UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form10-Q

For the quarterly period ended March 31,September 30, 2018

OR

For the transition period from (not applicable)

Commission file number1-6880

U.S. BANCORP

(Exact name of registrant as specified in its charter)

800 Nicollet Mall

Minneapolis, Minnesota 55402

(Address of principal executive offices, including zip code)

651-466-3000

(Registrant’s telephone number, including area code)

(not applicable)

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

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

YES ☑    NO ☐

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

YES ☑    NO ☐

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

YES ☐    NO ☑

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

Table of Contents andForm 10-Q Cross Reference Index

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

This quarterly report onForm 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 reversalDeterioration in general business and economic conditions or slowing of the current economic recoveryturbulence in domestic or another severe contractionglobal financial markets 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 couldliabilities, reduce the availability of funding to certain financial institutions, and lead to a tightening of credit a reduction of business activity, and increased marketincrease stock price volatility. Stress in the commercial real estate markets, as well as a downturn in the residential real estate markets, could cause credit losses and deterioration in asset values. In addition, changes to statutes, regulations, or regulatory policies or practices could affect U.S. Bancorp in substantial and unpredictable ways. U.S. Bancorp’s results could also be adversely affected by deterioration in general business and economic conditions; changes in interest rates; deterioration in the credit quality of its loan portfolios or in the value of the collateral securing those loans; deterioration in the value of its investment securities; legal and regulatory developments; litigation; increased competition from both banks andnon-banks; changes in the level of tariffs and other trade policies of the United States and its global trading partners; changes in customer behavior and preferences; breaches in data security; effects of mergers and acquisitions and related integration; effects of critical accounting policies and judgments; and management’s ability to effectively manage credit risk, market risk, operational risk, compliance risk, strategic risk, interest rate risk, liquidity risk and reputational risk.

For discussion of these and other risks that may cause actual results to differ from expectations, refer to U.S. Bancorp’s Annual Report on Form10-K for the year ended December 31, 2017, on file with the Securities and Exchange Commission, including the sections entitled “Corporate Risk Profile” and “Risk Factors” contained in Exhibit 13, and all subsequent filings with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934. However, factors other than these also could adversely affect U.S. Bancorp’s results, and the reader should not consider these factors to be a complete set of all potential risks or uncertainties. Forward-looking statements speak only as of the date hereof, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.

Management’s Discussion and Analysis

OVERVIEW

Earnings Summary U.S. Bancorp and its subsidiaries (the “Company”) reported net income attributable to U.S. Bancorp of $1.7$1.8 billion for the firstthird quarter of 2018, or $0.96$1.06 per diluted common share, compared with $1.5$1.6 billion, or $0.82$0.88 per diluted common share, for the firstthird quarter of 2017. Return on average assets and return on average common equity were 1.501.58 percent and 14.915.5 percent, respectively, for the firstthird quarter of 2018, compared with 1.351.38 percent and 13.313.6 percent, respectively, for the firstthird quarter of 2017.

Total net revenue for the firstthird quarter of 2018 was $180$132 million (3.4(2.4 percent) higher than the firstthird quarter of 2017, reflecting a 6.32.4 percent increase in net interest income (5.5(1.7 percent on a taxable-equivalent basis) and a 0.63.3 percent increase in noninterest income. The increase in net interest income from the firstthird quarter of 2017 was mainly a result of the impact of rising interest rates, earning assets growth, and loan growth.higher yields on the reinvestment of securities, partially offset by higher rates on deposits and funding mix changes. The noninterest income increase was principally due to higherdriven by strong growth in payment services revenue and trust and investment management fees, and deposit service charges,along with an increase in other noninterest income, partially offset by decreases in commercial products revenue and mortgage banking revenue in addition to lower equity investment income and securities gains compared with a year ago.commercial products revenue.

Noninterest expense in the firstthird quarter of 2018 was $146$46 million (5.0(1.5 percent) higher than the firstthird quarter of 2017, primarily due to increased compensation expense related to hiring to supportsupporting business growth and compliance programs, merit increases, and variable compensation related to revenue growth, increased expense from a change to a shorter vesting period for new stock-based compensation grants, and higher employee benefits expense, partially offset byand higher technology and communications expense in support of business growth. Partially offsetting these increases was lower professional servicesother noninterest expense driven by lower consulting costs for riskrelated totax-advantaged projects, lower Federal Deposit Insurance Corporation (“FDIC”) insurance expense, a reduction in mortgage servicing costs, and compliance programs, and other expenses.lower pension related costs.

The provision for credit losses for the firstthird quarter of 2018 of $341$343 million was $4$17 million (1.2(4.7 percent) lower than the firstthird quarter of 2017. Net charge-offs in the firstthird quarter of 2018 were $341$328 million, compared with $335$330 million in the firstthird quarter of 2017. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

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

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

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

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

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

STATEMENT OF INCOME ANALYSIS

Net Interest Income Net interest income, on a taxable-equivalent basis, was $3.2$3.3 billion in the third quarter and $9.7 billion in the first quarternine months of 2018, representing an increaseincreases of $167$54 million (5.5(1.7 percent) and $347 million (3.7 percent), respectively, over the first quartersame periods of 2017. The increase wasincreases were principally driven by the impact of rising interest rates, earning assets growth, and loan growth,higher yields on securities, partially offset by changes in depositloan mix, higher rates on deposits and changes in funding mix, andas well as the impact of the Tax Cuts and Jobs Act (“tax reform”) enacted by Congress in late 2017 which reduced the taxable-equivalent adjustment benefit related to tax exempt assets.assets, and higher interest recoveries in the prior year. Average earning assets were $12.6$6.4 billion (3.1(1.6 percent) higher thanin the third quarter and $9.2 billion (2.3 percent) higher in the first quarternine months of 2018, compared with the same periods of 2017, reflecting increases of $6.2 billion (2.3 percent) in loans, $2.7 billion (2.5 percent) in investment securities and $4.1 billion (34.9 percent) in other earning assets. The net interest margin, on a taxable-equivalent basis, in the third quarter and first quarternine months of 2018 was 3.133.15 percent and 3.14 percent, respectively, compared with 3.063.14 percent and 3.09 percent in the third quarter and first quarternine months of 2017.2017, respectively. The increaseincreases in the net interest margin from the first quartersame periods of 2017 wasthe prior year were primarily due to higher interest rates, partially offset by higher funding costs, changes in loan mix, and the impact of tax reform, higher funding costs and higher cash balances.reform. Refer to the “Consolidated Daily Average Balance Sheet and Related Yields and Rates” tabletables for further information on net interest income.

Average total loans in the third quarter and first nine months of 2018 were $6.2$3.4 billion (2.3(1.2 percent) and $4.2 billion (1.5 percent) higher, in the first quarter of 2018respectively, than the first quartersame periods of 2017, due to growth in residential mortgages, commercial loans (4.0 percent),and credit card loans. In addition, average other retail loans (6.1 percent), residential mortgages (3.9 percent) and credit card loans (2.1 percent).were also higher in the first nine months of 2018, compared to the same period of the prior year. The increases were driven by higher demand for loans from new and existing customers. These increases were partially offset by a decrease in commercial real estate loans (6.5 percent) due to disciplined underwriting and customers paying down balances over the past year, as well as a decrease in loans covered by loss sharing agreements with the Federal Deposit Insurance Corporation (“FDIC”) (18.3 percent),FDIC, arun-off portfolio.

Average investment securities in the third quarter and first quarternine months of 2018 were $2.7$1.7 billion (2.5(1.5 percent) and $2.5 billion (2.3 percent) higher, respectively, than the first quartersame periods of 2017, primarily due to purchases of U.S. Treasury, mortgage-backed and U.S. government mortgage-backedstate and political securities, net of prepayments and maturities,maturities.

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

partially offset by increases in Consumer and Business Banking balances. The declines in Corporate and Commercial Banking total savings balances reflect expected run-off related to the business merger of a large financial customer. Average totaltime deposits for the third quarter and first quarternine months of 2018 were $6.1increased $1.7 billion (1.9(4.6 percent) higher thanand $4.9 billion (14.9 percent), respectively, over the first quartersame periods of 2017. Average time depositsThe increases were $6.3 billion (20.7 percent) higher year-over-year. The increase was largely related to those deposits managed as an alternative to other funding sources such as wholesale borrowing, based largely on relative pricing and liquidity characteristics. Average total savings deposits were $1.1 billion (0.5 percent) higher, driven by growth in Consumer and Business Banking balances, partially offset by a decrease in Corporate and Commercial Banking balances. Average noninterest-bearing deposits decreased $1.3 billion (1.6 percent) from the prior year, primarily due to a decrease in Corporate and Commercial Banking balances, partially offset by increases in Consumer and Business Banking, and Wealth Management and Investment Services balances.

Provision for Credit Losses The provision for credit losses for the third quarter and first quarternine months of 2018 was $341decreased $17 million a decrease of $4(4.7 percent) and $44 million (1.2(4.2 percent), respectively, from the first quartersame periods of 2017. Net charge-offs increased $6decreased $2 million (1.8(0.6 percent) and $4 million (0.4 percent) in the third quarter and first quarternine months of 2018, respectively, compared with the first quartersame periods of 2017,the prior year, primarily due to lower commercial loan and residential mortgage net charge-offs, partially offset by higher credit card loan net charge-offs, partially offset by lower commercial loan net charge-offs driven by higher recoveries.charge-offs. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

Noninterest Income Noninterest income was $2.3$2.4 billion in the third quarter and $7.1 billion in the first quarternine months of 2018, representing an increaseincreases of $13$78 million (0.6(3.3 percent) and $157 million (2.3 percent), respectively, compared with the first quartersame periods of 2017. The increaseincreases from a year ago reflected strong growth in payment services revenue and trust and investment management fees, along with increases in other noninterest income and deposit service charges,ATM processing services revenue. These increases were partially offset by lower mortgage banking revenue and commercial products revenue, and mortgage banking revenue, reflectingwhich were impacted by industry trends in these revenue categories. The increase in noninterest income was further offset by lower equity investment income, included in other income, and securities gains compared with a year ago. Paymentpayment services revenue increased 6.5 percent due to strongerreflected higher credit and debit card revenue, of $25 million (8.4 percent), an increase in corporate payment products revenue, of $17 million (12.4 percent), and improving merchant processing services revenue, due toall driven by higher sales volumes. Trust and investment management fees increased $30 million (8.2 percent) due to business growth net asset inflows and favorable market conditions. Deposit service chargesATM processing services revenue increased $10 million (5.8 percent)due to higher transaction volumes. Other noninterest income increased in the third quarter of 2018, compared to the third quarter of 2017, primarily due to higher transaction volumesequity investment income and account growth. Commercialtax-advantaged project syndication revenue. Other noninterest income increased in the first nine months of 2018, compared with the same period of the prior year, primarily due to highertax-advantaged project syndication revenue. The decrease in mortgage banking revenue was primarily due to lower mortgage production and the adverse impact on gain on sale margins due to excess capacity in the industry in the near term. The decrease in commercial products revenue decreased $27 million (10.9 percent) mainlywas primarily due to lower corporate bond underwriting fees and loan syndication fees, while mortgage bankingfees. Commercial products revenue further decreased $23 million (11.1 percent) primarilyin the first nine months of 2018, compared with the same period of the prior year, due to lower margin on mortgage loan sales.trading revenue.

Noninterest Expense Noninterest expense was $3.1$3.0 billion in the third quarter and $9.2 billion in the first quarternine months of 2018, representing an increaseincreases of $146$46 million (5.0(1.5 percent) and $293 million (3.3 percent) over the first quartersame periods of 2017. The increaseincreases from a year ago waswere primarily due to higher personnel expense, net occupancy and equipment costs and technology and communications expense, partially offset by lower other noninterest expense and professional services expense. Compensation expense increased $132 million (9.5 percent), principally due to the impact of hiring to support business growth and compliance programs, merit increases, and higher variable compensation related to business production, and the impact of changes in the vesting provisions related to stock-based compensation programs. Employee benefits expense increased $29 million (9.6 percent), primarily driven by increased medical costs and staffing. Net occupancy and equipment

to business production. Employee benefits expense increased $18 million (7.3 percent)primarily due to higher rentincreased medical costs and maintenance costs,staffing, while technology and communications expense increased $18 million (8.3 percent) primarily due to technology investment initiatives. Other noninterest expense decreased $39 million (8.8 percent) due to lower costs related totax-advantaged projects, lower FDIC insurance expense, a reduction in mortgage servicing-relatedservicing costs and lower pension-related costs as a result of contributions to the Company’s pension plans in 2017. Professional services expense decreased $13 million (13.5 percent), primarily due to fewer consulting services as compliance programs near maturity.

Income Tax Expense The provision for income taxes was $362$460 million (an effective rate of 17.720.2 percent) for the third quarter and $1.3 billion (an effective rate of 19.4 percent) for the first quarternine months of 2018, compared with $499$589 million (an effective rate of 25.127.3 percent) and $1.6 billion (an effective rate of 26.4 percent) for the first quartersame periods of 2017. The first quarter oflower 2018 tax rate reflectedrates reflect tax reform a favorable settlement of tax matters, and the tax benefit of restricted stock vesting and option exercises.enacted in late 2017. For further information on income taxes, refer to Note 11 of the Notes to Consolidated Financial Statements.

BALANCE SHEET ANALYSIS

Loans The Company’s loan portfolio was $277.9$281.5 billion at March 31,September 30, 2018, compared with $280.4 billion at December 31, 2017, a decreasean increase of $2.5$1.1 billion (0.9(0.4 percent). The decreaseincrease was driven by lower other retail loans, credit card loans, commercial real estate loans and covered loans, partially offset by higher residential mortgages and commercial loans.

Otherloans, partially offset by lower other retail loans, decreased $2.0 billion (3.5 percent) at March 31, 2018, compared with December 31, 2017, reflecting the transfer of the Company’s federally guaranteed student loans from the loan portfolio to loans held for sale at the end of the first quarter of 2018, along with decreases in home equity loans, auto loans and revolving credit balances. Partially offsetting these decreases were increases in installment and retail leasing loans.

Credit card loans decreased $1.3 billion (5.8 percent) at March 31, 2018, compared with December 31, 2017, primarily the result of customers seasonally paying down balances.

Commercialcommercial real estate loans, decreased $323 million (0.8 percent) at March 31, 2018, compared with December 31, 2017, primarily the result of disciplined underwritingcredit card loans and customers paying down balances.covered loans.

Residential mortgages held in the loan portfolio increased $694 million (1.2$3.1 billion (5.2 percent) at March 31,September 30, 2018, compared with December 31, 2017, as origination activity more than offset the effect of customers paying down balances in the first quarternine months of 2018. Residential mortgages originated and placed in the Company’s loan portfolio include well-secured jumbo mortgages and branch-originated first lien home equity loans to borrowers with high credit quality.

Commercial loans increased $536 million (0.5$1.7 billion (1.8 percent) at March 31,September 30, 2018, compared with December 31, 2017, reflecting higher demand from new and existing customers.

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

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

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

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

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

Loans Held for Sale Loans held for sale, consisting of residential mortgages and other loans to be sold in the secondary market, were $4.8$4.5 billion at March 31,September 30, 2018, compared with $3.6 billion at December 31, 2017. The increase in loans held for sale was principally due to the transfer of the Company’s federally guaranteed student$1.3 billion of covered residential mortgage loan balances to loans held for sale at the end of the firstthird quarter of 2018,2018. This increase was partially offset by a decrease in originated residential mortgage loans held for sale (“MLHFS”)

The Company’savailable-for-sale securities are carried at fair value with changes in fair value reflected in other comprehensive income (loss) unless a security is deemed to be other-than-temporarily impaired. At March 31,September 30, 2018, the Company’s net unrealized losses onavailable-for-sale securities were $1.4$2.0 billion, compared with $580 million at December 31, 2017. The unfavorable change in net unrealized gains (losses) was primarily due to decreases in the fair value of U.S. Treasury, U.S. government mortgage-backed and state and political securities as a result of changes in interest rates. Gross unrealized losses onavailable-for-sale securities totaled $1.6$2.1 billion at March 31,September 30, 2018, compared with $888 million at December 31, 2017. At March 31,September 30, 2018, the Company had no plans to sell securities with unrealized losses, and believes it is more likely than not that it would not be required to sell such securities before recovery of their amortized cost.

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

Deposits Total deposits were $344.5$331.2 billion at March 31,September 30, 2018, compared with $347.2 billion at December 31, 2017, the result of decreases in noninterest-bearingtotal savings deposits and total savingsnoninterest-bearing deposits, partially offset by an increase in time deposits. Noninterest-bearing depositsMoney market deposit balances decreased $5.3$7.3 billion (6.1(6.8 percent) at March 31,September 30, 2018, compared with December 31, 2017, primarily due to lower Wealth Management and Investment Services, Corporate and Commercial Banking, and Consumer and Business Banking balances. Money market depositThe decline in Corporate and Commercial Banking balances reflects expected run-off related to the business merger of a large financial customer. Interest checking balances decreased $3.6$4.7 billion (3.4(6.3 percent) at March 31,September 30, 2018, compared with December 31, 2017, primarily due to lower Wealth Management and Investment Services, and Corporate and Commercial Banking balances. Interest checking balances decreased $1.4 billion (1.9 percent) primarily due to lower Wealth Management and Investment Services, and Corporate and Commercial Banking balances, partially offset by higher Consumer and Business Banking balances. Savings account balances increased $1.4 billion (3.3$853 million (1.9 percent), primarily due to higher Consumer and Business Banking balances. Noninterest-bearing deposits decreased $10.4 billion (11.9 percent) at September 30, 2018, compared with December 31, 2017, primarily due to lower Wealth Management and Investment Services, and Corporate and Commercial Banking balances, partially offset by higher Consumer and Business Banking balances. Time deposits increased $6.2$5.6 billion (18.7(16.7 percent) at March 31,September 30, 2018, compared with December 31, 2017, driven by an increase in those deposits managed as an alternative to other funding sources such as wholesale borrowing, based largely on relative pricing and liquidity characteristics.characteristics, along with higher Consumer and Business Banking balances.

Borrowings The Company utilizes both short-term and long-term borrowings as part of its asset/liability management and funding strategies. Short-term borrowings, which include federal funds purchased, commercial paper, repurchase agreements, borrowings secured by high-grade assets and other short-term borrowings, were $17.7$23.9 billion at March 31,September 30, 2018, compared with $16.7 billion at December 31, 2017. The $1.1$7.2 billion (6.3(43.3 percent) increase in short-term borrowings was primarily due to higher federal funds purchased, repurchase agreement and other short-term borrowings balances, partially offset by lower commercial paper balances. Long-term debt was $33.2$40.9 billion at March 31,September 30, 2018, compared with $32.3 billion at December 31, 2017. The $942 million (2.9$8.6 billion (26.8 percent) increase was primarily due to issuances of $2.0$8.4 billion of bank notes and $1.3 billion of medium-term notes, partially offset by a $1.0 billion$901 million decrease in Federal Home Loan Bank (“FHLB”) advances. Refer to the “Liquidity Risk Management” section for discussion of liquidity management of the Company.

CORPORATE RISK PROFILE

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

The Executive Risk Committee (“ERC”), which is chaired by the Chief Risk Officer and includes the Chief Executive Officer and other members of the executive management team, oversees execution against the risk management framework and risk appetite statements. The ERC focuses on current and emerging risks,

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 andavailable-for-sale securities, MLHFS, mortgage servicing rights (“MSRs”) and derivatives that are accounted for on a fair value basis. Liquidity risk is the possible inability to fund obligations or new business at a reasonable cost and in a timely manner. Operational risk is the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events, including the risk of loss resulting from breaches in data security. Operational risk can also include the risk of loss due to failures by third parties with which the Company does business. Compliance risk is the risk of loss arising from violations of, or nonconformance with, laws, rules, regulations, prescribed practices, internal policies, and procedures, or ethical standards, potentially exposing the Company to fines, civil money penalties, payment of damages and the voiding of contracts. Strategic risk is the risk to current or projected financial condition arising from adverse business decisions, poor implementation of business decisions, or lack of responsiveness to changes in the banking industry and operating environment. Reputational risk is the risk to current or anticipated earnings, capital, or franchise or enterprise value arising from negative public opinion. This risk may impair the Company’s competitiveness by affecting its ability to establish new relationships, offer new services or continue serving existing relationships. In addition to the risks identified above, other risk factors exist that may impact the Company. Refer to “Risk Factors” in the Company’s Annual Report on Form10-K for the year ended December 31, 2017, for a detailed discussion of these factors.

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

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

Credit Risk Management The Company’s strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria, and

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.filings, as well as the potential impact on customers and the domestic economy resulting from new tariffs or increases in existing tariffs. The Risk Management Committee oversees the Company’s credit risk management process.

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

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

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

The consumer lending segment represents loans and leases made to consumer customers, including residential mortgages, credit card loans, and other retail loans such as revolving consumer lines, auto loans and leases, home equity loans and lines, and student loans, arun-off portfolio. Home equity or second mortgage loans are junior lienclosed-end accounts fully disbursed at origination. These loans typically are fixed rate loans, secured by residential real estate, with a10- or15-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 a10- or15-year draw period during which a minimum payment is equivalent to the monthly interest, followed by a20- or10-year amortization period, respectively. At March 31,September 30, 2018, substantially all of the Company’s home equity lines were in the draw period. Approximately $1.4 billion, or 910 percent, of the outstanding home equity line balances at March 31,September 30, 2018, will enter the amortization period within the next 36 months. Key risk characteristics relevant to consumer lending segment loans primarily relate to the borrowers’ capacity and willingness to repay and include unemployment rates and other economic factors, customer payment history and credit scores, and in some cases, updatedloan-to-value (“LTV”) information reflecting current market conditions on real estate based loans. These risk characteristics, among others, are reflected in forecasts of delinquency levels, bankruptcies and losses which are the primary factors in determining the allowance for credit losses for the consumer lending segment.