EX-13

EX-13 8 d291857dex13.htm EX-13 EX-13

EXHIBIT 13

The following pages discuss in detail the financial results we achieved in 2016 — results that reflect one U.S. Bank.

Financial table of contents

22	Management’s discussion and analysis

Overview

Statement of income analysis

Balance sheet analysis

Corporate risk profile

Overview

Credit risk management

Residual value risk management

Operational risk management

Compliance risk management

Interest rate risk management

Market risk management

Liquidity risk management

Capital management

Fourth quarter summary

Line of business financial review

Non-GAAP financial measures

Accounting changes

Critical accounting policies

Controls and procedures

72	Reports of management and independent accountants

75	Consolidated financial statements and notes

142

Five-year consolidated financial statements

144

Quarterly consolidated financial data

145

Supplemental financial data

148

Company information

158

Executive officers

160

Directors

The following information appears in accordance with the private securities litigation reform act of 1995:

This report contains forward-looking statements about U.S. Bancorp. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements and are based on the information available to, and assumptions and estimates made by, management as of the date hereof. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future plans and prospects of U.S. Bancorp. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated. A reversal or slowing of the current economic recovery or another severe contraction could adversely affect U.S. Bancorp’s revenues and the values of its assets and liabilities. Global financial markets could experience a recurrence of significant turbulence, which could reduce the availability of funding to certain financial institutions and lead to a tightening of credit, a reduction of business activity, and increased market volatility. Stress in the commercial real estate markets, as well as a downturn in the residential real estate markets could cause credit losses and deterioration in asset values. In addition, changes to statutes, regulations, or regulatory policies or practices could affect U.S. Bancorp in substantial and unpredictable ways. U.S. Bancorp’s results could also be adversely affected by deterioration in general business and economic conditions; changes in interest rates; deterioration in the credit quality of its loan portfolios or in the value of the collateral securing those loans; deterioration in the value of securities held in its investment securities portfolio; legal and regulatory developments; litigation; increased competition from both banks and non-banks; changes in customer behavior and preferences; breaches in data security; effects of mergers and acquisitions and related integration; effects of critical accounting policies and judgments; and management’s ability to effectively manage credit risk, market risk, operational risk, compliance risk, strategic risk, interest rate risk, liquidity risk and reputational risk.

Additional factors could cause actual results to differ from expectations, including the risks discussed in the “Corporate Risk Profile” section on pages 38–60 and the “Risk Factors” section on pages 148–157 of this report. However, factors other than these also could adversely affect U.S. Bancorp’s results, and the reader should not consider these factors to be a complete set of all potential risks or uncertainties. Forward-looking statements speak only as of the date hereof, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.

Management’s Discussion and Analysis

Overview

U.S. Bancorp and its subsidiaries (the “Company”) delivered record financial performance in 2016. In a year where economic conditions continued to slowly improve, the Company delivered record full-year net income, diluted earnings per share and net revenue, while continuing to make important investments in its long-term growth strategy.

The Company earned $5.9 billion in 2016, an increase of 0.2 percent over 2015, principally due to total net revenue growth. Net interest income increased primarily as a result of loan growth and noninterest income increased as a result of higher payment services revenue, trust and investment management fees and mortgage banking revenue. The Company’s continued focus on controlling expenses allowed it to achieve an industry-leading efficiency ratio of 54.9 percent in 2016. In addition, the Company’s return on average assets and return on average common equity were 1.36 percent and 13.4 percent, respectively.

During 2016, the Company continued to create value for shareholders and customers by returning 79 percent of its earnings to common shareholders through dividends and common share repurchases. This was accomplished by generating steady growth in commercial and consumer lending and total deposits, by building momentum in its core business, particularly within Wealth Management and Securities Services and Payment Services, and by maintaining a very strong capital base.

The Company’s common equity tier 1 to risk-weighted assets ratio using the Basel III standardized approach and Basel III advanced approaches, as if fully implemented, were 9.1 percent and 11.7 percent, respectively, at December 31, 2016 — above the Company’s targeted ratio of 8.5 percent and well above the minimum ratio of 7.0 percent required when fully implemented. In addition, refer to Table 23 for a summary of the statutory capital ratios in effect for the Company at December 31, 2016 and 2015. 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.

In 2016, average loans and deposits increased $17.3 billion (6.9 percent) and $25.7 billion (8.9 percent), respectively, over 2015, reflecting growth from new and existing customers. Loan growth included increases in commercial, commercial real estate, residential mortgages, credit card and other retail loans, partially offset by a decline in loans covered by loss sharing agreements with the Federal Deposit Insurance Corporation (“FDIC”) (“covered” loans), which is a run-off portfolio. Deposit growth included increases in noninterest-bearing and total savings deposits.

The Company’s provision for credit losses increased $192 million (17.0 percent) in 2016, compared with 2015. Net charge-offs increased $97 million (8.3 percent) in 2016, compared with 2015, primarily due to higher commercial loan net charge-offs and lower commercial real estate recoveries, partially offset by lower charge-offs related to residential mortgage and home equity loans due to continued improvement in economic conditions during 2016. The provision for credit losses was $55 million more than net charge-offs in 2016, compared with $40 million less than net charge-offs in 2015, reflecting loan growth, partially offset by improvements in residential mortgage and home equity loans and lines.

The fundamental elements of the Company’s core businesses are solid, positioning the Company well for growth as it enters 2017. The Company generated record revenue in 2016 and has strong momentum as it begins 2017. The Company experienced total loan growth, deposit growth, net interest income growth, and noninterest income growth in 2016. In addition, its capital position remained strong. With a focus on customer satisfaction and providing them with innovative products and services, the Company believes it will continue to create outstanding value for its shareholders, customers and communities in 2017.

TABLE 1 _{Selected Financial Data}


Year Ended December 31 (Dollars and Shares in Millions, Except Per Share Data)	2016			2015			2014			2013			2012
Condensed Income Statement
Net interest income	$	11,528		$	11,001		$	10,775		$	10,604		$	10,745
Taxable-equivalent adjustment^(a)		203			213			222			224			224

Net interest income (taxable-equivalent basis)^(b)		11,731			11,214			10,997			10,828			10,969
Noninterest income		9,555			9,092			9,161			8,765			9,334
Securities gains (losses), net		22			–			3			9			(15	)

Total net revenue		21,308			20,306			20,161			19,602			20,288
Noninterest expense		11,676			10,931			10,715			10,274			10,456
Provision for credit losses		1,324			1,132			1,229			1,340			1,882

Income before taxes		8,308			8,243			8,217			7,988			7,950
Income taxes and taxable-equivalent adjustment		2,364			2,310			2,309			2,256			2,460

Net income		5,944			5,933			5,908			5,732			5,490
Net (income) loss attributable to noncontrolling interests		(56	)		(54	)		(57	)		104			157

Net income attributable to U.S. Bancorp	$	5,888		$	5,879		$	5,851		$	5,836		$	5,647

Net income applicable to U.S. Bancorp common shareholders	$	5,589		$	5,608		$	5,583		$	5,552		$	5,383

Per Common Share
Earnings per share	$	3.25		$	3.18		$	3.10		$	3.02		$	2.85
Diluted earnings per share		3.24			3.16			3.08			3.00			2.84
Dividends declared per share		1.070			1.010			.965			.885			.780
Book value per share		24.63			23.28			21.68			19.92			18.31
Market value per share		51.37			42.67			44.95			40.40			31.94
Average common shares outstanding		1,718			1,764			1,803			1,839			1,887
Average diluted common shares outstanding		1,724			1,772			1,813			1,849			1,896
Financial Ratios
Return on average assets		1.36	%		1.44	%		1.54	%		1.65	%		1.65	%
Return on average common equity		13.4			14.0			14.7			15.8			16.2
Net interest margin (taxable-equivalent basis)^(a)		3.01			3.05			3.23			3.44			3.58
Efficiency ratio^(b)		54.9			53.8			53.2			52.4			51.5
Net charge-offs as a percent of average loans outstanding		.47			.47			.55			.64			.97
Average Balances
Loans	$	267,811		$	250,459		$	241,692		$	227,474		$	215,374
Loans held for sale		4,181			5,784			3,148			5,723			7,847
Investment securities^(c)		107,922			103,161			90,327			75,046			72,501
Earning assets		389,877			367,445			340,994			315,139			306,270
Assets		433,313			408,865			380,004			352,680			342,849
Noninterest-bearing deposits		81,176			79,203			73,455			69,020			67,241
Deposits		312,810			287,151			266,640			250,457			235,710
Short-term borrowings		19,906			27,960			30,252			27,683			28,549
Long-term debt		36,220			33,566			26,535			21,280			28,448
Total U.S. Bancorp shareholders’ equity		47,339			44,813			42,837			39,917			37,611
Period End Balances
Loans	$	273,207		$	260,849		$	247,851		$	235,235		$	223,329
Investment securities		109,275			105,587			101,043			79,855			74,528
Assets		445,964			421,853			402,529			364,021			353,855
Deposits		334,590			300,400			282,733			262,123			249,183
Long-term debt		33,323			32,078			32,260			20,049			25,516
Total U.S. Bancorp shareholders’ equity		47,298			46,131			43,479			41,113			38,998
Asset Quality
Nonperforming assets	$	1,603		$	1,523		$	1,808		$	2,037		$	2,671
Allowance for credit losses		4,357			4,306			4,375			4,537			4,733
Allowance for credit losses as a percentage of period-end loans		1.59	%		1.65	%		1.77	%		1.93	%		2.12	%
Capital Ratios
Common equity tier 1 capital^(d)		9.4	%		9.6	%		9.7	%		9.4	%^(b)		9.0	%^(b)
Tier 1 capital^(d)		11.0			11.3			11.3			11.2			10.8
Total risk-based capital^(d)		13.2			13.3			13.6			13.2			13.1
Leverage^(d)		9.0			9.5			9.3			9.6			9.2
Common equity tier 1 capital to risk-weighted assets for the Basel III transitional advanced approaches		12.2			12.5			12.4
Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented standardized approach^(b)(e)		9.1			9.1			9.0			8.8			8.1
Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented advanced approaches^(b)		11.7			11.9			11.8
Tangible common equity to tangible assets^(b)		7.5			7.6			7.5			7.7			7.2
Tangible common equity to risk-weighted assets^(b)		9.2			9.2			9.3			9.1			8.6

(a)

Utilizes a tax rate of 35 percent for those assets and liabilities whose income or expense is not included for federal income tax purposes.

(b)

See Non-GAAP Financial Measures beginning on page 66.

(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.

(d)

December 31, 2016, 2015 and 2014, calculated under the Basel III transitional standardized approach; all other periods calculated under Basel I.

(e)

December 31, 2016, 2015, 2014 and 2013, calculated using final rules for the Basel III fully implemented standardized approach; December 31, 2012, calculated using proposed rules released June 2012.

Earnings Summary The Company reported net income attributable to U.S. Bancorp of $5.89 billion in 2016, or $3.24 per diluted common share, compared with $5.88 billion, or $3.16 per diluted common share, in 2015. Return on average assets and return on average common equity were 1.36 percent and 13.4 percent, respectively, in 2016, compared with 1.44 percent and 14.0 percent, respectively, in 2015. The results for 2016 included $180 million of equity investment income, related to the sale of the Company’s membership in Visa Europe Limited (“Visa Europe”) to Visa, Inc., along with a $110 million increase in reserves related to legal and regulatory matters and a $40 million charitable contribution.

Total net revenue for 2016 was $1.0 billion (4.9 percent) higher than 2015, reflecting a 4.8 percent increase in net interest income (4.6 percent on a taxable-equivalent basis), and a 5.3 percent increase in noninterest income. The increase in net interest income from the prior year was mainly the result of loan growth. The increase in noninterest income was primarily driven by higher payment services revenue, trust and investment management fees, and mortgage banking revenue, as well as the impact of the Visa Europe sale.

Noninterest expense in 2016 was $745 million (6.8 percent) higher than 2015, reflecting business growth, incremental costs related to compliance programs and investment in the business. Compensation expense increased due to the impact of hiring to support business growth and compliance programs, merit increases and higher variable compensation. Professional services expense was higher related to compliance programs and implementation costs of capital investments. Marketing expense increased as a result of the charitable contribution and costs for supporting new business development, while technology and communications expense increased reflecting capital investments. In addition, other noninterest expense was higher reflecting a special FDIC surcharge that began in the third quarter of 2016 and an increase in reserves related to legal and regulatory matters.

Statement of Income Analysis

Net Interest Income Net interest income, on a taxable-equivalent basis, was $11.7 billion in 2016, compared with $11.2 billion in 2015 and $11.0 billion in 2014. The $517 million (4.6 percent) increase in net interest income, on a taxable-equivalent basis, in 2016 compared with 2015, was principally driven by loan growth partially offset by a lower net interest margin. Average earning assets were $22.4 billion (6.1 percent) higher in 2016, compared with 2015, driven by increases in loans and in investment securities. The net interest margin, on a taxable-equivalent basis, in 2016 was 3.01 percent, compared with 3.05 percent in 2015 and 3.23 percent in 2014. The decrease in the net interest margin in 2016, compared with 2015, was principally due to lower yields on purchased securities, lower reinvestment rates on maturing securities and maintaining higher cash balances. 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 $267.8 billion in 2016, compared with $250.5 billion in 2015. The $17.3 billion (6.9 percent) increase was driven by growth in commercial, commercial real estate, residential mortgage, credit card and other retail loans, partially offset by a decrease in covered loans. Average commercial and commercial real estate loans increased $8.0 billion (9.5 percent) and $625 million (1.5 percent), respectively, driven by higher demand for loans from new and existing customers. The $3.8 billion (7.4 percent) increase in residential mortgages reflected higher origination activity, including strong refinancing activities, in 2016 compared with 2015. Average credit card balances increased $2.4 billion (13.5 percent) in 2016, compared with 2015, due to customer growth, including a portfolio acquisition in late 2015 which increased average 2016 credit card balances by $1.6 billion. The $3.3 billion (6.6 percent) increase in average other retail loans was primarily due to higher auto and installment loans, student loans, and home equity and second mortgage loan balances. Average covered loans decreased $759 million (15.2 percent) in 2016, compared with 2015, the result of portfolio run-off.

TABLE 2 _{Analysis of Net Interest Income (a)}


Year Ended December 31 (Dollars in Millions)	2016			2015			2014			2016 v 2015			2015 v 2014
Components of Net Interest Income
Income on earning assets (taxable-equivalent basis)	$	13,375		$	12,619		$	12,454		$	756		$	165
Expense on interest-bearing liabilities (taxable-equivalent basis)		1,644			1,405			1,457			239			(52	)
Net interest income (taxable-equivalent basis)^(b)	$	11,731		$	11,214		$	10,997		$	517		$	217
Net interest income, as reported	$	11,528		$	11,001		$	10,775		$	527		$	226
Average Yields and Rates Paid
Earning assets yield (taxable-equivalent basis)		3.43	%		3.43	%		3.65	%		–	%		(.22	)%
Rate paid on interest-bearing liabilities (taxable-equivalent basis)		.57			.52			.58			.05			(.06	)
Gross interest margin (taxable-equivalent basis)		2.86	%		2.91	%		3.07	%		(.05	)%		(.16	)%
Net interest margin (taxable-equivalent basis)		3.01	%		3.05	%		3.23	%		(.04	)%		(.18	)%
Average Balances
Investment securities^(c)	$	107,922		$	103,161		$	90,327		$	4,761		$	12,834
Loans		267,811			250,459			241,692			17,352			8,767
Earning assets		389,877			367,445			340,994			22,432			26,451
Interest-bearing liabilities		287,760			269,474			249,972			18,286			19,502

(a)

Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.

(b)

See Non-GAAP Financial Measures beginning on page 66.

(c)

Average investment securities in 2016 were $4.8 billion (4.6 percent) higher than 2015, primarily due to purchases of U.S. Treasury and U.S. government agency-backed securities, net of prepayments and maturities, to support liquidity.

Average total deposits for 2016 were $25.7 billion (8.9 percent) higher than 2015. Average noninterest-bearing deposits for 2016 were $2.0 billion (2.5 percent) higher than the prior year, mainly in Consumer and Small Business Banking and Wholesale Banking and Commercial Real Estate. Average total savings deposits for 2016 were $26.2 billion (15.2 percent) higher than 2015, reflecting growth in Wholesale Banking and Commercial Real Estate, Consumer and Small Business Banking, and Wealth Management and Securities Services balances. Average time deposits for 2016 were $2.6 billion (7.2 percent) lower than 2015. The decrease was driven by lower Consumer and Small Business Banking balances driven by maturities, as well as a decline related to those deposits managed as an alternative to other funding sources such as wholesale borrowing, based largely on relative pricing and liquidity characteristics.

The $217 million (2.0 percent) increase in net interest income in 2015, compared with 2014, was primarily the result of growth in average earning assets and lower cost core deposit funding, partially offset by a shift in loan portfolio mix, lower reinvestment rates on investment securities and lower loan fees due to the 2014 wind down of the short-term, small-dollar deposit advance product, Checking Account Advance (“CAA”). Average earning assets were $26.4 billion (7.8 percent) higher in 2015, compared with 2014, driven by increases in loans and investment securities. The decrease in the net interest margin in 2015, compared with 2014, primarily reflected a change in the loan portfolio mix,

growth in the investment portfolio at lower average rates and lower reinvestment rates on investment securities, as well as lower loan fees due to the CAA product wind down.

Average total loans increased $8.8 billion (3.6 percent) in 2015, compared with 2014, driven by growth in commercial, commercial real estate, credit card and other retail loans, partially offset by a decrease in covered loans. Average commercial loans increased $8.3 billion (11.0 percent), driven by higher demand for loans from new and existing customers. Average commercial real estate loans increased $1.8 billion (4.5 percent), driven by the reclassification of covered commercial real estate loans resulting from the expiration of loss sharing agreements related to those loans at the end of 2014, as well as higher loan demand. Average credit card balances increased $422 million (2.4 percent) in 2015, compared with 2014, due to customer growth, including portfolio acquisitions during 2015. The $726 million (1.5 percent) increase in average other retail loans was primarily due to higher auto and installment loans, partially offset by lower student loan balances, reflecting their classification as held for sale for a portion of 2015. Average residential mortgages were essentially unchanged in 2015, compared with 2014. Average covered loans decreased $2.6 billion (34.1 percent) in 2015, compared with 2014, the result of portfolio run-off and the expiration of the loss sharing agreements on commercial and commercial real estate loans at the end of 2014.

Average investment securities in 2015 were $12.8 billion (14.2 percent) higher than 2014, primarily due to purchases of U.S. Treasury and U.S. government agency-backed securities, net of prepayments and maturities, to support liquidity.

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


	2016 v 2015									2015 v 2014
Year Ended December 31 (Dollars in Millions)	Volume			Yield/Rate			Total			Volume			Yield/Rate			Total
Increase (decrease) in

Interest Income
Investment securities	$	98		$	(37	)	$	61		$	282		$	(153	)	$	129
Loans held for sale		(57	)		5			(52	)		108			(30	)		78
Loans
Commercial		216			99			315			245			(192	)		53
Commercial real estate		24			24			48			71			4			75
Residential mortgages		146			(42	)		104			1			(36	)		(35	)
Credit card		265			3			268			43			109			152
Other retail		134			(40	)		94			32			(153	)		(121	)
Total loans, excluding covered loans		785			44			829			392			(268	)		124
Covered loans		(41	)		(30	)		(71	)		(154	)		(27	)		(181	)
Total loans		744			14			758			238			(295	)		(57	)
Other earning assets		32			(43	)		(11	)		46			(31	)		15
Total earning assets		817			(61	)		756			674			(509	)		165

Interest Expense
Interest-bearing deposits
Interest checking		3			9			12			2			(7	)		(5	)
Money market savings		41			116			157			28			47			75
Savings accounts		4			(10	)		(6	)		4			(10	)		(6	)
Time deposits		(14	)		16			2			(40	)		(32	)		(72	)
Total interest-bearing deposits		34			131			165			(6	)		(2	)		(8	)
Short-term borrowings		(72	)		91			19			(20	)		2			(18	)
Long-term debt		55			–			55			192			(218	)		(26	)
Total interest-bearing liabilities		17			222			239			166			(218	)		(52	)
Increase (decrease) in net interest income	$	800		$	(283	)	$	517		$	508		$	(291	)	$	217

(a)

This table shows the components of the change in net interest income by volume and rate on a taxable-equivalent basis utilizing a tax rate of 35 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.

Average total deposits for 2015 were $20.5 billion (7.7 percent) higher than 2014. Average noninterest-bearing deposits for 2015 were $5.7 billion (7.8 percent) higher than 2014, reflecting growth in Consumer and Small Business Banking, and Wholesale Banking and Commercial Real Estate. Average total savings deposits for 2015 were $21.0 billion (13.8 percent) higher than 2014, reflecting growth in Consumer and Small Business Banking, Wholesale Banking and Commercial Real Estate and corporate trust balances. Average time deposits which are managed based largely on relative pricing and liquidity characteristics, decreased $6.2 billion (14.9 percent) in 2015, compared with 2014.

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

In 2016, the provision for credit losses was $1.3 billion, compared with $1.1 billion and $1.2 billion in 2015 and 2014, respectively. The provision for credit losses was higher than net charge-offs by $55 million in 2016, lower than net charge-offs by $40 million in 2015 and lower than net charge-offs by $105 million in 2014. The increase in the allowance for credit losses during 2016 was driven by loan portfolio growth and economic stress in the energy portfolio, partially offset by improvements in residential mortgage and home equity loans and lines. Nonperforming assets increased $80 million (5.3 percent) from December 31, 2015 to December 31, 2016, primarily driven by an increase in nonperforming commercial loans within the energy portfolio, partially offset by improvements in the Company’s residential portfolio due to improving economic conditions. Net charge-offs increased $97 million (8.3 percent) in 2016 from 2015 primarily due to higher commercial loan net charge-offs and lower commercial real estate recoveries, partially offset by lower charge-offs related to residential mortgages and home equity loans.

The $97 million (7.9 percent) decrease in the provision for credit losses in 2015, compared with 2014, reflected improving credit trends and the underlying risk profile of the loan portfolio as economic conditions slowly improved during the period, partially offset by portfolio growth. Nonperforming assets decreased $285 million (15.8 percent) from December 31, 2014 to December 31, 2015, primarily driven by nonperforming asset reductions in the commercial real estate, residential mortgages, and home equity and second mortgage portfolios, as economic conditions slowly improved during 2015. In addition, accruing loans ninety days or more past due decreased by $114 million (12.1 percent) from December 31, 2014 to December 31, 2015. Net charge-offs decreased $162 million (12.1 percent) in 2015 from 2014 due to improvement in the residential mortgages, and home equity and second mortgages portfolios, as economic conditions slowly improved in 2015, partially offset by higher commercial loan net charge-offs.

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.

Noninterest Income Noninterest income in 2016 was $9.6 billion, compared with $9.1 billion in 2015 and $9.2 billion in 2014. The $485 million (5.3 percent) increase in 2016 over 2015 was primarily due to higher payment services revenue, trust and investment management fees, and mortgage banking revenue, as well as the impact of the Visa Europe sale. Credit and debit card revenue increased 10.0 percent in 2016 compared with 2015, reflecting higher transaction volumes including the impact of acquired portfolios. Merchant processing services revenue was 2.9 percent higher as a result of an increase in product fees and higher transaction volumes. Adjusted for the impact of foreign currency rate changes, the increase would have been approximately 5.0 percent. Trust and investment management fees increased 8.0 percent in 2016, compared with 2015, reflecting lower money market fee waivers, along with account growth, an increase in assets under management and improved market conditions. Mortgage banking revenue increased 8.1 percent over the prior year, driven by higher origination and sales volumes. In addition, other revenue was 9.5 percent higher in 2016 compared with 2015, reflecting the 2016 Visa Europe sale and the impact of a 2015 student loan market valuation adjustment, partially offset by lower equity investment income and a 2015 gain recorded on the sale of a deposit portfolio.

TABLE 4 _{Noninterest Income}


Year Ended December 31 (Dollars in Millions)	2016		2015		2014		2016 v 2015			2015 v 2014
Credit and debit card revenue	$	1,177	$	1,070	$	1,021		10.0	%		4.8	%
Corporate payment products revenue		712		708		724		.6			(2.2	)
Merchant processing services		1,592		1,547		1,511		2.9			2.4
ATM processing services		338		318		321		6.3			(.9	)
Trust and investment management fees		1,427		1,321		1,252		8.0			5.5
Deposit service charges		725		702		693		3.3			1.3
Treasury management fees		583		561		545		3.9			2.9
Commercial products revenue		871		867		854		.5			1.5
Mortgage banking revenue		979		906		1,009		8.1			(10.2	)
Investment products fees		158		185		191		(14.6	)		(3.1	)
Securities gains (losses), net		22		–		3		*			*
Other		993		907		1,040		9.5			(12.8	)
Total noninterest income	$	9,577	$	9,092	$	9,164		5.3	%		(.8	)%

*	Not meaningful.

The $72 million (0.8 percent) decrease in noninterest income in 2015 from 2014 reflected a 2014 gain related to an equity interest in Nuveen Investments, lower equity investment income, the 2015 student loan market adjustment and lower mortgage banking revenue, partially offset by higher revenue in most other fee businesses and the 2015 gain recorded on the sale of a deposit portfolio. The decrease in mortgage banking revenue in 2015 of 10.2 percent, compared with 2014, was primarily due to an unfavorable change in the valuation of mortgage servicing rights (“MSRs”), net of hedging activities, partially offset by an increase in mortgage production volume. Credit and debit card revenue increased 4.8 percent in 2015 compared with 2014, due to higher transaction volumes. Trust and investment management fees increased 5.5 percent, reflecting the benefits of the Company’s investments in its corporate trust and fund services businesses, as well as account growth, improved market conditions and lower fee waivers. Merchant processing services revenue was 2.4 percent higher as a result of higher transaction volumes, along with account growth and equipment sales to merchants related to chip technology requirements. Adjusted for the impact of foreign currency rate changes, the increase would have been approximately 6.9 percent. In addition, treasury management fees increased 2.9 percent in 2015 compared with 2014, due to higher transaction volumes, and commercial products revenue increased 1.5 percent due to higher syndication and bond underwriting fees and higher commercial leasing revenue, partially offset by lower standby letter of credit fees.

Noninterest Expense Noninterest expense in 2016 was $11.7 billion, compared with $10.9 billion in 2015 and $10.7 billion in 2014. The Company’s efficiency ratio was 54.9 percent in 2016, compared with 53.8 percent in 2015 and 53.2 percent in 2014. The $745 million (6.8 percent) increase in noninterest expense in 2016 over 2015 was primarily due to higher compensation costs, professional services, marketing and business development, technology and communications, and other noninterest expenses, partially offset by lower employee benefits expense. Compensation expense increased 8.3 percent in 2016 over 2015, principally due to the impact of hiring to support business growth and compliance programs, merit increases, and higher variable compensation. Professional services expense increased 18.7 percent primarily due to compliance programs and implementation costs of capital investments to support business growth. Marketing and business development expense increased 20.5 percent in 2016 over 2015, resulting from the support of new business development and a 2016 charitable contribution. Technology and communications expense increased 7.7 percent primarily due to capital investments and costs related to acquired portfolios. Further, other noninterest expense increased 8.6 percent in 2016 over 2015, reflecting the impact of the FDIC surcharge, which began in the third quarter of 2016, and higher accruals related to legal and regulatory matters. Offsetting these increases was a 4.1 percent decrease in employee benefits expense mainly due to lower pension costs.

TABLE 5 _{Noninterest Expense}


Year Ended December 31 (Dollars in Millions)	2016			2015			2014			2016 v 2015			2015 v 2014
Compensation	$	5,212		$	4,812		$	4,523			8.3	%		6.4	%
Employee benefits		1,119			1,167			1,041			(4.1	)		12.1
Net occupancy and equipment		988			991			987			(.3	)		.4
Professional services		502			423			414			18.7			2.2
Marketing and business development		435			361			382			20.5			(5.5	)
Technology and communications		955			887			863			7.7			2.8
Postage, printing and supplies		311			297			328			4.7			(9.5	)
Other intangibles		179			174			199			2.9			(12.6	)
Other		1,975			1,819			1,978			8.6			(8.0	)
Total noninterest expense	$	11,676		$	10,931		$	10,715			6.8	%		2.0	%
Efficiency ratio^(a)		54.9	%		53.8	%		53.2	%

(a)

See Non-GAAP Financial Measures beginning on page 66.

The $216 million (2.0 percent) increase in noninterest expense in 2015 over 2014 reflected higher compensation, employee benefits and other costs related to compliance activities during 2015. Compensation expense increased 6.4 percent, reflecting merit increases, higher staffing for risk and compliance activities, and the impact of branch banking operations acquisitions in 2014. Employee benefits expense increased 12.1 percent, primarily the result of higher pension costs. In addition, technology and communications expense increased 2.8 percent in 2015 over 2014, reflecting higher software license and maintenance costs. Offsetting these increases was a 5.5 percent decrease in marketing and business development expense reflecting higher charitable contributions in 2014, a 9.5 percent decrease in postage, printing and supplies expense due to a 2015 reimbursement from a business partner, and a 12.6 percent decrease in other intangibles expense due to the reduction or completion of amortization of certain intangibles. In addition, other expense decreased 8.0 percent, reflecting the impact of a 2014 settlement relating to the Federal Housing Administration’s insurance program and 2014 legal accruals, partially offset by higher 2015 compliance-related expenses.

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. Differences related to participant benefits are recognized in expense over the future service period of the employees. Differences related to the expected return on plan assets are included in expense over a period of approximately fifteen years.

Pension expense is expected to decrease by $44 million in 2017 primarily due to favorable experience study results and earnings on higher plan assets due to Company contributions, partially offset by a lower discount rate. 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 decrease may differ from the expected amount.

Refer to Note 16 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 an analysis of hypothetical changes in the discount rate and long-term rate of return (“LTROR”):


Discount Rate (Dollars in Millions)	Down 100 Basis Points			Up 100 Basis Points
Incremental benefit (expense)	$	(94	)	$	76
Percent of 2016 net income		(.98	)%		.79	%
LTROR (Dollars in Millions)	Down 100 Basis Points			Up 100 Basis Points
Incremental benefit (expense)	$	(39	)	$	39
Percent of 2016 net income		(.41	)%		.41	%

Income Tax Expense The provision for income taxes was $2.2 billion (an effective rate of 26.7 percent) in 2016 and $2.1 billion (an effective rate of 26.1 percent) in both 2015 and 2014.

For further information on income taxes, refer to Note 18 of the Notes to Consolidated Financial Statements.

Balance Sheet Analysis

Average earning assets were $389.9 billion in 2016, compared with $367.4 billion in 2015. The increase in average earning assets of $22.4 billion (6.1 percent) was primarily due to increases in loans of $17.3 billion (6.9 percent) and investment securities of $4.8 billion (4.6 percent).

For average balance information, refer to Consolidated Daily Average Balance Sheet and Related Yields and Rates on pages 146 and 147.

Loans The Company’s loan portfolio was $273.2 billion at December 31, 2016, compared with $260.8 billion at December 31, 2015, an increase of $12.4 billion (4.7 percent). The increase was driven by increases in commercial loans of $5.0 billion (5.6 percent), residential mortgages of $3.8 billion (7.1 percent), commercial real estate loans of $961 million (2.3 percent), credit card loans of $737 million (3.5 percent) and other retail loans of $2.7 billion (5.2 percent), partially offset by a decrease in covered loans of $760 million (16.5 percent). Table 6 provides a summary of the loan distribution by product type, while Table 12 provides a summary of the selected loan maturity distribution by loan category. Average total loans increased $17.3 billion (6.9 percent) in 2016, compared with 2015. The increase was due to growth in most loan portfolio classes in 2016.

Commercial Commercial loans, including lease financing, increased $5.0 billion (5.6 percent) at December 31, 2016, compared with December 31, 2015. Average commercial loans increased $8.0 billion (9.5 percent) in 2016, compared with 2015. The growth was primarily driven by higher demand from new and existing customers. Table 7 provides a summary of commercial loans by industry and geographical locations.

Commercial Real Estate The Company’s portfolio of commercial real estate loans, which includes commercial mortgages and construction and development loans, increased $961 million (2.3 percent) at December 31, 2016, compared with December 31, 2015, primarily the result of higher demand from new and existing customers. Average commercial real estate loans increased $625 million (1.5 percent) in 2016, compared with 2015. Table 8 provides a summary of commercial real estate loans by property type and geographical location.

The Company reclassifies construction loans to the commercial mortgage category if permanent financing is provided by the Company. In 2016, approximately $447 million of construction loans were reclassified to the commercial mortgage category. At December 31, 2016 and 2015, $146 million and $155 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 $10.7 billion and $10.4 billion at December 31, 2016 and 2015, 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 are subject to terms and conditions similar to commercial loans. These loans were included in the commercial loan category and totaled $6.4 billion and $5.8 billion at December 31, 2016 and 2015, respectively.

TABLE 6 _{Loan Portfolio Distribution}


	2016					2015					2014					2013					2012
At December 31 (Dollars in Millions)	Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total
Commercial
Commercial	$	87,928		32.2	%	$	83,116		31.9	%	$	74,996		30.2	%	$	64,762		27.5	%	$	60,742		27.2	%
Lease financing		5,458		2.0			5,286		2.0			5,381		2.2			5,271		2.3			5,481		2.5
Total commercial		93,386		34.2			88,402		33.9			80,377		32.4			70,033		29.8			66,223		29.7

Commercial Real Estate
Commercial mortgages		31,592		11.6			31,773		12.2			33,360		13.5			32,183		13.7			31,005		13.9
Construction and development		11,506		4.2			10,364		3.9			9,435		3.8			7,702		3.3			5,948		2.6
Total commercial real estate		43,098		15.8			42,137		16.1			42,795		17.3			39,885		17.0			36,953		16.5

Residential Mortgages
Residential mortgages		43,632		16.0			40,425		15.5			38,598		15.6			37,545		15.9			32,648		14.6
Home equity loans, first liens		13,642		5.0			13,071		5.0			13,021		5.2			13,611		5.8			11,370		5.1
Total residential mortgages		57,274		21.0			53,496		20.5			51,619		20.8			51,156		21.7			44,018		19.7
Credit Card		21,749		7.9			21,012		8.1			18,515		7.5			18,021		7.7			17,115		7.7

Other Retail
Retail leasing		6,316		2.3			5,232		2.0			5,871		2.4			5,929		2.5			5,419		2.4
Home equity and second mortgages		16,369		6.0			16,384		6.3			15,916		6.4			15,442		6.6			16,726		7.5
Revolving credit		3,282		1.2			3,354		1.3			3,309		1.3			3,276		1.4			3,332		1.5
Installment		8,087		3.0			7,030		2.7			6,242		2.5			5,709		2.4			5,463		2.4
Automobile		17,571		6.4			16,587		6.3			14,822		6.0			13,743		5.8			12,593		5.6
Student		2,239		.8			2,619		1.0			3,104		1.3			3,579		1.5			4,179		1.9
Total other retail		53,864		19.7			51,206		19.6			49,264		19.9			47,678		20.2			47,712		21.3
Total loans, excluding covered loans		269,371		98.6			256,253		98.2			242,570		97.9			226,773		96.4			212,021		94.9
Covered Loans		3,836		1.4			4,596		1.8			5,281		2.1			8,462		3.6			11,308		5.1
Total loans	$	273,207		100.0	%	$	260,849		100.0	%	$	247,851		100.0	%	$	235,235		100.0	%	$	223,329		100.0	%

TABLE 7 _{Commercial Loans by Industry Group and Geography}


	2016					2015
At December 31 (Dollars in Millions)	Loans		Percent			Loans		Percent
Industry Group
Manufacturing	$	13,779		14.8	%	$	13,404		15.2	%
Real estate, rental and leasing		10,553		11.3			9,514		10.8
Finance and insurance		8,728		9.3			8,288		9.4
Retail trade		7,573		8.1			6,846		7.7
Wholesale trade		7,552		8.1			8,069		9.1
Healthcare and social assistance		6,345		6.8			5,802		6.6
Public administration		4,546		4.9			4,190		4.7
Professional, scientific and technical services		3,744		4.0			3,493		4.0
Information		3,597		3.8			3,542		4.0
Transport and storage		3,561		3.8			3,262		3.7
Arts, entertainment and recreation		3,340		3.6			2,772		3.1
Educational services		3,167		3.4			2,791		3.2
Utilities		1,747		1.9			1,435		1.6
Mining		1,645		1.8			2,208		2.5
Other services		1,625		1.7			1,703		1.9
Agriculture, forestry, fishing and hunting		1,449		1.5			1,721		1.9
Other		10,435		11.2			9,362		10.6
Total	$	93,386		100.0	%	$	88,402		100.0	%
Geography
California	$	12,677		13.6	%	$	11,253		12.7	%
Colorado		4,362		4.7			3,930		4.5
Illinois		4,636		5.0			4,636		5.3
Minnesota		7,093		7.6			7,166		8.1
Missouri		3,536		3.8			3,309		3.8
Ohio		4,270		4.6			4,063		4.6
Oregon		2,090		2.2			1,938		2.2
Washington		3,447		3.7			3,219		3.6
Wisconsin		3,512		3.8			2,936		3.3
Iowa, Kansas, Nebraska, North Dakota, South Dakota		4,900		5.2			4,543		5.1
Arkansas, Indiana, Kentucky, Tennessee		5,168		5.5			5,106		5.8
Idaho, Montana, Wyoming		1,251		1.3			1,427		1.6
Arizona, Nevada, New Mexico, Utah		3,487		3.7			3,280		3.7
Total banking region		60,429		64.7			56,806		64.3
Florida, Michigan, New York, Pennsylvania, Texas		15,467		16.6			15,819		17.9
All other states		17,490		18.7			15,777		17.8
Total outside Company’s banking region		32,957		35.3			31,596		35.7
Total	$	93,386		100.0	%	$	88,402		100.0	%

Residential Mortgages Residential mortgages held in the loan portfolio at December 31, 2016, increased $3.8 billion (7.1 percent) over December 31, 2015, reflecting higher origination activity during 2016. Average residential mortgages increased $3.8 billion (7.4 percent) in 2016, compared with 2015. 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 $737 million (3.5 percent) at December 31, 2016, compared with December 31, 2015, reflecting new and existing customer growth during the period. Average credit card balances increased $2.4 billion (13.5 percent) in 2016, compared with 2015. The increase reflected customer growth, including a portfolio acquisition in late 2015.

TABLE 8 _{Commercial Real Estate Loans by Property Type and
Geography}


	2016					2015
At December 31 (Dollars in Millions)	Loans		Percent			Loans		Percent
Property Type
Business owner occupied	$	10,899		25.3	%	$	11,186		26.6	%
Commercial property
Industrial		1,631		3.8			1,530		3.6
Office		5,536		12.8			5,480		13.0
Retail		4,997		11.6			4,944		11.7
Other commercial		4,064		9.4			4,165		9.9
Multi-family		9,607		22.3			8,833		21.0
Hotel/motel		3,791		8.8			3,428		8.1
Residential homebuilders		2,311		5.4			2,319		5.5
Healthcare facilities		262		.6			252		.6
Total	$	43,098		100.0	%	$	42,137		100.0	%
Geography
California	$	10,734		24.9	%	$	10,456		24.8	%
Colorado		1,819		4.2			2,004		4.8
Illinois		1,678		3.9			1,810		4.3
Minnesota		2,177		5.0			2,022		4.8
Missouri		1,372		3.2			1,382		3.3
Ohio		1,462		3.4			1,260		3.0
Oregon		2,094		4.9			1,988		4.7
Washington		3,435		8.0			3,422		8.1
Wisconsin		2,161		5.0			2,323		5.5
Iowa, Kansas, Nebraska, North Dakota, South Dakota		2,312		5.4			2,227		5.3
Arkansas, Indiana, Kentucky, Tennessee		1,810		4.2			1,708		4.1
Idaho, Montana, Wyoming		1,271		2.9			1,275		3.0
Arizona, Nevada, New Mexico, Utah		3,257		7.6			3,259		7.7
Total banking region		35,582		82.6			35,136		83.4
Florida, Michigan, New York, Pennsylvania, Texas		3,829		8.9			3,793		9.0
All other states		3,687		8.5			3,208		7.6
Total outside Company’s banking region		7,516		17.4			7,001		16.6
Total	$	43,098		100.0	%	$	42,137		100.0	%

Other Retail Total other retail loans, which include retail leasing, home equity and second mortgages and other retail loans, increased $2.7 billion (5.2 percent) at December 31, 2016, compared with December 31, 2015, reflecting higher auto and installment loans and retail leasing balances, partially offset by lower student loan balances. Average other retail loans increased $3.3 billion (6.6 percent) in 2016, compared with 2015. The increase was primarily due to higher auto and installment loans, student loans, and home equity and second mortgage loan balances. Of the total residential mortgages, credit card and other

retail loans outstanding at December 31, 2016, approximately 73.3 percent were to customers located in the Company’s primary banking region compared with 73.4 percent at December 31, 2015. Tables 9, 10 and 11 provide a geographic summary of residential mortgages, credit card loans and other retail loans outstanding, respectively, as of December 31, 2016 and 2015. The collateral for $2.6 billion of residential mortgages and other retail loans included in covered loans at December 31, 2016 was in California, compared with $3.1 billion at December 31, 2015.

TABLE 9 _{Residential Mortgages by Geography}


	2016					2015
At December 31 (Dollars in Millions)	Loans		Percent			Loans		Percent
California	$	15,115		26.4	%	$	11,994		22.4	%
Colorado		3,219		5.6			3,047		5.7
Illinois		3,071		5.4			2,991		5.6
Minnesota		4,200		7.3			4,035		7.6
Missouri		1,834		3.2			1,955		3.7
Ohio		2,230		3.9			2,322		4.3
Oregon		2,292		4.0			2,144		4.0
Washington		3,277		5.7			3,020		5.6
Wisconsin		1,546		2.7			1,556		2.9
Iowa, Kansas, Nebraska, North Dakota, South Dakota		2,146		3.8			2,188		4.1
Arkansas, Indiana, Kentucky, Tennessee		3,220		5.6			3,287		6.1
Idaho, Montana, Wyoming		1,276		2.2			1,209		2.3
Arizona, Nevada, New Mexico, Utah		4,203		7.4			3,773		7.1
Total banking region		47,629		83.2			43,521		81.4
Florida, Michigan, New York, Pennsylvania, Texas		4,191		7.3			4,321		8.1
All other states		5,454		9.5			5,654		10.5
Total outside Company’s banking region		9,645		16.8			9,975		18.6
Total	$	57,274		100.0	%	$	53,496		100.0	%

TABLE 10 _{Credit Card Loans by Geography}


	2016					2015
At December 31 (Dollars in Millions)	Loans		Percent			Loans		Percent
California	$	2,188		10.1	%	$	2,161		10.3	%
Colorado		761		3.5			787		3.7
Illinois		1,072		4.9			1,046		5.0
Minnesota		1,287		5.9			1,350		6.4
Missouri		717		3.3			746		3.6
Ohio		1,179		5.4			1,238		5.9
Oregon		657		3.0			707		3.4
Washington		860		4.0			898		4.3
Wisconsin		1,007		4.6			1,050		5.0
Iowa, Kansas, Nebraska, North Dakota, South Dakota		1,036		4.8			996		4.7
Arkansas, Indiana, Kentucky, Tennessee		1,580		7.3			1,613		7.7
Idaho, Montana, Wyoming		376		1.7			406		1.9
Arizona, Nevada, New Mexico, Utah		1,044		4.8			1,031		4.9
Total banking region		13,764		63.3			14,029		66.8
Florida, Michigan, New York, Pennsylvania, Texas		4,076		18.7			3,600		17.1
All other states		3,909		18.0			3,383		16.1
Total outside Company’s banking region		7,985		36.7			6,983		33.2
Total	$	21,749		100.0	%	$	21,012		100.0	%

TABLE 11 _{Other Retail Loans by Geography}


	2016					2015
At December 31 (Dollars in Millions)	Loans		Percent			Loans		Percent
California	$	8,468		15.7	%	$	7,495		14.6	%
Colorado		2,058		3.8			1,995		3.9
Illinois		3,111		5.8			3,000		5.8
Minnesota		3,537		6.6			3,600		7.0
Missouri		2,171		4.0			2,191		4.3
Ohio		2,764		5.1			2,740		5.4
Oregon		1,555		2.9			1,601		3.1
Washington		1,696		3.1			1,724		3.4
Wisconsin		1,565		2.9			1,651		3.2
Iowa, Kansas, Nebraska, North Dakota, South Dakota		2,355		4.4			2,318		4.5
Arkansas, Indiana, Kentucky, Tennessee		3,001		5.6			2,925		5.7
Idaho, Montana, Wyoming		978		1.8			963		1.9
Arizona, Nevada, New Mexico, Utah		2,772		5.2			2,539		5.0
Total banking region		36,031		66.9			34,742		67.8
Florida, Michigan, New York, Pennsylvania, Texas		9,807		18.2			8,858		17.3
All other states		8,026		14.9			7,606		14.9
Total outside Company’s banking region		17,833		33.1			16,464		32.2
Total	$	53,864		100.0	%	$	51,206		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

$4.8 billion at December 31, 2016, compared with $3.2 billion at December 31, 2015. The increase in loans held for sale was principally due to a higher level of mortgage loan closings in late 2016, compared with the same period of 2015. Almost all of the residential mortgage loans the Company originates or purchases for sale follow guidelines that allow the loans to be sold into existing, highly liquid secondary markets; in particular in government agency transactions and to government sponsored enterprises (“GSEs”).

TABLE 12 _{Selected Loan Maturity Distribution}


At December 31, 2016 (Dollars in Millions)	One Year or Less		Over One Through Five Years		Over Five Years		Total
Commercial	$	30,602	$	57,876	$	4,908	$	93,386
Commercial real estate		11,847		24,318		6,933		43,098
Residential mortgages		2,703		8,474		46,097		57,274
Credit card		21,749		—		—		21,749
Other retail		10,189		29,461		14,214		53,864
Covered loans		475		623		2,738		3,836
Total loans	$	77,565	$	120,752	$	74,890	$	273,207
Total of loans due after one year with
Predetermined interest rates							$	87,407
Floating interest rates							$	108,235

Investment Securities The Company uses its investment securities portfolio to manage enterprise 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 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 $109.3 billion at December 31, 2016, compared with $105.6 billion at December 31, 2015. The $3.7 billion (3.5 percent) increase reflected $4.6 billion of net investment purchases, partially offset by an $881 million unfavorable change in net unrealized gains (losses) on available-for-sale investment securities.

Average investment securities were $107.9 billion in 2016, compared with $103.2 billion in 2015. The weighted-average yield of the available-for-sale portfolio was 2.06 percent at December 31, 2016, compared with 2.21 percent at December 31, 2015. The weighted-average maturity of the available-for-sale portfolio was 5.1 years at December 31, 2016, compared with 4.7 years at December 31, 2015. The weighted-average yield of the held-to-maturity portfolio was 1.93 percent at December 31, 2016, compared with 1.92 percent at December 31, 2015. The weighted-average maturity of the held-to-maturity portfolio was 4.6 years at December 31, 2016, compared with 4.2 years at December 31, 2015. Investment securities by type are shown in Table 13.

The Company’s available-for-sale securities are carried at fair value with changes in fair value reflected in other comprehensive income (loss) unless a security is deemed to be other-than-temporarily impaired. At December 31, 2016, the Company’s net unrealized losses on available-for-sale securities were $701 million, compared with net unrealized gains of $180 million at December 31, 2015. The unfavorable change in net unrealized gains (losses) was primarily due to decreases in the fair value of U.S. Treasury, U.S. government agency-backed and state and political securities as a result of changes in interest rates. Gross unrealized losses on available-for-sale securities totaled $1.0 billion at December 31, 2016, compared with $480 million at December 31, 2015. The Company conducts a regular assessment of its investment portfolio to determine whether any securities are other-than-temporarily impaired. When assessing unrealized losses for other-than-temporary impairment, the Company considers the nature of the investment, the financial condition of the issuer, the extent and duration of unrealized loss, expected cash flows of underlying assets and market conditions. At December 31, 2016, 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 4 and 21 in the Notes to Consolidated Financial Statements for further information on investment securities.

TABLE 13 _{Investment Securities}


	Available-for-Sale									Held-to-Maturity
At December 31, 2016 (Dollars in Millions)	Amortized Cost		Fair Value		Weighted- Average Maturity in Years		Weighted- Average Yield^(e)			Amortized Cost		Fair Value		Weighted- Average Maturity in Years		Weighted- Average Yield^(e)
U.S. Treasury and Agencies
Maturing in one year or less	$	3,219	$	3,218		.6		.74	%	$	450	$	450		.5		.98	%
Maturing after one year through five years		9,509		9,414		2.7		1.10			709		715		2.7		1.78
Maturing after five years through ten years		4,285		4,203		6.2		1.91			4,087		3,961		6.7		1.77
Maturing after ten years		301		292		10.2		2.26			–		–		–		–
Total	$	17,314	$	17,127		3.3		1.25	%	$	5,246	$	5,126		5.6		1.71	%
Mortgage-Backed Securities^(a)
Maturing in one year or less	$	161	$	165		.7		4.15	%	$	271	$	273		.7		2.83	%
Maturing after one year through five years		19,304		19,279		4.2		2.06			25,882		25,680		3.8		1.99
Maturing after five years through ten years		22,222		21,834		5.8		1.79			11,317		11,071		5.7		1.86
Maturing after ten years		2,304		2,312		12.2		1.70			237		239		11.1		1.62
Total	$	43,991	$	43,590		5.4		1.91	%	$	37,707	$	37,263		4.4		1.96	%
Asset-Backed Securities^(a)
Maturing in one year or less	$	–	$	–		–		–	%	$	–	$	–		.1		1.38	%
Maturing after one year through five years		252		256		3.9		3.18			5		8		3.1		1.39
Maturing after five years through ten years		223		227		5.4		3.49			2		2		5.8		1.53
Maturing after ten years		–		–		–		–			1		6		11.5		1.52
Total	$	475	$	483		4.6		3.32	%	$	8	$	16		5.0		1.45	%
Obligations of State and Political Subdivisions^(b)(c)
Maturing in one year or less	$	1,573	$	1,593		.4		7.09	%	$	–	$	–		.3		8.20	%
Maturing after one year through five years		517		530		2.6		6.15			–		–		2.5		8.15
Maturing after five years through ten years		1,771		1,732		8.1		5.30			6		7		8.8		3.30
Maturing after ten years		1,306		1,184		20.0		5.05			–		–		–		–
Total	$	5,167	$	5,039		8.2		5.87	%	$	6	$	7		8.4		3.59	%
Other Debt Securities
Maturing in one year or less	$	–	$	–		–		–	%	$	8	$	8		.3		2.15	%
Maturing after one year through five years		–		–		–		–			16		15		3.8		1.65
Maturing after five years through ten years		–		–		–		–			–		–		–		–
Maturing after ten years		11		9		20.4		5.65			–		–		–		–
Total	$	11	$	9		20.4		5.65	%	$	24	$	23		2.6		1.82	%
Other Investments	$	27	$	36		–		–	%	$	–	$	–		–		–	%
Total investment securities^(d)	$	66,985	$	66,284		5.1		2.06	%	$	42,991	$	42,435		4.6		1.93	%

(a)

Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities anticipating future prepayments.

(b)

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

(c)

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

(d)

The weighted-average maturity of the available-for-sale investment securities was 4.7 years at December 31, 2015, with a corresponding weighted-average yield of 2.21 percent. The weighted-average maturity of the held-to-maturity investment securities was 4.2 years at December 31, 2015, with a corresponding weighted-average yield of 1.92 percent.

(e)

Weighted-average yields are presented on a fully-taxable equivalent basis under a tax rate of 35 percent. Yields on available-for-sale and held-to-maturity investment securities are computed based on amortized cost balances, excluding any premiums or discounts recorded related to the transfer of investment securities at fair value from available-for-sale to held-to-maturity. Weighted-average yield and maturity calculations exclude equity securities that have no stated yield or maturity.


	2016					2015
At December 31 (Dollars in Millions)	Amortized Cost		Percent of Total			Amortized Cost		Percent of Total
U.S. Treasury and agencies	$	22,560		20.5	%	$	7,536		7.2	%
Mortgage-backed securities		81,698		74.3			91,265		86.6
Asset-backed securities		483		.4			558		.5
Obligations of state and political subdivisions		5,173		4.7			5,157		4.9
Other debt securities and investments		62		.1			891		.8
Total investment securities	$	109,976		100.0	%	$	105,407		100.0	%

TABLE 14 _Deposits

The composition of deposits was as follows:


	2016					2015					2014					2013					2012
At December 31 (Dollars in Millions)	Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total
Noninterest-bearing deposits	$	86,097		25.7	%	$	83,766		27.9	%	$	77,323		27.3	%	$	76,941		29.4	%	$	74,172		29.8	%
Interest-bearing deposits
Interest checking		66,298		19.8			59,169		19.7			55,058		19.5			52,140		19.9			50,430		20.2
Money market savings		109,947		32.9			86,159		28.7			76,536		27.1			59,772		22.8			50,987		20.5
Savings accounts		41,783		12.5			38,468		12.8			35,249		12.4			32,469		12.4			30,811		12.4
Total savings deposits		218,028		65.2			183,796		61.2			166,843		59.0			144,381		55.1			132,228		53.1
Time deposits less than $100,000		8,040		2.4			9,050		3.0			10,609		3.8			11,784		4.5			13,744		5.5
Time deposits greater than $100,000
Domestic		7,230		2.2			7,272		2.4			10,636		3.8			9,527		3.6			12,148		4.8
Foreign		15,195		4.5			16,516		5.5			17,322		6.1			19,490		7.4			16,891		6.8
Total interest-bearing deposits		248,493		74.3			216,634		72.1			205,410		72.7			185,182		70.6			175,011		70.2
Total deposits	$	334,590		100.0	%	$	300,400		100.0	%	$	282,733		100.0	%	$	262,123		100.0	%	$	249,183		100.0	%

The maturity of time deposits was as follows:


	Time Deposits Less Than $100,000		Time Deposits Greater Than $100,000
At December 31, 2016 (Dollars in Millions)	Time Deposits Less Than $100,000		Domestic		Foreign		Total
Three months or less	$	1,472	$	1,641	$	14,969	$	18,082
Three months through six months		1,028		1,316		109		2,453
Six months through one year		1,439		1,337		117		2,893
Thereafter		4,101		2,936		–		7,037
Total	$	8,040	$	7,230	$	15,195	$	30,465

Deposits Total deposits were $334.6 billion at December 31, 2016, compared with $300.4 billion at December 31, 2015. The $34.2 billion (11.4 percent) increase in total deposits reflected growth in total savings and noninterest-bearing deposits, partially offset by a decrease in time deposits. Average total deposits in 2016 increased $25.7 billion (8.9 percent) over 2015.

Noninterest-bearing deposits at December 31, 2016, increased $2.3 billion (2.8 percent) over December 31, 2015. Average noninterest-bearing deposits increased $2.0 billion (2.5 percent) in 2016, compared with 2015. The increases reflected growth in Consumer and Small Business Banking and Wholesale Banking and Commercial Real Estate balances.

Interest-bearing savings deposits increased $34.2 billion (18.6 percent) at December 31, 2016, compared with December 31, 2015. The increase was related to higher money market, interest checking and savings account balances. Money market deposit balances increased $23.8 billion (27.6 percent) at December 31, 2016, compared with December 31, 2015, primarily due to higher Wholesale Banking and Commercial Real Estate and Wealth Management and Securities Services balances. Interest checking balances increased $7.1 billion (12.0 percent) primarily due to higher Consumer and Small Business Banking, Wholesale Banking and Commercial Real Estate, corporate trust, and broker dealer balances. Savings account balances increased $3.3 billion (8.6 percent), primarily due to higher Consumer and Small Business Banking balances. Average interest-bearing savings deposits in 2016 increased $26.2 billion (15.2 percent), compared with 2015, reflecting growth in Wholesale Banking and Commercial Real Estate,

Consumer and Small Business Banking, and Wealth Management and Securities Services.

Interest-bearing time deposits at December 31, 2016, decreased $2.4 billion (7.2 percent), compared with December 31, 2015. Average time deposits decreased $2.6 billion (7.2 percent) in 2016, compared with 2015. The decreases were primarily due to lower Consumer and Small Business Banking balances driven by maturities, as well as declines related to those deposits managed as an alternative to other funding sources such as wholesale borrowing, based largely on relative pricing and liquidity characteristics.

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 $14.0 billion at December 31, 2016, compared with $27.9 billion at December 31, 2015. The $13.9 billion (49.9 percent) decrease in short-term borrowings was primarily driven by lower commercial paper balances.

Long-term debt was $33.3 billion at December 31, 2016, compared with $32.1 billion at December 31, 2015. The $1.2 billion (3.9 percent) increase was primarily due to the issuances of $4.5 billion of bank notes, $2.6 billion of medium-term notes and $1.0 billion of subordinated notes, partially offset by $6.3 billion of bank note, medium-term note and subordinated note repayments and maturities and a $523 million decrease in Federal Home Loan Bank (“FHLB”) advances.

Refer to Notes 12 and 13 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 reputational 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 reputational. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan, investment or derivative contract when it is due. Interest rate risk is the potential reduction of net interest income or market valuations as a result 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 possible inability to fund obligations or new business at a reasonable cost and in a timely manner. Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, or systems, or from external events, including the risk of loss resulting from breaches in data security. Operational risk can also include failures by third parties with which the Company does business. Compliance risk is the risk of loss arising from violations of, or nonconformance with, laws, rules, regulations, prescribed practices, internal policies, and procedures, or ethical standards, potentially exposing the Company to fines, civil money penalties, payment of damages, and the voiding of contracts. Compliance risk also arises in situations where the laws or rules governing certain Company products or activities of the Company’s customers may be ambiguous or untested. Strategic risk is the risk to earnings or capital arising from adverse business decisions

or improper implementation of those decisions. Reputational 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, offer new 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 148, 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:

–

Qualitative considerations, such as the macroeconomic environment, regulatory and compliance changes, litigation developments, and technology and cybersecurity;

–

Capital ratios and projections, including regulatory measures and stressed scenarios;

–

Credit measures, including adversely rated and nonperforming loans, leveraged transactions, credit concentrations and lending limits;

–

Interest rate and market risk, including market value and net income simulation, and trading-related Value at Risk;

–

Liquidity risk, including funding projections under various stressed scenarios;

–

Operational and compliance risk, including losses stemming from events such as fraud, processing errors, control breaches,

breaches in data security, or adverse business decisions, as well as reporting on technology performance, and various legal and regulatory compliance measures; and

–

Reputational and strategic 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 risk has been identified. Loans with a special mention or classified rating, including loans that are 90 days or more past due and still accruing, nonaccrual loans, those loans considered troubled debt restructurings (“TDRs”), and loans in a junior lien position that are current but are behind a modified or delinquent loan in a first lien position, 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. The Company obtains recent collateral value estimates for the majority of its residential mortgage and home equity and second mortgage portfolios, which allows the Company to compute estimated loan-to-value (“LTV”) ratios reflecting current market conditions. These individual refreshed LTV ratios are considered in the determination of the appropriate allowance for credit losses. However, the underwriting criteria the Company employs consider the relevant income and credit characteristics of the borrower, such that the collateral is not the primary source of repayment. The Company strives to identify potential problem loans early, record any necessary charge-offs promptly and maintain appropriate allowance levels for probable incurred loan losses. Refer to Notes 1 and 5 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 three segments, which is the level at which it develops and documents a systematic methodology to determine the allowance for credit losses. The Company’s three loan portfolio segments are commercial lending, consumer lending and covered loans.

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. 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, 2016, substantially all of the Company’s home equity lines were in the draw period. Approximately $1.1 billion, or 8 percent, of the outstanding home equity line balances at December 31, 2016, 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 and other economic factors, customer payment history and in some cases, updated LTV information on real estate based loans. These risk characteristics, among others, 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 covered loan segment represents loans acquired in FDIC-assisted transactions that are covered by loss sharing agreements with the FDIC that greatly reduce the risk of future credit losses to the Company. Key risk characteristics for covered segment loans are consistent with the segment they would otherwise be included in had the loss share coverage not been in place, but consider the indemnification provided by the FDIC.

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. The covered loan segment consists of only one class.

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 and consumer bankruptcy filings.

Over the past several years, economic conditions generally have stabilized and the financial markets have slowly improved. During 2016, the domestic economy expanded at a moderate rate, driven primarily by consumer spending due to gains in household income and wealth. The Federal Reserve Bank began to slowly increase short-term interest rates beginning in late 2015 in conjunction with the improving economy. Periodic increases in short-term interest rates are anticipated to accelerate over the next few years, as economic conditions are expected to continue to improve at a more accelerated pace. However, business activities across certain industries and regions continue to face challenges due to slow global economic growth. If commodity prices, inclusive of energy, decline or remain depressed for an extended period of time, certain industries and the overall economy could be negatively impacted. In addition, any deterioration in global economic conditions, including those that could follow a withdrawal of the United Kingdom from the European Union and other political trends toward nationalism, could slow the recovery of the domestic economy or negatively impact the Company’s borrowers or other counterparties that have direct or indirect exposure to these regions.

Credit Diversification The Company manages its credit risk, in part, through diversification of its loan portfolio and limit setting by product type criteria and 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 and other consumer loans. These consumer lending products are primarily offered through the branch office network, home mortgage and loan production offices, on-line banking and indirect distribution channels, such as auto 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 2016.

The commercial loan class is diversified among various industries with somewhat higher concentrations in manufacturing, finance and insurance, retail trade, wholesale trade, and real estate, rental and leasing. Additionally, the commercial loan class is diversified across the Company’s geographical markets with 64.7 percent of total commercial loans within the Company’s Consumer and Small Business Banking region. Credit relationships outside of the Company’s Consumer and Small Business Banking region relate to the corporate banking, mortgage banking, auto dealer and leasing businesses, focusing on large national customers and specifically targeted industries. Loans to mortgage banking customers are primarily warehouse lines which are collateralized with the underlying mortgages. The Company regularly monitors its mortgage collateral position to manage its risk exposure. Table 7 provides a summary of significant industry groups and geographical locations of commercial loans outstanding at December 31, 2016 and 2015. Included within the commercial lending segment are energy loans, which represented 1.0 percent of the Company’s total loans outstanding at December 31, 2016. The effects of low energy prices during 2016 have increased criticized commitments and nonperforming loans at December 31, 2016 compared with December 31, 2015.

The following table provides a summary of the Company’s energy loans:


(Dollars in Millions)	December 31, 2016			December 31, 2015
Loans outstanding	$	2,642		$	3,183
Total commitments outstanding		10,955			12,118
Total criticized commitments outstanding		2,847			1,886
Nonperforming assets		257			19
Allowance for credit losses as a percentage of loans outstanding		7.8	%		5.4	%

The commercial real estate loan class reflects the Company’s focus on serving business owners within its geographic footprint 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 8 provides a summary of the significant property types and geographical locations of commercial real estate loans outstanding at December 31, 2016 and 2015. At December 31, 2016, approximately 25.3 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 and retail properties. From a geographical perspective, the Company’s commercial real estate loan class is generally well diversified. However, at December 31, 2016, 24.9 percent of the Company’s commercial real estate loans were secured by collateral in California, which has historically experienced higher delinquency levels and credit quality deterioration in recessionary periods due to excess inventory levels and declining valuations. Included in commercial real estate at year-end 2016 was approximately $657 million in loans related to land held for development and $623 million of loans related to residential and commercial acquisition and development properties. These loans are subject to quarterly monitoring for changes in local market conditions due to a higher credit risk profile. The commercial real estate loan class is diversified across the Company’s geographical markets with 82.6 percent of total commercial real estate loans outstanding at December 31, 2016, within the Company’s Consumer and Small Business Banking region.

The Company’s consumer lending segment utilizes several distinct business processes and channels to originate consumer credit, including traditional branch lending, on-line banking, indirect lending, portfolio acquisitions, correspondent banks and loan brokers. 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, 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 a LTV or CLTV, primarily due to lack of availability of relevant automated valuation model and/or home price indices values, or lack of necessary valuation data on acquired loans.

The following tables provide summary information of residential mortgages and home equity and second mortgages by LTV and borrower type at December 31, 2016:


Residential Mortgages (Dollars in Millions)	Interest Only		Amortizing		Total		Percent of Total
Loan-to-Value
Less than or equal to 80%	$	1,741	$	46,487	$	48,228		84.2	%
Over 80% through 90%		26		3,464		3,490		6.1
Over 90% through 100%		20		919		939		1.7
Over 100%		8		813		821		1.4
No LTV available		2		63		65		.1
Loans purchased from GNMA mortgage pools^(a)		–		3,731		3,731		6.5

Total	$	1,797	$	55,477	$	57,274		100.0	%
Borrower Type
Prime borrowers	$	1,796	$	50,331	$	52,127		91.0	%
Sub-prime borrowers		–		940		940		1.7
Other borrowers		1		475		476		.8
Loans purchased from GNMA mortgage pools^(a)		–		3,731		3,731		6.5

Total	$	1,797	$	55,477	$	57,274		100.0	%

(a)

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


Home Equity and Second Mortgages (Dollars in Millions)	Lines		Loans		Total		Percent of Total
Loan-to-Value
Less than or equal to 80%	$	11,620	$	559	$	12,179		74.4	%
Over 80% through 90%		2,151		656		2,807		17.2
Over 90% through 100%		636		153		789		4.8
Over 100%		422		37		459		2.8
No LTV/CLTV available		118		17		135		.8

Total	$	14,947	$	1,422	$	16,369		100.0	%
Borrower Type
Prime borrowers	$	14,592	$	1,315	$	15,907		97.2	%
Sub-prime borrowers		62		95		157		.9
Other borrowers		293		12		305		1.9

Total	$	14,947	$	1,422	$	16,369		100.0	%

The total amount of consumer lending segment residential mortgage, home equity and second mortgage loans to customers that may be defined as sub-prime borrowers represented only 0.2 percent of total assets at December 31, 2016, compared with 0.3 percent at December 31, 2015. The Company considers sub-prime loans to be those made to borrowers with a risk of default significantly higher than those approved for prime lending programs, as reflected in credit scores obtained from independent agencies at loan origination, in addition to other credit underwriting criteria. Sub-prime portfolios include only loans originated according to the Company’s

underwriting programs specifically designed to serve customers with weakened credit histories. The sub-prime designation indicators have been and will continue to be subject to re-evaluation over time as borrower characteristics, payment performance and economic conditions change. The sub-prime loans originated during periods from June 2009 and after are with borrowers who met the Company’s program guidelines and have a credit score that generally is at or below a threshold of 620 to 650 depending on the program. Sub-prime loans originated during periods prior to June 2009 were based upon program level guidelines without regard to credit score.

Home equity and second mortgages were $16.4 billion at December 31, 2016, unchanged from December 31, 2015, and included $4.9 billion of home equity lines in a first lien position and $11.5 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, 2016, included approximately $4.7 billion of loans and lines for which the Company also serviced the related first lien loan, and approximately $6.8 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, 2016:


	Junior Liens Behind
(Dollars in Millions)	Company Owned or Serviced First Lien			Third Party First Lien			Total
Total	$	4,754		$	6,761		$	11,515
Percent 30-89 days past due		.29	%		.41	%		.36	%
Percent 90 days or more past due		.09	%		.10	%		.09	%
Weighted-average CLTV		73	%		70	%		71	%
Weighted-average credit score		775			768			771

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 segment and geographies. Diversification in the credit card portfolio is achieved with broad customer relationship distribution through the Company’s and financial institution partner branches, retail and affinity partners, and digital channels.

Tables 9, 10 and 11 provide a geographical summary of the residential mortgage, credit card and other retail loan portfolios, respectively.

Covered assets were acquired by the Company in FDIC-assisted transactions and include loans with characteristics indicative of a high credit risk profile, including a substantial concentration in California and loans with negative-amortization payment options. Because these loans are covered under loss sharing agreements with the FDIC, the Company’s financial exposure to losses from these assets is substantially reduced. To the extent actual losses exceed the Company’s estimates at acquisition, the Company’s financial risk would only be its share of those losses under the loss sharing agreements. As of December 31, 2016, the loss share coverage provided by the FDIC has expired on all previously covered assets, except for residential mortgages and home equity and second mortgage loans that remain covered under loss sharing agreements with remaining terms of up to three years.

TABLE 15 _Delinquent

_{Loan Ratios as a Percent of Ending Loan Balances}


At December 31 90 days or more past due excluding nonperforming loans	2016			2015			2014			2013			2012
Commercial
Commercial		.06	%		.06	%		.05	%		.08	%		.10	%
Lease financing		–			–			–			–			–

Total commercial		.06			.05			.05			.08			.09
Commercial Real Estate
Commercial mortgages		.01			–			.02			.02			.02
Construction and development		.05			.13			.14			.30			.02

Total commercial real estate		.02			.03			.05			.07			.02
Residential Mortgages^(a)		.27			.33			.40			.65			.64
Credit Card		1.16			1.09			1.13			1.17			1.27
Other Retail
Retail leasing		.02			.02			.02			–			.02
Home equity and second mortgages		.25			.25			.26			.32			.30
Other		.13			.11			.12			.14			.17

Total other retail^(b)		.15			.15			.15			.18			.20

Total loans, excluding covered loans		.20			.21			.23			.31			.31
Covered Loans		5.53			6.31			7.48			5.63			5.86

Total loans		.28	%		.32	%		.38	%		.51	%		.59	%


At December 31 90 days or more past due including nonperforming loans	2016			2015			2014			2013			2012
Commercial		.57	%		.25	%		.19	%		.27	%		.27	%
Commercial real estate		.31			.33			.65			.83			1.50
Residential mortgages^(a)		1.31			1.66			2.07			2.16			2.14
Credit card		1.18			1.13			1.30			1.60			2.12
Other retail^(b)		.45			.46			.53			.58			.66

Total loans, excluding covered loans		.71			.67			.83			.97			1.11
Covered loans		5.68			6.48			7.74			7.13			9.28

Total loans		.78	%		.78	%		.97	%		1.19	%		1.52	%

(a)

Delinquent loan ratios exclude $2.5 billion, $2.9 billion, $3.1 billion, $3.7 billion, and $3.2 billion at December 31, 2016, 2015, 2014, 2013, and 2012, 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 5.73 percent, 7.15 percent, 8.02 percent, 9.34 percent, and 9.45 percent at December 31, 2016, 2015, 2014, 2013, and 2012, respectively.

(b)

Delinquent loan ratios exclude student loans that are guaranteed by the federal government. Including these loans, the ratio of total other retail loans 90 days or more past due including all nonperforming loans was .63 percent, .75 percent, .84 percent, .93 percent, and 1.08 percent at December 31, 2016, 2015, 2014, 2013, and 2012, 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 an account is considered delinquent if the minimum payment contractually required to be made is not received by the specified date on the billing statement. The Company measures delinquencies, both including and excluding nonperforming loans, to enable comparability with other companies. Delinquent loans purchased from Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs, as well as student loans guaranteed by the federal government, 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. To

qualify for re-aging, the account must have been open for at least nine months and cannot have been re-aged during the preceding 365 days. An account may not be re-aged more than two times in a five-year period. To qualify for re-aging, the customer must also have made three regular minimum monthly payments within the last 90 days. 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. Such additional re-ages are limited to one in a five-year period and must meet the qualifications for re-aging described above. All re-aging strategies must be independently approved by the Company’s risk management department. Commercial lending loans are generally not subject to re-aging policies.

Accruing loans 90 days or more past due totaled $764 million ($552 million excluding covered loans) at December 31, 2016, compared with $831 million ($541 million excluding covered loans) at December 31, 2015, and $945 million ($550 million excluding covered loans) at December 31, 2014. 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 0.28 percent (0.20 percent excluding covered loans) at December 31, 2016, compared with 0.32 percent (0.21 percent excluding covered loans) at December 31, 2015, and 0.38 percent (0.23 percent excluding covered loans) at December 31, 2014.

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)	2016		2015		2016			2015
Residential Mortgages^(a)
30-89 days	$	151	$	170		.26	%		.32	%
90 days or more		156		176		.27			.33
Nonperforming		595		712		1.04			1.33
Total	$	902	$	1,058		1.57	%		1.98	%

Credit Card
30-89 days	$	284	$	243		1.31	%		1.15	%
90 days or more		253		228		1.16			1.09
Nonperforming		3		9		.01			.04
Total	$	540	$	480		2.48	%		2.28	%

Other Retail
Retail Leasing
30-89 days	$	18	$	11		.28	%		.21	%
90 days or more		1		1		.02			.02
Nonperforming		2		3		.03			.06
Total	$	21	$	15		.33	%		.29	%
Home Equity and Second Mortgages
30-89 days	$	60	$	59		.37	%		.36	%
90 days or more		41		41		.25			.25
Nonperforming		128		136		.78			.83
Total	$	229	$	236		1.40	%		1.44	%
Other^(b)
30-89 days	$	206	$	154		.66	%		.52	%
90 days or more		41		33		.13			.11
Nonperforming		27		23		.09			.08
Total	$	274	$	210		.88	%		.71	%

(a)

Excludes $273 million of loans 30-89 days past due and $2.5 billion of loans 90 days or more past due at December 31, 2016, purchased from GNMA mortgage pools that continue to accrue interest, compared with $320 million and $2.9 billion at December 31, 2015, respectively.

(b)

Includes revolving credit, installment, automobile and student loans.

The following table provides summary delinquency information for covered loans:


	Amount				As a Percent of Ending Loan Balances
At December 31 (Dollars in Millions)	2016		2015		2016			2015
30-89 days	$	55	$	62		1.43	%		1.35	%
90 days or more		212		290		5.53			6.31
Nonperforming		6		8		.16			.17
Total	$	273	$	360		7.12	%		7.83	%

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, 2016, performing TDRs were $4.2 billion, compared with $4.7 billion, $5.1 billion, $6.0 billion and $5.6 billion at December 31, 2015, 2014, 2013 and 2012, respectively. Loans classified as TDRs are considered impaired loans for reporting and measurement purposes.

The Company continues to work with customers to modify loans for borrowers who are experiencing financial difficulties, including those acquired through FDIC-assisted acquisitions. 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 participates in the United States Department of the Treasury Home Affordable Modification Program (“HAMP”). HAMP gives qualifying homeowners an opportunity to permanently modify their loan and achieve more affordable monthly payments, with the United States Department of the Treasury compensating the Company for a portion of the reduction in monthly amounts due from borrowers participating in this program. The Company also modifies residential mortgage loans under Federal Housing Administration, United States Department of Veterans Affairs, and its own internal programs. Under these programs, the Company provides concessions to qualifying borrowers experiencing financial difficulties. The 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.

Modifications to loans in the covered segment are similar in nature to that described above for non-covered loans, and the evaluation and determination of TDR status is similar, except that acquired loans restructured after acquisition are not considered TDRs for purposes of the Company’s accounting and disclosure if the loans evidenced credit deterioration as of the acquisition date and are accounted for in pools. Losses associated with modifications on covered loans, including the economic impact of interest rate reductions, are generally eligible for reimbursement under the loss sharing agreements.

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, 2016 (Dollars in Millions)	Performing TDRs		30-89 Days Past Due			90 Days or More Past Due			Nonperforming TDRs			Total TDRs
Commercial	$	366		1.4	%		1.3	%	$	313	^(a)	$	679
Commercial real estate		169		2.1			.1			22	^(b)		191
Residential mortgages		1,679		3.1			3.8			425			2,104	^(d)
Credit card		219		11.1			7.1			3	^(c)		222
Other retail		124		4.5			3.7			49	^(c)		173	^(e)
TDRs, excluding GNMA and covered loans		2,557		3.6			3.5			812			3,369
Loans purchased from GNMA mortgage pools^(g)		1,574		–			–			–			1,574	^(f)
Covered loans		30		3.5			9.8			5			35
Total	$	4,161		2.2	%		2.2	%	$	817		$	4,978

(a)

Primarily represents loans less than six months from the modification date that have not met the performance period required to return to accrual status (generally six months) and small business credit cards with a modified rate equal to 0 percent.

(b)

Primarily represents loans less than six months from the modification date that have not met the performance period required to return to accrual status (generally six months).

(c)

Primarily represents loans with a modified rate equal to 0 percent.

(d)

Includes $270 million of residential mortgage loans to borrowers that have had debt discharged through bankruptcy and $70 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

(e)

Includes $89 million of other retail loans to borrowers that have had debt discharged through bankruptcy and $7 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

(f)

Includes $346 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 $466 million in trial period arrangements or previously placed in trial period arrangements but not successfully completed.

(g)

Approximately 4.9 percent and 68.7 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 Modifications The Company makes short-term modifications that it does not consider to be TDRs, in limited circumstances, to assist borrowers experiencing temporary hardships. Consumer lending 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. Short-term modifications were not material at December 31, 2016.

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. Nonperforming assets are generally either originated by the Company or acquired under FDIC loss sharing agreements that substantially reduce the risk of credit losses to 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, 2016, total nonperforming assets were $1.6 billion, compared with $1.5 billion at December 31, 2015 and $1.8 billion at December 31, 2014. The $80 million (5.3 percent) increase in nonperforming assets, from December 31, 2015 to December 31, 2016, was primarily driven by a $238 million increase in nonperforming commercial loans within the energy portfolio, partially offset by improvements in the Company’s residential real estate portfolio, as economic conditions continued to slowly improve during 2016. Excluding energy loans, nonperforming assets decreased 10.5 percent at December 31, 2016, compared with December 31, 2015. Nonperforming covered assets at December 31, 2016 were $32 million, compared with $40 million at December 31, 2015 and $51 million at December 31, 2014. The ratio of total nonperforming assets to total loans and other real estate was 0.59 percent at December 31, 2016, compared with 0.58 percent at December 31, 2015, and 0.73 percent at December 31, 2014.

OREO, excluding covered assets, was $186 million at December 31, 2016, compared with $280 million at December 31, 2015 and $288 million at December 31, 2014, 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.

TABLE 16 _{Nonperforming Assets (a)}


At December 31 (Dollars in Millions)	2016			2015			2014			2013			2012
Commercial
Commercial	$	443		$	160		$	99		$	122		$	107
Lease financing		40			14			13			12			16
Total commercial		483			174			112			134			123
Commercial Real Estate
Commercial mortgages		87			92			175			182			308
Construction and development		37			35			84			121			238
Total commercial real estate		124			127			259			303			546
Residential Mortgages^(b)		595			712			864			770			661
Credit Card		3			9			30			78			146
Other Retail
Retail leasing		2			3			1			1			1
Home equity and second mortgages		128			136			170			167			189
Other		27			23			16			23			27
Total other retail		157			162			187			191			217
Total nonperforming loans, excluding covered loans		1,362			1,184			1,452			1,476			1,693
Covered Loans		6			8			14			127			386
Total nonperforming loans		1,368			1,192			1,466			1,603			2,079
Other Real Estate^(c)(d)		186			280			288			327			381
Covered Other Real Estate^(d)		26			32			37			97			197
Other Assets		23			19			17			10			14
Total nonperforming assets	$	1,603		$	1,523		$	1,808		$	2,037		$	2,671
Total nonperforming assets, excluding covered assets	$	1,571		$	1,483		$	1,757		$	1,813		$	2,088
Excluding covered assets
Accruing loans 90 days or more past due^(b)	$	552		$	541		$	550		$	713		$	660
Nonperforming loans to total loans		.51	%		.46	%		.60	%		.65	%		.80	%
Nonperforming assets to total loans plus other real estate^(c)		.58	%		.58	%		.72	%		.80	%		.98	%
Including covered assets
Accruing loans 90 days or more past due^(b)	$	764		$	831		$	945		$	1,189		$	1,323
Nonperforming loans to total loans		.50	%		.46	%		.59	%		.68	%		.93	%
Nonperforming assets to total loans plus other real estate^(c)		.59	%		.58	%		.73	%		.86	%		1.19	%

Changes in Nonperforming Assets


(Dollars in Millions)	Commercial and Commercial Real Estate			Residential Mortgages, Credit Card and Other Retail			Covered Assets			Total
Balance December 31, 2015	$	336		$	1,147		$	40		$	1,523
Additions to nonperforming assets
New nonaccrual loans and foreclosed properties		1,051			431			22			1,504
Advances on loans		59			–			–			59
Total additions		1,110			431			22			1,563
Reductions in nonperforming assets
Paydowns, payoffs		(273	)		(256	)		(3	)		(532	)
Net sales		(218	)		(184	)		(25	)		(427	)
Return to performing status		(29	)		(119	)		(1	)		(149	)
Charge-offs^(e)		(303	)		(71	)		(1	)		(375	)
Total reductions		(823	)		(630	)		(30	)		(1,483	)
Net additions to (reductions in) nonperforming assets		287			(199	)		(8	)		80
Balance December 31, 2016	$	623		$	948		$	32		$	1,603

(a)

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

(b)

Excludes $2.5 billion, $2.9 billion, $3.1 billion, $3.7 billion and $3.2 billion at December 31, 2016, 2015, 2014, 2013 and 2012, respectively, of loans purchased from GNMA mortgage pools that are 90 days or more past due that continue to accrue interest, as their repayments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.

(c)

Foreclosed GNMA loans of $373 million, $535 million, $641 million, $527 million and $548 million at December 31, 2016, 2015, 2014, 2013 and 2012, respectively, continue to accrue interest and are recorded as other assets and excluded from nonperforming assets because they are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.

(d)

Includes equity investments in entities whose principal assets are other real estate owned.

(e)

Charge-offs exclude actions for certain card products and loan sales that were not classified as nonperforming at the time the charge-off occurred.

The following table provides an analysis of OREO, excluding covered assets, as a percent of their related loan balances, including geographical location detail for residential (residential mortgage, home equity and second mortgage) and commercial (commercial and commercial real estate) loan balances:


At December 31 (Dollars in Millions)	Amount				As a Percent of Ending Loan Balances
At December 31 (Dollars in Millions)	2016		2015		2016			2015
Residential
Illinios	$	15	$	18		.35	%		.42	%
Minnesota		12		23		.19			.37
Wisconsin		11		11		.50			.49
New York		9		9		1.16			1.13
Ohio		9		17		.31			.56
All other states		119		172		.21			.32

Total residential		175		250		.24			.36
Commercial
California		4		11		.02			.05
Tennessee		1		1		.04			.04
Iowa		1		1		.03			.04
Illinois		1		5		.02			.08
New Jersey		1		1		.04			.04
All other states		3		11		–			.01

Total commercial		11		30		.01			.02

Total	$	186	$	280		.07	%		.11	%

TABLE 17 _{Net Charge-Offs as a Percent of Average Loans
Outstanding}


Year Ended December 31	2016			2015			2014			2013			2012
Commercial
Commercial		.35	%		.26	%		.26	%		.19	%		.43	%
Lease financing		.34			.27			.17			.06			.63
Total commercial		.35			.26			.26			.18			.45
Commercial Real Estate
Commercial mortgages		(.01	)		.02			(.03	)		.08			.37
Construction and development		(.08	)		(.33	)		(.05	)		(.87	)		.86
Total commercial real estate		(.03	)		(.07	)		(.03	)		(.09	)		.45
Residential Mortgages		.11			.21			.38			.57			1.09
Credit Card		3.30			3.61			3.73			3.90			4.01
Other Retail
Retail leasing		.09			.09			.03			.02			.04
Home equity and second mortgages		.01			.24			.61			1.33			1.72
Other		.71			.65			.71			.81			.94
Total other retail		.42			.45			.60			.89			1.13
Total loans, excluding covered loans		.48			.48			.57			.66			1.03
Covered Loans		–			–			.15			.32			.08
Total loans		.47	%		.47	%		.55	%		.64	%		.97	%

Analysis of Loan Net Charge-offs Total loan net charge-offs were $1.3 billion in 2016, compared with $1.2 billion in 2015 and $1.3 billion in 2014. The increase in total net charge-offs in 2016, compared with 2015, reflected higher commercial loan net charge-offs and lower commercial real estate recoveries, partially offset by lower charge-offs related to residential mortgages and home equity loans. The ratio of total loan net charge-offs to average loans was 0.47 percent in 2016, compared with 0.47 percent in 2015 and 0.55 percent in 2014.

Commercial and commercial real estate loan net charge-offs for 2016 were $312 million (0.23 percent of average loans outstanding), compared with $191 million (0.15 percent of average loans outstanding) in 2015 and $182 million (0.16 percent of average loans outstanding) in 2014. The increase in net charge-offs in 2016, compared with 2015, reflected higher commercial loan net charge-offs and lower commercial real estate recoveries in 2016. The increase in net charge-offs in 2015, compared with 2014, reflected lower commercial loan recoveries in 2015.

Residential mortgage loan net charge-offs for 2016 were $60 million (0.11 percent of average loans outstanding), compared with $109 million (0.21 percent of average loans outstanding) in 2015 and $195 million (0.38 percent of average loans outstanding) in 2014. Credit card loan net charge-offs in 2016 were $676 million (3.30 percent of average loans outstanding), compared with $651 million (3.61 percent of average loans outstanding) in 2015 and $658 million (3.73 percent of average loans outstanding) in 2014. Other retail loan net charge-offs for 2016 were $221 million (0.42 percent of average loans outstanding), compared with $221 million (0.45 percent of average loans outstanding) in 2015 and $288 million (0.60 percent of average loans outstanding) in 2014. The decrease in total residential mortgage, credit card and other retail loan net charge-offs in 2016, compared with 2015, reflected continued improvement in economic conditions during 2016. The decrease in total residential mortgage, credit card and other retail loan net charge-offs in 2015, compared with 2014, reflected improvement in economic conditions during 2015.

Analysis and Determination of the Allowance for Credit Losses The allowance for credit losses reserves for probable and estimable losses incurred in the Company’s loan and lease portfolio, including unfunded credit commitments, and includes certain amounts that do not represent loss exposure to the Company because those losses are recoverable under loss sharing agreements with the FDIC. The allowance for credit losses is increased through provisions charged to operating earnings and reduced by net charge-offs. Management evaluates the allowance each quarter to ensure it appropriately reserves for incurred losses. The evaluation of each element and the overall allowance is based on a continuing assessment of problem loans, recent loss experience and other factors, including external factors such as regulatory guidance and economic conditions. Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its

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

At December 31, 2016, the allowance for credit losses was $4.4 billion (1.59 percent of period-end loans), compared with an allowance of $4.3 billion (1.65 percent of period-end loans) at December 31, 2015. The ratio of the allowance for credit losses to nonperforming loans was 318 percent at December 31, 2016, compared with 361 percent at December 31, 2015, reflecting an increase in nonperforming loans within the energy portfolio. The ratio of the allowance for credit losses to annual loan net charge-offs at December 31, 2016, was 343 percent, compared with 367 percent at December 31, 2015, reflecting higher total net charge-offs during 2016. Management determined the allowance for credit losses was appropriate at December 31, 2016.

The allowance recorded for loans in the commercial lending segment is based on reviews of individual credit relationships and considers the migration analysis of commercial lending segment loans and actual loss experience. In the migration analysis applied to risk rated loan portfolios, the Company currently examines up to a 16-year period of historical loss experience. For each loan type, this historical loss experience is adjusted as necessary to consider any relevant changes in portfolio composition, lending policies, underwriting standards, risk management practices or economic conditions. The results of the analysis are evaluated quarterly to confirm an appropriate historical timeframe is selected for each commercial loan type. The allowance recorded for impaired loans greater than $5 million in the commercial lending segment is based on an individual loan 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, rather than the migration analysis. The allowance recorded for all other commercial lending segment loans is determined on a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, and historical losses, adjusted for current trends. The allowance established for commercial lending segment loans was $2.3 billion at December 31, 2016, compared with $2.0 billion at December 31, 2015, reflecting growth in the portfolios and the uncertain outlook for loans in the energy portfolio. At December 31, 2016 the Company had credit reserves of 7.8 percent of total energy loan balances, compared with 5.4 percent at December 31, 2015.

The allowance recorded for TDR loans and purchased impaired 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, or the prior quarter effective rate, respectively. The allowance for collateral-dependent loans in the consumer lending segment is determined based on the fair value of the collateral less costs to sell. The allowance recorded for all other consumer lending segment loans is determined on a homogenous pool basis and

includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, delinquency status, refreshed LTV ratios when possible, portfolio growth and historical losses, adjusted for current trends. Credit card and other retail loans 90 days or more past due are generally not placed on nonaccrual status because of the relatively short period of time to charge-off and, therefore, are excluded from nonperforming loans and measures that include nonperforming loans as part of the calculation.

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, 2016, the Company serviced the first lien on 41 percent of the home equity loans and lines in a junior lien position. The Company also considers information received from its primary regulator on the status of the first liens that are serviced by other large servicers in the industry and the status of first lien mortgage accounts reported on customer credit bureau files. Regardless of whether or not 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 $313 million or 1.9 percent of its total home equity portfolio at December 31, 2016, represented non-delinquent junior liens where the first lien was delinquent or modified.

The Company uses historical loss experience on the loans and lines in a junior lien position where the first lien is serviced by the Company, or can be identified in credit bureau data, to establish loss estimates for junior lien loans and lines the Company services that are current, but the first lien is delinquent or

modified. Historically, the number of junior lien defaults has been a small percentage of the total portfolio (approximately 1.1 percent annually), while the long-term average loss rate on loans that default has been approximately 90 percent. In addition, the Company obtains updated credit scores on its home equity portfolio each quarter, and in some cases more frequently, and uses this information to qualitatively supplement its loss estimation methods. Credit score distributions for the portfolio are monitored monthly and any changes in the distribution are one of the factors considered in assessing the Company’s loss estimates. 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 and with residential lines and loans that have a balloon payoff provision.

The allowance established for consumer lending segment loans was $2.1 billion at December 31, 2016, compared with $2.3 billion at December 31, 2015. The $196 million (8.7 percent) decrease in the allowance for consumer lending segment loans at December 31, 2016, compared with December 31, 2015, reflected the impact of improving economic conditions during 2016, partially offset by portfolio growth.

The allowance for the covered loan segment is evaluated each quarter in a manner similar to that described for non-covered loans, and represents any decreases in expected cash flows on those loans after the acquisition date. The provision for credit losses for covered loans considers the indemnification provided by the FDIC. The allowance established for covered loans was $34 million at December 31, 2016, compared with $38 million at December 31, 2015, reflecting expected credit losses in excess of initial fair value adjustments.

TABLE 18 _{Summary of Allowance for Credit Losses}


(Dollars in Millions)	2016			2015			2014			2013			2012
Balance at beginning of year	$	4,306		$	4,375		$	4,537		$	4,733		$	5,014
Charge-Offs
Commercial
Commercial		388			289			278			212			312
Lease financing		29			25			27			34			66

Total commercial		417			314			305			246			378
Commercial real estate
Commercial mortgages		12			20			21			71			145
Construction and development		10			2			15			21			97

Total commercial real estate		22			22			36			92			242
Residential mortgages		85			135			216			297			461
Credit card		759			726			725			739			769
Other retail
Retail leasing		9			8			6			5			9
Home equity and second mortgages		40			73			121			237			327
Other		283			238			257			281			330

Total other retail		332			319			384			523			666
Covered loans^(a)		–			–			13			37			11

Total charge-offs		1,615			1,516			1,679			1,934			2,527
Recoveries
Commercial
Commercial		81			84			92			95			72
Lease financing		11			11			18			31			31

Total commercial		92			95			110			126			103
Commercial real estate
Commercial mortgages		16			15			30			45			31
Construction and development		19			35			19			80			45

Total commercial real estate		35			50			49			125			76
Residential mortgages		25			26			21			25			23
Credit card		83			75			67			83			102
Other retail
Retail leasing		4			3			4			4			7
Home equity and second mortgages		39			35			26			26			26
Other		68			60			66			75			92

Total other retail		111			98			96			105			125
Covered loans^(a)		–			–			2			5			1

Total recoveries		346			344			345			469			430
Net Charge-Offs
Commercial
Commercial		307			205			186			117			240
Lease financing		18			14			9			3			35

Total commercial		325			219			195			120			275
Commercial real estate
Commercial mortgages		(4	)		5			(9	)		26			114
Construction and development		(9	)		(33	)		(4	)		(59	)		52

Total commercial real estate		(13	)		(28	)		(13	)		(33	)		166
Residential mortgages		60			109			195			272			438
Credit card		676			651			658			656			667
Other retail
Retail leasing		5			5			2			1			2
Home equity and second mortgages		1			38			95			211			301
Other		215			178			191			206			238

Total other retail		221			221			288			418			541
Covered loans^(a)		–			–			11			32			10

Total net charge-offs		1,269			1,172			1,334			1,465			2,097
Provision for credit losses		1,324			1,132			1,229			1,340			1,882
Other changes^(b)		(4	)		(29	)		(57	)		(71	)		(66	)

Balance at end of year	$	4,357		$	4,306		$	4,375		$	4,537		$	4,733

Components
Allowance for loan losses	$	3,813		$	3,863		$	4,039		$	4,250		$	4,424
Liability for unfunded credit commitments		544			443			336			287			309

Total allowance for credit losses	$	4,357		$	4,306		$	4,375		$	4,537		$	4,733

Allowance for Credit Losses as a Percentage of
Period-end loans, excluding covered loans		1.60	%		1.67	%		1.78	%		1.94	%		2.15	%
Nonperforming loans, excluding covered loans		317			360			297			297			269
Nonperforming and accruing loans 90 days or more past due, excluding covered loans		226			247			215			201			194
Nonperforming assets, excluding covered assets		275			288			245			242			218
Net charge-offs, excluding covered loans		341			364			326			306			218
Period-end loans		1.59	%		1.65	%		1.77	%		1.93	%		2.12	%
Nonperforming loans		318			361			298			283			228
Nonperforming and accruing loans 90 days or more past due		204			213			181			163			139
Nonperforming assets		272			283			242			223			177
Net charge-offs		343			367			328			310			226

(a)

Relates to covered loan charge-offs and recoveries not reimbursable by the FDIC.

(b)

Includes net changes in credit losses to be reimbursed by the FDIC and beginning in 2013, reductions in the allowance for covered loans where the reversal of a previously recorded allowance was offset by an associated decrease in the indemnification asset, and the impact of any loan sales.

TABLE 19 _{Elements of the Allowance for Credit Losses}


	Allowance Amount										Allowance as a Percent of Loans
At December 31 (Dollars in Millions)	2016		2015		2014		2013		2012		2016			2015			2014			2013			2012
Commercial
Commercial	$	1,376	$	1,231	$	1,094	$	1,019	$	979		1.56	%		1.48	%		1.46	%		1.57	%		1.61	%
Lease financing		74		56		52		56		72		1.36			1.06			.97			1.06			1.31
Total commercial		1,450		1,287		1,146		1,075		1,051		1.55			1.46			1.43			1.53			1.59

Commercial Real Estate
Commercial mortgages		282		285		479		532		641		.89			.90			1.44			1.65			2.07
Construction and development		530		439		247		244		216		4.61			4.24			2.62			3.17			3.63
Total commercial real estate		812		724		726		776		857		1.88			1.72			1.70			1.95			2.32
Residential Mortgages		510		631		787		875		935		.89			1.18			1.52			1.71			2.12
Credit Card		934		883		880		884		863		4.29			4.20			4.75			4.91			5.04

Other Retail
Retail leasing		11		12		14		14		11		.17			.23			.24			.24			.20
Home equity and second mortgages		300		448		470		497		583		1.83			2.73			2.95			3.22			3.49
Other		306		283		287		270		254		.98			.96			1.04			1.03			.99
Total other retail		617		743		771		781		848		1.15			1.45			1.57			1.64			1.78
Covered Loans		34		38		65		146		179		.89			.83			1.23			1.73			1.58
Total allowance	$	4,357	$	4,306	$	4,375	$	4,537	$	4,733		1.59	%		1.65	%		1.77	%		1.93	%		2.12	%

In addition, the evaluation of the appropriate allowance for credit losses for purchased non-impaired loans acquired after January 1, 2009, in the various loan segments considers credit discounts recorded as a part of the initial determination of the fair value of the loans. For these loans, no allowance for credit losses is recorded at the purchase date. Credit discounts representing the principal losses expected over the life of the loans are a component of the initial fair value. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Company records a provision for credit losses only when the required allowance, net of any expected reimbursement under any loss sharing agreements with the FDIC, exceeds any remaining credit discounts.

The evaluation of the appropriate allowance for credit losses for purchased impaired loans in the various loan segments considers the expected cash flows to be collected from the borrower. These loans are initially recorded at fair value and therefore no allowance for credit losses is recorded at the purchase date.

Subsequent to the purchase date, the expected cash flows of purchased loans are subject to evaluation. Decreases in expected cash flows are recognized by recording an allowance for credit losses with the related provision for credit losses reduced for the amount reimbursable by the FDIC, where applicable. If the expected cash flows on the purchased loans increase such that a previously recorded impairment allowance can be reversed, the Company records a reduction in the allowance with a related reduction in losses reimbursable by the FDIC, where applicable. Increases in expected cash flows of purchased loans, when there are no reversals of previous impairment allowances, are recognized over the remaining life of the loans and resulting decreases in expected cash flows of the FDIC indemnification assets are amortized over the shorter of the remaining

contractual term of the indemnification agreements or the remaining life of the loans. Refer to Note 1 of the Notes to Consolidated Financial Statements, for more information.

The Company’s methodology for determining the appropriate allowance for credit losses for all the loan segments also considers the imprecision inherent in the methodologies used. As a result, in addition to the amounts determined under the methodologies described above, management also considers the potential impact of other qualitative factors which include, but are not limited to, economic factors; geographic and other concentration risks; delinquency and nonaccrual trends; current business conditions; changes in lending policy, underwriting standards and other relevant business practices; results of internal review; and the regulatory environment. The consideration of these items results in adjustments to allowance amounts included in the Company’s allowance for credit losses for each of the above loan segments. Table 19 shows the amount of the allowance for credit losses by loan class and underlying portfolio category.

Although the Company determines 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 incurred can vary significantly from the estimated amounts.

Residual Value Risk Management The Company manages its risk to changes in the residual value of leased 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 $4.9 billion of retail leasing residuals at December 31, 2016, compared with $4.4 billion at December 31, 2015. The Company monitors concentrations of leases by manufacturer and vehicle “make and model.” As of December 31, 2016, vehicle lease residuals related to sport utility vehicles were 43.6 percent of the portfolio, while auto and truck classes represented approximately 30.7 percent and 15.0 percent of the portfolio, respectively. At year-end 2016, the largest vehicle type represented 13.8 percent of the aggregate residual value of the vehicles in the portfolio. This risk is generally mitigated by collateral and residual value guarantees provided by the manufacturer. At December 31, 2016, the weighted-average origination term of the portfolio was 40 months, unchanged from December 31, 2015. At December 31, 2016, the commercial leasing portfolio had $468 million of residuals, compared with $511 million at December 31, 2015. At year-end 2016, lease residuals related to business and office equipment represented 34.7 percent of the total residual portfolio, and trucks and other transportation equipment represented 28.9 percent.

Operational Risk Management Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, or systems, or from external events, including the risk of loss resulting from fraud, litigation and breaches in data security. The Company operates in many different businesses in diverse markets and relies on the ability of its employees and systems to process a high number of transactions. Operational risk is inherent in all business activities, and the management of this risk is important to the achievement of the Company’s objectives. Business lines have direct and primary responsibility and accountability for identifying, controlling, and monitoring operational risks embedded in their business activities. 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 they do 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. However, attack attempts on the Company’s computer systems are 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.

The significant increase in regulation and regulatory oversight initiatives over the past several years has substantially increased the importance of the Company’s compliance risk management personnel and activities. For example, the Consumer Financial Protection Bureau (“CFPB”) has authority to prescribe rules, or issue orders or guidelines pursuant to any federal consumer financial law. The CFPB regulates and examines the Company, its bank and other subsidiaries with respect to matters that relate to these laws and consumer financial services and products. The CFPB’s rulemaking, examination and enforcement authority increases enforcement risk in this area including the potential for fines and penalties. 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, and the substantial changes to that regulation.

Interest Rate Risk Management In the banking industry, changes in interest rates are a significant risk that can impact earnings, market valuations and safety and soundness of an entity. To manage the impact on net interest income and the market value of assets and liabilities, the Company manages its exposure to changes in interest rates through asset and liability management activities within guidelines established by its Asset Liability 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. The Company uses net interest income simulation analysis and market value of equity modeling for measuring and analyzing consolidated interest rate risk.

Net Interest Income Simulation Analysis One of the primary tools used to measure interest rate risk and the effect of interest rate changes on net interest income is simulation analysis. The monthly 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 a 200 basis point (“bps”) upward or downward gradual change of market interest rates over a one-year period. The simulation also

estimates the effect of immediate and sustained parallel shifts in the yield curve of 50 bps as well as the effect of immediate and sustained flattening or steepening 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 through the selection of derivatives and various funding and investment portfolio strategies. The Company has established policy limits within which it manages the overall interest rate risk profile and at December 31, 2016 and 2015, the Company was within those limits.

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 assumptions based on historical information and expected behaviors, actual outcomes could vary significantly. For example, if deposit outflows are more limited (“stable”) than the assumptions the Company used in preparing Table 20, the projected impact to net interest income might increase to as much as 2.00 percent in the “Up 50 bps” and 3.73 percent in the “Up 200 bps” scenarios.

Market Value of Equity Modeling The Company also manages interest rate sensitivity by utilizing market value of equity modeling, which measures the degree to which the market values of the Company’s assets and liabilities and off-balance sheet instruments will change given a change in interest rates. The valuation analysis is dependent upon certain key assumptions about the nature of assets and liabilities with non-contractual maturities. Management estimates the average life and rate characteristics of asset and liability accounts based upon historical analysis and management’s expectation of rate behavior. Retail and wholesale loan prepayment assumptions are based on several key factors, including but not limited to, age, loan term, product type, seasonality and underlying contractual rates, as well as macroeconomic factors including unemployment, housing price indices, geography, interest rates and commercial real estate price indices. These factors are updated regularly based on historical experience and forward market expectations. The balance and pricing assumptions of

deposits that have no stated maturity are based on historical performance, the competitive environment, customer behavior, and product mix. These assumptions are validated on a periodic basis. A sensitivity analysis of key variables of the valuation analysis is provided to the ALCO monthly and is used to guide asset/liability management strategies.

Management measures the impact of changes in market interest rates under a number of scenarios, including immediate and sustained parallel shifts, and flattening or steepening of the yield curve. The ALCO policy limits the change in the market value of equity in +/- 200 bps parallel rate shocks and as of December 31, 2016 and 2015, the Company was within its policy limits. A 200 bps increase would have resulted in a 1.9 percent decrease in the market value of equity at December 31, 2016, compared with a 5.8 percent decrease at December 31, 2015. A 200 bps decrease, where possible given current rates, would have resulted in a 8.1 percent decrease in the market value of equity at December 31, 2016, compared with a 7.0 percent decrease at December 31, 2015.

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

–

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

–

To convert the cash flows associated with floating-rate debt from floating-rate payments to fixed-rate payments;

–

To mitigate changes in value of the Company’s mortgage origination pipeline, funded MLHFS and MSRs;

–

To mitigate remeasurement volatility of foreign currency denominated balances; and

–

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

The Company may enter into derivative contracts that are either exchange-traded, centrally cleared through clearinghouses or over-the-counter. 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 does not utilize derivatives for speculative purposes.

TABLE 20 _{Sensitivity of Net}

_{Interest Income}


	December 31, 2016											December 31, 2015
	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		(2.82	)%		1.52	%		*		1.82	%		*		1.78	%		*		2.69	%

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

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, 2016, to an immediate 25, 50 and 100 bps downward movement in interest rates would be a decrease of approximately $10 million, $29 million and $101 million, respectively. An immediate upward movement in interest rates at December 31, 2016, of 25, 50 and 100 bps would result in an increase of $1 million, and a decrease of $6 million and $44 million, in the fair value of the MSRs and related derivative instruments, respectively. Refer to Note 9 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, 2016, the Company had $6.5 billion of forward commitments to sell, hedging $3.7 billion of MLHFS and $3.5 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. 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 and 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 19 and 20 in the Notes to Consolidated Financial Statements.

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 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 trading positions and establishes policies for market risk management, including exposure limits for each portfolio. The Company uses a Value at Risk (“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 trading businesses 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 its corporate bond trading business, foreign currency transaction business, client derivatives business, loan trading business and municipal securities business. On average, the Company expects the one-day VaR to be exceeded by actual losses two to three times per year for its trading businesses. The Company monitors the effectiveness of its risk programs by back-testing the performance of its VaR models, regularly updating the historical data used by the VaR models and stress testing. 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 trading positions were as follows:


Year Ended December 31 (Dollars in Millions)	2016		2015
Average	$	1	$	1
High		2		2
Low		1		1
Period-end		1		1

The Company did not experience any actual trading losses for its combined trading businesses that exceeded VaR during 2016 and 2015. 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 trading portfolio. 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 trading positions were as follows:


Year Ended December 31 (Dollars in Millions)	2016		2015
Average	$	4	$	4
High		7		8
Low		2		2
Period-end		5		3

Valuations of positions in the client derivatives and foreign currency transaction businesses 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 the Company’s market risk management department. 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 the Company’s risk management department.

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. The Company monitors the effectiveness of the models through back-testing, updating the data and regular validations. A three-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)	2016		2015
Residential Mortgage Loans Held For Sale and Related Hedges
Average	$	–	$	1
High		2		2
Low		–		–
Mortgage Servicing Rights and Related Hedges
Average	$	9	$	6
High		11		8
Low		4		4

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 the contingency funding plan. The ALCO reviews the Company’s liquidity policy and guidelines, 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, name and market concentrations. The Company operates a Grand Cayman 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 include cash at the Federal Reserve Bank, unencumbered liquid assets, and capacity to borrow at the FHLB and the Federal Reserve Bank’s Discount Window. Unencumbered liquid assets in the Company’s available-for-sale and held-to-maturity investment portfolios provide asset liquidity through the Company’s ability to sell the securities or pledge and borrow against them. At December 31, 2016, the fair value of unencumbered available-for-sale and held-to-maturity investment securities totaled $100.6 billion, compared with $92.4 billion at December 31, 2015. Refer to Table 13 and “Balance Sheet Analysis” for further information on investment securities maturities and trends. Asset liquidity is further enhanced by the Company’s ability to pledge loans to access secured borrowing facilities through the FHLB and Federal Reserve Bank. At December 31, 2016, the Company could have borrowed an additional $91.4 billion at the FHLB and Federal Reserve Bank based on collateral available for additional borrowings.

TABLE 21 _{Debt Ratings}

Moody’s

Standard &
Poor’s

Fitch

Dominion
Bond
Rating Service

U.S. Bancorp

Long-term issuer rating

A+

Short-term issuer rating

A-1

F1+

R-1 (middle)

Senior unsecured debt

A+

Subordinated debt

A-

AA-

AA (low)

Junior subordinated debt

BBB

AA (low)

Preferred stock

BBB

BBB+

Commercial paper

P-1

A-1

F1+

U.S. Bank National Association

Long-term issuer rating

AA-

Short-term issuer rating

P-1

A-1+

F1+

R-1 (high)

Long-term deposits

Aa1

AA+

AA(high)

Short-term deposits

P-1

F1+

Senior unsecured debt

AA-

AA(high)

Subordinated debt

AA-

Commercial paper

P-1

A-1+

F1+

Counterparty risk assessment

Aa2(cr)/P-1(cr)

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 $334.6 billion at December 31, 2016, compared with $300.4 billion at December 31, 2015. Refer to Table 14 and “Balance Sheet Analysis” for further information on the Company’s deposits.

Additional funding is provided by long-term debt and short-term borrowings. Long-term debt was $33.3 billion at December 31, 2016, and is an important funding source because of its multi-year borrowing structure. Refer to Note 13 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 $14.0 billion at December 31, 2016, and supplement the Company’s other funding sources. Refer to Note 12 of the Notes to Consolidated Financial Statements and “Balance Sheet Analysis” for 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.

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 maintains

sufficient funding to meet expected parent company obligations, without access to the wholesale funding markets or dividends from subsidiaries, for 12 months when forecasted payments of common stock dividends are included and 24 months assuming dividends were reduced to zero. The parent company currently has available funds considerably greater than the amounts required to satisfy these conditions.

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, 2016, parent company long-term debt outstanding was $13.0 billion, compared with $11.5 billion at December 31, 2015. The increase was primarily due to the issuances of $2.6 billion of medium-term notes and $1.0 billion of subordinated notes, partially offset by the maturities of $1.3 billion of medium-term notes and $500 million of subordinated notes. At December 31, 2016, there was $1.3 billion of parent company debt scheduled to mature in 2017. 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.

TABLE 22 _{Contractual Obligations}


	Payments Due By Period
At December 31, 2016 (Dollars in Millions)	One Year or Less		Over One Through Three Years		Over Three Through Five Years		Over Five Years		Total
Contractual Obligations^(a)
Long-term debt^(b)	$	5,461	$	13,301	$	2,264	$	12,297	$	33,323
Operating leases		270		450		306		490		1,516
Benefit obligations^(c)		22		48		53		170		293
Time deposits		23,428		4,620		2,414		3		30,465
Contractual interest payments^(d)		1,004		1,130		836		1,186		4,156
Equity investment commitments		1,763		663		23		53		2,502
Other^(e)		431		32		14		123		600
Total	$	32,379	$	20,244	$	5,910	$	14,322	$	72,855

(a)

Unrecognized tax positions of $302 million at December 31, 2016, are excluded as the Company cannot make a reasonably reliable estimate of the period of cash settlement with the respective taxing authority.

(b)

Includes obligations under capital leases.

(c)

Amounts only include obligations related to the unfunded non-qualified pension plans.

(d)

Includes accrued interest and future contractual interest obligations.

(e)

Primarily includes purchase obligations for goods and services covered by noncancellable contracts including cancellation fees.

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 23 of the Notes to Consolidated Financial Statements.

Effective January 1, 2015, the Company became subject to a regulatory Liquidity Coverage Ratio (“LCR”) requirement. Certain transition provisions applied until the LCR rule was fully implemented on January 1, 2017. The LCR rule 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, 2016, the Company was compliant with the fully implemented LCR requirement based on its interpretation of the final United States LCR rule.

European Exposures Certain European countries have experienced slower than historical economic growth conditions over the past several years. The Company provides merchant processing and corporate trust services in Europe either directly or through banking affiliations in Europe. 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, 2016, the Company had an aggregate amount on deposit with European banks of approximately $7.0 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 further deterioration

in economic conditions in Europe is unlikely to have a significant effect on the Company related to these activities.

Off-Balance Sheet Arrangements Off-balance sheet arrangements include any contractual arrangements to which an unconsolidated entity is a party, under which the Company has an obligation to provide credit or liquidity enhancements or market risk support. Off-balance sheet 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.

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, 2016 were $293.4 billion. The Company also issues and confirms various types of letters of credit, including standby and commercial. Total contractual amounts of letters of credit at December 31, 2016 were $12.3 billion. For more information on the Company’s commitments to extend credit and letters of credit, refer to Note 22 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 net investment in these entities as of December 31, 2016 was approximately $2.5 billion.

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 $28 million at December 31, 2016, and the Company had unfunded commitments to invest an additional $22 million. For more information on the Company’s interests in unconsolidated VIEs, refer to Note 7 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 22 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.

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.

On September 19, 2016, the Company announced its Board of Directors had approved a 9.8 percent increase in the Company’s dividend rate per common share, from $0.255 per quarter to $0.28 per quarter.

The Company repurchased approximately 61 million shares of its common stock in 2016, compared with approximately 52 million shares in 2015. The average price paid for the shares

repurchased in 2016 was $42.63 per share, compared with $43.54 per share in 2015. As of December 31, 2016, the approximate dollar value of shares that may yet be purchased by the Company under the current Board of Directors approved authorization was $1.3 billion. For a more complete analysis of activities impacting shareholders’ equity and capital management programs, refer to Note 14 of the Notes to Consolidated Financial Statements.

Total U.S. Bancorp shareholders’ equity was $47.3 billion at December 31, 2016, compared with $46.1 billion at December 31, 2015. The increase was primarily the result of corporate earnings, partially offset by dividends, common share repurchases and changes in unrealized gains and losses on available-for-sale investment securities included in other comprehensive income (loss).

Beginning January 1, 2014, the regulatory capital requirements effective for the Company follow Basel III, subject to certain transition provisions from Basel I over the following four years to full implementation by January 1, 2018. Basel III includes two comprehensive methodologies for calculating risk-weighted assets: a general standardized approach and more risk-sensitive advanced approaches, with the Company’s capital adequacy being evaluated against the methodology that is most restrictive. 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, and tier 1 leverage ratio. The minimum required level for these ratios at December 31, 2016, was 5.125 percent, 6.625 percent, 8.625 percent, and 4.0 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. At December 31, 2016, the minimum “well-capitalized” threshold for the common equity tier 1 capital ratio, tier 1 capital ratio, total risk-based capital ratio, and tier 1 leverage ratio was 6.5 percent, 8.0 percent, 10.0 percent and 5.0 percent, respectively. The most recent notification from the Office of the Comptroller of the Currency categorized the Company’s bank subsidiary as “well-capitalized” under the FDIC Improvement Act prompt corrective action provisions that are applicable to all banks. There are no conditions or events since that notification 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, 2016, U.S. Bank National Association met these requirements.

Table 23 provides a summary of statutory regulatory capital ratios in effect for the Company at December 31, 2016 and 2015.

TABLE 23 _{Regulatory Capital Ratios}


	U.S. Bancorp						U.S. Bank National Association
At December 31 (Dollars in Millions)	2016			2015			2016			2015
Basel III transitional standardized approach:
Common equity tier 1 capital	$	33,720		$	32,612		$	36,914		$	33,831
Tier 1 capital		39,421			38,431			37,114			34,148
Total risk-based capital		47,355			45,313			44,853			41,112
Risk-weighted assets		358,237			341,360			352,023			336,938
Common equity tier 1 capital as a percent of risk-weighted assets		9.4	%		9.6	%		10.5	%		10.0	%
Tier 1 capital as a percent of risk-weighted assets		11.0			11.3			10.5			10.1
Total risk-based capital as a percent of risk-weighted assets		13.2			13.3			12.7			12.2
Tier 1 capital as a percent of adjusted quarterly average assets (leverage ratio)		9.0			9.5			8.6			8.5
Basel III transitional advanced approaches:
Common equity tier 1 capital	$	33,720		$	32,612		$	36,914		$	33,831
Tier 1 capital		39,421			38,431			37,114			34,148
Total risk-based capital		44,264			42,262			41,737			38,090
Risk-weighted assets		277,141			261,668			271,920			258,207
Common equity tier 1 capital as a percent of risk-weighted assets		12.2	%		12.5	%		13.6	%		13.1	%
Tier 1 capital as a percent of risk-weighted assets		14.2			14.7			13.6			13.2
Total risk-based capital as a percent of risk-weighted assets		16.0			16.2			15.3			14.8

Bank Regulatory Capital Requirements


	Minimum			Well- Capitalized
2016
Common equity tier 1 capital as a percent of risk-weighted assets		5.125	%		6.500	%
Tier 1 capital as a percent of risk-weighted assets		6.625			8.000
Total risk-based capital as a percent of risk-weighted assets		8.625			10.000
Tier 1 capital as a percent of adjusted quarterly average assets (leverage ratio)		4.000			5.000
2015
Common equity tier 1 capital as a percent of risk-weighted assets		4.500	%		6.500	%
Tier 1 capital as a percent of risk-weighted assets		6.000			8.000
Total risk-based capital as a percent of risk-weighted assets		8.000			10.000
Tier 1 capital as a percent of adjusted quarterly average assets (leverage ratio)		4.000			5.000

Effective January 1, 2018, the Company will be subject to a regulatory Supplementary Leverage Ratio (“SLR”) requirement for banks calculating capital adequacy using advanced approaches under Basel III. The SLR is defined as tier 1 capital divided by total leverage exposure, which includes both on- and off-balance sheet exposures. At December 31, 2016, the Company’s SLR exceeded the applicable minimum SLR requirement.

The Company believes certain capital ratios in addition to statutory regulatory capital ratios are useful in evaluating its capital adequacy. The Company’s tangible common equity, as a percent of tangible assets and as a percent of risk-weighted assets calculated under the transitional standardized approach, was 7.5 percent and 9.2 percent, respectively, at December 31, 2016, compared with 7.6 percent and 9.2 percent, respectively, at December 31, 2015. The Company’s common equity tier 1 capital to risk-weighted assets ratio using the Basel III standardized approach as if fully implemented was 9.1 percent at December 31, 2016 and December 31, 2015. The Company’s common equity tier 1 capital to risk-weighted assets ratio using

the Basel III advanced approaches as if fully implemented was 11.7 percent at December 31, 2016, compared with 11.9 percent at December 31, 2015.

Fourth Quarter Summary

The Company reported net income attributable to U.S. Bancorp of $1.5 billion for the fourth quarter of 2016, or $0.82 per diluted common share, compared with $1.5 billion, or $0.80 per diluted common share, for the fourth quarter of 2015. Return on average assets and return on average common equity were 1.32 percent and 13.1 percent, respectively, for the fourth quarter of 2016, compared with 1.41 percent and 13.7 percent, respectively, for the fourth quarter of 2015.

Total net revenue for the fourth quarter of 2016, was $224 million (4.3 percent) higher than the fourth quarter of 2015, reflecting a 4.8 percent increase in net interest income (4.6 percent increase on a taxable-equivalent basis) and a 3.9 percent increase in noninterest income. The increase in net

TABLE 24 _{Fourth Quarter Results}


	Three Months Ended December 31,
(Dollars and Shares in Millions, Except Per Share Data)	2016			2015
Condensed Income Statement
Net interest income	$	2,955		$	2,819
Taxable-equivalent adjustment^(a)		49			52
Net interest income (taxable-equivalent basis)^(b)		3,004			2,871
Noninterest income		2,425			2,339
Securities gains (losses), net		6			1
Total net revenue		5,435			5,211
Noninterest expense		3,004			2,809
Provision for credit losses		342			305
Income before taxes		2,089			2,097
Income taxes and taxable-equivalent adjustment		598			608
Net income		1,491			1,489
Net (income) loss attributable to noncontrolling interests		(13	)		(13	)
Net income attributable to U.S. Bancorp	$	1,478		$	1,476
Net income applicable to U.S. Bancorp common shareholders	$	1,391		$	1,404

Per Common Share
Earnings per share	$	.82		$	.80
Diluted earnings per share	$	.82		$	.80
Dividends declared per share	$	.280		$	.255
Average common shares outstanding		1,700			1,747
Average diluted common shares outstanding		1,705			1,754

Financial Ratios
Return on average assets		1.32	%		1.41	%
Return on average common equity		13.1			13.7
Net interest margin (taxable-equivalent basis)^(a)		2.98			3.06
Efficiency ratio^(b)		55.3			53.9

(a)

Utilizes a tax rate of 35 percent for those assets and liabilities whose income or expense is not included for federal income tax purposes.

(b)

See Non-GAAP Financial Measures beginning on page 66.

interest income from the fourth quarter of 2015 was mainly the result of loan growth. The noninterest income increase was primarily driven by higher payment services revenue, trust and investment management fees and mortgage banking revenue.

Noninterest expense in the fourth quarter of 2016 was higher than the fourth quarter of 2015, related to increased compensation expense due to hiring to support business growth and compliance programs as well as merit increases and higher variable compensation expense.

Fourth quarter 2016 net interest income, on a taxable-equivalent basis, was $3.0 billion, compared with $2.9 billion in the fourth quarter of 2015. The $133 million (4.6 percent) increase was principally driven by loan growth partially offset by a lower net interest margin. Average earning assets were $28.9 billion (7.7 percent) higher in the fourth quarter of 2016, compared with the fourth quarter of 2015, driven by increases of $16.0 billion (6.2 percent) in average loans, $4.9 billion (4.6 percent) in average investment securities and higher average cash balances. The net interest margin, on a taxable-equivalent basis, in the fourth quarter of 2016 was 2.98 percent, compared with 3.06 percent in the fourth quarter of 2015, principally due to lower yields on securities purchases, lower reinvestment rates on maturing securities and maintaining higher cash balances.

Noninterest income in the fourth quarter of 2016 was $2.4 billion, compared with $2.3 billion in the same period of 2015, representing an increase of $91 million (3.9 percent). The increase reflected higher payment services revenue, trust and investment management fees and mortgage banking revenue, partially offset by a decline in other noninterest income. Credit and debit card revenue increased $22 million (7.5 percent) reflecting higher transaction volumes including the impact of acquired portfolios. Merchant processing services revenue increased $11 million (2.8 percent) as a result of an increase in product fees and higher volumes. Adjusted for the impact of foreign currency rate changes, the increase would have been approximately 5.6 percent. Trust and investment management fees increased $32 million (9.5 percent) reflecting lower money market fee waivers, along with account growth, an increase in assets under management and improved market conditions. Mortgage banking revenue increased $29 million (13.7 percent) over the fourth quarter of 2015, driven by higher origination and sales volumes. Other income was lower $18 million (6.7 percent) in the fourth quarter of 2016, compared with the same period of 2015, primarily reflecting lower income from leasing residuals and the impact of a gain on the sale of a deposit portfolio in the fourth quarter 2015, partially offset by stronger trading income and higher fourth quarter 2016 equity investment income.

Noninterest expense in the fourth quarter of 2016 was $3.0 billion, compared with $2.8 billion in the same period of 2015, representing an increase of $195 million (6.9 percent). The increase was primarily due to higher compensation, professional services and marketing expenses. Compensation expense increased $145 million (12.0 percent) over the same period of the prior year, principally due to the impact of hiring to support business growth and compliance programs, merit increases, and higher variable compensation. Professional services expense increased $31 million (24.8 percent) primarily due to compliance programs and implementation costs of capital investments to support business growth. Marketing expense increased $11 million (11.5 percent) to support new business development. Partially offsetting these increases was an $11 million (4.0 percent) decrease in employee benefits expense mainly due to lower pension and healthcare costs.

The provision for credit losses for the fourth quarter of 2016 was $342 million, an increase of $37 million (12.1 percent) from the same period of 2015. The provision for credit losses was $20 million higher than net charge-offs in the fourth quarter of 2016 and equal to net charge-offs in the fourth quarter of 2015. The reserve build for the fourth quarter of 2016 was driven by portfolio growth, partially offset by improvement in residential mortgage and home equity credit quality. Net charge-offs were $322 million in the fourth quarter of 2016, compared with $305 million in the fourth quarter of 2015. The net charge-off ratio was 0.47 percent in the fourth quarter of 2016, unchanged from the fourth quarter of 2015.

The provision for income taxes for the fourth quarter of 2016 resulted in an effective tax rate of 26.9 percent, compared with an effective tax rate of 27.2 percent for the fourth quarter of 2015.

Line of Business Financial Review

The Company’s major lines of business are Wholesale Banking and Commercial Real Estate, Consumer and Small Business Banking, Wealth Management and Securities 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. The allowance for credit losses and related provision expense are allocated to the lines of business based on the related loan balances managed. Goodwill and other intangible assets are

assigned to the lines of business based on the mix of business of the acquired entity. Within the Company, capital levels are evaluated and managed centrally; however, capital is allocated to the operating segments to support evaluation of business performance. Business lines are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. Generally, the determination of the amount of capital allocated to each business line includes credit and operational capital allocations following a Basel III regulatory framework. Interest income and expense is determined based on the assets and liabilities managed by the business line. Because funding and asset liability management is a central function, funds transfer-pricing methodologies are utilized to allocate a cost of funds used or credit for funds provided to all business line assets and liabilities, respectively, using a matched funding concept. Also, each business unit is allocated the taxable-equivalent benefit of tax-exempt products. The residual effect on net interest income of asset/liability management activities is included in Treasury and Corporate Support. Noninterest income and expenses directly managed by each business line, including fees, service charges, salaries and benefits, and other direct revenues and costs are accounted for within each segment’s financial results in a manner similar to the consolidated financial statements. Occupancy costs are allocated based on utilization of facilities by the lines of business. Generally, operating losses are charged to the line of business when the loss event is realized in a manner similar to a loan charge-off. Noninterest expenses incurred by centrally managed operations or business lines that directly support another business line’s operations are charged to the applicable business line based on its utilization of those services, primarily measured by the volume of customer activities, number of employees or other relevant factors. These allocated expenses are reported as net shared services expense within noninterest expense. Certain activities that do not directly support the operations of the lines of business or for which the lines of business are not considered financially accountable in evaluating their performance are not charged to the lines of business. The income or expenses associated with these corporate activities is reported within the Treasury and Corporate Support line of business. Income taxes are assessed to each line of business at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support.

Designations, assignments and allocations change from time to time as management systems are enhanced, methods of evaluating performance or product lines change or business segments are realigned to better respond to the Company’s diverse customer base. During 2016, certain organization and methodology changes were made and, accordingly, 2015 results were restated and presented on a comparable basis.

Wholesale Banking and Commercial Real Estate Wholesale Banking and Commercial Real Estate 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. Wholesale Banking and Commercial Real Estate contributed $861 million of the Company’s net income in 2016, unchanged from 2015, driven by an increase in net revenue, offset by increases in the provision for credit losses and noninterest expense.

Net revenue increased $245 million (8.5 percent) in 2016, compared with 2015. Net interest income, on a taxable-equivalent basis, increased $238 million (11.9 percent) in 2016, compared with 2015, primarily due to higher average loan and deposit balances along with the impact of higher margin benefit from deposits, partially offset by lower rates on loans. Noninterest income increased $7 million (0.8 percent) in 2016, compared with 2015, driven by higher trading income, treasury management fees and capital markets activity, partially offset by higher loan-related charges.

Noninterest expense increased $95 million (7.2 percent) in 2016, compared with 2015, primarily due to an increase in variable costs allocated to manage the business, including the impact of a special FDIC surcharge that began in the third quarter of 2016. The provision for credit losses increased $151 million (70.6 percent) in 2016, compared with 2015, primarily due to higher commercial loan net charge-offs and lower commercial real estate recoveries, along with an unfavorable change in the reserve allocation driven by loan growth.

Consumer and Small Business Banking Consumer and Small Business Banking delivers products and services through banking offices, telephone servicing and sales, on-line services, direct mail, ATM processing and mobile devices, such as mobile phones and tablet computers. It encompasses community banking, metropolitan banking and indirect lending, as well as mortgage banking. Consumer and Small Business Banking contributed $1.4 billion of the Company’s net income in 2016, or an increase of $47 million (3.6 percent), compared with 2015. The increase was due to higher net revenue and a decrease in the provision for credit losses, partially offset by higher noninterest expense.

Net revenue increased $214 million (3.0 percent) in 2016, compared with 2015. Net interest income, on a taxable-equivalent basis, increased $172 million (3.8 percent) in 2016, compared with 2015, primarily due to higher average loan and deposit balances along with the impact of higher margin benefit from deposits, partially offset by lower loan rates. Noninterest income increased $42 million (1.7 percent) in 2016, compared with 2015, driven by higher mortgage banking revenue, reflecting the impact of higher origination and sales revenue, partially offset by lower income from leasing residuals.

Noninterest expense increased $192 million (4.0 percent) in 2016, compared with 2015, primarily due to higher net shared services expense, including the impact of capital investments to

support business growth, higher compensation expense, reflecting the impact of merit increases, increased staffing, and higher variable compensation related to higher mortgage production, and higher professional services expense principally due to compliance-related matters, partially offset by the impact of a prior year legal matter. The provision for credit losses decreased $55 million (37.2 percent) in 2016, compared with 2015, primarily due to a favorable change in the reserve allocation driven by improvements in the mortgage portfolio and lower net charge-offs.

Wealth Management and Securities Services Wealth Management and Securities Services provides private banking, financial advisory services, investment management, retail brokerage services, insurance, trust, custody and fund servicing through five businesses: Wealth Management, Corporate Trust Services, U.S. Bancorp Asset Management, Institutional Trust & Custody and Fund Services. Wealth Management and Securities Services contributed $379 million of the Company’s net income in 2016, an increase of $137 million (56.6 percent), compared with 2015. The increase from the prior year was primarily due to higher net revenue, partially offset by higher noninterest expense.

Net revenue increased $296 million (16.2 percent) in 2016, compared with 2015. Net interest income, on a taxable-equivalent basis, increased $182 million (51.3 percent) in 2016, compared with 2015, principally due to the impact of higher margin benefit from deposits. Noninterest income increased $114 million (7.7 percent) in 2016, compared with 2015, reflecting the impact of lower money market fee waivers, along with account growth, growth in assets under management and improved market conditions.

Noninterest expense increased $84 million (5.8 percent) in 2016, compared with 2015, primarily the result of higher compensation, reflecting the impact of merit increases and higher staffing.

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 $1.3 billion of the Company’s net income in 2016, or an increase of $103 million (8.8 percent) compared with 2015. The increase was due to higher net revenue, partially offset by higher noninterest expense and an increase in the provision for credit losses.

Net revenue increased $401 million (7.6 percent) in 2016, compared with 2015. Net interest income, on a taxable-equivalent basis, increased $210 million (10.9 percent) in 2016, compared with 2015, primarily due to higher average loan balances and fees. Noninterest income increased $191 million (5.7 percent) in 2016, compared with 2015, due to an increase in credit and debit card revenue on higher transaction volumes, including the impact of acquired portfolios, an increase in merchant processing services revenue as a result of an increase in product fees and higher volumes, and the impact of a 2016 sale of an equity investment.

TABLE 25 _{Line of Business Financial Performance}


	Wholesale Banking and Commercial Real Estate							Consumer and Small Business Banking
Year Ended December 31 (Dollars in Millions)	2016		2015		Percent Change			2016		2015		Percent Change
Condensed Income Statement
Net interest income (taxable-equivalent basis)	$	2,240	$	2,002		11.9	%	$	4,752	$	4,580		3.8	%
Noninterest income		897		892		.6			2,527		2,485		1.7
Securities gains (losses), net		2		–		*			–		–		–
Total net revenue		3,139		2,894		8.5			7,279		7,065		3.0
Noninterest expense		1,417		1,322		7.2			4,999		4,799		4.2
Other intangibles		4		4		–			32		40		(20.0	)
Total noninterest expense		1,421		1,326		7.2			5,031		4,839		4.0
Income before provision and income taxes		1,718		1,568		9.6			2,248		2,226		1.0
Provision for credit losses		365		214		70.6			93		148		(37.2	)
Income before income taxes		1,353		1,354		(.1	)		2,155		2,078		3.7
Income taxes and taxable-equivalent adjustment		492		493		(.2	)		785		755		4.0
Net income		861		861		–			1,370		1,323		3.6
Net (income) loss attributable to noncontrolling interests		–		–		–			–		–		–
Net income attributable to U.S. Bancorp	$	861	$	861		–		$	1,370	$	1,323		3.6
Average Balance Sheet
Commercial	$	70,854	$	64,569		9.7	%	$	10,352	$	9,848		5.1	%
Commercial real estate		21,193		20,506		3.4			18,224		17,917		1.7
Residential mortgages		8		8		–			53,402		50,007		6.8
Credit card		–		–		–			–		–		–
Other retail		2		2		–			50,251		46,964		7.0
Total loans, excluding covered loans		92,057		85,085		8.2			132,229		124,736		6.0
Covered loans		–		–		–			4,196		4,934		(15.0	)
Total loans		92,057		85,085		8.2			136,425		129,670		5.2
Goodwill		1,647		1,647		–			3,681		3,681		–
Other intangible assets		17		20		(15.0	)		2,421		2,594		(6.7	)
Assets		100,575		93,421		7.7			151,754		146,554		3.5
Noninterest-bearing deposits		36,849		36,345		1.4			27,544		25,829		6.6
Interest checking		8,615		7,445		15.7			43,587		39,930		9.2
Savings products		42,284		28,095		50.5			57,465		53,753		6.9
Time deposits		13,078		15,027		(13.0	)		14,273		15,828		(9.8	)
Total deposits		100,826		86,912		16.0			142,869		135,340		5.6
Total U.S. Bancorp shareholders’ equity		8,996		8,309		8.3			11,192		10,892		2.8

*	Not meaningful


Wealth Management and Securities Services								Payment Services									Treasury and Corporate Support									Consolidated Company
2016			2015		Percent Change			2016			2015			Percent Change			2016			2015			Percent Change			2016			2015			Percent Change

$	537		$	355		51.3	%	$	2,140		$	1,930			10.9	%	$	2,062		$	2,347			(12.1	)%	$	11,731		$	11,214			4.6	%
	1,589			1,475		7.7			3,562			3,371			5.7			980			869			12.8			9,555			9,092			5.1
	–			–		–			–			–			–			20			–			*			22			–			*
	2,126			1,830		16.2			5,702			5,301			7.6			3,062			3,216			(4.8	)		21,308			20,306			4.9
	1,510			1,422		6.2			2,656			2,521			5.4			915			693			32.0			11,497			10,757			6.9
	24			28		(14.3	)		119			102			16.7			–			–			–			179			174			2.9
	1,534			1,450		5.8			2,775			2,623			5.8			915			693			32.0			11,676			10,931			6.8
	592			380		55.8			2,927			2,678			9.3			2,147			2,523			(14.9	)		9,632			9,375			2.7
	(4	)		–		*			869			787			10.4			1			(17	)		*			1,324			1,132			17.0
	596			380		56.8			2,058			1,891			8.8			2,146			2,540			(15.5	)		8,308			8,243			.8
	217			138		57.2			750			687			9.2			120			237			(49.4	)		2,364			2,310			2.3
	379			242		56.6			1,308			1,204			8.6			2,026			2,303			(12.0	)		5,944			5,933			.2
	–			–		–			(32	)		(31	)		(3.2	)		(24	)		(23	)		(4.3	)		(56	)		(54	)		(3.7	)
$	379		$	242		56.6		$	1,276		$	1,173			8.8		$	2,002		$	2,280			(12.2	)	$	5,888		$	5,879			.2

$	2,916		$	2,322		25.6	%	$	7,535		$	7,059			6.7	%	$	386		$	285			35.4	%	$	92,043		$	84,083			9.5	%
	520			569		(8.6	)		–			–			–			3,103			3,423			(9.3	)		43,040			42,415			1.5
	2,272			1,816		25.1			–			–			–			–			9			*			55,682			51,840			7.4
	–			–		–			20,490			18,057			13.5			–			–			–			20,490			18,057			13.5
	1,553			1,517		2.4			524			596			(12.1	)		–			–			–			52,330			49,079			6.6
	7,261			6,224		16.7			28,549			25,712			11.0			3,489			3,717			(6.1	)		263,585			245,474			7.4
	–			1		*			–			–			–			30			50			(40.0	)		4,226			4,985			(15.2	)
	7,261			6,225		16.6			28,549			25,712			11.0			3,519			3,767			(6.6	)		267,811			250,459			6.9
	1,566			1,567		(.1	)		2,465			2,475			(.4	)		–			–			–			9,359			9,370			(.1	)
	101			126		(19.8	)		494			411			20.2			–			–			–			3,033			3,151			(3.7	)
	10,352			9,238		12.1			34,409			31,796			8.2			136,223			127,856			6.5			433,313			408,865			6.0
	13,735			14,393		(4.6	)		951			879			8.2			2,097			1,757			19.4			81,176			79,203			2.5
	9,484			7,959		19.2			–			605			*			40			35			14.3			61,726			55,974			10.3
	36,564			33,994		7.6			97			91			6.6			490			483			1.4			136,900			116,416			17.6
	3,876			3,343		15.9			–			–			–			1,781			1,360			31.0			33,008			35,558			(7.2	)
	63,659			59,689		6.7			1,048			1,575			(33.5	)		4,408			3,635			21.3			312,810			287,151			8.9
	2,382			2,312		3.0			6,390			5,868			8.9			18,379			17,432			5.4			47,339			44,813			5.6

Noninterest expense increased $152 million (5.8 percent) in 2016, compared with 2015, reflecting higher compensation expense due to merit increases and higher staffing to support business investment and compliance programs, higher net shared services expense, as well as higher technology and communications expense, postage, printing and supplies expense, and other intangibles expense, which were impacted by card portfolio acquisitions. The increase in 2016 noninterest expense was partially offset by the impact of a 2015 regulatory item. The provision for credit losses increased $82 million (10.4 percent) in 2016, compared with 2015, due to an unfavorable change in the reserve allocation due to portfolio growth along with higher net charge-offs.

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 $2.0 billion in 2016, compared with $2.3 billion in 2015.

Net revenue decreased $154 million (4.8 percent) in 2016, compared with 2015. Net interest income, on a taxable-equivalent basis, decreased $285 million (12.1 percent) in 2016, compared with 2015, principally due to the impact of higher margin benefits on deposits credited to the business lines and the issuance of long-term debt, partially offset by growth in the investment portfolio. Noninterest income increased $131 million (15.1 percent) in 2016, compared with 2015, mainly due to the Visa Europe sale and the impact of the 2015 student loan market valuation adjustment, partially offset by lower equity investment income and the impact of a gain on the sale of a deposit portfolio in 2015.

Noninterest expense increased $222 million (32.0 percent) in 2016, compared with 2015, principally due to higher compensation expense, reflecting the impact of merit increases and higher variable compensation along with increased staffing, higher professional services expense primarily due to compliance programs and implementation costs of capital investments to support business growth, an increase in reserves related to legal and regulatory matters and a 2016 charitable contribution, partially offset by lower net shared services expense.

Income taxes are assessed to each line of business at a managerial tax rate of 36.4 percent with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support.

Non-GAAP Financial Measures

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

–

Tangible common equity to tangible assets,

–

Tangible common equity to risk-weighted assets,

–

Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented standardized approach, and

–

Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented advanced approaches.

These capital measures are viewed by management as useful additional methods of reflecting the level of capital available to withstand unexpected 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 measures differ from currently effective capital ratios defined by banking regulations principally in that the numerator of the currently effective ratios, which are subject to certain transitional provisions, temporarily excludes a portion of unrealized gains and losses related to available-for-sale securities and retirement plan obligations, and includes a portion of capital related to intangible assets, other than MSRs. These capital measures are not defined in generally accepted accounting principles (“GAAP”), or are not currently effective or defined in federal banking regulations. As a result, these capital measures disclosed by the Company may be considered non-GAAP financial measures.

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.

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


At December 31 (Dollars in Millions)	2016			2015			2014			2013			2012
Total equity	$	47,933		$	46,817		$	44,168		$	41,807		$	40,267
Preferred stock		(5,501	)		(5,501	)		(4,756	)		(4,756	)		(4,769	)
Noncontrolling interests		(635	)		(686	)		(689	)		(694	)		(1,269	)
Goodwill (net of deferred tax liability)⁽¹⁾		(8,203	)		(8,295	)		(8,403	)		(8,343	)		(8,351	)
Intangible assets, other than mortgage servicing rights		(712	)		(838	)		(824	)		(849	)		(1,006	)

Tangible common equity(a)		32,882			31,497			29,496			27,165			24,872
Tangible common equity (as calculated above)		32,882			31,497			29,496			27,165			24,872
Adjustments⁽²⁾		(55	)		67			172			224			126

Common equity tier 1 capital estimated for the Basel III fully implemented standardized and advanced approaches⁽³⁾(b)		32,827			31,564			29,668			27,389			24,998
Tier 1 capital, determined in accordance with prescribed regulatory requirements using Basel I definition											33,386			31,203
Preferred stock											(4,756	)		(4,769	)
Noncontrolling interests, less preferred stock not eligible for Tier 1 capital											(688	)		(685	)

Tier 1 common equity using Basel 1 definition(c)											27,942			25,749
Total assets		445,964			421,853			402,529			364,021			353,855
Goodwill (net of deferred tax liability)⁽¹⁾		(8,203	)		(8,295	)		(8,403	)		(8,343	)		(8,351	)
Intangible assets, other than mortgage servicing rights		(712	)		(838	)		(824	)		(849	)		(1,006	)

Tangible assets(d)		437,049			412,720			393,302			354,829			344,498
Risk-weighted assets, determined in accordance with prescribed transitional standardized approach regulatory requirements⁽⁴⁾(e)		358,237			341,360			317,398			297,919			287,611
Adjustments⁽⁵⁾		4,027			3,892			11,110			13,712			21,233

Risk-weighted assets estimated for the Basel III fully implemented standardized approach⁽³⁾(f)		362,264			345,252			328,508			311,631			308,844
Risk-weighted assets, determined in accordance with prescribed transitional advanced approaches regulatory requirements		277,141			261,668			248,596
Adjustments⁽⁶⁾		4,295			4,099			3,270

Risk-weighted assets estimated for the Basel III fully implemented advanced approaches(g)		281,436			265,767			251,866

Ratios
Tangible common equity to tangible assets(a)/(d)		7.5	%		7.6	%		7.5	%		7.7	%		7.2	%
Tangible common equity to risk-weighted assets(a)/(e)		9.2			9.2			9.3			9.1			8.6
Tier 1 common equity to risk-weighted assets using Basel I definition(c)/(e)											9.4			9.0
Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented standardized approach(b)/(f)⁽³⁾		9.1			9.1			9.0			8.8			8.1
Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented advanced approaches(b)/(g)		11.7			11.9			11.8


	Three Months Ended December 31						Year Ended December 31
	2016			2015			2016			2015			2014			2013			2012
Net interest income	$	2,955		$	2,819		$	11,528		$	11,001		$	10,775		$	10,604		$	10,745
Taxable-equivalent adjustment⁽⁷⁾		49			52			203			213			222			224			224
Net interest income, on a taxable-equivalent basis		3,004			2,871			11,731			11,214			10,997			10,828			10,969
Net interest income, on a taxable-equivalent basis (as calculated above)		3,004			2,871			11,731			11,214			10,997			10,828			10,969
Noninterest income		2,431			2,340			9,577			9,092			9,164			8,774			9,319
Less: Securities gains (losses), net		6			1			22			–			3			9			(15	)
Total net revenue, excluding net securities gains (losses)(h)		5,429			5,210			21,286			20,306			20,158			19,593			20,303
Noninterest expense(i)		3,004			2,809			11,676			10,931			10,715			10,274			10,456
Efficiency ratio(i)/(h)		55.3	%		53.9	%		54.9	%		53.8	%		53.2	%		52.4	%		51.5	%

(1)

Includes goodwill related to certain investments in unconsolidated financial institutions per prescribed regulatory requirements beginning March 31, 2014.

(2)

Includes net losses on cash flow hedges included in accumulated other comprehensive income (loss) and other adjustments.

(3)

December 31, 2016, 2015, 2014 and 2013, calculated using final rules for the Basel III fully implemented standardized approach; December 31, 2012, calculated using proposed rules for the Basel III fully implemented standardized approach released June 2012.

(4)

December 31, 2016, 2015 and 2014, calculated under the Basel III transitional standardized approach; all other periods calculated under Basel I.

(5)

Includes higher risk-weighting for unfunded loan commitments, investment securities, residential mortgages, MSRs and other adjustments.

(6)

Primarily reflects higher risk-weighting for MSRs.

(7)

Utilizes a tax rate of 35 percent for those assets and liabilities whose income or expense is not included for federal income tax purposes.

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 The allowance for credit losses is established to provide for probable and estimable losses incurred in the Company’s credit portfolio. 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 are discussed in the “Credit Risk Management” section.

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. Although methodologies utilized to determine each element of the allowance reflect management’s assessment of credit risk as identified through assessments completed of

individual credits and of homogenous pools affected by material credit events, degrees of imprecision exist in these measurement tools due in part to subjective judgments involved and an inherent lagging of credit quality measurements relative to the stage of the business cycle. Even determining the stage of the business cycle is highly subjective. As discussed in the “Analysis and Determination of Allowance for Credit Losses” section, management considers the effect of changes in economic conditions, risk management practices, and other factors that contribute to imprecision of loss estimates in determining the allowance for credit losses. If not considered, incurred losses in the portfolio related to imprecision and other subjective factors could have a dramatic adverse impact on the liquidity and financial viability of a banking institution.

Given the many 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 recoveries. For example, the amount of loans within specific risk ratings may change, providing a leading indicator of changing credit quality, while nonperforming loans and net charge-offs may be slower to reflect changes. Also, inherent loss ratios, determined through migration analysis and historical loss performance over the estimated business cycle of a loan, may not change to the same degree as net charge-offs. Because risk ratings and inherent loss ratios primarily drive the allowance specifically allocated to commercial lending segment loans, the degree of change in the commercial lending allowance may differ from the level of changes in nonperforming loans and net charge-offs. Also, management would maintain an appropriate allowance for credit losses by updating allowance rates to reflect changes in economic uncertainty or business cycle conditions.

Some factors considered in determining the appropriate allowance for credit losses are quantifiable while other factors require qualitative judgment. Management conducts an analysis with respect to the accuracy of risk ratings and the volatility of inherent losses, and utilizes this analysis along with qualitative factors that can affect the precision of credit loss estimates, including economic conditions, such as changes in unemployment or bankruptcy rates, and concentration risks, such as risks associated with specific industries, collateral valuations, and loans to highly leveraged enterprises, in determining the overall level of the allowance for credit losses. The Company’s determination of the allowance for commercial lending segment loans is sensitive to the assigned credit risk ratings and inherent loss rates at December 31, 2016. In the event that 10 percent of period ending loan balances (including unfunded commitments) within each risk category of this segment of the loan portfolio experienced downgrades of two risk categories, the allowance for credit losses would increase by approximately $252 million at December 31, 2016. The Company

believes the allowance for credit losses appropriately considers the imprecision in estimating credit losses based on credit risk ratings and inherent loss rates but actual losses may differ from those estimates. In the event that inherent loss or estimated loss rates for commercial lending segment loans increased by 10 percent, the allowance for credit losses would increase by approximately $181 million at December 31, 2016. The Company’s determination of the allowance for consumer lending segment loans is sensitive to changes in estimated loss rates and estimated impairments on restructured loans. In the event that estimated losses for this segment of the loan portfolio increased by 10 percent, the allowance for credit losses would increase by approximately $170 million at December 31, 2016. 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 risk rating and inherent losses and do not imply any expectation of future deterioration in the risk rating or loss rates. Given current processes employed by the Company, management believes the risk ratings and inherent loss rates 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. An example is non-agency residential mortgage-backed securities. For more information on investment securities, refer to Note 4 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 19 of the Notes to Consolidated Financial Statements provides a summary of the Company’s derivative positions.

Refer to Note 21 of the Notes to Consolidated Financial Statements for additional information regarding estimations of fair value.

Purchased Loans and Related Indemnification Assets In accordance with applicable authoritative accounting guidance effective for the Company beginning January 1, 2009, all purchased loans and related indemnification assets arising from loss-sharing arrangements with the FDIC are recorded at fair value at date of purchase. The initial valuation of these loans and the related indemnification assets requires management to make subjective judgments concerning estimates about how the acquired loans will perform in the future using valuation methods including discounted cash flow analysis and independent third party appraisals. Factors that may significantly affect the initial valuation include, among others, market-based and industry data related to expected changes in interest rates, assumptions related to probability and severity of credit losses, estimated timing of credit losses including the foreclosure and liquidation of collateral, expected prepayment rates, required or anticipated loan modifications, unfunded loan commitments, the specific terms and provisions of any loss sharing agreements, and specific industry and market conditions that may impact discount rates and independent third party appraisals.

On an ongoing basis, the accounting for purchased loans and related indemnification assets follows applicable authoritative accounting guidance for purchased non-impaired loans and purchased impaired loans. Refer to Notes 1 and 5 of the Notes to Consolidated Financial Statements for additional information. In addition, refer to the “Analysis and Determination of the Allowance for Credit Losses” section for information on the determination of the required allowance for credit losses, if any, for these loans.

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 MSRs’ valuation 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 9 and 21 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.

Goodwill and Other Intangibles The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value. Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment. In certain situations, interim impairment tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Other intangible assets are amortized over their estimated useful lives using straight-line and accelerated methods and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount.

The initial recognition of goodwill and other intangible assets and subsequent impairment analysis require management to make subjective judgments concerning estimates of how the acquired assets will perform in the future using valuation methods including discounted cash flow analysis. Additionally, estimated cash flows may extend beyond ten years and, by their nature, are difficult to determine over an extended timeframe. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures, technology, changes in discount rates and specific industry and market conditions. In determining the reasonableness of cash flow estimates, the Company reviews historical performance of the underlying assets or similar assets in an effort to assess and validate assumptions utilized in its estimates.

In assessing the fair value of reporting units, the Company considers the stage of the current business cycle and potential changes in market conditions in estimating the timing and extent of future cash flows. Also, management often utilizes other information to validate the reasonableness of its valuations, including public market comparables, and multiples of recent mergers and acquisitions of similar businesses. Valuation

multiples may be based on revenue, price-to-earnings and tangible capital ratios of comparable public companies and business segments. These multiples may be adjusted to consider competitive differences, including size, operating leverage and other factors. The carrying amount of a reporting unit is determined based on the amount of equity required for the reporting unit’s activities, considering the specific assets and liabilities of the reporting unit. The Company determines the amount of equity for each reporting unit on a risk-adjusted basis considering economic and regulatory capital requirements, capital markets activity in the Company’s Wholesale Banking and Commercial Real Estate segment and includes deductions and limitations related to certain types of assets including MSRs and purchased credit card relationship intangibles. The Company does not assign corporate assets and liabilities to reporting units that do not relate to the operations of the reporting unit or are not considered in determining the fair value of the reporting unit. These assets and liabilities primarily relate to the Company’s investment securities portfolio and other investments (including direct equity investments, bank-owned life insurance and tax-advantaged investments) and corporate debt and other funding liabilities. In the most recent goodwill impairment test, the portion of the Company’s total equity allocated to the Treasury and Corporate Support operating segment included approximately $2 billion in excess of the economic and regulatory capital requirements of that segment.

The Company’s annual assessment of potential goodwill impairment was completed during the second quarter of 2016. Based on the results of this assessment, no goodwill impairment was recognized. The Company continues to monitor goodwill and other intangible assets for impairment indicators throughout the year.

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.

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 18 of the Notes to Consolidated Financial Statements for additional information regarding income taxes.

Controls and Procedures

Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the

effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon this evaluation, the principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.

During the most recently completed fiscal quarter, there was no change made in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

The annual report of the Company’s management on internal control over financial reporting is provided on page 72. The attestation report of Ernst & Young LLP, the Company’s independent accountants, regarding the Company’s internal control over financial reporting is provided on page 74.

Report of Management

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

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

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

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

Management assessed the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its Internal Control-Integrated Framework (2013 framework). Based on our assessment and those criteria, management believes the Company designed and maintained effective internal control over financial reporting as of December 31, 2016.

The Company’s independent accountants, Ernst & Young LLP, have been engaged to render an independent professional opinion on the financial statements and issue an attestation report on the Company’s internal control over financial reporting. Their opinion on the financial statements appearing on page 73 and their attestation on internal control over financial reporting appearing on page 74 are based on procedures conducted in accordance with auditing standards of the Public Company Accounting Oversight Board (United States).

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of U.S. Bancorp:

We have audited the accompanying consolidated balance sheets of U.S. Bancorp as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of U.S. Bancorp’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of U.S. Bancorp at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), U.S. Bancorp’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2017 expressed an unqualified opinion thereon.

LOGO

Minneapolis, Minnesota

February 23, 2017

Report of Independent Registered Public Accounting Firm

on Internal Control Over Financial Reporting

The Board of Directors and Shareholders of U.S. Bancorp:

We have audited U.S. Bancorp’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). U.S. Bancorp’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management. Our responsibility is to express an opinion on U.S. Bancorp’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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

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

In our opinion, U.S. Bancorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of U.S. Bancorp as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016 and our report dated February 23, 2017 expressed an unqualified opinion thereon.

LOGO

Minneapolis, Minnesota

February 23, 2017

Consolidated Financial Statements and Notes Table of Contents


Consolidated Financial Statements
Consolidated Balance Sheet			76
Consolidated Statement of Income			77
Consolidated Statement of Comprehensive Income			78
Consolidated Statement of Shareholders’ Equity			79
Consolidated Statement of Cash Flows			80
Notes to Consolidated Financial Statements
Note 1 — Significant Accounting Policies			81
Note 2 — Accounting Changes			88
Note 3 — Restrictions on Cash and Due From Banks			88
Note 4 — Investment Securities			89
Note 5 — Loans and Allowance for Credit Losses			92
Note 6 — Leases			100
Note 7 — Accounting for Transfers and Servicing of Financial Assets and Variable Interest Entities			101
Note 8 — Premises and Equipment			102
Note 9 — Mortgage Servicing Rights			102
Note 10 — Intangible Assets			104
Note 11 — Deposits			105
Note 12 — Short-Term Borrowings			105
Note 13 — Long-Term Debt			106
Note 14 — Shareholders’ Equity			106
Note 15 — Earnings Per Share			111
Note 16 — Employee Benefits			111
Note 17 — Stock-Based Compensation			116
Note 18 — Income Taxes			118
Note 19 — Derivative Instruments			119
Note 20 — Netting Arrangements for Certain Financial Instruments and Securities Financing Activities			124
Note 21 — Fair Values of Assets and Liabilities			126
Note 22 — Guarantees and Contingent Liabilities			135
Note 23 — U.S. Bancorp (Parent Company)			140
Note 24 — Subsequent Events			141

U.S. Bancorp

Consolidated Balance Sheet


At December 31 (Dollars in Millions)	2016			2015

Assets
Cash and due from banks	$	15,705		$	11,147
Investment securities
Held-to-maturity (fair value $42,435 and $43,493, respectively)		42,991			43,590
Available-for-sale ($755 and $1,018 pledged as collateral, respectively)^(a)		66,284			61,997
Loans held for sale (including $4,822 and $3,110 of mortgage loans carried at fair value, respectively)		4,826			3,184
Loans
Commercial		93,386			88,402
Commercial real estate		43,098			42,137
Residential mortgages		57,274			53,496
Credit card		21,749			21,012
Other retail		53,864			51,206

Total loans, excluding covered loans		269,371			256,253
Covered loans		3,836			4,596

Total loans		273,207			260,849
Less allowance for loan losses		(3,813	)		(3,863	)

Net loans		269,394			256,986
Premises and equipment		2,443			2,513
Goodwill		9,344			9,361
Other intangible assets		3,303			3,350
Other assets (including $314 and $121 of trading securities at fair value pledged as collateral, respectively)^(a)		31,674			29,725

Total assets	$	445,964		$	421,853


Liabilities and Shareholders’ Equity
Deposits
Noninterest-bearing	$	86,097		$	83,766
Interest-bearing^(b)		248,493			216,634

Total deposits		334,590			300,400
Short-term borrowings		13,963			27,877
Long-term debt		33,323			32,078
Other liabilities		16,155			14,681

Total liabilities		398,031			375,036
Shareholders’ equity
Preferred stock		5,501			5,501
Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares; issued: 2016 and 2015 — 2,125,725,742 shares		21			21
Capital surplus		8,440			8,376
Retained earnings		50,151			46,377
Less cost of common stock in treasury: 2016 — 428,813,585 shares; 2015 — 380,534,801 shares		(15,280	)		(13,125	)
Accumulated other comprehensive income (loss)		(1,535	)		(1,019	)

Total U.S. Bancorp shareholders’ equity		47,298			46,131
Noncontrolling interests		635			686

Total equity		47,933			46,817

Total liabilities and equity	$	445,964		$	421,853

(a)

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

(b)

lncludes time deposits greater than $250,000 balances of $3.0 billion and $2.6 billion at December 31, 2016 and 2015, respectively.

See

Notes to Consolidated Financial Statements.

U.S. Bancorp

Consolidated Statement of Income


Year Ended December 31 (Dollars and Shares in Millions, Except Per Share Data)	2016			2015			2014

Interest Income
Loans	$	10,810		$	10,059		$	10,113
Loans held for sale		154			206			128
Investment securities		2,078			2,001			1,866
Other interest income		125			136			121

Total interest income		13,167			12,402			12,228

Interest Expense
Deposits		622			457			465
Short-term borrowings		263			245			263
Long-term debt		754			699			725

Total interest expense		1,639			1,401			1,453

Net interest income		11,528			11,001			10,775
Provision for credit losses		1,324			1,132			1,229

Net interest income after provision for credit losses		10,204			9,869			9,546

Noninterest Income
Credit and debit card revenue		1,177			1,070			1,021
Corporate payment products revenue		712			708			724
Merchant processing services		1,592			1,547			1,511
ATM processing services		338			318			321
Trust and investment management fees		1,427			1,321			1,252
Deposit service charges		725			702			693
Treasury management fees		583			561			545
Commercial products revenue		871			867			854
Mortgage banking revenue		979			906			1,009
Investment products fees		158			185			191
Securities gains (losses), net
Realized gains (losses), net		27			1			11
Total other-than-temporary impairment		(6	)		(1	)		(7	)
Portion of other-than-temporary impairment recognized in other comprehensive income		1			–			(1	)

Total securities gains (losses), net		22			–			3
Other		993			907			1,040

Total noninterest income		9,577			9,092			9,164

Noninterest Expense
Compensation		5,212			4,812			4,523
Employee benefits		1,119			1,167			1,041
Net occupancy and equipment		988			991			987
Professional services		502			423			414
Marketing and business development		435			361			382
Technology and communications		955			887			863
Postage, printing and supplies		311			297			328
Other intangibles		179			174			199
Other		1,975			1,819			1,978

Total noninterest expense		11,676			10,931			10,715

Income before income taxes		8,105			8,030			7,995
Applicable income taxes		2,161			2,097			2,087

Net income		5,944			5,933			5,908
Net (income) loss attributable to noncontrolling interests		(56	)		(54	)		(57	)

Net income attributable to U.S. Bancorp	$	5,888		$	5,879		$	5,851

Net income applicable to U.S. Bancorp common shareholders	$	5,589		$	5,608		$	5,583

Earnings per common share	$	3.25		$	3.18		$	3.10
Diluted earnings per common share	$	3.24		$	3.16		$	3.08
Dividends declared per common share	$	1.070		$	1.010		$	.965
Average common shares outstanding		1,718			1,764			1,803
Average diluted common shares outstanding		1,724			1,772			1,813

See

Notes to Consolidated Financial Statements.

U.S. Bancorp

Consolidated Statement of Comprehensive Income


Year Ended December 31 (Dollars in Millions)	2016			2015			2014
Net income	$	5,944		$	5,933		$	5,908

Other Comprehensive Income (Loss)
Changes in unrealized gains and losses on securities available-for-sale		(858	)		(457	)		764
Other-than-temporary impairment not recognized in earnings on securities available-for-sale		(1	)		–			1
Changes in unrealized gains and losses on derivative hedges		74			(25	)		(41	)
Foreign currency translation		(28	)		20			(4	)
Changes in unrealized gains and losses on retirement plans		(255	)		(142	)		(733	)
Reclassification to earnings of realized gains and losses		247			393			297
Income taxes related to other comprehensive income (loss)		305			88			(109	)

Total other comprehensive income (loss)		(516	)		(123	)		175

Comprehensive income		5,428			5,810			6,083
Comprehensive (income) loss attributable to noncontrolling interests		(56	)		(54	)		(57	)

Comprehensive income attributable to U.S. Bancorp	$	5,372		$	5,756		$	6,026

See

Notes to Consolidated Financial Statements.

U.S. Bancorp

Consolidated Statement of Shareholders’ Equity


	U.S. Bancorp Shareholders
(Dollars and Shares in Millions)	Common Shares Outstanding			Preferred Stock		Common Stock		Capital Surplus			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total U.S. Bancorp Shareholders’ Equity			Noncontrolling Interests			Total Equity
Balance December 31, 2013		1,825		$	4,756	$	21	$	8,216		$	38,667		$	(9,476	)	$	(1,071	)	$	41,113		$	694		$	41,807
Net income (loss)												5,851									5,851			57			5,908
Other comprehensive income (loss)																		175			175						175
Preferred stock dividends												(243	)								(243	)					(243	)
Common stock dividends												(1,745	)								(1,745	)					(1,745	)
Issuance of common and treasury stock		15							(13	)					493						480						480
Purchase of treasury stock		(54	)												(2,262	)					(2,262	)					(2,262	)
Distributions to noncontrolling interests																					–			(59	)		(59	)
Net other changes in noncontrolling interests																					–			(3	)		(3	)
Stock option and restricted stock grants									110												110						110

Balance December 31, 2014		1,786		$	4,756	$	21	$	8,313		$	42,530		$	(11,245	)	$	(896	)	$	43,479		$	689		$	44,168

Net income (loss)												5,879									5,879			54			5,933
Other comprehensive income (loss)																		(123	)		(123	)					(123	)
Preferred stock dividends												(247	)								(247	)					(247	)
Common stock dividends												(1,785	)								(1,785	)					(1,785	)
Issuance of preferred stock					745																745						745
Issuance of common and treasury stock		11							(55	)					366						311						311
Purchase of treasury stock		(52	)												(2,246	)					(2,246	)					(2,246	)
Distributions to noncontrolling interests																					–			(55	)		(55	)
Net other changes in noncontrolling interests																					–			(2	)		(2	)
Stock option and restricted stock grants									118												118						118

Balance December 31, 2015		1,745		$	5,501	$	21	$	8,376		$	46,377		$	(13,125	)	$	(1,019	)	$	46,131		$	686		$	46,817

Net income (loss)												5,888									5,888			56			5,944
Other comprehensive income (loss)																		(516	)		(516	)					(516	)
Preferred stock dividends												(281	)								(281	)					(281	)
Common stock dividends												(1,842	)								(1,842	)					(1,842	)
Issuance of common and treasury stock		13							(71	)					445						374						374
Purchase of treasury stock		(61	)												(2,600	)					(2,600	)					(2,600	)
Distributions to noncontrolling interests																					–			(56	)		(56	)
Purchase of noncontrolling interests									1			9									10			(50	)		(40	)
Net other changes in noncontrolling interests																					–			(1	)		(1	)
Stock option and restricted stock grants									134												134						134

Balance December 31, 2016		1,697		$	5,501	$	21	$	8,440		$	50,151		$	(15,280	)	$	(1,535	)	$	47,298		$	635		$	47,933

See

Notes to Consolidated Financial Statements.

U.S. Bancorp

Consolidated Statement of Cash Flows


Year Ended December 31 (Dollars in Millions)	2016			2015			2014

Operating Activities
Net income attributable to U.S. Bancorp	$	5,888		$	5,879		$	5,851
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses		1,324			1,132			1,229
Depreciation and amortization of premises and equipment		291			307			302
Amortization of intangibles		179			174			199
(Gain) loss on sale of loans held for sale		(954	)		(993	)		(801	)
(Gain) loss on sale of securities and other assets		(617	)		(403	)		(595	)
Loans originated for sale in the secondary market, net of repayments		(42,867	)		(43,312	)		(30,858	)
Proceeds from sales of loans held for sale		41,605			45,211			29,962
Other, net		487			787			43

Net cash provided by operating activities		5,336			8,782			5,332

Investing Activities
Proceeds from sales of available-for-sale investment securities		9,877			690			475
Proceeds from maturities of held-to-maturity investment securities		9,733			10,567			9,479
Proceeds from maturities of available-for-sale investment securities		14,625			13,395			7,212
Purchases of held-to-maturity investment securities		(9,171	)		(9,234	)		(15,597	)
Purchases of available-for-sale investment securities		(29,684	)		(20,502	)		(21,752	)
Net increase in loans outstanding		(13,383	)		(11,788	)		(12,873	)
Proceeds from sales of loans		2,604			1,723			1,657
Purchases of loans		(2,881	)		(4,475	)		(2,355	)
Acquisitions, net of cash acquired		–			–			3,436
Other, net		322			(1,526	)		506

Net cash used in investing activities		(17,958	)		(21,150	)		(29,812	)

Financing Activities
Net increase in deposits		34,192			18,290			15,822
Net increase (decrease) in short-term borrowings		(13,914	)		(2,016	)		2,285
Proceeds from issuance of long-term debt		10,715			5,067			16,394
Principal payments or redemption of long-term debt		(9,495	)		(5,311	)		(4,128	)
Proceeds from issuance of preferred stock		–			745			–
Proceeds from issuance of common stock		355			295			453
Repurchase of common stock		(2,556	)		(2,190	)		(2,200	)
Cash dividends paid on preferred stock		(267	)		(242	)		(243	)
Cash dividends paid on common stock		(1,810	)		(1,777	)		(1,726	)
Purchase of noncontrolling interests		(40	)		–			–

Net cash provided by financing activities		17,180			12,861			26,657

Change in cash and due from banks		4,558			493			2,177
Cash and due from banks at beginning of year		11,147			10,654			8,477

Cash and due from banks at end of year	$	15,705		$	11,147		$	10,654


Supplemental Cash Flow Disclosures
Cash paid for income taxes	$	595		$	742		$	748
Cash paid for interest		1,591			1,434			1,476
Net noncash transfers to foreclosed property		156			204			199
Acquisitions
Assets (sold) acquired	$	–		$	–		$	1,376
Liabilities sold (assumed)		–			–			(4,797	)

Net	$	–		$	–		$	(3,421	)

See

Notes to Consolidated Financial Statements.

Notes to Consolidated Financial Statements

NOTE 1 _{Significant Accounting
Policies}

U.S. Bancorp is a multi-state financial services holding company headquartered in Minneapolis, Minnesota. U.S. Bancorp and its subsidiaries (the “Company”) provide a full range of financial services, including lending and depository services through banking offices principally in the Midwest and West regions of the United States. The Company also engages in credit card, merchant, and ATM processing, mortgage banking, cash management, capital markets, insurance, trust and investment management, brokerage, and leasing activities, principally in domestic markets.

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

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

Business Segments

Within the Company, financial performance is measured by major lines of business based on the products and services provided to customers through its distribution channels. The Company has five reportable operating segments:

Wealth Management and Securities Services Wealth Management and Securities Services provides private banking, financial advisory services, investment management, retail

brokerage services, insurance, trust, custody and fund servicing through five businesses: Wealth Management, Corporate Trust Services, U.S. Bancorp Asset Management, Institutional Trust & Custody and Fund Services.

Treasury and Corporate Support Treasury and Corporate Support includes the Company’s investment portfolios, funding, capital management, interest rate risk management, income taxes not allocated to business 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.

Segment Results Accounting policies for the lines of business are the same as those used in preparation of the consolidated financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to allocate funding costs and benefits, expenses and other financial elements to each line of business. For details of these methodologies and segment results, see “Basis for Financial Presentation” and Table 25 “Line of Business Financial Performance” included in Management’s Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements.

Securities

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

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

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

Held-to-maturity Securities Debt securities for which the Company has the positive intent and ability to hold to maturity are reported at historical cost adjusted for amortization of premiums and accretion of discounts. Declines in fair value for credit-related

other-than-temporary impairment, if any, are reported in noninterest income.

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

Equity Investments in Operating Entities

Equity investments in public entities in which the Company’s ownership is less than 20 percent are generally accounted for as available-for-sale securities and are carried at fair value. Similar investments in private entities are accounted for using the cost method. Investments in entities where the Company has a significant influence (generally between 20 percent and 50 percent ownership), but does not control the entity, are accounted for using the equity method. Investments in limited partnerships and limited liability companies where the Company’s ownership interest is greater than 5 percent are accounted for using the equity method. All equity investments are evaluated for impairment at least annually and more frequently if certain criteria are met.

Loans

The Company offers a broad array of lending products and categorizes its loan portfolio into three segments, which is the level at which it develops and documents a systematic methodology to determine the allowance for credit losses. The Company’s three loan portfolio segments are commercial lending, consumer lending and covered loans. 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. The covered loan segment consists of only one class.

The Company’s accounting methods for loans differ depending on whether the loans are originated or purchased, and for purchased loans, whether the loans were acquired at a discount related to evidence of credit deterioration since date of origination.

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

costs are deferred and recognized over the life of the loan and/or commitment period as yield adjustments.

Purchased Loans All purchased loans (non-impaired and impaired) acquired after January 1, 2009 are initially measured at fair value as of the acquisition date in accordance with applicable authoritative accounting guidance. Credit discounts are included in the determination of fair value. An allowance for credit losses is not recorded at the acquisition date for loans purchased after January 1, 2009. In accordance with applicable authoritative accounting guidance, purchased non-impaired loans acquired in a business combination prior to January 1, 2009 were generally recorded at the predecessor’s carrying value including an allowance for credit losses.

In determining the acquisition date fair value of purchased impaired loans, and in subsequent accounting, the Company generally aggregates purchased consumer loans and certain smaller balance commercial loans into pools of loans with common risk characteristics, while accounting for larger balance commercial loans individually. Expected cash flows at the purchase date in excess of the fair value of loans are recorded as interest income over the life of the loans if the timing and amount of the future cash flows is reasonably estimable. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. The present value of any decreases in expected cash flows, other than from decreases in variable interest rates, after the purchase date is recognized by recording an allowance for credit losses. Revolving loans, including lines of credit and credit cards loans, and leases are excluded from purchased impaired loans accounting.

For purchased loans acquired after January 1, 2009 that are not deemed impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Company records a provision for credit losses only when the required allowance exceeds any remaining credit discounts. The remaining differences between the purchase price and the unpaid principal balance at the date of acquisition are recorded in interest income over the life of the loans.

Covered Assets Loans covered under loss sharing or similar credit protection agreements with the Federal Deposit Insurance Corporation (“FDIC”) are reported in loans along with the related indemnification asset. Foreclosed real estate covered under similar agreements is recorded in other assets. In accordance with applicable authoritative accounting guidance effective for the Company beginning January 1, 2009, all purchased loans and related indemnification assets are recorded at fair value at the date of purchase.

Effective January 1, 2013, the Company amortizes any reduction in expected cash flows from the FDIC resulting from increases in expected cash flows from the covered assets (when there are no previous valuation allowances to reverse) over the

shorter of the remaining contractual term of the indemnification agreements or the remaining life of the covered assets. Prior to January 1, 2013, the Company considered such increases in expected cash flows of purchased loans and decreases in expected cash flows of the FDIC indemnification assets together and recognized them over the remaining life of the loans.

Commitments to Extend Credit Unfunded commitments for residential mortgage loans intended to be held for sale are considered derivatives and recorded in other assets and other liabilities on the Consolidated Balance Sheet at fair value with changes in fair value recorded in noninterest income. All other unfunded loan commitments are not considered derivatives and are not reported on the Consolidated Balance Sheet. For loans purchased after January 1, 2009, the fair value of the unfunded credit commitments is generally considered in the determination of the fair value of the loans recorded at the date of acquisition. Reserves for credit exposure on all other unfunded credit commitments are recorded in other liabilities.

Allowance for Credit Losses The allowance for credit losses is established for probable and estimable losses incurred in the Company’s loan and lease portfolio, including unfunded credit commitments, and includes certain amounts that do not represent loss exposure to the Company because those losses are recoverable under loss sharing agreements with the FDIC. The allowance for credit losses is increased through provisions charged to operating earnings and reduced by net charge-offs. Management evaluates the allowance each quarter to ensure it appropriately reserves for incurred losses.

The allowance recorded for loans in the commercial lending segment is based on reviews of individual credit relationships and considers the migration analysis of commercial lending segment loans and actual loss experience. In the migration analysis applied to risk rated loan portfolios, the Company currently examines up to a 16-year period of loss experience. For each loan type, this historical loss experience is adjusted as necessary to consider any relevant changes in portfolio composition, lending policies, underwriting standards, risk management practices or economic conditions. The results of the analysis are evaluated quarterly to confirm an appropriate historical time frame is selected for each commercial loan type. The allowance recorded for impaired loans greater than $5 million in the commercial lending segment is based on an individual loan 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, rather than the migration analysis. The allowance recorded for all other commercial lending segment loans is determined on a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, portfolio growth and historical losses, adjusted for current trends. The Company also considers the impacts of any loan modifications made to commercial lending segment loans and any subsequent payment defaults to its expectations of cash flows, principal balance, and current expectations about the borrower’s ability to pay in determining the allowance for credit losses.

The allowance recorded for Troubled Debt Restructuring (“TDR”) loans and purchased impaired 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, or the prior quarter effective rate, respectively. The allowance for collateral-dependent loans in the consumer lending segment is determined based on the fair value of the collateral less costs to sell. The allowance recorded for all other consumer lending segment loans is determined on a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, delinquency status, refreshed loan-to-value ratios when possible, portfolio growth and historical losses, adjusted for current trends. The Company also considers any modifications made to consumer lending segment loans including the impacts of any subsequent payment defaults since modification in determining the allowance for credit losses, such as the borrower’s ability to pay under the restructured terms, and the timing and amount of payments.

The allowance for the covered loan segment is evaluated each quarter in a manner similar to that described for non-covered loans and reflects decreases in expected cash flows of those loans after the acquisition date. The provision for credit losses for covered loans considers the indemnification provided by the FDIC.

In addition, subsequent payment defaults on loan modifications considered TDRs are considered in the underlying factors used in the determination of the appropriateness of the allowance for credit losses. For each loan segment, the Company estimates future loan charge-offs through a variety of analysis, trends and underlying assumptions. With respect to the commercial lending segment, TDRs may be collectively evaluated for impairment where observed performance history, including defaults, is a primary driver of the loss allocation. For commercial TDRs individually evaluated for impairment, attributes of the borrower are the primary factors in determining the allowance for credit losses. However, historical loss experience is also incorporated into the allowance methodology applied to this category of loans. With respect to the consumer lending segment, performance of the portfolio, including defaults on TDRs, is considered when estimating future cash flows.

The Company’s methodology for determining the appropriate allowance for credit losses for each loan segment also considers the imprecision inherent in the methodologies used. As a result, in addition to the amounts determined under the methodologies described above, management also considers the potential impact of other qualitative factors which include, but are not limited to, economic factors; geographic and other concentration risks; delinquency and nonaccrual trends; current business conditions; changes in lending policy, underwriting standards and other relevant business practices; results of internal review; and the regulatory environment. The consideration of these items results in adjustments to allowance amounts included in the Company’s allowance for credit losses for each of the above loan segments.

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

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

For all loan classes, loans are considered past due based on the number of days delinquent except for monthly amortizing loans which are classified delinquent based upon the number of contractually required payments not made (for example, two missed payments is considered 30 days delinquent). When a loan is placed on nonaccrual status, unpaid accrued interest is reversed, reducing interest income in the current period.

Commercial lending segment loans are generally placed on nonaccrual status when the collection of principal and interest has become 90 days past due or is otherwise considered doubtful. Commercial lending segment loans are generally fully or partially charged down to the fair value of the collateral securing the loan, less costs to sell, when the loan is placed on nonaccrual.

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

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

Covered loans not considered to be purchased impaired are evaluated for delinquency, nonaccrual status and charge-off consistent with the class of loan they would be included in had the loss share coverage not been in place. Generally, purchased impaired loans are considered accruing loans. However, the timing and amount of future cash flows for some loans is not reasonably estimable, and those loans are classified as nonaccrual loans with interest income not recognized until the timing and amount of the future cash flows can be reasonably estimated.

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

Troubled Debt Restructurings In certain circumstances, the Company may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term. Concessionary modifications are classified as TDRs unless the modification results in only an insignificant delay in payments to be received. The Company recognizes interest on TDRs if the borrower complies with the revised terms and conditions as agreed upon with the Company and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles, which is generally six months or greater. To the extent a previous restructuring was insignificant, the Company considers the cumulative effect of past restructurings related to the receivable when determining whether a current restructuring is a TDR. Loans classified as TDRs are considered impaired loans for reporting and measurement purposes.

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

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

Modifications for the consumer lending segment are generally part of programs the Company has initiated. The Company participates in the United States Department of Treasury Home Affordable Modification Program (“HAMP”). HAMP gives qualifying homeowners an opportunity to permanently modify residential mortgage loans and achieve more affordable monthly payments, with the United States Department of Treasury compensating the Company for a portion of the reduction in monthly amounts due from borrowers participating in this program. The Company also modifies residential mortgage loans under Federal Housing Administration, United States Department of Veterans Affairs, or its own internal programs. Under these programs, the Company provides concessions to qualifying borrowers experiencing financial difficulties. The concessions may include adjustments to interest rates, conversion of adjustable rates to fixed rates, extension of maturity dates or deferrals of payments, capitalization of accrued interest and/or outstanding advances, or in limited situations, partial forgiveness of loan principal. In most instances, participation in residential mortgage loan restructuring programs requires the customer to complete a short-term trial period. A permanent loan modification is contingent on the customer successfully completing the trial period arrangement and the loan documents are not modified until that time. The Company reports loans in a trial period arrangement as TDRs and continues to report them as TDRs after the trial period.

Credit card and other retail loan TDRs are generally part of distinct restructuring programs providing customers experiencing financial difficulty with modifications whereby balances may be amortized up to 60 months, and generally include waiver of fees and reduced interest rates.

In addition, the Company considers secured loans to consumer borrowers that have debt discharged through bankruptcy where the borrower has not reaffirmed the debt to be TDRs.

TDRs for accounting and disclosure purposes if the loans evidenced credit deterioration as of the acquisition date and are accounted for in pools. Losses associated with the modification on covered loans, including the economic impact of interest rate reductions, are generally eligible for reimbursement under loss sharing agreements with the FDIC.

Impaired Loans For all loan classes, a loan is considered to be impaired when, based on current events or information, it is probable the Company will be unable to collect all amounts due per the contractual terms of the loan agreement. Impaired loans include all nonaccrual and TDR loans. For all loan classes, interest income on TDR loans is recognized under the modified terms and conditions if the borrower has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles. Interest income is generally not recognized on other impaired loans until the loan is paid off. However, interest income may be recognized for interest payments if the remaining carrying amount of the loan is believed to be collectible.

Factors used by the Company in determining whether all principal and interest payments due on commercial and commercial real estate loans will be collected and, therefore, whether those loans are impaired include, but are not limited to, the financial condition of the borrower, collateral and/or guarantees on the loan, and the borrower’s estimated future ability to pay based on industry, geographic location and certain financial ratios. The evaluation of impairment on residential mortgages, credit card loans and other retail loans is primarily driven by delinquency status of individual loans or whether a loan has been modified, and considers any government guarantee where applicable. Individual covered loans, whose future losses are covered by loss sharing agreements with the FDIC that substantially reduce the risk of credit losses to the Company, are evaluated for impairment and accounted for in a manner consistent with the class of loan they would have been included in had the loss sharing coverage not been in place.

Leases The Company’s lease portfolio includes both direct financing and leveraged leases. The net investment in direct financing leases is the sum of all minimum lease payments and estimated residual values, less unearned income. Unearned income is recorded in interest income over the terms of the leases to produce a level yield.

The investment in leveraged leases is the sum of all lease payments, less nonrecourse debt payments, plus estimated residual values, less unearned income. Income from leveraged leases is recognized over the term of the leases based on the unrecovered equity investment.

Residual values on leased assets are reviewed regularly for other-than-temporary impairment. Residual valuations for retail automobile leases are based on independent assessments of expected used car sale prices at the end-of-term. Impairment tests are conducted based on these valuations considering the probability of the lessee returning the asset to the Company, re-marketing efforts, insurance coverage and ancillary fees and

costs. Valuations for commercial leases are based upon external or internal management appraisals. When there is impairment of the Company’s interest in the residual value of a leased asset, the carrying value is reduced to the estimated fair value with the writedown recognized in the current period.

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

Loans Held For Sale

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

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

Derivative Financial Instruments

In the ordinary course of business, the Company enters into derivative transactions to manage various risks and to accommodate the business requirements of its customers. Derivative instruments are reported in other assets or other liabilities at fair value. Changes in a derivative’s fair value are recognized currently in earnings unless specific hedge accounting criteria are met.

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

other comprehensive income (loss) until cash flows of the hedged item are realized. Any change in fair value resulting from hedge ineffectiveness is immediately recorded in noninterest income. Changes in the fair value of net investment hedges that are highly effective are recorded in other comprehensive income (loss). The Company performs an assessment, at inception and, at a minimum, quarterly thereafter, to determine the effectiveness of the derivative in offsetting changes in the value or cash flows of the hedged item(s).

If a derivative designated as a cash flow hedge is terminated or ceases to be highly effective, the gain or loss in other comprehensive income (loss) is amortized to earnings over the period the forecasted hedged transactions impact earnings. If a hedged forecasted transaction is no longer probable, hedge accounting is ceased and any gain or loss included in other comprehensive income (loss) is reported in earnings immediately, unless the forecasted transaction is at least reasonably possible of occurring, whereby the amounts remain within other comprehensive income (loss).

Revenue Recognition

The Company recognizes revenue as it is earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. In certain circumstances, noninterest income is reported net of associated expenses that are directly related to variable volume-based sales or revenue sharing arrangements or when the Company acts on an agency basis for others. Certain specific policies include the following:

Credit and Debit Card Revenue Credit and debit card revenue includes interchange from consumer credit and debit cards processed through card association networks, annual fees, and other transaction and account management fees. Interchange rates are generally set by the credit card associations and based on purchase volumes and other factors. The Company records interchange as transactions occur. Transaction and account management fees are recognized as transactions occur or services are provided, except for annual fees which are recognized over the applicable period. Volume-related payments to partners and credit card associations and costs for rewards programs are also recorded within credit and debit card revenue when earned by the partner or customer.

Corporate Payment Products Revenue Corporate payment products revenue primarily includes interchange from corporate and purchasing cards processed through card association networks and revenue from proprietary network transactions. The Company records corporate payment products revenue as transactions occur. Volume-related payments to customers and credit card associations are also recorded within corporate payment products revenue when earned by the customer or card association.

Merchant Processing Services Merchant processing services revenue consists principally of merchant discount and other

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

Trust and Investment Management Fees Trust and investment management fees are recognized over the period in which services are performed and are based on a percentage of the fair value of the assets under management or administration, fixed based on account type, or transaction-based fees.

Deposit Service Charges Service charges on deposit accounts are primarily monthly fees based on minimum balances or transaction-based fees. These fees are recognized as earned or as transactions occur and services are provided.

Commercial Products Revenue Commercial products revenue primarily includes revenue related to ancillary services provided to Wholesale Banking and Commercial Real Estate customers including standby letter of credit fees, non-yield related loan fees, capital markets related revenue and non-yield related leasing revenue. These fees are recognized as earned or as transactions occur and services are provided.

Mortgage Banking Revenue Mortgage banking revenue includes revenue derived from mortgages originated and subsequently sold, generally with servicing retained. The primary components include: gains and losses on mortgage sales; servicing revenue; changes in fair value for mortgage loans originated with the intent to sell and measured at fair value under the fair value option; changes in fair value for derivative commitments to purchase and originate mortgage loans; changes in the fair value of mortgage servicing rights (“MSRs”); and the impact of risk management activities associated with the mortgage origination pipeline, funded loans and MSRs. Net interest income from mortgage loans is recorded in interest income. Refer to Other Significant Policies in Note 1, as well as Note 9 and Note 21 for a further discussion of MSRs.

Other Significant Policies

Goodwill and Other Intangible Assets Goodwill is recorded on acquired businesses if the purchase price exceeds the fair value of the net assets acquired. Other intangible assets are recorded at their fair value upon completion of a business acquisition or certain other transactions, and generally represent the value of customer contracts or relationships. Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment at a

reporting unit level. In certain situations, an interim impairment test may be required if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Other intangible assets are amortized over their estimated useful lives, using straight-line and accelerated methods and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. Determining the amount of goodwill impairment, if any, includes assessing the current implied fair value of the reporting unit as if it were being acquired in a business combination and comparing it to the carrying amount of the reporting unit’s goodwill. Determining the amount of other intangible asset impairment, if any, includes assessing the present value of the estimated future cash flows associated with the intangible asset and comparing it to the carrying amount of the asset.

Income Taxes Deferred taxes are recorded to reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting carrying amounts. The Company uses the deferral method of accounting on investments that generate investment tax credits. Under this method, the investment tax credits are recognized as a reduction to the related asset. Beginning January 1, 2014, the Company presents the expense on certain qualified affordable housing investments in tax expense rather than noninterest expense.

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

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

in interest rates and market valuations. Actuarial gains and losses include the impact of plan amendments and various unrecognized gains and losses which are deferred and amortized over the future service periods of active employees. The market-related value utilized to determine the expected return on plan assets is based on fair value adjusted for the difference between expected returns and actual performance of plan assets. The unrealized difference between actual experience and expected returns is included in expense over a period of approximately fifteen years. The overfunded or underfunded status of the plans is recorded as an asset or liability on the Consolidated Balance Sheet, with changes in that status recognized through other comprehensive income (loss).

Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and depreciated primarily on a straight-line basis over the estimated life of the assets. Estimated useful lives range up to 40 years for newly constructed buildings and from 3 to 20 years for furniture and equipment.

Capitalized leases, less accumulated amortization, are included in premises and equipment. Capitalized lease obligations are included in long-term debt. Capitalized leases are amortized on a straight-line basis over the lease term and the amortization is included in depreciation expense.

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

Per Share Calculations Earnings per common share is calculated by dividing net income applicable to U.S. Bancorp common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per common share is calculated by adjusting income and outstanding shares, assuming conversion of all potentially dilutive securities.

NOTE 2 _{Accounting Changes}

Revenue Recognition In May 2014, the Financial Accounting Standards Board (“FASB”) issued accounting guidance, originally

effective for the Company on January 1, 2017, related to revenue recognition from contracts with customers. In August 2015, the FASB delayed the effective date of this guidance by one year, resulting in it becoming effective for the Company on January 1, 2018.

This guidance amends certain currently existing revenue recognition accounting guidance and allows for either retrospective application to all periods presented or a modified retrospective approach where the guidance would only be applied to existing contracts in effect at the adoption date and new contracts going forward. The Company expects the adoption of this guidance will not be material to its financial statements.

Accounting for Leases In February 2016, the FASB issued accounting guidance, effective for the Company on January 1, 2019, related to the accounting for leases. This guidance will require lessees to recognize all leases on the Consolidated Balance Sheet as lease assets and lease liabilities, with lessor accounting being largely unchanged. This guidance also requires additional disclosures regarding leasing arrangements. The Company expects the adoption of this guidance will not be material to its financial statements.

Financial Instruments – Credit Losses In June 2016, the FASB issued accounting guidance, effective for the Company no later than January 1, 2020, related to the impairment of financial instruments. This guidance changes existing impairment recognition to a model that is based on expected losses rather than incurred losses, which is intended to result in more timely recognition of credit losses. This guidance is also intended to reduce the complexity of current accounting guidance by decreasing the number of credit impairment models that entities use to account for debt instruments. The Company is currently evaluating the impact of this guidance on its financial statements.

NOTE 3 _{Restrictions on Cash and Due from}

_Banks

Banking regulators require bank subsidiaries to maintain minimum average reserve balances, either in the form of vault cash or reserve balances held with central banks or other financial institutions. The amount of required reserve balances were approximately $3.0 billion and $2.2 billion at December 31, 2016 and 2015, respectively, and primarily represent those required to be held at the Federal Reserve Bank. In addition to vault cash, the Company held balances at the Federal Reserve Bank and other financial institutions of $2.9 billion and $3.3 billion at December 31, 2016 and 2015, respectively, to meet these requirements. These balances are included in cash and due from banks on the Consolidated Balance Sheet.

NOTE 4 _{Investment Securities}

The amortized cost, other-than-temporary impairment recorded in other comprehensive income (loss), gross unrealized holding gains and losses, and fair value of held-to-maturity and available-for-sale investment securities at December 31 were as follows:


	2016												2015
					Unrealized Losses												Unrealized Losses
(Dollars in Millions)	Amortized Cost		Unrealized Gains		Other-than- Temporary^(e)			Other^(f)			Fair Value		Amortized Cost		Unrealized Gains		Other-than- Temporary^(e)			Other^(f)			Fair Value
Held-to-maturity^(a)
U.S. Treasury and agencies	$	5,246	$	12	$	–		$	(132	)	$	5,126	$	2,925	$	14	$	–		$	(20	)	$	2,919
Mortgage-backed securities
Residential
Agency		37,706		85		–			(529	)		37,262		40,619		175		–			(273	)		40,521
Non-agency non-prime^(d)		1		–		–			–			1		1		–		–			–			1
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		–		5		–			–			5		–		6		–			–			6
Other		8		3		–			–			11		10		3		–			–			13
Obligations of state and political subdivisions		6		1		–			–			7		8		1		–			(1	)		8
Obligations of foreign governments		9		–		–			–			9		9		–		–			–			9
Other debt securities		15		–		–			(1	)		14		18		–		–			(2	)		16
Total held-to-maturity	$	42,991	$	106	$	–		$	(662	)	$	42,435	$	43,590	$	199	$	–		$	(296	)	$	43,493
Available-for-sale^(b)
U.S. Treasury and agencies	$	17,314	$	11	$	–		$	(198	)	$	17,127	$	4,611	$	12	$	–		$	(27	)	$	4,596
Mortgage-backed securities
Residential
Agency		43,558		225		–			(645	)		43,138		50,056		384		–			(364	)		50,076
Non-agency
Prime^(c)		240		6		(3	)		(1	)		242		316		6		(3	)		(1	)		318
Non-prime^(d)		178		20		(3	)		–			195		221		20		(1	)		–			240
Commercial agency		15		–		–			–			15		52		–		–			–			52
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		–		–		–			–			–		16		3		–			–			19
Other		475		8		–			–			483		532		9		–			–			541
Obligations of state and political subdivisions		5,167		55		–			(183	)		5,039		5,149		169		–			(2	)		5,316
Corporate debt securities		11		–		–			(2	)		9		677		3		–			(70	)		610
Perpetual preferred securities		–		–		–			–			–		153		20		–			(12	)		161
Other investments		27		9		–			–			36		34		34		–			–			68
Total available-for-sale	$	66,985	$	334	$	(6	)	$	(1,029	)	$	66,284	$	61,817	$	660	$	(4	)	$	(476	)	$	61,997

(a)

Held-to-maturity investment securities are carried at historical cost or at fair value at the time of transfer from the available-for-sale to held-to-maturity category, adjusted for amortization of premiums and accretion of discounts and credit-related other-than-temporary impairment.

(b)

Available-for-sale investment securities are carried at fair value with unrealized net gains or losses reported within accumulated other comprehensive income (loss) in shareholders’ equity.

(c)

Prime securities are those designated as such by the issuer at origination. When an issuer designation is unavailable, the Company determines at acquisition date the categorization based on asset pool characteristics (such as weighted-average credit score, loan-to-value, loan type, prevalence of low documentation loans) and deal performance (such as pool delinquencies and security market spreads). When the Company determines the designation, prime securities typically have a weighted-average credit score of 725 or higher and a loan-to-value of 80 percent or lower; however, other pool characteristics may result in designations that deviate from these credit score and loan-to-value thresholds.

(d)

Includes all securities not meeting the conditions to be designated as prime.

(e)

Represents impairment not related to credit for those investment securities that have been determined to be other-than-temporarily impaired.

(f)

Represents unrealized losses on investment securities that have not been determined to be other-than-temporarily impaired.

The weighted-average maturity of the available-for-sale investment securities was 5.1 years at December 31, 2016, compared with 4.7 years at December 31, 2015. The corresponding weighted-average yields were 2.06 percent and 2.21 percent, respectively. The weighted-average maturity of the held-to-maturity investment securities was 4.6 years at December 31, 2016, and 4.2 years at December 31, 2015. The corresponding weighted-average yields were 1.93 percent and 1.92 percent, respectively.

For amortized cost, fair value and yield by maturity date of held-to-maturity and available-for-sale investment securities outstanding at December 31, 2016, refer to Table 13 included in Management’s Discussion and Analysis, which is incorporated by reference into these Notes to Consolidated Financial Statements.

Investment securities with a fair value of $11.3 billion at December 31, 2016, and $13.1 billion at December 31, 2015, were pledged to secure public, private and trust deposits,

repurchase agreements and for other purposes required by contractual obligation or law. Included in these amounts were securities where the Company and certain counterparties have agreements granting the counterparties the right to sell or pledge

the securities. Investment securities securing these types of arrangements had a fair value of $755 million at December 31, 2016, and $1.0 billion at December 31, 2015.

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


Year Ended December 31 (Dollars in Millions)	2016		2015		2014
Taxable	$	1,878	$	1,778	$	1,634
Non-taxable		200		223		232
Total interest income from investment securities	$	2,078	$	2,001	$	1,866

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


Year Ended December 31 (Dollars in Millions)	2016			2015			2014
Realized gains	$	93		$	7		$	11
Realized losses		(66	)		(6	)		–
Net realized gains (losses)	$	27		$	1		$	11
Income tax (benefit) on net realized gains (losses)	$	10		$	–		$	4

The Company conducts a regular assessment of its investment securities with unrealized losses to determine whether investment securities are other-than-temporarily impaired considering, among other factors, the nature of the investment securities, the credit ratings or financial condition of the issuer, the extent and duration of the unrealized loss, expected cash flows of underlying collateral, the existence of any government or agency guarantees, market conditions and whether the Company intends to sell or it is more likely than not the Company will be required to sell the investment securities. The Company determines other-than-temporary impairment recorded in

earnings for debt securities not intended to be sold by estimating the future cash flows of each individual investment security, using market information where available, and discounting the cash flows at the original effective rate of the investment security. Other-than-temporary impairment recorded in other comprehensive income (loss) is measured as the difference between that discounted amount and the fair value of each investment security. The total amount of other-than-temporary impairment recorded was immaterial for the years ended December 31, 2016, 2015 and 2014.

Changes in the credit losses on debt securities are summarized as follows:


Year Ended December 31 (Dollars in Millions)	2016			2015			2014
Balance at beginning of period	$	84		$	101		$	116
Additions to Credit Losses Due to Other-than-temporary Impairments
Decreases in expected cash flows on securities for which other-than-temporary impairment was previously recognized		3			1			3
Total other-than-temporary impairment on debt securities		3			1			3
Other Changes in Credit Losses
Increases in expected cash flows		(2	)		(3	)		(5	)
Realized losses^(a)		(10	)		(15	)		(13	)
Balance at end of period	$	75		$	84		$	101

(a)

Primarily represents principal losses allocated to mortgage and asset-backed securities in the Company’s portfolio under the terms of the securitization transaction documents.

At December 31, 2016, certain investment securities had a fair value below amortized cost. The following table shows the gross unrealized losses and fair value of the Company’s investment securities with unrealized losses, aggregated by investment category and length of time the individual investment securities have been in continuous unrealized loss positions, at December 31, 2016:


	Less Than 12 Months					12 Months or Greater					Total
(Dollars in Millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Held-to-maturity
U.S. Treasury and agencies	$	3,662	$	(132	)	$	–	$	–		$	3,662	$	(132	)
Residential agency mortgage-backed securities		26,937		(462	)		2,132		(67	)		29,069		(529	)
Other asset-backed securities		–		–			5		–			5		–
Other debt securities		15		(1	)		–		–			15		(1	)
Total held-to-maturity	$	30,614	$	(595	)	$	2,137	$	(67	)	$	32,751	$	(662	)
Available-for-sale
U.S. Treasury and agencies	$	14,490	$	(198	)	$	–	$	–		$	14,490	$	(198	)
Residential mortgage-backed securities
Agency		30,601		(552	)		3,149		(93	)		33,750		(645	)
Non-agency^(a)
Prime^(b)		11		–			93		(4	)		104		(4	)
Non-prime^(c)		18		(1	)		12		(2	)		30		(3	)
Commercial agency		10		–			–		–			10		–
Other asset-backed securities		–		–			2		–			2		–
Obligations of state and political subdivisions		2,272		(183	)		3		–			2,275		(183	)
Corporate debt securities		–		–			9		(2	)		9		(2	)
Other investments		1		–			–		–			1		–
Total available-for-sale	$	47,403	$	(934	)	$	3,268	$	(101	)	$	50,671	$	(1,035	)

(a)

The Company had $7 million of unrealized losses on residential non-agency mortgage-backed securities. Credit-related other-than-temporary impairment on these securities may occur if there is further deterioration in the underlying collateral pool performance. Borrower defaults may increase if economic conditions worsen. Additionally, deterioration in home prices may increase the severity of projected losses.

(b)

(c)

Includes all securities not meeting the conditions to be designated as prime.

The Company does not consider these unrealized losses to be credit-related. These unrealized losses primarily relate to changes in interest rates and market spreads subsequent to purchase. A substantial portion of investment securities that have unrealized losses are either U.S. Treasury and agencies, agency mortgage-backed or state and political securities. In general, the issuers of the investment securities are contractually prohibited

from prepayment at less than par, and the Company did not pay significant purchase premiums for these investment securities. At December 31, 2016, the Company had no plans to sell investment securities with unrealized losses, and believes it is more likely than not it would not be required to sell such investment securities before recovery of their amortized cost.

NOTE 5 _{Loans and Allowance for Credit Losses}

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


(Dollars in Millions)	2016		2015

Commercial
Commercial	$	87,928	$	83,116
Lease financing		5,458		5,286

Total commercial		93,386		88,402

Commercial Real Estate
Commercial mortgages		31,592		31,773
Construction and development		11,506		10,364

Total commercial real estate		43,098		42,137

Residential Mortgages
Residential mortgages		43,632		40,425
Home equity loans, first liens		13,642		13,071

Total residential mortgages		57,274		53,496

Credit Card		21,749		21,012

Other Retail
Retail leasing		6,316		5,232
Home equity and second mortgages		16,369		16,384
Revolving credit		3,282		3,354
Installment		8,087		7,030
Automobile		17,571		16,587
Student		2,239		2,619

Total other retail		53,864		51,206

Total loans, excluding covered loans		269,371		256,253
Covered Loans		3,836		4,596

Total loans	$	273,207	$	260,849

The Company had loans of $84.5 billion at December 31, 2016, and $78.1 billion at December 31, 2015, pledged at the Federal Home Loan Bank, and loans of $66.5 billion at December 31, 2016, and $63.4 billion at December 31, 2015, pledged at the Federal Reserve Bank.

The majority of the Company’s loans are to borrowers in the states in which it has Consumer and Small Business Banking offices. Collateral for commercial loans may include marketable securities, accounts receivable, inventory, equipment and real estate. For details of the Company’s commercial portfolio by industry group and geography as of December 31, 2016 and 2015, see Table 7 included in Management’s Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements.

For detail of the Company’s commercial real estate portfolio by property type and geography as of December 31, 2016 and 2015, see Table 8 included in Management’s Discussion and

Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements. Collateral for such loans may include the related property, marketable securities, accounts receivable, inventory and equipment.

Originated loans are reported at the principal amount outstanding, net of unearned interest and deferred fees and costs. Net unearned interest and deferred fees and costs amounted to $672 million at December 31, 2016, and $550 million at December 31, 2015. All purchased loans and related indemnification assets are recorded at fair value at the date of purchase. The Company evaluates purchased loans for impairment at the date of purchase in accordance with applicable authoritative accounting guidance. Purchased loans with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are considered “purchased impaired loans.” All other purchased loans are considered “purchased nonimpaired loans.”

Changes in the accretable balance for purchased impaired loans for the years ended December 31, were as follows:


(Dollars in Millions)	2016			2015			2014
Balance at beginning of period	$	957		$	1,309		$	1,655
Accretion		(392	)		(382	)		(441	)
Disposals		(110	)		(132	)		(131	)
Reclassifications from nonaccretable difference (a)		244			163			229
Other		(1	)		(1	)		(3	)

Balance at end of period	$	698		$	957		$	1,309

(a)

Primarily relates to changes in expected credit performance.

Allowance for Credit Losses The allowance for credit losses is established for probable and estimable losses incurred in the Company’s loan and lease portfolio, including unfunded credit

commitments, and includes certain amounts that do not represent loss exposure to the Company because those losses are recoverable under loss sharing agreements with the FDIC.

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


(Dollars in Millions)	Commercial			Commercial Real Estate			Residential Mortgages			Credit Card			Other Retail			Total Loans, Excluding Covered Loans			Covered Loans			Total Loans
Balance at December 31, 2015	$	1,287		$	724		$	631		$	883		$	743		$	4,268		$	38		$	4,306
Add
Provision for credit losses		488			75			(61	)		728			95			1,325			(1	)		1,324
Deduct
Loans charged off		417			22			85			759			332			1,615			–			1,615
Less recoveries of loans charged off		(92	)		(35	)		(25	)		(83	)		(111	)		(346	)		–			(346	)

Net loans charged off		325			(13	)		60			676			221			1,269			–			1,269
Other changes^(a)		–			–			–			(1	)		–			(1	)		(3	)		(4	)

Balance at December 31, 2016	$	1,450		$	812		$	510		$	934		$	617		$	4,323		$	34		$	4,357

Balance at December 31, 2014	$	1,146		$	726		$	787		$	880		$	771		$	4,310		$	65		$	4,375
Add
Provision for credit losses		361			(30	)		(47	)		654			193			1,131			1			1,132
Deduct
Loans charged off		314			22			135			726			319			1,516			–			1,516
Less recoveries of loans charged off		(95	)		(50	)		(26	)		(75	)		(98	)		(344	)		–			(344	)

Net loans charged off		219			(28	)		109			651			221			1,172			–			1,172
Other changes^(a)		(1	)		–			–			–			–			(1	)		(28	)		(29	)

Balance at December 31, 2015	$	1,287		$	724		$	631		$	883		$	743		$	4,268		$	38		$	4,306

Balance at December 31, 2013	$	1,075		$	776		$	875		$	884		$	781		$	4,391		$	146		$	4,537
Add
Provision for credit losses		266			(63	)		107			657			278			1,245			(16	)		1,229
Deduct
Loans charged off		305			36			216			725			384			1,666			13			1,679
Less recoveries of loans charged off		(110	)		(49	)		(21	)		(67	)		(96	)		(343	)		(2	)		(345	)

Net loans charged off		195			(13	)		195			658			288			1,323			11			1,334
Other changes^(a)		–			–			–			(3	)		–			(3	)		(54	)		(57	)

Balance at December 31, 2014	$	1,146		$	726		$	787		$	880		$	771		$	4,310		$	65		$	4,375

(a)

Includes net changes in credit losses to be reimbursed by the FDIC and reductions in the allowance for covered loans where the reversal of a previously recorded allowance was offset by an associated decrease in the indemnification asset, and the impact of any loan sales.

Additional detail of the allowance for credit losses by portfolio class was as follows:


(Dollars in Millions)	Commercial		Commercial Real Estate		Residential Mortgages		Credit Card		Other Retail		Total Loans, Excluding Covered Loans		Covered Loans		Total Loans

Allowance Balance at December 31, 2016 Related to
Loans individually evaluated for impairment^(a)	$	50	$	4	$	–	$	–	$	–	$	54	$	–	$	54
TDRs collectively evaluated for impairment		12		4		180		65		20		281		1		282
Other loans collectively evaluated for impairment		1,388		798		330		869		597		3,982		–		3,982
Loans acquired with deteriorated credit quality		–		6		–		–		–		6		33		39

Total allowance for credit losses	$	1,450	$	812	$	510	$	934	$	617	$	4,323	$	34	$	4,357

Allowance Balance at December 31, 2015 Related to
Loans individually evaluated for impairment^(a)	$	11	$	2	$	–	$	–	$	–	$	13	$	–	$	13
TDRs collectively evaluated for impairment		10		7		236		57		33		343		2		345
Other loans collectively evaluated for impairment		1,266		703		395		826		710		3,900		–		3,900
Loans acquired with deteriorated credit quality		–		12		–		–		–		12		36		48

Total allowance for credit losses	$	1,287	$	724	$	631	$	883	$	743	$	4,268	$	38	$	4,306

(a)

Represents the allowance for credit losses related to loans greater than $5 million classified as nonperforming or TDRs.

Additional detail of loan balances by portfolio class was as follows:


(Dollars in Millions)	Commercial		Commercial Real Estate		Residential Mortgages		Credit Card		Other Retail		Total Loans, Excluding Covered Loans		Covered Loans^(b)		Total Loans

December 31, 2016
Loans individually evaluated for impairment^(a)	$	623	$	70	$	–	$	–	$	–	$	693	$	–	$	693
TDRs collectively evaluated for impairment		145		146		3,678		222		173		4,364		35		4,399
Other loans collectively evaluated for impairment		92,611		42,751		53,595		21,527		53,691		264,175		1,553		265,728
Loans acquired with deteriorated credit quality		7		131		1		–		–		139		2,248		2,387

Total loans	$	93,386	$	43,098	$	57,274	$	21,749	$	53,864	$	269,371	$	3,836	$	273,207

December 31, 2015
Loans individually evaluated for impairment^(a)	$	336	$	41	$	13	$	–	$	–	$	390	$	–	$	390
TDRs collectively evaluated for impairment		138		235		4,241		210		211		5,035		35		5,070
Other loans collectively evaluated for impairment		87,927		41,566		49,241		20,802		50,995		250,531		2,059		252,590
Loans acquired with deteriorated credit quality		1		295		1		–		–		297		2,502		2,799

Total loans	$	88,402	$	42,137	$	53,496	$	21,012	$	51,206	$	256,253	$	4,596	$	260,849

(a)

Represents loans greater than $5 million classified as nonperforming or TDRs.

(b)

Includes expected reimbursements from the FDIC under loss sharing agreements.

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

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

The following table provides a summary of loans by portfolio class, including the delinquency status of those that continue to accrue interest, and those that are nonperforming:


	Accruing
(Dollars in Millions)	Current		30-89 Days Past Due		90 Days or More Past Due		Nonperforming		Total

December 31, 2016
Commercial	$	92,588	$	263	$	52	$	483	$	93,386
Commercial real estate		42,922		44		8		124		43,098
Residential mortgages^(a)		56,372		151		156		595		57,274
Credit card		21,209		284		253		3		21,749
Other retail		53,340		284		83		157		53,864

Total loans, excluding covered loans		266,431		1,026		552		1,362		269,371
Covered loans		3,563		55		212		6		3,836

Total loans	$	269,994	$	1,081	$	764	$	1,368	$	273,207

December 31, 2015
Commercial	$	87,863	$	317	$	48	$	174	$	88,402
Commercial real estate		41,907		89		14		127		42,137
Residential mortgages^(a)		52,438		170		176		712		53,496
Credit card		20,532		243		228		9		21,012
Other retail		50,745		224		75		162		51,206

Total loans, excluding covered loans		253,485		1,043		541		1,184		256,253
Covered loans		4,236		62		290		8		4,596

Total loans	$	257,721	$	1,105	$	831	$	1,192	$	260,849

(a)

At December 31, 2016, $273 million of loans 30–89 days past due and $2.5 billion of loans 90 days or more past due purchased from Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs, were classified as current, compared with $320 million and $2.9 billion at December 31, 2015, respectively.

Total nonperforming assets include nonaccrual loans, restructured loans not performing in accordance with modified terms, other real estate and other nonperforming assets owned by the Company. For details of the Company’s nonperforming assets as of December 31, 2016 and 2015, see Table 16 included in Management’s Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements.

At December 31, 2016, the amount of foreclosed residential real estate held by the Company, and included in OREO, was $201 million ($175 million excluding covered assets), compared with $282 million ($250 million excluding covered assets) at December 31, 2015. This excludes $373 million and $535 million

at December 31, 2016 and 2015, respectively, of foreclosed residential real estate related to mortgage loans whose payments are primarily insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs. In addition, the amount of residential mortgage loans secured by residential real estate in the process of foreclosure at December 31, 2016 and 2015, was $2.1 billion and $2.6 billion, respectively, of which $1.6 billion and $1.9 billion, respectively, related to loans purchased from Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs.

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


			Criticized
(Dollars in Millions)	Pass		Special Mention		Classified^(a)		Total Criticized		Total

December 31, 2016
Commercial^(b)	$	89,739	$	1,721	$	1,926	$	3,647	$	93,386
Commercial real estate		41,634		663		801		1,464		43,098
Residential mortgages^(c)		56,457		10		807		817		57,274
Credit card		21,493		–		256		256		21,749
Other retail		53,576		6		282		288		53,864

Total loans, excluding covered loans		262,899		2,400		4,072		6,472		269,371
Covered loans		3,766		–		70		70		3,836

Total loans	$	266,665	$	2,400	$	4,142	$	6,542	$	273,207

Total outstanding commitments	$	562,704	$	4,920	$	5,629	$	10,549	$	573,253

December 31, 2015
Commercial^(b)	$	85,206	$	1,629	$	1,567	$	3,196	$	88,402
Commercial real estate		41,079		365		693		1,058		42,137
Residential mortgages^(c)		52,548		2		946		948		53,496
Credit card		20,775		–		237		237		21,012
Other retail		50,899		6		301		307		51,206

Total loans, excluding covered loans		250,507		2,002		3,744		5,746		256,253
Covered loans		4,507		–		89		89		4,596

Total loans	$	255,014	$	2,002	$	3,833	$	5,835	$	260,849

Total outstanding commitments	$	539,614	$	3,945	$	4,845	$	8,790	$	548,404

(a)

Classified rating on consumer loans primarily based on delinquency status.

(b)

At December 31, 2016, $1.2 billion of energy loans ($2.8 billion of total outstanding commitments) had a special mention or classified rating, compared with $1.1 billion of energy loans ($1.9 billion of total outstanding commitments) at December 31, 2015.

(c)

At December 31, 2016, $2.5 billion of GNMA loans 90 days or more past due and $1.6 billion of restructured GNMA loans whose repayments are insured by the Federal Housing Administration or guaranteed by the United States Department of Veterans Affairs were classified with a pass rating, compared with $2.9 billion and $1.9 billion at December 31, 2015, respectively.

For all loan classes, a loan is considered to be impaired when, based on current events or information, it is probable the Company will be unable to collect all amounts due per the contractual terms of the loan agreement. A summary of impaired loans, which include all nonaccrual and TDR loans, by portfolio class was as follows:


(Dollars in Millions)	Period-end Recorded Investment^(a)		Unpaid Principal Balance		Valuation Allowance		Commitments to Lend Additional Funds

December 31, 2016
Commercial	$	849	$	1,364	$	68	$	284
Commercial real estate		293		697		10		–
Residential mortgages		2,274		2,847		153		–
Credit card		222		222		64		–
Other retail		281		456		22		4

Total loans, excluding GNMA and covered loans		3,919		5,586		317		288
Loans purchased from GNMA mortgage pools		1,574		1,574		28		–
Covered loans		36		42		1		1

Total	$	5,529	$	7,202	$	346	$	289

December 31, 2015
Commercial	$	520	$	1,110	$	25	$	154
Commercial real estate		336		847		11		1
Residential mortgages		2,575		3,248		199		–
Credit card		210		210		57		–
Other retail		309		503		35		4

Total loans, excluding GNMA and covered loans		3,950		5,918		327		159
Loans purchased from GNMA mortgage pools		1,913		1,913		40		–
Covered loans		39		48		2		1

Total	$	5,902	$	7,879	$	369	$	160

(a)

Substantially all loans classified as impaired at December 31, 2016 and 2015, had an associated allowance for credit losses. The total amount of interest income recognized during 2016 on loans classified as impaired at December 31, 2016, excluding those acquired with deteriorated credit quality, was $237 million, compared to what would have been recognized at the original contractual terms of the loans of $308 million.

Additional information on impaired loans for the years ended December 31 follows:


(Dollars in Millions)	Average Recorded Investment		Interest Income Recognized

2016
Commercial	$	799	$	9
Commercial real estate		324		15
Residential mortgages		2,422		124
Credit card		214		4
Other retail		293		13

Total loans, excluding GNMA and covered loans		4,052		165
Loans purchased from GNMA mortgage pools		1,620		71
Covered loans		38		1

Total	$	5,710	$	237

2015
Commercial	$	383	$	13
Commercial real estate		433		16
Residential mortgages		2,666		131
Credit card		221		4
Other retail		336		14

Total loans, excluding GNMA and covered loans		4,039		178
Loans purchased from GNMA mortgage pools		2,079		95
Covered loans		42		1

Total	$	6,160	$	274

2014
Commercial	$	414	$	9
Commercial real estate		592		26
Residential mortgages		2,742		140
Credit card		273		9
Other retail		377		17

Total loans, excluding GNMA and covered loans		4,398		201
Loans purchased from GNMA mortgage pools		2,609		124
Covered loans		334		15

Total	$	7,341	$	340


(Dollars in Millions)	Number of Loans		Pre-Modification Outstanding Loan Balance		Post-Modification Outstanding Loan Balance

2016
Commercial		2,352	$	844	$	699
Commercial real estate		102		259		256
Residential mortgages		1,576		168		178
Credit card		31,394		151		153
Other retail		2,235		41		40

Total loans, excluding GNMA and covered loans		37,659		1,463		1,326
Loans purchased from GNMA mortgage pools		11,260		1,274		1,267
Covered loans		39		6		7

Total loans		48,958	$	2,743	$	2,600

2015
Commercial		1,607	$	385	$	396
Commercial real estate		108		78		76
Residential mortgages		2,080		260		258
Credit card		26,772		133		134
Other retail		2,530		54		54

Total loans, excluding GNMA and covered loans		33,097		910		918
Loans purchased from GNMA mortgage pools		8,199		864		862
Covered loans		16		5		5

Total loans		41,312	$	1,779	$	1,785

2014
Commercial		2,027	$	238	$	203
Commercial real estate		78		80		71
Residential mortgages		2,089		271		274
Credit card		26,511		144		145
Other retail		2,833		61		61

Total loans, excluding GNMA and covered loans		33,538		794		754
Loans purchased from GNMA mortgage pools		8,961		1,000		1,013
Covered loans		43		15		14

Total loans		42,542	$	1,809	$	1,781

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

quarter of 2016, at December 31, 2016, 106 residential mortgages, 6 home equity and second mortgage loans and 1,366 loans purchased from GNMA mortgage pools with outstanding balances of $11 million, less than $1 million and $179 million, respectively, were in a trial period and have estimated post-modification balances of $13 million, less than $1 million and $175 million, respectively, assuming permanent modification occurs at the end of the trial period.

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


(Dollars in Millions)	Number of Loans		Amount Defaulted

2016
Commercial		531	$	24
Commercial real estate		27		12
Residential mortgages		132		17
Credit card		6,827		30
Other retail		434		9

Total loans, excluding GNMA and covered loans		7,951		92
Loans purchased from GNMA mortgage pools		202		25
Covered loans		4		1

Total loans		8,157	$	118

2015
Commercial		494	$	21
Commercial real estate		18		8
Residential mortgages		273		36
Credit card		6,286		29
Other retail		636		12

Total loans, excluding GNMA and covered loans		7,707		106
Loans purchased from GNMA mortgage pools		598		75
Covered loans		5		1

Total loans		8,310	$	182

2014
Commercial		629	$	44
Commercial real estate		22		12
Residential mortgages		611		86
Credit card		6,335		33
Other retail		845		24

Total loans, excluding GNMA and covered loans		8,442		199
Loans purchased from GNMA mortgage pools		876		102
Covered loans		14		5

Total loans		9,332	$	306

In addition to the defaults in the table above, the Company had a total of 1,697 residential mortgage loans, home equity and second mortgage loans and loans purchased from GNMA mortgage pools for the year ended December 31, 2016, where borrowers did not successfully complete the trial period

arrangement and, therefore, are no longer eligible for a permanent modification under the applicable modification program. These loans had aggregate outstanding balances of $230 million for year ended December 31, 2016.

Covered Assets Covered assets represent loans and other assets acquired from the FDIC, subject to loss sharing agreements, and include expected reimbursements from the FDIC. The carrying amount of the covered assets at December 31, consisted of purchased impaired loans, purchased nonimpaired loans and other assets as shown in the following table:


	2016								2015
(Dollars in Millions)	Purchased Impaired Loans		Purchased Nonimpaired Loans		Other		Total		Purchased Impaired Loans		Purchased Nonimpaired Loans		Other		Total
Residential mortgage loans	$	2,248	$	506	$	–	$	2,754	$	2,502	$	615	$	–	$	3,117
Other retail loans		–		278		–		278		–		447		–		447
Losses reimbursable by the FDIC^(a)		–		–		381		381		–		–		517		517
Unamortized changes in FDIC asset^(b)		–		–		423		423		–		–		515		515
Covered loans		2,248		784		804		3,836		2,502		1,062		1,032		4,596
Foreclosed real estate		–		–		26		26		–		–		32		32
Total covered assets	$	2,248	$	784	$	830	$	3,862	$	2,502	$	1,062	$	1,064	$	4,628

(a)

Relates to loss sharing agreements with remaining terms up to three years.

(b)

Represents decreases in expected reimbursements by the FDIC as a result of decreases in expected losses on the covered loans. These amounts are amortized as a reduction in interest income on covered loans over the shorter of the expected life of the respective covered loans or the remaining contractual term of the indemnification agreements.

Interest income is recognized on purchased impaired loans through accretion of the difference between the carrying amount of those loans and their expected cash flows. The initial determination of the fair value of the purchased loans includes the

impact of expected credit losses and, therefore, no allowance for credit losses is recorded at the purchase date. To the extent credit deterioration occurs after the date of acquisition, the Company records an allowance for credit losses.

NOTE 6 _Leases

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


(Dollars in Millions)	2016			2015
Aggregate future minimum lease payments to be received	$	11,257		$	10,257
Unguaranteed residual values accruing to the lessor’s benefit		1,175			766
Unearned income		(1,023	)		(887	)
Initial direct costs		237			204

Total net investment in sales-type and direct financing leases^(a)	$	11,646		$	10,340

(a)

The accumulated allowance for uncollectible minimum lease payments was $83 million and $66 million at December 31, 2016 and 2015, respectively.

The minimum future lease payments to be received from sales-type and direct financing leases were as follows at December 31, 2016:


(Dollars in Millions)
2017	$	3,836
2018		2,884
2019		2,641
2020		1,116
2021		375
Thereafter		405

100

NOTE 7 _{Accounting for Transfers and Servicing of
Financial Assets and Variable Interest}

_Entities

The Company transfers financial assets in the normal course of business. The majority of the Company’s financial asset transfers are residential mortgage loan sales primarily to government-sponsored enterprises (“GSEs”), transfers of tax-advantaged investments, commercial loan sales through participation agreements, and other individual or portfolio loan and securities sales. In accordance with the accounting guidance for asset transfers, the Company considers any ongoing involvement with transferred assets in determining whether the assets can be derecognized from the balance sheet. Guarantees provided to certain third parties in connection with the transfer of assets are further discussed in Note 22.

For loans sold under participation agreements, the Company also considers whether the terms of the loan participation agreement meet the accounting definition of a participating interest. With the exception of servicing and certain performance-based guarantees, the Company’s continuing involvement with financial assets sold is minimal and generally limited to market customary representation and warranty clauses. Any gain or loss on sale depends on the previous carrying amount of the transferred financial assets, the consideration received, and any liabilities incurred in exchange for the transferred assets. Upon transfer, any servicing assets and other interests that continue to be held by the Company are initially recognized at fair value. For further information on MSRs, refer to Note 9. On a limited basis, the Company may acquire and package high-grade corporate bonds for select corporate customers, in which the Company generally has no continuing involvement with these transactions. Additionally, the Company is an authorized GNMA issuer and issues GNMA securities on a regular basis. The Company has no other asset securitizations or similar asset-backed financing arrangements that are off-balance sheet.

Effective January 1, 2016, the Company adopted accounting guidance, issued by the FASB in February 2015, relating to the analysis required by organizations to evaluate whether they should consolidate certain legal entities. The adoption of this guidance did not have a material impact on the Company’s financial statements, and specifically excludes registered money market funds from the consolidation analysis. The Company provides financial support primarily through the use of waivers of management fees associated with various registered money market funds it manages, which are excluded from the consolidation analysis. The Company provided $45 million, $112 million and $119 million of support to the funds during the years ended December 31, 2016, 2015 and 2014, respectively.

The Company is involved in various entities that are considered to be VIEs. The Company’s investments in VIEs are primarily related to investments promoting affordable housing, community development and renewable energy sources. Some of these tax-advantaged investments support the Company’s regulatory compliance with the Community Reinvestment Act.

The Company’s investments in these entities generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. These tax credits are recognized as a reduction of tax expense or, for investments qualifying as investment tax credits, as a reduction to the related investment asset. The Company recognized federal and state income tax credits related to its affordable housing and other tax-advantaged investments in tax expense of $698 million, $733 million and $773 million for the years ended December 31, 2016, 2015 and 2014, respectively. The Company also recognized $1.4 billion, $1.2 billion and $937 million of investment tax credits for the years ended December 31, 2016, 2015 and 2014, respectively. The Company recognized $672 million, $698 million and $771 million of expenses related to all of these investments for the years ended December 31, 2016, 2015 and 2014, of which $251 million, $261 million and $258 million, respectively, was included in tax expense and the remainder was included in noninterest expense.

The Company is not required to consolidate VIEs in which it has concluded it does not have a controlling financial interest, and thus is not the primary beneficiary. In such cases, the Company does not have both the power to direct the entities’ most significant activities and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIEs.

The Company’s investments in these unconsolidated VIEs are carried in other assets on the Consolidated Balance Sheet. The Company’s unfunded capital and other commitments related to these unconsolidated VIEs are generally carried in other liabilities on the Consolidated Balance Sheet. The Company’s maximum exposure to loss from these unconsolidated VIEs include the investment recorded on the Company’s Consolidated Balance Sheet, net of unfunded capital commitments, and previously recorded tax credits which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level. While the Company believes potential losses from these investments are remote, the maximum exposure was determined by assuming a scenario where the community-based business and housing projects completely fail and do not meet certain government compliance requirements resulting in recapture of the related tax credits.

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


At December 31 (Dollars in Millions)	2016		2015
Investment carrying amount	$	5,009	$	5,257
Unfunded capital and other commitments		2,477		2,499
Maximum exposure to loss		10,373		9,436

101

The Company also has noncontrolling financial investments in private investment funds and partnerships considered to be VIEs, which are not consolidated. The Company’s recorded investment in these entities, carried in other assets on the Consolidated Balance Sheet, was approximately $28 million at December 31, 2016, compared with $32 million at December 31, 2015. The maximum exposure to loss related to these VIEs was $50 million at December 31, 2016 and $47 million at December 31, 2015, representing the Company’s investment balance and its unfunded commitments to invest additional amounts.

The Company’s individual net investments in unconsolidated VIEs, which exclude any unfunded capital commitments, ranged from less than $1 million to $40 million at December 31, 2016, compared with less than $1 million to $46 million at December 31, 2015.

The Company is required to consolidate VIEs in which it has concluded it has a controlling financial interest. The Company sponsors entities to which it transfers its interests in tax-advantaged investments to third parties. At December 31, 2016, approximately $3.5 billion of the Company’s assets and $2.6 billion of its liabilities included on the Consolidated Balance Sheet were related to community development and tax-advantaged investment VIEs which the Company has consolidated, primarily related to these transfers. These amounts compared to $3.0 billion and $2.2 billion, respectively, at December 31, 2015. The majority of the assets of these consolidated VIEs are reported in other assets, and the liabilities

are reported in long-term debt and other liabilities. The assets of a particular VIE are the primary source of funds to settle its obligations. The creditors of the VIEs do not have recourse to the general credit of the Company. The Company’s exposure to the consolidated VIEs is generally limited to the carrying value of its variable interests plus any related tax credits previously recognized or transferred to others with a guarantee.

The Company also sponsors a conduit to which it previously transferred high-grade investment securities. The Company consolidates the conduit because of its ability to manage the activities of the conduit. At December 31, 2016, $24 million of the held-to-maturity investment securities on the Company’s Consolidated Balance Sheet were related to the conduit, compared with $28 million at December 31, 2015.

In addition, the Company sponsors a municipal bond securities tender option bond program. The Company controls the activities of the program’s entities, is entitled to the residual returns and provides credit, liquidity and remarketing arrangements to the program. As a result, the Company has consolidated the program’s entities. At December 31, 2016, $1.1 billion of available-for-sale investment securities and $1.1 billion of short-term borrowings on the Consolidated Balance Sheet were related to the tender option bond program, compared with $2.3 billion of available-for-sale investment securities and $2.2 billion of short-term borrowings at December 31, 2015.

NOTE 8 _{Premises and Equipment}

Premises and equipment at December 31 consisted of the following:


(Dollars in Millions)	2016			2015
Land	$	516		$	522
Buildings and improvements		3,383			3,348
Furniture, fixtures and equipment		2,798			2,721
Capitalized building and equipment leases		125			113
Construction in progress		29			19

		6,851			6,723
Less accumulated depreciation and amortization		(4,408	)		(4,210	)

Total	$	2,443		$	2,513

NOTE 9 _{Mortgage Servicing Rights}

The Company serviced $232.6 billion of residential mortgage loans for others at December 31, 2016, and $231.8 billion at December 31, 2015, which include subserviced mortgages with no corresponding MSRs asset. The net impact included in mortgage banking revenue of fair value changes of MSRs due to changes in valuation assumptions and derivatives used to economically hedge MSRs were net gains of $7 million,

$23 million and $241 million (of which $44 million related to excess servicing rights sold during 2014) for the years ended December 31, 2016, 2015 and 2014, respectively. Loan servicing and ancillary fees, not including valuation changes, included in mortgage banking revenue, were $750 million, $728 million and $732 million for the years ended December 31, 2016, 2015 and 2014, respectively.

102

Changes in fair value of capitalized MSRs for the years ended December 31, are summarized as follows:


(Dollars in Millions)	2016			2015			2014
Balance at beginning of period	$	2,512		$	2,338		$	2,680
Rights purchased		43			29			5
Rights capitalized		524			632			382
Rights sold		–			–			(141	)
Changes in fair value of MSRs
Due to fluctuations in market interest rates^(a)		(55	)		(58	)		(276	)
Due to revised assumptions or models^(b)		19			10			86
Other changes in fair value^(c)		(452	)		(439	)		(398	)

Balance at end of period	$	2,591		$	2,512		$	2,338

(a)

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

(b)

Includes changes in MSR value not caused by changes in market interest rates, such as changes in cost to service, ancillary income, and option adjusted spread or discount rate, as well as the impact of any model changes. 2014 includes a $44 million revaluation gain related to excess servicing rights sold.

(c)

Primarily represents changes due to realization of expected cash flows over time (decay).

The estimated sensitivity to changes in interest rates of the fair value of the MSRs portfolio and the related derivative instruments as of December 31 follows:


	2016																		2015
(Dollars in Millions)	Down 100 bps			Down 50 bps			Down 25 bps			Up 25 bps			Up 50 bps			Up 100 bps			Down 100 bps			Down 50 bps			Down 25 bps			Up 25 bps			Up 50 bps			Up 100 bps
MSR portfolio	$	(476	)	$	(209	)	$	(98	)	$	85		$	159		$	270		$	(598	)	$	(250	)	$	(114	)	$	96		$	176		$	344
Derivative instrument hedges		375			180			88			(84	)		(165	)		(314	)		475			226			107			(98	)		(192	)		(377	)
Net sensitivity	$	(101	)	$	(29	)	$	(10	)	$	1		$	(6	)	$	(44	)	$	(123	)	$	(24	)	$	(7	)	$	(2	)	$	(16	)	$	(33	)

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

with limited adjustable-rate or jumbo mortgage loans. The HFA division specializes in servicing loans made under state and local housing authority programs. These programs provide mortgages to low-income and moderate-income borrowers and are generally government-insured programs with a favorable rate subsidy, down payment and/or closing cost assistance.

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


	2016												2015
(Dollars in Millions)	HFA			Government			Conventional^(c)			Total			HFA			Government			Conventional^(c)			Total
Servicing portfolio^(a)	$	34,746		$	37,530		$	157,771		$	230,047		$	26,492		$	40,350		$	162,533		$	229,375
Fair value	$	398		$	422		$	1,771		$	2,591		$	297		$	443		$	1,772		$	2,512
Value (bps)^(b)		115			112			112			113			112			110			109			110
Weighted-average servicing fees (bps)		36			34			27			30			36			34			27			29
Multiple (value/servicing fees)		3.19			3.29			4.15			3.77			3.11			3.24			4.04			3.79
Weighted-average note rate		4.37	%		3.95	%		4.02	%		4.06	%		4.46	%		4.08	%		4.09	%		4.13	%
Weighted-average age (in years)		2.9			3.8			3.8			3.7			3.1			3.6			3.4			3.4
Weighted-average expected prepayment (constant prepayment rate)		9.4	%		11.3	%		9.8	%		10.0	%		12.8	%		13.9	%		10.4	%		11.3	%
Weighted-average expected life (in years)		8.0			6.8			6.9			7.0			6.1			5.7			6.6			6.4
Weighted-average option adjusted spread or discount rate^(d)		9.9	%		9.2	%		7.2	%		8.0	%		11.8	%		11.2	%		9.4	%		10.0	%

(a)

Represents principal balance of mortgages having corresponding MSR asset.

(b)

Value is calculated as fair value divided by the servicing portfolio.

(c)

Represents loans sold primarily to GSEs.

(d)

Option adjusted spread is the incremental spread added to the risk-free rate to reflect optionality and other risk inherent in the MSRs. Prior to December 31, 2016 the Company valued MSRs using a static discount rate.

103

NOTE 10 _Intangible

_Assets

Intangible assets consisted of the following:


At December 31 (Dollars in Millions)	Estimated Life^(a)	Amortization Method^(b)			Balance
At December 31 (Dollars in Millions)	Estimated Life^(a)	Amortization Method^(b)			2016		2015
Goodwill			^(c	⁾	$	9,344	$	9,361
Merchant processing contracts	7 years/8 years		SL/AC			108		135
Core deposit benefits	22 years/5 years		SL/AC			161		194
Mortgage servicing rights			^(c	⁾		2,591		2,512
Trust relationships	10 years/6 years		SL/AC			59		75
Other identified intangibles	8 years/4 years		SL/AC			384		434
Total					$	12,647	$	12,711

(a)

Estimated life represents the amortization period for assets subject to the straight line method and the weighted average or life of the underlying cash flows amortization period for intangibles subject to accelerated methods. If more than one amortization method is used for a category, the estimated life for each method is calculated and reported separately.


(b) Amortization methods:		SL = straight line method
		AC = accelerated methods generally based on cash flows

(c)

Goodwill is evaluated for impairment, but not amortized. Mortgage servicing rights are recorded at fair value, and are not amortized.

Aggregate amortization expense consisted of the following:


Year Ended December 31 (Dollars in Millions)	2016		2015		2014
Merchant processing contracts	$	28	$	35	$	50
Core deposit benefits		34		40		38
Trust relationships		16		21		27
Other identified intangibles		101		78		84

Total	$	179	$	174	$	199

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


(Dollars in Millions)
2017	$	171
2018		138
2019		109
2020		86
2021		65

The following table reflects the changes in the carrying value of goodwill for the years ended December 31, 2016, 2015 and 2014:


(Dollars in Millions)	Wholesale Banking and Commercial Real Estate			Consumer and Small Business Banking		Wealth Management and Securities Services			Payment Services			Treasury and Corporate Support		Consolidated Company

Balance at December 31, 2013	$	1,605		$	3,514	$	1,565		$	2,521		$	–	$	9,205
Goodwill acquired		43			166		8			–			–		217
Foreign exchange translation and other		–			–		(3	)		(30	)		–		(33	)

Balance at December 31, 2014	$	1,648		$	3,680	$	1,570		$	2,491		$	–	$	9,389
Foreign exchange translation and other		(1	)		1		(3	)		(25	)		–		(28	)

Balance at December 31, 2015	$	1,647		$	3,681	$	1,567		$	2,466		$	–	$	9,361
Foreign exchange translation and other		–			–		(1	)		(16	)		–		(17	)

Balance at December 31, 2016	$	1,647		$	3,681	$	1,566		$	2,450		$	–	$	9,344

104

NOTE 11 _Deposits

The composition of deposits at December 31 was as follows:


(Dollars in Millions)	2016		2015
Noninterest-bearing deposits	$	86,097	$	83,766
Interest-bearing deposits
Interest checking		66,298		59,169
Money market savings		109,947		86,159
Savings accounts		41,783		38,468
Time deposits		30,465		32,838

Total interest-bearing deposits		248,493		216,634

Total deposits	$	334,590	$	300,400

The maturities of time deposits outstanding at December 31, 2016 were as follows:


(Dollars in Millions)
2017	$	23,428
2018		3,019
2019		1,601
2020		1,267
2021		1,147
Thereafter		3

Total	$	30,465

NOTE 12 _{Short-Term Borrowings (a)}

The following table is a summary of short-term borrowings for the last three years:


	2016					2015					2014
(Dollars in Millions)	Amount		Rate			Amount		Rate			Amount		Rate

At year-end
Federal funds purchased	$	447		.30	%	$	647		.23	%	$	886		.12	%
Securities sold under agreements to repurchase		801		.12			1,092		.02			948		.05
Commercial paper		10,010		.30			22,022		.21			22,197		.12
Other short-term borrowings		2,705		1.00			4,116		.69			5,862		.51
Total	$	13,963		.43	%	$	27,877		.27	%	$	29,893		.19	%
Average for the year
Federal funds purchased^(b)	$	1,015		17.17	%	$	1,169		15.05	%	$	2,366		7.94	%
Securities sold under agreements to repurchase		891		.18			973		.10			798		1.07
Commercial paper		14,827		.26			21,892		.12			21,227		.12
Other short-term borrowings		3,173		1.67			3,926		1.13			5,861		.78
Total^(b)	$	19,906		1.34	%	$	27,960		.89	%	$	30,252		.88	%
Maximum month-end balance
Federal funds purchased	$	2,487				$	1,868				$	3,258
Securities sold under agreements to repurchase		1,177					1,124					948
Commercial paper		21,441					23,101					22,322
Other short-term borrowings		6,771					7,656					7,417

(a)

Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.

(b)

Average federal funds purchased and total short-term borrowings rates include amounts paid by the Company to certain corporate card customers for paying outstanding noninterest-bearing corporate card balances within certain timeframes per specific agreements. These activities reduce the Company’s short-term funding needs, and if they did not occur, the Company would use other funding alternatives, including the use of federal funds purchased. The amount of this compensation expense paid by the Company and included in federal funds purchased and total short-term borrowings rates for 2016, 2015 and 2014 was $171 million, $175 million and $186 million, respectively.

105

NOTE 13 _{Long-Term Debt}

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


(Dollars in Millions)	Rate Type		Rate^(a)			Maturity Date		2016			2015

U.S. Bancorp (Parent Company)
Subordinated notes		Fixed		2.950	%		2022	$	1,300		$	1,300
		Fixed		3.600	%		2024		1,000			1,000
		Fixed		7.500	%		2026		199			199
		Fixed		3.100	%		2026		1,000			–
Medium-term notes		Fixed		1.650% - 4.125	%		2017 - 2026		8,800			7,500
		Floating		1.282% - 1.396	%		2018 - 2019		750			750
Junior subordinated debentures		Fixed		3.442	%		2016		–			500
Other^(b)									(4	)		204

Subtotal									13,045			11,453

Subsidiaries
Federal Home Loan Bank advances		Fixed		1.250% - 8.250	%		2017 - 2026		10			11
		Floating		.866% - 1.447	%		2017 - 2026		8,559			9,081
Bank notes		Fixed		1.350% - 2.800	%		2017 - 2025		6,800			5,850
		Floating		.582% - 1.467	%		2017 - 2056		3,898			4,928
Other^(c)									1,011			755

Subtotal									20,278			20,625

Total								$	33,323		$	32,078

(a)

Weighted-average interest rates of medium-term notes, Federal Home Loan Bank advances and bank notes were 2.48 percent, 1.17 percent and 1.57 percent, respectively.

(b)

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

(c)

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

The Company has arrangements with the Federal Home Loan Bank and Federal Reserve Bank whereby the Company could have borrowed an additional $91.4 billion and $74.9 billion at December 31, 2016 and 2015, respectively, based on collateral available.

Maturities of long-term debt outstanding at December 31, 2016, were:


(Dollars in Millions)	Parent Company		Consolidated
2017	$	1,250	$	5,461
2018		1,498		7,282
2019		1,503		6,019
2020		–		43
2021		2,195		2,221
Thereafter		6,599		12,297

Total	$	13,045	$	33,323

NOTE 14 _{Shareholders’ Equity}

At December 31, 2016 and 2015, the Company had authority to issue 4 billion shares of common stock and 50 million shares of preferred stock. The Company had 1.7 billion shares of common

stock outstanding at December 31, 2016 and 2015. The Company had 67 million shares reserved for future issuances, primarily under its stock incentive plans at December 31, 2016.

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


	2016								2015
At December 31 (Dollars in Millions)	Shares Issued and Outstanding		Liquidation Preference		Discount		Carrying Amount		Shares Issued and Outstanding		Liquidation Preference		Discount		Carrying Amount
Series A		12,510	$	1,251	$	145	$	1,106		12,510	$	1,251	$	145	$	1,106
Series B		40,000		1,000		–		1,000		40,000		1,000		–		1,000
Series F		44,000		1,100		12		1,088		44,000		1,100		12		1,088
Series G		43,400		1,085		10		1,075		43,400		1,085		10		1,075
Series H		20,000		500		13		487		20,000		500		13		487
Series I		30,000		750		5		745		30,000		750		5		745
Total preferred stock^(a)		189,910	$	5,686	$	185	$	5,501		189,910	$	5,686	$	185	$	5,501

(a)

The par value of all shares issued and outstanding at December 31, 2016 and 2015, was $1.00 per share.

106

During 2015, the Company issued depositary shares representing an ownership interest in 30,000 shares of Series I Non-Cumulative Perpetual Preferred Stock with a liquidation preference of $25,000 per share (the “Series I Preferred Stock”). The Series I Preferred Stock has no stated maturity and will not be subject to any sinking fund or other obligation of the Company. Dividends, if declared, will accrue and be payable semiannually, in arrears, at a rate per annum equal to 5.125 percent from the date of issuance to, but excluding, January 15, 2021, and thereafter will accrue and be payable quarterly at a floating rate per annum equal to three-month LIBOR plus 3.486 percent. The Series I Preferred Stock is redeemable at the Company’s option, in whole or in part, on or after January 15, 2021. The Series I Preferred stock is redeemable at the Company’s option, in whole, but not in part, prior to January 15, 2021 within 90 days following an official administrative or judicial decision, amendment to, or change in the laws or regulations that would not allow the Company to treat the full liquidation value of the Series I Preferred Stock as Tier 1 capital for purposes of the capital adequacy guidelines of the Federal Reserve Board.

During 2013, the Company issued depositary shares representing an ownership interest in 20,000 shares of Series H Non-Cumulative Perpetual Preferred Stock with a liquidation preference of $25,000 per share (the “Series H Preferred Stock”). The Series H Preferred Stock has no stated maturity and will not be subject to any sinking fund or other obligation of the Company. Dividends, if declared, will accrue and be payable quarterly, in arrears, at a rate per annum equal to 5.15 percent. The Series H Preferred Stock is redeemable at the Company’s option, in whole or in part, on or after July 15, 2018. The Series H Preferred stock is redeemable at the Company’s option, in whole, but not in part, prior to July 15, 2018 within 90 days following an official administrative or judicial decision, amendment to, or change in the laws or regulations that would not allow the Company to treat the full liquidation value of the Series H Preferred Stock as Tier 1 capital for purposes of the capital adequacy guidelines of the Federal Reserve.

During 2012, the Company issued depositary shares representing an ownership interest in 44,000 shares of Series F Non-Cumulative Perpetual Preferred Stock with a liquidation preference of $25,000 per share (the “Series F Preferred Stock”), and depositary shares representing an ownership interest in 43,400 shares of Series G Non-Cumulative Perpetual Preferred Stock with a liquidation preference of $25,000 per share (the “Series G Preferred Stock”). The Series F Preferred Stock and Series G Preferred Stock have no stated maturity and will not be subject to any sinking fund or other obligation of the Company. Dividends, if declared, will accrue and be payable quarterly, in arrears, at a rate per annum equal to 6.50 percent from the date of issuance to, but excluding, January 15, 2022, and thereafter at a floating rate per annum equal to three-month LIBOR plus 4.468 percent for the Series F Preferred Stock, and 6.00 percent from the date of issuance to, but excluding, April 15, 2017, and thereafter at a floating rate per annum equal to three-month LIBOR plus 4.86125 percent for the Series G Preferred Stock. Both series are redeemable at the Company’s option, in whole or

in part, on or after January 15, 2022, for the Series F Preferred Stock and April 15, 2017, for the Series G Preferred Stock. Both series are redeemable at the Company’s option, in whole, but not in part, prior to January 15, 2022, for the Series F Preferred Stock and prior to April 15, 2017, for the Series G Preferred Stock, within 90 days following an official administrative or judicial decision, amendment to, or change in the laws or regulations that would not allow the Company to treat the full liquidation value of the Series F Preferred Stock or Series G Preferred Stock, respectively, as Tier 1 capital for purposes of the capital adequacy guidelines of the Federal Reserve Board.

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

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

During 2016, 2015 and 2014, the Company repurchased shares of its common stock under various authorizations approved by its Board of Directors. As of December 31, 2016, the approximate dollar value of shares that may yet be purchased by the Company under the current Board of Directors approved authorization was $1.3 billion.

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


(Dollars and Shares in Millions)	Shares		Value
2016		61	$	2,600
2015		52		2,246
2014		54		2,262

107

Shareholders’ equity is affected by transactions and valuations of asset and liability positions that require adjustments to accumulated other comprehensive income (loss). The reconciliation of the transactions affecting accumulated other comprehensive income (loss) included in shareholders’ equity for the years ended December 31, is as follows:


(Dollars in Millions)	Unrealized Gains (Losses) on Securities Available-For- Sale			Unrealized Gains (Losses) on Securities Transferred From Available-For-Sale to Held-To-Maturity			Unrealized Gains (Losses) on Derivative Hedges			Unrealized Gains (Losses) on Retirement Plans			Foreign Currency Translation			Total

2016
Balance at beginning of period	$	111		$	36		$	(67	)	$	(1,056	)	$	(43	)	$	(1,019	)
Changes in unrealized gains and losses		(858	)		–			74			(255	)		–			(1,039	)
Other-than-temporary impairment not recognized in earnings on securities available-for-sale		(1	)		–			–			–			–			(1	)
Foreign currency translation adjustment^(a)		–			–			–			–			(28	)		(28	)
Reclassification to earnings of realized gains and losses		(22	)		(18	)		124			163			–			247
Applicable income taxes		339			7			(76	)		35			–			305

Balance at end of period	$	(431	)	$	25		$	55		$	(1,113	)	$	(71	)	$	(1,535	)


2015
Balance at beginning of period	$	392		$	52		$	(172	)	$	(1,106	)	$	(62	)	$	(896	)
Changes in unrealized gains and losses		(457	)		–			(25	)		(142	)		–			(624	)
Foreign currency translation adjustment^(a)		–			–			–			–			20			20
Reclassification to earnings of realized gains and losses		–			(25	)		195			223			–			393
Applicable income taxes		176			9			(65	)		(31	)		(1	)		88

Balance at end of period	$	111		$	36		$	(67	)	$	(1,056	)	$	(43	)	$	(1,019	)


2014
Balance at beginning of period	$	(77	)	$	70		$	(261	)	$	(743	)	$	(60	)	$	(1,071	)
Changes in unrealized gains and losses		764			–			(41	)		(733	)		–			(10	)
Other-than-temporary impairment not recognized in earnings on securities available-for-sale		1			–			–			–			–			1
Foreign currency translation adjustment^(a)		–			–			–			–			(4	)		(4	)
Reclassification to earnings of realized gains and losses		(3	)		(30	)		186			144			–			297
Applicable income taxes		(293	)		12			(56	)		226			2			(109	)

Balance at end of period	$	392		$	52		$	(172	)	$	(1,106	)	$	(62	)	$	(896	)

(a)

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

108

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


	Impact to Net Income									Affected Line Item in the Consolidated Statement of Income
(Dollars in Millions)	2016			2015			2014			Affected Line Item in the Consolidated Statement of Income
Unrealized gains (losses) on securities available-for-sale
Realized gains (losses) on sale of securities	$	27		$	1		$	11		Total securities gains (losses), net
Other-than-temporary impairment recognized in earnings		(5	)		(1	)		(8	)

		22			–			3		Total before tax
		(9	)		–			(1	)	Applicable income taxes

		13			–			2		Net-of-tax
Unrealized gains (losses) on securities transferred from available-for-sale to held-to-maturity
Amortization of unrealized gains		18			25			30		Interest income
		(7	)		(9	)		(12	)	Applicable income taxes

		11			16			18		Net-of-tax
Unrealized gains (losses) on derivative hedges
Realized gains (losses) on derivative hedges		(124	)		(195	)		(186	)	Net interest income
		48			75			71		Applicable income taxes

		(76	)		(120	)		(115	)	Net-of-tax
Unrealized gains (losses) on retirement plans
Actuarial gains (losses), prior service cost (credit) and transition obligation (asset) amortization		(163	)		(223	)		(144	)	Employee benefits expense
		63			85			56		Applicable income taxes

		(100	)		(138	)		(88	)	Net-of-tax

Total impact to net income	$	(152	)	$	(242	)	$	(183	)

Regulatory Capital The Company uses certain measures defined by bank regulatory agencies to assess its capital. Beginning January 1, 2014, the regulatory capital requirements effective for the Company follow Basel III, subject to certain transition provisions from Basel I over the following four years to full implementation by January 1, 2018. Basel III includes two comprehensive methodologies for calculating risk-weighted assets: a general standardized approach and more risk-sensitive advanced approaches, with the Company’s capital adequacy being evaluated against the methodology that is most restrictive.

Tier 1 capital is considered core capital and includes common shareholders’ equity adjusted for the aggregate impact of certain items included in other comprehensive income (loss) (“common equity tier 1 capital”), plus qualifying preferred stock, trust preferred securities and noncontrolling interests in consolidated subsidiaries subject to certain limitations. Total risk-based capital

includes Tier 1 capital and other items such as subordinated debt and the allowance for credit losses. Capital measures are stated as a percentage of risk-weighted assets, which are measured based on their perceived credit and operational risks and include certain off-balance sheet exposures, such as unfunded loan commitments, letters of credit, and derivative contracts. Under the standardized approach, the Company is also subject to a leverage ratio requirement, a non risk-based asset ratio, which is defined as Tier 1 capital as a percentage of average assets adjusted for goodwill and other non-qualifying intangibles and other assets.

For a summary of the regulatory capital requirements and the actual ratios as of December 31, 2016 and 2015, for the Company and its bank subsidiary, see Table 23 included in Management’s Discussion and Analysis, which is incorporated by reference into these Notes to Consolidated Financial Statements.

109

The following table provides the components of the Company’s regulatory capital at December 31:


(Dollars in Millions)	2016			2015

Basel III transitional standardized approach:
Common shareholders’ equity	$	41,797		$	40,630
Less intangible assets
Goodwill (net of deferred tax liability)		(8,203	)		(8,295	)
Other disallowed intangible assets		(427	)		(335	)
Other^(a)		553			612

Total common equity tier 1 capital		33,720			32,612
Qualifying preferred stock		5,501			5,501
Noncontrolling interests eligible for tier 1 capital		203			318
Other		(3	)		–

Total tier 1 capital		39,421			38,431
Eligible portion of allowance for credit losses		4,357			4,255
Subordinated debt and noncontrolling interests eligible for tier 2 capital		3,576			2,616
Other		1			11

Total tier 2 capital		7,934			6,882

Total risk-based capital	$	47,355		$	45,313

Risk-weighted assets	$	358,237		$	341,360

Basel III transitional advanced approaches:
Common shareholders’ equity	$	41,797		$	40,630
Less intangible assets
Goodwill (net of deferred tax liability)		(8,203	)		(8,295	)
Other disallowed intangible assets		(427	)		(335	)
Other^(a)		553			612

Total common equity tier 1 capital		33,720			32,612
Qualifying preferred stock		5,501			5,501
Noncontrolling interests eligible for tier 1 capital		203			318
Other		(3	)		–

Total tier 1 capital		39,421			38,431
Eligible portion of allowance for credit losses		1,266			1,204
Subordinated debt and noncontrolling interests eligible for tier 2 capital		3,576			2,616
Other		1			11

Total tier 2 capital		4,843			3,831

Total risk-based capital	$	44,264		$	42,262

Risk-weighted assets	$	277,141		$	261,668

(a)

Includes the impact of items included in other comprehensive income (loss), such as unrealized gains (losses) on available-for-sale securities, accumulated net gains on cash flow hedges, pension liability adjustments, etc.

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

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

The Series A Preferred Securities will be redeemable, in whole or in part, at the option of USB Realty Corp. on each fifth anniversary after the dividend payment date occurring in January 2012. Any redemption will be subject to the approval of the Office of the Comptroller of the Currency. During 2016, the Company purchased 500 shares of the Series A Preferred Securities held by third party investors at an amount below their carrying amount, recording a net gain of $9 million directly to retained earnings. As of December 31, 2016, 4,500 shares of the Series A Preferred Securities remain outstanding.

110

NOTE 15 _{Earnings Per Share}

The components of earnings per share were:


Year Ended December 31 (Dollars and Shares in Millions, Except Per Share Data)	2016			2015			2014
Net income attributable to U.S. Bancorp	$	5,888		$	5,879		$	5,851
Preferred dividends		(281	)		(247	)		(243	)
Impact of the purchase of noncontrolling interests^(a)		9			–			–
Earnings allocated to participating stock awards		(27	)		(24	)		(25	)

Net income applicable to U.S. Bancorp common shareholders	$	5,589		$	5,608		$	5,583

Average common shares outstanding		1,718			1,764			1,803
Net effect of the exercise and assumed purchase of stock awards		6			8			10

Average diluted common shares outstanding		1,724			1,772			1,813

Earnings per common share	$	3.25		$	3.18		$	3.10
Diluted earnings per common share	$	3.24		$	3.16		$	3.08

(a)

Represents the difference between the carrying amount and amount paid by the Company to purchase third party investor holdings of the preferred stock of USB Realty Corp, a consolidated subsidiary of the Company.

Options outstanding at December 31, 2016 and 2015 to purchase 1 million common shares, respectively, were not included in the computation of diluted earnings per share for the

years ended December 31, 2016 and 2015, respectively, because they were antidilutive.

NOTE 16 _{Employee Benefits}

Employee Retirement Savings Plan The Company has a defined contribution retirement savings plan that covers substantially all its employees. Qualified employees are allowed to contribute up to 75 percent of their annual compensation, subject to Internal Revenue Service limits, through salary deductions under Section 401(k) of the Internal Revenue Code. Employee contributions are invested at their direction among a variety of investment alternatives. Employee contributions are 100 percent matched by the Company, up to four percent of each employee’s eligible annual compensation. The Company’s matching contribution vests immediately and is invested in the same manner as each employee’s future contribution elections. Total expense for the Company’s matching contributions was $142 million, $131 million and $122 million in 2016, 2015 and 2014, respectively.

Pension Plans The Company has a tax qualified noncontributory defined benefit pension plan that provides benefits to substantially all its employees. Participants receive annual cash balance pay credits based on eligible pay multiplied by a percentage determined by their age and years of service. Participants also receive an annual interest credit. Employees become vested upon completing three years of vesting service. For participants in the plan before 2010 that elected to stay under their existing formula, pension benefits are provided to eligible employees based on years of service, multiplied by a percentage of their final average pay. Additionally, as a result of plan mergers, a portion of pension benefits may also be provided using a cash balance benefit formula where only interest credits continue to be credited to participants’ accounts.

In general, the Company’s qualified pension plan’s funding objectives include maintaining a funded status sufficient to meet participant benefit obligations over time while reducing long-term

funding requirements and pension costs. The Company has an established process for evaluating the plan, its performance and significant plan assumptions, including the assumed discount rate and the long-term rate of return (“LTROR”). Annually, the Company’s Compensation and Human Resources Committee (the “Committee”), assisted by outside consultants, evaluates plan objectives, funding policies and plan investment policies considering its long-term investment time horizon and asset allocation strategies. The process also evaluates significant plan assumptions. Although plan assumptions are established annually, the Company may update its analysis on an interim basis in order to be responsive to significant events that occur during the year, such as plan mergers and amendments.

The Company’s funding policy is to contribute amounts to its plan sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act, plus such additional amounts as the Company determines to be appropriate. The Company made a contribution of $358 million and $414 million to its qualified pension plan in 2016 and 2015, respectively, and expects to contribute $185 million in 2017. Any contributions made to the qualified plan are invested in accordance with established investment policies and asset allocation strategies.

In addition to the funded qualified pension plan, the Company maintains a non-qualified plan that is unfunded and provides benefits to certain employees. The assumptions used in computing the accumulated benefit obligation, the projected benefit obligation and net pension expense are substantially consistent with those assumptions used for the funded qualified plan. In 2017, the Company expects to contribute $22 million to its non-qualified pension plan which equals the 2017 expected benefit payments.

111

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

Employees retiring after December 31, 2013, are not eligible for retiree health care benefits. The Company expects to contribute $6 million to its postretirement welfare plan in 2017.

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


	Pension Plans						Postretirement Welfare Plan
(Dollars in Millions)	2016			2015			2016			2015

Change In Projected Benefit Obligation
Benefit obligation at beginning of measurement period	$	4,650		$	4,612		$	93		$	104
Service cost		177			188			–			–
Interest cost		211			195			3			3
Participants’ contributions		–			–			10			10
Actuarial loss (gain)		234			(176	)		(14	)		(5	)
Lump sum settlements		(61	)		(37	)		–			–
Benefit payments		(138	)		(132	)		(19	)		(21	)
Federal subsidy on benefits paid		–			–			2			2
Benefit obligation at end of measurement period^(a)	$	5,073		$	4,650		$	75		$	93
Change In Fair Value Of Plan Assets
Fair value at beginning of measurement period	$	3,355		$	3,187		$	82		$	85
Actual return on plan assets		230			(99	)		2			–
Employer contributions		383			436			7			8
Participants’ contributions		–			–			10			10
Lump sum settlements		(61	)		(37	)		–			–
Benefit payments		(138	)		(132	)		(19	)		(21	)
Fair value at end of measurement period	$	3,769		$	3,355		$	82		$	82
Funded (Unfunded) Status	$	(1,304	)	$	(1,295	)	$	7		$	(11	)
Components Of The Consolidated Balance Sheet
Noncurrent benefit asset	$	–		$	–		$	7		$	–
Current benefit liability		(22	)		(21	)		–			–
Noncurrent benefit liability		(1,282	)		(1,274	)		–			(11	)
Recognized amount	$	(1,304	)	$	(1,295	)	$	7		$	(11	)
Accumulated Other Comprehensive Income (Loss), Pretax
Net actuarial gain (loss)	$	(1,901	)	$	(1,806	)	$	66		$	55
Net prior service credit (cost)		2			7			25			28
Recognized amount	$	(1,899	)	$	(1,799	)	$	91		$	83

(a)

At December 31, 2016 and 2015, the accumulated benefit obligation for all pension plans was $4.6 billion and $4.3 billion.

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


(Dollars in Millions)	2016		2015
Pension Plans with Projected Benefit Obligations in Excess of Plan Assets
Projected benefit obligation	$	5,073	$	4,650
Fair value of plan assets		3,769		3,355
Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets
Projected benefit obligation	$	5,073	$	4,650
Accumulated benefit obligation		4,625		4,310
Fair value of plan assets		3,769		3,355

112

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


	Pension Plans									Postretirement Welfare Plan
(Dollars in Millions)	2016			2015			2014			2016			2015			2014

Components Of Net Periodic Benefit Cost
Service cost	$	177		$	188		$	152		$	–		$	–		$	–
Interest cost		211			195			197			3			3			3
Expected return on plan assets		(266	)		(223	)		(208	)		(1	)		(1	)		(1	)
Prior service cost (credit) and transition obligation (asset) amortization		(5	)		(4	)		(5	)		(3	)		(3	)		(3	)
Actuarial loss (gain) amortization		175			234			158			(4	)		(4	)		(6	)
Net periodic benefit cost	$	292		$	390		$	294		$	(5	)	$	(5	)	$	(7	)
Other Changes In Plan Assets And Benefit Obligations
Recognized In Other Comprehensive Income (Loss)
Net actuarial gain (loss) arising during the year	$	(270	)	$	(146	)	$	(719	)	$	15		$	4		$	(14	)
Net actuarial loss (gain) amortized during the year		175			234			158			(4	)		(4	)		(6	)
Net prior service cost (credit) and transition obligation (asset) amortized during the year		(5	)		(4	)		(5	)		(3	)		(3	)		(3	)
Total recognized in other comprehensive income (loss)	$	(100	)	$	84		$	(566	)	$	8		$	(3	)	$	(23	)
Total recognized in net periodic benefit cost and other comprehensive income (loss)^(a)(b)	$	(392	)	$	(306	)	$	(860	)	$	13		$	2		$	(16	)

(a)

The pretax estimated actuarial loss (gain) and prior service cost (credit) for the pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in 2017 are $127 million and $(2) million, respectively.

(b)

The pretax estimated actuarial loss (gain) and prior service cost (credit) for the postretirement welfare plan that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in 2017 are $(6) million and $(3) million, respectively.

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


	Pension Plans						Postretirement Welfare Plan
(Dollars in Millions)	2016			2015			2016			2015
Discount rate^(a)		4.27	%		4.45	%		3.57	%		3.59	%
Rate of compensation increase^(b)		3.58			4.06			*			*
Health care cost trend rate for the next year^(c)								7.00	%		6.50	%
Effect on accumulated postretirement benefit obligation
One percent increase							$	4		$	5
One percent decrease								(4	)		(5	)

(a)

The discount rates were developed using a cash flow matching bond model with a modified duration for the qualified pension plan, non-qualified pension plan and postretirement welfare plan of 15.5, 12.1, and 6.2 years, respectively, for 2016, and 15.0, 11.9 and 6.3 years, respectively, for 2015.

(b)

Determined on an active liability-weighted basis.

(c)

The 2016 and 2015 rates are assumed to decrease gradually to 5.00 percent by 2025 and 2019, respectively, and remain at this level thereafter.

*	Not applicable

113

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


	Pension Plans									Postretirement Welfare Plan
(Dollars in Millions)	2016			2015			2014			2016			2015			2014
Discount rate^(a)		4.45	%		4.13	%		4.97	%		3.59	%		3.46	%		3.93	%
Expected return on plan assets^(b)		7.50			7.50			7.50			1.50			1.50			1.50
Rate of compensation increase^(c)		4.06			4.07			4.02			*			*			*
Health care cost trend rate^(d)
Prior to age 65											6.50	%		7.00	%		7.50	%
After age 65											6.50			7.00			7.50
Effect on total of service cost and interest cost
One percent increase										$	–		$	–		$	–
One percent decrease											–			–			–

(a)

The discount rates were developed using a cash flow matching bond model with a modified duration for the qualified pension plan, non-qualified pension plan and postretirement welfare plan of 15.0, 11.9, and 6.3 years, respectively, for 2016, and 15.9, 12.4 and 6.8 years, respectively, for 2015.

(b)

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

(c)

Determined on an active liability weighted basis.

(d)

The pre-65 and post-65 rates are both assumed to decrease gradually to 5.00 percent by 2019 and remain at that level thereafter.

*	Not applicable

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

Generally, based on historical performance of the various investment asset classes, investments in equities have outperformed other investment classes but are subject to higher volatility. In an effort to minimize volatility, while recognizing the long-term up-side potential of investing in equities, the Committee has determined that a target asset allocation of 43 percent global equities, 30 percent debt securities, 7 percent domestic mid-small cap equities, 5 percent emerging markets equities, 5 percent real estate equities, 5 percent hedge funds and 5 percent private equity funds is appropriate.

At December 31, 2016 and 2015, plan assets of the qualified pension plan included an asset management arrangement with a related party totaling $48 million and $63 million, respectively.

In accordance with authoritative accounting guidance, the Company groups plan assets into a three-level hierarchy for valuation techniques used to measure their fair value based on whether the valuation inputs are observable or unobservable. Refer to Note 21 for further discussion on these levels.

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

114

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


	Qualified Pension Plan																Postretirement Welfare Plan
	2016								2015								2016		2015
(Dollars in Millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total		Level 1		Level 1
Cash and cash equivalents	$	49	$	–	$	–	$	49	$	64	$	–	$	–	$	64	$	82	$	82
Debt securities		362		577		–		939		361		465		–		826		–		–
Corporate stock
Domestic equity securities		–		–		–		–		178		–		–		178		–		–
Mid-small cap equity securities^(a)		–		–		–		–		146		–		–		146		–		–
International equity securities		–		–		–		–		123		–		–		123		–		–
Real estate equity securities^(b)		169		–		–		169		163		–		–		163		–		–
Mutual funds
Debt securities		–		164		–		164		–		197		–		197		–		–
Emerging markets equity securities		–		155		–		155		–		81		–		81		–		–
Other		–		–		1		1		–		–		1		1		–		–
	$	580	$	896	$	1		1,477	$	1,035	$	743	$	1		1,779		82		82
Plan investment assets not classified in fair value hierarchy^(e):
Collective investment funds
Domestic equity securities								977								679
Mid-small cap equity securities^(c)								303								68
Emerging markets equity securities								–								75
International equity securities								725								533
Hedge funds^(d)								188								171
Private equity funds								99								50
Total plan investment assets at fair value							$	3,769							$	3,355	$	82	$	82

(a)

At December 31, 2015, securities included $139 million in domestic equities and $7 million in international equities.

(b)

At December 31, 2016 and 2015, securities included $98 million and $90 million in domestic equities, respectively, and $71 million and $73 million in international equities, respectively.

(c)

At December 31, 2016, securities included $303 million in domestic equities. At December 31, 2015, securities included $30 million in domestic equities, $20 million in international equities and $18 million in cash and cash equivalents.

(d)

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

(e)

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

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


(Dollars in Millions)	2016		2015			2014
Balance at beginning of period	$	1	$	2		$	4
Unrealized gains (losses) relating to assets still held at end of year		–		(1	)		(2	)
Balance at end of period	$	1	$	1		$	2

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


(Dollars in Millions)	Pension Plans		Postretirement Welfare Plan^(a)		Medicare Part D Subsidy Receipts
2017	$	191	$	10	$	2
2018		202		10		2
2019		215		10		2
2020		230		9		2
2021		244		9		2
2022 – 2026		1,448		33		5

(a)

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

115

NOTE 17 _{Stock-Based
Compensation}

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

three to five years and are subject to forfeiture if certain vesting requirements are not met. Stock incentive plans of acquired companies are generally terminated at the merger closing dates. Participants under such plans receive the Company’s common stock, or options to buy the Company’s common stock, based on the conversion terms of the various merger agreements. At December 31, 2016, there were 41 million shares (subject to adjustment for forfeitures) available for grant under the Company’s stock incentive plan.

Stock Option Awards

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


Year Ended December 31	Stock Options/Shares			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value (in millions)

2016
Number outstanding at beginning of period		25,725,708		$	29.82
Granted		1,644,288			39.50
Exercised		(10,163,668	)		31.09
Cancelled^(a)		(147,087	)		35.18

Number outstanding at end of period^(b)		17,059,241		$	29.95		4.1	$	365
Exercisable at end of period		13,856,142		$	27.53		3.1	$	330

2015
Number outstanding at beginning of period		33,649,198		$	29.31
Granted		1,122,697			44.28
Exercised		(8,721,834	)		29.59
Cancelled^(a)		(324,353	)		32.93

Number outstanding at end of period^(b)		25,725,708		$	29.82		3.6	$	331
Exercisable at end of period		22,446,095		$	28.68		3.0	$	314

2014
Number outstanding at beginning of period		46,724,765		$	29.12
Granted		1,246,451			40.32
Exercised		(13,851,590	)		29.59
Cancelled^(a)		(470,428	)		31.12

Number outstanding at end of period^(b)		33,649,198		$	29.31		4.0	$	526
Exercisable at end of period		28,923,260		$	28.79		3.4	$	467

(a)

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

(b)

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

Stock-based compensation expense is based on the estimated fair value of the award at the date of grant or modification. The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model, requiring the use of subjective assumptions. Because employee stock options have characteristics that differ from those of traded options, including vesting provisions and trading limitations that impact

their liquidity, the determined value used to measure compensation expense may vary from the actual fair value of the employee stock options. The following table includes the weighted-average estimated fair value of stock options granted and the assumptions utilized by the Company for newly issued grants:


Year Ended December 31	2016			2015			2014
Estimated fair value	$	10.28		$	12.23		$	11.38
Risk-free interest rates		1.3	%		1.7	%		1.7	%
Dividend yield		2.6	%		2.6	%		2.6	%
Stock volatility factor		.36			.37			.38
Expected life of options (in years)		5.5			5.5			5.5

116

Expected stock volatility is based on several factors including the historical volatility of the Company’s common stock, implied volatility determined from traded options and other factors. The Company uses historical data to estimate option exercises and employee terminations to estimate the expected life of options.

The risk-free interest rate for the expected life of the options is based on the U.S. Treasury yield curve in effect on the date of grant. The expected dividend yield is based on the Company’s expected dividend yield over the life of the options.

The following summarizes certain stock option activity of the Company:


Year Ended December 31 (Dollars in Millions)	2016		2015		2014
Fair value of options vested	$	18	$	25	$	33
Intrinsic value of options exercised		138		130		171
Cash received from options exercised		316		257		408
Tax benefit realized from options exercised		53		50		66

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

Additional information regarding stock options outstanding as of December 31, 2016, is as follows:


	Outstanding Options						Exercisable Options
Range of Exercise Prices	Shares		Weighted- Average Remaining Contractual Life (Years)		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price
$11.02 – $15.00		1,997,288		2.1	$	11.14		1,997,288	$	11.14
$15.01 – $20.00		156,573		.9		19.63		156,573		19.63
$20.01 – $25.00		1,611,033		3.1		23.85		1,611,033		23.85
$25.01 – $30.00		4,282,283		4.4		28.28		4,282,283		28.28
$30.01 – $35.00		4,929,704		2.0		32.45		4,688,105		32.37
$35.01 – $40.00		1,956,643		7.6		38.93		340,870		36.25
$40.01 – $44.32		2,125,717		7.6		42.32		779,990		41.67
Total		17,059,241		4.1	$	29.95		13,856,142	$	27.53

Restricted Stock and Unit Awards

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


	2016					2015					2014
Year Ended December 31	Shares			Weighted- Average Grant- Date Fair Value		Shares			Weighted- Average Grant- Date Fair Value		Shares			Weighted- Average Grant- Date Fair Value
Outstanding at beginning of period		6,894,831		$	38.44		7,921,571		$	34.09		8,653,859		$	29.96
Granted		4,879,421			39.65		2,897,396			44.24		3,133,168			40.37
Vested		(3,069,035	)		37.25		(3,428,736	)		33.27		(3,409,650	)		29.38
Cancelled		(439,710	)		40.18		(495,400	)		38.66		(455,806	)		34.05
Outstanding at end of period		8,265,507		$	39.50		6,894,831		$	38.44		7,921,571		$	34.09

The total fair value of shares vested was $128 million, $152 million and $139 million for the years ended December 31, 2016, 2015 and 2014, respectively. Stock-based compensation expense was $150 million, $125 million and $125 million for the years ended December 31, 2016, 2015 and 2014, respectively. On an after-tax basis, stock-based compensation was $93 million, $78 million and $78 million for the years ended

December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, there was $199 million of total unrecognized compensation cost related to nonvested share-based arrangements granted under the plans. That cost is expected to be recognized over a weighted-average period of 2.6 years as compensation expense.

117

NOTE 18 _{Income Taxes}

The components of income tax expense were:


Year Ended December 31 (Dollars in Millions)	2016			2015			2014

Federal
Current	$	2,585		$	1,956		$	1,888
Deferred		(711	)		(223	)		(126	)

Federal income tax		1,874			1,733			1,762

State
Current		337			346			331
Deferred		(50	)		18			(6	)

State income tax		287			364			325

Total income tax provision	$	2,161		$	2,097		$	2,087

A reconciliation of expected income tax expense at the federal statutory rate of 35 percent to the Company’s applicable income tax expense follows:


Year Ended December 31 (Dollars in Millions)	2016			2015			2014
Tax at statutory rate	$	2,837		$	2,810		$	2,798
State income tax, at statutory rates, net of federal tax benefit		244			237			211
Tax effect of
Tax credits and benefits, net of related expenses		(710	)		(700	)		(701	)
Tax-exempt income		(196	)		(201	)		(205	)
Noncontrolling interests		(20	)		(19	)		(20	)
Other items		6			(30	)^(a)		4

Applicable income taxes	$	2,161		$	2,097		$	2,087

(a)

Includes the resolution of certain tax matters with taxing authorities in the first quarter of 2015.

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

In preparing its tax returns, the Company is required to interpret complex tax laws and regulations and utilize income and cost allocation methods to determine its taxable income. On an ongoing basis, the Company is subject to examinations by

federal, state, local and foreign taxing authorities that may give rise to differing interpretations of these complex laws, regulations and methods. Due to the nature of the examination process, it generally takes years before these examinations are completed and matters are resolved. Federal tax examinations for all years ending through December 31, 2010, are completed and resolved. The Company’s tax returns for the years ended December 31, 2011, 2012, 2013 and 2014 are under examination by the Internal Revenue Service. The years open to examination by state and local government authorities vary by jurisdiction.

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


Year Ended December 31 (Dollars in Millions)	2016			2015			2014
Balance at beginning of period	$	243		$	267		$	264
Additions (reductions) for tax positions taken in prior years		57			(17	)		31
Additions for tax positions taken in the current year		12			13			4
Exam resolutions		(6	)		(17	)		(22	)
Statute expirations		(4	)		(3	)		(10	)

Balance at end of period	$	302		$	243		$	267

The total amount of unrecognized tax positions that, if recognized, would impact the effective income tax rate as of December 31, 2016, 2015 and 2014, were $234 million, $165 million and $192 million, respectively. The Company classifies interest and penalties related to unrecognized tax positions as a component of income tax expense. At December 31, 2016, the

Company’s unrecognized tax position balance included $37 million in accrued interest. During the years ended December 31, 2016, 2015 and 2014 the Company recorded approximately $7 million, $(1) million and $4 million, respectively, in interest on unrecognized tax positions.

118

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

and the amounts used for the same items for income tax reporting purposes.

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


At December 31 (Dollars in Millions)	2016			2015

Deferred Tax Assets
Allowance for credit losses	$	1,667		$	1,615
Federal, state and foreign net operating loss and credit carryforwards		971			464
Accrued expenses		806			764
Partnerships and other investment assets		521			380
Pension and postretirement benefits		394			247
Securities available-for-sale and financial instruments		220			–
Stock compensation		120			131
Other deferred tax assets, net		291			219

Gross deferred tax assets		4,990			3,820

Deferred Tax Liabilities
Leasing activities		(3,096	)		(3,026	)
Goodwill and other intangible assets		(962	)		(859	)
Mortgage servicing rights		(883	)		(859	)
Loans		(234	)		(204	)
Fixed assets		(60	)		(111	)
Securities available-for-sale and financial instruments		–			(47	)
Other deferred tax liabilities, net		(113	)		(55	)

Gross deferred tax liabilities		(5,348	)		(5,161	)
Valuation allowance		(121	)		(137	)

Net Deferred Tax Asset (Liability)	$	(479	)	$	(1,478	)

The Company has approximately $1.3 billion of federal, state and foreign net operating loss carryforwards which expire at various times through 2036. A substantial portion of these carryforwards relate to state-only net operating losses, which are subject to a full valuation allowance as they are not expected to be realized within the carryforward period. Management has determined it is more likely than not the other net deferred tax assets could be realized through carry back to taxable income in prior years, future reversals of existing taxable temporary differences and future taxable income.

In addition, the Company has $794 million of federal credit carryforwards which expire at various times through 2036 which

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

At December 31, 2016, retained earnings included approximately $102 million of base year reserves of acquired thrift institutions, for which no deferred federal income tax liability has been recognized. These base year reserves would be recaptured if certain subsidiaries of the Company cease to qualify as a bank for federal income tax purposes. The base year reserves also remain subject to income tax penalty provisions that, in general, require recapture upon certain stock redemptions of, and excess distributions to, stockholders.

NOTE 19 _Derivative

_Instruments

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

an assessment, at inception and, at a minimum, quarterly thereafter, to determine the effectiveness of the derivative in offsetting changes in the value or cash flows of the hedged item(s).

Fair Value Hedges These derivatives are interest rate swaps the Company uses to hedge the change in fair value related to interest rate changes of its underlying fixed-rate debt. Changes in the fair value of derivatives designated as fair value hedges, and changes in the fair value of the hedged items, are recorded in earnings. All fair value hedges were highly effective for the year ended December 31, 2016, and the change in fair value attributed to hedge ineffectiveness was not material.

119

Cash Flow Hedges These derivatives are interest rate swaps the Company uses to hedge the forecasted cash flows from its underlying variable-rate debt. Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) until the cash flows of the hedged items are realized. If a derivative designated as a cash flow hedge is terminated or ceases to be highly effective, the gain or loss in other comprehensive income (loss) is amortized to earnings over the period the forecasted hedged transactions impact earnings. If a hedged forecasted transaction is no longer probable, hedge accounting is ceased and any gain or loss included in other comprehensive income (loss) is reported in earnings immediately, unless the forecasted transaction is at least reasonably possible of occurring, whereby the amounts remain within other comprehensive income (loss). At December 31, 2016, the Company had $55 million (net-of-tax) of realized and unrealized gains on derivatives classified as cash flow hedges recorded in other comprehensive income (loss), compared with $67 million (net-of-tax) of realized and unrealized losses at December 31, 2015. The estimated amount to be reclassified from other comprehensive income (loss) into earnings during the next 12 months is a loss of $20 million (net-of-tax). This amount includes gains and losses related to hedges that were terminated early for which the forecasted transactions are still probable. All cash flow hedges were highly effective for the year ended December 31, 2016, and the change in fair value attributed to hedge ineffectiveness was not material.

Net Investment Hedges The Company uses forward commitments to sell specified amounts of certain foreign currencies, and occasionally non-derivative debt instruments, to hedge the volatility of its net investment in foreign operations driven by fluctuations in foreign currency exchange rates. The ineffectiveness on all net investment hedges was not material for the year ended December 31, 2016. There were no non-derivative debt instruments designated as net investment hedges at December 31, 2016 or 2015.

Other Derivative Positions The Company enters into free-standing derivatives to mitigate interest rate risk and for other risk management purposes. These derivatives include forward commitments to sell to-be-announced securities (“TBAs”) and other commitments to sell residential mortgage loans, which are used to economically hedge the interest rate risk related to residential MLHFS and unfunded mortgage loan commitments. The Company also enters into interest rate swaps, swaptions, forward commitments to buy TBAs, U.S. Treasury and Eurodollar futures and options on U.S. Treasury futures to economically hedge the change in the fair value of the Company’s MSRs. The Company also enters into foreign currency forwards to economically hedge remeasurement gains and losses the Company recognizes on foreign currency denominated assets and liabilities. In addition, the Company acts as a seller and buyer of interest rate derivatives and foreign exchange contracts for its customers. The Company mitigates the market and liquidity risk associated with these customer derivatives by entering into similar offsetting positions with broker-dealers, or on a portfolio basis by entering into other derivative or non-derivative financial instruments that partially or fully offset the exposure from these customer-related positions. The Company’s customer derivatives and related hedges are monitored and reviewed by the Company’s Market Risk Committee, which establishes policies for market risk management, including exposure limits for each portfolio. The Company also has derivative contracts that are created through its operations, including commitments to originate MLHFS and swap agreements related to the sale of a portion of its Class B common shares of Visa Inc. Refer to Note 21 for further information on these swap agreements.

For additional information on the Company’s purpose for entering into derivative transactions and its overall risk management strategies, refer to “Management Discussion and Analysis — Use of Derivatives to Manage Interest Rate and Other Risks”, which is incorporated by reference into these Notes to Consolidated Financial Statements.

120

The following table summarizes the asset and liability management derivative positions of the Company:


	Asset Derivatives						Liability Derivatives
(Dollars in Millions)	Notional Value		Fair Value		Weighted-Average Remaining Maturity In Years		Notional Value		Fair Value		Weighted-Average Remaining Maturity In Years

December 31, 2016
Fair value hedges
Interest rate contracts
Receive fixed/pay floating swaps	$	2,550	$	49		4.28	$	1,250	$	12		2.32
Cash flow hedges
Interest rate contracts
Pay fixed/receive floating swaps		3,272		108		8.63		2,787		35		.83
Net investment hedges
Foreign exchange forward contracts		1,347		15		.04		–		–		–
Other economic hedges
Interest rate contracts
Futures and forwards
Buy		1,748		13		.09		1,722		18		.05
Sell		2,278		129		.08		4,214		43		.09
Options
Purchased		1,565		43		8.60		–		–		–
Written		1,073		25		.07		12		1		.06
Receive fixed/pay floating swaps		6,452		26		11.48		1,561		16		6.54
Pay fixed/receive floating swaps		4,705		13		6.51		2,320		9		7.80
Foreign exchange forward contracts		849		6		.02		867		6		.02
Equity contracts		11		–		.40		102		1		.57
Credit contracts		1,397		–		3.38		3,674		2		3.57
Other^(a)		19		–		.03		830		106		3.42
Total	$	27,266	$	427			$	19,339	$	249

December 31, 2015
Fair value hedges
Interest rate contracts
Receive fixed/pay floating swaps	$	3,050	$	73		4.43	$	–	$	–		–
Cash flow hedges
Interest rate contracts
Pay fixed/receive floating swaps		1,772		7		9.22		5,009		146		1.13
Net investment hedges
Foreign exchange forward contracts		1,140		4		.04		–		–		–
Other economic hedges
Interest rate contracts
Futures and forwards
Buy		3,812		17		.07		452		1		.06
Sell		3,201		12		.09		2,559		7		.12
Options
Purchased		2,935		–		.06		–		–		–
Written		3,199		29		.10		5		1		.08
Receive fixed/pay floating swaps		3,733		42		9.98		4,748		18		10.18
Pay fixed/receive floating swaps		287		2		9.82		4,158		35		9.97
Foreign exchange forward contracts		3,023		13		.01		2,380		10		.03
Equity contracts		62		–		.47		24		1		.82
Credit contracts		1,192		2		2.58		2,821		3		2.99
Other^(a)		36		–		.04		662		64		2.60
Total	$	27,442	$	201			$	22,818	$	286

(a)

Includes short-term underwriting purchase and sale commitments with total asset and liability notional values of $19 million and $36 million at December 31, 2016 and 2015, respectively, and derivative liability swap agreements related to the sale of a portion of the Company’s Class B common shares of Visa Inc. The Visa swap agreements had a total notional value, fair value and weighted average remaining maturity of $811 million, $106 million and 3.50 years at December 31, 2016, respectively, compared to $626 million, $64 million and 2.75 years at December 31, 2015, respectively.

121

The following table summarizes the customer-related derivative positions of the Company:


	Asset Derivatives						Liability Derivatives
(Dollars in Millions)	Notional Value		Fair Value		Weighted-Average Remaining Maturity In Years		Notional Value		Fair Value		Weighted-Average Remaining Maturity In Years

December 31, 2016
Interest rate contracts
Receive fixed/pay floating swaps	$	38,501	$	930		4.07	$	39,403	$	632		4.89
Pay fixed/receive floating swaps		36,671		612		4.99		40,324		996		4.07
Options
Purchased		14,545		51		1.85		125		2		1.37
Written		125		3		1.37		13,518		50		1.70
Futures
Buy		306		–		1.96		7,111		7		.90
Foreign exchange rate contracts
Forwards, spots and swaps		20,664		849		.58		19,640		825		.60
Options
Purchased		2,376		98		1.67		–		–		–
Written		–		–		–		2,376		98		1.67
Total	$	113,188	$	2,543			$	122,497	$	2,610

December 31, 2015
Interest rate contracts
Receive fixed/pay floating swaps	$	32,647	$	1,097		5.69	$	14,068	$	54		4.71
Pay fixed/receive floating swaps		10,685		43		4.55		35,045		1,160		5.74
Options
Purchased		8,705		10		2.61		146		1		2.23
Written		146		2		2.23		8,482		9		2.57
Futures
Buy		–		–		–		2,859		2		.84
Sell		45		–		.97		–		–		–
Foreign exchange rate contracts
Forwards, spots and swaps		18,399		851		.59		17,959		830		.58
Options
Purchased		1,485		43		1.19		–		–		–
Written		–		–		–		1,485		43		1.19
Total	$	72,112	$	2,046			$	80,044	$	2,099

122

The table below shows the effective portion of the gains (losses) recognized in other comprehensive income (loss) and the gains (losses) reclassified from other comprehensive income (loss) into earnings (net-of-tax) for the years ended December 31:


	Gains (Losses) Recognized in Other Comprehensive Income (Loss)								Gains (Losses) Reclassified from Other Comprehensive Income (Loss) into Earnings
(Dollars in Millions)	2016		2015			2014			2016			2015			2014

Asset and Liability Management Positions
Cash flow hedges
Interest rate contracts^(a)	$	46	$	(15	)	$	(26	)	$	(76	)	$	(120	)	$	(115	)
Net investment hedges
Foreign exchange forward contracts		33		101			130			–			–			–

Note:

Ineffectiveness on cash flow and net investment hedges was not material for the years ended December 31, 2016, 2015 and 2014.

(a)

Gains (Losses) reclassified from other comprehensive income (loss) into interest income on loans and interest expense on long-term debt.

The table below shows the gains (losses) recognized in earnings for fair value hedges, other economic hedges and the customer-related positions for the years ended December 31:


(Dollars in Millions)	Location of Gains (Losses) Recognized in Earnings		2016			2015			2014

Asset and Liability Management Positions
Fair value hedges^(a)
Interest rate contracts		Other noninterest income	$	(31	)	$	7		$	29
Other economic hedges
Interest rate contracts
Futures and forwards		Mortgage banking revenue		101			186			(122	)
Purchased and written options		Mortgage banking revenue		331			191			287
Receive fixed/pay floating swaps		Mortgage banking revenue		226			139			384
Pay fixed/receive floating swaps		Mortgage banking revenue		(140	)		(33	)		–
Foreign exchange forward contracts		Commercial products revenue		(14	)		108			(29	)
Equity contracts		Compensation expense		1			(1	)		2
Credit contracts		Other noninterest income		1			2			–
Other		Other noninterest income		(39	)		–			(43	)

Customer-Related Positions
Interest rate contracts
Receive fixed/pay floating swaps		Other noninterest income		(708	)		360			686
Pay fixed/receive floating swaps		Other noninterest income		769			(320	)		(652	)
Purchased and written options		Other noninterest income		(5	)		3			–
Futures		Other noninterest income		(6	)		1			–
Foreign exchange rate contracts
Forwards, spots and swaps		Commercial products revenue		88			74			66
Purchased and written options		Commercial products revenue		(1	)		2			1

(a)

Gains (Losses) on items hedged by interest rate contracts included in noninterest income (expense), were $31 million, $(7) million and $(27) million for the years ended December 31, 2016, 2015 and 2014, respectively. The ineffective portion was immaterial for the years ended December 31, 2016, 2015 and 2014.

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Derivatives are subject to credit risk associated with counterparties to the derivative contracts. The Company measures that credit risk using a credit valuation adjustment and includes it within the fair value of the derivative. The Company manages counterparty credit risk through diversification of its derivative positions among various counterparties, by entering into derivative positions that are centrally cleared through clearinghouses, by entering into master netting arrangements and, where possible, by requiring collateral arrangements. A master netting arrangement allows two counterparties, who have multiple derivative contracts with each other, the ability to net settle amounts under all contracts, including any related collateral, through a single payment and in a single currency. Collateral arrangements require the counterparty to deliver collateral (typically cash or U.S. Treasury and agency securities) equal to the Company’s net derivative receivable, subject to minimum transfer and credit rating requirements.

The Company’s collateral arrangements are predominately bilateral and, therefore, contain provisions that require collateralization of the Company’s net liability derivative positions. Required collateral coverage is based on certain net liability thresholds and contingent upon the Company’s credit rating from two of the nationally recognized statistical rating organizations. If the Company’s credit rating were to fall below credit ratings thresholds established in the collateral arrangements, the counterparties to the derivatives could request immediate additional collateral coverage up to and including full collateral coverage for derivatives in a net liability position. The aggregate fair value of all derivatives under collateral arrangements that were in a net liability position at December 31, 2016, was $563 million. At December 31, 2016, the Company had $455 million of cash posted as collateral against this net liability position.

NOTE 20 _{Netting Arrangements for Certain Financial
Instruments and Securities Financing}

_Activities

The majority of the Company’s derivative portfolio consists of bilateral over-the-counter trades. However, current regulations require that certain interest rate swaps and forwards and credit contracts need to be centrally cleared through clearinghouses. In addition, a portion of the Company’s derivative positions are exchange-traded. These are predominately U.S. Treasury futures or options on U.S. Treasury futures. Of the Company’s $282.3 billion total notional amount of derivative positions at December 31, 2016, $130.3 billion related to those centrally cleared through clearinghouses and $7.4 billion related to those that were exchange-traded. Irrespective of how derivatives are traded, the Company’s derivative contracts include offsetting rights (referred to as netting arrangements), and depending on expected volume, credit risk, and counterparty preference, collateral maintenance may be required. For all derivatives under collateral support arrangements, fair value is determined daily and, depending on the collateral maintenance requirements, the Company and a counterparty may receive or deliver collateral, based upon the net fair value of all derivative positions between the Company and the counterparty. Collateral is typically cash, but securities may be allowed under collateral arrangements with certain counterparties. Receivables and payables related to cash collateral are included in other assets and other liabilities on the Consolidated Balance Sheet, along with the related derivative asset and liability fair values. Any securities pledged to counterparties as collateral remain on the Consolidated Balance Sheet. Securities received from counterparties as collateral are not recognized on the Consolidated Balance Sheet, unless the counterparty defaults. In general, securities used as collateral can be sold, repledged or otherwise used by the party in possession. No restrictions exist on the use of cash collateral by either party. Refer to Note 19 for further discussion of the Company’s derivatives, including collateral arrangements.

As part of the Company’s treasury and broker-dealer operations, the Company executes transactions that are treated as securities sold under agreements to repurchase or securities purchased under

agreements to resell, both of which are accounted for as collateralized financings. Securities sold under agreements to repurchase include repurchase agreements and securities loaned transactions. Securities purchased under agreements to resell include reverse repurchase agreements and securities borrowed transactions. For securities sold under agreements to repurchase, the Company records a liability for the cash received, which is included in short-term borrowings on the Consolidated Balance Sheet. For securities purchased under agreements to resell, the Company records a receivable for the cash paid, which is included in other assets on the Consolidated Balance Sheet.

Securities transferred to counterparties under repurchase agreements and securities loaned transactions continue to be recognized on the Consolidated Balance Sheet, are measured at fair value, and are included in investment securities or other assets. Securities received from counterparties under reverse repurchase agreements and securities borrowed transactions are not recognized on the Consolidated Balance Sheet unless the counterparty defaults. The securities transferred under repurchase and reverse repurchase transactions typically are U.S. Treasury and agency securities or residential agency mortgage-backed securities. The securities loaned or borrowed typically are corporate debt securities traded by the Company’s broker-dealer. In general, the securities transferred can be sold, repledged or otherwise used by the party in possession. No restrictions exist on the use of cash collateral by either party. Repurchase/reverse repurchase and securities loaned/borrowed transactions expose the Company to counterparty risk. The Company manages this risk by performing assessments, independent of business line managers, and establishing concentration limits on each counterparty. Additionally, these transactions include collateral arrangements that require the fair values of the underlying securities to be determined daily, resulting in cash being obtained or refunded to counterparties to maintain specified collateral levels. At December 31, 2015, the Company had no outstanding securities loaned transactions.

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The following table summarizes the maturities by category of collateral pledged for repurchase agreements and securities loaned transactions:


(Dollars in Millions)	Overnight and Continuous		Less Than 30 Days		Total
December 31, 2016
Repurchase agreements
U.S. Treasury and agencies	$	60	$	–	$	60
Residential agency mortgage-backed securities		681		30		711
Corporate debt securities		30		–		30

Total repurchase agreements		771		30		801
Securities loaned
Corporate debt securities		223		–		223

Total securities loaned		223		–		223

Gross amount of recognized liabilities	$	994	$	30	$	1,024

December 31, 2015
Repurchase agreements
U.S. Treasury and agencies	$	122	$	–	$	122
Residential agency mortgage-backed securities		802		168		970

Gross amount of recognized liabilities	$	924	$	168	$	1,092

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

The Company has elected to offset the assets and liabilities under netting arrangements for the balance sheet presentation of

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

The following tables provide information on the Company’s netting adjustments, and items not offset on the Consolidated Balance Sheet but available for offset in the event of default:


	Gross Recognized Assets		Gross Amounts Offset on the Consolidated Balance Sheet^(a)			Net Amounts Presented on the Consolidated Balance Sheet		Gross Amounts Not Offset on the Consolidated Balance Sheet
(Dollars in Millions)	Gross Recognized Assets		Gross Amounts Offset on the Consolidated Balance Sheet^(a)			Net Amounts Presented on the Consolidated Balance Sheet		Financial Instruments^(b)			Collateral Received^(c)			Net Amount
December 31, 2016
Derivative assets^(d)	$	2,122	$	(984	)	$	1,138	$	(78	)	$	(10	)	$	1,050
Reverse repurchase agreements		77		–			77		(60	)		(17	)		–
Securities borrowed		944		–			944		(10	)		(909	)		25

Total	$	3,143	$	(984	)	$	2,159	$	(148	)	$	(936	)	$	1,075


December 31, 2015
Derivative assets^(d)	$	1,879	$	(807	)	$	1,072	$	(82	)	$	–		$	990
Reverse repurchase agreements		106		–			106		(102	)		(4	)		–
Securities borrowed		772		–			772		–			(753	)		19

Total	$	2,757	$	(807	)	$	1,950	$	(184	)	$	(757	)	$	1,009

(a)

Includes $210 million and $165 million of cash collateral related payables that were netted against derivative assets at December 31, 2016 and 2015, respectively.

(b)

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

(c)

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

(d)

Excludes $848 million and $368 million of derivative assets centrally cleared or otherwise not subject to netting arrangements at December 31, 2016 and 2015, respectively.

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	Gross Recognized Liabilities		Gross Amounts Offset on the Consolidated Balance Sheet^(a)			Net Amounts Presented on the Consolidated Balance Sheet		Gross Amounts Not Offset on the Consolidated Balance Sheet						Net Amount
(Dollars in Millions)	Gross Recognized Liabilities		Gross Amounts Offset on the Consolidated Balance Sheet^(a)			Net Amounts Presented on the Consolidated Balance Sheet		Financial Instruments^(b)			Collateral Pledged^(c)			Net Amount
December 31, 2016
Derivative liabilities^(d)	$	1,951	$	(1,185	)	$	766	$	(78	)	$	–		$	688
Repurchase agreements		801		–			801		(60	)		(741	)		–
Securities loaned		223		–			223		(10	)		(211	)		2

Total	$	2,975	$	(1,185	)	$	1,790	$	(148	)	$	(952	)	$	690


December 31, 2015
Derivative liabilities^(d)	$	1,809	$	(1,283	)	$	526	$	(82	)	$	–		$	444
Repurchase agreements		1,092		–			1,092		(102	)		(990	)		–

Total	$	2,901	$	(1,283	)	$	1,618	$	(184	)	$	(990	)	$	444

(a)

Includes $411 million and $641 million of cash collateral related receivables that were netted against derivative liabilities at December 31, 2016 and 2015, respectively.

(b)

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

(c)

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

(d)

Excludes $908 million and $576 million of derivative liabilities centrally cleared or otherwise not subject to netting arrangements at December 31, 2016 and 2015, respectively.

NOTE 21 _{Fair Values of Assets and
Liabilities}

The Company uses fair value measurements for the initial recording of certain assets and liabilities, periodic remeasurement of certain assets and liabilities, and disclosures. Derivatives, trading and available-for-sale investment securities, MSRs and substantially all MLHFS are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-fair value accounting or impairment write-downs of individual assets.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value measurement reflects all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance.

The Company groups its assets and liabilities measured at fair value into a three-level hierarchy for valuation techniques used to measure financial assets and financial liabilities at fair value. This hierarchy is based on whether the valuation inputs are observable or unobservable. These levels are:

–

Level 1 — Quoted prices in active markets for identical assets or liabilities. Level 1 includes U.S. Treasury securities, as well as exchange-traded instruments, including certain perpetual preferred and corporate debt securities.

–

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2

includes debt securities that are traded less frequently than exchange-traded instruments and which are typically valued using third party pricing services; derivative contracts and other assets and liabilities, including securities, whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data; and MLHFS whose values are determined using quoted prices for similar assets or pricing models with inputs that are observable in the market or can be corroborated by observable market data.

–

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category includes MSRs, certain debt securities and certain derivative contracts.

When the Company changes its valuation inputs for measuring financial assets and financial liabilities at fair value, either due to changes in current market conditions or other factors, it may need to transfer those assets or liabilities to another level in the hierarchy based on the new inputs used. The Company recognizes these transfers at the end of the reporting period in which the transfers occur. During the years ended December 31, 2016, 2015 and 2014, there were no transfers of financial assets or financial liabilities between the hierarchy levels.

The Company has processes and controls in place to increase the reliability of estimates it makes in determining fair value measurements. Items quoted on an exchange are verified to the quoted price. Items provided by a third party pricing service are subject to price verification procedures as described in more detail in the specific valuation discussions below. For fair

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value measurements modeled internally, the Company’s valuation models are subject to the Company’s Model Risk Governance Policy and Program, as maintained by the Company’s risk management department. The purpose of model validation is 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, and are subject to formal change control procedures. Under the Company’s Model Risk Governance Policy, models are required to be reviewed at least annually to ensure they are operating as intended. Inputs into the models are market observable inputs whenever available. When market observable inputs are not available, the inputs are developed based upon analysis of historical experience and evaluation of other relevant market data. Significant unobservable model inputs are subject to review by senior management in corporate functions, who are independent from the modeling. Significant unobservable model inputs are also compared to actual results, typically on a quarterly basis. Significant Level 3 fair value measurements are also subject to corporate-level review and are benchmarked to market transactions or other market data, when available. Additional discussion of processes and controls are provided in the valuation methodologies section that follows.

The following section describes the valuation methodologies used by the Company to measure financial assets and liabilities at fair value and for estimating fair value for financial instruments not recorded at fair value as required under disclosure guidance related to the fair value of financial instruments. In addition, the following section includes an indication of the level of the fair value hierarchy in which the assets or liabilities are classified. Where appropriate, the description includes information about the valuation models and key inputs to those models. During the years ended December 31, 2016, 2015 and 2014, there were no significant changes to the valuation techniques used by the Company to measure fair value.

Cash and Due From Banks The carrying value of cash and due from banks approximate fair value and are classified within Level 1. Fair value is provided for disclosure purposes only.

Federal Funds Sold and Securities Purchased Under Resale Agreements The carrying value of federal funds sold and securities purchased under resale agreements approximate fair value because of the relatively short time between the origination of the instrument and its expected realization and are classified within Level 2. Fair value is provided for disclosure purposes only.

Investment Securities When quoted market prices for identical securities are available in an active market, these prices are used to determine fair value and these securities are classified within Level 1 of the fair value hierarchy. Level 1 investment securities include U.S. Treasury and exchange-traded securities.

For other securities, quoted market prices may not be readily available for the specific securities. When possible, the Company determines fair value based on market observable information, including quoted market prices for similar securities, inactive transaction prices, and broker quotes. These securities are

classified within Level 2 of the fair value hierarchy. Level 2 valuations are generally provided by a third party pricing service. The Company reviews the valuation methodologies utilized by the pricing service and, on a quarterly basis, reviews the security level prices provided by the pricing service against management’s expectation of fair value, based on changes in various benchmarks and market knowledge from recent trading activity. Additionally, each quarter, the Company validates the fair value provided by the pricing services by comparing them to recent observable market trades (where available), broker provided quotes, or other independent secondary pricing sources. Prices obtained from the pricing service are adjusted if they are found to be inconsistent with relevant market data. Level 2 investment securities are predominantly agency mortgage-backed securities, certain other asset-backed securities, obligations of state and political subdivisions, corporate debt securities, agency debt securities and certain perpetual preferred securities.

The fair value of securities for which there are no market trades, or where trading is inactive as compared to normal market activity, are classified within Level 3 of the fair value hierarchy. The Company determines the fair value of these securities by using a discounted cash flow methodology and incorporating observable market information, where available. These valuations are modeled by a unit within the Company’s treasury department. The valuations use assumptions regarding housing prices, interest rates and borrower performance. Inputs are refined and updated at least quarterly to reflect market developments and actual performance. The primary valuation drivers of these securities are the prepayment rates, default rates and default severities associated with the underlying collateral, as well as the discount rate used to calculate the present value of the projected cash flows. Level 3 fair values, including the assumptions used, are subject to review by senior management in corporate functions, who are independent from the modeling. The fair value measurements are also compared to fair values provided by third party pricing services and broker provided quotes, where available. Securities classified within Level 3 include non-agency mortgage-backed securities, non-agency commercial mortgage-backed securities, certain asset-backed securities and certain corporate debt securities.

Mortgage Loans Held For Sale MLHFS measured at fair value, for which an active secondary market and readily available market prices exist, are initially valued at the transaction price and are subsequently valued by comparison to instruments with similar collateral and risk profiles. MLHFS are classified within Level 2. Included in mortgage banking revenue were net gains of $33 million, $27 million and $185 million for the years ended December 31, 2016, 2015 and 2014, respectively, from the changes to fair value of these MLHFS under fair value option accounting guidance. Changes in fair value due to instrument specific credit risk were immaterial. Interest income for MLHFS is measured based on contractual interest rates and reported as interest income on the Consolidated Statement of Income. Electing to measure MLHFS at fair value reduces certain timing differences and better matches changes in fair value of these assets with changes in the value of the derivative

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instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting.

Loans The loan portfolio includes adjustable and fixed-rate loans, the fair value of which is estimated using discounted cash flow analyses and other valuation techniques. The expected cash flows of loans consider historical prepayment experiences and estimated credit losses and are discounted using current rates offered to borrowers with similar credit characteristics. Generally, loan fair values reflect Level 3 information. Fair value is provided for disclosure purposes only, with the exception of impaired collateral-based loans that are measured at fair value on a non-recurring basis utilizing the underlying collateral fair value.

Mortgage Servicing Rights MSRs are valued using a discounted cash flow methodology, and are classified within Level 3. The Company determines fair value of the MSRs by projecting future cash flows for different interest rate scenarios using prepayment rates and other assumptions, and discounts these cash flows using a risk adjusted rate based on option adjusted spread levels. The MSR valuations, as well as the assumptions used, are developed by the mortgage banking division and are subject to review by senior management in corporate functions, who are independent from the modeling. The MSR valuations and assumptions are validated through comparison to trade information when available, publicly available data and industry surveys and are also compared to independent third party valuations each quarter. Risks inherent in MSR valuation include higher than expected prepayment rates and/or delayed receipt of cash flows. There is minimal observable market activity for MSRs on comparable portfolios and, therefore, the determination of fair value requires significant management judgment. Refer to Note 9 for further information on MSR valuation assumptions.

Derivatives The majority of derivatives held by the Company are executed over-the-counter and are valued using standard cash flow, Black-Derman-Toy and Monte Carlo valuation techniques. The models incorporate inputs, depending on the type of derivative, including interest rate curves, foreign exchange rates and volatility. In addition, all derivative values incorporate an assessment of the risk of counterparty nonperformance, measured based on the Company’s evaluation of credit risk as well as external assessments of credit risk, where available. The Company monitors and manages its nonperformance risk by considering its ability to net derivative positions under master netting arrangements, as well as collateral received or provided under collateral arrangements. Accordingly, the Company has elected to measure the fair value of derivatives, at a counterparty level, on a net basis. The majority of the derivatives are classified within Level 2 of the fair value hierarchy, as the significant inputs to the models, including nonperformance risk, are observable. However, certain derivative transactions are with counterparties where risk of nonperformance cannot be observed in the market and, therefore, the credit valuation adjustments result in these derivatives being classified within Level 3 of the fair value hierarchy. The credit valuation adjustments for nonperformance

risk are determined by the Company’s treasury department using credit assumptions provided by the risk management department. The credit assumptions are compared to actual results quarterly and are recalibrated as appropriate.

The Company also has other derivative contracts that are created through its operations, including commitments to purchase and originate mortgage loans and swap agreements executed in conjunction with the sale of a portion of its Class B common shares of Visa Inc. (the “Visa swaps”). The mortgage loan commitments are valued by pricing models that include market observable and unobservable inputs, which result in the commitments being classified within Level 3 of the fair value hierarchy. The unobservable inputs include assumptions about the percentage of commitments that actually become a closed loan and the MSR value that is inherent in the underlying loan value, both of which are developed by the Company’s mortgage banking division. The closed loan percentages for the mortgage loan commitments are monitored on an on-going basis, as these percentages are also used for the Company’s economic hedging activities. The inherent MSR value for the commitments are generated by the same models used for the Company’s MSRs and thus are subject to the same processes and controls as described for the MSRs above. The Visa swaps require payments by either the Company or the purchaser of the Visa Inc. Class B common shares when there are changes in the conversion rate of the Visa Inc. Class B common shares to Visa Inc. Class A common shares, as well as quarterly payments to the purchaser based on specified terms of the agreements. Management reviews and updates the Visa swaps fair value in conjunction with its review of Visa related litigation contingencies, and the associated escrow funding. The fair value of the Visa swaps are calculated by the Company’s corporate development department using a discounted cash flow methodology which includes unobservable inputs about the timing and settlement amounts related to the resolution of certain Visa related litigation. The expected litigation resolution impacts the Visa Inc. Class B common share to Visa Inc. Class A common share conversion rate, as well as the ultimate termination date for the Visa swaps. Accordingly, the Visa swaps are classified within Level 3. Refer to Note 22 for further information on the Visa restructuring and related card association litigation.

Other Financial Instruments Other financial instruments include cost method equity investments and certain community development and tax-advantaged related assets and liabilities. The majority of the Company’s cost method equity investments are in Federal Home Loan Bank and Federal Reserve Bank stock, for which the carrying amounts approximate fair value and are classified within Level 2. Investments in other equity and limited partnership funds are estimated using fund provided net asset values. These equity investments are classified within Level 3. The community development and tax-advantaged related asset balances primarily represent the underlying assets of consolidated community development and tax-advantaged entities. The community development and tax-advantaged related liabilities represent the underlying liabilities of the consolidated

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entities (included in long-term debt) and liabilities related to other third party interests (included in other liabilities). The carrying value of the community development and tax-advantaged related asset and other liability balances are a reasonable estimate of fair value and are classified within Level 3. Refer to Note 7 for further information on community development and tax-advantaged related assets and liabilities. Fair value is provided for disclosure purposes only.

Deposit Liabilities The fair value of demand deposits, savings accounts and certain money market deposits is equal to the amount payable on demand. The fair value of fixed-rate certificates of deposit was estimated by discounting the contractual cash flow using current market rates. Deposit liabilities are classified within Level 2. Fair value is provided for disclosure purposes only.

Short-term Borrowings Federal funds purchased, securities sold under agreements to repurchase, commercial paper and other short-term funds borrowed have floating rates or short-term maturities. The fair value of short-term borrowings was determined by discounting contractual cash flows using current market rates. Short-term borrowings are classified within Level 2. Included in short-term borrowings is the Company’s obligation on securities sold short, which is required to be accounted for at fair value per applicable accounting guidance. Fair value for other short-term borrowings is provided for disclosure purposes only.

Long-term Debt The fair value for most long-term debt was determined by discounting contractual cash flows using current market rates. Junior subordinated debt instruments were valued using market quotes. Long-term debt is classified within Level 2. Fair value is provided for disclosure purposes only.

Loan Commitments, Letters of Credit and Guarantees The fair value of commitments, letters of credit and guarantees represents the estimated costs to terminate or otherwise settle the obligations with a third party. Other loan commitments, letters of credit and guarantees are not actively traded, and the Company estimates their fair value based on the related amount of unamortized deferred commitment fees adjusted for the probable losses for these arrangements. These arrangements are classified within Level 3. Fair value is provided for disclosure purposes only.

Significant Unobservable Inputs of Level 3 Assets and Liabilities

The following section provides information on the significant inputs used by the Company to determine the fair value measurements of Level 3 assets and liabilities recorded at fair value on the Consolidated Balance Sheet. In addition, the following section includes a discussion of the sensitivity of the fair value measurements to changes in the significant inputs and a description of any interrelationships between these inputs for Level 3 assets and liabilities recorded at fair value on a recurring basis. The discussion below excludes nonrecurring fair value measurements of collateral value used for impairment measures for loans and OREO. These valuations utilize third party appraisal or broker price opinions, and are classified as Level 3 due to the significant judgment involved.

Available-For-Sale Investment Securities The significant unobservable inputs used in the fair value measurement of the Company’s modeled Level 3 available-for-sale investment securities are prepayment rates, probability of default and loss severities associated with the underlying collateral, as well as the discount margin used to calculate the present value of the projected cash flows. Increases in prepayment rates for Level 3 securities will typically result in higher fair values, as increased prepayment rates accelerate the receipt of expected cash flows and reduce exposure to credit losses. Increases in the probability of default and loss severities will result in lower fair values, as these increases reduce expected cash flows. Discount margin is the Company’s estimate of the current market spread above the respective benchmark rate. Higher discount margin will result in lower fair values, as it reduces the present value of the expected cash flows.

Prepayment rates generally move in the opposite direction of market interest rates. In the current environment, an increase in the probability of default will generally be accompanied with an increase in loss severity, as both are impacted by underlying collateral values. Discount margins are influenced by market expectations about the security’s collateral performance and, therefore, may directionally move with probability and severity of default; however, discount margins are also impacted by broader market forces, such as competing investment yields, sector liquidity, economic news, and other macroeconomic factors.

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The following table shows the significant valuation assumption ranges for Level 3 available-for-sale investment securities at December 31, 2016:


	Minimum			Maximum			Average

Residential Prime Non-Agency Mortgage-Backed Securities^(a)
Estimated lifetime prepayment rates		6	%		19	%		14	%
Lifetime probability of default rates		–			6			4
Lifetime loss severity rates		15			65			35
Discount margin		2			7			3

Residential Non-Prime Non-Agency Mortgage-Backed Securities^(b)
Estimated lifetime prepayment rates		3	%		16	%		9	%
Lifetime probability of default rates		4			12			7
Lifetime loss severity rates		15			80			49
Discount margin		1			10			4

(a)

(b)

Includes all securities not meeting the conditions to be designated as prime.

Mortgage Servicing Rights The significant unobservable inputs used in the fair value measurement of the Company’s MSRs are expected prepayments and the option adjusted spread that is added to the risk-free rate to discount projected cash flows. Significant increases in either of these inputs in isolation would result in a significantly lower fair value measurement. Significant

decreases in either of these inputs in isolation would result in a significantly higher fair value measurement. There is no direct interrelationship between prepayments and option adjusted spread. Prepayment rates generally move in the opposite direction of market interest rates. Option adjusted spread is generally impacted by changes in market return requirements.

The following table shows the significant valuation assumption ranges for MSRs at December 31, 2016:


	Minimum			Maximum			Average
Expected prepayment		6	%		18	%		10	%
Option adjusted spread		7			10			8

Derivatives The Company has two distinct Level 3 derivative portfolios: (i) the Company’s commitments to purchase and originate mortgage loans that meet the requirements of a derivative and (ii) the Company’s asset/liability and customer-

related derivatives that are Level 3 due to unobservable inputs related to measurement of risk of nonperformance by the counterparty. In addition, the Company’s Visa swaps are classified within Level 3.

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The significant unobservable inputs used in the fair value measurement of the Company’s derivative commitments to purchase and originate mortgage loans are the percentage of commitments that actually become a closed loan and the MSR value that is inherent in the underlying loan value. A significant increase in the rate of loans that close would result in a larger

derivative asset or liability. A significant increase in the inherent MSR value would result in an increase in the derivative asset or a reduction in the derivative liability. Expected loan close rates and the inherent MSR values are directly impacted by changes in market rates and will generally move in the same direction as interest rates.

The following table shows the significant valuation assumption ranges for the Company’s derivative commitments to purchase and originate mortgage loans at December 31, 2016:


	Minimum			Maximum			Average
Expected loan close rate		33	%		100	%		80	%
Inherent MSR value (basis points per loan)		(34	)		203			113

The significant unobservable input used in the fair value measurement of certain of the Company’s asset/liability and customer-related derivatives is the credit valuation adjustment related to the risk of counterparty nonperformance. A significant increase in the credit valuation adjustment would result in a lower fair value measurement. A significant decrease in the credit valuation adjustment would result in a higher fair value measurement. The credit valuation adjustment is impacted by changes in the Company’s assessment of the counterparty’s credit position. At December 31, 2016, the minimum, maximum and average credit valuation adjustment as a percentage of the derivative contract fair value prior to adjustment was 0 percent, 96 percent and 3 percent, respectively.

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

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The following table summarizes the balances of assets and liabilities measured at fair value on a recurring basis:


(Dollars in Millions)	Level 1		Level 2		Level 3		Netting			Total
December 31, 2016
Available-for-sale securities
U.S. Treasury and agencies	$	16,355	$	772	$	–	$	–		$	17,127
Mortgage-backed securities
Residential
Agency		–		43,138		–		–			43,138
Non-agency
Prime^(a)		–		–		242		–			242
Non-prime^(b)		–		–		195		–			195
Commercial
Agency		–		15		–		–			15
Asset-backed securities
Other		–		481		2		–			483
Obligations of state and political subdivisions		–		5,039		–		–			5,039
Corporate debt securities		–		–		9		–			9
Other investments		36		–		–		–			36
Total available-for-sale		16,391		49,445		448		–			66,284
Mortgage loans held for sale		–		4,822		–		–			4,822
Mortgage servicing rights		–		–		2,591		–			2,591
Derivative assets		–		2,416		554		(984	)		1,986
Other assets		183		1,137		–		–			1,320
Total	$	16,574	$	57,820	$	3,593	$	(984	)	$	77,003
Derivative liabilities	$	7	$	2,469	$	383	$	(1,185	)	$	1,674
Short-term borrowings and other liabilities^(c)		142		938		–		–			1,080
Total	$	149	$	3,407	$	383	$	(1,185	)	$	2,754
December 31, 2015
Available-for-sale securities
U.S. Treasury and agencies	$	3,708	$	888	$	–	$	–		$	4,596
Mortgage-backed securities
Residential
Agency		–		50,076		–		–			50,076
Non-agency
Prime^(a)		–		–		318		–			318
Non-prime^(b)		–		–		240		–			240
Commercial
Agency		–		52		–		–			52
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		–		19		–		–			19
Other		–		539		2		–			541
Obligations of state and political subdivisions		–		5,316		–		–			5,316
Corporate debt securities		102		499		9		–			610
Perpetual preferred securities		48		113		–		–			161
Other investments		40		28		–		–			68
Total available-for-sale		3,898		57,530		569		–			61,997
Mortgage loans held for sale		–		3,110		–		–			3,110
Mortgage servicing rights		–		–		2,512		–			2,512
Derivative assets		–		1,632		615		(807	)		1,440
Other assets		202		589		–		–			791
Total	$	4,100	$	62,861	$	3,696	$	(807	)	$	69,850
Derivative liabilities	$	2	$	2,266	$	117	$	(1,283	)	$	1,102
Short-term borrowings^(c)		122		645		–		–			767
Total	$	124	$	2,911	$	117	$	(1,283	)	$	1,869

(a)

(b)

Includes all securities not meeting the conditions to be designated as prime.

(c)

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

132

The following table presents the changes in fair value for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31:


(Dollars in Millions)	Beginning of Period Balance		Net Gains (Losses) Included in Net Income			Net Gains (Losses) Included in Other Comprehensive Income (Loss)			Purchases		Sales			Principal Payments			Issuances			Settlements			End of Period Balance		Net Change in Unrealized Gains (Losses) Relating to Assets and Liabilities Held at End of Period
2016
Available-for-sale securities
Mortgage-backed securities
Residential non-agency
Prime^(a)	$	318	$	(1	)	$	–		$	–	$	–		$	(75	)	$	–		$	–		$	242	$	–
Non-prime^(b)		240		(1	)		(2	)		–		–			(42	)		–			–			195		(2	)
Asset-backed securities
Other		2		–			–			–		–			–			–			–			2		–
Corporate debt securities		9		–			–			–		–			–			–			–			9		–
Total available-for-sale		569		(2	)^(c)		(2	)^(f)		–		–			(117	)		–			–			448		(2	)
Mortgage servicing rights		2,512		(488	)^(d)		–			43		–			–			524	^(g)		–			2,591		(488	)^(d)
Net derivative assets and liabilities		498		332	^(e)		–			2		(14	)		–			–			(647	)		171		(257	)^(h)

2015
Available-for-sale securities
Mortgage-backed securities
Residential non-agency
Prime^(a)	$	405	$	–		$	(4	)	$	–	$	–		$	(83	)	$	–		$	–		$	318	$	(4	)
Non-prime^(b)		280		(1	)		(1	)		–		–			(38	)		–			–			240		(1	)
Asset-backed securities
Other		62		4			(2	)		–		(51	)		(11	)		–			–			2		–
Corporate debt securities		9		–			–			–		–			–			–			–			9		–
Total available-for-sale		756		3	⁽ⁱ⁾		(7	)^(f)		–		(51	)		(132	)		–			–			569		(5	)
Mortgage servicing rights		2,338		(487	)^(d)		–			29		–			–			632	^(g)		–			2,512		(487	)^(d)
Net derivative assets and liabilities		574		707	^(j)		–			1		(13	)		–			–			(771	)		498		135	^(k)

2014
Available-for-sale securities
Mortgage-backed securities
Residential non-agency
Prime^(a)	$	478	$	–		$	15		$	–	$	–		$	(88	)	$	–		$	–		$	405	$	14
Non-prime^(b)		297		(6	)		19			–		–			(30	)		–			–			280		19
Asset-backed securities
Other		63		4			–			5		–			(10	)		–			–			62		–
Corporate debt securities		9		–			–			–		–			–			–			–			9		–
Total available-for-sale		847		(2	)^(l)		34	^(f)		5		–			(128	)		–			–			756		33
Mortgage servicing rights		2,680		(588	)^(d)		–			5		(141	)		–			382	^(g)		–			2,338		(588	)^(d)
Net derivative assets and liabilities		445		904	^(m)		–			1		(4	)		–			–			(772	)		574		188	⁽ⁿ⁾

(a)

(b)

Includes all securities not meeting the conditions to be designated as prime.

(c)

Approximately $(3) million included in securities gains (losses) and $1 million included in interest income.

(d)

Included in mortgage banking revenue.

(e)

Approximately $(77) million included in other noninterest income and $409 million included in mortgage banking revenue.

(f)

Included in changes in unrealized gains and losses on securities available-for-sale.

(g)

Represents MSRs capitalized during the period.

(h)

Approximately $(276) million included in other noninterest income and $19 million included in mortgage banking revenue.

(i)

Included in interest income.

(j)

Approximately $289 million included in other noninterest income and $418 million included in mortgage banking revenue.

(k)

Approximately $92 million included in other noninterest income and $43 million included in mortgage banking revenue.

(l)

Approximately $(3) million included in securities gains (losses) and $1 million included in interest income.

(m)

Approximately $404 million included in other noninterest income and $500 million included in mortgage banking revenue.

(n)

Approximately $128 million included in other noninterest income and $60 million included in mortgage banking revenue.

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

The following table summarizes the balances as of the measurement date of assets measured at fair value on a nonrecurring basis, and still held as of the reporting date as of December 31:


	2016								2015
(Dollars in Millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Loans^(a)	$	–	$	–	$	59	$	59	$	–	$	–	$	87	$	87
Other assets^(b)		–		–		60		60		–		–		66		66

(a)

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

(b)

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

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


(Dollars in Millions)	2016		2015		2014
Loans^(a)	$	192	$	175	$	108
Other assets^(b)		32		42		70

(a)

Represents write-downs of student loans held for sale based on non-binding quoted prices received for the portfolio, that were subsequently transferred to loans, and write-downs of loans which were based on the fair value of the collateral, excluding loans fully charged-off.

(b)

Primarily represents related losses of foreclosed properties that were measured at fair value subsequent to their initial acquisition.

Fair Value Option

The following table summarizes the differences between the aggregate fair value carrying amount of MLHFS for which the fair value option has been elected and the aggregate unpaid principal amount that the Company is contractually obligated to receive at maturity as of December 31:


	2016							2015
(Dollars in Millions)	Fair Value Carrying Amount		Aggregate Unpaid Principal		Carrying Amount Over (Under) Unpaid Principal			Fair Value Carrying Amount		Aggregate Unpaid Principal		Carrying Amount Over (Under) Unpaid Principal
Total loans	$	4,822	$	4,763	$	59		$	3,110	$	3,032	$	78
Nonaccrual loans		2		3		(1	)		5		7		(2	)
Loans 90 days or more past due		1		1		–			–		–		–

Disclosures About Fair Value of Financial Instruments

The following table summarizes the estimated fair value for financial instruments as of December 31, 2016 and 2015, and includes financial instruments that are not accounted for at fair value. In accordance with disclosure guidance related to fair values of financial instruments, the Company did not include

assets and liabilities that are not financial instruments, such as the value of goodwill, long-term relationships with deposit, credit card, merchant processing and trust customers, other purchased intangibles, premises and equipment, deferred taxes and other liabilities. Additionally, in accordance with the disclosure guidance, insurance contracts and investments accounted for under the equity method are excluded.

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


	2016										2015
	Carrying Amount		Fair Value								Carrying Amount		Fair Value
(Dollars in Millions)	Carrying Amount		Level 1		Level 2		Level 3		Total		Carrying Amount		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and due from banks	$	15,705	$	15,705	$	–	$	–	$	15,705	$	11,147	$	11,147	$	–	$	–	$	11,147
Federal funds sold and securities purchased under resale agreements		138		–		138		–		138		169		–		169		–		169
Investment securities held-to-maturity		42,991		4,605		37,810		20		42,435		43,590		2,275		41,138		80		43,493
Loans held for sale^(a)		4		–		–		4		4		74		–		–		74		74
Loans		269,394		–		–		273,422		273,422		256,986		–		–		259,823		259,823
Other financial instruments		2,362		–		920		1,449		2,369		2,311		–		921		1,398		2,319

Financial Liabilities
Deposits		334,590		–		334,361		–		334,361		300,400		–		300,225		–		300,225
Short-term borrowings^(b)		12,891		–		12,706		–		12,706		27,110		–		26,782		–		26,782
Long-term debt		33,323		–		33,678		–		33,678		32,078		–		32,412		–		32,412
Other liabilities		1,702		–		–		1,702		1,702		1,353		–		–		1,353		1,353

(a)

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

(b)

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

The fair value of unfunded commitments, deferred non-yield related loan fees, standby letters of credit and other guarantees is approximately equal to their carrying value. The carrying value of unfunded commitments, deferred non-yield related loan fees and

standby letters of credit was $618 million and $515 million at December 31, 2016 and 2015, respectively. The carrying value of other guarantees was $186 million and $184 million at December 31, 2016 and 2015, respectively.

NOTE 22 _{Guarantees and Contingent
Liabilities}

Visa Restructuring and Card Association Litigation The Company’s payment services business issues credit and debit cards and acquires credit and debit card transactions through the Visa U.S.A. Inc. card association or its affiliates (collectively “Visa”). In 2007, Visa completed a restructuring and issued shares of Visa Inc. common stock to its financial institution members in contemplation of its initial public offering (“IPO”) completed in the first quarter of 2008 (the “Visa Reorganization”). As a part of the Visa Reorganization, the Company received its proportionate number of shares of Visa Inc. common stock, which were subsequently converted to Class B shares of Visa Inc. (“Class B shares”). Visa U.S.A. Inc. (“Visa U.S.A.”) and MasterCard International (collectively, the “Card Associations”) are defendants in antitrust lawsuits challenging the practices of the Card Associations (the “Visa Litigation”). Visa U.S.A. member banks have a contingent obligation to indemnify Visa Inc. under the Visa U.S.A. bylaws (which were modified at the time of the restructuring in October 2007) for potential losses arising from the Visa Litigation. The indemnification by the Visa U.S.A. member banks has no specific maximum amount.

Using proceeds from its IPO and through reductions to the conversion ratio applicable to the Class B shares held by Visa U.S.A. member banks, Visa Inc. has funded an escrow account for the benefit of member financial institutions to fund their indemnification obligations associated with the Visa Litigation. The receivable related to the escrow account is classified in other

liabilities as a direct offset to the related Visa Litigation contingent liability. On October 19, 2012, Visa signed a settlement agreement to resolve class action claims associated with the multi-district interchange litigation, the largest of the remaining Visa Litigation matters. The United States District Court for the Eastern District of New York approved the settlement, but that approval was appealed by certain class members. On June 30, 2016, the United States Court of Appeals for the Second Circuit reversed the approval of the settlement and remanded the case to the district court for further proceedings consistent with the appellate ruling. On November 23, 2016, plaintiff merchants filed a petition with the United States Supreme Court asking it to review the Second Circuit’s decision to reject the settlement.

At December 31, 2016, the carrying amount of the Company’s liability related to the Visa Litigation matters, net of its share of the escrow fundings, was $19 million. During 2016, the Company sold 1.5 million of its Class B shares. These sales, and any previous sales of its Class B shares, do not impact the Company’s liability for the Visa Litigation matters or the receivable related to the escrow account. Upon final settlement of the Visa Litigation, the remaining 4.9 million Class B shares held by the Company will be eligible for conversion to Class A shares of Visa Inc., which are publicly traded. The Class B shares are excluded from the Company’s financial instruments disclosures included in Note 21.

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Commitments to Extend Credit Commitments to extend credit are legally binding and generally have fixed expiration dates or other termination clauses. The contractual amount represents the Company’s exposure to credit loss, in the event of default by the borrower. The Company manages this credit risk by using the same credit policies it applies to loans. Collateral is obtained to secure commitments based on management’s credit assessment of the borrower. The collateral may include marketable securities, receivables, inventory, equipment and real estate. Since the Company expects many of the commitments to expire without being drawn, total commitment amounts do not necessarily represent the Company’s future liquidity requirements. In addition, the commitments include consumer credit lines that are cancelable upon notification to the consumer.

The contract or notional amounts of unfunded commitments to extend credit at December 31, 2016, excluding those commitments considered derivatives, were as follows:


	Term
(Dollars in Millions)	Less Than One Year		Greater Than One Year		Total
Commercial and commercial real estate loans	$	26,471	$	98,452	$	124,923
Corporate and purchasing card loans^(a)		25,085		–		25,085
Residential mortgages		379		12		391
Retail credit card loans^(a)		101,258		–		101,258
Other retail loans		13,254		22,552		35,806
Covered loans		–		320		320
Other		5,558		18		5,576

(a)

Primarily cancelable at the Company’s discretion.

Lease Commitments Rental expense for operating leases totaled $326 million in 2016, $328 million in 2015 and $326 million in 2014. Future minimum payments, net of sublease rentals, under capitalized leases and noncancelable operating leases with initial or remaining terms of one year or more, consisted of the following at December 31, 2016:


(Dollars in Millions)	Capitalized Leases		Operating Leases
2017	$	17	$	270
2018		16		243
2019		14		207
2020		13		166
2021		10		140
Thereafter		41		490

Total minimum lease payments		111	$	1,516
Less amount representing interest		39

Present value of net minimum lease payments	$	72

Other Guarantees and Contingent Liabilities

The following table is a summary of other guarantees and contingent liabilities of the Company at December 31, 2016:


(Dollars in Millions)	Collateral Held		Carrying Amount		Maximum Potential Future Payments
Standby letters of credit	$	–	$	61	$	11,917
Third party borrowing arrangements		–		–		8
Securities lending indemnifications		3,164		–		3,083
Asset sales		–		138		6,211
Merchant processing		483		48		91,040
Tender option bond program guarantee		1,129		–		1,114
Minimum revenue guarantees		–		–		9
Other		–		–		1,287

Letters of Credit Standby letters of credit are commitments the Company issues to guarantee the performance of a customer to a third party. The guarantees frequently support public and private borrowing arrangements, including commercial paper issuances, bond financings and other similar transactions. The Company also issues and confirms commercial letters of credit on behalf of customers to ensure payment or collection in connection with trade transactions. In the event of a customer’s or counterparty’s nonperformance, the Company’s credit loss exposure is similar to that in any extension of credit, up to the letter’s contractual amount. Management assesses the borrower’s credit to determine the necessary collateral, which may include marketable securities, receivables, inventory, equipment and real estate. Since the conditions requiring the Company to fund letters of credit may not occur, the Company expects its liquidity requirements to be less than the total outstanding commitments. The maximum potential future payments guaranteed by the Company under standby letter of credit arrangements at December 31, 2016, were approximately $11.9 billion with a weighted-average term of approximately 20 months. The estimated fair value of standby letters of credit was approximately $61 million at December 31, 2016.

The contract or notional amount of letters of credit at December 31, 2016, were as follows:


	Term
(Dollars in Millions)	Less Than One Year		Greater Than One Year		Total
Standby	$	5,552	$	6,365	$	11,917
Commercial		328		18		346

136

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

Third Party Borrowing Arrangements The Company provides guarantees to third parties as a part of certain subsidiaries’ borrowing arrangements. The maximum potential future payments guaranteed by the Company under these arrangements were approximately $8 million at December 31, 2016.

Commitments from Securities Lending The Company participates in securities lending activities by acting as the customer’s agent involving the loan of securities. The Company indemnifies customers for the difference between the fair value of the securities lent and the fair value of the collateral received. Cash collateralizes these transactions. The maximum potential future payments guaranteed by the Company under these arrangements were approximately $3.1 billion at December 31, 2016, and represent the fair value of the securities lent to third parties. At December 31, 2016, the Company held $3.2 billion of cash as collateral for these arrangements.

Asset Sales The Company has provided guarantees to certain third parties in connection with the sale or syndication of certain assets, primarily loan portfolios and tax-advantaged investments. These guarantees are generally in the form of asset buy-back or make-whole provisions that are triggered upon a credit event or a change in the tax-qualifying status of the related projects, as applicable, and remain in effect until the loans are collected or final tax credits are realized, respectively. The maximum potential future payments guaranteed by the Company under these arrangements were approximately $6.2 billion at December 31, 2016, and represented the proceeds received from the buyer or the guaranteed portion in these transactions where the buy-back or make-whole provisions have not yet expired. At December 31, 2016, the Company had reserved $119 million for potential losses related to the sale or syndication of tax-advantaged investments.

The maximum potential future payments do not include loan sales where the Company provides standard representation and warranties to the buyer against losses related to loan underwriting documentation defects that may have existed at the time of sale that generally are identified after the occurrence of a triggering event such as delinquency. For these types of loan sales, the maximum potential future payments is generally the unpaid principal balance of loans sold measured at the end of the current

reporting period. Actual losses will be significantly less than the maximum exposure, as only a fraction of loans sold will have a representation and warranty breach, and any losses on repurchase would generally be mitigated by any collateral held against the loans.

The Company regularly sells loans to GSEs as part of its mortgage banking activities. The Company provides customary representations and warranties to the GSEs in conjunction with these sales. These representations and warranties generally require the Company to repurchase assets if it is subsequently determined that a loan did not meet specified criteria, such as a documentation deficiency or rescission of mortgage insurance. If the Company is unable to cure or refute a repurchase request, the Company is generally obligated to repurchase the loan or otherwise reimburse the counterparty for losses. At December 31, 2016, the Company had reserved $19 million for potential losses from representation and warranty obligations, compared with $30 million at December 31, 2015. The Company’s reserve reflects management’s best estimate of losses for representation and warranty obligations. The Company’s repurchase reserve is modeled at the loan level, taking into consideration the individual credit quality and borrower activity that has transpired since origination. The model applies credit quality and economic risk factors to derive a probability of default and potential repurchase that are based on the Company’s historical loss experience, and estimates loss severity based on expected collateral value. The Company also considers qualitative factors that may result in anticipated losses differing from historical loss trends.

As of December 31, 2016 and 2015, the Company had $7 million and $12 million, respectively, of unresolved representation and warranty claims from the GSEs. The Company does not have a significant amount of unresolved claims from investors other than the GSEs.

Merchant Processing The Company, through its subsidiaries, provides merchant processing services. Under the rules of credit card associations, a merchant processor retains a contingent liability for credit card transactions processed. This contingent liability arises in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor. In this situation, the transaction is “charged-back” to the merchant and the disputed amount is credited or otherwise refunded to the cardholder. If the Company is unable to collect this amount from the merchant, it bears the loss for the amount of the refund paid to the cardholder.

A cardholder, through its issuing bank, generally has until the later of up to four months after the date the transaction is processed or the receipt of the product or service to present a charge-back to the Company as the merchant processor. The absolute maximum potential liability is estimated to be the total volume of credit card transactions that meet the associations’ requirements to be valid charge-back transactions at any given time. Management estimates that the maximum potential exposure for charge-backs would approximate the total amount of merchant transactions processed through the credit card

137

associations for the last four months. For the last four months this amount totaled approximately $91.0 billion. In most cases, this contingent liability is unlikely to arise, as most products and services are delivered when purchased and amounts are refunded when items are returned to merchants. However, where the product or service has been purchased but is not provided until a future date (“future delivery”), the potential for this contingent liability increases. To mitigate this risk, the Company may require the merchant to make an escrow deposit, place maximum volume limitations on future delivery transactions processed by the merchant at any point in time, or require various credit enhancements (including letters of credit and bank guarantees). Also, merchant processing contracts may include event triggers to provide the Company more financial and operational control in the event of financial deterioration of the merchant.

The Company currently processes card transactions in the United States, Canada, Europe and Mexico through wholly-owned subsidiaries and joint ventures with other financial institutions. In the event a merchant was unable to fulfill product or services subject to future delivery, such as airline tickets, the Company could become financially liable for refunding tickets purchased through the credit card associations under the charge-back provisions. Charge-back risk related to these merchants is evaluated in a manner similar to credit risk assessments and, as such, merchant processing contracts contain various provisions to protect the Company in the event of default. At December 31, 2016, the value of airline tickets purchased to be delivered at a future date was $5.7 billion. The Company held collateral of $375 million in escrow deposits, letters of credit and indemnities from financial institutions, and liens on various assets. With respect to future delivery risk for other merchants, the Company held $22 million of merchant escrow deposits as collateral. In addition to specific collateral or other credit enhancements, the Company maintains a liability for its implied guarantees associated with future delivery. At December 31, 2016, the liability was $35 million primarily related to these airline processing arrangements.

In the normal course of business, the Company has unresolved charge-backs. The Company assesses the likelihood of its potential liability based on the extent and nature of unresolved charge-backs and its historical loss experience. At December 31, 2016, the Company held $86 million of merchant escrow deposits as collateral and had a recorded liability for potential losses of $13 million.

Tender Option Bond Program Guarantee As discussed in Note 7, the Company sponsors a municipal bond securities tender option bond program and consolidates the program’s entities on its Consolidated Balance Sheet. The Company provides financial performance guarantees related to the program’s entities. At December 31, 2016, the Company guaranteed $1.1 billion of borrowings of the program’s entities, included on the Consolidated Balance Sheet in short-term borrowings. The Company also included on its Consolidated

Balance Sheet the related $1.1 billion of available-for-sale investment securities serving as collateral for this arrangement.

Minimum Revenue Guarantees In the normal course of business, the Company may enter into revenue share agreements with third party business partners who generate customer referrals or provide marketing or other services related to the generation of revenue. In certain of these agreements, the Company may guarantee that a minimum amount of revenue share payments will be made to the third party over a specified period of time. At December 31, 2016, the maximum potential future payments required to be made by the Company under these agreements were $9 million.

Other Guarantees and Commitments As of December 31, 2016, the Company sponsored, and owned 100 percent of the common equity of, USB Capital IX, a wholly-owned unconsolidated trust, formed for the purpose of issuing redeemable Income Trust Securities (“ITS”) to third party investors, originally investing the proceeds in junior subordinated debt securities (“Debentures”) issued by the Company and entering into stock purchase contracts to purchase the Company’s preferred stock in the future. As of December 31, 2016, all of the Debentures issued by the Company have either matured or been retired. Total assets of USB Capital IX were $682 million at December 31, 2016, consisting primarily of the Company’s Series A Preferred Stock. The Company’s obligations under the transaction documents, taken together, have the effect of providing a full and unconditional guarantee by the Company, on a junior subordinated basis, of the payment obligations of the trust to third party investors totaling $681 million at December 31, 2016.

The Company has also made other financial performance guarantees and commitments primarily related to the operations of its subsidiaries. At December 31, 2016, the maximum potential future payments guaranteed or committed by the Company under these arrangements were approximately $606 million.

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

138

Litigation Matters In the last several years, the Company and other large financial institutions have been sued in their capacity as trustee for residential mortgage–backed securities trusts. Among these lawsuits are actions originally brought in June 2014 by a group of institutional investors, including BlackRock and PIMCO funds, against six bank trustees, including the Company. The actions brought by these institutional investors against the Company are in their early stages and currently are pending in the Supreme Court of the State of New York, New York County, and in the United States District Court for the Southern District of New York. In these lawsuits, the investors allege that the Company’s banking subsidiary, U.S. Bank National Association, as trustee caused them to incur substantial losses by failing to enforce loan repurchase obligations and failing to abide by appropriate standards of care after events of default allegedly occurred. The plaintiffs seek monetary damages in an unspecified amount and also seek equitable relief.

Regulatory Matters The Company is currently subject to examinations, inquiries and investigations by government agencies and bank regulators concerning mortgage-related practices, including those related to compliance with selling guidelines relating to residential home loans sold to GSEs, foreclosure-related expenses submitted to the Federal Housing Administration or GSEs for reimbursement, lender-placed insurance, and notices and filings in bankruptcy cases. The Company is also subject to ongoing examinations, inquiries and investigations by government agencies, bank regulators and law enforcement with respect to Bank Secrecy Act/anti-money laundering compliance program adequacy and effectiveness and sanctions compliance requirements as administered by the Office of Foreign Assets Control. The Company is cooperating with an investigation currently being conducted by the United States Attorney’s Office in Manhattan regarding its banking relationship with Scott Tucker, who has been indicted over the operation of an allegedly illegal payday lending business. Tucker, who is challenging his indictment, and his businesses maintained certain deposit accounts with U.S. Bank National Association. The United States Attorney’s Office has also requested information on aspects of the Company’s Bank Secrecy Act/anti-money laundering compliance program.

The Company is continually subject to examinations, inquiries and investigations in areas of increasing regulatory scrutiny, such as compliance, risk management, third party risk management and consumer protection.

The Company is cooperating fully with all pending examinations, inquiries and investigations, any of which could

lead to administrative or legal proceedings or settlements. Remedies in these proceedings or settlements may include fines, penalties, restitution or alterations in the Company’s business practices (which may increase the Company’s operating expenses and decrease its revenue).

In October 2015, the Company entered into a Consent Order with the Office of the Comptroller of the Currency (the “OCC”) concerning deficiencies in its Bank Secrecy Act/anti-money laundering compliance program, and requiring an ongoing review of that program. If the Company does not satisfactorily correct the identified deficiencies, it could be required to enter into further orders, pay fines or penalties or further modify its business practices. Some of the compliance program enhancements and other actions required by the Consent Order have already been, or are currently in the process of being, implemented, and are not expected to be material to the Company.

In April 2011, the Company and certain other large financial institutions entered into Consent Orders with the OCC and the Board of Governors of the Federal Reserve System relating to residential mortgage servicing and foreclosure practices. In June 2015, the Company entered into an agreement to amend the 2011 Consent Order it had with the OCC. The OCC terminated the amended Consent Order in February 2016. Depending on the Company’s progress toward addressing the requirements of the 2011 Consent Order it has with the Board of Governors of the Federal Reserve System, the Company may be required to enter into further orders and settlements, pay additional fines or penalties, make restitution or further modify the Company’s business practices (which may increase the Company’s operating expenses and decrease its revenue).

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

139

NOTE 23 _{U.S. Bancorp (Parent
Company)}

Condensed Balance Sheet


At December 31 (Dollars in Millions)	2016		2015

Assets
Due from banks, principally interest-bearing	$	7,800	$	9,426
Available-for-sale securities		225		352
Investments in bank subsidiaries		44,955		41,708
Investments in nonbank subsidiaries		2,326		2,060
Advances to bank subsidiaries		3,800		3,150
Advances to nonbank subsidiaries		1,265		823
Other assets		1,052		983

Total assets	$	61,423	$	58,502


Liabilities and Shareholders’ Equity
Short-term funds borrowed	$	22	$	25
Long-term debt		13,045		11,453
Other liabilities		1,058		893
Shareholders’ equity		47,298		46,131

Total liabilities and shareholders’ equity	$	61,423	$	58,502

Condensed Statement of Income


Year Ended December 31 (Dollars in Millions)	2016			2015			2014

Income
Dividends from bank subsidiaries	$	2,100		$	3,900		$	3,850
Dividends from nonbank subsidiaries		4			3			38
Interest from subsidiaries		140			120			123
Other income		57			55			64

Total income		2,301			4,078			4,075

Expense
Interest expense		327			292			335
Other expense		123			105			90

Total expense		450			397			425

Income before income taxes and equity in undistributed income of subsidiaries		1,851			3,681			3,650
Applicable income taxes		(97	)		(207	)		(94	)

Income of parent company		1,948			3,888			3,744
Equity in undistributed income of subsidiaries		3,940			1,991			2,107

Net income attributable to U.S. Bancorp	$	5,888		$	5,879		$	5,851

140

Condensed Statement of Cash Flows


Year Ended December 31 (Dollars in Millions)	2016			2015			2014

Operating Activities
Net income attributable to U.S. Bancorp	$	5,888		$	5,879		$	5,851
Adjustments to reconcile net income to net cash provided by operating activities
Equity in undistributed income of subsidiaries		(3,940	)		(1,991	)		(2,107	)
Other, net		75			507			48

Net cash provided by operating activities		2,023			4,395			3,792

Investing Activities
Proceeds from sales and maturities of investment securities		232			153			46
Purchases of investment securities		(120	)		(47	)		(39	)
Net (increase) decrease in short-term advances to subsidiaries		(442	)		(273	)		984
Long-term advances to subsidiaries		(750	)		(500	)		(1,800	)
Principal collected on long-term advances to subsidiaries		100			–			1,400
Other, net		(12	)		(6	)		(52	)

Net cash (used in) provided by investing activities		(992	)		(673	)		539

Financing Activities
Net (decrease) increase in short-term borrowings		(3	)		(152	)		39
Proceeds from issuance of long-term debt		3,550			–			3,250
Principal payments or redemption of long-term debt		(1,926	)		(1,750	)		(1,500	)
Proceeds from issuance of preferred stock		–			745			–
Proceeds from issuance of common stock		355			295			453
Repurchase of common stock		(2,556	)		(2,190	)		(2,200	)
Cash dividends paid on preferred stock		(267	)		(242	)		(243	)
Cash dividends paid on common stock		(1,810	)		(1,777	)		(1,726	)

Net cash used in financing activities		(2,657	)		(5,071	)		(1,927	)

Change in cash and due from banks		(1,626	)		(1,349	)		2,404
Cash and due from banks at beginning of year		9,426			10,775			8,371

Cash and due from banks at end of year	$	7,800		$	9,426		$	10,775

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

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

NOTE 24 _{Subsequent Events}

The Company has evaluated the impact of events that have occurred subsequent to December 31, 2016 through the date the consolidated financial statements were filed with the United States Securities and Exchange Commission. Based on this

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

141

U.S. Bancorp

Consolidated Balance Sheet — Five Year Summary (Unaudited)


At December 31 (Dollars in Millions)	2016			2015			2014			2013			2012			% Change 2016 v 2015

Assets
Cash and due from banks	$	15,705		$	11,147		$	10,654		$	8,477		$	8,252			40.9	%
Held-to-maturity securities		42,991			43,590			44,974			38,920			34,389			(1.4	)
Available-for-sale securities		66,284			61,997			56,069			40,935			40,139			6.9
Loans held for sale		4,826			3,184			4,792			3,268			7,976			51.6
Loans		273,207			260,849			247,851			235,235			223,329			4.7
Less allowance for loan losses		(3,813	)		(3,863	)		(4,039	)		(4,250	)		(4,424	)		1.3
Net loans		269,394			256,986			243,812			230,985			218,905			4.8
Other assets		46,764			44,949			42,228			41,436			44,194			4.0
Total assets	$	445,964		$	421,853		$	402,529		$	364,021		$	353,855			5.7
Liabilities and Shareholders’ Equity
Deposits
Noninterest-bearing	$	86,097		$	83,766		$	77,323		$	76,941		$	74,172			2.8	%
Interest-bearing		248,493			216,634			205,410			185,182			175,011			14.7
Total deposits		334,590			300,400			282,733			262,123			249,183			11.4
Short-term borrowings		13,963			27,877			29,893			27,608			26,302			(49.9	)
Long-term debt		33,323			32,078			32,260			20,049			25,516			3.9
Other liabilities		16,155			14,681			13,475			12,434			12,587			10.0
Total liabilities		398,031			375,036			358,361			322,214			313,588			6.1
Total U.S. Bancorp shareholders’ equity		47,298			46,131			43,479			41,113			38,998			2.5
Noncontrolling interests		635			686			689			694			1,269			(7.4	)
Total equity		47,933			46,817			44,168			41,807			40,267			2.4
Total liabilities and equity	$	445,964		$	421,853		$	402,529		$	364,021		$	353,855			5.7

142

U.S. Bancorp

Consolidated Statement of Income — Five-Year Summary (Unaudited)


Year Ended December 31 (Dollars in Millions)	2016			2015			2014			2013		2012			% Change 2016 v 2015

Interest Income
Loans	$	10,810		$	10,059		$	10,113		$	10,277	$	10,558			7.5	%
Loans held for sale		154			206			128			203		282			(25.2	)
Investment securities		2,078			2,001			1,866			1,631		1,792			3.8
Other interest income		125			136			121			174		251			(8.1	)

Total interest income		13,167			12,402			12,228			12,285		12,883			6.2

Interest Expense
Deposits		622			457			465			561		691			36.1
Short-term borrowings		263			245			263			353		442			7.3
Long-term debt		754			699			725			767		1,005			7.9

Total interest expense		1,639			1,401			1,453			1,681		2,138			17.0

Net interest income		11,528			11,001			10,775			10,604		10,745			4.8
Provision for credit losses		1,324			1,132			1,229			1,340		1,882			17.0

Net interest income after provision for credit losses		10,204			9,869			9,546			9,264		8,863			3.4

Noninterest Income
Credit and debit card revenue		1,177			1,070			1,021			965		892			10.0
Corporate payment products revenue		712			708			724			706		744			.6
Merchant processing services		1,592			1,547			1,511			1,458		1,395			2.9
ATM processing services		338			318			321			327		346			6.3
Trust and investment management fees		1,427			1,321			1,252			1,139		1,055			8.0
Deposit service charges		725			702			693			670		653			3.3
Treasury management fees		583			561			545			538		541			3.9
Commercial products revenue		871			867			854			859		878			.5
Mortgage banking revenue		979			906			1,009			1,356		1,937			8.1
Investment products fees		158			185			191			178		150			(14.6	)
Securities gains (losses), net		22			–			3			9		(15	)		*
Other		993			907			1,040			569		743			9.5

Total noninterest income		9,577			9,092			9,164			8,774		9,319			5.3

Noninterest Expense
Compensation		5,212			4,812			4,523			4,371		4,320			8.3
Employee benefits		1,119			1,167			1,041			1,140		945			(4.1	)
Net occupancy and equipment		988			991			987			949		917			(.3	)
Professional services		502			423			414			381		530			18.7
Marketing and business development		435			361			382			357		388			20.5
Technology and communications		955			887			863			848		821			7.7
Postage, printing and supplies		311			297			328			310		304			4.7
Other intangibles		179			174			199			223		274			2.9
Other		1,975			1,819			1,978			1,695		1,957			8.6

Total noninterest expense		11,676			10,931			10,715			10,274		10,456			6.8

Income before income taxes		8,105			8,030			7,995			7,764		7,726			.9
Applicable income taxes		2,161			2,097			2,087			2,032		2,236			3.1

Net income		5,944			5,933			5,908			5,732		5,490			.2
Net (income) loss attributable to noncontrolling interests		(56	)		(54	)		(57	)		104		157			(3.7	)

Net income attributable to U.S. Bancorp	$	5,888		$	5,879		$	5,851		$	5,836	$	5,647			.2

Net income applicable to U.S. Bancorp common shareholders	$	5,589		$	5,608		$	5,583		$	5,552	$	5,383			(.3	)

*	Not meaningful

143

U.S. Bancorp

Quarterly Consolidated Financial Data (Unaudited)


	2016												2015
(Dollars in Millions, Except Per Share Data)	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Interest Income
Loans	$	2,644		$	2,664		$	2,731		$	2,771		$	2,493		$	2,463		$	2,520		$	2,583
Loans held for sale		31			36			43			44			41			65			60			40
Investment securities		517			523			515			523			495			505			502			499
Other interest income		29			29			31			36			32			35			35			34
Total interest income		3,221			3,252			3,320			3,374			3,061			3,068			3,117			3,156

Interest Expense
Deposits		139			152			161			170			118			113			113			113
Short-term borrowings		65			66			70			62			61			62			66			56
Long-term debt		182			189			196			187			184			177			170			168
Total interest expense		386			407			427			419			363			352			349			337
Net interest income		2,835			2,845			2,893			2,955			2,698			2,716			2,768			2,819
Provision for credit losses		330			327			325			342			264			281			282			305
Net interest income after provision for credit losses		2,505			2,518			2,568			2,613			2,434			2,435			2,486			2,514

Noninterest Income
Credit and debit card revenue		266			296			299			316			241			266			269			294
Corporate payment products revenue		170			181			190			171			170			178			190			170
Merchant processing services		373			403			412			404			359			395			400			393
ATM processing services		80			84			87			87			78			80			81			79
Trust and investment management fees		339			358			362			368			322			334			329			336
Deposit service charges		168			179			192			186			161			174			185			182
Treasury management fees		142			147			147			147			137			142			143			139
Commercial products revenue		197			238			219			217			200			214			231			222
Mortgage banking revenue		187			238			314			240			240			231			224			211
Investment products fees		40			39			41			38			47			48			46			44
Securities gains (losses), net		3			3			10			6			–			–			(1	)		1
Other		184			386			172			251			199			210			229			269
Total noninterest income		2,149			2,552			2,445			2,431			2,154			2,272			2,326			2,340

Noninterest Expense
Compensation		1,249			1,277			1,329			1,357			1,179			1,196			1,225			1,212
Employee benefits		300			278			280			261			317			293			285			272
Net occupancy and equipment		248			243			250			247			247			247			251			246
Professional services		98			121			127			156			77			106			115			125
Marketing and business development		77			149			102			107			70			96			99			96
Technology and communications		233			241			243			238			214			221			222			230
Postage, printing and supplies		79			77			80			75			82			64			77			74
Other intangibles		45			44			45			45			43			43			42			46
Other		420			562			475			518			436			416			459			508
Total noninterest expense		2,749			2,992			2,931			3,004			2,665			2,682			2,775			2,809
Income before income taxes		1,905			2,078			2,082			2,040			1,923			2,025			2,037			2,045
Applicable income taxes		504			542			566			549			479			528			534			556
Net income		1,401			1,536			1,516			1,491			1,444			1,497			1,503			1,489
Net (income) loss attributable to noncontrolling interests		(15	)		(14	)		(14	)		(13	)		(13	)		(14	)		(14	)		(13	)
Net income attributable to U.S. Bancorp	$	1,386		$	1,522		$	1,502		$	1,478		$	1,431		$	1,483		$	1,489		$	1,476
Net income applicable to U.S. Bancorp common shareholders	$	1,329		$	1,435		$	1,434		$	1,391		$	1,365		$	1,417		$	1,422		$	1,404
Earnings per common share	$	.77		$	.83		$	.84		$	.82		$	.77		$	.80		$	.81		$	.80
Diluted earnings per common share	$	.76		$	.83		$	.84		$	.82		$	.76		$	.80		$	.81		$	.80

144

U.S. Bancorp

Supplemental Financial Data (Unaudited)


Earnings Per Common Share Summary	2016			2015			2014			2013			2012
Earnings per common share	$	3.25		$	3.18		$	3.10		$	3.02		$	2.85
Diluted earnings per common share		3.24			3.16			3.08			3.00			2.84
Dividends declared per common share		1.070			1.010			.965			.885			.780
Ratios
Return on average assets		1.36	%		1.44	%		1.54	%		1.65	%		1.65	%
Return on average common equity		13.4			14.0			14.7			15.8			16.2
Average total U.S. Bancorp shareholders’ equity to average assets		10.9			11.0			11.3			11.3			11.0
Dividends per common share to net income per common share		32.9			31.8			31.1			29.3			27.4
Other Statistics (Dollars and Shares in Millions)
Common shares outstanding^(a)		1,697			1,745			1,786			1,825			1,869
Average common shares outstanding and common stock equivalents
Earnings per common share		1,718			1,764			1,803			1,839			1,887
Diluted earnings per common share		1,724			1,772			1,813			1,849			1,896
Number of shareholders^(b)		38,794			40,666			44,114			46,632			49,430
Common dividends declared	$	1,842		$	1,785		$	1,745		$	1,631		$	1,474

(a)

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

(b)

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

Stock Price Range and Dividends


	2016								2015
	Sales Price								Sales Price
	High		Low		Closing Price		Dividends Declared		High		Low		Closing Price		Dividends Declared
First quarter	$	41.82	$	37.07	$	40.59	$	.255	$	45.49	$	40.70	$	43.67	$	.245
Second quarter		43.94		38.48		40.33		.255		45.29		42.12		43.40		.255
Third quarter		44.26		38.63		42.89		.280		46.26		38.81		41.01		.255
Fourth quarter		52.68		42.37		51.37		.280		44.58		39.28		42.67		.255

The common stock of U.S. Bancorp is traded on the New York Stock Exchange, under the ticker symbol “USB.” At January 31, 2017, there were 38,703 holders of record of the Company’s common stock.

Stock Performance Chart

The following chart compares the cumulative total shareholder return on the Company’s common stock during the five years ended December 31, 2016, with the cumulative total return on the Standard & Poor’s 500 Index and the KBW Bank Index. The comparison assumes $100 was invested on December 31, 2011, in the Company’s common stock and in each of the foregoing indices and assumes the reinvestment of all dividends. The comparisons in the graph are based upon historical data and are not indicative of, nor intended to forecast, future performance of the Company’s common stock.

LOGO

145

U.S. Bancorp

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


	2016								2015
Year Ended December 31 (Dollars in Millions)	Average Balances			Interest		Yields and Rates			Average Balances			Interest		Yields and Rates
Assets
Investment securities	$	107,922		$	2,181		2.02	%	$	103,161		$	2,120		2.05	%
Loans held for sale		4,181			154		3.70			5,784			206		3.56
Loans^(b)
Commercial		92,043			2,596		2.82			84,083			2,281		2.71
Commercial real estate		43,040			1,698		3.94			42,415			1,650		3.89
Residential mortgages		55,682			2,070		3.72			51,840			1,966		3.79
Credit card		20,490			2,237		10.92			18,057			1,969		10.90
Other retail		52,330			2,114		4.04			49,079			2,020		4.12
Total loans, excluding covered loans		263,585			10,715		4.06			245,474			9,886		4.03
Covered loans		4,226			200		4.73			4,985			271		5.42
Total loans		267,811			10,915		4.08			250,459			10,157		4.06
Other earning assets		9,963			125		1.26			8,041			136		1.69
Total earning assets		389,877			13,375		3.43			367,445			12,619		3.43
Allowance for loan losses		(3,837	)							(4,035	)
Unrealized gain (loss) on investment securities		593								710
Other assets		46,680								44,745
Total assets	$	433,313							$	408,865
Liabilities and Shareholders’ Equity
Noninterest-bearing deposits	$	81,176							$	79,203
Interest-bearing deposits
Interest checking		61,726			42		.07			55,974			30		.05
Money market savings		96,518			349		.36			79,266			192		.24
Savings accounts		40,382			34		.09			37,150			40		.11
Time deposits		33,008			197		.60			35,558			195		.55
Total interest-bearing deposits		231,634			622		.27			207,948			457		.22
Short-term borrowings		19,906			268		1.34			27,960			249		.89
Long-term debt		36,220			754		2.08			33,566			699		2.08
Total interest-bearing liabilities		287,760			1,644		.57			269,474			1,405		.52
Other liabilities		16,389								14,686
Shareholders’ equity
Preferred equity		5,501								4,836
Common equity		41,838								39,977
Total U.S. Bancorp shareholders’ equity		47,339								44,813
Noncontrolling interests		649								689
Total equity		47,988								45,502
Total liabilities and equity	$	433,313							$	408,865
Net interest income				$	11,731							$	11,214
Gross interest margin							2.86	%							2.91	%
Gross interest margin without taxable-equivalent increments							2.81	%							2.85	%
Percent of Earning Assets
Interest income							3.43	%							3.43	%
Interest expense							.42								.38
Net interest margin							3.01	%							3.05	%
Net interest margin without taxable-equivalent increments							2.96	%							2.99	%

(a)

Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.

(b)

Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances.

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2014								2013								2012								2016 v 2015
Average Balances			Interest		Yields and Rates			Average Balances			Interest		Yields and Rates			Average Balances			Interest		Yields and Rates			% Change Average Balances

$	90,327		$	1,991		2.20	%	$	75,046		$	1,767		2.35	%	$	72,501		$	1,939		2.67	%		4.6	%
	3,148			128		4.08			5,723			203		3.56			7,847			282		3.60			(27.7	)

	75,734			2,228		2.94			67,274			2,168		3.22			60,830			2,168		3.56			9.5
	40,592			1,575		3.88			38,237			1,589		4.16			36,505			1,638		4.49			1.5
	51,818			2,001		3.86			47,982			1,959		4.08			40,290			1,827		4.53			7.4
	17,635			1,817		10.30			16,813			1,691		10.06			16,653			1,693		10.16			13.5
	48,353			2,141		4.43			47,125			2,318		4.92			47,938			2,488		5.19			6.6
	234,132			9,762		4.17			217,431			9,725		4.47			202,216			9,814		4.85			7.4
	7,560			452		5.97			10,043			643		6.41			13,158			826		6.28			(15.2	)
	241,692			10,214		4.23			227,474			10,368		4.56			215,374			10,640		4.94			6.9
	5,827			121		2.08			6,896			175		2.53			10,548			251		2.38			23.9
	340,994			12,454		3.65			315,139			12,513		3.97			306,270			13,112		4.28			6.1
	(4,187	)							(4,373	)							(4,642	)							4.9
	466								633								1,077								(16.5	)
	42,731								41,281								40,144								4.3
$	380,004							$	352,680							$	342,849								6.0

$	73,455							$	69,020							$	67,241								2.5	%

	53,248			35		.07			48,792			36		.07			45,433			46		.10			10.3
	63,977			117		.18			55,512			76		.14			46,874			62		.13			21.8
	34,196			46		.14			31,916			49		.15			29,596			66		.22			8.7
	41,764			267		.64			45,217			400		.88			46,566			517		1.11			(7.2	)
	193,185			465		.24			181,437			561		.31			168,469			691		.41			11.4
	30,252			267		.88			27,683			357		1.29			28,549			447		1.57			(28.8	)
	26,535			725		2.73			21,280			767		3.60			28,448			1,005		3.53			7.9
	249,972			1,457		.58			230,400			1,685		.73			225,466			2,143		.95			6.8
	13,053								11,973								11,406								11.6

	4,756								4,804								4,381								13.8
	38,081								35,113								33,230								4.7
	42,837								39,917								37,611								5.6
	687								1,370								1,125								(5.8	)
	43,524								41,287								38,736								5.5
$	380,004							$	352,680							$	342,849								6.0
			$	10,997							$	10,828							$	10,969
						3.07	%							3.24	%							3.33	%
						3.00	%							3.17	%							3.26	%

						3.65	%							3.97	%							4.28	%
						.42								.53								.70
						3.23	%							3.44	%							3.58	%
						3.16	%							3.37	%							3.51	%

147