Form 10-Q

  3

Form 10-Q/September 30, 2012                                  

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from (not applicable)

Commission file number 1-6880

U.S. BANCORP

(Exact name of registrant as specified in its charter)

 

Delaware   41-0255900

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

800 Nicollet Mall

Minneapolis, Minnesota 55402

(Address of principal executive offices, including zip code)

651-466-3000

(Registrant’s telephone number, including area code)

(not applicable)

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

 

 

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

YES þ    NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES þ     NO ¨

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

 

Large accelerated filer þ      Accelerated filer ¨
Non-accelerated filer ¨      Smaller reporting company ¨
(Do not check if a smaller reporting company)     

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

YES ¨    NO þ

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

 

Class

Common Stock, $.01 Par Value

 

Outstanding as of October 31, 2012

1,880,370,592 shares

 

 

 


Table of Contents and Form 10-Q Cross Reference Index

 

Part I — Financial Information

  

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

  

a) Overview

     3   

b) Statement of Income Analysis

     4   

c) Balance Sheet Analysis

     6   

d) Non-GAAP Financial Measures

     34   

e) Critical Accounting Policies

     35   

f) Controls and Procedures (Item 4)

     35   

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

  

a) Overview

     10   

b) Credit Risk Management

     10   

c) Residual Value Risk Management

     22   

d) Operational Risk Management

     22   

e) Interest Rate Risk Management

     24   

f) Market Risk Management

     25   

g) Liquidity Risk Management

     26   

h) Capital Management

     27   

3) Line of Business Financial Review

     28   

4) Financial Statements (Item 1)

     36   

Part II — Other Information

  

1) Risk Factors (Item 1A)

     78   

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

     78   

3) Exhibits (Item 6)

     78   

4) Signature

     79   

5) Exhibits

     80   

“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 made. 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. Global and domestic economies could fail to recover from the recent economic downturn or could experience another severe contraction, which could adversely affect U.S. Bancorp’s revenues and the values of its assets and liabilities. Global financial markets could experience a recurrence of significant turbulence, which could reduce the availability of funding to certain financial institutions and lead to a tightening of credit, a reduction of business activity, and increased market volatility. Continued stress in the commercial real estate markets, as well as a delay or failure of recovery in the residential real estate markets, could cause additional credit losses and deterioration in asset values. In addition, U.S. Bancorp’s business and financial performance is likely to be negatively impacted by effects of recently enacted and future legislation and regulation. U.S. Bancorp’s results could also be adversely affected by continued deterioration in general business and economic conditions; changes in interest rates; deterioration in the credit quality of its loan portfolios or in the value of the collateral securing those loans; deterioration in the value of securities held in its investment securities portfolio; legal and regulatory developments; increased competition from both banks and non-banks; changes in customer behavior and preferences; effects of mergers and acquisitions and related integration; effects of critical accounting policies and judgments; and management’s ability to effectively manage credit risk, residual value risk, market risk, operational risk, interest rate risk, and liquidity 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, 2011, on file with the Securities and Exchange Commission, including the sections entitled “Risk Factors” and “Corporate Risk Profile” contained in Exhibit 13, and all subsequent filings with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934. Forward-looking statements speak only as of the date they are made, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.

 

U. S. Bancorp    1


Table 1

  Selected Financial Data

 

    

Three Months Ended

September 30,

    Nine Months Ended
September 30,
 
(Dollars and Shares in Millions, Except Per Share Data)    2012     2011     Percent  
Change  
    2012     2011     Percent
Change
 

Condensed Income Statement

            

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

   $ 2,783      $ 2,624        6.1   $ 8,186      $ 7,675        6.7

Noninterest income

     2,395        2,180        9.9        7,008        6,351        10.3   

Securities gains (losses), net

     1        (9     *        (18     (22     18.2   

Total net revenue

     5,179        4,795        8.0        15,176        14,004        8.4   

Noninterest expense

     2,609        2,476        5.4        7,770        7,215        7.7   

Provision for credit losses

     488        519        (6.0     1,439        1,846        (22.0

Income before taxes

     2,082        1,800        15.7        5,967        4,943        20.7   

Taxable-equivalent adjustment

     57        58        (1.7     168        169        (.6

Applicable income taxes

     593        490        21.0        1,684        1,314        28.2   

Net income

     1,432        1,252        14.4        4,115        3,460        18.9   

Net (income) loss attributable to noncontrolling interests

     42        21        *        112        62        80.6   

Net income attributable to U.S. Bancorp

   $ 1,474      $ 1,273        15.8      $ 4,227      $ 3,522        20.0   

Net income applicable to U.S. Bancorp common shareholders

   $ 1,404      $ 1,237        13.5      $ 4,034      $ 3,407        18.4   

Per Common Share

            

Earnings per share

   $ .74      $ .65        13.8   $ 2.13      $ 1.78        19.7

Diluted earnings per share

     .74        .64        15.6        2.12        1.77        19.8   

Dividends declared per share

     .195        .125        56.0        .585        .375        56.0   

Book value per share

     18.03        16.01        12.6         

Market value per share

     34.30        23.54        45.7         

Average common shares outstanding

     1,886        1,915        (1.5     1,892        1,918        (1.4

Average diluted common shares outstanding

     1,897        1,922        (1.3     1,901        1,926        (1.3

Financial Ratios

            

Return on average assets

     1.70     1.57       1.66     1.50  

Return on average common equity

     16.5        16.1          16.4        15.5     

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

     3.59        3.65          3.59        3.67     

Efficiency ratio (b)

     50.4        51.5          51.1        51.4     

Net charge-offs as a percent of average loans outstanding

     .99        1.31          1.02        1.49     

Average Balances

            

Loans

   $ 216,928      $ 202,169        7.3   $ 213,731      $ 199,533        7.1

Loans held for sale

     8,432        3,946        *        7,557        4,382        72.5   

Investment securities (c)

     72,454        66,252        9.4        72,371        61,907        16.9   

Earning assets

     308,959        286,269        7.9        304,269        279,305        8.9   

Assets

     345,653        321,581        7.5        340,807        314,079        8.5   

Noninterest-bearing deposits

     68,127        58,606        16.2        65,423        50,558        29.4   

Deposits

     239,281        215,369        11.1        232,978        209,735        11.1   

Short-term borrowings

     27,843        30,597        (9.0     28,942        30,597        (5.4

Long-term debt

     27,112        31,609        (14.2     29,388        31,786        (7.5

Total U.S. Bancorp shareholders’ equity

     38,619        33,087        16.7        37,105        31,699        17.1   
 
     September 30,
2012
    December 31,
2011
                         

Period End Balances

            

Loans

   $ 218,150      $ 209,835        4.0      

Investment securities

     74,145        70,814        4.7         

Assets

     352,253        340,122        3.6         

Deposits

     244,232        230,885        5.8         

Long-term debt

     26,264        31,953        (17.8      

Total U.S. Bancorp shareholders’ equity

     38,661        33,978        13.8         

Asset Quality

            

Nonperforming assets

   $ 2,835      $ 3,774        (24.9      

Allowance for credit losses

     4,771        5,014        (4.8      

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

     2.19     2.39        

Capital Ratios

            

Tier 1 capital

     10.9     10.8        

Total risk-based capital

     13.3        13.3           

Leverage

     9.2        9.1           

Tangible common equity to tangible assets (d)

     7.2        6.6           

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

     8.8        8.1           

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

     9.0        8.6           

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

            8.2           

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

     8.2                                          

 

* Not meaningful.
(a) Presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding net securities gains (losses).
(c) Excludes unrealized gains and losses on available-for-sale investment securities and any premiums or discounts recorded related to the transfer of investment securities at fair value from available-for-sale to held-to-maturity.
(d) See Non-GAAP Financial Measures on page 34.

 

2    U. S. Bancorp


Management’s Discussion and Analysis

 

OVERVIEW

Earnings Summary U.S. Bancorp and its subsidiaries (the “Company”) reported net income attributable to U.S. Bancorp of $1.5 billion for the third quarter of 2012, or $.74 per diluted common share, compared with $1.3 billion, or $.64 per diluted common share for the third quarter of 2011. Return on average assets and return on average common equity were 1.70 percent and 16.5 percent, respectively, for the third quarter of 2012, compared with 1.57 percent and 16.1 percent, respectively, for the third quarter of 2011. During the third quarter of 2012, the Company recognized a gain on the sale of a credit card portfolio, recorded a charge related to an investment under the equity method of accounting and recorded incremental charge-offs related to a regulatory clarification in the treatment of residential mortgage and other consumer loans to borrowers who have had debt discharged through bankruptcy but continue to make payments on their loans. Taken together, these items had no impact on third quarter 2012 diluted earnings per common share. The provision for credit losses was $50 million lower than net charge-offs for the third quarter of 2012, compared with $150 million lower than net charge-offs for the third quarter of 2011.

Total net revenue, on a taxable-equivalent basis, for the third quarter of 2012 was $384 million (8.0 percent) higher than the third quarter of 2011, reflecting a 6.1 percent increase in net interest income and a 10.4 percent increase in noninterest income. The increase in net interest income over a year ago was the result of higher average earning assets, continued growth in lower cost core deposit funding and the positive impact of lower cost long-term debt. Noninterest income increased over a year ago, primarily due to higher mortgage banking revenue, partially offset by lower debit card revenue as a result of legislative changes.

Noninterest expense in the third quarter of 2012 was $133 million (5.4 percent) higher than the third quarter of 2011, primarily due to higher compensation expense, employee benefits costs and mortgage servicing review-related professional services costs.

The provision for credit losses for the third quarter of 2012 of $488 million was $31 million (6.0 percent) lower than the third quarter of 2011. The third quarter of 2012 provision for credit losses reflected $54 million in charge-offs related to a regulatory clarification in the treatment of residential mortgage and other consumer loans to borrowers who have had debt discharged through bankruptcy but continue to make payments on their loans.

Net charge-offs in the third quarter of 2012 were $538 million, compared with $669 million in the third quarter of 2011. 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.

The Company reported net income attributable to U.S. Bancorp of $4.2 billion for the first nine months of 2012, or $2.12 per diluted common share, compared with $3.5 billion, or $1.77 per diluted common share for the first nine months of 2011. Return on average assets and return on average common equity were 1.66 percent and 16.4 percent, respectively, for the first nine months of 2012, compared with 1.50 percent and 15.5 percent, respectively, for the first nine months of 2011. Included in the Company’s results for the first nine months of 2012 were the third quarter credit card portfolio sale gain, equity-method investment charge and incremental charge-offs related to consumer loans to borrowers who have had debt discharged through bankruptcy. Included in the Company’s results for the first nine months of 2011 was a $46 million gain related to the acquisition of First Community Bank of New Mexico (“FCB”) in a transaction with the Federal Deposit Insurance Corporation (“FDIC”). The provision for credit losses was $190 million lower than net charge-offs for the first nine months of 2012, compared with $375 million lower than net charge-offs for the first nine months of 2011.

Total net revenue, on a taxable-equivalent basis, for the first nine months of 2012 was $1.2 billion (8.4 percent) higher than the first nine months of 2011, reflecting a 6.7 percent increase in net interest income and a 10.4 percent increase in noninterest income. The increase in net interest income over a year ago was largely the result of an increase in average earning assets, continued growth in lower cost core deposit funding and lower rates on long-term debt. Noninterest income increased over a year ago, primarily due to higher mortgage banking revenue, merchant processing services revenue, trust and investment management fees, and commercial products revenue, partially offset by lower debit card revenue as a result of legislative changes.

Noninterest expense in the first nine months of 2012 was $555 million (7.7 percent) higher than the first nine months of 2011, primarily due to higher compensation expense, employee benefits costs, mortgage servicing review-related professional services costs, and other expense, including higher regulatory and insurance-related costs and an accrual recorded by

 

 

U. S. Bancorp    3


the Company in the first nine months of 2012 related to its portion of obligations associated with Visa Inc. litigation matters (“Visa accrual”).

The provision for credit losses for the first nine months of 2012 of $1.4 billion was $407 million (22.0 percent) lower than the first nine months of 2011. Net charge-offs in the first nine months of 2012 were $1.6 billion, compared with $2.2 billion in the first nine months of 2011. 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 $2.8 billion in the third quarter of 2012, compared with $2.6 billion in the third quarter of 2011. Net interest income, on a taxable-equivalent basis, was $8.2 billion in the first nine months of 2012, compared with $7.7 billion in the first nine months of 2011. The increases were primarily the result of growth in both average earning assets and lower cost core deposit funding, as well as lower rates on long-term debt. Average earning assets increased $22.7 billion (7.9 percent) in the third quarter and $25.0 billion (8.9 percent) in the first nine months of 2012, compared with the same periods of 2011, driven by increases in loans and investment securities. The net interest margin in both the third quarter and first nine months of 2012 was 3.59 percent, compared with 3.65 percent and 3.67 percent in the third quarter and first nine months of 2011, respectively. The decreases in the net interest margin reflected higher average balances in lower-yielding investment securities, partially offset by lower rates on deposits and long-term debt, and the inclusion of credit card balance transfer fees in interest income beginning in the first quarter of 2012. Refer to the “Consolidated Daily Average Balance Sheet and Related Yields and Rates” tables for further information on net interest income.

Average total loans for the third quarter and first nine months of 2012 were $14.8 billion (7.3 percent) and $14.2 billion (7.1 percent) higher, respectively, than the same periods of 2011, driven by growth in commercial loans, residential mortgages, credit card loans and commercial real estate loans. During the third quarter of 2012, the Company sold a $735 million branded consumer and business credit card portfolio. This sale was offset by the impact of the purchase of approximately $700 million of consumer credit card

loans in the fourth quarter of 2011. The increases were partially offset by decreases in other retail loans and loans covered by loss sharing agreements with the FDIC. Average loans acquired in FDIC-assisted transactions that are covered by loss sharing agreements with the FDIC (“covered” loans) decreased $3.2 billion (20.2 percent) in the third quarter and $3.1 billion (18.5 percent) in the first nine months of 2012, compared with the same periods of 2011, respectively.

Average investment securities in the third quarter and first nine months of 2012 were $6.2 billion (9.4 percent) and $10.5 billion (16.9 percent) higher, respectively, than the same periods of 2011, primarily due to purchases of government agency mortgage-backed securities, as the Company increased its on-balance sheet liquidity in response to anticipated regulatory requirements.

Average total deposits for the third quarter and first nine months of 2012 were $23.9 billion (11.1 percent) and $23.2 billion (11.1 percent) higher, respectively, than the same periods of 2011. Average noninterest-bearing deposits for the third quarter and first nine months of 2012 were $9.5 billion (16.2 percent) and $14.9 billion (29.4 percent) higher, respectively, than the same periods of 2011, due to growth in average balances in a majority of the lines of business, including Wholesale Banking and Commercial Real Estate, Wealth Management and Securities Services, and Consumer and Small Business Banking. Average total savings deposits for the third quarter and first nine months of 2012 were $7.8 billion (6.9 percent) and $7.2 billion (6.3 percent) higher, respectively, than the same periods of 2011, primarily due to growth in Consumer and Small Business Banking and corporate trust balances, partially offset by lower government banking and broker-dealer balances. Average time certificates of deposit less than $100,000 were slightly lower in the third quarter and first nine months of 2012, compared with the same periods of 2011. Average time deposits greater than $100,000 for the third quarter and first nine months of 2012 were $7.5 billion (26.1 percent) and $1.8 billion (6.1 percent) higher, respectively, than the same periods of 2011. Time deposits greater than $100,000 are managed as an alternate to other funding sources such as wholesale borrowing, based largely on relative pricing.

Provision for Credit Losses The provision for credit losses for the third quarter and first nine months of 2012 decreased $31 million (6.0 percent) and $407 million (22.0 percent), respectively, from the same periods of 2011. Net charge-offs decreased $131 million (19.6 percent) and $592 million (26.7 percent) in the third quarter and first nine months of 2012, respectively,

 

 

4    U. S. Bancorp


Table 2

  Noninterest Income

 

    

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

 
(Dollars in Millions)    2012      2011     Percent
Change
     2012     2011     Percent
Change
 

Credit and debit card revenue

   $ 213       $ 289        (26.3 )%     $ 650      $ 842        (22.8 )% 

Corporate payment products revenue

     201         203        (1.0      566        563        .5   

Merchant processing services

     345         338        2.1         1,041        977        6.6   

ATM processing services

     87         115        (24.3      263        341        (22.9

Trust and investment management fees

     265         241        10.0         779        755        3.2   

Deposit service charges

     174         183        (4.9      483        488        (1.0

Treasury management fees

     135         137        (1.5      411        418        (1.7

Commercial products revenue

     225         212        6.1         652        621        5.0   

Mortgage banking revenue

     519         245        *         1,461        683        *   

Investment products fees and commissions

     38         31        22.6         111        98        13.3   

Securities gains (losses), net

     1         (9     *         (18     (22     18.2   

Other

     193         186        3.8         591        565        4.6   

Total noninterest income

   $ 2,396       $ 2,171        10.4    $ 6,990      $ 6,329        10.4

 

* Not meaningful.

 

compared with the same periods of 2011, principally due to improvement in the commercial, commercial real estate and credit card portfolios. Charge-offs for the third quarter and first nine months of 2012 included $54 million related to a regulatory clarification in the treatment of residential mortgage and other consumer loans to borrowers who have had debt discharged through bankruptcy but continue to make payments on their loans. The provision for credit losses was lower than net charge-offs by $50 million in the third quarter and $190 million in the first nine months of 2012, compared with $150 million in the third quarter and $375 million in the first nine months of 2011. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

Noninterest Income Noninterest income in the third quarter and first nine months of 2012 were $2.4 billion and $7.0 billion, respectively, compared with $2.2 billion and $6.3 billion in the same periods of 2011. The $225 million (10.4 percent) increase during the third quarter and the $661 million (10.4 percent) increase during the first nine months of 2012, compared with the same periods of 2011, were primarily driven by strong mortgage banking revenue, principally due to higher origination and sales revenue. In addition, merchant processing services revenue and investment products fees and commissions increased, primarily due to higher transaction volumes. Trust and investment management fees increased due to improved market conditions and business expansion. Commercial

products revenue was higher, principally driven by higher commercial loan fees and high-grade bond underwriting fees. The third quarter and first nine months of 2012 had favorable changes in net securities gains (losses), compared with the same periods of the prior year, primarily due to impairments recorded in 2011. Other income increased in the third quarter of 2012, compared with the same period of the prior year, reflecting the impact of the gain on the credit card portfolio sale, partially offset by the equity-method investment charge and lower retail lease residual revenue. Other income increased in the first nine months of 2012, compared with the same period of the prior year, primarily due to higher retail lease residual revenue and the gain on the credit card portfolio sale, partially offset by the FCB gain and a gain related to the Company’s investment in Visa Inc., both recorded in the first quarter of 2011, and lower equity investment income. Offsetting these positive variances were decreases in credit and debit card revenue due to lower debit card interchange fees as a result of fourth quarter of 2011 legislation (estimated impact of $82 million in the third quarter and $238 million in the first nine months of 2012), net of mitigation efforts, and the impact of the inclusion of credit card balance transfer fees in interest income beginning in the first quarter of 2012. These negative variances were partially offset by higher transaction volumes. ATM processing services revenue was also lower, due to excluding surcharge fees the Company passes through to others from revenue beginning in the first quarter of 2012, rather than reporting those amounts in occupancy expense as in previous periods.

 

 

U. S. Bancorp    5


Table 3

  Noninterest Expense

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(Dollars in Millions)    2012     2011     Percent
Change
     2012     2011     Percent
Change
 

Compensation

   $ 1,109      $ 1,021        8.6    $ 3,237      $ 2,984        8.5

Employee benefits

     225        203        10.8         714        643        11.0   

Net occupancy and equipment

     233        252        (7.5      683        750        (8.9

Professional services

     144        100        44.0         364        252        44.4   

Marketing and business development

     96        102        (5.9      285        257        10.9   

Technology and communications

     205        189        8.5         607        563        7.8   

Postage, printing and supplies

     75        76        (1.3      226        226          

Other intangibles

     67        75        (10.7      208        225        (7.6

Other

     455        458        (.7      1,446        1,315        10.0   

Total noninterest expense

   $ 2,609      $ 2,476        5.4    $ 7,770      $ 7,215        7.7

Efficiency ratio (a)

     50.4     51.5              51.1     51.4        

 

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

 

Noninterest Expense Noninterest expense was $2.6 billion in the third quarter and $7.8 billion in the first nine months of 2012, compared with $2.5 billion and $7.2 billion in the same periods of 2011, or increases of $133 million (5.4 percent) and $555 million (7.7 percent), respectively. The increases in noninterest expense from a year ago were principally due to higher compensation expense, employee benefits expense and professional services expense. Compensation expense increased primarily as a result of growth in staffing for business initiatives and mortgage servicing-related activities, in addition to higher commissions and merit increases. Employee benefits expense increased principally due to higher pension costs and staffing levels. Professional services expense was higher, principally due to mortgage servicing review-related projects. Technology and communications expense was higher due to business expansion and technology projects. Marketing and business development expense increased in the first nine months of 2012 over the same period of the prior year due to the timing of charitable contributions and new national media promotions. Other expense increased in the first nine months of 2012, over the same period of the prior year, driven by higher mortgage servicing, regulatory and insurance-related costs and the 2012 Visa accrual, partially offset by lower FDIC assessments, and costs related to other real estate owned and investments in affordable housing and other tax-advantaged projects. These increases were partially offset by decreases in net occupancy and equipment expense, principally reflecting the change in presentation of ATM surcharge revenue passed through to others, and decreases in other intangibles expense due principally to completion of amortization of certain intangibles.

Income Tax Expense The provision for income taxes was $593 million (an effective rate of 29.3 percent) for the third quarter and $1.7 billion (an effective rate of 29.0 percent) for the first nine months of 2012, compared with $490 million (an effective rate of 28.1 percent) and $1.3 billion (an effective rate of 27.5 percent) for the same periods of 2011. The increases in the effective tax rate for the third quarter and first nine months of 2012, compared with the same periods of the prior year, principally reflected the impact of higher pretax earnings year-over-year. For further information on income taxes, refer to Note 9 of the Notes to Consolidated Financial Statements.

BALANCE SHEET ANALYSIS

Loans The Company’s total loan portfolio was $218.2 billion at September 30, 2012, compared with $209.8 billion at December 31, 2011, an increase of $8.3 billion (4.0 percent). The increase was driven primarily by increases in commercial loans, residential mortgages and commercial real estate loans, partially offset by lower credit card, other retail and covered loans.

The $6.3 billion (11.1 percent) increase in commercial loans was driven by higher demand from new and existing customers.

Residential mortgages held in the loan portfolio increased $4.8 billion (13.0 percent) at September 30, 2012, compared with December 31, 2011, reflecting origination and refinancing activity due to the low interest rate environment. Residential mortgages held in the Company’s loan portfolio are primarily well secured jumbo mortgages to borrowers with high credit quality. The Company generally retains portfolio loans through maturity; however, the Company’s intent may change over time based upon various factors such as ongoing

 

 

6    U. S. Bancorp


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.

Commercial real estate loans increased $962 million (2.7 percent) at September 30, 2012, compared with December 31, 2011, reflecting higher demand from new and existing customers.

Total credit card loans decreased $958 million (5.5 percent) at September 30, 2012, compared with December 31, 2011, reflecting the impact of the sale of a branded credit card portfolio during 2012 and customers paying down their balances. Other retail loans, which include retail leasing, home equity and second mortgages and other retail loans, decreased $142 million (.3 percent) at September 30, 2012, compared with December 31, 2011. The decrease was primarily driven by lower home equity and second mortgages and student loan balances, partially offset by higher installment loan and retail leasing balances.

Loans Held for Sale Loans held for sale, consisting primarily of residential mortgages to be sold in the secondary market, were $9.9 billion at September 30, 2012, compared with $7.2 billion at December 31, 2011. The increase in loans held for sale was principally due to an increase in mortgage loan origination and refinancing activity due to the low interest rate environment.

Most of the residential mortgage loans the Company originates follow guidelines that allow the loans to be sold into existing, highly liquid secondary markets; in particular in government agency transactions and to government sponsored enterprises (“GSEs”).

Investment Securities Investment securities totaled $74.1 billion at September 30, 2012, compared with $70.8 billion at December 31, 2011. The $3.3 billion (4.7 percent) increase primarily reflected $2.6 billion of net investment purchases and a $.5 billion favorable change in net unrealized gains (losses) on available-for-sale securities. Held-to-maturity securities were $34.5 billion at September 30, 2012, compared with $18.9 billion at December 31, 2011, due to a transfer of approximately $11.7 billion of available-for-sale investment securities to the held-to-maturity category during the first nine months of 2012, reflecting the Company’s intent to hold those securities to maturity, and growth in government agency mortgage-backed securities as the Company continued to increase its on-balance sheet liquidity in response to anticipated regulatory requirements.

The Company’s available-for-sale securities are carried at fair value with changes in fair value reflected in other comprehensive income (loss) unless a security is deemed to be other-than-temporarily impaired. At September 30, 2012, the Company’s net unrealized gains on available-for-sale securities were $1.1 billion, compared with $581 million at December 31, 2011. The favorable change in net unrealized gains was primarily due to increases in the fair value of non-agency mortgage-backed and state and political securities. Gross unrealized losses on available-for-sale securities totaled $229 million at September 30, 2012, compared with $691 million at December 31, 2011.

The Company conducts a regular assessment of its investment portfolio to determine whether any securities are other-than-temporarily impaired. When assessing unrealized losses for other-than-temporary impairment, the Company considers the nature of the investment, the financial condition of the issuer, the extent and duration of the unrealized loss, expected cash flows of underlying assets and market conditions. At September 30, 2012, the Company had no plans to sell securities with unrealized losses and believes it is more likely than not that it would not be required to sell such securities before recovery of their amortized cost.

There is limited market activity for non-agency mortgage-backed securities held by the Company. As a result, the Company estimates the fair value of these securities using estimates of expected cash flows, discount rates and management’s assessment of various other market factors, which are judgmental in nature. The Company recorded $15 million and $36 million of impairment charges in earnings during the third quarter and first nine months of 2012, respectively, on non-agency mortgage-backed securities. These impairment charges were due to changes in expected cash flows primarily resulting from increases in defaults in the underlying mortgage pools. During the first nine months of 2012, the Company also recognized impairment charges of $27 million in earnings related to certain perpetual preferred securities issued by financial institutions, following the downgrades of money center banks by a rating agency. The unrealized loss on perpetual preferred securities in a loss position at September 30, 2012, was $19 million. Further adverse changes in market conditions may result in additional impairment charges in future periods. Refer to Notes 2 and 11 in the Notes to Consolidated Financial Statements for further information on investment securities.

 

 

U. S. Bancorp    7


Table 4

  Investment Securities

 

    Available-for-Sale      Held-to-Maturity  
At September 30, 2012 (Dollars in Millions)   Amortized
Cost
   

Fair

Value

    Weighted-
Average
Maturity in
Years
    Weighted-
Average
Yield (e)
     Amortized
Cost
    

Fair

Value

     Weighted-
Average
Maturity in
Years
     Weighted-
Average
Yield (e)
 

U.S. Treasury and Agencies

                     

Maturing in one year or less

  $ 72      $ 73        .5        2.57    $ 50       $ 50         .3         .61

Maturing after one year through five years

    497        501        1.3        .84         2,447         2,473         1.4         1.00   

Maturing after five years through ten years

    149        158        7.5        3.11                                   

Maturing after ten years

    10        11        10.9        2.89         60         60         12.4         1.96   

Total

  $ 728      $ 743        2.6        1.51    $ 2,557       $ 2,583         1.7         1.01

Mortgage-Backed Securities (a)

                     

Maturing in one year or less

  $ 3,312      $ 3,315        .6        1.58    $ 395       $ 396         .7         1.52

Maturing after one year through five years

    23,074        23,876        3.0        2.46         30,583         31,260         3.1         2.17   

Maturing after five years through ten years

    3,074        3,045        6.4        2.26         740         758         7.4         1.50   

Maturing after ten years

    294        299        12.5        1.49         59         60         10.4         1.22   

Total

  $ 29,754      $ 30,535        3.2        2.34    $ 31,777       $ 32,474         3.2         2.14

Asset-Backed Securities (a)

                     

Maturing in one year or less

  $ 8      $ 9               .24    $       $ 4         .5         1.22

Maturing after one year through five years

    36        46        3.2        6.36         11         9         3.5         .65   

Maturing after five years through ten years

    574        585        7.6        2.48         8         9         6.6         .73   

Maturing after ten years

                  18.8        5.88         9         18         22.6         .86   

Total

  $ 618      $ 640        7.3        2.68    $ 28       $ 40         10.5         .75

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

                     

Maturing in one year or less

  $ 81      $ 82        .1        2.65    $       $         .7         8.16

Maturing after one year through five years

    5,226        5,550        3.8        6.79         6         6         3.2         7.31   

Maturing after five years through ten years

    765        812        7.1        6.20         1         2         7.9         7.79   

Maturing after ten years

    13        13        17.2        15.83         14         14         14.6         5.42   

Total

  $ 6,085      $ 6,457        4.2        6.68    $ 21       $ 22         10.9         6.13

Other Debt Securities

                     

Maturing in one year or less

  $ 6      $ 6        .2        1.00    $ 3       $ 2         .5         1.14

Maturing after one year through five years

                                 94         91         3.5         1.30   

Maturing after five years through ten years

                                 29         14         8.1         1.18   

Maturing after ten years

    813        709        25.3        3.21                                   

Total

  $ 819      $ 715        25.1        3.19    $ 126       $ 107         4.4         1.27

Other Investments

  $ 516      $ 546        15.8        2.97    $       $                

Total investment securities (d)

  $ 38,520      $ 39,636        4.0        3.04    $ 34,509       $ 35,226         3.1         2.06

 

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

 

     September 30, 2012      December 31, 2011  
(Dollars in Millions)    Amortized
Cost
     Percent
of Total
     Amortized
Cost
     Percent
of Total
 

U.S. Treasury and agencies

   $ 3,285         4.5    $ 3,605         5.1

Mortgage-backed securities

     61,531         84.2         57,561         82.0   

Asset-backed securities

     646         .9         949         1.4   

Obligations of state and political subdivisions

     6,106         8.4         6,417         9.1   

Other debt securities and investments

     1,461         2.0         1,701         2.4   

Total investment securities

   $ 73,029         100.0    $ 70,233         100.0

 

 

8    U. S. Bancorp


Deposits Total deposits were $244.2 billion at September 30, 2012, compared with $230.9 billion at December 31, 2011, the result of increases in noninterest-bearing deposits, money market deposits, savings accounts and time deposits greater than $100,000, partially offset by decreases in interest checking deposits and time certificates less than $100,000. Time deposits greater than $100,000 increased $7.1 billion (25.8 percent) at September 30, 2012, compared with December 31, 2011. Time deposits greater than $100,000 are managed as an alternate to other funding sources such as wholesale borrowing, based largely on relative pricing. Noninterest-bearing deposits increased $4.4 billion (6.4 percent), primarily due to higher Consumer and Small Business Banking balances. Money market balances increased $2.4 billion (5.2 percent) primarily due to higher balances in Wholesale Banking and Commercial Real Estate. Savings account balances increased $1.9 billion (6.6 percent), primarily due to continued strong participation in a savings product offered by Consumer and Small Business Banking that includes multiple bank products in a package. Interest checking balances decreased $1.7 billion (3.6 percent) primarily due to lower Wholesale Banking and Commercial Real Estate and broker-dealer balances, partially offset by higher Consumer and Small Business Banking balances. Time certificates less than

$100,000 decreased $763 million (5.1 percent), reflecting lower Consumer and Small Business Banking balances.

Borrowings The Company utilizes both short-term and long-term borrowings as part of its asset/liability management and funding strategies. Short-term borrowings, which include federal funds purchased, commercial paper, repurchase agreements, borrowings secured by high-grade assets and other short-term borrowings, were $27.9 billion at September 30, 2012, compared with $30.5 billion at December 31, 2011. The $2.6 billion (8.6 percent) decrease in short-term borrowings was primarily in repurchase agreements, partially offset by higher commercial paper balances. Long-term debt was $26.3 billion at September 30, 2012, compared with $32.0 billion at December 31, 2011. The $5.7 billion (17.8 percent) decrease was primarily due to $3.8 billion of medium-term note repayments and maturities, $2.7 billion of redemptions of junior subordinated debentures and a $3.5 billion decrease in Federal Home Loan Bank advances, partially offset by issuances of $1.3 billion of subordinated debt and $2.3 billion of medium-term notes, and a $.8 billion increase in long-term debt related to certain consolidated variable interest entities. Refer to the “Liquidity Risk Management” section for discussion of liquidity management of the Company.

 

 

U. S. Bancorp    9


CORPORATE RISK PROFILE

Overview Managing risks is an essential part of successfully operating a financial services company. The Company’s most prominent risk exposures are credit, residual value, operational, interest rate, market, liquidity and reputation risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan, investment or derivative contract when it is due. Residual value risk is the potential reduction in the end-of-term value of leased assets. Operational risk includes risks related to fraud, processing errors, technology, breaches of internal controls and in data security, and business continuation and disaster recovery. Operational risk also includes legal and compliance risks, including risks arising from the failure to adhere to laws, rules, regulations and internal policies and procedures. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates, which can affect the re-pricing of assets and liabilities differently. Market risk arises from fluctuations in interest rates, foreign exchange rates, and security prices that may result in changes in the values of financial instruments, such as trading and available-for-sale securities, certain mortgage loans held for sale, mortgage servicing rights (“MSRs”) and derivatives that are accounted for on a fair value basis. Liquidity risk is the possible inability to fund obligations to depositors, investors or borrowers. Further, corporate strategic decisions, as well as the risks described above, could give rise to reputation risk. Reputation risk is the risk that negative publicity or press, whether true or not, could result in costly litigation or cause a decline in the Company’s stock value, customer base, funding sources or revenue. In addition to the risks identified above, other risk factors exist that may impact the Company. Refer to “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, for a detailed discussion of these factors.

Credit Risk Management The Company’s strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, the level of allowance coverage relative to similar banking institutions and macroeconomic factors, such as changes

in unemployment rates, gross domestic product, real estate values and consumer bankruptcy filings.

In addition, credit quality ratings, as defined by the Company, are an important part of the Company’s overall credit risk management and evaluation of its allowance for credit losses. Loans with a pass rating represent those not classified on the Company’s rating scale for problem credits, as minimal risk has been identified. Loans with a special mention or classified rating, including all of the Company’s loans that are 90 days or more past due and still accruing, nonaccrual loans, those loans considered troubled debt restructurings (“TDRs”), and loans in a junior lien position that are current but are behind a modified or delinquent loan in a first lien position, encompass all loans held by the Company that it considers to have a potential or well-defined weakness that may put full collection of contractual cash flows at risk. The Company’s internal credit quality ratings for consumer loans are primarily based on delinquency and nonperforming status, except for a limited population of larger loans within those portfolios that are individually evaluated. For this limited population, the determination of the internal credit quality rating may also consider collateral value and customer cash flows. The Company obtains recent collateral value estimates for the majority of its residential mortgage and home equity and second mortgage portfolios, which allows the Company to compute estimated loan-to-value (“LTV”) ratios reflecting current market conditions. These individually refreshed LTV ratios are considered in the determination of the appropriate allowance for credit losses. The decline in housing prices over the past several years has deteriorated the collateral support of the residential mortgage, home equity and second mortgage portfolios. However, the underwriting criteria the Company employs consider the relevant income and credit characteristics of the borrower, such that the collateral is not the primary source of repayment. Refer to Note 3 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, 2011, for a more detailed discussion on credit risk management processes.

The Company manages its credit risk, in part, through diversification of its loan portfolio and limit setting by product type criteria and concentrations. As part of its normal business activities, the Company offers

 

 

10    U. S. Bancorp


a broad array of lending products. The Company categorizes its loan portfolio into three segments, which is the level at which it develops and documents a systematic methodology to determine the allowance for credit losses. The Company’s three loan portfolio segments are commercial lending, consumer lending and covered loans. The commercial lending segment includes loans and leases made to small business, middle market, large corporate, commercial real estate, financial institution, and public sector customers. Key risk characteristics relevant to commercial lending segment loans include the industry and geography of the borrower’s business, purpose of the loan, repayment source, borrower’s debt capacity and financial flexibility, loan covenants, and nature of pledged collateral, if any. These risk characteristics, among others, are considered in determining estimates about the likelihood of default by the borrowers and the severity of loss in the event of default. The Company considers these risk characteristics in assigning internal risk ratings to, or forecasting losses on, these loans which are the significant factors in determining the allowance for credit losses for loans in the commercial lending segment.

The consumer lending segment represents loans and leases made to consumer customers including residential mortgages, credit card loans, and other retail loans such as revolving consumer lines, auto loans and leases, student loans, and home equity loans and lines. Home equity or second mortgage loans are junior lien closed-end accounts fully disbursed at origination. These loans typically are fixed rate loans, secured by residential real estate, with a 10 or 15 year fixed payment amortization schedule. Home equity lines are revolving accounts giving the borrower the ability to draw and repay balances repeatedly, up to a maximum commitment, and are secured by residential real estate. These include accounts in either a first or junior lien position. Typical terms on home equity lines are variable rates benchmarked to the prime rate, with a 15-year draw period during which a minimum payment is equivalent to the monthly interest, followed by a 10-year amortization period. At September 30, 2012, substantially all of the Company’s home equity lines were in the draw period. Key risk characteristics relevant to consumer lending segment loans primarily relate to the borrowers’ capacity and willingness to repay and include unemployment rates and other economic factors, customer payment history and in some cases, updated LTV information on real estate based loans. These risk characteristics, among others, are reflected in forecasts

of delinquency levels, bankruptcies and losses which are the primary factors in determining the allowance for credit losses for the consumer lending segment.

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

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

The Company’s consumer lending segment utilizes several distinct business processes and channels to originate consumer credit, including traditional branch lending, indirect lending, portfolio acquisitions, correspondent banks and loan brokers, which the Company refers to as consumer finance. Generally, the consumer finance loans exhibit higher credit risk characteristics, but have pricing commensurate with the differing risk profile. The Company may either retain the loans on its balance sheet or sell its interest in the balances into the secondary market while retaining the servicing rights and customer relationships. For residential mortgages that are retained in the Company’s portfolio and for home equity and second mortgages, credit risk is also diversified by geography and managed by adherence to LTV and borrower credit criteria during the underwriting process.

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

 

 

U. S. Bancorp    11


The following tables provide summary information for the LTVs of residential mortgages and home equity and second mortgages by origination channel and type at September 30, 2012:

 

Residential mortgages

(Dollars in Millions)

  Interest
Only
    Amortizing     Total     Percent
of Total
 

Consumer Finance

       

Less than or equal to 80 %

  $ 849      $ 6,938      $ 7,787        57.1

Over 80 % through 90 %

    223        2,337        2,560        18.7   

Over 90 % through 100 %

    183        917        1,100        8.1   

Over 100 %

    483        1,714        2,197        16.1   

No LTV available

           1        1          

Total

  $ 1,738      $ 11,907      $ 13,645        100.0

Other

       

Less than or equal to 80 %

  $ 1,081      $ 18,057      $ 19,138        67.7

Over 80 % through 90 %

    276        1,280        1,556        5.5   

Over 90 % through 100 %

    221        833        1,054        3.7   

Over 100 %

    410        925        1,335        4.7   

No LTV available

           95        95        .4   

Loans purchased from GNMA mortgage pools (a)

           5,079        5,079        18.0   

Total

  $ 1,988      $ 26,269      $ 28,257        100.0

Total Company

       

Less than or equal to 80 %

  $ 1,930      $ 24,995      $ 26,925        64.3

Over 80 % through 90 %

    499        3,617        4,116        9.8   

Over 90 % through 100 %

    404        1,750        2,154        5.2   

Over 100 %

    893        2,639        3,532        8.4   

No LTV available

           96        96        .2   

Loans purchased from GNMA mortgage pools (a)

           5,079        5,079        12.1   

Total

  $ 3,726      $ 38,176      $ 41,902        100.0

 

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

 

Home equity and second mortgages

(Dollars in Millions)

  Lines     Loans     Total     Percent
of Total
 

Consumer Finance

       

Less than or equal to 80 %

  $ 851      $ 67      $ 918        41.4

Over 80 % through 90 %

    306        48        354        15.9   

Over 90 % through 100 %

    198        70        268        12.1   

Over 100 %

    423        251        674        30.4   

No LTV/CLTV available

    3        1        4        .2   

Total

  $ 1,781      $ 437      $ 2,218        100.0

Other

       

Less than or equal to 80 %

  $ 7,613      $ 606      $ 8,219        55.1

Over 80 % through 90 %

    2,191        249        2,440        16.4   

Over 90 % through 100 %

    1,338        206        1,544        10.4   

Over 100 %

    1,986        378        2,364        15.9   

No LTV/CLTV available

    307        27        334        2.2   

Total

  $ 13,435      $ 1,466      $ 14,901        100.0

Total Company

       

Less than or equal to 80 %

  $ 8,464      $ 673      $ 9,137        53.4

Over 80 % through 90 %

    2,497        297        2,794        16.3   

Over 90 % through 100 %

    1,536        276        1,812        10.6   

Over 100 %

    2,409        629        3,038        17.7   

No LTV/CLTV available

    310        28        338        2.0   

Total

  $ 15,216      $ 1,903      $ 17,119        100.0

Within the consumer finance loans, at September 30, 2012, approximately $1.7 billion of residential mortgages were to customers that may be defined as sub-prime borrowers based on credit scores

from independent agencies at loan origination, compared with $1.9 billion at December 31, 2011. In addition to residential mortgages, at September 30, 2012, $.4 billion of the consumer finance home equity and second mortgage loans were to customers that may be defined as sub-prime borrowers, compared with $.5 billion at December 31, 2011. The total amount of consumer lending segment residential mortgage, home equity and second mortgage loans to customers that may be defined as sub-prime borrowers represented only .6 percent of total assets at September 30, 2012, compared with .7 percent at December 31, 2011. The Company considers sub-prime loans to be those made to borrowers with a risk of default significantly higher than those approved for prime lending programs, as reflected in credit scores obtained from independent agencies at loan origination, in addition to other credit underwriting criteria. Sub-prime portfolios include only loans originated according to the Company’s underwriting programs specifically designed to serve customers with weakened credit histories. The sub-prime designation indicators have been and will continue to be subject to re-evaluation over time as borrower characteristics, payment performance and economic conditions change. The sub-prime loans originated during the periods from June 2009 to September 2012 are with borrowers who met the Company’s program guidelines and have a credit score that generally is at or below a threshold of 620 to 650 depending on the program. Sub-prime loans originated during periods prior to June 2009 were based upon program level guidelines without regard to credit score.

The following table provides further information on the LTVs of residential mortgages, specifically for the consumer finance loans, at September 30, 2012:

 

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

Sub-Prime Borrowers

       

Less than or equal to 80%

  $ 2      $ 607      $ 609        4.5

Over 80% through 90%

    2        241        243        1.7   

Over 90% through 100%

    3        262        265        2.0   

Over 100%

    7        554        561        4.1   

Total

  $ 14      $ 1,664      $ 1,678        12.3

Other Borrowers

       

Less than or equal to 80%

  $ 847      $ 6,331      $ 7,178        52.6

Over 80% through 90%

    221        2,096        2,317        17.0   

Over 90% through 100%

    180        655        835        6.1   

Over 100%

    476        1,160        1,636        12.0   

No LTV available

           1        1          

Total

  $ 1,724      $ 10,243      $ 11,967        87.7

Total Consumer Finance

  $ 1,738      $ 11,907      $ 13,645        100.0
 

 

12    U. S. Bancorp


The following table provides further information on the LTVs of home equity and second mortgages, specifically for the consumer finance loans at September 30, 2012:

 

(Dollars in Millions)   Lines     Loans     Total     Percent of
Total
 

Sub-Prime Borrowers

       

Less than or equal to 80%

  $ 43      $ 34      $ 77        3.5

Over 80% through 90%

    19        25        44        1.9   

Over 90% through 100%

    17        45        62        2.8   

Over 100%

    42        162        204        9.2   

No LTV/CLTV available

           1        1        .1   

Total

  $ 121      $ 267      $ 388        17.5

Other Borrowers

       

Less than or equal to 80%

  $ 808      $ 33      $ 841        37.9

Over 80% through 90%

    287        23        310        14.0   

Over 90% through 100%

    181        25        206        9.3   

Over 100%

    381        89        470        21.2   

No LTV/CLTV available

    3               3        .1   

Total

  $ 1,660      $ 170      $ 1,830        82.5

Total Consumer Finance

  $ 1,781      $ 437      $ 2,218        100.0

Covered loans included $1.3 billion in loans with negative-amortization payment options at September 30, 2012, compared with $1.5 billion at December 31, 2011. Other than covered loans, the Company does not have any residential mortgages with payment schedules that would cause balances to increase over time.

Home equity and second mortgages were $17.1 billion at September 30, 2012, compared with $18.1 billion at December 31, 2011, and included $5.0 billion of home equity lines in a first lien position and $12.1 billion of home equity and second mortgage loans and lines in a junior lien position. Loans and lines in a junior lien position at September 30, 2012, included approximately $3.7 billion of loans and lines for which

the Company also serviced the related first lien loan, and approximately $8.4 billion where the Company did not service the related first lien loan. The Company was able to determine the status of the related first liens using information the Company has as the servicer of the first lien, information it received from its primary regulator on loans serviced by other large servicers or information reported on customer credit bureau files. The Company also evaluates other indicators of credit risk for these junior lien loans and lines including delinquency, estimated average CLTV ratios and weighted-average credit scores in making its assessment of credit risk, related loss estimates and determining the allowance for credit losses.

The following table provides a summary of delinquency statistics and other credit quality indicators for the Company’s junior lien positions at September 30, 2012:

 

     Junior Liens Behind        
(Dollars in Millions)   

Company

Owned

or Serviced

First Lien

    Third Party
First Lien
    Total  

Total

   $ 3,715      $ 8,349      $ 12,064   

Percent 30–89 days past due

     1.03     1.34     1.25

Percent 90 days or more past due

     .33     .29     .30

Weighted-average CLTV

     90     89     89

Weighted-average credit score

     749        746        747   

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

 

 

U. S. Bancorp    13


Table 5

  Delinquent Loan Ratios as a Percent of Ending Loan Balances

 

90 days or more past due excluding nonperforming loans    September 30,
2012
    December 31,
2011
 

Commercial

    

Commercial

     .07     .09

Lease financing

     .02          

Total commercial

     .06        .08   

Commercial Real Estate

    

Commercial mortgages

     .02        .02   

Construction and development

     .10        .13   

Total commercial real estate

     .03        .04   

Residential Mortgages (a)

     .72        .98   

Credit Card

     1.18        1.36   

Other Retail

    

Retail leasing

     .02        .02   

Other

     .23        .43   

Total other retail (b)

     .20        .38   

Total loans, excluding covered loans

     .31        .43   

Covered Loans

     5.61        6.15   

Total loans

     .61     .84

 

90 days or more past due including nonperforming loans    September 30,
2012
    December 31,
2011
 

Commercial

     .31     .63

Commercial real estate

     1.75        2.55   

Residential mortgages (a)

     2.52        2.73   

Credit card

     2.18        2.65   

Other retail (b)

     .64        .52   

Total loans, excluding covered loans

     1.24        1.54   

Covered loans

     9.30        12.42   

Total loans

     1.69     2.30

 

(a) Delinquent loan ratios exclude $3.0 billion at September 30, 2012, and $2.6 billion at December 31, 2011, of loans purchased from GNMA mortgage pools whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. Including these loans, the ratio of residential mortgages 90 days or more past due including all nonperforming loans was 9.64 percent at September 30, 2012, and 9.84 percent at December 31, 2011.
(b) Delinquent loan ratios exclude student loans that are guaranteed by the federal government. Including these loans, the ratio of total other retail loans 90 days or more past due including all nonperforming loans was 1.09 percent at September 30, 2012, and .99 percent at December 31, 2011.

 

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 $1.3 billion ($644 million excluding covered loans) at September 30, 2012, compared with $1.8 billion ($843 million excluding covered loans) at December 31, 2011. These balances exclude loans purchased from GNMA mortgage pools whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. The $199 million (23.6 percent) decrease, excluding covered loans,

reflected improvement in residential mortgages, credit card and other retail loan portfolios during the first nine months of 2012. These loans 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 .61 percent (.31 percent excluding covered loans) at September 30, 2012, compared with ..84 percent (.43 percent excluding covered loans) at December 31, 2011.

 

 

14    U. S. Bancorp


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

 

     Amount     

As a Percent of Ending

Loan Balances

 
(Dollars in Millions)    September 30,
2012
     December 31,
2011
     September 30,
2012
    December 31,
2011
 

Residential Mortgages (a)

          

30-89 days

   $ 393       $ 404         .93     1.09

90 days or more

     301         364         .72        .98   

Nonperforming

     757         650         1.81        1.75   

Total

   $ 1,451       $ 1,418         3.46     3.82

Credit Card

          

30-89 days

   $ 230       $ 238         1.41     1.37

90 days or more

     194         236         1.18        1.36   

Nonperforming

     163         224         .99        1.29   

Total

   $ 587       $ 698         3.58     4.02

Other Retail

          

Retail Leasing

          

30-89 days

   $ 9       $ 10         .17     .19

90 days or more

     1         1         .02        .02   

Nonperforming

     1                 .02          

Total

   $ 11       $ 11         .21     .21

Home Equity and Second Mortgages

          

30-89 days

   $ 140       $ 162         .81     .90

90 days or more

     54         133         .32        .73   

Nonperforming

     179         40         1.05        .22   

Total

   $ 373       $ 335         2.18     1.85

Other (b)

          

30-89 days

   $ 151       $ 168         .59     .68

90 days or more

     42         50         .16        .20   

Nonperforming

     30         27         .12        .11   

Total

   $ 223       $ 245         .87     .99

 

(a) Excludes $3.0 billion and $2.6 billion at September 30, 2012, and December 31, 2011, respectively, of loans purchased from GNMA mortgage pools that are 90 days or more past due that continue to accrue interest.
(b) Includes revolving credit, installment, automobile and student loans.

The following table provides information on delinquent and nonperforming consumer lending segment loans as a percent of ending loan balances, by channel:

 

     Consumer Finance      Other Consumer Lending  
      September 30,
2012
    December 31,
2011
     September 30,
2012
    December 31,
2011
 

Residential Mortgages (a)

           

30-89 days

     1.83     1.87      .51     .67

90 days or more

     1.19        1.71         .49        .59   

Nonperforming

     3.10        2.50         1.18        1.35   

Total

     6.12     6.08      2.18     2.61

Credit Card

           

30-89 days

              1.41     1.37

90 days or more

                    1.18        1.36   

Nonperforming

                    .99        1.29   

Total

              3.58     4.02

Other Retail

           

Retail Leasing

           

30-89 days

              .17     .19

90 days or more

                    .02        .02   

Nonperforming

                    .02          

Total

              .21     .21

Home Equity and Second Mortgages

           

30-89 days

     1.98     2.01      .64     .73

90 days or more

     .59        1.42         .28        .63   

Nonperforming

     2.03        .21         .90        .22   

Total

     4.60     3.64      1.82     1.58

Other (b)

           

30-89 days

     6.27     4.92      .52     .60

90 days or more

     1.25        .90         .15        .19   

Nonperforming

                    .12        .11   

Total

     7.52     5.82      .79     .90

 

(a) Excludes loans purchased from GNMA mortgage pools that are 90 days or more past due that continue to accrue interest.
(b) Includes revolving credit, installment, automobile and student loans.

 

U. S. Bancorp    15


Within the consumer finance loans at September 30, 2012, approximately $353 million of the delinquent residential mortgages and $64 million of the delinquent home equity and other retail loans were to customers defined as sub-prime, compared with $363 million and $63 million, respectively, at December 31, 2011.

The following table provides summary delinquency information for covered loans:

 

    Amount     As a Percent of Ending
Loan Balances
 
(Dollars in Millions)   September 30,
2012
    December 31,
2011
    September 30,
2012
    December 31,
2011
 

30-89 days

  $ 269      $ 362        2.22     2.45

90 days or more

    682        910        5.61        6.15   

Nonperforming

    449        926        3.69        6.26   

Total

  $ 1,400      $ 2,198        11.52     14.86

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. Loans classified as TDRs are considered impaired loans for reporting and measurement purposes.

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

The Company has also implemented certain residential mortgage loan restructuring programs that may result in TDRs. The Company participates in the U.S. Department of the Treasury Home Affordable

Modification Program (“HAMP”). HAMP gives qualifying homeowners an opportunity to permanently modify their loan and achieve more affordable monthly payments, with the U.S. Department of the Treasury compensating the Company for a portion of the reduction in monthly amounts due from borrowers participating in this program. The Company also modifies residential mortgage loans under Federal Housing Administration, Department of Veterans Affairs, and other internal programs. Under these programs, the Company provides concessions to qualifying borrowers experiencing financial difficulties. The concessions may include adjustments to interest rates, conversion of adjustable rates to fixed rates, extensions of maturity dates or deferrals of payments, capitalization of accrued interest and/or outstanding advances, or in limited situations, partial forgiveness of loan principal. In most instances, participation in residential mortgage loan restructuring programs requires the customer to complete a short-term trial period. A permanent loan modification is contingent on the customer successfully completing the trial period arrangement and the loan documents are not modified until that time. The Company reports loans in a trial period arrangement as TDRs.

Credit card and other retail loan modifications are generally part of distinct restructuring programs. The Company offers a workout program providing customers modification solutions over a specified time period, generally up to 60 months. The Company also provides modification programs to qualifying customers experiencing a temporary financial hardship in which reductions are made to monthly required minimum payments for up to 12 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 reported as nonperforming.

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

 

 

16    U. S. Bancorp


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

 

            As a Percent of Performing TDRs                  
At September 30, 2012
(Dollars in Millions)
   Performing
TDRs
     30-89 Days
Past Due
    90 Days or More
Past Due
    Nonperforming
TDRs
    Total
TDRs
 

Commercial

   $ 230         4.3     1.5   $ 76 (a)    $ 306   

Commercial real estate

     583         .8               222 (b)      805   

Residential mortgages

     2,076         6.8        5.1        326         2,402 (d) 

Credit card

     300         10.4        6.8        162 (c)      462   

Other retail

     198         8.4        3.6        71 (c)      269 (e) 

TDRs, excluding GNMA and covered loans

     3,387         6.0        4.0        857        4,244   

Loans purchased from GNMA mortgage pools

     1,631         9.9        48.1               1,631 (f) 

Covered loans

     371         3.6        10.6        121        492   

Total

   $ 5,389         7.0     17.8   $ 978      $ 6,367   

 

(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 $205 million of residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $64 million in trial period arrangements.
(e) Includes $81 million of home equity and second mortgage loans to borrowers that have had debt discharged through bankruptcy and $2 million in trial period arrangements.
(f) Includes $153 million of Federal Housing Administration and Department of Veterans Affairs residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $326 million in trial period arrangements.

 

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 September 30, 2012.

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 and other nonperforming assets owned by the Company. Interest payments collected from assets on nonaccrual status are typically applied against the principal balance and not recorded as income.

At September 30, 2012, total nonperforming assets were $2.8 billion, compared with $3.8 billion at December 31, 2011. Excluding covered assets, nonperforming assets were $2.2 billion at September 30, 2012, compared with $2.6 billion at December 31, 2011. The $386 million (15.0 percent) decrease in nonperforming assets, excluding covered assets, was

primarily driven by reductions in nonperforming construction and development loans, as the Company continued to reduce exposure to these problem assets, as well as improvement in other commercial loan portfolios, partially offset by increases in nonperforming residential mortgages and other retail loans. These increases were principally the result of approximately $109 million of loans placed on nonaccrual status due to regulatory clarification in the treatment of residential mortgage and other consumer loans to borrowers who have had debt discharged through bankruptcy but continue to make payments on their loans, and the inclusion, beginning in the second quarter of 2012, of junior lien loans and lines greater than 120 days past due, as well as junior lien loans and lines behind a first lien greater than 180 days past due or on nonaccrual status, as nonperforming loans. These changes did not have a material impact on the Company’s allowance for credit losses. Nonperforming covered assets at September 30, 2012, were $647 million, compared with $1.2 billion at December 31, 2011. These assets are covered by loss sharing agreements with the FDIC that substantially reduce the risk of credit losses to the Company. The ratio of total nonperforming assets to total loans and other real estate was 1.30 percent (1.06 percent excluding covered assets) at September 30, 2012, compared with 1.79 percent (1.32 percent excluding covered assets) at December 31, 2011. The Company expects total nonperforming assets to trend lower in the fourth quarter of 2012.

Other real estate owned, excluding covered assets, was $259 million at September 30, 2012, compared with $404 million at December 31, 2011, and was related to foreclosed properties that previously secured loan balances.

 

 

U. S. Bancorp    17


Table 6

  Nonperforming Assets (a)

 

(Dollars in Millions)    September 30,
2012
    December 31,
2011
 

Commercial

    

Commercial

   $ 133      $ 280   

Lease financing

     19        32   

Total commercial

     152        312   

Commercial Real Estate

    

Commercial mortgages

     392        354   

Construction and development

     239        545   

Total commercial real estate

     631        899   

Residential Mortgages (b)

     757        650   

Credit Card

     163        224   

Other Retail

    

Retail leasing

     1          

Other

     209        67   

Total other retail

     210        67   

Total nonperforming loans, excluding covered loans

     1,913        2,152   

Covered Loans

     449        926   

Total nonperforming loans

     2,362        3,078   

Other Real Estate (c)(d)

     259        404   

Covered Other Real Estate (d)

     198        274   

Other Assets

     16        18   

Total nonperforming assets

   $ 2,835      $ 3,774   

Total nonperforming assets, excluding covered assets

   $ 2,188      $ 2,574   

Excluding covered assets:

    

Accruing loans 90 days or more past due (b)

   $ 644      $ 843   

Nonperforming loans to total loans

     .93     1.10

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

     1.06     1.32

Including covered assets:

    

Accruing loans 90 days or more past due (b)

   $ 1,326      $ 1,753   

Nonperforming loans to total loans

     1.08     1.47

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

     1.30     1.79

Changes in Nonperforming Assets

 

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

Balance December 31, 2011

   $ 1,475      $ 1,099      $ 1,200      $ 3,774   

Additions to nonperforming assets

        

New nonaccrual loans and foreclosed properties

     710        898        209        1,817   

Advances on loans

     36                      36   

Total additions

     746        898        209        1,853   

Reductions in nonperforming assets

        

Paydowns, payoffs

     (609     (242     (529     (1,380

Net sales

     (229     (111     (189     (529

Return to performing status

     (38     (90     (35     (163

Charge-offs (e)

     (414     (297     (9     (720

Total reductions

     (1,290     (740     (762     (2,792

Net additions to (reductions in) nonperforming assets

     (544     158        (553     (939

Balance September 30, 2012

   $ 931      $ 1,257      $ 647      $ 2,835   

 

(a) Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due.
(b) Excludes $3.0 billion and $2.6 billion at September 30, 2012, and December 31, 2011, respectively, of loans purchased from GNMA mortgage pools that are 90 days or more past due that continue to accrue interest, as their repayments are primarily insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.
(c) Foreclosed GNMA loans of $596 million and $692 million at September 30, 2012, and December 31, 2011, 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 Department of Veterans Affairs.
(d) Includes equity investments in entities whose principal assets are other real estate owned.
(e) Charge-offs exclude actions for certain card products and loan sales that were not classified as nonperforming at the time the charge-off occurred.
(f) Residential mortgage information excludes changes related to residential mortgages serviced by others.

 

 

18    U. S. Bancorp


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

 

    Amount    

As a Percent of Ending

Loan Balances

 
(Dollars in Millions)   September 30,
2012
    December 31,
2011
    September 30,
2012
    December 31,
2011
 

Residential

         

Minnesota

  $ 13      $ 22        .22     .39

Illinois

    12        10        .35        .31   

Missouri

    8        7        .29        .26   

California

    7        16        .08        .22   

Wisconsin

    5        6        .23        .29   

All other states

    74        90        .20        .26   

Total residential

    119        151        .20        .27   

Commercial

         

California

    25        26        .16        .18   

Nevada

    21        44        1.70        3.13   

Ohio

    13        18        .27        .38   

Missouri

    12        5        .28        .12   

Arizona

    10        16        .84        1.41   

All other states

    59        144        .08        .22   

Total commercial

    140        253        .14        .27   

Total

  $ 259      $ 404        .13     .21

Analysis of Loan Net Charge-Offs Total loan net charge-offs were $538 million for the third quarter and $1.6 billion for the first nine months of 2012, compared with $669 million and $2.2 billion for the same periods of 2011. Net charge-offs for the third quarter and first nine months of 2012, included $54 million of incremental

charge-offs due to clarification of the regulatory guidance related to residential mortgage and other consumer loans to borrowers who have had debt discharged through bankruptcy but continue to make payments on their loans. The ratio of total loan net charge-offs to average loans outstanding on an annualized basis for the third quarter and first nine months of 2012 was .99 percent and 1.02 percent, respectively, compared with 1.31 percent and 1.49 percent for the same periods of 2011. The year-over-year decreases in total net charge-offs were due to improvement in most loan portfolios, as economic conditions continue to slowly improve. Given current economic conditions, the Company expects the level of net charge-offs to be lower in the fourth quarter of 2012.

Commercial and commercial real estate loan net charge-offs for the third quarter of 2012 were $91 million (.37 percent of average loans outstanding on an annualized basis), compared with $224 million (1.01 percent of average loans outstanding on an annualized basis) for the third quarter of 2011. Commercial and commercial real estate loan net charge-offs for the first nine months of 2012 were $372 million (.52 percent of average loans outstanding on an annualized basis), compared with $748 million (1.17 percent of average loans outstanding on an annualized basis) for the first nine months of 2011. The decreases reflected the impact of efforts to resolve and reduce exposure to problem assets in the Company’s commercial real estate portfolios and improvement in the other commercial portfolios due to the stabilizing economy.

 

 

Table 7

  Net Charge-offs as a Percent of Average Loans Outstanding

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
      2012     2011     2012     2011  

Commercial

        

Commercial

     .41     .77     .48     .90

Lease financing

     .50        .61        .71        .81   

Total commercial

     .42        .75        .50        .89   

Commercial Real Estate

        

Commercial mortgages

     .26        .93        .45        .81   

Construction and development

     .33        3.43        1.05        4.60   

Total commercial real estate

     .27        1.39        .55        1.56   

Residential Mortgages

     1.17        1.42        1.16        1.51   

Credit Card (a)

     4.01        4.40        4.05        5.35   

Other Retail

        

Retail leasing

            (.08     .03          

Home equity and second mortgages

     2.04        1.59        1.71        1.66   

Other

     1.06        1.11        .95        1.20   

Total other retail

     1.30        1.16        1.13        1.25   

Total loans, excluding covered loans

     1.04        1.42        1.09        1.62   

Covered Loans

     .06        .08        .03        .08   

Total loans

     .99     1.31     1.02     1.49

 

(a) Net charge-off as a percent of average loans outstanding, excluding portfolio purchases where the acquired loans were recorded at fair value at the purchase date, were 4.17 percent and 4.54 percent for the three months ended September 30, 2012 and 2011, respectively, and 4.21 percent and 5.53 percent for the nine months ended September 30, 2012 and 2011, respectively.

 

U. S. Bancorp    19


Residential mortgage loan net charge-offs for the third quarter of 2012 were $121 million (1.17 percent of average loans outstanding on an annualized basis), compared with $122 million (1.42 percent of average loans outstanding on an annualized basis) for the third quarter of 2011. Third quarter 2012 residential mortgage loan net charge-offs included $22 million of incremental charge-offs related to regulatory clarification on bankruptcy loans. Residential mortgage loan net charge-offs for the first nine months of 2012 were $342 million (1.16 percent of average loans outstanding on an annualized basis), compared with $370 million (1.51 percent of average loans outstanding on an annualized basis) for the first nine months of 2011. Credit card loan net charge-offs for the third quarter of 2012 were $167 million (4.01 percent of average loans outstanding on an annualized basis), compared with $178 million (4.40 percent of average loans outstanding on an annualized basis) for the third quarter of 2011. Credit card loan net charge-offs for the first nine months of 2012 were $506 million (4.05 percent of average loans outstanding on an annualized basis), compared with $641 million (5.35 percent of average loans outstanding on an

annualized basis) for the first nine months of 2011. Other retail loan net charge-offs for the third quarter of 2012 were $157 million (1.30 percent of average loans outstanding on an annualized basis), compared with $142 million (1.16 percent of average loans outstanding on an annualized basis) for the third quarter of 2011. Third quarter other retail loan net charge-offs included $32 million of incremental charge-offs related to regulatory clarification on bankruptcy loans. Other retail loan net charge-offs for the first nine months of 2012 were $406 million (1.13 percent of average loans outstanding on an annualized basis), compared with $452 million (1.25 percent of average loans outstanding on an annualized basis) for the first nine months of 2011. Total residential mortgage, credit card and other retail loan net charge-offs for the third quarter and first nine months of 2012, increased $3 million (.7 percent) and decreased $209 million (14.3 percent), respectively, compared with the same periods of 2011, reflecting the current year incremental charge-offs in the residential mortgages and other retail portfolios related to regulatory clarification on bankruptcy loans, offset by the impact of more stable economic conditions.

 

 

The following table provides an analysis of net charge-offs as a percent of average loans outstanding by channel:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     Average Loans      Percent of
Average
Loans
    Average Loans        Percent of
Average
Loans
 
(Dollars in Millions)    2012      2011      2012     2011     2012      2011      2012     2011  

Consumer Finance

                    

Residential mortgages

   $ 13,527       $ 12,397         2.71     2.59   $ 13,303       $ 12,127         2.49     2.87

Home equity and second mortgages

     2,250         2,442         5.48        3.57        2,304         2,476         4.35        4.32   

Other

     333         501         4.78        3.96        376         536         3.91        2.99   

Other Consumer Lending

                    

Residential mortgages

   $ 27,442       $ 21,629         .42     .75   $ 26,025       $ 20,727         .48     .71

Home equity and second mortgages

     15,079         16,068         1.53        1.28        15,315         16,172         1.32        1.25   

Other

     25,073         24,272         1.02        1.05        24,778         24,118         .91        1.16   

Total Company

                    

Residential mortgages

   $ 40,969       $ 34,026         1.17     1.42   $ 39,328       $ 32,854         1.16     1.51

Home equity and second mortgages

     17,329         18,510         2.04        1.59        17,619         18,648         1.71        1.66   

Other (a)

     25,406         24,773         1.06        1.11        25,154         24,654         .95        1.20   

 

(a) Includes revolving credit, installment, automobile and student loans

The following table provides further information on net charge-offs as a percent of average loans outstanding for the consumer finance loans:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     Average Loans     

Percent of
Average

Loans

    Average Loans      Percent of
Average
Loans
 
(Dollars in Millions)    2012      2011      2012     2011     2012      2011      2012     2011  

Residential mortgages

                    

Sub-prime borrowers

   $ 1,699       $ 1,940         7.49     6.14   $ 1,757       $ 2,009         6.61     6.12

Other borrowers

     11,828         10,457         2.02        1.93        11,546         10,118         1.86        2.22   

Total

   $ 13,527       $ 12,397         2.71     2.59   $ 13,303       $ 12,127         2.49     2.87

Home equity and second mortgages

                    

Sub-prime borrowers

   $ 398       $ 480         11.00     8.27   $ 417       $ 503         8.65     9.30

Other borrowers

     1,852         1,962         4.30        2.43        1,887         1,973         3.40        3.05   

Total

   $ 2,250       $ 2,442         5.48     3.57   $ 2,304       $ 2,476         4.35     4.32

 

 

20    U. S. Bancorp


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 and includes certain amounts that do not represent loss exposure to the Company because those losses are recoverable under loss sharing agreements with the FDIC. The allowance for credit losses is increased through provisions charged to operating earnings and reduced by net charge-offs. Management evaluates the allowance each quarter to ensure it appropriately reserves for incurred losses.

The allowance recorded for loans in the commercial lending segment is based on reviews of individual credit relationships and considers the migration analysis of commercial lending segment loans and actual loss experience. The Company currently uses an 11-year period of historical losses in considering actual loss experience. This timeframe and the results of the analysis are evaluated quarterly to determine the appropriateness. 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, or the fair value of the collateral for collateral-dependent loans. 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, bankruptcy experience, and historical losses, adjusted for current trends.

The allowance recorded for purchased impaired and TDR 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. The allowance for collateral-dependent loans in the consumer lending segment is determined based on the fair value of the collateral. 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 and historical losses, adjusted for current trends. Credit card and other retail loans 90 days or more past due are generally not placed on nonaccrual status because of the relatively short period of time to charge-off and, therefore, are excluded from nonperforming loans and measures that include nonperforming loans as part of the calculation.

When evaluating the appropriateness of the allowance for credit losses for any loans and lines in a junior lien position, the Company considers the delinquency and modification status of the first lien. At September 30, 2012, the Company serviced the first lien on 31 percent of

the home equity loans and lines in a junior lien position. The Company also considers information received from its primary regulator on the status of the first liens that are serviced by other large servicers in the industry and the status of first lien mortgage accounts reported on customer credit bureau files. Regardless of whether or not the Company services the first lien, an assessment is made of economic conditions, problem loans, recent loss experience and other factors in determining the allowance for credit losses. Based on the available information, the Company estimated $541 million or 3.2 percent of the total home equity portfolio at September 30, 2012, represented 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 when they are current, but the first lien is delinquent or modified. Historically, the number of junior lien defaults in any period has been a small percentage of the total portfolio (for example, only 1.5 percent for the twelve months ended September 30, 2012), and the long-term average loss rate on the small percentage of loans that default has been approximately 80 percent. In periods of economic stress such as the current environment, the Company has experienced loss severity rates in excess of 90 percent for junior liens that default. 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.

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

In addition, the evaluation of the appropriate allowance for credit losses for purchased non-impaired loans acquired after January 1, 2009, in the various loan segments considers credit discounts recorded as a part of the initial determination of the fair value of the loans. For these loans, no allowance for credit losses is recorded at the purchase date. Credit discounts representing the principal losses expected over the life of the loans are a component of the initial fair value. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for

 

 

U. S. Bancorp    21


these loans is similar to originated loans; however, the Company records a provision for credit losses only when the required allowance, net of any expected reimbursement under any loss sharing agreements with the FDIC, exceeds any remaining credit discounts.

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

Subsequent to the purchase date, the expected cash flows of purchased loans are subject to evaluation. Decreases in the present value of expected cash flows are recognized by recording an allowance for credit losses with the related provision for credit losses reduced for the amount reimbursable by the FDIC, where applicable. If the expected cash flows on the purchased loans increase such that a previously recorded impairment allowance can be reversed, the Company records a reduction in the allowance with a related reduction in losses reimbursable by the FDIC, where applicable. Increases in expected cash flows of purchased loans and decreases in expected cash flows of the FDIC indemnification assets, when there are no previous impairment allowances, are considered together and recognized over the remaining life of the loans. Refer to Note 3 for further information.

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

Refer to “Management’s Discussion and Analysis — Analysis and Determination of the Allowance for Credit Losses” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, for further discussion on the analysis and determination of the allowance for credit losses.

At September 30, 2012, the allowance for credit losses was $4.8 billion (2.19 percent of total loans and 2.26 percent of loans excluding covered loans),

compared with an allowance of $5.0 billion (2.39 percent of total loans and 2.52 percent of loans excluding covered loans) at December 31, 2011. The ratio of the allowance for credit losses to nonperforming loans was 202 percent (244 percent excluding covered loans) at September 30, 2012, compared with 163 percent (228 percent excluding covered loans) at December 31, 2011. The ratio of the allowance for credit losses to annualized loan net charge-offs was 223 percent at September 30, 2012, compared with 176 percent of full year 2011 net charge-offs at December 31, 2011, as net charge-offs continue to decline due to stabilizing economic conditions.

Residual Value Risk Management The Company manages its risk to changes in the residual value of leased assets through disciplined residual valuation setting at the inception of a lease, diversification of its leased assets, regular residual asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. As of September 30, 2012, no significant change in the amount of residual values or concentration of the portfolios had occurred since December 31, 2011. 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, 2011, for further discussion on residual value risk management.

Operational Risk Management The Company manages operational risk through a risk management framework and its internal control processes. Within this framework, the Risk Management Committee of the Company’s Board of Directors provides oversight and assesses the most significant operational risks facing the Company within its business lines. Under the guidance of the Risk Management Committee, enterprise risk management personnel establish policies and interact with business lines to monitor significant operating risks on a regular basis. Business lines have direct and primary responsibility and accountability for identifying, controlling, and monitoring operational risks embedded in their business activities. An operational risk that has been recently increasing for large financial institutions is information technology risk such as instances of cyber attacks or security breaches of the networks, systems or devices that the Company’s customers use to access the Company’s products and services. In addition, enterprise risk management is responsible for establishing a culture of compliance and compliance program standards and policies, and performing risk assessments on the business lines’ adherence to laws, rules, regulations and internal policies and procedures. The Consumer Financial

 

 

22    U. S. Bancorp


Table 8

  Summary of Allowance for Credit Losses

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(Dollars in Millions)    2012     2011     2012      2011  

Balance at beginning of period

   $ 4,864      $ 5,308      $ 5,014       $ 5,531   

Charge-Offs

         

Commercial

         

Commercial

     75        108        243         348   

Lease financing

     15        18        53         64   

Total commercial

     90        126        296         412   

Commercial real estate

         

Commercial mortgages

     33        70        123         185   

Construction and development

     14        61        83         261   

Total commercial real estate

     47        131        206         446   

Residential mortgages

     127        124        357         380   

Credit card

     186        203        585         712   

Other retail

         

Retail leasing

     3        2        7         8   

Home equity and second mortgages

     96        78        245         245   

Other

     88        95        251         298   

Total other retail

     187        175        503         551   

Covered loans (a)

     2        3        4         10   

Total charge-offs

     639        762        1,951         2,511   

Recoveries

         

Commercial

         

Commercial

     16        18        50         50   

Lease financing

     8        9        23         28   

Total commercial

     24        27        73         78   

Commercial real estate

         

Commercial mortgages

     13        2        21         13   

Construction and development

     9        4        36         19   

Total commercial real estate

     22        6        57         32   

Residential mortgages

     6        2        15         10   

Credit card

     19        25        79         71   

Other retail

         

Retail leasing

     3        3        6         8   

Home equity and second mortgages

     7        4        19         14   

Other

     20        26        72         77   

Total other retail

     30        33        97         99   

Covered loans (a)

                   1           

Total recoveries

     101        93        322         290   

Net Charge-Offs

         

Commercial

         

Commercial

     59        90        193         298   

Lease financing

     7        9        30         36   

Total commercial

     66        99        223         334   

Commercial real estate

         

Commercial mortgages

     20        68        102         172   

Construction and development

     5        57        47         242   

Total commercial real estate

     25        125        149         414   

Residential mortgages

     121        122        342         370   

Credit card

     167        178        506         641   

Other retail

         

Retail leasing

            (1     1           

Home equity and second mortgages

     89        74        226         231   

Other

     68        69        179         221   

Total other retail

     157        142        406         452   

Covered loans (a)

     2        3        3         10   

Total net charge-offs

     538        669        1,629         2,221   

Provision for credit losses

     488        519        1,439         1,846   

Net change for credit losses to be reimbursed by the FDIC

     (10     32        (20      34   

Other changes

     (33            (33        

Balance at end of period

   $ 4,771      $ 5,190      $ 4,771       $ 5,190   

Components

         

Allowance for loan losses, excluding losses to be reimbursed by the FDIC

   $ 4,426      $ 4,823        

Allowance for credit losses to be reimbursed by the FDIC

     55        127        

Liability for unfunded credit commitments

     290        240        

Total allowance for credit losses

   $ 4,771      $ 5,190        

Allowance for Credit Losses as a Percentage of

         

Period-end loans, excluding covered loans

     2.26     2.66     

Nonperforming loans, excluding covered loans

     244        196        

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

     182        149        

Nonperforming assets, excluding covered assets

     213        166        

Annualized net charge-offs, excluding covered loans

     219        190        

Period-end loans

     2.19     2.53     

Nonperforming loans

     202        145        

Nonperforming and accruing loans 90 days or more past due

     129        100        

Nonperforming assets

     168        120        

Annualized net charge-offs

     223        196                    

 

Note: At September 30, 2012 and 2011, $1.8 billion and $1.9 billion, respectively, of the total allowance for credit losses related to incurred losses on credit card and other retail loans.
(a) Relates to covered loan charge-offs and recoveries not reimbursable by the FDIC.

 

 

U. S. Bancorp    23


Protection Bureau has increasingly become active in its oversight of business practices relating to various consumer financial products, increasing enforcement risk in this area and resulting in fines and penalties against certain of the Company’s competitors. 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, 2011, for further discussion on operational 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 minimize the volatility of 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 Committee (“ALCO”) and approved by the Board of Directors. The ALCO has the responsibility for approving and ensuring compliance with the ALCO management policies, including interest rate risk exposure. The Company uses net interest income simulation analysis and market value of equity modeling for measuring and analyzing consolidated interest rate risk.

Net Interest Income Simulation Analysis Management estimates the impact on net interest income of changes in market interest rates under a number of scenarios, including gradual shifts, immediate and sustained parallel shifts, and flattening or steepening of the yield curve. The table on the following page summarizes the projected impact to net interest income over the next 12 months of various potential interest rate changes. The ALCO policy limits the estimated change in net interest income in a gradual 200 basis point (“bps”) rate change scenario to a 4.0 percent decline of forecasted net interest income over the next 12 months. At September 30, 2012, and December 31, 2011, the Company was within policy. 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, 2011, for further discussion on net interest income simulation analysis.

Market Value of Equity Modeling The Company also manages interest rate sensitivity by utilizing market value of equity modeling, which measures the degree to which the market values of the Company’s assets and liabilities and off-balance sheet instruments will change given a change in interest rates. Management measures

the impact of changes in market interest rates under a number of scenarios, including immediate and sustained parallel shifts, and flattening or steepening of the yield curve. The ALCO policy limits the change in market value of equity in a 200 bps parallel rate shock to a 15.0 percent decline. A 200 bps increase would have resulted in a 2.6 percent decrease in the market value of equity at September 30, 2012, compared with a 2.0 percent decrease at December 31, 2011. A 200 bps decrease, where possible given current rates, would have resulted in a 5.6 percent decrease in the market value of equity at September 30, 2012, compared with a 6.4 percent decrease at December 31, 2011. 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, 2011, for further discussion on market value of equity modeling.

Use of Derivatives to Manage Interest Rate and Other Risks To reduce the sensitivity of earnings 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 loans and debt from floating-rate payments to fixed-rate payments;

 

To mitigate changes in value of the Company’s mortgage origination pipeline, funded mortgage loans held for sale and MSRs; and

 

To mitigate remeasurement volatility of foreign currency denominated balances.

To manage these risks, the Company may enter into exchange-traded and over-the-counter derivative contracts, including interest rate swaps, swaptions, futures, forwards and options. 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 entering into similar offsetting positions with broker-dealers. 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

 

 

24    U. S. Bancorp


Sensitivity of Net Interest Income

 

     September 30, 2012      December 31, 2011  
      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

     *         1.54     *         2.06      *         1.57     *         1.92
                                                                       

 

* Given the current level of interest rates, a downward rate scenario can not be computed.

 

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

Additionally, the Company uses forward commitments to sell TBAs and other commitments to sell residential mortgage loans at specified prices to economically hedge the interest rate risk in its residential mortgage loan production activities. At September 30, 2012, the Company had $20.4 billion of forward commitments to sell, hedging $9.8 billion of mortgage loans held for sale and $17.3 billion of unfunded mortgage loan commitments. The forward commitments to sell and the unfunded mortgage loan commitments on loans intended to be sold are considered derivatives under the accounting guidance related to accounting for derivative instruments and hedging activities. The Company has elected the fair value option for the mortgage loans held for sale.

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 agreements, and, where possible, by requiring collateral agreements. The Company may also transfer counterparty credit risk related to interest rate swaps to third parties through the use of risk participation agreements.

For additional information on derivatives and hedging activities, refer to Note 10 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. The Company’s Market Risk Committee (“MRC”), underneath the ALCO, oversees market risk

management. The MRC monitors and reviews the Company’s trading positions and establishes policies for market risk management, including exposure limits for each portfolio. The Company uses a Value at Risk (“VaR”) approach to measure general market risk. Theoretically, VaR represents the statistical risk of loss the Company has to adverse market movements over a one-day time horizon. The Company uses the Historical Simulation method to calculate VaR for its trading businesses measured at the ninety-ninth percentile using a one-year look-back period for distributions derived from past market data. The market factors used in the calculations include those pertinent to market risks inherent in the underlying trading portfolios, principally those that affect its investment grade bond trading business, foreign currency transaction business, client derivatives business, loan trading business and municipal securities business. On average, the Company expects the one-day VaR to be exceeded two to three times per year in each business. 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 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 average, high and low VaR amounts for the Company’s trading positions for the nine months ended September 30, 2012, were $2 million, $3 million and $1 million, respectively, compared with $2 million, $4 million and $1 million, respectively, for the nine months ended September 30, 2011.

The Company also measures the market risk of its hedging activities related to MSRs and residential mortgage loans held for sale 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

 

 

U. S. Bancorp    25


and hedges. A three-year look-back period is used to obtain past market data. The Company monitors the effectiveness of the models through back-testing, updating the data and regular validations. The average, high and low VaR amounts for the MSRs and related hedges for the nine months ended September 30, 2012, were $4 million, $8 million and $2 million, respectively, compared with $8 million, $14 million and $3 million, respectively, for the nine months ended September 30, 2011. The average, high and low VaR amounts for residential mortgage loans held for sale and related hedges for the nine months ended September 30, 2012, were $2 million, $7 million and $1 million, respectively, compared with $3 million, $7 million and $2 million, respectively, for the nine months ended September 30, 2011.

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

The Company regularly projects its funding needs under various stress scenarios and maintains contingency plans 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 include cash at the Federal Reserve, unencumbered liquid assets, and capacity to borrow at the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Discount Window. At September 30, 2012, the fair value of unencumbered available-for-sale and held-to-maturity investment securities totaled $57.3 billion, compared with $48.7 billion at December 31,

2011. 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 ability to pledge loans to access secured borrowing facilities through the FHLB and Federal Reserve Bank. At September 30, 2012, the Company could have borrowed an additional $66.0 billion at the FHLB and Federal Reserve Bank based on collateral available for additional borrowings.

The Company’s diversified deposit base provides a sizeable source of relatively stable and low-cost funding, while reducing the Company’s reliance on the wholesale markets. Total deposits were $244.2 billion at September 30, 2012, compared with $230.9 billion at December 31, 2011, reflecting organic growth in core deposits and acquired balances. 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 $26.3 billion at September 30, 2012, and is an important funding source because of its multi-year borrowing structure. Short-term borrowings were $27.9 billion at September 30, 2012, 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 liquidity and maintains sufficient funding to meet expected parent company obligations, without access to the wholesale funding markets or dividends from subsidiaries, for 12 months when forecasted payments of common stock dividends are included and 24 months assuming dividends were reduced to zero. The parent company currently has available funds on its balance sheet considerably greater than the amounts required to satisfy these conditions.

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, 2011, for further discussion on liquidity risk management.

At September 30, 2012, parent company long-term debt outstanding was $12.8 billion, compared with $14.6 billion at December 31, 2011. The $1.8 billion decrease was primarily due to $2.7 billion of medium-term note maturities and $2.7 billion of redemptions of junior subordinated debentures, partially offset by issuances of $1.3 billion of subordinated debt and $2.3 billion of medium-term notes. As of September 30, 2012, there was no parent company debt scheduled to mature in the remainder of 2012.

 

 

26    U. S. Bancorp


Federal banking laws regulate the amount of dividends that may be paid by banking subsidiaries without prior approval. The amount of dividends available to the parent company from its banking subsidiaries after meeting the regulatory capital requirements for well-capitalized banks was approximately $8.3 billion at September 30, 2012.

European Exposures Certain European countries have experienced severe credit deterioration. The Company does not hold sovereign debt of any European country, but may have indirect exposure to sovereign debt through its investments in, and transactions with, European banks. At September 30, 2012, the Company had investments in perpetual preferred stock issued by European banks with an amortized cost totaling $99 million and unrealized losses totaling $10 million, compared with an amortized cost totaling $169 million and unrealized losses totaling $48 million, at December 31, 2011. The Company also transacts with various European banks as counterparties to interest rate swaps and foreign currency transactions for its hedging and customer-related activities, however none of these banks are domiciled in the countries experiencing the most significant credit deterioration. These derivative transactions are subject to master netting and collateral support agreements which significantly limit the Company’s exposure to loss as they generally require daily posting of collateral. At September 30, 2012, the Company was in a net payable position to each of these European banks.

The Company has not bought or sold credit protection on the debt of any European country or any company domiciled in Europe, nor does it provide retail lending services in Europe. While the Company does not offer commercial lending services in Europe, it does provide financing to domestic multinational corporations that generate revenue from customers in European countries and provides a limited number of corporate credit cards to their European subsidiaries. While an economic downturn in Europe could have a negative impact on these customers’ revenues, it is unlikely that any effect on the overall credit worthiness of these multinational corporations would be material to the Company.

The Company provides merchant processing and corporate trust services in Europe and through banking affiliations in Europe. Operating cash for these businesses are deposited on a short-term basis with certain European banks. However, exposure is mitigated by the Company placing deposits at multiple banks and managing the amounts on deposit at any bank based on institution-specific deposit limits. At September 30, 2012,

the Company had an aggregate amount on deposit with European banks of approximately $400 million.

The money market funds managed by an affiliate of the Company do not have any investments in European sovereign debt. Other than investments in banks in the countries of Sweden, Switzerland, Norway, the Netherlands and the United Kingdom, those funds do not have any unsecured investments in banks domiciled in the Eurozone.

Off-Balance Sheet Arrangements Off-balance sheet arrangements include any contractual arrangements to which an unconsolidated entity is a party, under which the