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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 March 31, 2017

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 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 ☑    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 ☐

(Do not check if a smaller reporting company)

  

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 April 30, 2017
Common Stock, $0.01 Par Value   1,685,283,199 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

       29  

e) Critical Accounting Policies

       31  

f) Controls and Procedures (Item 4)

       31  

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

       23  

i) Capital Management

       25  

3) Line of Business Financial Review

       26  

4) Financial Statements (Item 1)

       32  

Part II — Other Information

    

1) Legal Proceedings (Item 1)

       73  

2) Risk Factors (Item 1A)

       73  

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

       73  

4) Exhibits (Item 6)

       73  

5) Signature

       74  

6) Exhibits

       75  

“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, 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 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, 2016, 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)   2017     2016     Percent
Change
 

Condensed Income Statement

     

Net interest income

  $ 2,945     $ 2,835       3.9

Taxable-equivalent adjustment (a)

    50       53       (5.7

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

    2,995       2,888       3.7  

Noninterest income

    2,300       2,146       7.2  

Securities gains (losses), net

    29       3       *  

Total net revenue

    5,324       5,037       5.7  

Noninterest expense

    2,944       2,749       7.1  

Provision for credit losses

    345       330       4.5  

Income before taxes

    2,035       1,958       3.9  

Income taxes and taxable-equivalent adjustment

    549       557       (1.4

Net income

    1,486       1,401       6.1  

Net (income) loss attributable to noncontrolling interests

    (13     (15     13.3  

Net income attributable to U.S. Bancorp

  $ 1,473     $ 1,386       6.3  

Net income applicable to U.S. Bancorp common shareholders

  $ 1,387     $ 1,329       4.4  

Per Common Share

     

Earnings per share

  $ .82     $ .77       6.5

Diluted earnings per share

    .82       .76       7.9  

Dividends declared per share

    .280       .255       9.8  

Book value per share

    25.05       23.82       5.2  

Market value per share

    51.50       40.59       26.9  

Average common shares outstanding

    1,694       1,737       (2.5

Average diluted common shares outstanding

    1,701       1,743       (2.4

Financial Ratios

     

Return on average assets

    1.35     1.32  

Return on average common equity

    13.3       13.0    

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

    3.03       3.06    

Efficiency ratio (b)

    55.6       54.6    

Net charge-offs as a percent of average loans outstanding

    .50       .48    

Average Balances

     

Loans

  $ 273,158     $ 262,281       4.1

Loans held for sale

    3,625       3,167       14.5  

Investment securities (c)

    110,764       106,031       4.5  

Earning assets

    399,281       378,208       5.6  

Assets

    441,311       421,557       4.7  

Noninterest-bearing deposits

    80,738       78,569       2.8  

Deposits

    328,433       295,878       11.0  

Short-term borrowings

    13,201       27,399       (51.8

Long-term debt

    35,274       34,808       1.3  

Total U.S. Bancorp shareholders’ equity

    47,923       46,738       2.5  
    March 31,
2017
    December 31,
2016
       

Period End Balances

     

Loans

  $ 273,577     $ 273,207       .1

Investment securities

    110,424       109,275       1.1  

Assets

    449,522       445,964       .8  

Deposits

    336,873       334,590       .7  

Long-term debt

    35,948       33,323       7.9  

Total U.S. Bancorp shareholders’ equity

    47,798       47,298       1.1  

Asset Quality

     

Nonperforming assets

  $ 1,495     $ 1,603       (6.7 )% 

Allowance for credit losses

    4,366       4,357       .2  

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

    1.60     1.59  

Capital Ratios

     

Basel III transitional standardized approach:

     

Common equity tier 1 capital

    9.5     9.4  

Tier 1 capital

    11.0       11.0    

Total risk-based capital

    13.3       13.2    

Leverage

    9.1       9.0    

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

    11.8       12.2    

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

    9.2       9.1    

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

    11.5       11.7    

Tangible common equity to tangible assets (b)

    7.6       7.5    

Tangible common equity to risk-weighted assets (b)

    9.4       9.2          

 

  * Not meaningful
(a) Utilizes a tax rate of 35 percent 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 29.
(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.

 

2    U.S. Bancorp


Table of Contents

Management’s Discussion and Analysis

 

OVERVIEW

Earnings Summary U.S. Bancorp and its subsidiaries (the “Company”) reported net income attributable to U.S. Bancorp of $1.5 billion for the first quarter of 2017, or $0.82 per diluted common share, compared with $1.4 billion, or $0.76 per diluted common share, for the first quarter of 2016. Return on average assets and return on average common equity were 1.35 percent and 13.3 percent, respectively, for the first quarter of 2017, compared with 1.32 percent and 13.0 percent, respectively, for the first quarter of 2016.

Total net revenue for the first quarter of 2017 was $287 million (5.7 percent) higher than the first quarter of 2016, reflecting a 3.9 percent increase in net interest income (3.7 percent on a taxable-equivalent basis) and an 8.4 percent increase in noninterest income. The increase in net interest income from the first quarter of 2016 was mainly the result of loan growth. The noninterest income increase was driven by higher payment services revenue, trust and investment management fees and mortgage banking revenue.

Noninterest expense in the first quarter of 2017 was $195 million (7.1 percent) higher than the first quarter of 2016, due to increased compensation expense related to hiring to support business growth and compliance programs as well as merit increases and higher variable compensation expense.

The provision for credit losses for the first quarter of 2017 of $345 million was $15 million (4.5 percent) higher than the first quarter of 2016. Net charge-offs in the first quarter of 2017 were $335 million, compared with $315 million in the first quarter of 2016. 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 2017 was $3.0 billion, an increase of $107 million (3.7 percent) over the first quarter of 2016. The increase was principally driven by loan growth, partially offset by a lower net interest margin. Average earning assets were $21.1 billion (5.6 percent) higher than the first quarter of 2016, driven by increases of $10.9 billion (4.1 percent) in loans, $4.7 billion (4.5 percent) in investment securities and higher average cash balances. The net interest margin, on a taxable-equivalent basis, in the first quarter of 2017 was 3.03 percent, compared with 3.06 percent in the first quarter of 2016. The decrease in the net interest margin from the first quarter of 2016 reflected the net impact of loan mix, lower yield on securities purchased, higher rates paid on deposits, and a shift in interest-bearing liabilities mix. 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 2017 were $4.7 billion (4.5 percent) higher than the first quarter of 2016, primarily due to purchases of U.S. Treasury securities to support liquidity management, partially offset by a reduction in U.S. government agency-backed securities.

Average total loans were $10.9 billion (4.1 percent) higher in the first quarter of 2017 than the first quarter of 2016, due to growth in commercial loans (4.4 percent), residential mortgages (6.8 percent), other retail loans (5.3 percent), commercial real estate loans (1.8 percent) and credit card loans (3.0 percent). The increases were driven by higher demand for loans from new and existing customers. These increases were partially offset by a decline in loans covered by loss sharing agreements with the Federal Deposit Insurance Corporation (“FDIC”) (17.3 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 $3.7 billion in the first quarter of 2017, compared with $4.5 billion in the same period of 2016.

Average total deposits for the first quarter of 2017 were $32.6 billion (11.0 percent) higher than the first quarter of 2016. Average noninterest-bearing deposits increased $2.2 billion (2.8 percent) over the prior year, mainly in Consumer and Small Business Banking and Wealth Management and Securities Services. Average total savings deposits were $33.4 billion (18.2 percent) higher, the result of growth across all business lines. Average time deposits were $3.0 billion (9.0 percent) lower in the first quarter of 2017, compared with the same period of 2016. The decrease was 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.

 

U.S. Bancorp   3


Table of Contents
 Table 2  Noninterest Income

 

   

Three Months Ended

March 31,

 
(Dollars in Millions)   2017     2016     Percent
Change
 

Credit and debit card revenue

  $ 292     $ 266       9.8

Corporate payment products revenue

    179       170       5.3  

Merchant processing services

    378       373       1.3  

ATM processing services

    85       80       6.3  

Trust and investment management fees

    368       339       8.6  

Deposit service charges

    177       168       5.4  

Treasury management fees

    153       142       7.7  

Commercial products revenue

    207       197       5.1  

Mortgage banking revenue

    207       187       10.7  

Investment products fees

    40       40        

Securities gains (losses), net

    29       3       *  

Other

    214       184       16.3  

Total noninterest income

  $ 2,329     $ 2,149       8.4

 

* Not meaningful.

 

Provision for Credit Losses The provision for credit losses for the first quarter of 2017 was $345 million, an increase of $15 million (4.5 percent) over the first quarter of 2016. The provision for credit losses was $10 million higher than net-charge-offs in the first quarter of 2017, compared with $15 million higher than net charge-offs in the first quarter of 2016. The increase in the allowance for credit losses in the first quarter of 2017 was primarily driven by loan portfolio growth. Net charge-offs increased $20 million (6.3 percent) in the first quarter of 2017, compared with the same period of the prior year, primarily due to higher credit card loan and other retail loan net charge-offs, partially offset by lower net charge-offs related to commercial loans and residential mortgages. 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 2017 was $2.3 billion, an increase of $180 million (8.4 percent), compared with the first quarter of 2016. The increase from a year ago was driven by increases in payment services revenue, trust and investment management fees, mortgage banking and other revenue. Payment services revenue was higher principally due to an increase in credit and debit card revenue of $26 million (9.8 percent), reflecting higher sales volumes. Merchant processing services revenue increased $5 million (1.3 percent). Adjusted for the approximate $5 million impact of foreign currency rate changes, the increase would have been approximately 2.7 percent. Trust and investment management fees increased $29 million (8.6 percent), primarily due to improved market conditions and account growth, along with lower money market fee waivers. Mortgage banking revenue increased $20 million (10.7 percent) mainly due to the valuation of mortgage servicing rights (“MSRs”), net of hedging activities. Other income increased $30 million (16.3 percent) compared with the first quarter of 2016, primarily due to higher equity investment income in the first quarter of 2017.

Noninterest Expense Noninterest expense in the first quarter of 2017 was $2.9 billion, an increase of $195 million (7.1 percent), compared with the first quarter of 2016. The increase from a year ago was primarily due to higher compensation expense, employee benefits expense, marketing and business development expense and other expense. Compensation expense increased $142 million (11.4 percent), principally due to the impact of hiring to support business growth and compliance programs, merit increases and higher variable compensation. Employee benefits expense increased $14 million (4.7 percent), primarily driven by higher payroll taxes. Marketing and business development expense increased $13 million (16.9 percent) to support new business development. Other expense was $26 million (6.2 percent) higher, primarily reflecting the impact of the FDIC insurance surcharge, which began in the third quarter of 2016.

 

4    U.S. Bancorp


Table of Contents
 Table 3  Noninterest Expense

 

   

Three Months Ended

March 31,

 
(Dollars in Millions)   2017     2016     Percent
Change
 

Compensation

  $ 1,391     $ 1,249       11.4

Employee benefits

    314       300       4.7  

Net occupancy and equipment

    247       248       (.4

Professional services

    96       98       (2.0

Marketing and business development

    90       77       16.9  

Technology and communications

    235       233       .9  

Postage, printing and supplies

    81       79       2.5  

Other intangibles

    44       45       (2.2

Other

    446       420       6.2  

Total noninterest expense

  $ 2,944     $ 2,749       7.1

Efficiency ratio (a)

    55.6     54.6        

 

(a) See Non-GAAP Financial Measures beginning on page 29.

 

Income Tax Expense The provision for income taxes was $499 million (an effective rate of 25.1 percent) for the first quarter of 2017, compared with $504 million (an effective rate of 26.5 percent) for the first quarter of 2016. The decrease in the effective tax rate for the first quarter of 2017, compared with the first quarter of 2016, reflected the tax benefit associated with stock-based compensation under new accounting guidance, effective in the first quarter of 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 $273.6 billion at March 31, 2017, compared with $273.2 billion at December 31, 2016, an increase of $370 million (0.1 percent). The increase was driven primarily by higher commercial loans, residential mortgages and other retail loans, partially offset by lower credit card loans, commercial real estate loans and covered loans.

Commercial loans increased $1.1 billion (1.2 percent) at March 31, 2017, compared with December 31, 2016, reflecting higher demand from new and existing customers.

Residential mortgages held in the loan portfolio increased $992 million (1.7 percent), as origination activity exceeded customers paying down balances in the first quarter of 2017. Residential mortgages originated and placed in the Company’s loan portfolio include well-secured jumbo mortgages and branch-originated first lien home equity loans to borrowers with high credit quality.

Other retail loans increased $102 million (0.2 percent) at March 31, 2017, compared with December 31, 2016, primarily driven by higher retail leasing and installment loans, partially offset by decreases in home equity loans, student loans and revolving credit balances.

Credit card loans decreased $1.4 billion (6.3 percent) at March 31, 2017, compared with December 31, 2016, primarily the result of customers seasonally paying down balances.

Commercial real estate loans decreased $266 million (0.6 percent) at March 31, 2017, compared with December 31, 2016, primarily the result of customers paying down balances.

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

Loans Held for Sale Loans held for sale, consisting primarily of residential mortgages to be sold in the secondary market, were $2.7 billion at March 31, 2017, compared with $4.8 billion at December 31, 2016. The decrease in loans held for sale was principally due to a lower level of mortgage loan closings in the first quarter of 2017. 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 $110.4 billion at March 31, 2017, compared with $109.3 billion at December 31, 2016. The $1.1 billion (1.1 percent) increase was primarily due to $1.1 billion of net investment purchases.

 

U.S. Bancorp    5


Table of Contents
 Table 4  Investment Securities

 

    Available-for-Sale             Held-to-Maturity  

At March 31, 2017

(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

  $ 4,503      $ 4,500        .5        .84        $ 350      $ 350        .3        1.00

Maturing after one year through five years

    10,730        10,638        2.8        1.25            705        711        2.4        1.78  

Maturing after five years through ten years

    4,075        4,014        5.9        1.90            4,521        4,416        6.5        1.82  

Maturing after ten years

    1        1        10.4        4.15                                      

Total

  $ 19,309      $ 19,153        2.9        1.29            $ 5,576      $ 5,477        5.6        1.76

Mortgage-Backed Securities (a)

                          

Maturing in one year or less

  $ 144      $ 149        .7        4.19        $ 221      $ 223        .6        2.93

Maturing after one year through five years

    19,242        19,212        4.2        2.10            25,002        24,828        3.8        2.08  

Maturing after five years through ten years

    20,931        20,584        5.8        1.94            12,313        12,087        5.7        2.04  

Maturing after ten years

    2,189        2,195        12.1        1.89                239        240        11.4        1.80  

Total

  $ 42,506      $ 42,140        5.4        2.02            $ 37,775      $ 37,378        4.4        2.07

Asset-Backed Securities (a)

                          

Maturing in one year or less

  $      $                      $      $ 1        .8        1.88

Maturing after one year through five years

    351        356        3.0        4.33            5        6        2.6        1.60  

Maturing after five years through ten years

    85        87        5.7        2.64            3        4        6.8        1.75  

Maturing after ten years

                                               5        17.1        1.61  

Total

  $ 436      $ 443        3.5        4.00            $ 8      $ 16        4.3        1.67

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

                          

Maturing in one year or less

  $ 1,275      $ 1,287        .3        7.11        $      $        .1        8.21

Maturing after one year through five years

    476        501        3.0        6.23                          2.2        8.17  

Maturing after five years through ten years

    2,246        2,218        8.5        5.41            6        7        8.6        3.28  

Maturing after ten years

    1,356        1,250        19.0        5.07                                      

Total

  $ 5,353      $ 5,256        8.7        5.80            $ 6      $ 7        8.2        3.55

Other Debt Securities

                          

Maturing in one year or less

  $      $                      $ 6      $ 6        .2        2.10

Maturing after one year through five years

                                    22        22        3.3        1.90  

Maturing after five years through ten years

                                                          

Maturing after ten years

                                                              

Total

  $      $                          $ 28      $ 28        2.6        1.94

Other Investments

  $ 30      $ 39                          $      $              

Total investment securities (d)

  $ 67,634      $ 67,031        4.9        2.12            $ 43,393      $ 42,906        4.6        2.03

 

(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 5.1 years at December 31, 2016, with a corresponding weighted-average yield of 2.06 percent. The weighted-average maturity of the held-to-maturity investment securities was 4.6 years at December 31, 2016, with a corresponding weighted-average yield of 1.93 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, 2017             December 31, 2016  
(Dollars in Millions)   Amortized
Cost
     Percent
of Total
            Amortized
Cost
     Percent
of Total
 

U.S. Treasury and agencies

  $ 24,885        22.4        $ 22,560        20.5

Mortgage-backed securities

    80,281        72.3            81,698        74.3  

Asset-backed securities

    444        .4            483        .4  

Obligations of state and political subdivisions

    5,359        4.8            5,173        4.7  

Other debt securities and investments

    58        .1                62        .1  

Total investment securities

  $ 111,027        100.0            $ 109,976        100.0

 

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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, 2017, the Company’s net unrealized losses on available-for-sale securities were $603 million, compared with $701 million at December 31, 2016. The favorable change in net unrealized gains (losses) was primarily due to increases in the fair value of U.S. Treasury, U.S. government agency-backed and state and political securities as a result of changes in interest rates. Gross unrealized losses on available-for-sale securities totaled $903 million at March 31, 2017, compared with $1.0 billion at December 31, 2016. At March 31, 2017, 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 $336.9 billion at March 31, 2017, compared with $334.6 billion at December 31, 2016, the result of increases in total savings deposits and time deposits, partially offset by a decrease in noninterest-bearing deposits. Savings account balances increased $1.8 billion (4.4 percent), primarily due to higher Consumer and Small Business Banking balances. Interest checking balances increased $1.2 billion (1.9 percent) primarily due to higher Consumer and Small Business Banking, and Wholesale Banking and Commercial Real Estate balances, partially offset by lower corporate trust and broker-dealer balances. Money market deposit balances decreased $1.0 billion (0.9 percent) at March 31, 2017, compared with December 31, 2016, primarily due to lower Wholesale Banking and Commercial Real Estate balances, partially offset by higher Wealth Management and Securities Services balances. Time deposits increased $1.1 billion (3.6 percent) at March 31, 2017, compared with December 31, 2016, 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, partially offset by lower Consumer and Small Business Banking balances driven by maturities. Noninterest-bearing deposits decreased $875 million (1.0 percent) at March 31, 2017, compared with December 31, 2016, primarily due to lower Wholesale Banking and Commercial Real Estate, and Consumer and Small Business Banking balances, partially offset by higher Wealth Management and Securities Services 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 $12.2 billion at March 31, 2017, compared with $14.0 billion at December 31, 2016. The $1.8 billion (12.7 percent) decrease in short-term borrowings was primarily due to lower commercial paper balances, partially offset by higher other short-term borrowings balances. Long-term debt was $35.9 billion at March 31, 2017, compared with $33.3 billion at December 31, 2016. The $2.6 billion (7.9 percent) increase was primarily due to the issuances of $1.6 billion of bank notes and $1.5 billion of medium-term notes, partially offset by a $402 million decrease in Federal Home Loan Bank (“FHLB”) advances. Refer to the “Liquidity Risk Management” section for discussion of liquidity management of the Company.

 

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CORPORATE RISK PROFILE

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

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

The Company’s most prominent risk exposures are credit, interest rate, market, liquidity, operational, compliance, strategic, and reputational. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan, investment or derivative contract when it is due. Interest rate risk is the potential reduction of net interest income or market valuations as a result of changes in interest rates. Market risk arises from fluctuations in interest rates, foreign exchange rates, and security prices that may result in changes in the values of financial instruments, such as trading and available-for-sale securities, mortgage loans held for sale (“MLHFS”), 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, 2016, 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 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;

 

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  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 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 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. 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, 2016, for a more detailed discussion on credit risk management processes.

The Company manages its credit risk, in part, through diversification of its loan portfolio and limit setting by product type criteria and concentrations. As part of its normal business activities, the Company offers a broad array of lending products. The Company categorizes its loan portfolio into three segments, which is the level at which it develops and documents a systematic methodology to determine the allowance for credit losses. The Company’s three loan portfolio segments are commercial lending, consumer lending and covered loans.

The commercial lending segment includes loans and leases made to small business, middle market, large corporate, commercial real estate, financial institution, non-profit and public sector customers. Key risk characteristics relevant to commercial lending segment loans include the industry and geography of the borrower’s business, purpose of the loan, repayment source, borrower’s debt capacity and financial flexibility, loan covenants, and nature of pledged collateral, if any. These risk characteristics, among others, are considered in determining estimates about the likelihood of default by the borrowers and the severity of loss in the event of default. The Company considers these risk characteristics in assigning internal risk ratings to, or forecasting losses on, these loans which are the significant factors in determining the allowance for credit losses for loans in the commercial lending segment.

 

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Included within the commercial lending segment are energy loans, which represented 0.9 percent of the Company’s total loans outstanding at March 31, 2017. The effects of low energy prices beginning in late 2014, have resulted in higher than historical levels of criticized commitments and nonperforming assets at March 31, 2017 and December 31, 2016.

The following table provides a summary of the Company’s energy loans:

 

(Dollars in Millions)   March 31,
2017
    December 31,
2016
 

Loans outstanding

  $ 2,418     $ 2,642  

Total commitments

    10,704       10,955  

Total criticized commitments

    2,836       2,847  

Nonperforming assets

    182       257  

Allowance for credit losses as a percentage of loans outstanding

    7.8     7.8

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 March 31, 2017, substantially all of the Company’s home equity lines were in the draw period. Approximately $1.2 billion, or 8 percent, of the outstanding home equity line balances at March 31, 2017, will enter the amortization period within the next 36 months. Key risk characteristics relevant to consumer lending segment loans primarily relate to the borrowers’ capacity and willingness to repay and include unemployment rates and other economic factors, customer payment history and in some cases, updated LTV information on real estate based loans. These risk characteristics, among others, are reflected in forecasts of delinquency levels, bankruptcies and losses which are the primary factors in determining the allowance for credit losses for the consumer lending segment.

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

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

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

Residential mortgage originations are generally limited to prime borrowers and are performed through the Company’s branches, loan production offices, 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.

 

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The following tables provide summary information of residential mortgages and home equity and second mortgages by LTV and borrower type at March 31, 2017:

 

Residential Mortgages

(Dollars in Millions)

  Interest
Only
    Amortizing     Total     Percent
of Total
 

Loan-to-Value

       

Less than or equal to 80%

  $ 1,778     $ 46,978     $ 48,756       83.7

Over 80% through 90%

    29       3,903       3,932       6.7  

Over 90% through 100%

    18       991       1,009       1.7  

Over 100%

    9       788       797       1.4  

No LTV available

    2       61       63       .1  

Loans purchased from GNMA mortgage pools (a)

          3,709       3,709       6.4  

Total

  $ 1,836     $ 56,430     $ 58,266       100.0

Borrower Type

       

Prime borrowers

  $ 1,835     $ 51,360     $ 53,195       91.3

Sub-prime borrowers

          913       913       1.5  

Other borrowers

    1       448       449       .8  

Loans purchased from GNMA mortgage pools (a)

          3,709       3,709       6.4  

Total

  $ 1,836     $ 56,430     $ 58,266       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%

  $ 11,125     $ 567     $ 11,692       72.3

Over 80% through 90%

    2,300       667       2,967       18.3  

Over 90% through 100%

    771       146       917       5.7  

Over 100%

    429       35       464       2.9  

No LTV/CLTV available

    107       16       123       .8  

Total

  $ 14,732     $ 1,431     $ 16,163       100.0

Borrower Type

       

Prime borrowers

  $ 14,404     $ 1,332     $ 15,736       97.4

Sub-prime borrowers

    57       88       145       .9  

Other borrowers

    271       11       282       1.7  

Total

  $ 14,732     $ 1,431     $ 16,163       100.0

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 0.2 percent of the Company’s total assets at March 31, 2017 and December 31, 2016. The Company considers sub-prime loans to be those made to borrowers with a risk of default significantly higher than those approved for prime lending programs, as reflected in credit scores obtained from independent agencies at loan origination, in addition to other credit underwriting criteria. Sub-prime portfolios include only loans originated according to the Company’s underwriting programs specifically designed to serve customers with weakened credit histories. The sub-prime designation indicators have been and will continue to be subject to re-evaluation over time as borrower characteristics, payment performance and economic conditions change. The sub-prime loans originated during periods from June 2009 and after are with borrowers who met the Company’s program guidelines and have a credit score that generally is at or below a threshold of 620 to 650 depending on the program. Sub-prime loans originated during periods prior to June 2009 were based upon program level guidelines without regard to credit score.

Home equity and second mortgages were $16.2 billion at March 31, 2017, compared with $16.4 billion at December 31, 2016, and included $4.8 billion of home equity lines in a first lien position and $11.4 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, 2017, included approximately $4.7 billion of loans and lines for which the Company also serviced the related first lien loan, and approximately $6.7 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, 2017:

 

    Junior Liens Behind        
(Dollars in Millions)  

Company Owned
or Serviced

First Lien

    Third Party
First Lien
    Total  

Total

  $ 4,743     $ 6,671     $ 11,414  

Percent 30-89 days past due

    .26     .36     .32

Percent 90 days or more past due

    .07     .07     .07

Weighted-average CLTV

    74     70     72

Weighted-average credit score

    774       768       770  

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.

 

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

 

90 days or more past due excluding nonperforming loans   March 31,
2017
    December 31,
2016
 

Commercial

   

Commercial

    .06     .06

Lease financing

           

Total commercial

    .06       .06  

Commercial Real Estate

   

Commercial mortgages

          .01  

Construction and development

    .03       .05  

Total commercial real estate

    .01       .02  

Residential Mortgages (a)

    .24       .27  

Credit Card

    1.23       1.16  

Other Retail

   

Retail leasing

    .01       .02  

Home equity and second mortgages

    .24       .25  

Other

    .12       .13  

Total other retail (b)

    .14       .15  

Total loans, excluding covered loans

    .19       .20  

Covered Loans

    5.34       5.53  

Total loans

    .26     .28
90 days or more past due including nonperforming loans   March 31,
2017
    December 31,
2016
 

Commercial

    .52     .57

Commercial real estate

    .27       .31  

Residential mortgages (a)

    1.23       1.31  

Credit card

    1.24       1.18  

Other retail (b)

    .43       .45  

Total loans, excluding covered loans

    .67       .71  

Covered loans

    5.53       5.68  

Total loans

    .73     .78

 

(a) Delinquent loan ratios exclude $2.4 billion at March 31, 2017, and $2.5 billion at December 31, 2016, 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 5.39 percent at March 31, 2017, and 5.73 percent at December 31, 2016.
(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 .59 percent at March 31, 2017, and .63 percent at December 31, 2016.

 

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 $718 million ($524 million excluding covered loans) at March 31, 2017, compared with $764 million ($552 million excluding covered loans) at December 31, 2016. 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, 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 0.26 percent (0.19 percent excluding covered loans) at March 31, 2017, compared with 0.28 percent (0.20 percent excluding covered loans) at December 31, 2016.

 

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

 

    Amount              As a Percent of Ending
Loan Balances
 
(Dollars in Millions)   March 31,
2017
     December 31,
2016
             March 31,
2017
    December 31,
2016
 

Residential Mortgages (a)

              

30-89 days

  $ 120      $ 151             .21     .26

90 days or more

    142        156             .24       .27  

Nonperforming

    575        595                 .99       1.04  

Total

  $ 837      $ 902             1.44     1.57

Credit Card

              

30-89 days

  $ 252      $ 284             1.24     1.31

90 days or more

    251        253             1.23       1.16  

Nonperforming

    2        3                 .01       .01  

Total

  $ 505      $ 540             2.48     2.48

Other Retail

              

Retail Leasing

              

30-89 days

  $ 16      $ 18             .24     .28

90 days or more

    1        1             .01       .02  

Nonperforming

    3        2                 .04       .03  

Total

  $ 20      $ 21             .29     .33

Home Equity and Second Mortgages

              

30-89 days

  $ 55      $ 60             .33     .37

90 days or more

    38        41             .24       .25  

Nonperforming

    127        128                 .79       .78  

Total

  $ 220      $ 229             1.36     1.40

Other (b)

              

30-89 days

  $ 177      $ 206             .56     .66

90 days or more

    36        41             .12       .13  

Nonperforming

    27        27                 .09       .09  

Total

  $ 240      $ 274                 .77     .88

 

(a) Excludes $221 million of loans 30-89 days past due and $2.4 billion of loans 90 days or more past due at March 31, 2017, purchased from GNMA mortgage pools that continue to accrue interest, compared with $273 million and $2.5 billion at December 31, 2016, respectively.
(b) Includes revolving credit, installment, automobile and student loans.

 

The following table provides summary delinquency information for covered loans:

 

    Amount            As a Percent of Ending
Loan Balances
 
(Dollars in Millions)   March 31,
2017
    December 31,
2016
           March 31,
2017
    December 31,
2016
 

30-89 days

  $ 45     $ 55           1.24     1.43

90 days or more

    194       212           5.34       5.53  

Nonperforming

    7       6               .19       .16  

Total

  $ 246     $ 273               6.77     7.12

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. Performing TDRs were $4.2 billion at March 31, 2017 and December 31, 2016. 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 modifies residential mortgage loans under Federal Housing Administration, United States Department of Veterans Affairs, and its

 

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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.

 

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, 2017

(Dollars in Millions)

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

Commercial

  $ 345        3.5     1.5   $ 290 (a)    $ 635  

Commercial real estate

    153        2.0             18 (b)      171  

Residential mortgages

    1,631        2.3       3.6       401       2,032 (d) 

Credit card

    227        10.5       7.4       2 (c)      229  

Other retail

    122        3.7       4.7       47 (c)      169 (e) 

TDRs, excluding GNMA and covered loans

    2,478        3.3       3.5       758       3,236  

Loans purchased from GNMA mortgage pools (g)

    1,717                          1,717 (f) 

Covered loans

    29        1.3       8.1       5       34  

Total

  $ 4,224        1.9     2.1   $ 763     $ 4,987  

 

(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 $346 million of residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $66 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.
(e) Includes $83 million of other retail loans to borrowers that have had debt discharged through bankruptcy and $6 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.
(f) Includes $279 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 $635 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.
(g) Approximately 3.8 percent and 67.0 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.

 

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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, 2017.

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, 2017, total nonperforming assets were $1.5 billion, compared with $1.6 billion at December 31, 2016. The $108 million (6.7 percent) decrease in nonperforming assets was driven by improvements in commercial loans, commercial real estate, residential mortgages and other real estate. Nonperforming covered assets were $29 million at March 31, 2017, compared with $32 million at December 31, 2016. The ratio of total nonperforming assets to total loans and other real estate was 0.55 percent at March 31, 2017, compared with 0.59 percent at December 31, 2016.

OREO, excluding covered assets, was $155 million at March 31, 2017, compared with $186 million at December 31, 2016, 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)   March 31,
2017
    December 31,
2016
           March 31,
2017
    December 31,
2016
 

Residential

           

Illinois

  $ 12     $ 15           .28     .35

Minnesota

    11       12           .18       .19  

New York

    8       9           1.04       1.16  

Ohio

    8       9           .28       .31  

Washington

    8       8           .18       .19  

All other states

    99       122               .18       .22  

Total residential

    146       175           .20       .24  

Commercial

           

California

    4       4           .02       .02  

Tennessee

    1       1           .04       .04  

Idaho

    1                 .07        

New Jersey

    1       1           .04       .04  

New Mexico

                           

All other states

    2       5                      

Total  commercial

    9       11               .01       .01  

Total

  $ 155     $ 186               .06     .07

 

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 Table 6  Nonperforming Assets (a)

 

(Dollars in Millions)   March 31,
2017
    December 31,
2016
 

Commercial

   

Commercial

  $ 397     $ 443  

Lease financing

    42       40  

Total commercial

    439       483  

Commercial Real Estate

   

Commercial mortgages

    74       87  

Construction and development

    36       37  

Total commercial real estate

    110       124  

Residential Mortgages (b)

    575       595  

Credit Card

    2       3  

Other Retail

   

Retail leasing

    3       2  

Home equity and second mortgages

    127       128  

Other

    27       27  

Total other retail

    157       157  

Total nonperforming loans, excluding covered loans

    1,283       1,362  

Covered Loans

    7       6  

Total nonperforming loans

    1,290       1,368  

Other Real Estate (c)(d)

    155       186  

Covered Other Real Estate (d)

    22       26  

Other Assets

    28       23  

Total nonperforming assets

  $ 1,495     $ 1,603  

Total nonperforming assets, excluding covered assets

  $ 1,466     $ 1,571  

Excluding covered assets

   

Accruing loans 90 days or more past due (b)

  $ 524     $ 552  

Nonperforming loans to total loans

    .48     .51

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

    .54     .58

Including covered assets

   

Accruing loans 90 days or more past due (b)

  $ 718     $ 764  

Nonperforming loans to total loans

    .47     .50

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

    .55     .59

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, 2016

   $ 623     $ 948     $ 32     $ 1,603  

Additions to nonperforming assets

        

New nonaccrual loans and foreclosed properties

     138       106       3       247  

Advances on loans

     1                   1  

Total additions

     139       106       3       248  

Reductions in nonperforming assets

        

Paydowns, payoffs

     (120     (48     (1     (169

Net sales

     (7     (54     (5     (66

Return to performing status

     (3     (40           (43

Charge-offs (e)

     (66     (12           (78

Total reductions

     (196     (154     (6     (356

Net additions to (reductions in) nonperforming assets

     (57     (48     (3     (108

Balance March 31, 2017

   $ 566     $ 900     $ 29     $ 1,495  

 

(a) Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due.
(b) Excludes $2.4 billion and $2.5 billion at March 31, 2017, and December 31, 2016, 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 United States Department of Veterans Affairs.
(c) Foreclosed GNMA loans of $360 million and $373 million at March 31, 2017, and December 31, 2016, 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 United States 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.

 

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

 

    Three Months Ended
March 31,
 
     2017     2016  

Commercial

   

Commercial

    .33     .37

Lease financing

    .30       .38  

Total commercial

    .32       .37  

Commercial Real Estate

   

Commercial mortgages

    (.01     (.03

Construction and development

    (.03     (.11

Total commercial real estate

    (.02     (.05

Residential Mortgages

    .08       .14  

Credit Card

    3.70       3.26  

Other Retail

   

Retail leasing

    .19       .08  

Home equity and second mortgages

    (.02     .05  

Other

    .76       .69  

Total other retail

    .45       .43  

Total loans, excluding covered loans

    .50       .49  

Covered Loans

           

Total loans

    .50     .48

 

Analysis of Loan Net Charge-Offs Total loan net charge-offs were $335 million for the first quarter of 2017, compared with $315 million for the first quarter of 2016. The ratio of total loan net charge-offs to average loans outstanding on an annualized basis for the first quarter of 2017 was 0.50 percent, compared with 0.48 percent for the first quarter of 2016. The increase in net charge-offs for the first quarter of 2017, compared with the first quarter of 2016, reflected higher credit card and other retail loan net charge-offs, partially offset by lower net charge-offs related to commercial loans and residential mortgages.

Commercial and commercial real estate loan net charge-offs for the first quarter of 2017 were $73 million (0.22 percent of average loans outstanding on an annualized basis), compared with $78 million (0.24 percent of average loans outstanding on an annualized basis) for the first quarter of 2016.

Residential mortgage loan net charge-offs for the first quarter of 2017 were $12 million (0.08 percent of average loans outstanding on an annualized basis), compared with $19 million (0.14 percent of average loans outstanding on an annualized basis) for the first quarter of 2016. Credit card loan net charge-offs for the first quarter of 2017 were $190 million (3.70 percent of average loans outstanding on an annualized basis), compared with $164 million (3.26 percent of average loans outstanding on an annualized basis) for the first quarter of 2016. Other retail loan net charge-offs for the first quarter of 2017 were $60 million (0.45 percent of average loans outstanding on an annualized basis), compared with $54 million (0.43 percent of average loans outstanding on an annualized basis) for the first quarter of 2016.

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 16-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

 

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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, 2017, the Company serviced the first lien on 42 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 $323 million or 2.0 percent of the total home equity portfolio at March 31, 2017, 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 has been a small percentage of the total portfolio (approximately 1.1 percent annually), while the long-term average loss rate on loans that default has been approximately 90 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 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

 

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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 and other relevant business practices; results of internal review; 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, 2016, for further discussion on the analysis and determination of the allowance for credit losses.

At March 31, 2017, the allowance for credit losses was $4.4 billion (1.60 percent of period-end loans), compared with an allowance of $4.4 billion (1.59 percent of period-end loans) at December 31, 2016. The ratio of the allowance for credit losses to nonperforming loans was 338 percent at March 31, 2017, compared with 318 percent at December 31, 2016. The ratio of the allowance for credit losses to annualized loan net charge-offs was 321 percent at March 31, 2017, compared with 343 percent of full year 2016 net charge-offs at December 31, 2016.

 

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 Table 8  Summary of Allowance for Credit Losses

 

    Three Months Ended
March 31,
 
(Dollars in Millions)           2017             2016  

Balance at beginning of period

  $ 4,357     $ 4,306  

Charge-Offs

   

Commercial

   

Commercial

    90       104  

Lease financing

    6       7  

Total commercial

    96       111  

Commercial real estate

   

Commercial mortgages

    2       1  

Construction and development

    1       2  

Total commercial real estate

    3       3  

Residential mortgages

    17       23  

Credit card

    212       188  

Other retail

   

Retail leasing

    4       2  

Home equity and second mortgages

    8       9  

Other

    77       69  

Total other retail

    89       80  

Covered loans (a)

           

Total charge-offs

    417       405  

Recoveries

   

Commercial

   

Commercial

    19       26  

Lease financing

    2       2  

Total commercial

    21       28  

Commercial real estate

   

Commercial mortgages

    3       3  

Construction and development

    2       5  

Total commercial real estate

    5       8  

Residential mortgages

    5       4  

Credit card

    22       24  

Other retail

   

Retail leasing

    1       1  

Home equity and second mortgages

    9       7  

Other

    19       18  

Total other retail

    29       26  

Covered loans (a)

           

Total recoveries

    82       90  

Net Charge-Offs

   

Commercial

   

Commercial

    71       78  

Lease financing

    4       5  

Total commercial

    75       83  

Commercial real estate

   

Commercial mortgages

    (1     (2

Construction and development

    (1     (3

Total commercial real estate

    (2     (5

Residential mortgages

    12       19  

Credit card

    190       164  

Other retail

   

Retail leasing

    3       1  

Home equity and second mortgages

    (1     2  

Other

    58       51  

Total other retail

    60       54  

Covered loans (a)

           

Total net charge-offs

    335       315  

Provision for credit losses

    345       330  

Other changes (b)

    (1     (1

Balance at end of period (c)

  $ 4,366     $ 4,320  

Components

   

Allowance for loan losses

  $ 3,816     $ 3,853  

Liability for unfunded credit commitments

    550       467  

Total allowance for credit losses

  $ 4,366     $ 4,320  

Allowance for Credit Losses as a Percentage of

   

Period-end loans, excluding covered loans

    1.61     1.65

Nonperforming loans, excluding covered loans

    338       302  

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

    240       220  

Nonperforming assets, excluding covered assets

    296       255  

Annualized net charge-offs, excluding covered loans

    319       338  

Period-end loans

    1.60     1.63

Nonperforming loans

    338       303  

Nonperforming and accruing loans 90 days or more past due

    217       194  

Nonperforming assets

    292       251  

Annualized net charge-offs

    321       341  

 

(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, 2017 and 2016, $1.6 billion of the total allowance for credit losses related to incurred losses on credit card and other retail loans.

 

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Residual Value Risk Management The Company manages its risk to changes in the residual value of leased assets through disciplined residual valuation setting at the inception of a lease, diversification of its leased assets, regular residual asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. As of March 31, 2017, no significant change in the amount of residual values or concentration of the portfolios had occurred since December 31, 2016. 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, 2016, 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, 2016, 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, consumer protections 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, 2016, 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 and Liability Management 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. The Company has established policy limits within which it manages the overall interest rate risk profile, and at March 31, 2017 and December 31, 2016, the Company was within those limits. Table 9 summarizes the projected impact to net interest income over the next 12 months of various potential interest rate changes. The sensitivity of the projected impact to net interest income over the next 12 months is dependent on balance sheet growth, product mix, deposit behavior, pricing and funding decisions. While the Company utilizes assumptions based on historical information and expected behaviors, actual outcomes could vary significantly. For example, if deposit outflows are more limited (“stable”) than the assumptions the Company used in preparing Table 9, the projected impact to net interest income would increase to 2.00 percent in the “Up 50 basis point (“bps”)” and 3.78 percent in the “Up 200 bps” scenarios. 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, 2016, 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. A 200 bps increase would have resulted in a 2.0 percent decrease in the market value of equity at March 31, 2017, compared with a 1.9 percent decrease

 

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 Table 9  Sensitivity of Net Interest Income

 

    March 31, 2017             December 31, 2016  
     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

    (2.55 )%      1.37     *        1.73              (2.82 )%      1.52     *        1.82

 

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

 

at December 31, 2016. A 200 bps decrease, where possible given current rates, would have resulted in a 8.6 percent decrease in the market value of equity at March 31, 2017, compared with an 8.1 percent decrease at December 31, 2016. 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, 2016, 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 unfunded mortgage loan commitments, funded MLHFS and MSRs;
  To mitigate remeasurement volatility of foreign currency denominated balances; and
  To mitigate the volatility of the Company’s net investment in foreign operations driven by fluctuations in foreign currency exchange rates.

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

The Company does not designate all of the derivatives that it enters into for risk management purposes as accounting hedges because of the inefficiency of applying the accounting requirements and may instead elect fair value accounting for the related hedged items. In particular, the Company enters into interest rate swaps, swaptions, 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, 2017, the Company had $4.1 billion of forward commitments to sell, hedging $1.6 billion of MLHFS and $3.1 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, interest rate 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

 

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

  2017      2016  

Average

  $ 1      $ 1  

High

    1        1  

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, 2017 and 2016. 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)

  2017      2016  

Average

  $ 4      $ 4  

High

    5        5  

Low

    3        3  

Period-end

    5        4  

Valuations of positions in the client derivatives and foreign currency transaction businesses are based on discounted 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)

  2017      2016  

Residential Mortgage Loans Held For Sale and Related Hedges

    

Average

  $      $  

High

    1        2  

Low

            

Mortgage Servicing Rights and Related Hedges

    

Average

  $ 9      $ 7  

High

    10        8  

Low

    7        4  

Liquidity Risk Management The Company’s liquidity risk management process is designed to identify, measure, and

 

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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 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 liquidity sources include cash at the Federal Reserve Bank and certain European central banks, unencumbered liquid assets, and capacity to borrow at the FHLB and the Federal Reserve Bank’s Discount Window. At March 31, 2017, the fair value of unencumbered available-for-sale and held-to-maturity investment securities totaled $101.9 billion, compared with $100.6 billion at December 31, 2016. 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 practice of pledging loans to access secured borrowing facilities through the FHLB and Federal Reserve Bank. At March 31, 2017, the Company could have borrowed an additional $88.2 billion at the FHLB and Federal Reserve Bank based on collateral available for additional borrowings.

The Company’s diversified deposit base provides a sizeable source of relatively stable and low-cost funding, while reducing the Company’s reliance on the wholesale markets. Total deposits were $336.9 billion at March 31, 2017, compared with $334.6 billion at December 31, 2016. 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 $35.9 billion at March 31, 2017, and is an important funding source because of its multi-year borrowing structure. Short-term borrowings were $12.2 billion at March 31, 2017, 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, 2017, parent company long-term debt outstanding was $14.5 billion, compared with $13.0 billion at December 31, 2016. The increase was primarily due to the issuance of $1.5 billion of medium-term notes. As of March 31, 2017, there was $1.3 billion of parent company debt scheduled to mature in the remainder of 2017.

The Company is subject to a regulatory Liquidity Coverage Ratio (“LCR”) requirement which 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, 2017, the Company was compliant with this requirement.

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, 2016, for further discussion on liquidity risk management.

European Exposures 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 typically with certain European central banks. For deposits placed at other European banks, 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, 2017, the Company had an aggregate amount on deposit with European banks of approximately $7.4 billion, predominately with the Central Bank of Ireland and Bank of England.

In addition, the Company provides financing to domestic multinational corporations that generate revenue from customers in European countries, transacts with various European banks as counterparties to certain

 

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derivative-related activities, and through a subsidiary, manages money market funds that hold certain investments in European sovereign debt. Any deterioration in economic conditions in Europe is unlikely to have a significant effect on the Company related to these activities.

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, 2017 and December 31, 2016. 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 exposure, which includes both on- and off-balance sheet exposures. At March 31, 2017, the Company’s SLR exceeded the applicable minimum SLR requirement.

Total U.S. Bancorp shareholders’ equity was $47.8 billion at March 31, 2017, compared with $47.3 billion at December 31, 2016. The increase was primarily the result of corporate earnings, a preferred stock issuance and changes in unrealized gains and losses on available-for-sale investment securities included in other comprehensive income (loss). This increase was partially offset by common share repurchases, dividends and the call of $1.1 billion of preferred stock, reflected in other liabilities at March 31, 2017. Issuance costs related to the preferred stock called by the Company reduced net income applicable to U.S. Bancorp common shareholders by $10 million in the first quarter of 2017.

The Company believes certain capital ratios in addition to statutory regulatory capital ratios are useful

 

 Table 10  Regulatory Capital Ratios

 

(Dollars in Millions)   March 31,
2017
    December 31,
2016
 

Basel III transitional standardized approach:

   

Common equity tier 1 capital

  $ 33,847     $ 33,720  

Tier 1 capital

    39,374       39,421  

Total risk-based capital

    47,279       47,355  

Risk-weighted assets

    356,373       358,237  

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

    9.5     9.4

Tier 1 capital as a percent of risk-weighted assets

    11.0       11.0  

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

    13.3       13.2  

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

    9.1       9.0  

Basel III transitional advanced approaches:

   

Common equity tier 1 capital

  $ 33,847     $ 33,720  

Tier 1 capital

    39,374       39,421  

Total risk-based capital

    44,304       44,264  

Risk-weighted assets

    285,963       277,141  

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

    11.8     12.2

Tier 1 capital as a percent of risk-weighted assets

    13.8       14.2  

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

    15.5       16.0  

 

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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 7.6 percent and 9.4 percent, respectively, at March 31, 2017, compared with 7.5 percent and 9.2 percent, respectively, at December 31, 2016. The Company’s common equity tier 1 capital to risk-weighted assets ratio using the Basel III standardized approach as if fully implemented was 9.2 percent at March 31, 2017, compared with 9.1 percent at December 31, 2016. The Company’s common equity tier 1 capital to risk-weighted assets ratio using the Basel III advanced approaches as if fully implemented was 11.5 percent at March 31, 2017, compared with 11.7 percent at December 31, 2016.

On June 29, 2016, the Company announced its Board of Directors had approved an authorization to repurchase up to $2.6 billion of its common stock, from July 1, 2016 through June 30, 2017.

The following table provides a detailed analysis of all shares purchased by the Company or any affiliated purchaser during the first quarter of 2017:

 

Period   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
(In Millions)
 

January

    5,349,756  (b)    $ 52.03       5,274,756     $ 1,018  

February

    4,137,128  (c)      54.35       4,087,128       795  

March

    1,986,368  (d)      54.11       1,911,368       692  

Total

    11,473,252  (e)    $ 53.23       11,273,252     $ 692  

 

(a) All shares were purchased under the stock repurchase program announced on June 29, 2016.
(b) Includes 75,000 shares of common stock purchased, at an average price per share of $51.86, 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.
(c) Includes 50,000 shares of common stock purchased, at an average price per share of $53.03, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the Company’s Employee Retirement Savings Plan.
(d) Includes 75,000 shares of common stock purchased, at an average price per share of $54.22, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the Company’s Employee Retirement Savings Plan.
(e) Includes 200,000 shares of common stock purchased, at an average price per share of $53.04, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the Company’s Employee Retirement Savings 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, 2016, 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, 2016, 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 2017, certain organization and methodology changes were made and, accordingly, 2016 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 services, 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 $259 million of the Company’s net income in the first quarter of 2017, or an increase of $141 million compared with the first quarter of 2016. The increase was primarily due to a decrease in the provision for credit losses as well as an increase in net revenue, partially offset by an increase in noninterest expense.

Net revenue increased $93 million (12.7 percent) in the first quarter of 2017, compared with the first quarter of 2016. Net interest income, on a taxable-equivalent basis, increased $58 million (11.0 percent) in the first quarter of 2017, compared with the first quarter of 2016. The increase was primarily due to higher average loan and deposit balances along with the impact of higher margin benefit from deposits, partially offset by lower spread on loans reflecting a competitive marketplace. Noninterest income increased $35 million (17.0 percent) in the first quarter of 2017, compared with the first quarter of 2016, primarily due to higher capital markets volume and higher foreign currency customer activity.

Noninterest expense increased $36 million (10.3 percent) in the first quarter of 2017, compared with the

 

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first quarter of 2016, primarily due to an increase in variable costs allocated to manage the business, including the impact of the FDIC surcharge, and higher variable compensation. The provision for credit losses decreased $165 million (82.1 percent) in the first quarter of 2017, compared with the first quarter of 2016, primarily due to the impacts of reserve build for energy sector downgrades in the prior year, along with lower net charge-offs in the current year.

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. It encompasses community banking, metropolitan banking and indirect lending, as well as mortgage banking. Consumer and Small Business Banking contributed $295 million of the Company’s net income in the first quarter of 2017, or a decrease of $59 million (16.7 percent) compared with the first quarter of 2016. The decrease was due to an increase in the provision for credit losses and an increase in noninterest expense, partially offset by an increase in net revenue.

Net revenue increased $99 million (5.8 percent) in the first quarter of 2017, compared with the first quarter of 2016. Net interest income, on a taxable-equivalent basis, increased $65 million (5.6 percent) in the first quarter of 2017, compared with the first quarter of 2016. The increase was primarily due to higher average loan and deposit balances along with the impact of higher margin benefit from deposits, partially offset by lower spread on loans. Noninterest income increased $34 million (6.2 percent) in the first quarter of 2017, compared with the first quarter of 2016, reflecting higher mortgage banking revenue driven by the value of MSRs, net of hedging activities.

Noninterest expense increased $61 million (5.0 percent) in the first quarter of 2017, compared with the first quarter of 2016, primarily due to higher compensation and employee benefits expenses, reflecting the impact of increased staffing and merit increases, and higher net shared services expense, reflecting the impact of implementation costs of capital investments to support business growth. The provision for credit losses increased $132 million in the first quarter of 2017, compared with the first quarter of 2016. The increase was primarily due to the release of reserves in the first quarter of 2016 as a result of 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 $109 million of the Company’s net income in the first quarter of 2017, or an increase of $31 million (39.7 percent) compared with the first quarter of 2016. The increase was primarily due to an increase in net revenue, partially offset by an increase in noninterest expense.

Net revenue increased $81 million (16.3 percent) in the first quarter of 2017, compared with the first quarter of 2016. The increase was driven by higher net interest income, on a taxable-equivalent basis, of $62 million (53.0 percent), principally due to higher average loan and deposit balances along with the impact of higher margin benefit from deposits. Noninterest income increased $19 million (5.0 percent) principally due to improved market conditions and account growth, along with the impact of lower money market fee waivers.

Noninterest expense increased $28 million (7.4 percent) in the first quarter of 2017, compared with the first quarter of 2016. The increase was primarily the result of higher compensation and employee benefits expenses, reflecting the impact of higher staffing and merit increases, higher net shared services expense, and higher other expense including the impact of the FDIC surcharge.

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 $274 million of the Company’s net income in the first quarter of 2017, or a decrease of $13 million (4.5 percent) compared with the first quarter of 2016. The decrease was due to an increase in the provision for credit losses and an increase in noninterest expense, partially offset by an increase in net revenue.

Net revenue increased $63 million (4.7 percent) in the first quarter of 2017, compared with the first quarter of 2016. Net interest income, on a taxable-equivalent basis, increased $22 million (4.2 percent) in the first quarter of 2017, compared with the first quarter of 2016, primarily due to higher average loan balances and rates, in addition to higher fees. Noninterest income increased $41 million (5.0 percent) in the first quarter of 2017, compared with the first quarter of 2016, due to an increase in credit and debit card revenue, corporate payment products revenue and merchant processing services revenue driven by higher volumes.

Noninterest expense increased $37 million (5.4 percent) in the first quarter of 2017, compared with the first quarter of 2016, principally due to higher compensation and employee benefits expenses, reflecting

 

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)

 

2017

   

2016

   

Percent

Change

          

2017

    

2016

   

Percent

Change

        

Condensed Income Statement

                    

Net interest income (taxable-equivalent basis)

  $ 587     $ 529       11.0       $ 1,222      $ 1,157       5.6    

Noninterest income

    244       206       18.4           585        551       6.2      

Securities gains (losses), net

    (3           *                             

Total net revenue

    828       735       12.7           1,807        1,708       5.8      

Noninterest expense

    384       348       10.3           1,272        1,210       5.1      

Other intangibles

    1       1                 7        8       (12.5    

Total noninterest expense

    385       349       10.3           1,279        1,218       5.0      

Income before provision and income taxes

    443       386       14.8           528        490       7.8      

Provision for credit losses

    36       201       (82.1         65        (67     *      

Income before income taxes

    407       185       *           463        557       (16.9    

Income taxes and taxable-equivalent adjustment

    148       67       *           168        203       (17.2    

Net income

    259       118       *           295        354       (16.7    

Net (income) loss attributable to noncontrolling interests

                                            

Net income attributable to U.S. Bancorp

  $ 259     $ 118       *         $ 295      $ 354       (16.7    

Average Balance Sheet

                    

Commercial

  $ 72,413     $ 69,496       4.2       $ 9,915      $ 10,048       (1.3 )%     

Commercial real estate

    21,305       20,644       3.2           18,555        18,025       2.9      

Residential mortgages

    8       6       33.3           55,248        52,126       6.0      

Credit card

                                            

Other retail

    1       2       (50.0         51,689        49,004       5.5      

Total loans, excluding covered loans

    93,727       90,148       4.0           135,407        129,203       4.8      

Covered loans

                          3,717        4,466       (16.8    

Total loans

    93,727       90,148       4.0           139,124        133,669       4.1      

Goodwill

    1,647       1,647                 3,681        3,681            

Other intangible assets

    15       18       (16.7         2,768        2,513       10.1      

Assets

    102,308       98,444       3.9           153,666        148,019       3.8      

Noninterest-bearing deposits

    36,882       36,702       .5           26,974        25,965       3.9      

Interest checking

    9,256       6,861       34.9           46,320        42,141       9.9      

Savings products

    48,804       35,823       36.2           59,895        56,127       6.7      

Time deposits

    12,431       12,120       2.6           13,260        14,649       (9.5    

Total deposits

    107,373       91,506       17.3           146,449        138,882       5.4      

Total U.S. Bancorp shareholders’ equity

    9,680       8,817       9.8               11,523        11,019       4.6          

 

* Not meaningful

 

higher staffing to support business investment and compliance programs and merit increases, as well as higher net shared services expense. The provision for credit losses increased $49 million (25.5 percent) in the first quarter of 2017, compared with the first quarter of 2016, due to higher net charge-offs and an unfavorable change in the reserve allocation.

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 $536 million in the first quarter of 2017, compared with $549 million in the first quarter of 2016. The $13 million (2.4 percent) decrease in net income in the first quarter of 2017 from the same period of the prior year was primarily due to a decrease in net revenue and an increase in noninterest expense.

Net revenue decreased $49 million (6.5 percent) in the first quarter of 2017, compared with the first quarter of 2016. Net interest income, on a taxable-equivalent basis, decreased $100 million (17.9 percent) in the first quarter of 2017, compared with the first quarter of 2016, principally due to the impact of higher margin benefits on deposits credited to the business lines, partially offset by growth in the investment portfolio. Total noninterest income increased $51 million (25.9 percent) in the first quarter of 2017, compared with the first quarter of 2016, mainly due to income from equity investments and higher gains on investment securities.

Noninterest expense increased $33 million (27.5 percent) in the first quarter of 2017, compared with the first quarter of 2016, principally due to higher compensation expense, reflecting the impact of increased staffing and merit increases including variable compensation. The increase in compensation expense was partially offset by lower net shared services expense. The provision for credit losses was $4 million (66.7 percent) lower in the first quarter of 2017, compared with the first quarter of 2016, due to lower net charge-offs and a favorable change in the reserve allocation.

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

 

28    U.S. Bancorp


Table of Contents

 

      

Wealth Management and

Securities Services

   

Payment

Services

          

Treasury and

Corporate Support

          

Consolidated

Company

 
      

2017

   

2016

   

Percent

Change

          

2017

          

2016

   

Percent

Change

          

2017

   

2016

   

Percent

Change

          

2017

   

2016

   

Percent

Change

 
                                     
  $ 179     $ 117       53.0       $ 549       $ 527       4.2       $ 458     $ 558       (17.9 )%        $ 2,995     $ 2,888       3.7
    398       379       5.0           857         816       5.0           216       194       11.3           2,300       2,146       7.2  
                                                              32       3       *           29       3       *  
    577       496       16.3           1,406         1,343       4.7           706       755       (6.5         5,324       5,037       5.7  
    399       370       7.8           692         656       5.5           153       120       27.5           2,900       2,704       7.2  
          5       6       (16.7         31               30       3.3                                 44       45       (2.2
          404       376       7.4           723               686       5.4           153       120       27.5           2,944       2,749       7.1  
    173       120       44.2           683         657       4.0           553       635       (12.9         2,380       2,288       4.0  
          1       (2     *           241               192       25.5           2       6       (66.7         345       330       4.5  
    172       122       41.0           442         465       (4.9         551       629       (12.4         2,035       1,958       3.9  
          63       44       43.2           161               169       (4.7         9       74       (87.8         549       557       (1.4
    109       78       39.7           281         296       (5.1         542       555       (2.3         1,486       1,401       6.1  
                                (7             (9     22.2           (6     (6               (13     (15     13.3  
        $ 109     $ 78       39.7         $ 274             $ 287       (4.5       $ 536     $ 549       (2.4       $ 1,473     $ 1,386       6.3  
                                     
  $ 3,189     $ 2,894       10.2       $ 7,611       $ 7,022       8.4       $ 611     $ 360       69.7       $ 93,739     $ 89,820       4.4
    510       534       (4.5                                 2,788       3,198       (12.8         43,158       42,401       1.8  
    2,644       2,076       27.4                                                         57,900       54,208       6.8  
                          20,845         20,244       3.0                                 20,845       20,244       3.0  
          1,614       1,540       4.8           480               551       (12.9                               53,784       51,097       5.3  
    7,957       7,044       13.0           28,936         27,817       4.0           3,399       3,558       (4.5         269,426       257,770       4.5  
                                                              15       45       (66.7         3,732       4,511       (17.3
    7,957       7,044       13.0           28,936         27,817       4.0           3,414       3,603       (5.2         273,158       262,281       4.1  
    1,566       1,567       (.1         2,453         2,464       (.4                               9,347       9,359       (.1
    87       109       (20.2         437         508       (14.0                               3,307       3,148       5.1  
    11,437       10,285       11.2           34,588         33,999       1.7           139,312       130,810       6.5           441,311       421,557       4.7  
    13,862       12,889       7.5           1,024         961       6.6           1,996       2,052       (2.7         80,738       78,569       2.8  
    10,065       8,864       13.5                                   40       44       (9.1         65,681       57,910       13.4  
    42,116       33,176       26.9           99         95       4.2           454       491       (7.5         151,368       125,712       20.4  
          4,756       3,545       34.2                                         199       3,373       (94.1         30,646       33,687       (9.0
    70,799       58,474       21.1           1,123         1,056       6.3           2,689       5,960       (54.9         328,433       295,878       11.0  
          2,402       2,374       1.2               6,407               6,326       1.3               17,911       18,202       (1.6             47,923       46,738       2.5  

 

NON-GAAP FINANCIAL MEASURES

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

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

These capital measures are viewed by management as useful additional methods of reflecting the level of capital available to withstand unexpected negative 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 of the currently effective ratios, which are subject to certain transitional provisions, temporarily excludes a portion of unrealized gains and losses related to available-for-sale securities and retirement plan obligations, and includes a portion of capital related to intangible assets, other than MSRs. These capital 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 capital measures disclosed by the Company may be considered non-GAAP financial measures.

The Company also discloses net interest income and related ratios and analysis on a taxable-equivalent basis, which may also be considered non-GAAP financial measures. The Company believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison of net interest income arising from taxable and tax-exempt sources. In addition, certain performance measures, including the efficiency ratio and net interest margin utilize net interest income on a taxable-equivalent basis.

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.

 

U.S. Bancorp    29


Table of Contents

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

 

(Dollars in Millions)  

March 31,

2017

    December 31,
2016
 

Total equity

  $ 48,433     $ 47,933  

Preferred stock

    (5,419     (5,501

Noncontrolling interests

    (635     (635

Goodwill (net of deferred tax liability) (1)

    (8,186     (8,203

Intangible assets, other than mortgage servicing rights

    (671     (712

Tangible common equity (a)

    33,522       32,882  

Tangible common equity (as calculated above)

    33,522       32,882  

Adjustments (2)

    (136     (55

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

    33,386       32,827  

Total assets

    449,522       445,964  

Goodwill (net of deferred tax liability) (1)

    (8,186     (8,203

Intangible assets, other than mortgage servicing rights

    (671     (712

Tangible assets (c)

    440,665       437,049  

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

    356,373       358,237  

Adjustments (3)

    4,731       4,027  

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

    361,104       362,264  

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

    285,963       277,141  

Adjustments (4)

    5,046       4,295  

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

    291,009       281,436  

Ratios

   

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

    7.6     7.5

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

    9.4       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)

    11.5       11.7  

 

   

Three Months Ended

March 31,

 
    2017     2016  

Net interest income

  $ 2,945     $ 2,835  

Taxable-equivalent adjustment (5)

    50       53  

Net interest income, on a taxable-equivalent basis

    2,995       2,888  

Net interest income, on a taxable-equivalent basis (as calculated above)

    2,995       2,888  

Noninterest income

    2,329       2,149  

Less: Securities gains (losses), net

    29       3  

Total net revenue, excluding net securities gains (losses) (g)

    5,295       5,034  

Noninterest expense (h)

    2,944       2,749  

Efficiency ratio (h)/(g)

    55.6     54.6

 

(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.    
(5) Utilizes a tax rate of 35 percent for those assets and liabilities whose income or expense is not included for federal income tax purposes.    

 

30    U.S. Bancorp


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, 2016.

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.

 

U.S. Bancorp    31


Table of Contents

U.S. Bancorp

Consolidated Balance Sheet

 

(Dollars in Millions)   March 31,
2017
    December 31,
2016
 
    (Unaudited  

Assets

   

Cash and due from banks

  $ 20,319     $ 15,705  

Investment securities

   

Held-to-maturity (fair value $42,906 and $42,435, respectively)

    43,393       42,991  

Available-for-sale ($822 and $755 pledged as collateral, respectively) (a)

    67,031       66,284  

Loans held for sale (including $2,687 and $4,822 of mortgage loans carried at fair value, respectively)

    2,738       4,826  

Loans

   

Commercial

    94,491       93,386  

Commercial real estate

    42,832       43,098  

Residential mortgages

    58,266       57,274  

Credit card

    20,387       21,749  

Other retail

    53,966       53,864  

Total loans, excluding covered loans

    269,942       269,371  

Covered loans

    3,635       3,836  

Total loans

    273,577       273,207  

Less allowance for loan losses

    (3,816     (3,813

Net loans

    269,761       269,394  

Premises and equipment

    2,432       2,443  

Goodwill

    9,348       9,344  

Other intangible assets

    3,313       3,303  

Other assets (including $462 and $314 of trading securities at fair value pledged as collateral, respectively) (a)

    31,187       31,674  

Total assets

  $ 449,522     $ 445,964  

Liabilities and Shareholders’ Equity

   

Deposits

   

Noninterest-bearing

  $ 85,222     $ 86,097  

Interest-bearing (b)

    251,651       248,493  

Total deposits

    336,873       334,590  

Short-term borrowings

    12,183       13,963  

Long-term debt

    35,948       33,323  

Other liabilities

    16,085       16,155  

Total liabilities

    401,089       398,031  

Shareholders’ equity

   

Preferred stock

    5,419       5,501  

Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares; issued: 3/31/17 and 12/31/16 — 2,125,725,742 shares

    21       21  

Capital surplus

    8,388       8,440  

Retained earnings

    51,069       50,151  

Less cost of common stock in treasury: 3/31/17 — 433,951,270 shares; 12/31/16 — 428,813,585 shares

    (15,660     (15,280

Accumulated other comprehensive income (loss)

    (1,439     (1,535

Total U.S. Bancorp shareholders’ equity

    47,798       47,298  

Noncontrolling interests

    635       635  

Total equity

    48,433       47,933  

Total liabilities and equity

  $ 449,522     $ 445,964  

 

(a) Includes only collateral pledged by the Company where counterparties have the right to sell or pledge the collateral.
(b) lncludes time deposits greater than $250,000 balances of $3.7 billion and $3.0 billion at March 31, 2017 and December 31, 2016, respectively.

See Notes to Consolidated Financial Statements.

 

32    U.S. Bancorp


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U.S. Bancorp

Consolidated Statement of Income

 

    Three Months Ended
March 31,
 

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

(Unaudited)

          2017             2016  

Interest Income

   

Loans

  $ 2,797     $ 2,644  

Loans held for sale

    35       31  

Investment securities

    530       517  

Other interest income

    38       29  

Total interest income

    3,400       3,221  

Interest Expense

   

Deposits

    199       139  

Short-term borrowings

    66       65  

Long-term debt

    190       182  

Total interest expense

    455       386  

Net interest income

    2,945       2,835  

Provision for credit losses

    345       330  

Net interest income after provision for credit losses

    2,600       2,505  

Noninterest Income

   

Credit and debit card revenue

    292       266  

Corporate payment products revenue

    179       170  

Merchant processing services

    378       373  

ATM processing services

    85       80  

Trust and investment management fees

    368       339  

Deposit service charges

    177       168  

Treasury management fees

    153       142  

Commercial products revenue

    207       197  

Mortgage banking revenue

    207       187  

Investment products fees

    40       40  

Securities gains (losses), net

   

Realized gains (losses), net

    29       3  

Total other-than-temporary impairment

          (2

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

          2  

Total securities gains (losses), net

    29       3  

Other

    214       184  

Total noninterest income

    2,329       2,149  

Noninterest Expense

   

Compensation

    1,391       1,249  

Employee benefits

    314       300  

Net occupancy and equipment

    247       248  

Professional services

    96       98  

Marketing and business development

    90       77  

Technology and communications

    235       233  

Postage, printing and supplies

    81       79  

Other intangibles

    44       45  

Other

    446       420  

Total noninterest expense

    2,944       2,749  

Income before income taxes

    1,985       1,905  

Applicable income taxes

    499       504  

Net income

    1,486       1,401  

Net (income) loss attributable to noncontrolling interests

    (13     (15

Net income attributable to U.S. Bancorp

  $ 1,473     $ 1,386  

Net income applicable to U.S. Bancorp common shareholders

  $ 1,387     $ 1,329  

Earnings per common share

  $ .82     $ .77  

Diluted earnings per common share

  $ .82     $ .76  

Dividends declared per common share

  $ .280     $ .255  

Average common shares outstanding

    1,694       1,737  

Average diluted common shares outstanding

    1,701       1,743  

See Notes to Consolidated Financial Statements.

 

U.S. Bancorp    33


Table of Contents

U.S. Bancorp

Consolidated Statement of Comprehensive Income

 

(Dollars in Millions)

(Unaudited)

  Three Months Ended
March 31,
 
          2017             2016  

Net income

  $ 1,486     $ 1,401  

Other Comprehensive Income (Loss)

   

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

    127       488  

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

          (2

Changes in unrealized gains and losses on derivative hedges

    7       (96

Foreign currency translation

    10       (16

Reclassification to earnings of realized gains and losses

    11       76  

Income taxes related to other comprehensive income (loss)

    (59     (175

Total other comprehensive income (loss)

    96       275  

Comprehensive income

    1,582       1,676  

Comprehensive (income) loss attributable to noncontrolling interests

    (13     (15

Comprehensive income attributable to U.S. Bancorp

  $ 1,569     $ 1,661  

See Notes to Consolidated Financial Statements.

 

34    U.S. Bancorp


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, 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  

Balance December 31, 2016

    1,697     $ 5,501     $ 21     $ 8,440     $ 50,151     $ (15,280   $ (1,535   $ 47,298     $ 635     $ 47,933  

Net income (loss)

            1,473           1,473       13       1,486  

Other comprehensive income (loss)

                96       96         96  

Preferred stock dividends

            (69         (69       (69

Common stock dividends

            (476         (476       (476

Issuance of preferred stock

      993                 993         993  

Call of preferred stock

      (1,075         (10         (1,085       (1,085

Issuance of common and treasury stock

    6           (107       220         113         113  

Purchase of treasury stock

    (11             (600       (600       (600

Distributions to noncontrolling interests

                        (13     (13

Stock option and restricted stock grants

                            55                               55               55  

Balance March 31, 2017

    1,692     $ 5,419     $ 21     $ 8,388     $ 51,069     $ (15,660   $ (1,439   $ 47,798     $ 635     $ 48,433  

See Notes to Consolidated Financial Statements.

 

U.S. Bancorp    35


Table of Contents

U.S. Bancorp

Consolidated Statement of Cash Flows

 

(Dollars in Millions)

(Unaudited)

  Three Months Ended
March 31,
 
  2017     2016  

Operating Activities

   

Net income attributable to U.S. Bancorp

  $ 1,473     $ 1,386  

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

   

Provision for credit losses

    345       330  

Depreciation and amortization of premises and equipment

    73       74  

Amortization of intangibles

    44       45  

(Gain) loss on sale of loans held for sale

    (116     (194

(Gain) loss on sale of securities and other assets

    (146     (90

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

    (7,802     (8,883

Proceeds from sales of loans held for sale

    9,968       8,198  

Other, net

    (649     395  

Net cash provided by operating activities

    3,190       1,261  

Investing Activities

   

Proceeds from sales of available-for-sale investment securities

    828       530  

Proceeds from maturities of held-to-maturity investment securities

    2,085       2,088  

Proceeds from maturities of available-for-sale investment securities

    2,786       3,212  

Purchases of held-to-maturity investment securities

    (2,500     (625

Purchases of available-for-sale investment securities

    (4,253     (6,183

Net increase in loans outstanding

    (250     (3,702

Proceeds from sales of loans

    439       299  

Purchases of loans

    (932     (658

Other, net

    76       150  

Net cash used in investing activities

    (1,721     (4,889

Financing Activities

   

Net increase in deposits

    2,283       5,950  

Net decrease in short-term borrowings

    (1,780     (4,100

Proceeds from issuance of long-term debt

    3,162       6,607  

Principal payments or redemption of long-term debt

    (473     (3,907

Proceeds from issuance of preferred stock

    993        

Proceeds from issuance of common stock

    112       33  

Repurchase of common stock

    (594     (568

Cash dividends paid on preferred stock

    (80     (66

Cash dividends paid on common stock

    (478     (447

Purchase of noncontrolling interests

          (40

Net cash provided by financing activities

    3,145       3,462  

Change in cash and due from banks

    4,614       (166

Cash and due from banks at beginning of period

    15,705       11,147  

Cash and due from banks at end of period

  $ 20,319     $ 10,981  

See Notes to Consolidated Financial Statements.

 

36    U.S. Bancorp


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, 2016. 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

Stock-Based Compensation Effective January 1, 2017, the Company adopted accounting guidance, issued by the Financial Accounting Standards Board (“FASB”) in March 2016, simplifying the accounting for stock-based compensation awards issued to employees. The guidance requires all excess tax benefits and deficiencies that pertain to stock-based compensation awards to be recognized within income tax expense instead of within capital surplus. The adoption of this guidance did not have a material impact on the Company’s financial statements.

Revenue Recognition In May 2014, the FASB issued accounting guidance, effective for the Company on January 1, 2018, clarifying the principles for recognizing revenue from certain contracts with customers. The guidance does not apply to revenue associated with financial instruments, such as loans and securities. The Company is currently evaluating the adoption of this guidance using either a fully retrospective approach, where the guidance would be applied to all periods presented in the financial statements, 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 expects the adoption of this guidance 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 requires lessees to recognize all leases on the Consolidated Balance Sheet as lease assets and lease liabilities based primarily on the present value of future lease payments. Lessor accounting is largely unchanged. A modified retrospective approach is required at adoption which requires all prior periods presented in the financial statements to be restated, with a cumulative effect adjustment to retained earnings as of the beginning of the earliest period presented. 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.

Financial Instruments—Credit Losses In June 2016, the FASB issued accounting guidance, effective for the Company no later than January 1, 2020, related to the impairment of financial instruments. This guidance changes existing impairment recognition to a model that is based on expected losses rather than incurred losses, which is intended to result in more timely recognition of credit losses. This guidance is also intended to reduce the complexity of current accounting guidance by decreasing the number of credit impairment models that entities use to account for debt instruments. A modified retrospective approach is required at adoption with a cumulative effect adjustment to retained earnings as of the adoption date. The guidance also requires additional credit quality disclosures for loans. The Company is currently evaluating the impact of this guidance on its financial statements, and expects its allowance for credit losses to increase upon adoption. The extent of this increase will continue to be evaluated and will depend on economic conditions and the composition of the Company’s loan portfolio at the time of adoption.

 

U.S. Bancorp    37


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, 2017            December 31, 2016  
                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

  $ 5,576     $ 14     $     $ (113   $ 5,477         $ 5,246     $ 12     $     $ (132   $ 5,126  

Mortgage-backed securities