US BANCORP \DE\ - Quarter Report: 2020 September (Form 10-Q)

U.S. BANCORP

/s/ LISA R. STARK

Dated: November 5, 2020

Lisa R. Stark

Controller

(Principal Accounting Officer and Duly Authorized Officer)

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, 2020


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

For the transition period from (not applicable)

Commission file number

1-6880

U.S. BANCORP

(Exact name of registrant as specified in its charter)


Delaware		41-0255900
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

800 Nicollet Mall

Minneapolis, Minnesota 55402

(Address of principal executive offices, including zip code)

651-466-3000

(Registrant’s telephone number, including area code)

(not applicable)

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

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


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

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

YES ☑ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of

Regulation S-T

during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES ☑ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in

Rule 12b-2

of the Exchange Act.


Large accelerated filer ☑		Accelerated filer ☐
Non-accelerated filer ☐		Smaller reporting company ☐ Emerging growth company ☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Exchange Act).

YES ☐ NO ☑

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


Class		Outstanding as of October 31, 2020
Common Stock, $0.01 Par Value		1,506,438,314 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			32

e) Critical Accounting Policies			34

f) Controls and Procedures (Item 4)			35

2) Quantitative and Qualitative Disclosures About Market Risk/Corporate Risk Profile (Item 3)			8

a) Overview			8

b) Credit Risk Management			9

c) Residual Value Risk Management			22

d) Operational Risk Management			22

e) Compliance Risk Management			22

f) Interest Rate Risk Management			22

g) Market Risk Management			24

h) Liquidity Risk Management			25

i) Capital Management			26

3) Line of Business Financial Review			28

4) Financial Statements (Item 1)			36

Part II — Other Information

1) Legal Proceedings (Item 1)			79

2) Risk Factors (Item 1A)			79

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. The

COVID-19

pandemic is adversely affecting U.S. Bancorp, its customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on its business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions or turbulence in domestic or global financial markets could adversely affect U.S. Bancorp’s revenues and the values of its assets and liabilities, reduce the availability of funding to certain financial institutions, lead to a tightening of credit, and increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices could affect U.S. Bancorp in substantial and unpredictable ways. U.S. Bancorp’s results could also be adversely affected by changes in interest rates; further increases in unemployment rates; deterioration in the credit quality of its loan portfolios or in the value of the collateral securing those loans; deterioration in the value of its investment securities; legal and regulatory developments; litigation; increased competition from both banks and

non-banks;

changes in the level of tariffs and other trade policies of the United States and its global trading partners; civil unrest; changes in customer behavior and preferences; breaches in data security; failures to safeguard personal information; effects of mergers and acquisitions and related integration; effects of critical accounting policies and judgments; and management’s ability to effectively manage credit risk, market risk, operational risk, compliance risk, strategic risk, interest rate risk, liquidity risk and reputation risk.

For discussion of these and other risks that may cause actual results to differ from expectations, refer to the other information in this report, including the section entitled “Risk Factors” and U.S. Bancorp’s Annual Report on Form

10-K

for the year ended December 31, 2019, on file with the Securities and Exchange Commission, including the sections entitled “Corporate Risk Profile” and “Risk Factors” contained in Exhibit 13, and all subsequent filings with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934. In addition, factors other than these risks also could adversely affect U.S. Bancorp’s results, and the reader should not consider these risks to be a complete set of all potential risks or uncertainties. Forward-looking statements speak only as of the date hereof, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.


U.S. Bancorp		1


Table 1		Selected Financial Data


	Three Months Ended September 30									Nine Months Ended September 30
(Dollars and Shares in Millions, Except Per Share Data)	2020			2019			Percent Change			2020			2019			Percent Change
Condensed Income Statement
Net interest income		$ 3,227			$ 3,281			(1.6	)%		$ 9,650			$ 9,845			(2.0	)%
Taxable-equivalent adjustment (a)		25			25			—			73			79			(7.6	)
Net interest income (taxable-equivalent basis) (b)		3,252			3,306			(1.6	)		9,723			9,924			(2.0	)
Noninterest income		2,712			2,614			3.7			7,851			7,395			6.2
Total net revenue		5,964			5,920			.7			17,574			17,319			1.5
Noninterest expense		3,371			3,144			7.2			10,005			9,384			6.6
Provision for credit losses		635			367			73.0			3,365			1,109			*
Income before taxes		1,958			2,409			(18.7	)		4,204			6,826			(38.4	)
Income taxes and taxable-equivalent adjustment		372			492			(24.4	)		744			1,373			(45.8	)
Net income		1,586			1,917			(17.3	)		3,460			5,453			(36.5	)
Net (income) loss attributable to noncontrolling interests		(6	)		(9	)		33.3			(20	)		(25	)		20.0
Net income attributable to U.S. Bancorp		$ 1,580			$ 1,908			(17.2	)		$ 3,440			$ 5,428			(36.6	)
Net income applicable to U.S. Bancorp common shareholders		$ 1,494			$ 1,821			(18.0	)		$ 3,196			$ 5,175			(38.2	)
Per Common Share
Earnings per share		$ .99			$ 1.16			(14.7	)%		$ 2.12			$ 3.26			(35.0	)%
Diluted earnings per share		.99			1.15			(13.9	)		2.11			3.25			(35.1	)
Dividends declared per share		.42			.42			—			1.26			1.16			8.6
Book value per share (c)		30.93			30.26			2.2
Market value per share		35.85			55.34			(35.2	)
Average common shares outstanding		1,506			1,575			(4.4	)		1,510			1,589			(5.0	)
Average diluted common shares outstanding		1,507			1,578			(4.5	)		1,511			1,592			(5.1	)
Financial Ratios
Return on average assets		1.17	%		1.57	%					.87	%		1.54	%
Return on average common equity		12.8			15.3						9.3			14.9
Net interest margin (taxable-equivalent basis) (a)		2.67			3.02						2.73			3.10
Efficiency ratio (b)		56.6			53.3						57.4			54.3
Net charge-offs as a percent of average loans outstanding		.66			.48						.58			.49
Average Balances
Loans		$311,018			$292,436			6.4	%		$308,935			$289,278			6.8	%
Loans held for sale		7,983			4,476			78.4			6,352			3,265			94.5
Investment securities (d)		128,565			117,213			9.7			123,444			115,628			6.8
Earning assets		486,104			435,673			11.6			476,018			427,426			11.4
Assets		536,902			481,454			11.5			525,380			472,216			11.3
Noninterest-bearing deposits		109,375			74,594			46.6			92,935			73,711			26.1
Deposits		405,523			349,933			15.9			390,598			343,563			13.7
Short-term borrowings		18,049			18,597			(2.9	)		21,335			18,046			18.2
Long-term debt		43,542			42,691			2.0			44,587			41,664			7.0
Total U.S. Bancorp shareholders’ equity		52,416			53,292			(1.6	)		51,936			52,446			(1.0	)

	September 30, 2020			December 31, 2019
Period End Balances
Loans		$306,985			$296,102			3.7	%
Investment securities		134,032			122,613			9.3
Assets		540,455			495,426			9.1
Deposits		413,217			361,916			14.2
Long-term debt		42,443			40,167			5.7
Total U.S. Bancorp shareholders’ equity		52,565			51,853			1.4
Asset Quality
Nonperforming assets		$ 1,270			$ 829			53.2	%
Allowance for credit losses		8,010			4,491			78.4
Allowance for credit losses as a percentage of period-end loans		2.61	%		1.52	%
Capital Ratios
Common equity tier 1 capital		9.4	%		9.1	%
Tier 1 capital		11.0			10.7
Total risk-based capital		13.1			12.7
Leverage		8.3			8.8
Total leverage exposure		7.2			7.0
Tangible common equity to tangible assets (b)		7.0			7.5
Tangible common equity to risk-weighted assets (b)		9.3			9.3
Common equity tier 1 capital to risk-weighted assets, reflecting the full implementation of the current expected credit losses methodology (b)		9.0

*	Not meaningful

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

(b)	See Non-GAAP Financial Measures beginning on page 32.

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

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


2		U.S. Bancorp

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 $1.6 billion for the third quarter of 2020, or $0.99 per diluted common share, compared with $1.9 billion, or $1.15 per diluted common share, for the third quarter of 2019. Return on average assets and return on average common equity were 1.17 percent and 12.8 percent, respectively, for the third quarter of 2020, compared with 1.57 percent and 15.3 percent, respectively, for the third quarter of 2019. During a challenging period adversely impacted by the

COVID-19

pandemic, the Company’s diversified business generated growth in net revenue and supported a provision for credit losses of $635 million including a $120 million increase in the allowance for credit losses primarily to recognize the expected credit losses of an acquired credit card portfolio in the third quarter of 2020.

Total net revenue for the third quarter of 2020 was $44 million (0.7 percent) higher than the third quarter of 2019, reflecting a 3.7 percent increase in noninterest income, partially offset by a 1.6 percent decrease in net interest income. The decrease in net interest income from the third quarter of 2019 was primarily due to the impact of lower interest rates from a year ago, partially offset by changes in deposit and funding mix, and loan growth. The noninterest income increase was driven by significant growth in mortgage banking revenue due to refinancing production and strong growth in commercial products revenue due to capital markets activities. Growth in these fee categories was partially offset by a decline in payment services revenue and deposit service charges related to lower consumer and commercial spending. Additionally, other noninterest income declined from the third quarter of 2019 due to lower equity investment income, lower

tax-advantaged

investment syndication revenue and certain asset impairments as a result of expected branch closures.

Noninterest expense in the third quarter of 2020 was $227 million (7.2 percent) higher than the third quarter of 2019, reflecting costs related to

COVID-19

and an increase in revenue-related production expenses in the third quarter of 2020. Additionally, noninterest expense reflected an increase in personnel costs and technology and communications expense related to developing digital capabilities and related business investment, as well as an increase in other noninterest expense, partially offset by lower marketing and business development expense and lower professional services expense.

The provision for credit losses for the third quarter of 2020 of $635 million was $268 million (73.0 percent) higher than the third quarter of 2019, reflecting an increase in the allowance for credit losses during the third quarter of 2020 primarily to recognize the expected losses within the acquired State Farm Bank credit card portfolio. Net charge-offs in the third quarter of 2020 were $515 million, compared with $352 million in the third quarter of 2019. 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 2020 was $3.4 billion, or $2.11 per diluted common share, compared with $5.4 billion, or $3.25 per diluted common share, for the first nine months of 2019. Return on average assets and return on average common equity were 0.87 percent and 9.3 percent, respectively, for the first nine months of 2020, compared with 1.54 percent and 14.9 percent, respectively, for the first nine months of 2019.

Total net revenue for the first nine months of 2020 was $255 million (1.5 percent) higher than the first nine months of 2019, reflecting a 6.2 percent increase in noninterest income, partially offset by a 2.0 percent decrease in net interest income. The decrease in net interest income from the first nine months of 2019 was primarily due to the impact of lower interest rates, partially offset by changes in deposit and funding mix, and loan growth. The noninterest income increase was driven by significant growth in mortgage banking revenue and commercial products revenue, as well as increases in trust and investment management fees and gains on the sale of investment securities. Growth in these fee categories was partially offset by a decline in payment services revenue and deposit service charges related to lower consumer and commercial spending. Additionally, other noninterest income declined from the prior year due to lower equity investment income, lower

tax-advantaged

investment syndication revenue and certain asset impairments, partially offset by gains on sale of certain businesses in the first nine months of 2020.

Noninterest expense in the first nine months of 2020 was $621 million (6.6 percent) higher than the first nine months of 2019, reflecting costs related to

COVID-19

and an increase in revenue-related production expenses in the first nine months of 2020. Additionally, noninterest expense


U.S. Bancorp		3

reflected an increase in personnel costs and technology and communications expense related to developing digital capabilities and related business investment, as well as an increase in other noninterest expense, partially offset by lower marketing and business development expense and lower professional services expense.

The provision for credit losses for the first nine months of 2020 of $3.4 billion was $2.3 billion higher than the first nine months of 2019, reflecting an increase in the allowance for credit losses during the first nine months of 2020 due to deteriorating economic conditions driven by the impact of

COVID-19

on the domestic and global economies. Net charge-offs in the first nine months of 2020 were $1.3 billion, compared with $1.1 billion in the first nine months of 2019. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

STATEMENT OF INCOME ANALYSIS

Net Interest Income

Net interest income, on a taxable-equivalent basis, was $3.3 billion in the third quarter and $9.7 billion in the first nine months of 2020, representing decreases of $54 million (1.6 percent) and $201 million (2.0 percent), respectively, compared with the same periods of 2019. The decreases were principally driven by the impact of lower interest rates from the prior year, partially offset by changes in deposit and funding mix, and loan growth. The Company expects net interest income to be relatively flat or decline slightly in the fourth quarter of 2020, as compared with the third quarter of 2020, reflecting the expected continued low interest rate environment and its impact on the rates earned on reinvested securities, as well as higher premium amortization, within the investment securities portfolio. Average earning assets were $50.4 billion (11.6 percent) higher in the third quarter and $48.6 billion (11.4 percent) higher in the first nine months of 2020, compared with the same periods of 2019, reflecting increases in loans, investment securities and other earning assets primarily representing cash balances. The net interest margin, on a taxable-equivalent basis, in the third quarter and first nine months of 2020 was 2.67 percent and 2.73 percent, respectively, compared with 3.02 percent and 3.10 percent in the third quarter and first nine months of 2019, respectively. The decrease in net interest margin from the prior year was primarily due to the impact of lower interest rates, changes in the yield curve, a decision to maintain higher cash balances for liquidity and higher premium amortization within the investment portfolio, partially offset by the net benefit of changes in loan mix and deposit and funding mix. The Company expects downward pressure on its net interest margin in the fourth quarter of 2020 due to its expectation to maintain higher liquidity levels resulting from the acquisition of approximately $10 billion of deposit balances from State Farm Bank in early October 2020. Refer to the “Consolidated Daily Average Balance Sheet and Related Yields and Rates” tables for further information on net interest income.

Average total loans in the third quarter and first nine months of 2020 were $18.6 billion (6.4 percent) and $19.7 billion (6.8 percent) higher, respectively, than the same periods of 2019. The increases were primarily due to higher commercial loans, reflecting the utilization of bank credit facilities by customers to support liquidity requirements as well as the impact of loans made under the Small Business Administration’s (“SBA”) Paycheck Protection Program, along with growth in residential mortgages given the lower interest rate environment and higher Government National Mortgage Association (“GNMA”) buybacks, and higher commercial real estate loans. These increases were partially offset by lower credit card loans reflecting the net impact of lower consumer spending during the first nine months of 2020 partially offset by the acquisition of the credit card portfolio in the third quarter of 2020, as well as lower other retail loans.

Average investment securities in the third quarter and first nine months of 2020 were $11.4 billion (9.7 percent) and $7.8 billion (6.8 percent) higher, respectively, than the same periods of 2019, primarily due to purchases of mortgage-backed, U.S. Treasury and state and political securities, net of prepayments and maturities.

Average total deposits for the third quarter and first nine months of 2020 were $55.6 billion (15.9 percent) and $47.0 billion (13.7 percent) higher, respectively, than the same periods of 2019. Average total savings deposits for the third quarter and first nine months of 2020 were $29.3 billion (12.6 percent) and $33.1 billion (14.7 percent) higher, respectively, than the same periods of the prior year, driven by increases in Consumer and Business Banking, and Corporate and Commercial Banking balances. The increase in average total savings deposits for the first nine months of 2020, compared with the first nine months of 2019, was also due to higher Wealth Management and Investment Services balances. Average noninterest-bearing deposits for the third quarter and first nine months of 2020 were $34.8 billion (46.6 percent) and $19.2 billion (26.1 percent) higher, respectively, than the same periods of 2019, primarily due to increases in Corporate and Commercial Banking, Consumer and Business Banking, and Wealth Management and Investment Services balances. The growth in average total savings and noninterest-bearing deposits was primarily a result of the actions by the federal government to increase liquidity in the financial system, customers maintaining balance sheet liquidity by utilizing existing credit facilities and government stimulus programs. Average time deposits for the third quarter and first nine months of 2020 were $8.5 billion (19.9 percent) and $5.3 billion (11.8 percent) lower, respectively, than the same periods of the prior year, primarily driven by decreases in those deposits managed as an alternative to other funding sources, based largely on relative pricing and liquidity characteristics.


4		U.S. Bancorp


Table 2		Noninterest Income


	Three Months Ended September 30							Nine Months Ended September 30
(Dollars in Millions)	2020		2019		Percent Change			2020		2019		Percent Change
Credit and debit card revenue		$ 388		$ 366		6.0	%		$ 976		$1,035		(5.7	)%
Corporate payment products revenue		125		177		(29.4	)		371		506		(26.7	)
Merchant processing services		347		410		(15.4	)		950		1,192		(20.3	)
Trust and investment management fees		434		421		3.1			1,295		1,235		4.9
Deposit service charges		170		234		(27.4	)		512		678		(24.5	)
Treasury management fees		145		139		4.3			425		438		(3.0	)
Commercial products revenue		303		240		26.3			904		708		27.7
Mortgage banking revenue		553		272		*			1,596		630		*
Investment products fees		48		46		4.3			142		138		2.9
Securities gains (losses), net		12		25		(52.0	)		143		47		*
Other		187		284		(34.2	)		537		788		(31.9	)
Total noninterest income		$2,712		$2,614		3.7	%		$7,851		$7,395		6.2	%

*	Not meaningful

Provision for Credit Losses

The provision for credit losses was $635 million for the third quarter and $3.4 billion for the first nine months of 2020, representing increases of $268 million (73.0 percent) and $2.3 billion, respectively, from the same periods of 2019. In March 2020 economic conditions began to deteriorate, and continued to worsen in the second quarter of 2020, due to the impact of the

COVID-19

health crisis. During the third quarter of 2020, economic conditions began to moderate as economic projections for both the gross domestic product and unemployment levels improved from the second quarter. The Company recognized an increase of $2.0 billion in the allowance for credit losses during the first nine months of 2020 due to the deteriorating and ongoing effects of these adverse economic conditions. The Company recognized an increase of $120 million in the allowance for credit losses during the third quarter of 2020, primarily reflecting the expected losses within the State Farm Bank credit card portfolio acquired during the period. Net charge-offs increased $163 million (46.3 percent) and $276 million (25.8 percent) in the third quarter and first nine months of 2020, respectively, compared with the same periods of the prior year, primarily due to higher commercial loan, commercial real estate loan and retail leasing net charge-offs, partially offset by a decrease in other retail loan net charge-offs. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

Noninterest Income

Noninterest income was $2.7 billion in the third quarter and $7.9 billion in the first nine months of 2020, representing increases of $98 million (3.7 percent) and $456 million (6.2 percent), respectively, compared with the same periods of 2019. The increases from a year ago reflected higher mortgage banking revenue, commercial products revenue and trust and investment management fees, partially offset by lower payment services revenue, deposit service charges and other noninterest income. The increase in noninterest income in the first nine months of 2020, compared with the first nine months of 2019, was also due to higher gains on sales of investment securities. Mortgage banking revenue increased due to higher mortgage loan production and stronger gain on sale margins, partially offset by declines in mortgage servicing rights (“MSRs”) valuations, net of hedging activities. The Company expects mortgage banking revenue to decline in the fourth quarter of 2020, as compared with the third quarter of 2020, reflecting slower refinancing activity for the industry and seasonality of home sales. Commercial products revenue increased primarily due to higher corporate bond issuance fees and trading revenue. Trust and investment management fees were higher due to business growth and favorable market conditions over the past year. Payment services fee revenue decreased reflecting lower merchant processing services revenue and corporate payment products revenue, driven by lower sales volume due to the worldwide impact of the

COVID-19

pandemic on consumer and business spending. Credit and debit card revenue was higher in the third quarter of 2020, compared with the third quarter of 2019, reflecting significantly higher prepaid card fees related to the delayed impact of government stimulus programs adopted in the second quarter of 2020. Payment services revenue is likely to continue to be adversely affected through the remainder of 2020 due to reduced consumer and business spending activity, as well as lower expected prepaid card volume in the fourth quarter of 2020, as compared with the third quarter of 2020. Deposit service charges decreased primarily due to lower volume. Other noninterest income decreased due to lower equity investment income, lower

tax-advantaged

investment syndication revenue, and certain asset impairments as a result of expected branch closures. Other noninterest income further decreased in the


U.S. Bancorp		5


Table 3		Noninterest Expense


	Three Months Ended September 30									Nine Months Ended September 30
(Dollars in Millions)	2020			2019			Percent Change			2020			2019			Percent Change
Compensation	$	1,687		$	1,595			5.8	%	$	4,992		$	4,728			5.6	%
Employee benefits		335			324			3.4			1,001			971			3.1
Net occupancy and equipment		276			279			(1.1	)		823			837			(1.7	)
Professional services		102			114			(10.5	)		307			315			(2.5	)
Marketing and business development		72			109			(33.9	)		213			309			(31.1	)
Technology and communications		334			277			20.6			932			804			15.9
Postage, printing and supplies		70			74			(5.4	)		214			219			(2.3	)
Other intangibles		44			42			4.8			129			124			4.0
Other		451			330			36.7			1,394			1,077			29.4
Total noninterest expense	$	3,371		$	3,144			7.2	%	$	10,005		$	9,384			6.6	%
Efficiency ratio (a)		56.6	%		53.3	%					57.4	%		54.3	%

a)	See Non-GAAP Financial Measures beginning on page 32.

first nine months of 2020, compared with the first nine months of 2019, due to asset impairments as a result of property damage from civil unrest in the second quarter of 2020, partially offset by gains on sale of certain businesses in the first quarter of 2020.

Noninterest Expense

Noninterest expense was $3.4 billion in the third quarter and $10.0 billion in the first nine months of 2020, representing increases of $227 million (7.2 percent) and $621 million (6.6 percent), respectively, over the same periods of 2019. The increases from a year ago were driven by expenses of $157 million in the third quarter and $456 million in the first nine months of 2020, representing incremental costs related to the prepaid card business, expenses related to

COVID-19,

and revenue-related expenses due to higher mortgage production and capital markets activities. In addition, the increases were also driven by business investments, including those related to increased digital capabilities. The categories of expense impacted primarily include higher personnel expense, technology and communications expense, and other noninterest expense, partially offset by lower marketing and business development expense. Compensation expense increased due to the impacts of merit increases and higher variable compensation related to business production within the mortgage banking and fixed income capital markets businesses. Employee benefits expense increased primarily due to higher pension expense. Technology and communications expense increased primarily due to capital expenditures supporting business growth and the impact of increased call center volume related to prepaid cards. Other noninterest expense increased, reflecting $49 million and $228 million of expenses in the third quarter and first nine months of 2020, respectively, related to

COVID-19,

higher FDIC insurance expense driven by an increase in the assessment base, and higher state franchise taxes. The increase in other noninterest expense in the first nine months of 2020, compared with the first nine months of 2019, was partially offset by lower costs related to

tax-advantaged

projects in 2020. Incremental costs related to

COVID-19

include increased liabilities driven by the Company’s exposure as a credit card processor to charge-back risk on undelivered goods and services, including prepaid airline tickets, as well as expenses related to paying premium compensation to front-line workers and providing a safe working environment for employees. Professional services expense decreased primarily due to business initiatives completed in 2019, while marketing and business development expense decreased due to the timing of marketing campaigns and a reduction in travel as a result of

COVID-19.

The Company expects its noninterest expenses to be relatively stable for the fourth quarter of 2020, as compared with the third quarter of 2020.

Income Tax Expense

The provision for income taxes was $347 million (an effective rate of 18.0 percent) for the third quarter and $671 million (an effective rate of 16.2 percent) for the first nine months of 2020, compared with $467 million (an effective rate of 19.6 percent) and $1.3 billion (an effective rate of 19.2 percent) for the same periods of 2019. The reduced tax rates for 2020 were primarily a result of reduced pretax income being impacted by current economic conditions, including the higher provision for credit losses. 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 $307.0 billion at September 30, 2020, compared with $296.1 billion at December 31, 2019, an increase of $10.9 billion (3.7 percent). The increase was driven by higher commercial loans, residential mortgages, commercial real estate loans and other retail loans, partially offset by lower credit card loans.

Commercial loans increased $6.9 billion (6.6 percent) at September 30, 2020, compared with December 31, 2019, reflecting the impact of loans made under the SBA’s Paycheck Protection Program.


6		U.S. Bancorp


Table 4		Available-for-Sale Investment Securities


	September 30, 2020									December 31, 2019
(Dollars in Millions)	Amortized Cost		Fair Value		Weighted- Average Maturity in Years		Weighted- Average Yield (d)			Amortized Cost		Fair Value		Weighted- Average Maturity in Years		Weighted- Average Yield (d)
U.S. Treasury and agencies	$	22,029	$	22,564		2.9		1.50	%	$	19,845	$	19,839		2.7		1.68	%
Mortgage-backed securities (a)		100,711		102,891		2.7		1.67			95,385		95,564		4.4		2.39
Asset-backed securities (a)		203		208		4.1		2.26			375		383		3.1		3.09
Obligations of state and political subdivisions (b) (c)		7,784		8,356		6.4		4.07			6,499		6,814		6.6		4.29
Other		13		13		.3		1.59			13		13		.3		2.66
Total investment securities	$	130,740	$	134,032		3.0		1.78	%	$	122,117	$	122,613		4.2		2.38	%

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

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

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

(d)	Yields on investment securities are computed based on amortized cost balances. Weighted-average yields for obligations of state and political subdivisions are presented on a fully-taxable equivalent basis based on a federal income tax rate of 21 percent.

Residential mortgages held in the loan portfolio increased $6.2 billion (8.8 percent) at September 30, 2020, compared with December 31, 2019, due to higher mortgage loan production given the lower interest rate environment, and higher GNMA buybacks during the first nine months of 2020. 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 real estate loans increased $634 million (1.6 percent) at September 30, 2020, compared with December 31, 2019, primarily the result of new originations, partially offset by customers paying down balances.

Other retail loans increased $36 million (0.1 percent) at September 30, 2020, compared with December 31, 2019, due to an increase in installment loans, partially offset by decreases in home equity loans, auto loans, revolving credit balances and retail leasing balances.

Credit card loans decreased $2.9 billion (11.7 percent) at September 30, 2020, compared with December 31, 2019, reflecting reduced consumer spending in 2020 driven by the impact of

COVID-19,

partially offset by the acquisition of the State Farm Bank credit card portfolio in the third quarter of 2020.

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 $7.6 billion at September 30, 2020, compared with $5.6 billion at December 31, 2019. The increase in loans held for sale was principally due to a higher level of mortgage loan closings in the third quarter of 2020 given the lower interest rate environment, compared with the fourth quarter of 2019. Almost all of the residential mortgage loans the Company originates or purchases for sale follow guidelines that allow the loans to be sold into existing, highly liquid secondary markets; in particular in government agency transactions and to government-sponsored enterprises (“GSEs”).

Investment Securities

Available-for-sale

investment securities totaled $134.0 billion at September 30, 2020, compared with $122.6 billion at December 31, 2019. The $11.4 billion (9.3 percent) increase was primarily due to $8.6 billion of net investment purchases and a $2.8 billion favorable change in net unrealized gains (losses) on

available-for-sale

investment securities. The Company had no outstanding investment securities classified as

held-to-maturity

at September 30, 2020 and December 31, 2019.

The Company’s

available-for-sale

investment securities are carried at fair value with changes in fair value reflected in other comprehensive income (loss) unless a portion of a security’s unrealized loss is related to credit and an allowance for credit losses is necessary. At September 30, 2020, the Company’s net unrealized gains on

available-for-sale

investment securities were $3.3 billion, compared with $496 million at December 31, 2019. The favorable change in net unrealized gains was primarily due to increases in the fair value of mortgage-backed, U.S. Treasury, and state and political securities as a result of changes in interest rates. Gross unrealized losses on

available-for-sale

investment securities totaled $34 million at September 30, 2020, compared with $448 million at December 31, 2019. At


U.S. Bancorp		7

September 30, 2020, 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 $413.2 billion at September 30, 2020, compared with $361.9 billion at December 31, 2019. The $51.3 billion (14.2 percent) increase in total deposits reflected increases in noninterest-bearing and total savings deposits, partially offset by a decrease in time deposits. Noninterest-bearing deposits increased $39.0 billion (51.6 percent) at September 30, 2020, compared with December 31, 2019, primarily due to higher Corporate and Commercial Banking, Consumer and Business Banking, and Wealth Management and Investment Services balances. Interest checking balances increased $9.7 billion (12.7 percent), while savings account balances increased $7.0 billion (14.9 percent), both driven by higher Consumer and Business Banking balances. Money market deposit balances increased $5.9 billion (4.9 percent) at September 30, 2020, compared with December 31, 2019, primarily due to higher Corporate and Commercial Banking, and Consumer and Business Banking balances, partially offset by a decrease in Wealth Management and Investment Services balances. The growth in noninterest-bearing and total savings deposits was primarily a result of the economic impact of the

COVID-19

pandemic on the world economy resulting in actions by the federal government to increase liquidity in the financial system, customers maintaining balance sheet liquidity by utilizing existing credit facilities and government stimulus programs. Time deposits decreased $10.3 billion (24.0 percent) at September 30, 2020, compared with December 31, 2019, driven by a decrease in those deposits managed as an alternative to other funding sources, based largely on relative pricing and liquidity characteristics, along with a decrease in 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 $13.7 billion at September 30, 2020, compared with $23.7 billion at December 31, 2019. The $10.0 billion (42.2 percent) decrease in short-term borrowings was primarily due to a decrease in short-term Federal Home Loan Bank (“FHLB”) advances and other short-term borrowings balances, partially offset by higher repurchase agreement balances. Long-term debt was $42.4 billion at September 30, 2020, compared with $40.2 billion at December 31, 2019. The $2.3 billion (5.7 percent) increase was primarily due to $3.3 billion of bank note and $2.8 billion of medium-term note issuances, partially offset by $4.5 billion of bank note repayments and maturities. Refer to the “Liquidity Risk Management” section for discussion of liquidity management of the Company.

CORPORATE RISK PROFILE

Overview

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

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

COVID-19

and related risks are identified for each of the most prominent exposures. Oversight and governance is managed through a centralized command center which escalates through the ERC. The Board of Directors also oversees the Company’s responsiveness to the

COVID-19

pandemic. 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


8		U.S. Bancorp

instruments, such as trading and

available-for-sale

securities, mortgage loans held for sale (“MLHFS”), MSRs and derivatives that are accounted for on a fair value basis. Liquidity risk is the possible inability to fund obligations or new business at a reasonable cost and in a timely manner. Operational risk is the risk to current or projected financial condition arising from inadequate or failed internal processes or systems, people, or adverse external events, including the risk of loss resulting from breaches in data security. Operational risk can also include the risk of loss due to failures by third parties with which the Company does business. Compliance risk is the risk that the Company may suffer legal or regulatory sanctions, financial losses, and reputational damage if it fails to adhere to compliance requirements. 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. Reputation 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 or services, 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 this report and in the Company’s Annual Report on Form

10-K

for the year ended December 31, 2019, for a detailed discussion of these factors.

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

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

•

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

•

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

•

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

•

Liquidity risk, including funding projections under various stressed scenarios;

•

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

•

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

•

Strategic and reputation 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 levels and consumer bankruptcy filings, as well as the potential impact on customers and the domestic economy resulting from new tariffs or increases in existing tariffs, and the

COVID-19

pandemic. The Risk Management Committee oversees the Company’s credit risk management process.


U.S. Bancorp		9

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

Form 10-K

for the year ended December 31, 2019, for a more detailed discussion on credit risk management processes.

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

The commercial lending segment includes loans and leases made to small business, middle market, large corporate, commercial real estate, financial institution,

non-profit

and public sector customers. Key risk characteristics relevant to commercial lending segment loans include the industry and geography of the borrower’s business, purpose of the loan, repayment source, borrower’s debt capacity and financial flexibility, loan covenants, and nature of pledged collateral, if any, as well as macroeconomic factors such as unemployment rates, gross domestic product levels, corporate bond spreads and long-term interest rates, all of which have been impacted by the COVID-19 pandemic. These risk characteristics, among others, are considered in determining estimates about the likelihood of default by the borrowers and the severity of loss in the event of default. The Company considers these risk characteristics in assigning internal risk ratings to, or forecasting losses on, these loans, which are the significant factors in determining the allowance for credit losses for loans in the commercial lending segment.

The consumer lending segment represents loans and leases made to consumer customers, including residential mortgages, credit card loans, and other retail loans such as revolving consumer lines, auto loans and leases, home equity loans and lines, and student loans, a

run-off

portfolio. Home equity or second mortgage loans are junior lien

closed-end

accounts fully disbursed at origination. These loans typically are fixed rate loans, secured by residential real estate, with a

10-

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-

15-year

draw period during which a minimum payment is equivalent to the monthly interest, followed by a

20-

10-year

amortization period, respectively. At September 30, 2020, substantially all of the Company’s home equity lines were in the draw period. Approximately $1.4 billion, or 12 percent, of the outstanding home equity line balances at September 30, 2020, 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, consumer bankruptcy filings and other macroeconomic factors, customer payment history and credit scores, and in some cases, updated

loan-to-value

(“LTV”) information reflecting current market conditions on real estate-based loans. These and other risk characteristics, including elevated risk resulting from the

COVID-19

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

The Company further disaggregates its loan portfolio segments into various classes based on their underlying risk characteristics. The two classes within the 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.


10		U.S. Bancorp

The Company’s consumer lending segment utilizes several distinct business processes and channels to originate consumer credit, including traditional branch lending, mobile and

on-line

banking, indirect lending, correspondent banks and loan brokers. Each distinct underwriting and origination activity manages unique credit risk characteristics and prices its loan production commensurate with the differing risk profiles.

Residential mortgage originations are generally limited to prime borrowers and are performed through the Company’s branches, loan production offices, mobile and

on-line

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

The Company estimates updated LTV information on its outstanding residential mortgages quarterly, based on a method that combines automated valuation model updates and relevant home price indices. LTV is the ratio of the loan’s outstanding principal balance to the current estimate of property value. For home equity and second mortgages, combined

loan-to-value

(“CLTV”) is the combination of the first mortgage original principal balance and the second lien outstanding principal balance, relative to the current estimate of property value. Certain loans do not have an LTV or CLTV, primarily due to lack of availability of relevant automated valuation model and/or home price indices values, or lack of necessary valuation data on acquired loans.

The following tables provide summary information of residential mortgages and home equity and second mortgages by LTV at September 30, 2020:


Residential Mortgages (Dollars in Millions)	Interest Only		Amortizing		Total		Percent of Total
Loan-to-Value
Less than or equal to 80%		$3,069		$58,380		$61,449		80.0	%
Over 80% through 90%		11		5,472		5,483		7.1
Over 90% through 100%		—		518		518		.7
Over 100%		—		118		118		.2
No LTV available		—		18		18		—
Loans purchased from GNMA mortgage pools (a)		—		9,203		9,203		12.0
Total (b)		$3,080		$73,709		$76,789		100.0	%

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

(b)	At September 30, 2020, approximately $540 million of residential mortgage balances were considered sub-prime.


Home Equity and Second Mortgages (Dollars in Millions)	Lines		Loans		Total		Percent of Total
Loan-to-Value
Less than or equal to 80%		$10,213		$ 764		$10,977		83.1	%
Over 80% through 90%		1,320		462		1,782		13.5
Over 90% through 100%		210		47		257		2.0
Over 100%		90		7		97		.7
No LTV/CLTV available		91		4		95		.7
Total (a)		$11,924		$1,284		$13,208		100.0	%

(a)	At September 30, 2020, approximately $54 million of home equity and second mortgage balances were considered sub-prime.

Home equity and second mortgages were $13.2 billion at September 30, 2020, compared with $15.0 billion at December 31, 2019, and included $3.5 billion of home equity lines in a first lien position and $9.7 billion of home equity and second mortgage loans and lines in a junior lien position. Loans and lines in a junior lien position at September 30, 2020, included approximately $3.8 billion of loans and lines for which the Company also serviced the related first lien loan, and approximately $5.9 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.


U.S. Bancorp		11

The following table provides a summary of delinquency statistics and other credit quality indicators for the Company’s junior lien positions at September 30, 2020:


	Junior Liens Behind
(Dollars in Millions)	Company Owned or Serviced First Lien			Third Party First Lien			Total
Total		$3,755			$5,909			$9,664
Percent 30—89 days past due		.17	%		.31	%		.26	%
Percent 90 days or more past due		.04	%		.09	%		.07	%
Weighted-average CLTV		68	%		65	%		66	%
Weighted-average credit score		781			777			779

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 $461 million at September 30, 2020, compared with $605 million at December 31, 2019. These balances exclude loans purchased from GNMA mortgage pools whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs. 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 0.15 percent at September 30, 2020, compared with 0.20 percent at December 31, 2019.


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


90 days or more past due excluding nonperforming loans	September 30, 2020			December 31, 2019
Commercial
Commercial		.06	%		.08	%
Lease financing		—			—
Total commercial		.06			.08
Commercial Real Estate
Commercial mortgages		—			.01
Construction and development		.01			—
Total commercial real estate		—			.01
Residential Mortgages (a)		.15			.17
Credit Card		.91			1.23
Other Retail
Retail leasing		.06			.05
Home equity and second mortgages		.37			.32
Other		.07			.13
Total other retail		.14			.17
Total loans		.15	%		.20	%

90 days or more past due including nonperforming loans	September 30, 2020			December 31, 2019
Commercial		.48	%		.27	%
Commercial real estate		.82			.21
Residential mortgages (a)		.46			.51
Credit card		.91			1.23
Other retail		.40			.46
Total loans		.53	%		.44	%

(a)

Delinquent loan ratios exclude $1.6 billion at September 30, 2020, and $1.7 billion at December 31, 2019, of loans purchased from GNMA mortgage pools whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs. Including these loans, the ratio of residential mortgages 90 days or more past due including all nonperforming loans was 2.52 percent at September 30, 2020, and 2.92 percent at December 31, 2019.


12		U.S. Bancorp

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


	Amount				As a Percent of Ending Loan Balances
(Dollars in Millions)	September 30, 2020		December 31, 2019		September 30, 2020			December 31, 2019
Residential Mortgages (a)
30-89 days		$238		$154		.31	%		.22	%
90 days or more		114		120		.15			.17
Nonperforming		240		241		.31			.34
Total		$592		$515		.77	%		.73	%
Credit Card
30-89 days		$206		$321		.94	%		1.30	%
90 days or more		199		306		.91			1.23
Nonperforming		—		—		—			—
Total		$405		$627		1.85	%		2.53	%
Other Retail
Retail Leasing
30-89 days		$ 32		$ 45		.38	%		.53	%
90 days or more		5		4		.06			.05
Nonperforming		14		13		.17			.15
Total		$ 51		$ 62		.61	%		.73	%
Home Equity and Second Mortgages
30-89 days		$ 46		$ 77		.35	%		.51	%
90 days or more		49		48		.37			.32
Nonperforming		102		116		.77			.77
Total		$197		$241		1.49	%		1.60	%
Other (b)
30-89 days		$179		$271		.51	%		.81	%
90 days or more		25		45		.07			.13
Nonperforming		36		36		.10			.11
Total		$240		$352		.68	%		1.05	%

(a)	Excludes $1.3 billion of loans 30-89 days past due and $1.6 billion of loans 90 days or more past due at September 30, 2020, purchased from GNMA mortgage pools that continue to accrue interest, compared with $428 million and $1.7 billion at December 31, 2019, respectively.

(b)	Includes revolving credit, installment, automobile and student loans.

Restructured Loans

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

Troubled Debt Restructurings

Concessionary modifications are classified as TDRs unless the modification results in only an insignificant delay in the payments to be received. TDRs accrue interest if the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles, which is generally six months or greater. At September 30, 2020, performing TDRs were $3.4 billion, compared with $3.8 billion at December 31, 2019.

The Company continues to work with customers to modify loans for borrowers who are experiencing financial difficulties. Many of the Company’s TDRs are determined on a

case-by-case

basis in connection with ongoing loan collection processes. The modifications vary within each of the Company’s loan classes. Commercial lending segment TDRs generally include extensions of the maturity date and may be accompanied by an increase or decrease to the interest rate. The Company may also work with the borrower to make other changes to the loan to mitigate losses, such as obtaining additional collateral and/or guarantees to support the loan.

The Company has also implemented certain residential mortgage loan restructuring programs that may result in TDRs. The Company modifies residential mortgage loans under Federal Housing Administration, United States Department of Veterans Affairs, and its own internal programs. Under these programs, the Company offers qualifying homeowners the opportunity to permanently modify their loan and achieve more affordable monthly payments by providing loan concessions. These concessions may include adjustments to interest rates, conversion of adjustable rates to fixed rates, extensions of maturity dates or deferrals of payments, capitalization of accrued interest and/or outstanding advances, or in limited situations, partial forgiveness of loan principal. In most instances,


U.S. Bancorp		13

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.

Loan modifications or concessions granted to customers resulting directly from the effects of the

COVID-19

pandemic, who were otherwise in current payment status, are not considered to be TDRs.

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, 2020 (Dollars in Millions)	Performing TDRs		30-89 Days Past Due			90 Days or More Past Due			Nonperforming TDRs			Total TDRs
Commercial		$ 172		4.9	%		3.9	%		$290	(a)		$ 462
Commercial real estate		173		1.3			—			119	(b)		292
Residential mortgages		1,263		5.3			4.7			143			1,406	(d)
Credit card		246		6.9			4.6			—			246
Other retail		150		7.1			7.5			34	(c)		184	(e)
TDRs, excluding loans purchased from GNMA mortgage pools		2,004		5.3			4.4			586			2,590
Loans purchased from GNMA mortgage pools (g)		1,415		—			—			—			1,415	(f)
Total		$3,419		3.1	%		2.6	%		$586			$4,005

(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 $288 million of residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $25 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

(e)	Includes $80 million of other retail loans to borrowers that have had debt discharged through bankruptcy and $17 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

(f)

Includes $146 million of Federal Housing Administration and United States Department of Veterans Affairs residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $238 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

(g)

Approximately 11.5 percent and 38.9 percent of the total TDR loans purchased from GNMA mortgage pools are

30-89

days past due and 90 days or more past due, respectively, but are not classified as delinquent as their repayments are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.


14		U.S. Bancorp

Short-term and Other Loan Modifications

The Company makes short-term and other modifications that it does not consider to be TDRs, in limited circumstances, to assist borrowers experiencing temporary hardships. Short-term consumer lending modification 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.

COVID-19

Payment Relief

The Company has offered payment relief, including forbearance, payment deferrals and other customer accommodations, to assist borrowers that have experienced financial hardship resulting from the effects of the

COVID-19

pandemic. The majority of these borrowers were not delinquent on payments at the time they received the payment relief. From March 2020 through September 30, 2020, the Company had approved approximately 329,000 loan modifications for these borrowers, representing approximately $26.9 billion. The loans modified consisted primarily of payment forbearance or deferrals of 90 days or less. A portion of the borrowers who received account modifications are no longer participating in these payment relief programs, as the programs are generally short-term; and at September 30, 2020, approximately 91,000 accounts, representing approximately $12.1 billion, were currently in an active payment relief program. The recognition of delinquent or nonaccrual loans and loan net charge-offs may be delayed for those customers enrolled in these payment relief programs who would have otherwise moved into past due or nonaccrual status, as these customer accounts do not continue to age during the period the payment delay is provided.

The following table summarizes borrowers enrolled in payment relief programs as a result of the

COVID-19

pandemic at September 30, 2020, as a percentage of the Company’s loans and loan balances:


	Percentage of Loan Accounts in Payment Relief Programs			Percentage of Loan Balances in Payment Relief Programs			Program Details
Commercial		.15	%		.43	%	Primarily 3 month payment deferral up to a maximum of 6 months; interest continues to accrue with various payment options; may include short-term covenant waivers

Commercial real estate		1.03			1.64		Primarily 3 month payment deferral up to a maximum of 6 months; interest continues to accrue with various payment options; may include short-term covenant waivers

Residential mortgages (a)		4.25			5.47		Primarily 6 month payment forbearance, which may be extended up to 12 months; interest continues to accrue; cumulative payments suspended during forbearance period are either paid-off immediately or under a short-term repayment plan, or addressed through a permanent loan modification that either requires repayment at maturity or through restructured payments over time

Credit cards		.21			.43		Primarily 3 month payment deferral; interest continues to accrue

Other retail		.87			1.43		Home equity loan programs are similar to residential mortgage programs; programs for other loan portfolios are primarily 2 month payment deferral up to a maximum of 4 months; interest continues to accrue
Total loans (a)		.41	%		2.03	%

(a)

Excludes loans purchased from GNMA mortgage pools, whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs. At September 30, 2020, 58.76 percent of the total number of accounts and 64.13 percent of the total loan balances of loans purchased from GNMA mortgage pools were to borrowers enrolled in payment relief programs as a result of the

COVID-19

pandemic. Including these loans, 14.52 percent of the total number of accounts and 13.16 percent of the total balances of residential mortgages were to borrowers enrolled in payment relief programs as a result of the COVID-19 pandemic. Including these loans, .71 percent of the total number of accounts and 3.96 percent of the total balances of all loans were to borrowers enrolled in payment relief programs as result of the COVID-19 pandemic.


U.S. Bancorp		15

Nonperforming Assets

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

At September 30, 2020, total nonperforming assets were $1.3 billion, compared to $829 million at December 31, 2019. The $441 million (53.2 percent) increase in nonperforming assets was driven by increases in nonperforming commercial and commercial real estate loans. The ratio of total nonperforming assets to total loans and other real estate was 0.41 percent at September 30, 2020, compared with 0.28 percent at December 31, 2019. The Company expects nonperforming assets to increase given current economic conditions.

OREO was $35 million at September 30, 2020, compared with $78 million at December 31, 2019, and was related to foreclosed properties that previously secured loan balances. These balances exclude foreclosed GNMA loans whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.

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


	Amount				As a Percent of Ending Loan Balances
(Dollars in Millions)	September 30, 2020		December 31, 2019		September 30, 2020			December 31, 2019
Residential
New York	$	4	$	6		.35	%		.66	%
Illinois		3		10		.06			.22
Minnesota		3		6		.05			.10
California		2		7		.01			.03
Oregon		2		4		.06			.12
All other states		18		41		.04			.09
Total residential		32		74		.04			.09
Commercial
California		3		3		.01			.01
All other states		—		1		—			—
Total commercial		3		4		—			—
Total	$	35	$	78		.01	%		.03	%


16		U.S. Bancorp


Table 6		Nonperforming Assets (a)


(Dollars in Millions)	September 30, 2020			December 31, 2019
Commercial
Commercial	$	403		$	172
Lease financing		56			32
Total commercial		459			204
Commercial Real Estate
Commercial mortgages		323			74
Construction and development		7			8
Total commercial real estate		330			82
Residential Mortgages (b)		240			241
Credit Card		—			—
Other Retail
Retail leasing		14			13
Home equity and second mortgages		102			116
Other		36			36
Total other retail		152			165
Total nonperforming loans		1,181			692
Other Real Estate (c)		35			78
Other Assets		54			59
Total nonperforming assets	$	1,270		$	829
Accruing loans 90 days or more past due (b)	$	461		$	605
Nonperforming loans to total loans		.38	%		.23	%
Nonperforming assets to total loans plus other real estate (c)		.41	%		.28	%

Changes in Nonperforming Assets


(Dollars in Millions)	Commercial and Commercial Real Estate			Residential Mortgages, Credit Card and Other Retail			Total
Balance December 31, 2019	$	321		$	508		$	829
Additions to nonperforming assets
New nonaccrual loans and foreclosed properties		1,041			208			1,249
Advances on loans		7			1			8
Total additions		1,048			209			1,257
Reductions in nonperforming assets
Paydowns, payoffs		(309	)		(101	)		(410	)
Net sales		(10	)		(53	)		(63	)
Return to performing status		(11	)		(93	)		(104	)
Charge-offs (d)		(219	)		(20	)		(239	)
Total reductions		(549	)		(267	)		(816	)
Net additions to (reductions in) nonperforming assets		499			(58	)		441
Balance September 30, 2020	$	820		$	450		$	1,270

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

(b)

Excludes $1.6 billion at September 30, 2020, and $1.7 billion at December 31, 2019, of loans purchased from GNMA mortgage pools that are 90 days or more past due that continue to accrue interest, as their repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.

(c)

Foreclosed GNMA loans of $42 million at September 30, 2020, and $155 million at December 31, 2019, continue to accrue interest and are recorded as other assets and excluded from nonperforming assets because they are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.

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


U.S. Bancorp		17


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


	Three Months Ended September 30						Nine Months Ended September 30
	2020			2019			2020			2019
Commercial
Commercial		.60	%		.29	%		.41	%		.27	%
Lease financing		.78			.22			.52			.20
Total commercial		.61			.29			.42			.27
Commercial Real Estate
Commercial mortgages		1.13			.04			.46			.02
Construction and development		(.07	)		.11			—			.02
Total commercial real estate		.81			.06			.34			.02
Residential Mortgages		(.02	)		(.02	)		(.01	)		.01
Credit Card		3.63			3.53			3.95			3.85
Other Retail
Retail leasing		.94			.14			1.14			.14
Home equity and second mortgages		(.06	)		(.03	)		(.01	)		(.03	)
Other		.43			.72			.59			.75
Total other retail		.39			.43			.52			.44
Total loans		.66	%		.48	%		.58	%		.49	%

Analysis of Loan Net Charge-Offs

Total loan net charge-offs were $515 million for the third quarter and $1.3 billion for the first nine months of 2020, compared with $352 million and $1.1 billion, respectively, for the same periods of 2019. 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 2020 was 0.66 percent and 0.58 percent, respectively, compared with 0.48 percent and 0.49 percent, respectively, for the same periods of 2019. The year-over-year increases in net charge-offs reflected higher commercial loan, commercial real estate loan and retail leasing net charge-offs, partially offset by a decrease in other retail loan net charge-offs. The increase in retail leasing charge-offs reflected the inclusion of end of term losses on residual lease values as of January 1, 2020. The Company expects net charge-offs to increase given current economic conditions.

Analysis and Determination of the Allowance for Credit Losses

Prior to January 1, 2020, the allowance for credit losses was established to reserve for probable and estimable losses incurred in the Company’s loan and lease portfolio, including unfunded credit commitments. Effective January 1, 2020, the Company adopted new accounting guidance which changed previous impairment recognition to a model that is based on expected losses rather than incurred losses. The allowance for credit losses is increased through provisions charged to earnings and reduced by net charge-offs. Management evaluates the appropriateness of the allowance for credit losses on a quarterly basis. The allowance considers expected losses for the remaining lives of the applicable assets, inclusive of expected recoveries. Remaining lives of the applicable assets are adjusted for prepayments. Multiple economic scenarios are considered over a three-year reasonable and supportable forecast period, which incorporates historical loss experience in years two and three. These economic scenarios are constructed with interrelated projections of multiple economic variables, and loss estimates are produced that consider the historical correlation of those economic variables with credit losses. After the forecast period, the Company fully reverts to long-term historical loss experience, adjusted for prepayments and characteristics of the current loan and lease portfolio, to estimate losses over the remaining lives. The economic scenarios are updated at least quarterly, and are designed to provide a range of reasonable estimates, which are both better and worse than current expectations. Scenarios are weighted based on the Company’s expectation of future conditions. Final loss estimates also consider factors affecting credit losses not reflected in the scenarios, due to the unique aspects of current conditions and expectations. These factors may include, but are not limited to, loan servicing practices, regulatory guidance, and/or fiscal and monetary policy actions. 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, which is included in other liabilities in the Consolidated Balance Sheet. Both the allowance for loan losses and the liability for unfunded credit commitments are included in the Company’s analysis of credit losses and reported reserve ratios.

The allowance recorded for credit losses utilizes forward-looking expected loss models to consider a variety of factors affecting lifetime credit losses. These factors include, but are not limited to, macroeconomic variables such as unemployment rates, real estate prices, gross domestic product levels, corporate bonds spreads and long-term interest rate forecasts, as well as loan and borrower characteristics, such as internal risk ratings on


18		U.S. Bancorp

commercial loans and consumer credit scores, delinquency status, collateral type and available valuation information, consideration of

end-of-term

losses on lease residuals, and the remaining term of the loan, adjusted for expected prepayments. Where loans do not exhibit similar risk characteristics, an individual analysis is performed to consider expected credit losses. For each loan portfolio, model estimates are adjusted as necessary to consider any relevant changes in portfolio composition, lending policies, underwriting standards, risk management practices, economic conditions or other factors that would affect the accuracy of the model. Expected credit loss estimates also include consideration of expected cash recoveries on loans previously

charged-off,

or expected recoveries on collateral-dependent loans where recovery is expected through sale of the collateral.

The allowance recorded for individually evaluated loans greater than $5 million in the commercial lending segment is based on an 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. 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. Commercial lending segment TDR loans may be collectively evaluated for impairment where observed performance history, including defaults, is a primary driver of the loss allocation.

The allowance recorded for TDR loans in the consumer lending segment is determined on a homogenous pool basis utilizing expected cash flows discounted using the original effective interest rate of the pool. The expected cash flows on TDR loans consider subsequent payment defaults since modification, the borrower’s ability to pay under the restructured terms, and the timing and amount of payments. The allowance for collateral-dependent loans in the consumer lending segment is determined based on the current fair value of the collateral less costs to sell.

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, 2020, the Company serviced the first lien on 39 percent of the home equity loans and lines in a junior lien position. The Company also considers the status of first lien mortgage accounts reported on customer credit bureau files when the first lien is not serviced by the Company. Regardless of whether 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 $221 million or 1.7 percent of its total home equity portfolio at September 30, 2020, represented

non-delinquent

junior liens where the first lien was delinquent or modified, excluding loans in COVID-related forbearance programs.

The Company considers historical loss experience on the loans and lines in a junior lien position to establish loss estimates for junior lien loans and lines the Company services that are current, but the first lien is delinquent or modified. Historically, the number of junior lien defaults has been a small percentage of the total portfolio (approximately 1 percent annually), while the long-term average loss rate on loans that default has been approximately 80 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 in its loss estimation methods. 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.

Beginning January 1, 2020, when a loan portfolio is purchased, the acquired loans are divided into those considered purchased with more than insignificant credit deterioration (“PCD”) and those not considered purchased with more than insignificant credit deterioration. An allowance is established for each population and considers product mix, risk characteristics of the portfolio, bankruptcy experience, delinquency status, refreshed LTV ratios when possible, and portfolio growth. The allowance established for purchased loans not considered PCD is recognized through provision expense upon acquisition, whereas the allowance established for loans considered PCD at acquisition is offset by an increase in the basis of the acquired loans. Any subsequent increases and decreases in the allowance related to purchased loans are recognized through provision expense, with future charge-offs charged to the allowance. The Company did not have a material amount of PCD loans included in its loan portfolio at September 30, 2020.


U.S. Bancorp		19

under the methodologies described above are adjusted by management to consider the potential impact of other qualitative factors not captured in quantitative model adjustments which include, but are not limited to, the following: model imprecision, imprecision in economic scenario assumptions, and emerging risks related to either changes in the economic environment that are affecting specific portfolios, or changes in portfolio concentrations over time that may affect model performance. The consideration of these items results in adjustments to allowance amounts included in the Company’s allowance for credit losses for each portfolio class.

The results of the analysis are evaluated quarterly to confirm the estimates are appropriate for each loan portfolio.

Although the Company determined the amount of each element of the allowance separately and considers this process to be an important credit management tool, the entire allowance for credit losses is available for the entire loan portfolio. The actual amount of losses can vary significantly from the estimated amounts.

At September 30, 2020, the allowance for credit losses was $8.0 billion (2.61 percent of

period-end

loans), compared with an allowance of $4.5 billion (1.52 percent of

period-end

loans) at December 31, 2019. The ratio of the allowance for credit losses to nonperforming loans was 678 percent at September 30, 2020, compared with 649 percent at December 31, 2019. The ratio of the allowance for credit losses to annualized loan net charge-offs was 391 percent at September 30, 2020, compared with 309 percent of full year 2019 net charge-offs at December 31, 2019.

The increase in the allowance for credit losses of $3.5 billion (78.4 percent) at September 30, 2020, compared with December 31, 2019, reflected the $1.5 billion impact of the January 1, 2020 adoption of new accounting guidance, along with an additional $2.0 billion increase during the first nine months of 2020 to recognize the expected losses resulting from the deteriorating and ongoing effects of adverse economic conditions driven by the impact of

COVID-19

on the domestic and global economies, as well as new loan production and acquired loans. Expected loss estimates consider various factors including the changing economic activity, estimated mitigating effects of government stimulus, estimated duration and severity of the health crisis, customer specific information impacting changes in risk ratings, projected delinquencies and the impact of industrywide loan modification efforts designed to limit long-term effects of the

COVID-19

pandemic, among other factors.

Changes in economic conditions as of September 30, 2020 included significant reductions in economic activity related to actions taken by governmental authorities to slow the spread of

COVID-19.

High levels of unemployment, and lower gross domestic product estimates for 2020, as well as a slower pace of recovery in manufacturing activity and oil prices, were all observable changes in conditions that increased expected credit losses. At the same time, record economic stimulus measures were also enacted, and additional measures are being considered, with the intent to support businesses and consumers through what is expected to be a period of reduced economic activity. To balance these offsetting factors, economic scenarios updated through the end of the third quarter of 2020 that produced higher quantitative loss estimates consistent with the expected deterioration in reported economic statistics were evaluated in conjunction with management’s expectation that current and potential future stimulus efforts, as well as industrywide availability of short-term payment deferral programs, would mitigate losses estimated from models based on historical data from periods when mitigation efforts were not as extensive. Overall, loss expectations are consistent with prior economic downturn experience, but the severity of the deterioration in current economic conditions is not expected to persist over the life of the loan portfolio, as some indicators of economic activity have begun to improve directionally.

The allowance for credit losses related to commercial lending segment loans increased $1.4 billion during the nine months ended September 30, 2020, as increased loan volume and credit downgrades during the period reflected the impact of

COVID-19

on certain industry sectors, including the retail and restaurants, energy, media and entertainment, lodging and airline industries that were severely impacted by virus containment measures.

The following table summarizes the Company’s commercial lending segment credit exposure to customers within the industry sectors most impacted by

COVID-19,

as a percentage of total loans and legal commitments outstanding at September 30, 2020:


	Loans			Outstanding Commitments
Retail		4.1	%		5.4	%
Energy		.9			2.2
Media and entertainment		2.1			2.1
Lodging		1.4			1.1
Airline		.5			.6

The allowance for credit losses related to consumer lending segment loans increased $623 million during the nine months ended September 30, 2020, as higher economic risks, including those due to increased unemployment, and increases in expected losses related to acquired portfolios were partially mitigated by strong underlying credit quality that supports expectations of long-term repayment, and the decline in funded loan balances.


20		U.S. Bancorp


Table 8		Summary of Allowance for Credit Losses


	Three Months Ended September 30						Nine Months Ended September 30
(Dollars in Millions)	2020			2019			2020			2019
Balance at beginning of period	$	7,890		$	4,466		$	4,491		$	4,441
Change in accounting principle (a)		–			–			1,499			–
Charge-Offs
Commercial
Commercial		180			86			378			286
Lease financing		13			5			28			14
Total commercial		193			91			406			300
Commercial real estate
Commercial mortgages		88			3			107			7
Construction and development		1			4			5			4
Total commercial real estate		89			7			112			11
Residential mortgages		4			8			15			27
Credit card		236			248			775			767
Other retail
Retail leasing		25			6			86			17
Home equity and second mortgages		3			5			14			14
Other		61			86			216			252
Total other retail		89			97			316			283
Total charge-offs		611			451			1,624			1,388
Recoveries
Commercial
Commercial		13			14			37			87
Lease financing		2			2			6			6
Total commercial		15			16			43			93
Commercial real estate
Commercial mortgages		3			–			4			2
Construction and development		3			1			5			2
Total commercial real estate		6			1			9			4
Residential mortgages		7			11			20			23
Credit card		35			37			111			104
Other retail
Retail leasing		5			3			14			8
Home equity and second mortgages		5			6			15			17
Other		23			25			67			70
Total other retail		33			34			96			95
Total recoveries		96			99			279			319
Net Charge-Offs
Commercial
Commercial		167			72			341			199
Lease financing		11			3			22			8
Total commercial		178			75			363			207
Commercial real estate
Commercial mortgages		85			3			103			5
Construction and development		(2	)		3			–			2
Total commercial real estate		83			6			103			7
Residential mortgages		(3	)		(3	)		(5	)		4
Credit card		201			211			664			663
Other retail
Retail leasing		20			3			72			9
Home equity and second mortgages		(2	)		(1	)		(1	)		(3	)
Other		38			61			149			182
Total other retail		56			63			220			188
Total net charge-offs		515			352			1,345			1,069
Provision for credit losses		635			367			3,365			1,109
Balance at end of period	$	8,010		$	4,481		$	8,010		$	4,481
Components
Allowance for loan losses	$	7,407		$	4,007
Liability for unfunded credit commitments		603			474
Total allowance for credit losses	$	8,010		$	4,481
Allowance for Credit Losses as a Percentage of
Period-end loans		2.61	%		1.52	%
Nonperforming loans		678			541
Nonperforming and accruing loans 90 days or more past due		488			314
Nonperforming assets		631			458
Annualized net charge-offs		391			321

(a)	Effective January 1, 2020, the Company adopted accounting guidance which changed impairment recognition of financial instruments to a model that is based on expected losses rather than incurred losses.


U.S. Bancorp		21

Residual Value Risk Management

The Company manages its risk to changes in the residual value of leased vehicles, office and business equipment, and other assets through disciplined residual valuation setting at the inception of a lease, diversification of its leased assets, regular residual asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. As of September 30, 2020, no significant change in the amount of residual values or concentration of the portfolios had occurred since December 31, 2019. 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, 2019, 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, including those additional or increased risks created by the economic and financial disruptions, and the Company’s alternative working arrangements resulting from the

COVID-19

pandemic. The Company maintains a system of controls with the objective of providing proper transaction authorization and execution, proper system operations, proper oversight of third parties with whom it does business, safeguarding of assets from misuse or theft, and ensuring the reliability and security of financial and other data. Refer to “Management’s Discussion and Analysis — Operational Risk Management” in the Company’s Annual Report on

Form 10-K

for the year ended December 31, 2019, for further discussion on operational risk management.

Compliance Risk Management

The Company may suffer legal or regulatory sanctions, material financial loss, or damage to its reputation through failure to comply with laws, regulations, rules, standards of good practice, and codes of conduct, including those related to compliance with Bank Secrecy Act/anti-money laundering requirements, sanctions compliance requirements as administered by the Office of Foreign Assets Control, consumer protection and other requirements. The Company has controls and processes in place for the assessment, identification, monitoring, management and reporting of compliance risks and issues including those created or increased by the economic and financial disruptions caused by the

COVID-19

pandemic. 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, 2019, 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 and the safety and soundness of an entity. The Company manages its exposure to changes in interest rates through asset and liability management activities within guidelines established by its Asset Liability Management Committee (“ALCO”) and approved by the Board of Directors. The ALCO has the responsibility for approving and ensuring compliance with the ALCO management policies, including interest rate risk exposure. One way the Company measures and analyzes its interest rate risk is through net interest income simulation analysis.

Simulation analysis incorporates substantially all of the Company’s assets and liabilities and

off-balance

sheet instruments, together with forecasted changes in the balance sheet and assumptions that reflect the current interest rate environment. Through this simulation, management estimates the impact on net interest income of various interest rate changes that differ in the direction, amount and speed of change over time, as well as the shape of the yield curve. This simulation includes assumptions about how the balance sheet is likely to be affected by changes in loan and deposit growth. Assumptions are made to project interest rates for new loans and deposits based on historical analysis, management’s outlook and

re-pricing

strategies. These assumptions are reviewed and validated on a periodic basis with sensitivity analysis being provided for key variables of the simulation. The results are reviewed monthly by the ALCO and are used to guide asset/liability management strategies.

The Company manages its interest rate risk position by holding assets with desired interest rate risk characteristics on its balance sheet, implementing certain pricing strategies for loans and deposits and selecting derivatives and various funding and investment portfolio strategies.

Table 9 summarizes the projected impact to net interest income over the next 12 months of various potential interest rate changes. The sensitivity of the projected impact to net interest income over the next 12 months is dependent on balance sheet growth, product mix, deposit behavior, pricing and funding decisions. While the Company utilizes models and assumptions based on historical information and expected behaviors, actual outcomes could vary significantly.


22		U.S. Bancorp


Table 9		Sensitivity of Net Interest Income


	September 30, 2020											December 31, 2019
	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		(3.52	)%		3.72	%		*		5.80	%		(1.43	)%		.83	%		*		.21	%

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

Use of Derivatives to Manage Interest Rate and Other Risks

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

•

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

•

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

•

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

•

To mitigate remeasurement volatility of foreign currency denominated balances; and

•

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

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 may enter into derivative contracts that are either exchange-traded, centrally cleared through clearinghouses or

over-the-counter.

The Company does not utilize derivatives for speculative purposes.

The Company does not designate all of the derivatives that it enters into for risk management purposes as accounting hedges because of the inefficiency of applying the accounting requirements and may instead elect fair value accounting for the related hedged items. In particular, the Company enters into interest rate swaps, swaptions, forward commitments to buy

to-be-announced

securities (“TBAs”), U.S. Treasury and Eurodollar futures and options on U.S. Treasury futures to mitigate fluctuations in the value of its MSRs, but does not designate those derivatives as accounting hedges.

Additionally, the Company uses forward commitments to sell TBAs and other commitments to sell residential mortgage loans at specified prices to economically hedge the interest rate risk in its residential mortgage loan production activities. At September 30, 2020, the Company had $14.9 billion of forward commitments to sell, hedging $5.8 billion of MLHFS and $13.3 billion of unfunded mortgage loan commitments. The forward commitments to sell and the unfunded mortgage loan commitments on loans intended to be sold are considered derivatives under the accounting guidance related to accounting for derivative instruments and hedging activities. The Company has elected the fair value option for the MLHFS.

Derivatives are subject to credit risk associated with counterparties to the contracts. Credit risk associated with derivatives is measured by the Company based on the probability of counterparty default, including consideration of the

COVID-19

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

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

LIBOR Transition

In July 2017, the United Kingdom’s Financial Conduct Authority announced that it would no longer require banks to submit rates for the London InterBank Offered Rate (“LIBOR”) after 2021. The Company holds financial instruments that will be impacted by the discontinuance of LIBOR, including certain loans, investment securities, derivatives, borrowings and other financial instruments that use LIBOR as the benchmark rate. The Company also provides various services to customers in its capacity as trustee, which involve financial instruments that will be similarly impacted by the discontinuance of LIBOR. The Company anticipates these financial instruments will


U.S. Bancorp		23

require transition to a new reference rate. This transition will occur over time as many of these arrangements do not have an alternative rate referenced in their contracts or a clear path for the parties to agree upon an alternative reference rate. In order to facilitate the transition process, the Company has instituted a LIBOR Transition Office and commenced an enterprise-wide project to identify, assess and monitor risks associated with the expected discontinuance or unavailability of LIBOR, actively engage with industry working groups and regulators, achieve operational readiness and engage impacted customers. It is currently unclear what impact

COVID-19

may have on the LIBOR transition or on the timing thereof. Refer to “Risk Factors” in the Company’s Annual Report on Form

10-K

for the year ended December 31, 2019, for further discussion on potential risks that could adversely affect the Company’s financial results as a result of the LIBOR transition.

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 process, the Company considers risk arising from its trading activities, as well as the remeasurement volatility of foreign currency denominated balances included on its Consolidated Balance Sheet (collectively, “Covered Positions”), employing methodologies consistent with the requirements of regulatory rules for market risk. The Company’s Market Risk Committee (“MRC”), within the framework of the ALCO, oversees market risk management. The MRC monitors and reviews the Company’s Covered Positions and establishes policies for market risk management, including exposure limits for each portfolio. The Company uses a VaR approach to measure general market risk. Theoretically, VaR represents the statistical risk of loss the Company has to adverse market movements over a

one-day

time horizon. The Company uses the Historical Simulation method to calculate VaR for its Covered Positions measured at the ninety-ninth percentile using a

one-year

look-back period for distributions derived from past market data. The market factors used in the calculations include those pertinent to market risks inherent in the underlying trading portfolios, principally those that affect the Company’s corporate bond trading business, foreign currency transaction business, client derivatives business, loan trading business and municipal securities business, as well as those inherent in the Company’s foreign denominated balances and the derivatives used to mitigate the related measurement volatility. On average, the Company expects the

one-day

VaR to be exceeded by actual losses two to three times per year related to these positions. The Company monitors the accuracy of internal VaR models and modeling processes by back-testing model performance, regularly updating the historical data used by the VaR models and regular model validations 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. If the Company were to experience market losses in excess of the estimated VaR more often than expected, the VaR models and associated assumptions would be analyzed and adjusted.

The average, high, low and

period-end

one-day

VaR amounts for the Company’s Covered Positions were as follows:


Nine Months Ended September 30 (Dollars in Millions)	2020		2019
Average	$	2	$	1
High		3		2
Low		1		1
Period-end		2		1

Given the market volatility in the first quarter of 2020 resulting from effects of the

COVID-19

pandemic, the Company experienced actual losses for its combined Covered Positions that exceeded VaR five times during the nine months ended September 30, 2020. The Company did not experience any actual losses for its combined Covered Positions that exceeded VaR during the nine months ended September 30, 2019. The Company stress tests its market risk measurements to provide management with perspectives on market events that may not be captured by its VaR models, including worst case historical market movement combinations that have not necessarily occurred on the same date.

The Company calculates Stressed VaR using the same underlying methodology and model as VaR, except that a historical continuous

one-year

look-back period is utilized that reflects a period of significant financial stress appropriate to the Company’s Covered Positions. The period selected by the Company includes the significant market volatility of the last four months of 2008.

The average, high, low and

period-end

one-day

Stressed VaR amounts for the Company’s Covered Positions were as follows:


Nine Months Ended September 30 (Dollars in Millions)	2020		2019
Average	$	6	$	6
High		8		9
Low		4		4
Period-end		7		7


24		U.S. Bancorp

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

The Company also measures the market risk of its hedging activities related to residential MLHFS and MSRs using the Historical Simulation method. The VaRs are measured at the ninety-ninth percentile and employ factors pertinent to the market risks inherent in the valuation of the assets and hedges. A

one-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)	2020		2019
Residential Mortgage Loans Held For Sale and Related Hedges
Average	$	8	$	3
High		22		8
Low		2		–
Mortgage Servicing Rights and Related Hedges
Average	$	19	$	6
High		54		11
Low		6		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 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. During the nine months ended September 30, 2020, the Company effectively managed its liquidity position while funding significant loan growth during the period.

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

The Company regularly projects its funding needs under various stress scenarios and maintains a contingency funding plan consistent with the Company’s access to diversified sources of contingent funding. The Company maintains a substantial level of total available liquidity in the form of

on-balance

sheet and

off-balance

sheet funding sources. These liquidity sources include cash at the Federal Reserve Bank and certain European central banks, unencumbered liquid assets, and capacity to borrow from the FHLB and at Federal Reserve Bank’s Discount Window. At September 30, 2020, the fair value of unencumbered investment securities totaled $123.6 billion, compared with $114.2 billion at December 31, 2019. Refer to Note 3 of the Notes to Consolidated Financial Statements and “Balance Sheet Analysis” for further information on investment securities maturities and trends. Asset liquidity is further enhanced by the Company’s practice of pledging loans to access secured borrowing facilities through the FHLB and Federal Reserve Bank. At September 30, 2020, the Company could have borrowed a total of an additional $97.0 billion from the FHLB and Federal Reserve Bank based on collateral available for additional borrowings.

The Company’s diversified deposit base provides a sizeable source of relatively stable and

low-cost

funding, while reducing the Company’s reliance on the wholesale markets. Total deposits were $413.2 billion at September 30, 2020, compared with $361.9 billion at December 31, 2019. 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 $42.4 billion at September 30, 2020, and is an important funding source because of its multi-year borrowing structure. Short-term borrowings were $13.7 billion at September 30, 2020, and supplement the Company’s other funding sources. Refer to “Balance Sheet Analysis” for further information on the Company’s long-term debt and short-term borrowings.

In addition to assessing liquidity risk on a consolidated basis, the Company monitors the parent company’s liquidity. The Company establishes limits for the minimal number of months into the future where the parent company can meet existing and forecasted obligations with cash and securities held that can be readily monetized. The Company measures and manages this limit in both normal and adverse conditions. The


U.S. Bancorp		25

Company maintains sufficient funding to meet expected capital and debt service obligations for 24 months without the support of dividends from subsidiaries and assuming access to the wholesale markets is maintained. The Company maintains sufficient liquidity to meet its capital and debt service obligations for 12 months under adverse conditions without the support of dividends from subsidiaries or access to the wholesale markets. The parent company is currently well in excess of required liquidity minimums.

At September 30, 2020, parent company long-term debt outstanding was $22.1 billion, compared with $18.6 billion at December 31, 2019. The increase was primarily due to $2.8 billion of medium-term note issuances. As of September 30, 2020, there was no parent company debt scheduled to mature in the remainder of 2020.

The Company is subject to a regulatory Liquidity Coverage Ratio (“LCR”) requirement which requires banks to maintain an adequate level of unencumbered high quality liquid assets to meet estimated liquidity needs over a

30-day

stressed period. At September 30, 2020, the Company was compliant with this requirement.

Refer to “Management’s Discussion and Analysis — Liquidity Risk Management” in the Company’s Annual Report on

Form 10-K

for the year ended December 31, 2019, for further discussion on liquidity risk management.

European Exposures

The Company provides merchant processing and corporate trust services in Europe either directly or through banking affiliations in Europe. Revenue generated from sources in Europe represented approximately 2 percent of the Company’s total net revenue for both the three and nine months ended September 30, 2020. 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, 2020, the Company had an aggregate amount on deposit with European banks of approximately $9.2 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, including the potential negative impact of the United Kingdom’s withdrawal from the European Union (“Brexit”), is not expected to have a significant effect on the Company related to these activities. The Company is focused on providing continuity of services, with minimal disruption resulting from Brexit, to customers with activities in European countries. The Company has made certain structural changes to its legal entities and operations in the United Kingdom and European Union, where needed, and migrated certain business activities to the appropriate jurisdictions to continue to provide such services and generate revenue.

Off-Balance

Sheet Arrangements

Off-balance

sheet arrangements include any contractual arrangements to which an unconsolidated entity is a party, under which the Company has an obligation to provide credit or liquidity enhancements or market risk support. In the ordinary course of business, the Company enters into an array of commitments to extend credit, letters of credit and various forms of guarantees that may be considered

off-balance

sheet arrangements. Refer to Note 15 of the Notes to Consolidated Financial Statements for further information on these arrangements. The Company does not utilize private label asset securitizations as a source of funding.

Off-balance

sheet arrangements also include any obligation related to a variable interest held in an unconsolidated entity that provides financing, liquidity, credit enhancement or market risk support. Refer to Note 5 of the Notes to Consolidated Financial Statements for further information related to the Company’s interests in variable interest entities.

Capital Management

The Company is committed to managing capital to maintain strong protection for depositors and creditors and for maximum shareholder benefit. The Company also manages its capital to exceed regulatory capital requirements for banking organizations. The regulatory capital requirements effective for the Company follow Basel III, with the Company being subject to calculating its capital adequacy as a percentage of risk-weighted assets under the standardized approach. During 2020, the Company elected to adopt a rule issued in March 2020 by its regulators which permits banking organizations who adopt accounting guidance related to the impairment of financial instruments based on the current expected credit losses (“CECL”) methodology during 2020, the option to defer the impact of the effect of that guidance at adoption plus 25 percent of its quarterly credit reserve increases over the next two years on its regulatory capital requirements, followed by a three-year transition period


26		U.S. Bancorp


Table 10		Regulatory Capital Ratios


(Dollars in Millions)	September 30, 2020			December 31, 2019
Basel III standardized approach:
Common equity tier 1 capital	$	37,485		$	35,713
Tier 1 capital		43,916			41,721
Total risk-based capital		52,086			49,744
Risk-weighted assets		397,657			391,269

Common equity tier 1 capital as a percent of risk-weighted assets		9.4	%		9.1	%
Tier 1 capital as a percent of risk-weighted assets		11.0			10.7
Total risk-based capital as a percent of risk-weighted assets		13.1			12.7
Tier 1 capital as a percent of adjusted quarterly average assets (leverage ratio)		8.3			8.8
Tier 1 capital as a percent of total on- and off-balance sheet leverage exposure (total leverage exposure ratio)		7.2			7.0

to phase in the cumulative deferred impact. Table 10 provides a summary of statutory regulatory capital ratios in effect for the Company at September 30, 2020 and December 31, 2019. All regulatory ratios exceeded regulatory “well-capitalized” requirements.

The Company believes certain other capital ratios are useful in evaluating its capital adequacy. At September 30, 2020, the Company’s tangible common equity, as a percent of tangible assets and as a percent of risk-weighted assets determined in accordance with transitional regulatory capital requirements related to the CECL methodology under the standardized approach, was 7.0 percent and 9.3 percent, respectively. This compares to the Company’s tangible common equity, as a percent of tangible assets and as a percent of risk-weighted assets under the standardized approach, of 7.5 percent and 9.3 percent, respectively, at December 31, 2019. In addition, the Company’s common equity tier 1 capital to risk-weighted assets ratio, reflecting the full implementation of the CECL methodology was 9.0 percent at September 30, 2020. Refer to

“Non-GAAP

Financial Measures” beginning on page 32 for further information on these other capital ratios.

Total U.S. Bancorp shareholders’ equity was $52.6 billion at September 30, 2020, compared with $51.9 billion at December 31, 2019. 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 a reduction to retained earnings due to the January 1, 2020 adoption of accounting guidance related to the impairment of financial instruments, dividends and common share repurchases.

Beginning in March 2020, the Company suspended all common stock repurchases except for those done exclusively in connection with its stock-based compensation programs. This action was initially taken by the Company to maintain strong capital levels given the impact and uncertainties of

COVID-19

on the economy and global markets. Due to continued economic uncertainty, the Federal Reserve Board has implemented measures for the third and fourth quarters of 2020, prohibiting all large bank holding companies, including the Company, from making common stock repurchases, as well as capping dividends at existing rates, which may not be in excess of the average of the last four quarters’ earnings. The Company will continue to monitor the impact of

COVID-19

and will adjust its capital distributions as circumstances warrant. Additional capital distributions are subject to the approval of the Company’s Board of Directors, and will be consistent with regulatory requirements.

The following table provides a detailed analysis of all shares purchased by the Company or any affiliated purchaser during the third quarter of 2020:


Period	Total Number of Shares Purchased			Average Price Paid Per Share
July		134,675	(a)	$	37.62
August		1,788			35.63
September		90,201	(b)		34.65
Total		226,664	(c)	$	36.43

(a)

Includes 130,000 shares of common stock purchased, at an average price per share of $37.68, in open-market transactions by U.S. Bank National Association, the Company’s banking subsidiary, in its capacity as trustee of the U.S. Bank 401(k) Savings Plan, which is the Company’s employee retirement savings plan.

(b)	Includes 90,000 shares of common stock purchased, at an average price per share of $34.64, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the U.S. Bank 401(k) Savings Plan.

(c)	Includes 220,000 shares of common stock purchased, at an average price per share of $36.44, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the U.S. Bank 401(k) Savings Plan.

Note:

All other shares purchased by the Company were in connection with satisfaction of tax withholding obligations for vested restricted stock and unit awards and exercises under other compensation plans.

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, 2019, for further discussion on capital management.


U.S. Bancorp		27

LINE OF BUSINESS FINANCIAL REVIEW

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

Basis for Financial Presentation

Business line results are derived from the Company’s business unit profitability reporting systems by specifically attributing managed balance sheet assets, deposits and other liabilities and their related income or expense. Refer to Note 16 of the Notes to Consolidated Financial Statements for further information 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 2020, certain organization and methodology changes were made and, accordingly, 2019 results were restated and presented on a comparable basis.

Corporate and Commercial Banking

Corporate and Commercial Banking offers lending, equipment finance and small-ticket leasing, depository services, treasury management, capital markets services, international trade services and other financial services to middle market, large corporate, commercial real estate, financial institution,

non-profit

and public sector clients. Corporate and Commercial Banking contributed $421 million of the Company’s net income in the third quarter and $1.2 billion in the first nine months of 2020, or an increase of $15 million (3.7 percent) and a decrease of $114 million (8.9 percent), respectively, compared with the same periods of 2019.

Net revenue increased $89 million (9.1 percent) in the third quarter and $387 million (13.0 percent) in the first nine months of 2020, compared with the same periods of 2019. Net interest income, on a taxable-equivalent basis, increased $41 million (5.3 percent) in the third quarter and $180 million (7.8 percent) in the first nine months of 2020, compared with the same periods of 2019. The increases were primarily due to strong loan growth, and higher noninterest-bearing and interest-bearing deposits, partially offset by the impact on net interest margin of changes in loan mix and lower spreads on loans, reflecting changing interest rates given the current economic environment. Noninterest income increased $48 million (22.6 percent) in the third quarter and $207 million (31.2 percent) in the first nine months of 2020, compared with the same periods of 2019, primarily due to higher corporate bond issuance fees and trading revenue as corporate customers accessed the fixed income capital markets for bond issuances.

Noninterest expense increased $18 million (4.5 percent) in the third quarter and $50 million (4.1 percent) in the first nine months of 2020, compared with the same periods of 2019, primarily driven by higher compensation expense due to merit increases and variable compensation related to fixed income capital markets business production, and higher FDIC insurance expense, partially offset by lower net shared services expense and lower other noninterest expense due to a reduction in travel as a result of

COVID-19.

The provision for credit losses increased $51 million in the third quarter of 2020, compared with the third quarter of 2019, primarily due to higher net charge-offs, partially offset by a favorable change in the reserve allocation driven by payoffs of funded exposures net of the impact of credit risk rating downgrades. The provision for credit losses increased $490 million in the first nine months of 2020, compared with the first nine months of 2019, primarily due to an unfavorable change in the reserve allocation based on economic risks related to

COVID-19

in the portfolio, along with higher net charge-offs.

Consumer and Business Banking

Consumer and Business Banking delivers products and services through banking offices, telephone servicing and sales,

on-line

services, direct mail, ATM processing and mobile devices. It encompasses community banking, metropolitan banking and indirect lending, as well as mortgage banking. Consumer and Business Banking contributed $758 million of the Company’s net income in the third quarter and $2.1 billion in the first nine months of 2020, or increases of $103 million (15.7 percent) and $241 million (13.3 percent), respectively, compared with the same periods of 2019.

Net revenue increased $226 million (10.0 percent) in the third quarter and $650 million (9.9 percent) in the first nine months of 2020, compared with the same periods of 2019. Net interest income, on a taxable-equivalent basis, was essentially flat in the third quarter and decreased $151 million (3.2 percent) in the first nine months of 2020, compared with the same periods of 2019, reflecting the impact of declining interest rates on the margin benefit from deposits, offset by higher noninterest-bearing and interest-bearing deposit balances and loan growth driven in part by loans made under the SBA’s Paycheck Protection Program and higher GNMA buybacks. Noninterest income increased $225 million


28		U.S. Bancorp

(33.8 percent) in the third quarter and $801 million (45.3 percent) in the first nine months of 2020, compared with the same periods of 2019, primarily due to higher mortgage banking revenue driven by mortgage production and gain on sale margins, partially offset by declines in the valuation of MSRs, net of hedging activities. Other noninterest income increased primarily due to higher than expected retail leasing end of term residual gains. The increases in noninterest income were partially offset by lower deposit service charges due to lower volume.

Noninterest expense increased $84 million (6.3 percent) in the third quarter and $238 million (6.1 percent) in the first nine months of 2020, compared with the same periods of 2019, primarily due to higher net shared services expense reflecting the impact of investment in infrastructure supporting business growth and higher variable compensation related to strong mortgage banking origination activities, partially offset by lower other noninterest expense due to a reduction in travel as a result of

COVID-19.

The provision for credit losses increased $4 million (5.8 percent) in the third quarter of 2020, compared with the third quarter of 2019, due to an unfavorable change in the reserve allocation, mostly offset by lower net charge-offs reflecting stability in credit quality and a reduction in outstanding loan balances. The provision for credit losses increased $88 million (40.4 percent) in the first nine months of 2020, compared with the first nine months of 2019, due to an unfavorable change in the reserve allocation and higher net charge-offs reflecting deterioration in credit quality as compared with the prior year.

Wealth Management and Investment Services

Wealth Management and Investment Services provides private banking, financial advisory services, investment management, retail brokerage services, insurance, trust, custody and fund servicing through four businesses: Wealth Management, Global Corporate Trust & Custody, U.S. Bancorp Asset Management and Fund Services. Wealth Management and Investment Services contributed $168 million of the Company’s net income in the third quarter and $567 million in the first nine months of 2020, or decreases of $61 million (26.6 percent) and $113 million (16.6 percent), respectively, compared with the same periods of 2019.

Net revenue decreased $40 million (5.3 percent) in the third quarter and $46 million (2.1 percent) in the first nine months of 2020, compared with the same periods of 2019. Net interest income, on a taxable-equivalent basis, decreased $55 million (18.6 percent) in the third quarter and $115 million (12.9 percent) in the first nine months of 2020, compared with the same periods of 2019, primarily due to the impact of declining interest rates on the margin benefit from deposits, partially offset by higher noninterest-bearing deposit balances, and changes in deposit mix. The decrease in net interest income in the first nine months of 2020, compared with the first nine months of 2019, was further offset by higher interest-bearing deposit balances. Noninterest income increased $15 million (3.3 percent) in the third quarter and $69 million (5.2 percent) in the first nine months of 2020, compared with the same periods of 2019, primarily due to the impact of favorable market conditions and business growth on trust and investment management fees, partially offset by higher fee waivers related to the money market funds.

Noninterest expense increased $31 million (7.0 percent) in the third quarter and $72 million (5.5 percent) in the first nine months of 2020, compared with the same periods of 2019, reflecting increased net shared services expense due to technology development and higher compensation expense due to the impact of merit increases. In addition, other noninterest expense was higher due to the allocation to the business line of legal costs previously reserved for, partially offset by a reduction in travel as a result of

COVID-19.

The provision for credit losses increased $11 million in the third quarter and $33 million in the first nine months of 2020, compared with the same periods of 2019, reflecting unfavorable changes in the reserve allocation driven by downgrades within the loan portfolio.

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 $313 million of the Company’s net income in the third quarter and $988 million in the first nine months of 2020, or decreases of $85 million (21.4 percent) and $82 million (7.7 percent), respectively, compared with the same periods of 2019.

Net revenue decreased $85 million (5.4 percent) in the third quarter and $389 million (8.5 percent) in the first nine months of 2020, compared with the same periods of 2019. Net interest income, on a taxable-equivalent basis, increased $5 million (0.8 percent) in the third quarter and $53 million (2.9 percent) in the first nine months of 2020, compared with the same periods of 2019, primarily due to favorable margin benefit from deposits and higher deposit balances as a result of state unemployment programs utilizing prepaid cards, partially offset by lower loan volume, loan spreads and balance transfer loan fees. Noninterest income decreased


U.S. Bancorp		29


Table 11		Line of Business Financial Performance


	Corporate and Commercial Banking							Consumer and Business Banking
Three Months Ended September 30 (Dollars in Millions)	2020		2019		Percent Change			2020		2019		Percent Change
Condensed Income Statement
Net interest income (taxable-equivalent basis)	$	808	$	767		5.3	%	$	1,603	$	1,602		.1	%
Noninterest income		260		212		22.6			891		666		33.8
Total net revenue		1,068		979		9.1			2,494		2,268		10.0
Noninterest expense		416		397		4.8			1,406		1,321		6.4
Other intangibles		–		1		*			4		5		(20.0	)
Total noninterest expense		416		398		4.5			1,410		1,326		6.3
Income before provision and income taxes		652		581		12.2			1,084		942		15.1
Provision for credit losses		90		39		*			73		69		5.8
Income before income taxes		562		542		3.7			1,011		873		15.8
Income taxes and taxable-equivalent adjustment		141		136		3.7			253		218		16.1
Net income (loss)		421		406		3.7			758		655		15.7
Net (income) loss attributable to noncontrolling interests		–		–		–			–		–		–
Net income (loss) attributable to U.S. Bancorp	$	421	$	406		3.7		$	758	$	655		15.7
Average Balance Sheet
Commercial	$	86,030	$	78,718		9.3	%	$	14,879	$	9,711		53.2	%
Commercial real estate		22,119		20,031		10.4			16,048		16,111		(.4	)
Residential mortgages		2		4		(50.0	)		71,092		64,631		10.0
Credit card		–		–		–			–		–		–
Other retail		7		7		–			54,760		55,487		(1.3	)
Total loans		108,158		98,760		9.5			156,779		145,940		7.4
Goodwill		1,647		1,647		–			3,475		3,475		–
Other intangible assets		6		8		(25.0	)		1,942		2,444		(20.5	)
Assets		121,014		109,480		10.5			175,760		160,863		9.3
Noninterest-bearing deposits		43,302		29,058		49.0			39,941		28,590		39.7
Interest checking		12,271		11,633		5.5			62,040		51,015		21.6
Savings products		54,298		43,891		23.7			72,521		62,591		15.9
Time deposits		15,879		16,563		(4.1	)		15,321		15,981		(4.1	)
Total deposits		125,750		101,145		24.3			189,823		158,177		20.0
Total U.S. Bancorp shareholders’ equity		16,541		15,580		6.2			15,111		15,229		(.8	)

	Corporate and Commercial Banking							Consumer and Business Banking
Nine Months Ended September 30 (Dollars in Millions)	2020		2019		Percent Change			2020		2019		Percent Change
Condensed Income Statement
Net interest income (taxable-equivalent basis)	$	2,498	$	2,318		7.8	%	$	4,629	$	4,780		(3.2	)%
Noninterest income		870		663		31.2			2,569		1,768		45.3
Total net revenue		3,368		2,981		13.0			7,198		6,548		9.9
Noninterest expense		1,278		1,225		4.3			4,145		3,904		6.2
Other intangibles		–		3		*			12		15		(20.0	)
Total noninterest expense		1,278		1,228		4.1			4,157		3,919		6.1
Income before provision and income taxes		2,090		1,753		19.2			3,041		2,629		15.7
Provision for credit losses		536		46		*			306		218		40.4
Income before income taxes		1,554		1,707		(9.0	)		2,735		2,411		13.4
Income taxes and taxable-equivalent adjustment		389		428		(9.1	)		685		602		13.8
Net income (loss)		1,165		1,279		(8.9	)		2,050		1,809		13.3
Net (income) loss attributable to noncontrolling interests		–		–		–			–		–		–
Net income (loss) attributable to U.S. Bancorp	$	1,165	$	1,279		(8.9	)	$	2,050	$	1,809		13.3
Average Balance Sheet
Commercial	$	89,670	$	78,436		14.3	%	$	12,193	$	9,625		26.7	%
Commercial real estate		21,798		20,341		7.2			16,222		16,092		.8
Residential mortgages		3		5		(40.0	)		68,138		63,214		7.8
Credit card		–		–		–			–		–		–
Other retail		7		3		*			54,703		54,931		(.4	)
Total loans		111,478		98,785		12.8			151,256		143,862		5.1
Goodwill		1,647		1,647		–			3,508		3,475		.9
Other intangible assets		6		9		(33.3	)		2,095		2,679		(21.8	)
Assets		123,929		108,539		14.2			168,419		157,708		6.8
Noninterest-bearing deposits		37,129		29,435		26.1			34,167		27,402		24.7
Interest checking		13,787		11,308		21.9			57,980		51,154		13.3
Savings products		53,432		42,522		25.7			68,525		61,992		10.5
Time deposits		18,919		17,501		8.1			16,144		15,446		4.5
Total deposits		123,267		100,766		22.3			176,816		155,994		13.3
Total U.S. Bancorp shareholders’ equity		16,548		15,453		7.1			15,038		15,117		(.5	)

*	Not meaningful


30		U.S. Bancorp


Wealth Management and Investment Services							Payment Services							Treasury and Corporate Support									Consolidated Company
2020		2019		Percent Change			2020		2019		Percent Change			2020			2019			Percent Change			2020			2019			Percent Change

$	240	$	295		(18.6	)%	$	634	$	629		.8	%	$	(33	)	$	13			*	%	$	3,252		$	3,306			(1.6	)%
	469		454		3.3			867		957		(9.4	)		225			325			(30.8	)		2,712			2,614			3.7
	709		749		(5.3	)		1,501		1,586		(5.4	)		192			338			(43.2	)		5,964			5,920			.7
	470		439		7.1			800		762		5.0			235			183			28.4			3,327			3,102			7.3
	3		3		–			37		33		12.1			–			–			–			44			42			4.8
	473		442		7.0			837		795		5.3			235			183			28.4			3,371			3,144			7.2
	236		307		(23.1	)		664		791		(16.1	)		(43	)		155			*			2,593			2,776			(6.6	)
	12		1		*			246		260		(5.4	)		214			(2	)		*			635			367			73.0
	224		306		(26.8	)		418		531		(21.3	)		(257	)		157			*			1,958			2,409			(18.7	)
	56		77		(27.3	)		105		133		(21.1	)		(183	)		(72	)		*			372			492			(24.4	)
	168		229		(26.6	)		313		398		(21.4	)		(74	)		229			*			1,586			1,917			(17.3	)
	–		–		–			–		–		–			(6	)		(9	)		33.3			(6	)		(9	)		33.3
$	168	$	229		(26.6	)	$	313	$	398		(21.4	)	$	(80	)	$	220			*		$	1,580		$	1,908			(17.2	)

$	4,420	$	4,110		7.5	%	$	8,859	$	10,017		(11.6	)%	$	1,301		$	1,104			17.8	%	$	115,489		$	103,660			11.4	%
	608		524		16.0			–		–		–			2,154			2,324			(7.3	)		40,929			38,990			5.0
	4,692		3,973		18.1			–		–		–			–			–			–			75,786			68,608			10.5
	–		–		–			22,052		23,681		(6.9	)		–			–			–			22,052			23,681			(6.9	)
	1,738		1,657		4.9			257		346		(25.7	)		–			–			–			56,762			57,497			(1.3	)
	11,458		10,264		11.6			31,168		34,044		(8.4	)		3,455			3,428			.8			311,018			292,436			6.4
	1,618		1,617		.1			3,123		2,825		10.5			–			–			–			9,863			9,564			3.1
	37		47		(21.3	)		602		548		9.9			–			–			–			2,587			3,047			(15.1	)
	14,562		13,548		7.5			36,191		39,879		(9.2	)		189,375			157,684			20.1			536,902			481,454			11.5
	16,797		13,613		23.4			6,886		1,266		*			2,449			2,067			18.5			109,375			74,594			46.6
	9,996		9,127		9.5			–		–		–			187			232			(19.4	)		84,494			72,007			17.3
	49,933		53,452		(6.6	)		123		115		7.0			739			774			(4.5	)		177,614			160,823			10.4
	2,235		3,418		(34.6	)		1		2		(50.0	)		604			6,545			(90.8	)		34,040			42,509			(19.9	)
	78,961		79,610		(.8	)		7,010		1,383		*			3,979			9,618			(58.6	)		405,523			349,933			15.9
	2,482		2,456		1.1			6,219		6,102		1.9			12,063			13,925			(13.4	)		52,416			53,292			(1.6	)

Wealth Management and Investment Services							Payment Services							Treasury and Corporate Support									Consolidated Company
2020		2019		Percent Change			2020		2019		Percent Change			2020			2019			Percent Change			2020			2019			Percent Change

	$779	$	894		(12.9	)%	$	1,888	$	1,835		2.9	%	$	(71	)	$	97			*	%	$	9,723		$	9,924			(2.0	)%
	1,399		1,330		5.2			2,319		2,761		(16.0	)		694			873			(20.5	)		7,851			7,395			6.2
	2,178		2,224		(2.1	)		4,207		4,596		(8.5	)		623			970			(35.8	)		17,574			17,319			1.5
	1,380		1,308		5.5			2,303		2,231		3.2			770			592			30.1			9,876			9,260			6.7
	9		9		–			108		97		11.3			–			–			–			129			124			4.0
	1,389		1,317		5.5			2,411		2,328		3.6			770			592			30.1			10,005			9,384			6.6
	789		907		(13.0	)		1,796		2,268		(20.8	)		(147	)		378			*			7,569			7,935			(4.6	)
	33		–		*			477		841		(43.3	)		2,013			4			*			3,365			1,109			*
	756		907		(16.6	)		1,319		1,427		(7.6	)		(2,160	)		374			*			4,204			6,826			(38.4	)
	189		227		(16.7	)		331		357		(7.3	)		(850	)		(241	)		*			744			1,373			(45.8	)
	567		680		(16.6	)		988		1,070		(7.7	)		(1,310	)		615			*			3,460			5,453			(36.5	)
	–		–		–			–		–		–			(20	)		(25	)		20.0			(20	)		(25	)		20.0
$	567	$	680		(16.6	)	$	988	$	1,070		(7.7	)	$	(1,330	)	$	590			*		$	3,440		$	5,428			(36.6	)

$	4,373	$	3,995		9.5	%	$	8,977	$	9,850		(8.9	)%	$	1,288		$	1,051			22.5	%	$	116,501		$	102,957			13.2	%
	578		508		13.8			–		–		–			2,101			2,333			(9.9	)		40,699			39,274			3.6
	4,471		3,800		17.7			–		–		–			–			–			–			72,612			67,019			8.3
	–		–		–			22,465		23,040		(2.5	)		–			–			–			22,465			23,040			(2.5	)
	1,665		1,693		(1.7	)		283		361		(21.6	)		–			–			–			56,658			56,988			(.6	)
	11,087		9,996		10.9			31,725		33,251		(4.6	)		3,389			3,384			.1			308,935			289,278			6.8
	1,617		1,617		–			3,027		2,815		7.5			–			–			–			9,799			9,554			2.6
	40		50		(20.0	)		584		532		9.8			–			–			–			2,725			3,270			(16.7	)
	14,273		13,306		7.3			36,497		39,108		(6.7	)		182,262			153,555			18.7			525,380			472,216			11.3
	15,454		13,513		14.4			3,852		1,221		*			2,333			2,140			9.0			92,935			73,711			26.1
	9,896		8,904		11.1			–		–		–			227			173			31.2			81,890			71,539			14.5
	53,325		48,050		11.0			117		112		4.5			785			747			5.1			176,184			153,423			14.8
	2,226		3,653		(39.1	)		2		2		–			2,298			8,288			(72.3	)		39,589			44,890			(11.8	)
	80,901		74,120		9.1			3,971		1,335		*			5,643			11,348			(50.3	)		390,598			343,563			13.7
	2,475		2,443		1.3			6,056		6,037		.3			11,819			13,396			(11.8	)		51,936			52,446			(1.0	)


U.S. Bancorp		31

$90 million (9.4 percent) in the third quarter and $442 million (16.0 percent) in the first nine months of 2020, compared with the same periods of 2019, mainly due to the impacts of

COVID-19

on consumer and business spending volume in all payments businesses including merchant processing services, corporate payment products, and credit and debit card revenue. The decrease in credit and debit card revenue due to lower spending volume was offset by higher prepaid card fees as a result of state unemployment programs.

Noninterest expense increased $42 million (5.3 percent) in the third quarter and $83 million (3.6 percent) in the first nine months of 2020, compared with the same periods of 2019, reflecting incremental costs related to the prepaid card business and higher software expense due to capital expenditures and acquisitions, partially offset by lower marketing and business development expense due to the timing of marketing campaigns. The provision for credit losses decreased $14 million (5.4 percent) in the third quarter and $364 million (43.3 percent) in the first nine months of 2020, compared with the same periods of 2019, reflecting favorable changes in the reserve allocation driven by lower outstanding loan balances and lower delinquency rates, partially offset by the impact on the allowance for credit losses to recognize the expected losses within the acquired State Farm Bank credit card portfolio. The decrease in the provision for credit losses in the third quarter of 2020, compared with the third quarter of 2019, was also due to lower 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 losses of $80 million in the third quarter and $1.3 billion in the first nine months of 2020, compared with net income of $220 million and $590 million, respectively, in the same periods of 2019.

Net revenue decreased $146 million (43.2 percent) in the third quarter and $347 million (35.8 percent) in the first nine months of 2020, compared with the same periods of 2019. Net interest income, on a taxable-equivalent basis, decreased $46 million in the third quarter and $168 million in the first nine months of 2020, compared with the same periods of 2019, primarily due to higher prepayment amortization and lower reinvestment yields within the investment portfolio compared with the prior year. Noninterest income decreased $100 million (30.8 percent) in the third quarter and $179 million (20.5 percent) in the first nine months of 2020, compared with the same periods of 2019, primarily due to lower equity investment income, lower

tax-advantaged

investment syndication revenue and certain asset impairments as a result of expected branch closures. The decrease in noninterest income in the first nine months of 2020, compared with the first nine months of 2019, was also due to asset impairments as a result of property damage from civil unrest in the second quarter of 2020, partially offset by gains on the sale of certain businesses in the first quarter of 2020 and higher investment securities gains.

Noninterest expense increased $52 million (28.4 percent) in the third quarter and $178 million (30.1 percent) in the first nine months of 2020, compared with the same periods of 2019, primarily due to the recognition of liabilities related to airline exposure and COVID-related expenses, higher compensation expense reflecting merit increases and stock-based compensation, and higher implementation costs of capital investments to support business growth. These increases were partially offset by lower net shared services expense and lower costs related to

tax-advantaged

projects. The provision for credit losses increased $216 million in the third quarter and $2.0 billion in the first nine months of 2020, compared with the same periods of 2019, reflecting the residual impact of changes in the allowance for credit losses being impacted by adverse economic conditions and the expected impact to credit losses within the Company’s loan portfolios due to the COVID-19 pandemic.

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

NON-GAAP

FINANCIAL MEASURES

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

•

Tangible common equity to tangible assets,

•

Tangible common equity to risk-weighted assets, and

•

Common equity tier 1 capital to risk-weighted assets, reflecting the full implementation of the CECL methodology.

These capital measures are viewed by management as useful additional methods of evaluating the Company’s utilization of its capital held and the level of capital available to withstand unexpected negative market or economic conditions. Additionally,


32		U.S. Bancorp

presentation of these measures allows investors, analysts and banking regulators to assess the Company’s capital position relative to other financial services companies. These capital measures are not defined in generally accepted accounting principles (“GAAP”), or are not currently effective or defined in banking regulations. In addition, certain of these measures differ from currently effective capital ratios defined by banking regulations principally in that the currently effective ratios, which are subject to certain transitional provisions, temporarily exclude the impact of the 2020 adoption of accounting guidance related to impairment of financial instruments based on the CECL methodology. As a result, these capital measures disclosed by the Company may be considered

non-GAAP

financial measures. Management believes this information helps investors assess trends in the Company’s capital adequacy.

The Company also discloses net interest income and related ratios and analysis on a taxable-equivalent basis, which may also be considered

non-GAAP

financial measures. The Company believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison of net interest income arising from taxable and

tax-exempt

sources. In addition, certain performance measures, including the efficiency ratio and net interest margin utilize net interest income on a taxable-equivalent basis.

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

The following table shows the Company’s calculation of these

non-GAAP

financial measures:


(Dollars in Millions)	September 30, 2020			December 31, 2019
Total equity	$	53,195		$	52,483
Preferred stock		(5,984	)		(5,984	)
Noncontrolling interests		(630	)		(630	)
Goodwill (net of deferred tax liability) (1)		(8,992	)		(8,788	)
Intangible assets, other than mortgage servicing rights		(676	)		(677	)
Tangible common equity (a)		36,913			36,404
Common equity tier 1 capital, determined in accordance with transitional regulatory capital requirements related to the CECL methodology implementation		37,485
Adjustments (2)		(1,733	)
Common equity tier 1 capital, reflecting the full implementation of the CECL methodology (b)		35,752
Total assets		540,455			495,426
Goodwill (net of deferred tax liability) (1)		(8,992	)		(8,788	)
Intangible assets, other than mortgage servicing rights		(676	)		(677	)
Tangible assets (c)		530,787			485,961
Risk-weighted assets, determined in accordance with prescribed regulatory capital requirements effective for the Company (d)		397,657			391,269
Adjustments (3)		(1,449	)
Risk-weighted assets, reflecting the full implementation of the CECL methodology (e)		396,208

Ratios
Tangible common equity to tangible assets (a)/(c)		7.0	%		7.5	%
Tangible common equity to risk-weighted assets (a)/(d)		9.3			9.3
Common equity tier 1 capital to risk-weighted assets, reflecting the full implementation of the CECL methodology (b)/(e)		9.0



	Three Months Ended September 30						Nine Months Ended September 30
	2020			2019			2020			2019
Net interest income	$	3,227		$	3,281		$	9,650		$	9,845
Taxable-equivalent adjustment (4)		25			25			73			79
Net interest income, on a taxable-equivalent basis		3,252			3,306			9,723			9,924

Net interest income, on a taxable-equivalent basis (as calculated above)		3,252			3,306			9,723			9,924
Noninterest income		2,712			2,614			7,851			7,395
Less: Securities gains (losses), net		12			25			143			47
Total net revenue, excluding net securities gains (losses) (f)		5,952			5,895			17,431			17,272

Noninterest expense (g)		3,371			3,144			10,005			9,384

Efficiency ratio (g)/(f)		56.6	%		53.3	%		57.4	%		54.3	%

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

(2)	Includes the estimated increase in the allowance for credit losses related to the adoption of the CECL methodology net of deferred taxes.

(3)	Includes the impact of the estimated increase in the allowance for credit losses related to the adoption of the CECL methodology.

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


U.S. Bancorp		33

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. Management has discussed the development and the selection of critical accounting policies with the Company’s Audit Committee. Those policies considered to be critical accounting policies relate to the allowance for credit losses, fair value estimates, MSRs, and income taxes.

Allowance for Credit Losses

Management’s evaluation of the appropriate allowance for credit losses is often the most critical of all the accounting estimates for a banking institution. It is an inherently subjective process impacted by many factors as discussed throughout the Management’s Discussion and Analysis section of this Quarterly Report on Form

10-Q.

The methods utilized to estimate the allowance for credit losses, key assumptions and quantitative and qualitative information considered by management in determining the appropriate allowance for credit losses at September 30, 2020 are discussed in the “Credit Risk Management” section. Although methodologies utilized to determine each element of the allowance reflect management’s assessment of credit risk as identified through assessments completed of individual credits and of homogenous pools affected by material credit events, degrees of imprecision exist in these measurement tools due in part to subjective judgments involved and an inherent lag in the data available to quantify current conditions and events that affect credit loss reserve estimates. As discussed in the “Analysis and Determination of Allowance for Credit Losses” section, management considered the effect of changes in economic conditions, risk management practices, and other factors that contributed to imprecision of loss estimates in determining the allowance for credit losses. If not considered, expected losses in the credit portfolio related to imprecision and other subjective factors could have a dramatic adverse impact on the liquidity and financial viability of a banking institution.

Given the many quantitative variables and subjective factors affecting the credit portfolio, changes in the allowance for credit losses may not directly coincide with changes in the risk ratings of the credit portfolio reflected in the risk rating process. This is in part due to the timing of the risk rating process in relation to changes in the business cycle, the exposure and mix of loans within risk rating categories, levels of nonperforming loans and the timing of charge-offs and expected recoveries. The allowance for credit losses on commercial lending segment loans measures the expected loss content on the remaining portfolio exposure, while nonperforming loans and net charge-offs are measures of specific impairment events that have already been confirmed. Therefore, the degree of change in the forward-looking expected loss in the commercial lending allowance may differ from the level of changes in nonperforming loans and net charge-offs. Management maintains an appropriate allowance for credit losses by updating allowance rates to reflect changes in expected losses, including expected changes in economic or business cycle conditions.

Some factors considered in determining the appropriate allowance for credit losses are more readily quantifiable while other factors require extensive qualitative judgment. Management conducts an analysis with respect to the accuracy of risk ratings and the volatility of expected losses, and utilizes this analysis along with qualitative factors that can affect the precision of credit loss estimates, including economic conditions, such as changes in gross domestic product, unemployment or bankruptcy rates, and concentration risks, such as risks associated with specific industries, collateral valuations, and loans to highly leveraged enterprises, in determining the overall level of the allowance for credit losses.

The Company considers a range of economic scenarios in its determination of the allowance for credit losses. These scenarios are constructed with interrelated projections of multiple economic variables, and loss estimates are produced that consider the historical correlation of those economic variables with credit losses, and also the expectation that conditions will eventually normalize over the longer run. Scenarios worse than the Company’s expected outcome at September 30, 2020 include risks that government stimulus in response to the

COVID-19

pandemic is less broad or less effective than expected, or that a longer or more severe health crisis prolongs the downturn in economic activity, reducing the number of businesses that are ultimately able to resume operations after the crisis has passed.


34		U.S. Bancorp

The Company’s determination of the allowance for commercial lending segment loans is sensitive to the assigned credit risk ratings and expected loss rates at September 30, 2020. If 20 percent of period ending loan balances (including unfunded commitments) within each risk category of risk rated commercial lending loans experienced a downgrade to the next worse risk category, the allowance for credit losses would have increased by approximately $219 million at September 30, 2020. If quantitative loss estimates for commercial lending segment loans increased by 10 percent, the allowance for credit losses would have increased by approximately $343 million at September 30, 2020. The Company believes the allowance for credit losses appropriately considers the imprecision in estimating credit losses based on credit risk ratings and credit loss model estimates, but actual losses may differ from those estimates.

The Company’s determination of the allowance for consumer lending segment loans is sensitive to changes in estimated loss rates and estimated impairments on restructured loans. In the event that estimated losses for this segment of the loan portfolio increased by 10 percent, the allowance for credit losses would have increased by approximately $313 million at September 30, 2020.

Because several quantitative and qualitative factors are considered in determining the allowance for credit losses, these sensitivity analyses do not necessarily reflect the nature and extent of future changes in the allowance for credit losses. They are intended to provide insights into the impact of adverse changes in risk rating and loss model estimates and do not imply any expectation of future deterioration in the risk rating or loss rates. Given current processes employed by the Company, management believes the risk ratings and loss model estimates currently assigned are appropriate. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions that could be significant to the Company’s financial statements. Refer to the “Analysis and Determination of the Allowance for Credit Losses” section for further information.

Accounting policies related to fair value estimates, MSRs, and income taxes 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, 2019.

CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in

Rules 13a-15(e)

and

15d-15(e)

under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon this evaluation, the principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.

During the most recently completed fiscal quarter, there was no change made in the Company’s internal control over financial reporting (as defined in Rules

13a-15(f)

and

15d-15(f)

under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


U.S. Bancorp		35

U.S. Bancorp

Consolidated Balance Sheet


(Dollars in Millions)	September 30, 2020	December 31, 2019
	(Unaudited)

Assets
Cash and due from banks	$ 44,047	$ 22,405
Available-for-sale investment securities ($604 and $269 pledged as collateral, respectively) (a)	134,032	122,613
Loans held for sale (including $7,314 and $5,533 of mortgage loans carried at fair value, respectively)	7,618	5,578
Loans
Commercial	110,764	103,863
Commercial real estate	40,380	39,746
Residential mortgages	76,789	70,586
Credit card	21,898	24,789
Other retail	57,154	57,118
Total loans	306,985	296,102
Less allowance for loan losses	(7,407)	(4,020)
Net loans	299,578	292,082
Premises and equipment	3,516	3,702
Goodwill	9,889	9,655
Other intangible assets	2,654	3,223
Other assets (including $1,198 and $951 of trading securities at fair value pledged as collateral, respectively) (a)	39,121	36,168
Total assets	$540,455	$495,426

Liabilities and Shareholders’ Equity
Deposits
Noninterest-bearing	$114,583	$ 75,590
Interest-bearing (b)	298,634	286,326
Total deposits	413,217	361,916
Short-term borrowings	13,723	23,723
Long-term debt	42,443	40,167
Other liabilities	17,877	17,137
Total liabilities	487,260	442,943
Shareholders’ equity
Preferred stock	5,984	5,984
Common stock, par value $0.01 a share—authorized: 4,000,000,000 shares; issued: 9/30/20 and 12/31/19—2,125,725,742 shares	21	21
Capital surplus	8,516	8,475
Retained earnings	63,391	63,186
Less cost of common stock in treasury: 9/30/20—619,334,565 shares; 12/31/19—591,570,506 shares	(25,959)	(24,440)
Accumulated other comprehensive income (loss)	612	(1,373)
Total U.S. Bancorp shareholders’ equity	52,565	51,853
Noncontrolling interests	630	630
Total equity	53,195	52,483
Total liabilities and equity	$540,455	$495,426

(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 $5.0 billion and $7.8 billion at September 30, 2020 and December 31, 2019, respectively.

See Notes to Consolidated Financial Statements.


36		U.S. Bancorp

U.S. Bancorp

Consolidated Statement of Income


(Dollars and Shares in Millions, Except Per Share Data) (Unaudited)	Three Months Ended September 30						Nine Months Ended September 30
	2020			2019			2020			2019
Interest Income
Loans		$2,892			$3,555			$ 9,152			$10,677
Loans held for sale		61			48			157			107
Investment securities		586			734			1,908			2,184
Other interest income		34			100			144			271
Total interest income		3,573			4,437			11,361			13,239
Interest Expense
Deposits		130			744			849			2,201
Short-term borrowings		19			97			124			281
Long-term debt		197			315			738			912
Total interest expense		346			1,156			1,711			3,394
Net interest income		3,227			3,281			9,650			9,845
Provision for credit losses		635			367			3,365			1,109
Net interest income after provision for credit losses		2,592			2,914			6,285			8,736
Noninterest Income
Credit and debit card revenue		388			366			976			1,035
Corporate payment products revenue		125			177			371			506
Merchant processing services		347			410			950			1,192
Trust and investment management fees		434			421			1,295			1,235
Deposit service charges		170			234			512			678
Treasury management fees		145			139			425			438
Commercial products revenue		303			240			904			708
Mortgage banking revenue		553			272			1,596			630
Investment products fees		48			46			142			138
Securities gains (losses), net		12			25			143			47
Other		187			284			537			788
Total noninterest income		2,712			2,614			7,851			7,395
Noninterest Expense
Compensation		1,687			1,595			4,992			4,728
Employee benefits		335			324			1,001			971
Net occupancy and equipment		276			279			823			837
Professional services		102			114			307			315
Marketing and business development		72			109			213			309
Technology and communications		334			277			932			804
Postage, printing and supplies		70			74			214			219
Other intangibles		44			42			129			124
Other		451			330			1,394			1,077
Total noninterest expense		3,371			3,144			10,005			9,384
Income before income taxes		1,933			2,384			4,131			6,747
Applicable income taxes		347			467			671			1,294
Net income		1,586			1,917			3,460			5,453
Net (income) loss attributable to noncontrolling interests		(6	)		(9	)		(20	)		(25	)
Net income attributable to U.S. Bancorp		$1,580			$1,908			$ 3,440			$ 5,428
Net income applicable to U.S. Bancorp common shareholders		$1,494			$1,821			$ 3,196			$ 5,175
Earnings per common share		$ .99			$ 1.16			$ 2.12			$ 3.26
Diluted earnings per common share		$ .99			$ 1.15			$ 2.11			$ 3.25
Average common shares outstanding		1,506			1,575			1,510			1,589
Average diluted common shares outstanding		1,507			1,578			1,511			1,592

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)	2020			2019			2020			2019
Net income		$1,586			$1,917			$3,460			$5,453
Other Comprehensive Income (Loss)
Changes in unrealized gains and losses on investment securities available-for-sale		(305	)		284			2,935			1,790
Changes in unrealized gains and losses on derivative hedges		27			(59	)		(230	)		(268	)
Foreign currency translation		6			2			(6	)		10
Reclassification to earnings of realized gains and losses		23			2			(42	)		6
Income taxes related to other comprehensive income (loss)		63			(58	)		(672	)		(389	)
Total other comprehensive income (loss)		(186	)		171			1,985			1,149
Comprehensive income		1,400			2,088			5,445			6,602
Comprehensive (income) loss attributable to noncontrolling interests		(6	)		(9	)		(20	)		(25	)

Comprehensive income attributable to U.S. Bancorp		$1,394			$2,079			$5,425			$6,577

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, Except Per Share Data) (Unaudited)	Common Shares Outstanding			Preferred Stock		Common Stock		Capital Surplus			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total U.S. Bancorp Shareholders’ Equity			Noncontrolling Interests			Total Equity
Balance June 30, 2019		1,584		$	5,984	$	21	$	8,465		$	61,252		$	(21,465	)	$	(1,344	)	$	52,913		$	627		$	53,540
Net income (loss)												1,908									1,908			9			1,917
Other comprehensive income (loss)																		171			171						171
Preferred stock dividends (a)												(79	)								(79	)					(79	)
Common stock dividends ($.42 per share)												(662	)								(662	)					(662	)
Issuance of common and treasury stock		1							(8	)					36						28						28
Purchase of treasury stock		(14	)												(795	)					(795	)					(795	)
Net other changes in noncontrolling interests																					—			(6	)		(6	)
Stock option and restricted stock grants									33												33						33

Balance September 30, 2019		1,571		$	5,984	$	21	$	8,490		$	62,419		$	(22,224	)	$	(1,173	)	$	53,517		$	630		$	54,147
Balance June 30, 2020		1,506		$	5,984	$	21	$	8,483		$	62,526		$	(25,962	)	$	798		$	51,850		$	630		$	52,480
Net income (loss)												1,580									1,580			6			1,586
Other comprehensive income (loss)																		(186	)		(186	)					(186	)
Preferred stock dividends (b)												(79	)								(79	)					(79	)
Common stock dividends ($.42 per share)												(636	)								(636	)					(636	)
Issuance of common and treasury stock		—							(1	)					3						2						2
Distributions to noncontrolling interests																					—			(5	)		(5	)
Net other changes in noncontrolling interests																					—			(1	)		(1	)
Stock option and restricted stock grants									34												34						34

Balance September 30, 2020		1,506		$	5,984	$	21	$	8,516		$	63,391		$	(25,959	)	$	612		$	52,565		$	630		$	53,195
Balance December 31, 2018		1,608		$	5,984	$	21	$	8,469		$	59,065		$	(20,188	)	$	(2,322	)	$	51,029		$	628		$	51,657
Change in accounting principle												2									2						2
Net income (loss)												5,428									5,428			25			5,453
Other comprehensive income (loss)																		1,149			1,149						1,149
Preferred stock dividends (c)												(230	)								(230	)					(230	)
Common stock dividends ($1.16 per share)												(1,846	)								(1,846	)					(1,846	)
Issuance of common and treasury stock		4							(127	)					179						52						52
Purchase of treasury stock		(41	)												(2,215	)					(2,215	)					(2,215	)
Distributions to noncontrolling interests																					—			(16	)		(16	)
Net other changes in noncontrolling interests																					—			(7	)		(7	)
Stock option and restricted stock grants									148												148						148

Balance September 30, 2019		1,571		$	5,984	$	21	$	8,490		$	62,419		$	(22,224	)	$	(1,173	)	$	53,517		$	630		$	54,147
Balance December 31, 2019		1,534		$	5,984	$	21	$	8,475		$	63,186		$	(24,440	)	$	(1,373	)	$	51,853		$	630		$	52,483
Change in accounting principle (d)												(1,099	)								(1,099	)					(1,099	)
Net income (loss)												3,440									3,440			20			3,460
Other comprehensive income (loss)																		1,985			1,985						1,985
Preferred stock dividends (e)												(229	)								(229	)					(229	)
Common stock dividends ($1.26 per share)												(1,907	)								(1,907	)					(1,907	)
Issuance of common and treasury stock		3							(118	)					130						12						12
Purchase of treasury stock		(31	)												(1,649	)					(1,649	)					(1,649	)
Distributions to noncontrolling interests																					—			(19	)		(19	)
Net other changes in noncontrolling interests																					—			(1	)		(1	)
Stock option and restricted stock grants									159												159						159

Balance September 30, 2020		1,506		$	5,984	$	21	$	8,516		$	63,391		$	(25,959	)	$	612		$	52,565		$	630		$	53,195

(a)	Reflects dividends declared per share on the Company’s Series A, Series B, Series F, Series H, Series J and Series K Non-Cumulative Perpetual Preferred Stock of $894.444, $223.61, $406.25, $321.88, $662.50 and $343.75, respectively.

(b)	Reflects dividends declared per share on the Company’s Series A, Series B, Series F, Series H, Series J and Series K Non-Cumulative Perpetual Preferred Stock of $894.444, $223.61, $406.25, $321.88, $662.50 and $343.75, respectively.

(c)	Reflects dividends declared per share on the Company’s Series A, Series B, Series F, Series H, Series I, Series J and Series K Non-Cumulative Perpetual Preferred Stock of $2,760.506, $663.54, $1,218.75, $965.64, $640.625, $1,325.00 and $1,031.25, respectively.

(d)

Effective January 1, 2020, the Company adopted accounting guidance which changed impairment recognition of financial instruments to a model that is based on expected losses rather than incurred losses. Upon adoption, the Company increased its allowance for credit losses and reduced retained earnings net of deferred tax liabilities through a cumulative-effect adjustment.

(e)	Reflects dividends declared per share on the Company’s Series A, Series B, Series F, Series H, Series I, Series J and Series K Non-Cumulative Perpetual Preferred Stock of $2,663.888, $665.97, $1,218.75, $965.64, $640.625, $1,325.00 and $1,031.25, respectively.

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)	2020			2019
Operating Activities
Net income attributable to U.S. Bancorp	$	3,440		$	5,428
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses		3,365			1,109
Depreciation and amortization of premises and equipment		264			248
Amortization of intangibles		129			124
(Gain) loss on sale of loans held for sale		(1,613	)		(504	)
(Gain) loss on sale of securities and other assets		(274	)		(351	)
Loans originated for sale, net of repayments		(46,456	)		(24,795	)
Proceeds from sales of loans held for sale		45,469			23,146
Other, net		461			546
Net cash provided by operating activities		4,785			4,951
Investing Activities
Proceeds from sales of available-for-sale investment securities		13,920			5,776
Proceeds from maturities of held-to-maturity investment securities		—			6,256
Proceeds from maturities of available-for-sale investment securities		24,992			7,885
Purchases of held-to-maturity investment securities		—			(6,701	)
Purchases of available-for-sale investment securities		(48,481	)		(20,383	)
Net increase in loans outstanding		(3,915	)		(8,411	)
Proceeds from sales of loans		1,429			1,604
Purchases of loans		(9,561	)		(2,818	)
Net decrease (increase) in securities purchased under agreements to resell		732			(3,687	)
Other, net		(966	)		(892	)
Net cash used in investing activities		(21,850	)		(21,371	)
Financing Activities
Net increase in deposits		51,301			14,240
Net (decrease) increase in short-term borrowings		(10,000	)		440
Proceeds from issuance of long-term debt		14,282			7,968
Principal payments or redemption of long-term debt		(13,088	)		(8,225	)
Proceeds from issuance of common stock		11			51
Repurchase of common stock		(1,660	)		(2,232	)
Cash dividends paid on preferred stock		(222	)		(223	)
Cash dividends paid on common stock		(1,917	)		(1,780	)
Net cash provided by financing activities		38,707			10,239
Change in cash and due from banks		21,642			(6,181	)
Cash and due from banks at beginning of period		22,405			21,453
Cash and due from banks at end of period	$	44,047		$	15,272

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, 2019. Certain amounts in prior periods have been reclassified to conform to the current presentation.


Note 2		Accounting Changes

Financial Instruments—Credit Losses

Effective January 1, 2020, the Company adopted accounting guidance, issued by the Financial Accounting Standards Board (“FASB”) in June 2016, related to the impairment of financial instruments. This guidance changes 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 accounting guidance by decreasing the number of credit impairment models that entities use to account for debt instruments. In addition, the guidance requires additional credit quality disclosures for loans. Upon adoption, the Company increased its allowance for credit losses by approximately $1.5 billion and reduced retained earnings net of deferred tax balances by approximately $1.1 billion through a cumulative-effect adjustment. The increase in the allowance at adoption was primarily related to the commercial, credit card, installment and other retail loan portfolios where the allowance for loan losses had not previously considered the full term of the loans. The Company has elected to defer the impact of the effect of the guidance at adoption plus 25 percent of its quarterly credit reserve increases over the next two years on its regulatory capital requirements, followed by a transition period to phase in the cumulative deferred impact at 25 percent per year from 2022 to 2025, as provided by rules issued by its regulators.

The adoption of this guidance did not have a material impact on the Company’s

available-for-sale

securities as most of this portfolio consists of U.S. Treasury and residential agency mortgage-backed securities that inherently have an immaterial risk of loss.

Reference Interest Rate Transition

In March 2020, the FASB issued accounting guidance, providing temporary optional expedients and exceptions to the guidance in United States generally accepted accounting principles on contract modifications and hedge accounting, to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. Under the guidance, a company can elect not to apply certain modification accounting requirements to contracts affected by the reference rate transition, if certain criteria are met. A company that makes this election would not be required to remeasure the contracts at the modification date or reassess a previous accounting determination. This guidance also permits a company to elect various optional expedients that would allow it to continue applying hedge accounting for hedging relationships affected by reference rate transition, if certain criteria are met. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The Company is currently assessing the impact of this guidance on its financial statements.


U.S. Bancorp		41


Note 3		Investment Securities

The Company’s available-for-sale investment securities are carried at fair value with unrealized net gains or losses reported within accumulated other comprehensive income (loss) in shareholders’ equity. The Company had no outstanding investment securities classified as held-to-maturity at September 30, 2020 and December 31, 2019.

The amortized cost, gross unrealized holding gains and losses, and fair value of available-for-sale investment securities were as follows:


	September 30, 2020									December 31, 2019
(Dollars in Millions)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. Treasury and agencies	$	22,029	$	541	$	(6	)	$	22,564	$	19,845	$	61	$	(67	)	$	19,839
Mortgage-backed securities
Residential agency		96,461		2,023		(22	)		98,462		93,903		557		(349	)		94,111
Commercial agency		4,250		183		(4	)		4,429		1,482		–		(29	)		1,453
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		–		1		–			1		–		1		–			1
Other		203		4		–			207		375		7		–			382
Obligations of state and political subdivisions		7,784		574		(2	)		8,356		6,499		318		(3	)		6,814
Obligations of foreign governments		9		–		–			9		9		–		–			9
Corporate debt securities		4		–		–			4		4		–		–			4
Total available-for-sale	$	130,740	$	3,326	$	(34	)	$	134,032	$	122,117	$	944	$	(448	)	$	122,613

Investment securities with a fair value of $10.5 billion at September 30, 2020, and $8.4 billion at December 31, 2019, 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 $604 million at September 30, 2020, and $269 million at December 31, 2019.

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)	2020		2019		2020		2019
Taxable		$528		$683		$1,741		$2,023
Non-taxable		58		51		167		161
Total interest income from investment securities		$586		$734		$1,908		$2,184

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)	2020		2019		2020			2019
Realized gains		$12		$25		$166			$66
Realized losses		–		–		(23	)		(19	)
Net realized gains (losses)		$12		$25		$143			$47
Income tax (benefit) on net realized gains (losses)		$3		$6		$36			$12

The Company conducts a regular assessment of its available-for-sale investment securities with unrealized losses to determine whether all or some portion of a security’s unrealized loss is related to credit and an allowance for credit losses is necessary. If the Company intends to sell or it is more likely than not the Company will be required to sell an investment security, the amortized cost of the security is written down to fair value. When evaluating credit losses, the Company considers various factors such as the nature of the investment security, the credit ratings or financial condition of the issuer, the extent of the unrealized loss, expected cash flows of underlying collateral, the existence of any government or agency guarantees, and market conditions. The Company measures the allowance for credit losses using market information where available and discounting the cash flows at the original effective rate of the investment security. The allowance for credit losses is adjusted each period through earnings and can be subsequently recovered. The allowance for credit losses on the Company’s available-for-sale investment securities was immaterial at September 30, 2020.


42		U.S. Bancorp

At September 30, 2020, 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 available-for-sale 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, 2020:


	Less Than 12 Months					12 Months or Greater					Total
(Dollars in Millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Treasury and agencies	$	1,322	$	(6	)	$	–	$	–		$	1,322	$	(6	)
Residential agency mortgage-backed securities		5,995		(20	)		1,195		(2	)		7,190		(22	)
Commercial agency mortgage-backed securities		1,170		(4	)		–					1,170		(4	)
Other asset-backed securities		–		–			2		–			2		–
Obligations of state and political subdivisions		255		(2	)		–		–			255		(2	)
Obligations of foreign governments		2		–			–		–			2		–
Corporate debt securities		–		–			4		–			4		–
Total investment securities	$	8,744	$	(32	)	$	1,201	$	(2	)	$	9,945	$	(34	)

These unrealized losses primarily relate to changes in interest rates and market spreads subsequent to purchase of the investment securities. U.S. Treasury and agencies securities and agency mortgage-backed securities are issued, guaranteed or otherwise supported by the United States government. The Company’s obligations of state and political subdivisions are generally high grade. Accordingly, the Company does not consider these unrealized losses to be credit-related and an allowance for credit losses is not necessary. 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, 2020, 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.

During the nine months ended September 30, 2020, the Company did not purchase any available-for-sale investment securities that had more-than-insignificant credit deterioration.


U.S. Bancorp		43

The following table provides information about the amortized cost, fair value and yield by maturity date of the available-for-sale investment securities outstanding at September 30, 2020:


(Dollars in Millions)	Amortized Cost		Fair Value		Weighted- Average Maturity in Years		Weighted- Average Yield (e)
U.S. Treasury and Agencies
Maturing in one year or less	$	7,788	$	7,828		.4		1.41	%
Maturing after one year through five years		9,669		9,962		2.5		1.51
Maturing after five years through ten years		4,110		4,315		7.7		1.64
Maturing after ten years		462		459		12.8		1.64
Total	$	22,029	$	22,564		2.9		1.50	%
Mortgage-Backed Securities (a)
Maturing in one year or less	$	790	$	797		.7		1.74	%
Maturing after one year through five years		94,241		96,219		2.4		1.68
Maturing after five years through ten years		5,634		5,828		8.1		1.44
Maturing after ten years		46		47		11.5		1.23
Total	$	100,711	$	102,891		2.7		1.67	%
Asset-Backed Securities (a)
Maturing in one year or less	$	–	$	–		.4		2.69	%
Maturing after one year through five years		202		206		4.1		2.26
Maturing after five years through ten years		1		1		5.3		2.02
Maturing after ten years		–		1		14.4		2.41
Total	$	203	$	208		4.1		2.26	%
Obligations of State and Political Subdivisions (b) (c)
Maturing in one year or less	$	91	$	92		.6		4.61	%
Maturing after one year through five years		1,087		1,151		3.1		4.41
Maturing after five years through ten years		6,521		7,025		7.0		4.01
Maturing after ten years		85		88		11.0		3.00
Total	$	7,784	$	8,356		6.4		4.07	%
Other
Maturing in one year or less	$	13	$	13		.3		1.59	%
Maturing after one year through five years		–		–		–		–
Maturing after five years through ten years		–		–		–		–
Maturing after ten years		–		–		–		–
Total	$	13	$	13		.3		1.59	%
Total investment securities (d)	$	130,740	$	134,032		3.0		1.78	%

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

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

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

(d)	The weighted-average maturity of total available-for-sale investment securities was 4.2 years at December 31, 2019, with a corresponding weighted-average yield of 2.38 percent.

(e)	Weighted-average yields for obligations of state and political subdivisions are presented on a fully-taxable equivalent basis based on a federal income tax rate of 21 percent. Yields on investment securities are computed based on amortized cost balances.


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, 2020					December 31, 2019
(Dollars in Millions)	Amount		Percent of Total			Amount		Percent of Total
Commercial
Commercial	$	105,109		34.2	%	$	98,168		33.2	%
Lease financing		5,655		1.9			5,695		1.9
Total commercial		110,764		36.1			103,863		35.1
Commercial Real Estate
Commercial mortgages		29,264		9.6			29,404		9.9
Construction and development		11,116		3.6			10,342		3.5
Total commercial real estate		40,380		13.2			39,746		13.4
Residential Mortgages
Residential mortgages		66,952		21.8			59,865		20.2
Home equity loans, first liens		9,837		3.2			10,721		3.6
Total residential mortgages		76,789		25.0			70,586		23.8
Credit Card		21,898		7.1			24,789		8.4
Other Retail
Retail leasing		8,405		2.7			8,490		2.9
Home equity and second mortgages		13,208		4.3			15,036		5.1
Revolving credit		2,660		.9			2,899		1.0
Installment		13,513		4.4			11,038		3.7
Automobile		19,188		6.2			19,435		6.5
Student		180		.1			220		.1
Total other retail		57,154		18.6			57,118		19.3
Total loans	$	306,985		100.0	%	$	296,102		100.0	%

The Company had loans of $95.9 billion at September 30, 2020, and $96.2 billion at December 31, 2019, pledged at the Federal Home Loan Bank, and loans of $67.1 billion at September 30, 2020, and $76.3 billion at December 31, 2019, pledged at the Federal Reserve Bank.

Originated loans are reported at the principal amount outstanding, net of unearned interest and deferred fees and costs, and any partial charge-offs recorded. Net unearned interest and deferred fees and costs amounted to $848 million at September 30, 2020 and $781 million at December 31, 2019. All purchased loans are recorded at fair value at the date of purchase. Beginning January 1, 2020, the Company evaluates purchased loans for more-than-insignificant deterioration at the date of purchase in accordance with applicable authoritative accounting guidance. Purchased loans that have experienced more-than-insignificant deterioration from origination are considered purchased credit deteriorated (“PCD”) loans. All other purchased loans are considered

non-purchased

credit deteriorated loans.

The Company offers a broad array of lending products and categorizes its loan portfolio into two segments, which is the level at which it develops and documents a systematic methodology to determine the allowance for credit losses. The Company’s two loan portfolio segments are commercial lending and consumer lending.

Allowance for Credit Losses

Beginning January 1, 2020, the allowance for credit losses is established for current expected credit losses on the Company’s loan and lease portfolio, including unfunded credit commitments. The allowance for credit losses is increased through provisions charged to earnings and reduced by net charge-offs. Management evaluates the appropriateness of the allowance for credit losses on a quarterly basis. The allowance considers expected losses for the remaining lives of the applicable assets, inclusive of expected recoveries. Remaining lives of the applicable assets are adjusted for prepayments. Multiple economic scenarios are considered over a three-year reasonable and supportable forecast period, which incorporates historical loss experience in years two and three. These economic scenarios are constructed with interrelated projections of multiple economic variables, and loss estimates are produced that consider the historical correlation of those economic variables with credit losses. After the forecast period, the Company fully reverts to long-term historical loss experience, adjusted for prepayments and characteristics of the current loan and lease portfolio, to estimate losses over the remaining lives. The economic scenarios are updated at least quarterly and are designed to provide a range of reasonable estimates, both better and worse than current expectations. Scenarios are weighted based on the Company’s expectation of future conditions. Final loss estimates also consider factors affecting credit losses not reflected in the scenarios, due to the unique aspects of current conditions and expectations. These factors may include, but are not limited to, loan servicing practices, regulatory guidance, and/or fiscal and monetary policy actions.


U.S. Bancorp		45

The allowance recorded for credit losses utilizes forward-looking expected loss models to consider a variety of factors affecting lifetime credit losses. These factors include, but are not limited to, macroeconomic variables such as unemployment rate, real estate prices, gross domestic product levels, corporate bonds spreads and long-term interest rate forecasts, as well as loan and borrower characteristics, such as internal risk ratings on commercial loans and consumer credit scores, delinquency status, collateral type and available valuation information, consideration of

end-of-term

charged-off,

or expected recoveries on collateral dependent loans where recovery is expected through sale of the collateral. The allowance recorded for individually evaluated loans greater than $5 million in the commercial lending segment is based on an 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.

The allowance recorded for Troubled Debt Restructuring (“TDR”) loans in the consumer lending segment is determined on a homogenous pool basis utilizing expected cash flows discounted using the original effective interest rate of the pool. TDRs do not include loan modifications granted to customers resulting directly from the economic effects of the

COVID-19

pandemic. The expected cash flows on TDR loans consider subsequent payment defaults since modification, the borrower’s ability to pay under the restructured terms, and the timing and amount of payments. 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. 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.

Beginning January 1, 2020, when a loan portfolio is purchased, an allowance is established for those loans considered purchased with more-than-insignificant credit deterioration, or PCD loans, and those not considered purchased with more-than-insignificant credit deterioration. The allowance established for each population considers product mix, risk characteristics of the portfolio, bankruptcy experience, delinquency status, refreshed

loan-to-value

ratios when possible, and portfolio growth. The allowance established for purchased loans not considered PCD is recognized through provision expense upon acquisition, whereas the allowance established for loans considered PCD at acquisition is offset by an increase in the basis of the acquired loans. Any subsequent increases and decreases in the allowance related to purchased loans are recognized through provision expense, with future charge-offs charged to the allowance. The Company did not have a material amount of PCD loans included in its loan portfolio at September 30, 2020.

The Company’s methodology for determining the appropriate allowance for credit losses for each loan portfolio also considers the imprecision inherent in the methodologies used. As a result, amounts determined under the methodologies described above are adjusted by management to consider the potential impact of other qualitative factors not captured in quantitative model adjustments which include, but are not limited to, the following: model imprecision, imprecision in economic scenario assumptions, and emerging risks related to either changes in the environment that are affecting specific portfolios, or changes in portfolio concentrations over time that may affect model performance. The consideration of these items results in adjustments to allowance amounts included in the Company’s allowance for credit losses specific to each portfolio class.

The Company also assesses the credit risk associated with

off-balance

sheet loan commitments, letters of credit, investment securities 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.

The results of the analysis are evaluated quarterly to confirm the estimates are appropriate for each loan portfolio.


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
2020
Balance at beginning of period	$	2,645		$	1,269		$	633		$	2,156		$	1,187		$	7,890
Add
Provision for credit losses		20			263			(49	)		369			32			635
Deduct
Loans charged-off		193			89			4			236			89			611
Less recoveries of loans charged-off		(15	)		(6	)		(7	)		(35	)		(33	)		(96	)
Net loans charged-off		178			83			(3	)		201			56			515
Balance at end of period	$	2,487		$	1,449		$	587		$	2,324		$	1,163		$	8,010
2019
Balance at beginning of period	$	1,464		$	794		$	438		$	1,132		$	638		$	4,466
Add
Provision for credit losses		101			3			(10	)		212			61			367
Deduct
Loans charged-off		91			7			8			248			97			451
Less recoveries of loans charged-off		(16	)		(1	)		(11	)		(37	)		(34	)		(99	)
Net loans charged-off		75			6			(3	)		211			63			352
Balance at end of period	$	1,490		$	791		$	431		$	1,133		$	636		$	4,481

Nine Months Ended September 30 (Dollars in Millions)	Commercial			Commercial Real Estate			Residential Mortgages			Credit Card			Other Retail			Total Loans
2020
Balance at beginning of period	$	1,484		$	799		$	433		$	1,128		$	647		$	4,491
Add
Change in accounting principle (a)		378			(122	)		(30	)		872			401			1,499
Provision for credit losses		988			875			179			988			335			3,365
Deduct
Loans charged-off		406			112			15			775			316			1,624
Less recoveries of loans charged-off		(43	)		(9	)		(20	)		(111	)		(96	)		(279	)
Net loans charged-off		363			103			(5	)		664			220			1,345
Balance at end of period	$	2,487		$	1,449		$	587		$	2,324		$	1,163		$	8,010
2019
Balance at beginning of period	$	1,454		$	800		$	455		$	1,102		$	630		$	4,441
Add
Provision for credit losses		243			(2	)		(20	)		694			194			1,109
Deduct
Loans charged-off		300			11			27			767			283			1,388
Less recoveries of loans charged-off		(93	)		(4	)		(23	)		(104	)		(95	)		(319	)
Net loans charged-off		207			7			4			663			188			1,069
Balance at end of period	$	1,490		$	791		$	431		$	1,133		$	636		$	4,481

(a)	Effective January 1, 2020, the Company adopted accounting guidance which changed impairment recognition of financial instruments to a model that is based on expected losses rather than incurred losses.

The increase in the allowance for credit losses from December 31, 2019 to September 30, 2020 reflected the deteriorating and ongoing effects of adverse economic conditions driven by the impact of

COVID-19

on the domestic and global economies. Expected loss estimates consider both the changes in economic activity, and the mitigating effects of government stimulus and industrywide loan modification efforts designed to limit long term effects of the pandemic.

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.


U.S. Bancorp		47

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. Residential mortgage loans and lines in a first lien position are placed on nonaccrual status in instances where a partial

charge-off

occurs unless the loan is well secured and in the process of collection. Residential mortgage 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.

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. Generally, purchased credit deteriorated 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 (b)		Total
September 30, 2020
Commercial	$	109,994	$	243	$	68	$	459	$	110,764
Commercial real estate		39,957		92		1		330		40,380
Residential mortgages (a)		76,197		238		114		240		76,789
Credit card		21,493		206		199		–		21,898
Other retail		56,666		257		79		152		57,154
Total loans	$	304,307	$	1,036	$	461	$	1,181	$	306,985
December 31, 2019
Commercial	$	103,273	$	307	$	79	$	204	$	103,863
Commercial real estate		39,627		34		3		82		39,746
Residential mortgages (a)		70,071		154		120		241		70,586
Credit card		24,162		321		306		–		24,789
Other retail		56,463		393		97		165		57,118
Total loans	$	293,596	$	1,209	$	605	$	692	$	296,102

(a)

At September 30, 2020, $1.3 billion of loans 30–89 days past due and $1.6 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 United States Department of Veterans Affairs, were classified as current, compared with $428 million and $1.7 billion at December 31, 2019, respectively.

(b)

Substantially all nonperforming loans at September 30, 2020 and December 31, 2019, had an associated allowance for credit losses. The Company recognized interest income on nonperforming loans of $9 million and $7 million for the three months ended September 30, 2020 and 2019, respectively, and $19 million and $18 million for the nine months ended September 30, 2020 and 2019, respectively.

At September 30, 2020, the amount of foreclosed residential real estate held by the Company, and included in other real estate owned (“OREO”), was $32 million, compared with $74 million at December 31, 2019. These amounts

excluded

$42 million and $155 million at September 30, 2020 and December 31, 2019, respectively, of foreclosed residential real estate related to mortgage loans whose payments are primarily insured by the Federal Housing Administration or guaranteed by the United States 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, 2020 and December 31, 2019, was $1.1 billion and $1.5 billion, respectively, of which $857 million and $1.2 billion,


48		U.S. Bancorp

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 United States 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 loans not classified on the Company’s rating scale for problem credits, as minimal credit risk has been identified. Special mention loans are those loans that have a potential weakness deserving management’s close attention. Classified loans are those loans 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.

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


	September 30, 2020										December 31, 2019
			Criticized										Criticized
(Dollars in Millions)	Pass		Special Mention		Classified (a)		Total Criticized		Total		Pass		Special Mention		Classified (a)		Total Criticized		Total
Commercial
Originated in 2020	$	34,060	$	2,211	$	1,239	$	3,450	$	37,510	$	–	$	–	$	–	$	–	$	–
Originated in 2019		20,897		469		249		718		21,615		33,550		174		222		396		33,946
Originated in 2018		14,093		453		160		613		14,706		21,394		420		136		556		21,950
Originated in 2017		6,356		182		222		404		6,760		10,464		165		97		262		10,726
Originated in 2016		2,761		52		46		98		2,859		4,984		10		37		47		5,031
Originated prior to 2016		3,235		61		68		129		3,364		5,151		86		96		182		5,333
Revolving		22,906		756		288		1,044		23,950		26,307		292		278		570		26,877
Total commercial		104,308		4,184		2,272		6,456		110,764		101,850		1,147		866		2,013		103,863

Commercial real estate
Originated in 2020		7,276		921		382		1,303		8,579		–		–		–		–		–
Originated in 2019		10,517		1,022		313		1,335		11,852		12,976		108		108		216		13,192
Originated in 2018		6,880		728		356		1,084		7,964		9,455		71		56		127		9,582
Originated in 2017		3,305		370		172		542		3,847		5,863		99		64		163		6,026
Originated in 2016		2,338		224		183		407		2,745		3,706		117		60		177		3,883
Originated prior to 2016		3,167		248		163		411		3,578		4,907		78		101		179		5,086
Revolving		1,712		97		5		102		1,814		1,965		11		1		12		1,977
Revolving converted to term		1		–		–		–		1		–		–		–		–		–
Total commercial real estate		35,196		3,610		1,574		5,184		40,380		38,872		484		390		874		39,746

Residential mortgages (b)
Originated in 2020		18,800		1		3		4		18,804		–		–		–		–		–
Originated in 2019		15,313		3		9		12		15,325		18,819		2		1		3		18,822
Originated in 2018		6,468		1		20		21		6,489		9,204		–		11		11		9,215
Originated in 2017		7,745		1		17		18		7,763		9,605		–		21		21		9,626
Originated in 2016		9,469		–		30		30		9,499		11,378		–		29		29		11,407
Originated prior to 2016		18,597		–		311		311		18,908		21,168		–		348		348		21,516
Revolving		1		–		–		–		1		–		–		–		–		–
Total residential mortgages		76,393		6		390		396		76,789		70,174		2		410		412		70,586

Credit card (c)		21,699		–		199		199		21,898		24,483		–		306		306		24,789

Other retail
Originated in 2020		13,416		–		3		3		13,419		–		–		–		–		–
Originated in 2019		12,527		–		16		16		12,543		15,907		–		11		11		15,918
Originated in 2018		7,574		–		23		23		7,597		10,131		–		23		23		10,154
Originated in 2017		4,708		–		22		22		4,730		7,907		–		28		28		7,935
Originated in 2016		2,162		–		12		12		2,174		3,679		–		20		20		3,699
Originated prior to 2016		2,135		–		17		17		2,152		3,274		–		28		28		3,302
Revolving		13,939		–		116		116		14,055		15,509		10		138		148		15,657
Revolving converted to term		449		–		35		35		484		418		–		35		35		453
Total other retail		56,910		–		244		244		57,154		56,825		10		283		293		57,118
Total loans	$	294,506		7,800	$	4,679	$	12,479	$	306,985	$	292,204	$	1,643	$	2,255	$	3,898	$	296,102
Total outstanding commitments	$	635,980	$	10,868	$	5,664	$	16,532	$	652,512	$	619,224	$	2,451	$	2,873	$	5,324	$	624,548

(a)	Classified rating on consumer loans primarily based on delinquency status.

(b)

At September 30, 2020, $1.6 billion of GNMA loans 90 days or more past due and $1.4 billion of restructured GNMA loans whose repayments are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs were classified with a pass rating, compared with $1.7 billion and $1.6 billion at December 31, 2019, respectively.

(c)	All credit card loans are considered revolving loans.


U.S. Bancorp		49

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.

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


	2020						2019
(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		699	$	262	$	159		886	$	116	$	100
Commercial real estate		51		105		81		32		23		23
Residential mortgages		374		108		108		117		17		15
Credit card		4,699		27		27		8,429		46		46
Other retail		508		26		26		814		20		19
Total loans, excluding loans purchased from GNMA mortgage pools		6,331		528		401		10,278		222		203
Loans purchased from GNMA mortgage pools		735		106		105		1,524		211		203
Total loans		7,066	$	634	$	506		11,802	$	433	$	406

Nine Months Ended September 30
Commercial		2,837	$	505	$	375		2,622	$	242	$	215
Commercial real estate		116		165		141		76		95		93
Residential mortgages		585		142		142		318		43		41
Credit card		19,282		110		112		26,018		140		141
Other retail		1,537		50		48		2,029		44		42
Total loans, excluding loans purchased from GNMA mortgage pools		24,357		972		818		31,063		564		532
Loans purchased from GNMA mortgage pools		3,648		514		503		4,617		629		606
Total loans		28,005	$	1,486	$	1,321		35,680	$	1,193	$	1,138

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 2020, at September 30, 2020, 15 residential mortgages, 4 home equity and second mortgage loans and 238 loans purchased from GNMA mortgage pools with outstanding balances of $4 million, less than $1 million and $36 million, respectively, were in a trial period and have estimated post-modification balances of $4 million, less than $1 million and $36 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 interest rate. 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 modifies residential mortgage loans under Federal Housing Administration, United States Department of Veterans Affairs, or its own internal programs. Under these programs, the Company offers qualifying homeowners the opportunity to permanently modify their loan and achieve more affordable monthly payments by providing loan concessions. These concessions may include adjustments to interest rates, conversion of adjustable rates to fixed rates,


50		U.S. Bancorp

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.

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.

Loan modifications or concessions granted to borrowers resulting directly from the effects of the

COVID-19

pandemic, who were otherwise in current payment status, are not considered to be TDRs. As of September 30, 2020, approximately $12.1

billion of loan modifications included on the Company’s consolidated balance sheet related to borrowers impacted by the

COVID-19

pandemic, consisting primarily of payment deferrals of

days or less.

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:


	2020				2019
(Dollars in Millions)	Number of Loans		Amount Defaulted		Number of Loans		Amount Defaulted
Three Months Ended September 30
Commercial		305	$	21		263	$	9
Commercial real estate		5		8		8		7
Residential mortgages		5		2		13		1
Credit card		1,363		8		2,025		10
Other retail		55		1		72		1
Total loans, excluding loans purchased from GNMA mortgage pools		1,733		40		2,381		28
Loans purchased from GNMA mortgage pools		72		9		263		33
Total loans		1,805	$	49		2,644	$	61

Nine Months Ended September 30
Commercial		922	$	49		749	$	18
Commercial real estate		33		24		23		17
Residential mortgages		23		4		124		14
Credit card		5,169		27		6,001		29
Other retail		245		3		299		9
Total loans, excluding loans purchased from GNMA mortgage pools		6,392		107		7,196		87
Loans purchased from GNMA mortgage pools		427		57		697		93
Total loans		6,819	$	164		7,893	$	180

In addition to the defaults in the table above, the Company had a total of 161 and 402 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, 2020, 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 $19 million and $53 million for the three months and nine months ended September 30, 2020, respectively.

As of September 30, 2020, the Company had $156 million of commitments to lend additional funds to borrowers whose terms of their outstanding owed balances have been modified in

TDRs.


U.S. Bancorp		51


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.

The Company also provides financial support primarily through the use of waivers of trust and investment management fees associated with various unconsolidated registered money market funds it manages. The Company provided $28 million and $8 million of support to the funds during the three months ended September 30, 2020 and 2019, respectively, and $49 million and $22 million during the nine months ended September 30, 2020 and 2019, 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 $142 million and $132 million for the three months ended September 30, 2020 and 2019, respectively, and $437 million and $423 million for the nine months ended September 30, 2020 and 2019, respectively. The Company also recognized $118 million and $80 million of investment tax credits for the three months ended September 30, 2020 and 2019, respectively, and $307 million and $326 million for the nine months ended September 30, 2020 and 2019, respectively. The Company recognized $142 million and $122 million of expenses related to all of these investments for the three months ended September 30, 2020 and 2019, respectively, of which $97 million and $80 million, respectively, were included in tax expense and the remaining amounts were included in noninterest expense. The Company recognized $429 million and $391 million of expenses related to all of these investments for the nine months ended September 30, 2020 and 2019, respectively, of which $297 million and $237 million, respectively, were included in tax expense and the remaining amounts were included in noninterest expense.

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


52		U.S. Bancorp

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, 2020		December 31, 2019
Investment carrying amount	$	6,552	$	6,148
Unfunded capital and other commitments		3,201		2,938
Maximum exposure to loss		12,085		12,118

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 $34 million at September 30, 2020 and $31 million at December 31, 2019. The maximum exposure to loss related to these VIEs was $57 million at September 30, 2020 and $55 million at December 31, 2019, 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 $80 million at September 30, 2020, compared with less than $1 million to $87 million at December 31, 2019.

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, 2020, approximately $3.9 billion of the Company’s assets and $3.2 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 $4.0 billion and $3.2 billion, respectively, at December 31, 2019. 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.

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 liquidity and remarketing arrangements to the program. As a result, the Company has consolidated the program’s entities. At September 30, 2020, $2.8 billion of

available-for-sale

investment securities and $1.5 billion of short-term borrowings on the Consolidated Balance Sheet were related to the tender option bond program, compared with $3.0 billion of

available-for-sale

investment securities and $2.7 billion of short-term borrowings at December 31, 2019.


Note 6		Mortgage Servicing Rights

The Company capitalizes MSRs as separate assets when loans are sold and servicing is retained. MSRs may also be purchased from others. The Company carries MSRs at fair value, with changes in the fair value recorded in earnings during the period in which they occur. The Company serviced $214.6 billion of residential mortgage loans for others at September 30, 2020, and $226.0 billion at December 31, 2019, including subserviced mortgages with no corresponding MSR asset. Included in mortgage banking revenue are the MSR fair value changes arising from market rate and model assumption changes, net of the value change in derivatives used to economically hedge MSRs. These changes resulted in net gains of $9 million and net losses of $2 million for the three months ended September 30, 2020 and 2019, respectively, and net gains of $58 million and net losses of $5 million for the nine months ended September 30, 2020 and 2019, respectively. Loan servicing and ancillary fees, not including valuation changes, included in mortgage banking revenue were $177 million and $188 million for the three months ended September 30, 2020 and 2019, respectively, and $537 million and $547 million for the nine months ended September 30, 2020 and 2019, respectively.


U.S. Bancorp		53

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


	Three Months Ended September 30						Nine Months Ended September 30
(Dollars in Millions)	2020			2019			2020			2019
Balance at beginning of period	$	1,840		$	2,458		$	2,546		$	2,791
Rights purchased		8			6			16			13
Rights capitalized		321			168			712			373
Rights sold (a)		1			4			3			4
Changes in fair value of MSRs
Due to fluctuations in market interest rates (b)		(8	)		(243	)		(815	)		(573	)
Due to revised assumptions or models (c)		(7	)		15			37			30
Other changes in fair value (d)		(177	)		(112	)		(521	)		(342	)
Balance at end of period	$	1,978		$	2,296		$	1,978		$	2,296

(a)	MSRs sold include those having a negative fair value, resulting from the loans being severely delinquent.

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

(c)	Includes changes in MSR value not caused by changes in market interest rates, such as changes in assumed cost to service, ancillary income and option adjusted spread, as well as the impact of any model changes.

(d)	Primarily the change in MSR value from passage of time and cash flows realized (decay), but also includes the impact of changes to expected cash flows not associated with changes in market interest rates, such as the impact of delinquencies.

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


	September 30, 2020																		December 31, 2019
(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	$	(396	)	$	(255	)	$	(144	)	$	169		$	353		$	727		$	(663	)	$	(316	)	$	(153	)	$	141		$	269		$	485
Derivative instrument hedges		529			287			150			(161	)		(334	)		(706	)		613			306			152			(143	)		(279	)		(550	)
Net sensitivity	$	133		$	32		$	6		$	8		$	19		$	21		$	(50	)	$	(10	)	$	(1	)	$	(2	)	$	(10	)	$	(65	)

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 servicing portfolio is comprised of loans originated under state and local housing authority program guidelines which assist purchases by first-time or

low-

to moderate-income homebuyers through a favorable rate subsidy, down payment and/or closing cost assistance on government- and conventional-insured mortgages.

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


	September 30, 2020												December 31, 2019
(Dollars in Millions)	HFA			Government			Conventional (d)			Total			HFA			Government			Conventional (d)			Total
Servicing portfolio (a)	$	41,233		$	28,532		$	142,033		$	211,798		$	44,906		$	35,302		$	143,310		$	223,518
Fair value	$	378		$	312		$	1,288		$	1,978		$	486		$	451		$	1,609		$	2,546
Value (bps) (b)		92			109			91			93			108			128			112			114
Weighted-average servicing fees (bps)		35			40			30			32			34			39			28			31
Multiple (value/servicing fees)		2.64			2.74			3.01			2.89			3.15			3.29			4.00			3.67
Weighted-average note rate		4.52	%		3.93	%		3.91	%		4.03	%		4.65	%		3.99	%		4.07	%		4.17	%
Weighted-average age (in years)		3.9			5.4			4.5			4.5			3.7			4.9			4.8			4.6
Weighted-average expected prepayment (constant prepayment rate)		15.4	%		17.4	%		19.9	%		18.7	%		12.2	%		13.7	%		12.2	%		12.4	%
Weighted-average expected life (in years)		5.4			4.6			4.1			4.4			6.5			5.7			5.9			6.0
Weighted-average option adjusted spread (c)		7.7	%		7.3	%		6.2	%		6.7	%		8.4	%		7.9	%		6.9	%		7.3	%

(a)	Represents principal balance of mortgages having corresponding MSR asset.

(b)	Calculated as fair value divided by the servicing portfolio.

(c)	Option adjusted spread is the incremental spread added to the risk-free rate to reflect optionality and other risk inherent in the MSRs.

(d)	Represents loans sold primarily to GSEs.


54		U.S. Bancorp


Note 7		Preferred Stock

At September 30, 2020 and December 31, 2019, 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, 2020								December 31, 2019
(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 H		20,000		500		13		487		20,000		500		13		487
Series I		30,000		750		5		745		30,000		750		5		745
Series J		40,000		1,000		7		993		40,000		1,000		7		993
Series K		23,000		575		10		565		23,000		575		10		565
Total preferred stock (a)		209,510	$	6,176	$	192	$	5,984		209,510	$	6,176	$	192	$	5,984

(a)	The par value of all shares issued and outstanding at September 30, 2020 and December 31, 2019, 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 Investment Securities Available-For- Sale			Unrealized Gains (Losses) on Investment 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
2020
Balance at beginning of period	$	2,701		$	–		$	(240	)	$	(1,589	)	$	(74	)	$	798
Changes in unrealized gains and losses		(305	)		–			27			–			–			(278	)
Foreign currency translation adjustment (a)		–			–			–			–			6			6
Reclassification to earnings of realized gains and losses		(12	)		–			3			32			–			23
Applicable income taxes		81			–			(7	)		(9	)		(2	)		63
Balance at end of period	$	2,465		$	–		$	(217	)	$	(1,566	)	$	(70	)	$	612
2019
Balance at beginning of period	$	163		$	11		$	(55	)	$	(1,385	)	$	(78	)	$	(1,344	)
Changes in unrealized gains and losses		284			–			(59	)		–			–			225
Foreign currency translation adjustment (a)		–			–			–			–			2			2
Reclassification to earnings of realized gains and losses		(25	)		(1	)		6			22			–			2
Applicable income taxes		(66	)		–			14			(6	)		–			(58	)
Balance at end of period	$	356		$	10		$	(94	)	$	(1,369	)	$	(76	)	$	(1,173	)

(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		55


Nine Months Ended September 30 (Dollars in Millions)	Unrealized Gains (Losses) on Investment Securities Available-For- Sale			Unrealized Gains (Losses) on Investment 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
2020
Balance at beginning of period	$	379		$	–		$	(51	)	$	(1,636	)	$	(65	)	$	(1,373	)
Changes in unrealized gains and losses		2,935			–			(230	)		–			–			2,705
Foreign currency translation adjustment (a)		–			–			–			–			(6	)		(6	)
Reclassification to earnings of realized gains and losses		(143	)		–			7			94			–			(42	)
Applicable income taxes		(706	)		–			57			(24	)		1			(672	)
Balance at end of period	$	2,465		$	–		$	(217	)	$	(1,566	)	$	(70	)	$	612
2019
Balance at beginning of period	$	(946	)	$	14		$	112		$	(1,418	)	$	(84	)	$	(2,322	)
Changes in unrealized gains and losses		1,790			–			(268	)		–			–			1,522
Foreign currency translation adjustment (a)		–			–			–			–			10			10
Reclassification to earnings of realized gains and losses		(47	)		(5	)		(8	)		66			–			6
Applicable income taxes		(441	)		1			70			(17	)		(2	)		(389	)
Balance at end of period	$	356		$	10		$	(94	)	$	(1,369	)	$	(76	)	$	(1,173	)

(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)	2020			2019			2020			2019
Unrealized gains (losses) on investment securities available-for-sale
Realized gains (losses) on sale of investment securities	$	12		$	25		$	143		$	47		Securities gains (losses), net
		(3	)		(6	)		(36	)		(12	)	Applicable income taxes
		9			19			107			35		Net-of-tax
Unrealized gains (losses) on investment securities transferred from available-for-sale to held-to-maturity
Amortization of unrealized gains		–			1			–			5		Interest income
		–			–			–			(1	)	Applicable income taxes
		–			1			–			4		Net-of-tax
Unrealized gains (losses) on derivative hedges
Realized gains (losses) on derivative hedges		(3	)		(6	)		(7	)		8		Interest expense
		1			1			2			(2	)	Applicable income taxes
		(2	)		(5	)		(5	)		6		Net-of-tax
Unrealized gains (losses) on retirement plans
Actuarial gains (losses) and prior service cost (credit) amortization		(32	)		(22	)		(94	)		(66	)	Other noninterest expense
		9			6			24			17		Applicable income taxes
		(23	)		(16	)		(70	)		(49	)	Net-of-tax

Total impact to net income	$	(16	)	$	(1	)	$	32		$	(4	)


56		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)	2020			2019			2020			2019
Net income attributable to U.S. Bancorp	$	1,580		$	1,908		$	3,440		$	5,428
Preferred dividends		(79	)		(79	)		(229	)		(230	)
Earnings allocated to participating stock awards		(7	)		(8	)		(15	)		(23	)
Net income applicable to U.S. Bancorp common shareholders	$	1,494		$	1,821		$	3,196		$	5,175
Average common shares outstanding		1,506			1,575			1,510			1,589
Net effect of the exercise and assumed purchase of stock awards		1			3			1			3
Average diluted common shares outstanding		1,507			1,578			1,511			1,592
Earnings per common share	$	.99		$	1.16		$	2.12		$	3.26
Diluted earnings per common share	$	.99		$	1.15		$	2.11		$	3.25

Options outstanding at September 30, 2020, to purchase 4 million and 2 million common shares for the three months and nine months ended September 30, 2020, respectively, and outstanding at September 30, 2019, to purchase 1 million common shares for the three months and nine months ended September 30, 2019, 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)	2020			2019			2020			2019			2020			2019			2020			2019
Service cost	$	58		$	48		$	–		$	–		$	176		$	144		$	–		$	–
Interest cost		59			63			–			1			176			187			1			2
Expected return on plan assets		(101	)		(96	)		–			(1	)		(302	)		(287	)		(2	)		(2	)
Prior service cost (credit) amortization		–			–			–			(1	)		–			–			(2	)		(3	)
Actuarial loss (gain) amortization		34			24			(2	)		(1	)		101			73			(5	)		(4	)
Net periodic benefit cost (a)	$	50		$	39		$	(2	)	$	(2	)	$	151		$	117		$	(8	)	$	(7	)

(a)	Service cost is included in employee benefits expense on the Consolidated Statement of Income. All other components are included in other noninterest expense on the Consolidated Statement of Income.


Note 11		Income Taxes

The components of income tax expense were:


	Three Months Ended September 30						Nine Months Ended September 30
(Dollars in Millions)	2020			2019			2020			2019
Federal
Current	$	(53	)	$	414		$	966		$	1,002
Deferred		306			(59	)		(459	)		26
Federal income tax		253			355			507			1,028
State
Current		92			140			298			280
Deferred		2			(28	)		(134	)		(14	)

State income tax		94			112			164			266
Total income tax provision	$	347		$	467		$	671		$	1,294


U.S. Bancorp		57

A reconciliation of expected income tax expense at the federal statutory rate of 21 percent to the Company’s applicable income tax expense follows:


	Three Months Ended September 30						Nine Months Ended September 30
(Dollars in Millions)	2020			2019			2020			2019
Tax at statutory rate	$	406		$	501		$	867		$	1,417
State income tax, at statutory rates, net of federal tax benefit		75			99			170			277
Tax effect of
Tax credits and benefits, net of related expenses		(82	)		(97	)		(280	)		(307	)
Exam resolutions		(47	)		–			(47	)		(49	)
Tax-exempt income		(29	)		(29	)		(87	)		(92	)
Other items		24			(7	)		48			48
Applicable income taxes	$	347		$	467		$	671		$	1,294

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, 2020, federal tax examinations for all years ending through December 31, 2014 are completed and resolved. The Company’s tax returns for the years ended December 31, 2015, 2016, 2017 and 2018 are under examination by the Internal Revenue Service. The years open to examination by foreign, state and local government authorities vary by jurisdiction.

The Company’s net deferred tax asset was $657 million at September 30, 2020 and $382 million at December 31, 2019.


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.

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, 2020, the Company had $217 million

(net-of-tax)

of realized and unrealized losses on derivatives classified as cash flow hedges recorded in other comprehensive income (loss), compared with $51 million

(net-of-tax)

of realized and unrealized losses at December 31, 2019. The estimated amount to be reclassified from other comprehensive income (loss) into earnings during the remainder of 2020 and the next 12 months are losses of $10 million

(net-of-tax)

and $40 million

(net-of-tax),

respectively. All cash flow hedges were highly effective for the three and nine months ended September 30, 2020.

Net Investment Hedges

The Company uses forward commitments to sell specified amounts of certain foreign currencies, and

non-derivative

debt instruments, to hedge the volatility of its net investment in foreign operations driven by fluctuations in foreign currency exchange rates. The carrying amount of

non-derivative

debt instruments designated as net investment hedges was $1.4 billion and $1.3 billion at September 30, 2020 and December 31, 2019, respectively.

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


58		U.S. Bancorp

rate risk related to mortgage loans held for sale (“MLHFS”) and unfunded mortgage loan commitments. The Company also enters into interest rate swaps, swaptions, 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 to earnings 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 certain unfunded mortgage loan commitments and swap agreements related to the sale of a portion of its Class B common and preferred shares of Visa Inc. Refer to Note 14 for further information on these swap agreements.

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, 2020
Fair value hedges
Interest rate contracts
Receive fixed/pay floating swaps	$	8,400	$	–		2.02	$	–	$	–		–
Cash flow hedges
Interest rate contracts
Pay fixed/receive floating swaps		–		–		–		3,250		11		4.84
Net investment hedges
Foreign exchange forward contracts		483		5		.06		308		1		.06
Other economic hedges
Interest rate contracts
Futures and forwards
Buy		13,858		88		.06		5,141		11		.41
Sell		9,105		20		.04		28,066		102		.16
Options
Purchased		2,570		44		4.91		1,340		–		4.25
Written		5,817		227		.11		7,800		227		2.82
Receive fixed/pay floating swaps		4,985		–		5.36		6,367		–		11.18
Pay fixed/receive floating swaps		604		–		10.55		6,207		–		4.31
Foreign exchange forward contracts		275		2		.04		294		2		.05
Equity contracts		127		–		.67		20		–		.64
Other (a)		588		4		.02		2,376		199		2.07
Total	$	46,812	$	390			$	61,169	$	553
December 31, 2019
Fair value hedges
Interest rate contracts
Receive fixed/pay floating swaps	$	18,300	$	–		3.89	$	4,900	$	–		3.49
Cash flow hedges
Interest rate contracts
Pay fixed/receive floating swaps		1,532		–		6.06		7,150		10		2.11
Net investment hedges
Foreign exchange forward contracts		–		–		–		287		3		.04
Other economic hedges
Interest rate contracts
Futures and forwards
Buy		5,409		17		.08		5,477		11		.07
Sell		16,333		13		.81		8,113		25		.03
Options
Purchased		10,180		79		2.97		–		–		–
Written		1,270		30		.08		4,238		81		2.07
Receive fixed/pay floating swaps		4,408		–		5.99		5,316		–		13.04
Pay fixed/receive floating swaps		1,259		–		5.67		4,497		–		6.03
Foreign exchange forward contracts		113		1		.05		467		6		.04
Equity contracts		128		2		.45		20		–		1.06
Other (a)		34		–		.01		1,823		165		2.45
Total	$	58,966	$	142			$	42,288	$	301

(a)

Includes derivative liability swap agreements related to the sale of a portion of the Company’s Class B common and preferred shares of Visa Inc. The Visa swap agreements had a total notional value, fair value and weighted-average remaining maturity of $1.8 billion, $195 million and 2.75

years at September 30, 2020, respectively, compared to $1.8 billion, $165 million and 2.50 years at December 31, 2019, respectively. In addition, includes short-term underwriting purchase and sale commitments with total asset and liability notional values of $588

illion at September 30, 2020, and $34 million at December 31, 2019.


U.S. Bancorp		59

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, 2020
Interest rate contracts
Receive fixed/pay floating swaps	$	149,619	$	4,432		5.02	$	4,983	$	38		10.63
Pay fixed/receive floating swaps		5,479		3		10.31		142,997		1,409		4.83
Other (a)		9,049		2		3.53		7,490		3		3.59
Options
Purchased		65,401		110		1.36		3,119		64		2.10
Written		3,310		65		2.19		60,533		76		1.23
Futures
Buy		1,463		–		.71		–		–		–
Sell		–		–		–		5,682		–		.77
Foreign exchange rate contracts
Forwards, spots and swaps		35,624		1,029		1.15		36,540		998		1.36
Options
Purchased		744		22		.74		–		–		–
Written		–		–		–		744		22		.74
Credit contracts		2,836		2		2.88		7,478		9		3.84
Total	$	273,525	$	5,665			$	269,566	$	2,619
December 31, 2019
Interest rate contracts
Receive fixed/pay floating swaps	$	108,560	$	1,865		4.83	$	31,544	$	88		3.83
Pay fixed/receive floating swaps		28,150		30		3.83		101,078		753		4.55
Other (a)		6,895		1		3.45		6,218		2		2.98
Options
Purchased		46,406		43		2.06		12,804		47		1.25
Written		6,901		49		1.93		49,741		41		1.82
Futures
Buy		894		–		.21		–		–		–
Sell		3,874		1		1.18		1,995		–		1.04
Foreign exchange rate contracts
Forwards, spots and swaps		36,350		748		.97		36,671		729		1.07
Options
Purchased		1,354		17		.54		–		–		–
Written		–		–		–		1,354		17		.54
Credit contracts		2,879		1		3.28		7,488		5		4.33
Total	$	242,263	$	2,755			$	248,893	$	1,682

(a)	Primarily represents floating rate interest rate swaps that pay based on differentials between specified interest rate indexes.

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)	2020			2019			2020			2019			2020			2019			2020			2019
Asset and Liability Management Positions
Cash flow hedges
Interest rate contracts	$	21		$	(44	)	$	(2	)	$	(5	)	$	(171	)	$	(200	)	$	(5	)	$	6
Net investment hedges
Foreign exchange forward contracts		(4	)		10			–			–			6			8			–			–
Non-derivative debt instruments		(45	)		37			–			–			(41	)		42			–			–

Note:

The Company does not exclude components from effectiveness testing for cash flow and net investment hedges.


60		U.S. Bancorp

The table below shows the effect of fair value and cash flow hedge accounting included in interest expense on the Consolidated Statement of Income:


	Three Months Ended September 30						Nine Months Ended September 30
(Dollars in Millions)	2020			2019			2020			2019
Total amount of interest expense presented in the Consolidated Statement of Income	$	346		$	1,156		$	1,711		$	3,394

Asset and Liability Management Positions
Fair value hedges
Interest rate contract derivatives		28			(183	)		(166	)		(234	)
Hedged items		(27	)		181			167			232
Cash Flow hedges
Interest rate contract derivatives		3			6			7			(8	)

Note:

The Company does not exclude components from effectiveness testing for fair value and cash flow hedges. The Company reclassified losses of $18 million and $24 million into earnings during the three and nine months ended September 30, 2020, respectively, as a result of the discontinuance of cash flow hedges. The Company did not reclassify gains or losses into earnings as a result of the discontinuance of cash flow hedges during the three and nine months ended September 30, 2019.

The table below shows cumulative hedging adjustments and the carrying amount of assets and liabilities designated in fair value hedges:


	Carrying Amount of the Hedged Assets and Liabilities				Cumulative Hedging Adjustment (a)
(Dollars in Millions)	September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Line Item in the Consolidated Balance Sheet
Long-term Debt	$	8,599	$	23,195	$	990	$	35

(a)	The cumulative hedging adjustment related to discontinued hedging relationships was $780 million and $(7) million at September 30, 2020 and December 31, 2019, respectively.

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


	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		2020			2019			2020			2019
Asset and Liability Management Positions
Other economic hedges
Interest rate contracts
Futures and forwards		Mortgage banking revenue/ other noninterest income	$	46		$	20		$	53		$	(20	)
Purchased and written options		Mortgage banking revenue		428			154			1,173			347
Swaps		Mortgage banking revenue		(51	)		215			724			513
Foreign exchange forward contracts		Other noninterest income		(2	)		(3	)		9			(18	)
Equity contracts		Compensation expense		3			–			–			(2	)
Other		Other noninterest income		(69	)		–			(70	)		–
Customer-Related Positions
Interest rate contracts
Swaps		Commercial products revenue		59			26			103			61
Purchased and written options		Commercial products revenue		(14	)		2			3			11
Futures		Commercial products revenue		–			(3	)		(18	)		(7	)
Foreign exchange rate contracts
Forwards, spots and swaps		Commercial products revenue		20			20			54			59
Purchased and written options		Commercial products revenue		1			1			1			1
Credit contracts		Commercial products revenue		(10	)		(4	)		(15	)		(12	)

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 derivative positions that are centrally cleared through clearinghouses, 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 generally 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.


U.S. Bancorp		61

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 net liability thresholds and may be 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, 2020, was $1.5 billion. At September 30, 2020, the Company had $1.3 billion of cash posted as collateral against this net liability position.


Note 13		Netting Arrangements for Certain Financial Instruments and Securities Financing Activities

The Company’s derivative portfolio consists of bilateral

over-the-counter

trades, certain interest rate derivatives and credit contracts required to be centrally cleared through clearinghouses per current regulations, and exchange-traded positions which may include U.S. Treasury and Eurodollar futures or options on U.S. Treasury futures. Of the Company’s $651.1 billion total notional amount of derivative positions at September 30, 2020, $330.9 billion related to bilateral

over-the-counter

trades, $305.7 billion related to those centrally cleared through clearinghouses and $14.5 billion related to those that were exchange-traded. The Company’s derivative contracts typically 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 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, residential agency mortgage-backed securities or corporate debt securities. The securities loaned or borrowed typically are corporate debt securities traded by the Company’s broker-dealer subsidiary. 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.


62		U.S. Bancorp

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		Greater Than 90 Days		Total

September 30, 2020
Repurchase agreements
U.S. Treasury and agencies	$	242	$	–	$	–	$	–	$	242
Residential agency mortgage-backed securities		600		–		–		–		600
Corporate debt securities		668		–		–		–		668
Total repurchase agreements		1,510		–		–		–		1,510
Securities loaned
Corporate debt securities		288		–		–		–		288
Total securities loaned		288		–		–		–		288
Gross amount of recognized liabilities	$	1,798	$	–	$	–	$	–	$	1,798
December 31, 2019
Repurchase agreements
U.S. Treasury and agencies	$	289	$	–	$	–	$	–	$	289
Residential agency mortgage-backed securities		266		–		–		–		266
Corporate debt securities		610		–		–		–		610
Total repurchase agreements		1,165		–		–		–		1,165
Securities loaned
Corporate debt securities		50		–		–		–		50
Total securities loaned		50		–		–		–		50
Gross amount of recognized liabilities	$	1,215	$	–	$	–	$	–	$	1,215

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.

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. 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:


(Dollars in Millions)	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, 2020
Derivative assets (d)	$	5,756	$	(1,885	)	$	3,871	$	(87	)	$	(331	)	$	3,453
Reverse repurchase agreements		289		–			289		(227	)		(62	)		–
Securities borrowed		1,701		–			1,701		–			(1,649	)		52
Total	$	7,746	$	(1,885	)	$	5,861	$	(314	)	$	(2,042	)	$	3,505
December 31, 2019
Derivative assets (d)	$	2,857	$	(982	)	$	1,875	$	(80	)	$	(116	)	$	1,679
Reverse repurchase agreements		1,021		–			1,021		(152	)		(869	)		–
Securities borrowed		1,624		–			1,624		–			(1,569	)		55
Total	$	5,502	$	(982	)	$	4,520	$	(232	)	$	(2,554	)	$	1,734

(a)	Includes $1.1 billion and $429 million of cash collateral related payables that were netted against derivative assets at September 30, 2020 and December 31, 2019, 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 $299 million and $40 million at September 30, 2020 and December 31, 2019, respectively, of derivative assets not subject to netting arrangements.


U.S. Bancorp		63


(Dollars in Millions)	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, 2020
Derivative liabilities (d)	$	2,973	$	(2,067	)	$	906	$	(87	)	$	–		$	819
Repurchase agreements		1,510		–			1,510		(227	)		(1,281	)		2
Securities loaned		288		–			288		–			(284	)		4
Total	$	4,771	$	(2,067	)	$	2,704	$	(314	)	$	(1,565	)	$	825
December 31, 2019
Derivative liabilities (d)	$	1,816	$	(1,067	)	$	749	$	(80	)	$	–		$	669
Repurchase agreements		1,165		–			1,165		(152	)		(1,012	)		1
Securities loaned		50		–			50		–			(49	)		1
Total	$	3,031	$	(1,067	)	$	1,964	$	(232	)	$	(1,061	)	$	671

(a)	Includes $1.3 billion and $514 million of cash collateral related receivables that were netted against derivative liabilities at September 30, 2020 and December 31, 2019, 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 $199 million and $167 million at September 30, 2020 and December 31, 2019, respectively, of derivative liabilities not subject to netting arrangements.


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.

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.

•

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 and certain derivative contracts.

Valuation Methodologies

The valuation methodologies used by the Company to measure financial assets and liabilities at fair value are described below. In addition, the following section includes an indication of the level of the fair value hierarchy in which the


64		U.S. Bancorp

assets or liabilities are classified. Where appropriate, the descriptions include information about the valuation models and key inputs to those models. During the nine months ended September 30, 2020 and 2019, there were no significant changes to the valuation techniques used by the Company to measure fair value.

Available-For-Sale

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. Level 2 investment securities are predominantly agency mortgage-backed securities, certain other asset-backed securities, obligations of state and political subdivisions and agency 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 net gain of $97 million and $10 million for the three months ended September 30, 2020 and 2019, respectively, and a net gain of $271 million and $53 million for the nine months ended September 30, 2020 and 2019, 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.

Mortgage Servicing Rights

MSRs are valued using a discounted cash flow methodology, and are classified within Level 3. The Company determines fair value of the MSRs by projecting future cash flows for different interest rate scenarios using prepayment rates and other assumptions, and discounts these cash flows using a risk adjusted rate based on option adjusted spread levels. 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

or centrally cleared through clearinghouses and are valued using market standard cash flow valuation techniques. The models incorporate inputs, depending on the type of derivative, including interest rate curves, foreign exchange rates and volatility. All derivative values incorporate an assessment of the risk of counterparty nonperformance, measured based on the Company’s evaluation of credit risk including external assessments of credit risk. 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 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 and preferred 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. The Visa swaps require payments by either the Company or the purchaser of the Visa Inc. Class B common and preferred shares when there are changes in the conversion rate of the Visa Inc. Class B common and preferred shares to Visa Inc. Class A common and preferred shares, respectively, 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


U.S. Bancorp		65

review of Visa Inc. related litigation contingencies, and the associated escrow funding. 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 Inc. restructuring and related card association litigation.

Significant Unobservable Inputs of Level 3 Assets and Liabilities

The following section provides information to facilitate an understanding of the uncertainty in the fair value measurements for the Company’s Level 3 assets and liabilities recorded at fair value on the Consolidated Balance Sheet. This section includes a description of the significant inputs used by the Company and a description of any interrelationships between these inputs. 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.

Mortgage Servicing Rights

The significant unobservable inputs used in the fair value measurement of the Company’s MSRs are expected prepayments and the option adjusted spread that is added to the risk-free rate to discount projected cash flows. Significant increases in either of these inputs in isolation would have resulted in a significantly lower fair value measurement. Significant decreases in either of these inputs in isolation would have resulted in a significantly higher fair value measurement. There is no direct interrelationship between prepayments and option adjusted spread. Prepayment rates generally move in the opposite direction of market interest rates. Option adjusted spread is generally impacted by changes in market return requirements.

The following table shows the significant valuation assumption ranges for MSRs at September 30, 2020:


	Minimum			Maximum			Weighted Average (a)
Expected prepayment		13	%		24	%		19	%
Option adjusted spread		6			11			7

(a)	Determined based on the relative fair value of the related mortgage loans serviced.

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 have resulted in a larger derivative asset or liability. A significant increase in the inherent MSR value would have resulted 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, 2020:


	Minimum			Maximum			Weighted Average (a)
Expected loan close rate		5	%		100	%		75	%
Inherent MSR value (basis points per loan)		19			195			117

(a)	Determined based on the relative fair value of the related mortgage loans.

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 have resulted in a lower fair value measurement. A significant decrease in the credit valuation adjustment would have resulted in a higher fair value measurement. The credit valuation adjustment is impacted by changes in market rates, volatility, market implied credit spreads, and loss recovery rates, as well as the Company’s assessment of the counterparty’s credit position. At September 30, 2020, the


66		U.S. Bancorp

minimum, maximum and weighted average credit valuation adjustment as a percentage of the net fair value of the counterparty’s derivative contracts prior to adjustment was 0 percent, 101 percent and 2 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 occurring, 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 have resulted in an increase in the derivative liability. A decrease in the loss estimate or an acceleration of the resolution of the related litigation would have resulted 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, 2020
Available-for-sale securities
U.S. Treasury and agencies	$	19,357	$	3,207	$	–	$	–		$	22,564
Mortgage-backed securities
Residential agency		–		98,462		–		–			98,462
Commercial agency		–		4,429		–		–			4,429
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		–		–		1		–			1
Other		–		201		6		–			207
Obligations of state and political subdivisions		–		8,355		1		–			8,356
Obligations of foreign governments		–		9		–		–			9
Corporate debt securities		–		4		–		–			4
Total available-for-sale		19,357		114,667		8		–			134,032
Mortgage loans held for sale		–		7,314		–		–			7,314
Mortgage servicing rights		–		–		1,978		–			1,978
Derivative assets		–		2,983		3,072		(1,885	)		4,170
Other assets		184		1,722		–		–			1,906
Total	$	19,541	$	126,686	$	5,058	$	(1,885	)	$	149,400
Derivative liabilities	$	–	$	2,724	$	448	$	(2,067	)	$	1,105
Short-term borrowings and other liabilities (a)		158		1,594		–		–			1,752
Total	$	158	$	4,318	$	448	$	(2,067	)	$	2,857
December 31, 2019
Available-for-sale securities
U.S. Treasury and agencies	$	18,986	$	853	$	–	$	–		$	19,839
Mortgage-backed securities
Residential agency		–		94,111		–		–			94,111
Commercial agency		–		1,453		–		–			1,453
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		–		–		1		–			1
Other		–		375		7		–			382
Obligations of state and political subdivisions		–		6,813		1		–			6,814
Obligations of foreign governments		–		9		–		–			9
Corporate debt securities		–		4		–		–			4
Total available-for-sale		18,986		103,618		9		–			122,613
Mortgage loans held for sale		–		5,533		–		–			5,533
Mortgage servicing rights		–		–		2,546		–			2,546
Derivative assets		9		1,707		1,181		(982	)		1,915
Other assets		312		1,563		–		–			1,875
Total	$	19,307	$	112,421	$	3,736	$	(982	)	$	134,482
Derivative liabilities	$	–	$	1,612	$	371	$	(1,067	)	$	916
Short-term borrowings and other liabilities (a)		50		1,578		–		–			1,628
Total	$	50	$	3,190	$	371	$	(1,067	)	$	2,544

Note:

Excluded from the table above are equity investments without readily determinable fair values. The Company has elected to carry these investments at historical cost, adjusted for impairment and any changes resulting from observable price changes for identical or similar investments of the issuer. The aggregate carrying amount of these equity investments was $82 million and $91 million at September 30, 2020 and December 31, 2019 respectively. The Company has not recorded impairments or adjustments for observable price changes on these equity investments during the first nine months of 2020 and 2019, or on a cumulative basis.

(a)	Primarily represents the Company’s obligation on securities sold short required to be accounted for at fair value per applicable accounting guidance.


U.S. Bancorp		67

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			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
2020
Available-for-sale securities
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations	$	1	$	–		$	–	$	–		$	–	$	–		$	–		$	1	$	–
Other		6		–			–		–			–		–			–			6		–
Obligations of state and political subdivisions		1		–			–		–			–		–			–			1		–
Total available-for-sale		8		–			–		–			–		–			–			8		–
Mortgage servicing rights		1,840		(192	) (a)		8		1			–		321	(c)		–			1,978		(192	) (a)
Net derivative assets and liabilities		2,841		211	(b)		152		(1	)		–		–			(579	)		2,624		228	(d)

2019
Mortgage servicing rights	$	2,458	$	(340	) (a)	$	6	$	4		$	–	$	168	(c)	$	–		$	2,296	$	(340	) (a)
Net derivative assets and liabilities		1,045		313	(e)		1		(1	)		–		–			(72	)		1,286		322	(f)

(a)	Included in mortgage banking revenue.

(b)	Approximately $508 million, $(228) million and $(69) million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.

(c)	Represents MSRs capitalized during the period.

(d)	Approximately $291 million , $6 million and $(69) million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.

(e)	Approximately $144 million included in mortgage banking revenue and $169 million included in commercial products revenue.

(f)	Approximately $273 million included in mortgage banking revenue and $49 million included in commercial products revenue.


(Dollars in Millions)	Beginning of Period Balance		Net Gains (Losses) Included in Net Income			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
2020
Available-for-sale securities
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations	$	1	$	–		$	–	$	–		$	–		$	–		$	–		$	1	$	–
Other		7		–			–		–			(1	)		–			–			6		–
Obligations of state and political subdivisions		1		–			–		–			–			–			–			1		–
Total available-for-sale		9		–			–		–			(1	)		–			–			8		–
Mortgage servicing rights		2,546		(1,299	) (a)		16		3			–			712	(c)		–			1,978	$	(1,299	) (a)
Net derivative assets and liabilities		810		2,685	(b)		247		(2	)		–			–			(1,116	)		2,624		1,888	(d)

2019
Mortgage servicing rights	$	2,791	$	(885	) (a)	$	13	$	4		$	–		$	373	(c)	$	–		$	2,296	$	(885	) (a)
Net derivative assets and liabilities		80		1,244	(e)		55		(9	)		–			–			(84	)		1,286		1,256	(f)

(a)	Included in mortgage banking revenue.

(b)	Approximately $1.5 billion, $1.3 billion and $(70) million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.

(c)	Represents MSRs capitalized during the period.

(d)	Approximately $291 million , $1.7 billion and $(70) million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.

(e)	Approximately $363 million included in mortgage banking revenue and $881 million included in commercial products revenue.

(f)	Approximately $49 million included in mortgage banking revenue and $1.2 billion included in commercial products 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.


68		U.S. Bancorp

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, 2020								December 31, 2019
(Dollars in Millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Loans (a)	$	–	$	–	$	602	$	602	$	–	$	–	$	136	$	136

Other assets (b)		–		–		53		53		–		–		46		46

(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.

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)	2020		2019		2020		2019
Loans (a)	$	184	$	20	$	244	$	93

Other assets (b)		13		6		19		12

(a)	Represents 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, 2020						December 31, 2019
(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	$	7,314	$	6,983	$	331	$	5,533	$	5,366	$	167
Nonaccrual loans		1		1		–		1		1		–
Loans 90 days or more past due		–		–		–		1		1		–

Fair Value of Financial Instruments

The following section summarizes the estimated fair value for financial instruments accounted for at amortized cost as of September 30, 2020 and December 31, 2019. 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, receivables and payables due in one year or less, insurance contracts, equity investments not accounted for at fair value, and deposits with no defined or contractual maturities are excluded.

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


	September 30, 2020										December 31, 2019
	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	$	44,047	$	44,047	$	–	$	–	$	44,047	$	22,405	$	22,405	$	–	$	–	$	22,405
Federal funds sold and securities purchased under resale agreements		290		–		290		–		290		1,036		–		1,036		–		1,036
Loans held for sale (a)		304		–		–		304		304		45		–		–		43		43
Loans		299,578		–		–		310,721		310,721		292,082		–		–		297,241		297,241
Other (b)		1,818		–		809		1,009		1,818		1,923		–		929		994		1,923

Financial Liabilities
Time deposits		32,587		–		32,675		–		32,675		42,894		–		42,831		–		42,831
Short-term borrowings (c)		11,971		–		11,903		–		11,903		22,095		–		21,961		–		21,961
Long-term debt		42,443		–		43,657		–		43,657		40,167		–		41,077		–		41,077
Other (d)		3,541		–		1,245		2,296		3,541		3,678		–		1,342		2,336		3,678

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

(b)	Includes investments in Federal Reserve Bank and Federal Home Loan Bank stock and tax-advantaged investments.

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

(d)	Includes operating lease liabilities and liabilities related to tax-advantaged investments.


U.S. Bancorp		69

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 $681 million and $528 million at September 30, 2020 and December 31, 2019, respectively. The carrying value of other guarantees was $352 million and $200 million at September 30, 2020 and December 31, 2019, respectively.


Note 15		Guarantees and Contingent Liabilities

Visa Restructuring and Card Brand 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 brand 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 Brands”) are defendants in antitrust lawsuits challenging the practices of the Card Brands (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.

In October 2012, Visa signed a settlement agreement to resolve class action claims associated with the multi-district interchange litigation pending in the United States District Court for the Eastern District of New York (the “Multi-District Litigation”). The U.S. Court of Appeals for the Second Circuit reversed the approval of that settlement and remanded the matter to the district court. Thereafter, the case was split into two putative class actions, one seeking damages (the “Damages Action”) and a separate class action seeking injunctive relief only (the “Injunctive Action”). In September 2018, Visa signed a new settlement agreement, superseding the original settlement agreement, to resolve the Damages Action. The Damages Action settlement was approved by the United States District Court for the Eastern District of New York, but is now on appeal. The Injunctive Action, which generally seeks changes to Visa rules, is still pending.

Other Guarantees and Contingent Liabilities

The following table is a summary of other guarantees and contingent liabilities of the Company at September 30, 2020:


(Dollars in Millions)	Collateral Held		Carrying Amount		Maximum Potential Future Payments
Standby letters of credit	$	–	$	69	$	9,838
Third party borrowing arrangements		–		–		2
Securities lending indemnifications		5,790		–		5,659
Asset sales		–		75		5,148	(a)
Merchant processing		668		203		88,546
Tender option bond program guarantee		2,796		–		2,445
Other		–		74		1,450

(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.


70		U.S. Bancorp

The Company currently processes card transactions in the United States, Canada and Europe through wholly-owned subsidiaries and a network of other financial institutions. In the event a merchant was unable to fulfill product or services subject to future delivery, such as airline tickets, the Company could become financially liable for refunding the purchase price of such products or services 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, 2020, the value of airline tickets purchased to be delivered at a future date through card transactions processed by the Company was $12.0 billion. The Company held collateral of $517 million in escrow deposits, letters of credit and indemnities from financial institutions, and liens on various assets. In addition to specific collateral or other credit enhancements, the Company maintains a liability for its implied guarantees associated with future delivery. At September 30, 2020, the liability was $176 million primarily related to these airline processing arrangements.

Asset Sales

The Company regularly sells loans to GSEs as part of its mortgage banking activities. The Company provides customary representations and warranties to 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 GSE for losses. At September 30, 2020, the Company had reserved $19 million for potential losses from representation and warranty obligations, compared with $9 million at December 31, 2019. 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, 2020 and December 31, 2019, the Company had $8 million and $10 million, respectively, of unresolved representation and warranty claims from GSEs. The Company does not have a significant amount of unresolved claims from investors other than 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 uncertainties inherent 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.

Residential Mortgage-Backed Securities Litigation

Starting in 2011, the Company and other large financial institutions have been sued in their capacity as trustee for residential mortgage–backed securities trusts. In the lawsuits brought against the Company, the investors allege that the Company’s banking subsidiary, U.S. Bank National Association (“U.S. Bank”), 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 in these matters seek monetary damages in unspecified amounts and most also seek equitable relief.

Regulatory Matters

The Company is continually subject to examinations, inquiries and investigations in areas of heightened 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).

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


U.S. Bancorp		71

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 the range 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.


Note 16		Business Segments

Within the Company, financial performance is measured by major lines of business based on the products and services provided to customers through its distribution channels. 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. The Company has five reportable operating segments:

Corporate and Commercial Banking

non-profit

and public sector clients.

Consumer and Business Banking

Consumer and Business Banking delivers products and services through banking offices, telephone servicing and sales,

on-line

services, direct mail, ATM processing and mobile devices. It encompasses community banking, metropolitan banking and indirect lending, as well as mortgage banking.

Wealth Management and Investment Services

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.

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 business segments, 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.

Basis of Presentation

Business segment 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 business segments according to the volume and credit quality of the loan balances managed, but with the impact of changes in economic forecasts recorded in Treasury and Corporate Support. Goodwill and other intangible assets are assigned to the business segments based on the mix of business of an entity acquired by the Company. Within the Company, capital levels are evaluated and managed centrally; however, capital is allocated to the business segments to support evaluation of business performance. Business segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. Generally, the determination of the amount of capital allocated to each business segment includes credit allocations following a Basel III regulatory framework. Interest income and expense is determined based on the assets and liabilities managed by the business segment. Because funding and asset liability management is a central function, funds transfer-pricing methodologies are utilized to allocate a cost of funds used or credit for funds provided to all business segment assets and liabilities, respectively, using a matched funding concept. Also, each business unit is allocated the taxable-equivalent benefit of

tax-exempt

products. The residual effect on net interest income of asset/liability management activities is included in Treasury and Corporate Support. Noninterest income and expenses directly managed by each business segment, including fees, service charges, salaries and benefits, and other direct revenues and costs are accounted for within each segment’s financial results in a manner similar to the consolidated financial statements. Occupancy costs are allocated based on utilization of facilities by the business segments. Generally, operating losses are charged to the business segment when the loss event is realized in a manner similar to a loan

charge-off.

Noninterest expenses incurred by centrally managed operations or business segments that directly support another business segment’s operations are charged to the applicable business segment based on its utilization of those services,


72		U.S. Bancorp

primarily measured by the volume of customer activities, number of employees or other relevant factors. These allocated expenses are reported as net shared services expense within noninterest expense. Certain activities that do not directly support the operations of the business segments or for which the business segments are not considered financially accountable in evaluating their performance are not charged to the business segments. The income or expenses associated with these corporate activities is reported within the Treasury and Corporate Support business segment. Income taxes are assessed to each business segment at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support.


U.S. Bancorp		73

Business segment results for the three months ended September 30 were as follows:


	Corporate and Commercial Banking						Consumer and Business Banking						Wealth Management and Investment Services
(Dollars in Millions)	2020			2019			2020			2019			2020			2019
Condensed Income Statement
Net interest income (taxable-equivalent basis)	$	808		$	767		$	1,603		$	1,602		$	240		$	295
Noninterest income		260			212			891			666			469			454
Total net revenue		1,068			979			2,494			2,268			709			749
Noninterest expense		416			397			1,406			1,321			470			439
Other intangibles		–			1			4			5			3			3
Total noninterest expense		416			398			1,410			1,326			473			442
Income before provision and income taxes		652			581			1,084			942			236			307
Provision for credit losses		90			39			73			69			12			1
Income before income taxes		562			542			1,011			873			224			306
Income taxes and taxable-equivalent adjustment		141			136			253			218			56			77
Net income (loss)		421			406			758			655			168			229
Net (income) loss attributable to noncontrolling interests		–			–			–			–			–			–
Net income (loss) attributable to U.S. Bancorp	$	421		$	406		$	758		$	655		$	168		$	229
Average Balance Sheet
Loans	$	108,158		$	98,760		$	156,779		$	145,940		$	11,458		$	10,264
Other earning assets		4,110			4,016			8,206			4,711			288			265
Goodwill		1,647			1,647			3,475			3,475			1,618			1,617
Other intangible assets		6			8			1,942			2,444			37			47
Assets		121,014			109,480			175,760			160,863			14,562			13,548

Noninterest-bearing deposits		43,302			29,058			39,941			28,590			16,797			13,613
Interest-bearing deposits		82,448			72,087			149,882			129,587			62,164			65,997
Total deposits		125,750			101,145			189,823			158,177			78,961			79,610

Total U.S. Bancorp shareholders’ equity		16,541			15,580			15,111			15,229			2,482			2,456

	Payment Services						Treasury and Corporate Support						Consolidated Company
(Dollars in Millions)	2020			2019			2020			2019			2020			2019
Condensed Income Statement
Net interest income (taxable-equivalent basis)	$	634		$	629		$	(33	)	$	13		$	3,252		$	3,306
Noninterest income		867	(a)		957	(a)		225			325			2,712	(b)		2,614	(b)
Total net revenue		1,501			1,586			192			338			5,964	(c)		5,920	(c)
Noninterest expense		800			762			235			183			3,327			3,102
Other intangibles		37			33			–			–			44			42
Total noninterest expense		837			795			235			183			3,371			3,144
Income before provision and income taxes		664			791			(43	)		155			2,593			2,776
Provision for credit losses		246			260			214			(2	)		635			367
Income before income taxes		418			531			(257	)		157			1,958			2,409
Income taxes and taxable-equivalent adjustment		105			133			(183	)		(72	)		372			492
Net income (loss)		313			398			(74	)		229			1,586			1,917
Net (income) loss attributable to noncontrolling interests		–			–			(6	)		(9	)		(6	)		(9	)
Net income (loss) attributable to U.S. Bancorp	$	313		$	398		$	(80	)	$	220		$	1,580		$	1,908
Average Balance Sheet
Loans	$	31,168		$	34,044		$	3,455		$	3,428		$	311,018		$	292,436
Other earning assets		5			6			162,477			134,239			175,086			143,237
Goodwill		3,123			2,825			–			–			9,863			9,564
Other intangible assets		602			548			–			–			2,587			3,047
Assets		36,191			39,879			189,375			157,684			536,902			481,454

Noninterest-bearing deposits		6,886			1,266			2,449			2,067			109,375			74,594
Interest-bearing deposits		124			117			1,530			7,551			296,148			275,339
Total deposits		7,010			1,383			3,979			9,618			405,523			349,933

Total U.S. Bancorp shareholders’ equity		6,219			6,102			12,063			13,925			52,416			53,292

(a)	Presented net of related rewards and rebate costs and certain partner payments of $525 million and $572 million for the three months ended September 30, 2020 and 2019, respectively.

(b)	Includes revenue generated from certain contracts with customers of $1.8 billion and $1.9 billion for the three months ended September 30, 2020 and 2019, respectively.

(c)

The Company, as a lessor, originates retail and commercial leases either directly to the consumer or indirectly through dealer networks. Under these arrangements, the Company recorded $246 million and $257 million of revenue for the three months ended September 30, 2020 and 2019, respectively, primarily consisting of interest income on sales-type and direct financing leases.


74		U.S. Bancorp

Business segment results for the nine months ended September 30 were as follows:


	Corporate and Commercial Banking						Consumer and Business Banking						Wealth Management and Investment Services
(Dollars in Millions)	2020			2019			2020			2019			2020			2019
Condensed Income Statement
Net interest income (taxable-equivalent basis)	$	2,498		$	2,318		$	4,629		$	4,780		$	779		$	894
Noninterest income		870			663			2,569			1,768			1,399			1,330
Total net revenue		3,368			2,981			7,198			6,548			2,178			2,224
Noninterest expense		1,278			1,225			4,145			3,904			1,380			1,308
Other intangibles		–			3			12			15			9			9
Total noninterest expense		1,278			1,228			4,157			3,919			1,389			1,317
Income before provision and income taxes		2,090			1,753			3,041			2,629			789			907
Provision for credit losses		536			46			306			218			33			–
Income before income taxes		1,554			1,707			2,735			2,411			756			907
Income taxes and taxable-equivalent adjustment		389			428			685			602			189			227
Net income (loss)		1,165			1,279			2,050			1,809			567			680
Net (income) loss attributable to noncontrolling interests		–			–			–			–			–			–
Net income (loss) attributable to U.S. Bancorp	$	1,165		$	1,279		$	2,050		$	1,809		$	567		$	680
Average Balance Sheet
Loans	$	111,478		$	98,785		$	151,256		$	143,862		$	11,087		$	9,996
Other earning assets		4,170			3,692			6,589			3,486			285			284
Goodwill		1,647			1,647			3,508			3,475			1,617			1,617
Other intangible assets		6			9			2,095			2,679			40			50
Assets		123,929			108,539			168,419			157,708			14,273			13,306

Noninterest-bearing deposits		37,129			29,435			34,167			27,402			15,454			13,513
Interest-bearing deposits		86,138			71,331			142,649			128,592			65,447			60,607
Total deposits		123,267			100,766			176,816			155,994			80,901			74,120

Total U.S. Bancorp shareholders’ equity		16,548			15,453			15,038			15,117			2,475			2,443

	Payment Services						Treasury and Corporate Support						Consolidated Company
(Dollars in Millions)	2020			2019			2020			2019			2020			2019
Condensed Income Statement
Net interest income (taxable-equivalent basis)	$	1,888		$	1,835		$	(71	)	$	97		$	9,723		$	9,924
Noninterest income		2,319	(a)		2,761	(a)		694			873			7,851	(b)		7,395	(b)
Total net revenue		4,207			4,596			623			970			17,574	(c)		17,319	(c)
Noninterest expense		2,303			2,231			770			592			9,876			9,260
Other intangibles		108			97			–			–			129			124
Total noninterest expense		2,411			2,328			770			592			10,005			9,384
Income before provision and income taxes		1,796			2,268			(147	)		378			7,569			7,935
Provision for credit losses		477			841			2,013			4			3,365			1,109
Income before income taxes		1,319			1,427			(2,160	)		374			4,204			6,826
Income taxes and taxable-equivalent adjustment		331			357			(850	)		(241	)		744			1,373
Net income (loss)		988			1,070			(1,310	)		615			3,460			5,453
Net (income) loss attributable to noncontrolling interests		–			–			(20	)		(25	)		(20	)		(25	)
Net income (loss) attributable to U.S. Bancorp	$	988		$	1,070		$	(1,330	)	$	590		$	3,440		$	5,428
Average Balance Sheet
Loans	$	31,725		$	33,251		$	3,389		$	3,384		$	308,935		$	289,278
Other earning assets		5			6			156,034			130,680			167,083			138,148
Goodwill		3,027			2,815			–			–			9,799			9,554
Other intangible assets		584			532			–			–			2,725			3,270
Assets		36,497			39,108			182,262			153,555			525,380			472,216

Noninterest-bearing deposits		3,852			1,221			2,333			2,140			92,935			73,711
Interest-bearing deposits		119			114			3,310			9,208			297,663			269,852
Total deposits		3,971			1,335			5,643			11,348			390,598			343,563

Total U.S. Bancorp shareholders’ equity		6,056			6,037			11,819			13,396			51,936			52,446

(a)	Presented net of related rewards and rebate costs and certain partner payments of $1.5 billion and $1.7 billion for the nine months ended September 30, 2020 and 2019, respectively.

(b)	Includes revenue generated from certain contracts with customers of $5.1 billion and $5.5 billion for the nine months ended September 30, 2020 and 2019, respectively.

(c)

The Company, as a lessor, originates retail and commercial leases either directly to the consumer or indirectly through dealer networks. Under these arrangements, the Company recorded $714 million and $742 million of revenue for the nine months ended September 30, 2020 and 2019, respectively, primarily consisting of interest income on sales-type and direct financing leases.


U.S. Bancorp		75


Note 17		Subsequent Events

The Company has evaluated the impact of events that have occurred subsequent to September 30, 2020 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.


76		U.S. Bancorp

U.S. Bancorp

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


	For the Three Months Ended September 30
				2020								2019
(Dollars in Millions) (Unaudited)	Average Balances			Interest		Yields and Rates			Average Balances			Interest		Yields and Rates			% Change Average Balances
Assets
Investment securities	$	128,565		$	602		1.87	%	$	117,213		$	748		2.55	%		9.7	%
Loans held for sale		7,983			61		3.06			4,476			48		4.24			78.4
Loans (b)
Commercial		115,489			718		2.48			103,660			1,063		4.07			11.4
Commercial real estate		40,929			341		3.31			38,990			473		4.81			5.0
Residential mortgages		75,786			687		3.62			68,608			665		3.87			10.5
Credit card		22,052			583		10.51			23,681			686		11.50			(6.9	)
Other retail		56,762			572		4.01			57,497			682		4.70			(1.3	)
Total loans		311,018			2,901		3.72			292,436			3,569		4.85			6.4
Other earning assets		38,538			34		.35			21,548			100		1.85			78.8
Total earning assets		486,104			3,598		2.95			435,673			4,465		4.08			11.6
Allowance for loan losses		(7,824	)							(4,021	)							(94.6	)
Unrealized gain (loss) on investment securities		3,655								426								*
Other assets		54,967								49,376								11.3
Total assets	$	536,902							$	481,454								11.5
Liabilities and Shareholders’ Equity
Noninterest-bearing deposits	$	109,375							$	74,594								46.6	%
Interest-bearing deposits
Interest checking		84,494			7		.04			72,007			56		.31			17.3
Money market savings		124,115			68		.22			114,475			447		1.55			8.4
Savings accounts		53,499			5		.04			46,348			30		.25			15.4
Time deposits		34,040			50		.58			42,509			211		1.97			(19.9	)
Total interest-bearing deposits		296,148			130		.17			275,339			744		1.07			7.6
Short-term borrowings		18,049			19		.43			18,597			100		2.13			(2.9	)
Long-term debt		43,542			197		1.80			42,691			315		2.93			2.0
Total interest-bearing liabilities		357,739			346		.39			336,627			1,159		1.37			6.3
Other liabilities		16,742								16,312								2.6
Shareholders’ equity
Preferred equity		5,984								5,984								–
Common equity		46,432								47,308								(1.9	)
Total U.S. Bancorp shareholders’ equity		52,416								53,292								(1.6	)
Noncontrolling interests		630								629								.2
Total equity		53,046								53,921								(1.6	)
Total liabilities and equity	$	536,902							$	481,454								11.5
Net interest income				$	3,252							$	3,306
Gross interest margin							2.56	%							2.71	%
Gross interest margin without taxable-equivalent increments							2.54	%							2.69	%
Percent of Earning Assets
Interest income							2.95	%							4.08	%
Interest expense							.28								1.06
Net interest margin							2.67	%							3.02	%
Net interest margin without taxable-equivalent increments							2.65	%							3.00	%

*	Not meaningful

(a)	Interest and rates are presented on a fully taxable-equivalent basis based on a federal income tax rate of 21 percent.

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


U.S. Bancorp		77

U.S. Bancorp

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


	For the Nine Months Ended September 30
	2020								2019
(Dollars in Millions) (Unaudited)	Average Balances			Interest		Yields and Rates			Average Balances			Interest		Yields and Rates			% Change Average Balances
Assets
Investment securities	$	123,444		$	1,953		2.11	%	$	115,628		$	2,227		2.57	%		6.8	%
Loans held for sale		6,352			157		3.31			3,265			107		4.36			94.5
Loans (b)
Commercial		116,501			2,492		2.86			102,957			3,238		4.20			13.2
Commercial real estate		40,699			1,129		3.71			39,274			1,474		5.02			3.6
Residential mortgages		72,612			1,985		3.65			67,019			1,980		3.94			8.3
Credit card		22,465			1,794		10.66			23,040			2,003		11.63			(2.5	)
Other retail		56,658			1,783		4.20			56,988			2,025		4.75			(.6	)
Total loans		308,935			9,183		3.97			289,278			10,720		4.95			6.8
Other earning assets		37,287			144		.52			19,255			272		1.89			93.6
Total earning assets		476,018			11,437		3.21			427,426			13,326		4.16			11.4
Allowance for loan losses		(6,656	)							(4,005	)							(66.2	)
Unrealized gain (loss) on investment securities		2,863								(297	)							*
Other assets		53,155								49,092								8.3
Total assets	$	525,380							$	472,216								11.3
Liabilities and Shareholders’ Equity
Noninterest-bearing deposits	$	92,935							$	73,711								26.1	%
Interest-bearing deposits
Interest checking		81,890			58		.10			71,539			171		.32			14.5
Money market savings		125,247			474		.51			107,568			1,257		1.56			16.4
Savings accounts		50,937			42		.11			45,855			80		.23			11.1
Time deposits		39,589			275		.93			44,890			693		2.06			(11.8	)
Total interest-bearing deposits		297,663			849		.38			269,852			2,201		1.09			10.3
Short-term borrowings		21,335			127		.80			18,046			289		2.14			18.2
Long-term debt		44,587			738		2.21			41,664			912		2.93			7.0
Total interest-bearing liabilities		363,585			1,714		.63			329,562			3,402		1.38			10.3
Other liabilities		16,294								15,869								2.7
Shareholders’ equity
Preferred equity		5,984								5,984								–
Common equity		45,952								46,462								(1.1	)
Total U.S. Bancorp shareholders’ equity		51,936								52,446								(1.0	)
Noncontrolling interests		630								628								.3
Total equity		52,566								53,074								(1.0	)
Total liabilities and equity	$	525,380							$	472,216								11.3
Net interest income				$	9,723							$	9,924
Gross interest margin							2.58	%							2.78	%
Gross interest margin without taxable-equivalent increments							2.56	%							2.76	%
Percent of Earning Assets
Interest income							3.21	%							4.16	%
Interest expense							.48								1.06
Net interest margin							2.73	%							3.10	%
Net interest margin without taxable-equivalent increments							2.71	%							3.08	%

*	Not meaningful

(a)	Interest and rates are presented on a fully taxable-equivalent basis based on a federal income tax rate of 21 percent.

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


78		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. These risks are described elsewhere in this report or the Company’s other filings with the Securities and Exchange Commission, including the Company’s Annual Report on

Form 10-K

for the year ended December 31, 2019. Additional risks that the Company currently does not know about or currently views as immaterial may also impair the Company’s business or adversely impact its financial results or stock price.

There are no material changes from the risk factors set forth under Item 1A of the Company’s Annual Report on Form

10-K

for the year ended December 31, 2019, and Part II, Item 1A, “Risk Factors,” in the Company’s Quarterly Report on Form

10-Q

for the quarterly period ended June 30, 2020 (the “June

10-Q”),

except that the following risk factor replaces the risk factor in the June

10-Q:

The Company’s business, financial condition, liquidity, capital and results of operations have been, and will likely continue to be, adversely affected by the

COVID-19

pandemic

The

COVID-19

pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, the Company’s business, financial condition, capital, liquidity and results of operations. The Company cannot predict at this time the extent to which it will continue to be negatively affected by the

COVID-19

pandemic. The extent of any continued or future adverse effects of the

COVID-19

pandemic will depend on future developments, which are highly uncertain and outside the Company’s control, including the scope and duration of the pandemic, the direct and indirect impact of the pandemic on the Company’s employees, customers, counterparties and service providers, as well as other market participants, and actions taken by governmental authorities and other third parties in response to the pandemic. If the pandemic is prolonged, or other diseases emerge that give rise to similar effects, the adverse impact on the global economy and Company could deepen.

Many of the Company’s counterparties and third-party service providers have been, and may further be, affected by

“stay-at-home”

orders, market volatility and other factors that increase their risks of business disruption or that may otherwise affect their ability to perform under the terms of any agreements with the Company or provide essential services. As a result, the Company’s operational and other risks are generally expected to increase until the pandemic subsides. In addition, the Company’s business operations may be disrupted if significant portions of its workforce are unable to work effectively, including because of illness, caring for dependents, quarantines, government actions, or other restrictions in connection with the pandemic. The Company has temporarily, and in some cases permanently, closed certain of its offices and reduced operating hours and/or lobby services at its branches. The Company may also face heightened cybersecurity, information security or other operational risks resulting from alternative working arrangements of its employees.

In response to the pandemic and to support its customers, the Company is offering fee waivers, payment deferrals and other expanded assistance to credit card, automobile, mortgage, small business and personal lending customers, including committing in certain states in which it operates, to suspend mortgage payments and foreclosure sales for financially impacted customers for certain periods of time. A significant number of the Company’s customers have already sought to suspend their mortgage payments under these programs. Suspensions of mortgage payments and foreclosures and reduced pricing under these programs may adversely affect the Company’s revenue and results of operations. In addition, if these or other measures provided by the Company are not effective in mitigating the financial consequences of

COVID-19

on customers, including providing loans under various newly created government-sponsored lending programs such as the Paycheck Protection Program (the “PPP”), the Company may experience higher rates of default, increased credit losses and additional increases in its allowance for credit losses in future periods.

Certain industries where the Company has credit exposure, including the transportation industry, and in particular air travel, have experienced significant operational challenges as a result of

COVID-19.

These negative effects have resulted in a number of corporate lending clients making higher than usual draws on outstanding lines of credit over the last several months. Many of these customers have since paid down these draws, but if current economic conditions


U.S. Bancorp		79

persist or worsen, client draws on outstanding lines of credit may begin to increase again which may adversely affect the Company’s liquidity. The economic effects of

COVID-19

may also cause the Company’s customers to be unable to pay their loans as they come due or decrease the value of collateral, which the Company expects would cause significant increases in its credit losses and result in additional increases in the Company’s allowance for credit losses. In addition, the Company could be exposed to further losses in its role as merchant processor of credit card transactions, as under the rules of credit card associations, a merchant processor retains a contingent liability for credit card transactions processed. In the event a merchant was unable to fulfill product or services subject to future delivery, such as airline tickets, the Company could become financially liable for refunding to the cardholders the purchase price of such products or services purchased through credit card associations, in the event the merchant was not able to do so.

Net interest income is significantly affected by market rates of interest. The significant reductions to the federal funds rate have led to a decrease in the rates and yields on U.S. Treasury securities, in some cases declining below zero. If interest rates are reduced further in response to

COVID-19,

the Company’s net interest income could continue to decline, perhaps significantly. The overall effect of lower interest rates cannot be predicted at this time and depends on future actions the Federal Reserve may take to increase or reduce the targeted federal funds rate in response to the

COVID-19

pandemic and resulting economic conditions.

The Company, through its subsidiaries, provides credit and debit card, corporate payments products and merchant processing services. Revenues from its payment services businesses depend on consumer and business credit card spending, including at many small and medium-sized businesses. Due to responses to

COVID-19,

including

stay-at-home

orders that require businesses other than those defined as essential to close and for consumers to remain at home unless they are engaged in essential activities, consumer and business credit card spending significantly declined. Although

stay-at-home

orders have gradually been lifted and business activity has increased, if business closures reoccur, consumers are reluctant to return to open businesses or unemployment continues to stay at elevated levels, the Company expects to experience further adverse effects on its payment services businesses. This negative effect could continue after the pandemic subsides if a substantial number of businesses were to close permanently as a result of

COVID-19’s

economic effects or if consumer and business spending were to remain depressed.

The effects of the

COVID-19

pandemic on economic and market conditions may negatively affect the Company’s capital and leverage ratios. During 2020 the Federal Reserve implemented measures, requiring all large bank holding companies to preserve capital through the suspension of share repurchase programs and capping common stock dividends to existing rates that do not exceed the average of the last four quarters’ earnings. These capital preservation actions apply to the third and fourth quarters of 2020 but may be extended or modified by the Federal Reserve as economic conditions develop. The

COVID-19

pandemic may cause the Company to further extend the suspension of its share repurchase program and limit capital distributions, including reducing or suspending its common stock dividend. Additionally, as a result of the

COVID-19

sensitivity analysis conducted by the Federal Reserve, banks are required to resubmit capital plans in the fourth quarter of 2020 to reflect current stressed capital conditions.

Governmental authorities worldwide have taken unprecedented measures to stabilize the markets and support economic growth. However, these measures may not be sufficient to address the negative economic effects of

COVID-19

or avert severe and prolonged reductions in economic activity.

Many financial institutions, including the Company, have received inquiries from the United States Congress, regulators and other government agencies regarding implementation of provisions and programs under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, and also are subject to early-stage litigation concerning their participation in the PPP under that Act. The Company’s involvement in these and other programs created in response to the

COVID-19

pandemic may lead to additional government and regulatory inquiries and litigation in the future, any of which could negatively impact the Company’s business, reputation, financial condition and results of operations.

Other negative effects of

COVID-19

and the resulting economic and market disruptions, including customer disputes, challenges of transitioning employees back to the workplace, litigation and governmental and regulatory scrutiny of response actions taken by the Company, that may impact the Company’s business, reputation, financial condition, liquidity, capital and results of operations cannot be predicted at this time. However, it is likely that the Company’s business, financial condition, liquidity, capital and results of operations will continue to be adversely affected until the pandemic subsides and the domestic economy recovers. Further, the

COVID-19

pandemic may also have the effect of heightening many of the other risks described in the section entitled “Risk Factors” in the Company’s 2019 Annual Report on Form

10-K.

Until the pandemic subsides, the Company expects reduced revenues from its lending businesses, possible additional increases in its allowance and related provision for credit losses and decreased


80		U.S. Bancorp

revenue from its payments businesses. Even after the pandemic subsides, it is possible that the domestic and other major global economies will continue to experience a prolonged recession, which the Company expects would adversely affect its business, financial condition, liquidity, capital and results of operations, potentially materially.

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, Item 2 of this Report for information regarding shares repurchased by the Company during the third quarter of 2020.

Item 6. Exhibits


		3.1		Restated Certificate of Incorporation, as amended.
		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.
		32		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.INS		XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
		101.SCH		XBRL Taxonomy Extension Schema Document.
		101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
		101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.
		101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
		101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.
		104		The cover page of U.S. Bancorp’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL (included within the Exhibit 101 attachments).


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 31.1

CERTIFICATION PURSUANT TO

RULE 13a-14(a)

UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, Andrew Cecere, 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/ ANDREW CECERE

Andrew Cecere

Chief Executive Officer

Dated: November 5, 2020


U.S. Bancorp		83

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)

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)

(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 5, 2020


84		U.S. Bancorp

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, 2020 (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/ ANDREW CECERE				/s/ TERRANCE R. DOLAN
Andrew Cecere Chief Executive Officer Dated: November 5, 2020				Terrance R. Dolan Chief Financial Officer


U.S. Bancorp		85

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 Company. 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 505000

Louisville, KY 40233

Phone:

888-778-1311

201-680-6578

(international calls)

Internet: www.computershare.com/investor

Registered or Certified Mail:

Computershare

462 South 4

Street, Suite 1600

Louisville, KY 40202

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, seven 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

Executive Vice President, Investor Relations

jen.thompson@usbank.com

Phone:

612-303-0778

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, visit usbank.com and click on

About Us

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

David R. Palombi

Global Chief Communications Officer

Public Affairs and Communications

david.palombi@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 ethical culture has been recognized by the Ethisphere Institute, which again named us to its World’s Most Ethical Companies

list.

For details about our Code of Ethics and Business Conduct, visit usbank.com and click on

About Us

and then

Investor Relations

and then

Corporate Governance

Diversity and Inclusion

At U.S. Bancorp, embracing diversity, championing equity and fostering inclusion are business imperatives. We view everything we do through a diversity, equity 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, creed, citizenship, 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 Company 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.


		This report has been produced on recycled paper.