US BANCORP \DE\ (USB) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Management’s Discussion and Analysis
Overview
In 2021, U.S. Bancorp and its subsidiaries (the “Company”) continued to demonstrate its financial strength and diversified business model. In a year where the economy continued to recover from the impacts of the
COVID-19
pandemic, the Company maintained its sound credit quality and strong capital and liquidity position, while continuing to invest in digital capabilities and key business initiatives to drive growth in the future.
The Company earned $8.0 billion in 2021, an increase of $3.0 billion (60.6 percent) from 2020, reflecting a decrease in the provision for credit losses, partially offset by lower pre-provision operating income. The decrease in the provision for credit losses was driven by improvement in the global economy, as well as strong credit and collateral performance. Net interest income decreased due to lower loan spreads and declining average loan balances driven by commercial loan payoffs by business customers, partially offset by changes in deposit and funding mix and higher loan fees. Noninterest income decreased due to lower mortgage banking revenue, commercial products revenue and securities gains, partially offset by improvements in payment services revenue, trust and investment management fees, deposit service charges, treasury management fees and investment products fees. Noninterest expense was higher reflecting increases in compensation expense, employee benefits expense, technology and communications expense, professional services expense, and marketing and business development expense, partially offset by lower net occupancy and equipment expense and other noninterest expense.
In 2021, the Company increased deposits significantly, while average loan balances decreased. Average loan balances in 2021 decreased $10.3 billion (3.4 percent) from 2020 primarily due to lower commercial loans driven by continued payoffs by business customers, lower commercial real estate loans as a result of
customer payoffs and lower credit card loans driven by higher customer payment rates. These decreases were partially offset by higher other retail loans, driven by growth in installment loans due to strong auto and recreational vehicle lending, partially offset by lower home equity and second mortgages as more customers chose to refinance their existing first lien residential mortgage balances during the prior year due to the low interest rate environment. In addition, residential mortgages were higher due to increased loan portfolio production and slower payoffs in the mortgage portfolio. Average deposit balances in 2021 increased $35.7 billion (8.9 percent) over 2020 primarily due to higher noninterest-bearing and total savings deposit balances, partially offset by lower time deposit balances. The growth in average noninterest-bearing and total savings deposits was primarily a result of the actions taken by the federal government to increase liquidity in the financial system and government stimulus programs.
The Company’s common equity tier 1 capital to risk-weighted assets ratio, using the Basel III standardized approach was 10.0 percent at December 31, 2021. Refer to Table 22 for a summary of the statutory capital ratios in effect for the Company at December 31, 2021 and 2020. Further, credit rating organizations rate the Company’s debt among the highest of any bank in the world. This comparative financial strength provides the Company with favorable funding costs, strong liquidity and the ability to attract new customers.
The Company’s financial strength, diversified business model and strong credit quality position it well for 2022. The Company looks to continue building momentum in each of the lines of business, as the investments made in digital transformation and payments ecosystem initiatives will continue to enable customer and revenue growth, and the Company expects continued momentum in customer spend activity and loan growth.
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| TABLE 1 | Selected Financial Data |
| Year Ended December 31 (Dollars and Shares in Millions, Except Per Share Data) | 2021 | 2020 | 2019 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Condensed Income Statement | ||||||||||||
| Net interest income | $ | 12,494 | $ | 12,825 | $ | 13,052 | ||||||
| Taxable-equivalent adjustment(a) | 106 | 99 | 103 | |||||||||
| Net interest income (taxable-equivalent basis)(b) | 12,600 | 12,924 | 13,155 | |||||||||
| Noninterest income | 10,227 | 10,401 | 9,831 | |||||||||
| Total net revenue | 22,827 | 23,325 | 22,986 | |||||||||
| Noninterest expense | 13,728 | 13,369 | 12,785 | |||||||||
| Provision for credit losses | (1,173 | ) | 3,806 | 1,504 | ||||||||
| Income before taxes | 10,272 | 6,150 | 8,697 | |||||||||
| Income taxes and taxable-equivalent adjustment | 2,287 | 1,165 | 1,751 | |||||||||
| Net income | 7,985 | 4,985 | 6,946 | |||||||||
| Net (income) loss attributable to noncontrolling interests | (22 | ) | (26 | ) | (32 | ) | ||||||
| Net income attributable to U.S. Bancorp | $ | 7,963 | $ | 4,959 | $ | 6,914 | ||||||
| Net income applicable to U.S. Bancorp common shareholders | $ | 7,605 | $ | 4,621 | $ | 6,583 | ||||||
| Per Common Share | ||||||||||||
| Earnings per share | $ | 5.11 | $ | 3.06 | $ | 4.16 | ||||||
| Diluted earnings per share | 5.10 | 3.06 | 4.16 | |||||||||
| Dividends declared per share | 1.76 | 1.68 | 1.58 | |||||||||
| Book value per share(c) | 32.71 | 31.26 | 29.90 | |||||||||
| Market value per share | 56.17 | 46.59 | 59.29 | |||||||||
| Average common shares outstanding | 1,489 | 1,509 | 1,581 | |||||||||
| Average diluted common shares outstanding | 1,490 | 1,510 | 1,583 | |||||||||
| Financial Ratios | ||||||||||||
| Return on average assets | 1.43 | % | .93 | % | 1.45 | % | ||||||
| Return on average common equity | 16.0 | 10.0 | 14.1 | |||||||||
| Net interest margin (taxable-equivalent basis)(a) | 2.49 | 2.68 | 3.06 | |||||||||
| Efficiency ratio(b) | 60.4 | 57.8 | 55.8 | |||||||||
| Net charge-offs as a percent of average loans outstanding | .23 | .58 | .50 | |||||||||
| Average Balances | ||||||||||||
| Loans | $ | 296,965 | $ | 307,269 | $ | 290,686 | ||||||
| Loans held for sale | 8,024 | 6,985 | 3,769 | |||||||||
| Investment securities(d) | 154,702 | 125,954 | 117,150 | |||||||||
| Earning assets | 506,141 | 481,402 | 430,537 | |||||||||
| Assets | 556,532 | 531,207 | 475,653 | |||||||||
| Noninterest-bearing deposits | 127,204 | 98,539 | 73,863 | |||||||||
| Deposits | 434,281 | 398,615 | 346,812 | |||||||||
| Short-term borrowings | 14,774 | 19,182 | 18,137 | |||||||||
| Long-term debt | 36,682 | 44,040 | 41,572 | |||||||||
| Total U.S. Bancorp shareholders’ equity | 53,810 | 52,246 | 52,623 | |||||||||
| Period End Balances | ||||||||||||
| Loans | $ | 312,028 | $ | 297,707 | $ | 296,102 | ||||||
| Investment securities | 174,821 | 136,840 | 122,613 | |||||||||
| Assets | 573,284 | 553,905 | 495,426 | |||||||||
| Deposits | 456,083 | 429,770 | 361,916 | |||||||||
| Long-term debt | 32,125 | 41,297 | 40,167 | |||||||||
| Total U.S. Bancorp shareholders’ equity | 54,918 | 53,095 | 51,853 | |||||||||
| Asset Quality | ||||||||||||
| Nonperforming assets | $ | 878 | $ | 1,298 | $ | 829 | ||||||
| Allowance for credit losses | 6,155 | 8,010 | 4,491 | |||||||||
| Allowance for credit losses as a percentage of period-end loans | 1.97 | % | 2.69 | % | 1.52 | % | ||||||
| Capital Ratios | ||||||||||||
| Common equity tier 1 capital | 10.0 | % | 9.7 | % | 9.1 | % | ||||||
| Tier 1 capital | 11.6 | 11.3 | 10.7 | |||||||||
| Total risk-based capital | 13.4 | 13.4 | 12.7 | |||||||||
| Leverage | 8.6 | 8.3 | 8.8 | |||||||||
| Total leverage exposure | 6.9 | 7.3 | 7.0 | |||||||||
| Tangible common equity to tangible assets(b) | 6.8 | 6.9 | 7.5 | |||||||||
| Tangible common equity to risk-weighted assets(b) | 9.2 | 9.5 | 9.3 | |||||||||
| Common equity tier 1 capital to risk-weighted assets, reflecting the full implementation of the current expected credit losses methodology(b) | 9.6 | 9.3 |
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| (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. |
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| (b) | See Non-GAAP Financial Measures beginning on page 60. |
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| (c) | Calculated as U.S. Bancorp common shareholders’ equity divided by common shares outstanding at end of the period. |
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| (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. |
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| 23 |
Earnings Summary
The Company reported net income attributable to U.S. Bancorp of $8.0 billion in 2021, or $5.10 per diluted common share, compared with $5.0 billion, or $3.06 per diluted common share, in 2020. Return on average assets and return on average common equity were 1.43 percent and 16.0 percent, respectively, in 2021, compared with 0.93 percent and 10.0 percent, respectively, in 2020.
Total net revenue for 2021 was $498 million (2.1 percent) lower than 2020, reflecting a 2.6 percent decrease in net interest income (2.5 percent on a taxable-equivalent basis) and a 1.7 percent decrease in noninterest income. The decrease in net interest income from the prior year was due to lower loan spreads and declining average loan balances driven by commercial loan payoffs by business customers, partially offset by changes in deposit and funding mix and higher loan fees. The decrease in noninterest income was driven by lower mortgage banking revenue, commercial products revenue and securities gains, partially offset by improvements in payment services revenue, trust and investment management fees, deposit service charges, treasury management fees and investment products fees.
Noninterest expense in 2021 was $359 million (2.7 percent) higher than 2020, reflecting increases in compensation expense, employee benefits expense, technology and communications expense, professional services expense, and marketing and business development expense, partially offset by lower net occupancy and equipment expense and other noninterest expense.
Results for 2020 Compared With 2019
For discussion related to changes in financial condition and results of operations for 2020 compared with 2019, refer to “Management’s Discussion and Analysis” in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2020, which was filed with the Securities and Exchange Commission on February 23, 2021.
Pending Acquisition
In September 2021, the Company announced that it has entered into a definitive agreement to acquire MUFG Union Bank’s core regional banking franchise from Mitsubishi UFJ Financial Group (“MUFG”), for an expected purchase price of approximately $8.0 billion, including $5.5 billion in cash and approximately 44 million shares of U.S. Bancorp common stock. The transaction excludes the purchase of MUFG Union Bank’s Global Corporate & Investment Bank, certain middle and back office functions, and other assets. MUFG Union Bank currently has approximately 300 branches in California, Washington and Oregon and is expected to add approximately $105 billion in total assets, $58 billion of loans and $90 billion of deposits to the Company’s consolidated balance sheet. The transaction is expected to close in the first half of 2022, subject to customary closing conditions, including regulatory approvals.
Statement of Income Analysis
Net Interest Income
Net interest income, on a taxable-equivalent basis, was $12.6 billion in 2021, compared with $12.9 billion in 2020. The $324 million (2.5 percent) decrease in net interest income, on a taxable-equivalent basis, in 2021 compared with 2020, was principally driven by lower loan spreads and declining average loan balances driven by commercial loan payoffs by corporate customers accessing the capital markets and government supported loan programs, partially offset by changes in deposit and funding mix and higher loan fees driven by accelerated loan forgiveness from the Small Business Administration (“SBA”) Paycheck Protection Program. Average earning assets were $24.7 billion (5.1 percent) higher in 2021, compared with 2020, reflecting increases in investment securities and other earning assets primarily representing cash balances, while average loans decreased due to continued payoffs by corporate customers. The net interest margin, on a taxable-equivalent basis, in 2021 was 2.49 percent, compared with 2.68 percent in 2020. The decrease in the net interest margin in 2021, compared with 2020, was primarily due to the mix of loans, lower loan spreads and higher investment securities and cash balances, partially offset by changes in deposit and funding mix and higher loan fees. Refer to the “Interest Rate Risk Management” section for further information on the sensitivity of the Company’s net interest income to changes in interest rates.
Average total loans were $297.0 billion in 2021, compared with $307.3 billion in 2020. The $10.3 billion (3.4 percent) decrease was primarily due to lower commercial loans, commercial real estate loans and credit card loans, partially offset by higher residential mortgages and other retail loans. Average commercial loans decreased $11.1 billion (9.8 percent), driven by continued payoffs by corporate customers that accessed the capital markets and government supported loan programs. Average commercial real estate loans decreased $1.8 billion (4.4 percent), the result of customer payoffs. Average credit card loans decreased $687 million (3.1 percent), driven by higher customer payment rates. Average residential mortgages increased $962 million (1.3 percent) due to increased loan portfolio production and slower payoffs in the mortgage portfolio. Average other retail loans increased $2.3 billion (4.1 percent), driven by growth in installment loans due to strong auto and recreational vehicle lending, partially offset by lower home equity and second mortgages as more customers chose to refinance their existing first lien residential mortgage balances during the prior year due to the low interest rate environment.
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| TABLE 2 | Analysis of Net Interest Income(a) |
| Year Ended December 31 (Dollars in Millions) | 2021 | 2020 | 2019 | 2021 v 2020 | 2020 v 2019 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Components of Net Interest Income | ||||||||||||||||||||
| Income on earning assets (taxable-equivalent basis) | $ | 13,593 | $ | 14,942 | $ | 17,607 | $ | (1,349 | ) | $ | (2,665 | ) | ||||||||
| Expense on interest-bearing liabilities (taxable-equivalent basis) | 993 | 2,018 | 4,452 | (1,025 | ) | (2,434 | ) | |||||||||||||
| Net interest income (taxable-equivalent basis)(b) | $ | 12,600 | $ | 12,924 | $ | 13,155 | $ | (324 | ) | $ | (231 | ) | ||||||||
| Net interest income, as reported | $ | 12,494 | $ | 12,825 | $ | 13,052 | $ | (331 | ) | $ | (227 | ) | ||||||||
| Average Yields and Rates Paid | ||||||||||||||||||||
| Earning assets yield (taxable-equivalent basis) | 2.69 | % | 3.10 | % | 4.09 | % | (.41 | )% | (.99 | )% | ||||||||||
| Rate paid on interest-bearing liabilities (taxable-equivalent basis) | .28 | .56 | 1.34 | (.28 | ) | (.78 | ) | |||||||||||||
| Gross interest margin (taxable-equivalent basis) | 2.41 | % | 2.54 | % | 2.75 | % | (.13 | )% | (.21 | )% | ||||||||||
| Net interest margin (taxable-equivalent basis) | 2.49 | % | 2.68 | % | 3.06 | % | (.19 | )% | (.38 | )% | ||||||||||
| Average Balances | ||||||||||||||||||||
| Investment securities(c) | $ | 154,702 | $ | 125,954 | $ | 117,150 | $ | 28,748 | $ | 8,804 | ||||||||||
| Loans | 296,965 | 307,269 | 290,686 | (10,304 | ) | 16,583 | ||||||||||||||
| Earning assets | 506,141 | 481,402 | 430,537 | 24,739 | 50,865 | |||||||||||||||
| Noninterest-bearing deposits | 127,204 | 98,539 | 73,863 | 28,665 | 24,676 | |||||||||||||||
| Interest-bearing deposits | 307,077 | 300,076 | 272,949 | 7,001 | 27,127 | |||||||||||||||
| Total deposits | 434,281 | 398,615 | 346,812 | 35,666 | 51,803 | |||||||||||||||
| Interest-bearing liabilities | 358,533 | 363,298 | 332,658 | (4,765 | ) | 30,640 |
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| (a) | Interest and rates are presented on a fully taxable-equivalent basis based on a federal income tax rate of 21 percent. |
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| (b) | See Non-GAAP Financial Measures beginning on page 60. |
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| (c) | Excludes unrealized gains and losses on available-for-sale investment securities and any premiums or discounts recorded related to the transfer of investment securities at fair value from available-for-sale to held-to-maturity. |
Average investment securities in 2021 were $28.7 billion (22.8 percent) higher than in 2020, primarily due to purchases of mortgage-backed, U.S. Treasury and state and political securities, net of prepayments and maturities.
Average total deposits for 2021 were $35.7 billion (8.9 percent) higher than 2020. Average noninterest-bearing deposits were $28.7 billion (29.1 percent) higher in 2021, compared with 2020, reflecting increases across all business lines. Average total savings deposits for 2021 were $20.4 billion (7.8 percent) higher than 2020, driven by increases in Consumer and Business
Banking balances, partially offset by decreases in Corporate and Commercial Banking balances. The growth in average noninterest-bearing and total savings deposits was primarily a result of the actions by the federal government to increase liquidity in the financial system and government stimulus programs. Average time deposits for 2021 were $13.4 billion (35.3 percent) lower than 2020, driven by decreases across most business lines. Time deposits are managed as an alternative to other funding sources, based largely on relative pricing and liquidity characteristics.
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| TABLE 3 | Net Interest Income — Changes Due to Rate and Volume(a) |
| 2021 v 2020 | 2020 v 2019 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year Ended December 31 (Dollars in Millions) | Volume | Yield/Rate | Total | Volume | Yield/Rate | Total | ||||||||||||||||||
| Increase (decrease) in | ||||||||||||||||||||||||
| Interest Income | ||||||||||||||||||||||||
| Investment securities | $ | 569 | $ | (623 | ) | $ | (54 | ) | $ | 222 | $ | (684 | ) | $ | (462 | ) | ||||||||
| Loans held for sale | 32 | (16 | ) | 16 | 138 | (84 | ) | 54 | ||||||||||||||||
| Loans | ||||||||||||||||||||||||
| Commercial | (311 | ) | (197 | ) | (508 | ) | 442 | (1,479 | ) | (1,037 | ) | |||||||||||||
| Commercial real estate | (63 | ) | (175 | ) | (238 | ) | 57 | (519 | ) | (462 | ) | |||||||||||||
| Residential mortgages | 35 | (224 | ) | (189 | ) | 231 | (209 | ) | 22 | |||||||||||||||
| Credit card | (74 | ) | (40 | ) | (114 | ) | (112 | ) | (176 | ) | (288 | ) | ||||||||||||
| Other retail | 95 | (321 | ) | (226 | ) | (14 | ) | (316 | ) | (330 | ) | |||||||||||||
| Total loans | (318 | ) | (957 | ) | (1,275 | ) | 604 | (2,699 | ) | (2,095 | ) | |||||||||||||
| Other earning assets | 23 | (59 | ) | (36 | ) | 401 | (563 | ) | (162 | ) | ||||||||||||||
| Total earning assets | 306 | (1,655 | ) | (1,349 | ) | 1,365 | (4,030 | ) | (2,665 | ) | ||||||||||||||
| Interest Expense | ||||||||||||||||||||||||
| Interest-bearing deposits | ||||||||||||||||||||||||
| Interest checking | 15 | (56 | ) | (41 | ) | 36 | (198 | ) | (162 | ) | ||||||||||||||
| Money market savings | (37 | ) | (292 | ) | (329 | ) | 237 | (1,346 | ) | (1,109 | ) | |||||||||||||
| Savings accounts | 9 | (48 | ) | (39 | ) | 14 | (79 | ) | (65 | ) | ||||||||||||||
| Time deposits | (110 | ) | (111 | ) | (221 | ) | (130 | ) | (439 | ) | (569 | ) | ||||||||||||
| Total interest-bearing deposits | (123 | ) | (507 | ) | (630 | ) | 157 | (2,062 | ) | (1,905 | ) | |||||||||||||
| Short-term borrowings | (33 | ) | (41 | ) | (74 | ) | 21 | (247 | ) | (226 | ) | |||||||||||||
| Long-term debt | (155 | ) | (166 | ) | (321 | ) | 73 | (376 | ) | (303 | ) | |||||||||||||
| Total interest-bearing liabilities | (311 | ) | (714 | ) | (1,025 | ) | 251 | (2,685 | ) | (2,434 | ) | |||||||||||||
| Increase (decrease) in net interest income | $ | 617 | $ | (941 | ) | $ | (324 | ) | $ | 1,114 | $ | (1,345 | ) | $ | (231 | ) |
| Column 1 | Column 2 |
|---|---|
| (a) | This table shows the components of the change in net interest income by volume and rate on a taxable-equivalent basis based on a federal income tax rate of 21 percent. This table does not take into account the level of noninterest-bearing funding, nor does it fully reflect changes in the mix of assets and liabilities. The change in interest not solely due to changes in volume or rates has been allocated on a pro-rata basis to volume and yield/rate. |
Provision for Credit Losses
The provision for credit losses reflects changes in economic conditions and the size and credit quality of the entire portfolio of loans. The Company maintains an allowance for credit losses considered appropriate by management for expected losses, based on factors discussed in the “Analysis and Determination of Allowance for Credit Losses” section.
In 2021, the provision for credit losses was a benefit of $1.2 billion, compared with a provision for credit losses of $3.8 billion in 2020. The change was driven by the Company recognizing a decrease in the allowance for credit losses during 2021 as a result of improvement in the global economy, as well as strong credit and collateral performance, compared with the Company recognizing an increase in the allowance for credit
losses in 2020 due to deteriorating economic conditions related to
COVID-19.
Net charge-offs decreased $1.1 billion (61.8 percent) in 2021, compared with 2020, reflecting improvements across all loan categories. Nonperforming assets decreased $420 million (32.4 percent) from December 31, 2020 to December 31, 2021, primarily driven by decreases in nonperforming commercial and commercial real estate loans.
Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.
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| TABLE 4 | Noninterest Income |
| Year Ended December 31 (Dollars in Millions) | 2021 | 2020 | 2019 | 2021 v 2020 | 2020 v 2019 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Credit and debit card revenue | $ | 1,507 | $ | 1,338 | $ | 1,413 | 12.6 | % | (5.3 | )% | ||||||||||
| Corporate payment products revenue | 575 | 497 | 664 | 15.7 | (25.2 | ) | ||||||||||||||
| Merchant processing services | 1,449 | 1,261 | 1,601 | 14.9 | (21.2 | ) | ||||||||||||||
| Trust and investment management fees | 1,832 | 1,736 | 1,673 | 5.5 | 3.8 | |||||||||||||||
| Deposit service charges | 724 | 677 | 909 | 6.9 | (25.5 | ) | ||||||||||||||
| Treasury management fees | 614 | 568 | 578 | 8.1 | (1.7 | ) | ||||||||||||||
| Commercial products revenue | 1,102 | 1,143 | 934 | (3.6 | ) | 22.4 | ||||||||||||||
| Mortgage banking revenue | 1,361 | 2,064 | 874 | (34.1 | ) | * | ||||||||||||||
| Investment products fees | 239 | 192 | 186 | 24.5 | 3.2 | |||||||||||||||
| Securities gains (losses), net | 103 | 177 | 73 | (41.8 | ) | * | ||||||||||||||
| Other | 721 | 748 | 926 | (3.6 | ) | (19.2 | ) | |||||||||||||
| Total noninterest income | $ | 10,227 | $ | 10,401 | $ | 9,831 | (1.7 | )% | 5.8 | % |
| Column 1 | Column 2 |
|---|---|
| * | Not meaningful. |
Noninterest Income
Noninterest income in 2021 was $10.2 billion, compared with $10.4 billion in 2020. The $174 million (1.7 percent) decrease in 2021 from 2020 reflected lower mortgage banking revenue, commercial products revenue, other noninterest income and securities gains, partially offset by higher payment services revenue, trust and investment management fees, deposit service charges, treasury management fees and investment products fees. Mortgage banking revenue decreased 34.1 percent in 2021, compared with 2020, due to lower application volume, given declining refinancing activity, and related gain on sale margins, along with declines in mortgage servicing rights (“MSRs”) valuations, net of hedging activities. Commercial products revenue decreased 3.6 percent in 2021, compared with 2020, primarily due to lower capital markets activity and trading revenue, partially offset by higher syndication revenue and fees, higher
non-yield
loan fees as a result of higher unused commitments, and higher foreign currency customer activity. Other noninterest income decreased 3.6 percent in 2021, compared with 2020, driven by lower equity investment income and the 2020 impact of transition services agreement revenue associated with the sale of the Company’s ATM third-party servicing business, partially offset by higher retail leasing end of term residual gains and the 2020 impact of certain asset impairments as a result of branch optimization. During 2020, payment services revenue had been adversely affected by the impact of the
COVID-19
pandemic on consumer and business
spending, particularly related to travel and entertainment activities. However, spending has strengthened across most sectors driven by government stimulus, local jurisdictions reducing restrictions and consumer behaviors normalizing. As a result, payment services revenue increased in 2021, compared with 2020, driven by a 12.6 percent increase in credit and debit card revenue, a 15.7 percent increase in corporate payment products revenue and a 14.9 percent increase in merchant processing services revenue. Credit and debit card revenue growth related to stronger sales volume and fee activity, partially offset by investment in customer acquisition. Corporate payment products revenue increased primarily due to improving business spending, while merchant processing services revenue increased driven by higher sales volume as well as merchant fees. Trust and investment management fees increased 5.5 percent driven by business growth, favorable market conditions and activity related to the acquisition of PFM Asset Management LLC (“PFM”), partially offset by higher fee waivers. Deposit service charges increased 6.9 percent primarily due to stronger customer activity. Treasury management fees increased 8.1 percent due to core growth driven by the
COVID-19
economic recovery. Investment products fees increased 24.5 percent primarily driven by favorable market conditions and growth.
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| TABLE 5 | Noninterest Expense |
| Year Ended December 31 (Dollars in Millions) | 2021 | 2020 | 2019 | 2021 v 2020 | 2020 v 2019 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Compensation | $ | 7,299 | $ | 6,635 | $ | 6,325 | 10.0 | % | 4.9 | % | ||||||||||
| Employee benefits | 1,429 | 1,303 | 1,286 | 9.7 | 1.3 | |||||||||||||||
| Net occupancy and equipment | 1,048 | 1,092 | 1,123 | (4.0 | ) | (2.8 | ) | |||||||||||||
| Professional services | 492 | 430 | 454 | 14.4 | (5.3 | ) | ||||||||||||||
| Marketing and business development | 366 | 318 | 426 | 15.1 | (25.4 | ) | ||||||||||||||
| Technology and communications | 1,454 | 1,294 | 1,095 | 12.4 | 18.2 | |||||||||||||||
| Postage, printing and supplies | 274 | 288 | 290 | (4.9 | ) | (.7 | ) | |||||||||||||
| Other intangibles | 159 | 176 | 168 | (9.7 | ) | 4.8 | ||||||||||||||
| Other | 1,207 | 1,833 | 1,618 | (34.2 | ) | 13.3 | ||||||||||||||
| Total noninterest expense | $ | 13,728 | $ | 13,369 | $ | 12,785 | 2.7 | % | 4.6 | % | ||||||||||
| Efficiency ratio(a) | 60.4 | % | 57.8 | % | 55.8 | % |
| Column 1 | Column 2 |
|---|---|
| (a) | See Non-GAAP Financial Measures beginning on page 60. |
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| 27 |
Noninterest Expense
Noninterest expense in 2021 was $13.7 billion, compared with $13.4 billion in 2020. The Company’s efficiency ratio was 60.4 percent in 2021, compared with 57.8 percent in 2020. The $359 million (2.7 percent) increase in noninterest expense in 2021 over 2020 was driven by higher compensation expense, employee benefits expense, technology and communications expense, professional services expense, and marketing and business development expense, partially offset by lower net occupancy and equipment expense and other noninterest expense. Compensation expense increased 10.0 percent in 2021 over 2020, due to higher performance-based incentives, revenue related commissions, merit increases and hiring to support business growth. Employee benefits expense increased 9.7 percent driven by higher medical claims expense, compensation related payroll taxes and pension expense. Technology and communications expense increased 12.4 percent primarily due to expenditures supporting business investments. Professional services expense increased 14.4 percent primarily due to an increase in business investment and related initiatives in 2021. Marketing and business development expense increased 15.1 percent due to the timing of marketing campaigns supporting business development and lower marketing activities in 2020 during the pandemic. Net occupancy and equipment expense decreased 4.0 percent primarily due to branch closures. Other noninterest expense decreased 34.2 percent, primarily due to higher
COVID-19
related expenses in 2020 including recognizing liabilities related to future delivery exposures for merchant and airline processing, as well as lower amortization related to
tax-advantaged
projects which were scaled back in 2020 during the pandemic.
Pension Plans
Because of the long-term nature of pension plans, the related accounting is complex and can be impacted by several factors, including investment funding policies, accounting methods and actuarial assumptions.
The Company’s pension accounting reflects the long-term nature of the benefit obligations and the investment horizon of plan assets. Amounts recorded in the financial statements reflect actuarial assumptions about participant benefits and plan asset returns. Changes in actuarial assumptions and differences in actual plan experience, compared with actuarial assumptions, are deferred and recognized in expense in future periods.
Pension expense is expected to decrease by approximately $20 million to $181 million in 2022, primarily related to the return on higher plan assets and a higher discount rate, partially offset by demographic experience. Because of the complexity of forecasting pension plan activities, the accounting methods utilized for pension plans, the Company’s ability to respond to factors affecting the plans and the hypothetical nature of actuarial assumptions, the actual pension expense may differ from the expected amount.
Refer to Note 17 of the Notes to the Consolidated Financial Statements for further information on the Company’s pension plan funding practices, investment policies and asset allocation strategies, and accounting policies for pension plans.
The following table shows the effect of hypothetical changes in the discount rate and long-term rate of return (“LTROR”) on the Company’s expected 2022 pension expense:
| Discount Rate (Dollars in Millions) | Down 100 Basis Points | Up 100 Basis Points | ||||||
|---|---|---|---|---|---|---|---|---|
| Incremental benefit (expense) | $ | (108 | ) | $ | 96 | |||
| Percent of 2021 net income | (1.01 | )% | .90 | % | ||||
| LTROR (Dollars in Millions) | Down 100 Basis Points | Up 100 Basis Points | ||||||
| Incremental benefit (expense) | $ | (73 | ) | $ | 73 | |||
| Percent of 2021 net income | (.68 | )% | .68 | % |
Income Tax Expense
The provision for income taxes was $2.2 billion (an effective rate of 21.5 percent) in 2021, compared with $1.1 billion (an effective rate of 17.6 percent) in 2020. The higher tax rate for 2021 was due to the marginal impact of providing taxes on higher pretax earnings in 2021.
For further information on income taxes, refer to Note 19 of the Notes to Consolidated Financial Statements.
Balance Sheet Analysis
Average earning assets were $506.1 billion in 2021, compared with $481.4 billion in 2020. The increase in average earning assets of $24.7 billion (5.1 percent) was primarily due to increases in investment securities of $28.7 billion (22.8 percent) and other earning assets of $5.3 billion (12.8 percent), primarily representing higher cash balances, partially offset by a decrease in loans of $10.3 billion (3.4 percent).
For average balance information, refer to Consolidated Daily Average Balance Sheet and Related Yields and Rates on pages 134 and 135.
Loans
The Company’s loan portfolio was $312.0 billion at December 31, 2021, compared with $297.7 billion at December 31, 2020, an increase of $14.3 billion (4.8 percent). The increase was driven by increases in commercial loans of $9.2 billion (8.9 percent), other retail loans of $4.9 billion (8.7%), residential mortgages of $338 million (0.4 percent) and credit card loans of $154 million (0.7 percent), partially offset by a decrease in commercial real estate loans of $258 million (0.7 percent). Table 6 provides a summary of the loan distribution by product type, while Table 7 provides a summary of the selected loan maturity distribution by loan category. Average total loans decreased $10.3 billion (3.4 percent) in 2021, compared with 2020. The decrease was due to lower commercial loans, commercial real estate loans and credit card loans, partially offset by increases in other retail loans and residential mortgages.
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
|---|---|---|---|---|
| 28 |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| TABLE 6 | Loan Portfolio Distribution |
| 2021 | 2020 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| At December 31 (Dollars in Millions) | Amount | Percent of Total | Amount | Percent of Total | ||||||||||||||||
| Commercial | ||||||||||||||||||||
| Commercial | $ | 106,912 | 34.3 | % | $ | 97,315 | 32.7 | % | ||||||||||||
| Lease financing | 5,111 | 1.6 | 5,556 | 1.9 | ||||||||||||||||
| Total commercial | 112,023 | 35.9 | 102,871 | 34.6 | ||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||
| Commercial mortgages | 28,757 | 9.2 | 28,472 | 9.6 | ||||||||||||||||
| Construction and development | 10,296 | 3.3 | 10,839 | 3.6 | ||||||||||||||||
| Total commercial real estate | 39,053 | 12.5 | 39,311 | 13.2 | ||||||||||||||||
| Residential Mortgages | ||||||||||||||||||||
| Residential mortgages | 67,546 | 21.6 | 66,525 | 22.4 | ||||||||||||||||
| Home equity loans, first liens | 8,947 | 2.9 | 9,630 | 3.2 | ||||||||||||||||
| Total residential mortgages | 76,493 | 24.5 | 76,155 | 25.6 | ||||||||||||||||
| Credit Card | 22,500 | 7.2 | 22,346 | 7.5 | ||||||||||||||||
| Other Retail | ||||||||||||||||||||
| Retail leasing | 7,256 | 2.3 | 8,150 | 2.7 | ||||||||||||||||
| Home equity and second mortgages | 10,446 | 3.4 | 12,472 | 4.2 | ||||||||||||||||
| Revolving credit | 2,750 | .9 | 2,688 | .9 | ||||||||||||||||
| Installment | 16,514 | 5.3 | 13,823 | 4.6 | ||||||||||||||||
| Automobile | 24,866 | 8.0 | 19,722 | 6.6 | ||||||||||||||||
| Student | 127 | — | 169 | .1 | ||||||||||||||||
| Total other retail | 61,959 | 19.9 | 57,024 | 19.1 | ||||||||||||||||
| Total loans | $ | 312,028 | 100.0 | % | $ | 297,707 | 100.0 | % |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| TABLE 7 | Selected Loan Maturity Distribution |
| At December 31, 2021 (Dollars in Millions) | One Year or Less | Over One Through Five Years | Over Five Through Fifteen Years | Over Fifteen Years | Total | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Commercial | $ | 27,220 | $ | 78,342 | $ | 6,295 | $ | 166 | $ | 112,023 | |||||||||
| Commercial real estate | 8,334 | 22,462 | 4,527 | 3,730 | (a) | 39,053 | |||||||||||||
| Residential mortgages | 337 | 877 | 7,604 | 67,675 | 76,493 | ||||||||||||||
| Credit card | 22,500 | — | — | — | 22,500 | ||||||||||||||
| Other retail | 2,742 | 20,934 | 23,893 | 14,390 | 61,959 | ||||||||||||||
| Total loans | $ | 61,133 | $ | 122,615 | $ | 42,319 | $ | 85,961 | $ | 312,028 | |||||||||
| Total of loans due after one year with: | |||||||||||||||||||
| Predetermined Interest Rates | Floating Interest Rates | ||||||||||||||||||
| Commercial | $ | 16,816 | $ | 67,987 | |||||||||||||||
| Commercial real estate | 10,476 | 20,243 | |||||||||||||||||
| Residential mortgages | 53,517 | 22,639 | |||||||||||||||||
| Credit card | — | — | |||||||||||||||||
| Other retail | 47,261 | 11,956 | |||||||||||||||||
| Total | $ | 128,070 | $ | 122,825 |
| Column 1 | Column 2 |
|---|---|
| (a) | Primarily represents construction loans for single-family residences or loans guaranteed by the SBA. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| 29 |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| TABLE 8 | Commercial Loans by Industry Group and Geography |
| 2021 | 2020 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| At December 31 (Dollars in Millions) | Loans | Percent | Loans | Percent | ||||||||||||
| Industry Group | ||||||||||||||||
| Real-estate related | $ | 16,646 | 14.9 | % | $ | 14,032 | 13.6 | % | ||||||||
| Financial institutions | 14,002 | 12.5 | 11,208 | 10.9 | ||||||||||||
| Automotive | 7,590 | 6.8 | 4,395 | 4.3 | ||||||||||||
| Personal, professional and commercial services | 7,095 | 6.3 | 7,597 | 7.4 | ||||||||||||
| Healthcare | 6,923 | 6.2 | 7,815 | 7.6 | ||||||||||||
| Technology | 5,119 | 4.6 | 3,937 | 3.8 | ||||||||||||
| Retail | 4,717 | 4.2 | 5,277 | 5.1 | ||||||||||||
| Media and entertainment | 4,623 | 4.1 | 5,737 | 5.6 | ||||||||||||
| Capital goods | 4,099 | 3.6 | 2,911 | 2.8 | ||||||||||||
| Food and beverage | 4,097 | 3.6 | 3,869 | 3.8 | ||||||||||||
| Transportation | 3,895 | 3.5 | 3,441 | 3.3 | ||||||||||||
| Education and non-profit | 3,721 | 3.3 | 4,698 | 4.6 | ||||||||||||
| Metals and mining | 3,342 | 3.0 | 2,892 | 2.8 | ||||||||||||
| State and municipal government | 3,166 | 2.8 | 3,157 | 3.1 | ||||||||||||
| Power | 3,028 | 2.7 | 2,150 | 2.1 | ||||||||||||
| Building materials | 2,687 | 2.4 | 2,813 | 2.7 | ||||||||||||
| Energy | 2,299 | 2.1 | 2,624 | 2.6 | ||||||||||||
| Agriculture | 1,796 | 1.6 | 1,950 | 1.9 | ||||||||||||
| Other | 13,178 | 11.8 | 12,368 | 12.0 | ||||||||||||
| Total | $ | 112,023 | 100.0 | % | $ | 102,871 | 100.0 | % | ||||||||
| Geography | ||||||||||||||||
| California | $ | 15,439 | 13.8 | % | $ | 14,053 | 13.7 | % | ||||||||
| New York | 7,483 | 6.7 | 6,129 | 6.0 | ||||||||||||
| Texas | 6,748 | 6.0 | 6,163 | 6.0 | ||||||||||||
| Minnesota | 6,730 | 6.0 | 7,251 | 7.0 | ||||||||||||
| Illinois | 6,572 | 5.9 | 5,795 | 5.6 | ||||||||||||
| Ohio | 4,310 | 3.8 | 4,394 | 4.3 | ||||||||||||
| Wisconsin | 3,894 | 3.5 | 3,996 | 3.9 | ||||||||||||
| New Jersey | 3,825 | 3.4 | 2,148 | 2.1 | ||||||||||||
| Virginia | 3,822 | 3.4 | 2,098 | 2.0 | ||||||||||||
| Missouri | 3,817 | 3.4 | 4,085 | 4.0 | ||||||||||||
| All other states | 49,383 | 44.1 | 46,759 | 45.4 | ||||||||||||
| Total | $ | 112,023 | 100.0 | % | $ | 102,871 | 100.0 | % |
Commercial
Commercial loans, including lease financing, increased $9.2 billion (8.9 percent) at December 31, 2021, compared with December 31, 2020, driven by strong new business and higher utilization. Average commercial loans
decreased $11.1 billion (9.8 percent) in 2021, compared with 2020. Table 8 provides a summary of commercial loans by industry and geographical location.
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
|---|---|---|---|---|
| 30 |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| TABLE 9 | Commercial Real Estate Loans by Property Type and Geography |
| 2021 | 2020 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| At December 31 (Dollars in Millions) | Loans | Percent | Loans | Percent | ||||||||||||
| Property Type | ||||||||||||||||
| Multi-family | $ | 9,293 | 23.8 | % | $ | 8,672 | 22.1 | % | ||||||||
| Business owner occupied | 8,238 | 21.1 | 8,622 | 21.9 | ||||||||||||
| Office | 5,814 | 14.9 | 6,081 | 15.5 | ||||||||||||
| Industrial | 3,672 | 9.4 | 2,941 | 7.5 | ||||||||||||
| Retail | 3,382 | 8.7 | 3,645 | 9.3 | ||||||||||||
| Residential land and development | 2,788 | 7.1 | 2,724 | 6.9 | ||||||||||||
| Lodging | 2,422 | 6.2 | 2,814 | 7.1 | ||||||||||||
| Other | 3,444 | 8.8 | 3,812 | 9.7 | ||||||||||||
| Total | $ | 39,053 | 100.0 | % | $ | 39,311 | 100.0 | % | ||||||||
| Geography | ||||||||||||||||
| California | $ | 9,683 | 24.8 | % | $ | 9,653 | 24.6 | % | ||||||||
| Washington | 3,680 | 9.4 | 3,427 | 8.7 | ||||||||||||
| Minnesota | 1,717 | 4.4 | 1,869 | 4.7 | ||||||||||||
| Colorado | 1,684 | 4.3 | 1,680 | 4.3 | ||||||||||||
| Texas | 1,662 | 4.3 | 1,600 | 4.1 | ||||||||||||
| Oregon | 1,526 | 3.9 | 1,738 | 4.4 | ||||||||||||
| Florida | 1,520 | 3.9 | 1,265 | 3.2 | ||||||||||||
| Illinois | 1,409 | 3.6 | 1,487 | 3.8 | ||||||||||||
| Wisconsin | 1,391 | 3.6 | 1,585 | 4.0 | ||||||||||||
| Ohio | 1,215 | 3.1 | 1,213 | 3.1 | ||||||||||||
| All other states | 13,566 | 34.7 | 13,794 | 35.1 | ||||||||||||
| Total | $ | 39,053 | 100.0 | % | $ | 39,311 | 100.0 | % |
Commercial Real Estate
The Company’s portfolio of commercial real estate loans, which includes commercial mortgages and construction and development loans, decreased $258 million (0.7 percent) at December 31, 2021, compared with December 31, 2020. The decrease was primarily the result of customers paying down balances. Average commercial real estate loans decreased $1.8 billion (4.4 percent) in 2021, compared with 2020. Table 9 provides a summary of commercial real estate loans by property type and geographical location.
At December 31, 2021 and 2020, $72 million and $80 million, respectively, of
tax-exempt
industrial development loans were
secured by real estate. The Company’s commercial mortgage and construction and development loans had unfunded commitments of $11.8 billion and $11.3 billion at December 31, 2021 and 2020, respectively.
The Company also finances the operations of real estate developers and other entities with operations related to real estate. These loans are not secured directly by real estate but have similar characteristics to commercial real estate loans. These loans were included in the commercial loan category and totaled $16.6 billion and $14.0 billion at December 31, 2021 and 2020, respectively.
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| 31 |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| TABLE 10 | Residential Mortgages by Geography |
| 2021 | 2020 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| At December 31 (Dollars in Millions) | Loans | Percent | Loans | Percent | ||||||||||||||||
| California | $ | 23,568 | 30.8 | % | $ | 22,994 | 30.2 | % | ||||||||||||
| Washington | 4,002 | 5.2 | 3,943 | 5.2 | ||||||||||||||||
| Minnesota | 3,767 | 4.9 | 4,378 | 5.7 | ||||||||||||||||
| Colorado | 3,612 | 4.7 | 3,777 | 5.0 | ||||||||||||||||
| Illinois | 3,392 | 4.4 | 3,786 | 5.0 | ||||||||||||||||
| Florida | 3,340 | 4.4 | 3,112 | 4.1 | ||||||||||||||||
| Arizona | 2,684 | 3.5 | 2,865 | 3.8 | ||||||||||||||||
| Oregon | 2,332 | 3.1 | 2,399 | 3.1 | ||||||||||||||||
| Texas | 2,209 | 2.9 | 2,244 | 2.9 | ||||||||||||||||
| Ohio | 2,072 | 2.7 | 2,241 | 2.9 | ||||||||||||||||
| All other states | 25,515 | 33.4 | 24,416 | 32.1 | ||||||||||||||||
| Total | $ | 76,493 | 100.0 | % | $ | 76,155 | 100.0 | % |
Residential Mortgages
Residential mortgages held in the loan portfolio at December 31, 2021, increased $338 million (0.4 percent) compared to December 31, 2020, due to increased loan portfolio production and slower payoffs. Average residential mortgages increased $962 million (1.3 percent) in 2021, compared with 2020. Residential mortgages originated and placed in the Company’s loan portfolio include well-secured jumbo mortgages and branch-originated first lien home equity loans to borrowers with high credit quality.
Credit Card
Total credit card loans increased $154 million (0.7 percent) at December 31, 2021, compared with December 31, 2020, reflecting increased consumer spending.
Average credit card balances decreased $687 million (3.1 percent) in 2021, compared with 2020.
Other Retail
Total other retail loans, which include retail leasing, home equity and second mortgages and other retail loans, increased $4.9 billion (8.7 percent) at December 31, 2021, compared with December 31, 2020, reflecting increases in auto loans and installment loans, partially offset by decreases in home equity loans and retail leasing balances. Average other retail loans increased $2.3 billion (4.1 percent) in 2021, compared with 2020. Tables 10, 11 and 12 provide a geographic summary of residential mortgages, credit card loans and other retail loans outstanding, respectively, as of December 31, 2021 and 2020.
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| TABLE 11 | Credit Card Loans by Geography |
| 2021 | 2020 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| At December 31 (Dollars in Millions) | Loans | Percent | Loans | Percent | ||||||||||||||||
| California | $ | 2,134 | 9.5 | % | $ | 2,175 | 9.7 | % | ||||||||||||
| Texas | 1,343 | 6.0 | 1,300 | 5.8 | ||||||||||||||||
| Ohio | 1,113 | 4.9 | 1,153 | 5.2 | ||||||||||||||||
| Minnesota | 1,109 | 4.9 | 1,126 | 5.0 | ||||||||||||||||
| Illinois | 1,108 | 4.9 | 1,095 | 4.9 | ||||||||||||||||
| Florida | 1,046 | 4.6 | 974 | 4.4 | ||||||||||||||||
| Wisconsin | 895 | 4.0 | 926 | 4.1 | ||||||||||||||||
| Michigan | 822 | 3.7 | 848 | 3.8 | ||||||||||||||||
| Colorado | 761 | 3.4 | 773 | 3.5 | ||||||||||||||||
| Washington | 757 | 3.4 | 789 | 3.5 | ||||||||||||||||
| All other states | 11,412 | 50.7 | 11,187 | 50.1 | ||||||||||||||||
| Total | $ | 22,500 | 100.0 | % | $ | 22,346 | 100.0 | % |
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
|---|---|---|---|---|
| 32 |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| TABLE 12 | Other Retail Loans by Geography |
| 2021 | 2020 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| At December 31 (Dollars in Millions) | Loans | Percent | Loans | Percent | ||||||||||||||||
| California | $ | 9,605 | 15.5 | % | $ | 9,179 | 16.1 | % | ||||||||||||
| Texas | 7,570 | 12.2 | 6,381 | 11.2 | ||||||||||||||||
| Florida | 3,850 | 6.2 | 3,135 | 5.5 | ||||||||||||||||
| Minnesota | 2,947 | 4.8 | 3,009 | 5.3 | ||||||||||||||||
| Illinois | 2,692 | 4.3 | 2,571 | 4.5 | ||||||||||||||||
| Ohio | 2,634 | 4.2 | 2,579 | 4.5 | ||||||||||||||||
| New York | 2,014 | 3.3 | 1,766 | 3.1 | ||||||||||||||||
| Washington | 1,913 | 3.1 | 1,809 | 3.2 | ||||||||||||||||
| Colorado | 1,859 | 3.0 | 1,886 | 3.3 | ||||||||||||||||
| Missouri | 1,683 | 2.7 | 1,687 | 2.9 | ||||||||||||||||
| All other states | 25,192 | 40.7 | 23,022 | 40.4 | ||||||||||||||||
| Total | $ | 61,959 | 100.0 | % | $ | 57,024 | 100.0 | % |
The Company generally retains portfolio loans through maturity; however, the Company’s intent may change over time based upon various factors such as ongoing asset/liability management activities, assessment of product profitability, credit risk, liquidity needs, and capital implications. If the Company’s intent or ability to hold an existing portfolio loan changes, it is transferred to loans held for sale.
Loans Held for Sale
Loans held for sale, consisting primarily of residential mortgages to be sold in the secondary market, were
$7.8 billion at December 31, 2021, compared with $8.8 billion at December 31, 2020. The decrease in loans held for sale was principally due to a lower level of mortgage loan closings in late 2021, compared with the same period of 2020. Almost all of the residential mortgage loans the Company originates or purchases for sale follow guidelines that allow the loans to be sold into existing, highly liquid secondary markets; in particular in government agency transactions and to government sponsored enterprises (“GSEs”).
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| TABLE 13 | Investment Securities |
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| At December 31 (Dollars in Millions) | Amortized Cost | Fair Value | Weighted- Average Maturity in Years | Weighted- Average Yield(d) | Amortized Cost | Fair Value | Weighted- Average Maturity in Years | Weighted- Average Yield(d) | ||||||||||||||||||||||||||||
| Held-to-maturity | ||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities(a) | $ | 41,858 | $ | 41,812 | 7.4 | 1.45 | % | $ | — | $ | — | — | — | % | ||||||||||||||||||||||
| Total held-to-maturity | $ | 41,858 | $ | 41,812 | 7.4 | 1.45 | % | $ | — | $ | — | — | — | % | ||||||||||||||||||||||
| Available-for-sale | ||||||||||||||||||||||||||||||||||||
| U.S. Treasury and agencies | $ | 36,648 | $ | 36,609 | 6.7 | 1.54 | % | $ | 21,954 | $ | 22,391 | 3.8 | 1.37 | % | ||||||||||||||||||||||
| Mortgage-backed securities(a) | 85,394 | 85,564 | 4.9 | 1.58 | 103,282 | 105,374 | 3.0 | 1.47 | ||||||||||||||||||||||||||||
| Asset-backed securities(a) | 62 | 66 | 5.2 | 1.53 | 200 | 205 | 6.2 | 1.47 | ||||||||||||||||||||||||||||
| Obligations of state and political subdivisions(b)(c) | 10,130 | 10,717 | 6.6 | 3.67 | 8,166 | 8,861 | 6.3 | 3.99 | ||||||||||||||||||||||||||||
| Other | 7 | 7 | 3.4 | 2.07 | 9 | 9 | .1 | 1.81 | ||||||||||||||||||||||||||||
| Total available-for-sale | $ | 132,241 | $ | 132,963 | 5.5 | 1.73 | % | $ | 133,611 | $ | 136,840 | 3.4 | 1.61 | % |
| Column 1 | Column 2 |
|---|---|
| (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. |
| Column 1 | Column 2 |
|---|---|
| (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. |
| Column 1 | Column 2 |
|---|---|
| (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. |
| Column 1 | Column 2 |
|---|---|
| (d) | Yields on investment securities are computed based on amortized cost balances. Weighted-average yields for obligations of state and political subdivisions are presented on a fully-taxable equivalent basis based on a federal income tax rate of 21 percent. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| 33 |
Investment Securities
The Company uses its investment securities portfolio to manage interest rate risk, provide liquidity (including the ability to meet regulatory requirements), generate interest and dividend income, and as collateral for public deposits and wholesale funding sources. While the Company intends to hold its investment securities indefinitely, it may sell
available-for-sale
investment securities in response to structural changes in the balance sheet and related interest rate risk and to meet liquidity requirements, among other factors.
Investment securities totaled $174.8 billion at December 31, 2021, compared with $136.8 billion at December 31, 2020. The $38.0 billion (27.8 percent) increase reflected $41.9 billion of net investment purchases, partially offset by a $3.8 billion unfavorable change in net unrealized gains (losses) on
available-for-sale
investment securities. During the fourth quarter of 2021, the Company transferred $43.1 billion amortized cost ($41.8 billion fair value) of
available-for-sale
investment securities to the
held-to-maturity
category to reflect its new intent for these securities. The Company had no outstanding investment securities classified as
held-to-maturity
at December 31, 2020.
Average investment securities were $154.7 billion in 2021, compared with $126.0 billion in 2020. The weighted-average yield of the
available-for-sale
investment securities portfolio was 1.73 percent at December 31, 2021, compared with 1.61 percent at December 31, 2020. The weighted-average maturity of the
available-for-sale
investment securities portfolio was 5.5 years at December 31, 2021, compared with 3.4 years at December 31, 2020. The weighted-average yield of the
held-to-maturity
investment securities portfolio was 1.45 percent at December 31, 2021. The weighted-average maturity of the
held-to-maturity
investment securities portfolio was 7.4 years at December 31, 2021. Investment securities by type are shown in Table 13.
The Company’s
available-for-sale
investment securities are carried at fair value with changes in fair value reflected in other comprehensive income (loss) unless a portion of a security’s unrealized loss is related to credit and an allowance for credit losses is necessary. At December 31, 2021, the Company’s net unrealized gains on
available-for-sale
investment securities were $722 million, compared with $3.2 billion at December 31, 2020. The unfavorable change in net unrealized gains was primarily due to decreases in the fair value of mortgage-backed and U.S. Treasury securities as a result of changes in interest rates, partially offset by the impact of the transfer of
available-for-sale
investment securities to the
held-to-maturity
category. Gross unrealized losses on
available-for-sale
investment securities totaled $812 million at December 31, 2021, compared with $53 million at December 31, 2020. When evaluating credit losses, the Company considers various factors such as the nature of the investment security, the credit ratings or financial condition of the
issuer, the extent of the unrealized loss, expected cash flows of the underlying collateral, the existence of any government or agency guarantees, and market conditions. At December 31, 2021, the Company had no plans to sell securities with unrealized losses, and believes it is more likely than not that it would not be required to sell such securities before recovery of their amortized cost.
Refer to Notes 5 and 22 in the Notes to Consolidated Financial Statements for further information on investment securities.
Deposits
Total deposits were $456.1 billion at December 31, 2021, compared with $429.8 billion at December 31, 2020. The $26.3 billion (6.1 percent) increase in total deposits reflected increases in noninterest-bearing and total savings deposits, partially offset by a decrease in time deposits. Average total deposits in 2021 increased $35.7 billion (8.9 percent) over 2020.
Noninterest-bearing deposits at December 31, 2021, increased $16.8 billion (14.2 percent) from December 31, 2020. The increase was driven by higher Wealth Management and Investment Services, and Corporate and Commercial Banking balances. Average noninterest-bearing deposits increased $28.7 billion (29.1 percent) in 2021, compared with 2020.
Interest-bearing savings deposits increased $17.5 billion (6.2 percent) at December 31, 2021, compared with December 31, 2020. The increase was related to higher interest checking and savings account deposit balances, partially offset by lower money market deposit balances. Interest checking balances increased $19.2 billion (20.0 percent) primarily due to higher Consumer and Business Banking, and Corporate and Commercial Banking balances. Savings account balances increased $8.8 billion (15.3 percent), driven by higher Consumer and Business Banking balances. Money market deposit balances decreased $10.4 billion (8.2 percent), primarily due to lower Wealth Management and Investment Services balances, partially offset by higher Corporate and Commercial Banking balances. Average interest-bearing savings deposits increased $20.4 billion (7.8 percent) in 2021, compared with 2020, reflecting higher Consumer and Business Banking balances, partially offset by lower Corporate and Commercial Banking balances.
Interest-bearing time deposits at December 31, 2021, decreased $8.0 billion (26.2 percent), compared with December 31, 2020. Average time deposits decreased $13.4 billion (35.3 percent) in 2021, compared with 2020. The decreases were primarily driven by lower Corporate and Commercial Banking, Consumer and Business Banking, and Wealth Management and Investment Services balances. Changes in time deposits are primarily related to those deposits managed as an alternative to other funding sources, based largely on relative pricing and liquidity characteristics.
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
|---|---|---|---|---|
| 34 |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| TABLE 14 | Deposits |
The composition of deposits was as follows:
| 2021 | 2020 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| At December 31 (Dollars in Millions) | Amount | Percent of Total | Amount | Percent of Total | ||||||||||||||||
| Noninterest-bearing deposits | $ | 134,901 | 29.6 | % | $ | 118,089 | 27.5 | % | ||||||||||||
| Interest-bearing deposits | ||||||||||||||||||||
| Interest checking | 115,108 | 25.2 | 95,894 | 22.3 | ||||||||||||||||
| Money market savings | 117,619 | 25.8 | 128,058 | 29.8 | ||||||||||||||||
| Savings accounts | 65,790 | 14.4 | 57,035 | 13.3 | ||||||||||||||||
| Total savings deposits | 298,517 | 65.4 | 280,987 | 65.4 | ||||||||||||||||
| Domestic time deposits less than $250,000 | 11,303 | 2.5 | 14,187 | 3.3 | ||||||||||||||||
| Domestic time deposits greater than $250,000 | 2,743 | .6 | 4,413 | 1.0 | ||||||||||||||||
| Foreign time deposits | 8,619 | 1.9 | 12,094 | 2.8 | ||||||||||||||||
| Total interest-bearing deposits | 321,182 | 70.4 | 311,681 | 72.5 | ||||||||||||||||
| Total deposits(a) | $ | 456,083 | 100.0 | % | $ | 429,770 | 100.0 | % |
| Column 1 | Column 2 |
|---|---|
| (a) | Includes $238.0 billion and $239.0 billion of deposits at December 31, 2021 and 2020, respectively, that are not subject to any federal, state or foreign deposit insurance program. |
The maturity of domestic time deposits in excess of the insurance limit and those time deposits not subject to any federal, state
or foreign deposit insurance program at December 31, 2021 was as follows:
| (Dollars in Millions) | Domestic Time Deposits Greater Than $250,000 | Foreign Time Deposits | Total | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Three months or less | $ | 1,107 | $ | 8,619 | $ | 9,726 | |||||
| Three months through six months | 365 | — | 365 | ||||||||
| Six months through one year | 742 | — | 742 | ||||||||
| Thereafter | 529 | — | 529 | ||||||||
| Total | $ | 2,743 | $ | 8,619 | $ | 11,362 |
Borrowings
The Company utilizes both short-term and long-term borrowings as part of its asset/liability management and funding strategies. Short-term borrowings, which include federal funds purchased, commercial paper, repurchase agreements, borrowings secured by high-grade assets and other short-term borrowings, were $11.8 billion at December 31, 2021 and 2020. The $30 million (0.3 percent) increase in short-term borrowings at December 31, 2021, compared with December 31, 2020, reflected higher repurchase agreement and commercial paper balances, mostly offset by lower federal funds purchased balances.
Long-term debt was $32.1 billion at December 31, 2021, compared with $41.3 billion at December 31, 2020. The $9.2 billion (22.2 percent) decrease was primarily due to $7.0 billion of bank note repayments and maturities, $3.0 billion of medium-term note repayments and a $1.0 billion decrease in Federal Home Loan Bank (“FHLB”) advances, partially offset by $1.0 billion of bank note and $1.3 billion of subordinated note issuances.
Refer to Notes 13 and 14 of the Notes to Consolidated Financial Statements for additional information regarding short-term borrowings and long-term debt, and the “Liquidity Risk Management” section for discussion of liquidity management of the Company.
Corporate Risk Profile
Overview
Managing risks is an essential part of successfully operating a financial services company. The Company’s Board of Directors has approved a risk management framework which establishes governance and risk management requirements for all risk-taking activities. This framework includes Company and business line risk appetite statements which set boundaries for the types and amount of risk that may be undertaken in pursuing business objectives and initiatives. The Board of Directors, primarily through its Risk Management Committee, oversees performance relative to the risk management framework, risk appetite statements, and other policy requirements.
The Executive Risk Committee (“ERC”), which is chaired by the Chief Risk Officer and includes the Chief Executive Officer and other members of the executive management team, oversees execution against the risk management framework and risk appetite statements. The ERC focuses on current and emerging risks, including strategic and reputation risks, by directing timely and comprehensive actions. Senior operating committees have also been established, each responsible for overseeing a specified category of risk.
The Company’s most prominent risk exposures are credit, interest rate, market, liquidity, operational, compliance, strategic, and reputation. Leveraging the Company’s risk management framework, the specific impacts of
COVID-19
and related risks
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| 35 |
are identified for each of the most prominent exposures. With respect to direct impacts from
COVID-19,
oversight and governance is managed through a centralized command center with frequent reporting to the Managing Committee and ERC. The Board of Directors also oversees the Company’s responsiveness to the
COVID-19
pandemic.
Credit risk is the risk of loss associated with a change in the credit profile or the failure of a borrower or counterparty to meet its contractual obligations. Interest rate risk is the current or prospective risk to earnings and capital, or market valuations, arising from the impact of changes in interest rates. Market risk arises from fluctuations in interest rates, foreign exchange rates, and security prices that may result in changes in the values of financial instruments, such as trading and
available-for-sale
securities, mortgage loans held for sale (“MLHFS”), MSRs and derivatives that are accounted for on a fair value basis. Liquidity risk is the risk that financial condition or overall safety and soundness is adversely affected by the Company’s inability, or perceived inability, to meet its cash flow obligations in a timely and complete manner in either normal or stressed conditions. Operational risk is the risk to current or projected financial condition and resilience arising from inadequate or failed internal processes or systems, people (including human errors or misconduct), or adverse external events, including the risk of loss resulting from breaches in data security. Operational risk can also include the risk of loss due to failures by third parties with which the Company does business. Compliance risk is the risk that the Company may suffer legal or regulatory sanctions, financial losses, and reputational damage if it fails to adhere to compliance requirements and the Company’s compliance policies. Strategic risk is the risk to current or projected financial condition and resilience arising from adverse business decisions, poor implementation of business decisions, or lack of responsiveness to changes in the banking industry and operating environment. Reputation risk is the risk to current or anticipated earnings, capital, or franchise or enterprise value arising from negative public opinion. This risk may impair the Company’s competitiveness by affecting its ability to establish new relationships or services, or continue serving existing relationships. In addition to the risks identified above, other risk factors exist that may impact the Company. Refer to “Risk Factors” beginning on page 137, for a detailed discussion of these factors.
The Company’s Board and management-level governance committees are supported by a “three lines of defense” model for establishing effective checks and balances. The first line of defense, the business lines, manages risks in conformity with established limits and policy requirements. In turn, business line leaders and their risk officers establish programs to ensure conformity with these limits and policy requirements. The second line of defense, which includes the Chief Risk Officer’s organization as well as policy and oversight activities of corporate support functions, translates risk appetite and strategy into actionable risk limits and policies. The second line of defense monitors first line of defense conformity with limits and policies,
and provides reporting and escalation of emerging risks and other concerns to senior management and the Risk Management Committee of the Board of Directors. The third line of defense, internal audit, is responsible for providing the Audit Committee of the Board of Directors and senior management with independent assessment and assurance regarding the effectiveness of the Company’s governance, risk management and control processes.
Management regularly provides reports to the Risk Management Committee of the Board of Directors. The Risk Management Committee discusses with management the Company’s risk management performance, and provides a summary of key risks to the entire Board of Directors, covering the status of existing matters, areas of potential future concern and specific information on certain types of loss events. The Risk Management Committee considers quarterly reports by management assessing the Company’s performance relative to the risk appetite statements and the associated risk limits, including:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| – | Macroeconomic environment and other qualitative considerations, such as regulatory and compliance changes, litigation developments, and technology and cybersecurity; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| – | Credit measures, including adversely rated and nonperforming loans, leveraged transactions, credit concentrations and lending limits; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| – | Interest rate and market risk, including market value and net income simulation, and trading-related Value at Risk (“VaR”); |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| – | Liquidity risk, including funding projections under various stressed scenarios; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| – | 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; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| – | Capital ratios and projections, including regulatory measures and stressed scenarios; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| – | Strategic and reputation risk considerations, impacts and responses. |
Credit Risk Management
The Company’s strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. The strategy also emphasizes diversification on a geographic, industry and customer level, regular credit examinations and management reviews of loans exhibiting deterioration of credit quality. The Risk Management Committee oversees the Company’s credit risk management process.
In addition, credit quality ratings as defined by the Company, are an important part of the Company’s overall credit risk management and evaluation of its allowance for credit losses. Loans with a pass rating represent those loans not classified on the Company’s rating scale for problem credits, as minimal credit risk has been identified. Loans with a special mention or classified rating, including consumer lending and small business loans that are 90 days or more past due and still accruing, nonaccrual
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
|---|---|---|---|---|
| 36 |
loans, those loans considered troubled debt restructurings (“TDRs”), and loans in a junior lien position that are current but are behind a first lien position on nonaccrual, encompass all loans held by the Company that it considers to have a potential or well-defined weakness that may put full collection of contractual cash flows at risk. The Company’s internal credit quality ratings for consumer loans are primarily based on delinquency and nonperforming status, except for a limited population of larger loans within those portfolios that are individually evaluated. For this limited population, the determination of the internal credit quality rating may also consider collateral value and customer cash flows. Refer to Notes 1 and 6 in the Notes to Consolidated Financial Statements for further discussion of the Company’s loan portfolios including internal credit quality ratings.
The Company categorizes its loan portfolio into two segments, which is the level at which it develops and documents a systematic methodology to determine the allowance for credit losses. The Company’s two loan portfolio segments are commercial lending and consumer lending.
The commercial lending segment includes loans and leases made to small business, middle market, large corporate, commercial real estate, financial institution,
non-profit
and public sector customers. Key risk characteristics relevant to commercial lending segment loans include the industry and geography of the borrower’s business, purpose of the loan, repayment source, borrower’s debt capacity and financial flexibility, loan covenants, and nature of pledged collateral, if any, as well as macroeconomic factors such as unemployment rates, gross domestic product levels, corporate bond spreads and long-term interest rates, all of which have been impacted by the
COVID-19
pandemic. These risk characteristics, among others, are considered in determining estimates about the likelihood of default by the borrowers and the severity of loss in the event of default. The Company considers these risk characteristics in assigning internal risk ratings to, or forecasting losses on, these loans, which are the significant factors in determining the allowance for credit losses for loans in the commercial lending segment.
The consumer lending segment represents loans and leases made to consumer customers, including residential mortgages, credit card loans, and other retail loans such as revolving consumer lines, auto loans and leases, home equity loans and lines, and student loans, a
run-off
portfolio. Home equity or second mortgage loans are junior lien
closed-end
accounts fully disbursed at origination. These loans typically are fixed rate loans, secured by residential real estate, with a
10-
or
15-year
fixed payment amortization schedule. Home equity lines are revolving accounts giving the borrower the ability to draw and repay balances repeatedly, up to a maximum commitment, and are secured by residential real estate. These include accounts in either a first or junior lien position. Typical terms on home equity lines in the portfolio are variable rates benchmarked to the prime rate, with a
10-
or
15-year
draw period during which a minimum payment is equivalent to the monthly interest, followed by a
20-
or
10-year
amortization period, respectively. At December 31,
2021, substantially all of the Company’s home equity lines were in the draw period. Approximately $1.2 billion, or 13 percent, of the outstanding home equity line balances at December 31, 2021, will enter the amortization period within the next 36 months. Key risk characteristics relevant to consumer lending segment loans primarily relate to the borrowers’ capacity and willingness to repay and include unemployment rates, consumer bankruptcy filings and other macroeconomic factors, customer payment history and credit scores, and in some cases, updated
loan-to-value
(“LTV”) information reflecting current market conditions on real estate-based loans. These and other risk characteristics, including risk resulting from the
COVID-19
pandemic, are reflected in forecasts of delinquency levels, bankruptcies and losses which are the primary factors in determining the allowance for credit losses for the consumer lending segment.
The Company further disaggregates its loan portfolio segments into various classes based on their underlying risk characteristics. The two classes within the commercial lending segment are commercial loans and commercial real estate loans. The three classes within the consumer lending segment are residential mortgages, credit card loans and other retail loans.
Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments. The Company also engages in
non-lending
activities that may give rise to credit risk, including derivative transactions for balance sheet hedging purposes, foreign exchange transactions, deposit overdrafts and interest rate contracts for customers, investments in securities and other financial assets, and settlement risk, including Automated Clearing House transactions and the processing of credit card transactions for merchants. These activities are subject to credit review, analysis and approval processes.
Economic and Other Factors
In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), collateral values, trends in loan performance and macroeconomic factors, such as changes in unemployment rates, gross domestic product levels and consumer bankruptcy filings, as well as the potential impact on customers and the domestic economy resulting from the
COVID-19
pandemic.
During the first half of 2020, the
COVID-19
pandemic and the mitigation efforts put in place by companies, consumers and governmental authorities to contain it, created the most severe negative impact to the domestic economy since the Great Depression. During 2021, factors affecting economic conditions, including the enactment of additional benefits from government stimulus programs and broad vaccine availability in the United States, have contributed to economic improvement. As a result, economic projections for both the gross domestic product and unemployment levels improved from the prior year. However, economic uncertainty remains associated with supply chain concerns, rising inflationary concerns and additional virus variants.
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| 37 |
Credit Diversification
The Company manages its credit risk, in part, through diversification of its loan portfolio which is achieved through limit setting by product type criteria, such as industry, and identification of credit concentrations. As part of its normal business activities, the Company offers a broad array of traditional commercial lending products and specialized products such as asset-based lending, commercial lease financing, agricultural credit, warehouse mortgage lending, small business lending, commercial real estate lending, health care lending and correspondent banking financing. The Company also offers an array of consumer lending products, including residential mortgages, credit card loans, auto loans, retail leases, home equity loans and lines, revolving credit arrangements and other consumer loans. These consumer lending products are primarily offered through the branch office network, home mortgage and loan production offices, mobile and
on-line
banking, and indirect distribution channels, such as auto and recreational vehicle dealers. The Company monitors and manages the portfolio diversification by industry, customer and geography. Table 6 provides information with respect to the overall product diversification and changes in the mix during 2021.
The commercial loan class is diversified among various industries with higher concentrations in real estate and financial institutions. Additionally, the commercial loan class is diversified across the Company’s geographical markets, with a higher concentration in California. Table 8 provides a summary of significant industry groups and geographical locations of commercial loans outstanding at December 31, 2021 and 2020.
The commercial real estate loan class reflects the Company’s focus on serving business owners within states encompassing its branch office network, as well as regional and national investment-based real estate owners and builders. Within the commercial real estate loan class, different property types have varying degrees of credit risk. Table 9 provides a summary of the significant property types and geographical locations of commercial real estate loans outstanding at December 31, 2021 and 2020. At December 31, 2021, approximately 21.1 percent of the commercial real estate loans represented business owner-occupied properties that tend to exhibit less credit risk than non
owner-occupied properties. The investment-based real estate mortgages are diversified among various property types with somewhat higher concentrations in multi-family, office, industrial and retail properties. From a geographical perspective, the Company’s commercial real estate loan class is generally well diversified, with a higher concentration in California.
The Company’s consumer lending segment utilizes several distinct business processes and channels to originate consumer credit, including traditional branch lending, mobile and
on-line
banking, indirect lending, alliance partnerships and correspondent banks. Each distinct underwriting and origination activity manages unique credit risk characteristics and prices its loan production commensurate with the differing risk profiles.
Residential mortgage originations are generally limited to prime borrowers and are performed through the Company’s branches, loan production offices, mobile and
on-line
services, and a wholesale network of originators. The Company may retain residential mortgage loans it originates on its balance sheet or sell the loans into the secondary market while retaining the servicing rights and customer relationships. Utilizing the secondary markets enables the Company to effectively reduce its credit and other asset/liability risks. For residential mortgages that are retained in the Company’s portfolio and for home equity and second mortgages, credit risk is also diversified by geography and managed by adherence to LTV and borrower credit criteria during the underwriting process.
The Company estimates updated LTV information on its outstanding residential mortgages quarterly, based on a method that combines automated valuation model updates and relevant home price indices. LTV is the ratio of the loan’s outstanding principal balance to the current estimate of property value. For home equity and second mortgages, combined
loan-to-value
(“CLTV”) is the combination of the first mortgage original principal balance and the second lien outstanding principal balance, relative to the current estimate of property value. Certain loans do not have an LTV or CLTV, primarily due to lack of availability of relevant automated valuation model and/or home price indices values, or lack of necessary valuation data on acquired loans.
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
|---|---|---|---|---|
| 38 |
The following tables provide summary information of residential mortgages and home equity and second mortgages by LTV at December 31, 2021:
| Residential Mortgages (Dollars in Millions) | Interest Only | Amortizing | Total | Percent of Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Loan-to-Value | ||||||||||||||||
| Less than or equal to 80% | $ | 3,680 | $ | 62,380 | $ | 66,060 | 86.4 | % | ||||||||
| Over 80% through 90% | — | 1,946 | 1,946 | 2.5 | ||||||||||||
| Over 90% through 100% | — | 193 | 193 | .3 | ||||||||||||
| Over 100% | — | 72 | 72 | .1 | ||||||||||||
| No LTV available | — | 22 | 22 | — | ||||||||||||
| Loans purchased from GNMA mortgage pools(a) | — | 8,200 | 8,200 | 10.7 | ||||||||||||
| Total(b) | $ | 3,680 | $ | 72,813 | $ | 76,493 | 100.0 | % |
| Column 1 | Column 2 |
|---|---|
| (a) | Represents loans purchased from Government National Mortgage Association (“GNMA”) mortgage pools whose payments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs. |
| Column 1 | Column 2 |
|---|---|
| (b) | At December 31, 2021, approximately $418 million of residential mortgage balances were considered sub-prime. |
| Home Equity and Second Mortgages (Dollars in Millions) | Lines | Loans | Total | Percent of Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Loan-to-Value / Combined Loan-to-Value | ||||||||||||||||
| Less than or equal to 80% | $ | 9,132 | $ | 638 | $ | 9,770 | 93.5 | % | ||||||||
| Over 80% through 90% | 282 | 223 | 505 | 4.8 | ||||||||||||
| Over 90% through 100% | 47 | 23 | 70 | .7 | ||||||||||||
| Over 100% | 38 | 4 | 42 | .4 | ||||||||||||
| No LTV/CLTV available | 56 | 3 | 59 | .6 | ||||||||||||
| Total(a) | $ | 9,555 | $ | 891 | $ | 10,446 | 100.0 | % |
| Column 1 | Column 2 |
|---|---|
| (a) | At December 31, 2021, approximately $33 million of home equity and second mortgage balances were considered sub-prime. |
Home equity and second mortgages were $10.4 billion at December 31, 2021, compared with $12.5 billion at December 31, 2020, and included $3.0 billion of home equity lines in a first lien position and $7.4 billion of home equity and second mortgage loans and lines in a junior lien position. Loans and lines in a junior lien position at December 31, 2021, included approximately $2.6 billion of loans and lines for which the Company also serviced the related first lien loan, and
approximately $4.8 billion where the Company did not service the related first lien loan. The Company was able to determine the status of the related first liens using information the Company has as the servicer of the first lien or information reported on customer credit bureau files. The Company also evaluates other indicators of credit risk for these junior lien loans and lines, including delinquency, estimated average CLTV ratios and updated weighted-average credit scores in making its assessment of credit risk, related loss estimates and determining the allowance for credit losses.
The following table provides a summary of delinquency statistics and other credit quality indicators for the Company’s junior lien positions at December 31, 2021:
| Junior Liens Behind | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in Millions) | Company Owned or Serviced First Lien | Third Party First Lien | Total | |||||||||
| Total | $ | 2,594 | $ | 4,795 | $ | 7,389 | ||||||
| Percent 30 - 89 days past due | .53 | % | .56 | % | .55 | % | ||||||
| Percent 90 days or more past due | .11 | % | .08 | % | .09 | % | ||||||
| Weighted-average CLTV | 58 | % | 56 | % | 57 | % | ||||||
| Weighted-average credit score | 782 | 783 | 782 |
See the “Analysis and Determination of the Allowance for Credit Losses” section for additional information on how the Company determines the allowance for credit losses for loans in a junior lien position.
Credit card and other retail loans are diversified across customer segments and geographies. Diversification in the credit card portfolio is achieved with broad customer relationship distribution through the Company’s and financial institution partners’ branches, retail and affinity partners, and digital channels.
Tables 10, 11 and 12 provide a geographical summary of the residential mortgage, credit card and other retail loan portfolios, respectively.
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| 39 |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| TABLE 15 | Delinquent Loan Ratios as a Percent of Ending Loan Balances |
| At December 31 90 days or more past due excluding nonperforming loans | 2021 | 2020 | ||||||
|---|---|---|---|---|---|---|---|---|
| Commercial | ||||||||
| Commercial | .05 | % | .06 | % | ||||
| Lease financing | — | — | ||||||
| Total commercial | .04 | .05 | ||||||
| Commercial Real Estate | ||||||||
| Commercial mortgages | — | — | ||||||
| Construction and development | .10 | .02 | ||||||
| Total commercial real estate | .03 | .01 | ||||||
| Residential Mortgages(a) | .24 | .18 | ||||||
| Credit Card | .73 | .88 | ||||||
| Other Retail | ||||||||
| Retail leasing | .04 | .05 | ||||||
| Home equity and second mortgages | .35 | .36 | ||||||
| Other | .06 | .10 | ||||||
| Total other retail | .11 | .15 | ||||||
| Total loans | .15 | % | .16 | % | ||||
| At December 31 90 days or more past due including nonperforming loans | 2021 | 2020 | ||||||
| Commercial | .20 | % | .42 | % | ||||
| Commercial real estate | .76 | 1.15 | ||||||
| Residential mortgages(a) | .53 | .50 | ||||||
| Credit card | .73 | .88 | ||||||
| Other retail | .35 | .42 | ||||||
| Total loans | .42 | % | .57 | % |
| Column 1 | Column 2 |
|---|---|
| (a) | Delinquent loan ratios exclude $1.5 billion and $1.8 billion at December 31, 2021 and 2020, respectively, of loans purchased from GNMA mortgage pools whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs. Including these loans, the ratio of residential mortgages 90 days or more past due including all nonperforming loans was 2.43 percent and 2.87 percent at December 31, 2021 and 2020, respectively. |
Loan Delinquencies
Trends in delinquency ratios are an indicator, among other considerations, of credit risk within the Company’s loan portfolios. The entire balance of a loan account is considered delinquent if the minimum payment contractually required to be made is not received by the date specified on the billing statement. The Company measures delinquencies, both including and excluding nonperforming loans, to enable comparability with other companies. Delinquent loans purchased from GNMA mortgage pools whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs, are excluded from delinquency statistics. In addition, in certain situations, a consumer lending customer’s account may be
re-aged
to remove it from delinquent status. Generally, the purpose of
re-aging
accounts is to assist customers who have recently overcome temporary financial difficulties and have demonstrated both the ability and willingness to resume regular payments.
In addition, the Company may
re-age
the consumer lending account of a customer who has experienced longer-term financial difficulties and apply modified, concessionary terms and conditions to the account. Commercial lending loans are generally not subject to
re-aging
policies.
Accruing loans 90 days or more past due totaled $472 million at December 31, 2021, compared with $477 million at December 31, 2020. Accruing loans 90 days or more past due are not included in nonperforming assets and continue to accrue interest because they are adequately secured by collateral, are in the process of collection and are reasonably expected to result in repayment or restoration to current status, or are managed in homogeneous portfolios with specified
charge-off
timeframes adhering to regulatory guidelines. The ratio of accruing loans 90 days or more past due to total loans was 0.15 percent at December 31, 2021, compared with 0.16 percent at December 31, 2020.
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
|---|---|---|---|---|
| 40 |
The following table provides summary delinquency information for residential mortgages, credit card and other retail loans included in the consumer lending segment:
| Amount | As a Percent of Ending Loan Balances | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| At December 31 (Dollars in Millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Residential Mortgages(a) | ||||||||||||||||
| 30-89 days | $ | 124 | $ | 244 | .15 | % | .32 | % | ||||||||
| 90 days or more | 181 | 137 | .24 | .18 | ||||||||||||
| Nonperforming | 226 | 245 | .30 | .32 | ||||||||||||
| Total | $ | 531 | $ | 626 | .69 | % | .82 | % | ||||||||
| Credit Card | ||||||||||||||||
| 30-89 days | $ | 193 | $ | 231 | .86 | % | 1.04 | % | ||||||||
| 90 days or more | 165 | 197 | .73 | .88 | ||||||||||||
| Nonperforming | — | — | — | — | ||||||||||||
| Total | $ | 358 | $ | 428 | 1.59 | % | 1.92 | % | ||||||||
| Other Retail | ||||||||||||||||
| Retail Leasing | ||||||||||||||||
| 30-89 days | $ | 29 | $ | 35 | .40 | % | .43 | % | ||||||||
| 90 days or more | 3 | 4 | .04 | .05 | ||||||||||||
| Nonperforming | 10 | 13 | .14 | .16 | ||||||||||||
| Total | $ | 42 | $ | 52 | .58 | % | .64 | % | ||||||||
| Home Equity and Second Mortgages | ||||||||||||||||
| 30-89 days | $ | 55 | $ | 68 | .53 | % | .54 | % | ||||||||
| 90 days or more | 37 | 45 | .35 | .36 | ||||||||||||
| Nonperforming | 116 | 107 | 1.11 | .86 | ||||||||||||
| Total | $ | 208 | $ | 220 | 1.99 | % | 1.76 | % | ||||||||
| Other(b) | ||||||||||||||||
| 30-89 days | $ | 191 | $ | 215 | .43 | % | .60 | % | ||||||||
| 90 days or more | 26 | 37 | .06 | .10 | ||||||||||||
| Nonperforming | 24 | 34 | .05 | .09 | ||||||||||||
| Total | $ | 241 | $ | 286 | .54 | % | .79 | % |
| Column 1 | Column 2 |
|---|---|
| (a) | Excludes $.8 billion of loans 30-89 days past due and $1.5 billion of loans 90 days or more past due at December 31, 2021, purchased from GNMA mortgage pools that continue to accrue interest, compared with $1.4 billion and $1.8 billion at December 31, 2020, respectively. |
| Column 1 | Column 2 |
|---|---|
| (b) | Includes revolving credit, installment, automobile and student loans. |
Restructured Loans
In certain circumstances, the Company may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term. In most cases the modification is either a concessionary reduction in interest rate, extension of the maturity date or reduction in the principal balance that would otherwise not be considered.
Troubled Debt Restructurings
Concessionary modifications are classified as TDRs unless the modification results in only an insignificant delay in the payments to be received. TDRs accrue interest if the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a
level commensurate with the modified terms over several payment cycles, which is generally six months or greater. At December 31, 2021, performing TDRs were $3.1 billion, compared with $3.6 billion at December 31, 2020.
The Company continues to work with customers to modify loans for borrowers who are experiencing financial difficulties. Many of the Company’s TDRs are determined on a
case-by-case
basis in connection with ongoing loan collection processes. The modifications vary within each of the Company’s loan classes. Commercial lending segment TDRs generally include extensions of the maturity date and may be accompanied by an increase or decrease to the interest rate. The Company may also work with the borrower to make other changes to the loan to mitigate losses, such as obtaining additional collateral and/or guarantees to support the loan.
The Company has also implemented certain residential mortgage loan restructuring programs that may result in TDRs. The Company modifies residential mortgage loans under Federal Housing Administration, United States Department of Veterans Affairs, and its own internal programs. Under these programs, the Company offers qualifying homeowners the opportunity to permanently modify their loan and achieve more affordable monthly payments by providing loan concessions. These concessions may include adjustments to interest rates, conversion of adjustable rates to fixed rates, extensions of maturity dates or deferrals of payments, capitalization of accrued interest and/or outstanding advances, or in limited situations, partial forgiveness of loan principal. In most instances, participation in residential mortgage loan restructuring programs requires the customer to complete a short-term trial period. A permanent loan modification is contingent on the customer successfully completing the trial period arrangement, and the loan documents are not modified until that time. The Company reports loans in a trial period arrangement as TDRs and continues to report them as TDRs after the trial period.
Credit card and other retail loan TDRs are generally part of distinct restructuring programs providing customers modification solutions over a specified time period, generally up to 60 months.
In accordance with regulatory guidance, the Company considers secured consumer loans that have had debt discharged through bankruptcy where the borrower has not reaffirmed the debt to be TDRs. If the loan amount exceeds the collateral value, the loan is charged down to collateral value and the remaining amount is reported as nonperforming.
Loan modifications or concessions granted to customers resulting directly from the effects of the
COVID-19
pandemic, who were otherwise in current payment status, are not considered to be TDRs.
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| 41 |
The following table provides a summary of TDRs by loan class, including the delinquency status for TDRs that continue to accrue interest and TDRs included in nonperforming assets:
| As a Percent of Performing TDRs | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| At December 31, 2021 (Dollars in Millions) | Performing TDRs | 30-89 Days Past Due | 90 Days or More Past Due | Nonperforming TDRs | Total TDRs | |||||||||||||||
| Commercial | $ | 130 | 5.0 | % | 2.9 | % | $ | 77 | (a) | $ | 207 | |||||||||
| Commercial real estate | 92 | 1.2 | — | 219 | (b) | 311 | ||||||||||||||
| Residential mortgages | 1,363 | 3.0 | 4.9 | 126 | 1,489 | (d) | ||||||||||||||
| Credit card | 234 | 10.9 | 5.0 | — | 234 | |||||||||||||||
| Other retail | 164 | 11.0 | 5.9 | 38 | (c) | 202 | (e) | |||||||||||||
| TDRs, excluding loans purchased from GNMA mortgage pools | 1,983 | 4.7 | 4.6 | 460 | 2,443 | |||||||||||||||
| Loans purchased from GNMA mortgage pools(g) | 1,071 | — | — | — | 1,071 | (f) | ||||||||||||||
| Total | $ | 3,054 | 3.0 | % | 3.0 | % | $ | 460 | $ | 3,514 |
| Column 1 | Column 2 |
|---|---|
| (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. |
| Column 1 | Column 2 |
|---|---|
| (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). |
| Column 1 | Column 2 |
|---|---|
| (c) | Primarily represents loans with a modified rate equal to 0 percent. |
| Column 1 | Column 2 |
|---|---|
| (d) | Includes $231 million of residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $22 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed. |
| Column 1 | Column 2 |
|---|---|
| (e) | Includes $69 million of other retail loans to borrowers that have had debt discharged through bankruptcy and $14 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed. |
| Column 1 | Column 2 |
|---|---|
| (f) | Includes $177 million of Federal Housing Administration and United States Department of Veterans Affairs residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $132 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed. |
| Column 1 | Column 2 |
|---|---|
| (g) | Approximately 8.5 percent and 35.8 percent of the total TDR loans purchased from GNMA mortgage pools are 30-89 days past due and 90 days or more past due, respectively, but are not classified as delinquent as their repayments are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs. |
Short-term and Other Loan Modifications
The Company makes short-term and other modifications that it does not consider to be TDRs, in limited circumstances, to assist borrowers experiencing temporary hardships. Short-term consumer lending modification programs include payment reductions, deferrals of up to three past due payments, and the ability to return to current status if the borrower makes required payments. The Company may also make short-term modifications to commercial lending loans, with the most common modification being an extension of the maturity date of three months or less. Such extensions generally are used when the maturity date is imminent and the borrower is experiencing some level of financial stress, but the Company believes the borrower will pay all contractual amounts owed.
COVID-19
Payment Relief
The Company has offered payment relief, including forbearance, payment deferrals and other customer accommodations, to assist borrowers that have experienced financial hardship resulting from the effects of the
COVID-19
pandemic. The majority of these borrowers were not delinquent on payments at the time they received the payment relief. Most of the borrowers who received account modifications are no longer participating in these payment relief programs, as the programs are generally short-term. At December 31, 2021, less than 3,000 accounts representing approximately $304 million in loan balances, were currently in the Company’s payment relief programs. Borrowers participating in these programs at December 31, 2021 primarily represented those receiving payment forbearance on residential mortgages; payment relief for other loan products is insignificant. These amounts exclude loans purchased from GNMA mortgage pools whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veteran Affairs
and have received
COVID-19
payment relief under the respective government agency’s programs.
Nonperforming Assets
The level of nonperforming assets represents another indicator of the potential for future credit losses. Nonperforming assets include nonaccrual loans, restructured loans not performing in accordance with modified terms and not accruing interest, restructured loans that have not met the performance period required to return to accrual status, other real estate owned (“OREO”) and other nonperforming assets owned by the Company. Interest payments collected from assets on nonaccrual status are generally applied against the principal balance and not recorded as income. However, interest income may be recognized for interest payments if the remaining carrying amount of the loan is believed to be collectible.
At December 31, 2021, total nonperforming assets were $878 million, compared with $1.3 billion at December 31, 2020. The $420 million (32.4 percent) decrease in nonperforming assets, from December 31, 2020 to December 31, 2021, was driven by decreases in nonperforming commercial and commercial real estate loans. The ratio of total nonperforming assets to total loans and other real estate was 0.28 percent at December 31, 2021, compared with 0.44 percent at December 31, 2020. Nonperforming assets are expected to continue to decline over the next several quarters. However, some manageable levels of elevated nonperforming assets in certain industries and loan categories impacted by the pandemic may experience longer recovery periods.
OREO was $22 million at December 31, 2021, compared with $24 million at December 31, 2020, and was related to foreclosed properties that previously secured loan balances. These balances exclude foreclosed GNMA loans whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
|---|---|---|---|---|
| 42 |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| TABLE 16 | Nonperforming Assets(a) |
| At December 31 (Dollars in Millions) | 2021 | 2020 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Commercial | ||||||||||||
| Commercial | $ | 139 | $ | 321 | ||||||||
| Lease financing | 35 | 54 | ||||||||||
| Total commercial | 174 | 375 | ||||||||||
| Commercial Real Estate | ||||||||||||
| Commercial mortgages | 213 | 411 | ||||||||||
| Construction and development | 71 | 39 | ||||||||||
| Total commercial real estate | 284 | 450 | ||||||||||
| Residential Mortgages(b) | 226 | 245 | ||||||||||
| Credit Card | — | — | ||||||||||
| Other Retail | ||||||||||||
| Retail leasing | 10 | 13 | ||||||||||
| Home equity and second mortgages | 116 | 107 | ||||||||||
| Other | 24 | 34 | ||||||||||
| Total other retail | 150 | 154 | ||||||||||
| Total nonperforming loans(1) | 834 | 1,224 | ||||||||||
| Other Real Estate(c) | 22 | 24 | ||||||||||
| Other Assets | 22 | 50 | ||||||||||
| Total nonperforming assets | $ | 878 | $ | 1,298 | ||||||||
| Accruing loans 90 days or more past due(b) | $ | 472 | $ | 477 | ||||||||
| Period-end loans(2) | $ | 312,028 | $ | 297,707 | ||||||||
| Nonperforming loans to total loans(1)/(2) | .27 | % | .41 | % | ||||||||
| Nonperforming assets to total loans plus other real estate(c) | .28 | % | .44 | % |
Changes in Nonperforming Assets
| (Dollars in Millions) | Commercial and Commercial Real Estate | Residential Mortgages, Credit Card and Other Retail | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance December 31, 2020 | $ | 854 | $ | 444 | $ | 1,298 | ||||||
| Additions to nonperforming assets | ||||||||||||
| New nonaccrual loans and foreclosed properties | 316 | 212 | 528 | |||||||||
| Advances on loans | 10 | 1 | 11 | |||||||||
| Total additions | 326 | 213 | 539 | |||||||||
| Reductions in nonperforming assets | ||||||||||||
| Paydowns, payoffs | (292 | ) | (101 | ) | (393 | ) | ||||||
| Net sales | (178 | ) | (14 | ) | (192 | ) | ||||||
| Return to performing status | (129 | ) | (111 | ) | (240 | ) | ||||||
| Charge-offs(d) | (120 | ) | (14 | ) | (134 | ) | ||||||
| Total reductions | (719 | ) | (240 | ) | (959 | ) | ||||||
| Net additions to (reductions in) nonperforming assets | (393 | ) | (27 | ) | (420 | ) | ||||||
| Balance December 31, 2021 | $ | 461 | $ | 417 | $ | 878 |
| Column 1 | Column 2 |
|---|---|
| (a) | Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due. |
| Column 1 | Column 2 |
|---|---|
| (b) | Excludes $1.5 billion and $1.8 billion at December 31, 2021 and 2020, respectively, of loans purchased from GNMA mortgage pools that are 90 days or more past due that continue to accrue interest, as their repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs. |
| Column 1 | Column 2 |
|---|---|
| (c) | Foreclosed GNMA loans of $22 million and $33 million at December 31, 2021 and 2020, respectively, continue to accrue interest and are recorded as other assets and excluded from nonperforming assets because they are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs. |
| Column 1 | Column 2 |
|---|---|
| (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. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| 43 |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| TABLE 17 | Net Charge-offs as a Percent of Average Loans Outstanding |
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year Ended December 31 (Dollars in Millions) | Average Loan Balance | Net Charge-offs | Percent | Average Loan Balance | Net Charge-offs | Percent | Average Loan Balance | Net Charge-offs | Percent | |||||||||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial | $ | 97,649 | $ | 97 | .10 | % | $ | 108,367 | $ | 483 | .45 | % | $ | 97,697 | $ | 273 | .28 | % | ||||||||||||||||||||||||||
| Lease financing | 5,206 | 6 | .12 | 5,600 | 30 | .54 | 5,501 | 12 | .22 | |||||||||||||||||||||||||||||||||||
| Total commercial | 102,855 | 103 | .10 | 113,967 | 513 | .45 | 103,198 | 285 | .28 | |||||||||||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial mortgages | 27,997 | (14 | ) | (.05 | ) | 29,641 | 185 | .62 | 28,595 | 12 | .04 | |||||||||||||||||||||||||||||||||
| Construction | 10,784 | 16 | .15 | 10,907 | 2 | .02 | 10,791 | 2 | .02 | |||||||||||||||||||||||||||||||||||
| Total commercial real estate | 38,781 | 2 | .01 | 40,548 | 187 | .46 | 39,386 | 14 | .04 | |||||||||||||||||||||||||||||||||||
| Residential mortgages | 74,629 | (32 | ) | (.04 | ) | 73,667 | (12 | ) | (.02 | ) | 67,747 | 3 | — | |||||||||||||||||||||||||||||||
| Credit card | 21,645 | 512 | 2.37 | 22,332 | 829 | 3.71 | 23,309 | 893 | 3.83 | |||||||||||||||||||||||||||||||||||
| Other retail | ||||||||||||||||||||||||||||||||||||||||||||
| Retail leasing | 7,710 | 2 | .03 | 8,405 | 81 | .96 | 8,515 | 13 | .15 | |||||||||||||||||||||||||||||||||||
| Home equity and second mortgages | 11,228 | (10 | ) | (.09 | ) | 13,894 | (4 | ) | (.03 | ) | 15,659 | (3 | ) | (.02 | ) | |||||||||||||||||||||||||||||
| Other | 40,117 | 105 | .26 | 34,456 | 192 | .56 | 32,872 | 249 | .76 | |||||||||||||||||||||||||||||||||||
| Total other retail | 59,055 | 97 | .16 | 56,755 | 269 | .47 | 57,046 | 259 | .45 | |||||||||||||||||||||||||||||||||||
| Total loans | $ | 296,965 | $ | 682 | .23 | % | $ | 307,269 | $ | 1,786 | .58 | % | $ | 290,686 | $ | 1,454 | .50 | % |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| Analysis of Loan Net Charge-offs Total loan net charge-offs were $682 million in 2021, compared with $1.8 billion in 2020. The $1.1 billion (61.8 percent) decrease in total net charge-offs in 2021, compared with 2020, reflected improvement across most loan categories, associated with improving economic conditions, borrower liquidity and strong asset prices in the market that support repayment and recovery on problem loans. The ratio of total loan net charge-offs to average loans outstanding was 0.23 percent in 2021, compared with 0.58 percent in 2020. Commercial and commercial real estate loan net charge-offs for 2021 were $105 million (0.07 percent of average loans outstanding), compared with $700 million (0.45 percent of average loans outstanding) in 2020. The decrease in net charge-offs in 2021, compared with 2020, reflected lower charge-offs as a result of improving economic conditions in 2021. Residential mortgage loan net charge-offs for 2021 reflected a net recovery of $32 million (0.04 percent of average loans outstanding), compared with a net recovery of $12 million (0.02 percent of average loans outstanding) in 2020. Credit card loan net charge-offs in 2021 were $512 million (2.37 percent of average loans outstanding), compared with $829 million (3.71 percent of average loans outstanding) in 2020. Other retail loan net charge-offs for 2021 were $97 million (0.16 percent of average loans outstanding), compared with $269 million (0.47 percent of average loans outstanding) in 2020. The decrease in total residential mortgage, credit card and other retail loan net charge-offs in 2021, compared with 2020, reflected improving economic conditions. The Company expects net charge-offs to return to more normalized levels over time. | Analysis and Determination of the Allowance for Credit Losses The allowance for credit losses is established for current expected credit losses on the Company’s loan and lease portfolio, including unfunded credit commitments. The allowance considers expected losses for the remaining lives of the applicable assets, inclusive of expected recoveries. The allowance for credit losses is increased through provisions charged to earnings and reduced by net charge-offs. Management evaluates the appropriateness of the allowance for credit losses on a quarterly basis. Multiple economic scenarios are considered over a three-year reasonable and supportable forecast period, which includes increasing consideration of historical loss experience over years two and three. These economic scenarios are constructed with interrelated projections of multiple economic variables, and loss estimates are produced that consider the historical correlation of those economic variables with credit losses. After the forecast period, the Company fully reverts to long-term historical loss experience, adjusted for prepayments and characteristics of the current loan and lease portfolio, to estimate losses over the remaining life of the portfolio. The economic scenarios are updated at least quarterly and are designed to provide a range of reasonable estimates from better to worse than current expectations. Scenarios are weighted based on the Company’s expectation of economic conditions for the foreseeable future and reflect significant judgment and consideration of uncertainties that exist. Final loss estimates also consider factors affecting credit losses not reflected in the scenarios, due to the unique aspects of current conditions and expectations. These factors may include, but are not limited to, loan servicing practices, regulatory guidance, and/or fiscal and monetary policy actions. Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its |
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
|---|---|---|---|---|
| 44 |
liability for unfunded credit commitments, which is included in other liabilities in the Consolidated Balance Sheet. Both the allowance for loan losses and the liability for unfunded credit commitments are included in the Company’s analysis of credit losses and reported reserve ratios.
The allowance recorded for credit losses utilizes forward-looking expected loss models to consider a variety of factors affecting lifetime credit losses. These factors include, but are not limited to, macroeconomic variables such as unemployment rates, real estate prices, gross domestic product levels and corporate bonds spreads, as well as loan and borrower characteristics, such as internal risk ratings on commercial loans and consumer credit scores, delinquency status, collateral type and available valuation information, consideration of
end-of-term
losses on lease residuals, and the remaining term of the loan, adjusted for expected prepayments. For each loan portfolio, model estimates are adjusted as necessary to consider any relevant changes in portfolio composition, lending policies, underwriting standards, risk management practices, economic conditions or other factors that may affect the accuracy of the model. Expected credit loss estimates also include consideration of expected cash recoveries on loans previously
charged-off
or expected recoveries on collateral-dependent loans where recovery is expected through sale of the collateral. Where loans do not exhibit similar risk characteristics, an individual analysis is performed to consider expected credit losses.
The allowance recorded for individually evaluated loans greater than $5 million in the commercial lending segment is based on an analysis utilizing expected cash flows discounted using the original effective interest rate, the observable market price of the loan, or the fair value of the collateral, less selling costs, for collateral-dependent loans as appropriate. For commercial TDRs individually evaluated for impairment, attributes of the borrower are the primary factors in determining the allowance for credit losses. However, historical loss experience is also incorporated into the allowance methodology applied to this category of loans. Commercial lending segment TDR loans may be collectively evaluated for impairment where observed performance history, including defaults, is a primary driver of the loss allocation.
The allowance recorded for TDR loans in the consumer lending segment is determined on a homogenous pool basis utilizing expected cash flows discounted using the original effective interest rate of the pool. The expected cash flows on TDR loans consider subsequent payment defaults since modification, the borrower’s ability to pay under the restructured terms, and the timing and amount of payments. The allowance for collateral-dependent loans in the consumer lending segment is determined based on the current fair value of the collateral less costs to sell.
When evaluating the appropriateness of the allowance for credit losses for any loans and lines in a junior lien position, the Company considers the delinquency and modification status of the first lien. At December 31, 2021, the Company serviced the first lien on 35 percent of the home equity loans and lines in a
junior lien position. The Company also considers the status of first lien mortgage accounts reported on customer credit bureau files when the first lien is not serviced by the Company. Regardless of whether the Company services the first lien, an assessment is made of economic conditions, problem loans, recent loss experience and other factors in determining the allowance for credit losses. Based on the available information, the Company estimated $224 million or 2.1 percent of its total home equity portfolio at December 31, 2021, represented
non-delinquent
junior liens where the first lien was delinquent or modified, excluding loans in COVID-related forbearance programs.
The Company considers historical loss experience on the loans and lines in a junior lien position to establish loss estimates for junior lien loans and lines the Company services that are current, but the first lien is delinquent or modified. The historical long-term average loss experience related to junior liens has been relatively limited (less than 1 percent of the total portfolio annually), and estimates are adjusted to consider current collateral support and portfolio risk characteristics. These include updated credit scores and collateral estimates obtained on the Company’s home equity portfolio each quarter. In its evaluation of the allowance for credit losses, the Company also considers the increased risk of loss associated with home equity lines that are contractually scheduled to convert from a revolving status to a fully amortizing payment.
Beginning January 1, 2020, when a loan portfolio is purchased, the acquired loans are divided into those considered purchased with more than insignificant credit deterioration (“PCD”) and those not considered purchased with more than insignificant credit deterioration. An allowance is established for each population and considers product mix, risk characteristics of the portfolio, bankruptcy experience, delinquency status and refreshed LTV ratios when possible. The allowance established for purchased loans not considered PCD is recognized through provision expense upon acquisition, whereas the allowance established for loans considered PCD at acquisition is offset by an increase in the basis of the acquired loans. Any subsequent increases and decreases in the allowance related to purchased loans, regardless of PCD status, are recognized through provision expense, with charge-offs charged to the allowance. The Company did not have a material amount of PCD loans included in its loan portfolio at December 31, 2021.
The Company’s methodology for determining the appropriate allowance for credit losses also considers the imprecision inherent in the methodologies used and allocated to the various loan portfolios. As a result, amounts determined under the methodologies described above are adjusted by management to consider the potential impact of other qualitative factors not captured in quantitative model adjustments which include, but are not limited to, the following: model imprecision, imprecision in economic scenario assumptions, and emerging risks related to either changes in the economic environment that are affecting specific portfolios, or changes in portfolio concentrations over time that may affect model performance. The consideration of these items results in adjustments to allowance amounts included in the Company’s allowance for credit losses for each loan portfolio.
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| 45 |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| TABLE 18 | Summary of Allowance for Credit Losses |
| (Dollars in Millions) | 2021 | 2020 | 2019 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at beginning of year | $ | 8,010 | $ | 4,491 | $ | 4,441 | ||||||
| Change in accounting principle(a) | — | 1,499 | — | |||||||||
| Charge-Offs | ||||||||||||
| Commercial | ||||||||||||
| Commercial | 206 | 536 | 380 | |||||||||
| Lease financing | 16 | 39 | 19 | |||||||||
| Total commercial | 222 | 575 | 399 | |||||||||
| Commercial real estate | ||||||||||||
| Commercial mortgages | 9 | 202 | 17 | |||||||||
| Construction and development | 20 | 8 | 4 | |||||||||
| Total commercial real estate | 29 | 210 | 21 | |||||||||
| Residential mortgages | 18 | 19 | 34 | |||||||||
| Credit card | 686 | 975 | 1,028 | |||||||||
| Other retail | ||||||||||||
| Retail leasing | 26 | 101 | 24 | |||||||||
| Home equity and second mortgages | 12 | 16 | 19 | |||||||||
| Other | 215 | 284 | 342 | |||||||||
| Total other retail | 253 | 401 | 385 | |||||||||
| Total charge-offs | 1,208 | 2,180 | 1,867 | |||||||||
| Recoveries | ||||||||||||
| Commercial | ||||||||||||
| Commercial | 109 | 53 | 107 | |||||||||
| Lease financing | 10 | 9 | 7 | |||||||||
| Total commercial | 119 | 62 | 114 | |||||||||
| Commercial real estate | ||||||||||||
| Commercial mortgages | 23 | 17 | 5 | |||||||||
| Construction and development | 4 | 6 | 2 | |||||||||
| Total commercial real estate | 27 | 23 | 7 | |||||||||
| Residential mortgages | 50 | 31 | 31 | |||||||||
| Credit card | 174 | 146 | 135 | |||||||||
| Other retail | ||||||||||||
| Retail leasing | 24 | 20 | 11 | |||||||||
| Home equity and second mortgages | 22 | 20 | 22 | |||||||||
| Other | 110 | 92 | 93 | |||||||||
| Total other retail | 156 | 132 | 126 | |||||||||
| Total recoveries | 526 | 394 | 413 | |||||||||
| Net Charge-Offs | ||||||||||||
| Commercial | ||||||||||||
| Commercial | 97 | 483 | 273 | |||||||||
| Lease financing | 6 | 30 | 12 | |||||||||
| Total commercial | 103 | 513 | 285 | |||||||||
| Commercial real estate | ||||||||||||
| Commercial mortgages | (14 | ) | 185 | 12 | ||||||||
| Construction and development | 16 | 2 | 2 | |||||||||
| Total commercial real estate | 2 | 187 | 14 | |||||||||
| Residential mortgages | (32 | ) | (12 | ) | 3 | |||||||
| Credit card | 512 | 829 | 893 | |||||||||
| Other retail | ||||||||||||
| Retail leasing | 2 | 81 | 13 | |||||||||
| Home equity and second mortgages | (10 | ) | (4 | ) | (3 | ) | ||||||
| Other | 105 | 192 | 249 | |||||||||
| Total other retail | 97 | 269 | 259 | |||||||||
| Total net charge-offs | 682 | 1,786 | 1,454 | |||||||||
| Provision for credit losses | (1,173 | ) | 3,806 | 1,504 | ||||||||
| Balance at end of year | $ | 6,155 | $ | 8,010 | $ | 4,491 | ||||||
| Components | ||||||||||||
| Allowance for loan losses | $ | 5,724 | $ | 7,314 | $ | 4,020 | ||||||
| Liability for unfunded credit commitments | 431 | 696 | 471 | |||||||||
| Total allowance for credit losses(1) | $ | 6,155 | $ | 8,010 | $ | 4,491 | ||||||
| Period-end loans(2) | $ | 312,028 | $ | 297,707 | $ | 296,102 | ||||||
| Nonperforming loans(3) | 834 | 1,224 | 692 | |||||||||
| Allowance for Credit Losses as a Percentage of | ||||||||||||
| Period-end loans(1)/(2) | 1.97 | % | 2.69 | % | 1.52 | % | ||||||
| Nonperforming loans(1)/(3) | 738 | 654 | 649 | |||||||||
| Nonperforming and accruing loans 90 days or more past due | 471 | 471 | 346 | |||||||||
| Nonperforming assets | 701 | 617 | 542 | |||||||||
| Net charge-offs | 902 | 448 | 309 |
| Column 1 | Column 2 |
|---|---|
| (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. |
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
|---|---|---|---|---|
| 46 |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| TABLE 19 | Allocation of the Allowance for Credit Losses |
| Allowance Amount | Allowance as a Percent of Loans | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| At December 31 (Dollars in Millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Commercial | ||||||||||||||||
| Commercial | $ | 1,779 | $ | 2,344 | 1.66 | % | 2.41 | % | ||||||||
| Lease financing | 70 | 79 | 1.37 | 1.42 | ||||||||||||
| Total commercial | 1,849 | 2,423 | 1.65 | 2.36 | ||||||||||||
| Commercial Real Estate | ||||||||||||||||
| Commercial mortgages | 699 | 894 | 2.43 | 3.14 | ||||||||||||
| Construction and development | 424 | 650 | 4.12 | 6.00 | ||||||||||||
| Total commercial real estate | 1,123 | 1,544 | 2.88 | 3.93 | ||||||||||||
| Residential Mortgages | 565 | 573 | .74 | .75 | ||||||||||||
| Credit Card | 1,673 | 2,355 | 7.44 | 10.54 | ||||||||||||
| Other Retail | ||||||||||||||||
| Retail leasing | 136 | 252 | 1.87 | 3.09 | ||||||||||||
| Home equity and second mortgages | 231 | 349 | 2.21 | 2.80 | ||||||||||||
| Other | 578 | 514 | 1.31 | 1.41 | ||||||||||||
| Total other retail | 945 | 1,115 | 1.53 | 1.96 | ||||||||||||
| Total allowance | $ | 6,155 | $ | 8,010 | 1.97 | % | 2.69 | % |
The results of the analysis are evaluated quarterly to confirm the estimates are appropriate for each loan portfolio. Table 19 shows the amount of the allowance for credit losses by loan class and underlying portfolio category.
Although the Company determined the amount of each element of the allowance separately and considers this process to be an important credit management tool, the entire allowance for credit losses is available for the entire loan portfolio. The actual amount of losses can vary significantly from the estimated amounts.
At December 31, 2021, the allowance for credit losses was $6.2 billion (1.97 percent of
period-end
loans), compared with an allowance of $8.0 billion (2.69 percent of
period-end
loans) at December 31, 2020. The ratio of the allowance for credit losses to nonperforming loans was 738 percent at December 31, 2021, compared with 654 percent at December 31, 2020. The ratio of the allowance for credit losses to annual loan net charge-offs at December 31, 2021, was 902 percent, compared with 448 percent at December 31, 2020. Management determined the allowance for credit losses was appropriate at December 31, 2021 and 2020.
The decrease in the allowance for credit losses of $1.9 billion (23.2 percent) at December 31, 2021, compared with December 31, 2020, reflected factors affecting economic
conditions during 2021, including the enactment of additional benefits from government stimulus programs and broad vaccine availability in the United States that has reduced the risks associated with
COVID-19,
contributing to an economic recovery. However, economic uncertainty remains associated with supply chain concerns, rising inflationary concerns and additional virus variants. In addition to these factors, expected loss estimates consider various factors including customer specific information impacting changes in risk ratings, projected delinquencies and potential effects of diminishing liquidity without support of mortgage forbearance and direct federal stimulus. Consumer credit trends continued to perform better than expected in 2021, while select wholesale portfolios continue to be monitored for pandemic related impacts.
Changes in economic conditions considered in estimating the allowance for credit losses at December 31, 2021 included improvements in projected gross domestic product and unemployment levels, which reflected the additional government stimulus and availability of vaccines. These factors are evaluated through a combination of quantitative calculations using economic scenarios and qualitative assessments that consider the high degree of uncertainty related to the unprecedented levels of both economic stress and the stimulus response.
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| 47 |
The following table summarizes the baseline forecast for key economic variables the Company used in its estimate of the allowance for credit losses at December 31, 2021 and 2020:
| December 31, 2021 | December 31, 2020 | |||||||
|---|---|---|---|---|---|---|---|---|
| United States unemployment rate for the three months ending(a) | ||||||||
| December 31, 2021 | 4.3 | % | 6.8 | % | ||||
| June 30, 2022 | 3.6 | 6.2 | ||||||
| December 31, 2022 | 3.5 | 5.4 | ||||||
| United States real gross domestic product for the three months ending(b) | ||||||||
| December 31, 2021 | 2.8 | % | 1.5 | % | ||||
| June 30, 2022 | 5.0 | 3.8 | ||||||
| December 31, 2022 | 6.4 | 5.7 |
| Column 1 | Column 2 |
|---|---|
| (a) | Reflects quarterly average of forecasted reported United States unemployment rate. |
| Column 1 | Column 2 |
|---|---|
| (b) | Reflects cumulative change from December 31, 2019. |
Baseline economic forecasts are used in combination with alternative scenarios and historical loss experience as is considered reasonable and supportable to inform the Company’s allowance for credit losses. Changes in the allowance for credit losses are based on a variety of factors, including loan balance changes, portfolio credit quality and mix changes, and changes in general economic conditions and expectations (including for unemployment and gross domestic product), among other factors.
Based on economic conditions at December 31, 2021, it was difficult to estimate the length and severity of the longer term effects on certain industry sectors that may result from
COVID-19
and the impact of other factors that may influence the level of eventual losses and corresponding requirements for the allowance for credit losses, including the impact of inflationary pressures on certain lending sectors and diminishing liquidity after economic stimulus programs and accommodations delaying mortgage and rent payments end. While reserves consider the uncertainty in these estimates, the unpredictability of the
COVID-19
pandemic could result in the recognition of credit losses in the Company’s loan portfolios and increases in the allowance for credit losses. Scenarios worse than the Company’s expected outcome at December 31, 2021 include risks that government stimulus in response to the
COVID-19
pandemic is less effective than expected, or that a longer or more severe health crisis prolongs the downturn in economic activity, potentially reducing the number of businesses that are ultimately able to resume operations after the crisis has passed. Other factors considered include concerns around inflationary pressures, new virus variants, sustainability of asset values and borrower liquidity.
The allowance for credit losses related to commercial lending segment loans decreased $995 million during the year ended December 31, 2021, due to improvements in general economic conditions and portfolio credit quality that included some return of economic activity in certain industry sectors affected by
COVID-19.
The allowance for credit losses related to consumer lending segment loans decreased $860 million during the year ended December 31, 2021, due to improving economic risks, including those due to decreased unemployment, along with continued
strong underlying credit quality that supports expectations of long-term repayment.
Residual Value Risk Management
The Company manages its risk to changes in the residual value of leased vehicles, office and business equipment, and other assets through disciplined residual valuation setting at the inception of a lease, diversification of its leased assets, regular residual asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. Lease originations are subject to the same well-defined underwriting standards referred to in the “Credit Risk Management” section, which includes an evaluation of the residual value risk. Retail lease residual value risk is mitigated further by effective
end-of-term
marketing of
off-lease
vehicles.
Included in the retail leasing portfolio was approximately $5.6 billion of retail leasing residuals at December 31, 2021, compared with $6.3 billion at December 31, 2020. The Company monitors concentrations of leases by manufacturer and vehicle type. As of December 31, 2021, vehicle lease residuals related to sport utility vehicles were 46.7 percent of the portfolio, while truck and crossover utility vehicle classes represented approximately 32.5 percent and 14.7 percent of the portfolio, respectively. At
year-end
2021, the individual vehicle model with the largest residual value outstanding represented 14.9 percent of the aggregate residual value of all vehicles in the portfolio. At December 31, 2021 and 2020, the weighted-average origination term of the portfolio was 41 months. At December 31, 2021, the commercial leasing portfolio had $515 million of residuals, compared with $498 million at December 31, 2020. At
year-end
2021, lease residuals related to trucks and other transportation equipment represented 33.4 percent of the total residual portfolio, while business and office equipment represented 29.7 percent.
Operational Risk Management
. The Company operates in many different businesses in diverse markets and relies on the ability of its employees and systems to process a high number of transactions. Operational risk is inherent in all business activities, and the management of this risk is important to the achievement of the Company’s objectives. Business lines have direct and primary responsibility and accountability for identifying, controlling, and monitoring operational risks embedded in their
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
|---|---|---|---|---|
| 48 |
business activities, including those additional or increased risks created by the economic and financial disruptions, and the Company’s alternative working arrangements resulting from the
COVID-19
pandemic. The Company maintains a system of controls with the objective of providing proper transaction authorization and execution, proper system operations, proper oversight of third parties with whom it does business, safeguarding of assets from misuse or theft, and ensuring the reliability and security of financial and other data.
Business continuation and disaster recovery planning is also critical to effectively managing operational risks. Each business unit of the Company is required to develop, maintain and test these plans at least annually to ensure that recovery activities, if needed, can support mission critical functions, including technology, networks and data centers supporting customer applications and business operations.
While the Company believes it has designed effective processes to minimize operational risks, there is no absolute assurance that business disruption or operational losses would not occur from an external event or internal control breakdown. On an ongoing basis, management makes process changes and investments to enhance its systems of internal controls and business continuity and disaster recovery plans.
In the past, the Company has experienced attack attempts on its computer systems, including various
denial-of-service
attacks on customer-facing websites. The Company has not experienced any material losses relating to these attempts, as a result of its controls, processes and systems to protect its networks, computers, software and data from attack, damage or unauthorized access but future attacks could be more disruptive or damaging. Attack attempts on the Company’s computer systems are evolving and increasing, and the Company continues to develop and enhance its controls and processes to protect against these attempts.
Compliance Risk Management
The Company may suffer legal or regulatory sanctions, material financial loss, or damage to its reputation through failure to comply with laws, regulations, rules, standards of good practice, and codes of conduct, including those related to compliance with Bank Secrecy Act/anti-money laundering requirements, sanctions compliance requirements as administered by the Office of Foreign Assets Control, consumer protection and other requirements. The Company has controls and processes in place for the assessment, identification, monitoring, management and reporting of compliance risks and issues, including those created or increased by the economic and
financial disruptions caused by the
COVID-19
pandemic. Refer to “Supervision and Regulation” in the Company’s Annual Report on Form
10-K
for further discussion of the regulatory framework applicable to bank holding companies and their subsidiaries.
Interest Rate Risk Management
In the banking industry, changes in interest rates are a significant risk that can impact earnings and the safety and soundness of an entity. The Company manages its exposure to changes in interest rates through asset and liability management activities within guidelines established by its Asset Liability Management Committee (“ALCO”) and approved by the Board of Directors. The ALCO has the responsibility for approving and ensuring compliance with the ALCO management policies, including interest rate risk exposure. One way the Company measures and analyzes its interest rate risk is through net interest income simulation analysis.
Simulation analysis incorporates substantially all of the Company’s assets and liabilities and
off-balance
sheet instruments, together with forecasted changes in the balance sheet and assumptions that reflect the current interest rate environment. Through this simulation, management estimates the impact on net interest income of various interest rate changes that differ in the direction, amount and speed of change over time, as well as the shape of the yield curve. This simulation includes assumptions about how the balance sheet is likely to be affected by changes in loan and deposit growth. Assumptions are made to project interest rates for new loans and deposits based on historical analysis, management’s outlook and
re-pricing
strategies. These assumptions are reviewed and validated on a periodic basis with sensitivity analysis being provided for key variables of the simulation. The results are reviewed monthly by the ALCO and are used to guide asset/liability management strategies.
The Company manages its interest rate risk position by holding assets with desired interest rate risk characteristics on its balance sheet, implementing certain pricing strategies for loans and deposits and selecting derivatives and various funding and investment portfolio strategies.
Table 20 summarizes the projected impact to net interest income over the next 12 months of various potential interest rate changes. The sensitivity of the projected impact to net interest income over the next 12 months is dependent on balance sheet growth, product mix, deposit behavior, pricing and funding decisions. While the Company utilizes models and assumptions based on historical information and expected behaviors, actual outcomes could vary significantly.
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| TABLE 20 | Sensitivity of Net Interest Income |
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Down 50 bps Immediate | Up 50 bps Immediate | Down 200 bps Gradual | Up 200 bps Gradual | Down 50 bps Immediate | Up 50 bps Immediate | Down 200 bps Gradual | Up 200 bps Gradual | |||||||||||||||||||||||||
| Net interest income | (3.77 | )% | 3.09 | % | * | 5.39 | % | (4.48 | )% | 4.58 | % | * | 6.57 | % |
| Column 1 | Column 2 |
|---|---|
| * | Given the level of interest rates, downward rate scenario is not computed. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| 49 |
Use of Derivatives to Manage Interest Rate and Other Risks
To manage the sensitivity of earnings and capital to interest rate, prepayment, credit, price and foreign currency fluctuations (asset and liability management positions), the Company enters into derivative transactions. The Company uses derivatives for asset and liability management purposes primarily in the following ways:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| – | To convert fixed-rate debt and available-for-sale investment securities from fixed-rate payments to floating-rate payments; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| – | To convert floating-rate debt from floating-rate payments to fixed-rate payments; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| – | To mitigate changes in value of the Company’s unfunded mortgage loan commitments, funded MLHFS and MSRs; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| – | To mitigate remeasurement volatility of foreign currency denominated balances; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| – | To mitigate the volatility of the Company’s net investment in foreign operations driven by fluctuations in foreign currency exchange rates. |
In addition, the Company enters into interest rate and foreign exchange derivative contracts to support the business requirements of its customers (customer-related positions). The Company minimizes the market and liquidity risks of customer-related positions by either entering into similar offsetting positions with broker-dealers, or on a portfolio basis by entering into other derivative or
non-derivative
financial instruments that partially or fully offset the exposure from these customer-related positions. The Company may enter into derivative contracts that are either exchange-traded, centrally cleared through clearinghouses or
over-the-counter.
The Company does not utilize derivatives for speculative purposes.
The Company does not designate all of the derivatives that it enters into for risk management purposes as accounting hedges because of the inefficiency of applying the accounting requirements and may instead elect fair value accounting for the related hedged items. In particular, the Company enters into interest rate swaps, swaptions, forward commitments to buy
to-be-announced
securities (“TBAs”), U.S. Treasury and Eurodollar futures and options on U.S. Treasury futures to mitigate fluctuations in the value of its MSRs, but does not designate those derivatives as accounting hedges. The estimated net sensitivity to changes in interest rates of the fair value of the MSRs and the related derivative instruments at December 31, 2021, to an immediate 25, 50 and 100 bps downward movement in interest rates would be a decrease of approximately $8 million, $15 million and $22 million, respectively. An immediate upward movement in interest rates at December 31, 2021, of 25, 50 and 100 bps would result in an increase of approximately $8 million, an increase of $9 million and a decrease of $25 million, in the fair value of the MSRs and related derivative instruments, respectively. Refer to Note 10 of the Notes to Consolidated Financial Statements for additional information regarding MSRs.
Additionally, the Company uses forward commitments to sell TBAs and other commitments to sell residential mortgage loans at specified prices to economically hedge the interest rate risk in its residential mortgage loan production activities. At December 31,
2021, the Company had $8.6 billion of forward commitments to sell, hedging $5.4 billion of MLHFS and $4.7 billion of unfunded mortgage loan commitments. The forward commitments to sell and the unfunded mortgage loan commitments on loans intended to be sold are considered derivatives under the accounting guidance related to accounting for derivative instruments and hedging activities. The Company has elected the fair value option for the MLHFS.
Derivatives are subject to credit risk associated with counterparties to the contracts. Credit risk associated with derivatives is measured by the Company based on the probability of counterparty default, including consideration of the
COVID-19
pandemic. The Company manages the credit risk of its derivative positions by diversifying its positions among various counterparties, by entering into master netting arrangements, and, where possible, by requiring collateral arrangements. The Company may also transfer counterparty credit risk related to interest rate swaps to third parties through the use of risk participation agreements. In addition, certain interest rate swaps, interest rate forwards and credit contracts are required to be centrally cleared through clearinghouses to further mitigate counterparty credit risk.
For additional information on derivatives and hedging activities, refer to Notes 20 and 21 in the Notes to Consolidated Financial Statements.
LIBOR Transition
In July 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”) announced that it would no longer require banks to submit rates for the London InterBank Offered Rate (“LIBOR”) after 2021. In March 2021, the FCA and the administrator of LIBOR announced that, with respect to the most commonly used tenors of United States Dollar LIBOR, LIBOR will no longer be published on a representative basis after June 30, 2023. The publication of all other tenors of United States Dollar LIBOR ceased to be provided or ceased to be representative after December 31, 2021. The Company holds financial instruments impacted by the discontinuance of LIBOR, including certain loans, investment securities, derivatives, borrowings and other financial instruments that use LIBOR as the benchmark rate. The Company also provides various services to customers in its capacities as trustee and servicer, which involve financial instruments that will be similarly impacted by the discontinuance of LIBOR.
The Company has transitioned financial instruments associated to LIBOR currencies and tenors that ceased or became nonrepresentative on December 31, 2021 to alternative reference rates, with limited exceptions. The Company also anticipates that additional financial instruments associated to the remaining United States Dollar LIBOR tenors will require transition to a new reference rate by June 30, 2023. This transition will occur over time as many of these arrangements do not have an alternative rate referenced in their contracts or a clear path for the parties to agree upon an alternative reference rate and therefore require remediation. For residual exposure related to these rates after June 30, 2023, the Company is assessing the applicability of relevant contractual and statutory solutions. Certain states have passed legislation, and federal legislation has been proposed,
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
|---|---|---|---|---|
| 50 |
that would transition contracts from LIBOR to an alternative reference rate for any contracts with
non-existent
or impracticable fallback language. The Company is assessing the impact of such legislative solutions to its various products.
In order to facilitate the transition process, the Company has instituted a LIBOR Transition Office and commenced an enterprise-wide project to identify, assess, monitor and mitigate risks associated with the expected discontinuance or unavailability of LIBOR, actively engage with industry working groups and regulators, achieve operational readiness for the use of alternative reference rates and engage impacted customers to remediate and transition impacted instruments. The Company has also invested in updating its systems, models, procedures and internal infrastructure as part of the transition program. Additionally, in alignment with guidance from United States banking agencies and the FCA, the Company has ceased the use of LIBOR as a reference rate in new contracts, with limited exceptions, and continues to increase the usage of alternative reference rates such as the Secured Overnight Financing Rate (“SOFR”). The Company has also adopted industry best practice guidelines for fallback language for new transactions, converted its cleared interest rate swaps discounting to SOFR discounting, and distributed communications related to the transition to certain impacted parties, both inside and outside the Company. Refer to “Risk Factors” beginning on page 137, for further discussion on potential risks that could adversely affect the Company’s financial results as a result of the LIBOR transition.
Market Risk Management
In addition to interest rate risk, the Company is exposed to other forms of market risk, principally related to trading activities which support customers’ strategies to manage their own foreign currency, interest rate risk and funding activities. For purposes of its internal capital adequacy assessment process, the Company considers risk arising from its trading activities, as well as the remeasurement volatility of foreign currency denominated balances included on its Consolidated Balance Sheet (collectively, “Covered Positions”), employing methodologies consistent with the requirements of regulatory rules for market risk. The Company’s Market Risk Committee (“MRC”), within the framework of the ALCO, oversees market risk management. The MRC monitors and reviews the Company’s Covered Positions and establishes policies for market risk management, including exposure limits for each portfolio. The Company uses a VaR approach to measure general market risk. Theoretically, VaR represents the statistical risk of loss the Company has to adverse market movements over a
one-day
time horizon. The Company uses the Historical Simulation method to calculate VaR for its Covered Positions measured at the ninety-ninth percentile using a
one-year
look-back period for distributions derived from past market data. The market factors used in the calculations include those pertinent to market risks inherent in the underlying trading portfolios, principally those that affect the Company’s corporate bond trading business, foreign
currency transaction business, client derivatives business, loan trading business and municipal securities business, as well as those inherent in the Company’s foreign denominated balances and the derivatives used to mitigate the related measurement volatility. On average, the Company expects the
one-day
VaR to be exceeded by actual losses two to three times per year related to these positions. The Company monitors the accuracy of internal VaR models and modeling processes by back-testing model performance, regularly updating the historical data used by the VaR models and regular model validations to assess the accuracy of the models’ input, processing, and reporting components. All models are required to be independently reviewed and approved prior to being placed in use. If the Company were to experience market losses in excess of the estimated VaR more often than expected, the VaR models and associated assumptions would be analyzed and adjusted.
The average, high, low and
period-end
one-day
VaR amounts for the Company’s Covered Positions were as follows:
| Year Ended December 31 (Dollars in Millions) | 2021 | 2020 | |||||
|---|---|---|---|---|---|---|---|
| Average | $ | 2 | $ | 2 | |||
| High | 4 | 3 | |||||
| Low | 1 | 1 | |||||
| Period-end | 2 | 2 |
The Company did not experience any actual losses for its combined Covered Positions that exceeded VaR during the year ended December 31, 2021. Given the market volatility in the first quarter of 2020 resulting from effects of the
COVID-19
pandemic, the Company experienced actual losses for its combined Covered Positions that exceeded VaR five times during the year ended December 31, 2020. The Company stress tests its market risk measurements to provide management with perspectives on market events that may not be captured by its VaR models, including worst case historical market movement combinations that have not necessarily occurred on the same date.
The Company calculates Stressed VaR using the same underlying methodology and model as VaR, except that a historical continuous
one-year
look-back period is utilized that reflects a period of significant financial stress appropriate to the Company’s Covered Positions. The period selected by the Company includes the significant market volatility of the last four months of 2008.
The average, high, low and
period-end
one-day
Stressed VaR amounts for the Company’s Covered Positions were as follows:
| Year Ended December 31 (Dollars in Millions) | 2021 | 2020 | |||||
|---|---|---|---|---|---|---|---|
| Average | $ | 7 | $ | 6 | |||
| High | 9 | 8 | |||||
| Low | 5 | 4 | |||||
| Period-end | 7 | 5 |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| 51 |
Valuations of positions in client derivatives and foreign currency activities are based on discounted cash flow or other valuation techniques using market-based assumptions. These valuations are compared to third-party quotes or other market prices to determine if there are significant variances. Significant variances are approved by senior management in the Company’s corporate functions. Valuation of positions in the corporate bond trading, loan trading and municipal securities businesses are based on trader marks. These trader marks are evaluated against third-party prices, with significant variances approved by senior management in the Company’s corporate functions.
The Company also measures the market risk of its hedging activities related to residential MLHFS and MSRs using the Historical Simulation method. The VaRs are measured at the ninety-ninth percentile and employ factors pertinent to the market risks inherent in the valuation of the assets and hedges. A
one-year
look-back period is used to obtain past market data for the models.
The average, high and low VaR amounts for the residential MLHFS and related hedges and the MSRs and related hedges were as follows:
| Year Ended December 31 (Dollars in Millions) | 2021 | 2020 | |||||
|---|---|---|---|---|---|---|---|
| Residential Mortgage Loans Held For Sale and Related Hedges | |||||||
| Average | $ | 9 | $ | 10 | |||
| High | 19 | 22 | |||||
| Low | 4 | 2 | |||||
| Mortgage Servicing Rights and Related Hedges | |||||||
| Average | $ | 4 | $ | 19 | |||
| High | 11 | 54 | |||||
| Low | 1 | 1 |
Liquidity Risk Management
The Company’s liquidity risk management process is designed to identify, measure, and manage the Company’s funding and liquidity risk to meet its daily funding needs and to address expected and unexpected changes in its funding requirements. The Company engages in various activities to manage its liquidity risk. These activities include diversifying its funding sources, stress testing, and holding readily-marketable assets which can be used as a source of liquidity if needed. In addition, the Company’s profitable operations, sound credit quality and strong capital position have enabled it to develop a large and reliable base of core deposit funding within its market areas and in domestic and global capital markets.
The Company’s Board of Directors approves the Company’s liquidity policy. The Risk Management Committee of the Company’s Board of Directors oversees the Company’s liquidity risk management process and approves a contingency funding plan. The ALCO reviews the Company’s liquidity policy and limits, and regularly assesses the Company’s ability to meet funding requirements arising from adverse company-specific or market events.
The Company’s liquidity policy requires it to maintain diversified wholesale funding sources to avoid maturity, entity and
market concentrations. The Company operates a Cayman Islands branch for issuing Eurodollar time deposits. In addition, the Company has relationships with dealers to issue national market retail and institutional savings certificates and short-term and medium-term notes. The Company also maintains a significant correspondent banking network and relationships. Accordingly, the Company has access to national federal funds, funding through repurchase agreements and sources of stable certificates of deposit and commercial paper.
The Company regularly projects its funding needs under various stress scenarios and maintains a contingency funding plan consistent with the Company’s access to diversified sources of contingent funding. The Company maintains a substantial level of total available liquidity in the form of
on-balance
sheet and
off-balance
sheet funding sources. These liquidity sources include cash at the Federal Reserve Bank and certain European central banks, unencumbered liquid assets, and capacity to borrow from the FHLB and at the Federal Reserve Bank’s Discount Window. Unencumbered liquid assets in the Company’s investment securities portfolio provides asset liquidity through the Company’s ability to sell the securities or pledge and borrow against them. At December 31, 2021, the fair value of unencumbered investment securities totaled $144.0 billion, compared with $125.9 billion at December 31, 2020. Refer to Note 5 of the Notes to Consolidated Financial Statements and “Balance Sheet Analysis” for further information on investment securities maturities and trends. Asset liquidity is further enhanced by the Company’s practice of pledging loans to access secured borrowing facilities through the FHLB and Federal Reserve Bank. At December 31, 2021, the Company could have borrowed a total of an additional $101.0 billion from the FHLB and Federal Reserve Bank based on collateral available for additional borrowings.
The Company’s diversified deposit base provides a sizeable source of relatively stable and
low-cost
funding, while reducing the Company’s reliance on the wholesale markets. Total deposits were $456.1 billion at December 31, 2021, compared with $429.8 billion at December 31, 2020. Refer to Note 12 of the Notes to Consolidated Financial Statements and “Balance Sheet Analysis” for further information on the maturities, terms and trends of the Company’s deposits.
Additional funding is provided by long-term debt and short-term borrowings. Long-term debt was $32.1 billion at December 31, 2021, and is an important funding source because of its multi-year borrowing structure. Refer to Note 14 of the Notes to Consolidated Financial Statements for information on the terms and maturities of the Company’s long-term debt issuances and “Balance Sheet Analysis” for discussion on long-term debt trends. Short-term borrowings were $11.8 billion at December 31, 2021, and supplement the Company’s other funding sources. Refer to Note 13 of the Notes to Consolidated Financial Statements and “Balance Sheet Analysis” for further information on the terms and trends of the Company’s short-term borrowings.
The Company’s ability to raise negotiated funding at competitive prices is influenced by rating agencies’ views of the Company’s credit quality, liquidity, capital and earnings. Table 21 details the rating agencies’ most recent assessments.
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
|---|---|---|---|---|
| 52 |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| TABLE 21 | Credit Ratings |
| Moody’s | S&P Global Ratings | Fitch Ratings | DBRS Morningstar | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. Bancorp | |||||||||||||||
| Long-term issuer rating | A2 | A+ | AA- | AA | |||||||||||
| Short-term issuer rating | A-1 | F1+ | R-1 (middle) | ||||||||||||
| Senior unsecured debt | A2 | A+ | A+ | AA | |||||||||||
| Subordinated debt | A2 | A | A | AA (low) | |||||||||||
| Junior subordinated debt | A3 | ||||||||||||||
| Preferred stock | Baa1 | BBB+ | BBB+ | A | |||||||||||
| Commercial paper | P-1 | F1+ | |||||||||||||
| U.S. Bank National Association | |||||||||||||||
| Long-term issuer rating | A1 | AA- | AA- | AA (high) | |||||||||||
| Short-term issuer rating | P-1 | A-1+ | F1+ | R-1 (high) | |||||||||||
| Long-term deposits | Aa2 | AA | AA (high) | ||||||||||||
| Short-term deposits | P-1 | F1+ | |||||||||||||
| Senior unsecured debt | A1 | AA- | AA- | AA (high) | |||||||||||
| Subordinated debt | A1 | A+ | AA | ||||||||||||
| Commercial paper | P-1 | A-1+ | F1+ | ||||||||||||
| Counterparty risk assessment | Aa3(cr)/P-1(cr) | ||||||||||||||
| Counterparty risk rating | A1/P-1 | ||||||||||||||
| Baseline credit assessment | a1 |
In addition to assessing liquidity risk on a consolidated basis, the Company monitors the parent company’s liquidity. The parent company’s routine funding requirements consist primarily of operating expenses, dividends paid to shareholders, debt service, repurchases of common stock and funds used for acquisitions. The parent company obtains funding to meet its obligations from dividends collected from its subsidiaries and the issuance of debt and capital securities. The Company establishes limits for the minimal number of months into the future where the parent company can meet existing and forecasted obligations with cash and securities held that can be readily monetized. The Company measures and manages this limit in both normal and adverse conditions. The Company maintains sufficient funding to meet expected capital and debt service obligations for 24 months without the support of dividends from subsidiaries and assuming access to the wholesale markets is maintained. The Company maintains sufficient liquidity to meet its capital and debt service obligations for 12 months under adverse conditions without the support of dividends from subsidiaries or access to the wholesale markets. The parent company is currently well in excess of required liquidity minimums.
Under United States Securities and Exchange Commission rules, the parent company is classified as a “well-known seasoned issuer,” which allows it to file a registration statement that does not have a limit on issuance capacity. “Well-known seasoned issuers” generally include those companies with outstanding common securities with a market value of at least $700 million held by
non-affiliated
parties or those companies that have issued at least $1 billion in aggregate principal amount of
non-convertible
securities, other than common equity, in the last three years. However, the parent company’s ability to issue debt and other securities under a registration statement filed with the United States Securities and Exchange Commission under
these rules is limited by the debt issuance authority granted by the Company’s Board of Directors and/or the ALCO policy.
At December 31, 2021, parent company long-term debt outstanding was $18.9 billion, compared with $20.9 billion at December 31, 2020. The decrease was primarily due to $3.0 billion of medium-term note repayments, partially offset by $1.3 billion of subordinated note issuances. As of December 31, 2021, there was $2.3 billion of parent company debt scheduled to mature in 2022. Future debt maturities may be met through medium-term note and capital security issuances and dividends from subsidiaries, as well as from parent company cash and cash equivalents.
Dividend payments to the Company by its subsidiary bank are subject to regulatory review and statutory limitations and, in some instances, regulatory approval. In general, dividends to the parent company from its banking subsidiary are limited by rules which compare dividends to net income for regulatorily-defined periods. For further information, see Note 25 of the Notes to Consolidated Financial Statements.
The Company is subject to a regulatory Liquidity Coverage Ratio (“LCR”) requirement which requires banks to maintain an adequate level of unencumbered high quality liquid assets to meet estimated liquidity needs over a
30-day
stressed period. At December 31, 2021, the Company was compliant with this requirement.
Beginning July 1, 2021, the Company is also subject to a regulatory Net Stable Funding Ratio (“NSFR”) requirement which requires banks to maintain a minimum level of stable funding based on the liquidity characteristics of their assets, commitments, and derivative exposures over a
one-year
time horizon. At December 31, 2021, the Company was compliant with this requirement.
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| 53 |
European Exposures
The Company provides merchant processing and corporate trust services in Europe either directly or through banking affiliations in Europe. Revenue generated from sources in Europe represented approximately 2 percent of the Company’s total net revenue for 2021. Operating cash for these businesses is deposited on a short-term basis typically with certain European central banks. For deposits placed at other European banks, exposure is mitigated by the Company placing deposits at multiple banks and managing the amounts on deposit at any bank based on institution-specific deposit limits. At December 31, 2021, the Company had an aggregate amount on deposit with European banks of approximately $9.8 billion, predominately with the Central Bank of Ireland and Bank of England.
In addition, the Company provides financing to domestic multinational corporations that generate revenue from customers in European countries, transacts with various European banks as counterparties to certain derivative-related activities, and through a subsidiary, manages money market funds that hold certain investments in European sovereign debt. Any deterioration in economic conditions in Europe is not expected to have a significant effect on the Company related to these activities.
Commitments, Contingent Liabilities and Other Contractual Obligations
The Company participates in many different contractual arrangements which may or may not be recorded on its balance sheet, with unrelated or unconsolidated entities, under which the Company has an obligation to pay certain amounts, provide credit or liquidity enhancements or market risk support. These arrangements also include any obligation related to a variable interest held in an unconsolidated entity that provides financing, liquidity, credit enhancement or market risk support. The Company has not utilized private label asset securitizations as a source of funding.
In the ordinary course of business, the Company enters into contractual obligations that may require future cash payments, including funding for customer loan requests, customer deposit maturities and withdrawals, debt service, leases for premises and equipment, and other cash commitments including $3.3 billion of contractual interest payments at December 31, 2021. Refer to Notes 7, 12, 14, 17 and 23 in the Notes to Consolidated Financial Statements for information on the Company’s operating lease obligations, deposits, long-term debt, benefit obligations and guarantees and other commitments, respectively.
Commitments to extend credit are legally binding and generally have fixed expiration dates or other termination clauses. Many of the Company’s commitments to extend credit expire without being drawn and, therefore, total commitment amounts do not necessarily represent future liquidity requirements or the Company’s exposure to credit loss. Commitments to extend credit also include consumer credit lines that are cancelable upon notification to the consumer. Total contractual amounts of commitments to extend credit at December 31, 2021 were $355.1 billion. The Company also issues and confirms various types of letters of credit, including
standby and commercial. Total contractual amounts of letters of credit at December 31, 2021 were $10.5 billion. For more information on the Company’s commitments to extend credit and letters of credit, refer to Note 23 in the Notes to Consolidated Financial Statements.
The Company’s
off-balance
sheet arrangements with unconsolidated entities primarily consist of private investment funds or partnerships that make equity investments, provide debt financing or support community-based investments in
tax-advantaged
projects. In addition to providing investment returns, these arrangements in many cases assist the Company in complying with requirements of the Community Reinvestment Act. The investments in these entities generate a return primarily through the realization of federal and state income tax credits and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. The entities in which the Company invests are generally considered variable interest entities (“VIEs”). The Company’s recorded investment in these entities, net of contractual equity investment commitments of $1.9 billion, was $2.6 billion at December 31, 2021.
The Company also has
non-controlling
financial investments in private funds and partnerships considered VIEs. The Company’s recorded investment in these entities was approximately $40 million at December 31, 2021, and the Company had unfunded commitments to invest an additional $44 million. For more information on the Company’s interests in unconsolidated VIEs, refer to Note 8 in the Notes to Consolidated Financial Statements.
Guarantees are contingent commitments issued by the Company to customers or other third parties requiring the Company to perform if certain conditions exist or upon the occurrence or nonoccurrence of a specified event, such as a scheduled payment to be made under contract. The Company’s primary guarantees include commitments from securities lending activities in which indemnifications are provided to customers; indemnification or
buy-back
provisions related to sales of loans and tax credit investments; and merchant charge-back guarantees through the Company’s involvement in providing merchant processing services. For certain guarantees, the Company may have access to collateral to support the guarantee, or through the exercise of other recourse provisions, be able to offset some or all of any payments made under these guarantees.
The Company and certain of its subsidiaries, along with other Visa U.S.A. Inc. member banks, have a contingent guarantee obligation to indemnify Visa Inc. for potential losses arising from antitrust lawsuits challenging the practices of Visa U.S.A. Inc. and MasterCard International. The indemnification by the Company and other Visa U.S.A. Inc. member banks has no maximum amount. Refer to Note 23 in the Notes to Consolidated Financial Statements for further details regarding guarantees, other commitments, and contingent liabilities, including maximum potential future payments and current carrying amounts.
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
|---|---|---|---|---|
| 54 |
Capital Management
The Company is committed to managing capital to maintain strong protection for depositors and creditors and for maximum shareholder benefit. The Company continually assesses its business risks and capital position. The Company also manages its capital to exceed regulatory capital requirements for banking organizations. To achieve its capital goals, the Company employs a variety of capital management tools, including dividends, common share repurchases, and the issuance of subordinated debt,
non-cumulative
perpetual preferred stock, common stock and other capital instruments.
The Company repurchased approximately 28 million shares of its common stock in 2021, compared with approximately 31 million shares in 2020. The average price paid for the shares repurchased in 2021 was $54.18 per share, compared with $53.32 per share in 2020. Beginning in March of 2020 and continuing through the remainder of 2020, the Company suspended all common stock repurchases except for those done exclusively in connection with its stock-based compensation programs. This action was initially taken to maintain strong capital levels given the impact and uncertainties of
COVID-19
on the economy and global markets. Due to continued economic uncertainty, the Federal Reserve Board implemented measures beginning in the third quarter of 2020 and extending through the second quarter of 2021, restricting capital distributions of all large bank holding companies, including the Company. These restrictions limited the aggregate amount of common stock dividends and share repurchases to an amount that did not exceed the average net income of the four preceding calendar quarters. Based on the results of the December 2020 Federal Reserve Board Stress Test, the Company announced on December 22, 2020 that its Board of Directors had approved an authorization to repurchase $3.0 billion of its common stock beginning January 1, 2021, and repurchased $1.5 billion of its common stock during the first six months of 2021 under this program. The Company suspended all common stock repurchases at the beginning of the third quarter of 2021, except for those done exclusively in connection with its stock-based compensation programs, due to its recently announced pending acquisition of MUFG Union Bank’s core regional banking franchise. The Company does not expect to commence repurchasing its common stock again until the second half of 2022, or after the acquisition closes in order to build capital prior to the acquisition.
Based on the results of the 2021 Federal Reserve Board Annual Stress Test, the Company announced on September 14, 2021 that its Board of Directors had approved a regular quarterly dividend of $0.46 per common share. This represented a 9.5 percent increase over the previous dividend rate per common share of $0.42 per quarter.
The Company will continue to monitor its capital position and may adjust its capital distributions based on economic conditions and its financial performance. Capital distributions, including dividends and stock repurchases, are subject to the approval of the Company’s Board of Directors and will align with regulatory requirements. For a more complete analysis of
activities impacting shareholders’ equity and capital management programs, refer to Note 15 of the Notes to Consolidated Financial Statements.
Total U.S. Bancorp shareholders’ equity was $54.9 billion at December 31, 2021, compared with $53.1 billion at December 31, 2020. The increase was primarily the result of corporate earnings, partially offset by changes in unrealized gains and losses on
available-for-sale
investment securities included in other comprehensive income (loss), dividends and common share repurchases.
The regulatory capital requirements effective for the Company follow Basel III, with the Company being subject to calculating its capital adequacy as a percentage of risk-weighted assets under the standardized approach. Under Basel III, banking regulators define minimum capital requirements for banks and financial services holding companies. These requirements are expressed in the form of a minimum common equity tier 1 capital ratio, tier 1 capital ratio, total risk-based capital ratio, tier 1 leverage ratio and a tier 1 total leverage exposure, or supplementary leverage, ratio. The Company’s minimum required level for these ratios at December 31, 2021, which include a stress capital buffer of 2.5 percent for the common equity tier 1 capital, tier 1 capital and total capital ratios, was 7.0 percent, 8.5 percent, 10.5 percent, 4.0 percent, and 3.0 percent, respectively. The Company targets its regulatory capital levels, at both the bank and bank holding company level, to exceed the “well-capitalized” threshold for these ratios under the FDIC Improvement Act prompt corrective action provisions that are applicable to all banks. At December 31, 2021, the minimum “well-capitalized” thresholds under the prompt corrective action framework for the common equity tier 1 capital ratio, tier 1 capital ratio, total risk-based capital ratio, tier 1 leverage ratio, and tier 1 total leverage exposure ratio was 6.5 percent, 8.0 percent, 10.0 percent, 5.0 percent, and 3.0 percent, respectively. Beginning in 2020, the Company elected to adopt a rule issued in 2020 by its regulators which permits banking organizations who adopt accounting guidance related to the impairment of financial instruments based on the current expected credit losses (“CECL”) methodology during 2020, the option to defer the impact of the effect of that guidance at adoption plus 25 percent of its quarterly credit reserve increases over the next two years on its regulatory capital requirements, followed by a three-year transition period to phase in the cumulative deferred impact. As of December 31, 2021, the Company’s bank subsidiary met all regulatory capital ratios to be considered “well-capitalized”. There are no conditions or events since December 31, 2021 that management believes have changed the risk-based category of its covered subsidiary bank.
As an approved mortgage seller and servicer, U.S. Bank National Association, through its mortgage banking division, is required to maintain various levels of shareholder’s equity, as specified by various agencies, including the United States Department of Housing and Urban Development, Government National Mortgage Association, Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. At December 31, 2021, U.S. Bank National Association met these requirements.
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| 55 |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| TABLE 22 | Regulatory Capital Ratios |
| At December 31 (Dollars in Millions) | 2021 | 2020 | ||||||
|---|---|---|---|---|---|---|---|---|
| Basel III standardized approach: | ||||||||
| Common equity tier 1 capital | $ | 41,701 | $ | 38,045 | ||||
| Tier 1 capital | 48,516 | 44,474 | ||||||
| Total risk-based capital | 56,250 | 52,602 | ||||||
| Risk-weighted assets | 418,571 | 393,648 | ||||||
| Common equity tier 1 capital as a percent of risk-weighted assets | 10.0 | % | 9.7 | % | ||||
| Tier 1 capital as a percent of risk-weighted assets | 11.6 | 11.3 | ||||||
| Total risk-based capital as a percent of risk-weighted assets | 13.4 | 13.4 | ||||||
| Tier 1 capital as a percent of adjusted quarterly average assets (leverage ratio) | 8.6 | 8.3 | ||||||
| Tier 1 capital as a percent of total on- and off-balance sheet leverage exposure (total leverage exposure ratio) | 6.9 | 7.3 |
Table 22 provides a summary of statutory regulatory capital ratios in effect for the Company at December 31, 2021 and 2020. All regulatory ratios exceeded regulatory “well-capitalized” requirements.
The Company believes certain other capital ratios are useful in evaluating its capital adequacy. At December 31, 2021, the Company’s tangible common equity, as a percent of tangible assets and as a percent of risk-weighted assets determined in accordance with transitional regulatory capital requirements related to the CECL methodology under the standardized approach, was 6.8 percent and 9.2 percent, respectively, compared with 6.9 percent and 9.5 percent at December 31, 2020, respectively. In addition, the Company’s common equity tier 1 capital to risk-weighted assets ratio, reflecting the full implementation of the CECL methodology was 9.6 percent at December 31, 2021, compared with 9.3 percent at December 31, 2020. Refer to
“Non-GAAP
Financial Measures” beginning on page 60 for further information on these other capital ratios.
Line of Business Financial Review
The Company’s major lines of business are Corporate and Commercial Banking, Consumer and Business Banking, Wealth Management and Investment Services, Payment Services, and Treasury and Corporate Support. These operating segments are components of the Company about which financial information is prepared and is evaluated regularly by management in deciding how to allocate resources and assess performance.
Basis for Financial Presentation
Business line results are derived from the Company’s business unit profitability reporting systems by specifically attributing managed balance sheet assets, deposits and other liabilities and their related income or expense. Refer to Note 24 of the Notes to Consolidated Financial Statements for further information on the business lines’ basis for financial presentation.
Designations, assignments and allocations change from time to time as management systems are enhanced, methods of evaluating performance or product lines change or business segments are realigned to better respond to the Company’s diverse customer base. During 2021, certain organization and
methodology changes were made and, accordingly, 2020 results were restated and presented on a comparable basis.
Corporate and Commercial Banking
Corporate and Commercial Banking offers lending, equipment finance and small-ticket leasing, depository services, treasury management, capital markets services, international trade services and other financial services to middle market, large corporate, commercial real estate, financial institution,
non-profit
and public sector clients. Corporate and Commercial Banking contributed $1.6 billion of the Company’s net income in 2021, or a decrease of $33 million (2.0 percent), compared with 2020.
Net revenue decreased $593 million (13.1 percent) in 2021, compared with 2020. Net interest income, on a taxable-equivalent basis, decreased $511 million (15.0 percent) in 2021, compared with 2020, primarily due to the impact of declining interest rates on the margin benefit from deposits as well as lower average loan balances, partially offset by favorable deposit mix with higher noninterest-bearing deposit balances and slightly higher loan spreads. Noninterest income decreased $82 million (7.3 percent) in 2021, compared with 2020, primarily driven by lower capital markets activities and trading revenue, partially offset by continued stronger treasury management fees due to core growth driven by the economic recovery.
Noninterest expense decreased $33 million (1.9 percent) in 2021, compared with 2020, primarily due to lower FDIC insurance expense and higher capitalized loan costs, partially offset by an increase in net shared services expense driven by investment in infrastructure and technology development. The provision for credit losses decreased $515 million (85.3 percent) in 2021, compared with 2020, primarily due to a decrease in the reserve allocation driven by improving portfolio credit quality in 2021, compared with deteriorating credit quality in 2020.
Consumer and Business Banking
Consumer and Business Banking delivers products and services through banking offices, telephone servicing and sales,
on-line
services, direct mail, ATM processing and mobile devices. It encompasses community banking, metropolitan banking and indirect lending, as well as mortgage banking. Consumer and Business Banking contributed $2.3 billion of the Company’s net income in 2021, or a decrease of $103 million (4.3 percent), compared with 2020.
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
|---|---|---|---|---|
| 56 |
Net revenue decreased $358 million (4.0 percent) in 2021, compared with 2020. Net interest income, on a taxable-equivalent basis, increased $318 million (5.5 percent) in 2021, compared with 2020, reflecting continued strong growth in deposit balances as well as favorable deposit mix, favorable loan spreads driven by growth in installment loans, and higher loan fees driven by loan forgiveness related to the SBA’s Paycheck Protection Program. These increases in net interest income were partially offset by lower deposit spreads and loan balances. Noninterest income decreased $676 million (21.3 percent) in 2021, compared with 2020, primarily due to lower mortgage banking revenue reflecting lower application volume and related gain on sale margins as refinancing activities declined, along with a reduction in the fair value of MSRs, net of hedging activities, partially offset by higher gains on GNMA loan sales and higher retail product fees driven by retail leasing end of term residual gains.
Noninterest expense increased $216 million (3.9 percent) in 2021, compared with 2020, primarily due to increases in net shared services expense due to investments in digital capabilities and higher compensation expense related to merit increases, business growth and revenue-related compensation driven by business production. The provision for credit losses decreased $435 million in 2021, compared with 2020, due to a decrease in the reserve allocation reflecting improved credit quality in the current year.
Wealth Management and Investment Services
Wealth Management and Investment Services provides private banking, financial advisory services, investment management, retail brokerage services, insurance, trust, custody and fund servicing through four businesses: Wealth Management, Global Corporate Trust & Custody, U.S. Bancorp Asset Management and Fund Services. Wealth Management and Investment Services contributed $837 million of the Company’s net income in 2021, or a decrease of $104 million (11.1 percent), compared with 2020.
Net revenue decreased $45 million (1.4 percent) in 2021, compared with 2020. Net interest income, on a taxable-equivalent basis, decreased $244 million (19.6 percent) in 2021, compared with 2020, primarily due to the declining margin benefit from deposits, partially offset by higher noninterest-bearing deposit balances driving favorable deposit mix, as well as higher average loan balances. Noninterest income increased $199 million (9.8 percent) in 2021, compared with 2020, primarily due to core business growth in trust and investment
management fees and investment products fees, both driven by favorable market conditions, partially offset by higher fee waivers related to money market funds.
Noninterest expense increased $86 million (4.4 percent) in 2021, compared with 2020, reflecting higher compensation expense as a result of merit increases, higher performance-based incentives related to investment sales volumes and core business growth, and an increase in net shared services expense, partially offset by lower other noninterest expense due to the allocation to the business line of previously reserved legal matters in 2020. The provision for credit losses increased $7 million (17.5 percent) in 2021, compared with 2020, due to increased loan loss provisions supporting stronger balance sheet growth in 2021 compared to 2020.
Payment Services
Payment Services includes consumer and business credit cards, stored-value cards, debit cards, corporate, government and purchasing card services, consumer lines of credit and merchant processing. Payment Services contributed $1.7 billion of the Company’s net income in 2021, or an increase of $420 million (32.3 percent), compared with 2020.
Net revenue increased $322 million (5.7 percent) in 2021, compared with 2020. Net interest income, on a taxable-equivalent basis, decreased $104 million (4.1 percent) in 2021, compared with 2020, primarily due to lower loan balances and yields driven by higher credit card payment rates by customers. Noninterest income increased $426 million (13.6 percent) in 2021, compared with 2020, mainly due to continued strengthening of consumer and business spending across most sectors driven by government stimulus, local jurisdictions reducing restrictions and consumer behaviors normalizing. As a result, there was strong growth in merchant processing services revenue driven by increased sales volume and higher merchant fees, partially offset by higher rebates. There was also solid growth in corporate payment products revenue driven by improving business spending across all product groups. Credit and debit card revenue increased, driven by stronger sales volume and fee activity.
Noninterest expense increased $93 million (2.8 percent) in 2021, compared with 2020, due to lower marketing costs during 2020 reflecting the timing of marketing campaigns, along with incremental costs related to the prepaid card business in 2021. The provision for credit losses decreased $332 million (48.8 percent) in 2021, compared with 2020, primarily driven by improved credit quality in 2021.
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| 57 |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| TABLE 23 | Line of Business Financial Performance |
| Corporate and Commercial Banking | Consumer and Business Banking | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year Ended December 31 (Dollars in Millions) | 2021 | 2020 | Percent Change | 2021 | 2020 | Percent Change | ||||||||||||||||||||||
| Condensed Income Statement | ||||||||||||||||||||||||||||
| Net interest income (taxable-equivalent basis) | $ | 2,900 | $ | 3,411 | (15.0 | )% | $ | 6,077 | $ | 5,759 | 5.5 | % | ||||||||||||||||
| Noninterest income | 1,035 | 1,117 | (7.3 | ) | 2,501 | 3,177 | (21.3 | ) | ||||||||||||||||||||
| Total net revenue | 3,935 | 4,528 | (13.1 | ) | 8,578 | 8,936 | (4.0 | ) | ||||||||||||||||||||
| Noninterest expense | 1,678 | 1,711 | (1.9 | ) | 5,690 | 5,470 | 4.0 | |||||||||||||||||||||
| Other intangibles | — | — | — | 12 | 16 | (25.0 | ) | |||||||||||||||||||||
| Total noninterest expense | 1,678 | 1,711 | (1.9 | ) | 5,702 | 5,486 | 3.9 | |||||||||||||||||||||
| Income before provision and income taxes | 2,257 | 2,817 | (19.9 | ) | 2,876 | 3,450 | (16.6 | ) | ||||||||||||||||||||
| Provision for credit losses | 89 | 604 | (85.3 | ) | (144 | ) | 291 | * | ||||||||||||||||||||
| Income (loss) before income taxes | 2,168 | 2,213 | (2.0 | ) | 3,020 | 3,159 | (4.4 | ) | ||||||||||||||||||||
| Income taxes and taxable-equivalent adjustment | 542 | 554 | (2.2 | ) | 755 | 791 | (4.6 | ) | ||||||||||||||||||||
| Net income (loss) | 1,626 | 1,659 | (2.0 | ) | 2,265 | 2,368 | (4.3 | ) | ||||||||||||||||||||
| Net (income) loss attributable to noncontrolling interests | — | — | — | — | — | — | ||||||||||||||||||||||
| Net income (loss) attributable to U.S. Bancorp | $ | 1,626 | $ | 1,659 | (2.0 | ) | $ | 2,265 | $ | 2,368 | (4.3 | ) | ||||||||||||||||
| Average Balance Sheet | ||||||||||||||||||||||||||||
| Commercial | $ | 78,351 | $ | 89,841 | (12.8 | )% | $ | 8,656 | $ | 9,127 | (5.2 | )% | ||||||||||||||||
| Commercial real estate | 24,819 | 25,692 | (3.4 | ) | 10,944 | 11,977 | (8.6 | ) | ||||||||||||||||||||
| Residential mortgages | 26 | 19 | 36.8 | 67,442 | 67,981 | (.8 | ) | |||||||||||||||||||||
| Credit card | — | — | — | — | — | — | ||||||||||||||||||||||
| Other retail | 12 | 11 | 9.1 | 54,040 | 52,174 | 3.6 | ||||||||||||||||||||||
| Total loans | 103,208 | 115,563 | (10.7 | ) | 141,082 | 141,259 | (.1 | ) | ||||||||||||||||||||
| Goodwill | 1,715 | 1,647 | 4.1 | 3,428 | 3,500 | (2.1 | ) | |||||||||||||||||||||
| Other intangible assets | 5 | 6 | (16.7 | ) | 2,760 | 2,105 | 31.1 | |||||||||||||||||||||
| Assets | 115,194 | 128,038 | (10.0 | ) | 161,571 | 159,191 | 1.5 | |||||||||||||||||||||
| Noninterest-bearing deposits | 61,272 | 44,309 | 38.3 | 33,855 | 30,467 | 11.1 | ||||||||||||||||||||||
| Interest checking | 14,306 | 14,359 | (.4 | ) | 69,718 | 55,512 | 25.6 | |||||||||||||||||||||
| Savings products | 47,815 | 54,578 | (12.4 | ) | 75,404 | 62,702 | 20.3 | |||||||||||||||||||||
| Time deposits | 9,125 | 19,201 | (52.5 | ) | 13,312 | 13,322 | (.1 | ) | ||||||||||||||||||||
| Total deposits | 132,518 | 132,447 | .1 | 192,289 | 162,003 | 18.7 | ||||||||||||||||||||||
| Total U.S. Bancorp shareholders’ equity | 13,928 | 15,063 | (7.5 | ) | 12,337 | 12,739 | (3.2 | ) |
| Column 1 | Column 2 |
|---|---|
| * | Not meaningful |
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
|---|---|---|---|---|
| 58 |
| Wealth Management and Investment Services | Payment Services | Treasury and Corporate Support | Consolidated Company | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Percent Change | 2021 | 2020 | Percent Change | 2021 | 2020 | Percent Change | 2021 | 2020 | Percent Change | |||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 1,002 | $ | 1,246 | (19.6 | )% | $ | 2,458 | $ | 2,562 | (4.1 | )% | $ | 163 | $ | (54 | ) | * | % | $ | 12,600 | $ | 12,924 | (2.5 | )% | ||||||||||||||||||||||||||||||||||||
| 2,221 | 2,022 | 9.8 | 3,550 | 3,124 | 13.6 | 920 | 961 | (4.3 | ) | 10,227 | 10,401 | (1.7 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| 3,223 | 3,268 | (1.4 | ) | 6,008 | 5,686 | 5.7 | 1,083 | 907 | 19.4 | 22,827 | 23,325 | (2.1 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| 2,045 | 1,961 | 4.3 | 3,231 | 3,123 | 3.5 | 925 | 928 | (.3 | ) | 13,569 | 13,193 | 2.8 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 14 | 12 | 16.7 | 133 | 148 | (10.1 | ) | — | — | — | 159 | 176 | (9.7 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| 2,059 | 1,973 | 4.4 | 3,364 | 3,271 | 2.8 | 925 | 928 | (.3 | ) | 13,728 | 13,369 | 2.7 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 1,164 | 1,295 | (10.1 | ) | 2,644 | 2,415 | 9.5 | 158 | (21 | ) | * | 9,099 | 9,956 | (8.6 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| 47 | 40 | 17.5 | 349 | 681 | (48.8 | ) | (1,514 | ) | 2,190 | * | (1,173 | ) | 3,806 | * | ||||||||||||||||||||||||||||||||||||||||||||||
| 1,117 | 1,255 | (11.0 | ) | 2,295 | 1,734 | 32.4 | 1,672 | (2,211 | ) | * | 10,272 | 6,150 | 67.0 | |||||||||||||||||||||||||||||||||||||||||||||||
| 280 | 314 | (10.8 | ) | 575 | 434 | 32.5 | 135 | (928 | ) | * | 2,287 | 1,165 | 96.3 | |||||||||||||||||||||||||||||||||||||||||||||||
| 837 | 941 | (11.1 | ) | 1,720 | 1,300 | 32.3 | 1,537 | (1,283 | ) | * | 7,985 | 4,985 | 60.2 | |||||||||||||||||||||||||||||||||||||||||||||||
| — | — | — | — | — | — | (22 | ) | (26 | ) | 15.4 | (22 | ) | (26 | ) | 15.4 | |||||||||||||||||||||||||||||||||||||||||||||
| $ | 837 | $ | 941 | (11.1 | ) | $ | 1,720 | $ | 1,300 | 32.3 | $ | 1,515 | $ | (1,309 | ) | * | $ | 7,963 | $ | 4,959 | 60.6 | |||||||||||||||||||||||||||||||||||||||
| $ | 5,407 | $ | 4,755 | 13.7 | % | $ | 9,004 | $ | 8,936 | .8 | % | $ | 1,437 | $ | 1,308 | 9.9 | % | $ | 102,855 | $ | 113,967 | (9.8 | )% | |||||||||||||||||||||||||||||||||||||
| 735 | 738 | (.4 | ) | — | — | — | 2,283 | 2,141 | 6.6 | 38,781 | 40,548 | (4.4 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| 7,159 | 5,664 | 26.4 | — | — | — | 2 | 3 | (33.3 | ) | 74,629 | 73,667 | 1.3 | ||||||||||||||||||||||||||||||||||||||||||||||||
| — | — | — | 21,645 | 22,332 | (3.1 | ) | — | — | — | 21,645 | 22,332 | (3.1 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| 4,796 | 4,299 | 11.6 | 207 | 271 | (23.6 | ) | — | — | — | 59,055 | 56,755 | 4.1 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 18,097 | 15,456 | 17.1 | 30,856 | 31,539 | (2.2 | ) | 3,722 | 3,452 | 7.8 | 296,965 | 307,269 | (3.4 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| 1,628 | 1,617 | .7 | 3,185 | 3,060 | 4.1 | — | — | — | 9,956 | 9,824 | 1.3 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 84 | 39 | * | 508 | 581 | (12.6 | ) | — | — | — | 3,357 | 2,731 | 22.9 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 21,236 | 18,564 | 14.4 | 36,553 | 36,497 | .2 | 221,978 | 188,917 | 17.5 | 556,532 | 531,207 | 4.8 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 24,587 | 17,149 | 43.4 | 4,861 | 4,351 | 11.7 | 2,629 | 2,263 | 16.2 | 127,204 | 98,539 | 29.1 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 18,605 | 14,147 | 31.5 | — | — | — | 569 | 258 | * | 103,198 | 84,276 | 22.5 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 55,243 | 59,768 | (7.6 | ) | 145 | 120 | 20.8 | 780 | 760 | 2.6 | 179,387 | 177,928 | .8 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 1,770 | 3,610 | (51.0 | ) | — | 1 | * | 285 | 1,738 | (83.6 | ) | 24,492 | 37,872 | (35.3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| 100,205 | 94,674 | 5.8 | 5,006 | 4,472 | 11.9 | 4,263 | 5,019 | (15.1 | ) | 434,281 | 398,615 | 8.9 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 3,154 | 2,936 | 7.4 | 7,643 | 7,462 | 2.4 | 16,748 | 14,046 | 19.2 | 53,810 | 52,246 | 3.0 |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| 59 |
Treasury and Corporate Support
Treasury and Corporate Support includes the Company’s investment portfolios, funding, capital management, interest rate risk management, income taxes not allocated to the business lines, including most investments in
tax-advantaged
projects, and the residual aggregate of those expenses associated with corporate activities that are managed on a consolidated basis. Treasury and Corporate Support recorded net income of $1.5 billion in 2021, compared with a net loss of $1.3 billion in 2020.
Net revenue increased $176 million (19.4 percent) in 2021, compared with 2020. Net interest income, on a taxable-equivalent basis, increased $217 million in 2021, compared with 2020, due to favorable funding and deposit mix. Noninterest income decreased $41 million (4.3 percent) in 2021, compared with 2020, reflecting lower securities gains and changes in other noninterest income due to lower equity investment income and lower gains on sales of businesses in 2021, offset by the impact of asset impairments in 2020 as a result of branch closures.
Noninterest expense decreased $3 million (0.3 percent) in 2021, compared with 2020, primarily due to lower
COVID-19
related expenses compared with the prior year, including recognizing liabilities related to future delivery exposures for merchant and airline processing, lower net shared services expense, lower amortization related to
tax-advantaged
investments and lower severance and other accruals. These decreases were partially offset by higher compensation expense as a result of higher performance-based incentives and merit increases, as well as higher employee benefits driven by higher medical claims. The provision for credit losses was $3.7 billion lower in 2021, compared with 2020, reflecting the residual impact of changes in the allowance for credit losses being impacted by improving economic conditions in the current year, compared to deteriorating conditions in the prior year.
Income taxes are assessed to each line of business at a managerial tax rate of 25.0 percent with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support.
Non-GAAP
Financial Measures
In addition to capital ratios defined by banking regulators, the Company considers various other measures when evaluating capital utilization and adequacy, including:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| – | Tangible common equity to tangible assets, |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| – | Tangible common equity to risk-weighted assets, and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| – | 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.
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
|---|---|---|---|---|
| 60 |
The following table shows the Company’s calculation of these
non-GAAP
financial measures:
| At December 31 (Dollars in Millions) | 2021 | 2020 | ||||||
|---|---|---|---|---|---|---|---|---|
| Total equity | $ | 55,387 | $ | 53,725 | ||||
| Preferred stock | (6,371 | ) | (5,983 | ) | ||||
| Noncontrolling interests | (469 | ) | (630 | ) | ||||
| Goodwill (net of deferred tax liability)(1) | (9,323 | ) | (9,014 | ) | ||||
| Intangible assets, other than mortgage servicing rights | (785 | ) | (654 | ) | ||||
| Tangible common equity(a) | 38,439 | 37,444 | ||||||
| Common equity tier 1 capital, determined in accordance with transitional regulatory capital requirements related to the CECL methodology implementation | 41,701 | 38,045 | ||||||
| Adjustments(2) | (1,733 | ) | (1,733 | ) | ||||
| Common equity tier 1 capital, reflecting the full implementation of the CECL methodology(b) | 39,968 | 36,312 | ||||||
| Total assets | 573,284 | 553,905 | ||||||
| Goodwill (net of deferred tax liability)(1) | (9,323 | ) | (9,014 | ) | ||||
| Intangible assets, other than mortgage servicing rights | (785 | ) | (654 | ) | ||||
| Tangible assets(c) | 563,176 | 544,237 | ||||||
| Risk-weighted assets, determined in accordance with prescribed regulatory capital requirements effective for the Company(d) | 418,571 | 393,648 | ||||||
| Adjustments(3) | (357 | ) | (1,471 | ) | ||||
| Risk-weighted assets, reflecting the full implementation of the CECL methodology(e) | 418,214 | 392,177 | ||||||
| Ratios | ||||||||
| Tangible common equity to tangible assets(a)/(c) | 6.8 | % | 6.9 | % | ||||
| Tangible common equity to risk-weighted assets(a)/(d) | 9.2 | 9.5 | ||||||
| Common equity tier 1 capital to risk-weighted assets, reflecting the full implementation of the CECL methodology(b)/(e) | 9.6 | 9.3 |
| Year Ended December 31 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||
| Net interest income | $ 12,494 | $ 12,825 | $ 13,052 | |||||||||
| Taxable-equivalent adjustment(4) | 106 | 99 | 103 | |||||||||
| Net interest income, on a taxable-equivalent basis | 12,600 | 12,924 | 13,155 | |||||||||
| Net interest income, on a taxable-equivalent basis (as calculated above) | 12,600 | 12,924 | 13,155 | |||||||||
| Noninterest income | 10,227 | 10,401 | 9,831 | |||||||||
| Less: Securities gains (losses), net | 103 | 177 | 73 | |||||||||
| Total net revenue, excluding net securities gains (losses)(f) | 22,724 | 23,148 | 22,913 | |||||||||
| Noninterest expense(g) | 13,728 | 13,369 | 12,785 | |||||||||
| Efficiency ratio(g)/(f) | 60.4 | % | 57.8 | % | 55.8 | % |
| Year Ended December 31, 2021 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net Revenue | Net Revenue as a Percent of the Consolidated Company | Net Revenue as a Percent of the Consolidated Company Excluding Treasury and Corporate Support | ||||||||||
| Corporate and Commercial Banking | $ | 3,935 | 17 | % | 18 | % | ||||||
| Consumer and Business Banking | 8,578 | 38 | 39 | |||||||||
| Wealth Management and Investment Services | 3,223 | 14 | 15 | |||||||||
| Payment Services | 6,008 | 26 | 28 | |||||||||
| Treasury and Corporate Support | 1,083 | 5 | ||||||||||
| Consolidated Company | 22,827 | 100 | % | |||||||||
| Less: Treasury and Corporate Support | 1,083 | |||||||||||
| Consolidated Company excluding Treasury and Corporate Support | $ | 21,744 | 100 | % |
| Column 1 | Column 2 |
|---|---|
| (1) | Includes goodwill related to certain investments in unconsolidated financial institutions per prescribed regulatory requirements. |
| Column 1 | Column 2 |
|---|---|
| (2) | Includes the estimated increase in the allowance for credit losses related to the adoption of the CECL methodology net of deferred taxes. |
| Column 1 | Column 2 |
|---|---|
| (3) | Includes the impact of the estimated increase in the allowance for credit losses related to the adoption of the CECL methodology. |
| Column 1 | Column 2 |
|---|---|
| (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. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| 61 |
Accounting Changes
Note 2 of the Notes to Consolidated Financial Statements discusses accounting standards recently issued but not yet required to be adopted and the expected impact of these changes in accounting standards. To the extent the adoption of new accounting standards materially affects the Company’s financial condition or results of operations, the impacts are discussed in the applicable section(s) of the Management’s Discussion and Analysis and the Notes to Consolidated Financial Statements.
Critical Accounting Policies
The accounting and reporting policies of the Company comply with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. The Company’s financial position and results of operations can be affected by these estimates and assumptions, which are integral to understanding the Company’s financial statements. Critical accounting policies are those policies management believes are the most important to the portrayal of the Company’s financial condition and results, and require management to make estimates that are difficult, subjective or complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of financial statements. These factors include, among other things, whether the estimates are significant to the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information (including third-party sources or available prices), sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be utilized under GAAP. Management has discussed the development and the selection of critical accounting policies with the Company’s Audit Committee.
Significant accounting policies are discussed in Note 1 of the Notes to Consolidated Financial Statements. Those policies considered to be critical accounting policies are described below.
Allowance for Credit Losses
Management’s evaluation of the appropriate allowance for credit losses is often the most critical of all the accounting estimates for a banking institution. It is an inherently subjective process impacted by many factors as discussed throughout the Management’s Discussion and Analysis section of the Annual Report.
The methods utilized to estimate the allowance for credit losses, key assumptions and quantitative and qualitative information considered by management in determining the appropriate allowance for credit losses at December 31, 2021 are discussed in the “Credit Risk Management” section. Although methodologies utilized to determine each element of the allowance reflect management’s assessment of credit risk, imprecision exists in these measurement tools due in part to
subjective judgments involved and an inherent lag in the data available to quantify current conditions and events that affect credit loss reserve estimates.
Given the many quantitative variables and subjective factors affecting the credit portfolio, changes in the allowance for credit losses may not directly coincide with changes in the risk ratings of the credit portfolio reflected in the risk rating process. This is in part due to the timing of the risk rating process in relation to changes in the business cycle, the exposure and mix of loans within risk rating categories, levels of nonperforming loans and the timing of charge-offs and expected recoveries. The allowance for credit losses on commercial lending segment loans measures the expected loss content on the remaining portfolio exposure, while nonperforming loans and net charge-offs are measures of specific impairment events that have already been confirmed. Therefore, the degree of change in the forward-looking expected loss in the commercial lending allowance may differ from the level of changes in nonperforming loans and net charge-offs. Management maintains an appropriate allowance for credit losses by updating allowance rates to reflect changes in expected losses, including expected changes in economic or business cycle conditions. Some factors considered in determining the appropriate allowance for credit losses are more readily quantifiable while other factors require extensive qualitative judgment in determining the overall level of the allowance for credit losses.
The Company considers a range of economic scenarios in its determination of the allowance for credit losses. These scenarios are constructed with interrelated projections of multiple economic variables, and loss estimates are produced that consider the historical correlation of those economic variables with credit losses, and also the expectation that conditions will eventually normalize over the longer run. Scenarios worse than the Company’s expected outcome at December 31, 2021 include risks that government stimulus in response to the
COVID-19
pandemic is less effective than expected, or that a longer or more severe health crisis prolongs the downturn in economic activity, potentially reducing the number of businesses that are ultimately able to continue operations after the crisis has passed.
Under the range of economic scenarios considered, the allowance for credit losses would have been lower by $832 million or higher by $1.5 billion. This range reflects the sensitivity of the allowance for credit losses specifically related to the scenarios and weights considered as of December 31, 2021, and does not consider other potential adjustments that could increase or decrease loss estimates calculated using alternative economic scenarios.
Because several quantitative and qualitative factors are considered in determining the allowance for credit losses, these sensitivity analyses do not necessarily reflect the nature and extent of future changes in the allowance for credit losses. They are intended to provide insights into the impact of adverse changes in the economy on the Company’s modeled loss estimates for the loan portfolio and do not imply any expectation of future deterioration in the risk rating or loss rates. Given current
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
|---|---|---|---|---|
| 62 |
processes employed by the Company, management believes the risk ratings and loss model estimates currently assigned are appropriate. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions that could be significant to the Company’s financial statements. Refer to the “Analysis and Determination of the Allowance for Credit Losses” section for further information.
Fair Value Estimates
A portion of the Company’s assets and liabilities are carried at fair value on the Consolidated Balance Sheet, with changes in fair value recorded either through earnings or other comprehensive income (loss) in accordance with applicable accounting principles generally accepted in the United States. These include all of the Company’s
available-for-sale
investment securities, derivatives and other trading instruments, MSRs and MLHFS. The estimation of fair value also affects other loans held for sale, which are recorded at the
lower-of-cost-or-fair
value. The determination of fair value is important for certain other assets that are periodically evaluated for impairment using fair value estimates, including goodwill and other intangible assets, impaired loans, OREO and other repossessed assets.
Fair value is generally defined as the exit price at which an asset or liability could be exchanged in a current transaction between willing, unrelated parties, other than in a forced or liquidation sale. Fair value is based on quoted market prices in an active market, or if market prices are not available, is estimated using models employing techniques such as matrix pricing or discounting expected cash flows. The significant assumptions used in the models, which include assumptions for interest rates, discount rates, prepayments and credit losses, are independently verified against observable market data where possible. Where observable market data is not available, the estimate of fair value becomes more subjective and involves a high degree of judgment. In this circumstance, fair value is estimated based on management’s judgment regarding the value that market participants would assign to the asset or liability. This valuation process takes into consideration factors such as market illiquidity. Imprecision in estimating these factors can impact the amount recorded on the balance sheet for a particular asset or liability with related impacts to earnings or other comprehensive income (loss).
When available, trading and
available-for-sale
securities are valued based on quoted market prices. However, certain securities are traded less actively and, therefore, quoted market prices may not be available. The determination of fair value may require benchmarking to similar instruments or performing a discounted cash flow analysis using estimates of future cash flows and prepayment, interest and default rates. For more information on investment securities, refer to Note 5 of the Notes to Consolidated Financial Statements.
As few derivative contracts are listed on an exchange, the majority of the Company’s derivative positions are valued using valuation techniques that use readily observable market inputs. Certain derivatives, however, must be valued using techniques that include unobservable inputs. For these instruments, the significant assumptions must be estimated and, therefore, are
subject to judgment. Note 20 of the Notes to Consolidated Financial Statements provides a summary of the Company’s derivative positions.
Refer to Note 22 of the Notes to Consolidated Financial Statements for additional information regarding estimations of fair value.
Mortgage Servicing Rights
MSRs are capitalized as separate assets when loans are sold and servicing is retained, or may be purchased from others. The Company records MSRs at fair value. Because MSRs do not trade in an active market with readily observable prices, the Company determines the fair value by estimating the present value of the asset’s future cash flows utilizing market-based prepayment rates, option adjusted spread, and other assumptions validated through comparison to trade information, industry surveys and independent third-party valuations. Changes in the fair value of MSRs are recorded in earnings during the period in which they occur. Risks inherent in the valuation of MSRs include higher than expected prepayment rates and/or delayed receipt of cash flows. The Company utilizes derivatives, including interest rate swaps, swaptions, forward commitments to buy TBAs, U.S. Treasury and Eurodollar futures and options on U.S. Treasury futures, to mitigate the valuation risk. Refer to Notes 10 and 22 of the Notes to Consolidated Financial Statements for additional information on the assumptions used in determining the fair value of MSRs and an analysis of the sensitivity to changes in interest rates of the fair value of the MSRs portfolio and the related derivative instruments used to mitigate the valuation risk.
Income Taxes
The Company estimates income tax expense based on amounts expected to be owed to the various tax jurisdictions in which it operates, including federal, state and local domestic jurisdictions, and an insignificant amount to foreign jurisdictions. The estimated income tax expense is reported in the Consolidated Statement of Income. Accrued taxes are reported in other assets or other liabilities on the Consolidated Balance Sheet and represent the net estimated amount due to or to be received from taxing jurisdictions either currently or deferred to future periods. Deferred taxes arise from differences between assets and liabilities measured for financial reporting purposes versus income tax reporting purposes. Deferred tax assets are recognized if, in management’s judgment, their realizability is determined to be more likely than not. Uncertain tax positions that meet the more likely than not recognition threshold are measured to determine the amount of benefit to recognize. An uncertain tax position is measured at the largest amount of benefit management believes is more likely than not to be realized upon settlement. In estimating accrued taxes, the Company assesses the relative merits and risks of the appropriate tax treatment considering statutory, judicial and regulatory guidance in the context of the tax position. Because of the complexity of tax laws and regulations, interpretation can be difficult and subject to legal judgment given specific facts and circumstances. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions regarding the estimated amounts of accrued taxes.
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| 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.