FIVE STAR SERVICE IN ACTION 2004 ANNUAL REPORT AND FORM 10-K |
U.S. Bank lapel pin signifying This year, we At U.S. Bancorp, we value and recognize the expertise and energy of our employees, especially their commitment to providing outstanding customer service and contributing to the corporations financial results. Each employee wears a our customer service guarantee. will acknowledge employees milestone service anniversaries with special gemstone lapel pins for service at five, 10, 15, 20 and 25 years. |
At year-end 2004 |
||
U.S. BANCORP AT A GLANCE |
||
Ranking |
6th largest financial holding company | |
Asset size
|
$195 billion | |
Deposits
|
$121 billion | |
Total loans
|
$126 billion | |
Earnings per share (diluted)
|
$2.18 | |
Return on average assets
|
2.17% | |
Return on average equity
|
21.4% | |
Tangible common equity
|
6.4% | |
Efficiency ratio
|
45.3% | |
Customers
|
13.1 million | |
Primary banking region
|
24 states | |
Bank branches
|
2,370 | |
ATMs
|
4,620 | |
NYSE symbol
|
USB | |
FEATURES |
||||||
![]() |
Five Star Service in Action U.S. Bancorp employees deliver on our promise to provide the outstanding service our customers expect and deserve. |
6 | ||||
![]() |
Advantageous Business Mix We help our customers achieve their financial goals by offering an extensive scope of strategic services through specialized lines of business. |
10 | ||||
![]() |
Initiatives for Success
We are increasing our ability to provide the highest quality service and the most innova- tive products through new investments and initiatives for future growth and service. |
14 |
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995:
Statements in this report regarding U.S.
Bancorps business which are not historical facts are
forward-looking statements that involve risks and
uncertainties. For a discussion of such risks and
uncertainties, which could cause actual results to
differ from those contained in the forward-looking
statements, see the Forward-Looking Statements
disclosure on page 17 of this report.
CORPORATE PROFILE
U.S. Bancorp, headquartered in Minneapolis, is the 6th largest financial holding company in the United States, with total assets exceeding $195 billion at year-end 2004. U.S. Bancorp, the parent company of U.S. Bank, serves 13.1 million customers and operates 2,370 branch offices in 24 states. U.S. Bancorp customers also access their accounts through 4,620 U.S. Bank ATMs, U.S. Bank Internet Banking and telephone banking. A network of specialized U.S. Bancorp offices across the nation, inside and outside our 24-state footprint, provides a comprehensive
line of banking, brokerage, insurance, investment, mortgage, trust and payment services products to consumers, businesses, governments and institutions.
Major lines of business provided by U.S. Bancorp through U.S. Bank and other subsidiaries include Wholesale Banking; Payment Services; Private Client, Trust & Asset Management; and Consumer Banking. U.S. Bank is home of the exclusive Five Star Service Guarantee. Visit U.S. Bancorp on the web at usbank.com.
U.S. BANCORP 1
SELECTED FINANCIAL HIGHLIGHTS
(a)
|
Dividends per share have not been restated for the 2001 Firstar/USBM merger. | |
(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
FINANCIAL SUMMARY
Year Ended December 31 | 2004 | 2003 | ||||||||||||||||||
(Dollars and Shares in Millions, Except Per Share Data) | 2004 | 2003 | 2002 | v 2003 | v 2002 | |||||||||||||||
Total net revenue (taxable-equivalent basis) |
$ | 12,659.1 | $ | 12,530.5 | $ | 12,057.9 | 1.0 | % | 3.9 | % | ||||||||||
Noninterest expense |
5,784.5 | 5,596.9 | 5,740.5 | 3.4 | (2.5 | ) | ||||||||||||||
Provision for credit losses |
669.6 | 1,254.0 | 1,349.0 | |||||||||||||||||
Income taxes and taxable-equivalent adjustments |
2,038.2 | 1,969.5 | 1,740.4 | |||||||||||||||||
Income from continuing operations |
4,166.8 | 3,710.1 | 3,228.0 | 12.3 | 14.9 | |||||||||||||||
Discontinued operations (after-tax) |
| 22.5 | (22.7 | ) | ||||||||||||||||
Cumulative effect of accounting change (after-tax) |
| | (37.2 | ) | ||||||||||||||||
Net income |
$ | 4,166.8 | $ | 3,732.6 | $ | 3,168.1 | 11.6 | 17.8 | ||||||||||||
Per Common Share |
||||||||||||||||||||
Earnings per share from continuing operations |
$ | 2.21 | $ | 1.93 | $ | 1.68 | 14.5 | % | 14.9 | % | ||||||||||
Diluted earnings per share from continuing operations |
2.18 | 1.92 | 1.68 | 13.5 | 14.3 | |||||||||||||||
Earnings per share |
2.21 | 1.94 | 1.65 | 13.9 | 17.6 | |||||||||||||||
Diluted earnings per share |
2.18 | 1.93 | 1.65 | 13.0 | 17.0 | |||||||||||||||
Dividends declared per share |
1.020 | .855 | .780 | 19.3 | 9.6 | |||||||||||||||
Book value per share |
10.52 | 10.01 | 9.62 | 5.1 | 4.1 | |||||||||||||||
Market value per share |
31.32 | 29.78 | 21.22 | 5.2 | 40.3 | |||||||||||||||
Average common shares outstanding |
1,887.1 | 1,923.7 | 1,916.0 | (1.9 | ) | .4 | ||||||||||||||
Average diluted common shares outstanding |
1,912.9 | 1,936.2 | 1,924.8 | (1.2 | ) | .6 | ||||||||||||||
Financial Ratios |
||||||||||||||||||||
Return on average assets |
2.17 | % | 1.99 | % | 1.84 | % | ||||||||||||||
Return on average equity |
21.4 | 19.2 | 18.3 | |||||||||||||||||
Net interest margin (taxable-equivalent basis) |
4.25 | 4.49 | 4.65 | |||||||||||||||||
Efficiency ratio |
45.3 | 45.6 | 48.8 | |||||||||||||||||
Average Balances |
||||||||||||||||||||
Loans |
$ | 122,141 | $ | 118,362 | $ | 114,453 | 3.2 | % | 3.4 | % | ||||||||||
Investment securities |
43,009 | 37,248 | 28,829 | 15.5 | 29.2 | |||||||||||||||
Earning assets |
168,123 | 160,808 | 147,410 | 4.5 | 9.1 | |||||||||||||||
Assets |
191,593 | 187,630 | 171,948 | 2.1 | 9.1 | |||||||||||||||
Deposits |
116,222 | 116,553 | 105,124 | (.3 | ) | 10.9 | ||||||||||||||
Shareholders equity |
19,459 | 19,393 | 17,273 | .3 | 12.3 | |||||||||||||||
Period End Balances |
||||||||||||||||||||
Loans |
$ | 126,315 | $ | 118,235 | $ | 116,251 | 6.8 | % | 1.7 | % | ||||||||||
Allowance for credit losses |
2,269 | 2,369 | 2,422 | (4.2 | ) | (2.2 | ) | |||||||||||||
Investment securities |
41,481 | 43,334 | 28,488 | (4.3 | ) | 52.1 | ||||||||||||||
Assets |
195,104 | 189,471 | 180,027 | 3.0 | 5.2 | |||||||||||||||
Deposits |
120,741 | 119,052 | 115,534 | 1.4 | 3.0 | |||||||||||||||
Shareholders equity |
19,539 | 19,242 | 18,436 | 1.5 | 4.4 | |||||||||||||||
Regulatory capital ratios
|
||||||||||||||||||||
Tangible common equity |
6.4 | % | 6.5 | % | 5.7 | % | ||||||||||||||
Tier 1 capital |
8.6 | 9.1 | 8.0 | |||||||||||||||||
Total risk-based capital |
13.1 | 13.6 | 12.4 | |||||||||||||||||
Leverage |
7.9 | 8.0 | 7.7 | |||||||||||||||||
U.S. BANCORP 3
LETTER TO SHAREHOLDERS 2004 was a year that it all came together for U.S. Bancorp. Service quality levels have never been higher. Financial results are strong and lead the industry in key measurements. All lines of business are contributing to revenue and growth. |
Fellow Shareholders:
I am pleased to tell you that in 2004, U.S. Bancorp achieved its goals for the year and delivered on its promises to you.
STRONG FINANCIAL RESULTS WITH A
FOCUS ON REVENUE GROWTH
During the coming year, we will act to sustain those successes. Revenue growth is our primary focus, particularly net interest income from improved commercial lending results. Our consumer lending business continues to grow, and we have made a number of changes surrounding our commercial banking and small business banking lines of business to increase commercial loan growth. We saw middle market commercial loan balances move upward in fourth quarter 2004.
We are very disciplined in our acquisitions, focusing only on those which will enhance revenue growth, create operating scale, build a more profitable business line or strengthen a critical competitive advantage. This strategy has proved very successful, most notably in our payments business, which reported 10.6 percent net revenue growth in 2004.
Our capital position remains strong, and we repurchased 93.8 million shares during 2004.
INVESTING FOR GROWTH AND SERVICE
We continue to support our pledge of guaranteed high levels of customer service. Investments in delivery and operational systems allowed us to unify systems, simplify procedures, streamline processes and increase the ease of numerous customer transactions and communications. These investments improved customer service and increased customer satisfaction and loyalty, contributing significantly to our ability to attract and retain customers. We have also improved hiring and training practices, and service quality is an integral part of our employees performance evaluation and incentive programs.
RATING AGENCIES VIEW
U.S. BANK FAVORABLY
4 U.S. BANCORP
upgrade was Moodys view that the corporations business model will generate strong profitability, and the consistency of that profitability performance is supported by improving risk management and maintenance of very good liquidity.
We were also pleased that on September 27, 2004, Fitchs rating agency upgraded U.S. Banks ratings. Long- and short-term senior debt at the holding company, U.S. Bancorp, were upgraded to AA- and F1+, respectively, from A+ and F1, respectively. The long-term ratings of its subsidiary bank, U.S. Bank National Association, were upgraded to AA from AA-. The main driver behind the upgrade was Fitchs view of the corporations solid net interest margin, diverse sources of non-interest income, disciplined expense management and improved asset quality.
The debt ratings established for U.S. Bank by Moodys, Standard and Poors, and Fitch reflect the ratings agencies recognition of the strong, consistent financial performance of the company and the quality of the balance sheet.
U.S. BANCORP IS A CORPORATION
BUILT ON INTEGRITY
CREATING SHAREHOLDER VALUE
IS OUR PRIORITY
This corporation has paid a cash dividend for 142 consecutive years, and we have increased the dividend for 33 consecutive years. That long-time record of dividend increases earned U.S. Bancorp the designation of one of the S&Ps 58 Dividend Aristocrats. Only nine other issues have paid a dividend longer than U.S. Bancorp, which first paid a dividend in 1863.
We manage this corporation to increase the value of your investment in U.S. Bancorp. Its the reason we come to work each day.
Sincerely,
Jerry A. Grundhofer
Chairman and Chief Executive Officer
U.S. Bancorp
February 28, 2005
U.S. BANCORP 5
FIVE STAR SERVICE IN ACTION THE VALUES OF FIVE STAR SERVICE Take Ownership Make it Personal Add Value to Every Interaction Make Customer Courtesy Common Share Knowledge SHE TAKES OWNERSHIP. May Li, Manager Factoria Office, Bellevue, WA When Terrie Nixdorff needed help obtaining a debit card after experiencing an unsettling fraud situation, May Li stepped right in. With unyielding determination and extensive follow-through, May Li ensured that Terrie's situation was completely resolved. 6 U.S. BANCORP |
Teshan Lewis, Account Coordinator Corporate Payment Systems, Minneapolis, MN Teshan Lewis went above and beyond to secure a Government Purchase Card for a staff member of the United States Air Force who was preparing for a short-notice deployment to Iraq. Teshan's personal commitment and persistence ensured the staff member received the card in time to carry out his mission. Teshan is pictured with Lt. Col. Todd Pospisil and Government Purchase Card Program Managers Laura Ball and Marie D'Angelo. HE MAKES IT PERSONAL. |
SHE ADDS VALUE. Pam Paley, Relationship Manager The Private Client Group, Cincinnati, OH Pam Paley partners with Frederic H. Mayerson, Chairman and Managing General Partner of The Walnut Group, a diversified private equity investment company. Pam adds value to every interaction by consistently finding the right specialized, competitive products and services designed to meet the needs of The Walnut Group's principals. Ann Vazquez, Manager Broker Dealer Division, St. Louis, MO Since 1989, Ann Vazquez has provided unparalleled expertise and professional, courteous service to Rodger Riney, Founder, President and CEO of Scottrade. Recently, Ann was instrumental in finding a creative credit facility solution. Coupled with her consistently personalized attention, Ann makes sure that what matters most to Scottrade matters most to U.S. Bank. SHE MAKES CUSTOMER COURTESY COMMON. |
Andrew Eberhardy, Project Manager Elan Financial Services, Milwaukee, WI Andrew Eberhardy's skilled support made all the difference to Oregon-based Umpqua Bank during a recent credit card portfolio conversion. Drawing on his vast knowledge of conversion processes, Andrew offered Umpqua flexible, efficient and reliable options to guarantee their satisfaction. Andrew is pictured with Susie McEuin and Laura Schaeffer of Umpqua. HE SHARES HIS KNOWLEDGE. |
ADVANTAGEOUS BUSINESS MIX 13.1 million customers rely on U.S. Bancorp as their financial partner. From a simple personal checking account to sophisticated corporate transactions, U.S. Bancorp has the products and services, the talent, the technologies and the expertise to help our customers achieve their goals. |
WHOLESALE
BANKING
With relationship managers who understand the companies, the markets and the industries of our commercial, corporate and correspondent customers, no bank brings more to the table than U.S. Bank.
Whether its finding the right financing and capital for growth and expansion, accelerating receivables, expediting transactions, managing employee benefits programs or structuring transactions to finance foreign trade, U.S. Bank has the business solutions that build businesses and futures.
After several years of lackluster demand, in 2004 we saw an increase, albeit modest, in commercial and corporate lending, particularly in the areas of commercial and industrial lending and commercial real estate. Economic trends across most markets are positive overall and we expect to see continued improvement in 2005. Interest rates, while rising, are affordable, and companies appear more ready than at any time in the past several years to invest in their businesses.
Significant changes within our organization position us well to be more visible and active in every market, with more streamlined procedures and more competitive pricing. These changes augment the high level of customer service and industry expertise already provided to our customers.
KEY BUSINESS UNITS
|
Middle Market Commercial Banking |
|
|
Commercial Real Estate | |
|
Corporate Banking | |
|
Correspondent Banking | |
|
Dealer Commercial Services | |
|
Equipment Leasing | |
|
Foreign Exchange | |
|
Government Banking | |
|
International Banking | |
|
Specialized Industries | |
|
Specialized Lending | |
|
Treasury Management |
10 U.S. BANCORP
PAYMENT
SERVICES
U.S. Bancorp is a recognized leader in the rapidly growing payments business, with customers ranging from individual credit and debit cardholders and ATM users to local and global merchants, fleet enterprises and multinational corporations with complex payment and payment processing needs.
KEY BUSINESS UNITS
Corporate Payment Systems |
Merchant Payment Services |
NOVA Information Systems, Inc. |
Retail Payment Solutions (card services) |
Transaction Services |
We provide innovative card-based programs, internet-based reporting tools, fully integrated payment solutions and electronic payments settlement answers across the country and around the world.
Payment Services is a higher growth, higher return line of business for U.S. Bancorp. We will continue to invest in the technology, acquisitions, product development and sales promotion needed to support its continued growth.
There is strong momentum in merchant processing, especially related to our new NOVA processing capabilities in Europe. Both our retail payments and corporate payments businesses are focusing on the expansion of existing relationships with current
customers. Additionally, corporate payment products and merchant processing can provide valuable benefits to middle market and small business companies, and we are increasing penetration of those customer segments for payments and processing services.
We are also investing in the hardware and technology to expand and enhance our network of U.S. Bank ATMs. Our newest generation of ATMs are among the most highly functional in the industry, with vivid, striking graphics and transaction screens and customization capabilities so that customers transactions are faster, easier and individualized.
THE PRIVATE CLIENT GROUP,
TRUST & ASSET MANAGEMENT
U.S. Bancorp understands what it takes to build, manage and preserve our clients wealth. From sensitive and personalized family financial management and estate planning to sophisticated corporate trust transactions to expert advice on investments, we prepare clients for todays realities and tomorrows goals.
KEY BUSINESS UNITS
The Private Client Group |
Corporate Trust Services |
Institutional Trust & Custody |
U.S. Bancorp Asset Management, Inc. |
U.S. Bancorp Fund Services, LLC |
The Private Client Group works with affluent individuals and families, professional service corporations and non-profit organizations as a bank within a bank, providing tailored programs to meet specialized needs. Recognizing that many more U.S. Bank customers could benefit from the financial planning, investment management, personal trust and private banking expertise of The Private Client Group, this group is building stronger bank-wide partnerships with other U.S. Bank lines of business to identify Private Client Group referral opportunities.
Built on our strong technology platform and superior management, Corporate Trust Services is leveraging its distribution and scale following our two most recent acquisitions. We reported to you last year about our acquisition of the State Street corporate trust business, and in June 2004 we completed the acquisition of National Citys corporate trust division, a transaction that brought
the bank $34 billion in assets under administration and 3,800 corporate clients throughout the Midwest. It is our sixth corporate trust acquisition since 1999, reflecting our approach of acquisitions to grow revenue and businesses capable of competing with anyone.
U.S. Bancorp Asset Management, Inc., a subsidiary of U.S. Bank National Association, serves as the investment advisor to the First American Funds. It provides investment management services to individuals and institutions including corporations, foundations, pension funds, public funds, and retirement plans. The firm has offices in 24 states. Asset Management distribution is expanding through increased penetration of the Institutional Market and third-party distribution. In 2004, U.S. Bancorp Asset Management launched two new mutual fundsthe First American Inflation Protected Securities Fund and the First American U.S. Treasury Money Market Fund. A retirement (R) share class was also added to a number of funds in the fund family.
CONSUMER
BANKING
Our customers want convenience, accessibility, quality products and outstanding service. Our distribution channelsfull-service banking offices, ATMs, telephone banking, and internet bankingdeliver the deposit, credit, mortgage, investment and insurance products that support the goals and visions of personal and small business customers.
Business momentum in Consumer Banking is strong, and we continue to invest in technologies and initiatives that enhance distribution and deliver on customer expectations.
Customer satisfaction remains our top priority, and new Consumer Banking product initiatives are positively impacting customer satisfaction. Enhancements to internet banking on usbank.com, again ranked number one by Speer and Associates, provide even greater flexibility, customization and functionality.
Significant investment in innovative image technology enables U.S. Bank Internet Banking customers to instantly view more than 3.5 million check and deposit slip images per month on their computer screens. A wide range of operational procedures have also been simplified and streamlined.
KEY BUSINESS UNITS
24-Hour Banking & |
Investments and | |||||
Financial Sales | Insurance | |||||
|
Business Equipment Finance |
| Metropolitan Branch Banking |
|||
|
Community Banking | | Small Business Banking | |||
|
Consumer Lending | | SBA Division | |||
|
Home Mortgage | | Workplace and Student Banking |
|||
|
In-store and Corporate | |||||
On-site Banking |
We continue to expand our unique Checking That Pays® rewards program, which gives customers who use their U.S. Bank Visa® Check Card the choice of four different reward options. In 2004, U.S. Bank rewarded customers more than $26 million in annual cash rebates, five times the $5 million rewarded in 2000.
OUR IN-STORE BANKING NETWORK CONTINUES TO GROW |
Our in-store branch networkthe third largest in the industrydelivers all the access of traditional branches to our customers inside grocery and convenience stores. Building on the tremendous success of this lower cost distribution channel, last year U.S. Bank began a major expansion of in-store branches in fast-growing markets such as Arizona, California, Nevada and Utah. These new branches continue to exceed expectations for profitability. |
In 2003, we opened six new Nashville Publix and 32 new Safeway, Vons, Smiths, Pak N Save and Pavilion branches, plus additional branches with other valued partners. We continued to grow in 2004, opening 112 new in-store branches. By the end of 2005, U.S. Bank will have opened 185 new in-store branches as part of the newest expansion initiative, for a total overall of 478 in-store branches in 19 states. |
INITIATIVES FOR SUCCESS |
INVESTING |
IN OUR COMPANY FOR GROWTH AND SERVICE Increasing our ability to provide better customer service, offer new customer options, and develop and deliver new products keeps us ahead of the curve and ahead of the competition. |
MARKET PENETRATION
In Consumer Banking, we have improved our automated capability to identify product recommendation and customer service opportunities at the individual customer level so we can provide more personalized service and recommend the most appropriate products.
In Corporate Payment Systems, we are dedicating resources to build middle market relationships. We have redesigned and simplified processes, applications and contracts and have been pursuing new client categories among companies with annual sales between $20 and $500 million. Our new One Card for the middle market combines the best features from our corporate and purchasing cards into one easy-to-manage program.
NOVAs new Electronic Check Service processing streamlines check acceptance and mitigates risk for our customers so they can accept checks as safely and easily as card payment alternatives.
Gift card industry sales reached $45 billion in 2003 and are forecast to double by 2007. NOVAs growing gift card program meets the needs of merchants in a cost-effective manner, and NOVA gift cards are processed using the same point-of-sale systems used for credit and debit card processing, further controlling costs.
14 U.S. BANCORP
The Private Client Group has several initiatives in progress which leverage the franchise to develop new client relationships. Our focus is on building stronger internal partnerships with other U.S. Bancorp lines of business. We recognize that many customers already doing business with U.S. Bank could benefit from the comprehensive and specialized expertise of our Financial Planning, Private Banking, Personal Trust, Investment and Insurance experts in The Private Client Group.
Retail Payment Solutions has increased penetration of personal and small business checking account customers with U.S. Bank-branded credit and debit cards by investing in sales and training opportunities with our expanded branch network.
services. SinglePointSM allows business customers to access information and reports, initiate and manage ACH transactions and wires, view check and deposit images and manage check fraud programs at one source.
We have upgraded and image-enabled key lockbox sites for both wholesale and retail payment processing, and introduced a suite of check conversion products and services including On-Site Electronic Deposit and Electronic Cash Letter.
Institutional Trust has launched Health Savings Accounts (HSA) to client companies. HSAs are tax-exempt trust or custodial accounts to be used exclusively for future medical expenses. Similar to IRAs, they are special tax-sheltered savings accounts for medical bills for those employees who qualify.
Our new generation of ATMs integrates customization and information delivery with ATM transactions. Customers will have access to personalized messages, customized fast cash preferences, and more. These ATMs provide a faster, easier to use, and more personal experience. |
We are leveraging our expertise in Commercial Real Estate financing and capitalizing on an improving economy by opening new Commercial Real Estate offices in Phoenix, Dallas and Washington, D.C. Offering our clients greater investment choice, The Private Client Group launched Mutual Fund Open Architecture in 2004, allowing clients to access investments that complement our proprietary funds. We will continue to strategically expand Open Architecture. Retail Payment Solutions successfully entered the affinity debit and credit card market in June 2004. With a potential partner base of 7,000 or more across the country, growth prospects are excellent. U.S. Bancorps Elan Financial Services division now offers prepaid card processing for its financial institution clients, providing the ability for these clients to offer payroll cards and to offer or purchase gifts cards. MARKET DEVELOPMENT Our Asset Management business is performance driven, and on this foundation, we have created investment products attractive not only to our own investors, but also products that will be competitive and attractive in third party retail and institutional distribution. We will expand into these new distribution channels in 2005. U.S. Bancorp Fund Services (USBFS), long a recognized administrator for U.S.-based mutual funds, is gaining name recognition and reputation as a third party outsourcing administrator in the alternative investment industry as well. USBFS has made investments in the specialized technology and accounting systems to support servicing both the simple and complex investments held by hedge funds. NOVA continues its merchant processing expansion in Europe through its EuroConex business, headquartered in Ireland. Growing through acquisitions and alliances, EuroConex now supports more than 100,000 merchants across eight European countries. As a specialized business with notable competitive advantages, and one that benefits from economies of scale, we see considerable potential for further European expansion. NOVA also launched a Canadian merchant processing product in October 2004. We anticipate that many current U.S. customers will consolidate their U.S. and Canadian merchant processing with NOVA and that Canadian merchants will switch from fragmented processing systems to NOVA as a single source of top-rated processing and customer service. |
FORWARD-LOOKING STATEMENTS This Annual Report and Form 10-K contains forward-looking statements. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These statements often include the words may, could, would, should, believes, expects, anticipates, estimates, intends, plans, targets, potentially, probably, projects, outlook or similar expressions. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future prospects of U.S. Bancorp. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including the following, in addition to those contained in U.S. Bancorps reports on file with the SEC: (i) general economic or industry conditions could be less favorable than expected, resulting in a deterioration in credit quality, a change in the allowance for credit losses, or a reduced demand for credit or fee-based products and services; (ii) changes in the domestic interest rate environment could reduce net interest income and could increase credit losses; (iii) inflation, changes in securities market conditions and monetary fluctuations could adversely affect the value or credit quality of our assets, or the availability and terms of funding necessary to meet our liquidity needs; (iv) changes in the extensive laws, regulations and policies governing financial services companies could alter our business environment or affect operations; (v) the potential need to adapt to industry changes in information technology systems, on which we are highly dependent, could present operational issues or require significant capital spending; (vi) competitive pressures could intensify and affect our profitability, including as a result of continued industry consolidation, the increased availability of financial services from non-banks, technological developments or bank regulatory reform; (vii) changes in consumer spending and savings habits could adversely affect our results of operations; (viii) changes in the financial performance and condition of our borrowers could negatively affect repayment of such borrowers loans; (ix) acquisitions may not produce revenue enhancements or cost savings at levels or within time frames originally anticipated, or may result in unforeseen integration difficulties; (x) capital investments in our businesses may not produce expected growth in earnings anticipated at the time of the expenditure; and (xi) acts or threats of terrorism, and/or political and military actions taken by the U.S. or other governments in response to acts or threats of terrorism or otherwise could adversely affect general economic or industry conditions. Forward-looking statements speak only as of the date they are made, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.
U.S. BANCORP 17
OVERVIEW
In 2004, U.S. Bancorp and its subsidiaries (the Company) continued to demonstrate its financial strength and shareholder focus. We began the year with several specific financial objectives. The first goal was a focus on organic revenue growth. While growth in net interest income has been challenging for the banking industry due to rising interest rates and sluggish commercial loan growth, the Company experienced strong growth in its fee-based revenues, particularly in payment processing services. The Company generated fee-based revenue growth of 11.0 percent in 2004. By year-end, commercial loan balances also displayed encouraging trends as the Company experienced its first year-over-year growth in quarterly average balances since mid-2001. Retail loans continued to display strong growth in 2004. In 2005, the Company will continue to focus on revenue growth driven by disciplined strategic business initiatives, customer service and an emphasis on payment processing, retail banking and commercial lending. The second goal was to continue improving the credit quality of our loan portfolios. During the year nonperforming assets declined 34.8 percent from a year ago and total net charge-offs decreased to .63 percent of average loans outstanding in 2004, compared with 1.06 percent in 2003. By year end 2004, the credit risk profile of the Company had improved to pre-2001 levels. In 2005, the Company will continue to focus on credit quality and minimizing volatility of credit-related losses. Finally, effectively managing costs is always a goal for the Company. During 2004, our efficiency ratio (the ratio of noninterest expense to taxable-equivalent net revenue excluding net securities gains or losses) improved to 45.3 percent, compared with 45.6 percent in 2003, and continues to be a leader in the banking industry. The Companys results for 2004 reflect the achievement of these operating objectives and help to position the Company to achieve its long-term goal of 10 percent or greater growth in earnings per diluted share.
Earnings Summary The Company reported net income of $4.2 billion in 2004, or $2.18 per diluted share, compared with $3.7 billion, or $1.93 per diluted share, in 2003. The 13.0 percent increase in earnings per diluted share principally reflected growth in fee-based revenues and lower credit costs. Return on average assets and return on average equity were 2.17 percent and 21.4 percent, respectively, in 2004, compared with returns of 1.99 percent and 19.2 percent, respectively, in 2003. Net income in 2003 included after-tax income from discontinued operations of $22.5 million, or $.01 per diluted share.
Table 1 | Selected Financial Data |
Year Ended December 31 | |||||||||||||||||||||
(Dollars and Shares in Millions, Except Per Share Data) | 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
|
|||||||||||||||||||||
Condensed Income Statement
|
|||||||||||||||||||||
Net interest income (taxable-equivalent
basis) (a)
|
$ | 7,139.9 | $ | 7,217.5 | $ | 6,847.2 | $ | 6,405.2 | $ | 6,072.4 | |||||||||||
Noninterest income
|
5,624.1 | 5,068.2 | 4,910.8 | 4,340.3 | 3,958.9 | ||||||||||||||||
Securities gains (losses), net
|
(104.9 | ) | 244.8 | 299.9 | 329.1 | 8.1 | |||||||||||||||
Total net revenue
|
12,659.1 | 12,530.5 | 12,057.9 | 11,074.6 | 10,039.4 | ||||||||||||||||
Noninterest expense
|
5,784.5 | 5,596.9 | 5,740.5 | 6,149.0 | 4,982.9 | ||||||||||||||||
Provision for credit losses
|
669.6 | 1,254.0 | 1,349.0 | 2,528.8 | 828.0 | ||||||||||||||||
Income from continuing operations before taxes
|
6,205.0 | 5,679.6 | 4,968.4 | 2,396.8 | 4,228.5 | ||||||||||||||||
Taxable-equivalent adjustment
|
28.6 | 28.2 | 32.9 | 54.5 | 82.0 | ||||||||||||||||
Applicable income taxes
|
2,009.6 | 1,941.3 | 1,707.5 | 818.3 | 1,422.0 | ||||||||||||||||
Income from continuing operations
|
4,166.8 | 3,710.1 | 3,228.0 | 1,524.0 | 2,724.5 | ||||||||||||||||
Discontinued operations (after-tax)
|
| 22.5 | (22.7 | ) | (45.2 | ) | 27.6 | ||||||||||||||
Cumulative effect of accounting change (after-tax)
|
| | (37.2 | ) | | | |||||||||||||||
Net income
|
$ | 4,166.8 | $ | 3,732.6 | $ | 3,168.1 | $ | 1,478.8 | $ | 2,752.1 | |||||||||||
Per Common Share
|
|||||||||||||||||||||
Earnings per share from continuing operations
|
$ | 2.21 | $ | 1.93 | $ | 1.68 | $ | .79 | $ | 1.43 | |||||||||||
Diluted earnings per share from continuing
operations
|
2.18 | 1.92 | 1.68 | .79 | 1.42 | ||||||||||||||||
Earnings per share
|
2.21 | 1.94 | 1.65 | .77 | 1.44 | ||||||||||||||||
Diluted earnings per share
|
2.18 | 1.93 | 1.65 | .76 | 1.43 | ||||||||||||||||
Dividends declared per share (b)
|
1.020 | .855 | .780 | .750 | .650 | ||||||||||||||||
Book value per share
|
10.52 | 10.01 | 9.62 | 8.58 | 8.06 | ||||||||||||||||
Market value per share
|
31.32 | 29.78 | 21.22 | 20.93 | 23.25 | ||||||||||||||||
Average common shares outstanding
|
1,887.1 | 1,923.7 | 1,916.0 | 1,927.9 | 1,906.0 | ||||||||||||||||
Average diluted common shares outstanding
|
1,912.9 | 1,936.2 | 1,924.8 | 1,940.3 | 1,918.5 | ||||||||||||||||
Financial Ratios
|
|||||||||||||||||||||
Return on average assets
|
2.17 | % | 1.99 | % | 1.84 | % | .89 | % | 1.74 | % | |||||||||||
Return on average equity
|
21.4 | 19.2 | 18.3 | 9.0 | 19.0 | ||||||||||||||||
Net interest margin (taxable-equivalent basis)
|
4.25 | 4.49 | 4.65 | 4.46 | 4.38 | ||||||||||||||||
Efficiency ratio (c)
|
45.3 | 45.6 | 48.8 | 57.2 | 49.7 | ||||||||||||||||
Average Balances
|
|||||||||||||||||||||
Loans
|
$ | 122,141 | $ | 118,362 | $ | 114,453 | $ | 118,177 | $ | 118,317 | |||||||||||
Loans held for sale
|
1,608 | 3,616 | 2,644 | 1,911 | 1,303 | ||||||||||||||||
Investment securities
|
43,009 | 37,248 | 28,829 | 21,916 | 17,311 | ||||||||||||||||
Earning assets
|
168,123 | 160,808 | 147,410 | 143,501 | 138,636 | ||||||||||||||||
Assets
|
191,593 | 187,630 | 171,948 | 165,944 | 158,481 | ||||||||||||||||
Noninterest-bearing deposits
|
29,816 | 31,715 | 28,715 | 25,109 | 23,820 | ||||||||||||||||
Deposits
|
116,222 | 116,553 | 105,124 | 104,956 | 103,426 | ||||||||||||||||
Short-term borrowings
|
14,534 | 10,503 | 10,116 | 11,679 | 11,008 | ||||||||||||||||
Long-term debt
|
35,115 | 33,663 | 32,172 | 26,088 | 23,316 | ||||||||||||||||
Shareholders equity
|
19,459 | 19,393 | 17,273 | 16,426 | 14,499 | ||||||||||||||||
Period End Balances
|
|||||||||||||||||||||
Loans
|
$ | 126,315 | $ | 118,235 | $ | 116,251 | $ | 114,405 | $ | 122,365 | |||||||||||
Allowance for credit losses
|
2,269 | 2,369 | 2,422 | 2,457 | 1,787 | ||||||||||||||||
Investment securities
|
41,481 | 43,334 | 28,488 | 26,608 | 17,642 | ||||||||||||||||
Assets
|
195,104 | 189,471 | 180,027 | 171,390 | 164,921 | ||||||||||||||||
Deposits
|
120,741 | 119,052 | 115,534 | 105,219 | 109,535 | ||||||||||||||||
Long-term debt
|
34,739 | 33,816 | 31,582 | 28,542 | 23,276 | ||||||||||||||||
Shareholders equity
|
19,539 | 19,242 | 18,436 | 16,745 | 15,333 | ||||||||||||||||
Regulatory capital ratios
|
|||||||||||||||||||||
Tangible common equity
|
6.4 | % | 6.5 | % | 5.7 | % | 5.9 | % | 6.4 | % | |||||||||||
Tier 1 capital
|
8.6 | 9.1 | 8.0 | 7.8 | 7.3 | ||||||||||||||||
Total risk-based capital
|
13.1 | 13.6 | 12.4 | 11.9 | 10.7 | ||||||||||||||||
Leverage
|
7.9 | 8.0 | 7.7 | 7.9 | 7.5 | ||||||||||||||||
(a) | Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent. |
(b) | Dividends per share have not been restated for the 2001 Firstar/ former U.S. Bancorp of Minneapolis merger. |
(c) | 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. |
Acquisition and Divestiture Activity On December 31, 2003, the Company announced that it had completed the tax-free distribution of Piper Jaffray Companies representing substantially all of the Companys capital markets business line. The Company distributed to our shareholders one share of Piper Jaffray common stock for every 100 shares of U.S. Bancorp common stock, by means of a special dividend of $685 million. This distribution did not include brokerage, financial advisory or asset management services offered to customers through other business units. The Company continues to provide asset management services to its customers through the Private Client, Trust and Asset Management business segment and access to investment products and services through its extensive network of licensed financial advisors within the retail brokerage platform of the Consumer Banking business segment. In connection with the spin-off of Piper Jaffray, historical financial results related to Piper Jaffray have been segregated and accounted for in the Companys financial statements as discontinued operations.
STATEMENT OF INCOME ANALYSIS
Net Interest Income Net interest income, on a taxable-equivalent basis, was $7.1 billion in 2004, compared with $7.2 billion in 2003 and $6.8 billion in 2002. The decline in net interest income in 2004 reflected modest growth in average earning assets, more than offset by lower net interest margins. Also contributing to the year-over-year decline in net interest income was a $37.6 million reduction in loan fees, the result of fewer loan prepayments in a rising rate environment. Average earning assets were $168.1 billion for 2004, compared with $160.8 billion and $147.4 billion for 2003 and 2002, respectively. The $7.3 billion (4.5 percent) increase in average earning assets for 2004, compared with 2003, was primarily driven by increases in residential mortgages, retail loans and investment securities, partially offset by a decline in commercial loans and loans held for sale related to mortgage banking activities. The decline in average commercial loans from a year ago reflected soft loan demand in 2003 and through the third quarter of 2004. The Company began to experience growth in commercial
Table 2 | Analysis of Net Interest Income |
2004 | 2003 | ||||||||||||||||||||
(Dollars in Millions) | 2004 | 2003 | 2002 | v 2003 | v 2002 | ||||||||||||||||
|
|||||||||||||||||||||
Components of net interest income
|
|||||||||||||||||||||
Income on earning assets (taxable-equivalent
basis) (a)
|
$ | 9,215.1 | $ | 9,286.2 | $ | 9,526.8 | $ | (71.1 | ) | $ | (240.6 | ) | |||||||||
Expense on interest-bearing liabilities
|
2,075.2 | 2,068.7 | 2,679.6 | 6.5 | (610.9 | ) | |||||||||||||||
Net interest income (taxable-equivalent basis)
|
$ | 7,139.9 | $ | 7,217.5 | $ | 6,847.2 | $ | (77.6 | ) | $ | 370.3 | ||||||||||
Net interest income, as reported
|
$ | 7,111.3 | $ | 7,189.3 | $ | 6,814.3 | $ | (78.0 | ) | $ | 375.0 | ||||||||||
Average yields and rates paid
|
|||||||||||||||||||||
Earning assets yield (taxable-equivalent basis)
|
5.48 | % | 5.77 | % | 6.46 | % | (.29 | )% | (.69 | )% | |||||||||||
Rate paid on interest-bearing liabilities
|
1.53 | 1.60 | 2.26 | (.07 | ) | (.66 | ) | ||||||||||||||
Gross interest margin (taxable-equivalent basis)
|
3.95 | % | 4.17 | % | 4.20 | % | (.22 | )% | (.03 | )% | |||||||||||
Net interest margin (taxable-equivalent basis)
|
4.25 | % | 4.49 | % | 4.65 | % | (.24 | )% | (.16 | )% | |||||||||||
Average balances
|
|||||||||||||||||||||
Investment securities
|
$ | 43,009 | $ | 37,248 | $ | 28,829 | $ | 5,761 | $ | 8,419 | |||||||||||
Loans
|
122,141 | 118,362 | 114,453 | 3,779 | 3,909 | ||||||||||||||||
Earning assets
|
168,123 | 160,808 | 147,410 | 7,315 | 13,398 | ||||||||||||||||
Interest-bearing liabilities
|
136,055 | 129,004 | 118,697 | 7,051 | 10,307 | ||||||||||||||||
Net free funds (b)
|
32,068 | 31,804 | 28,713 | 264 | 3,091 | ||||||||||||||||
(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. |
Table 3 | Net Interest Income Changes Due to Rate and Volume (a) |
2004 v 2003 | 2003 v 2002 | |||||||||||||||||||||||||
(Dollars in Millions) | Volume | Yield/Rate | Total | Volume | Yield/Rate | Total | ||||||||||||||||||||
Increase (decrease) in
|
||||||||||||||||||||||||||
Interest income
|
||||||||||||||||||||||||||
Investment securities
|
$ | 254.3 | $ | (115.5 | ) | $ | 138.8 | $ | 428.4 | $ | (235.2 | ) | $ | 193.2 | ||||||||||||
Loans held for sale
|
(112.2 | ) | 1.5 | (110.7 | ) | 62.7 | (31.1 | ) | 31.6 | |||||||||||||||||
Commercial loans
|
(110.8 | ) | 8.3 | (102.5 | ) | (149.0 | ) | (157.8 | ) | (306.8 | ) | |||||||||||||||
Commercial real estate
|
7.3 | (48.6 | ) | (41.3 | ) | 90.2 | (141.9 | ) | (51.7 | ) | ||||||||||||||||
Residential mortgage
|
160.2 | (61.5 | ) | 98.7 | 232.5 | (114.4 | ) | 118.1 | ||||||||||||||||||
Retail loans
|
210.4 | (264.5 | ) | (54.1 | ) | 134.9 | (363.9 | ) | (229.0 | ) | ||||||||||||||||
Total loans
|
267.1 | (366.3 | ) | (99.2 | ) | 308.6 | (778.0 | ) | (469.4 | ) | ||||||||||||||||
Other earning assets
|
(13.7 | ) | 13.7 | | 6.4 | (2.4 | ) | 4.0 | ||||||||||||||||||
Total
|
395.5 | (466.6 | ) | (71.1 | ) | 806.1 | (1,046.7 | ) | (240.6 | ) | ||||||||||||||||
Interest expense
|
||||||||||||||||||||||||||
Interest checking
|
8.0 | (21.5 | ) | (13.5 | ) | 22.6 | (40.6 | ) | (18.0 | ) | ||||||||||||||||
Money market accounts
|
5.3 | (87.8 | ) | (82.5 | ) | 87.7 | (82.8 | ) | 4.9 | |||||||||||||||||
Savings accounts
|
1.0 | (6.8 | ) | (5.8 | ) | 3.5 | (7.4 | ) | (3.9 | ) | ||||||||||||||||
Time certificates of deposit less than $100,000
|
(70.4 | ) | (39.2 | ) | (109.6 | ) | (146.3 | ) | (146.2 | ) | (292.5 | ) | ||||||||||||||
Time deposits greater than $100,000
|
24.6 | (5.5 | ) | 19.1 | 26.3 | (105.5 | ) | (79.2 | ) | |||||||||||||||||
Total interest-bearing deposits
|
(31.5 | ) | (160.8 | ) | (192.3 | ) | (6.2 | ) | (382.5 | ) | (388.7 | ) | ||||||||||||||
Short-term borrowings
|
64.1 | 31.8 | 95.9 | 8.5 | (64.6 | ) | (56.1 | ) | ||||||||||||||||||
Long-term debt
|
34.7 | 68.2 | 102.9 | 45.0 | (211.1 | ) | (166.1 | ) | ||||||||||||||||||
Total
|
67.3 | (60.8 | ) | 6.5 | 47.3 | (658.2 | ) | (610.9 | ) | |||||||||||||||||
Increase (decrease) in net interest income
|
$ | 328.2 | $ | (405.8 | ) | $ | (77.6 | ) | $ | 758.8 | $ | (388.5 | ) | $ | 370.3 | |||||||||||
(a) | This table shows the components of the change in net interest income by volume and rate on a taxable-equivalent basis utilizing a tax rate of 35 percent. This table does not take into account the level of noninterest-bearing funding, nor does it fully reflect changes in the mix of assets and liabilities. The change in interest not solely due to changes in volume or rates has been allocated on a pro-rata basis to volume and yield/rate. |
Provision for Credit Losses The provision for credit losses is recorded to bring the allowance for credit losses to a level deemed appropriate by management based on factors discussed in the Analysis and Determination of Allowance for Credit Losses section. The provision for credit losses was $669.6 million in 2004, compared with $1,254.0 million and $1,349.0 million in 2003 and 2002, respectively.
Noninterest Income Noninterest income in 2004 was $5.5 billion, compared with $5.3 billion in 2003 and $5.2 billion in 2002. The increase in noninterest income of $206.2 million (3.9 percent) in 2004, compared with 2003, was driven by strong organic growth in most fee-based products and services categories (11.0 percent), particularly in payment processing revenue. Partially offsetting the increase in fee-based revenue growth in 2004 was a year-over-year reduction in net securities gains (losses) of $349.7 million.
Table 4 | Noninterest Income |
2004 | 2003 | ||||||||||||||||||||
(Dollars in Millions) | 2004 | 2003 | 2002 | v 2003 | v 2002 | ||||||||||||||||
|
|||||||||||||||||||||
Credit and debit card revenue
|
$ | 649.3 | $ | 560.7 | $ | 517.0 | 15.8 | % | 8.5 | % | |||||||||||
Corporate payment products revenue
|
406.8 | 361.3 | 325.7 | 12.6 | 10.9 | ||||||||||||||||
ATM processing services
|
175.3 | 165.9 | 160.6 | 5.7 | 3.3 | ||||||||||||||||
Merchant processing services
|
674.6 | 561.4 | 567.3 | 20.2 | (1.0 | ) | |||||||||||||||
Trust and investment management fees
|
981.2 | 953.9 | 892.1 | 2.9 | 6.9 | ||||||||||||||||
Deposit service charges
|
806.4 | 715.8 | 690.3 | 12.7 | 3.7 | ||||||||||||||||
Treasury management fees
|
466.7 | 466.3 | 416.9 | .1 | 11.8 | ||||||||||||||||
Commercial products revenue
|
432.2 | 400.5 | 479.2 | 7.9 | (16.4 | ) | |||||||||||||||
Mortgage banking revenue
|
397.3 | 367.1 | 330.2 | 8.2 | 11.2 | ||||||||||||||||
Investment products fees and commissions
|
156.0 | 144.9 | 132.7 | 7.7 | 9.2 | ||||||||||||||||
Securities gains (losses), net
|
(104.9 | ) | 244.8 | 299.9 | * | (18.4 | ) | ||||||||||||||
Other
|
478.3 | 370.4 | 398.8 | 29.1 | (7.1 | ) | |||||||||||||||
Total noninterest income
|
$ | 5,519.2 | $ | 5,313.0 | $ | 5,210.7 | 3.9 | % | 2.0 | % | |||||||||||
Noninterest Expense Noninterest expense in 2004 was $5.8 billion, compared with $5.6 billion and $5.7 billion in 2003 and 2002, respectively. The increase of $187.6 million (3.4 percent) in 2004, compared with 2003, principally reflected a $154.8 million charge related to the prepayment of a portion of the Companys long-term debt, costs related to business initiatives and incremental expenses of $62.8 million due to the expansion of EuroConex. These increases were offset somewhat by a net reduction in MSR impairments of $151.9 million and lower merger and restructuring-related charges. In 2003, noninterest expense included $46.2 million of merger and restructuring-related costs related to acquisitions completed in prior years. Compensation expense increased in 2004, compared with 2003, due to increases in salaries and stock-based compensation. The increase in salaries reflected business
Pension Plans Because of the long-term nature of pension plans, the administration and accounting for pensions is complex and can be impacted by several factors, including investment and funding policies, accounting methods and the plans actuarial assumptions. The Company and its Compensation Committee have an established process for evaluating the plans, their performance and significant plan assumptions, including the assumed discount rate and the long-term rate of return (LTROR). At least annually, an independent consultant is engaged to assist U.S. Bancorps Compensation Committee in evaluating plan objectives, funding policies and investment policies considering its long-term investment time horizon and asset allocation strategies. Note 19 of the Notes to Consolidated Financial Statements provides further information on funding practices, investment policies and asset allocation strategies.
Table 5 | Noninterest Expense |
2004 | 2003 | ||||||||||||||||||||
(Dollars in Millions) | 2004 | 2003 | 2002 | v 2003 | v 2002 | ||||||||||||||||
|
|||||||||||||||||||||
Compensation
|
$ | 2,252.2 | $ | 2,176.8 | $ | 2,167.5 | 3.5 | % | .4 | % | |||||||||||
Employee benefits
|
389.4 | 328.4 | 317.5 | 18.6 | 3.4 | ||||||||||||||||
Net occupancy and equipment
|
630.8 | 643.7 | 658.7 | (2.0 | ) | (2.3 | ) | ||||||||||||||
Professional services
|
148.9 | 143.4 | 129.7 | 3.8 | 10.6 | ||||||||||||||||
Marketing and business development
|
193.5 | 180.3 | 171.4 | 7.3 | 5.2 | ||||||||||||||||
Technology and communications
|
429.6 | 417.4 | 392.1 | 2.9 | 6.5 | ||||||||||||||||
Postage, printing and supplies
|
248.4 | 245.6 | 243.2 | 1.1 | 1.0 | ||||||||||||||||
Other intangibles
|
550.1 | 682.4 | 553.0 | (19.4 | ) | 23.4 | |||||||||||||||
Merger and restructuring-related charges
|
| 46.2 | 321.2 | * | (85.6 | ) | |||||||||||||||
Debt prepayment
|
154.8 | | (.2 | ) | * | * | |||||||||||||||
Other
|
786.8 | 732.7 | 786.4 | 7.4 | (6.8 | ) | |||||||||||||||
Total noninterest expense
|
$ | 5,784.5 | $ | 5,596.9 | $ | 5,740.5 | 3.4 | % | (2.5 | )% | |||||||||||
Efficiency ratio (a)
|
45.3 | % | 45.6 | % | 48.8 | % | |||||||||||||||
(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. |
* | Not meaningful |
Note 19 of the Notes to Consolidated Financial Statements provides a summary of the significant pension plan assumptions. Because of the subjective nature of plan assumptions, a sensitivity analysis to hypothetical changes in the LTROR and the discount rate is provided below:
Base | ||||||||||||||||||||
LTROR | 6.9% | 7.9% | 8.9% | 9.9% | 10.9% | |||||||||||||||
Incremental benefit (cost)
|
$ | (43.8 | ) | $ | (21.9 | ) | $ | | $ | 21.9 | $ | 43.7 | ||||||||
Percent of 2004 net income
|
(.65 | )% | (.33 | )% | | % | .33 | % | .65 | % | ||||||||||
Base | ||||||||||||||||||||
Discount rate | 4.0% | 5.0% | 6.0% | 7.0% | 8.0% | |||||||||||||||
Incremental benefit (cost)
|
$ | (57.0 | ) | $ | (30.9 | ) | $ | | $ | 35.4 | $ | 73.5 | ||||||||
Percent of 2004 net income
|
(.85 | )% | (.46 | )% | | % | .53 | % | 1.09 | % | ||||||||||
Due to the complexity of forecasting pension plan activities, the accounting method utilized for pension plans, managements ability to respond to factors impacting the plans and the hypothetical nature of this information, the actual changes in periodic pension costs could be significantly different than the information provided in the sensitivity analysis.
Income Tax Expense The provision for income taxes was $2,009.6 million (an effective rate of 32.5 percent) in 2004, compared with $1,941.3 million (an effective rate of 34.4 percent) in 2003 and $1,707.5 million (an effective rate of 34.6 percent) in 2002. The improvement in the effective tax rate in 2004, compared with 2003, was primarily due to changes in estimated tax liabilities of $90.0 million related to the resolution of federal tax examinations covering substantially all of the Companys legal entities for the years 1995 through 1999 and $16.3 million related to the resolution of a state tax examination for tax years through 2000. The improvement in the effective tax rate in 2003, compared with 2002, was primarily driven by a change in unitary state tax apportionment factors driven by a shift in business mix as a result of the impact of acquisitions, market demographics, the mix of product revenue and an increase in federal and state tax credits.
BALANCE SHEET ANALYSIS
Average earning assets were $168.1 billion in 2004, compared with $160.8 billion in 2003. The increase in average earning assets of $7.3 billion (4.5 percent) was primarily driven by growth in residential mortgages, retail loans and investment securities, partially offset by a decline in commercial loans and loans held for sale related to mortgage banking activities. The increase in average earning assets was principally funded by increases of $1.6 billion in interest-bearing deposits and $5.5 billion in wholesale funding.
Loans The Companys total loan portfolio was $126.3 billion at December 31, 2004, an increase of $8.1 billion (6.8 percent) from December 31, 2003. The increase in total loans was driven by strong growth in retail loans (10.7 percent) and residential mortgages (14.2 percent) and to a lesser extent by commercial loans (4.3 percent) and commercial real estate loans (1.3 percent). The increase in retail loans was across most loan categories while the increase in residential mortgages was primarily the result of asset/liability management decisions to retain a greater portion of the Companys adjustable-rate loan production. Table 6 provides a summary of the loan distribution by product type. Table 8 provides a summary of selected loan maturity distribution by loan category. Average total loans increased $3.8 billion (3.2 percent) in 2004, compared with 2003. Growth in average retail loans and residential mortgages, compared to 2003, was partially offset by a decline in average commercial loans.
Table 6 | Loan Portfolio Distribution |
2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||||||||||||||||||||||||
Percent | Percent | Percent | Percent | Percent | |||||||||||||||||||||||||||||||||||||||
At December 31 (Dollars in Millions) | Amount | of Total | Amount | of Total | Amount | of Total | Amount | of Total | Amount | of Total | |||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||
Commercial
|
|||||||||||||||||||||||||||||||||||||||||||
Commercial
|
$ | 35,210 | 27.9 | % | $ | 33,536 | 28.4 | % | $ | 36,584 | 31.5 | % | $ | 40,472 | 35.4 | % | $ | 47,041 | 38.5 | % | |||||||||||||||||||||||
Lease financing
|
4,963 | 3.9 | 4,990 | 4.2 | 5,360 | 4.6 | 5,858 | 5.1 | 5,776 | 4.7 | |||||||||||||||||||||||||||||||||
Total commercial
|
40,173 | 31.8 | 38,526 | 32.6 | 41,944 | 36.1 | 46,330 | 40.5 | 52,817 | 43.2 | |||||||||||||||||||||||||||||||||
Commercial real estate
|
|||||||||||||||||||||||||||||||||||||||||||
Commercial mortgages
|
20,315 | 16.1 | 20,624 | 17.4 | 20,325 | 17.5 | 18,765 | 16.4 | 19,466 | 15.9 | |||||||||||||||||||||||||||||||||
Construction and development
|
7,270 | 5.7 | 6,618 | 5.6 | 6,542 | 5.6 | 6,608 | 5.8 | 6,977 | 5.7 | |||||||||||||||||||||||||||||||||
Total commercial real estate
|
27,585 | 21.8 | 27,242 | 23.0 | 26,867 | 23.1 | 25,373 | 22.2 | 26,443 | 21.6 | |||||||||||||||||||||||||||||||||
Residential mortgages
|
|||||||||||||||||||||||||||||||||||||||||||
Residential mortgages
|
9,722 | 7.7 | 7,332 | 6.2 | 6,446 | 5.6 | 5,746 | 5.0 | * | * | |||||||||||||||||||||||||||||||||
Home equity loans, first liens
|
5,645 | 4.5 | 6,125 | 5.2 | 3,300 | 2.8 | 2,083 | 1.8 | * | * | |||||||||||||||||||||||||||||||||
Total residential mortgages
|
15,367 | 12.2 | 13,457 | 11.4 | 9,746 | 8.4 | 7,829 | 6.8 | 9,397 | 7.7 | |||||||||||||||||||||||||||||||||
Retail
|
|||||||||||||||||||||||||||||||||||||||||||
Credit card
|
6,603 | 5.2 | 5,933 | 5.0 | 5,665 | 4.9 | 5,889 | 5.1 | 6,012 | 4.9 | |||||||||||||||||||||||||||||||||
Retail leasing
|
7,166 | 5.7 | 6,029 | 5.1 | 5,680 | 4.9 | 4,906 | 4.3 | 4,153 | 3.4 | |||||||||||||||||||||||||||||||||
Home equity and second mortgages
|
14,851 | 11.8 | 13,210 | 11.2 | 13,572 | 11.6 | 12,235 | 10.7 | 11,956 | 9.7 | |||||||||||||||||||||||||||||||||
Other retail
|
|||||||||||||||||||||||||||||||||||||||||||
Revolving credit
|
2,541 | 2.0 | 2,540 | 2.1 | 2,650 | 2.3 | 2,673 | 2.3 | 2,750 | 2.2 | |||||||||||||||||||||||||||||||||
Installment
|
2,767 | 2.2 | 2,380 | 2.0 | 2,258 | 1.9 | 2,292 | 2.0 | 2,186 | 1.8 | |||||||||||||||||||||||||||||||||
Automobile
|
7,419 | 5.9 | 7,165 | 6.1 | 6,343 | 5.5 | 5,660 | 5.0 | 5,609 | 4.6 | |||||||||||||||||||||||||||||||||
Student
|
1,843 | 1.4 | 1,753 | 1.5 | 1,526 | 1.3 | 1,218 | 1.1 | 1,042 | .9 | |||||||||||||||||||||||||||||||||
Total other retail
|
14,570 | 11.5 | 13,838 | 11.7 | 12,777 | 11.0 | 11,843 | 10.4 | 11,587 | 9.5 | |||||||||||||||||||||||||||||||||
Total retail
|
43,190 | 34.2 | 39,010 | 33.0 | 37,694 | 32.4 | 34,873 | 30.5 | 33,708 | 27.5 | |||||||||||||||||||||||||||||||||
Total loans
|
$ | 126,315 | 100.0 | % | $ | 118,235 | 100.0 | % | $ | 116,251 | 100.0 | % | $ | 114,405 | 100.0 | % | $ | 122,365 | 100.0 | % | |||||||||||||||||||||||
* | Information not available |
Commercial Commercial loans, including lease financing, totaled $40.2 billion at December 31, 2004, compared with $38.5 billion at December 31, 2003, an increase of
Table 7 | Commercial Loans by Industry Group and Geography |
December 31, 2004 | December 31, 2003 | ||||||||||||||||
Industry Group (Dollars in Millions) | Loans | Percent | Loans | Percent | |||||||||||||
|
|||||||||||||||||
Consumer products and services
|
$ | 8,073 | 20.1 | % | $ | 6,858 | 17.8 | % | |||||||||
Financial services
|
4,784 | 11.9 | 4,469 | 11.6 | |||||||||||||
Commercial services and supplies
|
3,870 | 9.6 | 3,785 | 9.8 | |||||||||||||
Capital goods
|
3,825 | 9.5 | 4,598 | 11.9 | |||||||||||||
Agriculture
|
2,601 | 6.5 | 2,907 | 7.6 | |||||||||||||
Property management and development
|
2,334 | 5.8 | 1,653 | 4.3 | |||||||||||||
Paper and forestry products, mining and basic
materials
|
1,905 | 4.7 | 1,415 | 3.7 | |||||||||||||
Consumer staples
|
1,887 | 4.7 | 1,817 | 4.7 | |||||||||||||
Health care
|
1,826 | 4.6 | 1,532 | 4.0 | |||||||||||||
Private investors
|
1,630 | 4.1 | 1,629 | 4.2 | |||||||||||||
Transportation
|
1,592 | 4.0 | 1,758 | 4.6 | |||||||||||||
Energy
|
730 | 1.8 | 708 | 1.8 | |||||||||||||
Information technology
|
644 | 1.6 | 729 | 1.9 | |||||||||||||
Other
|
4,472 | 11.1 | 4,668 | 12.1 | |||||||||||||
Total
|
$ | 40,173 | 100.0 | % | $ | 38,526 | 100.0 | % | |||||||||
Geography
|
|||||||||||||||||
California
|
$ | 3,786 | 9.4 | % | $ | 4,091 | 10.6 | % | |||||||||
Colorado
|
2,064 | 5.1 | 1,820 | 4.7 | |||||||||||||
Illinois
|
2,549 | 6.3 | 2,121 | 5.5 | |||||||||||||
Minnesota
|
6,649 | 16.6 | 6,527 | 16.9 | |||||||||||||
Missouri
|
2,525 | 6.3 | 2,742 | 7.1 | |||||||||||||
Ohio
|
2,528 | 6.3 | 2,361 | 6.1 | |||||||||||||
Oregon
|
1,441 | 3.6 | 1,500 | 3.9 | |||||||||||||
Washington
|
2,695 | 6.7 | 2,767 | 7.2 | |||||||||||||
Wisconsin
|
2,604 | 6.5 | 2,874 | 7.5 | |||||||||||||
Iowa, Kansas, Nebraska, North Dakota, South Dakota
|
3,455 | 8.6 | 3,760 | 9.8 | |||||||||||||
Arkansas, Indiana, Kentucky, Tennessee
|
1,747 | 4.3 | 1,549 | 4.0 | |||||||||||||
Idaho, Montana, Wyoming
|
830 | 2.1 | 744 | 1.9 | |||||||||||||
Arizona, Nevada, Utah
|
926 | 2.3 | 829 | 2.2 | |||||||||||||
Total banking region
|
33,799 | 84.1 | 33,685 | 87.4 | |||||||||||||
Outside the Companys banking region
|
6,374 | 15.9 | 4,841 | 12.6 | |||||||||||||
Total
|
$ | 40,173 | 100.0 | % | $ | 38,526 | 100.0 | % | |||||||||
Table 8 | Selected Loan Maturity Distribution |
Over One | |||||||||||||||||
One Year | Through | Over Five | |||||||||||||||
December 31, 2004 (Dollars in Millions) | or Less | Five Years | Years | Total | |||||||||||||
|
|||||||||||||||||
Commercial
|
$ | 19,283 | $ | 18,141 | $ | 2,749 | $ | 40,173 | |||||||||
Commercial real estate
|
7,378 | 14,280 | 5,927 | 27,585 | |||||||||||||
Residential mortgages
|
974 | 2,698 | 11,695 | 15,367 | |||||||||||||
Retail
|
13,312 | 19,619 | 10,259 | 43,190 | |||||||||||||
Total loans
|
$ | 40,947 | $ | 54,738 | $ | 30,630 | $ | 126,315 | |||||||||
Total of loans due after one year with
|
|||||||||||||||||
Predetermined interest rates
|
$ | 40,042 | |||||||||||||||
Floating interest rates
|
$ | 45,326 | |||||||||||||||
Commercial Real Estate The Companys portfolio of commercial real estate loans, which includes commercial mortgages and construction loans, was $27.6 billion at December 31, 2004, compared with $27.2 billion at December 31, 2003, a modest increase of $343 million (1.3 percent). Specifically, construction and development loans increased by $652 million (9.9 percent) as developers continued to take advantage of relatively low interest rates. Commercial mortgages outstanding decreased modestly by $309 million (1.5 percent) as growth in Small Business Administration (SBA) real estate mortgages was more than offset by reductions in traditional commercial real estate mortgages. Average commercial real estate loans increased by $125 million (.5 percent) in 2004, compared with 2003, primarily driven by growth in SBA commercial real estate mortgage loans. Table 9 provides a summary of commercial real estate by property type and geographical locations.
Residential Mortgages Residential mortgages held in the loan portfolio were $15.4 billion at December 31, 2004, an increase of $1.9 billion (14.2 percent) from December 31,
Table 9 | Commercial Real Estate by Property Type and Geography |
December 31, 2004 | December 31, 2003 | ||||||||||||||||
Property Type (Dollars in Millions) | Loans | Percent | Loans | Percent | |||||||||||||
|
|||||||||||||||||
Business owner occupied
|
$ | 8,551 | 31.0 | % | $ | 8,037 | 29.5 | % | |||||||||
Multi-family
|
3,903 | 14.1 | 3,868 | 14.2 | |||||||||||||
Commercial property
|
|||||||||||||||||
Industrial
|
1,103 | 4.0 | 1,280 | 4.7 | |||||||||||||
Office
|
2,676 | 9.7 | 3,078 | 11.3 | |||||||||||||
Retail
|
3,586 | 13.0 | 3,487 | 12.8 | |||||||||||||
Other
|
2,359 | 8.6 | 2,452 | 9.0 | |||||||||||||
Homebuilders
|
2,952 | 10.7 | 2,098 | 7.7 | |||||||||||||
Hotel/motel
|
1,848 | 6.7 | 2,234 | 8.2 | |||||||||||||
Health care facilities
|
607 | 2.2 | 708 | 2.6 | |||||||||||||
Total
|
$ | 27,585 | 100.0 | % | $ | 27,242 | 100.0 | % | |||||||||
Geography
|
|||||||||||||||||
California
|
$ | 5,252 | 19.0 | % | $ | 4,380 | 16.1 | % | |||||||||
Colorado
|
1,181 | 4.3 | 1,139 | 4.2 | |||||||||||||
Illinois
|
996 | 3.6 | 1,095 | 4.0 | |||||||||||||
Minnesota
|
1,721 | 6.2 | 1,536 | 5.6 | |||||||||||||
Missouri
|
1,525 | 5.5 | 1,741 | 6.4 | |||||||||||||
Ohio
|
1,975 | 7.2 | 2,193 | 8.0 | |||||||||||||
Oregon
|
1,730 | 6.3 | 1,771 | 6.5 | |||||||||||||
Washington
|
2,855 | 10.3 | 2,956 | 10.9 | |||||||||||||
Wisconsin
|
1,768 | 6.4 | 1,921 | 7.1 | |||||||||||||
Iowa, Kansas, Nebraska, North Dakota, South Dakota
|
2,003 | 7.3 | 2,138 | 7.8 | |||||||||||||
Arkansas, Indiana, Kentucky, Tennessee
|
1,710 | 6.2 | 1,817 | 6.7 | |||||||||||||
Idaho, Montana, Wyoming
|
880 | 3.2 | 874 | 3.2 | |||||||||||||
Arizona, Nevada, Utah
|
1,948 | 7.1 | 1,722 | 6.3 | |||||||||||||
Total banking region
|
25,544 | 92.6 | 25,283 | 92.8 | |||||||||||||
Outside the Companys banking region
|
2,041 | 7.4 | 1,959 | 7.2 | |||||||||||||
Total
|
$ | 27,585 | 100.0 | % | $ | 27,242 | 100.0 | % | |||||||||
Retail Total retail loans outstanding, which include credit card, retail leasing, home equity and second mortgages and other retail loans, were $43.2 billion at December 31, 2004, compared with $39.0 billion at December 31, 2003. The increase of $4.2 billion (10.7 percent) was driven by an increase in home equity lines of credit, credit cards, retail leasing, automobile loans and installment loans, which increased $2,275 million, $670 million, $1,137 million, $254 million and $387 million, respectively, during 2004. The increases in these loan categories were offset somewhat by a reduction in home equity loans of $634 million during the year. Average retail loans increased $3.0 billion (7.9 percent) to $41.2 billion in 2004, reflecting growth in home equity lines, retail leasing, installment loans and credit card. Of the total retail loans and residential mortgages outstanding, approximately 87.4 percent are to customers located in the Companys primary banking regions.
Loans Held for Sale At December 31, 2004, loans held for sale, consisting of residential mortgages to be sold in the secondary market, were $1.4 billion. This asset category was essentially unchanged relative to loans held for sale at December 31, 2003, despite $4.4 billion of mortgage loan production during the fourth quarter of 2004, compared with $3.9 billion in fourth quarter 2003. Average loans held for sale declined to $1.6 billion in 2004, compared with $3.6 billion in 2003, due to the impact of rising interest rates on mortgage loan production.
Investment Securities The Company uses its investment securities portfolio for several purposes. It serves as a vehicle to manage interest rate and prepayment risk, generates interest and dividend income from the investment of excess funds depending on loan demand, provides liquidity and is used as collateral for public deposits and wholesale funding sources. While it is the Companys intent to hold its investment securities indefinitely, the Company may take actions in response to structural changes in interest rate risks and to meet liquidity requirements.
Deposits Total deposits were $120.7 billion at December 31, 2004, an increase of $1.7 billion (1.4 percent) from December 31, 2003. The increase in total deposits was primarily the result of an increase in time deposits greater than $100,000, partially offset by decreases in noninterest-bearing deposits, savings deposits and time certificates of deposit less than $100,000. Average total deposits were $116.2 billion in 2004, declining $331 million from $116.6 billion in 2003. The decline in average total deposits was primarily due to lower average noninterest-bearing deposits and time certificates of deposit less than $100,000. The reductions in these categories were offset somewhat by growth in average savings deposits and time deposits greater than $100,000.
Table 10 | Investment Securities |
Available-for-Sale | Held-to-Maturity | |||||||||||||||||||||||||||||||||
Weighted- | Weighted- | |||||||||||||||||||||||||||||||||
Average | Weighted- | Average | Weighted- | |||||||||||||||||||||||||||||||
Amortized | Fair | Maturity in | Average | Amortized | Fair | Maturity in | Average | |||||||||||||||||||||||||||
December 31, 2004 (Dollars in Millions) | Cost | Value | Years | Yield (d) | Cost | Value | Years | Yield (d) | ||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||
U.S. Treasury and agencies
|
||||||||||||||||||||||||||||||||||
Maturing in one year or less (a)
|
$ | 601 | $ | 593 | .19 | 3.24 | % | $ | | $ | | | | % | ||||||||||||||||||||
Maturing after one year through five years
|
56 | 58 | 3.09 | 4.98 | | | | | ||||||||||||||||||||||||||
Maturing after five years through ten years
|
27 | 28 | 7.52 | 4.47 | | | | | ||||||||||||||||||||||||||
Maturing after ten years (a)
|
| | | | | | | | ||||||||||||||||||||||||||
Total
|
$ | 684 | $ | 679 | .72 | 3.43 | % | $ | | $ | | | | % | ||||||||||||||||||||
Mortgage-backed securities (b)
|
||||||||||||||||||||||||||||||||||
Maturing in one year or less
|
$ | 1,716 | $ | 1,721 | .57 | 4.01 | % | $ | | $ | | | | % | ||||||||||||||||||||
Maturing after one year through five years
|
24,849 | 24,724 | 3.25 | 4.34 | 11 | 11 | 3.07 | 5.30 | ||||||||||||||||||||||||||
Maturing after five years through ten years
|
12,742 | 12,588 | 6.51 | 4.70 | | | | | ||||||||||||||||||||||||||
Maturing after ten years
|
502 | 504 | 14.06 | 3.85 | | | | | ||||||||||||||||||||||||||
Total
|
$ | 39,809 | $ | 39,537 | 4.31 | 4.43 | % | $ | 11 | $ | 11 | 3.07 | 5.30 | % | ||||||||||||||||||||
Asset-backed securities (b)
|
||||||||||||||||||||||||||||||||||
Maturing in one year or less
|
$ | 39 | $ | 39 | .65 | 5.61 | % | $ | | $ | | | | % | ||||||||||||||||||||
Maturing after one year through five years
|
25 | 25 | 2.36 | 5.26 | | | | | ||||||||||||||||||||||||||
Maturing after five years through ten years
|
| | | | | | | | ||||||||||||||||||||||||||
Maturing after ten years
|
| | | | | | | | ||||||||||||||||||||||||||
Total
|
$ | 64 | $ | 64 | 1.31 | 5.47 | % | $ | | $ | | | | % | ||||||||||||||||||||
Obligations of state and political
subdivisions
|
||||||||||||||||||||||||||||||||||
Maturing in one year or less
|
$ | 101 | $ | 102 | .39 | 7.38 | % | $ | 10 | $ | 10 | .25 | 6.44 | % | ||||||||||||||||||||
Maturing after one year through five years
|
97 | 101 | 2.49 | 7.24 | 35 | 37 | 2.66 | 6.55 | ||||||||||||||||||||||||||
Maturing after five years through ten years
|
6 | 7 | 6.38 | 7.82 | 19 | 20 | 6.90 | 6.57 | ||||||||||||||||||||||||||
Maturing after ten years
|
1 | 1 | 16.77 | 5.33 | 34 | 36 | 13.66 | 6.68 | ||||||||||||||||||||||||||
Total
|
$ | 205 | $ | 211 | 1.65 | 7.32 | % | $ | 98 | $ | 103 | 7.09 | 6.59 | % | ||||||||||||||||||||
Other debt securities
|
||||||||||||||||||||||||||||||||||
Maturing in one year or less
|
$ | 8 | $ | 8 | 1.11 | 3.10 | % | $ | | $ | | | | % | ||||||||||||||||||||
Maturing after one year through five years
|
86 | 86 | 2.35 | 11.00 | 18 | 18 | 3.23 | 5.20 | ||||||||||||||||||||||||||
Maturing after five years through ten years
|
| | | | | | | | ||||||||||||||||||||||||||
Maturing after ten years
|
499 | 490 | 22.35 | 2.98 | | | | | ||||||||||||||||||||||||||
Total
|
$ | 593 | $ | 584 | 19.16 | 4.15 | % | $ | 18 | $ | 18 | 3.23 | 5.20 | % | ||||||||||||||||||||
Other investments
|
$ | 270 | $ | 279 | | | % | $ | | $ | | | | % | ||||||||||||||||||||
Total investment securities (c)
|
$ | 41,625 | $ | 41,354 | 4.45 | 4.43 | % | $ | 127 | $ | 132 | 6.19 | 6.28 | % | ||||||||||||||||||||
(a) | In January 2005, approximately $450 million of floating-rate agency notes with an original maturity of June 2023 were called by the issuer. These notes are classified in the table as maturing in one year or less. |
(b) | Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities anticipating future prepayments. |
(c) | The weighted-average maturity of the available-for-sale investment securities was 5.12 years at December 31, 2003 with a corresponding weighted-average yield of 4.27%. The weighted- average maturity of the held-to-maturity investment securities was 6.16 years at December 31, 2003 with a corresponding weighted-average yield of 6.05%. |
(d) | 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. |
2004 | 2003 | ||||||||||||||||
Amortized | Percent | Amortized | Percent | ||||||||||||||
At December 31 (Dollars in Millions) | Cost | of Total | Cost | of Total | |||||||||||||
|
|||||||||||||||||
U.S. Treasury and agencies
|
$ | 684 | 1.6 | % | $ | 1,634 | 3.7 | % | |||||||||
Mortgage-backed securities
|
39,820 | 95.4 | 40,243 | 92.3 | |||||||||||||
Asset-backed securities
|
64 | .2 | 250 | .6 | |||||||||||||
Obligations of state and political subdivisions
|
303 | .7 | 473 | 1.1 | |||||||||||||
Other securities and investments
|
881 | 2.1 | 993 | 2.3 | |||||||||||||
Total investment securities
|
$ | 41,752 | 100.0 | % | $ | 43,593 | 100.0 | % | |||||||||
Borrowings The Company utilizes both short-term and long-term borrowings to fund growth of earning assets in excess of deposit growth. Short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings, were $13.1 billion at December 31, 2004, compared with $10.9 billion at December 31, 2003. Short-term funding is managed to levels deemed appropriate given alternative funding sources. The increase of $2.2 billion in short-term borrowings reflected wholesale funding associated with the Companys earning asset growth.
Table 11 | Deposits |
The composition of deposits was as follows:
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||||||||||||||||||||||||
Percent | Percent | Percent | Percent | Percent | ||||||||||||||||||||||||||||||||||||||
December 31 (Dollars in Millions) | Amount | of Total | Amount | of Total | Amount | of Total | Amount | of Total | Amount | of Total | ||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||
Noninterest-bearing deposits
|
$ | 30,756 | 25.5 | % | $ | 32,470 | 27.3 | % | $ | 35,106 | 30.4 | % | $ | 31,212 | 29.7 | % | $ | 26,633 | 24.3 | % | ||||||||||||||||||||||
Interest-bearing deposits
|
||||||||||||||||||||||||||||||||||||||||||
Interest checking
|
23,186 | 19.2 | 21,404 | 18.0 | 17,467 | 15.1 | 15,251 | 14.5 | 13,982 | 12.8 | ||||||||||||||||||||||||||||||||
Money market accounts
|
30,478 | 25.2 | 34,025 | 28.6 | 27,753 | 24.0 | 24,835 | 23.6 | 23,899 | 21.8 | ||||||||||||||||||||||||||||||||
Savings accounts
|
5,728 | 4.8 | 5,630 | 4.7 | 5,021 | 4.4 | 4,637 | 4.4 | 4,516 | 4.1 | ||||||||||||||||||||||||||||||||
Total of savings deposits
|
59,392 | 49.2 | 61,059 | 51.3 | 50,241 | 43.5 | 44,723 | 42.5 | 42,397 | 38.7 | ||||||||||||||||||||||||||||||||
Time certificates of deposit less than $100,000
|
12,544 | 10.4 | 13,690 | 11.5 | 17,973 | 15.5 | 20,724 | 19.7 | 25,780 | 23.5 | ||||||||||||||||||||||||||||||||
Time deposits greater than $100,000
|
||||||||||||||||||||||||||||||||||||||||||
Domestic
|
11,956 | 9.9 | 5,902 | 4.9 | 9,427 | 8.2 | 7,286 | 6.9 | 11,221 | 10.3 | ||||||||||||||||||||||||||||||||
Foreign
|
6,093 | 5.0 | 5,931 | 5.0 | 2,787 | 2.4 | 1,274 | 1.2 | 3,504 | 3.2 | ||||||||||||||||||||||||||||||||
Total interest-bearing deposits
|
89,985 | 74.5 | 86,582 | 72.7 | 80,428 | 69.6 | 74,007 | 70.3 | 82,902 | 75.7 | ||||||||||||||||||||||||||||||||
Total deposits
|
$ | 120,741 | 100.0 | % | $ | 119,052 | 100.0 | % | $ | 115,534 | 100.0 | % | $ | 105,219 | 100.0 | % | $ | 109,535 | 100.0 | % | ||||||||||||||||||||||
The maturity of time certificates of deposit less than $100,000 and time deposits greater than $100,000 was as follows:
Time Certificates of | Time Deposits | ||||||||||||
December 31, 2004 (Dollars in Millions) | Deposit Less Than $100,000 | Greater Than $100,000 | Total | ||||||||||
|
|||||||||||||
Three months or less
|
$ | 2,324 | $ | 14,097 | $ | 16,421 | |||||||
Three months through six months
|
1,961 | 1,325 | 3,286 | ||||||||||
Six months through one year
|
2,536 | 940 | 3,476 | ||||||||||
2006
|
2,998 | 825 | 3,823 | ||||||||||
2007
|
1,579 | 445 | 2,024 | ||||||||||
2008
|
614 | 188 | 802 | ||||||||||
2009
|
521 | 220 | 741 | ||||||||||
Thereafter
|
11 | 9 | 20 | ||||||||||
Total
|
$ | 12,544 | $ | 18,049 | $ | 30,593 | |||||||
CORPORATE RISK PROFILE
Overview Managing 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 Companys stock value, customer base or revenue.
Credit Risk Management The Companys 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, independent of business line managers, 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 to an independent credit administration function have higher levels of lending grades and support the business units in their credit decision process. Loan decisions are documented as to the borrowers 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 specific allowance for commercial 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 Companys 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 consumer 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 and are used to evaluate underwriting and collection and determine the specific allowance for credit losses for these products. Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments. The Company also engages in non-lending activities that may give rise to credit risk, including interest rate swap and option contracts for balance sheet hedging purposes, foreign exchange transactions, deposit overdrafts and interest rate swap contracts for customers, and settlement risk, including Automated Clearing House transactions, and the processing of credit card transactions for merchants. These activities are also subject to credit review, analysis and approval processes.
Economic Overview In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, the level of allowance coverage relative to similar banking institutions and macroeconomic factors. Beginning in 2000, the domestic economy experienced slower growth. During 2001, corporate earnings weakened and credit quality indicators among certain industry sectors deteriorated. The stagnant economic growth was evidenced by the Federal Reserve Boards (FRB) actions to stimulate economic growth through a series of interest rate reductions from mid-2001 through late 2002. In addition, events of September 11, 2001, had a profound impact on credit quality due to changes in consumer confidence and related spending, governmental priorities and business activities. In response to declining economic conditions, company-specific portfolio trends, and the Firstar/ USBM merger, the Company initiated several actions during 2001 including aligning the risk management practices and charge-off policies of the companies and restructuring and disposing of certain portfolios that did not align with the credit risk profile of the combined company. The Company also implemented accelerated loan workout strategies for certain commercial credits and increased the provision for credit losses in 2001.
Credit Diversification The Company manages its credit risk, in part, through diversification of its loan portfolio. As part of its normal business activities, it offers a broad array of traditional commercial lending products and specialized products such as asset-based lending, commercial lease financing, agricultural credit, warehouse mortgage lending, commercial real estate, health care and correspondent banking. The Company also offers an array of retail lending products including credit cards, retail leases, home equity, revolving credit, lending to students and other consumer loans. These retail credit products are primarily offered through the branch office network, specialized trust, home mortgage and loan production offices, indirect distribution channels, such as automobile dealers and a consumer finance division. The Company monitors and manages the portfolio diversification by industry, customer and geography. Table 6 provides information with respect to the overall product diversification and changes in the mix during 2004.
Analysis of Nonperforming Assets The level of nonperforming assets represents 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 collected from assets on nonaccrual status are typically applied against the principal balance and not recorded as income. At December 31, 2004, total nonperforming assets were $748.4 million, compared with $1,148.1 million at year-end 2003 and $1,373.5 million at year-end 2002. The ratio of total nonperforming assets to total loans and other real estate decreased to .59 percent at December 31, 2004, compared with .97 percent and 1.18 percent at the end of 2003 and 2002, respectively.
Table 12 | Nonperforming Assets (a) |
At December 31, (Dollars in Millions) | 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||||
|
|||||||||||||||||||||||
Commercial
|
|||||||||||||||||||||||
Commercial
|
$ | 289.5 | $ | 623.5 | $ | 760.4 | $ | 526.6 | $ | 470.4 | |||||||||||||
Lease financing
|
90.6 | 113.3 | 166.7 | 180.8 | 70.5 | ||||||||||||||||||
Total commercial
|
380.1 | 736.8 | 927.1 | 707.4 | 540.9 | ||||||||||||||||||
Commercial real estate
|
|||||||||||||||||||||||
Commercial mortgages
|
174.6 | 177.6 | 174.6 | 131.3 | 105.5 | ||||||||||||||||||
Construction and development
|
25.3 | 39.9 | 57.5 | 35.9 | 38.2 | ||||||||||||||||||
Total commercial real estate
|
199.9 | 217.5 | 232.1 | 167.2 | 143.7 | ||||||||||||||||||
Residential mortgages
|
43.3 | 40.5 | 52.0 | 79.1 | 56.9 | ||||||||||||||||||
Retail
|
|||||||||||||||||||||||
Credit card
|
| | | | 8.8 | ||||||||||||||||||
Retail leasing
|
| .4 | 1.0 | 6.5 | | ||||||||||||||||||
Other retail
|
17.2 | 24.8 | 25.1 | 41.1 | 15.0 | ||||||||||||||||||
Total retail
|
17.2 | 25.2 | 26.1 | 47.6 | 23.8 | ||||||||||||||||||
Total nonperforming loans
|
640.5 | 1,020.0 | 1,237.3 | 1,001.3 | 765.3 | ||||||||||||||||||
Other real estate
|
72.2 | 72.6 | 59.5 | 43.8 | 61.1 | ||||||||||||||||||
Other assets
|
35.7 | 55.5 | 76.7 | 74.9 | 40.6 | ||||||||||||||||||
Total nonperforming assets
|
$ | 748.4 | $ | 1,148.1 | $ | 1,373.5 | $ | 1,120.0 | $ | 867.0 | |||||||||||||
Restructured loans accruing interest (b)
|
$ | 10.2 | $ | 18.0 | $ | 1.4 | $ | | $ | | |||||||||||||
Accruing loans 90 days or more past due
|
$ | 294.0 | $ | 329.4 | $ | 426.4 | $ | 462.9 | $ | 385.2 | |||||||||||||
Nonperforming loans to total loans
|
.51 | % | .86 | % | 1.06 | % | .88 | % | .63 | % | |||||||||||||
Nonperforming assets to total loans plus other
real estate
|
.59 | % | .97 | % | 1.18 | % | .98 | % | .71 | % | |||||||||||||
Net interest lost on nonperforming loans
|
$ | 42.1 | $ | 67.4 | $ | 65.4 | $ | 63.0 | $ | 50.8 | |||||||||||||
Changes in Nonperforming Assets
Commercial and | Retail and | |||||||||||||||
(Dollars in Millions) | Commercial Real Estate | Residential Mortgages (d) | Total | |||||||||||||
|
||||||||||||||||
Balance December 31, 2003
|
$ | 1,013.3 | $ | 134.8 | $ | 1,148.1 | ||||||||||
Additions to nonperforming assets
|
||||||||||||||||
New nonaccrual loans and foreclosed properties
|
650.7 | 41.5 | 692.2 | |||||||||||||
Advances on loans
|
39.0 | | 39.0 | |||||||||||||
Total additions
|
689.7 | 41.5 | 731.2 | |||||||||||||
Reductions in nonperforming assets
|
||||||||||||||||
Paydowns, payoffs
|
(498.3 | ) | (24.1 | ) | (522.4 | ) | ||||||||||
Net sales
|
(132.0 | ) | | (132.0 | ) | |||||||||||
Return to performing status
|
(106.1 | ) | (15.3 | ) | (121.4 | ) | ||||||||||
Charge-offs (c)
|
(347.3 | ) | (7.8 | ) | (355.1 | ) | ||||||||||
Total reductions
|
(1,083.7 | ) | (47.2 | ) | (1,130.9 | ) | ||||||||||
Net reductions in nonperforming assets
|
(394.0 | ) | (5.7 | ) | (399.7 | ) | ||||||||||
Balance December 31, 2004
|
$ | 619.3 | $ | 129.1 | $ | 748.4 | ||||||||||
(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. |
Table 13 | Delinquent Loan Ratios as a Percent of Ending Loan Balances |
At December 31, | |||||||||||||||||||||||
90 days or more past due excluding nonperforming loans | 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||||
|
|||||||||||||||||||||||
Commercial
|
|||||||||||||||||||||||
Commercial
|
.05 | % | .06 | % | .14 | % | .14 | % | .11 | % | |||||||||||||
Lease financing
|
.02 | .04 | .10 | .45 | .02 | ||||||||||||||||||
Total commercial
|
.05 | .06 | .14 | .18 | .10 | ||||||||||||||||||
Commercial real estate
|
|||||||||||||||||||||||
Commercial mortgages
|
| .02 | .03 | .03 | .07 | ||||||||||||||||||
Construction and development
|
| .03 | .07 | .02 | .03 | ||||||||||||||||||
Total commercial real estate
|
| .02 | .04 | .02 | .06 | ||||||||||||||||||
Residential mortgages
|
.46 | .61 | .90 | .78 | .62 | ||||||||||||||||||
Retail
|
|||||||||||||||||||||||
Credit card
|
1.74 | 1.68 | 2.09 | 2.18 | 1.70 | ||||||||||||||||||
Retail leasing
|
.08 | .14 | .19 | .11 | .20 | ||||||||||||||||||
Other retail
|
.29 | .41 | .54 | .74 | .62 | ||||||||||||||||||
Total retail
|
.47 | .56 | .72 | .90 | .76 | ||||||||||||||||||
Total loans
|
.23 | % | .28 | % | .37 | % | .40 | % | .31 | % | |||||||||||||
At December 31, | |||||||||||||||||||||
90 days or more past due including nonperforming loans | 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
|
|||||||||||||||||||||
Commercial
|
.99 | % | 1.97 | % | 2.35 | % | 1.71 | % | 1.13 | % | |||||||||||
Commercial real estate
|
.73 | .82 | .90 | .68 | .60 | ||||||||||||||||
Residential mortgages (a)
|
.74 | .91 | 1.44 | 1.79 | 1.23 | ||||||||||||||||
Retail
|
.51 | .62 | .79 | 1.03 | .83 | ||||||||||||||||
Total loans
|
.74 | % | 1.14 | % | 1.43 | % | 1.28 | % | .94 | % | |||||||||||
(a) | Delinquent loan ratios exclude advances made pursuant to servicing agreements to Government National Mortgage Association (GNMA) mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. Including the guaranteed amounts, the ratio of residential mortgages 90 days or more past due was 5.19 percent and 6.07 percent at December 31, 2004 and 2003, respectively. Information prior to 2003 is not available. |
As a Percent | |||||||||||||||||||
of Ending Loan | |||||||||||||||||||
Amount | Balances | ||||||||||||||||||
December 31 | |||||||||||||||||||
(Dollars in Millions) | 2004 | 2003 | 2004 | 2003 | |||||||||||||||
Residential Mortgages
|
|||||||||||||||||||
30-89 days
|
$ | 108.3 | $ | 102.9 | .70 | % | .76 | % | |||||||||||
90 days or more
|
70.2 | 82.5 | .46 | .61 | |||||||||||||||
Nonperforming
|
43.3 | 40.5 | .28 | .30 | |||||||||||||||
Total
|
$ | 221.8 | $ | 225.9 | 1.44 | % | 1.68 | % | |||||||||||
Retail
|
|||||||||||||||||||
Credit Card
|
|||||||||||||||||||
30-89 days
|
$ | 142.4 | $ | 150.9 | 2.16 | % | 2.54 | % | |||||||||||
90 days or more
|
114.8 | 99.5 | 1.74 | 1.68 | |||||||||||||||
Nonperforming
|
| | | | |||||||||||||||
Total
|
$ | 257.2 | $ | 250.4 | 3.90 | % | 4.22 | % | |||||||||||
Retail Leasing
|
|||||||||||||||||||
30-89 days
|
$ | 59.4 | $ | 78.8 | .83 | % | 1.31 | % | |||||||||||
90 days or more
|
5.6 | 8.2 | .08 | .14 | |||||||||||||||
Nonperforming
|
| .4 | | .01 | |||||||||||||||
Total
|
$ | 65.0 | $ | 87.4 | .91 | % | 1.45 | % | |||||||||||
Other Retail
|
|||||||||||||||||||
30-89 days
|
$ | 223.6 | $ | 311.9 | .76 | % | 1.15 | % | |||||||||||
90 days or more
|
84.3 | 110.2 | .29 | .41 | |||||||||||||||
Nonperforming
|
17.2 | 24.8 | .05 | .09 | |||||||||||||||
Total
|
$ | 325.1 | $ | 446.9 | 1.10 | % | 1.65 | % | |||||||||||
Analysis of Loan Net Charge-Offs Total loan net charge-offs decreased $484.6 million to $767.1 million in 2004, compared with $1,251.7 million in 2003 and $1,373.0 million in 2002. The ratio of total loan net charge-offs to average loans was .63 percent in 2004, compared with 1.06 percent in 2003 and 1.20 percent in 2002. The overall level of net charge-offs in 2004 reflected the Companys ongoing efforts to reduce the overall risk profile of the organization, improved economic conditions, higher commercial loan recoveries, refinancing by higher risk customers with other companies and higher asset valuations. Net charge-offs are expected to increase modestly as the level of commercial loan recoveries declines to more normalized levels in 2005. The improvement in net charge-offs in 2003, compared with 2002, was due to credit risk management initiatives taken by the Company that improved the credit risk profile of the loan portfolio. These initiatives along with better economic conditions resulted in improving credit risk classifications and lower levels of nonperforming assets and consumer loan delinquencies.
Table 14 | Net Charge-offs as a Percent of Average Loans Outstanding |
Year Ended December 31 | 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||||
|
|||||||||||||||||||||||
Commercial
|
|||||||||||||||||||||||
Commercial
|
.29 | % | 1.34 | % | 1.29 | % | 1.62 | % | .56 | % | |||||||||||||
Lease financing
|
1.42 | 1.65 | 2.67 | 1.95 | .46 | ||||||||||||||||||
Total commercial
|
.43 | 1.38 | 1.46 | 1.66 | .55 | ||||||||||||||||||
Commercial real estate
|
|||||||||||||||||||||||
Commercial mortgages
|
.09 | .14 | .17 | .21 | .03 | ||||||||||||||||||
Construction and development
|
.13 | .16 | .11 | .17 | .11 | ||||||||||||||||||
Total commercial real estate
|
.10 | .14 | .15 | .20 | .05 | ||||||||||||||||||
Residential mortgages
|
.20 | .23 | .23 | .15 | .11 | ||||||||||||||||||
Retail
|
|||||||||||||||||||||||
Credit card
|
4.14 | 4.61 | 4.98 | 4.80 | 4.18 | ||||||||||||||||||
Retail leasing
|
.59 | .86 | .72 | .65 | .41 | ||||||||||||||||||
Home equity and second mortgages
|
.54 | .70 | .74 | .85 | * | ||||||||||||||||||
Other retail
|
1.22 | 1.60 | 2.10 | 2.16 | 1.32 | ||||||||||||||||||
Total retail
|
1.32 | 1.61 | 1.85 | 1.94 | 1.69 | ||||||||||||||||||
Total loans (a)
|
.63 | % | 1.06 | % | 1.20 | % | 1.31 | % | .70 | % | |||||||||||||
(a) | In accordance with guidance provided in the Interagency Guidance on Certain Loans Held for Sale, loans held with the intent to sell are transferred to the Loans Held for Sale category based on the lower of cost or fair value. At the time of transfer, the portion of the mark-to-market losses representing probable credit losses determined in accordance with policies and methods utilized to determine the allowance for credit losses is included in net charge-offs. The remaining portion of the losses was reported separately as a reduction of the allowance for credit losses under Losses from loan sales/transfers. Had the entire amount of the loss been reported as charge-offs, total net charge-offs would have been $1,875.8 million (1.59 percent of average loans) for the year ended December 31, 2001. |
* | Information not available |
Average Loan | Percent of | ||||||||||||||||
Amount | Average Loans | ||||||||||||||||
Year Ended December 31 | |||||||||||||||||
(Dollars in Millions) | 2004 | 2003 | 2004 | 2003 | |||||||||||||
Consumer finance (a)
|
|||||||||||||||||
Residential mortgages
|
$ | 4,531 | $ | 3,499 | .44 | % | .44 | % | |||||||||
Home equity and second mortgages
|
2,412 | 2,350 | 2.07 | 2.38 | |||||||||||||
Other retail
|
414 | 360 | 5.04 | 4.76 | |||||||||||||
Traditional branch
|
|||||||||||||||||
Residential mortgages
|
$ | 9,791 | $ | 8,197 | .09 | % | .14 | % | |||||||||
Home equity and second mortgages
|
11,628 | 10,889 | .22 | .34 | |||||||||||||
Other retail
|
14,007 | 13,270 | 1.10 | 1.52 | |||||||||||||
Total Company
|
|||||||||||||||||
Residential mortgages
|
$ | 14,322 | $ | 11,696 | .20 | % | .23 | % | |||||||||
Home equity and second mortgages
|
14,040 | 13,239 | .54 | .70 | |||||||||||||
Other retail
|
14,421 | 13,630 | 1.22 | 1.60 | |||||||||||||
(a) | Consumer finance category included credit originated and managed by USBCF, as well as home equity loans and second mortgages with a loan-to-value greater than 100 percent that were originated in the branches. |
Analysis and Determination of the Allowance for Credit Losses The allowance for loan losses provides coverage for probable and estimable losses inherent in the Companys loan and lease portfolio. Management evaluates the allowance each quarter to determine that it is adequate to cover these inherent losses. The evaluation of each element and the overall allowance is based on a continuing assessment of problem loans, recent loss experience and other factors, including regulatory guidance and economic conditions. Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments, which is included in other liabilities in the Consolidated Balance Sheet. Both the allowance for loan losses and the liability for unfunded credit commitments are included in the Companys analysis of credit losses.
Table 15 | Summary of Allowance for Credit Losses |
(Dollars in Millions) | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||||
Balance at beginning of year
|
$ | 2,368.6 | $ | 2,422.0 | $ | 2,457.3 | $ | 1,786.9 | $ | 1,710.3 | ||||||||||||||
Charge-offs
|
||||||||||||||||||||||||
Commercial
|
||||||||||||||||||||||||
Commercial
|
243.5 | 555.6 | 559.2 | 779.0 | 319.8 | |||||||||||||||||||
Lease financing
|
110.6 | 139.3 | 188.8 | 144.4 | 27.9 | |||||||||||||||||||
Total commercial
|
354.1 | 694.9 | 748.0 | 923.4 | 347.7 | |||||||||||||||||||
Commercial real estate
|
||||||||||||||||||||||||
Commercial mortgages
|
29.1 | 43.9 | 40.9 | 49.5 | 15.8 | |||||||||||||||||||
Construction and development
|
12.5 | 13.0 | 8.8 | 12.6 | 10.3 | |||||||||||||||||||
Total commercial real estate
|
41.6 | 56.9 | 49.7 | 62.1 | 26.1 | |||||||||||||||||||
Residential mortgages
|
32.5 | 30.3 | 23.1 | 15.8 | 13.7 | |||||||||||||||||||
Retail
|
||||||||||||||||||||||||
Credit card
|
281.5 | 282.1 | 304.9 | 294.1 | 235.8 | |||||||||||||||||||
Retail leasing
|
49.0 | 57.0 | 45.2 | 34.2 | 14.8 | |||||||||||||||||||
Home equity and second mortgages
|
89.6 | 105.0 | 107.9 | 112.7 | * | |||||||||||||||||||
Other retail
|
225.2 | 267.9 | 311.9 | 329.1 | 379.5 | |||||||||||||||||||
Total retail
|
645.3 | 712.0 | 769.9 | 770.1 | 630.1 | |||||||||||||||||||
Total charge-offs
|
1,073.5 | 1,494.1 | 1,590.7 | 1,771.4 | 1,017.6 | |||||||||||||||||||
Recoveries
|
||||||||||||||||||||||||
Commercial
|
||||||||||||||||||||||||
Commercial
|
143.9 | 70.0 | 67.4 | 60.6 | 64.0 | |||||||||||||||||||
Lease financing
|
41.5 | 55.3 | 39.9 | 30.4 | 7.2 | |||||||||||||||||||
Total commercial
|
185.4 | 125.3 | 107.3 | 91.0 | 71.2 | |||||||||||||||||||
Commercial real estate
|
||||||||||||||||||||||||
Commercial mortgages
|
11.1 | 15.8 | 9.1 | 9.1 | 10.8 | |||||||||||||||||||
Construction and development
|
3.5 | 2.0 | 1.4 | .8 | 2.6 | |||||||||||||||||||
Total commercial real estate
|
14.6 | 17.8 | 10.5 | 9.9 | 13.4 | |||||||||||||||||||
Residential mortgages
|
3.8 | 3.4 | 4.0 | 3.2 | 1.3 | |||||||||||||||||||
Retail
|
||||||||||||||||||||||||
Credit card
|
29.6 | 27.3 | 24.6 | 23.4 | 27.5 | |||||||||||||||||||
Retail leasing
|
9.6 | 7.0 | 6.3 | 4.5 | 2.0 | |||||||||||||||||||
Home equity and second mortgages
|
13.8 | 12.1 | 10.6 | 12.9 | * | |||||||||||||||||||
Other retail
|
49.6 | 49.5 | 54.4 | 80.0 | 76.8 | |||||||||||||||||||
Total retail
|
102.6 | 95.9 | 95.9 | 120.8 | 106.3 | |||||||||||||||||||
Total recoveries
|
306.4 | 242.4 | 217.7 | 224.9 | 192.2 | |||||||||||||||||||
Net Charge-offs
|
||||||||||||||||||||||||
Commercial
|
||||||||||||||||||||||||
Commercial
|
99.6 | 485.6 | 491.8 | 718.4 | 255.8 | |||||||||||||||||||
Lease financing
|
69.1 | 84.0 | 148.9 | 114.0 | 20.7 | |||||||||||||||||||
Total commercial
|
168.7 | 569.6 | 640.7 | 832.4 | 276.5 | |||||||||||||||||||
Commercial real estate
|
||||||||||||||||||||||||
Commercial mortgages
|
18.0 | 28.1 | 31.8 | 40.4 | 5.0 | |||||||||||||||||||
Construction and development
|
9.0 | 11.0 | 7.4 | 11.8 | 7.7 | |||||||||||||||||||
Total commercial real estate
|
27.0 | 39.1 | 39.2 | 52.2 | 12.7 | |||||||||||||||||||
Residential mortgages
|
28.7 | 26.9 | 19.1 | 12.6 | 12.4 | |||||||||||||||||||
Retail
|
||||||||||||||||||||||||
Credit card
|
251.9 | 254.8 | 280.3 | 270.7 | 208.3 | |||||||||||||||||||
Retail leasing
|
39.4 | 50.0 | 38.9 | 29.7 | 12.8 | |||||||||||||||||||
Home equity and second mortgages
|
75.8 | 92.9 | 97.3 | 99.8 | * | |||||||||||||||||||
Other retail
|
175.6 | 218.4 | 257.5 | 249.1 | 302.7 | |||||||||||||||||||
Total retail
|
542.7 | 616.1 | 674.0 | 649.3 | 523.8 | |||||||||||||||||||
Total net charge-offs
|
767.1 | 1,251.7 | 1,373.0 | 1,546.5 | 825.4 | |||||||||||||||||||
Provision for credit losses
|
669.6 | 1,254.0 | 1,349.0 | 2,528.8 | 828.0 | |||||||||||||||||||
Losses from loan sales/transfers (a)
|
| | | (329.3 | ) | | ||||||||||||||||||
Acquisitions and other changes
|
(1.8 | ) | (55.7 | ) | (11.3 | ) | 17.4 | 74.0 | ||||||||||||||||
Balance at end of year
|
$ | 2,269.3 | $ | 2,368.6 | $ | 2,422.0 | $ | 2,457.3 | $ | 1,786.9 | ||||||||||||||
Components
|
||||||||||||||||||||||||
Allowance for loan losses
|
$ | 2,080.4 | $ | 2,183.6 | ||||||||||||||||||||
Liability for unfunded credit commitments (b)
|
188.9 | 185.0 | ||||||||||||||||||||||
Total allowance for credit losses
|
$ | 2,269.3 | $ | 2,368.6 | ||||||||||||||||||||
Allowance for credit losses as a percentage of
|
||||||||||||||||||||||||
Period-end loans
|
1.80 | % | 2.00 | % | 2.08 | % | 2.15 | % | 1.46 | % | ||||||||||||||
Nonperforming loans
|
354 | 232 | 196 | 245 | 233 | |||||||||||||||||||
Nonperforming assets
|
303 | 206 | 176 | 219 | 206 | |||||||||||||||||||
Net charge-offs (a)
|
296 | 189 | 176 | 159 | 216 | |||||||||||||||||||
(a) | In accordance with guidance provided in the Interagency Guidance on Certain Loans Held for Sale, loans held with the intent to sell are transferred to the Loans Held for Sale category based on the lower of cost or fair value. At the time of the transfer, the portion of the mark-to-market losses representing probable credit losses determined in accordance with policies and methods utilized to determine the allowance for credit losses is included in net charge-offs. The remaining portion of the losses was reported separately as a reduction of the allowance for credit losses under Losses from loan sales/transfers. Had the entire amount of the loss been reported as charge-offs, total net charge-offs would have been $1,875.8 million for the year ended 2001. Additionally, the allowance as a percent of net charge-offs would have been 131 percent for the year ended December 31, 2001. |
(b) | During 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 included in other liabilities in the Consolidated Balance Sheet. Amounts for 2003 have been restated. |
* | Information not available |
Table 16 | Elements of the Allowance for Credit Losses |
Allowance Amount | Allowance as a Percent of Loans | |||||||||||||||||||||||||||||||||||||||||
December 31 (Dollars in Millions) | 2004 | 2003 | 2002 | 2001 | 2000 | 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||
Commercial
|
||||||||||||||||||||||||||||||||||||||||||
Commercial
|
$ | 663.6 | $ | 696.1 | $ | 776.4 | $ | 1,068.1 | $ | 418.8 | 1.88 | % | 2.08 | % | 2.12 | % | 2.64 | % | .89 | % | ||||||||||||||||||||||
Lease financing
|
105.8 | 90.4 | 107.6 | 107.5 | 17.7 | 2.13 | 1.81 | 2.01 | 1.84 | .31 | ||||||||||||||||||||||||||||||||
Total commercial
|
769.4 | 786.5 | 884.0 | 1,175.6 | 436.5 | 1.92 | 2.04 | 2.11 | 2.54 | .83 | ||||||||||||||||||||||||||||||||
Commercial real estate
|
||||||||||||||||||||||||||||||||||||||||||
Commercial mortgages
|
131.1 | 169.7 | 152.9 | 176.6 | 42.7 | .65 | .82 | .75 | .94 | .22 | ||||||||||||||||||||||||||||||||
Construction and development
|
40.2 | 58.8 | 53.5 | 76.4 | 17.7 | .55 | .89 | .82 | 1.16 | .25 | ||||||||||||||||||||||||||||||||
Total commercial real estate
|
171.3 | 228.5 | 206.4 | 253.0 | 60.4 | .62 | .84 | .77 | 1.00 | .23 | ||||||||||||||||||||||||||||||||
Residential mortgages
|
33.1 | 33.3 | 34.2 | 21.9 | 11.6 | .22 | .25 | .35 | .28 | .12 | ||||||||||||||||||||||||||||||||
Retail
|
||||||||||||||||||||||||||||||||||||||||||
Credit card
|
283.2 | 267.9 | 272.4 | 295.2 | 265.6 | 4.29 | 4.52 | 4.81 | 5.01 | 4.42 | ||||||||||||||||||||||||||||||||
Retail leasing
|
43.8 | 47.1 | 44.0 | 38.7 | 27.2 | .61 | .78 | .77 | .79 | .65 | ||||||||||||||||||||||||||||||||
Home equity and second mortgages
|
87.9 | 100.5 | 114.7 | 88.6 | 107.7 | .59 | .76 | .85 | .72 | .90 | ||||||||||||||||||||||||||||||||
Other retail
|
195.4 | 234.8 | 268.6 | 282.8 | 250.3 | 1.34 | 1.70 | 2.10 | 2.39 | 2.16 | ||||||||||||||||||||||||||||||||
Total retail
|
610.3 | 650.3 | 699.7 | 705.3 | 650.8 | 1.41 | 1.67 | 1.86 | 2.02 | 1.93 | ||||||||||||||||||||||||||||||||
Total allocated allowance
|
1,584.1 | 1,698.6 | 1,824.3 | 2,155.8 | 1,159.3 | 1.25 | 1.43 | 1.57 | 1.89 | .95 | ||||||||||||||||||||||||||||||||
Available for other factors
|
685.2 | 670.0 | 597.7 | 301.5 | 627.6 | .54 | .57 | .51 | .26 | .51 | ||||||||||||||||||||||||||||||||
Total allowance
|
$ | 2,269.3 | $ | 2,368.6 | $ | 2,422.0 | $ | 2,457.3 | $ | 1,786.9 | 1.80 | % | 2.00 | % | 2.08 | % | 2.15 | % | 1.46 | % | ||||||||||||||||||||||
At December 31, 2004, the allowance for credit losses was $2,269.3 million (1.80 percent of loans). This compares with an allowance of $2,368.6 million (2.00 percent of loans) at December 31, 2003, and $2,422.0 million (2.08 percent of loans) at December 31, 2002. The ratio of the allowance for credit losses to nonperforming loans was 354 percent at year-end 2004, compared with 232 percent at year-end 2003 and 196 percent at year-end 2002. The ratio of the allowance for credit losses to loan net charge-offs was 296 percent at year-end 2004, compared with 189 percent at year-end 2003 and 176 percent at year-end 2002. Management determined that the allowance for credit losses was adequate at December 31, 2004.
Residual Risk Management The Company manages its risk to changes in the residual value of leased assets through disciplined residual valuation setting at the inception of a
Operational Risk Management Operational risk represents the risk of loss resulting from the Companys 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 decisions or their implementation, and customer attrition due to potential negative publicity.
Interest Rate Risk Management In 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 Companys 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
Sensitivity of Net Interest Income and Rate Sensitive Income
December 31, 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
|
(.49 | )% | .04 | % | *% | (.19 | )% | 1.30 | % | .19 | % | *% | (.02 | )% | ||||||||||||||||||
Rate sensitive income
|
(.40 | )% | (.13 | )% | *% | (.69 | )% | .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 Companys 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 December 31, 2004. The up 200 basis point scenario resulted in a 2.7 percent decrease in the market value of equity at December 31, 2004, compared with a 3.1 percent decrease at December 31, 2003. The down 200 basis point scenario resulted in a 4.2 percent decrease in the market value of equity at December 31, 2004. Given the low level of interest rates, the down 200 basis point scenario was not computed for 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 ..7 percent decrease at December 31, 2004, and a 1.3 percent increase at December 31, 2003. At December 31, 2004 and 2003, the Company was within its policy guidelines.
Use of Derivatives to Manage Interest Rate 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
Table 17 | Derivative Positions |
Asset and Liability Management Positions
Weighted- | |||||||||||||||||||||||||||||||||||||||
Maturing | Average | ||||||||||||||||||||||||||||||||||||||
Remaining | |||||||||||||||||||||||||||||||||||||||
December 31, 2004 | Fair | Maturity | |||||||||||||||||||||||||||||||||||||
(Dollars in Millions) | 2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | Total | Value | In Years | ||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||
Interest rate contracts
|
|||||||||||||||||||||||||||||||||||||||
Receive fixed/pay floating swaps
|
|||||||||||||||||||||||||||||||||||||||
Notional amount
|
$ | 2,750 | $ | 2,750 | $ | 3,520 | $ | 5,000 | $ | 1,750 | $ | 4,300 | $ | 20,070 | $ | 379 | 5.25 | ||||||||||||||||||||||
Weighted-average
|
|||||||||||||||||||||||||||||||||||||||
Receive rate
|
3.75 | % | 3.67 | % | 3.76 | % | 3.78 | % | 4.62 | % | 6.29 | % | 4.37 | % | |||||||||||||||||||||||||
Pay rate
|
2.28 | 2.36 | 2.39 | 2.31 | 2.39 | 2.74 | 2.42 | ||||||||||||||||||||||||||||||||
Pay fixed/receive floating swaps
|
|||||||||||||||||||||||||||||||||||||||
Notional amount
|
$ | 5,425 | $ | 2,950 | $ | 2,400 | $ | | $ | | $ | | $ | 10,775 | $ | 56 | 1.42 | ||||||||||||||||||||||
Weighted-average
|
|||||||||||||||||||||||||||||||||||||||
Receive rate
|
2.38 | % | 2.24 | % | 2.47 | % | | % | | % | | % | 2.36 | % | |||||||||||||||||||||||||
Pay rate
|
2.21 | 2.64 | 3.36 | | | | 2.58 | ||||||||||||||||||||||||||||||||
Futures and forwards
|
$ | 2,262 | $ | | $ | | $ | | $ | | $ | | $ | 2,262 | $ | (4 | ) | .12 | |||||||||||||||||||||
Options
|
|||||||||||||||||||||||||||||||||||||||
Written
|
1,039 | 20 | | | | | 1,059 | $ | 1 | .15 | |||||||||||||||||||||||||||||
Foreign exchange forward contracts
|
$ | 314 | $ | | $ | | $ | | $ | | $ | | $ | 314 | $ | (12 | ) | .04 | |||||||||||||||||||||
Equity contracts
|
$ | | $ | | $ | | $ | | $ | 53 | $ | | $ | 53 | $ | 4 | 4.29 | ||||||||||||||||||||||
Customer-related Positions
Weighted- | ||||||||||||||||||||||||||||||||||||||
Maturing | Average | |||||||||||||||||||||||||||||||||||||
Remaining | ||||||||||||||||||||||||||||||||||||||
December 31, 2004 | Fair | Maturity | ||||||||||||||||||||||||||||||||||||
(Dollars in Millions) | 2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | Total | Value | In Years | |||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||
Interest rate contracts
|
||||||||||||||||||||||||||||||||||||||
Receive fixed/pay floating swaps
|
||||||||||||||||||||||||||||||||||||||
Notional amount
|
$ | 671 | $ | 1,069 | $ | 1,018 | $ | 1,171 | $ | 613 | $ | 2,166 | $ | 6,708 | $ | 76 | 4.67 | |||||||||||||||||||||
Pay fixed/receive floating swaps
|
||||||||||||||||||||||||||||||||||||||
Notional amount
|
671 | 1,067 | 1,006 | 1,159 | 613 | 2,166 |