UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K

 

 

Commission file number: 1-6880

U.S. Bancorp

(Exact name of registrant as specified in its charter)

 

800 Nicollet Mall, Minneapolis, Minnesota 55402

(Address of principal executive offices) (Zip Code)

 

(651) 446-3000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act: None

 

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

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o

 

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

 

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

 

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

 

As of June 30, 2009, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $34.3 billion based on the closing sale price as reported on the New York Stock Exchange.

 

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

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 

 

PART I

 

 

Information in response to this Item 1 can be found in our 2009 Annual Report on pages 129 to 130 under the headings “General Business Description,” “Competition,” “Government Policies” and “Supervision and Regulation”; on pages 20 to 21 under the heading “Acquisitions”; on pages 57 to 61 under the heading “Line of Business Financial Review”; and on page 130 under the heading “Website Access to SEC Reports.” That information is incorporated into this report by reference.

 

 

Information in response to this Item 1A can be found in our 2009 Annual Report on pages 130 to 136 under the heading “Risk Factors.” That information is incorporated into this report by reference.

 

 

None.

 

 

U.S. Bancorp and its significant subsidiaries occupy headquarter offices under a long-term lease in Minneapolis, Minnesota. The Company also leases seven freestanding operations centers in Cincinnati, Denver, Milwaukee, Minneapolis, Portland and St. Paul. The Company owns 11 principal operations centers in Cincinnati,
Coeur d’Alene, Fargo, Milwaukee, Olathe, Owensboro, Portland, St. Louis and St. Paul. At December 31, 2009, the Company’s subsidiaries owned and operated a total of 1,955 facilities and leased an additional 1,521 facilities, all of which are well maintained. The Company believes its current facilities are adequate to meet its needs. Additional information with respect to premises and equipment is presented in Notes 9 and 22 of the Notes to Consolidated Financial Statements included in our 2009 Annual Report. That information is incorporated into this report by reference.

 

 

None.

 

 

None.

 

Capital Covenants

 

The Company has entered into several transactions involving the issuance of capital securities (“Capital Securities”) by Delaware statutory trusts formed by the Company (the “Trusts”), the issuance by the Company of preferred stock (“Preferred Stock”) or the issuance by an indirect subsidiary of U.S. Bank National Association of preferred stock exchangeable for the Company’s Preferred Stock under certain circumstances (“Exchangeable Preferred Stock”). Simultaneously with the closing of each of those transactions, the Company entered into a replacement capital covenant (each, a “Replacement Capital Covenant” and collectively, the “Replacement Capital Covenants”) for the benefit of persons that buy, hold or sell a specified series of long-term indebtedness of the Company or U.S. Bank National Association (the “Covered Debt”). Each of the Replacement Capital Covenants provides that neither the Company nor any of its subsidiaries (including any of the Trusts) will repay, redeem or purchase any of the Preferred Stock, Exchangeable Preferred Stock or the Capital Securities and the securities held by the Trust (the “Other Securities”), as applicable, on or before the date specified in the applicable Replacement Capital Covenant, with certain limited exceptions, except to the extent that, during the 180 days prior to the date of that repayment, redemption or purchase, the Company has received proceeds from the sale of qualifying securities that (i) have equity-like characteristics that are the same as, or more equity-like than, the applicable characteristics of the Preferred Stock, the Exchangeable Preferred Stock, the Capital Securities or Other Securities, as applicable, at the time of repayment, redemption or purchase, and (ii) the Company has obtained the prior approval of the

Federal Reserve Board, if such approval is then required by the Federal Reserve Board or, in the case of the Exchangeable Preferred Stock, the approval of the Office of the Comptroller of the Currency.

 

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

 

The following table identifies the (i) closing date for each transaction, (ii) issuer, (iii) series of Capital Securities, Preferred Stock or Exchangeable Preferred Stock issued in the relevant transaction, (iv) Other Securities, if any, and (v) applicable Covered Debt.

 

 

 

 

PART II

 

 

On December 9, 2008, the Company announced its Board of Directors had approved an authorization to repurchase 20 million shares of common stock through December 31, 2010. All shares repurchased during the fourth quarter of 2009 were repurchased under this authorization. The following table provides a detailed analysis of all shares repurchased by the Company during the fourth quarter of 2009:

 

 

Additional Information

 

Additional information in response to this Item 5 can be found in our 2009 Annual Report on pages 54 to 55 under the heading “Capital Management”; and on page 128 under the heading “U.S. Bancorp Supplemental Financial Data (Unaudited).” That information is incorporated into this report by reference.

 

 

Information in response to this Item 6 can be found in our 2009 Annual Report on page 19 under the heading “Table 1 — Selected Financial Data.” That information is incorporated into this report by reference.

 

 

Information in response to this Item 7 can be found in our 2009 Annual Report on pages 18 to 66 under the heading “Management’s Discussion and Analysis.” That information is incorporated into this report by reference.

 

 

Information in response to this Item 7A can be found in our 2009 Annual Report on pages 34 to 55 under the heading “Corporate Risk Profile.” That information is incorporated into this report by reference.

 

 

Information in response to this Item 8 can be found in our 2009 Annual Report on pages 67 to 128 under the headings “Report of Management,” “Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements,” “Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting,” “U.S. Bancorp Consolidated Balance Sheet,” “U.S. Bancorp Consolidated Statement of Income,” “U.S. Bancorp Consolidated Statement of Shareholders’ Equity,” “U.S. Bancorp Consolidated Statement of Cash Flows,” “Notes to Consolidated Financial Statements,” “U.S. Bancorp Consolidated Balance Sheet — Five Year Summary (Unaudited),” “U.S. Bancorp Consolidated Statement of Income — Five Year Summary (Unaudited),” “U.S. Bancorp Quarterly Consolidated Financial Data (Unaudited),” “U.S. Bancorp Consolidated Daily Average Balance Sheet and Related Yields and Rates (Unaudited)” and “U.S. Bancorp Supplemental Financial Data (Unaudited).” That information is incorporated into this report by reference.

 

None.

 

 

Information in response to this Item 9A can be found in our 2009 Annual Report on page 66 under the heading “Controls and Procedures” and on pages 67 and 69 under the headings “Report of Management” and “Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting.” That information is incorporated into this report by reference.

 

 

None.

 

PART III

 

 

Executive Officers of the Registrant

 

Richard K. Davis

 

Mr. Davis is Chairman, President and Chief Executive Officer of U.S. Bancorp. Mr. Davis, 52, has served as Chairman of U.S. Bancorp since December 2007, Chief Executive Officer since December 2006 and President since October 2004. He also served as Chief Operating Officer from October 2004 until December 2006. From the time of the merger of Firstar Corporation and U.S. Bancorp in February 2001 until October 2004, Mr. Davis served as Vice Chairman of U.S. Bancorp. From the time of the merger, Mr. Davis was responsible for Consumer Banking, including Retail Payment Solutions (card services), and he assumed additional responsibility for Commercial Banking in 2003. Mr. Davis has held management positions with the Company since joining Star Banc Corporation, one of its predecessors, in 1993 as Executive Vice President.

 

Jennie P. Carlson

 

Ms. Carlson is Executive Vice President of U.S. Bancorp. Ms. Carlson, 49, has served as Executive Vice President, Human Resources since January 2002. Until that time, she served as Executive Vice President, Deputy General Counsel and Corporate Secretary of U.S. Bancorp since the merger of Firstar Corporation and U.S. Bancorp in February 2001. From 1995 until the merger, she was General Counsel and Secretary of Firstar Corporation and Star Banc Corporation.

 

Andrew Cecere

 

Mr. Cecere is Vice Chairman and Chief Financial Officer of U.S. Bancorp. Mr. Cecere, 49, has served as Chief Financial Officer of U.S. Bancorp since February 2007, and Vice Chairman since the merger of Firstar Corporation and U.S. Bancorp in February 2001. From February 2001 until February 2007 he was responsible for Wealth Management & Securities Services. Previously, he had served as an executive officer of the former U.S. Bancorp, including as Chief Financial Officer from May 2000 through February 2001.

 

William L. Chenevich

 

Mr. Chenevich is Vice Chairman of U.S. Bancorp. Mr. Chenevich, 66, has served as Vice Chairman of U.S. Bancorp since the merger of Firstar Corporation and U.S. Bancorp in February 2001, when he assumed responsibility for Technology and Operations Services. Previously, he served as Vice Chairman of Technology and Operations Services of Firstar Corporation from 1999 to 2001.

Richard C. Hartnack

 

Mr. Hartnack is Vice Chairman of U.S. Bancorp. Mr. Hartnack, 64, has served in this position since April 2005, when he joined U.S. Bancorp to assume responsibility for Consumer Banking. Prior to joining U.S. Bancorp, he served as Vice Chairman of Union Bank of California from 1991 to 2005 with responsibility for Community Banking and Investment Services.

 

Richard J. Hidy

 

Mr. Hidy is Executive Vice President and Chief Risk Officer of U.S. Bancorp. Mr. Hidy, 47, has served in these positions since 2005. From 2003 until 2005, he served as Senior Vice President and Deputy General Counsel of U.S. Bancorp, having served as Senior Vice President and Associate General Counsel of U.S. Bancorp and Firstar Corporation since 1999.

 

Joseph C. Hoesley

 

Mr. Hoesley is Vice Chairman of U.S. Bancorp. Mr. Hoesley, 55, has served as Vice Chairman of U.S. Bancorp since June 2006. From June 2002 until June 2006, he served as Executive Vice President and National Group Head of Commercial Real Estate at U.S. Bancorp, having previously served as Senior Vice President and Group Head of Commercial Real Estate at U.S. Bancorp since joining U.S. Bancorp in 1992.

 

Pamela A. Joseph

 

Ms. Joseph is Vice Chairman of U.S. Bancorp. Ms. Joseph, 50, has served as Vice Chairman of U.S. Bancorp since December 2004. Since November 2004, she has been Chairman and Chief Executive Officer of Elavon Inc., a wholly owned subsidiary of U.S. Bancorp. Prior to that time, she had been President and Chief Operating Officer of Elavon Inc. since February 2000.

 

Howell D. McCullough III

 

Mr. McCullough is Executive Vice President and Chief Strategy Officer of U.S. Bancorp and Head of U.S. Bancorp’s Enterprise Revenue Office. Mr. McCullough, 53, has served in these positions since September 2007. From July 2005 until September 2007, he served as Director of Strategy and Acquisitions of the Payment Services business of U.S. Bancorp. He also served as Chief Financial Officer of the Payment Services business from October 2006 until September 2007. From March 2001 until July 2005, he served as Senior Vice President and Director of Investor Relations at U.S. Bancorp.

 

Lee R. Mitau

 

Mr. Mitau is Executive Vice President and General Counsel of U.S. Bancorp. Mr. Mitau, 61, has served in these positions since 1995. Mr. Mitau also serves as Corporate Secretary. Prior to 1995 he was a partner at the law firm of Dorsey & Whitney LLP.

 

Joseph M. Otting

 

Mr. Otting is Vice Chairman of U.S. Bancorp. Mr. Otting, 52, has served in this position since April 2005, when he assumed responsibility for Commercial Banking. Previously, he served as Executive Vice President, East Commercial Banking Group of U.S. Bancorp from June 2003 to April 2005. He served as Market President of U.S. Bank in Oregon from December 2001 until June 2003.

 

P.W. Parker

 

Mr. Parker is Executive Vice President and Chief Credit Officer of U.S. Bancorp. Mr. Parker, 53, has served in this position since October 2007. From March 2005 until October 2007, he served as Executive Vice President of Credit Portfolio Management of U.S. Bancorp, having served as Senior Vice President of Credit Portfolio Management of U.S. Bancorp since January 2002.

Richard B. Payne, Jr.

 

Mr. Payne is Vice Chairman of U.S. Bancorp. Mr. Payne, 62, has served in this position since July 2006, when he joined U.S. Bancorp to assume responsibility for Corporate Banking. Prior to joining U.S. Bancorp, he served as Executive Vice President for National City Corporation in Cleveland, with responsibility for Capital Markets, from 2001 to 2006.

 

Diane L. Thormodsgard

 

Ms. Thormodsgard is Vice Chairman of U.S. Bancorp. Ms. Thormodsgard, 59, has served as Vice Chairman of U.S. Bancorp since April 2007, when she assumed responsibility for Wealth Management & Securities Services. From 1999 until April 2007, she served as President of Corporate Trust and Institutional Trust & Custody services of U.S. Bancorp, having previously served as Chief Administrative Officer of Corporate Trust at U.S. Bancorp from 1995 to 1999.

 

Code of Ethics and Business Conduct

 

We have adopted a Code of Ethics and Business Conduct that applies to our principal executive officer, principal financial officer and principal accounting officer. Our Code of Ethics and Business Conduct can be found at www.usbank.com by clicking on “About U.S. Bancorp” and then “Corporate Governance.” We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers from, certain provisions of the Code of Ethics and Business Conduct that apply to our principal executive officer, principal financial officer and principal accounting officer by posting such information on our website, at the address and location specified above.

 

Additional Information

 

Additional information in response to this Item 10 can be found in our Proxy Statement under the headings “Section 16(a) Beneficial Ownership Reporting Compliance,” “Proposal 1 — Election of Directors” and “Board Meetings and Committees.” That information is incorporated into this report by reference.

 

 

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

 

 

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

 

 

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

 

 

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

 

PART IV

 

 

List of documents filed as part of this report

 

 

 

 

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

 

 

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

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on February 26, 2010, on its behalf by the undersigned, thereunto duly authorized.

 

U.S. BANCORP

 

Richard K. Davis
Chairman, President and
Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 26, 2010, by the following persons on behalf of the registrant and in the capacities indicated.

 

 

 

 

Exhibit 10.11(k)

ELEVENTH AMENDMENT
OF
U.S. BANK NON-QUALIFIED RETIREMENT PLAN

     The U.S. Bank Non-Qualified Retirement Plan (the “Plan”) is amended as provided below. This amendment is intended to clarify the Plan. The amendment below is not intended to make any changes that would cause a violation of section 409A of the Internal Revenue Code or its accompanying regulations. If a change in this amendment is determined to be a violation of section 409A, the amendment shall not be effective and shall be disregarded with respect to the rules governing benefits under the Plan.

1. QUALIFIED PLAN. Effective January 1, 2010, Section 2.29 is amended to change “Bancorp” to “Bank”.

2. ACCELERATED DISTRIBUTIONS. Effective January 1, 2005, Section 4.6 (formerly Section 4.5) of the Plan was amended to add the following introductory sentence: “The provisions in Sections 4.5(a) and 4.5(b) below shall apply only with respect to Grandfathered Amounts of Grandfathered Participants.” The references to Sections 4.5(a) and 4.5(b) are clarified to read Sections 4.6(a) and 4.6(b). In addition, the Section references in Section 4.6 shall be revised as appropriate.

3. CHOICE OF VENUE AND RULES OF INTERPRETATION. Effective for claims filed on and after January 1, 2008, a new Section 13.9 was added (“Choice of Venue”) and the existing Section 13.9 (“Rules of Interpretation”) was re-numbered as Section 13.10 with subsequent numbering and cross-references revised as appropriate

4. APPLICABLE LAWS. Effective January 1, 2009, a new Section 13.11 of the Plan shall be added that reads as follows:

13.11. Applicable Laws.

     13.11.1. ERISA Status. The Plan is maintained with the understanding that the Plan is an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees as provided in sections 201(2), 301(3) and 401(a)(1) of ERISA, and section 2520.104-23 of the regulations under ERISA. Each provision shall be interpreted and administered accordingly.

     13.11.2. Internal Revenue Code Status. The Plan is maintained as a nonqualified excess and supplemental plan under section 409A of the Code. Each provision shall be interpreted and administered in accordance with section 409A of the Code and guidance provided thereunder. Notwithstanding the foregoing, neither the Employer nor any of its officers, directors, agents or affiliates, nor the Committee shall be obligated, directly or indirectly, to any Participant or any other person for any taxes, penalties, interest or like amounts that may be imposed on the Participant or other person on account of any amounts under this Plan or on account of any failure to comply with the Code.

5. APPENDICES B-10 and B-16. Effective December 31, 2009, the Formula – Part A Benefit under Appendix B-10 of the Plan is frozen. In addition, effective December 31, 2009, the time and form of payment of the Formula – Part B Benefit under Appendix B-10 shall be changed to be paid at the same time and form as the Participant’s benefit under the Excess Benefit (the benefits under Article IV of the Plan). Thus, the Formula – Part B Benefit under Appendix B-10 shall be paid as of the later of attainment of age 62 or Separation from Service. The Formula – Part A Benefit under Appendix B-10 is being frozen and the time and form of payment of the Formula – Part B Benefit under Appendix B-10 is being changed to avoid the potential of the shifting of benefits paid under Appendix B-10 and the benefits that could become payable under Appendix B-16 if the substantial risk of forfeiture for Appendix B-16 lapses.

6. APPENDIX B-15. Effective December 31, 2009, the Excess Benefit (the benefits under Article IV of the Plan) of the Participant under Appendix B-15 shall be frozen. The Participant’s Excess Benefit is being frozen to avoid the potential of the shifting of benefits paid under Excess Benefit portion of this Plan and the benefits the could become payable under Appendix B-15 if the substantial risk of forfeiture for Appendix B-15 lapses.

7. SAVINGS CLAUSE. Save and except as expressly amended above, the Plan shall continue in full force and effect.

EXHIBIT 12

Computation of Ratio of Earnings to Fixed Charges

Year Ended December 31 (Dollars in Millions)		2009				2008				2007				2006				2005
Earnings
1. Net income attributable to U.S. Bancorp		$	2,205			$	2,946			$	4,324			$	4,751			$	4,489
2. Applicable income taxes, including expense related to unrecognized tax positions			395				1,087				1,883				2,112				2,082
3. Net income attributable to U.S. Bancorp before income taxes (1 + 2)		$	2,600			$	4,033			$	6,207			$	6,863			$	6,571
4. Fixed charges:
a. Interest expense excluding interest on deposits		$	1,818			$	2,805			$	3,693			$	3,133			$	1,937
b. Portion of rents representative of interest			94				83				76				71				70
c. Fixed charges excluding interest on deposits (4a + 4b)			1,912				2,888				3,769				3,204				2,007
d. Interest on deposits			1,202				1,881				2,754				2,389				1,559
e. Fixed charges including interest on deposits (4c + 4d)		$	3,114			$	4,769			$	6,523			$	5,593			$	3,566
5. Amortization of interest capitalized		$	—			$	—			$	—			$	—			$	—
6. Earnings excluding interest on deposits (3 + 4c + 5)			4,512				6,921				9,976				10,067				8,578
7. Earnings including interest on deposits (3 + 4e + 5)			5,714				8,802				12,730				12,456				10,137
8. Fixed charges excluding interest on deposits (4c)			1,912				2,888				3,769				3,204				2,007
9. Fixed charges including interest on deposits (4e)			3,114				4,769				6,523				5,593				3,566
Ratio of Earnings to Fixed Charges
10. Excluding interest on deposits (line 6/line 8)			2.36				2.40				2.65				3.14				4.27
11. Including interest on deposits (line 7/line 9)			1.83				1.85				1.95				2.23				2.84

Management’s Discussion and Analysis

For the fiscal year ended December 31, 2009

 

Overview

 

The financial performance of U.S. Bancorp and its subsidiaries (the “Company”) in 2009 demonstrated the strength and quality of its businesses, as the Company achieved record total net revenue, maintained a strong capital position and grew both its balance sheet and fee-based businesses. While not immune to current economic conditions, the Company’s well diversified business has provided substantial resiliency to the credit challenges faced by many financial institutions. The significant weakness in the domestic and global economy continued to affect the Company’s loan portfolios, however the rate of deterioration moderated throughout 2009. Though business and consumer customers continue to be affected by the domestic recession and increased unemployment in the United States, the Company’s comparative financial strength and enhanced product offerings attracted a significant amount of new customer relationships in 2009. Additionally, the Company continued to invest opportunistically in businesses and products that strengthen its presence and ability to serve customers, including Federal Deposit Insurance Corporation (“FDIC”) assisted transactions.

Despite the economic environment adversely impacting the banking industry, the Company earned $2.2 billion in 2009. The difficult credit environment and related rise in credit costs resulted in a $2.5 billion (79.5 percent) increase in provision for credit losses over 2008. The increase in provision for credit losses was partially offset by higher net interest income, a result of growth in earning assets, core deposit growth and improving net interest margin, lower net securities losses, and strength in the Company’s fee-based businesses, particularly mortgage banking. Additionally the Company continued its focus on effectively managing its cost structure, with an efficiency ratio (the ratio of noninterest expense to taxable-equivalent net revenue, excluding net securities gains and losses) in 2009 of 48.4 percent, one of the lowest in the industry.

The Company maintained strong capital and liquidity during 2009. In May 2009, the Federal Reserve assessed the capital adequacy of the largest domestic banks, and concluded that the Company’s capital would be sufficient under the Federal Reserve’s projected scenarios. In June, the Company redeemed all of the $6.6 billion of preferred stock previously issued to the U.S. Department of the Treasury under the Capital Purchase Program of the Emergency Economic Stabilization Act of 2008, or TARP program, and subsequently repurchased the related common stock warrant. The Company raised $2.7 billion through the sale of common stock in May, and at December 31, 2009, the Company’s Tier 1 capital ratio was 9.6 percent, its total risk-based capital ratio was 12.9 percent, and its tangible common equity to risk-weighted assets was 6.1 percent. Credit rating organizations rate the Company’s debt one of the highest of its large domestic banking peers. This comparative financial strength generated growth in loans and deposits as a result of “flight to quality,” as well as favorable funding costs and net interest margin expansion.

In 2009, the Company grew its loan portfolio and increased deposits significantly, both organically and through acquisition, including an FDIC assisted transaction in the fourth quarter. Average loans and deposits increased $20.3 billion (12.2 percent) and $31.6 billion (23.2 percent), respectively, over 2008. Excluding acquisitions, average loans and deposits increased $7.7 billion (4.7 percent) and $19.0 billion (14.2 percent), respectively, over 2008. The Company originated approximately $129 billion of loans and commitments for new and existing customers and had over $55 billion of new mortgage production during 2009. Despite this activity, the Company has experienced a decrease in average commercial loan balances as customers continued to pay down their credit lines and strengthen their own balance sheets.

The Company’s increase in provision for credit losses reflected continuing weak economic conditions and the corresponding impact on commercial, commercial real estate and consumer loan portfolios, as well as stress in the residential real estate markets. As a result of these economic factors and an FDIC assisted acquisition, the Company’s nonperforming assets as a percent of total loans and other real estate increased to 3.02 percent at December 31, 2009, from 1.42 percent at December 31, 2008. In addition, net charge-offs as a percent of average loans outstanding increased to 2.08 percent in 2009 from 1.10 percent in 2008. These ratios increased throughout 2009, but at a decreasing rate in each linked quarter.

The Company’s financial strength, business model, credit culture and focus on efficiency have enabled it to deliver consistently profitable financial performance while operating in a very turbulent environment. Given the current economic environment, the Company will continue to focus on managing credit losses and operating costs, while also utilizing its financial strength to grow market share and profitability. Despite the likelihood of significant changes in regulation of the industry, the Company believes it is well positioned for long-term growth in earnings per common share and an industry-leading return on common equity. The

18  U.S. BANCORP

 

Table 1    Selected Financial Data

 

 

U.S. BANCORP  19

Company intends to achieve these financial objectives by providing high-quality customer service, continuing to carefully manage costs and, where appropriate, strategically investing in businesses that diversify and generate fee-based revenues, enhance the Company’s distribution network or expand its product offerings.

 

Earnings Summary The Company reported net income attributable to U.S. Bancorp of $2.2 billion in 2009, or $.97 per diluted common share, compared with $2.9 billion, or $1.61 per diluted common share, in 2008. Return on average assets and return on average common equity were .82 percent and 8.2 percent, respectively, in 2009, compared with 1.21 percent and 13.9 percent, respectively, in 2008. The results for 2009 reflected higher provision for credit losses, as the Company experienced a $2.1 billion increase in net charge-offs and increased its allowance for credit losses by $1.7 billion due to economic conditions and credit deterioration. Net securities losses of $451 million in 2009 were $527 million (53.9 percent) lower than 2008.

Total net revenue, on a taxable-equivalent basis, for 2009 was $2.0 billion (13.6 percent) higher than 2008, reflecting a 10.8 percent increase in net interest income and a 16.8 percent increase in noninterest income. Net interest income increased in 2009 as a result of growth in average earning assets, core deposit growth and improving net interest margin. Noninterest income increased principally due to strong growth in mortgage banking revenue, a decrease in net securities losses and higher commercial products revenue, ATM processing services and treasury management fees.

Total noninterest expense in 2009 increased $933 million (12.7 percent), compared with 2008, primarily due to the impact of acquisitions, higher FDIC deposit insurance expense, costs related to affordable housing and other tax-advantaged investments, and marketing and business development expense, principally related to credit card initiatives.

 

Acquisitions On October 30, 2009, the Company acquired the banking operations of First Bank of Oak Park Corporation (“FBOP”) in an FDIC assisted transaction. The Company acquired approximately $18.0 billion of assets and assumed approximately $17.4 billion of liabilities, including $15.4 billion of deposits. The Company entered into loss sharing agreements with the FDIC providing for specified credit loss protection for substantially all acquired loans, foreclosed real estate and selected investment securities. Under the terms of the loss sharing agreements, the FDIC will reimburse the Company for 80 percent of the first $3.5 billion of losses on those assets and 95 percent of losses beyond that amount. At the acquisition date, the Company estimated the FBOP assets would incur approximately $2.8 billion of losses, of which $1.9 billion would be reimbursable under the loss sharing agreements as losses are realized in future periods. The Company recorded the acquired assets and liabilities at their estimated fair values at the acquisition date. The estimated fair value for loans reflected expected credit losses at the acquisition date and related reimbursement under the loss sharing agreements. As a result, the Company will only recognize a provision for credit losses and charge-offs on the acquired loans for any further credit deterioration, net of any expected reimbursement under the loss sharing agreements.

On November 21, 2008, the Company acquired the banking operations of Downey Savings & Loan Association, F.A. (“Downey”), and PFF Bank & Trust (“PFF”) from the FDIC. The Company acquired approximately $17.4 billion of assets and assumed approximately $15.8 billion of liabilities. The Company entered into loss sharing agreements with the FDIC providing for specified credit loss and asset yield protection for all single family residential mortgages and credit loss protection for a significant portion of commercial and commercial real estate loans and foreclosed real estate. Under the terms of the loss sharing agreements, the Company will incur the first $1.6 billion of losses on those assets. The FDIC will reimburse the Company for 80 percent of the next $3.1 billion of losses and 95 percent of losses beyond that amount. At the acquisition date, the Company estimated the Downey and PFF assets would incur approximately $4.7 billion of losses, of which $2.4 billion would be reimbursable under the loss sharing agreements. At the acquisition date, the Company identified the acquired non-revolving loans experiencing credit deterioration, representing the majority of assets acquired, and recorded those assets at their estimated fair value, reflecting expected credit losses and the related reimbursement under the loss sharing agreements. As a result, the Company only records provision for credit losses and charge-offs on these loans for any further credit deterioration after the date of acquisition. Based on the accounting guidance applicable in 2008, the Company recorded all other loans at the predecessors’ carrying amount, net of fair value adjustments for any interest rate related discount or premium, and an allowance for credit losses.

At December 31, 2009, $22.5 billion of the Company’s assets were covered by loss sharing agreements with the FDIC (“covered assets”), compared with $11.5 billion at

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Table 2    Analysis of Net Interest Income

 

 

December 31, 2008. The Company’s financial disclosures segregate covered assets from those acquired assets not subject to the loss sharing agreements.

 

Statement of Income Analysis

 

Net Interest Income Net interest income, on a taxable-equivalent basis, was $8.7 billion in 2009, compared with $7.9 billion in 2008 and $6.8 billion in 2007. The $.8 billion (10.8 percent) increase in net interest income in 2009, compared with 2008, was attributable to growth in average earning assets and lower cost core deposit funding. Average earning assets were $237.3 billion for 2009, compared with $215.1 billion and $194.7 billion for 2008 and 2007, respectively. The $22.2 billion (10.3 percent) increase in average earning assets in 2009 over 2008 was principally a result of growth in total average loans, including originated and acquired loans, and loans held-for-sale. The net interest margin in 2009 was 3.67 percent, compared with 3.66 percent in 2008 and 3.47 percent in 2007. The net interest margin in 2008 benefited late in the year from significant turbulence in market rates as a result of financial market disruption. The net interest margin decreased in early 2009 as market rates returned to more historically normal levels. However, as a result of the Company’s ability to attract low cost deposits, net interest margin increased throughout the remainder of the year, resulting in a net interest margin in the fourth quarter of 2009 of 3.83 percent. Given the current interest rate environment, the Company expects the net interest margin will remain relatively stable with a positive bias. Refer to the “Interest Rate Risk Management” section for further information on the sensitivity of the Company’s net interest income to changes in interest rates.

Average total loans were $185.8 billion in 2009, compared with $165.6 billion in 2008. Average loans increased $20.3 billion (12.2 percent) in 2009, driven by new loan originations, acquisitions and portfolio purchases. Average retail loans increased $6.5 billion (11.6 percent) year-over-year, driven by increases in credit card, home equity and student loans. Average credit card balances were $3.0 billion (25.0 percent) higher, reflecting both growth in existing portfolios and portfolio purchases of approximately $1.6 billion during 2009. Average home equity and student loans, included in retail loans, increased 10.2 percent and 57.4 percent, respectively. Average commercial real estate balances increased $2.6 billion (8.5 percent), and reflected new business and higher utilization of existing credit facilities, driven by market conditions. Residential mortgages increased $1.2 billion (5.3 percent), reflecting an increase in activity as a result of market interest rate declines, including an increase in government agency-guaranteed mortgages. Average commercial loans decreased $1.5 billion

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Table 3    Net Interest Income — Changes Due to Rate and Volume (a)

 

 

(2.7 percent) year-over-year principally due to lower utilization of existing commitments and a reduction in the demand for new loans. Average covered assets increased $11.4 billion, due to the timing of the Downey, PFF and FBOP acquisitions.

Average investment securities in 2009 were essentially unchanged from 2008, as security purchases offset maturities and sales. In 2009, the composition of the Company’s investment portfolio shifted to a larger proportion in U.S. Treasury, agency and agency mortgage-backed securities, compared with a year ago.

Average noninterest-bearing deposits in 2009 were $9.1 billion (31.7 percent) higher than 2008. The increase reflected higher business demand deposit balances, partially offset by lower trust demand deposits.

Average total savings products increased $18.4 billion (29.0 percent) in 2009, compared with 2008, principally as a result of a $7.2 billion increase in savings accounts due to strong participation in a new savings product introduced across the franchise by Consumer Banking late in the third quarter of 2008, a $5.7 billion (18.4 percent) increase in interest checking balances from higher government and consumer banking customer balances and acquisitions, and a $5.5 billion (20.9 percent) increase in money market savings balances from higher broker-dealer, corporate trust and institutional trust customer balances and acquisitions.

Average time certificates of deposit less than $100,000 increased $4.3 billion (31.6 percent) primarily due to acquisitions. Average time deposits greater than $100,000 decreased $.2 billion (.7 percent) in 2009, compared with 2008. Time deposits greater than $100,000 are managed as an alternative to other funding sources, such as wholesale borrowing, based largely on relative pricing.

The $1.1 billion (16.3 percent) increase in net interest income in 2008, compared with 2007, was attributable to strong growth in average earning assets, as well as an

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improved net interest margin. The $20.3 billion (10.5 percent) increase in average earning assets in 2008 over 2007 was principally a result of growth in total average loans, including originated and acquired loans, and average investment securities. The increase in the net interest margin reflected growth in higher-spread loans, asset/liability re-pricing in a declining interest rate environment and wholesale funding mix during a period of significant volatility in short-term funding markets.

Average loans in 2008 were higher by $18.2 billion (12.4 percent), compared with 2007, driven by growth in most loan categories. Average investment securities were $1.5 billion (3.7 percent) higher in 2008, compared with 2007, principally reflecting the full year impact of holding structured investment securities the Company purchased in the fourth quarter of 2007 from certain money market funds managed by an affiliate and higher government agency securities, partially offset by maturities and sales of mortgage-backed securities, and realized and unrealized losses on certain investment securities recorded in 2008.

Average noninterest-bearing deposits in 2008 were $1.4 billion (5.0 percent) higher than 2007. The increase reflected higher business and other demand deposit balances, impacted by customer flight to quality and acquisitions. Average total savings products increased $6.6 billion (11.6 percent) in 2008, compared with 2007, principally as a result of a $5.0 billion (19.2 percent) increase in interest checking balances from broker-dealer, institutional trust, government and consumer banking customers, and a $1.0 billion (3.8 percent) increase in money market savings balances driven primarily by higher broker-dealer and consumer banking balances. Average time certificates of deposit less than $100,000 were lower in 2008 by $1.1 billion (7.3 percent), compared with 2007, due to the Company’s funding and pricing decisions and competition for these deposits. Average time deposits greater than $100,000 increased by $8.2 billion (36.7 percent) in 2008, compared with 2007, as a result of the Company’s wholesale funding decisions and the ability to attract larger customer deposits as a result of the Company’s relative strength.

 

Provision for Credit Losses The provision for credit losses reflects changes in the credit quality of the entire portfolio of loans, inclusive of credit loss protection from loss sharing agreements with the FDIC, and is maintained at a level considered appropriate by management for probable and estimable incurred losses, based on factors discussed in the “Analysis and Determination of Allowance for Credit Losses” section.

In 2009, the provision for credit losses was $5.6 billion, compared with $3.1 billion and $792 million in 2008 and 2007, respectively. The increases in the provision for credit losses of $2.5 billion from a year ago and allowance for credit losses from December 31, 2008 reflected deterioration in economic conditions during most of the year and the corresponding impact on the commercial, commercial real estate and consumer loan portfolios. It also reflected continuing stress in the residential real estate markets. Nonperforming assets increased $1.9 billion (excluding covered assets) over December 31, 2008. The increase was driven primarily by stress in residential home construction and related industries, deterioration in the residential mortgage portfolio, as well as an increase in foreclosed properties and the impact of the economic slowdown on commercial and consumer customers. Net charge-offs increased $2.1 billion from 2008, primarily due to economic factors affecting the residential housing markets, including homebuilding and related industries, commercial real estate properties and credit costs associated with credit card and other consumer and commercial loans as the economy weakened and unemployment increased.

Accruing loans ninety days or more past due increased $558 million (excluding covered assets), primarily due to stress in residential mortgages, commercial loans, construction loans, credit cards and home equity loans. Restructured loans that continue to accrue interest increased $769 million, primarily reflecting the impact of loan modifications for certain residential mortgage and consumer credit card customers in light of current economic conditions.

The $2.3 billion increase in the provision for credit losses in 2008, compared with 2007, and the increase in the allowance for credit losses from December 31, 2007 to December 31, 2008 reflected stress in the residential real estate markets, including homebuilding and related supplier industries, driven by declining home prices in most geographic regions. The increases also reflected deteriorating economic conditions and the corresponding impact on the commercial and consumer loan portfolios. Nonperforming loans increased $1.2 billion (excluding covered assets) over December 31, 2007. The increase was driven primarily by weakening real estate values and the impact of the economic slowdown on other commercial customers, and included increases in commercial real estate loans, commercial loans and residential mortgages. Net charge-offs increased $1.0 billion in 2008, compared with 2007, primarily due to the factors affecting the residential housing markets, including the impact on homebuilding and related industries,

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Table 4    Noninterest Income

 

 

and credit costs associated with credit card and other consumer loan growth during the period.

Refer to “Corporate Risk Profile” for further information on the provision for credit losses, net charge-offs, nonperforming assets and other factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for credit losses.

 

Noninterest Income Noninterest income in 2009 was $8.0 billion, compared with $6.8 billion in 2008 and $7.3 billion in 2007. The $1.2 billion (16.8 percent) increase in 2009 over 2008, was principally due to a $765 million increase in mortgage banking revenue, the result of strong mortgage loan production in the current low interest rate environment and an increase in the valuation of mortgage servicing rights (“MSRs”) net of related economic hedging instruments. Other increases in noninterest income included higher ATM processing services of 12.0 percent related to growth in transaction volumes and business expansion, higher treasury management fees of 6.8 percent resulting from increased new business activity and pricing, and 25.0 percent higher commercial products revenue due to higher letters of credit, capital markets and other commercial loan fees. Net securities losses in 2009 were 53.9 percent lower than the prior year. Other income decreased 9.3 percent, due to $551 million in gains in 2008 related to the Company’s ownership position in Visa Inc., partially offset by a reduction in residual lease valuation losses in the current year, a $92 million gain from a corporate real estate transaction in 2009, and other payments-related gains in 2009. Deposit service charges decreased 10.3 percent primarily due to a decrease in the number of transaction-related fees, which more than offset account growth. Trust and investment management fees declined 11.1 percent, reflecting lower assets under management account volume and the impact of low interest rates on money market investment fees. Investment product fees and commissions declined 25.9 percent due to lower sales levels from a year ago.

The $485 million (6.6 percent) decrease in 2008 in noninterest income from 2007, was driven by higher impairment charges on investment securities and higher retail lease residual losses, partially offset by the 2008 gains related to the Company’s ownership position in Visa Inc. and growth in fee income. In addition, noninterest income for 2008 was reduced by the adoption of accounting guidance related to fair value measurements in the financial statements. Upon adoption of this guidance, trading revenue decreased $62 million, as a result of the consideration of nonperformance risk for certain customer-related financial instruments. The growth in credit and debit card revenue in 2008 over 2007 was primarily driven by an increase in customer accounts and higher customer transaction volumes. The corporate payment products revenue growth reflected growth in sales volumes and business expansion. ATM processing services revenue increased due primarily to growth in transaction volumes, including the impact of additional ATMs during 2008. Merchant processing services revenue was higher in 2008 than 2007, reflecting higher transaction volume and business expansion. Treasury management fees increased due primarily to the favorable impact of declining rates on customer compensating balances. Commercial products revenue increased due to higher foreign exchange revenue, syndication fees, letters of credit fees, fees on customer derivatives, and other commercial loan fees. Mortgage banking revenue increased

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Table 5    Noninterest Expense

 

 

in 2008 over 2007 due to an increase in mortgage servicing income and production revenue, partially offset by a decrease in the valuation of MSRs net of related economic hedging instruments. Other income was higher due to the 2008 gains related to the Company’s ownership position in Visa Inc., partially offset by higher retail lease valuation losses, lower equity investment revenue, market valuation losses and the $62 million unfavorable impact to trading income from the adoption of new accounting guidance.

 

Noninterest Expense Noninterest expense in 2009 was $8.3 billion, compared with $7.3 billion in 2008 and $6.9 billion in 2007. The Company’s efficiency ratio was 48.4 percent in 2009, compared with 46.9 percent in 2008. The $933 million (12.7 percent) increase in noninterest expense in 2009, compared with 2008, was principally due to the impact of acquisitions, higher ongoing FDIC deposit insurance expense, and a $123 million special assessment, costs related to affordable housing and other tax-advantaged investments, and marketing and business development expense. Compensation expense increased 3.2 percent primarily due to acquisitions, partially offset by reductions from cost containment efforts. Employee benefits expense increased 11.5 percent primarily due to increased pension costs associated with previous declines in the value of pension assets. Net occupancy and equipment expense, and professional services expense increased 7.0 percent and 6.3 percent, respectively, primarily due to acquisitions, as well as branch-based and other business expansion initiatives. Marketing and business development expense increased 21.9 percent principally due to costs related to the introduction of new credit card products and advertising the Company’s national branding strategy, while technology and business communications expense increased 12.5 percent primarily related to business expansion initiatives. Other intangibles expense increased 9.0 percent due to acquisitions. Other expense increased 44.3 percent due to higher FDIC deposit insurance expense, including a $123 million special assessment in the second quarter of 2009. Other expense also reflected increased costs related to investments in affordable housing and other tax-advantaged projects, higher merchant processing expenses, growth in mortgage servicing expenses and costs associated with other real estate owned.

The $441 million (6.4 percent) increase in noninterest expense in 2008, compared with 2007, was principally due to investments in business initiatives, including acquisitions, higher credit collection costs, and incremental expenses associated with investments in tax-advantaged projects, partially offset by $330 million of charges recognized in 2007 for the Company’s proportionate share of a contingent obligation to indemnify Visa Inc. for certain litigation matters (“2007 Visa Charge”). Compensation expense was higher in 2008 than 2007 due to growth in ongoing bank operations, acquired businesses and other bank initiatives to increase the Company’s banking presence and enhance customer relationship management. Employee benefits expense increased as higher payroll taxes and medical costs were partially offset by lower pension costs. Net occupancy and equipment expense increased primarily due to acquisitions and branch-based and other business expansion initiatives. Marketing and business development expense increased due to costs incurred in 2008 for a national advertising campaign, as well as a $25 million charitable contribution made to the Company’s foundation in 2008. Technology and communications expense increased due to higher processing volumes and business expansion. Other intangibles expense decreased reflecting the timing and

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relative size of acquisitions. Other expense decreased, primarily due to the 2007 Visa Charge, partially offset by increases in 2008 in credit-related costs for other real estate owned and loan collection activities and investments in tax-advantaged projects.

 

Pension Plans Because of the long-term nature of pension plans, the related accounting is complex and can be impacted by several factors, including investment funding policies, accounting methods, and actuarial assumptions.

The Company’s pension accounting reflects the long-term nature of the benefit obligations and the investment horizon of plan assets. Amounts recorded in the financial statements reflect actuarial assumptions about participant benefits and plan asset returns. Changes in actuarial assumptions, and differences in actual plan experience compared with actuarial assumptions, are deferred and recognized in expense in future periods. Differences related to participant benefits are recognized over the future service period of the employees. Differences related to the expected return on plan assets are included in expense over a twelve-year period.

The Company expects pension expense to increase $25 million in 2010, driven by a $27 million increase related to asset return differences, an $8 million increase related to other actuarial gains and losses, and a $10 million decrease related to the January 1, 2010 establishment of a cash balance pension plan for certain current and all future eligible employees. If performance of plan assets equals the actuarially-assumed long-term rate of return (“LTROR”), the cumulative difference of $613 million at December 31, 2009 will incrementally increase pension expense $35 million in 2011, $38 million in 2012 and $49 million in 2013, and decrease pension expense $12 million in 2014. Because of the complexity of forecasting pension plan activities, the accounting methods utilized for pension plans, the Company’s ability to respond to factors affecting the plans and the hypothetical nature of actuarial assumptions, actual pension expense will differ from these amounts.

Refer to Note 17 of the Notes to the Consolidated Financial Statements for further information on the Company’s pension plan funding practices, investment policies and asset allocation strategies, and accounting policies for pension plans.

The following table shows an analysis of hypothetical changes in the LTROR and discount rate:

 

Income Tax Expense The provision for income taxes was $395 million (an effective rate of 15.0 percent) in 2009, compared with $1.1 billion (an effective rate of 26.5 percent) in 2008 and $1.9 billion (an effective rate of 30.0 percent) in 2007. The decrease in the effective tax rate from 2008 reflected the impact of the relative level of tax-exempt income and investments in affordable housing and other tax-advantaged projects, combined with lower pre-tax earnings year-over-year.

For further information on income taxes, refer to Note 19 of the Notes to Consolidated Financial Statements.

 

 

Balance Sheet Analysis

 

Average earning assets were $237.3 billion in 2009, compared with $215.0 billion in 2008. The increase in average earning assets of $22.2 billion (10.3 percent) was due to growth in total average loans of $20.3 billion (12.2 percent) and loans held-for-sale of $1.9 billion (48.7 percent).

For average balance information, refer to Consolidated Daily Average Balance Sheet and Related Yields and Rates on pages 126 and 127.

 

Loans The Company’s loan portfolio was $195.4 billion at December 31, 2009, an increase of $10.2 billion (5.5 percent) from December 31, 2008. The increase was driven by growth in retail loans of $3.6 billion (5.9 percent), residential mortgages of $2.5 billion (10.5 percent), commercial real estate loans of $.9 billion (2.6 percent) and covered assets of $11.1 billion, partially offset by a decrease in commercial loans of $7.8 billion (13.8 percent). Table 6 provides a summary of the loan distribution by product type, while Table 10 provides a summary of selected loan maturity distribution by loan category. Average total loans increased $20.3 billion (12.2 percent) in 2009, compared with 2008. The increase was due to growth in most major loan categories in 2009.

 

Commercial Commercial loans, including lease financing, decreased $7.8 billion (13.8 percent) as of December 31,

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Table 6    Loan Portfolio Distribution