Edgar Filing: US BANCORP \DE\

U.S. BANCORP

/S/ CRAIG E. GIFFORD

Dated: November 4, 2016

Craig E. Gifford

Controller

(Principal Accounting Officer and Duly Authorized Officer)

Form 10-Q

LOGO

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

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 ¨

(Do not check if a smaller reporting company)

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		Outstanding as of October 31, 2016
Common Stock, $0.01 Par Value		1,699,676,375 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)			3
a) Overview			3
b) Statement of Income Analysis			4
c) Balance Sheet Analysis			6
d) Non-GAAP Financial Measures			33
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)			9
a) Overview			9
b) Credit Risk Management			10
c) Residual Value Risk Management			23
d) Operational Risk Management			23
e) Compliance Risk Management			23
f) Interest Rate Risk Management			23
g) Market Risk Management			24
h) Liquidity Risk Management			25
i) Capital Management			27
3) Line of Business Financial Review			28
4) Financial Statements (Item 1)			36
Part II — Other Information
1) Legal Proceedings (Item 1)			81
2) Risk Factors (Item 1A)			81
3) Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)			81
4) Exhibits (Item 6)			81
5) Signature			82
6) Exhibits			83

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

This quarterly report on Form 10-Q contains forward-looking statements about U.S. Bancorp. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements and are based on the information available to, and assumptions and estimates made by, management as of the date hereof. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future plans and prospects of U.S. Bancorp. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated. A reversal or slowing of the current economic recovery or another severe contraction could adversely affect U.S. Bancorp’s revenues and the values of its assets and liabilities. Global financial markets could experience a recurrence of significant turbulence, which could reduce the availability of funding to certain financial institutions and lead to a tightening of credit, a reduction of business activity, and increased market volatility. Stress in the commercial real estate markets, as well as a downturn in the residential real estate markets could cause credit losses and deterioration in asset values. In addition, U.S. Bancorp’s business and financial performance is likely to be negatively impacted by recently enacted and future legislation and regulation. U.S. Bancorp’s results could also be adversely affected by deterioration in general business and economic conditions (which could result, in part, from the United Kingdom’s withdrawal from the European Union); changes in interest rates; deterioration in the credit quality of its loan portfolios or in the value of the collateral securing those loans; deterioration in the value of securities held in its investment securities portfolio; legal and regulatory developments; litigation; increased competition from both banks and non-banks; changes in customer behavior and preferences; breaches in data security; effects of mergers and acquisitions and related integration; effects of critical accounting policies and judgments; and management’s ability to effectively manage credit risk, market risk, operational risk, compliance risk, strategic risk, interest rate risk, liquidity risk and reputational risk.

For discussion of these and other risks that may cause actual results to differ from expectations, refer to U.S. Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2015, 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, including the “Risk Factors” section of U.S. Bancorp’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016. However, factors other than these also could adversely affect U.S. Bancorp’s results, and the reader should not consider these factors to be a complete set of all potential risks or uncertainties. Forward-looking statements speak only as of the date hereof, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.


U.S. Bancorp		1

Table 1

Selected Financial Data


	Three Months Ended September 30,									Nine Months Ended September 30,
(Dollars and Shares in Millions, Except Per Share Data)	2016			2015			Percent Change			2016			2015			Percent Change
Condensed Income Statement
Net interest income	$	2,893		$	2,768			4.5	%	$	8,573		$	8,182			4.8	%
Taxable-equivalent adjustment (a)		50			53			(5.7	)		154			161			(4.3	)
Net interest income (taxable-equivalent basis) (d)		2,943			2,821			4.3			8,727			8,343			4.6
Noninterest income		2,435			2,327			4.6			7,130			6,753			5.6
Securities gains (losses), net		10			(1	)		*			16			(1	)		*
Total net revenue		5,388			5,147			4.7			15,873			15,095			5.2
Noninterest expense		2,931			2,775			5.6			8,672			8,122			6.8
Provision for credit losses		325			282			15.2			982			827			18.7
Income before taxes		2,132			2,090			2.0			6,219			6,146			1.2
Income taxes and taxable-equivalent adjustment		616			587			4.9			1,766			1,702			3.8
Net income		1,516			1,503			.9			4,453			4,444			.2
Net (income) loss attributable to noncontrolling interests		(14	)		(14	)		–			(43	)		(41	)		(4.9	)
Net income attributable to U.S. Bancorp	$	1,502		$	1,489			.9		$	4,410		$	4,403			.2
Net income applicable to U.S. Bancorp common shareholders	$	1,434		$	1,422			.8		$	4,198		$	4,204			(.1	)
Per Common Share
Earnings per share	$	.84		$	.81			3.7	%	$	2.44		$	2.38			2.5	%
Diluted earnings per share		.84			.81			3.7			2.43			2.36			3.0
Dividends declared per share		.280			.255			9.8			.790			.755			4.6
Book value per share		24.78			22.99			7.8
Market value per share		42.89			41.01			4.6
Average common shares outstanding		1,710			1,758			(2.7	)		1,724			1,770			(2.6	)
Average diluted common shares outstanding		1,716			1,766			(2.8	)		1,730			1,778			(2.7	)
Financial Ratios
Return on average assets		1.36	%		1.44	%					1.37	%		1.45	%
Return on average common equity		13.5			14.1						13.4			14.1
Net interest margin (taxable-equivalent basis) (a)		2.98			3.04						3.02			3.05
Efficiency ratio (b)		54.5			53.9						54.7			53.8
Net charge-offs as a percent of average loans outstanding		.46			.46						.48			.47
Average Balances
Loans	$	269,637		$	250,536			7.6	%	$	266,179		$	248,358			7.2	%
Loans held for sale		4,691			6,835			(31.4	)		3,888			6,370			(39.0	)
Investment securities (c)		108,109			103,943			4.0			107,095			102,361			4.6
Earning assets		393,783			369,265			6.6			385,816			365,543			5.5
Assets		437,863			410,439			6.7			429,421			406,757			5.6
Noninterest-bearing deposits		82,021			80,940			1.3			79,928			77,623			3.0
Deposits		318,548			289,692			10.0			307,312			284,673			8.0
Short-term borrowings		15,929			27,525			(42.1	)		21,457			28,252			(24.1	)
Long-term debt		37,875			33,202			14.1			36,392			34,015			7.0
Total U.S. Bancorp shareholders’ equity		47,791			44,867			6.5			47,240			44,489			6.2

	September 30, 2016			December 31, 2015
Period End Balances
Loans	$	271,289		$	260,849			4.0	%
Investment securities		110,028			105,587			4.2
Assets		454,134			421,853			7.7
Deposits		334,595			300,400			11.4
Long-term debt		37,978			32,078			18.4
Total U.S. Bancorp shareholders’ equity		47,759			46,131			3.5
Asset Quality
Nonperforming assets	$	1,664		$	1,523			9.3	%
Allowance for credit losses		4,338			4,306			.7
Allowance for credit losses as a percentage of period-end loans		1.60	%		1.65	%
Capital Ratios
Basel III transitional standardized approach:
Common equity tier 1 capital		9.5	%		9.6	%
Tier 1 capital		11.1			11.3
Total risk-based capital		13.3			13.3
Leverage		9.2			9.5
Common equity tier 1 capital to risk-weighted assets for the Basel III transitional advanced approaches		12.4			12.5
Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented standardized approach (d)		9.3			9.1
Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented advanced approaches (d)		12.1			11.9
Tangible common equity to tangible assets (d)		7.5			7.6
Tangible common equity to risk-weighted assets (d)		9.3			9.2

*	Not meaningful

(a)

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

(b)

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

(c)

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

(d)

See Non-GAAP Financial Measures beginning on page 33.


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 2016, or $0.84 per diluted common share, compared with $1.5 billion, or $0.81 per diluted common share, for the third quarter of 2015. Return on average assets and return on average common equity were 1.36 percent and 13.5 percent, respectively, for the third quarter of 2016, compared with 1.44 percent and 14.1 percent, respectively, for the third quarter of 2015.

Total net revenue for the third quarter of 2016 was $241 million (4.7 percent) higher than the third quarter of 2015, reflecting a 4.5 percent increase in net interest income (4.3 percent increase on a taxable-equivalent basis) and a 5.1 percent increase in noninterest income. The increase in net interest income from the third quarter of 2015 was mainly a result of loan growth. The noninterest income increase was primarily driven by higher mortgage banking revenue, trust and investment management fees, and credit and debit card revenue.

Noninterest expense in the third quarter of 2016 was $156 million (5.6 percent) higher than the third quarter of 2015, the result of increased compensation expense due to merit increases and higher variable compensation expense along with hiring to support business growth and compliance programs, increased technology and communications expense reflecting capital investments, and higher other noninterest expense, which includes a special Federal Deposit Insurance Corporation (“FDIC”) surcharge that began in the third quarter of 2016.

The provision for credit losses for the third quarter of 2016 of $325 million was $43 million (15.2 percent) higher than the third quarter of 2015. Net charge-offs in the third quarter of 2016 were $315 million, compared with $292 million in the third quarter of 2015. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

Net income attributable to U.S. Bancorp for the first nine months of 2016 was $4.4 billion, or $2.43 per diluted common share, compared with $4.4 billion, or $2.36 per diluted common share, for the first nine months of 2015. Return on average assets and return on average common equity were 1.37 percent and 13.4 percent, respectively, for the first nine months of 2016, compared with 1.45 percent and 14.1 percent, respectively, for the first nine months of 2015. The results for the first nine months of 2016 included $180 million of equity investment income, primarily the result of the Company’s membership in Visa Europe Limited (“Visa Europe”) which was sold to Visa, Inc. in the second quarter of 2016, along with a $110 million increase in reserves related to legal and regulatory matters and a $40 million charitable contribution, also recorded in the second quarter of 2016.

Total net revenue for the first nine months of 2016 was $778 million (5.2 percent) higher than the first nine months of 2015, reflecting a 4.8 percent increase in net interest income (4.6 percent increase on a taxable-equivalent basis) and a 5.8 percent increase in noninterest income. The increase in net interest income from a year ago was mainly the result of loan growth. The increase in noninterest income was primarily driven by the impact of the Visa Europe sale, along with growth in credit and debit card revenue, trust and investment management fees, mortgage banking revenue and merchant processing services revenue.

Noninterest expense in the first nine months of 2016 was $550 million (6.8 percent) higher than the first nine months of 2015, the result of increased compensation expense due to merit increases and higher variable compensation expense along with hiring to support business growth and compliance programs, higher marketing expense as a result of a charitable contribution and brand advertising, increased technology and communications expense reflecting capital investments, and higher other noninterest expense, which includes the special FDIC surcharge and the second quarter 2016 increase in reserves related to legal and regulatory matters.

The provision for credit losses for the first nine months of 2016 of $982 million was $155 million (18.7 percent) higher than the first nine months of 2015. Net charge-offs in the first nine months of 2016 were $947 million, compared with $867 million in the first nine months of 2015. 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.


U.S. Bancorp		3

STATEMENT OF INCOME ANALYSIS

Net Interest Income Net interest income, on a taxable-equivalent basis, was $2.9 billion in the third quarter and $8.7 billion in the first nine months of 2016, representing increases of $122 million (4.3 percent) and $384 million (4.6 percent), respectively, over the same periods of 2015. The increases were driven by loan growth and higher interest rates, partially offset by the loan portfolio mix and lower yields in the investment portfolio. Average earning assets were $24.5 billion (6.6 percent) higher in the third quarter and $20.3 billion (5.5 percent) higher in the first nine months of 2016, compared with the same periods of 2015, driven by increases in loans and in investment securities. The net interest margin, on a taxable-equivalent basis, in the third quarter and first nine months of 2016 was 2.98 percent and 3.02 percent, respectively, compared with 3.04 percent and 3.05 percent in the third quarter and first nine months of 2015, respectively. The decreases in the net interest margin from the same periods of the prior year were principally due to increased funding costs, higher average cash balances, securities purchases at lower average rates and lower reinvestment rates on maturing securities, partially offset by higher rates on new loans. Refer to the “Consolidated Daily Average Balance Sheet and Related Yields and Rates” tables for further information on net interest income.

Average investment securities in the third quarter and first nine months of 2016 were $4.2 billion (4.0 percent) and $4.7 billion (4.6 percent) higher, respectively, than the same periods of 2015, primarily due to purchases of U.S. Treasury and U.S. government agency-backed securities, net of prepayments and maturities, to support regulatory liquidity coverage ratio requirements.

Average total loans in the third quarter and first nine months of 2016 were $19.1 billion (7.6 percent) and $17.8 billion (7.2 percent) higher, respectively, than the same periods of 2015, due to growth in commercial loans, residential mortgages, other retail loans, credit card loans and commercial real estate loans. The increases were driven by higher demand for loans from new and existing customers. In addition, at the end of the fourth quarter of 2015, the Company acquired a credit card portfolio which increased average credit card loans by approximately $1.6 billion and $1.5 billion for the third quarter and first nine months of 2016, respectively. These increases were partially offset by a decline in loans acquired in FDIC assisted transactions that are covered by loss sharing agreements with the FDIC (“covered” loans), a run-off portfolio.

Average total deposits for the third quarter and first nine months of 2016 were $28.9 billion (10.0 percent) and $22.6 billion (8.0 percent) higher, respectively, than the same periods of 2015. Average noninterest-bearing deposits for the third quarter and first nine months of 2016 increased $1.1 billion (1.3 percent) and $2.3 billion (3.0 percent), respectively, over the same periods of the prior year, mainly in Consumer and Small Business Banking, partially offset by declines in balances in Wealth Management and Securities Services. In addition, the increase in average noninterest-bearing deposits for the first nine months of 2016, compared with the same period of the prior year, was due to higher Wholesale Banking and Commercial Real Estate balances. Average total savings deposits for the third quarter and first nine months of 2016 were $29.4 billion (16.8 percent) and $23.4 billion (13.7 percent) higher, respectively, over the same periods of the prior year, the result of growth across all business lines. Average time deposits for the third quarter and first nine months of 2016 were $1.6 billion (4.7 percent) and $3.1 billion (8.4 percent) lower, respectively, compared with the same periods of 2015. The decreases were primarily due to lower Consumer and Small Business Banking balances driven by maturities, as well as declines related to those deposits managed as an alternative to other funding sources such as wholesale borrowing, based largely on relative pricing and liquidity characteristics.

Provision for Credit Losses The provision for credit losses for the third quarter and first nine months of 2016 increased $43 million (15.2 percent) and $155 million (18.7 percent), respectively, compared with the same periods of 2015. The provision for credit losses was higher than net charge-offs by $10 million and $35 million in the third quarter and first nine months of 2016, respectively. This compares with the provision for credit losses being lower than net charge-offs by $10 million and $40 million in the third quarter and first nine months of 2015, respectively. The increase in the allowance for credit losses during the third quarter of 2016 was driven by loan portfolio growth, partially offset by improvements in residential mortgage and home equity loans and lines. The increase in the allowance for credit losses during the first nine months of 2016 reflected loan portfolio growth and an increase in energy portfolio credit reserves, partially offset by improvements in residential mortgage and home equity loans and lines. Net charge-offs increased $23 million (7.9 percent) and $80 million (9.2 percent) in the third quarter and first nine months of 2016, respectively, compared with the same periods of the prior year, primarily due to higher commercial loan net charge-offs and lower commercial


4		U.S. Bancorp

Table 2

Noninterest Income


	Three Months Ended September 30,								Nine Months Ended September 30,
(Dollars in Millions)	2016		2015			Percent Change			2016		2015			Percent Change
Credit and debit card revenue	$	299	$	269			11.2	%	$	861	$	776			11.0	%
Corporate payment products revenue		190		190			–			541		538			.6
Merchant processing services		412		400			3.0			1,188		1,154			2.9
ATM processing services		87		81			7.4			251		239			5.0
Trust and investment management fees		362		329			10.0			1,059		985			7.5
Deposit service charges		192		185			3.8			539		520			3.7
Treasury management fees		147		143			2.8			436		422			3.3
Commercial products revenue		219		231			(5.2	)		654		645			1.4
Mortgage banking revenue		314		224			40.2			739		695			6.3
Investment products fees		41		46			(10.9	)		120		141			(14.9	)
Securities gains (losses), net		10		(1	)		*			16		(1	)		*
Other		172		229			(24.9	)		742		638			16.3
Total noninterest income	$	2,445	$	2,326			5.1	%	$	7,146	$	6,752			5.8	%

*	Not meaningful.

real estate loan recoveries, partially offset by lower charge-offs related to residential mortgages and home equity loans. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

Noninterest Income Noninterest income was $2.4 billion in the third quarter and $7.1 billion in the first nine months of 2016, representing increases of $119 million (5.1 percent) and $394 million (5.8 percent), respectively, compared with the same periods of 2015. The increases from a year ago were primarily due to higher mortgage banking revenue, trust and investment management fees, credit and debit card revenue and merchant processing services revenue. Mortgage banking revenue increased, driven by higher origination and sales volume in part due to refinancing activities in the marketplace. Trust and investment management fees increased, reflecting lower money market fee waivers, along with account growth, an increase in assets under management and improved market conditions. Credit and debit card revenue increased, reflecting higher transaction volumes including acquired portfolios. Merchant processing services revenue increased 3.0 percent in the third quarter and 2.9 percent in the first nine months of 2016, compared with the same periods of 2015, as a result of an increase in product fees and higher volumes. Adjusted for the impact of foreign currency rate changes, the increases would have been approximately 5.3 percent and 4.9 percent, respectively. Commercial products revenue decreased in the third quarter of 2016, compared with the third quarter of 2015, primarily driven by a large syndication transaction in the prior year. Other revenue was lower in the third quarter of 2016, compared with the third quarter of 2015, primarily due to lower equity investment income, partially offset by a third quarter 2015 student loan market valuation adjustment. Other revenue was higher in the first nine months of 2016, compared with the same period of the prior year, reflecting the second quarter 2016 Visa Europe sale and the impact of the 2015 student loan market valuation adjustment, partially offset by lower equity investment income.

Noninterest Expense Noninterest expense was $2.9 billion in the third quarter and $8.7 billion in the first nine months of 2016, representing increases of $156 million (5.6 percent) and $550 million (6.8 percent), respectively, compared with the same periods of 2015. The increases from a year ago were primarily due to higher compensation expense, technology and communications expense, professional services expense and other noninterest expense, partially offset by lower employee benefits expense. Compensation expense increased principally due to the impact of hiring decisions to support business growth and compliance programs, merit increases, and higher variable compensation. Technology and communications expense increased primarily due to capital investments and costs related to acquired card portfolios, while professional services expense increased due to compliance-related matters. The increases in other noninterest expense reflect the impact of the FDIC surcharge, which began in the third quarter of 2016. In addition, the increase in other noninterest expense for the first nine months of 2016, over the same period of the prior year, includes the second quarter 2016 change related to legal and regulatory matters. Further, marketing and business development expense for the first nine months of 2016 increased over the same period of the prior year, as a result of brand advertising and the second quarter 2016 charitable contribution.


U.S. Bancorp		5

Table 3

Noninterest Expense


	Three Months Ended September 30,									Nine Months Ended September 30,
(Dollars in Millions)	2016			2015			Percent Change			2016			2015			Percent Change
Compensation	$	1,329		$	1,225			8.5	%	$	3,855		$	3,600			7.1	%
Employee benefits		280			285			(1.8	)		858			895			(4.1	)
Net occupancy and equipment		250			251			(.4	)		741			745			(.5	)
Professional services		127			115			10.4			346			298			16.1
Marketing and business development		102			99			3.0			328			265			23.8
Technology and communications		243			222			9.5			717			657			9.1
Postage, printing and supplies		80			77			3.9			236			223			5.8
Other intangibles		45			42			7.1			134			128			4.7
Other		475			459			3.5			1,457			1,311			11.1
Total noninterest expense	$	2,931		$	2,775			5.6	%	$	8,672		$	8,122			6.8	%
Efficiency ratio (a)		54.5	%		53.9	%					54.7	%		53.8	%

(a)

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).

Offsetting the increases were lower employee benefits expense mainly due to lower pension costs.

Income Tax Expense The provision for income taxes was $566 million (an effective rate of 27.2 percent) for the third quarter and $1.6 billion (an effective rate of 26.6 percent) for the first nine months of 2016, compared with $534 million (an effective rate of 26.2 percent) and $1.5 billion (an effective rate of 25.7 percent) for the same periods of 2015. For further information on income taxes, refer to Note 11 of the Notes to Consolidated Financial Statements.

BALANCE SHEET ANALYSIS

Loans The Company’s loan portfolio was $271.3 billion at September 30, 2016, compared with $260.8 billion at December 31, 2015, an increase of $10.5 billion (4.0 percent). The increase was driven primarily by higher commercial loans, residential mortgages, commercial real estate loans and other retail loans, partially offset by lower credit card loans and covered loans.

Commercial loans and commercial real estate loans increased $4.8 billion (5.4 percent) and $1.3 billion (3.2 percent), respectively, at September 30, 2016, compared with December 31, 2015, reflecting higher demand from new and existing customers.

Residential mortgages held in the loan portfolio increased $2.7 billion (5.1 percent), reflecting 2016 origination activity, including strong refinancing activities due to lower longer-term interest rates during the third quarter of 2016. Residential mortgages originated and placed in the Company’s loan portfolio include well-secured jumbo mortgages and branch-originated first lien home equity loans to borrowers with high credit quality.

Other retail loans increased $2.5 billion (4.8 percent) at September 30, 2016, compared with December 31, 2015, driven by higher auto, installment and retail leasing balances, partially offset by decreases in student loan and revolving credit balances.

Credit card loans decreased $306 million (1.5 percent) at September 30, 2016, compared with December 31, 2015, primarily the result of customers paying down balances.

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

Loans Held for Sale Loans held for sale, consisting primarily of residential mortgages to be sold in the secondary market, were $5.6 billion at September 30, 2016, compared with $3.2 billion at December 31, 2015. The increase in loans held for sale was principally due to a higher level of mortgage loan closings, driven by strong refinancing activities, in the third quarter of 2016. Almost all of the residential mortgage loans the Company originates or purchases for sale follow guidelines that allow the loans to be sold into existing, highly liquid secondary markets; in particular in government agency transactions and to government-sponsored enterprises (“GSEs”).

Investment Securities Investment securities totaled $110.0 billion at September 30, 2016, compared with $105.6 billion at December 31, 2015. The $4.4 billion (4.2 percent) increase reflected $3.8 billion of net


6		U.S. Bancorp

Table 4

Investment Securities


	Available-for-Sale									Held-to-Maturity
At September 30, 2016 (Dollars in Millions)	Amortized Cost		Fair Value		Weighted- Average Maturity in Years		Weighted- Average Yield (e)			Amortized Cost		Fair Value		Weighted- Average Maturity in Years		Weighted- Average Yield (e)
U.S. Treasury and Agencies
Maturing in one year or less	$	2,729	$	2,731		.5		.88	%	$	424	$	426		.7		.97	%
Maturing after one year through five years		7,529		7,575		2.9		1.08			734		750		2.8		1.76
Maturing after five years through ten years		4,195		4,322		6.2		1.89			3,609		3,686		6.7		1.81
Maturing after ten years		1		2		10.9		4.15			–		–		–		–
Total	$	14,454	$	14,630		3.4		1.28	%	$	4,767	$	4,862		5.6		1.73	%
Mortgage-Backed Securities (a)
Maturing in one year or less	$	697	$	703		.6		2.39	%	$	479	$	481		.6		2.30	%
Maturing after one year through five years		41,085		41,592		3.9		1.84			35,952		36,368		3.5		1.94
Maturing after five years through ten years		3,489		3,522		6.3		1.97			1,595		1,607		5.8		1.55
Maturing after ten years		97		97		12.5		1.74			37		37		12.2		1.42
Total	$	45,368	$	45,914		4.1		1.85	%	$	38,063	$	38,493		3.6		1.92	%
Asset-Backed Securities (a)
Maturing in one year or less	$	11	$	13		.4		6.96	%	$	–	$	–		.1		1.17	%
Maturing after one year through five years		294		298		4.0		3.19			4		7		2.7		1.25
Maturing after five years through ten years		222		226		5.6		2.78			4		4		5.9		1.20
Maturing after ten years		–		–		–		–			–		5		17.6		1.29
Total	$	527	$	537		4.6		3.10	%	$	8	$	16		4.2		1.23	%
Obligations of State and Political Subdivisions (b) (c)
Maturing in one year or less	$	2,175	$	2,206		.4		7.10	%	$	–	$	–		.4		7.58	%
Maturing after one year through five years		674		713		2.4		6.40			1		1		2.7		8.15
Maturing after five years through ten years		1,743		1,810		8.2		5.17			7		7		9.1		2.60
Maturing after ten years		640		647		19.5		5.11			–		–		10.2		8.07
Total	$	5,232	$	5,376		5.6		6.12	%	$	8	$	8		8.6		3.18	%
Other Debt Securities
Maturing in one year or less	$	–	$	–		–		–	%	$	6	$	6		.4		2.00	%
Maturing after one year through five years		–		–		–		–			21		21		3.7		1.55
Maturing after five years through ten years		–		–		–		–			–		–		–		–
Maturing after ten years		628		579		15.8		2.62			–		–		–		–
Total	$	628	$	579		15.8		2.62	%	$	27	$	27		3.0		1.65	%
Other Investments	$	67	$	119		5.2		5.89	%	$	–	$	–		–		—	%
Total investment securities (d)	$	66,276	$	67,155		4.2		2.09	%	$	42,873	$	43,406		3.8		1.90	%

(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 4.7 years at December 31, 2015, with a corresponding weighted-average yield of 2.21 percent. The weighted-average maturity of the held-to-maturity investment securities was 4.2 years at December 31, 2015, with a corresponding weighted-average yield of 1.92 percent.

(e)

Weighted-average yields are presented on a fully-taxable equivalent basis under a tax rate of 35 percent. Yields on available-for-sale and held-to-maturity investment securities are computed based on amortized cost balances, excluding any premiums or discounts recorded related to the transfer of investment securities at fair value from available-for-sale to held-to-maturity. Weighted-average yield and maturity calculations exclude equity securities that have no stated yield or maturity.


	September 30, 2016					December 31, 2015
(Dollars in Millions)	Amortized Cost		Percent of Total			Amortized Cost		Percent of Total
U.S. Treasury and agencies	$	19,221		17.6	%	$	7,536		7.2	%
Mortgage-backed securities		83,431		76.4			91,265		86.6
Asset-backed securities		535		.5			558		.5
Obligations of state and political subdivisions		5,240		4.8			5,157		4.9
Other debt securities and investments		722		.7			891		.8
Total investment securities	$	109,149		100.0	%	$	105,407		100.0	%


U.S. Bancorp		7

investment purchases and a $699 million favorable change in net unrealized gains (losses) on available-for-sale investment securities.

The Company’s available-for-sale securities are carried at fair value with changes in fair value reflected in other comprehensive income (loss) unless a security is deemed to be other-than-temporarily impaired. At September 30, 2016, the Company’s net unrealized gains on available-for-sale securities were $879 million, compared with $180 million at December 31, 2015. The favorable change in net unrealized gains (losses) was primarily due to increases in the fair value of agency mortgage-backed securities as a result of changes in interest rates. Gross unrealized losses on available-for-sale securities totaled $130 million at September 30, 2016, compared with $480 million at December 31, 2015. At September 30, 2016, 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.

In December 2013, U.S. banking regulators approved final rules that prohibit banks from holding certain types of investments, such as investments in hedge and certain private equity funds. The Company does not anticipate the implementation of these final rules will require any significant liquidation of securities held or impairment charges. Refer to Notes 3 and 14 in the Notes to Consolidated Financial Statements for further information on investment securities.

Deposits Total deposits were $334.6 billion at September 30, 2016, compared with $300.4 billion at December 31, 2015, the result of increases in total savings deposits and noninterest-bearing deposits, partially offset by a decrease in time deposits. Money market deposit balances increased $20.9 billion (24.2 percent) at September 30, 2016, compared with December 31, 2015, primarily due to higher Wholesale Banking and Commercial Real Estate and Wealth Management and Securities Services balances. Interest checking balances increased $6.9 billion (11.6 percent) primarily due to higher Wholesale Banking and Commercial Real Estate, corporate trust, and Consumer and Small Business Banking balances. Savings account balances increased $2.4 billion (6.3 percent), primarily due to higher Consumer and Small Business Banking balances. Noninterest-bearing deposits increased $5.3 billion (6.4 percent) at September 30, 2016, compared with December 31, 2015, primarily due to higher corporate trust, Consumer and Small Business Banking and Wholesale Banking and Commercial Real Estate balances. Time deposits decreased $1.3 billion (3.9 percent) at September 30, 2016, compared with December 31, 2015, primarily related to a decrease in Consumer and Small Business Banking balances due to maturities and those deposits managed as an alternative to other funding sources such as wholesale borrowing, based largely on relative pricing and liquidity characteristics.

Borrowings The Company utilizes both short-term and long-term borrowings as part of its asset/liability management and funding strategies. Short-term borrowings, which include federal funds purchased, commercial paper, repurchase agreements, borrowings secured by high-grade assets and other short-term borrowings, were $15.7 billion at September 30, 2016, compared with $27.9 billion at December 31, 2015. The $12.2 billion (43.7 percent) decrease in short-term borrowings was primarily driven by lower commercial paper balances. Long-term debt was $38.0 billion at September 30, 2016, compared with $32.1 billion at December 31, 2015. The $5.9 billion (18.4 percent) increase was primarily due to the issuances of $4.5 billion of bank notes, $2.6 billion of medium-term notes and $1.0 billion of subordinated notes, and an $842 million increase in Federal Home Loan Bank (“FHLB”) advances, partially offset by $3.1 billion of bank note and subordinated note repayments and maturities. Refer to the “Liquidity Risk Management” section for discussion of liquidity management of the Company.


8		U.S. Bancorp

CORPORATE RISK PROFILE

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

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

The Company’s most prominent risk exposures are credit, interest rate, market, liquidity, operational, compliance, strategic, and reputational. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan, investment or derivative contract when it is due. Interest rate risk is the potential reduction of net interest income or market valuations as a result of changes in interest rates. Market risk arises from fluctuations in interest rates, foreign exchange rates, and security prices that may result in changes in the values of financial instruments, such as trading and available-for-sale securities, mortgage loans held for sale (“MLHFS”), mortgage servicing rights (“MSRs”) and derivatives that are accounted for on a fair value basis. Liquidity risk is the possible inability to fund obligations or new business at a reasonable cost and in a timely manner. Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, or systems, or from external events, including the risk of loss resulting from breaches in data security. Operational risk can also include failures by third parties with which the Company does business. Compliance risk is the risk of loss arising from violations of, or nonconformance with, laws, rules, regulations, prescribed practices, internal policies, and procedures, or ethical standards, potentially exposing the Company to fines, civil money penalties, payment of damages, and the voiding of contracts. Compliance risk also arises in situations where the laws or rules governing certain Company products or activities of the Company’s customers may be ambiguous or untested. Strategic risk is the risk to earnings or capital arising from adverse business decisions or improper implementation of those decisions. Reputational risk is the risk to current or anticipated earnings, capital, or franchise or enterprise value arising from negative public opinion. This risk may impair the Company’s competitiveness by affecting its ability to establish new relationships, offer new services or continue serving existing relationships. In addition to the risks identified above, other risk factors exist that may impact the Company. Refer to “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, and in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, for a detailed discussion of these factors.

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

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

•

Qualitative considerations, such as the macroeconomic environment, regulatory and compliance changes,


U.S. Bancorp		9

litigation developments, and technology and cybersecurity;

•

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

•

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

•

Interest rate and market risk, including market value and net income simulation, and trading-related Value at Risk;

•

Liquidity risk, including funding projections under various stressed scenarios;

•

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

•

Reputational and strategic risk considerations, impacts and responses.

Credit Risk Management The Company’s strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), collateral values, trends in loan performance and macroeconomic factors, such as changes in unemployment rates, gross domestic product and consumer bankruptcy filings. The Risk Management Committee oversees the Company’s credit risk management process.

In addition, credit quality ratings, as defined by the Company, are an important part of the Company’s overall credit risk management and evaluation of its allowance for credit losses. Loans with a pass rating represent those loans not classified on the Company’s rating scale for problem credits, as minimal risk has been identified. Loans with a special mention or classified rating, including loans that are 90 days or more past due and still accruing, nonaccrual loans, those loans considered troubled debt restructurings (“TDRs”), and loans in a junior lien position that are current but are behind a modified or delinquent loan in a first lien position, encompass all loans held by the Company that it considers to have a potential or well-defined weakness that may put full collection of contractual cash flows at risk. The Company’s internal credit quality ratings for consumer loans are primarily based on delinquency and nonperforming status, except for a limited population of larger loans within those portfolios that are individually evaluated. For this limited population, the determination of the internal credit quality rating may also consider collateral value and customer cash flows. The Company obtains recent collateral value estimates for the majority of its residential mortgage and home equity and second mortgage portfolios, which allows the Company to compute estimated loan-to-value (“LTV”) ratios reflecting current market conditions. These individual refreshed LTV ratios are considered in the determination of the appropriate allowance for credit losses. However, the underwriting criteria the Company employs consider the relevant income and credit characteristics of the borrower, such that the collateral is not the primary source of repayment. Refer to Note 4 in the Notes to Consolidated Financial Statements for further discussion of the Company’s loan portfolios, including internal credit quality ratings. In addition, refer to “Management’s Discussion and Analysis — Credit Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, for a more detailed discussion on credit risk management processes.

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

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

Included within the commercial lending segment are energy loans, which represented 1.0 percent of the Company’s total loans outstanding at September 30,


10		U.S. Bancorp

2016. Low energy prices during 2016 have increased criticized commitments and nonperforming loans at September 30, 2016, compared with December 31, 2015.

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


(Dollars in Millions)	September 30, 2016			December 31, 2015
Loans outstanding	$	2,732		$	3,183
Total commitments outstanding		11,085			12,118
Total criticized commitments outstanding		3,231			1,886
Nonperforming assets		259			19
Allowance for credit losses as a percentage of loans outstanding		8.9	%		5.4	%

The consumer lending segment represents loans and leases made to consumer customers, including residential mortgages, credit card loans, and other retail loans such as revolving consumer lines, auto loans and leases, home equity loans and lines, and student loans, a run-off portfolio. Home equity or second mortgage loans are junior lien closed-end accounts fully disbursed at origination. These loans typically are fixed rate loans, secured by residential real estate, with a 10- or 15-year fixed payment amortization schedule. Home equity lines are revolving accounts giving the borrower the ability to draw and repay balances repeatedly, up to a maximum commitment, and are secured by residential real estate. These include accounts in either a first or junior lien position. Typical terms on home equity lines in the portfolio are variable rates benchmarked to the prime rate, with a 10- or 15-year draw period during which a minimum payment is equivalent to the monthly interest, followed by a 20- or 10-year amortization period, respectively. At September 30, 2016, substantially all of the Company’s home equity lines were in the draw period. Approximately $1.0 billion, or 7 percent, of the outstanding home equity line balances at September 30, 2016, will enter the amortization period within the next 36 months. Key risk characteristics relevant to consumer lending segment loans primarily relate to the borrowers’ capacity and willingness to repay and include unemployment rates and other economic factors, customer payment history and in some cases, updated LTV information on real estate based loans. These risk characteristics, among others, are reflected in forecasts of delinquency levels, bankruptcies and losses which are the primary factors in determining the allowance for credit losses for the consumer lending segment.

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

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

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

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

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


U.S. Bancorp		11

The following tables provide summary information for the LTVs of residential mortgages and home equity and second mortgages by borrower type at September 30, 2016:


Residential mortgages (Dollars in Millions)	Interest Only		Amortizing		Total		Percent of Total
Prime Borrowers
Less than or equal to 80%	$	1,717	$	44,775	$	46,492		91.4	%
Over 80% through 90%		25		3,057		3,082		6.1
Over 90% through 100%		16		620		636		1.2
Over 100%		13		599		612		1.2
No LTV available		2		66		68		.1
Total	$	1,773	$	49,117	$	50,890		100.0	%
Sub-Prime Borrowers
Less than or equal to 80%	$	–	$	615	$	615		63.5	%
Over 80% through 90%		–		151		151		15.6
Over 90% through 100%		–		97		97		10.0
Over 100%		–		106		106		10.9
No LTV available		–		–		–		–
Total	$	–	$	969	$	969		100.0	%
Other Borrowers
Less than or equal to 80%	$	1	$	358	$	359		69.6	%
Over 80% through 90%		–		53		53		10.2
Over 90% through 100%		–		37		37		7.2
Over 100%		–		67		67		13.0
No LTV available		–		–		–		–
Total	$	1	$	515	$	516		100.0	%
Loans Purchased From GNMA Mortgage Pools (a)	$	–	$	3,854	$	3,854		100.0	%
Total
Less than or equal to 80%	$	1,718	$	45,748	$	47,466		84.4	%
Over 80% through 90%		25		3,261		3,286		5.8
Over 90% through 100%		16		754		770		1.4
Over 100%		13		772		785		1.4
No LTV available		2		66		68		.1
Loans purchased from GNMA mortgage pools (a)		–		3,854		3,854		6.9
Total	$	1,774	$	54,455	$	56,229		100.0	%

(a)

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


Home equity and second mortgages (Dollars in Millions)	Lines		Loans		Total		Percent of Total
Prime Borrowers
Less than or equal to 80%	$	11,533	$	536	$	12,069		75.6	%
Over 80% through 90%		2,223		589		2,812		17.6
Over 90% through 100%		488		114		602		3.8
Over 100%		385		24		409		2.5
No LTV/CLTV available		60		18		78		.5
Total	$	14,689	$	1,281	$	15,970		100.0	%
Sub-Prime Borrowers
Less than or equal to 80%	$	39	$	17	$	56		33.5	%
Over 80% through 90%		8		21		29		17.4
Over 90% through 100%		7		47		54		32.3
Over 100%		11		16		27		16.2
No LTV/CLTV available		–		1		1		.6
Total	$	65	$	102	$	167		100.0	%
Other Borrowers
Less than or equal to 80%	$	217	$	6	$	223		67.6	%
Over 80% through 90%		18		7		25		7.6
Over 90% through 100%		6		1		7		2.1
Over 100%		5		–		5		1.5
No LTV/CLTV available		70		–		70		21.2
Total	$	316	$	14	$	330		100.0	%
Total
Less than or equal to 80%	$	11,789	$	559	$	12,348		75.0	%
Over 80% through 90%		2,249		617		2,866		17.4
Over 90% through 100%		501		162		663		4.0
Over 100%		401		40		441		2.7
No LTV/CLTV available		130		19		149		.9
Total	$	15,070	$	1,397	$	16,467		100.0	%

The total amount of consumer lending segment residential mortgage, home equity and second mortgage loans to customers that may be defined as sub-prime borrowers represented only 0.3 percent of total assets at September 30, 2016 and December 31, 2015. The Company considers sub-prime loans to be those made to borrowers with a risk of default significantly higher than those approved for prime lending programs, as reflected in credit scores obtained from independent agencies at loan origination, in addition to other credit underwriting criteria. Sub-prime portfolios include only loans originated according to the Company’s underwriting programs specifically designed to serve customers with weakened credit histories. The sub-prime designation indicators have been and will continue to be subject to re-evaluation over time as borrower characteristics, payment performance and economic conditions change. The sub-prime loans originated during periods from June 2009 and after are with borrowers who met the Company’s program guidelines and have a credit score that generally is at or below a threshold of 620 to 650 depending on the program. Sub-prime loans originated during periods prior to June 2009 were based upon program level guidelines without regard to credit score.

Home equity and second mortgages were $16.5 billion at September 30, 2016, compared with $16.4 billion at December 31, 2015, and included $5.0 billion of home equity lines in a first lien position and $11.5 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, 2016, included approximately $4.7 billion of loans and lines for which the Company also serviced the related first lien loan, and approximately $6.8 billion where the Company did not service the related first lien loan. The Company was able to determine the status of the related first liens using information the Company has as the servicer of the first lien or information reported on customer credit bureau files. The Company also evaluates other indicators of credit risk for these junior lien loans and lines including delinquency, estimated average CLTV ratios and updated weighted-average credit scores in making its assessment of credit risk, related loss estimates and determining the allowance for credit losses.


12		U.S. Bancorp

Table 5

Delinquent Loan Ratios as a Percent of Ending Loan Balances


90 days or more past due excluding nonperforming loans	September 30, 2016			December 31, 2015
Commercial
Commercial		.06	%		.06	%
Lease financing		–			–
Total commercial		.05			.05
Commercial Real Estate
Commercial mortgages		–			–
Construction and development		.05			.13
Total commercial real estate		.02			.03
Residential Mortgages (a)		.28			.33
Credit Card		1.11			1.09
Other Retail
Retail leasing		–			.02
Home equity and second mortgages		.24			.25
Other		.11			.11
Total other retail (b)		.14			.15
Total loans, excluding covered loans		.19			.21
Covered Loans		5.72			6.31
Total loans		.28	%		.32	%

90 days or more past due including nonperforming loans	September 30, 2016			December 31, 2015
Commercial		.61	%		.25	%
Commercial real estate		.26			.33
Residential mortgages (a)		1.37			1.66
Credit card		1.13			1.13
Other retail (b)		.42			.46
Total loans, excluding covered loans		.72			.67
Covered loans		5.89			6.48
Total loans		.79	%		.78	%

(a)

Delinquent loan ratios exclude $2.4 billion at September 30, 2016, and $2.9 billion at December 31, 2015, 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 5.70 percent at September 30, 2016, and 7.15 percent at December 31, 2015.

(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 .60 percent at September 30, 2016, and .75 percent at December 31, 2015.

The following table provides a summary of delinquency statistics and other credit quality indicators for the Company’s junior lien positions at September 30, 2016:


	Junior Liens Behind
(Dollars in Millions)	Company Owned or Serviced First Lien			Third Party First Lien			Total
Total	$	4,695		$	6,818		$	11,513
Percent 30-89 days past due		.29	%		.47	%		.40	%
Percent 90 days or more past due		.10	%		.10	%		.10	%
Weighted-average CLTV		73	%		69	%		71	%
Weighted-average credit score		775			769			771

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

Loan Delinquencies Trends in delinquency ratios are an indicator, among other considerations, of credit risk within the Company’s loan portfolios. The Company measures delinquencies, both including and excluding nonperforming loans, to enable comparability with other companies. Accruing loans 90 days or more past due totaled $748 million ($518 million excluding covered loans) at September 30, 2016, compared with $831 million ($541 million excluding covered loans) at December 31, 2015. These balances exclude loans purchased from Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs, as well as student loans guaranteed by the federal government. Accruing loans 90 days or more past due are not included in nonperforming assets and continue to accrue interest because they are adequately secured by collateral, are in the process of collection and are reasonably expected to result in repayment or restoration to current status, or are managed in homogeneous portfolios with specified charge-off timeframes adhering to regulatory guidelines. The ratio of accruing loans 90 days or more past due to total loans was 0.28 percent (0.19 percent excluding covered loans) at September 30, 2016, compared with 0.32 percent (0.21 percent excluding covered loans) at December 31, 2015.


U.S. Bancorp		13

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, 2016		December 31, 2015		September 30, 2016			December 31, 2015
Residential Mortgages (a)
30-89 days	$	146	$	170		.26	%		.32	%
90 days or more		159		176		.28			.33
Nonperforming		614		712		1.09			1.33
Total	$	919	$	1,058		1.63	%		1.98	%
Credit Card
30-89 days	$	264	$	243		1.27	%		1.15	%
90 days or more		229		228		1.11			1.09
Nonperforming		4		9		.02			.04
Total	$	497	$	480		2.40	%		2.28	%
Other Retail
Retail Leasing
30-89 days	$	13	$	11		.21	%		.21	%
90 days or more		–		1		–			.02
Nonperforming		3		3		.05			.06
Total	$	16	$	15		.26	%		.29	%
Home Equity and Second Mortgages
30-89 days	$	67	$	59		.41	%		.36	%
90 days or more		40		41		.24			.25
Nonperforming		124		136		.75			.83
Total	$	231	$	236		1.40	%		1.44	%
Other (b)
30-89 days	$	174	$	154		.56	%		.52	%
90 days or more		34		33		.11			.11
Nonperforming		26		23		.08			.08
Total	$	234	$	210		.75	%		.71	%

(a)

Excludes $307 million of loans 30-89 days past due and $2.4 billion of loans 90 days or more past due at September 30, 2016, purchased from GNMA mortgage pools that continue to accrue interest, compared with $320 million and $2.9 billion at December 31, 2015, respectively.

(b)

Includes revolving credit, installment, automobile and student loans.

The following tables provide further information on residential mortgages and home equity and second mortgages as a percent of ending loan balances by borrower type:


Residential mortgages (a)	September 30, 2016			December 31, 2015
Prime Borrowers
30-89 days		.22	%		.25	%
90 days or more		.24			.30
Nonperforming		.89			1.12
Total		1.35	%		1.67	%
Sub-Prime Borrowers
30-89 days		2.89	%		3.92	%
90 days or more		2.89			2.52
Nonperforming		14.45			15.30
Total		20.23	%		21.74	%
Other Borrowers
30-89 days		1.36	%		1.60	%
90 days or more		1.36			1.12
Nonperforming		4.26			4.00
Total		6.98	%		6.72	%

(a)

Excludes delinquent and nonperforming information on loans purchased from GNMA mortgage pools as their repayments are primarily insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.


Home equity and second mortgages	September 30, 2016			December 31, 2015
Prime Borrowers
30-89 days		.36	%		.31	%
90 days or more		.22			.23
Nonperforming		.66			.74
Total		1.24	%		1.28	%
Sub-Prime Borrowers
30-89 days		2.39	%		2.56	%
90 days or more		1.20			1.03
Nonperforming		5.39			4.62
Total		8.98	%		8.21	%
Other Borrowers
30-89 days		1.82	%		1.23	%
90 days or more		.91			.74
Nonperforming		2.72			2.45
Total		5.45	%		4.42	%

The following table provides summary delinquency information for covered loans:


	Amount				As a Percent of Ending Loan Balances
(Dollars in Millions)	September 30, 2016		December 31, 2015		September 30, 2016			December 31, 2015
30-89 days	$	55	$	62		1.37	%		1.35	%
90 days or more		230		290		5.72			6.31
Nonperforming		7		8		.17			.17
Total	$	292	$	360		7.26	%		7.83	%


14		U.S. Bancorp

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

Troubled Debt Restructurings Concessionary modifications are classified as TDRs unless the modification results in only an insignificant delay in the payments to be received. TDRs accrue interest if the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles, which is generally six months or greater. At September 30, 2016, performing TDRs were $4.0 billion, compared with $4.7 billion at December 31, 2015. 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 its own 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 and continues to report them as TDRs after the trial period.

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

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

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


U.S. Bancorp		15

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, 2016 (Dollars in Millions)	Performing TDRs		30-89 Days Past Due			90 Days or More Past Due			Nonperforming TDRs			Total TDRs
Commercial	$	308		2.0	%		1.5	%	$	349	(a)	$	657
Commercial real estate		274		1.1			.1			25	(b)		299
Residential mortgages		1,749		3.1			4.1			426			2,175	(d)
Credit card		213		10.8			6.5			4	(c)		217
Other retail		128		4.3			3.2			50	(c)		178	(e)
TDRs, excluding GNMA and covered loans		2,672		3.4			3.6			854			3,526
Loans purchased from GNMA mortgage pools (g)		1,344		–			–			–			1,344	(f)
Covered loans		31		1.4			12.6			6			37
Total	$	4,047		2.3	%		2.4	%	$	860		$	4,907

(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 $282 million of residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $81 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

(e)

Includes $91 million of other retail loans to borrowers that have had debt discharged through bankruptcy and $7 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

(f)

Includes $366 million of Federal Housing Administration and Department of Veterans Affairs residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $284 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

(g)

Approximately 5.6 percent and 61.8 percent of the total TDR loans purchased from GNMA mortgage pools are 30-89 days past due and 90 days or more past due, respectively, but are not classified as delinquent as their repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.

Short-term Modifications The Company makes short-term modifications that it does not consider to be TDRs, in limited circumstances, to assist borrowers experiencing temporary hardships. Consumer lending programs include payment reductions, deferrals of up to three past due payments, and the ability to return to current status if the borrower makes required payments. The Company may also make short-term modifications to commercial lending loans, with the most common modification being an extension of the maturity date of three months or less. Such extensions generally are used when the maturity date is imminent and the borrower is experiencing some level of financial stress, but the Company believes the borrower will pay all contractual amounts owed. Short-term modified loans were not material at September 30, 2016.


16		U.S. Bancorp

Table 6

Nonperforming Assets (a)


(Dollars in Millions)	September 30, 2016			December 31, 2015
Commercial
Commercial	$	477		$	160
Lease financing		40			14
Total commercial		517			174
Commercial Real Estate
Commercial mortgages		98			92
Construction and development		7			35
Total commercial real estate		105			127
Residential Mortgages (b)		614			712
Credit Card		4			9
Other Retail
Retail leasing		3			3
Home equity and second mortgages		124			136
Other		26			23
Total other retail		153			162
Total nonperforming loans, excluding covered loans		1,393			1,184
Covered Loans		7			8
Total nonperforming loans		1,400			1,192
Other Real Estate (c)(d)		213			280
Covered Other Real Estate (d)		28			32
Other Assets		23			19
Total nonperforming assets	$	1,664		$	1,523
Total nonperforming assets, excluding covered assets	$	1,629		$	1,483
Excluding covered assets
Accruing loans 90 days or more past due (b)	$	518		$	541
Nonperforming loans to total loans		.52	%		.46	%
Nonperforming assets to total loans plus other real estate (c)		.61	%		.58	%
Including covered assets
Accruing loans 90 days or more past due (b)	$	748		$	831
Nonperforming loans to total loans		.52	%		.46	%
Nonperforming assets to total loans plus other real estate (c)		.61	%		.58	%

Changes in Nonperforming Assets


(Dollars in Millions)	Commercial and Commercial Real Estate			Residential Mortgages, Credit Card and Other Retail			Covered Assets			Total
Balance December 31, 2015	$	336		$	1,147		$	40		$	1,523
Additions to nonperforming assets
New nonaccrual loans and foreclosed properties		895			320			15			1,230
Advances on loans		57			–			–			57
Total additions		952			320			15			1,287
Reductions in nonperforming assets
Paydowns, payoffs		(221	)		(205	)		(1	)		(427	)
Net sales		(159	)		(125	)		(18	)		(302	)
Return to performing status		(27	)		(93	)		–			(120	)
Charge-offs (e)		(239	)		(57	)		(1	)		(297	)
Total reductions		(646	)		(480	)		(20	)		(1,146	)
Net additions to (reductions in) nonperforming assets		306			(160	)		(5	)		141
Balance September 30, 2016	$	642		$	987		$	35		$	1,664

(a)

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

(b)

Excludes $2.4 billion and $2.9 billion at September 30, 2016, and December 31, 2015, 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 $397 million and $535 million at September 30, 2016, and December 31, 2015, 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.


U.S. Bancorp		17

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

At September 30, 2016, total nonperforming assets were $1.7 billion, compared with $1.5 billion at December 31, 2015. The $141 million (9.3 percent) increase in nonperforming assets was primarily driven by a $240 million increase in nonperforming commercial loans within the energy portfolio, partially offset by improvements in the Company’s residential and commercial real estate portfolios. Excluding energy loans, nonperforming assets decreased 6.5 percent at September 30, 2016, compared with December 31, 2015. Nonperforming covered assets were $35 million at September 30, 2016, compared with $40 million at December 31, 2015. The ratio of total nonperforming assets to total loans and other real estate was 0.61 percent at September 30, 2016, compared with 0.58 percent at December 31, 2015.

OREO, excluding covered assets, was $213 million at September 30, 2016, compared with $280 million at December 31, 2015, and was related to foreclosed properties that previously secured loan balances. These balances exclude foreclosed GNMA loans whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.

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


	Amount				As a Percent of Ending Loan Balances
(Dollars in Millions)	September 30, 2016		December 31, 2015		September 30, 2016			December 31, 2015
Residential
Illinois	$	16	$	18		.37	%		.42	%
Minnesota		15		23		.24			.37
Wisconsin		13		11		.58			.49
Florida		12		17		.81			1.12
Ohio		11		17		.37			.56
All other states		134		164		.24			.31
Total residential		201		250		.28			.36
Commercial
California		4		11		.02			.05
Tennessee		1		1		.04			.04
Iowa		1		1		.03			.04
Ohio		1		1		.02			.02
New Jersey		1		1		.04			.04
All other states		4		15		–			.02
Total commercial		12		30		.01			.02
Total	$	213	$	280		.08	%		.11	%

Analysis of Loan Net Charge-Offs Total loan net charge-offs were $315 million for the third quarter and $947 million for the first nine months of 2016, compared with $292 million and $867 million for the same periods of 2015. 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 2016 was 0.46 percent and 0.48 percent, respectively, compared with 0.46 percent and 0.47 percent for the same periods of 2015. The year-over-year increases in total net charge-offs reflected higher commercial loan net charge-offs and lower commercial real estate recoveries, partially offset by lower charge-offs related to residential mortgages and home equity loans.

Commercial and commercial real estate loan net charge-offs for the third quarter of 2016 were $88 million (0.26 percent of average loans outstanding on an annualized basis), compared with $60 million (0.19 percent of average loans outstanding on an annualized basis) for the third quarter of 2015. Commercial and commercial real estate loan net charge-offs for the first nine months of 2016 were $245 million (0.24 percent of average loans outstanding on an annualized basis), compared with $128 million (0.14 percent of average loans outstanding on an annualized basis) for the first nine months of 2015. The year-over-year increases include higher energy net charge-offs and lower commercial real estate recoveries in the current year.


18		U.S. Bancorp

Table 7

Net Charge-offs as a Percent of Average Loans Outstanding


	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Commercial
Commercial		.38	%		.34	%		.37	%		.25	%
Lease financing		.23			.23			.33			.23
Total commercial		.37			.33			.36			.25
Commercial Real Estate
Commercial mortgages		.06			–			–			.01
Construction and development		(.14	)		(.43	)		(.04	)		(.42	)
Total commercial real estate		.01			(.10	)		(.01	)		(.09	)
Residential Mortgages		.08			.19			.12			.24
Credit Card		3.11			3.38			3.25			3.64
Other Retail
Retail leasing		.07			.14			.10			.09
Home equity and second mortgages		.02			.17			.02			.27
Other		.68			.65			.68			.62
Total other retail		.41			.44			.41			.44
Total loans, excluding covered loans		.47			.47			.48			.48
Covered Loans		–			–			–			–
Total loans		.46	%		.46	%		.48	%		.47	%

Residential mortgage loan net charge-offs for the third quarter of 2016 were $12 million (0.08 percent of average loans outstanding on an annualized basis), compared with $25 million (0.19 percent of average loans outstanding on an annualized basis) for the third quarter of 2015. Residential mortgage loan net charge-offs for the first nine months of 2016 were $48 million (0.12 percent of average loans outstanding on an annualized basis), compared with $93 million (0.24 percent of average loans outstanding on an annualized basis) for the first nine months of 2015. Credit card loan net charge-offs for the third quarter of 2016 were $161 million (3.11 percent of average loans outstanding on an annualized basis), compared with $153 million (3.38 percent of average loans outstanding on an annualized basis) for the third quarter of 2015. Credit card loan net charge-offs for the first nine months of 2016 were $495 million (3.25 percent of average loans outstanding on an annualized basis), compared with $485 million (3.64 percent of average loans outstanding on an annualized basis) for the first nine months of 2015. Other retail loan net charge-offs for the third quarter of 2016 were $54 million (0.41 percent of average loans outstanding on an annualized basis), compared with $54 million (0.44 percent of average loans outstanding on an annualized basis) for the third quarter of 2015. Other retail loan net charge-offs for the first nine months of 2016 were $159 million (0.41 percent of average loans outstanding on an annualized basis), compared with $161 million (0.44 percent of average loans outstanding on an annualized basis) for the first nine months of 2015. The decreases in total residential mortgage, credit card and other retail loan net charge-offs as a percentage of average loans outstanding on an annualized basis reflected the continued improvement in economic conditions.

The following table provides an analysis of net charge-offs as a percent of average loans outstanding for residential mortgages and home equity and second mortgages by borrower type:


	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)	2016		2015		2016			2015			2016		2015		2016			2015
Residential Mortgages
Prime borrowers	$	50,623	$	45,108		.07	%		.13	%	$	49,254	$	44,501		.09	%		.17	%
Sub-prime borrowers		980		1,124		.81			2.82			1,013		1,164		1.19			2.99
Other borrowers		528		689		.75			1.15			566		739		.71			1.09
Loans purchased from GNMA mortgage pools (a)		4,153		4,910		–			–			4,501		5,054		.06			.08
Total	$	56,284	$	51,831		.08	%		.19	%	$	55,334	$	51,458		.12	%		.24	%
Home Equity and Second Mortgages
Prime borrowers	$	15,958	$	15,428		.02	%		.13	%	$	15,864	$	15,286		.01	%		.22	%
Sub-prime borrowers		170		207		–			1.92			179		219		(.74	)		2.44
Other borrowers		342		448		–			.89			368		475		.73			.84
Total	$	16,470	$	16,083		.02	%		.17	%	$	16,411	$	15,980		.02	%		.27	%

(a)

Represents loans purchased from GNMA mortgage pools whose payments are primarily insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.


U.S. Bancorp		19

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

The allowance recorded for loans in the commercial lending segment is based on reviews of individual credit relationships and considers the migration analysis of commercial lending segment loans and actual loss experience. In the migration analysis applied to risk rated loan portfolios, the Company currently examines up to a 15-year period of historical loss experience. For each loan type, this historical loss experience is adjusted as necessary to consider any relevant changes in portfolio composition, lending policies, underwriting standards, risk management practices or economic conditions. The results of the analysis are evaluated quarterly to confirm an appropriate historical timeframe is selected for each commercial loan type. The allowance recorded for impaired loans greater than $5 million in the commercial lending segment is based on an individual loan analysis utilizing expected cash flows discounted using the original effective interest rate, the observable market price of the loan, or the fair value of the collateral, less selling costs, for collateral-dependent loans, rather than the migration analysis. The allowance recorded for all other commercial lending segment loans is determined on a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, and historical losses, adjusted for current trends.

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

When evaluating the appropriateness of the allowance for credit losses for any loans and lines in a junior lien position, the Company considers the delinquency and modification status of the first lien. At September 30, 2016, the Company serviced the first lien on 41 percent of the home equity loans and lines in a junior lien position. The Company also considers information received from its primary regulator on the status of the 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 $330 million or 2.0 percent of its total home equity portfolio at September 30, 2016, represented non-delinquent junior liens where the first lien was delinquent or modified.

The Company uses historical loss experience on the loans and lines in a junior lien position where the first lien is serviced by the Company, or can be identified in credit bureau data, to establish loss estimates for junior lien loans and lines the Company services that are current, but the first lien is delinquent or modified. Historically, the number of junior lien defaults has been a small percentage of the total portfolio (approximately 1.1 percent annually), while the long-term average loss rate on loans that default has been approximately 90 percent. In addition, the Company obtains updated credit scores on its home equity portfolio each quarter, and in some cases more frequently, and uses this information to qualitatively supplement its loss estimation methods. Credit score distributions for the portfolio are monitored monthly and any changes in the distribution are one of the factors considered in assessing the Company’s loss estimates. In its evaluation of the allowance for credit losses, the Company also considers the increased risk of loss associated with home equity lines that are contractually scheduled to convert from a revolving status to a fully amortizing payment and with residential lines and loans that have a balloon payoff provision.

The allowance for the covered loan segment is evaluated each quarter in a manner similar to that described for non-covered loans, and represents any decreases in expected cash flows on those loans after the


20		U.S. Bancorp

acquisition date. The provision for credit losses for covered loans considers the indemnification provided by the FDIC.

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

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

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

The Company’s methodology for determining the appropriate allowance for credit losses for all the loan segments also considers the imprecision inherent in the methodologies used. As a result, in addition to the amounts determined under the methodologies described above, management also considers the potential impact of other qualitative factors which include, but are not limited to, economic factors; geographic and other concentration risks; delinquency and nonaccrual trends; current business conditions; changes in lending policy, underwriting standards, 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 of the Allowance for Credit Losses” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, for further discussion on the analysis and determination of the allowance for credit losses.

At September 30, 2016, the allowance for credit losses was $4.3 billion (1.60 percent of period-end loans), compared with an allowance of $4.3 billion (1.65 percent of period-end loans) at December 31, 2015. The ratio of the allowance for credit losses to nonperforming loans was 310 percent at September 30, 2016, compared with 361 percent at December 31, 2015. The ratio of the allowance for credit losses to annualized loan net charge-offs was 346 percent at September 30, 2016, compared with 367 percent of full year 2015 net charge-offs at December 31, 2015.


U.S. Bancorp		21

Table 8

Summary of Allowance for Credit Losses


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Millions)	2016			2015			2016			2015
Balance at beginning of period	$	4,329		$	4,326		$	4,306		$	4,375
Charge-Offs
Commercial
Commercial		98			85			301			212
Lease financing		6			6			21			18
Total commercial		104			91			322			230
Commercial real estate
Commercial mortgages		7			2			10			15
Construction and development		2			–			9			1
Total commercial real estate		9			2			19			16
Residential mortgages		19			31			67			113
Credit card		182			171			559			543
Other retail
Retail leasing		2			3			7			6
Home equity and second mortgages		12			16			31			57
Other		70			58			205			170
Total other retail		84			77			243			233
Covered loans (a)		–			–			–			–
Total charge-offs		398			372			1,210			1,135
Recoveries
Commercial
Commercial		14			17			65			65
Lease financing		3			3			8			9
Total commercial		17			20			73			74
Commercial real estate
Commercial mortgages		2			2			11			12
Construction and development		6			11			12			32
Total commercial real estate		8			13			23			44
Residential mortgages		7			6			19			20
Credit card		21			18			64			58
Other retail
Retail leasing		1			1			3			2
Home equity and second mortgages		11			9			29			25
Other		18			13			52			45
Total other retail		30			23			84			72
Covered loans (a)		–			–			–			–
Total recoveries		83			80			263			268
Net Charge-Offs
Commercial
Commercial		84			68			236			147
Lease financing		3			3			13			9
Total commercial		87			71			249			156
Commercial real estate
Commercial mortgages		5			–			(1	)		3
Construction and development		(4	)		(11	)		(3	)		(31	)
Total commercial real estate		1			(11	)		(4	)		(28	)
Residential mortgages		12			25			48			93
Credit card		161			153			495			485
Other retail
Retail leasing		1			2			4			4
Home equity and second mortgages		1			7			2			32
Other		52			45			153			125
Total other retail		54			54			159			161
Covered loans (a)		–			–			–			–
Total net charge-offs		315			292			947			867
Provision for credit losses		325			282			982			827
Other changes (b)		(1	)		(10	)		(3	)		(29	)
Balance at end of period (c)	$	4,338		$	4,306		$	4,338		$	4,306
Components
Allowance for loan losses	$	3,797		$	3,965
Liability for unfunded credit commitments		541			341
Total allowance for credit losses	$	4,338		$	4,306
Allowance for Credit Losses as a Percentage of
Period-end loans, excluding covered loans		1.61	%		1.71	%
Nonperforming loans, excluding covered loans		309			347
Nonperforming and accruing loans 90 days or more past due, excluding covered loans		225			245
Nonperforming assets, excluding covered assets		264			280
Annualized net charge-offs, excluding covered loans		343			368
Period-end loans		1.60	%		1.69	%
Nonperforming loans		310			347
Nonperforming and accruing loans 90 days or more past due		202			208
Nonperforming assets		261			275
Annualized net charge-offs		346			372

(a)

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

(b)

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

(c)

At September 30, 2016 and 2015, $1.5 billion and $1.6 billion, respectively, of the total allowance for credit losses related to incurred losses on credit card and other retail loans.


22		U.S. Bancorp

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, 2016, no significant change in the amount of residual values or concentration of the portfolios had occurred since December 31, 2015. 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, 2015, for further discussion on residual value risk management.

Operational Risk Management Operational risk is inherent in all business activities, and the management of this risk is important to the achievement of the Company’s objectives. Business lines have direct and primary responsibility and accountability for identifying, controlling, and monitoring operational risks embedded in their business activities. The Company maintains a system of controls with the objective of providing proper transaction authorization and execution, proper system operations, proper oversight of third parties with whom they do business, safeguarding of assets from misuse or theft, and ensuring the reliability and security of financial and other data. Refer to “Management’s Discussion and Analysis — Operational Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, for further discussion on operational risk management.

Compliance Risk Management The Company may suffer legal or regulatory sanctions, material financial loss, or damage to reputation through failure to comply with laws, regulations, rules, standards of good practice, and codes of conduct, including those related to compliance with Bank Secrecy Act/anti-money laundering requirements, sanctions compliance requirements as administered by the Office of Foreign Assets Control, consumer protection and other requirements. The Company has controls and processes in place for the assessment, identification, monitoring, management and reporting of compliance risks and issues. Refer to “Management’s Discussion and Analysis — Compliance Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, for further discussion on compliance risk management.

Interest Rate Risk Management In the banking industry, changes in interest rates are a significant risk that can impact earnings, market valuations and the safety and soundness of an entity. To manage the impact on net interest income and the market value of assets and liabilities, the Company manages its exposure to changes in interest rates through asset and liability management activities within guidelines established by its Asset Liability 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. Table 9 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, 2016, and December 31, 2015, 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, 2015, 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

Table 9

Sensitivity of Net Interest Income

September 30, 2016

December 31, 2015

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

1.75

2.20

1.78

2.69

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


U.S. Bancorp		23

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 1.9 percent decrease in the market value of equity at September 30, 2016, compared with a 5.8 percent decrease at December 31, 2015. A 200 bps decrease, where possible given current rates, would have resulted in a 14.0 percent decrease in the market value of equity at September 30, 2016, compared with a 7.0 percent decrease at December 31, 2015. The change in the market value of equity sensitivity to an immediate 200 bps decrease in the yield curve at September 30, 2016, as compared with December 31, 2015, was primarily due to assuming deposit rates do not decrease below zero, combined with lower rates on the long end of the yield curve. 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, 2015, for further discussion on market value of equity modeling.

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

•

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

•

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

•

To mitigate changes in value of the Company’s mortgage origination pipeline, funded MLHFS and MSRs;

•

To mitigate remeasurement volatility of foreign currency denominated balances; and

•

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

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

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

Additionally, the Company uses forward commitments to sell TBAs and other commitments to sell residential mortgage loans at specified prices to economically hedge the interest rate risk in its residential mortgage loan production activities. At September 30, 2016, the Company had $9.1 billion of forward commitments to sell, hedging $4.0 billion of MLHFS and $6.0 billion of unfunded mortgage loan commitments. The forward commitments to sell and the unfunded mortgage loan commitments on loans intended to be sold are considered derivatives under the accounting guidance related to accounting for derivative instruments and hedging activities. The Company has elected the fair value option for the MLHFS.

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

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

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


24		U.S. Bancorp

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

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


Nine Months Ended September 30, (Dollars in Millions)	2016		2015
Average	$	1	$	1
High		1		2
Low		1		1
Period-end		1		1

The Company did not experience any actual trading losses for its combined trading businesses that exceeded VaR during the nine months ended September 30, 2016 and 2015. The Company stress tests its market risk measurements to provide management with perspectives on market events that may not be captured by its VaR models, including worst case historical market movement combinations that have not necessarily occurred on the same date.

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

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


Nine Months Ended September 30, (Dollars in Millions)	2016		2015
Average	$	4	$	4
High		7		8
Low		2		2
Period-end		5		3

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

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

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


Nine Months Ended September 30, (Dollars in Millions)	2016		2015
Residential Mortgage Loans Held For Sale and Related Hedges
Average	$	–	$	1
High		2		2
Low		–		–
Mortgage Servicing Rights and Related Hedges
Average	$	8	$	6
High		11		8
Low		4		4

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


U.S. Bancorp		25

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

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

The Company regularly projects its funding needs under various stress scenarios and maintains a contingency funding plan consistent with the Company’s access to diversified sources of contingent funding. The Company maintains a substantial level of total available liquidity in the form of on-balance sheet and off-balance sheet funding sources. These include cash at the Federal Reserve Bank, unencumbered liquid assets, and capacity to borrow at the FHLB and the Federal Reserve Bank’s Discount Window. At September 30, 2016, the fair value of unencumbered available-for-sale and held-to-maturity investment securities totaled $99.7 billion, compared with $92.4 billion at December 31, 2015. 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, 2016, the Company could have borrowed an additional $85.3 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 $334.6 billion at September 30, 2016, compared with $300.4 billion at December 31, 2015. 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 $38.0 billion at September 30, 2016, and is an important funding source because of its multi-year borrowing structure. Short-term borrowings were $15.7 billion at September 30, 2016, and supplement the Company’s other funding sources. Refer to “Balance Sheet Analysis” for further information on the Company’s long-term debt and short-term borrowings.

In addition to assessing liquidity risk on a consolidated basis, the Company monitors the parent company’s liquidity. The Company maintains sufficient funding to meet expected parent company obligations, without access to the wholesale funding markets or dividends from subsidiaries, for 12 months when forecasted payments of common stock dividends are included and 24 months assuming dividends were reduced to zero. The parent company currently has available funds considerably greater than the amounts required to satisfy these conditions.

At September 30, 2016, parent company long-term debt outstanding was $14.4 billion, compared with $11.5 billion at December 31, 2015. The $2.9 billion (25.5 percent) increase was primarily due to the issuances of $2.6 billion of medium-term notes and $1.0 billion of subordinated notes, partially offset by $500 million of subordinated note maturities. As of September 30, 2016, there was $1.3 billion of parent company debt scheduled to mature in the remainder of 2016.

Effective January 1, 2015, the Company became subject to a regulatory Liquidity Coverage Ratio (“LCR”) requirement. Certain transition provisions apply until full implementation by January 1, 2017. The LCR rule requires banks to maintain an adequate level of unencumbered high quality liquid assets to meet estimated liquidity needs over a 30-day stressed period. At September 30, 2016, the Company was compliant with the fully implemented LCR requirement based on its interpretation of the final U.S. LCR rule.

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, 2015, for further discussion on liquidity risk management.

European Exposures Certain European countries have experienced slower than historical economic growth conditions over the past several years. The Company provides merchant processing and corporate trust services in Europe either directly or through banking affiliations in Europe. Operating cash for these businesses is deposited on a short-term basis typically with certain European central banks. For deposits placed at other European banks, exposure is mitigated by the Company placing deposits at multiple banks and managing the amounts on deposit at any bank based on institution-specific deposit limits. At September 30, 2016, the


26		U.S. Bancorp

Company had an aggregate amount on deposit with European banks of approximately $5.8 billion, predominately with the Central Bank of Ireland and Bank of England.

In addition, the Company provides financing to domestic multinational corporations that generate revenue from customers in European countries, transacts with various European banks as counterparties to certain derivative-related activities, and through a subsidiary manages money market funds that hold certain investments in European sovereign debt. Any further deterioration in economic conditions in Europe is unlikely to have a significant effect on the Company related to these activities. However, the effects on the Company which could result from the United Kingdom’s potential formal withdrawal from the European Union (“Brexit”) remain uncertain. Refer to “Risk Factors” in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, for further information regarding potential impacts to the Company’s businesses, results of operations, financial condition, liquidity and capital resulting from Brexit.

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

The FDIC has adopted a final rule that establishes a temporary premium surcharge applicable to the Company. The surcharge began in the third quarter of 2016 which impacts the Company’s expenses by approximately $23 million per quarter through 2018.

Capital Management The Company is committed to managing capital to maintain strong protection for depositors and creditors and for maximum shareholder benefit. The Company also manages its capital to exceed regulatory capital requirements for banking organizations. Beginning January 1, 2014, the regulatory capital requirements effective for the Company follow Basel III, subject to certain transition provisions from Basel I over the following four years to full implementation by January 1, 2018. Basel III includes two comprehensive methodologies for calculating risk-weighted assets: a general standardized approach and more risk-sensitive advanced approaches, with the Company’s capital adequacy being evaluated against the methodology that is most restrictive. Table 10 provides a summary of statutory regulatory capital ratios in effect for the Company at September 30, 2016 and December 31, 2015. All regulatory ratios exceeded regulatory “well-capitalized” requirements.

Effective January 1, 2018, the Company will be subject to a regulatory Supplementary Leverage Ratio (“SLR”) requirement for banks calculating capital adequacy using advanced approaches under Basel III. The SLR is defined as tier 1 capital divided by total leverage exposures, which includes both on- and off-balance sheet exposures. At September 30, 2016, the Company’s SLR exceeds the applicable minimum SLR requirement.

Total U.S. Bancorp shareholders’ equity was $47.8 billion at September 30, 2016, compared with $46.1 billion at December 31, 2015. The increase was primarily the result of corporate earnings and changes in unrealized gains and losses on available-for-sale investment securities included in other comprehensive income (loss), partially offset by dividends and common share repurchases.

The Company believes certain capital ratios in addition to statutory regulatory capital ratios are useful in evaluating its capital adequacy. The Company’s tangible common equity, as a percent of tangible assets and as a percent of risk-weighted assets calculated under the transitional standardized approach, was 7.5 percent and 9.3 percent, respectively, at September 30, 2016, compared with 7.6 percent and 9.2 percent, respectively, at December 31, 2015. The Company’s common equity tier 1 capital to risk-weighted assets ratio using the Basel III standardized approach as if fully implemented was 9.3 percent at September 30, 2016, compared with 9.1 percent at December 31, 2015. The Company’s common equity tier 1 capital to risk-weighted assets ratio using the Basel III advanced approaches as if fully implemented was 12.1 percent at September 30, 2016, compared with 11.9 percent at December 31, 2015. Refer to “Non-GAAP Financial Measures” for further information regarding the calculation of these ratios.


U.S. Bancorp		27

Table 10

Regulatory Capital Ratios


(Dollars in Millions)	September 30, 2016			December 31, 2015
Basel III transitional standardized approach:
Common equity tier 1 capital	$	33,827		$	32,612
Tier 1 capital		39,531			38,431
Total risk-based capital		47,452			45,313
Risk-weighted assets		356,733			341,360
Common equity tier 1 capital as a percent of risk-weighted assets		9.5	%		9.6	%
Tier 1 capital as a percent of risk-weighted assets		11.1			11.3
Total risk-based capital as a percent of risk-weighted assets		13.3			13.3
Tier 1 capital as a percent of adjusted quarterly average assets (leverage ratio)		9.2			9.5
Basel III transitional advanced approaches:
Common equity tier 1 capital	$	33,827		$	32,612
Tier 1 capital		39,531			38,431
Total risk-based capital		44,368			42,262
Risk-weighted assets		272,832			261,668
Common equity tier 1 capital as a percent of risk-weighted assets		12.4	%		12.5	%
Tier 1 capital as a percent of risk-weighted assets		14.5			14.7
Total risk-based capital as a percent of risk-weighted assets		16.3			16.2

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

The following table provides a detailed analysis of all shares purchased by the Company or any affiliated purchaser during the third quarter of 2016:


Period (Dollars in Millions, Except Per Share Data)	Total Number of Shares Purchased			Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program (a)		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program
July		7,900,309	(b)	$	42.01		7,800,309	$	2,272
August		4,564,954			42.98		4,564,954		2,076
September		3,080,931	(c)		43.22		3,030,931		1,945
Total		15,546,194	(d)	$	42.53		15,396,194	$	1,945

(a)

All shares were purchased under the stock repurchase program announced on June 29, 2016.

(b)

Includes 100,000 shares of common stock purchased, at an average price per share of $40.94, in open-market transactions by U.S. Bank National Association, the Company’s banking subsidiary, in its capacity as trustee of the Company’s Employee Retirement Savings Plan.

(c)

Includes 50,000 shares of common stock purchased, at an average price per share of $43.20, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the Company’s Employee Retirement Savings Plan.

(d)

Includes 150,000 shares of common stock purchased, at an average price per share of $41.69, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the Company’s Employee Retirement Savings Plan.

On September 19, 2016, the Company announced its Board of Directors had approved a 9.8 percent increase in the Company’s dividend rate per common share from $0.255 per quarter to $0.28 per quarter.

Refer to “Management’s Discussion and Analysis —Capital Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, for further discussion on capital management.

LINE OF BUSINESS FINANCIAL REVIEW

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

Basis for Financial Presentation Business line results are derived from the Company’s business unit profitability reporting systems by specifically attributing managed balance sheet assets, deposits and other liabilities and their related income or expense. The allowance for credit losses and related provision expense are allocated to the lines of business based on the related loan balances managed. Refer to “Management’s Discussion and Analysis — Line of Business Financial Review” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, for further discussion on the business lines’ basis for financial presentation.

Designations, assignments and allocations change from time to time as management systems are enhanced, methods of evaluating performance or product lines change or business segments are realigned to better respond to the Company’s diverse customer base. During 2016, certain organization and methodology changes were made and, accordingly, 2015 results were restated and presented on a comparable basis.

Wholesale Banking and Commercial Real Estate Wholesale Banking and Commercial Real Estate offers lending, equipment finance and small-ticket leasing, depository services, treasury management, capital markets services, international trade services and other financial services to middle market, large corporate, commercial real estate, financial institution, non-profit and public sector clients. Wholesale Banking and Commercial Real Estate contributed $230 million of the


28		U.S. Bancorp

Company’s net income in the third quarter and $587 million in the first nine months of 2016, or an increase of $25 million (12.2 percent) and a decrease of $78 million (11.7 percent), respectively, compared with the same periods of 2015. The increase in the third quarter of 2016 over the same period of the prior year was primarily due to an increase in net revenue, partially offset by an increase in noninterest expense. The decrease in the first nine months of 2016 from the same period of the prior year was primarily due to increases in the provision for credit losses and noninterest expense, partially offset by an increase in net revenue.

Net revenue increased $51 million (7.0 percent) in the third quarter and $149 million (6.9 percent) in the first nine months of 2016, compared with the same periods of 2015. Net interest income, on a taxable-equivalent basis, increased $56 million (11.0 percent) in the third quarter and $143 million (9.6 percent) in the first nine months of 2016, compared with the same periods of 2015. The increases were primarily due to higher average loan and deposit balances, partially offset by lower rates on loans. Noninterest income decreased $5 million (2.2 percent) in the third quarter of 2016, compared with the third quarter of 2015, reflecting a large syndication transaction in the prior year and higher loan-related charges, partially offset by higher foreign currency customer activity and capital markets volume. Noninterest income increased $6 million (0.9 percent) in the first nine months of 2016, compared with the same period of 2015, driven by higher capital markets volume and foreign currency customer activity, partially offset by higher loan-related charges.

Noninterest expense increased $19 million (5.8 percent) in the third quarter and $61 million (6.2 percent) in the first nine months of 2016, compared with the same periods of 2015, primarily due to increases in variable costs allocated to manage the business, including the impact of the FDIC surcharge. The provision for credit losses decreased $7 million (8.8 percent) in the third quarter of 2016, compared with the third quarter of 2015, primarily due to a favorable change in the reserve allocation, partially offset by an increase in net charge-offs. The provision for credit losses increased $212 million in the first nine months of 2016, compared with the same period of 2015, primarily due to an increase in commercial loan net charge-offs and lower commercial real estate recoveries, along with an unfavorable change in the reserve allocation driven by loan growth and an increase in energy portfolio credit reserves.

Consumer and Small Business Banking Consumer and Small Business Banking delivers products and services through banking offices, telephone servicing and sales, on-line services, direct mail, ATM processing and mobile devices, such as mobile phones and tablet computers. It encompasses community banking, metropolitan banking and indirect lending, as well as mortgage banking. Consumer and Small Business Banking contributed $373 million of the Company’s net income in the third quarter and $1.1 billion in the first nine months of 2016, or increases of $61 million (19.6 percent) and $100 million (10.3 percent), respectively, compared with the same periods of 2015. The increase in the third quarter of 2016 over the same period of the prior year was primarily due to higher net revenue, partially offset by higher noninterest expense and an increase in the provision for credit losses. The increase in the first nine months of 2016 over the same period of the prior year was primarily due to higher net revenue and a decrease in the provision for credit losses, partially offset by higher noninterest expense.

Net revenue increased $136 million (7.6 percent) in the third quarter and $145 million (2.7 percent) in the first nine months of 2016, compared with the same periods of 2015. Net interest income, on a taxable-equivalent basis, increased $53 million (4.6 percent) in the third quarter and $122 million (3.6 percent) in the first nine months of 2016, compared with the same periods of 2015. The increases were primarily due to higher average loan and deposit balances, partially offset by lower loan rates. Noninterest income increased $83 million (13.2 percent) in the third quarter and $23 million (1.2 percent) in the first nine months of 2016, compared with the same periods of 2015, driven by higher mortgage banking revenue, reflecting the impact of higher origination and sales revenue in part due to refinancing activities in the marketplace.

Noninterest expense increased $26 million (2.1 percent) in the third quarter and $82 million (2.2 percent) in the first nine months of 2016, compared with the same periods of 2015, primarily due to higher net shared services expense and higher compensation expense, reflecting the impact of merit increases and increased staffing, partially offset by the impact of a prior year legal matter. In addition, the increase in the first nine months of 2016 included higher professional services expense, principally due to compliance-related matters. The provision for credit losses increased $14 million (45.2 percent) in the third quarter of 2016, compared with the third quarter of 2015, primarily due to an unfavorable change in the reserve allocation, partially offset by lower net charge-offs. The provision for credit losses decreased $96 million (81.4 percent) in the first nine months of 2016, compared with the same period of 2015, primarily due to a favorable change in the reserve allocation driven by improvements in the mortgage portfolio and lower net charge-offs.


U.S. Bancorp		29

Table 11

Line of Business Financial Performance


	Wholesale Banking and Commercial Real Estate							Consumer and Small Business Banking
Three Months Ended September 30, (Dollars in Millions)	2016		2015		Percent Change			2016		2015		Percent Change
Condensed Income Statement
Net interest income (taxable-equivalent basis)	$	563	$	507		11.0	%	$	1,203	$	1,150		4.6	%
Noninterest income		220		225		(2.2	)		712		629		13.2
Securities gains (losses), net		–		–		–			–		–		–
Total net revenue		783		732		7.0			1,915		1,779		7.6
Noninterest expense		348		329		5.8			1,275		1,247		2.2
Other intangibles		1		1		–			8		10		(20.0	)
Total noninterest expense		349		330		5.8			1,283		1,257		2.1
Income before provision and income taxes		434		402		8.0			632		522		21.1
Provision for credit losses		73		80		(8.8	)		45		31		45.2
Income before income taxes		361		322		12.1			587		491		19.6
Income taxes and taxable-equivalent adjustment		131		117		12.0			214		179		19.6
Net income		230		205		12.2			373		312		19.6
Net (income) loss attributable to noncontrolling interests		–		–		–			–		–		–
Net income attributable to U.S. Bancorp	$	230	$	205		12.2		$	373	$	312		19.6
Average Balance Sheet
Commercial	$	70,813	$	64,984		9.0	%	$	10,546	$	10,004		5.4	%
Commercial real estate		21,476		20,587		4.3			18,300		17,857		2.5
Residential mortgages		8		8		–			53,933		49,924		8.0
Credit card		–		–		–			–		–		–
Other retail		2		2		–			50,785		46,717		8.7
Total loans, excluding covered loans		92,299		85,581		7.8			133,564		124,502		7.3
Covered loans		–		–		–			4,107		4,839		(15.1	)
Total loans		92,299		85,581		7.8			137,671		129,341		6.4
Goodwill		1,647		1,647		–			3,681		3,681		–
Other intangible assets		16		20		(20.0	)		2,270		2,661		(14.7	)
Assets		100,871		93,681		7.7			153,496		147,273		4.2
Noninterest-bearing deposits		36,624		36,929		(.8	)		28,380		26,514		7.0
Interest checking		9,628		7,528		27.9			43,827		40,005		9.6
Savings products		44,288		28,855		53.5			57,777		54,161		6.7
Time deposits		13,490		13,827		(2.4	)		14,280		15,439		(7.5	)
Total deposits		104,030		87,139		19.4			144,264		136,119		6.0
Total U.S. Bancorp shareholders’ equity		8,997		8,497		5.9			11,312		10,629		6.4


	Wholesale Banking and Commercial Real Estate							Consumer and Small Business Banking
Nine Months Ended September 30, (Dollars in Millions)	2016		2015		Percent Change			2016		2015		Percent Change
Condensed Income Statement
Net interest income (taxable-equivalent basis)	$	1,638	$	1,495		9.6	%	$	3,532	$	3,410		3.6	%
Noninterest income		676		670		.9			1,900		1,877		1.2
Securities gains (losses), net		–		–		–			–		–		–
Total net revenue		2,314		2,165		6.9			5,432		5,287		2.7
Noninterest expense		1,047		986		6.2			3,704		3,616		2.4
Other intangibles		3		3		–			24		30		(20.0	)
Total noninterest expense		1,050		989		6.2			3,728		3,646		2.2
Income before provision and income taxes		1,264		1,176		7.5			1,704		1,641		3.8
Provision for credit losses		342		130		*			22		118		(81.4	)
Income before income taxes		922		1,046		(11.9	)		1,682		1,523		10.4
Income taxes and taxable-equivalent adjustment		335		381		(12.1	)		613		554		10.6
Net income		587		665		(11.7	)		1,069		969		10.3
Net (income) loss attributable to noncontrolling interests		–		–		–			–		–		–
Net income attributable to U.S. Bancorp	$	587	$	665		(11.7	)	$	1,069	$	969		10.3
Average Balance Sheet
Commercial	$	70,412	$	63,828		10.3	%	$	10,367	$	9,839		5.4	%
Commercial real estate		21,099		20,519		2.8			18,143		17,902		1.3
Residential mortgages		7		8		(12.5	)		53,127		49,678		6.9
Credit card		–		–		–			–		–		–
Other retail		2		3		(33.3	)		49,738		46,301		7.4
Total loans, excluding covered loans		91,520		84,358		8.5			131,375		123,720		6.2
Covered loans		–		–		–			4,289		5,006		(14.3	)
Total loans		91,520		84,358		8.5			135,664		128,726		5.4
Goodwill		1,647		1,647		–			3,681		3,681		–
Other intangible assets		17		21		(19.0	)		2,393		2,573		(7.0	)
Assets		99,937		92,805		7.7			150,704		146,200		3.1
Noninterest-bearing deposits		36,498		35,742		2.1			27,111		25,539		6.2
Interest checking		8,202		7,563		8.4			43,175		39,672		8.8
Savings products		40,028		27,194		47.2			57,057		53,381		6.9
Time deposits		13,000		15,467		(16.0	)		14,392		16,130		(10.8	)
Total deposits		97,728		85,966		13.7			141,735		134,722		5.2
Total U.S. Bancorp shareholders’ equity		8,927		8,261		8.1			11,138		10,944		1.8

*	Not meaningful


30		U.S. Bancorp


Wealth Management and Securities Services								Payment Services									Treasury and Corporate Support									Consolidated Company
2016			2015		Percent Change			2016			2015			Percent Change			2016			2015			Percent Change			2016			2015			Percent Change

$	135		$	90		50.0	%	$	538		$	484			11.2	%	$	504		$	590			(14.6	)%	$	2,943		$	2,821			4.3	%
	403			368		9.5			912			874			4.3			188			231			(18.6	)		2,435			2,327			4.6
	–			–		–			–			–			–			10			(1	)		*			10			(1	)		*
	538			458		17.5			1,450			1,358			6.8			702			820			(14.4	)		5,388			5,147			4.7
	383			355		7.9			679			635			6.9			201			167			20.4			2,886			2,733			5.6
	6			7		(14.3	)		30			24			25.0			–			–			–			45			42			7.1
	389			362		7.5			709			659			7.6			201			167			20.4			2,931			2,775			5.6
	149			96		55.2			741			699			6.0			501			653			(23.3	)		2,457			2,372			3.6
	(1	)		1		*			208			180			15.6			–			(10	)		*			325			282			15.2
	150			95		57.9			533			519			2.7			501			663			(24.4	)		2,132			2,090			2.0
	55			35		57.1			194			189			2.6			22			67			(67.2	)		616			587			4.9
	95			60		58.3			339			330			2.7			479			596			(19.6	)		1,516			1,503			.9
	–			–		–			(8	)		(8	)		–			(6	)		(6	)		–			(14	)		(14	)		–
$	95		$	60		58.3		$	331		$	322			2.8		$	473		$	590			(19.8	)	$	1,502		$	1,489			.9

$	2,892		$	2,212		30.7	%	$	7,766		$	7,239			7.3	%	$	352		$	265			32.8	%	$	92,369		$	84,704			9.0	%
	513			570		(10.0	)		–			–			–			3,085			3,302			(6.6	)		43,374			42,316			2.5
	2,343			1,887		24.2			–			–			–			–			12			*			56,284			51,831			8.6
	–			–		–			20,628			17,944			15.0			–			–			–			20,628			17,944			15.0
	1,549			1,544		.3			515			586			(12.1	)		–			–			–			52,851			48,849			8.2
	7,297			6,213		17.4			28,909			25,769			12.2			3,437			3,579			(4.0	)		265,506			245,644			8.1
	–			1		*			–			–			–			24			52			(53.8	)		4,131			4,892			(15.6	)
	7,297			6,214		17.4			28,909			25,769			12.2			3,461			3,631			(4.7	)		269,637			250,536			7.6
	1,567			1,567		–			2,463			2,476			(.5	)		–			–			–			9,358			9,371			(.1	)
	99			123		(19.5	)		494			381			29.7			–			–			–			2,879			3,185			(9.6	)
	10,382			9,117		13.9			34,733			31,585			10.0			138,381			128,783			7.5			437,863			410,439			6.7
	13,825			14,922		(7.4	)		954			851			12.1			2,238			1,724			29.8			82,021			80,940			1.3
	9,967			8,703		14.5			–			618			*			34			34			–			63,456			56,888			11.5
	37,961			34,227		10.9			98			92			6.5			492			483			1.9			140,616			117,818			19.4
	3,777			3,775		.1			–			–			–			908			1,005			(9.7	)		32,455			34,046			(4.7	)
	65,530			61,627		6.3			1,052			1,561			(32.6	)		3,672			3,246			13.1			318,548			289,692			10.0
	2,378			2,308		3.0			6,386			5,829			9.6			18,718			17,604			6.3			47,791			44,867			6.5

Wealth Management and Securities Services								Payment Services									Treasury and Corporate Support									Consolidated Company
2016			2015		Percent Change			2016			2015			Percent Change			2016			2015			Percent Change			2016			2015			Percent Change

$	374		$	252		48.4	%	$	1,578		$	1,410			11.9	%	$	1,605		$	1,776			(9.6	)%	$	8,727		$	8,343			4.6	%
	1,183			1,100		7.5			2,651			2,501			6.0			720			605			19.0			7,130			6,753			5.6
	–			–		–			–			–			–			16			(1	)		*			16			(1	)		*
	1,557			1,352		15.2			4,229			3,911			8.1			2,341			2,380			(1.6	)		15,873			15,095			5.2
	1,110			1,056		5.1			1,991			1,892			5.2			686			444			54.5			8,538			7,994			6.8
	18			21		(14.3	)		89			74			20.3			–			–			–			134			128			4.7
	1,128			1,077		4.7			2,080			1,966			5.8			686			444			54.5			8,672			8,122			6.8
	429			275		56.0			2,149			1,945			10.5			1,655			1,936			(14.5	)		7,201			6,973			3.3
	(2	)		–		*			615			585			5.1			5			(6	)		*			982			827			18.7
	431			275		56.7			1,534			1,360			12.8			1,650			1,942			(15.0	)		6,219			6,146			1.2
	157			100		57.0			558			495			12.7			103			172			(40.1	)		1,766			1,702			3.8
	274			175		56.6			976			865			12.8			1,547			1,770			(12.6	)		4,453			4,444			.2
	–			–		–			(25	)		(24	)		(4.2	)		(18	)		(17	)		(5.9	)		(43	)		(41	)		(4.9	)
$	274		$	175		56.6		$	951		$	841			13.1		$	1,529		$	1,753			(12.8	)	$	4,410		$	4,403			.2

$	2,874		$	2,254		27.5	%	$	7,438		$	6,975			6.6	%	$	360		$	271			32.8	%	$	91,451		$	83,167			10.0	%
	521			569		(8.4	)		–			–			–			3,159			3,486			(9.4	)		42,922			42,476			1.1
	2,200			1,760		25.0			–			–			–			–			12			*			55,334			51,458			7.5
	–			–		–			20,339			17,794			14.3			–			–			–			20,339			17,794			14.3
	1,537			1,502		2.3			532			605			(12.1	)		–			–			–			51,809			48,411			7.0
	7,132			6,085		17.2			28,309			25,374			11.6			3,519			3,769			(6.6	)		261,855			243,306			7.6
	–			1		*			–			–			–			35			45			(22.2	)		4,324			5,052			(14.4	)
	7,132			6,086		17.2			28,309			25,374			11.6			3,554			3,814			(6.8	)		266,179			248,358			7.2
	1,566			1,567		(.1	)		2,467			2,477			(.4	)		–			–			–			9,361			9,372			(.1	)
	104			130		(20.0	)		503			403			24.8			–			–			–			3,017			3,127			(3.5	)
	10,249			9,143		12.1			34,245			31,364			9.2			134,286			127,245			5.5			429,421			406,757			5.6
	13,270			13,776		(3.7	)		947			875			8.2			2,102			1,691			24.3			79,928			77,623			3.0
	9,328			7,721		20.8			–			602			*			41			34			20.6			60,746			55,592			9.3
	35,515			33,785		5.1			97			90			7.8			494			481			2.7			133,191			114,931			15.9
	3,743			3,426		9.3			–			–			–			2,312			1,504			53.7			33,447			36,527			(8.4	)
	61,856			58,708		5.4			1,044			1,567			(33.4	)		4,949			3,710			33.4			307,312			284,673			8.0
	2,379			2,306		3.2			6,362			5,809			9.5			18,434			17,169			7.4			47,240			44,489			6.2


U.S. Bancorp		31

Wealth Management and Securities Services Wealth Management and Securities Services provides private banking, financial advisory services, investment management, retail brokerage services, insurance, trust, custody and fund servicing through five businesses: Wealth Management, Corporate Trust Services, U.S. Bancorp Asset Management, Institutional Trust & Custody and Fund Services. Wealth Management and Securities Services contributed $95 million of the Company’s net income in the third quarter and $274 million in the first nine months of 2016, or increases of $35 million (58.3 percent) and $99 million (56.6 percent), respectively, compared with the same periods of 2015. The increases were primarily due to higher net revenue, partially offset by higher noninterest expense.

Net revenue increased $80 million (17.5 percent) in the third quarter and $205 million (15.2 percent) in the first nine months of 2016, compared with the same periods of 2015. Net interest income, on a taxable-equivalent basis, increased $45 million (50.0 percent) in the third quarter and $122 million (48.4 percent) in the first nine months of 2016, compared with the same periods of 2015. The increases were principally due to the impact of higher margin benefit from deposits. Noninterest income increased $35 million (9.5 percent) in the third quarter and $83 million (7.5 percent) in the first nine months of 2016, compared with the same periods of 2015, reflecting the impact of lower money market fee waivers, growth in assets under management and improved market conditions.

Noninterest expense increased $27 million (7.5 percent) in the third quarter and $51 million (4.7 percent) in the first nine months of 2016, compared with the same periods of 2015. The increases were primarily the result of higher compensation, reflecting the impact of merit increases and higher staffing.

Payment Services Payment Services includes consumer and business credit cards, stored-value cards, debit cards, corporate, government and purchasing card services, consumer lines of credit and merchant processing. Payment Services contributed $331 million of the Company’s net income in the third quarter and $951 million in the first nine months of 2016, or increases of $9 million (2.8 percent) and $110 million (13.1 percent), respectively, compared with the same periods of 2015. The increases were due to higher net revenue, partially offset by higher noninterest expense and provision for credit losses.

Net revenue increased $92 million (6.8 percent) in the third quarter and $318 million (8.1 percent) in the first nine months of 2016, compared with the same periods of 2015. Net interest income, on a taxable-equivalent basis, increased $54 million (11.2 percent) in the third quarter and $168 million (11.9 percent) in the first nine months of 2016, compared with the same periods of 2015, primarily due to higher average loan balances and fees. Noninterest income increased $38 million (4.3 percent) in the third quarter and $150 million (6.0 percent) in the first nine months of 2016, compared with the same periods of 2015, due to increases in credit and debit card revenue on higher transaction volumes and increases in merchant processing services as a result of increases in product fees and higher volumes. The increase in the first nine months of 2016 was further due to the sale of an equity investment.

Noninterest expense increased $50 million (7.6 percent) in the third quarter and $114 million (5.8 percent) in the first nine months of 2016, compared with the same periods of 2015, reflecting higher compensation expense and net shared services expense, along with increased technology and communications expense, which was impacted by card portfolio acquisitions. The increase in the first nine months of 2016 was partially offset by the impact of a regulatory item in the prior year. The provision for credit losses increased $28 million (15.6 percent) in the third quarter and $30 million (5.1 percent) in the first nine months of 2016, compared with the same periods of 2015, primarily due to an unfavorable change in the reserve allocation and higher net charge-offs.

Treasury and Corporate Support Treasury and Corporate Support includes the Company’s investment portfolios, funding, capital management, interest rate risk management, income taxes not allocated to the business lines, including most investments in tax-advantaged projects, and the residual aggregate of those expenses associated with corporate activities that are managed on a consolidated basis. Treasury and Corporate Support recorded net income of $473 million in the third quarter and $1.5 billion in the first nine months of 2016, compared with $590 million and $1.8 billion in the same periods of 2015, respectively. The $117 million (19.8 percent) decrease in the third quarter and $224 million (12.8 percent) decrease in the first nine months of 2016, compared to the same periods of the prior year, were due to decreases in net revenue and increases in noninterest expense.

Net revenue decreased $118 million (14.4 percent) in the third quarter and $39 million (1.6 percent) in the first nine months of 2016, compared with the same periods of 2015. Net interest income, on a taxable-equivalent basis, decreased $86 million (14.6 percent) in the third quarter and $171 million (9.6 percent) in the first nine months of


32		U.S. Bancorp

2016, compared with the same periods of 2015, principally due to the impact of higher margin benefits on deposits credited to the business lines and the issuance of long-term debt, partially offset by growth in the investment portfolio. Noninterest income decreased $32 million (13.9 percent) in the third quarter of 2016, compared with the third quarter of 2015, mainly due to higher equity investment income in the prior year, partially offset by the impact of the third quarter 2015 student loan market valuation adjustment. Noninterest income increased $132 million (21.9 percent) in the first nine months of 2016, compared with the same period of 2015, mainly due to the Visa Europe sale and the impact of the third quarter 2015 student loan market valuation adjustment, partially offset by lower equity investment income.

Noninterest expense increased $34 million (20.4 percent) in the third quarter and $242 million (54.5 percent) in the first nine months of 2016, compared with the same periods of 2015, principally due to higher compensation expense, reflecting the impact of merit increases and higher variable compensation along with increased staffing and higher costs related to investments in tax-advantaged projects, partially offset by lower net shared services expenses. The increase in noninterest expense in the first nine months of 2016 was further due to an increase in reserves related to legal and regulatory matters and a charitable contribution recorded in the second quarter of 2016. The provision for credit losses was $10 million higher in the third quarter and $11 million higher in the first nine months of 2016, compared with the same periods of the prior year, primarily due to an unfavorable change in the reserve allocation.

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

NON-GAAP FINANCIAL MEASURES

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

•

Tangible common equity to tangible assets,

•

Tangible common equity to risk-weighted assets,

•

Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented standardized approach, and

•

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

These capital measures are viewed by management as useful additional methods of reflecting the level of capital available to withstand unexpected market or economic conditions. Additionally, presentation of these measures allows investors, analysts and banking regulators to assess the Company’s capital position relative to other financial services companies. These measures differ from currently effective capital ratios defined by banking regulations principally in that the numerator of the currently effective ratios, which are subject to certain transitional provisions, temporarily excludes a portion of unrealized gains and losses related to available-for-sale securities and retirement plan obligations, and includes a portion of capital related to intangible assets, other than MSRs. These capital measures are not defined in generally accepted accounting principles (“GAAP”), or are not currently effective or defined in federal banking regulations. As a result, these capital measures disclosed by the Company may be considered non-GAAP financial measures.

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

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


U.S. Bancorp		33

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


(Dollars in Millions)	September 30, 2016			December 31, 2015
Total equity	$	48,399		$	46,817
Preferred stock		(5,501	)		(5,501	)
Noncontrolling interests		(640	)		(686	)
Goodwill (net of deferred tax liability) (1)		(8,239	)		(8,295	)
Intangible assets, other than mortgage servicing rights		(756	)		(838	)
Tangible common equity (a)		33,263			31,497

Tangible common equity (as calculated above)		33,263			31,497
Adjustments (2)		97			67
Common equity tier 1 capital estimated for the Basel III fully implemented standardized and advanced approaches (b)		33,360			31,564

Total assets		454,134			421,853
Goodwill (net of deferred tax liability) (1)		(8,239	)		(8,295	)
Intangible assets, other than mortgage servicing rights		(756	)		(838	)
Tangible assets (c)		445,139			412,720

Risk-weighted assets, determined in accordance with prescribed transitional standardized approach regulatory requirements (d)		356,733			341,360
Adjustments (3)		3,165			3,892
Risk-weighted assets estimated for the Basel III fully implemented standardized approach (e)		359,898			345,252
Risk-weighted assets, determined in accordance with prescribed transitional advanced approaches regulatory requirements		272,832			261,668
Adjustments (4)		3,372			4,099
Risk-weighted assets estimated for the Basel III fully implemented advanced approaches (f)		276,204			265,767
Ratios
Tangible common equity to tangible assets (a)/(c)		7.5	%		7.6	%
Tangible common equity to risk-weighted assets (a)/(d)		9.3			9.2
Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented standardized approach (b)/(e)		9.3			9.1
Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented advanced approaches (b)/(f)		12.1			11.9


	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Net interest income	$	2,893	$	2,768	$	8,573	$	8,182
Taxable-equivalent adjustment (5)		50		53		154		161
Net interest income, on a taxable-equivalent basis	$	2,943	$	2,821	$	8,727	$	8,343

(1)

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

(2)

Includes net losses on cash flow hedges included in accumulated other comprehensive income (loss) and other adjustments.

(3)

Includes higher risk-weighting for unfunded loan commitments, investment securities, residential mortgages, MSRs and other adjustments.

(4)

Primarily reflects higher risk-weighting for MSRs.

(5)

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


34		U.S. Bancorp

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company comply with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. The Company’s financial position and results of operations can be affected by these estimates and assumptions, which are integral to understanding the Company’s financial statements. Critical accounting policies are those policies management believes are the most important to the portrayal of the Company’s financial condition and results, and require management to make estimates that are difficult, subjective or complex. Most accounting policies are not considered by management to be critical accounting policies. Those policies considered to be critical accounting policies relate to the allowance for credit losses, fair value estimates, purchased loans and related indemnification assets, MSRs, goodwill and other intangibles and income taxes. Management has discussed the development and the selection of critical accounting policies with the Company’s Audit Committee. These accounting policies are discussed in detail in “Management’s Discussion and Analysis — Critical Accounting Policies” and the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

CONTROLS AND PROCEDURES

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

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


U.S. Bancorp		35

U.S. Bancorp

Consolidated Balance Sheet


(Dollars in Millions)	September 30, 2016			December 31, 2015
	(Unaudited)
Assets
Cash and due from banks	$	23,664		$	11,147
Investment securities
Held-to-maturity (fair value $43,406 and $43,493, respectively)		42,873			43,590
Available-for-sale ($840 and $1,018 pledged as collateral, respectively) (a)		67,155			61,997
Loans held for sale (including $5,572 and $3,110 of mortgage loans carried at fair value, respectively)		5,575			3,184
Loans
Commercial		93,201			88,402
Commercial real estate		43,468			42,137
Residential mortgages		56,229			53,496
Credit card		20,706			21,012
Other retail		53,664			51,206
Total loans, excluding covered loans		267,268			256,253
Covered loans		4,021			4,596
Total loans		271,289			260,849
Less allowance for loan losses		(3,797	)		(3,863	)
Net loans		267,492			256,986
Premises and equipment		2,449			2,513
Goodwill		9,357			9,361
Other intangible assets		2,887			3,350
Other assets (including $295 and $121 of trading securities at fair value pledged as collateral, respectively) (a)		32,682			29,725
Total assets	$	454,134		$	421,853
Liabilities and Shareholders’ Equity
Deposits
Noninterest-bearing	$	89,101		$	83,766
Interest-bearing (b)		245,494			216,634
Total deposits		334,595			300,400
Short-term borrowings		15,695			27,877
Long-term debt		37,978			32,078
Other liabilities		17,467			14,681
Total liabilities		405,735			375,036
Shareholders’ equity
Preferred stock		5,501			5,501
Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares; issued: 9/30/16 and 12/31/15 — 2,125,725,742 shares		21			21
Capital surplus		8,429			8,376
Retained earnings		49,231			46,377
Less cost of common stock in treasury: 9/30/16 — 420,896,586 shares; 12/31/15 — 380,534,801 shares		(14,844	)		(13,125	)
Accumulated other comprehensive income (loss)		(579	)		(1,019	)
Total U.S. Bancorp shareholders’ equity		47,759			46,131
Noncontrolling interests		640			686
Total equity		48,399			46,817
Total liabilities and equity	$	454,134		$	421,853

(a)

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

(b)

Includes time deposits greater than $250,000 balances of $2.8 billion and $2.6 billion at September 30, 2016, and December 31, 2015, respectively.

See Notes to Consolidated Financial Statements.


36		U.S. Bancorp

U.S. Bancorp

Consolidated Statement of Income


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars and Shares in Millions, Except Per Share Data) (Unaudited)	2016			2015			2016			2015
Interest Income
Loans	$	2,731		$	2,520		$	8,039		$	7,476
Loans held for sale		43			60			110			166
Investment securities		515			502			1,555			1,502
Other interest income		31			35			89			102
Total interest income		3,320			3,117			9,793			9,246
Interest Expense
Deposits		161			113			452			344
Short-term borrowings		70			66			201			189
Long-term debt		196			170			567			531
Total interest expense		427			349			1,220			1,064
Net interest income		2,893			2,768			8,573			8,182
Provision for credit losses		325			282			982			827
Net interest income after provision for credit losses		2,568			2,486			7,591			7,355
Noninterest Income
Credit and debit card revenue		299			269			861			776
Corporate payment products revenue		190			190			541			538
Merchant processing services		412			400			1,188			1,154
ATM processing services		87			81			251			239
Trust and investment management fees		362			329			1,059			985
Deposit service charges		192			185			539			520
Treasury management fees		147			143			436			422
Commercial products revenue		219			231			654			645
Mortgage banking revenue		314			224			739			695
Investment products fees		41			46			120			141
Securities gains (losses), net
Realized gains (losses), net		12			–			19			–
Total other-than-temporary impairment		(2	)		(1	)		(4	)		(1	)
Portion of other-than-temporary impairment recognized in other comprehensive income		–			–			1			–
Total securities gains (losses), net		10			(1	)		16			(1	)
Other		172			229			742			638
Total noninterest income		2,445			2,326			7,146			6,752
Noninterest Expense
Compensation		1,329			1,225			3,855			3,600
Employee benefits		280			285			858			895
Net occupancy and equipment		250			251			741			745
Professional services		127			115			346			298
Marketing and business development		102			99			328			265
Technology and communications		243			222			717			657
Postage, printing and supplies		80			77			236			223
Other intangibles		45			42			134			128
Other		475			459			1,457			1,311
Total noninterest expense		2,931			2,775			8,672			8,122
Income before income taxes		2,082			2,037			6,065			5,985
Applicable income taxes		566			534			1,612			1,541
Net income		1,516			1,503			4,453			4,444
Net (income) loss attributable to noncontrolling interests		(14	)		(14	)		(43	)		(41	)
Net income attributable to U.S. Bancorp	$	1,502		$	1,489		$	4,410		$	4,403
Net income applicable to U.S. Bancorp common shareholders	$	1,434		$	1,422		$	4,198		$	4,204
Earnings per common share	$	.84		$	.81		$	2.44		$	2.38
Diluted earnings per common share	$	.84		$	.81		$	2.43		$	2.36
Dividends declared per common share	$	.280		$	.255		$	.790		$	.755
Average common shares outstanding		1,710			1,758			1,724			1,770
Average diluted common shares outstanding		1,716			1,766			1,730			1,778

See Notes to Consolidated Financial Statements.


U.S. Bancorp		37

U.S. Bancorp

Consolidated Statement of Comprehensive Income


(Dollars in Millions) (Unaudited)	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Millions) (Unaudited)	2016			2015			2016			2015
Net income	$	1,516		$	1,503		$	4,453		$	4,444
Other Comprehensive Income (Loss)
Changes in unrealized gains and losses on securities available-for-sale		(105	)		202			716			54
Other-than-temporary impairment not recognized in earnings on securities available-for-sale		–			–			(1	)		–
Changes in unrealized gains and losses on derivative hedges		31			(38	)		(152	)		(61	)
Foreign currency translation		6			(28	)		(30	)		(3	)
Reclassification to earnings of realized gains and losses		54			98			196			295
Income taxes related to other comprehensive income (loss)		(3	)		(90	)		(289	)		(110	)
Total other comprehensive income (loss)		(17	)		144			440			175
Comprehensive income		1,499			1,647			4,893			4,619
Comprehensive (income) loss attributable to noncontrolling interests		(14	)		(14	)		(43	)		(41	)
Comprehensive income attributable to U.S. Bancorp	$	1,485		$	1,633		$	4,850		$	4,578

See Notes to Consolidated Financial Statements.


38		U.S. Bancorp

U.S. Bancorp

Consolidated Statement of Shareholders’ Equity


	U.S. Bancorp Shareholders
(Dollars and Shares in Millions) (Unaudited)	Common Shares Outstanding			Preferred Stock		Common Stock		Capital Surplus			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total U.S. Bancorp Shareholders’ Equity			Noncontrolling Interests			Total Equity
Balance December 31, 2014		1,786		$	4,756	$	21	$	8,313		$	42,530		$	(11,245	)	$	(896	)	$	43,479		$	689		$	44,168
Net income (loss)												4,403									4,403			41			4,444
Other comprehensive income (loss)																		175			175						175
Preferred stock dividends												(182	)								(182	)					(182	)
Common stock dividends												(1,338	)								(1,338	)					(1,338	)
Issuance of common and treasury stock		10							(45	)					319						274						274
Purchase of treasury stock		(42	)												(1,830	)					(1,830	)					(1,830	)
Distributions to noncontrolling interests																					–			(41	)		(41	)
Net other changes in noncontrolling interests																					–			3			3
Stock option and restricted stock grants									94												94						94
Balance September 30, 2015		1,754		$	4,756	$	21	$	8,362		$	45,413		$	(12,756	)	$	(721	)	$	45,075		$	692		$	45,767
Balance December 31, 2015		1,745		$	5,501	$	21	$	8,376		$	46,377		$	(13,125	)	$	(1,019	)	$	46,131		$	686		$	46,817
Net income (loss)												4,410									4,410			43			4,453
Other comprehensive income (loss)																		440			440						440
Preferred stock dividends												(201	)								(201	)					(201	)
Common stock dividends												(1,364	)								(1,364	)					(1,364	)
Issuance of common and treasury stock		7							(59	)					228						169						169
Purchase of treasury stock		(47	)												(1,947	)					(1,947	)					(1,947	)
Distributions to noncontrolling interests																					–			(38	)		(38	)
Purchase of noncontrolling interests									1			9									10			(50	)		(40	)
Net other changes in noncontrolling interests																					–			(1	)		(1	)
Stock option and restricted stock grants									111												111						111
Balance September 30, 2016		1,705		$	5,501	$	21	$	8,429		$	49,231		$	(14,844	)	$	(579	)	$	47,759		$	640		$	48,399

See Notes to Consolidated Financial Statements.


U.S. Bancorp		39

U.S. Bancorp

Consolidated Statement of Cash Flows


(Dollars in Millions) (Unaudited)	Nine Months Ended September 30,
(Dollars in Millions) (Unaudited)	2016			2015
Operating Activities
Net income attributable to U.S. Bancorp	$	4,410		$	4,403
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses		982			827
Depreciation and amortization of premises and equipment		219			230
Amortization of intangibles		134			128
(Gain) loss on sale of loans held for sale		(753	)		(753	)
(Gain) loss on sale of securities and other assets		(463	)		(319	)
Loans originated for sale in the secondary market, net of repayments		(31,975	)		(33,784	)
Proceeds from sales of loans held for sale		30,033			34,343
Other, net		651			1,176
Net cash provided by operating activities		3,238			6,251
Investing Activities
Proceeds from sales of available-for-sale investment securities		8,171			282
Proceeds from maturities of held-to-maturity investment securities		7,116			8,238
Proceeds from maturities of available-for-sale investment securities		10,252			10,354
Purchases of held-to-maturity investment securities		(6,428	)		(7,990	)
Purchases of available-for-sale investment securities		(22,897	)		(14,931	)
Net increase in loans outstanding		(11,063	)		(7,242	)
Proceeds from sales of loans		1,782			1,372
Purchases of loans		(2,136	)		(2,196	)
Other, net		(38	)		(998	)
Net cash used in investing activities		(15,241	)		(13,111	)
Financing Activities
Net increase in deposits		34,197			12,531
Net decrease in short-term borrowings		(12,182	)		(2,978	)
Proceeds from issuance of long-term debt		10,631			4,915
Principal payments or redemption of long-term debt		(4,806	)		(4,782	)
Proceeds from issuance of common stock		159			262
Repurchase of common stock		(1,902	)		(1,781	)
Cash dividends paid on preferred stock		(206	)		(182	)
Cash dividends paid on common stock		(1,331	)		(1,329	)
Purchase of noncontrolling interests		(40	)		–
Net cash provided by financing activities		24,520			6,656
Change in cash and due from banks		12,517			(204	)
Cash and due from banks at beginning of period		11,147			10,654
Cash and due from banks at end of period	$	23,664		$	10,450

See Notes to Consolidated Financial Statements.


40		U.S. Bancorp

Notes to Consolidated Financial Statements

(Unaudited)

Note 1

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States. In the opinion of management of U.S. Bancorp (the “Company”), all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of results for the interim periods have been made. These financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Certain amounts in prior periods have been reclassified to conform to the current presentation.

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

Note 2

Accounting Changes

Revenue Recognition In May 2014, the Financial Accounting Standards Board (“FASB”) issued accounting guidance, originally effective for the Company on January 1, 2017, related to revenue recognition from contracts with customers. In August 2015, the FASB delayed the effective date of this guidance by one year, resulting in it becoming effective for the Company on January 1, 2018.

This guidance amends certain currently existing revenue recognition accounting guidance and allows for either retrospective application to all periods presented or a modified retrospective approach where the guidance would only be applied to existing contracts in effect at the adoption date and new contracts going forward. The Company is currently evaluating the impact of this guidance under the modified retrospective approach and expects the adoption will not be material to its financial statements.

Accounting for Leases In February 2016, the FASB issued accounting guidance, effective for the Company on January 1, 2019, related to the accounting for leases. This guidance will require lessees to recognize all leases on the Consolidated Balance Sheet as lease assets and lease liabilities, with lessor accounting being largely unchanged. This guidance also requires additional disclosures regarding leasing arrangements. The Company expects the adoption of this guidance will not be material to its financial statements.

Financial Instruments — Credit Losses In June 2016, the FASB issued accounting guidance, effective for the Company on January 1, 2020, related to the impairment of financial instruments. This guidance changes existing impairment recognition to a model that is based on expected losses rather than incurred losses, which is intended to result in more timely recognition of credit losses. This guidance is also intended to reduce the complexity of current accounting guidance by decreasing the number of credit impairment models that entities use to account for debt instruments. The Company is currently evaluating the impact of this guidance on its financial statements.


U.S. Bancorp		41

Note 3

Investment Securities

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


	September 30, 2016												December 31, 2015
					Unrealized Losses												Unrealized Losses
(Dollars in Millions)	Amortized Cost		Unrealized Gains		Other-than- Temporary (e)			Other (f)			Fair Value		Amortized Cost		Unrealized Gains		Other-than- Temporary (e)			Other (f)			Fair Value
Held-to-maturity (a)
U.S. Treasury and agencies	$	4,767	$	96	$	–		$	(1	)	$	4,862	$	2,925	$	14	$	–		$	(20	)	$	2,919
Mortgage-backed securities
Residential
Agency		38,062		453		–			(23	)		38,492		40,619		175		–			(273	)		40,521
Non-agency non-prime (d)		1		–		–			–			1		1		–		–			–			1
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		–		5		–			–			5		–		6		–			–			6
Other		8		3		–			–			11		10		3		–			–			13
Obligations of state and political subdivisions		8		1		–			(1	)		8		8		1		–			(1	)		8
Obligations of foreign governments		9		–		–			–			9		9		–		–			–			9
Other debt securities		18		–		–			–			18		18		–		–			(2	)		16
Total held-to-maturity	$	42,873	$	558	$	–		$	(25	)	$	43,406	$	43,590	$	199	$	–		$	(296	)	$	43,493
Available-for-sale (b)
U.S. Treasury and agencies	$	14,454	$	179	$	–		$	(3	)	$	14,630	$	4,611	$	12	$	–		$	(27	)	$	4,596
Mortgage-backed securities
Residential
Agency		44,904		582		–			(53	)		45,433		50,056		384		–			(364	)		50,076
Non-agency
Prime (c)		257		6		(3	)		(1	)		259		316		6		(3	)		(1	)		318
Non-prime (d)		191		18		(3	)		–			206		221		20		(1	)		–			240
Commercial agency		16		–		–			–			16		52		–		–			–			52
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		11		2		–			–			13		16		3		–			–			19
Other		516		8		–			–			524		532		9		–			–			541
Obligations of state and political subdivisions		5,232		152		–			(8	)		5,376		5,149		169		–			(2	)		5,316
Corporate debt securities		628		10		–			(59	)		579		677		3		–			(70	)		610
Perpetual preferred securities		36		17		–			–			53		153		20		–			(12	)		161
Other investments		31		35		–			–			66		34		34		–			–			68
Total available-for-sale	$	66,276	$	1,009	$	(6	)	$	(124	)	$	67,155	$	61,817	$	660	$	(4	)	$	(476	)	$	61,997

(a)

Held-to-maturity investment securities are carried at historical cost or at fair value at the time of transfer from the available-for-sale to held-to-maturity category, adjusted for amortization of premiums and accretion of discounts and credit-related other-than-temporary impairment.

(b)

Available-for-sale investment securities are carried at fair value with unrealized net gains or losses reported within accumulated other comprehensive income (loss) in shareholders’ equity.

(c)

Prime securities are those designated as such by the issuer at origination. When an issuer designation is unavailable, the Company determines at acquisition date the categorization based on asset pool characteristics (such as weighted-average credit score, loan-to-value, loan type, prevalence of low documentation loans) and deal performance (such as pool delinquencies and security market spreads). When the Company determines the designation, prime securities typically have a weighted-average credit score of 725 or higher and a loan-to-value of 80 percent or lower; however, other pool characteristics may result in designations that deviate from these credit score and loan-to-value thresholds.

(d)

Includes all securities not meeting the conditions to be designated as prime.

(e)

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

(f)

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

The weighted-average maturity of the available-for-sale investment securities was 4.2 years at September 30, 2016, compared with 4.7 years at December 31, 2015. The corresponding weighted-average yields were 2.09 percent and 2.21 percent, respectively. The weighted-average maturity of the held-to-maturity investment securities was 3.8 years at September 30, 2016, and 4.2 years at December 31, 2015. The corresponding weighted-average yields were 1.90 percent and 1.92 percent, respectively.

For amortized cost, fair value and yield by maturity date of held-to-maturity and available-for-sale investment securities outstanding at September 30, 2016, refer to Table 4 included in Management’s Discussion and Analysis, which is incorporated by reference into these Notes to Consolidated Financial Statements.

Investment securities with a fair value of $11.4 billion at September 30, 2016, and $13.1 billion at December 31, 2015, were pledged to secure public, private and trust deposits, repurchase agreements and for other purposes required by contractual obligation or law. Included in these amounts were securities where the Company and certain counterparties have agreements granting the counterparties the right to sell or pledge the securities. Investment securities securing these types of arrangements had a fair value of $840 million at September 30, 2016, and $1.0 billion at December 31, 2015.


42		U.S. Bancorp

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in Millions)	2016		2015		2016		2015
Taxable	$	467	$	448	$	1,403	$	1,333
Non-taxable		48		54		152		169
Total interest income from investment securities	$	515	$	502	$	1,555	$	1,502

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in Millions)	2016		2015		2016			2015
Realized gains	$	12	$	–	$	31		$	1
Realized losses		–		–		(12	)		(1	)
Net realized gains (losses)	$	12	$	–	$	19		$	–
Income tax (benefit) on net realized gains (losses)	$	4	$	–	$	7		$	–

The Company conducts a regular assessment of its investment securities with unrealized losses to determine whether investment securities are other-than-temporarily impaired considering, among other factors, the nature of the investment securities, the credit ratings or financial condition of the issuer, the extent and duration of the unrealized loss, expected cash flows of underlying collateral, the existence of any government or agency guarantees, market conditions and whether the Company intends to sell or it is more likely than not the Company will be required to sell the investment securities. The Company determines other-than-temporary impairment recorded in earnings for debt securities not intended to be sold by estimating the future cash flows of each individual investment security, using market information where available, and discounting the cash flows at the original effective rate of the investment security. Other-than-temporary impairment recorded in other comprehensive income (loss) is measured as the difference between that discounted amount and the fair value of each investment security. The total amount of other-than-temporary impairment recorded was immaterial for the three and nine months ended September 30, 2016 and 2015.

Changes in the credit losses on debt securities are summarized as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Millions)	2016			2015			2016			2015
Balance at beginning of period	$	79		$	91		$	84		$	101
Additions to Credit Losses Due to Other-than-temporary Impairments
Decreases in expected cash flows on securities for which other-than-temporary impairment was previously recognized		2			1			3			1
Total other-than-temporary impairment on debt securities		2			1			3			1
Other Changes in Credit Losses
Increases in expected cash flows		–			(1	)		(1	)		(3	)
Realized losses (a)		(2	)		(3	)		(7	)		(11	)
Balance at end of period	$	79		$	88		$	79		$	88

(a)

Primarily represents principal losses allocated to mortgage and asset-backed securities in the Company’s portfolio under the terms of the securitization transaction documents.


U.S. Bancorp		43

At September 30, 2016, certain investment securities had a fair value below amortized cost. The following table shows the gross unrealized losses and fair value of the Company’s investment securities with unrealized losses, aggregated by investment category and length of time the individual investment securities have been in continuous unrealized loss positions, at September 30, 2016:


	Less Than 12 Months					12 Months or Greater					Total
(Dollars in Millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Held-to-maturity
U.S. Treasury and agencies	$	250	$	(1	)	$	–	$	–		$	250	$	(1	)
Residential agency mortgage-backed securities		3,728		(7	)		2,237		(16	)		5,965		(23	)
Other asset-backed securities		–		–			5		–			5		–
Obligations of state and political subdivisions		–		–			3		(1	)		3		(1	)
Other debt securities		–		–			18		–			18		–
Total held-to-maturity	$	3,978	$	(8	)	$	2,263	$	(17	)	$	6,241	$	(25	)
Available-for-sale
U.S. Treasury and agencies	$	1,611	$	(3	)	$	–	$	–		$	1,611	$	(3	)
Residential mortgage-backed securities
Agency		9,743		(35	)		2,885		(18	)		12,628		(53	)
Non-agency (a)
Prime (b)		48		–			91		(4	)		139		(4	)
Non-prime (c)		19		–			12		(3	)		31		(3	)
Commercial agency		10		–			–		–			10		–
Other asset-backed securities		–		–			2		–			2		–
Obligations of state and political subdivisions		687		(8	)		2		–			689		(8	)
Corporate debt securities		–		–			437		(59	)		437		(59	)
Total available-for-sale	$	12,118	$	(46	)	$	3,429	$	(84	)	$	15,547	$	(130	)

(a)

The Company had $7 million of unrealized losses on residential non-agency mortgage-backed securities. Credit-related other-than-temporary impairment on these securities may occur if there is further deterioration in the underlying collateral pool performance. Borrower defaults may increase if economic conditions worsen. Additionally, deterioration in home prices may increase the severity of projected losses.

(b)

(c)

Includes all securities not meeting the conditions to be designated as prime.

The Company does not consider these unrealized losses to be credit-related. These unrealized losses primarily relate to changes in interest rates and market spreads subsequent to purchase. A substantial portion of investment securities that have unrealized losses are either corporate debt issued with high investment grade credit ratings or agency mortgage-backed securities. In general, the issuers of the investment securities are contractually prohibited from prepayment at less than par, and the Company did not pay significant purchase premiums for these investment securities. At September 30, 2016, the Company had no plans to sell investment securities with unrealized losses, and believes it is more likely than not it would not be required to sell such investment securities before recovery of their amortized cost.


44		U.S. Bancorp

Note 4

Loans and Allowance for Credit Losses

The composition of the loan portfolio, disaggregated by class and underlying specific portfolio type, was as follows:


	September 30, 2016					December 31, 2015
(Dollars in Millions)	Amount		Percent of Total			Amount		Percent of Total
Commercial
Commercial	$	87,851		32.4	%	$	83,116		31.9	%
Lease financing		5,350		2.0			5,286		2.0
Total commercial		93,201		34.4			88,402		33.9
Commercial Real Estate
Commercial mortgages		31,916		11.8			31,773		12.2
Construction and development		11,552		4.2			10,364		3.9
Total commercial real estate		43,468		16.0			42,137		16.1
Residential Mortgages
Residential mortgages		42,846		15.8			40,425		15.5
Home equity loans, first liens		13,383		4.9			13,071		5.0
Total residential mortgages		56,229		20.7			53,496		20.5
Credit Card		20,706		7.6			21,012		8.1
Other Retail
Retail leasing		6,076		2.2			5,232		2.0
Home equity and second mortgages		16,467		6.1			16,384		6.3
Revolving credit		3,247		1.2			3,354		1.3
Installment		7,983		2.9			7,030		2.7
Automobile		17,559		6.5			16,587		6.3
Student		2,332		.9			2,619		1.0
Total other retail		53,664		19.8			51,206		19.6
Total loans, excluding covered loans		267,268		98.5			256,253		98.2
Covered Loans		4,021		1.5			4,596		1.8
Total loans	$	271,289		100.0	%	$	260,849		100.0	%

The Company had loans of $83.9 billion at September 30, 2016, and $78.1 billion at December 31, 2015, pledged at the Federal Home Loan Bank, and loans of $65.2 billion at September 30, 2016, and $63.4 billion at December 31, 2015, pledged at the Federal Reserve Bank.

Originated loans are reported at the principal amount outstanding, net of unearned interest and deferred fees and costs. Net unearned interest and deferred fees and costs amounted to $626 million at September 30, 2016, and $550 million at December 31, 2015. All purchased loans and related indemnification assets are recorded at fair value at the date of purchase. The Company evaluates purchased loans for impairment at the date of purchase in accordance with applicable authoritative accounting guidance. Purchased loans with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are considered “purchased impaired loans.” All other purchased loans are considered “purchased nonimpaired loans.”

Changes in the accretable balance for purchased impaired loans were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Millions)	2016			2015			2016			2015
Balance at beginning of period	$	891		$	1,076		$	957		$	1,309
Accretion		(102	)		(91	)		(297	)		(289	)
Disposals		(23	)		(32	)		(77	)		(102	)
Reclassifications from nonaccretable difference (a)		31			120			214			157
Other		–			1			–			(1	)
Balance at end of period	$	797		$	1,074		$	797		$	1,074

(a)

Primarily relates to changes in expected credit performance.

Allowance for Credit Losses The allowance for credit losses is established for probable and estimable losses incurred in the Company’s loan and lease portfolio, including unfunded credit commitments, and includes certain amounts that do not represent loss exposure to the Company because those losses are recoverable under loss sharing agreements with the Federal Deposit Insurance Corporation (“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.


U.S. Bancorp		45

the migration analysis applied to risk rated loan portfolios, the Company currently examines up to a 15-year period of loss experience. For each loan type, this historical loss experience is adjusted as necessary to consider any relevant changes in portfolio composition, lending policies, underwriting standards, risk management practices or economic conditions. The results of the analysis are evaluated quarterly to confirm an appropriate historical time frame is selected for each commercial loan type. The allowance recorded for impaired loans greater than $5 million in the commercial lending segment is based on an individual loan analysis utilizing expected cash flows discounted using the original effective interest rate, the observable market price of the loan, or the fair value of the collateral, less selling costs, for collateral-dependent loans, rather than the migration analysis. The allowance recorded for all other commercial lending segment loans is determined on a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, portfolio growth and historical losses, adjusted for current trends. The Company also considers the impacts of any loan modifications made to commercial lending segment loans and any subsequent payment defaults to its expectations of cash flows, principal balance, and current expectations about the borrower’s ability to pay in determining the allowance for credit losses.

The allowance recorded for Troubled Debt Restructuring (“TDR”) loans and purchased impaired loans in the consumer lending segment is determined on a homogenous pool basis utilizing expected cash flows discounted using the original effective interest rate of the pool, or the prior quarter effective rate, respectively. The allowance for collateral-dependent loans in the consumer lending segment is determined based on the fair value of the collateral less costs to sell. The allowance recorded for all other consumer lending segment loans is determined on a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, delinquency status, refreshed loan-to-value ratios when possible, portfolio growth and historical losses, adjusted for current trends. The Company also considers any modifications made to consumer lending segment loans including the impacts of any subsequent payment defaults since modification in determining the allowance for credit losses, such as the borrower’s ability to pay under the restructured terms, and the timing and amount of payments.

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

In addition, subsequent payment defaults on loan modifications considered TDRs are considered in the underlying factors used in the determination of the appropriateness of the allowance for credit losses. For each loan segment, the Company estimates future loan charge-offs through a variety of analysis, trends and underlying assumptions. With respect to the commercial lending segment, TDRs may be collectively evaluated for impairment where observed performance history, including defaults, is a primary driver of the loss allocation. For commercial TDRs individually evaluated for impairment, attributes of the borrower are the primary factors in determining the allowance for credit losses. However, historical loss experience is also incorporated into the allowance methodology applied to this category of loans. With respect to the consumer lending segment, performance of the portfolio, including defaults on TDRs, is considered when estimating future cash flows.

The Company’s methodology for determining the appropriate allowance for credit losses for each loan segment 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.

The Company also assesses the credit risk associated with off-balance sheet loan commitments, letters of credit, and derivatives. Credit risk associated with derivatives is reflected in the fair values recorded for those positions. The liability for off-balance sheet credit exposure related to loan commitments and other credit guarantees is included in other liabilities. Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments.


46		U.S. Bancorp

Activity in the allowance for credit losses by portfolio class was as follows:


Three Months Ended September 30, (Dollars in Millions)	Commercial			Commercial Real Estate			Residential Mortgages			Credit Card			Other Retail			Total Loans, Excluding Covered Loans			Covered Loans			Total Loans
2016
Balance at beginning of period	$	1,473		$	748		$	544		$	884		$	643		$	4,292		$	37		$	4,329
Add
Provision for credit losses		90			34			(12	)		178			37			327			(2	)		325
Deduct
Loans charged off		104			9			19			182			84			398			–			398
Less recoveries of loans charged off		(17	)		(8	)		(7	)		(21	)		(30	)		(83	)		–			(83	)
Net loans charged off		87			1			12			161			54			315			–			315
Other changes (a)		–			–			–			–			–			–			(1	)		(1	)
Balance at end of period	$	1,476		$	781		$	520		$	901		$	626		$	4,304		$	34		$	4,338
2015
Balance at beginning of period	$	1,180		$	735		$	737		$	873		$	752		$	4,277		$	49		$	4,326
Add
Provision for credit losses		114			(10	)		(24	)		156			46			282			–			282
Deduct
Loans charged off		91			2			31			171			77			372			–			372
Less recoveries of loans charged off		(20	)		(13	)		(6	)		(18	)		(23	)		(80	)		–			(80	)
Net loans charged off		71			(11	)		25			153			54			292			–			292
Other changes (a)		–			–			–			–			–			–			(10	)		(10	)
Balance at end of period	$	1,223		$	736		$	688		$	876		$	744		$	4,267		$	39		$	4,306

(a)


Nine Months Ended September 30, (Dollars in Millions)	Commercial			Commercial Real Estate			Residential Mortgages			Credit Card			Other Retail			Total Loans, Excluding Covered Loans			Covered Loans			Total Loans
2016
Balance at beginning of period	$	1,287		$	724		$	631		$	883		$	743		$	4,268		$	38		$	4,306
Add
Provision for credit losses		438			53			(63	)		514			42			984			(2	)		982
Deduct
Loans charged off		322			19			67			559			243			1,210			–			1,210
Less recoveries of loans charged off		(73	)		(23	)		(19	)		(64	)		(84	)		(263	)		–			(263	)
Net loans charged off		249			(4	)		48			495			159			947			–			947
Other changes (a)		–			–			–			(1	)		–			(1	)		(2	)		(3	)
Balance at end of period	$	1,476		$	781		$	520		$	901		$	626		$	4,304		$	34		$	4,338
2015
Balance at beginning of period	$	1,146		$	726		$	787		$	880		$	771		$	4,310		$	65		$	4,375
Add
Provision for credit losses		234			(18	)		(6	)		481			134			825			2			827
Deduct
Loans charged off		230			16			113			543			233			1,135			–			1,135
Less recoveries of loans charged off		(74	)		(44	)		(20	)		(58	)		(72	)		(268	)		–			(268	)
Net loans charged off		156			(28	)		93			485			161			867			–			867
Other changes (a)		(1	)		–			–			–			–			(1	)		(28	)		(29	)
Balance at end of period	$	1,223		$	736		$	688		$	876		$	744		$	4,267		$	39		$	4,306

(a)


U.S. Bancorp		47

Additional detail of the allowance for credit losses by portfolio class was as follows:


(Dollars in Millions)	Commercial		Commercial Real Estate		Residential Mortgages		Credit Card		Other Retail		Total Loans, Excluding Covered Loans		Covered Loans		Total Loans
Allowance Balance at September 30, 2016 Related to
Loans individually evaluated for impairment (a)	$	56	$	2	$	–	$	–	$	–	$	58	$	–	$	58
TDRs collectively evaluated for impairment		10		4		195		62		28		299		1		300
Other loans collectively evaluated for impairment		1,410		765		325		839		598		3,937		–		3,937
Loans acquired with deteriorated credit quality		–		10		–		–		–		10		33		43
Total allowance for credit losses	$	1,476	$	781	$	520	$	901	$	626	$	4,304	$	34	$	4,338
Allowance Balance at December 31, 2015 Related to
Loans individually evaluated for impairment (a)	$	11	$	2	$	–	$	–	$	–	$	13	$	–	$	13
TDRs collectively evaluated for impairment		10		7		236		57		33		343		2		345
Other loans collectively evaluated for impairment		1,266		703		395		826		710		3,900		–		3,900
Loans acquired with deteriorated credit quality		–		12		–		–		–		12		36		48
Total allowance for credit losses	$	1,287	$	724	$	631	$	883	$	743	$	4,268	$	38	$	4,306

(a)

Represents the allowance for credit losses related to loans greater than $5 million classified as nonperforming or TDRs.

Additional detail of loan balances by portfolio class was as follows:


(Dollars in Millions)	Commercial		Commercial Real Estate		Residential Mortgages		Credit Card		Other Retail		Total Loans, Excluding Covered Loans		Covered Loans (b)		Total Loans
September 30, 2016
Loans individually evaluated for impairment (a)	$	600	$	37	$	–	$	–	$	–	$	637	$	–	$	637
TDRs collectively evaluated for impairment		145		165		3,519		217		178		4,224		37		4,261
Other loans collectively evaluated for impairment		92,449		43,016		52,710		20,489		53,486		262,150		1,662		263,812
Loans acquired with deteriorated credit quality		7		250		–		–		–		257		2,322		2,579
Total loans	$	93,201	$	43,468	$	56,229	$	20,706	$	53,664	$	267,268	$	4,021	$	271,289
December 31, 2015
Loans individually evaluated for impairment (a)	$	336	$	41	$	13	$	–	$	–	$	390	$	–	$	390
TDRs collectively evaluated for impairment		138		235		4,241		210		211		5,035		35		5,070
Other loans collectively evaluated for impairment		87,927		41,566		49,241		20,802		50,995		250,531		2,059		252,590
Loans acquired with deteriorated credit quality		1		295		1		–		–		297		2,502		2,799
Total loans	$	88,402	$	42,137	$	53,496	$	21,012	$	51,206	$	256,253	$	4,596	$	260,849

(a)

Represents loans greater than $5 million classified as nonperforming or TDRs.

(b)

Includes expected reimbursements from the FDIC under loss sharing agreements.

Credit Quality The credit quality of the Company’s loan portfolios is assessed as a function of net credit losses, levels of nonperforming assets and delinquencies, and credit quality ratings as defined by the Company.

For all loan classes, loans are considered past due based on the number of days delinquent except for monthly amortizing loans which are classified delinquent based upon the number of contractually required payments not made (for example, two missed payments is considered 30 days delinquent). When a loan is placed on nonaccrual status, unpaid accrued interest is reversed, reducing interest income in the current period.

Commercial lending segment loans are generally placed on nonaccrual status when the collection of principal and interest has become 90 days past due or is otherwise considered doubtful. Commercial lending segment loans are generally fully or partially charged down to the fair value of the collateral securing the loan, less costs to sell, when the loan is placed on nonaccrual.

Consumer lending segment loans are generally charged-off at a specific number of days or payments past due. Residential mortgages and other retail loans secured by 1-4 family properties are generally charged down to the fair value of the collateral securing the loan, less costs to sell, at 180 days past due, and placed on nonaccrual status in instances where a partial charge-off occurs unless the loan is well secured and in the process of collection. Loans and lines in a junior lien position secured by 1-4 family properties are placed on nonaccrual status at 120 days past due or when they are behind a first lien that has become 180 days or greater past due or placed on nonaccrual status. Any secured consumer lending segment loan whose borrower has had debt discharged through bankruptcy, for which the loan amount exceeds the fair value of the collateral, is charged down to the fair value of the related collateral and the remaining balance is placed on nonaccrual status. Credit card loans continue to accrue interest until the account is charged off. Credit cards are charged off at 180 days past due. Other retail loans not secured by 1-4 family properties are charged-off at 120 days past due; and revolving consumer lines are charged off at 180 days past due. Similar to credit cards, other retail loans are generally not placed on nonaccrual status because of the relative short period of time to charge-off. Certain retail customers having financial difficulties may have the terms of their credit card and other loan agreements modified to require only principal payments and, as such, are reported as nonaccrual.


48		U.S. Bancorp

For all loan classes, interest payments received on nonaccrual loans are generally recorded as a reduction to a loan’s carrying amount while a loan is on nonaccrual and are recognized as interest income upon payoff of the loan. However, interest income may be recognized for interest payments if the remaining carrying amount of the loan is believed to be collectible. In certain circumstances, loans in any class may be restored to accrual status, such as when a loan has demonstrated sustained repayment performance or no amounts are past due and prospects for future payment are no longer in doubt; or when the loan becomes well secured and is in the process of collection. Loans where there has been a partial charge-off may be returned to accrual status if all principal and interest (including amounts previously charged-off) is expected to be collected and the loan is current.

Covered loans not considered to be purchased impaired are evaluated for delinquency, nonaccrual status and charge-off consistent with the class of loan they would be included in had the loss share coverage not been in place. Generally, purchased impaired loans are considered accruing loans. However, the timing and amount of future cash flows for some loans is not reasonably estimable, and those loans are classified as nonaccrual loans with interest income not recognized until the timing and amount of the future cash flows can be reasonably estimated.

The following table provides a summary of loans by portfolio class, including the delinquency status of those that continue to accrue interest, and those that are nonperforming:


	Accruing
(Dollars in Millions)	Current		30-89 Days Past Due		90 Days or More Past Due		Nonperforming		Total
September 30, 2016
Commercial	$	92,414	$	221	$	49	$	517	$	93,201
Commercial real estate		43,320		36		7		105		43,468
Residential mortgages (a)		55,310		146		159		614		56,229
Credit card		20,209		264		229		4		20,706
Other retail		53,183		254		74		153		53,664
Total loans, excluding covered loans		264,436		921		518		1,393		267,268
Covered loans		3,729		55		230		7		4,021
Total loans	$	268,165	$	976	$	748	$	1,400	$	271,289
December 31, 2015
Commercial	$	87,863	$	317	$	48	$	174	$	88,402
Commercial real estate		41,907		89		14		127		42,137
Residential mortgages (a)		52,438		170		176		712		53,496
Credit card		20,532		243		228		9		21,012
Other retail		50,745		224		75		162		51,206
Total loans, excluding covered loans		253,485		1,043		541		1,184		256,253
Covered loans		4,236		62		290		8		4,596
Total loans	$	257,721	$	1,105	$	831	$	1,192	$	260,849

(a)

At September 30, 2016, $307 million of loans 30–89 days past due and $2.4 billion of loans 90 days or more past due purchased from Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs, were classified as current, compared with $320 million and $2.9 billion at December 31, 2015, respectively.

At September 30, 2016, the amount of foreclosed residential real estate held by the Company, and included in other real estate owned (“OREO”), was $229 million ($201 million excluding covered assets), compared with $282 million ($250 million excluding covered assets) at December 31, 2015. This excludes $397 million and $535 million at September 30, 2016 and December 31, 2015, respectively, of foreclosed residential real estate related to mortgage loans whose payments are primarily insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. In addition, the amount of residential mortgage loans secured by residential real estate in the process of foreclosure at September 30, 2016 and December 31, 2015, was $2.2 billion and $2.6 billion, respectively, of which $1.6 billion and $1.9 billion, respectively, related to loans purchased from Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.

The Company classifies its loan portfolios using internal credit quality ratings on a quarterly basis. These ratings include: pass, special mention and classified, and are an important part of the Company’s overall credit risk management process and evaluation of the allowance for credit losses. Loans with a pass rating represent those not classified on the Company’s rating scale for problem credits, as minimal credit risk has been identified. Special mention loans are those that have a potential weakness deserving management’s close attention. Classified loans are those where a well-defined weakness has been identified that may put full collection of contractual cash flows at risk. It is possible that others, given the same information, may reach different reasonable conclusions regarding the credit quality rating classification of specific loans.


U.S. Bancorp		49

The following table provides a summary of loans by portfolio class and the Company’s internal credit quality rating:


			Criticized
(Dollars in Millions)	Pass		Special Mention		Classified (a)		Total Criticized		Total
September 30, 2016
Commercial (b)	$	89,289	$	1,702	$	2,210	$	3,912	$	93,201
Commercial real estate		42,204		512		752		1,264		43,468
Residential mortgages (c)		55,394		6		829		835		56,229
Credit card		20,474		–		232		232		20,706
Other retail		53,387		5		272		277		53,664
Total loans, excluding covered loans		260,748		2,225		4,295		6,520		267,268
Covered loans		3,946		–		75		75		4,021
Total loans	$	264,694	$	2,225	$	4,370	$	6,595	$	271,289
Total outstanding commitments	$	557,554	$	4,805	$	5,927	$	10,732	$	568,286
December 31, 2015
Commercial (b)	$	85,206	$	1,629	$	1,567	$	3,196	$	88,402
Commercial real estate		41,079		365		693		1,058		42,137
Residential mortgages (c)		52,548		2		946		948		53,496
Credit card		20,775		–		237		237		21,012
Other retail		50,899		6		301		307		51,206
Total loans, excluding covered loans		250,507		2,002		3,744		5,746		256,253
Covered loans		4,507		–		89		89		4,596
Total loans	$	255,014	$	2,002	$	3,833	$	5,835	$	260,849
Total outstanding commitments	$	539,614	$	3,945	$	4,845	$	8,790	$	548,404

(a)

Classified rating on consumer loans primarily based on delinquency status.

(b)

At September 30, 2016, $1.4 billion of energy loans ($3.2 billion of total outstanding commitments) had a special mention or classified rating, compared with $1.1 billion of energy loans ($1.9 billion of total outstanding commitments) at December 31, 2015.

(c)

At September 30, 2016, $2.4 billion of GNMA loans 90 days or more past due and $1.3 billion of restructured GNMA loans whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs were classified with a pass rating, compared with $2.9 billion and $1.9 billion at December 31, 2015, respectively.

For all loan classes, a loan is considered to be impaired when, based on current events or information, it is probable the Company will be unable to collect all amounts due per the contractual terms of the loan agreement. Impaired loans include all nonaccrual and TDR loans. For all loan classes, interest income on TDR loans is recognized under the modified terms and conditions if the borrower has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles. Interest income is generally not recognized on other impaired loans until the loan is paid off. However, interest income may be recognized for interest payments if the remaining carrying amount of the loan is believed to be collectible.

Factors used by the Company in determining whether all principal and interest payments due on commercial and commercial real estate loans will be collected and, therefore, whether those loans are impaired include, but are not limited to, the financial condition of the borrower, collateral and/or guarantees on the loan, and the borrower’s estimated future ability to pay based on industry, geographic location and certain financial ratios. The evaluation of impairment on residential mortgages, credit card loans and other retail loans is primarily driven by delinquency status of individual loans or whether a loan has been modified, and considers any government guarantee where applicable. Individual covered loans, whose future losses are covered by loss sharing agreements with the FDIC that substantially reduce the risk of credit losses to the Company, are evaluated for impairment and accounted for in a manner consistent with the class of loan they would have been included in had the loss sharing coverage not been in place.


50		U.S. Bancorp

A summary of impaired loans, which include all nonaccrual and TDR loans, by portfolio class was as follows:


(Dollars in Millions)	Period-end Recorded Investment (a)		Unpaid Principal Balance		Valuation Allowance		Commitments to Lend Additional Funds
September 30, 2016
Commercial	$	825	$	1,354	$	68	$	378
Commercial real estate		379		790		8		1
Residential mortgages		2,363		2,952		165		–
Credit card		217		217		62		–
Other retail		281		457		30		3
Total loans, excluding GNMA and covered loans		4,065		5,770		333		382
Loans purchased from GNMA mortgage pools		1,344		1,344		31		–
Covered loans		38		43		1		1
Total	$	5,447	$	7,157	$	365	$	383
December 31, 2015
Commercial	$	520	$	1,110	$	25	$	154
Commercial real estate		336		847		11		1
Residential mortgages		2,575		3,248		199		–
Credit card		210		210		57		–
Other retail		309		503		35		4
Total loans, excluding GNMA and covered loans		3,950		5,918		327		159
Loans purchased from GNMA mortgage pools		1,913		1,913		40		–
Covered loans		39		48		2		1
Total	$	5,902	$	7,879	$	369	$	160

(a)

Substantially all loans classified as impaired at September 30, 2016 and December 31, 2015, had an associated allowance for credit losses.

Additional information on impaired loans follows:


	2016				2015
(Dollars in Millions)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Three Months Ended September 30
Commercial	$	845	$	2	$	408	$	3
Commercial real estate		334		6		388		3
Residential mortgages		2,381		30		2,669		31
Credit card		214		1		216		1
Other retail		287		3		329		3
Total loans, excluding GNMA and covered loans		4,061		42		4,010		41
Loans purchased from GNMA mortgage pools		1,458		23		2,040		24
Covered loans		38		–		42		–
Total	$	5,557	$	65	$	6,092	$	65
Nine Months Ended September 30
Commercial	$	786	$	6	$	351	$	9
Commercial real estate		321		12		461		13
Residential mortgages		2,457		93		2,687		97
Credit card		212		3		224		4
Other retail		296		9		342		10
Total loans, excluding GNMA and covered loans		4,072		123		4,065		133
Loans purchased from GNMA mortgage pools		1,674		71		2,120		74
Covered loans		38		1		42		–
Total	$	5,784	$	195	$	6,227	$	207

Troubled Debt Restructurings 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. Concessionary modifications are classified as TDRs unless the modification results in only an insignificant delay in payments to be received. The Company recognizes interest on TDRs if the borrower complies with the revised terms and conditions as agreed upon with the Company and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles, which is generally six months or greater. To the extent a previous restructuring was insignificant, the Company considers the cumulative effect of past restructurings related to the receivable when determining whether a current restructuring is a TDR. Loans classified as TDRs are considered impaired loans for reporting and measurement purposes.


U.S. Bancorp		51

The following table provides a summary of loans modified as TDRs during the periods presented by portfolio class:


	2016						2015
(Dollars in Millions)	Number of Loans		Pre-Modification Outstanding Loan Balance		Post-Modification Outstanding Loan Balance		Number of Loans		Pre-Modification Outstanding Loan Balance		Post-Modification Outstanding Loan Balance
Three Months Ended September 30
Commercial		638	$	200	$	169		381	$	111	$	102
Commercial real estate		26		225		223		35		24		23
Residential mortgages		700		81		87		381		48		47
Credit card		8,051		38		40		7,289		35		36
Other retail		593		9		9		690		19		19
Total loans, excluding GNMA and covered loans		10,008		553		528		8,776		237		227
Loans purchased from GNMA mortgage pools		2,609		317		308		1,986		244		245
Covered loans		15		3		3		4		1		1
Total loans		12,632	$	873	$	839		10,766	$	482	$	473
Nine Months Ended September 30
Commercial		1,734	$	692	$	567		1,170	$	227	$	223
Commercial real estate		70		242		240		89		64		62
Residential mortgages		1,192		129		136		1,820		234		232
Credit card		22,693		109		111		19,978		100		101
Other retail		1,669		27		28		1,974		42		42
Total loans, excluding GNMA and covered loans		27,358		1,199		1,082		25,031		667		660
Loans purchased from GNMA mortgage pools		6,978		770		761		5,960		732		731
Covered loans		35		6		6		13		4		4
Total loans		34,371	$	1,975	$	1,849		31,004	$	1,403	$	1,395

Residential mortgages, home equity and second mortgages, and loans purchased from GNMA mortgage pools in the table above include trial period arrangements offered to customers during the periods presented. The post-modification balances for these loans reflect the current outstanding balance until a permanent modification is made. In addition, the post-modification balances typically include capitalization of unpaid accrued interest and/or fees under the various modification programs. For those loans modified as TDRs during the third quarter of 2016, at September 30, 2016, 526 residential mortgages, 7 home equity and second mortgage loans and 510 loans purchased from GNMA mortgage pools with outstanding balances of $50 million, less than $1 million and $68 million, respectively, were in a trial period and have estimated post-modification balances of $64 million, less than $1 million and $67 million, respectively, assuming permanent modification occurs at the end of the trial period.

The Company has implemented certain restructuring programs that may result in TDRs. However, many of the Company’s TDRs are also determined on a case-by-case basis in connection with ongoing loan collection processes.

For the commercial lending segment, modifications generally result in the Company working with borrowers on a case-by-case basis. Commercial and commercial real estate modifications generally include extensions of the maturity date and may be accompanied by an increase or decrease to the interest rate, which may not be deemed a market rate of interest. In addition, the Company may work with the borrower in identifying other changes that mitigate loss to the Company, which may include additional collateral or guarantees to support the loan. To a lesser extent, the Company may waive contractual principal. The Company classifies all of the above concessions as TDRs to the extent the Company determines that the borrower is experiencing financial difficulty.

Modifications for the consumer lending segment are generally part of programs the Company has initiated. The Company participates in the U.S. Department of Treasury Home Affordable Modification Program (“HAMP”). HAMP gives qualifying homeowners an opportunity to permanently modify residential mortgage loans and achieve more affordable monthly payments, with the U.S. Department of 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, or its own 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, extension of maturity dates or deferrals of payments, capitalization of accrued interest and/or outstanding advances, or in limited situations, partial forgiveness of loan principal. In most instances, participation in residential mortgage loan restructuring programs requires the customer to complete a short-term trial period. A permanent loan modification is contingent on the customer successfully completing the trial period arrangement and the loan documents are not modified until that time. The Company reports loans in a trial period arrangement as TDRs and continues to report them as TDRs after the trial period.


52		U.S. Bancorp

Credit card and other retail loan TDRs are generally part of distinct restructuring programs providing customers experiencing financial difficulty with modifications whereby balances may be amortized up to 60 months, and generally include waiver of fees and reduced interest rates.

In addition, the Company considers secured loans to consumer borrowers that have debt discharged through bankruptcy where the borrower has not reaffirmed the debt to be TDRs.

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 accounting and disclosure purposes if the loans evidenced credit deterioration as of the acquisition date and are accounted for in pools. Losses associated with the modification on covered loans, including the economic impact of interest rate reductions, are generally eligible for reimbursement under loss sharing agreements with the FDIC.

The following table provides a summary of TDR loans that defaulted (fully or partially charged-off or became 90 days or more past due) during the periods presented that were modified as TDRs within 12 months previous to default:


	2016				2015
(Dollars in Millions)	Number of Loans		Amount Defaulted		Number of Loans		Amount Defaulted
Three Months Ended September 30
Commercial		121	$	4		95	$	1
Commercial real estate		6		3		5		5
Residential mortgages		43		4		42		5
Credit card		1,617		7		1,576		7
Other retail		103		1		123		2
Total loans, excluding GNMA and covered loans		1,890		19		1,841		20
Loans purchased from GNMA mortgage pools		39		5		143		16
Covered loans		2		1		4		1
Total loans		1,931	$	25		1,988	$	37
Nine Months Ended September 30
Commercial		374	$	15		408	$	20
Commercial real estate		21		9		13		8
Residential mortgages		101		13		228		30
Credit card		4,822		21		4,597		22
Other retail		269		5		491		9
Total loans, excluding GNMA and covered loans		5,587		63		5,737		89
Loans purchased from GNMA mortgage pools		93		12		511		64
Covered loans		3		1		4		1
Total loans		5,683	$	76		6,252	$	154

In addition to the defaults in the table above, the Company had a total of 382 and 1,288 residential mortgage loans, home equity and second mortgage loans and loans purchased from GNMA mortgage pools for the three months and nine months ended September 30, 2016, respectively, where borrowers did not successfully complete the trial period arrangement and, therefore, are no longer eligible for a permanent modification under the applicable modification program. These loans had aggregate outstanding balances of $48 million and $178 million for the three months and nine months ended September 30, 2016, respectively.

Covered Assets Covered assets represent loans and other assets acquired from the FDIC, subject to loss sharing agreements, and include expected reimbursements from the FDIC. The carrying amount of the covered assets consisted of purchased impaired loans, purchased nonimpaired loans and other assets as shown in the following table:


	September 30, 2016								December 31, 2015
(Dollars in Millions)	Purchased Impaired Loans		Purchased Nonimpaired Loans		Other		Total		Purchased Impaired Loans		Purchased Nonimpaired Loans		Other		Total
Residential mortgage loans	$	2,322	$	534	$	–	$	2,856	$	2,502	$	615	$	–	$	3,117
Other retail loans		–		319		–		319		–		447		–		447
Losses reimbursable by the FDIC (a)		–		–		375		375		–		–		517		517
Unamortized changes in FDIC asset (b)		–		–		471		471		–		–		515		515
Covered loans		2,322		853		846		4,021		2,502		1,062		1,032		4,596
Foreclosed real estate		–		–		28		28		–		–		32		32
Total covered assets	$	2,322	$	853	$	874	$	4,049	$	2,502	$	1,062	$	1,064	$	4,628

(a)

Relates to loss sharing agreements with remaining terms up to three years.

(b)

Represents decreases in expected reimbursements by the FDIC as a result of decreases in expected losses on the covered loans. These amounts are amortized as a reduction in interest income on covered loans over the shorter of the expected life of the respective covered loans or the remaining contractual term of the indemnification agreements.


U.S. Bancorp		53

Interest income is recognized on purchased impaired loans through accretion of the difference between the carrying amount of those loans and their expected cash flows. The initial determination of the fair value of the purchased loans includes the impact of expected credit losses and, therefore, no allowance for credit losses is recorded at the purchase date. To the extent credit deterioration occurs after the date of acquisition, the Company records an allowance for credit losses.

Note 5

Accounting for Transfers and Servicing of Financial Assets and Variable Interest Entities

The Company transfers financial assets in the normal course of business. The majority of the Company’s financial asset transfers are residential mortgage loan sales primarily to government-sponsored enterprises (“GSEs”), transfers of tax-advantaged investments, commercial loan sales through participation agreements, and other individual or portfolio loan and securities sales. In accordance with the accounting guidance for asset transfers, the Company considers any ongoing involvement with transferred assets in determining whether the assets can be derecognized from the balance sheet. Guarantees provided to certain third parties in connection with the transfer of assets are further discussed in Note 15.

For loans sold under participation agreements, the Company also considers whether the terms of the loan participation agreement meet the accounting definition of a participating interest. With the exception of servicing and certain performance-based guarantees, the Company’s continuing involvement with financial assets sold is minimal and generally limited to market customary representation and warranty clauses. Any gain or loss on sale depends on the previous carrying amount of the transferred financial assets, the consideration received, and any liabilities incurred in exchange for the transferred assets. Upon transfer, any servicing assets and other interests that continue to be held by the Company are initially recognized at fair value. For further information on mortgage servicing rights (“MSRs”), refer to Note 6. On a limited basis, the Company may acquire and package high-grade corporate bonds for select corporate customers, in which the Company generally has no continuing involvement with these transactions. Additionally, the Company is an authorized GNMA issuer and issues GNMA securities on a regular basis. The Company has no other asset securitizations or similar asset-backed financing arrangements that are off-balance sheet.

Effective January 1, 2016, the Company adopted accounting guidance, issued by the FASB in February 2015, relating to the analysis required by organizations to evaluate whether they should consolidate certain legal entities. The adoption of this guidance did not have a material impact on the Company’s financial statements, and specifically excludes registered money market funds from the consolidation analysis. The Company provides financial support primarily through the use of waivers of management fees associated with various registered money market funds it manages, which are excluded from the consolidation analysis. The Company provided $9 million and $28 million of support to the funds during the three months ended September 30, 2016 and 2015, respectively, and $35 million and $86 million during the nine months ended September 30, 2016 and 2015, respectively.

The Company is involved in various entities that are considered to be variable interest entities (“VIEs”). The Company’s investments in VIEs are primarily related to investments promoting affordable housing, community development and renewable energy sources. Some of these tax-advantaged investments support the Company’s regulatory compliance with the Community Reinvestment Act. The Company’s investments in these entities generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. These tax credits are recognized as a reduction of tax expense or, for investments qualifying as investment tax credits, as a reduction to the related investment asset. The Company recognized federal and state income tax credits related to its affordable housing and other tax-advantaged investments in tax expense of $172 million and $174 million for the three months ended September 30, 2016 and 2015, respectively, and $504 million and $512 million for the nine months ended September 30, 2016 and 2015, respectively. The Company also recognized $219 million and $340 million of investment tax credits for the three months ended September 30, 2016 and 2015, respectively, and $850 million and $624 million for the nine months ended September 30, 2016 and 2015, respectively. The Company recognized $169 million of expenses related to all of these investments for both the three months ended September 30, 2016 and 2015, of which $61 million and $67 million, respectively, was included in tax expense and the remainder was included in noninterest expense. The Company recognized $476 million and $471 million of expenses related to all of these investments for the nine months ended September 30, 2016 and 2015, respectively, of which $194 million and $198 million, respectively, was included in tax expense and the remainder was included in noninterest expense.


54		U.S. Bancorp

The Company is not required to consolidate VIEs in which it has concluded it does not have a controlling financial interest, and thus is not the primary beneficiary. In such cases, the Company does not have both the power to direct the entities’ most significant activities and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIEs.

The Company’s investments in these unconsolidated VIEs are carried in other assets on the Consolidated Balance Sheet. The Company’s unfunded capital and other commitments related to these unconsolidated VIEs are generally carried in other liabilities on the Consolidated Balance Sheet. The Company’s maximum exposure to loss from these unconsolidated VIEs include the investment recorded on the Company’s Consolidated Balance Sheet, net of unfunded capital commitments, and previously recorded tax credits which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level. While the Company believes potential losses from these investments are remote, the maximum exposure was determined by assuming a scenario where the community-based business and housing projects completely fail and do not meet certain government compliance requirements resulting in recapture of the related tax credits.

The following table provides a summary of investments in community development and tax-advantaged VIEs that the Company has not consolidated:


(Dollars in Millions)	September 30, 2016		December 31, 2015
Investment carrying amount	$	5,175	$	5,257
Unfunded capital and other commitments		2,664		2,499
Maximum exposure to loss		9,940		9,436

The Company also has noncontrolling financial investments in private investment funds and partnerships considered to be VIEs, which are not consolidated. The Company’s recorded investment in these entities, carried in other assets on the Consolidated Balance Sheet, was approximately $27 million at September 30, 2016, compared with $32 million at December 31, 2015. The maximum exposure to loss related to these VIEs was $51 million at September 30, 2016 and $47 million at December 31, 2015, representing the Company’s investment balance and its unfunded commitments to invest additional amounts.

The Company’s individual net investments in unconsolidated VIEs, which exclude any unfunded capital commitments, ranged from less than $1 million to $42 million at September 30, 2016, compared with less than $1 million to $46 million at December 31, 2015.

The Company is required to consolidate VIEs in which it has concluded it has a controlling financial interest. The Company sponsors entities to which it transfers its interests in tax-advantaged investments to third parties. At September 30, 2016, approximately $3.4 billion of the Company’s assets and $2.5 billion of its liabilities included on the Consolidated Balance Sheet were related to community development and tax-advantaged investment VIEs which the Company has consolidated, primarily related to these transfers. These amounts compared to $3.0 billion and $2.2 billion, respectively, at December 31, 2015. The majority of the assets of these consolidated VIEs are reported in other assets, and the liabilities are reported in long-term debt and other liabilities. The assets of a particular VIE are the primary source of funds to settle its obligations. The creditors of the VIEs do not have recourse to the general credit of the Company. The Company’s exposure to the consolidated VIEs is generally limited to the carrying value of its variable interests plus any related tax credits previously recognized or transferred to others with a guarantee.

The Company also sponsors a conduit to which it previously transferred high-grade investment securities. The Company consolidates the conduit because of its ability to manage the activities of the conduit. At September 30, 2016, $27 million of the held-to-maturity investment securities on the Company’s Consolidated Balance Sheet were related to the conduit, compared with $28 million at December 31, 2015.

In addition, the Company sponsors a municipal bond securities tender option bond program. The Company controls the activities of the program’s entities, is entitled to the residual returns and provides credit, liquidity and remarketing arrangements to the program. As a result, the Company has consolidated the program’s entities. At September 30, 2016, $1.1 billion of available-for-sale investment securities and $1.0 billion of short-term borrowings on the Consolidated Balance Sheet were related to the tender option bond program, compared with $2.3 billion of available-for-sale investment securities and $2.2 billion of short-term borrowings at December 31, 2015.


U.S. Bancorp		55

Note 6

Mortgage Servicing Rights

The Company serviced $232.1 billion of residential mortgage loans for others at September 30, 2016, and $231.8 billion at December 31, 2015, which include subserviced mortgages with no corresponding MSRs asset. The net impact included in mortgage banking revenue of fair value changes of MSRs due to changes in valuation assumptions and derivatives used to economically hedge MSRs were net gains of $25 million and $12 million for the three months ended September 30, 2016 and 2015, respectively, and net losses of $7 million and net gains of $18 million for the nine months ended September 30, 2016 and 2015, respectively. Loan servicing and ancillary fees, not including valuation changes, included in mortgage banking revenue were $191 million and $182 million for the three months ended September 30, 2016 and 2015, respectively, and $562 million and $539 million for the nine months ended September 30, 2016 and 2015, respectively.

Changes in fair value of capitalized MSRs are summarized as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Millions)	2016			2015			2016			2015
Balance at beginning of period	$	2,056		$	2,481		$	2,512		$	2,338
Rights purchased		18			7			32			22
Rights capitalized		142			182			372			491
Changes in fair value of MSRs
Due to fluctuations in market interest rates (a)		42			(168	)		(446	)		(127	)
Due to revised assumptions or models (b)		–			7			–			9
Other changes in fair value (c)		(127	)		(112	)		(339	)		(336	)
Balance at end of period	$	2,131		$	2,397		$	2,131		$	2,397

(a)

Includes changes in MSR value associated with changes in market interest rates, including estimated prepayment rates and anticipated earnings on escrow deposits.

(b)

Includes changes in MSR value not caused by changes in market interest rates, such as changes in cost to service, ancillary income, and discount rate, as well as the impact of any model changes.

(c)

Primarily represents changes due to realization of expected cash flows over time (decay).

The estimated sensitivity to changes in interest rates of the fair value of the MSRs portfolio and the related derivative instruments was as follows:


	September 30, 2016																		December 31, 2015
(Dollars in Millions)	Down 100 bps			Down 50 bps			Down 25 bps			Up 25 bps			Up 50 bps			Up 100 bps			Down 100 bps			Down 50 bps			Down 25 bps			Up 25 bps			Up 50 bps			Up 100 bps
MSR portfolio	$	(576	)	$	(291	)	$	(148	)	$	137		$	259		$	495		$	(598	)	$	(250	)	$	(114	)	$	96		$	176		$	344
Derivative instrument hedges		542			281			140			(134	)		(264	)		(523	)		475			226			107			(98	)		(192	)		(377	)
Net sensitivity	$	(34	)	$	(10	)	$	(8	)	$	3		$	(5	)	$	(28	)	$	(123	)	$	(24	)	$	(7	)	$	(2	)	$	(16	)	$	(33	)

The fair value of MSRs and their sensitivity to changes in interest rates is influenced by the mix of the servicing portfolio and characteristics of each segment of the portfolio. The Company’s servicing portfolio consists of the distinct portfolios of government-insured mortgages, conventional mortgages and Housing Finance Agency (“HFA”) mortgages. The servicing portfolios are predominantly comprised of fixed-rate agency loans with limited adjustable-rate or jumbo mortgage loans. The HFA division specializes in servicing loans made under state and local housing authority programs. These programs provide mortgages to low-income and moderate-income borrowers and are generally government-insured programs with a favorable rate subsidy, down payment and/or closing cost assistance.

A summary of the Company’s MSRs and related characteristics by portfolio was as follows:


	September 30, 2016												December 31, 2015
(Dollars in Millions)	HFA			Government			Conventional (c)			Total			HFA			Government			Conventional (c)			Total
Servicing portfolio (a)	$	32,757		$	38,639		$	158,251		$	229,647		$	26,492		$	40,350		$	162,533		$	229,375
Fair value	$	357		$	355		$	1,419		$	2,131		$	297		$	443		$	1,772		$	2,512
Value (bps) (b)		109			92			90			93			112			110			109			110
Weighted-average servicing fees (bps)		37			34			27			30			36			34			27			29
Multiple (value/servicing fees)		2.95			2.71			3.33			3.10			3.11			3.24			4.04			3.79
Weighted-average note rate		4.41	%		4.02	%		4.05	%		4.10	%		4.46	%		4.08	%		4.09	%		4.13	%
Weighted-average age (in years)		2.9			3.9			3.8			3.7			3.1			3.6			3.4			3.4
Weighted-average expected prepayment (constant prepayment rate)		12.7	%		18.0	%		14.3	%		14.7	%		12.8	%		13.9	%		10.4	%		11.3	%
Weighted-average expected life (in years)		6.1			4.6			5.2			5.2			6.1			5.7			6.6			6.4
Weighted-average discount rate		11.7	%		11.1	%		9.4	%		10.0	%		11.8	%		11.2	%		9.4	%		10.0	%

(a)

Represents principal balance of mortgages having corresponding MSR asset.

(b)

Value is calculated as fair value divided by the servicing portfolio.

(c)

Represents loans sold primarily to GSEs.


56		U.S. Bancorp

Note 7

Preferred Stock

At September 30, 2016 and December 31, 2015, the Company had authority to issue 50 million shares of preferred stock. The number of shares issued and outstanding and the carrying amount of each outstanding series of the Company’s preferred stock were as follows:


	September 30, 2016								December 31, 2015
(Dollars in Millions)	Shares Issued and Outstanding		Liquidation Preference		Discount		Carrying Amount		Shares Issued and Outstanding		Liquidation Preference		Discount		Carrying Amount
Series A		12,510	$	1,251	$	145	$	1,106		12,510	$	1,251	$	145	$	1,106
Series B		40,000		1,000		–		1,000		40,000		1,000		–		1,000
Series F		44,000		1,100		12		1,088		44,000		1,100		12		1,088
Series G		43,400		1,085		10		1,075		43,400		1,085		10		1,075
Series H		20,000		500		13		487		20,000		500		13		487
Series I		30,000		750		5		745		30,000		750		5		745
Total preferred stock (a)		189,910	$	5,686	$	185	$	5,501		189,910	$	5,686	$	185	$	5,501

(a)

The par value of all shares issued and outstanding at September 30, 2016 and December 31, 2015, was $1.00 per share.

Note 8

Accumulated Other Comprehensive Income (Loss)

Shareholders’ equity is affected by transactions and valuations of asset and liability positions that require adjustments to accumulated other comprehensive income (loss). The reconciliation of the transactions affecting accumulated other comprehensive income (loss) included in shareholders’ equity is as follows:


Three Months Ended September 30, (Dollars in Millions)	Unrealized Gains (Losses) on Securities Available-For- Sale			Unrealized Gains (Losses) on Securities Transferred From Available-For-Sale to Held-To- Maturity			Unrealized Gains (Losses) on Derivative Hedges			Unrealized Gains (Losses) on Retirement Plans			Foreign Currency Translation			Total
2016
Balance at beginning of period	$	612		$	31		$	(133	)	$	(1,006	)	$	(66	)	$	(562	)
Changes in unrealized gains and losses		(105	)		–			31			–			–			(74	)
Foreign currency translation adjustment (a)		–			–			–			–			6			6
Reclassification to earnings of realized gains and losses		(10	)		(5	)		28			41			–			54
Applicable income taxes		44			1			(22	)		(16	)		(10	)		(3	)
Balance at end of period	$	541		$	27		$	(96	)	$	(981	)	$	(70	)	$	(579	)
2015
Balance at beginning of period	$	301		$	43		$	(125	)	$	(1,037	)	$	(47	)	$	(865	)
Changes in unrealized gains and losses		202			–			(38	)		–			–			164
Foreign currency translation adjustment (a)		–			–			–			–			(28	)		(28	)
Reclassification to earnings of realized gains and losses		1			(6	)		48			55			–			98
Applicable income taxes		(78	)		2			(4	)		(21	)		11			(90	)
Balance at end of period	$	426		$	39		$	(119	)	$	(1,003	)	$	(64	)	$	(721	)

(a)

Represents the impact of changes in foreign currency exchange rates on the Company’s investment in foreign operations and related hedges.


U.S. Bancorp		57


Nine Months Ended September 30, (Dollars in Millions)	Unrealized Gains (Losses) on Securities Available-For- Sale			Unrealized Gains (Losses) on Securities Transferred From Available-For-Sale to Held-To- Maturity			Unrealized Gains (Losses) on Derivative Hedges			Unrealized Gains (Losses) on Retirement Plans			Foreign Currency Translation			Total
2016
Balance at beginning of period	$	111		$	36		$	(67	)	$	(1,056	)	$	(43	)	$	(1,019	)
Changes in unrealized gains and losses		716			–			(152	)		–			–			564
Other-than-temporary impairment not recognized in earnings on securities available-for-sale		(1	)		–			–			–			–			(1	)
Foreign currency translation adjustment (a)		–			–			–			–			(30	)		(30	)
Reclassification to earnings of realized gains and losses		(16	)		(14	)		104			122			–			196
Applicable income taxes		(269	)		5			19			(47	)		3			(289	)
Balance at end of period	$	541		$	27		$	(96	)	$	(981	)	$	(70	)	$	(579	)
2015
Balance at beginning of period	$	392		$	52		$	(172	)	$	(1,106	)	$	(62	)	$	(896	)
Changes in unrealized gains and losses		54			–			(61	)		–			–			(7	)
Foreign currency translation adjustment (a)		–			–			–			–			(3	)		(3	)
Reclassification to earnings of realized gains and losses		1			(20	)		147			167			–			295
Applicable income taxes		(21	)		7			(33	)		(64	)		1			(110	)
Balance at end of period	$	426		$	39		$	(119	)	$	(1,003	)	$	(64	)	$	(721	)

(a)

Represents the impact of changes in foreign currency exchange rates on the Company’s investment in foreign operations and related hedges.

Additional detail about the impact to net income for items reclassified out of accumulated other comprehensive income (loss) and into earnings, is as follows:


	Impact to Net Income												Affected Line Item in the Consolidated Statement of Income
	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Millions)	2016			2015			2016			2015
Unrealized gains (losses) on securities available-for-sale
Realized gains (losses) on sale of securities	$	12		$	–		$	19		$	–		Total securities gains (losses), net
Other-than-temporary impairment recognized in earnings		(2	)		(1	)		(3	)		(1	)
		10			(1	)		16			(1	)	Total before tax
		(4	)		–			(6	)		–		Applicable income taxes
		6			(1	)		10			(1	)	Net-of-tax
Unrealized gains (losses) on securities transferred from available-for-sale to held-to-maturity
Amortization of unrealized gains		5			6			14			20		Interest income
		(1	)		(2	)		(5	)		(7	)	Applicable income taxes
		4			4			9			13		Net-of-tax
Unrealized gains (losses) on derivative hedges
Realized gains (losses) on derivative hedges		(28	)		(48	)		(104	)		(147	)	Interest expense
		11			19			40			57		Applicable income taxes
		(17	)		(29	)		(64	)		(90	)	Net-of-tax
Unrealized gains (losses) on retirement plans
Actuarial gains (losses) and prior service cost (credit) amortization		(41	)		(55	)		(122	)		(167	)	Employee benefits expense
		16			21			47			64		Applicable income taxes
		(25	)		(34	)		(75	)		(103	)	Net-of-tax
Total impact to net income	$	(32	)	$	(60	)	$	(120	)	$	(181	)


58		U.S. Bancorp

Note 9

Earnings Per Share

The components of earnings per share were:


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars and Shares in Millions, Except Per Share Data)	2016			2015			2016			2015
Net income attributable to U.S. Bancorp	$	1,502		$	1,489		$	4,410		$	4,403
Preferred dividends		(61	)		(62	)		(201	)		(182	)
Impact of the purchase of noncontrolling interests (a)		–			–			9			–
Earnings allocated to participating stock awards		(7	)		(5	)		(20	)		(17	)
Net income applicable to U.S. Bancorp common shareholders	$	1,434		$	1,422		$	4,198		$	4,204
Average common shares outstanding		1,710			1,758			1,724			1,770
Net effect of the exercise and assumed purchase of stock awards		6			8			6			8
Average diluted common shares outstanding		1,716			1,766			1,730			1,778
Earnings per common share	$	.84		$	.81		$	2.44		$	2.38
Diluted earnings per common share	$	.84		$	.81		$	2.43		$	2.36

(a)

Represents the difference between the carrying amount and amount paid by the Company to purchase third party investor holdings of the preferred stock of USB Realty Corp, a consolidated subsidiary of the Company.

Options outstanding at September 30, 2016, to purchase 1 million common shares for the three months and nine months ended September 30, 2016, and outstanding at September 30, 2015, to purchase 1 million common shares for the three months and nine months ended September 30, 2015, were not included in the computation of diluted earnings per share because they were antidilutive.

Note 10

Employee Benefits

The components of net periodic benefit cost for the Company’s retirement plans were:


	Three Months Ended September 30,												Nine Months Ended September 30,
	Pension Plans						Postretirement Welfare Plan						Pension Plans						Postretirement Welfare Plan
(Dollars in Millions)	2016			2015			2016			2015			2016			2015			2016			2015
Service cost	$	45		$	47		$	–		$	–		$	133		$	141		$	–		$	–
Interest cost		53			49			–			1			158			146			2			3
Expected return on plan assets		(66	)		(56	)		(1	)		–			(198	)		(167	)		(1	)		(1	)
Prior service cost (credit) amortization		(2	)		(2	)		–			(1	)		(4	)		(4	)		(2	)		(2	)
Actuarial loss (gain) amortization		44			59			(1	)		(1	)		131			176			(3	)		(3	)
Net periodic benefit cost	$	74		$	97		$	(2	)	$	(1	)	$	220		$	292		$	(4	)	$	(3	)

Note 11

Income Taxes

The components of income tax expense were:


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Millions)	2016			2015			2016			2015
Federal
Current	$	717		$	556		$	1,631		$	1,355
Deferred		(232	)		(114	)		(279	)		(81	)
Federal income tax		485			442			1,352			1,274
State
Current		108			103			235			283
Deferred		(27	)		(11	)		25			(16	)
State income tax		81			92			260			267
Total income tax provision	$	566		$	534		$	1,612		$	1,541


U.S. Bancorp		59

A reconciliation of expected income tax expense at the federal statutory rate of 35 percent to the Company’s applicable income tax expense follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Millions)	2016			2015			2016			2015
Tax at statutory rate	$	729		$	713		$	2,123		$	2,095
State income tax, at statutory rates, net of federal tax benefit		53			60			170			174
Tax effect of
Tax credits and benefits, net of related expenses		(183	)		(177	)		(523	)		(523	)
Tax-exempt income		(49	)		(51	)		(148	)		(154	)
Noncontrolling interests		(5	)		(5	)		(15	)		(15	)
Other items (a)		21			(6	)		5			(36	)
Applicable income taxes	$	566		$	534		$	1,612		$	1,541

(a)

Includes the resolution of certain tax matters with taxing authorities in the first quarter of 2015.

The Company’s income tax returns are subject to review and examination by federal, state, local and foreign government authorities. On an ongoing basis, numerous federal, state, local and foreign examinations are in progress and cover multiple tax years. As of September 30, 2016, the federal taxing authority has completed its examination of the Company through the fiscal year ended December 31, 2010. The years open to examination by foreign, state and local government authorities vary by jurisdiction.

The Company’s net deferred tax liability was $1.2 billion at September 30, 2016, and $1.5 billion at December 31, 2015.

Note 12

Derivative Instruments

In the ordinary course of business, the Company enters into derivative transactions to manage various risks and to accommodate the business requirements of its customers. The Company recognizes all derivatives on the Consolidated Balance Sheet at fair value in other assets or in other liabilities. On the date the Company enters into a derivative contract, the derivative is designated as either a fair value hedge, cash flow hedge, net investment hedge, or a designation is not made as it is a customer-related transaction, an economic hedge for asset/liability risk management purposes or another stand-alone derivative created through the Company’s operations (“free-standing derivative”). When a derivative is designated as a fair value, cash flow or net investment hedge, the Company performs an assessment, at inception and, at a minimum, quarterly thereafter, to determine the effectiveness of the derivative in offsetting changes in the value or cash flows of the hedged item(s).

Fair Value Hedges These derivatives are interest rate swaps the Company uses to hedge the change in fair value related to interest rate changes of its underlying fixed-rate debt. Changes in the fair value of derivatives designated as fair value hedges, and changes in the fair value of the hedged items, are recorded in earnings. All fair value hedges were highly effective for the three and nine months ended September 30, 2016, and the change in fair value attributed to hedge ineffectiveness was not material.

Cash Flow Hedges These derivatives are interest rate swaps the Company uses to hedge the forecasted cash flows from its underlying variable-rate debt. Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) until the cash flows of the hedged items are realized. If a derivative designated as a cash flow hedge is terminated or ceases to be highly effective, the gain or loss in other comprehensive income (loss) is amortized to earnings over the period the forecasted hedged transactions impact earnings. If a hedged forecasted transaction is no longer probable, hedge accounting is ceased and any gain or loss included in other comprehensive income (loss) is reported in earnings immediately, unless the forecasted transaction is at least reasonably possible of occurring, whereby the amounts remain within other comprehensive income (loss). At September 30, 2016, the Company had $96 million (net-of-tax) of realized and unrealized losses on derivatives classified as cash flow hedges recorded in other comprehensive income (loss), compared with $67 million (net-of-tax) of realized and unrealized losses at December 31, 2015. The estimated amount to be reclassified from other comprehensive income (loss) into earnings during the remainder of 2016 and the next 12 months are losses of $12 million (net-of-tax) and $34 million (net-of-tax), respectively. This amount includes gains and losses related to hedges that were terminated early for which the forecasted transactions are still probable. All cash flow hedges were highly effective for the three and nine months ended September 30, 2016, and the change in fair value attributed to hedge ineffectiveness was not material.


60		U.S. Bancorp

Net Investment Hedges The Company uses forward commitments to sell specified amounts of certain foreign currencies, and occasionally non-derivative debt instruments, to hedge the volatility of its investment in foreign businesses driven by fluctuations in foreign currency exchange rates. The ineffectiveness on all net investment hedges was not material for the three and nine months ended September 30, 2016. There were no non-derivative debt instruments designated as net investment hedges at September 30, 2016 or December 31, 2015.

Other Derivative Positions The Company enters into free-standing derivatives to mitigate interest rate risk and for other risk management purposes. These derivatives include forward commitments to sell to-be-announced securities (“TBAs”) and other commitments to sell residential mortgage loans, which are used to economically hedge the interest rate risk related to residential mortgage loans held for sale (“MLHFS”) and unfunded mortgage loan commitments. The Company also enters into interest rate swaps, forward commitments to buy TBAs, U.S. Treasury and Eurodollar futures and options on U.S. Treasury futures to economically hedge the change in the fair value of the Company’s MSRs. The Company also enters into foreign currency forwards to economically hedge remeasurement gains and losses the Company recognizes on foreign currency denominated assets and liabilities. In addition, the Company acts as a seller and buyer of interest rate derivatives and foreign exchange contracts for its customers. The Company mitigates the market and liquidity risk associated with these customer derivatives by entering into similar offsetting positions with broker-dealers, or on a portfolio basis by entering into other derivative or non-derivative financial instruments that partially or fully offset the exposure from these customer-related positions. The Company’s customer derivatives and related hedges are monitored and reviewed by the Company’s Market Risk Committee, which establishes policies for market risk management, including exposure limits for each portfolio. The Company also has derivative contracts that are created through its operations, including commitments to originate MLHFS and swap agreements related to the sale of a portion of its Class B common shares of Visa Inc. Refer to Note 14 for further information on these swap agreements.

For additional information on the Company’s purpose for entering into derivative transactions and its overall risk management strategies, refer to “Management Discussion and Analysis — Use of Derivatives to Manage Interest Rate and Other Risks”, which is incorporated by reference into these Notes to Consolidated Financial Statements.


U.S. Bancorp		61

The following table summarizes the asset and liability management derivative positions of the Company:


	Asset Derivatives						Liability Derivatives
(Dollars in Millions)	Notional Value		Fair Value		Weighted- Average Remaining Maturity In Years		Notional Value		Fair Value		Weighted- Average Remaining Maturity In Years
September 30, 2016
Fair value hedges
Interest rate contracts
Receive fixed/pay floating swaps	$	3,800	$	133		3.89	$	–	$	–		–
Cash flow hedges
Interest rate contracts
Pay fixed/receive floating swaps		500		–		1.33		6,625		176		4.78
Net investment hedges
Foreign exchange forward contracts		1,222		8		.05		152		–		.05
Other economic hedges
Interest rate contracts
Futures and forwards
Buy		6,723		52		.07		156		1		.12
Sell		1,071		12		.15		8,048		43		.09
Options
Purchased		2,200		–		.06		–		–		–
Written		3,277		67		.10		20		1		.09
Receive fixed/pay floating swaps		6,952		355		9.59		2,475		10		10.22
Pay fixed/receive floating swaps		47		–		7.95		4,333		341		9.22
Foreign exchange forward contracts		372		4		.04		3,426		25		.01
Equity contracts		64		1		.72		35		–		.26
Credit contracts		1,413		1		3.05		3,302		3		3.06
Other (a)		285		2		.01		997		100		2.68
Total	$	27,926	$	635			$	29,569	$	700
December 31, 2015
Fair value hedges
Interest rate contracts
Receive fixed/pay floating swaps	$	3,050	$	73		4.43	$	–	$	–		–
Cash flow hedges
Interest rate contracts
Pay fixed/receive floating swaps		1,772		7		9.22		5,009		146		1.13
Net investment hedges
Foreign exchange forward contracts		1,140		4		.04		–		–		–
Other economic hedges
Interest rate contracts
Futures and forwards
Buy		3,812		17		.07		452		1		.06
Sell		3,201		12		.09		2,559		7		.12
Options
Purchased		2,935		–		.06		–		–		–
Written		3,199		29		.10		5		1		.08
Receive fixed/pay floating swaps		3,733		42		9.98		4,748		18		10.18
Pay fixed/receive floating swaps		287		2		9.82		4,158		35		9.97
Foreign exchange forward contracts		3,023		13		.01		2,380		10		.03
Equity contracts		62		–		.47		24		1		.82
Credit contracts		1,192		2		2.58		2,821		3		2.99
Other (a)		36		–		.04		662		64		2.60
Total	$	27,442	$	201			$	22,818	$	286

(a)

Includes short-term underwriting purchase and sale commitments with total asset and liability notional values of $285 million and $36 million at September 30, 2016 and December 31, 2015, respectively, and derivative liability swap agreements related to the sale of a portion of the Company’s Class B common shares of Visa Inc. The Visa swap agreements had a total notional value, fair value and weighted average remaining maturity of $712 million, $98 million and 3.75 years at September 30, 2016, respectively, compared to $626 million, $64 million and 2.75 years at December 31, 2015, respectively.


62		U.S. Bancorp

The following table summarizes the customer-related derivative positions of the Company:


	Asset Derivatives						Liability Derivatives
(Dollars in Millions)	Notional Value		Fair Value		Weighted- Average Remaining Maturity In Years		Notional Value		Fair Value		Weighted- Average Remaining Maturity In Years
September 30, 2016
Interest rate contracts
Receive fixed/pay floating swaps	$	56,962	$	2,249		5.04	$	14,464	$	29		3.17
Pay fixed/receive floating swaps		11,835		29		2.81		59,866		2,385		5.01
Options
Purchased		10,127		7		2.11		356		26		.89
Written		449		27		5.47		8,987		3		1.67
Futures
Buy		3,540		1		1.41		4,701		–		.82
Foreign exchange rate contracts
Forwards, spots and swaps		24,249		690		.52		18,252		663		.65
Options
Purchased		1,771		47		1.23		–		–		–
Written		–		–		–		1,771		47		1.23
Total	$	108,933	$	3,050			$	108,397	$	3,153
December 31, 2015
Interest rate contracts
Receive fixed/pay floating swaps	$	32,647	$	1,097		5.69	$	14,068	$	54		4.71
Pay fixed/receive floating swaps		10,685		43		4.55		35,045		1,160		5.74
Options
Purchased		8,705		10		2.61		146		1		2.23
Written		146		2		2.23		8,482		9		2.57
Futures
Buy		–		–		–		2,859		2		.84
Sell		45		–		.97		–		–		–
Foreign exchange rate contracts
Forwards, spots and swaps		18,399		851		.59		17,959		830		.58
Options
Purchased		1,485		43		1.19		–		–		–
Written		–		–		–		1,485		43		1.19
Total	$	72,112	$	2,046			$	80,044	$	2,099

The table below shows the effective portion of the gains (losses) recognized in other comprehensive income (loss) and the gains (losses) reclassified from other comprehensive income (loss) into earnings (net-of-tax):


	Three Months Ended September 30,											Nine Months Ended September 30,
	Gains (Losses) Recognized in Other Comprehensive Income (Loss)					Gains (Losses) Reclassified from Other Comprehensive Income (Loss) into Earnings						Gains (Losses) Recognized in Other Comprehensive Income (Loss)						Gains (Losses) Reclassified from Other Comprehensive Income (Loss) into Earnings
(Dollars in Millions)	2016		2015			2016			2015			2016			2015			2016			2015
Asset and Liability Management Positions
Cash flow hedges
Interest rate contracts (a)	$	20	$	(24	)	$	(17	)	$	(30	)	$	(93	)	$	(38	)	$	(64	)	$	(91	)
Net investment hedges
Foreign exchange forward contracts		–		(1	)		–			–			(15	)		79			–			–

Note:

Ineffectiveness on cash flow and net investment hedges was not material for the three and nine months ended September 30, 2016 and 2015.

(a)

Gains (Losses) reclassified from other comprehensive income (loss) into interest expense.


U.S. Bancorp		63

The table below shows the gains (losses) recognized in earnings for fair value hedges, other economic hedges and the customer-related positions:


(Dollars in Millions)	Location of Gains (Losses) Recognized in Earnings		Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Millions)	Location of Gains (Losses) Recognized in Earnings		2016			2015			2016			2015
Asset and Liability Management Positions
Fair value hedges (a)
Interest rate contracts		Other noninterest income	$	(31	)	$	52		$	63		$	44
Other economic hedges
Interest rate contracts
Futures and forwards		Mortgage banking revenue		21			(55	)		(34	)		133
Purchased and written options		Mortgage banking revenue		102			99			315			181
Receive fixed/pay floating swaps		Mortgage banking revenue		(134	)		173			268			152
Pay fixed/receive floating swaps		Mortgage banking revenue		113			(4	)		111			(3	)
Foreign exchange forward contracts		Commercial products revenue		9			17			(46	)		103
Equity contracts		Compensation expense		1			(1	)		–			(2	)
Credit contracts		Other noninterest income		1			–			–			1
Other		Other noninterest income		–			–			(38	)		–
Customer-Related Positions
Interest rate contracts
Receive fixed/pay floating swaps		Other noninterest income		(397	)		540			1,326			640
Pay fixed/receive floating swaps		Other noninterest income		417			(534	)		(1,289	)		(615	)
Purchased and written options		Other noninterest income		(4	)		1			(3	)		2
Futures		Other noninterest income		(4	)		2			3			3
Foreign exchange rate contracts
Forwards, spots and swaps		Commercial products revenue		21			19			61			56
Purchased and written options		Commercial products revenue		1			–			3			1

(a)

Gains (Losses) on items hedged by interest rate contracts included in noninterest income (expense), were $31 million and $(50) million for the three months ended September 30, 2016 and 2015, respectively, and $(61) million and $(43) million for the nine months ended September 30, 2016 and 2015, respectively. The ineffective portion was immaterial for the three and nine months ended September 30, 2016 and 2015.

Derivatives are subject to credit risk associated with counterparties to the derivative contracts. The Company measures that credit risk using a credit valuation adjustment and includes it within the fair value of the derivative. The Company manages counterparty credit risk through diversification of its derivative positions among various counterparties, by entering into master netting arrangements and, where possible, by requiring collateral arrangements. A master netting arrangement allows two counterparties, who have multiple derivative contracts with each other, the ability to net settle amounts under all contracts, including any related collateral, through a single payment and in a single currency. Collateral arrangements require the counterparty to deliver collateral (typically cash or U.S. Treasury and agency securities) equal to the Company’s net derivative receivable, subject to minimum transfer and credit rating requirements.

The Company’s collateral arrangements are predominately bilateral and, therefore, contain provisions that require collateralization of the Company’s net liability derivative positions. Required collateral coverage is based on certain net liability thresholds and contingent upon the Company’s credit rating from two of the nationally recognized statistical rating organizations. If the Company’s credit rating were to fall below credit ratings thresholds established in the collateral arrangements, the counterparties to the derivatives could request immediate additional collateral coverage up to and including full collateral coverage for derivatives in a net liability position. The aggregate fair value of all derivatives under collateral arrangements that were in a net liability position at September 30, 2016, was $1.6 billion. At September 30, 2016, the Company had $1.5 billion of cash posted as collateral against this net liability position.

Note 13

Netting Arrangements for Certain Financial Instruments and Securities Financing Activities

The majority of the Company’s derivative portfolio consists of bilateral over-the-counter trades. However, current regulations require that certain interest rate swaps and forwards and credit contracts need to be centrally cleared through clearinghouses. In addition, a portion of the Company’s derivative positions are exchange-traded. These are predominately U.S. Treasury futures or options on U.S. Treasury futures. Of the Company’s $274.8 billion total notional amount of derivative positions at September 30, 2016, $122.6 billion related to those centrally cleared through clearinghouses and $11.7 billion related to those that were exchange-traded. Irrespective of how derivatives are traded, the Company’s derivative contracts include offsetting rights (referred to as netting arrangements), and depending on expected volume, credit risk, and counterparty preference, collateral maintenance may be required. For all derivatives under collateral support arrangements, fair value is determined daily and, depending on the collateral


64		U.S. Bancorp

maintenance requirements, the Company and a counterparty may receive or deliver collateral, based upon the net fair value of all derivative positions between the Company and the counterparty. Collateral is typically cash, but securities may be allowed under collateral arrangements with certain counterparties. Receivables and payables related to cash collateral are included in other assets and other liabilities on the Consolidated Balance Sheet, along with the related derivative asset and liability fair values. Any securities pledged to counterparties as collateral remain on the Consolidated Balance Sheet. Securities received from counterparties as collateral are not recognized on the Consolidated Balance Sheet, unless the counterparty defaults. In general, securities used as collateral can be sold, repledged or otherwise used by the party in possession. No restrictions exist on the use of cash collateral by either party. Refer to Note 12 for further discussion of the Company’s derivatives, including collateral arrangements.

As part of the Company’s treasury and broker-dealer operations, the Company executes transactions that are treated as securities sold under agreements to repurchase or securities purchased under agreements to resell, both of which are accounted for as collateralized financings. Securities sold under agreements to repurchase include repurchase agreements and securities loaned transactions. Securities purchased under agreements to resell include reverse repurchase agreements and securities borrowed transactions. For securities sold under agreements to repurchase, the Company records a liability for the cash received, which is included in short-term borrowings on the Consolidated Balance Sheet. For securities purchased under agreements to resell, the Company records a receivable for the cash paid, which is included in other assets on the Consolidated Balance Sheet.

Securities transferred to counterparties under repurchase agreements and securities loaned transactions continue to be recognized on the Consolidated Balance Sheet, are measured at fair value, and are included in investment securities or other assets. Securities received from counterparties under reverse repurchase agreements and securities borrowed transactions are not recognized on the Consolidated Balance Sheet unless the counterparty defaults. The securities transferred under repurchase and reverse repurchase transactions typically are U.S. Treasury and agency securities or residential agency mortgage-backed securities. The securities loaned or borrowed typically are corporate debt securities traded by the Company’s broker-dealer. In general, the securities transferred can be sold, repledged or otherwise used by the party in possession. No restrictions exist on the use of cash collateral by either party. Repurchase/reverse repurchase and securities loaned/borrowed transactions expose the Company to counterparty risk. The Company manages this risk by performing assessments, independent of business line managers, and establishing concentration limits on each counterparty. Additionally, these transactions include collateral arrangements that require the fair values of the underlying securities to be determined daily, resulting in cash being obtained or refunded to counterparties to maintain specified collateral levels. At December 31, 2015, the Company had no outstanding securities loaned transactions.

The following table summarizes the maturities by category of collateral pledged for repurchase agreements and securities loaned transactions:


(Dollars in Millions)	Overnight and Continuous		Less Than 30 Days		30-89 Days		Total
September 30, 2016
Repurchase agreements
U.S. Treasury and agencies	$	39	$	–	$	–	$	39
Residential agency mortgage-backed securities		714		54		25		793
Total repurchase agreements		753		54		25		832
Securities loaned
Corporate debt securities		259		–		–		259
Total securities loaned		259		–		–		259
Gross amount of recognized liabilities	$	1,012	$	54	$	25	$	1,091
December 31, 2015
Repurchase agreements
U.S. Treasury and agencies	$	122	$	–	$	–	$	122
Residential agency mortgage-backed securities		802		168		–		970
Gross amount of recognized liabilities	$	924	$	168	$	–	$	1,092

The Company executes its derivative, repurchase/reverse repurchase and securities loaned/borrowed transactions under the respective industry standard agreements. These agreements include master netting arrangements that allow for multiple contracts executed with the same counterparty to be viewed as a single arrangement. This allows for net settlement of a single amount on a daily basis. In the event of default, the master netting arrangement provides for close-out netting, which allows all of these positions with the defaulting counterparty to be terminated and net settled with a single payment amount.


U.S. Bancorp		65

The Company has elected to offset the assets and liabilities under netting arrangements for the balance sheet presentation of the majority of its derivative counterparties, excluding centrally cleared derivative contracts due to current uncertainty about the legal enforceability of netting arrangements with the clearinghouses. The netting occurs at the counterparty level, and includes all assets and liabilities related to the derivative contracts, including those associated with cash collateral received or delivered. The Company has not elected to offset the assets and liabilities under netting arrangements for the balance sheet presentation of repurchase/reverse repurchase and securities loaned/borrowed transactions.

The following tables provide information on the Company’s netting adjustments, and items not offset on the Consolidated Balance Sheet but available for offset in the event of default:


	Gross Recognized Assets		Gross Amounts Offset on the Consolidated Balance Sheet (a)			Net Amounts Presented on the Consolidated Balance Sheet		Gross Amounts Not Offset on the Consolidated Balance Sheet						Net Amount
(Dollars in Millions)	Gross Recognized Assets		Gross Amounts Offset on the Consolidated Balance Sheet (a)			Net Amounts Presented on the Consolidated Balance Sheet		Financial Instruments (b)			Collateral Received (c)			Net Amount
September 30, 2016
Derivative assets (d)	$	2,341	$	(746	)	$	1,595	$	(95	)	$	(11	)	$	1,489
Reverse repurchase agreements		170		–			170		(39	)		(131	)		–
Securities borrowed		895		–			895		(3	)		(864	)		28
Total	$	3,406	$	(746	)	$	2,660	$	(137	)	$	(1,006	)	$	1,517
December 31, 2015
Derivative assets (d)	$	1,879	$	(807	)	$	1,072	$	(82	)	$	–		$	990
Reverse repurchase agreements		106		–			106		(102	)		(4	)		–
Securities borrowed		772		–			772		–			(753	)		19
Total	$	2,757	$	(807	)	$	1,950	$	(184	)	$	(757	)	$	1,009

(a)

Includes $152 million and $165 million of cash collateral related payables that were netted against derivative assets at September 30, 2016 and December 31, 2015, respectively.

(b)

For derivative assets this includes any derivative liability fair values that could be offset in the event of counterparty default; for reverse repurchase agreements this includes any repurchase agreement payables that could be offset in the event of counterparty default; for securities borrowed this includes any securities loaned payables that could be offset in the event of counterparty default.

(c)

Includes the fair value of securities received by the Company from the counterparty. These securities are not included on the Consolidated Balance Sheet unless the counterparty defaults.

(d)

Excludes $1.3 billion and $368 million of derivative assets centrally cleared or otherwise not subject to netting arrangements at September 30, 2016 and December 31, 2015, respectively.


	Gross Recognized Liabilities		Gross Amounts Offset on the Consolidated Balance Sheet (a)			Net Amounts Presented on the Consolidated Balance Sheet		Gross Amounts Not Offset on the Consolidated Balance Sheet						Net Amount
(Dollars in Millions)	Gross Recognized Liabilities		Gross Amounts Offset on the Consolidated Balance Sheet (a)			Net Amounts Presented on the Consolidated Balance Sheet		Financial Instruments (b)			Collateral Pledged (c)			Net Amount
September 30, 2016
Derivative liabilities (d)	$	1,888	$	(1,485	)	$	403	$	(95	)	$	–		$	308
Repurchase agreements		832		–			832		(39	)		(793	)		–
Securities loaned		259		–			259		(3	)		(253	)		3
Total	$	2,979	$	(1,485	)	$	1,494	$	(137	)	$	(1,046	)	$	311
December 31, 2015
Derivative liabilities (d)	$	1,809	$	(1,283	)	$	526	$	(82	)	$	–		$	444
Repurchase agreements		1,092		–			1,092		(102	)		(990	)		–
Total	$	2,901	$	(1,283	)	$	1,618	$	(184	)	$	(990	)	$	444

(a)

Includes $891 million and $641 million of cash collateral related receivables that were netted against derivative liabilities at September 30, 2016 and December 31, 2015, respectively.

(b)

For derivative liabilities this includes any derivative asset fair values that could be offset in the event of counterparty default; for repurchase agreements this includes any reverse repurchase agreement receivables that could be offset in the event of counterparty default; for securities loaned this includes any securities borrowed receivables that could be offset in the event of counterparty default.

(c)

Includes the fair value of securities pledged by the Company to the counterparty. These securities are included on the Consolidated Balance Sheet unless the Company defaults.

(d)

Excludes $2.0 billion and $576 million of derivative liabilities centrally cleared or otherwise not subject to netting arrangements at September 30, 2016 and December 31, 2015, respectively.

Note 14

Fair Values of Assets and Liabilities

The Company uses fair value measurements for the initial recording of certain assets and liabilities, periodic remeasurement of certain assets and liabilities, and disclosures. Derivatives, trading and available-for-sale investment securities, MSRs and substantially all MLHFS are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-fair value accounting or impairment write-downs of individual assets.


66		U.S. Bancorp

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value measurement reflects all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance.

The Company groups its assets and liabilities measured at fair value into a three-level hierarchy for valuation techniques used to measure financial assets and financial liabilities at fair value. This hierarchy is based on whether the valuation inputs are observable or unobservable. These levels are:

•

Level 1 — Quoted prices in active markets for identical assets or liabilities. Level 1 includes U.S. Treasury securities, as well as exchange-traded instruments, including certain perpetual preferred and corporate debt securities.

•

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 includes debt securities that are traded less frequently than exchange-traded instruments and which are typically valued using third party pricing services; derivative contracts and other assets and liabilities, including securities, whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data; and MLHFS whose values are determined using quoted prices for similar assets or pricing models with inputs that are observable in the market or can be corroborated by observable market data.

•

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category includes MSRs, certain debt securities and certain derivative contracts.

When the Company changes its valuation inputs for measuring financial assets and financial liabilities at fair value, either due to changes in current market conditions or other factors, it may need to transfer those assets or liabilities to another level in the hierarchy based on the new inputs used. The Company recognizes these transfers at the end of the reporting period in which the transfers occur. During the nine months ended September 30, 2016 and 2015, there were no transfers of financial assets or financial liabilities between the hierarchy levels.

The Company has processes and controls in place to increase the reliability of estimates it makes in determining fair value measurements. Items quoted on an exchange are verified to the quoted price. Items provided by a third party pricing service are subject to price verification procedures as described in more detail in the specific valuation discussions below. For fair value measurements modeled internally, the Company’s valuation models are subject to the Company’s Model Risk Governance Policy and Program, as maintained by the Company’s risk management department. The purpose of model validation is to assess the accuracy of the models’ input, processing, and reporting components. All models are required to be independently reviewed and approved prior to being placed in use, and are subject to formal change control procedures. Under the Company’s Model Risk Governance Policy, models are required to be reviewed at least annually to ensure they are operating as intended. Inputs into the models are market observable inputs whenever available. When market observable inputs are not available, the inputs are developed based upon analysis of historical experience and evaluation of other relevant market data. Significant unobservable model inputs are subject to review by senior management in corporate functions, who are independent from the modeling. Significant unobservable model inputs are also compared to actual results, typically on a quarterly basis. Significant Level 3 fair value measurements are also subject to corporate-level review and are benchmarked to market transactions or other market data, when available. Additional discussion of processes and controls are provided in the valuation methodologies section that follows.

The following section describes the valuation methodologies used by the Company to measure financial assets and liabilities at fair value and for estimating fair value for financial instruments not recorded at fair value as required under disclosure guidance related to the fair value of financial instruments. In addition, the following section includes an indication of the level of the fair value hierarchy in which the assets or liabilities are classified. Where appropriate, the description includes information about the valuation models and key inputs to those models. During the nine months ended September 30, 2016 and 2015, there were no significant changes to the valuation techniques used by the Company to measure fair value.


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Cash and Due From Banks The carrying value of cash and due from banks approximate fair value and are classified within Level 1. Fair value is provided for disclosure purposes only.

Federal Funds Sold and Securities Purchased Under Resale Agreements The carrying value of federal funds sold and securities purchased under resale agreements approximate fair value because of the relatively short time between the origination of the instrument and its expected realization and are classified within Level 2. Fair value is provided for disclosure purposes only.

Investment Securities When quoted market prices for identical securities are available in an active market, these prices are used to determine fair value and these securities are classified within Level 1 of the fair value hierarchy. Level 1 investment securities include U.S. Treasury and exchange-traded securities.

For other securities, quoted market prices may not be readily available for the specific securities. When possible, the Company determines fair value based on market observable information, including quoted market prices for similar securities, inactive transaction prices, and broker quotes. These securities are classified within Level 2 of the fair value hierarchy. Level 2 valuations are generally provided by a third party pricing service. The Company reviews the valuation methodologies utilized by the pricing service and, on a quarterly basis, reviews the security level prices provided by the pricing service against management’s expectation of fair value, based on changes in various benchmarks and market knowledge from recent trading activity. Additionally, each quarter, the Company validates the fair value provided by the pricing services by comparing them to recent observable market trades (where available), broker provided quotes, or other independent secondary pricing sources. Prices obtained from the pricing service are adjusted if they are found to be inconsistent with relevant market data. Level 2 investment securities are predominantly agency mortgage-backed securities, certain other asset-backed securities, municipal securities, corporate debt securities, agency debt securities and certain perpetual preferred securities.

The fair value of securities for which there are no market trades, or where trading is inactive as compared to normal market activity, are classified within Level 3 of the fair value hierarchy. The Company determines the fair value of these securities by using a discounted cash flow methodology and incorporating observable market information, where available. These valuations are modeled by a unit within the Company’s treasury department. The valuations use assumptions regarding housing prices, interest rates and borrower performance. Inputs are refined and updated at least quarterly to reflect market developments and actual performance. The primary valuation drivers of these securities are the prepayment rates, default rates and default severities associated with the underlying collateral, as well as the discount rate used to calculate the present value of the projected cash flows. Level 3 fair values, including the assumptions used, are subject to review by senior management in corporate functions, who are independent from the modeling. The fair value measurements are also compared to fair values provided by third party pricing services and broker provided quotes, where available. Securities classified within Level 3 include non-agency mortgage-backed securities, non-agency commercial mortgage-backed securities, certain asset-backed securities and certain corporate debt securities.

Mortgage Loans Held For Sale MLHFS measured at fair value, for which an active secondary market and readily available market prices exist, are initially valued at the transaction price and are subsequently valued by comparison to instruments with similar collateral and risk profiles. MLHFS are classified within Level 2. Included in mortgage banking revenue was a $27 million and a $61 million net gain for the three months ended September 30, 2016 and 2015, respectively, and a $154 million and a $27 million net gain for the nine months ended September 30, 2016 and 2015, respectively, from the changes to fair value of these MLHFS under fair value option accounting guidance. Changes in fair value due to instrument specific credit risk were immaterial. Interest income for MLHFS is measured based on contractual interest rates and reported as interest income on the Consolidated Statement of Income. Electing to measure MLHFS at fair value reduces certain timing differences and better matches changes in fair value of these assets with changes in the value of the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting.

Loans The loan portfolio includes adjustable and fixed-rate loans, the fair value of which is estimated using discounted cash flow analyses and other valuation techniques. The expected cash flows of loans consider historical prepayment experiences and estimated credit losses and are discounted using current rates offered to borrowers with similar credit characteristics. Generally, loan fair values reflect Level 3 information. Fair value is provided for disclosure purposes only, with the exception of impaired collateral-based loans that are measured at fair value on a non-recurring basis utilizing the underlying collateral fair value.


68		U.S. Bancorp

Mortgage Servicing Rights MSRs are valued using a discounted cash flow methodology, and are classified within Level 3. The Company determines fair value by estimating the present value of the asset’s future cash flows using prepayment rates, discount rates, and other assumptions. The MSR valuations, as well as the assumptions used, are developed by the mortgage banking division and are subject to review by senior management in corporate functions, who are independent from the modeling. The MSR valuations and assumptions are validated through comparison to trade information when available, publicly available data and industry surveys and are also compared to independent third party valuations each quarter. Risks inherent in MSR valuation include higher than expected prepayment rates and/or delayed receipt of cash flows. There is minimal observable market activity for MSRs on comparable portfolios and, therefore, the determination of fair value requires significant management judgment. Refer to Note 6 for further information on MSR valuation assumptions.

Derivatives The majority of derivatives held by the Company are executed over-the-counter and are valued using standard cash flow, Black-Derman-Toy and Monte Carlo valuation techniques. The models incorporate inputs, depending on the type of derivative, including interest rate curves, foreign exchange rates and volatility. In addition, all derivative values incorporate an assessment of the risk of counterparty nonperformance, measured based on the Company’s evaluation of credit risk as well as external assessments of credit risk, where available. The Company monitors and manages its nonperformance risk by considering its ability to net derivative positions under master netting arrangements, as well as collateral received or provided under collateral arrangements. Accordingly, the Company has elected to measure the fair value of derivatives, at a counterparty level, on a net basis. The majority of the derivatives are classified within Level 2 of the fair value hierarchy, as the significant inputs to the models, including nonperformance risk, are observable. However, certain derivative transactions are with counterparties where risk of nonperformance cannot be observed in the market and, therefore, the credit valuation adjustments result in these derivatives being classified within Level 3 of the fair value hierarchy. The credit valuation adjustments for nonperformance risk are determined by the Company’s treasury department using credit assumptions provided by the risk management department. The credit assumptions are compared to actual results quarterly and are recalibrated as appropriate.

The Company also has other derivative contracts that are created through its operations, including commitments to purchase and originate mortgage loans and swap agreements executed in conjunction with the sale of a portion of its Class B common shares of Visa Inc. (the “Visa swaps”). The mortgage loan commitments are valued by pricing models that include market observable and unobservable inputs, which result in the commitments being classified within Level 3 of the fair value hierarchy. The unobservable inputs include assumptions about the percentage of commitments that actually become a closed loan and the MSR value that is inherent in the underlying loan value, both of which are developed by the Company’s mortgage banking division. The closed loan percentages for the mortgage loan commitments are monitored on an on-going basis, as these percentages are also used for the Company’s economic hedging activities. The inherent MSR value for the commitments are generated by the same models used for the Company’s MSRs and thus are subject to the same processes and controls as described for the MSRs above. The Visa swaps require payments by either the Company or the purchaser of the Visa Inc. Class B common shares when there are changes in the conversion rate of the Visa Inc. Class B common shares to Visa Inc. Class A common shares, as well as quarterly payments to the purchaser based on specified terms of the agreements. Management reviews and updates the Visa swaps fair value in conjunction with its review of Visa related litigation contingencies, and the associated escrow funding. The fair value of the Visa swaps are calculated by the Company’s corporate development department using a discounted cash flow methodology which includes unobservable inputs about the timing and settlement amounts related to the resolution of certain Visa related litigation. The expected litigation resolution impacts the Visa Inc. Class B common share to Visa Inc. Class A common share conversion rate, as well as the ultimate termination date for the Visa swaps. Accordingly, the Visa swaps are classified within Level 3. Refer to Note 15 for further information on the Visa restructuring and related card association litigation.

Other Financial Instruments Other financial instruments include cost method equity investments and certain community development and tax-advantaged related assets and liabilities. The majority of the Company’s cost method equity investments are in Federal Home Loan Bank and Federal Reserve Bank stock, for which the carrying amounts approximate fair value and are classified within Level 2. Investments in other equity and limited partnership funds are estimated using fund provided net asset values. These equity investments are classified within Level 3. The community development and tax-advantaged related asset balances primarily represent the underlying assets of consolidated community development and tax-advantaged entities. The community development and tax-advantaged related


U.S. Bancorp		69

liabilities represent the underlying liabilities of the consolidated entities (included in long-term debt) and liabilities related to other third party interests (included in other liabilities). The carrying value of the community development and tax-advantaged related asset and other liability balances are a reasonable estimate of fair value and are classified within Level 3. Refer to Note 5 for further information on community development and tax-advantaged related assets and liabilities. Fair value is provided for disclosure purposes only.

Deposit Liabilities The fair value of demand deposits, savings accounts and certain money market deposits is equal to the amount payable on demand. The fair value of fixed-rate certificates of deposit was estimated by discounting the contractual cash flow using current market rates. Deposit liabilities are classified within Level 2. Fair value is provided for disclosure purposes only.

Short-term Borrowings Federal funds purchased, securities sold under agreements to repurchase, commercial paper and other short-term funds borrowed have floating rates or short-term maturities. The fair value of short-term borrowings was determined by discounting contractual cash flows using current market rates. Short-term borrowings are classified within Level 2. Included in short-term borrowings is the Company’s obligation on securities sold short, which is required to be accounted for at fair value per applicable accounting guidance. Fair value for other short-term borrowings is provided for disclosure purposes only.

Long-term Debt The fair value for most long-term debt was determined by discounting contractual cash flows using current market rates. Junior subordinated debt instruments were valued using market quotes. Long-term debt is classified within Level 2. Fair value is provided for disclosure purposes only.

Loan Commitments, Letters of Credit and Guarantees The fair value of commitments, letters of credit and guarantees represents the estimated costs to terminate or otherwise settle the obligations with a third party. Other loan commitments, letters of credit and guarantees are not actively traded, and the Company estimates their fair value based on the related amount of unamortized deferred commitment fees adjusted for the probable losses for these arrangements. These arrangements are classified within Level 3. Fair value is provided for disclosure purposes only.

Significant Unobservable Inputs of Level 3 Assets and Liabilities

The following section provides information on the significant inputs used by the Company to determine the fair value measurements of Level 3 assets and liabilities recorded at fair value on the Consolidated Balance Sheet. In addition, the following section includes a discussion of the sensitivity of the fair value measurements to changes in the significant inputs and a description of any interrelationships between these inputs for Level 3 assets and liabilities recorded at fair value on a recurring basis. The discussion below excludes nonrecurring fair value measurements of collateral value used for impairment measures for loans and OREO. These valuations utilize third party appraisal or broker price opinions, and are classified as Level 3 due to the significant judgment involved.

Available-For-Sale Investment Securities The significant unobservable inputs used in the fair value measurement of the Company’s modeled Level 3 available-for-sale investment securities are prepayment rates, probability of default and loss severities associated with the underlying collateral, as well as the discount margin used to calculate the present value of the projected cash flows. Increases in prepayment rates for Level 3 securities will typically result in higher fair values, as increased prepayment rates accelerate the receipt of expected cash flows and reduce exposure to credit losses. Increases in the probability of default and loss severities will result in lower fair values, as these increases reduce expected cash flows. Discount margin is the Company’s estimate of the current market spread above the respective benchmark rate. Higher discount margin will result in lower fair values, as it reduces the present value of the expected cash flows.

Prepayment rates generally move in the opposite direction of market interest rates. In the current environment, an increase in the probability of default will generally be accompanied with an increase in loss severity, as both are impacted by underlying collateral values. Discount margins are influenced by market expectations about the security’s collateral performance and, therefore, may directionally move with probability and severity of default; however, discount margins are also impacted by broader market forces, such as competing investment yields, sector liquidity, economic news, and other macroeconomic factors.


70		U.S. Bancorp

The following table shows the significant valuation assumption ranges for Level 3 available-for-sale investment securities at September 30, 2016:


	Minimum			Maximum			Average
Residential Prime Non-Agency Mortgage-Backed Securities (a)
Estimated lifetime prepayment rates		6	%		19	%		14	%
Lifetime probability of default rates		–			6			4
Lifetime loss severity rates		15			65			35
Discount margin		2			6			4
Residential Non-Prime Non-Agency Mortgage-Backed Securities (b)
Estimated lifetime prepayment rates		3	%		15	%		8	%
Lifetime probability of default rates		4			12			7
Lifetime loss severity rates		15			75			51
Discount margin		2			10			4
Other Asset-Backed Securities
Estimated lifetime prepayment rates		6	%		6	%		6	%
Lifetime probability of default rates		5			5			5
Lifetime loss severity rates		40			40			40
Discount margin		6			6			6

(a)

(b)

Includes all securities not meeting the conditions to be designated as prime.

Mortgage Servicing Rights The significant unobservable inputs used in the fair value measurement of the Company’s MSRs are expected prepayments and the discount rate used to calculate the present value of the projected cash flows. Significant increases in either of these inputs in isolation would result in a significantly lower fair value measurement. Significant decreases in either of these inputs in isolation would result in a significantly higher fair value measurement. There is no direct interrelationship between prepayments and discount rate. Prepayment rates generally move in the opposite direction of market interest rates. Discount rates are generally impacted by changes in market return requirements.

The following table shows the significant valuation assumption ranges for MSRs at September 30, 2016:


	Minimum			Maximum			Average
Expected prepayment		12	%		20	%		15	%
Discount rate		9			13			10

Derivatives The Company has two distinct Level 3 derivative portfolios: (i) the Company’s commitments to purchase and originate mortgage loans that meet the requirements of a derivative and (ii) the Company’s asset/liability and customer-related derivatives that are Level 3 due to unobservable inputs related to measurement of risk of nonperformance by the counterparty. In addition, the Company’s Visa swaps are classified within Level 3.

The significant unobservable inputs used in the fair value measurement of the Company’s derivative commitments to purchase and originate mortgage loans are the percentage of commitments that actually become a closed loan and the MSR value that is inherent in the underlying loan value. A significant increase in the rate of loans that close would result in a larger derivative asset or liability. A significant increase in the inherent MSR value would result in an increase in the derivative asset or a reduction in the derivative liability. Expected loan close rates and the inherent MSR values are directly impacted by changes in market rates and will generally move in the same direction as interest rates.

The following table shows the significant valuation assumption ranges for the Company’s derivative commitments to purchase and originate mortgage loans at September 30, 2016:


	Minimum			Maximum			Average
Expected loan close rate		17	%		99	%		77	%
Inherent MSR value (basis points per loan)		46			192			112

The significant unobservable input used in the fair value measurement of certain of the Company’s asset/liability and customer-related derivatives is the credit valuation adjustment related to the risk of counterparty nonperformance. A significant increase in the credit valuation adjustment would result in a lower fair value measurement. A significant decrease in the credit valuation adjustment would result in a higher fair value measurement. The credit valuation


U.S. Bancorp		71

adjustment is impacted by changes in the Company’s assessment of the counterparty’s credit position. At September 30, 2016, the minimum, maximum and average credit valuation adjustment as a percentage of the derivative contract fair value prior to adjustment was 0 percent, 98 percent and 4 percent, respectively.

The significant unobservable inputs used in the fair value measurement of the Visa swaps are management’s estimate of the probability of certain litigation scenarios, and the timing of the resolution of the related litigation loss estimates in excess, or shortfall, of the Company’s proportional share of escrow funds. An increase in the loss estimate or a delay in the resolution of the related litigation would result in an increase in the derivative liability. A decrease in the loss estimate or an acceleration of the resolution of the related litigation would result in a decrease in the derivative liability.

The following table summarizes the balances of assets and liabilities measured at fair value on a recurring basis:


(Dollars in Millions)	Level 1		Level 2		Level 3		Netting			Total
September 30, 2016
Available-for-sale securities
U.S. Treasury and agencies	$	13,820	$	810	$	–	$	–		$	14,630
Mortgage-backed securities
Residential
Agency		–		45,433		–		–			45,433
Non-agency
Prime (a)		–		–		259		–			259
Non-prime (b)		–		–		206		–			206
Commercial
Agency		–		16		–		–			16
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		–		13		–		–			13
Other		–		522		2		–			524
Obligations of state and political subdivisions		–		5,376		–		–			5,376
Corporate debt securities		52		518		9		–			579
Perpetual preferred securities		27		26		–		–			53
Other investments		36		30		–		–			66
Total available-for-sale		13,935		52,744		476		–			67,155
Mortgage loans held for sale		–		5,572		–		–			5,572
Mortgage servicing rights		–		–		2,131		–			2,131
Derivative assets		1		2,578		1,106		(746	)		2,939
Other assets		176		1,490		–		–			1,666
Total	$	14,112	$	62,384	$	3,713	$	(746	)	$	79,463
Derivative liabilities	$	–	$	3,678	$	175	$	(1,485	)	$	2,368
Short-term borrowings (c)		210		898		–		–			1,108
Total	$	210	$	4,576	$	175	$	(1,485	)	$	3,476
December 31, 2015
Available-for-sale securities
U.S. Treasury and agencies	$	3,708	$	888	$	–	$	–		$	4,596
Mortgage-backed securities
Residential
Agency		–		50,076		–		–			50,076
Non-agency
Prime (a)		–		–		318		–			318
Non-prime (b)		–		–		240		–			240
Commercial
Agency		–		52		–		–			52
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		–		19		–		–			19
Other		–		539		2		–			541
Obligations of state and political subdivisions		–		5,316		–		–			5,316
Corporate debt securities		102		499		9		–			610
Perpetual preferred securities		48		113		–		–			161
Other investments		40		28		–		–			68
Total available-for-sale		3,898		57,530		569		–			61,997
Mortgage loans held for sale		–		3,110		–		–			3,110
Mortgage servicing rights		–		–		2,512		–			2,512
Derivative assets		–		1,632		615		(807	)		1,440
Other assets		202		589		–		–			791
Total	$	4,100	$	62,861	$	3,696	$	(807	)	$	69,850
Derivative liabilities	$	2	$	2,266	$	117	$	(1,283	)	$	1,102
Short-term borrowings (c)		122		645		–		–			767
Total	$	124	$	2,911	$	117	$	(1,283	)	$	1,869

(a)

(b)

Includes all securities not meeting the conditions to be designated as prime.

(c)

Represents the Company’s obligation on securities sold short required to be accounted for at fair value per applicable accounting guidance.


72		U.S. Bancorp

The following table presents the changes in fair value for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended September 30:


(Dollars in Millions)	Beginning of Period Balance		Net Gains (Losses) Included in Net Income			Net Gains (Losses) Included in Other Comprehensive Income (Loss)			Purchases		Sales			Principal Payments			Issuances			Settlements			End of Period Balance		Net Change in Unrealized Gains (Losses) Relating to Assets and Liabilities Held at End of Period
2016
Available-for-sale securities
Mortgage-backed securities
Residential non-agency
Prime (a)	$	280	$	–		$	–		$	–	$	–		$	(21	)	$	–		$	–		$	259	$	–
Non-prime (b)		216		–			(1	)		–		–			(9	)		–			–			206		(1	)
Asset-backed securities
Other		2		–			–			–		–			–			–			–			2		–
Corporate debt securities		9		–			–			–		–			–			–			–			9		–
Total available-for-sale		507		–	(c)		(1	) (f)		–		–			(30	)		–			–			476		(1	)
Mortgage servicing rights		2,056		(85	) (d)		–			18		–			–			142	(g)		–			2,131		(85	) (d)
Net derivative assets and liabilities		1,080		84	(e)		–			–		(2	)		–			–			(231	)		931		16	(h)
2015
Available-for-sale securities
Mortgage-backed securities
Residential non-agency
Prime (a)	$	363	$	–		$	–		$	–	$	–		$	(25	)	$	–		$	–		$	338	$	–
Non-prime (b)		262		(1	)		1			–		–			(11	)		–			–			251		1
Asset-backed securities
Other		58		2			(1	)		–		–			(3	)		–			–			56		(1	)
Corporate debt securities		9		–			–			–		–			–			–			–			9		–
Total available-for-sale		692		1	(i)		–	(f)		–		–			(39	)		–			–			654		–
Mortgage servicing rights		2,481		(273	) (d)		–			7		–			–			182	(g)		–			2,397		(273	) (d)
Net derivative assets and liabilities		478		426	(j)		–			–		(2	)		–			–			(219	)		683		231	(k)

(a)

(b)

Includes all securities not meeting the conditions to be designated as prime.

(c)

Approximately $(1) million included in securities gain (losses) and $1 million included in interest income.

(d)

Included in mortgage banking revenue.

(e)

Approximately $(73) million included in other noninterest income and $157 million included in mortgage banking revenue.

(f)

Included in changes in unrealized gains and losses on securities available-for-sale.

(g)

Represents MSRs capitalized during the period.

(h)

Approximately $(81) million included in other noninterest income and $97 million included in mortgage banking revenue.

(i)

Included in interest income.

(j)

Approximately $274 million included in other noninterest income and $152 million included in mortgage banking revenue.

(k)

Approximately $159 million included in other noninterest income and $72 million included in mortgage banking revenue.


U.S. Bancorp		73


(Dollars in Millions)	Beginning of Period Balance		Net Gains (Losses) Included in Net Income			Net Gains (Losses) Included in Other Comprehensive Income (Loss)			Purchases		Sales			Principal Payments			Issuances			Settlements			End of Period Balance		Net Change in Unrealized Gains (Losses) Relating to Assets and Liabilities Held at End of Period
2016
Available-for-sale securities
Mortgage-backed securities
Residential non-agency
Prime (a)	$	318	$	(1	)	$	–		$	–	$	–		$	(58	)	$	–		$	–		$	259	$	–
Non-prime (b)		240		(1	)		(4	)		–		–			(29	)		–			–			206		(4	)
Asset-backed securities
Other		2		–			–			–		–			–			–			–			2		–
Corporate debt securities		9		–			–			–		–			–			–			–			9		–
Total available-for-sale		569		(2	) (c)		(4	) (f)		–		–			(87	)		–			–			476		(4	)
Mortgage servicing rights		2,512		(785	) (d)		–			32		–			–			372	(g)		–			2,131		(785	) (d)
Net derivative assets and liabilities		498		1,047	(e)		–			1		(5	)		–			–			(610	)		931		494	(h)
2015
Available-for-sale securities
Mortgage-backed securities
Residential non-agency
Prime (a)	$	405	$	–		$	(2	)	$	–	$	–		$	(65	)	$	–		$	–		$	338	$	(2	)
Non-prime (b)		280		(1	)		1			–		–			(29	)		–			–			251		1
Asset-backed securities
Other		62		4			(1	)		–		–			(9	)		–			–			56		(1	)
Corporate debt securities		9		–			–			–		–			–			–			–			9		–
Total available-for-sale		756		3	(i)		(2	) (f)		–		–			(103	)		–			–			654		(2	)
Mortgage servicing rights		2,338		(454	) (d)		–			22		–			–			491	(g)		–			2,397		(454	) (d)
Net derivative assets and liabilities		574		725	(j)		–			–		(7	)		–			–			(609	)		683		203	(k)

(a)

(b)

Includes all securities not meeting the conditions to be designated as prime.

(c)

Approximately $(3) million included in securities gain (losses) and $1 million included in interest income.

(d)

Included in mortgage banking revenue.

(e)

Approximately $560 million included in other noninterest income and $487 million included in mortgage banking revenue.

(f)

Included in changes in unrealized gains and losses on securities available-for-sale.

(g)

Represents MSRs capitalized during the period.

(h)

Approximately $397 million included in other noninterest income and $97 million included in mortgage banking revenue.

(i)

Included in interest income.

(j)

Approximately $360 million included in other noninterest income and $365 million included in mortgage banking revenue.

(k)

Approximately $131 million included in other noninterest income and $72 million included in mortgage banking revenue.

The Company is also required periodically to measure certain other financial assets at fair value on a nonrecurring basis. These measurements of fair value usually result from the application of lower-of-cost-or-fair value accounting or write-downs of individual assets.

The following table summarizes the balances as of the measurement date of assets measured at fair value on a nonrecurring basis, and still held as of the reporting date:


	September 30, 2016								December 31, 2015
(Dollars in Millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Loans (a)	$	–	$	–	$	128	$	128	$	–	$	–	$	87	$	87
Other assets (b)		–		–		54		54		–		–		66		66

(a)

Represents the carrying value of loans for which adjustments were based on the fair value of the collateral, excluding loans fully charged-off.

(b)

Primarily represents the fair value of foreclosed properties that were measured at fair value based on an appraisal or broker price opinion of the collateral subsequent to their initial acquisition.


74		U.S. Bancorp

The following table summarizes losses recognized related to nonrecurring fair value measurements of individual assets or portfolios:


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in Millions)	2016		2015		2016		2015
Loans (a)	$	45	$	99	$	156	$	139
Other assets (b)		6		10		25		29

(a)

Represents write-downs of student loans held for sale based on non-binding quoted prices received for the portfolio, that were subsequently transferred to loans, and write-downs of loans which were based on the fair value of the collateral, excluding loans fully charged-off.

(b)

Primarily represents related losses of foreclosed properties that were measured at fair value subsequent to their initial acquisition.

Fair Value Option

The following table summarizes the differences between the aggregate fair value carrying amount of MLHFS for which the fair value option has been elected and the aggregate unpaid principal amount that the Company is contractually obligated to receive at maturity:


	September 30, 2016							December 31, 2015
(Dollars in Millions)	Fair Value Carrying Amount		Aggregate Unpaid Principal		Carrying Amount Over (Under) Unpaid Principal			Fair Value Carrying Amount		Aggregate Unpaid Principal		Carrying Amount Over (Under) Unpaid Principal
Total loans	$	5,572	$	5,368	$	204		$	3,110	$	3,032	$	78
Nonaccrual loans		3		4		(1	)		5		7		(2	)
Loans 90 days or more past due		1		1		–			–		–		–

Disclosures About Fair Value of Financial Instruments

The following table summarizes the estimated fair value for financial instruments as of September 30, 2016 and December 31, 2015, and includes financial instruments that are not accounted for at fair value. In accordance with disclosure guidance related to fair values of financial instruments, the Company did not include assets and liabilities that are not financial instruments, such as the value of goodwill, long-term relationships with deposit, credit card, merchant processing and trust customers, other purchased intangibles, premises and equipment, deferred taxes and other liabilities. Additionally, in accordance with the disclosure guidance, insurance contracts and investments accounted for under the equity method are excluded.

The estimated fair values of the Company’s financial instruments are shown in the table below:


	September 30, 2016										December 31, 2015
	Carrying Amount		Fair Value								Carrying Amount		Fair Value
(Dollars in Millions)	Carrying Amount		Level 1		Level 2		Level 3		Total		Carrying Amount		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and due from banks	$	23,664	$	23,664	$	–	$	–	$	23,664	$	11,147	$	11,147	$	–	$	–	$	11,147
Federal funds sold and securities purchased under resale agreements		209		–		209		–		209		169		–		169		–		169
Investment securities held-to-maturity		42,873		4,256		39,076		74		43,406		43,590		2,275		41,138		80		43,493
Loans held for sale (a)		3		–		–		3		3		74		–		–		74		74
Loans		267,492		–		–		273,136		273,136		256,986		–		–		259,823		259,823
Other financial instruments		2,332		–		920		1,420		2,340		2,311		–		921		1,398		2,319
Financial Liabilities
Deposits		334,595		–		334,522		–		334,522		300,400		–		300,225		–		300,225
Short-term borrowings (b)		14,587		–		14,444		–		14,444		27,110		–		26,782		–		26,782
Long-term debt		37,978		–		38,847		–		38,847		32,078		–		32,412		–		32,412
Other liabilities		1,634		–		–		1,634		1,634		1,353		–		–		1,353		1,353

(a)

Excludes mortgages held for sale for which the fair value option under applicable accounting guidance was elected.

(b)

Excludes the Company’s obligation on securities sold short required to be accounted for at fair value per applicable accounting guidance.

The fair value of unfunded commitments, deferred non-yield related loan fees, standby letters of credit and other guarantees is approximately equal to their carrying value. The carrying value of unfunded commitments, deferred non-yield related loan fees and standby letters of credit was $617 million and $515 million at September 30, 2016 and December 31, 2015, respectively. The carrying value of other guarantees was $162 million and $184 million at September 30, 2016 and December 31, 2015, respectively.


U.S. Bancorp		75

Note 15

Guarantees and Contingent Liabilities

Visa Restructuring and Card Association Litigation The Company’s payment services business issues credit and debit cards and acquires credit and debit card transactions through the Visa U.S.A. Inc. card association or its affiliates (collectively “Visa”). In 2007, Visa completed a restructuring and issued shares of Visa Inc. common stock to its financial institution members in contemplation of its initial public offering (“IPO”) completed in the first quarter of 2008 (the “Visa Reorganization”). As a part of the Visa Reorganization, the Company received its proportionate number of shares of Visa Inc. common stock, which were subsequently converted to Class B shares of Visa Inc. (“Class B shares”). Visa U.S.A. Inc. (“Visa U.S.A.”) and MasterCard International (collectively, the “Card Associations”) are defendants in antitrust lawsuits challenging the practices of the Card Associations (the “Visa Litigation”). Visa U.S.A. member banks have a contingent obligation to indemnify Visa Inc. under the Visa U.S.A. bylaws (which were modified at the time of the restructuring in October 2007) for potential losses arising from the Visa Litigation. The indemnification by the Visa U.S.A. member banks has no specific maximum amount.

Using proceeds from its IPO and through reductions to the conversion ratio applicable to the Class B shares held by Visa U.S.A. member banks, Visa Inc. has funded an escrow account for the benefit of member financial institutions to fund their indemnification obligations associated with the Visa Litigation. The receivable related to the escrow account is classified in other liabilities as a direct offset to the related Visa Litigation contingent liability. On October 19, 2012, Visa signed a settlement agreement to resolve class action claims associated with the multi-district interchange litigation, the largest of the remaining Visa Litigation matters. The United States District Court for the Eastern District of New York approved the settlement, but that approval was appealed by certain class members. On June 30, 2016, the United States Court of Appeals for the Second Circuit reversed the approval of the settlement and remanded the case to the district court for further proceedings. At September 30, 2016, the carrying amount of the Company’s liability related to the Visa Litigation matters, net of its share of the escrow fundings, was $19 million. During the three and nine months ended September 30, 2016, the Company sold 0.2 million and 0.7 million, respectively, of its Class B shares. These sales, and any previous sales of its Class B shares, do not impact the Company’s liability for the Visa Litigation matters or the receivable related to the escrow account. Upon final settlement of the Visa Litigation, the remaining 5.7 million Class B shares held by the Company will be eligible for conversion to Class A shares of Visa Inc., which are publicly traded. The Class B shares are excluded from the Company’s financial instruments disclosures included in Note 14.

Other Guarantees and Contingent Liabilities

The following table is a summary of other guarantees and contingent liabilities of the Company at September 30, 2016:


(Dollars in Millions)	Collateral Held		Carrying Amount		Maximum Potential Future Payments
Standby letters of credit	$	–	$	63	$	12,326
Third party borrowing arrangements		–		–		13
Securities lending indemnifications		3,442		–		3,382
Asset sales		–		105		5,799	(a)
Merchant processing		552		57		96,919
Tender option bond program guarantee		1,051		–		1,028
Minimum revenue guarantees		–		–		9
Other		–		–		867

(a)

The maximum potential future payments do not include loan sales where the Company provides standard representation and warranties to the buyer against losses related to loan underwriting documentation defects that may have existed at the time of sale that generally are identified after the occurrence of a triggering event such as delinquency. For these types of loan sales, the maximum potential future payments is generally the unpaid principal balance of loans sold measured at the end of the current reporting period. Actual losses will be significantly less than the maximum exposure, as only a fraction of loans sold will have a representation and warranty breach, and any losses on repurchase would generally be mitigated by any collateral held against the loans.

Merchant Processing The Company, through its subsidiaries, provides merchant processing services. Under the rules of credit card associations, a merchant processor retains a contingent liability for credit card transactions processed. This contingent liability arises in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor. In this situation, the transaction is “charged-back” to the merchant and the disputed amount is credited or otherwise refunded to the cardholder. If the Company is unable to collect this amount from the merchant, it bears the loss for the amount of the refund paid to the cardholder.

The Company currently processes card transactions in the United States, Canada, Europe and Mexico through wholly-owned subsidiaries and joint ventures with other financial institutions. In the event a merchant was unable to


76		U.S. Bancorp

fulfill product or services subject to future delivery, such as airline tickets, the Company could become financially liable for refunding tickets purchased through the credit card associations under the charge-back provisions. Charge-back risk related to these merchants is evaluated in a manner similar to credit risk assessments and, as such, merchant processing contracts contain various provisions to protect the Company in the event of default. At September 30, 2016, the value of airline tickets purchased to be delivered at a future date was $6.7 billion. The Company held collateral of $427 million in escrow deposits, letters of credit and indemnities from financial institutions, and liens on various assets.

Asset Sales The Company regularly sells loans to GSEs as part of its mortgage banking activities. The Company provides customary representations and warranties to the GSEs in conjunction with these sales. These representations and warranties generally require the Company to repurchase assets if it is subsequently determined that a loan did not meet specified criteria, such as a documentation deficiency or rescission of mortgage insurance. If the Company is unable to cure or refute a repurchase request, the Company is generally obligated to repurchase the loan or otherwise reimburse the counterparty for losses. At September 30, 2016, the Company had reserved $21 million for potential losses from representation and warranty obligations, compared with $30 million at December 31, 2015. The Company’s reserve reflects management’s best estimate of losses for representation and warranty obligations. The Company’s repurchase reserve is modeled at the loan level, taking into consideration the individual credit quality and borrower activity that has transpired since origination. The model applies credit quality and economic risk factors to derive a probability of default and potential repurchase that are based on the Company’s historical loss experience, and estimates loss severity based on expected collateral value. The Company also considers qualitative factors that may result in anticipated losses differing from historical loss trends.

As of September 30, 2016 and December 31, 2015, the Company had $7 million and $12 million, respectively, of unresolved representation and warranty claims from the GSEs. The Company does not have a significant amount of unresolved claims from investors other than the GSEs.

Litigation and Regulatory Matters The Company is subject to various litigation and regulatory matters that arise in the ordinary course of its business. The Company establishes reserves for such matters when potential losses become probable and can be reasonably estimated. The Company believes the ultimate resolution of existing legal and regulatory matters will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. However, in light of the inherent uncertainties involved in these matters, it is possible that the ultimate resolution of one or more of these matters may have a material adverse effect on the Company’s results from operations for a particular period, and future changes in circumstances or additional information could result in additional accruals or resolution in excess of established accruals, which could adversely affect the Company’s results from operations, potentially materially.

Litigation Matters In the last several years, the Company and other large financial institutions have been sued in their capacity as trustee for residential mortgage–backed securities trusts. Among these lawsuits are actions originally brought in June 2014 by a group of institutional investors, including BlackRock and PIMCO funds, against six bank trustees, including the Company. The actions brought by these institutional investors against the Company are in their early stages and currently are pending in the Supreme Court of the State of New York, New York County, and in the United States District Court for the Southern District of New York. In these lawsuits, the investors allege that the Company’s banking subsidiary, U.S. Bank National Association, as trustee caused them to incur substantial losses by failing to enforce loan repurchase obligations and failing to abide by appropriate standards of care after events of default allegedly occurred. The plaintiffs seek monetary damages in an unspecified amount and also seek equitable relief.

Regulatory Matters The Company is currently subject to examinations, inquiries and investigations by government agencies and bank regulators concerning mortgage-related practices, including those related to compliance with selling guidelines relating to residential home loans sold to GSEs, foreclosure-related expenses submitted to the Federal Housing Administration or GSEs for reimbursement, lender-placed insurance, and notices and filings in bankruptcy cases. The Company is also subject to ongoing examinations, inquiries and investigations by government agencies, bank regulators and law enforcement with respect to Bank Secrecy Act/anti-money laundering compliance program adequacy and effectiveness and sanctions compliance requirements as administered by the Office of Foreign Assets Control. The Company is cooperating with an investigation currently being conducted by the U.S. Attorney’s Office in Manhattan regarding its banking relationship with Scott Tucker, who has been indicted over the operation of an allegedly illegal payday lending business. Tucker, who is challenging his indictment, and his businesses maintained


U.S. Bancorp		77

certain deposit accounts with U.S. Bank National Association. The U.S. Attorney’s Office has also requested information on aspects of the Company’s Bank Secrecy Act/anti-money laundering compliance program.

The Company is continually subject to examinations, inquiries and investigations in areas of increasing regulatory scrutiny, such as compliance, risk management, third party risk management and consumer protection.

The Company is cooperating fully with all pending examinations, inquiries and investigations, any of which could lead to administrative or legal proceedings or settlements. Remedies in these proceedings or settlements may include fines, penalties, restitution or alterations in the Company’s business practices (which may increase the Company’s operating expenses and decrease its revenue).

In October 2015, the Company entered into a Consent Order with the Office of the Comptroller of the Currency (the “OCC”) concerning deficiencies in its Bank Secrecy Act/anti-money laundering compliance program, and requiring an ongoing review of that program. If the Company does not satisfactorily correct the identified deficiencies, it could be required to enter into further orders, pay fines or penalties or further modify its business practices. Some of the compliance program enhancements and other actions required by the Consent Order have already been, or are currently in the process of being, implemented, and are not expected to be material to the Company.

In April 2011, the Company and certain other large financial institutions entered into Consent Orders with the OCC and the Board of Governors of the Federal Reserve System relating to residential mortgage servicing and foreclosure practices. In June 2015, the Company entered into an agreement to amend the 2011 Consent Order it had with the OCC. The OCC terminated the amended Consent Order in February 2016. Depending on the Company’s progress toward addressing the requirements of the 2011 Consent Order it has with the Board of Governors of the Federal Reserve System, the Company may be required to enter into further orders and settlements, pay additional fines or penalties, make restitution or further modify the Company’s business practices (which may increase the Company’s operating expenses and decrease its revenue).

Outlook Due to their complex nature, it can be years before litigation and regulatory matters are resolved. The Company may be unable to develop an estimate or range of loss where matters are in early stages, there are significant factual or legal issues to be resolved, damages are unspecified or uncertain, or there is uncertainty as to a litigation class being certified or the outcome of pending motions, appeals or proceedings. For those litigation and regulatory matters where the Company has information to develop an estimate or range of loss, the Company believes the upper end of reasonably possible losses in aggregate, in excess of any reserves established for matters where a loss is considered probable, will not be material to its financial condition, results of operations or cash flows. The Company’s estimates are subject to significant judgment and uncertainties, and the matters underlying the estimates will change from time to time. Actual results may vary significantly from the current estimates.

For additional information on the nature of the Company’s guarantees and contingent liabilities, refer to Note 23 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Note 16

Subsequent Events

The Company has evaluated the impact of events that have occurred subsequent to September 30, 2016 through the date the consolidated financial statements were filed with the United States Securities and Exchange Commission. Based on this evaluation, the Company has determined none of these events were required to be recognized or disclosed in the consolidated financial statements and related notes.


78		U.S. Bancorp

U.S. Bancorp

Consolidated Daily Average Balance Sheet and Related Yields and Rates (a)


	For the Three Months Ended September 30,
	2016								2015
(Dollars in Millions) (Unaudited)	Average Balances			Interest		Yields and Rates			Average Balances			Interest		Yields and Rates			% Change Average Balances
Assets
Investment securities	$	108,109		$	539		2.00	%	$	103,943		$	531		2.04	%		4.0	%
Loans held for sale		4,691			43		3.68			6,835			60		3.54			(31.4	)
Loans (b)
Commercial		92,369			654		2.82			84,704			574		2.69			9.0
Commercial real estate		43,374			429		3.94			42,316			407		3.82			2.5
Residential mortgages		56,284			522		3.70			51,831			493		3.80			8.6
Credit card		20,628			569		10.98			17,944			498		11.02			15.0
Other retail		52,851			535		4.02			48,849			504		4.09			8.2
Total loans, excluding covered loans		265,506			2,709		4.06			245,644			2,476		4.01			8.1
Covered loans		4,131			49		4.76			4,892			68		5.54			(15.6	)
Total loans		269,637			2,758		4.07			250,536			2,544		4.04			7.6
Other earning assets		11,346			31		1.09			7,951			36		1.76			42.7
Total earning assets		393,783			3,371		3.41			369,265			3,171		3.42			6.6
Allowance for loan losses		(3,818	)							(4,031	)							5.3
Unrealized gain (loss) on investment securities		933								607								53.7
Other assets		46,965								44,598								5.3
Total assets	$	437,863							$	410,439								6.7
Liabilities and Shareholders’ Equity
Noninterest-bearing deposits	$	82,021							$	80,940								1.3	%
Interest-bearing deposits
Interest checking		63,456			12		.08			56,888			8		.05			11.5
Money market savings		99,921			92		.36			80,338			50		.25			24.4
Savings accounts		40,695			9		.09			37,480			9		.10			8.6
Time deposits		32,455			48		.59			34,046			46		.54			(4.7	)
Total interest-bearing deposits		236,527			161		.27			208,752			113		.21			13.3
Short-term borrowings		15,929			71		1.78			27,525			67		.97			(42.1	)
Long-term debt		37,875			196		2.06			33,202			170		2.04			14.1
Total interest-bearing liabilities		290,331			428		.59			269,479			350		.52			7.7
Other liabilities		17,081								14,463								18.1
Shareholders’ equity
Preferred equity		5,501								4,756								15.7
Common equity		42,290								40,111								5.4
Total U.S. Bancorp shareholders’ equity		47,791								44,867								6.5
Noncontrolling interests		639								690								(7.4	)
Total equity		48,430								45,557								6.3
Total liabilities and equity	$	437,863							$	410,439								6.7
Net interest income				$	2,943							$	2,821
Gross interest margin							2.82	%							2.90	%
Gross interest margin without taxable-equivalent increments							2.77	%							2.84	%
Percent of Earning Assets
Interest income							3.41	%							3.42	%
Interest expense							.43								.38
Net interest margin							2.98	%							3.04	%
Net interest margin without taxable-equivalent increments							2.93	%							2.98	%

(a)

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

(b)

Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances.


U.S. Bancorp		79

U.S. Bancorp

Consolidated Daily Average Balance Sheet and Related Yields and Rates (a)


	For the Nine Months Ended September 30,
				2016								2015
(Dollars in Millions) (Unaudited)	Average Balances			Interest		Yields and Rates			Average Balances			Interest		Yields and Rates			% Change Average Balances
Assets
Investment securities	$	107,095		$	1,634		2.03	%	$	102,361		$	1,592		2.07	%		4.6	%
Loans held for sale		3,888			110		3.78			6,370			166		3.48			(39.0	)
Loans (b)
Commercial		91,451			1,920		2.80			83,167			1,696		2.73			10.0
Commercial real estate		42,922			1,269		3.95			42,476			1,233		3.88			1.1
Residential mortgages		55,334			1,548		3.73			51,458			1,465		3.80			7.5
Credit card		20,339			1,656		10.88			17,794			1,444		10.85			14.3
Other retail		51,809			1,573		4.06			48,411			1,495		4.13			7.0
Total loans, excluding covered loans		261,855			7,966		4.06			243,306			7,333		4.03			7.6
Covered loans		4,324			152		4.67			5,052			216		5.69			(14.4	)
Total loans		266,179			8,118		4.07			248,358			7,549		4.06			7.2
Other earning assets		8,654			89		1.37			8,454			103		1.62			2.4
Total earning assets		385,816			9,951		3.44			365,543			9,410		3.44			5.5
Allowance for loan losses		(3,848	)							(4,057	)							5.2
Unrealized gain (loss) on investment securities		784								767								2.2
Other assets		46,669								44,504								4.9
Total assets	$	429,421							$	406,757								5.6
Liabilities and Shareholders’ Equity
Noninterest-bearing deposits	$	79,928							$	77,623								3.0	%
Interest-bearing deposits
Interest checking		60,746			29		.07			55,592			23		.05			9.3
Money market savings		93,121			247		.35			78,065			139		.24			19.3
Savings accounts		40,070			26		.09			36,866			32		.12			8.7
Time deposits		33,447			150		.60			36,527			150		.55			(8.4	)
Total interest-bearing deposits		227,384			452		.27			207,050			344		.22			9.8
Short-term borrowings		21,457			205		1.28			28,252			192		.91			(24.1	)
Long-term debt		36,392			567		2.08			34,015			531		2.09			7.0
Total interest-bearing liabilities		285,233			1,224		.57			269,317			1,067		.53			5.9
Other liabilities		16,369								14,639								11.8
Shareholders’ equity
Preferred equity		5,501								4,756								15.7
Common equity		41,739								39,733								5.0
Total U.S. Bancorp shareholders’ equity		47,240								44,489								6.2
Noncontrolling interests		651								689								(5.5	)
Total equity		47,891								45,178								6.0
Total liabilities and equity	$	429,421							$	406,757								5.6
Net interest income				$	8,727							$	8,343
Gross interest margin							2.87	%							2.91	%
Gross interest margin without taxable-equivalent increments							2.82	%							2.85	%
Percent of Earning Assets
Interest income							3.44	%							3.44	%
Interest expense							.42								.39
Net interest margin							3.02	%							3.05	%
Net interest margin without taxable-equivalent increments							2.97	%							2.99	%

(a)

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

(b)

Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances.


80		U.S. Bancorp

Part II — Other Information

Item 1. Legal Proceedings — See the information set forth in Note 15 in the Notes to Consolidated Financial Statements under Part I, Item 1 of this report, which is incorporated herein by reference.

Item 1A. Risk Factors — There are a number of factors that may adversely affect the Company’s business, financial results or stock price. Refer to “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, and in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, for discussion of these risks.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds — Refer to the “Capital Management” section within Management’s Discussion and Analysis in Part I for information regarding shares repurchased by the Company during the third quarter of 2016.

Item 6. Exhibits

Computation of Ratio of Earnings to Fixed Charges

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

101

Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2016, formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheet, (ii) the Consolidated Statement of Income, (iii) the Consolidated Statement of Comprehensive Income, (iv) the Consolidated Statement of Shareholders’ Equity, (v) the Consolidated Statement of Cash Flows and (vi) the Notes to Consolidated Financial Statements.


U.S. Bancorp		81

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


82		U.S. Bancorp

EXHIBIT 12

Computation of Ratio of Earnings to Fixed Charges


(Dollars in Millions)			Three Months Ended September 30, 2016		Nine Months Ended September 30, 2016
Earnings
1.	Net income attributable to U.S. Bancorp		$	1,502	$	4,410
2.	Applicable income taxes, including expense related to unrecognized tax positions			566		1,612
3.	Net income attributable to U.S. Bancorp before income taxes (1 + 2)		$	2,068	$	6,022
4.	Fixed charges:
	a.	Interest expense excluding interest on deposits*	$	266	$	768
	b.	Portion of rents representative of interest and amortization of debt expense		27		82
	c.	Fixed charges excluding interest on deposits (4a + 4b)		293		850
	d.	Interest on deposits		161		452
	e.	Fixed charges including interest on deposits (4c + 4d)	$	454	$	1,302
5.	Amortization of interest capitalized		$	—	$	—
6.	Earnings excluding interest on deposits (3 + 4c + 5)			2,361		6,872
7.	Earnings including interest on deposits (3 + 4e + 5)			2,522		7,324
8.	Fixed charges excluding interest on deposits (4c)			293		850
9.	Fixed charges including interest on deposits (4e)			454		1,302
Ratio of Earnings to Fixed Charges
10.	Excluding interest on deposits (line 6/line 8)			8.06		8.08
11.	Including interest on deposits (line 7/line 9)			5.56		5.63

*	Excludes interest expense related to unrecognized tax positions.


U.S. Bancorp		83

EXHIBIT 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, Richard K. Davis, certify that:

(1)	I have reviewed this Quarterly Report on Form 10-Q of U.S. Bancorp;

(2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4)

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5)	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/S/ RICHARD K. DAVIS

Richard K. Davis

Chief Executive Officer

Dated: November 4, 2016


84		U.S. Bancorp

EXHIBIT 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, Terrance R. Dolan, certify that:

(1)	I have reviewed this Quarterly Report on Form 10-Q of U.S. Bancorp;

(2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4)

(a)

(b)

(c)

(d)

(5)	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/S/ TERRANCE R. DOLAN

Terrance R. Dolan

Chief Financial Officer

Dated: November 4, 2016


U.S. Bancorp		85

EXHIBIT 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Chief Executive Officer and Chief Financial Officer of U.S. Bancorp, a Delaware corporation (the “Company”), do hereby certify that:

(1)	The Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)	The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.



/S/ RICHARD K. DAVIS				/S/ TERRANCE R. DOLAN
Richard K. Davis Chief Executive Officer Dated: November 4, 2016				Terrance R. Dolan Chief Financial Officer


86		U.S. Bancorp

Corporate Information

Executive Offices

U.S. Bancorp

800 Nicollet Mall

Minneapolis, MN 55402

Common Stock Transfer Agent and Registrar

Computershare acts as our transfer agent and registrar, dividend paying agent and dividend reinvestment plan administrator, and maintains all shareholder records for the corporation. Inquiries related to shareholder records, stock transfers, changes of ownership, lost stock certificates, changes of address and dividend payment should be directed to the transfer agent at:

Computershare

P.O. Box 30170

College Station, TX 77842-3170

Phone: 888-778-1311 or 201-680-6578 (international calls)

Internet: www.computershare.com/investor

Registered or Certified Mail:

Computershare

211 Quality Circle, Suite 210

College Station, TX 77845

Telephone representatives are available weekdays from 8:00 a.m. to 6:00 p.m. Central Time, and automated support is available 24 hours a day, 7 days a week. Specific information about your account is available on Computershare’s Investor Center website.

Independent Auditor

Ernst & Young LLP serves as the independent auditor for U.S. Bancorp’s financial statements.

Common Stock Listing and Trading

U.S. Bancorp common stock is listed and traded on the New York Stock Exchange under the ticker symbol USB.

Dividends and Reinvestment Plan

U.S. Bancorp currently pays quarterly dividends on our common stock on or about the 15th day of January, April, July and October, subject to approval by our Board of Directors. U.S. Bancorp shareholders can choose to participate in a plan that provides automatic reinvestment of dividends and/or optional cash purchase of additional shares of U.S. Bancorp common stock. For more information, please contact our transfer agent, Computershare.

Investor Relations Contact

Jennifer A. Thompson, CFA

Senior Vice President, Investor Relations

jen.thompson@usbank.com

Phone: 612-303-0778 or 866-775-9668

Financial Information

U.S. Bancorp news and financial results are available through our website and by mail.

Website For information about U.S. Bancorp, including news, financial results, annual reports and other documents filed with the Securities and Exchange Commission, access our home page on the internet at usbank.com, click on About U.S. Bank.

Mail At your request, we will mail to you our quarterly earnings, news releases, quarterly financial data reported on Form 10-Q, Form 10-K and additional copies of our annual reports. Please contact:

U.S. Bancorp Investor Relations

800 Nicollet Mall

Minneapolis, MN 55402

investorrelations@usbank.com

Phone: 866-775-9668

Media Requests

Dana E. Ripley

Senior Vice President, Corporate Communications

dana.ripley@usbank.com

Phone: 612-303-3167

Privacy

U.S. Bancorp is committed to respecting the privacy of our customers and safeguarding the financial and personal information provided to us. To learn more about the U.S. Bancorp commitment to protecting privacy, visit usbank.com and click on Privacy.

Code of Ethics

At U.S. Bancorp, our commitment to high ethical standards guides everything we do. Demonstrating this commitment through our words and actions is how each of us does the right thing every day for our customers, shareholders, communities and each other. Our style of ethical leadership is why we were named a World’s Most Ethical Company in 2015 by the Ethisphere Institute.

Each year, every employee certifies compliance with the letter and spirit of our Code of Ethics and Business Conduct. For details about our Code of Ethics and Business Conduct, visit usbank.com and click on About U.S. Bank and then Investor Relations and then Corporate Governance.

Diversity and Inclusion

At U.S. Bancorp, embracing diversity and fostering inclusion are business imperatives. We view everything we do through a diversity and inclusion lens to deepen our relationships with our stakeholders: our employees, customers, shareholders and communities.

Our employees bring their whole selves to work. We respect and value each other’s differences, strengths and perspectives, and we strive to reflect the communities we serve. This makes us stronger, more innovative and more responsive to our diverse customers’ needs.

Equal Opportunity and Affirmative Action

U.S. Bancorp and our subsidiaries are committed to providing Equal Employment Opportunity to all employees and applicants for employment. In keeping with this commitment, employment decisions are made based on abilities, not race, color, religion, national origin or ancestry, gender, age, disability, veteran status, sexual orientation, marital status, gender identity or expression, genetic information or any other factors protected by law. The corporation complies with municipal, state and federal fair employment laws, including regulations applying to federal contractors.

U.S. Bancorp, including each of our subsidiaries, is an equal opportunity employer committed to creating a diverse workforce.

Accessibility

U.S. Bancorp is committed to providing ready access to our products and services so all of our customers, including people with disabilities, can succeed financially. To learn more, visit usbank.com and click on Accessibility.

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		This report has been produced on recycled paper.