Form 10-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

    

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

    

EXCHANGE ACT OF 1934

For the transition period from (not applicable)

Commission file number: 1-6880

 

 

U.S. Bancorp

(Exact name of registrant as specified in its charter)

 

Delaware   41-0255900

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

800 Nicollet Mall, Minneapolis, Minnesota 55402

(Address of principal executive offices) (Zip Code)

(651) 466-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

  

Name of each exchange on which  registered

Common Stock, $.01 par value per share

   New York Stock Exchange

Depositary Shares (each representing 1/100th interest in a  share of Series A
Non-Cumulative Perpetual Preferred Stock, par value $1.00)

   New York Stock Exchange

Depositary Shares (each representing 1/1,000th interest in a share of Series B
Non-Cumulative Perpetual Preferred Stock, par value $1.00)

   New York Stock Exchange

Depositary Shares (each representing 1/1,000th interest in a share of Series F
Non-Cumulative Perpetual Preferred Stock, par value $1.00)

   New York Stock Exchange

Depositary Shares (each representing 1/1,000th interest in a share of Series H
Non-Cumulative Perpetual Preferred Stock, par value $1.00)

   New York Stock Exchange

Depositary Shares (each representing 1/1,000th interest in a share of Series K
Non-Cumulative Perpetual Preferred Stock, par value $1.00)

   New York Stock Exchange

0.850% Medium-Term Notes, Series X (Senior), due June 7, 2024

   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☑    No  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☑

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☑    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☑    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☑

As of June 30, 2018, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $81.8 billion based on the closing sale price as reported on the New York Stock Exchange.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

 

Class    Outstanding at January 31, 2019

Common Stock, $.01 par value per share

  

1,600,622,211

 

 

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Document

    

Parts Into Which Incorporated

1.   Portions of the Annual Report to Shareholders for the Fiscal Year Ended December 31, 2018 (the “2018 Annual Report”)      Parts I and II
2.   Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held April 16, 2019 (the “Proxy Statement”)      Part III

 

 

 


PART I

 

Item 1.

Business

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. Deterioration in general business and economic conditions or turbulence in domestic or global financial markets could adversely affect U.S. Bancorp’s revenues and the values of its assets and liabilities, reduce the availability of funding to certain financial institutions, lead to a tightening of credit and increase stock price volatility. 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 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 its investment securities; legal and regulatory developments; litigation; increased competition from both banks and non-banks; changes in the level of tariffs and other trade policies of the United States and its global trading partners; changes in customer behavior and preferences; breaches in data security; failures to safeguard personal information; 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.

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 59 and “Risk Factors” on pages 144 to 154 of the 2018 Annual Report. In addition, factors other than these risks also could adversely affect U.S. Bancorp’s results, and the reader should not consider these risks to be a complete set of all potential risks or uncertainties. 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. Bancorp’s banking subsidiary, U.S. Bank National Association, is engaged in the general banking business, principally in domestic markets. U.S. Bank National Association, with $356 billion in deposits at December 31, 2018, 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 Company’s 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. Bancorp’s 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 Company’s customers principally within its domestic markets, and fund administration services to a broad range of mutual and other funds.

Banking and investment services are provided through a network of 3,018 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 4,681 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 Company’s domestic 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 domestic 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, 2018, U.S. Bancorp employed 73,333 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 Company’s 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 Company’s various businesses are affected by federal and state laws and 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 Federal Reserve. U.S. Bank National Association and its subsidiaries, are subject to regulation, examination and supervision 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 includes comprehensive annual reviews of all major aspects of a bank holding company’s or bank’s 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 Company’s 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. Supervision and examinations are confidential, and the outcomes of these actions will not be made public.

Banking and other financial services statutes, regulations and policies are continually under review by Congress, state legislatures and federal and state regulatory agencies. In addition to laws and regulations, state and federal bank regulatory agencies may issue policy statements, interpretive letters and similar written guidance applicable to the Company and its subsidiaries. Any change in the statutes, regulations or regulatory policies applicable to the Company, including changes in their interpretation or implementation, could have a material effect on its business or organization.

Both the scope of the laws and regulations and the intensity of the supervision to which the Company is subject have increased in recent years in response to the financial crisis, as well as other factors such as technological and market changes. Regulatory enforcement and fines have also increased across the banking and financial services sector. Many of these changes have occurred as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations, most of which are now in place. While the regulatory environment has entered a period of rebalancing of the post financial crisis framework, the Company expects that its business will remain subject to extensive regulation and supervision.

On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “EGRRCPA”) was signed into law. Among other regulatory changes, the EGRRCPA amends various sections of the Dodd-Frank Act, including section 165, which was revised to raise the asset thresholds for determining the application of enhanced prudential standards for bank holding companies from $50 billion to $250 billion. Bank holding companies with $250 billion or more in total consolidated assets, including the Company, remain subject to the Dodd-Frank Act enhanced prudential standards requirements.

The Dodd-Frank Act, as amended by the EGRRCPA, however, mandates that the Federal Reserve tailor the enhanced prudential standards applicable to a banking holding company or category of bank holding companies based on several factors, including size, capital structure, complexity, and other risk-related factors. On October 31, 2018, the Federal banking regulators issued proposed rules pursuant to the EGRRCPA to adjust the thresholds at which certain enhanced prudential standards and capital and liquidity requirements would apply to United States bank holding companies and their depository institutions with $100 billion or more in total consolidated assets (the “Proposed Tailoring Rules”). Under the Proposed Tailoring Rules, these bank holding

 

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companies and banks, including the Company and U.S. Bank National Association, would be placed into one of four risk-based categories based on the banking organization’s size, status as a global systemically important bank, cross-jurisdictional activity, weighted short-term wholesale funding, nonbank assets and off-balance sheet exposures. The extent to which enhanced prudential standards and certain other capital and liquidity standards would apply to these bank holding companies and banks would depend upon the banking organization’s category. Under the Proposed Tailoring Rules, which remain subject to finalization and may be revised, the Company and U.S. Bank National Association would each qualify as a Category III banking organization subject to proposed requirements applicable to banking organizations that are not subject to Category I or II standards and that have at least $250 billion in total consolidated assets OR at least $100 billion in total consolidated assets and $75 billion or more in any one of three indicators: (1) nonbank assets, (2) weighted short-term wholesale funding, or (3) off-balance sheet exposures. In connection with the Proposed Tailoring Rules, the Federal Reserve indicated the firms that would fall into each of the four categories based on data for the second quarter of 2018. According to the Federal Reserve’s projections, which could change in accordance with any final rules, the Company and U.S. Bank National Association would be “Category III” banking organizations under the Proposed Tailoring Rules, and several regulatory requirements currently applicable to the Company and U.S. Bank National Association would be reduced or eliminated, as discussed in further detail in the paragraphs that follow.

The ultimate benefits or consequences of the EGRRCPA for the Company, U.S. Bank National Association, their other subsidiaries and their activities will depend on the final form of the Proposed Tailoring Rules and additional rulemakings to implement the Act that are expected to be issued by the United States banking agencies, which cannot be predicted.

Supervisory Ratings Federal banking regulators regularly examine the Company and U.S. Bank National Association to evaluate their financial condition and monitor their compliance with laws and regulatory policies. Following those exams, the Company and U.S. Bank National Association are assigned supervisory ratings. These ratings are considered 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 Company’s 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 Association’s deposit insurance assessment rate, and impose additional recordkeeping and corporate governance requirements, as well as generally increase regulatory scrutiny of the Company.

In November 2018, the Federal Reserve adopted a new rating system, the Large Financial Institution Rating System (“LFI Rating System”), to align its supervisory rating system for large financial institutions, including the Company, with its current supervisory programs for these firms. As compared to the rating system it replaces, which will continue to be used for smaller bank holding companies, the LFI Rating System places a greater emphasis on capital and liquidity, including related planning and risk management practices. The Company will receive its first ratings under the LFI Rating System in 2020. These ratings will remain confidential.

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 proposed guidance 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 LFI Rating System.

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 GLBA’s system of

 

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functional regulation, the Federal Reserve acts as an umbrella regulator for the Company, and certain of the Company’s 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 be well-capitalized or well-managed, the Federal Reserve may impose corrective capital and 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 and its ability to make certain acquisitions. 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, if a depository institution controlled by a financial holding company does not receive a Community Reinvestment Act (“CRA”) rating of at least “satisfactory” at its most recent examination, the financial holding company will have limitations placed on its ability to conduct all of the business activities that financial holding companies are generally permitted to conduct and its ability to make certain acquisitions.

The Federal Reserve also 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.

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, as long as it meets the capital, managerial and CRA requirements to qualify as a financial holding company. However, the Company is required to receive approval for an acquisition in which 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. Banks must receive approval before they may acquire, merge with, acquire substantially all of the assets of or assume any deposits of a bank or savings association and may be required to receive approval for acquisitions of other companies.

Interstate Banking 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 company’s 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).

Banks may merge across state lines to create interstate branches and are permitted to establish new branches in another state to the same extent as banks chartered by that state.

Regulatory Approval for Acquisitions In determining whether to approve a proposed bank acquisition, federal bank regulators will consider a number of factors, including the effect of the acquisition on competition,

 

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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 institution’s record of compliance under the 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, approval of interstate transactions requires that the acquiror satisfy regulatory standards for well-capitalized and well-managed institutions.

Source of Strength The Company is required 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. The Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices if the bank holding company fails to commit resources to such a subsidiary bank or if it undertakes actions that the Federal Reserve believes might jeopardize the bank holding company’s ability to commit resources to such subsidiary bank.

Under these requirements, the Company may in the future be required to provide financial assistance to U.S. Bank National Association, should it experience financial distress. Capital loans by the Company to U.S. Bank National Association would be subordinate in right of payment to deposits and certain other debts of U.S. Bank National Association. In the event of the Company’s bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital of U.S. Bank National Association would be assumed by the bankruptcy trustee and entitled to a priority of payment.

The Federal Reserve is prohibited from requiring payment by a bank 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.

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.

Enhanced Prudential Standards Under the Dodd-Frank Act, as modified by the EGRRCPA, bank holding companies with consolidated assets of more than $250 billion, such as the Company, are subject to certain enhanced prudential standards. 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. These standards also require the Federal Reserve to impose a maximum 15-to-1 debt-to-equity ratio on a bank holding company with total consolidated assets of $250 billion or more, if the Financial Stability Oversight Council determines that the company poses a grave threat to the financial stability of the United States and that the imposition of such a debt-to-equity requirement would mitigate such risk. In addition, the Federal Reserve is required to establish early remediation requirements for bank holding companies with total consolidated assets of $250 billion or more.

Certain of the enhanced prudential standards applicable to the Company are described below in further detail, including changes that have been proposed to these requirements under the Proposed Tailoring Rules.

Dividend Restrictions The Company is a legal entity separate and distinct from its subsidiaries. Typically, the majority of the Company’s 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.

 

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In general, dividends payable by U.S. Bank National Association and the Company’s trust bank subsidiaries, as national banking associations, are limited by rules that compare dividends to net income for periods defined by regulation.

The Company’s ability to declare and pay dividends is also limited by Federal Reserve regulations and policy. Large bank holding companies such as the Company may generally only pay dividends and repurchase stock in accordance with a capital plan that has been reviewed by the Federal Reserve and as to which the Federal Reserve has not objected. See “Comprehensive Capital Analysis and Review” below for further details.

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 regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banking organization.

The Company and U.S. Bank National Association must maintain the applicable common equity tier 1 capital conservation buffer to avoid becoming subject to restrictions on capital distributions, including dividends. As of January 1, 2019, the fully phased in common equity tier 1 capital conservation buffer is 2.5 percent. For more information on the common equity tier 1 capital conservation buffer and the stress buffer requirements that the Federal Reserve has proposed that would replace the common equity tier 1 capital conservation buffer for bank holding companies, see “Capital Requirements” and “Proposed Stress Buffer Requirements” below, respectively.

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.

Capital Requirements The Company is subject to certain regulatory risk-based capital and leverage requirements under the United States Basel III-based capital rules adopted by the Federal Reserve, and U.S. Bank National Association is subject to substantially similar rules adopted by the OCC. These rules implement the Basel III international regulatory capital standards in the United States, as well as certain provisions of the Dodd-Frank Act. These quantitative calculations are minimums, and the Federal Reserve and OCC may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner. The United States Basel III-based capital rules include 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 the United States Basel III-based capital rules, the Company is subject to a minimum common equity tier 1 capital ratio (common equity tier 1 capital to risk-weighted assets) of 4.5 percent, a minimum tier 1 capital ratio of 6.0 percent and a minimum total capital ratio of 8.0 percent. 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 capital buffer on top of the three minimum risk-weighted capital ratios listed above. Banking organizations that fail to meet the effective minimum ratios once the capital conservation buffer is taken into account will be subject to constraints on capital distributions, including dividends and share repurchases and certain discretionary executive compensation, with the severity of the constraints depending on the extent of the shortfall, with progressively more stringent constraints on capital actions as the Company approaches the minimum ratios.

 

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On April 10, 2018, the Federal Reserve issued a proposal that would create a single, integrated capital requirement by combining the capital conservation buffer requirement with the quantitative assessment of firms’ capital plans under the Federal Reserve’s Comprehensive Capital Analysis and Review (“CCAR”). Please refer to the “Proposed Stress Buffer Requirements” section below for further details. Although the proposal, if adopted, would change the way in which the minimum ratios are calculated, firms would continue to be subject to progressively more stringent constraints on capital actions as they approach the minimum ratios.

United States banking organizations are also subject to a minimum leverage ratio of 4.0 percent. Banking organizations that calculate their capital requirements using advanced approaches, including the Company, are also subject to a minimum Supplementary Leverage Ratio (“SLR”) of 3.0 percent that takes into account both on-balance sheet and certain off-balance sheet exposures. 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 and became subject to the minimum SLR requirement on January 1, 2018. At December 31, 2018, the Company exceeded the applicable minimum SLR requirement.

In December 2017, the Basel Committee finalized a package of revisions to the Basel III framework. 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 Committee’s 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 rulemakings in future years to implement these revisions in the United States.

Under the Proposed Tailoring Rules, the Company, as a Category III banking organization, would no longer be required to calculate risk-based capital ratios under the advanced approaches for purposes of determining regulatory compliance. Instead, the Company’s risk-based capital ratios would be calculated using only the standardized approach. The Company would remain subject to the SLR and the countercyclical capital buffer. In addition, the Company, as a Category III banking organization, would be permitted to opt out of recognizing accumulated other comprehensive income (“AOCI”) in common equity tier 1 capital for purposes of calculating its regulatory capital ratios. The Company cannot predict whether the final form of the Proposed Tailoring Rules will exempt the Company from using the advanced approaches to calculate risk-based capital ratios or permit the Company to opt out of including AOCI in its calculation of common equity tier 1 capital.

In addition, in December 2018, the United States federal banking agencies finalized rules that provide banking organizations the option to phase-in over a three year period, the day-one adverse effects on regulatory capital that may result from the adoption of the new current expected credit loss accounting rule. For further discussion of the new current expected credit loss accounting rule, see Note 2 of the Notes to Consolidated Financial Statements in the 2018 Annual Report.

For additional information regarding the Company’s regulatory capital, see “Capital Management” in the 2018 Annual Report.

Prompt Corrective Action 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

 

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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 institution’s classification within five capital categories. An institution that fails to remain well-capitalized becomes subject to a series of restrictions that increase in severity as its capital condition weakens. Such restrictions may include a prohibition on capital distributions, restrictions on asset growth or restrictions on the ability to receive regulatory approval of applications. The FDICIA also provides for enhanced supervisory authority over undercapitalized institutions, including authority for the appointment of a conservator or receiver for the institution.

The regulations apply only to banks and not to bank holding companies such as the Company. However, the Federal Reserve is authorized to take appropriate action at the holding company level, based on the undercapitalized status of the holding company’s subsidiary banking institutions. In certain instances relating to an undercapitalized banking institution, the bank holding company would be required to guarantee the performance of the undercapitalized subsidiary’s capital restoration plan and could be liable for civil money damages for failure to fulfill those guarantee commitments.

Comprehensive Capital Analysis and Review The Federal Reserve’s capital plan rule currently 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 in connection with its annual CCAR process. The Company may generally only pay dividends and repurchase stock in accordance with a capital plan that has been reviewed by the Federal Reserve and to which the Federal Reserve has not objected. These capital plans consist of a number of mandatory elements, including an assessment of a company’s sources and uses of capital over a nine-quarter planning horizon assuming both expected and stressful conditions; a detailed description of a company’s process for assessing capital adequacy; a demonstration of a company’s ability to maintain capital above each minimum regulatory capital ratio under expected and stressful conditions; and a demonstration of a company’s ability to achieve, readily and without difficulty, the minimum capital ratios and capital buffers under the United States Basel III-based capital rules.

The Company submitted its 2018 capital plan to the Federal Reserve in April 2018. The Federal Reserve did not object to the Company’s 2018 capital plan.

The Company will submit its 2019 capital plan to the Federal Reserve by April 5, 2019, 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 Company’s capital plan, including its planned capital distributions, no later than June 30, 2019.

In April 2018, the Federal Reserve issued a proposal to integrate its annual capital planning and stress testing requirements with certain ongoing regulatory capital requirements, which would make changes to capital planning and stress testing processes for bank holding companies subject to the proposed rule, including the Company. Please refer to the “Proposed Stress Buffer Requirements” section below for further details.

Stress Testing The Federal Reserve’s 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 Act supervisory stress tests employing stress scenarios and internal supervisory models. The Federal Reserve’s CCAR and Dodd-Frank Act supervisory stress tests incorporate the Company’s planned capital actions and the Dodd-Frank Act capital actions, respectively. The Federal Reserve and the Company are currently 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 currently required to submit a mid-cycle

 

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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 currently required to submit annual company-run stress test results to the OCC concurrently with their parent bank holding company’s CCAR submission to the Federal Reserve. The stress test is based on the OCC’s stress scenarios (which are typically the same as the Federal Reserve’s 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, 2019. The Company is required to publish the results of this stress test no later than June 30, 2019.

Under the Proposed EPS Tailoring Rule, the Company, as a Category III banking organization, would remain subject to annual supervisory stress tests but would be subject to company-run stress tests every two years, instead of annually. Consistent with EGRRCPA, the Federal Reserve also has proposed to eliminate the mid-cycle stress testing requirement for all banking organizations as of 2020 and eliminate the adverse scenario from all stress testing requirements. The Company cannot predict whether the Proposed EPS Tailoring Rule and other related issuances will be adopted as proposed or whether any changes will be made to it that would affect the stress testing requirements applicable to the Company.

Proposed Stress Buffer Requirements On April 10, 2018, the Federal Reserve issued a proposal to create a single capital requirement by integrating its annual capital planning and stress testing requirements with certain ongoing regulatory capital requirements. The proposal, which would apply to certain bank holding companies, including the Company, would introduce a stress capital buffer and a stress leverage buffer, or stress buffer requirements, and related changes to the capital planning and stress testing processes. For risk-based capital requirements, the stress capital buffer would replace the existing capital conservation buffer, which is 2.5 percent as of January 1, 2019. The stress capital buffer would equal the greater of (i) the maximum decline in the Company’s common equity tier 1 capital ratio under the severely adverse scenario over the supervisory stress test measurement period, plus the sum of the ratios of the dollar amount of its planned common stock dividends to its projected risk-weighted assets for each of the fourth through seventh quarters of the supervisory stress test projection period, and (ii) 2.5 percent.

The proposal would make related changes to capital planning and stress testing processes for bank holding companies subject to the stress buffer requirements. In particular, the proposal would remove the 30 percent dividend payout ratio that has been used as a threshold for heightened supervisory scrutiny and would assume that bank holding companies maintain a constant level of assets and risk-weighted assets throughout the supervisory stress test projection period.

In November 2018, the Federal Reserve’s Vice Chairman for Supervision stated that the Federal Reserve does not expect that the proposed stress buffer requirements will go into effect before 2020, and that, although the Federal Reserve expects to finalize certain elements of those requirements as proposed, other elements of the proposal will be re-proposed and again subject to public comment.

Basel III Liquidity Requirements Bank holding companies and their domestic bank subsidiaries that calculate their capital requirements using the advanced approaches, including the Company and U.S. Bank National Association, are subject to a minimum Liquidity Coverage Ratio (“LCR”). 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.

In June 2016, the federal banking regulators proposed a rule to implement the Net Stable Funding Ratio (“NSFR”). The NSFR is designed to promote stable, longer-term funding of assets and business activities over a

 

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one-year time horizon and would apply to the Company and U.S. Bank National Association. Federal banking regulators continue to work on finalizing the rule to implement the NSFR.

Under the Proposed Tailoring Rules, the Company and U.S. Bank National Association, as Category III banking organizations with less than $75 billion of weighted short-term wholesale funding, would qualify for reduced LCR and proposed NSFR requirements calibrated at 70-85 percent of the full requirements. The Company cannot predict whether the final form of the Proposed Tailoring Rules will subject the Company and U.S. Bank National Association to reduced LCR and proposed NSFR requirements.

Single-Counterparty Credit Limits On June 14, 2018, the Federal Reserve finalized rules that establish single-counterparty credit limits (“SCCL”) for large banking organizations, including the Company. Under these rules, the Company is subject to a limit of 25 percent of Tier 1 capital for aggregate net credit exposures to any other unaffiliated counterparty. The Company must comply with the final SCCL rules beginning on January 1, 2020.

Deposit Insurance The DIF provides insurance coverage for certain deposits, up to a standard maximum deposit insurance amount of $250,000 per depositor and is funded through assessments on insured depository institutions, based on the risk each institution poses to the DIF. U.S. Bank National Association accepts customer deposits that are insured by the DIF and therefore must pay insurance premiums. The FDIC may increase U.S. Bank National Association’s insurance premiums based on various factors, including the FDIC’s assessment of its risk profile. Until September 30, 2018, banks with $10 billion or more in total assets, such as U.S. Bank National Association, were required to pay an assessment surcharge. This requirement ended effective September 30, 2018, as a result of the FDIC’s reserve ratio exceeding 1.35 percent.

In addition, large insured depository institutions, including U.S. Bank National Association, are subject to enhanced deposit account recordkeeping and related information technology system requirements meant to facilitate prompt payment of insured deposits if such an institution were to fail. U.S. Bank National Association must comply with these new requirements by April 1, 2020.

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 institution’s assets and liabilities to a new obligor without the approval of the depository institution’s creditors; (b) enforce the terms of the depository institution’s 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 Company’s 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.

Orderly Liquidation Authority Upon the insolvency of a bank holding company, such as the Company, the FDIC may be appointed as conservator or receiver of the bank holding company if 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 certain conditions set forth in the Dodd-Frank Act regarding the potential impact on financial stability of the financial company’s failure have been met. FDIC rules set forth a comprehensive method for the receivership of a covered financial company. Acting as a conservator or receiver,

 

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the FDIC would have broad powers to transfer any assets or liabilities of a bank holding company without the approval of its creditors.

Resolution Plans As a bank holding company with assets of $250 billion or more, the Company is required to submit annually to the Federal Reserve and the FDIC a resolution plan for the orderly resolution of the Company and its significant legal entities under the United States Bankruptcy Code or other applicable insolvency laws in a rapid and orderly fashion in the event of future material financial distress or failure. If the Federal Reserve and the FDIC jointly determine that the resolution plan is not credible and the deficiencies are not cured in a timely manner, they may jointly impose on the Company more stringent capital, leverage or liquidity requirements or restrictions on the Company’s growth, activities or operations. If the Company were to fail to address the deficiencies in its resolution plan when required, it could eventually be required to divest certain assets or operations. The Company submitted its resolution plan to the Federal Reserve and the FDIC in December 2017. The Federal Reserve and FDIC have extended the filing deadline for certain bank holding companies, including the Company, and as a result the Company’s next resolution plan is not due to the Federal Reserve and FDIC until December 31, 2019.

In addition, U.S. Bank National Association is required to file periodically a separate resolution plan with the FDIC 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 institution’s 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 institution’s creditors. The Company submitted its insured depository institution resolution plan to the FDIC in July 2018. The FDIC’s Chairman has indicated that the FDIC intends to release an advanced notice of proposed rulemaking with respect to the FDIC’s bank resolution plan requirements meant to better tailor bank resolution plans to a firm’s size, complexity and risk profile. Until the FDIC’s revisions to its bank resolution plan requirement are finalized, no bank resolution plans will be required to be filed.

The public versions of the resolution plans previously submitted by the Company and U.S. Bank National Association are available on the FDIC’s website and, in the case of the Company’s resolution plans, also on the Federal Reserve’s website.

Recovery Plans The OCC has established enforceable guidelines for recovery planning by insured national banks, insured federal savings associations, and insured federal branches of foreign banks with average total consolidated assets of $250 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 2018.

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

 

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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 arm’s length terms and must be consistent with standards of safety and soundness.

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 Department’s 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 2018 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 institution’s 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 commenced its most recent CRA exam in 2017, the results of which will be made public upon completion.

 

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In April 2018, the United States Department of Treasury issued a memorandum to the federal banking regulators with recommend changes to the CRA’s implementing regulations to reduce their complexity and associated burden on banks. Leaders of the federal banking agencies recently have indicated their support for revising the CRA regulatory framework, and on August 28, 2018, the OCC issued an advance notice of proposed rulemaking to solicit ideas for building a new CRA framework. We will continue to evaluate the impact of any changes to the regulations implementing the CRA.

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. (“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.

On May 9, 2018, the SEC proposed Regulation Best Interest, which would impose a new standard of conduct on SEC-registered broker-dealers when making recommendations to retail customers, clarify certain aspects of the fiduciary duty that an SEC-registered investment adviser owes to its clients and mandate summary disclosure to retail customers describing their relationship with and services offered by registered broker-dealers and investment advisers. The Company does not expect that the adoption of the proposed Regulation Best Interest, as proposed, would cause a significant change in the practices of USBII.

The operations of the First American family of funds, the Company’s proprietary money market fund complex, also are subject to regulation by the SEC, including rules requiring a floating net asset value for institutional prime and tax-free money market funds and permitting 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).

The Company’s 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, U.S. Bank National Association, as a CFTC-registered swap dealer, is subject to rules regarding the regulation of the swaps marketplace and over-the-counter derivatives, including rules that 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, to centrally clear and trade swaps on regulated exchanges or execution facilities, and to be subject to certain capital and margin requirements. While the CFTC has finalized the majority of its regulations pursuant to the Dodd-Frank Act, the SEC, which has jurisdiction over security-based swaps, has not yet finalized all requirements, and entities that deal in security-based swaps are not yet required to register with the SEC as security-based swap dealers.

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 for swap dealers regulated by these agencies. 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

 

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March 1, 2017. The initial margin requirements will phase in over four years, which began on September 1, 2016, and will be fully phased-in on September 1, 2020, depending on the level of derivatives activity of the swap dealer and the relevant counterparty.

The Volcker Rule Section 13 of the BHC Act and its implementing regulations, commonly referred to as the “Volcker Rule,” prohibit banking entities from engaging in proprietary trading, and prohibits certain interests in, or relationships with, hedge funds or private equity funds. The Volcker Rule also requires annual attestation by a banking entity’s 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 compliance with the final rule. The Volcker Rule applies to the Company, U.S. Bank National Association and their affiliates. The Company has a Volcker Rule compliance program in place that covers all of its subsidiaries and affiliates, including U.S. Bank National Association.

In May 2018, the five federal agencies with rulemaking authority with respect to the Volcker Rule released a proposal to revise the Volcker Rule. The proposal would tailor the Volcker Rule’s compliance requirements to the amount of a firm’s trading activity, revise the definition of trading account, clarify certain key provisions in the Volcker Rule, and modify the information companies are required to provide the federal agencies. If adopted, the proposed changes to the definition of trading account would likely expand the scope of investing and trading activities subject to the Volcker Rule’s restrictions. The Company is currently evaluating the potential impact that this proposed rule would have on its investing and trading activities.

Data Privacy and Cybersecurity Federal and state law contains extensive consumer privacy protection provisions. The GLBA requires financial institutions to periodically disclose their privacy policies and practices relating to sharing such information and enables retail customers to opt out of the Company’s ability to share information with unaffiliated third parties under certain circumstances. Other federal and state laws and regulations impact the Company’s ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact customers with marketing offers. The GLBA also requires financial institutions to implement a comprehensive information security program that includes administrative, technical and physical safeguards to ensure the security and confidentiality of customer records and information. These security and privacy policies and procedures for the protection of personal and confidential information are in effect across all businesses and geographic locations. Federal law also makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.

Data privacy and data protection are areas of increasing state legislative focus. For example, in June of 2018, the Governor of California signed into law the California Consumer Protection Act of 2018 (the “CCPA”). The CCPA, which becomes effective on January 1, 2020, applies to for-profit businesses that conduct business in California and meet certain revenue or data collection thresholds. The CCPA will give consumers the right to request disclosure of information collected about them, and whether that information has been sold or shared with others, the right to request deletion of personal information (subject to certain exceptions), the right to opt out of the sale of the consumer’s personal information, and the right not to be discriminated against for exercising these rights. The CCPA contains several exemptions, including an exemption applicable to information that is collected, processed, sold or disclosed pursuant to the GLBA. The California Attorney General has not yet proposed or adopted regulations implementing the CCPA, and the California State Legislature has amended the Act since its passage. The Company has a physical footprint in California and will be required to comply with the CCPA. In addition, similar laws may be adopted by other states where the Company does business. The impact of the CCPA on the Company’s business is yet to be determined. The federal government may also pass data privacy or data protection legislation. In addition, in the European Union (“EU”), privacy law is now governed by the General Data Protection Regulation (“GDPR”), which is directly binding and applicable for each EU member state from May 25, 2018. The GDPR contains enhanced compliance obligations and increased penalties for non-compliance compared to the prior law governing data privacy in the EU.

 

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Like other lenders, U.S. Bank National Association and other of the Company’s subsidiaries use credit bureau data in their underwriting activities. Use of such data is regulated under the Fair Credit Reporting Act (“FCRA”), and the FCRA also regulates reporting information to credit bureaus, prescreening individuals for credit offers, sharing of information between affiliates, and using affiliate data for marketing purposes. Similar state laws may impose additional requirements on the Company and its subsidiaries.

The federal banking regulators, as well as the SEC, CFTC, and related self-regulatory organizations, regularly issue guidance regarding cybersecurity that is intended to enhance cyber risk management among financial institutions. A financial institution is expected to establish lines of defense and to ensure that their risk management processes also address the risk posed by potential threats to the institution. A financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber attack. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations if the institution or its critical service providers fall victim to a cyber attack.

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 CFPB’s 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 Company’s other subsidiaries. These regulatory activities may limit the types of financial services and products the Company may offer, which in turn may reduce the Company’s 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 Company’s 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. Bancorp’s internet website can be found at www.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 2018 Annual Report on pages 61 to 65 under the heading “Line of Business Financial Review.” That information is incorporated into this report by reference.

 

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Item 1A.

Risk Factors

Information in response to this Item 1A can be found in the 2018 Annual Report on pages 144 to 154 under the heading “Risk Factors.” That information is incorporated into this report by reference.

 

Item 1B.

Unresolved Staff Comments

None.

 

Item 2.

Properties

U.S. Bancorp and its significant subsidiaries occupy headquarter offices under a long-term lease in Minneapolis, Minnesota. The Company also leases 10 freestanding operations centers in Cincinnati, Denver, Milwaukee, Minneapolis, Overland Park, Portland and St. Paul. The Company owns 11 principal operations centers in Cincinnati, Coeur d’Alene, Fargo, Milwaukee, Olathe, Owensboro, Portland, St. Louis and St. Paul. At December 31, 2018, the Company’s subsidiaries owned and operated a total of 1,498 facilities and leased an additional 1,928 facilities. The Company believes its current facilities are adequate to meet its needs. Additional information with respect to the Company’s premises and equipment is presented in Note 8 of the Notes to Consolidated Financial Statements included in the 2018 Annual Report. That information is incorporated into this report by reference.

 

Item 3.

Legal Proceedings

Information in response to this Item 3 can be found in Note 22 of the Notes to Consolidated Financial Statements included in the 2018 Annual Report. That information is incorporated into this report by reference.

 

Item 4.

Mine Safety Disclosures

Not Applicable.

Capital Covenants

The Company has entered into several transactions involving the issuance of capital securities (“Capital Securities”) by certain Delaware statutory trusts formed by the Company (the “Trusts”), the issuance by the Company of preferred stock (“Preferred Stock”) or the issuance by an indirect subsidiary of U.S. Bank National Association of preferred stock exchangeable for the Company’s Preferred Stock under certain circumstances (“Exchangeable Preferred Stock”). Simultaneously with the closing of certain of those transactions, the Company entered into a replacement capital covenant, as amended from time to time (as amended, each, a “Replacement Capital Covenant” and collectively, the “Replacement Capital Covenants”) for the benefit of persons that buy, hold or sell a specified series of long-term indebtedness of the Company or U.S. Bank National Association (the “Covered Debt”). Each of the Replacement Capital Covenants provides that neither the Company nor any of its subsidiaries (including any of the Trusts) will repay, redeem or purchase any of the Preferred Stock, Exchangeable Preferred Stock or the Capital Securities and the securities held by the Trust (the “Other Securities”), as applicable, on or before the date specified in the applicable Replacement Capital Covenant, unless the Company has received proceeds from the sale of qualifying securities that (a) have equity-like characteristics that are the same as, or more equity-like than, the applicable characteristics of the Preferred Stock, the Exchangeable Preferred Stock, the Capital Securities or Other Securities, as applicable, at the time of repayment, redemption or purchase, and (b) the Company has obtained the prior approval of the Federal Reserve, if such approval is then required by the Federal Reserve or, in the case of the Exchangeable Preferred Stock, the approval of the OCC.

The Company will provide a copy of any Replacement Capital Covenant to a holder of the relevant Covered Debt. For copies of any of these documents, holders should write to Investor Relations, U.S. Bancorp, 800 Nicollet Mall, Minneapolis, Minnesota 55402, or call (866) 775-9668.

 

18


The following table identifies the closing date for each transaction, issuer, series of Capital Securities, Preferred Stock or Exchangeable Preferred Stock issued in the relevant transaction, Other Securities, if any, and applicable Covered Debt as of February 21, 2019, for those securities that remain outstanding.

 

Closing

Date

 

Issuer

 

Capital Securities or

Preferred Stock

 

Other Securities

 

Covered Debt

3/17/06

 

USB Capital

IX and

U.S. Bancorp

  USB Capital IX’s $675,378,000 of 6.189% Fixed-to-Floating Rate Normal Income Trust Securities   U.S. Bancorp’s Series A Non-Cumulative Perpetual Preferred Stock   U.S. Bancorp’s 7.50% Subordinated Debentures due 2026 (CUSIP No. 911596AL8)

3/27/06

  U.S. Bancorp   U.S. Bancorp’s 40,000,000 Depositary Shares ($25 per Depositary Share) each representing a 1/1000th interest in a share of Series B Non-Cumulative Perpetual Preferred Stock   Not Applicable   U.S. Bancorp’s 7.50% Subordinated Debentures due 2026 (CUSIP No. 911596AL8)

12/22/06

 

USB Realty

Corp(a) and U.S. Bancorp

  USB Realty Corp.’s 5,000 shares of Fixed-to-Floating-Rate Exchangeable Non-Cumulative Perpetual Series A Preferred Stock exchangeable for shares of U.S. Bancorp’s Series C Non-Cumulative Perpetual Preferred Stock(b)   Not Applicable   U.S. Bancorp’s 7.50% Subordinated Debentures due 2026 (CUSIP No. 911596AL8)

 

(a)

USB Realty Corp. is an indirect subsidiary of U.S. Bank National Association.

(b)

Under certain circumstances, upon the direction of the OCC, each share of USB Realty Corp.’s Series A Preferred Stock will be automatically exchanged for one share of U.S. Bancorp’s Series C Non-Cumulative Perpetual Preferred Stock.

 

19


PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

On June 28, 2018, the Company announced its Board of Directors had approved an authorization to repurchase up to $3.0 billion of its common stock, from July 1, 2018 through June 30, 2019. Except as otherwise indicated in the table below, all shares repurchased during the fourth quarter of 2018 were repurchased under this authorization. The following table provides a detailed analysis of all shares repurchased by the Company or any affiliated purchaser during the fourth quarter of 2018:

 

Period

   Total Number
of Shares
Purchased
    Average
Price Paid
per Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced Program
     Approximate Dollar Value
of Shares that May
Yet Be Purchased
Under the Program
(In  Millions)
 

October 1-31

     7,906,336 (a)    $ 51.75        7,806,336      $ 1,843  

November 1-30

     4,526,196       53.56        4,526,196        1,601  

December 1-31

     3,770,521 (b)      48.30        3,695,521        1,422  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

     16,203,053 (c)    $ 51.46        16,028,053      $ 1,422  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

(a)

Includes 100,000 shares of common stock purchased, at an average price per share of $50.65, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the U.S. Bank 401(k) Savings Plan, which is the Company’s employee retirement savings plan.

(b)

Includes 75,000 shares of common stock purchased, at an average price per share of $47.43, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the U.S. Bank 401(k) Savings Plan.

(c)

Includes 175,000 shares of common stock purchased, at an average price per share of $49.27, in open-market transactions by U.S. Bank National Association in its capacity as trustee of the U.S. Bank 401(k) Savings Plan.

Additional Information

Additional information in response to this Item 5 can be found in the 2018 Annual Report on page 141 under the heading “U.S. Bancorp Supplemental Financial Data (Unaudited).” That information is incorporated into this report by reference.

 

Item 6.

Selected Financial Data

Information in response to this Item 6 can be found in the 2018 Annual Report on page 23 under the heading “Table 1 — Selected Financial Data.” That information is incorporated into this report by reference.

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Information in response to this Item 7 can be found in the 2018 Annual Report on pages 22 to 70 under the heading “Management’s Discussion and Analysis.” That information is incorporated into this report by reference.

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

Information in response to this Item 7A can be found in the 2018 Annual Report on pages 38 to 59 under the heading “Corporate Risk Profile.” That information is incorporated into this report by reference.

 

20


Item 8.

Financial Statements and Supplementary Data

Information in response to this Item 8 can be found in the 2018 Annual Report on pages 71 to 143 under the headings “Report of Management,” “Report of Independent Registered Public Accounting Firm,” “Report of Independent Registered Public Accounting Firm,” “U.S. Bancorp Consolidated Balance Sheet,” “U.S. Bancorp Consolidated Statement of Income,” “U.S. Bancorp Consolidated Statement of Comprehensive Income,” “U.S. Bancorp Consolidated Statement of Shareholders’ Equity,” “U.S. Bancorp Consolidated Statement of Cash Flows,” “Notes to Consolidated Financial Statements,” “U.S. Bancorp Consolidated Balance Sheet — Five Year Summary (Unaudited),” “U.S. Bancorp Consolidated Statement of Income — Five Year Summary (Unaudited),” “U.S. Bancorp Quarterly Consolidated Financial Data (Unaudited),” “U.S. Bancorp Supplemental Financial Data (Unaudited)” and “U.S. Bancorp Consolidated Daily Average Balance Sheet and Related Yields and Rates (Unaudited)”. That information is incorporated into this report by reference.

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

 

Item 9A.

Controls and Procedures

Information in response to this Item 9A can be found in the 2018 Annual Report on page 70 under the heading “Controls and Procedures” and on pages 71 and 73 under the headings “Report of Management” and “Report of Independent Registered Public Accounting Firm.” That information is incorporated into this report by reference.

 

Item 9B.

Other Information

None.

 

21


PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance

Code of Ethics and Business Conduct

The Company has adopted a Code of Ethics and Business Conduct that applies to its principal executive officer, principal financial officer and principal accounting officer. The Company’s Code of Ethics and Business Conduct can be found at www.usbank.com by clicking on “About Us” and then clicking on “Investor Relations” and then clicking on “Corporate Governance” and then clicking on “Code of Ethics.” The Company intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers from, certain provisions of the Code of Ethics and Business Conduct that apply to its principal executive officer, principal financial officer and principal accounting officer by posting such information on its website, at the address and location specified above.

Executive Officers of the Registrant

Andrew Cecere

Mr. Cecere is Chairman, President and Chief Executive Officer of U.S. Bancorp. Mr. Cecere, 58, has served as President of U.S. Bancorp since January 2016, Chief Executive Officer since April 2017 and Chairman since April 2018. He also served as Vice Chairman and Chief Operating Officer from January 2015 to January 2016 and was U.S. Bancorp’s Vice Chairman and Chief Financial Officer from February 2007 until January 2015. Until that time, he served as Vice Chairman, Wealth Management and Investment Services, of U.S. Bancorp since the merger of Firstar Corporation and U.S. Bancorp in February 2001. Previously, he had served as an executive officer of the former U.S. Bancorp, including as Chief Financial Officer from May 2000 through February 2001.

Ismat Aziz

Ms. Aziz is Executive Vice President and Chief Human Resources Officer of U.S. Bancorp. Ms. Aziz, 51, has served in this position since joining U.S. Bancorp in September 2018. She served as Chief Human Resources Officer of Sprint Corporation from May 2016 until September 2018. Ms. Aziz served as the Chief Human Resources Officer of Sam’s Club from April 2012 to April 2016, and as the Senior Vice President of Business Capability and Human Resources of Sam’s Club from August 2010 to April 2012. Prior to that time, she served as the Vice President of Business Capability and Human Resources at Sears Canada from June 2009 to August 2010.

James L. Chosy

Mr. Chosy is Executive Vice President and General Counsel of U.S. Bancorp. Mr. Chosy, 55, has served in this position since March 2013. He also served as Corporate Secretary of U.S. Bancorp from March 2013 until April 2016. From 2001 to 2013, he served as the General Counsel and Secretary of Piper Jaffray Companies. From 1995 to 2001, Mr. Chosy was Vice President and Associate General Counsel of U.S. Bancorp, having also served as Assistant Secretary of U.S. Bancorp from 1995 through 2000 and as Secretary from 2000 until 2001.

Terrance R. Dolan

Mr. Dolan is Vice Chairman and Chief Financial Officer of U.S. Bancorp. Mr. Dolan, 57, has served in this position since August 2016. From July 2010 to July 2016, he served as Vice Chairman, Wealth Management and Investment Services, of U.S. Bancorp. From September 1998 to July 2010, Mr. Dolan served as U.S. Bancorp’s Controller. He additionally held the title of Executive Vice President from January 2002 until June 2010 and Senior Vice President from September 1998 until January 2002.

 

22


John R. Elmore

Mr. Elmore is Vice Chairman, Community Banking and Branch Delivery, of U.S. Bancorp. Mr. Elmore, 62, has served in this position since March 2013. From 1999 to 2013, he served as Executive Vice President, Community Banking, of U.S. Bancorp and its predecessor company, Firstar Corporation. Mr. Elmore will retire from U.S. Bancorp on March 1, 2019.

Leslie V. Godridge

Ms. Godridge is Vice Chairman, Corporate and Commercial Banking, of U.S. Bancorp. Ms. Godridge, 63, has served in this position since January 2016. From February 2013 until December 2015, she served as Executive Vice President, National Corporate Specialized Industries and Global Treasury Management, of U.S. Bancorp. From February 2007, when she joined U.S. Bancorp, until January 2013, Ms. Godridge served as Executive Vice President, National Corporate and Institutional Banking, of U.S. Bancorp. Prior to that time, she served as Senior Executive Vice President and a member of the Executive Committee at The Bank of New York, where she was head of BNY Asset Management, Private Banking, Consumer Banking and Regional Commercial Banking from 2004 to 2006.

Gunjan Kedia

Ms. Kedia is Vice Chairman, Wealth Management and Investment Services, of U.S. Bancorp. Ms. Kedia, 48, has served in this position since joining U.S. Bancorp in December 2016. From October 2008 until May 2016, she served as Executive Vice President of State Street Corporation where she led the core investment servicing business in North and South America and served as a member of State Street’s management committee, its senior most strategy and policy committee. Previously, Ms. Kedia was an Executive Vice President of global product management at Bank of New York Mellon from 2004 to 2008.

James B. Kelligrew

Mr. Kelligrew is Vice Chairman, Corporate and Commercial Banking, of U.S. Bancorp. Mr. Kelligrew, 53, has served in this position since January 2016. From March 2014 until December 2015, he served as Executive Vice President, Fixed Income and Capital Markets, of U.S. Bancorp, having served as Executive Vice President, Credit Fixed Income, of U.S. Bancorp from May 2009 to March 2014. Prior to that time, he held various leadership positions with Wells Fargo Securities from 2003 to 2009, and with Bank of America Securities from 1993 to 2003.

Shailesh M. Kotwal

Mr. Kotwal is Vice Chairman, Payment Services, of U.S. Bancorp. Mr. Kotwal, 54, has served in this position since joining U.S. Bancorp in March 2015. From July 2008 until May 2014, he served as Executive Vice President of TD Bank Group with responsibility for retail banking products and services and as Chair of its enterprise payments council. From 2006 until 2008, he served as President, International, of eFunds Corporation. Previously, Mr. Kotwal served in various leadership roles at American Express Company from 1989 until 2006, including responsibility for operations in North and South America, Europe and the Asia-Pacific regions.

Katherine B. Quinn

Ms. Quinn is Vice Chairman and Chief Administrative Officer of U.S. Bancorp. Ms. Quinn, 54, has served in this position since April 2017. From September 2013 to April 2017, she served as Executive Vice President and Chief Strategy and Reputation Officer of U.S. Bancorp and has served on U.S. Bancorp’s Managing Committee since January 2015. From September 2010 until January 2013, she served as Chief Marketing Officer of WellPoint, Inc. (now known as Anthem, Inc.), having served as Head of Corporate Marketing of WellPoint from July 2005 until September 2010. Prior to that time, she served as Chief Marketing and Strategy Officer at The Hartford from 2003 until 2005.

 

23


Jodi L. Richard

Ms. Richard is Vice Chairman and Chief Risk Officer of U.S. Bancorp. Ms. Richard, 50, has served in this position since October 2018. She served as Executive Vice President and Chief Operational Risk Officer of U.S. Bancorp from January 2018 until October 2018, having served as Senior Vice President and Chief Operational Risk Officer from 2014 until January 2018. Prior to that time, Ms. Richard held various senior leadership roles at HSBC from 2003 until 2014, including Executive Vice President and Head of Operational Risk and Internal Control at HSBC North America from 2008 to 2014. Ms. Richard started her career at the Office of the Comptroller of the Currency in 1990 as a national bank examiner.

Mark G. Runkel

Mr. Runkel is Executive Vice President and Chief Credit Officer of U.S. Bancorp. Mr. Runkel, 42, has served in this position since December 2013. From February 2011 until December 2013, he served as Senior Vice President and Credit Risk Group Manager of U.S. Bancorp Retail and Payment Services Credit Risk Management, having served as Senior Vice President and Risk Manager of U.S. Bancorp Retail and Small Business Credit Risk Management from June 2009 until February 2011. From March 2005 until May 2009, he served as Vice President and Risk Manager of U.S. Bancorp.

Jeffry H. von Gillern

Mr. von Gillern is Vice Chairman, Technology and Operations Services, of U.S. Bancorp. Mr. von Gillern, 53, has served in this position since July 2010. From April 2001, when he joined U.S. Bancorp, until July 2010, Mr. von Gillern served as Executive Vice President of U.S. Bancorp, additionally serving as Chief Information Officer from July 2007 until July 2010.

Timothy A. Welsh

Mr. Welsh is Vice Chairman, Consumer Banking Sales and Support, of U.S. Bancorp. Mr. Welsh, 53, has served in this position since joining U.S. Bancorp in July 2017. From July 2006 until June 2017, he served as a Senior Partner at McKinsey & Company where he specialized in financial services and the consumer experience. Previously, Mr. Welsh served as a Partner at McKinsey & Company from 1999 to 2006.

Additional Information

Additional information in response to this Item 10 can be found in the Proxy Statement under the headings “Other Matters — Section 16(a) Beneficial Ownership Reporting Compliance,” “Proposal 1 — Election of Directors,” “Corporate Governance — Committee Responsibilities” and “Corporate Governance — Committee Member Qualifications.” That information is incorporated into this report by reference.

 

Item 11.

Executive Compensation

Information in response to this Item 11 can be found in the Proxy Statement under the headings “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Executive Compensation” and “Director Compensation.” That information is incorporated into this report by reference.

 

24


Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Equity Compensation Plan Information

The following table summarizes information regarding the Company’s equity compensation plans in effect as of December 31, 2018:

 

Plan Category

   Number of Securities
to be Issued upon
Exercise of
Outstanding Options,
Warrants and  Rights
    Weighted-average
Exercise Price of
Outstanding Options,
Warrants and  Rights
     Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans  (Excluding
Securities Reflected in
the First Column)
 

Equity compensation plans approved by security holders

          34,713,980 (3)  

Stock Options

     9,115,010 (1)     $ 34.52     

Restricted Stock Units and Performance-Based Restricted Stock Units

     6,719,298 (2)       -     

Equity compensation plans not approved by security holders

     416,688 (4)       -        -  
  

 

 

      

 

 

 

Total

     16,250,996          34,713,980  

 

(1)

Includes shares of the Company’s common stock underlying stock options granted under the U.S. Bancorp 2015 Stock Incentive Plan (the “2015 Plan”) and the U.S. Bancorp Amended and Restated 2007 Stock Incentive Plan (the “2007 Plan”).

 

(2)

Includes shares of the Company’s common stock underlying performance-based restricted stock units (awarded to the members of the Company’s Managing Committee and settled in shares of the Company’s common stock on a one-for-one basis) and restricted stock units (settled in shares of the Company’s common stock on a one-for-one basis) under the 2015 Plan, the 2007 Plan and the U.S. Bancorp 2001 Stock Incentive Plan. No exercise price is paid upon vesting, and thus, no exercise price is included in the table.

 

(3)

The 34,713,980 shares of the Company’s common stock available for future issuance are reserved under the 2015 Plan. Future awards under the 2015 Plan may be made in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalents, stock awards, or other stock-based awards.

 

(4)

These shares of the Company’s common stock are issuable pursuant to various current and former deferred compensation plans of U.S. Bancorp and its predecessor entities. No exercise price is paid when shares are issued pursuant to the deferred compensation plans.

The deferred compensation plans allow non-employee directors and members of senior management to defer all or part of their compensation until the earlier of retirement or termination of employment. The deferred compensation is deemed to be invested in one of several investment alternatives at the option of the participant, including shares of U.S. Bancorp common stock. Deferred compensation deemed to be invested in U.S. Bancorp stock will be received in the form of shares of U.S. Bancorp common stock at the time of distribution, unless the Company chooses cash payment.

The 416,688 shares included in the table assume that participants in the plans whose deferred compensation had been deemed to be invested in the Company’s common stock had elected to receive all of that deferred compensation in shares of the Company’s common stock on December 31, 2018. The U.S. Bank Executive Employees Deferred Compensation Plan (2005 Statement) and the U.S. Bank Outside Directors Deferred Compensation Plan (2005 Statement) are the Company’s only deferred compensation plans under which compensation may currently be deferred.

 

25


Additional Information

Additional information in response to this Item 12 can be found in the Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and Management.” That information is incorporated into this report by reference.

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

Information in response to this Item 13 can be found in the Proxy Statement under the headings “Corporate Governance — Director Independence,” “Corporate Governance — Committee Member Qualifications” and “Certain Relationships and Related Transactions.” That information is incorporated into this report by reference.

 

Item 14.

Principal Accounting Fees and Services

Information in response to this Item 14 can be found in the Proxy Statement under the headings “Audit Committee Report and Payment of Fees to Auditor — Fees to Independent Auditor” and “Audit Committee Report and Payment of Fees to Auditor — Administration of Engagement of Independent Auditor.” That information is incorporated into this report by reference.

 

26


PART IV

 

Item 15.

Exhibits, Financial Statement Schedules

List of documents filed as part of this report

1. Financial Statements

 

   

Report of Management

 

   

Report of Independent Registered Public Accounting Firm on the Financial Statements

 

   

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

 

   

U.S. Bancorp Consolidated Balance Sheet as of December 31, 2018 and 2017

 

   

U.S. Bancorp Consolidated Statement of Income for each of the three years in the period ended December 31, 2018

 

   

U.S. Bancorp Consolidated Statement of Comprehensive Income for each of the three years in the period ended December 31, 2018

 

   

U.S. Bancorp Consolidated Statement of Shareholders’ Equity for each of the three years in the period ended December 31, 2018

 

   

U.S. Bancorp Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 2018

 

   

Notes to Consolidated Financial Statements

 

   

U.S. Bancorp Consolidated Balance Sheet — Five Year Summary (Unaudited)

 

   

U.S. Bancorp Consolidated Statement of Income — Five Year Summary (Unaudited)

 

   

U.S. Bancorp Quarterly Consolidated Financial Data (Unaudited)

 

   

U.S. Bancorp Supplemental Financial Data (Unaudited)

 

   

U.S. Bancorp Consolidated Daily Average Balance Sheet and Related Yields and Rates (Unaudited)

2. Financial Statement Schedules

All financial statement schedules for the Company have been included in the consolidated financial statements or the related footnotes, or are either inapplicable or not required.

3. Exhibits

Shareholders may obtain a copy of any of the exhibits to this report upon payment of a fee covering the Company’s reasonable expenses in furnishing the exhibits. You can request exhibits by writing to Investor Relations, U.S. Bancorp, 800 Nicollet Mall, Minneapolis, Minnesota 55402.

 

Exhibit

Number

  

Description

     (1)3.1

   Restated Certificate of Incorporation, as amended. Filed as Exhibit  3.1 to Form 10-Q for the quarterly period ended September 30, 2018.

     (1)3.2

   Amended and Restated Bylaws. Filed as Exhibit 3.1 to Form 8-K filed on January 20, 2016.

        4.1

   Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, copies of instruments defining the rights of holders of long-term debt are not filed. U.S. Bancorp agrees to furnish a copy thereof to the SEC upon request.

(1)(2)10.1(a)

   U.S. Bancorp 2001 Stock Incentive Plan. Filed as Exhibit 10.1 to Form 10-K for the year ended December 31, 2001.

 

27


Exhibit

Number

  

Description

(1)(2)10.1(b)

   Amendment No. 1 to U.S. Bancorp 2001 Stock Incentive Plan. Filed as Exhibit 10.2 to Form  10-K for the year ended December 31, 2002.

(1)(2)10.2

   U.S. Bancorp Annual Executive Incentive Plan. Filed as Exhibit 10.1 to Form 8-K filed on January 16, 2019.

(1)(2)10.3

   U.S. Bancorp Executive Deferral Plan, as amended. Filed as Exhibit 10.7 to Form 10-K for the year ended December 31, 1999.

(1)(2)10.4

   Summary of Nonqualified Supplemental Executive Retirement Plan, as amended, of the former U.S. Bancorp. Filed as Exhibit 10.4 to Form 10-K for the year ended December 31, 2001.

(1)(2)10.5(a)

   U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit 10.16 to Form 10-K for the year ended December 31, 2002.

(1)(2)10.5(b)

   First, Second and Third Amendments of U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit 10.17 to Form 10-K for the year ended December 31, 2003.

(1)(2)10.5(c)

   Fourth Amendment of U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit 10.1 to Form 8-K filed on December 23, 2004.

(1)(2)10.5(d)

   Fifth Amendment of U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit  10.2 to Form 10-Q for the quarterly period ended March 31, 2005.

(1)(2)10.5(e)

   Sixth Amendment of U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit  10.1 to Form 8-K filed on October 20, 2005.

(1)(2)10.5(f)

   Seventh Amendment of U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit 10.1(g) to Form 8-K filed on January 7, 2009.

(1)(2)10.5(g)

   Eighth Amendment of U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit 10.1(h) to Form 8-K filed on January 7, 2009.

(1)(2)10.5(h)

   Ninth Amendment of U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit  10.1(i) to Form 8-K filed on January 7, 2009.

(1)(2)10.5(i)

   Tenth Amendment of U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit 10.1(j) to Form 8-K filed on January 7, 2009.

(1)(2)10.5(j)

   Eleventh Amendment of U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit 10.11(k) to Form 10-K for the year ended December 31, 2009.

(1)(2)10.5(k)

   Twelfth Amendment of U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit 10.11(l) to Form 10-K for the year ended December 31, 2010.

(1)(2)10.5(l)

   Thirteenth Amendment of U.S. Bancorp Non-Qualified Executive Retirement Plan. Filed as Exhibit 10.6(l) to Form 10-K for the year ended December 31, 2013.

(1)(2)10.6(a)

   U.S. Bancorp Executive Employees Deferred Compensation Plan. Filed as Exhibit 10.18 to Form 10-K for the year ended December 31, 2003.

(1)(2)10.6(b)

   2011 Amendment of U.S. Bancorp Executive Employees Deferred Compensation Plan. Filed as Exhibit 10.9(b) to Form 10-K for the year ended December 31, 2011.

(1)(2)10.7(a)

   U.S. Bancorp 2005 Executive Employees Deferred Compensation Plan. Filed as Exhibit 10.2 to Form 8-K filed on December 21, 2005.

(1)(2)10.7(b)

   First Amendment of U.S. Bancorp 2005 Executive Employees Deferred Compensation Plan effective as of January  31, 2009. Filed as Exhibit 10.2(b) to Form 8-K filed on January 7, 2009.

 

28


Exhibit

Number

  

Description

(1)(2)10.7(c)

   Second Amendment of U.S. Bancorp 2005 Executive Employees Deferred Compensation Plan effective as of January  1, 2010. Filed as Exhibit 10.13(c) to Form 10-K for the year ended December 31, 2010.

(1)(2)10.7(d)

   Third Amendment of U.S. Bancorp 2005 Executive Employees Deferred Compensation Plan. Filed as Exhibit 10.10(d) to Form 10-K for the year ended December 31, 2011.

(1)(2)10.8(a)

   U.S. Bancorp Outside Directors Deferred Compensation Plan. Filed as Exhibit 10.19 to Form 10-K for the year ended December 31, 2003.

(1)(2)10.8(b)

   2011 Amendment of U.S. Bancorp Outside Directors Deferred Compensation Plan. Filed as Exhibit 10.11(b) to Form 10-K for the year ended December 31, 2011.

(1)(2)10.9(a)

   U.S. Bancorp 2005 Outside Directors Deferred Compensation Plan. Filed as Exhibit 10.1 to Form 8-K filed on December 21, 2005.

(1)(2)10.9(b)

   First Amendment of U.S. Bancorp 2005 Outside Directors Deferred Compensation Plan effective as of January  31, 2009. Filed as Exhibit 10.3(b) to Form 8-K filed on January 7, 2009.

(1)(2)10.9(c)

   Second Amendment of U.S. Bancorp 2005 Outside Directors Deferred Compensation Plan. Filed as Exhibit 10.12(c) to Form 10-K for the year ended December 31, 2011.

(1)(2)10.10(a)

   Form of Director Restricted Stock Unit Award Agreement under U.S. Bancorp 2001 Stock Incentive Plan. Filed as Exhibit 10.5 to Form 10-Q for the quarterly period ended September 30, 2004.

(1)(2)10.10(b)

   Form of Amendment to Director Restricted Stock Unit Award Agreements under U.S. Bancorp 2001 Stock Incentive Plan dated as of December 31, 2008. Filed as Exhibit 10.5(b) to Form 8-K filed on January 7, 2009.

(1)(2)10.11

   U.S. Bancorp Amended and Restated 2007 Stock Incentive Plan. Filed as Exhibit 10.1 to Form 8-K filed on April 20, 2010.

(1)(2)10.12

   Form of 2007 Non-Qualified Stock Option Agreement for Executive Officers under U.S. Bancorp Amended and Restated 2007 Stock Incentive Plan. Filed as Exhibit 10.2 to Form 8-K filed on April 18, 2007.

(1)(2)10.13

   Form of Non-Qualified Stock Option Agreement for Executive Officers under U.S. Bancorp Amended and Restated 2007 Stock Incentive Plan to be used after December 31, 2008. Filed as Exhibit 10.8(a) to Form 8-K filed on January 7, 2009.

(1)(2)10.14

   Form of Non-Qualified Stock Option Agreement for Executive Officers (as approved January  16, 2012) under U.S. Bancorp Amended and Restated 2007 Stock Incentive Plan. Filed as Exhibit 10.2 to Form 8-K filed on January 18, 2012.

(1)(2)10.15

   Form of Non-Qualified Stock Option Agreement for Executive Officers (as approved November  14, 2012) under U.S. Bancorp Amended and Restated 2007 Stock Incentive Plan. Filed as Exhibit 10.2 to Form 8-K filed on November 19, 2012.

(1)(2)10.16

   Form of Non-Qualified Stock Option Agreement for Executive Officers (as approved December  9, 2013) under U.S. Bancorp Amended and Restated 2007 Stock Incentive Plan. Filed as Exhibit 10.2 to Form 8-K filed on December 13, 2013.

(1)(2)10.17

   Form of Non-Qualified Stock Option Agreement for Executive Officers under U.S. Bancorp Amended and Restated 2007 Stock Incentive Plan to be used after December 31, 2014. Filed as Exhibit 10.2 to Form 8-K filed on December 31, 2014.

 

29


Exhibit

Number

  

Description

(1)(2)10.18

   Form of Restricted Stock Award Agreement for Executive Officers under U.S. Bancorp Amended and Restated 2007 Stock Incentive Plan to be used after December 31, 2008. Filed as Exhibit 10.9(a) to Form 8-K filed on January 7, 2009.

(1)(2)10.19

   Form of Restricted Stock Award Agreement under U.S. Bancorp Amended and Restated 2007 Stock Incentive Plan. Filed as Exhibit 10.1 to Form 10-Q filed for the quarterly period ended September 30, 2012.

(1)(2)10.20

   Form of Restricted Stock Unit Award Agreement for Executive Officers under U.S. Bancorp Amended and Restated 2007 Stock Incentive Plan to be used after December 31, 2008. Filed as Exhibit 10.10(a) to Form 8-K filed on January 7, 2009.

(1)(2)10.21

   Form of Restricted Stock Unit Award Agreement under U.S. Bancorp Amended and Restated 2007 Stock Incentive Plan to be used after December 31, 2013. Filed as Exhibit 10.27 to Form 10-K for the year ended December 31, 2013.

(1)(2)10.22

   Form of Performance Restricted Stock Unit Award Agreement for Executive Officers under U.S. Bancorp Amended and Restated 2007 Stock Incentive Plan to be used after December 31, 2014. Filed as Exhibit 10.1 to Form 8-K filed on December 31, 2014.

(1)(2)10.23

   Form of 2007 Restricted Stock Unit Award Agreement for Non-Employee Directors under U.S. Bancorp Amended and Restated 2007 Stock Incentive Plan. Filed as Exhibit 10.1 to Form 10-Q/A for the quarterly period ended September 30, 2007.

(1)(2)10.24

   Form of Restricted Stock Unit Award Agreement for Non-Employee Directors under U.S. Bancorp Amended and Restated 2007 Stock Incentive Plan to be used after December 31, 2008. Filed as Exhibit 10.11(a) to Form 8-K filed on January 7, 2009.

(1)(2)10.25

   Form of Restricted Stock Unit Award Agreement for Non-Employee Directors under U.S. Bancorp Amended and Restated 2007 Stock Incentive Plan to be used after December 31, 2013. Filed as Exhibit 10.37 to Form 10-K for the year ended December 31, 2013.

(1)(2)10.26

   U.S. Bancorp 2015 Stock Incentive Plan. Filed as Exhibit 10.1 to Form 8-K filed on April  23, 2015.

(1)(2)10.27

   Form of Stock Option Award Agreement for Executive Officers under U.S. Bancorp 2015 Stock Incentive Plan (in use for grants made through 2016). Filed as Exhibit 10.4 to Form 8-K filed on April 23, 2015.

(1)(2)10.28

   Form of Stock Option Award Agreement for Executive Officers under U.S. Bancorp 2015 Stock Incentive Plan (used for grants made after January 1, 2017). Filed as Exhibit 10.44 to Form 10-K for the year ended December 31, 2016.

(1)(2)10.29

   Form of Restricted Stock Unit Award Agreement for Non-Employee Directors under U.S. Bancorp 2015 Stock Incentive Plan (in use for grants made through 2016). Filed as Exhibit 10.2 to Form 8-K filed on April 23, 2015.

(1)(2)10.30

   Form of Restricted Stock Unit Award Agreement for Non-Employee Directors under U.S. Bancorp 2015 Stock Incentive Plan (used for grants made after January 1, 2017). Filed as Exhibit 10.42 to Form 10-K for the year ended December 31, 2016.

(1)(2)10.31

   Form of Performance Restricted Stock Unit Award Agreement for Executive Officers under U.S. Bancorp 2015 Stock Incentive Plan (in use for grants made through 2016). Filed as Exhibit 10.3 to Form 8-K filed on April 23, 2015.

(1)(2)10.32

   Form of Performance Restricted Stock Unit Award Agreement for Executive Officers under U.S. Bancorp 2015 Stock Incentive Plan (used for grants made during 2017). Filed as Exhibit 10.43 to Form 10-K for the year ended December 31, 2016.

 

30


Exhibit

Number

  

Description

(1)(2)10.33

   Form of Performance Restricted Stock Unit Award Agreement for Executive Officers under U.S. Bancorp 2015 Stock Incentive Plan (used for grants made after January 1, 2018). Filed as Exhibit 10.39 to Form 10-K for the year ended December 31, 2017.

    (2)10.34

   Form of Performance Restricted Stock Unit Award Agreement for Executive Officers under U.S. Bancorp 2015 Stock Incentive Plan (used for grants made after January 1, 2019).

(1)(2)10.35

   Form of Restricted Stock Unit Agreement used for December 2016 grant to Gunjan Kedia under U.S. Bancorp 2015 Stock Incentive Plan. Filed as Exhibit 10.41 to Form 10-K for the year ended December 31, 2016.

(1)(2)10.36

   Form of Restricted Stock Unit Award Agreement for Executive Officers under U.S. Bancorp 2015 Stock Incentive Plan (used for grants made after January 1, 2018). Filed as Exhibit 10.40 to Form 10-K for the year ended December 31, 2017.

(1)(2)10.37

   Form of Restricted Stock Unit Award Agreement for Executive Officers under U.S. Bancorp 2015 Stock Incentive Plan (used for grants made after July 1, 2018). Filed as Exhibit 10.1 to Form 10-Q for the quarterly period ended June 30, 2018.

    (1)10.38

   Deferred Prosecution Agreement, dated February  13, 2018, between U.S. Bancorp and the United States Attorney’s Office for the Southern District of New York. Filed as Exhibit 10.1 to Form 8-K filed on February 15, 2018.

    (1)10.39

   Consent Order and Stipulation and Consent to the Issuance of an Order for a Civil Money Penalty, dated February 13,  2018, between U.S. Bank and the Office of the Comptroller of the Currency. Filed as Exhibit 10.2 to Form 8-K filed on February 15, 2018.

    (1)10.40

   Stipulation and Order of Settlement and Dismissal, dated February  15, between U.S. Bank and the Financial Crimes Enforcement Network. Filed as Exhibit 10.3 to Form 8-K filed on February 15, 2018.

    (1)10.41

   Order to Cease and Desist and Order of Assessment of a Civil Money Penalty Issued Upon Consent Pursuant to the Federal Deposit Insurance Act, Amended, dated February 14, among U.S. Bancorp, USB Americas Holding Company and the Board of Governors of the Federal Reserve System. Filed as Exhibit 10.4 to Form 8-K filed on February 15, 2018.

      13

   2018 Annual Report, pages 21 through 157.

      21

   Subsidiaries of the Registrant.

      23

   Consent of Ernst & Young LLP.

      24

   Power of Attorney.

      31.1

   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

      31.2

   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

      32

   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

    101

   Financial statements from the Annual Report on Form 10-K of the Company for the year ended December 31, 2018, formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheet, (ii) the Consolidated Statement of Income, (iii) the Consolidated Statement of Comprehensive Income, (iv) the Consolidated Statement of Shareholders’ Equity, (v) the Consolidated Statement of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

 

(1)

Exhibit has been previously filed with the SEC and is incorporated herein as an exhibit by reference to the prior filing.

(2)

Management contracts or compensatory plans or arrangements.

 

31


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on February 21, 2019, on its behalf by the undersigned, thereunto duly authorized.

 

U.S. BANCORP
By   /s/ ANDREW CECERE
  Andrew Cecere
  Chairman, President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 21, 2019, by the following persons on behalf of the registrant and in the capacities indicated.

 

Signature and Title

/s/ ANDREW CECERE
Andrew Cecere,

Chairman, President and Chief Executive Officer

(principal executive officer)

/s/ TERRANCE R. DOLAN
Terrance R. Dolan,

Vice Chairman and Chief Financial Officer

(principal financial officer)

/s/ CRAIG E. GIFFORD
Craig E. Gifford,

Executive Vice President and Controller

(principal accounting officer)

WARNER L. BAXTER*
Warner L. Baxter, Director
DOROTHY J. BRIDGES*
Dorothy J. Bridges, Director
ELIZABETH L. BUSE*

Elizabeth L. Buse, Director

MARC N. CASPER*

Mark N. Casper, Director

ARTHUR D. COLLINS, JR.*

Arthur D. Collins, Jr., Director

KIMBERLY J. HARRIS*

Kimberly J. Harris, Director

ROLAND A. HERNANDEZ*

Roland A. Hernandez, Director

DOREEN WOO HO*

Doreen Woo Ho, Director

 

32


Signature and Title

OLIVIA F. KIRTLEY*

Olivia F. Kirtley, Director

KAREN S. LYNCH*

Karen S. Lynch, Director

RICHARD P. MCKENNEY*

Richard P. McKenney, Director

YUSUF I. MEHDI*
Yusuf I. Mehdi, Director
DAVID B. O’MALEY*
David B. O’Maley, Director
O’DELL M. OWENS, M.D., M.P.H.*
O’Dell M. Owens, M.D., M.P.H., Director
CRAIG D. SCHNUCK*
Craig D. Schnuck, Director
SCOTT W. WINE*
Scott W. Wine, Director

 

*

Andrew Cecere, by signing his name hereto, does hereby sign this document on behalf of each of the above named directors of the registrant pursuant to powers of attorney duly executed by such persons.

Dated: February 21, 2019

 

By:  

/s/ ANDREW CECERE

  Andrew Cecere
  Attorney-In-Fact
  Chairman, President and Chief Executive Officer

 

33

EX-10.34

Exhibit 10.34

U.S. BANCORP

PERFORMANCE RESTRICTED STOCK UNIT AWARD AGREEMENT

THIS AGREEMENT is made as of <Grant Date> (the “Grant Date”), by and between U.S. Bancorp (the “Company”) and <Participant Name> (the “Participant”), together with the Completed Exhibit A which is incorporated herein by reference (collectively, the “Agreement”), sets forth the terms and conditions of a performance restricted stock unit award representing the right to receive <Number of Target Awards Granted> shares of common stock of the Company, par value $0.01 per share (the “Common Stock”). The grant of this performance restricted stock unit award is made pursuant to the Company’s 2015 Stock Incentive Plan, which was approved by shareholders on April 21, 2015 (the “Plan”) and is subject to its terms. Capitalized terms that are not defined in the Agreement shall have the meaning ascribed to such terms in the Plan.

The Company and Participant agree as follows:

1. Award

Subject to the terms and conditions of the Plan and the Agreement, the Company grants to Participant a performance restricted stock unit award (the “Units”) entitling Participant to <Number of Target Awards Granted> performance restricted stock units (such number of units, the “Target Award Number”). The Target Award Number shall be adjusted upward or downward as provided in the Completed Exhibit A. The number of Units that Participant will receive under the Agreement, after giving effect to such adjustment, is referred to herein as the “Final Award Number.” Each Unit represents the right to receive one share of Common Stock, subject to the vesting requirements and distribution provisions of the Agreement and the terms of the Plan. The shares of Common Stock distributable to Participant with respect to the Units granted hereunder are referred to as the “Shares.” The Completed Exhibit A sets forth (a) the performance period over which the Final Award Number will be determined (the “Performance Period”), and (b) the date on which the Final Award Number will be determined (the “Determination Date”).

2. Vesting; Forfeiture

(a) Time-Based Vesting Conditions. Subject to the terms and conditions of the Agreement, if the Participant remains continuously employed by the Company or an Affiliate of the Company through the Vesting Date as set forth in the vesting schedule (the “Vesting Schedule”) detailed at the end of this Agreement in the Appendix: Vesting Schedule (the “Scheduled Vesting Date”), the number of Units equal to the Final Award Number shall become vested on the Scheduled Vesting Date and will be settled and Shares delivered in accordance with Section 3, provided that Participant has at all times since the Grant Date complied with the terms of any confidentiality and non-solicitation agreement between the Company or an Affiliate and the Participant. Except as otherwise provided in the Agreement, if Participant ceases to be an employee of the Company and its Affiliates prior to the Scheduled Vesting Date, all Units that have not become vested previously shall be immediately and irrevocably forfeited.

(b) Continued Vesting Upon Separation From Service Due to Retirement or Disability. Notwithstanding Section 2(a), if Participant has a Separation From Service (as defined in Section 10) with the Company or any Affiliate by reason of Retirement (as defined in Section 10) or Disability (as defined in Section 10), prior to the Scheduled Vesting Date, and provided such Separation From Service is not a Qualifying Termination (as defined in Section 10), the Units shall not be forfeited, but rather, the Final Award Number will be determined in accordance with Section 1 and the Units shall continue to vest on the Scheduled Vesting Date subject to the terms of the Agreement, including Section 2(f) hereof, and provided that Participant has at all times since the Grant Date complied with the terms of any confidentiality and non-solicitation agreement between the Company or an Affiliate and the Participant.

(c) Acceleration of Vesting Upon Death. If Participant ceases to be an employee by reason of death, or if Participant dies after a Separation From Service by reason of Retirement or Disability, prior to the Scheduled Vesting Date, then the Units will become vested in accordance with this Section 2(c). If such death occurs prior to the last day of the Performance Period, a number of Units equal to the Target Award Number will vest upon Participant’s death. If the death occurs on or after the last day of the Performance Period, then a number of Units equal to the Final Award Number will vest and be distributed to the Participant in accordance with Section 3(d). Notwithstanding the foregoing, such vesting is subject to the terms of the Agreement, including Section 2(f) hereof, and provided the Participant has at all times since the Grant Date complied with the terms of any confidentiality and non-solicitation agreement between the Company or an Affiliate and the Participant.


(d) Acceleration of Vesting Following a Qualifying Termination. Notwithstanding the vesting provisions contained in Sections 2(a) and 2(b) above, but subject to the other terms and conditions of the Agreement, if Participant experiences a Qualifying Termination prior to the Scheduled Vesting Date, then the Units will become vested in accordance with this Section 2(d). If the Qualifying Termination occurs prior to the last day of the Performance Period, a number of Units equal to the Target Award Number will vest upon Participant’s Qualifying Termination. If the Qualifying Termination occurs on or after the last date of the Performance Period, then a number of Units equal to the Final Award Number will vest and be distributed to the Participant in accordance with Section 3(b). Notwithstanding the foregoing, such accelerated vesting is subject to the terms of the Agreement, including Section 2(f) hereof, and provided that the Participant has at all times since the Grant Date complied with the terms of any confidentiality and non-solicitation agreement between the Company or an Affiliate and the Participant. Notwithstanding the foregoing, if in connection with a Change in Control the Units are adjusted, or units in the acquiring or surviving entity are substituted for the Units, or the Plan is terminated, in each case as permitted under the Plan and in accordance with Section 409A, then the terms of such adjustment, substitution or plan termination will govern the treatment of the Units.

(e) Forfeiture on Termination of Employment for Cause and on Breach of Confidentiality Agreement. If Participant violates the terms of any confidentiality and non-solicitation agreement between the Company or an Affiliate and the Participant, all Units that have not been settled (and Shares delivered) previously shall be immediately and irrevocably forfeited. If Participant’s employment with the Company is terminated for Cause, all Units that have not been settled (and Shares delivered) previously shall be immediately and irrevocably forfeited. Upon forfeiture, Participant shall have no rights relating to the forfeited Units (including, without limitation, any rights to receive a distribution of Shares with respect to the Units and the right to receive Dividend Equivalents).

(f) Special Risk-Related Cancellation Provisions. Notwithstanding any other provision of the Agreement, if at any time subsequent to the Grant Date the Committee determines, in its sole discretion, that Participant has subjected the Company to significant financial, reputational, or other risk by (i) failing to comply with Company policies and procedures, including the Code of Ethics and Business Conduct, (ii) violating any law or regulation, (iii) engaging in negligence or willful misconduct, or (iv) engaging in activity resulting in a significant or material control deficiency under the Sarbanes-Oxley Act of 2002, then all or part of the Units granted under the Agreement that have not been settled (and Shares delivered) at the time of such determination may be cancelled. If any Units are cancelled pursuant to this provision, Participant will have no rights with respect to the Units (including, without limitation, any rights to receive a distribution of Shares with respect to the Units and the right to receive Dividend Equivalents).

3. Distribution of Shares with Respect to Units

Subject to the terms of the Agreement, including the restrictions in this Section 3, following the vesting of Units and following the payment of any applicable withholding taxes pursuant to Section 7 hereof, the Company shall cause to be issued and delivered to Participant (including through book entry) Shares registered in the name of Participant or in the name of Participant’s legal representatives, beneficiaries or heirs, as the case may be, as follows:

(a) General Rule. As soon as administratively feasible following the Scheduled Vesting Date (but in no event later than December 31st of the year in which such Scheduled Vesting Date occurs), all Shares issuable pursuant to Units that become vested in accordance with Sections 2(a) through 2(c) hereof shall be distributed to Participant, or in the event of Participant’s death, to the representatives of Participant or to any Person to whom the Units have been transferred by will or the applicable laws of descent and distribution.

(b) Qualifying Termination Distributions. As soon as administratively feasible following a Separation From Service in connection with a Qualifying Termination (and in any case no later than 60 days following such Separation From Service except as otherwise provided in this Section 3(b)), all Shares issuable pursuant to Units that become vested in accordance with Sections 2(d) hereof shall be distributed to Participant. Notwithstanding the foregoing, any Shares issuable to a Specified Employee (as defined in Section 10) as a result of a Separation From Service in connection with a Qualifying Termination will not be delivered to such Specified Employee until the date that is six months and one day after the date of the Separation From Service. If in connection with a Change in Control the Units are adjusted, or units in the acquiring or surviving entity are substituted for the Units, or the Plan is terminated, in each case as permitted under the Plan and in accordance with Section 409A, then the terms of such adjustment, substitution or plan termination will govern the treatment of the Units, including the time and manner of settlement of the Units.

 

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(c) Distributions Following Retirement or Disability. If a Participant has a Separation From Service due to Retirement or Disability (so long as such Separation From Service is not in connection with a Qualifying Termination), the distribution of Shares with respect to Units will not be accelerated, and Shares will be distributed as soon as administratively feasible following the applicable Scheduled Vesting Dates (but in no event later than December 31st of the year in which such Scheduled Vesting Date occurs).

(d) Distributions Following Death. As soon as administratively feasible following the death of a Participant (but in no event later than 90 days following such death) all Shares issuable pursuant to Units that become vested pursuant to Section 2(c) shall be distributed to the Participant.

In the event that the number of Shares distributable pursuant to this Section 3 is a number that is not a whole number, then the number of Shares distributed shall be rounded down to the nearest whole number.

4. Rights as Shareholder; Dividend Equivalents

Prior to the distribution of Shares with respect to Units pursuant to Section 3 above, Participant shall not have ownership or rights of ownership of any Shares underlying the Units; provided, however, that Participant shall be entitled to accrue cash Dividend Equivalents on outstanding Units (i.e. Units that have not been forfeited, cancelled or settled), whether vested or unvested, if cash dividends on the Common Stock are declared by the Board on or after the Grant Date. Prior to the Determination Date, Participant will accrue cash Dividend Equivalents on Units equal to the Target Award Number. Specifically, when cash dividends are paid with respect to a share of outstanding Common Stock, an amount of cash per Unit equal to the cash dividend paid with respect to a share of outstanding Common Stock will be accrued with respect to each Unit in Participant’s Target Award Number. On the Determination Date, the dollar amount of Participant’s cumulative accrued Dividend Equivalents as of the Determination Date will be multiplied by Participant’s Target Award Number Percentage to determine the amount of cash Dividend Equivalents that will be paid to Participant. Dividend Equivalents will be paid in cash as soon as administratively feasible following the date on which the underlying Units giving rise to the Dividend Equivalents are settled and paid out, but in no event later than December 31st of the year in which the underlying Units are distributed in accordance with Section 3. The Dividend Equivalents shall be treated as earnings on, and as a separate amount from, the Units for purposes of Section 409A of the Code.

5. Restriction on Transfer

Except for transfers by will or the applicable laws of descent and distribution, the Units cannot be sold, assigned, transferred, gifted, pledged, or in any manner encumbered, alienated, attached or disposed of, and any purported sale, assignment, transfer, gift, pledge, alienation, attachment or encumbrance shall be void and unenforceable against the Company. No such attempt to transfer the Units, whether voluntary or involuntary, by operation of law or otherwise (except by will or laws of descent and distribution), shall vest the purported transferee with any interest or right in or with respect to the Units or the Shares issuable with respect to the Units.

6. Securities Law Compliance

The delivery of all or any of the Shares in accordance with this Award shall be effective only at such time that the issuance of such Shares will not violate any state or federal securities or other laws. The Company is under no obligation to effect any registration of the Shares under the Securities Act of 1933 or to effect any state registration or qualification of the Shares. The Company may, in its sole discretion, delay the delivery of the Shares or place restrictive legends on such Shares in order to ensure that the issuance of any Shares will be in compliance with federal or state securities laws and the rules of the New York Stock Exchange or any other exchange upon which the Common Stock is traded.

 

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7. Income Tax Withholding

In order to comply with all applicable federal, state, local and foreign income and payroll tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable withholding, income or other taxes, which are the sole and absolute responsibility of Participant, are withheld or collected from Participant. Without limiting the foregoing, the Company may, but is not obligated to, permit or require the satisfaction of tax withholding obligations through net Share settlement at the time of delivery of Shares (i.e. the Company withholds a portion of the Shares otherwise to be delivered with a Fair Market Value, as such term is defined in the Plan, equal to the amount of such taxes, but only to the extent necessary to satisfy certain statutory withholding requirements to avoid adverse accounting treatment under ASC 718) or through an open market sale of Shares otherwise to be delivered, in each case pursuant to such rules and procedures as may be established by the Company.

8. Miscellaneous

(a) The Agreement is issued pursuant to the Plan and is subject to its terms. The Plan is available for inspection during business hours at the principal office of the Company. In addition, the Plan may be viewed on the Fidelity Website at www.netbenefits.com (or the website of any other stock plan administrator selected by the Company in the future).

(b) The Agreement shall not confer on Participant any right with respect to continuance of employment with the Company or any Affiliate, nor will it interfere in any way with the right of the Company or any Affiliate to terminate such employment at any time.

(c) Participant acknowledges that the grant, vesting or any payment with respect to this Award, and the sale or other taxable disposition of the Shares issued with respect to the Units hereunder may have tax consequences pursuant to the Code or under local, state or international tax laws. It is intended that the Award shall comply with Section 409A of the Code, and the provisions of the Agreement and the Plan shall be construed and administered accordingly. Any amendment or modification of the Award (to the extent permitted under the terms of the Plan), will be undertaken in a manner intended to comply with Section 409A, to the extent applicable. Notwithstanding the foregoing, there is no guaranty or assurance as to the tax treatment of the Award. Participant acknowledges that Participant is relying solely and exclusively on Participant’s own professional tax and investment advisors with respect to any and all such matters (and is not relying, in any manner, on the Company or any of its employees or representatives). Participant understands and agrees that any and all tax consequences resulting from the Award and its grant, vesting, amendment, or any payment with respect thereto, and the sale or other taxable disposition of the Shares acquired pursuant to the Award, is solely and exclusively the responsibility of Participant without any expectation or understanding that the Company or any of its employees or representatives will pay or reimburse Participant for such taxes or other items.

9. Venue

Any claim or action brought with respect to this Award shall be brought in a federal or state court located in Minneapolis, Minnesota.

10. Definitions

For purposes of the Agreement, the following terms shall have the definitions as set forth below:

(a) “Change in Control” shall have the meaning ascribed to it in the Plan, but only if the event or circumstances constituting such change in control also constitute a change in ownership or effective control of the Company, or a change in the ownership of a substantial portion of the assets of the Company, within the meaning of Section 409A of the Code.

(b) “Disability” means leaving active employment and qualifying for and receiving disability benefits under the Company’s long-term disability programs as in effect from time to time.

(c) “Qualifying Termination” means:

(A) Participant’s Separation From Service as a result of the Company’s termination of Participant’s employment for any reason other than Cause within 12 months following a Change in Control, provided that such a termination will not be a Qualifying Termination if: i) the Company has notified the Participant in writing more than 30 days prior to the Announcement Date that Participant’s employment is not expected to

 

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continue for more than 12 months following the date of such notification, and Participant’s employment is in fact terminated within such 12 month period; or ii) Participant has announced in writing, prior to the date the Company provides a Notice of Termination to Participant, that Participant intends to terminate his or her employment; or

(B) Participant’s Separation From Service as a result of Disability within 12 months following a Change in Control; or

(C) Participant’s Separation From Service (other than as a result of Participant’s termination of employment by the Company for Cause) within 12 months following a Change in Control, if, at the time of such Separation From Service, Participant is age 55 or older and has had 10 or more years of employment with the Company or its Affiliates following such Participant’s most recent date of hire by the Company or its Affiliates.

For purposes of this definition, the term Company shall be deemed to include any Person that has assumed this Award (or provided a substitute award to Participant) in connection with a Change in Control.

(d) “Retirement” means a Separation From Service (other than for Cause) by a Participant who is age 55 or older and has had 10 or more years of employment with the Company or its Affiliates following such Participant’s most recent date of hire by the Company or its Affiliates.

(e) “Separation From Service” means a Participant’s separation from service with the Company and its affiliates, as determined under Treasury Regulation section 1.409A-1(h)(1), provided, that the term “affiliate” shall mean a business entity which is affiliated in ownership with the Company and that is treated as a single employer under the rules of section 414(b) and (c) of the Code (applying the eighty percent common ownership standard).

(f) “Specified Employee” shall mean any Participant who is a specified employee for purposes of section 1.409A-1(i) of the U.S. Treasury Regulations, determined in accordance with the rules set forth in the separate document entitled “U.S. Bank Specified Employee Determination.”

Appendix

Vesting Schedule

<Vesting Schedule>

 

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EXHIBIT A TO

PERFORMANCE RESTRICTED STOCK UNIT AWARD AGREEMENT

This Exhibit A to the Performance Restricted Stock Unit Award Agreement sets forth the manner in which the Final Award Number will be determined for each Participant.

Definitions

Capitalized terms used but not defined herein shall have the same meanings assigned to them in the Plan, and the Performance Restricted Stock Unit Award Agreement. The following terms used in the text of this Exhibit A and in the ROE Performance Matrix shall have the meanings set forth below:

Company ROE Maximum” means ____%.

Company ROE Minimum” means ____%.

Company ROE Result” means the ROE achieved by the Company during the Performance Period.

Company ROE Target” means ____%.

Determination Date” means the date on which the Final Award Number is determined, which date shall not be later than 45 days after the last day of the Performance Period.

Final Award Number” means the “Final Award Number” determined in accordance with this Exhibit A.

Peer Group Companies” means the following companies: ____________________________________.

Peer Group ROE Ranking Maximum” means the ____ percentile.

Peer Group ROE Ranking Minimum” means the ____ percentile.

Peer Group ROE Ranking Target” means the ____ percentile.

Peer Group ROE” means the ROE achieved by the Peer Group Companies during the Performance Period.

Peer Group ROE Ranking” means the percentile rank of the Company ROE Result relative to Peer Group ROE.

Performance Period” means the period commencing on January 1, 20__ and ending December 31, 20__.

ROE” means (a) net income applicable to the common shareholders of a company during the Performance Period, divided by (b) that company’s average common shareholders’ equity during the Performance Period.

ROE Performance Matrix” means the ROE Performance Matrix set forth in this Exhibit A.

Target Award Number” means the “Target Award Number” set forth in a Participant’s Performance Restricted Stock Unit Award Agreement.

Target Award Number Percentage” means the “Target Award Number Percentage” determined in accordance with the ROE Performance Matrix and the related rules set forth in this Exhibit A.

 

-6-


Determination of Final Award Number

Each Participant has been granted a number of Units equal to the Target Award Number. The Target Award Number will be adjusted upward or downward depending on (a) whether the Company ROE Result is greater or less than the Company ROE Target, and (b) the Peer Group ROE Ranking. The Final Award Number for each Participant will be determined by multiplying (i) the Target Award Number Percentage by (ii) the Target Award Number. The Target Award Number Percentage will be determined in accordance with the following ROE Performance Matrix and the related rules below:

ROE PERFORMANCE MATRIX

 

Company
ROE

Result

(Vertical
Axis)

        Target Award Number Percentage  
   Company ROE Maximum (__%) or more      75     125     150
   Company ROE Target (___%)      50     100     125
  

Company ROE Minimum (___%) or less

(but greater than zero)

     25     50     75
   Company ROE is 0% or less      0     0     0
          Peer Group
ROE Ranking
Minimum
or below
    Peer Group
ROE
Ranking
Target
    Peer Group
ROE Ranking
Maximum
or above
 
       

Peer Group ROE Ranking

(Horizontal Axis)

 

 

In determining the Target Award Number Percentage in accordance with the ROE Performance Matrix, the following rules will apply:

 

   

If the Company ROE Result is greater than the Company ROE Minimum and less than the Company ROE Target, the Target Award Number Percentage on the vertical axis will be determined by interpolation of the Company ROE Result between the Company ROE Minimum and the Company ROE Target.

 

   

If the Company ROE Result is greater than the Company ROE Target and less than the Company ROE Maximum, the Target Award Number Percentage on the vertical axis will be determined by interpolation of the Company ROE Result between the Company ROE Target and the Company ROE Maximum.

 

   

If the Peer Group ROE Ranking is greater than the Peer Group ROE Ranking Minimum and less than the Peer Group ROE Ranking Target, the Target Award Number Percentage on the horizontal axis will be determined by interpolation of the Peer Group ROE Ranking between the Peer Group ROE Minimum and the Peer Group ROE Target.

 

   

If the Peer Group ROE Ranking is greater than the Peer ROE Group Ranking Target and less than the Peer Group ROE Ranking Maximum, the Target Award Number Percentage on the horizontal axis will be determined by interpolation of the Peer Group ROE Ranking between the Peer Group ROE Target and the Peer Group ROE Maximum.

 

-7-


   

After the Target Award Number Percentage on each of the vertical axis and horizontal axis has been determined, the actual Target Award Number Percentage will be determined by interpolation of the data points (i.e., the percentages) set forth in the ROE Performance Matrix.

 

   

In no event shall the Target Award Number Percentage be greater than 150.0%.

The Final Award Number for each Participant shall be determined by the Committee on the Determination Date.

Committee Determinations

The Committee shall make all determinations necessary to arrive at the Final Award Number for each Participant. The Committee shall determine the Company ROE Result by reference to the Company’s audited financial statements as of and for the year ending on the last day of the Performance Period. The Committee shall determine the Peer Group ROE Ranking by reference to publicly available financial information regarding the Peer Companies. Any determination by the Committee pursuant to this Exhibit A will be binding upon each Participant and the Company.

No Fractional Units

In the event the Final Award Number is a number of Units that is not a whole number, then the Final Award Number shall be rounded down to the nearest whole number.

 

-8-

EX-13
Table of Contents

EXHIBIT 13

F I N A N C I A L   TA B L E   O F   C O N T E N T S

The following pages discuss in detail the financial results we achieved in

2018 — results that reflect how we are creating the future now.

 

The following information appears in accordance with the Private Securities Litigation Reform Act of 1995:

This report contains forward-looking statements about U.S. Bancorp. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements and are based on the information available to, and assumptions and estimates made by, management as of the date hereof. These forward-looking statements cover, among other things, 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. Deterioration in general business and economic conditions or turbulence in domestic or global financial markets could adversely affect U.S. Bancorp’s revenues and the values of its assets and liabilities, reduce the availability of funding to certain financial institutions, lead to a tightening of credit, and increase stock price volatility. 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 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 its investment securities; legal and regulatory developments; litigation; increased competition from both banks and non-banks; changes in the level of tariffs and other trade policies of the United States and its global trading partners; changes in customer behavior and preferences; breaches in data security; failures to safeguard personal information; 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 38–59 and the “Risk Factors” section on pages 144–154 of this report. In addition, factors other than these risks also could adversely affect U.S. Bancorp’s results, and the reader should not consider these risks to be a complete set of all potential risks or uncertainties. Forward- looking statements speak only as of the date hereof, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.

 

22     Management’s Discussion and Analysis
  22   Overview
  24   Statement of Income Analysis
  29   Balance Sheet Analysis
  38   Corporate Risk Profile
    38   Overview
    39   Credit Risk Management
    51   Residual Value Risk Management
    51   Operational Risk Management
    52   Compliance Risk Management
    52   Interest Rate Risk Management
    54   Market Risk Management
    55   Liquidity Risk Management
    58   Capital Management
  60   Fourth Quarter Summary
  61   Line of Business Financial Review
  66   Non-GAAP Financial Measures
  68   Accounting Changes
  68   Critical Accounting Policies
  70   Controls and Procedures
71    

Reports of Management and

Independent Accountants

74     Consolidated Financial Statements and Notes
138     Five-Year Consolidated Financial Statements
140     Quarterly Consolidated Financial Data
141     Supplemental Financial Data
144     Company Information
155     Executive Officers
157     Directors
 

 

 

 

Table of Contents        21  


Table of Contents

Management’s Discussion and Analysis

Overview

 

U.S. Bancorp and its subsidiaries (the “Company”) delivered record financial performance in 2018. In a year where the economy expanded at a moderate rate and the labor market continued to strengthen, the Company had record net revenue, net income and diluted earnings per share, while continuing to invest in technology and innovation to drive growth and improve efficiencies in the future.

The Company earned $7.1 billion in 2018, an increase of $878 million (14.1 percent) over 2017, principally due to total net revenue growth, lower noninterest expense and the impact of the Tax Cuts and Job Act (“tax reform”) enacted by Congress in late 2017. Net interest income increased as a result of the impact of rising interest rates on assets, earning assets growth, and higher yields on the reinvestment of securities, partially offset by higher rates on deposits and changes in funding mix. Noninterest income increased due to strong growth in payment services revenue and trust and investment management fees. The Company’s continued focus on controlling expenses allowed it to achieve an industry-leading efficiency ratio of 55.1 percent in 2018. In addition, the Company’s return on average assets and return on average common equity were 1.55 percent and 15.4 percent, respectively, the highest among its peers.

The Company remains deeply committed to value creation for shareholders, and during the third quarter of 2018, increased its dividend rate per common share by 23 percent. Overall, the Company returned 74 percent of its earnings to common shareholders through dividends and common share repurchases during 2018. This result was accomplished by the Company generating steady growth in commercial and consumer lending, by building momentum in its core business, particularly within Wealth Management and Investment Services and Payment Services, and by maintaining a 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 were 9.1 percent and 11.8 percent, respectively, at December 31, 2018. Refer to Table 23 for a summary of the statutory capital ratios in effect for the Company at December 31, 2018 and 2017. 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 2018, average loans increased $4.2 billion (1.5 percent) over 2017, reflecting growth from new and existing customers. Loan growth included increases in commercial loans, residential mortgages, credit card loans and other retail loans. These increases were partially offset by a decrease in commercial real estate loans, due to customers paying down balances over the past year, as well as a decrease in loans covered by loss sharing agreements with the Federal Deposit Insurance Corporation (“FDIC”) (“covered” loans). During the fourth quarter of 2018, the majority of the Company’s covered loans were sold and the loss share coverage expired. As of December 31, 2018, any remaining loan balances were reclassified to be included in their respective portfolio category.

The Company’s provision for credit losses decreased $11 million (0.8 percent) in 2018, compared with 2017, reflecting stable credit quality in the Company’s loan portfolios. The provision for credit losses was $25 million higher than net charge-offs in 2018, compared with $60 million higher than net charge-offs in 2017. The increase in the allowance for credit losses during 2018 reflected continued loan portfolio growth.

The Company’s strong 2018 financial results and momentum in its lending and fee businesses position it well for 2019. Loan growth accelerated in late 2018 even though the Company maintained its disciplined underwriting standards. The Company had strong 2018 sales activity in its fee businesses and continued to expand customer relationships across all of its businesses. Technology and innovation investment, such as digital, digital analytics and real-time payment capabilities remain a priority for the Company, however, the Company plans to remain vigilant in its expense discipline, driving long-term growth and creating value for shareholders. In addition, the Office of the Comptroller of the Currency terminated its 2015 Consent Order related to the Company’s Anti-Money Laundering and Bank Secrecy Act program and controls in late 2018. Since 2014, the Company has made significant investments to risk management and compliance to enhance and strengthen this program. The exit from the consent order will give the Company more flexibility to optimize its existing branch network and to selectively expand into new markets with a digitally-led and branch-lite strategy.

 

 

       

 

22    

 

 
   


Table of Contents

  TABLE 1

 

  Selected Financial Data

 

Year Ended December 31

(Dollars and Shares in Millions, Except Per Share Data)

  2018      2017      2016      2015      2014  

Condensed Income Statement

             

Net interest income

  $ 12,919      $ 12,380      $ 11,666      $ 11,151      $ 10,949  

Taxable-equivalent adjustment(a)

    116        205        203        213        222  
 

 

 

 

Net interest income (taxable-equivalent basis)(b)

    13,035        12,585        11,869        11,364        11,171  

Noninterest income

    9,572        9,260        9,268        8,818        8,872  

Securities gains (losses), net

    30        57        22               3  
 

 

 

 

Total net revenue

    22,637        21,902        21,159        20,182        20,046  

Noninterest expense

    12,464        12,790        11,527        10,807        10,600  

Provision for credit losses

    1,379        1,390        1,324        1,132        1,229  
 

 

 

 

Income before taxes

    8,794        7,722        8,308        8,243        8,217  

Income taxes and taxable-equivalent adjustment

    1,670        1,469        2,364        2,310        2,309  
 

 

 

 

Net income

    7,124        6,253        5,944        5,933        5,908  

Net (income) loss attributable to noncontrolling interests

    (28      (35      (56      (54      (57
 

 

 

 

Net income attributable to U.S. Bancorp

  $ 7,096      $ 6,218      $ 5,888      $ 5,879      $ 5,851  
 

 

 

 

Net income applicable to U.S. Bancorp common shareholders

  $ 6,784      $ 5,913      $ 5,589      $ 5,608      $ 5,583  
 

 

 

 

Per Common Share

             

Earnings per share

  $ 4.15      $ 3.53      $ 3.25      $ 3.18      $ 3.10  

Diluted earnings per share

    4.14        3.51        3.24        3.16        3.08  

Dividends declared per share

    1.34        1.16        1.07        1.01        .97  

Book value per share(c)

    28.01        26.34        24.63        23.28        21.68  

Market value per share

    45.70        53.58        51.37        42.67        44.95  

Average common shares outstanding

    1,634        1,677        1,718        1,764        1,803  

Average diluted common shares outstanding

    1,638        1,683        1,724        1,772        1,813  

Financial Ratios

             

Return on average assets

    1.55      1.39      1.36      1.44      1.54

Return on average common equity

    15.4        13.8        13.4        14.0        14.7  

Net interest margin (taxable-equivalent basis)(a)

    3.14        3.10        3.04        3.09        3.28  

Efficiency ratio(b)

    55.1        58.5        54.5        53.5        52.9  

Net charge-offs as a percent of average loans outstanding

    .48        .48        .47        .47        .55  

Average Balances

             

Loans

  $ 280,701      $ 276,537      $ 267,811      $ 250,459      $ 241,692  

Loans held for sale

    3,230        3,574        4,181        5,784        3,148  

Investment securities(d)

    113,940        111,820        107,922        103,161        90,327  

Earning assets

    415,067        406,421        389,877        367,445        340,994  

Assets

    457,014        448,582        433,313        408,865        380,004  

Noninterest-bearing deposits

    78,196        81,933        81,176        79,203        73,455  

Deposits

    333,462        333,514        312,810        287,151        266,640  

Short-term borrowings

    21,790        15,022        19,906        27,960        30,252  

Long-term debt

    37,450        35,601        36,220        33,566        26,535  

Total U.S. Bancorp shareholders’ equity

    49,763        48,466        47,339        44,813        42,837  

Period End Balances

             

Loans

  $ 286,810      $ 280,432      $ 273,207      $ 260,849      $ 247,851  

Investment securities

    112,165        112,499        109,275        105,587        101,043  

Assets

    467,374        462,040        445,964        421,853        402,529  

Deposits

    345,475        347,215        334,590        300,400        282,733  

Long-term debt

    41,340        32,259        33,323        32,078        32,260  

Total U.S. Bancorp shareholders’ equity

    51,029        49,040        47,298        46,131        43,479  

Asset Quality

             

Nonperforming assets

  $ 989      $ 1,200      $ 1,603      $ 1,523      $ 1,808  

Allowance for credit losses

    4,441        4,417        4,357        4,306        4,375  

Allowance for credit losses as a percentage of period-end loans

    1.55      1.58      1.59      1.65      1.77

Capital Ratios

             

Basel III standardized approach:

             

Common equity tier 1 capital

    9.1      9.3      9.4      9.6      9.7

Tier 1 capital

    10.7        10.8        11.0        11.3        11.3  

Total risk-based capital

    12.6        12.9        13.2        13.3        13.6  

Leverage

    9.0        8.9        9.0        9.5        9.3  

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

    11.8        12.0        12.2        12.5        12.4  

Tangible common equity to tangible assets(b)

    7.8        7.6        7.5        7.6        7.5  

Tangible common equity to risk-weighted assets(b)

    9.4        9.4        9.2        9.2        9.3  

Common equity tier 1 capital to risk-weighted assets estimated for the Basel III fully implemented standardized approach(b)

       9.1        9.1        9.1        9.0  

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

             11.6        11.7        11.9        11.8  
(a)

Based on federal income tax rates of 21 percent for 2018 and 35 percent for 2017, 2016, 2015 and 2014, 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)

Calculated as U.S. Bancorp common shareholders’ equity divided by common shares outstanding at end of the period.

(d)

Excludes unrealized gains and losses on available-for-sale investment securities and any premiums or discounts recorded related to the transfer of investment securities at fair value from available-for-sale to held-to-maturity.

 

 

 

23    

 

   
 


Table of Contents

Earnings Summary The Company reported net income attributable to U.S. Bancorp of $7.1 billion in 2018, or $4.14 per diluted common share, compared with $6.2 billion, or $3.51 per diluted common share, in 2017. Return on average assets and return on average common equity were 1.55 percent and 15.4 percent, respectively, in 2018, compared with 1.39 percent and 13.8 percent, respectively, in 2017. The results for 2018 included the impact of a gain from the sale of the Company’s ATM servicing business and the sale of a majority of its FDIC covered loans, charges related to severance, certain asset impairments, an accrual for legal matters, and the favorable impact to deferred tax assets and liabilities related to changes in estimates from tax reform. Combined, these items increased 2018 diluted earnings per common share by $0.03.

Total net revenue for 2018 was $735 million (3.4 percent) higher than 2017, reflecting a 4.4 percent increase in net interest income (3.6 percent on a taxable-equivalent basis), and a 3.1 percent increase in noninterest income. The increase in net interest income from the prior year was mainly a result of the impact of rising interest rates on assets, earning assets growth, and higher yields on the reinvestment of securities, partially offset by higher rates on deposits and changes in funding mix. The increase in noninterest income was primarily driven by strong growth in payment services revenue and trust and investment management fees, along with an increase in other noninterest income which reflected a gain on the sale of the Company’s ATM servicing business offset by charges for asset impairments related to the sale of FDIC covered loans and certain other assets. These increases in noninterest income were partially offset by decreases in mortgage banking revenue and commercial products revenue.

Noninterest expense in 2018 was $326 million (2.5 percent) lower than 2017, reflecting a decrease in marketing and business development expense due to lower charitable contributions to the Company’s foundation and a decrease in other noninterest expense driven by lower costs related to tax-advantaged projects, lower FDIC insurance expense, and a reduction in mortgage servicing costs, as well as the impact of the settlement of a regulatory matter recorded in 2017. Partially offsetting these decreases were increased compensation expense supporting business growth and compliance programs, merit increases, and variable compensation related to revenue growth, higher employee benefits expense, and an increase in technology and communications expense in support of business growth.

Statement of Income Analysis

Net Interest Income Net interest income, on a taxable-equivalent basis, was $13.0 billion in 2018, compared with $12.6 billion in 2017 and $11.9 billion in 2016. The $450 million (3.6 percent) increase in net interest income, on a taxable-equivalent basis, in 2018 compared with 2017, was principally driven by the impact of rising interest rates, earning assets growth, and higher yields on securities, partially offset by changes in loan mix, higher rates on deposits, and changes in funding mix, as well as the impact of tax reform which reduced the taxable-equivalent adjustment benefit related to tax exempt assets. Average earning assets were $8.6 billion (2.1 percent) higher in 2018, compared with 2017, driven by increases in loans, other earning assets and investment securities. The net interest margin, on a taxable-equivalent basis, in 2018 was 3.14 percent, compared with 3.10 percent in 2017 and 3.04 percent in 2016. The increase in the net interest margin in 2018, compared with 2017, was principally due to higher interest rates, partially offset by changes in deposit and funding mix, changes in loan mix, higher cash balances and the impact of tax reform. 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 $280.7 billion in 2018, compared with $276.5 billion in 2017. The $4.2 billion (1.5 percent) increase was driven by growth in commercial loans, residential mortgages, credit card loans and other retail loans, partially offset by decreases in commercial real estate and covered loans. The $3.0 billion (3.1 percent) increase in average commercial loans was driven by higher demand for loans from new and existing customers. Average residential mortgages increased $3.1 billion (5.3 percent) reflecting origination activity. Average credit card balances increased $766 million (3.7 percent) due to customer account growth and higher revolving balances. The $720 million (1.3 percent) increase in average other retail loans was primarily due to higher auto, installment and retail leasing loans, partially offset by the impact of the sale of the Company’s federally guaranteed student loan portfolio during 2018 and a decrease in home equity loans. Average commercial real estate loans decreased $2.1 billion (5.0 percent) in 2018, compared with 2017, due to customers paying down balances over the past year. Average covered loans decreased $1.3 billion (37.1 percent), the result of the sale in late 2018 of the majority of these balances.

 

 

       

 

24    

 

 
   


Table of Contents

  TABLE 2

 

  Analysis of Net Interest Income(a)

 

Year Ended December 31 (Dollars in Millions)   2018      2017      2016     

2018

v 2017

    

2017

v 2016

 

Components of Net Interest Income

               

Income on earning assets (taxable-equivalent basis)

  $ 16,298      $ 14,559      $ 13,342      $ 1,739      $ 1,217  

Expense on interest-bearing liabilities (taxable-equivalent basis)

    3,263        1,974        1,473        1,289        501  

Net interest income (taxable-equivalent basis)(b)

  $ 13,035      $ 12,585      $ 11,869      $ 450      $ 716  

Net interest income, as reported

  $ 12,919      $ 12,380      $ 11,666      $ 539      $ 714  

Average Yields and Rates Paid

               

Earning assets yield (taxable-equivalent basis)

    3.93      3.58      3.42      .35      .16

Rate paid on interest-bearing liabilities (taxable-equivalent basis)

    1.04        .65        .51        .39        .14  

Gross interest margin (taxable-equivalent basis)

    2.89      2.93      2.91      (.04 )%       .02

Net interest margin (taxable-equivalent basis)

    3.14      3.10      3.04      .04      .06

Average Balances

               

Investment securities(c)

  $ 113,940      $ 111,820      $ 107,922      $ 2,120      $ 3,898  

Loans

    280,701        276,537        267,811        4,164        8,726  

Earning assets

    415,067        406,421        389,877        8,646        16,544  

Interest-bearing liabilities

    314,506        302,204        287,760        12,302        14,444  
(a)

Interest and rates are presented on a fully taxable-equivalent basis based on a federal income tax rate of 21 percent for 2018 and 35 percent for 2017 and 2016.    

(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.    

 

Average investment securities in 2018 were $2.1 billion (1.9 percent) higher than 2017, primarily due to purchases of U.S. Treasury, mortgage-backed and state and political securities, net of prepayments and maturities.

Average total deposits for 2018 were essentially unchanged from 2017. Average noninterest-bearing deposits were $3.7 billion (4.6 percent) lower in 2018, compared with 2017, primarily due to decreases in business deposits within Corporate and Commercial Banking and trust balances within Wealth Management and Investment Services. Average total savings deposits for 2018 were $1.2 billion (0.6 percent) lower than 2017, driven by decreases in Corporate and Commercial Banking, and Wealth Management and Investment Services balances, partially offset by an increase in Consumer and Business Banking balances. The decline in Corporate and Commercial Banking total savings balances reflected run-off related to the business merger of a large financial services customer. Average time deposits for 2018 were $4.9 billion (14.5 percent) higher than 2017. The increase was primarily driven by increases in those deposits managed as an alternative to other funding sources such as wholesale borrowing, based largely on relative pricing and liquidity characteristics, as well as consumer customers’ migration to certificates of deposits for higher yields.

The $716 million (6.0 percent) increase in net interest income, on a taxable-equivalent basis, in 2017 compared with 2016, was principally driven by the impact of rising interest rates and loan growth. Average earning assets were $16.5 billion (4.2 percent) higher in 2017, compared with 2016, driven by

increases in loans, other earning assets and investment securities. The increase in the net interest margin in 2017, compared with 2016, was principally due to higher interest rates and changes in the loan portfolio mix, partially offset by rising funding costs and higher cash balances.

Average total loans increased $8.7 billion (3.3 percent) in 2017, compared with 2016, driven by growth in commercial loans, residential mortgages, credit card loans and other retail loans, partially offset by decreases in commercial real estate and covered loans. Average commercial loans increased $3.9 billion (4.2 percent) in 2017, compared with 2016, driven by higher demand for loans from new and existing customers. The $3.1 billion (5.6 percent) increase in residential mortgages reflected origination activity. Average credit card balances increased $416 million (2.0 percent) due to customer growth. The $3.1 billion (5.9 percent) increase in average other retail loans was primarily due to higher auto, installment and retail leasing loans, partially offset by decreases in home equity loans and runoff of student loan balances. Average commercial real estate loans decreased $963 million (2.2 percent) in 2017, compared with 2016, primarily the result of disciplined underwriting of construction and development loans and customers paying down balances, while average covered loans decreased $776 million (18.4 percent), the result of portfolio run-off.

Average investment securities in 2017 were $3.9 billion (3.6 percent) higher than 2016, primarily due to purchases of U.S. Treasury and mortgage-backed securities, net of prepayments and maturities, in support of liquidity management.

 

 

 

 

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  TABLE 3

 

  Net Interest Income — Changes Due to Rate and Volume(a)

 

    2018 v 2017      2017 v 2016  
Year Ended December 31 (Dollars in Millions)   Volume        Yield/Rate        Total      Volume        Yield/Rate        Total  

Increase (decrease) in

                          
 

Interest Income

                          

Investment securities

  $ 44        $ 302        $ 346      $ 79        $ 68        $ 147  

Loans held for sale

    (14        35          21        (22        12          (10

Loans

                          

Commercial

    96          568          664        109          426          535  

Commercial real estate

    (89        182          93        (38        128          90  

Residential mortgages

    115          71          186        115          (5        110  

Credit card

    86          101          187        45          109          154  

Other retail

    30          164          194        125          33          158  

Covered loans

    (65        24          (41      (37        12          (25

Total loans

    173          1,110          1,283        319          703          1,022  

Other earning assets

    34          55          89        57          1          58  

Total earning assets

    237          1,502          1,739        433          784          1,217  
 

Interest Expense

                          

Interest-bearing deposits

                          

Interest checking

    3          63          66        4          38          42  

Money market savings

    (29        463          434        36          259          295  

Savings accounts

    1          23          24        3          (5        (2

Time deposits

    41          263          304        5          79          84  

Total interest-bearing deposits

    16          812          828        48          371          419  

Short-term borrowings

    68          170          238        (24        76          52  

Long-term debt

    41          182          223        (13        43          30  

Total interest-bearing liabilities

    125          1,164          1,289        11          490          501  

Increase (decrease) in net interest income

  $ 112        $ 338        $ 450      $ 422        $ 294        $ 716  
(a)

This table shows the components of the change in net interest income by volume and rate on a taxable-equivalent basis based on federal income tax rates of 21 percent for 2018 and 35 percent for 2017 and 2016. 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 2017 were $20.7 billion (6.6 percent) higher than 2016. Average noninterest-bearing deposits for 2017 were $757 million (0.9 percent) higher than 2016, reflecting increases in Wealth Management and Investment Services, and Consumer and Business Banking balances, offset by a decrease in Corporate and Commercial Banking balances. Average total savings deposits for 2017 were $19.2 billion (9.7 percent) higher than 2016, a result of growth across all business lines. Average time deposits, which are managed based largely on relative pricing and liquidity characteristics, increased $751 million (2.3 percent) in 2017, compared with 2016.

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 2018, the provision for credit losses was $1.4 billion, compared with $1.4 billion and $1.3 billion in 2017 and 2016, respectively. The provision for credit losses was higher than net charge-offs by $25 million, $60 million and $55 million in 2018, 2017 and 2016, respectively. The increase in the allowance for credit losses during 2018 reflected loan portfolio growth and the continued maturity of vintages within the credit card portfolio, partially offset by improvements in the credit quality of the commercial loan and residential mortgage portfolios. Nonperforming assets decreased $211 million (17.6 percent) from December 31, 2017 to December 31, 2018, primarily driven by improvements in residential mortgages, commercial loans, commercial real estate loans and other real estate owned (“OREO”), partially offset by increases in nonperforming other retail loans and other nonperforming assets. Net charge-offs increased $24 million (1.8 percent) in 2018 from 2017 primarily due to higher credit card loan net charge-offs, partially offset by lower commercial loan, commercial real estate loan and residential mortgage net charge-offs.

 

 

       

 

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The increase in the allowance for credit losses during 2017 was driven by loan portfolio growth, the maturity of vintages within the credit card portfolio and exposures related to 2017 weather events, partially offset by improvements in the energy and residential mortgage portfolios. Nonperforming assets decreased $403 million (25.1 percent) from December 31, 2016 to December 31, 2017, primarily driven by improvements in commercial loans, residential mortgages and OREO balances, partially offset by an increase in nonperforming commercial real estate loans. Net charge-offs increased $61 million (4.8 percent) in 2017 from 2016 primarily due to higher credit card and other retail loan net charge-offs, partially offset by lower net charge-offs related to residential mortgages and by commercial loan recoveries.

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 2018 was $9.6 billion, compared with $9.3 billion in both 2017 and in 2016. The $285 million (3.1 percent) increase in 2018 over 2017 reflected strong growth in payment services revenue and trust and investment management fees, along with an increase in other

noninterest income. These increases were partially offset by lower mortgage banking revenue and commercial products revenue, which were impacted by industry trends in these categories. Payment services revenue was higher in 2018, compared with 2017, due to an 8.7 percent increase in credit and debit card revenue, a 12.0 percent increase in corporate payment products revenue and a 3.0 percent increase in merchant processing services revenue, all driven by higher sales volumes. Trust and investment management fees were 6.4 percent higher due primarily to business growth and favorable market conditions during most of 2018. Other noninterest income increased 17.6 percent primarily due to the net impact of a $340 million gain from the sale of the Company’s ATM servicing business, partially offset by $264 million of charges for asset impairments related to the sale of a majority of the Company’s covered loans and certain other assets, both recorded in 2018. In addition, the increase in other noninterest income reflected higher tax-advantaged project syndication revenue in 2018. Mortgage banking revenue decreased 13.7 percent in 2018, compared with 2017, primarily due to lower mortgage production and compression in gain on sale margins, while commercial products revenue decreased 6.2 percent in 2018 compared with 2017, primarily due to lower corporate bond underwriting fees and trading revenue.

 

 

  TABLE 4

 

  Noninterest Income

 

Year Ended December 31 (Dollars in Millions)   2018        2017        2016      2018
v 2017
     2017
v 2016
 

Credit and debit card revenue

  $ 1,401        $ 1,289        $ 1,206        8.7      6.9

Corporate payment products revenue

    644          575          541        12.0        6.3  

Merchant processing services

    1,531          1,486          1,498        3.0        (.8

ATM processing services

    308          303          277        1.7        9.4  

Trust and investment management fees

    1,619          1,522          1,427        6.4        6.7  

Deposit service charges

    762          732          706        4.1        3.7  

Treasury management fees

    594          618          583        (3.9      6.0  

Commercial products revenue

    895          954          971        (6.2      (1.8

Mortgage banking revenue

    720          834          979        (13.7      (14.8

Investment products fees

    188          173          169        8.7        2.4  

Securities gains (losses), net

    30          57          22        (47.4      *  

Other

    910          774          911        17.6        (15.0

Total noninterest income

  $ 9,602        $ 9,317        $ 9,290        3.1      .3
*

Not meaningful.

 

 

 

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The $27 million (0.3 percent) increase in 2017 noninterest income over 2016 was primarily due to increases in payment services revenue, trust and investment management fees, and treasury management fees, as well as higher gains on sales of investment securities, partially offset by decreases in mortgage banking revenue and other noninterest income. Payment services revenue was higher in 2017, compared with 2016, due to a 6.9 percent increase in credit and debit card revenue and a 6.3 percent increase in corporate payment products revenue, both driven by higher sales volumes. Trust and investment management fees were 6.7 percent higher due to favorable market conditions, and net asset and account growth, while treasury management fees increased 6.0 percent due to higher transaction volume. Mortgage banking revenue decreased 14.8 percent in 2017, compared with 2016, primarily due to lower origination and sales volumes from home refinancing activities which were higher in 2016, and lower margins on mortgage loan sales. Other revenue was 15.0 percent lower in 2017 compared with 2016, primarily due to lower equity investment income, which was higher in 2016 due to the sale of the Company’s membership interest in Visa Europe Limited to Visa Inc. during that year.

Noninterest Expense Noninterest expense in 2018 was $12.5 billion, compared with $12.8 billion in 2017 and $11.5 billion in 2016. The Company’s efficiency ratio was 55.1 percent in 2018, compared with 58.5 percent in 2017 and 54.5 percent in 2016. The $326 million (2.5 percent) decrease in noninterest expense in 2018 from 2017 reflected decreases in marketing and business development expense and other noninterest expense, partially offset by increases in compensation, employee benefits and technology and communications expenses. Marketing and business development expense decreased 20.8 percent in 2018, compared with 2017, primarily due to a large contribution made by the Company to the U.S. Bank Foundation during 2017. Other noninterest expense

decreased 32.4 percent in 2018, compared with 2017, primarily due to the recognition of a $608 million accrual in 2017 for the settlement of a regulatory matter, as well as lower costs related to tax-advantaged projects, lower FDIC assessment costs driven by the elimination of an FDIC insurance surcharge in late 2018, and a reduction in mortgage servicing costs. Compensation expense increased 7.2 percent in 2018 over 2017, principally driven by the impact of hiring to support business growth technology initiatives and compliance programs, merit increases and higher variable compensation related to business production, partially offset by a special bonus awarded to eligible employees in 2017. Employee benefits expense increased 8.6 percent in 2018 primarily due to increased medical costs and staffing, while technology and communications expense increased 8.3 percent in support of business investment and core growth.

The $1.3 billion (11.0 percent) increase in noninterest expense in 2017 over 2016 was primarily due to higher compensation expense, marketing and business development expense and other noninterest expense, partially offset by lower professional services expense. Compensation expense increased 10.2 percent in 2017 over 2016, principally due to the impact of hiring to support business growth and compliance programs, merit increases, higher variable compensation related to business production and the 2017 special bonus awarded to eligible employees. Employee benefits expense was 12.5 percent higher primarily driven by increased medical costs. Marketing and business development expense was higher 24.6 percent, primarily due to an increase in charitable contributions to the U.S. Bank Foundation. In addition, other expense increased 25.5 percent in 2017, compared with 2016, primarily due to the impact of the accrual recorded in 2017 for the settlement of a regulatory matter and higher FDIC insurance expense. Offsetting these increases was a decrease in professional services expense of 16.5 percent, primarily due to fewer consulting services as compliance programs neared maturity during 2017.

 

 

  TABLE 5

 

  Noninterest Expense

 

Year Ended December 31 (Dollars in Millions)   2018      2017      2016             2018
v 2017
     2017
v 2016
 

Compensation

  $ 6,162      $ 5,746      $ 5,212            7.2      10.2

Employee benefits

    1,231        1,134        1,008            8.6        12.5  

Net occupancy and equipment

    1,063        1,019        988            4.3        3.1  

Professional services

    407        419        502            (2.9      (16.5

Marketing and business development

    429        542        435            (20.8      24.6  

Technology and communications

    978        903        877            8.3        3.0  

Postage, printing and supplies

    324        323        311            .3        3.9  

Other intangibles

    161        175        179            (8.0      (2.2

Other

    1,709        2,529        2,015                (32.4      25.5  

Total noninterest expense

  $ 12,464      $ 12,790      $ 11,527                (2.5 )%       11.0

Efficiency ratio(a)

    55.1      58.5      54.5                          
(a)

See Non-GAAP Financial Measures beginning on page 66.

 

       

 

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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 15 years.

Pension expense is expected to decrease by $43 million in 2019 primarily due to a higher 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. The decrease in pension expense will result in a decrease in 2019 employee benefits expense of $16 million and a decrease in other noninterest expense of $27 million, compared with 2018.

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)

  $ (105    $ 89  

Percent of 2018 net income

    (1.11 )%       .94
LTROR (Dollars in Millions)   Down 100
Basis Points
     Up 100
Basis Points
 

Incremental benefit (expense)

  $ (53    $ 53  

Percent of 2018 net income

    (.56 )%       .56

Income Tax Expense In late 2017, tax reform was enacted that, among other provisions, reduced the federal statutory rate for corporations from 35 percent to 21 percent effective in 2018. In accordance with generally accepted accounting principles (“GAAP”), the Company revalued its deferred tax assets and liabilities at December 31, 2017, resulting in an estimated net tax benefit of $910 million, which the Company recorded in 2017. The 2018 provision for income taxes was $1.6 billion (an effective rate of 17.9 percent) and reflected the reduced federal statutory rate and the favorable impact of deferred tax assets and liabilities adjustments related to tax reform estimates. The 2017 provision for income taxes was $1.3 billion (an effective rate of 16.8 percent) and reflected the impact of tax reform enacted during the period. The 2016 provision for income taxes was $2.2 billion (an effective rate of 26.7 percent).

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

Balance Sheet Analysis

Average earning assets were $415.1 billion in 2018, compared with $406.4 billion in 2017. The increase in average earning assets of $8.6 billion (2.1 percent) was primarily due to increases in loans of $4.2 billion (1.5 percent), other earning assets of $2.7 billion (18.7 percent) and investment securities of $2.1 billion (1.9 percent).

For average balance information, refer to Consolidated Daily Average Balance Sheet and Related Yields and Rates on pages 142 and 143.

Loans The Company’s loan portfolio was $286.8 billion at December 31, 2018, compared with $280.4 billion at December 31, 2017, an increase of $6.4 billion (2.3 percent). The increase was driven by increases in residential mortgages of $5.3 billion (8.8 percent), commercial loans of $4.9 billion (5.0 percent) and credit card loans of $1.2 billion (5.3 percent), partially offset by decreases in other commercial real estate loans of $924 million (2.3 percent), other retail loans of $894 million (1.6 percent) and the impact of the sale of the majority of the Company’s covered loans. 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 $4.2 billion (1.5 percent) in 2018, compared with 2017. The increase was due to growth in most loan portfolio categories in 2018.

Commercial Commercial loans, including lease financing, increased $4.9 billion (5.0 percent) at December 31, 2018, compared with December 31, 2017. Average commercial loans increased $3.0 billion (3.1 percent) in 2018, compared with 2017. 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 location.

Commercial Real Estate The Company’s portfolio of commercial real estate loans, which includes commercial mortgages and construction and development loans, decreased $924 million (2.3 percent) at December 31, 2018, compared with December 31, 2017, primarily the result of customers paying down balances. Average commercial real estate loans decreased $2.1 billion (5.0 percent) in 2018, compared with 2017. 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 criteria are met. In 2018, approximately $355 million of construction loans were reclassified to the commercial mortgage category. At December 31, 2018 and 2017, $130 million and $161 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 $10.3 billion and $10.1 billion at December 31, 2018 and 2017, respectively.

 

 

 

 

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  TABLE 6

 

  Loan Portfolio Distribution

 

    2018     2017     2016     2015     2014  
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

  $ 96,849       33.8       $ 91,958       32.8       $ 87,928       32.2       $ 83,116       31.9       $ 74,996       30.2

Lease financing

    5,595       1.9               5,603       2.0               5,458       2.0               5,286       2.0               5,381       2.2  

Total commercial

    102,444       35.7           97,561       34.8           93,386       34.2           88,402       33.9           80,377       32.4  
       

Commercial Real Estate

                                   

Commercial mortgages

    28,596       10.0           29,367       10.5           31,592       11.6           31,773       12.2           33,360       13.5  

Construction and development

    10,943       3.8               11,096       4.0               11,506       4.2               10,364       3.9               9,435       3.8  

Total commercial real estate

    39,539       13.8           40,463       14.5           43,098       15.8           42,137       16.1           42,795       17.3  
       

Residential Mortgages

                                   

Residential mortgages

    53,034       18.5           46,685       16.6           43,632       16.0           40,425       15.5           38,598       15.6  

Home equity loans, first liens

    12,000       4.2               13,098       4.7               13,642       5.0               13,071       5.0               13,021       5.2  

Total residential mortgages

    65,034       22.7           59,783       21.3           57,274       21.0           53,496       20.5           51,619       20.8  

Credit Card

    23,363       8.1           22,180       7.9           21,749       7.9           21,012       8.1           18,515       7.5  
       

Other Retail

                                   

Retail leasing

    8,546       3.0           7,988       2.8           6,316       2.3           5,232       2.0           5,871       2.4  

Home equity and second mortgages

    16,122       5.6           16,327       5.8           16,369       6.0           16,384       6.3           15,916       6.4  

Revolving credit

    3,088       1.1           3,183       1.1           3,282       1.2           3,354       1.3           3,309       1.3  

Installment

    9,676       3.4           8,989       3.2           8,087       3.0           7,030       2.7           6,242       2.5  

Automobile

    18,719       6.5           18,934       6.8           17,571       6.4           16,587       6.3           14,822       6.0  

Student

    279       .1               1,903       .7               2,239       .8               2,619       1.0               3,104       1.3  

Total other retail

    56,430       19.7           57,324       20.4           53,864       19.7           51,206       19.6           49,264       19.9  

Covered Loans

                        3,121       1.1               3,836       1.4               4,596       1.8               5,281       2.1  

Total loans

  $ 286,810       100.0           $ 280,432       100.0           $ 273,207       100.0           $ 260,849       100.0           $ 247,851       100.0

 

The Company also finances the operations of real estate developers and other entities with operations related to real estate. These loans are not secured directly by real estate but have similar characteristics to commercial real estate loans.

These loans were included in the commercial loan category and totaled $9.8 billion and $9.4 billion at December 31, 2018 and 2017, respectively.

 

 

       

 

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  TABLE 7

 

  Commercial Loans by Industry Group and Geography

 

    2018      2017  
At December 31 (Dollars in Millions)   Loans        Percent      Loans      Percent  

Industry Group

              

Manufacturing

  $ 15,064          14.7    $ 14,710        15.1

Real estate, rental and leasing

    12,270          12.0        12,461        12.8  

Finance and insurance

    10,301          10.0        8,639        8.8  

Wholesale trade

    8,310          8.1        7,383        7.6  

Retail trade

    8,211          8.0        8,952        9.2  

Healthcare and social assistance

    5,769          5.6        6,517        6.7  

Public administration

    4,773          4.7        5,116        5.2  

Arts, entertainment and recreation

    4,089          4.0        3,853        3.9  

Information

    3,576          3.5        3,403        3.5  

Transport and storage

    3,559          3.5        3,198        3.3  

Professional, scientific and technical services

    3,358          3.3        3,499        3.6  

Educational services

    3,139          3.1        3,414        3.5  

Utilities

    2,760          2.7        1,933        2.0  

Other services

    1,691          1.6        1,698        1.7  

Mining

    1,636          1.6        1,590        1.6  

Agriculture, forestry, fishing and hunting

    1,235          1.2        1,429        1.5  

Other

    12,703          12.4        9,766        10.0  

Total

  $ 102,444          100.0    $ 97,561        100.0

Geography

              

California

  $ 13,507          13.2    $ 14,086        14.4

Colorado

    4,071          4.0        3,979        4.1  

Illinois

    5,356          5.2        5,245        5.4  

Minnesota

    7,832          7.6        7,406        7.6  

Missouri

    3,274          3.2        3,525        3.6  

Ohio

    4,913          4.8        4,330        4.5  

Oregon

    2,135          2.1        2,044        2.1  

Washington

    3,672          3.6        3,699        3.8  

Wisconsin

    3,630          3.5        3,539        3.6  

Iowa, Kansas, Nebraska, North Dakota, South Dakota

    5,094          5.0        4,806        4.9  

Arkansas, Indiana, Kentucky, Tennessee

    5,488          5.3        5,206        5.3  

Idaho, Montana, Wyoming

    1,114          1.1        1,225        1.3  

Arizona, Nevada, New Mexico, Utah

    4,183          4.1        3,836        3.9  

Total banking region

    64,269          62.7        62,926        64.5  

Florida, Michigan, New York, Pennsylvania, Texas

    18,031          17.6        16,408        16.8  

All other states

    20,144          19.7        18,227        18.7  

Total outside Company’s banking region

    38,175          37.3        34,635        35.5  

Total

  $ 102,444          100.0    $ 97,561        100.0

 

Residential Mortgages Residential mortgages held in the loan portfolio at December 31, 2018, increased $5.3 billion (8.8 percent) over December 31, 2017, as origination activity more than offset the effect of customers paying down balances during 2018. Average residential mortgages increased $3.1 billion (5.3 percent) in 2018, compared with 2017. 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 $1.2 billion (5.3 percent) at December 31, 2018, compared with December 31, 2017, reflecting new and existing customer growth during the year. Average credit card balances increased $766 million (3.7 percent) in 2018, compared with 2017.

 

 

 

 

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Table of Contents

  TABLE 8

 

  Commercial Real Estate Loans by Property Type and Geography

 

    2018      2017  
At December 31 (Dollars in Millions)   Loans        Percent      Loans        Percent  

Property Type

                

Business owner occupied

  $ 9,769          24.7    $ 10,205          25.2

Commercial property

                

Industrial

    1,695          4.3        1,580          3.9  

Office

    5,351          13.5        5,023          12.4  

Retail

    4,150          10.5        4,502          11.1  

Other commercial

    3,399          8.6        3,757          9.3  

Multi-family

    8,592          21.7        8,922          22.0  

Hotel/motel

    3,520          8.9        3,719          9.2  

Residential homebuilders

    2,764          7.0        2,489          6.2  

Healthcare facilities

    299          .8        266          .7  

Total

  $ 39,539          100.0    $ 40,463          100.0

Geography

                

California

  $ 9,784          24.7    $ 9,558          23.6

Colorado

    1,883          4.8        1,764          4.4  

Illinois

    1,484          3.8        1,605          4.0  

Minnesota

    1,896          4.8        2,031          5.0  

Missouri

    1,157          2.9        1,359          3.3  

Ohio

    1,278          3.2        1,445          3.6  

Oregon

    1,718          4.3        1,847          4.6  

Washington

    3,383          8.6        3,499          8.6  

Wisconsin

    1,892          4.8        2,036          5.0  

Iowa, Kansas, Nebraska, North Dakota, South Dakota

    2,085          5.3        2,210          5.5  

Arkansas, Indiana, Kentucky, Tennessee

    2,045          5.2        1,889          4.7  

Idaho, Montana, Wyoming

    962          2.4        1,163          2.9  

Arizona, Nevada, New Mexico, Utah

    3,130          7.9        3,134          7.7  

Total banking region

    32,697          82.7        33,540          82.9  

Florida, Michigan, New York, Pennsylvania, Texas

    3,613          9.1        3,688          9.1  

All other states

    3,229          8.2        3,235          8.0  

Total outside Company’s banking region

    6,842          17.3        6,923          17.1  

Total

  $ 39,539          100.0    $ 40,463          100.0

 

Other Retail Total other retail loans, which include retail leasing, home equity and second mortgages and other retail loans, decreased $894 million (1.6 percent) at December 31, 2018, compared with December 31, 2017, reflecting the sale of the Company’s federally guaranteed student loan portfolio during 2018, along with decreases in auto loans and home equity loans. Partially offsetting these decreases were increases in installment and retail leasing loans. Average other retail loans increased $720 million (1.3 percent) in 2018, compared with 2017. The increase was primarily due to higher auto, installment and retail

leasing loans, partially offset by decreases in student loans and home equity loans. Of the total residential mortgages, credit card and other retail loans outstanding at December 31, 2018, approximately 72.8 percent were to customers located in the Company’s primary banking region, essentially unchanged from December 31, 2017. 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, 2018 and 2017.

 

 

       

 

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  TABLE 9

 

  Residential Mortgages by Geography

 

    2018        2017  
At December 31 (Dollars in Millions)   Loans        Percent               Loans        Percent  

California

  $ 20,176          31.0          $ 16,914          28.3

Colorado

    3,586          5.5              3,380          5.7  

Illinois

    3,301          5.1              3,109          5.2  

Minnesota

    4,322          6.6              4,247          7.1  

Missouri

    1,710          2.6              1,748          2.9  

Ohio

    2,062          3.2              2,145          3.6  

Oregon

    2,427          3.7              2,413          4.0  

Washington

    3,702          5.7              3,403          5.7  

Wisconsin

    1,527          2.4              1,526          2.5  

Iowa, Kansas, Nebraska, North Dakota, South Dakota

    2,055          3.2              2,086          3.5  

Arkansas, Indiana, Kentucky, Tennessee

    3,170          4.9              3,166          5.3  

Idaho, Montana, Wyoming

    1,326          2.0              1,294          2.2  

Arizona, Nevada, New Mexico, Utah

    4,851          7.5                  4,489          7.5  

Total banking region

    54,215          83.4              49,920          83.5  

Florida, Michigan, New York, Pennsylvania, Texas

    4,744          7.3              4,448          7.4  

All other states

    6,075          9.3                  5,415          9.1  

Total outside Company’s banking region

    10,819          16.6                  9,863          16.5  

Total

  $ 65,034          100.0              $ 59,783          100.0

 

  TABLE 10

 

  Credit Card Loans by Geography

 

    2018        2017  
At December 31 (Dollars in Millions)   Loans        Percent               Loans        Percent  

California

  $ 2,399          10.3          $ 2,245          10.1

Colorado

    808          3.5              772          3.5  

Illinois

    1,176          5.0              1,089          4.9  

Minnesota

    1,275          5.5              1,271          5.7  

Missouri

    758          3.2              725          3.3  

Ohio

    1,215          5.2              1,185          5.4  

Oregon

    684          2.9              666          3.0  

Washington

    877          3.8              857          3.9  

Wisconsin

    1,017          4.3              990          4.5  

Iowa, Kansas, Nebraska, North Dakota, South Dakota

    1,100          4.7              1,048          4.7  

Arkansas, Indiana, Kentucky, Tennessee

    1,661          7.1              1,603          7.2  

Idaho, Montana, Wyoming

    384          1.6              376          1.7  

Arizona, Nevada, New Mexico, Utah

    1,183          5.1                  1,092          4.9  

Total banking region

    14,537          62.2              13,919          62.8  

Florida, Michigan, New York, Pennsylvania, Texas

    4,440          19.0              4,193          18.9  

All other states

    4,386          18.8                  4,068          18.3  

Total outside Company’s banking region

    8,826          37.8                  8,261          37.2  

Total

  $ 23,363          100.0              $ 22,180          100.0

 

 

 

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Table of Contents

  TABLE 11

 

  Other Retail Loans by Geography

 

    2018               2017  
At December 31 (Dollars in Millions)   Loans        Percent               Loans        Percent  

California

  $ 9,826          17.4          $ 9,119          15.9

Colorado

    2,079          3.7              2,144          3.8  

Illinois

    2,938          5.2              3,193          5.6  

Minnesota

    3,298          5.8              3,619          6.3  

Missouri

    1,961          3.5              2,142          3.7  

Ohio

    2,626          4.7              2,800          4.9  

Oregon

    1,530          2.7              1,545          2.7  

Washington

    1,755          3.1              1,735          3.0  

Wisconsin

    1,350          2.4              1,562          2.7  

Iowa, Kansas, Nebraska, North Dakota, South Dakota

    2,343          4.2              2,534          4.4  

Arkansas, Indiana, Kentucky, Tennessee

    2,951          5.2              3,108          5.4  

Idaho, Montana, Wyoming

    1,043          1.8              1,033          1.8  

Arizona, Nevada, New Mexico, Utah

    2,976          5.3                  2,958          5.2  

Total banking region

    36,676          65.0              37,492          65.4  

Florida, Michigan, New York, Pennsylvania, Texas

    11,752          20.8              11,547          20.1  

All other states

    8,002          14.2                  8,285          14.5  

Total outside Company’s banking region

    19,754          35.0                  19,832          34.6  

Total

  $ 56,430          100.0              $ 57,324          100.0

 

The Company generally retains portfolio loans through maturity; however, the Company’s intent may change over time based upon various factors such as ongoing asset/liability management activities, assessment of product profitability, credit risk, liquidity needs, and capital implications. If the Company’s intent or ability to hold an existing portfolio loan changes, it is transferred to loans held for sale.

Loans Held for Sale Loans held for sale, consisting primarily of residential mortgages to be sold in the secondary market, were

$2.1 billion at December 31, 2018, compared with $3.6 billion at December 31, 2017. The decrease in loans held for sale was principally due to a lower level of mortgage loan closings in late 2018, compared with the same period of 2017. 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”).

 

 

       

 

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  TABLE 12

 

  Selected Loan Maturity Distribution

 

At December 31, 2018 (Dollars in Millions)   One Year
or Less
       Over One
Through
Five Years
       Over Five
Years
       Total  

Commercial

  $ 38,934        $ 59,129        $ 4,381        $ 102,444  

Commercial real estate

    11,298          21,552          6,689          39,539  

Residential mortgages

    2,703          9,643          52,688          65,034  

Credit card

    23,363                            23,363  

Other retail

    11,364          31,016          14,050          56,430  

Total loans

  $ 87,662        $ 121,340        $ 77,808        $ 286,810  

Total of loans due after one year with

                

Predetermined interest rates

                 $ 93,295  

Floating interest rates

                                   $ 105,853  

 

Investment Securities The Company uses its investment securities portfolio to manage interest rate risk, provide liquidity (including the ability to meet regulatory requirements), generate interest and dividend income, and as collateral for public deposits and wholesale funding sources. While the Company intends to hold its investment securities indefinitely, it may sell available-for-sale 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 $112.2 billion at December 31, 2018, compared with $112.5 billion at December 31, 2017. The $334 million (0.3 percent) decrease reflected a $686 million unfavorable change in net unrealized gains (losses) on available-for-sale investment securities, partially offset by $470 million of net investment securities purchases.

Average investment securities were $113.9 billion in 2018, compared with $111.8 billion in 2017. The weighted-average yield of the available-for-sale portfolio was 2.57 percent at December 31, 2018, compared with 2.25 percent at December 31, 2017. The weighted-average maturity of the available-for-sale portfolio was 5.4 years at December 31, 2018, compared with 5.1 years at December 31, 2017. The weighted-average yield of the held-to-maturity portfolio was 2.46 percent at December 31, 2018, compared with 2.14 percent at December 31, 2017. The weighted-average maturity of the held-to-maturity portfolio was 5.2 years at December 31, 2018, compared with 4.7 years at December 31, 2017. 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, 2018, the Company’s net unrealized losses on available-for-sale securities were $1.3 billion, compared with $580 million at December 31, 2017. The unfavorable change in net unrealized gains (losses) was primarily due to decreases in the fair value of U.S. Treasury, mortgage-backed and state and political securities as a result of changes in interest rates. Gross unrealized losses on available-for-sale securities totaled $1.4 billion at December 31, 2018, compared with $888 million at December 31, 2017. 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 losses, expected cash flows of underlying assets and market conditions. At December 31, 2018, 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.

 

 

 

 

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Table of Contents

  TABLE 13

 

  Investment Securities

 

    Available-for-Sale            Held-to-Maturity  
At December 31, 2018 (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

  $ 2,231      $ 2,221        .5        1.49            $ 650      $ 647        .5        1.73

Maturing after one year through five years

    16,735        16,416        2.8        1.75            3,459        3,338        4.2        1.64  

Maturing after five years through ten years

    638        620        7.4        2.82            993        976        5.9        2.36  

Maturing after ten years

                                                              

Total

  $ 19,604      $ 19,257        2.7        1.76                $ 5,102      $ 4,961        4.1        1.79

Mortgage-Backed Securities(a)

                          

Maturing in one year or less

  $ 60      $ 60        .2        3.85            $ 65      $ 65        .8        2.37

Maturing after one year through five years

    19,058        18,598        4.4        2.38            18,247        17,688        4.1        2.17  

Maturing after five years through ten years

    18,987        18,648        6.4        2.81            22,280        21,891        6.2        2.84  

Maturing after ten years

    2,439        2,448        14.2        3.45                328        327        13.9        3.34  

Total

  $ 40,544      $ 39,754        5.9        2.65                $ 40,920      $ 39,971        5.3        2.54

Asset-Backed Securities(a)

                          

Maturing in one year or less

  $      $                          $      $              

Maturing after one year through five years

    397        403        3.5        3.69            3        4        3.3        3.19  

Maturing after five years through ten years

                                    2        3        5.6        3.29  

Maturing after ten years

                                               1        15.6        3.20  

Total

  $ 397      $ 403        3.5        3.69                $ 5      $ 8        4.1        3.22

Obligations of State and Political Subdivisions(b)(c)

                          

Maturing in one year or less

  $ 284      $ 287        .5        5.67            $      $        .2        6.49

Maturing after one year through five years

    552        558        3.5        4.53            1        1        3.1        6.65  

Maturing after five years through ten years

    4,093        4,069        7.9        4.36            5        6        7.2        1.97  

Maturing after ten years

    1,907        1,787        19.1        4.09                                      

Total

  $ 6,836      $ 6,701        10.4        4.35                $ 6      $ 7        6.8        2.45

Other

                          

Maturing in one year or less

  $      $                          $ 9      $ 9        .6        3.68

Maturing after one year through five years

                                    8        8        1.4        3.34  

Maturing after five years through ten years

                                                          

Maturing after ten years

                                                              

Total

  $      $                              $ 17      $ 17        1.0        3.52

Total investment securities(d)

  $ 67,381      $ 66,115        5.4        2.57                $ 46,050      $ 44,964        5.2        2.46
(a)

Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities that take into account anticipated future prepayments.

(b)

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

(c)

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

(d)

The weighted-average maturity of the available-for-sale investment securities was 5.1 years at December 31, 2017, with a corresponding weighted-average yield of 2.25 percent. The weighted-average maturity of the held-to-maturity investment securities was 4.7 years at December 31, 2017, with a corresponding weighted-average yield of 2.14 percent.

(e)

Weighted-average yields for obligations of state and political subdivisions are presented on a fully-taxable equivalent basis based on a federal income tax rate of 21 percent for 2018 and 35 percent for 2017. 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.

 

    2018               2017  
At December 31 (Dollars in Millions)   Amortized
Cost
       Percent
of Total
              Amortized
Cost
       Percent
of Total
 

U.S. Treasury and agencies

  $ 24,706          21.8          $ 28,767          25.5

Mortgage-backed securities

    81,464          71.8              77,606          68.6  

Asset-backed securities

    402          .4              419          .4  

Obligations of state and political subdivisions

    6,842          6.0              6,246          5.5  

Other

    17                           41           

Total investment securities

  $ 113,431          100.0              $ 113,079          100.0

 

       

 

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  TABLE 14

 

  Deposits

The composition of deposits was as follows:

 

    2018            2017            2016            2015            2014  
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

  $ 81,811       23.7           $ 87,557       25.2           $ 86,097       25.7           $ 83,766       27.9           $ 77,323       27.3

Interest-bearing deposits

                                   

Interest checking

    73,994       21.4           74,520       21.5           66,298       19.8           59,169       19.7           55,058       19.5  

Money market savings

    100,396       29.1           107,973       31.1           109,947       32.9           86,159       28.7           76,536       27.1  

Savings accounts

    44,720       12.9               43,809       12.6               41,783       12.5               38,468       12.8               35,249       12.4  

Total savings deposits

    219,110       63.4           226,302       65.2           218,028       65.2           183,796       61.2           166,843       59.0  

Time deposits less than $100,000

    7,422       2.1           7,315       2.1           8,040       2.4           9,050       3.0           10,609       3.8  

Time deposits greater than $100,000

                                   

Domestic

    19,958       5.8           10,792       3.1           7,230       2.2           7,272       2.4           10,636       3.8  

Foreign

    17,174       5.0               15,249       4.4               15,195       4.5               16,516       5.5               17,322       6.1  

Total interest-bearing deposits

    263,664       76.3               259,658       74.8               248,493       74.3               216,634       72.1               205,410       72.7  

Total deposits

  $ 345,475       100.0               $ 347,215       100.0               $ 334,590       100.0               $ 300,400       100.0               $ 282,733       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, 2018 (Dollars in Millions)                   Domestic                     Foreign      Total  

Three months or less

  $ 1,069     $ 5,060     $ 17,117      $ 23,246  

Three months through six months

    1,063       6,171       47        7,281  

Six months through one year

    1,924       5,813       8        7,745  

Thereafter

    3,366       2,914       2        6,282  

Total

  $ 7,422     $ 19,958     $ 17,174      $ 44,554  

 

Deposits Total deposits were $345.5 billion at December 31, 2018, compared with $347.2 billion at December 31, 2017. The $1.7 billion (0.5 percent) decrease in total deposits reflected decreases in total savings and noninterest-bearing deposits, partially offset by an increase in time deposits. Average total deposits in 2018 were essentially unchanged from 2017.

Interest-bearing savings deposits decreased $7.2 billion (3.2 percent) at December 31, 2018, compared with December 31, 2017. The decrease was related to lower money market and interest checking account balances, partially offset by higher savings account deposit balances. Money market deposit balances decreased $7.6 billion (7.0 percent), primarily due to lower Wealth Management and Investment Services, Corporate and Commercial Banking, and Consumer and Business Banking balances. The decline in Corporate and Commercial Banking balances reflected run-off related to the business merger of a large financial services customer. Interest checking balances decreased $526 million (0.7 percent) primarily due to lower Wealth Management and Investment Services balances, partially offset by higher Consumer and Business Banking and Corporate and Commercial Banking balances. Savings account balances increased $911 million (2.1 percent), primarily due to higher Consumer and Business Banking balances. Average interest-bearing savings deposits in 2018 decreased $1.2 billion (0.6 percent), compared with 2017, reflecting lower Corporate and Commercial Banking and Wealth Management and Investment Services balances, partially offset by higher Consumer and Business Banking balances.

Noninterest-bearing deposits at December 31, 2018, decreased $5.7 billion (6.6 percent) from December 31, 2017. Average noninterest-bearing deposits decreased $3.7 billion (4.6 percent) in 2018, compared with 2017. The decreases were primarily due to lower Corporate and Commercial Banking and Wealth Management and Investment Services balances.

Interest-bearing time deposits at December 31, 2018, increased $11.2 billion (33.6 percent), compared with December 31, 2017. Average time deposits increased $4.9 billion (14.5 percent) in 2018, compared with 2017. The increases were primarily driven by increases in those deposits managed as an alternative to other funding sources such as wholesale borrowing, based largely on relative pricing and liquidity characteristics, as well as consumer customers’ migration to certificates of deposits for higher yields.

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 $14.1 billion at December 31, 2018, compared with $16.7 billion at December 31, 2017. The $2.5 billion (15.1 percent) decrease in short-term borrowings was primarily due to a decrease in short-term Federal Home Loan Bank (“FHLB”) advances and lower commercial paper balances, partially offset by higher repurchase agreement balances.

 

 

 

 

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Long-term debt was $41.3 billion at December 31, 2018, compared with $32.3 billion at December 31, 2017. The $9.1 billion (28.2 percent) increase was primarily due to issuances of $9.5 billion of bank notes and $2.1 billion of medium-term notes, partially offset by a $901 million decrease in FHLB advances and $1.5 billion of medium-term note maturities.

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”), mortgage servicing rights (“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 the risk of loss due to failures by third parties with which the Company does business. Compliance risk is the risk that the Company may suffer legal or regulatory sanctions, material financial loss, or loss to reputation through failure to

comply with laws, regulations, rules, standards of good practice, and codes of conduct. Strategic risk is the risk to current or projected financial condition arising from adverse business decisions, poor implementation of business decisions, or lack of responsiveness to changes in the banking industry and operating environment. 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 customer relationships, offer new services or continue serving existing customer relationships. In addition to the risks identified above, other risk factors exist that may impact the Company. Refer to “Risk Factors” beginning on page 144, for a detailed discussion of these factors.

The Company’s Board and management-level governance committees are supported by a “three lines of defense” model for establishing effective checks and balances. The first line of defense, the business lines, manages risks in conformity with established limits and policy requirements. In turn, business line leaders and their risk officers establish programs to ensure conformity with these limits and policy requirements. The second line of defense, which includes the Chief Risk Officer’s organization as well as policy and oversight activities of corporate support functions, translates risk appetite and strategy into actionable risk limits and policies. The second line of defense monitors first line of defense conformity with limits and policies, and provides reporting and escalation of emerging risks and other concerns to senior management and the Risk Management Committee of the Board of Directors. The third line of defense, internal audit, is responsible for providing the Audit Committee of the Board of Directors and senior management with independent assessment and assurance regarding the effectiveness of the Company’s governance, risk management, and control processes.

Management regularly provides reports to the Risk Management Committee of the Board of Directors. The Risk Management Committee discusses with management the Company’s risk management performance, and provides a summary of key risks to the entire Board of Directors, covering the status of existing matters, areas of potential future concern and specific information on certain types of loss events. The Risk Management Committee considers quarterly reports by management assessing the Company’s performance relative to the risk appetite statements and the associated risk limits, including:

 

  Macroeconomic environment and other qualitative considerations, such as regulatory and compliance changes, litigation developments, and technology and cybersecurity;

 

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

 

  Interest rate and market risk, including market value and net income simulation, and trading-related Value at Risk (“VaR”);
 

 

       

 

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  Liquidity risk, including funding projections under various stressed scenarios;

 

  Operational and compliance risk, including losses stemming from events such as fraud, processing errors, control breaches, breaches in data security or adverse business decisions, as well as reporting on technology performance, and various legal and regulatory compliance measures;

 

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

 

  Strategic and reputational 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 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 two segments, which is the level at which it develops and documents a systematic methodology to determine the allowance for credit losses. The Company’s two loan portfolio segments are commercial lending and consumer lending. Previously, the Company categorized covered loans, along with the FDIC’s related loss share coverage, in a separate covered loans segment. As of December 31, 2018, the majority of these loans were sold and the loss share coverage expired, with any

remaining balances reclassified to be included in the loan segment they would have otherwise been included in had the loss share coverage not been in place.

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, 2018, substantially all of the Company’s home equity lines were in the draw period. Approximately $1.4 billion, or 10 percent, of the outstanding home equity line balances at December 31, 2018, 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 credit scores, and in some cases, updated loan-to-value (“LTV”) information reflecting current market conditions 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 Company further disaggregates its loan portfolio segments into various classes based on their underlying risk characteristics. The two classes within the commercial lending segment are commercial loans and commercial real estate loans. The three classes within the consumer lending segment are residential mortgages, credit card loans and other retail loans.

 

 

 

 

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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, as well as the potential impact on customers and the domestic economy resulting from new tariffs or increases in existing tariffs.

During 2018, domestic economic conditions continued to be favorable as evidenced by overall growth and a strong labor market with the lowest unemployment rate in decades. The domestic economy has experienced an increase in productivity growth over the past few years which has