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 March 31, 2019

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)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading symbol

 

Name of each exchange on which registered

Common Stock, $.01 par value per share   USB   New York Stock Exchange
Depositary Shares (each representing 1/100th interest in a share of Series A    
Non-Cumulative Perpetual Preferred Stock, par value $1.00)   USB PrA   New York Stock Exchange
Depositary Shares (each representing 1/1,000th interest in a share of Series B    
Non-Cumulative Perpetual Preferred Stock, par value $1.00)   USB PrH   New York Stock Exchange
Depositary Shares (each representing 1/1,000th interest in a share of Series F    
Non-Cumulative Perpetual Preferred Stock, par value $1.00)   USB PrM   New York Stock Exchange
Depositary Shares (each representing 1/1,000th interest in a share of Series H    
Non-Cumulative Perpetual Preferred Stock, par value $1.00)   USB PrO   New York Stock Exchange
Depositary Shares (each representing 1/1,000th interest in a share of Series K    
Non-Cumulative Perpetual Preferred Stock, par value $1.00)   USB PrP   New York Stock Exchange
0.850% Medium-Term Notes, Series X (Senior), due June 7, 2024   USB/24B   New York Stock Exchange

 

 

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 April 30, 2019
Common Stock, $0.01 Par Value    1,592,062,312 shares

 

 

 


Table of Contents

Table of Contents and Form 10-Q Cross Reference Index

 

Part I — Financial Information

    

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

       3  

a) Overview

       3  

b) Statement of Income Analysis

       3  

c) Balance Sheet Analysis

       5  

d) Non-GAAP Financial Measures

       28  

e) Critical Accounting Policies

       29  

f) Controls and Procedures (Item 4)

       29  

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

       7  

a) Overview

       7  

b) Credit Risk Management

       8  

c) Residual Value Risk Management

       19  

d) Operational Risk Management

       19  

e) Compliance Risk Management

       19  

f) Interest Rate Risk Management

       19  

g) Market Risk Management

       20  

h) Liquidity Risk Management

       22  

i) Capital Management

       23  

3) Line of Business Financial Review

       24  

4) Financial Statements (Item 1)

       30  

Part II — Other Information

    

1) Legal Proceedings (Item 1)

       67  

2) Risk Factors (Item 1A)

       67  

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

       67  

4) Exhibits (Item 6)

       67  

5) Signature

       68  

6) Exhibits

       69  

“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; failures to safeguard personal information; 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, 2018, 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. In addition, factors other than these risks also could adversely affect U.S. Bancorp’s results, and the reader should not consider these risks to be a complete set of all potential risks or uncertainties. Forward-looking statements speak only as of the date hereof, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.

 

U.S. Bancorp    1


Table of Contents
 Table 1      Selected Financial Data

 

   

Three Months Ended

March 31

 
(Dollars and Shares in Millions, Except Per Share Data)   2019     2018     Percent
Change
 

Condensed Income Statement

     

Net interest income

  $ 3,259     $ 3,168       2.9

Taxable-equivalent adjustment (a)

    27       29       (6.9

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

    3,286       3,197       2.8  

Noninterest income

    2,286       2,267       .8  

Securities gains (losses), net

    5       5        

Total net revenue

    5,577       5,469       2.0  

Noninterest expense

    3,087       3,055       1.0  

Provision for credit losses

    377       341       10.6  

Income before taxes

    2,113       2,073       1.9  

Income taxes and taxable-equivalent adjustment

    405       391       3.6  

Net income

    1,708       1,682       1.5  

Net (income) loss attributable to noncontrolling interests

    (9     (7     (28.6

Net income attributable to U.S. Bancorp

  $ 1,699     $ 1,675       1.4  

Net income applicable to U.S. Bancorp common shareholders

  $ 1,613     $ 1,597       1.0  

Per Common Share

     

Earnings per share

  $ 1.01     $ .97       4.1

Diluted earnings per share

    1.00       .96       4.2  

Dividends declared per share

    .37       .30       23.3  

Book value per share (c)

    28.81       26.54       8.6  

Market value per share

    48.19       50.50       (4.6

Average common shares outstanding

    1,602       1,652       (3.0

Average diluted common shares outstanding

    1,605       1,657       (3.1

Financial Ratios

     

Return on average assets

    1.49     1.50  

Return on average common equity

    14.3       14.9    

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

    3.16       3.13    

Efficiency ratio (b)

    55.4       55.9    

Net charge-offs as a percent of average loans outstanding

    .52       .49    

Average Balances

     

Loans

  $ 286,110     $ 279,388       2.4

Loans held for sale

    2,132       3,134       (32.0

Investment securities (d)

    114,179       113,493       .6  

Earning assets

    419,494       411,849       1.9  

Assets

    463,399       454,288       2.0  

Noninterest-bearing deposits

    73,433       79,482       (7.6

Deposits

    335,366       334,580       .2  

Short-term borrowings

    18,368       22,862       (19.7

Long-term debt

    41,855       33,655       24.4  

Total U.S. Bancorp shareholders’ equity

    51,589       48,825       5.7  
    March 31,
2019
    December 31,
2018
       

Period End Balances

     

Loans

  $ 287,699     $ 286,810       .3

Investment securities

    114,398       112,165       2.0  

Assets

    475,775       467,374       1.8  

Deposits

    348,087       345,475       .8  

Long-term debt

    40,680       41,340       (1.6

Total U.S. Bancorp shareholders’ equity

    52,057       51,029       2.0  

Asset Quality

     

Nonperforming assets

  $ 1,005     $ 989       1.6

Allowance for credit losses

    4,451       4,441       .2  

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

    1.55     1.55  

Capital Ratios

     

Basel III standardized approach:

     

Common equity tier 1 capital

    9.3     9.1  

Tier 1 capital

    10.9       10.7    

Total risk-based capital

    12.8       12.6    

Leverage

    9.2       9.0    

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

    12.0       11.8    

Tangible common equity to tangible assets (b)

    7.9       7.8    

Tangible common equity to risk-weighted assets (b)

    9.5       9.4          

 

(a)

Based on a federal income tax rate of 21 percent for those assets and liabilities whose income or expense is not included for federal income tax purpose.

(b)

See Non-GAAP Financial Measures beginning on page 28.

(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 $1.7 billion for the first quarter of 2019, or $1.00 per diluted common share, compared with $1.7 billion, or $0.96 per diluted common share, for the first quarter of 2018. Return on average assets and return on average common equity were 1.49 percent and 14.3 percent, respectively, for the first quarter of 2019, compared with 1.50 percent and 14.9 percent, respectively, for the first quarter of 2018.

Total net revenue for the first quarter of 2019 was $108 million (2.0 percent) higher than the first quarter of 2018, reflecting a 2.9 percent increase in net interest income (2.8 percent on a taxable-equivalent basis) and a 0.8 percent increase in noninterest income. The increase in net interest income from the first quarter of 2018 was mainly a result of the impact of rising interest rates, loan growth, and higher yields on reinvestment of securities, partially offset by higher rates on deposits and changes in funding mix. The noninterest income increase was driven by growth in merchant processing services revenue and corporate payment products revenue, along with higher other noninterest income, partially offset by declines in deposit service charges, credit and debit card revenue, and mortgage banking revenue. Deposit service charges include ATM processing services revenue, which decreased as a result of the sale of the Company’s third-party ATM processing business in the fourth quarter of 2018.

Noninterest expense in the first quarter of 2019 was $32 million (1.0 percent) higher than the first quarter of 2018, primarily due to increased compensation expense, along with 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 and Federal Deposit Insurance Corporation (“FDIC”) assessment costs.

The provision for credit losses for the first quarter of 2019 of $377 million was $36 million (10.6 percent) higher than the first quarter of 2018. Net charge-offs in the first quarter of 2019 were $367 million, compared with $341 million in the first quarter of 2018. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

STATEMENT OF INCOME ANALYSIS

Net Interest Income Net interest income, on a taxable-equivalent basis, was $3.3 billion in the first quarter of 2019, representing an increase of $89 million (2.8 percent) over the first quarter of 2018. The increase was principally driven by the impact of rising interest rates, earning assets growth, and higher yields on securities, partially offset by deposit pricing and changes in funding mix. Average earning assets were $7.6 billion (1.9 percent) higher than the first quarter of 2018, reflecting increases of $6.7 billion (2.4 percent) in loans, $686 million (0.6 percent) in investment securities and $1.2 billion (7.8 percent) in other earning assets. The net interest margin, on a taxable-equivalent basis, in the first quarter of 2019 was 3.16 percent, compared with 3.13 percent in the first quarter of 2018. The increase in the net interest margin from the first quarter of 2018 was primarily due to rising interest rates, higher reinvestment rates on maturing securities, and changes in loan portfolio mix, partially offset by changes in deposit and funding mix. Refer to the “Consolidated Daily Average Balance Sheet and Related Yields and Rates” table for further information on net interest income.

Average total loans were $6.7 billion (2.4 percent) higher in the first quarter of 2019 than the first quarter of 2018, due to growth in residential mortgages (9.0 percent), commercial loans (4.6 percent) and credit card loans (6.2 percent), all driven by higher demand for loans from new and existing customers. These increases were partially offset by a decrease in commercial real estate loans (2.2 percent) due to new originations being more than offset by customers paying down balances, a decrease in other retail loans (1.0 percent) which reflected the second quarter of 2018 sale of the Company’s federally guaranteed student loan portfolio, and the fourth quarter of 2018 sale of the majority of the Company’s FDIC covered loans. Subsequent to the fourth quarter of 2018 sale, any remaining covered loan balances were reclassified to their respective portfolio category.

Average investment securities in the first quarter of 2019 were $686 million (0.6 percent) higher than the first quarter of 2018, due to purchases of mortgage-backed and state and political securities, net of prepayments and maturities.

 

U.S. Bancorp   3


Table of Contents
 Table 2      Noninterest Income

 

   

Three Months Ended

March 31

 
(Dollars in Millions)   2019      2018      Percent
Change
 

Credit and debit card revenue

  $ 304      $ 324        (6.2 )% 

Corporate payment products revenue

    162        154        5.2  

Merchant processing services

    378        363        4.1  

Trust and investment management fees

    399        398        .3  

Deposit service charges

    217        261        (16.9

Treasury management fees

    146        150        (2.7

Commercial products revenue

    219        220        (.5

Mortgage banking revenue

    169        184        (8.2

Investment products fees

    45        46        (2.2

Securities gains (losses), net

    5        5         

Other

    247        167        47.9  

Total noninterest income

  $ 2,291      $ 2,272        .8

 

Average total deposits for the first quarter of 2019 were $786 million (0.2 percent) higher than the first quarter of 2018. Average time deposits were $8.1 billion (22.0 percent) higher than the prior year, primarily driven by increases in those deposits managed as an alternative to other funding sources such as wholesale borrowing, based largely on relative pricing and liquidity characteristics. Average noninterest-bearing deposits decreased $6.0 billion (7.6 percent) from the prior year, primarily due to lower business deposits within Corporate and Commercial Banking, as customers continued to deploy balances to support business growth, and lower corporate trust balances within Wealth Management and Investment Services. Average total savings deposits were $1.3 billion (0.6 percent) lower than the prior year, driven by a decrease in corporate trust balances within Wealth Management and Investment Services, along with the run-off related to the 2018 business merger of a large financial customer. These decreases were partially offset by an increase in Consumer and Business Banking total savings deposit balances.

Provision for Credit Losses The provision for credit losses for the first quarter of 2019 was $377 million, an increase of $36 million (10.6 percent) from the first quarter of 2018. Net charge-offs increased $26 million (7.6 percent) in the first quarter of 2019, compared with the first quarter of 2018, primarily due to higher credit card loan and commercial 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 $2.3 billion in the first quarter of 2019, representing an increase of $19 million (0.8 percent), compared with the first quarter of 2018. The increase from a year ago was driven by growth in merchant processing services revenue and corporate payment products revenue, both reflecting higher sales volumes. Other noninterest income also increased from a year ago primarily due to higher equity investment income, higher tax-advantaged investment syndication revenue, and transition services agreement revenue associated with the ATM processing business sale in 2018. These increases were partially offset by lower deposit services charges, credit and debit card revenue, and mortgage banking revenue. Deposit service charges decreased $44 million (16.9 percent) as a result of the sale of the Company’s ATM third-party servicing business in 2018. Credit and debit card revenue decreased $20 million (6.2 percent) reflecting fewer billing cycle processing days in the first quarter of 2019, a change in the accounting for prepaid card revenue in the first quarter of 2018, and industry trends in post-holiday consumer spending. The decrease in mortgage banking revenue of $15 million (8.2 percent) was due to changes in mortgage servicing rights (“MSRs”) valuations, net of hedging activities, and lower servicing income, partially offset by higher production volume.

Noninterest Expense Noninterest expense was $3.1 billion in the first quarter of 2019, representing an increase of $32 million (1.0 percent) over the first quarter of 2018. The increase from a year ago was primarily due to higher personnel costs and technology and communications expense, partially offset by lower other noninterest expense. Compensation expense increased $36 million (2.4 percent), principally due to the impact of hiring to support business growth and merit increases, while technology and communications expense increased $22 million (9.4 percent) due to technology investment in support of business growth. Other noninterest expense decreased $38 million (9.4 percent) due to lower FDIC assessment costs, driven by the elimination of the surcharge in the fourth quarter of 2018, and lower costs related to tax-advantaged projects, partially offset by higher other expenses.

 

4    U.S. Bancorp


Table of Contents
 Table 3      Noninterest Expense

 

    Three Months Ended
March 31
 
(Dollars in Millions)   2019     2018     Percent
Change
 

Compensation

  $ 1,559     $ 1,523       2.4

Employee benefits

    333       330       .9  

Net occupancy and equipment

    277       265       4.5  

Professional services

    95       83       14.5  

Marketing and business development

    89       97       (8.2

Technology and communications

    257       235       9.4  

Postage, printing and supplies

    72       80       (10.0

Other intangibles

    40       39       2.6  

Other

    365       403       (9.4

Total noninterest expense

  $ 3,087     $ 3,055       1.0

Efficiency ratio (a)

    55.4     55.9        

 

(a)

See Non-GAAP Financial Measures beginning on page 28.

 

Income Tax Expense The provision for income taxes was $378 million (an effective rate of 18.1 percent) for the first quarter of 2019, compared with $362 million (an effective rate of 17.7 percent) for the first quarter of 2018. Tax expense for the first quarter of 2019 reflected the favorable conclusion of a state tax matter. For further information on income taxes, refer to Note 12 of the Notes to Consolidated Financial Statements.

BALANCE SHEET ANALYSIS

Loans The Company’s loan portfolio was $287.7 billion at March 31, 2019, compared with $286.8 billion at December 31, 2018, an increase of $889 million (0.3 percent). The increase was driven by higher residential mortgages, commercial loans and other retail loans, partially offset by lower credit card loans and commercial real estate loans.

Residential mortgages held in the loan portfolio increased $1.2 billion (1.9 percent) at March 31, 2019, compared with December 31, 2018, as origination activity more than offset the effect of customers paying down balances in the first quarter of 2019. 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 $625 million (0.6 percent) at March 31, 2019, compared with December 31, 2018, reflecting higher demand from new and existing customers.

Other retail loans increased $268 million (0.5 percent) at March 31, 2019, compared with December 31, 2018, reflecting increases in installment loans, auto loans and retail leasing loans, partially offset by decreases in home equity loans and revolving credit balances.

Credit card loans decreased $1.1 billion (4.7 percent) at March 31, 2019, compared with December 31, 2018, primarily the result of customers seasonally paying down balances.

Commercial real estate loans decreased $118 million (0.3 percent) at March 31, 2019, compared with December 31, 2018, primarily the result of new originations being more than offset by customers paying down balances.

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

Loans Held for Sale Loans held for sale, consisting primarily of residential mortgages to be sold in the secondary market, were $2.7 billion at March 31, 2019, compared with $2.1 billion at December 31, 2018. The increase in loans held for sale was principally due to a higher level of mortgage loan closings in the first quarter of 2019. 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”).

 

U.S. Bancorp    5


Table of Contents
 Table 4      Investment Securities

 

    Available-for-Sale             Held-to-Maturity  
At March 31, 2019
(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

  $ 2,064      $ 2,056        .4        1.51        $ 500      $ 498        .3        1.72

Maturing after one year through five years

    16,534        16,339        2.6        1.77            3,901        3,820        4.1        1.71  

Maturing after five years through ten years

    529        524        7.2        2.80            530        524        6.5        2.45  

Maturing after ten years

                                                              
 

Total

  $ 19,127      $ 18,919        2.5        1.77            $ 4,931      $ 4,842        4.0        1.79

Mortgage-Backed Securities (a)

                          

Maturing in one year or less

  $ 19      $ 19        .6        3.10        $ 158      $ 156        .8        2.08

Maturing after one year through five years

    25,789        25,578        3.9        2.66            26,001        25,672        3.8        2.49  

Maturing after five years through ten years

    14,104        13,923        5.9        2.70            14,860        14,726        5.9        2.79  

Maturing after ten years

    2,357        2,361        13.3        3.50                308        307        12.9        3.44  
 

Total

  $ 42,269      $ 41,881        5.1        2.72            $ 41,327      $ 40,861        4.6        2.61

Asset-Backed Securities (a)

                          

Maturing in one year or less

  $      $                      $      $              

Maturing after one year through five years

    389        395        3.4        3.77            4        8        3.3        3.20  

Maturing after five years through ten years

                                    1        1        6.1        3.30  

Maturing after ten years

                                               1        14.8        3.19  
 

Total

  $ 389      $ 395        3.4        3.77            $ 5      $ 10        3.6        3.21

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

                          

Maturing in one year or less

  $ 266      $ 268        .3        5.65        $      $        .8        7.47

Maturing after one year through five years

    571        585        3.4        4.53            1        1        3.3        6.49  

Maturing after five years through ten years

    5,192        5,299        7.7        4.30            4        4        7.0        2.42  

Maturing after ten years

    785        766        20.4        4.04                                      
 

Total

  $ 6,814      $ 6,918        8.6        4.34            $ 5      $ 5        6.5        2.87

Other

                          

Maturing in one year or less

  $      $                      $ 9      $ 9        .3        3.68

Maturing after one year through five years

                                    8        8        1.1        3.44  

Maturing after five years through ten years

                                                          

Maturing after ten years

                                                              
 

Total

  $      $                          $ 17      $ 17        .7        3.56

Total investment securities (d)

  $ 68,599      $ 68,113        4.7        2.62            $ 46,285      $ 45,735        4.5        2.52

 

(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 5.4 years at December 31, 2018, with a corresponding weighted-average yield of 2.57 percent. The weighted-average maturity of the held-to-maturity investment securities was 5.2 years at December 31, 2018, with a corresponding weighted-average yield of 2.46 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. 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.

 

    March 31, 2019             December 31, 2018  
(Dollars in Millions)   Amortized
Cost
     Percent
of Total
            Amortized
Cost
     Percent
of Total
 

U.S. Treasury and agencies

  $ 24,058        20.9        $ 24,706        21.8

Mortgage-backed securities

    83,596        72.8            81,464        71.8  

Asset-backed securities

    394        .4            402        .4  

Obligations of state and political subdivisions

    6,819        5.9            6,842        6.0  

Other

    17                       17         

Total investment securities

  $ 114,884        100.0            $ 113,431        100.0

 

6    U.S. Bancorp


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Investment Securities Investment securities totaled $114.4 billion at March 31, 2019, compared with $112.2 billion at December 31, 2018. The $2.2 billion (2.0 percent) increase was primarily due to $1.5 billion of net investment purchases and a $780 million favorable change in net unrealized gains (losses) on available-for-sale investment securities.

The Company’s available-for-sale securities are carried at fair value with changes in fair value reflected in other comprehensive income (loss) unless a security is deemed to be other-than-temporarily impaired. At March 31, 2019, the Company’s net unrealized losses on available-for-sale securities were $486 million, compared with $1.3 billion at December 31, 2018. The favorable change in net unrealized gains (losses) was primarily due to increases 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 $800 million at March 31, 2019, compared with $1.4 billion at December 31, 2018. At March 31, 2019, 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 15 in the Notes to Consolidated Financial Statements for further information on investment securities.

Deposits Total deposits were $348.1 billion at March 31, 2019, compared with $345.5 billion at December 31, 2018, the result of increases in total savings deposits and time deposits, partially offset by a decrease in noninterest-bearing deposits. Money market deposit balances increased $5.6 billion (5.6 percent) at March 31, 2019, compared with December 31, 2018, primarily due to higher Wealth Management and Investment Services balances. Savings account balances increased $1.4 billion (3.2 percent), primarily due to higher Consumer and Business Banking balances. Interest checking balances increased $342 million (0.5 percent) primarily due to higher Consumer and Business Banking, and Corporate and Commercial Banking balances, partially offset by lower Wealth Management and Investment Services balances. Time deposits increased $2.5 billion (5.6 percent) at March 31, 2019, compared with December 31, 2018, 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. Noninterest-bearing deposits decreased $7.2 billion (8.8 percent) at March 31, 2019, compared with December 31, 2018, primarily due to lower Wealth Management and Investment Services, and Corporate and Commercial 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 $15.4 billion at March 31, 2019, compared with $14.1 billion at December 31, 2018. The $1.3 billion (8.9 percent) increase in short-term borrowings was primarily due to higher commercial paper balances and other short-term borrowings balances, partially offset by lower repurchase agreement balances. Long-term debt was $40.7 billion at March 31, 2019, compared with $41.3 billion at December 31, 2018. The $660 million (1.6 percent) decrease was primarily due to $1.5 billion of medium-term note repayments, $1.1 billion of bank note repayments and maturities, and a $1.0 billion decrease in Federal Home Loan Bank (“FHLB”) advances, partially offset by $1.7 billion of bank note issuances and $1.3 billion of medium-term note issuances. 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.

 

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The Company’s most prominent risk exposures are credit, interest rate, market, liquidity, operational, compliance, strategic, and reputational. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan, investment or derivative contract when it is due. Interest rate risk is the potential reduction of net interest income or market valuations as a result of changes in interest rates. Market risk arises from fluctuations in interest rates, foreign exchange rates, and security prices that may result in changes in the values of financial instruments, such as trading and available-for-sale securities, mortgage loans held for sale (“MLHFS”), MSRs and derivatives that are accounted for on a fair value basis. Liquidity risk is the possible inability to fund obligations or new business at a reasonable cost and in a timely manner. Operational risk is the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events, including the risk of loss resulting from breaches in data security. Operational risk can also include the risk of loss due to failures by third parties with which the Company does business. Compliance risk is the risk that the Company may suffer legal or regulatory sanctions, material financial loss, or loss to reputation through failure to comply with laws, regulations, rules, standards of good practice, and codes of conduct. 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 customer relationships, offer new services or continue serving existing customer 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, 2018, for a detailed discussion of these factors.

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

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

 

Macroeconomic environment and other qualitative considerations, such as regulatory and compliance changes, litigation developments, and technology and cybersecurity;

 

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;

 

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

 

Strategic and reputational 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

 

8    U.S. Bancorp


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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, 2018, 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 two segments, which is the level at which it develops and documents a systematic methodology to determine the allowance for credit losses. The Company’s two loan portfolio segments are commercial lending and consumer lending.

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 March 31, 2019, substantially all of the Company’s home equity lines were in the draw period. Approximately $1.3 billion, or 9 percent, of the outstanding home equity line balances at March 31, 2019, 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 Company further disaggregates its loan portfolio segments into various classes based on their underlying risk characteristics. The two classes within the

 

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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 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 March 31, 2019:

 

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

Loan-to-Value

       

Less than or equal to 80%

  $ 2,197     $ 53,916     $ 56,113       84.7

Over 80% through 90%

    25       5,350       5,375       8.1  

Over 90% through 100%

          897       897       1.4  

Over 100%

    1       347       348       .5  

No LTV available

          27       27        

Loans purchased from GNMA mortgage pools (a)

          3,483       3,483       5.3  

Total

  $ 2,223     $ 64,020     $ 66,243       100.0

Borrower Type

       

Prime borrowers

  $ 2,223     $ 59,861     $ 62,084       93.7

Sub-prime borrowers

          676       676       1.0  

Loans purchased from GNMA mortgage pools (a)

          3,483       3,483       5.3  

Total

  $ 2,223     $ 64,020     $ 66,243       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%

  $ 11,469     $ 911     $ 12,380       77.9

Over 80% through 90%

    1,837       773       2,610       16.5  

Over 90% through 100%

    474       76       550       3.5  

Over 100%

    164       14       178       1.1  

No LTV/CLTV available

    157       8       165       1.0  

Total

  $ 14,101     $ 1,782     $ 15,883       100.0

Borrower Type

       

Prime borrowers

  $ 14,062     $ 1,733     $ 15,795       99.4

Sub-prime borrowers

    39       49       88       .6  

Total

  $ 14,101     $ 1,782     $ 15,883       100.0

Home equity and second mortgages were $15.9 billion at March 31, 2019, compared with $16.1 billion at December 31, 2018, and included $4.1 billion of home equity lines in a first lien position and $11.8 billion of home equity and second mortgage loans and lines in a junior lien position. Loans and lines in a junior lien position at March 31, 2019, included approximately $4.8 billion of loans and lines for which the Company also serviced the related first lien loan, and approximately $7.0 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.

 

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The following table provides a summary of delinquency statistics and other credit quality indicators for the Company’s junior lien positions at March 31, 2019:

 

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

Total

  $ 4,799     $ 6,965     $ 11,764  

Percent 30-89 days past due

    .37     .55     .48

Percent 90 days or more past due

    .05     .09     .07

Weighted-average CLTV

    70     67     68

Weighted-average credit score

    779       774       776  

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.

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 $595 million at March 31, 2019, compared with $584 million at December 31, 2018. 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 0.21 percent at March 31, 2019, compared with 0.20 percent at December 31, 2018.

 

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

 

90 days or more past due excluding nonperforming loans   March 31,
2019
    December 31,
2018
 

Commercial

   

Commercial

    .08     .07

Lease financing

           

Total commercial

    .07       .07  

Commercial Real Estate

   

Commercial mortgages

           

Construction and development

    .02        

Total commercial real estate

    .01        

Residential Mortgages (a)

    .18       .18  

Credit Card

    1.29       1.25  

Other Retail

   

Retail leasing

    .03       .04  

Home equity and second mortgages

    .37       .35  

Other

    .14       .15  

Total other retail

    .19       .19  

Total loans

    .21     .20
90 days or more past due including nonperforming loans   March 31,
2019
    December 31,
2018
 

Commercial

    .34     .27

Commercial real estate

    .33       .29  

Residential mortgages (a)

    .62       .63  

Credit card

    1.29       1.25  

Other retail

    .49       .54  

Total loans

    .51     .49

 

(a)

Delinquent loan ratios exclude $1.7 billion at March 31, 2019, and at December 31, 2018, 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 3.14 percent at March 31, 2019, and 3.21 percent at December 31, 2018.

 

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

 

     Amount              As a Percent of Ending
Loan Balances
 
(Dollars in Millions)    March 31,
2019
     December 31,
2018
             March 31,
2019
    December 31,
2018
 

Residential Mortgages (a)

               

30-89 days

   $ 168      $ 181             .26     .27

90 days or more

     122        114             .18       .18  

Nonperforming

     287        296                 .43       .46  

Total

   $ 577      $ 591             .87     .91

Credit Card

               

30-89 days

   $ 290      $ 324             1.31     1.39

90 days or more

     288        293             1.29       1.25  

Nonperforming

                                   

Total

   $ 578      $ 617             2.60     2.64

Other Retail

               

Retail Leasing

               

30-89 days

   $ 36      $ 37             .42     .43

90 days or more

     3        3             .03       .04  

Nonperforming

     10        12                 .12       .14  

Total

   $ 49      $ 52             .57     .61

Home Equity and Second Mortgages

               

30-89 days

   $ 87      $ 90             .54     .56

90 days or more

     58        57             .37       .35  

Nonperforming

     122        145                 .77       .90  

Total

   $ 267      $ 292             1.68     1.81

Other (b)

               

30-89 days

   $ 252      $ 276             .78     .87

90 days or more

     44        48             .14       .15  

Nonperforming

     41        40                 .13       .13  

Total

   $ 337      $ 364                 1.05     1.15

 

(a)

Excludes $418 million of loans 30-89 days past due and $1.7 billion of loans 90 days or more past due at March 31, 2019, purchased from GNMA mortgage pools that continue to accrue interest, compared with $430 million and $1.7 billion at December 31, 2018, respectively.

(b)

Includes revolving credit, installment, automobile and student loans.

 

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

Troubled Debt Restructurings Concessionary modifications are classified as TDRs unless the modification results in only an insignificant delay in the payments to be received. TDRs accrue interest if the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles, which is generally six months or greater. At March 31, 2019, performing TDRs were $3.8 billion, compared with $3.9 billion at December 31, 2018. 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. 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,

 

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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.

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.

 

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

 

           As a Percent of Performing TDRs              
At March 31, 2019
(Dollars in Millions)
  Performing
TDRs
     30-89 Days
Past Due
    90 Days or More
Past Due
    Nonperforming
TDRs
    Total
TDRs
 

Commercial

  $ 231        5.5     2.8   $ 92 (a)    $ 323  

Commercial real estate

    139        1.6             71 (b)      210  

Residential mortgages

    1,397        4.1       2.8       183       1,580 (d) 

Credit card

    254        11.2       7.1             254  

Other retail

    152        7.2       8.0       38 (c)      190 (e) 

TDRs, excluding loans purchased from GNMA mortgage pools

    2,173        5.1       3.5       384       2,557  

Loans purchased from GNMA mortgage pools (g)

    1,578                          1,578 (f) 

Total

  $ 3,751        3.0     2.0   $ 384     $ 4,135  

 

(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 $335 million of residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $32 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

(e)

Includes $93 million of other retail loans to borrowers that have had debt discharged through bankruptcy and $16 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

(f)

Includes $157 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 $406 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

(g)

Approximately 9.5 percent and 43.6 percent of the total TDR loans purchased from GNMA mortgage pools are 30-89 days past due and 90 days or more past due, respectively, but are not classified as delinquent as their repayments are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.

 

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Short-term Modifications The Company makes short-term modifications that it does not consider to be TDRs, in limited circumstances, to assist borrowers experiencing temporary hardships. Consumer lending programs include payment reductions, deferrals of up to three past due payments, and the ability to return to current status if the borrower makes required payments. The Company may also make short-term modifications to commercial lending loans, with the most common modification being an extension of the maturity date of three months or less. Such extensions generally are used when the maturity date is imminent and the borrower is experiencing some level of financial stress, but the Company believes the borrower will pay all contractual amounts owed. Short-term modifications were not material at March 31, 2019.

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. Interest payments collected from assets on nonaccrual status are generally applied against the principal balance and not recorded as income. However, interest income may be recognized for interest payments if the remaining carrying amount of the loan is believed to be collectible.

At March 31, 2019, total nonperforming assets were $1.0 billion, compared to $989 million at December 31, 2018. The $16 million (1.6 percent) increase in nonperforming assets was driven by an increase in nonperforming commercial loans and commercial real estate loans, partially offset by improvements in nonperforming other retail loans, residential mortgages and OREO. The ratio of total nonperforming assets to total loans and other real estate was 0.35 percent at March 31, 2019, compared with 0.34 percent at December 31, 2018.

OREO was $93 million at March 31, 2019, compared with $111 million at December 31, 2018, 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 as a percent of their related loan balances, including geographical location detail for residential (residential mortgage, home equity and second mortgage) and commercial (commercial and commercial real estate) loan balances:

 

    Amount             As a Percent of Ending
Loan Balances
 
(Dollars in Millions)   March 31,
2019
    December 31,
2018
            March 31,
2019
    December 31,
2018
 

Residential

            

Illinois

  $ 10     $ 11            .22     .25

California

    8       11            .03       .04  

New York

    7       8            .84       .97  

Ohio

    5       6            .19       .22  

New Jersey

    4       6            .70       1.09  

All other states

    54       64                .11       .13  

Total residential

    88       106            .11       .13  

Commercial

            

California

    3       3            .01       .01  

Idaho

    1       1            .09       .09  

All other states

    1       1                       

Total commercial

    5       5                       

Total

  $ 93     $ 111                .03     .04

 

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 Table 6      Nonperforming Assets (a)

 

(Dollars in Millions)   March 31,
2019
    December 31,
2018
 

Commercial

   

Commercial

  $ 247     $ 186  

Lease financing

    24       23  

Total commercial

    271       209  

Commercial Real Estate

   

Commercial mortgages

    79       76  

Construction and development

    48       39  

Total commercial real estate

    127       115  

Residential Mortgages (b)

    287       296  

Credit Card

           

Other Retail

   

Retail leasing

    10       12  

Home equity and second mortgages

    122       145  

Other

    41       40  

Total other retail

    173       197  

Total nonperforming loans

    858       817  

Other Real Estate (c)

    93       111  

Other Assets

    54       61  

Total nonperforming assets

  $ 1,005     $ 989  

Accruing loans 90 days or more past due (b)

  $ 595     $ 584  

Nonperforming loans to total loans

    .30     .28

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

    .35     .34

Changes in Nonperforming Assets

 

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

Balance December 31, 2018

   $ 338     $ 651     $ 989  

Additions to nonperforming assets

      

New nonaccrual loans and foreclosed properties

     349       85       434  

Advances on loans

     2             2  

Total additions

     351       85       436  

Reductions in nonperforming assets

      

Paydowns, payoffs

     (50     (46     (96

Net sales

     (143     (31     (174

Return to performing status

     (4     (72     (76

Charge-offs (d)

     (68     (6     (74

Total reductions

     (265     (155     (420

Net additions to (reductions in) nonperforming assets

     86       (70     16  

Balance March 31, 2019

   $ 424     $ 581     $ 1,005  

 

(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 at March 31, 2019, and at December 31, 2018, 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 $231 million and $235 million at March 31, 2019, and December 31, 2018, 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
March 31
 
     2019     2018  

Commercial

   

Commercial

    .30     .25

Lease financing

    .15       .29  

Total commercial

    .29       .25  

Commercial Real Estate

   

Commercial mortgages

          (.06

Construction and development

          .04  

Total commercial real estate

          (.03

Residential Mortgages

    .02       .05  

Credit Card

    4.04       4.02  

Other Retail

   

Retail leasing

    .19       .15  

Home equity and second mortgages

    (.03     (.03

Other

    .80       .79  

Total other retail

    .47       .47  

Total loans

    .52     .49

 

Analysis of Loan Net Charge-Offs Total loan net charge-offs were $367 million for the first quarter of 2019, compared with $341 million for the first quarter of 2018. The ratio of total loan net charge-offs to average loans outstanding on an annualized basis for the first quarter of 2019 was 0.52 percent, compared with 0.49 percent for the first quarter of 2018. The increase in net charge-offs for the first quarter of 2019, compared with the first quarter of 2018, reflected higher credit card loan and commercial 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. 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 March 31, 2019, the Company serviced the first lien on 41 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

 

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first liens that are serviced by other large servicers in the industry and the status of first lien mortgage accounts reported on customer credit bureau files. Regardless of whether or not the Company services the first lien, an assessment is made of economic conditions, problem loans, recent loss experience and other factors in determining the allowance for credit losses. Based on the available information, the Company estimated $283 million or 1.8 percent of its total home equity portfolio at March 31, 2019, 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.

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 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. 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. 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.

The Company’s methodology for determining the appropriate allowance for credit losses for both 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 both 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, 2018, for further discussion on the analysis and determination of the allowance for credit losses.

At March 31, 2019, the allowance for credit losses was $4.5 billion (1.55 percent of period-end loans), compared with an allowance of $4.4 billion (1.55 percent of period-end loans) at December 31, 2018. The ratio of the allowance for credit losses to nonperforming loans was 519 percent at March 31, 2019, compared with 544 percent at December 31, 2018. The ratio of the allowance for credit losses to annualized loan net charge-offs was 299 percent at March 31, 2019, compared with 328 percent of full year 2018 net charge-offs at December 31, 2018.

 

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 Table 8      Summary of Allowance for Credit Losses

 

    Three Months Ended
March 31
 
(Dollars in Millions)   2019     2018  

Balance at beginning of period

  $ 4,441     $ 4,417  

Charge-Offs

   

Commercial

   

Commercial

    106       88  

Lease financing

    5       6  

Total commercial

    111       94  

Commercial real estate

   

Commercial mortgages

    1       2  

Construction and development

          1  

Total commercial real estate

    1       3  

Residential mortgages

    8       13  

Credit card

    257       248  

Other retail

   

Retail leasing

    6       5  

Home equity and second mortgages

    5       6  

Other

    85       84  

Total other retail

    96       95  

Total charge-offs

    473       453  

Recoveries

   

Commercial

   

Commercial

    35       32  

Lease financing

    3       2  

Total commercial

    38       34  

Commercial real estate

   

Commercial mortgages

    1       6  

Construction and development

           

Total commercial real estate

    1       6  

Residential mortgages

    5       6  

Credit card

    32       37  

Other retail

   

Retail leasing

    2       2  

Home equity and second mortgages

    6       7  

Other

    22       20  

Total other retail

    30       29  

Total recoveries

    106       112  

Net Charge-Offs

   

Commercial

   

Commercial

    71       56  

Lease financing

    2       4  

Total commercial

    73       60  

Commercial real estate

   

Commercial mortgages

          (4

Construction and development

          1  

Total commercial real estate

          (3

Residential mortgages

    3       7  

Credit card

    225       211  

Other retail

   

Retail leasing

    4       3  

Home equity and second mortgages

    (1     (1

Other

    63       64  

Total other retail

    66       66  

Total net charge-offs

    367       341  

Provision for credit losses

    377       341  

Other changes

           

Balance at end of period (a)

  $ 4,451     $ 4,417  

Components

   

Allowance for loan losses

  $ 3,990     $ 3,918  

Liability for unfunded credit commitments

    461       499  

Total allowance for credit losses

  $ 4,451     $ 4,417  

Allowance for Credit Losses as a Percentage of

   

Period-end loans

    1.55     1.59

Nonperforming loans

    519       431  

Nonperforming and accruing loans 90 days or more past due

    306       256  

Nonperforming assets

    443       367  

Annualized net charge-offs

    299       319  

 

(a)

At March 31, 2019 and 2018, $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 vehicles, office and business equipment, and other assets through disciplined residual valuation setting at the inception of a lease, diversification of its leased assets, regular residual asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. As of March 31, 2019, no significant change in the amount of residual values or concentration of the portfolios had occurred since December 31, 2018. 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, 2018, 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, 2018, for further discussion on operational risk management.

Compliance Risk Management The Company may suffer legal or regulatory sanctions, material financial loss, or damage to its 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, 2018, 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 March 31, 2019 and December 31, 2018, 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 1.45 percent in the “Up 50 basis point (“bps”)” and 2.75 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, 2018, for further discussion on net interest income simulation analysis.

 

 Table 9      Sensitivity of Net Interest Income

 

    March 31, 2019             December 31, 2018  
     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

    (1.58 )%      1.00     (3.25 )%      1.00              (1.43 )%      1.02     (3.90 )%      1.45

 

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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 2.2 percent decrease in the market value of equity at March 31, 2019, compared with a 2.3 percent decrease at December 31, 2018. A 200 bps decrease would have resulted in a 9.6 percent decrease in the market value of equity at March 31, 2019, compared with a 7.3 percent decrease at December 31, 2018. 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, 2018, for further discussion on market value of equity modeling.

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

 

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

 

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

 

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

 

To mitigate remeasurement volatility of foreign currency denominated balances; and

 

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

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

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

Additionally, the Company uses forward commitments to sell TBAs and other commitments to sell residential mortgage loans at specified prices to economically hedge the interest rate risk in its residential mortgage loan production activities. At March 31, 2019, the Company had $4.0 billion of forward commitments to sell, hedging $2.1 billion of MLHFS and $2.6 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 13 and 14 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, as well as the remeasurement volatility of foreign currency denominated balances included on its Consolidated Balance Sheet (collectively, “Covered Positions”), 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 Covered 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 Covered Positions 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, as well as those inherent in the Company’s foreign denominated balances and the derivatives used to mitigate the related measurement volatility. On average, the Company expects the one-day VaR to be exceeded by actual losses two to three times per year related to these positions. 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 Covered Positions were as follows:

 

Three Months Ended March 31

(Dollars in Millions)

  2019      2018  

Average

  $ 1      $ 1  

High

    2        1  

Low

    1        1  

Period-end

    1        1  

The Company did not experience any actual losses for its combined Covered Positions that exceeded VaR during the three months ended March 31, 2019 and 2018. 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 Covered Positions. 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 Covered Positions were as follows:

 

Three Months Ended March 31

(Dollars in Millions)

  2019      2018  

Average

  $ 6      $ 4  

High

    8        4  

Low

    4        2  

Period-end

    7        3  

Valuations of positions in client derivatives and foreign currency activities 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 senior management in the Company’s corporate functions. 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 senior management in the Company’s corporate functions.

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

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

 

Three Months Ended March 31

(Dollars in Millions)

  2019      2018  

Residential Mortgage Loans Held For Sale and Related Hedges

    

Average

  $ 1      $ 1  

High

    2        1  

Low

            

Mortgage Servicing Rights and Related Hedges

    

Average

  $ 4      $ 6  

High

    5        7  

Low

    4        5  

 

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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 from the FHLB and at Federal Reserve Bank’s Discount Window. At March 31, 2019, the fair value of unencumbered available-for-sale and held-to-maturity investment securities totaled $105.1 billion, compared with $100.2 billion at December 31, 2018. Refer to Table 4 and “Balance Sheet Analysis” for further information on investment securities maturities and trends. Asset liquidity is further enhanced by the Company’s practice of pledging loans to access secured borrowing facilities through the FHLB and Federal Reserve Bank. At March 31, 2019, the Company could have borrowed an additional $103.3 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 $348.1 billion at March 31, 2019, compared with $345.5 billion at December 31, 2018. 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 $40.7 billion at March 31, 2019, and is an important funding source because of its multi-year borrowing structure. Short-term borrowings were $15.4 billion at March 31, 2019, 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 March 31, 2019, parent company long-term debt outstanding was $16.1 billion, compared with $16.3 billion at December 31, 2018. The decrease was primarily due to $1.5 billion of medium-term note repayments, partially offset by $1.3 billion of medium-term note issuances. As of March 31, 2019, there was no parent company debt scheduled to mature in the remainder of 2019.

The Company is subject to a regulatory Liquidity Coverage Ratio (“LCR”) requirement which requires banks to maintain an adequate level of unencumbered high quality liquid assets to meet estimated liquidity needs over a 30-day stressed period. At March 31, 2019, 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, 2018, 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. Revenue generated from sources in Europe represented approximately 2 percent of the Company’s total net revenue for the three months ended March 31, 2019.

 

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Operating cash for these businesses is deposited on a short-term basis typically with certain European central banks. For deposits placed at other European banks, exposure is mitigated by the Company placing deposits at multiple banks and managing the amounts on deposit at any bank based on institution-specific deposit limits. At March 31, 2019, the Company had an aggregate amount on deposit with European banks of approximately $7.0 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, including the potential negative impact of the United Kingdom’s upcoming withdrawal from the European Union (“Brexit”), is not expected to have a significant effect on the Company related to these activities. The Company is focused on providing continuity of services, with minimal disruption resulting from Brexit, to customers with activities in European countries. The Company has been making certain structural changes to its legal entities and operations in the United Kingdom and European Union, where needed, and migrating certain business activities to the appropriate jurisdictions to continue to provide such services and generate revenue.

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 16 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 6 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 most restrictive. Table 10 provides a summary of statutory regulatory capital ratios in effect for the Company at March 31, 2019 and December 31, 2018. All regulatory ratios exceeded regulatory “well-capitalized” requirements.

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 7.9 percent and 9.5 percent, respectively, at March 31, 2019, compared with 7.8 percent and 9.4 percent, respectively, at December 31, 2018.

Total U.S. Bancorp shareholders’ equity was $52.1 billion at March 31, 2019, compared with $51.0 billion at December 31, 2018. The increase was primarily the result of corporate earnings and changes in unrealized gains and losses on available-for-sale investment securities included in other comprehensive income (loss), partially offset by common share repurchases and dividends.

 

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 Table 10      Regulatory Capital Ratios

 

(Dollars in Millions)   March 31,
2019
    December 31,
2018
 

Basel III standardized approach:

   

Common equity tier 1 capital

  $ 35,732     $ 34,724  

Tier 1 capital

    41,748       40,741  

Total risk-based capital

    49,194       48,178  

Risk-weighted assets

    384,394       381,661  

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

    9.3     9.1

Tier 1 capital as a percent of risk-weighted assets

    10.9       10.7  

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

    12.8       12.6  

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

    9.2       9.0  

Basel III advanced approaches:

   

Common equity tier 1 capital

  $ 35,732     $ 34,724  

Tier 1 capital

    41,748       40,741  

Total risk-based capital

    46,149       45,136  

Risk-weighted assets

    297,555       295,002  

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

    12.0     11.8

Tier 1 capital as a percent of risk-weighted assets

    14.0       13.8  

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

    15.5       15.3  

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

    7.3       7.2  

 

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 first quarter of 2019:

 

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

January

    8,308,667 (b)    $ 50.66       8,138,667     $ 1,009  

February

    3,227,951 (c)      51.22       3,147,951       848  

March

    1,318,855       50.23       1,318,855       782  

Total

    12,855,473 (d)    $ 50.76       12,605,473     $ 782  

 

(a)

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

(b)

Includes 170,000 shares of common stock purchased, at an average price per share of $49.15, in open-market transactions by U.S. Bank National Association, the Company’s banking subsidiary, in its capacity as trustee of the Company’s Employee Retirement Savings Plan.

(c)

Includes 80,000 shares of common stock purchased, at an average price per share of $51.50, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the Company’s Employee Retirement Savings Plan.

(d)

Includes 250,000 shares of common stock purchased, at an average price per share of $49.90, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the Company’s Employee Retirement Savings Plan.

Refer to “Management’s Discussion and Analysis — Capital Management” in the Company’s Annual Report on Form 10-K for the year ended December 31,  2018, 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, 2018, 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 2019, certain organization and methodology changes were made and, accordingly, 2018 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 $400 million of the Company’s net income in the first quarter of 2019, or an increase of $12 million (3.1 percent) compared with the first quarter of 2018.

 

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Net revenue increased $6 million (0.6 percent) in the first quarter of 2019, compared with the first quarter of 2018. Net interest income, on a taxable-equivalent basis, increased $3 million (0.4 percent) in the first quarter of 2019, compared with the first quarter of 2018. The increase was primarily due to the impact of rising rates on the margin benefit from deposits and loan growth, partially offset by lower rates on loans, reflecting a competitive marketplace, and lower deposit balances from a year ago. Noninterest bearing deposits are declining as customers deploy balances to support business growth. Noninterest income increased $3 million (1.4 percent) in the first quarter of 2019, compared with the first quarter of 2018, primarily due to higher trading revenue, partially offset by lower corporate bond underwriting fees.

Noninterest expense increased $15 million (3.8 percent) in the first quarter of 2019, compared with the first quarter of 2018, primarily due to an increase in net shared services expense driven by technology development and investment in infrastructure, and the write-down of equipment in the wholesale leasing business, partially offset by lower FDIC assessment costs. The provision for credit losses decreased $25 million in the first quarter of 2019, compared with the first quarter of 2018, reflecting a favorable change in the reserve allocation, partially offset by higher net charge-offs.

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 $555 million of the Company’s net income in the first quarter of 2019, or an increase of $11 million (2.0 percent) compared with the first quarter of 2018.

Net revenue increased $18 million (0.9 percent) in the first quarter of 2019, compared with the first quarter of 2018. Net interest income, on a taxable-equivalent basis, increased $56 million (3.7 percent) in the first quarter of 2019, compared with the first quarter of 2018. The increase was primarily due to the impact of rising rates on the margin benefit from deposits as well as growth in both core deposit balances and loan balances, partially offset by lower rates on loans. Noninterest income decreased $38 million (6.7 percent) in the first quarter of 2019, compared with the first quarter of 2018, principally due to a decline in mortgage banking revenue and a reduction in ATM processing services revenue due to the sale of the Company’s ATM servicing business during 2018, partially offset by the transition services agreement revenue associated with the sale.

Noninterest expense decreased $12 million (0.9 percent) in the first quarter of 2019, compared with the first quarter of 2018, primarily due to lower FDIC assessment costs and lower mortgage banking costs, partially offset by higher net shared services expense reflecting the impact of investments supporting business growth. The provision for credit losses increased $15 million (27.3 percent) in the first quarter of 2019, compared with the first quarter of 2018, due to an unfavorable change in the reserve allocation, partially offset by lower net charge-offs.

 

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 Table 11      Line of Business Financial Performance

 

    Corporate and
Commercial Banking
            Consumer and
Business Banking
        
Three Months Ended March 31
(Dollars in Millions)
  2019     2018      Percent
Change
            2019      2018      Percent
Change
        

Condensed Income Statement

                       

Net interest income (taxable-equivalent basis)

  $ 725     $ 722        .4        $ 1,568      $ 1,512        3.7    

Noninterest income

    210       207        1.4            533        571        (6.7    

Securities gains (losses), net

                                               

Total net revenue

    935       929        .6            2,101        2,083        .9      

Noninterest expense

    411       396        3.8            1,286        1,296        (.8    

Other intangibles

    1       1                   5        7        (28.6    

Total noninterest expense

    412       397        3.8            1,291        1,303        (.9    

Income before provision and income taxes

    523       532        (1.7          810        780        3.8      

Provision for credit losses

    (11     14        *            70        55        27.3      

Income before income taxes

    534       518        3.1            740        725        2.1      

Income taxes and taxable-equivalent adjustment

    134       130        3.1            185        181        2.2      

Net income

    400       388        3.1            555        544        2.0      

Net (income) loss attributable to noncontrolling interests

                                               

Net income attributable to U.S. Bancorp

  $ 400     $ 388        3.1          $ 555      $ 544        2.0      

Average Balance Sheet

                       

Commercial

  $ 77,761     $ 74,755        4.0        $ 9,451      $ 9,651        (2.1 )%     

Commercial real estate

    18,644       19,131        (2.5          16,005        16,419        (2.5    

Residential mortgages

    6       6                   61,906        57,049        8.5      

Credit card

                                               

Other retail

                            54,395        54,925        (1.0    

Total loans, excluding covered loans

    96,411       93,892        2.7            141,757        138,044        2.7      

Covered loans

                                   3,048        *      

Total loans

    96,411       93,892        2.7            141,757        141,092        .5      

Goodwill

    1,647       1,647                   3,475        3,632        (4.3    

Other intangible assets

    9       12        (25.0          2,882        2,871        .4      

Assets

    105,144       102,582        2.5            154,743        155,488        (.5    

Noninterest-bearing deposits

    29,979       34,278        (12.5          26,570        27,210        (2.4    

Interest checking

    11,753       9,491        23.8            51,149        49,299        3.8      

Savings products

    41,145       43,926        (6.3          61,395        61,292        .2      

Time deposits

    18,195       16,522        10.1            14,798        12,570        17.7      

Total deposits

    101,072       104,217        (3.0          153,912        150,371        2.4      

Total U.S. Bancorp shareholders’ equity

    10,439       10,416        .2                11,747        11,842        (.8        

 

*

Not meaningful

(a)

Presented net of related rewards and rebate costs and certain partner payments of $529 million and $534 million for the three months ended March 31, 2019 and 2018, respectively.

(b)

Includes revenue generated from certain contracts with customers of $1.7 billion and $1.8 billion for the three months ended March 31, 2019 and 2018, respectively.

 

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 four businesses: Wealth Management, Global Corporate Trust & Custody, U.S. Bancorp Asset Management and Fund Services. Wealth Management and Investment Services contributed $212 million of the Company’s net income in the first quarter of 2019, or an increase of $4 million (1.9 percent) compared with the first quarter of 2018.

Net revenue increased $12 million (1.7 percent) in the first quarter of 2019, compared with the first quarter of 2018. Net interest income, on a taxable-equivalent basis, increased $13 million (4.7 percent) in the first quarter of 2019, compared with the first quarter of 2018. The increase was primarily due to the impact of rising rates on the margin benefit from deposits, partially offset by lower deposit balances from a year ago. Noninterest income in the first quarter of 2019 was essentially flat compared with the first quarter of 2018.

Noninterest expense increased $11 million (2.6 percent) in the first quarter of 2019, compared with the first quarter of 2018, primarily due to increased net shared services expense and higher personnel expense driven by increased staffing and investments to support business growth and development, partially offset by lower FDIC assessment costs.

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 $322 million of the Company’s net income in the first quarter of 2019, or a decrease of $17 million (5.0 percent) compared with the first quarter of 2018.

 

 

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       Wealth Management and
Investment Services
     Payment
Services
           

Treasury and

Corporate Support

           

Consolidated

Company

 
       2019     2018      Percent
Change
            2019     2018     Percent
Change
            2019     2018     Percent
Change
            2019     2018     Percent
Change
 
                                       
    $     288     $ 275        4.7        $ 622     $ 611       1.8        $ 83     $ 77       7.8        $ 3,286     $ 3,197       2.8
    430       431        (.2          853 (a)      848 (a)      .6            260       210       23.8            2,286 (b)      2,267 (b)      .8  
                                                         5       5                  5       5        
    718       706        1.7            1,475       1,459       1.1            348       292       19.2            5,577       5,469       2.0  
    435       423        2.8            728       708       2.8            187       193       (3.1          3,047       3,016       1.0  
          3       4        (25.0          31       27       14.8                                   40       39       2.6  
          438       427        2.6            759       735       3.3            187       193       (3.1          3,087       3,055       1.0  
    280       279        .4            716       724       (1.1          161       99       62.6            2,490       2,414       3.1  
          (3)       1        *            286       272       5.1            35       (1     *            377       341       10.6  
    283       278        1.8            430       452       (4.9          126       100       26.0            2,113       2,073       1.9  
          71       70        1.4            108       113       (4.4          (93     (103     9.7            405       391       3.6  
    212       208        1.9            322       339       (5.0          219       203       7.9            1,708       1,682       1.5  
                                                         (9     (7     (28.6          (9     (7     (28.6
          $     212     $ 208        1.9          $ 322     $ 339       (5.0        $ 210     $ 196       7.1          $ 1,699     $ 1,675       1.4  
                                       
    $  3,921     $ 3,661        7.1        $ 9,441     $ 8,354       13.0        $ 1,386     $ 1,044       32.8        $ 101,960     $ 97,465       4.6
    504       511        (1.4                                 4,317       4,305       .3            39,470       40,366       (2.2
    3,670       3,113        17.9                                         6       *            65,582       60,174       9.0  
                            22,597       21,284       6.2                                   22,597       21,284       6.2  
          1,730       1,699        1.8            376       424       (11.3                3       *            56,501       57,051       (1.0
    9,825       8,984        9.4            32,414       30,062       7.8            5,703       5,358       6.4            286,110       276,340       3.5  
                                                                                      3,048       *  
    9,825       8,984        9.4            32,414       30,062       7.8            5,703       5,358       6.4            286,110       279,388       2.4  
    1,617       1,619        (.1          2,814       2,542       10.7                                   9,553       9,440       1.2  
    54       70        (22.9          513       396       29.5                                   3,458       3,349       3.3  
    13,187       12,026        9.7            38,618       36,161       6.8            151,707       148,031       2.5            463,399       454,288       2.0  
    13,293       14,361        (7.4          1,157       1,127       2.7            2,434       2,506       (2.9          73,433       79,482       (7.6
    9,175       11,525        (20.4                                 100       43       *            72,177       70,358       2.6  
    41,127       41,747        (1.5          109       103       5.8            872       687       26.9            144,648       147,755       (2.1
          3,806       3,700        2.9            2       3       (33.3          8,307       4,190       98.3            45,108       36,985       22.0  
    67,401       71,333        (5.5          1,268       1,233       2.8            11,713       7,426       57.7            335,366       334,580       .2  
          2,515       2,451        2.6                7,024       6,621       6.1                19,864       17,495       13.5                51,589       48,825       5.7  

 

Net revenue increased $16 million (1.1 percent) in the first quarter of 2019, compared with the first quarter of 2018. Net interest income, on a taxable-equivalent basis, increased $11 million (1.8 percent) in the first quarter of 2019, compared with the first quarter of 2018, primarily due to growth in average loans as well as loan fees, partially offset by compression on loan rates in a rising rate environment. Noninterest income increased $5 million (0.6 percent) in the first quarter of 2019, compared with the first quarter of 2018, mainly due to higher merchant processing services revenue and corporate payment products revenue driven by higher sales volumes, partially offset by lower credit and debit card revenue reflecting fewer billing cycle processing days in the first quarter of 2019, a change in the accounting for prepaid card revenue in the first quarter of 2018, and industry trends impacted by a decline in consumer spending.

Noninterest expense increased $24 million (3.3 percent) in the first quarter of 2019, compared with the first quarter of 2018, principally due to higher net shared services expense and personnel expense in support of business development, partially offset by lower marketing and business development expense due to the timing of certain advertising campaigns. The provision for credit losses increased $14 million (5.1 percent) in the first quarter of 2019, compared with the first quarter of 2018, reflecting higher net charge-offs, partially offset by a favorable change in the reserve allocation.

Treasury and Corporate Support Treasury and Corporate Support includes the Company’s investment portfolios, funding, capital management, interest rate risk management, income taxes not allocated to the business lines, including most investments in tax-advantaged projects, and the residual aggregate of those expenses associated with corporate activities that are managed on a consolidated basis. Treasury and Corporate Support recorded net income of $210 million in the first quarter of 2019, compared with $196 million in the first quarter of 2018.

 

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Net revenue increased $56 million (19.2 percent) in the first quarter of 2019, compared with the first quarter of 2018. Net interest income, on a taxable-equivalent basis, increased $6 million (7.8 percent) in the first quarter of 2019, compared with the first quarter of 2018, primarily due to growth in the investment portfolio. Noninterest income increased $50 million (23.3 percent) in the first quarter of 2019, compared with the first quarter of 2018, primarily reflecting higher income from equity investments.

Noninterest expense decreased $6 million (3.1 percent) in the first quarter of 2019, compared with the first quarter of 2018, reflecting a favorable change in net shared services expense allocated to manage the business and lower costs related to tax-advantaged projects. These decreases were partially offset by higher compensation expense, reflecting the impact of increased staffing and merit increases, and higher implementation costs of capital investments to support business growth. The provision for credit losses was $36 million higher in the first quarter of 2019, compared with the first quarter of 2018, due to an unfavorable change in the reserve allocation.

Income taxes are assessed to each line of business at a managerial tax rate of 25.0 percent with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support.

NON-GAAP FINANCIAL MEASURES

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

 

Tangible common equity to tangible assets, and

 

Tangible common equity to risk-weighted assets.

These capital measures are viewed by management as useful additional methods of evaluating the Company’s utilization of its capital held and the level of capital available to withstand unexpected negative market or economic conditions. Additionally, presentation of these measures allows investors, analysts and banking regulators to assess the Company’s capital position relative to other financial services companies. These capital measures are not defined in generally accepted accounting principles (“GAAP”), or are not defined in banking regulations. As a result, these capital measures disclosed by the Company may be considered non-GAAP financial measures. Management believes this information helps investors assess trends in the Company’s capital adequacy.

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

There may be limits in the usefulness of these measures to investors. As a result, the Company encourages readers to consider the consolidated financial statements and other financial information contained in this report in their entirety, and not to rely on any single financial measure.

 

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

 

(Dollars in Millions)   March 31,
2019
    December 31,
2018
 

Total equity

  $ 52,686     $ 51,657  

Preferred stock

    (5,984     (5,984

Noncontrolling interests

    (629     (628

Goodwill (net of deferred tax liability) (1)

    (8,716     (8,549

Intangible assets, other than mortgage servicing rights

    (685     (601

Tangible common equity (a)

    36,672       35,895  

Total assets

    475,775       467,374  

Goodwill (net of deferred tax liability) (1)

    (8,716     (8,549

Intangible assets, other than mortgage servicing rights

    (685     (601

Tangible assets (b)

    466,374       458,224  

Risk-weighted assets, determined in accordance with the Basel III standardized approach (c)

    384,394       381,661  

Ratios

   

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

    7.9     7.8

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

    9.5       9.4  

 

    Three Months Ended
March 31
 
            2019     2018  

Net interest income

  $ 3,259     $ 3,168  

Taxable-equivalent adjustment (2)

    27       29  

Net interest income, on a taxable-equivalent basis

    3,286       3,197  

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

    3,286       3,197  

Noninterest income

    2,291       2,272  

Less: Securities gains (losses), net

    5       5  

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

    5,572       5,464  

Noninterest expense (e)

    3,087       3,055  

Efficiency ratio (e)/(d)

    55.4     55.9

 

(1)

Includes goodwill related to certain investments in unconsolidated financial institutions per prescribed regulatory requirements.

(2)

Based on a federal income tax rate of 21 percent for those assets and liabilities whose income or expense is not included for federal income tax purposes.

 

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company comply with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. The Company’s financial position and results of operations can be affected by these estimates and assumptions, which are integral to understanding the Company’s financial statements. Critical accounting policies are those policies management believes are the most important to the portrayal of the Company’s financial condition and results, and require management to make estimates that are difficult, subjective or complex. Most accounting policies are not considered by management to be critical accounting policies. Those policies considered to be critical accounting policies relate to the allowance for credit losses, fair value estimates, MSRs, and income taxes. Management has discussed the development and the selection of critical accounting policies with the Company’s Audit Committee. These accounting policies are discussed in detail in “Management’s Discussion and Analysis — Critical Accounting Policies” and the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon this evaluation, the principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.

During the most recently completed fiscal quarter, there was no change made in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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U.S. Bancorp

Consolidated Balance Sheet

 

(Dollars in Millions)   March 31,
2019
    December 31,
2018
 
    (Unaudited)        

Assets

   

Cash and due from banks

  $ 18,115     $ 21,453  

Investment securities

   

Held-to-maturity (fair value $45,735 and $44,964, respectively)

    46,285       46,050  

Available-for-sale ($1,012 and $2,057 pledged as collateral, respectively) (a)

    68,113       66,115  

Loans held for sale (including $2,690 and $2,035 of mortgage loans carried at fair value, respectively)

    2,725       2,056  

Loans

   

Commercial

    103,069       102,444  

Commercial real estate

    39,421       39,539  

Residential mortgages

    66,243       65,034  

Credit card

    22,268       23,363  

Other retail

    56,698       56,430  

Total loans

    287,699       286,810  

Less allowance for loan losses

    (3,990     (3,973

Net loans

    283,709       282,837  

Premises and equipment

    3,686       2,457  

Goodwill

    9,547       9,369  

Other intangible assets

    3,341       3,392  

Other assets (including $988 and $843 of trading securities at fair value pledged as collateral, respectively) (a)

    40,254       33,645  

Total assets

  $ 475,775     $ 467,374  

Liabilities and Shareholders’ Equity

   

Deposits

   

Noninterest-bearing

  $ 74,587     $ 81,811  

Interest-bearing (b)

    273,500       263,664  

Total deposits

    348,087       345,475  

Short-term borrowings

    15,396       14,139  

Long-term debt

    40,680       41,340  

Other liabilities

    18,926       14,763  

Total liabilities

    423,089       415,717  

Shareholders’ equity

   

Preferred stock

    5,984       5,984  

Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares; issued: 3/31/19 and 12/31/18 — 2,125,725,742 shares

    21       21  

Capital surplus

    8,432       8,469  

Retained earnings

    60,092       59,065  

Less cost of common stock in treasury: 3/31/19 — 526,688,641 shares; 12/31/18 — 517,391,021 shares

    (20,699     (20,188

Accumulated other comprehensive income (loss)

    (1,773     (2,322

Total U.S. Bancorp shareholders’ equity

    52,057       51,029  

Noncontrolling interests

    629       628  

Total equity

    52,686       51,657  

Total liabilities and equity

  $ 475,775     $ 467,374  

 

(a)

Includes only collateral pledged by the Company where counterparties have the right to sell or pledge the collateral.

(b)

lncludes time deposits greater than $250,000 balances of $15.6 billion and $15.3 billion at March 31, 2019 and December 31, 2018, respectively.

See Notes to Consolidated Financial Statements.

 

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U.S. Bancorp

Consolidated Statement of Income

 

(Dollars and Shares in Millions, Except Per Share Data)
(Unaudited)
  Three Months Ended
March 31
 
          2019     2018  

Interest Income

   

Loans

  $ 3,540     $ 3,095  

Loans held for sale

    25       33  

Investment securities

    705       613  

Other interest income

    81       50  

Total interest income

    4,351       3,791  

Interest Expense

   

Deposits

    695       345  

Short-term borrowings

    93       75  

Long-term debt

    304       203  

Total interest expense

    1,092       623  

Net interest income

    3,259       3,168  

Provision for credit losses

    377       341  

Net interest income after provision for credit losses

    2,882       2,827  

Noninterest Income

   

Credit and debit card revenue

    304       324  

Corporate payment products revenue

    162       154  

Merchant processing services

    378       363  

Trust and investment management fees

    399       398  

Deposit service charges

    217       261  

Treasury management fees

    146       150  

Commercial products revenue

    219       220  

Mortgage banking revenue

    169       184  

Investment products fees

    45       46  

Realized securities gains (losses), net

    5       5  

Other

    247       167  

Total noninterest income

    2,291       2,272  

Noninterest Expense

   

Compensation

    1,559       1,523  

Employee benefits

    333       330  

Net occupancy and equipment

    277       265  

Professional services

    95       83  

Marketing and business development

    89       97  

Technology and communications

    257       235  

Postage, printing and supplies

    72       80  

Other intangibles

    40       39  

Other

    365       403  

Total noninterest expense

    3,087       3,055  

Income before income taxes

    2,086       2,044  

Applicable income taxes

    378       362  

Net income

    1,708       1,682  

Net (income) loss attributable to noncontrolling interests

    (9     (7

Net income attributable to U.S. Bancorp

  $ 1,699     $ 1,675  

Net income applicable to U.S. Bancorp common shareholders

  $ 1,613     $ 1,597  

Earnings per common share

  $ 1.01     $ .97  

Diluted earnings per common share

  $ 1.00     $ .96  

Average common shares outstanding

    1,602       1,652  

Average diluted common shares outstanding

    1,605       1,657  

See Notes to Consolidated Financial Statements.

 

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U.S. Bancorp

Consolidated Statement of Comprehensive Income

 

(Dollars in Millions)

(Unaudited)

  Three Months Ended
March 31
 
          2019     2018  

Net income

  $ 1,708     $ 1,682  

Other Comprehensive Income (Loss)

   

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

    785       (776

Changes in unrealized gains and losses on derivative hedges

    (74     86  

Foreign currency translation

    16       13  

Changes in unrealized gains and losses on retirement plans

          (3

Reclassification to earnings of realized gains and losses

    8       29  

Income taxes related to other comprehensive income (loss)

    (186     162  

Total other comprehensive income (loss)

    549       (489

Comprehensive income

    2,257       1,193  

Comprehensive (income) loss attributable to noncontrolling interests

    (9     (7

Comprehensive income attributable to U.S. Bancorp

  $ 2,248     $ 1,186  

See Notes to Consolidated Financial Statements.

 

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U.S. Bancorp

Consolidated Statement of Shareholders’ Equity

 

    U.S. Bancorp Shareholders              
(Dollars and Shares in Millions, Except Per
Share Data) (Unaudited)
  Common Shares
Outstanding
    Preferred
Stock
    Common
Stock
    Capital
Surplus
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
U.S. Bancorp
Shareholders’
Equity
    Noncontrolling
Interests
    Total
Equity
 

Balance December 31, 2017

    1,656     $ 5,419     $ 21     $ 8,464     $ 54,142     $ (17,602   $ (1,404   $ 49,040     $ 626     $ 49,666  

Changes in accounting principles (a)

            299         (300     (1       (1

Net income (loss)

            1,675           1,675       7       1,682  

Other comprehensive income (loss)

                (489     (489       (489

Preferred stock dividends (b)

            (70         (70       (70

Common stock dividends ($.30 per share)

            (497         (497       (497

Issuance of common and treasury stock

    4           (109       149         40         40  

Purchase of treasury stock

    (11             (594       (594       (594

Distributions to noncontrolling interests

                        (7     (7

Net other changes in noncontrolling interests

                        (1     (1

Stock option and restricted stock grants

                            83                               83               83  

Balance March 31, 2018

    1,649     $ 5,419     $ 21     $ 8,438     $ 55,549     $ (18,047   $ (2,193   $ 49,187     $ 625     $ 49,812  

Balance December 31, 2018

    1,608     $ 5,984     $ 21     $ 8,469     $ 59,065     $ (20,188   $ (2,322   $ 51,029     $ 628     $ 51,657  

Change in accounting principle

            2           2         2  

Net income (loss)

            1,699           1,699       9       1,708  

Other comprehensive income (loss)

                549       549         549  

Preferred stock dividends (c)

            (79         (79       (79

Common stock dividends ($.37 per share)

            (595         (595       (595

Issuance of common and treasury stock

    3           (114       129         15         15  

Purchase of treasury stock

    (12             (640       (640       (640

Distributions to noncontrolling interests

                        (8     (8

Stock option and restricted stock grants

                            77                               77               77  

Balance March 31, 2019

    1,599     $ 5,984     $ 21     $ 8,432     $ 60,092     $ (20,699   $ (1,773   $ 52,057     $ 629     $ 52,686  

 

(a)

Reflects the adoption of new accounting guidance on January 1, 2018 to reclassifiy the impact of the reduced federal statutory rate for corporations included in 2017 tax reform legislation from accumulated other comprehensive income to retained earnings.

(b)

Reflects dividends declared per share on the Company’s Series A, Series B, Series F, Series H and Series J Non-Cumulative Perpetual Preferred Stock of $875.00, $218.75, $406.25, $321.88 and $662.50, respectively.

(c)

Reflects dividends declared per share on the Company’s Series A, Series B, Series F, Series H, Series J and Series K Non-Cumulative Perpetual Preferred Stock of $951.828, $218.75, $406.25, $321.88, $662.50 and $343.75, respectively.

See Notes to Consolidated Financial Statements.

 

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U.S. Bancorp

Consolidated Statement of Cash Flows

 

(Dollars in Millions)

(Unaudited)

  Three Months Ended
March 31
 
  2019     2018  

Operating Activities

   

Net income attributable to U.S. Bancorp

  $ 1,699     $ 1,675  

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

   

Provision for credit losses

    377       341  

Depreciation and amortization of premises and equipment

    80       74  

Amortization of intangibles

    40       39  

(Gain) loss on sale of loans held for sale

    (105     (62

(Gain) loss on sale of securities and other assets

    (100     (78

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

    (6,028     (7,762

Proceeds from sales of loans held for sale

    5,404       7,975  

Other, net

    (71     (768

Net cash provided by operating activities

    1,296       1,434  

Investing Activities

   

Proceeds from sales of available-for-sale investment securities

    99       944  

Proceeds from maturities of held-to-maturity investment securities

    1,569       1,598  

Proceeds from maturities of available-for-sale investment securities

    1,865       2,771  

Purchases of held-to-maturity investment securities

    (1,817     (3,310

Purchases of available-for-sale investment securities

    (3,194     (2,068

Net (increase) decrease in loans outstanding

    (1,073     1,417  

Proceeds from sales of loans

    550       330  

Purchases of loans

    (780     (1,135

Net increase in securities purchased under agreements to resell

    (3,661     (135

Other, net

    (102     (330

Net cash (used in) provided by investing activities

    (6,544     82  

Financing Activities

   

Net increase (decrease) in deposits

    2,612       (2,689

Net increase in short-term borrowings

    1,257       1,052  

Proceeds from issuance of long-term debt

    3,000       2,110  

Principal payments or redemption of long-term debt

    (3,657     (1,137

Proceeds from issuance of common stock

    15       40  

Repurchase of common stock

    (648     (588

Cash dividends paid on preferred stock

    (72     (64

Cash dividends paid on common stock

    (597     (499

Net cash provided by (used in) financing activities

    1,910       (1,775

Change in cash and due from banks

    (3,338     (259

Cash and due from banks at beginning of period

    21,453       19,505  

Cash and due from banks at end of period

  $ 18,115     $ 19,246  

See Notes to Consolidated Financial Statements.

 

34    U.S. Bancorp


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Notes to Consolidated Financial Statements

(Unaudited)

 

 Note 1      Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States. In the opinion of management of U.S. Bancorp (the “Company”), all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of results for the interim periods have been made. These financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Certain amounts in prior periods have been reclassified to conform to the current presentation.

Accounting policies for the lines of business are generally the same as those used in preparation of the consolidated financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs, expenses and other financial elements to each line of business. Table 11 “Line of Business Financial Performance” included in Management’s Discussion and Analysis provides details of segment results. This information is incorporated by reference into these Notes to Consolidated Financial Statements.

 

 Note 2      Accounting Changes

Accounting for Leases Effective January 1, 2019, the Company adopted accounting guidance, issued by the Financial Accounting Standards Board (“FASB”) in February 2016, related to the accounting for leases. This guidance requires lessees to recognize all leases on the Consolidated Balance Sheet as lease assets and lease liabilities based primarily on the present value of future lease payments. The Company recognized approximately $1.3 billion of lease assets and related liabilities on its Consolidated Balance Sheet at the adoption date. In addition, lessors are now required to consider lease residual exposures of sales-type and direct financing leases when determining the allowance for credit losses. The adoption of this guidance was not material to the Company’s Consolidated Statement of Income.

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

 

U.S. Bancorp    35


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 Note 3      Investment Securities

The Company’s held-to-maturity investment securities are carried at historical cost, adjusted for amortization of premiums and accretion of discounts and credit-related other-than-temporary impairment. The Company’s available-for-sale investment securities are carried at fair value with unrealized net gains or losses reported within accumulated other comprehensive income (loss) in shareholders’ equity.

The amortized cost, other-than-temporary impairment recorded in other comprehensive income (loss), gross unrealized holding gains and losses, and fair value of held-to-maturity and available-for-sale investment securities were as follows:

 

    March 31, 2019            December 31, 2018  
                Unrealized Losses                             Unrealized Losses        
(Dollars in Millions)   Amortized
Cost
    Unrealized
Gains
    Other-than-
Temporary (a)
    Other (b)     Fair
Value
           Amortized
Cost
    Unrealized
Gains
    Other-than-
Temporary (a)
    Other (b)     Fair
Value
 

Held-to-maturity

                       

U.S. Treasury and agencies

  $ 4,931     $ 3     $     $ (92   $ 4,842         $ 5,102     $ 2     $     $ (143   $ 4,961  

Residential agency mortgage-backed securities

    41,327       103             (569     40,861           40,920       45             (994     39,971  

Asset-backed securities

                       

Collateralized debt obligations/Collateralized loan obligations

          3                   3                 1                   1  

Other

    5       2                   7           5       2                   7  

Obligations of state and political subdivisions

    5                         5           6       1                   7  

Obligations of foreign governments

    9                         9           9                         9  

Other

    8                         8               8                         8  

Total held-to-maturity

  $ 46,285     $ 111     $     $ (661   $ 45,735             $ 46,050     $ 51     $     $ (1,137   $ 44,964  

Available-for-sale

                       

U.S. Treasury and agencies

  $ 19,127     $ 17     $     $ (225   $ 18,919         $ 19,604     $ 11     $     $ (358   $ 19,257  

Mortgage-backed securities

                       

Residential agency

    42,267       153             (541     41,879           40,542       120             (910     39,752  

Commercial agency

    2                         2           2                         2  

Other asset-backed securities

    389       6                   395           397       6                   403  

Obligations of state and political subdivisions

    6,814       138             (34     6,918               6,836       37             (172     6,701  

Total available-for-sale

  $ 68,599     $ 314     $     $ (800   $ 68,113             $ 67,381     $ 174     $     $ (1,440   $ 66,115  

 

(a)

Represents impairment not related to credit for those investment securities that have been determined to be other-than-temporarily impaired.

(b)

Represents unrealized losses on investment securities that have not been determined to be other-than-temporarily impaired.

The weighted-average maturity of the available-for-sale investment securities was 4.7 years at March 31, 2019, compared with 5.4 years at December 31, 2018. The corresponding weighted-average yields were 2.62 percent and 2.57 percent, respectively. The weighted-average maturity of the held-to-maturity investment securities was 4.5 years at March 31, 2019, compared with 5.2 years at December 31, 2018. The corresponding weighted-average yields were 2.52 percent and 2.46 percent, respectively.

For amortized cost, fair value and yield by maturity date of held-to-maturity and available-for-sale investment securities outstanding at March 31, 2019, refer to Table 4 included in Management’s Discussion and Analysis, which is incorporated by reference into these Notes to Consolidated Financial Statements.

Investment securities with a fair value of $8.7 billion at March 31, 2019, and $10.9 billion at December 31, 2018, were pledged to secure public, private and trust deposits, repurchase agreements and for other purposes required by contractual obligation or law. Included in these amounts were securities where the Company and certain counterparties have agreements granting the counterparties the right to sell or pledge the securities. Investment securities securing these types of arrangements had a fair value of $1.0 billion at March 31, 2019, and $2.1 billion at December 31, 2018.

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

 

Three Months Ended March 31

(Dollars in Millions)

  2019      2018  

Taxable

  $       650      $       561  

Non-taxable

    55        52  

Total interest income from investment securities

  $ 705      $ 613  

 

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The following table provides information about the amount of gross gains and losses realized through the sales of available-for-sale investment securities:

 

Three Months Ended March 31

(Dollars in Millions)

  2019      2018  

Realized gains

  $         5      $         5  

Realized losses

            

Net realized gains (losses)

  $ 5      $ 5  

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

  $ 2      $ 1  

The Company conducts a regular assessment of its investment securities with unrealized losses to determine whether investment securities are other-than-temporarily impaired considering, among other factors, the nature of the investment securities, the credit ratings or financial condition of the issuer, the extent and duration of the unrealized loss, expected cash flows of underlying collateral, the existence of any government or agency guarantees, market conditions and whether the Company intends to sell or it is more likely than not the Company will be required to sell the investment securities. The Company determines other-than-temporary impairment recorded in earnings for investment securities not intended to be sold by estimating the future cash flows of each individual investment security, using market information where available, and discounting the cash flows at the original effective rate of the investment security. Other-than-temporary impairment recorded in other comprehensive income (loss) is measured as the difference between that discounted amount and the fair value of each investment security. The total amount of other-than-temporary impairment recorded was immaterial for the three months ended March 31, 2019 and 2018.

At March 31, 2019, certain investment securities had a fair value below amortized cost. The following table shows the gross unrealized losses and fair value of the Company’s investment securities with unrealized losses, aggregated by investment category and length of time the individual investment securities have been in continuous unrealized loss positions, at March 31, 2019:

 

    Less Than 12 Months      12 Months or Greater             Total  
(Dollars in Millions)   Fair
Value
     Unrealized
Losses
            Fair
Value
     Unrealized
Losses
            Fair
Value
     Unrealized
Losses
 

Held-to-maturity

                        

U.S. Treasury and agencies

  $      $          $ 4,449      $ (92        $ 4,449      $ (92

Residential agency mortgage-backed securities

    1,632        (6          27,456        (563          29,088        (569

Other asset-backed securities

                      1                   1