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  Title	US Bancorp : September 30, 2024 U.S. Bancorp
  ID	4411876
  External ID	7284300349
  Author	Unknown
  Published Date	Nov. 7, 2024, 9:51 p.m.
  Summary	November 07, 2024 at 10:45 pm EST Regulatory Capital Pillar 3 Disclosures Standardized Approach September 30, 2024 BACKGROUND Basel III regulatory capital rules established the definition of reg
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  URL	https://www.marketscreener.com/quote/stock/us-bancorp-47501/news/us-bancorp-september-30-2024-u-s-bancorp-48300675/
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  Content ID	2629351
  Key	212165cd-7b55-4c25-8a92-3a3b026164cc
  Content	November 07, 2024 at 10:45 pm EST Regulatory Capital Pillar 3 Disclosures Standardized Approach September 30, 2024 BACKGROUND Basel III regulatory capital rules established the definition of regulatory capital elements and minimum capital ratios, regulatory capital buffers above those minimums, a common equity tier 1 ratio, a supplementary leverage ratio and the rules for calculating risk-weighted assets. Basel III includes two comprehensive methodologies for calculating risk-weighted assets: 1) a general standardized approach and 2) a more risk-sensitive advanced approaches. Effective December 31, 2019, with the passing of the "Prudential Standards for Large Bank Holding Companies, Savings and Loan Holding Companies, and Foreign Banking Organizations" rule, U.S. Bancorp (the "Company") is classified as a Category III banking organization. Therefore, the Company is only required to utilize the general standardized approach of the regulatory capital requirements. OVERVIEW The Company, headquartered in Minneapolis, Minnesota, serves millions of customers locally, nationally and globally through a diversified mix of businesses including consumer banking, business banking, commercial banking, institutional banking, payments and wealth management. This document, and certain of the Company's public filings, present the Pillar 3 Disclosures in compliance with Basel III as described in Subsections 61-63 of the Capital Adequacy-Basel III Final Rule (the "Rule"). The Company's 2023 Annual Report ("Annual Report") included in the Company's Form 10-K for the year ended December 31, 2023 ("Form 10-K") and its Quarterly Report on Form 10-Q for the quarter ended September 30, 2024 ("Form 10-Q") filed with the Securities and Exchange Commission contain management's discussion of the overall corporate risk profile of the Company and related management strategies. The Pillar 3 Disclosures should be read in conjunction with the Annual Report, Form 10-K, Form 10-Q and the Consolidated Financial Statements for Bank Holding Companies - FR Y-9C. The Company's Pillar 3 Disclosures Matrix (see Appendix A) specifies where all the disclosures required by the Rule are located. The Pillar 3 Disclosures have not been audited by the Company's external auditors. The Rule applies only to the consolidated Company, with the exception that subsidiary depository institutions must disclose capital ratios. CORPORATE GOVERNANCE 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. Credit risk is the risk of loss associated with a change in the credit profile or the failure of a borrower or counterparty to meet its contractual obligations. Interest rate risk is the current or prospective risk to earnings and capital, or market valuations, arising from the impact of changes in interest rates. Market risk arises from fluctuations in interest rates, foreign exchange rates, and security prices that may result in changes in the values of financial instruments, such as trading and available-for-sale investment securities, mortgage loans held for sale, mortgage servicing rights ("MSRs") and derivatives that are accounted for on a fair value basis. Liquidity risk is the risk that financial condition or overall safety and soundness is adversely affected by the Company's inability, or perceived inability, to meet its cash flow obligations in a timely and complete manner in either normal or stressed conditions. Operational risk is the risk to current or projected financial condition and resilience arising from inadequate or failed internal processes or systems, people (including human errors or misconduct), or adverse external events, including the risk of loss resulting from breaches in data security. Operational risk can also include the risk of loss due to failures by third parties with which the Company does business. Compliance risk is the risk that the Company may suffer legal or regulatory sanctions, financial losses and reputational damage if it fails to adhere to compliance requirements and the Company's compliance policies. Strategic risk is the risk to current or projected financial condition and resilience arising from adverse business decisions, poor implementation of business decisions, or lack of responsiveness to changes in the banking industry and operating environment. Reputation risk is the risk to current or anticipated earnings, capital, or franchise or enterprise value arising from negative public opinion. This risk may impair the Company's competitiveness by affecting its ability to establish new relationships or services or continue serving existing relationships. In addition to the risks identified above, other risk factors exist that may impact the Company. Refer to "Risk Factors" in the Annual Report for a detailed discussion of these factors. The Company's Board of Directors and management-level governance committees are supported by a "three lines of defense" model for establishing effective checks and balances. The first line of defense, the business lines, manages risks in conformity with established limits and policy requirements. In turn, business line leaders and their risk officers establish programs to ensure conformity with these limits and policy requirements. The second line of defense, which includes the Chief Risk Officer's organization as well as policy and oversight activities of corporate support functions, translates risk appetite and strategy into actionable risk limits and policies. The second line of defense monitors first line of defense conformity with limits and policies and provides reporting and escalation of emerging risks and other concerns to senior management and the Risk Management Committee of the Board of Directors. The third line of defense, internal audit, is responsible for providing the Audit Committee of the Board of Directors and senior management with independent assessment and assurance regarding the effectiveness of the Company's governance, risk management, and control processes. INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS ("ICAAP") The Company's ICAAP is a component of its Basel Program. The Company manages its capital to multiple minimum thresholds and measures consistent with the Company's strategic objectives, business model and capital plan. Expectations of internal and external stakeholders are integral, and the capital goals and targets are calibrated considering internally developed models that ensure adequate coverage for all material quantitative and qualitative risks, minimum regulatory requirements, supervisory stress testing expectations and rating agency and counterparty perspectives. The Company is committed to managing capital to maintain strong protection for depositors and creditors, and for maximum shareholder benefit in order to achieve the Company's broader goals, which are as follows: Ensure the Company's safety and soundness; Maintain access to the debt and capital markets so the Company may continue to provide exceptional service to its customers and fulfill, without interruption, its obligations as a credit intermediary; Serve as a source of managerial and financial strength to its subsidiaries; and Ensure that the Company continues to be in a position to conduct its business in an environment of economic or financial stress. The Company's ICAAP, the identification of material risks and how those material risks inform capital adequacy, is conducted via the Company's stress testing program. During this process, the Company's material risks, informed by the risk identification process, are critical to the scenario design process and the development of the Company's internal stress scenario. The results of these forward-looking scenarios inform the Company's regulatory and internally defined capital adequacy relative to the Company's risk profile and risk appetite. REGULATORY CAPITAL ADEQUACY RATIOS The Company also manages its capital to exceed regulatory capital requirements for well-capitalized financial institutions. The Company's applicable capital requirement for regulatory and supervisory purposes is based upon the ratios determined under the standardized approach. Banking regulators define capital requirements for banks and financial services holding companies expressed in the form of a common equity tier 1 capital ratio, a tier 1 capital ratio, a total risk-based capital ratio, a leverage ratio and, for advanced approaches banks and Category III banks, a supplementary leverage ratio. The current minimum required levels for these ratios are 4.5 percent, 6.0 percent, 8.0 percent, 4.0 percent, and 3.0 percent, respectively, while the requirements for an insured depository institution to be considered "well-capitalized" are 6.5 percent, 8.0 percent, 10.0 percent, 5.0 percent, and 3.0 percent, respectively. Using the standardized approach, the Company's common equity tier 1 ratio was 10.5 percent at September 30, 2024. A summary of the capital ratios under the standardized approach is shown in Table 1. Table 1 Regulatory Capital Ratios The Company's total shareholders' equity was $58.9 billion at September 30, 2024, compared with $55.3 billion at December 31, 2023.The increase was primarily the result of corporate earnings and changes in unrealized gains and losses on available-for-sale investment securities included in other comprehensive income (loss), partially offset by dividends paid. In compliance with the Rule, the Company reviewed the aggregate amount of surplus capital of insurance subsidiaries included in the regulatory capital of the consolidated group and has determined it was not material. Refer to "Management's Discussion and Analysis-Capital Management" in the Annual Report and Form 10-Q for further discussion on capital management. In addition to capital ratios defined by banking regulators, the Company considers various other measures when evaluating capital utilization and adequacy. These measures are viewed by management as additional useful methods to reflect the level of capital available to withstand unexpected market or economic conditions. Presentation of these measures allows investors, analysts, and banking regulators to assess the Company's capital position relative to other financial services companies. Certain of these measures differ from the currently effective capital ratios principally in that these ratios are subject to transitional provisions, which temporarily exclude a portion of the impact of the 2020 adoption of accounting guidance related to the impairment of financial instruments based on the current expected credit loss ("CECL") methodology. These measures are not defined in generally accepted accounting principles ("GAAP") or are not currently effective or defined in federal banking regulations. As a result, these measures disclosed by the Company may be considered non-GAAP financial measures. Stress Capital Buffer A company's Stress Capital Buffer ("SCB") is added to the minimum capital requirement noted above for the risk- based capital ratios and represents the level of capital where restrictions on distributions and discretionary bonuses begin. The SCB is calculated based on 1) a decrease in the Company's common equity tier 1 capital under the severely adverse scenario in the Federal Reserve Board's ("FRB") annual supervisory stress test and related Comprehensive Capital Analysis and Review ("CCAR"), plus 2) four quarters of planned common stock dividends as a percentage of risk-weighted assets subject to a floor of 2.5 percent. As of September 30, 2024, the Company was subject to an SCB requirement of 2.5 percent based on its 2023 stress results. Starting in October 2024, the Company is subject to an SCB requirement of 3.1 percent based on its 2024 stress results. The FRB, OCC and FDIC also adopted a final rule revising the definition of "eligible retained income" for purposes of the SCB and other capital buffer requirements. This revision reduces the likelihood a banking organization is suddenly subject to abrupt and restrictive distribution limitations in a scenario where the Company's ratios would fall within its applicable minimum-plus-buffer requirements. The change to the definition of eligible retained income allows banking organizations to more freely use their capital and leverage buffers and supports banking organizations' lending activity and other financial intermediation activities to avoid compounding negative impacts in the financial markets. Under the final rule, eligible retained income is the greater of (1) the banking organization's net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (2) the average of the banking organization's net income over the preceding four quarters. The Company's eligible retained income at September 30, 2024, was $2.0 billion based on the Company's income net of distributions. Table 2 Non-GAAP Capital Ratios Refer to "Management's Discussion and Analysis-Non-GAAP Financial Measures" in the Annual Report and Form 10-Q for further discussion on the non-GAAP capital ratios and a reconciliation to measures calculated in accordance with GAAP. Table 3 Supplementary Leverage Ratio Advanced approaches banks and Category III banks are required to report the Supplementary Leverage Ratio ("SLR") defined as tier 1 capital divided by the total leverage exposure inclusive of both on- and off-balance sheet exposures. As a Category III banking organization, the Company is required to maintain an SLR of at least 3.0 percent. At September 30, 2024, the Company's and U.S. Bank National Association's SLR exceeded the requirement with ratios of 6.8 and 7.6 percent, respectively, compared to 6.6 percent and 7.5 percent, respectively, at December 31, 2023. STANDARDIZED APPROACH RISK-WEIGHTED ASSETS Risk-weighted assets ("RWA") represent an institution's assets and off-balance sheet exposures, weighted according to the risk associated with each exposure category. The risk-weighted asset calculation is used in determining the institution's capital requirements. The standardized approach defines a risk-weight to assign to each credit exposure. Standardized approach RWA was $447.5 billion at September 30, 2024, compared with $453.4 billion at December 31, 2023. The decrease in RWA was primarily driven by decreases in other assets and off-balance sheet commitments, partially offset by increases in residential mortgage exposures, corporate exposures, and off-balance sheet securitizations. Table 4 Risk-Weighted Assets Credit Risk Mitigation The Company's underwriting approach is to grant credit on the basis of capacity to repay rather than placing primary reliance on credit risk mitigation. Mitigation is nevertheless an important aspect of effective risk management. Various risk mitigation techniques are used by the Company, including collateral, guarantees and, to a limited extent, credit derivatives. The Company has a process that takes into account the risk-reducing effects of collateral in support of exposures including, but not limited to, cash, working capital, depreciable assets and real estate. Unsecured exposures generally result in larger losses compared to secured exposures. The Company uses credit derivatives or other instruments to manage the credit risk of certain lending exposures. These agreements are subject to credit risk associated with the counterparties to the contracts. Credit risk mitigants, including credit derivatives, are valued to monitor and ensure they continue to provide the secure repayment source anticipated at the time they were entered into. Company policy prescribes the frequency of valuation based on the volatility of the collateral. Valuation methods range from the use of market indices to individual professional inspection. Counterparty Credit Risk of Over-the-Counter (OTC) Derivative Contracts, Repo-Style Transactions and Eligible Margin Loans Counterparty exposure arises from OTC derivatives, repurchase agreements, securities lending and borrowing and other similar products and activities. The exposure amount depends on the value of underlying market factors (e.g., interest rates and foreign exchange rates), which can be volatile and uncertain in nature. The Company reduces its counterparty exposure related to derivative contracts by centrally clearing all eligible derivatives. All other credit exposure is approved either on a transaction level basis, or under credit limits supporting bilateral trades governed by appropriate master trading agreements. The primary element of the credit approval process is a detailed risk assessment of every credit exposure associated with a counterparty. The Company's risk assessment procedures consider both the credit worthiness of the counterparty and the risks related to the specific type of credit facility or exposure. The Company manages the credit risk of its derivative positions by diversifying its positions among various counterparties, entering into master netting arrangements with counterparties where possible, requiring collateral and, in certain cases, though insignificant, transferring the counterparty credit risk related to interest rate swaps to third parties through the use of risk participation arrangements. Credit exposures are monitored daily for counterparties with an established Credit Support Annex ("CSA") to ensure collateral levels are appropriately sized to cover risk, and prior to execution of an initial trade for any counterparty to ensure it does not exceed the approved credit limit for each counterparty. The Company uses the current exposure to calculate exposure at default ("EAD") and determine risk-weighted assets and capital requirements for counterparty risk. EAD is calculated for each counterparty with an International Swaps and Derivatives Association ("ISDA") Master Agreement with the Company using the collateral haircut approach in the current exposure methodology. For further information on counterparty credit risk, refer to the "Use of Derivatives to Manage Interest Rate and Other Risks" subsection in the "Management's Discussion and Analysis" section of the Annual Report and Form 10-Q. Collateral To calculate a counterparty's net risk position for counterparty credit risk, the Company revalues all financial instruments and associated collateral positions on a daily basis. Collateral positions are monitored by a dedicated group who manages a process to ensure calls for collateral and exposure reductions are made promptly. Processes exist for the resolution of trades where the level of collateral is disputed, or the collateral called is not received. Eligible collateral types are documented by a CSA to the ISDA Master Agreement and are controlled under the Company's general credit policies. A valuation haircut policy reflects the fact collateral may fall in value between the date the collateral is called and the date of liquidation or enforcement. In practice, most of the Company's collateral held as credit risk mitigation under a CSA is either cash or U.S. government securities. Credit ratings downgrade Certain CSAs to master arrangements provide for rating dependent triggers requiring additional collateral if a counterparty's rating is downgraded. The Company also enters into master arrangements providing for termination upon a party's rating downgrade. The Company analyzes and monitors its potential contingent payment obligations resulting from a rating downgrade in its stress testing approach for liquidity risk on an ongoing basis. At September 30, 2024, the additional collateral required to be posted for a three-notch downgrade of U.S. Bank National Association would be $60.5 million. No additional collateral would be required for a three-notch downgrade of the parent company, U.S. Bancorp. The following table summarizes the netting and collateral positions of the Company's derivatives and securities financing transactions ("SFT") using the Current Exposure Method. As defined by the Rule, the gross current credit exposure is calculated as the greater of the positive mark-to-market of the derivative or zero (asset derivatives). Table 5 General Disclosure for Counterparty Credit Risk of OTC Derivative Contracts, Repo-Style Transactions, and Eligible Margin Loans Represents netting of derivative asset and liability balances, and related collateral, with the same counterparty subject to master netting agreements. All collateral is either cash or money market investments. Certain counterparties have provided collateral in excess of the fair value of the related contracts. The distribution of gross current credit exposure is shown below: In addition to the current fair value for asset derivatives, EAD includes amounts for the potential future exposure which is calculated on both asset and liability derivatives. The notional amount of credit derivatives was $16.8 billion at September 30, 2024 and $15.7 billion at December 31, 2023. The gross positive fair value of derivative contracts averaged $6.3 billion for the third quarter of 2024 and $7.4 billion for the fourth quarter of 2023. The gross positive fair value of SFT contracts averaged $7.2 billion for the third quarter of 2024 and $8.0 billion for the fourth quarter of 2023. Securitization The disclosures in this section refer to securitizations held in the banking book and the regulatory capital on these exposures calculated according to the Rule. A participant in the securitization market is typically an originator, investor, or sponsor. The Company's primary securitization-related activities are investing in products originated by third parties and entering into structured lending transactions with clients as an originator. U.S. Bancorp has not acted in the capacity as a sponsor. Securitization exposures held in the banking book include asset- backed securities, loans and lines of credit. The Company has transferred credit risk of certain lending portfolios synthetically using derivatives and recognizes the credit risk mitigation benefits accordingly. The Company calculates the regulatory capital requirement for securitization exposures in accordance with the hierarchy of approaches prescribed in the Rule. The Company utilizes the Simplified Supervisory Formula Approach ("SSFA") to determine RWA for the majority of its securitization exposures. The SSFA framework considers the Company's seniority in the securitization structure and risk factors inherent in the underlying assets. As presented in Table 6 below, the Company's total securitization exposures at September 30, 2024, were $49.2 billion compared to $38.9 billion at December 31, 2023. Table 6 Securitizations Securitizations by exposure type are shown below (a): Securitizations by capital treatment and underlying exposure type are shown below (a): Securitizations by capital treatment and risk-weight bands are summarized below (a): Table related to the Company as an investor/originator in the securitization. Includes loans, lines of credit, and liquidity facilities. The capital impact of RWA is calculated by multiplying risk weighted assets by the minimum total risk-based capital ratio of 8%. Equity Securities Not Subject to Market Risk Rule The Company had total equity exposures of approximately $22.2 billion, with $16.3 billion in individual equities and $5.9 billion in equity funds at September 30, 2024. The majority of the individual equity investments are related to the Company's community reinvestment activities, including tax-advantaged investments made through U.S. Bancorp Impact Finance. The Company uses the Simple Risk-Weight Approach for its individual equity securities. Equity exposures in equity funds consist of Bank Owned Life Insurance ("BOLI"), private equity, money market and other equity funds. The Company uses the Full Look-Through Approach for BOLI assets in separate and hybrid accounts. Investment guidelines specify objectives and constraints for separate and hybrid account BOLI investment funds, requirements, and duration parameters. In compliance with these guidelines, underlying investment exposures include Treasury, agency, asset-backed, and mortgage-backed securities and corporate notes and bonds. Non-marketable equity securities are generally recorded either at historical cost or by using the equity method. Details of the Company's accounting policy for equity investments and the valuation of financial instruments are provided in Note 1-Significant Accounting Policies in the Annual Report. Marketable equity securities are generally recorded as available-for-sale and carried at fair value with unrealized net gains or losses reported within accumulated other comprehensive income (loss) in shareholders' equity. For regulatory capital purposes unrealized gains are excluded from tier 1 capital. Attachments Original document Permalink Disclaimer U.S. Bancorp published this content on November 08, 2024 , and is solely responsible for the information contained herein. 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