10-Q 1 d586012d10q.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

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

For the quarterly period ended September 30, 2018

OR

 

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

For the transition period from (not applicable)

Commission file number 1-6880

U.S. BANCORP

(Exact name of registrant as specified in its charter)

 

Delaware   41-0255900

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

800 Nicollet Mall

Minneapolis, Minnesota 55402

(Address of principal executive offices, including zip code)

651-466-3000

(Registrant’s telephone number, including area code)

(not applicable)

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

YES ☑    NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES ☑    NO ☐

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

 

Large accelerated filer ☑    Accelerated filer ☐

Non-accelerated filer ☐

  

Smaller reporting company ☐

Emerging growth company ☐

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

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

YES ☐    NO ☑

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

 

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

 

 

 


Table of Contents

Table of Contents and Form 10-Q Cross Reference Index

 

Part I — Financial Information

    

1) Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2)

       3  

a) Overview

       3  

b) Statement of Income Analysis

       4  

c) Balance Sheet Analysis

       6  

d) Non-GAAP Financial Measures

       30  

e) Critical Accounting Policies

       32  

f) Controls and Procedures (Item 4)

       32  

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

       8  

a) Overview

       8  

b) Credit Risk Management

       9  

c) Residual Value Risk Management

       21  

d) Operational Risk Management

       21  

e) Compliance Risk Management

       21  

f) Interest Rate Risk Management

       21  

g) Market Risk Management

       22  

h) Liquidity Risk Management

       24  

i) Capital Management

       25  

3) Line of Business Financial Review

       26  

4) Financial Statements (Item 1)

       33  

Part II — Other Information

    

1) Legal Proceedings (Item 1)

       75  

2) Risk Factors (Item 1A)

       75  

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

       75  

4) Exhibits (Item 6)

       75  

5) Signature

       76  

6) Exhibits

       77  

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995.

This quarterly report on Form 10-Q contains forward-looking statements about U.S. Bancorp. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements and are based on the information available to, and assumptions and estimates made by, management as of the date hereof. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future plans and prospects of U.S. Bancorp. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated. Deterioration in general business and economic conditions or turbulence in domestic or global financial markets could adversely affect U.S. Bancorp’s revenues and the values of its assets and liabilities, reduce the availability of funding to certain financial institutions, lead to a tightening of credit and increase stock price volatility. Stress in the commercial real estate markets, as well as a downturn in the residential real estate markets, could cause credit losses and deterioration in asset values. In addition, changes to statutes, regulations, or regulatory policies or practices could affect U.S. Bancorp in substantial and unpredictable ways. U.S. Bancorp’s results could also be adversely affected by changes in interest rates; deterioration in the credit quality of its loan portfolios or in the value of the collateral securing those loans; deterioration in the value of its investment securities; legal and regulatory developments; litigation; increased competition from both banks and non-banks; changes in the level of tariffs and other trade policies of the United States and its global trading partners; changes in customer behavior and preferences; breaches in data security; effects of mergers and acquisitions and related integration; effects of critical accounting policies and judgments; and management’s ability to effectively manage credit risk, market risk, operational risk, compliance risk, strategic risk, interest rate risk, liquidity risk and reputational risk.

For discussion of these and other risks that may cause actual results to differ from expectations, refer to U.S. Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2017, on file with the Securities and Exchange Commission, including the sections entitled “Corporate Risk Profile” and “Risk Factors” contained in Exhibit 13, and all subsequent filings with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934. However, factors other than these also could adversely affect U.S. Bancorp’s results, and the reader should not consider these factors to be a complete set of all potential risks or uncertainties. Forward-looking statements speak only as of the date hereof, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.

 

U.S. Bancorp    1


Table of Contents
 Table 1      Selected Financial Data

 

    Three Months Ended
September 30
            Nine Months Ended
September 30
 
(Dollars and Shares in Millions, Except Per Share Data)   2018     2017     Percent
Change
            2018     2017     Percent
Change
 

Condensed Income Statement

                

Net interest income

  $ 3,251     $ 3,176       2.4        $ 9,616     $ 9,205       4.5

Taxable-equivalent adjustment (a)

    30       51       (41.2          88       152       (42.1

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

    3,281       3,227       1.7            9,704       9,357       3.7  

Noninterest income

    2,408       2,331       3.3            7,079       6,900       2.6  

Securities gains (losses), net

    10       9       11.1            25       47       (46.8

Total net revenue

    5,699       5,567       2.4            16,808       16,304       3.1  

Noninterest expense

    3,044       2,998       1.5            9,184       8,891       3.3  

Provision for credit losses

    343       360       (4.7          1,011       1,055       (4.2

Income before taxes

    2,312       2,209       4.7            6,613       6,358       4.0  

Income taxes and taxable-equivalent adjustment

    490       640       (23.4          1,351       1,791       (24.6

Net income

    1,822       1,569       16.1            5,262       4,567       15.2  

Net (income) loss attributable to noncontrolling interests

    (7     (6     (16.7          (22     (31     29.0  

Net income attributable to U.S. Bancorp

  $ 1,815     $ 1,563       16.1          $ 5,240     $ 4,536       15.5  

Net income applicable to U.S. Bancorp common shareholders

  $ 1,732     $ 1,485       16.6          $ 5,007     $ 4,302       16.4  

Per Common Share

                

Earnings per share

  $ 1.06     $ .89       19.1        $ 3.05     $ 2.56       19.1

Diluted earnings per share

    1.06       .88       20.5            3.04       2.55       19.2  

Dividends declared per share

    .37       .30       23.3            .97       .86       12.8  

Book value per share (c)

    27.35       25.98       5.3             

Market value per share

    52.81       53.59       (1.5           

Average common shares outstanding

    1,629       1,672       (2.6          1,641       1,683       (2.5

Average diluted common shares outstanding

    1,633       1,678       (2.7          1,645       1,689       (2.6

Financial Ratios

                

Return on average assets

    1.58     1.38            1.54     1.36  

Return on average common equity

    15.5       13.6              15.2       13.4    

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

    3.15       3.14              3.14       3.09    

Efficiency ratio (b)

    53.5       53.9              54.7       54.7    

Net charge-offs as a percent of average loans outstanding

    .46       .47              .48       .49    

Average Balances

                

Loans

  $ 281,065     $ 277,626       1.2        $ 279,699     $ 275,454       1.5

Loans held for sale

    3,109       3,935       (21.0          3,262       3,457       (5.6

Investment securities (d)

    113,547       111,832       1.5            113,873       111,325       2.3  

Earning assets

    415,177       408,825       1.6            413,246       404,031       2.3  

Assets

    456,916       450,630       1.4            455,241       446,049       2.1  

Noninterest-bearing deposits

    77,192       81,964       (5.8          78,546       81,808       (4.0

Deposits

    330,121       335,151       (1.5          333,159       331,610       .5  

Short-term borrowings

    22,186       15,505       43.1            21,881       14,423       51.7  

Long-term debt

    39,701       35,544       11.7            36,400       35,697       2.0  

Total U.S. Bancorp shareholders’ equity

    50,138       48,819       2.7            49,433       48,342       2.3  
 
    September 30,
2018
    December 31,
2017
                                

Period End Balances

                

Loans

  $ 281,461     $ 280,432       .4           

Investment securities

    110,958       112,499       (1.4           

Assets

    464,607       462,040       .6             

Deposits

    331,178       347,215       (4.6           

Long-term debt

    40,894       32,259       26.8             

Total U.S. Bancorp shareholders’ equity

    50,375       49,040       2.7             

Asset Quality

                

Nonperforming assets

  $ 1,004     $ 1,200       (16.3 )%            

Allowance for credit losses

    4,426       4,417       .2             

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

    1.57     1.58             

Capital Ratios

                

Basel III standardized approach:

                

Common equity tier 1 capital

    9.0     9.3             

Tier 1 capital

    10.6       10.8               

Total risk-based capital

    12.6       12.9               

Leverage

    9.0       8.9               

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

    11.8       12.0               

Tangible common equity to tangible assets (b)

    7.7       7.6               

Tangible common equity to risk-weighted assets (b)

    9.3       9.4               

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

      9.1               

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

            11.6                                           

 

(a)

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

(b)

See Non-GAAP Financial Measures beginning on page 30.

(c)

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

(d)

Excludes unrealized gains and losses on available-for-sale investment securities and any premiums or discounts recorded related to the transfer of investment securities at fair value from available-for-sale to held-to-maturity.

 

2    U.S. Bancorp


Table of Contents

Management’s Discussion and Analysis

 

OVERVIEW

Earnings Summary U.S. Bancorp and its subsidiaries (the “Company”) reported net income attributable to U.S. Bancorp of $1.8 billion for the third quarter of 2018, or $1.06 per diluted common share, compared with $1.6 billion, or $0.88 per diluted common share, for the third quarter of 2017. Return on average assets and return on average common equity were 1.58 percent and 15.5 percent, respectively, for the third quarter of 2018, compared with 1.38 percent and 13.6 percent, respectively, for the third quarter of 2017.

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

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

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

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

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

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

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

 

U.S. Bancorp   3


Table of Contents
 Table 2      Noninterest Income

 

    Three Months Ended
September 30
            Nine Months Ended
September 30
 
(Dollars in Millions)   2018      2017      Percent
Change
            2018      2017      Percent
Change
 

Credit and debit card revenue

  $ 344      $ 318        8.2        $ 1,019      $ 947        7.6

Corporate payment products revenue

    169        150        12.7            481        427        12.6  

Merchant processing services

    392        377        4.0            1,142        1,112        2.7  

ATM processing services

    85        77        10.4            254        223        13.9  

Trust and investment management fees

    411        380        8.2            1,210        1,128        7.3  

Deposit service charges

    198        187        5.9            563        538        4.6  

Treasury management fees

    146        153        (4.6          451        466        (3.2

Commercial products revenue

    216        240        (10.0          670        730        (8.2

Mortgage banking revenue

    174        213        (18.3          549        632        (13.1

Investment products fees

    47        42        11.9            140        128        9.4  

Securities gains (losses), net

    10        9        11.1            25        47        (46.8

Other

    226        194        16.5                600        569        5.4  

Total noninterest income

  $ 2,418      $ 2,340        3.3            $ 7,104      $ 6,947        2.3

 

Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

STATEMENT OF INCOME ANALYSIS

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

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

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

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

 

4    U.S. Bancorp


Table of Contents
 Table 3      Noninterest Expense

 

    Three Months Ended
September 30
            Nine Months Ended
September 30
 
(Dollars in Millions)   2018     2017     Percent
Change
            2018     2017     Percent
Change
 

Compensation

  $ 1,529     $ 1,440       6.2        $ 4,594     $ 4,247       8.2

Employee benefits

    294       268       9.7            923       843       9.5  

Net occupancy and equipment

    270       258       4.7            797       760       4.9  

Professional services

    96       104       (7.7          274       305       (10.2

Marketing and business development

    106       92       15.2            314       291       7.9  

Technology and communications

    247       227       8.8            724       667       8.5  

Postage, printing and supplies

    84       82       2.4            244       244        

Other intangibles

    41       44       (6.8          120       131       (8.4

Other

    377       483       (21.9              1,194       1,403       (14.9

Total noninterest expense

  $ 3,044     $ 2,998       1.5            $ 9,184     $ 8,891       3.3

Efficiency ratio (a)

    53.5     53.9                      54.7     54.7        

 

a)

See Non-GAAP Financial Measures beginning on page 30.

 

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

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

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

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

 

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

Income Tax Expense The provision for income taxes was $460 million (an effective rate of 20.2 percent) for the third quarter and $1.3 billion (an effective rate of 19.4 percent) for the first nine months of 2018, compared with $589 million (an effective rate of 27.3 percent) and $1.6 billion (an effective rate of 26.4 percent) for the same periods of 2017. The lower 2018 tax rates reflect tax reform enacted in late 2017. For further information on income taxes, refer to Note 11 of the Notes to Consolidated Financial Statements.

BALANCE SHEET ANALYSIS

Loans The Company’s loan portfolio was $281.5 billion at September 30, 2018, compared with $280.4 billion at December 31, 2017, an increase of $1.1 billion (0.4 percent). The increase was driven by higher residential mortgages and commercial loans, partially offset by lower other retail loans, commercial real estate loans, credit card loans and covered loans.

Residential mortgages held in the loan portfolio increased $3.1 billion (5.2 percent) at September 30, 2018, compared with December 31, 2017, as origination activity more than offset the effect of customers paying down balances in the first nine months of 2018. Residential mortgages originated and placed in the Company’s loan portfolio include well-secured jumbo mortgages and branch-originated first lien home equity loans to borrowers with high credit quality.

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

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

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

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

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

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

Loans Held for Sale Loans held for sale, consisting of residential mortgages and other loans to be sold in the secondary market, were $4.5 billion at September 30, 2018, compared with $3.6 billion at December 31, 2017. The increase in loans held for sale was principally due to the transfer of $1.3 billion of covered residential mortgage loan balances to loans held for sale at the end of the third quarter of 2018. This increase was partially offset by a decrease in originated residential mortgage loans held for sale (“MLHFS”) balances due to a lower level of mortgage loan closings in the third quarter of 2018. Almost all of the residential mortgage loans the Company originates or purchases for sale follow guidelines that allow the loans to be sold into existing, highly liquid secondary markets; in particular in government agency transactions and to government-sponsored enterprises (“GSEs”).

Investment Securities Investment securities totaled $111.0 billion at September 30, 2018, compared with $112.5 billion at December 31, 2017. The $1.5 billion (1.4 percent) decrease was primarily due to a $1.4 billion unfavorable change in net unrealized gains (losses) on available-for-sale investment securities.

 

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 Table 4      Investment Securities

 

    Available-for-Sale             Held-to-Maturity  
At September 30, 2018
(Dollars in Millions)
  Amortized
Cost
     Fair Value      Weighted-
Average
Maturity in
Years
     Weighted-
Average
Yield (e)
            Amortized
Cost
     Fair Value      Weighted-
Average
Maturity in
Years
     Weighted-
Average
Yield (e)
 

U.S. Treasury and Agencies

                          

Maturing in one year or less

  $ 3,028      $ 3,016        .4        1.26        $ 650      $ 646        .7        1.73

Maturing after one year through five years

    16,490        15,935        3.0        1.70            2,912        2,755        4.4        1.64  

Maturing after five years through ten years

    658        630        7.6        2.85            1,550        1,475        5.7        2.10  

Maturing after ten years

                                                              

Total

  $ 20,176      $ 19,581        2.8        1.67            $ 5,112      $ 4,876        4.3        1.79

Mortgage-Backed Securities (a)

                          

Maturing in one year or less

  $ 69      $ 69        .4        3.83        $ 36      $ 36        .8        2.51

Maturing after one year through five years

    13,644        13,074        4.4        2.09            15,158        14,479        4.0        2.03  

Maturing after five years through ten years

    23,195        22,574        6.3        2.63            25,348        24,544        6.3        2.67  

Maturing after ten years

    2,583        2,598        14.4        3.18                360        361        14.0        3.06  

Total

  $ 39,491      $ 38,315        6.2        2.48            $ 40,902      $ 39,420        5.5        2.43

Asset-Backed Securities (a)

                          

Maturing in one year or less

  $      $                      $      $              

Maturing after one year through five years

    402        408        3.6        3.49            3        4        3.3        2.90  

Maturing after five years through ten years

                                    2        3        6.4        3.00  

Maturing after ten years

                                               1        17.0        2.84  

Total

  $ 402      $ 408        3.6        3.49            $ 5      $ 8        4.4        2.93

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

                          

Maturing in one year or less

  $ 238      $ 242        .6        5.70        $      $        .2        6.24

Maturing after one year through five years

    583        587        3.5        4.62            1        1        3.4        6.67  

Maturing after five years through ten years

    3,886        3,818        8.2        4.37            5        6        7.5        2.01  

Maturing after ten years

    2,140        1,961        19.0        4.11                                      

Total

  $ 6,847      $ 6,608        10.9        4.35            $ 6      $ 7        7.0        2.55

Other

                          

Maturing in one year or less

  $      $                      $ 9      $ 9        .1        3.21

Maturing after one year through five years

                                    12        12        1.2        3.08  

Maturing after five years through ten years

                                                          

Maturing after ten years

                                                              

Total

  $      $                          $ 21      $ 21        .7        3.14

Total investment securities (d)

  $ 66,916      $ 64,912        5.6        2.43            $ 46,046      $ 44,332        5.4        2.36

 

(a)

Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities that take into account anticipated future prepayments.

(b)

Information related to obligations of state and political subdivisions is presented based upon yield to first optional call date if the security is purchased at a premium, and yield to maturity if the security is purchased at par or a discount.

(c)

Maturity calculations for obligations of state and political subdivisions are based on the first optional call date for securities with a fair value above par and the contractual maturity date for securities with a fair value equal to or below par.

(d)

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

    

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

(e)

Weighted-average yields for obligations of state and political subdivisions are presented on a fully-taxable equivalent basis based on a federal income tax rate of 21 percent for 2018 and 35 percent for 2017. Yields on available-for-sale and held-to-maturity investment securities are computed based on amortized cost balances, excluding any premiums or discounts recorded related to the transfer of investment securities at fair value from available-for-sale to held-to-maturity.

 

    September 30, 2018             December 31, 2017  
(Dollars in Millions)   Amortized
Cost
     Percent
of Total
            Amortized
Cost
     Percent
of Total
 

U.S. Treasury and agencies

  $ 25,288        22.4        $ 28,767        25.5

Mortgage-backed securities

    80,393        71.2            77,606        68.6  

Asset-backed securities

    407        .3            419        .4  

Obligations of state and political subdivisions

    6,853        6.1            6,246        5.5  

Other

    21                       41         

Total investment securities

  $ 112,962        100.0            $ 113,079        100.0

 

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The Company’s available-for-sale securities are carried at fair value with changes in fair value reflected in other comprehensive income (loss) unless a security is deemed to be other-than-temporarily impaired. At September 30, 2018, the Company’s net unrealized losses on available-for-sale securities were $2.0 billion, compared with $580 million at December 31, 2017. The unfavorable change in net unrealized gains (losses) was primarily due to decreases in the fair value of U.S. Treasury, mortgage-backed and state and political securities as a result of changes in interest rates. Gross unrealized losses on available-for-sale securities totaled $2.1 billion at September 30, 2018, compared with $888 million at December 31, 2017. At September 30, 2018, the Company had no plans to sell securities with unrealized losses, and believes it is more likely than not that it would not be required to sell such securities before recovery of their amortized cost.

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

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

Borrowings The Company utilizes both short-term and long-term borrowings as part of its asset/liability management and funding strategies. Short-term borrowings, which include federal funds purchased, commercial paper, repurchase agreements, borrowings secured by high-grade assets and other short-term borrowings, were $23.9 billion at September 30, 2018, compared with $16.7 billion at December 31, 2017. The $7.2 billion (43.3 percent) increase in short-term borrowings was due to higher federal funds purchased, repurchase agreement and other short-term borrowings balances, partially offset by lower commercial paper balances. Long-term debt was $40.9 billion at September 30, 2018, compared with $32.3 billion at December 31, 2017. The $8.6 billion (26.8 percent) increase was primarily due to issuances of $8.4 billion of bank notes and $1.3 billion of medium-term notes, partially offset by a $901 million decrease in Federal Home Loan Bank (“FHLB”) advances. Refer to the “Liquidity Risk Management” section for discussion of liquidity management of the Company.

CORPORATE RISK PROFILE

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

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

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

 

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compliance, strategic, and reputational. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan, investment or derivative contract when it is due. Interest rate risk is the potential reduction of net interest income or market valuations as a result of changes in interest rates. Market risk arises from fluctuations in interest rates, foreign exchange rates, and security prices that may result in changes in the values of financial instruments, such as trading and available-for-sale securities, MLHFS, mortgage servicing rights (“MSRs”) and derivatives that are accounted for on a fair value basis. Liquidity risk is the possible inability to fund obligations or new business at a reasonable cost and in a timely manner. Operational risk is the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events, including the risk of loss resulting from breaches in data security. Operational risk can also include the risk of loss due to failures by third parties with which the Company does business. Compliance risk is the risk of loss arising from violations of, or nonconformance with, laws, rules, regulations, prescribed practices, internal policies, and procedures, or ethical standards, potentially exposing the Company to fines, civil money penalties, payment of damages and the voiding of contracts. Strategic risk is the risk to current or projected financial condition arising from adverse business decisions, poor implementation of business decisions, or lack of responsiveness to changes in the banking industry and operating environment. Reputational risk is the risk to current or anticipated earnings, capital, or franchise or enterprise value arising from negative public opinion. This risk may impair the Company’s competitiveness by affecting its ability to establish new relationships, offer new services or continue serving existing relationships. In addition to the risks identified above, other risk factors exist that may impact the Company. Refer to “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, for a detailed discussion of these factors.

The Company’s Board of Directors and management-level governance committees are supported by a “three lines of defense” model for establishing effective checks and balances. The first line of defense, the business lines, manages risks in conformity with established limits and policy requirements. In turn, business line leaders and their risk officers establish programs to ensure conformity with these limits and policy requirements. The second line of defense, which includes the Chief Risk Officer’s organization as well as policy and oversight activities of corporate support functions, translates risk appetite and strategy into actionable risk limits and policies. The second line of defense monitors first line of defense conformity with limits and policies, and provides reporting and escalation of emerging risks and other concerns to senior management and the Risk Management Committee of the Board of Directors. The third line of defense, internal audit, is responsible for providing the Audit Committee of the Board of Directors and senior management with independent assessment and assurance regarding the effectiveness of the Company’s governance, risk management and control processes.

Management regularly provides reports to the Risk Management Committee of the Board of Directors. The Risk Management Committee discusses with management the Company’s risk management performance, and provides a summary of key risks to the entire Board of Directors, covering the status of existing matters, areas of potential future concern and specific information on certain types of loss events. The Risk Management Committee considers quarterly reports by management assessing the Company’s performance relative to the risk appetite statements and the associated risk limits, including:

 

Qualitative considerations, such as the macroeconomic environment, regulatory and compliance changes, litigation developments, and technology and cybersecurity;

 

Capital ratios and projections, including regulatory measures and stressed scenarios;

 

Credit measures, including adversely rated and nonperforming loans, leveraged transactions, credit concentrations and lending limits;

 

Interest rate and market risk, including market value and net income simulation, and trading-related Value at Risk (“VaR”);

 

Liquidity risk, including funding projections under various stressed scenarios;

 

Operational and compliance risk, including losses stemming from events such as fraud, processing errors, control breaches, breaches in data security or adverse business decisions, as well as reporting on technology performance, and various legal and regulatory compliance measures; and

 

Reputational and strategic risk considerations, impacts and responses.

Credit Risk Management The Company’s strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or

 

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customer-specific concentrations), collateral values, trends in loan performance and macroeconomic factors, such as changes in unemployment rates, gross domestic product and consumer bankruptcy filings, as well as the potential impact on customers and the domestic economy resulting from new tariffs or increases in existing tariffs. The Risk Management Committee oversees the Company’s credit risk management process.

In addition, credit quality ratings as defined by the Company are an important part of the Company’s overall credit risk management and evaluation of its allowance for credit losses. Loans with a pass rating represent those loans not classified on the Company’s rating scale for problem credits, as minimal risk has been identified. Loans with a special mention or classified rating, including loans that are 90 days or more past due and still accruing, nonaccrual loans, those loans considered troubled debt restructurings (“TDRs”), and loans in a junior lien position that are current but are behind a modified or delinquent loan in a first lien position, encompass all loans held by the Company that it considers to have a potential or well-defined weakness that may put full collection of contractual cash flows at risk. The Company’s internal credit quality ratings for consumer loans are primarily based on delinquency and nonperforming status, except for a limited population of larger loans within those portfolios that are individually evaluated. For this limited population, the determination of the internal credit quality rating may also consider collateral value and customer cash flows. Refer to Note 4 in the Notes to Consolidated Financial Statements for further discussion of the Company’s loan portfolios including internal credit quality ratings. In addition, refer to “Management’s Discussion and Analysis — Credit Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, for a more detailed discussion on credit risk management processes.

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

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

The consumer lending segment represents loans and leases made to consumer customers, including residential mortgages, credit card loans, and other retail loans such as revolving consumer lines, auto loans and leases, home equity loans and lines, and student loans, a run-off portfolio. Home equity or second mortgage loans are junior lien closed-end accounts fully disbursed at origination. These loans typically are fixed rate loans, secured by residential real estate, with a 10- or 15-year fixed payment amortization schedule. Home equity lines are revolving accounts giving the borrower the ability to draw and repay balances repeatedly, up to a maximum commitment, and are secured by residential real estate. These include accounts in either a first or junior lien position. Typical terms on home equity lines in the portfolio are variable rates benchmarked to the prime rate, with a 10- or 15-year draw period during which a minimum payment is equivalent to the monthly interest, followed by a 20- or 10-year amortization period, respectively. At September 30, 2018, substantially all of the Company’s home equity lines were in the draw period. Approximately $1.4 billion, or 10 percent, of the outstanding home equity line balances at September 30, 2018, will enter the amortization period within the next 36 months. Key risk characteristics relevant to consumer lending segment loans primarily relate to the borrowers’ capacity and willingness to repay and include unemployment rates and other economic factors, customer payment history and credit scores, and in some cases, updated loan-to-value (“LTV”) information reflecting current market conditions on real estate based loans. These risk characteristics, among others, are reflected in forecasts of delinquency levels, bankruptcies and losses which are the primary factors in determining the allowance for credit losses for the consumer lending segment.

The covered loan segment represents loans acquired in FDIC-assisted transactions that are covered by loss sharing agreements with the FDIC that greatly reduce the risk of future credit losses to the Company. Key risk

 

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characteristics for covered segment loans are consistent with the segment they would otherwise be included in had the loss share coverage not been in place, but consider the indemnification provided by the FDIC.

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

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

Residential mortgage originations are generally limited to prime borrowers and are performed through the Company’s branches, loan production offices, mobile and on-line services and a wholesale network of originators. The Company may retain residential mortgage loans it originates on its balance sheet or sell the loans into the secondary market while retaining the servicing rights and customer relationships. Utilizing the secondary markets enables the Company to effectively reduce its credit and other asset/liability risks. For residential mortgages that are retained in the Company’s portfolio and for home equity and second mortgages, credit risk is also diversified by geography and managed by adherence to LTV and borrower credit criteria during the underwriting process.

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

The following tables provide summary information of residential mortgages and home equity and second mortgages by LTV and borrower type at September 30, 2018:

 

Residential Mortgages
(Dollars in Millions)
  Interest
Only
    Amortizing     Total     Percent
of Total
 

Loan-to-Value

       

Less than or equal to 80%

  $ 2,088     $ 52,312     $ 54,400       86.5

Over 80% through 90%

    7       4,054       4,061       6.5  

Over 90% through 100%

    3       457       460       .7  

Over 100%

    1       451       452       .7  

No LTV available

          48       48       .1  

Loans purchased from GNMA mortgage pools (a)

          3,483       3,483       5.5  

Total

  $ 2,099     $ 60,805     $ 62,904       100.0

Borrower Type

       

Prime borrowers

  $ 2,099     $ 56,292     $ 58,391       92.8

Sub-prime borrowers

          727       727       1.2  

Other borrowers

          303       303       .5  

Loans purchased from GNMA mortgage pools (a)

          3,483       3,483       5.5  

Total

  $ 2,099     $ 60,805     $ 62,904       100.0

 

(a)

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

 

Home Equity and Second Mortgages
(Dollars in Millions)
  Lines     Loans     Total     Percent
of Total
 

Loan-to-Value

       

Less than or equal to 80%

  $ 11,760     $ 781     $ 12,541       78.6

Over 80% through 90%

    1,966       736       2,702       16.9  

Over 90% through 100%

    318       85       403       2.5  

Over 100%

    238       16       254       1.6  

No LTV/CLTV available

    55       11       66       .4  

Total

  $ 14,337     $ 1,629     $ 15,966       100.0

Borrower Type

       

Prime borrowers

  $ 14,123     $ 1,565     $ 15,688       98.3

Sub-prime borrowers

    42       57       99       .6  

Other borrowers

    172       7       179       1.1  

Total

  $ 14,337     $ 1,629     $ 15,966       100.0

The total amount of consumer lending segment residential mortgage and home equity and second mortgage loans to customers that may be defined as sub-prime borrowers represented only 0.2 percent of the Company’s total assets at September 30, 2018 and December 31, 2017. The Company considers sub-prime loans to be those loans made to borrowers with a risk of default significantly higher than those approved for prime lending programs, as reflected in credit scores obtained from independent agencies at loan origination, in addition to other credit underwriting criteria. Sub-prime portfolios include only loans originated according to the Company’s underwriting programs

 

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specifically designed to serve customers with weakened credit histories. The sub-prime designation indicators have been and will continue to be subject to re-evaluation over time as borrower characteristics, payment performance and economic conditions change. The sub-prime loans originated during periods from June 2009 and after are with borrowers who met the Company’s program guidelines and have a credit score that generally is at or below a threshold of 620 to 650 depending on the program. Sub-prime loans originated during periods prior to June 2009 were based upon program level guidelines without regard to credit score.

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

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

 

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

Total

  $ 4,858     $ 6,845     $ 11,703  

Percent 30-89 days past due

    .35     .45     .41

Percent 90 days or more past due

    .06     .08     .07

Weighted-average CLTV

    71     67     69

Weighted-average credit score

    779       775       777  

See the “Analysis and Determination of the Allowance for Credit Losses” section for additional information on how the Company determines the allowance for credit losses for loans in a junior lien position.

 

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

 

90 days or more past due excluding nonperforming loans   September 30,
2018
    December 31,
2017
 

Commercial

   

Commercial

    .07     .06

Lease financing

           

Total commercial

    .06       .06  

Commercial Real Estate

   

Commercial mortgages

           

Construction and development

    .03       .05  

Total commercial real estate

    .01       .01  

Residential Mortgages (a)

    .19       .22  

Credit Card

    1.18       1.28  

Other Retail

   

Retail leasing

    .02       .03  

Home equity and second mortgages

    .32       .28  

Other

    .14       .15  

Total other retail

    .17       .17  

Total loans, excluding covered loans

    .19       .21  

Covered Loans (b)

    .86       4.74  

Total loans

    .20     .26
90 days or more past due including nonperforming loans   September 30,
2018
    December 31,
2017
 

Commercial

    .28     .31

Commercial real estate

    .27       .37  

Residential mortgages (a)

    .69       .96  

Credit card

    1.18       1.28  

Other retail

    .49       .46  

Total loans, excluding covered loans

    .48       .57  

Covered loans (b)

    .86       4.93  

Total loans

    .48     .62

 

(a)

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

(b)

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

 

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Loan Delinquencies Trends in delinquency ratios are an indicator, among other considerations, of credit risk within the Company’s loan portfolios. The Company measures delinquencies, both including and excluding nonperforming loans, to enable comparability with other companies. Accruing loans 90 days or more past due totaled $551 million at September 30, 2018, compared with $720 million at December 31, 2017. These balances exclude loans purchased from Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs. Accruing loans 90 days or more past due are not included in nonperforming assets and continue to accrue interest because they are adequately secured by collateral, are in the process of collection and are reasonably expected to result in repayment or restoration to current status, or are managed in homogeneous portfolios with specified charge-off timeframes adhering to regulatory guidelines. The ratio of accruing loans 90 days or more past due to total loans was 0.20 percent at September 30, 2018, compared with 0.26 percent at December 31, 2017.

 

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

 

     Amount              As a Percent of Ending
Loan Balances
 
(Dollars in Millions)    September 30,
2018
     December 31,
2017
             September 30,
2018
    December 31,
2017
 

Residential Mortgages (a)

               

30-89 days

   $ 167      $ 198             .27     .33

90 days or more

     118        130             .19       .22  

Nonperforming

     317        442                 .50       .74  

Total

   $ 602      $ 770             .96     1.29

Credit Card

               

30-89 days

   $ 309      $ 302             1.42     1.37

90 days or more

     259        284             1.18       1.28  

Nonperforming

            1                        

Total

   $ 568      $ 587             2.60     2.65

Other Retail

               

Retail Leasing

               

30-89 days

   $ 32      $ 33             .38     .41

90 days or more

     2        2             .02       .03  

Nonperforming

     11        8                 .13       .10  

Total

   $ 45      $ 43             .53     .54

Home Equity and Second Mortgages

               

30-89 days

   $ 71      $ 78             .45     .48

90 days or more

     51        45             .32       .28  

Nonperforming

     125        126                 .78       .77  

Total

   $ 247      $ 249             1.55     1.53

Other (b)

               

30-89 days

   $ 262      $ 265             .83     .80

90 days or more

     44        48             .14       .15  

Nonperforming

     39        34                 .12       .10  

Total

   $ 345      $ 347                 1.09     1.05

 

(a)

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

(b)

Includes revolving credit, installment, automobile and student loans.

 

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The following table provides summary delinquency information for covered loans:

 

    Amount            As a Percent of Ending
Loan Balances
 
(Dollars in Millions)   September 30,
2018
    December 31,
2017
           September 30,
2018
    December 31,
2017
 

30-89 days

  $ 6     $ 50           .43     1.61

90 days or more

    12       148           .86       4.74  

Nonperforming

          6                     .19  

Total (a)

  $ 18     $ 204               1.29     6.54

 

(a)

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

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

Troubled Debt Restructurings Concessionary modifications are classified as TDRs unless the modification results in only an insignificant delay in the payments to be received. TDRs accrue interest if the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles, which is generally six months or greater. At September 30, 2018, performing TDRs were $3.9 billion, compared with $4.0 billion at December 31, 2017. Loans classified as TDRs are considered impaired loans for reporting and measurement purposes.

The Company continues to work with customers to modify loans for borrowers who are experiencing financial difficulties, including those loans acquired through FDIC-assisted acquisitions. Many of the Company’s TDRs are determined on a case-by-case basis in connection with ongoing loan collection processes. The modifications vary within each of the Company’s loan classes. Commercial lending segment TDRs generally include extensions of the maturity date and may be accompanied by an increase or decrease to the interest rate. The Company may also work with the borrower to make other changes to the loan to mitigate losses, such as obtaining additional collateral and/or guarantees to support the loan.

The Company has also implemented certain residential mortgage loan restructuring programs that may result in TDRs. The Company modifies residential mortgage loans under Federal Housing Administration, United States Department of Veterans Affairs, and its own internal programs. Under these programs, the Company offers qualifying homeowners the opportunity to permanently modify their loan and achieve more affordable monthly payments by providing loan concessions. These concessions may include adjustments to interest rates, conversion of adjustable rates to fixed rates, extensions of maturity dates or deferrals of payments, capitalization of accrued interest and/or outstanding advances, or in limited situations, partial forgiveness of loan principal. In most instances, participation in residential mortgage loan restructuring programs requires the customer to complete a short-term trial period. A permanent loan modification is contingent on the customer successfully completing the trial period arrangement, and the loan documents are not modified until that time. The Company reports loans in a trial period arrangement as TDRs and continues to report them as TDRs after the trial period.

Credit card and other retail loan TDRs are generally part of distinct restructuring programs providing customers modification solutions over a specified time period, generally up to 60 months.

In accordance with regulatory guidance, the Company considers secured consumer loans that have had debt discharged through bankruptcy where the borrower has not reaffirmed the debt to be TDRs. If the loan amount exceeds the collateral value, the loan is charged down to collateral value and the remaining amount is reported as nonperforming.

Modifications to loans in the covered segment are similar in nature to that described above for non-covered loans, and the evaluation and determination of TDR status is similar, except that acquired loans restructured after acquisition are not considered TDRs for purposes of the Company’s accounting and disclosure if the loans evidenced credit deterioration as of the acquisition date and are accounted for in pools. Losses associated with modifications on covered loans, including the economic impact of interest rate reductions, are generally eligible for reimbursement under the loss sharing agreements.

 

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

 

           As a Percent of Performing TDRs              
At September 30, 2018
(Dollars in Millions)
  Performing
TDRs
     30-89 Days
Past Due
    90 Days or More
Past Due
    Nonperforming
TDRs
    Total
TDRs
 

Commercial

  $ 237        2.7     2.0   $ 129 (a)    $ 366  

Commercial real estate

    222        .6             36 (b)      258  

Residential mortgages

    1,430        3.1       4.2       224       1,654 (d) 

Credit card

    239        11.2       6.0             239  

Other retail

    134        6.6       6.6       49 (c)      183 (e) 

TDRs, excluding GNMA and covered loans

    2,262        3.9       3.9       438       2,700  

Loans purchased from GNMA mortgage pools (g)

    1,668                          1,668 (f) 

Covered loans

    10        7.5       2.5             10  

Total

  $ 3,940        2.2     2.2   $ 438     $ 4,378  

 

(a)

Primarily represents loans less than six months from the modification date that have not met the performance period required to return to accrual status (generally six months) and small business credit cards with a modified rate equal to 0 percent.

(b)

Primarily represents loans less than six months from the modification date that have not met the performance period required to return to accrual status (generally six months).

(c)

Primarily represents loans with a modified rate equal to 0 percent.

(d)

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

(e)

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

(f)

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

(g)

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

 

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

 

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Nonperforming Assets The level of nonperforming assets represents another indicator of the potential for future credit losses. Nonperforming assets include nonaccrual loans, restructured loans not performing in accordance with modified terms and not accruing interest, restructured loans that have not met the performance period required to return to accrual status, other real estate owned (“OREO”) and other nonperforming assets owned by the Company. Nonperforming assets are generally either originated by the Company or acquired under FDIC loss sharing agreements that substantially reduce the risk of credit losses to the Company. Interest payments collected from assets on nonaccrual status are generally applied against the principal balance and not recorded as income. However, interest income may be recognized for interest payments if the remaining carrying amount of the loan is believed to be collectible.

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

OREO, excluding covered assets, was $100 million at September 30, 2018, compared with $141 million at December 31, 2017, and was related to foreclosed properties that previously secured loan balances. These balances exclude foreclosed GNMA loans whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.

 

The following table provides an analysis of OREO, excluding covered assets, as a percent of their related loan balances, including geographical location detail for residential (residential mortgage, home equity and second mortgage) and commercial (commercial and commercial real estate) loan balances:

 

    Amount            As a Percent of Ending
Loan Balances
 
(Dollars in Millions)   September 30,
2018
    December 31,
2017
           September 30,
2018
    December 31,
2017
 

Residential

           

Illinois

  $ 11     $ 14           .25     .32

New York

    8       8           1.01       1.01  

Minnesota

    6       11           .10       .18  

Wisconsin

    5       8           .24       .38  

Oregon

    5       3           .15       .09  

All other states

    60       91               .10       .15  

Total residential

    95       135           .12       .18  

Commercial

           

California

    3       4           .01       .02  

Idaho

    1       1           .09       .07  

All other states

    1       1                      

Total commercial

    5       6                      

Total

  $ 100     $ 141               .04     .05

 

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 Table 6      Nonperforming Assets (a)

 

(Dollars in Millions)   September 30,
2018
    December 31,
2017
 

Commercial

   

Commercial

  $ 193     $ 225  

Lease financing

    23       24  

Total commercial

    216       249  

Commercial Real Estate

   

Commercial mortgages

    77       108  

Construction and development

    28       34  

Total commercial real estate

    105       142  

Residential Mortgages (b)

    317       442  

Credit Card

          1  

Other Retail

   

Retail leasing

    11       8  

Home equity and second mortgages

    125       126  

Other

    39       34  

Total other retail

    175       168  

Total nonperforming loans, excluding covered loans

    813       1,002  

Covered Loans

          6  

Total nonperforming loans

    813       1,008  

Other Real Estate (c)

    100       141  

Covered Other Real Estate

    19       21  

Other Assets

    72       30  

Total nonperforming assets

  $ 1,004     $ 1,200  

Accruing loans 90 days or more past due (b)

  $ 551     $ 720  

Nonperforming loans to total loans

    .29     .36

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

    .36     .43

Changes in Nonperforming Assets

 

(Dollars in Millions)    Commercial and
Commercial
Real Estate
    Residential
Mortgages,
Credit Card and
Other Retail
    Covered
Assets
    Total  

Balance December 31, 2017

   $ 404     $ 769     $ 27     $ 1,200  

Additions to nonperforming assets

        

New nonaccrual loans and foreclosed properties

     265       247       10       522  

Advances on loans

     19       1       1       21  

Total additions

     284       248       11       543  

Reductions in nonperforming assets

        

Paydowns, payoffs

     (152     (108     (1     (261

Net sales

     (44     (110     (12     (166

Return to performing status

     (11     (132           (143

Charge-offs (d)

     (148     (21           (169

Total reductions

     (355     (371     (13     (739

Net additions to (reductions in) nonperforming assets

     (71     (123     (2     (196

Balance September 30, 2018

   $ 333     $ 646     $ 25     $ 1,004  

 

(a)

Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due.

(b)

Excludes $1.7 billion and $1.9 billion at September 30, 2018 and December 31, 2017, respectively, of loans purchased from GNMA mortgage pools that are 90 days or more past due that continue to accrue interest, as their repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.

(c)

Foreclosed GNMA loans of $240 million and $267 million at September 30, 2018, and December 31, 2017, respectively, continue to accrue interest and are recorded as other assets and excluded from nonperforming assets because they are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.

(d)

Charge-offs exclude actions for certain card products and loan sales that were not classified as nonperforming at the time the charge-off occurred.

 

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

 

    Three Months Ended
September 30
           Nine Months Ended
September 30
 
     2018     2017            2018     2017  

Commercial

           

Commercial

    .27     .34         .25     .33

Lease financing

    .22       .29               .27       .27  

Total commercial

    .26       .34           .25       .33  

Commercial Real Estate

           

Commercial mortgages

    (.07     (.03         (.04     (.04

Construction and development

    (.14     (.17             (.04     (.09

Total commercial real estate

    (.09     (.07         (.04     (.06

Residential Mortgages

    .03       .05           .03       .06  

Credit Card

    3.75       3.55           3.91       3.73  

Other Retail

           

Retail leasing

    .14       .10           .15       .13  

Home equity and second mortgages

    (.02     (.02         (.03     (.02

Other

    .74       .73               .76       .74  

Total other retail

    .43       .42               .45       .44  

Total loans, excluding covered loans

    .47       .48           .48       .49  

Covered Loans

                               

Total loans

    .46     .47             .48     .49

 

Analysis of Loan Net Charge-Offs Total loan net charge-offs were $328 million for the third quarter and $1.0 billion for the first nine months of 2018, compared with $330 million and $1.0 billion for the same periods of 2017. The ratio of total loan net charge-offs to average loans outstanding on an annualized basis for the third quarter and first nine months of 2018 was 0.46 percent and 0.48 percent, respectively, compared with 0.47 percent and 0.49 percent, respectively, for the same periods of 2017. The year-over-year decreases in total net charge-offs reflected lower commercial loan and residential mortgage net charge-offs, partially offset by higher credit card loan net charge-offs.

Analysis and Determination of the Allowance for Credit Losses The allowance for credit losses reserves for probable and estimable losses incurred in the Company’s loan and lease portfolio, including unfunded credit commitments, and includes certain amounts that do not represent loss exposure to the Company because those losses are recoverable under loss sharing agreements with the FDIC. The allowance for credit losses is increased through provisions charged to earnings and reduced by net charge-offs. Management evaluates the adequacy of the allowance for incurred losses on a quarterly basis.

The allowance recorded for loans in the commercial lending segment is based on reviews of individual credit relationships and considers the migration analysis of commercial lending segment loans and actual loss experience. For each loan type, this historical loss experience is adjusted as necessary to consider any relevant changes in portfolio composition, lending policies, underwriting standards, risk management practices or economic conditions. The results of the analysis are evaluated quarterly to confirm the selected loss experience is appropriate for each commercial loan type. The allowance recorded for impaired loans greater than $5 million in the commercial lending segment is based on an individual loan analysis utilizing expected cash flows discounted using the original effective interest rate, the observable market price of the loan, or the fair value of the collateral, less selling costs, for collateral-dependent loans, rather than the migration analysis. The allowance recorded for all other commercial lending segment loans is determined on a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, delinquency status, bankruptcy experience, portfolio growth and historical losses, adjusted for current trends.

The allowance recorded for TDR loans and purchased impaired loans in the consumer lending segment is determined on a homogenous pool basis utilizing expected cash flows discounted using the original effective interest rate of the pool, or the prior quarter effective rate, respectively. The allowance for collateral-dependent loans in the consumer lending segment is determined based on the fair value of the collateral less costs to sell. The allowance recorded for all other consumer lending segment loans is determined on a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, delinquency status, refreshed LTV ratios when possible, portfolio growth and historical losses, adjusted for current trends. Credit card and other retail loans 90 days or more past due are generally not placed on nonaccrual status because of the relatively short period of time to charge-off and, therefore, are excluded from nonperforming loans and measures that include nonperforming loans as part of the calculation.

When evaluating the appropriateness of the allowance for credit losses for any loans and lines in a junior lien position, the Company considers the delinquency and modification status of the first lien. At September 30, 2018, the Company serviced the first lien on 42 percent of the home equity loans and lines in a junior lien position. The Company also considers information received from its primary regulator on the status of the first liens that are

 

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serviced by other large servicers in the industry and the status of first lien mortgage accounts reported on customer credit bureau files. Regardless of whether or not the Company services the first lien, an assessment is made of economic conditions, problem loans, recent loss experience and other factors in determining the allowance for credit losses. Based on the available information, the Company estimated $286 million or 1.8 percent of its total home equity portfolio at September 30, 2018, represented non-delinquent junior liens where the first lien was delinquent or modified.

The Company uses historical loss experience on the loans and lines in a junior lien position where the first lien is serviced by the Company, or can be identified in credit bureau data, to establish loss estimates for junior lien loans and lines the Company services that are current, but the first lien is delinquent or modified. Historically, the number of junior lien defaults has been a small percentage of the total portfolio (approximately 1 percent annually), while the long-term average loss rate on loans that default has been approximately 90 percent. In addition, the Company obtains updated credit scores on its home equity portfolio each quarter, and in some cases more frequently, and uses this information to qualitatively supplement its loss estimation methods. Credit score distributions for the portfolio are monitored monthly and any changes in the distribution are one of the factors considered in assessing the Company’s loss estimates. In its evaluation of the allowance for credit losses, the Company also considers the increased risk of loss associated with home equity lines that are contractually scheduled to convert from a revolving status to a fully amortizing payment and with residential lines and loans that have a balloon payoff provision.

The allowance for the covered loan segment is evaluated each quarter in a manner similar to that described for non-covered loans, and represents any decreases in expected cash flows on those loans after the acquisition date. The provision for credit losses for covered loans considers the indemnification provided by the FDIC.

In addition, the evaluation of the appropriate allowance for credit losses on purchased non-impaired loans acquired after January 1, 2009, in the various loan segments considers credit discounts recorded as a part of the initial determination of the fair value of the loans. For these loans, no allowance for credit losses is recorded at the purchase date. Credit discounts representing the principal losses expected over the life of the loans are a component of the initial fair value. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Company records a provision for credit losses only when the required allowance, net of any expected reimbursement under any loss sharing agreements with the FDIC, exceeds any remaining credit discounts.

The evaluation of the appropriate allowance for credit losses for purchased impaired loans in the various loan segments considers the expected cash flows to be collected from the borrower. These loans are initially recorded at fair value and, therefore, no allowance for credit losses is recorded at the purchase date.

Subsequent to the purchase date, the expected cash flows of purchased loans are subject to evaluation. Decreases in expected cash flows are recognized by recording an allowance for credit losses with the related provision for credit losses reduced for the amount reimbursable by the FDIC, where applicable. If the expected cash flows on the purchased loans increase such that a previously recorded impairment allowance can be reversed, the Company records a reduction in the allowance with a related reduction in losses reimbursable by the FDIC, where applicable. Increases in expected cash flows of purchased loans, when there are no reversals of previous impairment allowances, are recognized over the remaining life of the loans and resulting decreases in expected cash flows of the FDIC indemnification assets are amortized over the shorter of the remaining contractual term of the indemnification agreements or the remaining life of the loans.

The Company’s methodology for determining the appropriate allowance for credit losses for all the loan segments also considers the imprecision inherent in the methodologies used. As a result, in addition to the amounts determined under the methodologies described above, management also considers the potential impact of other qualitative factors which include, but are not limited to, the following: economic factors; geographic and other concentration risks; delinquency and nonaccrual trends; current business conditions; changes in lending policy, underwriting standards and other relevant business practices; results of internal review; and the regulatory environment. The consideration of these items results in adjustments to allowance amounts included in the Company’s allowance for credit losses for each of the above loan segments.

Refer to “Management’s Discussion and Analysis — Analysis of the Allowance for Credit Losses” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, for further discussion on the analysis and determination of the allowance for credit losses.

At September 30, 2018, the allowance for credit losses was $4.4 billion (1.57 percent of period-end loans), compared with an allowance of $4.4 billion (1.58 percent of period-end loans) at December 31, 2017. The ratio of the allowance for credit losses to nonperforming loans was 544 percent at September 30, 2018, compared with 438 percent at December 31, 2017. The ratio of the allowance for credit losses to annualized loan net charge-offs was 340 percent at September 30, 2018, compared with 332 percent of full-year 2017 net charge-offs at December 31, 2017.

 

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 Table 8      Summary of Allowance for Credit Losses

 

    Three Months Ended
September 30
            Nine Months Ended
September 30
 
(Dollars in Millions)   2018     2017             2018     2017  

Balance at beginning of period

  $ 4,411     $ 4,377          $ 4,417     $ 4,357  

Charge-Offs

            

Commercial

            

Commercial

    83       109            248       296  

Lease financing

    5       6                17       19  

Total commercial

    88       115            265       315  

Commercial real estate

            

Commercial mortgages

    1       1            4       5  

Construction and development

          1                2       2  

Total commercial real estate

    1       2            6       7  

Residential mortgages

    12       16            37       49  

Credit card

    231       214            727       653  

Other retail

            

Retail leasing

    6       3            16       11  

Home equity and second mortgages

    6       8            18       25  

Other

    84       75                249       227  

Total other retail

    96       86            283       263  

Covered loans (a)

                                

Total charge-offs

    428       433            1,318       1,287  

Recoveries

            

Commercial

            

Commercial

    20       30            75       71  

Lease financing

    2       2                6       8  

Total commercial

    22       32            81       79  

Commercial real estate

            

Commercial mortgages

    6       3            13       15  

Construction and development

    4       6                5       10  

Total commercial real estate

    10       9            18       25  

Residential mortgages

    8       9            22       22  

Credit card

    25       27            100       72  

Other retail

            

Retail leasing

    3       1            7       4  

Home equity and second mortgages

    7       9            22       28  

Other

    25       16                67       52  

Total other retail

    35       26            96       84  

Covered loans (a)

                                

Total recoveries

    100       103            317       282  

Net Charge-Offs

            

Commercial

            

Commercial

    63       79            173       225  

Lease financing

    3       4                11       11  

Total commercial

    66       83            184       236  

Commercial real estate

            

Commercial mortgages

    (5     (2          (9     (10

Construction and development

    (4     (5              (3     (8

Total commercial real estate

    (9     (7          (12     (18

Residential mortgages

    4       7            15       27  

Credit card

    206       187            627       581  

Other retail

            

Retail leasing

    3       2            9       7  

Home equity and second mortgages

    (1     (1          (4     (3

Other

    59       59                182       175  

Total other retail

    61       60            187       179  

Covered loans (a)

                                

Total net charge-offs

    328       330            1,001       1,005  

Provision for credit losses

    343       360            1,011       1,055  

Other changes (b)

                         (1      

Balance at end of period (c)

  $ 4,426     $ 4,407              $ 4,426     $ 4,407  

Components

            

Allowance for loan losses

  $ 3,954     $ 3,908           

Liability for unfunded credit commitments

    472       499               

Total allowance for credit losses

  $ 4,426     $ 4,407               

Allowance for Credit Losses as a Percentage of

            

Period-end loans

    1.57     1.58         

Nonperforming loans

    544       426           

Nonperforming and accruing loans 90 days or more past due

    324       262           

Nonperforming assets

    441       352           

Annualized net charge-offs

    340       337                           

 

(a)

Relates to covered loan charge-offs and recoveries not reimbursable by the FDIC.

(b)

Includes net changes in credit losses to be reimbursed by the FDIC and reductions in the allowance for covered loans where the reversal of a previously recorded allowance was offset by an associated decrease in the indemnification asset, and the impact of any loan sales.

(c)

At September 30, 2018 and 2017, $1.7 billion of the total allowance for credit losses related to incurred losses on credit card and other retail loans.

 

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Residual Value Risk Management The Company manages its risk to changes in the residual value of leased assets through disciplined residual valuation setting at the inception of a lease, diversification of its leased assets, regular residual asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. As of September 30, 2018, no significant change in the amount of residual values or concentration of the portfolios had occurred since December 31, 2017. Refer to “Management’s Discussion and Analysis — Residual Value Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, for further discussion on residual value risk management.

Operational Risk Management Operational risk is inherent in all business activities, and the management of this risk is important to the achievement of the Company’s objectives. Business lines have direct and primary responsibility and accountability for identifying, controlling, and monitoring operational risks embedded in their business activities. The Company maintains a system of controls with the objective of providing proper transaction authorization and execution, proper system operations, proper oversight of third parties with whom it does business, safeguarding of assets from misuse or theft, and ensuring the reliability and security of financial and other data. Refer to “Management’s Discussion and Analysis — Operational Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, for further discussion on operational risk management.

Compliance Risk Management The Company may suffer legal or regulatory sanctions, material financial loss, or damage to reputation through failure to comply with laws, regulations, rules, standards of good practice, and codes of conduct, including those related to compliance with Bank Secrecy Act/anti-money laundering requirements, sanctions compliance requirements as administered by the Office of Foreign Assets Control, consumer protection and other requirements. The Company has controls and processes in place for the assessment, identification, monitoring, management and reporting of compliance risks and issues. Refer to “Management’s Discussion and Analysis — Compliance Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, for further discussion on compliance risk management.

Interest Rate Risk Management In the banking industry, changes in interest rates are a significant risk that can impact earnings, market valuations and the safety and soundness of an entity. To manage the impact on net interest income and the market value of assets and liabilities, the Company manages its exposure to changes in interest rates through asset and liability management activities within guidelines established by its Asset Liability Management Committee (“ALCO”) and approved by the Board of Directors. The ALCO has the responsibility for approving and ensuring compliance with the ALCO management policies, including interest rate risk exposure. The Company uses net interest income simulation analysis and market value of equity modeling for measuring and analyzing consolidated interest rate risk. The Company has established policy limits within which it manages the overall interest rate risk profile, and at September 30, 2018 and December 31, 2017, the Company was within those limits.

Net Interest Income Simulation Analysis Management estimates the impact on net interest income of changes in market interest rates under a number of scenarios, including gradual shifts, immediate and sustained parallel shifts, and flattening or steepening of the yield curve. Table 9 summarizes the projected impact to net interest income over the next 12 months of various potential interest rate changes. The sensitivity of the projected impact to net interest income over the next 12 months is dependent on balance sheet growth, product mix, deposit behavior, pricing and funding decisions. While the Company utilizes assumptions based on historical information and expected behaviors, actual outcomes could vary significantly. For example, if deposit outflows are more limited (stable) than the assumptions the Company used in preparing Table 9, the projected impact to net interest income would increase to 1.72 percent in the “Up 50 basis point (“bps”)” and 3.85 percent in the “Up 200 bps” scenarios. Refer to “Management’s Discussion and Analysis — Net Interest Income Simulation Analysis” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, for further discussion on net interest income simulation analysis.

 

 Table 9      Sensitivity of Net Interest Income

 

    September 30, 2018             December 31, 2017  
     Down 50 bps
Immediate
    Up 50 bps
Immediate
    Down 200 bps
Gradual
    Up 200 bps
Gradual
            Down 50 bps
Immediate
    Up 50 bps
Immediate
    Down 200 bps
Gradual
     Up 200 bps
Gradual
 

Net interest income

    (1.42 )%      1.02     (3.84 )%      1.49              (2.07 )%      1.13     *        1.72

 

*

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

 

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Market Value of Equity Modeling The Company also manages interest rate sensitivity by utilizing market value of equity modeling, which measures the degree to which the market values of the Company’s assets and liabilities and off-balance sheet instruments will change given a change in interest rates. Management measures the impact of changes in market interest rates under a number of scenarios, including immediate and sustained parallel shifts, and flattening or steepening of the yield curve. A 200 bps increase would have resulted in a 3.7 percent decrease in the market value of equity at September 30, 2018, compared with a 3.1 percent decrease at December 31, 2017. A 200 bps decrease would have resulted in a 5.2 percent decrease in the market value of equity at September 30, 2018, compared with an 8.0 percent decrease at December 31, 2017. Refer to “Management’s Discussion and Analysis — Market Value of Equity Modeling” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, for further discussion on market value of equity modeling.

Use of Derivatives to Manage Interest Rate and Other Risks To manage the sensitivity of earnings and capital to interest rate, prepayment, credit, price and foreign currency fluctuations (asset and liability management positions), the Company enters into derivative transactions. The Company uses derivatives for asset and liability management purposes primarily in the following ways:

 

To convert fixed-rate debt from fixed-rate payments to floating-rate payments;

 

To convert the cash flows associated with floating-rate debt from floating-rate payments to fixed-rate payments;

 

To mitigate changes in value of the Company’s unfunded mortgage loan commitments, funded MLHFS and MSRs;

 

To mitigate remeasurement volatility of foreign currency denominated balances; and

 

To mitigate the volatility of the Company’s net investment in foreign operations driven by fluctuations in foreign currency exchange rates.

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

The Company does not designate all of the derivatives that it enters into for risk management purposes as accounting hedges because of the inefficiency of applying the accounting requirements and may instead elect fair value accounting for the related hedged items. In particular, the Company enters into interest rate swaps, swaptions, forward commitments to buy to-be-announced securities (“TBAs”), U.S. Treasury and Eurodollar futures and options on U.S. Treasury futures to mitigate fluctuations in the value of its MSRs, but does not designate those derivatives as accounting hedges.

Additionally, the Company uses forward commitments to sell TBAs and other commitments to sell residential mortgage loans at specified prices to economically hedge the interest rate risk in its residential mortgage loan production activities. At September 30, 2018, the Company had $4.0 billion of forward commitments to sell, hedging $2.2 billion of MLHFS and $2.3 billion of unfunded mortgage loan commitments. The forward commitments to sell and the unfunded mortgage loan commitments on loans intended to be sold are considered derivatives under the accounting guidance related to accounting for derivative instruments and hedging activities. The Company has elected the fair value option for the MLHFS.

Derivatives are subject to credit risk associated with counterparties to the contracts. Credit risk associated with derivatives is measured by the Company based on the probability of counterparty default. The Company manages the credit risk of its derivative positions by diversifying its positions among various counterparties, by entering into master netting arrangements, and, where possible, by requiring collateral arrangements. The Company may also transfer counterparty credit risk related to interest rate swaps to third parties through the use of risk participation agreements. In addition, certain interest rate swaps, interest rate forwards and credit contracts are required to be centrally cleared through clearinghouses to further mitigate counterparty credit risk.

For additional information on derivatives and hedging activities, refer to Notes 12 and 13 in the Notes to Consolidated Financial Statements.

Market Risk Management In addition to interest rate risk, the Company is exposed to other forms of market risk, principally related to trading activities which support customers’ strategies to manage their own foreign currency, interest rate risk and funding activities. For purposes of its internal capital adequacy assessment

 

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process, the Company considers risk arising from its trading activities employing methodologies consistent with the requirements of regulatory rules for market risk. The Company’s Market Risk Committee (“MRC”), within the framework of the ALCO, oversees market risk management. The MRC monitors and reviews the Company’s trading positions and establishes policies for market risk management, including exposure limits for each portfolio. The Company uses a VaR approach to measure general market risk. Theoretically, VaR represents the statistical risk of loss the Company has to adverse market movements over a one-day time horizon. The Company uses the Historical Simulation method to calculate VaR for its trading businesses measured at the ninety-ninth percentile using a one-year look-back period for distributions derived from past market data. The market factors used in the calculations include those pertinent to market risks inherent in the underlying trading portfolios, principally those that affect the Company’s corporate bond trading business, foreign currency transaction business, client derivatives business, loan trading business and municipal securities business. On average, the Company expects the one-day VaR to be exceeded by actual losses two to three times per year for its trading businesses. The Company monitors the effectiveness of its risk programs by back-testing the performance of its VaR models, regularly updating the historical data used by the VaR models and stress testing. If the Company were to experience market losses in excess of the estimated VaR more often than expected, the VaR models and associated assumptions would be analyzed and adjusted.

The average, high, low and period-end one-day VaR amounts for the Company’s trading positions were as follows:

 

Nine Months Ended September 30

(Dollars in Millions)

  2018      2017  

Average

  $ 1      $ 1  

High

    1        1  

Low

    1        1  

Period-end

    1        1  

The Company did not experience any actual trading losses for its combined trading businesses that exceeded VaR during the nine months ended September 30, 2018 and 2017. The Company stress tests its market risk measurements to provide management with perspectives on market events that may not be captured by its VaR models, including worst case historical market movement combinations that have not necessarily occurred on the same date.

The Company calculates Stressed VaR using the same underlying methodology and model as VaR, except that a historical continuous one-year look-back period is utilized that reflects a period of significant financial stress appropriate to the Company’s trading portfolio. The period selected by the Company includes the significant market volatility of the last four months of 2008.

The average, high, low and period-end one-day Stressed VaR amounts for the Company’s trading positions were as follows:

 

Nine Months Ended September 30

(Dollars in Millions)

  2018      2017  

Average

  $ 5      $ 4  

High

    8        6  

Low

    2        2  

Period-end

    6        6  

Valuations of positions in the client derivatives and foreign currency transaction businesses are based on discounted cash flow or other valuation techniques using market-based assumptions. These valuations are compared to third party quotes or other market prices to determine if there are significant variances. Significant variances are approved by the Company’s market risk management department. Valuation of positions in the corporate bond trading, loan trading and municipal securities businesses are based on trader marks. These trader marks are evaluated against third party prices, with significant variances approved by the Company’s risk management department.

The Company also measures the market risk of its hedging activities related to residential MLHFS and MSRs using the Historical Simulation method. The VaRs are measured at the ninety-ninth percentile and employ factors pertinent to the market risks inherent in the valuation of the assets and hedges. The Company monitors the effectiveness of the models through back-testing, updating the data and regular validations. A three-year look-back period is used to obtain past market data for the models.

The average, high and low VaR amounts for the residential MLHFS and related hedges and the MSRs and related hedges were as follows:

 

Nine Months Ended September 30

(Dollars in Millions)

  2018      2017  

Residential Mortgage Loans Held For Sale and Related Hedges

    

Average

  $ 1      $  

High

    2        1  

Low

            

Mortgage Servicing Rights and Related Hedges

    

Average

  $ 6      $ 8  

High

    7        10  

Low

    4        6  

 

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Liquidity Risk Management The Company’s liquidity risk management process is designed to identify, measure, and manage the Company’s funding and liquidity risk to meet its daily funding needs and to address expected and unexpected changes in its funding requirements. The Company engages in various activities to manage its liquidity risk. These activities include diversifying its funding sources, stress testing, and holding readily-marketable assets which can be used as a source of liquidity if needed. In addition, the Company’s profitable operations, sound credit quality and strong capital position have enabled it to develop a large and reliable base of core deposit funding within its market areas and in domestic and global capital markets.

The Company’s Board of Directors approves the Company’s liquidity policy. The Risk Management Committee of the Company’s Board of Directors oversees the Company’s liquidity risk management process and approves a contingency funding plan. The ALCO reviews the Company’s liquidity policy and limits, and regularly assesses the Company’s ability to meet funding requirements arising from adverse company-specific or market events.

The Company regularly projects its funding needs under various stress scenarios and maintains a contingency funding plan consistent with the Company’s access to diversified sources of contingent funding. The Company maintains a substantial level of total available liquidity in the form of on-balance sheet and off-balance sheet funding sources. These liquidity sources include cash at the Federal Reserve Bank and certain European central banks, unencumbered liquid assets, and capacity to borrow at the FHLB and the Federal Reserve Bank’s Discount Window. At September 30, 2018, the fair value of unencumbered available-for-sale and held-to-maturity investment securities totaled $98.9 billion, compared with $100.3 billion at December 31, 2017. Refer to Table 4 and “Balance Sheet Analysis” for further information on investment securities maturities and trends. Asset liquidity is further enhanced by the Company’s practice of pledging loans to access secured borrowing facilities through the FHLB and Federal Reserve Bank. At September 30, 2018, the Company could have borrowed an additional $92.1 billion from the FHLB and Federal Reserve Bank based on collateral available for additional borrowings.

The Company’s diversified deposit base provides a sizeable source of relatively stable and low-cost funding, while reducing the Company’s reliance on the wholesale markets. Total deposits were $331.2 billion at September 30, 2018, compared with $347.2 billion at December 31, 2017. Refer to “Balance Sheet Analysis” for further information on the Company’s deposits.

Additional funding is provided by long-term debt and short-term borrowings. Long-term debt was $40.9 billion at September 30, 2018, and is an important funding source because of its multi-year borrowing structure. Short-term borrowings were $23.9 billion at September 30, 2018, and supplement the Company’s other funding sources. Refer to “Balance Sheet Analysis” for further information on the Company’s long-term debt and short-term borrowings.

In addition to assessing liquidity risk on a consolidated basis, the Company monitors the parent company’s liquidity. The Company establishes limits for the minimal number of months into the future where the parent company can meet existing and forecasted obligations with cash and securities held that can be readily monetized. The Company measures and manages this limit in both normal and adverse conditions. The Company maintains sufficient funding to meet expected capital and debt service obligations for 24 months without the support of dividends from subsidiaries and assuming access to the wholesale markets is maintained. The Company maintains sufficient liquidity to meet its capital and debt service obligations for 12 months under adverse conditions without the support of dividends from subsidiaries or access to the wholesale markets. The parent company is currently well in excess of required liquidity minimums.

At September 30, 2018, parent company long-term debt outstanding was $17.1 billion, compared with $15.8 billion at December 31, 2017. The increase was primarily due to the issuance of $1.3 billion of medium-term notes. As of September 30, 2018, there was $1.5 billion of parent company debt scheduled to mature in the remainder of 2018.

The Company is subject to a regulatory Liquidity Coverage Ratio (“LCR”) requirement which requires banks to maintain an adequate level of unencumbered high quality liquid assets to meet estimated liquidity needs over a 30-day stressed period. At September 30, 2018, the Company was compliant with this requirement.

Refer to “Management’s Discussion and Analysis —Liquidity Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, for further discussion on liquidity risk management.

European Exposures The Company provides merchant processing and corporate trust services in Europe either directly or through banking affiliations in Europe. Operating cash for these businesses is deposited on a short-term basis typically with certain European central banks. For deposits placed at other European banks,

 

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exposure is mitigated by the Company placing deposits at multiple banks and managing the amounts on deposit at any bank based on institution-specific deposit limits. At September 30, 2018, the Company had an aggregate amount on deposit with European banks of approximately $8.1 billion, predominately with the Central Bank of Ireland and Bank of England.

In addition, the Company provides financing to domestic multinational corporations that generate revenue from customers in European countries, transacts with various European banks as counterparties to certain derivative-related activities, and through a subsidiary, manages money market funds that hold certain investments in European sovereign debt. Any deterioration in economic conditions in Europe is unlikely to have a significant effect on the Company related to these activities.

Off-Balance Sheet Arrangements Off-balance sheet arrangements include any contractual arrangements to which an unconsolidated entity is a party, under which the Company has an obligation to provide credit or liquidity enhancements or market risk support. In the ordinary course of business, the Company enters into an array of commitments to extend credit, letters of credit and various forms of guarantees that may be considered off-balance sheet arrangements. Refer to Note 15 of the Notes to Consolidated Financial Statements for further information on these arrangements. The Company does not utilize private label asset securitizations as a source of funding. Off-balance sheet arrangements also include any obligation related to a variable interest held in an unconsolidated entity that provides financing, liquidity, credit enhancement or market risk support. Refer to Note 5 of the Notes to Consolidated Financial Statements for further information related to the Company’s interests in variable interest entities.

Capital Management The Company is committed to managing capital to maintain strong protection for depositors and creditors and for maximum shareholder benefit. The Company also manages its capital to exceed regulatory capital requirements for banking organizations. The regulatory capital requirements effective for the Company follow Basel III, which includes two comprehensive methodologies for calculating risk-weighted assets: a general standardized approach and more risk-sensitive advanced approaches, with the Company’s capital adequacy being evaluated against the methodology that is most restrictive. Currently, the standardized approach is the most restrictive. Beginning January 1, 2018, the regulatory capital requirements reflect the full implementation of Basel III. Prior to 2018, the Company’s capital ratios reflected certain transitional adjustments. Table 10 provides a summary of statutory regulatory capital ratios in effect for the Company at September 30, 2018 and December 31, 2017. All regulatory ratios exceeded regulatory “well-capitalized” requirements. At September 30, 2018, the Company’s common equity tier 1 capital ratio using the Basel III standardized approach was 9.0 percent, compared with an estimated fully implemented common equity tier 1 capital ratio using the Basel III standardized approach of 9.1 percent at December 31, 2017.

The Company believes certain other capital ratios are useful in evaluating its capital adequacy. The Company’s tangible common equity, as a percent of tangible assets and as a percent of risk-weighted assets calculated under the standardized approach, was 7.7 percent and 9.3 percent, respectively, at September 30, 2018, compared with 7.6 percent and 9.4 percent, respectively, at December 31, 2017.

Total U.S. Bancorp shareholders’ equity was $50.4 billion at September 30, 2018, compared with $49.0 billion at December 31, 2017. The increase was primarily the result of the Company’s earnings and a preferred stock issuance, partially offset by common share repurchases, dividends and changes in unrealized gains and losses on available-for-sale investment securities included in other comprehensive income (loss).

 

 Table 10      Regulatory Capital Ratios

 

(Dollars in Millions)   September 30,
2018
    December 31,
2017
 

Basel III standardized approach:

   

Common equity tier 1 capital

  $ 34,097     $ 34,369  

Tier 1 capital

    40,114       39,806  

Total risk-based capital

    47,531       47,503  

Risk-weighted assets

    377,713       367,771  

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

    9.0     9.3

Tier 1 capital as a percent of risk-weighted assets

    10.6       10.8  

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

    12.6       12.9  

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

    9.0       8.9  

Basel III advanced approaches:

   

Common equity tier 1 capital

  $ 34,097     $ 34,369  

Tier 1 capital

    40,114       39,806  

Total risk-based capital

    44,492       44,477  

Risk-weighted assets

    289,600       287,211  

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

    11.8     12.0

Tier 1 capital as a percent of risk-weighted assets

    13.9       13.9  

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

    15.4       15.5  

Tier 1 capital as a percent of total on- and off-balance sheet leverage exposure (total leverage exposure ratio)

    7.2          

 

U.S. Bancorp    25


Table of Contents

On June 28, 2018, the Company announced its Board of Directors had approved an authorization to repurchase up to $3.0 billion of its common stock, from July 1, 2018 through June 30, 2019.

The following table provides a detailed analysis of all shares purchased by the Company or any affiliated purchaser during the third quarter of 2018:

 

Period   Total Number
of Shares
Purchased
     Average
Price Paid
Per Share
    Total Number of
Shares Purchased
as Part of Publicly
Announced
Program (a)
    Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Program
(In Millions)
 

July

    7,231,555      $ 52.11       7,231,555     $ 2,623  

August

    4,217,974        53.51       4,217,974       2,398  

September

    2,772,471        54.23       2,772,471       2,247  

Total

    14,222,000      $ 52.94       14,222,000     $ 2,247  

 

(a)

All shares were purchased under the July 1, 2018 through June 30, 2019, $3.0 billion common stock repurchase authorization program announced on June 28, 2018.

On September 18, 2018, the Company announced its Board of Directors had approved a 23 percent increase in the Company’s dividend rate per common share from $0.30 per quarter to $0.37 per quarter.

Refer to “Management’s Discussion and Analysis — Capital Management” in the Company’s Annual Report on Form 10-K for the year ended December 31,  2017, for further discussion on capital management.

LINE OF BUSINESS FINANCIAL REVIEW

The Company’s major lines of business are Corporate and Commercial Banking, Consumer and Business Banking, Wealth Management and Investment Services, Payment Services, and Treasury and Corporate Support. These operating segments are components of the Company about which financial information is prepared and is evaluated regularly by management in deciding how to allocate resources and assess performance.

Basis for Financial Presentation Business line results are derived from the Company’s business unit profitability reporting systems by specifically attributing managed balance sheet assets, deposits and other liabilities and their related income or expense. The allowance for credit losses and related provision expense are allocated to the lines of business based on the related loan balances managed. Refer to “Management’s Discussion and Analysis — Line of Business Financial Review” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, for further discussion on the business lines’ basis for financial presentation.

Designations, assignments and allocations change from time to time as management systems are enhanced, methods of evaluating performance or product lines change or business segments are realigned to better respond to the Company’s diverse customer base. During 2018, certain organization and methodology changes were made and, accordingly, 2017 results were restated and presented on a comparable basis.

Corporate and Commercial Banking Corporate and Commercial Banking offers lending, equipment finance and small-ticket leasing, depository services, treasury management, capital markets services, international trade services and other financial services to middle market, large corporate, commercial real estate, financial institution, non-profit and public sector clients. Corporate and Commercial Banking contributed $394 million of the Company’s net income in the third quarter and $1.2 billion in the first nine months of 2018, or increases of $30 million (8.2 percent) and $123 million (11.4 percent), respectively, compared with the same periods of 2017.

Net revenue decreased $14 million (1.5 percent) in the third quarter and $58 million (2.0 percent) in the first nine months of 2018, compared with the same periods of 2017. Noninterest income decreased $18 million (8.2 percent) in the third quarter and $74 million (10.5 percent) in the first nine months of 2018, compared with the same periods of 2017, primarily due to lower corporate bond underwriting fees, syndication fees and loan fees. Net interest income, on a taxable-equivalent basis, increased $4 million (0.5 percent) in the third quarter and $16 million (0.7 percent) in the first nine months of 2018, compared with the same periods of 2017, primarily due to the impact of rising rates on the margin benefit from deposits, offset by lower rates on loans, reflecting a competitive marketplace, loan mix and lower deposits. Noninterest bearing deposits are declining as customers deploy balances to support business growth. Decreases in interest-bearing deposits reflect expected balance run-off related to the business merger of a larger financial services customer.

Noninterest expense decreased $10 million (2.6 percent) in the third quarter and increased $8 million (0.7 percent) in the first nine months of 2018, compared with the same periods of 2017. The changes reflect lower FDIC insurance expense and lower variable compensation expense related to capital markets activities, offset by higher net shared services expense driven by technology development and investment in infrastructure. The provision for credit losses increased $44 million in the third quarter and $28 million in the first nine months of 2018, compared with the same periods of 2017, reflecting unfavorable changes in the reserve allocation, partially offset by lower net charge-offs.

 

26    U.S. Bancorp


Table of Contents

Consumer and Business Banking Consumer and Business Banking delivers products and services through banking offices, telephone servicing and sales, on-line services, direct mail, ATM processing and mobile devices. It encompasses community banking, metropolitan banking and indirect lending, as well as mortgage banking. Consumer and Business Banking contributed $596 million of the Company’s net income in the third quarter and $1.7 billion in the first nine months of 2018, or increases of $114 million (23.7 percent) and $352 million (25.9 percent), respectively, compared with the same periods of 2017.

Net revenue increased $48 million (2.3 percent) in the third quarter and $199 million (3.2 percent) in the first nine months of 2018, compared with the same periods of 2017. Net interest income, on a taxable-equivalent basis, increased $82 million (5.6 percent) in the third quarter and $250 million (5.8 percent) in the first nine months of 2018, compared with the same periods of 2017. The increases were primarily due to the impact of rising rates on the margin benefit from deposits along with growth in average loan and core deposit balances, partially offset by lower rates on loans. Noninterest income decreased $34 million (5.5 percent) in the third quarter and $51 million (2.8 percent) in the first nine months of 2018, compared with the same periods of 2017, principally driven by lower mortgage banking revenue, in line with industry trends, primarily due to lower mortgage production and gain on sale margins, and a reduction in other noninterest income driven by lower end of term gains in retail leasing due to lower vehicle sales. These decreases were partially offset by higher deposit service charges and ATM processing services fees, reflecting higher transaction volumes.

Noninterest expense increased $50 million (4.0 percent) in the third quarter and $131 million (3.5 percent) in the first nine months of 2018, compared with the same periods of 2017, primarily due to higher net shared services expense and higher personnel expense, reflecting the impact of investments supporting business growth and development as well as higher production related incentives. These increases were partially offset by lower mortgage banking costs. The provision for credit losses decreased $39 million (41.9 percent) in the third quarter and $78 million (32.2 percent) in the first nine months of 2018, compared with the same periods of 2017, reflecting favorable changes in the reserve allocation as well as lower net charge-offs.

Wealth Management and Investment Services Wealth Management and Investment Services provides private banking, financial advisory services, investment management, retail brokerage services, insurance, trust, custody and fund servicing through five businesses: Wealth Management, Corporate Trust Services, U.S. Bancorp Asset Management, Institutional Trust & Custody and Fund Services. Wealth Management and Investment Services contributed $221 million of the Company’s net income in the third quarter and $623 million in the first nine months of 2018, or increases of $59 million (36.4 percent) and $145 million (30.3 percent), respectively, compared with the same periods of 2017.

Net revenue increased $62 million (9.4 percent) in the third quarter and $181 million (9.2 percent) in the first nine months of 2018, compared with the same periods of 2017. Net interest income, on a taxable-equivalent basis, increased $29 million (11.5 percent) in the third quarter and $97 million (13.1 percent) in the first nine months of 2018, compared with the same periods of 2017. The increases were primarily due to the impact of rising rates on the margin benefit from deposits. Noninterest income increased $33 million (8.0 percent) in the third quarter and $84 million (6.9 percent) in the first nine months of 2018, compared with the same periods of 2017, principally due to favorable market conditions, business growth and net asset inflows.

Noninterest expense increased $25 million (6.1 percent) in the third quarter and $104 million (8.6 percent) in the first nine months of 2018, compared with the same periods of 2017, primarily due to increased net shared services expense and higher personnel expense driven by investments to support business growth, higher production related incentives and increased staffing to support business development. Noninterest expense further increased in the first nine months of 2018, compared to the same period of the prior year, as a result of settling certain litigation matters during the current year.

Payment Services Payment Services includes consumer and business credit cards, stored-value cards, debit cards, corporate, government and purchasing card services, consumer lines of credit and merchant processing. Payment Services contributed $393 million of the Company’s net income in the third quarter and $1.1 billion in the first nine months of 2018, or increases of $82 million (26.4 percent) and $207 million (23.2 percent), respectively, compared with the same periods of 2017.

Net revenue increased $65 million (4.4 percent) in the third quarter and $193 million (4.5 percent) in the first nine months of 2018, compared with the same periods of 2017. Noninterest income increased $60 million (7.1 percent) in the third quarter and $163 million (6.5 percent) in the first nine months of

 

U.S. Bancorp    27


Table of Contents
 Table 11      Line of Business Financial Performance

 

    Corporate and
Commercial Banking
           Consumer and
Business Banking
        
Three Months Ended September 30
(Dollars in Millions)
  2018     2017     Percent
Change
           2018     2017     Percent
Change
        

Condensed Income Statement

                   

Net interest income (taxable-equivalent basis)

  $ 739     $ 735       .5       $ 1,557     $ 1,475       5.6    

Noninterest income

    201       219       (8.2         582       616       (5.5    

Securities gains (losses), net

                                           

Total net revenue

    940       954       (1.5         2,139       2,091       2.3      

Noninterest expense

    379       389       (2.6         1,283       1,232       4.1      

Other intangibles

    1       1                 7       8       (12.5    

Total noninterest expense

    380       390       (2.6         1,290       1,240       4.0      

Income before provision and income taxes

    560       564       (.7         849       851       (.2    

Provision for credit losses

    35       (9     *           54       93       (41.9    

Income before income taxes

    525       573       (8.4         795       758       4.9      

Income taxes and taxable-equivalent adjustment

    131       209       (37.3         199       276       (27.9    

Net income

    394       364       8.2           596       482       23.7      

Net (income) loss attributable to noncontrolling interests

                                           

Net income attributable to U.S. Bancorp

  $ 394     $ 364       8.2         $ 596     $ 482       23.7      

Average Balance Sheet

                   

Commercial

  $ 74,828     $ 73,825       1.4       $ 9,985     $ 10,119       (1.3 )%     

Commercial real estate

    18,529       20,111       (7.9         16,232       16,668       (2.6    

Residential mortgages

    6       6                 58,624       56,111       4.5      

Credit card

                                           

Other retail

    1             *           53,742       53,830       (.2    

Total loans, excluding covered loans

    93,364       93,942       (.6         138,583       136,728       1.4      

Covered loans

                          2,756       3,347       (17.7    

Total loans

    93,364       93,942       (.6         141,339       140,075       .9      

Goodwill

    1,647       1,647                 3,631       3,632            

Other intangible assets

    10       13       (23.1         2,974       2,702       10.1      

Assets

    102,146       102,267       (.1         155,586       154,748       .5      

Noninterest-bearing deposits

    32,539       35,401       (8.1         28,005       28,389       (1.4    

Interest checking

    9,627       9,710       (.9         50,319       47,301       6.4      

Savings products

    40,356       45,138       (10.6         61,600       60,673       1.5      

Time deposits

    18,571       19,613       (5.3         13,634       12,888       5.8      

Total deposits

    101,093       109,862       (8.0         153,558       149,251       2.9      

Total U.S. Bancorp shareholders’ equity

    10,426       9,951       4.8               11,847       11,147       6.3          
    Corporate and
Commercial Banking
           Consumer and
Business Banking
        
Nine Months Ended September 30
(Dollars in Millions)
  2018     2017     Percent
Change
           2018     2017     Percent
Change
        

Condensed Income Statement

                   

Net interest income (taxable-equivalent basis)

  $ 2,186     $ 2,170       .7       $ 4,587     $ 4,337       5.8    

Noninterest income

    632       709       (10.9         1,741       1,792       (2.8    

Securities gains (losses), net

          (3     *                            

Total net revenue

    2,818       2,876       (2.0         6,328       6,129       3.2      

Noninterest expense

    1,175       1,167       .7           3,863       3,731       3.5      

Other intangibles

    3       3                 21       22       (4.5    

Total noninterest expense

    1,178       1,170       .7           3,884       3,753       3.5      

Income before provision and income taxes

    1,640       1,706       (3.9         2,444       2,376       2.9      

Provision for credit losses

    37       9       *           164       242       (32.2    

Income before income taxes

    1,603       1,697       (5.5         2,280       2,134       6.8      

Income taxes and taxable-equivalent adjustment

    401       618       (35.1         571       777       (26.5    

Net income

    1,202       1,079       11.4           1,709       1,357       25.9      

Net (income) loss attributable to noncontrolling interests

                                           

Net income attributable to U.S. Bancorp

  $ 1,202     $ 1,079       11.4         $ 1,709     $ 1,357       25.9      

Average Balance Sheet

                   

Commercial

  $ 74,781     $ 73,179       2.2       $ 9,811     $ 9,979       (1.7 )%     

Commercial real estate

    18,782       20,739       (9.4         16,318       16,742       (2.5    

Residential mortgages

    6       7       (14.3         57,756       55,704       3.7      

Credit card

                                           

Other retail

    1             *           53,994       52,610       2.6      

Total loans, excluding covered loans

    93,570       93,925       (.4         137,879       135,035       2.1      

Covered loans

                          2,900       3,531       (17.9    

Total loans

    93,570       93,925       (.4         140,779       138,566       1.6      

Goodwill

    1,647       1,647                 3,632       3,632            

Other intangible assets

    11       14       (21.4         2,926       2,733       7.1      

Assets

    102,417       102,520       (.1         155,239       152,879       1.5      

Noninterest-bearing deposits

    33,438       36,256       (7.8         27,443       27,387       .2      

Interest checking

    9,556       9,506       .5           50,052       46,938       6.6      

Savings products

    42,227       46,556       (9.3         61,621       60,317       2.2      

Time deposits

    17,829       15,238       17.0           12,996       12,967       .2      

Total deposits

    103,050       107,556       (4.2         152,112       147,609       3.1      

Total U.S. Bancorp shareholders’ equity

    10,447       9,850       6.1               11,850       11,154       6.2          

 

*

Not meaningful

(a)

Presented net of related rewards and rebate costs and certain partner payments of $539 million and $504 million for the three months ended September 30, 2018 and 2017, respectively, and $1.6 billion and $1.5 billion for the nine months ended September 30, 2018 and 2017, respectively.

(b)

Includes revenue generated from certain contracts with customers of $1.8 billion and $1.7 billion for the three months ended September 30, 2018 and 2017, respectively, and $5.5 billion and $5.2 billion for the nine months ended September 30, 2018 and 2017, respectively.

 

28    U.S. Bancorp


Table of Contents

 

       Wealth Management and
Investment Services
     Payment
Services
            Treasury and
Corporate Support
            Consolidated
Company
 
       2018     2017      Percent
Change
            2018     2017     Percent
Change
            2018     2017     Percent
Change
            2018     2017     Percent
Change
 
                                       
    $     281     $ 252        11.5        $ 619     $ 614       .8        $ 85     $ 151       (43.7 )%         $ 3,281     $ 3,227       1.7
    444       411        8.0            911 (a)      851 (a)      7.1            270       234       15.4            2,408 (b)      2,331 (b)      3.3  
                                                         10       9       11.1            10       9       11.1  
    725       663        9.4            1,530       1,465       4.4            365       394       (7.4          5,699       5,567       2.4  
    429       403        6.5            713       676       5.5            199       254       (21.7          3,003       2,954       1.7  
          4       5        (20.0          29       30       (3.3                                 41       44       (6.8
          433       408        6.1            742       706       5.1            199       254       (21.7          3,044       2,998       1.5  
    292       255        14.5            788       759       3.8            166       140       18.6            2,655       2,569       3.3  
          (3)       1        *            264       270       (2.2          (7     5       *            343       360       (4.7
    295       254        16.1            524       489       7.2            173       135       28.1            2,312       2,209       4.7  
          74       92        (19.6          131       178       (26.4          (45     (115     60.9            490       640       (23.4
    221       162        36.4            393       311       26.4            218       250       (12.8          1,822       1,569       16.1  
                                                         (7     (6     (16.7          (7     (6     (16.7
          $     221     $ 162        36.4          $ 393     $ 311       26.4          $ 211     $ 244       (13.5        $ 1,815     $ 1,563       16.1  
                                       
    $  3,783     $ 3,506        7.9        $ 9,272     $ 8,233       12.6        $ 1,180     $ 950       24.2        $ 99,048     $ 96,633       2.5
    529       517        2.3                                   4,252       4,325       (1.7          39,542       41,621       (5.0
    3,408       2,905        17.3                                   4       8       (50.0          62,042       59,030       5.1  
                            21,774       20,926       4.1                                   21,774       20,926       4.1  
          1,763       1,780        (1.0          397       453       (12.4                6       *            55,903       56,069       (.3
    9,483       8,708        8.9            31,443       29,612       6.2            5,436       5,289       2.8            278,309       274,279       1.5  
                                                                                2,756       3,347       (17.7
    9,483       8,708        8.9            31,443       29,612       6.2            5,436       5,289       2.8            281,065       277,626       1.2  
    1,618       1,618                   2,563       2,468       3.8                                   9,459       9,365       1.0  
    61       79        (22.8          400       384       4.2                                   3,445       3,178       8.4  
    12,663       11,657        8.6            37,128       35,019       6.0            149,393       146,939       1.7            456,916       450,630       1.4  
    13,190       14,742        (10.5          1,064       1,029       3.4            2,394       2,403       (.4          77,192       81,964       (5.8
    9,351       11,016        (15.1                                 33       39       (15.4          69,330       68,066       1.9  
    42,703       42,288        1.0            108       103       4.9            769       519       48.2            145,536       148,721       (2.1
          3,883       3,526        10.1            3       1       *            1,972       372       *            38,063       36,400       4.6  
    69,127       71,572        (3.4          1,175       1,133       3.7            5,168       3,333       55.1            330,121       335,151       (1.5
          2,486       2,434        2.1                6,584       6,205       6.1                19,425       19,710       (1.4              50,768       49,447       2.7  
       Wealth Management and
Investment Services
     Payment
Services
            Treasury and
Corporate Support
            Consolidated
Company
 
       2018     2017      Percent
Change
            2018     2017     Percent
Change
            2018     2017     Percent
Change
            2018     2017     Percent
Change
 
                                       
    $     840     $ 743        13.1        $ 1,822     $ 1,792       1.7        $ 269     $ 315       (14.6 )%         $ 9,704     $ 9,357       3.7
    1,305       1,221        6.9            2,662 (a)      2,499 (a)      6.5            739       679       8.8            7,079 (b)      6,900 (b)      2.6  
                                                         25       50       (50.0          25       47       (46.8
    2,145       1,964        9.2            4,484       4,291       4.5            1,033       1,044       (1.1          16,808       16,304       3.1  
    1,304       1,197        8.9            2,117       1,983       6.8            605       682       (11.3          9,064       8,760       3.5  
          12       15        (20.0          84       91       (7.7                                 120       131       (8.4
          1,316       1,212        8.6            2,201       2,074       6.1            605       682       (11.3          9,184       8,891       3.3  
    829       752        10.2            2,283       2,217       3.0            428       362       18.2            7,624       7,413       2.8  
          (2)       1        *            817       794       2.9            (5     9       *            1,011       1,055       (4.2
    831       751        10.7            1,466       1,423       3.0            433       353       22.7            6,613       6,358       4.0  
          208       273        (23.8          367       518       (29.2          (196     (395     50.4            1,351       1,791       (24.6
    623       478        30.3            1,099       905       21.4            629       748       (15.9          5,262       4,567       15.2  
                                        (13     *            (22     (18     (22.2          (22     (31     29.0  
          $     623     $ 478        30.3          $ 1,099     $ 892       23.2          $ 607     $ 730       (16.8        $ 5,240     $ 4,536       15.5  
                                       
    $  3,727     $ 3,358        11.0        $ 8,866     $ 7,942       11.6        $ 1,110     $ 889       24.9        $ 98,295     $ 95,347       3.1
    520       514        1.2                                   4,298       4,442       (3.2          39,918       42,437       (5.9
    3,256       2,777        17.2                                   5       8       (37.5          61,023       58,496       4.3  
                            21,428       20,801       3.0                                   21,428       20,801       3.0  
          1,728       1,757        (1.7          410       466       (12.0          2       2                  56,135       54,835       2.4  
    9,231       8,406        9.8            30,704       29,209       5.1            5,415       5,341       1.4            276,799       271,916       1.8  
                                                               7       *            2,900       3,538       (18.0
    9,231       8,406        9.8            30,704       29,209       5.1            5,415       5,348       1.3            279,699       275,454       1.5  
    1,619       1,617        .1            2,546       2,459       3.5                                   9,444       9,355       1.0  
    66       83        (20.5          396       409       (3.2                                 3,399       3,239       4.9  
    12,313       11,620        6.0            36,614       34,781       5.3            148,658       144,249       3.1            455,241       446,049       2.1  
    14,106       14,860        (5.1          1,092       1,023       6.7            2,467       2,282       8.1            78,546       81,808       (4.0
    10,220       10,534        (3.0                                 37       43       (14.0          69,865       67,021       4.2  
    42,531       42,629        (.2          106       101       5.0            738       518       42.5            147,223       150,121       (1.9
          3,825