Table of Contents
Table of Contents
UNITED STATES
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
For the quarterly period ended September 30, 2004
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
For the transition period from (not applicable)
Commission file number 1-6880
U.S. BANCORP
| Delaware (State or other jurisdiction of Incorporation or organization) | 41-0255900 (I.R.S. Employer Identification Number) |
800 Nicollet Mall
651-466-3000
(not applicable)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES X NO
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class Common Stock, $.01 Par Value | Outstanding as of October 31, 2004 1,867,157,587 shares |
Table of Contents
Table of Contents and Form 10-Q Cross Reference Index
| Part I — Financial Information | ||||||||
| 1) | Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2) | |||||||
| a) | Overview | 3 | ||||||
| b) | Statement of Income Analysis | 5 | ||||||
| c) | Balance Sheet Analysis | 9 | ||||||
| d) | Accounting Changes | 32 | ||||||
| e) | Critical Accounting Policies | 32 | ||||||
| f) | Controls and Procedures (Item 4) | 34 | ||||||
| 2) | Quantitative and Qualitative Disclosures About Market Risk / Corporate Risk Profile (Item 3) | |||||||
| a) | Overview | 11 | ||||||
| b) | Credit Risk Management | 11 | ||||||
| c) | Residual Risk Management | 17 | ||||||
| d) | Operational Risk Management | 17 | ||||||
| e) | Interest Rate Risk Management | 18 | ||||||
| f) | Market Risk Management | 21 | ||||||
| g) | Liquidity Risk Management | 21 | ||||||
| h) | Capital Management | 23 | ||||||
| 3) | Line of Business Financial Review | 24 | ||||||
| 4) | Financial Statements (Item 1) | 36 | ||||||
| Part II — Other Information | ||||||||
| 1) | Unregistered Sales of Equity Securities and Use of Proceeds (Item 2) | 54 | ||||||
| 2) | Exhibits (Item 6) | 54 | ||||||
| 3) | Signature | 55 | ||||||
| 4) | Exhibits | 56 | ||||||
Forward-Looking Statements
| U.S. Bancorp | 1 |
Table of Contents
| Table 1 | Selected Financial Data |
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||
| Percent | Percent | ||||||||||||||||||||||||
| (Dollars and Shares in Millions, Except Per Share Data) | 2004 | 2003 | Change | 2004 | 2003 | Change | |||||||||||||||||||
Condensed Income Statement | |||||||||||||||||||||||||
| Net interest income (taxable-equivalent basis) (a) | $ | 1,781.7 | $ | 1,825.5 | (2.4 | )% | $ | 5,340.1 | $ | 5,400.8 | (1.1 | )% | |||||||||||||
| Noninterest income | 1,436.7 | 1,286.3 | 11.7 | 4,168.4 | 3,771.5 | 10.5 | |||||||||||||||||||
| Securities gains (losses), net | 87.3 | (108.9 | ) | * | (84.4 | ) | 244.9 | * | |||||||||||||||||
| Total net revenue | 3,305.7 | 3,002.9 | 10.1 | 9,424.1 | 9,417.2 | .1 | |||||||||||||||||||
| Noninterest expense | 1,519.0 | 1,253.3 | 21.2 | 4,206.5 | 4,254.5 | (1.1 | ) | ||||||||||||||||||
| Provision for credit losses | 165.1 | 310.0 | (46.7 | ) | 604.6 | 968.0 | (37.5 | ) | |||||||||||||||||
| Income from continuing operations before taxes | 1,621.6 | 1,439.6 | 12.6 | 4,613.0 | 4,194.7 | 10.0 | |||||||||||||||||||
| Taxable-equivalent adjustment | 7.1 | 7.0 | 1.4 | 21.3 | 21.0 | 1.4 | |||||||||||||||||||
| Applicable income taxes | 549.0 | 491.9 | 11.6 | 1,480.9 | 1,433.9 | 3.3 | |||||||||||||||||||
| Income from continuing operations | 1,065.5 | 940.7 | 13.3 | 3,110.8 | 2,739.8 | 13.5 | |||||||||||||||||||
| Discontinued operations (after-tax) | — | 10.2 | * | — | 15.8 | * | |||||||||||||||||||
| Net income | $ | 1,065.5 | $ | 950.9 | 12.1 | $ | 3,110.8 | $ | 2,755.6 | 12.9 | |||||||||||||||
Per Common Share | |||||||||||||||||||||||||
| Earnings per share from continuing operations | $ | .57 | $ | .49 | 16.3 | % | $ | 1.64 | $ | 1.43 | 14.7 | % | |||||||||||||
| Diluted earnings per share from continuing operations | .56 | .48 | 16.7 | 1.62 | 1.42 | 14.1 | |||||||||||||||||||
| Earnings per share | .57 | .49 | 16.3 | 1.64 | 1.43 | 14.7 | |||||||||||||||||||
| Diluted earnings per share | .56 | .49 | 14.3 | 1.62 | 1.43 | 13.3 | |||||||||||||||||||
| Dividends declared per share | .240 | .205 | 17.1 | .720 | .615 | 17.1 | |||||||||||||||||||
| Book value per share | 10.48 | 10.26 | 2.1 | ||||||||||||||||||||||
| Market value per share | 28.90 | 23.99 | 20.5 | ||||||||||||||||||||||
| Average common shares outstanding | 1,877.0 | 1,926.0 | (2.5 | ) | 1,894.6 | 1,922.4 | (1.4 | ) | |||||||||||||||||
| Average common diluted shares outstanding | 1,903.7 | 1,939.8 | (1.9 | ) | 1,919.4 | 1,932.4 | (.7 | ) | |||||||||||||||||
Financial Ratios | |||||||||||||||||||||||||
| Return on average assets | 2.21 | % | 1.98 | % | 2.18 | % | 1.97 | % | |||||||||||||||||
| Return on average equity | 21.9 | 19.5 | 21.5 | 19.2 | |||||||||||||||||||||
| Net interest margin (taxable-equivalent basis) | 4.22 | 4.43 | 4.26 | 4.51 | |||||||||||||||||||||
| Efficiency ratio (b) | 47.2 | 40.3 | 44.2 | 46.4 | |||||||||||||||||||||
Average Balances | |||||||||||||||||||||||||
| Loans | $ | 122,906 | $ | 119,982 | 2.4 | % | $ | 120,966 | $ | 118,045 | 2.5 | % | |||||||||||||
| Loans held for sale | 1,405 | 4,460 | (68.5 | ) | 1,611 | 4,078 | (60.5 | ) | |||||||||||||||||
| Investment securities | 42,502 | 37,777 | 12.5 | 43,243 | 36,059 | 19.9 | |||||||||||||||||||
| Earning assets | 168,187 | 163,865 | 2.6 | 167,182 | 159,832 | 4.6 | |||||||||||||||||||
| Assets | 191,585 | 190,241 | .7 | 190,563 | 187,015 | 1.9 | |||||||||||||||||||
| Noninterest-bearing deposits | 29,791 | 31,907 | (6.6 | ) | 29,807 | 32,412 | (8.0 | ) | |||||||||||||||||
| Deposits | 115,316 | 117,956 | (2.2 | ) | 116,147 | 116,649 | (.4 | ) | |||||||||||||||||
| Short-term borrowings | 15,382 | 11,850 | 29.8 | 14,706 | 10,024 | 46.7 | |||||||||||||||||||
| Long-term debt and junior subordinated debentures | 35,199 | 33,794 | 4.2 | 34,254 | 33,737 | 1.5 | |||||||||||||||||||
| Total shareholders’ equity | 19,387 | 19,360 | .1 | 19,338 | 19,202 | .7 | |||||||||||||||||||
September 30, 2004 | December 31, 2003 | ||||||||||||||||||||||||
Period End Balances | |||||||||||||||||||||||||
| Loans | $ | 124,826 | $ | 118,235 | 5.6 | % | |||||||||||||||||||
| Allowance for loan losses | 2,184 | 2,184 | — | ||||||||||||||||||||||
| Investment securities | 39,654 | 43,334 | (8.5 | ) | |||||||||||||||||||||
| Assets | 192,844 | 189,471 | 1.8 | ||||||||||||||||||||||
| Deposits | 115,567 | 119,052 | (2.9 | ) | |||||||||||||||||||||
| Long-term debt and junior subordinated debentures | 38,004 | 33,816 | 12.4 | ||||||||||||||||||||||
| Total shareholders’ equity | 19,600 | 19,242 | 1.9 | ||||||||||||||||||||||
| Regulatory capital ratios | |||||||||||||||||||||||||
| Tangible common equity | 6.4 | % | 6.5 | % | |||||||||||||||||||||
| Tier 1 capital | 8.7 | 9.1 | |||||||||||||||||||||||
| Total risk-based capital | 12.7 | 13.6 | |||||||||||||||||||||||
| Leverage | 7.9 | 8.0 | |||||||||||||||||||||||
| * | Not meaningful | |
| (a) | Interest and rates are presented on a fully-taxable equivalent basis utilizing a tax rate of 35 percent. | |
| (b) | 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. |
| 2 | U.S. Bancorp |
Table of Contents
OVERVIEW
Earnings SummaryU.S. Bancorp and its subsidiaries (the “Company”) reported net income of $1,065.5 million for the third quarter of 2004, or $.56 per diluted share, compared with $950.9 million, or $.49 per diluted share, for the third quarter of 2003. Return on average assets and return on average equity were 2.21 percent and 21.9 percent, respectively, for the third quarter of 2004, compared with returns of 1.98 percent and 19.5 percent, respectively, for the third quarter of 2003. The Company’s results for the third quarter of 2004 improved over the third quarter of 2003, primarily due to lower credit costs and growth in fee-based products and services. Included in the third quarter of 2004 were net gains on the sale of securities of $87.3 million, a net increase of $196.2 million over net securities losses realized in the third quarter of 2003. The third quarter of 2004 also included the recognition of $86.7 million of mortgage servicing rights (“MSR”) impairment, a $195.2 million unfavorable variance over the third quarter of 2003. Operating expenses for the third quarter of 2004 also reflected a reduction in pre-tax merger and restructuring-related items of $10.2 million ($6.7 million on an after-tax basis), compared with the third quarter of 2003. The $10.2 million decline in pre-tax merger and restructuring-related charges was primarily due to the completion in 2003 of integration activities associated with the acquisition of NOVA Corporation (“NOVA”) and other smaller acquisitions.
| U.S. Bancorp | 3 |
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| 4 | U.S. Bancorp |
Table of Contents
STATEMENT OF INCOME ANALYSIS
Net Interest IncomeIn the third quarter of 2004 net interest income, on a taxable-equivalent basis, was $1,781.7 million, compared with $1,825.5 million in the third quarter of 2003, which represented a $43.8 million (2.4 percent) decrease from 2003. Net interest income for the first nine months of 2004, on a taxable equivalent basis, was $5,340.1 million, compared with $5,400.8 million for the first nine months of 2003, which represented a $60.7 million (1.1 percent) decrease from a year ago. The decline in net interest income for the third quarter and first nine months reflected modest growth in average earning assets, more than offset by lower net interest margins. Average earning assets in the third quarter and first nine months of 2004 increased $4.3 billion (2.6 percent) and $7.4 billion (4.6 percent), respectively, over the comparable periods of 2003. The increase in average earning assets for the third quarter and first nine months of 2004, compared with the same periods of 2003, was primarily driven by increases in investment securities, retail loans and residential mortgages, partially offset by a decline in commercial loans and loans held for sale related to mortgage banking activities. The net interest margin for the third quarter and first nine months of 2004 was 4.22 percent and 4.26 percent, respectively, compared with 4.43 percent and 4.51 percent for the comparable periods of 2003. The year-over-year decline in the net interest margin primarily reflected tighter credit spreads, a modest increase in the percent of total earning assets funded by wholesale sources of funding and higher rates paid on wholesale funding due to the impact of rising rates. The shift toward wholesale funding reflects, in part, asset/liability decisions to issue longer-term fixed-rate borrowings. In addition, the net interest margin declined for the first nine months of 2004 as a result of consolidating high credit quality, low margin loans from
| Table 2 | Analysis of Net Interest Income |
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||
| (Dollars in Millions) | 2004 | 2003 | Change | 2004 | 2003 | Change | |||||||||||||||||||
Components of net interest income | |||||||||||||||||||||||||
| Income on earning assets (taxable-equivalent basis) (a) | $ | 2,309.9 | $ | 2,318.3 | $ | (8.4 | ) | $ | 6,818.4 | $ | 6,991.3 | $ | (172.9 | ) | |||||||||||
| Expense on interest-bearing liabilities | 528.2 | 492.8 | 35.4 | 1,478.3 | 1,590.5 | (112.2 | ) | ||||||||||||||||||
| Net interest income (taxable-equivalent basis) | $ | 1,781.7 | $ | 1,825.5 | $ | (43.8 | ) | $ | 5,340.1 | $ | 5,400.8 | $ | (60.7 | ) | |||||||||||
| Net interest income, as reported | $ | 1,774.6 | $ | 1,818.5 | $ | (43.9 | ) | $ | 5,318.8 | $ | 5,379.8 | $ | (61.0 | ) | |||||||||||
Average yields and rates paid | |||||||||||||||||||||||||
| Earning assets yield (taxable-equivalent basis) | 5.47 | % | 5.63 | % | (.16 | )% | 5.44 | % | 5.84 | % | (.40 | )% | |||||||||||||
| Rate paid on interest-bearing liabilities | 1.55 | 1.49 | .06 | 1.46 | 1.66 | (.20 | ) | ||||||||||||||||||
| Gross interest margin (taxable-equivalent basis) | 3.92 | % | 4.14 | % | (.22 | )% | 3.98 | % | 4.18 | % | (.20 | )% | |||||||||||||
| Net interest margin (taxable-equivalent basis) | 4.22 | % | 4.43 | % | (.21 | )% | 4.26 | % | 4.51 | % | (.25 | )% | |||||||||||||
Average balances | |||||||||||||||||||||||||
| Investment securities | $ | 42,502 | $ | 37,777 | $ | 4,725 | $ | 43,243 | $ | 36,059 | $ | 7,184 | |||||||||||||
| Loans | 122,906 | 119,982 | 2,924 | 120,966 | 118,045 | 2,921 | |||||||||||||||||||
| Earning assets | 168,187 | 163,865 | 4,322 | 167,182 | 159,832 | 7,350 | |||||||||||||||||||
| Interest-bearing liabilities | 136,106 | 131,693 | 4,413 | 135,300 | 127,998 | 7,302 | |||||||||||||||||||
| Net free funds (b) | 32,081 | 32,172 | (91 | ) | 31,882 | 31,834 | 48 | ||||||||||||||||||
| (a) | Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent. | |
| (b) | 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. |
| U.S. Bancorp | 5 |
Table of Contents
Provision for Credit LossesThe provision for credit losses was $165.1 million and $310.0 million for the third quarter of 2004 and 2003, respectively, a year-over-year decrease of $144.9 million (46.7 percent). For the first nine months of 2004 and 2003, the provision for credit losses was $604.6 million and $968.0 million, respectively, a decrease of $363.4 million (37.5 percent). The decline from a year ago was primarily the result of lower nonperforming assets and lower retail and commercial loan losses, which were the result of an improving credit risk profile due to more favorable economic conditions, collection efforts and higher commercial loan recoveries. Refer to the “Corporate Risk Profile” section for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.
Noninterest IncomeNoninterest income during the third quarter of 2004 was $1,524.0 million, an increase of $346.6 million (29.4 percent) from the third quarter of 2003. Noninterest income during the first nine months of 2004 was $4,084.0 million, compared with $4,016.4 million for the first nine months of 2003, which represented an increase of $67.6 million
| 6 | U.S. Bancorp |
Table of Contents
| Table 3 | Noninterest Income |
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||
| Percent | Percent | ||||||||||||||||||||||||
| (Dollars in Millions) | 2004 | 2003 | Change | 2004 | 2003 | Change | |||||||||||||||||||
| Credit and debit card revenue | $ | 164.3 | $ | 137.6 | 19.4 | % | $ | 464.9 | $ | 407.3 | 14.1 | % | |||||||||||||
| Corporate payment products revenue | 108.5 | 95.7 | 13.4 | 306.0 | 272.6 | 12.3 | |||||||||||||||||||
| ATM processing services | 45.2 | 41.3 | 9.4 | 132.3 | 125.6 | 5.3 | |||||||||||||||||||
| Merchant processing services | 187.5 | 146.3 | 28.2 | 493.7 | 415.4 | 18.8 | |||||||||||||||||||
| Trust and investment management fees | 240.2 | 239.8 | .2 | 740.5 | 707.3 | 4.7 | |||||||||||||||||||
| Deposit service charges | 207.4 | 187.0 | 10.9 | 594.7 | 529.2 | 12.4 | |||||||||||||||||||
| Treasury management fees | 117.9 | 126.2 | (6.6 | ) | 356.9 | 350.0 | 2.0 | ||||||||||||||||||
| Commercial products revenue | 106.7 | 97.8 | 9.1 | 324.5 | 302.0 | 7.5 | |||||||||||||||||||
| Mortgage banking revenue | 97.2 | 89.5 | 8.6 | 301.3 | 275.2 | 9.5 | |||||||||||||||||||
| Investment products fees and commissions | 37.1 | 35.5 | 4.5 | 118.6 | 108.7 | 9.1 | |||||||||||||||||||
| Securities gains (losses), net | 87.3 | (108.9 | ) | * | (84.4 | ) | 244.9 | * | |||||||||||||||||
| Other | 124.7 | 89.6 | 39.2 | 335.0 | 278.2 | 20.4 | |||||||||||||||||||
| Total noninterest income | $ | 1,524.0 | $ | 1,177.4 | 29.4 | % | $ | 4,084.0 | $ | 4,016.4 | 1.7 | % | |||||||||||||
| * | Not meaningful |
| U.S. Bancorp | 7 |
Table of Contents
Noninterest ExpenseThird quarter of 2004 noninterest expense was $1,519.0 million, an increase of $265.7 million (21.2 percent) from the third quarter of 2003. For the first nine months of 2004, noninterest expense was $4,206.5 million, a reduction of $48.0 million (1.1 percent) from the first nine months of 2003. The year-over-year increase during the third quarter was primarily due to the unfavorable change in MSR valuations of $195.2 million, while the year-over-year decrease during the first nine months was primarily due to the favorable change in MSR valuations of $183.8 million. Refer to Note 6 of the Notes to Consolidated Financial Statements for a sensitivity analysis on the fair value of MSR to future changes in interest rates. The favorable variance in merger and restructuring-related charges in the third quarter and first nine months of 2004 of $10.2 million and $38.6 million, respectively, was primarily due to the completion of integration activities associated with NOVA and other smaller acquisitions in 2003. Included in these variances in the third quarter and first nine months of 2004, were increases in compensation, employee benefits, marketing and business development, technology and communications and operating expenses related to the expansion of the Company’s merchant acquiring business in Europe, including certain business integration costs. During the third quarter of 2004, expenses related to the expansion of the Company’s merchant acquiring business in Europe accounted for approximately $29 million of the year-over-year increase, including $6 million of business integration costs. Compensation expense increased during the third quarter and first nine months of 2004, compared with the same periods of 2003, due to an increase in salaries, primarily due to in-store branch expansion, and performance-based incentives. Employee benefits increased primarily as a result of higher pension expense and higher payroll taxes. Pension and retirement expense increased by $14.7 million and $22.0 million, during the third quarter and first nine months of 2004, respectively, compared with the same periods of 2003. Marketing and business development expense increased by $12.0 million (24.7 percent) in the third quarter of 2004 and $15.1 million (11.7 percent) in the first nine months of 2004, compared with the same periods of 2003, reflecting the increase and timing of marketing campaigns. Technology and communications expense was higher year-over-year by $7.7 million (7.5 percent) and $2.8 million (.9 percent), during the third quarter and first nine months of 2004, respectively, primarily due to outsourcing certain institutional trust participant record-keeping functions and capital expenditures for imaging and other electronic payment initiatives. Other expense increased $16.8 million (8.4 percent) and $71.3 million (12.6 percent) in the third quarter and first nine months of 2004, respectively, compared with the same periods of 2003. The year-over-year increase during the first nine months of 2004
| Table 4 | Noninterest Expense |
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||
| Percent | Percent | ||||||||||||||||||||||||
| (Dollars in Millions) | 2004 | 2003 | Change | 2004 | 2003 | Change | |||||||||||||||||||
| Compensation | $ | 564.6 | $ | 543.8 | 3.8 | % | $ | 1,673.0 | $ | 1,637.4 | 2.2 | % | |||||||||||||
| Employee benefits | 100.0 | 75.8 | 31.9 | 291.4 | 247.1 | 17.9 | |||||||||||||||||||
| Net occupancy and equipment | 159.2 | 161.3 | (1.3 | ) | 468.3 | 482.1 | (2.9 | ) | |||||||||||||||||
| Professional services | 37.2 | 39.9 | (6.8 | ) | 104.3 | 99.2 | 5.1 | ||||||||||||||||||
| Marketing and business development | 60.6 | 48.6 | 24.7 | 144.6 | 129.5 | 11.7 | |||||||||||||||||||
| Technology and communications | 109.8 | 102.1 | 7.5 | 313.9 | 311.1 | .9 | |||||||||||||||||||
| Postage, printing and supplies | 61.4 | 61.6 | (.3 | ) | 183.5 | 183.8 | (.2 | ) | |||||||||||||||||
| Other intangibles | 210.2 | 10.8 | * | 388.7 | 558.2 | (30.4 | ) | ||||||||||||||||||
| Merger and restructuring-related charges | — | 10.2 | * | — | 38.6 | * | |||||||||||||||||||
| Other | 216.0 | 199.2 | 8.4 | 638.8 | 567.5 | 12.6 | |||||||||||||||||||
| Total noninterest expense | $ | 1,519.0 | $ | 1,253.3 | 21.2 | % | $ | 4,206.5 | $ | 4,254.5 | (1.1 | )% | |||||||||||||
| Efficiency ratio (a) | 47.2 | % | 40.3 | % | 44.2 | % | 46.4 | % | |||||||||||||||||
| * | Not meaningful | |
| (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. |
| 8 | U.S. Bancorp |
Table of Contents
Income Tax ExpenseThe provision for income taxes was $549.0 million (an effective rate of 34.0 percent) for the third quarter of 2004 and $1,480.9 million (an effective rate of 32.3 percent) for the first nine months of 2004, compared with $491.9 million (an effective rate of 34.3 percent) and $1,433.9 million (an effective rate of 34.4 percent) for the same periods of 2003. The improvement in the effective tax rate in the first nine months of 2004 primarily reflected a $90.0 million reduction in income tax expense in the first quarter of 2004 related to the resolution of federal tax examinations covering substantially all of the Company’s legal entities for the years 1995 through 1999.
BALANCE SHEET ANALYSIS
LoansThe Company’s total loan portfolio was $124.8 billion at September 30, 2004, compared with $118.2 billion at December 31, 2003, an increase of $6.6 billion (5.6 percent). The increase in total loans was driven by growth in retail loans, commercial loans and residential mortgages. Commercial loans, including lease financing, totaled $40.2 billion at September 30, 2004, compared with $38.5 billion at December 31, 2003, an increase of $1.6 billion (4.2 percent). The increase in commercial loans was driven by new customer relationships, increased utilization under lines of credit by commercial customers and increases in corporate card balances. The Company’s portfolio of commercial real estate loans, which includes commercial mortgages and construction loans, was $27.4 billion at September 30, 2004, compared with $27.2 billion at December 31, 2003.
Loans Held for SaleLoans held for sale, consisting primarily of residential mortgages to be sold in the secondary markets, were $1,372 million at September 30, 2004, compared with $1,433 million at December 31, 2003. The decrease of $61 million (4.3 percent) was primarily due to the timing of loan originations and sales during the first nine months of 2004. Mortgage loan production is highly correlated to changes in interest rates with declines in balances during a period of rising interest rates.
Investment SecuritiesAt September 30, 2004, investment securities, both available-for-sale and held-to-maturity, totaled $39.7 billion, compared with $43.3 billion at December 31, 2003. The $3.7 billion (8.5 percent) decrease primarily reflected the sale of $6.4 billion of fixed-rate securities, along with maturities and prepayments, partially offset by purchases of primarily floating-rate securities. At September 30, 2004, approximately 35.9 percent of the investment securities portfolio represented adjustable-rate financial instruments, compared with 22.2 percent as of December 31, 2003. Adjustable-rate financial instruments include variable-rate collateralized mortgage obligations, mortgage-backed securities, agency securities, adjustable-rate money market accounts and asset-backed securities.
DepositsTotal deposits were $115.6 billion at September 30, 2004, compared with $119.1 billion at December 31, 2003, a decrease of $3.5 billion (2.9 percent). The decrease in total deposits was primarily the result of decreases in noninterest-bearing deposits, interest checking, money market accounts and time certificates of deposit less than $100,000, partially offset by increases in time deposits greater than $100,000.
| U.S. Bancorp | 9 |
Table of Contents
BorrowingsThe Company utilizes both short-term and long-term borrowings to fund growth of earning assets in excess of deposit growth. Short-term borrowings,
| Table 5 | Investment Securities |
| Available-for-Sale | Held-to-Maturity | |||||||||||||||||||||||||||||||||
| Weighted- | Weighted- | |||||||||||||||||||||||||||||||||
| Average | Weighted- | Average | Weighted- | |||||||||||||||||||||||||||||||
| Amortized | Fair | Maturity in | Average | Amortized | Fair | Maturity in | Average | |||||||||||||||||||||||||||
| September 30, 2004 (Dollars in Millions) | Cost | Value | Years | Yield | Cost | Value | Years | Yield | ||||||||||||||||||||||||||
U.S. Treasury and agencies | ||||||||||||||||||||||||||||||||||
| Maturing in one year or less | $ | 64 | $ | 64 | .55 | 3.35 | % | $ | — | $ | — | — | — | % | ||||||||||||||||||||
| Maturing after one year through five years | 160 | 165 | 2.13 | 4.52 | — | — | — | — | ||||||||||||||||||||||||||
| Maturing after five years through ten years | 229 | 223 | 8.52 | 4.01 | — | — | — | — | ||||||||||||||||||||||||||
| Maturing after ten years | 1,150 | 1,114 | 18.76 | 3.07 | — | — | — | — | ||||||||||||||||||||||||||
| Total | $ | 1,603 | $ | 1,566 | 14.91 | 3.36 | % | $ | — | $ | — | — | — | % | ||||||||||||||||||||
Mortgage-backed securities | ||||||||||||||||||||||||||||||||||
| Maturing in one year or less | $ | 1,842 | $ | 1,851 | .60 | 3.46 | % | $ | — | $ | — | — | — | % | ||||||||||||||||||||
| Maturing after one year through five years | 20,711 | 20,713 | 3.66 | 4.27 | 12 | 12 | 3.07 | 5.30 | ||||||||||||||||||||||||||
| Maturing after five years through ten years | 13,509 | 13,429 | 6.34 | 4.57 | — | — | — | — | ||||||||||||||||||||||||||
| Maturing after ten years | 694 | 703 | 15.04 | 2.78 | — | — | — | — | ||||||||||||||||||||||||||
| Total | $ | 36,756 | $ | 36,696 | 4.71 | 4.31 | % | $ | 12 | $ | 12 | 3.07 | 5.30 | % | ||||||||||||||||||||
Asset-backed securities | �� | |||||||||||||||||||||||||||||||||
| Maturing in one year or less | $ | 47 | $ | 48 | .83 | 5.61 | % | $ | — | $ | — | — | — | % | ||||||||||||||||||||
| Maturing after one year through five years | 37 | 37 | 2.25 | 5.36 | — | — | — | — | ||||||||||||||||||||||||||
| Maturing after five years through ten years | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Maturing after ten years | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Total | $ | 84 | $ | 85 | 1.46 | 5.50 | % | $ | — | $ | — | — | — | % | ||||||||||||||||||||
Obligations of state and political subdivisions | ||||||||||||||||||||||||||||||||||
| Maturing in one year or less | $ | 118 | $ | 120 | .34 | 7.49 | % | $ | 10 | $ | 10 | .32 | 5.85 | % | ||||||||||||||||||||
| Maturing after one year through five years | 120 | 126 | 2.45 | 7.26 | 37 | 39 | 2.72 | 6.49 | ||||||||||||||||||||||||||
| Maturing after five years through ten years | 10 | 10 | 6.00 | 8.04 | 22 | 24 | 7.06 | 6.43 | ||||||||||||||||||||||||||
| Maturing after ten years | — | — | — | — | 39 | 41 | 14.00 | 6.55 | ||||||||||||||||||||||||||
| Total | $ | 248 | $ | 256 | 1.58 | 7.40 | % | $ | 108 | $ | 114 | 7.42 | 6.44 | % | ||||||||||||||||||||
Other debt securities: | ||||||||||||||||||||||||||||||||||
| Maturing in one year or less | $ | 3 | $ | 4 | .58 | 8.87 | % | $ | — | $ | — | — | — | % | ||||||||||||||||||||
| Maturing after one year through five years | 111 | 111 | 2.33 | 10.05 | — | — | — | — | ||||||||||||||||||||||||||
| Maturing after five years through ten years | 5 | 5 | 5.63 | 2.73 | — | — | — | — | ||||||||||||||||||||||||||
| Maturing after ten years | 499 | 492 | 22.60 | 2.46 | — | — | — | — | ||||||||||||||||||||||||||
| Total | $ | 618 | $ | 612 | 18.70 | 3.86 | % | $ | — | $ | — | — | — | % | ||||||||||||||||||||
Other investments | $ | 317 | $ | 319 | — | — | % | $ | — | $ | — | — | — | % | ||||||||||||||||||||
| Total investment securities | $ | 39,626 | $ | 39,534 | 5.32 | 4.29 | % | $ | 120 | $ | 126 | 7.00 | 6.33 | % | ||||||||||||||||||||
| Note: | Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities anticipating future prepayments. Average yields are presented on a fully-taxable equivalent basis. Yields on available-for-sale and held-to-maturity securities are computed based on historical cost balances. Average yield and maturity calculations exclude equity securities that have no stated yield or maturity. |
The weighted-average maturity of the available-for-sale investment securities was 5.32 years at September 30, 2004, compared with 5.12 years at December 31, 2003. The corresponding weighted-average yields were 4.29% and 4.27%, respectively. The weighted-average maturity of the held-to-maturity investment securities was 7.00 years at September 30, 2004, compared with 6.16 years at December 31, 2003. The corresponding weighted-averaged yields were 6.33% and 6.05%, respectively.
| September 30, 2004 | December 31, 2003 | ||||||||||||||||
| Amortized | Percent | Amortized | Percent | ||||||||||||||
| (Dollars in Millions) | Cost | of Total | Cost | of Total | |||||||||||||
| U.S. Treasury and agencies | $ | 1,603 | 4.0 | % | $ | 1,634 | 3.7 | % | |||||||||
| Mortgage-backed securities | 36,768 | 92.5 | 40,243 | 92.3 | |||||||||||||
| Asset-backed securities | 84 | .2 | 250 | .6 | |||||||||||||
| Obligations of state and political subdivisions | 356 | .9 | 473 | 1.1 | |||||||||||||
| Other securities and investments | 935 | 2.4 | 993 | 2.3 | |||||||||||||
| Total investment securities | $ | 39,746 | 100.0 | % | $ | 43,593 | 100.0 | % | |||||||||
| 10 | U.S. Bancorp |
Table of Contents
CORPORATE RISK PROFILE
OverviewManaging risks is an essential part of successfully operating a financial services company. The most prominent risk exposures are credit, residual, operational, interest rate, market and liquidity risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Residual risk is the potential reduction in the end-of-term value of leased assets or the residual cash flows related to asset securitization and other off-balance sheet structures. Operational risk includes risks related to fraud, legal and compliance risk, processing errors, technology, breaches of internal controls and business continuation and disaster recovery risk. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates. Rate movements can affect the repricing of assets and liabilities differently, as well as their market value. Market risk arises from fluctuations in interest rates, foreign exchange rates, and equity prices that may result in changes in the values of financial instruments, such as trading and available-for-sale securities that are accounted for on a mark-to-market basis. Liquidity risk is the possible inability to fund obligations to depositors, investors or borrowers. In addition, corporate strategic decisions, as well as the risks described above, could give rise to reputation risk. Reputation risk is the risk that negative publicity or press, whether true or not, could result in costly litigation or cause a decline in the Company’s stock value, customer base or revenue.
Credit Risk ManagementThe Company’s strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. The strategy also emphasizes diversification on a geographic, industry and customer level, regular credit examinations and management reviews of loans experiencing deterioration of credit quality. The credit risk management strategy also includes a credit risk assessment process completely independent of Company management that performs assessments of compliance with commercial and consumer credit policies, risk ratings, and other critical credit information. The Company strives to identify potential problem loans early, take any necessary charge-offs promptly and maintain adequate reserve levels for probable loan losses inherent in the portfolio. Commercial banking operations rely on a strong credit culture that combines prudent credit policies and individual lender accountability. Lenders are assigned lending grades based on their level of experience and customer service requirements. Lending grades represent the level of approval authority for the amount of credit exposure and level of risk. Credit officers reporting independently to Credit Administration have higher levels of lending grades and support the business units in their credit decision process. Loan decisions are documented as to the borrower’s business, purpose of the loan, evaluation of the repayment source and the associated risks, evaluation of collateral, covenants and monitoring requirements, and risk rating rationale. The Company utilizes a credit risk rating system to measure the credit quality of individual commercial loan transactions. The Company uses the risk rating system for regulatory reporting, determining the frequency of review of the credit exposures, and evaluation and determination of the adequacy of the allowance for credit losses. The Company regularly forecasts potential changes in risk ratings, nonperforming status and potential for loss and the estimated impact on the allowance for credit losses. In the Company’s retail banking operations, standard credit scoring systems are used to assess credit risks of consumer, small business and small-ticket leasing customers and to price these products accordingly. The Company conducts the underwriting and collections of its retail products in loan underwriting and servicing centers specializing in certain retail products. Forecasts of delinquency levels, bankruptcies and losses in conjunction with projection of estimated losses by delinquency categories and vintage information are regularly prepared
| U.S. Bancorp | 11 |
Table of Contents
| Table 6 | Nonperforming Assets (a) |
| September 30, | December 31, | ||||||||||
| (Dollars in Millions) | 2004 | 2003 | |||||||||
Commercial | |||||||||||
| Commercial | $ | 347.7 | $ | 623.5 | |||||||
| Lease financing | 91.3 | 113.3 | |||||||||
| Total commercial | 439.0 | 736.8 | |||||||||
Commercial real estate | |||||||||||
| Commercial mortgages | 165.7 | 177.6 | |||||||||
| Construction and development | 35.3 | 39.9 | |||||||||
| Total commercial real estate | 201.0 | 217.5 | |||||||||
Residential mortgages | 45.3 | 40.5 | |||||||||
Retail | |||||||||||
| Retail leasing | .1 | .4 | |||||||||
| Other retail | 17.1 | 24.8 | |||||||||
| Total retail | 17.2 | 25.2 | |||||||||
| Total nonperforming loans | 702.5 | 1,020.0 | |||||||||
Other real estate | 68.7 | 72.6 | |||||||||
Other assets | 33.4 | 55.5 | |||||||||
| Total nonperforming assets | $ | 804.6 | $ | 1,148.1 | |||||||
| Restructured loans accruing interest (b) | $ | 3.7 | $ | 18.0 | |||||||
| Accruing loans 90 days or more past due | $ | 291.8 | $ | 329.4 | |||||||
| Nonperforming loans to total loans | .56 | % | .86 | % | |||||||
| Nonperforming assets to total loans plus other real estate | .64 | % | .97 | % | |||||||
Changes in Nonperforming Assets
| Commercial and | Retail and | |||||||||||||||
| Commercial | Residential | |||||||||||||||
| (Dollars in Millions) | Real Estate | Mortgages (d) | Total | |||||||||||||
Balance December 31, 2003 | $ | 1,082.4 | $ | 65.7 | $ | 1,148.1 | ||||||||||
| Additions to nonperforming assets | ||||||||||||||||
| New nonaccrual loans and foreclosed properties | 513.4 | 35.1 | 548.5 | |||||||||||||
| Advances on loans | 30.2 | — | 30.2 | |||||||||||||
| Total additions | 543.6 | 35.1 | 578.7 | |||||||||||||
| Reductions in nonperforming assets | ||||||||||||||||
| Paydowns, payoffs | (404.3 | ) | (20.8 | ) | (425.1 | ) | ||||||||||
| Net sales | (110.7 | ) | — | (110.7 | ) | |||||||||||
| Return to performing status | (78.8 | ) | (13.5 | ) | (92.3 | ) | ||||||||||
| Charge-offs (c) | (287.4 | ) | (6.7 | ) | (294.1 | ) | ||||||||||
| Total reductions | (881.2 | ) | (41.0 | ) | (922.2 | ) | ||||||||||
| Net reductions in nonperforming assets | (337.6 | ) | (5.9 | ) | (343.5 | ) | ||||||||||
Balance September 30, 2004 | $ | 744.8 | $ | 59.8 | $ | 804.6 | ||||||||||
| (a) | Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due. | |
| (b) | Nonaccrual restructured loans are included in the respective nonperforming loan categories and excluded from restructured loans accruing interest. | |
| (c) | Charge-offs exclude actions for certain card products and loan sales that were not classified as nonperforming at the time the charge-off occurred. | |
| (d) | Residential mortgage information excludes changes related to residential mortgages serviced by others. |
| 12 | U.S. Bancorp |
Table of Contents
Analysis of Nonperforming Assets Nonperforming assets represent a key indicator, among other considerations, of the potential for future credit losses. Nonperforming assets include nonaccrual loans, restructured loans not performing in accordance with modified terms and other real estate and other nonperforming assets owned by the Company. Interest payments on nonperforming assets are typically applied against the principal balance and not recorded as income. At September 30, 2004, total nonperforming assets were $804.6 million, compared with $1,148.1 million at December 31, 2003. The ratio of total nonperforming assets to total loans and other real estate decreased to .64 percent at September 30, 2004, compared with .97 percent at December 31, 2003. The improvement in credit quality has been broad-based across most industry categories reflecting continued improvement in economic conditions. While nonperforming assets are expected to continue to decline slightly during the next few quarters, the ongoing level of nonperforming assets is expected to stabilize in mid-2005.
| Table 7 | Delinquent Loan Ratios as a Percent of Ending Loan Balances |
| September 30, | December 31, | ||||||||||
| 90 days or more past dueexcludingnonperforming loans | 2004 | 2003 | |||||||||
Commercial | |||||||||||
| Commercial | .06 | % | .06 | % | |||||||
| Lease financing | — | .04 | |||||||||
| Total commercial | .05 | .06 | |||||||||
Commercial real estate | |||||||||||
| Commercial mortgages | .01 | .02 | |||||||||
| Construction and development | .01 | .03 | |||||||||
| Total commercial real estate | .01 | .02 | |||||||||
Residential mortgages | .46 | .61 | |||||||||
Retail | |||||||||||
| Credit card | 1.76 | 1.68 | |||||||||
| Retail leasing | .08 | .14 | |||||||||
| Other retail | .29 | .41 | |||||||||
| Total retail | .47 | .56 | |||||||||
| Total loans | .23 | % | .28 | % | |||||||
| September 30, | December 31, | ||||||||
| 90 days or more past dueincludingnonperforming loans | 2004 | 2003 | |||||||
| Commercial | 1.14 | % | 1.97 | % | |||||
| Commercial real estate | .75 | .82 | |||||||
| Residential mortgages | .77 | .91 | |||||||
| Retail | .51 | .62 | |||||||
| Total loans | .80 | % | 1.14 | % | |||||
| U.S. Bancorp | 13 |
Table of Contents
The following table provides summary delinquency information for residential mortgages and retail loans:
| As a Percent of Ending | |||||||||||||||||||
| Amount | Loan Balances | ||||||||||||||||||
| September 30, | December 31, | September 30, | December 31, | ||||||||||||||||
| (Dollars in Millions) | 2004 | 2003 | 2004 | 2003 | |||||||||||||||
Residential Mortgages | |||||||||||||||||||
| 30-89 days | $ | 100.6 | $ | 102.9 | .68 | % | .76 | % | |||||||||||
| 90 days or more | 68.2 | 82.5 | .46 | .61 | |||||||||||||||
| Nonperforming | 45.3 | 40.5 | .31 | .30 | |||||||||||||||
Total | $ | 214.1 | $ | 225.9 | 1.45 | % | 1.68 | % | |||||||||||
Retail | |||||||||||||||||||
Credit Card | |||||||||||||||||||
| 30-89 days | $ | 134.9 | $ | 150.9 | 2.17 | % | 2.54 | % | |||||||||||
| 90 days or more | 109.4 | 99.5 | 1.76 | 1.68 | |||||||||||||||
| Nonperforming | — | — | — | — | |||||||||||||||
Total | $ | 244.3 | $ | 250.4 | 3.93 | % | 4.22 | % | |||||||||||
Retail Leasing | |||||||||||||||||||
| 30-89 days | $ | 66.0 | $ | 78.8 | .95 | % | 1.31 | % | |||||||||||
| 90 days or more | 5.9 | 8.2 | .08 | .14 | |||||||||||||||
| Nonperforming | .1 | .4 | — | .01 | |||||||||||||||
Total | $ | 72.0 | $ | 87.4 | 1.03 | % | 1.45 | % | |||||||||||
Other Retail | |||||||||||||||||||
| 30-89 days | $ | 251.7 | $ | 311.9 | .86 | % | 1.15 | % | |||||||||||
| 90 days or more | 84.6 | 110.2 | .29 | .41 | |||||||||||||||
| Nonperforming | 17.1 | 24.8 | .06 | .09 | |||||||||||||||
Total | $ | 353.4 | $ | 446.9 | 1.21 | % | 1.65 | % | |||||||||||
Analysis of Net Loan Charge-offs Total loan net charge-offs were $165.1 million and $603.5 million during the third quarter and first nine months of 2004, respectively, compared with net charge-offs of $309.9 million and $966.6 million, respectively, for the same periods of 2003. The ratio of total loan net charge-offs to average loans in the third quarter and first nine months of 2004 was .53 percent and .67 percent, respectively, compared with 1.02 percent and 1.09 percent, respectively, for the same periods of 2003. The overall level of net charge-offs in the third quarter and first nine months of 2004 reflected the Company’s ongoing efforts to reduce the overall risk profile of the organization, improved economic conditions, higher commercial loan recoveries in the third quarter of 2004, refinancings by customers and higher asset valuations. Net charge-offs are expected to increase modestly as commercial loan recoveries return to more normal levels in future periods.
| 14 | U.S. Bancorp |
Table of Contents
The following table provides an analysis of net charge-offs as a percentage of average loans outstanding managed by the consumer finance division, compared with traditional branch-related loans:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
| Average Loan | Percent of | Average Loan | Percent of | ||||||||||||||||||||||||||||||
| Balance | Average Loans | Balance | Average Loans | ||||||||||||||||||||||||||||||
| (Dollars in Millions) | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||||||||
Consumer Finance (a) | |||||||||||||||||||||||||||||||||
| Residential mortgages | $ | 4,708 | $ | 3,669 | .46 | % | .40 | % | $ | 4,432 | $ | 3,312 | .45 | % | .46 | % | |||||||||||||||||
| Home equity and second mortgages | 2,527 | 2,259 | 1.93 | 2.50 | 2,322 | 2,408 | 2.20 | 2.40 | |||||||||||||||||||||||||
| Other retail | 426 | 379 | 4.42 | 4.52 | 414 | 349 | 4.70 | 4.48 | |||||||||||||||||||||||||
Traditional Branch | |||||||||||||||||||||||||||||||||
| Residential mortgages | $ | 9,861 | $ | 8,565 | .05 | % | .17 | % | $ | 9,647 | $ | 7,819 | .09 | % | .14 | % | |||||||||||||||||
| Home equity and second mortgages | 11,761 | 10,834 | .22 | .33 | 11,493 | 10,883 | .23 | .36 | |||||||||||||||||||||||||
| Other retail | 14,125 | 13,487 | .99 | 1.47 | 13,946 | 13,189 | 1.16 | 1.54 | |||||||||||||||||||||||||
Total Company | |||||||||||||||||||||||||||||||||
| Residential mortgages | $ | 14,569 | $ | 12,234 | .18 | % | .24 | % | $ | 14,079 | $ | 11,131 | .20 | % | .24 | % | |||||||||||||||||
| Home equity and second mortgages | 14,288 | 13,093 | .52 | .70 | 13,815 | 13,291 | .56 | .73 | |||||||||||||||||||||||||
| Other retail | 14,551 | 13,866 | 1.09 | 1.55 | 14,360 | 13,538 | 1.26 | 1.61 | |||||||||||||||||||||||||
| (a) | Consumer finance category included credit originated and managed by USBCF, as well as home equity loans and second mortgage loans with a loan-to-value greater than 100 percent that were originated in the branches. |
| Table 8 | Net Charge-offs as a Percent of Average Loans Outstanding |
| Three Months Ended | Nine Months Ended | ||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | ||||||||||||||||
Commercial | |||||||||||||||||||
| Commercial | .03 | % | 1.33 | % | .36 | % | 1.40 | % | |||||||||||
| Lease financing | 1.49 | 1.52 | 1.60 | 1.80 | |||||||||||||||
| Total commercial | .21 | 1.35 | .51 | 1.45 | |||||||||||||||
Commercial real estate | |||||||||||||||||||
| Commercial mortgages | .05 | .12 | .06 | .12 | |||||||||||||||
| Construction and development | .14 | .25 | .16 | .16 | |||||||||||||||
| Total commercial real estate | .08 | .15 | .08 | .13 | |||||||||||||||
Residential mortgages | .18 | .24 | .20 | .24 | |||||||||||||||
Retail | |||||||||||||||||||
| Credit card | 4.16 | 4.20 | 4.24 | 4.71 | |||||||||||||||
| Retail leasing | .56 | .83 | .62 | .90 | |||||||||||||||
| Home equity and second mortgages | .52 | .70 | .56 | .73 | |||||||||||||||
| Other retail | 1.09 | 1.55 | 1.26 | 1.61 | |||||||||||||||
| Total retail | 1.26 | 1.54 | 1.36 | 1.64 | |||||||||||||||
| Total loans | .53 | % | 1.02 | % | .67 | % | 1.09 | % | |||||||||||
| U.S. Bancorp | 15 |
Table of Contents
| Table 9 | Summary of Allowance for Credit Losses |
| Three Months Ended | Nine Months Ended | |||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||
| (Dollars in Millions) | 2004 | 2003 | 2004 | 2003 | ||||||||||||||||
| Balance at beginning of period | $ | 2,369.7 | $ | 2,367.6 | $ | 2,368.6 | $ | 2,422.0 | ||||||||||||
Charge-offs | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Commercial | 55.9 | 146.6 | 204.2 | 429.8 | ||||||||||||||||
| Lease financing | 29.1 | 31.6 | 89.6 | 111.4 | ||||||||||||||||
| Total commercial | 85.0 | 178.2 | 293.8 | 541.2 | ||||||||||||||||
| Commercial real estate | ||||||||||||||||||||
| Commercial mortgages | 5.0 | 9.6 | 18.9 | 27.8 | ||||||||||||||||
| Construction and development | 3.6 | 4.7 | 9.9 | 9.8 | ||||||||||||||||
| Total commercial real estate | 8.6 | 14.3 | 28.8 | 37.6 | ||||||||||||||||
| Residential mortgages | 7.9 | 8.3 | 24.5 | 22.4 | ||||||||||||||||
| Retail | ||||||||||||||||||||
| Credit card | 71.5 | 67.7 | 212.7 | 213.9 | ||||||||||||||||
| Retail leasing | 12.3 | 14.0 | 37.0 | 43.7 | ||||||||||||||||
| Home equity and second mortgages | 22.1 | 26.4 | 68.0 | 81.0 | ||||||||||||||||
| Other retail | 52.1 | 64.7 | 173.8 | 202.0 | ||||||||||||||||
| Total retail | 158.0 | 172.8 | 491.5 | 540.6 | ||||||||||||||||
| Total charge-offs | 259.5 | 373.6 | 838.6 | 1,141.8 | ||||||||||||||||
Recoveries | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Commercial | 53.2 | 22.7 | 112.2 | 45.1 | ||||||||||||||||
| Lease financing | 10.9 | 12.4 | 31.2 | 42.3 | ||||||||||||||||
| Total commercial | 64.1 | 35.1 | 143.4 | 87.4 | ||||||||||||||||
| Commercial real estate | ||||||||||||||||||||
| Commercial mortgages | 2.3 | 3.7 | 9.8 | 9.7 | ||||||||||||||||
| Construction and development | 1.1 | .1 | 2.0 | 1.7 | ||||||||||||||||
| Total commercial real estate | 3.4 | 3.8 | 11.8 | 11.4 | ||||||||||||||||
| Residential mortgages | 1.2 | 1.0 | 3.2 | 2.7 | ||||||||||||||||
| Retail | ||||||||||||||||||||
| Credit card | 7.2 | 8.4 | 22.3 | 21.4 | ||||||||||||||||
| Retail leasing | 2.7 | 1.8 | 6.6 | 5.0 | ||||||||||||||||
| Home equity and second mortgages | 3.4 | 3.2 | 9.6 | 8.5 | ||||||||||||||||
| Other retail | 12.4 | 10.4 | 38.2 | 38.8 | ||||||||||||||||
| Total retail | 25.7 | 23.8 | 76.7 | 73.7 | ||||||||||||||||
| Total recoveries | 94.4 | 63.7 | 235.1 | 175.2 | ||||||||||||||||
Net Charge-offs | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Commercial | 2.7 | 123.9 | 92.0 | 384.7 | ||||||||||||||||
| Lease financing | 18.2 | 19.2 | 58.4 | 69.1 | ||||||||||||||||
| Total commercial | 20.9 | 143.1 | 150.4 | 453.8 | ||||||||||||||||
| Commercial real estate | ||||||||||||||||||||
| Commercial mortgages | 2.7 | 5.9 | 9.1 | 18.1 | ||||||||||||||||
| Construction and development | 2.5 | 4.6 | 7.9 | 8.1 | ||||||||||||||||
| Total commercial real estate | 5.2 | 10.5 | 17.0 | 26.2 | ||||||||||||||||
| Residential mortgages | 6.7 | 7.3 | 21.3 | 19.7 | ||||||||||||||||
| Retail | ||||||||||||||||||||
| Credit card | 64.3 | 59.3 | 190.4 | 192.5 | ||||||||||||||||
| Retail leasing | 9.6 | 12.2 | 30.4 | 38.7 | ||||||||||||||||
| Home equity and second mortgages | 18.7 | 23.2 | 58.4 | 72.5 | ||||||||||||||||
| Other retail | 39.7 | 54.3 | 135.6 | 163.2 | ||||||||||||||||
| Total retail | 132.3 | 149.0 | 414.8 | 466.9 | ||||||||||||||||
| Total net charge-offs | 165.1 | 309.9 | 603.5 | 966.6 | ||||||||||||||||
| Provision for credit losses | 165.1 | 310.0 | 604.6 | 968.0 | ||||||||||||||||
| Acquisitions and other changes | — | — | — | (55.7 | ) | |||||||||||||||
| Balance at end of period | $ | 2,369.7 | $ | 2,367.7 | $ | 2,369.7 | $ | 2,367.7 | ||||||||||||
| Components | ||||||||||||||||||||
| Allowance for loan losses | $ | 2,184.0 | $ | 2,184.0 | ||||||||||||||||
| Liability for unfunded credit commitments (a) | 185.7 | 183.7 | ||||||||||||||||||
| Total allowance for credit losses | $ | 2,369.7 | $ | 2,367.7 | ||||||||||||||||
| Allowance for credit losses as a percentage of | ||||||||||||||||||||
| Period-end loans | 1.90 | % | 1.98 | % | ||||||||||||||||
| Nonperforming loans | 337 | 202 | ||||||||||||||||||
| Nonperforming assets | 295 | 180 | ||||||||||||||||||
| Annualized net charge-offs | 361 | 193 | ||||||||||||||||||
| (a) | During the first quarter of 2004, the Company reclassified the portion of its allowance for credit losses related to commercial off-balance sheet loan commitments and letters of credit to a separate liability account. Amounts for periods presented in 2003 represent estimates. |
| 16 | U.S. Bancorp |
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Analysis and Determination of the Allowance for Credit Losses The allowance for credit losses provides coverage for probable and estimable losses inherent in the Company’s loan and lease portfolio. Management evaluates the allowance each quarter to determine that it is adequate to cover inherent losses. The evaluation of each element and the overall allowance is based on a continuing assessment of problem loans and related off-balance sheet items, recent loss experience and other factors, including regulatory guidance and economic conditions.
Residual Risk ManagementThe Company manages its risk to changes in the residual value of leased assets through disciplined residual valuation setting at the inception of a lease, diversification of its leased assets, regular asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. Commercial lease originations are subject to the same well-defined underwriting standards referred to in the “Credit Risk Management” section which includes an evaluation of the residual risk. Retail lease residual risk is mitigated further by originating longer-term vehicle leases and effective end-of-term marketing of off-lease vehicles. Also, to reduce the financial risk of potential changes in vehicle residual values, the Company maintains residual value insurance. The catastrophic insurance maintained by the Company provides for the potential recovery of losses on individual vehicle sales in an amount equal to the difference between: (a) 105 percent or 110 percent of the average wholesale auction price for the vehicle at the time of sale and (b) the vehicle residual value specified by the Automotive Lease Guide (an authoritative industry source) at the inception of the lease. The potential recovery is calculated for each individual vehicle sold in a particular policy year and is reduced by any gains realized on vehicles sold during the same period. The Company will receive claim proceeds under this insurance program if, in the aggregate, there is a net loss for such period. In addition, the Company obtains separate residual value insurance for all vehicles at lease inception where end of lease term settlement is based solely on the residual value of the individual leased vehicles. Under this program, the potential recovery is computed for each individual vehicle sold and does not allow the insurance carrier to offset individually determined losses with gains from other leases. This individual vehicle coverage is included in the calculation of minimum lease payments when making the capital lease assessment. To reduce the risk associated with collecting insurance claims, the Company monitors the financial viability of the insurance carrier based on insurance industry ratings and available financial information.
Operational Risk ManagementOperational risk represents the risk of loss resulting from the Company’s operations, including, but not limited to, the risk of fraud by employees or persons outside the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the internal control system and compliance requirements and business continuation and disaster recovery. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business
| U.S. Bancorp | 17 |
Table of Contents
Interest Rate Risk ManagementIn the banking industry, a significant risk exists related to changes in interest rates. To minimize the volatility of net interest income and of the market value of assets and liabilities, the Company manages its exposure to changes in interest rates through asset and liability management activities within guidelines established by its Asset Liability Policy Committee (“ALPC”) and approved by the Board of Directors. ALPC has the responsibility for approving and ensuring compliance with ALPC management policies, including interest rate risk exposure. The Company uses Net Interest Income Simulation Analysis and Market Value of Equity Modeling for measuring and analyzing consolidated interest rate risk.
Net Interest Income Simulation Analysis One of the primary tools used to measure interest rate risk and the effect of interest rate changes on rate sensitive income and net interest income is simulation analysis. The monthly analysis incorporates substantially all of the Company’s assets and liabilities and off-balance sheet instruments, together with forecasted changes in the balance sheet and assumptions that reflect the current interest rate environment. Through these simulations, management estimates the impact on interest rate sensitive income of a 300 basis point upward or downward gradual change of market interest rates over a one-year period. The simulations also estimate the effect of immediate and sustained parallel shifts in the yield curve of 50 basis points as well as the effect of immediate and sustained flattening or steepening of the yield curve. These simulations include assumptions about how the balance sheet is likely to be affected by changes in loan and deposit growth. Assumptions are made to project interest rates for new loans and deposits based on historical analysis, management’s outlook and repricing strategies. These assumptions are validated on a periodic basis. A sensitivity analysis is provided for key variables of the simulation. The results are reviewed by ALPC monthly and are used to guide hedging strategies. ALPC policy guidelines limit the estimated change in interest rate sensitive income to
| 18 | U.S. Bancorp |
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Sensitivity of Net Interest Income and Rate Sensitive Income:
| September 30, 2004 | December 31, 2003 | |||||||||||||||||||||||||||||||
| Down 50 | Up 50 | Down 300 | Up 300 | Down 50 | Up 50 | Down 300 | Up 300 | |||||||||||||||||||||||||
| Immediate | Immediate | Gradual | Gradual | Immediate | Immediate | Gradual | Gradual | |||||||||||||||||||||||||
| Net interest income | (.80) | % | .31 | % | * | % | (.04) | % | 1.30 | % | .19% | * | % | (.02 | )% | |||||||||||||||||
| Rate sensitive income | (.69) | % | .13 | % | * | % | (.56) | % | .74 | % | .01% | * | % | (.54 | )% | |||||||||||||||||
| * | Given the current level of interest rates, a downward 300 basis point scenario can not be computed. |
Market Value of Equity Modeling The Company also utilizes the market value of equity as a measurement tool in managing interest rate sensitivity. The market value of equity measures the degree to which the market values of the Company’s assets and liabilities and off-balance sheet instruments will change given a change in interest rates. ALPC guidelines limit the change in market value of equity in a 200 basis point parallel rate shock to 15 percent of the market value of equity assuming interest rates at September 30, 2004. Given the low level of current interest rates, the down 200 basis point scenario cannot be computed. The up 200 basis point scenario resulted in a 1.9 percent decrease in the market value of equity at September 30, 2004, compared with a 3.1 percent decrease at December 31, 2003. ALPC reviews other down rate scenarios to evaluate the impact of falling interest rates. The down 100 basis point scenario resulted in a 1.4 percent decrease at September 30, 2004, and a 1.3 percent increase at December 31, 2003. At September 30, 2004, and December 31, 2003, the Company was within its policy guidelines.
Use of Derivatives to Manage Interest Rate and Foreign Currency Risk In the ordinary course of business, the Company enters into derivative transactions to manage its interest rate, prepayment, and foreign currency risks (“asset and liability management positions”) and to accommodate the business requirements of its customers (“customer-related positions”). To manage its interest rate risk, the Company may enter into interest rate swap agreements and interest rate options such as caps and floors. Interest rate swaps involve the exchange of fixed-rate and variable-rate payments without the exchange of the underlying notional amount on which the interest payments are calculated. Interest rate caps protect against rising interest rates while interest rate floors protect against declining interest rates. In connection with its mortgage banking operations, the Company enters into forward commitments to sell mortgage loans related to fixed-rate mortgage loans held for sale and fixed-rate mortgage loan commitments. The Company also acts as a seller and buyer of interest rate contracts and foreign exchange rate contracts on behalf
| U.S. Bancorp | 19 |
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| 20 | U.S. Bancorp |
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Market Risk ManagementIn addition to interest rate risk, the Company is exposed to other forms of market risk as a consequence of conducting normal trading activities. Business activities that contribute to market risk include, among other things, proprietary trading and foreign exchange positions. Value at Risk (“VaR”) is a key measure of market risk for the Company. Theoretically, VaR represents the maximum amount that the Company has placed at risk of loss, with a ninety-ninth percentile degree of confidence, to adverse market movements in the course of its risk taking activities.
Liquidity Risk ManagementALPC establishes policies, as well as analyzes and manages liquidity, to ensure that
| Table 10 | Derivative Positions |
| Weighted- | |||||||||||||||
| Average | |||||||||||||||
| Remaining | |||||||||||||||
| Notional | Fair | Maturity | |||||||||||||
| September 30, 2004 (Dollars in Millions) | Amount | Value | In Years | ||||||||||||
Asset and Liability Management Positions | |||||||||||||||
| Interest rate contracts | |||||||||||||||
| Receive fixed/pay floating swaps | $ | 19,520 | $ | 536 | 5.33 | ||||||||||
| Pay fixed/receive floating swaps | 8,275 | 10 | 1.33 | ||||||||||||
| Futures and forwards | 2,660 | (14 | ) | .12 | |||||||||||
| Options | |||||||||||||||
| Written | 1,514 | (1 | ) | .15 | |||||||||||
| Foreign exchange forward contracts | 272 | 1 | .08 | ||||||||||||
| Equity contracts | 48 | 1 | 4.55 | ||||||||||||
Customer-related Positions | |||||||||||||||
| Interest rate contracts | |||||||||||||||
| Receive fixed/pay floating swaps | $ | 6,364 | $ | 126 | 4.50 | ||||||||||
| Pay fixed/receive floating swaps | 6,364 | (93 | ) | 4.50 | |||||||||||
| Options | |||||||||||||||
| Purchased | 882 | 9 | 3.33 | ||||||||||||
| Written | 882 | (8 | ) | 3.33 | |||||||||||
| Risk participation agreements (a) | |||||||||||||||
| Purchased | 138 | — | 7.36 | ||||||||||||
| Written | 72 | — | 2.86 | ||||||||||||
| Foreign exchange rate contracts | |||||||||||||||
| Forwards, spots and swaps | |||||||||||||||
| Buy | 2,151 | 59 | .42 | ||||||||||||
| Sell | 2,110 | (57 | ) | .43 | |||||||||||
| Options | |||||||||||||||
| Purchased | 3 | — | .11 | ||||||||||||
| Written | 3 | — | .11 | ||||||||||||
| (a) | At September 30, 2004, the credit equivalent amount was $1 million and $5 million for purchased and written risk participation agreements, respectively. |
| U.S. Bancorp | 21 |
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Off-Balance Sheet Arrangements Off-balance sheet arrangements include any contractual arrangement to which an unconsolidated entity is a party, under which the Company has an obligation to provide credit or liquidity enhancements or market risk support. Off-balance sheet arrangements include certain defined guarantees, asset securitization trusts and conduits. Off-balance sheet arrangements also include any obligation under a variable interest held by an unconsolidated entity that provides financing, liquidity, credit enhancement or market risk support.
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Capital ManagementThe Company is committed to managing capital for maximum shareholder benefit and maintaining strong protection for depositors and creditors. The Company has targeted returning 80 percent of earnings to our shareholders through a combination of dividends and share repurchases. In keeping with this target, the Company returned 94 percent of earnings and 110 percent of earnings during the third quarter and first nine months of 2004, respectively. Total shareholders’ equity was $19.6 billion at September 30, 2004, compared with $19.2 billion at December 31, 2003. The increase was the result of corporate earnings offset by dividends and share repurchases.
| Table 11 | Capital Ratios |
| September 30, | December 31, | ||||||||
| (Dollars in Millions) | 2004 | 2003 | |||||||
| Tangible common equity | $ | 11,819 | $ | 11,858 | |||||
| As a percent of tangible assets | 6.4 | % | 6.5 | % | |||||
| Tier 1 capital | $ | 14,589 | $ | 14,623 | |||||
| As a percent of risk-weighted assets | 8.7 | % | 9.1 | % | |||||
| As a percent of adjusted quarterly average assets (leverage ratio) | 7.9 | % | 8.0 | % | |||||
| Total risk-based capital | $ | 21,428 | $ | 21,710 | |||||
| As a percent of risk-weighted assets | 12.7 | % | 13.6 | % | |||||
| U.S. Bancorp | 23 |
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| Number | Average | Remaining Shares | ||||||||||
| of Shares | Price Paid | Available to be | ||||||||||
| Time Period | Purchased (a) | per Share | Purchased | |||||||||
| July | 6,335,701 | $ | 28.14 | 81,055,584 | ||||||||
| August | 7,321,514 | 28.72 | 73,734,070 | |||||||||
| September | 5,802,388 | 29.13 | 67,931,682 | |||||||||
| Total | 19,459,603 | $ | 28.65 | 67,931,682 | ||||||||
| (a) | All shares purchased during the third quarter of 2004 were purchased under the publicly announced December 16, 2003 repurchase authorization. |
LINE OF BUSINESS FINANCIAL REVIEW
Within the Company, financial performance is measured by major lines of business, which include Wholesale Banking, Consumer Banking, Private Client, Trust and Asset 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.
Basis for Financial PresentationBusiness line results are derived from the Company’s business unit profitability reporting systems by specifically attributing managed balance sheet assets, deposits and other liabilities and their related income or expense. Funds transfer-pricing methodologies are utilized to allocate a cost of funds used or credit for funds provided to all business line assets and liabilities using a matched funding concept. Also, the business unit is allocated the taxable-equivalent benefit of tax-exempt products. Noninterest income and expenses directly managed by each business line, including fees, service charges, salaries and benefits, and other direct costs are accounted for within each segment’s financial results in a manner similar to the consolidated financial statements. Occupancy costs are allocated based on utilization of facilities by the lines of business. Certain expenses, including charges for potential litigation and liabilities for certain guarantees, are included in the line of business results upon final resolution. 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. These allocated expenses are reported as net shared services expense. Certain corporate activities that do not directly support the operations of the lines of business are not charged to the lines of business. Goodwill and other intangible assets are assigned to the lines of business based on the mix of business of the acquired entity. The provision for credit losses within the Wholesale Banking, Consumer Banking, Private Client, Trust and Asset Management and Payment Services lines of business is based on net charge-offs, while Treasury and Corporate Support reflects the residual component of the Company’s total consolidated provision for credit losses determined in accordance with accounting principles generally accepted in the United States. Income taxes are assessed to each line of business at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Treasury and Corporate Support. Merger and restructuring-related charges, discontinued operations and cumulative effects of changes in accounting principles are not identified by or allocated to lines of business. Within the Company, capital levels are evaluated and managed centrally; however, capital is allocated to the operating segments to support evaluation of business performance. Capital allocations to the business lines are based on the amount of goodwill and other intangibles, the extent of off-balance sheet managed assets and lending commitments and the ratio of on-balance sheet assets relative to the total Company. Certain lines of business, such as Trust and Asset Management, have no significant balance sheet components. For these business units, capital is allocated taking into consideration fiduciary and operational risk, capital levels of
| 24 | U.S. Bancorp |
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Wholesale Bankingoffers lending, depository, treasury management and other financial services to middle market, large corporate and public sector clients. Wholesale Banking contributed $278.0 million of the Company’s operating earnings for the third quarter of 2004 and $795.1 million for the first nine months of 2004, increases of $64.8 million (30.4 percent) and $157.8 million (24.8 percent), respectively, compared with the same periods of 2003. The increase in operating earnings in the third quarter of 2004 and the first nine months of 2004, compared with the same periods of 2003, was driven by reductions in the provision for credit losses and total noninterest expense, partially offset by a decline in total net revenue.
| U.S. Bancorp | 25 |
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| Table 12 | Line of Business Financial Performance |
| Wholesale | Consumer | ||||||||||||||||||||||||
| Banking | Banking | ||||||||||||||||||||||||
| Percent | Percent | ||||||||||||||||||||||||
| Three Months Ended September 30 (Dollars in Millions) | 2004 | 2003 | Change | 2004 | 2003 | Change | |||||||||||||||||||
Condensed Income Statement | |||||||||||||||||||||||||
| Net interest income (taxable-equivalent basis) | $ | 399.4 | $ | 417.6 | (4.4 | )% | $ | 919.8 | $ | 922.6 | (.3 | )% | |||||||||||||
| Noninterest income | 182.5 | 191.3 | (4.6 | ) | 462.7 | 392.1 | 18.0 | ||||||||||||||||||
| Securities gains (losses), net | .6 | — | * | 86.9 | (108.7 | ) | * | ||||||||||||||||||
| Total net revenue | 582.5 | 608.9 | (4.3 | ) | 1,469.4 | 1,206.0 | 21.8 | ||||||||||||||||||
| Noninterest expense | 153.6 | 164.6 | (6.7 | ) | 588.9 | 594.1 | (.9 | ) | |||||||||||||||||
| Other intangibles | 4.5 | 4.8 | (6.3 | ) | 148.7 | (52.0 | ) | * | |||||||||||||||||
| Total noninterest expense | 158.1 | 169.4 | (6.7 | ) | 737.6 | 542.1 | 36.1 | ||||||||||||||||||
| Operating earnings before provision and income taxes | 424.4 | 439.5 | (3.4 | ) | 731.8 | 663.9 | 10.2 | ||||||||||||||||||
| Provision for credit losses | (12.7 | ) | 104.4 | * | 88.1 | 105.5 | (16.5 | ) | |||||||||||||||||
| Operating earnings before income taxes | 437.1 | 335.1 | 30.4 | 643.7 | 558.4 | 15.3 | |||||||||||||||||||
| Income taxes and taxable-equivalent adjustment | 159.1 | 121.9 | 30.5 | 234.2 | 203.2 | 15.3 | |||||||||||||||||||
| Operating earnings | $ | 278.0 | $ | 213.2 | 30.4 | $ | 409.5 | $ | 355.2 | 15.3 | |||||||||||||||
| Merger and restructuring-related items (after-tax) | |||||||||||||||||||||||||
| Discontinued operations (after-tax) | |||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||
Average Balance Sheet Data | |||||||||||||||||||||||||
| Commercial | $ | 26,616 | $ | 28,771 | (7.5 | )% | $ | 7,813 | $ | 8,227 | (5.0 | )% | |||||||||||||
| Commercial real estate | 15,789 | 16,574 | (4.7 | ) | 10,668 | 10,090 | 5.7 | ||||||||||||||||||
| Residential mortgages | 77 | 102 | (24.5 | ) | 14,139 | 11,855 | 19.3 | ||||||||||||||||||
| Retail | 55 | 45 | 22.2 | 31,844 | 29,149 | 9.2 | |||||||||||||||||||
| Total loans | 42,537 | 45,492 | (6.5 | ) | 64,464 | 59,321 | 8.7 | ||||||||||||||||||
| Goodwill | 1,225 | 1,225 | — | 2,243 | 2,243 | — | |||||||||||||||||||
| Other intangible assets | 85 | 104 | (18.3 | ) | 1,143 | 853 | 34.0 | ||||||||||||||||||
| Assets | 48,815 | 52,577 | (7.2 | ) | 72,243 | 70,264 | 2.8 | ||||||||||||||||||
| Noninterest-bearing deposits | 12,574 | 14,510 | (13.3 | ) | 14,242 | 14,169 | .5 | ||||||||||||||||||
| Savings products | 8,563 | 12,709 | (32.6 | ) | 41,663 | 40,873 | 1.9 | ||||||||||||||||||
| Time deposits | 8,364 | 4,131 | * | 15,840 | 17,784 | (10.9 | ) | ||||||||||||||||||
| Total deposits | 29,501 | 31,350 | (5.9 | ) | 71,745 | 72,826 | (1.5 | ) | |||||||||||||||||
| Shareholders’ equity | 5,004 | 5,009 | (.1 | ) | 6,155 | 5,922 | 3.9 | ||||||||||||||||||
| Wholesale | Consumer | ||||||||||||||||||||||||
| Banking | Banking | ||||||||||||||||||||||||
| Percent | Percent | ||||||||||||||||||||||||
| Nine Months Ended September 30 (Dollars in Millions) | 2004 | 2003 | Change | 2004 | 2003 | Change | |||||||||||||||||||
Condensed Income Statement | |||||||||||||||||||||||||
| Net interest income (taxable-equivalent basis) | $ | 1,194.9 | $ | 1,264.1 | (5.5 | )% | $ | 2,679.8 | $ | 2,686.1 | (.2 | )% | |||||||||||||
| Noninterest income | 563.9 | 579.4 | (2.7 | ) | 1,341.4 | 1,163.7 | 15.3 | ||||||||||||||||||
| Securities gains (losses), net | 1.5 | — | * | (84.2 | ) | 193.4 | * | ||||||||||||||||||
| Total net revenue | 1,760.3 | 1,843.5 | (4.5 | ) | 3,937.0 | 4,043.2 | (2.6 | ) | |||||||||||||||||
| Noninterest expense | 466.4 | 496.2 | (6.0 | ) | 1,750.5 | 1,777.5 | (1.5 | ) | |||||||||||||||||
| Other intangibles | 13.9 | 14.6 | (4.8 | ) | 211.0 | 372.0 | (43.3 | ) | |||||||||||||||||
| Total noninterest expense | 480.3 | 510.8 | (6.0 | ) | 1,961.5 | 2,149.5 | (8.7 | ) | |||||||||||||||||
| Operating earnings before provision and income taxes | 1,280.0 | 1,332.7 | (4.0 | ) | 1,975.5 | 1,893.7 | 4.3 | ||||||||||||||||||
| Provision for credit losses | 29.9 | 330.8 | (91.0 | ) | 288.6 | 322.7 | (10.6 | ) | |||||||||||||||||
| Operating earnings before income taxes | 1,250.1 | 1,001.9 | 24.8 | 1,686.9 | 1,571.0 | 7.4 | |||||||||||||||||||
| Income taxes and taxable-equivalent adjustment | 455.0 | 364.6 | 24.8 | 613.8 | 571.7 | 7.4 | |||||||||||||||||||
| Operating earnings | $ | 795.1 | $ | 637.3 | 24.8 | $ | 1,073.1 | $ | 999.3 | 7.4 | |||||||||||||||
| Merger and restructuring-related items (after-tax) | |||||||||||||||||||||||||
| Discontinued operations (after-tax) | |||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||
Average Balance Sheet Data | |||||||||||||||||||||||||
| Commercial | $ | 26,485 | $ | 28,543 | (7.2 | )% | $ | 7,780 | $ | 8,318 | (6.5 | )% | |||||||||||||
| Commercial real estate | 15,865 | 16,419 | (3.4 | ) | 10,524 | 9,887 | 6.4 | ||||||||||||||||||
| Residential mortgages | 72 | 125 | (42.4 | ) | 13,690 | 10,750 | 27.3 | ||||||||||||||||||
| Retail | 52 | 51 | 2.0 | 30,913 | 28,953 | 6.8 | |||||||||||||||||||
| Total loans | 42,474 | 45,138 | (5.9 | ) | 62,907 | 57,908 | 8.6 | ||||||||||||||||||
| Goodwill | 1,225 | 1,227 | (.2 | ) | 2,242 | 2,242 | — | ||||||||||||||||||
| Other intangible assets | 89 | 109 | (18.3 | ) | 1,063 | 922 | 15.3 | ||||||||||||||||||
| Assets | 48,934 | 52,296 | (6.4 | ) | 70,739 | 68,235 | 3.7 | ||||||||||||||||||
| Noninterest-bearing deposits | 12,831 | 15,422 | (16.8 | ) | 13,980 | 13,715 | 1.9 | ||||||||||||||||||
| Savings products | 10,266 | 10,346 | (.8 | ) | 41,878 | 39,657 | 5.6 | ||||||||||||||||||
| Time deposits | 6,729 | 3,742 | 79.8 | 16,028 | 19,012 | (15.7 | ) | ||||||||||||||||||
| Total deposits | 29,826 | 29,510 | 1.1 | 71,886 | 72,384 | (.7 | ) | ||||||||||||||||||
| Shareholders’ equity | 5,047 | 5,034 | .3 | 6,180 | 5,805 | 6.5 | |||||||||||||||||||
| * | Not meaningful |
| 26 | U.S. Bancorp |
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| �� | ||||||||||||||||||||||||||||||||||||||||||||||||
| Private Client, Trust | Payment | Treasury and | Consolidated | |||||||||||||||||||||||||||||||||||||||||||||
| and Asset Management | Services | Corporate Support | Company | |||||||||||||||||||||||||||||||||||||||||||||
| Percent | Percent | Percent | Percent | |||||||||||||||||||||||||||||||||||||||||||||
| 2004 | 2003 | Change | 2004 | 2003 | Change | 2004 | 2003 | Change | 2004 | 2003 | Change | |||||||||||||||||||||||||||||||||||||
| $ | 94.8 | $ | 79.8 | 18.8 | % | $ | 138.1 | $ | 149.1 | (7.4 | )% | $ | 229.6 | $ | 256.4 | (10.5 | )% | $ | 1,781.7 | $ | 1,825.5 | (2.4 | )% | |||||||||||||||||||||||||
| 240.1 | 241.8 | (.7 | ) | 496.0 | 409.3 | 21.2 | 55.4 | 51.8 | 6.9 | 1,436.7 | 1,286.3 | 11.7 | ||||||||||||||||||||||||||||||||||||
| — | — | — | — | — | — | (.2 | ) | (.2 | ) | — | 87.3 | (108.9 | ) | * | ||||||||||||||||||||||||||||||||||
| 334.9 | 321.6 | 4.1 | 634.1 | 558.4 | 13.6 | 284.8 | 308.0 | (7.5 | ) | 3,305.7 | 3,002.9 | 10.1 | ||||||||||||||||||||||||||||||||||||
| 143.5 | 145.8 | (1.6 | ) | 214.0 | 178.9 | 19.6 | 208.8 | 148.9 | 40.2 | 1,308.8 | 1,232.3 | 6.2 | ||||||||||||||||||||||||||||||||||||
| 16.0 | 16.5 | (3.0 | ) | 39.6 | 39.8 | (.5 | ) | 1.4 | 1.7 | (17.6 | ) | 210.2 | 10.8 | * | ||||||||||||||||||||||||||||||||||
| 159.5 | 162.3 | (1.7 | ) | 253.6 | 218.7 | 16.0 | 210.2 | 150.6 | 39.6 | 1,519.0 | 1,243.1 | 22.2 | ||||||||||||||||||||||||||||||||||||
| 175.4 | 159.3 | 10.1 | 380.5 | 339.7 | 12.0 | 74.6 | 157.4 | (52.6 | ) | 1,786.7 | 1,759.8 | 1.5 | ||||||||||||||||||||||||||||||||||||
| 1.2 | 3.2 | (62.5 | ) | 89.6 | 98.3 | (8.9 | ) | (1.1 | ) | (1.4 | ) | (21.4 | ) | 165.1 | 310.0 | (46.7 | ) | |||||||||||||||||||||||||||||||
| 174.2 | 156.1 | 11.6 | 290.9 | 241.4 | 20.5 | 75.7 | 158.8 | (52.3 | ) | 1,621.6 | 1,449.8 | 11.8 | ||||||||||||||||||||||||||||||||||||
| 63.4 | 56.8 | 11.6 | 105.9 | 87.8 | 20.6 | (6.5 | ) | 32.7 | * | 556.1 | 502.4 | 10.7 | ||||||||||||||||||||||||||||||||||||
| $ | 110.8 | $ | 99.3 | 11.6 | $ | 185.0 | $ | 153.6 | 20.4 | $ | 82.2 | $ | 126.1 | (34.8 | ) | 1,065.5 | 947.4 | 12.5 | ||||||||||||||||||||||||||||||
| — | (6.7 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| — | 10.2 | |||||||||||||||||||||||||||||||||||||||||||||||
| $ | 1,065.5 | $ | 950.9 | |||||||||||||||||||||||||||||||||||||||||||||
| $ | 1,592 | $ | 1,857 | (14.3 | )% | $ | 3,085 | $ | 2,909 | 6.1 | % | $ | 211 | $ | 216 | (2.3 | )% | $ | 39,317 | $ | 41,980 | (6.3 | )% | |||||||||||||||||||||||||
| 610 | 567 | 7.6 | — | — | — | 127 | 166 | (23.5 | ) | 27,194 | 27,397 | (.7 | ) | |||||||||||||||||||||||||||||||||||
| 344 | 265 | 29.8 | — | — | — | 9 | 12 | (25.0 | ) | 14,569 | 12,234 | 19.1 | ||||||||||||||||||||||||||||||||||||
| 2,278 | 1,960 | 16.2 | 7,590 | 7,169 | 5.9 | 59 | 48 | 22.9 | 41,826 | 38,371 | 9.0 | |||||||||||||||||||||||||||||||||||||
| 4,824 | 4,649 | 3.8 | 10,675 | 10,078 | 5.9 | 406 | 442 | (8.1 | ) | 122,906 | 119,982 | 2.4 | ||||||||||||||||||||||||||||||||||||
| 845 | 741 | 14.0 | 1,915 | 1,813 | 5.6 | — | 306 | * | 6,228 | 6,328 | (1.6 | ) | ||||||||||||||||||||||||||||||||||||
| 362 | 389 | (6.9 | ) | 855 | 671 | 27.4 | 7 | 12 | (41.7 | ) | 2,452 | 2,029 | 20.8 | |||||||||||||||||||||||||||||||||||
| 6,580 | 6,464 | 1.8 | 14,081 | 13,667 | 3.0 | 49,866 | 47,269 | 5.5 | 191,585 | 190,241 | .7 | |||||||||||||||||||||||||||||||||||||
| 3,127 | 3,223 | (3.0 | ) | 115 | 178 | (35.4 | ) | (267 | ) | (173 | ) | 54.3 | 29,791 | 31,907 | (6.6 | ) | ||||||||||||||||||||||||||||||||
| 7,854 | 6,390 | 22.9 | 12 | 10 | 20.0 | 29 | (8 | ) | * | 58,121 | 59,974 | (3.1 | ) | |||||||||||||||||||||||||||||||||||
| 568 | 471 | 20.6 | — | — | — | 2,632 | 3,689 | (28.7 | ) | 27,404 | 26,075 | 5.1 | ||||||||||||||||||||||||||||||||||||
| 11,549 | 10,084 | 14.5 | 127 | 188 | (32.4 | ) | 2,394 | 3,508 | (31.8 | ) | 115,316 | 117,956 | (2.2 | ) | ||||||||||||||||||||||||||||||||||
| 2,296 | 1,995 | 15.1 | 3,320 | 3,007 | 10.4 | 2,612 | 3,427 | (23.8 | ) | 19,387 | 19,360 | .1 | ||||||||||||||||||||||||||||||||||||
| Private Client, Trust | Payment | Treasury and | Consolidated | |||||||||||||||||||||||||||||||||||||||||||||
| and Asset Management | Services | Corporate Support | Company | |||||||||||||||||||||||||||||||||||||||||||||
| Percent | Percent | Percent | Percent | |||||||||||||||||||||||||||||||||||||||||||||
| 2004 | 2003 | Change | 2004 | 2003 | Change | 2004 | 2003 | Change | 2004 | 2003 | Change | |||||||||||||||||||||||||||||||||||||
| $ | 265.8 | $ | 231.2 | 15.0 | % | $ | 428.3 | $ | 453.9 | (5.6 | )% | $ | 771.3 | $ | 765.5 | .8 | % | $ | 5,340.1 | $ | 5,400.8 | (1.1 | )% | |||||||||||||||||||||||||
| 743.2 | 710.0 | 4.7 | 1,370.8 | 1,186.6 | 15.5 | 149.1 | 131.8 | 13.1 | 4,168.4 | 3,771.5 | 10.5 | |||||||||||||||||||||||||||||||||||||
| — | — | — | — | — | — | (1.7 | ) | 51.5 | * | (84.4 | ) | 244.9 | * | |||||||||||||||||||||||||||||||||||
| 1,009.0 | 941.2 | 7.2 | 1,799.1 | 1,640.5 | 9.7 | 918.7 | 948.8 | (3.2 | ) | 9,424.1 | 9,417.2 | .1 | ||||||||||||||||||||||||||||||||||||
| 433.2 | 439.0 | (1.3 | ) | 584.1 | 531.7 | 9.9 | 583.6 | 413.3 | 41.2 | 3,817.8 | 3,657.7 | 4.4 | ||||||||||||||||||||||||||||||||||||
| 46.1 | 49.6 | (7.1 | ) | 113.5 | 117.4 | (3.3 | ) | 4.2 | 4.6 | (8.7 | ) | 388.7 | 558.2 | (30.4 | ) | |||||||||||||||||||||||||||||||||
| 479.3 | 488.6 | (1.9 | ) | 697.6 | 649.1 | 7.5 | 587.8 | 417.9 | 40.7 | 4,206.5 | 4,215.9 | (.2 | ) | |||||||||||||||||||||||||||||||||||
| 529.7 | 452.6 | 17.0 | 1,101.5 | 991.4 | 11.1 | 330.9 | 530.9 | (37.7 | ) | 5,217.6 | 5,201.3 | .3 | ||||||||||||||||||||||||||||||||||||
| 10.9 | 5.1 | * | 277.0 | 311.6 | (11.1 | ) | (1.8 | ) | (2.2 | ) | (18.2 | ) | 604.6 | 968.0 | (37.5 | ) | ||||||||||||||||||||||||||||||||
| 518.8 | 447.5 | 15.9 | 824.5 | 679.8 | 21.3 | 332.7 | 533.1 | (37.6 | ) | 4,613.0 | 4,233.3 | 9.0 | ||||||||||||||||||||||||||||||||||||
| 188.8 | 162.8 | 16.0 | 300.0 | 247.3 | 21.3 | (55.4 | ) | 121.7 | * | 1,502.2 | 1,468.1 | 2.3 | ||||||||||||||||||||||||||||||||||||
| $ | 330.0 | $ | 284.7 | 15.9 | $ | 524.5 | $ | 432.5 | 21.3 | $ | 388.1 | $ | 411.4 | (5.7 | ) | 3,110.8 | 2,765.2 | 12.5 | ||||||||||||||||||||||||||||||
| — | (25.4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| — | 15.8 | |||||||||||||||||||||||||||||||||||||||||||||||
| $ | 3,110.8 | $ | 2,755.6 | |||||||||||||||||||||||||||||||||||||||||||||
| $ | 1,637 | $ | 1,828 | (10.4 | )% | $ | 2,985 | $ | 2,852 | 4.7 | % | $ | 173 | $ | 217 | (20.3 | )% | $ | 39,060 | $ | 41,758 | (6.5 | )% | |||||||||||||||||||||||||
| 606 | 577 | 5.0 | — | — | — | 145 | 209 | (30.6 | ) | 27,140 | 27,092 | .2 | ||||||||||||||||||||||||||||||||||||
| 307 | 243 | 26.3 | — | — | — | 10 | 13 | (23.1 | ) | 14,079 | 11,131 | 26.5 | ||||||||||||||||||||||||||||||||||||
| 2,197 | 1,951 | 12.6 | 7,473 | 7,059 | 5.9 | 52 | 50 | 4.0 | 40,687 | 38,064 | 6.9 | |||||||||||||||||||||||||||||||||||||
| 4,747 | 4,599 | 3.2 | 10,458 | 9,911 | 5.5 | 380 | 489 | (22.3 | ) | 120,966 | 118,045 | 2.5 | ||||||||||||||||||||||||||||||||||||
| 809 | 740 | 9.3 | 1,852 | 1,814 | 2.1 | — | 306 | * | 6,128 | 6,329 | (3.2 | ) | ||||||||||||||||||||||||||||||||||||
| 354 | 407 | (13.0 | ) | 756 | 680 | 11.2 | 8 | 13 | (38.5 | ) | 2,270 | 2,131 | 6.5 | |||||||||||||||||||||||||||||||||||
| 6,491 | 6,383 | 1.7 | 13,523 | 13,262 | 2.0 | 50,876 | 46,839 | 8.6 | 190,563 | 187,015 | 1.9 | |||||||||||||||||||||||||||||||||||||
| 3,124 | 2,997 | 4.2 | 113 | 330 | (65.8 | ) | (241 | ) | (52 | ) | * | 29,807 | 32,412 | (8.0 | ) | |||||||||||||||||||||||||||||||||
| 7,911 | 5,450 | 45.2 | 11 | 9 | 22.2 | 21 | 3 | * | 60,087 | 55,465 | 8.3 | |||||||||||||||||||||||||||||||||||||
| 536 | 462 | 16.0 | — | — | — | 2,960 | 5,556 | (46.7 | ) | 26,253 | 28,772 | (8.8 | ) | |||||||||||||||||||||||||||||||||||
| 11,571 | 8,909 | 29.9 | 124 | 339 | (63.4 | ) | 2,740 | 5,507 | (50.2 | ) | 116,147 | 116,649 | (.4 | ) | ||||||||||||||||||||||||||||||||||
| 2,220 | 1,980 | 12.1 | 3,152 | 2,994 | 5.3 | 2,739 | 3,389 | (19.2 | ) | 19,338 | 19,202 | .7 | ||||||||||||||||||||||||||||||||||||
| U.S. Bancorp | 27 |
Table of Contents
Consumer Bankingdelivers products and services to the broad consumer market and small businesses through banking offices, telemarketing, on-line services, direct mail and automated teller machines (“ATMs”). It encompasses community banking, metropolitan banking, branch ATM banking, small business banking, including lending guaranteed by the Small Business Administration, small-ticket leasing, consumer lending, mortgage banking, workplace banking, student banking, 24-hour banking and investment product and insurance sales. Consumer Banking contributed $409.5 million of the Company’s operating earnings for the third quarter of 2004 and $1,073.1 million for the first nine months of 2004, an increase of $54.3 million (15.3 percent) and $73.8 million (7.4 percent), respectively, compared with the same periods of 2003. Within Consumer Banking, the retail banking business grew operating earnings by 26.2 percent in the third quarter of 2004 and 21.4 percent in the first nine months of 2004, offset somewhat by lower contribution from the mortgage banking business, compared with the same periods of 2003.
| 28 | U.S. Bancorp |
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Private Client, Trust and Asset Managementprovides trust, private banking, financial advisory, investment management and mutual fund and alternative investment product services through five businesses: Private Client Group, Corporate Trust, Asset Management, Institutional Trust and Custody and Fund Services, LLC. Private Client, Trust and Asset Management contributed $110.8 million of the Company’s operating earnings for the third quarter of 2004 and $330.0 million for the first nine months of 2004, increases of 11.6 percent and 15.9 percent, respectively, compared with the same periods of 2003. The period-over-period increases for the third quarter of 2004 and first nine months of 2004 were attributable to growth in total net revenue (4.1 percent and 7.2 percent, respectively) and a reduction in noninterest expense (1.7 percent and 1.9 percent, respectively), partially offset by an increase in the provision for credit losses for the first nine months of 2004.
| U.S. Bancorp | 29 |
Table of Contents
Payment Servicesincludes consumer and business credit cards, debit cards, corporate and purchasing card services, consumer lines of credit, ATM processing and merchant processing. Payment Services contributed $185.0 million of the Company’s operating earnings for the third quarter of 2004 and $524.5 million for the first nine months of 2004, a 20.4 percent and 21.3 percent increase, respectively, over the same periods of 2003. The increases were due to growth in total net revenue and reductions in provision for credit losses, partially offset by increases in total noninterest expense.
| 30 | U.S. Bancorp |
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Treasury and Corporate Supportincludes 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 expenses associated with business activities managed on a corporate basis, including enterprise-wide operations and administrative support functions. Operational expenses incurred by Treasury and Corporate Support on behalf of the other business lines are allocated back primarily based on customer transaction volume and account activities to the appropriate business unit and are identified as net shared services expense. Treasury and Corporate Support recorded operating earnings of $82.2 million for the third quarter of 2004 and $388.1 million for the first nine months of 2004, a decrease of $43.9 million (34.8 percent) and $23.3 million (5.7 percent), respectively, compared with the same periods of 2003.
| U.S. Bancorp | 31 |
Table of Contents
ACCOUNTING CHANGES
Note 2 of the Notes to Consolidated Financial Statements discusses new accounting policies adopted by the Company during 2004 and the expected impact of accounting policies recently issued but not yet required to be adopted. To the extent the adoption of new accounting standards affects the Company’s financial condition, results of operations or liquidity, the impacts are discussed in the applicable section(s) of Management’s Discussion and Analysis and the Notes to Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company comply with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions, which are integral to understanding the Company’s financial statements. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and require management to make estimates that are difficult, subjective or complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of financial statements. These factors include, among other things, whether the estimates are significant to the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including third-parties or available prices, and sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be utilized under generally accepted accounting principles. Management has discussed the development and the selection of critical accounting policies with the Company’s Audit Committee.
Allowance for Credit LossesThe allowance for credit losses is established to provide for probable losses inherent in the Company’s credit portfolio. The methods utilized to estimate the allowance for credit losses, key assumptions and quantitative and qualitative information considered by management in determining the adequacy of the allowance for credit losses are discussed in the “Credit Risk Management” section.
| 32 | U.S. Bancorp |
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Asset ImpairmentIn the ordinary course of business, the Company evaluates the carrying value of its assets for potential impairment. Generally, potential impairment is determined based on a comparison of fair value to the carrying value. The determination of fair value can be highly subjective, especially for assets that are not actively traded or when market-based prices are not available. The Company estimates fair value based on the present value of estimated future cash flows. The initial valuation and subsequent impairment tests may require the use of significant management estimates. Additionally, determining the amount, if any, of an impairment may require an assessment of whether or not a decline in an asset’s estimated fair value below the recorded value is temporary in nature. While impairment assessments impact most asset categories, the following areas are considered to be critical accounting matters in relation to the financial statements.
Mortgage Servicing Rights MSRs are capitalized as separate assets when loans are sold and servicing is retained. The total cost of loans sold is allocated between the loans sold and the servicing assets retained based on their relative fair values. MSRs that are purchased from others are initially recorded at cost. The carrying value of the MSRs is amortized in proportion to and over the period of estimated net servicing revenue and recorded in noninterest expense as amortization of intangible assets. The carrying value of these assets is periodically reviewed for impairment using a lower of carrying value or fair value methodology. For purposes of measuring impairment, the servicing rights are stratified based on the underlying loan type and note rate and the carrying value for each stratum is compared to fair value based on a discounted cash flow analysis, utilizing current prepayment speeds and discount rates. Events that may significantly affect the estimates used are changes in interest rates and the related impact on mortgage loan prepayment speeds and the payment performance of the underlying loans. If the carrying value is greater than fair value, impairment is recognized through a valuation allowance for each impaired stratum and recorded as amortization of intangible assets. The reduction in the fair value of MSRs at September 30, 2004, to immediate 25 and 50 basis point adverse changes in interest rates would be approximately $115 million and $239 million, respectively. An upward movement in interest rates at September 30, 2004, of 25 and 50 basis points would increase the value of the MSRs by approximately $99 million and $172 million, respectively. Refer to Note 6 of the Notes to Consolidated Financial Statements for additional information regarding MSRs.
Goodwill and Other Intangibles The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value as required by Statement of Financial Accounting Standards No. 141, “Goodwill and Other Intangible Assets.” Goodwill and indefinite-lived assets are no longer amortized but are subject, at a minimum, to annual tests for impairment. Under certain situations, interim impairment tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of a reporting segment below its carrying amount. Other intangible assets are amortized over their estimated useful lives using straight-line and accelerated methods and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount.
| U.S. Bancorp | 33 |
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CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon this evaluation, the principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
| 34 | U.S. Bancorp |
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| U.S. Bancorp | 35 |
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| September 30, | December 31, | ||||||||||
| (Dollars in Millions) | 2004 | 2003 | |||||||||
| (Unaudited) | |||||||||||
Assets | |||||||||||
| Cash and due from banks | $ | 6,969 | $ | 8,630 | |||||||
| Investment securities | |||||||||||
| Held-to-maturity (fair value $126 and $161, respectively) | 120 | 152 | |||||||||
| Available-for-sale | 39,534 | 43,182 | |||||||||
| Loans held for sale | 1,372 | 1,433 | |||||||||
| Loans | |||||||||||
| Commercial | 40,151 | 38,526 | |||||||||
| Commercial real estate | 27,414 | 27,242 | |||||||||
| Residential mortgages | 14,741 | 13,457 | |||||||||
| Retail | 42,520 | 39,010 | |||||||||
| Total loans | 124,826 | 118,235 | |||||||||
| Less allowance for loan losses | (2,184 | ) | (2,184 | ) | |||||||
| Net loans | 122,642 | 116,051 | |||||||||
| Premises and equipment | 1,894 | 1,957 | |||||||||
| Customers’ liability on acceptances | 146 | 121 | |||||||||
| Goodwill | 6,226 | 6,025 | |||||||||
| Other intangible assets | 2,419 | 2,124 | |||||||||
| Other assets | 11,522 | 9,796 | |||||||||
| Total assets | $ | 192,844 | $ | 189,471 | |||||||
Liabilities and Shareholders’ Equity | |||||||||||
| Deposits | |||||||||||
| Noninterest-bearing | $ | 31,585 | $ | 32,470 | |||||||
| Interest-bearing | 70,011 | 74,749 | |||||||||
| Time deposits greater than $100,000 | 13,971 | 11,833 | |||||||||
| Total deposits | 115,567 | 119,052 | |||||||||
| Short-term borrowings | 12,648 | 10,850 | |||||||||
| Long-term debt | 35,328 | 31,215 | |||||||||
| Junior subordinated debentures | 2,676 | 2,601 | |||||||||
| Acceptances outstanding | 146 | 121 | |||||||||
| Other liabilities | 6,879 | 6,390 | |||||||||
| Total liabilities | 173,244 | 170,229 | |||||||||
| Shareholders’ equity | |||||||||||
| Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares issued: 09/30/04 and 12/31/03 — 1,972,643,007 shares | 20 | 20 | |||||||||
| Capital surplus | 5,868 | 5,851 | |||||||||
| Retained earnings | 16,260 | 14,508 | |||||||||
| Less cost of common stock in treasury: 09/30/04 — 101,801,460 shares; 12/31/03 — 49,722,856 shares | (2,710 | ) | (1,205 | ) | |||||||
| Other comprehensive income | 162 | 68 | |||||||||
| Total shareholders’ equity | 19,600 | 19,242 | |||||||||
| Total liabilities and shareholders’ equity | $ | 192,844 | $ | 189,471 | |||||||
| 36 | U.S. Bancorp |
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| Three Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| (Dollars and Shares in Millions, Except Per Share Data) | ||||||||||||||||||
| (Unaudited) | 2004 | 2003 | 2004 | 2003 | ||||||||||||||
Interest Income | ||||||||||||||||||
| Loans | $ | 1,802.8 | $ | 1,818.3 | $ | 5,289.8 | $ | 5,476.0 | ||||||||||
| Loans held for sale | 21.1 | 59.5 | 68.3 | 170.9 | ||||||||||||||
| Investment securities | ||||||||||||||||||
| Taxable | 448.8 | 403.6 | 1,351.5 | 1,222.1 | ||||||||||||||
| Non-taxable | 4.4 | 6.7 | 14.4 | 23.1 | ||||||||||||||
| Other interest income | 25.7 | 23.2 | 73.1 | 78.2 | ||||||||||||||
| Total interest income | 2,302.8 | 2,311.3 | 6,797.1 | 6,970.3 | ||||||||||||||
Interest Expense | ||||||||||||||||||
| Deposits | 221.4 | 256.4 | 653.7 | 851.5 | ||||||||||||||
| Short-term borrowings | 74.5 | 44.9 | 183.3 | 123.3 | ||||||||||||||
| Long-term debt | 205.3 | 167.9 | 566.0 | 536.2 | ||||||||||||||
| Junior subordinated debentures | 27.0 | 23.6 | 75.3 | 79.5 | ||||||||||||||
| Total interest expense | 528.2 | 492.8 | 1,478.3 | 1,590.5 | ||||||||||||||
| Net interest income | 1,774.6 | 1,818.5 | 5,318.8 | 5,379.8 | ||||||||||||||
| Provision for credit losses | 165.1 | 310.0 | 604.6 | 968.0 | ||||||||||||||
| Net interest income after provision for credit losses | 1,609.5 | 1,508.5 | 4,714.2 | 4,411.8 | ||||||||||||||
Noninterest Income | ||||||||||||||||||
| Credit and debit card revenue | 164.3 | 137.6 | 464.9 | 407.3 | ||||||||||||||
| Corporate payment products revenue | 108.5 | 95.7 | 306.0 | 272.6 | ||||||||||||||
| ATM processing services | 45.2 | 41.3 | 132.3 | 125.6 | ||||||||||||||
| Merchant processing services | 187.5 | 146.3 | 493.7 | 415.4 | ||||||||||||||
| Trust and investment management fees | 240.2 | 239.8 | 740.5 | 707.3 | ||||||||||||||
| Deposit service charges | 207.4 | 187.0 | 594.7 | 529.2 | ||||||||||||||
| Treasury management fees | 117.9 | 126.2 | 356.9 | 350.0 | ||||||||||||||
| Commercial products revenue | 106.7 | 97.8 | 324.5 | 302.0 | ||||||||||||||
| Mortgage banking revenue | 97.2 | 89.5 | 301.3 | 275.2 | ||||||||||||||
| Investment products fees and commissions | 37.1 | 35.5 | 118.6 | 108.7 | ||||||||||||||
| Securities gains (losses), net | 87.3 | (108.9 | ) | (84.4 | ) | 244.9 | ||||||||||||
| Other | 124.7 | 89.6 | 335.0 | 278.2 | ||||||||||||||
| Total noninterest income | 1,524.0 | 1,177.4 | 4,084.0 | 4,016.4 | ||||||||||||||
Noninterest Expense | ||||||||||||||||||
| Compensation | 564.6 | 543.8 | 1,673.0 | 1,637.4 | ||||||||||||||
| Employee benefits | 100.0 | 75.8 | 291.4 | 247.1 | ||||||||||||||
| Net occupancy and equipment | 159.2 | 161.3 | 468.3 | 482.1 | ||||||||||||||
| Professional services | 37.2 | 39.9 | 104.3 | 99.2 | ||||||||||||||
| Marketing and business development | 60.6 | 48.6 | 144.6 | 129.5 | ||||||||||||||
| Technology and communications | 109.8 | 102.1 | 313.9 | 311.1 | ||||||||||||||
| Postage, printing and supplies | 61.4 | 61.6 | 183.5 | 183.8 | ||||||||||||||
| Other intangibles | 210.2 | 10.8 | 388.7 | 558.2 | ||||||||||||||
| Merger and restructuring-related charges | — | 10.2 | — | 38.6 | ||||||||||||||
| Other | 216.0 | 199.2 | 638.8 | 567.5 | ||||||||||||||
| Total noninterest expense | 1,519.0 | 1,253.3 | 4,206.5 | 4,254.5 | ||||||||||||||
| Income from continuing operations before income taxes | 1,614.5 | 1,432.6 | 4,591.7 | 4,173.7 | ||||||||||||||
| Applicable income taxes | 549.0 | 491.9 | 1,480.9 | 1,433.9 | ||||||||||||||
| Income from continuing operations | 1,065.5 | 940.7 | 3,110.8 | 2,739.8 | ||||||||||||||
| Income from discontinued operations (after-tax) | — | 10.2 | — | 15.8 | ||||||||||||||
| Net income | $ | 1,065.5 | $ | 950.9 | $ | 3,110.8 | $ | 2,755.6 | ||||||||||
Earnings Per Share | ||||||||||||||||||
| Income from continuing operations | $ | .57 | $ | .49 | $ | 1.64 | $ | 1.43 | ||||||||||
| Discontinued operations | — | — | — | — | ||||||||||||||
| Net income | $ | .57 | $ | .49 | $ | 1.64 | $ | 1.43 | ||||||||||
Diluted Earnings Per Share | ||||||||||||||||||
| Income from continuing operations | $ | .56 | $ | .48 | $ | 1.62 | $ | 1.42 | ||||||||||
| Discontinued operations | — | .01 | — | .01 | ||||||||||||||
| Net income | $ | .56 | $ | .49 | $ | 1.62 | $ | 1.43 | ||||||||||
| Dividends declared per share | $ | .240 | $ | .205 | $ | .720 | $ | .615 | ||||||||||
| Average common shares outstanding | 1,877.0 | 1,926.0 | 1,894.6 | 1,922.4 | ||||||||||||||
| Average diluted common shares outstanding | 1,903.7 | 1,939.8 | 1,919.4 | 1,932.4 | ||||||||||||||
| U.S. Bancorp | 37 |
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| Other | Total | ||||||||||||||||||||||||||||
| (Dollars in Millions) | Common Shares | Common | Capital | Retained | Treasury | Comprehensive | Shareholders’ | ||||||||||||||||||||||
| (Unaudited) | Outstanding | Stock | Surplus | Earnings | Stock | Income | Equity | ||||||||||||||||||||||
Balance December 31, 2002 | 1,916,956,560 | $20 | $ | 5,799 | $ | 13,105 | $ | (1,272 | ) | $784 | $ | 18,436 | |||||||||||||||||
| Net income | 2,756 | 2,756 | |||||||||||||||||||||||||||
| Unrealized loss on securities available for sale | (521 | ) | (521 | ) | |||||||||||||||||||||||||
| Unrealized loss on derivatives | (273 | ) | (273 | ) | |||||||||||||||||||||||||
| Foreign currency translation adjustment | 17 | 17 | |||||||||||||||||||||||||||
| Realized gain on derivatives | 199 | 199 | |||||||||||||||||||||||||||
| Reclassification adjustment for gains realized in net income | (279 | ) | (279 | ) | |||||||||||||||||||||||||
| Income taxes | 325 | 325 | |||||||||||||||||||||||||||
| Total comprehensive income | 2,224 | ||||||||||||||||||||||||||||
| Cash dividends declared on common stock | (1,184 | ) | (1,184 | ) | |||||||||||||||||||||||||
| Issuance of common and treasury stock | 11,195,691 | (52 | ) | 258 | 206 | ||||||||||||||||||||||||
| Stock option and restricted stock grants | 114 | 114 | |||||||||||||||||||||||||||
| Shares reserved to meet deferred compensation obligations | (755,215 | ) | (8 | ) | (17 | ) | (25 | ) | |||||||||||||||||||||
Balance September 30, 2003 | 1,927,397,036 | $20 | $ | 5,853 | $ | 14,677 | $ | (1,031 | ) | $252 | $ | 19,771 | |||||||||||||||||
Balance December 31, 2003 | 1,922,920,151 | $20 | $ | 5,851 | $ | 14,508 | $ | (1,205 | ) | $68 | $ | 19,242 | |||||||||||||||||
| Net income | 3,111 | 3,111 | |||||||||||||||||||||||||||
| Unrealized gain on securities available for sale | 82 | 82 | |||||||||||||||||||||||||||
| Unrealized gain on derivatives | 32 | 32 | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | (14 | ) | (14 | ) | |||||||||||||||||||||||||
| Realized gain on derivatives | 17 | 17 | |||||||||||||||||||||||||||
| Reclassification adjustment for losses realized in net income | 35 | 35 | |||||||||||||||||||||||||||
| Income taxes | (58 | ) | (58 | ) | |||||||||||||||||||||||||
| Total comprehensive income | 3,205 | ||||||||||||||||||||||||||||
| Cash dividends declared on common stock | (1,359 | ) | (1,359 | ) | |||||||||||||||||||||||||
| Issuance of common and treasury stock | 22,812,988 | (73 | ) | 583 | 510 | ||||||||||||||||||||||||
| Purchase of treasury stock | (74,067,318 | ) | (2,066 | ) | (2,066 | ) | |||||||||||||||||||||||
| Stock option and restricted stock grants | 73 | 73 | |||||||||||||||||||||||||||
| Shares reserved to meet deferred compensation obligations | (824,274 | ) | 17 | (22 | ) | (5 | ) | ||||||||||||||||||||||
Balance September 30, 2004 | 1,870,841,547 | $20 | $ | 5,868 | $ | 16,260 | $ | (2,710 | ) | $162 | $ | 19,600 | |||||||||||||||||
| 38 | U.S. Bancorp |
Table of Contents
| Nine Months Ended | |||||||||
| September 30, | |||||||||
| (Dollars in Millions) | |||||||||
| (Unaudited) | 2004 | 2003 | |||||||
Operating Activities | |||||||||
| Net cash provided by (used in) operating activities | $ | 4,257.3 | $ | 4,534.9 | |||||
Investing Activities | |||||||||
| Proceeds from sales of available-for-sale investment securities | 5,559.2 | 17,097.6 | |||||||
| Proceeds from maturities of investment securities | 9,322.8 | 15,873.1 | |||||||
| Purchases of investment securities | (12,497.2 | ) | (40,018.8 | ) | |||||
| Net (increase) decrease in loans outstanding | (6,545.3 | ) | (5,674.4 | ) | |||||
| Proceeds from sales of loans | 1,284.4 | 1,715.5 | |||||||
| Purchases of loans | (1,800.4 | ) | (554.5 | ) | |||||
| Proceeds from sales of premises and equipment | 43.1 | 33.2 | |||||||
| Purchases of premises and equipment | (129.3 | ) | (603.8 | ) | |||||
| Acquisitions, net of cash acquired | (301.6 | ) | — | ||||||
| Other, net | (331.2 | ) | (192.9 | ) | |||||
| Net cash provided by (used in) investing activities | (5,395.5 | ) | (12,325.0 | ) | |||||
Financing Activities | |||||||||
| Net increase (decrease) in deposits | (3,485.2 | ) | (490.9 | ) | |||||
| Net increase (decrease) in short-term borrowings | 1,798.0 | 5,057.3 | |||||||
| Principal payments on long-term debt | (7,458.3 | ) | (5,362.0 | ) | |||||
| Proceeds from issuance of long-term debt | 11,674.4 | 8,449.5 | |||||||
| Redemption of Company-obligated mandatorily redeemable preferred securities | — | (350.0 | ) | ||||||
| Proceeds from issuance of common stock | 443.6 | 179.0 | |||||||
| Repurchase of common stock | (2,115.0 | ) | — | ||||||
| Cash dividends paid | (1,371.2 | ) | (1,161.7 | ) | |||||
| Net cash provided by (used in) financing activities | (513.7 | ) | 6,321.2 | ||||||
| Change in cash and cash equivalents | (1,651.9 | ) | (1,468.9 | ) | |||||
| Cash and cash equivalents at beginning of period | 8,782.2 | 11,192.1 | |||||||
| Cash and cash equivalents at end of period | $ | 7,130.3 | $ | 9,723.2 | |||||
| U.S. Bancorp | 39 |
Table of Contents
| Note 1 | Basis of Presentation |
The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States. In the opinion of management of U.S. Bancorp (the “Company”), all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of results for the interim periods have been made. For further information, refer to the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. Certain amounts in prior periods have been reclassified to conform to the current presentation.
| Note 2 | Accounting Changes |
Loan CommitmentsOn March 9, 2004, the Securities and Exchange Commission Staff issued Staff Accounting Bulletin No. 105 (“SAB 105”), “Application of Accounting Principles to Loan Commitments,” which provides guidance regarding loan commitments accounted for as derivative instruments and is effective for commitments entered into after March 31, 2004. The guidance clarifies that expected future cash flows related to the servicing of the loan may be recognized only when the servicing asset has been contractually separated from the underlying loan by sale with servicing retained. The adoption of SAB 105 did not have a material impact on the Company’s financial statements.
| Note 3 | Discontinued Operations |
On December 31, 2003, the Company completed the distribution of all of the outstanding shares of common stock of Piper Jaffray Companies to its shareholders. This non-cash distribution was tax-free to the Company, its shareholders and Piper Jaffray Companies. In connection with the December 31, 2003, distribution, the results of Piper Jaffray Companies for 2003 are reported in the Company’s Consolidated Statement of Income separately as discontinued operations.
The following table represents the condensed results of operations for discontinued operations for the third quarter and first nine months of 2003:
| Three Months Ended | Nine Months Ended | ||||||||
| (Dollars in Millions) | September 30, 2003 | September 30, 2003 | |||||||
| Revenue | $ | 210.6 | $584.9 | ||||||
| Noninterest expense | 188.2 | 552.2 | |||||||
| Income from discontinued operations | 22.4 | 32.7 | |||||||
| Costs of disposal | 5.3 | 7.4 | |||||||
| Income taxes | 6.9 | 9.5 | |||||||
| Discontinued operations, net of tax | $ | 10.2 | $ 15.8 | ||||||
Following the distribution, the Company’s wholly-owned subsidiary, USB Holdings, Inc. holds a $180 million subordinated debt facility with Piper Jaffray & Co., a broker-dealer subsidiary of Piper Jaffray Companies. In addition, the Company provides an indemnification in an amount up to $17.5 million with respect to certain specified liabilities primarily resulting from third-party claims relating to research analyst independence and from certain regulatory investigations, as defined in the separation and distribution agreement entered into with Piper
| 40 | U.S. Bancorp |
Table of Contents
| Note 4 | Investment Securities |
The detail of the amortized cost, gross unrealized holding gains and losses, and fair value of held-to-maturity and available-for-sale securities was as follows:
| September 30, 2004 | December 31, 2003 | |||||||||||||||||||||||||||||||||
| Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | Unrealized | |||||||||||||||||||||||||||||||
| Amortized | Holding | Holding | Fair | Amortized | Holding | Holding | Fair | |||||||||||||||||||||||||||
| (Dollars in Millions) | Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | ||||||||||||||||||||||||||
Held-to-maturity (a) | ||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | $ | 12 | $ | — | $ | — | $ | 12 | $ | 14 | $ | — | $ | — | $ | 14 | ||||||||||||||||||
| Obligations of state and political subdivisions | 108 | 9 | (3 | ) | 114 | 138 | 11 | (2 | ) | 147 | ||||||||||||||||||||||||
| Total held-to-maturity securities | $ | 120 | $ | 9 | $ | (3 | ) | $ | 126 | $ | 152 | $ | 11 | $ | (2 | ) | $ | 161 | ||||||||||||||||
Available-for-sale (b) | ||||||||||||||||||||||||||||||||||
| U.S. Treasury and agencies | $ | 1,603 | $ | 7 | $ | (44 | ) | $ | 1,566 | $ | 1,634 | $ | 10 | $ | (69 | ) | $ | 1,575 | ||||||||||||||||
| Mortgage-backed securities | 36,756 | 145 | (205 | ) | 36,696 | 40,229 | 203 | (407 | ) | 40,025 | ||||||||||||||||||||||||
| Asset-backed securities | 84 | 1 | — | 85 | 250 | 5 | (3 | ) | 252 | |||||||||||||||||||||||||
| Obligations of state and political subdivisions | 248 | 8 | — | 256 | 335 | 13 | — | 348 | ||||||||||||||||||||||||||
| Other securities and investments | 935 | 9 | (13 | ) | 931 | 993 | 9 | (20 | ) | 982 | ||||||||||||||||||||||||
| Total available-for-sale securities | $ | 39,626 | $ | 170 | $ | (262 | ) | $ | 39,534 | $ | 43,441 | $ | 240 | $ | (499 | ) | $ | 43,182 | ||||||||||||||||
| (a) | Held-to-maturity securities are carried at historical cost adjusted for amortization of premiums and accretion of discounts. | |
| (b) | Available-for-sale securities are carried at fair value with unrealized net gains or losses reported within other comprehensive income in shareholders’ equity. |
The fair value of available-for-sale securities shown above includes securities totaling $6.8 billion with unrealized losses of $173.0 million which have been in an unrealized loss position for greater than 12 months. All principal and interest payments on available-for-sale debt securities in an unrealized loss position for greater than 12 months are expected to be collected given the high credit quality of the U.S. government agency debt securities and bank holding company issuers and the Company’s ability and intent to hold the securities until such time as the value recovers or maturity. All other available-for-sale securities with unrealized losses have an aggregate fair value of $14.0 billion and have been in an unrealized loss position for less than 12 months and represent both fixed-rate securities and floating-rate securities containing caps with temporary impairment resulting from increases in interest rates since the purchase of the securities.
The following table provides information as to the amount of gross gains and losses realized through the sales of available-for-sale investment securities:
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| (Dollars in Millions) | 2004 | 2003 | 2004 | 2003 | |||||||||||||
| Realized gains | $ | 87.8 | $ | .4 | $ | 89.1 | $ | 362.7 | |||||||||
| Realized losses | (.5 | ) | (109.3 | ) | (173.5 | ) | (117.8 | ) | |||||||||
| Net realized gains (losses) | $ | 87.3 | $ | (108.9 | ) | $ | (84.4 | ) | $ | 244.9 | |||||||
| Income tax (benefit) on realized gains (losses) | $ | 33.2 | $ | (41.4 | ) | $ | (32.1 | ) | $ | 93.1 | |||||||
| U.S. Bancorp | 41 |
Table of Contents
For amortized cost, fair value and yield by maturity date of held-to-maturity and available-for-sale securities outstanding at September 30, 2004, refer to Table 5 included in Management’s Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements.
| Note 5 | Loans |
The composition of the loan portfolio was as follows:
| September 30, 2004 | December 31, 2003 | ||||||||||||||||||
| Percent | Percent | ||||||||||||||||||
| (Dollars in Millions) | Amount | of Total | Amount | of Total | |||||||||||||||
Commercial | |||||||||||||||||||
| Commercial | $ | 35,286 | 28.3 | % | $ | 33,536 | 28.4 | % | |||||||||||
| Lease financing | 4,865 | 3.9 | 4,990 | 4.2 | |||||||||||||||
| Total commercial | 40,151 | 32.2 | 38,526 | 32.6 | |||||||||||||||
Commercial real estate | |||||||||||||||||||
| Commercial mortgages | 20,232 | 16.2 | 20,624 | 17.4 | |||||||||||||||
| Construction and development | 7,182 | 5.7 | 6,618 | 5.6 | |||||||||||||||
| Total commercial real estate | 27,414 | 21.9 | 27,242 | 23.0 | |||||||||||||||
Residential mortgages | |||||||||||||||||||
| Residential mortgages | 8,955 | 7.2 | 7,332 | 6.2 | |||||||||||||||
| Home equity loans, first liens | 5,786 | 4.6 | 6,125 | 5.2 | |||||||||||||||
| Total residential mortgages | 14,741 | 11.8 | 13,457 | 11.4 | |||||||||||||||
Retail | |||||||||||||||||||
| Credit card | 6,216 | 5.0 | 5,933 | 5.0 | |||||||||||||||
| Retail leasing | 7,004 | 5.6 | 6,029 | 5.1 | |||||||||||||||
| Home equity and second mortgages | 14,548 | 11.7 | 13,210 | 11.2 | |||||||||||||||
| Other retail | |||||||||||||||||||
| Revolving credit | 2,555 | 2.1 | 2,540 | 2.1 | |||||||||||||||
| Installment | 2,790 | 2.2 | 2,380 | 2.0 | |||||||||||||||
| Automobile | 7,481 | 6.0 | 7,165 | 6.1 | |||||||||||||||
| Student | 1,926 | 1.5 | 1,753 | 1.5 | |||||||||||||||
| Total other retail | 14,752 | 11.8 | 13,838 | 11.7 | |||||||||||||||
| Total retail | 42,520 | 34.1 | 39,010 | 33.0 | |||||||||||||||
| Total loans | $ | 124,826 | 100.0 | % | $ | 118,235 | 100.0 | % | |||||||||||
Loans are presented net of unearned interest and deferred fees and costs, which amounted to $1.4 billion and $1.5 billion at September 30, 2004, and December 31, 2003, respectively.
| Note 6 | Mortgage Servicing Rights |
The Company’s portfolio of residential mortgages serviced for others was $63.2 billion and $53.9 billion at September 30, 2004, and December 31, 2003, respectively.
The net carrying value of capitalized mortgage servicing rights was as follows:
| September 30, | December 31, | ||||||||
| (Dollars in Millions) | 2004 | 2003 | |||||||
| Initial carrying value, net of amortization | $ | 1,021 | $ | 830 | |||||
| Impairment valuation allowance | (156 | ) | (160 | ) | |||||
| Net carrying value | $ | 865 | $ | 670 | |||||
| 42 | U.S. Bancorp |
Table of Contents
Changes in capitalized mortgage servicing rights are summarized as follows:
| Nine Months Ended | Year Ended | ||||||||
| (Dollars in Millions) | September 30, 2004 | December 31, 2003 | |||||||
| Balance at beginning of period | $670 | $ | 642 | ||||||
| Rights purchased | 143 | 55 | |||||||
| Rights capitalized | 217 | 338 | |||||||
| Amortization | (140 | ) | (156 | ) | |||||
| Rights sold | — | — | |||||||
| Impairment (a) | (25 | ) | (209 | ) | |||||
| Balance at end of period | $865 | $ | 670 | ||||||
| (a) | Mortgage servicing rights impairment of $86.7 million and reparation of $108.5 million were recognized during the third quarter of 2004 and 2003, respectively. |
The key economic assumptions used to estimate the value of the mortgage servicing rights portfolio were as follows:
| September 30, | December 31, | |||||||
| (Dollars in Millions) | 2004 | 2003 | ||||||
| Fair value | $869 | $670 | ||||||
| Expected weighted-average life (in years) | 5.7 | 5.2 | ||||||
| Discount rate | 9.5% | 9.9% | ||||||
The estimated sensitivity of the fair value of the mortgage servicing rights portfolio to changes in interest rates at September 30, 2004, was as follows:
| Down Scenario | Up Scenario | |||||||||||||||
| (Dollars in Millions) | 50 bps | 25 bps | 25 bps | 50 bps | ||||||||||||
| Fair value | $ | (239 | ) | $ | (115 | ) | $99 | $ | 172 | |||||||
The fair value of mortgage servicing rights and its sensitivity to changes in interest rates is influenced by the mix of the servicing portfolio and characteristics of each segment of the portfolio. In the current interest rate environment, mortgage loans originated as part of government agency and state loan programs tend to experience slower prepayment speeds and better cash flows than conventional mortgage loans. The Company’s servicing portfolio consists of the distinct portfolios of Mortgage Revenue Bond Programs (“MRBP”), government-related mortgages and conventional mortgages. The MRBP division specializes in servicing loans made under state and local housing authority programs. These programs provide mortgages to low and moderate income borrowers and are generally under government insured programs with down payment or closing cost assistance. The conventional and government servicing portfolios are predominantly comprised of fixed-rate agency loans (FNMA, FHLMC, GNMA, FHLB and various housing agencies) with limited adjustable-rate or jumbo mortgage loans.
A summary of the Company’s mortgage servicing rights and related characteristics by portfolio as of September 30, 2004, was as follows:
| (Dollars in Millions) | MRBP | Government | Conventional | Total | ||||||||||||
| Servicing portfolio | $ | 7,503 | $ | 8,805 | $ | 46,900 | $ | 63,208 | ||||||||
| Fair market value | $ | 115 | $ | 135 | $ | 619 | $ | 869 | ||||||||
| Value (bps) | 153 | 153 | 132 | 137 | ||||||||||||
| Weighted-average servicing fees (bps) | 43 | 46 | 33 | 36 | ||||||||||||
| Multiple (value/servicing fees) | 3.56 | 3.33 | 4.00 | 3.81 | ||||||||||||
| Weighted-average note rate | 6.30 | % | 6.06 | % | 5.71 | % | 5.83 | % | ||||||||
| Age (in years) | 3.6 | 2.3 | 1.4 | 1.8 | ||||||||||||
| Expected life (in years) | 6.0 | 5.4 | 5.7 | 5.7 | ||||||||||||
| Discount rate | 10.0 | % | 10.9 | % | 9.1 | % | 9.5 | % | ||||||||
| U.S. Bancorp | 43 |
Table of Contents
| Note 7 | Intangible Assets |
The following table reflects the changes in the carrying value of goodwill for the nine months ended September 30, 2004:
| Private Client, | |||||||||||||||||||||
| Wholesale | Consumer | Trust and Asset | Payment | Consolidated | |||||||||||||||||
| (Dollars in Millions) | Banking | Banking | Management | Services | Company | ||||||||||||||||
| Balance at December 31, 2003 | $ | 1,225 | $ | 2,242 | $ | 742 | $ | 1,816 | $6,025 | ||||||||||||
| Goodwill acquired | — | — | 103 | 97 | 200 | ||||||||||||||||
| Other (a) | — | — | — | 1 | 1 | ||||||||||||||||
| Balance at September 30, 2004 | $ | 1,225 | $ | 2,242 | $ | 845 | $ | 1,914 | $6,226 | ||||||||||||
| (a) | Other changes in goodwill include foreign exchange effects on non-dollar-denominated goodwill. |
Intangible assets consisted of the following:
| Estimated | Amortization | September 30, | December 31, | ||||||||||||||
| (Dollars in Millions) | Life (a) | Method (b) | 2004 | 2003 | |||||||||||||
| Goodwill | — | — | $ | 6,226 | $6,025 | ||||||||||||
| Merchant processing contracts | 8 years | AC | 713 | 552 | |||||||||||||
| Core deposit benefits | 10 years/6 years | SL/AC | 356 | 417 | |||||||||||||
| Mortgage servicing rights | 6 years | AC | 865 | 670 | |||||||||||||
| Trust relationships | 15 years/9 years | SL/AC | 309 | 311 | |||||||||||||
| Other identified intangibles | 8 years/9 years | SL/AC | 176 | 174 | |||||||||||||
| Total | $ | 8,645 | $8,149 | ||||||||||||||
| (a) | Estimated life represents the amortization period for assets subject to the straight line method and the weighted-average amortization period for intangibles subject to accelerated methods. If more than one amortization method is used for a category, the estimated life for each method is calculated and reported separately. | |
| (b) | Amortization methods: SL = straight line method AC = accelerated methods generally based on cash flows |
Aggregate amortization and impairment expense consisted of the following:
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| (Dollars in Millions) | 2004 | 2003 | 2004 | 2003 | |||||||||||||
| Merchant processing contracts | $ | 32.3 | $ | 33.4 | $ | 92.5 | $ | 98.1 | |||||||||
| Core deposit benefits | 19.8 | 22.0 | 61.0 | 66.2 | |||||||||||||
| Mortgage servicing rights (a) | 133.5 | (68.8 | ) | 164.4 | 321.4 | ||||||||||||
| Trust relationships | 12.9 | 13.3 | 36.6 | 39.9 | |||||||||||||
| Other identified intangibles | 11.7 | 10.9 | 34.2 | 32.6 | |||||||||||||
| Total | $ | 210.2 | $ | 10.8 | $ | 388.7 | $ | 558.2 | |||||||||
| (a) | Includes mortgage servicing rights impairment of $86.7 million and reparation of $108.5 million for the three months ended September 30, 2004 and 2003, respectively, and impairment of $24.9 million and $208.7 million for the nine months ended September 30, 2004 and 2003, respectively. |
Below is the estimated amortization expense for the years ending:
| (Dollars in Millions) | |||||||||
| Remaining | 2004 | $ | 124.8 | ||||||
| 2005 | 446.2 | ||||||||
| 2006 | 375.4 | ||||||||
| 2007 | 322.3 | ||||||||
| 2008 | 264.1 | ||||||||
| 44 | U.S. Bancorp |
Table of Contents
| Note 8 | Junior Subordinated Debentures Issued to Unconsolidated Subsidiary Trusts |
The following table is a summary of the debt obligations relating to unconsolidated subsidiary trusts holding junior subordinated debentures of the Company as of September 30, 2004:
| Trust | |||||||||||||||||||||||||||||
| Preferred | Earliest | ||||||||||||||||||||||||||||
| Issuance | Securities | Debentures | Rate | Redemption | |||||||||||||||||||||||||
| Issuance Trust (Dollars in Millions) | Date | Amount | Amount (a) | Type (b) | Rate | Maturity Date | Date | ||||||||||||||||||||||
Retail | |||||||||||||||||||||||||||||
| USB Capital V | December 2001 | $ | 300 | $ | 309 | Fixed | 7.25 | % | December 2031 | December 7, 2006 | |||||||||||||||||||
| USB Capital IV | November 2001 | 500 | 515 | Fixed | 7.35 | November 2031 | November 1, 2006 | ||||||||||||||||||||||
| USB Capital III | May 2001 | 700 | 722 | Fixed | 7.75 | May 2031 | May 4, 2006 | ||||||||||||||||||||||
Institutional | |||||||||||||||||||||||||||||
| Star Capital I | June 1997 | 150 | 155 | Variable | 2.65 | June 2027 | June 15, 2007 | ||||||||||||||||||||||
| Mercantile Capital Trust I | February 1997 | 150 | 155 | Variable | 2.54 | February 2027 | February 1, 2007 | ||||||||||||||||||||||
| USB Capital I | December 1996 | 300 | 309 | Fixed | 8.27 | December 2026 | December 15, 2006 | ||||||||||||||||||||||
| Firstar Capital Trust I | December 1996 | 150 | 155 | Fixed | 8.32 | December 2026 | December 15, 2006 | ||||||||||||||||||||||
| FBS Capital I | November 1996 | 300 | 309 | Fixed | 8.09 | November 2026 | November 15, 2006 | ||||||||||||||||||||||
| (a) | Junior subordinated debentures issued to unconsolidated subsidiary trusts that are designated in fair value hedges at September 30, 2004, are recorded on the balance sheet at fair value. Carrying value includes a fair value adjustment of $50 million related to hedges on certain junior subordinated debentures, as well as prepaid issuance fees of $(3) million. | |
| (b) | The variable-rate Trust Preferred Securities and Debentures reprice quarterly based on three-month LIBOR. |
| Note 9 | Shareholders’ Equity |
At September 30, 2004, and December 31, 2003, the Company had authority to issue 4 billion shares of common stock and 10 million shares of preferred stock. The Company had 1,870.8 million and 1,922.9 million shares of common stock outstanding at September 30, 2004, and December 31, 2003, respectively.
| U.S. Bancorp | 45 |
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| Note 10 | Earnings Per Share |
The components of earnings per share were:
| Three Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| (Dollars and Shares in Millions, Except Per Share Data) | 2004 | 2003 | 2004 | 2003 | ||||||||||||||
| Income from continuing operations | $ | 1,065.5 | $ | 940.7 | $ | 3,110.8 | $ | 2,739.8 | ||||||||||
| Income from discontinued operations (after-tax) | — | 10.2 | — | 15.8 | ||||||||||||||
| Net income | $ | 1,065.5 | $ | 950.9 | $ | 3,110.8 | $ | 2,755.6 | ||||||||||
| Average common shares outstanding | 1,877.0 | 1,926.0 | 1,894.6 | 1,922.4 | ||||||||||||||
| Net effect of the assumed purchase of stock based on the treasury stock method for options and stock plans | 26.7 | 13.8 | 24.8 | 10.0 | ||||||||||||||
| Average diluted common shares outstanding | 1,903.7 | 1,939.8 | 1,919.4 | 1,932.4 | ||||||||||||||
Earnings per share | ||||||||||||||||||
| Income from continuing operations | $ | .57 | $ | .49 | $ | 1.64 | $ | 1.43 | ||||||||||
| Discontinued operations | — | — | — | — | ||||||||||||||
| Net income | $ | .57 | $ | .49 | $ | 1.64 | $ | 1.43 | ||||||||||
Diluted earnings per share | ||||||||||||||||||
| Income from continuing operations | $ | .56 | $ | .48 | $ | 1.62 | $ | 1.42 | ||||||||||
| Discontinued operations | — | .01 | — | .01 | ||||||||||||||
| Net income | $ | .56 | $ | .49 | $ | 1.62 | $ | 1.43 | ||||||||||
For the three months ended September 30, 2004 and 2003, options to purchase 29 million and 56 million shares, respectively, and 38 million and 92 million shares for the nine months ended 2004 and 2003, respectively, were outstanding but not included in the computation of diluted earnings per share because they were antidilutive.
| Note 11 | Employee Benefits |
Retirement PlansThe following table sets forth the components of net periodic benefit cost (income) for the retirement plans:
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| September 30, 2004 | September 30, 2004 | ||||||||||||||||
| Post- | Post- | ||||||||||||||||
| Retirement | Retirement | ||||||||||||||||
| Pension | Medical | Pension | Medical | ||||||||||||||
| (Dollars in Millions) | Plans | Plans | Plans | Plans | |||||||||||||
| Components of net periodic benefit cost (income) | |||||||||||||||||
| Service cost | $ | 14.7 | $ | 1.0 | $ | 44.0 | $ | 2.9 | |||||||||
| Interest cost | 27.6 | 4.1 | 81.3 | 13.7 | |||||||||||||
| Expected return on plan assets | (50.7 | ) | (.3 | ) | (152.3 | ) | (1.0 | ) | |||||||||
| Net amortization and deferral | (1.5 | ) | — | (4.7 | ) | (.1 | ) | ||||||||||
| Recognized actuarial loss | 17.9 | .3 | 33.0 | 2.1 | |||||||||||||
| Net periodic benefit cost (income) | $ | 8.0 | $ | 5.1 | $ | 1.3 | $ | 17.6 | |||||||||
The information for the components of the net periodic benefit cost (income) for the three and nine months ended September 30, 2003, was not readily available.
| 46 | U.S. Bancorp |
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| Note 12 | Income Taxes |
The components of income tax expense were:
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| (Dollars in Millions) | 2004 | 2003 | 2004 | 2003 | |||||||||||||
Federal | |||||||||||||||||
| Current | $ | 430.4 | $ | 380.9 | $ | 1,126.5 | $ | 1,121.3 | |||||||||
| Deferred | 63.0 | 57.2 | 196.3 | 165.6 | |||||||||||||
| Federal income tax | 493.4 | 438.1 | 1,322.8 | 1,286.9 | |||||||||||||
State | |||||||||||||||||
| Current | 43.4 | 40.4 | 121.5 | 107.0 | |||||||||||||
| Deferred | 12.2 | 13.4 | 36.6 | 40.0 | |||||||||||||
| State income tax | 55.6 | 53.8 | 158.1 | 147.0 | |||||||||||||
| Total income tax provision | $ | 549.0 | $ | 491.9 | $ | 1,480.9 | $ | 1,433.9 | |||||||||
A reconciliation of expected income tax expense at the federal statutory rate of 35% to the Company’s applicable income tax expense follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| (Dollars in Millions) | 2004 | 2003 | 2004 | 2003 | |||||||||||||
| Tax at statutory rate (35%) | $ | 565.1 | $ | 501.4 | $ | 1,607.1 | $ | 1,460.8 | |||||||||
| State income tax, at statutory rates, net of federal tax benefit | 36.2 | 36.6 | 102.8 | 98.7 | |||||||||||||
| Tax effect of | |||||||||||||||||
| Resolution of federal income tax examinations | — | — | (90.0 | ) | — | ||||||||||||
| Tax credits | (35.7 | ) | (27.1 | ) | (98.8 | ) | (80.9 | ) | |||||||||
| Tax-exempt interest, net | (5.3 | ) | (6.3 | ) | (16.2 | ) | (17.3 | ) | |||||||||
| Other items | (11.3 | ) | (12.7 | ) | (24.0 | ) | (27.4 | ) | |||||||||
| Applicable income taxes | $ | 549.0 | $ | 491.9 | $ | 1,480.9 | $ | 1,433.9 | |||||||||
Included in the first quarter of 2004 was a reduction in income tax expense related to the resolution of federal income tax examinations covering substantially all of the Company’s legal entities for the years 1995 through 1999. The resolution of these cycles was the result of a series of negotiations held between the Company and representatives of the Internal Revenue Service at both the examination and appellate levels. The resolution of these matters and the taxing authorities’ acceptance of submitted claims and tax return adjustments resulted in the reduction of estimated income tax liabilities.
| Note 13 | Guarantees and Contingent Liabilities |
COMMITMENTS TO EXTEND CREDIT
Commitments to extend credit are legally binding and generally have fixed expiration dates or other termination clauses. The contractual amount represents the Company’s exposure to credit loss, in the event of default by the borrower. The Company manages this credit risk by using the same credit policies it applies to loans. Collateral is obtained to secure commitments based on management’s credit assessment of the borrower. The collateral may include marketable securities, receivables, inventory, equipment and real estate. Since the Company expects many of the commitments to expire without being drawn, total commitment amounts do not necessarily represent the Company’s future liquidity requirements. In addition, the commitments include consumer credit lines that are cancelable upon notification to the consumer.
| U.S. Bancorp | 47 |
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LETTERS OF CREDIT
Standby letters of credit are commitments the Company issues to guarantee the performance of a customer to a third-party. The guarantees frequently support public and private borrowing arrangements, including commercial paper issuances, bond financings and other similar transactions. The Company issues commercial letters of credit on behalf of customers to ensure payment or collection in connection with trade transactions. In the event of a customer’s nonperformance, the Company’s credit loss exposure is the same as in any extension of credit, up to the letter’s contractual amount. Management assesses the borrower’s credit to determine the necessary collateral, which may include marketable securities, receivables, inventory, equipment and real estate. Since the conditions requiring the Company to fund letters of credit may not occur, the Company expects its liquidity requirements to be less than the total outstanding commitments. The maximum potential future payments guaranteed by the Company under standby letter of credit arrangements at September 30, 2004, were approximately $10.3 billion with a weighted- average term of approximately 23 months. The estimated fair value of standby letters of credit was approximately $72.7 million at September 30, 2004.
GUARANTEES
Guarantees are contingent commitments issued by the Company to customers or other third-parties. The Company’s guarantees primarily include parent guarantees related to subsidiaries’ third-party borrowing arrangements; third-party performance guarantees inherent in the Company’s business operations such as indemnified securities lending programs and merchant charge-back guarantees; indemnification or buy-back provisions related to certain asset sales; and contingent consideration arrangements related to acquisitions. For certain guarantees, the Company has recorded a liability related to the potential obligation, or has access to collateral to support the guarantee or through the exercise of other recourse provisions can offset some or all of the maximum potential future payments made under these guarantees. The estimated fair value of guarantees, other than standby letters of credit, was approximately $133 million at September 30, 2004.
Third-Party Borrowing ArrangementsThe Company provides guarantees to third-parties as a part of certain subsidiaries’ borrowing arrangements, primarily representing guaranteed operating or capital lease payments or other debt obligations with maturity dates extending through 2007. The maximum potential future payments guaranteed by the Company under these arrangements were approximately $1.4 billion at September 30, 2004. The Company’s recorded liabilities as of September 30, 2004, included $33.0 million representing outstanding amounts owed to these third-parties and required to be recorded on the Company’s balance sheet in accordance with accounting principles generally accepted in the United States.
Commitments from Securities LendingThe Company participates in securities lending activities by acting as the customer’s agent involving the loan or sale of securities. The Company indemnifies customers for the difference between the market value of the securities lent and the market value of the collateral received. Cash collateralizes these transactions. The maximum potential future payments guaranteed by the Company under these arrangements were approximately $17.3 billion at September 30, 2004, and represented the market value of the securities lent to third-parties. At September 30, 2004, the Company held assets with a market value of $17.9 billion as collateral for these arrangements.
Asset SalesThe Company has provided guarantees to certain third-parties in connection with the sale of certain assets, primarily loan portfolios and low-income housing tax credits. These guarantees are generally in the form of asset buy-back or make-whole provisions that are triggered upon a credit event or a change in the tax-qualifying status of the related projects, as applicable, and remain in effect until the loans are collected or final tax credits are realized, respectively. The maximum potential future payments guaranteed by the Company under these arrangements were approximately $554.4 million at September 30, 2004, and represented the total proceeds received from the buyer in these transactions where the buy-back or make-whole provisions have not yet expired. Recourse available to the Company includes guarantees from the Small Business Administration (for SBA loans sold), recourse against the correspondent that originated the loan or to the private mortgage issuer, the right to collect payments from the debtors, and/or the right to liquidate the underlying collateral, if any, and retain the proceeds. Based on its established loan-to-value guidelines, the Company believes the recourse available is sufficient to recover future payments, if any, under the loan buy-back guarantees.
| 48 | U.S. Bancorp |
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Merchant ProcessingThe Company, through its subsidiaries NOVA Information Systems, Inc. and NOVA European Holdings Company, provides merchant processing services. Under the rules of credit card associations, a merchant processor retains a contingent liability for credit card transactions processed. This contingent liability arises in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor. In this situation, the transaction is “charged back” to the merchant and the disputed amount is credited or otherwise refunded to the cardholder. If the Company is unable to collect this amount from the merchant, it bears the loss for the amount of the refund paid to the cardholder.
Other GuaranteesThe Company provides liquidity and credit enhancement facilities to a Company-sponsored conduit, as more fully described in the “Off-Balance Sheet Arrangements” section within Management’s Discussion and Analysis. Although management believes a draw against these facilities is remote, the maximum potential future payments guaranteed by the Company under these arrangements were approximately $6.1 billion at September 30, 2004. The recorded fair value of the Company’s liability for the credit enhancement recourse obligation and liquidity facilities was $35.3 million at September 30, 2004, and was included in other liabilities.
OTHER CONTINGENT LIABILITIES
In connection with the spin-off of Piper Jaffray Companies, the Company has agreed to indemnify Piper Jaffray Companies against losses that may result from third-party claims relating to certain specified matters. The Company’s indemnification obligation related to these specified matters is capped at $17.5 million and can be terminated by the Company if there is a change in control event for Piper Jaffray Companies. Through
| U.S. Bancorp | 49 |
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| Note 14 | Supplemental Disclosures to the Consolidated Financial Statements |
Consolidated Statement of Cash FlowsListed below are supplemental disclosures to the Consolidated Statement of Cash Flows:
| Nine Months Ended | ||||||||||
| September 30, | ||||||||||
| (Dollars in Millions) | 2004 | 2003 | ||||||||
| Acquisitions and divestitures | ||||||||||
| Assets acquired | $ | 413.1 | $ | — | ||||||
| Liabilities assumed | (110.6 | ) | — | |||||||
| Net | $ | 302.5 | $ | — | ||||||
Money Market InvestmentsMoney market investments are included with cash and due from banks as part of cash and cash equivalents. Money market investments consisted of the following:
| September 30, | December 31, | |||||||||
| (Dollars in Millions) | 2004 | 2003 | ||||||||
| Interest-bearing deposits | $ 6 | $ 4 | ||||||||
| Federal funds sold | 155 | 109 | ||||||||
| Securities purchased under agreements to resell | — | 39 | ||||||||
| Total money market investments | $161 | $152 | ||||||||
| 50 | U.S. Bancorp |
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| U.S. Bancorp | 51 |
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| For the Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2004 | 2003 | ||||||||||||||||||||||||||||||||||
| Yields | Yields | % Change | |||||||||||||||||||||||||||||||||
| (Dollars in Millions) | Average | and | Average | and | Average | ||||||||||||||||||||||||||||||
| (Unaudited) | Balances | Interest | Rates | Balances | Interest | Rates | Balances | ||||||||||||||||||||||||||||
Assets Taxable securities | | $ | 42,142 | $ | 448.8 | 4.26 | % | $ | 37,221 | $ | 403.6 | 4.34 | % | 13.2 | % | ||||||||||||||||||||
| Non-taxable securities | 360 | 6.4 | 7.11 | 556 | 9.7 | 7.00 | (35.3 | ) | |||||||||||||||||||||||||||
| Loans held for sale | 1,405 | 21.1 | 6.00 | 4,460 | 59.5 | 5.34 | (68.5 | ) | |||||||||||||||||||||||||||
| Loans (b) | |||||||||||||||||||||||||||||||||||
| Commercial | 39,317 | 556.5 | 5.64 | 41,980 | 579.7 | 5.49 | (6.3 | ) | |||||||||||||||||||||||||||
| Commercial real estate | 27,194 | 386.8 | 5.66 | 27,397 | 391.5 | 5.67 | (.7 | ) | |||||||||||||||||||||||||||
| Residential mortgages | 14,569 | 204.5 | 5.60 | 12,234 | 181.5 | 5.91 | 19.1 | ||||||||||||||||||||||||||||
| Retail | 41,826 | 660.2 | 6.28 | 38,371 | 669.5 | 6.92 | 9.0 | ||||||||||||||||||||||||||||
| Total loans | 122,906 | 1,808.0 | 5.86 | 119,982 | 1,822.2 | 6.03 | 2.4 | ||||||||||||||||||||||||||||
| Other earning assets | 1,374 | 25.6 | 7.45 | 1,646 | 23.3 | 5.60 | (16.5 | ) | |||||||||||||||||||||||||||
| Total earning assets | 168,187 | 2,309.9 | 5.47 | 163,865 | 2,318.3 | 5.63 | 2.6 | ||||||||||||||||||||||||||||
| Allowance for loan losses | (2,287 | ) | (2,451 | ) | (6.7 | ) | |||||||||||||||||||||||||||||
| Unrealized gain (loss) on available-for-sale securities | (492 | ) | (544 | ) | (9.6 | ) | |||||||||||||||||||||||||||||
| Other assets (c) | 26,177 | 29,371 | (10.9 | ) | |||||||||||||||||||||||||||||||
| Total assets | $ | 191,585 | $ | 190,241 | .7 | ||||||||||||||||||||||||||||||
Liabilities and Shareholders’ Equity | |||||||||||||||||||||||||||||||||||
| Noninterest-bearing deposits | $ | 29,791 | $ | 31,907 | (6.6 | ) | |||||||||||||||||||||||||||||
| Interest-bearing deposits | |||||||||||||||||||||||||||||||||||
| Interest checking | 20,413 | 16.0 | .31 | 20,148 | 20.3 | .40 | 1.3 | ||||||||||||||||||||||||||||
| Money market accounts | 31,854 | 53.3 | .67 | 33,980 | 78.9 | .92 | (6.3 | ) | |||||||||||||||||||||||||||
| Savings accounts | 5,854 | 3.6 | .25 | 5,846 | 5.2 | .36 | .1 | ||||||||||||||||||||||||||||
| Time certificates of deposit less than $100,000 | 12,869 | 83.1 | 2.57 | 14,824 | 105.1 | 2.81 | (13.2 | ) | |||||||||||||||||||||||||||
| Time deposits greater than $100,000 | 14,535 | 65.4 | 1.79 | 11,251 | 46.9 | 1.66 | 29.2 | ||||||||||||||||||||||||||||
| Total interest-bearing deposits | 85,525 | 221.4 | 1.03 | 86,049 | 256.4 | 1.18 | (.6 | ) | |||||||||||||||||||||||||||
| Short-term borrowings | 15,382 | 74.5 | 1.93 | 11,850 | 44.9 | 1.50 | 29.8 | ||||||||||||||||||||||||||||
| Long-term debt | 32,525 | 205.3 | 2.51 | 31,218 | 167.9 | 2.14 | 4.2 | ||||||||||||||||||||||||||||
| Junior subordinated debentures | 2,674 | 27.0 | 4.04 | 2,576 | 23.6 | 3.65 | 3.8 | ||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 136,106 | 528.2 | 1.55 | 131,693 | 492.8 | 1.49 | 3.4 | ||||||||||||||||||||||||||||
| Other liabilities (d) | 6,301 | 7,281 | (13.5 | ) | |||||||||||||||||||||||||||||||
| Shareholders’ equity | 19,387 | 19,360 | .1 | ||||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 191,585 | $ | 190,241 | .7 | % | |||||||||||||||||||||||||||||
| Net interest income | $ | 1,781.7 | $ | 1,825.5 | |||||||||||||||||||||||||||||||
| Gross interest margin | 3.92 | % | 4.14 | % | |||||||||||||||||||||||||||||||
| Gross interest margin without taxable-equivalent increments | 3.90 | 4.12 | |||||||||||||||||||||||||||||||||
Percent of Earning Assets | |||||||||||||||||||||||||||||||||||
| Interest income | 5.47 | % | 5.63 | % | |||||||||||||||||||||||||||||||
| Interest expense | 1.25 | 1.20 | |||||||||||||||||||||||||||||||||
| Net interest margin | 4.22 | % | 4.43 | % | |||||||||||||||||||||||||||||||
| Net interest margin without taxable-equivalent increments | 4.20 | % | 4.41 | % | |||||||||||||||||||||||||||||||
| (a) | Interest and rates are presented on a fully taxable-equivalent basis under a tax rate of 35 percent. | |
| (b) | Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances. | |
| (c) | Includes approximately $1,300 million of earning assets from discontinued operations in third quarter 2003. | |
| (d) | Includes approximately $949 million of interest-bearing liabilities from discontinued operations in third quarter 2003. |
| 52 | U.S. Bancorp |
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| For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
| 2004 | 2003 | |||||||||||||||||||||||||||||||
| Yields | Yields | % Change | ||||||||||||||||||||||||||||||
| (Dollars in Millions) | Average | and | Average | and | Average | |||||||||||||||||||||||||||
| (Unaudited) | Balances | Interest | Rates | Balances | Interest | Rates | Balances | |||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
| Taxable securities | $ | 42,848 | $ | 1,351.5 | 4.21 | % | $ | 35,429 | $ | 1,222.1 | 4.60 | % | 20.9 | % | ||||||||||||||||||
| Non-taxable securities | 395 | 21.0 | 7.10 | 630 | 33.1 | 7.00 | (37.3 | ) | ||||||||||||||||||||||||
| Loans held for sale | 1,611 | 68.3 | 5.65 | 4,078 | 170.9 | 5.59 | (60.5 | ) | ||||||||||||||||||||||||
| Loans (b) | ||||||||||||||||||||||||||||||||
| Commercial | 39,060 | 1,644.1 | 5.62 | 41,758 | 1,752.6 | 5.61 | (6.5 | ) | ||||||||||||||||||||||||
| Commercial real estate | 27,140 | 1,133.5 | 5.58 | 27,092 | 1,192.5 | 5.89 | .2 | |||||||||||||||||||||||||
| Residential mortgages | 14,079 | 601.5 | 5.70 | 11,131 | 516.0 | 6.19 | 26.5 | |||||||||||||||||||||||||
| Retail | 40,687 | 1,925.3 | 6.32 | 38,064 | 2,025.8 | 7.12 | 6.9 | |||||||||||||||||||||||||
| Total loans | 120,966 | 5,304.4 | 5.86 | 118,045 | 5,486.9 | 6.21 | 2.5 | |||||||||||||||||||||||||
| Other earning assets | 1,362 | 73.2 | 7.18 | 1,650 | 78.3 | 6.34 | (17.5 | ) | ||||||||||||||||||||||||
| Total earning assets | 167,182 | 6,818.4 | 5.44 | 159,832 | 6,991.3 | 5.84 | 4.6 | |||||||||||||||||||||||||
| Allowance for loan losses | (2,335 | ) | (2,476 | ) | (5.7 | ) | ||||||||||||||||||||||||||
| Unrealized gain (loss) on available-for-sale securities | (412 | ) | 250 | * | ||||||||||||||||||||||||||||
| Other assets (c) | 26,128 | 29,409 | (11.2 | ) | ||||||||||||||||||||||||||||
| Total assets | $ | 190,563 | $ | 187,015 | 1.9 | |||||||||||||||||||||||||||
| Liabilities and Shareholders’ Equity | ||||||||||||||||||||||||||||||||
| Noninterest-bearing deposits | $ | 29,807 | $ | 32,412 | (8.0 | ) | ||||||||||||||||||||||||||
| Interest-bearing deposits | ||||||||||||||||||||||||||||||||
| Interest checking | 20,699 | 49.3 | .32 | 18,601 | 64.4 | .46 | 11.3 | |||||||||||||||||||||||||
| Money market accounts | 33,492 | 177.5 | .71 | 31,285 | 238.4 | 1.02 | 7.1 | |||||||||||||||||||||||||
| Savings accounts | 5,896 | 11.7 | .26 | 5,579 | 16.5 | .40 | 5.7 | |||||||||||||||||||||||||
| Time certificates of deposit less than $100,000 | 13,168 | 257.2 | 2.61 | 15,936 | 353.3 | 2.96 | (17.4 | ) | ||||||||||||||||||||||||
| Time deposits greater than $100,000 | 13,085 | 158.0 | 1.61 | 12,836 | 178.9 | 1.86 | 1.9 | |||||||||||||||||||||||||
| Total interest-bearing deposits | 86,340 | 653.7 | 1.01 | 84,237 | 851.5 | 1.35 | 2.5 | |||||||||||||||||||||||||
| Short-term borrowings | 14,706 | 183.3 | 1.67 | 10,024 | 123.3 | 1.64 | 46.7 | |||||||||||||||||||||||||
| Long-term debt | 31,605 | 566.0 | 2.39 | 30,999 | 536.2 | 2.31 | 2.0 | |||||||||||||||||||||||||
| Junior subordinated debentures | 2,649 | 75.3 | 3.79 | 2,738 | 79.5 | 3.87 | (3.3 | ) | ||||||||||||||||||||||||
| Total interest-bearing liabilities | 135,300 | 1,478.3 | 1.46 | 127,998 | 1,590.5 | 1.66 | 5.7 | |||||||||||||||||||||||||
| Other liabilities (d) | 6,118 | 7,403 | (17.4 | ) | ||||||||||||||||||||||||||||
| Shareholders’ equity | 19,338 | 19,202 | .7 | |||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 190,563 | $ | 187,015 | 1.9 | % | ||||||||||||||||||||||||||
| Net interest income | $ | 5,340.1 | $ | 5,400.8 | ||||||||||||||||||||||||||||
| Gross interest margin | 3.98 | % | 4.18 | % | ||||||||||||||||||||||||||||
| Gross interest margin without taxable-equivalent increments | 3.96 | 4.16 | ||||||||||||||||||||||||||||||
Percent of Earning Assets | ||||||||||||||||||||||||||||||||
| Interest income | 5.44 | % | 5.84 | % | ||||||||||||||||||||||||||||
| Interest expense | 1.18 | 1.33 | ||||||||||||||||||||||||||||||
| Net interest margin | 4.26 | % | 4.51 | % | ||||||||||||||||||||||||||||
| Net interest margin without taxable-equivalent increments | 4.24 | % | 4.49 | % | ||||||||||||||||||||||||||||
| * | Not meaningful | |
| (a) | Interest and rates are presented on a fully taxable-equivalent basis under a tax rate of 35 percent. | |
| (b) | Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances. | |
| (c) | Includes approximately $1,453 million of earning assets from discontinued operations in 2003. | |
| (d) | Includes approximately $1,045 million of interest-bearing liabilities from discontinued operations in 2003. |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds —Refer to the “Capital Management” section within Management’s Discussion and Analysis in Part I for information regarding shares repurchased by the Company during the third quarter of 2004.
Item 6. Exhibits
| 10.1 | Form of Executive Officer Stock Option Agreement with cliff and performance vesting under U.S. Bancorp 2001 Stock Incentive Plan. | |
| 10.2 | Form of Executive Officer Stock Option Agreement with annual vesting under U.S. Bancorp 2001 Stock Incentive Plan. | |
| 10.3 | Form of Executive Officer Restricted Stock Award Agreement under U.S. Bancorp 2001 Stock Incentive Plan. | |
| 10.4 | Form of Director Stock Option Agreement under U.S. Bancorp 2001 Stock Incentive Plan. | |
| 10.5 | Form of Director Restricted Stock Unit Agreement under U.S. Bancorp 2001 Stock Incentive Plan. | |
| 10.6 | Form of Executive Officer Restricted Stock Unit Agreement under U.S. Bancorp 2001 Stock Incentive Plan. | |
| 10.7 | Restricted Stock Unit Award Agreement with Jerry A. Grundhofer dated January 2, 2002. | |
| 10.8 | Amendment No. 2 of Employment Agreement with Jerry A. Grundhofer. | |
| 12 | Computation of Ratio of Earnings to Fixed Charges. | |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | |
| 32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURE
| U.S. BANCORP |
| By: | /s/ TERRANCE R. DOLAN |
| Terrance R. Dolan | |
| Executive Vice President and Controller | |
| (Chief Accounting Officer and Duly Authorized Officer) |
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EXHIBIT 12
Computation of Ratio of Earnings to Fixed Charges
| Three Months Ended | Nine Months Ended | |||||||||||
| (Dollars in Millions) | September 30, 2004 | September 30, 2004 | ||||||||||
| Earnings | ||||||||||||
| 1. | Net income | $ | 1,065.5 | $ | 3,110.8 | |||||||
| 2. | Applicable income taxes | 549.0 | 1,480.9 | |||||||||
| 3. | Income before income taxes (1 + 2) | $ | 1,614.5 | $ | 4,591.7 | |||||||
| 4. | Fixed charges: | |||||||||||
| a. | Interest expense excluding interest on deposits | $ | 306.8 | $ | 824.6 | |||||||
| b. | Portion of rents representative of interest and amortization of debt expense | 16.8 | 51.1 | |||||||||
| c. | Fixed charges excluding interest on deposits (4a + 4b) | 323.6 | 875.7 | |||||||||
| d. | Interest on deposits | 221.4 | 653.7 | |||||||||
| e. | Fixed charges including interest on deposits (4c + 4d) | $ | 545.0 | $ | 1,529.4 | |||||||
| 5. | Amortization of interest capitalized | $ | — | $ | — | |||||||
| 6. | Earnings excluding interest on deposits (3 + 4c + 5) | 1,938.1 | 5,467.4 | |||||||||
| 7. | Earnings including interest on deposits (3 + 4e + 5) | 2,159.5 | 6,121.1 | |||||||||
| 8. | Fixed charges excluding interest on deposits (4c) | 323.6 | 875.7 | |||||||||
| 9. | Fixed charges including interest on deposits (4e) | 545.0 | 1,529.4 | |||||||||
| Ratio of Earnings to Fixed Charges | ||||||||||||
| 10. | Excluding interest on deposits (line 6/ line 8) | 5.99 | 6.24 | |||||||||
| 11. | Including interest on deposits (line 7/ line 9) | 3.96 | 4.00 | |||||||||
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EXHIBIT 31.1
CERTIFICATION PURSUANT TO
I, Jerry A. Grundhofer, Chief Executive Officer of U.S. Bancorp, a Delaware corporation, certify that:
| (1) | I have reviewed this Quarterly Report on Form 10-Q of U.S. Bancorp; |
| (2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| (3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| (4) | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
| (a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (c) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| (5) | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| /s/ JERRY A. GRUNDHOFER | |
| Jerry A. Grundhofer | |
| Chief Executive Officer |
Dated: November 9, 2004
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EXHIBIT 31.2
CERTIFICATION PURSUANT TO
I, David M. Moffett, Chief Financial Officer of U.S. Bancorp, a Delaware corporation, certify that:
| (1) | I have reviewed this Quarterly Report on Form 10-Q of U.S. Bancorp; |
| (2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| (3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| (4) | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
| (a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (c) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| (5) | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| /s/ DAVID M. MOFFETT | |
| David M. Moffett | |
| Chief Financial Officer |
Dated: November 9, 2004
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EXHIBIT 32
CERTIFICATION PURSUANT TO
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Chief Executive Officer and Chief Financial Officer of U.S. Bancorp, a Delaware corporation (the “Company”), do hereby certify that:
| (1) | The Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (the “Form 10-Q”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /s/ JERRY A. GRUNDHOFER | /s/ DAVID M. MOFFETT | |
| Jerry A. Grundhofer | David M. Moffett | |
| Chief Executive Officer | Chief Financial Officer |
Dated: November 9, 2004
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Executive Offices
U.S. Bancorp
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Financial Information
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Code of Ethics
U.S. Bancorp places the highest importance on honesty and integrity. Each year, every U.S. Bancorp employee certifies compliance with the letter and spirit of our Code of Ethics and Business Conduct, the guiding ethical standards of our organization. For details about our Code of Ethics and Business Conduct, visit usbank.com and click on About U.S. Bancorp, then Ethics at U.S. Bank.
Diversity
U.S. Bancorp and our subsidiaries are committed to developing and maintaining a workplace that reflects the diversity of the communities we serve. We support a work environment where individual differences are valued and respected and where each individual who shares the fundamental values of the company has an opportunity to contribute and grow based on individual merit.
Equal Employment Opportunity/Affirmative Action
U.S. Bancorp and our subsidiaries are committed to providing Equal Employment Opportunity to all employees and applicants for employment. In keeping with this commitment, employment decisions are made based upon performance, skills and abilities, rather than race, color, religion, national origin or ancestry, gender, age, disability, veteran status, sexual orientation or any other factors protected by law. The corporation complies with municipal, state and federal fair employment laws, including regulations applying to federal contractors.
U.S. Bancorp, including each of our subsidiaries, is an Equal Opportunity Employer committed to creating a diverse workforce.
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