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U.S. Bancorp
USB
#236
Rank
$91.91 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$59.11
Share price
-0.52%
Change (1 day)
27.64%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. U.S. Bancorp
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2020 Q2

U.S. Bancorp - 10-Q quarterly report FY2020 Q2


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Table of Contents
US BANCORP \DE\Yes0.410.0080.0010.0010.410.410.370.420.740.84Yesfalse2020Q20000036104--12-310.41Information 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 4.2 years at December 31, 2019, with a corresponding weighted-average yield of 2.38 percent.lncludes time deposits greater than $250,000 balances of $7.6 billion and $7.8 billion at June 30, 2020 and December 31, 2019, respectively.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.Includes only collateral pledged by the Company where counterparties have the right to sell or pledge the collateral.Reflects dividends declared per share on the Company’s Series A, Series B, Series F, Series H, Series I and Series K Non-Cumulative Perpetual Preferred Stock of $914.234, $221.18, $406.25, $321.88, $640.625 and $343.75, respectively.Reflects dividends declared per share on the Company’s Series A, Series B, Series F, Series H, Series I and Series K Non-Cumulative Perpetual Preferred Stock of $884.722, $221.18, $406.25, $321.88, $640.625 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 $1,866.062, $439.93, $812.50, $643.76, $640.625, $662.50 and $687.50, respectively.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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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 June 30, 2020
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 H
Non-Cumulative
Perpetual Preferred Stock, par value $1.00)
 USB PrO New York Stock Exchange
Depositary Shares (each representing 1/1,000th interest in a share of Series K
Non-Cumulative
Perpetual Preferred Stock, par value $1.00)
 USB PrP New York Stock Exchange
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 July 31, 2020
Common Stock, $0.01 Par Value  1,506,362,519 shares
 
 
 
Table of Contents
Table of Contents and
Form 10-Q
Cross Reference Index
 
Part I — Financial Information
    
1) Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2)
     3 
a) Overview
     3 
b) Statement of Income Analysis
     4 
c) Balance Sheet Analysis
     6 
d) Non-GAAP Financial Measures
     32 
e) Critical Accounting Policies
     33 
f) Controls and Procedures (Item 4)
     35 
2) Quantitative and Qualitative Disclosures About Market Risk/Corporate Risk Profile (Item 3)
     8 
a) Overview
     8 
b) Credit Risk Management
     9 
c) Residual Value Risk Management
     22 
d) Operational Risk Management
     22 
e) Compliance Risk Management
     22 
f) Interest Rate Risk Management
     22 
g) Market Risk Management
     24 
h) Liquidity Risk Management
     25 
i) Capital Management
     26 
3) Line of Business Financial Review
     28 
4) Financial Statements (Item 1)
     36 
Part II — Other Information
    
1) Legal Proceedings (Item 1)
     79 
2) Risk Factors (Item 1A)
     79 
3) Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)
     80 
4) Exhibits (Item 6)
     81 
5) Signature
     82 
6) Exhibits
     83 
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995.
This quarterly report on
Form 10-Q
contains forward-looking statements about U.S. Bancorp. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements and are based on the information available to, and assumptions and estimates made by, management as of the date hereof. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future plans and prospects of U.S. Bancorp. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated. The
COVID-19
pandemic is adversely affecting U.S. Bancorp, its customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on its business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions or turbulence in domestic or global financial markets could adversely affect U.S. Bancorp’s revenues and the values of its assets and liabilities, reduce the availability of funding to certain financial institutions, lead to a tightening of credit, and increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices could affect U.S. Bancorp in substantial and unpredictable ways. U.S. Bancorp’s results could also be adversely affected by changes in interest rates; further increases in unemployment rates; deterioration in the credit quality of its loan portfolios or in the value of the collateral securing those loans; deterioration in the value of its investment securities; legal and regulatory developments; litigation; increased competition from both banks and
non-banks;
changes in the level of tariffs and other trade policies of the United States and its global trading partners; changes in customer behavior and preferences; breaches in data security; failures to safeguard personal information; effects of mergers and acquisitions and related integration; effects of critical accounting policies and judgments; and management’s ability to effectively manage credit risk, market risk, operational risk, compliance risk, strategic risk, interest rate risk, liquidity risk and reputation risk.
For discussion of these and other risks that may cause actual results to differ from expectations, refer to the other information in this report, including the section entitled “Risk Factors” and U.S. Bancorp’s Annual Report on Form
10-K
for the year ended December 31, 2019, on file with the Securities and Exchange Commission, including the sections entitled “Corporate Risk Profile” and “Risk Factors” contained in Exhibit 13, and all subsequent filings with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934. In addition, factors other than these risks also could adversely affect U.S. Bancorp’s results, and the reader should not consider these risks to be a complete set of all potential risks or uncertainties. Forward-looking statements speak only as of the date hereof, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.
 
U.S. Bancorp  
1
Table of Contents
 Table 1
 
   Selected Financial Data
 
  
Three Months Ended
June 30
   
Six Months Ended
June 30
 
(Dollars and Shares in Millions, Except Per Share Data) 2020  2019  Percent
Change		   2020  2019  Percent
Change		 
Condensed Income Statement
        
Net interest income
 $3,200  $3,305   (3.2)%   $6,423  $6,564   (2.1)% 
Taxable-equivalent adjustment (a)
  24   27   (11.1)    48   54   (11.1) 
Net interest income (taxable-equivalent basis) (b)
  3,224   3,332   (3.2)    6,471   6,618   (2.2) 
Noninterest income
  2,533   2,473   2.4    5,008   4,759   5.2 
Securities gains (losses), net
  81   17   *    131   22   * 
Total net revenue
  5,838   5,822   .3    11,610   11,399   1.9 
Noninterest expense
  3,318   3,153   5.2    6,634   6,240   6.3 
Provision for credit losses
  1,737   365   *    2,730   742   * 
Income before taxes
  783   2,304   (66.0)    2,246   4,417   (49.2) 
Income taxes and taxable-equivalent adjustment
  88   476   (81.5)    372   881   (57.8) 
Net income
  695   1,828   (62.0)    1,874   3,536   (47.0) 
Net (income) loss attributable to noncontrolling interests
  (6)   (7)   14.3    (14)   (16)   12.5 
Net income attributable to U.S. Bancorp
 $689  $1,821   (62.2)   $1,860  $3,520   (47.2) 
Net income applicable to U.S. Bancorp common shareholders
 $614  $1,741   (64.7)   $1,702  $3,354   (49.3) 
Per Common Share
        
Earnings per share
 $.41  $1.09   (62.4)%   $1.13  $2.10   (46.2)% 
Diluted earnings per share
  .41   1.09   (62.4)    1.12   2.10   (46.7) 
Dividends declared per share
  .42   .37   13.5    .84   .74   13.5 
Book value per share (c)
  30.46   29.63   2.8     
Market value per share
  36.82   52.40   (29.7)     
Average common shares outstanding
  1,506   1,590   (5.3)    1,512   1,596   (5.3) 
Average diluted common shares outstanding
  1,507   1,592   (5.3)    1,513   1,599   (5.4) 
Financial Ratios
        
Return on average assets
  .51%   1.55%      .72%   1.52%  
Return on average common equity
  5.3   15.0      7.5   14.7  
Net interest margin (taxable-equivalent basis) (a)
  2.62   3.13      2.76   3.14  
Efficiency ratio (b)
  57.6   54.3      57.8   54.8  
Net charge-offs as a percent of average loans outstanding
  .55   .49      .54   .50  
Average Balances
        
Loans
 $318,107  $289,218   10.0%   $307,882  $287,672   7.0% 
Loans held for sale
  6,307   3,162   99.5    5,527   2,650   * 
Investment securities (d)
  120,867   115,460   4.7    120,856   114,823   5.3 
Earning assets
  494,119   426,933   15.7    470,921   423,234   11.3 
Assets
  544,306   471,598   15.4    519,556   467,521   11.1 
Noninterest-bearing deposits
  95,106   73,096   30.1    84,624   73,263   15.5 
Deposits
  403,303   345,232   16.8    383,053   340,326   12.6 
Short-term borrowings
  25,738   17,169   49.9    22,995   17,765   29.4 
Long-term debt
  46,385   40,438   14.7    45,116   41,143   9.7 
Total U.S. Bancorp shareholders’ equity
  52,241   52,438   (.4)    51,693   52,016   (.6) 
 
  June 30,
2020		  December 31,
2019		              
Period End Balances
        
Loans
 $310,335  $296,102   4.8%     
Investment securities
  128,120   122,613   4.5     
Assets
  546,652   495,426   10.3     
Deposits
  413,306   361,916   14.2     
Long-term debt
  42,579   40,167   6.0     
Total U.S. Bancorp shareholders’ equity
  51,850   51,853   –     
Asset Quality
        
Nonperforming assets
 $1,173  $829   41.5%     
Allowance for credit losses
  7,890   4,491   75.7     
Allowance for credit losses as a percentage of
period-end
loans
  2.54%   1.52%       
Capital Ratios
        
Common equity tier 1 capital
  9.0%   9.1%       
Tier 1 capital
  10.6   10.7       
Total risk-based capital
  12.8   12.7       
Leverage
  8.0   8.8       
Total leverage exposure
  7.1   7.0       
Tangible common equity to tangible assets (b)
  6.7   7.5       
Tangible common equity to risk-weighted assets (b)
  9.0   9.3       
Common equity tier 1 capital to risk-weighted assets, reflecting the full implementation of the current expected credit losses methodology (b)
  8.7                      
 
*
Not meaningful    
(a)
Based on a federal income tax rate of 21 percent for those assets and liabilities whose income or expense is not included for federal income tax purposes.    
(b)
See
Non-GAAP
Financial Measures beginning on page 32.    
(c)
Calculated as U.S. Bancorp common shareholders’ equity divided by common shares outstanding at end of the period.    
(d)
Excludes unrealized gains and losses on
available-for-sale
investment securities and any premiums or discounts recorded related to the transfer of investment securities at fair value from
available-for-sale
to
held-to-maturity.    
 
2
  U.S. Bancorp
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 $689 million for the second quarter of 2020, or $0.41 per diluted common share, compared with $1.8 billion, or $1.09 per diluted common share, for the second quarter of 2019. Return on average assets and return on average common equity were 0.51 percent and 5.3 percent, respectively, for the second quarter of 2020, compared with 1.55 percent and 15.0 percent, respectively, for the second quarter of 2019. During a challenging period adversely impacted by the
COVID-19
pandemic, the Company’s diversified business mix generated growth in net revenue and supported a provision for credit losses of $1.7 billion resulting in a $1.3 billion increase in the allowance for credit losses in the second quarter of 2020.
Total net revenue for the second quarter of 2020 was $16 million (0.3 percent) higher than the second quarter of 2019, reflecting a 5.0 percent increase in noninterest income, partially offset by a 3.2 percent decrease in net interest income. The decrease in net interest income from the second quarter of 2019 was primarily due to the impact of declining interest rates, partially offset by changes in deposit and funding mix, and loan growth. The noninterest income increase was driven by significant growth in mortgage banking revenue due to refinancing activities, strong growth in commercial products revenue, and an increase in gains on the sale of investment securities. Growth in these fee categories was partially offset by a decline in payment services revenue and deposit service charges related to lower consumer and commercial spending as well as higher fee waivers related to customers impacted by
COVID-19.
Additionally, other noninterest income declined from the second quarter of 2019 due to lower equity investment income, lower tax credit syndication revenues, and asset impairments as a result of property damage from civil unrest occurring during the second quarter of 2020.
Noninterest expense in the second quarter of 2020 was $165 million (5.2 percent) higher than the second quarter of 2019, reflecting costs related to
COVID-19
and an increase in revenue-related production expenses in the second quarter of 2020. Additionally, noninterest expense reflected an increase in personnel and technology and communications expenses related to developing digital capabilities and related business investment, partially offset by lower marketing and business development expense.
The provision for credit losses for the second quarter of 2020 of $1.7 billion was $1.4 billion higher than the second quarter of 2019, reflecting an increase in the allowance for credit losses during the second quarter of 2020 due to deteriorating economic conditions driven by the impact of
COVID-19
on the domestic and global economies. Net charge-offs in the second quarter of 2020 were $437 million, compared with $350 million in the second quarter of 2019. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.
Net income attributable to U.S. Bancorp for the first six months of 2020 was $1.9 billion, or $1.12 per diluted common share, compared with $3.5 billion, or $2.10 per diluted common share, for the first six months of 2019. Return on average assets and return on average common equity were 0.72 percent and 7.5 percent, respectively, for the first six months of 2020, compared with 1.52 percent and 14.7 percent, respectively, for the first six months of 2019.
Total net revenue for the first six months of 2020 was $211 million (1.9 percent) higher than the first six months of 2019, reflecting a 7.5 percent increase in noninterest income, partially offset by a 2.1 percent decrease in net interest income (2.2 percent on a taxable-equivalent basis). The decrease in net interest income from the first six months of 2019 was primarily due to the impact of declining interest rates, partially offset by changes in deposit and funding mix, and loan growth. The noninterest income increase was driven by significant growth in mortgage banking revenue due to refinancing activities, strong growth in commercial products revenue and trust and investment management fees, and an increase in gains on the sale of investment securities. Growth in these fee categories was partially offset by a decline in payment services revenue and deposit service charges related to lower consumer and commercial spending as well as higher fee waivers related to customers impacted by
COVID-19.
Additionally, other noninterest income declined from the prior year due to lower equity investment income, lower tax credit syndication revenues, and asset impairments recorded in
 
U.S. Bancorp 
3
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the first six months of 2020, partially offset by gains on sale of certain businesses in the first six months of 2020.
Noninterest expense in the first six months of 2020 was $394 million (6.3 percent) higher than the first six months of 2019, reflecting costs related to
COVID-19
and an increase in revenue-related production expenses in the first six months of 2020. Additionally, noninterest expense reflected an increase in personnel and technology and communications expenses related to developing digital capabilities and related business investment, partially offset by lower marketing and business development expense.
The provision for credit losses for the first six months of 2020 of $2.7 billion was $2.0 billion higher than the first six months of 2019, reflecting an increase in the allowance for credit losses during the first six months of 2020 due to deteriorating economic conditions driven by the impact of
COVID-19
on the domestic and global economies. Net charge-offs in the first six months of 2020 were $830 million, compared with $717 million in the first six months of 2019. Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.
STATEMENT OF INCOME ANALYSIS
Net Interest Income
 Net interest income, on a taxable-equivalent basis, was $3.2 billion in the second quarter and $6.5 billion in the first six months of 2020, representing decreases of $108 million (3.2 percent) and $147 million (2.2 percent), respectively, compared with the same periods of 2019. The decreases were principally driven by the impact of declining interest rates, partially offset by changes in deposit and funding mix, and loan growth. Average earning assets were $67.2 billion (15.7 percent) higher in the second quarter and $47.7 billion (11.3 percent) higher in the first six months of 2020, compared with the same periods of 2019, reflecting increases in loans, investment securities and other earning assets. The net interest margin, on a taxable-equivalent basis, in the second quarter and first six months of 2020 was 2.62 percent and 2.76 percent, respectively, compared with 3.13 percent and 3.14 percent in the second quarter and first six months of 2019, respectively. The decrease in net interest margin from the prior year was primarily due to the impact of the lower yield curve and a decision to retain higher cash balances to maintain liquidity given the environment, partially offset by changes in deposit pricing and funding mix. The Company expects its net interest margin to be relatively stable in the third quarter of 2020, as compared with the second quarter of 2020. Refer to the “Consolidated Daily Average Balance Sheet and Related Yields and Rates” tables for further information on net interest income.
Average total loans in the second quarter and first six months of 2020 were $28.9 billion (10.0 percent) and $20.2 billion (7.0 percent) higher, respectively, than the same periods of 2019. The increases were primarily due to higher commercial loans, reflecting the utilization of bank credit facilities by customers to support liquidity requirements as well as the impact of loans made under the Small Business Administration’s (“SBA”) Paycheck Protection Program, along with growth in residential mortgages given the lower interest rate environment. These increases were partially offset by lower credit card loans reflecting lower consumer spending during the first six months of 2020, as well as lower other retail loans.
Average investment securities in the second quarter and first six months of 2020 were $5.4 billion (4.7 percent) and $6.0 billion (5.3 percent) higher, respectively, than the same periods of 2019, primarily due to purchases of mortgage-backed securities, net of prepayments and maturities, partially offset by U.S. Treasury securities sales and maturities, net of purchases.
Average total deposits for the second quarter and first six months of 2020 were $58.1 billion (16.8 percent) and $42.7 billion (12.6 percent) higher, respectively, than the same periods of 2019. Average total savings deposits for the second quarter and first six months of 2020 were $39.7 billion (17.6 percent) and $35.1 billion (15.9 percent) higher, respectively, than the same periods of the prior year, driven by increases in Corporate and Commercial Banking, Consumer and Business Banking, and Wealth Management and Investment Services balances. Average noninterest-bearing deposits for the second quarter and first six months of 2020 were $22.0 billion (30.1 percent) and $11.4 billion (15.5 percent) higher, respectively, than the same periods of 2019, primarily due to increases in Corporate and Commercial Banking, Consumer and Business Banking, and Wealth Management and Investment Services balances. The growth in average total savings and noninterest-bearing deposits was primarily a result of the actions by the federal government to increase liquidity in the financial system, customers maintaining balance sheet liquidity by utilizing existing credit facilities and government stimulus programs. Average time deposits for the second quarter and first six months of 2020 were $3.6 billion (7.7 percent) and $3.7 billion (8.0 percent) lower, respectively, than the same periods of the prior year, primarily driven by decreases in those deposits managed as an alternative to other funding sources, based largely on relative pricing and liquidity characteristics, partially offset by increases in Consumer and Business Banking balances.
 
4
  U.S. Bancorp
Table of Contents
 Table 2
 
   Noninterest Income
 
       
Three Months Ended
June 30
   
Six Months Ended
June 30
 
(Dollars in Millions)      2020   2019   Percent
Change		   2020   2019   Percent
Change		 
Credit and debit card revenue
 
  $284   $365    (22.2)%   $588   $669    (12.1)% 
Corporate payment products revenue
 
   101    167    (39.5)    246    329    (25.2) 
Merchant processing services
 
   266    404    (34.2)    603    782    (22.9) 
Trust and investment management fees
 
   434    415    4.6    861    814    5.8 
Deposit service charges
 
   133    227    (41.4)    342    444    (23.0) 
Treasury management fees
 
   137    153    (10.5)    280    299    (6.4) 
Commercial products revenue
 
   355    249    42.6    601    468    28.4 
Mortgage banking revenue
 
   648    189    *    1,043    358    * 
Investment products fees
 
   45    47    (4.3)    94    92    2.2 
Securities gains (losses), net
 
   81    17    *    131    22    * 
Other
    130    257    (49.4)    350    504    (30.6) 
Total noninterest income
 
  $2,614   $2,490    5.0%   $5,139   $4,781    7.5% 
 
*
Not meaningful.
 
Provision for Credit Losses
 The provision for credit losses was $1.7 billion for the second quarter and $2.7 billion for the first six months of 2020, representing increases of $1.4 billion and $2.0 billion, respectively, from the same periods of 2019. During 2020, the Company adopted accounting guidance which changed previous impairment recognition to a model that is based on expected losses rather than incurred losses. In March 2020 economic conditions began to deteriorate, and subsequently continued to deteriorate during the second quarter, due to the impact of the
COVID-19
health crisis. As a result, economic projections for the Gross Domestic Product declined dramatically and unemployment levels increased significantly due to information related to the evolving impacts of the
COVID-19
health crisis. This resulted in the Company’s expectations related to loan delinquencies, credit risk ratings, nonperforming assets and related future credit losses to reflect deteriorating credit quality. As a result, the Company recognized increases of $1.3 billion and $1.9 billion, during the second quarter and first six months of 2020, respectively, in the allowance for credit losses due to these deteriorating economic conditions. The expected loss estimates consider various factors including the changing economic conditions, potential mitigating effects of government stimulus, estimated duration of the health crisis, customer specific information impacting changes in risk ratings, projected delinquencies and the impact of industrywide loan modification efforts designed to limit long-term effects of the pandemic, among other factors. Net charge-offs increased $87 million (24.9 percent) and $113 million (15.8 percent) in the second quarter and first six months of 2020, respectively, compared with the same periods of the prior year, primarily due to higher commercial loan, commercial real estate loan and retail leasing net charge-offs, partially offset by a decrease in other retail loan net charge-offs. The increases in retail leasing charge-offs reflected the inclusion of end of term losses on residual lease values as of January 1, 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.
Noninterest Income
 Noninterest income was $2.6 billion in the second quarter and $5.1 billion in the first six months of 2020, representing increases of $124 million (5.0 percent) and $358 million (7.5 percent), respectively, compared with the same periods of 2019. The increases from a year ago reflected higher mortgage banking revenue, commercial products revenue, trust and investment management fees and gains on sales of investment securities, partially offset by lower payment services revenue, deposit service charges and other noninterest income. Mortgage banking revenue increased due to higher mortgage production and stronger gain on sale margins, partially offset by changes in mortgage servicing rights (“MSRs”) valuations, net of hedging activities. The Company expects mortgage banking revenue to decline in the third quarter of 2020, as compared with the second quarter of 2020, reflecting slower refinancing activity for the industry. Commercial products revenue increased primarily due to higher corporate bond issuance fees and trading revenue. Trust and investment management fees were higher due to business growth and favorable market conditions over the past year. Payment services fee revenue decreased reflecting lower merchant processing services revenue, credit and debit card revenue, and corporate payment products revenue, driven by lower sales volume due to the worldwide impact of the
COVID-19
pandemic on consumer and business spending. Payment services revenue is likely to be adversely affected through the remainder of 2020 due to reduced consumer and business spending activity. However, sales volume trends continue
 
U.S. Bancorp  
5
Table of Contents
 Table 3
 
   Noninterest Expense
 
  
Three Months Ended
June 30
   
Six Months Ended
June 30
 
(Dollars in Millions) 2020  2019  Percent
Change		   2020  2019  Percent
Change		 
Compensation
 $1,685  $1,574   7.1%   $3,305  $3,133   5.5% 
Employee benefits
  314   314   –    666   647   2.9 
Net occupancy and equipment
  271   281   (3.6)    547   558   (2.0) 
Professional services
  106   106   –    205   201   2.0 
Marketing and business development
  67   111   (39.6)    141   200   (29.5) 
Technology and communications
  309   270   14.4    598   527   13.5 
Postage, printing and supplies
  72   73   (1.4)    144   145   (.7) 
Other intangibles
  43   42   2.4    85   82   3.7 
Other
  451   382   18.1    943   747   26.2 
Total noninterest expense
 $3,318  $3,153   5.2%   $6,634  $6,240   6.3% 
Efficiency ratio (a)
  57.6%   54.3%        57.8%   54.8%     
 
a)
See
Non-GAAP
Financial Measures beginning on page 32.
 
to improve from the levels seen in late March and early April, and the Company expects continued gradual improvement in sales volumes throughout the remainder of the year. Deposit service charges decreased primarily due to lower volume and higher fee waivers related to customers impacted by
COVID-19.
Other noninterest income decreased due to lower equity investment income, lower
tax-advantaged
investment syndication revenue and asset impairments as a result of property damage from civil unrest in the second quarter of 2020. The decrease in other noninterest income in the first six months of 2020, compared with the first six months of 2019, was partially offset by gains on sale of certain businesses in the first quarter of 2020.
Noninterest Expense
 Noninterest expense was $3.3 billion in the second quarter and $6.6 billion in the first six months of 2020, representing increases of $165 million (5.2 percent) and $394 million (6.3 percent), respectively, over the same periods of 2019. The increases from a year ago were driven by incremental costs related to
COVID-19
and revenue-related expenses due to higher mortgage production and capital markets activities of $150 million in the second quarter and $299 million in the first six months of 2020, in addition to business investments, including increased digital capabilities. The categories of expense impacted include higher personnel expense, technology and communications expense, and other noninterest expense, partially offset by lower marketing and business development expense. Compensation expense increased due to the impacts of merit increases and higher variable compensation related to business production within mortgage banking and fixed income capital markets. Technology and communications expense increased primarily due to capital expenditures supporting business growth. Other noninterest expense increased, reflecting $79 million and $179 million of expenses in the second quarter and first six months of 2020, respectively, related to
COVID-19,
and higher state franchise taxes, partially offset by lower costs related to
tax-advantaged
projects in 2020. Incremental costs related to
COVID-19
include increased liabilities driven by the Company’s exposure as a credit card processor to charge-back risk on undelivered goods and services, including prepaid airline tickets, as well as expenses related to paying premium compensation to front-line workers and providing a safe working environment for employees. The Company expects these incremental
COVID-19
costs to begin to dissipate in the second half of 2020. Marketing and business development expense decreased due to the timing of marketing campaigns and a reduction in travel as a result of
COVID-19.
Income Tax Expense
 The provision for income taxes was $64 million (an effective rate of 8.4 percent) for the second quarter and $324 million (an effective rate of 14.7 percent) for the first six months of 2020, compared with $449 million (an effective rate of 19.7 percent) and $827 million (an effective rate of 19.0 percent) for the same periods of 2019. The reduced tax rates for 2020 were primarily a result of reduced pretax income being impacted by current economic conditions, including the higher provision for credit losses. For further information on income taxes, refer to Note 11 of the Notes to Consolidated Financial Statements.
BALANCE SHEET ANALYSIS
Loans
 The Company’s loan portfolio was $310.3 billion at June 30, 2020, compared with $296.1 billion at December 31, 2019, an increase of $14.2 billion (4.8 percent). The increase was driven by higher commercial loans, commercial real estate loans and residential mortgages, partially offset by lower credit card loans and other retail loans.
Commercial loans increased $16.4 billion (15.8 percent) at June 30, 2020, compared with December 31, 2019, reflecting the utilization of bank credit facilities by customers to support liquidity
 
6
  U.S. Bancorp
Table of Contents
 Table 4
 
   Available-for-Sale Investment Securities
 
  June 30, 2020       December 31, 2019 
(Dollars in Millions) Amortized
Cost		   Fair Value  Weighted-
Average
Maturity in
Years		   Weighted-
Average
Yield (d)		       Amortized
Cost		   Fair Value  Weighted-
Average
Maturity in
Years		   Weighted-
Average
Yield (d)		 
U.S. Treasury and agencies
 $19,397   $19,978   2.7    1.64%     $19,845   $19,839   2.7    1.68% 
Mortgage-backed securities (a)
  97,272    99,765   2.8    1.97      95,385    95,564   4.4    2.39 
Asset-backed securities (a)
  361    368   2.9    3.58      375    383   3.1    3.09 
Obligations of state and political subdivisions (b) (c)
  7,470    7,996   6.5    4.15      6,499    6,814   6.6    4.29 
Other
  13    13   .6    1.65        13    13   .3    2.66 
Total investment securities
 $124,513   $128,120   3.0    2.05%       $122,117   $122,613   4.2    2.38% 
 
(a)
Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities that take into account anticipated future prepayments.
(b)
Information related to obligations of state and political subdivisions is presented based upon yield to first optional call date if the security is purchased at a premium, and yield to maturity if the security is purchased at par or a discount.
(c)
Maturity calculations for obligations of state and political subdivisions are based on the first optional call date for securities with a fair value above par and the contractual maturity date for securities with a fair value equal to or below par.
(d)
Yields on investment securities are computed based on amortized cost balances. Weighted-average yields for obligations of state and political subdivisions are presented on a fully-taxable equivalent basis based on a federal income tax rate of 21 percent.
 
requirements as well as the impact of loans made under the SBA’s Paycheck Protection Program.
Commercial real estate loans increased $1.3 billion (3.3 percent) at June 30, 2020, compared with December 31, 2019, primarily the result of new originations, partially offset by customers paying down balances.
Residential mortgages held in the loan portfolio increased $743 million (1.1 percent) at June 30, 2020, compared with December 31, 2019, as origination activity more than offset the effect of customers paying down balances in the first six months of 2020 given the lower interest rate environment. 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.
Credit card loans decreased $3.5 billion (14.2 percent) at June 30, 2020, compared with December 31, 2019, reflecting reduced consumer spending in 2020 driven by the impact of
COVID-19.
Other retail loans decreased $706 million (1.2 percent) at June 30, 2020, compared with December 31, 2019, the result of decreases in home equity loans, auto loans and revolving credit balances, partially offset by an increase in installment loans.
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 $8.2 billion at June 30, 2020, compared with $5.6 billion at December 31, 2019. The increase in loans held for sale was principally due to a higher level of mortgage loan closings in the second quarter of 2020 given the lower interest rate environment, compared with the fourth quarter of 2019. Almost all of the residential mortgage loans the Company originates or purchases for sale follow guidelines that allow the loans to be sold into existing, highly liquid secondary markets; in particular in government agency transactions and to government-sponsored enterprises (“GSEs”).
 
Investment Securities
 Available-for-sale
investment securities totaled $128.1 billion at June 30, 2020, compared with $122.6 billion at December 31, 2019. The $5.5 billion (4.5 percent) increase was primarily due to a $3.1 billion favorable change in net unrealized gains (losses) on
available-for-sale
investment securities and $2.3 billion of net investment purchases. The Company had no outstanding investment securities classified as
held-to-maturity
at June 30, 2020 and December 31, 2019.
The Company’s
available-for-sale
investment securities are carried at fair value with changes in fair value reflected in other comprehensive income (loss) unless a portion of a security’s unrealized loss is related to credit and an allowance for credit losses is necessary. At June 30, 2020, the Company’s net unrealized gains on
available-for-sale
investment securities were $3.6 billion, compared with $496 million at December 31, 2019. The favorable change in net unrealized gains was primarily due to increases in the fair value of U.S. Treasury, mortgage-backed, and state and political securities as a result of changes in interest rates. Gross unrealized losses on
available-for-sale
investment securities totaled $39 million at June 30, 2020, compared with
 
U.S. Bancorp  
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$448 million at December 31, 2019. At June 30, 2020, the Company had no plans to sell securities with unrealized losses, and believes it is more likely than not that it would not be required to sell such securities before recovery of their amortized cost.
Refer to Notes 3 and 14 in the Notes to Consolidated Financial Statements for further information on investment securities.
Deposits
 Total deposits were $413.3 billion at June 30, 2020, compared with $361.9 billion at December 31, 2019. The $51.4 billion (14.2 percent) increase in total deposits reflected increases in noninterest-bearing and total savings deposits, partially offset by a decrease in time deposits. Noninterest-bearing deposits increased $34.1 billion (45.2 percent) at June 30, 2020, compared with December 31, 2019, primarily due to higher Corporate and Commercial Banking, Consumer and Business Banking, and Wealth Management and Investment Services balances. Money market deposit balances increased $9.0 billion (7.5 percent) at June 30, 2020, compared with December 31, 2019, primarily due to higher Corporate and Commercial Banking, and Consumer and Business Banking balances, partially offset by a decrease in Wealth Management and Investment Services balances. Interest checking balances increased $7.6 billion (10.0 percent), while savings account balances increased $5.2 billion (11.1 percent), both driven by higher Consumer and Business Banking balances. The growth in noninterest-bearing and total savings deposits was primarily a result of the economic impact of the
COVID-19
pandemic on the world economy resulting in actions by the federal government to increase liquidity in the financial system, customers maintaining balance sheet liquidity by utilizing existing credit facilities and government stimulus programs. Time deposits decreased $4.6 billion (10.7 percent) at June 30, 2020, compared with December 31, 2019, driven by a decrease in those deposits managed as an alternative to other funding sources, based largely on relative pricing and liquidity characteristics.
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 $20.6 billion at June 30, 2020, compared with $23.7 billion at December 31, 2019. The $3.1 billion (13.2 percent) decrease in short-term borrowings was primarily due to a decrease in short-term Federal Home Loan Bank (“FHLB”) advances and other short-term borrowings balances, partially offset by higher commercial paper, repurchase agreement and federal funds purchased balances. Long-term debt was $42.6 billion at June 30, 2020, compared with $40.2 billion at December 31, 2019. The $2.4 billion (6.0 percent) increase was primarily due to $3.3 billion of bank note and $1.5 billion of medium-term note issuances, partially offset by $3.2 billion of bank note repayments and maturities. Refer to the “Liquidity Risk Management” section for discussion of liquidity management of the Company.
CORPORATE RISK PROFILE
Overview
Managing risks is an essential part of successfully operating a financial services company. The Company’s Board of Directors has approved a risk management framework which establishes governance and risk management requirements for all risk-taking activities. This framework includes Company and business line risk appetite statements which set boundaries for the types and amount of risk that may be undertaken in pursuing business objectives and initiatives. The Board of Directors, primarily through its Risk Management Committee, oversees performance relative to the risk management framework, risk appetite statements, and other policy requirements.
The Executive Risk Committee (“ERC”), which is chaired by the Chief Risk Officer and includes the Chief Executive Officer and other members of the executive management team, oversees execution against the risk management framework and risk appetite statements. The ERC focuses on current and emerging risks, including strategic and reputation risks, by directing timely and comprehensive actions. Senior operating committees have also been established, each responsible for overseeing a specified category of risk.
The Company’s most prominent risk exposures are credit, interest rate, market, liquidity, operational, compliance, strategic, and reputation. Leveraging the Company’s risk management framework, the specific impacts of
COVID-19
and related risks are identified for each of the most prominent exposures. Oversight and governance is managed through a centralized command center which escalates through the ERC. The Board of Directors also oversees the Company’s responsiveness to the
COVID-19
pandemic. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan, investment or derivative contract when it is due. Interest rate risk is the potential reduction of net interest income or market valuations as a result of changes in interest rates. Market risk arises from fluctuations in interest rates, foreign exchange rates, and security prices that may result in changes in the values of financial
 
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instruments, such as trading and
available-for-sale
securities, mortgage loans held for sale (“MLHFS”), MSRs and derivatives that are accounted for on a fair value basis. Liquidity risk is the possible inability to fund obligations or new business at a reasonable cost and in a timely manner. Operational risk is the risk to current or projected financial condition arising from inadequate or failed internal processes or systems, people, or adverse external events, including the risk of loss resulting from breaches in data security. Operational risk can also include the risk of loss due to failures by third parties with which the Company does business. Compliance risk is the risk that the Company may suffer legal or regulatory sanctions, financial losses, and reputational damage if it fails to adhere to compliance requirements. Strategic risk is the risk to current or projected financial condition arising from adverse business decisions, poor implementation of business decisions, or lack of responsiveness to changes in the banking industry and operating environment. Reputation risk is the risk to current or anticipated earnings, capital, or franchise or enterprise value arising from negative public opinion. This risk may impair the Company’s competitiveness by affecting its ability to establish new relationships or services offer new services or continue serving existing relationships. In addition to the risks identified above, other risk factors exist that may impact the Company. Refer to “Risk Factors” in this report and in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019, for a detailed discussion of these factors.
The Company’s Board and management-level governance committees are supported by a “three lines of defense” model for establishing effective checks and balances. The first line of defense, the business lines, manages risks in conformity with established limits and policy requirements. In turn, business line leaders and their risk officers establish programs to ensure conformity with these limits and policy requirements. The second line of defense, which includes the Chief Risk Officer’s organization as well as policy and oversight activities of corporate support functions, translates risk appetite and strategy into actionable risk limits and policies. The second line of defense monitors first line of defense conformity with limits and policies, and provides reporting and escalation of emerging risks and other concerns to senior management and the Risk Management Committee of the Board of Directors. The third line of defense, internal audit, is responsible for providing the Audit Committee of the Board of Directors and senior management with independent assessment and assurance regarding the effectiveness of the Company’s governance, risk management and control processes.
Management regularly provides reports to the Risk Management Committee of the Board of Directors. The Risk Management Committee discusses with management the Company’s risk management performance, and provides a summary of key risks to the entire Board of Directors, covering the status of existing matters, areas of potential future concern and specific information on certain types of loss events. The Risk Management Committee considers quarterly reports by management assessing the Company’s performance relative to the risk appetite statements and the associated risk limits, including:
• 
Macroeconomic environment and other qualitative considerations, such as regulatory and compliance changes, litigation developments, and technology and cybersecurity;
• 
Credit measures, including adversely rated and nonperforming loans, leveraged transactions, credit concentrations and lending limits;
• 
Interest rate and market risk, including market value and net income simulation, and trading-related Value at Risk (“VaR”);
• 
Liquidity risk, including funding projections under various stressed scenarios;
• 
Operational and compliance risk, including losses stemming from events such as fraud, processing errors, control breaches, breaches in data security or adverse business decisions, as well as reporting on technology performance, and various legal and regulatory compliance measures;
• 
Capital ratios and projections, including regulatory measures and stressed scenarios; and
• 
Strategic and reputation risk considerations, impacts and responses.
Credit Risk Management
 The Company’s strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), collateral values, trends in loan performance and macroeconomic factors, such as changes in unemployment rates, gross domestic product and consumer bankruptcy filings, as well as the potential impact on customers and the domestic economy resulting from new tariffs or increases in existing tariffs, and the
COVID-19
pandemic. The Risk Management Committee oversees the Company’s credit risk management process.
In addition, credit quality ratings as defined by the Company, are an important part of the Company’s
 
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overall credit risk management and evaluation of its allowance for credit losses. Loans with a pass rating represent those loans not classified on the Company’s rating scale for problem credits, as minimal risk has been identified. Loans with a special mention or classified rating, including loans that are 90 days or more past due and still accruing, nonaccrual loans, those loans considered troubled debt restructurings (“TDRs”), and loans in a junior lien position that are current but are behind a modified or delinquent loan in a first lien position, encompass all loans held by the Company that it considers to have a potential or well-defined weakness that may put full collection of contractual cash flows at risk. The Company’s internal credit quality ratings for consumer loans are primarily based on delinquency and nonperforming status, except for a limited population of larger loans within those portfolios that are individually evaluated. For this limited population, the determination of the internal credit quality rating may also consider collateral value and customer cash flows. Refer to Note 4 in the Notes to Consolidated Financial Statements for further discussion of the Company’s loan portfolios including internal credit quality ratings. In addition, refer to “Management’s Discussion and Analysis — Credit Risk Management” in the Company’s Annual Report on
Form 10-K
for the year ended December 31, 2019, for a more detailed discussion on credit risk management processes.
The Company manages its credit risk, in part, through diversification of its loan portfolio which is achieved through limit setting by product type criteria, such as industry, and identification of credit concentrations. As part of its normal business activities, the Company offers a broad array of lending products. The Company categorizes its loan portfolio into two segments, which is the level at which it develops and documents a systematic methodology to determine the allowance for credit losses. The Company’s two loan portfolio segments are commercial lending and consumer lending.
The commercial lending segment includes loans and leases made to small business, middle market, large corporate, commercial real estate, financial institution,
non-profit
and public sector customers. Key risk characteristics relevant to commercial lending segment loans include the industry and geography of the borrower’s business, purpose of the loan, repayment source, borrower’s debt capacity and financial flexibility, loan covenants, and nature of pledged collateral, if any. 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 June 30, 2020, substantially all of the Company’s home equity lines were in the draw period. Approximately $1.2 billion, or 10 percent, of the outstanding home equity line balances at June 30, 2020, will enter the amortization period within the next 36 months. Key risk characteristics relevant to consumer lending segment loans primarily relate to the borrowers’ capacity and willingness to repay and include unemployment rates and other economic factors, customer payment history and credit scores, and in some cases, updated
loan-to-value
(“LTV”) information reflecting current market conditions on real estate-based loans. These and other risk characteristics, including elevated risk resulting from the
COVID-19
pandemic, are reflected in forecasts of delinquency levels, bankruptcies and losses which are the primary factors in determining the allowance for credit losses for the consumer lending segment.
The Company further disaggregates its loan portfolio segments into various classes based on their underlying risk characteristics. The two classes within the commercial lending segment are commercial loans and commercial real estate loans. The three classes within the consumer lending segment are residential mortgages, credit card loans and other retail loans.
The Company’s consumer lending segment utilizes several distinct business processes and channels to originate consumer credit, including traditional branch lending, mobile and
on-line
banking, indirect lending, correspondent banks and loan brokers. Each distinct
 
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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 and borrower type at June 30, 2020:
 
Residential Mortgages
(Dollars in Millions)
 Interest
Only		  Amortizing  Total  Percent
of Total		 
Loan-to-Value
    
Less than or equal to 80%
 $2,907  $58,651  $61,558   86.3% 
Over 80% through 90%
  13   5,346   5,359   7.5 
Over 90% through 100%
  —   500   500   .7 
Over 100%
  —   129   129   .2 
No LTV available
  —   20   20   — 
Loans purchased from GNMA mortgage pools (a)
  —   3,763   3,763   5.3 
Total
 $2,920  $68,409  $71,329   100.0% 
Borrower Type
    
Prime borrowers
 $2,920  $64,086  $67,006   93.9% 
Sub-prime
borrowers
  —   560   560   .8 
Loans purchased from GNMA mortgage pools (a)
  —   3,763   3,763   5.3 
Total
 $2,920  $68,409  $71,329   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.    
 
Home Equity and Second Mortgages
(Dollars in Millions)		 Lines  Loans  Total  Percent
of Total		 
Loan-to-Value
    
Less than or equal to 80%
 $10,652  $836  $11,488   82.4% 
Over 80% through 90%
  1,411   548   1,959   14.1 
Over 90% through 100%
  224   51   275   2.0 
Over 100%
  97   7   104   .7 
No LTV/CLTV available
  101   5   106   .8 
Total
 $12,485  $1,447  $13,932   100.0% 
Borrower Type
    
Prime borrowers
 $12,456  $1,415  $13,871   99.6% 
Sub-prime
borrowers
  29   32   61   .4 
Total
 $12,485  $1,447  $13,932   100.0% 
Home equity and second mortgages were $13.9 billion at June 30, 2020, compared with $15.0 billion at December 31, 2019, and included $3.6 billion of home equity lines in a first lien position and $10.3 billion of home equity and second mortgage loans and lines in a junior lien position. Loans and lines in a junior lien position at June 30, 2020, included approximately $4.0 billion of loans and lines for which the Company also serviced the related first lien loan, and approximately $6.3 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 June 30, 2020:
 
  Junior Liens Behind    
(Dollars in Millions) 
Company Owned
or Serviced
First Lien
  
Third Party
First Lien
  Total 
Total
 $4,036  $6,254  $10,290 
Percent 30—89 days past due
  .25%   .51%   .41% 
Percent 90 days or more past due
  .03%   .06%   .05% 
Weighted-average CLTV
  68%   65%   66% 
Weighted-average credit score
  778   774   776 
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 $556 million at June 30, 2020, compared with $605 million at December 31, 2019. These balances exclude loans purchased from Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the 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 0.18 percent at June 30, 2020, compared with 0.20 percent at December 31, 2019.
 
 Table 5
    Delinquent Loan Ratios as a Percent of Ending Loan Balances
 
90 days or more past due
excluding
nonperforming loans		   June 30,
2020		  December 31,
2019		 
Commercial
    
Commercial
    .08%   .08% 
Lease financing
       —   — 
Total commercial
    .07   .08 
Commercial Real Estate
    
Commercial mortgages
    —   .01 
Construction and development
       .02   — 
Total commercial real estate
    —   .01 
Residential Mortgages (a)
    .16   .17 
Credit Card
    1.22   1.23 
Other Retail
    
Retail leasing
    .06   .05 
Home equity and second mortgages
    .37   .32 
Other
       .10   .13 
Total other retail
       .16   .17 
Total loans
       .18%   .20% 
90 days or more past due
including
nonperforming loans		      
June 30,
2020
  
December 31,
2019
 
Commercial
    .45%   .27% 
Commercial real estate
 
   .48   .21 
Residential mortgages (a)
 
   .50   .51 
Credit card
    1.22   1.23 
Other retail
       .48   .46 
Total loans
 
   .52%   .44% 
 
(a)
Delinquent loan ratios exclude $1.7 billion at June 30, 2020, and at December 31, 2019, of loans purchased from GNMA mortgage pools whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs. Including these loans, the ratio of residential mortgages 90 days or more past due including all nonperforming loans was 2.84 percent at June 30, 2020, and 2.92 percent at December 31, 2019.
 
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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) June 30,
2020		   December 31,
2019		        June 30,
2020		  December 31,
2019		 
Residential Mortgages (a)
         
30-89
days
 $241   $154       .34%   .22% 
90 days or more
  115    120       .16   .17 
Nonperforming
  242    241         .34   .34 
Total
 $598   $515       .84%   .73% 
Credit Card
         
30-89
days
 $230   $321       1.08%   1.30% 
90 days or more
  259    306       1.22   1.23 
Nonperforming
  —    —         —   — 
Total
 $489   $627       2.30%   2.53% 
Other Retail
         
Retail Leasing
         
30-89
days
 $43   $45       .51%   .53% 
90 days or more
  5    4       .06   .05 
Nonperforming
  19    13         .23   .15 
Total
 $67   $62       .80%   .73% 
Home Equity and Second Mortgages
         
30-89
days
 $64   $77       .46%   .51% 
90 days or more
  52    48       .37   .32 
Nonperforming
  110    116         .79   .77 
Total
 $226   $241       1.62%   1.60% 
Other (b)
         
30-89
days
 $147   $271       .43%   .81% 
90 days or more
  33    45       .10   .13 
Nonperforming
  49    36         .14   .11 
Total
 $229   $352         .67%   1.05% 
 
(a)
Excludes $656 million of loans
30-89
days past due and $1.7 billion of loans 90 days or more past due at June 30, 2020, purchased from GNMA mortgage pools that continue to accrue interest, compared with $428 million and $1.7 billion at December 31, 2019, respectively.    
(b)
Includes revolving credit, installment, automobile and student loans.    
 
Restructured Loans
In certain circumstances, the Company may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term. In most cases the modification is either a concessionary reduction in interest rate, extension of the maturity date or reduction in the principal balance that would otherwise not be considered.
Troubled Debt Restructurings
Concessionary modifications are classified as TDRs unless the modification results in only an insignificant delay in the payments to be received. TDRs accrue interest if the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles, which is generally six months or greater. At June 30, 2020, performing TDRs were $3.5 billion, compared with $3.8 billion at December 31, 2019.
The Company continues to work with customers to modify loans for borrowers who are experiencing financial difficulties. Many of the Company’s TDRs are determined on a
case-by-case
basis in connection with ongoing loan collection processes. The modifications vary within each of the Company’s loan classes. Commercial lending segment TDRs generally include extensions of the maturity date and may be accompanied by an increase or decrease to the interest rate. The Company may also work with the borrower to make other changes to the loan to mitigate losses, such as obtaining additional collateral and/or guarantees to support the loan.
The Company has also implemented certain residential mortgage loan restructuring programs that may result in TDRs. The Company modifies residential mortgage loans under Federal Housing Administration, United States Department of Veterans Affairs, and its own internal programs. Under these programs, the Company offers qualifying homeowners the opportunity to permanently modify their loan and achieve more affordable monthly payments by providing loan concessions. These concessions may include adjustments to interest rates, conversion of adjustable rates to fixed rates, extensions of maturity dates or deferrals of payments, capitalization of accrued interest and/or outstanding advances, or in limited situations, partial forgiveness of loan principal. In most instances, participation in residential mortgage loan restructuring
 
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programs requires the customer to complete a short-term trial period. A permanent loan modification is contingent on the customer successfully completing the trial period arrangement, and the loan documents are not modified until that time. The Company reports loans in a trial period arrangement as TDRs and continues to report them as TDRs after the trial period.
Credit card and other retail loan TDRs are generally part of distinct restructuring programs providing customers modification solutions over a specified time period, generally up to 60 months.
In accordance with regulatory guidance, the Company considers secured consumer loans that have had debt discharged through bankruptcy where the borrower has not reaffirmed the debt to be TDRs. If the loan amount exceeds the collateral value, the loan is charged down to collateral value and the remaining amount is reported as nonperforming.
Loan modifications or concessions granted to customers resulting directly from the effects of the
COVID-19
pandemic, who were otherwise in current payment status, are not considered to be TDRs.
 
The following table provides a summary of TDRs by loan class, including the delinquency status for TDRs that continue to accrue interest and TDRs included in nonperforming assets:
 
      As a Percent of Performing TDRs       
At June 30, 2020
(Dollars in Millions)
 Performing
TDRs		   
30-89 Days

Past Due		  90 Days or More
Past Due		  Nonperforming
TDRs		  Total
TDRs		 
Commercial
 $189    10.7%   4.3%  $236(a)  $425 
Commercial real estate
  180    .8   —   52(b)   232 
Residential mortgages
  1,215    4.2   3.8   139   1,354(d) 
Credit card
  260    9.8   5.7   —   260 
Other retail
  150    6.9   6.5   27(c)   177(e) 
TDRs, excluding loans purchased from GNMA mortgage pools
  1,994    5.4   4.0   454   2,448 
Loans purchased from GNMA mortgage pools (g)
  1,522    —   —   —   1,522(f) 
Total
 $3,516    3.1%   2.2%  $454  $3,970 
 
(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 $294 million of residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $30 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.
(e)
Includes $83 million of other retail loans to borrowers that have had debt discharged through bankruptcy and $18 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.
(f)
Includes $141 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 $303 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.
(g)
Approximately 9.2 percent and 41.2 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. Through June 30, 2020, the Company had approved approximately 249,000 loan modifications for these borrowers, representing approximately $20.0 billion, or 6.4 percent, of loans included on its consolidated balance sheet. 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 June 30, 2020, approximately 130,000 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 June 30, 2020, as a percentage of the Company’s loans and loan balances:
 
    Percentage of Loan Accounts
in Payment Relief Programs		   Percentage of Loan Balances
in Payment Relief Programs		   Program Details
Commercial
   1.07%    2.86%   Primarily 3 month payment deferral up to a maximum of 6 months; interest continues to accrue with various payment options; may include short-term covenant waivers
Commercial real estate
   7.28    13.13   Primarily 3 month payment deferral up to a maximum of 6 months; interest continues to accrue with various payment options; may include short-term covenant waivers
Residential mortgages (a)
   7.45    9.50   
Primarily 6 month payment forbearance, which may be extended up to 12 months; interest continues to accrue; cumulative payments suspended during forbearance period are either paid-off immediately or under a short-term repayment plan, or addressed through a permanent loan modification that either requires repayment at maturity or through restructured payments over time
Credit cards
   .35    .81   Primarily 3 month payment deferral; interest continues to accrue
Other retail
   1.96    3.05   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
   .97%    5.64%    
 
(a)
Includes 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, representing 30.74 percent of the total number of accounts and 35.79 percent of the total loan balances of loans purchased from GNMA mortgage pools at June 30, 2020.
 
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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 June 30, 2020, total nonperforming assets were $1.2 billion, compared to $829 million at December 31, 2019. The $344 million (41.5 percent) increase in nonperforming assets was driven by increases in nonperforming commercial and commercial real estate loans. The ratio of total nonperforming assets to total loans and other real estate was 0.38 percent at June 30, 2020, compared with 0.28 percent at December 31, 2019. The Company expects nonperforming assets to increase given current economic conditions.
OREO was $52 million at June 30, 2020, compared with $78 million at December 31, 2019, and was related to foreclosed properties that previously secured loan balances. These balances exclude foreclosed GNMA loans whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.
 
The following table provides an analysis of OREO, as a percent of their related loan balances, including geographical location detail for residential (residential mortgage, home equity and second mortgage) and commercial (commercial and commercial real estate) loan balances:
 
  Amount       As a Percent of Ending
Loan Balances		 
(Dollars in Millions) June 30,
2020		  December 31,
2019		       June 30,
2020		  December 31,
2019		 
Residential
       
Illinois
 $6  $10      .14%   .22% 
Minnesota
  4   6      .07   .10 
New York
  4   6      .42   .66 
California
  4   7      .01   .03 
Oregon
  3   4      .09   .12 
All other states
  28   41        .06   .09 
Total residential
  49   74      .06   .09 
Commercial
       
California
  3   3      .01   .01 
All other states
  —   1        —   — 
Total commercial
  3   4        —   — 
Total
 $52  $78        .02%   .03% 
 
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Table 6
 
   Nonperforming Assets (a)
 
(Dollars in Millions) June 30,
2020		  December 31,
2019		 
Commercial
  
Commercial
 $403  $172 
Lease financing
  53   32 
Total commercial
  456   204 
Commercial Real Estate
  
Commercial mortgages
  188   74 
Construction and development
  7   8 
Total commercial real estate
  195   82 
Residential Mortgages (b)
  242   241 
Credit Card
  –   – 
Other Retail
  
Retail leasing
  19   13 
Home equity and second mortgages
  110   116 
Other
  49   36 
Total other retail
  178   165 
Total nonperforming loans
  1,071   692 
Other Real Estate (c)
  52   78 
Other Assets
  50   59 
Total nonperforming assets
 $1,173  $829 
Accruing loans 90 days or more past due (b)
 $556  $605 
Nonperforming loans to total loans
  .35%   .23% 
Nonperforming assets to total loans plus other real estate (c)
  .38%   .28% 
Changes in Nonperforming Assets
 
(Dollars in Millions)  Commercial and
Commercial
Real Estate		  Residential
Mortgages,
Credit Card and
Other Retail		  Total 
Balance December 31, 2019
  $321  $508  $829 
Additions to nonperforming assets
    
New nonaccrual loans and foreclosed properties
   554   161   715 
Advances on loans
   5   1   6 
Total additions
   559   162   721 
Reductions in nonperforming assets
    
Paydowns, payoffs
   (76)   (62)   (138) 
Net sales
   (10)   (36)   (46) 
Return to performing status
   (6)   (72)   (78) 
Charge-offs (d)
   (104)   (11)   (115) 
Total reductions
   (196)   (181)   (377) 
Net additions to (reductions in) nonperforming assets
   363   (19)   344 
Balance June 30, 2020
  $684  $489  $1,173 
 
(a)
Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due.
(b)
Excludes $1.7 billion at June 30, 2020, and at December 31, 2019, of loans purchased from GNMA mortgage pools that are 90 days or more past due that continue to accrue interest, as their repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.
(c)
Foreclosed GNMA loans of $74 million at June 30, 2020, and $155 million at December 31, 2019, continue to accrue interest and are recorded as other assets and excluded from nonperforming assets because they are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.
(d)
Charge-offs exclude actions for certain card products and loan sales that were not classified as nonperforming at the time the
charge-off
occurred.
 
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Table 7
 
   Net Charge-offs as a Percent of Average Loans Outstanding
 
  Three Months Ended
June 30		       Six Months Ended
June 30		 
   2020  2019       2020  2019 
Commercial
       
Commercial
  .34%   .23%      .31%   .26% 
Lease financing
  .43   .22        .39   .18 
Total commercial
  .35   .23      .32   .26 
Commercial Real Estate
       
Commercial mortgages
  .25   .03      .12   .01 
Construction and development
  .11   (.04)        .04   (.02) 
Total commercial real estate
  .22   .01      .10   .01 
Residential Mortgages
  (.02)   .02      (.01)   .02 
Credit Card
  4.28   3.99      4.11   4.01 
Other Retail
       
Retail leasing
  1.58   .09      1.24   .14 
Home equity and second mortgages
  —   (.03)      .01   (.03) 
Other
  .54   .71        .67   .76 
Total other retail
  .56   .42        .58   .44 
Total loans
  .55%   .49%        .54%   .50% 
 
Analysis of Loan Net Charge-Offs
 Total loan net charge-offs were $437 million for the second quarter and $830 million for the first six months of 2020, compared with $350 million and $717 million, respectively, for the same periods of 2019. The ratio of total loan net charge-offs to average loans outstanding on an annualized basis for the second quarter and first six months of 2020 was 0.55 percent and 0.54 percent, respectively, compared with 0.49 percent and 0.50 percent, respectively, for the same periods of 2019. The year-over-year increases in net charge-offs reflected higher commercial loan, commercial real estate loan and retail leasing net charge-offs, partially offset by a decrease in other retail loan net charge-offs. The increase in retail leasing charge-offs reflected the inclusion of end of term losses on residual lease values as of January 1, 2020. The Company expects net charge-offs to increase given current economic conditions.
Analysis and Determination of the Allowance for Credit Losses
 Prior to January 1, 2020, the allowance for credit losses was established to reserve for probable and estimable losses incurred in the Company’s loan and lease portfolio, including unfunded credit commitments. Effective January 1, 2020, the Company adopted new accounting guidance which changed previous impairment recognition to a model that is based on expected losses rather than incurred losses. The allowance for credit losses is increased through provisions charged to earnings and reduced by net charge-offs. Management evaluates the appropriateness of the allowance for credit losses on a quarterly basis. The allowance considers expected losses for the remaining lives of the applicable assets, inclusive of expected recoveries. Multiple economic scenarios are considered over a three-year reasonable and supportable forecast period, which incorporates historical loss experience in years two and three. After the forecast period, the Company fully reverts to long-term historical loss experience, adjusted for prepayments and characteristics of the current loan and lease portfolio, to estimate losses over the remaining lives. The economic scenarios are updated at least quarterly, and are designed to provide a range of reasonable estimates, both better and worse than current expectations. Scenarios are weighted based on the Company’s expectation of future conditions. Final loss estimates also consider factors affecting credit losses not reflected in the scenarios, due to the unique aspects of current conditions and expectations. These factors may include 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 loan and borrower characteristics, such as internal risk ratings on commercial loans and consumer credit scores, delinquency status, collateral type and available valuation information, consideration of
end-of-term
losses on lease residuals, and the remaining term of the loan, adjusted for expected prepayments. Where loans do not exhibit similar risk characteristics, an individual analysis is performed to consider expected credit losses. For each loan portfolio, model estimates are adjusted as necessary to consider any relevant changes in portfolio composition, lending policies, underwriting standards, risk management practices or economic conditions that would affect the accuracy of the model.
 
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The results of the analysis are evaluated quarterly to confirm the estimates are appropriate for each loan portfolio. Expected credit loss estimates also include consideration of expected cash recoveries on loans previously charged-off, or expected recoveries on collateral-dependent loans where recovery is expected through sale of the collateral. The allowance recorded for individually evaluated loans greater than $5 million in the commercial lending segment is based on an analysis utilizing expected cash flows discounted using the original effective interest rate, the observable market price of the loan, or the fair value of the collateral, less selling costs, for collateral-dependent loans.
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 June 30, 2020, the Company serviced the first lien on 39 percent of the home equity loans and lines in a junior lien position. The Company also considers the status of first lien mortgage accounts reported on customer credit bureau files when the first lien is not serviced by the Company. Regardless of whether the Company services the first lien, an assessment is made of economic conditions, problem loans, recent loss experience and other factors in determining the allowance for credit losses. Based on the available information, the Company estimated $330 million or 2.4 percent of its total home equity portfolio at June 30, 2020, represented non-delinquent junior liens where the first lien was delinquent or modified, excluding loans on COVID-related forbearance programs.
The Company considers historical loss experience on the loans and lines in a junior lien position to establish loss estimates for junior lien loans and lines the Company services that are current, but the first lien is delinquent or modified. Historically, the number of junior lien defaults has been a small percentage of the total portfolio (approximately 1 percent annually), while the long-term average loss rate on loans that default has been approximately 80 percent. In addition, the Company obtains updated credit scores on its home equity portfolio each quarter, and in some cases more frequently, and uses this information in its loss estimation methods. In its evaluation of the allowance for credit losses, the Company also considers the increased risk of loss associated with home equity lines that are contractually scheduled to convert from a revolving status to a fully amortizing payment and with residential lines and loans that have a balloon payoff provision.
Beginning January 1, 2020, when a loan portfolio is purchased, the acquired loans are divided into those considered purchased with more than insignificant credit deterioration (“PCD”) and those not considered purchased with more than insignificant credit deterioration. An allowance is established for each population and considers product mix, risk characteristics of the portfolio, bankruptcy experience, delinquency status, refreshed LTV ratios when possible, and portfolio growth. The allowance established for purchased loans not considered PCD is recognized through provision expense upon acquisition, whereas the allowance established for loans considered PCD at acquisition is offset by an increase in the basis of the acquired loans. Any subsequent increases and decreases in the allowance related to purchased loans are recognized through provision expense, with future charge-offs charged to the allowance. The Company did not have a material amount of PCD loans included in its loan portfolio at June 30, 2020.
The Company’s methodology for determining the appropriate allowance for credit losses for each loan segment also considers the imprecision inherent in the methodologies used. As a result, amounts determined under the methodologies described above are adjusted by management to consider the potential impact of other qualitative factors which include, but are not limited to, the following: model imprecision, imprecision in economic scenario assumptions, and emerging risks related to either changes in the economic environment that are affecting specific portfolio segments, or changes in portfolio concentrations over time that may affect model performance. The consideration of these items results in adjustments to allowance amounts included in the Company’s allowance for credit losses for each portfolio class.
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.
 
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At June 30, 2020, the allowance for credit losses was $7.9 billion (2.54 percent of period-end loans), compared with an allowance of $4.5 billion (1.52 percent of period-end loans) at December 31, 2019. The ratio of the allowance for credit losses to nonperforming loans was 737 percent at June 30, 2020, compared with 649 percent at December 31, 2019. The ratio of the allowance for credit losses to annualized loan net charge-offs was 449 percent at June 30, 2020, compared with 309 percent of full year 2019 net charge-offs at December 31, 2019.
The increase in the allowance for credit losses of $3.4 billion (75.7 percent) at June 30, 2020, compared with December 31, 2019, reflected the $1.5 billion impact of the January 1, 2020 adoption of new accounting guidance, along with an additional $1.9 billion increase during the first six months of 2020 to recognize the expected losses due to deteriorating economic conditions driven by the impact of COVID-19 on the domestic and global economies. Expected loss estimates consider various factors including the changing economic activity, estimated mitigating effects of government stimulus, estimated duration and severity of the health crisis, customer specific information impacting changes in risk ratings, projected delinquencies and the impact of industrywide loan modification efforts designed to limit long-term effects of the COVID-19 pandemic, among other factors.
Changes in economic conditions as of June 30, 2020 included significant reductions in economic activity related to actions taken by governmental authorities to slow the spread of COVID-19. Record levels of unemployment, and lower Gross Domestic Product estimates for 2020, as well as a slower pace of recovery in manufacturing activity and oil prices, were all observable changes in conditions that increased expected credit losses. At the same time, record economic stimulus measures were also enacted, and additional measures are being considered, with the intent to support businesses and consumers through what is expected to be a period of reduced economic activity. To balance these offsetting factors, economic scenarios updated through the end of the second quarter of 2020 that produced higher quantitative loss estimates consistent with the expected deterioration in reported economic statistics were evaluated in conjunction with management’s expectation that current and potential future stimulus efforts, as well as industrywide availability of short-term payment deferral programs, would mitigate losses estimated from models based on historical data from periods when mitigation efforts were not as extensive. Overall, loss expectations are consistent with prior economic downturn experience, but the severity of the deterioration in current economic conditions is not expected to persist over the life of the loan portfolio, as some indicators of economic activity have already begun to improve directionally.
The allowance for credit losses related to commercial lending segment loans increased $1.4 billion during the six months ended June 30, 2020, as increased loan volume and credit downgrades during the period reflected the impact of COVID-19 on certain industry sectors, including the retail and restaurants, automobile, energy, media and entertainment, lodging and airline industries that were severely impacted by virus containment measures.
The following table summarizes the Company’s commercial lending segment credit exposure to customers within the industry sectors most impacted by COVID-19, as a percentage of total loans and noncancellable commitments outstanding at June 30, 2020:
 
   Loans  Outstanding
Commitments		 
Retail and restaurants
  4.6%   5.4% 
Automobile
  2.1   3.0 
Energy
  1.1   2.3 
Media and entertainment
  2.2   2.2 
Lodging
  1.4   1.1 
Airline
  .6   .6 
The allowance for credit losses related to consumer lending segment loans increased $525 million during the six months ended June 30, 2020, as higher economic risks, including those due to increased unemployment, were partially mitigated by strong underlying credit quality that supports expectations of long-term repayment, and the decline in funded loan balances.
 
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Table 8
 
   Summary of Allowance for Credit Losses
 
  Three Months Ended
June 30		        Six Months Ended
June 30		 
(Dollars in Millions) 2020  2019        2020  2019 
Balance at beginning of period
 $6,590  $4,451      $4,491  $4,441 
Change in accounting principle (a)
  –   –       1,499   – 
Charge-Offs
        
Commercial
        
Commercial
  117   94       198   200 
Lease financing
  8   4         15   9 
Total commercial
  125   98       213   209 
Commercial real estate
        
Commercial mortgages
  19   3       19   4 
Construction and development
  4   –         4   – 
Total commercial real estate
  23   3       23   4 
Residential mortgages
  3   11       11   19 
Credit card
  265   262       539   519 
Other retail
        
Retail leasing
  36   5       61   11 
Home equity and second mortgages
  6   4       11   9 
Other
  64   81         155   166 
Total other retail
  106   90         227   186 
Total charge-offs
  522   464       1,013   937 
Recoveries
        
Commercial
        
Commercial
  12   38       24   73 
Lease financing
  2   1         4   4 
Total commercial
  14   39       28   77 
Commercial real estate
        
Commercial mortgages
  –   1       1   2 
Construction and development
  1   1         2   1 
Total commercial real estate
  1   2       3   3 
Residential mortgages
  6   7       13   12 
Credit card
  36   35       76   67 
Other retail
        
Retail leasing
  3   3       9   5 
Home equity and second mortgages
  6   5       10   11 
Other
  19   23         44   45 
Total other retail
  28   31         63   61 
Total recoveries
  85   114       183   220 
Net Charge-Offs
        
Commercial
        
Commercial
  105   56       174   127 
Lease financing
  6   3         11   5 
Total commercial
  111   59       185   132 
Commercial real estate
        
Commercial mortgages
  19   2       18   2 
Construction and development
  3   (1)         2   (1) 
Total commercial real estate
  22   1       20   1 
Residential mortgages
  (3)   4       (2)   7 
Credit card
  229   227       463   452 
Other retail
        
Retail leasing
  33   2       52   6 
Home equity and second mortgages
  –   (1)       1   (2) 
Other
  45   58         111   121 
Total other retail
  78   59         164   125 
Total net charge-offs
  437   350       830   717 
Provision for credit losses
  1,737   365         2,730   742 
Balance at end of period
 $7,890  $4,466        $7,890  $4,466 
Components
        
Allowance for loan losses
 $7,383  $4,019       
Liability for unfunded credit commitments
  507   447         
Total allowance for credit losses
 $7,890  $4,466         
Allowance for Credit Losses as a Percentage of
        
Period-end loans
  2.54%   1.53%       
Nonperforming loans
  737   556       
Nonperforming and accruing loans 90 days or more past due
  485   287       
Nonperforming assets
  673   469       
Annualized net charge-offs
  449   318               
 
(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 June 30, 2020, no significant change in the amount of residual values or concentration of the portfolios had occurred since December 31, 2019. Refer to “Management’s Discussion and Analysis — Residual Value Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December  31, 2019, for further discussion on residual value risk management.
Operational Risk Management
 Operational risk is inherent in all business activities, and the management of this risk is important to the achievement of the Company’s objectives. Business lines have direct and primary responsibility and accountability for identifying, controlling, and monitoring operational risks embedded in their business activities. The Company maintains a system of controls with the objective of providing proper transaction authorization and execution, proper system operations, proper oversight of third parties with whom it does business, safeguarding of assets from misuse or theft, and ensuring the reliability and security of financial and other data. Refer to “Management’s Discussion and Analysis — Operational Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, for further discussion on operational risk management.
Compliance Risk Management
 The Company may suffer legal or regulatory sanctions, material financial loss, or damage to its reputation through failure to comply with laws, regulations, rules, standards of good practice, and codes of conduct, including those related to compliance with Bank Secrecy Act/anti-money laundering requirements, sanctions compliance requirements as administered by the Office of Foreign Assets Control, consumer protection and other requirements. The Company has controls and processes in place for the assessment, identification, monitoring, management and reporting of compliance risks and issues. Refer to “Management’s Discussion and Analysis — Compliance Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, for further discussion on compliance risk management.
Interest Rate Risk Management
In the banking industry, changes in interest rates are a significant risk that can impact earnings and the safety and soundness of an entity. The Company manages its exposure to changes in interest rates through asset and liability management activities within guidelines established by its Asset Liability Management Committee (“ALCO”) and approved by the Board of Directors. The ALCO has the responsibility for approving and ensuring compliance with the ALCO management policies, including interest rate risk exposure. One way the Company measures and analyzes its interest rate risk is through net interest income simulation analysis.
Simulation analysis incorporates substantially all of the Company’s assets and liabilities and off-balance sheet instruments, together with forecasted changes in the balance sheet and assumptions that reflect the current interest rate environment. Through this simulation, management estimates the impact on net interest income of various interest rate changes that differ in the direction, amount and speed of change over time, as well as the shape of the yield curve. This simulation includes assumptions about how the balance sheet is likely to be affected by changes in loan and deposit growth. Assumptions are made to project interest rates for new loans and deposits based on historical analysis, management’s outlook and re-pricing strategies. These assumptions are reviewed and validated on a periodic basis with sensitivity analysis being provided for key variables of the simulation. The results are reviewed monthly by the ALCO and are used to guide asset/liability management strategies.
The Company manages its interest rate risk position by holding assets with desired interest rate risk characteristics on its balance sheet, implementing certain pricing strategies for loans and deposits and selecting derivatives and various funding and investment portfolio strategies.
Table 9 summarizes the projected impact to net interest income over the next 12 months of various potential interest rate changes. The sensitivity of the projected impact to net interest income over the next 12 months is dependent on balance sheet growth, product mix, deposit behavior, pricing and funding decisions. While the Company utilizes models and assumptions based on historical information and expected behaviors, actual outcomes could vary significantly.
 
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Table 9
 
   Sensitivity of Net Interest Income
 
  June 30, 2020       December 31, 2019 
   Down 50 bps
Immediate		  Up 50 bps
Immediate		  Down 200 bps
Gradual		   Up 200 bps
Gradual		       Down 50 bps
Immediate		  Up 50 bps
Immediate		  Down 200 bps
Gradual		   Up 200 bps
Gradual		 
Net interest income
  (3.87)%   3.82%   *    5.71%        (1.43)%   .83%   *    .21% 
*
Given the level of interest rates, downward rate scenario is not computed.
 
Use of Derivatives to Manage Interest Rate and Other Risks
 To manage the sensitivity of earnings and capital to interest rate, prepayment, credit, price and foreign currency fluctuations (asset and liability management positions), the Company enters into derivative transactions. The Company uses derivatives for asset and liability management purposes primarily in the following ways:
• 
To convert fixed-rate debt from fixed-rate payments to floating-rate payments;
• 
To convert the cash flows associated with floating-rate debt from floating-rate payments to fixed-rate payments;
• 
To mitigate changes in value of the Company’s unfunded mortgage loan commitments, funded MLHFS and MSRs;
• 
To mitigate remeasurement volatility of foreign currency denominated balances; and
• 
To mitigate the volatility of the Company’s net investment in foreign operations driven by fluctuations in foreign currency exchange rates.
In addition, the Company enters into interest rate and foreign exchange derivative contracts to support the business requirements of its customers (customer-related positions). The Company minimizes the market and liquidity risks of customer-related positions by either entering into similar offsetting positions with broker-dealers, or on a portfolio basis by entering into other derivative or non-derivative financial instruments that partially or fully offset the exposure from these customer-related positions. The Company may enter into derivative contracts that are either exchange-traded, centrally cleared through clearinghouses or over-the-counter. The Company does not utilize derivatives for speculative purposes.
The Company does not designate all of the derivatives that it enters into for risk management purposes as accounting hedges because of the inefficiency of applying the accounting requirements and may instead elect fair value accounting for the related hedged items. In particular, the Company enters into interest rate swaps, swaptions, forward commitments to buy to-be-announced securities (“TBAs”), U.S. Treasury and Eurodollar futures and options on U.S. Treasury futures to mitigate fluctuations in the value of its MSRs, but does not designate those derivatives as accounting hedges.
Additionally, the Company uses forward commitments to sell TBAs and other commitments to sell residential mortgage loans at specified prices to economically hedge the interest rate risk in its residential mortgage loan production activities. At June 30, 2020, the Company had $15.0 billion of forward commitments to sell, hedging $6.8 billion of MLHFS and $13.3 billion of unfunded mortgage loan commitments. The forward commitments to sell and the unfunded mortgage loan commitments on loans intended to be sold are considered derivatives under the accounting guidance related to accounting for derivative instruments and hedging activities. The Company has elected the fair value option for the MLHFS.
Derivatives are subject to credit risk associated with counterparties to the contracts. Credit risk associated with derivatives is measured by the Company based on the probability of counterparty default, including consideration of the COVID-19 pandemic. The Company manages the credit risk of its derivative positions by diversifying its positions among various counterparties, by entering into master netting arrangements, and, where possible, by requiring collateral arrangements. The Company may also transfer counterparty credit risk related to interest rate swaps to third parties through the use of risk participation agreements. In addition, certain interest rate swaps, interest rate forwards and credit contracts are required to be centrally cleared through clearinghouses to further mitigate counterparty credit risk.
For additional information on derivatives and hedging activities, refer to Notes 12 and 13 in the Notes to Consolidated Financial Statements.
LIBOR Transition
 In July 2017, the United Kingdom’s Financial Conduct Authority announced that it would no longer require banks to submit rates for the London InterBank Offered Rate (“LIBOR”) after 2021. The Company holds financial instruments that will be impacted by the discontinuance of LIBOR, including certain loans, investment securities, derivatives, borrowings and other financial instruments that use LIBOR as the benchmark rate. The Company also provides various services to customers in its capacity as trustee, which involve financial instruments that will be similarly impacted by the discontinuance of LIBOR. The Company anticipates these financial instruments will
 
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require transition to a new reference rate. This transition will occur over time as many of these arrangements do not have an alternative rate referenced in their contracts or a clear path for the parties to agree upon an alternative reference rate. In order to facilitate the transition process, the Company has instituted a LIBOR Transition Office and commenced an enterprise-wide project to identify, assess and monitor risks associated with the expected discontinuance or unavailability of LIBOR, actively engage with industry working groups and regulators, achieve operational readiness and engage impacted customers. It is currently unclear what impact COVID-19 may have on the LIBOR transition or on the timing thereof. Refer to “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, for further discussion on potential risks that could adversely affect the Company’s financial results as a result of the LIBOR transition.
Market Risk Management
 In addition to interest rate risk, the Company is exposed to other forms of market risk, principally related to trading activities which support customers’ strategies to manage their own foreign currency, interest rate risk and funding activities. For purposes of its internal capital adequacy assessment process, the Company considers risk arising from its trading activities, as well as the remeasurement volatility of foreign currency denominated balances included on its Consolidated Balance Sheet (collectively, “Covered Positions”), employing methodologies consistent with the requirements of regulatory rules for market risk. The Company’s Market Risk Committee (“MRC”), within the framework of the ALCO, oversees market risk management. The MRC monitors and reviews the Company’s Covered Positions and establishes policies for market risk management, including exposure limits for each portfolio. The Company uses a VaR approach to measure general market risk. Theoretically, VaR represents the statistical risk of loss the Company has to adverse market movements over a one-day time horizon. The Company uses the Historical Simulation method to calculate VaR for its Covered Positions measured at the ninety-ninth percentile using a one-year look-back period for distributions derived from past market data. The market factors used in the calculations include those pertinent to market risks inherent in the underlying trading portfolios, principally those that affect the Company’s corporate bond trading business, foreign currency transaction business, client derivatives business, loan trading business and municipal securities business, as well as those inherent in the Company’s foreign denominated balances and the derivatives used to mitigate the related measurement volatility. On average, the Company expects the one-day VaR to be exceeded by actual losses two to three times per year related to these positions. The Company monitors the accuracy of internal VaR models and modeling processes by back-testing model performance, regularly updating the historical data used by the VaR models and regular model validations to assess the accuracy of the models’ input, processing, and reporting components. All models are required to be independently reviewed and approved prior to being placed in use. If the Company were to experience market losses in excess of the estimated VaR more often than expected, the VaR models and associated assumptions would be analyzed and adjusted.
The average, high, low and period-end one-day VaR amounts for the Company’s Covered Positions were as follows:
 
Six Months Ended June 30
(Dollars in Millions)
 2020   2019 
Average
 $2   $1 
High
  3    2 
Low
  1    1 
Period-end
  3    1 
Given the market volatility 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 six months ended June 30, 2020. The Company did not experience any actual losses for its combined Covered Positions that exceeded VaR during the six months ended June 30, 2019. The Company stress tests its market risk measurements to provide management with perspectives on market events that may not be captured by its VaR models, including worst case historical market movement combinations that have not necessarily occurred on the same date.
The Company calculates Stressed VaR using the same underlying methodology and model as VaR, except that a historical continuous one-year look-back period is utilized that reflects a period of significant financial stress appropriate to the Company’s Covered Positions. The period selected by the Company includes the significant market volatility of the last four months of 2008.
The average, high, low and period-end one-day Stressed VaR amounts for the Company’s Covered Positions were as follows:
 
Six Months Ended June 30
(Dollars in Millions)
 2020   2019 
Average
 $6   $6 
High
  8    9 
Low
  4    4 
Period-end
  7    7 
 
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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:
 
Six Months Ended June 30
(Dollars in Millions)
 2020   2019 
Residential Mortgage Loans Held For Sale and Related Hedges
   
Average
 $7   $2 
High
  22    4 
Low
  2    – 
Mortgage Servicing Rights and Related Hedges
   
Average
 $18   $6 
High
  54    8 
Low
  6    4 
Liquidity Risk Management
 The Company’s liquidity risk management process is designed to identify, measure, and manage the Company’s funding and liquidity risk to meet its daily funding needs and to address expected and unexpected changes in its funding requirements. The Company engages in various activities to manage its liquidity risk. These activities include diversifying its funding sources, stress testing, and holding readily-marketable assets which can be used as a source of liquidity if needed. In addition, the Company’s profitable operations, sound credit quality and strong capital position have enabled it to develop a large and reliable base of core deposit funding within its market areas and in domestic and global capital markets. During the six months ended June 30, 2020, the Company effectively managed its liquidity position while funding significant loan growth during the period.
The Company’s Board of Directors approves the Company’s liquidity policy. The Risk Management Committee of the Company’s Board of Directors oversees the Company’s liquidity risk management process and approves a contingency funding plan. The ALCO reviews the Company’s liquidity policy and limits, and regularly assesses the Company’s ability to meet funding requirements arising from adverse company-specific or market events.
The Company regularly projects its funding needs under various stress scenarios and maintains a contingency funding plan consistent with the Company’s access to diversified sources of contingent funding. The Company maintains a substantial level of total available liquidity in the form of on-balance sheet and off-balance sheet funding sources. These liquidity sources include cash at the Federal Reserve Bank and certain European central banks, unencumbered liquid assets, and capacity to borrow from the FHLB and at Federal Reserve Bank’s Discount Window. At June 30, 2020, the fair value of unencumbered investment securities totaled $116.3 billion, compared with $114.2 billion at December 31, 2019. Refer to Note 3 of the Notes to Consolidated Financial Statements and “Balance Sheet Analysis” for further information on investment securities maturities and trends. Asset liquidity is further enhanced by the Company’s practice of pledging loans to access secured borrowing facilities through the FHLB and Federal Reserve Bank. At June 30, 2020, the Company could have borrowed a total of an additional $97.8 billion from the FHLB and Federal Reserve Bank based on collateral available for additional borrowings.
The Company’s diversified deposit base provides a sizeable source of relatively stable and low-cost funding, while reducing the Company’s reliance on the wholesale markets. Total deposits were $413.3 billion at June 30, 2020, compared with $361.9 billion at December 31, 2019. Refer to “Balance Sheet Analysis” for further information on the Company’s deposits.
Additional funding is provided by long-term debt and short-term borrowings. Long-term debt was $42.6 billion at June 30, 2020, and is an important funding source because of its multi-year borrowing structure. Short-term borrowings were $20.6 billion at June 30, 2020, and supplement the Company’s other funding sources. Refer to “Balance Sheet Analysis” for further information on the Company’s long-term debt and short-term borrowings.
In addition to assessing liquidity risk on a consolidated basis, the Company monitors the parent company’s liquidity. The Company establishes limits for the minimal number of months into the future where the parent company can meet existing and forecasted obligations with cash and securities held that can be readily monetized. The Company measures and manages this limit in both normal and adverse conditions. The Company maintains sufficient
 
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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 June 30, 2020, parent company long-term debt outstanding was $20.9 billion, compared with $18.6 billion at December 31, 2019. The increase was primarily due to $1.5 billion of medium-term note issuances. As of June 30, 2020, there was no parent company debt scheduled to mature in the remainder of 2020.
The Company is subject to a regulatory Liquidity Coverage Ratio (“LCR”) requirement which requires banks to maintain an adequate level of unencumbered high quality liquid assets to meet estimated liquidity needs over a 30-day stressed period. At June 30, 2020, the Company was compliant with this requirement.
Refer to “Management’s Discussion and Analysis — Liquidity Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, for further discussion on liquidity risk management.
European Exposures
The Company provides merchant processing and corporate trust services in Europe either directly or through banking affiliations in Europe. Revenue generated from sources in Europe represented approximately 1 percent of the Company’s total net revenue for both the three and six months ended June 30, 2020. Operating cash for these businesses is deposited on a short-term basis typically with certain European central banks. For deposits placed at other European banks, exposure is mitigated by the Company placing deposits at multiple banks and managing the amounts on deposit at any bank based on institution-specific deposit limits. At June 30, 2020, the Company had an aggregate amount on deposit with European banks of approximately $9.1 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 15 of the Notes to Consolidated Financial Statements for further information on these arrangements. The Company does not utilize private label asset securitizations as a source of funding. Off-balance sheet arrangements also include any obligation related to a variable interest held in an unconsolidated entity that provides financing, liquidity, credit enhancement or market risk support. Refer to Note 5 of the Notes to Consolidated Financial Statements for further information related to the Company’s interests in variable interest entities.
Capital Management
 The Company is committed to managing capital to maintain strong protection for depositors and creditors and for maximum shareholder benefit. The Company also manages its capital to exceed regulatory capital requirements for banking organizations. The regulatory capital requirements effective for the Company follow Basel III, with the Company being subject to calculating its capital adequacy as a percentage of risk-weighted assets under the standardized approach. During 2020, the Company elected to adopt an interim final rule issued in March 2020 by its regulators which permits banking organizations who adopt accounting guidance related to the impairment of financial instruments based on the current expected credit losses 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 June 30, 2020 and December 31, 2019. All regulatory ratios exceeded regulatory “well-capitalized” requirements.
 
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Table 10
    Regulatory Capital Ratios
 
(Dollars in Millions) June 30,
2020		  December 31,
2019		 
Basel III standardized approach:
  
Common equity tier 1 capital
 $36,351  $35,713 
Tier 1 capital
  42,781   41,721 
Total risk-based capital
  51,457   49,744 
Risk-weighted assets
  401,832   391,269 
Common equity tier 1 capital as a percent of risk-weighted assets
  9.0%   9.1% 
Tier 1 capital as a percent of risk-weighted assets
  10.6   10.7 
Total risk-based capital as a percent of risk-weighted assets
  12.8   12.7 
Tier 1 capital as a percent of adjusted quarterly average assets (leverage ratio)
  8.0   8.8 
Tier 1 capital as a percent of total on- and off-balance sheet leverage exposure (total leverage exposure ratio)
  7.1   7.0 
 
The Company believes certain other capital ratios are useful in evaluating its capital adequacy. At June 30, 2020, the Company’s tangible common equity, as a percent of tangible assets and as a percent of risk-weighted assets determined in accordance with transitional regulatory capital requirements related to the current expected credit losses methodology under the standardized approach, was 6.7 percent and 9.0 percent, respectively. This compares to the Company’s tangible common equity, as a percent of tangible assets and as a percent of risk-weighted assets under the standardized approach, of 7.5 percent and 9.3 percent, respectively, at December 31, 2019. In addition, the Company’s common equity tier 1 capital to risk-weighted assets ratio, reflecting the full implementation of the current expected credit losses methodology was 8.7 percent at June 30, 2020. Refer to “Non-GAAP Financial Measures” beginning on page 32 for further information on these other capital ratios.
Total U.S. Bancorp shareholders’ equity was $51.9 billion at June 30, 2020, unchanged from December 31, 2019, resulting from a reduction to retained earnings due to the January 1, 2020 adoption of accounting guidance related to the impairment of financial instruments, common share repurchases and dividends, offset by changes in unrealized gains and losses on available-for-sale investment securities included in other comprehensive income (loss) and corporate earnings.
During 2019, the Company announced its Board of Directors had approved authorizations to repurchase up to $5.5 billion of its common stock, from July 1, 2019 through June 30, 2020. Beginning in March 2020, the Company suspended all common stock repurchases except for those done exclusively in connection with its stock-based compensation programs, to maintain strong capital levels given the impact and uncertainties of COVID-19 on the economy and global markets. In addition, the Federal Reserve announced in June 2020 that it will require all large bank holding companies to preserve capital during the third quarter of 2020 through the suspension of share repurchase programs and capping dividends at existing rates, which may not be in excess of the average of the last four quarters’ earnings, due to the continued economic uncertainty resulting from COVID-19. The Company will continue to monitor the impact of COVID-19 and will adjust its capital distributions as circumstances warrant. Additional capital distributions are subject to the approval of the Company’s Board of Directors, and will be consistent with regulatory requirements.
The following table provides a detailed analysis of all shares purchased by the Company or any affiliated purchaser during the second quarter of 2020:
 
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)		 
April
  365,131(b)  $32.91   5,131  $756 
May
  190,072(c)   33.08   72   756 
June
  10   37.13   10   – 
Total
  555,213(d)  $32.97   5,213  $– 
 
(a)
All shares were purchased under the common stock repurchase authorization programs announced in 2019 and represent shares acquired by the Company in connection with satisfaction of tax withholding obligations on vested restricted stock and unit awards and exercises under other compensation plans.
(b)
Includes 360,000 shares of common stock purchased, at an average price per share of $32.88, 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.
(c)
Includes 190,000 shares of common stock purchased, at an average price per share of $33.08, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the U.S. Bank 401(k) Savings Plan.
(d)
Includes 550,000 shares of common stock purchased, at an average price per share of $32.95, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the U.S. Bank 401(k) Savings Plan.
Refer to “Management’s Discussion and Analysis — Capital Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, for further discussion on capital management.
 
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LINE OF BUSINESS FINANCIAL REVIEW
The Company’s major lines of business are Corporate and Commercial Banking, Consumer and Business Banking, Wealth Management and Investment Services, Payment Services, and Treasury and Corporate Support. These operating segments are components of the Company about which financial information is prepared and is evaluated regularly by management in deciding how to allocate resources and assess performance.
Basis for Financial Presentation
 Business line results are derived from the Company’s business unit profitability reporting systems by specifically attributing managed balance sheet assets, deposits and other liabilities and their related income or expense. Refer to Note 16 of the Notes to Consolidated Financial Statements for further information on the business lines’ basis for financial presentation.
Designations, assignments and allocations change from time to time as management systems are enhanced, methods of evaluating performance or product lines change or business segments are realigned to better respond to the Company’s diverse customer base. During 2020, certain organization and methodology changes were made and, accordingly, 2019 results were restated and presented on a comparable basis.
Corporate and Commercial Banking
Corporate and Commercial Banking offers lending, equipment finance and small-ticket leasing, depository services, treasury management, capital markets services, international trade services and other financial services to middle market, large corporate, commercial real estate, financial institution, non-profit and public sector clients. Corporate and Commercial Banking contributed $598 million of the Company’s net income in the second quarter and $767 million in the first six months of 2020, or an increase of $133 million (28.6 percent) and a decrease of $114 million (12.9 percent), respectively, compared with the same periods of 2019.
Net revenue increased $212 million (20.8 percent) in the second quarter and $297 million (14.8 percent) in the first six months of 2020, compared with the same periods of 2019. Net interest income, on a taxable-equivalent basis, increased $116 million (15.0 percent) in the second quarter and $136 million (8.8 percent) in the first six months of 2020, compared with the same periods of 2019. The increases were primarily due to strong loan growth as well as higher noninterest-bearing and interest-bearing deposits, partially offset by the impact on net interest margin due to changes in loan mix and lower spreads on loans, reflecting changing interest rates given the economic environment. Noninterest income increased $96 million (39.3 percent) in the second quarter and $161 million (35.6 percent) in the first six months of 2020, compared with the same periods of 2019, primarily due to higher capital markets and trading revenue as corporate customers accessed the fixed income capital markets for bond issuances.
Noninterest expense decreased $3 million (0.7 percent) in the second quarter and increased $10 million (1.2 percent) in the first six months of 2020, compared with the same periods of 2019, reflecting lower net shared services expense, lower other noninterest expense due to a reduction in travel as a result of COVID-19, and lower loan costs, offset by higher variable compensation related to fixed income capital markets business production. The provision for credit losses increased $37 million in the second quarter of 2020, compared with the second quarter of 2019, primarily due to higher net charge-offs, partially offset by a favorable change in the reserve allocation driven by payoffs of funded exposures net of the impact of credit risk rating downgrades. The provision for credit losses increased $439 million in the first six months of 2020, compared with the first six months of 2019, primarily due to an unfavorable change in the reserve allocation based on economic risks related to COVID-19 in the portfolio, along with higher net charge-offs.
Consumer and Business Banking
 Consumer and Business Banking delivers products and services through banking offices, telephone servicing and sales, on-line services, direct mail, ATM processing and mobile devices. It encompasses community banking, metropolitan banking and indirect lending, as well as mortgage banking. Consumer and Business Banking contributed $692 million of the Company’s net income in the second quarter and $1.3 billion in the first six months of 2020, or increases of $111 million (19.1 percent) and $162 million (13.8 percent), respectively, compared with the same periods of 2019.
Net revenue increased $243 million (11.2 percent) in the second quarter and $427 million (10.0 percent) in the first six months of 2020, compared with the same periods of 2019. Net interest income, on a taxable-equivalent basis, decreased $111 million (7.0 percent) in the second quarter and $149 million (4.7 percent) in the first six months of 2020, compared with the same periods of 2019. The decreases were primarily due to the impact of declining interest rates on the margin benefit from deposits, partially offset by growth in non-interest bearing and interest-bearing deposit balances and loan growth driven in part by loans made under the SBA’s Paycheck Protection Program. Noninterest income increased $354 million (62.4 percent) in the second
 
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quarter and $576 million (52.3 percent) in the first six months of 2020, compared with the same periods of 2019, primarily due to higher mortgage banking revenue driven by mortgage production and related gain on sale margins, partially offset by changes in the valuation of MSRs, net of hedging activities. The increases in noninterest income were partially offset by lower deposit service charges due to lower volume and fee waivers related to customers impacted by COVID-19.
Noninterest expense increased $64 million (4.9 percent) in the second quarter and $127 million (5.0 percent) in the first six months of 2020, compared with the same periods of 2019, primarily due to higher variable compensation related to strong mortgage banking origination activities, and higher net shared services expense, reflecting the impact of investment in infrastructure supporting business growth. The provision for credit losses increased $31 million (39.2 percent) in the second quarter and $84 million (56.4 percent) in the first six months of 2020, compared with the same periods of 2019, due to higher net charge-offs and unfavorable changes in the reserve allocation reflecting deterioration in credit quality given the economic environment.
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 $204 million of the Company’s net income in the second quarter and $420 million in the first six months of 2020, or decreases of $31 million (13.2 percent) and $41 million (8.9 percent), respectively, compared with the same periods of 2019.
Net revenue decreased $31 million (4.1 percent) in the second quarter and $7 million (0.5 percent) in the first six months of 2020, compared with the same periods of 2019. Net interest income, on a taxable-equivalent basis, decreased $49 million (16.1 percent) in the second quarter and $59 million (9.9 percent) in the first six months of 2020, compared with the same periods of 2019, primarily due to the impact of declining interest rates on the margin benefit from deposits, partially offset by higher noninterest-bearing and interest-bearing deposit balances, and changes in deposit mix. Noninterest income increased $18 million (4.0 percent) in the second quarter and $52 million (5.9 percent) in the first six months of 2020, compared with the same periods of 2019, primarily due to the impact of favorable market conditions and business growth on trust and investment management fees.
Noninterest expense increased $14 million (3.2 percent) in the second quarter and $26 million (3.0 percent) in the first six months of 2020, compared with the same periods of 2019, reflecting increased net shared services expense due to technology development and higher compensation expense due to the impact of merit increases, increased staffing, and higher business incentives. The provision for credit losses decreased $4 million in the second quarter of 2020, compared with the second quarter of 2019, reflecting a favorable change in the reserve allocation driven by the strong credit quality of the loan portfolio. The provision for credit losses increased $22 million in the first six months of 2020, compared with the first six months of 2019, primarily due to an unfavorable change in the reserve allocation in the first quarter of 2020.
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 $400 million of the Company’s net income in the second quarter and $716 million in the first six months of 2020, or increases of $46 million (13.0 percent) and $28 million (4.1 percent), respectively, compared with the same periods of 2019.
Net revenue decreased $277 million (18.0 percent) in the second quarter and $303 million (10.1 percent) in the first six months of 2020, compared with the same periods of 2019. Net interest income, on a taxable-equivalent basis, increased $17 million (2.9 percent) in the second quarter and $51 million (4.2 percent) in the first six months of 2020, compared with the same periods of 2019, primarily due to favorable loan spreads, partially offset by lower loan fees. The increase in net interest income in the second quarter of 2020, compared with the second quarter of 2019, was further offset by lower loan volume. Noninterest income decreased $294 million (30.9 percent) in the second quarter and $354 million (19.6 percent) in the first six months of 2020, compared with the same periods of 2019, mainly due to the impacts of COVID-19 on consumer and business spending volume in all payments businesses including merchant processing services, corporate payment products, and credit and debit card revenue.
Noninterest expense decreased $12 million (1.6 percent) in the second quarter and increased $10 million (0.7 percent) in the first six months of 2020, compared with the same periods of 2019, reflecting lower marketing and business development expense due to the timing of marketing campaigns and a reduction in costs related to equipment sales driven by lower volumes, offset
 
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 Table 11
    Line of Business Financial Performance
 
  
Corporate and
Commercial Banking
       
Consumer and
Business Banking
     
Three Months Ended June 30
(Dollars in Millions)
 2020   2019  Percent
Change		       2020   2019   Percent
Change		     
Condensed Income Statement
              
Net interest income (taxable-equivalent basis)
 $890   $774   15.0%     $1,486   $1,597    (7.0)%   
Noninterest income
  340    244   39.3      921    567    62.4   
Securities gains (losses), net
  –    –   –      –    –    –   
Total net revenue
  1,230    1,018   20.8      2,407    2,164    11.2   
Noninterest expense
  411    413   (.5)      1,370    1,305    5.0   
Other intangibles
  –    1   *      4    5    (20.0)   
Total noninterest expense
  411    414   (.7)      1,374    1,310    4.9   
Income before provision and income taxes
  819    604   35.6      1,033    854    21.0   
Provision for credit losses
  21    (16)   *      110    79    39.2   
Income before income taxes
  798    620   28.7      923    775    19.1   
Income taxes and taxable-equivalent adjustment
  200    155   29.0      231    194    19.1   
Net income
  598    465   28.6      692    581    19.1   
Net (income) loss attributable to noncontrolling interests
  –    –   –      –    –    –   
Net income (loss) attributable to U.S. Bancorp
 $598   $465   28.6     $692   $581    19.1   
Average Balance Sheet
              
Commercial
 $100,857   $78,463   28.5%     $12,808   $9,710    31.9%   
Commercial real estate
  22,083    20,452   8.0      16,313    16,096    1.3   
Residential mortgages
  3    6   (50.0)      66,655    63,074    5.7   
Credit card
  –    –   –      –    –    –   
Other retail
  7    1   *      54,430    54,897    (.9)   
Total loans
  122,950    98,922   24.3      150,206    143,777    4.5   
Goodwill
  1,647    1,647   –      3,475    3,475    –   
Other intangible assets
  6    9   (33.3)      1,935    2,717    (28.8)   
Assets
  135,504    108,823   24.5      167,501    157,445    6.4   
Noninterest-bearing deposits
  38,658    29,061   33.0      34,662    27,051    28.1   
Interest checking
  15,047    10,549   42.6      58,872    51,388    14.6   
Savings products
  57,801    42,404   36.3      68,841    62,036    11.0   
Time deposits
  22,525    17,787   26.6      16,606    15,508    7.1   
Total deposits
  134,031    99,801   34.3      178,981    155,983    14.7   
Total U.S. Bancorp shareholders’ equity
  17,295    15,436   12.0        14,973    15,119    (1.0)     
  
Corporate and
Commercial Banking
       
Consumer and
Business Banking
     
Six Months Ended June 30
(Dollars in Millions)
 2020   2019  Percent
Change		       2020   2019   Percent
Change		     
Condensed Income Statement
              
Net interest income (taxable-equivalent basis)
 $1,688   $1,552   8.8%     $3,029   $3,178    (4.7)%   
Noninterest income
  613    452   35.6      1,678    1,102    52.3   
Securities gains (losses), net
  –    –   –      –    –    –   
Total net revenue
  2,301    2,004   14.8      4,707    4,280    10.0   
Noninterest expense
  832    820   1.5      2,684    2,555    5.0   
Other intangibles
  –    2   *      8    10    (20.0)   
Total noninterest expense
  832    822   1.2      2,692    2,565    5.0   
Income before provision and income taxes
  1,469    1,182   24.3      2,015    1,715    17.5   
Provision for credit losses
  446    7   *      233    149    56.4   
Income before income taxes
  1,023    1,175   (12.9)      1,782    1,566    13.8   
Income taxes and taxable-equivalent adjustment
  256    294   (12.9)      446    392    13.8   
Net income
  767    881   (12.9)      1,336    1,174    13.8   
Net (income) loss attributable to noncontrolling interests
  –    –   –      –    –    –   
Net income (loss) attributable to U.S. Bancorp
 $767   $881   (12.9)     $1,336   $1,174    13.8   
Average Balance Sheet
              
Commercial
 $91,512   $78,291   16.9%     $10,834   $9,582    13.1%   
Commercial real estate
  21,638    20,502   5.5      16,307    16,078    1.4   
Residential mortgages
  3    6   (50.0)      66,644    62,494    6.6   
Credit card
  –    –   –      –    –    –   
Other retail
  8    1   *      54,674    54,650    –   
Total loans
  113,161    98,800   14.5      148,459    142,804    4.0   
Goodwill
  1,647    1,647   –      3,475    3,475    –   
Other intangible assets
  7    9   (22.2)      2,170    2,799    (22.5)   
Assets
  125,409    108,063   16.1      164,630    156,103    5.5   
Noninterest-bearing deposits
  34,002    29,623   14.8      31,265    26,800    16.7   
Interest checking
  14,558    11,147   30.6      55,958    51,251    9.2   
Savings products
  53,003    41,834   26.7      66,524    61,711    7.8   
Time deposits
  20,456    17,978   13.8      16,559    15,173    9.1   
Total deposits
  122,019    100,582   21.3      170,306    154,935    9.9   
Total U.S. Bancorp shareholders’ equity
  16,553    15,389   7.6        14,952    15,060    (.7)     
 
*
Not meaningful
 
30
  U.S. Bancorp
Table of Contents
 
    
 
    
Wealth Management and
Investment Services
   
Payment
Services
       
Treasury and
Corporate Support
       
Consolidated
Company
 
    2020  2019  Percent
Change		       2020  2019   Percent
Change		       2020  2019  Percent
Change		       2020  2019  Percent
Change		 
                      
 $256  $305   (16.1)%     $602  $585    2.9%     $(10)  $71   *%     $3,224  $3,332   (3.2)% 
  463   445   4.0      658   952    (30.9)      151   265   (43.0)      2,533   2,473   2.4 
     –   –   –      –   –    –      81   17   *      81   17   * 
  719   750   (4.1)      1,260   1,537    (18.0)      222   353   (37.1)      5,838   5,822   .3 
  446   432   3.2      722   737    (2.0)      326   224   45.5      3,275   3,111   5.3 
     3   3   –      36   33    9.1      –   –   –      43   42   2.4 
     449   435   3.2      758   770    (1.6)      326   224   45.5      3,318   3,153   5.2 
  270   315   (14.3)      502   767    (34.6)      (104)   129   *      2,520   2,669   (5.6) 
     (2)   2   *      (31)   295    *      1,639   5   *      1,737   365   * 
  272   313   (13.1)      533   472    12.9      (1,743)   124   *      783   2,304   (66.0) 
     68   78   (12.8)      133   118    12.7      (544)   (69)   *      88   476   (81.5) 
  204   235   (13.2)      400   354    13.0      (1,199)   193   *      695   1,828   (62.0) 
     –   –   –      –   –    –      (6)   (7)   14.3      (6)   (7)   14.3 
    $204  $235   (13.2)     $400  $354    13.0     $(1,205)  $186   *     $689  $1,821   (62.2) 
                      
 $4,510  $3,952   14.1%     $8,529  $10,087    (15.4)%     $1,335  $1,021   30.8%     $128,039  $103,233   24.0% 
  591   494   19.6      –   –    –      2,101   2,323   (9.6)      41,088   39,365   4.4 
  4,464   3,754   18.9      –   –    –      –   –   –      71,122   66,834   6.4 
  –   –   –      21,510   22,830    (5.8)      –   –   –      21,510   22,830   (5.8) 
     1,629   1,698   (4.1)      282   360    (21.7)      –   –   –      56,348   56,956   (1.1) 
  11,194   9,898   13.1      30,321   33,277    (8.9)      3,436   3,344   2.8      318,107   289,218   10.0 
  1,616   1,617   (.1)      3,101   2,806    10.5      –   –   –      9,839   9,545   3.1 
  40   50   (20.0)      590   533    10.7      –   –   –      2,571   3,309   (22.3) 
  14,308   13,178   8.6      35,473   39,588    (10.4)      191,520   152,564   25.5      544,306   471,598   15.4 
  16,298   13,612   19.7      3,165   1,221    *      2,323   2,151   8.0      95,106   73,096   30.1 
  9,629   8,310   15.9      –   –    –      241   186   29.6      83,789   70,433   19.0 
  53,398   49,364   8.2      115   113    1.8      774   704   9.9      180,929   154,621   17.0 
     2,273   3,743   (39.3)      2   2    –      2,073   10,042   (79.4)      43,479   47,082   (7.7) 
  81,598   75,029   8.8      3,282   1,336    *      5,411   13,083   (58.6)      403,303   345,232   16.8 
     2,478   2,432   1.9        5,876   6,043    (2.8)        11,619   13,408   (13.3)        52,241   52,438   (.4) 
    
Wealth Management and
Investment Services
   
Payment
Services
       
Treasury and
Corporate Support
       
Consolidated
Company
 
    2020  2019  Percent
Change		       2020  2019   Percent
Change		       2020  2019  Percent
Change		       2020  2019  Percent
Change		 
                      
 $539  $598   (9.9)%     $1,253  $1,202    4.2%     $(38)  $88   *%     $6,471  $6,618   (2.2)% 
  927   875   5.9      1,452   1,806    (19.6)      338   524   (35.5)      5,008   4,759   5.2 
     –   –   –      –   –    –      131   22   *      131   22   * 
  1,466   1,473   (.5)      2,705   3,008    (10.1)      431   634   (32.0)      11,610   11,399   1.9 
  879   853   3.0      1,448   1,445    .2      706   485   45.6      6,549   6,158   6.3 
     6   6   –      71   64    10.9      –   –   –      85   82   3.7 
     885   859   3.0      1,519   1,509    .7      706   485   45.6      6,634   6,240   6.3 
  581   614   (5.4)      1,186   1,499    (20.9)      (275)   149   *      4,976   5,159   (3.5) 
     21   (1)   *      231   581    (60.2)      1,799   6   *      2,730   742   * 
  560   615   (8.9)      955   918    4.0      (2,074)   143   *      2,246   4,417   (49.2) 
     140   154   (9.1)      239   230    3.9      (709)   (189)   *      372   881   (57.8) 
  420   461   (8.9)      716   688    4.1      (1,365)   332   *      1,874   3,536   (47.0) 
     –   –   –      –   –    –      (14)   (16)   12.5      (14)   (16)   12.5 
    $420  $461   (8.9)     $716  $688    4.1     $(1,379)  $316   *     $1,860  $3,520   (47.2) 
                      
 $4,350  $3,937   10.5%     $9,036  $9,766    (7.5)%     $1,281  $1,024   25.1%     $117,013  $102,600   14.0% 
  564   499   13.0      –   –    –      2,074   2,338   (11.3)      40,583   39,417   3.0 
  4,360   3,712   17.5      –   –    –      –   –   –      71,007   66,212   7.2 
  –   –   –      22,673   22,714    (.2)      –   –   –      22,673   22,714   (.2) 
     1,628   1,710   (4.8)      296   368    (19.6)      –   –   –      56,606   56,729   (.2) 
  10,902   9,858   10.6      32,005   32,848    (2.6)      3,355   3,362   (.2)      307,882   287,672   7.0 
  1,616   1,617   (.1)      3,028   2,810    7.8      –   –   –      9,766   9,549   2.3 
  42   52   (19.2)      576   523    10.1      –   –   –      2,795   3,383   (17.4) 
  14,129   13,180   7.2      37,137   39,112    (5.0)      178,251   151,063   18.0      519,556   467,521   11.1 
  14,758   13,459   9.7      2,318   1,198    93.5      2,281   2,183   4.5      84,624   73,263   15.5 
  9,811   8,759   12.0      –   –    –      246   144   70.8      80,573   71,301   13.0 
  55,009   45,273   21.5      114   111    2.7      812   733   10.8      175,462   149,662   17.2 
     2,221   3,773   (41.1)      2   2    –      3,156   9,174   (65.6)      42,394   46,100   (8.0) 
  81,799   71,264   14.8      2,434   1,311    85.7      6,495   12,234   (46.9)      383,053   340,326   12.6 
     2,472   2,437   1.4        5,980   6,009    (.5)        11,736   13,121   (10.6)        51,693   52,016   (.6) 
 
U.S. Bancorp  
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Table of Contents
by higher software expense due to capital expenditures and acquisitions. The provision for credit losses decreased $326 million in the second quarter and $350 million (60.2 percent) in the first six months of 2020, compared with the same periods of 2019, reflecting favorable changes in the reserve allocation driven by lower outstanding loan balances and lower delinquency rates, partially offset by higher net charge-offs.
Treasury and Corporate Support
 Treasury and Corporate Support includes the Company’s investment portfolios, funding, capital management, interest rate risk management, income taxes not allocated to the business lines, including most investments in tax-advantaged projects, and the residual aggregate of those expenses associated with corporate activities that are managed on a consolidated basis. Treasury and Corporate Support recorded net losses of $1.2 billion in the second quarter and $1.4 billion in the first six months of 2020, compared with net income of $186 million and $316 million, respectively, in the same periods of 2019.
Net revenue decreased $131 million (37.1 percent) in the second quarter and $203 million (32.0 percent) in the first six months of 2020, compared with the same periods of 2019. Net interest income, on a taxable-equivalent basis, decreased $81 million in the second quarter and $126 million in the first six months of 2020, compared with the same periods of 2019, primarily due to lower spreads within the investment portfolio. Noninterest income decreased $50 million (17.7 percent) in the second quarter and $77 million (14.1 percent) in the first six months of 2020, compared with the same periods of 2019, primarily due to lower equity investment income, lower tax-advantaged investment syndication revenue, and asset impairments as a result of property damage from civil unrest in the second quarter of 2020, partially offset by higher investment securities gains. The decrease in noninterest income in the first six months of 2020, compared with the first six months of 2019, was also due to higher credit valuation losses, partially offset by gains on the sale of certain businesses in the first quarter of 2020.
Noninterest expense increased $102 million (45.5 percent) in the second quarter and $221 million (45.6 percent) in the first six months of 2020, compared with the same periods of 2019, primarily due to COVID-related expenses, higher state franchise taxes, higher compensation expense reflecting merit increases and stock-based compensation, and higher implementation costs of capital investments to support business growth. These increases were partially offset by lower net shared services expense, lower costs related to tax-advantaged projects and a reduction in travel expenses as a result of COVID-19. The provision for credit losses increased $1.6 billion in the second quarter and $1.8 billion in the first six months of 2020, compared with the same periods of 2019, reflecting unfavorable changes in the reserve allocation due to adverse changes in economic conditions and the expected impact to credit losses in the current environment.
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 current expected credit losses 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 current expected credit losses 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.
 
32
  U.S. Bancorp
Table of Contents
The following table shows the Company’s calculation of these non-GAAP financial measures:
 
(Dollars in Millions) June 30,
2020		  December 31,
2019		 
Total equity
 $52,480  $52,483 
Preferred stock
  (5,984)   (5,984) 
Noncontrolling interests
  (630)   (630) 
Goodwill (net of deferred tax liability) (1)
  (8,954)   (8,788) 
Intangible assets, other than mortgage servicing rights
  (678)   (677) 
Tangible common equity (a)
  36,234   36,404 
Common equity tier 1 capital, determined in accordance with transitional regulatory capital requirements related to the current expected credit losses methodology implementation
  36,351  
Adjustments (2)
  (1,702)  
Common equity tier 1 capital, reflecting the full implementation of the current expected credit losses methodology (b)
  34,649  
Total assets
  546,652   495,426 
Goodwill (net of deferred tax liability) (1)
  (8,954)   (8,788) 
Intangible assets, other than mortgage servicing rights
  (678)   (677) 
Tangible assets (c)
  537,020   485,961 
Risk-weighted assets, determined in accordance with prescribed regulatory capital requirements effective for the Company (d)
  401,832   391,269 
Adjustments (3)
  (1,394)  
Risk-weighted assets, reflecting the full implementation of the current expected credit losses methodology (e)
  400,438  
Ratios
  
Tangible common equity to tangible assets (a)/(c)
  6.7%   7.5% 
Tangible common equity to risk-weighted assets (a)/(d)
  9.0   9.3 
Common equity tier 1 capital to risk-weighted assets, reflecting the full implementation of the current expected credit losses methodology (b)/(e)
  8.7  
  Three Months Ended
June 30		       Six Months Ended
June 30		 
  2020  2019       2020  2019 
Net interest income
 $3,200  $3,305     $6,423  $6,564 
Taxable-equivalent adjustment (4)
  24   27        48   54 
Net interest income, on a taxable-equivalent basis
  3,224   3,332      6,471   6,618 
 
Net interest income, on a taxable-equivalent basis (as calculated above)
  3,224   3,332      6,471   6,618 
Noninterest income
  2,614   2,490      5,139   4,781 
Less: Securities gains (losses), net
  81   17        131   22 
Total net revenue, excluding net securities gains (losses) (f)
  5,757   5,805      11,479   11,377 
 
Noninterest expense (g)
  3,318   3,153      6,634   6,240 
 
Efficiency ratio (g)/(f)
  57.6%   54.3%        57.8%   54.8% 
 
(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 current expected credit losses 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 current expected credit losses 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.
Allowance for Credit Losses
Management’s evaluation of the appropriate allowance for credit losses is often the most critical of all the accounting estimates for a banking institution. It is an inherently subjective process impacted by many factors as discussed throughout the Management’s Discussion and Analysis section of this Quarterly Report on Form 10-Q. Prior to January 1, 2020, the allowance for credit losses was established to provide for probable and estimable losses incurred in the Company’s credit portfolio. Effective January 1, 2020,
 
U.S. Bancorp  
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the Company adopted new accounting guidance which changed previous impairment recognition to a model that is based on expected losses rather than incurred losses. Refer to Note 2 of the Notes to Consolidated Financial Statements for discussion on the effect of the adoption of this guidance on the Company’s financial statements.
The methods utilized to estimate the allowance for credit losses, key assumptions and quantitative and qualitative information considered by management in determining the appropriate allowance for credit losses at June 30, 2020 are discussed in the “Credit Risk Management” section. Although methodologies utilized to determine each element of the allowance reflect management’s assessment of credit risk as identified through assessments completed of individual credits and of homogenous pools affected by material credit events, degrees of imprecision exist in these measurement tools due in part to subjective judgments involved and an inherent lag in the data available to quantify current conditions and events that affect credit loss reserve estimates. As discussed in the “Analysis and Determination of Allowance for Credit Losses” section, management considered the effect of changes in economic conditions, risk management practices, and other factors that contributed to imprecision of loss estimates in determining the allowance for credit losses. If not considered, expected losses in the credit portfolio related to imprecision and other subjective factors could have a dramatic adverse impact on the liquidity and financial viability of a banking institution.
Given the many quantitative variables and subjective factors affecting the credit portfolio, changes in the allowance for credit losses may not directly coincide with changes in the risk ratings of the credit portfolio reflected in the risk rating process. This is in part due to the timing of the risk rating process in relation to changes in the business cycle, the exposure and mix of loans within risk rating categories, levels of nonperforming loans and the timing of charge-offs and expected recoveries. The allowance for credit losses on commercial lending segment loans measures the expected loss content on the remaining portfolio exposure, while nonperforming loans and net charge-offs are measures of specific impairment events that have already been confirmed. Therefore, the degree of change in the forward-looking expected loss in the commercial lending allowance may differ from the level of changes in nonperforming loans and net charge-offs. Management maintains an appropriate allowance for credit losses by updating allowance rates to reflect changes in expected losses, including expected changes in economic or business cycle conditions.
Some factors considered in determining the appropriate allowance for credit losses are more readily quantifiable while other factors require extensive qualitative judgment. Management conducts an analysis with respect to the accuracy of risk ratings and the volatility of expected losses, and utilizes this analysis along with qualitative factors that can affect the precision of credit loss estimates, including economic conditions, such as changes in Gross Domestic Product, unemployment or bankruptcy rates, and concentration risks, such as risks associated with specific industries, collateral valuations, and loans to highly leveraged enterprises, in determining the overall level of the allowance for credit losses.
The Company considers a range of economic scenarios in its determination of the allowance for credit losses. These scenarios are constructed with interrelated projections of multiple economic variables, and loss estimates are produced that consider the historical correlation of those economic variables with credit losses, and also the expectation that conditions will eventually normalize over the longer run. Scenarios worse than the Company’s expected outcome at June 30, 2020 include risks that government stimulus in response to the COVID-19 pandemic is less broad or less effective than expected, or that a longer or more severe health crisis prolongs the downturn in economic activity, reducing the number of businesses that are ultimately able to resume operations after the crisis has passed.
The Company’s determination of the allowance for commercial lending segment loans is sensitive to the assigned credit risk ratings and expected loss rates at June 30, 2020. If 20 percent of period ending loan balances (including unfunded commitments) within each risk category of risk rated commercial lending loans experienced a downgrade to the next worse risk category, the allowance for credit losses would have increased by approximately $238 million at June 30, 2020. If quantitative loss estimates for commercial lending segment loans increased by 10 percent, the allowance for credit losses would have increased by approximately $358 million at June 30, 2020. The Company believes the allowance for credit losses appropriately considers the imprecision in estimating credit losses based on credit risk ratings and credit loss model estimates, but actual losses may differ from those estimates.
The Company’s determination of the allowance for consumer lending segment loans is sensitive to changes in estimated loss rates and estimated impairments on restructured loans. In the event that estimated losses for this segment of the loan portfolio increased by 10 percent, the allowance for credit losses would have increased by approximately $324 million at June 30, 2020. Because several quantitative and qualitative factors are considered in determining the allowance for credit
 
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losses, these sensitivity analyses do not necessarily reflect the nature and extent of future changes in the allowance for credit losses. They are intended to provide insights into the impact of adverse changes in risk rating and loss model estimates and do not imply any expectation of future deterioration in the risk rating or loss rates. Given current processes employed by the Company, management believes the risk ratings and loss model estimates currently assigned are appropriate. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions that could be significant to the Company’s financial statements. Refer to the “Analysis and Determination of the Allowance for Credit Losses” section for further information.
Accounting policies related to fair value estimates, MSRs, and income taxes are discussed in detail in “Management’s Discussion and Analysis — Critical Accounting Policies” and the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon this evaluation, the principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
During the most recently completed fiscal quarter, there was no change made in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
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U.S. Bancorp
Consolidated Balance
Sheet
 
(Dollars in Millions)         June 30,
2020		  December 31,
2019		 
  (Unaudited)    
Assets
  
Cash and due from banks
 $52,392  $22,405 
Available-for-sale
investment securities ($1,017 and $269 pledged as collateral, respectively) (a)
  128,120   122,613 
Loans held for sale (including $8,084 and $5,533 of mortgage loans carried at fair value, respectively)
  8,178   5,578 
Loans
  
Commercial
  120,261   103,863 
Commercial real estate
  41,076   39,746 
Residential mortgages
  71,329   70,586 
Credit card
  21,257   24,789 
Other retail
  56,412   57,118 
Total loans
  310,335   296,102 
Less allowance for loan losses
  (7,383)   (4,020) 
Net loans
  302,952   292,082 
Premises and equipment
  3,616   3,702 
Goodwill
  9,842   9,655 
Other intangible assets
  2,518   3,223 
Other assets (including $1,198 and $951 of trading securities at fair value pledged as collateral, respectively) (a)
  39,034   36,168 
Total assets
 $546,652  $495,426 
Liabilities and Shareholders’ Equity
  
Deposits
  
Noninterest-bearing
 $109,723  $75,590 
Interest-bearing (b)
  303,583   286,326 
Total deposits
  413,306   361,916 
Short-term borrowings
  20,595   23,723 
Long-term debt
  42,579   40,167 
Other liabilities
  17,692   17,137 
Total liabilities
  494,172   442,943 
Shareholders’ equity
  
Preferred stock
  5,984   5,984 
Common stock, par value $0.01 a share—authorized: 4,000,000,000 shares; issued: 6/30/20 and 12/31/19—2,125,725,742 shares
  21   21 
Capital surplus
  8,483   8,475 
Retained earnings
  62,526   63,186 
Less cost of common stock in treasury: 6/30/20—619,380,455 shares; 12/31/19—591,570,506 shares
  (25,962)   (24,440) 
Accumulated other comprehensive income (loss)
  798   (1,373) 
Total U.S. Bancorp shareholders’ equity
  51,850   51,853 
Noncontrolling interests
  630   630 
Total equity
  52,480   52,483 
Total liabilities and equity
 $546,652  $495,426 
 
(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 $7.6 billion and $7.8 billion at June 30, 2020 and December 31, 2019, 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 June 30		   Six Months
Ended June 30		 
  2020  2019  2020  2019 
Interest Income
     
Loans
  $2,949  $3,582  $6,260  $7,122 
Loans held for sale
   52   34   96   59 
Investment securities
   630   745   1,322   1,450 
Other interest income
   41   90   110   171 
Total interest income
   3,672   4,451   7,788   8,802 
Interest Expense
     
Deposits
   194   762   719   1,457 
Short-term borrowings
   34   91   105   184 
Long-term debt
   244   293   541   597 
Total interest expense
   472   1,146   1,365   2,238 
Net interest income
   3,200   3,305   6,423   6,564 
Provision for credit losses
   1,737   365   2,730   742 
Net interest income after provision for credit losses
   1,463   2,940   3,693   5,822 
Noninterest Income
     
Credit and debit card revenue
   284   365   588   669 
Corporate payment products revenue
   101   167   246   329 
Merchant processing services
   266   404   603   782 
Trust and investment management fees
   434   415   861   814 
Deposit service charges
   133   227   342   444 
Treasury management fees
   137   153   280   299 
Commercial products revenue
   355   249   601   468 
Mortgage banking revenue
   648   189   1,043   358 
Investment products fees
   45   47   94   92 
Securities gains (losses), net
   81   17   131   22 
Other
   130   257   350   504 
Total noninterest income
   2,614   2,490   5,139   4,781 
Noninterest Expense
     
Compensation
   1,685   1,574   3,305   3,133 
Employee benefits
   314   314   666   647 
Net occupancy and equipment
   271   281   547   558 
Professional services
   106   106   205   201 
Marketing and business development
   67   111   141   200 
Technology and communications
   309   270   598   527 
Postage, printing and supplies
   72   73   144   145 
Other intangibles
   43   42   85   82 
Other
   451   382   943   747 
Total noninterest expense
   3,318   3,153   6,634   6,240 
Income before income taxes
   759   2,277   2,198   4,363 
Applicable income taxes
   64   449   324   827 
Net income
   695   1,828   1,874   3,536 
Net (income) loss attributable to noncontrolling interests
   (6)   (7)   (14)   (16) 
Net income attributable to U.S. Bancorp
  $689  $1,821  $1,860  $3,520 
Net income applicable to U.S. Bancorp common shareholders
  $614  $1,741  $1,702  $3,354 
Earnings per common share
  $.41  $1.09  $1.13  $2.10 
Diluted earnings per common share
  $.41  $1.09  $1.12  $2.10 
Average common shares outstanding
   1,506   1,590   1,512   1,596 
Average diluted common shares outstanding
   1,507   1,592   1,513   1,599 
See Notes to Consolidated Financial Statements.
 
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U.S. Bancorp
Consolidated Statement of Comprehensive Income
 
(Dollars in Millions)
(Unaudited)
  Three Months
Ended June 30		  Six Months
Ended June 30		 
  2020  2019  2020  2019 
Net income
  $695  $1,828  $1,874  $3,536 
Other Comprehensive Income (Loss)
     
Changes in unrealized gains and losses on investment securities
available-for-sale
   453   721   3,240   1,506 
Changes in unrealized gains and losses on derivative hedges
   –   (135)   (257)   (209) 
Foreign currency translation
   1   (8)   (12)   8 
Reclassification to earnings of realized gains and losses
   (59)   (4)   (65)   4 
Income taxes related to other comprehensive income (loss)
   (100)   (145)   (735)   (331) 
Total other comprehensive income (loss)
   295   429   2,171   978 
Comprehensive income
   990   2,257   4,045   4,514 
Comprehensive (income) loss attributable to noncontrolling interests
   (6)   (7)   (14)   (16) 
Comprehensive income attributable to U.S. Bancorp
  $984  $2,250  $4,031  $4,498 
See Notes to Consolidated Financial Statements.
 
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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 March 31, 2019
  1,599  $5,984  $21  $8,432  $60,092  $(20,699)  $(1,773)  $52,057  $629  $52,686 
Net income (loss)
      1,821     1,821   7   1,828 
Other comprehensive income (loss)
        429   429    429 
Preferred stock dividends (a)
      (72)     (72)    (72) 
Common stock dividends ($.37 per share)
      (589)     (589)    (589) 
Issuance of common and treasury stock
  –     (5)    14    9    9 
Purchase of treasury stock
  (15)       (780)    (780)    (780) 
Distributions to noncontrolling interests
         –   (8)   (8) 
Net other changes in noncontrolling interests
         –   (1)   (1) 
Stock option and restricted stock grants
              38               38       38 
Balance June 30, 2019
  1,584  $5,984  $21  $8,465  $61,252  $(21,465)  $(1,344)  $52,913  $627  $53,540 
Balance March 31, 2020
  1,506  $5,984  $21  $8,452  $62,544  $(25,972)  $503  $51,532  $630  $52,162 
Net income (loss)
      689     689   6   695 
Other comprehensive income (loss)
        295   295    295 
Preferred stock dividends (b)
      (72)     (72)    (72) 
Common stock dividends ($.42 per share)
      (635)     (635)    (635) 
Issuance of common and treasury stock
  –     (9)    10    1    1 
Distributions to noncontrolling interests
         –   (6)   (6) 
Stock option and restricted stock grants
              40               40       40 
Balance June 30, 2020
  1,506  $5,984  $21  $8,483  $62,526  $(25,962)  $798  $51,850  $630  $52,480 
Balance December 31, 2018
  1,608  $5,984  $21  $8,469  $59,065  $(20,188)  $(2,322)  $51,029  $628  $51,657 
Change in accounting principle
      2     2    2 
Net income (loss)
      3,520     3,520   16   3,536 
Other comprehensive income (loss)
        978   978    978 
Preferred stock dividends (c)
      (151)     (151)    (151) 
Common stock dividends ($.74 per share)
      (1,184)     (1,184)    (1,184) 
Issuance of common and treasury stock
  3     (119)    143    24    24 
Purchase of treasury stock
  (27)       (1,420)    (1,420)    (1,420) 
Distributions to noncontrolling interests
         –   (16)   (16) 
Net other changes in noncontrolling interests
         –   (1)   (1) 
Stock option and restricted stock grants
              115               115       115 
Balance June 30, 2019
  1,584  $5,984  $21  $8,465  $61,252  $(21,465)  $(1,344)  $52,913  $627  $53,540 
Balance December 31, 2019
  1,534  $5,984  $21  $8,475  $63,186  $(24,440)  $(1,373)  $51,853  $630  $52,483 
Change in accounting principle (d)
      (1,099)     (1,099)    (1,099) 
Net income (loss)
      1,860     1,860   14   1,874 
Other comprehensive income (loss)
        2,171   2,171    2,171 
Preferred stock dividends (e)
      (150)     (150)    (150) 
Common stock dividends ($.84 per share)
      (1,271)     (1,271)    (1,271) 
Issuance of common and treasury stock
  3     (117)    127    10    10 
Purchase of treasury stock
  (31)       (1,649)    (1,649)    (1,649) 
Distributions to noncontrolling interests
         –   (14)   (14) 
Stock option and restricted stock grants
              125               125       125 
Balance June 30, 2020
  1,506  $5,984  $21  $8,483  $62,526  $(25,962)  $798  $51,850  $630  $52,480 
 
(a)
Reflects dividends declared per share on the Company’s Series A, Series B, Series F, Series H, Series I and Series K
Non-Cumulative
Perpetual Preferred Stock of $914.234, $221.18, $406.25, $321.88, $640.625 and $343.75, respectively.
(b)
Reflects dividends declared per share on the Company’s Series A, Series B, Series F, Series H, Series I and Series K
Non-Cumulative
Perpetual Preferred Stock of $884.722, $221.18, $406.25, $321.88, $640.625 and $343.75, respectively.
(c)
Reflects dividends declared per share on the Company’s Series A, Series B, Series F, Series H, Series I, Series J and Series K
Non-Cumulative
Perpetual Preferred Stock of $1,866.062, $439.93, $812.50, $643.76, $640.625, $662.50 and $687.50, respectively.
(d)
Effective January 1, 2020, the Company adopted accounting guidance which changed impairment recognition of financial instruments to a model that is based on expected losses rather than incurred losses. Upon adoption, the Company increased its allowance for credit losses and reduced retained earnings net of deferred tax liabilities through a cumulative-effect adjustment.
(e)
Reflects dividends declared per share on the Company’s Series A, Series B, Series F, Series H, Series I, Series J and Series K
Non-Cumulative
Perpetual Preferred Stock of $1,769.444, $442.36, $812.50, $643.76, $640.625, $662.50 and $687.50, respectively.
See Notes to Consolidated Financial Statements.
 
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U.S. Bancorp
Consolidated Statement of Cash Flows
 
(Dollars in Millions)
(Unaudited)
 Six Months Ended
June 30		 
 2020  2019 
Operating Activities
  
Net income attributable to U.S. Bancorp
 $1,860  $3,520 
Adjustments to reconcile net income to net cash provided by operating activities
  
Provision for credit losses
  2,730   742 
Depreciation and amortization of premises and equipment
  175   163 
Amortization of intangibles
  85   82 
(Gain) loss on sale of loans held for sale
  (867)   (248) 
(Gain) loss on sale of securities and other assets
  (227)   (209) 
Loans originated for sale, net of repayments
  (26,821)   (14,566) 
Proceeds from sales of loans held for sale
  24,935   12,912 
Other, net
  (369)   (491) 
Net cash provided by operating activities
  1,501   1,905 
Investing Activities
  
Proceeds from sales of
available-for-sale
investment securities
  13,366   2,535 
Proceeds from maturities of
held-to-maturity
investment securities
  –   3,707 
Proceeds from maturities of
available-for-sale
investment securities
  13,945   4,753 
Purchases of
held-to-maturity
investment securities
  –   (4,052) 
Purchases of
available-for-sale
investment securities
  (30,561)   (8,886) 
Net increase in loans outstanding
  (14,245)   (5,527) 
Proceeds from sales of loans
  1,014   1,183 
Purchases of loans
  (1,743)   (1,676) 
Net decrease (increase) in securities purchased under agreements to resell
  627   (3,921) 
Other, net
  (398)   12 
Net cash used in investing activities
  (17,995)   (11,872) 
Financing Activities
  
Net increase in deposits
  51,390   7,702 
Net (decrease) increase in short-term borrowings
  (3,128)   893 
Proceeds from issuance of long-term debt
  12,801   5,610 
Principal payments or redemption of long-term debt
  (11,500)   (6,000) 
Proceeds from issuance of common stock
  10   24 
Repurchase of common stock
  (1,660)   (1,441) 
Cash dividends paid on preferred stock
  (150)   (151) 
Cash dividends paid on common stock
  (1,282)   (1,191) 
Net cash provided by financing activities
  46,481   5,446 
Change in cash and due from banks
  29,987   (4,521) 
Cash and due from banks at beginning of period
  22,405   21,453 
Cash and due from banks at end of period
 $52,392  $16,932 
See Notes to Consolidated Financial Statements.
 
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Notes to Consolidated Financial Statements
(Unaudited)
 
 Note 1
 
   Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with the instructions to
Form 10-Q
and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States. In the opinion of management of U.S. Bancorp (the “Company”), all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of results for the interim periods have been made. These financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on
Form 10-K
for the year ended December 31, 2019. Certain amounts in prior periods have been reclassified to conform to the current presentation.
 
 Note 2
 
   Accounting Changes
Financial Instruments—Credit Losses
Effective January 1, 2020, the Company adopted accounting guidance, issued by the Financial Accounting Standards Board (“FASB”) in June 2016, related to the impairment of financial instruments. This guidance changes impairment recognition to a model that is based on expected losses rather than incurred losses, which is intended to result in more timely recognition of credit losses. This guidance is also intended to reduce the complexity of accounting guidance by decreasing the number of credit impairment models that entities use to account for debt instruments. In addition, the guidance requires additional credit quality disclosures for loans. Upon adoption, the Company increased its allowance for credit losses by approximately $1.5 billion and reduced retained earnings net of deferred tax balances by approximately $1.1 billion through a cumulative-effect adjustment. The Company has elected to defer the impact of the effect of the guidance at adoption plus 25 percent of its quarterly credit reserve increases over the next two years on its regulatory capital requirements, followed by a transition period to phase in the cumulative deferred impact at 25 percent per year from 2022 to 2025, as provided by rules issued by its regulators.
When determining expected losses, the Company uses multiple economic scenarios and a three-year reasonable and supportable forecast period, which incorporates historical loss experience in years two and three. After the forecast period, the Company fully reverts to long-term historical loss experience, adjusted for prepayments and characteristics of the current loan and lease portfolio, to estimate losses over the remaining lives of the financial instruments.
The increase in the allowance at adoption was primarily related to the commercial, credit card, installment and other retail loan portfolios where the allowance for loan losses had not previously considered the full term of the loans. The Company also recognized an additional $1.3 billion and $1.9 billion increase in its allowance for credit losses during the second quarter and first six months of 2020, respectively, utilizing this guidance. These increases reflected deteriorating economic conditions driven by the impact of
COVID-19
on the domestic and global economies. Expected loss estimates considered both the decrease in economic activity, and the mitigating effects of government stimulus and industrywide loan modification efforts designed to limit long term effects of the pandemic event. The increases in the allowance for credit losses resulted from the estimated impact of deteriorating economic conditions and higher unemployment, partially offset by the benefits of government stimulus programs.    
The adoption of this guidance did not have a material impact on the Company’s
available-for-sale
securities as most of this portfolio consists of U.S. Treasury and residential agency mortgage-backed securities that inherently have an immaterial risk of loss.
Reference Interest Rate Transition
In March 2020, the FASB issued accounting guidance, providing temporary optional expedients and exceptions to the guidance in United States generally accepted accounting principles on contract modifications and hedge accounting, to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. Under the guidance, a company can elect not to apply certain modification accounting requirements to contracts affected by reference rate transition, if certain criteria are met. A company that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. This guidance also permits a company to elect various optional expedients that would allow it to continue applying hedge accounting for hedging relationships affected by reference rate transition, if certain criteria are met. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The Company is currently assessing the impact of this guidance on its financial statements.
 
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 Note 3
 
   Investment Securities
The Company’s
available-for-sale
investment securities are carried at fair value with unrealized net gains or losses reported within accumulated other comprehensive income (loss) in shareholders’ equity. The Company had no outstanding investment securities classified as
held-to-maturity
at June 30, 2020 and December 31, 2019.
The amortized cost, gross unrealized holding gains and losses, and fair value of
available-for-sale
investment securities were as follows:
 
  June 30, 2020  December 31, 2019 
(Dollars in Millions) Amortized
Cost		  Unrealized
Gains		  Unrealized
Losses		  Fair
Value		      Amortized
Cost		  Unrealized
Gains		  Unrealized
Losses		  Fair
Value		 
U.S. Treasury and agencies
 $19,397  $581  $–  $19,978    $19,845  $61  $(67)  $19,839 
Mortgage-backed securities
          
Residential agency
  94,193   2,347   (38)   96,502     93,903   557   (349)   94,111 
Commercial agency
  3,079   184   –   3,263     1,482   –   (29)   1,453 
Asset-backed securities
          
Collateralized debt obligations/Collateralized loan obligations
  –   1   –   1     –   1   –   1 
Other
  361   6   –   367     375   7   –   382 
Obligations of state and political subdivisions
  7,470   527   (1)   7,996     6,499   318   (3)   6,814 
Obligations of foreign governments
  9   –   –   9     9   –   –   9 
Corporate debt securities
  4   –   –   4       4   –   –   4 
Total
available-for-sale
 $124,513  $3,646  $(39)  $128,120      $122,117  $944  $(448)  $122,613 
Investment securities with a fair value of $11.8 billion at June 30, 2020, and $8.4 billion at December 31, 2019, were pledged to secure public, private and trust deposits, repurchase agreements and for other purposes required by contractual obligation or law. Included in these amounts were securities where the Company and certain counterparties have agreements granting the counterparties the right to sell or pledge the securities. Investment securities securing these types of arrangements had a fair value of $1.0 billion at June 30, 2020, and $269 million at December 31, 2019.
The following table provides information about the amount of interest income from taxable and
non-taxable
investment securities:
 
  Three Months
Ended June 30		        Six Months
Ended June 30		 
(Dollars in Millions) 2020   2019        2020   2019 
Taxable
 $573   $690      $1,213   $1,340 
Non-taxable
  57    55         109    110 
Total interest income from investment securities
 $630   $745        $1,322   $1,450 
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 June 30		       Six Months
Ended June 30		 
(Dollars in Millions) 2020   2019       2020  2019 
Realized gains
 $81   $36     $154  $41 
Realized losses
  –    (19)        (23)   (19) 
Net realized gains (losses)
 $81   $17       $131  $22 
Income tax (benefit) on net realized gains (losses)
 $20   $4       $33  $6 
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 June 30, 2020.
 
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At June 30, 2020, certain investment securities had a fair value below amortized cost. The following table shows the gross unrealized losses and fair value of the Company’s
available-for-sale
investment securities with unrealized losses, aggregated by investment category and length of time the individual investment securities have been in continuous unrealized loss positions, at June 30, 2020:
 
  Less Than 12 Months       12 Months or Greater       Total 
(Dollars in Millions) Fair
Value		   Unrealized
Losses		       Fair
Value		   Unrealized
Losses		       Fair
Value		   Unrealized
Losses		 
U.S. Treasury and agencies
 $143   $–     $–   $–     $143   $– 
Residential agency mortgage-backed securities
  2,821    (18)      4,985    (20)      7,806    (38) 
Other asset-backed securities
  –    –      2    –      2    – 
Obligations of state and political subdivisions
  80    (1)      –    –      80    (1) 
Obligations of foreign governments
  2    –      –    –      2    – 
Corporate debt securities
  4    –        –    –        4    – 
Total investment securities
 $3,050   $(19)       $4,987   $(20)       $8,037   $(39) 
These unrealized losses primarily relate to changes in interest rates and market spreads subsequent to purchase of the investment securities. U.S. Treasury and agencies securities and agency mortgage-backed securities are issued, guaranteed, or otherwise supported by the United States government. The Company’s obligations of state and political subdivisions are generally high grade. Accordingly, the Company does not consider these unrealized losses to be credit-related and an allowance for credit losses is not necessary. In general, the issuers of the investment securities are contractually prohibited from prepayment at less than par, and the Company did not pay significant purchase premiums for these investment securities. At June 30, 2020, the Company had no plans to sell investment securities with unrealized losses, and believes it is more likely than not it would not be required to sell such investment securities before recovery of their amortized cost.
During the six months ended June 30, 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 June 30, 2020:
 
(Dollars in Millions) Amortized
Cost		   Fair Value   Weighted-
Average
Maturity in
Years		   Weighted-
Average
Yield (e)		 
U.S. Treasury and Agencies
       
Maturing in one year or less
 $5,453   $5,486    .5    1.64% 
Maturing after one year through five years
  9,834    10,167    2.2    1.69 
Maturing after five years through ten years
  4,044    4,259    6.6    1.51 
Maturing after ten years
  66    66    10.8    1.78 
Total
 $19,397   $19,978    2.7    1.64% 
Mortgage-Backed Securities (a)
        
Maturing in one year or less
 $1,194   $1,215    .8    2.33% 
Maturing after one year through five years
  91,418    93,694    2.6    1.98 
Maturing after five years through ten years
  4,601    4,797    7.9    1.56 
Maturing after ten years
  59    59    12.4    1.22 
Total
 $97,272   $99,765    2.8    1.97% 
Asset-Backed Securities (a)
        
Maturing in one year or less
 $–   $–    .7    2.69% 
Maturing after one year through five years
  360    366    2.9    3.59 
Maturing after five years through ten years
  1    1    5.7    1.00 
Maturing after ten years
  –    1    14.6    2.41 
Total
 $361   $368    2.9    3.58% 
Obligations of State and Political Subdivisions (b) (c)
       
Maturing in one year or less
 $67   $68    .4    5.64% 
Maturing after one year through five years
  863    904    2.7    4.37 
Maturing after five years through ten years
  6,263    6,736    6.9    4.15 
Maturing after ten years
  277    288    10.2    3.16 
Total
 $7,470   $7,996    6.5    4.15% 
Other
       
Maturing in one year or less
 $13   $13    .6    1.65% 
Maturing after one year through five years
  –    –    –    – 
Maturing after five years through ten years
  –    –    –    – 
Maturing after ten years
  –    –    –    – 
Total
 $13   $13    .6    1.65% 
Total investment securities (d)
 $124,513   $128,120    3.0    2.05% 
 
(a)
Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities that take into account anticipated future prepayments.
(b)
Information related to obligations of state and political subdivisions is presented based upon yield to first optional call date if the security is purchased at a premium, and yield to maturity if the security is purchased at par or a discount.
(c)
Maturity calculations for obligations of state and political subdivisions are based on the first optional call date for securities with a fair value above par and the contractual maturity date for securities with a fair value equal to or below par.
(d)
The weighted-average maturity of total
available-for-sale
investment securities was 4.2 years at December 31, 2019, with a corresponding weighted-average yield of 2.38 percent.
(e)
Weighted-average yields for obligations of state and political subdivisions are presented on a fully-taxable equivalent basis based on a federal income tax rate of 21 percent. Yields on investment securities are computed based on amortized cost balances.
 
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 Note 4
 
   Loans and Allowance for Credit Losses
The composition of the loan portfolio, disaggregated by class and underlying specific portfolio type, was as follows:
 
  June 30, 2020       December 31, 2019 
(Dollars in Millions) Amount   Percent
of Total		       Amount   Percent
of Total		 
Commercial
         
Commercial
 $114,621    37.0%     $98,168    33.2% 
Lease financing
  5,640    1.8        5,695    1.9 
Total commercial
  120,261    38.8      103,863    35.1 
Commercial Real Estate
         
Commercial mortgages
  30,098    9.7      29,404    9.9 
Construction and development
  10,978    3.5        10,342    3.5 
Total commercial real estate
  41,076    13.2      39,746    13.4 
Residential Mortgages
         
Residential mortgages
  61,169    19.7      59,865    20.2 
Home equity loans, first liens
  10,160    3.3        10,721    3.6 
Total residential mortgages
  71,329    23.0      70,586    23.8 
Credit Card
  21,257    6.8      24,789    8.4 
Other Retail
         
Retail leasing
  8,412    2.7      8,490    2.9 
Home equity and second mortgages
  13,932    4.5      15,036    5.1 
Revolving credit
  2,625    .8      2,899    1.0 
Installment
  12,556    4.1      11,038    3.7 
Automobile
  18,694    6.0      19,435    6.5 
Student
  193    .1         220    .1  
Total other retail
  56,412    18.2        57,118    19.3 
Total loans
 $310,335    100.0%       $296,102    100.0% 
The Company had loans of $100.3 billion at June 30, 2020, and $96.2 billion at December 31, 2019, pledged at the Federal Home Loan Bank, and loans of $70.3 billion at June 30, 2020, and $76.3 billion at December 31, 2019, pledged at the Federal Reserve Bank.
Originated loans are reported at the principal amount outstanding, net of unearned interest and deferred fees and costs, and any partial charge-offs recorded. Net unearned interest and deferred fees and costs amounted to $922 million at June 30, 2020 and $781 million at December 31, 2019. All purchased loans are recorded at fair value at the date of purchase. Beginning January 1, 2020, the Company evaluates purchased loans for more-than-insignificant deterioration at the date of purchase in accordance with applicable authoritative accounting guidance. Purchased loans that have experienced more-than-insignificant deterioration from origination are considered purchased credit deteriorated (“PCD”) loans. All other purchased loans are considered
non-purchased
credit deteriorated loans.
The Company offers a broad array of lending products and categorizes its loan portfolio into two segments, which is the level at which it develops and documents a systematic methodology to determine the allowance for credit losses. The Company’s two loan portfolio segments are commercial lending and consumer lending.
Allowance for Credit Losses
Effective 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. Prior to January 1, 2020, the allowance for credit losses was established based on an incurred loss model. The allowance for credit losses is increased through provisions charged to earnings and reduced by net charge-offs. Management evaluates the appropriateness of the allowance for credit losses on a quarterly basis. The allowance considers expected losses for the remaining lives of the applicable assets, inclusive of expected recoveries. Multiple economic scenarios are considered over a three-year reasonable and supportable forecast period, which incorporates historical loss experience in years two and three. After the forecast period, the Company fully reverts to long-term historical loss experience, adjusted for prepayments and characteristics of the current loan and lease portfolio, to estimate losses over the remaining lives. The economic scenarios are updated at least quarterly and are designed to provide a range of reasonable estimates, both better and worse than current expectations. Scenarios are weighted based on the Company’s expectation of future conditions. Final loss estimates also consider factors affecting credit losses not reflected in the scenarios, due to the unique aspects of current conditions and expectations. These factors may include 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 loan and borrower characteristics, such as internal risk
 
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ratings on commercial loans and consumer credit scores, delinquency status, collateral type and available valuation information, consideration of
end-of-term
losses on lease residuals, and the remaining term of the loan, adjusted for expected prepayments. Where loans do not exhibit similar risk characteristics, an individual analysis is performed to consider expected credit losses. For each loan portfolio, model estimates are adjusted as necessary to consider any relevant changes in portfolio composition, lending policies, underwriting standards, risk management practices or economic conditions that would affect the accuracy of the model. The results of the analysis are evaluated quarterly to confirm the estimates are appropriate for each loan portfolio. Expected credit loss estimates also include consideration of expected cash recoveries on loans previously
charged-off,
or expected recoveries on collateral dependent loans where recovery is expected through sale of the collateral. The allowance recorded for individually evaluated loans greater than $5 million in the commercial lending segment is based on an analysis utilizing expected cash flows discounted using the original effective interest rate, the observable market price of the loan, or the fair value of the collateral, less selling costs, for collateral-dependent loans.
The allowance recorded for Troubled Debt Restructuring (“TDR”) loans in the consumer lending segment is determined on a homogenous pool basis utilizing expected cash flows discounted using the original effective interest rate of the pool. TDRs do not include loan modifications granted to customers resulting directly from the economic effects of the
COVID-19
pandemic. The expected cash flows on TDR loans consider subsequent payment defaults since modification, the borrower’s ability to pay under the restructured terms, and the timing and amount of payments. The allowance for collateral-dependent loans in the consumer lending segment is determined based on the current fair value of the collateral less costs to sell. With respect to the commercial lending segment, TDRs may be collectively evaluated for impairment where observed performance history, including defaults, is a primary driver of the loss allocation. For commercial TDRs individually evaluated for impairment, attributes of the borrower are the primary factors in determining the allowance for credit losses. However, historical loss experience is also incorporated into the allowance methodology applied to this category of loans.
Beginning January 1, 2020, when a loan portfolio is purchased, an allowance is established for those loans considered purchased with more-than-insignificant credit deterioration, or PCD loans, and those not considered purchased with more-than-insignificant credit deterioration. The allowance established for each population considers product mix, risk characteristics of the portfolio, bankruptcy experience, delinquency status, refreshed
loan-to-value
ratios when possible, and portfolio growth. The allowance established for purchased loans not considered PCD is recognized through provision expense upon acquisition, whereas the allowance established for loans considered PCD at acquisition is offset by an increase in the basis of the acquired loans. Any subsequent increases and decreases in the allowance related to purchased loans are recognized through provision expense, with future charge-offs charged to the allowance.
The Company’s methodology for determining the appropriate allowance for credit losses for each loan segment also considers the imprecision inherent in the methodologies used. As a result, amounts determined under the methodologies described above are adjusted by management to consider the potential impact of other qualitative factors 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 portfolio segments, or changes in portfolio concentrations over time that may affect model performance. The consideration of these items results in adjustments to allowance amounts included in the Company’s allowance for credit losses specific to each portfolio class.
The Company also assesses the credit risk associated with
off-balance
sheet loan commitments, letters of credit, investment securities and derivatives. Credit risk associated with derivatives is reflected in the fair values recorded for those positions. The liability for
off-balance
sheet credit exposure related to loan commitments and other credit guarantees is included in other liabilities. Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments.
 
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  U.S. Bancorp
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Activity in the allowance for credit losses by portfolio class was as follows:
 
Three Months Ended June 30
(Dollars in Millions)
 Commercial  Commercial
Real Estate		  Residential
Mortgages		  Credit
Card		  Other
Retail		  Total
Loans		 
2020
            
Balance at beginning of period
 $2,240  $841  $412  $2,012  $1,085  $6,590 
Add
      
Provision for credit losses
  516   450   218   373   180   1,737 
Deduct
      
Loans
charged-off
  125   23   3   265   106   522 
Less recoveries of loans
charged-off
  (14)   (1)   (6)   (36)   (28)   (85) 
Net loans
charged-off
  111   22   (3)   229   78   437 
Balance at end of period
 $2,645  $1,269  $633  $2,156  $1,187  $7,890 
2019
            
Balance at beginning of period
 $1,445  $812  $445  $1,115  $634  $4,451 
Add
      
Provision for credit losses
  78   (17)   (3)   244   63   365 
Deduct
      
Loans
charged-off
  98   3   11   262   90   464 
Less recoveries of loans
charged-off
  (39)   (2)   (7)   (35)   (31)   (114) 
Net loans
charged-off
  59   1   4   227   59   350 
Balance at end of period
 $1,464  $794  $438  $1,132  $638  $4,466 
Six Months Ended June 30
(Dollars in Millions)
 Commercial  Commercial
Real Estate		  Residential
Mortgages		  Credit
Card		  Other
Retail		  Total
Loans		 
2020
            
Balance at beginning of period
 $1,484  $799  $433  $1,128  $647  $4,491 
Add
      
Change in accounting principle (a)
  378   (122)   (30)   872   401   1,499 
Provision for credit losses
  968   612   228   619   303   2,730 
Deduct
      
Loans
charged-off
  213   23   11   539   227   1,013 
Less recoveries of loans
charged-off
  (28)   (3)   (13)   (76)   (63)   (183) 
Net loans
charged-off
  185   20   (2)   463   164   830 
Balance at end of period
 $2,645  $1,269  $633  $2,156  $1,187  $7,890 
2019
            
Balance at beginning of period
 $1,454  $800  $455  $1,102  $630  $4,441 
Add
      
Provision for credit losses
  142   (5)   (10)   482   133   742 
Deduct
      
Loans
charged-off
  209   4   19   519   186   937 
Less recoveries of loans
charged-off
  (77)   (3)   (12)   (67)   (61)   (220) 
Net loans
charged-off
  132   1   7   452   125   717 
Balance at end of period
 $1,464  $794  $438  $1,132  $638  $4,466 
 
(a)
Effective January 1, 2020, the Company adopted accounting guidance which changed impairment recognition of financial instruments to a model that is based on expected losses rather than incurred losses.
The increase in the allowance for credit losses from December 31, 2019 to June 30, 2020 reflected the adoption of new accounting guidance and deteriorating economic conditions driven by the impact of
COVID-19
on the domestic and global economies. Expected loss estimates consider both the decrease in economic activity, and the mitigating effects of government stimulus and industrywide loan modification efforts designed to limit long term effects of the pandemic. The increase in the allowance for credit losses resulted from the estimated impact of deteriorating economic conditions and higher unemployment, partially offset by the benefits of government stimulus programs.
Credit Quality
The credit quality of the Company’s loan portfolios is assessed as a function of net credit losses, levels of nonperforming assets and delinquencies, and credit quality ratings as defined by the Company.
For all loan classes, loans are considered past due based on the number of days delinquent except for monthly amortizing loans which are classified delinquent based upon the number of contractually required payments not made (for example, two missed payments is considered 30 days delinquent). When a loan is placed on nonaccrual status, unpaid accrued interest is reversed, reducing interest income in the current period.
Commercial lending segment loans are generally placed on nonaccrual status when the collection of principal and interest has become 90 days past due or is otherwise considered doubtful. Commercial lending segment loans are generally fully or partially charged down to the fair value of the collateral securing the loan, less costs to sell, when the loan is placed on nonaccrual.
 
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Consumer lending segment loans are generally
charged-off
at a specific number of days or payments past due. Residential mortgages and other retail loans secured by
1-4
family properties are generally charged down to the fair value of the collateral securing the loan, less costs to sell, at 180 days past due. Residential mortgage loans and lines in a first lien position are placed on nonaccrual status in instances where a partial
charge-off
occurs unless the loan is well secured and in the process of collection. Residential mortgage loans and lines in a junior lien position secured by
1-4 family
properties are placed on nonaccrual status at 120 days past due or when they are behind a first lien that has become 180 days or greater past due or placed on nonaccrual status. Any secured consumer lending segment loan whose borrower has had debt discharged through bankruptcy, for which the loan amount exceeds the fair value of the collateral, is charged down to the fair value of the related collateral and the remaining balance is placed on nonaccrual status. Credit card loans continue to accrue interest until the account is
charged-off.
Credit cards are
charged-off
at 180 days past due. Other retail loans not secured by
1-4
family properties are
charged-off
at 120 days past due; and revolving consumer lines are
charged-off
at 180 days past due. Similar to credit cards, other retail loans are generally not placed on nonaccrual status because of the relative short period of time to
charge-off.
Certain retail customers having financial difficulties may have the terms of their credit card and other loan agreements modified to require only principal payments and, as such, are reported as nonaccrual.
For all loan classes, interest payments received on nonaccrual loans are generally recorded as a reduction to a loan’s carrying amount while a loan is on nonaccrual and are recognized as interest income upon payoff of the loan. However, interest income may be recognized for interest payments if the remaining carrying amount of the loan is believed to be collectible. In certain circumstances, loans in any class may be restored to accrual status, such as when a loan has demonstrated sustained repayment performance or no amounts are past due and prospects for future payment are no longer in doubt; or when the loan becomes well secured and is in the process of collection. Loans where there has been a partial
charge-off
may be returned to accrual status if all principal and interest (including amounts previously
charged-off)
is expected to be collected and the loan is current. Generally, purchased credit deteriorated loans are considered accruing loans. However, the timing and amount of future cash flows for some loans is not reasonably estimable, and those loans are classified as nonaccrual loans with interest income not recognized until the timing and amount of the future cash flows can be reasonably estimated.
The following table provides a summary of loans by portfolio class, including the delinquency status of those that continue to accrue interest, and those that are nonperforming:
 
  Accruing         
(Dollars in Millions) Current   
30-89 Days

Past Due		   90 Days or
More Past Due		   Nonperforming (b)   Total 
June 30, 2020
         
Commercial
 $119,316   $399   $90   $456   $120,261 
Commercial real estate
  40,776    103    2    195    41,076 
Residential mortgages (a)
  70,731    241    115    242    71,329 
Credit card
  20,768    230    259    –    21,257 
Other retail
  55,890    254    90    178    56,412 
Total loans
 $307,481   $1,227   $556   $1,071   $310,335 
December 31, 2019
         
Commercial
 $103,273   $307   $79   $204   $103,863 
Commercial real estate
  39,627    34    3    82    39,746 
Residential mortgages (a)
  70,071    154    120    241    70,586 
Credit card
  24,162    321    306    –    24,789 
Other retail
  56,463    393    97    165    57,118 
Total loans
 $293,596   $1,209   $605   $692   $296,102 
 
(a)
At June 30, 2020, $656 million of loans 30–89 days past due and $1.7 billion of loans 90 days or more past due purchased from Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs, were classified as current, compared with $428 million and $1.7 billion at December 31, 2019, respectively.
(b)
Substantially all nonperforming loans at June 30, 2020 and December 31, 2019, had an associated allowance for credit losses. The Company recognized interest income on nonperforming loans of $6 million for both the three months ended June 30, 2020 and 2019, and $10 million and $11 million for the six months ended June 30, 2020 and 2019, respectively.
At June 30, 2020, the amount of foreclosed residential real estate held by the Company, and included in other real estate owned (“OREO”), was $49 million, compared with $74 million at December 31, 2019. These amounts exclude $74 million and $155 million at June 30, 2020 and December 31, 2019, respectively, of foreclosed residential real estate related to mortgage loans whose payments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs. In addition, the amount of residential mortgage loans secured by residential real estate in the process of foreclosure at June 30, 2020 and December 31, 2019, was
 
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$1.2 billion and $1.5 billion, respectively, of which $964 million and $1.2 billion, respectively, related to loans purchased from Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.
The Company classifies its loan portfolios using internal credit quality ratings on a quarterly basis.
These
ratings include pass, special mention and classified, and are an important part of the Company’s overall credit risk management process and evaluation of the allowance for credit losses. Loans with a pass rating represent those loans not classified on the Company’s rating scale for problem credits, as minimal credit risk has been identified. Special mention loans are those loans that have a potential weakness deserving management’s close attention. Classified loans are those loans where a well-defined weakness has been identified that may put full collection of contractual cash flows at risk. It is possible that others, given the same information, may reach different reasonable conclusions regarding the credit quality rating classification of specific loans.
The following table provides a summary of loans by portfolio class and the Company’s internal credit quality rating:
 
  June 30, 2020       December 31, 2019 
     Criticized            Criticized    
(Dollars in Millions) Pass  Special
Mention		  Classified (a)  Total
Criticized		  Total       Pass  Special
Mention		  Classified (a)  Total
Criticized		  Total 
Commercial
             
Originated in 2020
 $31,789  $1,360  $651  $2,011  $33,800     $–  $–  $–  $–  $– 
Originated in 2019
  24,882   603   332   935   25,817      33,550   174   222   396   33,946 
Originated in 2018
  17,201   684   376   1,060   18,261      21,394   420   136   556   21,950 
Originated in 2017
  8,020   177   256   433   8,453      10,464   165   97   262   10,726 
Originated in 2016
  3,674   266   57   323   3,997      4,984   10   37   47   5,031 
Originated prior to 2016
  4,004   53   268   321   4,325      5,151   86   96   182   5,333 
Revolving
  24,470   678   460   1,138   25,608        26,307   292   278   570   26,877 
Total commercial
  114,040   3,821   2,400   6,221   120,261      101,850   1,147   866   2,013   103,863 
 
Commercial real estate
             
Originated in 2020
  5,903   706   140   846   6,749      –   –   –   –   – 
Originated in 2019
  10,813   1,214   228   1,442   12,255      12,976   108   108   216   13,192 
Originated in 2018
  7,470   826   226   1,052   8,522      9,455   71   56   127   9,582 
Originated in 2017
  3,773   409   231   640   4,413      5,863   99   64   163   6,026 
Originated in 2016
  2,644   243   129   372   3,016      3,706   117   60   177   3,883 
Originated prior to 2016
  3,692   267   153   420   4,112      4,907   78   101   179   5,086 
Revolving
  1,900   102   7   109   2,009        1,965   11   1   12   1,977 
Total commercial real estate
  36,195   3,767   1,114   4,881   41,076      38,872   484   390   874   39,746 
 
Residential mortgages (b)
             
Originated in 2020
  11,996   1   1   2   11,998      –   –   –   –   – 
Originated in 2019
  15,921   3   5   8   15,929      18,819   2   1   3   18,822 
Originated in 2018
  6,955   1   19   20   6,975      9,204   –   11   11   9,215 
Originated in 2017
  7,993   1   22   23   8,016      9,605   –   21   21   9,626 
Originated in 2016
  9,868   –   31   31   9,899      11,378   –   29   29   11,407 
Originated prior to 2016
  18,192   –   319   319   18,511      21,168   –   348   348   21,516 
Revolving
  1   –   –   –   1        –   –   –   –   – 
Total residential mortgages
  70,926   6   397   403   71,329      70,174   2   410   412   70,586 
 
Credit card (c)
  20,998   –   259   259   21,257      24,483   –   306   306   24,789 
 
Other retail
             
Originated in 2020
  8,265   –   3   3   8,268      –   –   –   –   – 
Originated in 2019
  13,648   –   22   22   13,670      15,907   –   11   11   15,918 
Originated in 2018
  8,449   –   29   29   8,478      10,131   –   23   23   10,154 
Originated in 2017
  5,809   –   27   27   5,836      7,907   –   28   28   7,935 
Originated in 2016
  2,611   –   16   16   2,627      3,679   –   20   20   3,699 
Originated prior to 2016
  2,481   –   20   20   2,501      3,274   –   28   28   3,302 
Revolving
  14,450   –   112   112   14,562      15,509   10   138   148   15,657 
Revolving converted to term
  438   –   32   32   470        418   –   35   35   453 
Total other retail
  56,151   –   261   261   56,412        56,825   10   283   293   57,118 
Total loans
 $298,310  $7,594  $4,431  $12,025  $310,335       $292,204  $1,643  $2,255  $3,898  $296,102 
Total outstanding commitments
 $630,092  $10,740  $5,301  $16,041  $646,133       $619,224  $2,451  $2,873  $5,324  $624,548 
 
(a)
Classified rating on consumer loans primarily based on delinquency status.
(b)
At June 30, 2020, $1.7 billion of GNMA loans 90 days or more past due and $1.5 billion of restructured GNMA loans whose repayments are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs were classified with a pass rating, compared with $1.7 billion and $1.6 billion at December 31, 2019, respectively.
(c)
All credit card loans are considered revolving loans.
 
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Troubled Debt Restructurings
In certain circumstances, the Company may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term. Concessionary modifications are classified as TDRs unless the modification results in only an insignificant delay in payments to be received. The Company recognizes interest on TDRs if the borrower complies with the revised terms and conditions as agreed upon with the Company and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles, which is generally six months or greater. To the extent a previous restructuring was insignificant, the Company considers the cumulative effect of past restructurings related to the receivable when determining whether a current
restructuring
is a TDR.
The following table provides a summary of loans modified as TDRs during the periods presented by portfolio class:
 
  2020        2019 
(Dollars in Millions) Number
of Loans		  
Pre-Modification

Outstanding
Loan Balance		  
Post-Modification

Outstanding
Loan Balance		        Number
of Loans		   
Pre-Modification

Outstanding
Loan Balance		   
Post-Modification

Outstanding
Loan Balance		 
Three Months Ended June 30
            
Commercial
  1,139  $144  $115       823   $90   $86 
Commercial real estate
  38   39   39       24    25    24 
Residential mortgages
  121   24   24       105    12    13 
Credit card
  6,168   37   38       7,941    44    44 
Other retail
  374   9   8         642    13    13 
Total loans, excluding loans purchased from GNMA mortgage pools
  7,840   253   224       9,535    184    180 
Loans purchased from GNMA mortgage pools
  1,009   142   138         1,555    215    208 
Total loans
  8,849  $395  $362         11,090   $399   $388 
 
Six Months Ended June 30
            
Commercial
  2,138  $243  $216       1,736   $126   $115 
Commercial real estate
  65   60   60       44    72    70 
Residential mortgages
  211   34   34       201    26    26 
Credit card
  14,583   83   85       17,589    94    95 
Other retail
  1,029   24   22         1,215    24    23 
Total loans, excluding loans purchased from GNMA mortgage pools
  18,026   444   417       20,785    342    329 
Loans purchased from GNMA mortgage pools
  2,913   408   398         3,093    418    403 
Total loans
  20,939  $852  $815         23,878   $760   $732 
Residential mortgages, home equity and second mortgages, and loans purchased from GNMA mortgage pools in the table above include trial period arrangements offered to customers during the periods presented. The post-modification balances for these loans reflect the current outstanding balance until a permanent modification is made. In addition, the post-modification balances typically include capitalization of unpaid accrued interest and/or fees under the various modification programs.
 For those loans modified as TDRs during the second quarter of 2020, at June 30, 2020, 29 residential mortgages, 13 home equity and second mortgage loans and 349 loans purchased from GNMA mortgage pools with outstanding balances of $8 million, $1 million and $48 million, respectively, were in a trial period and have estimated post-modification balances of $7 million, $1 million and $48 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,
 
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extension of maturity dates or deferrals of payments, capitalization of accrued interest and/or outstanding advances, or in limited situations, partial forgiveness of loan principal. In most instances, participation in residential mortgage loan restructuring programs requires the customer to complete a short-term trial period. A permanent loan modification is contingent on the customer successfully completing the trial period arrangement, and the loan documents are not modified until that time. The Company reports loans in a trial period arrangement as TDRs and continues to report them as TDRs after the trial period.
Credit card and other retail loan TDRs are generally part of distinct restructuring programs providing customers experiencing financial difficulty with modifications whereby balances may be amortized up to 60 months, and generally include waiver of fees and reduced interest rates.
In addition, the Company considers secured loans to consumer borrowers that have debt discharged through bankruptcy where the borrower has not reaffirmed the debt to be TDRs.
Loan modifications or concessions granted to borrowers resulting directly from the effects of the COVID-19 pandemic, who were otherwise in current payment status, are not considered to be TDRs.
 As of June 30, 2020, the Company had approved approximately $17.2 billion of loan modifications included on its consolidated balance sheet related to borrowers impacted by the
COVID-19
pandemic, consisting primarily of payment deferrals of 90 days or less.
The following table provides a summary of TDR loans that defaulted (fully or partially
charged-off
or became 90 days or more
past
due) during the periods presented that were modified as TDRs within 12 months previous to default:
 
  2020        2019 
(Dollars in Millions) Number
of Loans		   Amount
Defaulted		        Number
of Loans		   Amount
Defaulted		 
Three Months Ended June 30
          
Commercial
  330   $8       252   $4 
Commercial real estate
  12    6       7    4 
Residential mortgages
  5    1       15    3 
Credit card
  1,736    9       1,922    10 
Other retail
  82    1         80    1 
Total loans, excluding loans purchased from GNMA mortgage pools
  2,165    25       2,276    22 
Loans purchased from GNMA mortgage pools
  51    7         310    43 
Total loans
  2,216   $32         2,586   $65 
 
Six Months Ended June 30
          
Commercial
  617   $28       486   $9 
Commercial real estate
  28    16       15    10 
Residential mortgages
  18    2       111    13 
Credit card
  3,806    19       3,976    19 
Other retail
  190    2         227    8 
Total loans, excluding loans purchased from GNMA mortgage pools
  4,659    67       4,815    59 
Loans purchased from GNMA mortgage pools
  355    48         434    60 
Total loans
  5,014   $115         5,249   $119 
In addition to the defaults in the table above, the Company had a total of 104 and 241 residential mortgage loans, home equity and second mortgage loans and loans purchased from GNMA mortgage pools for the three months and six months ended June 30, 2020, respectively, where borrowers did not successfully complete the trial period arrangement and, therefore, are no longer eligible for a permanent modification under the applicable modification program. These loans had aggregate outstanding balances of $15 million and $34 million for the three months and six months ended June 30, 2020, respectively.
As of June 30, 2020, the Company had $116 million of commitments to lend additional funds to borrowers whose terms of their outstanding owed balances have been modified in troubled debt restructurings.
 
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 Note 5
    Accounting for Transfers and Servicing of Financial Assets and Variable Interest Entities
The Company transfers financial assets in the normal course of business. The majority of the Company’s financial asset transfers are residential mortgage loan sales primarily to government-sponsored enterprises (“GSEs”), transfers of
tax-advantaged
investments, commercial loan sales through participation agreements, and other individual or portfolio loan and securities sales. In accordance with the accounting guidance for asset transfers, the Company considers any ongoing involvement with transferred assets in determining whether the assets can be derecognized from the balance sheet. Guarantees provided to certain third parties in connection with the transfer of assets are further discussed in Note 15.
For loans sold under participation agreements, the Company also considers whether the terms of the loan participation agreement meet the accounting definition of a participating interest. With the exception of servicing and certain performance-based guarantees, the Company’s continuing involvement with financial assets sold is minimal and generally limited to market customary representation and warranty clauses. Any gain or loss on sale depends on the previous carrying amount of the transferred financial assets, the consideration received, and any liabilities incurred in exchange for the transferred assets. Upon transfer, any servicing assets and other interests that continue to be held by the Company are initially recognized at fair value.
 
For further information on mortgage servicing rights (“MSRs”), refer to Note
6
. On a limited basis, the Company may acquire and package high-grade corporate bonds for select corporate customers, in which the Company generally has no continuing involvement with these transactions. Additionally, the Company is an authorized GNMA issuer and issues GNMA securities on a regular basis. The Company has no other asset securitizations or similar asset-backed financing arrangements that are
off-balance
sheet.
The Company also provides financial support primarily through the use of waivers of trust and investment management fees associated with various unconsolidated registered money market funds it manages. The Company provided $13 million and $7 million of support to the funds during the three months ended June 30, 2020 and 2019, respectively, and $21 million and $14 million during the six months ended June 30, 2020 and 2019, respectively.
The Company is involved in various entities that are considered to be variable interest entities (“VIEs”). The Company’s investments in VIEs are primarily related to investments promoting affordable housing, community development and renewable energy sources. Some of these
tax-advantaged
investments support the Company’s regulatory compliance with the Community Reinvestment Act. The Company’s investments in these entities generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. These tax credits are recognized as a reduction of tax expense or, for investments qualifying as investment tax credits, as a reduction to the related investment asset. The Company recognized federal and state income tax credits related to its affordable housing and other
tax-advantaged
investments in tax expense of $145 million and $146 million for the three months ended June 30, 2020 and 2019, respectively, and $295 million and $291 million for the six months ended June 30, 2020 and 2019, respectively. The Company also recognized $90 million and $162 million of investment tax credits for the three months ended June 30, 2020 and 2019, respectively, and $189 million and $246 million for the six months ended June 30, 2020 and 2019, respectively. The Company recognized $145 million and $137 million of expenses related to all of these investments for the three months ended June 30, 2020 and 2019, respectively, of which $99 million and $76 million, respectively, were included in tax expense and the remaining amounts were included in noninterest expense. The Company recognized $287 million and $269 million of expenses related to all of these investments for the six months ended June 30, 2020 and 2019, respectively, of which $200 million and $157 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
 
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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) 
June 30,
2020
   
December 31,
2019
 
Investment carrying amount
 $6,345   $6,148 
Unfunded capital and other commitments
  2,966    2,938 
Maximum exposure to loss
  12,204    12,118 
The Company also has noncontrolling financial investments in private investment funds and partnerships considered to be VIEs, which are not consolidated. The Company’s recorded investment in these entities, carried in other assets on the Consolidated Balance Sheet, was approximately $34 million at June 30, 2020 and $31 million at December 31, 2019. The maximum exposure to loss related to these VIEs was $55 million at June 30, 2020 and December 31, 2019, representing the Company’s investment balance and its unfunded commitments to invest additional amounts.
The Company’s individual net investments in unconsolidated VIEs, which exclude any unfunded capital commitments, ranged from less than $1 million to $84 million at June 30, 2020, compared with less than $1 million to $87 million at December 31, 2019.
The Company is required to consolidate VIEs in which it has concluded it has a controlling financial interest. The Company sponsors entities to which it transfers its interests in tax-advantaged investments to third parties.
 
At June 30, 2020, approximately $3.7 billion of the Company’s assets and $2.9 billion of its liabilities included on the Consolidated Balance Sheet were related to community development and
tax-advantaged
investment VIEs which the Company has consolidated, primarily related to these transfers. These amounts compared to $4.0 billion and $3.2 billion, respectively, at December 31, 2019.
 
The majority of the assets of these consolidated VIEs are reported in other assets, and the liabilities are reported in long-term debt and other liabilities. The assets of a particular VIE are the primary source of funds to settle its obligations. The creditors of the VIEs do not have recourse to the general credit of the Company. The Company’s exposure to the consolidated VIEs is generally limited to the carrying value of its variable interests plus any related tax credits previously recognized or transferred to others with a guarantee.
In addition, the Company sponsors a municipal bond securities tender option bond program. The Company controls the activities of the program’s entities, is entitled to the residual returns and provides liquidity and remarketing arrangements to the program. As a result, the Company has consolidated the program’s entities. At June 30, 2020, $3.0 billion of
available-for-sale
investment securities and $1.5 billion of short-term borrowings on the Consolidated Balance Sheet were related to the tender option bond program, compared with $3.0 billion of
available-for-sale
investment securities and $2.7 billion of short-term borrowings at December 31, 2019.
 
 Note 6
    Mortgage Servicing Rights
The Company capitalizes MSRs as separate assets when loans are sold and servicing is retained. MSRs may also be purchased from others. The Company carries MSRs at fair value, with changes in the fair value recorded in earnings during the period in which they occur. The Company serviced $220.3 billion of residential mortgage loans for others at June 30, 2020, and $226.0 billion at December 31, 2019, including subserviced mortgages with no corresponding MSR asset. Included in mortgage banking revenue are the MSR fair value changes arising from market rate and model assumption changes, net of the value change in derivatives used to economically hedge MSRs. These changes resulted in net gains of $24 million and net losses of $14 million for the three months ended June 30, 2020 and 2019, respectively, and net gains of $49 million and net losses of $3 million for the six months ended June 30, 2020 and 2019, respectively. Loan servicing and ancillary fees, not including valuation changes, included in mortgage banking revenue were $174 million and $180 million for the three months ended June 30, 2020 and 2019, respectively, and $360 million and $359 million for the six months ended June 30, 2020 and 2019, respectively.
 
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Changes in fair value of capitalized MSRs are summarized as follows:
 
  Three Months Ended
June 30		       Six Months Ended
June 30		 
(Dollars in Millions) 2020  2019       2020  2019 
Balance at beginning of period
 $1,887  $2,656     $2,546  $2,791 
Rights purchased
  3   6      8   7 
Rights capitalized
  190   127      391   205 
Rights sold (a)
  1   –      2   – 
Changes in fair value of MSRs
       
Due to fluctuations in market interest rates (b)
  (64)   (211)      (807)   (330) 
Due to revised assumptions or models (c)
  27   4      44   15 
Other changes in fair value (d)
  (204)   (124)        (344)   (230) 
Balance at end of period
 $1,840  $2,458       $1,840  $2,458 
 
(a)
MSRs sold in 2020 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 cost to service, ancillary income and option adjusted spread, as well as the impact of any model changes.
(d)
Primarily represents changes due to realization of expected cash flows over time (decay).
The estimated sensitivity to changes in interest rates of the fair value of the MSR portfolio and the related derivative instruments was as follows:
 
  June 30, 2020       December 31, 2019 
(Dollars in Millions) Down
100 bps		  Down
50 bps		  Down
25 bps		  Up
25 bps		  Up
50 bps		  Up
100 bps		       Down
100 bps		  Down
50 bps		  Down
25 bps		  Up
25 bps		  Up
50 bps		  Up
100 bps		 
MSR portfolio
 $(323)  $(216)  $(124)  $151  $321  $687     $(663)  $(316)  $(153)  $141  $269  $485 
Derivative instrument hedges
  422   229   121   (136)   (285)   (611)        613   306   152   (143)   (279)   (550) 
Net sensitivity
 $99  $13  $(3)  $15  $36  $76       $(50)  $(10)  $(1)  $(2)  $(10)  $(65) 
The fair value of MSRs and their sensitivity to changes in interest rates is influenced by the mix of the servicing portfolio and characteristics of each segment of the portfolio. The Company’s servicing portfolio consists of the distinct portfolios of government-insured mortgages, conventional mortgages and Housing Finance Agency (“HFA”) mortgages. The servicing portfolios are predominantly comprised of fixed-rate agency loans with limited adjustable-rate or jumbo mortgage loans. The HFA servicing portfolio is comprised of loans originated under state and local housing authority program guidelines which assist purchases by first-time or
low-
to moderate-income homebuyers through a favorable rate subsidy, down payment and/or closing cost assistance on government- and conventional-insured mortgages.
A summary of the Company’s MSRs and related characteristics by portfolio was as follows:
 
  June 30, 2020      December 31, 2019 
(Dollars in Millions) HFA  Government  Conventional (d)  Total      HFA  Government  Conventional (d)  Total 
Servicing portfolio (a)
 $44,216  $33,064  $140,370  $217,650    $44,906  $35,302  $143,310  $223,518 
Fair value
 $375  $327  $1,138  $1,840    $486  $451  $1,609  $2,546 
Value (bps) (b)
  85   99   81   85     108   128   112   114 
Weighted-average servicing fees (bps)
  35   40   29   32     34   39   28   31 
Multiple (value/servicing fees)
  2.45   2.48   2.79   2.66     3.15   3.29   4.00   3.67 
Weighted-average note rate
  4.59%   3.95%   4.00%   4.11%     4.65%   3.99%   4.07%   4.17% 
Weighted-average age (in years)
  3.8   5.2   4.8   4.7     3.7   4.9   4.8   4.6 
Weighted-average expected prepayment (constant prepayment rate)
  16.5%   19.0%   21.7%   20.2%     12.2%   13.7%   12.2%   12.4% 
Weighted-average expected life (in years)
  5.1   4.3   3.7   4.1     6.5   5.7   5.9   6.0 
Weighted-average option adjusted spread (c)
  7.1%   6.7%   5.6%   6.1%       8.4%   7.9%   6.9%   7.3% 
 
(a)
Represents principal balance of mortgages having corresponding MSR asset.
(b)
Calculated as fair value divided by the servicing portfolio.
(c)
Option adjusted spread is the incremental spread added to the risk-free rate to reflect optionality and other risk inherent in the MSRs.
(d)
Represents loans sold primarily to GSEs.
 
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 Note 7
    Preferred Stock
At June 30, 2020 and December 31, 2019, the Company had authority to issue 50 million shares of preferred stock. The number of shares issued and outstanding and the carrying amount of each outstanding series of the Company’s preferred stock were as follows:
 
  June 30, 2020        December 31, 2019 
(Dollars in Millions) Shares
Issued and
Outstanding		   Liquidation
Preference		   Discount   Carrying
Amount		        Shares
Issued and
Outstanding		   Liquidation
Preference		   Discount   Carrying
Amount		 
Series A
  12,510   $1,251   $145   $1,106       12,510   $1,251   $145   $1,106 
Series B
  40,000    1,000    –    1,000       40,000    1,000    –    1,000 
Series F
  44,000    1,100    12    1,088       44,000    1,100    12    1,088 
Series H
  20,000    500    13    487       20,000    500    13    487 
Series I
  30,000    750    5    745       30,000    750    5    745 
Series J
  40,000    1,000    7    993       40,000    1,000    7    993 
Series K
  23,000    575    10    565         23,000    575    10    565 
Total preferred stock (a)
  209,510   $6,176   $192   $5,984         209,510   $6,176   $192   $5,984 
 
(a)
The par value of all shares issued and outstanding at June 30, 2020 and December 31, 2019, was $1.00 per share.
 
 Note 8
 
   Accumulated Other Comprehensive Income (Loss)
Shareholders’ equity is affected by transactions and valuations of asset and liability positions that require adjustments to accumulated other comprehensive income (loss). The reconciliation of the transactions affecting accumulated other comprehensive income (loss) included in shareholders’ equity is as follows:
 
Three Months Ended June 30
(Dollars in Millions)
 Unrealized Gains
(Losses) on
Investment
Securities
Available-For-

Sale		  Unrealized Gains
(Losses) on
Investment
Securities
Transferred From
Available-For-Sale

to
Held-To-

Maturity		  Unrealized Gains
(Losses) on
Derivative Hedges		  Unrealized Gains
(Losses) on
Retirement Plans		  Foreign
Currency
Translation		  Total 
2020
      
Balance at beginning of period
 $2,424  $–  $(233)  $(1,613)  $(75)  $503 
Changes in unrealized gains and losses
  453   –   –   –   –   453 
Foreign currency translation adjustment (a)
  –   –   –   –   1   1 
Reclassification to earnings of realized gains and losses
  (81)   –   (9)   31   –   (59) 
Applicable income taxes
  (95)   –   2   (7)   –   (100) 
Balance at end of period
 $2,701  $–  $(240)  $(1,589)  $(74)  $798 
2019
      
Balance at beginning of period
 $(363)  $13  $51  $(1,402)  $(72)  $(1,773) 
Changes in unrealized gains and losses
  721   –   (135)   –   –   586 
Foreign currency translation adjustment (a)
  –   –   –   –   (8)   (8) 
Reclassification to earnings of realized gains and losses
  (17)   (3)   (6)   22   –   (4) 
Applicable income taxes
  (178)   1   35   (5)   2   (145) 
Balance at end of period
 $163  $11  $(55)  $(1,385)  $(78)  $(1,344) 
 
(a)
Represents the impact of changes in foreign currency exchange rates on the Company’s investment in foreign operations and related hedges.    
 
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Six Months Ended June 30
(Dollars in Millions)
 Unrealized Gains
(Losses) on
Investment
Securities
Available-For-

Sale		  Unrealized Gains
(Losses) on
Investment
Securities
Transferred From
Available-For-Sale

to
Held-To-

Maturity		  Unrealized Gains
(Losses) on
Derivative Hedges		  Unrealized Gains
(Losses) on
Retirement Plans		  Foreign
Currency
Translation		  Total 
2020
      
Balance at beginning of period
 $379  $–  $(51)  $(1,636)  $(65)  $(1,373) 
Changes in unrealized gains and losses
  3,240   –   (257)   –   –   2,983 
Foreign currency translation adjustment (a)
  –   –   –   –   (12)   (12) 
Reclassification to earnings of realized gains and losses
  (131)   –   4   62   –   (65) 
Applicable income taxes
  (787)   –   64   (15)   3   (735) 
Balance at end of period
 $2,701  $–  $(240)  $(1,589)  $(74)  $798 
2019
      
Balance at beginning of period
 $(946)  $14  $112  $(1,418)  $(84)  $(2,322) 
Changes in unrealized gains and losses
  1,506   –   (209)   –   –   1,297 
Foreign currency translation adjustment (a)
  –   –   –   –   8   8 
Reclassification to earnings of realized gains and losses
  (22)   (4)   (14)   44   –   4 
Applicable income taxes
  (375)   1   56   (11)   (2)   (331) 
Balance at end of period
 $163  $11  $(55)  $(1,385)  $(78)  $(1,344) 
 
(a)
Represents the impact of changes in foreign currency exchange rates on the Company’s investment in foreign operations and related hedges.    
Additional detail about the impact to net income for items reclassified out of accumulated other comprehensive income (loss) and into earnings is as follows:
 
  Impact to Net Income  Affected Line Item in the
Consolidated Statement of Income
  Three Months Ended June 30       Six Months Ended June 30 
(Dollars in Millions) 2020  2019       2020  2019 
Unrealized gains (losses) on investment securities
available-for-sale
        
Realized gains (losses) on sale of investment securities
 $81  $17     $131  $22  Securities gains (losses), net
  (20)   (4)        (33)   (6)  Applicable income taxes
  61   13      98   16  
Net-of-tax
Unrealized gains (losses) on investment securities transferred from
        
available-for-sale
to
held-to-maturity
        
Amortization of unrealized gains
  –   3      –   4  Interest income
  –   (1)        –   (1)  Applicable income taxes
  –   2      –   3  
Net-of-tax
Unrealized gains (losses) on derivative hedges
        
Realized gains (losses) on derivative hedges
  9   6      (4)   14  Interest expense
  (2)   (1)        1   (3)  Applicable income taxes
  7   5      (3)   11  
Net-of-tax
Unrealized gains (losses) on retirement plans
        
Actuarial gains (losses) and prior service cost (credit) amortization
  (31)   (22)      (62)   (44)  Other noninterest expense
  7   5        15   11  Applicable income taxes
  (24)   (17)      (47)   (33)  
Net-of-tax
 
Total impact to net income
 $44  $3       $48  $(3)   
 
 Note 9
 
   Earnings Per Share
The components of earnings per share were:    
 
  Three Months Ended
June 30		       Six Months Ended
June 30		 
(Dollars and Shares in Millions, Except Per Share Data)     2020      2019           2020      2019 
Net income attributable to U.S. Bancorp
 $689  $1,821     $1,860  $3,520 
Preferred dividends
  (72)   (72)      (150)   (151) 
Earnings allocated to participating stock awards
  (3)   (8)        (8)   (15) 
Net income applicable to U.S. Bancorp common shareholders
 $614  $1,741       $1,702  $3,354 
Average common shares outstanding
  1,506   1,590      1,512   1,596 
Net effect of the exercise and assumed purchase of stock awards
  1   2        1   3 
Average diluted common shares outstanding
  1,507   1,592        1,513   1,599 
Earnings per common share
 $.41   $1.09     $1.13  $2.10 
Diluted earnings per common share
 $.41   $1.09       $1.12  $2.10 
 
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Options outstanding at June 30, 2020, to purchase 4 million and 2 million common shares for the three months and six months ended June 30, 2020, respectively, and outstanding at June 30, 2019, to purchase 1 million common shares for the three months and six months ended June 30, 2019, were not included in the computation of diluted earnings per share because they were
antidilutive
.
 
 Note 10
 
   Employee Benefits
The components of net periodic benefit cost for the Company’s retirement plans were:    
 
  Three Months Ended June 30       Six Months Ended June 30 
  Pension Plans  Postretirement
Welfare Plan		       Pension Plans  Postretirement
Welfare Plan		 
(Dollars in Millions) 2020  2019  2020  2019       2020  2019  2020  2019 
Service cost
 $59  $48  $–  $–     $118  $96  $–  $– 
Interest cost
  59   62   –   –      117   124   1   1 
Expected return on plan assets
  (100)   (96)   (1)   –      (201)   (191)   (2)   (1) 
Prior service cost (credit) amortization
  –   –   (1)   (1)      –   –   (2)   (2) 
Actuarial loss (gain) amortization
  33   25   (1)   (2)        67   49   (3)   (3) 
Net periodic benefit cost (a)
 $51  $39  $(3)  $(3)       $101  $78  $(6)  $(5) 
 
(a)
Service cost is included in employee benefits expense on the Consolidated Statement of Income. All other components are included in other noninterest expense on the Consolidated Statement of Income.
 
 Note 11
 
   Income Taxes
The components of income tax expense were:
 
  Three Months Ended
June 30		       Six Months Ended
June 30		 
(Dollars in Millions) 2020  2019       2020  2019 
Federal
       
Current
 $704  $368     $1,019  $588 
Deferred
  (659)   (31)        (765)   85 
Federal income tax
  45   337      254   673 
State
       
Current
  136   110      206   140 
Deferred
  (117)   2        (136)   14 
 
State income tax
  19   112        70   154 
Total income tax provision
 $64  $449       $324  $827 
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
June 30		       Six Months Ended
June 30		 
(Dollars in Millions) 2020  2019       2020  2019 
Tax at statutory rate
 $159  $478     $461  $916 
State income tax, at statutory rates, net of federal tax benefit
  36   94      95   178 
Tax effect of
       
Tax credits and benefits, net of related expenses
  (96)   (107)      (198)   (210) 
Exam resolutions
  –   –      –   (49) 
Tax-exempt
income
  (29)   (31)      (58)   (63) 
Other items
  (6)   15        24   55 
Applicable income taxes
 $64  $449       $324  $827 
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 June 30, 2020, federal tax examinations for all years ending through December 31, 2010, and years ending December 31, 2013, and December 31, 2014 are completed and resolved. The Company’s tax returns for the years ended December 31, 2011, 2012, 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 $900 million at June 30, 2020 and $382 million at December 31, 2019.
 
U.S. Bancorp  
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 Note 12
 
   Derivative Instruments
In the ordinary course of business, the Company enters into derivative transactions to manage various risks and to accommodate the business requirements of its customers. The Company recognizes all derivatives on the Consolidated Balance Sheet at fair value in other assets or in other liabilities. On the date the Company enters into a derivative contract, the derivative is designated as either a fair value hedge, cash flow hedge, net investment hedge, or a designation is not made as it is a customer-related transaction, an economic hedge for asset/liability risk management purposes or another stand-alone derivative created through the Company’s operations (“free-standing derivative”). When a derivative is designated as a fair value, cash flow or net investment hedge, the Company performs an assessment, at inception and, at a minimum, quarterly thereafter, to determine the effectiveness of the derivative in offsetting changes in the value or cash flows of the hedged item(s).
Fair Value Hedges
These derivatives are interest rate swaps the Company uses to hedge the change in fair value related to interest rate changes of its underlying fixed-rate debt. Changes in the fair value of derivatives designated as fair value hedges, and changes in the fair value of the hedged items, are recorded in earnings.
Cash Flow Hedges
These derivatives are interest rate swaps the Company uses to hedge the forecasted cash flows from its underlying variable-rate debt. Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) until the cash flows of the hedged items are realized. If a derivative designated as a cash flow hedge is terminated or ceases to be highly effective, the gain or loss in other comprehensive income (loss) is amortized to earnings over the period the forecasted hedged transactions impact earnings. If a hedged forecasted transaction is no longer probable, hedge accounting is ceased and any gain or loss included in other comprehensive income (loss) is reported in earnings immediately, unless the forecasted transaction is at least reasonably possible of occurring, whereby the amounts remain within other comprehensive income (loss). At June 30, 2020, the Company had $240 million
(net-of-tax)
of realized and unrealized losses on derivatives classified as cash flow hedges recorded in other comprehensive income (loss), compared with $51 million
(net-of-tax)
of realized and unrealized losses at December 31, 2019. The estimated amount to be reclassified from other comprehensive income (loss) into earnings during the remainder of 2020 and the next 12 months are losses of $18 million
(net-of-tax)
and $44 million
(net-of-tax),
respectively. All cash flow hedges were highly effective for the three months ended June 30, 2020.
Net Investment Hedges
 The Company uses forward commitments to sell specified amounts of certain foreign currencies, and
non-derivative
debt instruments, to hedge the volatility of its net investment in foreign operations driven by fluctuations in foreign currency exchange rates. The carrying amount of
non-derivative
debt instruments designated as net investment hedges was $1.3 billion at June 30, 2020 and December 31, 2019.
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 14 for further information on these swap agreements.
 
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  U.S. Bancorp
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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
 
June 30, 2020
              
Fair value hedges
              
Interest rate contracts
              
Receive fixed/pay floating swaps
 $8,400   $–    2.27      $–   $–    – 
Cash flow hedges
              
Interest rate contracts
              
Pay fixed/receive floating swaps
  –    –    –       3,250    7    5.09 
Net investment hedges
              
Foreign exchange forward contracts
  231    1    .05       –    –    – 
Other economic hedges
              
Interest rate contracts
              
Futures and forwards
              
Buy
  17,443    153    .32       4,156    29    .07 
Sell
  10,813    47    .04       27,043    143    .06 
Options
              
Purchased
  2,530    50    5.41       –    –    – 
Written
  7,219    237    .38       5,800    178    3.60 
Receive fixed/pay floating swaps
  12,632    –    7.28       610    –    20.15 
Pay fixed/receive floating swaps
  1,474    –    6.00       8,277    –    5.12 
Foreign exchange forward contracts
  317    2    .08       248    2    .37 
Equity contracts
  49    1    .94       87    1    .90 
Other (a)
  470    4    .02       2,258    144    1.59 
Total
 $61,578   $495        $51,729   $504   
December 31, 2019
              
Fair value hedges
              
Interest rate contracts
              
Receive fixed/pay floating swaps
 $18,300   $–    3.89      $4,900   $–    3.49 
Cash flow hedges
              
Interest rate contracts
              
Pay fixed/receive floating swaps
  1,532    –    6.06       7,150    10    2.11 
Net investment hedges
              
Foreign exchange forward contracts
  –    –    –       287    3    .04 
Other economic hedges
              
Interest rate contracts
              
Futures and forwards
              
Buy
  5,409    17    .08       5,477    11    .07 
Sell
  16,333    13    .81       8,113    25    .03 
Options
              
Purchased
  10,180    79    2.97       –    –    – 
Written
  1,270    30    .08       4,238    81    2.07 
Receive fixed/pay floating swaps
  4,408    –    5.99       5,316    –    13.04 
Pay fixed/receive floating swaps
  1,259    –    5.67       4,497    –    6.03 
Foreign exchange forward contracts
  113    1    .05       467    6    .04 
Equity contracts
  128    2    .45       20    –    1.06 
Other (a)
  34    –    .01       1,823    165    2.45 
Total
 $58,966   $142             $42,288   $301      
 
(a)
Includes derivative liability swap agreements related to the sale of a portion of the Company’s Class B common and preferred shares of Visa Inc. The Visa swap agreements had a total notional value, fair value and weighted-average remaining maturity of $
1.8
billion, $
140
million and 2.00 years at June 30, 2020, respectively, compared to $1.8 billion, $165 million and 2.50 years at December 31, 2019, respectively. In addition, includes short-term underwriting purchase and sale commitments with total asset and liability notional values of $470
m
illion at June 30, 2020, and $34 million at December 31, 2019.
 
U.S. Bancorp  
59
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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		 
June 30, 2020
              
Interest rate contracts
              
Receive fixed/pay floating swaps
 $154,746   $4,788    5.06      $949   $11    20.16 
Pay fixed/receive floating swaps
  1,115    –    18.40       148,543    1,501    4.88 
Other (a)
  8,264    2    3.65       8,538    5    3.56 
Options
              
Purchased
  61,304    113    1.40       3,878    210    1.79 
Written
  2,806    213    2.03       57,736    82    1.25 
Futures
              
Buy
  2,439    –    .35       –    –    – 
Sell
  –    –    –       6,496    –    1.00 
Foreign exchange rate contracts
              
Forwards, spots and swaps
  33,851    976    1.19       34,087    945    1.29 
Options
              
Purchased
  1,021    32    .61       –    –    – 
Written
  –    –    –       1,021    32    .61 
Credit contracts
  3,648    7    3.39       7,514    15    3.86 
Total
 $269,194   $6,131        $268,762   $2,801   
December 31, 2019
              
Interest rate contracts
              
Receive fixed/pay floating swaps
 $108,560   $1,865    4.83      $31,544   $88    3.83 
Pay fixed/receive floating swaps
  28,150    30    3.83       101,078    753    4.55 
Other (a)
  6,895    1    3.45       6,218    2    2.98 
Options
              
Purchased
  46,406    43    2.06       12,804    47    1.25 
Written
  6,901    49    1.93       49,741    41    1.82 
Futures
              
Buy
  894    –    .21       –    –    – 
Sell
  3,874    1    1.18       1,995    –    1.04 
Foreign exchange rate contracts
              
Forwards, spots and swaps
  36,350    748    .97       36,671    729    1.07 
Options
              
Purchased
  1,354    17    .54       –    –    – 
Written
  –    –    –       1,354    17    .54 
Credit contracts
  2,879    1    3.28       7,488    5    4.33 
Total
 $242,263   $2,755             $248,893   $1,682      
 
(a)
Primarily represents floating rate interest rate swaps that pay based on differentials between specified interest rate indexes.
The table below shows the effective portion of the gains (losses) recognized in other comprehensive income (loss) and the gains (losses) reclassified from other comprehensive income (loss) into earnings
(net-of-tax):
 
  Three Months Ended June 30        Six Months Ended June 30 
  
Gains (Losses)
Recognized in
Other
Comprehensive
Income
(Loss)
  Gains (Losses)
Reclassified from
Other
Comprehensive
Income
(Loss) into Earnings		        
Gains (Losses)
Recognized in
Other
Comprehensive
Income
(Loss)
  Gains (Losses)
Reclassified from
Other
Comprehensive
Income
(Loss) into Earnings		 
(Dollars in Millions) 2020  2019  2020   2019        2020  2019  2020   2019 
Asset and Liability Management Positions
              
Cash flow hedges
              
Interest rate contracts
 $–  $(101)  $7   $5      $(192)  $(156)  $(3)   $11 
Net investment hedges
              
Foreign exchange forward contracts
  (6)   (4)   –    –       10   (2)   –    – 
Non-derivative
debt instruments
  (21)   (11)   –    –         4   5   –    – 
 
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 included in interest expense on the Consolidated Statement of Income:
 
  Three Months Ended
June 30		       Six Months Ended
June 30		 
(Dollars in Millions)         2020  2019       2020  2019 
Total amount of interest expense presented in the Consolidated Statement of Income
 $472  $1,146     $1,365  $2,238 
 
Asset and Liability Management Positions
       
Fair value hedges
       
Interest rate contract derivatives
  841   (30)      (194)   (51) 
Hedged items
  (834)   30      194   51 
Cash Flow hedges
       
Interest rate contract derivatives
  (9)   (6)        4   (14) 
 
Note:
The Company does not exclude components from effectiveness testing for fair value and cash flow hedges. The Company reclassified losses of $6 million into earnings during the three and six months ended June 30, 2020 as a result of the discontinuance of cash flow hedges. The Company did not reclassify gains or losses into earnings as a result of the discontinuance of cash flow hedges during the three and six months ended June 30, 2019.
The table below shows cumulative hedging adjustments and the carrying amount of assets and liabilities designated in fair value hedges:
 
  Carrying Amount of the Hedged Assets
and
Liabilities		        Cumulative Hedging Adjustment (a) 
(Dollars in Millions) June 30, 2020   December 31, 2019        June 30, 2020   December 31, 2019 
Line Item in the Consolidated Balance Sheet
          
Long-term Debt
 $8,625   $23,195        $1,070   $35 
 
(a)
The cumulative hedging adjustment related to discontinued hedging relationships was $833 million and $(7) million at June 30, 2020 and December 31, 2019, respectively.
The table below shows the gains (losses) recognized in earnings for other economic hedges and the customer-related positions:
 
   Location of Gains (Losses)
Recognized in Earnings		   
Three Months Ended
June 30
       Six Months Ended
June 30		 
(Dollars in Millions)  2020  2019       2020  2019 
Asset and Liability Management Positions
          
Other economic hedges
          
Interest rate contracts
          
Futures and forwards
   Mortgage banking revenue/
other noninterest income
 		  $82  $(23)     $7  $(40) 
Purchased and written options
   Mortgage banking revenue    465   126      745   193 
Swaps
   Mortgage banking revenue    46   187      775   298 
Foreign exchange forward contracts
   Other noninterest income    (6)   (9)      11   (15) 
Equity contracts
   Compensation expense    1   (1)      (3)   (2) 
Other
   Other noninterest income    –   (1)      (1)   – 
Customer-Related Positions
          
Interest rate contracts
          
Swaps
   Commercial products revenue    66   15      44   35 
Purchased and written options
   Commercial products revenue    –   5      17   9 
Futures
   Commercial products revenue    –   (3)      (18)   (4) 
Foreign exchange rate contracts
          
Forwards, spots and swaps
   Commercial products revenue    17   21      34   39 
Credit contracts
   Commercial products revenue    (23)   (5)        (5)   (8) 
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.
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
 
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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 June 30, 2020, was $1.4 billion. At June 30, 2020, the Company had $1.1 billion of cash posted as collateral against this net liability position.
 
 
Note 13
 Netting Arrangements for Certain Financial Instruments and Securities Financing Activities
    
The Company’s derivative portfolio consists of bilateral
over-the-counter
trades, certain interest rate derivatives and credit contracts required to be centrally cleared through clearinghouses per current regulations, and exchange-traded positions which may include U.S. Treasury and Eurodollar futures or options on U.S. Treasury futures. Of the Company’s $651.3 billion total notional amount of derivative positions at June 30, 2020, $317.4 billion related to bilateral
over-the-counter
trades, $318.2 billion related to those centrally cleared through clearinghouses and $15.7 billion related to those that were exchange-traded. The Company’s derivative contracts typically include offsetting rights (referred to as netting arrangements), and depending on expected volume, credit risk, and counterparty preference, collateral maintenance may be required. For all derivatives under collateral support arrangements, fair value is determined daily and, depending on the collateral maintenance requirements, the Company and a counterparty may receive or deliver collateral, based upon the net fair value of all derivative positions between the Company and the counterparty. Collateral is typically cash, but securities may be allowed under collateral arrangements with certain counterparties. Receivables and payables related to cash collateral are included in other assets and other liabilities on the Consolidated Balance Sheet, along with the related derivative asset and liability fair values. Any securities pledged to counterparties as collateral remain on the Consolidated Balance Sheet. Securities received from counterparties as collateral are not recognized on the Consolidated Balance Sheet, unless the counterparty defaults. In general, securities used as collateral can be sold, repledged or otherwise used by the party in possession. No restrictions exist on the use of cash collateral by either party. Refer to Note 12 for further discussion of the Company’s derivatives, including collateral arrangements.
As part of the Company’s treasury and broker-dealer operations, the Company executes transactions that are treated as securities sold under agreements to repurchase or securities purchased under agreements to resell, both of which are accounted for as collateralized financings. Securities sold under agreements to repurchase include repurchase agreements and securities loaned transactions. Securities purchased under agreements to resell include reverse repurchase agreements and securities borrowed transactions. For securities sold under agreements to repurchase, the Company records a liability for the cash received, which is included in short-term borrowings on the Consolidated Balance Sheet. For securities purchased under agreements to resell, the Company records a receivable for the cash paid, which is included in other assets on the Consolidated Balance Sheet.
Securities transferred to counterparties under repurchase agreements and securities loaned transactions continue to be recognized on the Consolidated Balance Sheet, are measured at fair value, and are included in investment securities or other assets. Securities received from counterparties under reverse repurchase agreements and securities borrowed transactions are not recognized on the Consolidated Balance Sheet unless the counterparty defaults. The securities transferred under repurchase and reverse repurchase transactions typically are U.S. Treasury and agency securities, residential agency mortgage-backed securities or corporate debt securities. The securities loaned or borrowed typically are corporate debt securities traded by the Company’s broker-dealer subsidiary. In general, the securities transferred can be sold, repledged or otherwise used by the party in possession. No restrictions exist on the use of cash collateral by either party. Repurchase/reverse repurchase and securities loaned/borrowed transactions expose the Company to counterparty risk. The Company manages this risk by performing assessments, independent of business line managers, and establishing concentration limits on each counterparty. Additionally, these transactions include collateral arrangements that require the fair values of the underlying securities to be determined daily, resulting in cash being obtained or refunded to counterparties to maintain specified collateral levels.
 
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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 
June 30, 2020
         
Repurchase agreements
         
U.S. Treasury and agencies
 
$
236
 
  
$
–
 
  
$
–
 
  
$
–
 
  
$
236
 
Residential agency mortgage-backed securities
 
 
741
 
  
 
265
 
  
 
–
 
  
 
–
 
  
 
1,006
 
Corporate debt securities
 
 
628
 
  
 
–
 
  
 
–
 
  
 
–
 
  
 
628
 
Total repurchase agreements
 
 
1,605
 
  
 
265
 
  
 
–
 
  
 
–
 
  
 
1,870
 
Securities loaned
         
Corporate debt securities
 
 
321
 
  
 
–
 
  
 
–
 
  
 
–
 
  
 
321
 
Total securities loaned
 
 
321
 
  
 
–
 
  
 
–
 
  
 
–
 
  
 
321
 
Gross amount of recognized liabilities
 
$
1,926
 
  
$
265
 
  
$
–
 
  
$
–
 
  
$
2,191
 
December 31, 2019
         
Repurchase agreements
         
U.S. Treasury and agencies
 
$
289
 
  
$
–
 
  
$
–
 
  
$
–
 
  
$
289
 
Residential agency mortgage-backed securities
 
 
266
 
  
 
–
 
  
 
–
 
  
 
–
 
  
 
266
 
Corporate debt securities
 
 
610
 
  
 
–
 
  
 
–
 
  
 
–
 
  
 
610
 
Total repurchase agreements
 
 
1,165
 
  
 
–
 
  
 
–
 
  
 
–
 
  
 
1,165
 
Securities loaned
         
Corporate debt securities
 
 
50
 
  
 
–
 
  
 
–
 
  
 
–
 
  
 
50
 
Total securities loaned
 
 
50
 
  
 
–
 
  
 
–
 
  
 
–
 
  
 
50
 
Gross amount of recognized liabilities
 
$
1,215
 
  
$
–
 
  
$
–
 
  
$
–
 
  
$
1,215
 
The Company executes its derivative, repurchase/reverse repurchase and securities loaned/borrowed transactions under the respective industry standard agreements. These agreements include master netting arrangements that allow for multiple contracts executed with the same counterparty to be viewed as a single arrangement. This allows for net settlement of a single amount on a daily basis. In the event of default, the master netting arrangement provides for
close-out
netting, which allows all of these positions with the defaulting counterparty to be terminated and net settled with a single payment amount.
The Company has elected to offset the assets and liabilities under netting arrangements for the balance sheet presentation of the majority of its derivative counterparties. The netting occurs at the counterparty level, and includes all assets and liabilities related to the derivative contracts, including those associated with cash collateral received or delivered. The Company has not elected to offset the assets and liabilities under netting arrangements for the balance sheet presentation of repurchase/reverse repurchase and securities loaned/borrowed transactions.
The following tables provide information on the Company’s netting adjustments, and items not offset on the Consolidated Balance Sheet but available for offset in the event of default:
 
(Dollars in Millions) 
Gross
Recognized
Assets
   
Gross Amounts
Offset on the
Consolidated
Balance Sheet (a)
  
Net Amounts
Presented on the
Consolidated
Balance Sheet
   Gross Amounts Not Offset on the
Consolidated Balance Sheet		  
Net Amount
 
  Financial
Instruments (b)		  Collateral
Received (c)		 
June 30, 2020
        
Derivative assets (d)
 
$
6,282
 
  
$
(2,277
) 
 
$
4,005
 
  
$
(85
) 
 
$
(281
) 
 
$
3,639
 
Reverse repurchase agreements
 
 
394
 
  
 
–
 
 
 
394
 
  
 
(205
) 
 
 
(189
) 
 
 
–
 
Securities borrowed
 
 
1,572
 
  
 
–
 
 
 
1,572
 
  
 
–
 
 
 
(1,531
) 
 
 
41
 
Total
 
$
8,248
 
  
$
(2,277
) 
 
$
5,971
 
  
$
(290
) 
 
$
(2,001
) 
 
$
3,680
 
December 31, 2019
        
Derivative assets (d)
 
$
2,857
 
  
$
(982
) 
 
$
1,875
 
  
$
(80
) 
 
$
(116
) 
 
$
1,679
 
Reverse repurchase agreements
 
 
1,021
 
  
 
–
 
 
 
1,021
 
  
 
(152
) 
 
 
(869
) 
 
 
–
 
Securities borrowed
 
 
1,624
 
  
 
–
 
 
 
1,624
 
  
 
–
 
 
 
(1,569
) 
 
 
55
 
Total
 
$
5,502
 
  
$
(982
) 
 
$
4,520
 
  
$
(232
) 
 
$
(2,554
) 
 
$
1,734
 
 
(a)
Includes $1.4 billion and $429 million of cash collateral related payables that were netted against derivative assets at June 30, 2020 and December 31, 2019, respectively.
(b)
For derivative assets this includes any derivative liability fair values that could be offset in the event of counterparty default; for reverse repurchase agreements this includes any repurchase agreement payables that could be offset in the event of counterparty default; for securities borrowed this includes any securities loaned payables that could be offset in the event of counterparty default.
(c)
Includes the fair value of securities received by the Company from the counterparty. These securities are not included on the Consolidated Balance Sheet unless the counterparty defaults.
(d)
Excludes $344 million and $40 million at June 30, 2020 and December 31, 2019, 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)		 
June 30, 2020
        
Derivative liabilities (d)
 
$
3,161
 
  
$
(2,061
) 
 
$
1,100
 
  
$
(85
) 
 
$
–
 
 
$
1,015
 
Repurchase agreements
 
 
1,870
 
  
 
–
 
 
 
1,870
 
  
 
(205
) 
 
 
(1,665
) 
 
 
–
 
Securities loaned
 
 
321
 
  
 
–
 
 
 
321
 
  
 
–
 
 
 
(317
) 
 
 
4
 
Total
 
$
5,352
 
  
$
(2,061
) 
 
$
3,291
 
  
$
(290
) 
 
$
(1,982
) 
 
$
1,019
 
December 31, 2019
        
Derivative liabilities (d)
 
$
1,816
 
  
$
(1,067
) 
 
$
749
 
  
$
(80
) 
 
$
–
 
 
$
669
 
Repurchase agreements
 
 
1,165
 
  
 
–
 
 
 
1,165
 
  
 
(152
) 
 
 
(1,012
) 
 
 
1
 
Securities loaned
 
 
50
 
  
 
–
 
 
 
50
 
  
 
–
 
 
 
(49
) 
 
 
1
 
Total
 
$
3,031
 
  
$
(1,067
) 
 
$
1,964
 
  
$
(232
) 
 
$
(1,061
) 
 
$
671
 
 
(a)
Includes $1.1 billion and $514 million of cash collateral related receivables that were netted against derivative liabilities at June 30, 2020 and December 31, 2019, respectively.
(b)
For derivative liabilities this includes any derivative asset fair values that could be offset in the event of counterparty default; for repurchase agreements this includes any reverse repurchase agreement receivables that could be offset in the event of counterparty default; for securities loaned this includes any securities borrowed receivables that could be offset in the event of counterparty default.
(c)
Includes the fair value of securities pledged by the Company to the counterparty. These securities are included on the Consolidated Balance Sheet unless the Company defaults.
(d)
Excludes $144 million and $167 million at June 30, 2020 and December 31, 2019, respectively, of derivative liabilities not subject to netting arrangements.
 
 Note 14
    Fair Values of Assets and Liabilities
The Company uses fair value measurements for the initial recording of certain assets and liabilities, periodic remeasurement of certain assets and liabilities, and disclosures. Derivatives, trading and
available-for-sale
investment securities, MSRs and substantially all MLHFS are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of
lower-of-cost-or-fair
value accounting or impairment write-downs of individual assets.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value measurement reflects all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance.
The Company groups its assets and liabilities measured at fair value into a three-level hierarchy for valuation techniques used to measure financial assets and financial liabilities at fair value. This hierarchy is based on whether the valuation inputs are observable or unobservable. These levels are:
 • 
Level 1 — Quoted prices in active markets for identical assets or liabilities. Level 1 includes U.S. Treasury securities, as well as exchange-traded instruments.
 • 
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 includes debt securities that are traded less frequently than exchange-traded instruments and which are typically valued using third party pricing services; derivative contracts and other assets and liabilities, including securities, whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data; and MLHFS whose values are determined using quoted prices for similar assets or pricing models with inputs that are observable in the market or can be corroborated by observable market data.
 • 
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category includes MSRs and certain derivative contracts.
Valuation Methodologies
The valuation methodologies used by the Company to measure financial assets and liabilities at fair value are described below. In addition, the following section includes an indication of the level of the fair value hierarchy in which the
 
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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 six months ended June 30, 2020 and 2019, there were no significant changes to the valuation techniques used by the Company to measure fair value.
Available-For-Sale
Investment Securities
When quoted market prices for identical securities are available in an active market, these prices are used to determine fair value and these securities are classified within Level 1 of the fair value hierarchy. Level 1 investment securities include U.S. Treasury and exchange-traded securities.
For other securities, quoted market prices may not be readily available for the specific securities. When possible, the Company determines fair value based on market observable information, including quoted market prices for similar securities, inactive transaction prices, and broker quotes. These securities are classified within Level 2 of the fair value hierarchy. Level 2 valuations are generally provided by a third-party pricing service. Level 2 investment securities are predominantly agency mortgage-backed securities, certain other asset-backed securities, obligations of state and political subdivisions and agency debt securities.
Mortgage Loans Held For Sale
 MLHFS measured at fair value, for which an active secondary market and readily available market prices exist, are initially valued at the transaction price and are subsequently valued by comparison to instruments with similar collateral and risk profiles. MLHFS are classified within Level 2. Included in mortgage banking revenue was a net gain of $81 million and $25 million for the three months ended June 30, 2020 and 2019, respectively, and a net gain of $174 million and $43 million for the six months ended June 30, 2020 and 2019, respectively, from the changes to fair value of these MLHFS under fair value option accounting guidance. Changes in fair value due to instrument specific credit risk were immaterial. Interest income for MLHFS is measured based on contractual interest rates and reported as interest income on the Consolidated Statement of Income. Electing to measure MLHFS at fair value reduces certain timing differences and better matches changes in fair value of these assets with changes in the value of the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting.
Mortgage Servicing Rights
 MSRs are valued using a discounted cash flow methodology, and are classified within Level 3. The Company determines fair value of the MSRs by projecting future cash flows for different interest rate scenarios using prepayment rates and other assumptions, and discounts these cash flows using a risk adjusted rate based on option adjusted spread levels. There is minimal observable market activity for MSRs on comparable portfolios and, therefore, the determination of fair value requires significant management judgment. Refer to Note 6 for further information on MSR valuation assumptions.
Derivatives
The majority of derivatives held by the Company are executed
over-the-counter
or centrally cleared through clearinghouses and are valued using market standard cash flow valuation techniques. The models incorporate inputs, depending on the type of derivative, including interest rate curves, foreign exchange rates and volatility. All derivative values incorporate an assessment of the risk of counterparty nonperformance, measured based on the Company’s evaluation of credit risk including external assessments of credit risk. The Company monitors and manages its nonperformance risk by considering its ability to net derivative positions under master netting arrangements, as well as collateral received or provided under collateral arrangements. Accordingly, the Company has elected to measure the fair value of derivatives, at a counterparty level, on a net basis. The majority of the derivatives are classified within Level 2 of the fair value hierarchy, as the significant inputs to the models, including nonperformance risk, are observable. However, certain derivative transactions are with counterparties where risk of nonperformance cannot be observed in the market and, therefore, the credit valuation adjustments result in these derivatives being classified within Level 3 of the fair value hierarchy.
The Company also has other derivative contracts that are created through its operations, including commitments to purchase and originate mortgage loans and swap agreements executed in conjunction with the sale of a portion of its Class B common and preferred shares of Visa Inc. (the “Visa swaps”). The mortgage loan commitments are valued by pricing models that include market observable and unobservable inputs, which result in the commitments being classified within Level 3 of the fair value hierarchy. The unobservable inputs include assumptions about the percentage of commitments that actually become a closed loan and the MSR value that is inherent in the underlying loan value. The Visa swaps require payments by either the Company or the purchaser of the Visa Inc. Class B common and preferred shares when there are changes in the conversion rate of the Visa Inc. Class B common and preferred shares to Visa Inc. Class A common and preferred shares, respectively, as well as quarterly payments to the purchaser based on specified terms of the agreements. Management reviews and updates the Visa swaps fair value in conjunction with its
 
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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 15 for further information on the Visa Inc. restructuring and related card association litigation.
Significant Unobservable Inputs of Level 3 Assets and Liabilities
The following section provides information to facilitate an understanding of the uncertainty in the fair value measurements for the Company’s Level 3 assets and liabilities recorded at fair value on the Consolidated Balance Sheet. This section includes a description of the significant inputs used by the Company and a description of any interrelationships between these inputs. The discussion below excludes nonrecurring fair value measurements of collateral value used for impairment measures for loans and OREO. These valuations utilize third-party appraisal or broker price opinions, and are classified as Level 3 due to the significant judgment involved.
Mortgage Servicing Rights
The significant unobservable inputs used in the fair value measurement of the Company’s MSRs are expected prepayments and the option adjusted spread that is added to the risk-free rate to discount projected cash flows. Significant increases in either of these inputs in isolation would have resulted in a significantly lower fair value measurement. Significant decreases in either of these inputs in isolation would have resulted in a significantly higher fair value measurement. There is no direct interrelationship between prepayments and option adjusted spread. Prepayment rates generally move in the opposite direction of market interest rates. Option adjusted spread is generally impacted by changes in market return requirements.
The following table shows the significant valuation assumption ranges for MSRs at June 30, 2020:
 
   Minimum  Maximum  Weighted
Average (a)		 
Expected prepayment
  15%   25%   20% 
Option adjusted spread
  5   7   6 
 
(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 June 30, 2020:
 
   Minimum  Maximum  Weighted
Average (a)		 
Expected loan close rate
  10%   100%   75% 
Inherent MSR value (basis points per loan)
  36   171   106 
 
(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 June 30, 2020, 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, 90 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, 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 
June 30, 2020
        
Available-for-sale
securities
        
U.S. Treasury and agencies
 $18,068   $1,910   $–   $–  $19,978 
Mortgage-backed securities
        
Residential agency
  –    96,502    –    –   96,502 
Commercial agency
  –    3,263    –    –   3,263 
Asset-backed securities
        
Collateralized debt obligations/Collateralized loan obligations
  –    –    1    –   1 
Other
  –    361    6    –   367 
Obligations of state and political subdivisions
  –    7,995    1    –   7,996 
Obligations of foreign governments
  –    9    –    –   9 
Corporate debt securities
  –    4    –    –   4 
Total
available-for-sale
  18,068    110,044    8    –   128,120 
Mortgage loans held for sale
  –    8,084    –    –   8,084 
Mortgage servicing rights
  –    –    1,840    –   1,840 
Derivative assets
  –    3,303    3,323    (2,277)   4,349 
Other assets
  209    1,682    –    –   1,891 
Total
 $18,277   $123,113   $5,171   $(2,277)  $144,284 
Derivative liabilities
 $1   $2,822   $482   $(2,061)  $1,244 
Short-term borrowings and other liabilities (a)
  170    1,590    –    –   1,760 
Total
 $171   $4,412   $482   $(2,061)  $3,004 
December 31, 2019
        
Available-for-sale
securities
        
U.S. Treasury and agencies
 $18,986   $853   $–   $–  $19,839 
Mortgage-backed securities
        
Residential agency
  –    94,111    –    –   94,111 
Commercial agency
  –    1,453    –    –   1,453 
Asset-backed securities
        
Collateralized debt obligations/Collateralized loan obligations
  –    –    1    –   1 
Other
  –    375    7    –   382 
Obligations of state and political subdivisions
  –    6,813    1    –   6,814 
Obligations of foreign governments
  –    9    –    –   9 
Corporate debt securities
  –    4    –    –   4 
Total
available-for-sale
  18,986    103,618    9    –   122,613 
Mortgage loans held for sale
  –    5,533    –    –   5,533 
Mortgage servicing rights
  –    –    2,546    –   2,546 
Derivative assets
  9    1,707    1,181    (982)   1,915 
Other assets
  312    1,563    –    –   1,875 
Total
 $19,307   $112,421   $3,736   $(982)  $134,482 
Derivative liabilities
 $–   $1,612   $371   $(1,067)  $916 
Short-term borrowings and other liabilities (a)
  50    1,578    –    –   1,628 
Total
 $50   $3,190   $371   $(1,067)  $2,544 
 
Note:
Excluded from the table above are equity investments without readily determinable fair values. The Company has elected to carry these investments at historical cost, adjusted for impairment and any changes resulting from observable price changes for identical or similar investments of the issuer. The aggregate carrying amount of these equity investments was $89 million and $91 million at June 30, 2020 and December 31, 2019 respectively. The Company has not recorded impairments or adjustments for observable price changes on these equity investments during the first six months of 2020 and 2019, or on a cumulative basis.
(a)
Primarily represents the Company’s obligation on securities sold short required to be accounted for at fair value per applicable accounting guidance.
 
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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 June 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  Transfers
into
Level 3		  End
of Period
Balance		  Net Change
in Unrealized
Gains (Losses)
Relating to
Assets and
Liabilities
Held at End
of Period		 
2020
           
Available-for-sale
securities
           
Asset-backed securities
           
Collateralized debt obligations/Collateralized loan obligations
 $2  $–  $(1)  $–  $–  $–  $–  $–  $–  $1  $(1) 
Other
  6   –   1   –   –   (1)   –   –   –   6   – 
Obligations of state and political subdivisions
  2   –   (1)   –   –   –   –   –   –   1   (1) 
Total
available-for-sale
  10   –   (1)   –   –   (1)   –   –   –   8   (2) 
Mortgage servicing rights
  1,887   (241) (a)   –   3   1   –   190 (c)   –   –   1,840   (241) (a) 
Net derivative assets and liabilities
  2,496   732  (b)   –   91   (1)   –   –   (477)   –   2,841   640  (d) 
2019
           
Mortgage servicing rights
 $2,656  $(331) (a)  $–  $6  $–  $–  $127 (c)  $–  $–  $2,458  $(331) (a) 
Net derivative assets and liabilities
  455   568  (e)   –   53   (1)   –   –   (30)   –   1,045   662  (f) 
 
(a)
Included in mortgage banking revenue.
(b)
Approximately $622  million and $110 million included in mortgage banking revenue and commercial products revenue, respectively.
(c)
Represents MSRs capitalized during the period.
(d)
Approximately $334  million and $306 million included in mortgage banking revenue and commercial products revenue, respectively.
(e)
Approximately $136 million, $433 million and $(1) million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.
(f)
Approximately $51 million, $612 million and $(1) 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 six months ended June 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  Transfers
into
Level 3		  End
of Period
Balance		  Net Change
in Unrealized
Gains (Losses)
Relating to
Assets and
Liabilities
Held at End
of Period		 
2020
           
Available-for-sale
securities
           
Asset-backed securities
           
Collateralized debt obligations/Collateralized loan obligations
 $1  $–  $–  $–  $–  $–  $–  $–  $–  $1  $– 
Other
  7   –   –   –   –   (1)   –   –   –   6   – 
Obligations of state and political subdivisions
  1   –   –   –   –   –   –   –   –   1   – 
Total
available-for-sale
  9   –   –   –   –   (1)   –   –   –   8   – 
Mortgage servicing rights
  2,546   (1,107) (a)   –   8   2   –   391 (c)   –   –   1,840   (1,107) (a) 
Net derivative assets and liabilities
  810   2,474  (b)   –   95   (1)   –   –   (537)   –   2,841   2,066  (d) 
2019
           
Mortgage servicing rights
 $2,791  $(545) (a)  $–  $7  $–  $–  $205 (c)  $–  $–  $2,458  $(545) (a) 
Net derivative assets and liabilities
  80   931  (e)   –   54   (8)   –   –   (12)   –   1,045   1,019  (f) 
 
(a)
Included in mortgage banking revenue.
(b)
Approximately $979 million, $1.5 billion 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 $334 million, $1.7 billion and $(1) million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.
(e)
Approximately $219 million and $712 million included in mortgage banking revenue and commercial products revenue, respectively.
(f)
Approximately $52  million and $967 million included in mortgage banking revenue and commercial products revenue, 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:
 
  June 30, 2020        December 31, 2019 
(Dollars in Millions) Level 1   Level 2   Level 3   Total        Level 1   Level 2   Level 3   Total 
Loans (a)
 $–   $–   $122   $122      $–   $–   $136   $136 
 
Other assets (b)
  –    –    18    18         –    –    46    46 
 
(a)
Represents the carrying value of loans for which adjustments were based on the fair value of the collateral, excluding loans fully
charged-off.
(b)
Primarily represents the fair value of foreclosed properties that were measured at fair value based on an appraisal or broker price opinion of the collateral subsequent to their initial acquisition.
The following table summarizes losses recognized related to nonrecurring fair value measurements of individual assets or portfolios:
 
  Three Months Ended
June 30		   Six Months Ended
June 30		 
(Dollars in Millions) 2020   2019        2020   2019 
Loans (a)
 $55   $29      $60   $73 
 
Other assets (b)
  3    3         6    6 
 
(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:
 
  June 30, 2020        December 31, 2019 
(Dollars in Millions) Fair
Value
Carrying
Amount		   Aggregate
Unpaid
Principal		   Carrying
Amount Over
(Under) Unpaid
Principal		        Fair
Value
Carrying
Amount		   Aggregate
Unpaid
Principal		   Carrying
Amount Over
(Under) Unpaid
Principal		 
Total loans
 $8,084   $7,679   $405      $5,533   $5,366   $167 
Nonaccrual loans
  1    1    –       1    1    – 
Loans 90 days or more past due
  –    –    –         1    1    – 
Fair Value of Financial Instruments
The following section summarizes the estimated fair value for financial instruments accounted for at amortized cost as of June 30, 2020 and December 31, 2019. In accordance with disclosure guidance related to fair values of financial instruments, the Company did not include assets and liabilities that are not financial instruments, such as the value of goodwill, long-term relationships with deposit, credit card, merchant processing and trust customers, other purchased intangibles, premises and equipment, deferred taxes and other liabilities. Additionally, in accordance with the disclosure guidance, receivables and payables due in one year or less, insurance contracts, equity investments not accounted for at fair value, and deposits with no defined or contractual maturities are excluded.
The estimated fair values of the Company’s financial instruments are shown in the table below:
 
  June 30, 2020   December 31, 2019 
  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
 $52,392   $52,392  $–  $–  $52,392     $22,405    $22,405   $–   $–   $22,405 
Federal funds sold and securities purchased under resale agreements
  395    –   395   –   395      1,036     –    1,036    –    1,036 
Loans held for sale (a)
  94    –   –   94   94      45     –    –    43    43 
Loans
  302,952    –   –   315,519   315,519      292,082     –    –    297,241    297,241 
Other
  1,991    –   1,128   863   1,991      1,923     –    929    994    1,923 
 
Financial Liabilities
                   
Time deposits
  38,300    –   38,387   –   38,387      42,894     –    42,831    –    42,831 
Short-term borrowings (b)
  18,835    –   18,738   –   18,738      22,095     –    21,961    –    21,961 
Long-term debt
  42,579    –   43,728   –   43,728      40,167     –    41,077    –    41,077 
Other
  3,481       –   1,280   2,201   3,481        3,678        –    1,342    2,336    3,678 
 
(a)
Excludes mortgages held for sale for which the fair value option under applicable accounting guidance was elected.
(b)
Excludes 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 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 $585 million and $528 million at June 30, 2020 and December 31, 2019, respectively. The carrying value of other guarantees was $333 million and $200 million at June 30, 2020 and December 31, 2019, respectively.
 
 Note 15
    Guarantees and Contingent Liabilities
Visa Restructuring and Card Brand Litigation
 The Company’s payment services business issues credit and debit cards and acquires credit and debit card transactions through the Visa U.S.A. Inc. card brand or its affiliates (collectively “Visa”). In 2007, Visa completed a restructuring and issued shares of Visa Inc. common stock to its financial institution members in contemplation of its initial public offering (“IPO”) completed in the first quarter of 2008 (the “Visa Reorganization”). As a part of the Visa Reorganization, the Company received its proportionate number of shares of Visa Inc. common stock, which were subsequently converted to Class B shares of Visa Inc. (“Class B shares”).
Visa U.S.A. Inc. (“Visa U.S.A.”) and MasterCard International (collectively, the “Card Brands”) are defendants in antitrust lawsuits challenging the practices of the Card Brands (the “Visa Litigation”). Visa U.S.A. member banks have a contingent obligation to indemnify Visa Inc. under the Visa U.S.A. bylaws (which were modified at the time of the restructuring in October 2007) for potential losses arising from the Visa Litigation. The indemnification by the Visa U.S.A. member banks has no specific maximum amount. Using proceeds from its IPO and through reductions to the conversion ratio applicable to the Class B shares held by Visa U.S.A. member banks, Visa Inc. has funded an escrow account for the benefit of member financial institutions to fund their indemnification obligations associated with the Visa Litigation. The receivable related to the escrow account is classified in other liabilities as a direct offset to the related Visa Litigation contingent liability.
In October 2012, Visa signed a settlement agreement to resolve class action claims associated with the multi-district interchange litigation pending in the United States District Court for the Eastern District of New York (the “Multi-District Litigation”). The U.S. Court of Appeals for the Second Circuit reversed the approval of that settlement and remanded the matter to the district court. Thereafter, the case was split into two putative class actions, one seeking damages (“Damages Action”) and a separate class action seeking injunctive relief only (“Injuctive 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 June 30, 2020:
 
(Dollars in Millions) Collateral
Held		   Carrying
Amount		   
Maximum
Potential
Future
Payments
 
Standby letters of credit
 $–   $67   $9,877 
Third party borrowing arrangements
  –    –    3 
Securities lending indemnifications
  4,995    –    4,917 
Asset sales
  –    76    4,990 (a) 
Merchant processing
  864    171    72,705 
Tender option bond program guarantee
  2,968    –    2,618 
Other
  –    86    1,393 
 
(a)
The maximum potential future payments do not include loan sales where the Company provides standard representation and warranties to the buyer against losses related to loan underwriting documentation defects that may have existed at the time of sale that generally are identified after the occurrence of a triggering event such as delinquency. For these types of loan sales, the maximum potential future payments is generally the unpaid principal balance of loans sold measured at the end of the current reporting period. Actual losses will be significantly less than the maximum exposure, as only a fraction of loans sold will have a representation and warranty breach, and any losses on repurchase would generally be mitigated by any collateral held against the loans.
Merchant Processing
The Company, through its subsidiaries, provides merchant processing services. Under the rules of credit card associations, a merchant processor retains a contingent liability for credit card transactions processed. This contingent liability arises in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor. In this situation, the transaction is “charged-back” to the merchant and the disputed amount is credited or otherwise refunded to the cardholder. If the Company is unable to collect this amount from the merchant, it bears the loss for the amount of the refund paid to the cardholder.
 
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The Company currently processes card transactions in the United States, Canada and Europe through wholly-owned subsidiaries and a network of other financial institutions. In the event a merchant was unable to fulfill product or services subject to future delivery, such as airline tickets, the Company could become financially liable for refunding the purchase price of such products or services purchased through the credit card associations under the charge-back provisions. Charge-back risk related to these merchants is evaluated in a manner similar to credit risk assessments and, as such, merchant processing contracts contain various provisions to protect the Company in the event of default.
At June 30, 2020, the value of airline tickets purchased to be delivered at a future date through card transactions processed by the Company was $9.5 billion. The Company held collateral of $743 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 June 30, 2020, the liability was $144 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 June 30, 2020, the Company had reserved $19 million for potential losses from representation and warranty obligations, compared with $9 million at December 31, 2019. The Company’s reserve reflects management’s best estimate of losses for representation and warranty obligations. The Company’s repurchase reserve is modeled at the loan level, taking into consideration the individual credit quality and borrower activity that has transpired since origination. The model applies credit quality and economic risk factors to derive a probability of default and potential repurchase that are based on the Company’s historical loss experience, and estimates loss severity based on expected collateral value. The Company also considers qualitative factors that may result in anticipated losses differing from historical loss trends.
As of June 30, 2020 and December 31, 2019, the Company had $11 million and $10 million, respectively, of unresolved representation and warranty claims from GSEs. The Company does not have a significant amount of unresolved claims from investors other than GSEs.
Litigation and Regulatory Matters
The Company is subject to various litigation and regulatory matters that arise in the ordinary course of its business. The Company establishes reserves for such matters when potential losses become probable and can be reasonably estimated. The Company believes the ultimate resolution of existing legal and regulatory matters will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. However, in light of the uncertainties inherent in these matters, it is possible that the ultimate resolution of one or more of these matters may have a material adverse effect on the Company’s results from operations for a particular period, and future changes in circumstances or additional information could result in additional accruals or resolution in excess of established accruals, which could adversely affect the Company’s results from operations, potentially materially.
Residential Mortgage-Backed Securities Litigation
Starting in 2011, the Company and other large financial institutions have been sued in their capacity as trustee for residential mortgage–backed securities trusts. In the lawsuits brought against the Company, the investors allege that the Company’s banking subsidiary, U.S. Bank National Association (“U.S. Bank”), as trustee caused them to incur substantial losses by failing to enforce loan repurchase obligations and failing to abide by appropriate standards of care after events of default allegedly occurred. The plaintiffs in these matters seek monetary damages in unspecified amounts and most also seek equitable relief.
Regulatory Matters
The Company is continually subject to examinations, inquiries and investigations in areas of heightened regulatory scrutiny, such as compliance, risk management, third-party risk management and consumer protection. The Company is cooperating fully with all pending examinations, inquiries and investigations, any of which could lead to administrative or legal proceedings or settlements. Remedies in these proceedings or settlements may include fines, penalties, restitution or alterations in the Company’s business practices (which may increase the Company’s operating expenses and decrease its revenue).
Outlook
Due to their complex nature, it can be years before litigation and regulatory matters are resolved. The Company may be unable to develop an estimate or range of loss where matters are in early stages, there are significant
 
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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 16
 
   Business Segments
Within the Company, financial performance is measured by major lines of business based on the products and services provided to customers through its distribution channels. These operating segments are components of the Company about which financial information is prepared and is evaluated regularly by management in deciding how to allocate resources and assess performance. The Company has five reportable operating segments:
Corporate and Commercial Banking
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 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
 
 
72
  
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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 2020, certain organization and methodology changes were made and, accordingly, 2019 results were restated and presented on a comparable basis.
 
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Business segment results for the three months ended June 30 were as follows:
 
  Corporate and Commercial
Banking		       Consumer and
Business Banking		       Wealth Management and
Investment Services		 
(Dollars in Millions) 2020  2019       2020  2019       2020  2019 
Condensed Income Statement
             
Net interest income (taxable-equivalent basis)
 $890  $774     $1,486  $1,597     $256  $305 
Noninterest income
  340   244      921   567      463   445 
Securities gains (losses), net
  –   –        –   –        –   – 
Total net revenue
  1,230   1,018      2,407   2,164      719   750 
Noninterest expense
  411   413      1,370   1,305      446   432 
Other intangibles
  –   1        4   5        3   3 
Total noninterest expense
  411   414        1,374   1,310        449   435 
Income before provision and income taxes
  819   604      1,033   854      270   315 
Provision for credit losses
  21   (16)        110   79        (2)   2 
Income before income taxes
  798   620      923   775      272   313 
Income taxes and taxable-equivalent adjustment
  200   155        231   194        68   78 
Net income
  598   465      692   581      204   235 
Net (income) loss attributable to noncontrolling interests
  –   –        –   –        –   – 
Net income (loss) attributable to U.S. Bancorp
 $598  $465       $692  $581       $204  $235 
Average Balance Sheet
             
Loans
 $122,950  $98,922     $150,206  $143,777     $11,194  $9,898 
Other earning assets
  3,847   3,883      6,576   3,333      285   341 
Goodwill
  1,647   1,647      3,475   3,475      1,616   1,617 
Other intangible assets
  6   9      1,935   2,717      40   50 
Assets
  135,504   108,823      167,501   157,445      14,308   13,178 
   
Noninterest-bearing deposits
  38,658   29,061      34,662   27,051      16,298   13,612 
Interest-bearing deposits
  95,373   70,740        144,319   128,932        65,300   61,417 
Total deposits
  134,031   99,801      178,981   155,983      81,598   75,029 
   
Total U.S. Bancorp shareholders’ equity
  17,295   15,436        14,973   15,119        2,478   2,432 
  
Payment
Services
       Treasury and
Corporate Support		       
Consolidated
Company
 
(Dollars in Millions) 2020  2019       2020  2019       2020  2019 
Condensed Income Statement
             
Net interest income (taxable-equivalent basis)
 $602  $585     $(10)  $71     $3,224  $3,332 
Noninterest income
  658 (a)   952 (a)      151   265      2,533  (b)   2,473  (b) 
Securities gains (losses), net
  –   –        81   17        81   17 
Total net revenue
  1,260   1,537      222   353      5,838  (c)   5,822  (c) 
Noninterest expense
  722   737      326   224      3,275   3,111 
Other intangibles
  36   33        –   –        43   42 
Total noninterest expense
  758   770        326   224        3,318   3,153 
Income before provision and income taxes
  502   767      (104)   129      2,520   2,669 
Provision for credit losses
  (31)   295        1,639   5        1,737   365 
Income before income taxes
  533   472      (1,743)   124      783   2,304 
Income taxes and taxable-equivalent adjustment
  133   118        (544)   (69)        88   476 
Net income
  400   354      (1,199)   193      695   1,828 
Net (income) loss attributable to noncontrolling interests
  –   –        (6)   (7)        (6)   (7) 
Net income (loss) attributable to U.S. Bancorp
 $400  $354       $(1,205)  $186       $689  $1,821 
Average Balance Sheet
             
Loans
 $30,321  $33,277     $3,436  $3,344     $318,107  $289,218 
Other earning assets
  447   327      164,857   129,831      176,012   137,715 
Goodwill
  3,101   2,806      –   –      9,839   9,545 
Other intangible assets
  590   533      –   –      2,571   3,309 
Assets
  35,473   39,588      191,520   152,564      544,306   471,598 
   
Noninterest-bearing deposits
  3,165   1,221      2,323   2,151      95,106   73,096 
Interest-bearing deposits
  117   115        3,088   10,932        308,197   272,136 
Total deposits
  3,282   1,336      5,411   13,083      403,303   345,232 
   
Total U.S. Bancorp shareholders’ equity
  5,876   6,043        11,619   13,408        52,241   52,438 
 
(a)
Presented net of related rewards and rebate costs and certain partner payments of $445 million and $566 million for the three months ended June 30, 2020 and 2019, respectively.
(b)
Includes revenue generated from certain contracts with customers of $1.6 billion and $1.9 billion for the three months ended June 30, 2020 and 2019, respectively.
(c)
The Company, as a lessor, originates retail and commercial leases either directly to the consumer or indirectly through dealer networks. Under these arrangements, the Company recorded $230 million and $246 million of revenue for the three months ended June 30, 2020 and 2019, respectively, primarily consisting of interest income on sales-type and direct financing leases.
 
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Business segment results for the six months ended June 30 were as follows:
 
  Corporate and Commercial
Banking		       Consumer and
Business Banking		       Wealth Management and
Investment Services		 
(Dollars in Millions) 2020  2019       2020  2019       2020  2019 
Condensed Income Statement
             
Net interest income (taxable-equivalent basis)
 $1,688  $1,552     $3,029  $3,178     $539  $598 
Noninterest income
  613   452      1,678   1,102      927   875 
Securities gains (losses), net
  –   –        –   –        –   – 
Total net revenue
  2,301   2,004      4,707   4,280      1,466   1,473 
Noninterest expense
  832   820      2,684   2,555      879   853 
Other intangibles
  –   2        8   10        6   6 
Total noninterest expense
  832   822        2,692   2,565        885   859 
Income before provision and income taxes
  1,469   1,182      2,015   1,715      581   614 
Provision for credit losses
  446   7        233   149        21   (1) 
Income before income taxes
  1,023   1,175      1,782   1,566      560   615 
Income taxes and taxable-equivalent adjustment
  256   294        446   392        140   154 
Net income
  767   881      1,336   1,174      420   461 
Net (income) loss attributable to noncontrolling interests
  –   –        –   –        –   – 
Net income (loss) attributable to U.S. Bancorp
 $767  $881       $1,336  $1,174       $420  $461 
Average Balance Sheet
             
Loans
 $113,161  $98,800     $148,459  $142,804     $10,902  $9,858 
Other earning assets
  4,201   3,527      5,772   2,864      283   293 
Goodwill
  1,647   1,647      3,475   3,475      1,616   1,617 
Other intangible assets
  7   9      2,170   2,799      42   52 
Assets
  125,409   108,063      164,630   156,103      14,129   13,180 
   
Noninterest-bearing deposits
  34,002   29,623      31,265   26,800      14,758   13,459 
Interest-bearing deposits
  88,017   70,959        139,041   128,135        67,041   57,805 
Total deposits
  122,019   100,582      170,306   154,935      81,799   71,264 
   
Total U.S. Bancorp shareholders’ equity
  16,553   15,389        14,952   15,060        2,472   2,437 
  
Payment
Services
       Treasury and
Corporate Support		       
Consolidated
Company
 
(Dollars in Millions) 2020  2019       2020  2019       2020  2019 
Condensed Income Statement
             
Net interest income (taxable-equivalent basis)
 $1,253  $1,202     $(38)  $88     $6,471  $6,618 
Noninterest income
  1,452 (a)   1,806 (a)      338   524      5,008  (b)   4,759  (b) 
Securities gains (losses), net
  –   –        131   22        131   22 
Total net revenue
  2,705   3,008      431   634      11,610  (c)   11,399  (c) 
Noninterest expense
  1,448   1,445      706   485      6,549   6,158 
Other intangibles
  71   64        –   –        85   82 
Total noninterest expense
  1,519   1,509        706   485        6,634   6,240 
Income before provision and income taxes
  1,186   1,499      (275)   149      4,976   5,159 
Provision for credit losses
  231   581        1,799   6        2,730   742 
Income before income taxes
  955   918      (2,074)   143      2,246   4,417 
Income taxes and taxable-equivalent adjustment
  239   230        (709)   (189)        372   881 
Net income
  716   688      (1,365)   332      1,874   3,536 
Net (income) loss attributable to noncontrolling interests
  –   –        (14)   (16)        (14)   (16) 
Net income (loss) attributable to U.S. Bancorp
 $716  $688       $(1,379)  $316       $1,860  $3,520 
Average Balance Sheet
             
Loans
 $32,005  $32,848     $3,355  $3,362     $307,882  $287,672 
Other earning assets
  423   387      152,360   128,491      163,039   135,562 
Goodwill
  3,028   2,810      –   –      9,766   9,549 
Other intangible assets
  576   523      –   –      2,795   3,383 
Assets
  37,137   39,112      178,251   151,063      519,556   467,521 
   
Noninterest-bearing deposits
  2,318   1,198      2,281   2,183      84,624   73,263 
Interest-bearing deposits
  116   113        4,214   10,051        298,429   267,063 
Total deposits
  2,434   1,311      6,495   12,234      383,053   340,326 
   
Total U.S. Bancorp shareholders’ equity
  5,980   6,009        11,736   13,121        51,693   52,016 
 
(a)
Presented net of related rewards and rebate costs and certain partner payments of $975 million and $1.1 billion for the six months ended June 30, 2020 and 2019, respectively.
(b)
Includes revenue generated from certain contracts with customers of $3.3 billion and $3.6 billion for the six months ended June 30, 2020 and 2019, respectively.
(c)
The Company, as a lessor, originates retail and commercial leases either directly to the consumer or indirectly through dealer networks. Under these arrangements, the Company recorded $468 million and $485 million of revenue for the six months ended June 30, 2020 and 2019, respectively, primarily consisting of interest income on sales-type and direct financing leases.
 
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 Note 17
 
   Subsequent Events
The Company has evaluated the impact of events that have occurred subsequent to June 30, 2020 through the date the consolidated financial statements were filed with the United States Securities and Exchange Commission. Based on this evaluation, the Company has determined none of these events were required to be recognized or disclosed in the consolidated financial statements and related notes.
 
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U.S. Bancorp
Consolidated Daily Average Balance Sheet and Related Yields and Rates (a)
 
  For the Three Months Ended June 30    
  2020   2019          
(Dollars in Millions)
(Unaudited)
 Average
Balances		  Interest        Yields
and
Rates		       Average
Balances		       Interest        Yields
and
Rates		           % Change
Average
Balances		 
Assets
                       
Investment securities
 $120,867  $645      2.13%     $115,460    $759      2.63%       4.7% 
Loans held for sale
  6,307   52      3.30      3,162     34      4.30       99.5 
Loans (b)
                       
Commercial
  128,039   833      2.61      103,233     1,099      4.27       24.0 
Commercial real estate
  41,088   360      3.53      39,365     512      5.22       4.4 
Residential mortgages
  71,122   635      3.58      66,834     661      3.96       6.4 
Credit card
  21,510   552      10.33      22,830     646      11.36       (5.8) 
Other retail
  56,348   579      4.13      56,956        678      4.78       (1.1) 
Total loans
  318,107   2,959      3.74      289,218     3,596      4.99       10.0 
Other earning assets
  48,838   41      .33      19,093        91      1.90       * 
Total earning assets
  494,119   3,697      3.00      426,933     4,480      4.21       15.7 
Allowance for loan losses
  (6,543)           (4,011)              (63.1) 
Unrealized gain (loss) on investment securities
  3,499           (288)              * 
Other assets
  53,231           48,964              8.7 
Total assets
 $544,306          $471,598              15.4 
Liabilities and Shareholders’ Equity
                       
Noninterest-bearing deposits
 $95,106          $73,096              30.1% 
Interest-bearing deposits
                       
Interest checking
  83,789   12      .05      70,433     53      .30       19.0 
Money market savings
  129,692   95      .30      108,633     435      1.61       19.4 
Savings accounts
  51,237   11      .09      45,988     26      .23       11.4 
Time deposits
  43,479   76      .70      47,082        248      2.12       (7.7) 
Total interest-bearing deposits
  308,197   194      .25      272,136     762      1.12       13.3 
Short-term borrowings
  25,738   35      .54      17,169     93      2.16       49.9 
Long-term debt
  46,385   244      2.11      40,438        293      2.91       14.7 
Total interest-bearing liabilities
  380,320   473      .50      329,743     1,148      1.40       15.3 
Other liabilities
  16,009           15,693              2.0 
Shareholders’ equity
                       
Preferred equity
  5,984           5,984              – 
Common equity
  46,257           46,454              (.4) 
Total U.S. Bancorp shareholders’ equity
  52,241           52,438              (.4) 
Noncontrolling interests
  630           628              .3 
Total equity
  52,871           53,066              (.4) 
Total liabilities and equity
 $544,306          $471,598              15.4 
Net interest income
  $3,224            $3,332          
Gross interest margin
       2.50%               2.81%        
Gross interest margin without taxable-equivalent increments
       2.48%               2.78%        
Percent of Earning Assets
                      
Interest income
       3.00%             4.21%      
Interest expense
       .38               1.08        
Net interest margin
       2.62%               3.13%        
Net interest margin without taxable-equivalent increments
                2.60%                           3.10%        
 
*
Not meaningful
(a)
Interest and rates are presented on a fully taxable-equivalent basis based on a federal income tax rate of 21 percent.
(b)
Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances.
 
U.S. Bancorp  
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U.S. Bancorp
Consolidated Daily Average Balance Sheet and Related Yields and Rates (a)
 
  For the Six Months Ended June 30    
  2020   2019          
(Dollars in Millions)
(Unaudited)
 Average
Balances		  Interest        Yields
and
Rates		       Average
Balances		       Interest        Yields
and
Rates		           % Change
Average
Balances		 
Assets
                       
Investment securities
 $120,856  $1,351      2.24%     $114,823    $1,479      2.58%       5.3% 
Loans held for sale
  5,527   96      3.49      2,650     59      4.47       * 
Loans (b)
                       
Commercial
  117,013   1,774      3.05      102,600     2,175      4.27       14.0 
Commercial real estate
  40,583   788      3.91      39,417     1,001      5.12       3.0 
Residential mortgages
  71,007   1,298      3.66      66,212     1,315      3.98       7.2 
Credit card
  22,673   1,211      10.74      22,714     1,317      11.69       (.2) 
Other retail
  56,606   1,211      4.30      56,729        1,343      4.77       (.2) 
Total loans
  307,882   6,282      4.10      287,672     7,151      5.01       7.0 
Other earning assets
  36,656   110      .60      18,089        172      1.91       * 
Total earning assets
  470,921   7,839      3.34      423,234     8,861      4.21       11.3 
Allowance for loan losses
  (6,066)           (3,997)              (51.8) 
Unrealized gain (loss) on investment securities
  2,462           (664)              * 
Other assets
  52,239           48,948              6.7 
Total assets
 $519,556          $467,521              11.1 
Liabilities and Shareholders’ Equity
                       
Noninterest-bearing deposits
 $84,624          $73,263              15.5% 
Interest-bearing deposits
                       
Interest checking
  80,573   51      .13      71,301     115      .32       13.0 
Money market savings
  125,819   406      .65      104,058     810      1.57       20.9 
Savings accounts
  49,643   37      .15      45,604     50      .22       8.9 
Time deposits
  42,394   225      1.07      46,100        482      2.11       (8.0) 
Total interest-bearing deposits
  298,429   719      .48      267,063     1,457      1.10       11.7 
Short-term borrowings
  22,995   108      .94      17,765     189      2.14       29.4 
Long-term debt
  45,116   541      2.41      41,143        597      2.92       9.7 
Total interest-bearing liabilities
  366,540   1,368      .75      325,971     2,243      1.39       12.4 
Other liabilities
  16,069           15,643              2.7 
Shareholders’ equity
                       
Preferred equity
  5,984           5,984              – 
Common equity
  45,709           46,032              (.7) 
Total U.S. Bancorp shareholders’ equity
  51,693           52,016              (.6) 
Noncontrolling interests
  630           628              .3 
Total equity
  52,323           52,644              (.6) 
Total liabilities and equity
 $519,556          $467,521              11.1 
Net interest income
  $6,471            $6,618          
Gross interest margin
       2.59%               2.82%        
Gross interest margin without taxable-equivalent increments
       2.57%               2.79%        
Percent of Earning Assets
                      
Interest income
       3.34%             4.21%      
Interest expense
       .58               1.07        
Net interest margin
       2.76%               3.14%        
Net interest margin without taxable-equivalent increments
                2.74%                           3.11%        
 
*
Not meaningful
(a)
Interest and rates are presented on a fully taxable-equivalent basis based on a federal income tax rate of 21 percent.
(b)
Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances.
 
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  U.S. Bancorp
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Part II — Other Information
Item 1. Legal Proceedings
 — See the information set forth in Note 15 in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Report, which is incorporated herein by reference.
Item 1A. Risk Factors
 — There are a number of factors that may adversely affect the Company’s business, financial results or stock price. These risks are described elsewhere in this report or the Company’s other filings with the Securities and Exchange Commission, including the Company’s Annual Report on
Form 10-K
for the year ended December 31, 2019. Additional risks that the Company currently does not know about or currently views as immaterial may also impair the Company’s business or adversely impact its financial results or stock price.
There are no material changes from the risk factors set forth under Item 1A of the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019, and Part II, Item 1A, “Risk Factors,” in the Company’s Quarterly Report on Form
10-Q
for the quarterly period ended March 31, 2020 (the “March
10-Q”),
except that the following risk factor replaces the risk factor in the March
10-Q:
The Company’s business, financial condition, liquidity, capital and results of operations have been, and will likely continue to be, adversely affected by the
COVID-19
pandemic
The
COVID-19
pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, the Company’s business, financial condition, capital, liquidity and results of operations. The Company cannot predict at this time the extent to which it will continue to be negatively affected by the
COVID-19
pandemic. The extent of any continued or future adverse effects of the
COVID-19
pandemic will depend on future developments, which are highly uncertain and outside the Company’s control, including the scope and duration of the pandemic, the direct and indirect impact of the pandemic on the Company’s employees, customers, counterparties and service providers, as well as other market participants, and actions taken by governmental authorities and other third parties in response to the pandemic. If the pandemic is prolonged, or other diseases emerge that give rise to similar effects, the adverse impact on the global economy and Company could deepen.
Many of the Company’s counterparties and third-party service providers have been, and may further be, affected by
“stay-at-home”
orders, market volatility and other factors that increase their risks of business disruption or that may otherwise affect their ability to perform under the terms of any agreements with the Company or provide essential services. As a result, the Company’s operational and other risks are generally expected to increase until the pandemic subsides. In addition, the Company’s business operations may be disrupted if significant portions of its workforce are unable to work effectively, including because of illness, caring for dependents, quarantines, government actions, or other restrictions in connection with the pandemic. The Company has temporarily closed certain of its offices and reduced operating hours and/or lobby services at its branches. The Company may also face heightened cybersecurity, information security or other operational risks resulting from alternative working arrangements of its employees.
In response to the pandemic and to support its customers, the Company is offering fee waivers, payment deferrals and other expanded assistance to credit card, automobile, mortgage, small business and personal lending customers, including committing in certain states in which it operates, to suspend mortgage payments and foreclosure sales for financially impacted customers for certain periods of time. A significant number of the Company’s customers have already sought to suspend their mortgage payments under these programs. Suspensions of mortgage payments and foreclosures and reduced pricing under these programs may adversely affect the Company’s revenue and results of operations. In addition, if these or other measures provided by the Company are not effective in mitigating the financial consequences of
COVID-19
on customers, including providing loans under various newly created government-sponsored lending programs such as the Paycheck Protection Program (the “PPP”), the Company may experience higher rates of default, increased credit losses and additional increases in its allowance for credit losses in future periods.
Certain industries where the Company has credit exposure, including the transportation industry, and in particular air travel, have experienced significant operational challenges as a result of
COVID-19.
These negative effects have resulted in a number of corporate lending clients making higher than usual draws on outstanding lines of credit over the last several months. Many of these customers have since paid down these draws, but if current economic conditions persist or worsen, client draws on outstanding lines of credit may begin to increase again which may adversely affect the Company’s liquidity. The economic effects of
COVID-19
may also cause the Company’s customers to be unable to pay their loans as they come due or decrease the value of collateral, which the Company expects would cause significant increases in its credit losses and result in additional increases in the Company’s allowance for credit losses. In addition, the Company could be exposed to further losses in its role as merchant processor of credit card transactions, as under the
 
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rules of credit card associations, a merchant processor retains a contingent liability for credit card transactions processed. In the event a merchant was unable to fulfill product or services subject to future delivery, such as airline tickets, the Company could become financially liable for refunding to the cardholders the purchase price of such products or services purchased through credit card associations, in the event the merchant was not able to do so.
Net interest income is significantly affected by market rates of interest. The significant reductions to the federal funds rate have led to a decrease in the rates and yields on U.S. Treasury securities, in some cases declining below zero. If interest rates are reduced further in response to
COVID-19,
the Company’s net interest income could continue to decline, perhaps significantly. The overall effect of lower interest rates cannot be predicted at this time and depends on future actions the Federal Reserve may take to increase or reduce the targeted federal funds rate in response to the
COVID-19
pandemic and resulting economic conditions.
The Company, through its subsidiaries, provides credit and debit card, corporate payments products and merchant processing services. Revenues from its payment services businesses depend on consumer and business credit card spending, including at many small and
medium-sized
businesses. Due to responses to
COVID-19,
including
stay-at-home
orders that require businesses other than those defined as essential to close and for consumers to remain at home unless they are engaged in essential activities, consumer and business credit card spending significantly declined. Although
stay-at-home
orders have gradually been lifted and business activity has increased, if the reopening of certain nonessential businesses is delayed or closures reoccur or unemployment continues to rise or stay at elevated levels, the Company expects to experience further adverse effects on its payment services businesses. This negative effect could continue after the pandemic subsides if a substantial number of businesses were to close permanently as a result of
COVID-19’s
economic effects or if consumer and business spending were to remain depressed.
The effects of the
COVID-19
pandemic on economic and market conditions may negatively affect the Company’s capital and leverage ratios. In June 2020 the Federal Reserve announced it will require all large bank holding companies to preserve capital through the suspension of share repurchase programs and capping common stock dividends to existing rates that do not exceed the average of the last four quarters’ earnings. These capital preservation actions apply to the third quarter of 2020 but may be extended or modified by the Federal Reserve as economic conditions develop. The
COVID-19
pandemic may cause the Company to further extend the suspension of its share repurchase program and limit capital distributions, including reducing or suspending its common stock dividend. Additionally, as a result of the COVID-19 sensitivity analysis conducted by the Federal Reserve, banks are required to resubmit capital plans in the fourth quarter of 2020 to reflect current stressed capital conditions.
Governmental authorities worldwide have taken unprecedented measures to stabilize the markets and support economic growth. However, these measures may not be sufficient to address the negative economic effects of
COVID-19
or avert severe and prolonged reductions in economic activity.
Many financial institutions, including the Company, have received inquiries from the Unites States Congress, regulators and other government agencies regarding implementation of provisions and programs under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, and also are subject to early-stage litigation concerning their participation in the PPP under that Act. The Company’s involvement in these and other programs created in response to the
COVID-19
pandemic may lead to additional government and regulatory inquiries and litigation in the future, any of which could negatively impact the Company’s business, reputation, financial condition and results of operations.
Other negative effects of
COVID-19
and the resulting economic and market disruptions, including customer disputes, challenges of transitioning employees back to the workplace, litigation and governmental and regulatory scrutiny of response actions taken by the Company, that may impact the Company’s business, reputation, financial condition, liquidity, capital and results of operations cannot be predicted at this time. However, it is likely that the Company’s business, financial condition, liquidity, capital and results of operations will continue to be adversely affected until the pandemic subsides and the domestic economy recovers. Further, the
COVID-19
pandemic may also have the effect of heightening many of the other risks described in the section entitled “Risk Factors” in the Company’s 2019 Annual Report on Form
10-K.
Until the pandemic subsides, the Company expects reduced revenues from its lending businesses, increased credit losses in its lending portfolios, possible additional increases in its allowance for credit losses and decreased revenue from its payments businesses. Even after the pandemic subsides, it is possible that the domestic and other major global economies will continue to experience a prolonged recession, which the Company expects would adversely affect its business, financial condition, liquidity, capital and results of operations, potentially materially.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
— Refer to the “Capital Management” section within Management’s Discussion and Analysis in Part I, Item 2 of this Report for information regarding shares repurchased by the Company during the second quarter of 2020.
 
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  U.S. Bancorp
Table of Contents
Item 6. Exhibits
 
 
  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 June 30, 2020, formatted in Inline XBRL (included within the Exhibit 101 attachments).
 
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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/    LISA R. STARK
  
 
Dated: August 6, 2020   
Lisa R. Stark
Controller
(Principal Accounting Officer and Duly Authorized Officer)
 
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  U.S. Bancorp
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EXHIBIT 31.1
CERTIFICATION PURSUANT TO
RULE 13a-14(a)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Andrew Cecere, certify that:
 
(1)
I have reviewed this Quarterly Report on Form
10-Q
of U.S. Bancorp;
 
(2)
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
(3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
(4)
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e)
and
15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f)
and
15d-15(f))
for the registrant and have:
 
 (a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 (b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 (c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 (d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
(5)
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 (a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 (b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
/S/    ANDREW CECERE
Andrew Cecere
Chief Executive Officer
Dated: August 6, 2020
 
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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/    TERRANCE R. DOLAN
Terrance R. Dolan
Chief Financial Officer
Dated: August 6, 2020
 
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  U.S. Bancorp
Table of Contents
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 June 30, 2020 (the “Form
10-Q”)
of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)
The information contained in the Form
10-Q
fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
/s/    ANDREW CECERE  /s/    TERRANCE R. DOLAN
Andrew Cecere
Chief Executive Officer
 
Dated: August 6, 2020
  
Terrance R. Dolan
Chief Financial Officer
 
U.S. Bancorp  
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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 8:00 a.m. to 6:00 p.m., Central Time, and automated support is available 24 hours a day, seven days a week. Specific information about your account is available on Computershare’s Investor Center website.
Independent Auditor
Ernst & Young LLP serves as the independent auditor for U.S. Bancorp’s financial statements.
Common Stock Listing and Trading
U.S. Bancorp common stock is listed and traded on the New York Stock Exchange under the ticker symbol USB.
Dividends and Reinvestment Plan
U.S. Bancorp currently pays quarterly dividends on our common stock on or about the 15th day of January, April, July and October, subject to approval by our Board of Directors. U.S. Bancorp shareholders can choose to participate in a plan that provides automatic reinvestment of dividends and/or optional cash purchase of additional shares of U.S. Bancorp common stock. For more information, please contact our transfer agent, Computershare.
Investor Relations Contact
Jennifer A. Thompson, CFA
Executive Vice President, Investor Relations
jen.thompson@usbank.com
Phone:
612-303-0778
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.
 
 
 
 This report has been produced on recycled paper.
 

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