by higher compensation expense reflecting the impact of merit increases, one additional day in the first quarter of 2016 and higher variable compensation. The provision for credit losses was $6 million higher primarily due to an unfavorable 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. Income tax expense increased in the first quarter of 2016, compared with the first quarter of 2015, as a result of the resolution of certain tax matters in the first quarter of 2015.

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.

 

 

30

U.S. Bancorp


Table of Contents

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)   March 31,
2016
    December 31,
2015
 

Total equity

  $ 47,393      $ 46,817   

Preferred stock

    (5,501     (5,501

Noncontrolling interests

    (638     (686

Goodwill (net of deferred tax liability) (1)

    (8,270     (8,295

Intangible assets, other than mortgage servicing rights

    (820     (838

Tangible common equity (a)

    32,164        31,497   

Tangible common equity (as calculated above)

    32,164        31,497   

Adjustments (2)

    99        67   

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

    32,263        31,564   

Total assets

    428,638        421,853   

Goodwill (net of deferred tax liability) (1)

    (8,270     (8,295

Intangible assets, other than mortgage servicing rights

    (820     (838

Tangible assets (c)

    419,548        412,720   

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

    346,227        341,360   

Adjustments (3)

    3,485        3,892   

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

    349,712        345,252   

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

    267,309        261,668   

Adjustments (4)

    3,707        4,099   

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

    271,016        265,767   

Ratios

   

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

    7.7     7.6

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

    9.3        9.2   

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

    9.2        9.1   

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

    11.9        11.9   

 

(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.

 

U.S. Bancorp

31


Table of Contents

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, 2015.

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.

 

 

32

U.S. Bancorp


Table of Contents

U.S. Bancorp

Consolidated Balance Sheet

 

(Dollars in Millions)   March 31,
2016
    December 31,
2015
 
    (Unaudited)        

Assets

   

Cash and due from banks

  $ 10,981      $ 11,147   

Investment securities

   

Held-to-maturity (fair value $42,521 and $43,493, respectively)

    42,113        43,590   

Available-for-sale ($949 and $1,018 pledged as collateral, respectively) (a)

    64,912        61,997   

Loans held for sale (including $3,993 and $3,110 of mortgage loans carried at fair value, respectively)

    4,005        3,184   

Loans

   

Commercial

    91,277        88,402   

Commercial real estate

    42,743        42,137   

Residential mortgages

    54,955        53,496   

Credit card

    19,957        21,012   

Other retail

    51,161        51,206   

Total loans, excluding covered loans

    260,093        256,253   

Covered loans

    4,429        4,596   

Total loans

    264,522        260,849   

Less allowance for loan losses

    (3,853     (3,863

Net loans

    260,669        256,986   

Premises and equipment

    2,486        2,513   

Goodwill

    9,368        9,361   

Other intangible assets

    3,042        3,350   

Other assets (including $89 and $121 of trading securities at fair value pledged as collateral, respectively) (a)

    31,062        29,725   

Total assets

  $ 428,638      $ 421,853   

Liabilities and Shareholders’ Equity

   

Deposits

   

Noninterest-bearing

  $ 80,407      $ 83,766   

Interest-bearing (b)

    225,941        216,634   

Total deposits

    306,348        300,400   

Short-term borrowings

    23,777        27,877   

Long-term debt

    34,872        32,078   

Other liabilities

    16,248        14,681   

Total liabilities

    381,245        375,036   

Shareholders’ equity

   

Preferred stock

    5,501        5,501   

Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares; issued: 3/31/16 and 12/31/15 — 2,125,725,742 shares

    21        21   

Capital surplus

    8,368        8,376   

Retained earnings

    47,267        46,377   

Less cost of common stock in treasury: 3/31/16 — 393,719,352 shares; 12/31/15 — 380,534,801 shares

    (13,658     (13,125

Accumulated other comprehensive income (loss)

    (744     (1,019

Total U.S. Bancorp shareholders’ equity

    46,755        46,131   

Noncontrolling interests

    638        686   

Total equity

    47,393        46,817   

Total liabilities and equity

  $ 428,638      $ 421,853   

 

(a) Includes only collateral pledged by the Company where counterparties have the right to sell or pledge the collateral.
(b) Includes time deposits greater than $250,000 balances of $5.5 billion and $2.6 billion at March 31, 2016, and December 31, 2015, respectively.

See Notes to Consolidated Financial Statements.

 

 

U.S. Bancorp

33


Table of Contents

U.S. Bancorp

Consolidated Statement of Income

 

    Three Months Ended
March 31,
 

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

(Unaudited)

          2016             2015  

Interest Income

   

Loans

  $ 2,644      $ 2,493   

Loans held for sale

    31        41   

Investment securities

    517        495   

Other interest income

    29        32   

Total interest income

    3,221        3,061   

Interest Expense

   

Deposits

    139        118   

Short-term borrowings

    65        61   

Long-term debt

    182        184   

Total interest expense

    386        363   

Net interest income

    2,835        2,698   

Provision for credit losses

    330        264   

Net interest income after provision for credit losses

    2,505        2,434   

Noninterest Income

   

Credit and debit card revenue

    266        241   

Corporate payment products revenue

    170        170   

Merchant processing services

    373        359   

ATM processing services

    80        78   

Trust and investment management fees

    339        322   

Deposit service charges

    168        161   

Treasury management fees

    142        137   

Commercial products revenue

    197        200   

Mortgage banking revenue

    187        240   

Investment products fees

    40        47   

Securities gains (losses), net

   

Realized gains (losses), net

    3          

Total other-than-temporary impairment

    (2       

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

    2          

Total securities gains (losses), net

    3          

Other

    184        199   

Total noninterest income

    2,149        2,154   

Noninterest Expense

   

Compensation

    1,249        1,179   

Employee benefits

    300        317   

Net occupancy and equipment

    248        247   

Professional services

    98        77   

Marketing and business development

    77        70   

Technology and communications

    233        214   

Postage, printing and supplies

    79        82   

Other intangibles

    45        43   

Other

    420        436   

Total noninterest expense

    2,749        2,665   

Income before income taxes

    1,905        1,923   

Applicable income taxes

    504        479   

Net income

    1,401        1,444   

Net (income) loss attributable to noncontrolling interests

    (15     (13

Net income attributable to U.S. Bancorp

  $ 1,386      $ 1,431   

Net income applicable to U.S. Bancorp common shareholders

  $ 1,329      $ 1,365   

Earnings per common share

  $ .77      $ .77   

Diluted earnings per common share

  $ .76      $ .76   

Dividends declared per common share

  $ .255      $ .245   

Average common shares outstanding

    1,737        1,781   

Average diluted common shares outstanding

    1,743        1,789   

See Notes to Consolidated Financial Statements.

 

 

34

U.S. Bancorp


Table of Contents

U.S. Bancorp

Consolidated Statement of Comprehensive Income

 

(Dollars in Millions)

(Unaudited)

  Three Months Ended
March 31,
 
      2016         2015  

Net income

  $ 1,401      $ 1,444   

Other Comprehensive Income (Loss)

   

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

    488        208   

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

    (2       

Changes in unrealized gains and losses on derivative hedges

    (96     (28

Foreign currency translation

    (16     17   

Reclassification to earnings of realized gains and losses

    76        99   

Income taxes related to other comprehensive income (loss)

    (175     (114

Total other comprehensive income (loss)

    275        182   

Comprehensive income

    1,676        1,626   

Comprehensive (income) loss attributable to noncontrolling interests

    (15     (13

Comprehensive income attributable to U.S. Bancorp

  $ 1,661      $ 1,613   

See Notes to Consolidated Financial Statements.

 

U.S. Bancorp

35


Table of Contents

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, 2014

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

Net income (loss)

            1,431            1,431        13        1,444   

Other comprehensive income (loss)

                182        182          182   

Preferred stock dividends

            (60         (60       (60

Common stock dividends

            (438         (438       (438

Issuance of common and treasury stock

    6            (43       199          156          156   

Purchase of treasury stock

    (12             (518       (518       (518

Distributions to noncontrolling interests

                         (14     (14

Stock option and restricted stock grants

                            45                                45                45   

Balance March 31, 2015

    1,780      $ 4,756      $ 21      $ 8,315      $ 43,463      $ (11,564   $ (714   $ 44,277      $ 688      $ 44,965   

Balance December 31, 2015

    1,745      $ 5,501      $ 21      $ 8,376      $ 46,377      $ (13,125   $ (1,019   $ 46,131      $ 686      $ 46,817   

Net income (loss)

            1,386            1,386        15        1,401   

Other comprehensive income (loss)

                275        275          275   

Preferred stock dividends

            (61         (61       (61

Common stock dividends

            (444         (444       (444

Issuance of common and treasury stock

    3            (61       92          31          31   

Purchase of treasury stock

    (16             (625       (625       (625

Distributions to noncontrolling interests

                         (13     (13

Purchase of noncontrolling interests

          1        9            10        (50     (40

Stock option and restricted stock grants

                            52                                52                52   

Balance March 31, 2016

    1,732      $ 5,501      $ 21      $ 8,368      $ 47,267      $ (13,658   $ (744   $ 46,755      $ 638      $ 47,393   

See Notes to Consolidated Financial Statements.

 

 

36

U.S. Bancorp


Table of Contents

U.S. Bancorp

Consolidated Statement of Cash Flows

 

Dollars in Millions

(Unaudited)

  Three Months Ended
March 31,
 
  2016     2015  

Operating Activities

   

Net income attributable to U.S. Bancorp

  $ 1,386      $ 1,431   

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

   

Provision for credit losses

    330        264   

Depreciation and amortization of premises and equipment

    74        77   

Amortization of intangibles

    45        43   

(Gain) loss on sale of loans held for sale

    (194     (259

(Gain) loss on sale of securities and other assets

    (90     (63

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

    (8,883     (10,008

Proceeds from sales of loans held for sale

    8,198        9,885   

Other, net

    395        381   

Net cash provided by operating activities

    1,261        1,751   

Investing Activities

   

Proceeds from sales of available-for-sale investment securities

    530        123   

Proceeds from maturities of held-to-maturity investment securities

    2,088        2,334   

Proceeds from maturities of available-for-sale investment securities

    3,212        3,100   

Purchases of held-to-maturity investment securities

    (625     (2,977

Purchases of available-for-sale investment securities

    (6,183     (3,783

Net increase in loans outstanding

    (3,702     (843

Proceeds from sales of loans

    299        441   

Purchases of loans

    (658     (492

Other, net

    150        (404

Net cash used in investing activities

    (4,889     (2,501

Financing Activities

   

Net increase in deposits

    5,950        3,868   

Net decrease in short-term borrowings

    (4,100     (1,667

Proceeds from issuance of long-term debt

    6,607        3,322   

Principal payments or redemption of long-term debt

    (3,907     (543

Proceeds from issuance of common stock

    33        152   

Repurchase of common stock

    (568     (464

Cash dividends paid on preferred stock

    (66     (61

Cash dividends paid on common stock

    (447     (439

Purchase of noncontrolling interests

    (40       

Net cash provided by financing activities

    3,462        4,168   

Change in cash and due from banks

    (166     3,418   

Cash and due from banks at beginning of period

    11,147        10,654   

Cash and due from banks at end of period

  $ 10,981      $ 14,072   

See Notes to Consolidated Financial Statements.

 

U.S. Bancorp

37


Table of Contents

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, 2015. 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.

Accounting for Leases In February 2016, the FASB issued accounting guidance, effective for the Company on January 1, 2019, related to the accounting for leases. This guidance will require lessees to recognize all leases on the Consolidated Balance Sheet as lease assets and lease liabilities, with lessor accounting being largely unchanged. This guidance also requires additional disclosures regarding leasing arrangements. The Company expects the adoption of this guidance will not be material to its financial statements.

 

 

38

U.S. Bancorp


Table of Contents
 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:

 

    March 31, 2016          December 31, 2015  
                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

  $ 2,908      $ 57      $      $      $ 2,965          $ 2,925      $ 14      $      $ (20   $ 2,919   

Mortgage-backed securities

                       

Residential

                       

Agency

    39,160        402               (59     39,503            40,619        175               (273     40,521   

Non-agency non-prime (d)

    1                             1            1                             1   

Asset-backed securities

                       

Collateralized debt obligations/Collateralized loan obligations

           6                      6                   6                      6   

Other

    9        3                      12            10        3                      13   

Obligations of state and political subdivisions

    8        1               (1     8            8        1               (1     8   

Obligations of foreign governments

    9                             9            9                             9   

Other debt securities

    18                      (1     17            18                      (2     16   

Total held-to-maturity

  $ 42,113      $ 469      $      $ (61   $ 42,521          $ 43,590      $ 199      $      $ (296   $ 43,493   

Available-for-sale (b)

                       

U.S. Treasury and agencies

  $ 7,662      $ 110      $      $ (3   $ 7,769          $ 4,611      $ 12      $      $ (27   $ 4,596   

Mortgage-backed securities

                       

Residential

                       

Agency

    49,619        531               (99     50,051            50,056        384               (364     50,076   

Non-agency

                       

Prime (c)

    297        6        (4     (2     297            316        6        (3     (1     318   

Non-prime (d)

    213        18        (4            227            221        20        (1            240   

Commercial agency

    32                             32            52                             52   

Asset-backed securities

                       

Collateralized debt obligations/Collateralized loan obligations

    16        2                      18            16        3                      19   

Other

    524        9                      533            532        9                      541   

Obligations of state and political subdivisions

    5,042        156               (1     5,197            5,149        169               (2     5,316   

Corporate debt securities

    678        5               (97     586            677        3               (70     610   

Perpetual preferred securities

    138        19               (15     142            153        20               (12     161   

Other investments

    28        32                      60            34        34                      68   

Total available-for-sale

  $ 64,249      $ 888      $ (8   $ (217   $ 64,912          $ 61,817      $ 660      $ (4   $ (476   $ 61,997   

 

(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 4.3 years at March 31, 2016, compared with 4.7 years at December 31, 2015. The corresponding weighted-average yields were 2.19 percent and 2.21 percent, respectively. The weighted-average maturity of the held-to-maturity investment securities was 3.8 years at March 31, 2016, and 4.2 years at December 31, 2015. The corresponding weighted-average yields were 1.94 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 March 31, 2016, 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 $13.0 billion at March 31, 2016, and $13.1 billion at December 31, 2015, 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 securing these types of arrangements had a fair value of $949 million at March 31, 2016, and $1.0 billion at December 31, 2015.

 

U.S. Bancorp

39


Table of Contents

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

 

Three Months Ended March 31,      
(Dollars in Millions)           2016              2015  

Taxable

  $ 465       $ 436   

Non-taxable

    52         59   

Total interest income from investment securities

  $ 517       $ 495   

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 March 31,      
(Dollars in Millions)           2016              2015  

Realized gains

  $ 3       $ 1   

Realized losses

            (1

Net realized gains (losses)

  $ 3       $   

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

  $ 1       $   

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, the 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 months ended March 31, 2016 and 2015.

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

 

Three Months Ended March 31,      
(Dollars in Millions)           2016             2015  

Balance at beginning of period

  $ 84      $ 101   

Increases in expected cash flows

           (2

Realized losses (a)

    (3     (3

Balance at end of period

  $ 81      $ 96   

 

(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.

 

 

40

U.S. Bancorp


Table of Contents

At March 31, 2016, 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 March 31, 2016:

 

    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

  $       $           $ 61       $           $ 61       $   

Residential agency mortgage-backed securities

    3,837         (16          4,231         (43          8,068         (59

Other asset-backed securities

    2                     6                     8           

Obligations of state and political subdivisions

                        2         (1          2         (1

Other debt securities

                        17         (1          17         (1

Total held-to-maturity

  $ 3,839       $ (16        $ 4,317       $ (45        $ 8,156       $ (61

Available-for-sale

                        

U.S. Treasury and agencies

  $ 1,155       $ (3        $ 2       $           $ 1,157       $ (3

Residential mortgage-backed securities

                        

Agency

    7,387         (28          6,486         (71          13,873         (99

Non-agency (a)

                        

Prime (b)

    73         (1          107         (5          180         (6

Non-prime (c)

    38         (1          13         (3          51         (4

Other asset-backed securities

                        2                     2           

Obligations of state and political subdivisions

    176         (1          21                     197         (1

Corporate debt securities

                        399         (97          399         (97

Perpetual preferred securities

                        70         (15          70         (15

Total available-for-sale

  $ 8,829       $ (34        $ 7,100       $ (191        $ 15,929       $ (225

 

(a) The Company had $10 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 March 31, 2016, 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.

 

U.S. Bancorp

41


Table of Contents
 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:

 

    March 31, 2016           December 31, 2015  
(Dollars in Millions)   Amount      Percent
of Total
          Amount      Percent
of Total
 

Commercial

              

Commercial

  $ 85,986         32.5        $ 83,116         31.9

Lease financing

    5,291         2.0             5,286         2.0   

Total commercial

    91,277         34.5             88,402         33.9   

Commercial Real Estate

              

Commercial mortgages

    31,936         12.1             31,773         12.2   

Construction and development

    10,807         4.1             10,364         3.9   

Total commercial real estate

    42,743         16.2             42,137         16.1   

Residential Mortgages

              

Residential mortgages

    41,742         15.8             40,425         15.5   

Home equity loans, first liens

    13,213         5.0             13,071         5.0   

Total residential mortgages

    54,955         20.8             53,496         20.5   

Credit Card

    19,957         7.5             21,012         8.1   

Other Retail

              

Retail leasing

    5,268         2.0             5,232         2.0   

Home equity and second mortgages

    16,332         6.2             16,384         6.3   

Revolving credit

    3,220         1.2             3,354         1.3   

Installment

    7,162         2.7             7,030         2.7   

Automobile

    16,657         6.3             16,587         6.3   

Student

    2,522         .9             2,619         1.0   

Total other retail

    51,161         19.3             51,206         19.6   

Total loans, excluding covered loans

    260,093         98.3             256,253         98.2   

Covered Loans

    4,429         1.7             4,596         1.8   

Total loans

  $ 264,522         100.0        $ 260,849         100.0

The Company had loans of $80.5 billion at March 31, 2016, and $78.1 billion at December 31, 2015, pledged at the Federal Home Loan Bank, and loans of $64.5 billion at March 31, 2016, and $63.4 billion at December 31, 2015, 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 $544 million at March 31, 2016, and $550 million at December 31, 2015. 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 March 31,

(Dollars in Millions)

  2016     2015  

Balance at beginning of period

  $ 957      $ 1,309   

Accretion

    (92     (98

Disposals

    (21     (27

Reclassifications from nonaccretable difference (a)

    169        5   

Other

           (2

Balance at end of period

  $ 1,013      $ 1,187   

 

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

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 15-year period of

 

 

42

U.S. Bancorp


Table of Contents

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, less selling costs, 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 each loan segment 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 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.

 

U.S. Bancorp

43


Table of Contents

Activity in 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
 

Balance at December 31, 2015

  $ 1,287      $ 724      $ 631      $ 883      $ 743      $ 4,268      $ 38      $ 4,306   

Add

               

Provision for credit losses

    237        5        (56     157        (11     332        (2     330   

Deduct

               

Loans charged off

    111        3        23        188        80        405               405   

Less recoveries of loans charged off

    (28     (8     (4     (24     (26     (90            (90

Net loans charged off

    83        (5     19        164        54        315               315   

Other changes (a)

                         (1            (1            (1

Balance at March 31, 2016

  $ 1,441      $ 734      $ 556      $ 875      $ 678      $ 4,284      $ 36      $ 4,320   

Balance at December 31, 2014

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

Add

               

Provision for credit losses

    98        (23     12        154        23        264               264   

Deduct

               

Loans charged off

    74        5        41        182        81        383               383   

Less recoveries of loans charged off

    (31     (23     (6     (19     (25     (104            (104

Net loans charged off

    43        (18     35        163        56        279               279   

Other changes (a)

    (1                                 (1     (8     (9

Balance at March 31, 2015

  $ 1,200      $ 721      $ 764      $ 871      $ 738      $ 4,294      $ 57      $ 4,351   

 

(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.

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 March 31, 2016 Related to

                      

Loans individually evaluated for impairment (a)

  $ 45       $ 1       $       $       $       $ 46       $       $ 46   

TDRs collectively evaluated for impairment

    6         1         221         57         32         317         1         318   

Other loans collectively evaluated for impairment

    1,390         720         335         818         646         3,909         1         3,910   

Loans acquired with deteriorated credit quality

            12                                 12         34         46   

Total allowance for credit losses

  $ 1,441       $ 734       $ 556       $ 875       $ 678       $ 4,284       $ 36       $ 4,320   

Allowance Balance at December 31, 2015 Related to

                      

Loans individually evaluated for impairment (a)

  $ 11       $ 2       $       $       $       $ 13       $       $ 13   

TDRs collectively evaluated for impairment

    10         7         236         57         33         343         2         345   

Other loans collectively evaluated for impairment

    1,266         703         395         826         710         3,900                 3,900   

Loans acquired with deteriorated credit quality

            12                                 12         36         48   

Total allowance for credit losses

  $ 1,287       $ 724       $ 631       $ 883       $ 743       $ 4,268       $ 38       $ 4,306   

 

(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
 

March 31, 2016

                      

Loans individually evaluated for impairment (a)

  $ 616       $ 28       $ 13       $       $       $ 657       $       $ 657   

TDRs collectively evaluated for impairment

    155         220         4,093         212         204         4,884         35         4,919   

Other loans collectively evaluated for impairment

    90,505         42,205         50,848         19,745         50,957         254,260         1,941         256,201   

Loans acquired with deteriorated credit quality

    1         290         1                         292         2,453         2,745   

Total loans

  $ 91,277       $ 42,743       $ 54,955       $ 19,957       $ 51,161       $ 260,093       $ 4,429       $ 264,522   

December 31, 2015

                      

Loans individually evaluated for impairment (a)

  $ 336       $ 41       $ 13       $       $       $ 390       $       $ 390   

TDRs collectively evaluated for impairment

    138         235         4,241         210         211         5,035         35         5,070   

Other loans collectively evaluated for impairment

    87,927         41,566         49,241         20,802         50,995         250,531         2,059         252,590   

Loans acquired with deteriorated credit quality

    1         295         1                         297         2,502         2,799   

Total loans

  $ 88,402       $ 42,137       $ 53,496       $ 21,012       $ 51,206       $ 256,253       $ 4,596       $ 260,849   

 

(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 credit 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, reducing interest income in the current period.

 

 

44

U.S. Bancorp


Table of Contents

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 placed on nonaccrual.

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.

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  

March 31, 2016

             

Commercial

  $ 90,561       $ 195       $ 48       $ 473       $ 91,277   

Commercial real estate

    42,541         82         16         104         42,743   

Residential mortgages (a)

    53,975         134         169         677         54,955   

Credit card

    19,511         219         220         7         19,957   

Other retail

    50,734         195         75         157         51,161   

Total loans, excluding covered loans

    257,322         825         528         1,418         260,093   

Covered loans

    4,086         60         276         7         4,429   

Total loans

  $ 261,408       $ 885       $ 804       $ 1,425       $ 264,522   

December 31, 2015

             

Commercial

  $ 87,863       $ 317       $ 48       $ 174       $ 88,402   

Commercial real estate

    41,907         89         14         127         42,137   

Residential mortgages (a)

    52,438         170         176         712         53,496   

Credit card

    20,532         243         228         9         21,012   

Other retail

    50,745         224         75         162         51,206   

Total loans, excluding covered loans

    253,485         1,043         541         1,184         256,253   

Covered loans

    4,236         62         290         8         4,596   

Total loans

  $ 257,721       $ 1,105       $ 831       $ 1,192       $ 260,849   

 

(a) At March 31, 2016, $271 million of loans 30–89 days past due and $2.8 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 $320 million and $2.9 billion at December 31, 2015, respectively.

 

U.S. Bancorp

45


Table of Contents

At March 31, 2016, the amount of foreclosed residential real estate held by the Company, and included in other real estate owned (“OREO”), was $257 million ($224 million excluding covered assets), compared with $282 million ($250 million excluding covered assets) at December 31, 2015. This excludes $477 million and $535 million at March 31, 2016 and December 31, 2015, 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 March 31, 2016 and December 31, 2015, was $2.3 billion and $2.6 billion, respectively, of which $1.7 billion and $1.9 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.

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  

March 31, 2016

             

Commercial (b)

  $ 87,044       $ 1,495       $ 2,738       $ 4,233       $ 91,277   

Commercial real estate

    41,665         356         722         1,078         42,743   

Residential mortgages (c)

    54,037         1         917         918         54,955   

Credit card

    19,731                 226         226         19,957   

Other retail

    50,872         6         283         289         51,161   

Total loans, excluding covered loans

    253,349         1,858         4,886         6,744         260,093   

Covered loans

    4,344                 85         85         4,429   

Total loans

  $ 257,693       $ 1,858       $ 4,971       $ 6,829       $ 264,522   

Total outstanding commitments

  $ 544,957       $ 4,551       $ 6,849       $ 11,400       $ 556,357   

December 31, 2015

             

Commercial (b)

  $ 85,206       $ 1,629       $ 1,567       $ 3,196       $ 88,402   

Commercial real estate

    41,079         365         693         1,058         42,137   

Residential mortgages (c)

    52,548         2         946         948         53,496   

Credit card

    20,775                 237         237         21,012   

Other retail

    50,899         6         301         307         51,206   

Total loans, excluding covered loans

    250,507         2,002         3,744         5,746         256,253   

Covered loans

    4,507                 89         89         4,596   

Total loans

  $ 255,014       $ 2,002       $ 3,833       $ 5,835       $ 260,849   

Total outstanding commitments

  $ 539,614       $ 3,945       $ 4,845       $ 8,790       $ 548,404   

 

(a) Classified rating on consumer loans primarily based on delinquency status.
(b) At March 31, 2016, $1.8 billion of loans ($4.2 billion of total outstanding commitments) to customers in energy-related businesses had a special mention or classified rating, compared with $1.1 billion of loans ($1.9 billion of total outstanding commitments) at December 31, 2015.
(c) At March 31, 2016, $2.8 billion of GNMA loans 90 days or more past due and $1.8 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 $2.9 billion and $1.9 billion at December 31, 2015, 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

 

 

46

U.S. Bancorp


Table of Contents

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.

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
 

March 31, 2016

          

Commercial

  $ 820       $ 1,365       $ 51       $ 376   

Commercial real estate

    316         784         3         5   

Residential mortgages

    2,504         3,141         188           

Credit card

    212         212         57           

Other retail

    301         493         34         3   

Total loans, excluding GNMA and covered loans

    4,153         5,995         333         384   

Loans purchased from GNMA mortgage pools

    1,820         1,820         34           

Covered loans

    38         45         1         1   

Total

  $ 6,011       $ 7,860       $ 368       $ 385   

December 31, 2015

          

Commercial

  $ 520       $ 1,110       $ 25       $ 154   

Commercial real estate

    336         847         11         1   

Residential mortgages

    2,575         3,248         199           

Credit card

    210         210         57           

Other retail

    309         503         35         4   

Total loans, excluding GNMA and covered loans

    3,950         5,918         327         159   

Loans purchased from GNMA mortgage pools

    1,913         1,913         40           

Covered loans

    39         48         2         1   

Total

  $ 5,902       $ 7,879       $ 369       $ 160   

 

(a) Substantially all loans classified as impaired at March 31, 2016 and December 31, 2015, had an associated allowance for credit losses.

Additional information on impaired loans follows:

 

    2016            2015  

Three Months Ended March 31,

(Dollars in Millions)

  Average
Recorded
Investment
     Interest
Income
Recognized
           Average
Recorded
Investment
     Interest
Income
Recognized
 

Commercial

  $ 670       $ 1            $ 311       $ 2   

Commercial real estate

    326         3              550         3   

Residential mortgages

    2,539         32              2,703         33   

Credit card

    211         1              233         2   

Other retail

    305         3              355         4   

Total loans, excluding GNMA and covered loans

    4,051         40              4,152         44   

Loans purchased from GNMA mortgage pools

    1,867         25              2,201         25   

Covered loans

    39                      42           

Total

  $ 5,957       $ 65            $ 6,395       $ 69   

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.

 

U.S. Bancorp

47


Table of Contents

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

 

    2016            2015  

Three Months Ended March 31,

(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

 

Commercial

    601       $ 160       $ 161              359       $ 23       $ 23   

Commercial real estate

    24         7         7              25         13         13   

Residential mortgages

    278         32         32              374         51         51   

Credit card

    7,988         38         39              6,337         33         33   

Other retail

    609         11         11              622         11         11   

Total loans, excluding GNMA and covered loans

    9,500         248         250              7,717         131         131   

Loans purchased from GNMA mortgage pools

    2,868         313         311              2,024         246         245   

Covered loans

    3                              1                   

Total loans

    12,371       $ 561       $ 561              9,742       $ 377       $ 376   

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 first quarter of 2016, at March 31, 2016, 120 residential mortgages, 27 home equity and second mortgage loans and 913 loans purchased from GNMA mortgage pools with outstanding balances of $15 million, $2 million and $120 million, respectively, were in a trial period and have estimated post-modification balances of $19 million, $2 million and $124 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.

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.

 

 

48

U.S. Bancorp


Table of Contents

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:

 

    2016            2015  

Three Months Ended March 31,

(Dollars in Millions)

  Number
of Loans
     Amount
Defaulted
           Number
of Loans
     Amount
Defaulted
 

Commercial

    112       $ 2              164       $ 2   

Commercial real estate

    10         5              5         2   

Residential mortgages

    31         5              106         13   

Credit card

    1,573         7              1,578         8   

Other retail

    78         1              131         3   

Total loans, excluding GNMA and covered loans

    1,804         20              1,984         28   

Loans purchased from GNMA mortgage pools

    26         3              198         26   

Covered loans

                                   

Total loans

    1,830       $ 23              2,182       $ 54   

In addition to the defaults in the table above, for the three months ended March 31, 2016, the Company had a total of 611 residential mortgage loans, home equity and second mortgage loans and loans purchased from GNMA mortgage pools with aggregate outstanding balances of $88 million 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:

 

    March 31, 2016            December 31, 2015  
(Dollars in Millions)   Purchased
Impaired
Loans
     Purchased
Nonimpaired
Loans
     Other      Total            Purchased
Impaired
Loans
     Purchased
Nonimpaired
Loans
     Other      Total  

Residential mortgage loans

  $ 2,453       $ 583       $       $ 3,036            $ 2,502       $ 615       $       $ 3,117   

Other retail loans

            416                 416                      447                 447   

Losses reimbursable by the FDIC (a)

                    394         394                              517         517   

Unamortized changes in FDIC asset (b)

                    583         583                              515         515   

Covered loans

    2,453         999         977         4,429              2,502         1,062         1,032         4,596   

Foreclosed real estate

                    33         33                              32         32   

Total covered assets

  $ 2,453       $ 999       $ 1,010       $ 4,462            $ 2,502       $ 1,062       $ 1,064       $ 4,628   

 

(a) Relates to loss sharing agreements with remaining terms up to three 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.

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

 

U.S. Bancorp

49


Table of Contents

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.

Effective January 1, 2016, the Company adopted accounting guidance, issued by the FASB in February 2015, relating to the analysis required by organizations to evaluate whether they should consolidate certain legal entities. The adoption of this guidance did not have a material impact on the Company’s financial statements, and specifically excludes registered money market funds from the consolidation analysis. The Company provides financial support primarily through the use of waivers of management fees associated with various registered money market funds it manages, which are excluded from the consolidation analysis. During the first quarter of 2016, the Company provided $17 million of support to the funds, compared with $30 million in the first quarter of 2015.

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 $168 million for each of the three months ended March 31, 2016 and 2015. The Company also recognized $223 million and $114 million of investment tax credits for the three months ended March 31, 2016 and 2015, respectively. The Company recognized $151 million and $146 million of expenses related to all of these investments for the three months ended March 31, 2016 and 2015, respectively, of which $67 million and $66 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 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)  

March 31,

2016

    

December 31,

2015

 

Investment carrying amount

  $ 5,370       $ 5,257   

Unfunded capital and other commitments

    2,672         2,499   

Maximum exposure to loss

    9,551         9,436   

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 $28 million at March 31, 2016, compared with $32 million at December 31, 2015. The maximum exposure to loss related to these VIEs was $44 million at March 31, 2016 and $47 million at December 31, 2015, representing the Company’s investment balance and its unfunded commitments to invest additional amounts.

 

 

50

U.S. Bancorp


Table of Contents

The Company’s individual net investments in unconsolidated VIEs, which exclude any unfunded capital commitments, ranged from less than $1 million to $45 million at March 31, 2016, compared with less than $1 million to $46 million at December 31, 2015.

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 March 31, 2016, approximately $2.9 billion of the Company’s assets and $2.2 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 $3.0 billion and $2.2 billion, respectively, at December 31, 2015. 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 March 31, 2016 and December 31, 2015, $28 million of the held- to-maturity investment securities on the Company’s Consolidated Balance Sheet were related to the conduit.

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 March 31, 2016, $2.0 billion of available-for-sale investment securities and $2.0 billion of short-term borrowings on the Consolidated Balance Sheet were related to the tender option bond program, compared with $2.3 billion of available-for-sale investment securities and $2.2 billion of short-term borrowings at December 31, 2015.

 

 Note 6  Mortgage Servicing Rights

The Company serviced $232.2 billion of residential mortgage loans for others at March 31, 2016, and $231.8 billion at December 31, 2015, which include 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 losses of $22 million and $1 million for the three months ended March 31, 2016 and 2015, respectively. Loan servicing fees, not including valuation changes, included in mortgage banking revenue, were $184 million and $178 million for the three months ended March 31, 2016 and 2015, respectively.

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

 

Three Months Ended March 31,

(Dollars in Millions)

  2016     2015  

Balance at beginning of period

  $ 2,512      $ 2,338   

Rights purchased

    9        6   

Rights capitalized

    99        145   

Changes in fair value of MSRs

   

Due to fluctuations in market interest rates (a)

    (301     (131

Other changes in fair value (b)

    (97     (108

Balance at end of period

  $ 2,222      $ 2,250   

 

(a) Includes changes in MSR value associated with changes in market interest rates, including estimated prepayment rates and anticipated earnings on escrow deposits.
(b) Primarily represents changes due to realization of expected cash flows over time (decay).

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

 

    March 31, 2016           December 31, 2015  
(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

  $ (590   $ (296   $ (145   $ 134      $ 249      $ 467           $ (598   $ (250   $ (114   $ 96      $ 176      $ 344   

Derivative instrument hedges

    528        274        138        (134     (263     (517          475        226        107        (98     (192     (377

Net sensitivity

  $ (62   $ (22   $ (7   $      $ (14   $ (50        $ (123   $ (24   $ (7   $ (2   $ (16   $ (33

 

U.S. Bancorp

51


Table of Contents

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:

 

    March 31, 2016          December 31, 2015  
(Dollars in Millions)   HFA     Government     Conventional (c)     Total          HFA     Government     Conventional (c)     Total  

Servicing portfolio (a)

  $ 28,241      $ 39,921      $ 161,586      $ 229,748          $ 26,492      $ 40,350      $ 162,533      $ 229,375   

Fair value

  $ 314      $ 385      $ 1,523      $ 2,222          $ 297      $ 443      $ 1,772      $ 2,512   

Value (bps) (b)

    111        96        94        97            112        110        109        110   

Weighted-average servicing fees (bps)

    36        34        27        29            36        34        27        29   

Multiple (value/servicing fees)

    3.08        2.82        3.48        3.34            3.11        3.24        4.04        3.79   

Weighted-average note rate

    4.45     4.06     4.08     4.12         4.46     4.08     4.09     4.13

Weighted-average age (in years)

    3.1        3.7        3.5        3.5            3.1        3.6        3.4        3.4   

Weighted-average expected prepayment (constant prepayment rate)

    12.7     17.2     13.3     13.9         12.8     13.9     10.4     11.3

Weighted-average expected life (in years)

    6.1        4.8        5.5        5.5            6.1        5.7        6.6        6.4   

Weighted-average discount rate

    11.8     11.2     9.4     10.0         11.8     11.2     9.4     10.0

 

(a) Represents principal balance of mortgages having corresponding MSR asset.
(b) Value is calculated as fair value divided by the servicing portfolio.
(c) Represents loans sold primarily to GSEs.

 

 Note 7  Preferred Stock

At March 31, 2016 and December 31, 2015, 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:

 

    March 31, 2016            December 31, 2015  
(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   

Series I

    30,000         750         5         745              30,000         750         5         745   

Total preferred stock (a)

    189,910       $ 5,686       $ 185       $ 5,501              189,910       $ 5,686       $ 185       $ 5,501   

 

(a) The par value of all shares issued and outstanding at March 31, 2016 and December 31, 2015, was $1.00 per share.

 

 

52

U.S. Bancorp


Table of Contents
 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 for the three months ended March 31, is as follows:

 

(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  

2016

           

Balance at beginning of period

  $ 111      $ 36      $ (67   $ (1,056   $ (43   $ (1,019

Changes in unrealized gains and losses

    488               (96                   392   

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

    (2                                 (2

Foreign currency translation adjustment (a)

                                (16     (16

Reclassification to earnings of realized gains and losses

    (3     (5     43        41               76   

Applicable income taxes

    (187     2        21        (16     5        (175

Balance at end of period

  $ 407      $ 33      $ (99   $ (1,031   $ (54   $ (744

2015

           

Balance at beginning of period

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

Changes in unrealized gains and losses

    208               (28                   180   

Foreign currency translation adjustment (a)

                                17        17   

Reclassification to earnings of realized gains and losses

           (7     50        56               99   

Applicable income taxes

    (80     3        (8     (22     (7     (114

Balance at end of period

  $ 520      $ 48      $ (158   $ (1,072   $ (52   $ (714

 

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

Additional detail about the impact to net income for items reclassified out of accumulated other comprehensive income (loss) and into earnings for the three months ended March 31, is as follows:

 

    Impact to Net Income    

Affected Line Item in the
Consolidated Statement of Income

(Dollars in Millions)   2016     2015    

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

     

Realized gains (losses) on sale of securities

  $ 3      $      Total securities gains (losses), net
    (1          Applicable income taxes
    2             Net-of-tax

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

     

Amortization of unrealized gains

    5        7      Interest income
    (2     (3   Applicable income taxes
    3        4      Net-of-tax

Unrealized gains (losses) on derivative hedges

     

Realized gains (losses) on derivative hedges

    (43     (50   Interest expense
    16        19      Applicable income taxes
    (27     (31   Net-of-tax

Unrealized gains (losses) on retirement plans

     

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

    (41     (56   Employee benefits expense
    16        22      Applicable income taxes
    (25     (34   Net-of-tax

Total impact to net income

  $ (47   $ (61    

 

U.S. Bancorp

53


Table of Contents
 Note 9  Earnings Per Share

The components of earnings per share were:

 

     Three Months Ended
March 31,
 
(Dollars and Shares in Millions, Except Per Share Data)    2016     2015  

Net income attributable to U.S. Bancorp

   $ 1,386      $ 1,431   

Preferred dividends

     (61     (60

Impact of the purchase of noncontrolling interests (a)

     9          

Earnings allocated to participating stock awards

     (5     (6

Net income applicable to U.S. Bancorp common shareholders

   $ 1,329      $ 1,365   

Average common shares outstanding

     1,737        1,781   

Net effect of the exercise and assumed purchase of stock awards

     6        8   

Average diluted common shares outstanding

     1,743        1,789   

Earnings per common share

   $ .77      $ .77   

Diluted earnings per common share

   $ .76      $ .76   

 

(a) Represents the difference between the carrying amount and amount paid by the Company to purchase third party investor holdings of the preferred stock of USB Realty Corp, a consolidated subsidiary of the Company.

Options outstanding at March 31, 2016 and 2015, to purchase 2 million and 1 million common shares, respectively, were not included in the computation of diluted earnings per share for the three months ended March 31, 2016 and 2015, respectively, 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 March 31,  
    Pension Plans      Postretirement
Welfare Plan
 
(Dollars in Millions)       2016         2015          2016         2015  

Service cost

  $ 44      $ 47       $      $   

Interest cost

    52        48         1        1   

Expected return on plan assets

    (66     (56               

Prior service cost (credit) amortization

    (1     (1      (1     (1

Actuarial loss (gain) amortization

    44        59         (1     (1

Net periodic benefit cost

  $ 73      $ 97       $ (1   $ (1

 

  Note 11  Income Taxes

The components of income tax expense were:

 

    Three Months Ended
March 31,
 
(Dollars in Millions)       2016          2015  

Federal

    

Current

  $ 301       $ 380   

Deferred

    107         20   

Federal income tax

    408         400   

State

    

Current

    90         84   

Deferred

    6         (5

State income tax

    96         79   

Total income tax provision

  $ 504       $ 479   

 

 

54

U.S. Bancorp


Table of Contents

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
March 31,
 
(Dollars in Millions)       2016         2015  

Tax at statutory rate

  $ 667      $ 673   

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

    63        51   

Tax effect of

   

Tax credits and benefits, net of related expenses

    (166     (164

Tax-exempt income

    (50     (52

Noncontrolling interests

    (5     (4

Other items (a)

    (5     (25

Applicable income taxes

  $ 504      $ 479   

 

(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 March 31, 2016, 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 $1.6 billion at March 31, 2016, and $1.5 billion at December 31, 2015.

 

 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 fair value hedge, cash flow hedge, 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 months ended March 31, 2016, and the change in fair value attributed to hedge ineffectiveness was not material.

Cash Flow Hedges These derivatives are interest rate swaps the Company uses to hedge the forecasted cash flows from its underlying variable-rate 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 March 31, 2016, the Company had $99 million (net-of-tax) of realized and unrealized losses on derivatives classified as cash flow hedges recorded in other comprehensive income (loss), compared with $67 million (net-of-tax) of realized and unrealized losses at December 31, 2015. The estimated amount to be reclassified from other comprehensive income (loss) into earnings during the remainder of 2016 and the next 12 months are losses of $51 million (net-of-tax) and $62 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 months ended March 31, 2016, 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 businesses driven

 

U.S. Bancorp

55


Table of Contents

by fluctuations in foreign currency exchange rates. The ineffectiveness on all net investment hedges was not material for the three months ended March 31, 2016. There were no non-derivative debt instruments designated as net investment hedges at March 31, 2016 or December 31, 2015.

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.

 

 

56

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
 

March 31, 2016

                     

Fair value hedges

                     

Interest rate contracts

                     

Receive fixed/pay floating swaps

  $ 2,550       $ 128         5.03            $       $           

Cash flow hedges

                     

Interest rate contracts

                     

Pay fixed/receive floating swaps

    1,500         6         9.88              6,439         193         3.31   

Net investment hedges

                     

Foreign exchange forward contracts

                                 1,170         30         .04   

Other economic hedges

                     

Interest rate contracts

                     

Futures and forwards

                     

Buy

    5,650         54         .08              21         2         .05   

Sell

    455         5         .17              5,982         48         .10   

Options

                     

Purchased

    2,000                 .06                                

Written

    3,532         47         .12              9         1         .10   

Receive fixed/pay floating swaps

    9,656         290         10.00                                

Pay fixed/receive floating swaps

                                 4,381         277         9.71   

Foreign exchange forward contracts

    4,735         56         .01              1,139         13         .03   

Equity contracts

    62         2         .22              23         1         .58   

Credit contracts

    1,206         1         2.84              3,175         4         3.16   

Other (a)

    597         9         .02              1,278         73         1.34   

Total

  $ 31,943       $ 598               $ 23,617       $ 642      

December 31, 2015

                     

Fair value hedges

                     

Interest rate contracts

                     

Receive fixed/pay floating swaps

  $ 3,050       $ 73         4.43            $       $           

Cash flow hedges

                     

Interest rate contracts

                     

Pay fixed/receive floating swaps

    1,772         7         9.22              5,009         146         1.13   

Net investment hedges

                     

Foreign exchange forward contracts

    1,140         4         .04                                

Other economic hedges

                     

Interest rate contracts

                     

Futures and forwards

                     

Buy

    3,812         17         .07              452         1         .06   

Sell

    3,201         12         .09              2,559         7         .12   

Options

                     

Purchased

    2,935                 .06                                

Written

    3,199         29         .10              5         1         .08   

Receive fixed/pay floating swaps

    3,733         42         9.98              4,748         18         10.18   

Pay fixed/receive floating swaps

    287         2         9.82              4,158         35         9.97   

Foreign exchange forward contracts

    3,023         13         .01              2,380         10         .03   

Equity contracts

    62                 .47              24         1         .82   

Credit contracts

    1,192         2         2.58              2,821         3         2.99   

Other (a)

    36                 .04              662         64         2.60   

Total

  $ 27,442       $ 201                     $ 22,818       $ 286            

 

(a) Includes short-term underwriting purchase and sale commitments with total asset and liability notional values of $597 million and $36 million at March 31, 2016 and December 31, 2015, 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 $681 million, $64 million and 2.50 years at March 31, 2016, respectively, compared to $626 million, $64 million and 2.75 years at December 31, 2015, respectively.

 

U.S. Bancorp

57


Table of Contents

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
 

March 31, 2016

                     

Interest rate contracts

                     

Receive fixed/pay floating swaps

  $ 51,354       $ 2,000         5.24            $ 5,011       $ 8         3.25   

Pay fixed/receive floating swaps

    5,224         8         4.08              50,201         2,056         5.27   

Options

                     

Purchased

    8,676         7         2.33              321         13         1.24   

Written

    321         14         1.24              8,256         5         2.24   

Futures

                     

Buy

    3,870         2         1.02                                

Foreign exchange rate contracts

                     

Forwards, spots and swaps

    24,917         938         .49              23,476         896         .51   

Options

                     

Purchased

    1,708         49         1.29                                

Written

                                 1,708         49         1.29   

Total

  $ 96,070       $ 3,018               $ 88,973       $ 3,027      

December 31, 2015

                     

Interest rate contracts

                     

Receive fixed/pay floating swaps

  $ 32,647       $ 1,097         5.69            $ 14,068       $ 54         4.71   

Pay fixed/receive floating swaps

    10,685         43         4.55              35,045         1,160         5.74   

Options

                     

Purchased

    8,705         10         2.61              146         1         2.23   

Written

    146         2         2.23              8,482         9         2.57   

Futures

                     

Buy

                                 2,859         2         .84   

Sell

    45                 .97                                

Foreign exchange rate contracts

                     

Forwards, spots and swaps

    18,399         851         .59              17,959         830         .58   

Options

                     

Purchased

    1,485         43         1.19                                

Written

                                 1,485         43         1.19   

Total

  $ 72,112       $ 2,046                     $ 80,044       $ 2,099            

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) for the three months ended March 31:

 

   

Gains (Losses)

Recognized in

Other

Comprehensive

Income

(Loss)

         

Gains (Losses)

Reclassified from

Other

Comprehensive
Income

(Loss) into Earnings

 
(Dollars in Millions)   2016     2015           2016     2015  

Asset and Liability Management Positions

            

Cash flow hedges

            

Interest rate contracts (a)

  $ (59   $ (17        $ (27   $ (31

Net investment hedges

            

Foreign exchange forward contracts

    (32     115                      

 

Note: Ineffectiveness on cash flow and net investment hedges was not material for the three months ended March 31, 2016 and 2015.
(a) Gains (Losses) reclassified from other comprehensive income (loss) into interest expense.

 

 

58

U.S. Bancorp


Table of Contents

The table below shows the gains (losses) recognized in earnings for fair value hedges, other economic hedges and the customer-related positions for the three months ended March 31:

 

(Dollars in Millions)  

Location of

Gains (Losses)
Recognized in Earnings

   2016     2015  

Asset and Liability Management Positions

      

Fair value hedges (a)

      

Interest rate contracts

  Other noninterest income    $ 62      $ 34   

Other economic hedges

      

Interest rate contracts

      

Futures and forwards

  Mortgage banking revenue      (47     41   

Purchased and written options

  Mortgage banking revenue      93        59   

Receive fixed/pay floating swaps

  Mortgage banking revenue      242        115   

Pay fixed/receive floating swaps

  Mortgage banking revenue      9          

Foreign exchange forward contracts

  Commercial products revenue      25        20   

Equity contracts

  Compensation expense      (2       

Customer-Related Positions

      

Interest rate contracts

      

Receive fixed/pay floating swaps

  Other noninterest income      1,005        358   

Pay fixed/receive floating swaps

  Other noninterest income      (1,004     (350

Purchased and written options

  Other noninterest income      2          

Futures

  Other noninterest income      4          

Foreign exchange rate contracts

      

Forwards, spots and swaps

  Commercial products revenue      17        20   

Purchased and written options

  Commercial products revenue      1        1   

 

(a) Gains (Losses) on items hedged by interest rate contracts included in noninterest income (expense), were $(61) million and $(33) million for the three months ended March 31, 2016 and 2015, respectively. The ineffective portion was immaterial for the three months ended March 31, 2016 and 2015.

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 March 31, 2016, was $1.3 billion. At March 31, 2016, the Company had $1.2 billion of cash 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 $240.6 billion total notional amount of derivative positions at March 31, 2016, $91.2 billion related to those centrally cleared through clearinghouses and $8.2 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 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

 

U.S. Bancorp

59


Table of Contents

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. At March 31, 2016 and December 31, 2015, the Company had no outstanding securities loaned transactions.

The following table summarizes the maturities by category of collateral pledged for repurchase agreements:

 

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

March 31, 2016

       

U.S. Treasury and agencies

  $ 88       $       $ 88   

Residential agency mortgage-backed securities

    867         62         929   

Gross amount of recognized liabilities

  $ 955       $ 62       $ 1,017   

December 31, 2015

       

U.S. Treasury and agencies

  $ 122       $       $ 122   

Residential agency mortgage-backed securities

    802         168         970   

Gross amount of recognized liabilities

  $ 924       $ 168       $ 1,092   

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.

 

 

60

U.S. Bancorp


Table of Contents

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)
   

March 31, 2016

                                                 

Derivative assets (d)

  $ 2,485       $ (1,071   $ 1,414       $ (135   $ (3   $ 1,276   

Reverse repurchase agreements

    93                93         (75     (18       

Securities borrowed

    749                749                (730     19   

Total

  $ 3,327       $ (1,071   $ 2,256       $ (210   $ (751   $ 1,295   

December 31, 2015

             

Derivative assets (d)

  $ 1,879       $ (807   $ 1,072       $ (82   $      $ 990   

Reverse repurchase agreements

    106                106         (102     (4       

Securities borrowed

    772                772                (753     19   

Total

  $ 2,757       $ (807   $ 1,950       $ (184   $ (757   $ 1,009   

 

(a) Includes $212 million and $165 million of cash collateral related payables that were netted against derivative assets at March 31, 2016 and December 31, 2015, 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 $1.1 billion and $368 million of derivative assets centrally cleared or otherwise not subject to netting arrangements at March 31, 2016 and December 31, 2015, 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)
   

March 31, 2016

                                                 

Derivative liabilities (d)

  $ 2,136       $ (1,652   $ 484       $ (135   $      $ 349   

Repurchase agreements

    1,017                1,017         (75     (942       

Total

  $ 3,153       $ (1,652   $ 1,501       $ (210   $ (942   $ 349   

December 31, 2015

             

Derivative liabilities (d)

  $ 1,809       $ (1,283   $ 526       $ (82   $      $ 444   

Repurchase agreements

    1,092                1,092         (102     (990       

Total

  $ 2,901       $ (1,283   $ 1,618       $ (184   $ (990   $ 444   

 

(a) Includes $793 million and $641 million of cash collateral related receivables that were netted against derivative liabilities at March 31, 2016 and December 31, 2015, 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 $1.5 billion and $576 million of derivative liabilities centrally cleared or otherwise not subject to netting arrangements at March 31, 2016 and December 31, 2015, 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.

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.

 

U.S. Bancorp

61


Table of Contents
    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 three months ended March 31, 2016 and 2015, 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 three months ended March 31, 2016 and 2015, 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.

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

 

 

62

U.S. Bancorp


Table of Contents

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 services 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 relevant 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 and broker provided quotes, where available. Securities classified within Level 3 include non-agency mortgage-backed securities, non-agency commercial mortgage-backed securities, certain asset-backed securities 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 $52 million and a $49 million net gain for the three months ended March 31, 2016 and 2015, 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 when available, publicly available data and industry surveys and are also compared to independent third party valuations each quarter. Risks inherent in MSR valuation include higher than expected prepayment rates 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,

 

U.S. Bancorp

63


Table of Contents

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.

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

 

 

64

U.S. Bancorp


Table of Contents

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 OREO. 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.

The following table shows the significant valuation assumption ranges for Level 3 available-for-sale investment securities at March 31, 2016:

 

     Minimum     Maximum     Average  

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

     

Estimated lifetime prepayment rates

    5     20     14

Lifetime probability of default rates

           6        4   

Lifetime loss severity rates

    15        60        32   

Discount margin

    2        6        3   

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

     

Estimated lifetime prepayment rates

    3     17     8

Lifetime probability of default rates

    3        12        7   

Lifetime loss severity rates

    20        70        51   

Discount margin

    1        11        3   

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.

 

U.S. Bancorp

65


Table of Contents

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 March 31, 2016:

 

     Minimum     Maximum     Average  

Expected prepayment

    12     20     14

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 March 31, 2016:

 

     Minimum     Maximum     Average  

Expected loan close rate

    9     100     78

Inherent MSR value (basis points per loan)

    2        183        113   

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 March 31, 2016, the minimum, maximum and average credit valuation adjustment as a percentage of the derivative contract fair value prior to adjustment was 0 percent, 78 percent and 4 percent, respectively.

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.

 

 

66

U.S. Bancorp


Table of Contents

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  

March 31, 2016

            

Available-for-sale securities

            

U.S. Treasury and agencies

  $ 6,887       $ 882       $       $      $ 7,769   

Mortgage-backed securities

            

Residential

            

Agency

            50,051                        50,051   

Non-agency

            

Prime (a)

                    297                297   

Non-prime (b)

                    227                227   

Commercial

            

Agency

            32                        32   

Asset-backed securities

            

Collateralized debt obligations/Collateralized loan obligations

            18                        18   

Other

            531         2                533   

Obligations of state and political subdivisions

            5,197                        5,197   

Corporate debt securities

    103         474         9                586   

Perpetual preferred securities

    48         94                        142   

Other investments

    33         27                        60   

Total available-for-sale

    7,071         57,306         535                64,912   

Mortgage loans held for sale

            3,993                        3,993   

Mortgage servicing rights

                    2,222                2,222   

Derivative assets

    2         2,617         997         (1,071     2,545   

Other assets

    173         757                        930   

Total

  $ 7,246       $ 64,673       $ 3,754       $ (1,071   $ 74,602   

Derivative liabilities

  $       $ 3,524       $ 145       $ (1,652   $ 2,017   

Short-term borrowings (c)

    144         666                        810   

Total

  $ 144       $ 4,190       $ 145       $ (1,652   $ 2,827   

December 31, 2015

            

Available-for-sale securities

            

U.S. Treasury and agencies

  $ 3,708       $ 888       $       $      $ 4,596   

Mortgage-backed securities

            

Residential

            

Agency

            50,076                        50,076   

Non-agency

            

Prime (a)

                    318                318   

Non-prime (b)

                    240                240   

Commercial

            

Agency

            52                        52   

Asset-backed securities

            

Collateralized debt obligations/Collateralized loan obligations

            19                        19   

Other

            539         2                541   

Obligations of state and political subdivisions

            5,316                        5,316   

Corporate debt securities

    102         499         9                610   

Perpetual preferred securities

    48         113                        161   

Other investments

    40         28                        68   

Total available-for-sale

    3,898         57,530         569                61,997   

Mortgage loans held for sale

            3,110                        3,110   

Mortgage servicing rights

                    2,512                2,512   

Derivative assets

            1,632         615         (807     1,440   

Other assets

    202         589                        791   

Total

  $ 4,100       $ 62,861       $ 3,696       $ (807   $ 69,850   

Derivative liabilities

  $ 2       $ 2,266       $ 117       $ (1,283   $ 1,102   

Short-term borrowings (c)

    122         645                        767   

Total

  $ 124       $ 2,911       $ 117       $ (1,283   $ 1,869   
(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.

 

U.S. Bancorp

67


Table of Contents

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 March 31:

 

(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
 

2016

                   

Available-for-sale securities

                   

Mortgage-backed securities

                   

Residential non-agency

                   

Prime (a)

  $ 318      $      $ (3   $      $      $ (18   $      $      $ 297      $ (3

Non-prime (b)

    240               (5                   (8                   227        (5

Asset-backed securities

                   

Other

    2                                                         2          

Corporate debt securities

    9                                                         9          

Total available-for-sale

    569         (c)      (8 ) (f)                    (26                   535        (8

Mortgage servicing rights

    2,512        (398 ) (d)             9                      99  (g)             2,222        (398 ) (d) 

Net derivative assets and liabilities

    498        502  (e)                    (2                   (147     851        369  (h) 

2015

                   

Available-for-sale securities

                   

Mortgage-backed securities

                   

Residential non-agency

                   

Prime (a)

  $ 405      $      $ (1   $      $      $ (19   $      $      $ 385      $ (1

Non-prime (b)

    280                                    (7                   273          

Asset-backed securities

                   

Other

    62        1        2                      (4                   61        2   

Corporate debt securities

    9                                                         9          

Total available-for-sale

    756        1  (c)      1  (f)                    (30                   728        1   

Mortgage servicing rights

    2,338        (239 ) (d)             6                      145  (g)             2,250        (239 ) (d) 

Net derivative assets and liabilities

    574        371  (i)                    (1                   (215     729        243  (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 $362 million included in other noninterest income and $140 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 $289 million included in other noninterest income and $80 million included in mortgage banking revenue.
(i) Approximately $207 million included in other noninterest income and $164 million included in mortgage banking revenue.
(j) Approximately $139 million included in other noninterest income and $104 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:

 

    March 31, 2016            December 31, 2015  
(Dollars in Millions)   Level 1      Level 2      Level 3      Total            Level 1      Level 2      Level 3      Total  

Loans (a)

  $       $       $ 94       $ 94            $       $       $ 87       $ 87   

Other assets (b)

                    42         42                              66         66   

 

(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 for the three months ended March 31:

 

(Dollars in Millions)   2016      2015  

Loans (a)

  $ 51       $ 25   

Other assets (b)

    9         9   

 

(a) Represents 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.

 

 

68

U.S. Bancorp


Table of Contents

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:

 

    March 31, 2016           December 31, 2015  
(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

  $ 3,993       $ 3,867       $ 126           $ 3,110       $ 3,032       $ 78   

Nonaccrual loans

    4         6         (2          5         7         (2

Loans 90 days or more past due

    1         1                                       

Disclosures About Fair Value of Financial Instruments

The following table summarizes the estimated fair value for financial instruments as of March 31, 2016 and December 31, 2015, 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:

 

    March 31, 2016   December 31, 2015  
   

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

  $ 10,981        $ 10,981      $      $      $ 10,981          $ 11,147        $ 11,147      $      $      $ 11,147   

Federal funds sold and securities purchased under resale agreements

    130                 130               130            169                 169               169   

Investment securities held-to-maturity

    42,113          2,330        40,113        78        42,521            43,590          2,275        41,138        80        43,493   

Loans held for sale (a)

    12                        12        12            74                        74        74   

Loans

    260,669                        265,791        265,791            256,986                        259,823        259,823   

Other financial instruments

    2,320                 920        1,405        2,325            2,311                 921        1,398        2,319   

Financial Liabilities

                           

Deposits

    306,348                 306,264               306,264            300,400                 300,225               300,225   

Short-term borrowings (b)

    22,967                 22,749               22,749            27,110                 26,782               26,782   

Long-term debt

    34,872                 35,452               35,452            32,078                 32,412               32,412   

Other liabilities

    1,305                          1,305        1,305            1,353                          1,353        1,353   

 

(a) Excludes mortgages held for sale for which the fair value option under applicable accounting guidance was elected.
(b) 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 loan 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 $545 million and $515 million at March 31, 2016 and December 31, 2015, respectively. The carrying value of other guarantees was $189 million and $184 million at March 31, 2016 and December 31, 2015, 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 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.

 

U.S. Bancorp

69


Table of Contents

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 March 31, 2016, 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 months ended March 31, 2016, the Company sold 0.5 million 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 5.9 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 March 31, 2016:

 

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

Standby letters of credit

  $       $ 62       $ 12,817   

Third party borrowing arrangements

                    14   

Securities lending indemnifications

    6,454                 6,318   

Asset sales

            114         5,136  (a) 

Merchant processing

    521         74         95,567   

Contingent consideration arrangements

            1         1   

Tender option bond program guarantee

    2,012                 1,957   

Minimum revenue guarantees

                    9   

Other

                    852   

 

(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 future 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 March 31, 2016, the value of airline tickets purchased to be delivered at a future date was $9.5 billion. The Company held collateral of $396 million in escrow deposits, letters of credit and indemnities from financial institutions, and liens on various assets.

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 March 31, 2016 and December 31, 2015, the Company had reserved

 

 

70

U.S. Bancorp


Table of Contents

$30 million for potential losses from representation and warranty obligations. 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.

As of March 31, 2016 and December 31, 2015, the Company had $6 million and $12 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, in light of the inherent uncertainties involved in these matters, it is possible that the ultimate resolution of one or more of these matters may have a material adverse effect on the Company’s results from operations for a particular period, and future 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 in early stages and currently are 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 substantial 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 compliance program adequacy and effectiveness and sanctions compliance requirements as administered by the Office of Foreign Assets Control. The Company is cooperating with an investigation currently being conducted by the U.S. Attorney’s Office in Manhattan regarding Scott Tucker, who was recently indicted over the operation of an allegedly illegal payday lending business. Tucker, who is challenging his indictment, and his businesses maintained certain deposit accounts with the Company’s bank subsidiary. In October 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. If the Company does not satisfactorily correct the identified deficiencies, it could be required to enter into further orders, pay fines or penalties or further modify its business practices. 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 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).

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

 

U.S. Bancorp

71


Table of Contents

foreclosure practices. In June 2015, the Company entered into an agreement to amend the 2011 Consent Order it had with the OCC. The OCC terminated the amended Consent Order in February 2016. Depending on the Company’s progress toward addressing the requirements of the 2011 Consent Order it has with the Board of Governors of the Federal Reserve System, the Company may 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. The Company may be unable to develop an estimate or range of loss where matters are in early stages, there are significant factual or legal issues to be resolved, damages are unspecified or uncertain, or there is uncertainty as to a litigation class being certified or the outcome of pending motions, appeals or proceedings. 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, 2015.

 

 Note 16  Subsequent Events

The Company has evaluated the impact of events that have occurred subsequent to March 31, 2016 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.

 

 

72

U.S. Bancorp


Table of Contents

U.S. Bancorp

Consolidated Daily Average Balance Sheet and Related Yields and Rates (a) 

 

        For the Three Months Ended March 31,           
    2016    2015             

(Dollars in Millions)

(Unaudited)

  Average
Balances
         Interest           Yields
and
Rates
          Average
Balances
         Interest           Yields
and
Rates
               % Change
Average
Balances
 

Assets

                                     

Investment securities

  $ 106,031        $ 545           2.06        $ 100,712        $ 526           2.09            5.3

Loans held for sale

    3,167          31           3.92             4,338          41           3.75               (27.0

Loans (b)

                                     

Commercial

    89,820          624           2.79             81,508          556           2.76               10.2   

Commercial real estate

    42,401          416           3.94             42,671          413           3.92               (.6

Residential mortgages

    54,208          509           3.76             51,426          489           3.82               5.4   

Credit card

    20,244          549           10.91             17,823          475           10.81               13.6   

Other retail

    51,097            520           4.09             49,320            505           4.15               3.6   

Total loans, excluding covered loans

    257,770          2,618           4.08             242,748          2,438           4.06               6.2   

Covered loans

    4,511            52           4.63             5,202            79           6.04               (13.3

Total loans

    262,281          2,670           4.09             247,950          2,517           4.11               5.8   

Other earning assets

    6,729            29           1.75             7,841            32           1.67               (14.2

Total earning assets

    378,208          3,275           3.48             360,841          3,116           3.49               4.8   

Allowance for loan losses

    (3,864                   (4,088                     5.5   

Unrealized gain (loss) on investment securities

    648                      905                        (28.4

Other assets

    46,565                      44,178                        5.4   

Total assets

  $ 421,557                    $ 401,836                        4.9   

Liabilities and Shareholders’ Equity

                                     

Noninterest-bearing deposits

  $ 78,569                    $ 74,511                        5.4

Interest-bearing deposits

                                     

Interest checking

    57,910          7           .05             54,658          8           .06               5.9   

Money market savings

    86,462          73           .34             73,889          42           .23               17.0   

Savings accounts

    39,250          9           .09             36,033          12           .14               8.9   

Time deposits

    33,687            50           .60             39,369            56           .57               (14.4

Total interest-bearing deposits

    217,309          139           .26             203,949          118           .23               6.6   

Short-term borrowings

    27,399          66           .97             29,497          62           .85               (7.1

Long-term debt

    34,808            182           2.10             34,436            184           2.17               1.1   

Total interest-bearing liabilities

    279,516          387           .56             267,882          364           .55               4.3   

Other liabilities

    16,056                      14,678                        9.4   

Shareholders’ equity

                                     

Preferred equity

    5,501                      4,756                        15.7   

Common equity

    41,237                      39,322                        4.9   

Total U.S. Bancorp shareholders’ equity

    46,738                      44,078                        6.0   

Noncontrolling interests

    678                      687                        (1.3

Total equity

    47,416                      44,765                        5.9   

Total liabilities and equity

  $ 421,557                    $ 401,836                        4.9   

Net interest income

      $ 2,888                    $ 2,752                 

Gross interest margin

             2.92                   2.94         

Gross interest margin without taxable-equivalent increments

             2.86                   2.88         

Percent of Earning Assets

                                   

Interest income

             3.48                   3.49         

Interest expense

             .42                      .41            

Net interest margin

             3.06                   3.08         

Net interest margin without taxable-equivalent increments

                             3.00                                   3.02         

 

(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

73


Table of Contents

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, 2015, 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 first quarter of 2016.

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 March 31, 2016, 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.

 

 

74

U.S. Bancorp


Table of Contents

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: May 6, 2016      

Craig E. Gifford

Controller

(Principal Accounting Officer and Duly Authorized Officer)

 

U.S. Bancorp

75


Table of Contents

EXHIBIT 12

Computation of Ratio of Earnings to Fixed Charges

 

(Dollars in Millions)    Three Months Ended
March 31, 2016
 

Earnings

  

  1.

 

Net income attributable to U.S. Bancorp

   $ 1,386   

  2.

 

Applicable income taxes, including expense related to unrecognized tax positions

     504   

  3.

 

Net income attributable to U.S. Bancorp before income taxes (1 + 2)

   $ 1,890   

  4.

 

Fixed charges:

  
  a.  

Interest expense excluding interest on deposits*

   $ 247   
  b.  

Portion of rents representative of interest and amortization of debt expense

     27   
  c.  

Fixed charges excluding interest on deposits (4a + 4b)

     274   
  d.  

Interest on deposits

     139   
  e.  

Fixed charges including interest on deposits (4c + 4d)

   $ 413   

  5.

 

Amortization of interest capitalized

   $   

  6.

 

Earnings excluding interest on deposits (3 + 4c + 5)

     2,164   

  7.

 

Earnings including interest on deposits (3 + 4e + 5)

     2,303   

  8.

 

Fixed charges excluding interest on deposits (4c)

     274   

  9.

 

Fixed charges including interest on deposits (4e)

     413   

Ratio of Earnings to Fixed Charges

  

10.

 

Excluding interest on deposits (line 6/line 8)

     7.90   

11.

 

Including interest on deposits (line 7/line 9)

     5.58   

 

* Excludes interest expense related to unrecognized tax positions

 

 

76

U.S. Bancorp


Table of Contents

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: May 6, 2016

 

 

U.S. Bancorp

77


Table of Contents

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: May 6, 2016

 

 

78

U.S. Bancorp


Table of Contents

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 March 31, 2016 (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: May 6, 2016

   

Kathleen A. Rogers

Chief Financial Officer

 

 

U.S. Bancorp

79


Table of Contents

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 Center 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

Jennifer A. Thompson, CFA

Senior Vice President, Investor Relations

jen.thompson@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 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 and then Corporate Governance.

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: our employees, customers, shareholders and communities.

Our employees bring their whole selves to work. 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.

 

LOGO

 

LOGO   This report has been produced on recycled paper. LOGO