USB 10-Q Quarterly Report Sept. 30, 2021 | Alphaminr
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USB 10-Q Quarter ended Sept. 30, 2021

Balance Sheet
Cash Flow
Income Statement
Debt
US BANCORP \DE\
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PROXIES
DEF 14A
 		Filed on March 5, 2025
DEF 14A
 		Filed on March 5, 2024
DEF 14A
 		Filed on March 7, 2023
DEF 14A
 		Filed on March 8, 2022
DEF 14A
 		Filed on March 9, 2021
DEF 14A
 		Filed on March 10, 2020
DEF 14A
 		Filed on March 5, 2019
DEF 14A
 		Filed on March 6, 2018
DEF 14A
 		Filed on March 7, 2017
DEF 14A
 		Filed on March 8, 2016
DEF 14A
 		Filed on March 12, 2015
DEF 14A
 		Filed on March 4, 2014
DEF 14A
 		Filed on March 8, 2013
DEF 14A
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DEF 14A
 		Filed on March 12, 2010
10-Q
US BANCORP \DE\Yes0.99P1M20DP11M15DP11M15DP10M24DP6MP6MP7M6DP7M6D0.0010.009P10M24DP18DP5M12DP11M15DP8M19DP21DP25DP3M14DP1M2DP14DP3M21DP7DP21DP6MP14DP1M17DP4M20DP1M9DP14DP14DP2M23DP18DP1M20DP18DP8M12DP21DP25DP25DP18DP5M15D0.99YesfalseQ30000036104--12-31Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities that take into account anticipated future prepayments. 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. 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.The weighted-average maturity of total available-for-sale investment securities was 3.4 years at December 31, 2020, with a corresponding weighted-average yield of 1.61 percent.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. lncludes time deposits greater than $250,000 balances of $2.4 billion and $4.4 billion at September 30, 2021 and December 31, 2020, respectively. Includes only collateral pledged by the Company where counterparties have the right to sell or pledge the collateral. 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. Reflects dividends declared per share on the Company’s Series A, Series B, Series F, Series J, Series K, Series L and Series M Non-Cumulative Perpetual Preferred Stock of $894.444, $223.611, $406.25, $662.50, $343.75, $234.375 and $250.00, respectively.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. 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. Reflects dividends declared per share on the Company’s Series A, Series B, Series F, Series I, Series J, Series K, Series L and Series M Non-Cumulative Perpetual Preferred Stock of $2,654.166, $663.542, $1,218.75, $232.953, $1,325.00, $1,031.25, $703.125 and $702.778, respectively. 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.Represents stock issuance costs originally recorded in preferred stock upon the issuance of the Company’s Series I Preferred Stock that were reclassified to retained earnings on the date the Company announced its intent to redeem the outstanding shares. 0000036104 2021-01-01 2021-09-30 0000036104 2021-07-01 2021-09-30 0000036104 2020-07-01 2020-09-30 0000036104 2020-01-01 2020-09-30 0000036104 2020-12-31 0000036104 2021-09-30 0000036104 2020-01-01 2020-12-31 0000036104 2021-10-31 0000036104 2021-06-30 0000036104 2019-12-31 0000036104 2020-06-30 0000036104 2020-09-30 0000036104 us-gaap:VariableInterestEntityNotPrimaryBeneficiaryMember usb:CommunityDevelopmentAndTaxAdvantagedInvestmentsMember 2020-12-31 0000036104 us-gaap:SeriesAPreferredStockMember 2020-12-31 0000036104 us-gaap:SeriesBPreferredStockMember 2020-12-31 0000036104 us-gaap:SeriesFPreferredStockMember 2020-12-31 0000036104 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Table of Contents
Table of Contents
 
 
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, 2021
OR
 
☐  
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
    
For the transition period from (not applicable)
Commission file number
1-6880
U.S. BANCORP
(Exact name of registrant as specified in its charter)
 
Delaware
  
41-0255900
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
800 Nicollet Mall
Minneapolis, Minnesota 55402
(Address of principal executive offices, including zip code)
651-466-3000
(Registrant’s telephone number, including area code)
(not applicable)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
  
Trading
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 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
Depositary Shares (each representing 1/1,000th interest in a share of Series M
Non-Cumulative
Perpetual Preferred Stock, par value $1.00)
   USB PrR   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, 2021
Common Stock, $0.01 Par Value    1,482,797,679 shares
 
 
 
Table of Contents
Table of Contents and
Form 10-Q
Cross Reference Index
 
Part I — Financial Information
    
    
 
4
 
    
 
4
 
    
 
5
 
    
 
8
 
    
 
35
 
    
 
36
 
    
 
36
 
    
 
9
 
    
 
9
 
    
 
11
 
    
 
24
 
    
 
24
 
    
 
24
 
    
 
24
 
    
 
26
 
    
 
27
 
    
 
29
 
    
 
30
 
    
 
37
 
Part II — Other Information
    
    
 
80
 
    
 
80
 
    
 
80
 
    
 
80
 
    
 
81
 
    
 
82
 
 
U.S. Bancorp
 
1
Table of Contents
“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;
civil unrest; changes in customer behavior and preferences; breaches in data security, including as a result of work-from-home arrangements; 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. In addition, U.S. Bancorp’s proposed acquisition of MUFG Union Bank presents risks and uncertainties, including, among others: the risk that the cost savings, any revenue synergies and other anticipated benefits of the proposed acquisition may not be realized or may take longer than anticipated to be realized; the risk that U.S. Bancorp’s business could be disrupted as a result of the announcement and pendency of the proposed acquisition and diversion of management’s attention from ongoing business operations and opportunities; the possibility that the proposed acquisition, including the integration of MUFG Union Bank, may be more costly or difficult to complete than anticipated; delays in closing the proposed acquisition; and the failure of required governmental approvals to be obtained or any other closing conditions in the definitive purchase agreement to be satisfied.
For discussion of these and other risks that may cause actual results to differ from expectations, refer to U.S. Bancorp’s Annual Report on Form
10-K
for the year ended December 31, 2020, 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.
 
2
   U.S. Bancorp
Table of Contents
 Table 1
  
   Selected Financial Data
 
   
Three Months Ended
September 30
     
Nine Months Ended
September 30
  
(Dollars and Shares in Millions, Except Per Share Data)   2021     2020     Percent
Change		      2021     2020     Percent
Change		  
Condensed Income Statement
 
    
 
       
Net interest income
   $ 3,171     $ 3,227       (1.7 )%     $ 9,371     $ 9,650       (2.9 )% 
Taxable-equivalent adjustment (a)
     26       25       4.0        79       73       8.2  
Net interest income (taxable-equivalent basis) (b)
     3,197       3,252       (1.7 )       9,450       9,723       (2.8 ) 
Noninterest income
     2,693       2,712       (.7 )       7,693       7,851       (2.0 ) 
Total net revenue
     5,890       5,964       (1.2 )       17,143       17,574       (2.5 ) 
Noninterest expense
     3,429       3,371       1.7        10,195       10,005       1.9  
Provision for credit losses
     (163 )      635       *        (1,160 )      3,365       *  
Income before taxes
     2,624       1,958       34.0        8,108       4,204       92.9  
Income taxes and taxable-equivalent adjustment
     590       372       58.6        1,801       744       *  
Net income
     2,034       1,586       28.2        6,307       3,460       82.3  
Net (income) loss attributable to noncontrolling interests
     (6 )      (6 )      —        (17 )      (20 )      15.0  
Net income attributable to U.S. Bancorp
   $ 2,028     $ 1,580       28.4      $ 6,290     $ 3,440       82.8  
Net income applicable to U.S. Bancorp common shareholders
   $ 1,934     $ 1,494       29.5      $ 6,023     $ 3,196       88.5  
Per Common Share
 
    
 
       
Earnings per share
   $ 1.30     $ .99       31.3 %     $ 4.04     $ 2.12       90.6 % 
Diluted earnings per share
     1.30       .99       31.3        4.04       2.11       91.5  
Dividends declared per share
     .46       .42       9.5        1.30       1.26       3.2  
Book value per share (c)
     32.22       30.93       4.2         
Market value per share
     59.44       35.85       65.8         
Average common shares outstanding
     1,483       1,506       (1.5 )       1,491       1,510       (1.3 ) 
Average diluted common shares outstanding
     1,484       1,507       (1.5 )       1,492       1,511       (1.3 ) 
Financial Ratios
      
 
       
Return on average assets
     1.45 %      1.17 %   
 
      1.53 %      .87 %   
Return on average common equity
     15.9       12.8    
 
      17.0       9.3    
Net interest margin (taxable-equivalent basis) (a)
     2.53       2.67    
 
      2.52       2.73    
Efficiency ratio (b)
     58.4       56.6    
 
      59.8       57.4    
Net charge-offs as a percent of average loans outstanding
     .20       .66    
 
      .25       .58    
Average Balances
 
    
 
       
Loans
   $ 296,739     $ 311,018       (4.6 )%     $ 295,014     $ 308,935       (4.5 )% 
Loans held for sale
     7,438       7,983       (6.8 )       8,422       6,352       32.6  
Investment securities (d)
     151,755       128,565       18.0        152,653       123,444       23.7  
Earning assets
     503,325       486,104       3.5        500,616       476,018       5.2  
Assets
     553,446       536,902       3.1        551,199       525,380       4.9  
Noninterest-bearing deposits
     129,018       109,375       18.0        124,262       92,935       33.7  
Deposits
     431,487       405,523       6.4        429,039       390,598       9.8  
Short-term borrowings
     14,688       18,049       (18.6 )       14,758       21,335       (30.8 ) 
Long-term debt
     35,972       43,542       (17.4 )       37,196       44,587       (16.6 ) 
Total U.S. Bancorp shareholders’ equity
     54,273       52,416       3.5        53,327       51,936       2.7  
 
        September 30,
2021		     December 31,
2020		                           
Period End Balances
 
    
 
       
Loans
   $ 297,608     $ 297,707       — %        
Investment securities
     149,376       136,840       9.2         
Assets
     567,495       553,905       2.5         
Deposits
     442,902       429,770       3.1         
Long-term debt
     35,671       41,297       (13.6 )        
Total U.S. Bancorp shareholders’ equity
     53,743       53,095       1.2         
Asset Quality
      
 
       
Nonperforming assets
   $ 944     $ 1,298       (27.3 )%        
Allowance for credit losses
     6,300       8,010       (21.3 )        
Allowance for credit losses as a percentage of
period-end
loans
     2.12 %      2.69 %   
 
       
Capital Ratios
      
 
       
Common equity tier 1 capital
     10.2 %      9.7 %   
 
       
Tier 1 capital
     11.7       11.3    
 
       
Total risk-based capital
     13.4       13.4    
 
       
Leverage
     8.7       8.3    
 
       
Total leverage exposure
     7.0       7.3    
 
       
Tangible common equity to tangible assets (b)
     6.8       6.9    
 
       
Tangible common equity to risk-weighted assets (b)
     9.4       9.5    
 
       
Common equity tier 1 capital to risk-weighted assets, reflecting the full implementation of the current expected credit losses methodology (b)
     9.7       9.3    
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
 
*
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 35.
(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.
 
U.S. Bancorp  
3
Table of Contents
Management’s Discussion and Analysis
 
OVERVIEW
Earnings Summary
U.S. Bancorp and its subsidiaries (the “Company”) reported net income attributable to U.S. Bancorp of $2.0 billion for the third quarter of 2021, or $1.30 per diluted common share, compared with $1.6 billion, or $0.99 per diluted common share, for the third quarter of 2020. Return on average assets and return on average common equity were 1.45 percent and 15.9 percent, respectively, for the third quarter of 2021, compared with 1.17 percent and 12.8 percent, respectively, for the third quarter of 2020.
Total net revenue for the third quarter of 2021 was $74 million (1.2 percent) lower than the third quarter of 2020, reflecting a 1.7 percent decrease in net interest income and a 0.7 percent decrease in noninterest income. The decrease in net interest income from the third quarter of 2020 was due to changes in loan portfolio composition and lower average loan balances primarily driven by commercial loan paydowns by corporate customers accessing the capital markets and the Small Business Administration (“SBA”) Paycheck Protection Program, partially offset by changes in deposit and funding mix as well as higher loan fees related to the SBA Paycheck Protection Program. The noninterest income decrease was driven by lower mortgage banking revenue, commercial products revenue and other noninterest income, mostly offset by improvements in payment services revenue, trust and investment management fees, deposit service charges, treasury management fees and investment products fees.
Noninterest expense in the third quarter of 2021 was $58 million (1.7 percent) higher than the third quarter of 2020, reflecting increases in compensation expense, primarily related to performance-based incentive compensation, as well as higher professional services expense, marketing and business development expense, and technology and communications expense, partially offset by lower net occupancy and equipment expense and other noninterest expense.
The provision for credit losses for the third quarter of 2021 was a benefit of $163 million, which was $798 million favorable from the third quarter of 2020, driven by a decrease in the allowance for credit losses during the third quarter of 2021 as a result of continued improvement in the global economy, as well as strong credit and collateral performance, compared with an increase in the allowance for credit losses during the third quarter of 2020. Net charge-offs in the third quarter of 2021 were $147 million, compared with $515 million in the third quarter of 2020. 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 2021 was $6.3 billion, or $4.04 per diluted common share, compared with $3.4 billion, or $2.11 per diluted common share, for the first nine months of 2020. Return on average assets and return on average common equity were 1.53 percent and 17.0 percent, respectively, for the first nine months of 2021, compared with 0.87 percent and 9.3 percent, respectively, for the first nine months of 2020.
Total net revenue for the first nine months of 2021 was $431 million (2.5 percent) lower than the first nine months of 2020, reflecting a 2.9 percent decrease in net interest income (2.8 percent on a taxable-equivalent basis) and a 2.0 percent decrease in noninterest income. The decrease in net interest income from the first nine months of 2020 was due to changes in loan portfolio composition, lower average loan balances, the impact of lower interest rates compared with the prior year and higher premium amortization in the investment portfolio related to mortgage refinance activities, partially offset by changes in deposit and funding mix as well as higher loan fees related to the SBA Paycheck Protection Program. The noninterest income decrease was driven by lower mortgage banking revenue, commercial products revenue and securities gains, partially offset by improvements in payment services revenue, trust and investment management fees, treasury management fees, investment products fees, deposit service charges and other noninterest income.
Noninterest expense in the first nine months of 2021 was $190 million (1.9 percent) higher than the first nine months of 2020, reflecting increases in compensation expense, technology and communications expense, professional services expense, and marketing and business development expense, partially offset by lower net occupancy and equipment expense and other noninterest expense.
 
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   U.S. Bancorp
Table of Contents
The provision for credit losses for the first nine months of 2021 was a benefit of $1.2 billion, which was $4.5 billion favorable compared to the first nine months of 2020, driven by a decrease in the allowance for credit losses during the first nine months of 2021 as a result of improvement in the global economy and strong credit and collateral performance, compared with an increase in the allowance for credit losses during the first nine months of 2020. Net charge-offs in the first nine months of 2021 were $550 million, compared with $1.3 billion in the first nine months of 2020. 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.
Pending Acquisition
 In September 2021, the Company announced that it has entered into a definitive agreement to acquire MUFG Union Bank’s core regional banking franchise from Mitsubishi UFJ Financial Group (“MUFG”), for a purchase price of approximately $8.0 billion, including $5.5 billion in cash and approximately 44 million shares of U.S. Bancorp common stock. Upon close of the transaction, MUFG will hold approximately 2.9 percent of the Company’s common stock. The transaction excludes the purchase of MUFG Union Bank’s Global Corporate & Investment Bank, certain middle and back office functions, and other assets. MUFG Union Bank currently has approximately 300 branches in California, Washington and Oregon and is expected to add, based on MUFG Union Bank’s June 30, 2021 balance sheet, approximately $105 billion in total assets, $58 billion of loans and $90 billion of deposits to the Company’s consolidated balance sheet. The transaction is expected to close in the first half of 2022, subject to customary closing conditions, including regulatory approvals.
STATEMENT OF INCOME ANALYSIS
Net Interest Income
 Net interest income, on a taxable-equivalent basis, was $3.2 billion in the third quarter and $9.5 billion in the first nine months of 2021, representing decreases of $55 million (1.7 percent) and $273 million (2.8 percent), respectively, compared with the same periods of 2020. The decreases were primarily due to changes in loan mix and lower average loan balances driven by commercial loan paydowns by corporate customers accessing the capital markets and the SBA Paycheck Protection Program, partially offset by changes in deposit and funding mix as well as higher loan fees related to the SBA Paycheck Protection Program. Net interest income further decreased in the first nine months of 2021, compared with the first nine months of 2020, due to higher premium amortization related to securities prepayments and the impact of lower interest rates compared with the prior year. Average earning assets were $17.2 billion (3.5 percent) higher in the third quarter and $24.6 billion (5.2 percent) higher in the first nine months of 2021, compared with the same periods of 2020, reflecting increases in investment securities and other earning assets, primarily driven by higher cash balances, while average loans decreased due to continued paydowns by corporate customers. The net interest margin, on a taxable-equivalent basis, in the third quarter and first nine months of 2021 was 2.53 percent and 2.52 percent, respectively, compared with 2.67 percent and 2.73 percent in the third quarter and first nine months of 2020, respectively. The decrease in net interest margin from the prior year was primarily due to the impact of declining interest rates on loan yields, the mix of earning assets and lower reinvestment yields in the investment portfolio, partially offset by the net benefit of funding composition and higher loan fees. The decrease in net interest margin in the first nine months of 2021, compared with the first nine months of 2020, was further due to higher premium amortization within the investment portfolio. 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 2021 were $14.3 billion (4.6 percent) and $13.9 billion (4.5 percent) lower, respectively, than the same periods of 2020. The decreases were primarily due to lower commercial loans driven by continued paydowns by corporate customers that accessed the capital markets and the SBA Paycheck Protection Program, lower commercial real estate loans as a result of customer paydowns, and lower credit card loans driven by higher customer payment rates. Average total loans further decreased in the third quarter of 2021, compared with the third quarter of 2020, due to lower residential mortgages driven by paydowns. These decreases were partially offset by higher other retail loans, driven by growth in installment loans due to strong auto and recreational vehicle lending, partially offset by lower home equity and second mortgages as more customers chose to refinance their existing first lien residential mortgage balances during the prior year due to the low interest rate environment.
Average investment securities in the third quarter and first nine months of 2021 were $23.2 billion (18.0 percent) and $29.2 billion (23.7 percent) higher, respectively, than the same periods of 2020, primarily due to purchases of mortgage-backed, U.S. Treasury and state and political securities, net of prepayments and maturities.
 
U.S. Bancorp  
5
Table of Contents
 Table 2
  
   Noninterest Income
 
    Three Months Ended
September 30		      Nine Months Ended
September 30		  
(Dollars in Millions)   2021      2020      Percent
Change		      2021      2020      Percent
Change		  
Credit and debit card revenue
   $ 393      $ 388        1.3 %     $ 1,125      $ 976        15.3 % 
Corporate payment products revenue
     156        125        24.8        420        371        13.2  
Merchant processing services
     392        347        13.0        1,084        950        14.1  
Trust and investment management fees
     459        434        5.8        1,349        1,295        4.2  
Deposit service charges
     194        170        14.1        531        512        3.7  
Treasury management fees
     155        145        6.9        462        425        8.7  
Commercial products revenue
     277        303        (8.6 )       837        904        (7.4 ) 
Mortgage banking revenue
     418        553        (24.4 )       1,063        1,596        (33.4 ) 
Investment products fees
     62        48        29.2        177        142        24.6  
Securities gains (losses), net
     20        12        66.7        88        143        (38.5 ) 
Other
     167        187        (10.7 )       557        537        3.7  
Total noninterest income
   $ 2,693      $ 2,712        (.7 )%     $ 7,693      $ 7,851        (2.0 )% 
 
Average total deposits for the third quarter and first nine months of 2021 were $26.0 billion (6.4 percent) and $38.4 billion (9.8 percent) higher, respectively, than the same periods of 2020, including the acquisition of deposit balances from State Farm Bank in the fourth quarter of 2020. Average noninterest-bearing deposits for the third quarter and first nine months of 2021 were $19.6 billion (18.0 percent) and $31.3 billion (33.7 percent) higher, respectively, than the same periods of 2020, primarily due to higher Corporate and Commercial Banking, and Wealth Management and Investment Services balances. The increase in noninterest-bearing deposits in the third quarter of 2021, compared with the third quarter of 2020, was partially offset by a decrease in Payment Services balances. Average total savings deposits for the third quarter and first nine months of 2021 were $16.9 billion (6.4 percent) and $21.6 billion (8.4 percent) higher, respectively, than the same periods of the prior year, driven by increases in Consumer and Business Banking balances, partially offset by decreases in Corporate and Commercial Banking balances. The growth in average noninterest-bearing and total savings deposits was primarily a result of the actions by the federal government to increase liquidity in the financial system and government stimulus programs. Average time deposits for the third quarter and first nine months of 2021 were $10.5 billion (31.0 percent) and $14.5 billion (36.7 percent) lower, respectively, than the same periods of 2020, primarily driven by decreases in those deposits managed as an alternative to other funding sources, based largely on relative pricing and liquidity characteristics.
Provision for Credit Losses
 The provision for credit losses was a benefit of $163 million for the third quarter and $1.2 billion for the first nine months of 2021, representing decreases of $798 million and $4.5 billion, respectively, from the same periods of 2020. The decreases were driven by the Company decreasing the allowance for credit losses in 2021 as a result of improvement in the global economy, as well as strong credit and collateral performance, compared with the Company increasing the allowance for credit losses in 2020 due to deteriorating economic conditions related to
COVID-19.
Net charge-offs decreased $368 million (71.5 percent) and $795 million (59.1 percent) in the third quarter and first nine months of 2021, respectively, compared with the same periods of the prior year, reflecting improvement across all loan categories. 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 $7.7 billion in the first nine months of 2021, representing decreases of $19 million (0.7 percent) and $158 million (2.0 percent), respectively, compared with the same periods of 2020. The decreases from a year ago reflected lower mortgage banking revenue and commercial products revenue, partially offset by higher payment services revenue, trust and investment management fees, deposit service charges, treasury management fees and investment products fees. The decrease in noninterest income in the first nine months of 2021, compared with the first nine months of 2020, was also due to lower securities gains. Mortgage banking revenue decreased in the third quarter of 2021, compared with the third quarter of 2020, driven by lower production volume and related gain on sale margins, partially offset by increases in mortgage servicing rights (“MSRs”) valuations, net of hedging activities, as well as gains on higher Government National Mortgage Association (“GNMA”) loan sales. The decrease in mortgage banking revenue in the first nine months of 2021, compared with the first nine months of 2020, was due to lower production volume and related gain on sale margins, along with declines in MSR valuations, net of hedging activities. Commercial
 
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   U.S. Bancorp
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 Table 3
  
   Noninterest Expense
 
    Three Months Ended
September 30		     
Nine Months Ended
September 30
  
(Dollars in Millions)   2021     2020     Percent
Change		      2021     2020     Percent
Change		  
Compensation
   $ 1,847     $ 1,687       9.5 %     $ 5,448     $ 4,992       9.1 % 
Employee benefits
     336       335       .3        1,057       1,001       5.6  
Net occupancy and equipment
     259       276       (6.2 )       780       823       (5.2 ) 
Professional services
     126       102       23.5        332       307       8.1  
Marketing and business development
     99       72       37.5        237       213       11.3  
Technology and communications
     361       334       8.1        1,082       932       16.1  
Postage, printing and supplies
     69       70       (1.4 )       203       214       (5.1 ) 
Other intangibles
     41       44       (6.8 )       119       129       (7.8 ) 
Other
     291       451       (35.5 )       937       1,394       (32.8 ) 
Total noninterest expense
   $ 3,429     $ 3,371       1.7 %     $ 10,195     $ 10,005       1.9 % 
Efficiency ratio (a)
     58.4 %      56.6 %   
 
 
 
      59.8 %      57.4 %   
 
 
 
 
a)
See
Non-GAAP
Financial Measures beginning on page 35.
 
products revenue decreased in the third quarter and first nine months of 2021, compared with the same periods of the prior year, primarily due to lower capital markets activity and trading revenue, partially offset by higher syndication revenue and fees. The decrease in commercial products revenue in the first nine months of 2021, compared with the first nine months of 2020, was further offset by higher
non-yield
loan fees as a result of higher unused commitments. Other noninterest income decreased in the third quarter of 2021, compared with the third quarter of 2020, primarily due to the third quarter of 2020 impact of higher equity investment income and transition services agreement revenue associated with the sale of the Company’s ATM third-party servicing business, partially offset by certain asset impairments as a result of branch optimization, and higher retail leasing end of term residual gains in the third quarter of 2021. During 2020, payment services revenue had been adversely affected by the impact of the
COVID-19
pandemic on consumer and business spending, particularly related to travel and entertainment activities. However, spending has continued to strengthen across most sectors driven by government stimulus, local jurisdictions reducing restrictions and consumer behaviors normalizing. As a result, payment services revenue increased in the third quarter and first nine months of 2021, compared with the same periods of 2020. The components of payment services revenue included higher credit and debit card revenue driven by higher net interchange revenue related to sales volume as well as stronger transaction and cash advance fees, partially offset by lower prepaid card processing activities as government stimulus programs dissipated, as well as higher investment in customer acquisition. Corporate payment products revenue increased primarily due to improving business spending, while merchant processing services revenue increased driven by higher sales volume as well as higher merchant and equipment fees. Trust and investment management fees increased primarily due to business growth and favorable market conditions, while deposit service charges increased primarily due to higher customer activity and ATM processing revenue. Treasury management fees increased due to core growth driven by the
COVID-19
economic recovery, while investment products fees increased primarily driven by favorable market conditions and core growth.
Noninterest Expense
 Noninterest expense was $3.4 billion in the third quarter and $10.2 billion in the first nine months of 2021, representing increases of $58 million (1.7 percent) and $190 million (1.9 percent), respectively, over the same periods of 2020. The increases from the prior year reflected higher compensation expense, professional services expense, marketing and business development expense, and technology and communications expense, partially offset by lower net occupancy and equipment expense, and other noninterest expense. Compensation expense increased due to higher performance-based incentives, merit increases and revenue-related compensation driven by business production. Professional services expense increased primarily due to an increase in business investment and related initiatives in the third quarter of 2021. Marketing and business development expense increased due to the timing of marketing campaigns supporting business development and lower marketing activities in 2020 during the pandemic. Technology and communications expense increased primarily due to higher expenditures supporting business technology investments. Employee benefits expense increased in the first nine months of 2021, compared with the first nine months of 2020, primarily due to higher payroll taxes and related benefits, and higher pension expense. Net occupancy and equipment expense decreased in the third quarter and first nine months of 2021, compared with the same periods of the prior year, primarily due to
 
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branch closures. Other noninterest expense decreased primarily due to higher
COVID-19
related expenses in 2020 including recognizing liabilities related to future delivery exposures for merchant and airline processing, as well as lower costs related to
tax-advantaged
projects which were scaled back in 2020 during the pandemic.
Income Tax Expense
 The provision for income taxes was $564 million (an effective rate of 21.7 percent) for the third quarter and $1.7 billion (an effective rate of 21.4 percent) for the first nine months of 2021, compared with $347 million (an effective rate of 18.0 percent) and $671 million (an effective rate of 16.2 percent) for the same periods of 2020, respectively. The increases in the tax rates were due to the marginal impact of providing taxes on higher pretax earnings in 2021. For further information on income taxes, refer to Note 12 of the Notes to Consolidated Financial Statements.
BALANCE SHEET ANALYSIS
Loans
 The Company’s loan portfolio was $297.6 billion at September 30, 2021, compared with $297.7 billion at December 31, 2020, a decrease of $99 million. The decrease was driven by lower commercial loans, residential mortgages, commercial real estate loans and credit card loans, partially offset by higher other retail loans.
Commercial loans decreased $1.9 billion (1.8 percent) at September 30, 2021, compared with December 31, 2020, reflecting paydowns by corporate customers that accessed the capital markets and the SBA Paycheck Protection Program during the first nine months of 2021.
Residential mortgages held in the loan portfolio decreased $1.2 billion (1.6 percent) at September 30, 2021, compared with December 31, 2020, due to customers paying down balances in the first nine months of 2021. 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 decreased $503 million (1.3 percent) at September 30, 2021, compared with December 31, 2020, the result of customers paying down balances.
Credit card loans decreased $209 million (0.9 percent) at September 30, 2021, compared with December 31, 2020, reflecting higher customer payment rates.
Other retail loans increased $3.7 billion (6.4 percent) at September 30, 2021, compared with December 31, 2020, due to increases in auto loans and installment loans, partially offset by decreases in home equity loans and retail leasing balances.
The Company generally retains portfolio loans through maturity; however, the Company’s intent may change over time based upon various factors such as ongoing asset/liability management activities, assessment of product profitability, credit risk, liquidity needs, and capital implications. If the Company’s intent or ability to hold an existing portfolio loan changes, it is transferred to loans held for sale.
Loans Held for Sale
 Loans held for sale, consisting primarily of residential mortgages to be sold in the secondary market, were $6.2 billion at September 30, 2021, compared with $8.8 billion at December 31, 2020. The decrease in loans held for sale was principally due to a lower level of mortgage loan closings in the third quarter of 2021, compared with the fourth quarter of 2020. 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 $149.4 billion at September 30, 2021, compared with $136.8 billion at December 31, 2020. The $12.5 billion (9.2 percent) increase was primarily due to $15.7 billion of net investment purchases, partially offset by a $3.1 billion unfavorable 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, 2021 and December 31, 2020.
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, 2021, the Company’s net unrealized gains on
available-for-sale
investment securities were $138 million, compared with $3.2 billion at December 31, 2020. The unfavorable change in net unrealized gains (losses) was primarily due to decreases in the fair value of mortgage-backed and U.S. Treasury securities as a result of changes in interest rates. Gross unrealized losses on
available-for-sale
investment securities totaled $1.7 billion at September 30, 2021, compared with $53 million at December 31, 2020. At September 30, 2021, 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 4 and 15 in the Notes to Consolidated Financial Statements for further information on investment securities.
 
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 Table 4
  
   Available-for-Sale
Investment Securities
 
    September 30, 2021      December 31, 2020  
(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
   $ 18,460      $ 18,491       5.1        1.57 %     $ 21,954      $ 22,391       3.8        1.37 % 
Mortgage-backed securities (a)
     120,887        120,482       5.1        1.55        103,282        105,374       3.0        1.47  
Asset-backed securities (a)
     64        69       3.8        1.51        200        205       6.2        1.47  
Obligations of state and political subdivisions (b) (c)
     9,820        10,327       7.4        3.71        8,166        8,861       6.3        3.99  
Other
     7        7       3.7        2.07        9        9       .1        1.81  
Total investment securities
   $ 149,238      $ 149,376       5.3        1.69 %     $ 133,611      $ 136,840       3.4        1.61 % 
 
(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.
 
Deposits
 Total deposits were $442.9 billion at September 30, 2021, compared with $429.8 billion at December 31, 2020. The $13.1 billion (3.1 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 $17.5 billion (14.8 percent) at September 30, 2021, compared with December 31, 2020, primarily due to higher Corporate and Commercial Banking, Wealth Management and Investment Services, and Consumer and Business Banking balances. Interest checking balances increased $7.8 billion (8.2 percent) while savings account balances increased $7.0 billion (12.4 percent), both driven by higher Consumer and Business Banking balances. Money market deposit balances decreased $11.4 billion (8.9 percent) at September 30, 2021, compared with December 31, 2020, primarily due to lower Wealth Management and Investment Services, and Corporate and Commercial Banking balances. Time deposits decreased $7.8 billion (25.5 percent) at September 30, 2021, compared with December 31, 2020, 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 $16.1 billion at September 30, 2021, compared with $11.8 billion at December 31, 2020. The $4.3 billion (36.7 percent) increase in short-term borrowings was primarily due to higher commercial paper, repurchase agreement and federal funds purchased balances. Long-term debt was $35.7 billion at September 30, 2021, compared with $41.3 billion at December 31, 2020. The $5.6 billion (13.6 percent) decrease was primarily due to $3.7 billion of bank note repayments and maturities, $1.5 billion of medium-term note repayments and a $1.0 billion decrease in Federal Home Loan Bank (“FHLB”) advances, partially offset by $1.0 billion of bank note issuances. Refer to the “Liquidity Risk Management” section for discussion of liquidity management of the Company.
CORPORATE RISK PROFILE
Overview
Managing risks is an essential part of successfully operating a financial services company. The Company’s Board of Directors has approved a risk management framework which establishes governance and risk management requirements for all risk-taking activities. This framework includes Company and business line risk appetite statements which set boundaries for the types and amount of risk that may be undertaken in pursuing business objectives and initiatives. The Board of Directors, primarily through its Risk Management Committee, oversees performance relative to the risk management framework, risk appetite statements, and other policy requirements.
The Executive Risk Committee (“ERC”), which is chaired by the Chief Risk Officer and includes the Chief Executive Officer and other members of the executive management team, oversees execution against the risk management framework and risk appetite statements. The ERC focuses on current and emerging risks, including strategic and reputation risks, by directing timely and comprehensive actions. Senior operating committees have also been established, each responsible for overseeing a specified category of risk.
 
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The Company’s most prominent risk exposures are credit, interest rate, market, liquidity, operational, compliance, strategic, and 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. With respect to direct impacts from
COVID-19,
oversight and governance is managed through a centralized command center with frequent reporting to the Managing Committee and ERC. The Board of Directors also oversees the Company’s responsiveness to the
COVID-19
pandemic. Credit risk is the risk of loss associated with a change in the credit profile or the failure of a borrower or counterparty to meet its contractual obligations. Interest rate risk is the current or prospective risk to earnings and capital, or market valuations, arising from the impact of changes in interest rates. Market risk arises from fluctuations in interest rates, foreign exchange rates, and security prices that may result in changes in the values of financial instruments, such as trading and
available-for-sale
securities, mortgage loans held for sale (“MLHFS”), MSRs and derivatives that are accounted for on a fair value basis. Liquidity risk is the risk that financial condition or overall safety and soundness is adversely affected by the Company’s inability, or perceived inability, to meet its cash flow obligations in a timely and complete manner in either normal or stressed conditions. Operational risk is the risk to current or projected financial condition and resilience arising from inadequate or failed internal processes or systems, people (including human errors or misconduct), 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 and the Company’s compliance policies. Strategic risk is the risk to current or projected financial condition and resilience 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, or continue serving existing relationships. In addition to the risks identified above, other risk factors exist that may impact the Company. Refer to “Risk Factors” in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2020, 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
 
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•  
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 the
COVID-19
pandemic. The Risk Management Committee oversees the Company’s credit risk management process.
In addition, credit quality ratings as defined by the Company, are an important part of the Company’s overall credit risk management and evaluation of its allowance for credit losses. Loans with a pass rating represent those loans not classified on the Company’s rating scale for problem credits, as minimal credit risk has been identified. Loans with a special mention or classified rating, including consumer lending and small business 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 first lien position on nonaccrual, 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 5 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, 2020, 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-
or
15-year
fixed payment amortization schedule. Home equity lines are revolving accounts giving the borrower the ability to draw and repay balances repeatedly, up to a maximum commitment, and are secured by residential real estate. These include accounts in either a first or junior lien position. Typical terms on home equity lines in the portfolio are variable rates benchmarked to the prime rate, with a
10-
or
15-year
draw period during which a minimum payment is equivalent to the monthly interest, followed by a
20-
or
10-year
amortization period, respectively. At September 30, 2021, substantially all of the Company’s home equity lines were in the draw period. Approximately $1.2 billion, or 12 percent, of the outstanding home equity line balances at September 30, 2021, will enter the amortization period within the next 36 months. Key risk characteristics relevant to consumer
 
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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 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.
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, alliance partnerships, 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, 2021:
 
Residential Mortgages
(Dollars in Millions)		   Interest
Only		     Amortizing     Total     Percent
of Total		  
Loan-to-Value
        
Less than or equal to 80%
   $ 3,243     $ 60,169     $ 63,412       84.6 % 
Over 80% through 90%
     4       1,706       1,710       2.3  
Over 90% through 100%
     —       179       179       .2  
Over 100%
     —       79       79       .1  
No LTV available
     —       32       32       —  
Loans purchased from GNMA mortgage pools (a)
     —       9,542       9,542       12.8  
Total (b)
   $ 3,247     $ 71,707     $ 74,954       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, 2021, approximately $443 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%
   $ 9,379     $ 636     $ 10,015       93.4 % 
Over 80% through 90%
     266       244       510       4.8  
Over 90% through 100%
     48       26       74       .7  
Over 100%
     48       5       53       .5  
No LTV/CLTV available
     63       3       66       .6  
Total (a)
   $ 9,804     $ 914     $ 10,718       100.0 % 
 
(a)
At September 30, 2021, approximately $37 million of home equity and second mortgage balances were considered
sub-prime.
Home equity and second mortgages were $10.7 billion at September 30, 2021, compared with $12.5 billion at December 31, 2020, and included $3.1 billion of home equity lines in a first lien position and $7.6 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, 2021, included approximately $2.8 billion of loans and lines for which the Company also serviced the related first lien loan, and approximately $4.8 billion where the Company did not service the related first lien loan. The Company was able to determine the status of the related first liens using information the Company has as the servicer of the first lien or information reported on customer credit bureau files. The Company also evaluates other indicators of credit risk for these junior lien loans and lines including delinquency, estimated average CLTV ratios and updated weighted-average credit scores in making its assessment of credit risk, related loss estimates and determining the allowance for credit losses.
 
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The following table provides a summary of delinquency statistics and other credit quality indicators for the Company’s junior lien positions at September 30, 2021:
 
    Junior Liens Behind        
(Dollars in Millions)   Company Owned
or Serviced First
Lien		     Third Party
First Lien		     Total  
Total
   $ 2,750     $ 4,837     $ 7,587  
Percent 30—89 days past due
     .49 %      .38 %      .42 % 
Percent 90 days or more past due
     .06 %      .06 %      .06 % 
Weighted-average CLTV
     59 %      56 %      57 % 
Weighted-average credit score
     782       781       781  
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 $385 million at September 30, 2021, compared with $477 million at December 31, 2020. 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 0.13 percent at September 30, 2021 compared with 0.16 percent at December 31, 2020.
 
 Table 5
      Delinquent Loan Ratios as a Percent of Ending Loan Balances
 
90 days or more past due
excluding
nonperforming loans		    September 30,
2021		     December 31,
2020		  
Commercial
     
Commercial
      .04 %      .06 % 
Lease financing
      —       —  
Total commercial
      .04       .05  
Commercial Real Estate
     
Commercial mortgages
      .01       —  
Construction and development
      .16       .02  
Total commercial real estate
      .05       .01  
Residential Mortgages (a)
      .15       .18  
Credit Card
      .66       .88  
Other Retail
     
Retail leasing
      .03       .05  
Home equity and second mortgages
      .37       .36  
Other
      .05       .10  
Total other retail
      .11       .15  
Total loans
      .13 %      .16 % 
90 days or more past due
including
nonperforming loans		    September 30,
2021		     December 31,
2020		  
Commercial
      .25 %      .42 % 
Commercial real estate
      .82       1.15  
Residential mortgages (a)
      .47       .50  
Credit card
      .66       .88  
Other retail
      .36       .42  
Total loans
      .43 %      .57 % 
 
(a)
Delinquent loan ratios exclude $1.5 billion at September 30, 2021, and $1.8 billion at December 31, 2020, 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 2.50 percent at September 30, 2021, and 2.87 percent at December 31, 2020.
 
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The following table provides summary delinquency information for residential mortgages, credit card and other retail loans included in the consumer lending segment:
 
    Amount             
As a Percent of Ending
Loan Balances
  
(Dollars in Millions)   September 30,
2021		      December 31,
2020		              September 30,
2021		     December 31,
2020		  
Residential Mortgages (a)
        
 
     
30-89
days
   $ 153      $ 244     
 
      .20 %      .32 % 
90 days or more
     114        137     
 
      .15       .18  
Nonperforming
     237        245     
 
 
 
      .32       .32  
Total
   $ 504      $ 626     
 
      .67 %      .82 % 
Credit Card
        
 
     
30-89
days
   $ 183      $ 231     
 
      .83 %      1.04 % 
90 days or more
     147        197     
 
      .66       .88  
Nonperforming
     —        —     
 
 
 
      —       —  
Total
   $ 330      $ 428     
 
      1.49 %      1.92 % 
Other Retail
        
 
     
Retail Leasing
        
 
     
30-89
days
   $   26      $   35     
 
      .34 %      .43 % 
90 days or more
     2        4     
 
      .03       .05  
Nonperforming
     11        13     
 
 
 
      .15       .16  
Total
   $   39      $   52     
 
      .52 %      .64 % 
Home Equity and Second Mortgages
        
 
     
30-89
days
   $   46      $   68     
 
      .43 %      .54 % 
90 days or more
     40        45     
 
      .37       .36  
Nonperforming
     120        107     
 
 
 
      1.12       .86  
Total
   $ 206      $ 220     
 
      1.92 %      1.76 % 
Other (b)
        
 
     
30-89
days
   $ 179      $ 215     
 
      .42 %      .60 % 
90 days or more
     22        37     
 
      .05       .10  
Nonperforming
     26        34     
 
 
 
      .06       .09  
Total
   $ 227      $ 286     
 
 
 
      .53 %      .79 % 
 
(a)
Excludes $946 million of loans
30-89
days past due and $1.5 billion of loans 90 days or more past due at September 30, 2021, purchased from GNMA mortgage pools that continue to accrue interest, compared with $1.4 billion and $1.8 billion at December 31, 2020, 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, 2021, performing TDRs were $3.3 billion, compared with $3.6 billion at December 31, 2020.
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, 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.
 
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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, 2021
(Dollars in Millions)
   Performing
TDRs		     
30-89 Days

Past Due		     90 Days or More
Past Due		     Nonperforming
TDRs		     Total
TDRs		  
Commercial
   $ 145        4.9 %      2.6 %    $ 112 (a)    $ 257  
Commercial real estate
     122        1.0       —       163 (b)      285  
Residential mortgages
     1,428        4.1       3.6       137       1,565 (d) 
Credit card
     228        9.9       4.0       —       228  
Other retail
     175        13.3       6.0       42 (c)      217 (e) 
TDRs, excluding loans purchased from GNMA mortgage pools
     2,098        5.4       3.6       454       2,552  
Loans purchased from GNMA mortgage pools (g)
     1,208        —       —       —       1,208 (f) 
Total
   $ 3,306        3.4 %      2.3 %    $ 454     $ 3,760  
 
(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 $242 million of residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $24 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.
(e)
Includes $73 million of other retail loans to borrowers that have had debt discharged through bankruptcy and $15 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.
(f)
Includes $193 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 $152 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.
(g)
Approximately 9.4 percent and 34.5 percent of the total TDR loans purchased from GNMA mortgage pools are
30-89
days past due and 90 days or more past due, respectively, but are not classified as delinquent as their repayments are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.
 
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Short-term 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, 2021, the Company had approved approximately 384,000 loan modifications for these borrowers, representing approximately $22.0 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, 2021, approximately 19,000 accounts, representing approximately $3.0 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, 2021, 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
      .01 %       — %     Primarily 3 month payment deferral up to a maximum of 6 months; interest continues to accrue with various payment options
Commercial real estate
      .08        .60      Primarily 3 month payment deferral up to a maximum of 6 months; interest continues to accrue with various payment options
Residential mortgages (a)
      .97        .96      Primarily 6 month payment forbearance, which may be extended up to 18 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
      .02        .04      Primarily payment reduction up to 6 months; payment relief of up to 3 months; interest continues to accrue
Other retail
      .07        .19      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)
      .04 %       .35 %    
 
 
Note:
Payment relief generally includes payment deferrals, forbearances, extensions and
re-ages,
and excludes loans made under the Small Business Administration’s (“SBA”) Paycheck Protection Program, as amounts due under that program are expected to be fully forgiven by the SBA.
 
(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, 2021, 19.44 percent of the total number of accounts and 20.91 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, 5.11 percent of the total number of accounts and 3.50 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, .15 percent of the total number of accounts and 1.01 percent of the total balances of all loans were to borrowers enrolled in payment relief programs as a result of the
COVID-19
pandemic.
 
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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, 2021, total nonperforming assets were $944 million, compared to $1.3 billion at December 31, 2020. The $354 million (27.3 percent) decrease in nonperforming assets was driven by decreases in nonperforming commercial and commercial real estate loans. The ratio of total nonperforming assets to total loans and other real estate was 0.32 percent at September 30, 2021, compared with 0.44 percent at December 31, 2020. Nonperforming assets are expected to continue to decline over the next several quarters. However, some manageable levels of elevated nonperforming assets in certain industries and loan categories impacted by the pandemic may experience longer recovery periods.
OREO was $17 million at September 30, 2021, compared with $24 million at December 31, 2020, 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,
2021		     December 31,
2020		             September 30,
2021		     December 31,
2020		  
Residential
       
 
    
New York
               $ 2                 $ 2     
 
     .14 %      .17 % 
California
     2       2     
 
     .01       .01  
Oregon
     2       2     
 
     .07       .07  
Illinois
     1       2     
 
     .02       .04  
Wisconsin
     1       1     
 
     .06       .06  
All other states
     9       14     
 
 
 
     .02       .03  
Total residential
     17       23     
 
     .02       .03  
Commercial
       
 
    
Iowa
     —       1     
 
     —       .04  
All other states
     —       —     
 
 
 
     —       —  
Total commercial
     —       1     
 
 
 
     —       —  
Total
               $ 17                 $ 24     
 
 
 
     .01 %      .01 % 
 
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 Table 6
  
   Nonperforming Assets (a)
 
(Dollars in Millions)   September 30,
2021		     December 31,
2020		  
Commercial
    
Commercial
           $ 179             $ 321  
Lease financing
     37       54  
Total commercial
     216       375  
Commercial Real Estate
    
Commercial mortgages
     215       411  
Construction and development
     81       39  
Total commercial real estate
     296       450  
Residential Mortgages (b)
     237       245  
Credit Card
     —       —  
Other Retail
    
Retail leasing
     11       13  
Home equity and second mortgages
     120       107  
Other
     26       34  
Total other retail
     157       154  
Total nonperforming loans
     906       1,224  
Other Real Estate (c)
     17       24  
Other Assets
     21       50  
Total nonperforming assets
           $ 944             $ 1,298  
Accruing loans 90 days or more past due (b)
           $ 385             $ 477  
Nonperforming loans to total loans
     .30 %      .41 % 
Nonperforming assets to total loans plus other real estate (c)
     .32 %      .44 % 
Changes in Nonperforming Assets
 
(Dollars in Millions)   Commercial and
Commercial
Real Estate		     Residential
Mortgages,
Credit Card and
Other Retail		     Total  
Balance December 31, 2020
             $ 854                 $ 444         $ 1,298  
Additions to nonperforming assets
      
New nonaccrual loans and foreclosed properties
     277       153       430  
Advances on loans
     8       1       9  
Total additions
     285       154       439  
Reductions in nonperforming assets
      
Paydowns, payoffs
     (235 )      (79 )      (314 ) 
Net sales
     (173 )      (13 )      (186 ) 
Return to performing status
     (111 )      (65 )      (176 ) 
Charge-offs (d)
     (105 )      (12 )      (117 ) 
Total reductions
     (624 )      (169 )      (793 ) 
Net additions to (reductions in) nonperforming assets
     (339 )      (15 )      (354 ) 
Balance September 30, 2021
             $ 515                 $ 429         $ 944  
 
(a)
Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due.
(b)
Excludes $1.5 billion at September 30, 2021, and $1.8 billion at December 31, 2020, 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 $19 million at September 30, 2021, and $33 million at December 31, 2020, continue to accrue interest and are recorded as other assets and excluded from nonperforming assets because they are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.
(d)
Charge-offs exclude actions for certain card products and loan sales that were not classified as nonperforming at the time the
charge-off
occurred.
 
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Table 7
  
   Net Charge-offs as a Percent of Average Loans Outstanding
 
    Three Months Ended
September 30		             Nine Months Ended
September 30		  
     2021     2020             2021     2020  
Commercial
      
 
     
Commercial
     .05 %      .60 %   
 
      .13 %      .41 % 
Lease financing
     .08       .78    
 
 
 
      .15       .52  
Total commercial
     .05       .61    
 
      .13       .42  
Commercial Real Estate
      
 
     
Commercial mortgages
     .01       1.13    
 
      (.05 )      .46  
Construction and development
     .44       (.07 )   
 
 
 
      .21       —  
Total commercial real estate
     .13       .81    
 
      .02       .34  
Residential Mortgages
     (.05 )      (.02 )   
 
      (.05 )      (.01 ) 
Credit Card
     2.01       3.63    
 
      2.52       3.95  
Other Retail
      
 
     
Retail leasing
     .05       .94    
 
      .02       1.14  
Home equity and second mortgages
     (.11 )      (.06 )   
 
      (.09 )      (.01 ) 
Other
     .20       .43    
 
 
 
      .26       .59  
Total other retail
     .13       .39    
 
 
 
      .16       .52  
Total loans
     .20 %      .66 %   
 
 
 
      .25 %      .58 % 
 
Analysis of Loan Net Charge-Offs
 Total loan net charge-offs were $147 million for the third quarter and $550 million for the first nine months of 2021, compared with $515 million and $1.3 billion, respectively, for the same periods of 2020. The year-over-year decreases in net charge-offs reflected improvement across most loan categories, associated with improving economic conditions, borrower liquidity and strong asset prices in the market that support repayment and recovery on problem loans. The ratio of total loan net charge-offs to average loans outstanding on an annualized basis for the third quarter and first nine months of 2021 was 0.20 percent and 0.25 percent, respectively, compared with 0.66 percent and 0.58 percent, respectively, for the same periods of 2020. The Company expects net charge-offs to return to more normalized levels over time as the beneficial impact of government stimulus during the pandemic dissipates.
Analysis and Determination of the Allowance for Credit Losses
 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 considers expected losses for the remaining lives of the applicable assets, inclusive of expected recoveries. 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. Multiple economic scenarios are considered over a three-year reasonable and supportable forecast period, which includes increasing consideration of historical loss experience over 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 life of the portfolio. The economic scenarios are updated at least quarterly and are designed to provide a range of reasonable estimates from better to worse than current expectations. Scenarios are weighted based on the Company’s expectation of economic conditions for the foreseeable future and reflect significant judgment and consideration of uncertainties that exist. 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 and corporate bonds spreads, as well as loan and borrower characteristics, such as internal risk ratings on commercial loans and consumer credit scores, delinquency status, collateral
 
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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. 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 may 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. Where loans do not exhibit similar risk characteristics, an individual analysis is performed to consider expected credit losses.
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 as appropriate. 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, 2021, the Company serviced the first lien on 36 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 $247 million or 2.3 percent of its total home equity portfolio at September 30, 2021, 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. The historical long-term average loss experience related to junior liens has been relatively limited (less than 1 percent of the total portfolio annually), and estimates are adjusted to consider current collateral support and portfolio risk characteristics. These include updated credit scores and collateral estimates obtained on the Company’s home equity portfolio each quarter. 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 and refreshed LTV ratios when possible. 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, regardless of PCD status, are recognized through provision expense, with 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, 2021.
The Company’s methodology for determining the appropriate allowance for credit losses also considers the imprecision inherent in the methodologies used and allocated to the various loan portfolios. 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,
 
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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 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, 2021, the allowance for credit losses was $6.3 billion (2.12 percent of
period-end
loans), compared with an allowance of $8.0 billion (2.69 percent of
period-end
loans) at December 31, 2020. The ratio of the allowance for credit losses to nonperforming loans was 695 percent at September 30, 2021, compared with 654 percent at December 31, 2020. The ratio of the allowance for credit losses to annualized loan net charge-offs was 1,080 percent at September 30, 2021, compared with 448 percent of full year 2020 net charge-offs at December 31, 2020.
The decrease in the allowance for credit losses of $1.7 billion (21.3 percent) at September 30, 2021, compared with December 31, 2020, reflected factors affecting economic conditions during the first nine months of 2021, including the enactment of additional benefits from government stimulus programs and broad vaccine availability in the United States that has reduced the risks associated with
COVID-19,
contributing to an economic recovery. However, economic uncertainty remains associated with rising inflationary concerns, additional virus variants and lack of a clear path to government funding. In addition to these factors, expected loss estimates consider various factors including customer specific information impacting changes in risk ratings, projected delinquencies and potential effects of diminishing liquidity without support of mortgage forbearance and direct federal stimulus. Currently, consumer credit trends continue to perform better than expected, while select commercial portfolios most impacted by
COVID-19
continue to be monitored for structural shifts associated with the pandemic.
Changes in economic conditions during the first nine months of 2021 included improvements in projected gross domestic product and unemployment levels for 2021, which reflected the additional government stimulus and availability of vaccines. These factors are evaluated through a combination of quantitative calculations using economic scenarios and qualitative assessments that consider the high degree of uncertainty related to the unprecedented levels of both economic stress and the stimulus response.
The following table summarizes the baseline forecast for key economic variables the Company used in its estimate of the allowance for credit losses at September 30, 2021 and December 31, 2020:
 
     September 30,
2021		     December 31,
2020		  
United States unemployment rate for the three months ending (a)
    
September 30, 2021
     5.2 %      7.0 % 
December 31, 2021
     4.5       6.8  
United States real gross domestic product for the three months ending (b)
    
September 30, 2021
     1.8 %      .1 % 
December 31, 2021
     3.6       1.5  
 
(a)
Reflects quarterly average of forecasted reported United States unemployment rate.
(b)
Reflects cumulative change from December 31, 2019.
 
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Baseline economic forecasts are used in combination with alternative scenarios and historical loss experience as is considered reasonable and supportable to inform the Company’s allowance for credit losses. Changes in the allowance for credit losses are based on a variety of factors, including loan balance changes, portfolio credit quality and mix changes, and changes in general economic conditions and expectations (including for unemployment and gross domestic product), among other factors. Based on economic conditions at September 30, 2021, it was difficult to estimate the length and severity of the longer term effects on certain industry sectors that may result from
COVID-19
and the impact of other factors that may influence the level of eventual losses and corresponding requirements for the allowance for credit losses, including the impact of inflationary pressures on certain lending sectors and diminishing liquidity after economic stimulus programs and accommodations delaying mortgage and rent payments end. While reserves consider the uncertainty in these estimates, the unpredictability of the
COVID-19
pandemic could result in the recognition of credit losses in the Company’s loan portfolios and increases in the allowance for credit losses. Scenarios worse than the Company’s expected outcome at September 30, 2021 include risks that government stimulus in response to the
COVID-19
pandemic is less effective than expected, or that a longer or more severe health crisis prolongs the downturn in economic activity, potentially reducing the number of businesses that are ultimately able to resume operations after the crisis has passed. Other factors considered include concerns around inflationary pressures, new virus variants, sustainability of asset values and borrower liquidity, along with the lack of a clear path to government funding.
The allowance for credit losses related to commercial lending segment loans decreased $926 million during the first nine months of 2021, due to improvements in general economic conditions and portfolio credit quality that included some return of economic activity in certain industry sectors affected by
COVID-19.
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, 2021:
 
     Loans     Outstanding
Commitments		  
Retail
     3.1 %      4.7 % 
Energy (includes Oil and gas)
     .7       2.1  
Media and entertainment
     1.6       2.1  
Lodging
     1.1       .8  
Airline
     .3       .5  
The allowance for credit losses related to consumer lending segment loans decreased $784 million during the first nine months of 2021, due to improving economic risks, including those due to decreased unemployment, along with continued strong underlying credit quality that supports expectations of long-term repayment.
 
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Table 8
  
   Summary of Allowance for Credit Losses
 
    Three Months Ended
September 30		     Nine Months Ended
September 30		  
(Dollars in Millions)   2021     2020     2021     2020  
Balance at beginning of period
   $ 6,610     $ 7,890     $ 8,010     $ 4,491  
Change in accounting principle (a)
     —       —       —       1,499  
Charge-Offs
        
Commercial
        
Commercial
     37       180       171       378  
Lease financing
     3       13       13       28  
Total commercial
     40       193       184       406  
Commercial real estate
        
Commercial mortgages
     1       88       9       107  
Construction and development
     13       1       19       5  
Total commercial real estate
     14       89       28       112  
Residential mortgages
     3       4       13       15  
Credit card
     154       236       536       775  
Other retail
        
Retail leasing
     5       25       20       86  
Home equity and second mortgages
     3       3       9       14  
Other
     47       61       164       216  
Total other retail
     55       89       193       316  
Total charge-offs
     266       611       954       1,624  
Recoveries
        
Commercial
        
Commercial
     24       13       80       37  
Lease financing
     2       2       7       6  
Total commercial
     26       15       87       43  
Commercial real estate
        
Commercial mortgages
     —       3       20       4  
Construction and development
     1       3       2       5  
Total commercial real estate
     1       6       22       9  
Residential mortgages
     13       7       38       20  
Credit card
     43       35       133       111  
Other retail
        
Retail leasing
     4       5       19       14  
Home equity and second mortgages
     6       5       17       15  
Other
     26       23       88       67  
Total other retail
     36       33       124       96  
Total recoveries
     119       96       404       279  
Net Charge-Offs
        
Commercial
        
Commercial
     13       167       91       341  
Lease financing
     1       11       6       22  
Total commercial
     14       178       97       363  
Commercial real estate
        
Commercial mortgages
     1       85       (11 )      103  
Construction and development
     12       (2 )      17       —  
Total commercial real estate
     13       83       6       103  
Residential mortgages
     (10 )      (3 )      (25 )      (5 ) 
Credit card
     111       201       403       664  
Other retail
        
Retail leasing
     1       20       1       72  
Home equity and second mortgages
     (3 )      (2 )      (8 )      (1 ) 
Other
     21       38       76       149  
Total other retail
     19       56       69       220  
Total net charge-offs
     147       515       550       1,345  
Provision for credit losses
     (163 )      635       (1,160 )      3,365  
Balance at end of period
   $ 6,300     $ 8,010     $ 6,300     $ 8,010  
Components
        
Allowance for loan losses
   $ 5,792     $ 7,407      
Liability for unfunded credit commitments
     508       603      
Total allowance for credit losses
   $ 6,300     $ 8,010      
Allowance for Credit Losses as a Percentage of
        
Period-end
loans
     2.12 %      2.61 %     
Nonperforming loans
     695       678      
Nonperforming and accruing loans 90 days or more past due
     488       488      
Nonperforming assets
     667       631      
Annualized net charge-offs
     1,080       391    
 
 
 
  
 
 
 
 
(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.
 
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Residual Value Risk Management
 The Company manages its risk to changes in the residual value of leased vehicles, office and business equipment, and other assets through disciplined residual valuation setting at the inception of a lease, diversification of its leased assets, regular residual asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. As of September 30, 2021, no significant change in the amount of residual values or concentration of the portfolios had occurred since December 31, 2020. 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, 2020, for further discussion on residual value risk management.
Operational Risk Management
 The Company operates in many different businesses in diverse markets and relies on the ability of its employees and systems to process a high number of transactions. 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, 2020, 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, 2020, 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.
 
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Table 9
  
   Sensitivity of Net Interest Income
 
    September 30, 2021             December 31, 2020  
     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
     (2.75 )%      3.54 %      *        5.84 %   
 
 
 
      (4.48 )%      4.58 %      *        6.57 % 
*
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 and
available-for-sale
investment securities from fixed-rate payments to floating-rate payments;
•  
To convert 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, 2021, the Company had $10.7 billion of forward commitments to sell, hedging $5.0 billion of MLHFS and $8.6 billion of unfunded mortgage loan commitments. The forward commitments to sell and the unfunded mortgage loan commitments on loans intended to be sold are considered derivatives under the accounting guidance related to accounting for derivative instruments and hedging activities. The Company has elected the fair value option for the MLHFS.
Derivatives are subject to credit risk associated with counterparties to the contracts. Credit risk associated with derivatives is measured by the Company based on the probability of counterparty default, 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 13 and 14 in the Notes to Consolidated Financial Statements.
LIBOR Transition
 In July 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”) announced that it would no longer require banks to submit rates for the London InterBank Offered Rate (“LIBOR”) after 2021. In March 2021, the FCA and the administrator of LIBOR announced that LIBOR will no longer be published on a representative basis after December 31, 2021, except for the most commonly used tenors of United States Dollar LIBOR which will no longer be published on a representative basis after June 30, 2023. The Company holds financial instruments that will be impacted by the discontinuance of LIBOR, including
 
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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 capacities as trustee and servicer, which involve financial instruments that will be similarly impacted by the discontinuance of LIBOR. The Company anticipates these financial instruments will 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, monitor and mitigate risks associated with the expected discontinuance or unavailability of LIBOR, actively engage with industry working groups and regulators, achieve operational readiness for the use of alternative reference rates and engage impacted customers to remediate and transition impacted instruments. The Company has invested in its systems, models, procedures and internal infrastructure to accept alternative reference rates to LIBOR and has begun offering these alternatives to clients. The Company also adopted industry best practice guidelines for fallback language for new transactions, converted its cleared interest rate swaps discounting to Secured Overnight Financing Rate discounting, and distributed communications related to the transition to certain impacted parties, both inside and outside the Company. Refer to “Risk Factors” in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2020, 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)
   2021      2020  
Average
   $ 2      $ 2  
High
     4        3  
Low
     1        1  
Period-end
     2        2  
The Company did not experience any actual losses for its combined Covered Positions that exceeded VaR during the nine months ended September 30, 2021. 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 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.
 
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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)
   2021      2020  
Average
   $ 7      $ 6  
High
     9        8  
Low
     5        4  
Period-end
     7        7  
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)
   2021      2020  
Residential Mortgage Loans Held For Sale and Related Hedges
     
Average
   $ 10      $ 8  
High
     19        22  
Low
     5        2  
Mortgage Servicing Rights and Related Hedges
     
Average
   $ 4      $ 19  
High
     11        54  
Low
     1        6  
Liquidity Risk Management
 The Company’s liquidity risk management process is designed to identify, measure, and manage the Company’s funding and liquidity risk to meet its daily funding needs and to address expected and unexpected changes in its funding requirements. The Company engages in various activities to manage its liquidity risk. These activities include diversifying its funding sources, stress testing, and holding readily-marketable assets which can be used as a source of liquidity if needed. In addition, the Company’s profitable operations, sound credit quality and strong capital position have enabled it to develop a large and reliable base of core deposit funding within its market areas and in domestic and global capital markets.
The Company’s Board of Directors approves the Company’s liquidity policy. The Risk Management Committee of the Company’s Board of Directors oversees the Company’s liquidity risk management process and approves a contingency funding plan. The ALCO reviews the Company’s liquidity policy and limits, and regularly assesses the Company’s ability to meet funding requirements arising from adverse company-specific or market events.
The Company regularly projects its funding needs under various stress scenarios and maintains a contingency funding plan consistent with the Company’s access to diversified sources of contingent funding. The Company maintains a substantial level of total available liquidity in the form of
on-balance
sheet and
off-balance
sheet funding sources. These liquidity sources include cash at the Federal Reserve Bank and certain European central banks, unencumbered liquid assets, and capacity to borrow from the FHLB and at Federal Reserve Bank’s Discount Window. At September 30, 2021, the fair value of unencumbered investment securities totaled $117.6 billion, compared with $125.9 billion at December 31, 2020. Refer to Note 4 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, 2021, the Company could have borrowed a total of an additional $97.4 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 $442.9 billion at September 30, 2021, compared with $429.8 billion at December 31, 2020. 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 $35.7 billion at September 30, 2021, and is an important funding source because of its multi-year borrowing structure. Short-term borrowings were $16.1 billion at
 
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September 30, 2021, and supplement the Company’s other funding sources. Refer to “Balance Sheet Analysis” for further information on the Company’s long-term debt and short-term borrowings.
In addition to assessing liquidity risk on a consolidated basis, the Company monitors the parent company’s liquidity. The Company establishes limits for the minimal number of months into the future where the parent company can meet existing and forecasted obligations with cash and securities held that can be readily monetized. The Company measures and manages this limit in both normal and adverse conditions. The Company maintains sufficient funding to meet expected capital and debt service obligations for 24 months without the support of dividends from subsidiaries and assuming access to the wholesale markets is maintained. The Company maintains sufficient liquidity to meet its capital and debt service obligations for 12 months under adverse conditions without the support of dividends from subsidiaries or access to the wholesale markets. The parent company is currently well in excess of required liquidity minimums.
At September 30, 2021, parent company long-term debt outstanding was $19.2 billion, compared with $20.9 billion at December 31, 2020. The decrease was primarily due to $1.5 billion of medium-term note repayments. As of September 30, 2021, there was no parent company debt scheduled to mature in the remainder of 2021.
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, 2021, the Company was compliant with this requirement.
Beginning July 1, 2021, the Company is also subject to a regulatory Net Stable Funding Ratio (“NSFR”) requirement which requires banks to maintain a minimum level of stable funding based on the liquidity characteristics of their assets, commitments, and derivative exposures over a
one-year
time horizon. At September 30, 2021, 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, 2020, 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, 2021. 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, 2021, the Company had an aggregate amount on deposit with European banks of approximately $10.1 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 16 of the Notes to Consolidated Financial Statements for further information on these arrangements. The Company does not utilize private label asset securitizations as a source of funding.
Off-balance
sheet arrangements also include any obligation related to a variable interest held in an unconsolidated entity that provides financing, liquidity, credit enhancement or market risk support. Refer to Note 6 of the Notes to Consolidated Financial Statements for further information related to the Company’s interests in variable interest entities.
 
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Table 10
      Regulatory Capital Ratios
 
(Dollars in Millions)    September 30,
2021		     December 31,
2020		  
Basel III standardized approach:
     
Common equity tier 1 capital
    $ 41,014     $ 38,045  
Tier 1 capital
      47,426       44,474  
Total risk-based capital
      54,178       52,602  
Risk-weighted assets
      404,021       393,648  
Common equity tier 1 capital as a percent of risk-weighted assets
      10.2 %      9.7 % 
Tier 1 capital as a percent of risk-weighted assets
      11.7       11.3  
Total risk-based capital as a percent of risk-weighted assets
      13.4       13.4  
Tier 1 capital as a percent of adjusted quarterly average assets (leverage ratio)
      8.7       8.3  
Tier 1 capital as a percent of total
on-
and
off-balance
sheet leverage exposure (total leverage exposure ratio)
      7.0       7.3  
 
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. Beginning in 2020, the Company elected to adopt a rule issued in 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 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, 2021 and December 31, 2020. All regulatory ratios exceeded regulatory “well-capitalized” requirements.
The Company believes certain other capital ratios are useful in evaluating its capital adequacy. The Company’s tangible common equity, as a percent of tangible assets and as a percent of risk-weighted assets determined in accordance with transitional regulatory capital requirements related to the CECL methodology under the standardized approach, was 6.8 percent and 9.4 percent, respectively, at September 30, 2021, compared with 6.9 percent and 9.5 percent, respectively, at December 31, 2020. In addition, the Company’s common equity tier 1 capital to risk-weighted assets ratio, reflecting the full implementation of the CECL methodology was 9.7 percent at September 30, 2021, compared with 9.3 percent at December 31, 2020. Refer to
“Non-GAAP
Financial Measures” beginning on page 35 for further information on these other capital ratios.
Total U.S. Bancorp shareholders’ equity was $53.7 billion at September 30, 2021, compared with $53.1 billion at December 31, 2020. The increase was primarily the result of corporate earnings, partially offset by changes in unrealized gains and losses on
available-for-sale
investment securities included in other comprehensive income (loss), dividends and common share repurchases.
Beginning in March of 2020 and continuing through the remainder of 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 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 implemented measures beginning in the third quarter of 2020 and extending through the second quarter of 2021, restricting capital distributions of all large bank holding companies, including the Company. These restrictions limited the aggregate amount of common stock dividends and share repurchases to an amount that did not exceed the average net income of the four preceding calendar quarters. Based on the results of the December 2020 Federal Reserve Board Stress Test, the Company announced on December 22, 2020 that its Board of Directors had approved an authorization to repurchase up to $3.0 billion of its common stock beginning January 1, 2021, and repurchased $1.5 billion of its common stock during the first six months of 2021 under this program. The Company suspended all common stock repurchases at the beginning of the third quarter of 2021, except for those done exclusively in connection with its stock-based compensation programs, due to its recently announced acquisition of MUFG Union Bank’s core regional banking franchise. The Company does not expect to commence repurchasing its common stock again until the second half of 2022, or after the acquisition closes in order to build capital prior to the acquisition.
 
U.S. Bancorp  
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The following table provides a detailed analysis of all shares purchased by the Company or any affiliated purchaser during the third quarter of 2021:
 
Period   Total Number
of Shares
Purchased		     Average
Price Paid
Per Share		     Total Number of
Shares Purchased
as Part of Publicly
Announced
Program (a)		    
Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Program
(In Millions)
  
July
     80,295 (b)    $ 58.05       5,295     $ 1,463  
August
     368       55.50       368       1,463  
September
     428       55.91       428       1,463  
Total
     81,091 (b)    $ 58.03       6,091     $ 1,463  
 
(a)
All shares were purchased under the $3.0 billion common stock repurchase authorization program announced December 22, 2020.
(b)
Includes 75,000 shares of common stock purchased, at an average price per share of $58.15, 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.
Based on the results of the 2021 Federal Reserve Board Annual Stress Test, the Company announced on September 14, 2021 that its Board of Directors had approved a regular quarterly dividend of $0.46 per common share, payable in October 2021. This represented a 9.5 percent increase over the previous dividend rate per common share of $0.42 per quarter.
The Company will continue to monitor its capital position and may adjust its capital distributions based on economic conditions and its financial performance. Capital distributions, including dividends and stock repurchases, are subject to the approval of the Company’s Board of Directors and will align with regulatory requirements.
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, 2020, for further discussion on capital management.
LINE OF BUSINESS FINANCIAL REVIEW
The Company’s major lines of business are Corporate and Commercial Banking, Consumer and Business Banking, Wealth Management and Investment Services, Payment Services, and Treasury and Corporate Support. These operating segments are components of the Company about which financial information is prepared and is evaluated regularly by management in deciding how to allocate resources and assess performance.
Basis for Financial Presentation
 Business line results are derived from the Company’s business unit profitability reporting systems by specifically attributing managed balance sheet assets, deposits and other liabilities and their related income or expense. Refer to Note 17 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 2021, certain organization and methodology changes were made and, accordingly, 2020 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 $403 million of the Company’s net income in the third quarter and $1.3 billion in the first nine months of 2021, or a decrease of $44 million (9.8 percent) and an increase of $61 million (5.0 percent), respectively, compared with the same periods of 2020.
Net revenue decreased $149 million (13.3 percent) in the third quarter and $564 million (16.0 percent) in the first nine months of 2021, compared with the same periods of 2020. Net interest income, on a taxable-equivalent basis, decreased $135 million (15.8 percent) in the third quarter and $451 million (17.2 percent) in the first nine months of 2021, compared with the same periods of 2020. The decreases were primarily due to lower average loan and deposit balances as well as the impact of declining interest rates on the margin benefit from deposits, partially offset by favorable deposit mix with higher noninterest-bearing deposit balances and slightly higher loan spreads. Average loan balances declined as significant liquidity draws during the early stages of the pandemic were paid down in the second half of 2020 and the first quarter of 2021. Noninterest income decreased $14 million (5.2 percent) in the third quarter and $113 million (12.6 percent) in the first nine months of 2021, compared with the same periods of 2020, primarily driven by lower capital markets activities and trading revenue, partially offset by continued stronger treasury management fees due to core growth driven by the economic recovery.
Noninterest expense decreased $10 million (2.3 percent) in the third quarter and $53 million (4.0 percent) in the first nine months of 2021, compared with the same periods of 2020, primarily due to lower FDIC insurance expense, lower production incentives, and higher capitalized loan costs, partially offset by an increase in net shared services expense driven by investment in infrastructure and technology development.
 
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   U.S. Bancorp
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The provision for credit losses decreased $80 million (84.2 percent) in the third quarter and $592 million in the first nine months of 2021, compared with the same periods of 2020, primarily due to a decrease in the reserve allocation driven by improving portfolio credit quality in the current year, compared with deteriorating credit quality in the prior year.
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 $628 million of the Company’s net income in the third quarter and $1.8 billion in the first nine months of 2021, or a decrease of $21 million (3.2 percent) and an increase of $86 million (4.9 percent), respectively, compared with the same periods of 2020.
Net revenue decreased $56 million (2.4 percent) in the third quarter and $151 million (2.3 percent) in the first nine months of 2021, compared with the same periods of 2020. Net interest income, on a taxable-equivalent basis, increased $77 million (5.2 percent) in the third quarter and $364 million (8.6 percent) in the first nine months of 2021, compared with the same periods of 2020, reflecting continued strong growth in deposit balances as well as favorable deposit mix, favorable loan spreads driven by growth in installment loans, and higher loan fees driven by loan forgiveness related to the SBA’s Paycheck Protection Program. These increases in net interest income were partially offset by lower deposit spreads. Noninterest income decreased $133 million (15.7 percent) in the third quarter of 2021, compared with the third quarter of 2020, primarily due to lower mortgage banking revenue reflecting lower production volume and related gain on sale margins as refinancing activities declined, partially offset by an increase in the fair value of MSRs, net of hedging activities, as well as higher gains on GNMA loan sales. Partially offsetting the decline in mortgage banking revenue, retail product fees were stronger driven by retail leasing end of term residual gains, and deposit service charges increased as a result of customer activity and higher ATM processing revenue. Noninterest income decreased $515 million (21.2 percent) in the first nine months of 2021, compared with the first nine months of 2020, primarily due to lower mortgage banking revenue reflecting lower production volume and related gain on sale margins, along with a reduction in the fair value of MSRs, net of hedging activities, partially offset by higher gains on GNMA loan sales and higher retail product fees.
Noninterest expense increased $66 million (4.8 percent) in the third quarter and $146 million (3.6 percent) in the first nine months of 2021, compared with the same periods of 2020, primarily due to increases in net shared services expense due to investments in digital capabilities and higher compensation expense related to merit increases, business hiring related to mortgage forbearance loss mitigation and revenue-related compensation driven by business production. The provision for credit losses decreased $94 million in the third quarter and $412 million in the first nine months of 2021, compared with the same periods of 2020, due to a decrease in the reserve allocation primarily reflecting lower delinquency rates in consumer portfolios and a reduction in end of period outstanding loan balances in the first nine months of 2021, compared with loan growth in the first nine months of 2020.
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 $196 million of the Company’s net income in the third quarter and $618 million in the first nine months of 2021, or decreases of $31 million (13.7 percent) and $119 million (16.1 percent), respectively, compared with the same periods of 2020.
Net revenue decreased $23 million (2.9 percent) in the third quarter and $112 million (4.5 percent) in the first nine months of 2021, compared with the same periods of 2020. Net interest income, on a taxable-equivalent basis, decreased $76 million (25.2 percent) in the third quarter and $243 million (25.2 percent) in the first nine months of 2021, compared with the same periods of 2020, primarily due to the declining margin benefit from deposits given lower interest rates, partially offset by higher noninterest-bearing deposit balances, favorable deposit mix and higher average loan balances. Noninterest income increased $53 million (10.5 percent) in the third quarter and $131 million (8.7 percent) in the first nine months of 2021, compared with the same periods of 2020, primarily due to core business growth in trust and investment management fees and investment products fees, both driven by favorable market conditions, partially offset by higher fee waivers related to money market funds.
 
U.S. Bancorp  
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 Table 11
      Line of Business Financial Performance
 
   
Corporate and
Commercial Banking
            
Consumer and
Business Banking
       
Three Months Ended September 30
(Dollars in Millions)
   2021      2020      Percent
Change		             2021     2020      Percent
Change		       
Condensed Income Statement
          
 
          
 
Net interest income (taxable-equivalent basis)
   $ 717      $ 852        (15.8 )%   
 
    $ 1,551     $ 1,474        5.2 %   
 
Noninterest income
     253        267        (5.2 )   
 
      715       848        (15.7 )   
 
Total net revenue
     970        1,119        (13.3 )   
 
      2,266       2,322        (2.4 )   
 
Noninterest expense
     418        428        (2.3 )   
 
      1,450       1,383        4.8    
 
Other intangibles
     —        —        —    
 
      3       4        (25.0 )   
 
Total noninterest expense
     418        428        (2.3 )   
 
      1,453       1,387        4.8    
 
Income (loss) before provision and income taxes
     552        691        (20.1 )   
 
      813       935        (13.0 )   
 
Provision for credit losses
     15        95        (84.2 )   
 
      (25 )      69        *    
 
Income (loss) before income taxes
     537        596        (9.9 )   
 
      838       866        (3.2 )   
 
Income taxes and taxable-equivalent adjustment
     134        149        (10.1 )   
 
      210       217        (3.2 )   
 
Net income (loss)
     403        447        (9.8 )   
 
      628       649        (3.2 )   
 
Net (income) loss attributable to noncontrolling interests
     —        —        —    
 
      —       —        —    
 
Net income (loss) attributable to U.S. Bancorp
   $ 403      $ 447        (9.8 )   
 
    $ 628     $ 649        (3.2 )   
 
Average Balance Sheet
          
 
          
 
Commercial
   $ 77,474      $ 89,435        (13.4 )%   
 
    $ 8,158     $ 11,173        (27.0 )%   
 
Commercial real estate
     24,916        26,083        (4.5 )   
 
      10,975       11,916        (7.9 )   
 
Residential mortgages
     29        19        52.6    
 
      66,787       69,945        (4.5 )   
 
Credit card
     —        —        —    
 
      —       —        —    
 
Other retail
     12        10        20.0    
 
      54,913       52,195        5.2    
 
Total loans
     102,431        115,547        (11.4 )   
 
      140,833       145,229        (3.0 )   
 
Goodwill
     1,650        1,647        .2    
 
      3,506       3,475        .9    
 
Other intangible assets
     5        6        (16.7 )   
 
      2,754       1,942        41.8    
 
Assets
     114,629        128,369        (10.7 )   
 
      160,882       164,246        (2.0 )   
 
Noninterest-bearing deposits
     62,642        48,058        30.3    
 
      34,416       34,288        .4    
 
Interest checking
     12,843        12,673        1.3    
 
      70,953       57,593        23.2    
 
Savings products
     47,073        56,945        (17.3 )   
 
      76,367       63,577        20.1    
 
Time deposits
     9,001        17,940        (49.8 )   
 
      12,951       11,925        8.6    
 
Total deposits
     131,559        135,616        (3.0 )   
 
      194,687       167,383        16.3    
 
Total U.S. Bancorp shareholders’ equity
     13,772        15,051        (8.5 )   
 
 
 
      12,277       13,562        (9.5 )   
 
 
   
Corporate and
Commercial Banking
            
Consumer and
Business Banking
       
Nine Months Ended September 30
(Dollars in Millions)
   2021     2020      Percent
Change		             2021     2020      Percent
Change		       
Condensed Income Statement
         
 
          
 
Net interest income (taxable-equivalent basis)
   $ 2,172     $ 2,623        (17.2 )%   
 
    $ 4,603     $ 4,239        8.6 %   
 
Noninterest income
     786       899        (12.6 )   
 
      1,918       2,433        (21.2 )   
 
Total net revenue
     2,958       3,522        (16.0 )   
 
      6,521       6,672        (2.3 )   
 
Noninterest expense
     1,257       1,310        (4.0 )   
 
      4,210       4,061        3.7    
 
Other intangibles
     —       —        —    
 
      9       12        (25.0 )   
 
Total noninterest expense
     1,257       1,310        (4.0 )   
 
      4,219       4,073        3.6    
 
Income (loss) before provision and income taxes
     1,701       2,212        (23.1 )   
 
      2,302       2,599        (11.4 )   
 
Provision for credit losses
     (20 )      572        *    
 
      (143 )      269        *    
 
Income (loss) before income taxes
     1,721       1,640        4.9    
 
      2,445       2,330        4.9    
 
Income taxes and taxable-equivalent adjustment
     430       410        4.9    
 
      612       583        5.0    
 
Net income (loss)
     1,291       1,230        5.0    
 
      1,833       1,747        4.9    
 
Net (income) loss attributable to noncontrolling interests
     —       —        —    
 
      —       —        —    
 
Net income (loss) attributable to U.S. Bancorp
   $ 1,291     $ 1,230        5.0    
 
    $ 1,833     $ 1,747        4.9    
 
Average Balance Sheet
         
 
          
 
Commercial
   $ 77,339     $ 92,959        (16.8 )%   
 
    $ 9,447     $ 8,601        9.8 %   
 
Commercial real estate
     24,744       25,696        (3.7 )   
 
      11,009       12,166        (9.5 )   
 
Residential mortgages
     23       20        15.0    
 
      67,301       67,093        .3    
 
Credit card
     —       —        —    
 
      —       —        —    
 
Other retail
     11       11        —    
 
      53,463       52,121        2.6    
 
Total loans
     102,117       118,686        (14.0 )   
 
      141,220       139,981        .9    
 
Goodwill
     1,648       1,647        .1    
 
      3,485       3,508        (.7 )   
 
Other intangible assets
     5       6        (16.7 )   
 
      2,692       2,095        28.5    
 
Assets
     114,182       131,106        (12.9 )   
 
      162,316       157,177        3.3    
 
Noninterest-bearing deposits
     59,841       41,091        45.6    
 
      33,734       29,397        14.8    
 
Interest checking
     13,246       14,266        (7.1 )   
 
      68,596       53,815        27.5    
 
Savings products
     47,576       55,451        (14.2 )   
 
      74,542       60,404        23.4    
 
Time deposits
     9,177       20,864        (56.0 )   
 
      13,683       12,715        7.6    
 
Total deposits
     129,840       131,672        (1.4 )   
 
      190,555       156,331        21.9    
 
Total U.S. Bancorp shareholders’ equity
     13,995       15,201        (7.9 )   
 
 
 
      12,378       12,797        (3.3 )   
 
 
*
Not meaningful
 
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   U.S. Bancorp
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       Wealth Management and
Investment Services		      Payment Services      Treasury and Corporate Support      Consolidated Company  
       2021     2020      Percent
Change		      2021      2020      Percent
Change		      2021     2020     Percent
Change		      2021     2020     Percent
Change		  
 
 
    
 
                                  
  $ 225     $ 301        (25.2 )%     $ 616      $ 643        (4.2 )%     $ 88     $ (18 )      * %     $ 3,197     $ 3,252       (1.7 )% 
 
 
 
     558       505        10.5        946        867        9.1        221       225       (1.8 )       2,693       2,712       (.7 ) 
    783       806        (2.9 )       1,562        1,510        3.4        309       207       49.3        5,890       5,964       (1.2 ) 
    507       489        3.7        817        797        2.5        196       230       (14.8 )       3,388       3,327       1.8  
 
 
 
     4       3        33.3        34        37        (8.1 )       —       —       —        41       44       (6.8 ) 
 
 
 
     511       492        3.9        851        834        2.0        196       230       (14.8 )       3,429       3,371       1.7  
    272       314        (13.4 )       711        676        5.2        113       (23 )      *        2,461       2,593       (5.1 ) 
 
 
 
     11       11        —        166        246        (32.5 )       (330 )      214       *        (163 )      635       *  
    261       303        (13.9 )       545        430        26.7        443       (237 )      *        2,624       1,958       34.0  
 
 
 
     65       76        (14.5 )       136        108        25.9        45       (178 )      *        590       372       58.6  
    196       227        (13.7 )       409        322        27.0        398       (59 )      *        2,034       1,586       28.2  
 
 
 
     —       —        —        —        —        —        (6 )      (6 )      —        (6 )      (6 )      —  
 
 
 
   $ 196     $ 227        (13.7 )     $ 409      $ 322        27.0      $ 392     $ (65 )      *      $ 2,028     $ 1,580       28.4  
                                   
  $ 5,551     $ 4,721        17.6 %     $ 9,271      $ 8,859        4.7 %     $ 1,378     $ 1,301       5.9 %     $ 101,832     $ 115,489       (11.8 )% 
    767       776        (1.2 )       —        —        —        2,263       2,154       5.1        38,921       40,929       (4.9 ) 
    7,286       5,819        25.2        —        —        —        2       3       (33.3 )       74,104       75,786       (2.2 ) 
    —       —        —        21,905        22,052        (.7 )       —       —       —        21,905       22,052       (.7 ) 
 
 
 
     4,850       4,300        12.8        202        257        (21.4 )       —       —       —        59,977       56,762       5.7  
    18,454       15,616        18.2        31,378        31,168        .7        3,643       3,458       5.3        296,739       311,018       (4.6 ) 
    1,618       1,618        —        3,168        3,123        1.4        —       —       —        9,942       9,863       .8  
    80       37        *        496        602        (17.6 )       —       —       —        3,335       2,587       28.9  
    21,566       18,708        15.3        37,173        36,191        2.7        219,196       189,388       15.7        553,446       536,902       3.1  
    24,453       17,719        38.0        4,913        6,886        (28.7 )       2,594       2,424       7.0        129,018       109,375       18.0  
    18,784       14,041        33.8        —        —        —        456       187       *        103,036       84,494       21.9  
    51,564       56,245        (8.3 )       150        123        22.0        776       724       7.2        175,930       177,614       (.9 ) 
 
 
 
     1,493       3,571        (58.2 )       —        1        *        58       603       (90.4 )       23,503       34,040       (31.0 ) 
    96,294       91,576        5.2        5,063        7,010        (27.8 )       3,884       3,938       (1.4 )       431,487       405,523       6.4  
 
 
 
     3,172       2,968        6.9        7,561        7,716        (2.0 )       17,491       13,119       33.3        54,273       52,416       3.5  
 
       Wealth Management and
Investment Services		     
Payment
Services
     
Treasury and
Corporate Support
     
Consolidated
Company
  
       2021     2020      Percent
Change		      2021      2020      Percent
Change		      2021     2020     Percent
Change		      2021     2020     Percent
Change		  
                                   
  $ 721     $ 964        (25.2 )%     $ 1,841      $ 1,910        (3.6 )%     $ 113     $ (13 )      * %     $ 9,450     $ 9,723       (2.8 )% 
 
 
 
     1,638       1,507        8.7        2,644        2,319        14.0        707       693       2.0        7,693       7,851       (2.0 ) 
    2,359       2,471        (4.5 )       4,485        4,229        6.1        820       680       20.6        17,143       17,574       (2.5 ) 
    1,499       1,445        3.7        2,381        2,296        3.7        729       764       (4.6 )       10,076       9,876       2.0  
 
 
 
     10       9        11.1        100        108        (7.4 )       —       —       —        119       129       (7.8 ) 
 
 
 
     1,509       1,454        3.8        2,481        2,404        3.2        729       764       (4.6 )       10,195       10,005       1.9  
    850       1,017        (16.4 )       2,004        1,825        9.8        91       (84 )      *        6,948       7,569       (8.2 ) 
 
 
 
     26       34        (23.5 )       216        477        (54.7 )       (1,239 )      2,013       *        (1,160 )      3,365       *  
    824       983        (16.2 )       1,788        1,348        32.6        1,330       (2,097 )      *        8,108       4,204       92.9  
 
 
 
     206       246        (16.3 )       447        338        32.2        106       (833 )      *        1,801       744       *  
    618       737        (16.1 )       1,341        1,010        32.8        1,224       (1,264 )      *        6,307       3,460       82.3  
 
 
 
     —       —        —        —        —        —        (17 )      (20 )      15.0        (17 )      (20 )      15.0  
 
 
 
   $ 618     $ 737        (16.1 )     $ 1,341      $ 1,010        32.8      $ 1,207     $ (1,284 )      *      $ 6,290     $ 3,440       82.8  
                                   
  $ 5,315     $ 4,676        13.7 %     $ 8,752      $ 8,977        (2.5 )%     $ 1,445     $ 1,288       12.2 %     $ 102,298     $ 116,501       (12.2 )% 
    711       736        (3.4 )       —        —        —        2,293       2,101       9.1        38,757       40,699       (4.8 ) 
    6,889       5,496        25.3        —        —        —        2       3       (33.3 )       74,215       72,612       2.2  
    —       —        —        21,391        22,465        (4.8 )       —       —       —        21,391       22,465       (4.8 ) 
 
 
 
     4,669       4,243        10.0        210        283        (25.8 )       —       —       —        58,353       56,658       3.0  
    17,584       15,151        16.1        30,353        31,725        (4.3 )       3,740       3,392       10.3        295,014       308,935       (4.5 ) 
    1,618       1,617        .1        3,174        3,027        4.9        —       —       —        9,925       9,799       1.3  
    69       40        72.5        519        584        (11.1 )       —       —       —        3,285       2,725       20.6  
    20,676       18,324        12.8        35,972        36,497        (1.4 )       218,053       182,276       19.6        551,199       525,380       4.9  
    23,024       16,285        41.4        5,068        3,852        31.6        2,595       2,310       12.3        124,262       92,935       33.7  
    18,885       13,584        39.0        —        —        —        553       225       *        101,280       81,890       23.7  
    55,375       59,442        (6.8 )       141        117        20.5        796       770       3.4        178,430       176,184       1.3  
 
 
 
     1,838       3,710        (50.5 )       —        2        *        369       2,298       (83.9 )       25,067       39,589       (36.7 ) 
    99,122       93,021        6.6        5,209        3,971        31.2        4,313       5,603       (23.0 )       429,039       390,598       9.8  
 
 
 
     3,099       2,924        6.0        7,544        7,269        3.8        16,311       13,745       18.7        53,327       51,936       2.7  
 
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Noninterest expense increased $19 million (3.9 percent) in the third quarter and $55 million (3.8 percent) in the first nine months of 2021, compared with the same periods of 2020, reflecting higher compensation expense as a result of merit increases, higher performance-based incentives related to investment sales volumes and core business growth, and an increase in net shared services expense, partially offset by lower other noninterest expense due to the allocation to the business line of previously reserved legal matters in the third quarter of 2020. The provision for credit losses was flat in the third quarter of 2021, compared with the third quarter of 2020, reflecting stable credit quality in the current quarter, compared with credit quality deterioration in the third quarter of 2020, offset by stronger balance growth in the current period compared with the third quarter of 2021. The provision for credit losses decreased $8 million (23.5 percent) in the first nine months of 2021, compared with the first nine months of 2020, reflecting a decrease in the reserve allocation in the first quarter of 2021 driven by stable credit quality.
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 $409 million of the Company’s net income in the third quarter and $1.3 billion in the first nine months of 2021, or increases of $87 million (27.0 percent) and $331 million (32.8 percent), respectively, compared with the same periods of 2020.
Net revenue increased $52 million (3.4 percent) in the third quarter and $256 million (6.1 percent) in the first nine months of 2021, compared with the same periods of 2020. Net interest income, on a taxable-equivalent basis, decreased $27 million (4.2 percent) in the third quarter and $69 million (3.6 percent) in the first nine months of 2021, compared with the same periods of 2020, primarily due to loan mix and lower loan balances resulting from higher credit card payment rates by customers. Net interest income further decreased in the third quarter of 2021, compared with the third quarter of 2020, due to slightly lower loan yields and lower deposit balances driven by lower prepaid card processing activities as government stimulus dissipated. Noninterest income increased $79 million (9.1 percent) in the third quarter and $325 million (14.0 percent) in the first nine months of 2021, compared with the same periods of 2020, mainly due to continued strengthening of consumer and business spending across most sectors driven by government stimulus, local jurisdictions reducing restrictions and consumer behaviors normalizing. As a result, there was strong growth in merchant processing services revenue driven by increased sales volume and higher merchant fees and equipment income, partially offset by higher rebates. There was also solid growth in corporate payment products revenue driven by improving business spending across all product groups. Credit and debit card revenue increased, driven by higher net interchange revenue related to sales volume. The increase in credit and debit card revenue in the third quarter of 2021, compared with the third quarter of 2020, was mostly offset by lower prepaid card processing activities as government stimulus programs dissipated.
Noninterest expense increased $17 million (2.0 percent) in the third quarter of 2021, compared with the third quarter of 2020, reflecting the timing of marketing campaigns and higher net shared services expense, partially offset by higher incremental costs related to the prepaid card business in the third quarter of 2020. Noninterest expense increased $77 million (3.2 percent) in the first nine months of 2021, compared with the first nine months of 2020, due to incremental costs related to the prepaid card business in the first six months of 2021 and lower marketing costs during 2020. The provision for credit losses decreased $80 million (32.5 percent) in the third quarter and $261 million (54.7 percent) in the first nine months of 2021, compared with the same periods of 2020, primarily driven by improved credit quality relative to the prior year.
Treasury and Corporate Support
 Treasury and Corporate Support includes the Company’s investment portfolios, funding, capital management, interest rate risk management, income taxes not allocated to the business lines, including most investments in
tax-advantaged
projects, and the residual aggregate of those expenses associated with corporate activities that are managed on a consolidated basis. Treasury and Corporate Support recorded net income of $392 million in the third quarter and $1.2 billion in the first nine months of 2021, compared with net losses of $65 million and $1.3 billion in the same periods of 2020, respectively.
Net revenue increased $102 million (49.3 percent) in the third quarter and $140 million (20.6 percent) in the first nine months of 2021, compared with the same periods of 2020. Net interest income, on a taxable-equivalent basis, increased $106 million in the third quarter of 2021, compared with the third quarter of 2020, primarily due to favorable funding and deposit mix and lower premium amortization within the investment portfolio compared with the prior year. Net interest income, on a taxable-equivalent basis, increased $126 million in the first nine months of 2021, compared with the first nine months of 2020, due to favorable
 
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   U.S. Bancorp
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funding and deposit mix, partially offset by higher premium amortization within the investment portfolio compared with the prior year. Noninterest income decreased $4 million (1.8 percent) in the third quarter and increased $14 million (2.0 percent) in the first nine months of 2021, compared with the same periods of 2020, reflecting changes in other noninterest income driven by lower equity investment income in 2021, offset by the impact of asset impairments in 2020 as a result of branch closures. The increase in noninterest income in the first nine months of 2021, compared with the first nine months of 2020, was further offset by lower gains on sales of businesses in 2021 and lower securities gains.
Noninterest expense decreased $34 million (14.8 percent) in the third quarter and $35 million (4.6 percent) in the first nine months of 2021, compared with the same periods of 2020, primarily due to lower
COVID-19
related expenses compared with the prior year, including recognizing liabilities related to future delivery exposures for merchant and airline processing, lower net shared services expense and lower amortization related to
tax-advantaged
investments which were scaled back in 2020 during the pandemic. These decreases were partially offset by higher compensation expense as a result of merit increases and higher performance-based incentives. The provision for credit losses decreased $544 million in the third quarter and $3.3 billion in the first nine months of 2021, compared with the same periods of 2020, reflecting the residual impact of changes in the allowance for credit losses being impacted by improving economic conditions in the current year, compared to deteriorating conditions in the prior year.
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, 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.
 
U.S. Bancorp  
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The following table shows the Company’s calculation of these
non-GAAP
financial measures:
 
(Dollars in Millions)   September 30,
2021		     December 31,
2020		  
Total equity
       $ 54,378     $ 53,725  
Preferred stock
     (5,968 )      (5,983 ) 
Noncontrolling interests
     (635 )      (630 ) 
Goodwill (net of deferred tax liability) (1)
     (9,063 )      (9,014 ) 
Intangible assets, other than mortgage servicing rights
     (618 )      (654 ) 
Tangible common equity (a)
     38,094       37,444  
Common equity tier 1 capital, determined in accordance with transitional regulatory capital requirements related to the CECL methodology implementation
     41,014       38,045  
Adjustments (2)
     (1,733 )      (1,733 ) 
Common equity tier 1 capital, reflecting the full implementation of the CECL methodology (b)
     39,281       36,312  
Total assets
     567,495       553,905  
Goodwill (net of deferred tax liability) (1)
     (9,063 )      (9,014 ) 
Intangible assets, other than mortgage servicing rights
     (618 )      (654 ) 
Tangible assets (c)
     557,814       544,237  
Risk-weighted assets, determined in accordance with prescribed regulatory capital requirements effective for the Company (d)
     404,021       393,648  
Adjustments (3)
     (684 )      (1,471 ) 
Risk-weighted assets, reflecting the full implementation of the CECL methodology (e)
     403,337       392,177  
Ratios
    
Tangible common equity to tangible assets (a)/(c)
     6.8 %      6.9 % 
Tangible common equity to risk-weighted assets (a)/(d)
     9.4       9.5  
Common equity tier 1 capital to risk-weighted assets, reflecting the full implementation of the CECL methodology (b)/(e)
     9.7       9.3  
 
    Three Months Ended
September 30		     Nine Months Ended
September 30		  
    2021     2020     2021     2020  
Net interest income
   $ 3,171     $ 3,227     $ 9,371     $ 9,650  
Taxable-equivalent adjustment (4)
     26       25       79       73  
Net interest income, on a taxable-equivalent basis
     3,197       3,252       9,450       9,723  
Net interest income, on a taxable-equivalent basis (as calculated above)
     3,197       3,252       9,450       9,723  
Noninterest income
     2,693       2,712       7,693       7,851  
Less: Securities gains (losses), net
     20       12       88       143  
Total net revenue, excluding net securities gains (losses) (f)
     5,870       5,952       17,055       17,431  
 
Noninterest expense (g)
     3,429       3,371       10,195       10,005  
 
Efficiency ratio (g)/(f)
     58.4 %      56.6 %      59.8 %      57.4 % 
 
(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.    
 
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. These accounting policies are discussed in detail in “Management’s Discussion and Analysis — Critical Accounting Policies” and the Notes to Consolidated Financial Statements in the Company’s Annual Report on
Form 10-K
for the year ended December 31, 2020.
CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon this evaluation, the principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
During the most recently completed fiscal quarter, there was no change made in the Company’s internal control over financial reporting (as defined in Rules
13a-15(f)
and
15d-15(f)
under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
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   U.S. Bancorp
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U.S. Bancorp
Consolidated Balance Sheet
 
(Dollars in Millions)  
September 30,
2021
   
December 31,
2020
 
    (Unaudited)        
     
Assets
                
Cash and due from banks
   $  63,904     $  62,580  
Available-for-sale investment securities ($850 and $402 pledged as collateral, respectively) (a)
     149,376       136,840  
Loans held for sale (including $6,176 and $8,524 of mortgage loans carried at fair value, respectively)
     6,191       8,761  
Loans
                
Commercial
     101,013       102,871  
Commercial real estate
     38,808       39,311  
Residential mortgages
     74,954       76,155  
Credit card
     22,137       22,346  
Other retail
     60,696       57,024  
Total loans
     297,608       297,707  
Less allowance for loan losses
     (5,792 )      (7,314 ) 
Net loans
     291,816       290,393  
Premises and equipment
     3,262       3,468  
Goodwill
     9,996       9,918  
Other intangible assets
     3,528       2,864  
Other assets (including $1,426 and $1,255 of trading securities at fair value pledged as collateral, respectively) (a)
     39,422       39,081  
Total assets
   $ 567,495     $ 553,905  
     
Liabilities and Shareholders’ Equity
                
Deposits
                
Noninterest-bearing
   $ 135,549     $ 118,089  
Interest-bearing (b)
     307,353       311,681  
Total deposits
     442,902       429,770  
Short-term borrowings
     16,088       11,766  
Long-term debt
     35,671       41,297  
Other liabilities
     18,456       17,347  
Total liabilities
     513,117       500,180  
Shareholders’ equity
                
Preferred stock
     5,968       5,983  
Common stock, par value $0.01 a share—authorized: 4,000,000,000 shares; issued: 9/30/21 and 12/31/20— 2,125,725,742 shares
     21       21  
Capital surplus
     8,550       8,511  
Retained earnings
     68,297       64,188  
Less cost of common stock in treasury: 9/30/21—643,035,053 shares; 12/31/20—618,618,084 shares
     (27,301 )      (25,930 ) 
Accumulated other comprehensive income (loss)
     (1,792 )      322  
Total U.S. Bancorp shareholders’ equity
     53,743       53,095  
Noncontrolling interests
     635       630  
Total equity
     54,378       53,725  
Total liabilities and equity
   $ 567,495     $ 553,905  
 
(a)
Includes only collateral pledged by the Company where counterparties have the right to sell or pledge the collateral.
(b)
lncludes time deposits greater than $250,000 balances of $2.4 billion and $4.4 billion at September 30, 2021 and December 31, 2020, respectively.
See Notes to Consolidated Financial Statements.
 
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U.S. Bancorp
Consolidated Statement of Income
 
(Dollars and Shares in Millions, Except Per Share Data)
(Unaudited)
   Three Months Ended
September 30		             Nine Months Ended
September 30		  
  2021     2020             2021     2020  
Interest Income
                      
 
                 
Loans
   $ 2,711     $ 2,892        
 
    $ 8,112     $ 9,152  
Loans held for sale
     54       61        
 
      176       157  
Investment securities
     606       586        
 
      1,741       1,908  
Other interest income
     38       34    
 
 
 
      103       144  
Total interest income
     3,409       3,573        
 
      10,132       11,361  
Interest Expense
                      
 
                 
Deposits
     78       130        
 
      245       849  
Short-term borrowings
     18       19        
 
      52       124  
Long-term debt
     142       197    
 
 
 
      464       738  
Total interest expense
     238       346    
 
 
 
      761       1,711  
Net interest income
     3,171       3,227        
 
      9,371       9,650  
Provision for credit losses
     (163 )      635    
 
 
 
      (1,160 )      3,365  
Net interest income after provision for credit losses
     3,334       2,592        
 
      10,531       6,285  
Noninterest Income
                      
 
                 
Credit and debit card revenue
     393       388        
 
      1,125       976  
Corporate payment products revenue
     156       125        
 
      420       371  
Merchant processing services
     392       347        
 
      1,084       950  
Trust and investment management fees
     459       434        
 
      1,349       1,295  
Deposit service charges
     194       170        
 
      531       512  
Treasury management fees
     155       145        
 
      462       425  
Commercial products revenue
     277       303        
 
      837       904  
Mortgage banking revenue
     418       553        
 
      1,063       1,596  
Investment products fees
     62       48        
 
      177       142  
Securities gains (losses), net
     20       12        
 
      88       143  
Other
     167       187    
 
 
 
      557       537  
Total noninterest income
     2,693       2,712        
 
      7,693       7,851  
Noninterest Expense
                      
 
                 
Compensation
     1,847       1,687        
 
      5,448       4,992  
Employee benefits
     336       335        
 
      1,057       1,001  
Net occupancy and equipment
     259       276        
 
      780       823  
Professional services
     126       102        
 
      332       307  
Marketing and business development
     99       72        
 
      237       213  
Technology and communications
     361       334        
 
      1,082       932  
Postage, printing and supplies
     69       70        
 
      203       214  
Other intangibles
     41       44        
 
      119       129  
Other
     291       451    
 
 
 
      937       1,394  
Total noninterest expense
     3,429       3,371    
 
 
 
      10,195       10,005  
Income before income taxes
     2,598       1,933        
 
      8,029       4,131  
Applicable income taxes
     564       347    
 
 
 
      1,722       671  
Net income
     2,034       1,586        
 
      6,307       3,460  
Net (income) loss attributable to noncontrolling interests
     (6 )      (6 )   
 
 
 
      (17 )      (20 ) 
Net income attributable to U.S. Bancorp
   $ 2,028     $ 1,580    
 
 
 
    $ 6,290     $ 3,440  
Net income applicable to U.S. Bancorp common shareholders
   $ 1,934     $ 1,494    
 
 
 
    $ 6,023     $ 3,196  
Earnings per common share
   $   1.30     $     .99        
 
    $   4.04     $   2.12  
Diluted earnings per common share
   $   1.30     $     .99        
 
    $   4.04     $   2.11  
Average common shares outstanding
     1,483       1,506        
 
      1,491       1,510  
Average diluted common shares outstanding
     1,484       1,507    
 
 
 
      1,492       1,511  
See Notes to Consolidated Financial Statements.
 
38
   U.S. Bancorp
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U.S. Bancorp
Consolidated Statement of Comprehensive Income
 
(Dollars in Millions)
(Unaudited)
  
Three Months Ended
September 30
            
Nine Months Ended
September 30
  
  2021     2020             2021     2020  
Net income
   $ 2,034     $ 1,586        
 
    $ 6,307     $ 3,460  
Other Comprehensive Income (Loss)
                      
 
                 
Changes in unrealized gains and losses on investment securities available-for-sale
     (825 )      (305 )       
 
      (3,008 )      2,935  
Changes in unrealized gains and losses on derivative hedges
     8       27        
 
      121       (230 ) 
Foreign currency translation
     (1 )      6        
 
      23       (6 ) 
Reclassification to earnings of realized gains and losses
     27       23        
 
      34       (42 ) 
Income taxes related to other comprehensive income (loss)
     201       63    
 
 
 
      716       (672 ) 
Total other comprehensive income (loss)
     (590 )      (186 )   
 
 
 
      (2,114 )      1,985  
Comprehensive income (loss)
     1,444       1,400        
 
      4,193       5,445  
Comprehensive (income) loss attributable to noncontrolling interests
     (6 )      (6 )   
 
 
 
      (17 )      (20 ) 
           
Comprehensive income (loss) attributable to U.S. Bancorp
   $ 1,438     $ 1,394    
 
 
 
    $ 4,176     $ 5,425  
See Notes to Consolidated Financial Statements.
 
 
U.S. Bancorp  
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U.S. Bancorp
Consolidated Statement of Shareholders’ Equity
 
    U.S. Bancorp Shareholders              
(Dollars and Shares in Millions, Except Per
Share Data) (Unaudited)		  
Common
Shares
Outstanding
    
Preferred
Stock
    
Common
Stock
    
Capital
Surplus
    
Retained
Earnings
    
Treasury
Stock
    
Accumulated
Other
Comprehensive
Income (Loss)
    
Total
U.S. Bancorp
Shareholders’
Equity
    
Noncontrolling
Interests
    
Total
Equity
  
Balance 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 (a)
                                     (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 June 30, 2021
     1,483     $ 5,968     $ 21     $ 8,518     $ 67,039     $ (27,305 )    $ (1,202 )    $ 53,039     $ 635     $ 53,674  
Net income (loss)
                                     2,028                       2,028       6       2,034  
Other comprehensive income (loss)
                                                     (590 )      (590 )              (590 ) 
Preferred stock dividends (b)
                                     (84 )                      (84 )              (84 ) 
Common stock dividends ($.46 per share)
                                     (686 )                      (686 )              (686 ) 
Issuance of common and treasury stock
                             (1 )              4               3               3  
Distributions to noncontrolling interests
                                                             —       (5 )      (5 ) 
Net other changes in noncontrolling interests
                                                             —       (1 )      (1 ) 
Stock option and restricted stock grants
  
 
 
 
  
 
 
 
  
 
 
 
     33    
 
 
 
  
 
 
 
  
 
 
 
     33    
 
 
 
     33  
                     
Balance September 30, 2021
     1,483     $ 5,968     $ 21     $ 8,550     $ 68,297     $ (27,301 )    $ (1,792 )    $ 53,743     $ 635     $ 54,378  
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 (c)
                                     (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 (d)
                                     (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  
Balance December 31, 2020
     1,507     $ 5,983     $ 21     $ 8,511     $ 64,188     $ (25,930 )    $ 322     $ 53,095     $ 630     $ 53,725  
Net income (loss)
                                     6,290                       6,290       17       6,307  
Other comprehensive income (loss)
                                                     (2,114 )      (2,114 )              (2,114 ) 
Preferred stock dividends (e)
                                     (232 )                      (232 )              (232 ) 
Common stock dividends ($1.30 per share)
                                     (1,944 )                      (1,944 )              (1,944 ) 
Issuance of preferred stock
             730                                               730               730  
Redemption of preferred stock
             (745 )                      (5 )                      (750 )              (750 ) 
Issuance of common and treasury stock
     4                       (127 )              166               39               39  
Purchase of treasury stock
     (28 )                                      (1,537 )              (1,537 )              (1,537 ) 
Distributions to noncontrolling interests
                                                             —       (16 )      (16 ) 
Net other changes in noncontrolling interests
                                                             —       4       4  
Stock option and restricted stock grants
  
 
 
 
  
 
 
 
  
 
 
 
     166    
 
 
 
  
 
 
 
  
 
 
 
     166    
 
 
 
     166  
                     
Balance September 30, 2021
     1,483     $ 5,968     $ 21     $ 8,550     $ 68,297     $ (27,301 )    ($ 1,792 )    $ 53,743     $ 635     $ 54,378  
 
(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 J, Series K, Series L and Series M Non-Cumulative Perpetual Preferred Stock of $894.444, $223.611, $406.25, $662.50, $343.75, $234.375 and $250.00, respectively.
(c)
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.
(d)
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.
(e)
Reflects dividends declared per share on the Company’s Series A, Series B, Series F, Series I, Series J, Series K, Series L and Series M Non-Cumulative Perpetual Preferred Stock of $2,654.166, $663.542, $1,218.75, $232.953, $1,325.00, $1,031.25, $703.125 and $702.778, respectively.
See Notes to Consolidated Financial Statements.
 
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U.S. Bancorp
Consolidated Statement of Cash Flows
 
(Dollars in Millions)
(Unaudited)
  
Nine Months Ended
September 30
  
  2021     2020  
Operating Activities
                
Net income attributable to U.S. Bancorp
   $ 6,290     $ 3,440  
Adjustments to reconcile net income to net cash provided by operating activities
                
Provision for credit losses
     (1,160 )      3,365  
Depreciation and amortization of premises and equipment
     253       264  
Amortization of intangibles
     119       129  
(Gain) loss on sale of loans held for sale
     (950 )      (1,613 ) 
(Gain) loss on sale of securities and other assets
     (297 )      (274 ) 
Loans originated for sale, net of repayments
     (56,256 )      (46,456 ) 
Proceeds from sales of loans held for sale
     58,517       45,469  
Other, net
     2,651       461  
Net cash provided by operating activities
     9,167       4,785  
Investing Activities
                
Proceeds from sales of available-for-sale investment securities
     13,383       13,920  
Proceeds from maturities of available-for-sale investment securities
     33,740       24,992  
Purchases of available-for-sale investment securities
     (62,764 )      (48,481 ) 
Net increase in loans outstanding
     (1,157 )      (3,915 ) 
Proceeds from sales of loans
     4,228       1,429  
Purchases of loans
     (3,278 )      (9,561 ) 
Net (increase) decrease in securities purchased under agreements to resell
     (41 )      732  
Other, net
     120       (966 ) 
Net cash used in investing activities
     (15,769 )      (21,850 ) 
Financing Activities
                
Net increase in deposits
     13,132       51,301  
Net increase (decrease) in short-term borrowings
     4,322       (10,000 ) 
Proceeds from issuance of long-term debt
     1,211       14,282  
Principal payments or redemption of long-term debt
     (6,603 )      (13,088 ) 
Proceeds from issuance of preferred stock
     730       —    
Proceeds from issuance of common stock
     38       11  
Repurchase of preferred stock
     (1,250 )      —    
Repurchase of common stock
     (1,537 )      (1,660 ) 
Cash dividends paid on preferred stock
     (223 )      (222 ) 
Cash dividends paid on common stock
     (1,894 )      (1,917 ) 
Net cash provided by financing activities
     7,926       38,707  
Change in cash and due from banks
     1,324       21,642  
Cash and due from banks at beginning of period
     62,580       22,405  
Cash and due from banks at end of period
   $ 63,904     $ 44,047  
See Notes to Consolidated Financial Statements.
 
U.S. Bancorp  
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Table of Contents
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, 2020. Certain amounts in prior periods have been reclassified to conform to the current presentation.
 
 Note 2
  
   Accounting Changes
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 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 in the process of evaluating and applying, as applicable, the optional expedients and exceptions in accounting for eligible contract modifications, eligible existing hedging relationships and new hedging relationships available through December 31, 2022. The adoption of this guidance has not had, and is expected to continue to not have, a material impact on the Company’s financial statements.
 
 Note 3
  
   Business Combinations
In September 2021, the Company announced that it has entered into a definitive agreement to acquire MUFG Union Bank’s core regional banking franchise from Mitsubishi UFJ Financial Group (“MUFG”), for a purchase price of approximately $8.0 billion, including $5.5 billion in cash and approximately 44 million shares of the Company’s common stock. Upon close of the transaction, MUFG will hold approximately 2.9 percent of the Company’s common stock. The transaction excludes the purchase of MUFG Union Bank’s Global Corporate & Investment Bank, certain middle and back office functions, and other assets. MUFG Union Bank currently has approximately 300 branches in California, Washington and Oregon and is expected to add, based on MUFG Union Bank’s June 30, 2021 balance sheet, approximately $105 billion in total assets, $58 billion of loans and $90 billion of deposits to the Company’s consolidated balance sheet. The transaction is expected to close in the first half of 2022, subject to customary closing conditions, including regulatory approvals.
 
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   U.S. Bancorp
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 Note 4
  
   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, 2021 and December 31, 2020.
The amortized cost, gross unrealized holding gains and losses, and fair value of available-for-sale investment securities were as follows:
 
    September 30, 2021      December 31, 2020  
(Dollars in Millions)  
Amortized
Cost
      Unrealized
Gains		      Unrealized
Losses		    
Fair
Value
     
Amortized
Cost
      Unrealized
Gains		      Unrealized
Losses		    
Fair
Value
  
U.S. Treasury and agencies
   $ 18,460      $ 230      $ (199 )    $ 18,491      $ 21,954      $ 462      $ (25 )    $ 22,391  
Mortgage-backed securities
                                
 
                                   
Residential agency
     113,137        996        (1,337 )      112,796        98,031        1,950        (13 )      99,968  
Commercial agency
     7,750        77        (141 )      7,686        5,251        170        (15 )      5,406  
Asset-backed securities
     64        5        –       69        200        5        –       205  
Obligations of state and political subdivisions
     9,820        560        (53 )      10,327        8,166        695        –       8,861  
Other
     7        –        –       7        9        –        –       9  
Total available-for-sale
   $ 149,238      $ 1,868      $ (1,730 )    $ 149,376      $ 133,611      $ 3,282      $ (53 )    $ 136,840  
Investment securities with a fair value of $31.7 billion at September 30, 2021, and $11.0 billion at December 31, 2020, 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 $850 million at September 30, 2021, and $402 million at December 31, 2020.
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)           2021              2020          2021          2020  
Taxable
   $ 539      $ 528      $ 1,548      $ 1,741  
Non-taxable
     67        58        193        167  
Total interest income from investment securities
   $ 606      $ 586      $ 1,741      $ 1,908  
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)           2021             2020           2021          2020  
Realized gains
   $ 39     $ 12      $ 107     $ 166  
Realized losses
     (19 )      –        (19 )      (23 ) 
Net realized gains
   $ 20     $ 12      $ 88     $ 143  
Income tax on net realized gains
   $ 5     $ 3      $ 22     $ 36  
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, 2021 and December 31, 2020.
 
U.S. Bancorp  
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At September 30, 2021, 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, 2021:
 
    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
 
$
 6,023
 
  
$
 (163
) 
  
$
 980
 
  
        $
 (36
) 
  
$
 7,003
 
  
$
 (199
) 
Residential agency mortgage-backed securities
 
 
 66,781
 
  
 
 (1,328
) 
  
 
 375
 
  
 
 (9
) 
  
 
 67,156
 
  
 
 (1,337
) 
Commercial agency mortgage-backed securities
 
 
 3,947
 
  
 
 (88
) 
  
 
 1,122
 
  
 
 (53
) 
  
 
 5,069
 
  
 
 (141
) 
Asset-backed securities
 
 
–
 
  
 
–
 
  
 
 2
 
  
 
–
 
  
 
 2
 
  
 
–
 
Obligations of state and political subdivisions
 
 
 2,145
 
  
 
 (53
) 
  
 
–
 
  
 
–
 
  
 
 2,145
 
  
 
 (53
) 
Other
 
 
 4
 
  
 
–
 
  
 
–
 
  
 
–
 
  
 
 4
 
  
 
–
 
Total investment securities
 
$
 78,900
 
  
$
 (1,632
) 
  
$
 2,479
 
  
        $
 (98
) 
  
$
 81,379
 
  
$
 (1,730
) 
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 unr
e
alized 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, 2021, 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, 2021 and 2020, the Company did not purchase any available-for-sale investment securities that had more-than-insignificant credit deterioration.
 
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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, 2021:
 
(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
   $ 2,873      $ 2,894        .5        1.87 % 
Maturing after one year through five years
     6,835        6,977        2.4        1.61  
Maturing after five years through ten years
     7,146        7,041        7.9        1.33  
Maturing after ten years
     1,606        1,579        12.6        1.91  
Total
   $ 18,460      $ 18,491        5.1        1.57 % 
Mortgage-Backed Securities (a)
                                   
Maturing in one year or less
   $ 140      $ 138        .5        1.70 % 
Maturing after one year through five years
     54,361        55,259        3.4        1.57  
Maturing after five years through ten years
     66,370        65,068        6.5        1.53  
Maturing after ten years
     16        17        12.2        1.27  
Total
   $ 120,887      $ 120,482        5.1        1.55 % 
Asset-Backed Securities (a)
                                   
Maturing in one year or less
   $ –      $ –        .6        2.69 % 
Maturing after one year through five years
     63        66        3.8        1.50  
Maturing after five years through ten years
     1        2        6.2        2.58  
Maturing after ten years
     –        1        12.9        2.41  
Total
   $ 64      $ 69        3.8        1.51 % 
Obligations of State and Political Subdivisions (b) (c)
                                   
Maturing in one year or less
   $ 349      $ 355        .6        4.28 % 
Maturing after one year through five years
     2,492        2,663        4.1        4.24  
Maturing after five years through ten years
     5,595        5,964        6.9        3.73  
Maturing after ten years
     1,384        1,345        17.4        2.50  
Total
   $ 9,820      $ 10,327        7.4        3.71 % 
Other
                                   
Maturing in one year or less
   $ –      $ –        –        – % 
Maturing after one year through five years
     7        7        3.7        2.07  
Maturing after five years through ten years
     –        –        –        –  
Maturing after ten years
     –        –        –        –  
Total
   $ 7      $ 7        3.7        2.07 % 
Total investment securities (d)
   $ 149,238      $ 149,376        5.3        1.69 % 
 
(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 3.4 years at December 31, 2020, with a corresponding weighted-average yield of 1.61 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.
 
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 Note 5
 
   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, 2021             December 31, 2020  
(Dollars in Millions)   Amount      Percent
of Total		             Amount      Percent
of Total		  
Commercial
                       
 
                  
Commercial
   $ 95,876        32.2 %       
 
    $ 97,315        32.7 % 
Lease financing
     5,137        1.8    
 
 
 
      5,556        1.9  
Total commercial
     101,013        34.0        
 
      102,871        34.6  
Commercial Real Estate
                       
 
                  
Commercial mortgages
     28,029        9.4        
 
      28,472        9.6  
Construction and development
     10,779        3.6    
 
 
 
      10,839        3.6  
Total commercial real estate
     38,808        13.0        
 
      39,311        13.2  
Residential Mortgages
                       
 
                  
Residential mortgages
     65,941        22.2        
 
      66,525        22.4  
Home equity loans, first liens
     9,013        3.0    
 
 
 
      9,630        3.2  
Total residential mortgages
     74,954        25.2        
 
      76,155        25.6  
Credit Card
     22,137        7.4        
 
      22,346        7.5  
Other Retail
                       
 
                  
Retail leasing
     7,505        2.5        
 
      8,150        2.7  
Home equity and second mortgages
     10,718        3.6        
 
      12,472        4.2  
Revolving credit
     2,682        .9        
 
      2,688        .9  
Installment
     16,166        5.5        
 
      13,823        4.6  
Automobile
     23,488        7.9        
 
      19,722        6.6  
Student
     137        –    
 
 
 
      169        .1  
Total other retail
     60,696        20.4    
 
 
 
      57,024        19.1  
Total loans
   $ 297,608        100.0 %   
 
 
 
    $ 297,707        100.0 % 
The Company had loans of $89.8 billion at September 30, 2021, and $96.1 billion at December 31, 2020, pledged at the Federal Home Loan Bank, and loans of $73.1 billion at September 30, 2021, and $67.8 billion at December 31, 2020, 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 $567 million at September 30, 2021 and $763 million at December 31, 2020. 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 loans. All other purchased loans are considered
non-purchased
credit deteriorated loans.
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 considers expected losses for the remaining lives of the applicable assets, inclusive of expected recoveries. 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. Multiple economic scenarios are considered over a three-year reasonable and supportable forecast period, which includes increasing consideration of historical loss experience over 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 life of the portfolio. The economic scenarios are updated at least quarterly and are designed to provide a range of reasonable estimates, from better to worse than current expectations. Scenarios are weighted based on the Company’s expectation of economic conditions for the foreseeable future and reflect significant judgment and consideration of uncertainties that exist. 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.
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 and corporate bonds spreads, as well as loan and borrower characteristics, such as internal risk ratings on commercial loans and consumer credit scores, delinquency
 
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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. 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. Where loans do not exhibit similar risk characteristics, an individual analysis is performed to consider expected credit losses. 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 as appropriate.
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 generally do not include loan modifications granted to customers resulting directly from the economic effects of the
COVID-19
pandemic, who were otherwise in current payment status. 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, 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 and refreshed LTV ratios when possible. 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, regardless of PCD status, are recognized through provision expense, with 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, 2021.
The Company’s methodology for determining the appropriate allowance for credit losses also considers the imprecision inherent in the methodologies used and allocated to the various loan portfolios. 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 the 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 for each loan portfolio.
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.
Prior to January 1, 2020, the allowance for credit losses was established based on an incurred loss model. The allowance recorded for loans in the commercial lending segment was based on the migration analysis of commercial loans and actual loss experience. The allowance recorded for loans in the consumer lending segment was determined on a homogenous pool basis and primarily included consideration of delinquency status and historical losses. In addition to the amounts determined under the methodologies described above, management also considered the potential impact of qualitative factors.
 
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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		  
2021
                                                
Balance at beginning of period
     $1,838       $1,409       $478       $1,891       $   994       $6,610  
Add
                                                
Provision for credit losses
     (75 )      (104 )      3       (23 )      36       (163 ) 
Deduct
                                                
Loans
charged-off
     40       14       3       154       55       266  
Less recoveries of loans
charged-off
     (26 )      (1 )      (13 )      (43 )      (36 )      (119 ) 
Net loan charge-offs (recoveries)
     14       13       (10 )      111       19       147  
Balance at end of period
     $1,749       $1,292       $491       $1,757       $1,011       $6,300  
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 loan charge-offs (recoveries)
     178       83       (3 )      201       56       515  
Balance at end of period
     $2,487       $1,449       $587       $2,324       $1,163       $8,010  
 
Nine Months Ended September 30
(Dollars in Millions)
   Commercial     Commercial
Real Estate		     Residential
Mortgages		     Credit
Card		     Other
Retail		     Total
Loans		  
2021
                                                
Balance at beginning of period
     $2,423       $1,544       $573       $2,355       $1,115       $8,010  
Add
                                                
Provision for credit losses
     (577 )      (246 )      (107 )      (195 )      (35 )      (1,160 ) 
Deduct
                                                
Loans
charged-off
     184       28       13       536       193       954  
Less recoveries of loans
charged-off
     (87 )      (22 )      (38 )      (133 )      (124 )      (404 ) 
Net loan charge-offs (recoveries)
     97       6       (25 )      403       69       550  
Balance at end of period
     $1,749       $1,292       $491       $1,757       $1,011       $6,300  
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 loan charge-offs (recoveries)
     363       103       (5 )      664       220       1,345  
Balance at end of period
     $2,487       $1,449       $587       $2,324       $1,163       $8,010  
 
(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 decrease in the allowance for credit losses from December 31, 2020 to September 30, 2021 primarily reflected factors affecting economic conditions during the first nine months of 2021, including the enactment of additional benefits from government stimulus programs and broad vaccine availability in the United States that has reduced the risks associated with
COVID-19,
contributing to an economic recovery and strong portfolio credit performance. Other factors considered include concerns around inflationary pressures, new virus variants, sustainability of asset values and borrower liquidity, along with the lack of a clear path to government funding.
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 portfolio 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 cont
r
actually required payments not made (for example, two missed payments is considered 30 days delinquent). When a loan is placed on nonaccrual status, unpaid accrued interest is reversed, reducing interest income in the current period.
Commercial lending segment loans are generally placed on nonaccrual status when the collection of principal and interest has become 90 days past due or is otherwise considered doubtful. Commercial lending segment loans are generally fully or partially charged down to the fair value of the collateral securing the loan, less costs to sell, when the loan is placed on nonaccrual.
Consumer lending segment loans are generally
charged-off
at a specific number of days or payments past due. Residential mortgages and other retail loans secured by
1-4
family properties are generally charged down to the fair
 
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   U.S. Bancorp
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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.
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, 2021
                                            
Commercial
   $ 100,595        $   163        $  39        $   216        $101,013  
Commercial real estate
     38,459        32        21        296        38,808  
Residential mortgages (a)
     74,450        153        114        237        74,954  
Credit card
     21,807        183        147        –        22,137  
Other retail
     60,224        251        64        157        60,696  
Total loans
   $ 295,535        $   782        $385        $   906        $297,608  
December 31, 2020
                                            
Commercial
   $ 102,127        $   314        $  55        $   375        $102,871  
Commercial real estate
     38,676        183        2        450        39,311  
Residential mortgages (a)
     75,529        244        137        245        76,155  
Credit card
     21,918        231        197        –        22,346  
Other retail
     56,466        318        86        154        57,024  
Total loans
   $ 294,716        $1,290        $477        $1,224        $297,707  
 
(a)
At September 30, 2021, $946 million of loans 30–89 days past due and $1.5 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 $1.4 billion and $1.8 billion at December 31, 2020, respectively.
(b)
Substantially all nonperforming loans at September 30, 2021 and December 31, 2020, had an associated allowance for credit losses. The Company recognized interest income on nonperforming loans of $4 million and $9 million for the three months ended September 30, 2021 and 2020, respectively, and $11 million and $19 million for the nine months ended September 30, 2021 and 2020, respectively.
At September 30, 2021, the amount of foreclosed residential real estate held by the Company, and included in other real estate owned (“OREO”), was $17 million, compared with $23 million at December 31, 2020. These amounts excluded $19 million and $33 million at September 30, 2021 and December 31, 2020, 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, 2021 and December 31, 2020, was $778 million and $1.0 billion, respectively, of which $620 million and $812 million, 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.
 
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The Company classifies its loan portfolio classes 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, 2021              December 31, 2020  
          Criticized                         Criticized        
(Dollars in Millions)   Pass     Special
Mention		     Classified (a)     Total
Criticized		     Total              Pass     Special
Mention		     Classified (a)     Total
Criticized		     Total  
Commercial
                                               
 
                                         
Originated in 2021
     $  32,826       $   346       $   277       $     623       $  33,449         
 
      $          –       $       –       $       –       $         –       $          –  
Originated in 2020
     17,202       637       252       889       18,091         
 
        34,557       1,335       1,753       3,088       37,645  
Originated in 2019
     11,851       198       63       261       12,112         
 
      17,867       269       349       618       18,485  
Originated in 2018
     6,853       77       51       128       6,981         
 
      12,349       351       176       527       12,876  
Originated in 2017
     3,213       14       53       67       3,280         
 
      5,257       117       270       387       5,644  
Originated prior to 2017
     3,373       30       40       70       3,443         
 
      4,954       128       115       243       5,197  
Revolving
     23,204       353       100       453       23,657     
 
 
 
      22,445       299       280       579       23,024  
Total commercial
     98,522       1,655       836       2,491       101,013         
 
      97,429       2,499       2,943       5,442       102,871  
                       
Commercial real estate
                                               
 
                                         
Originated in 2021
     9,456       50       772       822       10,278         
 
      –       –       –       –       –  
Originated in 2020
     8,238       119       435       554       8,792         
 
      9,446       461       1,137       1,598       11,044  
Originated in 2019
     7,382       298       694       992       8,374         
 
      9,514       454       1,005       1,459       10,973  
Originated in 2018
     3,662       142       330       472       4,134         
 
      6,053       411       639       1,050       7,103  
Originated in 2017
     1,943       25       150       175       2,118         
 
      2,650       198       340       538       3,188  
Originated prior to 2017
     3,239       26       103       129       3,368         
 
      4,762       240       309       549       5,311  
Revolving
     1,556       1       187       188       1,744     
 
 
 
      1,445       9       238       247       1,692  
Total commercial real estate
     35,476       661       2,671       3,332       38,808         
 
      33,870       1,773       3,668       5,441       39,311  
                       
Residential mortgages (b)
                                               
 
                                         
Originated in 2021
     21,045       –       –       –       21,045         
 
      –       –       –       –       –  
Originated in 2020
     18,043       1       5       6       18,049         
 
      23,262       1       3       4       23,266  
Originated in 2019
     8,508       1       18       19       8,527         
 
      13,969       1       17       18       13,987  
Originated in 2018
     3,492       –       21       21       3,513         
 
      5,670       1       22       23       5,693  
Originated in 2017
     4,494       –       21       21       4,515         
 
      6,918       1       24       25       6,943  
Originated prior to 2017
     19,002       –       302       302       19,304         
 
      25,921       2       342       344       26,265  
Revolving
     1       –       –       –       1     
 
 
 
      1       –       –       –       1  
Total residential mortgages
     74,585       2       367       369       74,954         
 
      75,741       6       408       414       76,155  
                       
Credit card (c)
     21,990       –       147       147       22,137         
 
      22,149       –       197       197       22,346  
                       
Other retail
                                               
 
                                         
Originated in 2021
     17,248       –       3       3       17,251         
 
      –       –       –       –       –  
Originated in 2020
     13,318       –       8       8       13,326         
 
      17,589       –       7       7       17,596  
Originated in 2019
     8,300       –       16       16       8,316         
 
      11,605       –       23       23       11,628  
Originated in 2018
     4,332       –       16       16       4,348         
 
      6,814       –       27       27       6,841  
Originated in 2017
     2,130       –       11       11       2,141         
 
      3,879       –       22       22       3,901  
Originated prior to 2017
     2,259       –       16       16       2,275         
 
      3,731       –       29       29       3,760  
Revolving
     12,400       –       123       123       12,523         
 
      12,647       –       110       110       12,757  
Revolving converted to term
     473       –       43       43       516     
 
 
 
      503       –       38       38       541  
Total other retail
     60,460       –       236       236       60,696     
 
 
 
      56,768       –       256       256       57,024  
Total loans
     $291,033       $2,318       $4,257       $  6,575       $297,608     
 
 
 
      $285,957       $4,278       $7,472       $11,750       $297,707  
Total outstanding commitments
     $645,955       $4,606       $6,342       $10,948       $656,903     
 
 
 
      $627,606       $8,772       $9,374       $18,146       $645,752  
 
Note:
Year of origination is based on the origination date of a loan, or for existing loans the date when the maturity date, pricing or commitment amount is amended.
(a)
Classified rating on consumer loans primarily based on delinquency status.
(b)
At September 30, 2021, $1.5 billion of GNMA loans 90 days or more past due and $1.2 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 $1.8 billion and $1.4 billion at December 31, 2020, respectively.
(c)
All credit card loans are considered revolving loans.
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
 
 
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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 for the periods presented by portfolio class:
 
    2021              2020  
(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
     506        $     46        $  47         
 
      699        $   262        $   159  
Commercial real estate
     14        12        13         
 
      51        105        81  
Residential mortgages
     171        54        54         
 
      374        108        108  
Credit card
     6,656        38        38         
 
      4,699        27        27  
Other retail
     382        9        9     
 
 
 
      508        26        26  
Total loans, excluding loans purchased from GNMA mortgage pools
     7,729        159        161         
 
      6,331        528        401  
Loans purchased from GNMA mortgage pools
     802        113        118     
 
 
 
      735        106        105  
Total loans
     8,531        $   272        $279     
 
 
 
      7,066        $   634        $   506  
Nine Months Ended September 30
                                 
 
                           
Commercial
     1,736        $   133        $120         
 
      2,837        $   505        $   375  
Commercial real estate
     100        136        125         
 
      116        165        141  
Residential mortgages
     867        299        298         
 
      585        142        142  
Credit card
     17,492        102        103         
 
      19,282        110        112  
Other retail
     2,175        64        58     
 
 
 
      1,537        50        48  
Total loans, excluding loans purchased from GNMA mortgage pools
     22,370        734        704         
 
      24,357        972        818  
Loans purchased from GNMA mortgage pools
     1,839        267        276     
 
 
 
      3,648        514        503  
Total loans
     24,209        $1,001        $980     
 
 
 
      28,005        $1,486        $1,321  
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. At September 30, 2021, 5 residential mortgages, 2 home equity and second mortgage loans and 43 loans purchased from GNMA mortgage pools with outstanding balances of less than $1 million, less than $1 million and $5 million, respectively, were in a trial period and have estimated post-modification balances of less than $1 million, less than $1 million and $5 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, 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
 
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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 generally not considered to be TDRs.
As of September 30, 2021 and December 31, 2020, approximately
 $3.0 
billion and $10.1 billion, respectively, 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. 
The following table provides a summary of TDR loans that defaulted (fully or partially
charged-off
or became 90 days or more past due) for the periods presented, that were modified as TDRs within 12 months previous to default:
 
    2021              2020  
(Dollars in Millions)   Number
of Loans		      Amount
Defaulted		              Number
of Loans		      Amount
Defaulted		  
Three Months Ended September 30
                        
 
                  
Commercial
     244        $  5         
 
      305        $  21  
Commercial real estate
     4        1         
 
      5        8  
Residential mortgages
     20        2         
 
      5        2  
Credit card
     2,069        12         
 
      1,363        8  
Other retail
     124        2     
 
 
 
      55        1  
Total loans, excluding loans purchased from GNMA mortgage pools
     2,461        22         
 
      1,733        40  
Loans purchased from GNMA mortgage pools
     29        5     
 
 
 
      72        9  
Total loans
     2,490        $27     
 
 
 
      1,805        $  49  
Nine Months Ended September 30
                        
 
                  
Commercial
     856        $29         
 
      922        $  49  
Commercial real estate
     16        7         
 
      33        24  
Residential mortgages
     47        5         
 
      23        4  
Credit card
     5,638        32         
 
      5,169        27  
Other retail
     595        10     
 
 
 
      245        3  
Total loans, excluding loans purchased from GNMA mortgage pools
     7,152        83         
 
      6,392        107  
Loans purchased from GNMA mortgage pools
     102        15     
 
 
 
      427        57  
Total loans
     7,254        $98     
 
 
 
      6,819        $164  
In addition to the defaults in the table above, the Company had a total of 10 and 45 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, 2021, 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 $1 million and $7 million for the three months and nine months ended September 30, 2021, respectively.
As of September 30, 2021, the Company had $158 million of commitments to lend additional funds to borrowers whose terms of their outstanding owed balances have been modified in TDRs.
 
 Note 6
      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 16.
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
 
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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 7. 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 $67 million and $28 million of support to the funds during the three months ended September 30, 2021 and 2020, respectively, and $184 million and $49 million during the nine months ended September 30, 2021 and 2020, 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 $113 million and $142 million for the three months ended September 30, 2021 and 2020, respectively, and $356 million and $437 million for the nine months ended September 30, 2021 and 2020, respectively. The Company also recognized $75 million and $118 million of investment tax credits for the three months ended September 30, 2021 and 2020, respectively, and $235 million and $307 million for the nine months ended September 30, 2021 and 2020, respectively. The Company recognized $101 million and $142 million of expenses related to all of these investments for the three months ended September 30, 2021 and 2020, respectively, of which $83 million and $97 million, respectively, were included in tax expense and the remaining amounts were included in noninterest expense. The
C
ompany recognized $333 million and $429 million of expenses related to all of these investments for the nine months ended September 30, 2021 and 2020, respectively, of which $262 million and $297 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 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,
2021
      December 31,
2020		  
Investment carrying amount
   $ 4,865      $ 5,378  
Unfunded capital and other commitments
     2,180        2,334  
Maximum exposure to loss
     10,368        11,219  
 
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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 $40 million at September 30, 2021 and $35 million at December 31, 2020. The maximum exposure to loss related to these VIEs was $81 million at September 30, 2021 and $57 million at December 31, 2020, 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 $71 million at September 30, 2021, compared with less than $1 million to $78 million at December 31, 2020.
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, 2021, approximately $5.1 billion of the Company’s assets and $3.6 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 $4.9 billion and $3.7 billion, respectively, at December 31, 2020. 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, 2021, $1.7 billion of
available-for-sale
investment securities and $1.2 billion of short-term borrowings on the Consolidated Balance Sheet were related to the tender option bond program, compared with $2.4 billion of
available-for-sale
investment securities and $1.5 billion of short-term borrowings at December 31, 2020.
 
 Note 7
      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 $219.3 billion of residential mortgage loans for others at September 30, 2021, and $211.8 billion at December 31, 2020, 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 a net loss of $21 million and a net gain of $9 million for the three months ended September 30, 2021 and 2020, respectively, and a net loss of $168 million and a net gain of $58 million for the nine months ended September 30, 2021 and 2020, respectively. Loan servicing and ancillary fees, not including valuation changes, included in mortgage banking revenue were $183 million and $177 million for the three months ended September 30, 2021 and 2020, respectively, and $536 million and $537 million for the nine months ended September 30, 2021 and 2020, respectively.
Changes in fair value of capitalized MSRs are summarized as follows:
 
    Three Months Ended
September 30		             Nine Months Ended
September 30		  
(Dollars in Millions)   2021     2020             2021     2020  
Balance at beginning of period
   $ 2,713     $ 1,840        
 
    $ 2,210     $ 2,546  
Rights purchased
     9       8        
 
      36       16  
Rights capitalized
     284       321        
 
      896       712  
Rights sold (a)
     —       1        
 
      1       3  
Changes in fair value of MSRs
                      
 
                 
Due to fluctuations in market interest rates (b)
     53       (8 )       
 
      307       (815 ) 
Due to revised assumptions or models (c)
     (30 )      (7 )       
 
      (169 )      37  
Other changes in fair value (d)
     (119 )      (177 )   
 
 
 
      (371 )      (521 ) 
Balance at end of period
   $ 2,910     $ 1,978    
 
 
 
    $ 2,910     $ 1,978  
 
(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.
 
54
 
U.S. Bancorp
Table of Contents
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, 2021             December 31, 2020  
(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
   $ (619 )    $ (320 )    $ (161 )    $ 154     $ 294     $ 520        
 
    $ (442 )    $ (271 )    $ (150 )    $ 169     $ 343     $ 671  
Derivative instrument hedges
     574       290       144       (137 )      (270 )      (524 )   
 
 
 
      523       281       145       (149 )      (304 )      (625 ) 
Net sensitivity
   $ (45 )    $ (30 )    $ (17 )    $ 17     $ 24     $ (4 )   
 
 
 
    $ 81     $ 10     $ (5 )    $ 20     $ 39     $ 46  
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, 2021            December 31, 2020  
(Dollars in Millions)   HFA     Government     Conventional(d)     Total            HFA     Government     Conventional(d)     Total  
Servicing portfolio (a)
   $ 40,038     $ 22,392     $ 153,543     $ 215,973        
 
   $ 40,396     $ 25,474     $ 143,085     $ 208,955  
Fair value
   $ 508     $ 304     $ 2,098     $ 2,910        
 
   $ 406     $ 261     $ 1,543     $ 2,210  
Value (bps) (b)
     127       136       137       135        
 
     101       102       108       106  
Weighted-average servicing fees (bps)
     36       41       30       32        
 
     35       40       30       32  
Multiple (value/servicing fees)
     3.56       3.34       4.51       4.16        
 
     2.87       2.56       3.55       3.26  
Weighted-average note rate
     4.14 %      3.75 %      3.48 %      3.63 %       
 
     4.43 %      3.91 %      3.78 %      3.92 % 
Weighted-average age (in years)
     3.8       5.8       3.4       3.7        
 
     3.8       5.6       4.2       4.3  
Weighted-average expected prepayment (constant prepayment rate)
     11.3 %      13.4 %      9.4 %      10.2 %       
 
     14.1 %      18.0 %      13.8 %      14.4 % 
Weighted-average expected life (in years)
     6.6       5.5       7.0       6.8        
 
     5.6       4.3       5.5       5.4  
Weighted-average option adjusted spread (c)
     7.7 %      7.3 %      6.5 %      6.8 %   
 
 
 
     7.7 %      7.3 %      6.2 %      6.6 % 
 
(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.
 
 Note 8
      Preferred Stock
At September 30, 2021 and December 31, 2020, 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, 2021              December 31, 2020  
(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 I
     —        —        —        —         
 
      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  
Series L
     20,000        500        14        486         
 
      20,000        500        14        486  
Series M
     30,000        750        20        730     
 
 
 
      —        —        —        —  
Total preferred stock (a)
     209,510      $ 6,176      $ 208      $ 5,968     
 
 
 
      209,510      $ 6,176      $ 193      $ 5,983  
 
(a)
The par value of all shares issued and outstanding at September 30, 2021 and December 31, 2020, was $1.00 per share.
During the first nine months of 2021, the Company issued depositary shares representing an ownership interest in 30,000 shares of Series M
Non-Cumulative
Perpetual Preferred Stock with a liquidation preference of $25,000
per share (the “Series M Preferred Stock”). The Series M Preferred Stock has no stated maturity and will not be subject to
 
U.S. Bancorp
 
55
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any sinking fund or other obligation of the Company. Dividends, if declared, will accrue and be payable quarterly,
in arrears, at a rate per annum equal to
4.00 percent. The Series M Preferred Stock is redeemable at the Company’s option, in whole or in part, on or after April 15, 2026. The Series M Preferred Stock is redeemable at the Company’s option, in whole, but not in part, prior to April 15, 2026 within 90 days following an official administrative or judicial decision, amendment to, or change in the laws or regulations that would not allow the Company to treat the full liquidation value of the Series M Preferred Stock as Tier 1 capital for purposes of the capital adequacy guidelines of the Federal Reserve Board.
During the first nine months of 2021, the Company redeemed all outstanding shares of the Series I
Non-Cumulative
Perpetual Preferred Stock (the “Series I Preferred Stock”) at a redemption price equal to the liquidation preference amount. The Company included a $5 million loss in the computation of
diluted
 
earnings per common share for the first nine months of 2021, which represents the stock issuance costs recorded in preferred stock upon the issuance of the Series I Preferred Stock that were reclassified to retained earnings on the date the Company provided notice of its intent to redeem the outstanding shares.
 
 Note 9
 
   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
Derivative Hedges
 
 
Unrealized Gains
(Losses) on
Retirement Plans
 
 
Foreign
Currency
Translation
 
 
Total
 
2021
 
      
 
      
 
      
 
      
 
      
Balance at beginning of period
 
$
735
 
 
$
(107
) 
 
$
(1,783
) 
 
$
(47
) 
 
$
(1,202
) 
Changes in unrealized gains and losses
 
 
(825
) 
 
 
8
 
 
 
—
 
 
 
—
 
 
 
(817
) 
Foreign currency translation adjustment (a)
 
 
—
 
 
 
—
 
 
 
—
 
 
 
(1
) 
 
 
(1
) 
Reclassification to earnings of realized gains and losses
 
 
(20
) 
 
 
8
 
 
 
39
 
 
 
—
 
 
 
27
 
Applicable income taxes
 
 
215
 
 
 
(4
) 
 
 
(10
) 
 
 
—
 
 
 
201
 
Balance at end of period
 
$
105
 
 
$
(95
) 
 
$
(1,754
) 
 
$
(48
) 
 
$
(1,792
) 
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
 
 
(a)
Represents the impact of changes in foreign currency exchange rates on the Company's investment in foreign operations and related hedges.
 
Nine Months Ended September 30
(Dollars in Millions)
 
Unrealized Gains
(Losses) on
Investment
Securities
Available-For-
Sale
 
 
Unrealized Gains
(Losses) on
Derivative Hedges
 
 
Unrealized Gains
(Losses) on
Retirement Plans
 
 
Foreign
Currency
Translation
 
 
Total
 
2021
 
      
 
      
 
      
 
      
 
      
Balance at beginning of period
 
$
2,417
 
 
$
(189
) 
 
$
(1,842
) 
 
$
(64
) 
 
$
322
 
Changes in unrealized gains and losses
 
 
(3,008
) 
 
 
121
 
 
 
—
 
 
 
—
 
 
 
(2,887
) 
Foreign currency translation adjustment (a)
 
 
—
 
 
 
—
 
 
 
—
 
 
 
23
 
 
 
23
 
Reclassification to earnings of realized gains and losses
 
 
(88
) 
 
 
4
 
 
 
118
 
 
 
—
 
 
 
34
 
Applicable income taxes
 
 
784
 
 
 
(31
) 
 
 
(30
) 
 
 
(7
) 
 
 
716
 
Balance at end of period
 
$
105
 
 
$
(95
) 
 
$
(1,754
) 
 
$
(48
) 
 
$
(1,792
) 
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
 
 
(a)
Represents the impact of changes in foreign currency exchange rates on the Company's investment in foreign operations and related hedges.
 
56
 
U.S. Bancorp
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)   2021     2020             2021     2020  
Unrealized gains (losses) on investment securities available-for-sale
 
              
 
                     
Realized gains (losses) on sale of investment securities
   $ 20     $ 12        
 
    $ 88     $ 143     Securities gains (losses), net
      (5 )      (3 )   
 
 
 
      (22 )      (36 )    Applicable income taxes
      15       9        
 
      66       107     Net-of-tax
Unrealized gains (losses) on derivative hedges
                      
 
                     
Realized gains (losses) on derivative hedges
     (8 )      (3 )       
 
      (4 )      (7 )    Interest expense
      2       1    
 
 
 
      1       2     Applicable income taxes
      (6 )      (2 )       
 
      (3 )      (5 )    Net-of-tax
Unrealized gains (losses) on retirement plans
                      
 
                     
Actuarial gains (losses) and prior service cost (credit) amortization
     (39 )      (32 )       
 
      (118 )      (94 )    Other noninterest expense
      10       9    
 
 
 
      30       24     Applicable income taxes
      (29 )      (23 )       
 
      (88 )      (70 )    Net-of-tax
             
Total impact to net income
   $ (20 )    $ (16 )   
 
 
 
    $ (25 )    $ 32    
 
 
 Note 10
  
   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)   2021     2020             2021     2020  
Net income attributable to U.S. Bancorp
   $ 2,028     $ 1,580        
 
    $ 6,290     $ 3,440  
Preferred dividends
     (84 )      (79 )       
 
      (232 )      (229 ) 
Impact of preferred stock redemption (a)
     —       —        
 
      (5 )      —  
Earnings allocated to participating stock awards
     (10 )      (7 )   
 
 
 
      (30 )      (15 ) 
Net income applicable to U.S. Bancorp common shareholders
   $ 1,934     $ 1,494    
 
 
 
    $ 6,023     $ 3,196  
Average common shares outstanding
     1,483       1,506        
 
      1,491       1,510  
Net effect of the exercise and assumed purchase of stock awards
     1       1    
 
 
 
      1       1  
Average diluted common shares outstanding
     1,484       1,507    
 
 
 
      1,492       1,511  
Earnings per common share
   $ 1.30     $ .99        
 
    $ 4.04     $ 2.12  
Diluted earnings per common share
   $ 1.30     $ .99    
 
 
 
    $ 4.04     $ 2.11  
 
(a)
Represents stock issuance costs originally recorded in preferred stock upon the issuance of the Company’s Series I Preferred Stock that were reclassified to retained earnings on the date the Company announced its intent to redeem the outstanding shares.
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, were not included in the computation of diluted earnings per share because they were antidilutive.
 
 Note 11
  
   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)   2021     2020     2021     2020             2021     2020     2021     2020  
Service cost
   $ 66     $ 58     $ —     $ —        
 
    $ 198     $ 176     $ —     $ —  
Interest cost
     54       59       1       —        
 
      164       176       1       1  
Expected return on plan assets
     (112 )      (101 )      —       —        
 
      (337 )      (302 )      —       (2 ) 
Prior service cost (credit) amortization
     —       —       (1 )      —        
 
      (1 )      —       (3 )      (2 ) 
Actuarial loss (gain) amortization
     42       34       (2 )      (2 )   
 
 
 
      127       101       (5 )      (5 ) 
Net periodic benefit cost (a)
   $ 50     $ 50     $ (2 )    $ (2 )   
 
 
 
    $ 151     $ 151     $ (7 )    $ (8 ) 
 
(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.
 
U.S. Bancorp  
57
Table of Contents
Note 12
 
   Income Taxes
The components of income tax expense were:
 
 
 
Three Months Ended
September 30
 
 
  
 
  
Nine Months Ended
September 30
 
(Dollars in Millions)
 
    2021
 
  
    2020
 
 
  
 
  
2021
 
  
2020
 
Federal
 
      
  
      
 
    
 
  
      
  
      
Current
 
$
354
 
  
$
(53
) 
 
    
 
  
$
1,057
 
  
$
966
 
Deferred
 
 
99
 
  
 
306
 
 
 
 
 
  
 
305
 
  
 
(459
) 
Federal income tax
 
 
453
 
  
 
253
 
 
    
 
  
 
1,362
 
  
 
507
 
State
 
      
  
      
 
    
 
  
      
  
      
Current
 
 
94
 
  
 
92
 
 
    
 
  
 
297
 
  
 
298
 
Deferred
 
 
17
 
  
 
2
 
 
 
 
 
  
 
63
 
  
 
(134
) 
     
 
    
State income tax
 
 
111
 
  
 
94
 
 
 
 
 
  
 
360
 
  
 
164
 
Total income tax provision
 
$
564
 
  
$
347
 
 
 
 
 
  
$
1,722
 
  
$
671
 
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)
 
    2021
 
 
    2020
 
 
  
 
  
2021
 
 
2020
 
Tax at statutory rate
 
$
546
 
 
$
406
 
 
    
 
  
$
1,686
 
 
$
867
 
State income tax, at statutory rates, net of federal tax benefit
 
 
108
 
 
 
75
 
 
    
 
  
 
327
 
 
 
170
 
Tax effect of
 
      
 
      
 
    
 
  
      
 
      
Tax credits and benefits, net of related expenses
 
 
(91
) 
 
 
(82
) 
 
    
 
  
 
(267
) 
 
 
(280
) 
Exam resolutions
 
 
—
 
 
 
(47
) 
 
    
 
  
 
—
 
 
 
(47
) 
Tax-exempt income
 
 
(28
) 
 
 
(29
) 
 
    
 
  
 
(85
) 
 
 
(87
) 
Other items
 
 
29
 
 
 
24
 
 
 
 
 
  
 
61
 
 
 
48
 
Applicable income taxes
 
$
564
 
 
$
347
 
 
 
 
 
  
$
1,722
 
 
$
671
 
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, 2021, 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 $946 million at September 30, 2021 and $597 million at December 31, 2020.
 Note 13
 
   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
available-for-sale
investment securities and 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
 
58
 
U.S. Bancorp
Table of Contents
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, 2021, the Company had $95 million
(net-of-tax)
of realized and unrealized losses on derivatives classified as cash flow hedges recorded in other comprehensive income (loss), compared with $189 million
(net-of-tax)
of realized and unrealized losses at December 31, 2020. The estimated amount to be reclassified from other comprehensive income (loss) into earnings during both the remainder of 2021 and the next 12 months are losses of $1 million
(net-of-tax).
All cash flow hedges were highly effective for the three and nine months ended September 30, 2021.
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 at September 30, 2021 and December 31, 2020
.
Other Derivative Positions
 The Company enters into free-standing derivatives to mitigate interest rate risk and for other risk management purposes. These derivatives include forward commitments to sell
to-be-announced
securities (“TBAs”) and other commitments to sell residential mortgage loans, which are used to economically hedge the interest rate risk related to 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 15 for further information on these swap agreements.
 
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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, 2021
                                 
 
                           
Fair value hedges
                                 
 
                           
Interest rate contracts
                                 
 
                           
Receive fixed/pay floating swaps
   $ 700      $ —        .04         
 
    $ 2,250      $ —        3.70  
Pay fixed/receive floating swaps
    
1,330
        —       
9.23
         
 
      1,850        —        8.95  
Cash flow hedges
                                 
 
                           
Interest rate contracts
                                 
 
                           
Pay fixed/receive floating swaps
     —        —        —         
 
      250        —        .23  
Net investment hedges
                                 
 
                           
Foreign exchange forward contracts
     826        7        .06         
 
      —        —        —  
Other economic hedges
                                 
 
                           
Interest rate contracts
                                 
 
                           
Futures and forwards
                                 
 
                           
Buy
     5,325        29        .07         
 
      10,347        69        .05  
Sell
     28,069        139        .29         
 
      17,637        57        .14  
Options
                                 
 
                           
Purchased
     16,930        235        3.34         
 
      —        —        —  
Written
     3,620        78        .09         
 
      7,541        241        2.11  
Receive fixed/pay floating swaps
     4,423        —        4.38         
 
      5,690        —        10.29  
Pay fixed/receive floating swaps
     2,006        —        4.26         
 
      4,562        —        4.24  
Foreign exchange forward contracts
     292        2        .04         
 
      275        2        .05  
Equity contracts
     21        2        .31         
 
      184        5        .70  
Other (a)
     601        9        .02         
 
      2,386        147        1.31  
Total
   $ 64,143      $ 501                  
 
    $ 52,972      $ 521           
December 31, 2020
                                 
 
                           
Fair value hedges
                                 
 
                           
Interest rate contracts
                                 
 
                           
Receive fixed/pay floating swaps
   $ 8,400      $ —        1.76         
 
    $ —      $ —        —  
Pay fixed/receive floating swaps
     —        —        —         
 
      100        —        9.63  
Cash flow hedges
                                 
 
                           
Interest rate contracts
                                 
 
                           
Pay fixed/receive floating swaps
     —        —        —         
 
      3,250        —        4.59  
Net investment hedges
                                 
 
                           
Foreign exchange forward contracts
     479        —        .06         
 
      336        3        .06  
Other economic hedges
                                 
 
                           
Interest rate contracts
                                 
 
                           
Futures and forwards
                                 
 
                           
Buy
     16,431        73        .50         
 
      1,925        5        .07  
Sell
     10,440        48        .04         
 
      28,976        157        .07  
Options
                                 
 
                           
Purchased
     11,610        121        4.11         
 
      —        —        —  
Written
     5,073        202        .13         
 
      7,770        198        2.53  
Receive fixed/pay floating swaps
     11,064        —        7.31         
 
      907        —        23.43  
Pay fixed/receive floating swaps
     78        —        13.68         
 
      8,538        —        5.67  
Foreign exchange forward contracts
     292        1        .04         
 
      341        2        .05  
Equity contracts
     127        3        .39         
 
      45        —        .46  
Other (a)
     47        1        .11         
 
      1,832        183        2.44  
Total
   $ 64,041      $ 449     
 
 
 
   
 
 
 
    $ 54,020      $ 548     
 
 
 
 
(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, $139 million and 1.75 years at September 30, 2021, respectively, compared to $1.8 billion, $182 million and 2.50 years at December 31, 2020, respectively. In addition, includes short-term underwriting purchase and sale commitments with total asset and liability notional values of $602 million at September 30, 2021, and $47 million at December 31, 2020.
 
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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, 2021
                                 
 
                           
Interest rate contracts
                                 
 
                           
Receive fixed/pay floating swaps
   $ 124,770      $ 2,398        4.80         
 
    $ 46,250      $ 296        6.61  
Pay fixed/receive floating swaps
     47,573        80        6.65         
 
      119,027        784        4.51  
Other (a)
     8,463        1        3.98         
 
      7,260        3        4.66  
Options
                                 
 
                           
Purchased
     85,251        217        1.29         
 
      2,701        41        1.86  
Written
     2,690        41        1.85         
 
      79,781        192        1.23  
Futures
                                 
 
                           
Buy
     3,456        —        .14         
 
      318        —        1.97  
Sell
     2,583        —        1.43         
 
      565        —        .45  
Foreign exchange rate contracts
                                 
 
                           
Forwards, spots and swaps
     38,518        1,112        1.20         
 
      39,988        1,121        1.45  
Options
                                 
 
                           
Purchased
     629        18        .96         
 
      —        —        —  
Written
     —        —        —         
 
      629        18        .96  
Credit contracts
     2,737        —        2.49         
 
      6,934        6        4.41  
Total
   $ 316,670      $ 3,867                  
 
    $ 303,453      $ 2,461           
December 31, 2020
                                 
 
                           
Interest rate contracts
                                 
 
                           
Receive fixed/pay floating swaps
   $ 144,859      $ 3,782        4.93         
 
    $ 12,027      $ 99        8.72  
Pay fixed/receive floating swaps
     15,048        2        8.43         
 
      134,963        1,239        4.71  
Other (a)
     9,921        6        3.75         
 
      6,387        3        4.22  
Options
                                 
 
                           
Purchased
     72,655        111        1.40         
 
      1,454        46        2.96  
Written
     1,736        46        2.76         
 
      68,205        81        1.25  
Futures
                                 
 
                           
Buy
     1,851        —        1.22         
 
      924        —        .05  
Sell
     —        —        —         
 
      4,090        —        .72  
Foreign exchange rate contracts
                                 
 
                           
Forwards, spots and swaps
     44,845        1,590        .96         
 
      45,992        1,565        1.13  
Options
                                 
 
                           
Purchased
     519        14        .90         
 
      —        —        —  
Written
     —        —        —         
 
      519        14        .90  
Credit contracts
     2,876        1        2.75         
 
      7,479        7        3.81  
Total
   $ 294,310      $ 5,552     
 
 
 
   
 
 
 
    $ 282,040      $ 3,054     
 
 
 
 
(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)   2021      2020     2021     2020             2021      2020     2021     2020  
Asset and Liability Management Positions
                                       
 
                                  
Cash flow hedges
                                       
 
                                  
Interest rate contracts
   $ 6      $ 21     $ (6 )    $ (2 )       
 
    $ 91      $ (171 )    $ (3 )    $ (5 ) 
Net investment hedges
                                       
 
                                  
Foreign exchange forward contracts
     17        (4 )      —       —        
 
      16        6       —       —  
Non-derivative
debt instruments
     27        (45 )      —       —    
 
 
 
      61        (41 )      —       —  
 
Note:
The Company does not exclude components from effectiveness testing for cash flow and net investment hedges.
 
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The table below shows the effect of fair value and cash flow hedge accounting on the Consolidated Statement of Income:
 
 
 
Interest Income
 
  
Interest Expense
 
 
  
 
  
Interest Income
 
  
Interest Expense
 
 
 
Three Months Ended September 30
 
  
Nine Months Ended September 30
 
(Dollars in Millions)
 
2021
 
 
2020
 
  
2021
 
 
2020
 
 
  
 
  
2021
 
 
2020
 
  
2021
 
 
2020
 
Total amount of income and expense line items presented in the Consolidated Statement of Income in which the effects of fair value or cash flow hedges are recorded
 
$
3,409
 
 
$
3,573
 
  
$
238
 
 
$
346
 
 
    
 
  
$
10,132
 
 
$
11,361
 
  
$
761
 
 
$
1,711
 
         
 
        
Asset and Liability Management Positions
 
      
 
      
  
      
 
      
 
    
 
  
      
 
      
  
      
 
      
Fair value hedges
 
      
 
      
  
      
 
      
 
    
 
  
      
 
      
  
      
 
      
Interest rate contract derivatives
 
 
45
 
 
 
—
 
  
 
112
 
 
 
28
 
 
    
 
  
 
14
 
 
 
—
 
  
 
185
 
 
 
(166
) 
Hedged items
 
 
(45
) 
 
 
—
 
  
 
(113
) 
 
 
(27
) 
 
    
 
  
 
(15
) 
 
 
—
 
  
 
(185
) 
 
 
167
 
Cash flow hedges
 
      
 
      
  
      
 
      
 
    
 
  
      
 
      
  
      
 
      
Interest rate contract derivatives
 
 
—
 
 
 
—
 
  
 
8
 
 
 
3
 
 
 
 
 
  
 
—
 
 
 
—
 
  
 
4
 
 
 
7
 
 
Note:
The Company does not exclude components from effectiveness testing for fair value and cash flow hedges. The Company reclassified losses of $13 million and $40 million into earnings during the three and nine months ended September 30, 2021, respectively,
as a result of realized cash flows on discontinued 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 realized cash flows on discontinued cash flow hedges. No amounts were reclassified into earnings on discontinued cash flow hedges because it is probable the original hedged forecasted cash flows will not occur. 
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, 2021
 
  
December 31, 2020
 
  
  
 
  
September 30, 2021
 
 
December 31, 2020
 
Line Item in the Consolidated Balance Sheet
 
      
  
      
  
    
 
  
      
 
      
Available-for-sale
investment securities
 
$
3,127
 
  
$
99
 
  
    
 
  
$
(22
) 
 
$
(1
) 
Long-term debt
 
 
2,940
 
  
 
8,567
 
  
 
 
 
  
 
692
 
 
 
903
 
 
(a)
The cumulative hedging adjustment related to discontinued hedging relationships on
available-for-sale
investment securities and long-term debt was $(6) million and $700 million, respectively, at September 30, 2021. The cumulative hedging adjustment related to discontinued hedging relationships on long-term debt was $726 million at December 31, 2020.
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)      2021       2020               2021       2020  
Asset and Liability Management Positions
                                
 
                 
Other economic hedges
                                
 
                 
Interest rate contracts
                                
 
                 
Futures and forwards
      Mortgage banking revenue/
other noninterest income
 		    $ 101     $ 46        
 
    $ 432     $ 53  
Purchased and written options
      Mortgage banking revenue        171       428        
 
      436       1,173  
Swaps
      Mortgage banking revenue        (39 )      (51 )       
 
      (236 )      724  
Foreign exchange forward contracts
      Other noninterest income        9       (2 )       
 
      (1 )      9  
Equity contracts
      Compensation expense        1       3        
 
      6       —  
Other
      Other noninterest income        2       (69 )       
 
      3       (70 ) 
Customer-Related Positions
                                
 
                 
Interest rate contracts
                                
 
                 
Swaps
      Commercial products revenue        26       59        
 
      78       103  
Purchased and written options
      Commercial products revenue        (1 )      (14 )       
 
      (4 )      3  
Futures
      Commercial products revenue        —       —        
 
      —       (18 ) 
Foreign exchange rate contracts
                                
 
                 
Forwards, spots and swaps
      Commercial products revenue        23       20        
 
      69       54  
Purchased and written options
      Commercial products revenue        1       1        
 
      1       1  
Credit contracts
      Commercial products revenue        (1 )      (10 )   
 
 
 
      (3 )      (15 ) 
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.
 
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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, 2021, was $874 million. At September 30, 2021, the Company had $589 million of cash posted as collateral against this net liability position.
 
 
Note 14
   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 $737.2 billion total notional amount of derivative positions at September 30, 2021, $384.1 billion related to bilateral
over-the-counter
trades, $331.5 billion related to those centrally cleared through clearinghouses and $21.6 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 13 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.
 
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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, 2021
                                            
Repurchase agreements
                                            
U.S. Treasury and agencies
  
$
568
 
   
$
–
 
   
$
–
 
   
$
–
 
   
$
568
 
Residential agency mortgage-backed securities
  
 
838
 
   
 
–
 
   
 
–
 
   
 
–
 
   
 
838
 
Corporate debt securities
  
 
692
 
   
 
–
 
   
 
–
 
   
 
–
 
   
 
692
 
Total repurchase agreements
  
 
2,098
 
   
 
–
 
   
 
–
 
   
 
–
 
   
 
2,098
 
Securities loaned
                                            
Corporate debt securities
  
 
166
 
   
 
–
 
   
 
–
 
   
 
–
 
   
 
166
 
Total securities loaned
  
 
166
 
   
 
–
 
   
 
–
 
   
 
–
 
   
 
166
 
Gross amount of recognized liabilities
  
$
2,264
 
   
$
–
 
   
$
–
 
   
$
–
 
   
$
2,264
 
December 31, 2020
                                            
Repurchase agreements
                                            
U.S. Treasury and agencies
  
$
472
 
   
$
–
 
   
$
–
 
   
$
–
 
   
$
472
 
Residential agency mortgage-backed securities
  
 
398
 
   
 
–
 
   
 
–
 
   
 
–
 
   
 
398
 
Corporate debt securities
  
 
560
 
   
 
–
 
   
 
–
 
   
 
–
 
   
 
560
 
Total repurchase agreements
  
 
1,430
 
   
 
–
 
   
 
–
 
   
 
–
 
   
 
1,430
 
Securities loaned
                                            
Corporate debt securities
  
 
218
 
   
 
–
 
   
 
–
 
   
 
–
 
   
 
218
 
Total securities loaned
  
 
218
 
   
 
–
 
   
 
–
 
   
 
–
 
   
 
218
 
Gross amount of recognized liabilities
  
$
1,648
 
   
$
–
 
   
$
–
 
   
$
–
 
   
$
1,648
 
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  
   Financial
Instruments (b)		     Collateral
Received (c)		  
September 30, 2021
                                                  
Derivative assets (d)
  
$
4,275
 
   
$
(1,858
) 
  
$
2,417
 
   
$
(104
) 
  
$
(141
) 
  
$
2,172
 
Reverse repurchase agreements
  
 
418
 
   
 
–
 
  
 
418
 
   
 
(317
) 
  
 
(101
) 
  
 
–
 
Securities borrowed
  
 
1,978
 
   
 
–
 
  
 
1,978
 
   
 
–
 
  
 
(1,925
) 
  
 
53
 
Total
  
$
6,671
 
   
$
(1,858
) 
  
$
4,813
 
   
$
(421
) 
  
$
(2,167
) 
  
$
2,225
 
December 31, 2020
                                                  
Derivative assets (d)
  
$
5,744
 
   
$
(1,874
) 
  
$
3,870
 
   
$
(109
) 
  
$
(287
) 
  
$
3,474
 
Reverse repurchase agreements
  
 
377
 
   
 
–
 
  
 
377
 
   
 
(262
) 
  
 
(115
) 
  
 
–
 
Securities borrowed
  
 
1,716
 
   
 
–
 
  
 
1,716
 
   
 
–
 
  
 
(1,670
) 
  
 
46
 
Total
  
$
7,837
 
   
$
(1,874
) 
  
$
5,963
 
   
$
(371
) 
  
$
(2,072
) 
  
$
3,520
 
 
(a)
Includes $750 million and $898 million of cash collateral related payables that were netted against derivative assets at September 30, 2021 and December 31, 2020, 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 $93 million and $257 million at September 30, 2021 and December 31, 2020, respectively, of derivative assets not subject to netting arrangements.
 
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(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  
  
Financial
Instruments (b)
    
Collateral
Pledged (c)
  
September 30, 2021
                                                  
Derivative liabilities (d)
  
$
2,809
 
   
$
(1,697
) 
  
$
1,112
 
   
$
(104
) 
  
$
–
 
  
$
1,008
 
Repurchase agreements
  
 
2,098
 
   
 
–
 
  
 
2,098
 
   
 
(317
) 
  
 
(1,779
) 
  
 
2
 
Securities loaned
  
 
166
 
   
 
–
 
  
 
166
 
   
 
–
 
  
 
(164
) 
  
 
2
 
Total
  
$
5,073
 
   
$
(1,697
) 
  
$
3,376
 
   
$
(421
) 
  
$
(1,943
) 
  
$
1,012
 
December 31, 2020
                                                  
Derivative liabilities (d)
  
$
3,419
 
   
$
(2,312
) 
  
$
1,107
 
   
$
(109
) 
  
$
–
 
  
$
998
 
Repurchase agreements
  
 
1,430
 
   
 
–
 
  
 
1,430
 
   
 
(262
) 
  
 
(1,168
) 
  
 
–
 
Securities loaned
  
 
218
 
   
 
–
 
  
 
218
 
   
 
–
 
  
 
(215
) 
  
 
3
 
Total
  
$
5,067
 
   
$
(2,312
) 
  
$
2,755
 
   
$
(371
) 
  
$
(1,383
) 
  
$
1,001
 
 
(a)
Includes $589 million and $1.3 billion of cash collateral related receivables that were netted against derivative liabilities at September 30, 2021 and December 31, 2020, 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 $173 million and $183 million at September 30, 2021 and December 31, 2020, respectively, of derivative liabilities not subject to netting arrangements.
 
 Note 15
      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
 
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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, 2021 and 2020, 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 loss of $18 million and a net gain of $97 million for the three months ended September 30, 2021 and 2020, respectively, and a net loss of $135 million and a net gain of $271 million for the nine months ended September 30, 2021 and 2020, 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 7 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
 
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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 16 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, 2021:
 
     Minimum     Maximum     Weighted-
Average (a)		  
Expected prepayment
     3 %      13 %      10 % 
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, 2021:
 
     Minimum     Maximum     Weighted-
Average (a)		  
Expected loan close rate
     1 %      100 %      76 % 
Inherent MSR value (basis points per loan)
     47       187       121  
 
(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, 2021, the 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, 97 percent and 2 percent, respectively.
 
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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, 2021
                                           
Available-for-sale
securities
                                           
U.S. Treasury and agencies
   $ 14,344      $ 4,147      $ –      $ –     $ 18,491  
Mortgage-backed securities
                                           
Residential agency
     –        112,796        –        –       112,796  
Commercial agency
     –        7,686        –        –       7,686  
Asset-backed securities
     –        61        8        –       69  
Obligations of state and political subdivisions
     –        10,326        1        –       10,327  
Other
     –        7        –        –       7  
Total
available-for-sale
     14,344        135,023        9        –       149,376  
Mortgage loans held for sale
     –        6,176        –        –       6,176  
Mortgage servicing rights
     –        –        2,910        –       2,910  
Derivative assets
     6        2,691        1,671        (1,858 )      2,510  
Other assets
     322        2,118        –        –       2,440  
Total
   $ 14,672      $ 146,008      $ 4,590      $ (1,858 )    $ 163,412  
Derivative liabilities
   $ –      $ 2,429      $ 553      $ (1,697 )    $ 1,285  
Short-term borrowings and other liabilities (a)
     205        1,893        –        –       2,098  
Total
   $ 205      $ 4,322      $ 553      $ (1,697 )    $ 3,383  
December 31, 2020
                                           
Available-for-sale
securities
                                           
U.S. Treasury and agencies
   $ 19,251      $ 3,140      $ –      $ –     $ 22,391  
Mortgage-backed securities
                                           
Residential agency
     –        99,968        –        –       99,968  
Commercial agency
     –        5,406        –        –       5,406  
Asset-backed securities
     –        198        7        –       205  
Obligations of state and political subdivisions
     –        8,860        1        –       8,861  
Other
     –        9        –        –       9  
Total
available-for-sale
     19,251        117,581        8        –       136,840  
Mortgage loans held for sale
     –        8,524        –        –       8,524  
Mortgage servicing rights
     –        –        2,210        –       2,210  
Derivative assets
     4        3,235        2,762        (1,874 )      4,127  
Other assets
     302        1,601        –        –       1,903  
Total
   $ 19,557      $ 130,941      $ 4,980      $ (1,874 )    $ 153,604  
Derivative liabilities
   $ –      $ 3,166      $ 436      $ (2,312 )    $ 1,290  
Short-term borrowings and other liabilities (a)
     85        1,672        –        –       1,757  
Total
   $ 85      $ 4,838      $ 436      $ (2,312 )    $ 3,047  
 
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 $73 million and $85 million at September 30, 2021 and December 31, 2020, respectively. The Company has not recorded impairments or adjustments for observable price changes on these equity investments during the first nine months of 2021 and 2020, 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.
 
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The following table presents the changes in fair value for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended September 30:
 
(Dollars in Millions)  
Beginning
of Period
Balance
    
Net Gains
(Losses)
Included in
Net Income
    
Net Gains
(Losses)
Included in
Other
Comprehensive
Income (Loss)
     Purchases     Sales    
Principal
Payments
     Issuances     Settlements    
End
of Period
Balance
    
Net Change
in Unrealized
Gains (Losses)
Relating to
Assets and
Liabilities
Held at End
of Period
  
2021
                                                                                
Available-for-sale
securities
                                                                                
Asset-backed securities
   $ 8     $ –     $ –     $ –     $ –     $ –     $ –     $ –     $ 8     $ –  
Obligations of state and political subdivisions
     1       –       –       –       –       –       –       –       1       –  
Total
available-for-sale
     9       –       –       –       –       –       –       –       9       –  
Mortgage servicing rights
     2,713       (96 ) (a)      –       9       –       –       284   (c)      –       2,910       (96 ) (a) 
Net derivative assets and liabilities
     1,500       (225 ) (b)      –       106       (1 )      –       –       (262 )      1,118       (203 ) (d) 
                     
2020
                                                                                
Available-for-sale
securities
                                                                                
Asset-backed securities
   $ 7     $ –     $ –     $ –     $ –     $ –     $ –     $ –     $ 7     $ –  
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   (e)      –       152       (1 )      –       –       (579 )      2,624       228   (f) 
 
(a)
Included in mortgage banking revenue.
(b)
Approximately $208 million, $(434) million and $1 million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.
(c)
Represents MSRs capitalized during the period.
(d)
Approximately $57 million, $(261) million and $1 million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.
(e)
Approximately $508 million, $(228) million and $(69) million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.
(f)
Approximately $291 million, $6 million and $(69) million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.
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 nine months ended September 30:
 
(Dollars in Millions)  
Beginning
of Period
Balance
    
Net Gains
(Losses)
Included in
Net Income
    
Net Gains
(Losses)
Included in
Other
Comprehensive
Income (Loss)
     Purchases     Sales    
Principal
Payments
     Issuances     Settlements    
End
of Period
Balance
    
Net Change
in Unrealized
Gains (Losses)
Relating to
Assets and
Liabilities
Held at End
of Period
  
2021
                                                                                
Available-for-sale
securities
                                                                                
Asset-backed securities
   $ 7     $ –     $  1     $ –     $ –     $ –     $ –     $ –     $ 8     $ 1  
Obligations of state and political subdivisions
     1       –       –       –       –       –       –       –       1       –  
Total
available-for-sale
     8       –       1       –       –       –       –       –       9       1  
Mortgage servicing rights
     2,210       (233 ) (a)      –       36       1       –       896   (c)      –       2,910       (233 ) (a) 
Net derivative assets and liabilities
     2,326       (604 ) (b)      –       166       (2 )      –       –       (768 )      1,118       (761 ) (d) 
                     
2020
                                                                                
Available-for-sale
securities
                                                                                
Asset-backed securities
   $ 8     $ –     $ –     $ –     $ –     $ (1 )    $ –     $ –     $ 7     $ –  
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   (e)      –       247       (2 )      –       –       (1,116 )      2,624       1,888   (f) 
 
(a)
Included in mortgage banking revenue.
(b)
Approximately $544 million, $(1.2) billion and $2 million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.
(c)
Represents MSRs capitalized during the period.
(d)
Approximately $57 million,
$
(820) million and $2 million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.
(e)
Approximately $1.5 billion, $1.3 billion and $(70) million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.
(f)
Approximately $291 million, $1.7 billion and $(70) million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.
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.
 
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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, 2021              December 31, 2020  
(Dollars in Millions)   Level 1      Level 2      Level 3      Total              Level 1      Level 2      Level 3      Total  
Loans (a)
   $ –      $ –      $
65
      $
65
         
 
    $ –      $ –      $
385
      $
385
  
                   
Other assets (b)
     –        –       
67
       
67
     
 
 
 
      –        –       
30
       
30
  
 
(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)       2021          2020                  2021          2020  
Loans (a)
   $
15
      $
184
         
 
    $
58
      $
244
  
           
Other assets (b)
    
1
       
13
     
 
 
 
     
7
       
19
  
 
(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, 2021              December 31, 2020  
(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
   $
6,176
      $
6,017
      $
159
         
 
    $
8,524
      $
8,136
      $
388
  
Nonaccrual loans
    
1
       
1
        –         
 
     
1
       
1
        –  
Loans 90 days or more past due
    
1
       
1
        –     
 
 
 
     
2
       
2
        –  
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, 2021 and December 31, 2020. 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, 2021      December 31, 2020  
   
Carrying
Amount
            Fair Value            
Carrying
Amount
             Fair Value  
(Dollars in Millions)   Level 1     Level 2     Level 3     Total             Level 1      Level 2      Level 3      Total  
Financial Assets
                                                      
 
                                                     
Cash and due from banks
   $
63,904
             $
63,904
     $ –     $ –     $
63,904
        
 
    $
62,580
              $
62,580
      $ –      $ –      $
62,580
  
Federal funds sold and securities purchased under resale agreements
    
440
               –      
440
       –      
440
        
 
     
377
                –       
377
        –       
377
  
Loans held for sale (a)
    
15
               –       –      
15
      
15
        
 
     
237
                –        –       
237
       
237
  
Loans
    
291,816
               –       –      
298,764
      
298,764
        
 
     
290,393
                –        –       
300,419
       
300,419
  
Other (b)
    
1,472
               –      
630
      
842
      
1,472
        
 
     
1,772
                –       
731
       
1,041
       
1,772
  
                           
Financial Liabilities
                                                      
 
                                                     
Time deposits
    
22,879
               –      
22,946
       –      
22,946
        
 
     
30,694
                –       
30,864
        –       
30,864
  
Short-term borrowings (c)
    
13,990
               –      
13,894
       –      
13,894
        
 
     
10,009
                –       
9,956
        –       
9,956
  
Long-term debt
    
35,671
               –      
36,262
       –      
36,262
        
 
     
41,297
                –       
42,485
        –       
42,485
  
Other (d)
    
3,972
    
 
 
 
     –      
1,114
      
2,858
      
3,972
    
 
 
 
     
4,052
    
 
 
 
      –       
1,234
       
2,818
       
4,052
  
(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.
 
     
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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 $
577
 million and $
774
 million at September 30, 2021 and December 31, 2020, respectively. The carrying value of other guarantees was $
278
 million and $
362
 million at September 30, 2021 and December 31, 2020, respectively.
 
     
 Note 16
  
   Guarantees and Contingent Liabilities
Visa Restructuring and Card Association Litigation
The Company’s payment services business issues credit and debit cards and acquires credit and debit card transactions through the Visa U.S.A. Inc. card association or its affiliates (collectively “Visa”). In 2007, Visa completed a restructuring and issued shares of Visa Inc. common stock to its financial institution members in contemplation of its initial public offering (“IPO”) completed in the first quarter of 2008 (the “Visa Reorganization”). As a part of the Visa Reorganization, the Company received its proportionate number of shares of Visa Inc. common stock, which were subsequently converted to Class B shares of Visa Inc. (“Class B shares”).
Visa U.S.A. Inc. (“Visa U.S.A.”) and MasterCard International (collectively, the “Card 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 multidistrict 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, 2021:
 
                         
(Dollars in Millions)   Collateral
Held		      Carrying
Amount		      Maximum
Potential
Future
Payments		  
Standby letters of credit
   $ –      $
60
      $
9,556
  
Third party borrowing arrangements
     –        –       
4
  
Securities lending indemnifications
    
10,479
        –       
10,157
  
Asset sales
     –       
84
       
6,793
 		 (a) 
Merchant processing
    
827
       
172
       
121,902
  
Tender option bond program guarantee
    
1,719
        –       
1,490
  
Other
     –       
22
       
1,532
  
 
(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
 
     
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amount is credited or otherwise refunded to the cardholder. If the Company is unable to collect this amount from the merchant, it bears the loss for the amount of the refund paid to the cardholder.
The Company currently processes card transactions in the United States, Canada and Europe through wholly-owned subsidiaries. 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, 2021, the value of airline tickets purchased to be delivered at a future date through card transactions processed by the Company was $7.2 billion. The Company held collateral of $653 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, 2021, the liability was $155 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, 2021, the Company had reserved $18 million for potential losses from representation and warranty obligations, compared with $19 million at December 31, 2020. 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, 2021 and December 31, 2020, the Company had $14 million and $13 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. For example, the Consumer Financial Protection Bureau (“CFPB”) is investigating certain of the Company’s consumer sales practices, and the Company has responded and continues to respond to the CFPB. 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,
 
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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 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 17
  
   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
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.
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
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.
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
 
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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, 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.
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 2021, certain organization and methodology changes were made and, accordingly, 2020 results were restated and presented on a comparable basis.
 
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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)   2021     2020             2021     2020             2021      2020  
Condensed Income Statement
                      
 
                       
 
                
 
Net interest income (taxable-equivalent basis)
   $ 717     $ 852        
 
    $ 1,551     $ 1,474        
 
    $ 225      $ 301  
Noninterest income
     253       267    
 
 
 
      715       848    
 
 
 
      558        505  
Total net revenue
     970       1,119        
 
      2,266       2,322        
 
      783        806  
Noninterest expense
     418       428        
 
      1,450       1,383        
 
      507        489  
Other intangibles
     –       –    
 
 
 
      3       4    
 
 
 
      4        3  
Total noninterest expense
     418       428    
 
 
 
      1,453       1,387    
 
 
 
      511        492  
Income (loss) before provision and income taxes
     552       691        
 
      813       935        
 
      272        314  
Provision for credit losses
     15       95    
 
 
 
      (25 )      69    
 
 
 
      11        11  
Income (loss) before income taxes
     537       596        
 
      838       866        
 
      261        303  
Income taxes and taxable-equivalent adjustment
     134       149    
 
 
 
      210       217    
 
 
 
      65        76  
Net income (loss)
     403       447        
 
      628       649        
 
      196        227  
Net (income) loss attributable to noncontrolling interests
     –       –    
 
 
 
      –       –    
 
 
 
      –        –  
Net income (loss) attributable to U.S. Bancorp
   $ 403     $ 447    
 
 
 
    $ 628     $ 649    
 
 
 
    $ 196      $ 227  
Average Balance Sheet
                      
 
                       
 
                
 
Loans
   $ 102,431     $ 115,547        
 
    $ 140,833     $ 145,229        
 
    $ 18,454      $ 15,616  
Other earning assets
     4,722       4,110        
 
      7,645       8,195        
 
      225        288  
Goodwill
     1,650       1,647        
 
      3,506       3,475        
 
      1,618        1,618  
Other intangible assets
     5       6        
 
      2,754       1,942        
 
      80        37  
Assets
     114,629       128,369        
 
      160,882       164,246        
 
      21,566        18,708  
                 
Noninterest-bearing deposits
     62,642       48,058        
 
      34,416       34,288        
 
      24,453        17,719  
Interest-bearing deposits
     68,917       87,558    
 
 
 
      160,271       133,095    
 
 
 
      71,841        73,857  
Total deposits
     131,559       135,616        
 
      194,687       167,383        
 
      96,294        91,576  
                 
Total U.S. Bancorp shareholders’ equity
     13,772       15,051    
 
 
 
      12,277       13,562    
 
 
 
      3,172        2,968  
           
   
Payment
Services
            
Treasury and
Corporate Support
            
Consolidated
Company
  
(Dollars in Millions)   2021     2020             2021     2020             2021      2020  
Condensed Income Statement
                      
 
                       
 
                
 
Net interest income (taxable-equivalent basis)
   $ 616     $ 643        
 
    $ 88     $ (18 )       
 
    $ 3,197      $ 3,252  
Noninterest income
     946  (a)      867  (a)   
 
 
 
      221       225    
 
 
 
      2,693  (b)       2,712  (b) 
Total net revenue
     1,562       1,510        
 
      309       207        
 
      5,890  (c)       5,964  (c) 
Noninterest expense
     817       797        
 
      196       230        
 
      3,388        3,327  
Other intangibles
     34       37    
 
 
 
      –       –    
 
 
 
      41        44  
Total noninterest expense
     851       834    
 
 
 
      196       230    
 
 
 
      3,429        3,371  
Income (loss) before provision and income taxes
     711       676        
 
      113       (23 )       
 
      2,461        2,593  
Provision for credit losses
     166       246    
 
 
 
      (330 )      214    
 
 
 
      (163 )       635  
Income (loss) before income taxes
     545       430        
 
      443       (237 )       
 
      2,624        1,958  
Income taxes and taxable-equivalent adjustment
     136       108    
 
 
 
      45       (178 )   
 
 
 
      590        372  
Net income (loss)
     409       322        
 
      398       (59 )       
 
      2,034        1,586  
Net (income) loss attributable to noncontrolling interests
     –       –    
 
 
 
      (6 )      (6 )   
 
 
 
      (6 )       (6 ) 
Net income (loss) attributable to U.S. Bancorp
   $ 409     $ 322    
 
 
 
    $ 392     $ (65 )   
 
 
 
    $ 2,028      $ 1,580  
Average Balance Sheet
                      
 
                       
 
                
 
Loans
   $ 31,378     $ 31,168        
 
    $ 3,643     $ 3,458        
 
    $ 296,739      $ 311,018  
Other earning assets
     5       5        
 
      193,989       162,488        
 
      206,586        175,086  
Goodwill
     3,168       3,123        
 
      –       –        
 
      9,942        9,863  
Other intangible assets
     496       602        
 
      –       –        
 
      3,335        2,587  
Assets
     37,173       36,191        
 
      219,196       189,388        
 
      553,446        536,902  
                 
Noninterest-bearing deposits
     4,913       6,886        
 
      2,594       2,424        
 
      129,018        109,375  
Interest-bearing deposits
     150       124    
 
 
 
      1,290       1,514    
 
 
 
      302,469        296,148  
Total deposits
     5,063       7,010        
 
      3,884       3,938        
 
      431,487        405,523  
                 
Total U.S. Bancorp shareholders’ equity
     7,561       7,716    
 
 
 
      17,491       13,119    
 
 
 
      54,273        52,416  
 
(a)
Presented net of related rewards and rebate costs and certain partner payments of $652 million and $525 million for the three months ended September 30, 2021 and 2020, respectively.
(b)
Includes revenue generated from certain contracts with customers of $2.0 billion and $1.8 billion for the three months ended September 30, 2021 and 2020, respectively.
(c)
The Company, as a lessor, originates retail and commercial leases either directly to the consumer or indirectly through dealer networks. Under these arrangments, the Company recorded $220 million and $246 million of revenue for the three months ended September 30, 2021 and 2020, respectively, primarily consisting of interest income on sales-type and direct financing leases.
 
U.S. Bancorp  
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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)   2021     2020             2021     2020             2021      2020  
Condensed Income Statement
                      
 
                       
 
                
 
Net interest income (taxable-equivalent basis)
   $ 2,172     $ 2,623        
 
    $ 4,603     $ 4,239        
 
    $ 721      $ 964  
Noninterest income
     786       899    
 
 
 
      1,918       2,433    
 
 
 
      1,638        1,507  
Total net revenue
     2,958       3,522        
 
      6,521       6,672        
 
      2,359        2,471  
Noninterest expense
     1,257       1,310        
 
      4,210       4,061        
 
      1,499        1,445  
Other intangibles
     –       –    
 
 
 
      9       12    
 
 
 
      10        9  
Total noninterest expense
     1,257       1,310    
 
 
 
      4,219       4,073    
 
 
 
      1,509        1,454  
Income (loss) before provision and income taxes
     1,701       2,212        
 
      2,302       2,599        
 
      850        1,017  
Provision for credit losses
     (20 )      572    
 
 
 
      (143 )      269    
 
 
 
      26        34  
Income (loss) before income taxes
     1,721       1,640        
 
      2,445       2,330        
 
      824        983  
Income taxes and taxable-equivalent adjustment
     430       410    
 
 
 
      612       583    
 
 
 
      206        246  
Net income (loss)
     1,291       1,230        
 
      1,833       1,747        
 
      618        737  
Net (income) loss attributable to noncontrolling interests
     –       –    
 
 
 
      –       –    
 
 
 
      –        –  
Net income (loss) attributable to U.S. Bancorp
   $ 1,291     $ 1,230    
 
 
 
    $ 1,833     $ 1,747    
 
 
 
    $ 618      $ 737  
Average Balance Sheet
                      
 
                       
 
                
 
Loans
   $ 102,117     $ 118,686        
 
    $ 141,220     $ 139,981        
 
    $ 17,584      $ 15,151  
Other earning assets
     4,485       4,170        
 
      8,606       6,578        
 
      247        285  
Goodwill
     1,648       1,647        
 
      3,485       3,508        
 
      1,618        1,617  
Other intangible assets
     5       6        
 
      2,692       2,095        
 
      69        40  
Assets
     114,182       131,106        
 
      162,316       157,177        
 
      20,676        18,324  
                 
Noninterest-bearing deposits
     59,841       41,091        
 
      33,734       29,397        
 
      23,024        16,285  
Interest-bearing deposits
     69,999       90,581    
 
 
 
      156,821       126,934    
 
 
 
      76,098        76,736  
Total deposits
     129,840       131,672        
 
      190,555       156,331        
 
      99,122        93,021  
                 
Total U.S. Bancorp shareholders’ equity
     13,995       15,201    
 
 
 
      12,378       12,797    
 
 
 
      3,099        2,924  
           
   
Payment
Services
            
Treasury and
Corporate Support
            
Consolidated
Company
  
(Dollars in Millions)   2021     2020             2021     2020             2021      2020  
Condensed Income Statement
                      
 
                       
 
                
 
Net interest income (taxable-equivalent basis)
   $ 1,841     $ 1,910        
 
    $ 113     $ (13 )       
 
    $ 9,450      $ 9,723  
Noninterest income
     2,644  (a)      2,319  (a)   
 
 
 
      707       693    
 
 
 
      7,693  (b)       7,851  (b) 
Total net revenue
     4,485       4,229        
 
      820       680        
 
      17,143  (c)       17,574  (c) 
Noninterest expense
     2,381       2,296        
 
      729       764        
 
      10,076        9,876  
Other intangibles
     100       108    
 
 
 
      –       –    
 
 
 
      119        129  
Total noninterest expense
     2,481       2,404    
 
 
 
      729       764    
 
 
 
      10,195        10,005  
Income (loss) before provision and income taxes
     2,004       1,825        
 
      91       (84 )       
 
      6,948        7,569  
Provision for credit losses
     216       477    
 
 
 
      (1,239 )      2,013    
 
 
 
      (1,160 )       3,365  
Income (loss) before income taxes
     1,788       1,348        
 
      1,330       (2,097 )       
 
      8,108        4,204  
Income taxes and taxable-equivalent adjustment
     447       338    
 
 
 
      106       (833 )   
 
 
 
      1,801        744  
Net income (loss)
     1,341       1,010        
 
      1,224       (1,264 )       
 
      6,307        3,460  
Net (income) loss attributable to noncontrolling interests
     –       –    
 
 
 
      (17 )      (20 )   
 
 
 
      (17 )       (20 ) 
Net income (loss) attributable to U.S. Bancorp
   $ 1,341     $ 1,010    
 
 
 
    $ 1,207     $ (1,284 )   
 
 
 
    $ 6,290      $ 3,440  
Average Balance Sheet
                      
 
                       
 
                
 
Loans
   $ 30,353     $ 31,725        
 
    $ 3,740     $ 3,392        
 
    $ 295,014      $ 308,935  
Other earning assets
     5       5        
 
      192,259       156,045        
 
      205,602        167,083  
Goodwill
     3,174       3,027        
 
      –       –        
 
      9,925        9,799  
Other intangible assets
     519       584        
 
      –       –        
 
      3,285        2,725  
Assets
     35,972       36,497        
 
      218,053       182,276        
 
      551,199        525,380  
                 
Noninterest-bearing deposits
     5,068       3,852        
 
      2,595       2,310        
 
      124,262        92,935  
Interest-bearing deposits
     141       119    
 
 
 
      1,718       3,293    
 
 
 
      304,777        297,663  
Total deposits
     5,209       3,971        
 
      4,313       5,603        
 
      429,039        390,598  
                 
Total U.S. Bancorp shareholders’ equity
     7,544       7,269    
 
 
 
      16,311       13,745    
 
 
 
      53,327        51,936  
 
(a)
Presented net of related rewards and rebate costs and certain partner payments of $1.8 billion and $1.5 billion for the nine months ended September 30, 2021 and 2020, respectively.
(b)
Includes revenue generated from certain contracts with customers of $5.6 billion and $5.1 billion for the nine months ended September 30, 2021 and 2020, respectively.
(c)
The Company, as a lessor, originates retail and commercial leases either directly to the consumer or indirectly through dealer networks. Under these arrangments, the Company recorded $686 million and $714 million of revenue for the nine months ended September 30, 2021 and 2020, respectively, primarily consisting of interest income on sales-type and direct financing leases.
 
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   U.S. Bancorp
Table of Contents
 Note 18
  
   Subsequent Events
The Company has evaluated the impact of events that have occurred subsequent to September 30, 2021 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.
 
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U.S. Bancorp
Consolidated Daily Average Balance Sheet and Related Yields and Rates (a)
 
                                                                                                         
    For the Three Months Ended September 30               
           2021                                     2020                                        
(Dollars in Millions)
(Unaudited)
   Average
Balances		     Interest              Yields and
Rates		             Average
Balances		             Interest              Yields and
Rates		                    % Change
Average
Balances		  
Assets
                                        
 
                                                  
 
               
 
Investment securities
   $ 151,755     $ 624                 1.64 %       
 
    $ 128,565              $ 602                 1.87 %       
 
              18.0 % 
Loans held for sale
     7,438       54                 2.92        
 
      7,983                61                 3.06        
 
              (6.8 ) 
Loans (b)
                                        
 
                                                  
 
               
 
Commercial
     101,832       711                 2.77        
 
      115,489                718                 2.48        
 
              (11.8 ) 
Commercial real estate
     38,921       303                 3.09        
 
      40,929                341                 3.31        
 
              (4.9 ) 
Residential mortgages
     74,104       604                 3.25        
 
      75,786                687                 3.62        
 
              (2.2 ) 
Credit card
     21,905       569                 10.30        
 
      22,052                583                 10.51        
 
              (.7 ) 
Other retail
     59,977       532                 3.52        
 
      56,762    
 
 
 
      572                 4.01        
 
              5.7  
Total loans
     296,739       2,719                 3.64        
 
      311,018                2,901                 3.72        
 
              (4.6 ) 
Other earning assets
     47,393       38                 .31        
 
      38,538    
 
 
 
      34                 .35        
 
              23.0  
Total earning assets
     503,325       3,435                 2.72        
 
      486,104                3,598                 2.95        
 
              3.5  
Allowance for loan losses
     (5,972 )                                 
 
      (7,824 )                                          
 
              23.7  
Unrealized gain (loss) on investment securities
     1,231                                  
 
      3,655                                           
 
              (66.3 ) 
Other assets
     54,862                                  
 
      54,967                                           
 
              (.2 ) 
Total assets
   $ 553,446                                  
 
    $ 536,902                                           
 
              3.1  
Liabilities and Shareholders’ Equity
                                        
 
                                                  
 
               
 
Noninterest-bearing deposits
   $ 129,018                                  
 
    $ 109,375                                           
 
              18.0 % 
Interest-bearing deposits
                                        
 
                                                  
 
               
 
Interest checking
     103,036       5                 .02        
 
      84,494                7                 .04        
 
              21.9  
Money market savings
     112,543       50                 .17        
 
      124,115                68                 .22        
 
              (9.3 ) 
Savings accounts
     63,387       2                 .01        
 
      53,499                5                 .04        
 
              18.5  
Time deposits
     23,503       21                 .35        
 
      34,040    
 
 
 
      50                 .58        
 
              (31.0 ) 
Total interest-bearing deposits
     302,469       78                 .10        
 
      296,148                130                 .17        
 
              2.1  
Short-term borrowings
     14,688       18                 .49        
 
      18,049                19                 .43        
 
              (18.6 ) 
Long-term debt
     35,972       142                 1.57        
 
      43,542    
 
 
 
      197                 1.80        
 
              (17.4 ) 
Total interest-bearing liabilities
     353,129       238                 .27        
 
      357,739                346                 .39        
 
              (1.3 ) 
Other liabilities
     16,391                                  
 
      16,742                                           
 
              (2.1 ) 
Shareholders’ equity
                                        
 
                                                  
 
               
 
Preferred equity
     5,968                                  
 
      5,984                                           
 
              (.3 ) 
Common equity
     48,305                                  
 
      46,432                                           
 
              4.0  
Total U.S. Bancorp shareholders’ equity
     54,273                                  
 
      52,416                                           
 
              3.5  
Noncontrolling interests
     635                                  
 
      630                                           
 
              .8  
Total equity
     54,908                                  
 
      53,046                                           
 
              3.5  
Total liabilities and equity
   $ 553,446                                  
 
    $ 536,902                                           
 
              3.1  
Net interest income
           $ 3,197                          
 
                     $ 3,252                          
 
                 
Gross interest margin
                               2.45 %   
 
 
 
                                         2.56 %   
 
 
 
                 
Gross interest margin without taxable-equivalent increments
                               2.43 %   
 
 
 
                                         2.54 %   
 
 
 
                 
Percent of Earning Assets
                                        
 
                                                  
 
                 
Interest income
                               2.72 %       
 
                                         2.95 %       
 
                 
Interest expense
                               .19    
 
 
 
                                         .28    
 
 
 
                 
Net interest margin
                               2.53 %   
 
 
 
                                         2.67 %   
 
 
 
                 
Net interest margin without taxable-equivalent increments
  
 
 
 
  
 
 
 
   
 
 
 
      2.51 %   
 
 
 
   
 
 
 
  
 
 
 
   
 
 
 
   
 
 
 
      2.65 %   
 
 
 
                 
 
(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
Table of Contents
U.S. Bancorp
Consolidated Daily Average Balance Sheet and Related Yields and Rates (a)
 
                                                                                                         
    For the Nine Months Ended September 30               
           2021                                     2020                                        
(Dollars in Millions)
(Unaudited)
   Average
Balances		     Interest              Yields and
Rates		             Average
Balances		             Interest              Yields and
Rates		                    % Change
Average
Balances		  
Assets
                                        
 
                                                  
 
               
 
Investment securities
   $ 152,653     $ 1,793                 1.57 %       
 
    $ 123,444              $ 1,953                 2.11 %       
 
              23.7 % 
Loans held for sale
     8,422       176                 2.79        
 
      6,352                157                 3.31        
 
              32.6  
Loans (b)
                                        
 
                                                  
 
               
 
Commercial
     102,298       2,060                 2.69        
 
      116,501                2,492                 2.86        
 
              (12.2 ) 
Commercial real estate
     38,757       914                 3.15        
 
      40,699                1,129                 3.71        
 
              (4.8 ) 
Residential mortgages
     74,215       1,870                 3.36        
 
      72,612                1,985                 3.65        
 
              2.2  
Credit card
     21,391       1,701                 10.63        
 
      22,465                1,794                 10.66        
 
              (4.8 ) 
Other retail
     58,353       1,594                 3.65        
 
      56,658    
 
 
 
      1,783                 4.20        
 
              3.0  
Total loans
     295,014       8,139                 3.69        
 
      308,935                9,183                 3.97        
 
              (4.5 ) 
Other earning assets
     44,527       103                 .31        
 
      37,287    
 
 
 
      144                 .52        
 
              19.4  
Total earning assets
     500,616       10,211                 2.72        
 
      476,018                11,437                 3.21        
 
              5.2  
Allowance for loan losses
     (6,513 )                                 
 
      (6,656 )                                          
 
              2.1  
Unrealized gain (loss) on investment securities
     1,304                                  
 
      2,863                                           
 
              (54.5 ) 
Other assets
     55,792                                  
 
      53,155                                           
 
              5.0  
Total assets
   $ 551,199                                  
 
    $ 525,380                                           
 
              4.9  
Liabilities and Shareholders’ Equity
                                        
 
                                                  
 
               
 
Noninterest-bearing deposits
   $ 124,262                                  
 
    $ 92,935                                           
 
              33.7 % 
Interest-bearing deposits
                                        
 
                                                  
 
               
 
Interest checking
     101,280       18                 .02        
 
      81,890                58                 .10        
 
              23.7  
Money market savings
     116,968       150                 .17        
 
      125,247                474                 .51        
 
              (6.6 ) 
Savings accounts
     61,462       5                 .01        
 
      50,937                42                 .11        
 
              20.7  
Time deposits
     25,067       72                 .38        
 
      39,589    
 
 
 
      275                 .93        
 
              (36.7 ) 
Total interest-bearing deposits
     304,777       245                 .11        
 
      297,663                849                 .38        
 
              2.4  
Short-term borrowings
     14,758       52                 .47        
 
      21,335                127                 .80        
 
              (30.8 ) 
Long-term debt
     37,196       464                 1.67        
 
      44,587    
 
 
 
      738                 2.21        
 
              (16.6 ) 
Total interest-bearing liabilities
     356,731       761                 .28        
 
      363,585                1,714                 .63        
 
              (1.9 ) 
Other liabilities
     16,247                                  
 
      16,294                                           
 
              (.3 ) 
Shareholders’ equity
                                        
 
                                                  
 
               
 
Preferred equity
     6,049                                  
 
      5,984                                           
 
              1.1  
Common equity
     47,278                                  
 
      45,952                                           
 
              2.9  
Total U.S. Bancorp shareholders’ equity
     53,327                                  
 
      51,936                                           
 
              2.7  
Noncontrolling interests
     632                                  
 
      630                                           
 
              .3  
Total equity
     53,959                                  
 
      52,566                                           
 
              2.7  
Total liabilities and equity
   $ 551,199                                  
 
    $ 525,380                                           
 
              4.9  
Net interest income
           $ 9,450                          
 
                     $ 9,723                          
 
                 
Gross interest margin
                               2.44 %   
 
 
 
                                         2.58 %   
 
 
 
                 
Gross interest margin without taxable-equivalent increments
                               2.42 %   
 
 
 
                                         2.56 %   
 
 
 
                 
Percent of Earning Assets
                                        
 
                                                  
 
                 
Interest income
                               2.72 %       
 
                                         3.21 %       
 
                 
Interest expense
                               .20    
 
 
 
                                         .48    
 
 
 
                 
Net interest margin
                               2.52 %   
 
 
 
                                         2.73 %   
 
 
 
                 
Net interest margin without taxable-equivalent increments
  
 
 
 
  
 
 
 
   
 
 
 
      2.50 %   
 
 
 
   
 
 
 
  
 
 
 
   
 
 
 
   
 
 
 
      2.71 %   
 
 
 
                 
 
(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  
79
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Part II — Other Information
Item
 1. Legal Proceedings
— See the information set forth in Note 16 in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Report, which is incorporated herein by reference.
Item 1A. Risk Factors
— There are a number of factors that may adversely affect the Company’s business, financial results or stock price. Refer to “Risk Factors” in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2020, for discussion of these risks.
Item
 2. Unregistered Sales of Equity Securities and Use of Proceeds
— Refer to the “Capital Management” section within Management’s Discussion and Analysis in Part I, Item 2 of this Report for information regarding shares repurchased by the Company during the third quarter of 2021.
Item 6. Exhibits
 
 
    2.1
    Share Purchase Agreement, dated as of September 21, 2021, among Mitsubishi UFJ Financial Group, Inc., MUFG Americas Holdings Corporation, and U.S. Bancorp (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on September 24, 2021).
 
  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, 2021, formatted in Inline XBRL (included within the Exhibit 101 attachments).
 
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   U.S. Bancorp
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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.
 
        U.S. BANCORP
       
        By:   /s/    L
ISA
R. S
TARK
       
 
Dated: November 2, 2021          
Lisa R. Stark
Controller
(Principal Accounting Officer and Duly Authorized Officer)
 
 
U.S. Bancorp  
81
Table of Contents
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
/    A
NDREW
C
ECERE
Andrew Cecere
Chief Executive Officer
Dated: November 2, 2021
 
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   U.S. Bancorp
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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)
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/    T
ERRANCE
R. D
OLAN
Terrance R. Dolan
Chief Financial Officer
Dated: November 2, 2021
 
U.S. Bancorp  
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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, 2021 (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/    A
NDREW
C
ECERE
  
 
    /s/    T
ERRANCE
R. D
OLAN
Andrew Cecere
Chief Executive Officer
 
Dated: November 2, 2021
       
Terrance R. Dolan
Chief Financial Officer
 
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   U.S. Bancorp
Table of Contents
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
or
201-680-6578
(international calls)
Internet: www.computershare.com/investor
Registered or Certified Mail:
Computershare
462 South 4
th
Street, Suite 1600
Louisville, KY 40202
Telephone representatives are available weekdays from 8 a.m. to 6 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
or
866-775-9668
Financial Information
U.S. Bancorp news and financial results are available through our website and by mail.
Website
 For information about U.S. Bancorp, including news, financial results, annual reports and other documents filed with the Securities and Exchange Commission, 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.
 
 
 
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TABLE OF CONTENTS
Note 1 Basis Of PresentationprintNote 2 Accounting ChangesprintNote 3 Business CombinationsprintNote 4 Investment SecuritiesprintNote 5 Loans and Allowance For Credit LossesprintNote 6 Accounting For Transfers and Servicing Of Financial Assets and Variable Interest EntitiesprintNote 7 Mortgage Servicing RightsprintNote 8 Preferred StockprintNote 9 Accumulated Other Comprehensive Income (loss)printNote 10 Earnings Per ShareprintNote 11 Employee BenefitsprintNote 12 Income TaxesprintNote 13 Derivative InstrumentsprintNote 14 Netting Arrangements For Certain Financial Instruments and Securities Financing ActivitiesprintNote 15 Fair Values Of Assets and LiabilitiesprintNote 16 Guarantees and Contingent LiabilitiesprintNote 17 Business SegmentsprintNote 18 Subsequent EventsprintPart II Other InformationprintItem 1A. Risk FactorsprintItem 6. Exhibitsprint

Exhibits

2.1 Share Purchase Agreement, dated as of September21, 2021, among Mitsubishi UFJ Financial Group, Inc., MUFG Americas Holdings Corporation, and U.S. Bancorp (incorporated by reference to Exhibit 2.1 to the Companys Form8-Kfiled on September24, 2021). 31.1 Certification of Chief Executive Officer pursuant to Rule13a-14(a)under the Securities Exchange Act of 1934. 31.2 Certification of Chief Financial Officer pursuant to Rule13a-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. section1350 as adopted pursuant to section906 of the Sarbanes-Oxley Act of 2002.