Note 1—Summary of Significant Accounting Policies and Nature of Operations (Continued)

Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks, interest bearing deposits in banks, and federal funds sold.

Trading Account Assets and Liabilities

Trading account assets and liabilities are recorded at fair value and include certain securities and derivatives. Securities are classified as trading when management acquires them as an accommodation to customers or with the intent to hold for short periods. Substantially all of these securities have a high degree of liquidity and a readily determinable fair value. Interest on securities classified as trading is included in interest income, and realized gains and losses from sale and unrealized fair value adjustments are recognized in noninterest income.

Derivatives included in trading account assets and liabilities are entered into as an accommodation to customers or for other risk management purposes, primarily to manage the Bank’s exposure to certain interest rate risks. Contracts primarily include interest rate swaps and options and foreign exchange contracts. The Bank nets derivative assets and liabilities, and the related cash collateral receivables and payables, when a legally enforceable master netting arrangement exists between the Bank and the derivative counterparty. Changes in fair values and realized income or expense for trading asset and liability derivatives are included in noninterest income.

Securities

Securities are recorded on the consolidated balance sheet as of the trade date, when acquired in a regular-way trade. Debt securities for which management has both the positive intent and ability to hold to maturity are classified as held to maturity and are carried at amortized cost. Debt securities that are not classified as trading assets or held to maturity are classified as available for sale and are carried at fair value, with the unrealized gains or losses reported net of taxes as a component of AOCI in stockholder’s equity until realized. However, unrealized losses on securities available for sale that we intend to sell, or if it is more likely than not that we will be required to sell, before recovery of the security’s amortized cost basis are included in noninterest income. Credit losses on securities available for sale that we do not expect to sell and credit losses on securities held to maturity, if any, are recorded as discussed in “Allowance for Credit Losses” in this note.

Interest income on debt securities classified as either available for sale or held to maturity includes the amortization of premiums and the accretion of discounts using a method that produces a level yield based on the estimated lives of the securities and is included in interest income on securities.

Realized gains and losses on the sale of available for sale securities are included in noninterest income. The specific identification method is used to calculate realized gains and losses on sales.

For further information on our debt securities, see Note 2 to these consolidated financial statements.

Loans Held for Investment, Loans Held for Sale and Leases

Loans held for investment are reported at the principal amounts outstanding, net of charge-offs, unamortized nonrefundable loan fees, direct loan origination costs, and purchase premiums and discounts. Where loans are held for investment, the net basis adjustment excluding charge-offs on the loan is generally recognized in interest income on an effective yield basis over the contractual loan term.

Nonaccrual loans are those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest. Loans are generally placed on nonaccrual when such loans have become contractually past due 90 days with respect to principal

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Note 1—Summary of Significant Accounting Policies and Nature of Operations (Continued)

or interest. Past due status is determined based on the contractual terms of the loan and the number of payment cycles since the last payment date. Interest accruals are continued past 90 days for certain small business loans and consumer installment loans, which are charged off at 120 days. For the commercial loan portfolio segment, interest accruals are also continued for loans that are both well-secured and in the process of collection.

When a loan is placed on nonaccrual status, all previously accrued but uncollected interest is reversed against current period interest income. When full collection of the outstanding principal balance is in doubt, subsequent payments received are first applied to unpaid principal and then to uncollected interest. A loan may be returned to accrual status at such time as the loan is brought fully current as to both principal and interest, and such loan is considered to be fully collectible on a timely basis. The Bank’s policy also allows management to continue the recognition of interest income on certain loans placed on nonaccrual status. Interest income may be recognized on these nonaccrual loans, referred to as “Cash Basis Nonaccrual”, only when payments are collected. This policy applies to consumer portfolio segment loans and commercial portfolio segment loans that are well-secured and in management’s judgment are considered to be fully collectible but the timely collection of payments is in doubt.

A TDR is a restructuring of a loan in which the creditor, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. A loan subject to such a restructuring is accounted for as a TDR. A TDR typically involves a modification of terms such as a reduction of the interest rate below the current market rate for a loan with similar risk characteristics or extending the maturity date of the loan without corresponding compensation. Credit losses on TDR’s are recorded as discussed in “Allowance for Credit Losses” in this note. For the consumer portfolio segment, TDRs are initially placed on nonaccrual and typically, a minimum of six consecutive months of sustained performance is required before returning to accrual status. For the commercial portfolio segment, the Bank generally determines accrual status for TDRs by performing an individual assessment of each loan, which may include, among other factors, demonstrated performance by the borrower under the previous terms.

Except for certain transactions between entities under common control, loans acquired in a transfer, including business combinations, are recorded at fair value at the acquisition date.

Loans held for sale are carried at the lower of cost or fair value and measured on an individual basis for commercial loans and on an aggregate basis for residential mortgage loans. Changes in fair value are recognized in other noninterest income. Nonrefundable fees, direct loan origination costs, and purchase premiums and discounts related to loans held for sale are deferred and recognized as a component of the gain or loss on sale. Contractual interest earned on loans held for sale is recognized in interest income.

Allowance for Credit Losses

Allowance for loan losses

Allowance for loan losses is a valuation account that is deducted from the assets’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management confirms the uncollectibility of a loan balance. Expected recoveries, if any, do not exceed the aggregate of amounts previously charged-off.

Management develops and documents its systematic methodology for determining the allowance by first dividing its portfolio into two segments—the commercial segment and consumer segment. The Bank further divides its portfolio segments into classes based on initial measurement attributes, risk characteristics or its method of monitoring and assessing credit risk. The classes for the Bank include commercial and industrial, commercial mortgage, construction, residential mortgage and home equity, and other consumer loans. While the Bank’s methodology attributes portions of the allowance to specific portfolio segments and classes, the allowance estimate is provided to cover all credit losses expected in the loan portfolio.

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Note 1—Summary of Significant Accounting Policies and Nature of Operations (Continued)

The Bank’s methodology for estimating the allowance uses relevant available information relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made to account for differences between current and expected future conditions and those reflected in historical loss information. The allowance is measured on a collective basis when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis.

The collectively-assessed allowance methodology incorporated an economic forecast over a 36-month period. Beyond the economic forecast period, the allowance methodology reverted to average historical loss information on a straight-line basis over a 24-month period. These timeframes are regularly reviewed and approved by management and may be adjusted if economic conditions warrant.

An expected loss approach is used to estimate the collectively-assessed allowance for both the commercial and consumer portfolio segments. Expected loss is calculated as the product of PD, LGD, and EAD modeled parameters that are projected on a monthly basis over the assets’ remaining contractual lives. The sum of each month’s expected loss calculation results in the collectively-assessed allowance estimate. Expected loss models use historical loss information and a variety of economic assumptions to estimate PD, LGD, and EAD. These models are tailored to different loan segments, classes and products by changing the economic variables or their weighting in the calculation used to estimate expected losses.

The allowance is an estimate of expected credit losses over the remaining contractual term of each asset. Expected prepayments are incorporated into the estimation of the EAD for each asset over the asset’s remaining term, which shortens the expected remaining term. Contractual term is not adjusted for expected extensions, renewals, and modifications unless management has a reasonable expectation that a TDR will be executed with a borrower. Credit cards do not have defined contractual terms. In order to estimate the expected credit losses on actively used revolving credit card balances, we make assumptions about expected payments and expected spending on the unconditionally cancelable unfunded amount at the measurement date. Expected spending after the measurement date reduces the expected payments that are allocated to the outstanding balance at the measurement date. Expected credit losses are calculated only on the outstanding balances component at the measurement date, which is amortized by applying the proportion of the expected payment allocated to the outstanding balance. Expected payments applied to the expected spending after the measurement date are excluded from the analysis because unconditionally cancelable unfunded commitments are not reservable.

Loans that do not share risk characteristics are evaluated individually to determine the allowance. Loans assessed individually include larger nonaccruing loans within the commercial portfolio, TDRs, reasonably expected TDRs and collateral-dependent loans. Collateral-dependent loans are generally individually-assessed for allowance purposes. Collateral-dependent assets’ expected credit losses are assessed when the fair value of the collateral is less than the amortized cost basis of the asset. Collateral-dependent assets are evaluated in this manner when foreclosure is probable, or when repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty. Estimated costs to sell are included in the estimate when repayment is expected by the sale of the collateral. Collateral-dependent assets are generally secured by real estate collateral. When the discounted cash flow method is used to determine the allowance for individually-assessed loans, management does not adjust the interest rate used to discount expected cash flows to incorporate expected prepayments.

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Note 1—Summary of Significant Accounting Policies and Nature of Operations (Continued)

Management implements qualitative adjustments to the collectively-assessed allowance to account for the risks not incorporated in the model between current conditions and those reflected in the historical loss information used to estimate the models. These qualitative factors include changes in credit policies, problem loan trends, identification of new risks not incorporated into the modeling framework, credit concentrations, changes in lending management and other external factors. Qualitative adjustments are also used to adjust the collectively-assessed allowance to account for risks attributed to imprecision in the economic forecast and when risks emerge that impact specific portfolio components (i.e., natural disasters).

TDRs are loans where we have granted a concession to a borrower as a result of the borrower experiencing financial difficulty and, consequently, we receive less than the current market-based compensation for loans with similar risk characteristics. Such loans’ allowance is measured either individually or in pools with similar risk characteristics. The allowance for a TDR loan is measured using the same method as all other loans when evaluated in pools. The allowance for individually assessed TDR loans is measured using a discounted cash flow methodology, or by evaluating the fair value of the collateral, if collateral dependent. When the value of a concession cannot be measured using a method other than the discounted cash flow method, the value of a concession is measured by discounting the expected future cash flows at the original interest rate of the loan. When we have a reasonable expectation that a TDR loan may be executed with a borrower at the evaluation date, we may modify the allowance calculation to align with the expected modification terms, which may include modifying the expected contractual term.

We generally do not record an allowance for accrued interest receivable on loans held for investment, which is included in other assets on the consolidated balance sheet. Uncollectible accrued interest is generally reversed through interest income.

Allowance for Credit Losses on Debt Securities

The Bank’s debt securities generally are explicitly or implicitly guaranteed by U.S. government entities or agencies or are non-agency-backed assets that are highly rated and have not incurred credit losses historically. No credit losses are expected on these assets and thus no allowance is estimated on these debt securities.

Allowance for Credit Losses on Unfunded Credit Commitments

The Bank maintains an allowance for losses on unfunded credit commitments for the contractual term over which we are exposed to credit risk that is not unconditionally cancelable by the Bank. The Bank’s allowance methodology for unfunded credit commitments is the same as that used for the allowance for the other collectively-evaluated assets and includes an estimate of commitments that are expected to fund over the remaining contractual term. The allowance for losses on unfunded credit commitments is classified as other liabilities on the balance sheet, with changes recognized in the provision for credit losses.

Goodwill and Identifiable Intangible Assets

Intangible assets represent purchased assets that lack physical substance and can be separately distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold, exchanged, or licensed. Intangible assets are recorded at fair value at the date of acquisition.

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Note 1—Summary of Significant Accounting Policies and Nature of Operations (Continued)

Intangible assets that have finite lives, which include core deposit intangibles, customer relationships, non-compete agreements and trade names, are amortized either using the straight-line method or a method that patterns the consumption of the economic benefit. Intangible assets are amortized over their estimated periods of benefit, which range from three to forty years. The Bank periodically evaluates the recoverability of intangible assets and takes into account events or circumstances that warrant revised estimates of useful lives or that indicate impairment exists. Intangible assets that have indefinite lives are tested for impairment at least annually, and more frequently in certain circumstances.

The Bank has elected to account for its residential mortgage servicing rights using the fair value measurement method. Under the fair value measurement method, residential mortgage servicing rights are measured at estimated fair value each period with changes in fair value included in other, net within noninterest income.

Goodwill is assessed for impairment at least annually at the reporting unit level either qualitatively or quantitatively. If the elected qualitative assessment results indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative impairment test is required. Various valuation methodologies are applied to carry out the impairment test by comparing the fair value of the reporting unit to its carrying amount, including goodwill. A goodwill impairment loss is measured as the amount by which a reporting unit’s carrying amount exceeds its fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. Goodwill impairment is recognized through noninterest expense as a direct write down to its carrying amount and subsequent reversals of goodwill impairment are prohibited.

Other Investments

The Bank invests in limited liability partnerships and other entities operating qualified affordable housing projects. These LIHC investments provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. The LIHC investments are initially recorded at cost, and are subsequently accounted for under the proportional amortization method, when such requirements are met to apply that methodology. Under the proportional amortization method, the Bank amortizes the initial investment in proportion to the tax credits and other tax benefits allocated to the Bank, with amortization recognized in the statement of income as a component of income tax expense. When the requirements are not met to apply the proportional amortization method, the investment is accounted for under the equity method of accounting with equity method losses recorded in noninterest expense. LIHC investments are reviewed periodically for impairment.

The Bank also invests in limited liability entities and trusts that operate renewable energy projects, either directly or indirectly. Tax credits, taxable income and distributions associated with these renewable energy projects may be allocated to investors according to the terms of the partnership agreements. These investments are accounted for under the equity method and are reviewed periodically for impairment, considering projected operating results and realizability of tax credits. For those projects where economic benefits are not allocated based on pro rata ownership percentage, the Bank accounts for its investments using the HLBV method. Under the HLBV method, the Bank determines its share of an investee’s earnings by comparing the amount it would hypothetically receive at each balance sheet reporting date under the liquidation provisions of the partnership agreements, assuming the investee’s net assets were liquidated at amounts determined in accordance with GAAP and distributed to the Bank, after taking capital transactions during the period into account.

Derivative Instruments Used in Hedging Relationships

The Bank enters into a variety of derivative contracts as a means of managing the Bank’s interest rate exposure and designates such derivatives under qualifying hedge relationships. All such derivative instruments are recorded at fair value and are included in other assets or other liabilities. The Bank offsets derivative assets and liabilities, and the related cash collateral receivables and payables, when a legally enforceable master netting arrangement exists between the Bank and the derivative counterparty.

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Note 1—Summary of Significant Accounting Policies and Nature of Operations (Continued)

At hedge inception, the Bank designates a derivative instrument as a hedge of the fair value of a recognized asset or liability (i.e., fair value hedge), or a hedge of the variability in the expected future cash flows associated with either an existing recognized asset or liability or a probable forecasted transaction (i.e., cash flow hedge).

Where hedge accounting is applied at hedge inception, the Bank formally documents its risk management objective and strategy for undertaking the hedge, which includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged, and how the hedge’s effectiveness will be assessed prospectively and retrospectively. Both at the inception of the hedge and on an ongoing basis, the hedging instrument must be highly effective in offsetting changes in fair values or cash flows of the hedged item in order to qualify for hedge accounting.

For fair value hedges, changes in the fair value of the derivative instrument are recorded in earnings together with the change in fair value of the hedged item. For cash flow hedges, changes in the fair value of the derivative instrument are recognized in other comprehensive income. For cash flow hedges of interest rate risk, the amount in other comprehensive income is subsequently reclassified to net interest income in the period in which the cash flow from the hedged item is recognized in earnings. If a derivative instrument is no longer determined to be highly effective as a designated hedge, hedge accounting is discontinued and subsequent fair value adjustments of the derivative instrument are recorded in earnings.

Transfers of Financial Assets

Transfers of financial assets in which the Bank has surrendered control over the transferred assets are accounted for as sales. Control is generally considered to have been surrendered when the transferred assets have been legally isolated from the Bank, the transferee has the right to pledge or exchange the assets without any significant constraints, and the Bank has not entered into a repurchase agreement, does not hold unconditional call options and has not written put options on the transferred assets. In assessing whether control has been surrendered, the Bank considers whether the transferee would be a consolidated affiliate and the impact of all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not entered into at the time of transfer.

Revenues from Contracts with Customers

Revenues from contracts with customers include service charges on deposit accounts, trust and investment management fees, brokerage commissions and fees, card processing fees, net, investment banking and syndication fees, and fees from affiliates. The Bank recognizes revenue from contracts with customers according to a five-step revenue recognition model: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The Bank’s contracts with customers generally contain a single performance obligation or separately identified performance obligations, each with a stated transaction price and generally do not involve a significant timing difference between satisfaction of the performance obligation and customer payment. Revenues are recognized over time or at a point in time as the performance obligations are satisfied. Revenues are generally not variable and do not involve significant estimates or constraints.

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Note 1—Summary of Significant Accounting Policies and Nature of Operations (Continued)

Transfer Pricing

Employees of the Bank perform management and support services for MUFG Bank, Ltd. in connection with the operation and administration of MUFG Bank, Ltd.’s businesses in the Americas. In consideration for the services provided, MUFG Bank, Ltd. pays the Bank fees under a master services agreement, which reflects market-based pricing for those services. The Bank recognizes transfer pricing revenue when delivery (performance) has occurred or services have been rendered. Revenue is typically recognized based on the gross amount billed to MUFG Bank, Ltd. without netting the associated costs to perform those services. Gross presentation is typically deemed appropriate in these instances as the Bank acts as a principal when providing these services directly to MUFG Bank, Ltd. Transfer pricing revenue is included in fees from affiliates revenue.

Income Taxes

The Bank files consolidated U.S. federal income tax returns, foreign tax returns and various combined and separate company state income tax returns.

We record a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as for loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We recognize the deferred income tax effects of a change in tax rates in the period of the enactment.

We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. We make adjustments to these reserves in accordance with the income tax accounting guidance when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made, and could have a material impact on our financial condition and operating results. Foreign taxes paid are generally applied as credits to reduce U.S. federal income taxes payable.

Employee Pension and Other Postretirement Benefits

The Bank provides a variety of pension and other postretirement benefit plans for eligible employees and retirees. Net periodic pension and other postretirement benefit cost is recognized over the approximate service period of plan participants and includes significant discount rate and plan asset return assumptions.

Stock-Based Compensation

The Bank grants restricted stock units settled in ADRs representing shares of common stock of the Bank’s ultimate parent company, MUFG, to employees. The Bank recognizes compensation expense on restricted stock units granted on a straight-line basis over the vesting period for non-retirement eligible employees based on the grant date fair value of MUFG ADRs. Restricted stock units granted to employees who are retirement eligible or will become retirement eligible during the vesting period are expensed as of the grant date or on a straight-line basis over the period from the grant date to the date the employee becomes retirement eligible. Forfeitures are recognized as incurred in earnings.

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Note 1—Summary of Significant Accounting Policies and Nature of Operations (Continued)

Recently Adopted Accounting Pronouncements

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. This ASU applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This guidance is effective on a prospective basis to new modifications made before December 31, 2022. The Bank adopted this guidance in 2020 and management does not expect the adoption of this guidance to significantly impact the Bank’s financial position or results of operations. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848) – Scope, which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. We will continue to assess the impact as the reference rate transition occurs over the next year.

Recently Issued Accounting Pronouncements

Fair Value Hedging—Portfolio Layer Method

In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815)—Fair Value Hedging—Portfolio Layer Method, related to fair value hedge accounting of portfolios of financial assets. This ASU expands the current single-layer method to allow multiple hedge layers of a single closed portfolio of qualifying assets, which include prepayable and non-prepayable assets. The guidance is effective for fiscal years beginning January 1, 2023 and early adoption is permitted. The Bank is evaluating the impact that ASU 2022-01 will have on its consolidated financial statements.

Troubled Debt Restructurings and Vintage Disclosures

In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326)—Troubled Debt Restructurings and Vintage Disclosures. The ASU removes the recognition and measurement guidance for troubled-debt restructurings by creditors, enhances disclosure requirements for certain loan refinancings and restructurings by creditors, and requires that an entity disclose current-period gross write-offs by year of origination for financing receivables. The guidance is effective January 1, 2023 and early adoption is permitted. The Bank is evaluating the impact that ASU 2022-02 will have on its consolidated financial statements.

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The Bank’s securities available for sale with a continuous unrealized loss position at December 31, 2021 are shown below, identified for periods less than 12 months and 12 months or more.

The fair value of debt securities available for sale by contractual maturity are shown above. Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.

At December 31, 2021, the Bank did not have the intent to sell any securities in an unrealized loss position before a recovery of the amortized cost, which may be at maturity. The Bank also believes that it is more likely than not that it will not be required to sell the securities prior to recovery of amortized cost.

Agency residential and commercial mortgage-backed securities consist of securities guaranteed by a U.S. government corporation, such as Ginnie Mae, or a government-sponsored agency such as Freddie Mac or Fannie Mae. These securities are collateralized by residential and commercial mortgage loans and may be prepaid at par prior to maturity. The unrealized losses on agency residential mortgage-backed securities resulted from changes in interest rates and not from changes in credit quality. At December 31, 2021, the Bank expected to recover the entire amortized cost basis of these securities because the Bank determined that the strength of the issuers’ guarantees through direct obligations or support from the U.S. government is sufficient to protect the Bank from losses.

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Note 2—Securities (Continued)

Residential mortgage-backed securities are collateralized by residential mortgage loans and may be prepaid at par prior to maturity. Commercial mortgage-backed securities are collateralized by commercial mortgage loans and are generally subject to prepayment penalties. The unrealized losses on residential and commercial mortgage-backed securities resulted from higher market yields since purchase. Cash flow analysis of the underlying collateral provides an estimate of recoverability and is performed quarterly when the fair value of a security is lower than its amortized cost. Based on the analysis performed as of December 31, 2021, the Bank expects to recover the entire amortized cost basis of these securities.

The Bank’s CLOs consist of Cash Flow CLOs. A Cash Flow CLO is a structured finance product that securitizes a diversified pool of loan assets into multiple classes of notes. Cash Flow CLOs pay the note holders through the receipt of interest and principal repayments from the underlying loans unlike other types of CLOs that pay note holders through the trading and sale of underlying collateral. Unrealized losses typically arise from widening credit spreads and deteriorating credit quality of the underlying collateral. Cash flow analysis of the underlying collateral provides an estimate of recoverability and is performed quarterly when the fair value of a security is lower than its amortized cost. Based on the analysis performed as of December 31, 2021, the Bank expects to recover the entire amortized cost basis of these securities.

Direct bank purchase bonds are not rated by external credit rating agencies. The unrealized losses on these bonds resulted from a higher return on capital expected by the secondary market compared with the return on capital required at the time of origination when the bonds were purchased. The Bank estimates the unrealized loss for each security by assessing the underlying collateral of each security. The Bank estimates the portion of loss attributable to credit based on the expected cash flows of the underlying collateral using estimates of current key assumptions, such as probability of default and loss severity. Cash flow analysis of the underlying collateral provides an estimate of recoverability and is performed quarterly when the fair value of a security is lower than its amortized cost and potential impairment is identified. Based on the analysis performed as of December 31, 2021, the Bank expects to recover the entire amortized cost basis of these securities.

The fair value of debt securities available for sale by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.

The gross realized gains and losses from sales of available for sale securities for the year ended December 31, 2021 are shown below. The specific identification method is used to calculate realized gains and losses on sales.

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Amortized cost is defined as the original purchase cost, adjusted for any accretion or amortization of a purchase discount or premium, less principal payments and any impairment previously recognized in earnings. The carrying amount is the difference between the amortized cost and the amount recognized in OCI. The amount recognized in OCI primarily reflects the unrealized gain or loss at date of transfer from available for sale to the held to maturity classification, net of amortization, which is recorded in interest income on securities.

The Bank’s securities held to maturity with a continuous unrealized loss position at December 31, 2021 are shown below, separately for periods less than 12 months and 12 months or more.

The carrying amount and fair value of securities held to maturity by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.

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Note 2—Securities (Continued)

Securities Pledged and Received as Collateral

At December 31, 2021, the Bank pledged $2.7 billion of trading securities as collateral of which $0.1 billion was permitted to be sold or repledged. These securities were pledged as collateral to secure public and trust department deposits and for derivative liability positions.

At December 31, 2021, the Bank received $22.4 billion of collateral for derivative asset positions, of which $22.4 billion was permitted to be sold or repledged. Of the collateral received, the Bank did not sell or repledge any securities loaned or sold under repurchase agreements.

Accrued interest receivable on loans held for investment totaled $225 million at December 31, 2021 and is included in other assets on the consolidated balance sheet.

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The following table shows the aging of the balance of loans held for investment by class as of December 31, 2021.

Loans held for investment 90 days or more past due and still accruing interest totaled $27 million at December 31, 2021. The following table presents the loans that are 90 days or more past due, but are not on nonaccrual status, by loan class.

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Note 3—Loans and Allowance for Loan Losses (Continued)

Credit Quality Indicators

Management analyzes the Bank’s loan portfolios by applying specific monitoring policies and procedures that vary according to the relative risk profile and other characteristics within the various loan portfolios. Loans within the commercial portfolio segment are classified as either pass or criticized. Criticized credits are those that have regulatory risk ratings of special mention, substandard or doubtful; classified credits are those that have regulatory risk ratings of substandard or doubtful. Special mention credits are potentially weak, as the borrower has begun to exhibit deteriorating trends, which, if not corrected, may jeopardize repayment of the loan and result in further downgrade. Substandard credits have well-defined weaknesses, which, if not corrected, could jeopardize the full satisfaction of the debt. A credit classified as doubtful has critical weaknesses that make full collection improbable on the basis of currently existing facts and conditions.

The following table summarizes the loans in the commercial portfolio segment monitored for credit quality based on regulatory risk ratings.

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