# EDGAR Filing Document

**Accession Number:** 0000036104
**File Stem:** 0001193125-23-062834
**Filing Date:** 2023-3
**Character Count:** 289953
**Document Hash:** 9ae59cb6bab0befa1d2f23885e2e4e89
**Contains OCR:** False
**Source Format:** 

## Filing Content

## Filing Summary
**0001193125-23-062834.hdr.sgml**: 20230307

**ACCESSION NUMBER**: 0001193125-23-062834

**CONFORMED SUBMISSION TYPE**: ARS

**PUBLIC DOCUMENT COUNT**: 1

**CONFORMED PERIOD OF REPORT**: 20221231

**FILED AS OF DATE**: 20230307

**DATE AS OF CHANGE**: 20230307

**EFFECTIVENESS DATE**: 20230307

**FILER**: 

**COMPANY DATA:**
- **COMPANY CONFORMED NAME:** US BANCORP \DE\
- **CENTRAL INDEX KEY:** 0000036104
- **STANDARD INDUSTRIAL CLASSIFICATION:** NATIONAL COMMERCIAL BANKS [6021]
- **IRS NUMBER:** 410255900
- **STATE OF INCORPORATION:** DE
- **FISCAL YEAR END:** 1231

**FILING VALUES:**
- **FORM TYPE:** ARS
- **SEC ACT:** 1934 Act
- **SEC FILE NUMBER:** 001-06880
- **FILM NUMBER:** 23712185

**BUSINESS ADDRESS:**
- **STREET 1:** U.S. BANCORP
- **STREET 2:** 800 NICOLLET MALL
- **CITY:** MINNEAPOLIS
- **STATE:** MN
- **ZIP:** 55402-7020
- **BUSINESS PHONE:** 651-466-3000

**MAIL ADDRESS:**
- **STREET 1:** U.S. BANCORP
- **STREET 2:** 800 NICOLLET MALL
- **CITY:** MINNEAPOLIS
- **STATE:** MN
- **ZIP:** 55402-7020

**FORMER COMPANY:**
- **FORMER CONFORMED NAME:** FIRST BANK SYSTEM INC
- **DATE OF NAME CHANGE:** 19920703

**FORMER COMPANY:**
- **FORMER CONFORMED NAME:** FIRST BANK STOCK CORP
- **DATE OF NAME CHANGE:** 19720317

### Attached PDF Documents

**Attachment 1:** `d410791dars.pdf`

# CREATING THE FUTURE NOW

![img-0.jpeg](img-0.jpeg)

## Simplifying and accelerating supply-chain financing

A constant over the past several years has been unprecedented stress in the global supply chain. To help lessen the burden, we entered into an agreement with trade-finance fintech LiquidX to expedite and simplify supply chain transactions.

This collaboration pairs our strong balance sheet with LiquidX's streamlined platform technology to address supply chain finance friction and cash flow challenges facing many companies. Suppliers and buyers can connect their supply chain payment systems directly to U.S. Bank and transact through LiquidX's easy-to-use platform. Our financing solutions delivered through this collaboration enable suppliers to be paid nearly immediately and buyers to receive extended payment terms.

![img-1.jpeg](img-1.jpeg)

## Helping clients track ESG data

With investors' increasing interest in companies that are socially responsible and can prove it, there are new and higher standards for companies to meet. That's why we partnered with Sustainalytics, a Morningstar company and a leading global provider of environmental, social and governance (ESG) research and ratings, to offer ESG data solutions to U.S. Bank Global Fund Services clients. Where independent ESG analytics and reporting services are required, clients will have access to a range of derived fund-level sustainability measures applicable to their portfolio.

We continued to grow our commercial real estate (CRE) team in 2022, both geographically and in terms of capabilities. First, we expanded into Florida and built a team with extensive experience there. Additionally, we launched a new middle market commercial real estate team to grow our business with midsize developers and investors in key metro areas.

![img-2.jpeg](img-2.jpeg)

9

## STRIVING FOR SIMPLICITY

![img-3.jpeg](img-3.jpeg)

# Powering potential for our customers

Powering potential includes removing barriers to success. That's why we are focused on making things simpler both in how we work, and in the products and services we provide. But simple is not the same as basic. We're excited about the new ways we're making life easier for customers' everyday money matters.

## A new and improved approach to checking

While more and more of us may no longer write out physical checks to pay for purchases or bills, our checking accounts are still the foundation of our financial world. How we use our accounts has changed, though. So, we launched the U.S. Bank Smartly® Checking and U.S. Bank Smart Rewards® program to help customers maximize their money, smartly.

The benefits and features include lowered or even zero monthly maintenance fees, and no-fee overdraft protection for transfers as part of our Overdraft Fee Forgiven program. Based on their relationship with the bank, customers can also enjoy waived fees for non-U.S. Bank ATMs; a savings interest rate lift; 0.25% off on mortgage closing costs; and 100 free trades of online investing. Customers who meet balance minimums or other qualifiers can then enroll in the U.S. Bank Smart Rewards® program and unlock more benefits, like higher interest rates on savings and discounts on mortgage closing costs, based on their total balances throughout the bank.

Customers who open a U.S. Bank Smartly® Checking account can also enroll in the U.S. Bank Smart Rewards® program and unlock more benefits based on their total qualifying balances throughout the bank.

10 U.S. Bancorp 2022 Annual Report | usbank.com/AR2022

# STRIVING FOR SIMPLICITY

![img-4.jpeg](img-4.jpeg)

![img-5.jpeg](img-5.jpeg)

The new **U.S. Bank Shopper Cash Rewards® Card** allows cardmembers to earn up to 6% cash back on purchases at two retailers of their choice.

## Helping customers get more for their money

Remember carrying multiple credit cards for all your favorite retailers? Well, we've made shopping as a loyalty customer a lot more convenient with the new **U.S. Bank Shopper Cash Rewards® Card**. This single card allows cardmembers to earn up to 6% cash back on purchases at two retailers of their choice out of a list that includes big brands such as Amazon.comTM, Home Depot® and Walmart®. Cardmembers also can change which retailers they receive cash back from, a feature that can help them save money when they know they will be making a significant purchase. The U.S. Bank Shopper Cash Rewards® Card also gives cardmembers up to 3% cash back on their top choice between gas stations and EV charging stations, wholesale clubs such as Costco Wholesale® and Sam's Clubs®, or bills and home utilities - plus 1.5% cash back on everything else. In addition, the card offers 5.5% cash back on hotels and car rentals listed and booked directly in the U.S. Bank Rewards Center.

## Equipping customers with financial tools to reach their goals

Banking is about more than moving your money around. It's about understanding how to use your money in ways that help you achieve your goals. That's why we added a new Goals feature to our mobile app and online banking - giving customers an amazing, personalized experience. Every day customers are adding new goals in the app - everything from 'Buy a Home,' 'Grow My Family,' 'Start or Grow My Business,' 'Pursue a Passion' - where it's easy to compile and chart their progress. Then, we give them the tools, guidance and pathways to reach those goals. We're the first bank to approach behavioral science the way we have, designing digital plus human experiences. In 2022, we helped more than 330,000 customers plan for or achieve more than 400,000 meaningful goals and outcomes in their lives.

11

# STRIVING FOR SIMPLICITY

## The first Spanish-language voice assistant for banking

U.S. Bank is the first financial institution in the United States to offer Spanish-speaking customers the ability to bank by voice in their preferred language via mobile app. Asistente Inteligente de U.S. BankTM is a Spanish-language version of our best-in-class Smart Assistant in the U.S. Bank Mobile App with all the same features and functionality as the popular English-language version.

Customers who set their preferred language to Spanish in the U.S. Bank Mobile App can now check their balance and transactions, transfer and send money, track their credit score, lock and unlock their card, make payments, and quickly search for and complete many other functions - just by talking into their smartphone in Spanish. If they prefer to text instead of talk, Asistente Inteligente de U.S. BankTM supports that too.1

## A new technology for Wealth Management and Investment Services clients

We hit an exciting milestone in 2022 for Wealth Management and Investment Services clients. After two years of migration groundwork, we’ve converted nearly 10,000 client accounts to our new cutting-edge and scalable SEI Wealth PlatformTM. The platform is what we use to hold (custody) customers’ cash and assets and manage their financial transactions across global markets. The new technology is a critical step in positioning our business and our clients for the future. SEI Wealth PlatformTM will support our growth through robust servicing capabilities, as well as allowing transactions across multiple markets and currencies, to meet the demands of our global client base.

![img-6.jpeg](img-6.jpeg)

## An overall leader in mobile banking

Javelin Strategy & Research’s 2022 Digital Banking Scorecard recognized U.S. Bank as the category leader in five out of six mobile banking categories - even more than last year - and a category leader in an additional two categories for Online Banking.

![img-7.jpeg](img-7.jpeg)

## Empowering student-athletes to build long-term wealth

Student-athletes have an opportunity to score big with the new policies that allow high school and college athletes to monetize the use of their name, image and likeness (NIL), and we’re helping them make the most of it. We teamed up with Opendorse, the leading technology provider in athlete endorsement, to empower student-athletes with free financial programming. Our financial education and college banking experts worked with Opendorse curriculum specialists to create U.S. Bank Financial FitnessTM, the customized financial literacy program curated specifically for student-athletes to learn how to game-plan for creating short-term and long-term wealth for their new income stream.

1. Some services may only be available in English.

12 U.S. Bancorp 2022 Annual Report | usbank.com/AR2022

## BEING THE MOST TRUSTED CHOICE

![img-8.jpeg](img-8.jpeg)

![img-9.jpeg](img-9.jpeg)

This is the **eighth consecutive year** we have earned this honor, and we're one of only three U.S.-based banks honored.

'World's Most Ethical Companies' and 'Ethisphere' names and marks are registered trademarks of Ethisphere LLC.

# Powering potential for success

Our employees work hard every day to earn and keep the trust of the customers and communities we serve. We know that trust is a key factor when customers decide who they want to do business with. Being the most trusted choice also means being a good corporate citizen. For us, doing business in an environmentally sustainable and socially responsible manner is also a driver of innovation - today and for generations to come.

We're proud to have received ongoing recognition for our commitment to ethics, accountability and social responsibility. In 2022:

- • We were once again named one of the World's Most Ethical Companies® by Ethisphere Institute, a global leader in defining and advancing the standards of ethical business practices. This is the eighth consecutive year we have earned this honor, and we're one of only three U.S.-based banks honored.
- • Fortune® magazine recognized us as one of the 2022 World's Most Admired Companies, naming us No. 1 in the Superregional Banks industry category for the 12th consecutive year. Within this category, we topped the list in seven of the nine key attributes of reputation: People Management, Use of Corporate Assets, Social Responsibility, Quality of Management, Financial Soundness, Long-Term Investment Value and Quality of Products/Services.

13

# BEING THE MOST TRUSTED CHOICE

# Building trust through corporate citizenship

As a financial services provider, our Environmental, Social and Governance (ESG) efforts reflect our commitment to being a responsible corporate citizen. This includes our work to meet our Community Reinvestment Act (CRA) goals, to drive social and environmental impact while delivering for customers and to dedicate ourselves to creating an inclusive workplace.

You can learn more about our progress in our 2021 ESG report and our Task Force on Climate-related Financial Disclosures report published in December. Our 2022 ESG report is expected later this year. In the interim, below we've highlighted some key advancements we made in 2022 to enable a sustainable future and increase equity, access and economic empowerment:

![img-10.jpeg](img-10.jpeg)

$64M

in corporate contributions and
U.S. Bank Foundation giving

$2.7B

invested in renewable
energy tax equity

![img-11.jpeg](img-11.jpeg)

98%

of U.S. Bank Foundation dollars
supported women, people of
color and low-and-moderate
income communities

![img-12.jpeg](img-12.jpeg)

$321M

in capital went to Black-owned or
-led businesses and organizations
through U.S. Bancorp Community
Development Corporation financing

![img-13.jpeg](img-13.jpeg)

$20

increased minimum
hourly wage to $20

![img-14.jpeg](img-14.jpeg)

Outstanding

rating received by U.S. Bank from
the most recent Community
Reinvestment Act (CRA) exam1

![img-15.jpeg](img-15.jpeg)

1.5M

individuals received financial
education with a focus on diverse
and underserved communities

$13M

pledged to nonprofits
through annual Employee
Giving Campaign

311,000

employee volunteer
hours, equated to
$9.3 million investment2

1. Community Reinvestment Act (CRA) exam by the Office of the Comptroller of the Currency (OCC) is from January 1, 2016, to December 31, 2020.

2. Volunteer hours valued at $29.95 per hour by the Independent Sector.

14 U.S. Bancorp 2022 Annual Report | usbank.com/AR2022

To read more, visit:
usbank.com/community

DRIVING ONE U.S. BANK

# Powering potential for our people

Our people are our greatest asset; they're vital to our success and our customers' success. That's why we invest in the careers of our approximately 77,000 employees through programs that empower each of us to bring our diverse perspectives to work every day. We're honored that our efforts to create a great place to work received wide recognition yet again this year.

- We ranked among the Top 50 companies overall in the American Opportunity Index - a new report created by The Burning Glass Institute, Harvard Business School and the Schultz Family Foundation - which measures employee economic mobility. We were also among the “Best Workplaces to Advance Within” and “Best Workplaces to Advance Without a College Degree.”
- Seramount ranked us as one of the 100 Best Companies for Working Parents for the third consecutive year.
- Military Times again recognized us as one of the “Best for Vets” - an honor we've received annually since 2010.
- We earned a perfect score of 100 on the 2022 Disability Equality Index® and were recognized as a “Best Place to Work for Disability Inclusion” for the fifth consecutive year.
- For the 16th consecutive year, we scored 100 on the Human Rights Campaign Foundation's annual Corporate Equality Index®, the nation's most prominent report measuring corporate policies and practices related to LGBTQ workplace equality.
- We were named to the DiversityInc. Top 50 Index® again this year, rising to No. 17 overall. We also continue to be ranked on DiversityInc.'s specialty lists for topics including philanthropy, supplier diversity, Board, and employee resource groups.

![img-16.jpeg](img-16.jpeg)

Notable enhancements we made in 2022:

- Increased our parental leave policy in January to ensure we're investing in our employees' life moments.
- Enhanced our leaves of absence policies for military members to help smooth the transition into active duty.
- Boosted salaries of thousands of employees, including front-line branch, call center and operations center employees as part of our announcement that all employees in the U.S. and Canada will make at least $20 an hour.

15

DRIVING ONE U.S. BANK

# Powering potential in our communities

We're passionate about helping people thrive through building wealth. That's why we invest in and give back to communities we live and work in.

![img-17.jpeg](img-17.jpeg)

In 2022, we made significant progress implementing and building on U.S. Bank Access CommitmentTM, a series of long-term initiatives to address the persistent racial wealth gap and increase wealth building opportunities. We also continued to integrate social, environmental and economic progress into our work through U.S. Bancorp Community Development Corporation, financing projects that help develop affordable housing, build thriving communities, or accelerate the transition to a green economy. And, as part of our acquisition of Union Bank, we also announced a $100 billion community benefit plan that will build on U.S. Bank Access CommitmentTM and expand our efforts to increase access to capital in all the communities we serve.

## Getting more people into homes

We know that homeownership is a cornerstone to wealth building, and that Black families disproportionately rent their homes, which is why we launched U.S. Bank Access HomeTM, a part of U.S. Bank Access CommitmentTM, an initiative we believe is key to our commitment to helping close the racial wealth gap. The multipronged program will provide financial education, increase awareness of lending and financing options, and help fund our new mortgage loan officer development program designed to reach the Black community.

We also announced a separate investment from our mortgage business that will support a wide range of outreach, engagement and educational efforts through partnerships with organizations that promote housing in diverse and underserved communities. The initial investment will focus on partners where housing disparities are the largest, including: Las Vegas, Little Rock, Milwaukee, Minneapolis and St. Louis, and we are also partnering nationally with Fannie Mae and Freddie Mac.

16 U.S. Bancorp 2022 Annual Report | usbank.com/AR2022

# DRIVING ONE U.S. BANK

![img-18.jpeg](img-18.jpeg)

## Expanding our investment in developers of color

As part of our U.S. Bank Access to CapitalTM initiative, we're investing in developers of color through our Community Development Financial Institution (CDFI) partners. In 2022, we provided $300,000 in grants to five Black-led CDFIs that work with Black affordable housing developers. The combination of technical assistance and predevelopment capital helps create on-ramps for developers of color in the affordable housing industry.

## Coaching financial literacy with the WNBA

We're proud to be a WNBA Changemaker, providing the league's players and alumni access to financial resources, and creating programs to increase financial education across the country. The multiyear relationship means we are joining a collective of purpose-driven companies that are striving to elevate women in sports and support the league's mission around advancing diversity, equity and inclusion. One of the early initiatives in partnership with Project Destined - a social impact platform - is the launch of She's Invested: Supporting Emerging Female Leaders. The program provides mentoring and financial education to women of color from Historically Black Colleges and Universities (HBCUs) as well as universities in Southern California.

![img-19.jpeg](img-19.jpeg)

## Receive an electronic copy of the Annual Report

To help to reduce the use of environmental resources and promote environmental stewardship, we partnered with Arbor Day to plant a tree for every retail shareholder account who opted for electronic delivery of our annual report. Last year, 3,200 trees were planted as a result, and we are continuing that partnership again this year.

If you haven't already done so, you can sign up to receive electronic versions of our Annual Report at usbank.com/electronicAR.

17

# MANAGING COMMITTEE

![img-20.jpeg](img-20.jpeg)

Andrew Cecere

Chairman, President and
Chief Executive Officer

![img-21.jpeg](img-21.jpeg)

Souheil S. Badran

Senior Executive
Vice President and
Chief Operations Officer

![img-22.jpeg](img-22.jpeg)

Elcio R.T. Barcelos

Senior Executive Vice
President and Chief Human
Resources Officer

![img-23.jpeg](img-23.jpeg)

James L. Chosy

Senior Executive
Vice President and
General Counsel

![img-24.jpeg](img-24.jpeg)

Gregory G. Cunningham

Senior Executive
Vice President and
Chief Diversity Officer

![img-25.jpeg](img-25.jpeg)

Venkatachari Dilip

Executive Vice President
and Global Chief Information
and Technology Officer

![img-26.jpeg](img-26.jpeg)

Terrance R. Dolan

Vice Chair and
Chief Financial Officer

![img-27.jpeg](img-27.jpeg)

Gunjan Kedia

Vice Chair, Wealth
Management and
Investment Services

![img-28.jpeg](img-28.jpeg)

James B. Kelligrew

Vice Chair, Corporate
and Commercial Banking

![img-29.jpeg](img-29.jpeg)

Shailesh M. Kotwal

Vice Chair,
Payment Services

![img-30.jpeg](img-30.jpeg)

Katherine B. Quinn

Vice Chair and Chief
Administrative Officer

![img-31.jpeg](img-31.jpeg)

Jodi L. Richard

Vice Chair and
Chief Risk Officer

![img-32.jpeg](img-32.jpeg)

Mark G. Runkel

Senior Executive Vice
President and Chief
Transformation Officer

![img-33.jpeg](img-33.jpeg)

Dominic V. Venturo

Senior Executive
Vice President and
Chief Digital Officer

![img-34.jpeg](img-34.jpeg)

Jeffry H. von Gillern

Vice Chair, Technology
and Operations Services

![img-35.jpeg](img-35.jpeg)

Timothy A. Welsh

Vice Chair, Consumer
and Business Banking

18 U.S. Bancorp 2022 Annual Report | usbank.com/AR2022

# BOARD OF DIRECTORS

![img-0.jpeg](img-0.jpeg)

Andrew Cecere

Chairman, President and
Chief Executive Officer,
U.S. Bancorp

![img-1.jpeg](img-1.jpeg)

Warner L. Baxter

Executive Chairman
and Former Chairman,
President and CEO,
Ameren Corporation

![img-2.jpeg](img-2.jpeg)

Dorothy J. Bridges

Chief Executive Officer,
Metropolitan Economic
Development Association
(Meda)

![img-3.jpeg](img-3.jpeg)

Elizabeth L. Buse

Former Chief Executive
Officer, Monitise plc

![img-4.jpeg](img-4.jpeg)

Alan B. Colberg

Retired President and
Chief Executive Officer,
Assurant, Inc.

![img-5.jpeg](img-5.jpeg)

Kimberly N. Ellison-Taylor

Founder and Chief Executive
Officer, KET Solutions, LLC

![img-6.jpeg](img-6.jpeg)

Kimberly J. Harris

Retired President and
Chief Executive Officer,
Puget Energy, Inc.

![img-7.jpeg](img-7.jpeg)

Roland A. Hernandez

Founding Principal and Chief
Executive Officer, Hernandez
Media Ventures (Incoming
Lead Independent Director)

![img-8.jpeg](img-8.jpeg)

Olivia F. Kirtley

Business Consultant
(Lead Independent Director)

![img-9.jpeg](img-9.jpeg)

Richard P. McKenney

President and Chief
Executive Officer,
Unum Group

![img-10.jpeg](img-10.jpeg)

Yusuf I. Mehdi

Corporate Vice President,
Microsoft Corporation

![img-11.jpeg](img-11.jpeg)

Loretta E. Reynolds

Founder and Chief
Executive Officer,
LEReynolds Group, LLC

![img-12.jpeg](img-12.jpeg)

John P. Wiehoff

Retired Chairman and
Chief Executive Officer,
C.H. Robinson Worldwide, Inc.

![img-13.jpeg](img-13.jpeg)

Scott W. Wine

Chief Executive Officer,
CNH Industrial N.V.

19

# ABOUT US

U.S. Bancorp, with approximately 77,000 employees and $675 billion in assets as of Dec. 31, 2022, is the parent company of U.S. Bank National Association.

The Minneapolis-based company serves millions of customers locally, nationally and globally through a diversified mix of businesses: Consumer and Business Banking; Payment Services; Corporate and Commercial Banking; and Wealth Management and Investment Services. The company has been recognized for its approach to digital innovation, social responsibility, and customer service, including being named one of the 2022 World's Most Ethical Companies and Fortune's most admired superregional bank. MUFG Union Bank, consisting primarily of retail banking branches on the West Coast, joined U.S. Bancorp in 2022.

Learn more at usbank.com/about.

Revenue mix by business line 2022 taxable-equivalent basis.
Business line revenue percentages exclude Treasury and Corporate Support.
See Non-GAAP Financial Statements on page 59.

![img-14.jpeg](img-14.jpeg)

• Consumer and Business Banking:

Branches; 24-hour customer centers; mobile banking; online banking; mortgages; consumer lending; ATM and debit processing; workplace banking; student banking

• Payment Services:

Credit, debit, prepaid, virtual, corporate, purchasing and fleet cards; global payment processing; freight payment services; real-time payments; eCommerce

• Corporate and Commercial Banking:

Lending; asset based financing; equipment finance and small-ticket leasing; correspondent banking; depository services; capital markets; international trade

• Wealth Management and Investment Services:

Wealth planning, investments, trust services; private banking; specialty asset management; global custody solutions; global fund services; corporate and institutional trust services

Our strategic pillars. Our strategy is how we will grow; it comes to life by activating our pillars.

Being the Most Trusted Choice

Driving One U.S. Bank

Striving for Simplicity

Creating the Future Now

20 U.S. Bancorp 2022 Annual Report | usbank.com/AR2022

usbank.com

## The following pages discuss in detail the financial results we achieved in 2022 - 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, future economic conditions and the anticipated future revenue, expenses, financial condition, asset quality, capital and liquidity levels, plans, prospects and operations of U.S. Bancorp. Forward-looking statements often use words such as “anticipates,” “targets,” “expects,” “hopes,” “estimates,” “projects,” “forecasts,” “intends,” “plans,” “goals,” “believes,” “continue” and other similar expressions or future or conditional verbs such as “will,” “may,” “might,” “should,” “would” and “could.” Forward-looking statements involve inherent risks and uncertainties that could cause actual results to differ materially from those set forth in forward-looking statements, including the following risks and uncertainties:

- Deterioration in general business and economic conditions or turbulence in domestic or global financial markets, which 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;
- Changes to statutes, regulations, or regulatory policies or practices, including capital and liquidity requirements, and the enforcement and interpretation of such laws and regulations, and U.S. Bancorp’s ability to address or satisfy those requirements and other requirements or conditions imposed by regulatory entities;
- 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;
- Risks related to originating and selling mortgages, including repurchase and indemnity demands, and related to U.S. Bancorp’s role as a loan servicer;
- Impacts of current, pending or future litigation and governmental proceedings;
- Increased competition from both banks and non-banks;
- Effects of climate change and related physical and transition risks;
- Changes in customer behavior and preferences and the ability to implement technological changes to respond to customer needs and meet competitive demands;
- Breaches in data security;
- Failures or disruptions in or breaches of U.S. Bancorp’s operational or security systems or infrastructure, or those of third parties;
- Failures to safeguard personal information;
- Impacts of pandemics, including the COVID-19 pandemic, natural disasters, terrorist activities, civil unrest, international hostilities and geopolitical events;
- Impacts of supply chain disruptions, rising inflation, slower growth or a recession;

- Failure to execute on strategic or operational plans;
- Effects of mergers and acquisitions and related integration;
- Effects of critical accounting policies and judgments;
- Effects of changes in or interpretations of tax laws and regulations;
- Management’s ability to effectively manage credit risk, market risk, operational risk, compliance risk, strategic risk, interest rate risk, liquidity risk and reputation risk; and
- The risks and uncertainties more fully discussed in the section entitled “Risk Factors” of this report.

In addition, U.S. Bancorp’s 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 acquisition may not be realized or may take longer than anticipated to be realized; and the possibility that the combination of MUFG Union Bank with U.S. Bancorp, including the integration of MUFG Union Bank, may be more costly or difficult to complete than anticipated or have unanticipated adverse results.

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. Readers are cautioned not to place undue reliance on any forward-looking statements. 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
59 Non-GAAP Financial Measures
62 Accounting Changes
62 Critical Accounting Policies
64 Controls and Procedures
65 Reports of Management and Independent Accountants
70 Consolidated Financial Statements and Notes
138 Consolidated Daily Average Balance Sheet and Related Yields and Rates
139 Supplemental Financial Data
140 Company Information
156 Managing Committee
158 Directors

21

# Management's Discussion and Analysis

## Overview

In 2022, U.S. Bancorp and its subsidiaries (the "Company") continued to demonstrate financial strength and a diversified business model by maintaining sound credit quality and a strong capital and liquidity position, while continuing to invest in key business initiatives to drive growth in the future.

**MUFG Union Bank Acquisition** On December 1, 2022, the Company acquired MUFG Union Bank N.A.'s core regional banking franchise ("MUB") from Mitsubishi UFJ Financial Group, Inc. Pursuant to the terms of a previously announced Share Purchase Agreement, the Company acquired all of the issued and outstanding shares of common stock of MUB for a purchase price consisting of $5.5 billion in cash and approximately 44 million shares of the Company's common stock. The Company also received additional MUB capital of $3.5 billion upon completion of the acquisition. The additional capital received is held at the MUB subsidiary and required to be repaid to Mitsubishi UFJ Financial Group, Inc. on or prior to the fifth anniversary date of the completion of the purchase, in accordance with the terms of the Share Purchase Agreement. As such, it is recognized as debt at the parent company. The transaction excludes the purchase of substantially all of MUB's Global Corporate & Investment Bank (other than certain deposits), certain middle and back-office functions, and other assets. MUB operates approximately 300 branches in California, Washington and Oregon. The Company's 2022 results reflect MUB's operations for the month of December 2022, and the Company's balance sheet as of December 31, 2022 includes MUB's balances acquired or assumed in the transaction, including $81.4 billion in total assets, $53.1 billion of loans and $82.0 billion of deposits. As of the date of acquisition, MUB is a wholly-owned subsidiary of the Company and an affiliate of U.S. Bank National Association ("USBNA"), the Company's primary banking subsidiary. The Company expects to merge MUB into USBNA in connection with the conversion of MUB customers and systems to the USBNA platform over Memorial Day weekend in 2023.

**Financial Performance** The Company earned $5.8 billion in 2022, or $3.69 per diluted common share, compared with $8.0 billion, or $5.10 per diluted common share in 2021. Financial performance for 2022, compared with 2021, included the following:

- Net interest income increased $2.2 billion (17.8 percent) due to the impact of rising rates on earnings assets and growth in average loan and investment securities balances, partially offset by deposit pricing and changes in funding mix;
- Noninterest income decreased $771 million (7.5 percent) primarily due to lower mortgage banking revenue, and lower other noninterest income driven by the impact of interest rate economic hedges related to the MUB acquisition, partially offset by higher trust and investment management fees and payment services revenue;
- Noninterest expense increased $1.2 billion (8.6 percent), reflecting operating expenses and merger and integration charges related to the MUB acquisition, along with increases in compensation and employee benefits expense, marketing and business development expense and other noninterest expense;

- The provision for credit losses increased $3.2 billion, driven by the impact of loan growth and increasing economic uncertainty, as well as the initial provision for credit losses related to the MUB acquisition and the provision impact of balance sheet repositioning and capital management actions taken in 2022 in connection with the acquisition;
- Average loans increased $36.6 billion (12.3 percent) primarily due to higher average commercial loans and residential mortgages, including the impact of the MUB acquisition; and
- Average deposits increased $28.1 billion (6.5 percent), driven by increases in average total savings deposits and time deposits including the impact of the MUB acquisition, partially offset by a decrease in average noninterest bearing deposits.

**Credit Quality** The Company continues to maintain strong credit quality as it prudently manages credit underwriting.

- The allowance for credit losses was $7.4 billion at December 31, 2022, an increase of $1.2 billion compared with December 31, 2021. The increase included the impacts of the MUB acquisition, along with loan growth and increased economic uncertainty.
- Nonperforming assets were $1.0 billion at December 31, 2022, an increase of $138 million compared with December 31, 2021. The increase was driven by acquired balances related to the MUB acquisition, partially offset by decreases in nonperforming loans in the legacy portfolio.
- Net charge-offs were $1.1 billion in 2022, an increase of $381 million compared with 2021. The increase reflected approximately $179 million related to the purchase accounting treatment for acquired MUB loans, as well as the impact related to balance sheet repositioning and capital management actions taken during 2022 in connection with the acquisition.

**Capital Management** At December 31, 2022, all of the Company's regulatory capital ratios exceeded regulatory "well-capitalized" requirements.

- The Company's common equity tier 1 capital ratio was 8.4 percent at December 31, 2022.
- During 2022, the Company announced a 4.3 percent increase in the quarterly dividend rate per common share.

The Company's financial strength, diversified business model and strong credit quality position it well for 2023. Economic uncertainty in both the domestic and global economies currently exists. The Company's business model is resilient due to disciplined credit underwriting standards and robust risk management infrastructure. The Company remains focused on prudent balance sheet growth and the prudent allocation of capital to lines of business and products best served to deliver on its strategic vision. The Company's growth strategy is focused on creating value for its customers, communities and shareholders, which will allow it to continue to generate industry-leading performance.

22

**TABLE 1** Selected Financial Data

Year Ended December 31
(Dollars and Shares in Millions, Except Per Share Data)

|  | 2022 | 2021 | 2020 |
| --- | --- | --- | --- |
| Condensed Income Statement |  |  |  |
| Net interest income | $14,728 | $12,494 | $12,825 |
| Taxable-equivalent adjustment (a) | 118 | 106 | 99 |
| Net interest income (taxable-equivalent basis) (b) | 14,846 | 12,600 | 12,924 |
| Noninterest income | 9,456 | 10,227 | 10,401 |
| Total net revenue | 24,302 | 22,827 | 23,325 |
| Noninterest expense | 14,906 | 13,728 | 13,369 |
| Provision for credit losses | 1,977 | (1,173) | 3,806 |
| Income before taxes | 7,419 | 10,272 | 6,150 |
| Income taxes and taxable-equivalent adjustment | 1,581 | 2,287 | 1,165 |
| Net income | 5,838 | 7,985 | 4,985 |
| Net (income) loss attributable to noncontrolling interests | (13) | (22) | (26) |
| Net income attributable to U.S. Bancorp | $5,825 | $7,963 | $4,959 |
| Net income applicable to U.S. Bancorp common shareholders | $5,501 | $7,605 | $4,621 |
| Per Common Share |  |  |  |
| Earnings per share | $3.69 | $5.11 | $3.06 |
| Diluted earnings per share | 3.69 | 5.10 | 3.06 |
| Dividends declared per share | 1.88 | 1.76 | 1.68 |
| Book value per share (c) | 28.71 | 32.71 | 31.26 |
| Market value per share | 43.61 | 56.17 | 46.59 |
| Average common shares outstanding | 1,489 | 1,489 | 1,509 |
| Average diluted common shares outstanding | 1,490 | 1,490 | 1,510 |
| Financial Ratios |  |  |  |
| Return on average assets | .98% | 1.43% | .93% |
| Return on average common equity | 12.6 | 16.0 | 10.0 |
| Net interest margin (taxable-equivalent basis) (a) | 2.72 | 2.49 | 2.68 |
| Efficiency ratio (b) | 61.4 | 60.4 | 57.8 |
| Net charge-offs as a percent of average loans outstanding | .32 | .23 | .58 |
| Average Balances |  |  |  |
| Loans | $333,573 | $296,965 | $307,269 |
| Loans held for sale | 3,829 | 8,024 | 6,985 |
| Investment securities (d) | 169,442 | 154,702 | 125,954 |
| Earning assets | 545,343 | 506,141 | 481,402 |
| Assets | 592,149 | 556,532 | 531,207 |
| Noninterest-bearing deposits | 120,394 | 127,204 | 98,539 |
| Deposits | 462,384 | 434,281 | 398,615 |
| Short-term borrowings | 25,740 | 14,774 | 19,182 |
| Long-term debt | 33,114 | 36,682 | 44,040 |
| Total U.S. Bancorp shareholders' equity | 50,416 | 53,810 | 52,246 |
| Period End Balances |  |  |  |
| Loans | $388,213 | $312,028 | $297,707 |
| Investment securities | 161,650 | 174,821 | 136,840 |
| Assets | 674,805 | 573,284 | 553,905 |
| Deposits | 524,976 | 456,083 | 429,770 |
| Long-term debt | 39,829 | 32,125 | 41,297 |
| Total U.S. Bancorp shareholders' equity | 50,766 | 54,918 | 53,095 |
| Asset Quality |  |  |  |
| Nonperforming assets | $1,016 | $878 | $1,298 |
| Allowance for credit losses | 7,404 | 6,155 | 8,010 |
| Allowance for credit losses as a percentage of period-end loans | 1.91% | 1.97% | 2.69% |
| Capital Ratios |  |  |  |
| Common equity tier 1 capital | 8.4% | 10.0% | 9.7% |
| Tier 1 capital | 9.8 | 11.6 | 11.3 |
| Total risk-based capital | 11.9 | 13.4 | 13.4 |
| Leverage | 7.9 | 8.6 | 8.3 |
| Total leverage exposure | 6.4 | 6.9 | 7.3 |
| Tangible common equity to tangible assets (b) | 4.5 | 6.8 | 6.9 |
| Tangible common equity to risk-weighted assets (b) | 6.0 | 9.2 | 9.5 |
| Common equity tier 1 capital to risk-weighted assets, reflecting the full implementation of the current expected credit losses methodology (b) | 8.1 | 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 59.

(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 $5.8 billion in 2022, or $3.69 per diluted common share, compared with $8.0 billion, or $5.10 per diluted common share, in 2021. Return on average assets and return on average common equity were 0.98 percent and 12.6 percent, respectively, in 2022, compared with 1.43 percent and 16.0 percent, respectively, in 2021. The results for 2022 included the impact of the 2022 acquisition of MUB. The transaction closed on December 1, 2022 and results reflect one month of operating results of MUB including $255 million of net interest income, $47 million of fee income and $221 million of noninterest expense. In addition, the results for 2022 included the impact of certain actions directly related to the acquisition, including $399 million of losses primarily related to interest rate economic hedges, entered into after regulatory approval for the acquisition was obtained, to manage the impact of interest rate volatility on capital prior to closing the transaction, $329 million of merger and integration charges, and $791 million of provision for credit losses related to acquired loans and balance sheet repositioning and capital management actions taken in the fourth quarter of 2022 in connection with the acquisition. Combined, these items decreased 2022 diluted earnings per common share by $0.76.

Total net revenue for 2022 was $1.5 billion (6.5 percent) higher than 2021, reflecting a 17.9 percent increase in net interest income (17.8 percent on a taxable-equivalent basis) and a 7.5 percent decrease in noninterest income. The increase in net interest income from the prior year was due to the impact of rising rates on earning assets and strong growth in average loan and investment securities balances, partially offset by deposit pricing and changes in funding mix. The reduction in noninterest income reflected lower mortgage banking revenue due to a decline in refinancing activities, and lower other noninterest income driven by the impact of interest rate economic hedges related to the MUB acquisition, partially offset by higher trust and investment management fees and payment services revenue.

Noninterest expense in 2022 was $1.2 billion (8.6 percent) higher than 2021, reflecting operating expenses and merger and integration charges related to the MUB acquisition, as well as increases in legacy compensation and employee benefits expense, marketing and business development expense and other noninterest expense.

**Results for 2021 Compared With 2020** For discussion related to changes in financial condition and results of operations for 2021 compared with 2020, refer to “Management’s Discussion

and Analysis” in the Company’s Annual Report for the year ended December 31, 2021, included as Exhibit 13 to the Company’s Form 10-K filed with the Securities and Exchange Commission on February 22, 2022.

## Statement of Income Analysis

**Net Interest Income** Net interest income, on a taxable-equivalent basis, was $14.8 billion in 2022, compared with $12.6 billion in 2021. The $2.2 billion (17.8 percent) increase in net interest income, on a taxable-equivalent basis, in 2022 compared with 2021, was primarily due to the impact of rising interest rates on earning assets, strong growth in loan and investment securities balances and the impact of loans and investment securities acquired related to MUB partially offset by deposit pricing and changes in funding mix. Average earning assets were $39.2 billion (7.7 percent) higher in 2022, compared with 2021, reflecting increases in loans and investment securities, partially offset by a decrease in interest-bearing deposits with banks. The net interest margin, on a taxable-equivalent basis, in 2022 was 2.72 percent, compared with 2.49 percent in 2021. The increase in the net interest margin in 2022, compared with 2021, was due to the impact of higher rates on earning assets, partially offset by deposit pricing and short-term borrowing costs given the rise in short-term interest rates. 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 $333.6 billion in 2022, compared with $297.0 billion in 2021. The $36.6 billion (12.3 percent) increase was due to growth in all loan classes, including a $4.6 billion impact related to the MUB acquisition. Average commercial loans increased $20.9 billion (20.4 percent), primarily due to higher utilization driven by working capital needs of corporate customers, slower payoffs given higher volatility in the capital markets, as well as core growth. Average residential mortgages increased $10.1 billion (13.6 percent) driven by slower refinance activity, along with the impact related to the MUB acquisition. Average commercial real estate loans increased $2.3 billion (6.0 percent), primarily the result of reduced payoff activity and MUB balances. Average credit card loans increased $1.8 billion (8.5 percent) primarily due to increased consumer spending, account growth and lower payment rates. Average other retail loans increased $1.4 billion (2.4 percent), driven by higher auto and recreational vehicle loans, partially offset by lower retail leasing balances.

24

**TABLE 2** Analysis of Net Interest Income$^{(a)}$

| Year Ended December 31 (Dollars in Millions) | 2022 | 2021 | 2020 | 2022 v 2021 | 2021 v 2020 |
| --- | --- | --- | --- | --- | --- |
| Components of Net Interest Income |  |  |  |  |  |
| Income on earning assets (taxable-equivalent basis) | $18,066 | $13,593 | $14,942 | $4,473 | $(1,349) |
| Expense on interest-bearing liabilities (taxable-equivalent basis) | 3,220 | 993 | 2,018 | 2,227 | (1,025) |
| Net interest income (taxable-equivalent basis) (b) | $14,846 | $12,600 | $12,924 | $2,246 | $(324) |
| Net interest income, as reported | $14,728 | $12,494 | $12,825 | $2,234 | $(331) |
| Average Yields and Rates Paid |  |  |  |  |  |
| Earning assets yield (taxable-equivalent basis) | 3.31% | 2.69% | 3.10% | .62% | (.41)% |
| Rate paid on interest-bearing liabilities (taxable-equivalent basis) | .80 | .28 | .56 | .52 | (.28) |
| Gross interest margin (taxable-equivalent basis) | 2.51% | 2.41% | 2.54% | .10% | (.13)% |
| Net interest margin (taxable-equivalent basis) | 2.72% | 2.49% | 2.68% | .23% | (.19)% |
| Average Balances |  |  |  |  |  |
| Investment securities (c) | $169,442 | $154,702 | $125,954 | $14,740 | $28,748 |
| Loans | 333,573 | 296,965 | 307,269 | 36,608 | (10,304) |
| Earning assets | 545,343 | 506,141 | 481,402 | 39,202 | 24,739 |
| Noninterest-bearing deposits | 120,394 | 127,204 | 98,539 | (6,810) | 28,665 |
| Interest-bearing deposits | 341,990 | 307,077 | 300,076 | 34,913 | 7,001 |
| Total deposits | 462,384 | 434,281 | 398,615 | 28,103 | 35,666 |
| Interest-bearing liabilities | 400,844 | 358,533 | 363,298 | 42,311 | (4,765) |

(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 59.

(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 2022 were $14.7 billion (9.5 percent) higher than in 2021, primarily due to purchases of mortgage-backed and U.S. Treasury securities, net of prepayments, sales and maturities in the legacy portfolio, along with the $1.2 billion impact of the MUB acquisition.

Average total deposits for 2022 were $28.1 billion (6.5 percent) higher than 2021, including the $7.2 billion impact of the MUB acquisition. Average total savings deposits were $28.8 billion (10.2 percent) higher in 2022, compared with 2021, driven by increases in Corporate and Commercial Banking, and Consumer and Business Banking balances, partially offset by

decreases in Wealth Management and Investment Services balances. Average time deposits for 2022 were $6.1 billion (24.8 percent) higher than 2021, primarily driven by increases in Corporate and Commercial Banking balances, partially offset by decreases in Consumer and Business Banking 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. Average noninterest-bearing deposits were $6.8 billion (5.4 percent) lower in 2022, compared with 2021, driven by decreases in Corporate and Commercial Banking, and Payment Services balances.

25

**TABLE 3** Net Interest Income - Changes Due to Rate and Volume$^{(a)}$

| Year Ended December 31 (Dollars in Millions) | 2022 v 2021 |  |  | 2021 v 2020 |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | Volume | Yield/Rate | Total | Volume | Yield/Rate | Total |
| Increase (decrease) in |  |  |  |  |  |  |
| Interest Income |  |  |  |  |  |  |
| Investment securities | $231 | $792 | $1,023 | $569 | $(623) | $(54) |
| Loans held for sale | (121) | 90 | (31) | 32 | (16) | 16 |
| Loans |  |  |  |  |  |  |
| Commercial | 547 | 1,109 | 1,656 | (311) | (197) | (508) |
| Commercial real estate | 73 | 363 | 436 | (63) | (175) | (238) |
| Residential mortgages | 336 | (38) | 298 | 35 | (224) | (189) |
| Credit card | 193 | 112 | 305 | (74) | (40) | (114) |
| Other retail | 50 | 116 | 166 | 95 | (321) | (226) |
| Total loans | 1,199 | 1,662 | 2,861 | (318) | (957) | (1,275) |
| Interest-bearing deposits with banks | (8) | 525 | 517 | 9 | (27) | (18) |
| Other earning assets | 8 | 95 | 103 | (3) | (15) | (18) |
| Total earning assets | 1,309 | 3,164 | 4,473 | 289 | (1,638) | (1,349) |
| Interest Expense |  |  |  |  |  |  |
| Interest-bearing deposits |  |  |  |  |  |  |
| Interest checking | 3 | 250 | 253 | 15 | (56) | (41) |
| Money market savings | 16 | 1,005 | 1,021 | (37) | (292) | (329) |
| Savings accounts | 1 | 2 | 3 | 9 | (48) | (39) |
| Time deposits | 23 | 252 | 275 | (110) | (111) | (221) |
| Total interest-bearing deposits | 43 | 1,509 | 1,552 | (123) | (507) | (630) |
| Short-term borrowings | 52 | 446 | 498 | (33) | (41) | (74) |
| Long-term debt | (59) | 236 | 177 | (155) | (166) | (321) |
| Total interest-bearing liabilities | 36 | 2,191 | 2,227 | (311) | (714) | (1,025) |
| Increase (decrease) in net interest income | $1,273 | $973 | $2,246 | $600 | $(924) | $(324) |

(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.

The provision for credit losses was $2.0 billion in 2022, compared with a benefit of $1.2 billion in 2021. The change was driven by the Company recognizing a provision for credit losses of $662 million during 2022 related to the acquisition of MUB and a $129 million provision impact of balance sheet repositioning and capital management actions taken in the fourth quarter of 2022, along with the impact of strong loan growth in the legacy portfolio and increasing economic uncertainty. The benefit recognized in 2021 reflected the enactment of government

stimulus programs and economic recovery from the pandemic in the United States, which resulted in decreases in the allowance for credit losses. Net charge-offs increased $381 billion (55.9 percent) in 2022, compared with 2021, reflecting $179 million of uncollectible MUB acquired loans, of which the majority of this balance related to loans that were previously charged-off by MUB, along with $189 million of net charge-offs related to balance sheet repositioning and capital management actions taken in the fourth quarter of 2022 in connection with the acquisition.

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) | 2022 | 2021 | 2020 | 2022 v 2021 | 2021 v 2020 |
| --- | --- | --- | --- | --- | --- |
| Card revenue | $1,512 | $1,507 | $1,338 | .3% | 12.6% |
| Corporate payment products revenue | 698 | 575 | 497 | 21.4 | 15.7 |
| Merchant processing services | 1,579 | 1,449 | 1,261 | 9.0 | 14.9 |
| Trust and investment management fees | 2,209 | 1,832 | 1,736 | 20.6 | 5.5 |
| Service charges | 1,298 | 1,338 | 1,245 | (3.0) | 7.5 |
| Commercial products revenue | 1,105 | 1,102 | 1,143 | .3 | (3.6) |
| Mortgage banking revenue | 527 | 1,361 | 2,064 | (61.3) | (34.1) |
| Investment products fees | 235 | 239 | 192 | (1.7) | 24.5 |
| Securities gains (losses), net | 20 | 103 | 177 | (80.6) | (41.8) |
| Other | 273 | 721 | 748 | (62.1) | (3.6) |
| Total noninterest income | $9,456 (a) | $10,227 | $10,401 | (7.5)% | (1.7)% |

$^{(a)}$ Includes $399 million of losses primarily related to interest rate economic hedges, entered into after regulatory approval for the MUB acquisition was obtained, to manage the impact of interest rate volatility on capital prior to closing the transaction.

**Noninterest Income** Noninterest income in 2022 was $9.5 billion, compared with $10.2 billion in 2021. The $771 million (7.5 percent) decrease in 2022 from 2021 reflected lower mortgage banking revenue, lower other noninterest income, lower service charges and lower gains on the sale of securities, partially offset by higher trust and investment management fees and payment services revenue. Mortgage banking revenue decreased 61.3 percent in 2022, compared with 2021, reflecting lower application volume, given declining refinancing activities experienced in the mortgage industry, lower related gain on sale margins and lower performing loan sales, partially offset by increases in mortgage servicing rights ('MSRs') valuations, net of hedging activities. Other noninterest income decreased 62.1 percent in 2022, compared with 2021, primarily due to the impact of interest rate economic hedges, entered into after regulatory approval of the MUB acquisition was obtained, to manage the impact of interest rate volatility on capital prior to closing the transaction in December, as well as lower retail leasing end-of-term residual gains. Service charges

decreased 3.0 percent primarily due to the impact of the elimination of certain consumer overdraft fees in 2022. Trust and investment management fees increased 20.6 percent primarily due to lower money market fee waivers, activity related to the fourth quarter of 2021 acquisition of PFM Asset Management LLC ('PFM') and core business growth, partially offset by unfavorable market conditions. Payment services revenue increased in 2022, compared with 2021, driven by a 21.4 percent increase in corporate payment products revenue and a 9.0 percent increase in merchant processing services revenue. Corporate payment products revenue increased due to improving business spending across all product groups, while merchant processing services revenue increased driven by higher sales volume and merchant fees. The increase in merchant processing services revenue was partially offset by the impact of foreign currency rate changes, as the U.S. dollar has strengthened considerably compared to European currencies given recent uncertainties in Europe.

**TABLE 5** Noninterest Expense

| Year Ended December 31 (Dollars in Millions) | 2022 | 2021 | 2020 | 2022 v 2021 | 2021 v 2020 |
| --- | --- | --- | --- | --- | --- |
| Compensation and employee benefits | $9,157 | $8,728 | $7,938 | 4.9% | 10.0% |
| Net occupancy and equipment | 1,096 | 1,048 | 1,092 | 4.6 | (4.0) |
| Professional services | 529 | 492 | 430 | 7.5 | 14.4 |
| Marketing and business development | 456 | 366 | 318 | 24.6 | 15.1 |
| Technology and communications | 1,726 | 1,728 | 1,582 | (.1) | 9.2 |
| Other intangibles | 215 | 159 | 176 | 35.2 | (9.7) |
| Other | 1,398 | 1,207 | 1,833 | 15.8 | (34.2) |
| Total before merger and integration charges | 14,577 | 13,728 | 13,369 | 6.2 | 2.7 |
| Merger and integration charges | 329 | - | - | * | - |
| Total noninterest expense | $14,906 | $13,728 | $13,369 | 8.6% | 2.7% |
| Efficiency ratio (a) | 61.4% | 60.4% | 57.8% |  |  |

* Not meaningful

(a) See Non-GAAP Financial Measures beginning on page 59.

27

**Noninterest Expense** Noninterest expense in 2022 was $14.9 billion, compared with $13.7 billion in 2021. The Company's efficiency ratio was 61.4 percent in 2022, compared with 60.4 percent in 2021. The $1.2 billion (8.6 percent) increase in noninterest expense in 2022 over 2021 was driven by higher compensation and employee benefits expense, marketing and business development expense, net occupancy and equipment expense and other noninterest expense. The increase in noninterest expense included the impact of the MUB acquisition, including $329 million of merger and integration-related charges and $42 million of intangible amortization primarily related to core deposit intangibles. Compensation and employee benefits expense increased 4.9 percent in 2022 over 2021, primarily due to MUB expense as well as merit increases and hiring to support business growth and higher post-pandemic medical expenses, partially offset by lower performance-based incentives and variable compensation. Marketing and business development expense increased 24.6 percent due to the timing of marketing campaigns as well as increased travel and entertainment. Net occupancy and equipment expense increased 4.6 percent to support business growth. Other noninterest expense increased 15.8 percent due to accruals related to future delivery exposures for merchant and airline processing as processing volumes recover, higher Federal Deposit Insurance Company ('FDIC') insurance expense driven by an increase in the assessment base and rate, and higher other accruals, partially offset by lower costs related to tax-advantaged projects and lower other expenses related to the decline in mortgage production.

**Income Tax Expense** The provision for income taxes was $1.5 billion (an effective rate of 20.0 percent) in 2022, compared with $2.2 billion (an effective rate of 21.5 percent) 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 $545.3 billion in 2022, compared with $506.1 billion in 2021. The increase in average earning assets of $39.2 billion (7.7 percent), including the $6.5 billion (1.3 percent) impact of the MUB acquisition, was primarily due to increases in loans of $36.6 billion (12.3 percent) and investment securities of $14.7 billion (9.5 percent), partially offset by a decrease in interest-bearing deposits with banks of $8.5 billion (21.3 percent).

For average balance information, refer to Consolidated Daily Average Balance Sheet and Related Yields and Rates on page 138.

**Loans** The Company's loan portfolio was $388.2 billion at December 31, 2022, compared with $312.0 billion at December 31, 2021, an increase of $76.2 billion (24.4 percent), which includes $53.1 billion of loans acquired from MUB. The increase was driven by increases in residential mortgages of $39.4 billion (51.4 percent), commercial loans of $23.7 billion (21.1 percent), commercial real estate loans of $16.4 billion (42.1 percent), credit card loans of $3.8 billion (16.9 percent), partially offset by a decrease in other retail loans of $7.1 billion (11.4 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 increased $36.6 billion (12.3 percent) in 2022, compared with 2021. The increase was primarily driven by higher commercial loans and residential mortgages.

- 28 -

**TABLE 6** Loan Portfolio Distribution

| At December 31 (Dollars in Millions) | 2022 |  | 2021 |  |
| --- | --- | --- | --- | --- |
|  | Amount | Percent of Total | Amount | Percent of Total |
| Commercial |  |  |  |  |
| Commercial | $131,128 | 33.8% | $106,912 | 34.3% |
| Lease financing | 4,562 | 1.2 | 5,111 | 1.6 |
| Total commercial | 135,690 | 35.0 | 112,023 | 35.9 |
| Commercial Real Estate |  |  |  |  |
| Commercial mortgages | 43,765 | 11.3 | 28,757 | 9.2 |
| Construction and development | 11,722 | 3.0 | 10,296 | 3.3 |
| Total commercial real estate | 55,487 | 14.3 | 39,053 | 12.5 |
| Residential Mortgages |  |  |  |  |
| Residential mortgages | 107,858 | 27.8 | 67,546 | 21.6 |
| Home equity loans, first liens | 7,987 | 2.0 | 8,947 | 2.9 |
| Total residential mortgages | 115,845 | 29.8 | 76,493 | 24.5 |
| Credit Card | 26,295 | 6.8 | 22,500 | 7.2 |
| Other Retail |  |  |  |  |
| Retail leasing | 5,519 | 1.4 | 7,256 | 2.3 |
| Home equity and second mortgages | 12,863 | 3.3 | 10,446 | 3.4 |
| Revolving credit | 3,983 | 1.0 | 2,750 | .9 |
| Installment | 14,592 | 3.8 | 16,641 | 5.3 |
| Automobile | 17,939 | 4.6 | 24,866 | 8.0 |
| Total other retail | 54,896 | 14.1 | 61,959 | 19.9 |
| Total loans | $388,213 | 100.0% | $312,028 | 100.0% |

**TABLE 7** Selected Loan Maturity Distribution

| At December 31, 2022 (Dollars in Millions) | One Year or Less | Over One Through Five Years | Over Five Through Fifteen Years | Over Fifteen Years | Total |
| --- | --- | --- | --- | --- | --- |
| Commercial | $29,430 | $96,841 | $9,158 | $261 | $135,690 |
| Commercial real estate | 12,181 | 27,081 | 8,136 | 8,089 (a) | 55,487 |
| Residential mortgages | 3,303 | 5,042 | 21,350 | 86,150 | 115,845 |
| Credit card | 26,295 | - | - | - | 26,295 |
| Other retail | 3,428 | 17,759 | 18,643 | 15,066 | 54,896 |
| Total loans | $74,637 | $146,723 | $57,287 | $109,566 | $388,213 |

Total of loans due after one year with:

|  | Predetermined Interest Rates | Roasting Interest Rates |
| --- | --- | --- |
| Commercial | $14,892 | $91,368 |
| Commercial real estate | 14,761 | 28,545 |
| Residential mortgages | 64,306 | 48,236 |
| Credit card | - | - |
| Other retail | 38,959 | 12,509 |
| Total | $132,918 | $180,658 |

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

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**TABLE 8** Commercial Loans by Industry Group and Geography

| At December 31 (Dollars in Millions) | 2022 |  | 2021 |  |
| --- | --- | --- | --- | --- |
|  | Loans | Percent | Loans | Percent |
| Industry Group |  |  |  |  |
| Real-estate related | $19,539 | 14.4% | $16,646 | 14.9% |
| Financial institutions | 17,381 | 12.8 | 14,002 | 12.5 |
| Personal, professional and commercial services | 10,106 | 7.5 | 7,095 | 6.3 |
| Healthcare | 8,536 | 6.3 | 6,923 | 6.2 |
| Automotive | 7,154 | 5.3 | 7,590 | 6.8 |
| Media and entertainment | 5,867 | 4.3 | 4,623 | 4.1 |
| Food and beverage | 5,574 | 4.1 | 4,097 | 3.6 |
| Technology | 5,425 | 4.0 | 5,119 | 4.6 |
| Capital goods | 5,332 | 3.9 | 4,099 | 3.6 |
| Retail | 5,128 | 3.8 | 4,717 | 4.2 |
| Transportation | 4,988 | 3.7 | 3,895 | 3.5 |
| Power | 4,945 | 3.6 | 3,028 | 2.7 |
| Energy | 3,811 | 2.8 | 2,299 | 2.1 |
| Metals and mining | 3,700 | 2.7 | 3,342 | 3.0 |
| Education and non-profit | 3,609 | 2.7 | 3,721 | 3.3 |
| Building materials | 3,293 | 2.4 | 2,687 | 2.4 |
| State and municipal government | 3,240 | 2.4 | 3,166 | 2.8 |
| Agriculture | 1,909 | 1.4 | 1,796 | 1.6 |
| Other | 16,153 | 11.9 | 13,178 | 11.8 |
| Total | $135,690 | 100.0% | $112,023 | 100.0% |
| Geography |  |  |  |  |
| California | $23,736 | 17.5% | $15,439 | 13.8% |
| Texas | 10,244 | 7.6 | 6,748 | 6.0 |
| New York | 8,989 | 6.6 | 7,483 | 6.7 |
| Illinois | 7,626 | 5.6 | 6,572 | 5.9 |
| Minnesota | 6,707 | 5.0 | 6,730 | 6.0 |
| Ohio | 4,497 | 3.3 | 4,310 | 3.8 |
| Wisconsin | 4,112 | 3.0 | 3,894 | 3.5 |
| Florida | 3,777 | 2.8 | 3,790 | 3.4 |
| Washington | 3,721 | 2.7 | 2,936 | 2.6 |
| Colorado | 3,613 | 2.7 | 3,791 | 3.4 |
| All other states | 58,668 | 43.2 | 50,330 | 44.9 |
| Total | $135,690 | 100.0% | $112,023 | 100.0% |

**Commercial** Commercial loans, including lease financing, increased $23.7 billion (21.1 percent) at December 31, 2022, compared with December 31, 2021, due to higher utilization driven by working capital needs of corporate customers, slower payoffs given higher volatility in the capital markets, core growth and the impact of the MUB acquisition. Average commercial

loans increased $20.9 billion (20.4 percent) in 2022, compared with 2021. Table 8 provides a summary of commercial loans by industry and geographical location.

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**TABLE 9** Commercial Real Estate Loans by Property Type and Geography

| At December 31 (Dollars in Millions) | 2022 |  | 2021 |  |
| --- | --- | --- | --- | --- |
|  | Loans | Percent | Loans | Percent |
| Property Type |  |  |  |  |
| Multi-family | $16,722 | 30.1% | $9,293 | 23.8% |
| Business owner occupied | 11,487 | 20.7 | 8,238 | 21.1 |
| Office | 7,239 | 13.1 | 5,814 | 14.9 |
| Industrial | 5,258 | 9.5 | 3,672 | 9.4 |
| Residential land and development | 4,454 | 8.0 | 2,788 | 7.1 |
| Retail | 4,011 | 7.2 | 3,382 | 8.7 |
| Lodging | 1,932 | 3.5 | 2,422 | 6.2 |
| Other | 4,384 | 7.9 | 3,444 | 8.8 |
| Total | $55,487 | 100.0% | $39,053 | 100.0% |
| Geography |  |  |  |  |
| California | $22,250 | 40.1% | $9,683 | 24.8% |
| Washington | 4,235 | 7.6 | 3,680 | 9.4 |
| New York | 2,547 | 4.6 | 859 | 2.2 |
| Texas | 2,337 | 4.2 | 1,662 | 4.3 |
| Illinois | 1,830 | 3.3 | 1,409 | 3.6 |
| Colorado | 1,648 | 3.0 | 1,684 | 4.3 |
| Oregon | 1,622 | 2.9 | 1,526 | 3.9 |
| Minnesota | 1,470 | 2.7 | 1,717 | 4.4 |
| Florida | 1,276 | 2.3 | 1,520 | 3.9 |
| Ohio | 1,247 | 2.2 | 1,215 | 3.1 |
| All other states | 15,025 | 27.1 | 14,098 | 36.1 |
| Total | $55,487 | 100.0% | $39,053 | 100.0% |

**Commercial Real Estate** The Company's portfolio of commercial real estate loans, which includes commercial mortgages and construction and development loans, increased $16.4 billion (42.1 percent) at December 31, 2022, compared with December 31, 2021. The increase was primarily due to the impact of the MUB acquisition. Average commercial real estate loans increased $2.3 billion (6.0 percent) in 2022, compared with 2021. Table 9 provides a summary of commercial real estate loans by property type and geographical location.

The Company's commercial mortgage and construction and development loans had unfunded commitments of $13.8 billion and $11.8 billion at December 31, 2022 and 2021, 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 $19.5 billion and $16.6 billion at December 31, 2022 and 2021, respectively.

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**TABLE 10** Residential Mortgages by Geography

| At December 31 (Dollars in Millions) | 2022 |  | 2021 |  |
| --- | --- | --- | --- | --- |
|  | Loans | Percent | Loans | Percent |
| California | $53,967 | 46.7% | $23,568 | 30.8% |
| Washington | 6,343 | 5.5 | 4,002 | 5.2 |
| Colorado | 4,192 | 3.6 | 3,612 | 4.7 |
| Florida | 3,946 | 3.4 | 3,340 | 4.4 |
| Minnesota | 3,692 | 3.2 | 3,767 | 4.9 |
| Illinois | 3,592 | 3.1 | 3,392 | 4.4 |
| Arizona | 3,178 | 2.7 | 2,684 | 3.5 |
| Texas | 2,801 | 2.4 | 2,209 | 2.9 |
| Oregon | 2,701 | 2.3 | 2,332 | 3.1 |
| Massachusetts | 2,536 | 2.2 | 1,995 | 2.6 |
| All other states | 28,897 | 24.9 | 25,592 | 33.5 |
| Total | $115,845 | 100.0% | $76,493 | 100.0% |

**Residential Mortgages** Residential mortgages held in the loan portfolio at December 31, 2022, increased $39.4 billion (51.4 percent) compared to December 31, 2021, due to $26.4 billion of acquired MUB residential mortgages, as well as stronger on-balance sheet loan activities and slower refinance activity. Average residential mortgages increased $10.1 billion (13.6 percent) in 2022, compared with 2021. Residential mortgages originated and placed in the Company's loan portfolio include well-secured jumbo mortgages and branch-originated first lien home equity loans to borrowers with high credit quality.

**Credit Card** Total credit card loans increased $3.8 billion (16.9 percent) at December 31, 2022, compared with December 31, 2021, primarily driven by higher spend volumes, account growth and lower payment rates. Average credit card balances increased $1.8 billion (8.5 percent) in 2022, compared with 2021.

**Other Retail** Total other retail loans, which include retail leasing, home equity and second mortgages and other retail loans, decreased $7.1 billion (11.4 percent) at December 31, 2022, compared with December 31, 2021, reflecting decreases in auto loans, installment loans and retail leasing balances, partially offset by increases in home equity loans and revolving credit balances. The decrease in auto loans was primarily driven by the sale of approximately $4 billion of indirect auto loans as part of balance sheet repositioning and capital management actions taken in the fourth quarter of 2022 in connection with the acquisition of MUB. Average other retail loans increased $1.4 billion (2.4 percent) in 2022, compared with 2021. 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, 2022 and 2021.

**TABLE 11** Credit Card Loans by Geography

| At December 31 (Dollars in Millions) | 2022 |  | 2021 |  |
| --- | --- | --- | --- | --- |
|  | Loans | Percent | Loans | Percent |
| California | $2,609 | 9.9% | $2,134 | 9.5% |
| Texas | 1,584 | 6.0 | 1,343 | 6.0 |
| Illinois | 1,330 | 5.1 | 1,108 | 4.9 |
| Ohio | 1,320 | 5.0 | 1,113 | 4.9 |
| Minnesota | 1,257 | 4.8 | 1,109 | 4.9 |
| Florida | 1,252 | 4.8 | 1,046 | 4.6 |
| Wisconsin | 1,029 | 3.9 | 895 | 4.0 |
| Michigan | 925 | 3.5 | 822 | 3.7 |
| Colorado | 862 | 3.3 | 761 | 3.4 |
| Missouri | 850 | 3.2 | 704 | 3.1 |
| All other states | 13,277 | 50.5 | 11,465 | 51.0 |
| Total | $26,295 | 100.0% | $22,500 | 100.0% |

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**TABLE 12** Other Retail Loans by Geography

| At December 31 (Dollars in Millions) | 2022 |  | 2021 |  |
| --- | --- | --- | --- | --- |
|  | Loans | Percent | Loans | Percent |
| California | $11,098 | 20.2% | $9,605 | 15.5% |
| Texas | 5,149 | 9.4 | 7,570 | 12.2 |
| Florida | 3,449 | 6.3 | 3,850 | 6.2 |
| Minnesota | 2,527 | 4.6 | 2,947 | 4.8 |
| Illinois | 2,180 | 4.0 | 2,692 | 4.3 |
| Ohio | 2,083 | 3.8 | 2,634 | 4.2 |
| Washington | 1,999 | 3.6 | 1,913 | 3.1 |
| New York | 1,878 | 3.4 | 2,014 | 3.3 |
| Colorado | 1,673 | 3.0 | 1,859 | 3.0 |
| Oregon | 1,414 | 2.6 | 1,451 | 2.3 |
| All other states | 21,446 | 39.1 | 25,424 | 41.1 |
| Total | $54,896 | 100.0% | $61,959 | 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

$2.2 billion at December 31, 2022, compared with $7.8 billion at December 31, 2021. The decrease in loans held for sale was principally due to a lower level of mortgage loan closings in late 2022, compared with the same period of 2021. 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

| At December 31 (Dollars in Millions) | 2022 |  |  |  | 2021 |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | Amortized Cost | Fair Value | Weighted-Average Maturity in Years | Weighted-Average Yield (a) | Amortized Cost | Fair Value | Weighted-Average Maturity in Years | Weighted-Average Yield (a) |
| Held-to-maturity |  |  |  |  |  |  |  |  |
| U.S. Treasury and agencies | $1,344 | $1,293 | 3.3 | 2.85% | $ - | $ - | - | -% |
| Mortgage-backed securities (a) | 87,396 | 76,581 | 9.3 | 2.17 | 41,858 | 41,812 | 7.4 | 1.45 |
| Total held-to-maturity | $88,740 | $77,874 | 9.2 | 2.18% | $41,858 | $41,812 | 7.4 | 1.45% |
| Available-for-sale |  |  |  |  |  |  |  |  |
| U.S. Treasury and agencies | $24,801 | $22,033 | 7.1 | 2.43% | $36,648 | $36,609 | 6.7 | 1.54% |
| Mortgage-backed securities (a) | 40,803 | 36,423 | 6.6 | 2.83 | 85,394 | 85,564 | 4.9 | 1.58 |
| Asset-backed securities (a) | 4,356 | 4,323 | 1.3 | 4.59 | 62 | 66 | 5.2 | 1.53 |
| Obligations of state and political subdivisions (b)(c) | 11,484 | 10,125 | 13.6 | 3.76 | 10,130 | 10,717 | 6.6 | 3.67 |
| Other | 6 | 6 | .1 | 1.99 | 7 | 7 | 3.4 | 2.07 |
| Total available-for-sale | $81,450 | $72,910 | 7.4 | 2.94% | $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) 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.

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**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 $161.7 billion at December 31, 2022, compared with $174.8 billion at December 31, 2021. The $13.2 billion (7.5 percent) decrease was primarily due to $25.4 billion of net investment sales, including the sale of certain investment securities acquired as part of the MUB acquisition, and a $13.3 billion unfavorable change in net unrealized gains (losses) on available-for-sale investment securities, partially offset by $22.7 billion of acquired investment securities and $3.4 billion of senior notes the Company received as part of the sale of approximately $4 billion of indirect auto loans to third-party securitization vehicles during 2022. During 2022, the Company transferred $45.1 billion amortized cost ($40.7 billion fair value) of available-for-sale investment securities to the held-to-maturity category to reflect its new intent for these securities. Average investment securities were $169.4 billion in 2022, compared with $154.7 billion in 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, 2022, the Company's net unrealized losses on available-for-sale investment securities were $8.5 billion, compared with net unrealized gains of $722 million at December 31, 2021. The unfavorable change in net unrealized gains (losses) was primarily due to decreases in the fair value of mortgage-backed, U.S. Treasury and state and political 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 $8.6 billion at December 31, 2022, compared with $812 million at December 31, 2021. 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, 2022, 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 $525.0 billion at December 31, 2022, including $82.0 billion of deposits related to the MUB acquisition, compared with $456.1 billion at December 31, 2021. The $68.9 billion (15.1 percent) increase in total deposits reflected increases in total savings deposits, time deposits and noninterest-bearing deposits. Average total deposits in 2022 increased $28.1 billion (6.5 percent) over 2021.

Interest-bearing savings deposits increased $55.8 billion (18.7 percent) at December 31, 2022, compared with December 31, 2021. The increase was related to higher money market, interest checking and savings account deposit balances, including those balances related to the MUB acquisition. Money market deposit balances increased $30.4 billion (25.8 percent), primarily due to higher Wealth Management and Investment Services, Corporate and Commercial Banking, and Consumer and Business Banking balances. Interest checking balances increased $19.4 billion (16.8 percent) primarily due to higher Corporate and Commercial Banking, and Consumer and Business Banking balances. Savings account balances increased $6.0 billion (9.1 percent), driven by higher Consumer and Business Banking balances, partially offset by lower Wealth Management and Investment Services balances. Average interest-bearing savings deposits increased $28.8 billion (10.2 percent) in 2022, compared with 2021, reflecting higher Corporate and Commercial Banking, and Consumer and Business Banking balances, partially offset by lower Wealth Management and Investment Services balances.

Interest-bearing time deposits at December 31, 2022, increased $10.3 billion (45.4 percent), compared with December 31, 2021. Average time deposits increased $6.1 billion (24.8 percent) in 2022, compared with 2021. 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.

Noninterest-bearing deposits at December 31, 2022, increased $2.8 billion (2.1 percent) from December 31, 2021. The increase was driven by higher Consumer and Business Banking balances, primarily related to the MUB acquisition, partially offset by lower Wealth Management and Investment Services, and Corporate and Commercial Banking balances. Average noninterest-bearing deposits decreased $6.8 billion (5.4 percent) in 2022, compared with 2021.

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**TABLE 14** Deposits

The composition of deposits was as follows:

| At December 31 (Dollars in Millions) | 2022 |  | 2021 |  |
| --- | --- | --- | --- | --- |
|  | Amount | Percent of Total | Amount | Percent of Total |
| Noninterest-bearing deposits | $137,743 | 26.2% | $134,901 | 29.6% |
| Interest-bearing deposits |  |  |  |  |
| Interest checking | 134,491 | 25.6 | 115,108 | 25.2 |
| Money market savings | 148,014 | 28.2 | 117,619 | 25.8 |
| Savings accounts | 71,782 | 13.7 | 65,790 | 14.4 |
| Total savings deposits | 354,287 | 67.5 | 298,517 | 65.4 |
| Domestic time deposits less than $250,000 | 16,329 | 3.1 | 11,303 | 2.5 |
| Domestic time deposits greater than $250,000 | 11,999 | 2.3 | 2,743 | .6 |
| Foreign time deposits | 4,618 | .9 | 8,619 | 1.9 |
| Total interest-bearing deposits | 387,233 | 73.8 | 321,182 | 70.4 |
| Total deposits (a) | $524,976 | 100.0% | $456,083 | 100.0% |

(a) Includes $289.3 billion and $238.0 billion of deposits at December 31, 2022 and 2021, 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, 2022 was as follows:

| (Dollars in Millions) | Domestic Time Deposits Greater Than $250,000 | Foreign Time Deposits | Total |
| --- | --- | --- | --- |
| Three months or less | $5,805 | $4,618 | $10,423 |
| Three months through six months | 2,448 | - | 2,448 |
| Six months through one year | 1,967 | - | 1,967 |
| Thereafter | 1,779 | - | 1,779 |
| Total | $11,999 | $4,618 | $16,617 |

**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 $31.2 billion at December 31, 2022, compared with $11.8 billion at December 31, 2021. The $19.4 billion increase in short-term borrowings at December 31, 2022, compared with December 31, 2021, reflected higher short-term Federal Home Loan Bank ('FHLB') advances and commercial paper balances, including assumed short-term borrowing balances as a result of the MUB acquisition.

Long-term debt was $39.8 billion at December 31, 2022, compared with $32.1 billion at December 31, 2021. The $7.7 billion (24.0 percent) increase was primarily due to $6.9 billion of medium-term note and $1.3 billion of subordinated note issuances, along with a $1.6 billion increase in FHLB advances including those balances assumed as a result of the MUB acquisition. In addition, long-term debt increased as a result of the $3.5 billion obligation to repay Mitsubishi UFJ Financial Group, Inc., which was incurred as part of the acquisition. These increases were partially offset by $3.2 billion of bank note repayments and maturities, $1.3 billion of subordinated note repayments and $1.0 billion of medium-term note repayments.

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.

Upon closing of the MUB acquisition, the Company's risk management framework applies to the legal entities acquired from Mitsubishi UFJ Financial Group, Inc., including MUB. Prior to closing, the Company evaluated the frameworks, policies and procedures of the acquired entities as necessary. Updates were made to align the acquired entities with the Company's risk

35

appetite and connect the elements of their respective risk governance and reporting into the Company's existing risk management framework. Connecting the existing MUB risk governance and reporting framework into the Company's existing risk management framework allows separate risk profiles, governance, and reporting for the Company and the acquired entities, during the period from acquisition through bank merger, while also providing the ability to consolidate reporting for the Company. Upon completing the merger of MUB into USBNA, which is expected to occur in connection with the conversion of MUB customers and systems to the USBNA platform over Memorial Day weekend in 2023, the MUB risk governance and reporting framework will no longer be applicable.

The Company's most prominent risk exposures are credit, interest rate, market, liquidity, operational, compliance, strategic, and reputation. Credit risk is the risk of loss associated with a change in the credit profile or the failure of a borrower or counterparty to meet its contractual obligations. Interest rate risk is the current or prospective risk to earnings and capital, or market valuations, arising from the impact of changes in interest rates. Market risk arises from fluctuations in interest rates, foreign exchange rates, and security prices that may result in changes in the values of financial instruments, such as trading and available-for-sale 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 140, 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, geopolitical events, 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

36

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 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. 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, 2022, substantially all of the Company's home equity lines were in the draw period. 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 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, inflation, interest rates and consumer bankruptcy filings.

During 2021, factors affecting economic conditions, including the further enactment of government stimulus programs and declining impacts from the pandemic in the United States, contributed to economic improvement. During 2022, economic

37

uncertainty and recession risk increased due to ongoing supply chain challenges, rising interest rates and inflationary concerns, market volatility, rising energy prices resulting from the Russia-Ukraine conflict and related pressure on corporate earnings. In addition to these broad economic factors, expected loss estimates consider various factors including customer specific information impacting changes in risk ratings, projected delinquencies, potential effects of inflationary pressures and the impact of rising interest rates on selected borrowers' liquidity and ability to repay.

**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 2022.

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, 2022 and 2021.

The commercial real estate loan class reflects the Company's focus on serving business owners within its local network, as well as regional and national investment-based real estate owners and developers. 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, 2022 and 2021. Commercial real estate loans are diversified among various property types with higher concentrations in business owner-occupied, multi-family and office properties.

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 managed by adherence to LTV and borrower credit criteria during the underwriting process.

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

The following tables provide summary information of residential mortgages and home equity and second mortgages by LTV at December 31, 2022:

| Residential Mortgages (Dollars in Millions) | Interest Only | Amortizing | Percent Total | Percent of Total |
| --- | --- | --- | --- | --- |
| Loan-to-Value |  |  |  |  |
| Less than or equal to 80% . . . | $15,474 | $82,114 | $97,588 | 84.2% |
| Over 80% through 90% . . . . . | 557 | 8,440 | 8,997 | 7.8 |
| Over 90% through 100% . . . . . | 44 | 1,514 | 1,558 | 1.4 |
| Over 100% . . . . . | 6 | 368 | 374 | .3 |
| No LTV available . . . . . | - | 11 | 11 | - |
| Loans purchased from GNMA mortgage pools (a) . . . . . | - | 7,317 | 7,317 | 6.3 |
| Total . . . . . | $16,081 | $99,764 | $115,845 | 100.0% |

(a) Represents loans purchased and loans that could be purchased from Government National Mortgage Association ('GNMA') mortgage pools under delinquent loan repurchase options whose payments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.

| Home Equity and Second Mortgages (Dollars in Millions) | Lines | Loans | Percent Total | Percent of Total |
| --- | --- | --- | --- | --- |
| Loan-to-Value / Combined Loan-to-Value |  |  |  |  |
| Less than or equal to 80% . . . | $10,657 | $1,331 | $11,988 | 93.2% |
| Over 80% through 90% . . . . . | 574 | 130 | 704 | 5.5 |
| Over 90% through 100% . . . . . | 61 | 12 | 73 | .6 |
| Over 100% . . . . . | 37 | 9 | 46 | .3 |
| No LTV/CLTV available . . . . . | 50 | 2 | 52 | .4 |
| Total . . . . . | $11,379 | $1,484 | $12,863 | 100.0% |

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Home equity and second mortgages were $12.9 billion at December 31, 2022, compared with $10.4 billion at December 31, 2021, and included $2.9 billion of home equity lines in a first lien position and $10.0 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, 2022, included approximately $3.3 billion of loans and lines for which the Company also serviced the related first lien loan, and approximately $6.7 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, 2022:

| (Dollars in Millions) | Junior Liens Behind |  |  |
| --- | --- | --- | --- |
|  | Company Owned or Serviced First Lien | Third Party First Lien | Total |
| Total | $3,311 | $6,693 | $10,004 |
| Percent 30 - 89 days past due | .50% | .42% | .45% |
| Percent 90 days or more past due | .03% | .04% | .03% |
| Weighted-average CLTV | 70% | 68% | 69% |
| Weighted-average credit score | 782 | 783 | 783 |

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.

The following table provides a summary of the Company's credit card loan balances disaggregated based upon updated credit score at December 31, 2022:

|  | Percent of Total a |
| --- | --- |
| Credit score > 660 | 87% |
| Credit score < 660 | 13 |
| No credit score | - |

(a) Credit score distribution excludes loans serviced by others.

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

| At December 31 90 days or more past due | 2022 | 2021 |
| --- | --- | --- |
| Commercial |  |  |
| Commercial | .07% | .05% |
| Lease financing | - | - |
| Total commercial | .07 | .04 |
| Commercial Real Estate |  |  |
| Commercial mortgages | - | - |
| Construction and development | .03 | .10 |
| Total commercial real estate | .01 | .03 |
| Residential Mortgages (a) | .08 | .24 |
| Credit Card | .88 | .73 |
| Other Retail |  |  |
| Retail leasing | .04 | .04 |
| Home equity and second mortgages | .28 | .35 |
| Other | .08 | .06 |
| Total other retail | .12 | .11 |
| Total loans | .13% | .15% |

| At December 31 90 days or more past due and nonperforming loans | 2022 | 2021 |
| --- | --- | --- |
| Commercial | .19% | .20% |
| Commercial real estate | .62 | .76 |
| Residential mortgages (a) | .36 | .53 |
| Credit card | .88 | .73 |
| Other retail | .37 | .35 |
| Total loans | .38% | .42% |

(a) Delinquent loan ratios exclude $2.2 billion and $1.5 billion at December 31, 2022 and 2021, respectively, of loans purchased and loans that could be purchased from GNMA mortgage pools under delinquent loan repurchase options 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 and nonperforming to total residential mortgages was 2.28 percent and 2.43 percent at December 31, 2022 and 2021, 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. Delinquent loans purchased and loans that could be purchased from GNMA mortgage pools under delinquent loan repurchase options 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 $491 million at December 31, 2022, and included $22 million of accruing loans 90 days or more past due acquired as part of the MUB acquisition, compared with $472 million at December 31, 2021. Accruing loans 90 days or more past due are not included in nonperforming assets and continue to accrue interest because they are adequately secured by collateral, are in the process of collection and are reasonably expected to result in repayment or restoration to current status, or are managed in homogeneous portfolios with specified charge-off timeframes adhering to regulatory guidelines. The ratio of accruing loans 90 days or more past due to total loans was 0.13 percent at December 31, 2022, compared with 0.15 percent at December 31, 2021.

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

| At December 31 (Dollars in Millions) | Amount |  | As a Percent of Ending Loan Balances |  |
| --- | --- | --- | --- | --- |
|  | 2022 | 2021 | 2022 | 2021 |
| Residential Mortgages (a) |  |  |  |  |
| 30-89 days | $201 | $124 | .17% | .15% |
| 90 days or more | 95 | 181 | .08 | .24 |
| Nonperforming | 325 | 226 | .28 | .30 |
| Total | $621 | $531 | .54% | .69% |
| Credit Card |  |  |  |  |
| 30-89 days | $283 | $193 | 1.08% | .86% |
| 90 days or more | 231 | 165 | .88 | .73 |
| Nonperforming | 1 | - | - | - |
| Total | $515 | $358 | 1.96% | 1.59% |
| Other Retail |  |  |  |  |
| Retail Leasing |  |  |  |  |
| 30-89 days | $27 | $29 | .49% | .40% |
| 90 days or more | 2 | 3 | .04 | .04 |
| Nonperforming | 8 | 10 | .14 | .14 |
| Total | $37 | $42 | .67% | .58% |
| Home Equity and Second Mortgages |  |  |  |  |
| 30-89 days | $65 | $55 | .51% | .53% |
| 90 days or more | 36 | 37 | .28 | .35 |
| Nonperforming | 110 | 116 | .86 | 1.11 |
| Total | $211 | $208 | 1.64% | 1.99% |
| Other (b) |  |  |  |  |
| 30-89 days | $217 | $191 | .59% | .43% |
| 90 days or more | 28 | 26 | .08 | .06 |
| Nonperforming | 21 | 24 | .06 | .05 |
| Total | $266 | $241 | .73% | .54% |

(a) Excludes $647 million of loans 30-89 days past due and $2.2 billion of loans 90 days or more past due at December 31, 2022, purchased and that could be purchased from GNMA mortgage pools under delinquent loan repurchase options that continue to accrue interest, compared with $791 million and $1.5 billion at December 31, 2021.

(b) Includes revolving credit, installment and automobile 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, 2022, performing TDRs were $3.3 billion, compared with $3.1 billion at December 31, 2021.

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.

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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:

| At December 31, 2022 (Dollars in Millions) | Performing TDRs | As a Percent of Performing TDRs |  | Nonperforming TDRs | Total TDRs |
| --- | --- | --- | --- | --- | --- |
|  |  | 30-89 Days Past Due | 90 Days or More Past Due |  |  |
| Commercial | $141 | 6.0% | 2.9% | $44 (a) | $185 |
| Commercial real estate | 102 | .3 | - | 101 (b) | 203 |
| Residential mortgages | 1,600 | 2.5 | 2.9 | 122 | 1,722 (c) |
| Credit card | 296 | 15.8 | 7.7 | - | 296 |
| Other retail | 179 | 11.2 | 4.5 | 31 (c) | 210 (c) |
| TDRs, excluding loans purchased from GNMA mortgage pools | 2,318 | 5.0 | 3.5 | 298 | 2,616 |
| Loans purchased from GNMA mortgage pools (g) | 1,018 | - | - | - | 1,018 (f) |
| Total | $3,336 | 3.5% | 2.4% | $298 | $3,634 |

(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 $205 million of residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $18 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

(e) Includes $52 million of other retail loans to borrowers that have had debt discharged through bankruptcy and $13 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

(f) Includes $155 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 $105 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

(g) Approximately 6.8 percent and 32.4 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, including previously offering payment relief to borrowers that experienced financial hardship resulting directly from the effects of the COVID-19 pandemic. 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.

**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, 2022, total nonperforming assets were $1.0 billion, and included $329 million of nonperforming loans related to the MUB acquisition, compared with $878 million at December 31, 2021. The $138 million (15.7 percent) increase in nonperforming assets, from December 31, 2021 to December 31, 2022, was driven by acquired balances partially offset by decreases in legacy portfolio nonperforming loans across all loan classes. The ratio of total nonperforming assets to total loans and other real estate was 0.26 percent at December 31, 2022, compared with 0.28 percent at December 31, 2021.

OREO was $23 million at December 31, 2022, compared with $22 million at December 31, 2021, 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.

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**TABLE 16** Nonperforming Assets$^{(a)}$

At December 31 (Dollars in Millions)

|  | 2022 | 2021 |
| --- | --- | --- |
| Commercial |  |  |
| Commercial | $139 | $139 |
| Lease financing | 30 | 35 |
| Total commercial | 169 | 174 |
| Commercial Real Estate |  |  |
| Commercial mortgages | 251 | 213 |
| Construction and development | 87 | 71 |
| Total commercial real estate | 338 | 284 |
| Residential Mortgages (b) | 325 | 226 |
| Credit Card | 1 | - |
| Other Retail |  |  |
| Retail leasing | 8 | 10 |
| Home equity and second mortgages | 110 | 116 |
| Other | 21 | 24 |
| Total other retail | 139 | 150 |
| Total nonperforming loans (1) | 972 | 834 |
| Other Real Estate (c) | 23 | 22 |
| Other Assets | 21 | 22 |
| Total nonperforming assets | $1,016 | $878 |
| Accruing loans 90 days or more past due (b) | $491 | $472 |
| Period-end loans (2) | $388,213 | $312,028 |
| Nonperforming loans to total loans (1)(2) | .25% | .27% |
| Nonperforming assets to total loans plus other real estate (c) | .26% | .28% |

## Changes in Nonperforming Assets

| (Dollars in Millions) | Commercial and Commercial Real Estate | Residential Mortgages, Credit Card and Other Retail | Total |
| --- | --- | --- | --- |
| Balance December 31, 2021 | $461 | $417 | $878 |
| Additions to nonperforming assets |  |  |  |
| New nonaccrual loans and foreclosed properties | 327 | 191 | 518 |
| Advances on loans | 7 | 2 | 9 |
| Acquired nonperforming assets | 182 | 148 | 330 |
| Total additions | 516 | 341 | 857 |
| Reductions in nonperforming assets |  |  |  |
| Paydowns, payoffs | (282) | (78) | (360) |
| Net sales | (8) | (23) | (31) |
| Return to performing status | (65) | (143) | (208) |
| Charge-offs (d) | (113) | (7) | (120) |
| Total reductions | (468) | (251) | (719) |
| Net additions to (reductions in) nonperforming assets | 48 | 90 | 138 |
| Balance December 31, 2022 | $509 | $507 | $1,016 |

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

(b) Excludes $2.2 billion and $1.5 billion at December 31, 2022 and 2021, respectively, of loans purchased and loans that could be purchased from GNMA mortgage pools under delinquent loan repurchase options 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 $53 million and $22 million at December 31, 2022 and 2021, 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.

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

| Year Ended December 31 (Dollars in Millions) | 2022 |  |  | 2021 |  |  | 2020 |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | Average Loan Balance | Net Charge-offs | Percent | Average Loan Balance | Net Charge-offs | Percent | Average Loan Balance | Net Charge-offs | Percent |
| Commercial |  |  |  |  |  |  |  |  |  |
| Commercial | $118,967 | $211 | .18% | $97,649 | $97 | .10% | $108,367 | $483 | .45% |
| Lease financing | 4,830 | 16 | .33 | 5,206 | 6 | .12 | 5,600 | 30 | .54 |
| Total commercial | 123,797 | 227 | .18 | 102,855 | 103 | .10 | 113,967 | 513 | .45 |
| Commercial real estate |  |  |  |  |  |  |  |  |  |
| Commercial mortgages | 30,890 | 17 | .06 | 27,997 | (14) | (.05) | 29,641 | 185 | .62 |
| Construction | 10,208 | 20 | .20 | 10,784 | 16 | .15 | 10,907 | 2 | .02 |
| Total commercial real estate | 41,098 | 37 | .09 | 38,781 | 2 | .01 | 40,548 | 187 | .46 |
| Residential mortgages | 84,749 | (23) | (.03) | 74,629 | (32) | (.04) | 73,667 | (12) | (.02) |
| Credit card | 23,478 | 524 | 2.23 | 21,645 | 512 | 2.37 | 22,332 | 829 | 3.71 |
| Other retail |  |  |  |  |  |  |  |  |  |
| Retail leasing | 6,459 | 3 | .05 | 7,710 | 2 | .03 | 8,405 | 81 | .96 |
| Home equity and second mortgages | 11,051 | (7) | (.06) | 11,228 | (10) | (.09) | 13,894 | (4) | (.03) |
| Other | 42,941 | 302 | .70 | 40,117 | 105 | .26 | 34,456 | 192 | .56 |
| Total other retail | 60,451 | 298 | .49 | 59,055 | 97 | .16 | 56,755 | 269 | .47 |
| Total loans | $333,573 | $1,063 | .32% | $296,965 | $682 | .23% | $307,269 | $1,786 | .58% |

**Analysis of Loan Net Charge-offs** Total loan net charge-offs were $1.1 billion in 2022, compared with $682 million in 2021.

The $381 million (55.9 percent) increase in total net charge-offs in 2022, compared with 2021, reflected $179 million of uncollectible MUB acquired loans, of which the majority of this balance related to loans that were previously charged-off by MUB, as well as $189 million of net charge-offs related to balance sheet repositioning and capital management actions taken during the fourth quarter of 2022 in connection with the acquisition. These increases in net charge-offs were partially offset by lower credit card net charge-offs in the legacy portfolio. The ratio of total loan net charge-offs to average loans outstanding, including the impacts of the acquisition, was 0.32 percent in 2022, compared with 0.23 percent in 2021.

Commercial and commercial real estate loan net charge-offs for 2022 were $264 million (0.16 percent of average loans outstanding), compared with $105 million (0.07 percent of average loans outstanding) in 2021. The increase in net charge-offs in 2022, compared with 2021, were driven primarily by MUB purchase accounting related net charge-offs of $143 million.

Residential mortgage loan net charge-offs for 2022 reflected a net recovery of $23 million (0.03 percent of average loans outstanding), compared with a net recovery of $32 million (0.04 percent of average loans outstanding) in 2021. Credit card loan net charge-offs in 2022 were $524 million (2.23 percent of average loans outstanding), compared with $512 million (2.37 percent of average loans outstanding) in 2021. Other retail loan net charge-offs for 2022 were $298 million (0.49 percent of average loans outstanding), compared with $97 million (0.16 percent of average loans outstanding) in 2021. The increase in total residential mortgage, credit card and other retail loan net charge-offs in 2022, compared with 2021, was driven by charge-offs related to the balance sheet repositioning and capital management actions taken in the fourth quarter of 2022, along

with MUB purchase accounting related net charge-offs, partially offset by lower net charge-offs in the legacy portfolio.

#### **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 economic forecast uncertainty. 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.

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Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments, which is included in other liabilities in the Consolidated Balance Sheet. Both the allowance for loan losses and the liability for unfunded credit commitments are included in the Company's analysis of credit losses and reported reserve ratios.

The allowance recorded for credit losses utilizes forward-looking expected loss models to consider a variety of factors affecting lifetime credit losses. These factors include, but are not limited to, macroeconomic variables such as unemployment rates, real estate prices, gross domestic product levels, inflation, interest rates, 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 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. For smaller commercial loans collectively evaluated for impairment, historical loss experience is also incorporated into the allowance methodology applied to this category of loans.

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

When evaluating the appropriateness of the allowance for credit losses for any loans and lines in a junior lien position, the Company considers the delinquency and modification status of

the first lien. At December 31, 2022, the Company serviced the first lien on 33 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 $195 million or 1.5 percent of its total home equity portfolio at December 31, 2022, represented non-delinquent junior liens where the first lien was delinquent or modified.

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 PCD. An allowance is established for each population and considers product mix, risk characteristics of the portfolio and delinquency status and refreshed LTV ratios when possible. PCD loans also consider whether the loan has experienced a charge-off, bankruptcy or significant deterioration since origination. 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 had a total unpaid principal balance of $5.1 billion of PCD loans, primarily related to the MUB acquisition, included in its loan portfolio at December 31, 2022.

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.

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.

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At December 31, 2022, the allowance for credit losses was $7.4 billion, compared with an allowance of $6.2 billion at December 31, 2021. The increase in the allowance for credit losses of $1.2 billion (20.3 percent) at December 31, 2022, compared with December 31, 2021, included $336 million of initial allowance recorded through purchase accounting as well as the provision for credit losses of $662 million related to acquired loans from MUB, along with loan growth in the legacy portfolio and increased economic uncertainty.

The ratio of the allowance for credit losses to period-end loans was 1.91 percent at December 31, 2022, compared with 1.97 percent at December 31, 2021. The ratio of the allowance for credit losses to nonperforming loans was 762 percent at December 31, 2022, compared with 738 percent at

December 31, 2021. The ratio of the allowance for credit losses to annual loan net charge-offs at December 31, 2022, was 697 percent, compared with 902 percent at December 31, 2021. Management determined the allowance for credit losses was appropriate on December 31, 2022 and 2021.

Economic conditions considered in estimating the allowance for credit losses at December 31, 2022 included changes in projected gross domestic product and unemployment levels. These factors are evaluated through a combination of quantitative calculations using multiple economic scenarios and additional qualitative assessments that consider the high degree of economic uncertainty in the current environment. The projected unemployment rates for 2023 considered in the estimate range from 3.5 percent to 8.4 percent.

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, 2022 and 2021:

|  | December 31, 2022 | December 31, 2021 |
| --- | --- | --- |
| United States unemployment rate for the three months ending (a) |  |  |
| December 31, 2022 | 3.7% | 3.5% |
| June 30, 2023 | 4.0 | 3.5 |
| December 31, 2023 | 4.2 | 3.5 |
| United States real gross domestic product for the three months ending (b) |  |  |
| December 31, 2022 | .4% | 3.4% |
| June 30, 2023 | 1.1 | 2.9 |
| December 31, 2023 | 1.0 | 2.9 |

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

(b) Reflects year-over-year growth rates.

The allowance for credit losses related to commercial lending segment loans increased $516 million during the year ended December 31, 2022, reflecting the impact of the MUB acquisition, along with the impacts of loan growth and increasing economic uncertainty.

The allowance for credit losses related to consumer lending segment loans increased $733 million during the year ended

December 31, 2022, due to the impacts of the MUB acquisition, loan growth and economic uncertainty, along with the effects of higher interest rates on the life of the residential mortgage portfolios and normalizing credit trends in the unsecured portfolios.

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**TABLE 18** Summary of Allowance for Credit Losses

| (Dollars in Millions) | 2022 | 2021 | 2020 |
| --- | --- | --- | --- |
| Balance at beginning of year | $6,155 | $8,010 | $4,491 |
| Allowance for acquired credit losses (a) | 336 | - | - |
| Change in accounting principle (b) | - | - | 1,499 |
| Charge-Offs |  |  |  |
| Commercial |  |  |  |
| Commercial | 294 | 206 | 536 |
| Lease financing | 25 | 16 | 39 |
| Total commercial | 319 | 222 | 575 |
| Commercial real estate |  |  |  |
| Commercial mortgages | 28 | 9 | 202 |
| Construction and development | 26 | 20 | 8 |
| Total commercial real estate | 54 | 29 | 210 |
| Residential mortgages | 13 | 18 | 19 |
| Credit card | 696 | 686 | 975 |
| Other retail |  |  |  |
| Retail leasing | 18 | 26 | 101 |
| Home equity and second mortgages | 9 | 12 | 16 |
| Other | 391 | 215 | 284 |
| Total other retail | 418 | 253 | 401 |
| Total charge-offs | 1,500 | 1,208 | 2,180 |
| Recoveries |  |  |  |
| Commercial |  |  |  |
| Commercial | 83 | 109 | 53 |
| Lease financing | 9 | 10 | 9 |
| Total commercial | 92 | 119 | 62 |
| Commercial real estate |  |  |  |
| Commercial mortgages | 11 | 23 | 17 |
| Construction and development | 6 | 4 | 6 |
| Total commercial real estate | 17 | 27 | 23 |
| Residential mortgages | 36 | 50 | 31 |
| Credit card | 172 | 174 | 146 |
| Other retail |  |  |  |
| Retail leasing | 15 | 24 | 20 |
| Home equity and second mortgages | 16 | 22 | 20 |
| Other | 89 | 110 | 92 |
| Total other retail | 120 | 156 | 132 |
| Total recoveries | 437 | 526 | 394 |
| Net Charge-Offs |  |  |  |
| Commercial |  |  |  |
| Commercial | 211 | 97 | 483 |
| Lease financing | 16 | 6 | 30 |
| Total commercial | 227 | 103 | 513 |
| Commercial real estate |  |  |  |
| Commercial mortgages | 17 | (14) | 185 |
| Construction and development | 20 | 16 | 2 |
| Total commercial real estate | 37 | 2 | 187 |
| Residential mortgages | (23) | (32) | (12) |
| Credit card | 524 | 512 | 829 |
| Other retail |  |  |  |
| Retail leasing | 3 | 2 | 81 |
| Home equity and second mortgages | (7) | (10) | (4) |
| Other | 302 | 105 | 192 |
| Total other retail | 298 | 97 | 269 |
| Total net charge-offs | 1,063 (c) | 682 | 1,786 |
| Provision for credit losses | 1,977 (d) | (1,173) | 3,806 |
| Other changes | (1) | - | - |
| Balance at end of year | $7,404 | $6,155 | $8,010 |
| Components |  |  |  |
| Allowance for loan losses | $6,936 | $5,724 | $7,314 |
| Liability for unfunded credit commitments | 468 | 431 | 696 |
| Total allowance for credit losses (1) | $7,404 | $6,155 | $8,010 |
| Period-end loans (2) | $388,213 | $312,028 | $297,707 |
| Nonperforming loans (3) | 972 | 834 | 1,224 |
| Allowance for Credit Losses as a Percentage of |  |  |  |
| Period-end loans (1)(2) | 1.91% | 1.97% | 2.69% |
| Nonperforming loans (1)(3) | 762 | 738 | 654 |
| Nonperforming and accruing loans 90 days or more past due | 506 | 471 | 471 |
| Nonperforming assets | 729 | 701 | 617 |
| Net charge-offs | 697 | 902 | 448 |

(a) Allowance for purchased credit deteriorated and charged-off loans acquired from MUB.

(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.

(c) Includes $179 million of net charge-offs related to uncollectible MUB acquired loans, of which the majority of this balance related to loans that were previously charged-off by MUB, as well as $189 million of net charge-offs related to balance sheet repositioning and capital management actions taken during the fourth quarter of 2022 in connection with the acquisition.

(d) Includes provision for credit losses of $662 million related to the acquisition of MUB and a $129 million provision impact of balance sheet repositioning and capital management actions taken in the fourth quarter of 2022 related to the acquisition.

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**TABLE 19** Allocation of the Allowance for Credit Losses

| At December 31 (Dollars in Millions) | Allowance Amount |  | Allowance as a Percent of Loans |  |
| --- | --- | --- | --- | --- |
|  | 2022 | 2021 | 2022 | 2021 |
| Commercial |  |  |  |  |
| Commercial | $2,087 | $1,779 | 1.59% | 1.66% |
| Lease financing | 76 | 70 | 1.67 | 1.37 |
| Total commercial | 2,163 | 1,849 | 1.59 | 1.65 |
| Commercial Real Estate |  |  |  |  |
| Commercial mortgages | 878 | 699 | 2.01 | 2.43 |
| Construction and development | 447 | 424 | 3.81 | 4.12 |
| Total commercial real estate | 1,325 | 1,123 | 2.39 | 2.88 |
| Residential Mortgages | 926 | 565 | .80 | .74 |
| Credit Card | 2,020 | 1,673 | 7.68 | 7.44 |
| Other Retail |  |  |  |  |
| Retail leasing | 127 | 136 | 2.30 | 1.87 |
| Home equity and second mortgages | 298 | 231 | 2.32 | 2.21 |
| Other | 545 | 578 | 1.49 | 1.31 |
| Total other retail | 970 | 945 | 1.77 | 1.53 |
| Total allowance | $7,404 | $6,155 | 1.91% | 1.97% |

**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 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 $4.4 billion of retail leasing residuals at December 31, 2022, compared with $5.6 billion at December 31, 2021. The Company monitors concentrations of leases by manufacturer and vehicle type. As of December 31, 2022, vehicle lease residuals related to sport utility vehicles were 49.9 percent of the portfolio, while truck and crossover utility vehicle classes represented approximately 29.2 percent and 14.7 percent of the portfolio, respectively. At year-end 2022, the individual vehicle model with the largest residual value outstanding represented 19.8 percent of the aggregate residual value of all vehicles in the portfolio. At December 31, 2022, the weighted-average origination term of the portfolio was 42 months, compared with 41 months at December 31, 2021. At December 31, 2022, the commercial leasing portfolio had $500 million of residuals, compared with $515 million at December 31, 2021. At year-end 2022, lease residuals related to trucks and other transportation equipment represented 36.1 percent of the total residual portfolio, while business and office equipment represented 29.3 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 business activities, including those additional or increased risks created by economic and financial disruptions. 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

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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 economic and financial disruptions. Refer to “Supervision and Regulation” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, 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 overseeing 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. Net interest income sensitivities reflect the impact of current market expectations for interest rates, driving an increase in baseline projected net interest income. As market expectations are reflected in projected results, incremental interest rate sensitivity declines on a percentage basis.

#### **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 loans and 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.

**TABLE 20** Sensitivity of Net Interest Income

|  | December 31, 2022 (a) |  |  |  | December 31, 2021 |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | 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 | (.58)% | .95% | (2.02)% | 1.44% | (3.77)% | 3.09% | * | 5.39% |

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

(a) December 31, 2022 amounts include MUB.

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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. Refer to Note 10 of the Notes to Consolidated Financial Statements for additional information regarding MSRs, including management of the changes in fair value.

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. 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. 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. The Company may mitigate credit risk on loans or lending portfolios through the use of credit contracts.

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, as well as all non-United States Dollar LIBOR tenors, 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, servicer, and asset manager, which involve financial instruments that will be similarly impacted by the discontinuance of LIBOR.

In order to facilitate the transition process, the Company has instituted a LIBOR Transition Office and commenced an enterprise-wide project to (1) identify, assess, monitor and mitigate risks associated with the expected discontinuance or unavailability of LIBOR, (2) actively engage with industry working groups and regulators, (3) develop and implement training and education materials with respect to LIBOR and its discontinuance for the Company and for customers, (4) achieve operational readiness for the use of alternative reference rates (“ARRs”) in new financial instruments and transition existing LIBOR financial instruments to ARRs, (5) develop and implement customer notification programs across the Company and engage impacted customers to remediate and transition impacted instruments, and (6) develop reporting on remediation of LIBOR instruments across the Company for both internal and external stakeholders. The Company has also invested in updating its systems, models, procedures and internal infrastructure as part of the transition program.

The Company transitioned its financial instruments associated to LIBOR currencies and tenors that ceased or became nonrepresentative on December 31, 2021, to ARRs, with limited exceptions. 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 ARRs such as the Secured Overnight Financing Rate (“SOFR”). The Company also anticipates that additional financial instruments associated with the remaining United States Dollar LIBOR tenors will require transition to a new reference rate by June 30, 2023. The Company has been undergoing an enterprise-wide effort to proactively reprice LIBOR loans and derivatives that mature after June 30, 2023, with customers to an ARR. 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.

The Company’s MUB acquisition impacts the execution of the Company’s LIBOR transition strategies and execution plans. The Company is currently assessing MUB’s LIBOR transition program, remediation strategies, and preparedness to execute on remediation strategies. In certain instances, the Company and MUB have different remediation strategies. As a result, the Company is updating its LIBOR transition plans to ensure that the Company can execute remediation plans across all products and business units, including with respect to MUB.

The Company is currently assessing the applicability and scope of the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”), which was enacted on March 15, 2022, and the Regulations Implementing the Adjustable Interest Rate (LIBOR) Act (Regulation ZZ) (the “Final Rules”), which were implemented

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on December 16, 2022. The LIBOR Act and Final Rules establish a process for replacing LIBOR in existing LIBOR contracts that do not provide for the use of a clearly defined or practicable replacement benchmark rate by providing that a benchmark replacement identified by the Federal Reserve Board that is based on SOFR will replace LIBOR as the benchmark for those contracts as a matter of law, without the need to be amended by the parties. The Company is currently assessing its outstanding LIBOR portfolio to determine the eligibility of certain financial instruments for the LIBOR Act and will incorporate the LIBOR Act as a remediation strategy where prudent. Refer to “Risk Factors” beginning on page 140, 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. VaR

amounts reflect MUB beginning December 1, 2022, the day the acquisition transaction closed.

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) | 2022 | 2021 |
| --- | --- | --- |
| Average | $2 | $2 |
| High | 7 | 4 |
| Low | 1 | 1 |
| Period-end | 5 | 2 |

The Company did not experience any actual losses for its combined Covered Positions that exceeded VaR during the years ended December 31, 2022 and 2021. 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) | 2022 | 2021 |
| --- | --- | --- |
| Average | $10 | $7 |
| High | 19 | 9 |
| Low | 6 | 5 |
| Period-end | 13 | 7 |

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

The Company also measures the market risk of its hedging activities related to residential MLHFS and MSRs using the Historical Simulation method. The VaRs are measured at the ninety-ninth percentile and employ factors pertinent to the market risks inherent in the valuation of the assets and hedges. A one-year look-back period is used to obtain past market data for the models.

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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) | 2022 | 2021 |
| --- | --- | --- |
| Residential Mortgage Loans Held For Sale and Related Hedges |  |  |
| Average | $2 | $9 |
| High | 5 | 19 |
| Low | - | 4 |
| Mortgage Servicing Rights and Related Hedges |  |  |
| Average | $8 | $4 |
| High | 20 | 11 |
| Low | 3 | 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, 2022, the fair value of unencumbered investment securities totaled $135.5 billion, compared with $144.0 billion at December 31, 2021. 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, 2022, the Company could have borrowed a total of an additional $114.8 billion from the FHLB and Federal Reserve Bank based on collateral available for additional borrowings.

The Company's diversified deposit base provides a sizeable source of relatively stable and low-cost funding, while reducing the Company's reliance on the wholesale markets. Total deposits were $525.0 billion at December 31, 2022, compared with $456.1 billion at December 31, 2021. 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 $39.8 billion at December 31, 2022, 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 $31.2 billion at December 31, 2022, 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.

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**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. During 2022, the Company used approximately $5.5 billion of parent company cash to acquire MUB. 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 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, 2022, parent company long-term debt outstanding was $27.0 billion, compared with $18.9 billion at December 31, 2021. The increase was primarily due to $6.9 billion of medium-term note and $1.3 billion of subordinated note issuances, along with an increase related to the $3.5 billion of additional capital received as part of the MUB acquisition. These increases were partially offset by $1.3 billion of subordinated note and $1.0 billion of medium-term note repayments. As of December 31, 2022, there was no parent company debt scheduled to mature in 2023. 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 banks are subject to regulatory review and statutory limitations and, in some instances, regulatory approval. In general, dividends to the parent company from its banking subsidiaries are limited by rules which compare dividends to net income for regulatoryly-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, 2022, the Company was compliant with this requirement.

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

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characteristics of their assets, commitments, and derivative exposures over a one-year time horizon. At December 31, 2022, the Company was compliant with this requirement.

**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 2022. 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, 2022, the Company had an aggregate amount on deposit with European banks of approximately $7.7 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, including the impacts resulting from the Russia-Ukraine conflict, 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 consolidated entities, under which the Company has an obligation to pay certain amounts, provide credit or liquidity enhancements or provide 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.

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. 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, 2022 were

$387.4 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, 2022 were $11.4 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 $2.4 billion, was $3.0 billion at December 31, 2022.

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 $177 million at December 31, 2022, and the Company had unfunded commitments to invest an additional $133 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.

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**Capital Management** The Company is committed to managing capital to maintain strong protection for depositors and creditors and for maximum shareholder benefit. The Company also manages its capital to exceed regulatory capital requirements for banking organizations. 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 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 acquisition of MUB. The Company does not expect to commence repurchasing its common stock until after its common equity tier 1 capital ratio approximates 9.0 percent at which time the Company will assess its capital position relative to existing and proposed regulatory capital requirements.

The Company announced on September 13, 2022 that its Board of Directors had approved a regular quarterly dividend of $0.48 per common share. This represented a 4.3 percent increase over the previous dividend rate per common share of $0.46 per quarter.

The Company will continue to monitor its capital position and may adjust its capital distributions based on economic conditions, existing and proposed regulatory capital requirements and its financial performance. Capital distributions, including dividends and stock repurchases, are subject to the approval of the Company's Board of Directors and compliance 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 $50.8 billion at December 31, 2022, compared with $54.9 billion at December 31, 2021. The decrease was primarily the result of changes in unrealized gains and losses on available-for-sale investment securities included in other comprehensive income (loss) and dividends paid, partially offset by corporate earnings, the issuance of additional common shares related to the acquisition of MUB and the issuance of preferred stock.

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, 2022, 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, 2022, 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 2022, the Company began to phase into its regulatory capital requirements the cumulative deferred impact of its 2020 adoption of the accounting guidance related to the impairment of financial instruments based on the current expected credit losses ('CECL') methodology plus 25 percent of its quarterly credit reserve increases over the past two years. This cumulative deferred impact will be phased into the Company's regulatory capital over the next three years, culminating with a fully phased in regulatory capital calculation beginning in 2025. As of December 31, 2022, the Company's bank subsidiaries met all regulatory capital ratios to be considered 'well-capitalized'. There are no conditions or events since December 31, 2022 that management believes have changed the risk-based category of its covered subsidiary banks.

As an approved mortgage seller and servicer, the Company's banking subsidiaries, through their mortgage banking divisions, are 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, 2022, the Company's banking subsidiaries met these requirements.

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**TABLE 22 Regulatory Capital Ratios**

| At December 31 (Dollars in Millions) | 2022 | 2021 |
| --- | --- | --- |
| Basel III standardized approach: |  |  |
| Common shareholders' equity | $43,958 | $48,547 |
| Less intangible assets |  |  |
| Goodwill (net of deferred tax liability) | (11,395) | (9,323) |
| Other disallowed intangible assets (net of deferred tax liability) | (2,792) | (785) |
| Other (a) | 11,789 | 3,262 |
| Common equity tier 1 capital | 41,560 | 41,701 |
| Qualifying preferred stock | 6,808 | 6,371 |
| Noncontrolling interests eligible for tier 1 capital | 450 | 450 |
| Other (b) | (5) | (6) |
| Tier 1 capital | 48,813 | 48,516 |
| Eligible portion of allowance for credit losses | 5,682 | 4,081 |
| Subordinated debt and noncontrolling interests eligible for tier 2 capital | 4,520 | 3,653 |
| Tier 2 capital | 10,202 | 7,734 |
| Total risk-based capital | $59,015 | $56,250 |
| Risk-weighted assets | $496,500 | $418,571 |
| Common equity tier 1 capital as a percent of risk-weighted assets | 8.4% | 10.0% |
| Tier 1 capital as a percent of risk-weighted assets | 9.8 | 11.6 |
| Total risk-based capital as a percent of risk-weighted assets | 11.9 | 13.4 |
| Tier 1 capital as a percent of adjusted quarterly average assets (leverage ratio) | 7.9 | 8.6 |
| Tier 1 capital as a percent of total on- and off-balance sheet leverage exposure (total leverage exposure ratio) | 6.4 | 6.9 |

(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.

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

Table 22 provides a summary of statutory regulatory capital ratios in effect for the Company at December 31, 2022 and 2021. All regulatory ratios exceeded regulatory 'well-capitalized' requirements.

The Company believes certain other capital ratios are useful in evaluating its capital adequacy. The Company's tangible common equity, as a percent of tangible assets and as a percent of risk-weighted assets determined in accordance with transitional regulatory capital requirements related to the CECL methodology under the standardized approach, was 4.5 percent and 6.0 percent, respectively, at December 31, 2022, compared with 6.8 percent and 9.2 percent at December 31, 2021, 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 8.1 percent at December 31, 2022, compared with 9.6 percent at December 31, 2021. Refer to 'Non-GAAP Financial Measures' beginning on page 59 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 2022, certain organization and methodology changes were made and, accordingly, 2021 results were restated and presented on a comparable basis. Effective with the close of the MUB acquisition, MUB related business activities were integrated into the applicable line of business results.

**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 $1.8 billion of the Company's net income in 2022, or an increase of $277 million (17.7 percent), compared with 2021.

Net revenue increased $584 million (15.0 percent) in 2022, compared with 2021. Net interest income, on a taxable-

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equivalent basis, increased $615 million (21.6 percent) in 2022, compared with 2021, primarily due to higher loan and interest-bearing deposit balances, including those balances related to MUB, and the impact of higher rates on the margin benefit from deposits, partially offset by lower spreads on loans and lower noninterest-bearing deposits. Noninterest income decreased $31 million (3.0 percent) in 2022, compared with 2021, primarily due to lower commercial products revenue due to lower capital markets revenue, partially offset by higher trading revenue.

Noninterest expense increased $131 million (7.5 percent) in 2022, compared with 2021, primarily due to higher FDIC insurance expense, higher net shared services expense driven by investment in support of business growth and the impacts of the MUB acquisition, as well as higher compensation and employee benefits expense primarily due to merit increases and hiring to support business growth, partially offset by lower performance-based incentives related to capital markets activity. The provision for credit losses increased $84 million in 2022, compared with 2021, primarily due to loan loss provisions supporting growth in loan balances.

**Consumer and Business Banking** Consumer and Business Banking comprises consumer banking, small business banking and consumer lending. Products and services are delivered through banking offices, telephone servicing and sales, on-line services, direct mail, ATM processing, mobile devices, distributed mortgage loan officers, and intermediary relationships including auto dealerships, mortgage banks, and strategic business partners. Consumer and Business Banking contributed $1.8 billion of the Company's net income in 2022, or a decrease of $551 million (23.4 percent), compared with 2021.

Net revenue decreased $121 million (1.4 percent) in 2022, compared with 2021. Noninterest income decreased $940 million (37.7 percent) in 2022, compared with 2021, primarily due to lower mortgage banking revenue reflecting lower application volume, lower related gain on sale margins and lower performing loan sales, partially offset by an increase in the fair value of MSRs, net of hedging activities. Net interest income, on a taxable-equivalent basis, increased $819 million (13.5 percent) in 2022, compared with 2021, reflecting the favorable impact of higher rates on the margin benefit of deposits, partially offset by lower spreads on loans and lower loan fees.

Noninterest expense increased $249 million (4.5 percent) in 2022, compared with 2021, primarily due to increases in net shared services expense due to investments in digital capabilities and the impact of the MUB acquisition, as well as lower capitalized loan costs driven by lower mortgage production, partially offset by lower compensation and employee benefits expense and related loan expenses due to lower mortgage production. The provision for credit losses increased $364 million in 2022, compared with 2021, due to the impacts of balance sheet repositioning and capital management actions taken in the fourth quarter of 2022 in connection with the acquisition, along with loan balance growth and more favorable credit trends in 2021.

**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 $1.3 billion of the Company's net income in 2022, or an increase of $471 million (55.9 percent), compared with 2021.

Net revenue increased $953 million (29.6 percent) in 2022, compared with 2021. Net interest income, on a taxable-equivalent basis, increased $622 million (62.1 percent) in 2022, compared with 2021, primarily due to the favorable impact of higher rates on the margin benefit from deposits. Noninterest income increased $331 million (14.9 percent) in 2022, compared with 2021, primarily driven by higher trust and investment management fees reflecting lower money market fund fee waivers, the impact of the PFM acquisition and core business growth, partially offset by the impact of unfavorable market conditions.

Noninterest expense increased $323 million (15.4 percent) in 2022, compared with 2021, reflecting higher compensation and employee benefits expense as a result of merit increases, the PFM acquisition, core business growth and performance-based incentives, as well as higher net shared services expense driven by investment in support of business growth and the impact of the MUB acquisition.

**Payment Services** Payment Services includes consumer and business credit cards, stored-value cards, debit cards, corporate, government and purchasing card services and merchant processing. Payment Services contributed $1.3 billion of the Company's net income in 2022, or a decrease of $380 million (22.3 percent), compared with 2021.

Net revenue increased $290 million (4.8 percent) in 2022, compared with 2021. Net interest income, on a taxable-equivalent basis, increased $41 million (1.7 percent) in 2022, compared with 2021, primarily due to higher loan balances, higher loan fees and higher loan yields driven by higher interest rates, partially offset by higher funding costs. Noninterest income increased $249 million (7.0 percent) in 2022, compared with 2021, mainly due to continued strengthening of consumer and business spending across most sectors. As a result, there was strong growth in corporate payment products revenue driven by improving business spending across all product groups. In addition, merchant processing services revenue increased due to higher sales volume and higher merchant fees, partially offset by the impact of foreign currency rate changes in Europe.

Noninterest expense increased $165 million (4.9 percent) in 2022, compared with 2021, reflecting higher net shared services expense driven by investment in infrastructure and technology development, in addition to higher compensation and employee benefits expense as a result of merit increases and core business growth. The provision for credit losses increased $631 million in 2022, compared with 2021, primarily due to the impacts of increasing delinquency rates, along with stronger growth in loan balances.

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**TABLE 23** Line of Business Financial Performance

| Year Ended December 31 (Dollars in Millions) | Corporate and Commercial Banking |  |  | Consumer and Business Banking |  |  | Wealth Management and Investment Services |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | 2022 | 2021 | Percent Change | 2022 | 2021 | Percent Change | 2022 | 2021 | Percent Change |
| Condensed Income Statement |  |  |  |  |  |  |  |  |  |
| Net interest income (taxable-equivalent basis) | $3,468 | $2,853 | 21.6% | $6,904 | $6,085 | 13.5% | $1,624 | $1,002 | 62.1% |
| Noninterest income | 1,008 | 1,039 | (3.0) | 1,556 | 2,496 | (37.7) | 2,553 | 2,222 | 14.9 |
| Total net revenue | 4,476 | 3,892 | 15.0 | 8,460 | 8,581 | (1.4) | 4,177 | 3,224 | 29.6 |
| Noninterest expense | 1,872 | 1,741 | 7.5 | 5,824 | 5,575 | 4.5 | 2,417 | 2,094 | 15.4 |
| Income (loss) before provision and income taxes | 2,604 | 2,151 | 21.1 | 2,636 | 3,006 | (12.3) | 1,760 | 1,130 | 55.8 |
| Provision for credit losses | 149 | 65 | * | 228 | (136) | * | 9 | 7 | 28.6 |
| Income (loss) before income taxes | 2,455 | 2,086 | 17.7 | 2,408 | 3,142 | (23.4) | 1,751 | 1,123 | 55.9 |
| Income taxes and taxable-equivalent adjustment | 614 | 522 | 17.6 | 602 | 785 | (23.3) | 438 | 281 | 55.9 |
| Net income (loss) | 1,841 | 1,564 | 17.7 | 1,806 | 2,357 | (23.4) | 1,313 | 842 | 55.9 |
| Net (income) loss attributable to noncontrolling interests | - | - | - | - | - | - | - | - | - |
| Net income (loss) attributable to U.S. Bancorp | $1,841 | $1,564 | 17.7 | $1,806 | $2,357 | (23.4) | $1,313 | $842 | 55.9 |
| Average Balance Sheet |  |  |  |  |  |  |  |  |  |
| Loans | $127,916 | $103,404 | 23.7 | $145,079 | $140,890 | 3.0 | $22,410 | $18,095 | 23.8 |
| Goodwill | 1,915 | 1,715 | 11.7 | 3,249 | 3,429 | (5.2) | 1,720 | 1,628 | 5.7 |
| Other intangible assets | 57 | 5 | * | 3,785 | 2,761 | 37.1 | 308 | 84 | * |
| Assets | 143,370 | 115,423 | 24.2 | 160,713 | 161,385 | (.4) | 26,036 | 21,303 | 22.2 |
| Noninterest-bearing deposits | 57,451 | 61,991 | (7.3) | 32,256 | 33,063 | (2.4) | 24,721 | 24,663 | .2 |
| Interest-bearing deposits | 97,169 | 71,711 | 35.5 | 167,938 | 157,592 | 6.6 | 73,461 | 76,000 | (3.3) |
| Total deposits | 154,620 | 133,702 | 15.6 | 200,194 | 190,655 | 5.0 | 98,182 | 100,663 | (2.5) |
| Total U.S. Bancorp shareholders' equity | 14,403 | 13,906 | 3.6 | 12,550 | 12,319 | 1.9 | 3,675 | 3,154 | 16.5 |

| Year Ended December 31 (Dollars in Millions) | Payment Services |  |  | Treasury and Corporate Support |  |  | Consolidated Company |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | 2022 | 2021 | Percent Change | 2022 | 2021 | Percent Change | 2022 | 2021 | Percent Change |
| Condensed Income Statement |  |  |  |  |  |  |  |  |  |
| Net interest income (taxable-equivalent basis) | $2,498 | $2,457 | 1.7% | $352 | $203 | 73.4% | $14,846 | $12,600 | 17.8% |
| Noninterest income | 3,799 | 3,550 | 7.0 | 540 | 920 | (41.3) | 9,456 | 10,227 | (7.5) |
| Total net revenue | 6,297 | 6,007 | 4.8 | 892 | 1,123 | (20.6) | 24,302 | 22,827 | 6.5 |
| Noninterest expense | 3,551 | 3,386 | 4.9 | 1,242 | 932 | 33.3 | 14,906 | 13,728 | 8.6 |
| Income (loss) before provision and income taxes | 2,746 | 2,621 | 4.8 | (350) | 191 | * | 9,396 | 9,099 | 3.3 |
| Provision for credit losses | 980 | 349 | * | 611 | (1,458) | * | 1,977 | (1,173) | * |
| Income (loss) before income taxes | 1,766 | 2,272 | (22.3) | (961) | 1,649 | * | 7,419 | 10,272 | (27.8) |
| Income taxes and taxable-equivalent adjustment | 442 | 568 | (22.2) | (515) | 131 | * | 1,581 | 2,287 | (30.9) |
| Net income (loss) | 1,324 | 1,704 | (22.3) | (446) | 1,518 | * | 5,838 | 7,985 | (26.9) |
| Net (income) loss attributable to noncontrolling interests | - | - | - | (13) | (22) | 40.9 | (13) | (22) | 40.9 |
| Net income (loss) attributable to U.S. Bancorp | $1,324 | $1,704 | (22.3) | $(459) | $1,496 | * | $5,825 | $7,963 | (26.8) |
| Average Balance Sheet |  |  |  |  |  |  |  |  |  |
| Loans | $34,627 | $30,856 | 12.2 | $3,541 | $3,720 | (4.8) | $333,573 | $296,965 | 12.3 |
| Goodwill | 3,305 | 3,184 | 3.8 | - | - | - | 10,189 | 9,956 | 2.3 |
| Other intangible assets | 423 | 507 | (16.6) | 4 | - | * | 4,577 | 3,357 | 36.3 |
| Assets | 41,109 | 36,549 | 12.5 | 220,921 | 221,872 | (.4) | 592,149 | 556,532 | 6.4 |
| Noninterest-bearing deposits | 3,410 | 4,861 | (29.8) | 2,556 | 2,626 | (2.7) | 120,394 | 127,204 | (5.4) |
| Interest-bearing deposits | 162 | 145 | 11.7 | 3,260 | 1,629 | * | 341,990 | 307,077 | 11.4 |
| Total deposits | 3,572 | 5,006 | (28.6) | 5,816 | 4,255 | 36.7 | 462,384 | 434,281 | 6.5 |
| Total U.S. Bancorp shareholders' equity | 8,235 | 7,642 | 7.8 | 11,553 | 16,789 | (31.2) | 50,416 | 53,810 | (6.3) |

\* Not meaningful

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**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 a net loss of $459 million in 2022, compared with net income of $1.5 billion in 2021.

Net revenue decreased $231 million (20.6 percent) in 2022, compared with 2021. Noninterest income decreased $380 million (41.3 percent) in 2022, compared with 2021, primarily due to the impacts of balance sheet repositioning and capital management actions taken in the fourth quarter of 2022 associated with the acquisition of MUB, partially offset by higher tax-advantaged investment syndication revenue. Net interest income, on a taxable-equivalent basis, increased $149 million (73.4 percent) in 2022, compared with 2021, primarily due to higher yields on the investment securities portfolio and interest-bearing deposits with banks, mostly offset by higher funding costs.

Noninterest expense increased $310 million (33.3 percent) in 2022, compared with 2021, primarily due to merger and integration charges associated with the acquisition of MUB, other accruals and higher compensation and employee benefits expense reflecting merit increases and hiring to support business growth, partially offset by lower net shared services expense. The provision for credit losses was $2.1 billion higher in 2022, compared with 2021, primarily due to the initial provision for credit losses recorded in the fourth quarter of 2022 related to the MUB acquisition and additional impacts to the allowance for credit losses related to increasing economic uncertainty in the current year, compared to improving economic 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.

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The following tables show the Company's calculation of these non-GAAP financial measures:

| At December 31 (Dollars in Millions) | 2022 | 2021 |
| --- | --- | --- |
| Total equity | $51,232 | $55,387 |
| Preferred stock | (6,808) | (6,371) |
| Noncontrolling interests | (466) | (469) |
| Goodwill (net of deferred tax liability) (1) | (11,395) | (9,323) |
| Intangible assets (net of deferred tax liability), other than mortgage servicing rights | (2,792) | (785) |
| Tangible common equity (a) | 29,771 | 38,439 |
| Common equity tier 1 capital, determined in accordance with transitional regulatory capital requirements related to the CECL methodology implementation | 41,560 | 41,701 |
| Adjustments (2) | (1,299) | (1,733) |
| Common equity tier 1 capital, reflecting the full implementation of the CECL methodology (b) | 40,261 | 39,968 |
| Total assets | 674,805 | 573,284 |
| Goodwill (net of deferred tax liability) (1) | (11,395) | (9,323) |
| Intangible assets (net of deferred tax liability), other than mortgage servicing rights | (2,792) | (785) |
| Tangible assets (c) | 660,618 | 563,176 |
| Risk-weighted assets, determined in accordance with prescribed regulatory capital requirements effective for the Company (d) | 496,500 | 418,571 |
| Adjustments (3) | (620) | (357) |
| Risk-weighted assets, reflecting the full implementation of the CECL methodology (e) | 495,880 | 418,214 |
| Ratios |  |  |
| Tangible common equity to tangible assets (a)(c) | 4.5% | 6.8% |
| Tangible common equity to risk-weighted assets (a)(d) | 6.0 | 9.2 |
| Common equity tier 1 capital to risk-weighted assets, reflecting the full implementation of the CECL methodology (e)(f) | 8.1 | 9.6 |

|  | Year Ended December 31 |  |  |
| --- | --- | --- | --- |
|  | 2022 | 2021 | 2020 |
| Net interest income | $14,728 | $12,494 | $12,825 |
| Taxable-equivalent adjustment (4) | 118 | 106 | 99 |
| Net interest income, on a taxable-equivalent basis | 14,846 | 12,600 | 12,924 |
| Net interest income, on a taxable-equivalent basis (as calculated above) | 14,846 | 12,600 | 12,924 |
| Noninterest income | 9,456 | 10,227 | 10,401 |
| Less: Securities gains (losses), net | 20 | 103 | 177 |
| Total net revenue, excluding net securities gains (losses) (1) | 24,282 | 22,724 | 23,148 |
| Noninterest expense (2) | 14,906 | 13,728 | 13,369 |
| Efficiency ratio (3)(4) | 61.4% | 60.4% | 57.8% |

|  | Year Ended December 31, 2022 |  |  |
| --- | --- | --- | --- |
|  | 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 | $4,476 | 18% | 19% |
| Consumer and Business Banking | 8,460 | 35 | 36 |
| Wealth Management and Investment Services | 4,177 | 17 | 18 |
| Payment Services | 6,297 | 26 | 27 |
| Treasury and Corporate Support | 892 | 4 |  |
| Consolidated Company | 24,302 | 100% |  |
| Less: Treasury and Corporate Support | 892 |  |  |
| Consolidated Company excluding Treasury and Corporate Support | $23,410 |  | 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.

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| (Dollars in Millions) | Year Ended December 31 |  | Percent Change |
| --- | --- | --- | --- |
|  | 2022 | 2021 |  |
| Net interest income | $14,728 | $12,494 |  |
| Taxable-equivalent adjustment (1) | 118 | 106 |  |
| Net interest income, on a taxable-equivalent basis | 14,846 | 12,600 |  |
| Net interest income, on a taxable-equivalent basis (as calculated above) | 14,846 | 12,600 |  |
| Noninterest income | 9,456 | 10,227 |  |
| Total net revenue | 24,302 | 22,827 | 6.5%(a) |
| Less: MUB net revenue | 302 | - |  |
| Less: Notable items (2) | (399) | - |  |
| Total net revenue, excluding MUB and notable items | 24,399 | 22,827 | 6.9%(b) |
| Noninterest expense | 14,906 | 13,728 | 8.6%(c) |
| Less: MUB noninterest expense | 221 | - |  |
| Less: Notable items (3) | 329 | - |  |
| Total noninterest expense, excluding MUB and notable items | 14,356 | 13,728 | 4.6%(d) |
| Operating leverage (a) - (c) | (2.1)% |  |  |
| Operating leverage, excluding MUB and notable items (b) - (d) | 2.3% |  |  |

(1) 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.

(2) Represents $399 million of losses primarily related to interest rate economic hedges, entered into after regulatory approval was obtained, to manage the impact of interest rate volatility on capital prior to closing the MUB acquisition.

(3) Represents $329 million of merger and integration charges.

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## 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, 2022 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 risk ratings or delinquency status within loan and lease portfolios. 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 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 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, 2022 include risks that inflationary pressures persist longer than anticipated, which could precipitate a moderate to severe recession that increases credit losses.

Under the range of economic scenarios considered, the allowance for credit losses would have been lower by $1.4 billion or higher by $2.1 billion. This range reflects the sensitivity of the allowance for credit losses specifically related to the scenarios and weights considered as of December 31, 2022, 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 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,

62

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. Refer to Note 3 of the Notes to Consolidated Financial Statements for additional information on fair value estimates of assets and liabilities assumed in the MUB acquisition.

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, which excluded the operations of MUB as noted in the Report of Management below, 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.

As permitted by Securities and Exchange Commission-issued guidance that an assessment of internal controls over financial reporting of a recently acquired business may be excluded from management's evaluation of disclosure controls and procedures for up to a year from the date of acquisition, the Company has excluded MUB from management's reporting on internal control over financial reporting as of December 31, 2022 as MUB was acquired by the Company during 2022. The Company will continue to evaluate the effectiveness of internal controls over financial reporting as it completes the integration of MUB with the Company and will make changes to its internal control framework, as necessary. The acquisition of MUB contributed $81.4 billion of assets, or 12 percent of the Company's total assets, at December 31, 2022 and $281 million of revenue, or 1 percent of the Company's total revenue for the year ended December 31, 2022.

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 69.

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# 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, 2022. 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 its assessment and those criteria, which excluded the operations of MUB as noted below, management believes the Company designed and maintained effective internal control over financial reporting as of December 31, 2022.

In conducting the evaluation of the effectiveness of its system of internal control over financial reporting as of December 31, 2022, the Company has excluded the operations of MUB as permitted by the guidance issued by the Office of the Chief Accountant of the Securities and Exchange Commission (not to extend more than one year beyond the date of the acquisition or for more than one annual reporting period). In conducting the evaluation of the effectiveness of its disclosure controls and procedures as of December 31, 2022, the Company has excluded those disclosure controls and procedures of MUB that are subsumed by the system of internal control over financial reporting. The acquisition of MUB was completed on December 1, 2022. As of and for the year ended December 31, 2022, MUB's assets represented approximately 12 percent of the Company's consolidated assets and its revenues represented approximately 1 percent of the Company's consolidated revenues. Refer to Note 3 of the Notes to Consolidated Financial Statements for further discussion of the acquisition and its impact on the Company's consolidated financial statements.

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 to 68 and their audit report on internal control over financial reporting appearing on page 69 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, 2022 and 2021, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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, 2022 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 27, 2023 expressed an unqualified opinion thereon.

## 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 Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

### Allowance for Credit Losses

#### *Description of the Matter*

The Company's loan and lease portfolio and the associated allowance for credit losses (ACL), were $388.2 billion and $7.4 billion as of December 31, 2022, respectively. The provision for credit losses was $2.0 billion for the year ended December 31, 2022. 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.

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.

- 66 -

# *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 and external 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.

# **Fair Value of Acquired Loans Recognized as Part of the Acquisition of MUFG Union Bank**

# *Description of the  
Matter*

As described in Note 3 to the consolidated financial statements, the Company acquired MUFG Union Bank (MUB) on December 1, 2022. The transaction has been accounted for as a business combination and accordingly, the assets acquired and liabilities assumed from MUB were recorded at fair value as of the acquisition date.

The fair value of loans acquired from MUB was approximately $53.0 billion as of December 1, 2022. As disclosed by the Company, the fair value of acquired loans is based on a discounted cash flow methodology that considers credit loss and prepayment expectations, market interest rates and other market factors, such as liquidity.

Auditing the Company's estimate of the fair value of acquired loans was complex due to the significant judgment required by management in developing the credit loss and prepayment expectations, and market interest rates used in the discounted cash flow methodology. This required a high degree of auditor judgment and effort in performing procedures and evaluating audit evidence obtained related to the significant judgments made by management and required the use of professionals with specialized skill and knowledge.

# *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 estimating the acquired loans fair value, including management's controls over: 1) developing credit loss and prepayment expectations and establishing market interest rates used in the discounted cash flow methodology, and 2) completeness and accuracy of key inputs and assumptions used in the discounted cash flow methodology, including loan data.

67

To test the estimated fair value of acquired loans, our audit procedures included, among others, involving valuation specialists to assist us in testing management's methodology and significant assumptions used in measuring the fair value of the acquired loan portfolio. For example, we involved our specialists to develop, on a sample basis, independent expectations for credit losses, prepayments and market interest rates and compared management's assumptions to the independently developed ranges based on third party market data. Additionally, we tested, on a sample basis, completeness and accuracy of the underlying loan data provided by management that was used in the discounted cash flow model. Lastly, on a sample basis, we performed independent comparative calculations of the fair value adjustment to the acquired loans. We searched for and evaluated information that corroborates or contradicts management's selected assumptions, including current external economic information and historical Company-specific information.

#### **Fair Value of Core Deposit Intangible Asset Recognized as Part of the MUB Acquisition**

##### *Description of the Matter*

As described in Note 3 to the consolidated financial statements, the Company acquired MUB on December 1, 2022. The transaction has been accounted for as a business combination and accordingly, the assets acquired and liabilities assumed from MUB were recorded at fair value as of the acquisition date.

The fair value of the core deposit intangible (CDI) recognized was approximately $2.7 billion. To estimate the fair value of the CDI, management used a discounted cash flow methodology that considers estimates of deposit costs including cost of funds, net maintenance costs or servicing costs, client retention rates and alternative funding source costs, and a market discount rate.

##### *How We Addressed the Matter in Our Audit*

Auditing the Company's estimate of the CDI fair value was complex due to the significant judgment required by management in developing the estimated net maintenance costs, client retention rates and alternative funding source costs used in the discounted cash flow model. This required a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence obtained related to the significant judgments made by management and required the use of professionals with specialized skill and knowledge.

We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company's process for estimating the CDI fair value, including management's controls over: 1) developing net maintenance costs, client retention rates and alternative funding source cost assumptions used in the discounted cash flow model, and 2) completeness and accuracy of key inputs and significant assumptions used in the discounted cash flow model, including deposit data.

To test the estimated fair value of the CDI, our audit procedures included, among others, involving valuation specialists to assist us in testing management's discounted cash flow methodology and significant assumptions used in measuring the fair value of the CDI. For example, we involved our specialists to develop independent expectations for net maintenance costs, client retention rates and alternative funding source costs, and compared management's assumptions to our independently developed ranges. Additionally, we tested the completeness and accuracy of the deposit data used in the discounted cash flow model. We searched for and evaluated information that corroborates or contradicts management's selected significant assumptions, including current external economic and historical Company-specific information.

*Ernst & Young LLP*

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

Minneapolis, Minnesota

February 27, 2023

68

# 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, 2022, 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, 2022, based on the COSO criteria.

As indicated in the accompanying Report of Management, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of MUFG Union Bank, which is included in the 2022 consolidated financial statements of the Company and constituted 12% of total assets and 1% of revenue, as of and for the year ended December 31, 2022. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of MUFG Union Bank.

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, 2022 and 2021, 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, 2022, and the related notes and our report dated February 27, 2023 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 27, 2023

69

# Consolidated Financial Statements and Notes Table of Contents

## Consolidated Financial Statements

| Consolidated Balance Sheet | 71 |
| --- | --- |
| Consolidated Statement of Income | 72 |
| Consolidated Statement of Comprehensive Income | 73 |
| Consolidated Statement of Shareholders' Equity | 74 |
| Consolidated Statement of Cash Flows | 75 |

## Notes to Consolidated Financial Statements

| Note 1 - Significant Accounting Policies | 76 |
| --- | --- |
| Note 2 - Accounting Changes | 83 |
| Note 3 - Business Combinations | 83 |
| Note 4 - Restrictions on Cash and Due From Banks | 86 |
| Note 5 - Investment Securities | 86 |
| Note 6 - Loans and Allowance for Credit Losses | 89 |
| Note 7 - Leases | 95 |
| Note 8 - Accounting for Transfers and Servicing of Financial Assets and Variable Interest Entities | 97 |
| Note 9 - Premises and Equipment | 98 |
| Note 10 - Mortgage Servicing Rights | 99 |
| Note 11 - Intangible Assets | 100 |
| Note 12 - Deposits | 101 |
| Note 13 - Short-Term Borrowings | 101 |
| Note 14 - Long-Term Debt | 102 |
| Note 15 - Shareholders' Equity | 103 |
| Note 16 - Earnings Per Share | 108 |
| Note 17 - Employee Benefits | 108 |
| Note 18 - Stock-Based Compensation | 113 |
| Note 19 - Income Taxes | 115 |
| Note 20 - Derivative Instruments | 117 |
| Note 21 - Netting Arrangements for Certain Financial Instruments and Securities Financing Activities | 121 |
| Note 22 - Fair Values of Assets and Liabilities | 124 |
| Note 23 - Guarantees and Contingent Liabilities | 130 |
| Note 24 - Business Segments | 133 |
| Note 25 - U.S. Bancorp (Parent Company) | 136 |
| Note 26 - Subsequent Events | 137 |

70

# U.S. Bancorp Consolidated Balance Sheet

At December 31 (Dollars in Millions)

|  | 2022 | 2021 |
| --- | --- | --- |
| Assets |  |  |
| Cash and due from banks | $53,542 | $28,905 |
| Investment securities |  |  |
| Held-to-maturity (fair value $77,874 and $41,812, respectively) | 88,740 | 41,858 |
| Available-for-sale ($858 and $557 pledged as collateral, respectively) (a) | 72,910 | 132,963 |
| Loans held for sale (including $1,849 and $6,623 of mortgage loans carried at fair value, respectively) | 2,200 | 7,775 |
| Loans |  |  |
| Commercial | 135,690 | 112,023 |
| Commercial real estate | 55,487 | 39,053 |
| Residential mortgages | 115,845 | 76,493 |
| Credit card | 26,295 | 22,500 |
| Other retail | 54,896 | 61,959 |
| Total loans | 388,213 | 312,028 |
| Less allowance for loan losses | (6,936) | (5,724) |
| Net loans | 381,277 | 306,304 |
| Premises and equipment | 3,858 | 3,305 |
| Goodwill | 12,373 | 10,262 |
| Other intangible assets | 7,155 | 3,738 |
| Other assets (including $702 and $1,193 of trading securities at fair value pledged as collateral, respectively) (a) | 52,750 | 38,174 |
| Total assets | $674,805 | $573,284 |
| Liabilities and Shareholders' Equity |  |  |
| Deposits |  |  |
| Noninterest-bearing | $137,743 | $134,901 |
| Interest-bearing | 387,233 | 321,182 |
| Total deposits | 524,976 | 456,083 |
| Short-term borrowings | 31,216 | 11,796 |
| Long-term debt | 39,829 | 32,125 |
| Other liabilities | 27,552 | 17,893 |
| Total liabilities | 623,573 | 517,897 |
| Shareholders' equity |  |  |
| Preferred stock | 6,808 | 6,371 |
| Common stock, par value $0.01 a share - authorized: 4,000,000,000 shares; issued: 2022 and 2021 - 2,125,725,742 shares | 21 | 21 |
| Capital surplus | 8,712 | 8,539 |
| Retained earnings | 71,901 | 69,201 |
| Less cost of common stock in treasury: 2022 - 594,747,484 shares; 2021 - 642,223,571 shares | (25,269) | (27,271) |
| Accumulated other comprehensive income (loss) | (11,407) | (1,943) |
| Total U.S. Bancorp shareholders' equity | 50,766 | 54,918 |
| Noncontrolling interests | 466 | 469 |
| Total equity | 51,232 | 55,387 |
| Total liabilities and equity | $674,805 | $573,284 |

(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.

71

## Consolidated Statement of Income

Year Ended December 31 (Dollars and Shares in Millions, Except Per Share Data)

|  | 2022 | 2021 | 2020 |
| --- | --- | --- | --- |
| Interest Income |  |  |  |
| Loans | $13,603 | $10,747 | $12,018 |
| Loans held for sale | 201 | 232 | 216 |
| Investment securities | 3,378 | 2,365 | 2,428 |
| Other interest income | 763 | 143 | 178 |
| Total interest income | 17,945 | 13,487 | 14,840 |
| Interest Expense |  |  |  |
| Deposits | 1,872 | 320 | 950 |
| Short-term borrowings | 565 | 70 | 141 |
| Long-term debt | 780 | 603 | 924 |
| Total interest expense | 3,217 | 993 | 2,015 |
| Net interest income | 14,728 | 12,494 | 12,825 |
| Provision for credit losses | 1,977 | (1,173) | 3,806 |
| Net interest income after provision for credit losses | 12,751 | 13,667 | 9,019 |
| Noninterest Income |  |  |  |
| Card revenue | 1,512 | 1,507 | 1,338 |
| Corporate payment products revenue | 698 | 575 | 497 |
| Merchant processing services | 1,579 | 1,449 | 1,261 |
| Trust and investment management fees | 2,209 | 1,832 | 1,736 |
| Service charges | 1,298 | 1,338 | 1,245 |
| Commercial products revenue | 1,105 | 1,102 | 1,143 |
| Mortgage banking revenue | 527 | 1,361 | 2,064 |
| Investment products fees | 235 | 239 | 192 |
| Securities gains (losses), net | 20 | 103 | 177 |
| Other | 273 | 721 | 748 |
| Total noninterest income | 9,456 | 10,227 | 10,401 |
| Noninterest Expense |  |  |  |
| Compensation and employee benefits | 9,157 | 8,728 | 7,938 |
| Net occupancy and equipment | 1,096 | 1,048 | 1,092 |
| Professional services | 529 | 492 | 430 |
| Marketing and business development | 456 | 366 | 318 |
| Technology and communications | 1,726 | 1,728 | 1,582 |
| Other intangibles | 215 | 159 | 176 |
| Merger and integration charges | 329 | - | - |
| Other | 1,398 | 1,207 | 1,833 |
| Total noninterest expense | 14,906 | 13,728 | 13,369 |
| Income before income taxes | 7,301 | 10,166 | 6,051 |
| Applicable income taxes | 1,463 | 2,181 | 1,066 |
| Net income | 5,838 | 7,985 | 4,985 |
| Net (income) loss attributable to noncontrolling interests | (13) | (22) | (26) |
| Net income attributable to U.S. Bancorp | $5,825 | $7,963 | $4,959 |
| Net income applicable to U.S. Bancorp common shareholders | $5,501 | $7,605 | $4,621 |
| Earnings per common share | $3.69 | $5.11 | $3.06 |
| Diluted earnings per common share | $3.69 | $5.10 | $3.06 |
| Average common shares outstanding | 1,489 | 1,489 | 1,509 |
| Average diluted common shares outstanding | 1,490 | 1,490 | 1,510 |

See Notes to Consolidated Financial Statements.

72

# U.S. Bancorp

## Consolidated Statement of Comprehensive Income

| Year Ended December 31 (Dollars in Millions) | 2022 | 2021 | 2020 |
| --- | --- | --- | --- |
| Net income | $5,838 | $7,985 | $4,985 |
| Other Comprehensive Income (Loss) |  |  |  |
| Changes in unrealized gains (losses) on investment securities available-for-sale | (13,656) | (3,698) | 2,905 |
| Changes in unrealized gains (losses) on derivative hedges | (75) | 125 | (194) |
| Foreign currency translation | (10) | 35 | 2 |
| Changes in unrealized gains (losses) on retirement plans | 526 | 400 | (401) |
| Reclassification to earnings of realized (gains) losses | 544 | 104 | (42) |
| Income taxes related to other comprehensive income (loss) | 3,207 | 769 | (575) |
| Total other comprehensive income (loss) | (9,464) | (2,265) | 1,695 |
| Comprehensive income (loss) | (3,626) | 5,720 | 6,680 |
| Comprehensive (income) loss attributable to noncontrolling interests | (13) | (22) | (26) |
| Comprehensive income (loss) attributable to U.S. Bancorp | $(3,639) | $5,698 | $6,654 |

See Notes to Consolidated Financial Statements.

73

# U.S. Bancorp Consolidated Statement of Shareholders' Equity

| (Dollars and Shares in Millions, Except Per Share Data) | U.S. Bancorp Shareholders |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | 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, 2019 | 1,534 | $5,984 | $21 | $8,475 | $63,186 | $(24,440) | $(1,373) | $51,853 | $630 | $52,483 |
| Change in accounting principle (a) |  |  |  |  | (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 (b) |  |  |  |  | (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 (c) |  |  |  |  | (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 |
| Net income (loss) |  |  |  |  | 5,825 |  |  | 5,825 | 13 | 5,838 |
| Other comprehensive income (loss) |  |  |  |  |  |  | (9,464) | (9,464) |  | (9,464) |
| Preferred stock dividends (d) |  |  |  |  | (296) |  |  | (296) |  | (296) |
| Common stock dividends ($1.88 per share) |  |  |  |  | (2,829) |  |  | (2,829) |  | (2,829) |
| Issuance of preferred stock |  | 437 |  |  |  |  |  | 437 |  | 437 |
| Issuance of common and treasury stock | 48 |  |  | (32) |  | 2,071 |  | 2,039 |  | 2,039 |
| Purchase of treasury stock | (1) |  |  |  |  | (69) |  | (69) |  | (69) |
| Distributions to noncontrolling interests |  |  |  |  |  |  |  | - | (13) | (13) |
| Net other changes in noncontrolling interests |  |  |  |  |  |  |  | - | (3) | (3) |
| Stock option and restricted stock grants |  |  |  | 205 |  |  |  | 205 |  | 205 |
| Balance December 31, 2022 | 1,531 | $6,808 | $21 | $8,712 | $71,901 | $(25,269) | $(11,407) | $50,766 | $466 | $51,232 |

(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. Upon adoption, the Company increased its allowance for credit losses and reduced retained earnings net of deferred taxes through a cumulative-effect adjustment.

(b) 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.

(c) 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.

(d) Reflects dividends declared per share on the Company's Series A, Series B, Series J, Series K, Series L, Series M, Series N and Series O Non-Cumulative Perpetual Preferred Stock of $3,965,458, $962.487, $1,325.00, $1,375.00, $937.50, $1,000.00, $925.00, and $1,050.00, respectively.

See Notes to Consolidated Financial Statements.

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## Consolidated Statement of Cash Flows

Year Ended December 31 (Dollars in Millions)

|  | 2022 | 2021 | 2020 |
| --- | --- | --- | --- |
| Operating Activities |  |  |  |
| Net income attributable to U.S. Bancorp | $5,825 | $7,963 | $4,959 |
| Adjustments to reconcile net income to net cash provided by operating activities |  |  |  |
| Provision for credit losses | 1,977 | (1,173) | 3,806 |
| Depreciation and amortization of premises and equipment | 345 | 338 | 351 |
| Amortization of intangibles | 215 | 159 | 176 |
| (Gain) loss on sale of loans held for sale | 387 | (1,135) | (2,193) |
| (Gain) loss on sale of securities and other assets | (188) | (398) | (344) |
| Loans originated for sale, net of repayments | (33,127) | (72,627) | (67,449) |
| Proceeds from sales of loans held for sale | 38,895 | 74,315 | 65,468 |
| Other, net | 6,790 | 2,428 | (1,058) |
| Net cash provided by operating activities | 21,119 | 9,870 | 3,716 |
| Investing Activities |  |  |  |
| Proceeds from sales of available-for-sale investment securities | 36,391 | 16,075 | 15,596 |
| Proceeds from maturities of held-to-maturity investment securities | 5,759 | 1,093 | - |
| Proceeds from maturities of available-for-sale investment securities | 14,927 | 41,199 | 40,639 |
| Purchases of held-to-maturity investment securities | (7,091) | (1,088) | - |
| Purchases of available-for-sale investment securities | (24,592) | (99,045) | (68,662) |
| Net (increase) decrease in loans outstanding | (27,318) | (17,459) | 6,350 |
| Proceeds from sales of loans | 4,420 | 6,183 | 2,250 |
| Purchases of loans | (2,113) | (4,466) | (11,622) |
| Net decrease in securities purchased under agreements to resell | 252 | 18 | 645 |
| Net cash received from (paid for) acquisitions | 12,257 | (661) | (556) |
| Other, net | (5,392) | 664 | (80) |
| Net cash provided by (used in) investing activities | 7,500 | (57,487) | (15,440) |
| Financing Activities |  |  |  |
| Net (decrease) increase in deposits | (17,215) | 26,313 | 67,854 |
| Net increase (decrease) in short-term borrowings | 15,213 | 30 | (11,957) |
| Proceeds from issuance of long-term debt | 8,732 | 2,626 | 14,501 |
| Principal payments or redemption of long-term debt | (6,926) | (11,432) | (14,476) |
| Proceeds from issuance of preferred stock | 437 | 2,221 | 486 |
| Proceeds from issuance of common stock | 21 | 43 | 15 |
| Repurchase of preferred stock | (1,100) | (1,250) | - |
| Repurchase of common stock | (69) | (1,555) | (1,672) |
| Cash dividends paid on preferred stock | (299) | (308) | (300) |
| Cash dividends paid on common stock | (2,776) | (2,579) | (2,552) |
| Purchase of noncontrolling interests | - | (167) | - |
| Net cash (used in) provided by financing activities | (3,982) | 13,942 | 51,899 |
| Change in cash and due from banks | 24,637 | (33,675) | 40,175 |
| Cash and due from banks at beginning of period | 28,905 | 62,580 | 22,405 |
| Cash and due from banks at end of period | $53,542 | $28,905 | $62,580 |
| Supplemental Cash Flow Disclosures |  |  |  |
| Cash paid for income taxes | $767 | $535 | $1,025 |
| Cash paid for interest | 2,717 | 1,061 | 2,199 |
| Noncash transfer of available-for-sale investment securities to held-to-maturity | 40,695 | 41,823 | - |
| Net noncash transfers to foreclosed property | 23 | 14 | 23 |
| Acquisitions |  |  |  |
| Assets (sold) acquired | $106,209 | $749 | $828 |
| Liabilities sold (assumed) | (95,753) | (88) | (272) |
| Net | $10,456 | $661 | $556 |

See Notes to Consolidated Financial Statements.

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# 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.

On December 1, 2022, the Company acquired MUB's core regional banking franchise from Mitsubishi UFJ Financial Group, Inc. The Company's results for the year ended December 31, 2022 reflect MUB's business operations for the month of December 2022 and the Company's Consolidated Balance Sheet at December 31, 2022 includes MUB's balances. Refer to Note 3 for additional information on this acquisition.

**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.

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**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, 2020 are divided into those considered purchased with more than insignificant credit deterioration ('PCD') and those not considered PCD. An allowance for credit losses is established for each population and considers product mix, risk characteristics of the portfolio, delinquency status and refreshed loan-to-value 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.

**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 economic forecast uncertainty. 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, inflation, interest rates 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 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. 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. For commercial TDRs individually evaluated for impairment, attributes of the borrower are the primary factors in determining the allowance for credit losses. For smaller commercial loans collectively evaluated for impairment, historical loss experience is also incorporated into the allowance methodology applied to this category of loans.

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

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

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

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,

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