News Release | ||||
Contact: | ||||
Steve Dale | Judith T. Murphy | |||
Media Relations | Investor Relations | |||
(612) 303-0784 | (612) 303-0783 |
U.S. BANCORP REPORTS RECORD NET INCOME FOR THE
THIRD QUARTER OF 2006
THIRD QUARTER OF 2006
EARNINGS SUMMARY | Table 1 | |||||||||||||||||||||||||||||||
($ in millions, except per-share data) | Percent | Percent | ||||||||||||||||||||||||||||||
Change | Change | |||||||||||||||||||||||||||||||
3Q | 2Q | 3Q | 3Q06 vs | 3Q06 vs | YTD | YTD | Percent | |||||||||||||||||||||||||
2006 | 2006 | 2005 | 2Q06 | 3Q05 | 2006 | 2005 | Change | |||||||||||||||||||||||||
Net income | $ | 1,203 | $ | 1,201 | $ | 1,154 | .2 | 4.2 | $ | 3,557 | $ | 3,346 | 6.3 | |||||||||||||||||||
Diluted earnings per common share | .66 | .66 | .62 | — | 6.5 | 1.95 | 1.80 | 8.3 | ||||||||||||||||||||||||
Return on average assets (%) | 2.23 | 2.27 | 2.23 | 2.24 | 2.22 | |||||||||||||||||||||||||||
Return on average common equity (%) | 23.6 | 24.3 | 22.8 | 23.7 | 22.5 | |||||||||||||||||||||||||||
Net interest margin (%) | 3.56 | 3.68 | 3.95 | 3.68 | 4.00 | |||||||||||||||||||||||||||
Efficiency ratio (%) | 45.0 | 44.4 | 43.8 | 44.7 | 44.6 | |||||||||||||||||||||||||||
Tangible efficiency ratio (%) (a) | 42.4 | 41.8 | 40.0 | 42.2 | 40.8 | |||||||||||||||||||||||||||
Dividends declared per common share | $ | .33 | $ | .33 | $ | .30 | — | 10.0 | $ | .99 | $ | .90 | 10.0 | |||||||||||||||||||
Book value per common share (period-end) | 11.30 | 10.89 | 10.93 | 3.8 | 3.4 |
(a) | computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net and intangible amortization. |
MINNEAPOLIS, October 17, 2006 —U.S. Bancorp (NYSE: USB) today reported net income of $1,203 million for the third quarter of 2006, compared with $1,154 million for the third quarter of 2005. Net income of $.66 per diluted common share in the third quarter of 2006 was higher than the same period of 2005 by 6.5 percent, or $.04 per diluted common share. Return on average assets and return on average common equity were 2.23 percent and 23.6 percent, respectively, for the third quarter of 2006, compared with returns of 2.23 percent and 22.8 percent, respectively, for the third quarter of 2005.
U.S. Bancorp Chairman and Chief Executive Officer Jerry A. Grundhofer said, “The Company’s third quarter results included excellent growth in fee revenue, exceptional credit quality and good expense control. Once again, we achieved industry-leading profitability metrics with a return on average assets of 2.23 percent and a return on average common equity of 23.6 percent. Further, in August, the Company’s board of directors authorized a new 150 million share repurchase program, enabling us to buyback approximately 30
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 2
October 17, 2006
Page 2
million shares in the third quarter. The result of this buyback, along with our regular quarterly dividend, represented a return of earnings to shareholders of 128 percent.
“Fee revenue experienced double-digit growth year-over-year, led by our payments and fiduciary businesses. In fact, fee income was, once again, over 50 percent of total net revenue in the third quarter. This growth in fee revenue helped to mitigate the impact of the decrease in net interest income, as pressure from competitive pricing and growth in lower-spread, fixed-rate assets reduced the quarter’s net interest margin to 3.56 percent. On a positive note, although the net interest margin declined on a linked quarter basis, it does appear to have stabilized over the past few months. Consequently, assuming the Fed has stopped raising rates, we should begin to see some improvement in net interest income in the fourth quarter. This is an important inflection point for our Company, as a stable and increasing net interest margin, coupled with growth in earning assets, will lead to growth in net interest income — growth we have not experienced since the third quarter of 2005.
“Our third quarter results demonstrated our disciplined approach to expense, as the increase year-over-year of 4.4 percent was primarily the result of expenses related to recent acquisitions and business development efforts. Expense discipline does not mean that we don’t spend appropriately or invest in our Company. It simply means that we manage our business — spending and investing when and where it makes the most sense for the Company. This discipline has enabled us to become a low cost producer, and that allows us to compete very effectively during the most challenging of times.
“Credit quality was excellent this quarter, the result of our continued efforts to reduce the risk profile of the Company and maintain a high quality credit portfolio. This is the time in the cycle when it is tempting to compromise on terms in order to maximize growth. We are not willing to make that compromise. We believe this approach best serves our customers and shareholders now and in the future.
“The U.S. Bank Five Star Service Guarantee has now been a part of this Company for over 10 years. We strongly believe that in a commodity business such as ours, customer service is what will differentiate us from our competitors over time. We have tracked our performance for many years in order to monitor our success. Feedback from both external and internal surveys indicates that we are exceeding expectations and are amongst the best in our peer group. Customer service will continue to be a priority for this Company. Our current success is the direct result of our employees’ dedication to serving their customers and representing our brand.
(MORE)
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 3
October 17, 2006
Page 3
“I am very proud of what we have accomplished over the past three quarters, particularly given the economic and interest rate challenges that our industry has had to face this year. We have expanded our distribution, invested in attractive fee-based payments and fiduciary businesses, maintained exceptional credit quality, sustained our disciplined approach to expense, provided peer-leading customer service and returned over 120 percent of our capital to shareholders in the form of dividends and buybacks. Our strategy is working, and I am confident that this Company will continue to provide the products, services and results that our customers, communities, employees and shareholders expect and deserve.”
The Company’s results for the third quarter of 2006 improved over the same period of 2005, as net income increased by $49 million (4.2 percent), primarily due to strong growth in fee-based revenues and the benefit of a lower effective tax rate from a year ago. This was offset somewhat by lower net interest income and the additional operating costs of acquired businesses. Total net revenue on a taxable-equivalent basis for the third quarter of 2006 was $3,421 million, $54 million (1.6 percent) higher than the third quarter of 2005, primarily reflecting a 10.9 percent increase in noninterest income partially offset by a 6.6 percent decline in net interest income. Noninterest income growth was driven by organic business growth and expansion in trust and payment processing businesses, partially offset by lower mortgage banking revenue principally due to the impact of adopting Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets” (“SFAS 156”) in the first quarter of 2006. Total noninterest expense in the third quarter of 2006 was $1,538 million, $65 million (4.4 percent) higher than the third quarter of 2005, primarily reflecting incremental operating and business integration costs principally associated with recent acquisitions, increased pension costs and higher expenses related to investments in tax-advantaged projects from a year ago. This was partially offset by lower intangible expense due to the adoption of SFAS 156.
Provision for credit losses for the third quarter of 2006 was $135 million, a decrease of $10 million from the third quarter of 2005. The decrease in the provision for credit losses year-over-year primarily reflected strong credit quality and the near-term favorable impact of changes in bankruptcy law in the fourth quarter of 2005. Net charge-offs in the third quarter of 2006 were $135 million, compared with the second quarter of 2006 net charge-offs of $125 million and the third quarter of 2005 net charge-offs of $156 million. Total nonperforming assets were $575 million at September 30, 2006, compared with $550 million at June 30, 2006, and $644 million at September 30, 2005. The ratio of the allowance for credit losses to nonperforming loans was 476 percent at September 30, 2006, compared with 500 percent at June 30, 2006, and 413 percent at September 30, 2005.
(MORE)
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 4
October 17, 2006
Page 4
INCOME STATEMENT HIGHLIGHTS | Table 2 | |||||||||||||||||||||||||||||||
(Taxable-equivalent basis, $ in millions, | Percent | Percent | ||||||||||||||||||||||||||||||
except per-share data) | Change | Change | ||||||||||||||||||||||||||||||
3Q | 2Q | 3Q | 3Q06 vs | 3Q06 vs | YTD | YTD | Percent | |||||||||||||||||||||||||
2006 | 2006 | 2005 | 2Q06 | 3Q05 | 2006 | 2005 | Change | |||||||||||||||||||||||||
Net interest income | $ | 1,673 | $ | 1,697 | $ | 1,791 | (1.4 | ) | (6.6 | ) | $ | 5,095 | $ | 5,303 | (3.9 | ) | ||||||||||||||||
Noninterest income | 1,748 | 1,755 | 1,576 | (.4 | ) | 10.9 | 5,117 | 4,499 | 13.7 | |||||||||||||||||||||||
Total net revenue | 3,421 | 3,452 | 3,367 | (.9 | ) | 1.6 | 10,212 | 9,802 | 4.2 | |||||||||||||||||||||||
Noninterest expense | 1,538 | 1,530 | 1,473 | .5 | 4.4 | 4,568 | 4,399 | 3.8 | ||||||||||||||||||||||||
Income before provision and taxes | 1,883 | 1,922 | 1,894 | (2.0 | ) | (.6 | ) | 5,644 | 5,403 | 4.5 | ||||||||||||||||||||||
Provision for credit losses | 135 | 125 | 145 | 8.0 | (6.9 | ) | 375 | 461 | (18.7 | ) | ||||||||||||||||||||||
Income before taxes | 1,748 | 1,797 | 1,749 | (2.7 | ) | (.1 | ) | 5,269 | 4,942 | 6.6 | ||||||||||||||||||||||
Taxable-equivalent adjustment | 13 | 11 | 9 | 18.2 | 44.4 | 34 | 23 | 47.8 | ||||||||||||||||||||||||
Applicable income taxes | 532 | 585 | 586 | (9.1 | ) | (9.2 | ) | 1,678 | 1,573 | 6.7 | ||||||||||||||||||||||
Net income | $ | 1,203 | $ | 1,201 | $ | 1,154 | .2 | 4.2 | $ | 3,557 | $ | 3,346 | 6.3 | |||||||||||||||||||
Net income applicable to common equity | $ | 1,187 | $ | 1,184 | $ | 1,154 | .3 | 2.9 | $ | 3,524 | $ | 3,346 | 5.3 | |||||||||||||||||||
Diluted earnings per common share | $ | .66 | $ | .66 | $ | .62 | — | 6.5 | $ | 1.95 | $ | 1.80 | 8.3 | |||||||||||||||||||
Net Interest Income
Third quarter net interest income on a taxable-equivalent basis was $1,673 million, compared with $1,791 million recorded in the third quarter of 2005. Average earning assets for the period increased over the third quarter of 2005 by $6.7 billion (3.7 percent), primarily driven by an increase in total average loans. This was partially offset by a $2.0 billion (4.7 percent) decrease in average investment securities. The positive impact to net interest income from the growth in earning assets was more than offset by a lower net interest margin. The net interest margin in the third quarter of 2006 was 3.56 percent, compared with 3.95 percent in the third quarter of 2005. The decline in the net interest margin reflected the competitive lending environment, asset/liability management decisions and the impact of changes in the yield curve from a year ago. Since the third quarter of 2005, credit spreads have tightened by approximately 24 basis points across most lending products due to competitive pricing and a change in mix reflecting growth in lower-spread, fixed-rate credit products and noninterest-bearing corporate and purchasing card balances. The net interest margin also declined due to funding incremental asset growth with higher cost wholesale funding, share repurchases and asset/liability decisions designed to minimize the Company’s rate sensitivity position. An increase in the margin benefit of net free funds and loan fees partially offset these factors.
(MORE)
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 5
October 17, 2006
Page 5
Net interest income in the third quarter of 2006 was lower than the second quarter of 2006 by $24 million (1.4 percent). The net interest margin of 3.56 percent in the third quarter of 2006 was 12 basis points lower than the net interest margin of 3.68 percent in the second quarter of 2006. The decline in the net interest margin from the second quarter of 2006 was due to continued tightening of credit spreads (4 basis points), including the impact of growth in noninterest-bearing corporate and purchasing card balances, incrementally funding growth in earning assets with wholesale funding and the ongoing impact of the flat yield curve.
Beginning in the third quarter, the Federal Reserve Bank paused from its policies of increasing interest rates and tightening the money supply. If the Federal Reserve Bank leaves rates unchanged, the Company expects net interest margin to stabilize in the fourth quarter as the cost of funding the balance sheet levels off and the yield on earning assets continues to rise through re-pricing and incremental growth.
NET INTEREST INCOME | Table 3 | |||||||||||||||||||||||||||||||
(Taxable-equivalent basis; $ in millions) | ||||||||||||||||||||||||||||||||
Change | Change | |||||||||||||||||||||||||||||||
3Q | 2Q | 3Q | 3Q06 vs | 3Q06 vs | YTD | YTD | ||||||||||||||||||||||||||
2006 | 2006 | 2005 | 2Q06 | 3Q05 | 2006 | 2005 | Change | |||||||||||||||||||||||||
Components of net interest income | ||||||||||||||||||||||||||||||||
Income on earning assets | $ | 3,175 | $ | 3,037 | $ | 2,727 | $ | 138 | $ | 448 | $ | 9,115 | $ | 7,741 | $ | 1,374 | ||||||||||||||||
Expense on interest-bearing liabilities | 1,502 | 1,340 | 936 | 162 | 566 | 4,020 | 2,438 | 1,582 | ||||||||||||||||||||||||
Net interest income | $ | 1,673 | $ | 1,697 | $ | 1,791 | $ | (24 | ) | $ | (118 | ) | $ | 5,095 | $ | 5,303 | $ | (208 | ) | |||||||||||||
Average yields and rates paid | ||||||||||||||||||||||||||||||||
Earning assets yield | 6.74 | % | 6.58 | % | 6.01 | % | .16 | % | .73 | % | 6.58 | % | 5.85 | % | .73 | % | ||||||||||||||||
Rate paid on interest-bearing liabilities | 3.79 | 3.45 | 2.49 | .34 | 1.30 | 3.45 | 2.23 | 1.22 | ||||||||||||||||||||||||
Gross interest margin | 2.95 | % | 3.13 | % | 3.52 | % | (.18 | )% | (.57 | )% | 3.13 | % | 3.62 | % | (.49 | )% | ||||||||||||||||
Net interest margin | 3.56 | % | 3.68 | % | 3.95 | % | (.12 | )% | (.39 | )% | 3.68 | % | 4.00 | % | (.32 | )% | ||||||||||||||||
Average balances | ||||||||||||||||||||||||||||||||
Investment securities | $ | 39,806 | $ | 40,087 | $ | 41,782 | $ | (281 | ) | $ | (1,976 | ) | $ | 39,858 | $ | 42,308 | $ | (2,450 | ) | |||||||||||||
Loans | 142,894 | 140,863 | 135,283 | 2,031 | 7,611 | 141,059 | 131,432 | 9,627 | ||||||||||||||||||||||||
Earning assets | 187,190 | 184,890 | 180,452 | 2,300 | 6,738 | 185,075 | 176,851 | 8,224 | ||||||||||||||||||||||||
Interest-bearing liabilities | 157,248 | 155,755 | 149,431 | 1,493 | 7,817 | 155,650 | 145,878 | 9,772 | ||||||||||||||||||||||||
Net free funds (a) | 29,942 | 29,135 | 31,021 | 807 | (1,079 | ) | 29,425 | 30,973 | (1,548 | ) |
(a) | Represents noninterest-bearing deposits, allowance for loan losses, unrealized gain (loss) on available-for-sale securities, non-earning assets, other noninterest-bearing liabilities and equity. |
(MORE)
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 6
October 17, 2006
Page 6
AVERAGE LOANS | Table 4 | |||||||||||||||||||||||||||||||
($ in millions) | Percent | Percent | ||||||||||||||||||||||||||||||
Change | Change | |||||||||||||||||||||||||||||||
3Q | 2Q | 3Q | 3Q06 vs | 3Q06 vs | YTD | YTD | Percent | |||||||||||||||||||||||||
2006 | 2006 | 2005 | 2Q06 | 3Q05 | 2006 | 2005 | Change | |||||||||||||||||||||||||
Commercial | $ | 40,781 | $ | 39,871 | $ | 38,343 | 2.3 | 6.4 | $ | 39,840 | $ | 37,348 | 6.7 | |||||||||||||||||||
Lease financing | 5,287 | 5,199 | 4,908 | 1.7 | 7.7 | 5,189 | 4,915 | 5.6 | ||||||||||||||||||||||||
Total commercial | 46,068 | 45,070 | 43,251 | 2.2 | 6.5 | 45,029 | 42,263 | 6.5 | ||||||||||||||||||||||||
Commercial mortgages | 19,941 | 20,195 | 20,341 | (1.3 | ) | (2.0 | ) | 20,133 | 20,255 | (.6 | ) | |||||||||||||||||||||
Construction and development | 8,760 | 8,600 | 7,852 | 1.9 | 11.6 | 8,571 | 7,507 | 14.2 | ||||||||||||||||||||||||
Total commercial real estate | 28,701 | 28,795 | 28,193 | (.3 | ) | 1.8 | 28,704 | 27,762 | 3.4 | |||||||||||||||||||||||
Residential mortgages | 21,118 | 20,868 | 18,741 | 1.2 | 12.7 | 20,992 | 17,266 | 21.6 | ||||||||||||||||||||||||
Credit card | 7,800 | 7,360 | 6,684 | 6.0 | 16.7 | 7,429 | 6,544 | 13.5 | ||||||||||||||||||||||||
Retail leasing | 7,069 | 7,115 | 7,467 | (.6 | ) | (5.3 | ) | 7,144 | 7,328 | (2.5 | ) | |||||||||||||||||||||
Home equity and second mortgages | 15,166 | 15,035 | 14,984 | .9 | 1.2 | 15,047 | 14,944 | .7 | ||||||||||||||||||||||||
Other retail | 16,972 | 16,620 | 15,963 | 2.1 | 6.3 | 16,714 | 15,325 | 9.1 | ||||||||||||||||||||||||
Total retail | 47,007 | 46,130 | 45,098 | 1.9 | 4.2 | 46,334 | 44,141 | 5.0 | ||||||||||||||||||||||||
Total loans | $ | 142,894 | $ | 140,863 | $ | 135,283 | 1.4 | 5.6 | $ | 141,059 | $ | 131,432 | 7.3 | |||||||||||||||||||
Average loans for the third quarter of 2006 were $7.6 billion (5.6 percent) higher than the third quarter of 2005, driven by growth in average total commercial loans of $2.8 billion (6.5 percent), residential mortgages of $2.4 billion (12.7 percent) and total retail loans of $1.9 billion (4.2 percent). Average loans for the third quarter of 2006 were higher than the second quarter of 2006 by $2.0 billion (1.4 percent), reflecting growth in total commercial and total retail loans. Residential mortgages and total commercial real estate loans remained relatively flat in the third quarter of 2006 compared with the second quarter of 2006. During the first quarter of 2006, the Company began selling an increased proportion of its residential mortgage loan production and anticipates that balances will remain essentially flat.
Average investment securities in the third quarter of 2006 were $2.0 billion (4.7 percent) lower than in the third quarter of 2005. The change in the balance of the investment securities portfolio from a year ago principally reflected asset/liability management decisions to reduce the focus on residential mortgage assets given the changing rate environment and mix of loan growth. Additionally, the Company reclassified approximately $460 million of principal-only securities to its trading account as of January 1, 2006, in connection with the adoption of SFAS 156.
(MORE)
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 7
October 17, 2006
Page 7
AVERAGE DEPOSITS | Table 5 | |||||||||||||||||||||||||||||||
($ in millions) | Percent | Percent | ||||||||||||||||||||||||||||||
Change | Change | |||||||||||||||||||||||||||||||
3Q | 2Q | 3Q | 3Q06 vs | 3Q06 vs | YTD | YTD | Percent | |||||||||||||||||||||||||
2006 | 2006 | 2005 | 2Q06 | 3Q05 | 2006 | 2005 | Change | |||||||||||||||||||||||||
Noninterest-bearing deposits | $ | 28,220 | $ | 28,949 | $ | 29,434 | (2.5 | ) | (4.1 | ) | $ | 28,666 | $ | 29,003 | (1.2 | ) | ||||||||||||||||
Interest-bearing deposits | ||||||||||||||||||||||||||||||||
Interest checking | 23,595 | 23,333 | 22,508 | 1.1 | 4.8 | 23,358 | 22,891 | 2.0 | ||||||||||||||||||||||||
Money market savings | 26,116 | 26,981 | 28,740 | (3.2 | ) | (9.1 | ) | 26,820 | 29,517 | (9.1 | ) | |||||||||||||||||||||
Savings accounts | 5,598 | 5,720 | 5,777 | (2.1 | ) | (3.1 | ) | 5,669 | 5,876 | (3.5 | ) | |||||||||||||||||||||
Total of savings deposits | 55,309 | 56,034 | 57,025 | (1.3 | ) | (3.0 | ) | 55,847 | 58,284 | (4.2 | ) | |||||||||||||||||||||
Time certificates of deposit less than $100,000 | 13,867 | 13,689 | 13,263 | 1.3 | 4.6 | 13,688 | 13,132 | 4.2 | ||||||||||||||||||||||||
Time deposits greater than $100,000 | 22,579 | 22,561 | 21,262 | .1 | 6.2 | 22,255 | 20,133 | 10.5 | ||||||||||||||||||||||||
Total interest-bearing deposits | 91,755 | 92,284 | 91,550 | (.6 | ) | .2 | 91,790 | 91,549 | .3 | |||||||||||||||||||||||
Total deposits | $ | 119,975 | $ | 121,233 | $ | 120,984 | (1.0 | ) | (.8 | ) | $ | 120,456 | $ | 120,552 | (.1 | ) | ||||||||||||||||
Average noninterest-bearing deposits for the third quarter of 2006 decreased $1.2 billion (4.1 percent) compared with the third quarter of 2005 reflecting a decline in business demand deposits as these customers reduce excess liquidity to fund business growth. The change also reflects a migration of customers to interest-bearing products given rising interest rates.
Average total savings deposits declined year-over-year by $1.7 billion (3.0 percent) due to reductions in average money market savings and savings accounts, partially offset by an increase in interest checking balances. Average money market savings balances declined by $2.6 billion (9.1 percent) year-over-year, primarily due to a decline in balances within the branches. This was partially offset by increases in broker dealer and corporate trust balances. The overall decrease in average money market savings balances year-over-year was primarily the result of the Company’s deposit pricing decisions for money market products in relation to other fixed-rate deposit products offered. A portion of branch-based money market savings accounts have migrated to fixed-rate time certificates to take advantage of higher interest rates for these products.
Average time certificates of deposit less than $100,000 were higher in the third quarter of 2006 than the third quarter of 2005 by $604 million (4.6 percent). Additionally, the Company experienced year-over-year growth in average consumer-based time deposits greater than $100,000 of $1.2 billion (34.9 percent) due to customer migration of deposit balances. Other time deposits greater than $100,000 were essentially unchanged from a year ago.
(MORE)
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 8
October 17, 2006
Page 8
Average noninterest-bearing deposits for the third quarter of 2006 decreased $729 million (2.5 percent) compared with the second quarter of 2006 reflecting seasonally higher second quarter demand deposit balances. Total savings deposits declined $725 million (1.3 percent) from the second quarter of 2006 partially offset by a modest increase in fixed-rate time certificates and time deposits greater than $100,000.
NONINTEREST INCOME | Table 6 | |||||||||||||||||||||||||||||||
($ in millions) | Percent | Percent | ||||||||||||||||||||||||||||||
Change | Change | |||||||||||||||||||||||||||||||
3Q | 2Q | 3Q | 3Q06 vs | 3Q06 vs | YTD | YTD | Percent | |||||||||||||||||||||||||
2006 | 2006 | 2005 | 2Q06 | 3Q05 | 2006 | 2005 | Change | |||||||||||||||||||||||||
Credit and debit card revenue | $ | 206 | $ | 202 | $ | 185 | 2.0 | 11.4 | $ | 590 | $ | 516 | 14.3 | |||||||||||||||||||
Corporate payment products revenue | 150 | 139 | 135 | 7.9 | 11.1 | 416 | 362 | 14.9 | ||||||||||||||||||||||||
ATM processing services | 63 | 61 | 64 | 3.3 | (1.6 | ) | 183 | 168 | 8.9 | |||||||||||||||||||||||
Merchant processing services | 253 | 253 | 200 | — | 26.5 | 719 | 576 | 24.8 | ||||||||||||||||||||||||
Trust and investment management fees | 305 | 314 | 251 | (2.9 | ) | 21.5 | 916 | 751 | 22.0 | |||||||||||||||||||||||
Deposit service charges | 268 | 264 | 246 | 1.5 | 8.9 | 764 | 690 | 10.7 | ||||||||||||||||||||||||
Treasury management fees | 111 | 116 | 109 | (4.3 | ) | 1.8 | 334 | 333 | .3 | |||||||||||||||||||||||
Commercial products revenue | 100 | 107 | 103 | (6.5 | ) | (2.9 | ) | 311 | 299 | 4.0 | ||||||||||||||||||||||
Mortgage banking revenue | 68 | 75 | 111 | (9.3 | ) | (38.7 | ) | 167 | 323 | (48.3 | ) | |||||||||||||||||||||
Investment products fees and commissions | 34 | 42 | 37 | (19.0 | ) | (8.1 | ) | 114 | 115 | (.9 | ) | |||||||||||||||||||||
Securities gains (losses), net | — | 3 | 1 | nm | nm | 3 | (57 | ) | nm | |||||||||||||||||||||||
Other | 190 | 179 | 134 | 6.1 | 41.8 | 600 | 423 | 41.8 | ||||||||||||||||||||||||
Total noninterest income | $ | 1,748 | $ | 1,755 | $ | 1,576 | (.4 | ) | 10.9 | $ | 5,117 | $ | 4,499 | 13.7 | ||||||||||||||||||
Noninterest Income
Third quarter noninterest income was $1,748 million, an increase of $172 million (10.9 percent) from the same quarter of 2005 and $7 million (.4 percent) lower than the second quarter of 2006. The increase in noninterest income over the third quarter of 2005 was driven by favorable variances in the majority of fee income categories. Strong growth in fee-based revenue was partially offset by the accounting impact of SFAS 156 on mortgage banking revenue.
Credit and debit card revenue and corporate payment products revenue were both higher in the third quarter of 2006 than the third quarter of 2005 by $21 million and $15 million, or 11.4 percent and 11.1 percent, respectively. The strong growth in credit and debit card revenue was primarily driven by higher customer transaction volumes. The corporate payment products revenue growth reflected organic growth in sales volumes and card usage and acquired business expansion. Merchant processing services revenue was higher in the third quarter of 2006 than the same quarter a year ago by $53 million (26.5 percent), reflecting
(MORE)
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 9
October 17, 2006
Page 9
an increase in sales volume driven by acquisitions, higher same store sales, rates and equipment fees. Trust and investment management fees increased by $54 million (21.5 percent) year-over-year, due to the acquisition of the corporate and institutional trust business of a large national bank, account growth and favorable equity market conditions. Deposit service charges grew year-over-year by $22 million (8.9 percent) due to increased transaction-related fees and the impact of net new checking accounts. Other income was higher by $56 million (41.8 percent) as compared with the third quarter of 2005, primarily due to a $32 million gain on the sale of equity interests in a card association and an increase in other equity investment revenue. These favorable changes in fee-based revenue were partially offset by the decline in mortgage banking revenue of $43 million (38.7 percent), principally driven by the adoption of the fair value method of accounting for mortgage servicing rights.
Noninterest income was slighter lower ($7 million or .4 percent) in the third quarter of 2006 compared with the second quarter of 2006. This reflected seasonally lower trust and investment management fees, treasury management fees and investment products fees and commissions of $9 million (2.9 percent), $5 million (4.3 percent) and $8 million (19.0 percent) respectively. Mortgage banking revenue was lower than the second quarter of 2006 by $7 million (9.3 percent) primarily due to lower production gains due to the current interest rate environment. In addition, commercial products revenue was lower in the third quarter of 2006 by $7 million (6.5 percent) primarily due to lower commercial leasing revenue. These decreases were partially offset by increases in credit and debit card revenue of $4 million (2.0 percent) corporate payment products revenue of $11 million (7.9 percent) and deposit services charges of $4 million (1.5 percent) primarily due to higher transaction volume. Other revenue increased $11 million (6.1 percent) in the third quarter of 2006 primarily due to increased equity investment revenue.
(MORE)
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 10
October 17, 2006
Page 10
NONINTEREST EXPENSE | Table 7 | |||||||||||||||||||||||||||||||
($ in millions) | Percent | Percent | ||||||||||||||||||||||||||||||
Change | Change | |||||||||||||||||||||||||||||||
3Q | 2Q | 3Q | 3Q06 vs | 3Q06 vs | YTD | YTD | Percent | |||||||||||||||||||||||||
2006 | 2006 | 2005 | 2Q06 | 3Q05 | 2006 | 2005 | Change | |||||||||||||||||||||||||
Compensation | $ | 632 | $ | 627 | $ | 603 | .8 | 4.8 | $ | 1,892 | $ | 1,782 | 6.2 | |||||||||||||||||||
Employee benefits | 123 | 123 | 106 | — | 16.0 | 379 | 330 | 14.8 | ||||||||||||||||||||||||
Net occupancy and equipment | 168 | 161 | 162 | 4.3 | 3.7 | 494 | 475 | 4.0 | ||||||||||||||||||||||||
Professional services | 54 | 41 | 44 | 31.7 | 22.7 | 130 | 119 | 9.2 | ||||||||||||||||||||||||
Marketing and business development | 58 | 58 | 61 | — | (4.9 | ) | 156 | 171 | (8.8 | ) | ||||||||||||||||||||||
Technology and communications | 128 | 127 | 118 | .8 | 8.5 | 372 | 337 | 10.4 | ||||||||||||||||||||||||
Postage, printing and supplies | 66 | 66 | 64 | — | 3.1 | 198 | 190 | 4.2 | ||||||||||||||||||||||||
Other intangibles | 89 | 89 | 125 | — | (28.8 | ) | 263 | 377 | (30.2 | ) | ||||||||||||||||||||||
Debt prepayment | — | 11 | — | nm | nm | 11 | 54 | (79.6 | ) | |||||||||||||||||||||||
Other | 220 | 227 | 190 | (3.1 | ) | 15.8 | 673 | 564 | 19.3 | |||||||||||||||||||||||
Total noninterest expense | $ | 1,538 | $ | 1,530 | $ | 1,473 | .5 | 4.4 | $ | 4,568 | $ | 4,399 | 3.8 | |||||||||||||||||||
Noninterest Expense
Third quarter noninterest expense totaled $1,538 million, an increase of $65 million (4.4 percent) from the same quarter of 2005 and $8 million (.5 percent) from the second quarter of 2006. Compensation expense was higher year-over-year by $29 million (4.8 percent) primarily due to the corporate and institutional trust and payments processing acquisitions and other growth initiatives. Benefits expense increased from the third quarter of 2005 primarily due to higher pension costs from a year ago. Professional services expense increased by $10 million (22.7 percent) due primarily to business development initiatives. Technology and communications expense rose by $10 million (8.5 percent) due to higher outside data processing expense principally associated with expanding a prepaid gift card program and the corporate and institutional trust acquisition. Other expense increased in the third quarter of 2006 from the same quarter of 2005 by $30 million (15.8 percent) primarily due to increased investments in tax-advantaged projects relative to a year ago and business integration costs. Offsetting these expense increases was a year-over-year decline in other intangible expense of $36 million (28.8 percent), reflecting the elimination of mortgage servicing rights amortization and impairment due to the adoption of SFAS 156.
Noninterest expense in the third quarter of 2006 was higher than the second quarter of 2006 by $8 million (.5 percent). The increase in noninterest expense in the third quarter of 2006 from the second quarter of 2006 was primarily due to operating costs from acquired businesses and other business development
(MORE)
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 11
October 17, 2006
Page 11
initiatives. Partially offsetting these increases was a decline of $11 million due to debt prepayment expense recorded in the second quarter of 2006.
Provision for Income Taxes
The provision for income taxes for the third quarter of 2006 declined to an effective tax rate of 30.7 percent compared with an effective tax rate of 33.7 percent in the third quarter of 2005 and an effective tax rate of 32.8 percent in second quarter of 2006. The decrease in the effective rate reflected an expected increase in income tax credits from tax-advantaged investments through the remainder of the year.
(MORE)
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 12
October 17, 2006
Page 12
ALLOWANCE FOR CREDIT LOSSES | Table 8 | |||||||||||||||||||
($ in millions) | 3Q | 2Q | 1Q | 4Q | 3Q | |||||||||||||||
2006 | 2006 | 2006 | 2005 | 2005 | ||||||||||||||||
Balance, beginning of period | $ | 2,251 | $ | 2,251 | $ | 2,251 | $ | 2,258 | $ | 2,269 | ||||||||||
Net charge-offs | ||||||||||||||||||||
Commercial | 18 | 13 | 5 | 15 | 7 | |||||||||||||||
Lease financing | 3 | 7 | 7 | 7 | 16 | |||||||||||||||
Total commercial | 21 | 20 | 12 | 22 | 23 | |||||||||||||||
Commercial mortgages | — | (1 | ) | 2 | (1 | ) | 2 | |||||||||||||
Construction and development | — | 1 | — | — | (2 | ) | ||||||||||||||
Total commercial real estate | — | — | 2 | (1 | ) | — | ||||||||||||||
Residential mortgages | 11 | 11 | 7 | 10 | 9 | |||||||||||||||
Credit card | 56 | 50 | 46 | 86 | 63 | |||||||||||||||
Retail leasing | 4 | 2 | 4 | 8 | 5 | |||||||||||||||
Home equity and second mortgages | 12 | 13 | 12 | 21 | 14 | |||||||||||||||
Other retail | 31 | 29 | 32 | 67 | 42 | |||||||||||||||
Total retail | 103 | 94 | 94 | 182 | 124 | |||||||||||||||
Total net charge-offs | 135 | 125 | 115 | 213 | 156 | |||||||||||||||
Provision for credit losses | 135 | 125 | 115 | 205 | 145 | |||||||||||||||
Acquisitions and other changes | 5 | — | — | 1 | — | |||||||||||||||
Balance, end of period | $ | 2,256 | $ | 2,251 | $ | 2,251 | $ | 2,251 | $ | 2,258 | ||||||||||
Components | ||||||||||||||||||||
Allowance for loan losses | $ | 2,034 | $ | 2,039 | $ | 2,035 | $ | 2,041 | $ | 2,055 | ||||||||||
Liability for unfunded credit commitments | 222 | 212 | 216 | 210 | 203 | |||||||||||||||
Total allowance for credit losses | $ | 2,256 | $ | 2,251 | $ | 2,251 | $ | 2,251 | $ | 2,258 | ||||||||||
Gross charge-offs | $ | 195 | $ | 176 | $ | 175 | $ | 267 | $ | 229 | ||||||||||
Gross recoveries | $ | 60 | $ | 51 | $ | 60 | $ | 54 | $ | 73 | ||||||||||
Allowance as a percentage of | ||||||||||||||||||||
Period-end loans | 1.56 | 1.59 | 1.62 | 1.63 | 1.65 | |||||||||||||||
Nonperforming loans | 476 | 500 | 432 | 414 | 413 | |||||||||||||||
Nonperforming assets | 392 | 409 | 364 | 350 | 351 |
Credit Quality
The allowance for credit losses was $2,256 million at September 30, 2006, compared with $2,251 million at June 30, 2006, and $2,258 million at September 30, 2005. The ratio of the allowance for credit losses to period-end loans was 1.56 percent at September 30, 2006, compared with 1.59 percent at June 30, 2006, and 1.65 percent at September 30, 2005. The ratio of the allowance for credit losses to nonperforming loans was 476 percent at September 30, 2006, compared with 500 percent at June 30, 2006, and 413 percent at September 30, 2005. Total net charge-offs in the third quarter of 2006 were $135 million, compared with
(MORE)
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 13
October 17, 2006
Page 13
the second quarter of 2006 net charge-offs of $125 million and the third quarter of 2005 net charge-offs of $156 million. The year-over-year decrease in total net charge-offs was principally due to the impact of changes in bankruptcy legislation that went into effect during the fourth quarter of 2005.
Commercial and commercial real estate loan net charge-offs remained relatively flat at $21 million in the third quarter of 2006 (.11 percent of average loans outstanding) compared with $20 million (.11 percent of average loans outstanding) in the second quarter of 2006 and $23 million (.13 percent of average loans outstanding) in the third quarter of 2005. The Company expects commercial net charge-offs to increase somewhat over the next several quarters, in part due to the timing and extent of commercial loan recoveries.
Retail loan net charge-offs were $103 million in the third quarter of 2006 compared with $94 million in the second quarter of 2006 and $124 million in the third quarter of 2005. Retail loan net charge-offs increased as compared with the second quarter of 2006, despite retail recoveries being higher than expected in the current quarter, and declined from the third quarter of 2005, reflecting the impact of the bankruptcy legislation change that occurred in the fourth quarter of 2005. Retail loan net charge-offs as a percent of average loans outstanding were .87 percent in the third quarter of 2006, compared with .82 percent and 1.09 percent in the second quarter of 2006 and third quarter of 2005, respectively. The increase reflects a higher level of bankruptcy-related charge-offs relative to the first and second quarters of 2006. The Company anticipates that bankruptcy charge-offs will continue to increase to more normalized levels during the next several quarters.
(MORE)
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 14
October 17, 2006
Page 14
CREDIT RATIOS | Table 9 |
(Percent) | 3Q | 2Q | 1Q | 4Q | 3Q | ||||||||||||||||
2006 | 2006 | 2006 | 2005 | 2005 | |||||||||||||||||
Net charge-offs ratios (a) | |||||||||||||||||||||
Commercial | .18 | .13 | .05 | .15 | .07 | ||||||||||||||||
Lease financing | .23 | .54 | .56 | .56 | 1.29 | ||||||||||||||||
Total commercial | .18 | .18 | .11 | .20 | .21 | ||||||||||||||||
Commercial mortgages | — | (.02 | ) | .04 | (.02 | ) | .04 | ||||||||||||||
Construction and development | — | .05 | — | — | (.10 | ) | |||||||||||||||
Total commercial real estate | — | — | .03 | (.01 | ) | — | |||||||||||||||
Residential mortgages | .21 | .21 | .14 | .20 | .19 | ||||||||||||||||
Credit card | 2.85 | 2.72 | 2.62 | 5.00 | 3.74 | ||||||||||||||||
Retail leasing | .22 | .11 | .22 | .43 | .27 | ||||||||||||||||
Home equity and second mortgages | .31 | .35 | .33 | .56 | .37 | ||||||||||||||||
Other retail | .72 | .70 | .78 | 1.64 | 1.04 | ||||||||||||||||
Total retail | .87 | .82 | .83 | 1.59 | 1.09 | ||||||||||||||||
Total net charge-offs | .37 | .36 | .33 | .61 | .46 | ||||||||||||||||
Delinquent loan ratios - 90 days or more past dueexcludingnonperforming loans (b) | |||||||||||||||||||||
Commercial | .06 | .05 | .05 | .05 | .04 | ||||||||||||||||
Commercial real estate | .01 | — | — | — | .01 | ||||||||||||||||
Residential mortgages | .36 | .30 | .31 | .32 | .30 | ||||||||||||||||
Retail | .40 | .38 | .36 | .36 | .36 | ||||||||||||||||
Total loans | .20 | .19 | .18 | .18 | .18 | ||||||||||||||||
Delinquent loan ratios - 90 days or more past dueincludingnonperforming loans (b) | |||||||||||||||||||||
Commercial | .55 | .58 | .64 | .69 | .74 | ||||||||||||||||
Commercial real estate | .54 | .40 | .51 | .55 | .57 | ||||||||||||||||
Residential mortgages | .53 | .49 | .53 | .55 | .53 | ||||||||||||||||
Retail | .51 | .50 | .52 | .50 | .45 | ||||||||||||||||
Total loans | .53 | .51 | .56 | .58 | .58 |
(a) annualized and calculated on average loan balances
(b) ratios are expressed as a percent of ending loan balances
(MORE)
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 15
October 17, 2006
Page 15
ASSET QUALITY | Table 10 |
($ in millions) | |||||||||||||||||||||
Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | |||||||||||||||||
2006 | 2006 | 2006 | 2005 | 2005 | |||||||||||||||||
Nonperforming loans | |||||||||||||||||||||
Commercial | $ | 192 | $ | 203 | $ | 219 | $ | 231 | $ | 265 | |||||||||||
Lease financing | 39 | 38 | 41 | 42 | 35 | ||||||||||||||||
Total commercial | 231 | 241 | 260 | 273 | 300 | ||||||||||||||||
Commercial mortgages | 114 | 88 | 123 | 134 | 144 | ||||||||||||||||
Construction and development | 40 | 25 | 23 | 23 | 16 | ||||||||||||||||
Total commercial real estate | 154 | 113 | 146 | 157 | 160 | ||||||||||||||||
Residential mortgages | 36 | 39 | 45 | 48 | 44 | ||||||||||||||||
Retail | 53 | 57 | 70 | 66 | 43 | ||||||||||||||||
Total nonperforming loans | 474 | 450 | 521 | 544 | 547 | ||||||||||||||||
Other real estate | 79 | 77 | 71 | 71 | 68 | ||||||||||||||||
Other nonperforming assets | 22 | 23 | 27 | 29 | 29 | ||||||||||||||||
Total nonperforming assets (a) | $ | 575 | $ | 550 | $ | 619 | $ | 644 | $ | 644 | |||||||||||
Accruing loans 90 days or more past due | $ | 295 | $ | 264 | $ | 251 | $ | 253 | $ | 242 | |||||||||||
Restructured loans that continue to accrue interest | $ | 369 | $ | 370 | $ | 371 | $ | 315 | $ | 301 | |||||||||||
Nonperforming assets to loans plus ORE (%) | .40 | .39 | .45 | .47 | .47 |
(a) does not include accruing loans 90 days or more past due or restructured loans that continue to accrue interest
Nonperforming assets at September 30, 2006, totaled $575 million, compared with $550 million at June 30, 2006, and $644 million at September 30, 2005. The ratio of nonperforming assets to loans and other real estate was .40 percent at September 30, 2006, .39 percent at June 30, 2006, and .47 percent at September 30, 2005. Restructured loans that continue to accrue interest have increased from the third quarter of 2005, reflecting the impact of implementing higher minimum balance payment requirements for credit card customers in response to industry guidance issued by the banking regulatory agencies.
(MORE)
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 16
October 17, 2006
Page 16
CAPITAL POSITION | Table 11 |
($ in millions) | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | |||||||||||||||
2006 | 2006 | 2006 | 2005 | 2005 | ||||||||||||||||
Total shareholders’ equity | $ | 20,926 | $ | 20,415 | $ | 20,256 | $ | 20,086 | $ | 19,864 | ||||||||||
Tier 1 capital | 17,042 | 16,841 | 16,478 | 15,145 | 15,180 | |||||||||||||||
Total risk-based capital | 25,011 | 24,893 | 24,328 | 23,056 | 23,283 | |||||||||||||||
Tier 1 capital ratio | 8.8 | % | 8.9 | % | 8.9 | % | 8.2 | % | 8.4 | % | ||||||||||
Total risk-based capital ratio | 13.0 | 13.1 | 13.1 | 12.5 | 12.8 | |||||||||||||||
Leverage ratio | 8.3 | 8.2 | 8.2 | 7.6 | 7.7 | |||||||||||||||
Common equity to assets | 9.2 | 9.1 | 9.2 | 9.6 | 9.6 | |||||||||||||||
Tangible common equity to assets | 5.4 | 5.6 | 5.4 | 5.9 | 6.2 |
Total shareholders’ equity was $20.9 billion at September 30, 2006, compared with $19.9 billion at September 30, 2005. The increase was the result of corporate earnings and the issuance of $1.0 billion of non-cumulative, perpetual preferred stock on March 27, 2006, partially offset by share buybacks and dividends.
The Tier 1 capital ratio was 8.8 percent at September 30, 2006, compared with 8.9 percent at June 30, 2006, and 8.4 percent at September 30, 2005. The total risk-based capital ratio was 13.0 percent at September 30, 2006, compared with 13.1 percent at June 30, 2006, and 12.8 percent at September 30, 2005. The leverage ratio was 8.3 percent at September 30, 2006, compared with 8.2 percent at June 30, 2006, and 7.7 percent at September 30, 2005. Tangible common equity to assets was 5.4 percent at September 30, 2006, compared with 5.6 percent at June 30, 2006, and 6.2 percent at September 30, 2005. All regulatory ratios continue to be in excess of stated “well capitalized” requirements.
(MORE)
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 17
October 17, 2006
Page 17
COMMON SHARES | Table 12 |
(Millions) | 3Q | 2Q | 1Q | 4Q | 3Q | |||||||||||||||
2006 | 2006 | 2006 | 2005 | 2005 | ||||||||||||||||
Beginning shares outstanding | 1,783 | 1,783 | 1,815 | 1,818 | 1,829 | |||||||||||||||
Shares issued for stock option and stock purchase plans, acquisitions and other corporate purposes | 10 | 9 | 9 | 6 | 4 | |||||||||||||||
Shares repurchased | (30 | ) | (9 | ) | (41 | ) | (9 | ) | (15 | ) | ||||||||||
Ending shares outstanding | 1,763 | 1,783 | 1,783 | 1,815 | 1,818 | |||||||||||||||
On December 21, 2004, the Board of Directors of U.S. Bancorp approved an authorization to repurchase up to 150 million shares of outstanding common stock during the following 24 months. On August 3, 2006, the Company announced that the Board of Directors approved an authorization to repurchase 150 million shares of common stock through December 2008. This new authorization replaces the December 21, 2004, share repurchase program. During the third quarter of 2006, the Company repurchased 30 million shares of common stock. As of September 30, 2006, there were approximately 132 million shares remaining to be repurchased under the current authorization.
(MORE)
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 18
October 17, 2006
Page 18
LINE OF BUSINESS FINANCIAL PERFORMANCE (a) | Table 13 |
($ in millions) | ||||||||||||||||||||||||||||||||||||
Net Income | Percent Change | 3Q 2006 | ||||||||||||||||||||||||||||||||||
3Q | 2Q | 3Q | 3Q06 vs | 3Q06 vs | YTD | YTD | Percent | Earnings | ||||||||||||||||||||||||||||
Business Line | 2006 | 2006 | 2005 | 2Q06 | 3Q05 | 2006 | 2005 | Change | Composition | |||||||||||||||||||||||||||
Wholesale Banking | $ | 298 | $ | 304 | $ | 287 | (2.0 | ) | 3.8 | $ | 907 | $ | 866 | 4.7 | 25 | % | ||||||||||||||||||||
Consumer Banking | 477 | 490 | 447 | (2.7 | ) | 6.7 | 1,379 | 1,262 | 9.3 | 40 | ||||||||||||||||||||||||||
Wealth Management | 147 | 149 | 122 | (1.3 | ) | 20.5 | 433 | 349 | 24.1 | 12 | ||||||||||||||||||||||||||
Payment Services | 252 | 251 | 207 | .4 | 21.7 | 726 | 559 | 29.9 | 21 | |||||||||||||||||||||||||||
Treasury and Corporate Support | 29 | 7 | 91 | nm | (68.1 | ) | 112 | 310 | (63.9 | ) | 2 | |||||||||||||||||||||||||
Consolidated Company | $ | 1,203 | $ | 1,201 | $ | 1,154 | .2 | 4.2 | $ | 3,557 | $ | 3,346 | 6.3 | 100 | % | |||||||||||||||||||||
(a) preliminary data
Lines of Business
Within the Company, financial performance is measured by major lines of business, which include Wholesale Banking, Consumer Banking, Wealth Management, Payment Services, and Treasury and Corporate Support. These operating segments are components of the Company about which financial information is available and is evaluated regularly in deciding how to allocate resources and assess performance. Noninterest expenses incurred by centrally managed operations or business lines that directly support another business line’s operations are charged to the applicable business line based on its utilization of those services primarily measured by the volume of customer activities, number of employees or other relevant factors. These allocated expenses are reported as net shared services expense within noninterest expense. Designations, assignments and allocations change from time to time as management systems are enhanced, methods of evaluating performance or product lines change or business segments are realigned to better respond to our diverse customer base. During 2006, certain organization and methodology changes were made and, accordingly, prior period results have been restated and presented on a comparable basis.
Wholesale Banking offers lending, depository, treasury management and other financial services to middle market, large corporate, commercial real estate, equipment finance, small-ticket leasing and public sector clients, along with lending guaranteed by the Small Business Administration. Wholesale Banking contributed $298 million of the Company’s net income in the third quarter of 2006, a 3.8 percent increase over the same period of 2005 and a 2.0 percent decrease as compared with the second quarter of 2006. The increase in Wholesale Banking’s third quarter 2006 contribution over the same quarter of 2005 was the result of a favorable variance in total net revenue (2.2 percent). The favorable variance in total net revenue year-
(MORE)
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 19
October 17, 2006
Page 19
over-year was the result of growth in total noninterest income (6.3 percent), driven by higher equity investment revenue and commercial real estate production income, offset somewhat by lower syndication and letter of credit fee revenue. Net interest income remained relatively flat as growth from average loan balances and the margin benefit of deposits was offset by tighter credit spreads and a decline in average deposit balances.
Wholesale Banking’s contribution to net income in the third quarter of 2006 compared with the second quarter of 2006 was $6 million (2.0 percent) lower, due primarily to an unfavorable variance in total net revenue (2.0 percent). Total net revenue was lower on a linked quarter basis due to a decrease in total noninterest income of $7 million (3.1 percent) and lower net interest income, driven primarily by lower average deposit balances and tightening credit spreads. Total noninterest income decreased due to lower commercial leasing revenue and seasonally lower treasury management revenue.
Consumer Banking delivers products and services through banking offices, telephone servicing and sales, on-line services, direct mail and ATMs. It encompasses community banking, metropolitan banking, in-store banking, small business banking, consumer lending, mortgage banking, consumer finance, workplace banking, student banking, and 24-hour banking. Consumer Banking contributed $477 million of the Company’s net income in the third quarter of 2006, a 6.7 percent increase over the same period of 2005 and a 2.7 percent decrease from the prior quarter. The Company’s adoption of SFAS 156 reduced the business line’s total net revenue and noninterest expense compared with the third quarter of 2005 by approximately $36 million and $46 million, respectively. After consideration of the impact of adopting this accounting standard, the favorable increase in contribution from a year ago was the result of core net revenue growth (1.9 percent) and lower provision for credit losses (9.2 percent). Net interest income was higher year-over-year primarily due to growth in average loan balances of 5.4 percent and the margin benefit of deposits, somewhat offset by lower spreads on those assets given the competitive lending environment. Fee-based revenues, excluding the impact of adopting SFAS 156, increased 1.2 percent reflecting strong growth in deposit service charges (9.0 percent) due to increased transaction-related fees and net new checking accounts, offset somewhat by lower investment product sales and end-of-term retail lease residual income. Total noninterest expense in the third quarter of 2006 was lower compared with the same quarter of 2005 due to the elimination of mortgage servicing rights amortization under SFAS 156. In addition, there was a favorable variance in net shared services expense (3.3 percent) partially offset by higher compensation and employee benefit expense (3.3 percent) resulting from investments in the branch distribution network. A $6
(MORE)
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 20
October 17, 2006
Page 20
million year-over-year decrease in net charge-offs (9.2 percent) resulted in the favorable variance in the business line’s provision for credit losses.
The decrease in Consumer Banking’s contribution in the third quarter of 2006 from the second quarter of 2006 was principally the result of growth in net interest income that was more than offset by lower fee-based revenues and higher noninterest expense. The change in total net revenue was due primarily to an increase in net interest income (1.9 percent) driven by average loan growth and the margin benefit of deposits, partially offset by a reduction in total noninterest income (1.5 percent). The decline in total noninterest income was primarily due to a decrease in mortgage banking revenue reflecting the impact of the interest rate environment on production gains, partially offset by higher deposit service charges. Total noninterest expense was higher on a linked quarter basis, primarily due to higher compensation costs in the branch network and an increase in business development expense. The increase in the provision for credit losses was due to a $5 million increase in net charge-offs, as bankruptcy related charge-offs continue to return to more normalized levels.
Wealth Management provides trust, private banking, financial advisory, investment management, insurance, custody and mutual fund servicing through six businesses: Private Client Group, Corporate Trust, U.S. Bancorp Investments and Insurance, FAF Advisors, Institutional Trust and Custody and Fund Services. Wealth Management contributed $147 million of the Company’s net income in the third quarter of 2006, a 20.5 percent increase over the same period of 2005 and a 1.3 percent decrease from the second quarter of 2006. The growth in the business line’s contribution in the third quarter of 2006 over the same quarter of 2005 was the result of core growth in net interest income and fee-based revenues and an acquired corporate and institutional trust business. Net interest income was favorably impacted year-over-year by wider deposit spreads and growth in average loan and deposit balances. Total noninterest income increased by 17.6 percent from the same quarter of 2005, primarily due to improved equity market conditions, incremental growth in customer accounts and balances and the acquisition of the corporate and institutional trust business of a large national bank. The increase in total noninterest expense was primarily due to the recent acquisition. The decrease in the business line’s contribution in the third quarter of 2006, as compared with the second quarter of 2006, was due primarily to seasonally lower trust and investment management fees offset somewhat by lower production-based compensation costs.
Payment Services includes consumer and business credit cards, stored-value cards, debit cards, corporate and purchasing card services, consumer lines of credit, ATM processing and merchant processing.
(MORE)
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 21
October 17, 2006
Page 21
Payment Services contributed $252 million of the Company’s net income in the third quarter of 2006, a 21.7 percent increase from the same period of 2005 and a .4 percent increase from the second quarter of 2006. The increase in Payment Services’ contribution in the third quarter of 2006 from the same period of 2005 was the result of higher total net revenue (14.1 percent) and a favorable variance in the provision for credit losses (15.9 percent), partially offset by an increase in total noninterest expense (14.7 percent). The increase in total net revenue year-over-year was due to growth in total noninterest income (16.1 percent) and net interest income (6.5 percent), reflecting growth in higher yielding retail loan balances, partially offset by the margin impact of noninterest-bearing corporate and purchasing card balances and intangibles related to recent acquisitions. All revenue categories benefited from higher transaction volumes, rate changes and business expansion initiatives. The growth in total noninterest expense year-over-year primarily reflected new business initiatives, including costs associated with acquisitions and other business growth initiatives. The decrease in the provision for credit losses was driven by lower net charge-offs, year-over-year, reflecting the impact of changes in bankruptcy legislation in the fourth quarter of 2005.
The increase in Payment Services’ contribution in the third quarter of 2006 from the second quarter of 2006 was due to improved total noninterest income (2.8 percent), partially offset by increased provision for credit losses (13.8 percent) and an increase in total noninterest expense (4.6 percent). The increase in noninterest income was due to higher volumes in credit and debit card revenue and corporate payment products revenue. An $8 million increase in net charge-offs drove the increase in the provision for credit losses, as bankruptcy charge-offs continue to return to more normalized levels. The increase in total noninterest expense was primarily due to the impact of acquisitions on various costs including compensation and employee benefits and other intangible expense.
Treasury and Corporate Support includes the Company’s investment portfolios, funding, capital management and asset securitization activities, interest rate risk management, the net effect of transfer pricing related to average balances and the residual aggregate of those expenses associated with corporate activities that are managed on a consolidated basis. In addition, prior to the adoption of SFAS 156, changes in mortgage servicing rights valuations due to interest rate changes were managed at a corporate level and, as such, reported within this business unit. Operational expenses incurred by Treasury and Corporate Support on behalf of the other business lines are allocated back to the appropriate business unit, primarily based on customer transaction volume and account activities, deposit balances and employee levels and are identified as net shared services expense. Treasury and Corporate Support recorded net income of $29 million in the
(MORE)
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 22
October 17, 2006
Page 22
third quarter of 2006, compared with net income of $91 million in the third quarter of 2005 and $7 million in the second quarter of 2006. Net interest income decreased in the current quarter from the third quarter of 2005 by $167 million, reflecting the impact of a flatter yield curve and asset/liability management decisions during the past year, including reducing the investment securities portfolio, changes in interest rate derivative positions and the issuance of higher cost wholesale funding. The adverse impact of net interest income was offset somewhat by growth in noninterest income from a year ago related to a $32 million gain on the sale of equity interests in a card association and an increase in gains from the sale of certain corporate real estate. Total noninterest expense increased $38 million primarily due to operating costs associated with incremental investments in tax-advantaged projects relative to a year ago and business integration costs. The favorable change in income taxes, compared with a year ago, resulted from expected income tax credits from incremental tax-advantaged investments. Net income in the third quarter of 2006 was higher than the second quarter of 2006 due to lower total noninterest expense ($21 million) primarily related to debt prepayment expense recorded in the second quarter and a favorable change in income taxes ($38 million) reflecting the increase in income tax credits. This improvement was partially offset by lower net interest income ($43 million) driven by the flatter yield curve and funding earning asset growth with wholesale funding.
Additional schedules containing more detailed information about the Company’s business line results are available on the web at usbank.com or by calling Investor Relations at 612-303-0781.
(MORE)
U.S. Bancorp Reports Third Quarter 2006 Results
October 17, 2006
Page 23
October 17, 2006
Page 23
CHAIRMAN AND CHIEF EXECUTIVE OFFICER, JERRY A. GRUNDHOFER, AND VICE CHAIRMAN AND CHIEF FINANCIAL OFFICER, DAVID M. MOFFETT, WILL REVIEW THE FINANCIAL RESULTS IN A PRE-RECORDED CALL ON TUESDAY, OCTOBER 17, 2006. The call will be available by telephone or on the internet. The pre-recorded call will be available from approximately 7:00 a.m. (CT) on Tuesday, October 17th through Tuesday, October 24th at 11:00 p.m. (CT). To access the recorded call, please dial 800-839-8292. Participants calling from outside the United States, please call 402-220-6069. Find the recorded call via the internet at usbank.com.
Minneapolis-based U.S. Bancorp (“USB”), with $217 billion in assets, is the 6th largest financial holding company in the United States. The Company operates 2,462 banking offices and 4,943 ATMs, and provides a comprehensive line of banking, brokerage, insurance, investment, mortgage, trust and payment services products to consumers, businesses and institutions. U.S. Bancorp is the parent company of U.S. Bank. Visit U.S. Bancorp on the web at usbank.com.
Forward-Looking Statements
The following information appears in accordance with the Private Securities Litigation Reform Act of 1995:
This press release 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. These statements often include the words “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future plans and prospects of the Company. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including changes in general business and economic conditions, changes in interest rates, legal and regulatory developments, increased competition from both banks and non-banks, changes in customer behavior and preferences, effects of mergers and acquisitions and related integration, and effects of critical accounting policies and judgments. For discussion of these and other risks that may cause actual results to differ from expectations, refer to our Annual Report on Form 10-K for the year ended December 31, 2005, on file with the SEC, including the sections entitled “Risk Factors” and “Corporate Risk Profile.” Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update them in light of new information or future events.
###
(MORE)
U.S. Bancorp
Consolidated Statement of Income
Consolidated Statement of Income
Three Months Ended | Nine Months Ended | |||||||||||||||||
(Dollars and Shares in Millions, Except Per Share Data) | September 30, | September 30, | ||||||||||||||||
(Unaudited) | 2006 | 2005 | 2006 | 2005 | ||||||||||||||
Interest Income | ||||||||||||||||||
Loans | $ | 2,569 | $ | 2,167 | $ | 7,350 | $ | 6,105 | ||||||||||
Loans held for sale | 40 | 30 | 99 | 75 | ||||||||||||||
Investment securities | 500 | 492 | 1,490 | 1,454 | ||||||||||||||
Other interest income | 40 | 29 | 119 | 84 | ||||||||||||||
Total interest income | 3,149 | 2,718 | 9,058 | 7,718 | ||||||||||||||
Interest Expense | ||||||||||||||||||
Deposits | 640 | 414 | 1,721 | 1,083 | ||||||||||||||
Short-term borrowings | 321 | 205 | 861 | 460 | ||||||||||||||
Long-term debt | 528 | 317 | 1,415 | 895 | ||||||||||||||
Total interest expense | 1,489 | 936 | 3,997 | 2,438 | ||||||||||||||
Net interest income | 1,660 | 1,782 | 5,061 | 5,280 | ||||||||||||||
Provision for credit losses | 135 | 145 | 375 | 461 | ||||||||||||||
Net interest income after provision for credit losses | 1,525 | 1,637 | 4,686 | 4,819 | ||||||||||||||
Noninterest Income | ||||||||||||||||||
Credit and debit card revenue | 206 | 185 | 590 | 516 | ||||||||||||||
Corporate payment products revenue | 150 | 135 | 416 | 362 | ||||||||||||||
ATM processing services | 63 | 64 | 183 | 168 | ||||||||||||||
Merchant processing services | 253 | 200 | 719 | 576 | ||||||||||||||
Trust and investment management fees | 305 | 251 | 916 | 751 | ||||||||||||||
Deposit service charges | 268 | 246 | 764 | 690 | ||||||||||||||
Treasury management fees | 111 | 109 | 334 | 333 | ||||||||||||||
Commercial products revenue | 100 | 103 | 311 | 299 | ||||||||||||||
Mortgage banking revenue | 68 | 111 | 167 | 323 | ||||||||||||||
Investment products fees and commissions | 34 | 37 | 114 | 115 | ||||||||||||||
Securities gains (losses), net | — | 1 | 3 | (57 | ) | |||||||||||||
Other | 190 | 134 | 600 | 423 | ||||||||||||||
Total noninterest income | 1,748 | 1,576 | 5,117 | 4,499 | ||||||||||||||
Noninterest Expense | ||||||||||||||||||
Compensation | 632 | 603 | 1,892 | 1,782 | ||||||||||||||
Employee benefits | 123 | 106 | 379 | 330 | ||||||||||||||
Net occupancy and equipment | 168 | 162 | 494 | 475 | ||||||||||||||
Professional services | 54 | 44 | 130 | 119 | ||||||||||||||
Marketing and business development | 58 | 61 | 156 | 171 | ||||||||||||||
Technology and communications | 128 | 118 | 372 | 337 | ||||||||||||||
Postage, printing and supplies | 66 | 64 | 198 | 190 | ||||||||||||||
Other intangibles | 89 | 125 | 263 | 377 | ||||||||||||||
Debt prepayment | — | — | 11 | 54 | ||||||||||||||
Other | 220 | 190 | 673 | 564 | ||||||||||||||
Total noninterest expense | 1,538 | 1,473 | 4,568 | 4,399 | ||||||||||||||
Income before income taxes | 1,735 | 1,740 | 5,235 | 4,919 | ||||||||||||||
Applicable income taxes | 532 | 586 | 1,678 | 1,573 | ||||||||||||||
Net income | $ | 1,203 | $ | 1,154 | $ | 3,557 | $ | 3,346 | ||||||||||
Net income applicable to common equity | $ | 1,187 | $ | 1,154 | $ | 3,524 | $ | 3,346 | ||||||||||
Earnings per common share | $ | .67 | $ | .63 | $ | 1.98 | $ | 1.82 | ||||||||||
Diluted earnings per common share | $ | .66 | $ | .62 | $ | 1.95 | $ | 1.80 | ||||||||||
Dividends declared per common share | $ | .33 | $ | .30 | $ | .99 | $ | .90 | ||||||||||
Average common shares outstanding | 1,771 | 1,823 | 1,784 | 1,836 | ||||||||||||||
Average diluted common shares outstanding | 1,796 | 1,849 | 1,809 | 1,862 | ||||||||||||||
Page 24
U.S. Bancorp
Consolidated Ending Balance Sheet
Consolidated Ending Balance Sheet
September 30, | December 31, | September 30, | ||||||||||
(Dollars in Millions) | 2006 | 2005 | 2005 | |||||||||
(Unaudited) | (Unaudited) | |||||||||||
Assets | ||||||||||||
Cash and due from banks | $ | 6,355 | $ | 8,004 | $ | 6,918 | ||||||
Investment securities | ||||||||||||
Held-to-maturity | 91 | 109 | 114 | |||||||||
Available-for-sale | 39,429 | 39,659 | 41,402 | |||||||||
Loans held for sale | 2,649 | 1,686 | 1,695 | |||||||||
Loans | ||||||||||||
Commercial | 46,594 | 42,942 | 43,237 | |||||||||
Commercial real estate | 28,973 | 28,463 | 28,521 | |||||||||
Residential mortgages | 21,215 | 20,730 | 19,469 | |||||||||
Retail | 47,626 | 45,671 | 45,400 | |||||||||
Total loans | 144,408 | 137,806 | 136,627 | |||||||||
Less allowance for loan losses | (2,034 | ) | (2,041 | ) | (2,055 | ) | ||||||
Net loans | 142,374 | 135,765 | 134,572 | |||||||||
Premises and equipment | 1,835 | 1,841 | 1,850 | |||||||||
Goodwill | 7,444 | 7,005 | 6,372 | |||||||||
Other intangible assets | 3,171 | 2,874 | 2,586 | |||||||||
Other assets | 13,507 | 12,522 | 11,386 | |||||||||
Total assets | $ | 216,855 | $ | 209,465 | $ | 206,895 | ||||||
Liabilities and Shareholders’ Equity | ||||||||||||
Deposits | ||||||||||||
Noninterest-bearing | $ | 30,554 | $ | 32,214 | $ | 30,871 | ||||||
Interest-bearing | 69,095 | 70,024 | 69,478 | |||||||||
Time deposits greater than $100,000 | 21,312 | 22,471 | 20,446 | |||||||||
Total deposits | 120,961 | 124,709 | 120,795 | |||||||||
Short-term borrowings | 24,783 | 20,200 | 23,061 | |||||||||
Long-term debt | 41,230 | 37,069 | 36,257 | |||||||||
Other liabilities | 8,955 | 7,401 | 6,918 | |||||||||
Total liabilities | 195,929 | 189,379 | 187,031 | |||||||||
Shareholders’ equity | ||||||||||||
Preferred stock | 1,000 | — | — | |||||||||
Common stock | 20 | 20 | 20 | |||||||||
Capital surplus | 5,770 | 5,907 | 5,913 | |||||||||
Retained earnings | 20,770 | 19,001 | 18,457 | |||||||||
Less treasury stock | (6,093 | ) | (4,413 | ) | (4,318 | ) | ||||||
Other comprehensive income | (541 | ) | (429 | ) | (208 | ) | ||||||
Total shareholders’ equity | 20,926 | 20,086 | 19,864 | |||||||||
Total liabilities and shareholders’ equity | $ | 216,855 | $ | 209,465 | $ | 206,895 | ||||||
Page 25