Exhibit 13

The following pages discuss in detail the financial results we achieved in 2021 — results that reflect how we are creating the future now.

The following information appears in accordance with the Private Securities Litigation Reform Act of 1995:

This report 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, including the following risks and uncertainties and the risks and uncertainties more fully discussed in the “Risk Factors” section of this report, which 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; increases in unemployment rates; deterioration in the credit quality of its loan portfolios or in the value of the collateral securing those loans; deterioration in the value of its investment securities; legal and regulatory developments; litigation; increased competition from both banks and non-banks; civil unrest; the effects of climate change; changes in customer behavior and preferences; breaches in data security, including as a result of work-from-home arrangements; failures to safeguard personal information; effects of mergers and acquisitions and related integration; effects of critical accounting policies and judgments; and management’s ability to effectively manage credit risk, market risk, operational risk, compliance risk, strategic risk, interest rate risk, liquidity risk and reputation risk. In addition, U.S. Bancorp’s proposed acquisition of MUFG Union Bank presents risks and uncertainties, including, among others: the risk that the cost savings, any revenue synergies and other anticipated benefits of the proposed acquisition may not be realized or may take longer than anticipated to be realized; the risk that U.S. Bancorp’s business could be disrupted as a result of the announcement and pendency of the proposed acquisition and diversion of management’s attention from ongoing business operations and opportunities; the possibility that the proposed acquisition, including the integration of MUFG Union Bank, may be more costly or difficult to complete than anticipated; delays in closing the proposed acquisition; and the failure of required governmental approvals to be obtained or any other closing conditions in the definitive purchase agreement to be satisfied.

Additional factors could cause actual results to differ from expectations, including the risks discussed in the “Corporate Risk Profile” section on pages 35 to 56 and “Risk Factors” section on pages 137 to 150 of this report. 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.

22	Management’s Discussion and Analysis
	22	Overview
	24	Statement of Income Analysis
	28	Balance Sheet Analysis
	35	Corporate Risk Profile
		35	Overview
		36	Credit Risk Management
		48	Residual Value Risk Management
		48	Operational Risk Management
		49	Compliance Risk Management
		49	Interest Rate Risk Management
		51	Market Risk Management
		52	Liquidity Risk Management
		55	Capital Management
	56	Line of Business Financial Review
	60	Non-GAAP Financial Measures
	62	Accounting Changes
	62	Critical Accounting Policies
	64	Controls and Procedures
65	Reports of Management and Independent Accountants
69	Consolidated Financial Statements and Notes
134	Consolidated Daily Average Balance Sheet and Related Yields and Rates
136	Supplemental Financial Data
137	Company Information
151	Managing Committee
153	Directors

21

Management’s Discussion and Analysis

Overview

In 2021, U.S. Bancorp and its subsidiaries (the “Company”) continued to demonstrate its financial strength and diversified business model. In a year where the economy continued to recover from the impacts of the COVID-19 pandemic, the Company maintained its sound credit quality and strong capital and liquidity position, while continuing to invest in digital capabilities and key business initiatives to drive growth in the future.

The Company earned $8.0 billion in 2021, an increase of $3.0 billion (60.6 percent) from 2020, reflecting a decrease in the provision for credit losses, partially offset by lower pre-provision operating income. The decrease in the provision for credit losses was driven by improvement in the global economy, as well as strong credit and collateral performance. Net interest income decreased due to lower loan spreads and declining average loan balances driven by commercial loan payoffs by business customers, partially offset by changes in deposit and funding mix and higher loan fees. Noninterest income decreased due to lower mortgage banking revenue, commercial products revenue and securities gains, partially offset by improvements in payment services revenue, trust and investment management fees, deposit service charges, treasury management fees and investment products fees. Noninterest expense was higher reflecting increases in compensation expense, employee benefits expense, technology and communications expense, professional services expense, and marketing and business development expense, partially offset by lower net occupancy and equipment expense and other noninterest expense.

In 2021, the Company increased deposits significantly, while average loan balances decreased. Average loan balances in 2021 decreased $10.3 billion (3.4 percent) from 2020 primarily due to lower commercial loans driven by continued payoffs by business customers, lower commercial real estate loans as a result of

customer payoffs and lower credit card loans driven by higher customer payment rates. These decreases were partially offset by higher other retail loans, driven by growth in installment loans due to strong auto and recreational vehicle lending, partially offset by lower home equity and second mortgages as more customers chose to refinance their existing first lien residential mortgage balances during the prior year due to the low interest rate environment. In addition, residential mortgages were higher due to increased loan portfolio production and slower payoffs in the mortgage portfolio. Average deposit balances in 2021 increased $35.7 billion (8.9 percent) over 2020 primarily due to higher noninterest-bearing and total savings deposit balances, partially offset by lower time deposit balances. The growth in average noninterest-bearing and total savings deposits was primarily a result of the actions taken by the federal government to increase liquidity in the financial system and government stimulus programs.

The Company’s common equity tier 1 capital to risk-weighted assets ratio, using the Basel III standardized approach was 10.0 percent at December 31, 2021. Refer to Table 22 for a summary of the statutory capital ratios in effect for the Company at December 31, 2021 and 2020. Further, credit rating organizations rate the Company’s debt among the highest of any bank in the world. This comparative financial strength provides the Company with favorable funding costs, strong liquidity and the ability to attract new customers.

The Company’s financial strength, diversified business model and strong credit quality position it well for 2022. The Company looks to continue building momentum in each of the lines of business, as the investments made in digital transformation and payments ecosystem initiatives will continue to enable customer and revenue growth, and the Company expects continued momentum in customer spend activity and loan growth.

22    

  TABLE 1   Selected Financial Data

Year Ended December 31 (Dollars and Shares in Millions, Except Per Share Data)	2021			2020			2019
Condensed Income Statement
Net interest income	$	12,494		$	12,825		$	13,052
Taxable-equivalent adjustment(a)		106			99			103
Net interest income (taxable-equivalent basis)(b)		12,600			12,924			13,155
Noninterest income		10,227			10,401			9,831
Total net revenue		22,827			23,325			22,986
Noninterest expense		13,728			13,369			12,785
Provision for credit losses		(1,173	)		3,806			1,504
Income before taxes		10,272			6,150			8,697
Income taxes and taxable-equivalent adjustment		2,287			1,165			1,751
Net income		7,985			4,985			6,946
Net (income) loss attributable to noncontrolling interests		(22	)		(26	)		(32	)
Net income attributable to U.S. Bancorp	$	7,963		$	4,959		$	6,914
Net income applicable to U.S. Bancorp common shareholders	$	7,605		$	4,621		$	6,583
Per Common Share
Earnings per share	$	5.11		$	3.06		$	4.16
Diluted earnings per share		5.10			3.06			4.16
Dividends declared per share		1.76			1.68			1.58
Book value per share(c)		32.71			31.26			29.90
Market value per share		56.17			46.59			59.29
Average common shares outstanding		1,489			1,509			1,581
Average diluted common shares outstanding		1,490			1,510			1,583
Financial Ratios
Return on average assets		1.43	%		.93	%		1.45	%
Return on average common equity		16.0			10.0			14.1
Net interest margin (taxable-equivalent basis)(a)		2.49			2.68			3.06
Efficiency ratio(b)		60.4			57.8			55.8
Net charge-offs as a percent of average loans outstanding		.23			.58			.50
Average Balances
Loans	$	296,965		$	307,269		$	290,686
Loans held for sale		8,024			6,985			3,769
Investment securities(d)		154,702			125,954			117,150
Earning assets		506,141			481,402			430,537
Assets		556,532			531,207			475,653
Noninterest-bearing deposits		127,204			98,539			73,863
Deposits		434,281			398,615			346,812
Short-term borrowings		14,774			19,182			18,137
Long-term debt		36,682			44,040			41,572
Total U.S. Bancorp shareholders’ equity		53,810			52,246			52,623
Period End Balances
Loans	$	312,028		$	297,707		$	296,102
Investment securities		174,821			136,840			122,613
Assets		573,284			553,905			495,426
Deposits		456,083			429,770			361,916
Long-term debt		32,125			41,297			40,167
Total U.S. Bancorp shareholders’ equity		54,918			53,095			51,853
Asset Quality
Nonperforming assets	$	878		$	1,298		$	829
Allowance for credit losses		6,155			8,010			4,491
Allowance for credit losses as a percentage of period-end loans		1.97	%		2.69	%		1.52	%
Capital Ratios
Common equity tier 1 capital		10.0	%		9.7	%		9.1	%
Tier 1 capital		11.6			11.3			10.7
Total risk-based capital		13.4			13.4			12.7
Leverage		8.6			8.3			8.8
Total leverage exposure		6.9			7.3			7.0
Tangible common equity to tangible assets(b)		6.8			6.9			7.5
Tangible common equity to risk-weighted assets(b)		9.2			9.5			9.3
Common equity tier 1 capital to risk-weighted assets, reflecting the full implementation of the current expected credit losses methodology(b)		9.6			9.3

(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 60.

(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.

23    

Earnings Summary The Company reported net income attributable to U.S. Bancorp of $8.0 billion in 2021, or $5.10 per diluted common share, compared with $5.0 billion, or $3.06 per diluted common share, in 2020. Return on average assets and return on average common equity were 1.43 percent and 16.0 percent, respectively, in 2021, compared with 0.93 percent and 10.0 percent, respectively, in 2020.

Total net revenue for 2021 was $498 million (2.1 percent) lower than 2020, reflecting a 2.6 percent decrease in net interest income (2.5 percent on a taxable-equivalent basis) and a 1.7 percent decrease in noninterest income. The decrease in net interest income from the prior year was due to lower loan spreads and declining average loan balances driven by commercial loan payoffs by business customers, partially offset by changes in deposit and funding mix and higher loan fees. The decrease in noninterest income was driven by lower mortgage banking revenue, commercial products revenue and securities gains, partially offset by improvements in payment services revenue, trust and investment management fees, deposit service charges, treasury management fees and investment products fees.

Noninterest expense in 2021 was $359 million (2.7 percent) higher than 2020, reflecting increases in compensation expense, employee benefits expense, technology and communications expense, professional services expense, and marketing and business development expense, partially offset by lower net occupancy and equipment expense and other noninterest expense.

Results for 2020 Compared With 2019 For discussion related to changes in financial condition and results of operations for 2020 compared with 2019, refer to “Management’s Discussion and Analysis” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the Securities and Exchange Commission on February 23, 2021.

Pending Acquisition In September 2021, the Company announced that it has entered into a definitive agreement to acquire MUFG Union Bank’s core regional banking franchise from Mitsubishi UFJ Financial Group (“MUFG”), for an expected purchase price of approximately $8.0 billion, including $5.5 billion in cash and approximately 44 million shares of U.S. Bancorp common stock. The transaction excludes the purchase of MUFG Union Bank’s Global Corporate & Investment Bank, certain middle and back office functions, and other assets. MUFG Union Bank currently has approximately 300 branches in California, Washington and Oregon and is expected to add approximately $105 billion in total assets, $58 billion of loans and $90 billion of deposits to the Company’s consolidated balance sheet. The transaction is expected to close in the first half of 2022, subject to customary closing conditions, including regulatory approvals.

Statement of Income Analysis

Net Interest Income Net interest income, on a taxable-equivalent basis, was $12.6 billion in 2021, compared with $12.9 billion in 2020. The $324 million (2.5 percent) decrease in net interest income, on a taxable-equivalent basis, in 2021 compared with 2020, was principally driven by lower loan spreads and declining average loan balances driven by commercial loan payoffs by corporate customers accessing the capital markets and government supported loan programs, partially offset by changes in deposit and funding mix and higher loan fees driven by accelerated loan forgiveness from the Small Business Administration (“SBA”) Paycheck Protection Program. Average earning assets were $24.7 billion (5.1 percent) higher in 2021, compared with 2020, reflecting increases in investment securities and other earning assets primarily representing cash balances, while average loans decreased due to continued payoffs by corporate customers. The net interest margin, on a taxable-equivalent basis, in 2021 was 2.49 percent, compared with 2.68 percent in 2020. The decrease in the net interest margin in 2021, compared with 2020, was primarily due to the mix of loans, lower loan spreads and higher investment securities and cash balances, partially offset by changes in deposit and funding mix and higher loan fees. Refer to the “Interest Rate Risk Management” section for further information on the sensitivity of the Company’s net interest income to changes in interest rates.

Average total loans were $297.0 billion in 2021, compared with $307.3 billion in 2020. The $10.3 billion (3.4 percent) decrease was primarily due to lower commercial loans, commercial real estate loans and credit card loans, partially offset by higher residential mortgages and other retail loans. Average commercial loans decreased $11.1 billion (9.8 percent), driven by continued payoffs by corporate customers that accessed the capital markets and government supported loan programs. Average commercial real estate loans decreased $1.8 billion (4.4 percent), the result of customer payoffs. Average credit card loans decreased $687 million (3.1 percent), driven by higher customer payment rates. Average residential mortgages increased $962 million (1.3 percent) due to increased loan portfolio production and slower payoffs in the mortgage portfolio. Average other retail loans increased $2.3 billion (4.1 percent), driven by growth in installment loans due to strong auto and recreational vehicle lending, partially offset by lower home equity and second mortgages as more customers chose to refinance their existing first lien residential mortgage balances during the prior year due to the low interest rate environment.

24    

  TABLE 2 Analysis of Net Interest Income(a)

Year Ended December 31 (Dollars in Millions)	2021			2020			2019			2021 v 2020			2020 v 2019
Components of Net Interest Income
Income on earning assets (taxable-equivalent basis)	$	13,593		$	14,942		$	17,607		$	(1,349	)	$	(2,665	)
Expense on interest-bearing liabilities (taxable-equivalent basis)		993			2,018			4,452			(1,025	)		(2,434	)
Net interest income (taxable-equivalent basis)(b)	$	12,600		$	12,924		$	13,155		$	(324	)	$	(231	)
Net interest income, as reported	$	12,494		$	12,825		$	13,052		$	(331	)	$	(227	)
Average Yields and Rates Paid
Earning assets yield (taxable-equivalent basis)		2.69	%		3.10	%		4.09	%		(.41	)%		(.99	)%
Rate paid on interest-bearing liabilities (taxable-equivalent basis)		.28			.56			1.34			(.28	)		(.78	)
Gross interest margin (taxable-equivalent basis)		2.41	%		2.54	%		2.75	%		(.13	)%		(.21	)%
Net interest margin (taxable-equivalent basis)		2.49	%		2.68	%		3.06	%		(.19	)%		(.38	)%
Average Balances
Investment securities(c)	$	154,702		$	125,954		$	117,150		$	28,748		$	8,804
Loans		296,965			307,269			290,686			(10,304	)		16,583
Earning assets		506,141			481,402			430,537			24,739			50,865
Noninterest-bearing deposits		127,204			98,539			73,863			28,665			24,676
Interest-bearing deposits		307,077			300,076			272,949			7,001			27,127
Total deposits		434,281			398,615			346,812			35,666			51,803
Interest-bearing liabilities		358,533			363,298			332,658			(4,765	)		30,640

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

(b) See Non-GAAP Financial Measures beginning on page 60.

(c) 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.

Average investment securities in 2021 were $28.7 billion (22.8 percent) higher than in 2020, primarily due to purchases of mortgage-backed, U.S. Treasury and state and political securities, net of prepayments and maturities.

Average total deposits for 2021 were $35.7 billion (8.9 percent) higher than 2020. Average noninterest-bearing deposits were $28.7 billion (29.1 percent) higher in 2021, compared with 2020, reflecting increases across all business lines. Average total savings deposits for 2021 were $20.4 billion (7.8 percent) higher than 2020, driven by increases in Consumer and Business

Banking balances, partially offset by decreases in Corporate and Commercial Banking balances. The growth in average noninterest-bearing and total savings deposits was primarily a result of the actions by the federal government to increase liquidity in the financial system and government stimulus programs. Average time deposits for 2021 were $13.4 billion (35.3 percent) lower than 2020, driven by decreases across most business lines. Time deposits are managed as an alternative to other funding sources, based largely on relative pricing and liquidity characteristics.

25    

  TABLE 3   Net Interest Income — Changes Due to Rate and Volume(a)

	2021 v 2020									2020 v 2019
Year Ended December 31 (Dollars in Millions)	Volume			Yield/Rate			Total			Volume			Yield/Rate			Total
Increase (decrease) in
Interest Income
Investment securities	$	569		$	(623	)	$	(54	)	$	222		$	(684	)	$	(462	)
Loans held for sale		32			(16	)		16			138			(84	)		54
Loans
Commercial		(311	)		(197	)		(508	)		442			(1,479	)		(1,037	)
Commercial real estate		(63	)		(175	)		(238	)		57			(519	)		(462	)
Residential mortgages		35			(224	)		(189	)		231			(209	)		22
Credit card		(74	)		(40	)		(114	)		(112	)		(176	)		(288	)
Other retail		95			(321	)		(226	)		(14	)		(316	)		(330	)
Total loans		(318	)		(957	)		(1,275	)		604			(2,699	)		(2,095	)
Other earning assets		23			(59	)		(36	)		401			(563	)		(162	)
Total earning assets		306			(1,655	)		(1,349	)		1,365			(4,030	)		(2,665	)
Interest Expense
Interest-bearing deposits
Interest checking		15			(56	)		(41	)		36			(198	)		(162	)
Money market savings		(37	)		(292	)		(329	)		237			(1,346	)		(1,109	)
Savings accounts		9			(48	)		(39	)		14			(79	)		(65	)
Time deposits		(110	)		(111	)		(221	)		(130	)		(439	)		(569	)
Total interest-bearing deposits		(123	)		(507	)		(630	)		157			(2,062	)		(1,905	)
Short-term borrowings		(33	)		(41	)		(74	)		21			(247	)		(226	)
Long-term debt		(155	)		(166	)		(321	)		73			(376	)		(303	)
Total interest-bearing liabilities		(311	)		(714	)		(1,025	)		251			(2,685	)		(2,434	)
Increase (decrease) in net interest income	$	617		$	(941	)	$	(324	)	$	1,114		$	(1,345	)	$	(231	)

(a) This table shows the components of the change in net interest income by volume and rate on a taxable-equivalent basis based on a federal income tax rate of 21 percent. This table does not take into account the level of noninterest-bearing funding, nor does it fully reflect changes in the mix of assets and liabilities. The change in interest not solely due to changes in volume or rates has been allocated on a pro-rata basis to volume and yield/rate.

Provision for Credit Losses The provision for credit losses reflects changes in economic conditions and the size and credit quality of the entire portfolio of loans. The Company maintains an allowance for credit losses considered appropriate by management for expected losses, based on factors discussed in the “Analysis and Determination of Allowance for Credit Losses” section.

In 2021, the provision for credit losses was a benefit of $1.2 billion, compared with a provision for credit losses of $3.8 billion in 2020. The change was driven by the Company recognizing a decrease in the allowance for credit losses during 2021 as a result of improvement in the global economy, as well as strong credit and collateral performance, compared with the Company recognizing an increase in the allowance for credit

losses in 2020 due to deteriorating economic conditions related to COVID-19. Net charge-offs decreased $1.1 billion (61.8 percent) in 2021, compared with 2020, reflecting improvements across all loan categories. Nonperforming assets decreased $420 million (32.4 percent) from December 31, 2020 to December 31, 2021, primarily driven by decreases in nonperforming commercial and commercial real estate loans.

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.

26    

  TABLE 4   Noninterest Income

Year Ended December 31 (Dollars in Millions)	2021		2020		2019		2021 v 2020			2020 v 2019
Credit and debit card revenue	$	1,507	$	1,338	$	1,413		12.6	%		(5.3	)%
Corporate payment products revenue		575		497		664		15.7			(25.2	)
Merchant processing services		1,449		1,261		1,601		14.9			(21.2	)
Trust and investment management fees		1,832		1,736		1,673		5.5			3.8
Deposit service charges		724		677		909		6.9			(25.5	)
Treasury management fees		614		568		578		8.1			(1.7	)
Commercial products revenue		1,102		1,143		934		(3.6	)		22.4
Mortgage banking revenue		1,361		2,064		874		(34.1	)		*
Investment products fees		239		192		186		24.5			3.2
Securities gains (losses), net		103		177		73		(41.8	)		*
Other		721		748		926		(3.6	)		(19.2	)
Total noninterest income	$	10,227	$	10,401	$	9,831		(1.7	)%		5.8	%

* Not meaningful.    

Noninterest Income Noninterest income in 2021 was $10.2 billion, compared with $10.4 billion in 2020. The $174 million (1.7 percent) decrease in 2021 from 2020 reflected lower mortgage banking revenue, commercial products revenue, other noninterest income and securities gains, partially offset by higher payment services revenue, trust and investment management fees, deposit service charges, treasury management fees and investment products fees. Mortgage banking revenue decreased 34.1 percent in 2021, compared with 2020, due to lower application volume, given declining refinancing activity, and related gain on sale margins, along with declines in mortgage servicing rights (“MSRs”) valuations, net of hedging activities. Commercial products revenue decreased 3.6 percent in 2021, compared with 2020, primarily due to lower capital markets activity and trading revenue, partially offset by higher syndication revenue and fees, higher non-yield loan fees as a result of higher unused commitments, and higher foreign currency customer activity. Other noninterest income decreased 3.6 percent in 2021, compared with 2020, driven by lower equity investment income and the 2020 impact of transition services agreement revenue associated with the sale of the Company’s ATM third-party servicing business, partially offset by higher retail leasing end of term residual gains and the 2020 impact of certain asset impairments as a result of branch optimization. During 2020, payment services revenue had been adversely affected by the impact of the COVID-19 pandemic on consumer and business

spending, particularly related to travel and entertainment activities. However, spending has strengthened across most sectors driven by government stimulus, local jurisdictions reducing restrictions and consumer behaviors normalizing. As a result, payment services revenue increased in 2021, compared with 2020, driven by a 12.6 percent increase in credit and debit card revenue, a 15.7 percent increase in corporate payment products revenue and a 14.9 percent increase in merchant processing services revenue. Credit and debit card revenue growth related to stronger sales volume and fee activity, partially offset by investment in customer acquisition. Corporate payment products revenue increased primarily due to improving business spending, while merchant processing services revenue increased driven by higher sales volume as well as merchant fees. Trust and investment management fees increased 5.5 percent driven by business growth, favorable market conditions and activity related to the acquisition of PFM Asset Management LLC (“PFM”), partially offset by higher fee waivers. Deposit service charges increased 6.9 percent primarily due to stronger customer activity. Treasury management fees increased 8.1 percent due to core growth driven by the COVID-19 economic recovery. Investment products fees increased 24.5 percent primarily driven by favorable market conditions and growth.

  TABLE 5   Noninterest Expense

Year Ended December 31 (Dollars in Millions)	2021			2020			2019			2021 v 2020			2020 v 2019
Compensation	$	7,299		$	6,635		$	6,325			10.0	%		4.9	%
Employee benefits		1,429			1,303			1,286			9.7			1.3
Net occupancy and equipment		1,048			1,092			1,123			(4.0	)		(2.8	)
Professional services		492			430			454			14.4			(5.3	)
Marketing and business development		366			318			426			15.1			(25.4	)
Technology and communications		1,454			1,294			1,095			12.4			18.2
Postage, printing and supplies		274			288			290			(4.9	)		(.7	)
Other intangibles		159			176			168			(9.7	)		4.8
Other		1,207			1,833			1,618			(34.2	)		13.3
Total noninterest expense	$	13,728		$	13,369		$	12,785			2.7	%		4.6	%
Efficiency ratio(a)		60.4	%		57.8	%		55.8	%

(a) See Non-GAAP Financial Measures beginning on page 60.    

27    

Noninterest Expense Noninterest expense in 2021 was $13.7 billion, compared with $13.4 billion in 2020. The Company’s efficiency ratio was 60.4 percent in 2021, compared with 57.8 percent in 2020. The $359 million (2.7 percent) increase in noninterest expense in 2021 over 2020 was driven by higher compensation expense, employee benefits expense, technology and communications expense, professional services expense, and marketing and business development expense, partially offset by lower net occupancy and equipment expense and other noninterest expense. Compensation expense increased 10.0 percent in 2021 over 2020, due to higher performance-based incentives, revenue related commissions, merit increases and hiring to support business growth. Employee benefits expense increased 9.7 percent driven by higher medical claims expense, compensation related payroll taxes and pension expense. Technology and communications expense increased 12.4 percent primarily due to expenditures supporting business investments. Professional services expense increased 14.4 percent primarily due to an increase in business investment and related initiatives in 2021. Marketing and business development expense increased 15.1 percent due to the timing of marketing campaigns supporting business development and lower marketing activities in 2020 during the pandemic. Net occupancy and equipment expense decreased 4.0 percent primarily due to branch closures. Other noninterest expense decreased 34.2 percent, primarily due to higher COVID-19 related expenses in 2020 including recognizing liabilities related to future delivery exposures for merchant and airline processing, as well as lower amortization related to tax-advantaged projects which were scaled back in 2020 during the pandemic.

Pension Plans Because of the long-term nature of pension plans, the related accounting is complex and can be impacted by several factors, including investment funding policies, accounting methods and actuarial assumptions.

The Company’s pension accounting reflects the long-term nature of the benefit obligations and the investment horizon of plan assets. Amounts recorded in the financial statements reflect actuarial assumptions about participant benefits and plan asset returns. Changes in actuarial assumptions and differences in actual plan experience, compared with actuarial assumptions, are deferred and recognized in expense in future periods.

Pension expense is expected to decrease by approximately $20 million to $181 million in 2022, primarily related to the return on higher plan assets and a higher discount rate, partially offset by demographic experience. Because of the complexity of forecasting pension plan activities, the accounting methods utilized for pension plans, the Company’s ability to respond to factors affecting the plans and the hypothetical nature of actuarial assumptions, the actual pension expense may differ from the expected amount.

Refer to Note 17 of the Notes to the Consolidated Financial Statements for further information on the Company’s pension plan funding practices, investment policies and asset allocation strategies, and accounting policies for pension plans.

The following table shows the effect of hypothetical changes in the discount rate and long-term rate of return (“LTROR”) on the Company’s expected 2022 pension expense:

Discount Rate (Dollars in Millions)	Down 100 Basis Points			Up 100 Basis Points
Incremental benefit (expense)	$	(108	)	$	96
Percent of 2021 net income		(1.01	)%		.90	%
LTROR (Dollars in Millions)	Down 100 Basis Points			Up 100 Basis Points
Incremental benefit (expense)	$	(73	)	$	73
Percent of 2021 net income		(.68	)%		.68	%

Income Tax Expense The provision for income taxes was $2.2 billion (an effective rate of 21.5 percent) in 2021, compared with $1.1 billion (an effective rate of 17.6 percent) in 2020. The higher tax rate for 2021 was due to the marginal impact of providing taxes on higher pretax earnings in 2021.

For further information on income taxes, refer to Note 19 of the Notes to Consolidated Financial Statements.

Balance Sheet Analysis

Average earning assets were $506.1 billion in 2021, compared with $481.4 billion in 2020. The increase in average earning assets of $24.7 billion (5.1 percent) was primarily due to increases in investment securities of $28.7 billion (22.8 percent) and other earning assets of $5.3 billion (12.8 percent), primarily representing higher cash balances, partially offset by a decrease in loans of $10.3 billion (3.4 percent).

For average balance information, refer to Consolidated Daily Average Balance Sheet and Related Yields and Rates on pages 134 and 135.

Loans The Company’s loan portfolio was $312.0 billion at December 31, 2021, compared with $297.7 billion at December 31, 2020, an increase of $14.3 billion (4.8 percent). The increase was driven by increases in commercial loans of $9.2 billion (8.9 percent), other retail loans of $4.9 billion (8.7%), residential mortgages of $338 million (0.4 percent) and credit card loans of $154 million (0.7 percent), partially offset by a decrease in commercial real estate loans of $258 million (0.7 percent). Table 6 provides a summary of the loan distribution by product type, while Table 7 provides a summary of the selected loan maturity distribution by loan category. Average total loans decreased $10.3 billion (3.4 percent) in 2021, compared with 2020. The decrease was due to lower commercial loans, commercial real estate loans and credit card loans, partially offset by increases in other retail loans and residential mortgages.

28    

  TABLE 6   Loan Portfolio Distribution

	2021					2020
At December 31 (Dollars in Millions)	Amount		Percent of Total			Amount		Percent of Total
Commercial
Commercial	$	106,912		34.3	%	$	97,315		32.7	%
Lease financing		5,111		1.6			5,556		1.9
Total commercial		112,023		35.9			102,871		34.6
Commercial Real Estate
Commercial mortgages		28,757		9.2			28,472		9.6
Construction and development		10,296		3.3			10,839		3.6
Total commercial real estate		39,053		12.5			39,311		13.2
Residential Mortgages
Residential mortgages		67,546		21.6			66,525		22.4
Home equity loans, first liens		8,947		2.9			9,630		3.2
Total residential mortgages		76,493		24.5			76,155		25.6
Credit Card		22,500		7.2			22,346		7.5
Other Retail
Retail leasing		7,256		2.3			8,150		2.7
Home equity and second mortgages		10,446		3.4			12,472		4.2
Revolving credit		2,750		.9			2,688		.9
Installment		16,514		5.3			13,823		4.6
Automobile		24,866		8.0			19,722		6.6
Student		127		—			169		.1
Total other retail		61,959		19.9			57,024		19.1
Total loans	$	312,028		100.0	%	$	297,707		100.0	%

  TABLE 7   Selected Loan Maturity Distribution

At December 31, 2021 (Dollars in Millions)	One Year or Less		Over One Through Five Years		Over Five Through Fifteen Years		Over Fifteen Years			Total
Commercial	$	27,220	$	78,342	$	6,295	$	166		$	112,023
Commercial real estate		8,334		22,462		4,527		3,730	(a)		39,053
Residential mortgages		337		877		7,604		67,675			76,493
Credit card		22,500		—		—		—			22,500
Other retail		2,742		20,934		23,893		14,390			61,959
Total loans	$	61,133	$	122,615	$	42,319	$	85,961		$	312,028
Total of loans due after one year with:
							Predetermined Interest Rates			Floating Interest Rates
Commercial							$	16,816		$	67,987
Commercial real estate								10,476			20,243
Residential mortgages								53,517			22,639
Credit card								—			—
Other retail								47,261			11,956
Total							$	128,070		$	122,825

(a) Primarily represents construction loans for single-family residences or loans guaranteed by the SBA.

29    

  TABLE 8   Commercial Loans by Industry Group and Geography

	2021					2020
At December 31 (Dollars in Millions)	Loans		Percent			Loans		Percent
Industry Group
Real-estate related	$	16,646		14.9	%	$	14,032		13.6	%
Financial institutions		14,002		12.5			11,208		10.9
Automotive		7,590		6.8			4,395		4.3
Personal, professional and commercial services		7,095		6.3			7,597		7.4
Healthcare		6,923		6.2			7,815		7.6
Technology		5,119		4.6			3,937		3.8
Retail		4,717		4.2			5,277		5.1
Media and entertainment		4,623		4.1			5,737		5.6
Capital goods		4,099		3.6			2,911		2.8
Food and beverage		4,097		3.6			3,869		3.8
Transportation		3,895		3.5			3,441		3.3
Education and non-profit		3,721		3.3			4,698		4.6
Metals and mining		3,342		3.0			2,892		2.8
State and municipal government		3,166		2.8			3,157		3.1
Power		3,028		2.7			2,150		2.1
Building materials		2,687		2.4			2,813		2.7
Energy		2,299		2.1			2,624		2.6
Agriculture		1,796		1.6			1,950		1.9
Other		13,178		11.8			12,368		12.0
Total	$	112,023		100.0	%	$	102,871		100.0	%
Geography
California	$	15,439		13.8	%	$	14,053		13.7	%
New York		7,483		6.7			6,129		6.0
Texas		6,748		6.0			6,163		6.0
Minnesota		6,730		6.0			7,251		7.0
Illinois		6,572		5.9			5,795		5.6
Ohio		4,310		3.8			4,394		4.3
Wisconsin		3,894		3.5			3,996		3.9
New Jersey		3,825		3.4			2,148		2.1
Virginia		3,822		3.4			2,098		2.0
Missouri		3,817		3.4			4,085		4.0
All other states		49,383		44.1			46,759		45.4
Total	$	112,023		100.0	%	$	102,871		100.0	%

Commercial Commercial loans, including lease financing, increased $9.2 billion (8.9 percent) at December 31, 2021, compared with December 31, 2020, driven by strong new business and higher utilization. Average commercial loans

decreased $11.1 billion (9.8 percent) in 2021, compared with 2020. Table 8 provides a summary of commercial loans by industry and geographical location.

30    

  TABLE 9   Commercial Real Estate Loans by Property Type and Geography

	2021					2020
At December 31 (Dollars in Millions)	Loans		Percent			Loans		Percent
Property Type
Multi-family	$	9,293		23.8	%	$	8,672		22.1	%
Business owner occupied		8,238		21.1			8,622		21.9
Office		5,814		14.9			6,081		15.5
Industrial		3,672		9.4			2,941		7.5
Retail		3,382		8.7			3,645		9.3
Residential land and development		2,788		7.1			2,724		6.9
Lodging		2,422		6.2			2,814		7.1
Other		3,444		8.8			3,812		9.7
Total	$	39,053		100.0	%	$	39,311		100.0	%
Geography
California	$	9,683		24.8	%	$	9,653		24.6	%
Washington		3,680		9.4			3,427		8.7
Minnesota		1,717		4.4			1,869		4.7
Colorado		1,684		4.3			1,680		4.3
Texas		1,662		4.3			1,600		4.1
Oregon		1,526		3.9			1,738		4.4
Florida		1,520		3.9			1,265		3.2
Illinois		1,409		3.6			1,487		3.8
Wisconsin		1,391		3.6			1,585		4.0
Ohio		1,215		3.1			1,213		3.1
All other states		13,566		34.7			13,794		35.1
Total	$	39,053		100.0	%	$	39,311		100.0	%

Commercial Real Estate The Company’s portfolio of commercial real estate loans, which includes commercial mortgages and construction and development loans, decreased $258 million (0.7 percent) at December 31, 2021, compared with December 31, 2020. The decrease was primarily the result of customers paying down balances. Average commercial real estate loans decreased $1.8 billion (4.4 percent) in 2021, compared with 2020. Table 9 provides a summary of commercial real estate loans by property type and geographical location.

At December 31, 2021 and 2020, $72 million and $80 million, respectively, of tax-exempt industrial development loans were

secured by real estate. The Company’s commercial mortgage and construction and development loans had unfunded commitments of $11.8 billion and $11.3 billion at December 31, 2021 and 2020, respectively.

The Company also finances the operations of real estate developers and other entities with operations related to real estate. These loans are not secured directly by real estate but have similar characteristics to commercial real estate loans. These loans were included in the commercial loan category and totaled $16.6 billion and $14.0 billion at December 31, 2021 and 2020, respectively.

31    

  TABLE 10   Residential Mortgages by Geography

	2021					2020
At December 31 (Dollars in Millions)	Loans		Percent			Loans		Percent
California	$	23,568		30.8	%	$	22,994		30.2	%
Washington		4,002		5.2			3,943		5.2
Minnesota		3,767		4.9			4,378		5.7
Colorado		3,612		4.7			3,777		5.0
Illinois		3,392		4.4			3,786		5.0
Florida		3,340		4.4			3,112		4.1
Arizona		2,684		3.5			2,865		3.8
Oregon		2,332		3.1			2,399		3.1
Texas		2,209		2.9			2,244		2.9
Ohio		2,072		2.7			2,241		2.9
All other states		25,515		33.4			24,416		32.1
Total	$	76,493		100.0	%	$	76,155		100.0	%

Residential Mortgages Residential mortgages held in the loan portfolio at December 31, 2021, increased $338 million (0.4 percent) compared to December 31, 2020, due to increased loan portfolio production and slower payoffs. Average residential mortgages increased $962 million (1.3 percent) in 2021, compared with 2020. Residential mortgages originated and placed in the Company’s loan portfolio include well-secured jumbo mortgages and branch-originated first lien home equity loans to borrowers with high credit quality.

Credit Card Total credit card loans increased $154 million (0.7 percent) at December 31, 2021, compared with December 31, 2020, reflecting increased consumer spending.

Average credit card balances decreased $687 million (3.1 percent) in 2021, compared with 2020.

Other Retail Total other retail loans, which include retail leasing, home equity and second mortgages and other retail loans, increased $4.9 billion (8.7 percent) at December 31, 2021, compared with December 31, 2020, reflecting increases in auto loans and installment loans, partially offset by decreases in home equity loans and retail leasing balances. Average other retail loans increased $2.3 billion (4.1 percent) in 2021, compared with 2020. Tables 10, 11 and 12 provide a geographic summary of residential mortgages, credit card loans and other retail loans outstanding, respectively, as of December 31, 2021 and 2020.

  TABLE 11   Credit Card Loans by Geography

	2021					2020
At December 31 (Dollars in Millions)	Loans		Percent			Loans		Percent
California	$	2,134		9.5	%	$	2,175		9.7	%
Texas		1,343		6.0			1,300		5.8
Ohio		1,113		4.9			1,153		5.2
Minnesota		1,109		4.9			1,126		5.0
Illinois		1,108		4.9			1,095		4.9
Florida		1,046		4.6			974		4.4
Wisconsin		895		4.0			926		4.1
Michigan		822		3.7			848		3.8
Colorado		761		3.4			773		3.5
Washington		757		3.4			789		3.5
All other states		11,412		50.7			11,187		50.1
Total	$	22,500		100.0	%	$	22,346		100.0	%

32    

  TABLE 12   Other Retail Loans by Geography

	2021					2020
At December 31 (Dollars in Millions)	Loans		Percent			Loans		Percent
California	$	9,605		15.5	%	$	9,179		16.1	%
Texas		7,570		12.2			6,381		11.2
Florida		3,850		6.2			3,135		5.5
Minnesota		2,947		4.8			3,009		5.3
Illinois		2,692		4.3			2,571		4.5
Ohio		2,634		4.2			2,579		4.5
New York		2,014		3.3			1,766		3.1
Washington		1,913		3.1			1,809		3.2
Colorado		1,859		3.0			1,886		3.3
Missouri		1,683		2.7			1,687		2.9
All other states		25,192		40.7			23,022		40.4
Total	$	61,959		100.0	%	$	57,024		100.0	%

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

Loans Held for Sale Loans held for sale, consisting primarily of residential mortgages to be sold in the secondary market, were

$7.8 billion at December 31, 2021, compared with $8.8 billion at December 31, 2020. The decrease in loans held for sale was principally due to a lower level of mortgage loan closings in late 2021, compared with the same period of 2020. Almost all of the residential mortgage loans the Company originates or purchases for sale follow guidelines that allow the loans to be sold into existing, highly liquid secondary markets; in particular in government agency transactions and to government sponsored enterprises (“GSEs”).

  TABLE 13   Investment Securities

	2021									2020
At December 31 (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)
Held-to-maturity
Mortgage-backed securities(a)	$	41,858	$	41,812		7.4		1.45	%	$	—	$	—		—		—	%
Total held-to-maturity	$	41,858	$	41,812		7.4		1.45	%	$	—	$	—		—		—	%
Available-for-sale
U.S. Treasury and agencies	$	36,648	$	36,609		6.7		1.54	%	$	21,954	$	22,391		3.8		1.37	%
Mortgage-backed securities(a)		85,394		85,564		4.9		1.58			103,282		105,374		3.0		1.47
Asset-backed securities(a)		62		66		5.2		1.53			200		205		6.2		1.47
Obligations of state and political subdivisions(b)(c)		10,130		10,717		6.6		3.67			8,166		8,861		6.3		3.99
Other		7		7		3.4		2.07			9		9		.1		1.81
Total available-for-sale	$	132,241	$	132,963		5.5		1.73	%	$	133,611	$	136,840		3.4		1.61	%

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

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

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

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

33    

Investment Securities The Company uses its investment securities portfolio to manage interest rate risk, provide liquidity (including the ability to meet regulatory requirements), generate interest and dividend income, and as collateral for public deposits and wholesale funding sources. While the Company intends to hold its investment securities indefinitely, it may sell available-for-sale investment securities in response to structural changes in the balance sheet and related interest rate risk and to meet liquidity requirements, among other factors.

Investment securities totaled $174.8 billion at December 31, 2021, compared with $136.8 billion at December 31, 2020. The $38.0 billion (27.8 percent) increase reflected $41.9 billion of net investment purchases, partially offset by a $3.8 billion unfavorable change in net unrealized gains (losses) on available-for-sale investment securities. During the fourth quarter of 2021, the Company transferred $43.1 billion amortized cost ($41.8 billion fair value) of available-for-sale investment securities to the held-to-maturity category to reflect its new intent for these securities. The Company had no outstanding investment securities classified as held-to-maturity at December 31, 2020.

Average investment securities were $154.7 billion in 2021, compared with $126.0 billion in 2020. The weighted-average yield of the available-for-sale investment securities portfolio was 1.73 percent at December 31, 2021, compared with 1.61 percent at December 31, 2020. The weighted-average maturity of the available-for-sale investment securities portfolio was 5.5 years at December 31, 2021, compared with 3.4 years at December 31, 2020. The weighted-average yield of the held-to-maturity investment securities portfolio was 1.45 percent at December 31, 2021. The weighted-average maturity of the held-to-maturity investment securities portfolio was 7.4 years at December 31, 2021. Investment securities by type are shown in Table 13.

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 December 31, 2021, the Company’s net unrealized gains on available-for-sale investment securities were $722 million, compared with $3.2 billion at December 31, 2020. The unfavorable change in net unrealized gains was primarily due to decreases in the fair value of mortgage-backed and U.S. Treasury securities as a result of changes in interest rates, partially offset by the impact of the transfer of available-for-sale investment securities to the held-to-maturity category. Gross unrealized losses on available-for-sale investment securities totaled $812 million at December 31, 2021, compared with $53 million at December 31, 2020. 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 the underlying collateral, the existence of any government or agency guarantees, and market conditions. At December 31, 2021, the Company had no plans to sell securities with unrealized losses, and believes it is more likely than not that it would not be required to sell such securities before recovery of their amortized cost.

Refer to Notes 5 and 22 in the Notes to Consolidated Financial Statements for further information on investment securities.

Deposits Total deposits were $456.1 billion at December 31, 2021, compared with $429.8 billion at December 31, 2020. The $26.3 billion (6.1 percent) increase in total deposits reflected increases in noninterest-bearing and total savings deposits, partially offset by a decrease in time deposits. Average total deposits in 2021 increased $35.7 billion (8.9 percent) over 2020.

Noninterest-bearing deposits at December 31, 2021, increased $16.8 billion (14.2 percent) from December 31, 2020. The increase was driven by higher Wealth Management and Investment Services, and Corporate and Commercial Banking balances. Average noninterest-bearing deposits increased $28.7 billion (29.1 percent) in 2021, compared with 2020.

Interest-bearing savings deposits increased $17.5 billion (6.2 percent) at December 31, 2021, compared with December 31, 2020. The increase was related to higher interest checking and savings account deposit balances, partially offset by lower money market deposit balances. Interest checking balances increased $19.2 billion (20.0 percent) primarily due to higher Consumer and Business Banking, and Corporate and Commercial Banking balances. Savings account balances increased $8.8 billion (15.3 percent), driven by higher Consumer and Business Banking balances. Money market deposit balances decreased $10.4 billion (8.2 percent), primarily due to lower Wealth Management and Investment Services balances, partially offset by higher Corporate and Commercial Banking balances. Average interest-bearing savings deposits increased $20.4 billion (7.8 percent) in 2021, compared with 2020, reflecting higher Consumer and Business Banking balances, partially offset by lower Corporate and Commercial Banking balances.

Interest-bearing time deposits at December 31, 2021, decreased $8.0 billion (26.2 percent), compared with December 31, 2020. Average time deposits decreased $13.4 billion (35.3 percent) in 2021, compared with 2020. The decreases were primarily driven by lower Corporate and Commercial Banking, Consumer and Business Banking, and Wealth Management and Investment Services balances. Changes in time deposits are primarily related to those deposits managed as an alternative to other funding sources, based largely on relative pricing and liquidity characteristics.

34    

  TABLE 14   Deposits

The composition of deposits was as follows:

	2021					2020
At December 31 (Dollars in Millions)	Amount		Percent of Total			Amount		Percent of Total
Noninterest-bearing deposits	$	134,901		29.6	%	$	118,089		27.5	%
Interest-bearing deposits
Interest checking		115,108		25.2			95,894		22.3
Money market savings		117,619		25.8			128,058		29.8
Savings accounts		65,790		14.4			57,035		13.3
Total savings deposits		298,517		65.4			280,987		65.4
Domestic time deposits less than $250,000		11,303		2.5			14,187		3.3
Domestic time deposits greater than $250,000		2,743		.6			4,413		1.0
Foreign time deposits		8,619		1.9			12,094		2.8
Total interest-bearing deposits		321,182		70.4			311,681		72.5
Total deposits(a)	$	456,083		100.0	%	$	429,770		100.0	%

(a) Includes $238.0 billion and $239.0 billion of deposits at December 31, 2021 and 2020, respectively, that are not subject to any federal, state or foreign deposit insurance program.

The maturity of domestic time deposits in excess of the insurance limit and those time deposits not subject to any federal, state    

or foreign deposit insurance program at December 31, 2021 was as follows:

(Dollars in Millions)	Domestic Time Deposits Greater Than $250,000		Foreign Time Deposits		Total
Three months or less	$	1,107	$	8,619	$	9,726
Three months through six months		365		—		365
Six months through one year		742		—		742
Thereafter		529		—		529
Total	$	2,743	$	8,619	$	11,362

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 $11.8 billion at December 31, 2021 and 2020. The $30 million (0.3 percent) increase in short-term borrowings at December 31, 2021, compared with December 31, 2020, reflected higher repurchase agreement and commercial paper balances, mostly offset by lower federal funds purchased balances.

Long-term debt was $32.1 billion at December 31, 2021, compared with $41.3 billion at December 31, 2020. The $9.2 billion (22.2 percent) decrease was primarily due to $7.0 billion of bank note repayments and maturities, $3.0 billion of medium-term note repayments and a $1.0 billion decrease in Federal Home Loan Bank (“FHLB”) advances, partially offset by $1.0 billion of bank note and $1.3 billion of subordinated note issuances.

Refer to Notes 13 and 14 of the Notes to Consolidated Financial Statements for additional information regarding short-term borrowings and long-term debt, and 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

35    

are identified for each of the most prominent exposures. With respect to direct impacts from COVID-19, oversight and governance is managed through a centralized command center with frequent reporting to the Managing Committee and ERC. The Board of Directors also oversees the Company’s responsiveness to the COVID-19 pandemic.

Credit risk is the risk of loss associated with a change in the credit profile or the failure of a borrower or counterparty to meet its contractual obligations. Interest rate risk is the current or prospective risk to earnings and capital, or market valuations, arising from the impact of changes in interest rates. Market risk arises from fluctuations in interest rates, foreign exchange rates, and security prices that may result in changes in the values of financial instruments, such as trading and available-for-sale securities, mortgage loans held for sale (“MLHFS”), MSRs and derivatives that are accounted for on a fair value basis. Liquidity risk is the risk that financial condition or overall safety and soundness is adversely affected by the Company’s inability, or perceived inability, to meet its cash flow obligations in a timely and complete manner in either normal or stressed conditions. Operational risk is the risk to current or projected financial condition and resilience arising from inadequate or failed internal processes or systems, people (including human errors or misconduct), or adverse external events, including the risk of loss resulting from breaches in data security. Operational risk can also include the risk of loss due to failures by third parties with which the Company does business. Compliance risk is the risk that the Company may suffer legal or regulatory sanctions, financial losses, and reputational damage if it fails to adhere to compliance requirements and the Company’s compliance policies. Strategic risk is the risk to current or projected financial condition and resilience arising from adverse business decisions, poor implementation of business decisions, or lack of responsiveness to changes in the banking industry and operating environment. Reputation risk is the risk to current or anticipated earnings, capital, or franchise or enterprise value arising from negative public opinion. This risk may impair the Company’s competitiveness by affecting its ability to establish new relationships or services, or continue serving existing relationships. In addition to the risks identified above, other risk factors exist that may impact the Company. Refer to “Risk Factors” beginning on page 137, 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. The strategy also emphasizes diversification on a geographic, industry and customer level, regular credit examinations and management reviews of loans exhibiting deterioration of credit quality. The Risk Management Committee oversees the Company’s credit risk management process.

In addition, credit quality ratings as defined by the Company, are an important part of the Company’s overall credit risk management and evaluation of its allowance for credit losses. Loans with a pass rating represent those loans not classified on the Company’s rating scale for problem credits, as minimal credit risk has been identified. Loans with a special mention or classified rating, including consumer lending and small business loans that are 90 days or more past due and still accruing, nonaccrual

36    

loans, those loans considered troubled debt restructurings (“TDRs”), and loans in a junior lien position that are current but are behind a first lien position on nonaccrual, encompass all loans held by the Company that it considers to have a potential or well-defined weakness that may put full collection of contractual cash flows at risk. The Company’s internal credit quality ratings for consumer loans are primarily based on delinquency and nonperforming status, except for a limited population of larger loans within those portfolios that are individually evaluated. For this limited population, the determination of the internal credit quality rating may also consider collateral value and customer cash flows. Refer to Notes 1 and 6 in the Notes to Consolidated Financial Statements for further discussion of the Company’s loan portfolios including internal credit quality ratings.

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

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

The consumer lending segment represents loans and leases made to consumer customers, including residential mortgages, credit card loans, and other retail loans such as revolving consumer lines, auto loans and leases, home equity loans and lines, and student loans, a run-off portfolio. Home equity or second mortgage loans are junior lien closed-end accounts fully disbursed at origination. These loans typically are fixed rate loans, secured by residential real estate, with a 10- or 15-year fixed payment amortization schedule. Home equity lines are revolving accounts giving the borrower the ability to draw and repay balances repeatedly, up to a maximum commitment, and are secured by residential real estate. These include accounts in either a first or junior lien position. Typical terms on home equity lines in the portfolio are variable rates benchmarked to the prime rate, with a 10- or 15-year draw period during which a minimum payment is equivalent to the monthly interest, followed by a 20- or 10-year amortization period, respectively. At December 31,

2021, substantially all of the Company’s home equity lines were in the draw period. Approximately $1.2 billion, or 13 percent, of the outstanding home equity line balances at December 31, 2021, will enter the amortization period within the next 36 months. Key risk characteristics relevant to consumer lending segment loans primarily relate to the borrowers’ capacity and willingness to repay and include unemployment rates, consumer bankruptcy filings and other macroeconomic factors, customer payment history and credit scores, and in some cases, updated loan-to-value (“LTV”) information reflecting current market conditions on real estate-based loans. These and other risk characteristics, including 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.

Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments. The Company also engages in non-lending activities that may give rise to credit risk, including derivative transactions for balance sheet hedging purposes, foreign exchange transactions, deposit overdrafts and interest rate contracts for customers, investments in securities and other financial assets, and settlement risk, including Automated Clearing House transactions and the processing of credit card transactions for merchants. These activities are subject to credit review, analysis and approval processes.

Economic and Other Factors In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), collateral values, trends in loan performance and macroeconomic factors, such as changes in unemployment rates, gross domestic product levels and consumer bankruptcy filings, as well as the potential impact on customers and the domestic economy resulting from the COVID-19 pandemic.

During the first half of 2020, the COVID-19 pandemic and the mitigation efforts put in place by companies, consumers and governmental authorities to contain it, created the most severe negative impact to the domestic economy since the Great Depression. During 2021, factors affecting economic conditions, including the enactment of additional benefits from government stimulus programs and broad vaccine availability in the United States, have contributed to economic improvement. As a result, economic projections for both the gross domestic product and unemployment levels improved from the prior year. However, economic uncertainty remains associated with supply chain concerns, rising inflationary concerns and additional virus variants.

37    

Credit Diversification 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 traditional commercial lending products and specialized products such as asset-based lending, commercial lease financing, agricultural credit, warehouse mortgage lending, small business lending, commercial real estate lending, health care lending and correspondent banking financing. The Company also offers an array of consumer lending products, including residential mortgages, credit card loans, auto loans, retail leases, home equity loans and lines, revolving credit arrangements and other consumer loans. These consumer lending products are primarily offered through the branch office network, home mortgage and loan production offices, mobile and on-line banking, and indirect distribution channels, such as auto and recreational vehicle dealers. The Company monitors and manages the portfolio diversification by industry, customer and geography. Table 6 provides information with respect to the overall product diversification and changes in the mix during 2021.

The commercial loan class is diversified among various industries with higher concentrations in real estate and financial institutions. Additionally, the commercial loan class is diversified across the Company’s geographical markets, with a higher concentration in California. Table 8 provides a summary of significant industry groups and geographical locations of commercial loans outstanding at December 31, 2021 and 2020.

The commercial real estate loan class reflects the Company’s focus on serving business owners within states encompassing its branch office network, as well as regional and national investment-based real estate owners and builders. Within the commercial real estate loan class, different property types have varying degrees of credit risk. Table 9 provides a summary of the significant property types and geographical locations of commercial real estate loans outstanding at December 31, 2021 and 2020. At December 31, 2021, approximately 21.1 percent of the commercial real estate loans represented business owner-occupied properties that tend to exhibit less credit risk than non

owner-occupied properties. The investment-based real estate mortgages are diversified among various property types with somewhat higher concentrations in multi-family, office, industrial and retail properties. From a geographical perspective, the Company’s commercial real estate loan class is generally well diversified, with a higher concentration in California.

The Company’s consumer lending segment utilizes several distinct business processes and channels to originate consumer credit, including traditional branch lending, mobile and on-line banking, indirect lending, alliance partnerships and correspondent banks. Each distinct underwriting and origination activity manages unique credit risk characteristics and prices its loan production commensurate with the differing risk profiles.

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

The Company estimates updated LTV information on its outstanding residential mortgages quarterly, based on a method that combines automated valuation model updates and relevant home price indices. LTV is the ratio of the loan’s outstanding principal balance to the current estimate of property value. For home equity and second mortgages, combined loan-to-value (“CLTV”) is the combination of the first mortgage original principal balance and the second lien outstanding principal balance, relative to the current estimate of property value. Certain loans do not have an LTV or CLTV, primarily due to lack of availability of relevant automated valuation model and/or home price indices values, or lack of necessary valuation data on acquired loans.

38    

The following tables provide summary information of residential mortgages and home equity and second mortgages by LTV at December 31, 2021:

Residential Mortgages (Dollars in Millions)	Interest Only		Amortizing		Total		Percent of Total
Loan-to-Value
Less than or equal to 80%	$	3,680	$	62,380	$	66,060		86.4	%
Over 80% through 90%		—		1,946		1,946		2.5
Over 90% through 100%		—		193		193		.3
Over 100%		—		72		72		.1
No LTV available		—		22		22		—
Loans purchased from GNMA mortgage pools(a)		—		8,200		8,200		10.7
Total(b)	$	3,680	$	72,813	$	76,493		100.0	%

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

(b) At December 31, 2021, approximately $418 million of residential mortgage balances were considered sub-prime.    

Home Equity and Second Mortgages (Dollars in Millions)	Lines		Loans		Total		Percent of Total
Loan-to-Value / Combined Loan-to-Value
Less than or equal to 80%	$	9,132	$	638	$	9,770		93.5	%
Over 80% through 90%		282		223		505		4.8
Over 90% through 100%		47		23		70		.7
Over 100%		38		4		42		.4
No LTV/CLTV available		56		3		59		.6
Total(a)	$	9,555	$	891	$	10,446		100.0	%

(a) At December 31, 2021, approximately $33 million of home equity and second mortgage balances were considered sub-prime.

Home equity and second mortgages were $10.4 billion at December 31, 2021, compared with $12.5 billion at December 31, 2020, and included $3.0 billion of home equity lines in a first lien position and $7.4 billion of home equity and second mortgage loans and lines in a junior lien position. Loans and lines in a junior lien position at December 31, 2021, included approximately $2.6 billion of loans and lines for which the Company also serviced the related first lien loan, and

approximately $4.8 billion where the Company did not service the related first lien loan. The Company was able to determine the status of the related first liens using information the Company has as the servicer of the first lien or information reported on customer credit bureau files. The Company also evaluates other indicators of credit risk for these junior lien loans and lines, including delinquency, estimated average CLTV ratios and updated weighted-average credit scores in making its assessment of credit risk, related loss estimates and determining the allowance for credit losses.

The following table provides a summary of delinquency statistics and other credit quality indicators for the Company’s junior lien positions at December 31, 2021:

	Junior Liens Behind
(Dollars in Millions)	Company Owned or Serviced First Lien			Third Party First Lien			Total
Total	$	2,594		$	4,795		$	7,389
Percent 30 - 89 days past due		.53	%		.56	%		.55	%
Percent 90 days or more past due		.11	%		.08	%		.09	%
Weighted-average CLTV		58	%		56	%		57	%
Weighted-average credit score		782			783			782

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.

Credit card and other retail loans are diversified across customer segments and geographies. Diversification in the credit card portfolio is achieved with broad customer relationship distribution through the Company’s and financial institution partners’ branches, retail and affinity partners, and digital channels.

Tables 10, 11 and 12 provide a geographical summary of the residential mortgage, credit card and other retail loan portfolios, respectively.

39    

  TABLE 15   Delinquent Loan Ratios as a Percent of Ending Loan Balances

At December 31 90 days or more past due excluding nonperforming loans	2021			2020
Commercial
Commercial		.05	%		.06	%
Lease financing		—			—
Total commercial		.04			.05
Commercial Real Estate
Commercial mortgages		—			—
Construction and development		.10			.02
Total commercial real estate		.03			.01
Residential Mortgages(a)		.24			.18
Credit Card		.73			.88
Other Retail
Retail leasing		.04			.05
Home equity and second mortgages		.35			.36
Other		.06			.10
Total other retail		.11			.15
Total loans		.15	%		.16	%
At December 31 90 days or more past due including nonperforming loans	2021			2020
Commercial		.20	%		.42	%
Commercial real estate		.76			1.15
Residential mortgages(a)		.53			.50
Credit card		.73			.88
Other retail		.35			.42
Total loans		.42	%		.57	%

(a) Delinquent loan ratios exclude $1.5 billion and $1.8 billion at December 31, 2021 and 2020, respectively, 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 2.43 percent and 2.87 percent at December 31, 2021 and 2020, respectively.

Loan Delinquencies Trends in delinquency ratios are an indicator, among other considerations, of credit risk within the Company’s loan portfolios. The entire balance of a loan account is considered delinquent if the minimum payment contractually required to be made is not received by the date specified on the billing statement. The Company measures delinquencies, both including and excluding nonperforming loans, to enable comparability with other companies. Delinquent 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, are excluded from delinquency statistics. In addition, in certain situations, a consumer lending customer’s account may be re-aged to remove it from delinquent status. Generally, the purpose of re-aging accounts is to assist customers who have recently overcome temporary financial difficulties and have demonstrated both the ability and willingness to resume regular payments.

In addition, the Company may re-age the consumer lending account of a customer who has experienced longer-term financial difficulties and apply modified, concessionary terms and conditions to the account. Commercial lending loans are generally not subject to re-aging policies.

Accruing loans 90 days or more past due totaled $472 million at December 31, 2021, compared with $477 million at December 31, 2020. Accruing loans 90 days or more past due are not included in nonperforming assets and continue to accrue interest because they are adequately secured by collateral, are in the process of collection and are reasonably expected to result in repayment or restoration to current status, or are managed in homogeneous portfolios with specified charge-off timeframes adhering to regulatory guidelines. The ratio of accruing loans 90 days or more past due to total loans was 0.15 percent at December 31, 2021, compared with 0.16 percent at December 31, 2020.

40    

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
At December 31 (Dollars in Millions)	2021		2020		2021			2020
Residential Mortgages(a)
30-89 days	$	124	$	244		.15	%		.32	%
90 days or more		181		137		.24			.18
Nonperforming		226		245		.30			.32
Total	$	531	$	626		.69	%		.82	%
Credit Card
30-89 days	$	193	$	231		.86	%		1.04	%
90 days or more		165		197		.73			.88
Nonperforming		—		—		—			—
Total	$	358	$	428		1.59	%		1.92	%
Other Retail
Retail Leasing
30-89 days	$	29	$	35		.40	%		.43	%
90 days or more		3		4		.04			.05
Nonperforming		10		13		.14			.16
Total	$	42	$	52		.58	%		.64	%
Home Equity and Second Mortgages
30-89 days	$	55	$	68		.53	%		.54	%
90 days or more		37		45		.35			.36
Nonperforming		116		107		1.11			.86
Total	$	208	$	220		1.99	%		1.76	%
Other(b)
30-89 days	$	191	$	215		.43	%		.60	%
90 days or more		26		37		.06			.10
Nonperforming		24		34		.05			.09
Total	$	241	$	286		.54	%		.79	%

(a) Excludes $.8 billion of loans 30-89 days past due and $1.5 billion of loans 90 days or more past due at December 31, 2021, purchased from GNMA mortgage pools that continue to accrue interest, compared with $1.4 billion and $1.8 billion at December 31, 2020, respectively.

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

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

Troubled Debt Restructurings Concessionary modifications are classified as TDRs unless the modification results in only an insignificant delay in the payments to be received. TDRs accrue interest if the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a

level commensurate with the modified terms over several payment cycles, which is generally six months or greater. At December 31, 2021, performing TDRs were $3.1 billion, compared with $3.6 billion at December 31, 2020.

The Company continues to work with customers to modify loans for borrowers who are experiencing financial difficulties. Many of the Company’s TDRs are determined on a case-by-case basis in connection with ongoing loan collection processes. The modifications vary within each of the Company’s loan classes. Commercial lending segment TDRs generally include extensions of the maturity date and may be accompanied by an increase or decrease to the interest rate. The Company may also work with the borrower to make other changes to the loan to mitigate losses, such as obtaining additional collateral and/or guarantees to support the loan.

The Company has also implemented certain residential mortgage loan restructuring programs that may result in TDRs. The Company modifies residential mortgage loans under Federal Housing Administration, United States Department of Veterans Affairs, and its own internal programs. Under these programs, the Company offers qualifying homeowners the opportunity to permanently modify their loan and achieve more affordable monthly payments by providing loan concessions. These concessions may include adjustments to interest rates, conversion of adjustable rates to fixed rates, extensions of maturity dates or deferrals of payments, capitalization of accrued interest and/or outstanding advances, or in limited situations, partial forgiveness of loan principal. In most instances, participation in residential mortgage loan restructuring programs requires the customer to complete a short-term trial period. A permanent loan modification is contingent on the customer successfully completing the trial period arrangement, and the loan documents are not modified until that time. The Company reports loans in a trial period arrangement as TDRs and continues to report them as TDRs after the trial period.

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.

41    

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 December 31, 2021 (Dollars in Millions)	Performing TDRs		30-89 Days Past Due			90 Days or More Past Due			Nonperforming TDRs			Total TDRs
Commercial	$	130		5.0	%		2.9	%	$	77	(a)	$	207
Commercial real estate		92		1.2			—			219	(b)		311
Residential mortgages		1,363		3.0			4.9			126			1,489	(d)
Credit card		234		10.9			5.0			—			234
Other retail		164		11.0			5.9			38	(c)		202	(e)
TDRs, excluding loans purchased from GNMA mortgage pools		1,983		4.7			4.6			460			2,443
Loans purchased from GNMA mortgage pools(g)		1,071		—			—			—			1,071	(f)
Total	$	3,054		3.0	%		3.0	%	$	460		$	3,514

(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 $231 million of residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $22 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

(e) Includes $69 million of other retail loans to borrowers that have had debt discharged through bankruptcy and $14 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

(f) Includes $177 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 $132 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

(g) Approximately 8.5 percent and 35.8 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.

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. Most of the borrowers who received account modifications are no longer participating in these payment relief programs, as the programs are generally short-term. At December 31, 2021, less than 3,000 accounts representing approximately $304 million in loan balances, were currently in the Company’s payment relief programs. Borrowers participating in these programs at December 31, 2021 primarily represented those receiving payment forbearance on residential mortgages; payment relief for other loan products is insignificant. These amounts exclude loans purchased from GNMA mortgage pools whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veteran Affairs

and have received COVID-19 payment relief under the respective government agency’s programs.

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 December 31, 2021, total nonperforming assets were $878 million, compared with $1.3 billion at December 31, 2020. The $420 million (32.4 percent) decrease in nonperforming assets, from December 31, 2020 to December 31, 2021, was driven by decreases in nonperforming commercial and commercial real estate loans. The ratio of total nonperforming assets to total loans and other real estate was 0.28 percent at December 31, 2021, compared with 0.44 percent at December 31, 2020. Nonperforming assets are expected to continue to decline over the next several quarters. However, some manageable levels of elevated nonperforming assets in certain industries and loan categories impacted by the pandemic may experience longer recovery periods.

OREO was $22 million at December 31, 2021, compared with $24 million at December 31, 2020, and was related to foreclosed properties that previously secured loan balances. These balances exclude foreclosed GNMA loans whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.

42    

  TABLE 16   Nonperforming Assets(a)

At December 31 (Dollars in Millions)	2021			2020
Commercial
Commercial	$	139		$	321
Lease financing		35			54
Total commercial		174			375
Commercial Real Estate
Commercial mortgages		213			411
Construction and development		71			39
Total commercial real estate		284			450
Residential Mortgages(b)		226			245
Credit Card		—			—
Other Retail
Retail leasing		10			13
Home equity and second mortgages		116			107
Other		24			34
Total other retail		150			154
Total nonperforming loans(1)		834			1,224
Other Real Estate(c)		22			24
Other Assets		22			50
Total nonperforming assets	$	878		$	1,298
Accruing loans 90 days or more past due(b)	$	472		$	477
Period-end loans(2)	$	312,028		$	297,707
Nonperforming loans to total loans(1)/(2)		.27	%		.41	%
Nonperforming assets to total loans plus other real estate(c)		.28	%		.44	%

Changes in Nonperforming Assets

(Dollars in Millions)	Commercial and Commercial Real Estate			Residential Mortgages, Credit Card and Other Retail			Total
Balance December 31, 2020	$	854		$	444		$	1,298
Additions to nonperforming assets
New nonaccrual loans and foreclosed properties		316			212			528
Advances on loans		10			1			11
Total additions		326			213			539
Reductions in nonperforming assets
Paydowns, payoffs		(292	)		(101	)		(393	)
Net sales		(178	)		(14	)		(192	)
Return to performing status		(129	)		(111	)		(240	)
Charge-offs(d)		(120	)		(14	)		(134	)
Total reductions		(719	)		(240	)		(959	)
Net additions to (reductions in) nonperforming assets		(393	)		(27	)		(420	)
Balance December 31, 2021	$	461		$	417		$	878

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

(b) Excludes $1.5 billion and $1.8 billion at December 31, 2021 and 2020, respectively, 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 $22 million and $33 million at December 31, 2021 and 2020, respectively, 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.

43    

  TABLE 17   Net Charge-offs as a Percent of Average Loans Outstanding

	2021								2020								2019
Year Ended December 31 (Dollars in Millions)	Average Loan Balance		Net Charge-offs			Percent			Average Loan Balance		Net Charge-offs			Percent			Average Loan Balance		Net Charge-offs			Percent
Commercial
Commercial	$	97,649	$	97			.10	%	$	108,367	$	483			.45	%	$	97,697	$	273			.28	%
Lease financing		5,206		6			.12			5,600		30			.54			5,501		12			.22
Total commercial		102,855		103			.10			113,967		513			.45			103,198		285			.28
Commercial real estate
Commercial mortgages		27,997		(14	)		(.05	)		29,641		185			.62			28,595		12			.04
Construction		10,784		16			.15			10,907		2			.02			10,791		2			.02
Total commercial real estate		38,781		2			.01			40,548		187			.46			39,386		14			.04
Residential mortgages		74,629		(32	)		(.04	)		73,667		(12	)		(.02	)		67,747		3			—
Credit card		21,645		512			2.37			22,332		829			3.71			23,309		893			3.83
Other retail
Retail leasing		7,710		2			.03			8,405		81			.96			8,515		13			.15
Home equity and second mortgages		11,228		(10	)		(.09	)		13,894		(4	)		(.03	)		15,659		(3	)		(.02	)
Other		40,117		105			.26			34,456		192			.56			32,872		249			.76
Total other retail		59,055		97			.16			56,755		269			.47			57,046		259			.45
Total loans	$	296,965	$	682			.23	%	$	307,269	$	1,786			.58	%	$	290,686	$	1,454			.50	%

Analysis of Loan Net Charge-offs Total loan net charge-offs were $682 million in 2021, compared with $1.8 billion in 2020. The $1.1 billion (61.8 percent) decrease in total net charge-offs in 2021, compared with 2020, reflected improvement across most loan categories, associated with improving economic conditions, borrower liquidity and strong asset prices in the market that support repayment and recovery on problem loans. The ratio of total loan net charge-offs to average loans outstanding was 0.23 percent in 2021, compared with 0.58 percent in 2020. Commercial and commercial real estate loan net charge-offs for 2021 were $105 million (0.07 percent of average loans outstanding), compared with $700 million (0.45 percent of average loans outstanding) in 2020. The decrease in net charge-offs in 2021, compared with 2020, reflected lower charge-offs as a result of improving economic conditions in 2021. Residential mortgage loan net charge-offs for 2021 reflected a net recovery of $32 million (0.04 percent of average loans outstanding), compared with a net recovery of $12 million (0.02 percent of average loans outstanding) in 2020. Credit card loan net charge-offs in 2021 were $512 million (2.37 percent of average loans outstanding), compared with $829 million (3.71 percent of average loans outstanding) in 2020. Other retail loan net charge-offs for 2021 were $97 million (0.16 percent of average loans outstanding), compared with $269 million (0.47 percent of average loans outstanding) in 2020. The decrease in total residential mortgage, credit card and other retail loan net charge-offs in 2021, compared with 2020, reflected improving economic conditions. The Company expects net charge-offs to return to more normalized levels over time. Analysis and Determination of the Allowance for Credit Losses The allowance for credit losses is established for current expected credit losses on the Company’s loan and lease portfolio, including unfunded credit commitments. The allowance considers expected losses for the remaining lives of the applicable assets, inclusive of expected recoveries. The allowance for credit losses is increased through provisions charged to earnings and reduced by net charge-offs. Management evaluates the appropriateness of the allowance for credit losses on a quarterly basis. Multiple economic scenarios are considered over a three-year reasonable and supportable forecast period, which includes increasing consideration of historical loss experience over years two and three. These economic scenarios are constructed with interrelated projections of multiple economic variables, and loss estimates are produced that consider the historical correlation of those economic variables with credit losses. After the forecast period, the Company fully reverts to long-term historical loss experience, adjusted for prepayments and characteristics of the current loan and lease portfolio, to estimate losses over the remaining life of the portfolio. The economic scenarios are updated at least quarterly and are designed to provide a range of reasonable estimates from better to worse than current expectations. Scenarios are weighted based on the Company’s expectation of economic conditions for the foreseeable future and reflect significant judgment and consideration of uncertainties that exist. Final loss estimates also consider factors affecting credit losses not reflected in the scenarios, due to the unique aspects of current conditions and expectations. These factors may include, but are not limited to, loan servicing practices, regulatory guidance, and/or fiscal and monetary policy actions. Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its

44    

liability for unfunded credit commitments, which is included in other liabilities in the Consolidated Balance Sheet. Both the allowance for loan losses and the liability for unfunded credit commitments are included in the Company’s analysis of credit losses and reported reserve ratios.

The allowance recorded for credit losses utilizes forward-looking expected loss models to consider a variety of factors affecting lifetime credit losses. These factors include, but are not limited to, macroeconomic variables such as unemployment rates, real estate prices, gross domestic product levels and corporate bonds spreads, as well as loan and borrower characteristics, such as internal risk ratings on commercial loans and consumer credit scores, delinquency status, collateral type and available valuation information, consideration of end-of-term losses on lease residuals, and the remaining term of the loan, adjusted for expected prepayments. For each loan portfolio, model estimates are adjusted as necessary to consider any relevant changes in portfolio composition, lending policies, underwriting standards, risk management practices, economic conditions or other factors that may affect the accuracy of the model. Expected credit loss estimates also include consideration of expected cash recoveries on loans previously charged-off or expected recoveries on collateral-dependent loans where recovery is expected through sale of the collateral. Where loans do not exhibit similar risk characteristics, an individual analysis is performed to consider expected credit losses.

The allowance recorded for individually evaluated loans greater than $5 million in the commercial lending segment is based on an analysis utilizing expected cash flows discounted using the original effective interest rate, the observable market price of the loan, or the fair value of the collateral, less selling costs, for collateral-dependent loans as appropriate. For commercial TDRs individually evaluated for impairment, attributes of the borrower are the primary factors in determining the allowance for credit losses. However, historical loss experience is also incorporated into the allowance methodology applied to this category of loans. Commercial lending segment TDR loans may be collectively evaluated for impairment where observed performance history, including defaults, is a primary driver of the loss allocation.

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

When evaluating the appropriateness of the allowance for credit losses for any loans and lines in a junior lien position, the Company considers the delinquency and modification status of the first lien. At December 31, 2021, the Company serviced the first lien on 35 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 $224 million or 2.1 percent of its total home equity portfolio at December 31, 2021, represented non-delinquent junior liens where the first lien was delinquent or modified, excluding loans in COVID-related forbearance programs.

The Company considers historical loss experience on the loans and lines in a junior lien position to establish loss estimates for junior lien loans and lines the Company services that are current, but the first lien is delinquent or modified. The historical long-term average loss experience related to junior liens has been relatively limited (less than 1 percent of the total portfolio annually), and estimates are adjusted to consider current collateral support and portfolio risk characteristics. These include updated credit scores and collateral estimates obtained on the Company’s home equity portfolio each quarter. In its evaluation of the allowance for credit losses, the Company also considers the increased risk of loss associated with home equity lines that are contractually scheduled to convert from a revolving status to a fully amortizing payment.

Beginning January 1, 2020, when a loan portfolio is purchased, the acquired loans are divided into those considered purchased with more than insignificant credit deterioration (“PCD”) and those not considered purchased with more than insignificant credit deterioration. An allowance is established for each population and considers product mix, risk characteristics of the portfolio, bankruptcy experience, delinquency status and refreshed LTV ratios when possible. The allowance established for purchased loans not considered PCD is recognized through provision expense upon acquisition, whereas the allowance established for loans considered PCD at acquisition is offset by an increase in the basis of the acquired loans. Any subsequent increases and decreases in the allowance related to purchased loans, regardless of PCD status, are recognized through provision expense, with charge-offs charged to the allowance. The Company did not have a material amount of PCD loans included in its loan portfolio at December 31, 2021.

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

45    

  TABLE 18   Summary of Allowance for Credit Losses

(Dollars in Millions)	2021			2020			2019
Balance at beginning of year	$	8,010		$	4,491		$	4,441
Change in accounting principle(a)		—			1,499			—
Charge-Offs
Commercial
Commercial		206			536			380
Lease financing		16			39			19
Total commercial		222			575			399
Commercial real estate
Commercial mortgages		9			202			17
Construction and development		20			8			4
Total commercial real estate		29			210			21
Residential mortgages		18			19			34
Credit card		686			975			1,028
Other retail
Retail leasing		26			101			24
Home equity and second mortgages		12			16			19
Other		215			284			342
Total other retail		253			401			385
Total charge-offs		1,208			2,180			1,867
Recoveries
Commercial
Commercial		109			53			107
Lease financing		10			9			7
Total commercial		119			62			114
Commercial real estate
Commercial mortgages		23			17			5
Construction and development		4			6			2
Total commercial real estate		27			23			7
Residential mortgages		50			31			31
Credit card		174			146			135
Other retail
Retail leasing		24			20			11
Home equity and second mortgages		22			20			22
Other		110			92			93
Total other retail		156			132			126
Total recoveries		526			394			413
Net Charge-Offs
Commercial
Commercial		97			483			273
Lease financing		6			30			12
Total commercial		103			513			285
Commercial real estate
Commercial mortgages		(14	)		185			12
Construction and development		16			2			2
Total commercial real estate		2			187			14
Residential mortgages		(32	)		(12	)		3
Credit card		512			829			893
Other retail
Retail leasing		2			81			13
Home equity and second mortgages		(10	)		(4	)		(3	)
Other		105			192			249
Total other retail		97			269			259
Total net charge-offs		682			1,786			1,454
Provision for credit losses		(1,173	)		3,806			1,504
Balance at end of year	$	6,155		$	8,010		$	4,491
Components
Allowance for loan losses	$	5,724		$	7,314		$	4,020
Liability for unfunded credit commitments		431			696			471
Total allowance for credit losses(1)	$	6,155		$	8,010		$	4,491
Period-end loans(2)	$	312,028		$	297,707		$	296,102
Nonperforming loans(3)		834			1,224			692
Allowance for Credit Losses as a Percentage of
Period-end loans(1)/(2)		1.97	%		2.69	%		1.52	%
Nonperforming loans(1)/(3)		738			654			649
Nonperforming and accruing loans 90 days or more past due		471			471			346
Nonperforming assets		701			617			542
Net charge-offs		902			448			309

(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.

46    

  TABLE 19   Allocation of the Allowance for Credit Losses

	Allowance Amount				Allowance as a Percent of Loans
At December 31 (Dollars in Millions)	2021		2020		2021			2020
Commercial
Commercial	$	1,779	$	2,344		1.66	%		2.41	%
Lease financing		70		79		1.37			1.42
Total commercial		1,849		2,423		1.65			2.36
Commercial Real Estate
Commercial mortgages		699		894		2.43			3.14
Construction and development		424		650		4.12			6.00
Total commercial real estate		1,123		1,544		2.88			3.93
Residential Mortgages		565		573		.74			.75
Credit Card		1,673		2,355		7.44			10.54
Other Retail
Retail leasing		136		252		1.87			3.09
Home equity and second mortgages		231		349		2.21			2.80
Other		578		514		1.31			1.41
Total other retail		945		1,115		1.53			1.96
Total allowance	$	6,155	$	8,010		1.97	%		2.69	%

The results of the analysis are evaluated quarterly to confirm the estimates are appropriate for each loan portfolio. Table 19 shows the amount of the allowance for credit losses by loan class and underlying portfolio category.

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

At December 31, 2021, the allowance for credit losses was $6.2 billion (1.97 percent of period-end loans), compared with an allowance of $8.0 billion (2.69 percent of period-end loans) at December 31, 2020. The ratio of the allowance for credit losses to nonperforming loans was 738 percent at December 31, 2021, compared with 654 percent at December 31, 2020. The ratio of the allowance for credit losses to annual loan net charge-offs at December 31, 2021, was 902 percent, compared with 448 percent at December 31, 2020. Management determined the allowance for credit losses was appropriate at December 31, 2021 and 2020.

The decrease in the allowance for credit losses of $1.9 billion (23.2 percent) at December 31, 2021, compared with December 31, 2020, reflected factors affecting economic

conditions during 2021, including the enactment of additional benefits from government stimulus programs and broad vaccine availability in the United States that has reduced the risks associated with COVID-19, contributing to an economic recovery. However, economic uncertainty remains associated with supply chain concerns, rising inflationary concerns and additional virus variants. In addition to these factors, expected loss estimates consider various factors including customer specific information impacting changes in risk ratings, projected delinquencies and potential effects of diminishing liquidity without support of mortgage forbearance and direct federal stimulus. Consumer credit trends continued to perform better than expected in 2021, while select wholesale portfolios continue to be monitored for pandemic related impacts.

Changes in economic conditions considered in estimating the allowance for credit losses at December 31, 2021 included improvements in projected gross domestic product and unemployment levels, which reflected the additional government stimulus and availability of vaccines. These factors are evaluated through a combination of quantitative calculations using economic scenarios and qualitative assessments that consider the high degree of uncertainty related to the unprecedented levels of both economic stress and the stimulus response.

47    

The following table summarizes the baseline forecast for key economic variables the Company used in its estimate of the allowance for credit losses at December 31, 2021 and 2020:

	December 31, 2021			December 31, 2020
United States unemployment rate for the three months ending(a)
December 31, 2021		4.3	%		6.8	%
June 30, 2022		3.6			6.2
December 31, 2022		3.5			5.4
United States real gross domestic product for the three months ending(b)
December 31, 2021		2.8	%		1.5	%
June 30, 2022		5.0			3.8
December 31, 2022		6.4			5.7

(a) Reflects quarterly average of forecasted reported United States unemployment rate.

(b) Reflects cumulative change from December 31, 2019.

Baseline economic forecasts are used in combination with alternative scenarios and historical loss experience as is considered reasonable and supportable to inform the Company’s allowance for credit losses. Changes in the allowance for credit losses are based on a variety of factors, including loan balance changes, portfolio credit quality and mix changes, and changes in general economic conditions and expectations (including for unemployment and gross domestic product), among other factors.

Based on economic conditions at December 31, 2021, it was difficult to estimate the length and severity of the longer term effects on certain industry sectors that may result from COVID-19 and the impact of other factors that may influence the level of eventual losses and corresponding requirements for the allowance for credit losses, including the impact of inflationary pressures on certain lending sectors and diminishing liquidity after economic stimulus programs and accommodations delaying mortgage and rent payments end. While reserves consider the uncertainty in these estimates, the unpredictability of the COVID-19 pandemic could result in the recognition of credit losses in the Company’s loan portfolios and increases in the allowance for credit losses. Scenarios worse than the Company’s expected outcome at December 31, 2021 include risks that government stimulus in response to the COVID-19 pandemic is less effective than expected, or that a longer or more severe health crisis prolongs the downturn in economic activity, potentially reducing the number of businesses that are ultimately able to resume operations after the crisis has passed. Other factors considered include concerns around inflationary pressures, new virus variants, sustainability of asset values and borrower liquidity.

The allowance for credit losses related to commercial lending segment loans decreased $995 million during the year ended December 31, 2021, due to improvements in general economic conditions and portfolio credit quality that included some return of economic activity in certain industry sectors affected by COVID-19.

The allowance for credit losses related to consumer lending segment loans decreased $860 million during the year ended December 31, 2021, due to improving economic risks, including those due to decreased unemployment, along with continued

strong underlying credit quality that supports expectations of long-term repayment.

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. Lease originations are subject to the same well-defined underwriting standards referred to in the “Credit Risk Management” section, which includes an evaluation of the residual value risk. Retail lease residual value risk is mitigated further by effective end-of-term marketing of off-lease vehicles.

Included in the retail leasing portfolio was approximately $5.6 billion of retail leasing residuals at December 31, 2021, compared with $6.3 billion at December 31, 2020. The Company monitors concentrations of leases by manufacturer and vehicle type. As of December 31, 2021, vehicle lease residuals related to sport utility vehicles were 46.7 percent of the portfolio, while truck and crossover utility vehicle classes represented approximately 32.5 percent and 14.7 percent of the portfolio, respectively. At year-end 2021, the individual vehicle model with the largest residual value outstanding represented 14.9 percent of the aggregate residual value of all vehicles in the portfolio. At December 31, 2021 and 2020, the weighted-average origination term of the portfolio was 41 months. At December 31, 2021, the commercial leasing portfolio had $515 million of residuals, compared with $498 million at December 31, 2020. At year-end 2021, lease residuals related to trucks and other transportation equipment represented 33.4 percent of the total residual portfolio, while business and office equipment represented 29.7 percent.

Operational Risk Management. The Company operates in many different businesses in diverse markets and relies on the ability of its employees and systems to process a high number of transactions. Operational risk is inherent in all business activities, and the management of this risk is important to the achievement of the Company’s objectives. Business lines have direct and primary responsibility and accountability for identifying, controlling, and monitoring operational risks embedded in their

48    

business activities, including those additional or increased risks created by the economic and financial disruptions, and the Company’s alternative working arrangements resulting from the COVID-19 pandemic. The Company maintains a system of controls with the objective of providing proper transaction authorization and execution, proper system operations, proper oversight of third parties with whom it does business, safeguarding of assets from misuse or theft, and ensuring the reliability and security of financial and other data.

Business continuation and disaster recovery planning is also critical to effectively managing operational risks. Each business unit of the Company is required to develop, maintain and test these plans at least annually to ensure that recovery activities, if needed, can support mission critical functions, including technology, networks and data centers supporting customer applications and business operations.

While the Company believes it has designed effective processes to minimize operational risks, there is no absolute assurance that business disruption or operational losses would not occur from an external event or internal control breakdown. On an ongoing basis, management makes process changes and investments to enhance its systems of internal controls and business continuity and disaster recovery plans.

In the past, the Company has experienced attack attempts on its computer systems, including various denial-of-service attacks on customer-facing websites. The Company has not experienced any material losses relating to these attempts, as a result of its controls, processes and systems to protect its networks, computers, software and data from attack, damage or unauthorized access but future attacks could be more disruptive or damaging. Attack attempts on the Company’s computer systems are evolving and increasing, and the Company continues to develop and enhance its controls and processes to protect against these attempts.

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

financial disruptions caused by the COVID-19 pandemic. Refer to “Supervision and Regulation” in the Company’s Annual Report on Form 10-K for further discussion of the regulatory framework applicable to bank holding companies and their subsidiaries.

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 20 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.

  TABLE 20   Sensitivity of Net Interest Income

	December 31, 2021											December 31, 2020
	Down 50 bps Immediate			Up 50 bps Immediate			Down 200 bps Gradual		Up 200 bps Gradual			Down 50 bps Immediate			Up 50 bps Immediate			Down 200 bps Gradual		Up 200 bps Gradual
Net interest income		(3.77	)%		3.09	%		*		5.39	%		(4.48	)%		4.58	%		*		6.57	%

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

49    

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

– To convert fixed-rate debt and available-for-sale investment securities from fixed-rate payments to floating-rate payments;

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

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

– To mitigate remeasurement volatility of foreign currency denominated balances; and

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

In addition, the Company enters into interest rate and foreign exchange derivative contracts to support the business requirements of its customers (customer-related positions). The Company minimizes the market and liquidity risks of customer-related positions by either entering into similar offsetting positions with broker-dealers, or on a portfolio basis by entering into other derivative or non-derivative financial instruments that partially or fully offset the exposure from these customer-related positions. The Company may enter into derivative contracts that are either exchange-traded, centrally cleared through clearinghouses or over-the-counter. The Company does not utilize derivatives for speculative purposes.

The Company does not designate all of the derivatives that it enters into for risk management purposes as accounting hedges because of the inefficiency of applying the accounting requirements and may instead elect fair value accounting for the related hedged items. In particular, the Company enters into interest rate swaps, swaptions, forward commitments to buy to-be-announced securities (“TBAs”), U.S. Treasury and Eurodollar futures and options on U.S. Treasury futures to mitigate fluctuations in the value of its MSRs, but does not designate those derivatives as accounting hedges. The estimated net sensitivity to changes in interest rates of the fair value of the MSRs and the related derivative instruments at December 31, 2021, to an immediate 25, 50 and 100 bps downward movement in interest rates would be a decrease of approximately $8 million, $15 million and $22 million, respectively. An immediate upward movement in interest rates at December 31, 2021, of 25, 50 and 100 bps would result in an increase of approximately $8 million, an increase of $9 million and a decrease of $25 million, in the fair value of the MSRs and related derivative instruments, respectively. Refer to Note 10 of the Notes to Consolidated Financial Statements for additional information regarding MSRs.

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 December 31,

2021, the Company had $8.6 billion of forward commitments to sell, hedging $5.4 billion of MLHFS and $4.7 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 20 and 21 in the Notes to Consolidated Financial Statements.

LIBOR Transition In July 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”) announced that it would no longer require banks to submit rates for the London InterBank Offered Rate (“LIBOR”) after 2021. In March 2021, the FCA and the administrator of LIBOR announced that, with respect to the most commonly used tenors of United States Dollar LIBOR, LIBOR will no longer be published on a representative basis after June 30, 2023. The publication of all other tenors of United States Dollar LIBOR ceased to be provided or ceased to be representative after December 31, 2021. The Company holds financial instruments 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 capacities as trustee and servicer, which involve financial instruments that will be similarly impacted by the discontinuance of LIBOR.

The Company has transitioned financial instruments associated to LIBOR currencies and tenors that ceased or became nonrepresentative on December 31, 2021 to alternative reference rates, with limited exceptions. The Company also anticipates that additional financial instruments associated to the remaining United States Dollar LIBOR tenors will require transition to a new reference rate by June 30, 2023. 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 and therefore require remediation. For residual exposure related to these rates after June 30, 2023, the Company is assessing the applicability of relevant contractual and statutory solutions. Certain states have passed legislation, and federal legislation has been proposed,

50    

that would transition contracts from LIBOR to an alternative reference rate for any contracts with non-existent or impracticable fallback language. The Company is assessing the impact of such legislative solutions to its various products.

In order to facilitate the transition process, the Company has instituted a LIBOR Transition Office and commenced an enterprise-wide project to identify, assess, monitor and mitigate risks associated with the expected discontinuance or unavailability of LIBOR, actively engage with industry working groups and regulators, achieve operational readiness for the use of alternative reference rates and engage impacted customers to remediate and transition impacted instruments. The Company has also invested in updating its systems, models, procedures and internal infrastructure as part of the transition program. Additionally, in alignment with guidance from United States banking agencies and the FCA, the Company has ceased the use of LIBOR as a reference rate in new contracts, with limited exceptions, and continues to increase the usage of alternative reference rates such as the Secured Overnight Financing Rate (“SOFR”). The Company has also adopted industry best practice guidelines for fallback language for new transactions, converted its cleared interest rate swaps discounting to SOFR discounting, and distributed communications related to the transition to certain impacted parties, both inside and outside the Company. Refer to “Risk Factors” beginning on page 137, 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:

Year Ended December 31 (Dollars in Millions)	2021		2020
Average	$	2	$	2
High		4		3
Low		1		1
Period-end		2		2

The Company did not experience any actual losses for its combined Covered Positions that exceeded VaR during the year ended December 31, 2021. Given the market volatility in the first quarter of 2020 resulting from effects of the COVID-19 pandemic, the Company experienced actual losses for its combined Covered Positions that exceeded VaR five times during the year ended December 31, 2020. The Company stress tests its market risk measurements to provide management with perspectives on market events that may not be captured by its VaR models, including worst case historical market movement combinations that have not necessarily occurred on the same date.

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:

Year Ended December 31 (Dollars in Millions)	2021		2020
Average	$	7	$	6
High		9		8
Low		5		4
Period-end		7		5

51    

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:

Year Ended December 31 (Dollars in Millions)	2021		2020
Residential Mortgage Loans Held For Sale and Related Hedges
Average	$	9	$	10
High		19		22
Low		4		2
Mortgage Servicing Rights and Related Hedges
Average	$	4	$	19
High		11		54
Low		1		1

Liquidity Risk Management The Company’s liquidity risk management process is designed to identify, measure, and manage the Company’s funding and liquidity risk to meet its daily funding needs and to address expected and unexpected changes in its funding requirements. The Company engages in various activities to manage its liquidity risk. These activities include diversifying its funding sources, stress testing, and holding readily-marketable assets which can be used as a source of liquidity if needed. In addition, the Company’s profitable operations, sound credit quality and strong capital position have enabled it to develop a large and reliable base of core deposit funding within its market areas and in domestic and global capital markets.

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

The Company’s liquidity policy requires it to maintain diversified wholesale funding sources to avoid maturity, entity and

market concentrations. The Company operates a Cayman Islands branch for issuing Eurodollar time deposits. In addition, the Company has relationships with dealers to issue national market retail and institutional savings certificates and short-term and medium-term notes. The Company also maintains a significant correspondent banking network and relationships. Accordingly, the Company has access to national federal funds, funding through repurchase agreements and sources of stable certificates of deposit and commercial paper.

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 the Federal Reserve Bank’s Discount Window. Unencumbered liquid assets in the Company’s investment securities portfolio provides asset liquidity through the Company’s ability to sell the securities or pledge and borrow against them. At December 31, 2021, the fair value of unencumbered investment securities totaled $144.0 billion, compared with $125.9 billion at December 31, 2020. Refer to Note 5 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 December 31, 2021, the Company could have borrowed a total of an additional $101.0 billion from the FHLB and Federal Reserve Bank based on collateral available for additional borrowings.

The Company’s diversified deposit base provides a sizeable source of relatively stable and low-cost funding, while reducing the Company’s reliance on the wholesale markets. Total deposits were $456.1 billion at December 31, 2021, compared with $429.8 billion at December 31, 2020. Refer to Note 12 of the Notes to Consolidated Financial Statements and “Balance Sheet Analysis” for further information on the maturities, terms and trends of the Company’s deposits.

Additional funding is provided by long-term debt and short-term borrowings. Long-term debt was $32.1 billion at December 31, 2021, and is an important funding source because of its multi-year borrowing structure. Refer to Note 14 of the Notes to Consolidated Financial Statements for information on the terms and maturities of the Company’s long-term debt issuances and “Balance Sheet Analysis” for discussion on long-term debt trends. Short-term borrowings were $11.8 billion at December 31, 2021, and supplement the Company’s other funding sources. Refer to Note 13 of the Notes to Consolidated Financial Statements and “Balance Sheet Analysis” for further information on the terms and trends of the Company’s short-term borrowings.

The Company’s ability to raise negotiated funding at competitive prices is influenced by rating agencies’ views of the Company’s credit quality, liquidity, capital and earnings. Table 21 details the rating agencies’ most recent assessments.

52    

  TABLE 21   Credit Ratings

	Moody’s		S&P Global Ratings		Fitch Ratings		DBRS Morningstar
U.S. Bancorp
Long-term issuer rating		A2		A+		AA-		AA
Short-term issuer rating				A-1		F1+		R-1 (middle)
Senior unsecured debt		A2		A+		A+		AA
Subordinated debt		A2		A		A		AA (low)
Junior subordinated debt		A3
Preferred stock		Baa1		BBB+		BBB+		A
Commercial paper		P-1				F1+
U.S. Bank National Association
Long-term issuer rating		A1		AA-		AA-		AA (high)
Short-term issuer rating		P-1		A-1+		F1+		R-1 (high)
Long-term deposits		Aa2				AA		AA (high)
Short-term deposits		P-1				F1+
Senior unsecured debt		A1		AA-		AA-		AA (high)
Subordinated debt		A1		A+				AA
Commercial paper		P-1		A-1+		F1+
Counterparty risk assessment		Aa3(cr)/P-1(cr)
Counterparty risk rating		A1/P-1
Baseline credit assessment		a1

In addition to assessing liquidity risk on a consolidated basis, the Company monitors the parent company’s liquidity. The parent company’s routine funding requirements consist primarily of operating expenses, dividends paid to shareholders, debt service, repurchases of common stock and funds used for acquisitions. The parent company obtains funding to meet its obligations from dividends collected from its subsidiaries and the issuance of debt and capital securities. The Company establishes limits for the minimal number of months into the future where the parent company can meet existing and forecasted obligations with cash and securities held that can be readily monetized. The Company measures and manages this limit in both normal and adverse conditions. The Company maintains sufficient funding to meet expected capital and debt service obligations for 24 months without the support of dividends from subsidiaries and assuming access to the wholesale markets is maintained. The Company maintains sufficient liquidity to meet its capital and debt service obligations for 12 months under adverse conditions without the support of dividends from subsidiaries or access to the wholesale markets. The parent company is currently well in excess of required liquidity minimums.

Under United States Securities and Exchange Commission rules, the parent company is classified as a “well-known seasoned issuer,” which allows it to file a registration statement that does not have a limit on issuance capacity. “Well-known seasoned issuers” generally include those companies with outstanding common securities with a market value of at least $700 million held by non-affiliated parties or those companies that have issued at least $1 billion in aggregate principal amount of non-convertible securities, other than common equity, in the last three years. However, the parent company’s ability to issue debt and other securities under a registration statement filed with the United States Securities and Exchange Commission under

these rules is limited by the debt issuance authority granted by the Company’s Board of Directors and/or the ALCO policy.

At December 31, 2021, parent company long-term debt outstanding was $18.9 billion, compared with $20.9 billion at December 31, 2020. The decrease was primarily due to $3.0 billion of medium-term note repayments, partially offset by $1.3 billion of subordinated note issuances. As of December 31, 2021, there was $2.3 billion of parent company debt scheduled to mature in 2022. Future debt maturities may be met through medium-term note and capital security issuances and dividends from subsidiaries, as well as from parent company cash and cash equivalents.

Dividend payments to the Company by its subsidiary bank are subject to regulatory review and statutory limitations and, in some instances, regulatory approval. In general, dividends to the parent company from its banking subsidiary are limited by rules which compare dividends to net income for regulatorily-defined periods. For further information, see Note 25 of the Notes to Consolidated Financial Statements.

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 December 31, 2021, the Company was compliant with this requirement.

Beginning July 1, 2021, the Company is also subject to a regulatory Net Stable Funding Ratio (“NSFR”) requirement which requires banks to maintain a minimum level of stable funding based on the liquidity characteristics of their assets, commitments, and derivative exposures over a one-year time horizon. At December 31, 2021, the Company was compliant with this requirement.

53    

European Exposures The Company provides merchant processing and corporate trust services in Europe either directly or through banking affiliations in Europe. Revenue generated from sources in Europe represented approximately 2 percent of the Company’s total net revenue for 2021. Operating cash for these businesses is deposited on a short-term basis typically with certain European central banks. For deposits placed at other European banks, exposure is mitigated by the Company placing deposits at multiple banks and managing the amounts on deposit at any bank based on institution-specific deposit limits. At December 31, 2021, the Company had an aggregate amount on deposit with European banks of approximately $9.8 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 deterioration in economic conditions in Europe is not expected to have a significant effect on the Company related to these activities.

Commitments, Contingent Liabilities and Other Contractual Obligations The Company participates in many different contractual arrangements which may or may not be recorded on its balance sheet, with unrelated or unconsolidated entities, under which the Company has an obligation to pay certain amounts, provide credit or liquidity enhancements or market risk support. These 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. The Company has not utilized private label asset securitizations as a source of funding.

In the ordinary course of business, the Company enters into contractual obligations that may require future cash payments, including funding for customer loan requests, customer deposit maturities and withdrawals, debt service, leases for premises and equipment, and other cash commitments including $3.3 billion of contractual interest payments at December 31, 2021. Refer to Notes 7, 12, 14, 17 and 23 in the Notes to Consolidated Financial Statements for information on the Company’s operating lease obligations, deposits, long-term debt, benefit obligations and guarantees and other commitments, respectively.

Commitments to extend credit are legally binding and generally have fixed expiration dates or other termination clauses. Many of the Company’s commitments to extend credit expire without being drawn and, therefore, total commitment amounts do not necessarily represent future liquidity requirements or the Company’s exposure to credit loss. Commitments to extend credit also include consumer credit lines that are cancelable upon notification to the consumer. Total contractual amounts of commitments to extend credit at December 31, 2021 were $355.1 billion. The Company also issues and confirms various types of letters of credit, including

standby and commercial. Total contractual amounts of letters of credit at December 31, 2021 were $10.5 billion. For more information on the Company’s commitments to extend credit and letters of credit, refer to Note 23 in the Notes to Consolidated Financial Statements.

The Company’s off-balance sheet arrangements with unconsolidated entities primarily consist of private investment funds or partnerships that make equity investments, provide debt financing or support community-based investments in tax-advantaged projects. In addition to providing investment returns, these arrangements in many cases assist the Company in complying with requirements of the Community Reinvestment Act. The 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. The entities in which the Company invests are generally considered variable interest entities (“VIEs”). The Company’s recorded investment in these entities, net of contractual equity investment commitments of $1.9 billion, was $2.6 billion at December 31, 2021.

The Company also has non-controlling financial investments in private funds and partnerships considered VIEs. The Company’s recorded investment in these entities was approximately $40 million at December 31, 2021, and the Company had unfunded commitments to invest an additional $44 million. For more information on the Company’s interests in unconsolidated VIEs, refer to Note 8 in the Notes to Consolidated Financial Statements.

Guarantees are contingent commitments issued by the Company to customers or other third parties requiring the Company to perform if certain conditions exist or upon the occurrence or nonoccurrence of a specified event, such as a scheduled payment to be made under contract. The Company’s primary guarantees include commitments from securities lending activities in which indemnifications are provided to customers; indemnification or buy-back provisions related to sales of loans and tax credit investments; and merchant charge-back guarantees through the Company’s involvement in providing merchant processing services. For certain guarantees, the Company may have access to collateral to support the guarantee, or through the exercise of other recourse provisions, be able to offset some or all of any payments made under these guarantees.

The Company and certain of its subsidiaries, along with other Visa U.S.A. Inc. member banks, have a contingent guarantee obligation to indemnify Visa Inc. for potential losses arising from antitrust lawsuits challenging the practices of Visa U.S.A. Inc. and MasterCard International. The indemnification by the Company and other Visa U.S.A. Inc. member banks has no maximum amount. Refer to Note 23 in the Notes to Consolidated Financial Statements for further details regarding guarantees, other commitments, and contingent liabilities, including maximum potential future payments and current carrying amounts.

54    

Capital Management The Company is committed to managing capital to maintain strong protection for depositors and creditors and for maximum shareholder benefit. The Company continually assesses its business risks and capital position. The Company also manages its capital to exceed regulatory capital requirements for banking organizations. To achieve its capital goals, the Company employs a variety of capital management tools, including dividends, common share repurchases, and the issuance of subordinated debt, non-cumulative perpetual preferred stock, common stock and other capital instruments.

The Company repurchased approximately 28 million shares of its common stock in 2021, compared with approximately 31 million shares in 2020. The average price paid for the shares repurchased in 2021 was $54.18 per share, compared with $53.32 per share in 2020. Beginning in March of 2020 and continuing through the remainder of 2020, the Company suspended all common stock repurchases except for those done exclusively in connection with its stock-based compensation programs. This action was initially taken to maintain strong capital levels given the impact and uncertainties of COVID-19 on the economy and global markets. Due to continued economic uncertainty, the Federal Reserve Board implemented measures beginning in the third quarter of 2020 and extending through the second quarter of 2021, restricting capital distributions of all large bank holding companies, including the Company. These restrictions limited the aggregate amount of common stock dividends and share repurchases to an amount that did not exceed the average net income of the four preceding calendar quarters. Based on the results of the December 2020 Federal Reserve Board Stress Test, the Company announced on December 22, 2020 that its Board of Directors had approved an authorization to repurchase $3.0 billion of its common stock beginning January 1, 2021, and repurchased $1.5 billion of its common stock during the first six months of 2021 under this program. The Company suspended all common stock repurchases at the beginning of the third quarter of 2021, except for those done exclusively in connection with its stock-based compensation programs, due to its recently announced pending acquisition of MUFG Union Bank’s core regional banking franchise. The Company does not expect to commence repurchasing its common stock again until the second half of 2022, or after the acquisition closes in order to build capital prior to the acquisition.

Based on the results of the 2021 Federal Reserve Board Annual Stress Test, the Company announced on September 14, 2021 that its Board of Directors had approved a regular quarterly dividend of $0.46 per common share. This represented a 9.5 percent increase over the previous dividend rate per common share of $0.42 per quarter.

The Company will continue to monitor its capital position and may adjust its capital distributions based on economic conditions and its financial performance. Capital distributions, including dividends and stock repurchases, are subject to the approval of the Company’s Board of Directors and will align with regulatory requirements. For a more complete analysis of

activities impacting shareholders’ equity and capital management programs, refer to Note 15 of the Notes to Consolidated Financial Statements.

Total U.S. Bancorp shareholders’ equity was $54.9 billion at December 31, 2021, compared with $53.1 billion at December 31, 2020. The increase was primarily the result of corporate earnings, partially offset by changes in unrealized gains and losses on available-for-sale investment securities included in other comprehensive income (loss), dividends and common share repurchases.

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. Under Basel III, banking regulators define minimum capital requirements for banks and financial services holding companies. These requirements are expressed in the form of a minimum common equity tier 1 capital ratio, tier 1 capital ratio, total risk-based capital ratio, tier 1 leverage ratio and a tier 1 total leverage exposure, or supplementary leverage, ratio. The Company’s minimum required level for these ratios at December 31, 2021, which include a stress capital buffer of 2.5 percent for the common equity tier 1 capital, tier 1 capital and total capital ratios, was 7.0 percent, 8.5 percent, 10.5 percent, 4.0 percent, and 3.0 percent, respectively. The Company targets its regulatory capital levels, at both the bank and bank holding company level, to exceed the “well-capitalized” threshold for these ratios under the FDIC Improvement Act prompt corrective action provisions that are applicable to all banks. At December 31, 2021, the minimum “well-capitalized” thresholds under the prompt corrective action framework for the common equity tier 1 capital ratio, tier 1 capital ratio, total risk-based capital ratio, tier 1 leverage ratio, and tier 1 total leverage exposure ratio was 6.5 percent, 8.0 percent, 10.0 percent, 5.0 percent, and 3.0 percent, respectively. Beginning in 2020, the Company elected to adopt a rule issued in 2020 by its regulators which permits banking organizations who adopt accounting guidance related to the impairment of financial instruments based on the current expected credit losses (“CECL”) methodology during 2020, the option to defer the impact of the effect of that guidance at adoption plus 25 percent of its quarterly credit reserve increases over the next two years on its regulatory capital requirements, followed by a three-year transition period to phase in the cumulative deferred impact. As of December 31, 2021, the Company’s bank subsidiary met all regulatory capital ratios to be considered “well-capitalized”. There are no conditions or events since December 31, 2021 that management believes have changed the risk-based category of its covered subsidiary bank.

As an approved mortgage seller and servicer, U.S. Bank National Association, through its mortgage banking division, is required to maintain various levels of shareholder’s equity, as specified by various agencies, including the United States Department of Housing and Urban Development, Government National Mortgage Association, Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. At December 31, 2021, U.S. Bank National Association met these requirements.

55    

  TABLE 22   Regulatory Capital Ratios

At December 31 (Dollars in Millions)	2021			2020
Basel III standardized approach:
Common equity tier 1 capital	$	41,701		$	38,045
Tier 1 capital		48,516			44,474
Total risk-based capital		56,250			52,602
Risk-weighted assets		418,571			393,648
Common equity tier 1 capital as a percent of risk-weighted assets		10.0	%		9.7	%
Tier 1 capital as a percent of risk-weighted assets		11.6			11.3
Total risk-based capital as a percent of risk-weighted assets		13.4			13.4
Tier 1 capital as a percent of adjusted quarterly average assets (leverage ratio)		8.6			8.3
Tier 1 capital as a percent of total on- and off-balance sheet leverage exposure (total leverage exposure ratio)		6.9			7.3

Table 22 provides a summary of statutory regulatory capital ratios in effect for the Company at December 31, 2021 and 2020. All regulatory ratios exceeded regulatory “well-capitalized” requirements.

The Company believes certain other capital ratios are useful in evaluating its capital adequacy. At December 31, 2021, the Company’s tangible common equity, as a percent of tangible assets and as a percent of risk-weighted assets determined in accordance with transitional regulatory capital requirements related to the CECL methodology under the standardized approach, was 6.8 percent and 9.2 percent, respectively, compared with 6.9 percent and 9.5 percent at December 31, 2020, respectively. In addition, the Company’s common equity tier 1 capital to risk-weighted assets ratio, reflecting the full implementation of the CECL methodology was 9.6 percent at December 31, 2021, compared with 9.3 percent at December 31, 2020. Refer to “Non-GAAP Financial Measures” beginning on page 60 for further information on these other capital ratios.

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 24 of the Notes to Consolidated Financial Statements for further information on the business lines’ basis for financial presentation.

Designations, assignments and allocations change from time to time as management systems are enhanced, methods of evaluating performance or product lines change or business segments are realigned to better respond to the Company’s diverse customer base. During 2021, certain organization and

methodology changes were made and, accordingly, 2020 results were restated and presented on a comparable basis.

Corporate and Commercial Banking Corporate and Commercial Banking offers lending, equipment finance and small-ticket leasing, depository services, treasury management, capital markets services, international trade services and other financial services to middle market, large corporate, commercial real estate, financial institution, non-profit and public sector clients. Corporate and Commercial Banking contributed $1.6 billion of the Company’s net income in 2021, or a decrease of $33 million (2.0 percent), compared with 2020.

Net revenue decreased $593 million (13.1 percent) in 2021, compared with 2020. Net interest income, on a taxable-equivalent basis, decreased $511 million (15.0 percent) in 2021, compared with 2020, primarily due to the impact of declining interest rates on the margin benefit from deposits as well as lower average loan balances, partially offset by favorable deposit mix with higher noninterest-bearing deposit balances and slightly higher loan spreads. Noninterest income decreased $82 million (7.3 percent) in 2021, compared with 2020, primarily driven by lower capital markets activities and trading revenue, partially offset by continued stronger treasury management fees due to core growth driven by the economic recovery.

Noninterest expense decreased $33 million (1.9 percent) in 2021, compared with 2020, primarily due to lower FDIC insurance expense and higher capitalized loan costs, partially offset by an increase in net shared services expense driven by investment in infrastructure and technology development. The provision for credit losses decreased $515 million (85.3 percent) in 2021, compared with 2020, primarily due to a decrease in the reserve allocation driven by improving portfolio credit quality in 2021, compared with deteriorating credit quality in 2020.

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 $2.3 billion of the Company’s net income in 2021, or a decrease of $103 million (4.3 percent), compared with 2020.

56    

Net revenue decreased $358 million (4.0 percent) in 2021, compared with 2020. Net interest income, on a taxable-equivalent basis, increased $318 million (5.5 percent) in 2021, compared with 2020, reflecting continued strong growth in deposit balances as well as favorable deposit mix, favorable loan spreads driven by growth in installment loans, and higher loan fees driven by loan forgiveness related to the SBA’s Paycheck Protection Program. These increases in net interest income were partially offset by lower deposit spreads and loan balances. Noninterest income decreased $676 million (21.3 percent) in 2021, compared with 2020, primarily due to lower mortgage banking revenue reflecting lower application volume and related gain on sale margins as refinancing activities declined, along with a reduction in the fair value of MSRs, net of hedging activities, partially offset by higher gains on GNMA loan sales and higher retail product fees driven by retail leasing end of term residual gains.

Noninterest expense increased $216 million (3.9 percent) in 2021, compared with 2020, primarily due to increases in net shared services expense due to investments in digital capabilities and higher compensation expense related to merit increases, business growth and revenue-related compensation driven by business production. The provision for credit losses decreased $435 million in 2021, compared with 2020, due to a decrease in the reserve allocation reflecting improved credit quality in the current year.

Wealth Management and Investment Services Wealth Management and Investment Services provides private banking, financial advisory services, investment management, retail brokerage services, insurance, trust, custody and fund servicing through four businesses: Wealth Management, Global Corporate Trust & Custody, U.S. Bancorp Asset Management and Fund Services. Wealth Management and Investment Services contributed $837 million of the Company’s net income in 2021, or a decrease of $104 million (11.1 percent), compared with 2020.

Net revenue decreased $45 million (1.4 percent) in 2021, compared with 2020. Net interest income, on a taxable-equivalent basis, decreased $244 million (19.6 percent) in 2021, compared with 2020, primarily due to the declining margin benefit from deposits, partially offset by higher noninterest-bearing deposit balances driving favorable deposit mix, as well as higher average loan balances. Noninterest income increased $199 million (9.8 percent) in 2021, compared with 2020, primarily due to core business growth in trust and investment

management fees and investment products fees, both driven by favorable market conditions, partially offset by higher fee waivers related to money market funds.

Noninterest expense increased $86 million (4.4 percent) in 2021, compared with 2020, reflecting higher compensation expense as a result of merit increases, higher performance-based incentives related to investment sales volumes and core business growth, and an increase in net shared services expense, partially offset by lower other noninterest expense due to the allocation to the business line of previously reserved legal matters in 2020. The provision for credit losses increased $7 million (17.5 percent) in 2021, compared with 2020, due to increased loan loss provisions supporting stronger balance sheet growth in 2021 compared to 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 $1.7 billion of the Company’s net income in 2021, or an increase of $420 million (32.3 percent), compared with 2020.

Net revenue increased $322 million (5.7 percent) in 2021, compared with 2020. Net interest income, on a taxable-equivalent basis, decreased $104 million (4.1 percent) in 2021, compared with 2020, primarily due to lower loan balances and yields driven by higher credit card payment rates by customers. Noninterest income increased $426 million (13.6 percent) in 2021, compared with 2020, mainly due to continued strengthening of consumer and business spending across most sectors driven by government stimulus, local jurisdictions reducing restrictions and consumer behaviors normalizing. As a result, there was strong growth in merchant processing services revenue driven by increased sales volume and higher merchant fees, partially offset by higher rebates. There was also solid growth in corporate payment products revenue driven by improving business spending across all product groups. Credit and debit card revenue increased, driven by stronger sales volume and fee activity.

Noninterest expense increased $93 million (2.8 percent) in 2021, compared with 2020, due to lower marketing costs during 2020 reflecting the timing of marketing campaigns, along with incremental costs related to the prepaid card business in 2021. The provision for credit losses decreased $332 million (48.8 percent) in 2021, compared with 2020, primarily driven by improved credit quality in 2021.

57    

  TABLE 23   Line of Business Financial Performance

	Corporate and Commercial Banking							Consumer and Business Banking
Year Ended December 31 (Dollars in Millions)	2021		2020		Percent Change			2021			2020		Percent Change
Condensed Income Statement
Net interest income (taxable-equivalent basis)	$	2,900	$	3,411		(15.0	)%	$	6,077		$	5,759		5.5	%
Noninterest income		1,035		1,117		(7.3	)		2,501			3,177		(21.3	)
Total net revenue		3,935		4,528		(13.1	)		8,578			8,936		(4.0	)
Noninterest expense		1,678		1,711		(1.9	)		5,690			5,470		4.0
Other intangibles		—		—		—			12			16		(25.0	)
Total noninterest expense		1,678		1,711		(1.9	)		5,702			5,486		3.9
Income before provision and income taxes		2,257		2,817		(19.9	)		2,876			3,450		(16.6	)
Provision for credit losses		89		604		(85.3	)		(144	)		291		*
Income (loss) before income taxes		2,168		2,213		(2.0	)		3,020			3,159		(4.4	)
Income taxes and taxable-equivalent adjustment		542		554		(2.2	)		755			791		(4.6	)
Net income (loss)		1,626		1,659		(2.0	)		2,265			2,368		(4.3	)
Net (income) loss attributable to noncontrolling interests		—		—		—			—			—		—
Net income (loss) attributable to U.S. Bancorp	$	1,626	$	1,659		(2.0	)	$	2,265		$	2,368		(4.3	)
Average Balance Sheet
Commercial	$	78,351	$	89,841		(12.8	)%	$	8,656		$	9,127		(5.2	)%
Commercial real estate		24,819		25,692		(3.4	)		10,944			11,977		(8.6	)
Residential mortgages		26		19		36.8			67,442			67,981		(.8	)
Credit card		—		—		—			—			—		—
Other retail		12		11		9.1			54,040			52,174		3.6
Total loans		103,208		115,563		(10.7	)		141,082			141,259		(.1	)
Goodwill		1,715		1,647		4.1			3,428			3,500		(2.1	)
Other intangible assets		5		6		(16.7	)		2,760			2,105		31.1
Assets		115,194		128,038		(10.0	)		161,571			159,191		1.5
Noninterest-bearing deposits		61,272		44,309		38.3			33,855			30,467		11.1
Interest checking		14,306		14,359		(.4	)		69,718			55,512		25.6
Savings products		47,815		54,578		(12.4	)		75,404			62,702		20.3
Time deposits		9,125		19,201		(52.5	)		13,312			13,322		(.1	)
Total deposits		132,518		132,447		.1			192,289			162,003		18.7
Total U.S. Bancorp shareholders’ equity		13,928		15,063		(7.5	)		12,337			12,739		(3.2	)

* Not meaningful

58    

Wealth Management and Investment Services							Payment Services							Treasury and Corporate Support									Consolidated Company
2021		2020		Percent Change			2021		2020		Percent Change			2021			2020			Percent Change			2021			2020			Percent Change
$	1,002	$	1,246		(19.6	)%	$	2,458	$	2,562		(4.1	)%	$	163		$	(54	)		*	%	$	12,600		$	12,924			(2.5	)%
	2,221		2,022		9.8			3,550		3,124		13.6			920			961			(4.3	)		10,227			10,401			(1.7	)
	3,223		3,268		(1.4	)		6,008		5,686		5.7			1,083			907			19.4			22,827			23,325			(2.1	)
	2,045		1,961		4.3			3,231		3,123		3.5			925			928			(.3	)		13,569			13,193			2.8
	14		12		16.7			133		148		(10.1	)		—			—			—			159			176			(9.7	)
	2,059		1,973		4.4			3,364		3,271		2.8			925			928			(.3	)		13,728			13,369			2.7
	1,164		1,295		(10.1	)		2,644		2,415		9.5			158			(21	)		*			9,099			9,956			(8.6	)
	47		40		17.5			349		681		(48.8	)		(1,514	)		2,190			*			(1,173	)		3,806			*
	1,117		1,255		(11.0	)		2,295		1,734		32.4			1,672			(2,211	)		*			10,272			6,150			67.0
	280		314		(10.8	)		575		434		32.5			135			(928	)		*			2,287			1,165			96.3
	837		941		(11.1	)		1,720		1,300		32.3			1,537			(1,283	)		*			7,985			4,985			60.2
	—		—		—			—		—		—			(22	)		(26	)		15.4			(22	)		(26	)		15.4
$	837	$	941		(11.1	)	$	1,720	$	1,300		32.3		$	1,515		$	(1,309	)		*		$	7,963		$	4,959			60.6
$	5,407	$	4,755		13.7	%	$	9,004	$	8,936		.8	%	$	1,437		$	1,308			9.9	%	$	102,855		$	113,967			(9.8	)%
	735		738		(.4	)		—		—		—			2,283			2,141			6.6			38,781			40,548			(4.4	)
	7,159		5,664		26.4			—		—		—			2			3			(33.3	)		74,629			73,667			1.3
	—		—		—			21,645		22,332		(3.1	)		—			—			—			21,645			22,332			(3.1	)
	4,796		4,299		11.6			207		271		(23.6	)		—			—			—			59,055			56,755			4.1
	18,097		15,456		17.1			30,856		31,539		(2.2	)		3,722			3,452			7.8			296,965			307,269			(3.4	)
	1,628		1,617		.7			3,185		3,060		4.1			—			—			—			9,956			9,824			1.3
	84		39		*			508		581		(12.6	)		—			—			—			3,357			2,731			22.9
	21,236		18,564		14.4			36,553		36,497		.2			221,978			188,917			17.5			556,532			531,207			4.8
	24,587		17,149		43.4			4,861		4,351		11.7			2,629			2,263			16.2			127,204			98,539			29.1
	18,605		14,147		31.5			—		—		—			569			258			*			103,198			84,276			22.5
	55,243		59,768		(7.6	)		145		120		20.8			780			760			2.6			179,387			177,928			.8
	1,770		3,610		(51.0	)		—		1		*			285			1,738			(83.6	)		24,492			37,872			(35.3	)
	100,205		94,674		5.8			5,006		4,472		11.9			4,263			5,019			(15.1	)		434,281			398,615			8.9
	3,154		2,936		7.4			7,643		7,462		2.4			16,748			14,046			19.2			53,810			52,246			3.0

59    

Treasury and Corporate Support Treasury and Corporate Support includes the Company’s investment portfolios, funding, capital management, interest rate risk management, income taxes not allocated to the business lines, including most investments in tax-advantaged projects, and the residual aggregate of those expenses associated with corporate activities that are managed on a consolidated basis. Treasury and Corporate Support recorded net income of $1.5 billion in 2021, compared with a net loss of $1.3 billion in 2020.

Net revenue increased $176 million (19.4 percent) in 2021, compared with 2020. Net interest income, on a taxable-equivalent basis, increased $217 million in 2021, compared with 2020, due to favorable funding and deposit mix. Noninterest income decreased $41 million (4.3 percent) in 2021, compared with 2020, reflecting lower securities gains and changes in other noninterest income due to lower equity investment income and lower gains on sales of businesses in 2021, offset by the impact of asset impairments in 2020 as a result of branch closures.

Noninterest expense decreased $3 million (0.3 percent) in 2021, compared with 2020, primarily due to lower COVID-19 related expenses compared with the prior year, including recognizing liabilities related to future delivery exposures for merchant and airline processing, lower net shared services expense, lower amortization related to tax-advantaged investments and lower severance and other accruals. These decreases were partially offset by higher compensation expense as a result of higher performance-based incentives and merit increases, as well as higher employee benefits driven by higher medical claims. The provision for credit losses was $3.7 billion lower in 2021, compared with 2020, reflecting the residual impact of changes in the allowance for credit losses being impacted by improving economic conditions in the current year, compared to deteriorating conditions in the prior year.

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

Non-GAAP Financial Measures

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

– Tangible common equity to tangible assets,

– Tangible common equity to risk-weighted assets, and

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

These capital measures are viewed by management as useful additional methods of evaluating the Company’s utilization of its capital held and the level of capital available to withstand unexpected negative market or economic conditions. Additionally, presentation of these measures allows investors, analysts and banking regulators to assess the Company’s capital position relative to other financial services companies. These capital measures are not defined in generally accepted accounting principles (“GAAP”), or are not currently effective or defined in banking regulations. In addition, certain of these measures differ from currently effective capital ratios defined by banking regulations principally in that the currently effective ratios, which are subject to certain transitional provisions, temporarily exclude the impact of the 2020 adoption of accounting guidance related to impairment of financial instruments based on the CECL methodology. As a result, these capital measures disclosed by the Company may be considered non-GAAP financial measures. Management believes this information helps investors assess trends in the Company’s capital adequacy.

The Company also discloses net interest income and related ratios and analysis on a taxable-equivalent basis, which may also be considered non-GAAP financial measures. The Company believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison of net interest income arising from taxable and tax-exempt sources. In addition, certain performance measures, including the efficiency ratio and net interest margin utilize net interest income on a taxable-equivalent basis.

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

60    

The following table shows the Company’s calculation of these non-GAAP financial measures:

At December 31 (Dollars in Millions)	2021			2020
Total equity	$	55,387		$	53,725
Preferred stock		(6,371	)		(5,983	)
Noncontrolling interests		(469	)		(630	)
Goodwill (net of deferred tax liability)(1)		(9,323	)		(9,014	)
Intangible assets, other than mortgage servicing rights		(785	)		(654	)
Tangible common equity(a)		38,439			37,444
Common equity tier 1 capital, determined in accordance with transitional regulatory capital requirements related to the CECL methodology implementation		41,701			38,045
Adjustments(2)		(1,733	)		(1,733	)
Common equity tier 1 capital, reflecting the full implementation of the CECL methodology(b)		39,968			36,312
Total assets		573,284			553,905
Goodwill (net of deferred tax liability)(1)		(9,323	)		(9,014	)
Intangible assets, other than mortgage servicing rights		(785	)		(654	)
Tangible assets(c)		563,176			544,237
Risk-weighted assets, determined in accordance with prescribed regulatory capital requirements effective for the Company(d)		418,571			393,648
Adjustments(3)		(357	)		(1,471	)
Risk-weighted assets, reflecting the full implementation of the CECL methodology(e)		418,214			392,177
Ratios
Tangible common equity to tangible assets(a)/(c)		6.8	%		6.9	%
Tangible common equity to risk-weighted assets(a)/(d)		9.2			9.5
Common equity tier 1 capital to risk-weighted assets, reflecting the full implementation of the CECL methodology(b)/(e)		9.6			9.3

	Year Ended December 31
	2021			2020			2019
Net interest income		$ 12,494			$ 12,825			$ 13,052
Taxable-equivalent adjustment(4)		106			99			103
Net interest income, on a taxable-equivalent basis		12,600			12,924			13,155
Net interest income, on a taxable-equivalent basis (as calculated above)		12,600			12,924			13,155
Noninterest income		10,227			10,401			9,831
Less: Securities gains (losses), net		103			177			73
Total net revenue, excluding net securities gains (losses)(f)		22,724			23,148			22,913
Noninterest expense(g)		13,728			13,369			12,785
Efficiency ratio(g)/(f)		60.4	%		57.8	%		55.8	%

	Year Ended December 31, 2021
	Net Revenue		Net Revenue as a Percent of the Consolidated Company			Net Revenue as a Percent of the Consolidated Company Excluding Treasury and Corporate Support
Corporate and Commercial Banking	$	3,935		17	%		18	%
Consumer and Business Banking		8,578		38			39
Wealth Management and Investment Services		3,223		14			15
Payment Services		6,008		26			28
Treasury and Corporate Support		1,083		5
Consolidated Company		22,827		100	%
Less: Treasury and Corporate Support		1,083
Consolidated Company excluding Treasury and Corporate Support	$	21,744					100	%

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

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

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

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

61    

Accounting Changes

Note 2 of the Notes to Consolidated Financial Statements discusses accounting standards recently issued but not yet required to be adopted and the expected impact of these changes in accounting standards. To the extent the adoption of new accounting standards materially affects the Company’s financial condition or results of operations, the impacts are discussed in the applicable section(s) of the Management’s Discussion and Analysis and the Notes to Consolidated Financial Statements.

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. Several factors are considered in determining whether or not a policy is critical in the preparation of financial statements. These factors include, among other things, whether the estimates are significant to the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information (including third-party sources or available prices), sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be utilized under GAAP. Management has discussed the development and the selection of critical accounting policies with the Company’s Audit Committee.

Significant accounting policies are discussed in Note 1 of the Notes to Consolidated Financial Statements. Those policies considered to be critical accounting policies are described below.

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 the Annual Report.

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 December 31, 2021 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, imprecision exists 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.

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 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 December 31, 2021 include risks that government stimulus in response to the COVID-19 pandemic is less effective than expected, or that a longer or more severe health crisis prolongs the downturn in economic activity, potentially reducing the number of businesses that are ultimately able to continue operations after the crisis has passed.

Under the range of economic scenarios considered, the allowance for credit losses would have been lower by $832 million or higher by $1.5 billion. This range reflects the sensitivity of the allowance for credit losses specifically related to the scenarios and weights considered as of December 31, 2021, and does not consider other potential adjustments that could increase or decrease loss estimates calculated using alternative economic scenarios.

Because several quantitative and qualitative factors are considered in determining the allowance for credit losses, these sensitivity analyses do not necessarily reflect the nature and extent of future changes in the allowance for credit losses. They are intended to provide insights into the impact of adverse changes in the economy on the Company’s modeled loss estimates for the loan portfolio and do not imply any expectation of future deterioration in the risk rating or loss rates. Given current

62    

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.

Fair Value Estimates A portion of the Company’s assets and liabilities are carried at fair value on the Consolidated Balance Sheet, with changes in fair value recorded either through earnings or other comprehensive income (loss) in accordance with applicable accounting principles generally accepted in the United States. These include all of the Company’s available-for-sale investment securities, derivatives and other trading instruments, MSRs and MLHFS. The estimation of fair value also affects other loans held for sale, which are recorded at the lower-of-cost-or-fair value. The determination of fair value is important for certain other assets that are periodically evaluated for impairment using fair value estimates, including goodwill and other intangible assets, impaired loans, OREO and other repossessed assets.

Fair value is generally defined as the exit price at which an asset or liability could be exchanged in a current transaction between willing, unrelated parties, other than in a forced or liquidation sale. Fair value is based on quoted market prices in an active market, or if market prices are not available, is estimated using models employing techniques such as matrix pricing or discounting expected cash flows. The significant assumptions used in the models, which include assumptions for interest rates, discount rates, prepayments and credit losses, are independently verified against observable market data where possible. Where observable market data is not available, the estimate of fair value becomes more subjective and involves a high degree of judgment. In this circumstance, fair value is estimated based on management’s judgment regarding the value that market participants would assign to the asset or liability. This valuation process takes into consideration factors such as market illiquidity. Imprecision in estimating these factors can impact the amount recorded on the balance sheet for a particular asset or liability with related impacts to earnings or other comprehensive income (loss).

When available, trading and available-for-sale securities are valued based on quoted market prices. However, certain securities are traded less actively and, therefore, quoted market prices may not be available. The determination of fair value may require benchmarking to similar instruments or performing a discounted cash flow analysis using estimates of future cash flows and prepayment, interest and default rates. For more information on investment securities, refer to Note 5 of the Notes to Consolidated Financial Statements.

As few derivative contracts are listed on an exchange, the majority of the Company’s derivative positions are valued using valuation techniques that use readily observable market inputs. Certain derivatives, however, must be valued using techniques that include unobservable inputs. For these instruments, the significant assumptions must be estimated and, therefore, are

subject to judgment. Note 20 of the Notes to Consolidated Financial Statements provides a summary of the Company’s derivative positions.

Refer to Note 22 of the Notes to Consolidated Financial Statements for additional information regarding estimations of fair value.

Mortgage Servicing Rights MSRs are capitalized as separate assets when loans are sold and servicing is retained, or may be purchased from others. The Company records MSRs at fair value. Because MSRs do not trade in an active market with readily observable prices, the Company determines the fair value by estimating the present value of the asset’s future cash flows utilizing market-based prepayment rates, option adjusted spread, and other assumptions validated through comparison to trade information, industry surveys and independent third-party valuations. Changes in the fair value of MSRs are recorded in earnings during the period in which they occur. Risks inherent in the valuation of MSRs include higher than expected prepayment rates and/or delayed receipt of cash flows. The Company utilizes derivatives, including interest rate swaps, swaptions, forward commitments to buy TBAs, U.S. Treasury and Eurodollar futures and options on U.S. Treasury futures, to mitigate the valuation risk. Refer to Notes 10 and 22 of the Notes to Consolidated Financial Statements for additional information on the assumptions used in determining the fair value of MSRs and an analysis of the sensitivity to changes in interest rates of the fair value of the MSRs portfolio and the related derivative instruments used to mitigate the valuation risk.

Income Taxes The Company estimates income tax expense based on amounts expected to be owed to the various tax jurisdictions in which it operates, including federal, state and local domestic jurisdictions, and an insignificant amount to foreign jurisdictions. The estimated income tax expense is reported in the Consolidated Statement of Income. Accrued taxes are reported in other assets or other liabilities on the Consolidated Balance Sheet and represent the net estimated amount due to or to be received from taxing jurisdictions either currently or deferred to future periods. Deferred taxes arise from differences between assets and liabilities measured for financial reporting purposes versus income tax reporting purposes. Deferred tax assets are recognized if, in management’s judgment, their realizability is determined to be more likely than not. Uncertain tax positions that meet the more likely than not recognition threshold are measured to determine the amount of benefit to recognize. An uncertain tax position is measured at the largest amount of benefit management believes is more likely than not to be realized upon settlement. In estimating accrued taxes, the Company assesses the relative merits and risks of the appropriate tax treatment considering statutory, judicial and regulatory guidance in the context of the tax position. Because of the complexity of tax laws and regulations, interpretation can be difficult and subject to legal judgment given specific facts and circumstances. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions regarding the estimated amounts of accrued taxes.

63    

Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by various taxing authorities, and newly enacted statutory, judicial and regulatory guidance that impacts the relative merits and risks of tax positions. These changes, when they occur, affect accrued taxes and can be significant to the operating results of the Company. Refer to Note 19 of the Notes to Consolidated Financial Statements for additional information regarding income taxes.

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.

The annual report of the Company’s management on internal control over financial reporting is provided on page 65. The audit report of Ernst & Young LLP, the Company’s independent accountants, regarding the Company’s internal control over financial reporting is provided on page 68.

64    

Report of Management

Responsibility for the financial statements and other information presented throughout this Annual Report rests with the management of U.S. Bancorp. The Company believes the consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and present the substance of transactions based on the circumstances and management’s best estimates and judgment.

In meeting its responsibilities for the reliability of the financial statements, management is responsible for establishing and maintaining an adequate system of internal control over financial reporting as defined by Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s system of internal control is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of publicly filed financial statements in accordance with accounting principles generally accepted in the United States.

To test compliance, the Company carries out an extensive audit program. This program includes a review for compliance with written policies and procedures and a comprehensive review of the adequacy and effectiveness of the system of internal control. Although control procedures are designed and tested, it must be recognized that there are limits inherent in all systems of internal control and, therefore, errors and irregularities may nevertheless occur. Also, estimates and judgments are required to assess and balance the relative cost and expected benefits of the controls. Projection of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Board of Directors of the Company has an Audit Committee composed of directors who are independent of U.S. Bancorp. The Audit Committee meets periodically with management, the internal auditors and the independent accountants to consider audit results and to discuss internal accounting control, auditing and financial reporting matters.

Management assessed the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its Internal Control-Integrated Framework (2013 framework). Based on our assessment and those criteria, management believes the Company designed and maintained effective internal control over financial reporting as of December 31, 2021.

The Company’s independent registered accountants, Ernst & Young LLP, have been engaged to render an independent professional opinion on the financial statements and issue an audit report on the Company’s internal control over financial reporting. Their opinion on the financial statements appearing on pages 66 and 67 and their audit report on internal control over financial reporting appearing on page 68 are based on procedures conducted in accordance with auditing standards of the Public Company Accounting Oversight Board (United States).

65    

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of U.S. Bancorp

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of U.S. Bancorp (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 22, 2022 expressed an unqualified opinion thereon.

Adoption of New Accounting Standard

As discussed in Notes 1 and 6 to the consolidated financial statements, the Company changed its method for accounting for credit losses in 2020.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses

Description of the Matter The Company’s loan and lease portfolio and the associated allowance for credit losses (ACL), were $312.0 billion and $6.2 billion as of December 31, 2021, respectively. The provision for credit losses was a benefit of $1.2 billion for the year ended December 31, 2021. As discussed in Notes 1 and 6 to the financial statements, the ACL is established for current expected credit losses on the Company’s loan and lease portfolio, including unfunded credit commitments, by utilizing forward-looking expected loss models. When determining expected losses, the Company uses multiple probability weighted economic scenarios over a reasonable and supportable forecast period and then fully reverts to historical loss experience to estimate losses over the remaining asset lives. Model estimates are adjusted 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. Additionally, management may adjust ACL for other qualitative factors such as 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.

66    

Auditing management’s ACL estimate and related provision for credit losses was complex due to the highly judgmental nature of the probability weighted economic scenarios, expected loss models, as well as model and qualitative factor adjustments.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s process for establishing the ACL, including management’s controls over: 1) selection and implementation of forward-looking economic scenarios and the probability weights assigned to them; 2) expected loss models, including model validation, implementation, monitoring, the completeness and accuracy of key inputs and assumptions used in the models, and management’s output assessment and related adjustments; 3) adjustments to reflect management’s consideration of qualitative factors; 4) the ACL methodology and governance process. With the support of specialists, we assessed the economic scenarios and related probability weights by, among other procedures, evaluating management’s methodology and agreeing a sample of key economic variables used to external sources. We also performed and considered the results of various sensitivity analyses and analytical procedures, including comparison of a sample of the key economic variables to alternative external sources, historical statistics and peer bank information. With respect to expected loss models, with the support of specialists, we evaluated model calculation design and reperformed the calculation for a sample of models. We also tested the appropriateness of key inputs and assumptions used in these models by agreeing a sample of inputs to internal sources. As to model adjustments, with the support of specialists, we evaluated management’s estimate methodology and assessment of factors that could potentially impact the accuracy of expected loss models. We also recalculated a sample of model adjustments and tested internal and external data used by agreeing a sample of inputs to internal and external sources. Regarding the completeness of qualitative factors identified and incorporated into measuring the ACL, we evaluated the potential impact of imprecision in the expected loss models and economic scenario assumptions; emerging risks related to changes in the environment impacting specific portfolio segments and portfolio concentrations. We also evaluated and tested internal and external data used in the qualitative adjustments by agreeing significant inputs and underlying data to internal and external sources. We evaluated the overall ACL amount, including model estimates and adjustments, qualitative factors adjustments, and whether the recorded ACL appropriately reflects expected credit losses on the loan and lease portfolio and unfunded credit commitments. We reviewed historical loss statistics, peer-bank information, subsequent events and transactions and considered whether they corroborate or contradict the Company’s measurement of the ACL. We searched for and evaluated information that corroborates or contradicts management’s forecasted assumptions and related probability weights as well as identification and measurement of adjustments to model estimates and qualitative factors.

We have served as the Company’s auditor since 2003.

Minneapolis, Minnesota

February 22, 2022

67    

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of U.S. Bancorp

Opinion on Internal Control over Financial Reporting

We have audited U.S. Bancorp’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, U.S. Bancorp (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and our report dated February 22, 2022 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Minneapolis, Minnesota

February 22, 2022

68    

Consolidated Financial Statements and Notes Table of Contents

Consolidated Financial Statements
Consolidated Balance Sheet	70
Consolidated Statement of Income	71
Consolidated Statement of Comprehensive Income	72
Consolidated Statement of Shareholders’ Equity	73
Consolidated Statement of Cash Flows	74
Notes to Consolidated Financial Statements
Note 1 — Significant Accounting Policies	75
Note 2 — Accounting Changes	82
Note 3 — Business Combinations	82
Note 4 — Restrictions on Cash and Due From Banks	82
Note 5 — Investment Securities	83
Note 6 — Loans and Allowance for Credit Losses	86
Note 7 — Leases	92
Note 8 — Accounting for Transfers and Servicing of Financial Assets and Variable Interest Entities	93
Note 9 — Premises and Equipment	94
Note 10 — Mortgage Servicing Rights	95
Note 11 — Intangible Assets	96
Note 12 — Deposits	97
Note 13 — Short-Term Borrowings	97
Note 14 — Long-Term Debt	98
Note 15 — Shareholders’ Equity	99
Note 16 — Earnings Per Share	104
Note 17 — Employee Benefits	104
Note 18 — Stock-Based Compensation	109
Note 19 — Income Taxes	111
Note 20 — Derivative Instruments	113
Note 21 — Netting Arrangements for Certain Financial Instruments and Securities Financing Activities	117
Note 22 — Fair Values of Assets and Liabilities	120
Note 23 — Guarantees and Contingent Liabilities	126
Note 24 — Business Segments	129
Note 25 — U.S. Bancorp (Parent Company)	132
Note 26 — Subsequent Events	133

69    

U.S. Bancorp    

Consolidated Balance Sheet    

At December 31 (Dollars in Millions)	2021			2020
Assets
Cash and due from banks	$	28,905		$	62,580
Investment securities
Held-to-maturity (2021 fair value $41,812)		41,858			–
Available-for-sale ($557 and $402 pledged as collateral, respectively)(a)		132,963			136,840
Loans held for sale (including $6,623 and $8,524 of mortgage loans carried at fair value, respectively)		7,775			8,761
Loans
Commercial		112,023			102,871
Commercial real estate		39,053			39,311
Residential mortgages		76,493			76,155
Credit card		22,500			22,346
Other retail		61,959			57,024
Total loans		312,028			297,707
Less allowance for loan losses		(5,724	)		(7,314	)
Net loans		306,304			290,393
Premises and equipment		3,305			3,468
Goodwill		10,262			9,918
Other intangible assets		3,738			2,864
Other assets (including $1,193 and $1,255 of trading securities at fair value pledged as collateral, respectively)(a)		38,174			39,081
Total assets	$	573,284		$	553,905
Liabilities and Shareholders’ Equity
Deposits
Noninterest-bearing	$	134,901		$	118,089
Interest-bearing		321,182			311,681
Total deposits		456,083			429,770
Short-term borrowings		11,796			11,766
Long-term debt		32,125			41,297
Other liabilities		17,893			17,347
Total liabilities		517,897			500,180
Shareholders’ equity
Preferred stock		6,371			5,983
Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares; issued: 2021 and 2020 — 2,125,725,742 shares		21			21
Capital surplus		8,539			8,511
Retained earnings		69,201			64,188
Less cost of common stock in treasury: 2021 — 642,223,571 shares; 2020 — 618,618,084 shares		(27,271	)		(25,930	)
Accumulated other comprehensive income (loss)		(1,943	)		322
Total U.S. Bancorp shareholders’ equity		54,918			53,095
Noncontrolling interests		469			630
Total equity		55,387			53,725
Total liabilities and equity	$	573,284		$	553,905

(a) Includes only collateral pledged by the Company where counterparties have the right to sell or pledge the collateral.     

See Notes to Consolidated Financial Statements.     

70    

U.S. Bancorp    

Consolidated Statement of Income    

Year Ended December 31 (Dollars and Shares in Millions, Except Per Share Data)	2021			2020			2019
Interest Income
Loans	$	10,747		$	12,018		$	14,099
Loans held for sale		232			216			162
Investment securities		2,365			2,428			2,893
Other interest income		143			178			340
Total interest income		13,487			14,840			17,494
Interest Expense
Deposits		320			950			2,855
Short-term borrowings		70			141			360
Long-term debt		603			924			1,227
Total interest expense		993			2,015			4,442
Net interest income		12,494			12,825			13,052
Provision for credit losses		(1,173	)		3,806			1,504
Net interest income after provision for credit losses		13,667			9,019			11,548
Noninterest Income
Credit and debit card revenue		1,507			1,338			1,413
Corporate payment products revenue		575			497			664
Merchant processing services		1,449			1,261			1,601
Trust and investment management fees		1,832			1,736			1,673
Deposit service charges		724			677			909
Treasury management fees		614			568			578
Commercial products revenue		1,102			1,143			934
Mortgage banking revenue		1,361			2,064			874
Investment products fees		239			192			186
Securities gains (losses), net		103			177			73
Other		721			748			926
Total noninterest income		10,227			10,401			9,831
Noninterest Expense
Compensation		7,299			6,635			6,325
Employee benefits		1,429			1,303			1,286
Net occupancy and equipment		1,048			1,092			1,123
Professional services		492			430			454
Marketing and business development		366			318			426
Technology and communications		1,454			1,294			1,095
Postage, printing and supplies		274			288			290
Other intangibles		159			176			168
Other		1,207			1,833			1,618
Total noninterest expense		13,728			13,369			12,785
Income before income taxes		10,166			6,051			8,594
Applicable income taxes		2,181			1,066			1,648
Net income		7,985			4,985			6,946
Net (income) loss attributable to noncontrolling interests		(22	)		(26	)		(32	)
Net income attributable to U.S. Bancorp	$	7,963		$	4,959		$	6,914
Net income applicable to U.S. Bancorp common shareholders	$	7,605		$	4,621		$	6,583
Earnings per common share	$	5.11		$	3.06		$	4.16
Diluted earnings per common share	$	5.10		$	3.06		$	4.16
Average common shares outstanding		1,489			1,509			1,581
Average diluted common shares outstanding		1,490			1,510			1,583

See Notes to Consolidated Financial Statements.    

71    

U.S. Bancorp    

Consolidated Statement of Comprehensive Income    

Year Ended December 31 (Dollars in Millions)	2021			2020			2019
Net income	$	7,985		$	4,985		$	6,946
Other Comprehensive Income (Loss)
Changes in unrealized gains (losses) on investment securities available-for-sale		(3,698	)		2,905			1,693
Unrealized gains (losses) on held-to-maturity investment securities transferred to available-for-sale		–			–			141
Changes in unrealized gains (losses) on derivative hedges		125			(194	)		(229	)
Foreign currency translation		35			2			26
Changes in unrealized gains (losses) on retirement plans		400			(401	)		(380	)
Reclassification to earnings of realized (gains) losses		104			(42	)		20
Income taxes related to other comprehensive income (loss)		769			(575	)		(322	)
Total other comprehensive income (loss)		(2,265	)		1,695			949
Comprehensive income		5,720			6,680			7,895
Comprehensive (income) loss attributable to noncontrolling interests		(22	)		(26	)		(32	)
Comprehensive income attributable to U.S. Bancorp	$	5,698		$	6,654		$	7,863

See Notes to Consolidated Financial Statements.    

72    

U.S. Bancorp    

Consolidated Statement of Shareholders’ Equity    

	U.S. Bancorp Shareholders
(Dollars and Shares in Millions, Except Per Share Data)	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 December 31, 2018		1,608		$	5,984		$	21	$	8,469		$	59,065		$	(20,188	)	$	(2,322	)	$	51,029		$	628		$	51,657
Changes in accounting principle													2									2						2
Net income (loss)													6,914									6,914			32			6,946
Other comprehensive income (loss)																			949			949						949
Preferred stock dividends(a)													(302	)								(302	)					(302	)
Common stock dividends ($1.58 per share)													(2,493	)								(2,493	)					(2,493	)
Issuance of common and treasury stock		7								(174	)					263						89						89
Purchase of treasury stock		(81	)													(4,515	)					(4,515	)					(4,515	)
Distributions to noncontrolling interests																						–			(31	)		(31	)
Net other changes in noncontrolling interests																						–			1			1
Stock option and restricted stock grants										180												180						180
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(b)													(1,099	)								(1,099	)					(1,099	)
Net income (loss)													4,959									4,959			26			4,985
Other comprehensive income (loss)																			1,695			1,695						1,695
Preferred stock dividends(c)													(304	)								(304	)					(304	)
Common stock dividends ($1.68 per share)													(2,541	)								(2,541	)					(2,541	)
Issuance of preferred stock					486																	486						486
Call of preferred stock					(487	)							(13	)								(500	)					(500	)
Issuance of common and treasury stock		4								(154	)					171						17						17
Purchase of treasury stock		(31	)													(1,661	)					(1,661	)					(1,661	)
Distributions to noncontrolling interests																						–			(25	)		(25	)
Net other changes in noncontrolling interests																						–			(1	)		(1	)
Stock option and restricted stock grants										190												190						190
Balance December 31, 2020		1,507		$	5,983		$	21	$	8,511		$	64,188		$	(25,930	)	$	322		$	53,095		$	630		$	53,725
Net income (loss)													7,963									7,963			22			7,985
Other comprehensive income (loss)																			(2,265	)		(2,265	)					(2,265	)
Preferred stock dividends(d)													(303	)								(303	)					(303	)
Common stock dividends ($1.76 per share)													(2,630	)								(2,630	)					(2,630	)
Issuance of preferred stock					2,221																	2,221						2,221
Call and redemption of preferred stock					(1,833	)							(17	)								(1,850	)					(1,850	)
Issuance of common and treasury stock		5								(169	)					215						46						46
Purchase of treasury stock		(28	)													(1,556	)					(1,556	)					(1,556	)
Distributions to noncontrolling interests																						–			(20	)		(20	)
Purchase of noncontrolling interests																						–			(167	)		(167	)
Net other changes in noncontrolling interests																						–			4			4
Stock option and restricted stock grants										197												197						197
Balance December 31, 2021		1,484		$	6,371		$	21	$	8,539		$	69,201		$	(27,271	)	($	1,943	)	$	54,918		$	469		$	55,387

(a) 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 $3,654.95, $887.15, $1,625.00, $1,287.52, $1,281.25, $1,325.00 and $1,375.00, respectively.

(b) 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 taxes through a cumulative-effect adjustment.

(c) Reflects dividends declared per share on the Company’s Series A, Series B, Series F, Series H, Series I, Series J, Series K and Series L Non-Cumulative Perpetual Preferred Stock of $3,558.332, $889.58, $1,625.00, $1,287.52, $1,281.25, $1,325.00, $1,375.00 and $203.13, respectively.

(d) Reflects dividends declared per share on the Company’s Series A, Series B, Series F, Series I, Series J, Series K, Series L, Series M and Series N Non-Cumulative Perpetual Preferred Stock of $3,548.61, $887.153, $1,625.00, $232.953, $1,325.00, $1,375.00, $937.50, $952.778 and $202.986, respectively.

See Notes to Consolidated Financial Statements.

73    

U.S. Bancorp    

Consolidated Statement of Cash Flows    

Year Ended December 31 (Dollars in Millions)	2021			2020			2019
Operating Activities
Net income attributable to U.S. Bancorp	$	7,963		$	4,959		$	6,914
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses		(1,173	)		3,806			1,504
Depreciation and amortization of premises and equipment		338			351			334
Amortization of intangibles		159			176			168
(Gain) loss on sale of loans held for sale		(1,135	)		(2,193	)		(762	)
(Gain) loss on sale of securities and other assets		(398	)		(344	)		(469	)
Loans originated for sale, net of repayments		(72,627	)		(67,449	)		(36,561	)
Proceeds from sales of loans held for sale		74,315			65,468			33,303
Other, net		2,428			(1,058	)		458
Net cash provided by operating activities		9,870			3,716			4,889
Investing Activities
Proceeds from sales of available-for-sale investment securities		16,075			15,596			11,252
Proceeds from maturities of held-to-maturity investment securities		1,093			–			9,137
Proceeds from maturities of available-for-sale investment securities		41,199			40,639			11,454
Purchases of held-to-maturity investment securities		(1,088	)		–			(6,701	)
Purchases of available-for-sale investment securities		(99,045	)		(68,662	)		(33,814	)
Net (increase) decrease in loans outstanding		(17,459	)		6,350			(9,871	)
Proceeds from sales of loans		6,183			2,250			2,899
Purchases of loans		(4,466	)		(11,622	)		(3,805	)
Net decrease (increase) in securities purchased under agreements to resell		18			645			(816	)
Other, net		3			(636	)		(1,295	)
Net cash used in investing activities		(57,487	)		(15,440	)		(21,560	)
Financing Activities
Net increase in deposits		26,313			67,854			16,441
Net increase (decrease) in short-term borrowings		30			(11,957	)		9,584
Proceeds from issuance of long-term debt		2,626			14,501			9,899
Principal payments or redemption of long-term debt		(11,432	)		(14,476	)		(11,119	)
Proceeds from issuance of preferred stock		2,221			486			–
Proceeds from issuance of common stock		43			15			88
Repurchase of preferred stock		(1,250	)		–			–
Repurchase of common stock		(1,555	)		(1,672	)		(4,525	)
Cash dividends paid on preferred stock		(308	)		(300	)		(302	)
Cash dividends paid on common stock		(2,579	)		(2,552	)		(2,443	)
Purchase of noncontrolling interests		(167	)		–			–
Net cash provided by financing activities		13,942			51,899			17,623
Change in cash and due from banks		(33,675	)		40,175			952
Cash and due from banks at beginning of period		62,580			22,405			21,453
Cash and due from banks at end of period	$	28,905		$	62,580		$	22,405
Supplemental Cash Flow Disclosures
Cash paid for income taxes	$	535		$	1,025		$	941
Cash paid for interest		1,061			2,199			4,404
Noncash transfer of held-to-maturity investment securities to available-for-sale		–			–			43,596
Noncash transfer of available-for-sale investment securities to held-to-maturity		41,823			–			–
Net noncash transfers to foreclosed property		14			23			60
Acquisitions
Assets (sold) acquired	$	749		$	828		$	407
Liabilities sold (assumed)		(88	)		(272	)		36
Net	$	661		$	556		$	443

See Notes to Consolidated Financial Statements.    

74    

Notes to Consolidated Financial Statements

  NOTE 1   Significant  Accounting  Policies

U.S. Bancorp is a financial services holding company headquartered in Minneapolis, Minnesota, serving millions of local, national and global customers. U.S. Bancorp and its subsidiaries (the “Company”) provide a full range of financial services, including lending and depository services through banking offices principally in the Midwest and West regions of the United States, through on-line services, over mobile devices and through other distribution channels. The Company also engages in credit card, merchant, and ATM processing, mortgage banking, cash management, capital markets, insurance, trust and investment management, brokerage, and leasing activities, principally in domestic markets.

Basis of Presentation The consolidated financial statements include the accounts of the Company and its subsidiaries and all variable interest entities (“VIEs”) for which the Company has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and the obligation to absorb losses or right to receive benefits of the VIE that could potentially be significant to the VIE. Consolidation eliminates intercompany accounts and transactions. Certain items in prior periods have been reclassified to conform to the current period presentation.

Uses of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual experience could differ from those estimates and assumptions.

Securities

Realized gains or losses on securities are determined on a trade date basis based on the specific amortized cost of the investments sold.

Trading Securities Securities held for resale are classified as trading securities and are included in other assets and reported at fair value. Changes in fair value and realized gains or losses are reported in noninterest income.

Available-for-sale Securities Debt securities that are not trading securities but may be sold before maturity in response to changes in the Company’s interest rate risk profile, funding needs, demand for collateralized deposits by public entities or other reasons, are carried at fair value with unrealized net gains or losses reported within other comprehensive income (loss). Declines in fair value related to credit, if any, are recorded through the establishment of an allowance for credit losses.

Held-to-maturity Securities Debt securities for which the Company has the positive intent and ability to hold to maturity are reported at historical cost adjusted for amortization of premiums and accretion of discounts. Expected credit losses, if any, are recorded through the establishment of an allowance for credit losses.

Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized financing transactions with a receivable or payable recorded at the amounts at which the securities were acquired or sold, plus accrued interest. Collateral requirements are continually monitored and additional collateral is received or provided as required. The Company records a receivable or payable for cash collateral paid or received.

Equity Investments

Equity investments in entities where the Company has a significant influence (generally between 20 percent and 50 percent ownership), but does not control the entity, are accounted for using the equity method. Investments in limited partnerships and similarly structured limited liability companies where the Company’s ownership interest is greater than 5 percent are accounted for using the equity method. Equity investments not using the equity method are accounted for at fair value with changes in fair value and realized gains or losses reported in noninterest income, unless fair value is not readily determinable, in which case the investment is carried at cost subject to adjustments for any observable market transactions on the same or similar instruments of the investee. Most of the Company’s equity investments do not have readily determinable fair values. All equity investments are evaluated for impairment at least annually and more frequently if certain criteria are met.

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. 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.

Originated Loans Held for Investment Loans the Company originates as held for investment are reported at the principal amount outstanding, net of unearned interest income and deferred fees and costs, and any direct principal charge-offs. Interest income is accrued on the unpaid principal balances as earned. Loan and commitment fees and certain direct loan origination costs are deferred and recognized over the life of the loan and/or commitment period as yield adjustments.

Purchased Loans All purchased loans are recorded at fair value at the date of purchase and those acquired on or after January 1,

75    

2020 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 for credit losses is established for each population and considers product mix, risk characteristics of the portfolio, bankruptcy experience, delinquency status and refreshed loan-to-value ratios when possible. The allowance for credit losses established for purchased loans not considered PCD is recognized through provision expense upon acquisition, whereas the allowance for credit losses 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 for credit losses related to purchased loans, regardless of PCD status, are recognized through provision expense, with charge-offs charged to the allowance. The Company did not have a material amount of PCD loans included in its loan portfolio at December 31, 2021. In accordance with applicable authoritative accounting guidance, purchased loans acquired prior to January 1, 2020 were initially measured at fair value, inclusive of any credit discounts, and an allowance for credit losses was not recorded as of the acquisition date.

Commitments to Extend Credit Unfunded commitments for residential mortgage loans intended to be held for sale are considered derivatives and recorded in other assets and other liabilities on the Consolidated Balance Sheet at fair value with changes in fair value recorded in noninterest income. All other unfunded loan commitments are not considered derivatives and are not reported on the Consolidated Balance Sheet. Reserves for credit exposure on all other unfunded credit commitments are recorded in other liabilities.

Allowance for Credit Losses Beginning January 1, 2020, the allowance for credit losses is established for current expected credit losses on the Company’s loan and lease portfolio, including unfunded credit commitments. The allowance considers expected losses for the remaining lives of the applicable assets, inclusive of expected recoveries. The allowance for credit losses is increased through provisions charged to earnings and reduced by net charge-offs. Management evaluates the appropriateness of the allowance for credit losses on a quarterly basis.

Multiple economic scenarios are considered over a three-year reasonable and supportable forecast period, which includes increasing consideration of historical loss experience over years two and three. These economic scenarios are constructed with interrelated projections of multiple economic variables, and loss estimates are produced that consider the historical correlation of those economic variables with credit losses. After the forecast period, the Company fully reverts to long-term historical loss experience, adjusted for prepayments and characteristics of the current loan and lease portfolio, to estimate losses over the remaining life of the portfolio. The economic scenarios are updated at least quarterly and are designed to provide a range of reasonable estimates, from better to worse than current expectations. Scenarios are weighted based on the Company’s

expectation of economic conditions for the foreseeable future and reflect significant judgment and consideration of uncertainties that exist. Final loss estimates also consider factors affecting credit losses not reflected in the scenarios, due to the unique aspects of current conditions and expectations. These factors may include, but are not limited to, loan servicing practices, regulatory guidance, and/or fiscal and monetary policy actions.

The allowance recorded for credit losses utilizes forward-looking expected loss models to consider a variety of factors affecting lifetime credit losses. These factors include, but are not limited to, macroeconomic variables such as unemployment rates, real estate prices, gross domestic product levels and corporate bond spreads, as well as loan and borrower characteristics, such as internal risk ratings on commercial loans and consumer credit scores, delinquency status, collateral type and available valuation information, consideration of end-of-term losses on lease residuals, and the remaining term of the loan, adjusted for expected prepayments. For each loan portfolio, model estimates are adjusted as necessary to consider any relevant changes in portfolio composition, lending policies, underwriting standards, risk management practices, economic conditions or other factors that would affect the accuracy of the model. Expected credit loss estimates also include consideration of expected cash recoveries on loans previously charged-off or expected recoveries on collateral dependent loans where recovery is expected through sale of the collateral. Where loans do not exhibit similar risk characteristics, an individual analysis is performed to consider expected credit losses. The allowance recorded for individually evaluated loans greater than $5 million in the commercial lending segment is based on an analysis utilizing expected cash flows discounted using the original effective interest rate, the observable market price of the loan, or the fair value of the collateral, less selling costs, for collateral-dependent loans as appropriate.

The allowance recorded for Troubled Debt Restructuring (“TDR”) loans in the consumer lending segment is determined on a homogenous pool basis utilizing expected cash flows discounted using the original effective interest rate of the pool. TDRs generally do not include loan modifications granted to customers resulting directly from the economic effects of the COVID-19 pandemic, who were otherwise in current payment status. The expected cash flows on TDR loans consider subsequent payment defaults since modification, the borrower’s ability to pay under the restructured terms, and the timing and amount of payments. The allowance for collateral-dependent loans in the consumer lending segment is determined based on the fair value of the collateral less costs to sell. With respect to the commercial lending segment, TDRs may be collectively evaluated for impairment where observed performance history, including defaults, is a primary driver of the loss allocation. For commercial TDRs individually evaluated for impairment, attributes of the borrower are the primary factors in determining the allowance for credit losses. However, historical loss experience is also incorporated into the allowance methodology applied to this category of loans.

76    

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

The Company also assesses the credit risk associated with off-balance sheet loan commitments, letters of credit, investment securities and derivatives. Credit risk associated with derivatives is reflected in the fair values recorded for those positions. The liability for off-balance sheet credit exposure related to loan commitments and other credit guarantees is included in other liabilities. Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments.

The results of the analysis are evaluated quarterly to confirm the estimates are appropriate for each specific loan portfolio, as well as the entire loan portfolio, as the entire allowance for credit losses is available for the entire loan portfolio.

Prior to January 1, 2020, the allowance for credit losses was established based on an incurred loss model. The allowance recorded for loans in the commercial lending segment was based on the migration analysis of commercial loans and actual loss experience. The allowance recorded for loans in the consumer lending segment was determined on a homogenous pool basis and primarily included consideration of delinquency status and historical losses. In addition to the amounts determined under the methodologies described above, management also considered the potential impact of qualitative factors.

Credit Quality The credit quality of the Company’s loan portfolios is assessed as a function of net credit losses, levels of nonperforming assets and delinquencies, and credit quality ratings as defined by the Company.

For all loan portfolio classes, loans are considered past due based on the number of days delinquent except for monthly amortizing loans which are classified delinquent based upon the number of 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 charged down if unsecured by collateral or partially charged down to the fair value of the collateral securing the loan, less costs to sell, when the loan is placed on nonaccrual.

Consumer lending segment loans are generally charged-off at a specific number of days or payments past due. Residential mortgages and other retail loans secured by 1-4 family properties are generally charged down to the fair value of the collateral securing the loan, less costs to sell, at 180 days past due. Residential mortgage loans and lines in a first lien position are placed on nonaccrual status in instances where a partial charge-off occurs unless the loan is well secured and in the process of collection. Residential mortgage loans and lines in a junior lien position secured by 1-4 family properties are placed on nonaccrual status at 120 days past due or when they are behind a first lien that has become 180 days or greater past due or placed on nonaccrual status. Any secured consumer lending segment loan whose borrower has had debt discharged through bankruptcy, for which the loan amount exceeds the fair value of the collateral, is charged down to the fair value of the related collateral and the remaining balance is placed on nonaccrual status. Credit card loans continue to accrue interest until the account is charged-off. Credit cards are charged-off at 180 days past due. Other retail loans not secured by 1-4 family properties are charged-off at 120 days past due; and revolving consumer lines are charged-off at 180 days past due. Similar to credit cards, other retail loans are generally not placed on nonaccrual status because of the relative short period of time to charge-off. Certain retail customers having financial difficulties may have the terms of their credit card and other loan agreements modified to require only principal payments and, as such, are reported as nonaccrual.

For all loan classes, interest payments received on nonaccrual loans are generally recorded as a reduction to a loan’s carrying amount while a loan is on nonaccrual and are recognized as interest income upon payoff of the loan. However, interest income may be recognized for interest payments if the remaining carrying amount of the loan is believed to be collectible. In certain circumstances, loans in any class may be restored to accrual status, such as when a loan has demonstrated sustained repayment performance or no amounts are past due and prospects for future payment are no longer in doubt; or when the loan becomes well secured and is in the process of collection. Loans where there has been a partial charge-off may be returned to accrual status if all principal and interest (including amounts previously charged-off) is expected to be collected and the loan is current.

The Company classifies its loan portfolio classes using internal credit quality ratings on a quarterly basis. These ratings include pass, special mention and classified, and are an important part of the Company’s overall credit risk management process and evaluation of the allowance for credit losses. Loans with a pass rating represent those loans not classified on the Company’s rating scale for problem credits, as minimal credit risk has been identified. Special mention loans are those loans that have a potential weakness deserving management’s close attention. Classified loans are those loans where a well-defined weakness has been identified that may put full collection of contractual cash flows at risk. It is possible that others, given the same information, may reach different reasonable conclusions regarding the credit quality rating classification of specific loans.

77    

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 Company has implemented certain restructuring programs that may result in TDRs. However, many of the Company’s TDRs are also determined on a case-by-case basis in connection with ongoing loan collection processes.

For the commercial lending segment, modifications generally result in the Company working with borrowers on a case-by-case basis. Commercial and commercial real estate modifications generally include extensions of the maturity date and may be accompanied by an increase or decrease to the interest rate, which may not be deemed a market interest rate. In addition, the Company may work with the borrower in identifying other changes that mitigate loss to the Company, which may include additional collateral or guarantees to support the loan. To a lesser extent, the Company may waive contractual principal. The Company classifies all of the above concessions as TDRs to the extent the Company determines that the borrower is experiencing financial difficulty.

Modifications for the consumer lending segment are generally part of programs the Company has initiated. The Company modifies residential mortgage loans under Federal Housing Administration, United States Department of Veterans Affairs, or its own internal programs. Under these programs, the Company offers qualifying homeowners the opportunity to permanently modify their loan and achieve more affordable monthly payments by providing loan concessions. These concessions may include adjustments to interest rates, conversion of adjustable rates to fixed rates, extension of maturity dates or deferrals of payments, capitalization of accrued interest and/or outstanding advances, or in limited situations, partial forgiveness of loan principal. In most instances, participation in residential mortgage loan restructuring programs requires the customer to complete a short-term trial period. A permanent loan modification is 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.

Leases The Company, as a lessor, originates retail and commercial leases either directly to the consumer or indirectly through dealer networks. Retail leases, primarily automobiles, have 3 to 5 year terms. Commercial leases may include high dollar assets such as aircraft or lower cost items such as office equipment. At lease inception, retail lease customers are provided with an end-of-term purchase option, which is based on the expected fair value of the automobile at the expiration of the lease. Automobile leases do not typically contain options to extend or terminate the lease. Equipment leases may contain various types of purchase options. Some option amounts are a stated value, while others are determined using the fair market value at the time of option exercise.

Residual values on leased assets are reviewed regularly for impairment. Residual valuations for retail leases are based on independent assessments of expected used automobile sale prices at the end of the lease term. Impairment tests are conducted based on these valuations considering the probability of the lessee returning the asset to the Company, re-marketing efforts, insurance coverage and ancillary fees and costs. Valuations for commercial leases are based upon external or internal management appraisals. 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. Retail lease residual value risk is mitigated further by the purchase of residual value insurance coverage and effective end-of-term marketing of off-lease vehicles.

The Company, as lessee, leases certain assets for use in its operations. Leased assets primarily include retail branches, operations centers and other corporate locations, and, to a lesser extent, office and computer equipment. For each lease with an original term greater than 12 months, the Company records a lease liability and a corresponding right of use (“ROU”) asset. The Company accounts for the lease and non-lease components in the majority of its lease contracts as a single lease component, with the determination of the lease liability at lease inception based on the present value of the consideration to be paid under the contract. The discount rate used by the Company is determined at commencement of the lease using a secured rate for a similar term as the period of the lease. The Company’s leases do not include significant variable lease payments.

Certain of the Company’s real estate leases include options to extend. Lease extension options are generally exercisable at market rates. Such option periods do not provide a significant

78    

incentive, and their exercise is not reasonably certain. Accordingly, the Company does not generally recognize payments occurring during option periods in the calculation of its ROU assets and lease liabilities.

Other Real Estate Other real estate owned (“OREO”) is included in other assets, and is property acquired through foreclosure or other proceedings on defaulted loans. OREO is initially recorded at fair value, less estimated selling costs. The fair value of OREO is evaluated regularly and any decreases in value along with holding costs, such as taxes and insurance, are reported in noninterest expense.

Loans Held For Sale

Loans held for sale (“LHFS”) represent mortgage loans intended to be sold in the secondary market and other loans that management has an active plan to sell. LHFS are carried at the lower-of-cost-or-fair value as determined on an aggregate basis by type of loan with the exception of loans for which the Company has elected fair value accounting, which are carried at fair value. Any writedowns to fair value upon the transfer of loans to LHFS are reflected in loan charge-offs.

Where an election is made to carry the LHFS at fair value, any change in fair value is recognized in noninterest income. Where an election is made to carry LHFS at lower-of-cost-or-fair value, any further decreases are recognized in noninterest income and increases in fair value above the loan cost basis are not recognized until the loans are sold. Fair value elections are made at the time of origination or purchase based on the Company’s fair value election policy. The Company has elected fair value accounting for substantially all its mortgage loans held for sale (“MLHFS”).

Derivative Financial 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. Derivative instruments are reported in other assets or other liabilities at fair value. Changes in a derivative’s fair value are recognized currently in earnings unless specific hedge accounting criteria are met.

All derivative instruments that qualify and are designated for hedge accounting are recorded at fair value and classified as either a hedge of the fair value of a recognized asset or liability (“fair value hedge”); a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”); or a hedge of the volatility of a net investment in foreign operations driven by changes in foreign currency exchange rates (“net investment hedge”). Changes in the fair value of a derivative that is highly effective and designated as a fair value hedge, and the offsetting changes in the fair value of the hedged item, are recorded in earnings. Changes in the fair value of a derivative that is highly effective and designated as a cash flow hedge are recorded in

other comprehensive income (loss) until cash flows of the hedged item are realized. Changes in the fair value of net investment hedges that are highly effective are recorded in other comprehensive income (loss). 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).

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).

Revenue Recognition

In the ordinary course of business, the Company recognizes income derived from various revenue generating activities. Certain revenues are generated from contracts where they are recognized when, or as services or products are transferred to customers for amounts the Company expects to be entitled. Revenue generating activities related to financial assets and liabilities are also recognized; including mortgage servicing fees, loan commitment fees, foreign currency remeasurements, and gains and losses on securities, equity investments and unconsolidated subsidiaries. Certain specific policies include the following:

Credit and Debit Card Revenue Credit and debit card revenue includes interchange from credit and debit cards processed through card association networks, annual fees, and other transaction and account management fees. Interchange rates are generally set by the credit card associations and based on purchase volumes and other factors. The Company records interchange as services are provided. Transaction and account management fees are recognized as services are provided, except for annual fees which are recognized over the applicable period. Costs for rewards programs and certain payments to partners and credit card associations are also recorded within credit and debit card revenue when services are provided. The Company predominately records credit and debit card revenue within the Payment Services line of business.

Corporate Payment Products Revenue Corporate payment products revenue primarily includes interchange from commercial card products processed through card association networks and revenue from proprietary network transactions. The Company records corporate payment products revenue as services are provided. Certain payments to credit card associations and customers are also recorded within corporate payment products revenue as services are provided. Corporate payment products revenue is recorded within the Payment Services line of business.

79    

Merchant Processing Services Merchant processing services revenue consists principally of merchant discount and other transaction and account management fees charged to merchants for the electronic processing of card association network transactions, less interchange paid to the card-issuing bank, card association assessments, and revenue sharing amounts. All of these are recognized at the time the merchant’s services are performed. The Company may enter into revenue sharing agreements with referral partners or in connection with purchases of merchant contracts from sellers. The revenue sharing amounts are determined primarily on sales volume processed or revenue generated for a particular group of merchants. Merchant processing revenue also includes revenues related to point-of-sale equipment recorded as sales when the equipment is shipped or as earned for equipment rentals. The Company records merchant processing services revenue within the Payment Services line of business.

Trust and Investment Management Fees Trust and investment management fees are recognized over the period in which services are performed and are based on a percentage of the fair value of the assets under management or administration, fixed based on account type, or transaction-based fees. Services provided to clients include trustee, transfer agent, custodian, fiscal agent, escrow, fund accounting and administration services. Services provided to mutual funds may include selling, distribution and marketing services. Trust and investment management fees are predominately recorded within the Wealth Management and Investment Services line of business.

Deposit Service Charges Deposit service charges include service charges on deposit accounts received under depository agreements with customers to provide access to deposited funds, serve as a custodian of funds, and when applicable, pay interest on deposits. Checking or savings accounts may contain fees for various services used on a day to day basis by a customer. Fees are recognized as services are delivered to and consumed by the customer, or as penalty fees are charged. Deposit service charges also include revenue generated from ATM transaction processing and settlement services which is recognized at the time the services are performed. Certain payments to partners and card associations related to ATM processing services are also recorded within deposit service charges as services are provided. Deposit service charges are reported primarily within the Consumer and Business Banking line of business.

Treasury Management Fees Treasury management fees include fees for a broad range of products and services that enables customers to manage their cash more efficiently. These products and services include cash and investment management, receivables management, disbursement services, funds transfer services, and information reporting. Revenue is recognized as products and services are provided to customers. The Company reflects a discount calculated on monthly average collected customer balances. Total treasury management fees are reported primarily within the Corporate and Commercial Banking and Consumer and Business Banking lines of business.

Commercial Products Revenue Commercial products revenue primarily includes revenue related to ancillary services provided to Corporate and Commercial Banking and Consumer and Business Banking customers, including standby letter of credit fees, non-yield related loan fees, capital markets related revenue, sales of direct financing leases, and loan and syndication fees. Sales of direct financing leases are recognized at the point of sale. In addition, the Company may lead or participate with a group of underwriters in raising investment capital on behalf of securities issuers and charge underwriting fees. These fees are recognized at securities issuance. The Company, in its role as lead underwriter, arranges deal structuring and use of outside vendors for the underwriting group. The Company recognizes only those fees and expenses related to its underwriting commitment.

Mortgage Banking Revenue Mortgage banking revenue includes revenue derived from mortgages originated and subsequently sold, generally with servicing retained. The primary components include: gains and losses on mortgage sales; servicing revenue; changes in fair value for mortgage loans originated with the intent to sell and measured at fair value under the fair value option; changes in fair value for derivative commitments to purchase and originate mortgage loans; changes in the fair value of mortgage servicing rights (“MSRs”); and the impact of risk management activities associated with the mortgage origination pipeline, funded loans and MSRs. Net interest income from mortgage loans is recorded in interest income. Refer to Other Significant Policies in Note 1, as well as Note 10 and Note 22 for a further discussion of MSRs. Mortgage banking revenue is reported within the Consumer and Business Banking line of business.

Investment Products Fees Investment products fees include commissions related to the execution of requested security trades, distribution fees from sale of mutual funds, and investment advisory fees. Commissions and investment advisory fees are recognized as services are delivered to and utilized by the customer. Distribution fees are received over time, are dependent on the consumer maintaining their mutual fund asset position and the value of such position. These revenues are estimated and recognized at the point a significant reversal of revenue becomes remote. Investment products fees are predominately reported within the Wealth Management and Investment Services line of business.

Other Noninterest Income Other noninterest income is primarily related to financial assets including income on unconsolidated subsidiaries and equity method investments, gains on sale of other investments and corporate owned life insurance proceeds. The Company reports other noninterest income across all lines of business.

Other Significant Policies

Goodwill and Other Intangible Assets Goodwill is recorded on acquired businesses if the purchase price exceeds the fair value of the net assets acquired. Other intangible assets are recorded

80    

at their fair value upon completion of a business acquisition or certain other transactions, and generally represent the value of customer contracts or relationships. Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment at a reporting unit level. In certain situations, an interim impairment test may be required if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Other intangible assets are amortized over their estimated useful lives, using straight-line and accelerated methods and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. Determining the amount of goodwill impairment, if any, includes assessing whether the carrying value of a reporting unit exceeds its fair value. Determining the amount of other intangible asset impairment, if any, includes assessing the present value of the estimated future cash flows associated with the intangible asset and comparing it to the carrying amount of the asset.​​​​​​​

Income Taxes Deferred taxes are recorded to reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting carrying amounts. The Company uses the deferral method of accounting on investments that generate investment tax credits. Under this method, the investment tax credits are recognized as a reduction to the related asset. For certain investments in qualified affordable housing projects, the Company presents the expense in tax expense rather than noninterest expense.

Mortgage Servicing Rights MSRs are capitalized as separate assets when loans are sold and servicing is retained or if they are purchased from others. MSRs are recorded at fair value. The Company determines the fair value by estimating the present value of the asset’s future cash flows utilizing market-based prepayment rates, option adjusted spread, and other assumptions validated through comparison to trade information, industry surveys and independent third-party valuations. Changes in the fair value of MSRs are recorded in earnings as mortgage banking revenue during the period in which they occur.

Pensions For purposes of its pension plans, the Company utilizes its fiscal year-end as the measurement date. At the measurement date, plan assets are determined based on fair value, generally representing observable market prices or the net asset value provided by the funds’ trustee or administrator. The actuarial cost method used to compute the pension liabilities and related expense is the projected unit credit method. The projected benefit obligation is principally determined based on the present value of projected benefit distributions at an assumed discount rate. The discount rate utilized is based on the investment yield of high quality corporate bonds available in the marketplace with maturities equal to projected cash flows of future benefit payments as of the measurement date. Periodic pension expense (or income) includes service costs, interest costs based on the assumed discount rate, the expected return on plan assets based on an actuarially derived market-related value and amortization of actuarial gains and losses. Service cost is included in employee benefits expense on the Consolidated

Statement of Income, with all other components of periodic pension expense included in other noninterest expense on the Consolidated Statement of Income. Pension accounting reflects the long-term nature of benefit obligations and the investment horizon of plan assets, and can have the effect of reducing earnings volatility related to short-term changes in interest rates and market valuations. Actuarial gains and losses include the impact of plan amendments and various unrecognized gains and losses which are deferred and amortized over the future service periods of active employees or the remaining life expectancies of inactive participants. The market-related value utilized to determine the expected return on plan assets is based on fair value adjusted for the difference between expected returns and actual performance of plan assets. The unrealized difference between actual experience and expected returns is included in expense over a period of approximately 15 years for active employees and approximately 30 years for inactive participants. The overfunded or underfunded status of each plan is recorded as an asset or liability on the Consolidated Balance Sheet, with changes in that status recognized through other comprehensive income (loss).​​​​​​​

Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and depreciated primarily on a straight-line basis over the estimated life of the assets. Estimated useful lives range up to 40 years for newly constructed buildings and from 3 to 25 years for furniture and equipment.

The Company, as lessee, records an ROU asset for each lease with an original term greater than 12 months. ROU assets are included in premises and equipment, with the corresponding lease liabilities included in long-term debt and other liabilities.

Capitalized Software The Company capitalizes certain costs associated with the acquisition or development of internal-use software. Once the software is ready for its intended use, these costs are amortized on a straight-line basis over the software’s expected useful life and reviewed for impairment on an ongoing basis. Estimated useful lives are generally 3 years, but may range up to 7 years.

Stock-Based Compensation The Company grants stock-based awards, which may include restricted stock, restricted stock units and options to purchase common stock of the Company. Stock option grants are for a fixed number of shares to employees and directors with an exercise price equal to the fair value of the shares at the date of grant. Restricted stock and restricted stock unit grants are awarded at no cost to the recipient. Stock-based compensation for awards is recognized in the Company’s results of operations over the vesting period. The Company immediately recognizes compensation cost of awards to employees that meet retirement status, despite their continued active employment. The amortization of stock-based compensation reflects estimated forfeitures adjusted for actual forfeiture experience. As compensation expense is recognized, a deferred tax asset is recorded that represents an estimate of the future tax deduction from exercise or release of restrictions. At the time stock-based awards are exercised, cancelled, expire, or

81    

restrictions are released, the Company may be required to recognize an adjustment to tax expense, depending on the market price of the Company’s common stock at that time.​​​​​​​

Per Share Calculations Earnings per common share is calculated using the two-class method under which earnings are allocated to common shareholders and holders of participating securities. Unvested stock-based compensation awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities under the two-class method. Net income applicable to U.S. Bancorp common shareholders is then divided by the weighted-average number of common shares outstanding to determine earnings per common share. Diluted earnings per common share is calculated by adjusting income and outstanding shares, assuming conversion of all potentially dilutive securities.

  NOTE 2   Accounting  Changes

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

and exceptions in accounting for eligible contract modifications, eligible existing hedging relationships and new hedging relationships available through December 31, 2022. The adoption of this guidance has not had, and is expected to continue to not have, a material impact on the Company’s financial statements.​​​​​​​

  NOTE 3   Business Combinations

In September 2021, the Company announced that it has entered into a definitive agreement to acquire MUFG Union Bank’s core regional banking franchise from Mitsubishi UFJ Financial Group (“MUFG”), for an expected purchase price of approximately $8.0 billion, including $5.5 billion in cash and approximately 44 million shares of the Company’s common stock. The transaction excludes the purchase of MUFG Union Bank’s Global Corporate & Investment Bank, certain middle and back office functions, and other assets. MUFG Union Bank currently has approximately 300 branches in California, Washington and Oregon and is expected to add approximately $105 billion in total assets, $58 billion of loans and $90 billion of deposits to the Company’s consolidated balance sheet. The transaction is expected to close in the first half of 2022, subject to customary closing conditions, including regulatory approvals.

NOTE 4	Restrictions on Cash and Due from
	Banks

Banking regulators require bank subsidiaries to maintain minimum average reserve balances, either in the form of vault cash or reserve balances held with central banks or other financial institutions. The amount of required reserve balances were approximately $78 million and $73 million at December 31, 2021 and 2020, respectively. The Company held balances at central banks and other financial institutions of $23.0 billion and $55.4 billion at December 31, 2021 and 2020, respectively, to meet these requirements and for other purposes. These balances are included in cash and due from banks on the Consolidated Balance Sheet.​​​​​​​

82    

  NOTE 5   Investment  Securities

The amortized cost, gross unrealized holding gains and losses, and fair value of held-to-maturity and available-for-sale investment securities at December 31 were as follows:​​​​​​​

	2021									2020
(Dollars in Millions)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Held-to-maturity
Residential agency mortgage-backed securities	$	41,858	$	2	$	(48	)	$	41,812	$	–	$	–	$	–		$	–
Total held-to-maturity	$	41,858	$	2	$	(48	)	$	41,812	$	–	$	–	$	–		$	–
Available-for-sale
U.S. Treasury and agencies	$	36,648	$	205	$	(244	)	$	36,609	$	21,954	$	462	$	(25	)	$	22,391
Mortgage-backed securities
Residential agency		76,761		665		(347	)		77,079		98,031		1,950		(13	)		99,968
Commercial agency		8,633		53		(201	)		8,485		5,251		170		(15	)		5,406
Asset-backed securities		62		4		–			66		200		5		–			205
Obligations of state and political subdivisions		10,130		607		(20	)		10,717		8,166		695		–			8,861
Other		7		–		–			7		9		–		–			9
Total available-for-sale	$	132,241	$	1,534	$	(812	)	$	132,963	$	133,611	$	3,282	$	(53	)	$	136,840

During the fourth quarter of 2021, the Company transferred $43.1 billion amortized cost ($41.8 billion fair value) of available-for-sale investment securities to the held-to-maturity category to reflect its new intent for these securities.

Investment securities with a fair value of $30.7 billion at December 31, 2021, and $11.0 billion at December 31, 2020, were pledged to secure public, private and trust deposits,

repurchase agreements and for other purposes required by contractual obligation or law. Included in these amounts were securities where the Company and certain counterparties have agreements granting the counterparties the right to sell or pledge the securities. Investment securities securing these types of arrangements had a fair value of $557 million at December 31, 2021, and $402 million at December 31, 2020.

The following table provides information about the amount of interest income from taxable and non-taxable investment securities:

Year Ended December 31 (Dollars in Millions)	2021		2020		2019
Taxable	$	2,103	$	2,201	$	2,680
Non-taxable		262		227		213
Total interest income from investment securities	$	2,365	$	2,428	$	2,893

The following table provides information about the amount of gross gains and losses realized through the sales of available-for-sale investment securities:

Year Ended December 31 (Dollars in Millions)	2021			2020			2019
Realized gains	$	122		$	200		$	99
Realized losses		(19	)		(23	)		(26	)
Net realized gains	$	103		$	177		$	73
Income tax on net realized gains	$	26		$	45		$	18

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 December 31, 2021 and December 31, 2020.

83    

At December 31, 2021, certain investment securities had a fair value below amortized cost. The following table shows the gross unrealized losses and fair value of the Company’s available-for-sale investment securities with unrealized losses, aggregated by investment category and length of time the individual investment securities have been in continuous unrealized loss positions, at December 31, 2021:

	Less Than 12 Months					12 Months or Greater					Total
(Dollars in Millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Treasury and agencies	$	11,445	$	(100	)	$	2,879	$	(144	)	$	14,324	$	(244	)
Residential agency mortgage-backed securities		39,720		(342	)		263		(5	)		39,983		(347	)
Commercial agency mortgage-backed securities		4,463		(104	)		1,764		(97	)		6,227		(201	)
Asset-backed securities		–		–			2		–			2		–
Obligations of state and political subdivisions		1,500		(20	)		–		–			1,500		(20	)
Other		6		–			–		–			6		–
Total investment securities	$	57,134	$	(566	)	$	4,908	$	(246	)	$	62,042	$	(812	)

These unrealized losses primarily relate to changes in interest rates and market spreads subsequent to purchase of these available-for-sale 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 December 31, 2021, the Company had no plans to

sell investment securities with unrealized losses, and believes it is more likely than not it would not be required to sell such investment securities before recovery of their amortized cost.

During the year ended December 31, 2021 and 2020, the Company did not purchase any investment securities that had more-than-insignificant credit deterioration.

All of the Company’s held-to-maturity investment securities are highly rated agency mortgage-backed securities that are guaranteed or otherwise supported by the United States government and have no history of credit losses. Accordingly the Company does not expect to incur any credit losses on held-to-maturity investment securities and has no allowance for credit losses recorded for these securities.

84    

The following table provides information about the amortized cost, fair value and yield by maturity date of the investment securities outstanding at December 31, 2021:

(Dollars in Millions)	Amortized Cost		Fair Value		Weighted- Average Maturity in Years		Weighted- Average Yield(e)
Held-to-maturity
Mortgage-Backed Securities(a)
Maturing in one year or less	$	–	$	–		–		–	%
Maturing after one year through five years		2		2		4.8		1.69
Maturing after five years through ten years		41,856		41,810		7.4		1.45
Maturing after ten years		–		–		–		–
Total	$	41,858	$	41,812		7.4		1.45	%
Total held-to-maturity	$	41,858	$	41,812		7.4		1.45	%
Available-for-sale
U.S. Treasury and Agencies
Maturing in one year or less	$	2,724	$	2,744		.6		1.91	%
Maturing after one year through five years		8,400		8,483		2.9		1.52
Maturing after five years through ten years		22,469		22,378		8.1		1.44
Maturing after ten years		3,055		3,004		12.0		1.99
Total	$	36,648	$	36,609		6.7		1.54	%
Mortgage-Backed Securities(a)
Maturing in one year or less	$	104	$	104		.7		2.02	%
Maturing after one year through five years		42,711		43,267		3.6		1.47
Maturing after five years through ten years		42,560		42,174		6.3		1.70
Maturing after ten years		19		19		12.4		1.24
Total	$	85,394	$	85,564		4.9		1.58	%
Asset-Backed Securities(a)
Maturing in one year or less	$	–	$	–		.5		2.69	%
Maturing after one year through five years		3		4		2.6		1.62
Maturing after five years through ten years		59		61		5.3		1.52
Maturing after ten years		–		1		12.9		2.41
Total	$	62	$	66		5.2		1.53	%
Obligations of State and Political Subdivisions(b) (c)
Maturing in one year or less	$	393	$	398		.5		4.30	%
Maturing after one year through five years		2,954		3,178		4.1		4.25
Maturing after five years through ten years		6,217		6,579		7.2		3.45
Maturing after ten years		566		562		17.7		2.58
Total	$	10,130	$	10,717		6.6		3.67	%
Other
Maturing in one year or less	$	–	$	–		–		–	%
Maturing after one year through five years		7		7		3.4		2.07
Maturing after five years through ten years		–		–		–		–
Maturing after ten years		–		–		–		–
Total	$	7	$	7		3.4		2.07	%
Total available-for-sale(d)	$	132,241	$	132,963		5.5		1.73	%

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

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

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

(d) The weighted-average maturity of total available-for-sale investment securities was 3.4 years at December 31, 2020, with a corresponding weighted-average yield of 1.61 percent.

(e) Weighted-average yields for obligations of state and political subdivisions are presented on a fully-taxable equivalent basis based on a federal income tax rate of 21 percent. Yields on investment securities are computed based on amortized cost balances, excluding any premiums or discounts recorded related to the transfer of investment securities at fair value from available-for-sale to held-to-maturity.

85    

  NOTE 6   Loans and Allowance for Credit Losses

The composition of the loan portfolio at December 31, disaggregated by class and underlying specific portfolio type, was as follows:

(Dollars in Millions)	2021		2020
Commercial
Commercial	$	106,912	$	97,315
Lease financing		5,111		5,556
Total commercial		112,023		102,871
Commercial Real Estate
Commercial mortgages		28,757		28,472
Construction and development		10,296		10,839
Total commercial real estate		39,053		39,311
Residential Mortgages
Residential mortgages		67,546		66,525
Home equity loans, first liens		8,947		9,630
Total residential mortgages		76,493		76,155
Credit Card		22,500		22,346
Other Retail
Retail leasing		7,256		8,150
Home equity and second mortgages		10,446		12,472
Revolving credit		2,750		2,688
Installment		16,514		13,823
Automobile		24,866		19,722
Student		127		169
Total other retail		61,959		57,024
Total loans	$	312,028	$	297,707

The Company had loans of $92.1 billion at December 31, 2021, and $96.1 billion at December 31, 2020, pledged at the Federal Home Loan Bank, and loans of $76.9 billion at December 31, 2021, and $67.8 billion at December 31, 2020, pledged at the Federal Reserve Bank.

The Company offers a broad array of lending products to consumer and commercial customers, in various industries, across several geographical locations, predominately in the states in which it has Consumer and Business Banking offices. Collateral for commercial and commercial real estate loans may include marketable securities, accounts receivable, inventory, equipment, real estate, or the related property.

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 $475 million at December 31, 2021 and $763 million at December 31, 2020. All

purchased loans are recorded at fair value at the date of purchase. Beginning January 1, 2020, the Company evaluates purchased loans for more-than-insignificant deterioration at the date of purchase in accordance with applicable authoritative accounting guidance. Purchased loans that have experienced more-than-insignificant deterioration from origination are considered purchased credit deteriorated loans. All other purchased loans are considered non-purchased credit deteriorated loans.

Allowance for Credit Losses Beginning January 1, 2020, the allowance for credit losses is established for current expected credit losses on the Company’s loan and lease portfolio, including unfunded credit commitments. The allowance considers expected losses for the remaining lives of the applicable assets, inclusive of expected recoveries. The allowance for credit losses is increased through provisions charged to earnings and reduced by net charge-offs.

86    

Activity in the allowance for credit losses by portfolio class was as follows:

(Dollars in Millions)	Commercial			Commercial Real Estate			Residential Mortgages			Credit Card			Other Retail			Total Loans
Balance at December 31, 2020	$	2,423		$	1,544		$	573		$	2,355		$	1,115		$	8,010
Add
Provision for credit losses		(471	)		(419	)		(40	)		(170	)		(73	)		(1,173	)
Deduct
Loans charged-off		222			29			18			686			253			1,208
Less recoveries of loans charged-off		(119	)		(27	)		(50	)		(174	)		(156	)		(526	)
Net loan charge-offs (recoveries)		103			2			(32	)		512			97			682
Balance at December 31, 2021	$	1,849		$	1,123		$	565		$	1,673		$	945		$	6,155
Balance at December 31, 2019	$	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		1,074			1,054			158			1,184			336			3,806
Deduct
Loans charged-off		575			210			19			975			401			2,180
Less recoveries of loans charged-off		(62	)		(23	)		(31	)		(146	)		(132	)		(394	)
Net loan charge-offs (recoveries)		513			187			(12	)		829			269			1,786
Balance at December 31, 2020	$	2,423		$	1,544		$	573		$	2,355		$	1,115		$	8,010
Balance at December 31, 2018	$	1,454		$	800		$	455		$	1,102		$	630		$	4,441
Add
Provision for credit losses		315			13			(19	)		919			276			1,504
Deduct
Loans charged-off		399			21			34			1,028			385			1,867
Less recoveries of loans charged-off		(114	)		(7	)		(31	)		(135	)		(126	)		(413	)
Net loan charge-offs (recoveries)		285			14			3			893			259			1,454
Balance at December 31, 2019	$	1,484		$	799		$	433		$	1,128		$	647		$	4,491

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

The decrease in the allowance for credit losses from December 31, 2020 to December 31, 2021 reflected factors affecting economic conditions during 2021, including the enactment of additional benefits from government stimulus programs and broad vaccine availability in the United States that has reduced the risks associated with COVID-19, contributing to an economic recovery. However, economic uncertainty remains associated with supply chain concerns, rising inflationary concerns and additional virus variants.

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. These credit quality ratings are an important part of the Company’s overall credit risk management process and evaluation of the allowance for credit losses.

87    

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
December 31, 2021
Commercial	$	111,270	$	530	$	49	$	174	$	112,023
Commercial real estate		38,678		80		11		284		39,053
Residential mortgages(a)		75,962		124		181		226		76,493
Credit card		22,142		193		165		–		22,500
Other retail		61,468		275		66		150		61,959
Total loans	$	309,520	$	1,202	$	472	$	834	$	312,028
December 31, 2020
Commercial	$	102,127	$	314	$	55	$	375	$	102,871
Commercial real estate		38,676		183		2		450		39,311
Residential mortgages(a)		75,529		244		137		245		76,155
Credit card		21,918		231		197		–		22,346
Other retail		56,466		318		86		154		57,024
Total loans	$	294,716	$	1,290	$	477	$	1,224	$	297,707

(a) At December 31, 2021, $791 million of loans 30–89 days past due and $1.5 billion of loans 90 days or more past due purchased from Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs, were classified as current, compared with $1.4 billion and $1.8 billion at December 31, 2020, respectively.

(b) Substantially all nonperforming loans at December 31, 2021 and 2020, had an associated allowance for credit losses. The Company recognized interest income on nonperforming loans of $16 million and $23 million for the years ended December 31, 2021 and 2020, respectively, compared to what would have been recognized at the original contractual terms of the loans of $34 million and $45 million, respectively.

At December 31, 2021, total nonperforming assets held by the Company were $878 million, compared with $1.3 billion at December 31, 2020. Total nonperforming assets included $834 million of nonperforming loans, $22 million of OREO and $22 million of other nonperforming assets owned by the Company at December 31, 2021, compared with $1.2 billion, $24 million and $50 million, respectively at December 31, 2020.

At December 31, 2021, the amount of foreclosed residential real estate held by the Company, and included in OREO, was $22 million, compared with $23 million at December 31, 2020. These amounts excluded $22 million and $33 million at December 31, 2021 and December 31, 2020, respectively, of

foreclosed residential real estate related to mortgage loans whose payments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs. In addition, the amount of residential mortgage loans secured by residential real estate in the process of foreclosure at December 31, 2021 and December 31, 2020, was $696 million and $1.0 billion, respectively, of which $555 million and $812 million, respectively, related to loans purchased from Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.​​​​​​​

88    

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

	December 31, 2021										December 31, 2020
			Criticized										Criticized
(Dollars in Millions)	Pass		Special Mention		Classified(a)		Total Criticized		Total		Pass		Special Mention		Classified(a)		Total Criticized		Total
Commercial
Originated in 2021	$	51,155	$	387	$	287	$	674	$	51,829	$	–	$	–	$	–	$	–	$	–
Originated in 2020		14,091		304		133		437		14,528		34,557		1,335		1,753		3,088		37,645
Originated in 2019		10,159		151		54		205		10,364		17,867		269		349		618		18,485
Originated in 2018		5,122		3		36		39		5,161		12,349		351		176		527		12,876
Originated in 2017		2,149		2		38		40		2,189		5,257		117		270		387		5,644
Originated prior to 2017		2,774		28		43		71		2,845		4,954		128		115		243		5,197
Revolving		24,722		268		117		385		25,107		22,445		299		280		579		23,024
Total commercial		110,172		1,143		708		1,851		112,023		97,429		2,499		2,943		5,442		102,871
Commercial real estate
Originated in 2021		13,364		6		990		996		14,360		–		–		–		–		–
Originated in 2020		7,459		198		263		461		7,920		9,446		461		1,137		1,598		11,044
Originated in 2019		6,368		251		610		861		7,229		9,514		454		1,005		1,459		10,973
Originated in 2018		2,996		29		229		258		3,254		6,053		411		639		1,050		7,103
Originated in 2017		1,662		38		113		151		1,813		2,650		198		340		538		3,188
Originated prior to 2017		2,811		17		111		128		2,939		4,762		240		309		549		5,311
Revolving		1,494		1		43		44		1,538		1,445		9		238		247		1,692
Total commercial real estate		36,154		540		2,359		2,899		39,053		33,870		1,773		3,668		5,441		39,311
Residential mortgages(b)
Originated in 2021		29,882		–		3		3		29,885		–		–		–		–		–
Originated in 2020		15,948		1		8		9		15,957		23,262		1		3		4		23,266
Originated in 2019		6,938		–		36		36		6,974		13,969		1		17		18		13,987
Originated in 2018		2,889		–		30		30		2,919		5,670		1		22		23		5,693
Originated in 2017		3,796		–		30		30		3,826		6,918		1		24		25		6,943
Originated prior to 2017		16,619		–		312		312		16,931		25,921		2		342		344		26,265
Revolving		1		–		–		–		1		1		–		–		–		1
Total residential mortgages		76,073		1		419		420		76,493		75,741		6		408		414		76,155
Credit card(c)		22,335		–		165		165		22,500		22,149		–		197		197		22,346
Other retail
Originated in 2021		22,455		–		6		6		22,461		–		–		–		–		–
Originated in 2020		12,071		–		9		9		12,080		17,589		–		7		7		17,596
Originated in 2019		7,223		–		17		17		7,240		11,605		–		23		23		11,628
Originated in 2018		3,285		–		14		14		3,299		6,814		–		27		27		6,841
Originated in 2017		1,726		–		9		9		1,735		3,879		–		22		22		3,901
Originated prior to 2017		1,973		–		15		15		1,988		3,731		–		29		29		3,760
Revolving		12,532		–		112		112		12,644		12,647		–		110		110		12,757
Revolving converted to term		472		–		40		40		512		503		–		38		38		541
Total other retail		61,737		–		222		222		61,959		56,768		–		256		256		57,024
Total loans	$	306,471	$	1,684	$	3,873	$	5,557	$	312,028	$	285,957	$	4,278	$	7,472	$	11,750	$	297,707
Total outstanding commitments	$	662,363	$	3,372	$	5,684	$	9,056	$	671,419	$	627,606	$	8,772	$	9,374	$	18,146	$	645,752

Note: Year of origination is based on the origination date of a loan, or for existing loans the date when the maturity date, pricing or commitment amount is amended.

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

(b) At December 31, 2021, $1.5 billion of GNMA loans 90 days or more past due and $1.1 billion of restructured GNMA loans whose repayments are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs were classified with a pass rating, compared with $1.8 billion and $1.4 billion at December 31, 2020, respectively.

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

89    

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. The following table provides a summary of loans modified as TDRs for the years ended December 31, by portfolio class:​​​​​​​

(Dollars in Millions)	Number of Loans		Pre-Modification Outstanding Loan Balance		Post-Modification Outstanding Loan Balance
2021
Commercial		2,156	$	140	$	127
Commercial real estate		112		193		179
Residential mortgages		977		329		328
Credit card		25,297		144		146
Other retail		2,576		74		67
Total loans, excluding loans purchased from GNMA mortgage pools		31,118		880		847
Loans purchased from GNMA mortgage pools		2,311		334		346
Total loans		33,429	$	1,214	$	1,193
2020
Commercial		3,423	$	628	$	493
Commercial real estate		149		262		218
Residential mortgages		1,176		402		401
Credit card		23,549		135		136
Other retail		4,027		117		114
Total loans, excluding loans purchased from GNMA mortgage pools		32,324		1,544		1,362
Loans purchased from GNMA mortgage pools		4,630		667		659
Total loans		36,954	$	2,211	$	2,021
2019
Commercial		3,445	$	376	$	359
Commercial real estate		136		129		125
Residential mortgages		417		55		54
Credit card		34,247		185		186
Other retail		2,952		63		61
Total loans, excluding loans purchased from GNMA mortgage pools		41,197		808		785
Loans purchased from GNMA mortgage pools		6,257		856		827
Total loans		47,454	$	1,664	$	1,612

Residential mortgages, home equity and second mortgages, and loans purchased from GNMA mortgage pools in the table above include trial period arrangements offered to customers during the periods presented. The post-modification balances for these loans reflect the current outstanding balance until a permanent modification is made. In addition, the post-modification balances typically include capitalization of unpaid accrued interest and/or fees under the various modification

programs. At December 31, 2021, 7 residential mortgages, 2 home equity and second mortgage loans and 34 loans purchased from GNMA mortgage pools with outstanding balances of $1 million, less than $1 million and $4 million, respectively, were in a trial period and have estimated post-modification balances of $1 million, less than $1 million and $5 million, respectively, assuming permanent modification occurs at the end of the trial period.​​​​​​​

90    

The following table provides a summary of TDR loans that defaulted (fully or partially charged-off or became 90 days or more past due) for the years ended December 31, that were modified as TDRs within 12 months previous to default:

(Dollars in Millions)	Number of Loans		Amount Defaulted
2021
Commercial		1,084	$	32
Commercial real estate		16		7
Residential mortgages		81		9
Credit card		7,700		43
Other retail		714		11
Total loans, excluding loans purchased from GNMA mortgage pools		9,595		102
Loans purchased from GNMA mortgage pools		176		26
Total loans		9,771	$	128
2020
Commercial		1,148	$	80
Commercial real estate		50		30
Residential mortgages		38		5
Credit card		6,688		35
Other retail		307		4
Total loans, excluding loans purchased from GNMA mortgage pools		8,231		154
Loans purchased from GNMA mortgage pools		498		66
Total loans		8,729	$	220
2019
Commercial		1,040	$	46
Commercial real estate		36		24
Residential mortgages		137		15
Credit card		8,273		40
Other retail		380		10
Total loans, excluding loans purchased from GNMA mortgage pools		9,866		135
Loans purchased from GNMA mortgage pools		997		131
Total loans		10,863	$	266

In addition to the defaults in the table above, the Company had a total of 17 residential mortgage loans, home equity and second mortgage loans and loans purchased from GNMA mortgage pools for the year ended December 31, 2021, 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 $2 million for the year ended December 31, 2021.

As of December 31, 2021, the Company had $132 million of commitments to lend additional funds to borrowers whose terms of their outstanding owed balances have been modified in TDRs.

91    

  NOTE 7   Leases

The Company, as a lessor, originates retail and commercial leases either directly to the consumer or indirectly through dealer networks. Retail leases consist primarily of automobiles, while​​​​​​​

commercial leases may include high dollar assets such as aircraft or lower cost items such as office equipment.​​​​​​​​​​​​​​​​​​​​​

The components of the net investment in sales-type and direct financing leases, at December 31, were as follows:

(Dollars in Millions)	2021		2020
Lease receivables	$	10,738	$	11,890
Unguaranteed residual values accruing to the lessor’s benefit		1,610		1,787
Total net investment in sales-type and direct financing leases	$	12,348	$	13,677

The Company, as a lessor, recorded $888 million, $952 million and $996 million of revenue on its Consolidated Statement of Income for the years ended December 31, 2021, 2020 and

2019, respectively, primarily consisting of interest income on sales-type and direct financing leases.

The contractual future lease payments to be received by the Company, at December 31, 2021, were as follows:    

(Dollars in Millions)	Sales-type and direct financing leases			Operating leases
2022	$	3,926		$	136
2023		3,293			104
2024		2,402			68
2025		963			44
2026		281			15
Thereafter		540			8
Total lease payments		11,405		$	375
Amounts representing interest		(667	)
Lease receivables	$	10,738

The Company, as lessee, leases certain assets for use in its operations. Leased assets primarily include retail branches, operations centers and other corporate locations, and, to a lesser extent, office and computer equipment. For each lease with an original term greater than 12 months, the Company records a lease liability and a corresponding right of use (“ROU”) asset. At December 31, 2021, the Company’s ROU assets included in premises and equipment and lease liabilities included in long-term debt and other liabilities, were $1.2 billion and $1.3 billion,

respectively, compared with $1.1 billion of ROU assets and $1.3 billion of lease liabilities at December 31, 2020, respectively.

Total costs incurred by the Company, as a lessee, were $364 million, $374 million and $394 million for the years ended December 31, 2021, 2020 and 2019, respectively, and principally related to contractual lease payments on operating leases. The Company’s leases do not impose significant covenants or other restrictions on the Company.

The following table presents amounts relevant to the Company’s assets leased for use in its operations for the years ended December 31:

(Dollars in Millions)	2021		2020		2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	288	$	305	$	302
Operating cash flows from finance leases		5		6		7
Financing cash flows from finance leases		12		12		10
Right of use assets obtained in exchange for new operating lease liabilities		164		128		134
Right of use assets obtained in exchange for new finance lease liabilities		75		6		10

The following table presents the weighted-average remaining lease terms and discount rates of the Company’s assets leased for use in its operations at December 31:

	2021			2020
Weighted-average remaining lease term of operating leases (in years)		7.0			7.0
Weighted-average remaining lease term of finance leases (in years)		9.5			9.6
Weighted-average discount rate of operating leases		2.7	%		3.0	%
Weighted-average discount rate of finance leases		9.3	%		12.5	%

92    

The contractual future lease obligations of the Company at December 31, 2021, were as follows:

(Dollars in Millions)	Operating leases			Finance leases
2022	$	278		$	27
2023		240			27
2024		194			24
2025		145			16
2026		105			10
Thereafter		329			32
Total lease payments		1,291			136
Amounts representing interest		(121	)		(23	)
Lease liabilities	$	1,170		$	113

NOTE 8	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 23.

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 MSR’s, refer to Note 10. 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 $250 million, $89 million and $30 million of support to the funds during the years ended December 31, 2021, 2020 and 2019, respectively.

The Company is involved in various entities that are considered to be 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 $508 million, $578 million and $615 million for the years ended December 31, 2021, 2020 and 2019, respectively. The Company also recognized $418 million, $414 million and $506 million of investment tax credits for the years ended December 31, 2021, 2020 and 2019, respectively. The Company recognized $468 million, $545 million and $557 million of expenses related to all of these investments for the years ended December 31, 2021, 2020 and 2019, respectively, of which $336 million, $367 million and $318 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

93    

authorities based on compliance features required to be met at the project level. While the Company believes potential losses from these investments are remote, the maximum exposure was determined by assuming a scenario where the community-based business and housing projects completely fail and do not meet certain government compliance requirements resulting in recapture of the related tax credits.

The following table provides a summary of investments in community development and tax-advantaged VIEs that the Company has not consolidated:

At December 31 (Dollars in Millions)	2021		2020
Investment carrying amount	$	4,484	$	5,378
Unfunded capital and other commitments		1,890		2,334
Maximum exposure to loss		9,899		11,219

The Company also has noncontrolling financial investments in private investment funds and partnerships considered to be VIEs, which are not consolidated. The Company’s recorded investment in these entities, carried in other assets on the Consolidated Balance Sheet, was approximately $40 million at December 31, 2021 and $35 million at December 31, 2020. The maximum exposure to loss related to these VIEs was $84 million at December 31, 2021 and $57 million at December 31, 2020, representing the Company’s investment balance and its unfunded commitments to invest additional amounts.

The Company’s individual net investments in unconsolidated VIEs, which exclude any unfunded capital commitments, ranged from less than $1 million to $75 million at December 31, 2021, compared with less than $1 million to $78 million at December 31, 2020.

The Company is required to consolidate VIEs in which it has concluded it has a controlling financial interest. The Company sponsors entities to which it transfers its interests in tax-advantaged investments to third parties. At December 31, 2021, approximately $5.0 billion of the Company’s assets and $3.4 billion of its liabilities included on the Consolidated Balance Sheet were related to community development and tax-advantaged investment VIEs which the Company has consolidated, primarily related to these transfers. These amounts compared to $4.9 billion and $3.7 billion, respectively, at December 31, 2020. The majority of the assets of these consolidated VIEs are reported in other assets, and the liabilities are reported in long-term debt and other liabilities. The assets of a particular VIE are the primary source of funds to settle its obligations. The creditors of the VIEs do not have recourse to the general credit of the Company. The Company’s exposure to the consolidated VIEs is generally limited to the carrying value of its variable interests plus any related tax credits previously recognized or transferred to others with a guarantee.

In addition, the Company sponsors a municipal bond securities tender option bond program. The Company controls the activities of the program’s entities, is entitled to the residual returns and provides liquidity and remarketing arrangements to the program. As a result, the Company has consolidated the program’s entities. At December 31, 2021, $1.7 billion of available-for-sale investment securities and $1.2 billion of short-term borrowings on the Consolidated Balance Sheet were related to the tender option bond program, compared with $2.4 billion of available-for-sale investment securities and $1.5 billion of short-term borrowings at December 31, 2020.

    NOTE 9   Premises and Equipment

Premises and equipment at December 31 consisted of the following:

(Dollars in Millions)	2021			2020
Land	$	445		$	487
Buildings and improvements		3,161			3,519
Furniture, fixtures and equipment		3,438			3,439
Right of use assets on operating leases		1,014			1,038
Right of use assets on finance leases		172			110
Construction in progress		23			25
		8,253			8,618
Less accumulated depreciation and amortization		(4,948	)		(5,150	)
Total	$	3,305		$	3,468

94    

    NOTE 10   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 $222.4 billion of residential mortgage loans for others at December 31, 2021, and $211.8 billion at December 31, 2020, including subserviced mortgages with no corresponding MSR asset. Included in mortgage banking revenue are the MSR fair value changes arising

from market rate and model assumption changes, net of the value change in derivatives used to economically hedge MSRs. These changes resulted in a net loss of $183 million, a net gain of $18 million, and a net loss of $24 million for the years ended December 31, 2021, 2020 and 2019, respectively. Loan servicing and ancillary fees, not including valuation changes, included in mortgage banking revenue were $725 million, $718 million and $734 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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

(Dollars in Millions)	2021			2020			2019
Balance at beginning of period	$	2,210		$	2,546		$	2,791
Rights purchased		42			34			20
Rights capitalized		1,136			1,030			559
Rights sold(a)		2			3			5
Changes in fair value of MSRs
Due to fluctuations in market interest rates(b)		272			(719	)		(390	)
Due to revised assumptions or models(c)		(196	)		(12	)		23
Other changes in fair value(d)		(513	)		(672	)		(462	)
Balance at end of period	$	2,953		$	2,210		$	2,546

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

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

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

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

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

	2021															2020
(Dollars in Millions)	Down 100 bps			Down 50 bps			Down 25 bps			Up 25 bps		Up 50 bps		Up 100 bps		Down 100 bps			Down 50 bps			Down 25 bps			Up 25 bps		Up 50 bps		Up 100 bps
MSR portfolio	$	(636	)	$	(324	)	$	(160	)	$	150	$	287	$	511	$	(442	)	$	(271	)	$	(150	)	$	169	$	343	$	671
Derivative instrument hedges		614			309			152			(142)		(278)		(536)		523			281			145			(149)		(304)		(625)
Net sensitivity	$	(22)		$	(15)		$	(8)		$	8	$	9	$	(25)	$	81		$	10		$	(5)		$	20	$	39	$	46

The fair value of MSRs and their sensitivity to changes in interest rates is influenced by the mix of the servicing portfolio and characteristics of each segment of the portfolio. The Company’s servicing portfolio consists of the distinct portfolios of government-insured mortgages, conventional mortgages and Housing Finance Agency (“HFA”) mortgages. The servicing portfolios are predominantly comprised of fixed-rate agency loans

with limited adjustable-rate or jumbo mortgage loans. The HFA servicing portfolio is comprised of loans originated under state and local housing authority program guidelines which assist purchases by first-time or low- to moderate-income homebuyers through a favorable rate subsidy, down payment and/or closing cost assistance on government- and conventional-insured mortgages.

95    

A summary of the Company’s MSRs and related characteristics by portfolio as of December 31 was as follows:

	2021												2020
(Dollars in Millions)	HFA			Government			Conventional(d)			Total			HFA			Government			Conventional(d)			Total
Servicing portfolio(a)	$	40,652		$	21,919		$	156,382		$	218,953		$	40,396		$	25,474		$	143,085		$	208,955
Fair value	$	527		$	308		$	2,118		$	2,953		$	406		$	261		$	1,543		$	2,210
Value (bps)(b)		130			141			135			135			101			102			108			106
Weighted-average servicing fees (bps)		36			41			30			32			35			40			30			32
Multiple (value/servicing fees)		3.63			3.43			4.50			4.18			2.87			2.56			3.55			3.26
Weighted-average note rate		4.07	%		3.70	%		3.41	%		3.56	%		4.43	%		3.91	%		3.78	%		3.92	%
Weighted-average age (in years)		3.8			5.9			3.3			3.7			3.8			5.6			4.2			4.3
Weighted-average expected prepayment (constant prepayment rate)		11.5	%		13.2	%		9.6	%		10.3	%		14.1	%		18.0	%		13.8	%		14.4	%
Weighted-average expected life (in years)		6.5			5.6			6.9			6.7			5.6			4.3			5.5			5.4
Weighted-average option adjusted spread(c)		7.3	%		7.3	%		6.3	%		6.6	%		7.7	%		7.3	%		6.2	%		6.6	%

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

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

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

(d) Represents loans sold primarily to GSEs.

    NOTE 11   Intangible Assets

Intangible assets consisted of the following:

At December 31 (Dollars in Millions)	2021		2020
Goodwill	$	10,262	$	9,918
Merchant processing contracts		195		235
Core deposit benefits		49		64
Mortgage servicing rights		2,953		2,210
Trust relationships		62		19
Other identified intangibles		479		336
Total	$	14,000	$	12,782

Aggregate amortization expense consisted of the following:

Year Ended December 31 (Dollars in Millions)	2021		2020		2019
Merchant processing contracts	$	45	$	49	$	45
Core deposit benefits		15		18		22
Trust relationships		10		9		10
Other identified intangibles		89		100		91
Total	$	159	$	176	$	168

The estimated amortization expense for the next five years is as follows:

(Dollars in Millions)
2022	$	154
2023		111
2024		89
2025		63
2026		50

96    

The following table reflects the changes in the carrying value of goodwill for the years ended December 31, 2021, 2020 and 2019:

(Dollars in Millions)	Corporate and Commercial Banking		Consumer and Business Banking			Wealth Management and Investment Services			Payment Services			Treasury and Corporate Support		Consolidated Company
Balance at December 31, 2018	$	1,647	$	3,475		$	1,618		$	2,629		$	—	$	9,369
Goodwill acquired		—		—			—			285			—		285
Foreign exchange translation and other		—		—			(1	)		2			—		1
Balance at December 31, 2019	$	1,647	$	3,475		$	1,617		$	2,916		$	—	$	9,655
Goodwill acquired		—		—			—			180			—		180
Foreign exchange translation and other		—		—			2			81			—		83
Balance at December 31, 2020	$	1,647	$	3,475		$	1,619		$	3,177		$	—	$	9,918
Goodwill acquired		—		35			144			192			—		371
Foreign exchange translation and other		265		(265	)		(2	)		(25	)		—		(27	)
Balance at December 31, 2021	$	1,912	$	3,245		$	1,761		$	3,344		$	—	$	10,262

    NOTE 12   Deposits

The composition of deposits at December 31 was as follows:

(Dollars in Millions)	2021		2020
Noninterest-bearing deposits	$	134,901	$	118,089
Interest-bearing deposits
Interest checking		115,108		95,894
Money market savings		117,619		128,058
Savings accounts		65,790		57,035
Time deposits		22,665		30,694
Total interest-bearing deposits		321,182		311,681
Total deposits	$	456,083	$	429,770

The maturities of time deposits outstanding at December 31, 2021 were as follows:

(Dollars in Millions)
2022	$	17,637
2023		2,298
2024		1,640
2025		655
2026		434
Thereafter		1
Total	$	22,665

    NOTE 13   Short-Term Borrowings

Short-term borrowings at December 31 consisted of the following:

(Dollars in Millions)	2021		2020
Federal funds purchased	$	628	$	777
Securities sold under agreements to repurchase		1,575		1,430
Commercial paper		6,026		6,007
Other short-term borrowings		3,567		3,552
Total	$	11,796	$	11,766

97    

  NOTE 14   Long-Term Debt

Long-term debt (debt with original maturities of more than one year) at December 31 consisted of the following: 

(Dollars in Millions)	Rate Type			Rate(a)			Maturity Date		2021		2020
U.S. Bancorp (Parent Company)
Subordinated notes		Fixed			2.950	%		2022	$	1,300	$	1,300
		Fixed			3.600	%		2024		1,000		1,000
		Fixed			7.500	%		2026		199		199
		Fixed			3.100	%		2026		1,000		1,000
		Fixed			3.000	%		2029		1,000		1,000
		Fixed			2.491	%		2036		1,300		–
Medium-term notes		Fixed			.850% - 3.950	%		2022 - 2030		12,631		15,492
		Floating			.855	%		2021		–		250
Other(b)										472		683
Subtotal										18,902		20,924
Subsidiaries
Federal Home Loan Bank advances		Fixed			6.440% - 8.250	%		2023 - 2026		2		1,003
		Floating	(d)		.384% - .710	%		2022 - 2026		3,272		3,272
Bank notes		Fixed			1.950% - 3.400	%		2022 - 2025		5,700		9,100
		Floating	(d)		– % - .604	%		2022 - 2059		3,337		5,888
Other(c)										912		1,110
Subtotal										13,223		20,373
Total									$	32,125	$	41,297

(a) Weighted-average interest rates of medium-term notes, Federal Home Loan Bank advances and bank notes were 2.51 percent, .65 percent and 1.80 percent, respectively.

(b) Includes debt issuance fees and unrealized gains and losses and deferred amounts relating to derivative instruments.

(c) Includes consolidated community development and tax-advantaged investment VIEs, finance lease obligations, debt issuance fees, and unrealized gains and losses and deferred amounts relating to derivative instruments.

(d) Includes $3.3 billion of Federal Home Loan Bank advances and $2.3 billion of bank notes, whose interest is calculated by reference to LIBOR. The outstanding debt contains fallback provisions in the event that LIBOR is no longer published or quoted, but these fallback provisions have not yet been utilized.

The Company has arrangements with the Federal Home Loan Bank and Federal Reserve Bank whereby the Company could have borrowed an additional $101.0 billion and $96.5 billion at December 31, 2021 and 2020, respectively, based on collateral available.

Maturities of long-term debt outstanding at December 31, 2021, were:

(Dollars in Millions)	Parent Company		Consolidated
2022	$	2,311	$	4,834
2023		–		3,847
2024		5,740		5,768
2025		2,240		5,804
2026		2,685		4,200
Thereafter		5,926		7,672
Total	$	18,902	$	32,125

98    

  NOTE 15   Shareholders’  Equity

At December 31, 2021 and 2020, the Company had authority to issue 4 billion shares of common stock and 50 million shares of preferred stock. The Company had 1.5 billion shares of common stock outstanding at December 31, 2021 and 2020. The

Company had 36 million shares of common stock reserved for future issuances, primarily under its stock incentive plans at December 31, 2021.

The number of shares issued and outstanding and the carrying amount of each outstanding series of the Company’s preferred stock were as follows:

	2021								2020
At December 31 (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
Series I		–		–		–		–		30,000		750		5		745
Series J		40,000		1,000		7		993		40,000		1,000		7		993
Series K		23,000		575		10		565		23,000		575		10		565
Series L		20,000		500		14		486		20,000		500		14		486
Series M		30,000		750		21		729		–		–		–		–
Series N		60,000		1,500		8		1,492		–		–		–		–
Total preferred stock(a)		225,510	$	6,576	$	205	$	6,371		209,510	$	6,176	$	193	$	5,983

(a) The par value of all shares issued and outstanding at December 31, 2021 and 2020, was $1.00 per share.

During 2021, the Company issued depositary shares representing an ownership interest in 60,000 shares of Series N Fixed Rate Reset Non-Cumulative Perpetual Preferred Stock with a liquidation preference of $25,000 per share (the “Series N Preferred Stock”). The Series N Preferred Stock has no stated maturity and will not be subject to any sinking fund or other obligation of the Company. Dividends, if declared, will accrue and be payable quarterly, in arrears, at a rate per annum equal to 3.70 percent from the date of issuance to, but excluding, January 15, 2027, and thereafter will accrue and be payable quarterly at a floating rate per annum equal to the five-year treasury rate plus 2.541 percent. The Series N Preferred Stock is redeemable at the Company’s option, in whole or in part, on or after January 15, 2027. The Series N Preferred Stock is redeemable at the Company’s option, in whole, but not in part, prior to January 15, 2027 within 90 days following an official administrative or judicial decision, amendment to, or change in the laws or regulations that would not allow the Company to treat the full liquidation value of the Series N Preferred Stock as Tier 1 capital for purposes of the capital adequacy guidelines of the Federal Reserve Board.

During 2021, the Company issued depositary shares representing an ownership interest in 30,000 shares of Series M Non-Cumulative Perpetual Preferred Stock with a liquidation preference of $25,000 per share (the “Series M Preferred Stock”). The Series M Preferred Stock has no stated maturity and will not be subject to any sinking fund or other obligation of the Company. Dividends, if declared, will accrue and be payable quarterly, in arrears, at a rate per annum equal to 4.00 percent. The Series M Preferred Stock is redeemable at the Company’s option, in whole or in part, on or after April 15, 2026. The Series M Preferred Stock is redeemable at the Company’s option, in whole, but not in part, prior to April 15, 2026 within 90 days following an official administrative or judicial decision, amendment to, or change in the laws or regulations that would not allow the

Company to treat the full liquidation value of the Series M Preferred Stock as Tier 1 capital for purposes of the capital adequacy guidelines of the Federal Reserve Board.

During 2020, the Company issued depositary shares representing an ownership interest in 20,000 shares of Series L Non-Cumulative Perpetual Preferred Stock with a liquidation preference of $25,000 per share (the “Series L Preferred Stock”). The Series L Preferred Stock has no stated maturity and will not be subject to any sinking fund or other obligation of the Company. Dividends, if declared, will accrue and be payable quarterly, in arrears, at a rate per annum equal to 3.75 percent. The Series L Preferred Stock is redeemable at the Company’s option, in whole or in part, on or after January 15, 2026. The Series L Preferred Stock is redeemable at the Company’s option, in whole, but not in part, prior to January 15, 2026 within 90 days following an official administrative or judicial decision, amendment to, or change in the laws or regulations that would not allow the Company to treat the full liquidation value of the Series L Preferred Stock as Tier 1 capital for purposes of the capital adequacy guidelines of the Federal Reserve Board.

During 2018, the Company issued depositary shares representing an ownership interest in 23,000 shares of Series K Non-Cumulative Perpetual Preferred Stock with a liquidation preference of $25,000 per share (the “Series K Preferred Stock”). The Series K Preferred Stock has no stated maturity and will not be subject to any sinking fund or other obligation of the Company. Dividends, if declared, will accrue and be payable quarterly, in arrears, at a rate per annum equal to 5.50 percent. The Series K Preferred Stock is redeemable at the Company’s option, in whole or in part, on or after October 15, 2023. The Series K Preferred Stock is redeemable at the Company’s option, in whole, but not in part, prior to October 15, 2023 within 90 days following an official administrative or judicial decision, amendment to, or change in the laws or regulations that would not allow the

99    

Company to treat the full liquidation value of the Series K Preferred Stock as Tier 1 capital for purposes of the capital adequacy guidelines of the Federal Reserve Board.

During 2017, the Company issued depositary shares representing an ownership interest in 40,000 shares of Series J Non-Cumulative Perpetual Preferred Stock with a liquidation preference of $25,000 per share (the “Series J Preferred Stock”). The Series J Preferred Stock has no stated maturity and will not be subject to any sinking fund or other obligation of the Company. Dividends, if declared, will accrue and be payable semiannually, in arrears, at a rate per annum equal to 5.300 percent from the date of issuance to, but excluding, April 15, 2027, and thereafter will accrue and be payable quarterly at a floating rate per annum equal to the three-month London Interbank Offered Rate (“LIBOR”) plus 2.914 percent. The Series J Preferred Stock is redeemable at the Company’s option, in whole or in part, on or after April 15, 2027. The Series J Preferred Stock is redeemable at the Company’s option, in whole, but not in part, prior to April 15, 2027 within 90 days following an official administrative or judicial decision, amendment to, or change in the laws or regulations that would not allow the Company to treat the full liquidation value of the Series J Preferred Stock as Tier 1 capital for purposes of the capital adequacy guidelines of the Federal Reserve Board.

During 2015, the Company issued depositary shares representing an ownership interest in 30,000 shares of Series I Non-Cumulative Perpetual Preferred Stock with a liquidation preference of $25,000 per share (the “Series I Preferred Stock”). During 2021, the Company redeemed all outstanding shares of the Series I Preferred Stock at a redemption price equal to the liquidation preference amount. The Company included a $5 million loss in the computation of diluted earnings per common share for 2021, which represents the stock issuance costs recorded in preferred stock upon the issuance of the Series I Preferred Stock that were reclassified to retained earnings on the date the Company provided notice of its intent to redeem the outstanding shares.

During 2012, the Company issued depositary shares representing an ownership interest in 44,000 shares of Series F Non-Cumulative Perpetual Preferred Stock with a liquidation preference of $25,000 per share (the “Series F Preferred Stock”). During 2021, the Company provided notice of its intent to redeem all outstanding shares of the Series F Preferred Stock during the first quarter of 2022. The Company removed the outstanding liquidation preference amount of the Series F Preferred Stock from shareholders’ equity and included it in other liabilities on the Consolidated Balance Sheet as of December 31, 2021, because upon the notification date it became mandatorily redeemable. The liquidation preference amount equals the redemption price for all outstanding shares of the Series F Preferred Stock. The Company included a $12 million loss in the computation of diluted earnings per common share for 2021, which represents the stock issuance costs recorded in preferred stock upon the issuance of the Series F Preferred Stock that were reclassified to retained earnings on the notification date.

Effective January 15, 2022, the Company redeemed all outstanding shares of the Series F Preferred Stock.

During 2010, the Company issued depositary shares representing an ownership interest in 5,746 shares of Series A Non-Cumulative Perpetual Preferred Stock (the “Series A Preferred Stock”) to investors, in exchange for their portion of USB Capital IX Income Trust Securities. During 2011, the Company issued depositary shares representing an ownership interest in 6,764 shares of Series A Preferred Stock to USB Capital IX, thereby settling the stock purchase contract established between the Company and USB Capital IX as part of the 2006 issuance of USB Capital IX Income Trust Securities. The preferred shares were issued to USB Capital IX for the purchase price specified in the stock forward purchase contract. The Series A Preferred Stock has a liquidation preference of $100,000 per share, no stated maturity and will not be subject to any sinking fund or other obligation of the Company. Dividends, if declared, will accrue and be payable quarterly, in arrears, at a rate per annum equal to the greater of three-month LIBOR plus 1.02 percent or 3.50 percent. The Series A Preferred Stock is redeemable at the Company’s option, subject to prior approval by the Federal Reserve Board.

During 2006, the Company issued depositary shares representing an ownership interest in 40,000 shares of Series B Non-Cumulative Perpetual Preferred Stock with a liquidation preference of $25,000 per share (the “Series B Preferred Stock”). The Series B Preferred Stock has no stated maturity and will not be subject to any sinking fund or other obligation of the Company. Dividends, if declared, will accrue and be payable quarterly, in arrears, at a rate per annum equal to the greater of three-month LIBOR plus .60 percent, or 3.50 percent. The Series B Preferred Stock is redeemable at the Company’s option, subject to the prior approval of the Federal Reserve Board.

Dividends for certain of the Company’s outstanding series of preferred stock described above are, or will in the future be, calculated by reference to LIBOR. The outstanding series contain fallback provisions in the event that LIBOR is no longer published or quoted, but these fallback provisions have not yet been utilized.

During 2021, 2020 and 2019, the Company repurchased shares of its common stock under various authorizations approved by its Board of Directors. Beginning in March of 2020 and continuing through the remainder of 2020, the Company suspended all common stock repurchases except for those done exclusively in connection with its stock-based compensation programs. This action was initially taken to maintain strong capital levels given the impact and uncertainties of COVID-19 on the economy and global markets. Due to continued economic uncertainty, the Federal Reserve Board implemented measures beginning in the third quarter of 2020 and extending through the second quarter of 2021, restricting capital distributions of all large bank holding companies, including the Company. These restrictions limited the aggregate amount of common stock dividends and share repurchases to an amount that did not exceed the average net income of the four preceding calendar

100    

quarters. Based on the results of the December 2020 Federal Reserve Board Stress Test, the Company announced on December 22, 2020 that its Board of Directors had approved an authorization to repurchase $3.0 billion of its common stock beginning January 1, 2021, and repurchased $1.5 billion of its common stock during the first six months of 2021 under this program. The Company suspended all common stock repurchases at the beginning of the third quarter of 2021, except for those done exclusively in connection with its stock-based compensation programs, due to its recently announced pending acquisition of MUFG Union Bank’s core regional banking​​​​​​​​​​​​​​

franchise. The Company does not expect to commence repurchasing its common stock again until the second half of 2022, or after the acquisition closes in order to build capital prior to the acquisition.

The following table summarizes the Company’s common stock repurchased in each of the last three years:

(Dollars and Shares in Millions)	Shares		Value
2021		28	$	1,556
2020		31		1,661
2019		81		4,515

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 for the years ended December 31, is as follows:

(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
2021
Balance at beginning of period	$	2,417	$	–	$	(189)	$	(1,842)	$	(64)	$	322
Changes in unrealized gains (losses)		(3,698)		–		125		400		–		(3,173)
Transfer of securities from available-for-sale to held-to-maturity		1,289		(1,289)		–		–		–		–
Foreign currency translation adjustment(a)		–		–		–		–		35		35
Reclassification to earnings of realized (gains) losses		(103)		36		14		157		–		104
Applicable income taxes		635		318		(35)		(141)		(8)		769
Balance at end of period	$	540	$	(935)	$	(85)	$	(1,426)	$	(37)	$	(1,943)
2020
Balance at beginning of period	$	379	$	–	$	(51)	$	(1,636)	$	(65)	$	(1,373)
Changes in unrealized gains (losses)		2,905		–		(194)		(401)		–		2,310
Foreign currency translation adjustment(a)		–		–		–		–		2		2
Reclassification to earnings of realized (gains) losses		(177)		–		10		125		–		(42)
Applicable income taxes		(690)		–		46		70		(1)		(575)
Balance at end of period	$	2,417	$	–	$	(189)	$	(1,842)	$	(64)	$	322
2019
Balance at beginning of period	$	(946)	$	14	$	112	$	(1,418)	$	(84)	$	(2,322)
Changes in unrealized gains (losses)		1,693		–		(229)		(380)		–		1,084
Unrealized gains (losses) on held-to-maturity investment securities transferred to available-for-sale		150		(9)		–		–		–		141
Foreign currency translation adjustment(a)		–		–		–		–		26		26
Reclassification to earnings of realized (gains) losses		(73)		(7)		11		89		–		20
Applicable income taxes		(445)		2		55		73		(7)		(322)
Balance at end of period	$	379	$	–	$	(51)	$	(1,636)	$	(65)	$	(1,373)

(a) Represents the impact of changes in foreign currency exchange rates on the Company’s investment in foreign operations and related hedges.

101    

Additional detail about the impact to net income for items reclassified out of accumulated other comprehensive income (loss) and into earnings for the years ended December 31, is as follows:

	Impact to Net Income									Affected Line Item in the Consolidated Statement of Income
(Dollars in Millions)	2021			2020			2019
Unrealized gains (losses) on investment securities available-for-sale
Realized gains (losses) on sale of investment securities	$	103		$	177		$	73		Securities gains (losses), net
		(26	)		(45	)		(18	)	Applicable income taxes
		77			132			55		Net-of-tax
Unrealized gains (losses) on investment securities transferred from available-for-sale to held-to-maturity
Amortization of unrealized gains		(36	)		–			7		Interest income
		9			–			(2	)	Applicable income taxes
		(27	)		–			5		Net-of-tax
Unrealized gains (losses) on derivative hedges
Realized gains (losses) on derivative hedges		(14	)		(10	)		(11	)	Interest expense
		4			3			3		Applicable income taxes
		(10	)		(7	)		(8	)	Net-of-tax
Unrealized gains (losses) on retirement plans
Actuarial gains (losses) and prior service cost (credit) amortization		(157	)		(125	)		(89	)	Other noninterest expense
		40			32			22		Applicable income taxes
		(117	)		(93	)		(67	)	Net-of-tax
Total impact to net income	$	(77	)	$	32		$	(15	)

Regulatory Capital The Company uses certain measures defined by bank regulatory agencies to assess its capital. 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.

Tier 1 capital is considered core capital and includes common shareholders’ equity adjusted for the aggregate impact of certain items included in other comprehensive income (loss) (“common equity tier 1 capital”), plus qualifying preferred stock, trust preferred securities and noncontrolling interests in consolidated subsidiaries subject to certain limitations. Total risk-based capital includes Tier 1 capital and other items such as subordinated debt and the allowance for credit losses. Capital measures are stated as a percentage of risk-weighted assets, which are measured based on their perceived credit risks and include certain off-balance sheet exposures, such as unfunded

loan commitments, letters of credit, and derivative contracts. Beginning in 2020, the Company elected to adopt a rule issued in 2020 by its regulators which permits banking organizations who adopt accounting guidance related to the impairment of financial instruments based on the current expected credit losses 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.

The Company is also subject to leverage ratio requirements, which is defined as Tier 1 capital as a percentage of adjusted average assets under the standardized approach and Tier 1 capital as a percentage of total on- and off-balance sheet leverage exposure under more risk-sensitive advanced approaches.

102    

The following table provides a summary of the regulatory capital requirements in effect, along with the actual components and ratios for the Company and its bank subsidiary, at December 31, 2021 and 2020:

	U.S. Bancorp						U.S. Bank National Association
(Dollars in Millions)	2021			2020			2021			2020
Basel III standardized approach:
Common shareholders’ equity	$	48,547		$	47,112		$	51,465		$	52,589
Less intangible assets
Goodwill (net of deferred tax liability)		(9,323	)		(9,014	)		(9,209	)		(9,034	)
Other disallowed intangible assets		(785	)		(654	)		(754	)		(654	)
Other(a)		3,262			601			3,498			1,254
Total common equity tier 1 capital		41,701			38,045			45,000			44,155
Qualifying preferred stock		6,371			5,983			—			—
Noncontrolling interests eligible for tier 1 capital		450			451			450			451
Other(b)		(6	)		(5	)		(6	)		(6	)
Total tier 1 capital		48,516			44,474			45,444			44,600
Eligible portion of allowance for credit losses		4,081			4,905			4,081			4,850
Subordinated debt and noncontrolling interests eligible for tier 2 capital		3,653			3,223			3,600			3,517
Total tier 2 capital		7,734			8,128			7,681			8,367
Total risk-based capital	$	56,250		$	52,602		$	53,125		$	52,967
Risk-weighted assets	$	418,571		$	393,648		$	412,979		$	387,388
Common equity tier 1 capital as a percent of risk-weighted assets		10.0	%		9.7	%		10.9	%		11.4	%
Tier 1 capital as a percent of risk-weighted assets		11.6			11.3			11.0			11.5
Total risk-based capital as a percent of risk-weighted assets		13.4			13.4			12.9			13.7
Tier 1 capital as a percent of adjusted quarterly average assets (leverage ratio)		8.6			8.3			8.2			8.4
Tier 1 capital as a percent of total on- and off-balance sheet leverage exposure (total leverage exposure ratio)		6.9			7.3			6.6			6.8

	Minimum(c)			Well- Capitalized
Bank Regulatory Capital Requirements
Common equity tier 1 capital as a percent of risk-weighted assets		7.0	%		6.5	%(d)
Tier 1 capital as a percent of risk-weighted assets		8.5			8.0
Total risk-based capital as a percent of risk-weighted assets		10.5			10.0
Tier 1 capital as a percent of adjusted quarterly average assets (leverage ratio)		4.0			5.0	(d)
Tier 1 capital as a percent of total on- and off-balance sheet leverage exposure (total leverage exposure ratio)		3.0			3.0

(a) Includes the impact of items included in other comprehensive income (loss), such as unrealized gains (losses) on available-for-sale securities, accumulated net gains on cash flow hedges, pension liability adjustments, etc., and the portion of deferred tax assets related to net operating loss and tax credit carryforwards not eligible for common equity tier 1 capital. Excludes the impact of the 2020 adoption of accounting guidance related to impairment of financial instruments based on the CECL methodology included in retained earnings.

(b) Includes the remaining portion of deferred tax assets not eligible for total tier 1 capital.

(c) The minimum common equity tier 1 capital, tier 1 capital and total risk-based capital ratio requirements reflect a stress capital buffer requirement of 2.5 percent. Banks and financial services holding companies must maintain minimum capital levels, including a stress capital buffer requirement, to avoid limitations on capital distributions and certain discretionary compensation payments.

(d) A minimum well-capitalized threshold does not apply to U.S. Bancorp for this ratio as it is not formally defined under applicable banking regulations for bank holding companies.

Noncontrolling interests principally represent third-party investors’ interests in consolidated entities, including preferred stock of consolidated subsidiaries. During 2006, the Company’s banking subsidiary formed USB Realty Corp., a real estate investment trust, for the purpose of issuing 5,000 shares of Fixed-to-Floating Rate Exchangeable Non-cumulative Perpetual Series A Preferred Stock with a liquidation preference of $100,000 per share (“Series A Preferred Securities”) to third-party investors. Dividends on the Series A Preferred Securities, if declared, will accrue and be payable quarterly, in arrears, at a rate per annum equal to three-month LIBOR plus 1.147 percent. If USB Realty Corp. has not declared a dividend on the Series A Preferred Securities before the dividend payment date for any

dividend period, such dividend shall not be cumulative and shall cease to accrue and be payable, and USB Realty Corp. will have no obligation to pay dividends accrued for such dividend period, whether or not dividends on the Series A Preferred Securities are declared for any future dividend period.

The Series A Preferred Securities will be redeemable, in whole or in part, at the option of USB Realty Corp. on each fifth anniversary after the dividend payment date occurring in January 2012. Any redemption will be subject to the approval of the Office of the Comptroller of the Currency. During 2016, the Company purchased 500 shares of the Series A Preferred Securities held by third-party investors. As of December 31, 2021, 4,500 shares of the Series A Preferred Securities remain outstanding.

103    

  NOTE 16   Earnings Per Share

The components of earnings per share were:

Year Ended December 31 (Dollars and Shares in Millions, Except Per Share Data)	2021			2020			2019
Net income attributable to U.S. Bancorp	$	7,963		$	4,959		$	6,914
Preferred dividends		(303	)		(304	)		(302	)
Impact of preferred stock call and redemption		(17	)(a)		(13	)(b)		–
Earnings allocated to participating stock awards		(38	)		(21	)		(29	)
Net income applicable to U.S. Bancorp common shareholders	$	7,605		$	4,621		$	6,583
Average common shares outstanding		1,489			1,509			1,581
Net effect of the exercise and assumed purchase of stock awards		1			1			2
Average diluted common shares outstanding		1,490			1,510			1,583
Earnings per common share	$	5.11		$	3.06		$	4.16
Diluted earnings per common share	$	5.10		$	3.06		$	4.16

(a) Represents stock issuance costs originally recorded in preferred stock upon the issuance of the Company’s Series I and Series F Preferred Stock that were reclassified to retained earnings on the date the Company announced its intent to redeem the outstanding shares.

(b) Represents stock issuance costs originally recorded in preferred stock upon the issuance of the Company’s Series H Preferred Stock that were reclassified to retained earnings on the date the Company announced its intent to redeem the outstanding shares.

Options outstanding at December 31, 2020 and 2019, to purchase 2 million and 1 million common shares, respectively, were not included in the computation of diluted earnings per share for the years ended December 31, 2020 and 2019, because they were antidilutive.

  NOTE 17   Employee Benefits

Employee Retirement Savings Plan The Company has a defined contribution retirement savings plan that covers substantially all its employees. Qualified employees are allowed to contribute up to 75 percent of their annual compensation, subject to Internal Revenue Service limits, through salary deductions under Section 401(k) of the Internal Revenue Code. Employee contributions are invested at their direction among a variety of investment alternatives. Employee contributions are 100 percent matched by the Company, up to four percent of each employee’s eligible annual compensation. The Company’s matching contribution vests immediately and is invested in the same manner as each employee’s future contribution elections. Total expense for the Company’s matching contributions was $213 million, $192 million and $179 million in 2021, 2020 and 2019, respectively.

Pension Plans The Company has two tax qualified noncontributory defined benefit pension plans: the U.S. Bank Pension Plan and the U.S. Bank Legacy Pension Plan. The U.S. Bank Legacy Pension Plan was established effective January 1, 2020, to receive a transfer from the U.S. Bank Pension Plan of the accrued benefits and related plan assets of participants who terminated employment prior to January 1, 2020. The two plans have substantively identical terms. The plans provide benefits to substantially all the Company’s employees. Participants receive annual cash balance pay credits based on eligible pay multiplied by a percentage determined by their age and years of service. Participants also receive an annual interest credit. Employees become vested upon completing three years of vesting service. For participants in the plans before 2010 that elected to stay under their existing formula, pension benefits are provided to eligible employees based on years of service, multiplied by a

percentage of their final average pay. Additionally, as a result of past plan mergers, a portion of pension benefits may also be provided using a cash balance benefit formula where only interest credits continue to be credited to participants’ accounts.

In general, the Company’s qualified pension plans’ funding objectives include maintaining a funded status sufficient to meet participant benefit obligations over time while reducing long-term funding requirements and pension costs. The Company has an established process for evaluating the plans, their performance and significant plan assumptions, including the assumed discount rate and the long-term rate of return (“LTROR”). Although plan assumptions are established annually, the Company may update its analysis on an interim basis in order to be responsive to significant events that occur during the year, such as plan mergers and amendments. The Company’s Compensation and Human Resources Committee (the “Committee”) oversees the Company’s process of evaluating the plans, their performance and significant plan assumptions.

The Company’s funding policy is to contribute amounts to its plans sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act, plus such additional amounts as the Company determines to be appropriate. The Company did not contribute to its qualified pension plans in 2021 and contributed $1.1 billion in 2020. The Company does not expect to contribute to the plans in 2022. Any contributions made to the qualified plans are invested in accordance with established investment policies and asset allocation strategies.

In addition to the funded qualified pension plans, the Company maintains a non-qualified plan that is unfunded and provides benefits to certain employees. The assumptions used in

104    

computing the accumulated benefit obligation, the projected benefit obligation and net pension expense are substantially consistent with those assumptions used for the funded qualified plans. In 2022, the Company expects to contribute approximately $26 million to its non-qualified pension plan which equals the 2022 expected benefit payments.

Postretirement Welfare Plan In addition to providing pension benefits, the Company provides health care and death benefits to certain former employees who retired prior to January 1, 2014.

Employees retiring after December 31, 2013, are not eligible for retiree health care benefits. Prior to December 31, 2020, the postretirement welfare plan operated as a voluntary employees’ beneficiary association (“VEBA”) plan. Effective December 31, 2020, the VEBA trust was dissolved and the postretirement welfare plan now operates as an unfunded plan. In 2022, the Company expects to contribute approximately $4 million to its postretirement welfare plan which equals the 2022 expected benefit payments net of participant contributions.

The following table summarizes the changes in benefit obligations and plan assets for the years ended December 31, and the funded status and amounts recognized in the Consolidated Balance Sheet at December 31 for the retirement plans:

	Pension Plans						Postretirement Welfare Plan
(Dollars in Millions)	2021			2020			2021			2020
Change In Projected Benefit Obligation(a)
Benefit obligation at beginning of measurement period	$	7,805		$	6,829		$	38		$	47
Service cost		265			235			–			–
Interest cost		219			235			1			1
Participants’ contributions		–			–			4			6
Plan amendments		–			(18	)		–			–
Actuarial (gain) loss		(4	)		754			(2	)		(4	)
Lump sum settlements		(71	)		(55	)		–			–
Benefit payments		(184	)		(175	)		(7	)		(13	)
Federal subsidy on benefits paid		–			–			–			1
Benefit obligation at end of measurement period(b)	$	8,030		$	7,805		$	34		$	38
Change In Fair Value Of Plan Assets
Fair value at beginning of measurement period	$	7,498		$	5,838		$	–		$	84
Actual return on plan assets		844			737			–			1
Employer contributions		26			1,153			3			5
Participants’ contributions		–			–			4			6
Lump sum settlements		(71	)		(55	)		–			–
Benefit payments		(184	)		(175	)		(7	)		(13	)
Other Changes(c)		–			–			–			(83	)
Fair value at end of measurement period	$	8,113		$	7,498		$	–		$	–
Funded (Unfunded) Status	$	83		$	(307	)	$	(34	)	$	(38	)
Components Of The Consolidated Balance Sheet
Noncurrent benefit asset	$	776		$	369		$	–		$	–
Current benefit liability		(26	)		(27	)		(5	)		(5	)
Noncurrent benefit liability		(667	)		(649	)		(29	)		(33	)
Recognized amount	$	83		$	(307	)	$	(34	)	$	(38	)
Accumulated Other Comprehensive Income (Loss), Pretax
Net actuarial (loss) gain	$	(1,989	)	$	(2,557	)	$	58		$	63
Net prior service credit (cost)		16			18			8			11
Recognized amount	$	(1,973	)	$	(2,539	)	$	66		$	74

(a) The increase in the projected benefit obligation for 2021 was primarily due to demographic experience partially offset by a higher discount rate, and the increase for 2020 was primarily due to a lower discount rate.    

(b) At December 31, 2021 and 2020, the accumulated benefit obligation for all pension plans was $7.3 billion and $7.1 billion, respectively.

(c) The fair value of postretirement welfare plan assets decreased in 2020 due to the dissolution of the VEBA trust. Prior to dissolution, the remaining assets in the VEBA trust were used to pay benefits under other programs of the Company’s health and welfare plan, as permitted by the VEBA trust agreement. The postreirement welfare plan now operates as an unfunded plan.    

The following table provides information for pension plans with benefit obligations in excess of plan assets at December 31:

(Dollars in Millions)	2021		2020
Pension Plans with Projected Benefit Obligations in Excess of Plan Assets
Projected benefit obligation	$	692	$	676
Fair value of plan assets		–		–
Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets
Accumulated benefit obligation	$	631	$	628
Fair value of plan assets		–		–

105    

The following table sets forth the components of net periodic benefit cost and other amounts recognized in accumulated other comprehensive income (loss) for the years ended December 31 for the retirement plans:

	Pension Plans									Postretirement Welfare Plan
(Dollars in Millions)	2021			2020			2019			2021			2020			2019
Components Of Net Periodic Benefit Cost
Service cost	$	265		$	235		$	192		$	–		$	–		$	–
Interest cost		219			235			249			1			1			2
Expected return on plan assets		(450	)		(403	)		(383	)		–			(3	)		(3	)
Prior service cost (credit) and transition obligation (asset) amortization		(2	)		–			–			(3	)		(3	)		(3	)
Actuarial loss (gain) amortization		169			134			98			(7	)		(6	)		(6	)
Net periodic benefit cost	$	201		$	201		$	156		$	(9	)	$	(11	)	$	(10	)
Other Changes In Plan Assets And Benefit Obligations
Recognized In Other Comprehensive Income (Loss)
Net actuarial gain (loss) arising during the year	$	398		$	(420	)	$	(388	)	$	2		$	1		$	7
Net actuarial loss (gain) amortized during the year		169			134			98			(7	)		(6	)		(6	)
Net prior service (cost) credit and transition (obligation) asset arising during the year		–			18			–			–			–			–
Net prior service cost (credit) and transition obligation (asset) amortized during the year		(2	)		–			–			(3	)		(3	)		(3	)
Total recognized in other comprehensive income (loss)	$	565		$	(268	)	$	(290	)	$	(8	)	$	(8	)	$	(2	)
Total recognized in net periodic benefit cost and other comprehensive income (loss)	$	364		$	(469	)	$	(446	)	$	1		$	3		$	8

The following table sets forth weighted average assumptions used to determine the projected benefit obligations at December 31:

	Pension Plans						Postretirement Welfare Plan
(Dollars in Millions)	2021			2020			2021			2020
Discount rate(a)		3.00	%		2.75	%		2.37	%		1.82	%
Cash balance interest crediting rate		3.00			3.00			*			*
Rate of compensation increase(b)		3.56			3.56			*			*
Health care cost trend rate(c)
Prior to age 65								5.75	%		6.00	%
After age 65								5.75	%		6.00	%

(a) The discount rates were developed using a cash flow matching bond model with a modified duration for the qualified pension plan, legacy pension plan, non-qualified pension plan and postretirement welfare plan of 17.8, 12.2, 12.4, and 5.8 years, respectively, for 2021, and 18.6, 12.9, 12.5 and 6.1 years, respectively, for 2020.    

(b) Determined on an active liability-weighted basis.    

(c) The 2021 and 2020 pre-65 and post-65 rates are both assumed to decrease gradually to 5.00 percent by 2025 and remain at this level thereafter.

* Not applicable    

The following table sets forth weighted average assumptions used to determine net periodic benefit cost for the years ended December 31:

	Pension Plans									Postretirement Welfare Plan
(Dollars in Millions)	2021			2020			2019			2021			2020			2019
Discount rate(a)		2.75	%		3.40	%		4.45	%		2.37	%		2.80	%		4.05	%
Cash balance interest crediting rate		3.00			3.00			3.00			*			*			*
Expected return on plan assets(b)		6.50			7.25			7.25			*			3.50			3.50
Rate of compensation increase(c)		3.56			3.56			3.52			*			*			*
Health care cost trend rate(d)
Prior to age 65											5.75	%		6.25	%		6.50	%
After age 65											5.75			6.25			10.00

(a) The discount rates were developed using a cash flow matching bond model with a modified duration for the qualified pension plan, legacy pension plan, non-qualified pension plan and postretirement welfare plan of 18.6, 12.9, 12.5 and 6.1 years, respectively, for 2021, and for the qualified pension plan, non-qualified pension plan and postretirement welfare plan of 15.8, 12.3 and 6.1 years, respectively, for 2020.    

(b) With the help of an independent pension consultant, the Company considers several sources when developing its expected long-term rates of return on plan assets assumptions, including, but not limited to, past returns and estimates of future returns given the plans’ asset allocation, economic conditions, and peer group LTROR information. The Company determines its expected long-term rates of return reflecting current economic conditions and plan assets.

(c) Determined on an active liability weighted basis.    

(d) The 2021, 2020 and 2019 pre-65 and post-65 rates are both assumed to decrease gradually to 5.00 percent by 2025 and remain at that level thereafter.

* Not applicable    

106    

Investment Policies and Asset Allocation In establishing its investment policies and asset allocation strategies, the Company considers expected returns and the volatility associated with different strategies. An independent consultant performs modeling that projects numerous outcomes using a broad range of possible scenarios, including a mix of possible rates of inflation and economic growth. Starting with current economic information, the model bases its projections on past relationships between inflation, fixed income rates and equity returns when these types of economic conditions have existed over the previous 30 years, both in the United States and in foreign countries. Estimated future returns and other actuarially determined adjustments are also considered in calculating the estimated return on assets.

Generally, based on historical performance of the various investment asset classes, investments in equities have outperformed other investment classes but are subject to higher volatility. In an effort to minimize volatility, while recognizing the long-term up-side potential of investing in equities, the Committee has determined that a target asset allocation of 35 percent long duration bonds, 30 percent global equities, 10 percent real assets, 10 percent private equity funds, 5 percent domestic mid-small cap equities, 5 percent emerging markets equities, and 5 percent hedge funds is appropriate.

At December 31, 2021 and 2020, plan assets included an asset management arrangement with a related party totaling $55.3 million and $1.0 billion, respectively.

In accordance with authoritative accounting guidance, the Company groups plan assets into a three-level hierarchy for valuation techniques used to measure their fair value based on whether the valuation inputs are observable or unobservable. Refer to Note 22 for further discussion on these levels.

The assets of the qualified pension plans include investments in equity and U.S. Treasury securities whose fair values are determined based on quoted prices in active markets and are classified within Level 1 of the fair value hierarchy. The qualified pension plans also invest in U.S. agency, corporate and municipal debt securities, which are all valued based on observable market prices or data by third party pricing services, and mutual funds which are valued based on quoted net asset values provided by the trustee of the fund; these assets are classified as Level 2. Additionally, the qualified pension plans invest in certain assets that are valued based on net asset values as a practical expedient, including investments in collective investment funds, hedge funds, and private equity funds; the net asset values are provided by the fund trustee or administrator and are not classified in the fair value hierarchy.

The following table summarizes plan investment assets measured at fair value at December 31:

	Qualified Pension Plans
	2021								2020
(Dollars in Millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	43	$	–	$	–	$	43	$	975	$	–	$	–	$	975
Debt securities		1,022		1,096		–		2,118		894		1,224		–		2,118
Mutual funds
Debt securities		–		409		–		409		–		371		–		371
Emerging markets equity securities		–		188		–		188		–		174		–		174
Other		–		–		4		4		–		–		6		6
	$	1,065	$	1,693	$	4		2,762	$	1,869	$	1,769	$	6		3,644
Plan investment assets not classified in fair value hierarchy(a):
Collective investment funds
Domestic equity securities								1,958								1,515
Mid-small cap equity securities(b)								433								431
International equity securities								867								718
Domestic real estate securities								829								520
Hedge funds(c)								450								251
Private equity funds(d)								814								419
Total plan investment assets at fair value							$	8,113							$	7,498

(a) These investments are valued based on net asset value per share as a practical expedient; fair values are provided to reconcile to total investment assets of the plans at fair value.

(b) At December 31, 2021 and 2020, securities included $433 million and $431 million in domestic equities, respectively.    

(c) This category consists of several investment strategies diversified across several hedge fund managers.    

(d) This category consists of several investment strategies diversified across several private equity fund managers.    

107    

The following table summarizes the changes in fair value for qualified pension plans investment assets measured at fair value using significant unobservable inputs (Level 3) for the years ended December 31:

	2021			2020		2019
(Dollars in Millions)	Other			Other		Other
Balance at beginning of period	$	6		$	3	$	3
Unrealized gains (losses) relating to assets still held at end of year		(2	)		3		–
Purchases, sales, and settlements, net		–			–		–
Balance at end of period	$	4		$	6	$	3

The following benefit payments are expected to be paid from the retirement plans for the years ended December 31:

(Dollars in Millions)	Pension Plans		Postretirement Welfare Plan(a)
2022	$	264	$	4
2023		286		4
2024		305		4
2025		357		3
2026		347		3
2027-2031		1,975		11

(a) Net of expected retiree contributions and before Medicare Part D subsidy.    

108    

  NOTE 18   Stock-Based Compensation

As part of its employee and director compensation programs, the Company currently may grant certain stock awards under the provisions of its stock incentive plan. The plan provides for grants of options to purchase shares of common stock at a fixed price equal to the fair value of the underlying stock at the date of grant. Option grants are generally exercisable up to ten years from the date of grant. In addition, the plan provides for grants of shares of common stock or stock units that are subject to restriction on transfer prior to vesting. Most stock and unit awards vest over

three to five years and are subject to forfeiture if certain vesting requirements are not met. Stock incentive plans of acquired companies are generally terminated at the merger closing dates. Participants under such plans receive the Company’s common stock, or options to buy the Company’s common stock, based on the conversion terms of the various merger agreements. At December 31, 2021, there were 24 million shares (subject to adjustment for forfeitures) available for grant under the Company’s stock incentive plan.

Stock Option Awards

The following is a summary of stock options outstanding and exercised under prior and existing stock incentive plans of the Company:

Year Ended December 31	Stock Options/Shares			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value (in millions)
2021
Number outstanding at beginning of period		5,180,391		$	40.38
Exercised		(1,281,646	)		33.66
Cancelled(a)		(8,614	)		48.20
Number outstanding at end of period(b)		3,890,131		$	42.58		3.3	$	53
Exercisable at end of period		3,890,131		$	42.58		3.3	$	53
2020
Number outstanding at beginning of period		5,718,256		$	39.25
Exercised		(513,293	)		27.48
Cancelled(a)		(24,572	)		45.08
Number outstanding at end of period(b)		5,180,391		$	40.38		3.7	$	32
Exercisable at end of period		4,942,077		$	39.68		3.6	$	34
2019
Number outstanding at beginning of period		9,115,010		$	34.52
Exercised		(3,333,467	)		26.36
Cancelled(a)		(63,287	)		36.74
Number outstanding at end of period(b)		5,718,256		$	39.25		4.4	$	115
Exercisable at end of period		4,869,805		$	37.67		4.0	$	105

Note: The Company did not grant any stock option awards during 2021, 2020 and 2019.

(a) Options cancelled include both non-vested (i.e., forfeitures) and vested options.

(b) Outstanding options include stock-based awards that may be forfeited in future periods. The impact of the estimated forfeitures is reflected in compensation expense.

Stock-based compensation expense is based on the estimated fair value of the award at the date of grant or modification. The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model, requiring the use of subjective assumptions. Because employee

stock options have characteristics that differ from those of traded options, including vesting provisions and trading limitations that impact their liquidity, the determined value used to measure compensation expense may vary from the actual fair value of the employee stock options.

The following summarizes certain stock option activity of the Company:

Year Ended December 31 (Dollars in Millions)	2021		2020		2019
Fair value of options vested	$	3	$	7	$	10
Intrinsic value of options exercised		27		11		95
Cash received from options exercised		43		14		88
Tax benefit realized from options exercised		7		3		24

109    

To satisfy option exercises, the Company predominantly uses treasury stock.

Additional information regarding stock options outstanding as of December 31, 2021, is as follows:

	Outstanding Options						Exercisable Options
Range of Exercise Prices	Shares		Weighted- Average Remaining Contractual Life (Years)		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price
$25.01—$30.00		251,126		.1	$	28.63		251,126	$	28.63
$30.01—$35.00		446,538		1.1		33.98		446,538		33.98
$35.01—$40.00		1,051,053		4.1		39.49		1,051,053		39.49
$40.01—$45.00		1,269,994		2.7		42.43		1,269,994		42.43
$45.01—$50.00		—		—		—		—		—
$50.01—$55.01		871,420		5.1		54.96		871,420		54.96
		3,890,131		3.3	$	42.58		3,890,131	$	42.58

Restricted Stock and Unit Awards

A summary of the status of the Company’s restricted shares of stock and unit awards is presented below:

	2021					2020					2019
Year Ended December 31	Shares			Weighted- Average Grant- Date Fair Value		Shares			Weighted- Average Grant- Date Fair Value		Shares			Weighted- Average Grant- Date Fair Value
Outstanding at beginning of period		6,343,313		$	51.38		6,606,833		$	48.99		6,719,298		$	48.17
Granted		4,512,995			52.54		3,552,923			53.90		3,519,474			50.45
Vested		(3,793,978	)		53.27		(3,534,770	)		49.28		(3,270,778	)		48.69
Cancelled		(249,577	)		52.83		(281,673	)		53.51		(361,161	)		50.55
Outstanding at end of period		6,812,753		$	51.04		6,343,313		$	51.38		6,606,833		$	48.99

The total fair value of shares vested was $191 million, $182 million and $175 million for the years ended December 31, 2021, 2020 and 2019, respectively. Stock-based compensation expense was $207 million, $189 million and $178 million for the years ended December 31, 2021, 2020 and 2019, respectively. On an after-tax basis, stock-based compensation was $155 million, $142 million and $133 million for the years ended

December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, there was $155 million of total unrecognized compensation cost related to nonvested share-based arrangements granted under the plans. That cost is expected to be recognized over a weighted-average period of 1.9 years as compensation expense.​​​​​​​

110    

  NOTE 19   Income Taxes

The components of income tax expense were:

Year Ended December 31 (Dollars in Millions)	2021		2020			2019
Federal
Current	$	1,203	$	1,146		$	1,162
Deferred		469		(291	)		166
Federal income tax		1,672		855			1,328
State
Current		398		355			379
Deferred		111		(144	)		(59	)
State income tax		509		211			320
Total income tax provision	$	2,181	$	1,066		$	1,648

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

Year Ended December 31 (Dollars in Millions)	2021			2020			2019
Tax at statutory rate	$	2,135		$	1,271		$	1,805
State income tax, at statutory rates, net of federal tax benefit		439			240			355
Tax effect of
Tax credits and benefits, net of related expenses		(331	)		(370	)		(424	)
Tax-exempt income		(114	)		(117	)		(120	)
Nondeductible legal and regulatory expenses		24			29			23
Other items(a)		28			13			9
Applicable income taxes	$	2,181		$	1,066		$	1,648

(a) Includes excess tax benefits associated with stock-based compensation and adjustments related to deferred tax assets and liabilities.

The tax effects of fair value adjustments on securities available-for-sale, derivative instruments in cash flow hedges, foreign currency translation adjustments, and pension and post-retirement plans are recorded directly to shareholders’ equity as part of other comprehensive income (loss).

In preparing its tax returns, the Company is required to interpret complex tax laws and regulations and utilize income and cost allocation methods to determine its taxable income. On an ongoing basis, the Company is subject to examinations by federal, state, local and foreign taxing authorities that may give

rise to differing interpretations of these complex laws, regulations and methods. Due to the nature of the examination process, it generally takes years before these examinations are completed and matters are resolved. Federal tax examinations for all years ending through December 31, 2014 are completed and resolved. The Company’s tax returns for the years ended December 31, 2015, 2016, 2017 and 2018 are under examination by the Internal Revenue Service. The years open to examination by foreign, state and local government authorities vary by jurisdiction.

A reconciliation of the changes in the federal, state and foreign uncertain tax position balances are summarized as follows:

Year Ended December 31 (Dollars in Millions)	2021			2020			2019
Balance at beginning of period	$	474		$	432		$	335
Additions for tax positions taken in prior years		14			62			168
Additions for tax positions taken in the current year		7			6			6
Exam resolutions		(1	)		(8	)		(62	)
Statute expirations		(7	)		(18	)		(15	)
Balance at end of period	$	487		$	474		$	432

The total amount of uncertain tax positions that, if recognized, would impact the effective income tax rate as of December 31, 2021, 2020 and 2019, were $285 million, $280 million and $274 million, respectively. The Company classifies interest and penalties related to uncertain tax positions as a component of income tax expense. At December 31, 2021, the Company’s uncertain tax position balance included $45 million of accrued interest and penalties. During the years

ended December 31, 2021, 2020 and 2019 the Company recorded approximately $5 million, $5 million and $7 million, respectively, in interest and penalties on uncertain tax positions.

Deferred income tax assets and liabilities reflect the tax effect of estimated temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for the same items for income tax reporting purposes.

111    

The significant components of the Company’s net deferred tax asset (liability) follows:

At December 31 (Dollars in Millions)	2021			2020
Deferred Tax Assets
Federal, state and foreign net operating loss and credit carryforwards	$	2,331		$	2,495
Allowance for credit losses		1,561			2,042
Accrued expenses		568			554
Obligation for operating leases		281			293
Securities available-for-sale and financial instruments		163			—
Stock compensation		76			84
Pension and postretirement benefits		8			108
Partnerships and other investment assets		—			9
Other deferred tax assets, net		451			383
Gross deferred tax assets		5,439			5,968
Deferred Tax Liabilities
Leasing activities		(2,263	)		(2,511	)
Goodwill and other intangible assets		(845	)		(802	)
Mortgage servicing rights		(593	)		(408	)
Right of use operating leases		(246	)		(249	)
Fixed assets		(238	)		(226	)
Loans		(85	)		(112	)
Partnerships and other investment assets		(8	)		—
Securities available-for-sale and financial instruments		—			(755	)
Other deferred tax liabilities, net		(127	)		(145	)
Gross deferred tax liabilities		(4,405	)		(5,208	)
Valuation allowance		(249	)		(163	)
Net Deferred Tax Asset	$	785		$	597

The Company has approximately $2.8 billion of federal, state and foreign net operating loss carryforwards which expire at various times beginning in 2022. A substantial portion of these carryforwards relate to state-only net operating losses, for which the related deferred tax asset is subject to a full valuation allowance as the carryforwards are not expected to be realized within the carryforward period. Management has determined it is more likely than not the other net deferred tax assets could be realized through carry back to taxable income in prior years, future reversals of existing taxable temporary differences and future taxable income.

In addition, the Company has $2.1 billion of federal credit carryforwards which expire at various times through 2041 which

are not subject to a valuation allowance as management believes that it is more likely than not that the credits will be utilized within the carryforward period.

At December 31, 2021, retained earnings included approximately $102 million of base year reserves of acquired thrift institutions, for which no deferred federal income tax liability has been recognized. These base year reserves would be recaptured if certain subsidiaries of the Company cease to qualify as a bank for federal income tax purposes. The base year reserves also remain subject to income tax penalty provisions that, in general, require recapture upon certain stock redemptions of, and excess distributions to, stockholders.

112    

  NOTE 20   Derivative Instruments

In the ordinary course of business, the Company enters into derivative transactions to manage various risks and to accommodate the business requirements of its customers. The Company recognizes all derivatives on the Consolidated Balance Sheet at fair value in other assets or in other liabilities. On the date the Company enters into a derivative contract, the derivative is designated as either a fair value hedge, cash flow hedge, net investment hedge, or a designation is not made as it is a customer-related transaction, an economic hedge for asset/liability risk management purposes or another stand-alone derivative created through the Company’s operations (“free-standing derivative”). When a derivative is designated as a fair value, cash flow or net investment hedge, the Company performs an assessment, at inception and, at a minimum, quarterly thereafter, to determine the effectiveness of the derivative in offsetting changes in the value or cash flows of the hedged item(s).

Fair Value Hedges These derivatives are interest rate swaps the Company uses to hedge the change in fair value related to interest rate changes of its underlying available-for-sale investment securities and fixed-rate debt. Changes in the fair value of derivatives designated as fair value hedges, and changes in the fair value of the hedged items, are recorded in earnings.

Cash Flow Hedges These derivatives are interest rate swaps the Company uses to hedge the forecasted cash flows from its underlying variable-rate debt. Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) until the cash flows of the hedged items are realized. If a derivative designated as a 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 December 31, 2021, the Company had $85 million (net-of-tax) of realized and unrealized losses on derivatives classified as cash flow hedges recorded in other comprehensive income (loss), compared with $189 million (net-of-tax) of realized and unrealized losses at December 31, 2020. The estimated amount to be reclassified from other

comprehensive income (loss) into earnings during the next 12 months is a loss of $27 million (net-of-tax). All cash flow hedges were highly effective for the year ended December 31, 2021. There were no cash flow hedges at December 31, 2021.

Net Investment Hedges The Company uses forward commitments to sell specified amounts of certain foreign currencies, and non-derivative debt instruments, to hedge the volatility of its net investment in foreign operations driven by fluctuations in foreign currency exchange rates. The carrying amount of non-derivative debt instruments designated as net investment hedges was $1.3 billion at December 31, 2021, compared with $1.4 billion December 31, 2020.

Other Derivative Positions The Company enters into free-standing derivatives to mitigate interest rate risk and for other risk management purposes. These derivatives include forward commitments to sell to-be-announced securities (“TBAs”) and other commitments to sell residential mortgage loans, which are used to economically hedge the interest rate risk related to mortgage loans held for sale (“MLHFS”) and unfunded mortgage loan commitments. The Company also enters into interest rate swaps, swaptions, forward commitments to buy TBAs, U.S. Treasury and Eurodollar futures and options on U.S. Treasury futures to economically hedge the change in the fair value of the Company’s MSRs. The Company also enters into foreign currency forwards to economically hedge remeasurement gains and losses the Company recognizes on foreign currency denominated assets and liabilities. In addition, the Company acts as a seller and buyer of interest rate derivatives and foreign exchange contracts for its customers. The Company mitigates the market and liquidity risk associated with these customer derivatives by entering into similar offsetting positions with broker-dealers, or on a portfolio basis by entering into other derivative or non-derivative financial instruments that partially or fully offset the exposure to earnings from these customer-related positions. The Company’s customer derivatives and related hedges are monitored and reviewed by the Company’s Market Risk Committee, which establishes policies for market risk management, including exposure limits for each portfolio. The Company also has derivative contracts that are created through its operations, including certain unfunded mortgage loan commitments and swap agreements related to the sale of a portion of its Class B common and preferred shares of Visa Inc. Refer to Note 22 for further information on these swap agreements.

113    

The following table summarizes the asset and liability management derivative positions of the Company at December 31:
	2021						2020
	Notional Value		Fair Value				Notional Value		Fair Value
(Dollars in Millions)			Assets		Liabilities				Assets		Liabilities
Fair value hedges
Interest rate contracts
Receive fixed/pay floating swaps	$	12,350	$	–	$	–	$	8,400	$	–	$	–
Pay fixed/receive floating swaps		16,650		–		–		100		–		–
Cash flow hedges
Interest rate contracts
Pay fixed/receive floating swaps		–		–		–		3,250		–		–
Net investment hedges
Foreign exchange forward contracts		793		–		4		815		–		3
Other economic hedges
Interest rate contracts
Futures and forwards
Buy		9,322		10		16		18,356		73		5
Sell		29,348		25		27		39,416		48		157
Options
Purchased		18,570		256		–		11,610		121		–
Written		9,662		52		231		12,843		202		198
Receive fixed/pay floating swaps		9,653		–		–		11,971		–		–
Pay fixed/receive floating swaps		7,033		–		–		8,616		–		–
Foreign exchange forward contracts		735		2		6		633		1		2
Equity contracts		209		5		–		172		3		–
Other (a)		1,792		–		125		1,879		1		183
Total	$	116,117	$	350	$	409	$	118,061	$	449	$	548

(a) Includes derivative liability swap agreements related to the sale of a portion of the Company’s Class B common and preferred shares of Visa Inc. The Visa swap agreements had a total notional value and fair value of $1.8 billion and $125 million at December 31, 2021, respectively, compared to $1.8 billion and $182 million at December 31, 2020, respectively. In addition, includes short-term underwriting purchase and sale commitments with total asset and liability notional values of $4 million at December 31, 2021, and $47 million at December 31, 2020.

The following table summarizes the customer-related derivative positions of the Company at December 31:
	2021						2020
	Notional Value		Fair Value				Notional Value		Fair Value
(Dollars in Millions)			Assets		Liabilities				Assets		Liabilities
Interest rate contracts
Receive fixed/pay floating swaps	$	178,701	$	2,007	$	438	$	156,886	$	3,782	$	99
Pay fixed/receive floating swaps		174,176		134		670		150,011		2		1,239
Other (a)		16,267		1		2		16,308		6		3
Options
Purchased		89,679		194		36		74,109		111		46
Written		85,211		36		176		69,941		46		81
Futures
Buy		3,607		–		–		2,775		–		–
Sell		3,941		–		–		4,090		–		–
Foreign exchange rate contracts
Forwards, spots and swaps		89,321		1,145		1,143		90,837		1,590		1,565
Options
Purchased		805		19		–		519		14		–
Written		805		–		19		519		–		14
Credit contracts		9,331		1		5		10,355		1		7
Total	$	651,844	$	3,537	$	2,489	$	576,350	$	5,552	$	3,054
(a) Primarily represents floating rate interest rate swaps that pay based on differentials between specified interest rate indexes.

114    

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) for the years ended December 31:
	Gains (Losses) Recognized in Other Comprehensive Income (Loss)								Gains (Losses) Reclassified from Other Comprehensive Income (Loss) into Earnings
(Dollars in Millions)	2021		2020			2019			2021			2020			2019
Asset and Liability Management Positions
Cash flow hedges
Interest rate contracts	$	94	$	(145	)	$	(171	)	$	(10	)	$	(7	)		$(8)
Net investment hedges
Foreign exchange forward contracts		19		(21	)		3			–			–			–
Non-derivative debt instruments		84		(90	)		13			–			–			–
Note:The Company does not exclude components from effectiveness testing for cash flow and net investment hedges.

The table below shows the effect of fair value and cash flow hedge accounting on the Consolidated Statement of Income for the years ended December 31:
	Interest Income								Interest Expense
(Dollars in Millions)	2021			2020			2019		2021			2020			2019
Total amount of income and expense line items presented in the Consolidated Statement of Income in which the effects of fair value or cash flow hedges are recorded	$	13,487		$	14,840		$	17,494	$	993		$	2,015		$	4,442
Asset and Liability Management Positions
Fair value hedges
Interest rate contract derivatives		17			1			–		232			(134	)		(44)
Hedged items		(19	)		(1	)		–		(232	)		134			44
Cash flow hedges
Interest rate contract derivatives		–			–			–		14			10			11
Note: The Company does not exclude components from effectiveness testing for fair value and cash flow hedges. The Company reclassified losses of $53 million and $41 million into earnings during the years ended December 31, 2021 and 2020, respectively, as a result of realized cash flows on discontinued cash flow hedges. The Company did not reclassify gains or losses into earnings as a result of realized cash flows on discontinued cash flow hedges during the year ended December 31, 2019. No amounts were reclassified into earnings on discontinued cash flow hedges because it is probable the original hedged forecasted cash flows will not occur.

The table below shows cumulative hedging adjustments and the carrying amount of assets and liabilities designated in fair value hedges:
	Carrying Amount of the Hedged Assets and Liabilities				Cumulative Hedging Adjustment(a)
At December 31 (Dollars in Millions)	2021		2020		2021			2020
Line Item in the Consolidated Balance Sheet
Available-for-sale investment securities	$	16,445	$	99	$	(26	)		$(1)
Long-term debt		12,278		8,567		585			903
(a) The cumulative hedging adjustment related to discontinued hedging relationships on available-for-sale investment securities and long-term debt was $(6) million and $640 million, respectively, at December 31, 2021. The cumulative hedging adjustment related to discontinued hedging relationships on long-term debt was $726 million at December 31, 2020.

115    

The table below shows the gains (losses) recognized in earnings for other economic hedges and the customer-related positions for the years ended December 31:
(Dollars in Millions)	Location of Gains (Losses) Recognized in Earnings	2021			2020			2019
Asset and Liability Management Positions
Other economic hedges
Interest rate contracts
Futures and forwards	Mortgage banking revenue/ other noninterest income	$	511		$	82		$	34
Purchased and written options	Mortgage banking revenue		527			1,527			432
Swaps	Mortgage banking revenue		(197	)		598			316
Foreign exchange forward contracts	Other noninterest income		1			3			(24)
Equity contracts	Compensation expense		7			3			—
Other	Other noninterest income		5			(70	)		(140)
Customer-Related Positions
Interest rate contracts
Swaps	Commercial products revenue		110			135			82
Purchased and written options	Commercial products revenue		(5	)		(8	)		10
Futures	Commercial products revenue		3			(18	)		(5)
Foreign exchange rate contracts
Forwards, spots and swaps	Commercial products revenue		93			78			82
Purchased and written options	Commercial products revenue		1			1			1
Credit contracts	Commercial products revenue		(7	)		(32	)		(18)

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 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 December 31, 2021, was $731 million. At December 31, 2021, the Company had $508 million of cash posted as collateral against this net liability position.​​​​​​​​​​​​​​

116    

NOTE 21	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 $768.0 billion total notional amount of derivative positions at December 31, 2021, $402.0 billion related to bilateral over-the-counter trades, $345.1 billion related to those centrally cleared through clearinghouses and $20.9 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 20 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.

117    

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
December 31, 2021
Repurchase agreements
U.S. Treasury and agencies	$	378	$	–	$	–	$	–	$	378
Residential agency mortgage-backed securities		551		–		–		–		551
Corporate debt securities		646		–		–		–		646
Total repurchase agreements		1,575		–		–		–		1,575
Securities loaned
Corporate debt securities		169		–		–		–		169
Total securities loaned		169		–		–		–		169
Gross amount of recognized liabilities	$	1,744	$	–	$	–	$	–	$	1,744
December 31, 2020
Repurchase agreements
U.S. Treasury and agencies	$	472	$	–	$	–	$	–	$	472
Residential agency mortgage-backed securities		398		–		–		–		398
Corporate debt securities		560		–		–		–		560
Total repurchase agreements		1,430		–		–		–		1,430
Securities loaned
Corporate debt securities		218		–		–		–		218
Total securities loaned		218		–		–		–		218
Gross amount of recognized liabilities	$	1,648	$	–	$	–	$	–	$	1,648

The Company executes its derivative, repurchase/reverse repurchase and securities loaned/borrowed transactions under the respective industry standard agreements. These agreements include master netting arrangements that allow for multiple contracts executed with the same counterparty to be viewed as a single arrangement. This allows for net settlement of a single amount on a daily basis. In the event of default, the master netting arrangement provides for close-out netting, which allows all of these positions with the defaulting counterparty to be terminated and net settled with a single payment amount.

The Company has elected to offset the assets and liabilities under netting arrangements for the balance sheet presentation of the majority of its derivative counterparties. The netting occurs at the counterparty level, and includes all assets and liabilities related to the derivative contracts, including those associated with cash collateral received or delivered. The Company has not elected to offset the assets and liabilities under netting arrangements for the balance sheet presentation of repurchase/reverse repurchase and securities loaned/borrowed transactions.​​​​​​​​​​​​​​​​​​​​​

118    

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
								Financial Instruments(b)			Collateral Received(c)			Net Amount
December 31, 2021
Derivative assets(d)	$	3,830	$	(1,609	)	$	2,221	$	(142	)	$	(106	)	$	1,973
Reverse repurchase agreements		359		–			359		(249	)		(110	)		–
Securities borrowed		1,868		–			1,868		–			(1,818	)		50
Total	$	6,057	$	(1,609	)	$	4,448	$	(391	)	$	(2,034	)	$	2,023
December 31, 2020
Derivative assets(d)	$	5,744	$	(1,874	)	$	3,870	$	(109	)	$	(287	)	$	3,474
Reverse repurchase agreements		377		–			377		(262	)		(115	)		–
Securities borrowed		1,716		–			1,716		–			(1,670	)		46
Total	$	7,837	$	(1,874	)	$	5,963	$	(371	)	$	(2,072	)	$	3,520

(a) Includes $528 million and $898 million of cash collateral related payables that were netted against derivative assets at December 31, 2021 and 2020, respectively.

(b) For derivative assets this includes any derivative liability fair values that could be offset in the event of counterparty default; for reverse repurchase agreements this includes any repurchase agreement payables that could be offset in the event of counterparty default; for securities borrowed this includes any securities loaned payables that could be offset in the event of counterparty default.

(c) Includes the fair value of securities received by the Company from the counterparty. These securities are not included on the Consolidated Balance Sheet unless the counterparty defaults.    

(d) Excludes $57 million and $257 million at December 31, 2021 and 2020, respectively, of derivative assets not subject to netting arrangements.

(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)
December 31, 2021
Derivative liabilities(d)	$	2,761	$	(1,589	)	$	1,172	$	(142	)	$	–		$	1,030
Repurchase agreements		1,575		–			1,575		(249	)		(1,326	)		–
Securities loaned		169		–			169		–			(167	)		2
Total	$	4,505	$	(1,589	)	$	2,916	$	(391	)	$	(1,493	)	$	1,032
December 31, 2020
Derivative liabilities(d)	$	3,419	$	(2,312	)	$	1,107	$	(109	)	$	–		$	998
Repurchase agreements		1,430		–			1,430		(262	)		(1,168	)		–
Securities loaned		218		–			218		–			(215	)		3
Total	$	5,067	$	(2,312	)	$	2,755	$	(371	)	$	(1,383	)	$	1,001

(a) Includes $508 million and $1.3 billion of cash collateral related receivables that were netted against derivative liabilities at December 31, 2021 and 2020, respectively.

(b) For derivative liabilities this includes any derivative asset fair values that could be offset in the event of counterparty default; for repurchase agreements this includes any reverse repurchase agreement receivables that could be offset in the event of counterparty default; for securities loaned this includes any securities borrowed receivables that could be offset in the event of counterparty default.

(c) Includes the fair value of securities pledged by the Company to the counterparty. These securities are included on the Consolidated Balance Sheet unless the Company defaults.

(d) Excludes $137 million and $183 million at December 31, 2021 and 2020, respectively, of derivative liabilities not subject to netting arrangements.

119    

  NOTE 22 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 assets or liabilities are classified. Where appropriate, the descriptions include information about the valuation models and key inputs to those models. During the years ended December 31, 2021, 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 loss of $145 million, a net gain of $362 million and a net gain of $73 million for the years ended December 31, 2021, 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

120    

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 10 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 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 23 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 December 31, 2021:

	Minimum			Maximum			Weighted- Average(a)
Expected prepayment		3	%		13	%		10	%
Option adjusted spread		6			11			7

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

121    

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 December 31, 2021:

	Minimum			Maximum			Weighted- Average(a)
Expected loan close rate		2	%		100	%		80	%
Inherent MSR value (basis points per loan)		14			181			116

(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 December 31, 2021, the minimum, maximum and weighted-average credit valuation adjustment as a percentage of the net​​​​​​​​​​​​​​

fair value of the counterparty’s derivative contracts prior to adjustment was 0 percent, 1,744 percent and 3 percent, respectively.

The significant unobservable inputs used in the fair value measurement of the Visa swaps are management’s estimate of the probability of certain litigation scenarios occurring, and the timing of the resolution of the related litigation loss estimates in excess, or shortfall, of the Company’s proportional share of escrow funds. An increase in the loss estimate or a delay in the resolution of the related litigation would have resulted in an increase in the derivative liability. A decrease in the loss estimate or an acceleration of the resolution of the related litigation would have resulted in a decrease in the derivative liability.

122    

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
December 31, 2021
Available-for-sale securities
U.S. Treasury and agencies	$	30,917	$	5,692	$	–	$	–		$	36,609
Mortgage-backed securities
Residential agency		–		77,079		–		–			77,079
Commercial agency		–		8,485		–		–			8,485
Asset-backed securities		–		59		7		–			66
Obligations of state and political subdivisions		–		10,716		1		–			10,717
Other		–		7		–		–			7
Total available-for-sale		30,917		102,038		8		–			132,963
Mortgage loans held for sale		–		6,623		–		–			6,623
Mortgage servicing rights		–		–		2,953		–			2,953
Derivative assets		8		2,490		1,389		(1,609	)		2,278
Other assets		278		1,921		–		–			2,199
Total	$	31,203	$	113,072	$	4,350	$	(1,609)		$	147,016
Derivative liabilities	$	–	$	2,308	$	590	$	(1,589)		$	1,309
Short-term borrowings and other liabilities(a)		209		1,837		–		–			2,046
Total	$	209	$	4,145	$	590	$	(1,589)		$	3,355
December 31, 2020
Available-for-sale securities
U.S. Treasury and agencies	$	19,251	$	3,140	$	–	$	–		$	22,391
Mortgage-backed securities
Residential agency		–		99,968		–		–			99,968
Commercial agency		–		5,406		–		–			5,406
Asset-backed securities		–		198		7		–			205
Obligations of state and political subdivisions		–		8,860		1		–			8,861
Other		–		9		–		–			9
Total available-for-sale		19,251		117,581		8		–			136,840
Mortgage loans held for sale		–		8,524		–		–			8,524
Mortgage servicing rights		–		–		2,210		–			2,210
Derivative assets		4		3,235		2,762		(1,874	)		4,127
Other assets		302		1,601		–		–			1,903
Total	$	19,557	$	130,941	$	4,980	$	(1,874)		$	153,604
Derivative liabilities	$	–	$	3,166	$	436	$	(2,312)		$	1,290
Short-term borrowings and other liabilities(a)		85		1,672		–		–			1,757
Total	$	85	$	4,838	$	436	$	(2,312)		$	3,047

Note: Excluded from the table above are equity investments without readily determinable fair values. The Company has elected to carry these investments at historical cost, adjusted for impairment and any changes resulting from observable price changes for identical or similar investments of the issuer. The aggregate carrying amount of these equity investments was $79 million and $85 million at December 31, 2021 and 2020, respectively. The Company has not recorded impairments or adjustments for observable price changes on these equity investments during 2021 and 2020, or on a cumulative basis.

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

123    

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 years ended December 31:

(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
2021
Available-for-sale securities
Asset-backed securities	$	7	$	–		$	1	$	–	$	–		$	(1	)	$	–		$	–		$	–	$	7	$	1
Obligations of state and political subdivisions		1		–			–		–		–			–			–			–			–		1		–
Total available-for-sale		8		–			1		–		–			(1	)		–			–			–		8		1
Mortgage servicing rights		2,210		(437	)(a)		–		42		2			–			1,136	(c)		–			–		2,953		(437	)(a)
Net derivative assets and liabilities		2,326		(924	)(b)		–		337		(3	)		–			–			(937	)		–		799		(968	)(d)
2020
Available-for-sale securities
Asset-backed securities	$	8	$	–		$	–	$	–	$	–		$	(1	)	$	–		$	–		$	–	$	7	$	–
Obligations of state and political subdivisions		1		–			–		–		–			–			–			–			–		1		–
Total available-for-sale		9		–			–		–		–			(1	)		–			–			–		8		–
Mortgage servicing rights		2,546		(1,403	)(a)		–		34		3			–			1,030	(c)		–			–		2,210		(1,403	)(a)
Net derivative assets and liabilities		810		2,922	(e)		–		247		(3	)		–			–			(1,650	)		–		2,326		1,649	(f)
2019
Available-for-sale securities
Asset-backed securities	$	–	$	–		$	–	$	–	$	–		$	–		$	–		$	–		$	8	$	8	$	–
Obligations of state and political subdivisions		–		–			–		–		–			–			–			–			1		1		–
Total available-for-sale		–		–			–		–		–			–			–			–			9		9		–
Mortgage servicing rights		2,791		(829	)(a)		–		20		5			–			559	(c)		–			–		2,546		(829	)(a)
Net derivative assets and liabilities		80		769	(g)		–		142		(9	)		–			–			(172	)		–		810		782	(h)

(a) Included in mortgage banking revenue.

(b) Approximately $666 million, $(1.6) billion and $5 million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.

(c) Represents MSRs capitalized during the period.

(d) Approximately $42 million, $(1.0) billion and $5 million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.

(e) Approximately $1.9 billion, $1.1 billion and $(70) million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.

(f) Approximately $247 million, $1.5 billion and $(70) million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.

(g) Approximately $482 million, $428 million and $(141) million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.

(h) Approximately $35 million, $888 million and $(141) million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.

The Company is also required periodically to measure certain other financial assets at fair value on a nonrecurring basis. These measurements of fair value usually result from the application of lower-of-cost-or-fair value accounting or write-downs of individual assets.

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 December 31:

	2021								2020
(Dollars in Millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Loans(a)	$	–	$	–	$	59	$	59	$	–	$	–	$	385	$	385
Other assets(b)		–		–		77		77		–		–		30		30

(a) Represents the carrying value of loans for which adjustments were based on the fair value of the collateral, excluding loans fully charged-off.

(b) Primarily represents the fair value of foreclosed properties that were measured at fair value based on an appraisal or broker price opinion of the collateral subsequent to their initial acquisition.

124    

The following table summarizes losses recognized related to nonrecurring fair value measurements of individual assets or portfolios for the years ended December 31:

(Dollars in Millions)	2021		2020		2019
Loans(a)	$	60	$	426	$	122
Other assets(b)		25		21		17

(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 as of December 31:

	2021						2020
(Dollars in Millions)	Fair Value Carrying Amount		Aggregate Unpaid Principal		Carrying Amount Over (Under) Unpaid Principal		Fair Value Carrying Amount		Aggregate Unpaid Principal		Carrying Amount Over (Under) Unpaid Principal
Total loans	$	6,623	$	6,453	$	170	$	8,524	$	8,136	$	388
Nonaccrual loans		1		1		—		1		1		—
Loans 90 days or more past due		2		2		—		2		2		—

Fair Value of Financial Instruments

The following section summarizes the estimated fair value for financial instruments accounted for at amortized cost as of December 31, 2021 and 2020. In accordance with disclosure guidance related to fair values of financial instruments, the Company did not include assets and liabilities that are not financial instruments, such as the value of goodwill, long-term

relationships with deposit, credit card, merchant processing and trust customers, other purchased intangibles, premises and equipment, deferred taxes and other liabilities. Additionally, in accordance with the disclosure guidance, receivables and payables due in one year or less, insurance contracts, equity investments not accounted for at fair value, and deposits with no defined or contractual maturities are excluded.​​​​​​​

The estimated fair values of the Company’s financial instruments as of December 31, are shown in the table below:

	2021										2020
	Carrying Amount		Fair Value								Carrying Amount		Fair Value
(Dollars in Millions)			Level 1		Level 2		Level 3		Total				Level 1		Level 2		Level 3		Total
Financial Assets
Cash and due from banks	$	28,905	$	28,905	$	–	$	–	$	28,905	$	62,580	$	62,580	$	–	$	–	$	62,580
Federal funds sold and securities purchased under resale agreements		359		–		359		–		359		377		–		377		–		377
Investment securities held-to-maturity		41,858		–		41,812		–		41,812		–		–		–		–		–
Loans held for sale(a)		1,152		–		–		1,152		1,152		237		–		–		237		237
Loans		306,304		–		–		312,724		312,724		290,393		–		–		300,419		300,419
Other(b)		1,521		–		630		891		1,521		1,772		–		731		1,041		1,772
Financial Liabilities
Time deposits		22,665		–		22,644		–		22,644		30,694		–		30,864		–		30,864
Short-term borrowings(c)		9,750		–		9,646		–		9,646		10,009		–		9,956		–		9,956
Long-term debt		32,125		–		32,547		–		32,547		41,297		–		42,485		–		42,485
Other(d)		3,862		–		1,170		2,692		3,862		4,052		–		1,234		2,818		4,052

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

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

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

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

125    

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 $495 million and $774 million at December 31, 2021 and 2020, respectively. The carrying value of other guarantees was $245 million and $362 million at December 31, 2021 and 2020, respectively.​​​​​​​​​​​​​​

  NOTE 23   Guarantees and Contingent Liabilities

Visa Restructuring and Card Association Litigation The Company’s payment services business issues credit and debit cards and acquires credit and debit card transactions through the Visa U.S.A. Inc. card association or its affiliates (collectively “Visa”). In 2007, Visa completed a restructuring and issued shares of Visa Inc. common stock to its financial institution members in contemplation of its initial public offering (“IPO”) completed in the first quarter of 2008 (the “Visa Reorganization”). As a part of the Visa Reorganization, the Company received its proportionate number of shares of Visa Inc. common stock, which were subsequently converted to Class B shares of Visa Inc. (“Class B shares”).

Visa U.S.A. Inc. (“Visa U.S.A.”) and MasterCard International (collectively, the “Card Brands”) are defendants in antitrust lawsuits challenging the practices of the Card Brands (the “Visa Litigation”). Visa U.S.A. member banks have a contingent obligation to indemnify Visa Inc. under the Visa U.S.A. bylaws (which were modified at the time of the restructuring in October 2007) for potential losses arising from the Visa Litigation. The indemnification by the Visa U.S.A. member banks has no specific maximum amount. Using proceeds from its IPO and through reductions to the conversion ratio applicable to the Class B shares held by Visa U.S.A. member banks, Visa Inc. has funded an escrow account for the benefit of member financial institutions to fund their indemnification obligations associated with the Visa Litigation. The receivable related to the escrow account is classified in other liabilities as a direct offset to the related Visa Litigation contingent liability.

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

Commitments to Extend Credit Commitments to extend credit are legally binding and generally have fixed expiration dates or other termination clauses. The contractual amount represents the Company’s exposure to credit loss, in the event of default by the

borrower. The Company manages this credit risk by using the same credit policies it applies to loans. Collateral is obtained to secure commitments based on management’s credit assessment of the borrower. The collateral may include marketable securities, receivables, inventory, equipment and real estate. Since the Company expects many of the commitments to expire without being drawn, total commitment amounts do not necessarily represent the Company’s future liquidity requirements. In addition, the commitments include consumer credit lines that are cancelable upon notification to the consumer.

The contract or notional amounts of unfunded commitments to extend credit at December 31, 2021, excluding those commitments considered derivatives, were as follows:

	Term
(Dollars in Millions)	Less Than One Year		Greater Than One Year		Total
Commercial and commercial real estate loans	$	40,385	$	118,879	$	159,264
Corporate and purchasing card loans(a)		30,263		–		30,263
Residential mortgages		613		1		614
Retail credit card loans(a)		120,905		–		120,905
Other retail loans		14,924		22,905		37,829
Other		6,268		–		6,268

(a) Primarily cancelable at the Company’s discretion.

Other Guarantees and Contingent Liabilities

The following table is a summary of other guarantees and contingent liabilities of the Company at December 31, 2021:

(Dollars in Millions)	Collateral Held		Carrying Amount		Maximum Potential Future Payments
Standby letters of credit	$	–	$	57	$	9,605
Third party borrowing arrangements		–		–		3
Securities lending indemnifications		9,074		–		8,807
Asset sales		–		84		7,229
Merchant processing		777		140		120,417
Tender option bond program guarantee		1,725		–		1,488
Other		–		21		1,398

126    

Letters of Credit Standby letters of credit are commitments the Company issues to guarantee the performance of a customer to a third party. The guarantees frequently support public and private borrowing arrangements, including commercial paper issuances, bond financings and other similar transactions. The Company also issues and confirms commercial letters of credit on behalf of customers to ensure payment or collection in connection with trade transactions. In the event of a customer’s or counterparty’s nonperformance, the Company’s credit loss exposure is similar to that in any extension of credit, up to the letter’s contractual amount. Management assesses the borrower’s credit to determine the necessary collateral, which may include marketable securities, receivables, inventory, equipment and real estate. Since the conditions requiring the Company to fund letters of credit may not occur, the Company expects its liquidity requirements to be less than the total outstanding commitments. The maximum potential future payments guaranteed by the Company under standby letter of credit arrangements at December 31, 2021, were approximately $9.6 billion with a weighted-average term of approximately 19 months. The estimated fair value of standby letters of credit was approximately $57 million at December 31, 2021.

The contract or notional amount of letters of credit at December 31, 2021, were as follows:

	Term
(Dollars in Millions)	Less Than One Year		Greater Than One Year		Total
Standby	$	4,760	$	4,845	$	9,605
Commercial		889		22		911

Guarantees Guarantees are contingent commitments issued by the Company to customers or other third parties. The Company’s guarantees primarily include parent guarantees related to subsidiaries’ third party borrowing arrangements; third party performance guarantees inherent in the Company’s business operations, such as indemnified securities lending programs and merchant charge-back guarantees; and indemnification or buy-back provisions related to certain asset sales. For certain guarantees, the Company has recorded a liability related to the potential obligation, or has access to collateral to support the guarantee or through the exercise of other recourse provisions can offset some or all of the maximum potential future payments made under these guarantees.

Third Party Borrowing Arrangements The Company provides guarantees to third parties as a part of certain subsidiaries’ borrowing arrangements. The maximum potential future payments guaranteed by the Company under these arrangements were approximately $3 million at December 31, 2021.

Commitments from Securities Lending The Company participates in securities lending activities by acting as the customer’s agent involving the loan of securities. The Company indemnifies customers for the difference between the fair value of the securities lent and the fair value of the collateral received.

Cash collateralizes these transactions. The maximum potential future payments guaranteed by the Company under these arrangements were approximately $8.8 billion at December 31, 2021, and represent the fair value of the securities lent to third parties. At December 31, 2021, the Company held $9.1 billion of cash as collateral for these arrangements.

Asset Sales The Company has provided guarantees to certain third parties in connection with the sale or syndication of certain assets, primarily loan portfolios and tax-advantaged investments. These guarantees are generally in the form of asset buy-back or make-whole provisions that are triggered upon a credit event or a change in the tax-qualifying status of the related projects, as applicable, and remain in effect until the loans are collected or final tax credits are realized, respectively. The maximum potential future payments guaranteed by the Company under these arrangements were approximately $7.2 billion at December 31, 2021, and represented the proceeds received from the buyer or the guaranteed portion in these transactions where the buy-back or make-whole provisions have not yet expired. At December 31, 2021, the Company had reserved $84 million for potential losses related to the sale or syndication of tax-advantaged investments.

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.

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 December 31, 2021, the Company had reserved $18 million for potential losses from representation and warranty obligations, compared with $19 million at December 31, 2020. The Company’s reserve reflects management’s best estimate of losses for representation and warranty obligations. The Company’s repurchase reserve is modeled at the loan level, taking into consideration the individual credit quality and borrower activity that has transpired since origination. The model applies credit quality and economic risk factors to derive a probability of default and potential repurchase that are based on the Company’s historical loss experience, and

127    

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 December 31, 2021 and 2020, the Company had $19 million and $13 million, respectively, of unresolved representation and warranty claims from GSEs. The Company does not have a significant amount of unresolved claims from investors other than GSEs.

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.

A cardholder, through its issuing bank, generally has until the later of up to four months after the date the transaction is processed or the receipt of the product or service to present a charge-back to the Company as the merchant processor. The absolute maximum potential liability is estimated to be the total volume of credit card transactions that meet the associations’ requirements to be valid charge-back transactions at any given time. Management estimates that the maximum potential exposure for charge-backs would approximate the total amount of merchant transactions processed through the credit card associations for the last four months. For the last four months of 2021 this amount totaled approximately $120.4 billion. In most cases, this contingent liability is unlikely to arise, as most products and services are delivered when purchased and amounts are refunded when items are returned to merchants. However, where the product or service has been purchased but is not provided until a future date (“future delivery”), the potential for this contingent liability increases. To mitigate this risk, the Company may require the merchant to make an escrow deposit, place maximum volume limitations on future delivery transactions processed by the merchant at any point in time, or require various credit enhancements (including letters of credit and bank guarantees). Also, merchant processing contracts may include event triggers to provide the Company more financial and operational control in the event of financial deterioration of the merchant.

The Company currently processes card transactions in the United States, Canada and Europe through wholly-owned subsidiaries. In the event a merchant was unable to fulfill product or services subject to future delivery, such as airline tickets, the Company could become financially liable for refunding the purchase price of such products or services purchased through the credit card associations under the charge-back provisions. Charge-back risk related to these merchants is evaluated in a manner similar to credit risk assessments and, as such, merchant

processing contracts contain various provisions to protect the Company in the event of default. At December 31, 2021, the value of airline tickets purchased to be delivered at a future date through card transactions processed by the Company was $7.6 billion. The Company held collateral of $598 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 December 31, 2021, the liability was $125 million primarily related to these airline processing arrangements.

In the normal course of business, the Company has unresolved charge-backs. The Company assesses the likelihood of its potential liability based on the extent and nature of unresolved charge-backs and its historical loss experience. At December 31, 2021, the Company held $177 million of merchant escrow deposits as collateral and had a recorded liability for potential losses of $15 million.

Tender Option Bond Program Guarantee As discussed in Note 8, the Company sponsors a municipal bond securities tender option bond program and consolidates the program’s entities on its Consolidated Balance Sheet. The Company provides financial performance guarantees related to the program’s entities. At December 31, 2021, the Company guaranteed $1.5 billion of borrowings of the program’s entities, included on the Consolidated Balance Sheet in short-term borrowings. The Company also included on its Consolidated Balance Sheet the related $1.7 billion of available-for-sale investment securities serving as collateral for this arrangement.

Other Guarantees and Commitments As of December 31, 2021, the Company sponsored, and owned 100 percent of the common equity of, USB Capital IX, a wholly-owned unconsolidated trust, formed for the purpose of issuing redeemable Income Trust Securities (“ITS”) to third-party investors, originally investing the proceeds in junior subordinated debt securities (“Debentures”) issued by the Company and entering into stock purchase contracts to purchase the Company’s preferred stock in the future. As of December 31, 2021, all of the Debentures issued by the Company have either matured or been retired. Total assets of USB Capital IX were $682 million at December 31, 2021, consisting primarily of the Company’s Series A Preferred Stock. The Company’s obligations under the transaction documents, taken together, have the effect of providing a full and unconditional guarantee by the Company, on a junior subordinated basis, of the payment obligations of the trust to third-party investors totaling $681 million at December 31, 2021.

The Company has also made other financial performance guarantees and commitments primarily related to the operations of its subsidiaries. At December 31, 2021, the maximum potential future payments guaranteed or committed by the Company under these arrangements were approximately $717 million.

128    

Litigation and Regulatory Matters

The Company is subject to various litigation and regulatory matters that arise in the ordinary course of its business. The Company establishes reserves for such matters when potential losses become probable and can be reasonably estimated. The Company believes the ultimate resolution of existing legal and regulatory matters will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. However, in light of the uncertainties inherent in these matters, it is possible that the ultimate resolution of one or more of these matters may have a material adverse effect on the Company’s results from operations for a particular period, and future changes in circumstances or additional information could result in additional accruals or resolution in excess of established accruals, which could adversely affect the Company’s results from operations, potentially materially.

Residential Mortgage-Backed Securities Litigation Starting in 2011, the Company and other large financial institutions have been sued in their capacity as trustee for residential mortgage–backed securities trusts. In the lawsuits brought against the Company, the investors allege that the Company’s banking subsidiary, U.S. Bank National Association (“U.S. Bank”), as trustee caused them to incur substantial losses by failing to enforce loan repurchase obligations and failing to abide by appropriate standards of care after events of default allegedly occurred. The plaintiffs in these matters seek monetary damages in unspecified amounts and most also seek equitable relief.

Regulatory Matters The Company is continually subject to examinations, inquiries and investigations in areas of heightened

regulatory scrutiny, such as compliance, risk management, third-party risk management and consumer protection. For example, the Consumer Financial Protection Bureau (“CFPB”) is investigating certain of the Company’s consumer sales practices, and the Company has responded and continues to respond to the CFPB. The Company is cooperating fully with all pending examinations, inquiries and investigations, any of which could lead to administrative or legal proceedings or settlements. Remedies in these proceedings or settlements may include fines, penalties, restitution or alterations in the Company’s business practices (which may increase the Company’s operating expenses and decrease its revenue).

Outlook Due to their complex nature, it can be years before litigation and regulatory matters are resolved. The Company may be unable to develop an estimate or range of loss where matters are in early stages, there are significant factual or legal issues to be resolved, damages are unspecified or uncertain, or there is uncertainty as to a litigation class being certified or the outcome of pending motions, appeals or proceedings. For those litigation and regulatory matters where the Company has information to develop an estimate or range of loss, the Company believes the upper end of the range of reasonably possible losses in aggregate, in excess of any reserves established for matters where a loss is considered probable, will not be material to its financial condition, results of operations or cash flows. The Company’s estimates are subject to significant judgment and uncertainties, and the matters underlying the estimates will change from time to time. Actual results may vary significantly from the current estimates.

  NOTE 24   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,

129    

deposits and other liabilities and their related income or expense. The allowance for credit losses and related provision expense are allocated to the business segments according to the volume and credit quality of the loan balances managed, but with the impact

of changes in economic forecasts recorded in Treasury and Corporate Support. Goodwill and other intangible assets are assigned to the business segments based on the mix of business of an entity acquired by the Company. Within the Company, capital levels are evaluated and managed centrally; however, capital is allocated to the business segments to support evaluation of business performance. Business segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. Generally, the determination of the amount of capital allocated to each business segment includes credit allocations following a Basel III regulatory framework. Interest income and expense is determined based on the assets and liabilities managed by the business segment. Because funding and asset liability management is a central function, funds transfer-pricing methodologies are utilized to allocate a cost of funds used or credit for funds provided to all business segment assets and liabilities, respectively, using a matched funding concept. Also, each business unit is allocated the taxable-equivalent benefit of tax-exempt products. The residual effect on net interest income of asset/ liability management activities is included in Treasury and Corporate Support. Noninterest income and expenses directly managed by each business segment, including fees, service charges, salaries and benefits, and other direct revenues and costs are accounted for within each segment’s financial results in a manner similar to

the consolidated financial statements. Occupancy costs are allocated based on utilization of facilities by the business segments. Generally, operating losses are charged to the business segment when the loss event is realized in a manner similar to a loan charge-off. Noninterest expenses incurred by centrally managed operations or business segments that directly support another business segment’s operations are charged to the applicable business segment based on its utilization of those services, primarily measured by the volume of customer activities, number of employees or other relevant factors. These allocated expenses are reported as net shared services expense within noninterest expense. Certain activities that do not directly support the operations of the business segments or for which the business segments are not considered financially accountable in evaluating their performance are not charged to the business segments. The income or expenses associated with these corporate activities is reported within the Treasury and Corporate Support business segment. Income taxes are assessed to each business segment at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support.

Designations, assignments and allocations change from time to time as management systems are enhanced, methods of evaluating performance or product lines change or business segments are realigned to better respond to the Company’s diverse customer base. During 2021, certain organization and methodology changes were made and, accordingly, 2020 results were restated and presented on a comparable basis.

130    

Business segment results for the years ended December 31 were as follows:

	Corporate and Commercial Banking						Consumer and Business Banking						Wealth Management and Investment Services
(Dollars in Millions)	2021			2020			2021			2020			2021			2020
Condensed Income Statement
Net interest income (taxable-equivalent basis)	$	2,900		$	3,411		$	6,077		$	5,759		$	1,002		$	1,246
Noninterest income		1,035			1,117			2,501			3,177			2,221			2,022
Total net revenue		3,935			4,528			8,578			8,936			3,223			3,268
Noninterest expense		1,678			1,711			5,690			5,470			2,045			1,961
Other intangibles		–			–			12			16			14			12
Total noninterest expense		1,678			1,711			5,702			5,486			2,059			1,973
Income (loss) before provision and income taxes		2,257			2,817			2,876			3,450			1,164			1,295
Provision for credit losses		89			604			(144	)		291			47			40
Income (loss) before income taxes		2,168			2,213			3,020			3,159			1,117			1,255
Income taxes and taxable-equivalent adjustment		542			554			755			791			280			314
Net income (loss)		1,626			1,659			2,265			2,368			837			941
Net (income) loss attributable to noncontrolling interests		–			–			–			–			–			–
Net income (loss) attributable to U.S. Bancorp	$	1,626		$	1,659		$	2,265		$	2,368		$	837		$	941
Average Balance Sheet
Loans	$	103,208		$	115,563		$	141,082		$	141,259		$	18,097		$	15,456
Other earning assets		4,537			4,163			8,093			7,175			242			287
Goodwill		1,715			1,647			3,428			3,500			1,628			1,617
Other intangible assets		5			6			2,760			2,105			84			39
Assets		115,194			128,038			161,571			159,191			21,236			18,564
Noninterest-bearing deposits		61,272			44,309			33,855			30,467			24,587			17,149
Interest-bearing deposits		71,246			88,138			158,434			131,536			75,618			77,525
Total deposits		132,518			132,447			192,289			162,003			100,205			94,674
Total U.S. Bancorp shareholders’ equity		13,928			15,063			12,337			12,739			3,154			2,936
	Payment Services						Treasury and Corporate Support						Consolidated Company
(Dollars in Millions)	2021			2020			2021			2020			2021			2020
Condensed Income Statement
Net interest income (taxable-equivalent basis)	$	2,458		$	2,562		$	163		$	(54	)	$	12,600		$	12,924
Noninterest income		3,550	(a)		3,124	(a)		920			961			10,227	(b)		10,401	(b)
Total net revenue		6,008			5,686			1,083			907			22,827			23,325
Noninterest expense		3,231			3,123			925			928			13,569			13,193
Other intangibles		133			148			–			–			159			176
Total noninterest expense		3,364			3,271			925			928			13,728			13,369
Income (loss) before provision and income taxes		2,644			2,415			158			(21	)		9,099			9,956
Provision for credit losses		349			681			(1,514	)		2,190			(1,173	)		3,806
Income (loss) before income taxes		2,295			1,734			1,672			(2,211	)		10,272			6,150
Income taxes and taxable-equivalent adjustment		575			434			135			(928	)		2,287			1,165
Net income (loss)		1,720			1,300			1,537			(1,283	)		7,985			4,985
Net (income) loss attributable to noncontrolling interests		–			–			(22	)		(26	)		(22	)		(26	)
Net income (loss) attributable to U.S. Bancorp	$	1,720		$	1,300		$	1,515		$	(1,309	)	$	7,963		$	4,959
Average Balance Sheet
Loans	$	30,856		$	31,539		$	3,722		$	3,452		$	296,965		$	307,269
Other earning assets		93			5			196,211			162,503			209,176			174,133
Goodwill		3,185			3,060			–			–			9,956			9,824
Other intangible assets		508			581			–			–			3,357			2,731
Assets		36,553			36,497			221,978			188,917			556,532			531,207
Noninterest-bearing deposits		4,861			4,351			2,629			2,263			127,204			98,539
Interest-bearing deposits		145			121			1,634			2,756			307,077			300,076
Total deposits		5,006			4,472			4,263			5,019			434,281			398,615
Total U.S. Bancorp shareholders’ equity		7,643			7,462			16,748			14,046			53,810			52,246

(a) Presented net of related rewards and rebate costs and certain partner payments of $2.5 billion and $2.1 billion for 2021 and 2020, respectively.

(b)  Includes revenue generated from certain contracts with customers of $7.5 billion and $6.9 billion for 2021 and 2020, respectively.

131    

  NOTE 25   U.S. Bancorp (Parent Company)  

Condensed Balance Sheet

At December 31 (Dollars in Millions)	2021		2020
Assets
Due from banks, principally interest-bearing	$	8,369	$	12,279
Available-for-sale investment securities		1,209		1,469
Investments in bank subsidiaries		51,432		52,551
Investments in nonbank subsidiaries		3,632		3,286
Advances to bank subsidiaries		9,600		3,850
Advances to nonbank subsidiaries		707		1,118
Other assets		898		869
Total assets	$	75,847	$	75,422
Liabilities and Shareholders’ Equity
Long-term debt	$	18,902	$	20,924
Other liabilities		2,027		1,403
Shareholders’ equity		54,918		53,095
Total liabilities and shareholders’ equity	$	75,847	$	75,422

Condensed Income Statement

Year Ended December 31 (Dollars in Millions)	2021			2020			2019
Income
Dividends from bank subsidiaries	$	7,000		$	1,500		$	7,100
Dividends from nonbank subsidiaries		2			24			6
Interest from subsidiaries		112			172			317
Other income		46			85			25
Total income		7,160			1,781			7,448
Expense
Interest expense		348			433			551
Other expense		154			140			140
Total expense		502			573			691
Income before income taxes and equity in undistributed income of subsidiaries		6,658			1,208			6,757
Applicable income taxes		(53	)		(78	)		(92	)
Income of parent company		6,711			1,286			6,849
Equity in undistributed income of subsidiaries		1,252			3,673			65
Net income attributable to U.S. Bancorp	$	7,963		$	4,959		$	6,914

132    

Condensed Statement of Cash Flows

Year Ended December 31 (Dollars in Millions)	2021			2020			2019
Operating Activities
Net income attributable to U.S. Bancorp	$	7,963		$	4,959		$	6,914
Adjustments to reconcile net income to net cash provided by operating activities
Equity in undistributed income of subsidiaries		(1,252	)		(3,673	)		(65	)
Other, net		(85	)		907			231
Net cash provided by operating activities		6,626			2,193			7,080
Investing Activities
Proceeds from sales and maturities of investment securities		200			258			291
Purchases of investment securities		–			–			(1,013	)
Net (increase) decrease in short-term advances to subsidiaries		411			347			578
Long-term advances to subsidiaries		(7,000	)		–			(2,600	)
Principal collected on long-term advances to subsidiaries		1,250			–			2,550
Other, net		(269	)		379			(341	)
Net cash provided by (used in) investing activities		(5,408	)		984			(535	)
Financing Activities
Net increase (decrease) in short-term borrowings		–			(8	)		8
Proceeds from issuance of long-term debt		1,300			2,750			3,743
Principal payments or redemption of long-term debt		(3,000	)		(1,200	)		(1,500	)
Proceeds from issuance of preferred stock		2,221			486			–
Proceeds from issuance of common stock		43			15			88
Repurchase of preferred stock		(1,250	)		–			–
Repurchase of common stock		(1,555	)		(1,672	)		(4,525	)
Cash dividends paid on preferred stock		(308	)		(300	)		(302	)
Cash dividends paid on common stock		(2,579	)		(2,552	)		(2,443	)
Net cash used in financing activities		(5,128	)		(2,481	)		(4,931	)
Change in cash and due from banks		(3,910	)		696			1,614
Cash and due from banks at beginning of year		12,279			11,583			9,969
Cash and due from banks at end of year	$	8,369		$	12,279		$	11,583

Transfer of funds (dividends, loans or advances) from bank subsidiaries to the Company is restricted. Federal law requires loans to the Company or its affiliates to be secured and generally limits loans to the Company or an individual affiliate to 10 percent of each bank’s unimpaired capital and surplus. In the aggregate, loans to the Company and all affiliates cannot exceed 20 percent of each bank’s unimpaired capital and surplus.

Dividend payments to the Company by its subsidiary bank are subject to regulatory review and statutory limitations and, in some instances, regulatory approval. In general, dividends by the Company’s bank subsidiary to the parent company are limited by rules which compare dividends to net income for regulatorily-defined periods. Furthermore, dividends are restricted by minimum capital constraints for all national banks.​​​​​​​

  NOTE 26   Subsequent Events

The Company has evaluated the impact of events that have occurred subsequent to December 31, 2021 through the date the consolidated financial statements were filed with the United States Securities and Exchange Commission. Based on this​​​​​​​

evaluation, the Company has determined none of these events were required to be recognized or disclosed in the consolidated financial statements and related notes.​​​​​​​​​​​​​​​​​​​​​

133    

U.S. Bancorp

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

	2021
Year Ended December 31 (Dollars in Millions)	Average Balances			Interest		Yields and Rates
Assets
Investment securities	$	154,702		$	2,434		1.57	%
Loans held for sale		8,024			232		2.89
Loans(b)
Commercial		102,855			2,684		2.61
Commercial real estate		38,781			1,219		3.14
Residential mortgages		74,629			2,477		3.32
Credit card		21,645			2,278		10.52
Other retail		59,055			2,126		3.60
Total loans		296,965			10,784		3.63
Other earning assets		46,450			143		.31
Total earning assets		506,141			13,593		2.69
Allowance for loan losses		(6,326	)
Unrealized gain (loss) on investment securities		1,174
Other assets		55,543
Total assets	$	556,532
Liabilities and Shareholders’ Equity
Noninterest-bearing deposits	$	127,204
Interest-bearing deposits
Interest checking		103,198			24		.02
Money market savings		117,093			199		.17
Savings accounts		62,294			7		.01
Time deposits		24,492			90		.37
Total interest-bearing deposits		307,077			320		.10
Short-term borrowings
Federal funds purchased		1,507			2		.10
Securities sold under agreements to repurchase		1,790			2		.13
Commercial paper		7,228			1		.01
Other short-term borrowings		4,249			65		1.54
Total short-term borrowings		14,774			70		.47
Long-term debt		36,682			603		1.64
Total interest-bearing liabilities		358,533			993		.28
Other liabilities		16,353
Shareholders’ equity
Preferred equity		6,255
Common equity		47,555
Total U.S. Bancorp shareholders’ equity		53,810
Noncontrolling interests		632
Total equity		54,442
Total liabilities and equity	$	556,532
Net interest income				$	12,600
Gross interest margin							2.41	%
Gross interest margin without taxable-equivalent increments							2.39	%
Percent of Earning Assets
Interest income							2.69	%
Interest expense							.20
Net interest margin							2.49	%
Net interest margin without taxable-equivalent increments							2.47	%

(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.

134    

2020								2019								2021 v 2020
Average Balances			Interest		Yields and Rates			Average Balances			Interest		Yields and Rates			% Change Average Balances
$	125,954		$	2,488		1.98	%	$	117,150		$	2,950		2.52	%		22.8	%
	6,985			216		3.10			3,769			162		4.30			14.9
	113,967			3,192		2.80			103,198			4,229		4.10			(9.8	)
	40,548			1,457		3.59			39,386			1,919		4.87			(4.4	)
	73,667			2,666		3.62			67,747			2,644		3.90			1.3
	22,332			2,392		10.71			23,309			2,680		11.50			(3.1	)
	56,755			2,352		4.14			57,046			2,682		4.70			4.1
	307,269			12,059		3.92			290,686			14,154		4.87			(3.4	)
	41,194			179		.43			18,932			341		1.80			12.8
	481,402			14,942		3.10			430,537			17,607		4.09			5.1
	(6,858	)							(4,007	)							7.8
	2,901								(117	)							(59.5	)
	53,762								49,240								3.3
$	531,207							$	475,653								4.8
$	98,539							$	73,863								29.1	%
	84,276			65		.08			72,553			227		.31			22.5
	125,786			528		.42			109,849			1,637		1.49			(6.9	)
	52,142			46		.09			46,130			111		.24			19.5
	37,872			311		.82			44,417			880		1.98			(35.3	)
	300,076			950		.32			272,949			2,855		1.05			2.3
	1,660			6		.35			1,457			28		1.94			(9.2	)
	1,686			8		.50			1,770			36		2.00			6.2
	8,141			21		.26			8,186			119		1.45			(11.2	)
	7,695			109		1.41			6,724			187		2.78			(44.8	)
	19,182			144		.75			18,137			370		2.04			(23.0	)
	44,040			924		2.10			41,572			1,227		2.95			(16.7	)
	363,298			2,018		.56			332,658			4,452		1.34			(1.3	)
	16,494								15,880								(.9	)
	6,042								5,984								3.5
	46,204								46,639								2.9
	52,246								52,623								3.0
	630								629								.3
	52,876								53,252								3.0
$	531,207							$	475,653								4.8
			$	12,924							$	13,155
						2.54	%							2.75	%
						2.52	%							2.73	%
						3.10	%							4.09	%
						.42								1.03
						2.68	%							3.06	%
						2.66	%							3.04	%

135    

U.S. Bancorp

Supplemental Financial Data (Unaudited)

Earnings Per Common Share Summary	2021		2020		2019
Earnings per common share	$	5.11	$	3.06	$	4.16
Diluted earnings per common share		5.10		3.06		4.16
Dividends declared per common share		1.76		1.68		1.58
Other Statistics (Dollars and Shares in Millions)
Common shares outstanding(a)		1,484		1,507		1,534
Average common shares outstanding and common stock equivalents
Earnings per common share		1,489		1,509		1,581
Diluted earnings per common share		1,490		1,510		1,583
Number of shareholders(b)		31,111		32,520		33,515
Common dividends declared	$	2,630	$	2,541	$	2,493

(a) Defined as total common shares less common stock held in treasury at December 31.

(b) Based on number of common stock shareholders of record at December 31.

The common stock of U.S. Bancorp is traded on the New York Stock Exchange, under the ticker symbol “USB.” At January 31, 2022, there were 31,055 holders of record of the Company’s common stock.

Stock Performance Chart

The following chart compares the cumulative total shareholder return on the Company’s common stock during the five years ended December 31, 2021, with the cumulative total return on the Standard & Poor’s 500 Index and the KBW Bank Index. The comparison assumes $100 was invested on December 31, 2016, in the Company’s common stock and in each of the foregoing indices and assumes the reinvestment of all dividends. The comparisons in the graph are based upon historical data and are not indicative of, nor intended to forecast, future performance of the Company’s common stock.

136    

Company Information

General Business Description U.S. Bancorp is a financial services holding company headquartered in Minneapolis, Minnesota, serving millions of local, national and global customers. U.S. Bancorp is registered as a bank holding company under the Bank Holding Company Act of 1956 (the “BHC Act”), and has elected to be treated as a financial holding company under the BHC Act. The Company provides a full range of financial services, including lending and depository services, cash management, capital markets, and trust and investment management services. It also engages in credit card services, merchant and ATM processing, mortgage banking, insurance, brokerage and leasing.

U.S. Bancorp’s banking subsidiary, U.S. Bank National Association, is engaged in the general banking business, principally in domestic markets. U.S. Bank National Association, with $465 billion in deposits at December 31, 2021, provides a wide range of products and services to individuals, businesses, institutional organizations, governmental entities and other financial institutions. Commercial and consumer lending services are principally offered to customers within the Company’s domestic markets, to domestic customers with foreign operations and to large national customers operating in specific industries targeted by the Company, such as healthcare, utilities, oil and gas, and state and municipal government. Lending services include traditional credit products as well as credit card services, lease financing and import/export trade, asset-backed lending, agricultural finance and other products. Depository services include checking accounts, savings accounts and time certificate contracts. Ancillary services such as capital markets, treasury management and receivable lock-box collection are provided to corporate and governmental entity customers. U.S. Bancorp’s bank and trust subsidiaries provide a full range of asset management and fiduciary services for individuals, estates, foundations, business corporations and charitable organizations.

Other U.S. Bancorp non-banking subsidiaries offer investment and insurance products to the Company’s customers principally within its domestic markets, and fund administration services to a broad range of mutual and other funds.

Banking and investment services are provided through a network of 2,230 banking offices as of December 31, 2021, principally operating in the Midwest and West regions of the United States, through on-line services, over mobile devices and through other distribution channels. The Company operates a network of 4,059 ATMs as of December 31, 2021, and provides 24-hour, seven day a week telephone customer service. Mortgage banking services are provided through banking offices and loan production offices throughout the Company’s domestic markets. Lending products may be originated through banking offices, indirect correspondents, brokers or other lending sources. The Company is also one of the largest providers of corporate and purchasing card services and corporate trust services in the United States. The Company’s wholly-owned subsidiary, Elavon, Inc. (“Elavon”), provides domestic merchant processing services

directly to merchants. Wholly-owned subsidiaries of Elavon provide similar merchant services in Canada and segments of Europe. The Company also provides corporate trust and fund administration services in Europe. These foreign operations are not significant to the Company.

The COVID-19 pandemic has created economic and operational disruptions that have affected the Company’s business. Customer behavior has evolved greatly as more customers have migrated to on-line and digital-based products and services more quickly than originally anticipated. To meet these evolving customer preferences, the Company has continued and accelerated the development of digital-based products and services, as well as reduced the number of higher-cost physical branches.

On a full-time equivalent basis, as of December 31, 2021, U.S. Bancorp employed 68,796 people.

Risk Factors An investment in the Company involves risk, including the possibility that the value of the investment could fall substantially and that dividends or other distributions on the investment could be reduced or eliminated. Below are risk factors that are material to, and could adversely affect, the Company’s financial results and condition and the value of, and return on, an investment in the Company.

Economic and Market Conditions Risk

The COVID-19 pandemic has caused and may continue to cause significant harm to the global economy and the Company’s businesses The COVID-19 pandemic has had, and is expected to continue to have, negative effects on global economic conditions, including disruption and volatility of financial markets, supply chain disruptions, fluctuations in unemployment and other negative outcomes, including inflation. It is expected that these negative effects will be episodic for the duration of the pandemic, and, if new COVID variants or other diseases emerge, these negative effects on the global economy could worsen.

The continuation or worsening of the economic conditions caused by COVID-19 may continue to have a material adverse effect on the Company and its business, including: (i) additional changes in demand for the Company’s products and services; (ii) possible increased recognition of credit losses and increases in the allowance for credit losses (particularly if unemployment rises and customers draw on their lines of credit); (iii) possible downgrades to the Company’s credit ratings; (iv) increased constraints on liquidity and capital; (v) the possibility of further reduced revenues from the Company’s credit and debit card, corporate payments products and merchant processing services product offerings, including because of business closures, unemployment or requirements for consumers to stay at home; (vi) negative impacts on the ability of the Company’s employees to work effectively, including because of illness, quarantines, work-from-home arrangements or other restrictions relating to the pandemic, and (vii) negative impacts on the ability of the Company’s third-party service providers to provide their services to the Company.

137    

Continuing negative effects of COVID-19 and the resulting economic and market disruptions will depend on developments that are highly uncertain and 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 fully recovers. Further, the COVID-19 pandemic may also have the effect of heightening many of the other risks described in this section.

Deterioration in business and economic conditions could adversely affect the Company’s lending business and the value of loans and debt securities it holds The Company’s business activities and earnings are affected by general business conditions in the United States and abroad, including factors such as the level and volatility of short-term and long-term interest rates, inflation, home prices, unemployment and under-employment levels, bankruptcies, household income, consumer spending, fluctuations in both debt and equity capital markets, liquidity of the global financial markets, the availability and cost of capital and credit, investor sentiment and confidence in the financial markets, and the strength of the domestic and global economies in which the Company operates. Changes in these conditions caused by the COVID-19 pandemic adversely affected the Company’s consumer and commercial businesses and securities portfolios, its level of charge-offs and provision for credit losses, and its results of operations during 2020 and 2021, and other future changes in these conditions, whether related to the COVID-19 pandemic or otherwise, could have additional adverse effects on the Company and its businesses.

Given the high percentage of the Company’s assets represented directly or indirectly by loans, and the importance of lending to its overall business, weak economic conditions caused by COVID-19 negatively affected the Company’s business and results of operations, including new loan origination activity, existing loan utilization rates and delinquencies, defaults and the ability of customers to meet obligations under the loans. Although the effects of COVID-19 were mitigated in part by governmental programs, availability of vaccines and the Company’s measures to assist its borrowers, there can be no assurances that such measures will continue to be effective or that there will be future governmental programs. In addition, future deterioration in economic conditions, whether caused by COVID-19 or other events, could have adverse effects on loan origination activity, loan utilization rates and delinquencies, defaults and the ability of customers to meet loan obligations. The value to the Company of other assets such as investment securities, most of which are debt securities or other financial instruments supported by loans, similarly have been, and would be, negatively impacted by widespread decreases in credit quality resulting from a weakening of the economy.

In addition, volatility and uncertainty related to inflation and its effects, which could potentially contribute to poor economic conditions, may contribute to or enhance some of the risks described herein. For example, higher inflation could reduce demand for the Company’s products, adversely affect the creditworthiness of its borrowers or result in lower values for its

interest-earning assets and investment securities. Any of these effects, or others that the Company is not able to predict, could adversely affect its financial condition or results of operations.

Any deterioration in global economic conditions could damage the domestic economy or negatively impact the Company’s borrowers or other counterparties that have direct or indirect exposure to these regions. Such global disruptions, including disruptions in supply chains or geopolitical risk, can undermine investor confidence, cause a contraction of available credit, or create market volatility, any of which could have material adverse effects on the Company’s businesses, results of operations, financial condition and liquidity, even if the Company’s direct exposure to the affected region is limited. Global political trends toward nationalism and isolationism, could increase the probability of a deterioration in global economic conditions.

Changes in interest rates could reduce the Company’s net interest income The Company’s earnings are dependent to a large degree on net interest income, which is the difference between interest income from loans and investments and interest expense on deposits and borrowings. Net interest income is significantly affected by market rates of interest, which in turn are affected by prevailing economic conditions, by the fiscal and monetary policies of the federal government and by the policies of various regulatory agencies. Volatility in interest rates can also result in the flow of funds away from financial institutions into direct investments. Direct investments, such as United States government and corporate securities and other investment vehicles (including mutual funds), generally pay higher rates of return than financial institutions, because of the absence of federal insurance premiums and reserve requirements. During the first quarter of 2020, United States interest rates fell dramatically, which adversely impacted the Company’s net interest income. Interest rates remained low through 2021, which adversely affected the Company’s net interest income over the same period, and a prolonged low-interest rate environment may continue to adversely impact the Company’s net interest income in future periods. In addition, some foreign central banks have moved to a negative interest rate environment, which has exerted downward pressure on the profitability of banks in those regions. The Company’s financial condition could be damaged if this interest rate trend extends to the United States.

Conversely, when interest rates are increasing, the Company can generally be expected to earn higher net interest income. However, higher interest rates can also lead to fewer originations of loans, less liquidity in the financial markets, and higher funding costs, each of which could adversely affect the Company’s revenues and its liquidity and capital levels. Higher interest rates can also negatively affect the payment performance on loans that are linked to variable interest rates. If borrowers of variable rate loans are unable to afford higher interest payments, those borrowers may reduce or stop making payments, thereby causing the Company to incur losses and increased operational costs related to servicing a higher volume of delinquent loans.    

138    

Changes in, or the discontinuance of, the London Interbank Offered Rate (“LIBOR”) as an interest rate benchmark could adversely affect the Company’s business, financial condition and results of operations The administrator of LIBOR has announced that the publication of the most commonly used United States Dollar LIBOR settings will cease to be provided or cease to be representative after June 30, 2023. The publication of all other LIBOR settings ceased to be provided or ceased to representative as of December 31, 2021. The United States federal banking agencies have also issued guidance strongly encouraging banking organizations to cease using the United States Dollar LIBOR as a reference rate in “new” contracts by December 31, 2021, with limited exceptions.

The replacement of LIBOR is complex and could have a range of adverse impacts on the Company’s business and results of operations. The Company has various types of transactions, including derivatives, loans, bonds, and securitized products, that reference LIBOR and other Interbank Offered Rates (“IBORs”). The replacement of LIBOR and other IBORs with alternative benchmark rates and the Company’s development of products linked to alternate benchmark rates has created a number of risks for the Company, its customers, and the financial services industry more widely.

The extensive changes to documentation that govern or reference LIBOR or LIBOR-based products create a variety of execution risks for the Company. The Company may be unable to modify contracts with its counterparties to replace the reference rate for existing contracts based on or linked to LIBOR and other interest rate benchmarks with alternative reference rates by the dates set for cessation of LIBOR and other interest rate benchmarks.

The transition from LIBOR may also result in disputes, litigation or other actions with clients, counterparties or investors, including with respect to, among other things, (i) the interpretation and enforceability of provisions in LIBOR-based products such as fallback language or other related provisions, (ii) any economic, legal, operational or other impact from the fundamental differences between LIBOR and the various alterative reference rates, and (iii) any actions resulting from the Company’s interpretation and execution of its roles and responsibilities in corporate trust transactions. The transition may also result in additional inquiries or other actions from regulators regarding the Company’s preparation and readiness for the replacement of LIBOR.

The discontinuation of a LIBOR setting, changes in LIBOR or changes in market acceptance of LIBOR as a reference rate may also adversely affect the yield on loans or securities held by the Company; amounts paid on securities the Company has issued; amounts received and paid on derivative instruments it has entered into; the value of such loans, securities or derivative instruments; the trading market for securities; the terms of new loans being made using different or modified reference rates; the Company’s ability to effectively use derivative instruments to manage risk; and the availability or cost of floating-rate funding and the Company’s exposure to fluctuations in interest rates.

Changes to benchmark indices may also adversely affect the price, liquidity, value of, return on and trading for a broad array of financial products, including any LIBOR-linked securities, loans and derivatives that are included in the Company’s financial assets and liabilities.

The Company is also subject to the risk that its customers, counterparties and third-party vendors are not operationally ready to transition away from LIBOR, and the failure of such third parties to upgrade their operations to transition away from LIBOR on a timely basis could materially disrupt the Company’s operations.

Operations and Business Risk

A breach in the security of the Company’s systems, or the systems of certain third parties, could disrupt the Company’s businesses, result in the disclosure of confidential information, damage its reputation and create significant financial and legal exposure The Company experiences numerous attacks on its computer systems, software, networks and other technology assets daily, and the number of attacks is increasing. Although the Company devotes significant resources to maintain and regularly upgrade its systems and processes that are designed to protect the security of the Company’s computer systems, software, networks and other technology assets, as well as its intellectual property, and to protect the confidentiality, integrity and availability of information belonging to the Company and its customers, the Company’s security measures may not be effective. Adversaries continue to develop more sophisticated cyber attacks that could impact the Company. Many banking institutions, retailers and other companies engaged in data processing, including software and information technology service providers, have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber attacks and other means.

Attacks on financial or other institutions important to the overall functioning of the financial system could also adversely affect, directly or indirectly, aspects of the Company’s businesses. The increasing consolidation, interdependence and complexity of financial entities and technology systems increases the risk of operational failure, both for the Company and on an industry-wide basis, and means that a technology failure, cyber attack, or other information or security breach that significantly degrades, deletes or compromises the systems or data of one or more financial entities could materially affect counterparties or other market participants, including the Company.

Third parties that facilitate the Company’s business activities, including exchanges, clearinghouses, payment and ATM networks, financial intermediaries or vendors that provide services or technology solutions for the Company’s operations, could also be sources of operational and security risks to the Company, including with respect to breakdowns or failures of their systems, misconduct by their employees or cyber attacks that could affect their ability to deliver a product or service to the Company or

139    

result in lost or compromised information of the Company or its customers. The Company’s ability to implement back-up systems or other safeguards with respect to third-party systems is limited. Furthermore, an attack on or failure of a third-party system may not be revealed to the Company in a timely manner, which could compromise the Company’s ability to respond effectively. Some of these third parties may engage vendors of their own, which introduces the risk that these “fourth parties” could be the source of operational and security failures. In addition, if a third party or fourth party obtains access to the customer account data on the Company’s systems, and that party experiences a breach or misappropriates such data, the Company and its customers could suffer material harm, including heightened risk of fraudulent transactions, losses from fraudulent transactions, increased operational costs to remediate any security breach and reputational harm. These risks are expected to continue to increase as the Company expands its interconnectivity with its customers and other third parties.

During the past several years a number of retailers and hospitality companies have disclosed substantial cyber security breaches affecting debit and credit card accounts of their customers, some of whom were the Company’s cardholders and who may experience fraud on their card accounts as a result of a breach. The Company might suffer losses associated with reimbursing its customers for such fraudulent transactions, as well as for other costs related to data security compromise events, such as replacing cards associated with compromised card accounts. These attacks involving Company cards are likely to continue and could, individually or in the aggregate, have a material adverse effect on the Company’s financial condition or results of operations.

It is possible that the Company may not be able to anticipate or to implement effective preventive measures against all security breaches of these types, because the techniques used change frequently, generally increase in sophistication, often are not recognized until launched, sometimes go undetected even when successful, and originate from a wide variety of sources, including organized crime, hackers, terrorists, activists, hostile foreign governments and other external parties. Those parties may also attempt to fraudulently induce employees, customers or other users of the Company’s systems to disclose sensitive information to gain access to the Company’s data or that of its customers or clients, such as through “phishing” and other “social engineering” schemes. Other types of attacks may include computer viruses, malicious or destructive code, denial-of-service attacks, ransomware or ransom demands. During the COVID-19 pandemic, the Company has experienced increased information security risks, primarily as a result of the increase in work-from-home arrangements. These risks may increase in the future as the Company continues to increase its mobile and internet-based product offerings and expands its internal usage of web-based products and applications, which is expected to remain elevated at least as long as the COVID-19 pandemic continues. In addition, the Company’s customers often use their own devices, such as computers, smart phones and tablet computers, to

make payments and manage their accounts, and are subject to “phishing” and other attempts from cyber criminals to compromise or deny access to their accounts. The Company has limited ability to assure the safety and security of its customers’ transactions with the Company to the extent they are using their own devices, which have been, and likely will continue to be, subject to such threats.

In the event that the Company’s physical or cyber security systems are penetrated or circumvented, or an authorized user intentionally or unintentionally removes, loses or destroys operations data, serious negative consequences for the Company can follow, including significant disruption of the Company’s operations, misappropriation of confidential Company and/or customer information, or damage to the Company’s or customers’ or counterparties’ computers or systems. These consequences could result in violations of applicable privacy and other laws; financial loss to the Company or to its customers; loss of confidence in the Company’s security measures; customer dissatisfaction; significant litigation exposure; regulatory fines, penalties or intervention; reimbursement or other compensatory costs (including the costs of credit monitoring services); additional compliance costs; and harm to the Company’s reputation, all of which could adversely affect the Company.

Because the investigation of any information security breach is inherently unpredictable and would require substantial time to complete, the Company may not be able to quickly remediate the consequences of any breach, which may increase the costs, and enhance the negative consequences associated with a breach. In addition, to the extent the Company’s insurance covers aspects of any breach, such insurance may not be sufficient to cover all of the Company’s losses.

The Company relies on its employees, systems and third parties to conduct its business, and certain failures by systems or misconduct by employees or third parties could adversely affect its operations The Company operates in many different businesses in diverse markets and relies on the ability of its employees and systems to process a high number of transactions. The Company’s business, financial, accounting, data processing, and other operating systems and facilities may stop operating properly or become disabled or damaged as a result of a number of factors, including events that are out of its control. In addition to the risks posed by information security breaches, as discussed above, such systems could be compromised because of spikes in transaction volume, electrical or telecommunications outages, degradation or loss of internet or website availability, natural disasters, political or social unrest, and terrorist acts. The Company’s business operations may be adversely affected by significant disruption to the operating systems that support its businesses and customers. If backup systems are used during outages, they might not process data as quickly as do the primary systems, resulting in the potential of some data not being backed up.

The Company could also incur losses resulting from the risk of fraud by employees or persons outside the Company, unauthorized access to its computer systems, the execution of

140    

unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the internal control system and compliance requirements, and business continuation and disaster recovery. This risk of loss also includes the potential legal actions, fines or civil money penalties that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity.

Third parties provide key components of the Company’s business infrastructure, such as internet connections, network access and mutual fund distribution. While the Company has selected these third parties carefully, it does not control their actions. Any problems caused by third-party service providers, including as a result of not providing the Company their services for any reason or performing their services poorly, could adversely affect the Company’s ability to deliver products and services to the Company’s customers and otherwise to conduct its business. Replacing third-party service providers could also entail significant delay and expense. In addition, failure of third-party service providers to handle current or higher volumes of use could adversely affect the Company’s ability to deliver products and services to clients and otherwise to conduct business. Technological or financial difficulties of a third-party service provider could adversely affect the Company’s businesses to the extent those difficulties result in the interruption or discontinuation of services provided by that party.

Operational risks for large financial institutions such as the Company have generally increased in recent years, in part because of the proliferation of new technologies, implementation of work-from-home arrangements such as during the COVID-19 pandemic, the use of internet services and telecommunications technologies to conduct financial transactions, the increased number and complexity of transactions being processed, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties. In the event of a breakdown in the internal control system, improper operation of systems or improper employee or third-party actions, the Company could suffer financial loss, face legal or regulatory action and suffer damage to its reputation.

The Company could face material legal and reputational harm if it fails to safeguard personal information The Company is subject to complex and evolving laws and regulations, both inside and outside the United States, governing the privacy and protection of personal information. Individuals whose personal information may be protected by law can include the Company’s customers (and in some cases its customers’ customers), prospective customers, job applicants, employees, and the employees of the Company’s suppliers, and third parties. Complying with laws and regulations applicable to the Company’s collection, use, transfer and storage of personal information can increase operating costs, impact the development and marketing of new products or services, and reduce operational efficiency. Any mishandling or misuse of personal information by the Company or a third party affiliated

with the Company could expose the Company to litigation or regulatory fines, penalties or other sanctions.

In the United States, several states have recently enacted consumer privacy laws that impose compliance obligations with respect to personal information. In particular, the California Consumer Privacy Act (the “CCPA”) and its implementing regulations impose significant requirements on covered companies with respect to consumer data privacy rights. In November 2020, voters in the State of California approved the California Privacy Rights Act (“CPRA”), a ballot measure that amends and supplements the CCPA by, among other things, expanding certain rights relating to personal information and its use, collection, deletion, and disclosure by covered businesses. Compliance with the CCPA, the CPRA after it becomes effective, and other state statutes, common law, or regulations designed to protect consumer, employee, or job applicant personal information could potentially require substantive technology infrastructure and process changes across many of the Company’s businesses. Non-compliance with the CCPA, CPRA, or similar laws and regulations could lead to substantial regulatory fines and penalties, damages from private causes of action, and/or reputational harm. The Company cannot predict whether any pending or future state or federal legislation will be adopted, or the substance and impact of any legislation on the Company. Future legislation could result in substantial costs to the Company and could have an adverse effect on its business, financial condition and results of operations.

In addition, standards for personal data transfers from outside the United States are constantly changing, including the revisions made by the European Economic Area and Switzerland in 2021. Compliance with these changes and any future changes to data transfer or privacy requirements could potentially require the Company to make significant technological and operational changes, any of which could result in substantial costs to the Company, and failure to comply with applicable data protection and privacy laws could subject the Company to fines or regulatory oversight.

Additional risks could arise from the failure of the Company or third parties to provide adequate disclosure or transparency to the Company’s customers about the personal information collected from them and the use of such information; to receive, document, and honor the privacy preferences expressed by the Company’s customers; to protect personal information from unauthorized disclosure; or to maintain proper training on privacy practices for all employees or third parties who have access to personal information. Concerns regarding the effectiveness of the Company’s measures to safeguard personal information and abide by privacy preferences, or even the perception that those measures are inadequate, could cause the Company to lose existing or potential customers and thereby reduce its revenues. In addition, any failure or perceived failure by the Company to comply with applicable privacy or data protection laws and regulations could result in requirements to modify or cease certain operations or practices, and/or in material liabilities or regulatory fines, penalties, or other sanctions. Refer to

141    

“Supervision and Regulation” in the Company’s Annual Report on Form 10-K for additional information regarding data privacy laws and regulations. Any of these outcomes could damage the Company’s reputation and otherwise adversely affect its business.

The Company could lose market share and experience increased costs if it does not effectively develop and implement new technology The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services, including innovative ways that customers can make payments or manage their accounts, such as through the use of mobile payments, digital wallets or digital currencies. The growth of many of these technologies was accelerated as a result of the COVID-19 pandemic and the shift to increased digital activity. The Company’s continued success depends, in part, upon its ability to address customer needs by using technology to provide products and services that customers want to adopt and create additional efficiencies in the Company’s operations. When launching a new product or service or introducing a new platform for the delivery of products and services, the Company might not identify or fully appreciate new operational risks arising from those innovations or might fail to implement adequate controls to mitigate those risks. Developing and deploying new technology-driven products and services can also involve costs that the Company may not recover and divert resources away from other product development efforts. The Company may not be able to effectively develop and implement profitable new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry, including because larger competitors may have more resources to spend on developing new technologies or because non-bank competitors have a lower cost structure and more flexibility, could harm the Company’s competitive position and negatively affect its revenue and profit.

Damage to the Company’s reputation could adversely impact its business and financial results Reputation risk, or the risk to the Company’s business, earnings and capital from negative public opinion, is inherent in the Company’s business. Negative public opinion about the financial services industry generally or the Company specifically could adversely affect the Company’s ability to keep and attract customers, investors, and employees and could expose the Company to litigation and regulatory action. Negative public opinion can result from the Company’s actual or alleged conduct in any number of activities, including lending practices, cybersecurity breaches, failures to safeguard personal information, discriminating or harassing behavior of employees toward other employees or customers, mortgage servicing and foreclosure practices, compensation practices, sales practices, regulatory compliance, mergers and acquisitions, and actions taken by government regulators and community organizations in response to that conduct. In addition, failure to deliver against environmental, social and governance

(“ESG”) goals and objectives could present reputational and financial harm to the Company. Many of the Company’s stakeholders, including investors, communities, customers, and employees, have increased expectations regarding how corporations are establishing and meeting ESG objectives when considering whether to conduct business with, invest in, or otherwise work with the Company. If the Company is unable to design or execute against business strategies that support ESG initiatives, reputational damage could result, leading to a loss of customers or negative investor sentiment. Although the Company takes steps to minimize reputation risk in dealing with customers and other constituencies, the Company, as a large diversified financial services company with a high industry profile, is inherently exposed to this risk.

The Company’s business and financial performance could be adversely affected, directly or indirectly, by natural disasters, pandemics, terrorist activities, civil unrest or international hostilities Neither the occurrence nor the potential impact of natural disasters, pandemics, terrorist activities, civil unrest or international hostilities can be predicted. However, these occurrences could impact the Company directly (for example, by interrupting the Company’s systems, which could prevent the Company from obtaining deposits, originating loans and processing and controlling its flow of business; causing significant damage to the Company’s facilities; or otherwise preventing the Company from conducting business in the ordinary course), or indirectly as a result of their impact on the Company’s borrowers, depositors, other customers, vendors or other counterparties (for example, by damaging properties pledged as collateral for the Company’s loans or impairing the ability of certain borrowers to repay their loans). The Company could also suffer adverse consequences to the extent that natural disasters, pandemics, terrorist activities, civil unrest or international hostilities affect the financial markets or the economy in general or in any particular region.

During the COVID-19 pandemic, the Company experienced significant disruptions to its normal operations, including the temporary closing of branches and a sudden increase in the volume of work-from-home arrangements. In addition, the Company has been indirectly negatively affected by the pandemic’s effects on the Company’s borrowers and other customers, and by its effects on global financial markets. Many of these effects are expected to continue for the duration of the pandemic and could worsen if the pandemic continues to spread or if any vaccines are not effective over the long term (including because of lack of acceptance or because of the emergence of new COVID variants), or if governmental and other responses to the pandemic are ineffective. The COVID-19 pandemic has caused, and other future natural disasters, pandemics, terrorist activities, civil unrest or international hostilities, may cause, an increase in delinquencies, bankruptcies or defaults that could result in the Company experiencing higher levels of nonperforming assets, net charge-offs and provisions for credit losses.

142    

The United States, and in particular, the Minneapolis/St. Paul metropolitan area following the tragic events that occurred in May 2020, faced a period of significant civil unrest during 2020. Although civil unrest has not materially affected the Company’s businesses to date, similar events could, directly or indirectly, have a material adverse effect on the Company’s operations (for example, by causing shutdowns of branches or working locations of vendors or other counterparties or damaging property pledged as collateral for the Company’s loans).

The Company’s ability to mitigate the adverse consequences of these occurrences is in part dependent on the quality of the Company’s resiliency planning, and the Company’s ability, if any, to anticipate the nature of any such event that occurs. The adverse effects of natural disasters, pandemics, terrorist activities, civil unrest or international hostilities also could be increased to the extent that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other organizations and businesses that the Company transacts with, particularly those that it depends upon, but has no control over. Additionally, both the frequency and severity of some kinds of natural disasters, including wildfires, flooding, tornadoes and hurricanes, have increased, and the Company expects will continue to increase, as a result of climate change.

The Company’s business strategy, operations, financial performance and customers could be materially adversely affected by the impacts related to climate change There is an increasing concern over the risks of climate change and the impact that climate change may have on the Company and its customers and communities. The physical risks of climate change include increasing average global temperatures, rising sea levels and an increase in the frequency and severity of extreme weather events and natural disasters, including wildfires, floods, tornadoes and hurricanes. Climate shifts and the increasing frequency and severity of natural disasters reduce the Company’s ability to predict accurately the effects of natural disasters. Such disasters could disrupt the Company’s operations or the operations of customers or third parties on which the Company relies. Such disasters could also result in market volatility, negatively impact customers’ ability to pay outstanding loans, damage collateral or result in the deterioration of the value of collateral. Such disasters may also result in reduced availability of insurance, including insurance that protects property pledged as collateral for Company loans, which could negatively affect the Company’s ability to predict credit losses accurately.

Additionally, climate change concerns could result in transition risk. Transition risks could include changes in consumer preferences, new technologies, and additional legislation and regulatory requirements, including those associated with the transition to a low-carbon economy. These physical risks and transition risks could increase expenses or otherwise adversely impact the Company’s business strategy, operations, financial performance and customers. In particular, new regulations or guidance, or the attitudes of regulators, shareholders and employees regarding climate change, may affect the activities in which the Company engages and the products that the

Company offers. In addition, an increasing perspective that financial institutions, including the Company, play an important role in managing risks related to climate change, including indirectly with respect to their customers, may result in increased pressure on the Company to take additional steps to disclose and manage its climate risks and related lending and other activities. The Company could also experience increased expenses resulting from strategic planning, litigation and technology and market changes, and reputational harm as a result of negative public sentiment, regulatory scrutiny and reduced investor and stakeholder confidence due to the Company’s response to climate change and the Company’s climate change strategy.

Risks associated with climate change are continuing to evolve rapidly, making it difficult to assess the effects of climate change on the Company, and the Company expects that climate change-related risks will continue to evolve and increase over time.

Regulatory and Legal Risk

The Company is subject to extensive and evolving government regulation and supervision, which can increase the cost of doing business, limit the Company’s ability to make investments and generate revenue, and lead to costly enforcement actions Banking regulations are primarily intended to protect depositors’ funds, the federal Deposit Insurance Fund, and the United States financial system as a whole, and not the Company’s debt holders or shareholders. These regulations, and the Company’s inability to act in certain instances without receiving prior regulatory approval, affect the Company’s lending practices, capital structure, investment practices, dividend policy, ability to repurchase common stock, and ability to pursue strategic acquisitions, among other activities.

The Company expects that its business will remain subject to extensive regulation and supervision and that the level of scrutiny and the enforcement environment may fluctuate over time, based on numerous factors, including changes in the United States presidential administration or one or both houses of Congress and public sentiment regarding financial institutions (which can be influenced by scandals and other incidents that involve participants in the industry). In particular, changes in administration may result in the Company and other large financial institutions becoming subject to increased scrutiny and/or more extensive legal and regulatory requirements than under prior presidential and congressional regimes. In addition, changes in key personnel at the agencies that regulate the Company, including the federal banking regulators, may result in differing interpretations of existing rules and guidelines and potentially more stringent enforcement and more severe penalties than previously experienced. New regulations or modifications to existing regulations and supervisory expectations have increased, and may in the future increase, the Company’s costs over time and necessitate changes to the Company’s existing regulatory compliance and risk management infrastructure. In addition,

143    

regulatory changes may reduce the Company’s revenues, limit the types of financial services and products it may offer, alter the investments it makes, affect the manner in which it operates its businesses, increase its litigation and regulatory costs should it fail to appropriately comply with new or modified laws and regulatory requirements, and increase the ability of non-banks to offer competing financial services and products.

Changes to statutes, regulations or regulatory policies, or their interpretation or implementation, and/or regulatory practices, requirements or expectations, could affect the Company in substantial and unpredictable ways. Moreover, general regulatory practices, such as longer time frames to obtain regulatory approvals for acquisitions and other activities (and the resultant impact on businesses the Company may seek to acquire), could affect the Company’s ability or willingness to make certain acquisitions or introduce new products or services.

Federal law grants substantial supervisory and enforcement powers to federal banking regulators and law enforcement agencies, including, among other things, the ability to assess significant civil or criminal monetary penalties, fines, or restitution; to issue cease and desist or removal orders; and to initiate injunctive actions against banking organizations and institution-affiliated parties. The financial services industry continues to face scrutiny from bank supervisors in the examination process and stringent enforcement of regulations on both the federal and state levels, particularly with respect to mortgage-related practices, student lending practices, sales practices and related incentive compensation programs, and other consumer compliance matters, as well as compliance with Bank Secrecy Act/anti-money laundering (“BSA/AML”) requirements and sanctions compliance requirements as administered by the Office of Foreign Assets Control, and consumer protection issues more generally. This heightened regulatory scrutiny, or the results of an investigation or examination, may lead to additional regulatory investigations or enforcement actions. There is no assurance that those actions will not result in regulatory settlements or other enforcement actions against the Company, which could cause the Company material financial and reputational harm. Furthermore, a single event involving a potential violation of law or regulation may give rise to numerous and overlapping investigations and proceedings, either by multiple federal and state agencies and officials in the United States or, in some instances, regulators and other governmental officials in foreign jurisdictions. In addition, another financial institution’s violation of law or regulation relating to a business activity or practice often will give rise to an investigation of the same or similar activities or practices of the Company.

In general, the amounts paid by financial institutions in settlement of proceedings or investigations and the severity of other terms of regulatory settlements are likely to remain elevated. In some cases, governmental authorities have required criminal pleas or other extraordinary terms, including admissions of wrongdoing and the imposition of monitors, as part of such settlements, which could have significant consequences for a financial institution, including loss of customers, reputational

harm, increased exposure to civil litigation, restrictions on the ability to access the capital markets, and the inability to operate certain businesses or offer certain products for a period of time.

Non-compliance with sanctions laws and/or BSA/AML laws or failure to maintain an adequate BSA/AML compliance program can lead to significant monetary penalties and reputational damage. In addition, federal regulators evaluate the effectiveness of an applicant in combating money laundering when determining whether to approve a proposed bank merger, acquisition, restructuring, or other expansionary activity. There have been a number of significant enforcement actions against banks, broker-dealers and non-bank financial institutions with respect to sanctions laws and BSA/AML laws, and some have resulted in substantial penalties, including against the Company and U.S. Bank National Association in 2018.

Violations of laws and regulations or deemed deficiencies in risk management practices or consumer compliance also may be incorporated into the Company’s confidential supervisory ratings. A downgrade in these ratings, or these or other regulatory actions and settlements, could limit the Company’s ability to conduct expansionary activities for a period of time and require new or additional regulatory approvals before engaging in certain other business activities.

Differences in regulation can affect the Company’s ability to compete effectively The content and application of laws and regulations applicable to financial institutions vary according to the size of the institution, the jurisdictions in which the institution is organized and operates and other factors. Large institutions, such as the Company, often are subject to more stringent regulatory requirements and supervision than smaller institutions. In addition, financial technology companies and other non-bank competitors may not be subject to the prudential and consumer protection regulatory framework that applies to banks, or may be regulated by a national or state agency that does not have the same regulatory priorities or supervisory requirements as the Company’s regulators. These differences in regulation can impair the Company’s ability to compete effectively with competitors that are less regulated and that do not have similar compliance costs.

Stringent requirements related to capital and liquidity have been adopted by United States banking regulators that may limit the Company’s ability to return earnings to shareholders or operate or invest in its business United States banking regulators have adopted stringent capital- and liquidity-related standards applicable to larger banking organizations, including the Company. The rules require banks to hold more and higher quality capital as well as sufficient unencumbered liquid assets to meet certain stress scenarios defined by regulation. In November 2019, the federal banking regulators adopted two final rules (the “Tailoring Rules”) that revised the criteria for determining the applicability of regulatory capital and liquidity requirements for large United States banking organizations, including the Company and U.S. Bank National Association, and that tailored the application of the Federal

144    

Reserve’s enhanced prudential standards to large banking organizations. Although the Tailoring Rules and other recent changes to capital- and liquidity-related rules generally have simplified the regulatory framework applicable to the Company, future changes to the implementation of these rules including the common equity tier 1 capital conservation buffer, or additional capital- and liquidity-related rules, could require the Company to take further steps to increase its capital, increase its investment security holdings, divest assets or operations, or otherwise change aspects of its capital and/or liquidity measures, including in ways that may be dilutive to shareholders or could limit the Company’s ability to pay common stock dividends, repurchase its common stock, invest in its businesses or provide loans to its customers.

The effects of the COVID-19 pandemic and actions by the Federal Reserve have in the past limited and may in the future limit capital distributions, including suspension of the Company’s share repurchase program or reduction or suspension of the Company’s common stock dividend.

Additional capital and liquidity requirements may be imposed in the future. In December 2017, the Basel Committee finalized a package of revisions to the Basel III framework (commonly referred to as “Basel IV”). The changes are meant to improve the calculation of risk-weighted assets and the comparability of capital ratios. Federal banking regulators are expected to undertake rule-makings in future years to implement these revisions in the United States. The ultimate impact of revisions to the Basel III–based framework in the United States on the Company’s capital and liquidity will depend on the final rule-makings and the implementation process thereafter.

Refer to “Supervision and Regulation” in the Company’s Annual Report on Form 10-K for additional information regarding the Company’s capital and liquidity requirements.

The Company is subject to significant financial and reputation risks from potential legal liability and governmental actions The Company faces significant legal risks in its businesses, and the volume of claims and amount of damages and penalties claimed in litigation and governmental proceedings against it and other financial institutions are substantial. Customers, clients and other counterparties are making claims for substantial or indeterminate amounts of damages, while banking regulators and certain other governmental authorities have focused on enforcement. The Company is named as a defendant or is otherwise involved in many legal proceedings, including class actions and other litigation. As a participant in the financial services industry, it is likely that the Company will continue to experience a high level of litigation related to its businesses and operations in the future. Substantial legal liability or significant governmental action against the Company could materially impact the Company’s financial condition and results of operations (including because such matters may be resolved for amounts that exceed established accruals for a particular period) or cause significant reputational harm to the Company.

Since 2020, many financial institutions, including the Company, have received regulatory and governmental inquiries regarding participation directly or on behalf of customers and clients in United States government programs designed to support individuals, households and businesses impacted by the economic disruptions caused by the COVID-19 pandemic. The Company’s participation in these and other programs used 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.

The Company may be required to repurchase mortgage loans or indemnify mortgage loan purchasers as a result of breaches in contractual representations and warranties When the Company sells mortgage loans that it has originated to various parties, including GSEs, it is required to make customary representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated. The Company may be required to repurchase mortgage loans or be subject to indemnification claims in the event of a breach of contractual representations or warranties that is not remedied within a certain period. Contracts for residential mortgage loan sales to the GSEs include various types of specific remedies and penalties that could be applied if the Company does not adequately respond to repurchase requests. If economic conditions and the housing market deteriorate or the GSEs increase their claims for breached representations and warranties, the Company could have increased repurchase obligations and increased losses on repurchases, requiring material increases to its repurchase reserve.

Credit and Mortgage Business Risk

Heightened credit risk could require the Company to increase its provision for credit losses, which could have a material adverse effect on the Company’s results of operations and financial condition When the Company lends money, or commits to lend money, it incurs credit risk, or the risk of losses if its borrowers do not repay their loans. As one of the largest lenders in the United States, the credit performance of the Company’s loan portfolios significantly affects its financial results and condition. If the current economic environment were to further deteriorate, the Company’s customers may have more difficulty in repaying their loans or other obligations, which could result in a higher level of credit losses and higher provisions for credit losses. Unexpected stress on the United States economy or the local economies in which the Company does business, including the economic stress caused by the COVID-19 pandemic, has resulted, and in the future may result, in, among other things, unexpected deterioration in credit quality of the loan portfolio, or in the value of collateral securing those loans, which, during the COVID-19 pandemic caused, and in the future could cause, the Company to establish higher provisions for credit losses.

145    

The Company reserves for credit losses by establishing an allowance through a charge to earnings to provide for loan defaults and nonperformance. The Company’s allowance for loan losses is compliant with the CECL methodology, which is based on the portfolio’s historical loss experience, an evaluation of the risks associated with its loan portfolio, including the size and composition of the loan portfolio, current and foreseeable economic conditions and borrower and collateral quality. These conditions inform the Company’s expected lifetime loss estimates of the portfolio, which is the foundation for the allowance for credit losses. These forecasts and estimates require difficult, subjective, and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of the Company’s borrowers to repay their loans. The Company may not be able to accurately predict these economic conditions and/or some or all of their effects, which may, in turn, negatively impact the reliability of the process. The Company also makes loans to borrowers where it does not have or service the loan with the first lien on the property securing its loan. For loans in a junior lien position, the Company may not have access to information on the position or performance of the first lien when it is held and serviced by a third party, which may adversely affect the accuracy of the loss estimates for loans of these types. Increases in the Company’s allowance for loan losses may not be adequate to cover actual loan losses, and future provisions for loan losses could materially and adversely affect its financial results. In addition, the Company’s ability to assess the creditworthiness of its customers may be impaired if the models and approaches it uses to select, manage, and underwrite its customers become less predictive of future behaviors.

A concentration of credit and market risk in the Company’s loan portfolio could increase the potential for significant losses The Company may have higher credit risk, or experience higher credit losses, to the extent its loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral. For example, the Company’s credit risk and credit losses can increase if borrowers who engage in similar activities are uniquely or disproportionately affected by economic or market conditions, or by regulation, such as regulation related to climate change. Deterioration in economic conditions or real estate values in states or regions where the Company has relatively larger concentrations of residential or commercial real estate could result in higher credit costs. For example, once the Company’s expected acquisition of MUFG Union Bank closes, deterioration in real estate values and underlying economic conditions in California could result in significantly higher credit losses to the Company.

Changes in interest rates can impact the value of the Company’s mortgage servicing rights and mortgages held for sale, and can make its mortgage banking revenue volatile from quarter to quarter, which can reduce its earnings The Company has a portfolio of MSRs, which is the right to service a mortgage loan—collect principal, interest and

escrow amounts—for a fee, with a fair value of $3.0 billion as of December 31, 2021. The Company initially carries its MSRs using a fair value measurement of the present value of the estimated future net servicing income, which includes assumptions about the likelihood of prepayment by borrowers. Changes in interest rates can affect prepayment assumptions and thus fair value. When interest rates fall, prepayments tend to increase as borrowers refinance, and the fair value of MSRs can decrease, which in turn reduces the Company’s earnings. Further, it is possible that, because of economic conditions and/or a weak or deteriorating housing market, even when interest rates fall or remain low, mortgage originations may fall or any increase in mortgage originations may not be enough to offset the decrease in the MSRs’ value caused by the lower rates.

A decline in the soundness of other financial institutions could adversely affect the Company’s results of operations The Company’s ability to engage in routine funding or settlement transactions could be adversely affected by the actions and commercial soundness of other domestic or foreign financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. The Company has exposure to many different counterparties, and the Company routinely executes and settles transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. As a result, defaults by, or even rumors or questions about, the soundness of one or more financial services institutions, or the financial services industry generally, could lead to losses or defaults by the Company or by other institutions and impact the Company’s predominately United States–based businesses or the less significant merchant processing, corporate trust and fund administration services businesses it operates in foreign countries. Many of these transactions expose the Company to credit risk in the event of a default by a counterparty or client. In addition, the Company’s credit risk may be further increased when the collateral held by the Company cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due the Company. There is no assurance that any such losses would not adversely affect the Company’s results of operations.

Change in residual value of leased assets may have an adverse impact on the Company’s financial results The Company engages in leasing activities and is subject to the risk that the residual value of the property under lease will be less than the Company’s recorded asset value. Adverse changes in the residual value of leased assets can have a negative impact on the Company’s financial results. The risk of changes in the realized value of the leased assets compared to recorded residual values depends on many factors outside of the Company’s control, including supply and demand for the assets, condition of the assets at the end of the lease term, and other economic factors.

146    

Liquidity Risk

If the Company does not effectively manage its liquidity, its business could suffer The Company’s liquidity is essential for the operation of its business. Market conditions, unforeseen outflows of funds or other events could negatively affect the Company’s level or cost of funding, affecting its ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, and fund asset growth and new business transactions at a reasonable cost and in a timely manner. If the Company’s access to stable and low-cost sources of funding, such as customer deposits, is reduced, the Company might need to use alternative funding, which could be more expensive or of limited availability. Any substantial, unexpected or prolonged changes in the level or cost of liquidity could adversely affect the Company’s business.

Loss of customer deposits could increase the Company’s funding costs The Company relies on bank deposits to be a low-cost and stable source of funding. The Company competes with banks and other financial services companies for deposits, including those that offer on-line channels. If the Company’s competitors raise the interest rates they pay on deposits, the Company’s funding costs may increase, either because the Company raises the interest rates it pays on deposits to avoid losing deposits to competitors or because the Company loses deposits to competitors and must rely on more expensive sources of funding. Higher funding costs reduce the Company’s net interest margin and net interest income. Checking and savings account balances and other forms of customer deposits may decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. When customers move money out of bank deposits and into other investments, the Company may lose a relatively low-cost source of funds, increasing the Company’s funding costs and reducing the Company’s net interest income.

The Company relies on dividends from its subsidiaries for its liquidity needs, and the payment of those dividends is limited by laws and regulations The Company is a separate and distinct legal entity from U.S. Bank National Association and its non-bank subsidiaries. The Company receives a significant portion of its cash from dividends paid by its subsidiaries. These dividends are the principal source of funds to pay dividends on the Company’s stock and interest and principal on its debt. Various federal and state laws and regulations limit the amount of dividends that U.S. Bank National Association and certain of its non-bank subsidiaries may pay to the Company without regulatory approval. Also, the Company’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to prior claims of the subsidiary’s creditors, except to the extent that any of the Company’s claims as a creditor of that subsidiary may be recognized. Refer to “Supervision and Regulation” in the Company’s Annual Report on Form 10-K for additional information regarding limitations on the amount of dividends U.S. Bank National Association may pay.

Competitive and Strategic Risk

The financial services industry is highly competitive, and competitive pressures could intensify and adversely affect the Company’s financial results The Company operates in a highly competitive industry that could become even more competitive as a result of legislative, regulatory and technological changes, as well as continued industry consolidation, which may increase in connection with current economic and market conditions. This consolidation may produce larger, better-capitalized and more geographically diverse companies that are capable of offering a wider array of financial products and services at more competitive prices. The Company competes with other commercial banks, savings and loan associations, mutual savings banks, finance companies, mortgage banking companies, credit unions, investment companies, credit card companies, and a variety of other financial services and advisory companies. Legislative or regulatory changes also could lead to increased competition in the financial services sector. For example, the Economic Growth Act and the Tailoring Rules have reduced the regulatory burden of large bank holding companies, including the Company and some of its competitors, and raised the asset thresholds at which more onerous requirements apply, which could cause certain large bank holding companies with less than $250 billion in total consolidated assets, which were previously subject to more stringent enhanced prudential standards, to become more competitive or to pursue expansion more aggressively.

The adoption and rapid growth of new technologies, including cryptocurrencies and blockchain and other distributed ledger technologies, have required the Company to invest resources to adapt its systems, products and services, and it expects to continue to make similar investments. In addition, technology has lowered barriers to entry and made it possible for non-banks to offer products and services, such as loans and payment services, that traditionally were banking products, and made it possible for technology companies to compete with financial institutions in providing electronic, internet-based, and mobile phone–based financial solutions. Competition with non-banks, including technology companies, to provide financial products and services is intensifying. In particular, the activity of financial technology companies (“fintechs”) has grown significantly over recent years and is expected to continue to grow. Fintechs have and may continue to offer bank or bank-like products. For example, a number of fintechs have applied for bank or industrial loan charters, which, in some cases, have been granted. In addition, other fintechs have partnered with existing banks to allow them to offer deposit products or payment services to their customers. Many of these companies, including the Company’s competitors, have fewer regulatory constraints, and some have lower cost structures, in part due to lack of physical structures. Also, the potential need to adapt to industry changes in information technology systems, on which the Company and financial services industry are highly dependent, could present operational issues and require capital spending. The Company’s ability to

147    

compete successfully depends on a number of factors, including, among others, its ability to develop and execute strategic plans and initiatives; developing, maintaining and building long-term customer relationships based on quality service, competitive prices, high ethical standards and safe, sound assets; and industry and general economic trends. A failure to compete effectively could contribute to downward price pressure on the Company’s products or services or a loss of market share.

The Company may need to lower prices on existing products and services and develop and introduce new products and services to maintain market share The Company’s success depends, in part, on its ability to adapt its products and services to evolving industry standards. There is increasing pressure to provide products and services at lower prices. Lower prices can reduce the Company’s net interest margin and revenues from its fee-based products and services. In addition, the adoption of new technologies or further developments in current technologies require the Company to make substantial expenditures to modify or adapt its existing products and services. Also, these and other capital investments in the Company’s businesses may not produce expected growth in earnings anticipated at the time of the expenditure. The Company might not be successful in developing or introducing new products and services, adapting to changing customer preferences and spending and saving habits (which may be altered significantly and with little warning, such as during the COVID-19 pandemic), achieving market acceptance of its products and services, or sufficiently developing and maintaining loyal customer relationships.

The Company may not be able to complete future acquisitions, and completed acquisitions may not produce revenue enhancements or cost savings at levels or within timeframes originally anticipated, may result in unforeseen integration difficulties, and may dilute existing shareholders’ interests The Company regularly explores opportunities to acquire financial services businesses or assets and may also consider opportunities to acquire other banks or financial institutions. The Company cannot predict the number, size or timing of acquisitions it might pursue.

The Company must generally receive federal regulatory approval before it can acquire a bank or bank holding company. The Company’s ability to pursue or complete an attractive acquisition could be negatively impacted by regulatory delay or other regulatory issues. The Company cannot be certain when or if, or on what terms and conditions, any required regulatory approvals will be granted. For example, the Company may be required to sell branches as a condition to receiving regulatory approval for bank acquisitions. If the Company commits certain regulatory violations, including those that result in a downgrade in certain of the Company’s bank regulatory ratings, governmental authorities could, as a consequence, preclude it from pursuing future acquisitions for a period of time.

In July 2021, the United States presidential administration issued an executive order on competition, which included

provisions relating to bank mergers. These provisions encourage the Department of Justice and the federal banking regulators to update guidelines on banking mergers and to provide more scrutiny of bank mergers. A number of large bank deals that were pending at the time of the executive order have not yet obtained approval, or obtained approval on an extended time frame. The Company is unable to predict what impact the executive order or any updated guidelines on banking mergers the Department of Justice or federal banking regulators may implement will have on the timing of or ability to obtain regulatory approvals of mergers, including its pending acquisition of MUFG Union Bank. In addition, changes in personnel at the Company’s federal banking regulators or shifts in public or Congressional sentiment regarding bank mergers could result in additional requirements on, or scrutiny of, bank mergers, any of which could make it more difficult for banking organizations to obtain merger approvals. The Company is unable to predict the nature or scope of any such changes, any of which could adversely affect its business or the approval of its pending acquisition of MUFG Union Bank.

If the Company’s pending acquisition of MUFG Union Bank is not completed for any reason, the Company’s ongoing business may be adversely affected and, without realizing any of the benefits of having completed the merger, the Company would be subject to a number of risks. These risks include potential negative reactions from the financial markets or the Company’s customers, including negative effects on the Company’s stock price or reputation. In addition, the Company will have incurred substantial expenses relating to the merger, including legal, accounting, and other fees, whether or not the merger is completed, and the Company’s management will have devoted substantial time and resources to the merger that would otherwise have been devoted to other opportunities that may have been more beneficial for the Company.

There can be no assurance that acquisitions the Company completes will have the anticipated positive results, including results related to expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits. Integration efforts could divert management’s attention and resources, which could adversely affect the Company’s operations or results. The integration could result in higher than expected customer loss, deposit attrition, loss of key employees, disruption of the Company’s businesses or the businesses of the acquired company, or otherwise adversely affect the Company’s ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition. Also, the negative effect of any divestitures required by regulatory authorities in acquisitions or business combinations may be greater than expected. In addition, future acquisitions may also expose the Company to increased legal or regulatory risks. Finally, future acquisitions could be material to the Company, and it may issue additional shares of stock to pay for those acquisitions, which would dilute current shareholders’ ownership interests.

148    

Accounting and Tax Risk

The Company’s reported financial results depend on management’s selection of accounting methods and certain assumptions and estimates, which, if incorrect, could cause unexpected losses in the future The Company’s accounting policies and methods are fundamental to how the Company records and reports its financial condition and results of operations. The Company’s management must exercise judgment in selecting and applying many of these accounting policies and methods, so they comply with generally accepted accounting principles and reflect management’s judgment regarding the most appropriate manner to report the Company’s financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances, yet might result in the Company’s reporting materially different results than would have been reported under a different alternative.

Certain accounting policies are critical to presenting the Company’s financial condition and results of operations. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include the allowance for credit losses, estimations of fair value, the valuation of MSRs, and income taxes. Because of the uncertainty of estimates involved in these matters, the Company may be required to do one or more of the following: significantly increase the allowance for credit losses and/or sustain credit losses that are significantly higher than the reserve provided, recognize significant losses on the remeasurement of certain asset and liability balances, or significantly increase its accrued taxes liability. For more information, refer to “Critical Accounting Policies” in this Annual Report.

The Company’s investments in certain tax-advantaged projects may not generate returns as anticipated and may have an adverse impact on the Company’s financial results The Company invests in certain tax-advantaged projects promoting affordable housing, community development and renewable energy resources. The Company’s investments in these projects are designed to generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, over specified time periods. The Company is subject to the risk that previously recorded tax credits, which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level, will fail to meet certain government compliance requirements and will not be able to be realized. The possible inability to realize these tax credit and other tax benefits can have a negative impact on the Company’s financial results. The risk of not being able to realize the tax credits and other tax benefits depends on many factors outside of the Company’s control, including changes in the applicable tax code and the ability of the projects to be completed.

General Risk Factors

The Company’s framework for managing risks may not be effective in mitigating risk and loss to the Company The Company’s risk management framework seeks to mitigate risk and loss. The Company has established processes and procedures intended to identify, measure, monitor, report, and analyze the types of risk to which it is subject, including liquidity risk, credit risk, market risk, interest rate risk, compliance risk, strategic risk, reputation risk, and operational risk related to its employees, systems and vendors, among others. However, as with any risk management framework, there are inherent limitations to the Company’s risk management strategies as there may exist, or develop in the future, risks that it has not appropriately anticipated or identified. In addition, the Company relies on quantitative models to measure certain risks and to estimate certain financial values, and these models could fail to predict future events or exposures accurately. The Company must also develop and maintain a culture of risk management among its employees, as well as manage risks associated with third parties, and could fail to do so effectively. If the Company’s risk management framework proves ineffective, the Company could incur litigation and negative regulatory consequences, and suffer unexpected losses that could affect its financial condition or results of operations.

The Company’s business could suffer if it fails to attract and retain skilled employees The Company’s success depends, in large part, on its ability to attract and retain key employees. Competition for the best people in most activities the Company engages in can be intense.

COVID-19 has had significant effects on labor and employment, including heightened pressures on employers to increase compensation and provide work-from-home and other flexible working arrangements. During the COVID-19 pandemic, employees have shifted their focus to expectations that extend beyond compensation, including better work-life balance, improved advancement opportunities and improved training, and many businesses, including the Company, have experienced higher rates of turnover as a result of such changes. The Company’s ability to compete successfully for talent has been and may continue to be affected by its ability to adapt quickly to such shifts in employee focus, and there is no assurance that these developments will not cause increased turnover or impede the Company’s ability to retain and attract the highest caliber employees.

A downgrade in the Company’s credit ratings could have a material adverse effect on its liquidity, funding costs and access to capital markets The Company’s credit ratings, which are subject credit agencies’ ongoing review of a number of factors, including factors not within the Company’s control, are important to the Company’s liquidity. A reduction in one or more of the Company’s credit ratings could adversely affect its liquidity, increase its funding costs or limit its access to the capital markets. Further, a downgrade could decrease the number of investors and counterparties willing or able, contractually or

149    

otherwise, to do business with or lend to the Company, thereby adversely affecting the Company’s competitive position. There can be no assurance that the Company will maintain its current ratings and outlooks.

Changes in accounting standards could materially impact the Company’s financial statements From time to time, the Financial Accounting Standards Board and the United States Securities and Exchange Commission change the financial

accounting and reporting standards that govern the preparation of the Company’s financial statements. These changes can be hard to predict and can materially impact how the Company records and reports its financial condition and results of operations. The Company could be required to apply a new or revised standard retroactively or apply an existing standard differently, on a retroactive basis, in each case potentially resulting in the Company restating prior period financial statements.

150    

Managing Committee

Andrew Cecere

Mr. Cecere is Chairman, President and Chief Executive Officer of U.S. Bancorp. Mr. Cecere, 61, has served as President of U.S. Bancorp since January 2016, Chief Executive Officer since April 2017 and Chairman since April 2018. He also served as Vice Chairman and Chief Operating Officer from January 2015 to January 2016 and was U.S. Bancorp’s Vice Chairman and Chief Financial Officer from February 2007 until January 2015. Until that time, he served as Vice Chairman, Wealth Management and Investment Services, of U.S. Bancorp since the merger of Firstar Corporation and U.S. Bancorp in February 2001. Previously, he had served as an executive officer of the former U.S. Bancorp, including as Chief Financial Officer from May 2000 through February 2001.

Elcio R.T. Barcelos

Mr. Barcelos is Senior Executive Vice President and Chief Human Resources Officer of U.S. Bancorp. Mr. Barcelos, 51, has served in this position since joining U.S. Bancorp in September 2020. From April 2018 until August 2020, he served as Senior Vice President and Chief People and Places Officer of the Federal National Mortgage Association (Fannie Mae), having served as Senior Vice President, Human Resources of the DXC Technology Company from April 2017 to March 2018. Previously, Mr. Barcelos served as Senior Vice President and Head of Human Resources for the Enterprise Services business of Hewlett Packard Enterprise Company from June 2015 to April 2017, and in other human resources senior leadership positions at Hewlett-Packard Company and Hewlett Packard Enterprise Company from July 2009 to June 2015. He previously served in various leadership roles at Wells Fargo and Bank of America.

James L. Chosy

Mr. Chosy is Senior Executive Vice President and General Counsel of U.S. Bancorp. Mr. Chosy, 58, has served in this position since March 2013. He also served as Corporate Secretary of U.S. Bancorp from March 2013 until April 2016. From 2001 to 2013, he served as the General Counsel and Secretary of Piper Jaffray Companies. From 1995 to 2001, Mr. Chosy was Vice President and Associate General Counsel of U.S. Bancorp, having also served as Assistant Secretary of U.S. Bancorp from 1995 through 2000 and as Secretary from 2000 until 2001.

Gregory G. Cunningham

Mr. Cunningham is Senior Executive Vice President and Chief Diversity Officer of U.S. Bancorp. Mr. Cunningham, 58, has served in this position since July 2020. From July 2019 until July 2020, he served as Senior Vice President and Chief Diversity

Officer of U.S. Bancorp, having served as Vice President of Customer Engagement of U.S. Bancorp from October 2015, when he joined U.S. Bancorp, until July 2019. Previously, Mr. Cunningham served in various roles in the marketing department of Target Corporation from January 1998 until March 2015.

Terrance R. Dolan

Mr. Dolan is Vice Chair and Chief Financial Officer of U.S. Bancorp. Mr. Dolan, 60, has served in this position since August 2016. From July 2010 to July 2016, he served as Vice Chair, Wealth Management and Investment Services, of U.S. Bancorp. From September 1998 to July 2010, Mr. Dolan served as U.S. Bancorp’s Controller. He additionally held the title of Executive Vice President from January 2002 until June 2010 and Senior Vice President from September 1998 until January 2002.

Gunjan Kedia

Ms. Kedia is Vice Chair, Wealth Management and Investment Services, of U.S. Bancorp. Ms. Kedia, 51, has served in this position since joining U.S. Bancorp in December 2016. From October 2008 until May 2016, she served as Executive Vice President of State Street Corporation where she led the core investment servicing business in North and South America and served as a member of State Street’s management committee, its senior most strategy and policy committee. Previously, Ms. Kedia was an Executive Vice President of global product management at Bank of New York Mellon from 2004 to 2008 and a Partner and associate at McKinsey from 1996 to 2004.

James B. Kelligrew

Mr. Kelligrew is Vice Chair, Corporate and Commercial Banking, of U.S. Bancorp. Mr. Kelligrew, 56, has served in this position since January 2016. From March 2014 until December 2015, he served as Executive Vice President, Fixed Income and Capital Markets, of U.S. Bancorp, having served as Executive Vice President, Credit Fixed Income, of U.S. Bancorp from May 2009 to March 2014. Prior to that time, he held various leadership positions with Wells Fargo Securities from 2003 to 2009.

Shailesh M. Kotwal

Mr. Kotwal is Vice Chair, Payment Services, of U.S. Bancorp. Mr. Kotwal, 57, has served in this position since joining U.S. Bancorp in March 2015. From July 2008 until May 2014, he served as Executive Vice President of TD Bank Group with responsibility for retail banking products and services and as Chair of its enterprise payments council. From 2006 until 2008, he served as President, International, of eFunds Corporation. Previously, Mr. Kotwal served in various leadership roles at American Express Company from 1989 until 2006, including responsibility for operations in North and South America, Europe and the Asia-Pacific regions.

151    

Katherine B. Quinn

Ms. Quinn is Vice Chair and Chief Administrative Officer of U.S. Bancorp. Ms. Quinn, 57, has served in this position since April 2017. From September 2013 to April 2017, she served as Executive Vice President and Chief Strategy and Reputation Officer of U.S. Bancorp and has served on U.S. Bancorp’s Managing Committee since January 2015. From September 2010 until January 2013, she served as Chief Marketing Officer of WellPoint, Inc. (now known as Anthem, Inc.), having served as Head of Corporate Marketing of WellPoint from July 2005 until September 2010.

Jodi L. Richard

Ms. Richard is Vice Chair and Chief Risk Officer of U.S. Bancorp. Ms. Richard, 53, has served in this position since October 2018. She served as Executive Vice President and Chief Operational Risk Officer of U.S. Bancorp from January 2018 until October 2018, having served as Senior Vice President and Chief Operational Risk Officer from 2014 until January 2018. Prior to that time, Ms. Richard held various senior leadership roles at HSBC from 2003 until 2014, including Executive Vice President and Head of Operational Risk and Internal Control at HSBC North America from 2008 to 2014. Ms. Richard started her career at the Office of the Comptroller of the Currency in 1990 as a national bank examiner.

Mark G. Runkel

Mr. Runkel is Senior Executive Vice President and Chief Transformation Officer of U.S. Bancorp. Mr. Runkel, 45, has served in this position since August 2021. From December 2013 to August 2021, he served as Senior Executive Vice President and Chief Credit Officer. From February 2011 until December 2013, he served as Senior Vice President and Credit Risk Group Manager of U.S. Bancorp Retail and Payment Services Credit Risk Management, having served as Senior Vice President and Risk Manager of U.S. Bancorp Retail and Small Business Credit

Risk Management from June 2009 until February 2011. From March 2005 until May 2009, he served as Vice President and Risk Manager of U.S. Bancorp.

Dominic V. Venturo

Mr. Venturo is Senior Executive Vice President and Chief Digital Officer of U.S. Bancorp. Mr. Venturo, 55, has served in this position since July 2020. From January 2015 until July 2020, he served as Executive Vice President and Chief Innovation Officer of U.S. Bancorp, having served as Senior Vice President and Chief Innovation Officer of U.S. Bancorp Payment Services from January 2010 until January 2015. From January 2007 to December 2009, Mr. Venturo served as Senior Vice President and Chief Innovation Officer of U.S. Bancorp Retail Payment Solutions. Prior to that time, he served as Senior Vice President and held product management positions in various U.S. Bancorp Payment Services business lines from December 1998 to December 2006.

Jeffry H. von Gillern

Mr. von Gillern is Vice Chair, Technology and Operations Services, of U.S. Bancorp. Mr. von Gillern, 56, has served in this position since July 2010. From April 2001, when he joined U.S. Bancorp, until July 2010, Mr. von Gillern served as Executive Vice President of U.S. Bancorp, additionally serving as Chief Information Officer from July 2007 until July 2010.

Timothy A. Welsh

Mr. Welsh is Vice Chair, Consumer and Business Banking, of U.S. Bancorp. Mr. Welsh, 56, has served in this position since March 2019. Prior to that, he served as Vice Chair, Consumer Banking Sales and Support since joining U.S. Bancorp in July 2017. From July 2006 until June 2017, he served as a Senior Partner at McKinsey & Company where he specialized in financial services and the consumer experience. Previously, Mr. Welsh served as a Partner at McKinsey from 1999 to 2006.

152    

Directors

Andrew Cecere1,3,7

Chairman, President and Chief Executive Officer

U.S. Bancorp

Warner L. Baxter2,4

Executive Chairman and Former Chairman,

President and Chief Executive Officer

Ameren Corporation

(Energy)

Dorothy J. Bridges1,6,7

Former Senior Vice President

Federal Reserve Bank of Minneapolis

(Government)

Elizabeth L. Buse2,3

Former Chief Executive Officer

Monitise PLC

(Financial services)

Kimberly N. Ellison-Taylor2,6

Founder and Chief Executive Officer

KET Solutions, LLC

(Technology)

Kimberly J. Harris1,3,5

Retired President and Chief Executive Officer

Puget Energy, Inc.

(Energy)

Roland A. Hernandez1,3,5

Founding Principal and Chief Executive Officer

Hernandez Media Ventures

(Media)

Olivia F. Kirtley1,4,5

Business Consultant

(Consulting)

Karen S. Lynch1,2,4

President and Chief Executive Officer

CVS Health Corporation

(Health care)

Richard P. McKenney1,5,7

President and Chief Executive Officer

Unum Group

(Financial protection benefits)

Yusuf I. Mehdi6,7

Corporate Vice President

Microsoft Corporation

(Technology)

John P. Wiehoff6,7

Retired Chairman and Chief Executive Officer

C.H. Robinson Worldwide, Inc.

(Transportation and logistics services)

Scott W. Wine1,2,4

Chief Executive Officer

CNH Industrial N.V.

(Agricultural machinery)

1. Executive Committee

2. Audit Committee

3. Capital Planning Committee

4. Compensation and Human Resources Committee

5. Governance Committee

6. Public Responsibility Committee

7. Risk Management Committee

153