EX-13 3 d445313dex13.htm 2012 ANNUAL REPORT, PAGES 20 THROUGH 154 AND 157 2012 Annual Report, pages 20 through 154 and 157

EXHIBIT 13

Management’s Discussion and Analysis

 

Overview

U.S. Bancorp and its subsidiaries (the “Company”) achieved record earnings in 2012, reflecting growth in net interest income and fee revenues, sound expense management and improved credit quality. The Company’s results demonstrated the strength of its diverse business model and prudent growth strategy, as it achieved these results during a year of modest economic growth and while absorbing the unfavorable impact of new regulation on both revenue and expense. The Company experienced solid growth in loans and deposits during 2012, as it continued to expand and deepen relationships with current customers, as well as acquire new customers and market share. The Company’s fee-based revenues also grew over the prior year, led by mortgage banking, which posted record production levels and earnings as a result of an expanded presence in the market and the favorable interest rate environment. With ongoing investments in its business line growth initiatives and small, strategic acquisitions, the Company remains positioned to continue to grow and leverage the expected slow, but steady, economic recovery.

The Company earned $5.6 billion in 2012, an increase of 15.9 percent over 2011. Growth in total net revenue of $1.2 billion (6.2 percent) was attributable to an increase in both net interest income and noninterest income. Net interest income increased as the result of higher average earning assets, continued growth in lower cost core deposit funding and the positive impact from long-term debt repricing. Noninterest income grew year-over-year as increases in mortgage banking revenue and other fee-based businesses were partially offset by expected decreases in revenue from recent legislative and regulatory actions. The Company’s total net charge-offs and nonperforming assets decreased throughout the year. The Company also continued to focus on effectively controlling expenses while making investments to increase revenue and enhance customer service, with an industry-leading efficiency ratio (the ratio of noninterest expense to taxable-equivalent net revenue, excluding net securities gains and losses) in 2012 of 51.5 percent. As a result, the Company’s return on average common equity was 16.2 percent, the highest among the Company’s peers.

With the Company’s growth in earnings during 2012, it continued to generate significant capital. The Company’s capital position remained strong. Using proposed rules for the Basel III standardized approach released June 2012, the Company’s Tier 1 common equity ratio was 8.1 percent at December 31, 2012 — above the Company’s targeted ratio of 8.0 percent and well above the minimum of 7.0 percent required in 2019 when these proposed rules are to be fully implemented. The Company had a Tier 1 common equity to risk-weighted assets ratio (using Basel I definition) of 9.0 percent and a Tier 1 capital ratio of 10.8 percent at December 31, 2012. In addition, at December 31, 2012, the Company’s total risk-based capital ratio was 13.1 percent, and its tangible common equity to risk-weighted assets ratio was 8.6 percent (refer to “Non-GAAP Financial Measures” for further information on the calculation of certain of these measures). Given the strength of its capital position and on-going ability to generate significant capital through earnings, the Company was able to return 62 percent of its earnings to common shareholders in the form of dividends and common share repurchases during 2012. Credit rating organizations rate the Company’s debt among the highest of its large domestic banking peers. This comparative financial strength provides the Company with favorable funding costs, strong liquidity and the ability to attract new customers, leading to growth in loans and deposits.

In 2012, the Company’s loans and deposits grew significantly. Average loans and deposits increased $13.9 billion (6.9 percent) and $22.6 billion (10.6 percent), respectively, over 2011. Loan growth reflected increases in commercial loans, including small business loans, residential mortgages, credit card loans and commercial real estate loans, partially offset by a modest decrease in other retail loans and a 19.3 percent decrease in loans covered by loss sharing agreements with the Federal Deposit Insurance Corporation (“FDIC”) (“covered” loans), which is a run-off portfolio. Deposit growth reflected the Company’s continued benefit from customer “flight-to-quality”.

The Company’s provision for credit losses decreased $461 million (19.7 percent) in 2012, compared with 2011. Net charge-offs decreased $746 million (26.2 percent) in 2012, compared with 2011, principally due to improvement in the commercial, commercial real estate and credit card portfolio classes. The provision for credit losses was $215 million less than net charge-offs in 2012, compared with $500 million less than net charge-offs in 2011.

 

20   U.S. BANCORP


  TABLE 1   Selected Financial Data

 

Year Ended December 31

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

  2012     2011     2010     2009     2008  

Condensed Income Statement

         

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

  $ 10,969      $ 10,348      $ 9,788      $ 8,716      $ 7,866   

Noninterest income

    9,334        8,791        8,438        8,403        7,789   

Securities gains (losses), net

    (15     (31     (78     (451     (978

Total net revenue

    20,288        19,108        18,148        16,668        14,677   

Noninterest expense

    10,456        9,911        9,383        8,281        7,348   

Provision for credit losses

    1,882        2,343        4,356        5,557        3,096   

Income before taxes

    7,950        6,854        4,409        2,830        4,233   

Taxable-equivalent adjustment

    224        225        209        198        134   

Applicable income taxes

    2,236        1,841        935        395        1,087   

Net income

    5,490        4,788        3,265        2,237        3,012   

Net (income) loss attributable to noncontrolling interests

    157        84        52        (32     (66

Net income attributable to U.S. Bancorp

  $ 5,647      $ 4,872      $ 3,317      $ 2,205      $ 2,946   

Net income applicable to U.S. Bancorp common shareholders

  $ 5,383      $ 4,721      $ 3,332      $ 1,803      $ 2,819   

Per Common Share

         

Earnings per share

  $ 2.85      $ 2.47      $ 1.74      $ .97      $ 1.62   

Diluted earnings per share

    2.84        2.46        1.73        .97        1.61   

Dividends declared per share

    .78        .50        .20        .20        1.70   

Book value per share

    18.31        16.43        14.36        12.79        10.47   

Market value per share

    31.94        27.05        26.97        22.51        25.01   

Average common shares outstanding

    1,887        1,914        1,912        1,851        1,742   

Average diluted common shares outstanding

    1,896        1,923        1,921        1,859        1,756   

Financial Ratios

         

Return on average assets

    1.65     1.53     1.16     .82     1.21

Return on average common equity

    16.2        15.8        12.7        8.2        13.9   

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

    3.58        3.65        3.88        3.67        3.66   

Efficiency ratio (b)

    51.5        51.8        51.5        48.4        46.9   

Net charge-offs as a percent of average loans outstanding

    .97        1.41        2.17        2.08        1.10   

Average Balances

         

Loans

  $ 215,374      $ 201,427      $ 193,022      $ 185,805      $ 165,552   

Loans held for sale

    7,847        4,873        5,616        5,820        3,914   

Investment securities (c)

    72,501        63,645        47,763        42,809        42,850   

Earning assets

    306,270        283,290        252,042        237,287        215,046   

Assets

    342,849        318,264        285,861        268,360        244,400   

Noninterest-bearing deposits

    67,241        53,856        40,162        37,856        28,739   

Deposits

    235,710        213,159        184,721        167,801        136,184   

Short-term borrowings

    28,549        30,703        33,719        29,149        38,237   

Long-term debt

    28,448        31,684        30,835        36,520        39,250   

Total U.S. Bancorp shareholders’ equity

    37,611        32,200        28,049        26,307        22,570   

Period End Balances

         

Loans

  $ 223,329      $ 209,835      $ 197,061      $ 194,755      $ 184,955   

Investment securities

    74,528        70,814        52,978        44,768        39,521   

Assets

    353,855        340,122        307,786        281,176        265,912   

Deposits

    249,183        230,885        204,252        183,242        159,350   

Long-term debt

    25,516        31,953        31,537        32,580        38,359   

Total U.S. Bancorp shareholders’ equity

    38,998        33,978        29,519        25,963        26,300   

Asset Quality

         

Nonperforming assets

  $ 2,671      $ 3,774      $ 5,048      $ 5,907      $ 2,624   

Allowance for credit losses

    4,733        5,014        5,531        5,264        3,639   

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

    2.12     2.39     2.81     2.70     1.97

Capital Ratios

         

Tier 1 capital

    10.8     10.8     10.5     9.6     10.6

Total risk-based capital

    13.1        13.3        13.3        12.9        14.3   

Leverage

    9.2        9.1        9.1        8.5        9.8   

Tangible common equity to tangible assets (d)

    7.2        6.6        6.0        5.3        3.3   

Tangible common equity to risk-weighted assets using Basel I definition (d)

    8.6        8.1        7.2        6.1        3.7   

Tier 1 common equity to risk-weighted assets using Basel I definition (d)

    9.0        8.6        7.8        6.8        5.1   

Tier 1 common equity to risk-weighted assets using Basel III proposals published prior to June 2012 (d)

           8.2        7.3                 

Tier 1 common equity to risk-weighted assets approximated using proposed rules for the Basel III standardized approach released June 2012 (d)

    8.1                            

 

(a) Presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding net securities gains (losses).
(c) Excludes unrealized gains and losses on available-for-sale investment securities and any premiums or discounts recorded related to the transfer of investment securities at fair value from available-for-sale to held-to-maturity.
(d) See Non-GAAP Financial Measures beginning on page 65.

 

U.S. BANCORP     21   


Earnings Summary The Company reported net income attributable to U.S. Bancorp of $5.6 billion in 2012, or $2.84 per diluted common share, compared with $4.9 billion, or $2.46 per diluted common share, in 2011. Return on average assets and return on average common equity were 1.65 percent and 16.2 percent, respectively, in 2012, compared with 1.53 percent and 15.8 percent, respectively, in 2011. The Company’s results for 2012 included an $80 million expense accrual for a mortgage foreclosure-related regulatory settlement. The results for 2011 included a $263 million gain from the settlement of litigation related to the termination of a merchant processing referral agreement (“merchant settlement gain”), a $46 million gain related to the acquisition of First Community Bank of New Mexico (“FCB”) and a $130 million expense accrual related to mortgage servicing matters. The provision for credit losses was $215 million lower than net charge-offs for 2012, compared with $500 million lower than net charge-offs for 2011.

Total net revenue, on a taxable-equivalent basis, for 2012 was $1.2 billion (6.2 percent) higher than 2011, reflecting a 6.0 percent increase in net interest income and a 6.4 percent increase in noninterest income. Net interest income increased in 2012 as a result of an increase in average earning assets, continued growth in lower cost core deposit funding and the positive impact from long-term debt repricing. Noninterest income increased primarily due to higher mortgage banking revenue, trust and investment management fees, merchant processing services revenue, and commercial products revenue, partially offset by the 2011 merchant settlement gain and lower debit card revenue as a result of legislative changes.

Total noninterest expense in 2012 increased $545 million (5.5 percent), compared with 2011, primarily due to higher compensation expense, employee benefits costs and mortgage servicing review-related professional services costs.

Acquisitions In January 2012, the Company acquired the banking operations of BankEast, a subsidiary of BankEast Corporation, from the FDIC. This transaction did not include a loss sharing agreement. The Company acquired approximately $261 million of assets and assumed approximately $252 million of deposits from the FDIC with this transaction.

In November 2012, the Company acquired the hedge fund administration servicing business of Alternative Investment Solutions, LLC. The Company recorded approximately $108 million of assets, including intangibles, and approximately $3 million of liabilities with this transaction.

In December 2012, the Company acquired FSV Payment Systems, Inc., a prepaid card program manager with a proprietary processing platform. The Company recorded approximately $243 million of assets, including intangibles, and approximately $28 million of liabilities with this transaction.

In January 2011, the Company acquired the banking operations of FCB from the FDIC. The FCB transaction did not include a loss sharing agreement. The Company acquired 38 branch locations and approximately $1.8 billion in assets, assumed approximately $2.1 billion in liabilities, and received approximately $412 million in cash from the FDIC. The Company recognized a $46 million gain on this transaction during the first quarter of 2011.

Statement of Income Analysis

Net Interest Income Net interest income, on a taxable-equivalent basis, was $11.0 billion in 2012, compared with $10.3 billion in 2011 and $9.8 billion in 2010. The $621 million (6.0 percent) increase in net interest income in 2012, compared with 2011, was primarily the result of growth in average earning assets and lower cost core deposit funding, as well as the positive impact from long-term debt repricing. Average earning assets were $23.0 billion (8.1 percent) higher in 2012 than in 2011, driven by increases in loans and investment securities. Average deposits increased $22.6 billion (10.6 percent) in 2012, compared with 2011. The net interest margin in 2012 was 3.58 percent, compared with 3.65 percent in 2011 and 3.88 percent in 2010. The decrease in the net interest margin in 2012, compared with 2011, reflected higher average balances in lower-yielding investment securities and lower loan rates, partially offset by lower rates on deposits and long-term debt, and the inclusion of credit card balance transfer fees in interest income beginning in the first quarter of 2012. Refer to the “Interest Rate Risk Management” section for further information on the sensitivity of the Company’s net interest income to changes in interest rates.

Average total loans were $215.4 billion in 2012, compared with $201.4 billion in 2011. The $13.9 billion (6.9 percent) increase was driven by growth in commercial loans, residential mortgages, credit card loans and commercial real estate loans, partially offset by decreases in other retail loans and covered loans. Average commercial loans increased $9.2 billion (17.9 percent) year-over-year, primarily driven by higher demand from new and existing customers. Average residential mortgages increased $6.6 billion (19.5 percent), reflecting higher origination and refinancing activity due to the low interest rate environment. Average credit card balances increased $569 million (3.5 percent) in 2012, compared with 2011, reflecting the impact of the purchase of a credit card portfolio in the fourth quarter of 2011, partially offset by a portfolio sale in the third quarter of 2012. Growth in average commercial real estate balances of $991 million (2.8 percent) was primarily due to higher demand from new and existing customers. The $261 million (.5 percent) decrease in average other retail loans was primarily due to lower home equity and second mortgage and student loan balances, partially offset by higher installment loan and retail leasing balances. Average covered loans decreased $3.1 billion (19.3 percent) in 2012, compared with 2011.

 

22   U.S. BANCORP


  TABLE 2   Analysis of Net Interest Income (a)

 

Year Ended December 31 (Dollars in Millions)   2012      2011      2010             2012
v 2011
     2011
v 2010
 

Components of Net Interest Income

                   

Income on earning assets (taxable-equivalent basis)

  $ 13,112       $ 12,870       $ 12,375             $ 242       $ 495   

Expense on interest-bearing liabilities (taxable-equivalent basis)

    2,143         2,522         2,587               (379      (65

Net interest income (taxable-equivalent basis)

  $ 10,969       $ 10,348       $ 9,788             $ 621       $ 560   

Net interest income, as reported

  $ 10,745       $ 10,123       $ 9,579             $ 622       $ 544   

Average Yields and Rates Paid

                   

Earning assets yield (taxable-equivalent basis)

    4.28      4.54      4.91            (.26 )%       (.37 )% 

Rate paid on interest-bearing liabilities (taxable-equivalent basis)

    .95         1.14         1.24               (.19      (.10

Gross interest margin (taxable-equivalent basis)

    3.33      3.40      3.67            (.07 )%       (.27 )% 

Net interest margin (taxable-equivalent basis)

    3.58      3.65      3.88            (.07 )%       (.23 )% 

Average Balances

                   

Investment securities (b)

  $ 72,501       $ 63,645       $ 47,763             $ 8,856       $ 15,882   

Loans

    215,374         201,427         193,022               13,947         8,405   

Earning assets

    306,270         283,290         252,042               22,980         31,248   

Interest-bearing liabilities

    225,466         221,690         209,113               3,776         12,577   

 

(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a federal tax rate of 35 percent.
(b) 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.

 

Average investment securities in 2012 were $8.9 billion (13.9 percent) higher than 2011, primarily due to purchases of government agency mortgage-backed securities, net of prepayments and maturities, as the Company continued to increase its on-balance sheet liquidity in response to anticipated regulatory requirements.

Average total deposits for 2012 were $22.6 billion (10.6 percent) higher than 2011. Average noninterest-bearing deposits in 2012 were $13.4 billion (24.9 percent) higher than 2011 due to growth in average balances in a majority of the lines of business, including Wholesale Banking and Commercial Real Estate, Wealth Management and Securities Services, and Consumer and Small Business Banking. Average total savings deposits were $7.3 billion (6.4 percent) higher in 2012, compared with 2011, primarily due to growth in Consumer and Small Business Banking balances resulting from continued strong participation in a product offering that includes multiple bank products in a package, and higher corporate trust balances. These increases were partially offset by lower government banking and broker-dealer balances. Average time certificates of deposit less than $100,000 were lower in 2012 by $728 million (4.8 percent), compared with 2011, a result of maturities and lower renewals. Average time deposits greater than $100,000 were $2.6 billion (8.8 percent) higher in 2012, compared with 2011. Time deposits greater than $100,000 are managed as an alternative to other funding sources such as wholesale borrowing, based largely on relative pricing.

The $560 million (5.7 percent) increase in net interest income in 2011, compared with 2010, was primarily the result of growth in average earning assets and lower cost core deposit funding. Average earning assets were $31.2 billion (12.4 percent) higher in 2011 compared with 2010, driven by increases in investment securities, loans and cash balances at the Federal Reserve reflected in other earning assets. Average deposits increased $28.4 billion (15.4 percent) in 2011, compared with 2010.

Average total loans increased $8.4 billion (4.4 percent) in 2011, compared with 2010, driven by growth in residential mortgages, commercial loans, commercial real estate loans and other retail loans, partially offset by lower covered loans and credit card loans. Average residential mortgages increased $6.0 billion (21.7 percent) resulting from the net effect of origination and prepayment activity in the portfolio during 2011 due to the low interest rate environment. Average commercial loans increased $4.6 billion (9.8 percent) in 2011, compared with 2010, primarily driven by higher demand from new and existing customers, including small business. Growth in average commercial real estate balances of $1.2 billion (3.6 percent) was primarily due to the FCB acquisition. The $513 million (1.1 percent) increase in average other retail loans in 2011, compared with 2010, was primarily due to higher automobile and installment loans, and retail leasing balances, partially offset by lower home equity and second mortgage balances. Average credit card balances decreased $319 million (1.9 percent), as a result of consumers spending less and paying down their balances. Average covered loans decreased $3.6 billion (18.2 percent) in 2011, compared with 2010.

 

U.S. BANCORP     23   


  TABLE 3   Net Interest Income — Changes Due to Rate and Volume (a)

 

    2012 v 2011           2011 v 2010  
Year Ended December 31 (Dollars in Millions)   Volume      Yield/Rate      Total           Volume      Yield/Rate      Total  

Increase (decrease) in

                    

Interest Income

                    

Investment securities

  $ 275       $ (316    $ (41        $ 586       $ (369    $ 217   

Loans held for sale

    122         (40      82             (32      (14      (46

Loans

                    

Commercial

    369         (272      97             193         (99      94   

Commercial real estate

    45         (29      16             56         36         92   

Residential mortgages

    318         (123      195             311         (115      196   

Credit card

    54         101         155             (30      52         22   

Other retail

    (14      (147      (161          30         (137      (107

Total loans, excluding covered loans

    772         (470      302             560         (263      297   

Covered loans

    (179      77         (102          (179      122         (57

Total loans

    593         (393      200             381         (141      240   

Other earning assets

    (52      53         1             226         (142      84   

Total earning assets

    938         (696      242             1,161         (666      495   

Interest Expense

                    

Interest-bearing deposits

                    

Interest checking

    4         (23      (19          5         (17      (12

Money market accounts

    3         (17      (14          18         (74      (56

Savings accounts

    12         (58      (46          33         (42      (9

Time certificates of deposit less than $100,000

    (14      (28      (42          (25      12         (13

Time deposits greater than $100,000

    26         (54      (28          25         (23      2   

Total interest-bearing deposits

    31         (180      (149          56         (144      (88

Short-term borrowings

    (38      (52      (90          (50      31         (19

Long-term debt

    (117      (23      (140          30         12         42   

Total interest-bearing liabilities

    (124      (255      (379          36         (101      (65

Increase (decrease) in net interest income

  $ 1,062       $ (441    $ 621           $ 1,125       $ (565    $ 560   

 

(a) This table shows the components of the change in net interest income by volume and rate on a taxable-equivalent basis utilizing a tax rate of 35 percent. This table does not take into account the level of noninterest-bearing funding, nor does it fully reflect changes in the mix of assets and liabilities. The change in interest not solely due to changes in volume or rates has been allocated on a pro-rata basis to volume and yield/rate.

 

Average investment securities in 2011 were $15.9 billion (33.3 percent) higher than 2010, primarily due to planned purchases of U.S. Treasury and government agency mortgage-backed securities, as the Company increased its on-balance sheet liquidity in response to anticipated regulatory requirements.

Average total deposits for 2011 were $28.4 billion (15.4 percent) higher than 2010. Excluding deposits from acquisitions, 2011 average total deposits increased $19.3 billion (10.5 percent) over 2010. Average noninterest-bearing deposits in 2011 were $13.7 billion (34.1 percent) higher than 2010, primarily due to growth in Wholesale Banking and Commercial Real Estate, and Wealth Management and Securities Services balances. Average total savings deposits were $13.8 billion (13.7 percent) higher in 2011, compared with 2010, primarily due to growth in corporate and institutional trust balances, as well as an increase in Consumer and Small Business Banking balances. These increases were partially offset by lower broker-dealer balances. Average time certificates of deposit less than $100,000 were lower in 2011 by $1.4 billion (8.4 percent), compared with 2010, a result of maturities and lower renewals. Average time deposits greater than $100,000 were $2.3 billion (8.5 percent) higher in 2011, compared with 2010, primarily due to acquisitions.

Provision for Credit Losses The provision for credit losses reflects changes in the size and credit quality of the entire portfolio of loans. The Company maintains an allowance for credit losses considered appropriate by management for probable and estimable incurred losses, based on factors discussed in the “Analysis and Determination of Allowance for Credit Losses” section.

In 2012, the provision for credit losses was $1.9 billion, compared with $2.3 billion and $4.4 billion in 2011 and 2010, respectively. The provision for credit losses was lower than net charge-offs by $215 million in 2012 and $500 million in 2011, and exceeded net charge-offs by $175 million in 2010. The $461 million (19.7 percent) decrease in the provision for credit losses in 2012, compared with 2011, reflected improving credit trends and the underlying risk profile of the loan portfolio as economic conditions continued to slowly improve, partially offset by portfolio growth. Accruing loans ninety days or more past due decreased by $183 million (21.7 percent) (excluding covered loans) from

 

24   U.S. BANCORP


December 31, 2011 to December 31, 2012, reflecting improvement in residential mortgages, credit card and other retail loan portfolios during 2012. Nonperforming assets decreased $486 million (18.9 percent) (excluding covered assets) from December 31, 2011 to December 31, 2012, led by reductions in nonperforming construction and development loans of $307 million (56.3 percent), as the Company continued to resolve and reduce exposure to these problem assets, as well as improvement in other commercial loan portfolios. Net charge-offs decreased $746 million (26.2 percent) from 2011, due to the improvement in most loan portfolios as economic conditions continued to slowly improve.

The $2.0 billion (46.2 percent) decrease in the provision for credit losses in 2011, compared with 2010, reflected improving credit trends and the underlying risk profile of the loan portfolio as economic conditions continued to stabilize in 2011, partially offset by portfolio growth. Accruing loans ninety days or more past due decreased by $251 million (22.9 percent) (excluding covered loans) from December 31, 2010 to December 31, 2011, reflecting a moderation in the level of stress in economic conditions during 2011 as compared to 2010. Nonperforming assets decreased $777 million (23.2 percent) (excluding covered assets) from December 31, 2010 to December 31, 2011, led by a reduction in commercial real estate nonperforming assets of $394 million (30.5 percent), as the Company continued to resolve and reduce exposure to these assets. Net charge-offs decreased $1.3 billion (32.0 percent) in 2011 from 2010, due to the improvement in the commercial, commercial real estate, credit card and other retail loan portfolios.

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 2012 was $9.3 billion, compared with $8.8 billion in 2011 and $8.4 billion in 2010. The $559 million (6.4 percent) increase in 2012 over 2011 was due to strong mortgage banking revenue growth of 96.5 percent, principally due to strong origination and sales revenue, as well as an increase in loan servicing revenue. In addition, merchant processing services revenue and investment products fees and commissions increased 3.0 percent and 16.3 percent, respectively, primarily due to higher transaction volumes. Trust and investment management fees increased 5.5 percent due to improved market conditions and business expansion. Commercial products revenue was 4.4 percent higher, principally driven by increases in high-grade bond underwriting fees and commercial loan fees. Net securities losses were 51.6 percent lower in 2012, compared with 2011, primarily due to higher realized gains on securities sold in 2012. Offsetting these positive variances was a 16.9 percent decrease in credit and debit card revenue due to lower debit card interchange fees as a result of 2011 legislation (estimated impact of $328 million for 2012 and $77 million for 2011), net of mitigation efforts, and the impact of the inclusion of credit card balance transfer fees in interest income beginning in the first quarter of 2012. ATM processing services revenue was lower 23.5 percent, due to excluding surcharge fees the Company passes through to others from revenue, beginning in the first quarter of 2012, rather than reporting those amounts in occupancy expense as in previous periods. Other income also decreased 26.5 percent, primarily due to the 2011 merchant settlement gain, gain on the FCB acquisition and gains related to the Company’s investment in Visa Inc., and a 2012 equity-method investment charge, partially offset by a 2012 gain on the sale of a credit card portfolio.

 

  TABLE 4   Noninterest Income

 

Year Ended December 31 (Dollars in Millions)   2012      2011      2010             2012
v 2011
     2011
v 2010
 

Credit and debit card revenue

  $ 892       $ 1,073       $ 1,091               (16.9 )%       (1.6 )% 

Corporate payment products revenue

    744         734         710               1.4         3.4   

Merchant processing services

    1,395         1,355         1,253               3.0         8.1   

ATM processing services

    346         452         423               (23.5      6.9   

Trust and investment management fees

    1,055         1,000         1,080               5.5         (7.4

Deposit service charges

    653         659         710               (.9      (7.2

Treasury management fees

    541         551         555               (1.8      (.7

Commercial products revenue

    878         841         771               4.4         9.1   

Mortgage banking revenue

    1,937         986         1,003               96.5         (1.7

Investment products fees and commissions

    150         129         111               16.3         16.2   

Securities gains (losses), net

    (15      (31      (78            51.6         60.3   

Other

    743         1,011         731               (26.5      38.3   

Total noninterest income

  $ 9,319       $ 8,760       $ 8,360               6.4      4.8

 

U.S. BANCORP     25   


The $400 million (4.8 percent) increase in noninterest income in 2011 over 2010 was due to higher payments-related revenues of 3.5 percent due to growth in transaction volumes and new business initiatives, partially offset by a decline in credit and debit card revenue due to the impact of legislative changes to debit card interchange fees beginning in the fourth quarter of 2011; higher ATM processing services income of 6.9 percent largely due to increased transaction volumes; an increase in commercial products revenue of 9.1 percent due to higher commercial leasing revenue, syndication fees and other commercial loan fees; a 16.2 percent increase in investment products fees and commissions due to business initiatives; and lower net securities losses of 60.3 percent, primarily due to lower impairments and an increase in other income. The increase in other income of 38.3 percent reflected the 2011 merchant settlement gain, the gain on the FCB acquisition and gains related to the Company’s investment in Visa Inc., in addition to higher retail lease residual revenue, partially offset by a gain recognized on the exchange of the Company’s proprietary long-term mutual fund business for an equity interest in Nuveen Investments in 2010. Offsetting these positive variances was a decrease in deposit service charges of 7.2 percent as a result of 2010 legislative and pricing changes. Trust and investment management fees declined 7.4 percent as a result of the sale of the Company’s proprietary long-term mutual fund business and lower money market investment management fees, due to the low interest rate environment, partially offset by the positive impact of a securitization trust administration acquisition and improved equity market conditions. Mortgage banking revenue decreased 1.7 percent, principally due to lower origination and sales revenue, partially offset by higher loan servicing revenue and a favorable net change in the valuation of mortgage servicing rights (“MSRs”) and related economic hedging activities.

Noninterest Expense Noninterest expense in 2012 was $10.5 billion, compared with $9.9 billion in 2011 and $9.4 billion in 2010. The Company’s efficiency ratio was 51.5 percent in 2012, compared with 51.8 percent in 2011. The $545 million (5.5 percent) increase in noninterest expense in 2012 over 2011 was principally due to higher compensation expense, employee benefits expense and professional services expense. Compensation expense increased 6.9 percent, primarily as a result of growth in staffing for business initiatives and mortgage servicing-related activities, in addition to higher commissions and merit increases. Employee benefits expense increased 11.8 percent principally due to higher pension and medical insurance costs and staffing levels. Professional services expense increased 38.4 percent principally due to mortgage servicing review-related projects. Technology and communications expense was 8.3 percent higher due to business expansion and technology projects. Other expense increased 2.2 percent in 2012, from 2011, reflecting the $80 million expense accrual for a mortgage foreclosure-related regulatory settlement, higher regulatory and insurance-related costs and an accrual recorded by the Company related to its portion of obligations associated with Visa Inc., partially offset by a $130 million expense accrual related to mortgage servicing matters recorded in 2011, lower FDIC assessments and lower costs related to other real estate owned. These increases were partially offset by a decrease of 8.2 percent in net occupancy and equipment expense, principally reflecting the change in presentation of ATM surcharge revenue passed through to others, and a 8.4 percent decrease in other intangibles expense due to the reduction or completion of amortization of certain intangibles.

The $528 million (5.6 percent) increase in noninterest expense in 2011 over 2010 was principally due to increased compensation, employee benefits, net occupancy and equipment, and professional services expenses, partially offset by a decrease in other intangibles expense. Compensation expense increased 6.9 percent, primarily due to an increase in

 

  TABLE 5   Noninterest Expense

 

Year Ended December 31 (Dollars in Millions)   2012      2011      2010             2012
v 2011
     2011
v 2010
 

Compensation

  $ 4,320       $ 4,041       $ 3,779               6.9      6.9

Employee benefits

    945         845         694               11.8         21.8   

Net occupancy and equipment

    917         999         919               (8.2      8.7   

Professional services

    530         383         306               38.4         25.2   

Marketing and business development

    388         369         360               5.1         2.5   

Technology and communications

    821         758         744               8.3         1.9   

Postage, printing and supplies

    304         303         301               .3         .7   

Other intangibles

    274         299         367               (8.4      (18.5

Other

    1,957         1,914         1,913               2.2         .1   

Total noninterest expense

  $ 10,456       $ 9,911       $ 9,383               5.5      5.6

Efficiency ratio (a)

    51.5      51.8      51.5                        
(a) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.

 

26   U.S. BANCORP


staffing related to branch expansion and other business initiatives, and merit increases. Employee benefits expense increased 21.8 percent due to higher pension costs and the impact of additional staffing. Net occupancy and equipment expense increased 8.7 percent, principally due to business expansion and technology initiatives. Professional services expense increased 25.2 percent due to mortgage servicing-related and other projects across multiple business lines. Other intangibles expense decreased 18.5 percent due to the reduction or completion of amortization of certain intangibles. Other expense was essentially flat and reflected the $130 million expense accrual related to mortgage servicing matters recorded in 2011, offset by lower conversion costs and insurance and litigation related costs.

Pension Plans Because of the long-term nature of pension plans, the related accounting is complex and can be impacted by several factors, including investment funding policies, accounting methods and actuarial assumptions.

The Company’s pension accounting reflects the long-term nature of the benefit obligations and the investment horizon of plan assets. Amounts recorded in the financial statements reflect actuarial assumptions about participant benefits and plan asset returns. Changes in actuarial assumptions and differences in actual plan experience compared with actuarial assumptions are deferred and recognized in expense in future periods. Differences related to participant benefits are recognized in expense over the future service period of the employees. Differences related to the expected return on plan assets are included in expense over a period of approximately twelve years.

The Company expects pension expense to increase $158 million in 2013, primarily driven by a $92 million increase related to a decrease in the discount rate, a $51 million increase related to the recognition of deferred actuarial losses from previous years and a $12 million increase related to lower future expected returns on plan assets. If performance of plan assets equals the actuarially-assumed long-term expected return, the cumulative asset return difference not yet being amortized will not have a significant incremental impact on pension expense in future years. Because of the complexity of forecasting pension plan activities, the accounting methods utilized for pension plans, the Company’s ability to respond to factors affecting the plans and the hypothetical nature of actuarial assumptions, actual pension expense will differ from these amounts.

Refer to Note 16 of the Notes to the Consolidated Financial Statements for further information on the Company’s pension plan funding practices, investment policies and asset allocation strategies, and accounting policies for pension plans.

The following table shows an analysis of hypothetical changes in the long-term rate of return (“LTROR”) and discount rate:

 

LTROR (Dollars in Millions)   Down 100
Basis Points
    Up 100
Basis Points
 

Incremental benefit (expense)

  $ (24   $ 24   

Percent of 2012 net income

    (.26 )%      .26
Discount Rate (Dollars in Millions)   Down 100
Basis Points
    Up 100
Basis Points
 

Incremental benefit (expense)

  $ (115   $ 92   

Percent of 2012 net income

    (1.26 )%      1.01

Income Tax Expense The provision for income taxes was $2.2 billion (an effective rate of 28.9 percent) in 2012, compared with $1.8 billion (an effective rate of 27.8 percent) in 2011 and $935 million (an effective rate of 22.3 percent) in 2010. The increase in the effective tax rate over 2011 principally reflected the impact of higher pretax earnings year-over-year.

For further information on income taxes, refer to Note 18 of the Notes to Consolidated Financial Statements.

Balance Sheet Analysis

Average earning assets were $306.3 billion in 2012, compared with $283.3 billion in 2011. The increase in average earning assets of $23.0 billion (8.1 percent) was primarily due to an increase in loan balances of $13.9 billion (6.9 percent) and planned increases in investment securities of $8.9 billion (13.9 percent).

For average balance information, refer to Consolidated Daily Average Balance Sheet and Related Yields and Rates on pages 142 and 143.

Loans The Company’s loan portfolio was $223.3 billion at December 31, 2012, an increase of $13.5 billion (6.4 percent) from December 31, 2011. The increase was driven by growth in commercial loans of $9.6 billion (16.9 percent), residential mortgages of $6.9 billion (18.7 percent) and commercial real estate loans of $1.1 billion (3.1 percent), partially offset by decreases in covered loans of $3.5 billion (23.5 percent), credit card loans of $245 million (1.4 percent), reflecting the impact of the sale of a branded portfolio in 2012, and other retail loans of $395 million (.8 percent). Table 6 provides a summary of the loan distribution by product type, while Table 12 provides a summary of the selected loan maturity distribution by loan category. Average total loans increased $13.9 billion (6.9 percent) in 2012, compared with 2011. The increase was due to growth in most loan portfolio classes in 2012.

 

U.S. BANCORP     27   


Commercial Commercial loans, including lease financing, increased $9.6 billion (16.9 percent) as of December 31, 2012, compared with December 31, 2011. Average commercial loans increased $9.2 billion (17.9 percent) in 2012, compared with 2011. The growth was primarily driven by higher demand from new and existing customers. Table 7 provides a summary of commercial loans by industry and geographical locations.

Commercial Real Estate The Company’s portfolio of commercial real estate loans, which includes commercial mortgages and construction and development loans, increased $1.1 billion (3.1 percent) at December 31, 2012, compared with December 31, 2011. Average commercial real estate loans increased $991 million (2.8 percent) in 2012, compared with 2011. The increases reflected higher demand from new and existing customers. Table 8 provides a summary of commercial real estate loans by property type and geographical location. The collateral for $1.7 billion of commercial real estate loans included in covered loans at December 31, 2012 was in California, compared with $2.5 billion at December 31, 2011.

The Company classifies loans as construction loans until the completion of the construction phase. Following construction, if permanent financing is provided by the Company, the loan is reclassified to the commercial mortgage category. In 2012, approximately $978 million of construction loans were reclassified to the commercial mortgage category for bridge financing after completion of the construction phase. At December 31, 2012 and 2011, $225 million and $289 million, respectively, of tax-exempt industrial development loans were secured by real estate. The Company’s commercial mortgage and construction and development loans had unfunded commitments of $9.0 billion and $7.0 billion at December 31, 2012 and 2011, respectively.

The Company also finances the operations of real estate developers and other entities with operations related to real estate. These loans are not secured directly by real estate but are subject to terms and conditions similar to commercial loans. These loans were included in the commercial loan category and totaled $3.1 billion and $1.9 billion at December 31, 2012 and 2011, respectively.

 

  TABLE 6   Loan Portfolio Distribution

 

    2012   2011   2010   2009          2008  
At December 31 (Dollars in Millions)   Amount     Percent
of Total
         Amount     Percent
of Total
         Amount     Percent
of Total
         Amount     Percent
of Total
         Amount     Percent
of Total
 

Commercial

                                   

Commercial

  $ 60,742        27.2       $ 50,734        24.2       $ 42,272        21.5       $ 42,255        21.7       $ 49,759        26.9

Lease financing

    5,481        2.5            5,914        2.8            6,126        3.1            6,537        3.4            6,859        3.7   

Total commercial

    66,223        29.7            56,648        27.0            48,398        24.6            48,792        25.1            56,618        30.6   

Commercial Real Estate

                                   

Commercial mortgages

    31,005        13.9            29,664        14.1            27,254        13.8            25,306        13.0            23,434        12.7   

Construction and development

    5,948        2.6            6,187        3.0            7,441        3.8            8,787        4.5            9,779        5.3   

Total commercial real estate

    36,953        16.5            35,851        17.1            34,695        17.6            34,093        17.5            33,213        18.0   

Residential Mortgages

                                   

Residential mortgages

    32,648        14.6            28,669        13.7            24,315        12.3            20,581        10.6            18,232        9.9   

Home equity loans, first liens

    11,370        5.1            8,413        4.0            6,417        3.3            5,475        2.8            5,348        2.9   

Total residential mortgages

    44,018        19.7            37,082        17.7            30,732        15.6            26,056        13.4            23,580        12.8   

Credit Card

    17,115        7.7            17,360        8.3            16,803        8.5            16,814        8.6            13,520        7.3   

Other Retail

                                   

Retail leasing

    5,419        2.4            5,118        2.4            4,569        2.3            4,568        2.3            5,126        2.8   

Home equity and second mortgages

    16,726        7.5            18,131        8.6            18,940        9.6            19,439        10.0            19,177        10.3   

Revolving credit

    3,332        1.5            3,344        1.6            3,472        1.8            3,506        1.8            3,205        1.7   

Installment

    5,463        2.4            5,348        2.6            5,459        2.8            5,455        2.8            5,525        3.0   

Automobile

    12,593        5.6            11,508        5.5            10,897        5.5            9,544        4.9            9,212        5.0   

Student

    4,179        1.9            4,658        2.2            5,054        2.5            4,629        2.4            4,603        2.5   

Total other retail

    47,712        21.3            48,107        22.9            48,391        24.5            47,141        24.2            46,848        25.3   

Total loans, excluding covered loans

    212,021        94.9            195,048        93.0            179,019        90.8            172,896        88.8            173,779        94.0   

Covered Loans

    11,308        5.1            14,787        7.0            18,042        9.2            21,859        11.2            11,176        6.0   

Total loans

  $ 223,329        100.0       $ 209,835        100.0       $ 197,061        100.0       $ 194,755        100.0       $ 184,955        100.0

 

28   U.S. BANCORP


  TABLE 7   Commercial Loans by Industry Group and Geography

 

    December 31, 2012             December 31, 2011    
(Dollars in Millions)   Loans        Percent             Loans        Percent  

Industry Group

                    

Manufacturing

  $ 9,518           14.4          $ 8,085           14.3

Finance and insurance

    6,579           9.9               5,749           10.1   

Wholesale trade

    6,297           9.5               5,485           9.7   

Real estate, rental and leasing

    5,855           8.8               4,229           7.5   

Retail trade

    4,735           7.2               3,683           6.5   

Healthcare and social assistance

    4,733           7.1               3,850           6.8   

Public administration

    4,709           7.1               3,695           6.5   

Transport and storage

    2,549           3.9               2,409           4.3   

Information

    2,203           3.3               2,115           3.7   

Professional, scientific and technical services

    2,185           3.3               1,932           3.4   

Arts, entertainment and recreation

    2,124           3.2               2,046           3.6   

Mining

    2,122           3.2               1,987           3.5   

Educational services

    1,964           3.0               1,422           2.5   

Other services

    1,670           2.5               1,760           3.1   

Agriculture, forestry, fishing and hunting

    1,553           2.4               1,429           2.5   

Utilities

    1,390           2.1               1,272           2.3   

Other

    6,037           9.1               5,500           9.7   

Total

  $ 66,223           100.0          $ 56,648           100.0

Geography

                    

California

  $ 8,081           12.2          $ 6,664           11.8

Colorado

    2,722           4.1               2,292           4.0   

Illinois

    3,544           5.3               3,110           5.5   

Minnesota

    4,720           7.1               3,968           7.0   

Missouri

    2,922           4.4               2,499           4.4   

Ohio

    3,240           4.9               3,050           5.4   

Oregon

    1,792           2.7               1,514           2.7   

Washington

    2,626           4.0               2,568           4.5   

Wisconsin

    2,727           4.1               2,357           4.2   

Iowa, Kansas, Nebraska, North Dakota, South Dakota

    4,244           6.4               3,586           6.3   

Arkansas, Indiana, Kentucky, Tennessee

    3,545           5.4               3,246           5.7   

Idaho, Montana, Wyoming

    1,096           1.7               1,113           2.0   

Arizona, Nevada, New Mexico, Utah

    2,435           3.7               2,351           4.1   

Total banking region

    43,694           66.0               38,318           67.6   

Florida, Michigan, New York, Pennsylvania, Texas

    11,082           16.7               9,204           16.3   

All other states

    11,447           17.3               9,126           16.1   

Total outside Company’s banking region

    22,529           34.0               18,330           32.4   

Total

  $ 66,223           100.0          $ 56,648           100.0

 

Residential Mortgages Residential mortgages held in the loan portfolio at December 31, 2012, increased $6.9 billion (18.7 percent) over December 31, 2011. Average residential mortgages increased $6.6 billion (19.5 percent) in 2012, compared with 2011. The growth reflected origination and refinancing activity due to the low interest rate environment. Residential mortgages originated and placed in the Company’s loan portfolio are primarily well secured jumbo mortgages to borrowers with high credit quality. 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.

Credit Card Total credit card loans decreased $245 million (1.4 percent) at December 31, 2012, compared with December 31, 2011, reflecting the impact of the sale of a branded credit card portfolio during the third quarter of 2012 and customers paying down their balances. Average credit card balances increased $569 million (3.5 percent) in 2012, compared with 2011, reflecting the impact of the purchase of a credit card portfolio in the fourth quarter of 2011, partially offset by the portfolio sale in the third quarter of 2012.

 

U.S. BANCORP     29   


  TABLE 8   Commercial Real Estate Loans by Property Type and Geography

 

    December 31, 2012             December 31, 2011    
(Dollars in Millions)   Loans        Percent             Loans        Percent  

Property Type

                    

Business owner occupied

  $ 11,405           30.9          $ 11,756           32.8

Commercial property

                    

Industrial

    1,586           4.3               1,561           4.4   

Office

    4,833           13.1               4,590           12.8   

Retail

    4,537           12.3               4,402           12.3   

Other commercial

    3,735           10.1               3,632           10.1   

Homebuilders

                    

Condominiums

    146           .4               283           .8   

Other residential

    996           2.7               988           2.8   

Multi-family

    6,857           18.5               6,293           17.5   

Hotel/motel

    2,569           6.9               2,041           5.7   

Health care facilities

    289           .8               305           .8   

Total

  $ 36,953           100.0          $ 35,851           100.0

Geography

                    

California

  $ 8,039           21.8          $ 7,634           21.3

Colorado

    1,644           4.5               1,569           4.4   

Illinois

    1,555           4.2               1,411           3.9   

Minnesota

    1,958           5.3               1,891           5.3   

Missouri

    1,560           4.2               1,599           4.4   

Ohio

    1,512           4.1               1,436           4.0   

Oregon

    1,921           5.2               1,961           5.5   

Washington

    3,586           9.7               3,540           9.9   

Wisconsin

    2,011           5.4               1,892           5.3   

Iowa, Kansas, Nebraska, North Dakota, South Dakota

    2,349           6.4               2,295           6.4   

Arkansas, Indiana, Kentucky, Tennessee

    1,886           5.1               1,736           4.8   

Idaho, Montana, Wyoming

    1,156           3.1               1,183           3.3   

Arizona, Nevada, New Mexico, Utah

    2,958           8.0               3,189           8.9   

Total banking region

    32,135           87.0               31,336           87.4   

Florida, Michigan, New York, Pennsylvania, Texas

    2,405           6.5               2,470           6.9   

All other states

    2,413           6.5               2,045           5.7   

Total outside Company’s banking region

    4,818           13.0               4,515           12.6   

Total

  $ 36,953           100.0          $ 35,851           100.0

 

Other Retail Total other retail loans, which include retail leasing, home equity and second mortgages and other retail loans, decreased $395 million (.8 percent) at December 31, 2012, compared with December 31, 2011. Average other retail loans decreased $261 million (.5 percent) in 2012, compared with 2011. The decreases were primarily due to lower home equity and second mortgages and student loan balances, partially offset by higher automobile and installment loans, and retail leasing balances.

 

30   U.S. BANCORP


  TABLE 9   Residential Mortgages by Geography

 

    December 31, 2012      December 31, 2011  
(Dollars in Millions)   Loans        Percent             Loans        Percent  

California

  $ 6,022           13.7          $ 4,339           11.7

Colorado

    2,674           6.1               2,354           6.3   

Illinois

    2,882           6.5               2,560           6.9   

Minnesota

    3,521           8.0               2,955           8.0   

Missouri

    2,064           4.7               1,849           5.0   

Ohio

    2,301           5.2               2,051           5.5   

Oregon

    1,836           4.2               1,541           4.2   

Washington

    2,543           5.8               2,101           5.7   

Wisconsin

    1,482           3.4               1,325           3.6   

Iowa, Kansas, Nebraska, North Dakota, South Dakota

    2,049           4.6               1,759           4.7   

Arkansas, Indiana, Kentucky, Tennessee

    3,233           7.3               2,822           7.6   

Idaho, Montana, Wyoming

    989           2.2               825           2.2   

Arizona, Nevada, New Mexico, Utah

    2,753           6.3               2,281           6.2   

Total banking region

    34,349           78.0               28,762           77.6   

Florida, Michigan, New York, Pennsylvania, Texas

    4,329           9.9               3,819           10.3   

All other states

    5,340           12.1               4,501           12.1   

Total outside Company’s banking region

    9,669           22.0               8,320           22.4   

Total

  $ 44,018           100.0          $ 37,082           100.0

 

  TABLE 10   Credit Card Loans by Geography

 

    December 31, 2012      December 31, 2011  
(Dollars in Millions)   Loans        Percent             Loans        Percent  

California

  $ 1,757           10.3          $ 1,719           9.9

Colorado

    665           3.9               670           3.9   

Illinois

    796           4.6               791           4.5   

Minnesota

    1,196           7.0               1,193           6.9   

Missouri

    616           3.6               619           3.6   

Ohio

    1,071           6.3               1,326           7.6   

Oregon

    597           3.5               623           3.6   

Washington

    771           4.5               849           4.9   

Wisconsin

    972           5.7               959           5.5   

Iowa, Kansas, Nebraska, North Dakota, South Dakota

    862           5.0               863           5.0   

Arkansas, Indiana, Kentucky, Tennessee

    1,342           7.8               1,353           7.8   

Idaho, Montana, Wyoming

    352           2.1               377           2.2   

Arizona, Nevada, New Mexico, Utah

    794           4.6               788           4.5   

Total banking region

    11,791           68.9               12,130           69.9   

Florida, Michigan, New York, Pennsylvania, Texas

    2,884           16.8               2,923           16.8   

All other states

    2,440           14.3               2,307           13.3   

Total outside Company’s banking region

    5,324           31.1               5,230           30.1   

Total

  $ 17,115           100.0          $ 17,360           100.0

 

U.S. BANCORP     31   


  TABLE 11   Other Retail Loans by Geography

 

            December 31, 2012             December 31, 2011  
(Dollars in Millions)   Loans        Percent             Loans        Percent  

California

  $ 5,545           11.6          $ 5,793           12.0

Colorado

    2,068           4.3               2,175           4.5   

Illinois

    2,232           4.7               2,233           4.6   

Minnesota

    4,113           8.6               4,400           9.2   

Missouri

    2,234           4.7               2,170           4.5   

Ohio

    2,628           5.5               2,620           5.5   

Oregon

    1,748           3.7               1,851           3.9   

Washington

    1,954           4.1               2,058           4.3   

Wisconsin

    1,845           3.9               1,907           4.0   

Iowa, Kansas, Nebraska, North Dakota, South Dakota

    2,465           5.2               2,522           5.2   

Arkansas, Indiana, Kentucky, Tennessee

    2,772           5.8               2,765           5.8   

Idaho, Montana, Wyoming

    1,071           2.2               1,125           2.3   

Arizona, Nevada, New Mexico, Utah

    2,080           4.4               2,135           4.4   

Total banking region

    32,755           68.7               33,754           70.2   

Florida, Michigan, New York, Pennsylvania, Texas

    6,957           14.6               6,493           13.5   

All other states

    8,000           16.7               7,860           16.3   

Total outside Company’s banking region

    14,957           31.3               14,353           29.8   

Total

  $ 47,712           100.0          $ 48,107           100.0

 

Of the total residential mortgages, credit card and other retail loans outstanding at December 31, 2012, approximately 72.5 percent were to customers located in the Company’s primary banking region. Tables 9, 10 and 11 provide a geographic summary of residential mortgages, credit card loans and other retail loans outstanding, respectively, as of December 31, 2012 and 2011. The collateral for $5.1 billion of residential mortgages and other retail loans included in covered loans at December 31, 2012 was in California, compared with $5.2 billion at December 31, 2011.

Loans Held for Sale Loans held for sale, consisting primarily of residential mortgages to be sold in the secondary market, were $8.0 billion at December 31, 2012, compared with $7.2 billion at December 31, 2011. The increase in loans held for sale was principally due to an increase in mortgage loan origination and refinancing activity due to the low interest rate environment.

Most of the residential mortgage loans the Company originates 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”).

 

  TABLE 12   Selected Loan Maturity Distribution

 

At December 31, 2012 (Dollars in Millions)   One Year
or Less
       Over One
Through
Five Years
       Over Five
Years
       Total  

Commercial

  $ 24,339         $ 38,471         $ 3,413         $ 66,223   

Commercial real estate

    8,379           22,007           6,567           36,953   

Residential mortgages

    2,187           6,531           35,300           44,018   

Credit card

    17,115                               17,115   

Other retail

    8,854           25,618           13,240           47,712   

Covered loans

    2,469           3,080           5,759           11,308   

Total loans

  $ 63,343         $ 95,707         $ 64,279         $ 223,329   

Total of loans due after one year with

                

Predetermined interest rates

                 $ 74,680   

Floating interest rates

                                   $ 85,306   

 

32   U.S. BANCORP


  TABLE 13   Investment Securities

 

    Available-for-Sale          Held-to-Maturity  
At December 31, 2012 (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

  $ 960      $ 961        .8        1.42       $ 501      $ 503        .7        .90

Maturing after one year through five years

    95        98        1.9        1.61            1,995        2,015        1.3        1.01   

Maturing after five years through ten years

    155        165        7.4        3.11            598        603        9.5        1.78   

Maturing after ten years

    1        2        14.7        4.15            60        60        12.2        1.86   

Total

  $ 1,211      $ 1,226        1.8        1.65       $ 3,154      $ 3,181        3.0        1.16

Mortgage-Backed Securities (a)

                   

Maturing in one year or less

  $ 2,749      $ 2,762        .6        1.64       $ 296      $ 297        .6        1.53

Maturing after one year through five years

    22,736        23,409        3.2        2.35            29,419        29,942        3.2        2.05   

Maturing after five years through ten years

    4,177        4,200        6.0        1.96            1,294        1,309        6.4        1.49   

Maturing after ten years

    290        296        12.7        1.78            58        58        10.3        1.21   

Total

  $ 29,952      $ 30,667        3.5        2.23       $ 31,067      $ 31,606        3.3        2.02

Asset-Backed Securities (a)

                   

Maturing in one year or less

  $ 7      $ 9               .21       $      $ 4        .2        1.26

Maturing after one year through five years

    36        46        3.4        6.31            11        10        3.3        .65   

Maturing after five years through ten years

    568        579        7.4        2.33            8        9        6.6        .67   

Maturing after ten years

                  18.6        5.83            7        16        22.3        .78   

Total

  $ 611      $ 634        7.1        2.54       $ 26      $ 39        9.5        .70

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

                   

Maturing in one year or less

  $ 24      $ 24        .3        7.68       $      $        .7        6.77

Maturing after one year through five years

    5,293        5,646        3.5        6.73            5        6        3.0        7.50   

Maturing after five years through ten years

    729        772        7.8        5.85            3        3        8.6        7.36   

Maturing after ten years

    13        13        17.0        16.15            12        12        14.8        5.33   

Total

  $ 6,059      $ 6,455        4.1        6.65       $ 20      $ 21        10.8        6.16

Other Debt Securities

                   

Maturing in one year or less

  $ 55      $ 55        .1        6.45       $ 2      $ 2        .3        1.03

Maturing after one year through five years

    6        6        1.2        1.15            94        91        3.2        1.23   

Maturing after five years through ten years

                                    26        12        7.8        1.05   

Maturing after ten years

    759        676        22.3        2.90                                   

Total

  $ 820      $ 737        20.6        3.12       $ 122      $ 105        4.2        1.19

Other Investments

  $ 387      $ 420        17.0        2.53       $      $              

Total investment securities (d)

  $ 39,040      $ 40,139        4.1        2.93       $ 34,389      $ 34,952        3.3        1.94

 

(a) Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities anticipating future prepayments.
(b) Information related to obligations of state and politcal 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 politicial 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 5.2 years at December 31, 2011, with a corresponding weighted-average yield of 3.19 percent. The weighted-average maturity of the held-to-maturity investment securities was 3.9 years at December 31, 2011, with a corresponding weighted-average yield of 2.21 percent.
(e) Average yields are presented on a fully-taxable equivalent basis under a tax rate of 35 percent. Yields on available-for-sale and held-to-maturity investment securities are computed based on amortized cost balances, excluding any premiums or discounts recorded related to the transfer of investment securities at fair value from available-for-sale to held-to-maturity. Average yield and maturity calculations exclude equity securities that have no stated yield or maturity.

 

    2012             2011  
At December 31 (Dollars in Millions)   Amortized
Cost
       Percent
of Total
            Amortized
Cost
       Percent
of Total
 

U.S. Treasury and agencies

  $ 4,365           5.9          $ 3,605           5.1

Mortgage-backed securities

    61,019           83.1               57,561           82.0   

Asset-backed securities

    637           .9               949           1.4   

Obligations of state and political subdivisions

    6,079           8.3               6,417           9.1   

Other debt securities and investments

    1,329           1.8               1,701           2.4   

Total investment securities

  $ 73,429           100.0          $ 70,233           100.0

 

U.S. BANCORP     33   


Investment Securities The Company uses its investment securities portfolio to manage enterprise interest rate risk, provide liquidity (including the ability to meet proposed regulatory requirements), generate interest and dividend income, and as collateral for public deposits and wholesale funding sources. While the Company intends to hold its investment securities indefinitely, it may sell available-for-sale securities in response to structural changes in the balance sheet and related interest rate risk and to meet liquidity requirements, among other factors.

Investment securities totaled $74.5 billion at December 31, 2012, compared with $70.8 billion at December 31, 2011. The $3.7 billion (5.2 percent) increase primarily reflected $3.1 billion of net investment purchases and a $517 million favorable change in net unrealized gains (losses) on available-for-sale investment securities. Held-to-maturity securities were $34.4 billion at December 31, 2012, compared with $18.9 billion at December 31, 2011, due to the transfer of approximately $11.7 billion of available-for-sale investment securities to the held-to-maturity category during 2012, reflecting the Company’s intent to hold those securities to maturity, and growth in government agency mortgage-backed securities as the Company increased its on-balance sheet liquidity in response to anticipated regulatory requirements.

Average investment securities were $72.5 billion in 2012, compared with $63.6 billion in 2011. The weighted-average yield of the available-for-sale portfolio was 2.93 percent at December 31, 2012, compared with 3.19 percent at December 31, 2011. The average maturity of the available-for-sale portfolio was 4.1 years at December 31, 2012, compared with 5.2 years at December 31, 2011. The weighted-average yield of the held-to-maturity portfolio was 1.94 percent at December 31, 2012, compared with 2.21 percent at December 31, 2011. The average maturity of the held-to-maturity portfolio was 3.3 years at December 31, 2012, compared with 3.9 years at December 31, 2011. Investment securities by type are shown in Table 13.

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 December 31, 2012, the Company’s net unrealized gains on available-for-sale securities were $1.1 billion, compared with $581 million at December 31, 2011. The favorable change in net unrealized gains was primarily due to increases in the fair value of non-agency mortgage-backed and state and political securities. Gross unrealized losses on available-for-sale securities totaled $147 million at December 31, 2012, compared with $691 million at December 31, 2011.

The Company conducts a regular assessment of its investment portfolio to determine whether any securities are other-than-temporarily impaired. When assessing unrealized losses for other-than-temporary impairment, the Company considers the nature of the investment, the financial condition of the issuer, the extent and duration of unrealized loss, expected cash flows of underlying assets and market conditions. At December 31, 2012, 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.

There is limited market activity for non-agency mortgage-backed securities held by the Company. As a result, the Company estimates the fair value of these securities using estimates of expected cash flows, discount rates and management’s assessment of various other market factors, which are judgmental in nature. The Company recorded $46 million of impairment charges in earnings during 2012 on non-agency mortgage-backed securities. These impairment charges were due to changes in expected cash flows primarily resulting from increases in defaults in the underlying mortgage pools. During 2012, the Company also recognized impairment charges of $27 million in earnings related to certain perpetual preferred securities issued by financial institutions, following the downgrades of money center banks by a rating agency. The unrealized loss on perpetual preferred securities in a loss position at December 31, 2012, was $14 million. Further adverse changes in market conditions may result in additional impairment charges in future periods.

During 2011, the Company recorded $35 million of impairment charges in earnings predominately on non-agency mortgage-backed securities. These impairment charges were due to changes in expected cash flows primarily resulting from increases in defaults in the underlying mortgage pools.

Refer to Notes 4 and 20 in the Notes to Consolidated Financial Statements for further information on investment securities.

 

34   U.S. BANCORP


  TABLE 14   Deposits

The composition of deposits was as follows:

 

    2012   2011   2010   2009   2008  
At December 31 (Dollars in Millions)   Amount     Percent
of Total
         Amount     Percent
of Total
         Amount     Percent
of Total
         Amount     Percent
of Total
         Amount     Percent
of Total
 

Noninterest-bearing deposits

  $ 74,172        29.8       $ 68,579        29.7       $ 45,314        22.2       $ 38,186        20.8       $ 37,494        23.5

Interest-bearing deposits

                                   

Interest checking

    50,430        20.2            45,933        19.9            43,183        21.2            38,436        21.0            32,254        20.2   

Money market savings

    50,987        20.5            45,854        19.9            46,855        22.9            40,848        22.3            26,137        16.4   

Savings accounts

    30,811        12.4            28,018        12.1            24,260        11.9            16,885        9.2            9,070        5.7   

Total of savings deposits

    132,228        53.1            119,805        51.9            114,298        56.0            96,169        52.5            67,461        42.3   

Time certificates of deposit less than $100,000

    13,744        5.5            14,952        6.5            15,083        7.4            18,966        10.4            18,425        11.7   

Time deposits greater than $100,000

                                   

Domestic

    12,148        4.8            12,583        5.4            12,330        6.0            16,858        9.2            20,791        13.0   

Foreign

    16,891        6.8            14,966        6.5            17,227        8.4            13,063        7.1            15,179        9.5   

Total interest-bearing deposits

    175,011        70.2            162,306        70.3            158,938        77.8            145,056        79.2            121,856        76.5   

Total deposits

  $ 249,183        100.0       $ 230,885        100.0       $ 204,252        100.0       $ 183,242        100.0       $ 159,350        100.0

The maturity of time deposits was as follows:

 

At December 31, 2012 (Dollars in Millions)   Certificates
Less Than $100,000
       Time Deposits
Greater Than $100,000
       Total  

Three months or less

  $ 1,512         $ 18,963         $ 20,475   

Three months through six months

    1,911           1,595           3,506   

Six months through one year

    3,215           2,197           5,412   

2014

    3,584           2,949           6,533   

2015

    1,769           1,775           3,544   

2016

    1,061           937           1,998   

2017

    688           619           1,307   

Thereafter

    4           4           8   

Total

  $ 13,744         $ 29,039         $ 42,783   

 

Deposits Total deposits were $249.2 billion at December 31, 2012, compared with $230.9 billion at December 31, 2011. The $18.3 billion (7.9 percent) increase in total deposits reflected organic growth in core deposits due to the overall “flight-to-quality” by customers. Average total deposits increased $22.6 billion (10.6 percent) over 2011 due to increases in noninterest-bearing and total savings account balances, reflecting organic growth.

Noninterest-bearing deposits at December 31, 2012, increased $5.6 billion (8.2 percent) over December 31, 2011. Average noninterest-bearing deposits increased $13.4 billion (24.9 percent) in 2012, compared with 2011. The increases were due to growth in balances in the majority of the lines of business, including Wholesale Banking and Commercial Real Estate, Wealth Management and Securities Services, and Consumer and Small Business Banking.

Interest-bearing savings deposits increased $12.4 billion (10.4 percent) at December 31, 2012, compared with December 31, 2011. The increase in these deposit balances was related to increases in money market savings, interest checking and savings account balances. The $5.1 billion (11.2 percent) increase in money market savings account balances was primarily due to higher Wholesale Banking and Commercial Real Estate, and corporate trust balances. The $4.5 billion (9.8 percent) increase in interest checking account balances was primarily due to higher Consumer and Small Business Banking and broker-dealer balances, partially offset by lower Wholesale Banking and Commercial Real Estate balances. The $2.8 billion (10.0 percent) increase in savings account balances reflected continued strong participation in a savings product offered by Consumer and Small Business Banking that includes multiple bank products in a package. Average interest-bearing savings deposits in 2012 increased $7.3 billion (6.4 percent), compared with 2011, primarily due to growth in Consumer and Small Business Banking and corporate trust balances, partially offset by lower government banking and broker-dealer balances.

Interest-bearing time deposits at December 31, 2012, increased $282 million (.7 percent), compared with December 31, 2011, driven by an increase in time deposits greater than $100,000, partially offset by a decrease in time certificates of deposit less than $100,000. Time deposits greater than

 

U.S. BANCORP     35   


$100,000 increased $1.5 billion (5.4 percent) at December 31, 2012, compared with December 31, 2011. Average time deposits greater than $100,000 in 2012 increased $2.6 billion (8.8 percent), compared with 2011. Time deposits greater than $100,000 are managed as an alternative to other funding sources such as wholesale borrowing, based largely on relative pricing. Time certificates of deposit less than $100,000 decreased $1.2 billion (8.1 percent) at December 31, 2012, compared with December 31, 2011. Average time certificates of deposit less than $100,000 in 2012 decreased $728 million (4.8 percent), compared with 2011. The decreases were the result of lower Consumer and Small Business Banking balances.

Borrowings The Company utilizes both short-term and long-term borrowings as part of its asset/liability management and funding strategies. Short-term borrowings, which include federal funds purchased, commercial paper, repurchase agreements, borrowings secured by high-grade assets and other short-term borrowings, were $26.3 billion at December 31, 2012, compared with $30.5 billion at December 31, 2011. The $4.2 billion (13.7 percent) decrease in short-term borrowings reflected reduced borrowing needs by the Company as a result of an increase in deposits.

Long-term debt was $25.5 billion at December 31, 2012, compared with $32.0 billion at December 31, 2011. The $6.5 billion (20.1 percent) decrease was primarily due to repayments and maturities of $3.8 billion of medium-term notes and $1.1 billion of subordinated debt, $2.7 billion of redemptions of junior subordinated debentures and a $3.4 billion decrease in Federal Home Loan Bank (“FHLB”) advances, partially offset by issuances of $1.3 billion of subordinated debt and $2.3 billion of medium-term notes, and a $1.1 billion increase in long-term debt related to certain consolidated variable interest entities. Refer to Note 12 of the Notes to Consolidated Financial Statements for additional information regarding long-term debt and the “Liquidity Risk Management” section for discussion of liquidity management of the Company.

Corporate Risk Profile

Overview Managing risks is an essential part of successfully operating a financial services company. The Company’s most prominent risk exposures are credit, residual value, operational, interest rate, market, liquidity and reputation risk. 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. Residual value risk is the potential reduction in the end-of-term value of leased assets. Operational risk includes risks related to fraud, processing errors, technology, breaches of internal controls and in data security, and business continuation and disaster recovery. Operational risk also includes legal and compliance risks, including risks arising from the failure to adhere to laws, rules, regulations and internal policies and procedures. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates, which can affect the re-pricing of assets and liabilities differently. 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, certain mortgage loans held for sale, MSRs and derivatives that are accounted for on a fair value basis. Liquidity risk is the possible inability to fund obligations to depositors, investors or borrowers. Further, corporate strategic decisions, as well as the risks described above, could give rise to reputation risk. Reputation risk is the risk that negative publicity or press, whether true or not, could result in costly litigation or cause a decline in the Company’s stock value, customer base, funding sources or revenue. In addition to the risks identified above, other risk factors exist that may impact the Company. Refer to “Risk Factors” beginning on page 145, for a detailed discussion of these factors.

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. The strategy also emphasizes diversification on a geographic, industry and customer level, regular credit examinations and management reviews of loans exhibiting deterioration of credit quality. The Risk Management Committee of the Company’s Board of Directors 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 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 all of the Company’s loans that are 90 days or more past due and still accruing, nonaccrual loans, those considered troubled debt restructurings (“TDRs”), and loans in a junior lien position that are current but are behind a modified or delinquent loan in a first lien position, encompass all loans held by the Company that it considers to have a potential or well-defined weakness that may put full collection of contractual cash flows at risk. The Company’s internal credit quality ratings for consumer loans are primarily based on delinquency and nonperforming status, except for a limited population of larger loans within those portfolios that are individually evaluated. For this limited population, the determination of the internal credit quality rating may also consider collateral value and customer cash flows. The Company obtains recent collateral value estimates for the majority of its residential mortgage and home equity and

 

36   U.S. BANCORP


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. The decline in housing prices over the past several years has deteriorated the collateral support of the residential mortgage, home equity and second mortgage portfolios. 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. The Company strives to identify potential problem loans early, record any necessary charge-offs promptly and maintain appropriate allowance levels for probable incurred loan losses. Refer to Notes 1 and 5 in the Notes to Consolidated Financial Statements for further information of the Company’s loan portfolios including internal credit quality ratings.

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

The consumer lending segment represents loans and leases made to consumer customers including residential mortgages, credit card loans, and other retail loans such as revolving consumer lines, auto loans and leases, student loans, and home equity loans and lines. Home equity or second mortgage loans are junior lien closed-end accounts fully disbursed at origination. These loans typically are fixed rate loans, secured by residential real estate, with a 10 or 15 year fixed payment amortization schedule. Home equity lines are revolving accounts giving the borrower the ability to draw and repay balances repeatedly, up to a maximum commitment, and are secured by residential real estate. These include accounts in either a first or junior lien position. Typical terms on home equity lines are variable rates benchmarked to the prime rate, with a 15-year draw period during which a minimum payment is equivalent to the monthly interest, followed by a 10-year amortization period. At December 31, 2012, substantially all of the Company’s home equity lines were in the draw period. 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.

Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments. The Company also engages in non-lending activities that may give rise to credit risk, including derivative transactions for balance sheet hedging purposes, foreign exchange transactions, deposit overdrafts and interest rate swap contracts for customers, investments in securities and other financial assets, and settlement risk, including Automated Clearing House transactions and the processing of credit card transactions for merchants. These activities are subject to credit review, analysis and approval processes.

Economic and Other Factors In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, the level of allowance coverage relative to similar banking institutions and macroeconomic factors, such as changes in unemployment rates, gross domestic product and consumer bankruptcy filings.

Beginning in late 2007, financial markets suffered significant disruptions, leading to and exacerbated by declining real estate values and subsequent economic

 

U.S. BANCORP     37   


challenges, both domestically and globally. Median home prices declined across most domestic markets, which had a significant adverse impact on the collectability of residential mortgage loans. Residential mortgage delinquencies increased throughout 2008 and 2009. High unemployment levels beginning in 2009, further increased losses in prime-based residential portfolios and credit cards.

Although economic conditions generally have stabilized from the dramatic downturn experienced in 2008 and 2009, and the financial markets have generally improved, business activities across a range of industries continue to face difficulties due to lower consumer confidence and spending, continued elevated unemployment and under-employment, and continued stress in the residential mortgage portfolio. Credit costs peaked for the Company in late 2009 and have trended downward thereafter. The provision for credit losses was lower than net charge-offs by $215 million in 2012 and $500 million in 2011, and exceeded net charge-offs by $175 million in 2010. The $461 million (19.7 percent) decrease in the provision for credit losses in 2012, compared with 2011, reflected improving credit trends and the underlying risk profile of the loan portfolio as economic conditions continued to slowly improve, partially offset by portfolio growth.

Credit Diversification 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 traditional commercial lending products and specialized products such as asset-based lending, commercial lease financing, agricultural credit, warehouse mortgage lending, small business lending, commercial real estate, health care and correspondent banking. The Company also offers an array of consumer lending products, including residential mortgages, credit card loans, automobile loans, retail leases, home equity, revolving credit, lending to students and other consumer loans. These consumer lending products are primarily offered through the branch office network, home mortgage and loan production offices and indirect distribution channels, such as automobile dealers. The Company monitors and manages the portfolio diversification by industry, customer and geography. Table 6 provides information with respect to the overall product diversification and changes in the mix during 2012.

The commercial loan class is diversified among various industries with somewhat higher concentrations in manufacturing, finance and insurance, wholesale trade, and real estate, rental and leasing. Additionally, the commercial loan class is diversified across the Company’s geographical markets with 66.0 percent of total commercial loans within the Company’s Consumer and Small Business Banking markets. Credit relationships outside of the Company’s Consumer and Small Business Banking markets relate to the corporate banking, mortgage banking, auto dealer and leasing businesses, focusing on large national customers and specifically targeted industries. Loans to mortgage banking customers are primarily warehouse lines which are collateralized with the underlying mortgages. The Company regularly monitors its mortgage collateral position to manage its risk exposure. Table 7 provides a summary of significant industry groups and geographical locations of commercial loans outstanding at December 31, 2012 and 2011.

The commercial real estate loan class reflects the Company’s focus on serving business owners within its geographic footprint as well as regional and national investment-based real estate owners and builders. Within the commercial real estate loan class, different property types have varying degrees of credit risk. Table 8 provides a summary of the significant property types and geographical locations of commercial real estate loans outstanding at December 31, 2012 and 2011. At December 31, 2012, approximately 30.9 percent of the commercial real estate loans represented business owner-occupied properties that tend to exhibit less credit risk than non owner-occupied properties. The investment-based real estate mortgages are diversified among various property types with somewhat higher concentrations in multi-family and retail properties. From a geographical perspective, the Company’s commercial real estate loan class is generally well diversified. However, at December 31, 2012, 21.8 percent of the Company’s commercial real estate loans were secured by collateral in California, which has experienced higher delinquency levels and credit quality deterioration due to excess home inventory levels and declining valuations. Included in commercial real estate at year-end 2012 was approximately $804 million in loans related to land held for development and $1.4 billion of loans related to residential and commercial acquisition and development properties. These loans are subject to quarterly monitoring for changes in local market conditions due to a higher credit risk profile. The commercial real estate loan class is diversified across the Company’s geographical markets with 87.0 percent of total commercial real estate loans outstanding at December 31, 2012, within the Company’s Consumer and Small Business Banking markets.

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

Residential mortgages represent an important financial product for consumer customers of the Company and are originated through the Company’s branches, loan production offices and a wholesale network of originators. The Company may retain residential mortgage loans it originates on its

 

38   U.S. BANCORP


balance sheet or sell the loans into the secondary market while retaining the servicing rights and customer relationships. Utilizing the secondary markets enables the Company to effectively reduce its credit and other asset/liability risks. For residential mortgages that are retained in the Company’s portfolio and for home equity and second mortgages, credit risk is also diversified by geography and managed by adherence to LTV and borrower credit criteria during the underwriting process.

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

The following tables provide summary information for the LTVs of residential mortgages and home equity and second mortgages by borrower type at December 31, 2012:

 

Residential mortgages

(Dollars in Millions)

  Interest
Only
    Amortizing     Total     Percent
of Total
 

Prime Borrowers

       

Less than or equal to 80%

  $ 1,864      $ 25,786      $ 27,650        76.1

Over 80% through 90%

    458        3,459        3,917        10.8   

Over 90% through 100%

    369        1,475        1,844        5.1   

Over 100%

    925        1,877        2,802        7.7   

No LTV available

           116        116        .3   

Total

  $ 3,616      $ 32,713      $ 36,329        100.0

Sub-Prime Borrowers

       

Less than or equal to 80%

  $ 1      $ 544      $ 545        34.2

Over 80% through 90%

    2        234        236        14.8   

Over 90% through 100%

    2        239        241        15.1   

Over 100%

    8        563        571        35.9   

No LTV available

                           

Total

  $ 13      $ 1,580      $ 1,593        100.0

Other Borrowers

       

Less than or equal to 80%

  $ 9      $ 257      $ 266        32.3

Over 80% through 90%

    3        176        179        21.8   

Over 90% through 100%

    3        103        106        12.9   

Over 100%

    3        268        271        33.0   

No LTV available

                           

Total

  $ 18      $ 804      $ 822        100.0

Loans Purchased From GNMA Mortgage Pools (a)

  $      $ 5,274      $ 5,274        100.0

Total

       

Less than or equal to 80%

  $ 1,874      $ 26,587      $ 28,461        64.6

Over 80% through 90%

    463        3,869        4,332        9.8   

Over 90% through 100%

    374        1,817        2,191        5.0   

Over 100%

    936        2,708        3,644        8.3   

No LTV available

           116        116        .3   

Loans purchased from GNMA mortgage pools (a)

           5,274        5,274        12.0   

Total

  $ 3,647      $ 40,371      $ 44,018        100.0

 

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

 

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

Prime Borrowers

       

Less than or equal to 80%

  $ 7,751      $ 535      $ 8,286        52.0

Over 80% through 90%

    2,403        248        2,651        16.6   

Over 90% through 100%

    1,600        197        1,797        11.3   

Over 100%

    2,427        458        2,885        18.1   

No LTV/CLTV available

    289        26        315        2.0   

Total

  $ 14,470      $ 1,464      $ 15,934        100.0

Sub-Prime Borrowers

       

Less than or equal to 80%

  $ 39      $ 28      $ 67        18.3

Over 80% through 90%

    17        20        37        10.1   

Over 90% through 100%

    17        38        55        15.0   

Over 100%

    42        164        206        56.3   

No LTV/CLTV available

           1        1        .3   

Total

  $ 115      $ 251      $ 366        100.0

Other Borrowers

       

Less than or equal to 80%

  $ 280      $ 4      $ 284        66.7

Over 80% through 90%

    64        5        69        16.2   

Over 90% through 100%

    30        2        32        7.5   

Over 100%

    32        6        38        8.9   

No LTV/CLTV available

    3               3        .7   

Total

  $ 409      $ 17      $ 426        100.0

Total

       

Less than or equal to 80%

  $ 8,070      $ 567      $ 8,637        51.6

Over 80% through 90%

    2,484        273        2,757        16.5   

Over 90% through 100%

    1,647        237        1,884        11.3   

Over 100%

    2,501        628        3,129        18.7   

No LTV/CLTV available

    292        27        319        1.9   

Total

  $ 14,994      $ 1,732      $ 16,726        100.0

At December 31, 2012, approximately $1.6 billion of residential mortgages were to customers that may be defined as sub-prime borrowers based on credit scores from independent agencies at loan origination, compared with $1.9 billion at December 31, 2011. In addition to residential mortgages, at December 31, 2012, $.4 billion of home equity and second mortgage loans were to customers that may be defined as sub-prime borrowers, compared with $.5 billion at December 31, 2011. 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 .6 percent of total assets at December 31, 2012, compared with .7 percent at December 31, 2011. 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

 

U.S. BANCORP     39   


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.

Covered loans included $1.3 billion in loans with negative-amortization payment options at December 31, 2012, compared with $1.5 billion at December 31, 2011. Other than covered loans, the Company does not have any residential mortgages with payment schedules that would cause balances to increase over time.

Home equity and second mortgages were $16.7 billion at December 31, 2012, compared with $18.1 billion at December 31, 2011, and included $5.1 billion of home equity lines in a first lien position and $11.6 billion of home equity and second mortgage loans and lines in a junior lien position. Loans and lines in a junior lien position at December 31, 2012, included approximately $3.7 billion of loans and lines for which the Company also serviced the related first lien loan, and approximately $7.9 billion where the Company did not service the related first lien loan. The Company was able to determine the status of the related first liens using information the Company has as the servicer of the first lien, information it received from its primary regulator on loans serviced by other large servicers 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 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 December 31, 2012:

 

    Junior Liens Behind        
(Dollars in Millions)  

Company
Owned or
Serviced

First Lien

    Third Party
First Lien
    Total  

Total

  $ 3,673      $ 7,950      $ 11,623   

Percent 30 – 89 days past due

    .85     1.19     1.08

Percent 90 days or more past due

    .26     .28     .27

Weighted-average CLTV

    86     85     85

Weighted-average credit score

    750        746        747   

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.

Credit card and other retail loans principally reflect the Company’s focus on consumers within its geographical footprint of branches and certain niche lending activities that are nationally focused. Approximately 68.6 percent of the Company’s credit card balances relate to cards originated through the Company’s branches or co-branded, travel and affinity programs that generally experience better credit quality performance than portfolios generated through other channels.

Tables 9, 10 and 11 provide a geographical summary of the residential mortgage, credit card and other retail loan portfolios, respectively.

Assets acquired by the Company in FDIC-assisted transactions included nonperforming loans and other loans with characteristics indicative of a high credit risk profile, including a substantial concentration in California, loans with negative-amortization payment options, and homebuilder and other construction finance loans. Because most of these loans are covered under loss sharing agreements with the FDIC, the Company’s financial exposure to losses from these assets is substantially reduced. To the extent actual losses exceed the Company’s estimates at acquisition, the Company’s financial risk would only be its share of those losses under the loss sharing agreements.

 

40   U.S. BANCORP


  TABLE 15   Delinquent Loan Ratios as a Percent of Ending Loan Balances

 

At December 31,

90 days or more past due excluding nonperforming loans

     2012      2011      2010      2009      2008  

Commercial

                

Commercial

       .10      .09      .15      .25      .15

Lease financing

                       .02                   

Total commercial

       .09         .08         .13         .22         .13   

Commercial Real Estate

                

Commercial mortgages

       .02         .02                           

Construction and development

       .02         .13         .01         .07         .36   

Total commercial real estate

       .02         .04