Forward-Looking Statements
THE FOLLOWING INFORMATION APPEARS IN ACCORDANCE WITH THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: This report contains
forward-looking statements about U.S. Bancorp (U.S. Bancorp or the Company). Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements and are
based on the information available to, and assumptions and estimates made by, management as of the date hereof. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future plans and prospects of
U.S. Bancorp. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated. A reversal or slowing of the current economic recovery or another severe
contraction could adversely affect U.S. Bancorps revenues and the values of its assets and liabilities. Global financial markets could experience a recurrence of significant turbulence, which could reduce the availability of funding to certain
financial institutions and lead to a tightening of credit, a reduction of business activity, and increased market volatility. Stress in the commercial real estate markets, as well as a downturn in the residential real estate markets could cause
credit losses and deterioration in asset values. In addition, changes to statutes, regulations, or regulatory policies or practices could affect U.S. Bancorp in substantial and unpredictable ways. U.S. Bancorps results could also be adversely
affected by deterioration in general business and economic conditions; changes in interest rates; deterioration in the credit quality of its loan portfolios or in the value of the collateral securing those loans; deterioration in the value of
securities held in its investment securities portfolio; legal and regulatory developments; litigation; increased competition from both banks and non-banks; changes in customer behavior and preferences; breaches in data security; effects of mergers
and acquisitions and related integration; effects of critical accounting policies and judgments; and managements ability to effectively manage credit risk, market risk, operational risk, compliance risk, strategic risk, interest rate risk,
liquidity risk and reputational risk.
For discussion of these and other risks that may cause actual results to differ from
expectations, refer to the sections entitled Corporate Risk Profile on pages 38 60 and Risk Factors on pages 148 157 of the Companys 2016 Annual Report. However, factors other than these also could
adversely affect U.S. Bancorps results, and the reader should not consider these factors to be a complete set of all potential risks or uncertainties. Forward-looking statements speak only as of the date hereof, and U.S. Bancorp undertakes no
obligation to update them in light of new information or future events.
General Business Description
U.S. Bancorp is a multi-state financial services holding company headquartered in Minneapolis, Minnesota. U.S. Bancorp was incorporated in
Delaware in 1929 and operates as a financial holding company and a bank holding company under the Bank Holding Company Act of 1956. U.S. Bancorp provides a full range of financial services, including lending and depository services, cash management,
capital markets, and trust and investment management services. It also engages in credit card services, merchant and ATM processing, mortgage banking, insurance, brokerage and leasing.
U.S. Bancorps banking subsidiary, U.S. Bank National Association, is engaged in the general banking business, principally in
domestic markets. U.S. Bank National Association, with $343 billion in deposits at December 31, 2016, provides a wide range of products and services to individuals, businesses, institutional organizations, governmental entities and other
financial institutions. Commercial and consumer lending services are principally offered to customers within the Companys domestic markets, to domestic customers with foreign operations and to large national customers operating in specific
industries targeted by the Company. Lending services include traditional credit products as well as credit card services, lease financing and import/export trade, asset-backed lending, agricultural finance and other products. Depository services
include checking
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accounts, savings accounts and time certificate contracts. Ancillary services such as capital markets, treasury management and receivable lock-box collection are provided to corporate customers.
U.S. Bancorps bank and trust subsidiaries provide a full range of asset management and fiduciary services for individuals, estates, foundations, business corporations and charitable organizations.
Other U.S. Bancorp non-banking subsidiaries offer investment and insurance products to the Companys customers principally within
its markets, and fund administration services to a broad range of mutual and other funds.
Banking and investment services are
provided through a network of 3,106 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 4,842 ATMs and provides 24-hour,
seven day a week telephone customer service. Mortgage banking services are provided through banking offices and loan production offices throughout the Companys markets. Lending products may be originated through banking offices, indirect
correspondents, brokers or other lending sources. The Company is also one of the largest providers of corporate and purchasing card services and corporate trust services in the United States. A wholly-owned subsidiary, Elavon, Inc.
(Elavon), provides merchant processing services directly to merchants and through a network of banking affiliations. Wholly-owned subsidiaries, and affiliates of Elavon, provide similar merchant services in Canada, Mexico and segments of
Europe directly or through joint ventures with other financial institutions. 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, 2016, U.S. Bancorp employed 71,191 people.
Competition
The
commercial banking business is highly competitive. The Company competes with other commercial banks, savings and loan associations, mutual savings banks, finance companies, mortgage banking companies, credit unions, investment companies, credit card
companies and a variety of other financial services, advisory and technology companies. In recent years, competition has increased from institutions not subject to the same regulatory restrictions as domestic banks and bank holding companies.
Competition is based on a number of factors including, among others, customer service, quality and range of products and services offered, price, reputation, interest rates on loans and deposits, lending limits and customer convenience. The
Companys ability to continue to compete effectively also depends in large part on its ability to attract new employees and retain and motivate existing employees, while managing compensation and other costs.
Government Policies
The
operations of the Companys various operating units are affected by federal and state legislative changes and by policies of various regulatory authorities, including those of the numerous states in which they operate, the United States and
foreign governments. These policies include, for example, statutory maximum legal lending rates, domestic monetary policies of the Board of Governors of the Federal Reserve System (the Federal Reserve), United States fiscal policy,
international currency regulations and monetary policies and capital adequacy and liquidity constraints imposed by bank regulatory agencies.
Supervision and Regulation
U.S. Bancorp and its subsidiaries are subject to the extensive regulatory framework applicable to bank holding companies and their subsidiaries. This regulatory framework is intended primarily for the
protection of depositors, the deposit insurance fund of the Federal Deposit Insurance Corporation (the FDIC), consumers, the stability of the financial system in the United States, and the health of the national economy, and not for
investors in bank holding companies such as the Company.
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This section summarizes certain provisions of the principal laws and regulations applicable
to the Company and its subsidiaries. The descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations described below.
General
As a bank holding company, the Company is subject to regulation under the Bank Holding Company Act (the BHC
Act) and to inspection, examination and supervision by the Board of Governors of the Federal Reserve System (the Federal Reserve). U.S. Bank National Association and its subsidiaries, are subject to regulation and examination
primarily by the Office of the Comptroller of the Currency (the OCC) and also by the FDIC, the Federal Reserve, the Consumer Financial Protection Bureau (the CFPB), the Securities and Exchange Commission (the SEC)
and the Commodities Futures Trading Commission (the CFTC) in certain areas.
Supervision and regulation by the
responsible regulatory agency generally include comprehensive annual reviews of all major aspects of a banks business and condition, and imposition of periodic reporting requirements and limitations on investments and certain types of
activities. U.S. Bank National Association, the Company and the Companys non-bank affiliates must undergo regular on-site examinations by the appropriate regulatory agency, which examine for adherence to a range of legal and regulatory
compliance responsibilities. If they deem the Company to be operating in a manner that is inconsistent with safe and sound banking practices, the applicable regulatory agencies can require the entry into informal or formal supervisory agreements,
including board resolutions, memoranda of understanding, written agreements and consent or cease and desist orders, pursuant to which the Company would be required to take identified corrective actions to address cited concerns and to refrain from
taking certain actions.
Dodd-Frank Act
Substantial changes to the regulation of bank holding companies and their
subsidiaries have occurred and will continue to occur as a result of the enactment in 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). Changes in applicable law or regulation, and in their
application by regulatory agencies, have had and will continue to have a material effect on the business and results of the Company and its subsidiaries.
The Dodd-Frank Act significantly changed the regulatory framework for financial services companies, and since its enactment has required significant rulemaking and numerous studies and reports that will
continue over the next several years. Among other things, it created a new Financial Stability Oversight Council (the Council) with broad authority to make recommendations covering enhanced prudential standards and more stringent
supervision for large bank holding companies and certain non-bank financial services companies. The Dodd-Frank Act significantly reduced interchange fees on debit card transactions, changed the preemption of state laws applicable to national banks,
increased the regulation of consumer mortgage banking and made numerous other changes, some of which are discussed below.
In
addition to the Dodd-Frank Act, other legislative and regulatory proposals affecting banks have been made in recent years both domestically and internationally. Among other things, these proposals include significant additional capital and liquidity
requirements and limitations on the size or types of activity in which banks may engage.
Bank Holding Company
Activities
The Company elected to become a financial holding company as of March 13, 2000, pursuant to the provisions of the Gramm-Leach-Bliley Act (the GLBA). Under the GLBA, qualifying bank holding companies may engage in, and
affiliate with financial companies engaging in, a broader range of activities than would otherwise be permitted for a bank holding company. Under the GLBAs system of functional regulation, the Federal Reserve acts as an umbrella regulator for
the Company, and certain of the Companys subsidiaries are regulated directly by additional agencies based on the particular activities of those subsidiaries.
If a financial holding company or a depository institution controlled by a financial holding company ceases to meet certain capital or management standards, the Federal Reserve may impose corrective
capital and
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managerial requirements on the financial holding company, and may place limitations on its ability to conduct all of the business activities that financial holding companies are generally
permitted to conduct. See Permissible Business Activities below. If the failure to meet these standards persists, a financial holding company may be required to divest its depository institution subsidiaries, or cease all activities
other than those activities that may be conducted by bank holding companies that are not financial holding companies. In addition, the Federal Reserve requires bank holding companies to meet certain applicable capital and management standards.
Failure by the Company to meet these standards could limit the Company from engaging in any new activity or acquiring other companies without the prior approval of the Federal Reserve.
Federal Reserve regulations also provide that, if any depository institution controlled by a financial holding company fails to maintain
a satisfactory rating under the Community Reinvestment Act (CRA), the Federal Reserve must prohibit the financial holding company and its subsidiaries from engaging in the additional activities in which only financial holding companies
may engage. See Community Reinvestment Act below.
U.S. Bank National Association received a
Satisfactory CRA rating in its most recent examination, covering the period from January 1, 2009 through December 31, 2011. The OCC has scheduled a CRA examination in 2017.
Source of Strength
The Dodd-Frank Act codified existing Federal Reserve policy requiring the Company to act as a source of
financial strength to U.S. Bank National Association, and to commit resources to support this subsidiary in circumstances where it might not otherwise do so. However, because the GLBA provides for functional regulation of financial holding company
activities by various regulators, the GLBA prohibits the Federal Reserve from requiring payment by a holding company to a depository institution if the functional regulator of the depository institution objects to the payment. In those cases, the
Federal Reserve could instead require the divestiture of the depository institution and impose operating restrictions pending the divestiture. As a result of the Dodd-Frank Act, non-bank subsidiaries of a holding company that engage in activities
permissible for an insured depository institution must be examined and regulated in a manner that is at least as stringent as if the activities were conducted by the lead depository institution of the holding company.
Enhanced Prudential Standards
In March 2014, the Federal Reserve finalized a rule relating to enhanced prudential standards
required under the Dodd-Frank Act for bank holding companies with over $50 billion in consolidated assets. The prudential standards include enhanced risk-based capital and leverage requirements, enhanced liquidity requirements, enhanced risk
management and risk committee requirements, a requirement to submit a resolution plan, single-counterparty credit limits and stress tests. The rule incorporates the requirement that the Federal Reserve conduct annual supervisory capital adequacy
stress tests of covered companies under baseline, adverse and severely adverse scenarios, and requires covered companies to conduct their own capital adequacy stress tests. The rule provides for notification to a covered company as to which the
Council has determined to impose a debt-to-equity ratio of no more than 15-to-1, based upon the determination by the Council that (a) such company poses a grave threat to the financial stability of the United States and (b) the imposition
of such a requirement is necessary to mitigate the risk that the company poses to the financial stability of the United States.
OCC Heightened Standards
In September 2014, the OCC, under separate authority, finalized guidelines establishing heightened
standards for large national banks such as U.S. Bank National Association. The guidelines establish minimum standards for the design and implementation of a risk governance framework for banks. The OCC may take action against institutions that fail
to meet these standards.
Permissible Business Activities
As a financial holding company, the Company may affiliate
with securities firms and insurance companies and engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature. Financial in nature activities include the following:
securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking; and activities that the Federal Reserve, in consultation
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with the Secretary of the United States Treasury, determines to be financial in nature or incidental to such financial activity. Complementary activities are activities that the
Federal Reserve determines upon application to be complementary to a financial activity and that do not pose a safety and soundness risk.
The Company generally is not required to obtain Federal Reserve approval to acquire a company (other than a bank holding company, bank or savings association) engaged in activities that are financial in
nature or incidental to activities that are financial in nature, as determined by the Federal Reserve. However, the Dodd-Frank Act added a provision requiring approval if the total consolidated assets to be acquired exceed $10 billion. Financial
holding companies are also required to obtain the approval of the Federal Reserve before they may acquire more than five percent of the voting shares or substantially all of the assets of an unaffiliated bank holding company, bank or savings
association.
Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
Riegle-Neal Act), a bank holding company may acquire banks in states other than its home state, subject to any state requirement that the bank has been organized and operating for a minimum period of time (not to exceed five years).
Also, such an acquisition is not permitted if the bank holding company controls, prior to or following the proposed acquisition, more than 10 percent of the total amount of deposits of insured depository institutions nationwide, or, if the
acquisition is the bank holding companys initial entry into the state, more than 30 percent of the deposits of insured depository institutions in the state (or any lesser or greater amount set by the state).
The Riegle-Neal Act also authorizes banks to merge across state lines to create interstate branches. Under the Dodd-Frank Act, banks are
permitted to establish new branches in another state to the same extent as banks chartered in that state.
Regulatory
Approval for Acquisitions
In determining whether to approve a proposed bank acquisition, federal bank regulators will consider a number of factors, including the following: the effect of the acquisition on competition, financial condition and
future prospects (including current and projected capital ratios and levels); the competence, experience and integrity of management and its record of compliance with laws and regulations; the convenience and needs of the communities to be served
(including the acquiring institutions record of compliance under the CRA); the effectiveness of the acquiring institution in combating money laundering activities; and the extent to which the transaction would result in greater or more
concentrated risks to the stability of the United States banking or financial system. In addition, under the Dodd-Frank Act, approval of interstate transactions requires that the acquiror satisfy regulatory standards for well-capitalized and
well-managed institutions.
Dividend Restrictions
The Company is a legal entity separate and distinct from its
subsidiaries. Typically, the majority of the Companys operating funds are received in the form of dividends paid to the Company by U.S. Bank National Association. Federal law imposes limitations on the payment of dividends by national banks.
In general, dividends payable by U.S. Bank National Association and the Companys trust bank subsidiaries, as national
banking associations, are limited by rules that compare dividends to net income for periods defined by regulation.
The OCC,
the Federal Reserve and the FDIC also have authority to prohibit or limit the payment of dividends by the banking organizations they supervise (including the Company and U.S. Bank National Association), if, in the banking regulators opinion,
payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banking organization. Subject to exceptions for well-capitalized and well-managed holding companies, Federal Reserve regulations also
require approval of holding company purchases and redemptions of its securities if the gross consideration paid exceeds 10 percent of consolidated net worth for any 12-month period.
In addition, Federal Reserve policy on the payment of dividends, stock redemptions and stock repurchases requires that bank holding
companies consult with and inform the Federal Reserve in advance of doing any of the
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following: declaring and paying dividends that could raise safety and soundness concerns (e.g., declaring and paying dividends that exceed earnings for the period for which dividends are being
paid); redeeming or repurchasing capital instruments when experiencing financial weakness; and redeeming or repurchasing common stock and perpetual preferred stock, if the result will be a net reduction in the amount of such capital instruments
outstanding for the quarter in which the reduction occurs.
In 2010, the Federal Reserve issued an addendum to its policy on
dividends, stock redemptions and stock repurchases that is specifically applicable to the 19 largest bank holding companies (including the Company) that are covered by the Supervisory Capital Assessment Program. The addendum provides for Federal
Reserve review of dividend increases, implementation of capital repurchase programs and other capital repurchases or redemptions.
The supervisory stress tests of the Company conducted by the Federal Reserve as part of its annual Comprehensive Capital Analysis and Review (CCAR) process also affect the ability of the
Company to pay dividends and make other forms of capital distribution. See Comprehensive Capital Analysis and Review and Stress Testing below.
Capital Requirements
The Company is subject to regulatory capital requirements established by the Federal Reserve, and U.S. Bank National Association is subject to substantially similar rules
established by the OCC. These requirements have changed significantly as a result of standards established by the Basel Committee on Banking Supervision (the Basel Committee), an international organization that has the goal of creating
standards for banking regulation, and the implementation of these standards and of relevant provisions of the Dodd-Frank Act by banking regulators in the United States. Minimum regulatory capital levels will significantly increase as these
requirements are implemented and phased in.
Prior to 2014, regulatory capital requirements effective for the Company followed
the 1988 capital accord of the Basel Committee known as Basel I. In implementing Basel I, federal banking regulators adopted risk-based capital and leverage rules that require the capital-to-assets ratios of financial institutions to meet certain
minimum standards. The risk-based capital ratio is calculated by allocating assets and specified off-balance sheet financial instruments into risk-weighted categories (with higher levels of capital being required for the categories perceived as
representing greater risk), and is used to determine the amount of a financial institutions total risk-weighted assets (RWAs). Under the rules, capital is divided into multiple tiers: common equity tier 1 capital, additional tier 1
capital and tier 2 capital. The amount of tier 2 capital may not exceed the amount of tier 1 capital. Total capital is the sum of tier 1 capital and tier 2 capital. The federal banking regulators also have established minimum leverage ratio
guidelines. The leverage ratio is defined as tier 1 capital divided by adjusted average total on-balance sheet assets.
The
Federal Reserve and the OCC approved a final rule in 2007 adopting international guidelines established by the Basel Committee known as Basel II. The Basel II framework consists of three pillars: (a) capital adequacy; (b) supervisory
review (including the computation of capital and internal assessment processes); and (c) market discipline (including increased disclosure requirements). In December 2010, the Basel Committee issued a new set of international standards for
determining regulatory capital known as Basel III. Federal banking regulators published the United States Basel III final rule in July 2013 to implement many aspects of these international standards as well as certain provisions of the Dodd-Frank
Act. The United States Basel III final rule focuses regulatory capital on common equity tier 1 capital, introduces new regulatory adjustments and deductions from capital, narrows the eligibility criteria for regulatory capital instruments and makes
other changes to the Basel I and Basel II frameworks. Specifically, Basel III includes two comprehensive methodologies for calculating risk-weighted assets: a general standardized approach and more risk-sensitive advanced approaches, with the
Companys capital adequacy being evaluated against the Basel III methodology that is most restrictive. In December 2013, the Federal Reserve approved a final rule to revise the market risk capital rule, which addresses the market risk of
significant trading activities, so that it conforms to the Basel III capital framework. The revised market risk capital rule was effective April 1, 2014.
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Beginning January 1, 2014, the regulatory capital requirements for the Company follow
Basel III, subject to certain transition provisions from Basel I over the following four years to full implementation by January 1, 2018. Under the United States Basel III final rule, the Company is subject to a minimum common equity tier 1
capital ratio (common equity tier 1 capital to RWA) of 4.5 percent, a minimum tier 1 capital ratio of 6.0 percent and a minimum total capital ratio of 8.0 percent on a fully phased-in basis. In addition, the final rule provides that certain new
items be deducted from common equity tier 1 capital and certain Basel I deductions be modified. The Company is also subject to a 2.5 percent common equity tier 1 capital conservation buffer and, if deployed, up to a 2.5 percent common equity tier 1
countercyclical buffer on a fully phased-in basis by 2019. United States banking organizations are subject to a minimum leverage ratio of 4.0 percent. The final rule also subjects banking organizations calculating their capital requirements using
advanced approaches, including the Company, to a minimum Basel III supplementary leverage ratio of 3.0 percent that takes into account both on-balance sheet and certain off-balance sheet exposures.
The United States banking regulators also published final regulations in June 2011 implementing Section 171 of the Dodd-Frank Act,
commonly known as the Collins Amendment, which requires that certain institutions supervised by the Federal Reserve, including the Company, be subject to minimum capital requirements that are not less than the generally applicable risk-based capital
requirements. Prior to 2015, this minimum capital floor was based on Basel I. On January 1, 2015, the United States Basel III final rule replaced the Basel I-based capital floor with a standardized approach that, among
other things, modifies the existing risk weights for certain types of asset classes. The capital floor applies to the calculation of both minimum risk-based capital requirements as well as the capital conservation buffer and, if
deployed, the countercyclical capital buffer.
In September 2014, United States banking regulators approved a final rule that
enhanced the regulatory Supplementary Leverage Ratio (SLR) requirement for banks calculating capital adequacy using advanced approaches under Basel III. The SLR is defined as tier 1 capital divided by total leverage exposure, which
includes both on- and off-balance sheet exposures. The Company began calculating and reporting its SLR beginning in the first quarter of 2015; however, it is not subject to the minimum SLR requirement until January 1, 2018. At December 31,
2016, the Company exceeds the applicable minimum SLR requirement.
For additional information regarding the Companys
regulatory capital, see Capital Management in the Companys 2016 Annual Report.
Comprehensive Capital
Analysis and Review
The Federal Reserves Capital Plans rule requires large bank holding companies with assets in excess of $50 billion to submit capital plans to the Federal Reserve on an annual basis and to obtain approval from the
Federal Reserve for capital distributions proposed in the capital plan. These capital plans consist of a number of mandatory elements, including an assessment of a companys sources and uses of capital over a nine-quarter planning horizon
assuming both expected and stressful conditions; a detailed description of a companys process for assessing capital adequacy; a demonstration of a companys ability to maintain capital above each minimum regulatory capital ratio and above
a tier 1 common ratio of 5.0 percent under expected and stressful conditions; and a demonstration of a companys ability to achieve, readily and without difficulty, the minimum capital ratios and capital buffers under the Basel III framework as
it comes into effect in the United States.
The Federal Reserve has issued a final rule specifying how large bank holding
companies, including the Company, should incorporate the United States Basel III capital standards into their capital plans. Among other things, the final rule requires large bank holding companies to project both their common equity tier 1 capital
ratio using the methodology under existing capital guidelines and their common equity tier 1 capital ratio under the United States Basel III capital standards, as such standards phase in over the nine-quarter planning horizon.
The Company will submit its 2017 capital plan to the Federal Reserve by April 5, 2017, in accordance with instructions from the
Federal Reserve. Applicable stress testing rules require the Federal Reserve to publish the
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results of its assessment of the Companys capital plan, including its planned capital distributions, no later than June 30, 2017.
Stress Testing
The Federal Reserves CCAR framework and the Dodd-Frank Act stress testing framework require large bank
holding companies such as the Company to conduct company-run stress tests and subject them to supervisory stress tests conducted by the Federal Reserve. Among other things, the company-run stress tests employ stress scenarios developed by the
Company as well as stress scenarios provided by the Federal Reserve and incorporate the Dodd-Frank Act capital actions, which are intended to normalize capital distributions across large United States bank holding companies. The Federal Reserve
conducts CCAR and Dodd-Frank supervisory stress tests employing its adverse and severely adverse stress scenarios and internal supervisory models. The Federal Reserves CCAR and Dodd-Frank Act supervisory stress tests incorporate the
Companys planned capital actions and the Dodd-Frank Act capital actions, respectively. The Federal Reserve and the Company are required to publish the results of the annual supervisory and annual company-run stress tests, respectively, no
later than June 30 of each year. In addition, all large bank holding companies are required to submit a mid-cycle company-run stress test employing stress scenarios developed by the Company. The results of this stress test must be submitted to
the Federal Reserve for review in early October of each year. The Company is required to publish its results of this stress test no later than the end of November of each year. The Federal Reserve currently publishes summaries of supervisory stress
test results for each large bank holding company under both the adverse and severely adverse stress scenarios developed by the Federal Reserve.
National banks with assets in excess of $50 billion are required to submit annual company-run stress test results to the OCC concurrently with their parent bank holding companys CCAR submission to
the Federal Reserve. The stress test is based on the OCCs stress scenarios (which are typically the same as the Federal Reserves stress scenarios) and capital actions that are appropriate for the economic conditions assumed in each
scenario. U.S. Bank National Association will submit its stress test in accordance with regulatory requirements by April 5, 2017. The Company is required to publish the results of this stress test no later than June 30, 2017.
Basel III Liquidity Requirements
The Basel Committee proposed in 2009 two minimum standards for limiting liquidity risk: the
Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). The LCR is designed to ensure that bank holding companies have sufficient high-quality liquid assets to survive a significant liquidity stress event
lasting for 30 calendar days. The NSFR is designed to promote stable, longer-term funding of assets and business activities over a one-year time horizon.
In October 2014, the federal banking regulators finalized a rule to implement the LCR in the United States. The rule applies the LCR standards to bank holding companies and their domestic bank
subsidiaries calculating their capital requirements using advanced approaches, including the Company and U.S. Bank National Association. The LCR standards in the rule differ in certain respects from the Basel Committees version of the LCR,
including a narrower definition of high-quality liquid assets, different prescribed cash inflow and outflow assumptions for certain types of instruments and transactions, a different methodology for calculating the LCR and a shorter phase-in
schedule that ended on December 31, 2016. In June 2016, the federal banking regulators proposed a rule to implement a NSFR requirement in the United States that would apply to the Company and U.S. Bank National Association, consistent with the
Basel Committee NSFR standard finalized in October 2014. The Basel Committee contemplates that the NSFR, including any revisions, will be implemented as a minimum standard by January 1, 2018.
Federal Deposit Insurance Corporation Improvement Act
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
FDICIA) provides a framework for regulation of depository institutions and their affiliates (including parent holding companies) by federal banking regulators. As part of that framework, the FDICIA requires the relevant federal banking
regulator to take prompt corrective action with respect to a depository institution if that institution does not meet certain capital adequacy standards.
Supervisory actions by the appropriate federal banking regulator under the prompt corrective action rules generally depend upon an institutions classification within five capital
categories. The United States Basel III
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final rule revises the capital ratio thresholds in the prompt corrective action framework to reflect the new Basel III capital ratios. This aspect of the United States Basel III rule became
effective on January 1, 2015. The regulations apply only to banks and not to bank holding companies such as the Company; however, subject to limitations that may be imposed pursuant to the GLBA, the Federal Reserve is authorized to take
appropriate action at the holding company level, based on the undercapitalized status of the holding companys subsidiary banking institutions. In certain instances relating to an undercapitalized banking institution, the bank holding company
would be required to guarantee the performance of the undercapitalized subsidiarys capital restoration plan and could be liable for civil money damages for failure to fulfill those guarantee commitments.
Deposit Insurance
Under current FDIC regulations, each depository institution is assigned to a risk category based on capital and
supervisory measures. A depository institution is assessed premiums by the FDIC based on its risk category and the amount of deposits held. In 2009, the FDIC revised the method for calculating the assessment rate for depository institutions by
introducing several adjustments to an institutions initial base assessment rate. The Dodd-Frank Act altered the assessment base for deposit insurance assessments from a deposit to an asset base, and seeks to fund part of the cost of the
Dodd-Frank Act by increasing the reserve ratio of the deposit insurance fund to 1.35 percent of estimated insured deposits. The Dodd-Frank Act also requires that FDIC assessments be set in a manner that offsets the cost of the assessment increases
for institutions with consolidated assets of less than $10 billion. This provision effectively places the increased assessment costs on larger financial institutions such as the Company.
The Dodd-Frank Act also permanently increased deposit insurance coverage from $100,000 per account ownership type to $250,000. In
February 2011, the FDIC adopted a final rule implementing the Dodd-Frank Act provisions, which provides for use of a risk scorecard to determine deposit premiums. The effect of the rule was to increase the FDIC premiums paid by U.S. Bank National
Association. In 2014, the FDIC adopted a final rule revising its deposit insurance assessment system to reflect changes in the regulatory capital rules that are effective in 2015 and 2018. The rule (a) revises the ratios and ratio thresholds
relating to capital evaluations; (b) revises the assessment base calculation for custodial banks; and (c) requires that all highly complex institutions measure counterparty exposure for assessment purposes using the Basel III standardized
approach in the regulatory capital rules.
In March 2016, in order to bring the reserve ratio of the deposit insurance fund to
1.35 percent, the FDIC finalized a surcharge on the quarterly assessments of insured depository institutions with total consolidated assets of $10 billion or more. The surcharges were first imposed in the third quarter of 2016, the calendar quarter
after the reserve ratio of the deposit insurance fund first reached or exceeded 1.15 percent. The surcharge imposed on each insured depository institution equals an annual rate of 4.5 basis points applied to the institutions assessment base
(with certain adjustments). The FDIC expects that these surcharges should be sufficient to raise the reserve ratio to 1.35 percent in approximately eight quarters (i.e., before the end of 2018). If, contrary to the FDICs expectations, the
reserve ratio does not reach 1.35 percent by December 31, 2018, the FDIC plans to impose a shortfall assessment on insured depository institutions with total consolidated assets of $10 billion or more on March 31, 2019.
Powers of the FDIC Upon Insolvency of an Insured Institution
If the FDIC is appointed the conservator or receiver of an insured
depository institution upon its insolvency or in certain other events, the FDIC has the power to (a) transfer any of the depository institutions assets and liabilities to a new obligor without the approval of the depository
institutions creditors; (b) enforce the terms of the depository institutions contracts pursuant to their terms; or (c) repudiate or disaffirm any contracts (if the FDIC determines that performance of the contract is burdensome
and that the repudiation or disaffirmation is necessary to promote the orderly administration of the depository institution). These provisions would be applicable to obligations and liabilities of the Companys insured depository institution
subsidiary, U.S. Bank National Association.
Depositor Preference
Under federal law, in the event of the liquidation or
other resolution of an insured depository institution, the claims of a receiver of the institution for administrative expense and the claims of
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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
The Dodd-Frank Act created a new framework for
the orderly liquidation of a covered financial company by the FDIC as receiver. A covered financial company is a financial company (including a bank holding company, but not an insured depository institution), in situations where the Secretary of
the Treasury determines (upon the written recommendation of the FDIC and the Federal Reserve and after consultation with the President) that the conditions set forth in the Dodd-Frank Act regarding the potential impact on financial stability of the
financial companys failure have been met. The rule sets forth a comprehensive method for the receivership of a covered financial company. The Company is a financial company and, therefore, is potentially subject to the orderly liquidation
authority of the FDIC.
Resolution Plans
The Federal Reserve and the FDIC have adopted a rule to implement the
requirements of the Dodd-Frank Act regarding annual resolution plans for bank holding companies with assets of $50 billion or more (so-called Living Wills). The rule requires each covered company to produce a contingency resolution plan
for the rapid and orderly resolution of the company in the event of material financial distress or failure. Resolution plans must include information regarding the manner and extent to which any insured depository institution affiliated with the
company is adequately protected from risks arising from the activities of any non-bank subsidiaries of the company; full descriptions of ownership structure, assets, liabilities and contractual obligations of the company; identification of the
cross-guarantees tied to different securities; identification of major counterparties; a process for determining to whom the collateral of the company is pledged; and any other information that the Federal Reserve and the FDIC jointly require by
rule or order. Plans must analyze baseline, adverse, and severely adverse economic condition impacts. Plans must demonstrate, in the event of material financial distress or failure of the covered company, a reorganization or liquidation of the
covered company under the federal bankruptcy code that could be accomplished within a reasonable period of time and in a manner that substantially mitigates the risk that the failure of the covered company would have serious adverse effects on
financial stability in the United States. Covered companies and their subsidiaries are subject to more stringent capital, leverage and liquidity requirements or restrictions on growth, activities or operations if they fail to file an acceptable plan
(i.e., the plan is determined to not be credible and deficiencies are not cured in a timely manner). Plans must typically be updated annually.
The FDIC has also adopted regulations under its own authority requiring an insured depository institution with $50 billion or more in total assets to submit periodically to the FDIC a contingency plan for
the resolution of such institution in the event of its failure. The rule requires a covered depository institution to submit a resolution plan that should enable the FDIC, as receiver, to resolve the institution under applicable receivership
provisions of the Federal Deposit Insurance Act in a manner that ensures that depositors receive access to their insured deposits within one business day of the institutions failure, maximizes the net present value return from the sale or
disposition of its assets and minimizes the amount of any loss to be realized by the institutions creditors.
The
Company filed its resolution plans pursuant to each rule in December 2015, and will periodically revise its plans as required.
Recovery Plans
In September 2016, the OCC finalized a rule that establishes enforceable guidelines for recovery planning by
insured national banks, insured federal savings associations, and insured federal branches of foreign banks with average total consolidated assets of $50 billion or more, which includes U.S. Bank National Association. The guidelines provide that a
covered bank should develop and maintain a recovery plan that is appropriate for its individual risk profile, size, activities, and complexity, including the complexity of its organizational and legal entity structure. The guidelines state that a
recovery plan should (a) establish triggers, which are quantitative or qualitative indicators of the risk or existence of severe stress that should always be
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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.
Liability of Commonly Controlled Institutions
An FDIC-insured depository institution can be held liable for any loss incurred or expected to be incurred by the FDIC in connection with another
FDIC-insured institution under common control with that institution being in default or in danger of default (commonly referred to as cross-guarantee liability). An FDIC claim for cross-guarantee liability against
a depository institution is generally superior in right of payment to claims of the holding company and its affiliates against the depository institution.
Transactions with Affiliates
There are various legal restrictions on the extent to which the Company and its non-bank subsidiaries may borrow or otherwise engage in certain types of transactions
with U.S. Bank National Association. Under the Federal Reserve Act and Regulation W, U.S. Bank National Association (and its subsidiaries) is subject to quantitative and qualitative limits on extensions of credit, purchases of assets, and certain
other transactions involving its non-bank affiliates. Additionally, transactions between U.S. Bank National Association and its non-bank affiliates are required to be on arms length terms and must be consistent with standards of safety and
soundness.
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 Money Laundering Control
Act, the USA PATRIOT Act (AML laws), and implementing regulations for the International Emergency Economic Powers Act and the Trading with the Enemy Act, as administered by the United States Treasury Departments Office of Foreign
Assets Control (sanctions laws).
In October 2015, U.S. Bank National Association entered into a Consent Order
with the OCC regarding its Bank Secrecy Act (BSA) /Anti-Money Laundering (AML) compliance program. U.S. Bank National Association has implemented a number of BSA/AML compliance program enhancements and is taking significant
steps to remediate the issues identified in the Consent Order.
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/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 criminal pleas.
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
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low-income and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, and does not limit an institutions discretion
to develop the types of products and services that it believes are best suited to its particular community in a manner consistent with the CRA.
The OCC regularly assesses U.S. Bank National Association on its record in meeting the credit needs of the community served by that institution, including low-income and moderate-income neighborhoods. The
assessment also is considered when the Federal Reserve or OCC reviews applications by banking institutions to acquire, merge or consolidate with another banking institution or its holding company, to establish a new branch office that will accept
deposits, or to relocate an office. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the records of each subsidiary depository institution of the applicant
bank holding company, and those records may be the basis for denying the application.
U.S. Bank National Association received
a Satisfactory CRA rating in its most recent examination, covering the period from January 1, 2009 through December 31, 2011.
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.
The operations of the First American family of funds, the Companys proprietary money market fund complex, also are subject to regulation by the SEC. In July 2014, the SEC finalized rules regarding
money market fund reform. The final rules require a floating net asset value for institutional prime and tax-free money market funds. The rules also give the board of directors of the money market funds the ability to limit redemptions during
periods of stress (allowing for the use of liquidity fees and redemption gates during such times). Other changes include tightened diversification requirements and enhanced disclosure requirements.
The Companys operations in the areas of insurance brokerage and reinsurance of credit life insurance are subject to regulation and
supervision by various state insurance regulatory authorities, including the licensing of insurance brokers and agents.
Regulation of Derivatives and the Swaps Marketplace
Under the Dodd-Frank Act, the CFTC has issued and will continue to issue
additional rules regarding the regulation of the swaps marketplace and over-the-counter derivatives. The rules require swap dealers and major swap participants to register with the CFTC and require them to meet robust business conduct standards to
lower risk and promote market integrity, to meet certain recordkeeping and reporting requirements so that regulators can better monitor the markets, and to be subject to certain capital and margin requirements. U.S. Bank National Association is a
registered swap dealer.
In addition, in October 2015, the Federal Reserve, the OCC, the FDIC, the Federal Housing Finance
Agency, and the Farm Credit Administration finalized a rule concerning swap margin and capital requirements. The rule incorporates many aspects of the international framework for margin requirements for non-centrally cleared derivatives issued in
September 2013 by the Basel Committee and the Board of the International Organization of Securities Commissions. The final rule mandates the exchange of initial and variation margin for non-cleared swaps and non-cleared security-based swaps between
swap entities regulated by the five agencies and certain counterparties. The amount of margin will vary based on the relative risk of the non-cleared swap or
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non-cleared security-based swap. The final rule phases in the variation margin requirements between September 1, 2016, and March 1, 2017. The initial margin requirements will phase in
over four years, beginning on September 1, 2016. Additionally, the agencies issued a final rule on August 1, 2016 relating to the rules exemption from margin requirements for certain non-cleared swaps and non-cleared security-based
swaps used for hedging purposes by commercial end-users and certain other counterparties.
Other swaps requirements have
been modified by legislation. Section 716 of the Dodd-Frank Act required covered United States banks acting as dealers in commodity swaps, equity swaps and certain credit default swaps to push out such activities and conduct them
through one or more non-bank affiliates. In December 2014, the Consolidated and Further Continuing Appropriations Act of 2015 was signed into law, which contains a provision that narrows the push-out requirements in Section 716 only to
structured finance swaps.
Future regulations will likely impose additional operational and compliance costs,
although the ultimate impact of regulations that have not yet been finalized remains unclear.
The Volcker Rule
In
December 2013, the SEC, the CFTC, the Federal Reserve, the OCC and the FDIC jointly issued a final rule to implement the so-called Volcker Rule under the Dodd-Frank Act. The Volcker Rule prohibits banking entities from engaging in
proprietary trading, and prohibits certain interests in, or relationships with, hedge funds or private equity funds. The final rule also requires annual attestation by a banking entitys Chief Executive Officer that the banking entity has in
place processes to establish, maintain, enforce, review, test and modify a Compliance Program established in a manner reasonably designed to achieve compliance with the final rule. The final rule became effective on April 1, 2014, and applies
to the Company, U.S. Bank National Association and their affiliates. The Company has a Volcker compliance program in place that covers all of its subsidiaries and affiliates, including U.S. Bank National Association.
Financial Privacy
Under the requirements imposed by the GLBA, the Company and its subsidiaries are required periodically to
disclose to their retail customers the Companys policies and practices with respect to the sharing of nonpublic customer information with its affiliates and others, and the confidentiality and security of that information. Under the GLBA,
retail customers also must be given the opportunity to opt out of information-sharing arrangements with non-affiliates, subject to certain exceptions set forth in the GLBA.
Incentive-Based Compensation Arrangements
In April 2011, the Federal Reserve, the OCC, the FDIC, the SEC, the National Credit
Union Administration and the Federal Housing Finance Agency issued a proposed rule under Section 956 of the Dodd-Frank Act that would require the reporting of incentive-based compensation arrangements by a covered financial institution, and
prohibit incentive-based compensation arrangements at a covered financial institution that provide excessive compensation or that could expose the institution to inappropriate risks that could lead to material financial loss. In June 2016, those
agencies issued a joint proposed rule to revise the proposed rule that had been issued in 2011 and that would prohibit incentive-based compensation arrangements that those agencies determine encourage inappropriate risks by certain financial
institutions by providing excessive compensation or that could lead to material financial loss and require those financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate federal
regulator.
Durbin Amendment
A provision of the Dodd-Frank Act known as the Durbin Amendment required the Federal
Reserve to establish a cap on the interchange fees that merchants pay banks for electronic clearing of debit transactions. The Federal Reserve issued final rules, effective October 1, 2011, for establishing standards, including a cap, for debit
card interchange fees and prohibiting network exclusivity arrangements and routing restrictions. The final rule established standards for assessing whether debit card interchange fees received by debit card issuers were reasonable and proportional
to the costs incurred by issuers for electronic debit transactions, and it established a maximum permissible interchange fee that an issuer may receive for an electronic debit transaction, which reduces fee revenue to debit card issuers such as the
Company. Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction is
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the sum of 21 cents per transaction, a 1 cent fraud prevention adjustment, and 5 basis points multiplied by the value of the transaction.
In July 2013, the United States District Court for the District of Columbia, in
NACS, et al. v. Board of Governors of the Federal
Reserve System
, invalidated these regulations, ruling in favor of a group of retailers who argued that the new lower interchange fees had been inappropriately set too high. The United States Court of Appeals for the District of Columbia Circuit,
in March 2014, reversed the district court, upheld the vast majority of the regulations, and remanded the matter to the district court for the limited purpose of reviewing the Federal Reserves treatment of transaction monitoring costs. In
January 2015, the Supreme Court declined to review the Court of Appeals decision, which effectively keeps the final interchange fees rules intact.
Consumer Protection Regulation
Retail banking activities are subject to a variety of statutes and regulations designed to protect consumers, including laws related to fair lending and the
prohibition of unfair, deceptive, or abusive acts or practices in connection with the offer, sale, or provision of consumer financial products and services. These laws and regulations include the Truth-in-Lending, Truth-in-Savings, Home Mortgage
Disclosure, Equal Credit Opportunity, Fair Credit Reporting, Fair Debt Collection Practices, Real Estate Settlement Procedures, Electronic Funds Transfer, Right to Financial Privacy and Servicemembers Civil Relief Acts. Interest and other charges
collected or contracted for by banks are subject to state usury laws and federal laws concerning interest rates.
Consumer
Financial Protection Bureau
U.S. Bank National Association and its subsidiaries are subject to supervision and regulation by the CFPB with respect to federal consumer laws, including many of the laws and regulations described above. The CFPB has
undertaken numerous rule-making and other initiatives, including issuing informal guidance and taking enforcement actions against certain financial institutions. The CFPBs rulemaking, examination and enforcement authority has and will continue
to significantly affect financial institutions involved in the provision of consumer financial products and services, including the Company, U.S. Bank National Association, and the Companys other subsidiaries. These regulatory activities may
limit the types of financial services and products the Company may offer, which in turn may reduce the Companys revenues.
Supervisory Ratings
Federal banking regulators regularly examine the Company to evaluate its financial condition and monitor its
compliance with laws and regulatory policies. Key products of such exams are supervisory ratings of the Companys overall condition, commonly referred to as the CAMELS rating for U.S. Bank National Association (which reflects the OCCs
evaluation of certain components of the banks condition) and the RFI/C(D) rating for U.S. Bancorp (which reflects the Federal Reserves evaluation of certain components of the holding companys condition). Violations of laws and
regulations or deemed deficiencies in risk management practices may be incorporated into these supervisory ratings. A downgrade in these ratings could limit the Companys ability to pursue acquisitions or conduct other expansionary activities
for a period of time, require new or additional regulatory approvals before engaging in certain other business activities or investments, affect U.S. Bank National Associations deposit insurance assessment rate, and impose additional
recordkeeping and corporate governance requirements, as well as generally increase regulatory scrutiny of the Company.
Other Supervision and Regulation
The Company is subject to the disclosure and regulatory requirements of the Securities Act of
1933, as amended, and the Securities Exchange Act of 1934, as amended (the Exchange Act), both as administered by the SEC, by virtue of the Companys status as a public company. As a listed company on the New York Stock Exchange
(the NYSE), the Company is subject to the rules of the NYSE for listed companies.
Website Access to SEC Reports
U.S. Bancorps internet website can be found at
usbank.com
. U.S. Bancorp makes available free of charge on its
website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act, as well as all
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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 Companys 2016 Annual Report on pages 62 to 66 under the
heading Line of Business Financial Review. That information is incorporated into this report by reference.