US BANCORP \DE\ - Quarter Report: 2018 September (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

☑		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

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 ☑    NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

YES ☑    NO ☐

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

 

Large accelerated filer ☑		Accelerated filer ☐
Non-accelerated filer ☐		Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

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

YES ☐    NO ☑

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

 

Class		Outstanding as of October 31, 2018
Common Stock, $0.01 Par Value		1,616,092,910 shares

 

 

 

Table of Contents and Form 10-Q Cross Reference Index

 

Part I — Financial Information
1) Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2)			3
a) Overview			3
b) Statement of Income Analysis			4
c) Balance Sheet Analysis			6
d) Non-GAAP Financial Measures			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)			8
a) Overview			8
b) Credit Risk Management			9
c) Residual Value Risk Management			21
d) Operational Risk Management			21
e) Compliance Risk Management			21
f) Interest Rate Risk Management			21
g) Market Risk Management			22
h) Liquidity Risk Management			24
i) Capital Management			25
3) Line of Business Financial Review			26
4) Financial Statements (Item 1)			33
Part II — Other Information
1) Legal Proceedings (Item 1)			75
2) Risk Factors (Item 1A)			75
3) Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)			75
4) Exhibits (Item 6)			75
5) Signature			76
6) Exhibits			77

“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. Deterioration in general business and economic conditions or turbulence in domestic or global financial markets could adversely affect U.S. Bancorp’s revenues and the values of its assets and liabilities, reduce the availability of funding to certain financial institutions, lead to a tightening of credit and increase stock price 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, changes to statutes, regulations, or regulatory policies or practices could affect U.S. Bancorp in substantial and unpredictable ways. U.S. Bancorp’s results could also be adversely affected by 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 its investment securities; legal and regulatory developments; litigation; increased competition from both banks and non-banks; changes in the level of tariffs and other trade policies of the United States and its global trading partners; 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, 2017, on file with the Securities and Exchange Commission, including the sections entitled “Corporate Risk Profile” and “Risk Factors” 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 1		Selected Financial Data

 

		Three Months Ended September 30																Nine Months Ended September 30
(Dollars and Shares in Millions, Except Per Share Data)		2018				2017				Percent Change								2018				2017				Percent Change
Condensed Income Statement
Net interest income		$	3,251			$	3,176				2.4	%						$	9,616			$	9,205				4.5	%
Taxable-equivalent adjustment (a)			30				51				(41.2	)							88				152				(42.1	)
Net interest income (taxable-equivalent basis) (b)			3,281				3,227				1.7								9,704				9,357				3.7
Noninterest income			2,408				2,331				3.3								7,079				6,900				2.6
Securities gains (losses), net			10				9				11.1								25				47				(46.8	)
Total net revenue			5,699				5,567				2.4								16,808				16,304				3.1
Noninterest expense			3,044				2,998				1.5								9,184				8,891				3.3
Provision for credit losses			343				360				(4.7	)							1,011				1,055				(4.2	)
Income before taxes			2,312				2,209				4.7								6,613				6,358				4.0
Income taxes and taxable-equivalent adjustment			490				640				(23.4	)							1,351				1,791				(24.6	)
Net income			1,822				1,569				16.1								5,262				4,567				15.2
Net (income) loss attributable to noncontrolling interests			(7	)			(6	)			(16.7	)							(22	)			(31	)			29.0
Net income attributable to U.S. Bancorp		$	1,815			$	1,563				16.1							$	5,240			$	4,536				15.5
Net income applicable to U.S. Bancorp common shareholders		$	1,732			$	1,485				16.6							$	5,007			$	4,302				16.4
Per Common Share
Earnings per share		$	1.06			$	.89				19.1	%						$	3.05			$	2.56				19.1	%
Diluted earnings per share			1.06				.88				20.5								3.04				2.55				19.2
Dividends declared per share			.37				.30				23.3								.97				.86				12.8
Book value per share (c)			27.35				25.98				5.3
Market value per share			52.81				53.59				(1.5	)
Average common shares outstanding			1,629				1,672				(2.6	)							1,641				1,683				(2.5	)
Average diluted common shares outstanding			1,633				1,678				(2.7	)							1,645				1,689				(2.6	)
Financial Ratios
Return on average assets			1.58	%			1.38	%											1.54	%			1.36	%
Return on average common equity			15.5				13.6												15.2				13.4
Net interest margin (taxable-equivalent basis) (a)			3.15				3.14												3.14				3.09
Efficiency ratio (b)			53.5				53.9												54.7				54.7
Net charge-offs as a percent of average loans outstanding			.46				.47												.48				.49
Average Balances
Loans		$	281,065			$	277,626				1.2	%						$	279,699			$	275,454				1.5	%
Loans held for sale			3,109				3,935				(21.0	)							3,262				3,457				(5.6	)
Investment securities (d)			113,547				111,832				1.5								113,873				111,325				2.3
Earning assets			415,177				408,825				1.6								413,246				404,031				2.3
Assets			456,916				450,630				1.4								455,241				446,049				2.1
Noninterest-bearing deposits			77,192				81,964				(5.8	)							78,546				81,808				(4.0	)
Deposits			330,121				335,151				(1.5	)							333,159				331,610				.5
Short-term borrowings			22,186				15,505				43.1								21,881				14,423				51.7
Long-term debt			39,701				35,544				11.7								36,400				35,697				2.0
Total U.S. Bancorp shareholders’ equity			50,138				48,819				2.7								49,433				48,342				2.3
		September 30, 2018				December 31, 2017
Period End Balances
Loans		$	281,461			$	280,432				.4	%
Investment securities			110,958				112,499				(1.4	)
Assets			464,607				462,040				.6
Deposits			331,178				347,215				(4.6	)
Long-term debt			40,894				32,259				26.8
Total U.S. Bancorp shareholders’ equity			50,375				49,040				2.7
Asset Quality
Nonperforming assets		$	1,004			$	1,200				(16.3	)%
Allowance for credit losses			4,426				4,417				.2
Allowance for credit losses as a percentage of period-end loans			1.57	%			1.58	%
Capital Ratios
Basel III standardized approach:
Common equity tier 1 capital			9.0	%			9.3	%
Tier 1 capital			10.6				10.8
Total risk-based capital			12.6				12.9
Leverage			9.0				8.9
Common equity tier 1 capital to risk-weighted assets for the Basel III advanced approaches			11.8				12.0
Tangible common equity to tangible assets (b)			7.7				7.6
Tangible common equity to risk-weighted assets (b)			9.3				9.4
Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented standardized approach (b)							9.1
Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented advanced approaches (b)							11.6

 

(a)	Based on federal income tax rates of 21 percent for 2018 and 35 percent for 2017, for those assets and liabilities whose income or expense is not included for federal income tax purposes.

(b)	See Non-GAAP Financial Measures beginning on page 30.

(c)	Calculated as U.S. Bancorp common shareholders’ equity divided by common shares outstanding at end of the period.

(d)	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.

 

2		U.S. Bancorp

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 $1.8 billion for the third quarter of 2018, or $1.06 per diluted common share, compared with $1.6 billion, or $0.88 per diluted common share, for the third quarter of 2017. Return on average assets and return on average common equity were 1.58 percent and 15.5 percent, respectively, for the third quarter of 2018, compared with 1.38 percent and 13.6 percent, respectively, for the third quarter of 2017.

Total net revenue for the third quarter of 2018 was $132 million (2.4 percent) higher than the third quarter of 2017, reflecting a 2.4 percent increase in net interest income (1.7 percent on a taxable-equivalent basis) and a 3.3 percent increase in noninterest income. The increase in net interest income from the third quarter of 2017 was mainly a result of the impact of rising interest rates, earning assets growth, and higher yields on the reinvestment of securities, partially offset by higher rates on deposits and funding mix changes. The noninterest income increase was driven by strong growth in payment services revenue and trust and investment management fees, along with an increase in other noninterest income, partially offset by decreases in mortgage banking revenue and commercial products revenue.

Noninterest expense in the third quarter of 2018 was $46 million (1.5 percent) higher than the third quarter of 2017, primarily due to increased compensation expense related to supporting business growth and compliance programs, merit increases, and variable compensation related to revenue growth, higher employee benefits expense, and higher technology and communications expense in support of business growth. Partially offsetting these increases was lower other noninterest expense driven by lower costs related to tax-advantaged projects, lower Federal Deposit Insurance Corporation (“FDIC”) insurance expense, a reduction in mortgage servicing costs, and lower pension related costs.

The provision for credit losses for the third quarter of 2018 of $343 million was $17 million (4.7 percent) lower than the third quarter of 2017. Net charge-offs in the third quarter of 2018 were $328 million, compared with $330 million in the third quarter of 2017. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

Net income attributable to U.S. Bancorp for the first nine months of 2018 was $5.2 billion, or $3.04 per diluted common share, compared with $4.5 billion, or $2.55 per diluted common share, for the first nine months of 2017. Return on average assets and return on average common equity were 1.54 percent and 15.2 percent, respectively, for the first nine months of 2018, compared with 1.36 percent and 13.4 percent, respectively, for the first nine months of 2017.

Total net revenue for the first nine months of 2018 was $504 million (3.1 percent) higher than the first nine months of 2017, reflecting a 4.5 percent increase in net interest income (3.7 percent on a taxable-equivalent basis) and a 2.3 percent increase in noninterest income. The increase in net interest income from a year ago was mainly a result of the impact of rising interest rates, earnings assets growth, and higher yields on the reinvestment of securities, partially offset by higher rates on deposits and funding mix changes. The noninterest income increase was driven by strong growth in payment services revenue and trust and investment management fees, along with increases in other noninterest income and ATM processing services revenue, partially offset by decreases in mortgage banking revenue and commercial products revenue.

Noninterest expense in the first nine months of 2018 was $293 million (3.3 percent) higher than the first nine months of 2017, primarily due to increased compensation expense related to supporting business growth and compliance programs, merit increases, and variable compensation related to revenue growth, higher employee benefits expense, and higher technology and communications expense in support of business growth. Partially offsetting these increases was lower other noninterest expense driven by lower costs related to tax-advantaged projects, lower FDIC insurance expense, a reduction in mortgage servicing costs, and lower pension related costs.

The provision for credit losses for the first nine months of 2018 of $1.0 billion was $44 million (4.2 percent) lower than the first nine months of 2017. Net charge-offs were $1.0 billion in both the first nine months of 2018 and 2017. Refer to “Corporate Risk

 

U.S. Bancorp		3

Table 2		Noninterest Income

 

		Three Months Ended September 30																Nine Months Ended September 30
(Dollars in Millions)		2018				2017				Percent Change								2018				2017				Percent Change
Credit and debit card revenue		$	344			$	318				8.2	%						$	1,019			$	947				7.6	%
Corporate payment products revenue			169				150				12.7								481				427				12.6
Merchant processing services			392				377				4.0								1,142				1,112				2.7
ATM processing services			85				77				10.4								254				223				13.9
Trust and investment management fees			411				380				8.2								1,210				1,128				7.3
Deposit service charges			198				187				5.9								563				538				4.6
Treasury management fees			146				153				(4.6	)							451				466				(3.2	)
Commercial products revenue			216				240				(10.0	)							670				730				(8.2	)
Mortgage banking revenue			174				213				(18.3	)							549				632				(13.1	)
Investment products fees			47				42				11.9								140				128				9.4
Securities gains (losses), net			10				9				11.1								25				47				(46.8	)
Other			226				194				16.5								600				569				5.4
Total noninterest income		$	2,418			$	2,340				3.3	%						$	7,104			$	6,947				2.3	%

 

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, was $3.3 billion in the third quarter and $9.7 billion in the first nine months of 2018, representing increases of $54 million (1.7 percent) and $347 million (3.7 percent), respectively, over the same periods of 2017. The increases were principally driven by the impact of rising interest rates, earning assets growth, and higher yields on securities, partially offset by changes in loan mix, higher rates on deposits and changes in funding mix, as well as the impact of the Tax Cuts and Jobs Act (“tax reform”) enacted by Congress in late 2017 which reduced the taxable-equivalent adjustment benefit related to tax exempt assets, and higher interest recoveries in the prior year. Average earning assets were $6.4 billion (1.6 percent) higher in the third quarter and $9.2 billion (2.3 percent) higher in the first nine months of 2018, compared with the same periods of 2017, reflecting increases in loans, investment securities and other earning assets. The net interest margin, on a taxable-equivalent basis, in the third quarter and first nine months of 2018 was 3.15 percent and 3.14 percent, respectively, compared with 3.14 percent and 3.09 percent in the third quarter and first nine months of 2017, respectively. The increases in the net interest margin from the same periods of the prior year were primarily due to higher interest rates, partially offset by higher funding costs, changes in loan mix, and the impact of tax reform. Refer to the “Consolidated Daily Average Balance Sheet and Related Yields and Rates” tables for further information on net interest income.

Average total loans in the third quarter and first nine months of 2018 were $3.4 billion (1.2 percent) and $4.2 billion (1.5 percent) higher, respectively, than the same periods of 2017, due to growth in residential mortgages, commercial loans and credit card loans. In addition, average other retail loans were also higher in the first nine months of 2018, compared to the same period of the prior year. The increases were driven by higher demand for loans from new and existing customers. These increases were partially offset by a decrease in commercial real estate loans due to disciplined underwriting and customers paying down balances over the past year, as well as a decrease in loans covered by loss sharing agreements with the FDIC, a run-off portfolio.

Average investment securities in the third quarter and first nine months of 2018 were $1.7 billion (1.5 percent) and $2.5 billion (2.3 percent) higher, respectively, than the same periods of 2017, primarily due to purchases of U.S. Treasury, mortgage-backed and state and political securities, net of prepayments and maturities.

Average total deposits were $5.0 billion (1.5 percent) lower in the third quarter and $1.5 billion (0.5 percent) higher in the first nine months of 2018, respectively, compared to the same periods of 2017. Average noninterest-bearing deposits for the third quarter and first nine months of 2018 decreased $4.8 billion (5.8 percent) and $3.3 billion (4.0 percent), respectively, from the same periods of 2017, primarily due to decreases in business deposits within Corporate and Commercial Banking, and trust balances within Wealth Management and Investment Services. Average total savings deposits for the third quarter and first nine months of 2018 were $1.9 billion (0.9 percent) and $54 million lower, respectively, than the same periods of 2017, driven by decreases in Corporate and Commercial Banking, and Wealth Management and Investment Services balances,

 

4		U.S. Bancorp

Table 3		Noninterest Expense

 

		Three Months Ended September 30																Nine Months Ended September 30
(Dollars in Millions)		2018				2017				Percent Change								2018				2017				Percent Change
Compensation		$	1,529			$	1,440				6.2	%						$	4,594			$	4,247				8.2	%
Employee benefits			294				268				9.7								923				843				9.5
Net occupancy and equipment			270				258				4.7								797				760				4.9
Professional services			96				104				(7.7	)							274				305				(10.2	)
Marketing and business development			106				92				15.2								314				291				7.9
Technology and communications			247				227				8.8								724				667				8.5
Postage, printing and supplies			84				82				2.4								244				244				–
Other intangibles			41				44				(6.8	)							120				131				(8.4	)
Other			377				483				(21.9	)							1,194				1,403				(14.9	)
Total noninterest expense		$	3,044			$	2,998				1.5	%						$	9,184			$	8,891				3.3	%
Efficiency ratio (a)			53.5	%			53.9	%											54.7	%			54.7	%

 

a)	See Non-GAAP Financial Measures beginning on page 30.

 

partially offset by increases in Consumer and Business Banking balances. The declines in Corporate and Commercial Banking total savings balances reflect expected run-off related to the business merger of a large financial customer. Average time deposits for the third quarter and first nine months of 2018 increased $1.7 billion (4.6 percent) and $4.9 billion (14.9 percent), respectively, over the same periods of 2017. The increases were largely related to those deposits managed as an alternative to other funding sources such as wholesale borrowing, based largely on relative pricing and liquidity characteristics.

Provision for Credit Losses The provision for credit losses for the third quarter and first nine months of 2018 decreased $17 million (4.7 percent) and $44 million (4.2 percent), respectively, from the same periods of 2017. Net charge-offs decreased $2 million (0.6 percent) and $4 million (0.4 percent) in the third quarter and first nine months of 2018, respectively, compared with the same periods of the prior year, primarily due to lower commercial loan and residential mortgage net charge-offs, partially offset by higher credit card loan net charge-offs. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

Noninterest Income Noninterest income was $2.4 billion in the third quarter and $7.1 billion in the first nine months of 2018, representing increases of $78 million (3.3 percent) and $157 million (2.3 percent), respectively, compared with the same periods of 2017. The increases from a year ago reflected strong growth in payment services revenue and trust and investment management fees, along with increases in other noninterest income and ATM processing services revenue. These increases were partially offset by lower mortgage banking revenue and commercial products revenue, which were impacted by industry trends in these revenue categories. The increase in payment services revenue reflected higher credit and debit card revenue, corporate payment products revenue, and merchant processing services revenue, all driven by higher sales volumes. Trust and investment management fees increased due to business growth and favorable market conditions. ATM processing services revenue increased due to higher transaction volumes. Other noninterest income increased in the third quarter of 2018, compared to the third quarter of 2017, primarily due to higher equity investment income and tax-advantaged project syndication revenue. Other noninterest income increased in the first nine months of 2018, compared with the same period of the prior year, primarily due to higher tax-advantaged project syndication revenue. The decrease in mortgage banking revenue was primarily due to lower mortgage production and the adverse impact on gain on sale margins due to excess capacity in the industry in the near term. The decrease in commercial products revenue was primarily due to lower corporate bond underwriting fees and loan syndication fees. Commercial products revenue further decreased in the first nine months of 2018, compared with the same period of the prior year, due to lower trading revenue.

Noninterest Expense Noninterest expense was $3.0 billion in the third quarter and $9.2 billion in the first nine months of 2018, representing increases of $46 million (1.5 percent) and $293 million (3.3 percent) over the same periods of 2017. The increases from a year ago were primarily due to higher personnel costs and technology and communications expense, partially offset by lower other noninterest expense. Compensation expense increased principally due to the impact of hiring to support business growth and compliance programs, merit increases, and higher variable compensation related

 

U.S. Bancorp		5

to business production. Employee benefits expense increased primarily due to increased medical costs and staffing, while technology and communications expense increased primarily due to technology investment initiatives. Other noninterest expense decreased due to lower costs related to tax-advantaged projects, lower FDIC insurance expense, a reduction in mortgage servicing costs and lower pension-related costs as a result of contributions to the Company’s pension plans in 2017.

Income Tax Expense The provision for income taxes was $460 million (an effective rate of 20.2 percent) for the third quarter and $1.3 billion (an effective rate of 19.4 percent) for the first nine months of 2018, compared with $589 million (an effective rate of 27.3 percent) and $1.6 billion (an effective rate of 26.4 percent) for the same periods of 2017. The lower 2018 tax rates reflect tax reform enacted in late 2017. 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 $281.5 billion at September 30, 2018, compared with $280.4 billion at December 31, 2017, an increase of $1.1 billion (0.4 percent). The increase was driven by higher residential mortgages and commercial loans, partially offset by lower other retail loans, commercial real estate loans, credit card loans and covered loans.

Residential mortgages held in the loan portfolio increased $3.1 billion (5.2 percent) at September 30, 2018, compared with December 31, 2017, as origination activity more than offset the effect of customers paying down balances in the first nine months of 2018. 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.

Commercial loans increased $1.7 billion (1.8 percent) at September 30, 2018, compared with December 31, 2017, reflecting higher demand from new and existing customers.

Other retail loans decreased $1.3 billion (2.2 percent) at September 30, 2018, compared with December 31, 2017, reflecting the sale of the Company’s federally guaranteed student loans during the first nine months of 2018, along with decreases in auto loans and home equity loans. Partially offsetting these decreases were increases in installment and retail leasing loans.

Commercial real estate loans decreased $497 million (1.2 percent) at September 30, 2018, compared with December 31, 2017, primarily the result of continued disciplined underwriting and customers paying down balances.

Credit card loans decreased $311 million (1.4 percent) at September 30, 2018, compared with December 31, 2017, primarily the result of customers paying down balances.

Covered loans decreased $1.7 billion (55.1 percent) at September 30, 2018, compared with December 31, 2017, reflecting the transfer of $1.3 billion of covered residential mortgage loans from the loan portfolio to loans held for sale at the end of the third quarter of 2018.

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 of residential mortgages and other loans to be sold in the secondary market, were $4.5 billion at September 30, 2018, compared with $3.6 billion at December 31, 2017. The increase in loans held for sale was principally due to the transfer of $1.3 billion of covered residential mortgage loan balances to loans held for sale at the end of the third quarter of 2018. This increase was partially offset by a decrease in originated residential mortgage loans held for sale (“MLHFS”) balances due to a lower level of mortgage loan closings in the third quarter of 2018. 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 $111.0 billion at September 30, 2018, compared with $112.5 billion at December 31, 2017. The $1.5 billion (1.4 percent) decrease was primarily due to a $1.4 billion unfavorable change in net unrealized gains (losses) on available-for-sale investment securities.

 

6		U.S. Bancorp

Table 4		Investment Securities

 

		Available-for-Sale																				Held-to-Maturity
At September 30, 2018 (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		$	3,028			$	3,016				.4				1.26	%						$	650			$	646				.7				1.73	%
Maturing after one year through five years			16,490				15,935				3.0				1.70								2,912				2,755				4.4				1.64
Maturing after five years through ten years			658				630				7.6				2.85								1,550				1,475				5.7				2.10
Maturing after ten years			–				–				–				–								–				–				–				–
Total		$	20,176			$	19,581				2.8				1.67	%						$	5,112			$	4,876				4.3				1.79	%
Mortgage-Backed Securities (a)
Maturing in one year or less		$	69			$	69				.4				3.83	%						$	36			$	36				.8				2.51	%
Maturing after one year through five years			13,644				13,074				4.4				2.09								15,158				14,479				4.0				2.03
Maturing after five years through ten years			23,195				22,574				6.3				2.63								25,348				24,544				6.3				2.67
Maturing after ten years			2,583				2,598				14.4				3.18								360				361				14.0				3.06
Total		$	39,491			$	38,315				6.2				2.48	%						$	40,902			$	39,420				5.5				2.43	%
Asset-Backed Securities (a)
Maturing in one year or less		$	–			$	–				–				–	%						$	–			$	–				–				–	%
Maturing after one year through five years			402				408				3.6				3.49								3				4				3.3				2.90
Maturing after five years through ten years			–				–				–				–								2				3				6.4				3.00
Maturing after ten years			–				–				–				–								–				1				17.0				2.84
Total		$	402			$	408				3.6				3.49	%						$	5			$	8				4.4				2.93	%
Obligations of State and Political Subdivisions (b) (c)
Maturing in one year or less		$	238			$	242				.6				5.70	%						$	–			$	–				.2				6.24	%
Maturing after one year through five years			583				587				3.5				4.62								1				1				3.4				6.67
Maturing after five years through ten years			3,886				3,818				8.2				4.37								5				6				7.5				2.01
Maturing after ten years			2,140				1,961				19.0				4.11								–				–				–				–
Total		$	6,847			$	6,608				10.9				4.35	%						$	6			$	7				7.0				2.55	%
Other
Maturing in one year or less		$	–			$	–				–				–	%						$	9			$	9				.1				3.21	%
Maturing after one year through five years			–				–				–				–								12				12				1.2				3.08
Maturing after five years through ten years			–				–				–				–								–				–				–				–
Maturing after ten years			–				–				–				–								–				–				–				–
Total		$	–			$	–				–				–	%						$	21			$	21				.7				3.14	%
Total investment securities (d)		$	66,916			$	64,912				5.6				2.43	%						$	46,046			$	44,332				5.4				2.36	%

 

(a)	Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities that take into account anticipated 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, and yield to maturity if the security is 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 the contractual maturity date for securities with a fair value equal to or below par.

(d)	The weighted-average maturity of the available-for-sale investment securities was 5.1 years at December 31, 2017, with a corresponding weighted-average yield of 2.25 percent.

The weighted-average maturity of the held-to-maturity investment securities was 4.7 years at December 31, 2017, with a corresponding weighted-average yield of 2.14 percent.

(e)

Weighted-average yields for obligations of state and political subdivisions are presented on a fully-taxable equivalent basis based on a federal income tax rate of 21 percent for 2018 and 35 percent for 2017. 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.

 

		September 30, 2018												December 31, 2017
(Dollars in Millions)		Amortized Cost				Percent of Total								Amortized Cost				Percent of Total
U.S. Treasury and agencies		$	25,288				22.4	%						$	28,767				25.5	%
Mortgage-backed securities			80,393				71.2								77,606				68.6
Asset-backed securities			407				.3								419				.4
Obligations of state and political subdivisions			6,853				6.1								6,246				5.5
Other			21				–								41				–
Total investment securities		$	112,962				100.0	%						$	113,079				100.0	%

 

U.S. Bancorp		7

The Company’s available-for-sale securities are carried at fair value with changes in fair value reflected in other comprehensive income (loss) unless a security is deemed to be other-than-temporarily impaired. At September 30, 2018, the Company’s net unrealized losses on available-for-sale securities were $2.0 billion, compared with $580 million at December 31, 2017. The unfavorable change in net unrealized gains (losses) was primarily due to decreases in the fair value of U.S. Treasury, mortgage-backed and state and political securities as a result of changes in interest rates. Gross unrealized losses on available-for-sale securities totaled $2.1 billion at September 30, 2018, compared with $888 million at December 31, 2017. At September 30, 2018, 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.

Refer to Notes 3 and 14 in the Notes to Consolidated Financial Statements for further information on investment securities.

Deposits Total deposits were $331.2 billion at September 30, 2018, compared with $347.2 billion at December 31, 2017, the result of decreases in total savings deposits and noninterest-bearing deposits, partially offset by an increase in time deposits. Money market deposit balances decreased $7.3 billion (6.8 percent) at September 30, 2018, compared with December 31, 2017, primarily due to lower Wealth Management and Investment Services, Corporate and Commercial Banking, and Consumer and Business Banking balances. The decline in Corporate and Commercial Banking balances reflects expected run-off related to the business merger of a large financial customer. Interest checking balances decreased $4.7 billion (6.3 percent) at September 30, 2018, compared with December 31, 2017, primarily due to lower Wealth Management and Investment Services, and Corporate and Commercial Banking balances, partially offset by higher Consumer and Business Banking balances. Savings account balances increased $853 million (1.9 percent), primarily due to higher Consumer and Business Banking balances. Noninterest-bearing deposits decreased $10.4 billion (11.9 percent) at September 30, 2018, compared with December 31, 2017, primarily due to lower Wealth Management and Investment Services, and Corporate and Commercial Banking balances, partially offset by higher Consumer and Business Banking balances. Time deposits increased $5.6 billion (16.7 percent) at September 30, 2018, compared with December 31, 2017, driven by an increase in those deposits managed as an alternative to other funding sources such as wholesale borrowing, based largely on relative pricing and liquidity characteristics, along with higher Consumer and Business Banking balances.

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 $23.9 billion at September 30, 2018, compared with $16.7 billion at December 31, 2017. The $7.2 billion (43.3 percent) increase in short-term borrowings was due to higher federal funds purchased, repurchase agreement and other short-term borrowings balances, partially offset by lower commercial paper balances. Long-term debt was $40.9 billion at September 30, 2018, compared with $32.3 billion at December 31, 2017. The $8.6 billion (26.8 percent) increase was primarily due to issuances of $8.4 billion of bank notes and $1.3 billion of medium-term notes, partially offset by a $901 million decrease in Federal Home Loan Bank (“FHLB”) advances. 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, primarily through its Risk Management Committee, oversees performance relative to the risk management framework, risk appetite statements, and other policy requirements.

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

The Company’s most prominent risk exposures are credit, interest rate, market, liquidity, operational,

 

8		U.S. Bancorp

compliance, strategic, and reputational. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan, investment or derivative contract when it is due. Interest rate risk is the potential reduction of net interest income or market valuations as a result of changes in interest rates. Market risk arises from fluctuations in interest rates, foreign exchange rates, and security prices that may result in changes in the values of financial instruments, such as trading and available-for-sale securities, 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 the risk of loss due to 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. Strategic risk is the risk to current or projected financial condition arising from adverse business decisions, poor implementation of business decisions, or lack of responsiveness to changes in the banking industry and operating environment. 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, 2017, for a detailed discussion of these factors.

The Company’s Board of Directors 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 line 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 regularly provides 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 (“VaR”);

•

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

 

U.S. Bancorp		9

customer-specific concentrations), collateral values, trends in loan performance and macroeconomic factors, such as changes in unemployment rates, gross domestic product and consumer bankruptcy filings, as well as the potential impact on customers and the domestic economy resulting from new tariffs or increases in existing tariffs. 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 loans 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. 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, 2017, for a more detailed discussion on credit risk management processes.

The Company manages its credit risk, in part, through diversification of its loan portfolio which is achieved through limit setting by product type criteria, such as industry, and identification of credit 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.

The consumer lending segment represents loans and leases made to consumer customers, including residential mortgages, credit card loans, and other retail loans such as revolving consumer lines, auto loans and leases, home equity loans and lines, and student loans, a run-off portfolio. Home equity or second mortgage loans are junior lien closed-end accounts fully disbursed at origination. These loans typically are fixed rate loans, secured by residential real estate, with a 10- or 15-year fixed payment amortization schedule. Home equity lines are revolving accounts giving the borrower the ability to draw and repay balances repeatedly, up to a maximum commitment, and are secured by residential real estate. These include accounts in either a first or junior lien position. Typical terms on home equity lines in the portfolio are variable rates benchmarked to the prime rate, with a 10- or 15-year draw period during which a minimum payment is equivalent to the monthly interest, followed by a 20- or 10-year amortization period, respectively. At September 30, 2018, substantially all of the Company’s home equity lines were in the draw period. Approximately $1.4 billion, or 10 percent, of the outstanding home equity line balances at September 30, 2018, 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 credit scores, and in some cases, updated loan-to-value (“LTV”) information reflecting current market conditions 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

 

10		U.S. Bancorp

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, mobile and on-line banking, indirect lending, 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 mortgage originations are generally limited to prime borrowers and are performed through the Company’s branches, loan production offices, mobile and on-line services 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 of residential mortgages and home equity and second mortgages by LTV and borrower type at September 30, 2018:

 

Residential Mortgages (Dollars in Millions)		Interest Only				Amortizing				Total				Percent of Total
Loan-to-Value
Less than or equal to 80%		$	2,088			$	52,312			$	54,400				86.5	%
Over 80% through 90%			7				4,054				4,061				6.5
Over 90% through 100%			3				457				460				.7
Over 100%			1				451				452				.7
No LTV available			–				48				48				.1
Loans purchased from GNMA mortgage pools (a)			–				3,483				3,483				5.5
Total		$	2,099			$	60,805			$	62,904				100.0	%
Borrower Type
Prime borrowers		$	2,099			$	56,292			$	58,391				92.8	%
Sub-prime borrowers			–				727				727				1.2
Other borrowers			–				303				303				.5
Loans purchased from GNMA mortgage pools (a)			–				3,483				3,483				5.5
Total		$	2,099			$	60,805			$	62,904				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 United States Department of Veterans Affairs.

 

Home Equity and Second Mortgages (Dollars in Millions)		Lines				Loans				Total				Percent of Total
Loan-to-Value
Less than or equal to 80%		$	11,760			$	781			$	12,541				78.6	%
Over 80% through 90%			1,966				736				2,702				16.9
Over 90% through 100%			318				85				403				2.5
Over 100%			238				16				254				1.6
No LTV/CLTV available			55				11				66				.4
Total		$	14,337			$	1,629			$	15,966				100.0	%
Borrower Type
Prime borrowers		$	14,123			$	1,565			$	15,688				98.3	%
Sub-prime borrowers			42				57				99				.6
Other borrowers			172				7				179				1.1
Total		$	14,337			$	1,629			$	15,966				100.0	%

The total amount of consumer lending segment residential mortgage and home equity and second mortgage loans to customers that may be defined as sub-prime borrowers represented only 0.2 percent of the Company’s total assets at September 30, 2018 and December 31, 2017. The Company considers sub-prime loans to be those loans 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

 

U.S. Bancorp		11

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 $16.0 billion at September 30, 2018, compared with $16.3 billion at December 31, 2017, and included $4.3 billion of home equity lines in a first lien position and $11.7 billion of home equity and second mortgage loans and lines in a junior lien position. Loans and lines in a junior lien position at September 30, 2018, included approximately $4.9 billion of loans and lines for which the Company also serviced the related first lien loan, and approximately $6.8 billion where the Company did not service the related first lien loan. The Company was able to determine the status of the related first liens using information the Company has as the servicer of the first lien or information reported on customer credit bureau files. The Company also evaluates other indicators of credit risk for these junior lien loans and lines including delinquency, estimated average CLTV ratios and updated weighted-average credit scores in making its assessment of credit risk, related loss estimates and determining the allowance for credit losses.

The following table provides a summary of delinquency statistics and other credit quality indicators for the Company’s junior lien positions at September 30, 2018:

 

		Junior Liens Behind
(Dollars in Millions)		Company Owned or Serviced First Lien				Third Party First Lien				Total
Total		$	4,858			$	6,845			$	11,703
Percent 30-89 days past due			.35	%			.45	%			.41	%
Percent 90 days or more past due			.06	%			.08	%			.07	%
Weighted-average CLTV			71	%			67	%			69	%
Weighted-average credit score			779				775				777

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.

 

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

 

90 days or more past due excluding nonperforming loans		September 30, 2018				December 31, 2017
Commercial
Commercial			.07	%			.06	%
Lease financing			–				–
Total commercial			.06				.06
Commercial Real Estate
Commercial mortgages			–				–
Construction and development			.03				.05
Total commercial real estate			.01				.01
Residential Mortgages (a)			.19				.22
Credit Card			1.18				1.28
Other Retail
Retail leasing			.02				.03
Home equity and second mortgages			.32				.28
Other			.14				.15
Total other retail			.17				.17
Total loans, excluding covered loans			.19				.21
Covered Loans (b)			.86				4.74
Total loans			.20	%			.26	%
90 days or more past due including nonperforming loans		September 30, 2018				December 31, 2017
Commercial			.28	%			.31	%
Commercial real estate			.27				.37
Residential mortgages (a)			.69				.96
Credit card			1.18				1.28
Other retail			.49				.46
Total loans, excluding covered loans			.48				.57
Covered loans (b)			.86				4.93
Total loans			.48	%			.62	%

 

(a)

Delinquent loan ratios exclude $1.7 billion at September 30, 2018, and $1.9 billion December 31, 2017, of loans purchased from GNMA mortgage pools whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs. Including these loans, the ratio of residential mortgages 90 days or more past due including all nonperforming loans was 3.35 percent at September 30, 2018, and 4.16 percent at December 31, 2017.

(b)	Effective September 30, 2018, the Company transferred $1.3 billion of covered loans to loans held for sale. Included in the amount transferred were $108 million of loans 90 days or more past due and $6 million that were nonperforming.

 

12		U.S. Bancorp

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 $551 million at September 30, 2018, compared with $720 million at December 31, 2017. 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 United States Department of Veterans Affairs. Accruing loans 90 days or more past due are not included in nonperforming assets and continue to accrue interest because they are adequately secured by collateral, are in the process of collection and are reasonably expected to result in repayment or restoration to current status, or are managed in homogeneous portfolios with specified charge-off timeframes adhering to regulatory guidelines. The ratio of accruing loans 90 days or more past due to total loans was 0.20 percent at September 30, 2018, compared with 0.26 percent at December 31, 2017.

 

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

 

		Amount												As a Percent of Ending Loan Balances
(Dollars in Millions)		September 30, 2018				December 31, 2017								September 30, 2018				December 31, 2017
Residential Mortgages (a)
30-89 days		$	167			$	198								.27	%			.33	%
90 days or more			118				130								.19				.22
Nonperforming			317				442								.50				.74
Total		$	602			$	770								.96	%			1.29	%
Credit Card
30-89 days		$	309			$	302								1.42	%			1.37	%
90 days or more			259				284								1.18				1.28
Nonperforming			–				1								–				–
Total		$	568			$	587								2.60	%			2.65	%
Other Retail
Retail Leasing
30-89 days		$	32			$	33								.38	%			.41	%
90 days or more			2				2								.02				.03
Nonperforming			11				8								.13				.10
Total		$	45			$	43								.53	%			.54	%
Home Equity and Second Mortgages
30-89 days		$	71			$	78								.45	%			.48	%
90 days or more			51				45								.32				.28
Nonperforming			125				126								.78				.77
Total		$	247			$	249								1.55	%			1.53	%
Other (b)
30-89 days		$	262			$	265								.83	%			.80	%
90 days or more			44				48								.14				.15
Nonperforming			39				34								.12				.10
Total		$	345			$	347								1.09	%			1.05	%

 

(a)	Excludes $414 million of loans 30-89 days past due and $1.7 billion of loans 90 days or more past due at September 30, 2018, purchased from GNMA mortgage pools that continue to accrue interest, compared with $385 million and $1.9 billion at December 31, 2017, respectively.

(b)	Includes revolving credit, installment, automobile and student loans.

 

U.S. Bancorp		13

The following table provides summary delinquency information for covered loans:

 

		Amount												As a Percent of Ending Loan Balances
(Dollars in Millions)		September 30, 2018				December 31, 2017								September 30, 2018				December 31, 2017
30-89 days		$	6			$	50								.43	%			1.61	%
90 days or more			12				148								.86				4.74
Nonperforming			–				6								–				.19
Total (a)		$	18			$	204								1.29	%			6.54	%

 

(a)	Effective September 30, 2018, the Company transferred $1.3 billion of covered loans to loans held for sale. Included in the amount transferred were $42 million of loans 30-89 days past due, $108 million of loans 90 days or more past due and $6 million that were nonperforming.

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

Troubled Debt Restructurings Concessionary modifications are classified as TDRs unless the modification results in only an insignificant delay in the payments to be received. TDRs accrue interest if the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles, which is generally six months or greater. At September 30, 2018, performing TDRs were $3.9 billion, compared with $4.0 billion at December 31, 2017. 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 loans 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 modifies residential mortgage loans under Federal Housing Administration, United States Department of Veterans Affairs, and its own internal programs. Under these programs, the Company offers qualifying homeowners the opportunity to permanently modify their loan and achieve more affordable monthly payments by providing loan concessions. These 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

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

 

						As a Percent of Performing TDRs
At September 30, 2018 (Dollars in Millions)		Performing TDRs				30-89 Days Past Due				90 Days or More Past Due				Nonperforming TDRs				Total TDRs
Commercial		$	237				2.7	%			2.0	%		$	129	(a)		$	366
Commercial real estate			222				.6				–				36	(b)			258
Residential mortgages			1,430				3.1				4.2				224				1,654	(d)
Credit card			239				11.2				6.0				–				239
Other retail			134				6.6				6.6				49	(c)			183	(e)
TDRs, excluding GNMA and covered loans			2,262				3.9				3.9				438				2,700
Loans purchased from GNMA mortgage pools (g)			1,668				–				–				–				1,668	(f)
Covered loans			10				7.5				2.5				–				10
Total		$	3,940				2.2	%			2.2	%		$	438			$	4,378

 

(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 $299 million of residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $46 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

(e)	Includes $74 million of other retail loans to borrowers that have had debt discharged through bankruptcy and $12 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

(f)

Includes $195 million of Federal Housing Administration and United States Department of Veterans Affairs residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $398 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

(g)

Approximately 5.7 percent and 46.1 percent of the total TDR loans purchased from GNMA mortgage pools are 30-89 days past due and 90 days or more past due, respectively, but are not classified as delinquent as their repayments are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.

 

Short-term Modifications The Company makes short-term modifications that it does not consider to be TDRs, in limited circumstances, to assist borrowers experiencing temporary hardships. Consumer lending programs include payment reductions, deferrals of up to three past due payments, and the ability to return to current status if the borrower makes required payments. The Company may also make short-term modifications to commercial lending loans, with the most common modification being an extension of the maturity date of three months or less. Such extensions generally are used when the maturity date is imminent and the borrower is experiencing some level of financial stress, but the Company believes the borrower will pay all contractual amounts owed. Short-term modified loans were not material at September 30, 2018.

 

U.S. Bancorp		15

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 September 30, 2018, total nonperforming assets were $1.0 billion, compared with $1.2 billion at December 31, 2017. The $196 million (16.3 percent) decrease in nonperforming assets was driven by improvements in residential mortgages, commercial real estate loans, commercial loans and OREO, partially offset by increases in nonperforming other retail loans and other nonperforming assets. The ratio of total nonperforming assets to total loans and other real estate was 0.36 percent at September 30, 2018, compared with 0.43 percent at December 31, 2017.

OREO, excluding covered assets, was $100 million at September 30, 2018, compared with $141 million at December 31, 2017, 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 United States 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)		September 30, 2018				December 31, 2017								September 30, 2018				December 31, 2017
Residential
Illinois		$	11			$	14								.25	%			.32	%
New York			8				8								1.01				1.01
Minnesota			6				11								.10				.18
Wisconsin			5				8								.24				.38
Oregon			5				3								.15				.09
All other states			60				91								.10				.15
Total residential			95				135								.12				.18
Commercial
California			3				4								.01				.02
Idaho			1				1								.09				.07
All other states			1				1								–				–
Total commercial			5				6								–				–
Total		$	100			$	141								.04	%			.05	%

 

16		U.S. Bancorp