Forward-Looking Statements
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 (U.S. Bancorp or the Company). 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. Bancorps 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. Bancorps 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 managements ability to effectively manage credit risk, market risk, operational risk, compliance
risk, strategic risk, interest rate risk, liquidity risk and reputational risk.
For discussion of these and other risks that
may cause actual results to differ from expectations, refer to the sections entitled Corporate Risk Profile on pages 38 to 60 and Risk Factors on pages 146 to 156 of the 2017 Annual Report. However, factors other
than these also could adversely affect U.S. Bancorps 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.
General Business Description
U.S. Bancorp is a multi-state financial services holding company headquartered in Minneapolis, Minnesota. U.S. Bancorp was incorporated in
Delaware in 1929 and operates as a financial holding company and a bank holding company under the Bank Holding Company Act of 1956. U.S. Bancorp provides a full range of financial services, including lending and depository services, cash management,
capital markets, and trust and investment management services. It also engages in credit card services, merchant and ATM processing, mortgage banking, insurance, brokerage and leasing.
U.S. Bancorps banking subsidiary, U.S. Bank National Association, is engaged in the general banking business, principally in
domestic markets. U.S. Bank National Association, with $357 billion in deposits at December 31, 2017, provides a wide range of products and services to individuals, businesses, institutional organizations, governmental entities and other
financial institutions. Commercial and consumer lending services are principally offered to customers within the Companys domestic markets, to domestic customers with foreign operations and to large national customers operating in specific
industries targeted by the Company. Lending services include traditional credit products as well as credit card services, lease financing and import/export trade, asset-backed lending, agricultural finance and other products. Depository services
include checking
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accounts, savings accounts and time certificate contracts. Ancillary services such as capital markets, treasury management and receivable
lock-box
collection are provided to corporate customers. U.S. Bancorps bank and trust subsidiaries provide a full range of asset management and fiduciary services for individuals, estates, foundations, business corporations and charitable
organizations.
Other U.S. Bancorp
non-banking
subsidiaries offer investment and
insurance products to the Companys customers principally within its markets, and fund administration services to a broad range of mutual and other funds.
Banking and investment services are provided through a network of 3,067 banking offices principally operating in the Midwest and West regions of the United States, through
on-line
services and over mobile devices. The Company operates a network of 4,771 ATMs and provides
24-hour,
seven day a week telephone customer service. Mortgage
banking services are provided through banking offices and loan production offices throughout the Companys markets. Lending products may be originated through banking offices, indirect correspondents, brokers or other lending sources. The
Company is also one of the largest providers of corporate and purchasing card services and corporate trust services in the United States. A wholly-owned subsidiary, Elavon, Inc. (Elavon), provides merchant processing services directly to
merchants and through a network of banking affiliations. Wholly-owned subsidiaries, and affiliates of Elavon, provide similar merchant services in Canada, Mexico and segments of Europe. The Company also provides corporate trust and fund
administration services in Europe. These foreign operations are not significant to the Company.
On a full-time equivalent
basis, as of December 31, 2017, U.S. Bancorp employed 72,402 people.
Competition
The commercial banking business is highly competitive. The Company competes with other commercial banks, savings and loan associations,
mutual savings banks, finance companies, mortgage banking companies, credit unions, investment companies, credit card companies and a variety of other financial services, advisory and technology companies. In recent years, competition has increased
from institutions not subject to the same regulatory restrictions as domestic banks and bank holding companies. Competition is based on a number of factors, including, among others, customer service, quality and range of products and services
offered, price, reputation, interest rates on loans and deposits, lending limits and customer convenience. The Companys ability to continue to compete effectively also depends in large part on its ability to attract new employees and retain
and motivate existing employees, while managing compensation and other costs.
Government Policies
The operations of the Companys various businesses are affected by federal and state legislative changes and by policies of various
regulatory authorities, including the statutes, and the rules and policies of regulatory authorities, of the numerous states in which they operate, the United States and foreign governments. These policies include, for example, statutory maximum
legal lending rates, domestic monetary policies of the Board of Governors of the Federal Reserve System (the Federal Reserve), United States fiscal policy, international currency regulations and monetary policies and capital adequacy and
liquidity constraints imposed by bank regulatory agencies.
Supervision and Regulation
U.S. Bancorp and its subsidiaries are subject to the extensive regulatory framework applicable to bank holding companies and their
subsidiaries. This regulatory framework is intended primarily for the protection of depositors, the deposit insurance fund of the Federal Deposit Insurance Corporation (the FDIC), consumers, the stability of the financial system in the
United States, and the health of the national economy, and not for investors in bank holding companies such as the Company.
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This section summarizes certain provisions of the principal laws and regulations applicable
to the Company and its subsidiaries. The descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations described below.
General
As a bank holding company, the Company is subject to regulation under the Bank Holding Company Act (the BHC
Act) and to inspection, examination and supervision by the Board of Governors of the Federal Reserve System (the Federal Reserve). U.S. Bank National Association and its subsidiaries, are subject to regulation and examination
primarily by the Office of the Comptroller of the Currency (the OCC) and also by the FDIC, the Federal Reserve, the Consumer Financial Protection Bureau (the CFPB), the Securities and Exchange Commission (the SEC)
and the Commodities Futures Trading Commission (the CFTC) in certain areas.
Supervision and regulation by the
responsible regulatory agency generally include comprehensive annual reviews of all major aspects of a banks business and condition, and imposition of periodic reporting requirements and limitations on investments and certain types of
activities. U.S. Bank National Association, the Company and the Companys
non-bank
affiliates must undergo regular
on-site
examinations by the appropriate
regulatory agency, which examine for adherence to a range of legal and regulatory compliance responsibilities. If they deem the Company to be operating in a manner that is inconsistent with safe and sound banking practices, the applicable regulatory
agencies can require the entry into informal or formal supervisory agreements, including board resolutions, memoranda of understanding, written agreements and consent or cease and desist orders, pursuant to which the Company would be required to
take identified corrective actions to address cited concerns and to refrain from taking certain actions.
Dodd-Frank
Act
Substantial changes to the regulation of bank holding companies and their subsidiaries have occurred as a result of the enactment in 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).
Changes in applicable law or regulation, and in their application by regulatory agencies, have had and will continue to have a material effect on the business and results of the Company and its subsidiaries.
The Dodd-Frank Act significantly changed the regulatory framework for financial services companies, and since its enactment has required
significant rulemaking and numerous studies and reports. Among other things, it created a new Financial Stability Oversight Council (the Council) with broad authority to make recommendations covering enhanced prudential standards and
more stringent supervision for large bank holding companies and certain
non-bank
financial services companies. The Dodd-Frank Act significantly reduced interchange fees on debit card transactions, changed the
preemption of state laws applicable to national banks, increased the regulation of consumer mortgage banking and made numerous other changes, some of which are discussed below.
In addition to the Dodd-Frank Act, other legislative and regulatory proposals affecting banks have been made in recent years both
domestically and internationally. Among other things, these proposals include significant additional capital and liquidity requirements and limitations on the size or types of activity in which banks may engage.
Bank Holding Company Activities
The Company elected to become a financial holding company as of March 13, 2000, pursuant to
the provisions of the Gramm-Leach-Bliley Act (the GLBA). Under the GLBA, qualifying bank holding companies may engage in, and affiliate with financial companies engaging in, a broader range of activities than would otherwise be permitted
for a bank holding company. Under the GLBAs system of functional regulation, the Federal Reserve acts as an umbrella regulator for the Company, and certain of the Companys subsidiaries are regulated directly by additional agencies based
on the particular activities of those subsidiaries.
If a financial holding company or a depository institution controlled by
a financial holding company ceases to meet certain capital or management standards, the Federal Reserve may impose corrective capital and
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managerial requirements on the financial holding company, and may place limitations on its ability to conduct all of the business activities that financial holding companies are generally
permitted to conduct. See Permissible Business Activities below. If the failure to meet these standards persists, a financial holding company may be required to divest its depository institution subsidiaries, or cease all activities
other than those activities that may be conducted by bank holding companies that are not financial holding companies. In addition, the Federal Reserve requires bank holding companies to meet certain applicable capital and management standards.
Failure by the Company to meet these standards could limit the Company from engaging in any new activity or acquiring other companies without the prior approval of the Federal Reserve.
Source of Strength
The Dodd-Frank Act codified existing Federal Reserve policy requiring the Company to act as a source of
financial strength to U.S. Bank National Association, and to commit resources to support this subsidiary in circumstances where it might not otherwise do so. However, because the GLBA provides for functional regulation of financial holding company
activities by various regulators, the GLBA prohibits the Federal Reserve from requiring payment by a holding company to a depository institution if the functional regulator of the depository institution objects to the payment. In those cases, the
Federal Reserve could instead require the divestiture of the depository institution and impose operating restrictions pending the divestiture. As a result of the Dodd-Frank Act,
non-bank
subsidiaries of a
holding company that engage in activities permissible for an insured depository institution must be examined and regulated in a manner that is at least as stringent as if the activities were conducted by the lead depository institution of the
holding company.
OCC Heightened Standards
The OCC has issued guidelines establishing heightened standards for large
national banks such as U.S. Bank National Association. The guidelines establish minimum standards for the design and implementation of a risk governance framework for banks. The OCC may take action against institutions that fail to meet these
standards.
Permissible Business Activities
As a financial holding company, the Company may affiliate with securities
firms and insurance companies and engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature. Financial in nature activities include the following: securities
underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking; and activities that the Federal Reserve, in consultation with the Secretary of the United States
Treasury, determines to be financial in nature or incidental to such financial activity. Complementary activities are activities that the Federal Reserve determines upon application to be complementary to a financial activity and that do
not pose a safety and soundness risk.
The Company generally is not required to obtain Federal Reserve approval to acquire a
company (other than a bank holding company, bank or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve. However, the Dodd-Frank Act
added a provision requiring approval if the total consolidated assets to be acquired exceed $10 billion. Financial holding companies are also required to obtain the approval of the Federal Reserve before they may acquire more than five percent
of the voting shares or substantially all of the assets of an unaffiliated bank holding company, bank or savings association.
Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the Riegle-Neal
Act), a bank holding company may acquire banks in states other than its home state, subject to any state requirement that the bank has been organized and operating for a minimum period of time (not to exceed five years). Also, such an
acquisition is not permitted if the bank holding company controls, prior to or following the proposed acquisition, more than 10 percent of the total amount of deposits of insured depository institutions nationwide, or, if the acquisition is the
bank holding companys initial entry into the state, more than 30 percent of the deposits of insured depository institutions in the state (or any lesser or greater amount set by the state).
The Riegle-Neal Act also authorizes banks to merge across state lines to create interstate branches. Under the Dodd-Frank Act, banks are
permitted to establish new branches in another state to the same extent as banks chartered in that state.
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Regulatory Approval for Acquisitions
In determining whether to approve a proposed
bank acquisition, federal bank regulators will consider a number of factors, including the following: the effect of the acquisition on competition, financial condition and future prospects (including current and projected capital ratios and levels);
the competence, experience and integrity of management and its record of compliance with laws and regulations; the convenience and needs of the communities to be served (including the acquiring institutions record of compliance under the
Community Reinvestment Act (CRA)); the effectiveness of the acquiring institution in combating money laundering activities; and the extent to which the transaction would result in greater or more concentrated risks to the stability of
the United States banking or financial system. In addition, under the Dodd-Frank Act, approval of interstate transactions requires that the acquiror satisfy regulatory standards for well-capitalized and well-managed institutions.
Enhanced Prudential Standards
The Company is subject to a final rule issued by the Federal Reserve relating to enhanced prudential
standards required under the Dodd-Frank Act for bank holding companies with over $50 billion in consolidated assets. The prudential standards include enhanced risk-based capital and leverage requirements, enhanced liquidity requirements,
enhanced risk management and risk committee requirements, a requirement to submit a resolution plan, single-counterparty credit limits and stress tests. The rule incorporates the requirement that the Federal Reserve conduct annual supervisory
capital adequacy stress tests of covered companies under baseline, adverse and severely adverse scenarios, and requires covered companies to conduct their own capital adequacy stress tests. The rule provides for notification to a covered company as
to which the Council has determined to impose a
debt-to-equity
ratio of no more than
15-to-1,
based upon the determination by the Council that (a) such company poses a grave threat to the financial stability of the United States and (b) the
imposition of such a requirement is necessary to mitigate the risk that the company poses to the financial stability of the United States.
Dividend Restrictions
The Company is a legal entity separate and distinct from its subsidiaries. Typically, the majority of the Companys operating funds are received in the form of dividends
paid to the Company by U.S. Bank National Association. Federal law imposes limitations on the payment of dividends by national banks.
In general, dividends payable by U.S. Bank National Association and the Companys trust bank subsidiaries, as national banking associations, are limited by rules that compare dividends to net income
for periods defined by regulation.
The OCC, the Federal Reserve and the FDIC also have authority to prohibit or limit the
payment of dividends by the banking organizations they supervise (including the Company and U.S. Bank National Association), if, in the banking regulators opinion, payment of a dividend would constitute an unsafe or unsound practice in light
of the financial condition of the banking organization. Subject to exceptions for well-capitalized and well-managed holding companies, Federal Reserve regulations also require approval of holding company purchases and redemptions of its securities
if the gross consideration paid exceeds 10 percent of consolidated net worth for any
12-month
period.
In addition, Federal Reserve policy on the payment of dividends, stock redemptions and stock repurchases requires that bank holding companies consult with and inform the Federal Reserve in advance of
doing any of the following: declaring and paying dividends that could raise safety and soundness concerns (i.e. declaring and paying dividends that exceed earnings for the period for which dividends are being paid); redeeming or repurchasing capital
instruments when experiencing financial weakness; and redeeming or repurchasing common stock and perpetual preferred stock, if the result will be a net reduction in the amount of such capital instruments outstanding for the quarter in which the
reduction occurs.
In 2010, the Federal Reserve issued an addendum to its policy on dividends, stock redemptions and stock
repurchases that is specifically applicable to the 19 largest bank holding companies (including the Company) that are covered by the Supervisory Capital Assessment Program. The addendum provides for Federal Reserve review of dividend increases,
implementation of capital repurchase programs and other capital repurchases or redemptions.
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The supervisory stress tests of the Company conducted by the Federal Reserve as part of its
annual Comprehensive Capital Analysis and Review (CCAR) process also affect the ability of the Company to pay dividends and make other forms of capital distribution. See Comprehensive Capital Analysis and Review and
Stress Testing below.
Capital Requirements
The Company is subject to regulatory capital requirements
established by the Federal Reserve, and U.S. Bank National Association is subject to substantially similar rules established by the OCC. These requirements have changed significantly as a result of standards established by the Basel Committee on
Banking Supervision (the Basel Committee), an international organization that has the goal of creating standards for banking regulation, and the implementation of these standards and of relevant provisions of the Dodd-Frank Act by
banking regulators in the United States. Minimum regulatory capital levels will significantly increase as these requirements are implemented and phased in.
Prior to 2014, regulatory capital requirements effective for the Company followed the 1988 capital accord of the Basel Committee known as Basel I. In implementing Basel I, federal banking regulators
adopted risk-based capital and leverage rules that require the
capital-to-assets
ratios of financial institutions to meet certain minimum standards. The risk-based
capital ratio is calculated by allocating assets and specified
off-balance
sheet financial instruments into risk-weighted categories (with higher levels of capital being required for the categories perceived
as representing greater risk), and is used to determine the amount of a financial institutions total risk-weighted assets (RWAs). Under the rules, capital is divided into multiple tiers: common equity tier 1 capital, additional
tier 1 capital and tier 2 capital. The amount of tier 2 capital may not exceed the amount of tier 1 capital. Total capital is the sum of tier 1 capital and tier 2 capital. The federal banking regulators also have established minimum leverage ratio
guidelines. The leverage ratio is defined as tier 1 capital divided by adjusted average total
on-balance
sheet assets.
The Federal Reserve and the OCC finalized a rule in 2007 adopting international guidelines established by the Basel Committee known as Basel II. The Basel II framework consists of three pillars:
(a) capital adequacy; (b) supervisory review (including the computation of capital and internal assessment processes); and (c) market discipline (including increased disclosure requirements).
In December 2010, the Basel Committee issued a new set of international standards for determining regulatory capital known as Basel III.
Federal banking regulators published the United States Basel III final rule in July 2013 to implement many aspects of these international standards as well as certain provisions of the Dodd-Frank Act. The United States Basel III final rule focuses
regulatory capital on common equity tier 1 capital, introduces new regulatory adjustments and deductions from capital, narrows the eligibility criteria for regulatory capital instruments and makes other changes to the Basel I and Basel II
frameworks. Specifically, Basel III includes two comprehensive methodologies for calculating risk-weighted assets: a general standardized approach and more risk-sensitive advanced approaches, with the Companys capital adequacy being evaluated
against the Basel III methodology that is most restrictive. The Federal Reserve approved a final rule, effective April 1, 2014, revising the market risk capital rule, which addresses the market risk of significant trading activities, so that it
conforms to the Basel III capital framework.
Beginning January 1, 2014, the regulatory capital requirements 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. Under the United States Basel III final rule, the Company is subject to a minimum common
equity tier 1 capital ratio (common equity tier 1 capital to RWA) of 4.5 percent, a minimum tier 1 capital ratio of 6.0 percent and a minimum total capital ratio of 8.0 percent on a fully
phased-in
basis. In addition, the final rule provides that certain new items be deducted from common equity tier 1 capital and certain Basel I deductions be modified. The Company is also subject to a
2.5 percent common equity tier 1 capital conservation buffer and, if deployed, up to a 2.5 percent common equity tier 1 countercyclical buffer on a fully
phased-in
basis by 2019. United States
banking organizations are subject to a minimum leverage ratio of 4.0 percent. The final rule also subjects banking organizations calculating their capital requirements using advanced approaches, including the Company,
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to a minimum Basel III supplementary leverage ratio of 3.0 percent that takes into account both
on-balance
sheet and certain
off-balance
sheet exposures.
The United States banking regulators also published final
regulations in June 2011 implementing Section 171 of the Dodd-Frank Act, commonly known as the Collins Amendment, which requires that certain institutions supervised by the Federal Reserve, including the Company, be subject to minimum capital
requirements that are not less than the generally applicable risk-based capital requirements. Prior to 2015, this minimum capital floor was based on Basel I. On January 1, 2015, the United States Basel III final rule replaced the
Basel
I-based
capital floor with a standardized approach that, among other things, modifies the existing risk weights for certain types of asset classes. The capital floor applies to
the calculation of both minimum risk-based capital requirements as well as the capital conservation buffer and, if deployed, the countercyclical capital buffer.
In September 2014, United States banking regulators approved a final rule that enhanced the 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. The Company began calculating and reporting its SLR beginning in the first quarter of 2015, however it became subject to the minimum SLR requirement on January 1, 2018. At December 31, 2017, the Company exceeded the applicable
minimum SLR requirement.
In December 2017, the Basel Committee finalized a package of revisions to the Basel III framework,
unofficially known as Basel IV. The changes are meant to improve the calculation of risk-weighted assets and improve the comparability of capital ratios by (a) enhancing the robustness and risk sensitivity of the standardized approaches for
credit risk, credit valuation adjustment (CVA) risk and operational risk; (b) constraining the use of the internal model approaches, by placing limits on certain inputs used to calculate capital requirements under the internal
ratings-based (IRB) approach for credit risk and by removing the use of the internal model approaches for CVA risk and for operational risk; (c) introducing a leverage ratio buffer to further limit the leverage of global
systemically important banks
(G-SIBs);
and (d) replacing the existing Basel II output floor with a more robust risk-sensitive floor based on the Committees revised Basel III standardized
approaches. January 1, 2022 is the implementation date for the revised standardized approach for credit risk and leverage ratio as well as the IRB, CVA, operational risk, and market risk frameworks. The output floor will be subject to a
transitional period beginning in January 1, 2022, with full implementation by January 1, 2027. Federal banking regulators are expected to undertake one or more rulemakings in future years to implement these revisions in the United States.
For additional information regarding the Companys regulatory capital, see Capital Management in the 2017
Annual Report.
Comprehensive Capital Analysis and Review
The Federal Reserves Capital Plans rule requires large
bank holding companies with assets in excess of $50 billion to submit capital plans to the Federal Reserve on an annual basis and to obtain approval from the Federal Reserve for capital distributions proposed in the capital plan. These capital
plans consist of a number of mandatory elements, including an assessment of a companys sources and uses of capital over a nine-quarter planning horizon assuming both expected and stressful conditions; a detailed description of a companys
process for assessing capital adequacy; a demonstration of a companys ability to maintain capital above each minimum regulatory capital ratio and above a tier 1 common ratio of 5.0 percent under expected and stressful conditions; and a
demonstration of a companys ability to achieve, readily and without difficulty, the minimum capital ratios and capital buffers under the Basel III framework as it comes into effect in the United States.
The Federal Reserve has issued a final rule specifying how large bank holding companies, including the Company, should incorporate the
United States Basel III capital standards into their capital plans. Among other things, the final rule requires large bank holding companies to project both their common equity tier 1 capital
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ratio using the methodology under existing capital guidelines and their common equity tier 1 capital ratio under the United States Basel III capital standards, as such standards phase in over the
nine-quarter planning horizon.
The Company will submit its 2018 capital plan to the Federal Reserve by April 5, 2018, in
accordance with instructions from the Federal Reserve. Applicable stress testing rules require the Federal Reserve to publish the results of its assessment of the Companys capital plan, including its planned capital distributions, no later
than June 30, 2018.
Stress Testing
The Federal Reserves CCAR framework and the Dodd-Frank Act stress
testing framework require large bank holding companies such as the Company to conduct
company-run
stress tests and subject them to supervisory stress tests conducted by the Federal Reserve. Among other things,
the
company-run
stress tests employ stress scenarios developed by the Company as well as stress scenarios provided by the Federal Reserve and incorporate the Dodd-Frank Act capital actions, which are intended
to normalize capital distributions across large United States bank holding companies. The Federal Reserve conducts CCAR and Dodd-Frank supervisory stress tests employing its adverse and severely adverse stress scenarios and internal supervisory
models. The Federal Reserves CCAR and Dodd-Frank Act supervisory stress tests incorporate the Companys planned capital actions and the Dodd-Frank Act capital actions, respectively. The Federal Reserve and the Company are required to
publish the results of the annual supervisory and annual
company-run
stress tests, respectively, no later than June 30 of each year. In addition, all large bank holding companies are required to submit a
mid-cycle
company-run
stress test employing stress scenarios developed by the Company. The results of this stress test must be submitted to the Federal Reserve for review in
early October of each year. The Company is required to publish its results of this stress test no later than the end of November of each year. The Federal Reserve currently publishes summaries of supervisory stress test results for each large bank
holding company under both the adverse and severely adverse stress scenarios developed by the Federal Reserve.
National banks
with assets in excess of $50 billion are required to submit annual
company-run
stress test results to the OCC concurrently with their parent bank holding companys CCAR submission to the Federal
Reserve. The stress test is based on the OCCs stress scenarios (which are typically the same as the Federal Reserves stress scenarios) and capital actions that are appropriate for the economic conditions assumed in each scenario. U.S.
Bank National Association will submit its stress test in accordance with regulatory requirements by April 5, 2018. The Company is required to publish the results of this stress test no later than June 30, 2018.
Basel III Liquidity Requirements
In 2009, the Basel Committee proposed two minimum standards for limiting liquidity risk: the
Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). The LCR is designed to ensure that bank holding companies have sufficient high-quality liquid assets to survive a significant liquidity stress event
lasting for 30 calendar days. The NSFR is designed to promote stable, longer-term funding of assets and business activities over a
one-year
time horizon.
The federal banking regulators have jointly issued a final rule that implements the LCR in the United States. The rule applies the LCR
standards to bank holding companies and their domestic bank subsidiaries calculating their capital requirements using advanced approaches, including the Company and U.S. Bank National Association. The LCR standards in the rule differ in certain
respects from the Basel Committees version of the LCR, including a narrower definition of high-quality liquid assets, different prescribed cash inflow and outflow assumptions for certain types of instruments and transactions, a different
methodology for calculating the LCR and a shorter
phase-in
schedule that ended on December 31, 2016. In June 2016, the federal banking regulators proposed a rule to implement a NSFR requirement in the
United States that would apply to the Company and U.S. Bank National Association, consistent with the Basel Committee NSFR standard finalized in October 2014. The Basel Committee contemplated that the NSFR, including any revisions, would be
implemented as a minimum standard by January 1, 2018. Federal banking regulators continue to work on finalizing a rule to implement the NSFR standards in the United States.
Recovery Plans
In September 2016, the OCC finalized a rule that establishes enforceable guidelines for recovery planning by
insured national banks, insured federal savings associations, and insured federal branches
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of foreign banks with average total consolidated assets of $50 billion or more, which includes U.S. Bank National Association. The guidelines provide that a covered bank should develop and
maintain a recovery plan that is appropriate for its individual risk profile, size, activities, and complexity, including the complexity of its organizational and legal entity structure. The guidelines state that a recovery plan should
(a) establish triggers, which are quantitative or qualitative indicators of the risk or existence of severe stress that should always be escalated to management or the board of directors, as appropriate, for purposes of initiating a response;
(b) identify a wide range of credible options that a covered bank could undertake to restore financial and operational strength and viability; and (c) address escalation procedures, management reports, and communication procedures. The
board of U.S. Bank National Association approved a recovery plan pursuant to these guidelines in December 2017.
Supervisory Ratings
Federal banking regulators regularly examine the Company to evaluate its financial condition and monitor its
compliance with laws and regulatory policies. Key products of such exams are supervisory ratings of the Companys overall condition, commonly referred to as the CAMELS rating for U.S. Bank National Association (which reflects the OCCs
evaluation of certain components of the banks condition) and the RFI/C(D) rating for U.S. Bancorp (which reflects the Federal Reserves evaluation of certain components of the holding companys condition). These ratings are
considered to be confidential supervisory information and disclosure to third parties is not allowed without permission of the issuing regulator. Violations of laws and regulations or deemed deficiencies in risk management practices may be
incorporated into these supervisory ratings. A downgrade in these ratings could limit the Companys ability to pursue acquisitions or conduct other expansionary activities for a period of time, require new or additional regulatory approvals
before engaging in certain other business activities or investments, affect U.S. Bank National Associations deposit insurance assessment rate, and impose additional recordkeeping and corporate governance requirements, as well as generally
increase regulatory scrutiny of the Company. In August 2017, the Federal Reserve proposed a new supervisory rating system that would govern the Federal Reserves supervision of all bank holding companies with total consolidated assets of
$50 billion or more and United States intermediate holding companies of foreign banking organizations, as well as certain savings and loan holding companies with assets of $50 billion or more. Under the proposal, ratings would be assigned
for each of three component categories: (a) Capital Planning and Positions, (b) Liquidity Risk Management and Positions, and (c) Governance and Controls. However, no composite rating would be assigned, and this proposal is still under
consideration.
In August 2017, the Federal Reserve also issued proposed guidance with respect to its expectations regarding
the supervisory role of boards of directors of large financial institutions. In addition, in January 2018, the Federal Reserve made a proposal relating to the supervisory responsibilities of members of senior and business line management for risk
management and controls at large financial institutions. Both of these proposals are meant to set regulatory expectations for the Governance and Controls component of the new rating system that has been proposed by the Federal Reserve.
Federal Deposit Insurance Corporation Improvement Act
The Federal Deposit Insurance Corporation Improvement Act of
1991 (the FDICIA) provides a framework for regulation of depository institutions and their affiliates (including parent holding companies) by federal banking regulators. As part of that framework, the FDICIA requires the relevant federal
banking regulator to take prompt corrective action with respect to a depository institution if that institution does not meet certain capital adequacy standards.
Supervisory actions by the appropriate federal banking regulator under the prompt corrective action rules generally depend upon an institutions classification within five capital
categories. The United States Basel III final rule revises the capital ratio thresholds in the prompt corrective action framework to reflect the new Basel III capital ratios. This aspect of the United States Basel III rule became effective on
January 1, 2015. The regulations apply only to banks and not to bank holding companies such as the Company; however, subject to limitations that may be imposed pursuant to the GLBA, the Federal Reserve is authorized to take appropriate action
at the holding company level, based on the undercapitalized status of the holding companys subsidiary banking institutions. In certain instances relating to an undercapitalized banking institution, the bank holding
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company would be required to guarantee the performance of the undercapitalized subsidiarys capital restoration plan and could be liable for civil money damages for failure to fulfill those
guarantee commitments.
Deposit Insurance
Under current FDIC regulations, each depository institution is assigned to a
risk category based on capital and supervisory measures. A depository institution is assessed premiums by the FDIC based on its risk category and the amount of deposits held. In 2009, the FDIC revised the method for calculating the assessment rate
for depository institutions by introducing several adjustments to an institutions initial base assessment rate. The Dodd-Frank Act altered the assessment base for deposit insurance assessments from a deposit to an asset base, and seeks to fund
part of the cost of the Dodd-Frank Act by increasing the reserve ratio of the deposit insurance fund to 1.35 percent of estimated insured deposits. The Dodd-Frank Act also requires that FDIC assessments be set in a manner that offsets the cost
of the assessment increases for institutions with consolidated assets of less than $10 billion. This provision effectively places the increased assessment costs on larger financial institutions such as the Company.
The Dodd-Frank Act also permanently increased deposit insurance coverage from $100,000 per account ownership type to $250,000. In
February 2011, the FDIC adopted a final rule implementing the Dodd-Frank Act provisions, which provides for use of a risk scorecard to determine deposit premiums. The effect of the rule was to increase the FDIC premiums paid by U.S. Bank National
Association. In 2014, the FDIC adopted a final rule revising its deposit insurance assessment system to reflect changes in the regulatory capital rules that became effective in 2015, with additional revisions to become effective in 2018. The rule
(a) revises the ratios and ratio thresholds relating to capital evaluations; (b) revises the assessment base calculation for custodial banks; and (c) requires that all highly complex institutions measure counterparty exposure for
assessment purposes using the Basel III standardized approach in the regulatory capital rules.
In March 2016, in order to
bring the reserve ratio of the deposit insurance fund to 1.35 percent, the FDIC finalized a surcharge on the quarterly assessments of insured depository institutions with total consolidated assets of $10 billion or more. The surcharges
were first imposed in the third quarter of 2016, the calendar quarter after the reserve ratio of the deposit insurance fund first reached or exceeded 1.15 percent. The surcharge imposed on each insured depository institution equals an annual
rate of 4.5 basis points applied to the institutions assessment base (with certain adjustments). The FDIC expects that these surcharges should be sufficient to raise the reserve ratio to 1.35 percent in approximately eight quarters (i.e.,
before the end of 2018). If, contrary to the FDICs expectations, the reserve ratio does not reach 1.35 percent by December 31, 2018, the FDIC plans to impose a shortfall assessment on insured depository institutions with total
consolidated assets of $10 billion or more on March 31, 2019.
Powers of the FDIC Upon Insolvency of an Insured
Institution
If the FDIC is appointed the conservator or receiver of an insured depository institution upon its insolvency or in certain other events, the FDIC has the power to (a) transfer any of the depository institutions assets and
liabilities to a new obligor without the approval of the depository institutions creditors; (b) enforce the terms of the depository institutions contracts pursuant to their terms; or (c) repudiate or disaffirm any contracts (if
the FDIC determines that performance of the contract is burdensome and that the repudiation or disaffirmation is necessary to promote the orderly administration of the depository institution). These provisions would be applicable to obligations and
liabilities of the Companys insured depository institution subsidiary, U.S. Bank National Association.
Depositor
Preference
Under federal law, in the event of the liquidation or other resolution of an insured depository institution, the claims of a receiver of the institution for administrative expense and the claims of holders of domestic deposit
liabilities (including the FDIC, as subrogee of the depositors) have priority over the claims of other unsecured creditors of the institution, including holders of publicly issued senior or subordinated debt and depositors in
non-domestic
offices. As a result, those debtholders and depositors would be treated differently from, and could receive, if anything, substantially less than, the depositors in domestic offices of the depository
institution.
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Orderly Liquidation Authority
The Dodd-Frank Act created a new framework for the
orderly liquidation of a covered financial company by the FDIC as receiver. A covered financial company is a financial company (including a bank holding company, but not an insured depository institution), in situations where the Secretary of the
Treasury determines (upon the written recommendation of the FDIC and the Federal Reserve and after consultation with the President of the United States) that the conditions set forth in the Dodd-Frank Act regarding the potential impact on financial
stability of the financial companys failure have been met. The rule sets forth a comprehensive method for the receivership of a covered financial company. The Company is a financial company and, therefore, is potentially subject to the orderly
liquidation authority of the FDIC.
Resolution Plans
The Federal Reserve and the FDIC have adopted a rule to implement
the requirements of the Dodd-Frank Act regarding annual resolution plans for bank holding companies with assets of $50 billion or more
(so-called
Living Wills). The rule requires each covered
company to produce a contingency resolution plan for the rapid and orderly resolution of the company in the event of material financial distress or failure. Resolution plans must include information regarding the manner and extent to which any
insured depository institution affiliated with the company is adequately protected from risks arising from the activities of any
non-bank
subsidiaries of the company; full descriptions of ownership structure,
assets, liabilities and contractual obligations of the company; identification of the cross-guarantees tied to different securities; identification of major counterparties; a process for determining to whom the collateral of the company is pledged;
and any other information that the Federal Reserve and the FDIC jointly require by rule or order. Plans must analyze baseline, adverse, and severely adverse economic condition impacts. Plans must demonstrate, in the event of material financial
distress or failure of the covered company, a reorganization or liquidation of the covered company under the federal bankruptcy code that could be accomplished within a reasonable period of time and in a manner that substantially mitigates the risk
that the failure of the covered company would have serious adverse effects on financial stability in the United States. Covered companies and their subsidiaries are subject to more stringent capital, leverage and liquidity requirements or
restrictions on growth, activities or operations if they fail to file an acceptable plan (i.e., the plan is determined to not be credible and deficiencies are not cured in a timely manner). Plans must typically be updated annually.
The FDIC has also adopted regulations under its own authority requiring an insured depository institution with $50 billion or more
in total assets to submit periodically to the FDIC a contingency plan for the resolution of such institution in the event of its failure. The rule requires a covered depository institution to submit a resolution plan that should enable the FDIC, as
receiver, to resolve the institution under applicable receivership provisions of the Federal Deposit Insurance Act in a manner that ensures that depositors receive access to their insured deposits within one business day of the institutions
failure, maximizes the net present value return from the sale or disposition of its assets and minimizes the amount of any loss to be realized by the institutions creditors.
The Company filed its Dodd-Frank Act resolution plan in December 2017, and will periodically revise its resolution plans as required
under each rule.
Liability of Commonly Controlled Institutions
An FDIC-insured depository institution can be held
liable for any loss incurred or expected to be incurred by the FDIC in connection with another FDIC-insured institution under common control with that institution being in default or in danger of default (commonly referred to
as cross-guarantee liability). An FDIC claim for cross-guarantee liability against a depository institution is generally superior in right of payment to claims of the holding company and its affiliates against the depository institution.
Transactions with Affiliates
There are various legal restrictions on the extent to which the Company and its
non-bank
subsidiaries may borrow or otherwise engage in certain types of transactions with U.S. Bank National Association. Under the Federal Reserve Act and Regulation W, U.S. Bank National Association (and its
subsidiaries) is subject to quantitative and qualitative limits on extensions of credit, purchases of assets, and certain other transactions involving its
non-bank
affiliates. Additionally, transactions
between U.S. Bank National Association and its
non-bank
affiliates are required to be on arms length terms and must be consistent with standards of safety and soundness.
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Anti-Money Laundering and Sanctions
The Company is subject to several federal laws
that are designed to combat money laundering and terrorist financing, and to restrict transactions with persons, companies, or foreign governments sanctioned by United States authorities. This category of laws includes the Bank Secrecy Act (the
BSA), the Money Laundering Control Act, the USA PATRIOT Act (collectively, AML laws), and implementing regulations for the International Emergency Economic Powers Act and the Trading with the Enemy Act, as administered by the
United States Treasury Departments Office of Foreign Assets Control (sanctions laws).
As implemented by
federal banking and securities regulators and the Department of the Treasury, AML laws obligate depository institutions and broker-dealers to verify their customers identity, conduct customer due diligence, report on suspicious activity, file
reports of transactions in currency, and conduct enhanced due diligence on certain accounts. Sanctions laws prohibit persons of the United States from engaging in any transaction with a restricted person or restricted country. Depository
institutions and broker-dealers are required by their respective federal regulators to maintain policies and procedures in order to ensure compliance with the above obligations. Federal regulators regularly examine BSA/Anti-Money Laundering
(AML) and sanctions compliance programs to ensure their adequacy and effectiveness, and the frequency and extent of such examinations and the remedial actions resulting therefrom have been increasing.
Non-compliance
with sanctions laws and/or AML laws or failure to maintain an adequate BSA/AML
compliance program can lead to significant monetary penalties and reputational damage, and federal regulators evaluate the effectiveness of an applicant in combating money laundering when determining whether to approve a proposed bank merger,
acquisition, restructuring, or other expansionary activity. There have been a number of significant enforcement actions against banks, broker-dealers and
non-bank
financial institutions with respect to
sanctions laws and AML laws and some have resulted in substantial penalties, including against the Company and U.S. Bank National Association. See Note 22 of the Notes to Consolidated Financial Statements in the 2017 Annual Report.
Community Reinvestment Act
U.S. Bank National Association is subject to the provisions of the CRA. Under the terms of the CRA,
banks have a continuing and affirmative obligation, consistent with safe and sound operation, to help meet the credit needs of their communities, including providing credit to individuals residing in
low-income
and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, and does not limit an institutions discretion to develop the
types of products and services that it believes are best suited to its particular community in a manner consistent with the CRA.
The OCC regularly assesses U.S. Bank National Association on its record in meeting the credit needs of the community served by that institution, including
low-income
and moderate-income neighborhoods. The assessment also is considered when the Federal Reserve or OCC reviews applications by banking institutions to acquire, merge or consolidate with another
banking institution or its holding company, to establish a new branch office that will accept deposits, or to relocate an office. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the
Federal Reserve will assess the records of each subsidiary depository institution of the applicant bank holding company, and those records may be the basis for denying the application.
U.S. Bank National Association received a Satisfactory CRA rating in its most recent examination, covering the period from
January 1, 2009 through December 31, 2011. The OCC has commenced it most recent CRA exam in 2017, the results of which will be made public upon completion.
Regulation of Brokerage, Investment Advisory and Insurance Activities
The Company conducts securities underwriting, dealing and brokerage activities in the United States through U.S. Bancorp
Investments, Inc.
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(USBII) and other subsidiaries. These activities are subject to regulations of the SEC, the Financial Industry Regulatory Authority and other authorities, including state regulators.
These regulations generally cover licensing of securities personnel, interactions with customers, trading operations and periodic examinations.
Securities regulators impose capital requirements on USBII and monitor its financial operations with periodic financial reviews. In addition, USBII is a member of the Securities Investor Protection
Corporation, which oversees the liquidation of member broker-dealers that close when the broker-dealer is bankrupt or in financial trouble and imposes reporting requirements and assessments on USBII.
The operations of the First American family of funds, the Companys proprietary money market fund complex, also are subject to
regulation by the SEC. In July 2014, the SEC finalized rules regarding money market fund reform. The final rules require a floating net asset value for institutional prime and
tax-free
money market funds. The
rules also give the board of directors of the money market funds the ability to limit redemptions during periods of stress (allowing for the use of liquidity fees and redemption gates during such times). Other changes include tightened
diversification requirements and enhanced disclosure requirements.
The Companys operations in the areas of insurance
brokerage and reinsurance of credit life insurance are subject to regulation and supervision by various state insurance regulatory authorities, including the licensing of insurance brokers and agents.
Regulation of Derivatives and the Swaps Marketplace
Under the Dodd-Frank Act, the CFTC has issued and will continue to issue
additional rules regarding the regulation of the swaps marketplace and
over-the-counter
derivatives. The rules require swap dealers and major swap participants to
register with the CFTC and require them to meet robust business conduct standards to lower risk and promote market integrity, to meet certain recordkeeping and reporting requirements so that regulators can better monitor the markets, and to be
subject to certain capital and margin requirements. U.S. Bank National Association is a registered swap dealer.
In addition,
the Federal Reserve, the OCC, the FDIC, the Federal Housing Finance Agency, and the Farm Credit Administration have finalized a rule concerning swap margin and capital requirements. The rule incorporates many aspects of the international framework
for margin requirements for
non-centrally
cleared derivatives issued in September 2013 by the Basel Committee and the Board of the International Organization of Securities Commissions. The final rule mandates
the exchange of initial and variation margin for
non-cleared
swaps and
non-cleared
security-based swaps between swap entities regulated by the five agencies and certain
counterparties. The amount of margin will vary based on the relative risk of the
non-cleared
swap or
non-cleared
security-based swap. The final rule phased in the
variation margin requirements between September 1, 2016, and March 1, 2017. The initial margin requirements will phase in over four years, beginning on September 1, 2016. Additionally, the agencies have issued a final rule relating to
the rules exemption from margin requirements for certain
non-cleared
swaps and
non-cleared
security-based swaps used for hedging purposes by commercial
end-users
and certain other counterparties.
Other swaps requirements have been
modified by legislation. Section 716 of the Dodd-Frank Act required covered United States banks acting as dealers in commodity swaps, equity swaps and certain credit default swaps to push out such activities and conduct them through
one or more
non-bank
affiliates. The Consolidated and Further Continuing Appropriations Act of 2015 narrowed the
push-out
requirements in Section 716 to only
structured finance swaps.
The Volcker Rule
In December 2013, the SEC, the CFTC, the Federal Reserve, the
OCC and the FDIC jointly issued a final rule to implement the
so-called
Volcker Rule under the Dodd-Frank Act. The Volcker Rule prohibits banking entities from engaging in proprietary trading, and
prohibits certain interests in, or relationships with, hedge funds or private equity funds. The final rule also requires annual attestation by a banking entitys Chief Executive Officer that the banking entity has in place processes to
establish, maintain, enforce, review, test and modify a compliance program established in a manner reasonably designed to achieve
14
compliance with the final rule. The final rule became effective on April 1, 2014, and applies to the Company, U.S. Bank National Association and their affiliates. The Company has a Volcker
compliance program in place that covers all of its subsidiaries and affiliates, including U.S. Bank National Association.
Financial Privacy
Under the requirements imposed by the GLBA, the Company and its subsidiaries are required periodically to
disclose to their retail customers the Companys policies and practices with respect to the sharing of nonpublic customer information with its affiliates and others, and the confidentiality and security of that information. Under the GLBA,
retail customers also must be given the opportunity to opt out of information-sharing arrangements with
non-affiliates,
subject to certain exceptions set forth in the GLBA.
Consumer Protection Regulation
Retail banking activities are subject to a variety of statutes and regulations designed to protect
consumers, including laws related to fair lending and the prohibition of unfair, deceptive, or abusive acts or practices in connection with the offer, sale, or provision of consumer financial products and services. These laws and regulations include
the
Truth-in-Lending,
Truth-in-Savings,
Home Mortgage Disclosure, Equal Credit
Opportunity, Fair Credit Reporting, Fair Debt Collection Practices, Real Estate Settlement Procedures, Electronic Funds Transfer, Right to Financial Privacy and Servicemembers Civil Relief Acts. Interest and other charges collected or contracted for
by banks are subject to state usury laws and federal laws concerning interest rates.
Consumer Financial Protection Bureau
U.S. Bank National Association and its subsidiaries are subject to supervision and regulation by the CFPB with respect to federal consumer laws, including many of the laws and regulations described above. The CFPB has undertaken numerous
rule-making and other initiatives, including issuing informal guidance and taking enforcement actions against certain financial institutions. The CFPBs rulemaking, examination and enforcement authority has affected and will continue to impact
financial institutions involved in the provision of consumer financial products and services, including the Company, U.S. Bank National Association, and the Companys other subsidiaries. These regulatory activities may limit the types of
financial services and products the Company may offer, which in turn may reduce the Companys revenues.
Other
Supervision and Regulation
The Company is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the Exchange Act), both as administered
by the SEC, by virtue of the Companys status as a public company. As a listed company on the New York Stock Exchange (the NYSE), the Company is subject to the rules of the NYSE for listed companies.
Website Access to SEC Reports
U.S. Bancorps internet website can be found at
usbank.com
. U.S. Bancorp makes available free of charge on its website its annual reports on Form
10-K,
quarterly reports on Form
10-Q,
current reports on Form
8-K,
and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act,
as well as all other reports filed by U.S. Bancorp with the SEC as soon as reasonably practicable after electronically filed with, or furnished to, the SEC.
Additional Information
Additional information in response to this
Item 1 can be found in the 2017 Annual Report on pages 61 to 65 under the heading Line of Business Financial Review. That information is incorporated into this report by reference.