Annual Report — Form 10-K Filing Table of Contents
Document/ExhibitDescriptionPagesSize
1: 10-K Annual Report for Fiscal Year Ended December 31, HTML 129K
2007
2: EX-10.37 Employment Agreement With Pamela A. Joseph HTML 97K
3: EX-12 Statement Re: Computation of Ratio of Earnings to HTML 17K
Fixed Charges
4: EX-13 2007 Annual Report HTML 2.71M
5: EX-21 Subsidiaries of the Registrant HTML 7K
6: EX-23.1 Consent of Ernst & Young LLP HTML 14K
7: EX-31.1 Certification of Chief Executive Officer Pursuant HTML 13K
to Rule 13A-14(A)
8: EX-31.2 Certification of Chief Financial Officer Pursuant HTML 13K
to Rule 13A-14(A)
9: EX-32 Certification of Chief Executive Officer and Chief HTML 9K
Financial Officer Pursuant to Section
906
In 2007, U.S. Bancorp and its subsidiaries (the
“Company”) continued to demonstrate its financial
strength and shareholder focus, despite a particularly
challenging economic environment for the banking industry.
Throughout 2007, the mortgage lending and homebuilding
industries experienced stress resulting in higher delinquencies,
net charge-offs and nonperforming loans for the industry,
especially within the sub-prime mortgage sector. The financial
markets experienced significant turbulence during the second
half of 2007 as the impact of sub-prime mortgage delinquencies,
defaults and foreclosures adversely affected investor confidence
in a broad range of investment sectors and asset classes.
Despite these challenges, the Company’s prudent credit
culture, balance sheet strength and capital management enabled
it to manage through the turbulent market conditions. The
Company’s financial strength enabled it to remain focused
on organic growth and investing in business initiatives that
strengthen its presence and product offerings for customers.
This focus over the past several years has created a well
diversified business, generating strong fee-based revenues that
represented over 50 percent of total net revenue in 2007.
While net interest income declined in 2007 due to lower net
interest margins, average earning assets increased
4.5 percent year-over-year, despite a very competitive
credit environment in the first half of the year. By the end of
2007, the Company’s net interest margin was beginning to
stabilize and average earning assets grew by 11.1 percent,
on an annualized basis, in the fourth quarter, compared with the
third quarter of 2007. The Company’s performance was also
driven by the continued strong credit quality of the
Company’s loan portfolios, despite stress in the mortgage
lending and homebuilding industries and an anticipated increase
in consumer charge-offs, primarily related to credit cards. The
ratio of nonperforming assets to total loans and other real
estate was .45 percent at December 31, 2007, compared
with .41 percent at December 31, 2006. Total net
charge-offs were .54 percent of average loans outstanding
in 2007, compared with .39 percent in 2006. In 2008, credit
quality within the industry is expected to continue to
deteriorate. While the Company’s loan portfolios are not
immune to these economic factors and will deteriorate somewhat,
credit quality trends of the Company are expected to be
manageable through the foreseeable business cycle. Finally, the
Company’s efficiency ratio (the ratio of noninterest
expense to taxable-equivalent net revenue excluding net
securities gains or losses) was 49.3 percent in 2007,
compared with 45.4 percent in 2006, and continues to be an
industry leader. The Company’s ability to effectively
manage its cost structure has provided a strategic advantage in
this highly competitive environment. As a result of these
factors, the Company achieved a return on average common equity
of 21.3 percent in 2007.
The Company’s strong performance is also reflected in its
capital levels and the favorable credit ratings assigned by
various credit rating agencies. Equity capital of the Company
continued to be strong at 5.1 percent of tangible assets at
December 31, 2007, compared with 5.5 percent at
December 31, 2006. The Company’s regulatory
Tier 1 capital ratio was 8.3 percent at
December 31, 2007, compared with 8.8 percent at
December 31, 2006. In 2007, the Company’s credit
ratings were upgraded by Standard & Poor’s
Ratings Services. Credit ratings assigned by various credit
rating agencies reflect the rating agencies’ recognition of
the Company’s industry-leading earnings performance and
credit risk profile.
In concert with this financial performance, the Company achieved
its objective of returning at least 80 percent of earnings
to shareholders in the form of dividends and share repurchases
by returning 111 percent of 2007 earnings to shareholders.
In December 2007, the Company increased its cash dividend by
6.3 percent from the dividend rate of the fourth quarter of
2006. During 2007, the Company continued to repurchase common
shares under the share repurchase program announced in August
2006.
The Company’s financial and strategic objectives are
unchanged from those goals that have enabled it to deliver
industry-leading financial performance. While net income
declined in 2007 and is expected to grow somewhat moderately in
2008, the Company’s financial objectives are to achieve
10 percent long-term growth in earnings per common share
and a return on common equity of at least 20 percent. The
Company will continue to focus on effectively managing credit
quality and maintaining an acceptable level of credit and
earnings volatility. The Company intends to achieve these
financial objectives by providing high-quality customer service
and continuing to make strategic investments in businesses that
diversify and generate fee-based revenues, enhance the
Company’s distribution network or expand its product
offerings. Finally, the Company continues to target an
80 percent return of earnings to its shareholders through
dividends or share repurchases.
Earnings Summary
The Company reported net
income of $4.3 billion in 2007, or $2.43 per diluted common
share, compared with $4.8 billion, or $2.61 per diluted
common
18 U.S. BANCORP
share, in 2006. Return on average assets and return on average
common equity were 1.93 percent and 21.3 percent,
respectively, in 2007, compared with returns of
2.23 percent and 23.6 percent, respectively, in 2006.
The decline in the Company’s net income was driven by
several significant items discussed below and management’s
decision to further invest in payment services businesses,
geographical presence, technology, relationship management and
other customer service initiatives and product innovations.
Also, credit losses increased in 2007 due to loan portfolio
growth, somewhat higher levels of nonperforming assets from
stress in the mortgage lending and homebuilding industries and
deterioration in consumer credit quality experienced throughout
the banking industry.
Table
1 SELECTED
FINANCIAL DATA
Year Ended
December 31
(Dollars and Shares
in Millions, Except Per Share Data)
2007
2006
2005
2004
2003
Condensed Income Statement
Net interest income (taxable-equivalent basis) (a)
$
6,764
$
6,790
$
7,088
$
7,140
$
7,217
Noninterest income
7,157
6,832
6,151
5,624
5,068
Securities gains (losses), net
15
14
(106
)
(105
)
245
Total net revenue
13,936
13,636
13,133
12,659
12,530
Noninterest expense
6,862
6,180
5,863
5,785
5,597
Provision for credit losses
792
544
666
669
1,254
Income from continuing operations before taxes
6,282
6,912
6,604
6,205
5,679
Taxable-equivalent adjustment
75
49
33
29
28
Applicable income taxes
1,883
2,112
2,082
2,009
1,941
Income from continuing operations
4,324
4,751
4,489
4,167
3,710
Discontinued operations (after-tax)
–
–
–
–
23
Net income
$
4,324
$
4,751
$
4,489
$
4,167
$
3,733
Net income applicable to common equity
$
4,264
$
4,703
$
4,489
$
4,167
$
3,733
Per Common Share
Earnings per share from continuing operations
$
2.46
$
2.64
$
2.45
$
2.21
$
1.93
Diluted earnings per share from continuing operations
2.43
2.61
2.42
2.18
1.92
Earnings per share
2.46
2.64
2.45
2.21
1.94
Diluted earnings per share
2.43
2.61
2.42
2.18
1.93
Dividends declared per share
1.625
1.390
1.230
1.020
.855
Book value per share
11.60
11.44
11.07
10.52
10.01
Market value per share
31.74
36.19
29.89
31.32
29.78
Average common shares outstanding
1,735
1,778
1,831
1,887
1,924
Average diluted common shares outstanding
1,758
1,804
1,857
1,913
1,936
Financial Ratios
Return on average assets
1.93
%
2.23
%
2.21
%
2.17
%
1.99
%
Return on average common equity
21.3
23.6
22.5
21.4
19.2
Net interest margin (taxable-equivalent basis) (a)
3.47
3.65
3.97
4.25
4.49
Efficiency ratio (b)
49.3
45.4
44.3
45.3
45.6
Average Balances
Loans
$
147,348
$
140,601
$
131,610
$
120,670
$
116,937
Loans held for sale
4,298
3,663
3,290
3,079
5,041
Investment securities
41,313
39,961
42,103
43,009
37,248
Earning assets
194,683
186,231
178,425
168,123
160,808
Assets
223,621
213,512
203,198
191,593
187,630
Noninterest-bearing deposits
27,364
28,755
29,229
29,816
31,715
Deposits
121,075
120,589
121,001
116,222
116,553
Short-term borrowings
28,925
24,422
19,382
14,534
10,503
Long-term debt
44,560
40,357
36,141
35,115
33,663
Shareholders’ equity
20,997
20,710
19,953
19,459
19,393
Period End Balances
Loans
$
153,827
$
143,597
$
136,462
$
124,941
$
116,811
Allowance for credit losses
2,260
2,256
2,251
2,269
2,369
Investment securities
43,116
40,117
39,768
41,481
43,334
Assets
237,615
219,232
209,465
195,104
189,471
Deposits
131,445
124,882
124,709
120,741
119,052
Long-term debt
43,440
37,602
37,069
34,739
33,816
Shareholders’ equity
21,046
21,197
20,086
19,539
19,242
Regulatory capital ratios
Tier 1 capital
8.3
%
8.8
%
8.2
%
8.6
%
9.1
%
Total risk-based capital
12.2
12.6
12.5
13.1
13.6
Leverage
7.9
8.2
7.6
7.9
8.0
Tangible common equity
5.1
5.5
5.9
6.4
6.5
(a)
Presented
on a fully taxable-equivalent basis utilizing a tax rate of
35 percent.
(b)
Computed
as noninterest expense divided by the sum of net interest income
on a taxable-equivalent basis and noninterest income excluding
securities gains (losses), net.
U.S. BANCORP 19
Total net revenue, on a taxable-equivalent basis for 2007, was
$300 million (2.2 percent) higher than 2006, primarily
reflecting a 4.8 percent increase in noninterest income,
partially offset by a .4 percent decline in net interest
income from a year ago. Noninterest income growth was driven
primarily by organic growth in fee-based revenue of
8.6 percent, muted somewhat by $107 million of market
valuation losses related to securities purchased during 2007
from certain money market funds managed by an affiliate. Refer
to the “Market Risk Management” section for further
information on securities purchased from certain money market
funds managed by an affiliate. The fee-based revenue growth was
further offset by the net favorable impact in 2006 of
$142 million from several previously reported items,
including a $50 million gain related to certain
derivatives, $67 million of gains from the initial public
offering and subsequent sale of equity interests in a cardholder
association, a $52 million gain from the sale of a 401(k)
defined contribution recordkeeping business and a
$10 million gain related to a favorable settlement in the
merchant processing business, offset by a $37 million
reduction in mortgage banking revenue due principally to the
adoption of fair value accounting for mortgage servicing rights
(“MSRs”). The modest decline in net interest income
reflected growth in average earning assets, more than offset by
a lower net interest margin. In 2007, average earning assets
increased $8.5 billion (4.5 percent), compared with
2006, primarily due to growth in total average loans of
$6.7 billion (4.8 percent) and investment securities
of $1.4 billion (3.4 percent). The net interest margin
in 2007 was 3.47 percent, compared with 3.65 percent
in 2006. The year-over-year decline in net interest margin
reflected lower credit spreads given the competitive
environment, a flat yield curve during early 2007 and lower net
free funds relative to a year ago. In addition, funding costs
were higher as rates paid on interest-bearing deposits increased
and the funding mix continued to shift toward higher cost
deposits and wholesale funding sources. These adverse factors
impacting the net interest margin were offset somewhat by higher
loan fees.
Total noninterest expense in 2007 increased $682 million
(11.0 percent), compared with 2006, representing an
efficiency ratio of 49.3 percent in 2007, compared with
45.4 percent in 2006. The increase included
$330 million of charges recognized in 2007 for the
Company’s proportionate share of a contingent obligation to
indemnify Visa Inc. for certain litigation matters, including
the settlement between Visa U.S.A. Inc. and American Express
(collectively “Visa Charge”). For more information on
the Visa Charge, refer to Note 21 of the Notes to
Consolidated Financial Statements. Additionally, the increase in
noninterest expense was caused by specific management decisions
to make further investments in revenue-enhancing business
initiatives designed to expand the Company’s geographical
presence, strengthen corporate and commercial banking
relationship management, capitalize on current product
offerings, further improve technology and support innovation of
products and services for customers. Growth in expenses from a
year ago also included costs related to acquired payments
businesses, investments in affordable housing and other
tax-advantaged products, an increase in credit-related costs for
other real estate owned and collection activities, and an
increase in merchant airline processing expenses primarily due
to sales volumes and business expansion with a major airline.
The increase in these costs was partially offset by a
$33 million debt prepayment charge recorded in 2006.
The provision for credit losses was $792 million for 2007,
an increase of $248 million (45.6 percent) from 2006,
reflecting growth in credit card accounts, increasing retail
loan delinquencies and higher commercial and consumer credit
losses from a year ago. In addition, the provision for credit
losses in 2006 partially reflected the favorable residual impact
on net charge-offs, principally for credit cards and other
retail charge-offs, resulting from changes in bankruptcy laws
enacted in the fourth quarter of 2005.
STATEMENT OF INCOME
ANALYSIS
Net Interest
Income Net interest
income, on a taxable-equivalent basis, was $6.8 billion in
2007, $6.8 billion in 2006 and $7.1 billion in 2005.
Average earning assets were $194.7 billion for 2007,
compared with $186.2 billion and $178.4 billion for
2006 and 2005, respectively. The $8.5 billion
(4.5 percent) increase in average earning assets for 2007,
compared with 2006, was primarily driven by growth in total
average loans of $6.7 billion (4.8 percent) and
average investment securities of $1.4 billion
(3.4 percent). The positive impact on net interest income
from growth in earning assets was more than offset by a lower
net interest margin from a year ago. The net interest margin in
2007 was 3.47 percent, compared with 3.65 percent and
3.97 percent in 2006 and 2005, respectively. The
18 basis point decline in 2007 net interest margin,
compared with 2006, reflected the competitive business
environment in 2007, the impact of a flat yield curve during the
first half of the year and declining net free funds relative to
a year ago. Compared with 2006, credit spreads tightened by
approximately 6 basis points across most lending products
due to competitive loan pricing. The reduction in net free funds
was primarily due to a decline in non-interest bearing deposits,
an investment in bank-owned life insurance, share repurchases
through mid-third quarter 2007 and the impact of acquisitions.
In addition, funding costs were higher as rates paid on
interest-bearing deposits
20 U.S. BANCORP
Table
2 ANALYSIS
OF NET INTEREST INCOME
2007
2006
(Dollars in Millions)
2007
2006
2005
v 2006
v 2005
Components of Net Interest Income
Income on earning assets (taxable-equivalent basis) (a)
$
13,309
$
12,351
$
10,584
$
958
$
1,767
Expense on interest-bearing liabilities (taxable-equivalent
basis)
6,545
5,561
3,496
984
2,065
Net interest income (taxable-equivalent basis)
$
6,764
$
6,790
$
7,088
$
(26
)
$
(298
)
Net interest income, as reported
$
6,689
$
6,741
$
7,055
$
(52
)
$
(314
)
Average Yields and Rates Paid
Earning assets yield (taxable-equivalent basis)
6.84
%
6.63
%
5.93
%
.21
%
.70
%
Rate paid on interest-bearing liabilities (taxable-equivalent
basis)
3.91
3.55
2.37
.36
1.18
Gross interest margin (taxable-equivalent basis)
2.93
%
3.08
%
3.56
%
(.15
)%
(.48
)%
Net interest margin (taxable-equivalent basis)
3.47
%
3.65
%
3.97
%
(.18
)%
(.32
)%
Average Balances
Investment securities
$
41,313
$
39,961
$
42,103
$
1,352
$
(2,142
)
Loans
147,348
140,601
131,610
6,747
8,991
Earning assets
194,683
186,231
178,425
8,452
7,806
Interest-bearing liabilities
167,196
156,613
147,295
10,583
9,318
Net free funds (b)
27,487
29,618
31,130
(2,131
)
(1,512
)
(a)
Interest
and rates are presented on a fully taxable-equivalent basis
utilizing a federal 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.
increased and the funding mix continued to shift toward higher
cost deposits and other funding sources. An increase in loan
fees partially offset these factors. During the second half of
2007, the financial markets experienced significant turbulence
as the impact of sub-prime mortgage delinquencies, defaults and
foreclosures adversely affected investor confidence in a broad
range of investment sectors and asset classes. In response to
certain liquidity disruptions, the increasing risk of a credit
crunch and other economic factors, the Federal Reserve Bank
began to reduce interest rates beginning in September 2007, in
an effort to stimulate the economy and restore investor
confidence in the financial markets. Since that time, the target
Federal Fund rate declined 100 basis points through
year-end and another 125 basis points during January 2008.
If the Federal Reserve Bank leaves rates unchanged from the
current Federal Funds rate of 3.00 percent, the Company
would expect the net interest margin to remain relatively stable
at levels similar to 2007. This outlook is based on expectations
that credit spreads will improve slightly, higher yielding
retail loans will continue to grow, funding and liquidity in the
overnight financial markets will normalize and the Company will
resume its share repurchase program after the first quarter of
2008.
Average loans in 2007 were $6.7 billion (4.8 percent)
higher than 2006, driven by growth in retail loans, commercial
loans and residential mortgages of $3.5 billion
(7.7 percent), $2.4 billion (5.2 percent) and
$1.0 billion (4.9 percent), respectively, partially
offset by a modest decline in commercial real estate loans of
$.2 billion (.6 percent). The favorable change in
average retail loans included strong growth in credit card
balances of 25.4 percent as a result of growth in branch
originated, co-branded and financial institution partner
portfolios. Average installment loans, including automobile
loans, increased 11.2 percent from a year ago. Average home
equity loans increased at a more moderate growth rate of
5.1 percent, impacted somewhat by the changing trends in
residential home valuations, while retail leasing balances
declined approximately 8.4 percent from a year ago. The
increase in average commercial loans was principally due to
growth in corporate and industrial lending, equipment leasing
and corporate payments product offerings. The decline in average
commercial real estate balances reflected customer refinancing
activities in the capital markets during the first half of 2007,
a decision by the Company to reduce condominium construction
financing and the impact of a economic slowdown in residential
homebuilding since 2006.
Average investment securities were $1.4 billion
(3.4 percent) higher in 2007, compared with 2006. The
increase principally reflected higher balances in the municipal
securities portfolio and the purchase in the fourth quarter of
2007 of securities from certain money market funds managed by an
affiliate. This increase was partially offset by a reduction in
mortgage-backed assets due to prepayments. Refer to the
“Interest Rate Risk Management” section for further
information on the sensitivity of net interest income to changes
in interest rates.
Average noninterest-bearing deposits in 2007 were
$1.4 billion (4.8 percent) lower than 2006. The
year-over-
U.S. BANCORP 21
Table
3 NET
INTEREST INCOME — CHANGES DUE TO RATE AND VOLUME (a)
2007 v 2006
2006 v 2005
(Dollars in Millions)
Volume
Yield/Rate
Total
Volume
Yield/Rate
Total
Increase (decrease) in
Interest Income
Investment securities
$
70
$
106
$
176
$
(100
)
$
201
$
101
Loans held for sale
41
–
41
20
35
55
Loans
Commercial
155
19
174
164
304
468
Commercial real estate
(12
)
(13
)
(25
)
51
249
300
Residential mortgages
60
70
130
167
56
223
Retail
279
199
478
167
410
577
Total loans
482
275
757
549
1,019
1,568
Other earning assets
(22
)
6
(16
)
45
(2
)
43
Total earning assets
571
387
958
514
1,253
1,767
Interest Expense
Interest-bearing deposits
Interest checking
25
93
118
5
93
98
Money market savings
(28
)
110
82
(32
)
243
211
Savings accounts
(1
)
1
–
(1
)
5
4
Time certificates of deposit less than $100,000
34
86
120
17
118
135
Time deposits greater than $100,000
2
43
45
51
331
382
Total interest-bearing deposits
32
333
365
40
790
830
Short-term borrowings
229
60
289
179
373
552
Long-term debt
201
129
330
145
538
683
Total interest-bearing liabilities
462
522
984
364
1,701
2,065
Increase (decrease) in net interest income
$
109
$
(135
)
$
(26
)
$
150
$
(448
)
$
(298
)
(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.
year decrease reflected a decline in personal and business
demand deposits, partially offset by higher trust deposits. The
decline in personal demand deposit balances occurred within the
Consumer Banking business line. The decline in business demand
deposits occurred within most business lines as business
customers utilized deposit balances to fund business growth and
meet other liquidity requirements.
Average total savings products increased $.9 billion
(1.7 percent) in 2007, compared with 2006, as increases in
interest checking balances more than offset declines in money
market and savings balances, primarily within Consumer Banking.
Interest checking balances increased $2.6 billion
(10.9 percent) in 2007, compared with 2006, due to higher
broker-dealer, government and institutional trust balances.
Average money market savings balances declined year-over-year by
$1.3 billion (5.0 percent) as a result of the
Company’s deposit pricing decisions for money market
products in relation to other fixed-rate deposit products.
During 2007, a portion of branch-based money market savings
accounts migrated to fixed-rate time certificates, as customers
took advantage of higher interest rates for these products.
Average time certificates of deposit less than $100,000 were
$.9 billion (6.5 percent) higher in 2007, compared
with 2006. The year-over-year growth in time certificates less
than $100,000 was primarily due to branch-based time deposits,
reflecting customer migration to higher rate deposit products
and pricing decisions for these products. Average time deposits
greater than $100,000 were basically unchanged in 2007, compared
with 2006. Time deposits greater than $100,000 are largely
viewed as purchased funds and are managed at levels deemed
appropriate, given alternative funding sources.
The decline in net interest income in 2006, compared with 2005,
reflected growth in average earning assets, more than offset by
a lower net interest margin. The $7.8 billion
(4.4 percent) increase in average earning assets for 2006,
compared with 2005, was primarily driven by growth in average
loans, partially offset by a decrease in average investment
securities. The 32 basis point decline in net interest
margin in 2006, compared with 2005, reflected the competitive
lending environment and the impact of a flatter yield curve. The
net interest margin also declined due to funding incremental
asset growth with higher cost wholesale funding, share
repurchases and asset/liability decisions. An
22 U.S. BANCORP
increase in the margin benefit of net free funds and loan fees
partially offset these factors.
Average loans in 2006 were higher by $9.0 billion
(6.8 percent), compared with 2005, driven by growth in
residential mortgages, commercial loans and retail loans.
Average investment securities were $2.1 billion
(5.1 percent) lower in 2006, compared with 2005,
principally reflecting asset/liability management decisions to
reduce the focus on residential mortgage-backed assets given the
rising interest rate environment in 2006 and the mix of loan
growth experienced by the Company. Average noninterest-bearing
deposits in 2006 were $.5 billion (1.6 percent) lower
than in 2005. The year-over-year decrease reflected a decline in
personal and business demand deposits, partially offset by
higher corporate trust deposits resulting from acquisitions.
Average total savings products declined $2.1 billion
(3.6 percent) in 2006, compared with 2005, due to
reductions in average money market savings and other savings
accounts, partially offset by an increase in interest checking
balances. Average money market savings account balances declined
from 2005 to 2006 by $2.6 billion (9.0 percent),
primarily due to a decline in branch-based balances. The decline
was primarily the result of the Company’s deposit pricing
decisions for money market products in relation to other
fixed-rate deposit products offered. During 2006, a portion of
branch-based money market savings balances migrated to
fixed-rate time certificates to take advantage of higher
interest rates for these products. Average time certificates of
deposit less than $100,000 and average time deposits greater
than $100,000 grew $.6 billion (4.3 percent) and
$1.6 billion (7.7 percent), respectively, in 2006
compared with 2005, primarily driven by the migration of money
market balances within the Consumer Banking and Wealth
Management & Securities Services business lines, as
customers migrated balances to higher rate deposits.
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.
In 2007, the provision for credit losses was $792 million,
compared with $544 million and $666 million in 2006
and 2005, respectively. The $248 million
(45.6 percent) increase in the provision for credit losses
in 2007 reflected growth in credit card accounts, increasing
loan delinquencies and nonperforming loans, and higher
commercial and consumer credit losses from a year ago. In
addition, the provision for 2006 partially reflected the
favorable residual impact on net charge-offs, principally for
credit cards and other retail charge-offs, resulting from
changes in bankruptcy laws enacted in the fourth quarter of
2005. Nonperforming loans increased $87 million
(18.5 percent) from December 31, 2006, as a result of
stress in condominium and other residential home construction.
Accruing loans ninety days past due increased $235 million
(67.3 percent), primarily related to residential mortgages,
credit cards and home equity loans. Restructured loans that
continue to accrue interest increased $127 million
(31.3 percent), reflecting the impact of programs for
certain credit card and sub-prime residential mortgage customers
in light of current economic conditions. Net charge-offs
increased $248 million (45.6 percent) from 2006,
primarily due to an anticipated increase in consumer charge-offs
principally related to growth in credit card balances, and
somewhat higher commercial loan net charge-offs. In addition,
net charge-offs were lower during 2006, reflecting the
beneficial impact of bankruptcy legislation that went into
effect during the fourth quarter of 2005.
The $122 million (18.3 percent) decrease in the
provision for credit losses in 2006, compared with 2005,
reflected stable credit quality in 2006 and the adverse impact
in the fourth quarter of 2005 on net charge-offs from changes in
bankruptcy laws enacted in 2005. Nonperforming loans,
principally reflecting favorable changes in the quality of
commercial loans, declined $74 million from
December 31, 2005. However, accruing loans ninety days past
due and restructured loans that continue to accrue interest
increased by $186 million over this same period. Net
charge-offs declined $141 million from 2005, principally
due to the impact of changes in bankruptcy laws that went into
effect during the fourth quarter of 2005. In 2005, approximately
$64 million of incremental net charge-offs occurred due to
the change in bankruptcy laws and a separate policy change
related to overdraft balances. As a result of these changes,
bankruptcy charge-offs were lower in 2006, while customers
experiencing credit deterioration migrated further through
contractual delinquencies. Refer to “Corporate Risk
Profile” for further information on the provision for
credit losses, net charge-offs, nonperforming assets and other
factors considered by the Company in assessing the credit
quality of the loan portfolio and establishing the allowance for
credit losses.
Noninterest
Income
Noninterest income in 2007
was $7.2 billion, compared with $6.8 billion in 2006
and $6.0 billion in 2005. The $326 million
(4.8 percent) increase in 2007 over 2006, was driven by
strong organic fee-based revenue growth (8.6 percent) in
most fee categories, offset somewhat by the $107 million in
valuation losses related to securities purchased from certain
money market funds managed by an affiliate. Additionally, 2006
included several significant items representing approximately
$142 million of incremental revenue, including: higher
trading income related to gains from the termination of certain
interest rate swaps, equity gains from the initial public
offering and
U.S. BANCORP 23
Table
4 NONINTEREST
INCOME
2007
2006
(Dollars in Millions)
2007
2006
2005
v 2006
v 2005
Credit and debit card revenue
$
949
$
800
$
713
18.6
%
12.2
%
Corporate payment products revenue
631
557
488
13.3
14.1
ATM processing services
245
243
229
.8
6.1
Merchant processing services
1,101
963
770
14.3
25.1
Trust and investment management fees
1,339
1,235
1,009
8.4
22.4
Deposit service charges
1,058
1,023
928
3.4
10.2
Treasury management fees
472
441
437
7.0
.9
Commercial products revenue
433
415
400
4.3
3.8
Mortgage banking revenue
259
192
432
34.9
(55.6
)
Investment products fees and commissions
146
150
152
(2.7
)
(1.3
)
Securities gains (losses), net
15
14
(106
)
7.1
*
Other
524
813
593
(35.5
)
37.1
Total noninterest income
$
7,172
$
6,846
$
6,045
4.8
%
13.3
%
*
Not
meaningful
subsequent sale of the equity interests in a cardholder
association, a gain on the sale of a 401(k) defined contribution
recordkeeping business, and a favorable settlement in the
merchant processing business, offset by lower mortgage banking
revenue due to adopting fair value accounting standards for MSRs.
The growth in credit and debit card revenue of 18.6 percent
was primarily driven by an increase in customer accounts and
higher customer transaction volumes from a year ago. The
increase coincides with the strong organic growth in credit card
balances during the year. The corporate payment products revenue
growth of 13.3 percent reflected growth in customer sales
volumes and card usage, and the impact of an acquired business.
Merchant processing services revenue was 14.3 percent
higher in 2007, compared with 2006, reflecting an increase in
customers and sales volumes on both a domestic and global basis.
Trust and investment management fees increased 8.4 percent
primarily due to core account growth and favorable equity market
conditions during the year. Deposit service charges were
3.4 percent higher year-over-year due primarily to
increased transaction-related fees and the impact of continued
growth in net new checking accounts. This growth in deposit
account-related revenue was muted somewhat as service charges,
traditionally reflected in this fee category, continued to
migrate to yield-related loan fees as customers utilized new
consumer products. Treasury management fees increased
7.0 percent over the prior year due, in part, to new
customer account growth, new product offerings and higher
transaction volumes. Commercial products revenue increased
4.3 percent over the prior year due to higher syndication
fees, and foreign exchange and commercial leasing revenue.
Mortgage banking revenue increased 34.9 percent in 2007,
compared with 2006, due to an increase in mortgage originations
and servicing income, partially offset by an adverse net change
in the valuation of MSRs and related economic hedging activities
given changing interest rates. In 2006, mortgage banking revenue
included a valuation loss of $37 million related to the
adoption of fair value accounting for MSRs.
Growth in these fee-based revenue categories was partially
offset by slightly lower investment products fees and
commissions and a decline in other income. The 35.5 percent
reduction of other revenue in 2007, compared with 2006, included
$107 million in valuation losses recognized in 2007,
related to securities purchased from certain money market funds
managed by an affiliate. In addition, 2006 results reflected a
$52 million gain on the sale of a 401(k) defined
contribution recordkeeping business, $67 million of gains
on the initial public offering and subsequent sale of the equity
interests in a cardholder association, a $10 million
favorable legal settlement within the merchant processing
business and a $50 million trading gain related to
terminating certain interest rate swaps.
The $801 million (13.3 percent) increase in 2006 over
2005, was driven by organic business growth in several fee
categories, expansion in trust and payment processing
businesses, a favorable change of $120 million in net
securities gains (losses) and other gains recorded in 2006 of
$179 million. These included the gains from terminated
interest rate swaps, equity gains from the initial public
offering and subsequent sale of the equity interests in a
cardholder association, gains from the sale of a 401(k) defined
contribution recordkeeping business and a favorable legal
settlement in the merchant processing business. The growth in
credit and debit card revenue was principally driven by higher
customer transaction sales volumes and fees related to cash
advances, balance transfers and over-limit positions. The
corporate payment products revenue growth reflected organic
growth in sales volumes and card usage, enhancements in product
pricing and acquired business expansion. ATM processing services
revenue was higher due
24 U.S. BANCORP
to an ATM business acquisition in May 2005. Merchant processing
services revenue reflected an increase in sales volume driven by
acquisitions, higher same store sales, new merchant signings and
associated equipment fees. The increase in trust and investment
management fees was primarily due to organic customer account
growth, improving asset management fees given favorable equity
market conditions, and incremental revenue generated by
acquisitions of corporate and institutional trust businesses.
Deposit service charges grew due to increased
transaction-related fees and the impact of net new checking
accounts. Mortgage banking revenue declined primarily due to the
adoption of fair value accounting for MSRs. Other income
increased primarily due to the notable asset gains previously
discussed.
Noninterest
Expense Noninterest
expense in 2007 was $6.9 billion, compared with
$6.2 billion and $5.9 billion in 2006 and 2005,
respectively. The Company’s efficiency ratio increased to
49.3 percent in 2007 from 45.4 percent in 2006. The
change in the efficiency ratio and the $682 million
(11.0 percent) increase in noninterest expenses in 2007,
compared with 2006, was principally due to a $330 million
Visa Charge recognized in 2007 for the contingent obligation for
certain Visa U.S.A. Inc. litigation matters. The remaining
expense increase was principally related to higher credit costs,
incremental growth in tax-advantaged projects or specific
management investment in revenue-enhancing business initiatives
designed to expand the Company’s geographical presence,
strengthen corporate and commercial banking relationship
management, capitalize on current product offerings, further
improve technology and support innovation of products and
services for customers. The impact of these factors was
reflected in various expense categories.
Compensation expense was 5.1 percent higher year-over-year
primarily due to investment in personnel within the branch
distribution network, Wholesale Banking and Payment Services in
connection with various business initiatives, including the
Company’s PowerBank initiative with Consumer Banking,
expanding its corporate banking team, enhancing relationship
management processes and supporting organic business growth and
acquired businesses. Employee benefits expense increased
2.7 percent year-over-year as higher medical costs were
partially offset by lower pension costs. Net occupancy and
equipment expense increased 3.9 percent primarily due to
bank acquisitions and investments in branches. Professional
services expense was 17.1 percent higher due to revenue
enhancing business initiatives, higher litigation-related costs,
and higher legal fees associated with the establishment of a
bank charter in Ireland to support pan-European payment
processing. Marketing and business development expense increased
11.5 percent over the prior year due to higher customer
promotion, solicitation and advertising activities. Postage,
printing and supplies increased 6.8 percent due to
increasing customer promotional mailings and changes in postal
rates from a year ago. Other intangibles expense increased
5.9 percent year-over-year due to recent acquisitions in
Consumer Banking, Wealth Management & Securities
Services and Payment Services. Other expense increased
$444 million (46.6 percent) over the prior year
primarily due to the $330 million Visa Charge, higher costs
related to affordable housing and other tax-advantaged
investments, an increase in merchant processing expenses to
support organic growth in Payment Services, integration expenses
related to recent acquisitions and higher credit-related costs
for other real estate owned and loan collection activities.
These increases were partially offset by $33 million of
debt prepayment charges recorded during 2006.
The $317 million (5.4 percent) increase in noninterest
expenses in 2006, compared with 2005, was primarily driven by
incremental operating and business integration costs associated
with acquisitions, increased pension costs and higher expense
related to certain tax-advantaged
Table
5 NONINTEREST
EXPENSE
2007
2006
(Dollars in Millions)
2007
2006
2005
v 2006
v 2005
Compensation
$
2,640
$
2,513
$
2,383
5.1
%
5.5
%
Employee benefits
494
481
431
2.7
11.6
Net occupancy and equipment
686
660
641
3.9
3.0
Professional services
233
199
166
17.1
19.9
Marketing and business development
242
217
235
11.5
(7.7
)
Technology and communications
512
505
466
1.4
8.4
Postage, printing and supplies
283
265
255
6.8
3.9
Other intangibles
376
355
458
5.9
(22.5
)
Debt prepayment
–
33
54
*
(38.9
)
Other (a)
1,396
952
774
46.6
23.0
Total noninterest expense
$
6,862
$
6,180
$
5,863
11.0
%
5.4
%
Efficiency ratio (b)
49.3
%
45.4
%
44.3
%
(a)
Included
in other expense in 2007 was a $330 million charge related
to the Company’s contingent obligation to Visa U.S.A. Inc
for indemnification of certain litigation matters.
(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.
*
Not
meaningful
U.S. BANCORP 25
investments. This was partially offset by a reduction in other
intangibles expense and lower debt prepayment charges in 2006.
Compensation expense was higher primarily due to corporate and
institutional trust and payments processing acquisitions and
other growth initiatives undertaken by the Company. Employee
benefits increased primarily as a result of higher pension
expense. Net occupancy and equipment expense increased primarily
due to business expansion. Professional services expense was
higher primarily due to revenue enhancement-related business
initiatives and higher legal costs. Technology and
communications expense rose, reflecting higher outside data
processing expense principally associated with expanding a
prepaid gift card program and acquisitions. Other intangibles
expense decreased in connection with the adoption of fair value
accounting for MSRs in 2006, and the impact of eliminating the
amortization and related impairments or reparations of these
servicing rights. Debt prepayment charges declined from 2005 and
were related to longer-term callable debt that was prepaid by
the Company as part of asset/liability decisions to improve
funding costs and reposition the Company’s interest rate
risk position. Other expense increased primarily due to
increased investments in tax-advantaged projects and business
integration costs.
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. Refer to Note 16
of the Notes to Consolidated Financial Statements for further
information on funding practices, investment policies and asset
allocation strategies.
The Company’s pension accounting policy follows generally
accepted accounting standards and reflects the long-term nature
of benefit obligations and the investment horizon of plan
assets. Actuarial gains and losses include the impact of plan
amendments and various unrecognized gains and losses related to
differences in actual plan experience compared with actuarial
assumptions, which are deferred and amortized over the future
service periods of active employees. The actuarially derived
market-related value utilized to determine the expected return
on plan assets is based on fair value, adjusted for the
difference between expected returns and actual performance of
plan assets. The unrealized difference between actual experience
and expected returns is included in the actuarially derived
market-related value and amortized as a component of pension
expense ratably over a five-year period. At September 30,2007, this accumulated unrecognized gain approximated
$358 million, compared with $249 million at
September 30, 2006. The impact on pension expense of the
unrecognized asset gains will incrementally decrease pension
costs in each year from 2008 to 2012, by approximately
$38 million, $29 million, $24 million,
$15 million and $12 million, respectively. This
assumes that the performance of plan assets in 2008 and beyond
equals the assumed long-term rate of return (“LTROR”).
Actual results will vary depending on the performance of plan
assets and changes to assumptions required in the future. Refer
to Note 1 of the Notes to Consolidated Financial Statements
for further discussion of the Company’s accounting policies
for pension plans.
In 2008, the Company anticipates that pension costs will
decrease by approximately $36 million. The decrease will be
primarily driven by utilizing a higher discount rate and
amortization of unrecognized actuarial gains from prior years,
accounting for approximately $14 million and
$37 million of the anticipated decrease, respectively,
partially offset by a $15 million increase related to a
change in the assumption of future salary growth.
Due to the complexity of forecasting pension plan activities,
the accounting method utilized for pension plans,
management’s ability to respond to factors impacting the
plans and the hypothetical nature of this information, the
actual changes in periodic pension costs could be different than
the information provided in the sensitivity analysis below.
Note 16 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 (Dollars
in Millions)
7.9%
8.9%
9.9%
Incremental benefit (cost)
$
(25
)
$
–
$
25
Percent of 2007 net income
(.36
)%
–
%
.36
%
Base
Discount
Rate (Dollars
in Millions)
5.3%
6.3%
7.3%
Incremental benefit (cost)
$
(56
)
$
–
$
42
Percent of 2007 net income
(.80
)%
–
%
.60
%
Income Tax
Expense The provision
for income taxes was $1,883 million (an effective rate of
30.3 percent) in 2007, compared with $2,112 million
(an effective rate of 30.8 percent) in 2006 and
$2,082 million (an effective rate of 31.7 percent) in
2005. The decrease in the effective tax rate from 2006 primarily
reflected higher tax exempt income from investment securities
and insurance products as well as incremental tax credits from
affordable housing and other tax-advantaged investments.
Included in 2006 was a reduction of income tax expense of
$61 million related to the resolution of federal income tax
examinations covering substantially all of the Company’s
legal entities for all years through 2004 and $22 million
related to certain state examinations. Included in the
determination of income taxes for 2005 was a reduction
26 U.S. BANCORP
of income tax expense of $94 million related to the
resolution of income tax examinations. The Company anticipates
that its effective tax rate for the foreseeable future will
remain stable relative to the full year rate for 2007 of
30.3 percent of pretax earnings.
For further information on income taxes, refer to Note 18
of the Notes to Consolidated Financial Statements.
BALANCE SHEET
ANALYSIS
Average earning assets were $194.7 billion in 2007,
compared with $186.2 billion in 2006. The increase in
average earning assets of $8.5 billion (4.5 percent)
was due to growth in total average loans (4.8 percent),
investment securities (3.4 percent) and loans held-for-sale
(17.3 percent), partially offset by slightly lower trading
and other earning assets. The change in total average earning
assets was principally funded by increases in wholesale funding.
For average balance information, refer to Consolidated Daily
Average Balance Sheet and Related Yields and Rates on
pages 112 and 113.
Loans
The Company’s loan
portfolio was $153.8 billion at December 31, 2007, an
increase of $10.2 billion (7.1 percent) from
December 31, 2006. The increase was driven by growth in all
major loan categories with strong growth in commercial loans
(10.6 percent), retail loans (6.9 percent), and
residential mortgages (7.0 percent) and more moderate
growth in commercial real estate loans (2.0 percent). Table
6 provides a summary of the loan distribution by product type,
while Table 7 provides a summary of selected loan maturity
distribution by loan category. Average total loans increased
$6.7 billion (4.8 percent) in 2007, compared with
2006. The increase was due to strong growth in retail loans and
moderate growth in commercial loans and residential mortgages,
while average commercial real estate loans were essentially
unchanged from a year ago.
Commercial
Commercial loans,
including lease financing, increased $4.9 billion
(10.6 percent) as of December 31, 2007, compared with
December 31, 2006. During 2007, the Company made certain
personnel investments and organizational changes to better
emphasize corporate banking, with an enhanced focus on
relationship banking. As a result of these business initiatives
and changing economic conditions, the Company experienced growth
in commercial loans driven by new customer relationships,
utilization of lines of credit and growth in commercial leasing
and corporate payment card balances. Average commercial loans
increased $2.4 billion (5.2 percent) in 2007, compared
with 2006, primarily due to these initiatives and an increase in
commercial loan demand driven by general economic conditions in
2007.
Table 8 provides a summary of commercial loans by industry
and geographical locations.
Commercial Real
Estate The
Company’s portfolio of commercial real estate loans, which
includes commercial mortgages and construction loans, was
essentially unchanged from a year ago. Total commercial real
estate balances increased $.6 billion (2.0 percent) at
December 31, 2007, compared with December 31, 2006.
Average commercial real estate loans decreased $.2 billion
(.6 percent) in 2007, compared with 2006. Since 2006,
growth in commercial real estate balances has been limited due
to capital market
Table
8 COMMERCIAL
LOANS BY INDUSTRY GROUP AND GEOGRAPHY
conditions in early 2007 that enabled customer refinancing of
projects, a management decision to reduce condominium
construction financing in selected markets, and a slowdown in
residential homebuilding impacting construction lending. During
the fourth quarter of 2007, the Company experienced growth of
2.4 percent in commercial real estate loans as developers
sought bank financing as liquidity disruptions in the capital
markets occurred. Table 9 provides a summary of commercial
real estate by property type and geographical locations.
The Company maintains the real estate construction designation
until the completion of the construction phase and, if retained,
the loan is reclassified to the commercial mortgage category.
Approximately $107 million of construction loans were
permanently financed and reclassified to the commercial mortgage
loan category in 2007. At December 31, 2007,
$231 million of tax-exempt industrial development loans
were secured by real estate. The Company’s commercial real
estate mortgages and construction loans had unfunded commitments
of $8.9 billion at December 31, 2007 and 2006. The
Company also finances the operations of real estate developers
and other entities with operations related to real estate. These
loans are not secured directly by real estate and are subject to
terms and conditions similar to commercial loans. These loans
were included in the commercial loan category and totaled
$1.8 billion at December 31, 2007.
Residential
Mortgages Residential
mortgages held in the loan portfolio at December 31, 2007,
increased $1.5 billion (7.0 percent) from
December 31, 2006. The growth was principally the result of
an increase in consumer finance originations during the year.
The majority of loans retained in the portfolio represented
originations to customers with better than sub-prime credit risk
ratings. Average residential mortgages increased
1.0 billion (4.9 percent) in 2007, compared with 2006.
The growth in average residential mortgages from the consumer
finance distribution channel was offset somewhat by lower
balances from traditional branch and mortgage banking channels.
Retail
Total retail loans
outstanding, which include credit card, retail leasing, home
equity and second mortgages and other retail loans, increased
$3.3 billion (6.9 percent) at December 31, 2007,
compared with December 31, 2006.
U.S. BANCORP 29
Table
10 RESIDENTIAL
MORTGAGES AND RETAIL LOANS BY GEOGRAPHY
The increase was primarily driven by growth in credit card,
installment and home equity loans, partially offset by decreases
in retail leasing and student loan balances. Average retail
loans increased $3.5 billion (7.7 percent) in 2007,
principally reflecting growth in credit card and installment
loans. Strong growth in credit cards occurred in branch
originated, co-branded and financial institution partner
portfolios.
Of the total retail loans and residential mortgages outstanding,
approximately 80.0 percent were to customers located in the
Company’s primary banking region. Table 10 provides a
geographic summary of residential mortgages and retail loans
outstanding as of December 31, 2007 and 2006.
Loans Held for
Sale Loans held for
sale, consisting primarily of residential mortgages and student
loans to be sold in the secondary market, were $4.8 billion
at December 31, 2007, compared with $3.3 billion at
December 31, 2006. The increase in loans held for sale was
principally due to an increase in residential mortgage loan
balances. Average loans held for sale were $4.3 billion in
2007, compared with $3.7 billion in 2006. During 2007,
certain companies in the mortgage banking industry experienced
significant disruption due to their inability to access
financing through the capital markets as investor concerns
increased related to the quality of sub-prime loan originations
and related securitizations. The Company’s primary focus of
originating conventional mortgages packaged through government
agencies enabled it to avoid these issues impacting other
mortgage banking firms. Given these market conditions and the
nature of the Company’s mortgage banking business,
residential mortgage originations increased in 2007 by
21.2 percent as customers sought more reliable financing
alternatives.
Investment
Securities The Company
uses its investment securities portfolio for several purposes.
It serves as a vehicle to manage interest rate risk, generates
interest and dividend income from the investment of excess funds
depending on
30 U.S. BANCORP
loan demand, provides liquidity and is used as collateral for
public deposits and wholesale funding sources. While it is the
Company’s intent to hold its investment securities
indefinitely, the Company may take actions in response to
structural changes in the balance sheet and related interest
rate risk and to meet liquidity requirements, among other
factors.
At December 31, 2007, investment securities, both
available-for-sale and held-to-maturity, totaled
$43.1 billion, compared with $40.1 billion at
December 31, 2006. The $3.0 billion (7.5 percent)
increase reflected securities purchases of $9.7 billion
partially offset by securities sales, maturities and
prepayments. Included in purchases during 2007, were
approximately $3.0 billion of securities from certain money
market funds managed by an affiliate of the Company. These
securities primarily represent beneficial interests in
structured investment vehicles or similar
Obligations of State and Political Subdivisions (b)
Maturing in one year or less
$
42
$
42
.3
6.83
%
$
4
$
4
.5
5.77
%
Maturing after one year through five years
25
26
3.2
6.31
9
10
2.7
6.29
Maturing after five years through ten years
5,603
5,565
8.3
6.86
16
18
7.8
6.90
Maturing after ten years
1,461
1,422
20.4
6.49
27
28
15.8
5.45
Total
$
7,131
$
7,055
10.7
6.78
%
$
56
$
60
10.2
6.03
%
Other Debt Securities
Maturing in one year or less
$
127
$
127
.1
3.80
%
$
4
$
4
.5
4.88
%
Maturing after one year through five years
46
37
3.9
6.27
8
8
2.4
5.43
Maturing after five years through ten years
100
90
9.2
6.32
–
–
–
–
Maturing after ten years
1,567
1,349
34.2
6.37
–
–
–
–
Total
$
1,840
$
1,603
29.8
6.19
%
$
12
$
12
1.8
5.26
%
Other Investments
$
506
$
448
–
7.16
%
$
–
$
–
–
–
%
Total investment securities (c)
$
44,106
$
43,042
7.4
5.51
%
$
74
$
78
8.3
5.92
%
(a)
Information
related to asset and mortgage-backed securities included above
is presented based upon weighted-average maturities anticipating
future prepayments.
(b)
Information
related to obligations of state and political subdivisions is
presented based upon yield to first optional call date if the
security is purchased at a premium, yield to maturity if
purchased at par or a discount.
(c)
The
weighted-average maturity of the available-for-sale investment
securities was 6.6 years at December 31, 2006, with a
corresponding weighted-average yield of 5.32 percent. The
weighted-average maturity of the held-to-maturity investment
securities was 8.4 years at December 31, 2006, with a
corresponding weighted-average yield of
6.03 percent.
(d)
Average
yields are presented on a fully-taxable equivalent basis under a
tax rate of 35 percent. 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.
(e)
Primarily
includes investments in structured investment vehicles with
underlying collateral that includes a mix of various mortgage
and other asset-backed securities.
2007
2006
Amortized
Percent
Amortized
Percent
December 31
(Dollars in Millions)
Cost
of Total
Cost
of Total
U.S. Treasury and agencies
$
407
.9
%
$
472
1.2
%
Mortgage-backed securities
31,306
70.9
34,472
84.7
Asset-backed securities
2,922
6.6
7
–
Obligations of state and political subdivisions
7,187
16.3
4,530
11.1
Other debt securities and investments
2,358
5.3
1,236
3.0
Total investment securities
$
44,180
100.0
%
$
40,717
100.0
%
U.S. BANCORP 31
structures and are classified as asset-backed securities within
the consolidated financial statements.
At December 31, 2007, approximately 39 percent of the
investment securities portfolio represented adjustable-rate
financial instruments, compared with 37 percent at
December 31, 2006. Adjustable-rate financial instruments
include variable-rate collateralized mortgage obligations,
mortgage-backed securities, agency securities, adjustable-rate
money market accounts, asset-backed securities, corporate debt
securities and floating-rate preferred stock. Average investment
securities were $1.4 billion (3.4 percent) higher in
2007, compared with 2006, driven primarily by an increase in the
municipal securities portfolio, partially offset by a reduction
in mortgage-backed assets. The weighted-average yield of the
available-for-sale portfolio was 5.51 percent at
December 31, 2007, compared with 5.32 percent at
December 31, 2006. The average maturity of the
available-for-sale portfolio increased to 7.4 years at
December 31, 2007, up from 6.6 years at
December 31, 2006. The relative mix of the type of
investment securities maintained in the portfolio is provided in
Table 11.
The Company conducts a regular assessment of its investment
portfolios to determine whether any securities are
other-than-temporarily impaired considering, among other
factors, the nature of the investments, credit ratings or
financial condition of the issuer, the extent and duration of
the unrealized loss, expected cash flows of underlying
collateral, market conditions and the Company’s ability to
hold the securities through the anticipated recovery period.
At December 31, 2007, the available-for-sale securities
portfolio included a $1.1 billion net unrealized loss,
compared with a net unrealized loss of $600 million at
December 31, 2006. The substantial portion of securities
with unrealized losses were either government securities, issued
by government-backed agencies or privately issued securities
with high investment grade credit ratings and limited, if any,
credit exposure. Some securities classified within obligations
of state and political subdivisions are supported by mono-line
insurers that have recently experienced credit rating
downgrades. Based on management’s evaluation, the impact of
these changes is expected to be minimal to the Company. The
majority of asset-backed securities at December 31, 2007,
represented structured investments. The valuation of these
securities is determined through estimates of expected cash
flows, discount rates and management’s assessment of
various
market factors, which are judgmental in nature. Based on
management’s review as of the reporting date, the Company
expected to receive all principal and interest related to
securities within its investment portfolios.
During January 2008, actions by the Federal Reserve Bank and a
related rally in the fixed income markets caused the fair value
of a substantial portion of investment securities to recover
somewhat from their unrealized loss position. However, credit
spreads for certain structured investment securities widened
during the month causing their values to decline. Given the
nature of these structured investments, the Company is likely to
recognize further impairment of these investments during the
next few quarters.
Deposits
Total deposits were
$131.4 billion at December 31, 2007, compared with
$124.9 billion at December 31, 2006. The
$6.5 billion (5.3 percent) increase in total deposits
was primarily the result of increases in interest checking, time
deposits and noninterest-bearing deposits, partially offset by a
decrease in money market savings accounts. Average total
deposits increased $.5 billion (.4 percent) from 2006,
reflecting an increase in average interest checking and personal
certificates of deposit, partially offset by a decrease in
average noninterest-bearing deposits and money market savings
accounts.
Noninterest-bearing deposits at December 31, 2007,
increased $1.2 billion (3.8 percent) from
December 31, 2006. The increase was primarily attributed to
an increase in corporate trust deposits, partially offset by a
decline in consumer and business demand deposits as these
customers utilized deposit balances to fund business growth and
meet other liquidity requirements. Average noninterest-bearing
deposits in 2007 decreased $1.4 billion (4.8 percent),
compared with 2006, due primarily to a decline in business
demand deposits.
Interest-bearing savings deposits increased $1.8 billion
(3.2 percent) at December 31, 2007, compared with
December 31, 2006. The increase in these deposit balances
was primarily related to higher interest checking account
balances, partially offset by a reduction in money market
savings balances. The $4.1 billion (16.2 percent)
increase in interest checking account balances was due to higher
broker-dealer, government and institutional trust balances. The
$1.9 billion (7.3 percent) decrease in money market
savings account balances reflected the Company’s deposit
pricing decisions for money market products in relation to
fixed-rate time deposit products and business customer decisions
to utilize deposit liquidity to fund business requirements.
Average interest-bearing savings deposits in 2007 increased
$.9 billion (1.7 percent), compared with 2006,
primarily driven by higher interest checking account balances of
$2.6 billion (10.9 percent), partially offset by a
reduction in money market savings account balances of
$1.3 billion (5.0 percent).
Interest-bearing time deposits at December 31, 2007,
increased $3.5 billion (9.7 percent), compared with
December 31, 2006, primarily driven by an increase in time
deposits greater than $100,000. Time deposits greater than
$100,000 increased $3.2 billion (14.4 percent),
including a $.4 billion (8.9 percent) increase in
personal certificates of deposit, compared with
December 31, 2006, as customers migrated money market
balances to these products. Average time certificates of deposit
less than $100,000 increased $.9 billion (6.5 percent)
and average time deposits greater than $100,000 were basically
unchanged in 2007, compared with 2006. Time deposits greater
than $100,000 are largely viewed as purchased funds and are
managed to levels deemed appropriate given alternative funding
sources.
Borrowings
The Company utilizes
both short-term and long-term borrowings to fund growth of
assets in excess of deposit growth. Short-term borrowings, which
include federal funds purchased, commercial paper, repurchase
agreements, borrowings secured by high-grade assets and other
short-term borrowings, were $32.4 billion at
December 31, 2007, compared with $26.9 billion at
December 31, 2006. Short-term funding is managed within
approved liquidity policies. The increase of $5.5 billion
in short-term borrowings reflected wholesale funding associated
with the Company’s asset growth and asset/liability
management activities.
Long-term debt was $43.4 billion at December 31, 2007,
compared with $37.6 billion at December 31, 2006,
reflecting the issuances of $3.0 billion of convertible
senior debentures, $1.3 billion of subordinated notes,
$1.4 billion of medium-term notes and $.5 billion of
junior subordinated debentures, and the net addition of
$10.1 billion of Federal Home Loan Bank (“FHLB”)
advances, partially offset by long-term debt maturities and
repayments. The $5.8 billion (15.5 percent) increase
in long-term debt reflected wholesale funding associated with
the Company’s asset growth and asset/liability management
activities. Refer to Note 12 of the Notes to Consolidated
Financial Statements for additional information regarding
long-term debt and the “Liquidity Risk Management”
section for discussion of liquidity management of the Company.
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
value, 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 value 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
U.S. BANCORP 33
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 change of net interest income as a result of
changes in interest rates, which 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 security prices that may result in
changes in the values of financial instruments, such as trading
and available-for-sale securities that are accounted for on a
mark-to-market basis. Liquidity risk is the possible inability
to fund obligations to depositors, investors or borrowers. In
addition, corporate strategic decisions, as well as the risks
described above, could give rise to reputation risk. Reputation
risk is the risk that negative publicity or press, whether true
or not, could result in costly litigation or cause a decline in
the Company’s stock value, customer base or revenue.
Credit Risk
Management The
Company’s strategy for credit risk management includes
well-defined, centralized credit policies, uniform underwriting
criteria, and ongoing risk monitoring and review processes for
all commercial and consumer credit exposures. The strategy also
emphasizes diversification on a geographic, industry and
customer level, regular credit examinations and management
reviews of loans exhibiting 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, record any necessary charge-offs promptly and
maintain adequate reserve levels for probable loan losses
inherent in the portfolio. Commercial banking operations rely on
prudent credit policies and procedures and individual lender and
business line manager accountability. Lenders are assigned
lending authority based on their level of experience and
customer service requirements. Credit officers reporting to an
independent credit administration function have higher levels of
lending authority and support the business units in their credit
decision process. Loan decisions are documented as to the
borrower’s business, purpose of the loan, evaluation of the
repayment source and the associated risks, evaluation of
collateral, covenants and monitoring requirements, and risk
rating rationale. The Company utilizes a credit risk rating
system to measure the credit quality of individual commercial
loans, including the probability of default of an obligor and
the loss given default of credit facilities. The Company uses
the risk rating system for regulatory reporting, determining the
frequency of review of the credit exposures, and evaluation and
determination of the 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
Company’s retail banking operations, standard credit
scoring systems are used to assess credit risks of consumer,
small business and small-ticket leasing customers and to price
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 and
Other
Factors
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.
During 2005 through mid-2007, economic conditions steadily
improved as reflected in strong expansion of the gross domestic
product index, relatively low unemployment rates, expanding
retail sales levels, favorable trends related to corporate
profits and consumer spending for retail goods and services.
Beginning in mid-2004 through the second quarter of 2006, the
Federal Reserve Bank pursued a measured approach to increasing
short-term rates in an effort to prevent an acceleration of
inflation and maintain a moderate rate of economic growth. The
rising interest rate environment caused some softening of
residential home and condominium sales. Nationwide sales of
condominium units reached a peak in mid-2005 and have declined
since that timeframe.
During 2007, economic conditions were mixed. While gross
domestic product continued to expand at a slower rate,
unemployment rates have risen somewhat, inflation continues to
be problematic, retail sales have slowed and vehicle sales
levels continue to decline. Both consumer and business
bankruptcies have continued to rise from levels experienced in
2006 and industrial production and corporate profit levels have
began to slow or decline somewhat from prior years. In
34 U.S. BANCORP
addition, the mortgage lending and homebuilding industries
continued to experience increased levels of stress. With respect
to residential homes, inventory levels approximated a 9.5 month
supply at the end of 2007, up from 4.5 months in the third
quarter of 2005. Median home prices, which peaked in mid-2006,
have declined across most domestic markets with more severe
price reductions in California and the Northeast and Southeast
regions.
The decline in residential home values and rising interest rates
through September 2007 began to have a significant adverse
impact on residential mortgage loans. While residential mortgage
delinquencies have been increasing, these adverse market
conditions particularly affected sub-prime borrowers. In August
2007, the securitization markets began to experience significant
liquidity disruptions as investor confidence in the credit
quality of asset-backed securitization programs began to
decline. During the fourth quarter of 2007, certain asset-backed
commercial paper programs and other structured investment
vehicles have been unable to remarket their commercial paper
creating further deterioration in the capital markets. In
response to these economic factors, the Federal Reserve
Bank’s monetary policies changed in September 2007. Since
that time, the Federal Reserve Bank has decreased the target
Federal Funds interest rate several times from its high of
5.25 percent to a rate of 3.00 percent at
January 31, 2008, in an effort to improve liquidity in the
capital markets and investor confidence. Currently, there is
heightened concern that the domestic economy may experience a
recession over the next several quarters. As a result of this
expectation, the equity markets have experienced significant
volatility.
In addition to economic factors, changes in regulations and
legislation can have an impact on the credit performance of the
loan portfolios. Beginning in 2005, the Company implemented
higher minimum balance payment requirements for its credit card
customers in response to industry guidance issued by the banking
regulatory agencies. This industry guidance was provided to
minimize the likelihood that minimum balance payments would not
be sufficient to cover interest, fees and a portion of the
principal balance of a credit card loan resulting in negative
amortization, or increasing account balances. Also, new
bankruptcy legislation was enacted in October 2005, making it
more difficult for borrowers to have their debts forgiven during
bankruptcy proceedings. As a result of the changes in bankruptcy
laws, the levels of consumer and business bankruptcy filings
increased dramatically in the fourth quarter of 2005 and
declined in early 2006 to levels that were a third of average
bankruptcy filings during 2004 and early 2005. While consumer
bankruptcies have increased since early 2006, bankruptcy filings
in the fourth quarter of 2007 approximated only 50 percent
to 60 percent of pre-2005 levels. In response to the recent
sub-prime lending and market disruption issues, regulators and
legislators have encouraged mortgage servicers to implement
restructuring programs to enable borrowers to continue loan
repayments and dampen the impact of interest rates on homeowners.
Credit
DiversificationThe 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, 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
2007.
The commercial portfolio reflects the Company’s focus on
serving small business customers, middle market and larger
corporate businesses throughout its 24-state banking region, as
well as large national customers. The commercial loan portfolio
is diversified among various industries with somewhat higher
concentrations in consumer products and services, financial
services, commercial services and supplies, capital goods
(including manufacturing and commercial construction-related
businesses), property management and development and
agricultural industries. Additionally, the commercial portfolio
is diversified across the Company’s geographical markets
with 74.2 percent of total commercial loans within the
24-state banking region. Credit relationships outside of the
Company’s banking region are reflected within the corporate
banking, mortgage banking, auto dealer and leasing businesses
focusing on large national customers and specifically targeted
industries. Loans to mortgage banking customers are primarily
warehouse lines which are collateralized with the underlying
mortgages. The Company regularly monitors its mortgage
collateral position to manage its risk exposure. Table 8
provides a summary of significant industry groups and geographic
locations of commercial loans outstanding at December 31, 2007
and 2006.
The commercial real estate portfolio reflects the Company’s
focus on serving business owners within its geographic footprint
as well as regional and national investment-based real estate
owners. At December 31, 2007, the Company had commercial
real estate loans of
U.S. BANCORP 35
$29.2 billion, or 19.0 percent of total loans,
compared with $28.6 billion at December 31, 2006.
Within commercial real estate loans, different property types
have varying degrees of credit risk. Table 9 provides a summary
of the significant property types and geographical locations of
commercial real estate loans outstanding at December 31,2007 and 2006. At December 31, 2007, approximately
35.4 percent of the commercial real estate loan portfolio
represented business owner-occupied properties that tend to
exhibit credit risk characteristics similar to the middle market
commercial loan portfolio. Generally, the investment-based real
estate mortgages are diversified among various property types
with somewhat higher concentrations in office and retail
properties. While investment-based commercial real estate
continues to perform well with relatively strong occupancy
levels and cash flows, these categories of loans can be
adversely impacted during a rising rate environment. During
2007, the Company continued to reduce its level of exposure to
homebuilders, given the stress in the homebuilding industry
sector. Beginning in mid-2006, construction financing of
condominium projects was significantly curtailed, given the
deterioration in unit pricing in several regions of the country.
From a geographical perspective, the Company’s commercial
real estate portfolio is generally well diversified. However, at
December 31, 2007, the Company had 19.8 percent of its
portfolio within California, which has experienced higher
delinquency levels and credit quality deterioration due to
excess home inventory levels and declining valuations. Credit
losses may increase within this portfolio. Included in
commercial real estate at year end 2007 was approximately
$.9 billion in loans related to land held for development
and $2.6 billion of loans related to residential and
commercial acquisition and development properties. These loans
are subject to quarterly monitoring for changes in local market
conditions due to a higher credit risk profile. Acquisition and
development loans continued to perform well, despite a slow down
in the housing market and softening of demand. The commercial
real estate portfolio is diversified across the Company’s
geographical markets with 91.4 percent of total commercial
real estate loans outstanding at December 31, 2007, within
the 24-state banking region.
The Company’s retail lending business utilizes several
distinct business processes and channels to originate retail
credit, including traditional branch lending, indirect lending,
portfolio acquisitions and a consumer finance division. Each
distinct underwriting and origination activity manages unique
credit risk characteristics and prices its loan production
commensurate with the differing risk profiles. Within Consumer
Banking, U.S. Bank Consumer Finance (“USBCF”), a
division of the Company, participates in substantially all
facets of the Company’s consumer lending activities. USBCF
specializes in serving channel-specific and alternative lending
markets in residential mortgages, home equity and installment
loan financing. USBCF manages loans originated through a broker
network, correspondent relationships and U.S. Bank branch
offices. Generally, loans managed by the Company’s consumer
finance division exhibit higher credit risk characteristics, but
are priced commensurate with the differing risk profile.
Residential mortgages represent an important financial product
for consumer customers of the Company and are originated through
the Company’s branches, loan production offices, a
wholesale network of originators and the consumer finance
division. With respect to residential mortgages originated
through these channels, the Company may either retain the loans
on its balance sheet or sell its interest in the balances into
the secondary market while retaining the servicing rights and
customer relationships. Utilizing the secondary markets enables
the Company to effectively reduce its credit and other
asset/liability risks. For residential mortgages that are
retained in the Company’s portfolio, credit risk is also
diversified by geography and by monitoring loan-to-values during
the underwriting process.
The following table provides summary information of the
loan-to-values of residential mortgages by distribution channel
and type at December 31, 2007:
Interest
Percent
(Dollars in Millions)
Only
Amortizing
Total
of Total
Consumer Finance
Less than or equal to 80%
$
730
$
2,279
$
3,009
30.9
%
Over 80% through 90%
819
1,637
2,456
25.2
Over 90% through 100%
831
3,354
4,185
42.9
Over 100%
–
97
97
1.0
Total
$
2,380
$
7,367
$
9,747
100.0
%
Other Retail
Less than or equal to 80%
$
2,164
$
9,335
$
11,499
88.2
%
Over 80% through 90%
273
637
910
7.0
Over 90% through 100%
132
494
626
4.8
Over 100%
–
–
–
–
Total
$
2,569
$
10,466
$
13,035
100.0
%
Total Company
Less than or equal to 80%
$
2,894
$
11,614
$
14,508
63.7
%
Over 80% through 90%
1,092
2,274
3,366
14.8
Over 90% through 100%
963
3,848
4,811
21.1
Over 100%
–
97
97
.4
Total
$
4,949
$
17,833
$
22,782
100.0
%
Note:
loan-to-values determined as of the date of origination and
consider mortgage insurance, as applicable.
Within the consumer finance division approximately
$3.3 billion, or 33.5 percent of that division,
represents residential mortgages to customers that may be
defined as sub-prime borrowers. Of these loans,
34.0 percent had a loan-to-value of less than or equal to
80 percent of the origination amount, while
24.9 percent had loan-to-values of over 80 percent
through 90 percent and 39.1 percent had loan-to-values
of over 90 percent through 100 percent.
36 U.S. BANCORP
Table
13 DELINQUENT
LOAN RATIOS AS A PERCENT OF ENDING LOAN BALANCES
At
December 31,
90 days or more
past due excluding nonperforming loans
2007
2006
2005
2004
2003
Commercial
Commercial
.08
%
.06
%
.06
%
.05
%
.06
%
Lease financing
–
–
–
.02
.04
Total commercial
.07
.05
.05
.05
.06
Commercial Real Estate
Commercial mortgages
.02
.01
–
–
.02
Construction and development
.02
.01
–
–
.03
Total commercial real estate
.02
.01
–
–
.02
Residential Mortgages
.86
.42
.32
.46
.61
Retail
Credit card
1.94
1.75
1.26
1.74
1.68
Retail leasing
.10
.03
.04
.08
.14
Other retail
.37
.24
.23
.30
.43
Total retail
.68
.49
.37
.49
.58
Total loans
.38
%
.24
%
.19
%
.24
%
.28
%
At
December 31,
90 days or more
past due including nonperforming loans
2007
2006
2005
2004
2003
Commercial
.43
%
.57
%
.69
%
.99
%
1.97
%
Commercial real estate
1.02
.53
.55
.73
.82
Residential mortgages (a)
1.10
.59
.55
.74
.91
Retail
.73
.59
.52
.53
.65
Total loans
.74
%
.57
%
.58
%
.75
%
1.16
%
(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 3.78 percent, 3.08 percent,
4.35 percent, 5.19 percent and 6.07 percent at
December 31, 2007, 2006, 2005, 2004 and 2003,
respectively.
The following table provides further information on residential
mortgages for the consumer finance division:
Percent
Interest
of
(Dollars in Millions)
Only
Amortizing
Total
Division
Sub-Prime Borrowers
Less than or equal to 80%
$
4
$
1,108
$
1,112
11.4
%
Over 80% through 90%
6
809
815
8.4
Over 90% through 100%
25
1,252
1,277
13.1
Over 100%
–
66
66
.7
Total
$
35
$
3,235
$
3,270
33.6
%
Other Borrowers
Less than or equal to 80%
$
726
$
1,171
$
1,897
19.5
%
Over 80% through 90%
813
828
1,641
16.8
Over 90% through 100%
806
2,102
2,908
29.8
Over 100%
–
31
31
.3
Total
$
2,345
$
4,132
$
6,477
66.4
%
Total Consumer Finance
$
2,380
$
7,367
$
9,747
100.0
%
In addition to residential mortgages, the consumer finance
division had $.9 billion of home equity and second mortgage
loans to customers that may be defined as sub-prime borrowers at
December 31, 2007. Including residential mortgages, and
home equity and second mortgage loans, the total amount of loans
to customers that may be defined as sub-prime borrowers,
represented only 1.7 percent of total assets of the Company
at December 31, 2007. The Company does not have any
residential mortgages whose payment schedule would cause
balances to increase over time.
The retail loan portfolio principally reflects the
Company’s focus on consumers within its footprint of
branches and certain niche lending activities that are
nationally focused. Within the Company’s retail loan
portfolio approximately 77.4 percent of the credit card
balances relate to bank branch, co-branded and affinity programs
that generally experience better credit quality performance than
portfolios generated through national direct mail programs.
Table 10 provides a geographical summary of the residential
mortgage and retail loan portfolios.
U.S. BANCORP 37
Loan
Delinquencies Trends
in delinquency ratios represent an indicator, among other
considerations, of credit risk within the Company’s loan
portfolios. The entire balance of an account is considered
delinquent if the minimum payment contractually required to be
made is not received by the specified date on the billing
statement. The Company measures delinquencies, both including
and excluding nonperforming loans, to enable comparability with
other companies. Advances made pursuant to servicing agreements
to Government National Mortgage Association (“GNMA”)
mortgage pools whose repayments of principal and interest are
substantially insured by the Federal Housing Administration or
guaranteed by the Department of Veterans Affairs are excluded
from delinquency statistics. In addition, under certain
situations, a retail customer’s account may be re-aged to
remove it from delinquent status. Generally, the intent of a
re-aged account is to assist customers who have recently
overcome temporary financial difficulties, and have demonstrated
both the ability and willingness to resume regular payments. To
qualify for re-aging, the account must have been open for at
least one year and cannot have been re-aged during the preceding
365 days. An account may not be re-aged more than two times
in a five-year period. To qualify for re-aging, the customer
must also have made three regular minimum monthly payments
within the last 90 days. In addition, the Company may
re-age the retail account of a customer who has experienced
longer-term financial difficulties and apply modified,
concessionary terms and conditions to the account. Such
additional re-ages are limited to one in a five-year period and
must meet the qualifications for re-aging described above. All
re-aging strategies must be independently approved by the
Company’s credit administration function and are limited to
credit card and credit line accounts. Commercial loans are not
subject to re-aging policies.
Accruing loans 90 days or more past due totaled
$584 million at December 31, 2007, compared with
$349 million at December 31, 2006, and
$253 million at December 31, 2005. The increase in
90 day delinquent loans from December 31, 2006, to
December 31, 2007, was primarily related to residential
mortgages, credit cards and home equity loans. These loans were
not included in nonperforming assets and continue to accrue
interest because they are adequately secured by collateral,
and/or are
in the process of collection and are reasonably expected to
result in repayment or restoration to current status. The ratio
of 90 day delinquent loans to total loans was
.38 percent at December 31, 2007, compared with
.24 percent at December 31, 2006.
To monitor credit risk associated with retail loans, the Company
also monitors delinquency ratios in the various stages of
collection, including nonperforming status. The following table
provides summary delinquency information for residential
mortgages and retail loans:
As a Percent of
Ending
Amount
Loan Balances
December 31,
(Dollars in Millions)
2007
2006
2007
2006
Residential Mortgages
30-89 days
$
233
$
140
1.02
%
.66
%
90 days or more
196
89
.86
.42
Nonperforming
54
36
.24
.17
Total
$
483
$
265
2.12
%
1.25
%
Retail
Credit card
30-89 days
$
268
$
204
2.44
%
2.35
%
90 days or more
212
152
1.94
1.75
Nonperforming
14
31
.13
.36
Total
$
494
$
387
4.51
%
4.46
%
Retail leasing
30-89 days
$
39
$
34
.65
%
.49
%
90 days or more
6
2
.10
.03
Nonperforming
–
–
–
–
Total
$
45
$
36
.75
%
.52
%
Home equity and second mortgages
30-89 days
$
107
$
93
.65
%
.60
%
90 days or more
64
34
.39
.22
Nonperforming
11
14
.07
.09
Total
$
182
$
141
1.11
%
.91
%
Other retail
30-89 days
$
177
$
131
1.02
%
.80
%
90 days or more
62
44
.36
.27
Nonperforming
4
3
.02
.02
Total
$
243
$
178
1.40
%
1.09
%
38 U.S. BANCORP
While delinquency ratios have increased, the accelerating trend
in residential and retail delinquency ratios has occurred
primarily within the portfolios originated by the consumer
finance division.
Within these product categories, the following table provides
information on delinquent and nonperforming loans as a percent
of ending loan balances, by channel:
Within the consumer finance division at December 31, 2007,
approximately $227 million and $89 million of these
delinquent and nonperforming residential mortgages and other
retail loans, respectively, were to customers that may be
defined as sub-prime borrowers, compared with $105 million
and $50 million, respectively at December 31, 2006.
The Company expects the accelerating trends in delinquencies to
continue during 2008 as residential home valuations continue to
decline and economic factors affect the consumer sectors.
Restructured
Loans Accruing Interest
On a
case-by-case
basis, management determines whether an account that experiences
financial difficulties should be modified as to its interest
rate or repayment terms to maximize the Company’s
collection of its balance. Loans restructured at a rate equal to
or greater than that of a new loan with comparable risk at the
time the contract is modified are excluded from restructured
loans once repayment performance, in accordance with the
modified agreement, has been demonstrated over several payment
cycles. Loans that have interest rates reduced below comparable
market rates remain classified as restructured loans; however,
interest income is accrued at the reduced rate as long as the
customer complies with the revised terms and conditions.
In late 2007, the Company began implementing a mortgage loan
restructuring program for certain qualifying borrowers. In
general, borrowers with sub-prime credit quality, that are
current in their repayment status, will be allowed to retain the
lower of their existing interest rate or the market interest
rate as of their interest reset date. The following table
provides a summary of restructured loans that continue to accrue
interest:
As a Percent
of Ending
Amount
Loan Balances
December 31
(Dollars in Millions)
2007
2006
2007
2006
Commercial
$
21
$
18
.04
%
.04
%
Commercial real estate
–
1
–
–
Residential mortgages
157
80
.69
.38
Credit card
324
267
2.96
3.08
Other retail
49
39
.12
.10
Total
$
551
$
405
.36
%
.28
%
Restructured loans that accrue interest were higher at
December 31, 2007, compared with December 31, 2006,
reflecting the impact of restructurings for certain residential
mortgage customers in light of current economic conditions. The
Company expects this trend to continue during 2008 as
residential home valuations continue to decline and certain
borrowers take advantage of the Company’s mortgage loan
restructuring programs.
Nonperforming
Assets The level of
nonperforming assets represents another indicator of the
potential for future credit losses. Nonperforming assets include
nonaccrual loans, restructured loans not performing in
accordance with modified terms, 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.
U.S. BANCORP 39
At December 31, 2007, total nonperforming assets were
$690 million, compared with $587 million at year-end
2006 and $644 million at year-end 2005. The ratio of total
nonperforming assets to total loans and other real estate was
.45 percent at December 31, 2007, compared with
.41 percent and .47 percent at the end of 2006 and
2005, respectively. The $103 million increase in total
nonperforming assets in 2007 primarily reflected higher levels
of nonperforming loans resulting from stress in residential
construction, associated homebuilding industries and financial
services companies. Partially offsetting the increase in total
nonperforming loans, was a decrease in nonperforming loans in
manufacturing and transportation industry sectors within the
commercial loan portfolio. Other real estate included in
nonperforming assets was $111 million at December 31,2007, compared with $95 million at December 31, 2006,
and was primarily related to properties that the Company has
taken ownership of that once secured residential mortgages and
home equity and second mortgage loan balances. Other real estate
assets were also higher in 2007 due to higher residential
mortgage loan foreclosures as consumers experienced financial
difficulties given inflationary factors, changing interest rates
and other current economic conditions. The following table
provides an analysis of other real estate owned
(“OREO”) as a percent of their related loan balances,
including further detail for
Table
14 NONPERFORMING
ASSETS (a)
At December 31,
(Dollars in Millions)
2007
2006
2005
2004
2003
Commercial
Commercial
$128
$196
$231
$289
$624
Lease financing
53
40
42
91
113
Total commercial
181
236
273
380
737
Commercial Real Estate
Commercial mortgages
84
112
134
175
178
Construction and development
209
38
23
25
40
Total commercial real estate
293
150
157
200
218
Residential Mortgages
54
36
48
43
40
Retail
Credit card
14
31
49
–
–
Retail leasing
–
–
–
–
–
Other retail
15
17
17
17
25
Total retail
29
48
66
17
25
Total nonperforming loans
557
470
544
640
1,020
Other Real Estate (b)
111
95
71
72
73
Other Assets
22
22
29
36
55
Total nonperforming assets
$690
$587
$644
$748
$1,148
Accruing loans 90 days or more past due
$584
$349
$253
$294
$329
Nonperforming loans to total loans
.36
%
.33
%
.40
%
.51
%
.87
%
Nonperforming assets to total loans plus other real
estate (b)
Throughout
this document, nonperforming assets and related ratios do not
include accruing loans 90 days or more past due.
(b)
Excludes
$102 million and $83 million at December 31, 2007
and 2006, respectively, of foreclosed GNMA loans which continue
to accrue 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.
40 U.S. BANCORP
residential mortgages and home equity and second mortgage loan
balances by geographical location:
As a Percent of
Ending
Amount
Loan Balances
December 31,
(Dollars in Millions)
2007
2006
2007
2006
Residential
Michigan
$
22
$
17
3.47
%
2.90
%
Minnesota
12
11
.23
.21
Ohio
10
12
.40
.48
Colorado
7
7
.25
.28
Missouri
6
6
.22
.25
All other states
53
38
.21
.16
Total residential
110
91
.28
.25
Commercial
1
4
–
.01
Total OREO
$
111
$
95
.07
%
.07
%
Within other real estate in the table above, approximately
$61 million at December 31, 2007, and $41 million
at December 31, 2006, were from portfolios defined as
sub-prime.
The Company expects nonperforming assets to increase moderately
over the next several quarters due to continued stress in
residential mortgages and residential construction.
The $57 million decrease in total nonperforming assets in
2006, as compared with 2005, reflected decreases in
nonperforming commercial, residential mortgages and retail
loans, partially offset by an increase in other real estate
assets as a result of taking more ownership of residential
properties. The decrease in nonperforming commercial loans in
2006 was also broad-based across most industry sectors within
the commercial loan portfolio. The decrease in nonperforming
retail loans during 2006 was primarily due to the run-off of
nonaccrual accounts from a discontinued workout program for
customers having financial difficulties meeting recent minimum
balance payment requirements.
Included in nonperforming loans were restructured loans of
$17 million and $38 million at December 31, 2007
and 2006, respectively. At December 31, 2007 and 2006, the
Company had no commitments to lend additional funds under
restructured loans. Restructured loans performing under the
restructured terms beyond a specified timeframe are reported as
“Restructured Loans Accruing Interest.”
Analysis of
Loan Net Charge-Offs
Total loan net
charge-offs were $792 million in 2007, compared with
$544 million in 2006 and $685 million in 2005. The
ratio of total loan net charge-offs to average loans was
.54 percent in 2007, compared with .39 percent in 2006
and .52 percent in 2005. The year-over-year increase in net
charge-offs in 2007, compared with 2006, was due primarily to an
anticipated increase in consumer charge-offs, primarily related
to credit cards, and somewhat higher commercial loan net
charge-offs. In addition, net charge-offs during 2006 reflected
the beneficial impact of bankruptcy legislation that went into
effect in the fourth quarter of 2005.
Commercial and commercial real estate loan net charge-offs for
2007 were $159 million (.21 percent of average loans
outstanding), compared with $88 million (.12 percent
of average loans outstanding) in 2006 and $90 million
(.13 percent of average loans outstanding) in 2005. The
year-over-year increase in net charge-offs primarily reflected
higher levels of nonperforming loans and delinquencies within
these portfolios, especially residential homebuilding and
related industry sectors. Given the continuing stress in the
homebuilding and commercial home supplier industry, the Company
expects commercial and commercial real estate net charge-offs to
continue to increase moderately over the next several quarters.
The decrease in commercial and commercial real estate loan net
charge-offs in 2006 compared with 2005, reflected lower gross
charge-offs, partially offset by a lower level of recoveries.
Retail loan net charge-offs in 2007 were $572 million
(1.17 percent of average loans outstanding), compared with
$415 million (.92 percent of average loans
outstanding) in 2006 and $559 million (1.30 percent of
average loans outstanding) in 2005. The increase in retail loan
net charge-offs in 2007, compared with 2006, reflected growth in
the credit card and installment loan portfolios of
25.4 percent and 11.2 percent, respectively. It also
reflected higher retail loan delinquency ratios, compared with
the prior year. In addition, net charge-offs for 2006 reflected
the beneficial impact of bankruptcy legislation changes that
occurred in the fourth quarter of 2005. The Company anticipates
higher delinquency levels in the retail portfolios and that the
trend in retail net charge-offs will accelerate, but remain in a
manageable range during 2008. The decrease in retail loan net
charge-offs in 2006, compared with 2005, reflected the impact of
the bankruptcy legislation enacted in the fourth quarter of 2005
and improved retail portfolio performance.
U.S. BANCORP 41
Table
15 NET
CHARGE-OFFS AS A PERCENT OF AVERAGE LOANS OUTSTANDING
Year Ended December
31
2007
2006
2005
2004
2003
Commercial
Commercial
.24
%
.15
%
.12
%
.29
%
1.34
%
Lease financing
.61
.46
.85
1.42
1.65
Total commercial
.29
.18
.20
.43
1.38
Commercial Real Estate
Commercial mortgages
.06
.01
.03
.09
.14
Construction and development
.11
.01
(.04
)
.13
.16
Total commercial real estate
.08
.01
.01
.10
.14
Residential Mortgages
.28
.19
.20
.20
.23
Retail
Credit card
3.34
2.88
4.20
4.14
4.62
Retail leasing
.25
.20
.35
.59
.86
Home equity and second mortgages
.46
.33
.46
.54
.70
Other retail
.96
.85
1.33
1.35
1.79
Total retail
1.17
.92
1.30
1.36
1.68
Total loans
.54
%
.39
%
.52
%
.64
%
1.07
%
The following table provides an analysis of net charge-offs as a
percent of average loans outstanding managed by the consumer
finance division, compared with other retail loans:
Consumer
Finance category included credit originated and managed by
USBCF, as well as home equity and second mortgages with a
loan-to-value greater than 100 percent that were originated
in the branches.
Within the consumer finance division, the Company originates
loans to customers that may be defined as sub-prime borrowers.
The following table provides further information on net
charge-offs as a percent of average loans outstanding for this
division:
Percent of
Average Loans
Average Loans
Year Ended
December 31
(Dollars in Millions)
2007
2006
2007
2006
Residential Mortgages
Sub-prime borrowers
$
3,158
$
2,602
1.17
%
.95
%
Other borrowers
5,971
4,812
.27
.27
Total
$
9,129
$
7,414
.58
%
.51
%
Home Equity And Second Mortgages
Sub-prime borrowers
$
908
$
842
3.41
%
1.72
%
Other borrowers
942
1,129
2.02
1.20
Total
$
1,850
$
1,971
2.70
%
1.42
%
Analysis and
Determination of the Allowance for Credit Losses
The allowance for
loan losses provides coverage for probable and estimable losses
inherent in the Company’s loan and lease portfolio.
Management evaluates the allowance each quarter to determine
that it is adequate to cover 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 Company’s
analysis of credit losses.
At December 31, 2007, the allowance for credit losses was
$2,260 million (1.47 percent of loans), compared with
an allowance of $2,256 million (1.57 percent of loans)
at December 31, 2006, and $2,251 million
(1.65 percent of loans) at December 31, 2005. The
ratio of the allowance for credit losses to nonperforming loans
was 406 percent at December 31, 2007, compared with
480 percent and 414 percent at December 31, 2006
and 2005, respectively. The ratio of the allowance for credit
losses to loan net charge-offs at December 31, 2007, was
285 percent, compared with 415 percent and
329 percent at December 31, 2006 and 2005,
respectively. Management determined that the allowance for
credit losses was adequate at December 31, 2007.
Several factors were taken into consideration in evaluating the
allowance for credit losses at December 31, 2007, including
the risk profile of the portfolios, loan net charge-offs during
the period, the level of nonperforming
42 U.S. BANCORP
Table
16 SUMMARY
OF ALLOWANCE FOR CREDIT LOSSES
(Dollars in Millions)
2007
2006
2005
2004
2003
Balance at beginning of year
$
2,256
$
2,251
$
2,269
$
2,369
$
2,422
Charge-Offs
Commercial
Commercial
154
121
140
244
556
Lease financing
63
51
76
110
139
Total commercial
217
172
216
354
695
Commercial real estate
Commercial mortgages
16
11
16
29
44
Construction and development
10
1
3
13
13
Total commercial real estate
26
12
19
42
57
Residential mortgages
63
43
39
33
30
Retail
Credit card
389
256
313
282
282
Retail leasing
23
25
38
49
57
Home equity and second mortgages
82
62
83
89
105
Other retail
232
193
241
225
268
Total retail
726
536
675
645
712
Total charge-offs
1,032
763
949
1,074
1,494
Recoveries
Commercial
Commercial
52
61
95
144
70
Lease financing
28
27
34
41
55
Total commercial
80
88
129
185
125
Commercial real estate
Commercial mortgages
4
8
10
11
16
Construction and development
–
–
6
4
2
Total commercial real estate
4
8
16
15
18
Residential mortgages
2
2
3
4
3
Retail
Credit card
69
36
35
30
27
Retail leasing
7
11
12
10
7
Home equity and second mortgages
8
12
15
13
12
Other retail
70
62
54
50
50
Total retail
154
121
116
103
96
Total recoveries
240
219
264
307
242
Net Charge-Offs
Commercial
Commercial
102
60
45
100
486
Lease financing
35
24
42
69
84
Total commercial
137
84
87
169
570
Commercial real estate
Commercial mortgages
12
3
6
18
28
Construction and development
10
1
(3
)
9
11
Total commercial real estate
22
4
3
27
39
Residential mortgages
61
41
36
29
27
Retail
Credit card
320
220
278
252
255
Retail leasing
16
14
26
39
50
Home equity and second mortgages
74
50
68
76
93
Other retail
162
131
187
175
218
Total retail
572
415
559
542
616
Total net charge-offs
792
544
685
767
1,252
Provision for credit losses
792
544
666
669
1,254
Acquisitions and other changes
4
5
1
(2
)
(55
)
Balance at end of year
$
2,260
$
2,256
$
2,251
$
2,269
$
2,369
Components
Allowance for loan losses
$
2,058
$
2,022
$
2,041
$
2,080
$
2,184
Liability for unfunded credit commitments
202
234
210
189
185
Total allowance for credit losses
$
2,260
$
2,256
$
2,251
$
2,269
$
2,369
Allowance for credit losses as a percentage of
Period-end loans
1.47
%
1.57
%
1.65
%
1.82
%
2.03
%
Nonperforming loans
406
480
414
355
232
Nonperforming assets
328
384
350
303
206
Net charge-offs
285
415
329
296
189
assets, accruing loans 90 days or more past due,
delinquency ratios and changes in restructured loan balances
compared with December 31, 2006. Management also considered
the uncertainty related to certain industry sectors, and the
extent of credit exposure to specific borrowers within the
portfolio. In addition, concentration risks associated with
commercial
U.S. BANCORP 43
Table 17
ELEMENTS
OF THE ALLOWANCE FOR CREDIT LOSSES
Allowance Amount
Allowance as a
Percent of Loans
December 31
(Dollars in Millions)
2007
2006
2005
2004
2003
2007
2006
2005
2004
2003
Commercial
Commercial
$
860
$
665
$
656
$
664
$
696
1.92
%
1.64
%
1.73
%
1.89
%
2.08
%
Lease financing
146
90
105
106
90
2.34
1.62
2.06
2.14
1.80
Total commercial
1,006
755
761
770
786
1.97
1.63
1.77
1.92
2.04
Commercial Real Estate
Commercial mortgages
150
126
115
131
170
.74
.64
.57
.64
.82
Construction and development
108
74
53
40
59
1.19
.83
.65
.55
.89
Total commercial real estate
258
200
168
171
229
.88
.70
.59
.62
.84
Residential Mortgages
131
58
39
33
33
.58
.27
.19
.21
.25
Retail
Credit card
487
298
284
283
268
4.45
3.44
3.98
4.29
4.52
Retail leasing
17
15
24
44
47
.28
.22
.33
.61
.78
Home equity and second mortgages
114
52
62
88
101
.69
.33
.41
.59
.76
Other retail
247
177
188
195
235
1.42
1.08
1.26
1.48
1.89
Total retail
865
542
558
610
651
1.70
1.14
1.26
1.46
1.73
Total allocated allowance
2,260
1,555
1,526
1,584
1,699
1.47
1.08
1.12
1.27
1.46
Available for other factors
–
701
725
685
670
–
.49
.53
.55
.57
Total allowance
$
2,260
$
2,256
$
2,251
$
2,269
$
2,369
1.47
%
1.57
%
1.65
%
1.82
%
2.03
%
real estate and the mix of loans, including credit cards, loans
originated through the consumer finance division and residential
mortgages balances, and their relative credit risks were
evaluated. Finally, the Company considered current economic
conditions that might impact the portfolio. Management
determines the allowance that is required for specific loan
categories based on relative risk characteristics of the loan
portfolio. On an ongoing basis, management evaluates its methods
for determining the allowance for each element of the portfolio
and makes enhancements considered appropriate. Table 17 shows
the amount of the allowance for credit losses by portfolio
category.
Regardless of the extent of the Company’s analysis of
customer performance, portfolio trends or risk management
processes, certain inherent but undetected losses are probable
within the loan portfolios. This is due to several factors,
including inherent delays in obtaining information regarding a
customer’s financial condition or changes in their unique
business conditions, the judgmental nature of individual loan
evaluations, collateral assessments and the interpretation of
economic trends. Volatility of economic or customer-specific
conditions affecting the identification and estimation of losses
from larger non-homogeneous credits and the sensitivity of
assumptions utilized to establish allowances for homogeneous
groups of loans, loan portfolio concentrations, and other
subjective considerations are among other factors. Because of
these subjective factors, the process utilized to determine each
element of the allowance for credit losses by specific loan
category has some imprecision. As such, the Company estimates a
range of inherent losses in the portfolio based on statistical
analyses and management judgment. A statistical analysis
attempts to measure the extent of imprecision and other
uncertainty by determining the volatility of losses over time,
across loan categories. Also, management judgmentally considers
loan concentrations, risks associated with specific industries,
the stage of the business cycle, economic conditions and other
qualitative factors. In 2007, this element of the allowance was
specifically assigned to each portfolio type to better reflect
the Company’s risk in the specific portfolios. In prior
years, this element of the allowance was separately disclosed as
“allowance available for other factors”.
The allowance recorded for commercial and commercial real estate
loans is based, in part, on a regular review of individual
credit relationships. The Company’s risk rating process is
an integral component of the methodology utilized to determine
these elements of the allowance for credit losses. An allowance
for credit losses is established for pools of commercial and
commercial real estate loans and unfunded commitments based on
the risk ratings assigned. An analysis of the migration of
commercial and commercial real estate loans and actual loss
experience throughout the business cycle is conducted quarterly
to assess the exposure for credits with similar risk
characteristics. In addition to its risk rating process, the
Company separately analyzes the carrying value of impaired loans
to determine whether the carrying value is less than or equal to
the appraised collateral value or the present value of expected
cash flows. Based on this analysis, an allowance for credit
losses may be specifically established for impaired loans. The
allowance established for commercial
44 U.S. BANCORP
and commercial real estate loan portfolios, including impaired
commercial and commercial real estate loans, was
$1,264 million at December 31, 2007, compared with
$955 million and $929 million at December 31,2006 and 2005, respectively. The increase in the allowance for
commercial and commercial real estate loans of $309 million
at December 31, 2007, compared with December 31, 2006,
reflected the impact of growth in the portfolios and the change
in the process of allocating the allowance for credit losses to
the specific loan portfolios during 2007, partially offset by a
reduction in net inherent loss rates.
The allowance recorded for the residential mortgages and retail
loan portfolios is based on an analysis of product mix, credit
scoring and risk composition of the portfolio, loss and
bankruptcy experiences, economic conditions and historical and
expected delinquency and charge-off statistics for each
homogenous group of loans. Based on this information and
analysis, an allowance was established approximating a rolling
twelve-month estimate of net charge-offs. The allowance
established for residential mortgages was $131 million at
December 31, 2007, compared with $58 million and
$39 million at December 31, 2006 and 2005,
respectively. The increase in the allowance for the residential
mortgages portfolio year-over-year was driven by portfolio
growth, deterioration in the resale value of real estate
collateral due to the housing market and the change in the
process of allocating the allowance for credit losses to the
specific loan portfolios during 2007. The allowance established
for retail loans was $865 million at December 31,2007, compared with $542 million and $558 million at
December 31, 2006 and 2005, respectively. The increase in
the allowance for the retail portfolio in 2007 reflected
foreclosures in the home equity portfolio, growth in the credit
card and other retail portfolios and the change in the process
of allocating the allowance for credit losses to the specific
loan portfolios during 2007.
Although the Company determines the amount of each element of
the allowance separately and this process is an important credit
management tool, the entire allowance for credit losses is
available for the entire loan portfolio. The actual amount of
losses incurred can vary significantly from the estimated
amounts.
Residual Value
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 lease, diversification of its leased assets,
regular residual asset valuation reviews and monitoring of
residual value gains or losses upon the disposition of assets.
Commercial lease originations are subject to the same
well-defined underwriting standards referred to in the
“Credit Risk Management” section which includes an
evaluation of the residual risk. Retail lease residual risk is
mitigated further by originating longer-term vehicle leases and
effective end-of-term marketing of off-lease vehicles. Also, to
reduce the financial risk of potential changes in vehicle
residual values, the Company maintains residual value insurance.
The catastrophic insurance maintained by the Company provides
for the potential recovery of losses on individual vehicle sales
in an amount equal to the difference between:
(a) 105 percent or 110 percent of the average
wholesale auction price for the vehicle at the time of sale and
(b) the vehicle residual value specified by the Automotive
Lease Guide (an authoritative industry source) at the inception
of the lease. The potential recovery is calculated for each
individual vehicle sold in a particular policy year and is
reduced by any gains realized on vehicles sold during the same
period. The Company will receive claim proceeds under this
insurance program if, in the aggregate, there is a net loss for
such period. In addition, the Company obtains separate residual
value insurance for all vehicles at lease inception where end of
lease term settlement is based solely on the residual value of
the individual leased vehicles. Under this program, the
potential recovery is computed for each individual vehicle sold
and does not allow the insurance carrier to offset individual
determined losses with gains from other leases. This individual
vehicle coverage is included in the calculation of minimum lease
payments when making the capital lease assessment. To reduce the
risk associated with collecting insurance claims, the Company
monitors the financial viability of the insurance carrier based
on insurance industry ratings and available financial
information.
Included in the retail leasing portfolio was approximately
$3.8 billion of retail leasing residuals at
December 31, 2007, compared with $4.3 billion at
December 31, 2006. The Company monitors concentrations of
leases by manufacturer and vehicle “make and model.”
As of December 31, 2007, vehicle lease residuals related to
sport utility vehicles were 42.2 percent of the portfolio
while upscale and mid-range vehicle classes represented
approximately 23.1 percent and 13.9 percent,
respectively. At year-end 2007, the largest vehicle-type
concentration represented approximately 7.8 percent of the
aggregate residual value of the vehicles in the portfolio. No
other vehicle-type exceeded five percent of the aggregate
residual value of the portfolio. Because retail residual
valuations tend to be less volatile for longer-term leases,
relative to the estimated residual at inception of the lease,
the Company actively manages lease origination production to
achieve a longer-term portfolio. At December 31, 2007, the
weighted-average origination term of the portfolio was
49 months, compared with 50 months at
December 31, 2006. During the past several years, new
vehicles sales volumes experienced strong growth driven by
manufacturer incentives, consumer spending levels and strong
economic conditions. In 2007, sales of new cars have softened
U.S. BANCORP 45
somewhat relative to a year ago. In part, this is due to
manufacturers reducing sales incentives to consumers, as well as
the overall general weakening of the economy. Current
expectations are that sales of new vehicles will trend downward
in 2008. Given that manufacturers’ inventories of vehicles
have declined somewhat during this period, this trend in sales
should provide support of residual valuations. With respect to
used vehicles, wholesale values for automobiles during 2004 and
2005 performed better than wholesale values for trucks resulting
in car prices becoming somewhat inflated and truck prices
declining over this period. This has led to a shift in the
comparative performance of these two segments, resulting in car
values experiencing a decrease of .9 percent in 2007, while
truck values have experienced an improvement of 1.1 percent
over the same timeframe. The overall stability in the used car
marketplace combined with the mix of the Company’s lease
residual portfolio have caused the exposure to retail lease
residual impairments to be relatively stable relative to a year
ago.
At December 31, 2007, the commercial leasing portfolio had
$660 million of residuals, compared with $636 million
at December 31, 2006. At year-end 2007, lease residuals
related to trucks and other transportation equipment were
26.6 percent of the total residual portfolio. Railcars
represented 17.5 percent of the aggregate portfolio, while
business and office equipment and aircraft were
16.7 percent and 12.9 percent, respectively. No other
significant concentrations of more than 10 percent existed
at December 31, 2007. In 2007, residual values in general
remained stable or were favorable. The transportation industry
residual values improved for marine, rail and aircraft.
Operational Risk
Management Operational
risk represents the risk of loss resulting from the
Company’s operations, including, but not limited to, the
risk of fraud by employees or persons outside the Company, the
execution of unauthorized transactions by employees, errors
relating to transaction processing and technology, breaches of
the internal control system and compliance requirements and
business continuation and disaster recovery. This risk of loss
also includes the potential legal actions that could arise as a
result of an operational deficiency or as a result of
noncompliance with applicable regulatory standards, adverse
business decisions or their implementation, and customer
attrition due to potential negative publicity.
The Company operates in many different businesses in diverse
markets and relies on the ability of its employees and systems
to process a high number of transactions. Operational risk is
inherent in all business activities, and the management of this
risk is important to the achievement of the Company’s
objectives. In the event of a breakdown in the internal control
system, improper operation of systems or improper
employees’ actions, the Company could suffer financial
loss, face regulatory action and suffer damage to its reputation.
The Company manages operational risk through a risk management
framework and its internal control processes. Within this
framework, the Corporate Risk Committee (“Risk
Committee”) provides oversight and assesses the most
significant operational risks facing the Company within its
business lines. Under the guidance of the Risk Committee,
enterprise risk management personnel establish policies and
interact with business lines to monitor significant operating
risks on a regular basis. Business lines have direct and primary
responsibility and accountability for identifying, controlling,
and monitoring operational risks embedded in their business
activities. Business managers maintain a system of controls with
the objective of providing proper transaction authorization and
execution, proper system operations, safeguarding of assets from
misuse or theft, and ensuring the reliability of financial and
other data. Business managers ensure that the controls are
appropriate and are implemented as designed.
Each business line within the Company has designated risk
managers. These risk managers are responsible for, among other
things, coordinating the completion of ongoing risk assessments
and ensuring that operational risk management is integrated into
business decision-making activities. Business continuation and
disaster recovery planning is also critical to effectively
managing operational risks. Each business unit of the Company is
required to develop, maintain and test these plans at least
annually to ensure that recovery activities, if needed, can
support mission critical functions including technology,
networks and data centers supporting customer applications and
business operations. The Company’s internal audit function
validates the system of internal controls through risk-based,
regular and ongoing audit procedures and reports on the
effectiveness of internal controls to executive management and
the Audit Committee of the Board of Directors.
Customer-related business conditions may also increase
operational risk, or the level of operational losses in certain
transaction processing business units, including merchant
processing activities. Ongoing risk monitoring of customer
activities and their financial condition and operational
processes serve to mitigate customer-related operational risk.
Refer to Note 21 of the Notes to Consolidated Financial
Statements for further discussion on merchant processing.
While the Company believes that it has designed effective
methods to minimize operational risks, there is no absolute
assurance that business disruption or operational losses would
not occur in the event of a disaster. On an ongoing basis,
management makes process changes and investments to enhance its
systems of internal controls and business continuity and
disaster recovery plans.
Interest Rate
Risk Management In the
banking industry, changes in interest rates are a significant
risk that can
46 U.S. BANCORP
impact earnings, market valuations and safety and soundness of
an entity. To minimize the volatility of net interest income and
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 net interest income is simulation
analysis. The monthly analysis incorporates substantially all of
the Company’s assets and liabilities and off-balance sheet
instruments, together with forecasted changes in the balance
sheet and assumptions that reflect the current interest rate
environment. Through this simulation, management estimates the
impact on net interest income of a 200 basis point upward
or downward gradual change of market interest rates over a
one-year period. The simulation also estimates the effect of
immediate and sustained parallel shifts in the yield curve of
50 basis points as well as the effect of immediate and
sustained flattening or steepening of the yield curve. This
simulation includes assumptions about how the balance sheet is
likely to be affected by changes in loan and deposit growth.
Assumptions are made to project interest rates for new loans and
deposits based on historical analysis, management’s outlook
and repricing strategies. These assumptions are validated on a
periodic basis. A sensitivity analysis is provided for key
variables of the simulation. The results are reviewed by ALPC
monthly and are used to guide asset/liability management
strategies.
The table below summarizes the interest rate risk of net
interest income based on forecasts over the succeeding
12 months. At December 31, 2007, based on the rate
environment at that time, the Company’s overall interest
rate risk position was liability sensitive to changes in
interest rates. In January 2008, the Federal Reserve Bank
lowered the Federal Funds rate by 125 basis points to 3.00
percent, which resulted in the overall interest rate risk
position of the Company being slightly liability sensitive. The
Company manages its interest rate risk position by holding
assets on the balance sheet with desired interest rate risk
characteristics, implementing certain pricing strategies for
loans and deposits and through the selection of derivatives and
various funding and investment portfolio strategies. The Company
manages the overall interest rate risk profile within policy
limits. ALPC policy limits the estimated change in net interest
income to 4.0 percent of forecasted net interest income
over the succeeding 12 months. At December 31, 2007,
and 2006, the Company was within its ALPC policy.
Market Value
of Equity Modeling
The Company also
utilizes the market value of equity as a measurement tool in
managing interest rate sensitivity. The market value of equity
measures the degree to which the market values of the
Company’s assets and liabilities and off-balance sheet
instruments will change given a change in interest rates. ALPC
policy limits 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, 2007. The up 200 basis point scenario
resulted in a 7.6 percent decrease in the market value of
equity at December 31, 2007, compared with a
6.7 percent decrease at December 31, 2006. The down
200 basis point scenario resulted in a 3.5 percent
decrease in the market value of equity at December 31,2007, compared with a 1.8 percent decrease at
December 31, 2006. At December 31, 2007 and 2006, the
Company was within its ALPC policy.
The valuation analysis is dependent upon certain key assumptions
about the nature of assets and liabilities with non-contractual
maturities. Management estimates the average life and rate
characteristics of asset and liability accounts based upon
historical analysis and management’s expectation of rate
behavior. These assumptions are validated on a periodic basis. A
sensitivity analysis of key variables of the valuation analysis
is provided to ALPC monthly and is used to guide asset/liability
management strategies. The Company also uses duration of equity
as a measure of interest rate risk. The duration of equity is a
measure of the net market value sensitivity of the assets,
liabilities and derivative positions of the Company. The
duration of assets was 1.8 years at December 31, 2007
and 2006. The duration of liabilities was 1.9 years at
December 31, 2007 and 2006. At December 31, 2007, the
duration of equity was 1.2 years, compared with
1.6 years at December 31, 2006. The duration of equity
measures shows that sensitivity of the market value of equity of
the Company was liability sensitive to changes in interest rates.
Use of
Derivatives to Manage Interest Rate and Other Risks
In the ordinary course of business, the Company
enters into
derivative transactions to manage its interest rate, prepayment,
credit, price and foreign currency risks (“asset and
liability management positions”) and to accommodate the
business requirements of its customers (“customer-related
positions”). To manage its interest rate risk, the Company
may enter into interest rate swap agreements and interest rate
options such as caps and floors. Interest rate swaps involve the
exchange of fixed-rate and variable-rate payments without the
exchange of the underlying notional amount on which the interest
payments are calculated. Interest rate caps protect against
rising interest rates while interest rate floors protect against
declining interest rates. In connection with its mortgage
banking operations, the Company enters into forward commitments
to sell mortgage loans related to fixed-rate mortgage loans held
for sale and fixed-rate mortgage loan commitments. The Company
also acts as a seller and buyer of interest rate contracts and
foreign exchange rate contracts on behalf of customers. The
Company minimizes its market and liquidity risks by taking
similar offsetting positions.
All interest rate derivatives that qualify for hedge accounting
are recorded at fair value as other assets or liabilities on the
balance sheet and are designated as either “fair
value” or “cash flow” hedges. The Company
performs an assessment, both at inception and quarterly
thereafter, when required, to determine whether these
derivatives are highly effective in offsetting changes in the
value of the hedged items. Hedge ineffectiveness for both cash
flow and fair value hedges is recorded in noninterest income.
Changes in the fair value of derivatives designated as fair
value hedges, and changes in the fair value of the hedged items,
are recorded in earnings. Changes in the fair value of
derivatives designated as cash flow hedges are recorded in other
comprehensive income until income from the cash flows of the
hedged items is realized. Customer-related interest rate swaps,
foreign exchange rate contracts, and all other derivative
contracts that do not qualify for hedge accounting are recorded
at fair value and resulting gains or losses are recorded in
trading account gains or losses or mortgage banking revenue.
Gains or losses on customer-related derivative positions were
not material in 2007.
By their nature, derivative instruments are subject to market
risk. The Company does not utilize derivative instruments for
speculative purposes. Of the Company’s $57.5 billion
of total notional amount of asset and liability management
positions at December 31, 2007, $24.4 billion was
designated as either fair value or cash flow hedges or net
investment hedges of foreign operations. The cash flow hedge
derivative positions are interest rate swaps that hedge the
forecasted cash flows from the underlying variable-rate debt.
The fair value hedges are primarily interest rate swaps that
hedge the change in fair value related to interest rate changes
of underlying fixed-rate debt and subordinated obligations.
The Company uses forward commitments to sell residential
mortgage loans to hedge its interest rate risk related to
residential mortgage loans held-for-sale. The Company commits to
sell the loans at specified prices in a future period, typically
within 90 days. The Company is exposed to interest rate
risk during the period between issuing a loan commitment and the
sale of the loan into the secondary market. In connection with
its mortgage banking operations, the Company held
$2.8 billion of forward commitments to sell mortgage loans
and $3.7 billion of unfunded mortgage loan commitments at
December 31, 2007, that were derivatives in accordance with
the provisions of the Statement of Financial Accounting
Standards No. 133, “Accounting for Derivative
Instruments and Hedge Activities.” The unfunded mortgage
loan commitments are reported at fair value as options in
Table 18. The Company also utilizes U.S. Treasury
futures, options on U.S. Treasury futures contracts,
interest rate swaps and forward commitments to buy residential
mortgage loans to economically hedge the change in fair value of
its residential MSRs.
Derivative instruments are also subject to credit risk
associated with counterparties to the derivative contracts.
Credit risk associated with derivatives is measured based on the
replacement cost should the counterparties with contracts in a
gain position to the Company fail to perform under the terms of
the contract. The Company manages this risk through
diversification of its derivative positions among various
counterparties, requiring collateral agreements with
credit-rating thresholds, entering into master netting
agreements in certain cases and entering into interest rate swap
risk participation agreements. These agreements transfer the
credit risk related to interest rate swaps from the Company to
an unaffiliated third-party. The Company also provides credit
protection to third-parties with risk participation agreements,
for a fee, as part of a loan syndication transaction.
At December 31, 2007, the Company had $219 million in
accumulated other comprehensive income related to realized and
unrealized losses on derivatives classified as cash flow hedges.
Unrealized gains and losses are reflected in earnings when the
related cash flows or hedged transactions occur and offset the
related performance of the hedged items. The estimated amount to
be reclassified from accumulated other comprehensive income into
earnings during the next 12 months is a loss of
$106 million.
The change in the fair value of all other asset and liability
management derivative positions attributed to hedge
ineffectiveness recorded in noninterest income was not material
for 2007.
The Company enters into derivatives to protect its net
investment in certain foreign operations. The Company uses
forward commitments to sell specified amounts of certain foreign
currencies to hedge fluctuations in foreign currency exchange
rates. The net amount of gains or losses included
U.S. BANCORP 49
in the cumulative translation adjustment for 2007 was not
material.
Table 18 summarizes information on the Company’s derivative
positions at December 31, 2007. Refer to Notes 1 and
19 of the Notes to Consolidated Financial Statements for
significant accounting policies and additional information
regarding the Company’s use of derivatives.
Market Risk
Management In addition
to interest rate risk, the Company is exposed to other forms of
market risk as a consequence of conducting normal trading
activities. These trading activities principally support the
risk management processes of the Company’s customers
including their management of foreign currency and interest rate
risks. The Company also manages market risk of non-trading
business activities, including its MSRs and loans held-for-sale.
Value at Risk (“VaR”) is a key measure of market risk
for the Company. Theoretically, VaR represents the maximum
amount that the Company has placed at risk of loss, with a
ninety-ninth percentile degree of confidence, to adverse market
movements in the course of its risk taking activities.
VaR modeling of trading activities is subject to certain
limitations. Additionally, it should be recognized that there
are assumptions and estimates associated with VaR modeling, and
actual results could differ from those assumptions and
estimates. The Company mitigates these uncertainties through
regular monitoring of trading activities by management and other
risk management practices, including stop-loss and position
limits related to its trading activities. Stress-test models are
used to provide management with perspectives on market events
that VaR models do not capture.
The Company establishes market risk limits, subject to approval
by the Company’s Board of Directors. The Company’s
market valuation risk for trading and non-trading positions, as
estimated by the VaR analysis, was $1 million and
$15 million, respectively, at December 31, 2007,
compared with $1 million and $30 million,
respectively, at December 31, 2006. The Company’s VaR
limit was $45 million at December 31, 2007.
During the second half of 2007, the financial markets
experienced significant turbulence as the impact of mortgage
delinquencies, defaults and foreclosures adversely affected
investor confidence in a broad range of investment sectors and
asset classes. Given that the Company’s owned investments
are principally U.S. Treasury securities, notes issued by
government-sponsored agencies or privately issued securities
with high investment grade credit ratings, the Company believes
these securities are not other-than-temporarily impaired as of
December 31, 2007, despite being subject to changes in
market valuations. As problems in the sub-prime mortgage market
emerged, certain securities backed by mortgages experienced both
credit and liquidity issues, and investors became hesitant to
purchase many types of asset-backed securities, even those with
little or no exposure to sub-prime mortgages. The money market
funds managed by an affiliate of the Company, FAF Advisors, held
certain investments with exposure to the liquidity and credit
issues of the asset-backed securities markets. In the fourth
quarter of 2007, the Company purchased certain securities at
amortized cost from certain money market funds managed by FAF
Advisors to maintain investor confidence in the funds. Given the
nature and credit ratings of the remaining holdings of these
money market funds, the Company does not intend to purchase
additional investments from the funds.
As a result of purchasing these structured investments, the
Company recognized valuation losses of $107 million in its
financial statements in the fourth quarter of 2007. The Company
continues to monitor changes in market conditions, including the
underlying credit quality and performance of assets
collateralizing these structured investments. Given the nature
of these securities and widening credit spreads for similar
assets, further deterioration in value is likely to occur over
the next few quarters and may result in the recognition of
further impairment by the Company.
Liquidity Risk
Management ALPC
establishes policies, as well as analyzes and manages liquidity,
to ensure that adequate funds are available to meet normal
operating requirements in addition to unexpected customer
demands for funds, such as high levels of deposit withdrawals or
loan demand, in a timely and cost-effective manner. The most
important factor in the preservation of liquidity is maintaining
public confidence that facilitates the retention and growth of a
large, stable supply of core deposits and wholesale funds.
Ultimately, public confidence is generated through profitable
operations, sound credit quality and a strong capital position.
The Company’s performance in these areas has enabled it to
develop a large and reliable base of core funding within its
market areas and in domestic and global capital markets.
Liquidity management is viewed from long-term and short-term
perspectives, as well as from an asset and liability
perspective. Management monitors liquidity through a regular
review of maturity profiles, funding sources, and loan and
deposit forecasts to minimize funding risk.
The Company maintains strategic liquidity and contingency plans
that are subject to the availability of asset liquidity in the
balance sheet. Monthly, ALPC reviews the Company’s ability
to meet funding requirements due to adverse business events.
These funding needs are then matched with specific asset-based
sources to ensure sufficient funds are available. Also,
strategic liquidity policies require diversification of
wholesale funding sources to avoid concentrations in any one
market source. Subsidiary companies are members of various
Federal Home Loan Banks
50 U.S. BANCORP
Table 19
DEBT
RATINGS
Dominion
Standard &
Bond
Moody’s
Poor’s
Fitch
Rating Service
U.S. Bancorp
Short-term borrowings
F1+
R-1 (middle
)
Senior debt and medium-term notes
Aa2
AA
AA-
AA
Subordinated debt
Aa3
AA-
A+
AA (low
)
Preferred stock
A1
A+
A+
Commercial paper
P-1
A-1+
F1+
R-1 (middle
)
U.S. Bank National Association
Short-term time deposits
P-1
A-1+
F1+
R-1 (high
)
Long-term time deposits
Aa1
AA+
AA
AA (high
)
Bank notes
Aa1/P-1
AA+/A-1+
AA-/F1+
AA (high
)
Subordinated debt
Aa2
AA
A+
AA
Commercial paper
P-1
A-1+
F1+
R-1 (high
)
(“FHLB”) that provide a source of funding through FHLB
advances. The Company maintains a Grand Cayman branch for
issuing eurodollar time deposits. The Company also issues
commercial paper through its Canadian branch. In addition, the
Company establishes relationships with dealers to issue national
market retail and institutional savings certificates and
short-term and medium-term bank notes. The Company’s
subsidiary banks also have significant correspondent banking
networks and corporate accounts. Accordingly, the Company has
access to national fed funds, funding through repurchase
agreements and sources of stable, regionally-based certificates
of deposit and commercial paper.
The Company’s ability to raise negotiated funding at
competitive prices is influenced by rating agencies’ views
of the Company’s credit quality, liquidity, capital and
earnings. On February 14, 2007, Standard &
Poor’s Ratings Services upgraded the Company’s credit
ratings to
AA/A-1+. At
December 31, 2007, the credit ratings outlook for the
Company was considered “Positive” by Fitch and
“Stable” by Standard & Poor’s Ratings
Services, Moody’s Investors Service and Dominion Bond
Ratings Service. The debt ratings noted in Table 19 reflect the
rating agencies’ recognition of the Company’s
sector-leading core earnings performance and lower credit risk
profile.
The parent company’s routine funding requirements consist
primarily of operating expenses, dividends paid to shareholders,
debt service, repurchases of common stock and funds used for
acquisitions. The parent company obtains funding to meet its
obligations from dividends collected from its subsidiaries and
the issuance of debt securities.
Under United States Securities and Exchange Commission rules,
the parent company is classified as a “well-known seasoned
issuer,” which allows it to file a registration statement
that does not have a limit on issuance capacity.
“Well-known seasoned issuers” generally include those
companies with outstanding common securities with a market value
of at least $700 million held by non-affiliated parties or
those companies that have issued at least $1 billion in
aggregate principal amount of non-convertible securities, other
than common equity, in the last three years. However, the parent
company’s ability to issue debt and other securities under
a registration statement filed with the United States Securities
and Exchange Commission under these rules is limited by the debt
issuance authority granted by the Company’s Board of
Directors
and/or ALPC
policy.
At December 31, 2007, parent company long-term debt
outstanding was $10.7 billion, compared with
$11.4 billion at December 31, 2006. The
$.7 billion decrease was primarily due to repayments of
$2.6 billion of convertible senior debentures and
$1.4 billion of maturities of subordinated and medium-term
notes, partially offset by the issuances of $3.0 billion of
convertible senior debentures and $.5 billion of junior
subordinated debentures. Total parent company debt scheduled to
mature in 2008 is $.5 billion. These debt obligations may
be met through medium-term note and capital security issuances
and dividends from subsidiaries, as well as from parent company
cash and cash equivalents.
Federal banking laws regulate the amount of dividends that may
be paid by banking subsidiaries without prior approval. The
amount of dividends available to the parent company from its
banking subsidiaries after meeting the regulatory capital
requirements for well-capitalized banks was approximately
$1.1 billion at December 31, 2007. For further
information, see Note 22 of the Notes to Consolidated
Financial Statements.
Off-Balance
Sheet Arrangements
Off-balance sheet arrangements include any contractual
arrangement to which an unconsolidated entity is a party, under
which the Company has an obligation to provide credit or
liquidity enhancements or market risk support. Off-balance sheet
arrangements include
Unrecognized
tax positions of $296 million at December 31, 2007,
are excluded as the Company cannot make a reasonably reliable
estimate of the period of cash settlement with the respective
taxing authority.
(b)
In
the banking industry, interest-bearing obligations are
principally utilized to fund interest-bearing assets. As such,
interest charges on related contractual obligations were
excluded from reported amounts as the potential cash outflows
would have corresponding cash inflows from interest-bearing
assets.
(c)
Amounts
only include obligations related to the unfunded non-qualified
pension plans and post-retirement medical plan.
certain defined guarantees, asset securitization trusts and
conduits. Off-balance sheet arrangements also include any
obligation under a variable interest held by an unconsolidated
entity that provides financing, liquidity, credit enhancement or
market risk support.
In the ordinary course of business, the Company enters into an
array of commitments to extend credit, letters of credit and
various forms of guarantees that may be considered off-balance
sheet arrangements. The nature and extent of these arrangements
are provided in Note 21 of the Notes to Consolidated
Financial Statements.
Asset securitizations and conduits may represent a source of
funding for the Company through off-balance sheet structures.
Credit, liquidity, operational and legal structural risks exist
due to the nature and complexity of asset securitizations and
other off-balance sheet structures. ALPC regularly monitors the
performance of each off-balance sheet structure in an effort to
minimize these risks and ensure compliance with the requirements
of the structures. The Company uses its credit risk management
processes to evaluate the credit quality of underlying assets
and regularly forecasts cash flows to evaluate any potential
impairment of retained interests. Also, regulatory guidelines
require consideration of asset securitizations in the
determination of risk-based capital ratios. The Company does not
rely significantly on off-balance sheet arrangements for
liquidity or capital resources.
The Company sponsors an off-balance sheet conduit, a qualified
special purpose entity (“QSPE”), to which it
transferred high-grade investment securities, funded by the
issuance of commercial paper. Because QSPEs are exempt from
consolidation under the provisions of Financial Accounting
Standards Board Interpretation No. 46R
(“FIN 46R”), “Consolidation of Variable
Interest Entities”, the Company does not consolidate the
conduit structure in its financial statements. The conduit held
assets of $1.2 billion at December 31, 2007, and
$2.2 billion at December 31, 2006. These investment
securities include primarily (i) private label asset-backed
securities, which are insurance “wrapped” by mono-line
insurance companies and (ii) government agency
mortgage-backed securities and collateralized mortgage
obligations. The conduit had commercial paper liabilities of
$1.2 billion at December 31, 2007, and
$2.2 billion at December 31, 2006. The Company
provides a liquidity facility to the conduit. Utilization of the
liquidity facility would be triggered if the conduit is unable
to, or does not, issue commercial paper to fund its assets. A
liability for the estimate of the potential risk of loss for the
Company as the liquidity facility provider is recorded on the
balance sheet in other liabilities. The liability is adjusted
downward over time as the underlying assets pay down with the
offset recognized as other noninterest income. The liability for
the liquidity facility was $2 million and $10 million
at December 31, 2007 and 2006, respectively. In addition,
the Company recorded its retained residual interest in the
investment securities conduit of $2 million and
$13 million at December 31, 2007 and 2006,
respectively.
Capital
Management The Company
is committed to managing capital for maximum shareholder benefit
and maintaining strong protection for depositors and creditors.
The Company has targeted returning 80 percent of earnings
to its common shareholders through a combination of dividends
and share repurchases. During 2007, the Company returned
111 percent of earnings. The Company continually assesses
its business risks and capital position. The Company also
manages its capital to exceed regulatory capital requirements
for well-capitalized bank holding companies. To achieve these
capital goals, the Company employs a variety of capital
management tools, including dividends, common share repurchases,
and the issuance of subordinated debt and other capital
instruments. Total shareholders’ equity was
$21.0 billion at December 31,
52 U.S. BANCORP
Table 21
ÜREGULATORY
CAPITAL RATIOS
At December 31
(Dollars in Millions)
2007
2006
U.S. Bancorp
Tier 1 capital
$
17,539
$
17,036
As a percent of risk-weighted assets
8.3
%
8.8
%
As a percent of adjusted quarterly average assets (leverage
ratio)
2007, compared with $21.2 billion at December 31,2006. The decrease was the result of share repurchases and
dividends, partially offset by corporate earnings.
On December 11, 2007, the Company increased its dividend
rate per common share by 6.25 percent, from $.40 per
quarter to $.425 per quarter. On December 12, 2006, the
Company increased its dividend rate per common share by
21.2 percent, from $.33 per quarter to $.40 per quarter.
On December 21, 2004, the Board of Directors approved and
announced an authorization to repurchase 150 million shares
of common stock during the next 24 months. On
August 3, 2006, the Company announced that the Board of
Directors approved an authorization to repurchase
150 million shares of common stock through
December 31, 2008. This new authorization replaced the
December 21, 2004, share repurchase program. During 2006,
the Company repurchased 62 million shares under the 2004
authorization and 28 million shares under the 2006
authorization. The average price paid for all shares repurchased
in 2006 was $31.35 per share. In 2007, the Company repurchased
58 million shares under the 2006 authorization. The average
price paid for shares repurchased in 2007 was $34.84 per share.
For a complete analysis of activities impacting
shareholders’ equity and capital management programs, refer
to Note 14 of the Notes to Consolidated Financial
Statements.
The following table provides a detailed analysis of all shares
repurchased under the 2006 authorization during the fourth
quarter of 2007:
Total Number
Maximum Number
of Shares
of Shares that
May
Purchased as
Average
Yet Be Purchased
Part of the
Price Paid
Under the
Time Period
Program
per Share
Program
October
168,766
$
32.74
64,320,188
November
272
31.04
64,319,916
December
58,439
31.97
64,261,477
Total
227,477
$
32.54
64,261,477
U.S. BANCORP 53
Banking regulators define minimum capital requirements for banks
and financial services holding companies. These requirements are
expressed in the form of a minimum Tier 1 capital ratio,
total risk-based capital ratio, and Tier 1 leverage ratio.
The minimum required level for these ratios is 4.0 percent,
8.0 percent, and 4.0 percent, respectively. The
Company targets its regulatory capital levels, at both the bank
and bank holding company level, to exceed the
“well-capitalized” threshold for these ratios of
6.0 percent, 10.0 percent, and 5.0 percent,
respectively. All regulatory ratios, at both the bank and bank
holding company level, continue to be in excess of stated
“well-capitalized” requirements.
Table 21 provides a summary of capital ratios as of
December 31, 2007 and 2006, including Tier 1 and total
risk-based capital ratios, as defined by the regulatory
agencies. During 2008, the Company expects to target capital
level ratios of 8.5 percent Tier 1 capital and
12.0 percent total risk-based capital on a consolidated
basis.
FOURTH QUARTER
SUMMARY
The Company reported net income of $942 million for the
fourth quarter of 2007, or $.53 per diluted common share,
compared with $1,194 million, or $.66 per diluted common
share, for the fourth quarter of 2006. Return on average assets
and return on average common equity were 1.63 percent and
18.3 percent, respectively, for the fourth quarter of 2007,
compared with returns of 2.18 percent and
23.2 percent, respectively, for the fourth quarter of 2006.
Several significant items impacted the Company’s quarterly
results, including a $215 million Visa Charge and
$107 million for valuation losses related to securities
purchased from certain money market funds managed by an
affiliate. The cumulative impact of these charges in the fourth
quarter of 2007 was approximately $.13 per diluted common share.
The Company’s results for the fourth quarter of 2006
included a $52 million gain related to the sale of a 401(k)
recordkeeping business, a $22 million debt prepayment
charge and a reduction in tax liabilities related to the
resolution of various income tax examinations.
Table 22
FOURTH
QUARTER
RESULTS
Three Months
Ended
December 31,
(In millions, Except
Per Share Data)
2007
2006
Condensed Income Statement
Net interest income (taxable-equivalent basis) (a)
$
1,763
$
1,695
Noninterest income
1,773
1,718
Securities gains (losses), net
4
11
Total net revenue
3,540
3,424
Noninterest expense
1,934
1,612
Provision for credit losses
225
169
Income before taxes
1,381
1,643
Taxable-equivalent adjustment
22
15
Applicable income taxes
417
434
Net income
$
942
$
1,194
Net income applicable to common equity
$
927
$
1,179
Per Common Share
Earnings per share
$
.54
$
.67
Diluted earnings per share
.53
.66
Dividends declared per share
.425
.400
Average common shares outstanding
1,726
1,761
Average diluted common shares outstanding
1,746
1,789
Financial Ratios
Return on average assets
1.63
%
2.18
%
Return on average common equity
18.3
23.2
Net interest margin (taxable-equivalent basis) (a)
3.51
3.56
Efficiency ratio (b)
54.7
47.2
(a)
Interest
and rates are presented on a fully taxable-equivalent basis
utilizing a tax rate of 35 percent.
(b)
Computed
as noninterest expense divided by the sum of net interest income
on a taxable-equivalent basis and noninterest income excluding
securities gains (losses), net.
54 U.S. BANCORP
Total net revenue, on a taxable-equivalent basis for the fourth
quarter of 2007, was $116 million (3.4 percent) higher
than the fourth quarter of 2006, reflecting a 4.0 percent
increase in net interest income and a 2.8 percent increase
in noninterest income. Net interest income increased from a year
ago, driven by growth in earning assets, somewhat higher credit
spreads, an increase in yield-related loan fees and lower
funding rates. Noninterest income growth was driven primarily by
organic growth in fee-based revenue of 12.3 percent, muted
somewhat by the $107 million market valuation losses
recorded in the fourth quarter of 2007 and a $52 million
gain recognized in the fourth quarter of 2006 related to the
Company’s sale of a 401(k) recordkeeping business.
Fourth quarter net interest income, on a taxable-equivalent
basis was $1,763 million, compared with $1,695 million
in the fourth quarter of 2006. Average earning assets for the
period increased over the fourth quarter of 2006 by
$10.6 billion (5.6 percent), primarily driven by a
$7.8 billion (5.4 percent) increase in average loans.
The positive impact to net interest income from the growth in
earning assets was partially offset by a lower net interest
margin. The net interest margin in the fourth quarter of 2007
was 3.51 percent, compared with 3.56 percent in the
fourth quarter of 2006, reflecting the competitive environment
in early 2007 and declining net free funds relative to a year
ago. The reduction in net free funds was primarily due to a
decline in noninterest-bearing deposits, an investment in
bank-owned life insurance, share repurchases through mid-third
quarter of 2007 and the impact of acquisitions. An increase in
loan fees from a year ago and improved wholesale funding rates
partially offset these factors.
Noninterest income in the fourth quarter of 2007 was
$1,777 million, compared with $1,729 million in the
same period of 2006. The $48 million (2.8 percent)
increase was driven by strong organic fee-based revenue growth,
offset somewhat by the $107 million valuation losses
related to securities purchased from certain money market funds
managed by an affiliate, recognized in the fourth quarter of
2007, and the $52 million gain on the sale of a 401(k)
recordkeeping business recorded in the fourth quarter of 2006.
After consideration of these factors, noninterest income grew by
approximately 12.3 percent year-over-year. Credit and debit
card revenue and corporate payment products revenue were higher
in the fourth quarter of 2007 than the fourth quarter of 2006 by
$71 million (33.8 percent) and $24 million
(17.0 percent), respectively. The strong growth in credit
and debit card revenue was primarily driven by an increase in
customer accounts and higher customer transaction volumes from a
year ago. Approximately 7.6 percent of the growth in credit
card revenues was the result of the full year impact of a
favorable rate change from renegotiating a contract with a
cardholder association. Corporate payment products revenue
growth reflected organic growth in sales volumes and card usage
and the impact of an acquired business. Merchant processing
services revenue was higher in the fourth quarter of 2007 than
the same quarter a year ago by $35 million
(14.3 percent), primarily reflecting an increase in
customers and sales volumes. Trust and investment management
fees increased $25 million (7.8 percent)
year-over-year, due to core account growth and favorable equity
market conditions. Deposit service charges grew year-over-year
by $13 million (5.0 percent) driven by increased
transaction-related fees and the impact of continued growth in
net new checking accounts. Additionally, deposit account-related
revenue, traditionally reflected in this fee category, continued
to migrate to yield-related loan fees as customers utilize new
consumer products. Treasury management fees increased
$10 million (9.3 percent) due, in part, to new
customer account growth, new product offerings and higher
transaction volumes. Commercial products revenue increased
$17 million (16.3 percent) year-over-year due to
higher syndication fees and foreign exchange and commercial
leasing revenue. Mortgage banking revenue grew $23 million
(92.0 percent) over the prior year due to an increase in
mortgage servicing income and production gains. These favorable
changes in fee-based revenue were partially offset by a decline
in other income of $167 million (78.4 percent)
compared with the fourth quarter of 2006. The decline in other
income was primarily due to the $107 million in valuation
losses related to securities purchased in the fourth quarter of
2007 from certain money market funds managed by an affiliate and
the $52 million gain on the sale of a 401(k) defined
contribution recordkeeping business recorded in the fourth
quarter of 2006. This decline was partially offset by increased
revenue from investment in bank-owned life insurance programs.
Securities gains (losses) were lower year-over-year by
$7 million.
Noninterest expense was $1,934 million in the fourth
quarter of 2007, an increase of $322 million
(20.0 percent) from the fourth quarter of 2006. The
increase included the $215 million Visa Charge in the
fourth quarter of 2007 and $22 million of debt prepayment
charges recorded in the fourth quarter of 2006. Compensation
expense was higher year-over-year by $69 million
(11.1 percent), due to growth in ongoing bank operations
and acquired businesses. Employee benefits expense increased
$17 million (16.7 percent) year-over-year as higher
medical costs were partially offset by lower pension costs. Net
occupancy and equipment expense increased $9 million
(5.4 percent) from the fourth quarter of 2006 primarily due
to acquisitions and branch-based business initiatives. Postage,
printing and
U.S. BANCORP 55
supplies expense increased $6 million (9.0 percent)
from the fourth quarter of 2006, due primarily to changes in
postage rates. Other expense increased in the fourth quarter of
2007 from the same quarter of 2006 by $236 million
(84.6 percent), due primarily to the Visa Charge and higher
credit-related costs for other real estate owned and loan
collection activities. These increases were partially offset by
debt prepayment charges recorded in the fourth quarter of 2006.
The provision for credit losses for the fourth quarter of 2007
was $225 million, an increase of $56 million
(33.1 percent) from the fourth quarter of 2006. The
increase in the provision for credit losses from a year ago
reflected growth in credit card accounts, increasing retail loan
delinquencies and higher commercial losses. Net charge-offs in
the fourth quarter of 2007 were $225 million, compared with
net charge-offs of $169 million during the fourth quarter
of 2006.
The provision for income taxes for the fourth quarter of 2007
increased to an effective tax rate of 30.7 percent from an
effective tax rate of 26.7 percent in the fourth quarter of
2006. The lower tax rate in the fourth quarter of the prior year
compared with the current quarter was primarily due to the
resolution of federal income tax examinations for all years
through 2004 and certain state tax examinations during the
fourth quarter of 2006, which reduced the Company’s tax
liabilities.
LINE OF BUSINESS
FINANCIAL REVIEW
Within the Company, financial performance is measured by major
lines of business, which include Wholesale Banking, Consumer
Banking, Wealth Management & Securities Services,
Payment Services, and Treasury and Corporate Support. These
operating segments are components of the Company about which
financial information is available and is evaluated regularly in
deciding how to allocate resources and assess performance.
Basis for
Financial Presentation
Business line results
are derived from the Company’s business unit profitability
reporting systems by specifically attributing managed balance
sheet assets, deposits and other liabilities and their related
income or expense. Goodwill and other intangible assets are
assigned to the lines of business based on the mix of business
of the acquired entity. Within the Company, capital levels are
evaluated and managed centrally; however, capital is allocated
to the operating segments to support evaluation of business
performance. Business lines are allocated capital on a
risk-adjusted basis considering economic and regulatory capital
requirements. Generally, the determination of the amount of
capital allocated to each business line includes credit and
operational capital allocations following a Basel II
regulatory framework adjusted for regulatory Tier 1
leverage requirements. Interest income and expense is determined
based on the assets and liabilities managed by the business
line. Because funding and asset liability management is a
central function, funds transfer-pricing methodologies are
utilized to allocate a cost of funds used or credit for funds
provided to all business line assets and liabilities,
respectively, using a matched funding concept. Also, each
business unit is allocated the taxable-equivalent benefit of
tax-exempt products. The residual effect on net interest income
of asset/liability management activities is included in Treasury
and Corporate Support. Noninterest income and expenses directly
managed by each business line, including fees, service charges,
salaries and benefits, and other direct revenues and costs are
accounted for within each segment’s financial results in a
manner similar to the consolidated financial statements.
Occupancy costs are allocated based on utilization of facilities
by the lines of business. Generally, operating losses are
charged to the line of business when the loss event is realized
in a manner similar to a loan charge-off. Noninterest expenses
incurred by centrally managed operations or business lines that
directly support another business line’s operations are
charged to the applicable business line based on its utilization
of those services primarily measured by the volume of customer
activities, number of employees or other relevant factors. These
allocated expenses are reported as net shared services expense
within noninterest expense. Certain activities that do not
directly support the operations of the lines of business or for
which the line of business is not considered financially
accountable in evaluating their performance are not charged to
the lines of business. The income or expenses associated with
these corporate activities is reported within the Treasury and
Corporate Support line of business. The provision for credit
losses within the Wholesale Banking, Consumer Banking, Wealth
Management & Securities Services and Payment Services
lines of business is based on net charge-offs, while Treasury
and Corporate Support reflects the residual component of the
Company’s total consolidated provision for credit losses
determined in accordance with accounting principles generally
accepted in the United States. Income taxes are assessed to each
line of business at a standard tax rate with the residual tax
expense or benefit to arrive at the consolidated effective tax
rate included in Treasury and Corporate Support.
Designations, assignments and allocations change from time to
time as management systems are enhanced, methods of evaluating
performance or product lines change or business segments are
realigned to better respond to the Company’s diverse
customer base. During 2007, certain organization and methodology
changes were made and,
56 U.S. BANCORP
accordingly, 2006 results were restated and presented on a
comparable basis. Due to organizational and methodology changes,
the Company’s basis of financial presentation differed in
2005. The presentation of comparative business line results for
2005 is not practical and has not been provided.
Wholesale Banking
Wholesale Banking offers
lending, equipment finance and small-ticket leasing, depository,
treasury management, capital markets, foreign exchange,
international trade services and other financial services to
middle market, large corporate, commercial real estate, and
public sector clients. Wholesale Banking contributed
$1,093 million of the Company’s net income in 2007, a
decrease of $100 million (8.4 percent), compared with
2006. The decrease was primarily driven by lower total net
revenue, higher total noninterest expense and an increase in the
provision for credit losses.
Total net revenue decreased $72 million (2.6 percent)
in 2007, compared with 2006. Net interest income, on a
taxable-equivalent basis, decreased $81 million
(4.2 percent) in 2007, compared with 2006, driven by
tighter credit spreads and a decline in average
noninterest-bearing deposit balances as business customers
managed their liquidity to fund business growth or to generate
higher returns by investing excess funds in interest-bearing
deposit and sweep products. The decrease was partially offset by
growth in average loan balances of $1.3 billion
(2.6 percent) and the margin benefit of deposits. The
increase in average loans was primarily driven by commercial
loan growth during 2007 offset somewhat by declining commercial
real estate loan balances. The $9 million
(1.0 percent) increase in noninterest income in 2007,
compared with 2006, was due to increases in treasury management
and commercial products revenue. These favorable increases in
wholesale banking fees were partially offset by market-related
valuation losses in the second half of 2007.
Noninterest expense increased $39 million
(4.2 percent) in 2007 compared with 2006, primarily as a
result of increases in personnel expenses related to investments
in select business units. The provision for credit losses
increased $47 million to $51 million in 2007, compared
with $4 million in 2006. The unfavorable change was due to
an increase in gross charge-offs driven by higher levels of
nonperforming loans from a year ago. Nonperforming assets were
$334 million at December 31, 2007, compared with
$241 million at December 31, 2006, representing
.60 percent of loans outstanding at December 31, 2007,
compared with .47 percent of loans outstanding at
December 31, 2006. The increase in nonperforming loans
during the year is principally related to continued stress in
residential homebuilding and related industry sectors. Refer to
the “Corporate Risk Profile” section for further
information on factors impacting the credit quality of the
commercial and commercial real estate loan portfolios.
Consumer Banking
Consumer Banking
delivers products and services through banking offices,
telephone servicing and sales, on-line services, direct mail and
ATMs. It encompasses community banking, metropolitan banking,
in-store banking, small business banking, consumer lending,
mortgage banking, consumer finance, workplace banking, student
banking and
24-hour
banking. Consumer Banking contributed $1,746 million of the
Company’s net income in 2007, a decrease of
$45 million (2.5 percent), compared with 2006. Within
the Consumer Banking business, the retail banking division
contributed $1,641 million of the total net income in 2007,
or a decrease of 4.7 percent, compared with 2006. Mortgage
banking contributed $105 million of the business
line’s net income in 2007, an increase of 52.2 percent
from the prior year.
Total net revenue increased $148 million (2.7 percent)
in 2007, compared with 2006. Net interest income, on a
taxable-equivalent basis, increased $24 million
(.6 percent) in 2007, compared with 2006. The
year-over-year increase in net interest income was due to growth
in average loans of $3.1 billion (4.3 percent), higher
loan fees and the funding benefit of deposits. Partially
offsetting these increases were reduced spreads on commercial
and retail loans due to competitive pricing within the
Company’s markets and lower noninterest bearing deposit
balances. The increase in average loan balances reflected strong
growth in all loan categories, with the largest increase in
retail loans. The favorable change in retail loans was
principally driven by an increase in installment and home equity
loans, partially offset by a reduction in retail leasing
balances due to customer demand for installment loan products
and pricing competition. The year-over-year decrease in average
deposits reflected a reduction in savings and
noninterest-bearing deposit products, offset somewhat by growth
in time deposits and interest checking. Average time deposit
balances grew $1.5 billion (7.8 percent) in 2007,
compared with the prior year, as a portion of
noninterest-bearing and money market balances migrated to
fixed-rate time deposit products. Average savings balances
declined $1.7 billion (8.0 percent) in 2007, compared
with 2006, principally related to a decrease in money market
account balances. Fee-based noninterest income increased
$124 million (7.3 percent) in 2007, compared with
2006, driven by growth in mortgage banking revenue and an
increase in deposit service charges. Mortgage banking revenue
grew due to gains from stronger loan production and higher
servicing income in 2007, as well as the impact of adopting fair
value accounting for MSRs in the first quarter of 2006. The
growth in deposit services charges was muted somewhat from past
experience as deposit account-related revenue traditionally
reflected in
U.S. BANCORP 57
deposit service charges, continued to migrate to yield-related
loan fees as customers utilized new consumer products.
Total noninterest expense increased $138 million
(5.5 percent) in 2007, compared with the prior year. The
increase was primarily attributable to higher compensation and
employee benefits expense which reflected business investments
in customer service and various promotional activities,
including further deployment of the PowerBank initiative.
Additionally, the increase included the net addition of 23
in-store and 23 traditional branches during 2007 and higher
credit related costs associated with collection activities and
other real estate owned.
The provision for credit losses increased $82 million
(33.1 percent) in 2007, compared with 2006. The increase
was attributable to higher net charge-offs driven by an increase
in nonperforming assets of 15.5 percent from a year ago. As
a percentage of average loans outstanding, net charge-offs
increased to .44 percent in 2007, compared with
.35 percent in 2006. Commercial and commercial real estate
loan net charge-offs increased $13 million and retail loan
and residential mortgage charge-offs increased $69 million
in 2007, compared with 2006. Nonperforming assets were
$327 million at December 31, 2007, compared with
$283 million at December 31, 2006, representing
.45 percent of loans outstanding at December 31, 2007,
compared with .40 percent of loans outstanding at
December 31, 2006. Refer to the “Corporate Risk
Profile” section for further information on factors
impacting the credit quality of the loan portfolios.
banking, financial advisory, investment management, retail
brokerage services, insurance, custody and mutual fund servicing
through five businesses: Wealth Management, Corporate Trust, FAF
Advisors, Institutional Trust and Custody and
Fund Services. During 2007, Wealth Management &
Securities Services contributed $592 million of the
Company’s net income, a decrease of $5 million
(.8 percent) compared with 2006. The decrease was primarily
attributed to valuation losses related to securities purchased
from certain money market funds managed by FAF Advisors. The
decrease was partially offset by core account fee growth and
improved equity market conditions relative to a year ago.
Total net revenue increased $4 million (.2 percent) in
2007, compared with 2006. Net interest income, on a
taxable-equivalent basis, decreased $6 million
(1.2 percent) from the prior year. The decrease in net
interest income was due to the unfavorable impacts of deposit
pricing and tightening credit spreads, partially offset by
earnings from deposit growth. The increase in total deposits was
attributable to growth in noninterest-bearing deposits, interest
checking and time deposits, principally due to acquired
businesses and growth related to broker-dealer and institutional
trust customers. Noninterest income increased $10 million
(.7 percent) in 2007, compared with 2006, primarily driven
by core account fee growth and favorable equity market
conditions. Strong organic growth of 8.1 percent was
substantially offset by the $107 million of valuation
losses realized by this line of business in 2007.
Total noninterest expense increased $9 million
(.9 percent) in 2007, compared with 2006, primarily due to
the completion of certain acquisition integration activities.
Payment Services
Payment Services
includes consumer and business credit cards, stored-value cards,
debit cards, corporate and purchasing card services, consumer
lines of credit, ATM processing and merchant processing. Payment
Services are highly inter-related with banking products and
services of the other lines of business and rely on access to
the bank subsidiary’s settlement network, lower cost
funding available to the Company, cross-selling opportunities
and operating efficiencies. Payment Services contributed
$1,075 million of the Company’s net income in 2007, or
an increase of $109 million (11.3 percent), compared
with 2006. The increase was due to growth in total net revenue,
driven by loan growth and higher transaction volumes, partially
offset by an increase in total noninterest expense and a higher
provision for credit losses.
Total net revenue increased $437 million
(13.5 percent) in 2007, compared with 2006. The 2007
increase in net interest income of $80 million
(12.2 percent), compared with the prior year, was due to
growth in higher yielding retail credit card loan balances,
partially offset by the margin impact of merchant receivables
and growth in corporate payment card balances. The increase in
fee-based revenue of $357 million (13.8 percent) in
2007 was driven by organic account growth, higher sales
transaction volumes and business expansion initiatives. Credit
and debit card revenue was higher due to an increase in customer
accounts and balance transfers, higher customer transaction
volumes, a favorable rate change from renegotiating a contract
with a cardholder association and an increase in cash advance
and prepaid card fees from a year ago. Corporate payment
products revenue increased, reflecting organic growth in sales
volumes and card usage, and the impact of an acquired business.
Merchant processing services revenue grew 14.1 percent
domestically and 17.6 percent in the European business
division compared with a year ago. This organic growth was due
to an increase in the number of merchants serviced, sales
transactions and related sales volumes and merchant equipment
and other related fees.
Total noninterest expense increased $145 million
(10.1 percent) in 2007, compared with 2006, due primarily
to operating costs to support organic growth, higher collection
costs and investments in new business initiatives, including
costs associated with marketing programs and acquisitions.
The provision for credit losses increased $120 million
(42.3 percent) in 2007, compared with 2006, due to higher
net charge-offs, which reflected average retail credit card
portfolio growth of 25.4 percent and somewhat higher
delinquency rates from a year ago. As a percentage of average
loans outstanding, net charge-offs were 2.72 percent in
2007, compared with 2.26 percent in 2006.
Treasury and
Corporate Support
Treasury and Corporate
Support includes the Company’s investment portfolios,
funding, capital management and asset securitization activities,
interest rate risk management, the net effect of transfer
pricing related to average balances and the residual aggregate
of those expenses associated with corporate activities that are
managed on a consolidated basis. During 2007, Treasury and
Corporate Support recorded a net loss of $182 million,
compared with net income in 2006 of $204 million.
Total net revenue decreased $217 million in 2007, compared
with 2006, primarily due to a decrease in both net interest
income and noninterest income from a year ago. The decline in
net interest income reflected the impact of issuing higher cost
wholesale funding to support earning asset growth. The decrease
in noninterest income was primarily due to gains recognized in
2006 related to the initial public offering and subsequent sale
of equity interests in a cardholder association, trading gains
realized related to terminating certain interest rate
derivatives, and a gain related to the sale of a 401(k)
recordkeeping business.
Total noninterest expense increased $351 million in 2007,
compared with 2006. The year-over-year increase was primarily
driven by a $330 million charge related to a contingent
obligation for certain Visa U.S.A. Inc. litigation, including
the settlement between Visa U.S.A. Inc and American Express
announced in the third quarter of 2007.
The provision for credit losses for this business unit
represents the residual aggregate of the net credit losses
allocated to the reportable business units and the
Company’s recorded provision determined in accordance with
accounting principles generally accepted in the United States.
Refer to the “Corporate Risk Profile” section for
further information on the provision for credit losses,
nonperforming assets and factors considered by the Company in
assessing the credit quality of the loan portfolio and
establishing the allowance for credit losses.
Income taxes are assessed to each line of business at a
managerial tax rate of 36.4 percent with the residual tax
expense or benefit to arrive at the consolidated effective tax
rate included in Treasury and Corporate Support. The
consolidated effective tax rate of the Company was
30.3 percent in 2007, compared with 30.8 percent in
2006. The decrease in the effective tax rate from 2006 primarily
reflected higher tax exempt income from investment securities
and insurance products as well as incremental tax credits from
affordable housing and other tax-advantaged investments.
60 U.S. BANCORP
ACCOUNTING CHANGES
Note 2 of the Notes to Consolidated Financial Statements
discusses accounting standards adopted in the current year, as
well as, accounting standards recently issued but not yet
required to be adopted and the expected impact of these changes
in accounting standards. To the extent the adoption of new
accounting standards affects the Company’s financial
condition, results of operations or liquidity, the impacts are
discussed in the applicable section(s) of the Management’s
Discussion and Analysis and the Notes to Consolidated Financial
Statements.
CRITICAL ACCOUNTING
POLICIES
The accounting and reporting policies of the Company comply with
accounting principles generally accepted in the United States
and conform to general practices within the banking industry.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions. The financial position and
results of operations can be affected by these estimates and
assumptions, which are integral to understanding the
Company’s financial statements. Critical accounting
policies are those policies that management believes are the
most important to the portrayal of the Company’s financial
condition and results, and require management to make estimates
that are difficult, subjective or complex. Most accounting
policies are not considered by management to be critical
accounting policies. Several factors are considered in
determining whether or not a policy is critical in the
preparation of financial statements. These factors include,
among other things, whether the estimates are significant to the
financial statements, the nature of the estimates, the ability
to readily validate the estimates with other information
including third-parties or available prices, and sensitivity of
the estimates to changes in economic conditions and whether
alternative accounting methods may be utilized under generally
accepted accounting principles. Management has discussed the
development and the selection of critical accounting policies
with the Company’s Audit Committee.
Significant accounting policies are discussed in Note 1 of
the Notes to Consolidated Financial Statements. Those policies
considered to be critical accounting policies are described
below.
Allowance for
Credit Losses The
allowance for credit losses is established to provide for
probable losses inherent in the Company’s credit portfolio.
The methods utilized to estimate the allowance for credit
losses, key assumptions and quantitative and qualitative
information considered by management in determining the adequacy
of the allowance for credit losses are discussed in the
“Credit Risk Management” section.
Management’s evaluation of the adequacy of the allowance
for credit losses is often the most critical of accounting
estimates for a banking institution. It is an inherently
subjective process impacted by many factors as discussed
throughout the Management’s Discussion and Analysis section
of the Annual Report. Although risk management practices,
methodologies and other tools are utilized to determine each
element of the allowance, degrees of imprecision exist in these
measurement tools due in part to subjective judgments involved
and an inherent lagging of credit quality measurements relative
to the stage of the business cycle. Even determining the stage
of the business cycle is highly subjective. As discussed in the
“Analysis and Determination of Allowance for Credit
Losses” section, management considers the effect of
imprecision and many other factors in determining the allowance
for credit losses. If not considered, inherent losses in the
portfolio related to imprecision and other subjective factors
could have a dramatic adverse impact on the liquidity and
financial viability of a bank.
Given the many subjective factors affecting the credit
portfolio, changes in the allowance for credit losses may not
directly coincide with changes in the risk ratings of the credit
portfolio reflected in the risk rating process. This is in part
due to the timing of the risk rating process in relation to
changes in the business cycle, the exposure and mix of loans
within risk rating categories, levels of nonperforming loans and
the timing of charge-offs and recoveries. For example, the
amount of loans within specific risk ratings may change,
providing a leading indicator of improving credit quality, while
nonperforming loans and net charge-offs continue at elevated
levels. Also, inherent loss ratios, determined through migration
analysis and historical loss performance over the estimated
business cycle of a loan, may not change to the same degree as
net charge-offs. Because risk ratings and inherent loss ratios
primarily drive the allowance specifically allocated to
commercial loans, the amount of the allowance for commercial and
commercial real estate loans might decline; however, the degree
of change differs somewhat from the level of changes in
nonperforming loans and net charge-offs. Also, management would
maintain an adequate allowance for credit losses by increasing
the allowance during periods of economic uncertainty or changes
in the business cycle.
Some factors considered in determining the adequacy of the
allowance for credit losses are quantifiable while other factors
require qualitative judgment. Management conducts an analysis
with respect to the accuracy of risk ratings and the volatility
of inherent losses, and utilizes
U.S. BANCORP 61
this analysis along with qualitative factors, including
uncertainty in the economy from changes in unemployment rates,
the level of bankruptcies and concentration risks, including
risks associated with the weakened housing market and highly
leveraged enterprise-value credits, in determining the overall
level of the allowance for credit losses. The Company’s
determination of the allowance for commercial and commercial
real estate loans is sensitive to the assigned credit risk
ratings and inherent loss rates at December 31, 2007. In
the event that 10 percent of loans within these portfolios
experienced downgrades of two risk categories, the allowance for
commercial and commercial real estate would increase by
approximately $168 million at December 31, 2007. In
the event that inherent loss or estimated loss rates for these
portfolios increased by 10 percent, the allowance
determined for commercial and commercial real estate would
increase by approximately $95 million at December 31,2007. The Company’s determination of the allowance for
residential and retail loans is sensitive to changes in
estimated loss rates. In the event that estimated loss rates
increased by 10 percent, the allowance for residential
mortgages and retail loans would increase by approximately
$82 million at December 31, 2007. Because several
quantitative and qualitative factors are considered in
determining the allowance for credit losses, these sensitivity
analyses do not necessarily reflect the nature and extent of
future changes in the allowance for credit losses. They are
intended to provide insights into the impact of adverse changes
in risk rating and inherent losses and do not imply any
expectation of future deterioration in the risk rating or loss
rates. Given current processes employed by the Company,
management believes the risk ratings and inherent loss rates
currently assigned are appropriate. It is possible that others,
given the same information, may at any point in time reach
different reasonable conclusions that could be significant to
the Company’s financial statements. Refer to the
“Analysis and Determination of the Allowance for Credit
Losses” section for further information.
Estimations of
Fair Value A portion of
the Company’s assets and liabilities are carried at fair
value on the Consolidated Balance Sheet, with changes in fair
value recorded either through earnings or other comprehensive
income in accordance with applicable accounting principles
generally accepted in the United States. These include all of
the Company’s trading securities, available-for-sale
securities, derivatives and MSRs. The estimation of fair value
also affects loans held-for-sale, which are recorded at the
lower of cost or fair value. The determination of fair value is
important for certain other assets, including goodwill and other
intangible assets, impaired loans, other real estate owned and
other repossessed assets, that are recorded at either fair value
or fair value less costs-to-sell when acquired, and are
periodically evaluated for impairment using fair value estimates.
Fair value is generally defined as the amount at which an asset
or liability could be exchanged in a current transaction between
willing, unrelated parties, other than in a forced or
liquidation sale. Fair value is based on quoted market prices in
an active market, or if market prices are not available, is
estimated using models employing techniques such as matrix
pricing or discounting expected cash flows. The significant
assumptions used in the models, which include assumptions for
interest rates, discount rates, prepayments and credit losses,
are independently verified against observable market data where
possible. Where observable market data is not available, the
estimate of fair value becomes more subjective and involves a
high degree of judgment. In this circumstance, fair value is
estimated based on management’s judgment regarding the
value that market participants would assign to the asset or
liability. This valuation process takes into consideration
factors such as market illiquidity. Imprecision in estimating
these factors can impact the amount recorded on the balance
sheet for a particular asset or liability with related impacts
to earnings or other comprehensive income.
Trading and available-for-sale securities are generally valued
based on quoted market prices. However, certain securities are
traded less actively and therefore, may not be able to be valued
based on quoted market prices. The determination of fair value
may require benchmarking to similar instruments or performing a
discounted cash flow analysis using estimates of future cash
flows and prepayment, interest and default rates. An example is
interests held in entities collateralized by mortgage
and/or debt
obligations as part of a structured investment. For more
information on investment securities, refer to Note 4 of
the Notes to Consolidated Financial Statements.
As few derivative contracts are listed on an exchange, the
majority of the Company’s derivative positions are valued
using valuation techniques that use readily observable market
parameters. Certain derivatives, however, must be valued using
techniques that include unobservable parameters. For these
instruments, the significant assumptions must be estimated and
therefore, are subject to judgment. These instruments are
normally traded less actively. An example includes certain
long-dated interest rate swaps. Table 18 provides a summary of
the Company’s derivative positions.
Mortgage
Servicing Rights
Mortgage servicing
rights are capitalized as separate assets when loans are sold
and servicing is retained or may be purchased from others. MSRs
are initially recorded at fair value and at each subsequent
reporting date. Because MSRs do not trade in an active
62 U.S. BANCORP
market with readily observable prices, the Company determines
the fair value by estimating the present value of the
asset’s future cash flows utilizing market-based prepayment
rates, discount rates, and other assumptions validated through
comparison to trade information, industry surveys and
independent third party appraisals. Changes in the fair value of
MSRs are recorded in earnings during the period in which they
occur. Risks inherent in the MSRs valuation include higher than
expected prepayment rates
and/or
delayed receipt of cash flows. The Company may utilize
derivatives, including futures and options contracts to mitigate
the valuation risk. The estimated sensitivity to changes in
interest rates of the fair value of the MSRs portfolio and the
related derivative instruments at December 31, 2007, to an
immediate 25 and 50 basis point downward movement in
interest rates would be an increase of approximately
$1 million and a decrease of approximately $8 million,
respectively. An upward movement in interest rates at
December 31, 2007, of 25 and 50 basis points would
decrease the value of the MSRs and related derivative
instruments by approximately $14 million and
$49 million, respectively. Refer to Note 9 of the
Notes to Consolidated Financial Statements for additional
information regarding MSRs.
Goodwill and
Other Intangibles The
Company records all assets and liabilities acquired in purchase
acquisitions, including goodwill and other intangibles, at fair
value. Goodwill and indefinite-lived assets are not amortized
but are subject, at a minimum, to annual tests for impairment.
Under certain situations, interim impairment tests may be
required if events occur or circumstances change that would more
likely than not reduce the fair value of a reporting segment
below its carrying amount. Other intangible assets are amortized
over their estimated useful lives using straight-line and
accelerated methods and are subject to impairment if events or
circumstances indicate a possible inability to realize the
carrying amount.
The initial recognition of goodwill and other intangible assets
and subsequent impairment analysis require management to make
subjective judgments concerning estimates of how the acquired
assets will perform in the future using valuation methods
including discounted cash flow analysis. Additionally, estimated
cash flows may extend beyond ten years and, by their nature, are
difficult to determine over an extended timeframe. Events and
factors that may significantly affect the estimates include,
among others, competitive forces, customer behaviors and
attrition, changes in revenue growth trends, cost structures,
technology, changes in discount rates and specific industry and
market conditions. In determining the reasonableness of cash
flow estimates, the Company reviews historical performance of
the underlying assets or similar assets in an effort to assess
and validate assumptions utilized in its estimates.
In assessing the fair value of reporting units, the Company may
consider the stage of the current business cycle and potential
changes in market conditions in estimating the timing and extent
of future cash flows. Also, management often utilizes other
information to validate the reasonableness of its valuations
including public market comparables, and multiples of recent
mergers and acquisitions of similar businesses. Valuation
multiples may be based on revenue, price-to-earnings and
tangible capital ratios of comparable public companies and
business segments. These multiples may be adjusted to consider
competitive differences including size, operating leverage and
other factors. The carrying amount of a reporting unit is
determined based on the capital required to support the
reporting unit’s activities including its tangible and
intangible assets. The determination of a reporting unit’s
capital allocation requires management judgment and considers
many factors including the regulatory capital regulations and
capital characteristics of comparable public companies in
relevant industry sectors. In certain circumstances, management
will engage a third-party to independently validate its
assessment of the fair value of its business segments.
The Company’s annual assessment of potential goodwill
impairment was completed during the second quarter of 2007.
Based on the results of this assessment, no goodwill impairment
was recognized.
Income Taxes
The Company estimates
income tax expense based on amounts expected to be owed to
various tax jurisdictions. Currently, the Company files tax
returns in approximately 144 federal, state and local domestic
jurisdictions and 13 foreign jurisdictions. The estimated income
tax expense is reported in the Consolidated Statement of Income.
Accrued taxes represent the net estimated amount due or to be
received from taxing jurisdictions either currently or in the
future and are reported in other assets or other liabilities on
the Consolidated Balance Sheet. In estimating accrued taxes, the
Company assesses the relative merits and risks of the
appropriate tax treatment considering statutory, judicial and
regulatory guidance in the context of the tax position. Because
of the complexity of tax laws and regulations, interpretation
can be difficult and subject to legal judgment given specific
facts and circumstances. It is possible that others, given the
same information, may at any point in time reach different
reasonable conclusions regarding the estimated amounts of
accrued taxes.
Changes in the estimate of accrued taxes occur periodically due
to changes in tax rates, interpretations of tax laws, the status
of examinations being conducted by
U.S. BANCORP 63
various taxing authorities, and newly enacted statutory,
judicial and regulatory guidance that impact the relative merits
and risks of tax positions. These changes, when they occur,
affect accrued taxes and can be significant to the operating
results of the Company. Refer to Note 18 of the Notes to
Consolidated Financial Statements for additional information
regarding income taxes.
CONTROLS AND
PROCEDURES
Under the supervision and with the participation of the
Company’s management, including its principal executive
officer and principal financial officer, the Company has
evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934 (the “Exchange
Act”)). Based upon this evaluation, the principal executive
officer and principal financial officer have concluded that, as
of the end of the period covered by this report, the
Company’s disclosure controls and procedures were effective.
During the most recently completed fiscal quarter, there was no
change made in the Company’s internal controls over
financial reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, the Company’s
internal control over financial reporting.
The annual report of the Company’s management on internal
control over financial reporting is provided on page 65.
The attestation report of Ernst & Young LLP, the
Company’s independent accountants, regarding the
Company’s internal control over financial reporting is
provided on page 67.
64 U.S. BANCORP
Report
of Management
Responsibility for the financial statements and other
information presented throughout this Annual Report rests with
the management of U.S. Bancorp. The Company believes that
the consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States and present the substance of transactions based on
the circumstances and management’s best estimates and
judgment.
In meeting its responsibilities for the reliability of the
financial statements, management is responsible for establishing
and maintaining an adequate system of internal control over
financial reporting as defined by
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934. The Company’s
system of internal controls is designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of publicly filed financial statements in
accordance with accounting principles generally accepted in the
United States.
To test compliance, the Company carries out an extensive audit
program. This program includes a review for compliance with
written policies and procedures and a comprehensive review of
the adequacy and effectiveness of the internal control system.
Although control procedures are designed and tested, it must be
recognized that there are limits inherent in all systems of
internal control and, therefore, errors and irregularities may
nevertheless occur. Also, estimates and judgments are required
to assess and balance the relative cost and expected benefits of
the controls. Projection of any evaluation of effectiveness to
future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
The Board of Directors of the Company has an Audit Committee
composed of directors who are independent of U.S. Bancorp.
The committee meets periodically with management, the internal
auditors and the independent accountants to consider audit
results and to discuss internal accounting control, auditing and
financial reporting matters.
Management assessed the effectiveness of the Company’s
internal controls over financial reporting as of
December 31, 2007. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in its Internal
Control-Integrated Framework. Based on our assessment and those
criteria, management believes that the Company designed and
maintained effective internal control over financial reporting
as of December 31, 2007.
The Company’s independent accountants, Ernst &
Young LLP, have been engaged to render an independent
professional opinion on the financial statements and issue an
attestation report on the Company’s system of internal
control over financial reporting. Their opinion on the financial
statements appearing on page 66 and their attestation on
the system of internal controls over financial reporting
appearing on page 67 are based on procedures conducted in
accordance with auditing standards of the Public Company
Accounting Oversight Board (United States).
U.S. BANCORP 65
Report of Independent Registered Public Accounting Firm on the
Consolidated Financial Statements
The Board of Directors and Shareholders of U.S. Bancorp:
We have audited the accompanying consolidated balance sheets of
U.S. Bancorp as of December 31, 2007 and 2006, and the
related consolidated statements of income, shareholders’
equity, and cash flows for each of the three years in the period
ended December 31, 2007. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of U.S. Bancorp at December 31,2007 and 2006, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2007, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
U.S. Bancorp’s internal control over financial
reporting as of December 31, 2007, based on criteria
established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 20, 2008
expressed an unqualified opinion thereon.
Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting
The Board of Directors and Shareholders of U.S. Bancorp:
We have audited U.S. Bancorp’s internal control over
financial reporting as of December 31, 2007, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria).
U.S. Bancorp’s management is responsible for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Report of
Management. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, U.S. Bancorp maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of U.S. Bancorp as of
December 31, 2007 and 2006, and the related consolidated
statements of income, shareholders’ equity, and cash flows
for each of the three years in the period ended
December 31, 2007 and our report dated February 20,2008, expressed an unqualified opinion thereon.
Preferred stock, par value $1.00 a share (liquidation preference
of $25,000 per share) — authorized:
50,000,000 shares; issued and outstanding: 2007 and
2006 — 40,000 shares
1,000
1,000
Common stock, par value $0.01 a share — authorized:
4,000,000,000 shares; issued: 2007 and 2006 —
1,972,643,007 shares
U.S. Bancorp and its subsidiaries (the “Company”)
is a multi-state financial services holding company
headquartered in Minneapolis, Minnesota. The Company provides a
full range of financial services including lending and
depository services through banking offices principally in
24 states. The Company also engages in credit card,
merchant, and ATM processing, mortgage banking, insurance, trust
and investment management, brokerage, and leasing activities
principally in domestic markets.
Basis of
Presentation The
consolidated financial statements include the accounts of the
Company and its subsidiaries and all variable interest entities
for which the Company is the primary beneficiary. The
consolidation eliminates all significant intercompany accounts
and transactions. Certain items in prior periods have been
reclassified to conform to the current presentation.
Uses of Estimates
The preparation of
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual experience could
differ from those estimates.
BUSINESS SEGMENTS
Within the Company, financial performance is measured by major
lines of business based on the products and services provided to
customers through its distribution channels. The Company has
five reportable operating segments:
Wholesale Banking
Wholesale Banking offers
lending, equipment finance and small-ticket leasing, depository,
treasury management, capital markets, foreign exchange,
international trade services and other financial services to
middle market, large corporate, commercial real estate and
public sector clients.
Consumer Banking
Consumer Banking
delivers products and services through banking offices,
telephone servicing and sales, on-line services, direct mail and
ATMs. It encompasses community banking, metropolitan banking,
in-store banking, small business banking, consumer lending,
mortgage banking, consumer finance, workplace banking, student
banking and
24-hour
banking.
Wealth
Management & Securities Services
Wealth
Management & Securities Services provides trust,
private banking, financial advisory, investment management,
retail brokerage services, insurance, custody and mutual fund
servicing through five businesses: Wealth Management, Corporate
Trust, FAF Advisors, Institutional Trust & Custody and
Fund Services.
Payment Services
Payment Services
includes consumer and business credit cards, stored-value cards,
debit cards, corporate and purchasing card services, consumer
lines of credit, ATM processing and merchant processing.
Treasury and
Corporate Support
Treasury and Corporate
Support includes the Company’s investment portfolios,
funding, capital management and asset securitization activities,
interest rate risk management, the net effect of transfer
pricing related to average balances and the residual aggregate
of those expenses associated with corporate activities that are
managed on a consolidated basis.
Segment Results
Accounting policies for
the lines of business are the same as those used in preparation
of the consolidated financial statements with respect to
activities specifically attributable to each business line.
However, the preparation of business line results requires
management to establish methodologies to allocate funding costs
and benefits, expenses and other financial elements to each line
of business. For details of these methodologies and segment
results, see “Basis for Financial Presentation” and
Table 23 “Line of Business Financial Performance”
included in Management’s Discussion and Analysis which is
incorporated by reference into these Notes to Consolidated
Financial Statements.
SECURITIES
Realized gains or losses on securities are determined on a trade
date basis based on the specific carrying value of the
investments being sold.
Trading
Securities Debt and
equity securities held for resale are classified as trading
securities and reported at fair value. Realized gains or losses
are reported in noninterest income.
Available-for-sale
Securities These
securities are not trading securities but may be sold before
maturity in response to changes in the Company’s interest
rate risk profile, funding needs or demand for collateralized
deposits by public entities. Available-for-sale securities are
carried at fair value with unrealized net gains or losses
reported within other
72 U.S. BANCORP
comprehensive income in shareholders’ equity. When sold,
the amortized cost of the specific securities is used to compute
the gain or loss. Declines in fair value that are deemed
other-than-temporary, if any, are reported in noninterest income.
Held-to-maturity
Securities Debt
securities for which the Company has the positive intent and
ability to hold to maturity are reported at historical cost
adjusted for amortization of premiums and accretion of
discounts. Declines in fair value that are deemed other than
temporary, if any, are reported in noninterest income.
Securities
Purchased Under Agreements to Resell and Securities Sold Under
Agreements to Repurchase
Securities purchased
under agreements to resell and securities sold under agreements
to repurchase are generally accounted for as collateralized
financing transactions and are recorded at the amounts at which
the securities were acquired or sold, plus accrued interest. The
fair value of collateral received is continually monitored and
additional collateral obtained or requested to be returned to
the Company as deemed appropriate.
EQUITY INVESTMENTS
IN OPERATING ENTITIES
Equity investments in public entities in which ownership is less
than 20 percent are accounted for as available-for-sale
securities and carried at fair value. Similar investments in
private entities are accounted for using the cost method.
Investments in entities where ownership interest is between
20 percent and 50 percent are accounted for using the
equity method with the exception of limited partnerships and
limited liability companies where an ownership interest of
greater than 5 percent requires the use of the equity
method. If the Company has a voting interest greater than
50 percent, the consolidation method is used. All equity
investments are evaluated for impairment at least annually and
more frequently if certain criteria are met.
LOANS
Loans are reported net of unearned income. Interest income is
accrued on the unpaid principal balances as earned. Loan and
commitment fees and certain direct loan origination costs are
deferred and recognized over the life of the loan
and/or
commitment period as yield adjustments.
Commitments to
Extend Credit Unfunded
residential mortgage loan commitments entered into in connection
with mortgage banking activities are considered derivatives and
recorded on the balance sheet at fair value with changes in fair
value recorded in income. All other unfunded loan commitments
are generally related to providing credit facilities to
customers of the bank and are not actively traded financial
instruments. These unfunded commitments are disclosed as
off-balance sheet financial instruments in Note 21 in the
Notes to Consolidated Financial Statements.
Allowance for
Credit Losses Management
determines the adequacy of the allowance based on evaluations of
credit relationships, the loan portfolio, recent loss
experience, and other pertinent factors, including economic
conditions. This evaluation is inherently subjective as it
requires estimates, including amounts of future cash collections
expected on nonaccrual loans, which may be susceptible to
significant change. The allowance for credit losses relating to
impaired loans is based on the loan’s observable market
price, the collateral for certain collateral-dependent loans, or
the discounted cash flows using the loan’s effective
interest rate.
The Company determines the amount of the allowance required for
certain sectors based on relative risk characteristics of the
loan portfolio. The allowance recorded for commercial loans is
based on quarterly reviews of individual credit relationships
and an analysis of the migration of commercial loans and actual
loss experience. The allowance recorded for homogeneous consumer
loans is based on an analysis of product mix, risk
characteristics of the portfolio, bankruptcy experiences, and
historical losses, adjusted for current trends, for each
homogenous category or group of loans. The allowance is
increased through provisions charged to operating earnings and
reduced by net charge-offs.
The Company also assesses the credit risk associated with
off-balance sheet loan commitments, letters of credit, and
derivatives and determines the appropriate amount of credit loss
liability that should be recorded. The liability for off-balance
sheet credit exposure related to loan commitments and other
financial instruments is included in other liabilities.
Nonaccrual Loans
Generally commercial
loans (including impaired loans) are placed on nonaccrual status
when the collection of interest or principal has become
90 days past due or is otherwise considered doubtful. When
a loan is placed on nonaccrual status, unpaid accrued interest
is reversed. Future interest payments are generally applied
against principal. Revolving consumer lines and credit cards are
charged off by 180 days past due and closed-end consumer
loans other than loans secured by 1-4 family properties are
charged off at 120 days past due and are, therefore,
generally not placed on nonaccrual status. Certain retail
customers having financial difficulties may have the terms of
their credit card and other loan agreements modified to require
only principal payments and, as such, are reported as nonaccrual.
U.S. BANCORP 73
Impaired Loans
A loan is considered to
be impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts
due (both interest and principal) according to the contractual
terms of the loan agreement.
Restructured
Loans In cases where a
borrower experiences financial difficulties and the Company
makes certain concessionary modifications to contractual terms,
the loan is classified as a restructured loan. Loans
restructured at a rate equal to or greater than that of a new
loan with comparable risk at the time the contract is modified
may be excluded from restructured loans in the calendar years
subsequent to the restructuring if they are in compliance with
the modified terms.
Generally, a nonaccrual loan that is restructured remains on
nonaccrual for a period of six months to demonstrate that the
borrower can meet the restructured terms. However, performance
prior to the restructuring, or significant events that coincide
with the restructuring, are considered in assessing whether the
borrower can meet the new terms and may result in the loan being
returned to accrual status at the time of restructuring or after
a shorter performance period. If the borrower’s ability to
meet the revised payment schedule is not reasonably assured, the
loan remains classified as a nonaccrual loan.
Leases
The Company engages in
both direct and leveraged lease financing. The net investment in
direct financing leases is the sum of all minimum lease payments
and estimated residual values, less unearned income. Unearned
income is added to interest income over the terms of the leases
to produce a level yield.
The investment in leveraged leases is the sum of all lease
payments (less nonrecourse debt payments) plus estimated
residual values, less unearned income. Income from leveraged
leases is recognized over the term of the leases based on the
unrecovered equity investment.
Residual values on leased assets are reviewed regularly for
other-than-temporary impairment. Residual valuations for retail
automobile leases are based on independent assessments of
expected used car sale prices at the end-of-term. Impairment
tests are conducted based on these valuations considering the
probability of the lessee returning the asset to the Company,
re-marketing efforts, insurance coverage and ancillary fees and
costs. Valuations for commercial leases are based upon external
or internal management appraisals. When there is other than
temporary impairment in the estimated fair value of the
Company’s interest in the residual value of a leased asset,
the carrying value is reduced to the estimated fair value with
the writedown recognized in the current period.
Loans Held for
Sale Loans held for sale
(“LHFS”) represent mortgage loan originations intended
to be sold in the secondary market and other loans that
management has an active plan to sell. LHFS are carried at the
lower of cost or market value as determined on an aggregate
basis by type of loan. In the event management decides to sell
loans receivable, the loans are transferred at the lower of cost
or fair value. Loans transferred to LHFS are marked-to-market
(“MTM”) at the time of transfer. MTM losses related to
the sale/transfer of non-homogeneous loans that are
predominantly credit-related are reflected in charge-offs. With
respect to homogeneous loans, the amount of “probable”
credit loss, determined in accordance with Statement of
Financial Accounting Standards No. 5, “Accounting for
Contingencies,” methodologies utilized to determine the
specific allowance allocation for the portfolio, is also
included in charge-offs. Any incremental loss determined in
accordance with MTM accounting, that includes consideration of
other factors such as estimates of inherent losses, is reported
separately from charge-offs as a reduction to the allowance for
credit losses. Subsequent decreases in fair value are recognized
in noninterest income.
Other Real Estate
Other real estate
(“ORE”), which is included in other assets, is
property acquired through foreclosure or other proceedings. ORE
is carried at fair value, less estimated selling costs. The
property is evaluated regularly and any decreases in the
carrying amount are included in noninterest expense.
DERIVATIVE FINANCIAL
INSTRUMENTS
In the ordinary course of business, the Company enters into
derivative transactions to manage its interest rate, prepayment,
credit, price and foreign currency risk and to accommodate the
business requirements of its customers. All derivative
instruments are recorded as either other assets, other
liabilities or short-term borrowings at fair value. Subsequent
changes in a derivative’s fair value are recognized
currently in earnings unless specific hedge accounting criteria
are met.
All derivative instruments that qualify for hedge accounting are
recorded at fair value and classified either as a hedge of the
fair value of a recognized asset or liability (“fair
value” hedge) or as a hedge of the variability of cash
flows to be received or paid related to a recognized asset or
liability or a forecasted transaction (“cash flow”
hedge). Changes in the fair value of a derivative that is highly
effective and designated as a fair value hedge and the
offsetting changes in the fair value of the hedged item are
recorded in income. Changes in the fair value of a derivative
that is highly effective and designated as a cash flow hedge are
recognized in other comprehensive income until income from the
cash flows of the hedged item is recognized. The Company
performs an assessment, both at the inception of
74 U.S. BANCORP
the hedge and on a quarterly basis thereafter, when required, to
determine whether these derivatives are highly effective in
offsetting changes in the value of the hedged items. Any change
in fair value resulting from hedge ineffectiveness is
immediately recorded in noninterest income.
If a derivative designated as a hedge is terminated or ceases to
be highly effective, the gain or loss is amortized to earnings
over the remaining life of the hedged asset or liability (fair
value hedge) or over the same period(s) that the forecasted
hedged transactions impact earnings (cash flow hedge). If the
hedged item is disposed of, or the forecasted transaction is no
longer probable, the derivative is recorded at fair value with
any resulting gain or loss included in the gain or loss from the
disposition of the hedged item or, in the case of a forecasted
transaction that is no longer probable, included in earnings
immediately.
REVENUE RECOGNITION
The Company recognizes revenue as it is earned based on
contractual terms, as transactions occur, or as services are
provided and collectibility is reasonably assured. In certain
circumstances, noninterest income is reported net of associated
expenses that are directly related to variable volume-based
sales or revenue sharing arrangements or when the Company acts
on an agency basis for others. Certain specific policies include
the following:
Credit and Debit
Card Revenue Credit and
debit card revenue includes interchange income from credit and
debit cards, annual fees, and other transaction and account
management fees. Interchange income is a fee paid by a merchant
bank to the card-issuing bank through the interchange network.
Interchange fees are set by the credit card associations and are
based on cardholder purchase volumes. The Company records
interchange income as transactions occur. Transaction and
account management fees are recognized as transactions occur or
services are provided, except for annual fees, which are
recognized over the applicable period. Volume-related payments
to partners and credit card associations and expenses for
rewards programs are also recorded within credit and debit card
revenue. Payments to partners and expenses related to rewards
programs are recorded when earned by the partner or customer.
Merchant
Processing Services
Merchant processing
services revenue consists principally of transaction and account
management fees charged to merchants for the electronic
processing of transactions, net of interchange fees paid to the
credit card issuing bank, card association assessments, and
revenue sharing amounts, and are all recognized at the time the
merchant’s transactions are processed or other services are
performed. The Company may enter into revenue sharing agreements
with referral partners or in connection with purchases of
merchant contracts from sellers. The revenue sharing amounts are
determined primarily on sales volume processed or revenue
generated for a particular group of merchants. Merchant
processing revenue also includes revenues related to
point-of-sale equipment recorded as sales when the equipment is
shipped or as earned for equipment rentals.
Trust and
Investment Management Fees
Trust and investment
management fees are recognized over the period in which services
are performed and are based on a percentage of the fair value of
the assets under management or administration, fixed based on
account type, or transaction-based fees.
Deposit Service
Charges Service charges
on deposit accounts primarily represent monthly fees based on
minimum balances or transaction-based fees. These fees are
recognized as earned or as transactions occur and services are
provided.
OTHER SIGNIFICANT
POLICIES
Intangible Assets
The price paid over the
net fair value of the acquired businesses (“goodwill”)
is not amortized. Other intangible assets are amortized over
their estimated useful lives, using straight-line and
accelerated methods. The recoverability of goodwill and other
intangible assets is evaluated annually, at a minimum, or on an
interim basis if events or circumstances indicate a possible
inability to realize the carrying amount. The evaluation
includes assessing the estimated fair value of the intangible
asset based on market prices for similar assets, where
available, and the present value of the estimated future cash
flows associated with the intangible asset.
Income Taxes
Deferred taxes are
recorded to reflect the tax consequences on future years of
differences between the tax basis of assets and liabilities and
the financial reporting amounts at each year-end.
Mortgage
Servicing Rights
Mortgage servicing
rights (“MSRs”) are capitalized as separate assets
when loans are sold and servicing is retained or may be
purchased from others. MSRs are initially recorded at fair
value, if practicable, and at each subsequent reporting date.
The Company determines the fair value by estimating the present
value of the asset’s future cash flows utilizing
market-based prepayment rates, discount rates, and other
assumptions validated through comparison to trade information,
industry surveys and independent third party appraisals. Changes
in the fair value of MSRs are recorded in earnings during the
period in which they occur. Risks inherent in the MSRs valuation
include higher than expected prepayment rates
U.S. BANCORP 75
and/or
delayed receipt of cash flows. The Company utilizes futures,
forwards and interest rate swaps to mitigate the valuation risk.
Fair value changes related to the MSRs and the futures, forwards
and interest rate swaps, as well as servicing and other related
fees, are recorded in mortgage banking revenue.
Pensions
For purposes of its
retirement plans, the Company utilizes a measurement date of
September 30. At the measurement date, plan assets are
determined based on fair value, generally representing
observable market prices. The actuarial cost method used to
compute the pension liabilities and related expense is the
projected unit credit method. The projected benefit obligation
is principally determined based on the present value of
projected benefit distributions at an assumed discount rate. The
discount rate utilized is based on match-funding maturities and
interest payments of high quality corporate bonds available in
the market place to projected cash flows as of the measurement
date for future benefit payments. Periodic pension expense (or
income) includes service costs, interest costs based on the
assumed discount rate, the expected return on plan assets based
on an actuarially derived market-related value and amortization
of actuarial gains and losses. Pension accounting reflects the
long-term nature of benefit obligations and the investment
horizon of plan assets and can have the effect of reducing
earnings volatility related to short-term changes in interest
rates and market valuations. Actuarial gains and losses include
the impact of plan amendments and various unrecognized gains and
losses which are deferred and amortized over the future service
periods of active employees. The market-related value utilized
to determine the expected return on plan assets is based on fair
value adjusted for the difference between expected returns and
actual performance of plan assets. The unrealized difference
between actual experience and expected returns is included in
the market-related value and amortized as a component of pension
expense ratably over a five-year period. The overfunded or
underfunded status of the plans is recorded as an asset or
liability on the balance sheet, with changes in that status
recognized through other comprehensive income.
Premises and
Equipment Premises and
equipment are stated at cost less accumulated depreciation and
depreciated primarily on a straight-line basis over the
estimated life of the assets. Estimated useful lives range up to
40 years for newly constructed buildings and from 3 to
20 years for furniture and equipment.
Capitalized leases, less accumulated amortization, are included
in premises and equipment. The lease obligations are included in
long-term debt. Capitalized leases are amortized on a
straight-line basis over the lease term and the amortization is
included in depreciation expense.
Statement of Cash
Flows For purposes of
reporting cash flows, cash and cash equivalents include cash and
money market investments, defined as interest-bearing amounts
due from banks, federal funds sold and securities purchased
under agreements to resell.
Stock-Based
Compensation The Company
grants stock-based awards, including restricted stock and
options to purchase common stock of the Company. Stock option
grants are for a fixed number of shares to employees and
directors with an exercise price equal to the fair value of the
shares at the date of grant. Stock-based compensation for awards
is recognized in the Company’s results of operations on a
straight-line basis over the vesting period. The Company
immediately recognizes compensation cost of awards to employees
that meet retirement status, despite their continued active
employment. The amortization of stock-based compensation
reflects estimated forfeitures adjusted for actual forfeiture
experience. As compensation expense is recognized, a deferred
tax asset is recorded that represents an estimate of the future
tax deduction from exercise or release of restrictions. At the
time stock-based awards are exercised, cancelled, expire, or
restrictions are released, the Company may be required to
recognize an adjustment to tax expense.
Per Share
Calculations Earnings
per share is calculated by dividing net income applicable to
common equity by the weighted average number of common shares
outstanding during the year. Diluted earnings per share is
calculated by adjusting income and outstanding shares, assuming
conversion of all potentially dilutive securities, using the
treasury stock method.
Note 2
ACCOUNTING
CHANGES
Business
Combinations In December
2007, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards No. 141 (revised 2007)
(“SFAS 141R”), “Business Combinations”,
effective for the Company beginning on January 1, 2009.
SFAS 141R establishes principles and requirements for the
acquirer in a business combination, including the recognition
and measurement of the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the
acquired entity as of the acquisition date; the recognition and
measurement of the goodwill acquired in the business combination
or gain from a bargain purchase as of the acquisition date; and
the determination of additional disclosures needed to enable
users of the financial statements to evaluate the nature and
financial effects of the business combination. Under SFAS 141R,
nearly all acquired assets and liabilities assumed are required
to be recorded at fair value at the acquisition date, including
loans. This will
76 U.S. BANCORP
eliminate separate recognition of the acquired allowance for
loan losses on the acquirer’s balance sheet as credit
related factors will be incorporated directly into the fair
value of the loans recorded at the acquisition date. Other
significant changes include recognizing transaction costs and
most restructuring costs as expenses when incurred. Early
adoption is not permitted. The Company is currently assessing
the impact of this guidance on potential future business
combinations that may occur on or after the January 1, 2009
effective date.
Noncontrolling
Interests In December
2007, the FASB issued Statement of Financial Accounting
Standards No. 160 (“SFAS 160”),
“Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51”, effective for
the Company beginning on January 1, 2009. SFAS 160
will change the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests and
classified as a component of equity, separate from the
Company’s own equity, in the consolidated balance sheet.
This Statement also requires the amount of net income
attributable to the entity and to the noncontrolling interests
to be shown separately on the face of the consolidated statement
of income. SFAS 160 also requires expanded disclosures that
clearly identify and distinguish between the interests of the
entity and those of the noncontrolling owners. The Company is
currently assessing the impact of this guidance on its financial
statements.
Loan Commitments
In November 2007, the
Securities and Exchange Commission (“SEC”) issued
Staff Accounting Bulletin No. 109
(“SAB 109”), “Written Loan Commitments
Recorded at Fair Value Through Earnings”, which revises and
rescinds portions of Staff Accounting
Bulletin No. 105, “Application of Accounting
Principles to Loan Commitments.” SAB 109 is effective
for written loan commitments issued or modified by the Company
beginning on January 1, 2008. SAB 109 provides the
SEC’s views on the accounting for written loan commitments
recorded at fair value through earnings under accounting
principles generally accepted in the United States, and
specifically states that the expected net future cash flows
related to the servicing of a loan should be included in the
measurement of all such written loan commitments. The adoption
of SAB 109 is not expected to have a material impact on the
Company’s financial statements.
Fair Value Option
In February 2007, the
FASB issued Statement of Financial Accounting Standards
No. 159 (“SFAS 159”), “The Fair Value
Option for Financial Assets and Financial Liabilities”,
effective for the Company beginning on January 1, 2008.
This Statement provides entities with an option to report
selected financial assets and liabilities at fair value, with
the objective to reduce both the complexity in accounting for
financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. The
Company’s adoption of SFAS 159 is not expected to have
a material impact on the Company’s financial statements.
Fair Value
Measurements In
September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157 (“SFAS 157”),
“Fair Value Measurements”, effective for the Company
beginning on January 1, 2008. This Statement defines fair
value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. This
Statement provides a consistent definition of fair value which
focuses on exit price and prioritizes market-based inputs
obtained from sources independent of the entity over those from
the entity’s own inputs that are not corroborated by
observable market data. SFAS 157 also requires
consideration of nonperformance risk when determining fair value
measurements.
This Statement expands disclosures about the use of fair value
to measure assets and liabilities in interim and annual periods
subsequent to initial recognition. The disclosures focus on the
inputs used to measure fair value, and for recurring fair value
measurements using significant unobservable inputs, the effect
of the measurements on earnings or changes in net assets for the
period. The Company’s adoption of SFAS 157 will result
in certain changes in the measurement of fair value and, at the
time of adoption, is expected to reduce earnings per diluted
common share by two cents in the first quarter of 2008.
Uncertainty in
Income Taxes In June
2006, the FASB issued Interpretation No. 48
(“FIN 48”), “Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109,
Accounting for Income Taxes”, effective for the Company
beginning on January 1, 2007. FIN 48 clarifies the
recognition threshold a tax position is required to meet before
being recognized in the financial statements. FIN 48 also
provides guidance on disclosure and other matters. The adoption
of FIN 48 did not have a material impact on the
Company’s financial statements.
Note 3 RESTRICTIONS
ON CASH AND DUE FROM BANKS
The Federal Reserve Bank requires bank subsidiaries to maintain
minimum average reserve balances. The amount of the reserve
requirement was approximately $1.0 billion at
December 31, 2007.
U.S. BANCORP 77
Note 4 INVESTMENT
SECURITIES
The amortized cost, gross unrealized holding gains and losses,
and fair value of
held-to-maturity
and
available-for-sale
securities at December 31 was as follows:
2007
2006
Amortized
Unrealized
Unrealized
Fair
Amortized
Unrealized
Unrealized
Fair
December 31 (Dollars
in Millions)
Cost
Gains
Losses
Value
Cost
Gains
Losses
Value
Held-to-maturity (a)
Mortgage-backed securities
$
6
$
–
$
–
$
6
$
7
$
–
$
–
$
7
Obligations of state and political subdivisions
56
4
–
60
67
5
–
72
Other debt securities
12
–
–
12
13
–
–
13
Total held-to-maturity securities
$
74
$
4
$
–
$
78
$
87
$
5
$
–
$
92
Available-for-sale (b)
U.S. Treasury and agencies
$
407
$
1
$
(3
)
$
405
$
472
$
1
$
(6
)
$
467
Mortgage-backed securities
31,300
48
(745
)
30,603
34,465
103
(781
)
33,787
Asset-backed securities (c)
2,922
6
–
2,928
7
–
–
7
Obligations of state and political subdivisions
7,131
18
(94
)
7,055
4,463
82
(6
)
4,539
Other securities and investments
2,346
5
(300
)
2,051
1,223
13
(6
)
1,230
Total available-for-sale securities
$
44,106
$
78
$
(1,142
)
$
43,042
$
40,630
$
199
$
(799
)
$
40,030
(a)
Held-to-maturity
securities are carried at historical cost adjusted for
amortization of premiums and accretion of discounts.
(b)
Available-for-sale
securities are carried at fair value with unrealized net gains
or losses reported within other comprehensive income in
shareholders’ equity.
(c)
Primarily
includes investments in structured investment vehicles with
underlying collateral that includes a mix of various mortgage
and other asset-backed securities.
The weighted-average maturity of the available-for-sale
investment securities was 7.4 years at December 31,2007, compared with 6.6 years at December 31, 2006.
The corresponding weighted-average yields were 5.51 percent
and 5.32 percent, respectively. The
weighted-average
maturity of the
held-to-maturity
investment securities was 8.3 years at December 31,2007, compared with 8.4 years at December 31, 2006.
The corresponding
weighted-average
yields were 5.92 percent and 6.03 percent,
respectively.
For amortized cost, fair value and yield by maturity date of
held-to-maturity and available-for-sale securities outstanding
at December 31, 2007, refer to Table 11 included in
Management’s Discussion and Analysis which is incorporated
by reference into these Notes to Consolidated Financial
Statements.
Securities carried at $39.6 billion at December 31,2007, and $35.8 billion at December 31, 2006, were
pledged to secure public, private and trust deposits, repurchase
agreements and for other purposes required by law. Securities
sold under agreements to repurchase where the buyer/lender has
the right to sell or pledge the securities were collateralized
by securities with an amortized cost of $10.5 billion at
December 31, 2007, and $9.8 billion at
December 31, 2006, respectively.
The following table provides information as to the amount of
interest income from taxable and non-taxable investment
securities:
Year Ended December
31 (Dollars in Millions)
2007
2006
2005
Taxable
$1,833
$1,882
$1,938
Non-taxable
262
119
16
Total interest income from investment securities
$2,095
$2,001
$1,954
The following table provides information as to the amount of
gross gains and losses realized through the sales of
available-for-sale investment securities:
Year Ended December
31 (Dollars in Millions)
2007
2006
2005
Realized gains
$
15
$
15
$
13
Realized losses
–
(1
)
(119
)
Net realized gains (losses)
$
15
$
14
$
(106
)
Income tax (benefit) on realized gains (losses)
$
6
$
5
$
(40
)
78 U.S. BANCORP
Included in available-for-sale, asset-backed investment
securities, are structured investment securities which were
purchased in the fourth quarter of 2007 from certain money
market funds managed by FAF Advisors, Inc., an affiliate of the
Company. Some of these securities evidenced credit deterioration
subsequent to origination, but prior to acquisition by the
Company. Statement of Position
No. 03-3
(“SOP 03-3”),
“Accounting for Certain Loans or Debt Securities Acquired
in a Transfer”, requires the difference between the total
expected cash flows for these securities and the initial
recorded investment to be recognized in earnings over the life
of the securities, using a level yield. If subsequent decreases
in the fair value of these securities are accompanied by an
adverse change in the expected cash flows, an
other-than-temporary impairment will be recorded through
earnings. Subsequent increases in the expected cash flows will
be recognized as income prospectively over the remaining life of
the security by increasing the level yield.
At December 31, 2007, the gross undiscounted cash flows
that were due under the contractual terms of the purchased
securities subject to
SOP 03-3,
were $2.5 billion, which included payments receivable of
$33 million.
Changes in the carrying amount and accretable yield for the year
ended December 31, 2007, are as follows:
Accretable
Carrying
(Dollars in Millions)
Yield
Amount
Balance at beginning of period
$
–
$
–
Purchases (a)
107
2,445
Payments received
–
(20
)
Accretion
(2
)
2
Balance at end of period
$
105
$
2,427
(a)
The
Carrying amount of purchases represents the fair value of the
securities on that date.
The Company conducts a regular assessment of its investment
portfolios to determine whether any securities are
other-than-temporarily impaired considering, among other
factors, the nature of the securities, credit ratings or
financial condition of the issuer, the extent and duration of
the unrealized loss, expected cash flows of underlying
collateral, market conditions and the Company’s ability to
hold the securities through the anticipated recovery period.
At December 31, 2007, certain investment securities
included in the held-to-maturity and available-for-sale
categories had a fair value that was below their amortized cost.
The following table shows the gross unrealized losses and fair
value of the Company’s investments with unrealized losses
that are not deemed to be other-than-temporarily impaired based
on the period the investments have been in a continuous
unrealized loss position:
Less Than 12 Months
12 Months or Greater
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
(Dollars in Millions)
Value
Losses
Value
Losses
Value
Losses
Held-to-maturity
Obligations of state and political subdivisions
$
10
$
–
$
1
$
–
$
11
$
–
Total
$
10
$
–
$
1
$
–
$
11
$
–
Available-for-sale
U.S. Treasury and agencies
$
23
$
–
$
230
$
(3
)
$
253
$
(3
)
Mortgage-backed securities
3,238
(63
)
23,524
(682
)
26,762
(745
)
Asset-backed securities
5
–
–
–
5
–
Obligations of state and political subdivisions
4,853
(89
)
197
(5
)
5,050
(94
)
Other securities and investments
1,573
(277
)
198
(23
)
1,771
(300
)
Total
$
9,692
$
(429
)
$
24,149
$
(713
)
$
33,841
$
(1,142
)
Generally, the unrealized losses within each investment category
have occurred due to rising interest rates over the past few
years. The substantial portion of securities that have
unrealized losses are either government securities, issued by
government-backed agencies or privately issued securities with
high investment grade credit ratings. Unrealized losses within
other securities and investments are also the result of a modest
widening of credit spreads since the initial purchase date. In
general, the issuers of the investment securities do not have
the contractual ability to pay them off at less than par at
maturity or any earlier call date. As of the reporting date, the
Company expects to
U.S. BANCORP 79
receive all principal and interest related to these securities.
Because the Company has the ability and intent to hold its
investment securities until their anticipated recovery in value
or maturity, they are not considered to be
other-than-temporarily impaired as of December 31, 2007.
Note 5 LOANS
AND ALLOWANCE FOR CREDIT LOSSES
The composition of the loan portfolio at December 31 was as
follows:
Loans are presented net of unearned interest and deferred fees
and costs, which amounted to $1.4 billion and
$1.3 billion at December 31, 2007 and 2006,
respectively. The Company had loans of $44.5 billion at
December 31, 2007, and $44.8 billion at
December 31, 2006, pledged at the Federal Home Loan Bank
(“FHLB”). Loans of $16.8 billion at
December 31, 2007, and $16.2 billion at
December 31, 2006, were pledged at the Federal Reserve Bank.
The Company primarily lends to borrowers in the 24 states
in which it has banking offices. Collateral for commercial loans
may include marketable securities, accounts receivable,
inventory and equipment. For details of the Company’s
commercial portfolio by industry group and geography as of
December 31, 2007 and 2006, see Table 8 included in
Management’s Discussion and Analysis which is incorporated
by reference into these Notes to Consolidated Financial
Statements.
For detail of the Company’s commercial real estate
portfolio by property type and geography as of December 31,2007 and 2006, see Table 9 included in Management’s
Discussion and Analysis which is incorporated by reference into
these Notes to Consolidated Financial Statements. Such loans are
collateralized by the related property.
Nonperforming assets include nonaccrual loans, restructured
loans not performing in accordance with modified terms, other
real estate and other nonperforming assets owned by the Company.
For details of the Company’s nonperforming assets as of
December 31, 2007 and 2006, see Table 14 included in
Management’s Discussion and Analysis which is incorporated
by reference into these Notes to Consolidated Financial
Statements.
80 U.S. BANCORP
The following table lists information related to nonperforming
loans as of December 31:
(Dollars in Millions)
2007
2006
Loans on nonaccrual status
$
540
$
432
Restructured loans
17
38
Total nonperforming loans
$
557
$
470
Interest income that would have been recognized at original
contractual terms
$
60
$
55
Amount recognized as interest income
19
16
Forgone revenue
$
41
$
39
Activity in the allowance for credit losses was as follows:
(Dollars in Millions)
2007
2006
2005
Balance at beginning of year
$
2,256
$
2,251
$
2,269
Add
Provision charged to operating expense
792
544
666
Deduct
Loans charged off
1,032
763
949
Less recoveries of loans charged off
240
219
264
Net loans charged off
792
544
685
Acquisitions and other changes
4
5
1
Balance at end of year(a)
$
2,260
$
2,256
$
2,251
Components
Allowance for loan losses
$
2,058
$
2,022
$
2,041
Liability for unfunded credit commitments
202
234
210
Total allowance for credit losses
$
2,260
$
2,256
$
2,251
(a)
Included
in this analysis is activity related to the Company’s
liability for unfunded commitments, which is separately recorded
in other liabilities in the Consolidated Balance
Sheet.
A portion of the allowance for credit losses is allocated to
commercial and commercial real estate loans deemed impaired.
These impaired loans are included in nonperforming assets. A
summary of impaired loans and their related allowance for credit
losses is as follows:
2007
2006
2005
Recorded
Valuation
Recorded
Valuation
Recorded
Valuation
(Dollars in Millions)
Investment
Allowance
Investment
Allowance
Investment
Allowance
Impaired loans
Valuation allowance required
$
314
$
34
$
346
$
44
$
388
$
37
No valuation allowance required
107
–
–
–
–
–
Total impaired loans
$
421
$
34
$
346
$
44
$
388
$
37
Average balance of impaired loans during the year
$
366
$
344
$
412
Interest income recognized on impaired loans during the year
–
4
2
Commitments to lend additional funds to customers whose
commercial and commercial real estate loans were classified as
nonaccrual or restructured at December 31, 2007, totaled
$12 million.
In addition to impaired commercial and commercial real estate
loans, the Company had smaller balance homogenous loans that are
accruing interest at rates considered to be below market rate.
At December 31, 2007, 2006 and 2005, the recorded
investment in these other restructured loans was
$551 million, $405 million and $315 million,
respectively, with average balances of $466 million,
$379 million, and $278 million during 2007, 2006 and
2005, respectively. The Company recognized estimated interest
income on these loans of $29 million, $35 million, and
$20 million during 2007, 2006 and 2005, respectively.
For the years ended December 31, 2007, 2006 and 2005, the
Company had net gains on the sale of loans of $163 million,
$104 million and $175 million, respectively, which
were included in noninterest income, primarily in mortgage
banking revenue.
The Company has equity interests in two joint ventures that are
accounted for utilizing the equity method. The principal
activity of one entity is to provide commercial real
U.S. BANCORP 81
estate financing that the joint venture securitizes and sells to
third party investors. The principal activity of the other
entity is to provide senior or subordinated financing to
customers for the construction, rehabilitation or redevelopment
of commercial real estate. In connection with these joint
ventures, the Company provides warehousing lines to support the
operations. Warehousing advances to the joint ventures are made
in the ordinary course of business and repayment of these credit
facilities occurs when the securitization is completed or the
commercial real estate project is permanently refinanced by
others. At December 31, 2007 and 2006, the Company had
$2.3 billion and $1.3 billion, respectively, of
outstanding loan balances to these joint ventures.
Note 6 LEASES
The components of the net investment in sales-type and direct
financing leases at December 31 were as follows:
(Dollars in Millions)
2007
2006
Aggregate future minimum lease payments to be received
The
accumulated allowance for uncollectible minimum lease payments
was $120 million and $100 million at December 31,2007 and 2006, respectively.
The minimum future lease payments to be received from sales-type
and direct financing leases were as follows at
December 31, 2007:
(Dollars in Millions)
2008
$
3,612
2009
3,353
2010
3,011
2011
1,850
2012
829
Thereafter
264
Note 7 ACCOUNTING
FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND VARIABLE
INTEREST
ENTITIES
FINANCIAL ASSET SALES
When the Company sells financial assets, it may retain
interest-only strips, servicing rights, residual rights to a
cash reserve account,
and/or other
retained interests in the sold financial assets. The gain or
loss on sale depends in part on the previous carrying amount of
the financial assets involved in the transfer and is allocated
between the assets sold and the retained interests based on
their relative fair values at the date of transfer. Quoted
market prices are used to determine retained interest fair
values when readily available. Since quotes are generally not
available for retained interests, the Company estimates fair
value based on the present value of future expected cash flows
using management’s best estimates of the key assumptions,
including credit losses, prepayment speeds, forward yield
curves, and discount rates commensurate with the risks involved.
Retained interests and liabilities are recorded at fair value
using a discounted cash flow methodology at inception and are
evaluated at least quarterly thereafter.
Conduit and
Securitization The
Company sponsors an off-balance sheet conduit, a qualified
special purpose entity (“QSPE”), to which it
transferred high-grade investment securities, funded by the
issuance of commercial paper. Because QSPE’s are exempt
from consolidation under the provisions of Financial
Interpretation No. 46R (“FIN 46R”),
“Consolidation of Variable Interest Entities,” the
Company does not consolidate the conduit structure in its
financial statements. The conduit held assets of
$1.2 billion at December 31, 2007, and
$2.2 billion at December 31, 2006. These investment
securities include primarily (i) private label asset-backed
securities, which are insurance “wrapped” by monoline
insurance companies and (ii) government agency
mortgage-backed securities and collateralized mortgage
obligations. The conduit had commercial paper liabilities of
$1.2 billion at December 31, 2007, and
$2.2 billion at December 31, 2006. The Company
benefits by transferring the investment securities into a
conduit that provides diversification of funding sources in a
capital-efficient manner and the generation of income.
82 U.S. BANCORP
The Company provides a liquidity facility to the conduit.
Utilization of the liquidity facility would be triggered if the
conduit is unable to, or does not, issue commercial paper to
fund its assets. A liability for the estimate of the potential
risk of loss the Company has as the liquidity facility provider
is recorded on the balance sheet in other liabilities. The
liability is adjusted downward over time as the underlying
assets pay down with the offset recognized as other noninterest
income. The liability for the liquidity facility was
$2 million at December 31, 2007, and $10 million
at December 31, 2006. In addition, the Company recorded its
retained residual interest in the investment securities conduit
of $2 million at December 31, 2007 and
$13 million at December 31, 2006. The Company recorded
$2 million in revenue from the conduit during 2007 and
$8 million during 2006, including fees for servicing,
management, administration and accretion income from retained
interests.
Sensitivity
Analysis At
December 31, 2007, key economic assumptions and the
sensitivity of the current fair value of residual cash flows to
immediate 10 percent and 20 percent adverse changes in
those assumptions for the investment securities conduit were as
follows:
Current Economic Assumptions Sensitivity Analysis (a)
Fair value of retained interests
$
3
Weighted average life (in years)
.3
Expected Remaining Life (In Years)
2.3
Impact of 10% adverse change
$
—
Impact of 20% adverse change
(1
)
(a)
The
residual cash flow discount rate was 2.9 percent at
December 31, 2007. The investments are AAA/Aaa rated or
insured investments, therefore, credit losses are assumed to be
zero with no impact for interest rate movement. Also, interest
rate movements create no material impact to the value of the
residual interest, as the investment securities conduit is
mostly match funded.
These sensitivities are hypothetical and should be used with
caution. As the figures indicate, changes in fair value based on
a 10 percent variation in assumptions generally cannot be
extrapolated because the relationship of the change in the
assumptions to the change in fair value may not be linear. Also,
in this table the effect of a variation in a particular
assumption on the fair value of the retained interest is
calculated without changing any other assumptions; in reality,
changes in one factor may result in changes in another (for
example, increases in market interest rates may result in lower
prepayments and increased credit losses), which might magnify or
counteract the sensitivities.
Cash Flow
Information During the
years ended December 31, 2007 and 2006, the investment
conduit generated $11 million and $15 million of cash
flows, respectively, from servicing, other fees and retained
interests.
VARIABLE INTEREST
ENTITIES
The Company is involved in various entities that are considered
to be variable interest entities (“VIEs”), as defined
in FASB Interpretation No. 46R. Generally, a VIE is a
corporation, partnership, trust or any other legal structure
that either does not have equity investors with substantive
voting rights or has equity investors that do not provide
sufficient financial resources for the entity to support its
activities. The Company’s investments in VIEs primarily
represent private investment funds that make equity investments,
provide debt financing or partnerships to support
community-based investments in affordable housing, development
entities that provide capital for communities located in
low-income districts and historic rehabilitation projects that
may enable the Company to ensure regulatory compliance with the
Community Reinvestment Act.
With respect to these investments, the Company is required to
consolidate any VIE in which it is determined to be the primary
beneficiary. At December 31, 2007, approximately
$382 million of total assets related to various VIEs were
consolidated by the Company in its financial statements.
Creditors of these VIEs have no recourse to the general credit
of the Company. The Company is not required to consolidate other
VIEs as it is not the primary beneficiary. In such cases, the
Company does not absorb the majority of the entities’
expected losses nor does it receive a majority of the
entities’ expected residual returns. The amounts of the
Company’s investment in these unconsolidated entities
ranged from less than $1 million to $69 million with
an aggregate amount of approximately $2.2 billion at
December 31, 2007. While the Company believes potential
losses from these investments is remote, the Company’s
maximum exposure to these unconsolidated VIEs, including any tax
implications and unfunded commitments, was approximately
$3.7 billion at December 31, 2007, assuming that all
of the separate investments within the individual private funds
are deemed worthless and the community-based business and
housing projects, and related tax credits, completely failed and
did not meet certain government compliance requirements.
U.S. BANCORP 83
Note 8 PREMISES
AND EQUIPMENT
Premises and equipment at December 31 consisted of the following:
(Dollars in Millions)
2007
2006
Land
$
335
$
331
Buildings and improvements
2,432
2,372
Furniture, fixtures and equipment
2,463
2,352
Capitalized building and equipment leases
164
163
Construction in progress
8
11
5,402
5,229
Less accumulated depreciation and amortization
(3,623
)
(3,394
)
Total
$
1,779
$
1,835
Note 9 MORTGAGE
SERVICING RIGHTS
The Company’s portfolio of residential mortgages serviced
for others was $97.0 billion and $82.9 billion at
December 31, 2007 and 2006, respectively. Effective
January 1, 2006, the Company records MSRs initially at fair
value and at each subsequent reporting date, and records changes
in fair value in noninterest income in the period in which they
occur. Prior to January 1, 2006, the initial carrying value
of MSRs was amortized over the estimated life of the tangible
asset and changes in valuation, under the
lower-of-cost-or-market accounting method, were recognized as
impairments or reparation within other intangible expenses.
In conjunction with its MSRs, the Company may utilize
derivatives, including futures, forwards and interest rate swaps
to offset the effect of interest rate changes on the fair value
of MSRs. The net impact of assumption changes on the fair value
of MSRs, excluding decay, and the related derivatives included
in mortgage banking revenue was a net loss of $35 million
and $37 million for the years ended December 31, 2007,
and 2006, respectively. Loan servicing fees, not including
valuation changes, included in mortgage banking revenue were
$353 million and $319 million for the years ended
December 31, 2007 and 2006, respectively.
Changes in fair value of capitalized MSRs are summarized as
follows:
Year Ended
December 31 (Dollars in Millions)
2007
2006
2005
Balance at beginning of period
$1,427
$1,123
$866
Rights purchased
14
52
27
Rights capitalized
440
398
369
Rights sold
(130
)
–
–
Changes in fair value of MSRs:
Due to change in valuation assumptions (a)
(102
)
26
–
Other changes in fair value (b)
(187
)
(172
)
–
Amortization
–
–
(197
)
Reparation (impairment)
–
–
53
Change in accounting principle
–
–
5
Balance at end of period
$1,462
$1,427
$1,123
(a)
Principally
reflects changes in discount rates and prepayment speed
assumptions, primarily arising from interest rate
changes.
(b)
Primarily
represents changes due to collection/realization of expected
cash flows over time (decay).
The Company determines fair value by estimating the present
value of the asset’s future cash flows utilizing
market-based prepayment rates, discount rates, and other
assumptions validated through comparison to trade information,
industry surveys, and independent third party appraisals. Risks
inherent in the MSRs valuation include higher than expected
prepayment rates
and/or
delayed receipt of cash flows. The estimated sensitivity to
changes in interest rates of the fair value of the MSRs
portfolio and the related derivative instruments at
December 31, 2007, was as follows:
Down
Scenario
Up Scenario
(Dollars in Millions)
50bps
25bps
25bps
50bps
Net fair value
$
(8
)
$
1
$
(14
)
$
(49
)
84 U.S. BANCORP
The fair value of MSRs and its sensitivity to changes in
interest rates is influenced by the mix of the servicing
portfolio and characteristics of each segment of the portfolio.
The Company’s servicing portfolio consists of the distinct
portfolios of Mortgage Revenue Bond Programs (“MRBP”),
government-insured mortgages and conventional mortgages. The
MRBP division specializes in servicing loans made under state
and local housing authority programs. These programs provide
mortgages to low-income and moderate-income borrowers and are
generally government-insured programs with a favorable rate
subsidy, down payment
and/or
closing cost assistance. Mortgage loans originated as part of
government agency and state loans programs tend to experience
slower prepayment rates and better cash flows than conventional
mortgage loans. The servicing portfolios are predominantly
comprised of fixed-rate agency loans (FNMA, FHLMC, GNMA, FHLB
and various housing agencies) with limited adjustable-rate or
jumbo mortgage loans.
A summary of the Company’s MSRs and related characteristics
by portfolio as of December 31, 2007, was as follows:
(Dollars in Millions)
MRBP
Government
Conventional
Total
Servicing portfolio
$
10,926
$
10,171
$
75,917
$
97,014
Fair market value
$
231
$
166
$
1,065
$
1,462
Value (bps) *
211
163
140
151
Weighted-average servicing fees (bps)
40
41
32
34
Multiple (value/servicing fees)
5.28
3.98
4.38
4.44
Weighted-average note rate
5.92
%
6.27
%
5.99
%
6.01
%
Age (in years)
2.9
3.1
2.7
2.8
Expected life (in years)
9.0
6.2
6.3
6.6
Discount rate
11.1
%
10.9
%
10.0
%
10.2
%
*
Value is
calculated as fair market value divided by the servicing
portfolio.
Estimated
life represents the amortization period for assets subject to
the straight line method and the weighted average amortization
period for intangibles subject to accelerated methods. If more
than one amortization method is used for a category, the
estimated life for each method is calculated and reported
separately.
(b)
Amortization methods: SL =
straight line method
AC = accelerated methods generally based on
cash flows
(c)
Mortgage
servicing rights are recorded at fair value, and are not
amortized.
Aggregate amortization expense consisted of the following:
Effective
January 1, 2006, mortgage servicing rights are recorded at
fair value and are no longer amortized. The year ended
December 31, 2005, includes mortgage servicing rights
reparation of $53 million.
U.S. BANCORP 85
Below is the estimated amortization expense for the next five
years:
(Dollars in Millions)
2008
$
332
2009
287
2010
224
2011
172
2012
128
The following table reflects the changes in the carrying value
of goodwill for the years ended December 31, 2007 and 2006:
Weighted-average
interest rates of medium-term notes, Federal Home Loan Bank
advances and bank notes were 4.54 percent,
5.00 percent and 4.89 percent, respectively.
(b)
Other
includes debt issuance fees and unrealized gains and losses and
deferred fees relating to derivative instruments.
Convertible senior debentures issued by the Company pay interest
on a quarterly basis until a specified period of time (five or
nine years prior to the applicable maturity date). After this
date, the Company will not pay interest on the debentures prior
to maturity. On the maturity date or on any earlier redemption
date, the holder will receive the original principal plus
accrued interest. The debentures are convertible at any time on
or prior to the maturity date. If the convertible senior
debentures are converted, holders of the debentures will
generally receive cash up to the accreted principal amount of
the debentures plus, if the market price of the Company’s
stock exceeds the conversion price in effect on the date of
conversion, a number of shares of the Company’s common
stock, or an equivalent amount of cash at the Company’s
option, as determined in accordance with specified terms. The
convertible senior debentures are callable by the Company and
putable by the investors at a price equal to 100 percent of
the accreted principal amount plus accrued and unpaid interest.
During 2007, investors elected to put debentures with a
principal amount of $2.6 billion back to the Company.
U.S. BANCORP 87
The table below summarizes the significant terms of the
floating-rate convertible senior debentures issued during 2006
and 2007 at $1,000 per debenture:
The
interest rate index represents three month London Interbank
Offered Rate (“LIBOR”)
During 2007, the Company issued $536 million of fixed-rate
junior subordinated debentures to a separately formed
wholly-owned trust for the purpose of issuing Company-obligated
mandatorily redeemable preferred securities at an interest rate
of 6.30 percent. In addition, the Company elected to redeem
$312 million of floating-rate junior subordinated
debentures. Refer to Note 13, “Junior Subordinated
Debentures” for further information on the nature and terms
of these debentures.
The Company’s subsidiary, U.S. Bank National
Association, may issue fixed and floating rate subordinated
notes to provide liquidity and support its capital requirements.
During 2007, subordinated notes of $1.3 billion were issued
by the subsidiary.
The Company has an arrangement with the FHLB whereby based on
collateral available (residential and commercial mortgages), the
Company could have borrowed an additional $9 billion at
December 31, 2007.
Maturities of long-term debt outstanding at December 31,2007, were:
Parent
(Dollars in Millions)
Company
Consolidated
2008
$
502
$
10,486
2009
1,003
7,389
2010
992
2,012
2011
28
2,590
2012
7
3,297
Thereafter
8,176
17,666
Total
$
10,708
$
43,440
88 U.S. BANCORP
Note 13 JUNIOR
SUBORDINATED DEBENTURES
As of December 31, 2007, the Company sponsored and wholly
owned 100% of the common equity of nine trusts that were formed
for the purpose of issuing Company-obligated mandatorily
redeemable preferred securities (“Trust Preferred
Securities”) to third-party investors and investing the
proceeds from the sale of the Trust Preferred Securities
solely in junior subordinated debt securities of the Company
(the “Debentures”). The Debentures held by the trusts,
which totaled $4.1 billion, are the sole assets of each
trust. The Company’s obligations under the Debentures and
related documents, taken together, constitute a full and
unconditional guarantee by the Company of the obligations of the
trusts. The guarantee covers the distributions and payments on
liquidation or redemption of the Trust Preferred
Securities, but only to the extent of funds held by the trusts.
The Company has the right to redeem the Debentures in whole or
in part, on or after specific dates, at a redemption price
specified in the indentures plus any accrued but unpaid interest
to the redemption date. The Company used the proceeds from the
sales of the Debentures for general corporate purposes.
In connection with the formation of USB Capital IX, the trust
issued redeemable Income Trust Securities (“ITS”)
to third party investors, investing the proceeds in Debentures
issued by the Company and entered into stock purchase contracts
to purchase preferred stock to be issued by the Company in the
future. Pursuant to the stock purchase contracts, the Company is
required to make contract payments of .65 percent, also
payable semi-annually, through a specified stock purchase date
expected to be April 15, 2011. Prior to the specified stock
purchase date, the Trust is required to remarket and sell the
Debentures to third party investors to generate cash proceeds to
satisfy its obligation to purchase the Company’s
Series A Non-Cumulative Perpetual Preferred Stock
(“Series A Preferred Stock”) pursuant to the
stock purchase contracts. The Series A Preferred Stock,
when issued pursuant to the stock purchase contracts, is
expected to pay quarterly dividends equal to the greater of
three-month LIBOR plus 1.02 percent or 3.50 percent.
In connection with this transaction, the Company also entered
into a replacement capital covenant which restricts the
Company’s rights to repurchase the ITS and to redeem or
repurchase the Series A Preferred Stock.
The following table is a summary of the Debentures included in
long-term debt as of December 31, 2007:
At December 31, 2007 and 2006, the Company had authority to
issue 4 billion shares of common stock and 50 million
shares of preferred stock. The Company had 1,728 million
and 1,765 million shares of common stock outstanding at
December 31, 2007 and 2006, respectively, and had
482 million shares reserved for future issuances, primarily
under stock option plans and shares that may be issued in
connection with the Company’s convertible senior
debentures, at December 31, 2007. At December 31,2007, the Company had 40,000 shares of preferred stock
outstanding.
On March 27, 2006, the Company issued depositary shares
representing an ownership interest in 40,000 shares of
Series B Non-Cumulative Perpetual Preferred Stock with a
liquidation preference of $25,000 per share (the
“Series B Preferred Stock”). The Series B
Preferred Stock has no stated maturity and will not be subject
to any sinking fund or other obligation of the Company.
Dividends on the Series B Preferred Stock, if declared,
will accrue and be payable quarterly, in arrears, at a rate per
annum equal to the greater of three-month LIBOR plus
.60 percent, or 3.50 percent. On April 15, 2011,
or thereafter, the Series B Preferred Stock is redeemable
at the Company’s option, subject to the prior approval of
the Federal Reserve Board, at a redemption price equal to
$25,000 per share, plus any declared and unpaid dividends,
without accumulation of any undeclared dividends. In connection
with the issuance of the Series B Preferred Stock, the
Company also entered into a replacement capital covenant, which
restricts the Company’s rights to redeem or repurchase the
Series B Preferred Stock. Except in certain limited
circumstances, the Series B Preferred Stock will not have
any voting rights.
The Company has a preferred share purchase rights plan intended
to preserve the long-term value of the Company by discouraging a
hostile takeover of the Company. Under the plan, each share of
common stock carries a right to purchase one one-thousandth of a
share of preferred stock. The rights become exercisable in
certain limited circumstances involving a potential business
combination transaction or an acquisition of shares of the
Company and are exercisable at a price of $100 per right,
subject to adjustment. Following certain other events, each
right entitles its holder to purchase for $100 an amount of
common stock of the Company, or, in certain circumstances,
securities of the acquirer, having a then-current market value
of twice the exercise price of the right. The dilutive effect of
the rights on the acquiring company is intended to encourage it
to negotiate with the Company’s Board of Directors prior to
attempting a takeover. If the Board of Directors believes a
proposed acquisition is in the best interests of the Company and
its shareholders, the Board may amend the plan or redeem the
rights for a nominal amount in order to permit the acquisition
to be completed without interference from the plan. Until a
right is exercised, the holder of a right has no rights as a
shareholder of the Company. The rights expire on
February 27, 2011.
On December 21, 2004, the Board of Directors approved an
authorization to repurchase 150 million shares of
outstanding common stock during the following 24 months. In
2005, all share repurchases were made under this plan. On
August 3, 2006, the Board of Directors approved an
authorization to repurchase 150 million shares of
outstanding common stock through December 31, 2008. This
new authorization replaced the December 21, 2004,
repurchase program. During 2006, the Company repurchased
62 million shares of common stock under the 2004
authorization and 28 million shares under the 2006
authorization. During 2007, all share repurchases were made
under the 2006 authorization.
The following table summarizes the Company’s common stock
repurchased in each of the last three years:
(Dollars and Shares
in Millions)
Shares
Value
2007
58
$
2,011
2006
90
2,817
2005
62
1,807
90 U.S. BANCORP
Shareholders’ equity is affected by transactions and
valuations of asset and liability positions that require
adjustments to Accumulated Other Comprehensive Income. The
reconciliation of the transactions affecting Accumulated Other
Comprehensive Income included in shareholders’ equity for
the years ended December 31, is as follows:
Transactions
Balances
(Dollars in Millions)
Pre-tax
Tax-effect
Net-of-tax
Net-of-Tax
2007
Unrealized loss on securities available-for-sale
$
(482
)
$
183
$
(299
)
$
(659
)
Unrealized loss on derivatives
(299
)
115
(184
)
(191
)
Foreign currency translation
8
(3
)
5
(6
)
Realized loss on derivatives
–
–
–
(28
)
Reclassification for realized losses
96
(38
)
58
–
Change in retirement obligation
352
(132
)
220
(52
)
Total
$
(325
)
$
125
$
(200
)
$
(936
)
2006
Unrealized gain on securities available-for-sale
$
67
$
(25
)
$
42
$
(370
)
Unrealized gain on derivatives
35
(14
)
21
(6
)
Foreign currency translation
(30
)
11
(19
)
(12
)
Realized loss on derivatives
(199
)
75
(124
)
(77
)
Reclassification for realized losses
33
(12
)
21
–
Change in retirement obligation
(398
)
150
(248
)
(271
)
Total
$
(492
)
$
185
$
(307
)
$
(736
)
2005
Unrealized loss on securities available-for-sale
$
(539
)
$
205
$
(334
)
$
(402
)
Unrealized loss on derivatives
(58
)
22
(36
)
(27
)
Foreign currency translation
3
(1
)
2
7
Realized loss on derivatives
(74
)
28
(46
)
16
Reclassification for realized losses
39
(15
)
24
–
Minimum pension liability
(38
)
15
(23
)
(23
)
Total
$
(667
)
$
254
$
(413
)
$
(429
)
Regulatory
Capital The measures
used to assess capital include the capital ratios established by
bank regulatory agencies, including the specific ratios for the
“well capitalized” designation. Capital adequacy for
the Company and its banking subsidiaries is measured based on
two risk-based measures, Tier 1 and total risk-based
capital. Tier 1 capital is considered core capital and
includes common shareholders’ equity plus qualifying
preferred stock, trust preferred securities and minority
interests in consolidated subsidiaries (included in other
liabilities and subject to certain limitations), and is adjusted
for the aggregate impact of certain items included in other
comprehensive income. Total risk-based capital includes
Tier 1 capital and other items such as subordinated debt
and the allowance for credit losses. Both measures are stated as
a percentage of risk-weighted assets, which are measured based
on their perceived credit risk and include certain off-balance
sheet exposures, such as unfunded loan commitments, letters of
credit, and derivative contracts. The Company is also subject to
a leverage ratio requirement, a non risk-based asset ratio,
which is defined as Tier 1 capital as a percentage of
average assets, adjusted for goodwill and other non-qualifying
intangibles and other assets.
The following table provides the components of the
Company’s regulatory capital:
December 31
(Dollars in Millions)
2007
2006
Tier 1 Capital
Common shareholders’ equity
$
20,046
$
20,197
Qualifying preferred stock
1,000
1,000
Qualifying trust preferred securities
4,024
3,639
Minority interests
695
694
Less intangible assets
Goodwill
(7,534
)
(7,423
)
Other disallowed intangible assets
(1,421
)
(1,640
)
Other (a)
729
569
Total Tier 1 Capital
17,539
17,036
Tier 2 Capital
Allowance for credit losses
2,260
2,256
Eligible subordinated debt
6,126
5,199
Other
–
4
Total Tier 2 capital
8,386
7,459
Total Risk Based Capital
$
25,925
$
24,495
Risk-Weighted Assets
$
212,592
$
194,659
(a)
Includes
the impact of items included in other comprehensive income, such
as unrealized gains/(losses) on available-for-sale securities,
accumulated net gains on cash flow hedges, pension liability
adjustments, etc.
U.S. BANCORP 91
Minority interests principally represent preferred stock of
consolidated subsidiaries. During 2006, the Company’s
primary banking subsidiary formed USB Realty Corp., a real
estate investment trust, for the purpose of issuing
5,000 shares of Fixed-to-Floating Rate Exchangeable
Non-cumulative Perpetual Series A Preferred Stock with a
liquidation preference of $100,000 per share
(“Series A Preferred Securities”) to third party
investors, and investing the proceeds in certain assets,
consisting predominately of mortgage-backed securities from the
Company. Dividends on the Series A Preferred Securities, if
declared, will accrue and be payable quarterly, in arrears, at a
rate per annum of 6.091 percent from December 22, 2006
to, but excluding, January 15, 2012. After January 15,2012, the rate will be equal to three-month LIBOR for the
related dividend period plus 1.147 percent. If USB Realty
Corp. has not declared a dividend on the Series A Preferred
Securities before the dividend payment date for any dividend
period, such dividend shall not be cumulative and shall cease to
accrue and be payable, and USB Realty Corp. will have no
obligation to pay dividends accrued for such dividend period,
whether or not dividends on the Series A Preferred
Securities are declared for any future dividend period.
The Series A Preferred Securities will be redeemable, in
whole or in part, at the option of USB Realty Corp. on the
dividend payment date occurring in January 2012 and each fifth
anniversary thereafter, or in whole but not in part, at the
option of USB Realty Corp. on any dividend date before or after
January 2012 that is not a five-year date. Any redemption will
be subject to the approval of the Office of the Comptroller of
the Currency.
For a summary of the regulatory capital requirements and the
actual ratios as of December 31, 2007 and 2006, for the
Company and its bank subsidiaries, see Table 21 included in
Management’s Discussion and Analysis, which is incorporated
by reference into these Notes to Consolidated Financial
Statements.
Note 15 EARNINGS
PER SHARE
The components of earnings per share were:
(Dollars and Shares
in Millions, Except Per Share Data)
2007
2006
2005
Net income
$
4,324
$
4,751
$
4,489
Preferred dividends
(60
)
(48
)
–
Net income applicable to common equity
$
4,264
$
4,703
$
4,489
Average common shares outstanding
1,735
1,778
1,831
Net effect of the exercise and assumed purchase of stock awards
and conversion of outstanding convertible notes
23
26
26
Average diluted common shares outstanding
1,758
1,804
1,857
Earnings per common share
$
2.46
$
2.64
$
2.45
Diluted earnings per common share
$
2.43
$
2.61
$
2.42
For the years ended December 31, 2007, 2006 and 2005,
options to purchase 13 million, 1 million and
16 million shares, respectively, were outstanding but not
included in the computation of diluted earnings per share
because they were antidilutive. Convertible senior debentures
that could potentially be converted into shares of the
Company’s common stock pursuant to a specified formula,
were not included in the computation of diluted earnings per
share to the extent the conversions were antidilutive.
Note 16 EMPLOYEE
BENEFITS
Employee
Investment Plan The
Company has a defined contribution retirement savings plan which
allows qualified employees to make contributions up to
75 percent of their annual compensation, subject to
Internal Revenue Service limits, through salary deductions under
Section 401(k) of the Internal Revenue Code. Employee
contributions are invested, at the employees’ direction,
among a variety of investment alternatives. Employee
contributions are 100 percent matched by the Company, up to
four percent of an employee’s eligible annual compensation.
The Company’s matching contribution vests immediately.
Although the matching contribution is initially invested in the
Company’s common stock, an employee can reinvest the
matching contributions among various investment alternatives.
Total expense was $62 million, $58 million and
$53 million in 2007, 2006 and 2005, respectively.
Pension Plans
Pension benefits are
provided to substantially all employees based on years of
service, multiplied by a percentage of their final average pay.
Employees become vested upon completing five years of vesting
service. In
92 U.S. BANCORP
addition, two cash balance pension benefit plans exist and only
investment or interest credits continue to be credited to
participants’ accounts. Plan assets consist of various
equities, equity mutual funds and other miscellaneous assets.
In general, the Company’s pension plans’ objectives
include maintaining a funded status sufficient to meet
participant benefit obligations over time while reducing
long-term funding requirements and pension costs. The Company
has an established process for evaluating all the plans, their
performance and significant plan assumptions, including the
assumed discount rate and the long-term rate of return
(“LTROR”). Annually, the Company’s Compensation
Committee (“the Committee”), assisted by outside
consultants, evaluates plan objectives, funding policies and
plan investment policies considering its long-term investment
time horizon and asset allocation strategies. The process also
evaluates significant plan assumptions. Although plan
assumptions are established annually, the Company may update its
analysis on an interim basis in order to be responsive to
significant events that occur during the year, such as plan
mergers and amendments.
In addition to the funded qualified pension plans, the Company
maintains non-qualified plans that are unfunded and the
aggregate accumulated benefit obligation exceeds the assets. The
assumptions used in computing the present value of the
accumulated benefit obligation, the projected benefit obligation
and net pension expense are substantially consistent with those
assumptions used for the funded qualified plans.
Funding
Practices The
Company’s funding policy is to contribute amounts to its
plans sufficient to meet the minimum funding requirements of the
Employee Retirement Income Security Act of 1974, plus such
additional amounts as the Company determines to be appropriate.
There were no minimum funding requirements in 2007 or 2006, and
the Company anticipates no minimum funding requirement in 2008.
Any contributions made to the plans are invested in accordance
with established investment policies and asset allocation
strategies.
Investment
Policies and Asset Allocation
In establishing its
investment policies and asset allocation strategies, the Company
considers expected returns and the volatility associated with
different strategies. The independent consultant performs
modeling that projects numerous outcomes using a broad range of
possible scenarios, including a mix of possible rates of
inflation and economic growth. Starting with current economic
information, the model bases its projections on past
relationships between inflation, fixed income rates and equity
returns when these types of economic conditions have existed
over the previous 30 years, both in the U.S. and in
foreign countries.
Generally, based on historical performance of the various
investment asset classes, investments in equities have
outperformed other investment classes but are subject to higher
volatility. While an asset allocation including bonds and other
assets generally has lower volatility and may provide protection
in a declining interest rate environment, it limits the pension
plan’s long-term up-side potential. Given the pension
plans’ investment horizon and the financial viability of
the Company to meet its funding objectives, the Committee has
determined that an asset allocation strategy investing in
100 percent equities diversified among various domestic
equity categories and international equities is appropriate. At
December 31, 2007 and 2006, plan assets of the qualified
retirement plans included mutual funds that have asset
management arrangements with related parties totaling
$1.3 billion and $1.2 billion, respectively.
The following table, which is unaudited, except for the actual
asset allocations at December 31, 2007 and 2006, provides a
summary of asset allocations adopted by the Company compared
with a typical asset allocation alternative:
2008
Asset Allocation
Expected Returns
December 2007
December 2006
Typical
Standard
Asset Class
Asset Mix
Actual
Target
Actual
Target
Compound
Deviation
Domestic Equities
Large Cap
32
%
55
%
55
%
55
%
55
%
9.0
%
16.0
%
Mid Cap
10
17
19
16
19
10.0
21.0
Small Cap
5
5
6
6
6
10.0
21.0
International Equities
15
20
20
19
20
9.0
19.0
Fixed Income
32
–
–
–
–
Alternative Investments
6
2
–
2
–
Other
–
1
–
2
–
Total Mix Or Weighted Rates
100
%
100
%
100
%
100
%
100
%
9.5
16.5
LTROR assumed
7.9
%
8.9
% (a)
8.9
%
Standard deviation
10.8
%
16.5
%
16.0
%
(a)
The
LTROR assumed for the target asset allocation strategy of
8.9 percent is based on a range of estimates evaluated by
the Company which were centered around the compound expected
return of 9.5 percent reduced for estimated asset
management and administrative fees.
U.S. BANCORP 93
In accordance with its existing practices, the independent
pension consultant utilized by the Company updated the analysis
of expected rates of return and evaluated peer group data,
market conditions and other factors relevant to determining the
LTROR assumptions for pension costs for 2007 and 2006. The
analysis performed indicated that the LTROR assumption of
8.9 percent, used in both 2007 and 2006, continued to be in
line with expected returns based on current economic conditions
and the Company expects to continue using this LTROR in 2008.
Regardless of the extent of the Company’s analysis of
alternative asset allocation strategies, economic scenarios and
possible outcomes, plan assumptions developed for the LTROR are
subject to imprecision and changes in economic factors. As a
result of the modeling imprecision and uncertainty, the Company
considers a range of potential expected rates of return,
economic conditions for several scenarios, historical
performance relative to assumed rates of return and asset
allocation and LTROR information for a peer group in
establishing its assumptions.
Postretirement
Medical Plan In
addition to providing pension benefits, the Company provides
health care and death benefits to certain retired employees
through a retiree medical program. Generally, all active
employees may become eligible for retiree health care benefits
by meeting defined age and service requirements. The Company may
also subsidize the cost of coverage for employees meeting
certain age and service requirements. The medical plan contains
other cost-sharing features such as deductibles and coinsurance.
The estimated cost of these retiree benefit payments is accrued
during the employees’ active service.
The Company uses a measurement date of September 30 for its
retirement plans. The following table summarizes benefit
obligation and plan asset activity for the retirement plans:
Pension Plans
Postretirement Medical
Plan
(Dollars in Millions)
2007
2006
2007
2006
Projected Benefit Obligation
Benefit obligation at beginning of measurement period
$
2,127
$
2,147
$
238
$
245
Service cost
70
70
6
5
Interest cost
126
118
14
13
Plan participants’ contributions
–
–
15
17
Actuarial (gain) loss
12
(84
)
(34
)
(9
)
Benefit payments
(122
)
(124
)
(35
)
(35
)
Acquisitions and other
12
–
2
2
Benefit obligation at end of measurement period (a)
$
2,225
$
2,127
$
206
$
238
Fair Value Of Plan Assets
Fair value at beginning of measurement period
$
2,578
$
2,419
$
183
$
39
Actual return on plan assets
468
260
9
7
Employer contributions
19
23
5
155
Plan participants’ contributions
–
–
15
17
Benefit payments
(122
)
(124
)
(35
)
(35
)
Fair value at end of measurement period
$
2,943
$
2,578
$
177
$
183
Funded Status
Funded status at end of measurement period
$
718
$
451
$
(29
)
$
(55
)
Fourth quarter contribution
5
4
–
–
Recognized amount
$
723
$
455
$
(29
)
$
(55
)
Components Of The Consolidated Balance Sheet
Noncurrent benefit asset
$
992
$
704
$
–
$
–
Current benefit liability
(21
)
(13
)
–
–
Noncurrent benefit liability
(248
)
(236
)
(29
)
(55
)
Recognized amount
$
723
$
455
$
(29
)
$
(55
)
Accumulated Other Comprehensive Income
Net actuarial (gain) loss
$
159
$
480
$
(50
)
$
(13
)
Prior service (credit) cost
(26
)
(32
)
(4
)
(4
)
Transition (asset) obligation
–
–
4
4
Recognized amount
133
448
(50
)
(13
)
Deferred tax asset (liability)
50
169
(19
)
(5
)
Net impact on other comprehensive income
$
83
$
279
$
(31
)
$
(8
)
(a)
At
December 31, 2007 and 2006, the accumulated benefit
obligation for all qualified pension plans was
$1.8 billion.
The following table provides information for pension plans with
benefit obligations in excess of plan assets:
(Dollars in Millions)
2007
2006
Projected benefit obligation
$
274
$
249
Accumulated benefit obligation
265
248
Fair value of plan assets
–
–
94 U.S. BANCORP
The following table sets forth the components of net periodic
benefit cost and other amounts recognized in accumulated other
comprehensive income for the retirement plans:
Pension Plans
Postretirement
Medical Plan
(Dollars in Millions)
2007
2006
2005
2007
2006
2005
Components Of Net Periodic Benefit Cost
Service cost
$
70
$
70
$
63
$
6
$
5
$
5
Interest cost
126
118
112
14
13
16
Expected return on plan assets
(199
)
(191
)
(194
)
(6
)
(1
)
(1
)
Prior service (credit) cost and transition (asset) obligation
amortization
(6
)
(6
)
(6
)
–
–
–
Actuarial (gain) loss amortization
63
90
58
–
–
–
Net periodic benefit cost
$
54
$
81
$
33
$
14
$
17
$
20
Other Changes In Plan Assets And Benefit Obligations
Recognized In Accumulated Other Comprehensive Income
Current year actuarial (gain) loss
$
(258
)
$
(154
)
$
–
$
(37
)
$
(15
)
$
–
Actuarial (gain) loss amortization
(63
)
(90
)
–
–
–
–
Prior service (credit) cost and transition (asset) obligation
amortization
6
6
–
–
–
–
Total recognized in accumulated other comprehensive income
$
(315
)
$
(238
)
$
–
$
(37
)
$
(15
)
$
–
Total recognized in net periodic benefit cost and accumulated
other comprehensive income (a)(b)
$
(261
)
$
(157
)
$
33
$
(23
)
$
2
$
20
(a)
The
estimated net loss and prior service credit for the defined
benefit pension plans that will be amortized from accumulated
other comprehensive income into net periodic benefit cost in
2008 are $32 million and $(6) million,
respectively.
(b)
The
estimated net gain for the postretirement medical plan that will
be amortized from accumulated other comprehensive income into
net periodic benefit cost in 2008 is $4 million.
The following table sets forth weighted average assumptions used
to determine end of year obligations:
Pension Plans
Postretirement Medical
Plan
(Dollars in Millions)
2007
2006
2007
2006
Discount rate(a)
6.3
%
6.0
%
6.1
%
6.0
%
Rate of compensation increase, determined on a liability
weighted basis
3.2
2.2
*
*
Health care cost trend rate(b)
Prior to age 65
8.0
%
8.0
%
After age 65
9.0
10.0
Effect on accumulated postretirement benefit obligation
One percent increase
$
12
$
15
One percent decrease
(11
)
(13
)
(a)
For
2007, the discount rate was developed using Towers Perrin’s
cash flow matching bond model with a modified duration for the
pension plans and postretirement medical plan of 12.5 and
7.9 years, respectively. For 2006, the discount rate was
developed using Towers Perrin’s cash flow matching bond
model with a modified duration of 12.6 years for all
employee benefit plans.
(b)
The
pre-65 and post-65 rates are assumed to decrease gradually to
5.5 percent by 2012 and 6.0 percent by 2013,
respectively, and remain at these levels thereafter.
*
Not
applicable
The following table sets forth weighted average assumptions used
to determine net periodic benefit cost:
Pension Plans
Postretirement
Medical Plan
(Dollars in Millions)
2007
2006
2005
2007
2006
2005
Discount rate
6.0
%
5.7
%
6.0
%
6.0
%
5.7
%
6.0
%
Expected return on plan assets
8.9
8.9
8.9
3.5
3.5
3.5
Rate of compensation increase
3.5
3.5
3.5
*
*
*
Health care cost trend rate(a)
Prior to age 65
8.0
%
9.0
%
10.0
%
After age 65
10.0
11.0
12.0
Effect on total of service cost and interest cost
One percent increase
$
1
$
1
$
1
One percent decrease
(1
)
(1
)
(1
)
(a)
The
pre-65 and post-65 rates are assumed to decrease gradually to
5.5 percent and 6.0 percent, respectively, by 2012 and
remain at these levels thereafter.
*
Not
applicable.
U.S. BANCORP 95
In 2008, the Company expects to contribute $21 million to
its non-qualified pension plans and to make no contributions to
its postretirement medical plan.
The following benefit payments are expected to be paid from the
retirement plans:
Postretirement
(Dollars in Millions)
Pension Plans
Medical Plan (a)
Estimated Future Benefit Payments
2008
$
147
$
18
2009
132
19
2010
134
19
2011
139
19
2012
141
20
2013 – 2017
771
106
(a)
Net
of participant contributions.
Federal subsidies expected to be received by the postretirement
medical plan are not significant to the Company.
Note 17 STOCK-BASED
COMPENSATION
As part of its employee and director compensation programs, the
Company may grant certain stock awards under the provisions of
the existing stock compensation plans, including plans assumed
in acquisitions. The plans provide for grants of options to
purchase shares of common stock at a fixed price equal to the
fair value of the underlying stock at the date of grant. Option
grants are generally exercisable up to ten years from the date
of grant. In addition, the plans provide for grants of shares of
common stock or stock units that are subject to restriction on
transfer prior to vesting. Most stock awards vest over three to
five years and are subject to forfeiture if certain vesting
requirements are not met. Stock incentive plans of acquired
companies are generally terminated at the merger closing dates.
Option holders under such plans receive the Company’s
common stock, or options to buy the Company’s stock, based
on the conversion terms of the various merger agreements. The
historical stock award information presented below has been
restated to reflect the options originally granted under
acquired companies’ plans. At December 31, 2007, there
were 68 million shares (subject to adjustment for
forfeitures) available for grant under various plans.
STOCK OPTIONS AWARDS
The following is a summary of stock options outstanding and
exercised under various stock options plans of the Company:
Options
cancelled includes both non-vested (i.e., forfeitures) and
vested options.
(b)
Outstanding
options include stock-based awards that may be forfeited in
future periods, however the impact of the estimated forfeitures
is reflected in compensation expense.
96 U.S. BANCORP
Stock-based compensation expense is based on the estimated fair
value of the award at the date of grant or modification. The
fair value of each option award is estimated on the date of
grant using the Black-Scholes option-pricing model, requiring
the use of subjective assumptions. Because employee stock
options have characteristics that differ from those of traded
options, including vesting provisions and trading limitations
that impact their liquidity, the determined value used to
measure compensation expense may vary from their actual fair
value. The following table includes the weighted average
estimated fair value and assumptions utilized by the Company for
newly issued grants:
2007
2006
2005
Estimated fair value
$5.38
$6.26
$6.65
Risk-free interest rates
4.7
%
4.3
%
3.6
%
Dividend yield
4.3
%
4.0
%
3.5
%
Stock volatility factor
.20
.28
.29
Expected life of options (in years)
5.0
5.4
5.4
Expected stock volatility is based on several factors including
the historical volatility of the Company’s stock, implied
volatility determined from traded options and other factors. The
Company uses historical data to estimate option exercises and
employee terminations to estimate the expected life of options.
The risk-free interest rate for the expected life of the options
is based on the U.S. Treasury yield curve in effect on the
date of grant. The expected dividend yield is based on the
Company’s expected dividend yield over the life of the
options.
The aggregate fair value of option shares vested was
$61 million and $81 million for 2007 and 2006,
respectively. The intrinsic value of options exercised was
$192 million, $346 million and $161 million for
2007, 2006 and 2005, respectively.
Cash received from option exercises under all share-based
payment arrangements was $400 million, $885 million
and $367 million for 2007, 2006 and 2005, respectively. The
tax benefit realized for the tax deductions from option
exercises of the share-based payment arrangements totaled
$73 million, $131 million and $60 million for
2007, 2006 and 2005, respectively. To satisfy option exercises,
the Company predominantly uses treasury stock.
Additional information regarding stock options outstanding as of
December 31, 2007, is as follows:
A summary of the status of the Company’s restricted shares
of stock is presented below:
2007
2006
2005
Weighted-
Weighted-
Weighted-
Average Grant-
Average Grant-
Average Grant-
Year Ended December
31
Shares
Date Fair Value
Shares
Date Fair Value
Shares
Date Fair Value
Nonvested Shares
Number outstanding at beginning of period
2,919,901
$
27.32
2,644,171
$
26.73
2,265,625
$
25.06
Granted
952,878
35.69
1,040,201
30.22
1,024,622
30.03
Vested
(1,292,748
)
25.31
(493,730
)
28.91
(481,323
)
25.58
Cancelled
(211,946
)
31.05
(270,741
)
29.75
(164,753
)
27.60
Number outstanding at end of period
2,368,085
$
31.45
2,919,901
$
27.32
2,644,171
$
26.73
U.S. BANCORP 97
The total fair value of shares vested was $45 million,
$15 million, and $15 million for 2007, 2006 and 2005,
respectively.
Stock-based compensation expense was $77 million,
$101 million and $132 million for 2007, 2006 and 2005,
respectively. At the time employee stock options expire, are
exercised or cancelled, the Company determines the tax benefit
associated with the stock award and under certain circumstances
may be required to recognize an adjustment to tax expense. On an
after-tax basis, stock-based compensation was $48 million,
$64 million and $83 million for 2007, 2006, and 2005,
respectively. As of December 31, 2007, there was
$118 million of total unrecognized compensation cost
related to nonvested share-based arrangements granted under the
plans. That cost is expected to be recognized over a
weighted-average period of 3 years as compensation.
Note 18 INCOME
TAXES
The components of income tax expense were:
(Dollars in Millions)
2007
2006
2005
Federal
Current
$
1,732
$
1,817
$
2,107
Deferred
(95
)
1
(281
)
Federal income tax
1,637
1,818
1,826
State
Current
248
298
276
Deferred
(2
)
(4
)
(20
)
State income tax
246
294
256
Total income tax provision
$
1,883
$
2,112
$
2,082
A reconciliation of expected income tax expense at the federal
statutory rate of 35 percent to the Company’s
applicable income tax expense follows:
(Dollars in Millions)
2007
2006
2005
Tax at statutory rate (35 percent)
$
2,173
$
2,402
$
2,300
State income tax, at statutory rates, net of federal tax benefit
160
191
166
Tax effect of
Tax credits
(220
)
(212
)
(184
)
Tax-exempt income
(130
)
(91
)
(70
)
Resolution of federal and state income tax examinations
(57
)
(83
)
(94
)
Other items
(43
)
(95
)
(36
)
Applicable income taxes
$
1,883
$
2,112
$
2,082
The tax effects of fair value adjustments on securities
available-for-sale, derivative instruments in cash flow hedges
and certain tax benefits related to stock options are recorded
directly to shareholders’ equity as part of other
comprehensive income.
In preparing its tax returns, the Company is required to
interpret complex tax laws and regulations and utilize income
and cost allocation methods to determine its taxable income. On
an ongoing basis, the Company is subject to examinations by
federal, state and local government taxing authorities that may
give rise to differing interpretations of these complex laws,
regulations and methods. Due to the nature of the examination
process, it generally takes years before these examinations are
completed and matters are resolved. Included in each of the last
three years were reductions in income tax expense and associated
liabilities related to the resolution of various federal and
state income tax examinations. The federal income tax
examination resolutions cover substantially all of the
Company’s legal entities for the years through 2004. The
Company also resolved several state income tax examinations
which cover varying years from 1998 through 2005 in different
states. The resolution of these cycles was the result of
negotiations held between the Company and representatives of
various taxing authorities throughout the examinations. During
2007, the Internal Revenue Service commenced examination of the
Company’s tax returns for the years ended December 31,2005 and 2006. The years open to examination by state and local
government authorities vary by jurisdiction.
98 U.S. BANCORP
Effective January 1, 2007, the Company adopted the
provisions of FIN 48. The adoption of FIN 48 did not
result in a cumulative-effect accounting adjustment for the
Company. The Company classifies interest and penalties related
to unrecognized tax positions as a component of income tax
expense. At January 1, 2007, the Company’s total
amount of unrecognized tax positions were $364 million, of
which $237 million related to unrecognized tax positions
that if recognized, would affect the effective tax rate. In
addition, the amount accrued for the payment of interest on
unrecognized tax positions was $22 million.
A reconciliation of the change in the federal, state and foreign
unrecognized tax positions balance from January 1, 2007 to
December 31, 2007 follows:
The total amount of unrecognized tax positions that, if
recognized would impact the effective income tax rate as of
December 31, 2007, was $192 million. During the year
ended December 31, 2007, the Company recognized
approximately $13 million in interest and had approximately
$35 million accrued for the payment of interest at
December 31, 2007.
The Company completed its analysis of uncertain tax positions as
of December 31, 2007. While certain examinations may be
concluded, statutes may lapse or other developments may occur.
The Company does not believe that a significant increase or
decrease in the uncertain tax positions will occur over the next
twelve months.
Deferred income tax assets and liabilities reflect the tax
effect of estimated temporary differences between the carrying
amounts of assets and liabilities for financial reporting
purposes and the amounts used for the same items for income tax
reporting purposes.
The significant components of the Company’s net deferred
tax liability as of December 31 were:
(Dollars in Millions)
2007
2006
Deferred Tax Assets
Allowance for credit losses
$
879
$
871
Securities available-for-sale and financial instruments
538
278
Stock compensation
232
255
Other investment basis differences
184
95
Accrued expenses
111
135
Accrued severance, pension and retirement benefits
67
68
Federal, state and foreign net operating loss carryforwards
66
66
Other deferred tax assets, net
25
10
Gross deferred tax assets
2,102
1,778
Deferred Tax Liabilities
Leasing activities
(2,139
)
(2,327
)
Pension and postretirement benefits
(392
)
(167
)
Mortgage servicing rights
(390
)
(290
)
Loans
(80
)
(48
)
Deferred fees
(59
)
(81
)
Intangible asset basis
(20
)
(29
)
Accelerated depreciation
(9
)
(13
)
Other deferred tax liabilities, net
(226
)
(240
)
Gross deferred tax liabilities
(3,315
)
(3,195
)
Valuation allowance
(66
)
(66
)
Net Deferred Tax Liability
$
(1,279
)
$
(1,483
)
The Company has established a valuation allowance to offset
deferred tax assets related to federal, state and foreign net
operating loss carryforwards which are subject to various
limitations under the respective income tax laws and some of
which may expire unused. The Company has approximately
$413 million of federal, state and foreign net operating
loss carryforwards which expire at various times through 2024.
Certain events covered by Internal Revenue Code
section 593(e), which was not repealed, will trigger a
U.S. BANCORP 99
recapture of base year reserves of acquired thrift institutions.
The base year reserves of acquired thrift institutions would be
recaptured if an entity ceases to qualify as a bank for federal
income tax purposes. The base year reserves of thrift
institutions also remain subject to income tax penalty
provisions that, in general, require recapture upon certain
stock redemptions of, and excess distributions to, stockholders.
At December 31, 2007, retained earnings included
approximately $102 million of base year reserves for which
no deferred federal income tax liability has been recognized.
Note 19 DERIVATIVE
INSTRUMENTS
In the ordinary course of business, the Company enters into
derivative transactions to manage its interest rate, prepayment,
credit, price and foreign currency risks and to accommodate the
business requirements of its customers. The Company does not
enter into derivative transactions for speculative purposes.
Refer to Note 1 “Significant Accounting Policies”
in the Notes to Consolidated Financial Statements for a
discussion of the Company’s accounting policies for
derivative instruments. For information related to derivative
positions held for asset and liability management purposes and
customer-related derivative positions, see Table 18
“Derivative Positions,” included in Management’s
Discussion and Analysis, which is incorporated by reference in
these Notes to Consolidated Financial Statements.
ASSET AND LIABILITY
MANAGEMENT POSITIONS
Cash Flow Hedges
The Company has
$16.0 billion of designated cash flow hedges at
December 31, 2007. These derivatives are interest rate
swaps that are hedges of the forecasted cash flows from the
underlying variable-rate debt. All cash flow hedges are highly
effective for the year ended December 31, 2007, and the
change in fair value attributed to hedge ineffectiveness was not
material.
At December 31, 2007 and 2006, accumulated other
comprehensive income included a deferred after-tax net loss of
$219 million and $83 million, respectively, related to
cash flow hedges. The unrealized loss will be reflected in
earnings when the related cash flows or hedged transactions
occur and will offset the related performance of the hedged
items. The occurrence of these related cash flows and hedged
transactions remains probable. The estimated amount of after-tax
loss to be reclassified from accumulated other comprehensive
income into earnings during 2008 is $106 million. This
includes gains related to hedges that were terminated early and
the forecasted transactions are still probable.
Fair Value
Hedges The Company may
use derivatives that are primarily interest rate swaps that
hedge the change in fair value related to interest rate changes
of underlying fixed-rate debt, junior subordinated debentures
and deposit obligations. In addition, the Company may use
forward commitments to sell residential mortgage loans to hedge
its interest rate risk related to residential mortgage loans
held for sale. The Company commits to sell the loans at
specified prices in a future period, typically within
90 days, and is exposed to interest rate risk during the
period between issuing a loan commitment and the sale of the
loan into the secondary market.
The Company has $7.3 billion of designated fair value
hedges at December 31, 2007. All fair value hedges are
considered highly effective for the year ended December 31,2007. The change in fair value attributed to hedge
ineffectiveness was a loss of $7 million for the year ended
December 31, 2007.
Net Investment
Hedges The Company
enters into derivatives to protect its net investment in certain
foreign operations. The Company uses forward commitments to sell
specified amounts of certain foreign currencies and foreign
denominated debt to hedge its capital volatility risk associated
with fluctuations in foreign currency exchange rates. The net
amount of gains or losses included in the cumulative translation
adjustment for 2007 was not significant.
Other Derivative
Positions The Company
has derivative positions that are used for interest rate risk
and other risk management purposes but are not designated as
cash flow hedges or fair value hedges in accordance with the
provisions of Statement of Financial Accounting Standards
No. 133, “Accounting for Derivative Instruments and
Hedging Activities.”
At December 31, 2007, the Company had $2.8 billion of
forward commitments to sell residential mortgage loans to hedge
the Company’s interest rate risk related to
$3.7 billion of unfunded residential mortgage loan
commitments. Gains and losses on mortgage banking derivatives
and the unfunded loan commitments are included in mortgage
banking revenue on the statement of income. At December 31,2007, the Company also held U.S. Treasury futures, options
on U.S. Treasury futures contracts, forward commitments to
buy residential mortgage loans and interest rate swaps to
economically hedge the change in fair value of its residential
MSRs.
CUSTOMER-RELATED
POSITIONS
The Company acts as a seller and buyer of interest rate
contracts and foreign exchange rate contracts on behalf of
customers. At December 31, 2007, the Company had
$40.9 billion of aggregate customer derivative positions,
including $33.4 billion of interest rate swaps, caps and
100 U.S. BANCORP
floors, and $7.5 billion of foreign exchange rate
contracts. The Company minimizes its market and liquidity risks
by taking similar offsetting positions. Gains or losses on
customer-related transactions were not significant for the year
ended December 31, 2007.
Note 20 FAIR
VALUES OF FINANCIAL INSTRUMENTS
Due to the nature of its business and its customers’ needs,
the Company offers a large number of financial instruments, most
of which are not actively traded. When market quotes are
unavailable, valuation techniques, including discounted cash
flow calculations and pricing models or services, are used. The
Company also uses various aggregation methods and assumptions,
such as the discount rate and cash flow timing and amounts. As a
result, the fair value estimates can neither be substantiated by
independent market comparisons, nor realized by the immediate
sale or settlement of the financial instrument. Also, the
estimates reflect a point in time and could change significantly
based on changes in economic factors, such as interest rates.
Furthermore, the disclosure of certain financial and
nonfinancial assets and liabilities is not required. Finally,
the fair value disclosure is not intended to estimate a market
value of the Company as a whole. A summary of the Company’s
valuation techniques and assumptions follows.
Cash and Cash
Equivalents The
carrying value of cash, amounts due from banks, federal funds
sold and securities purchased under resale agreements was
assumed to approximate fair value.
Securities
Investment securities
were valued using available market quotes. In some instances,
for securities that are not widely traded, market quotes for
comparable securities were used.
Loans
The loan portfolio
includes adjustable and fixed-rate loans, the fair value of
which was estimated using discounted cash flow analyses and
other valuation techniques. To calculate discounted cash flows,
the loans were aggregated into pools of similar types and
expected repayment terms. The expected cash flows of loans
considered historical prepayment experiences and estimated
credit losses for nonperforming loans and were discounted using
current rates offered to borrowers of similar credit
characteristics. The fair value of adjustable rate loans is
assumed to be equal to their par value.
Deposit
Liabilities The fair
value of demand deposits, savings accounts and certain money
market deposits is equal to the amount payable on demand at
year-end. The fair value of fixed-rate certificates of deposit
was estimated by discounting the contractual cash flow using the
discount rates implied by high-grade corporate bond yield curves.
Short-term
Borrowings Federal
funds purchased, securities sold under agreements to repurchase,
commercial paper and other short-term funds borrowed have
floating rates or short-term maturities. Their par value is
assumed to approximate their fair value.
Long-term Debt
The estimated fair value
of medium-term notes, bank notes, and subordinated debt was
determined by using discounted cash flow analysis based on
high-grade corporate bond yield curves. Floating rate debt is
assumed to be equal to par value. Capital trust and other
long-term debt instruments were valued using market quotes.
Interest Rate
Swaps, Equity Contracts and Options
The interest rate
options and swap cash flows were estimated using a third-party
pricing model and discounted based on appropriate LIBOR,
eurodollar futures, swap, treasury note yield curves and equity
market prices.
Loan Commitments,
Letters of Credit and Guarantees
The fair value of
commitments, letters of credit and guarantees represents the
estimated costs to terminate or otherwise settle the obligations
with a third-party. Residential mortgage commitments are
actively traded and the fair value is estimated using available
market quotes. Other loan commitments, letters of credit and
guarantees are not actively traded. Substantially all loan
commitments have floating rates and do not expose the Company to
interest rate risk, assuming no premium or discount was ascribed
to loan commitments because funding could occur at market rates.
The Company estimates the fair value of loan commitments,
letters of credit and guarantees based on the related amount of
unamortized deferred commitment fees, adjusted for the probable
losses for these arrangements.
U.S. BANCORP 101
The estimated fair values of the Company’s financial
instruments at December 31 are shown in the table below.
The fair value of unfunded commitments, standby letters of
credit and other guarantees is approximately equal to their
carrying value. The carrying value of unfunded commitments and
standby letters of credit was $313 million. The carrying
value of other guarantees was $290 million.
Note 21 GUARANTEES
AND CONTINGENT LIABILITIES
COMMITMENTS TO
EXTEND CREDIT
Commitments to extend credit are legally binding and generally
have fixed expiration dates or other termination clauses. The
contractual amount represents the Company’s exposure to
credit loss, in the event of default by the borrower. The
Company manages this credit risk by using the same credit
policies it applies to loans. Collateral is obtained to secure
commitments based on management’s credit assessment of the
borrower. The collateral may include marketable securities,
receivables, inventory, equipment and real estate. Since the
Company expects many of the commitments to expire without being
drawn, total commitment amounts do not necessarily represent the
Company’s future liquidity requirements. In addition, the
commitments include consumer credit lines that are cancelable
upon notification to the consumer.
LETTERS OF CREDIT
Standby letters of credit are commitments the Company issues to
guarantee the performance of a customer to a third-party. The
guarantees frequently support public and private borrowing
arrangements, including commercial paper issuances, bond
financings and other similar transactions. The Company issues
commercial letters of credit on behalf of customers to ensure
payment or collection in connection with trade transactions. In
the event of a customer’s nonperformance, the
Company’s credit loss exposure is the same as in any
extension of credit, up to the letter’s contractual amount.
Management assesses the borrower’s credit to determine the
necessary collateral, which may include marketable securities,
receivables, inventory, equipment and real estate. Since the
conditions requiring the
102 U.S. BANCORP
Company to fund letters of credit may not occur, the Company
expects its liquidity requirements to be less than the total
outstanding commitments. The maximum potential future payments
guaranteed by the Company under standby letter of credit
arrangements at December 31, 2007, were approximately
$12.7 billion with a weighted-average term of approximately
23 months. The estimated fair value of standby letters of
credit was $90 million at December 31, 2007.
The contract or notional amounts of commitments to extend credit
and letters of credit at December 31, 2007, were as follows:
Rental expense for operating leases amounted to
$207 million in 2007, $193 million in 2006 and
$192 million in 2005. Future minimum payments, net of
sublease rentals, under capitalized leases and noncancelable
operating leases with initial or remaining terms of one year or
more, consisted of the following at December 31, 2007:
Capitalized
Operating
(Dollars in Millions)
Leases
Leases
2008
$
11
$
168
2009
10
156
2010
10
141
2011
9
121
2012
9
105
Thereafter
34
358
Total minimum lease payments
$
83
$
1,049
Less amount representing interest
29
Present value of net minimum lease payments
$
54
GUARANTEES
Guarantees are contingent commitments issued by the Company to
customers or other third-parties. The Company’s guarantees
primarily include parent guarantees related to
subsidiaries’ third-party borrowing arrangements;
third-party performance guarantees inherent in the
Company’s business operations, such as indemnified
securities lending programs and merchant charge-back guarantees;
indemnification or buy-back provisions related to certain asset
sales; and contingent consideration arrangements related to
acquisitions. For certain guarantees, the Company has recorded a
liability related to the potential obligation, or has access to
collateral to support the guarantee or through the exercise of
other recourse provisions can offset some or all of the maximum
potential future payments made under these guarantees.
Third-Party
Borrowing Arrangements
The Company provides
guarantees to third-parties as a part of certain
subsidiaries’ borrowing arrangements, primarily
representing guaranteed operating or capital lease payments or
other debt obligations with maturity dates extending through
2013. The maximum potential future payments guaranteed by the
Company under these arrangements were approximately
$331 million at December 31, 2007. The Company’s
recorded liabilities as of December 31, 2007, included
$1 million representing outstanding amounts owed to these
third-parties and required to be recorded on the Company’s
balance sheet in accordance with accounting principles generally
accepted in the United States.
Commitments from
Securities Lending The
Company participates in securities lending activities by acting
as the customer’s agent involving the loan of securities.
The Company indemnifies customers for the difference between the
market value of the securities lent and the market value of the
collateral received. Cash collateralizes these transactions. The
maximum potential future payments guaranteed by the Company
under these arrangements were approximately $13.9 billion
at December 31, 2007, and represented the market value of
the securities lent to third-parties. At December 31, 2007,
the Company held assets with a market value of
$14.3 billion as collateral for these arrangements.
Assets Sales
The Company has provided
guarantees to certain third-parties in connection with the sale
of certain assets, primarily loan portfolios and low-income
housing tax credits. These guarantees are generally in the form
of asset buy-back or make-whole provisions that are triggered
upon a credit event or a change in the tax-qualifying status of
the related projects, as applicable, and remain in effect until
the loans are collected or final tax credits are realized,
respectively. The maximum potential future payments guaranteed
by the Company under these arrangements were approximately
$500 million at December 31, 2007, and represented the
proceeds or the guaranteed portion received from the buyer in
these transactions where the buy-back or make-whole provisions
have not yet expired. Recourse available to the Company includes
guarantees from the Small Business Administration (for SBA loans
sold), recourse
U.S. BANCORP 103
against the correspondent that originated the loan or the
private mortgage issuer, the right to collect payments from the
debtors,
and/or the
right to liquidate the underlying collateral, if any, and retain
the proceeds. Based on its established loan-to-value guidelines,
the Company believes the recourse available is sufficient to
recover future payments, if any, under the loan buy-back
guarantees.
Merchant
Processing The Company,
through its subsidiaries, provides merchant processing services.
Under the rules of credit card associations, a merchant
processor retains a contingent liability for credit card
transactions processed. This contingent liability arises in the
event of a billing dispute between the merchant and a cardholder
that is ultimately resolved in the cardholder’s favor. In
this situation, the transaction is “charged-back” to
the merchant and the disputed amount is credited or otherwise
refunded to the cardholder. If the Company is unable to collect
this amount from the merchant, it bears the loss for the amount
of the refund paid to the cardholder.
A cardholder, through its issuing bank, generally has until the
latter of up to four months after the date the transaction is
processed or the receipt of the product or service to present a
charge-back to the Company as the merchant processor. The
absolute maximum potential liability is estimated to be the
total volume of credit card transactions that meet the
associations’ requirements to be valid charge-back
transactions at any given time. Management estimates that the
maximum potential exposure for charge-backs would approximate
the total amount of merchant transactions processed through the
credit card associations for the last four months. For the last
four months this amount totaled approximately
$73.0 billion. In most cases, this contingent liability is
unlikely to arise, as most products and services are delivered
when purchased and amounts are refunded when items are returned
to merchants. However, where the product or service is not
provided until a future date (“future delivery”), the
potential for this contingent liability increases. To mitigate
this risk, the Company may require the merchant to make an
escrow deposit, may place maximum volume limitations on future
delivery transactions processed by the merchant at any point in
time, or may require various credit enhancements (including
letters of credit and bank guarantees). Also, merchant
processing contracts may include event triggers to provide the
Company more financial and operational control in the event of
financial deterioration of the merchant.
The Company’s primary exposure to future delivery is
related to merchant processing for airlines, cruise lines and
large tour operators. The Company currently processes card
transactions in the United States, Canada and Europe for
airlines, cruise lines and large tour operators. In the event of
liquidation of these merchants, the Company could become
financially liable for refunding tickets purchased through the
credit card associations under the charge-back provisions.
Charge-back risk related to these merchants is evaluated in a
manner similar to credit risk assessments and, as such, merchant
processing contracts contain various provisions to protect the
Company in the event of default. At December 31, 2007, the
value of airline, cruise line and large tour operator tickets
purchased to be delivered at a future date was
$4.0 billion, with airline tickets representing
91 percent of that amount. The Company held collateral of
$943 million in escrow deposits, letters of credit and
indemnities from financial institutions, and liens on various
assets. With respect to future delivery risk for other
merchants, the Company held $52 million of merchant escrow
deposits as collateral. In addition to specific collateral or
other credit enhancements, the Company maintains a liability for
its implied guarantees associated with future delivery. At
December 31, 2007, the liability was $33 million
primarily related to these airlines, cruise lines and large tour
operators processing arrangements.
In the normal course of business, the Company has unresolved
charge-backs that are in process of resolution. The Company
assesses the likelihood of its potential liability based on the
extent and nature of unresolved charge-backs and its historical
loss experience. At December 31, 2007, the Company had a
recorded liability for potential losses of $17 million.
Contingent
Consideration Arrangements
The Company has
contingent payment obligations related to certain business
combination transactions. Payments are guaranteed as long as
certain post-acquisition performance-based criteria are met or
customer relationships are maintained. At December 31,2007, the maximum potential future payments required to be made
by the Company under these arrangements was approximately
$13 million. If required, the majority of these contingent
payments are payable within the next 12 months.
Minimum Revenue
Guarantees In the normal
course of business, the Company may enter into revenue share
agreements with third party business partners who generate
customer referrals or provide marketing or other services
related to the generation of revenue. In certain of these
agreements, the Company may guarantee that a minimum amount of
revenue share payments will be made to the third party over a
specified period of time. At December 31, 2007, the maximum
potential future payments required to be made by the Company
under these agreements was $24 million.
Other Guarantees
The Company provides
liquidity and credit enhancement facilities to a
Company-sponsored conduit, as more fully described in the
“Off-Balance Sheet
104 U.S. BANCORP
Arrangements” section within Management’s Discussion
and Analysis. Although management believes a draw against these
facilities is remote, the maximum potential future payments
guaranteed by the Company under these arrangements were
approximately $1.2 billion at December 31, 2007. The
recorded fair value of the Company’s liability for the
credit enhancement liquidity facility was $2 million at
December 31, 2007, and was included in other liabilities.
The Company has also made financial performance guarantees
related to the operations of its subsidiaries. The maximum
potential future payments guaranteed by the Company under these
arrangements were approximately $2.1 billion at
December 31, 2007.
OTHER CONTINGENT
LIABILITIES
Visa
Restructuring and Card Association Litigation
The Company’s
payment services business issues and acquires credit and debit
card transactions through the Visa U.S.A. Inc. card association
(“Visa U.S.A.”) or its affiliates (collectively
“Visa”). On October 3, 2007, Visa completed a
restructuring and issued shares of Visa Inc. common stock to its
financial institution members in contemplation of its initial
public offering (“IPO”) anticipated in the first
quarter of 2008 (the “Visa Reorganization”). In
addition, the Company and certain of its subsidiaries have been
named as defendants along with Visa U.S.A. and MasterCard
International (the “Card Associations”), as well as
several other banks, in antitrust lawsuits challenging the
practices of the Card Associations (the “Visa
Litigation”). Visa U.S.A. member banks have a contingent
obligation to indemnify Visa Inc. under the Visa U.S.A. bylaws
(which were modified at the time of the restructuring in October
2007) for potential losses arising from the Visa
Litigation. The Company has also entered into judgment and loss
sharing agreements with Visa U.S.A. and certain other banks in
order to apportion financial responsibilities arising from any
potential adverse judgment or negotiated settlements related to
the Visa Litigation.
As a part of the Visa Reorganization, the Company received its
proportionate number of Class U.S.A. shares of Visa Inc.
common stock. In connection with the IPO, it is expected that a
portion of these shares will be redeemed for cash, with the
remaining shares to be converted to Class A shares three
years after the IPO or upon settlement of the Visa Litigation,
whichever is later. Additionally, Visa Inc. is expected to set
aside a portion of the proceeds from the IPO in an escrow
account for the benefit of member financial institutions to fund
the expenses of the Visa Litigation as well as the members’
proportionate share of any judgments or settlements that may
arise out of the Visa Litigation. On November 7, 2007, Visa
announced the settlement of the portion of the Visa Litigation
involving American Express, and accordingly, the Company
recorded a $115 million charge in the third quarter of 2007
for its proportionate share of this settlement.
In addition to the liability related to the settlement with
American Express, Visa U.S.A. member banks are required to
recognize the contingent obligation to indemnify Visa Inc. under
the Visa U.S.A. bylaws for potential losses arising from the
remaining Visa Litigation at the estimated fair value of such
obligation in accordance with Financial Accounting Standards
Board Interpretation No. 45, “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others.” The
contingent obligation of member banks under the Visa U.S.A.
bylaws has no specified maximum amount. While the estimation of
any potential losses related to this litigation is highly
judgmental, the Company recognized a charge of approximately
$215 million in the fourth quarter of 2007.
Upon completion of the anticipated IPO, the Company expects to
recognize a gain related to its interest in Visa Inc. The amount
of the gain will be based on the fair value of any Visa Inc.
shares utilized to establish the escrow account (limited to the
amount of the obligation recorded) and the Visa Inc. shares
redeemed for cash. The Company expects the value of these Visa
Inc. shares to exceed the aggregate of the $115 million and
$215 million litigation charges recorded by the Company in
the third and fourth quarter of 2007, respectively.
Other
The Company is subject
to various other litigation, investigations and legal and
administrative cases and proceedings that arise in the ordinary
course of its businesses. Due to their complex nature, it may be
years before some matters are resolved. While it is impossible
to ascertain the ultimate resolution or range of financial
liability with respect to these contingent matters, the Company
believes that the aggregate amount of such liabilities will not
have a material adverse effect on the financial condition,
results of operations or cash flows of the Company.
U.S. BANCORP 105
Note 22 U.S. BANCORP
(PARENT COMPANY)
CONDENSED
BALANCE SHEET
December 31
(Dollars in Millions)
2007
2006
Assets
Deposits with subsidiary banks, principally interest-bearing
$
5,948
$
9,903
Available-for-sale securities
3,735
253
Investments in bank and bank holding company subsidiaries
Principal collected on long-term advances to subsidiaries
1,000
–
–
Other, net
(32
)
(18
)
(18
)
Net cash used in investing activities
(2,394
)
(1,547
)
(14
)
Financing Activities
Net increase (decrease) in short-term borrowings
(12
)
273
99
Proceeds from issuance of long-term debt
3,536
6,550
5,979
Principal payments or redemption of long-term debt
(4,328
)
(5,947
)
(1,862
)
Proceeds from issuance of preferred stock
–
948
–
Proceeds from issuance of common stock
427
910
371
Repurchase of common stock
(1,983
)
(2,798
)
(1,855
)
Cash dividends paid on preferred stock
(60
)
(33
)
–
Cash dividends paid on common stock
(2,785
)
(2,359
)
(2,245
)
Net cash provided by (used in) financing activities
(5,205
)
(2,456
)
487
Change in cash and cash equivalents
(3,955
)
21
3,076
Cash and cash equivalents at beginning of year
9,903
9,882
6,806
Cash and cash equivalents at end of year
$
5,948
$
9,903
$
9,882
Transfer of funds (dividends, loans or advances) from bank
subsidiaries to the Company is restricted. Federal law requires
loans to the Company or its affiliates to be secured and
generally limits loans to the Company or an individual affiliate
to 10 percent of each bank’s unimpaired capital and
surplus. In the aggregate, loans to the Company and all
affiliates cannot exceed 20 percent of each bank’s
unimpaired capital and surplus.
Dividend payments to the Company by its subsidiary banks are
subject to regulatory review and statutory limitations and, in
some instances, regulatory approval. The approval of the
Comptroller of the Currency is required if total dividends by a
national bank in any calendar year exceed the bank’s net
income for that year combined with its retained net income for
the preceding two calendar years, or if the bank’s retained
earnings are less than zero. Furthermore, dividends are
restricted by the Comptroller of the Currency’s minimum
capital constraints for all national banks. Within these
guidelines, all bank subsidiaries have the ability to pay
dividends without prior regulatory approval. The amount of
dividends available to the parent company from the bank
subsidiaries at December 31, 2007, was approximately
$1.1 billion.
Net interest income after provision for credit losses
5,897
6,197
6,389
6,442
5,935
(4.8
)
Noninterest Income
Credit and debit card revenue
949
800
713
649
561
18.6
Corporate payment products revenue
631
557
488
407
361
13.3
ATM processing services
245
243
229
175
166
.8
Merchant processing services
1,101
963
770
675
561
14.3
Trust and investment management fees
1,339
1,235
1,009
981
954
8.4
Deposit service charges
1,058
1,023
928
807
716
3.4
Treasury management fees
472
441
437
467
466
7.0
Commercial products revenue
433
415
400
432
401
4.3
Mortgage banking revenue
259
192
432
397
367
34.9
Investment products fees and commissions
146
150
152
156
145
(2.7
)
Securities gains (losses), net
15
14
(106
)
(105
)
245
7.1
Other
524
813
593
478
370
(35.5
)
Total noninterest income
7,172
6,846
6,045
5,519
5,313
4.8
Noninterest Expense
Compensation
2,640
2,513
2,383
2,252
2,177
5.1
Employee benefits
494
481
431
389
328
2.7
Net occupancy and equipment
686
660
641
631
644
3.9
Professional services
233
199
166
149
143
17.1
Marketing and business development
242
217
235
194
180
11.5
Technology and communications
512
505
466
430
418
1.4
Postage, printing and supplies
283
265
255
248
246
6.8
Other intangibles
376
355
458
550
682
5.9
Debt prepayment
–
33
54
155
–
*
Other
1,396
952
774
787
779
46.6
Total noninterest expense
6,862
6,180
5,863
5,785
5,597
11.0
Income from continuing operations before income taxes
6,207
6,863
6,571
6,176
5,651
(9.6
)
Applicable income taxes
1,883
2,112
2,082
2,009
1,941
(10.8
)
Income from continuing operations
4,324
4,751
4,489
4,167
3,710
(9.0
)
Discontinued operations (after-tax)
–
–
–
–
23
–
Net income
$
4,324
$
4,751
$
4,489
$
4,167
$
3,733
(9.0
)
Net income applicable to common equity
$
4,264
$
4,703
$
4,489
$
4,167
$
3,733
(9.3
)
* Not
meaningful
U.S. BANCORP 109
U.S. Bancorp
Quarterly
Consolidated Financial Data
2007
2006
First
Second
Third
Fourth
First
Second
Third
Fourth
(Dollars in
Millions, Except Per Share Data)
Quarter
Quarter
Quarter
Quarter
Quarter
Quarter
Quarter
Quarter
Interest Income
Loans
$
2,578
$
2,616
$
2,703
$
2,730
$
2,307
$
2,425
$
2,545
$
2,596
Loans held for sale
59
70
76
72
51
57
64
64
Investment securities
516
516
522
541
490
500
500
511
Other interest income
34
34
33
36
43
36
40
34
Total interest income
3,187
3,236
3,334
3,379
2,891
3,018
3,149
3,205
Interest Expense
Deposits
675
663
694
722
503
578
640
668
Short-term borrowings
328
379
374
352
270
270
321
342
Long-term debt
535
562
599
564
403
484
528
515
Total interest expense
1,538
1,604
1,667
1,638
1,176
1,332
1,489
1,525
Net interest income
1,649
1,632
1,667
1,741
1,715
1,686
1,660
1,680
Provision for credit losses
177
191
199
225
115
125
135
169
Net interest income after provision for credit losses
1,472
1,441
1,468
1,516
1,600
1,561
1,525
1,511
Noninterest Income
Credit and debit card revenue
205
228
235
281
182
202
206
210
Corporate payment products revenue
145
157
164
165
127
139
150
141
ATM processing services
59
62
62
62
59
61
63
60
Merchant processing services
250
285
287
279
213
253
253
244
Trust and investment management fees
322
342
331
344
297
314
305
319
Deposit service charges
243
272
271
272
232
264
268
259
Treasury management fees
111
126
118
117
107
116
111
107
Commercial products revenue
100
105
107
121
104
107
100
104
Mortgage banking revenue
67
68
76
48
24
75
68
25
Investment products fees and commissions
34
38
36
38
38
42
34
36
Securities gains (losses), net
1
3
7
4
–
3
–
11
Other
159
169
150
46
231
179
190
213
Total noninterest income
1,696
1,855
1,844
1,777
1,614
1,755
1,748
1,729
Noninterest Expense
Compensation
635
659
656
690
633
627
632
621
Employee benefits
133
123
119
119
133
123
123
102
Net occupancy and equipment
165
171
175
175
165
161
168
166
Professional services
47
59
56
71
35
41
54
69
Marketing and business development
48
64
66
64
40
58
58
61
Technology and communications
125
126
127
134
117
127
128
133
Postage, printing and supplies
69
71
70
73
66
66
66
67
Other intangibles
94
95
94
93
85
89
89
92
Debt prepayment
–
–
–
–
–
11
–
22
Other
229
272
380
515
226
227
220
279
Total noninterest expense
1,545
1,640
1,743
1,934
1,500
1,530
1,538
1,612
Income before income taxes
1,623
1,656
1,569
1,359
1,714
1,786
1,735
1,628
Applicable income taxes
493
500
473
417
561
585
532
434
Net income
$
1,130
$
1,156
$
1,096
$
942
$
1,153
$
1,201
$
1,203
$
1,194
Net income applicable to common equity
$
1,115
$
1,141
$
1,081
$
927
$
1,153
$
1,184
$
1,187
$
1,179
Earnings per common share
$
.64
$
.66
$
.63
$
.54
$
.64
$
.66
$
.67
$
.67
Diluted earnings per common share
$
.63
$
.65
$
.62
$
.53
$
.63
$
.66
$
.66
$
.66
110 U.S. BANCORP
U.S. Bancorp
Supplemental
Financial Data
Earnings
Per Common Share Summary
2007
2006
2005
2004
2003
Earnings per common share from continuing operations
$
2.46
$
2.64
$
2.45
$
2.21
$
1.93
Discontinued operations
–
–
–
–
.01
Earnings per common share
$
2.46
$
2.64
$
2.45
$
2.21
$
1.94
Diluted earnings per common share from continuing operations
$
2.43
$
2.61
$
2.42
$
2.18
$
1.92
Discontinued operations
–
–
–
–
.01
Diluted earnings per common share
$
2.43
$
2.61
$
2.42
$
2.18
$
1.93
Dividends declared per common share
$
1.625
$
1.390
$
1.230
$
1.020
$
.855
Ratios
Return on average assets
1.93
%
2.23
%
2.21
%
2.17
%
1.99
%
Return on average common equity
21.3
23.6
22.5
21.4
19.2
Average total equity to average assets
9.4
9.7
9.8
10.2
10.3
Dividends per common share to net income per common share
66.1
52.7
50.2
46.2
44.1
Other Statistics (Dollars and Shares in Millions)
Common shares outstanding (a)
1,728
1,765
1,815
1,858
1,923
Average common shares outstanding and common stock equivalents
Earnings per common share
1,735
1,778
1,831
1,887
1,924
Diluted earnings per common share
1,758
1,804
1,857
1,913
1,936
Number of shareholders (b)
63,837
66,313
69,217
71,492
74,341
Common dividends declared
$
2,813
$
2,466
$
2,246
$
1,917
$
1,645
(a)
Defined
as total common shares less common stock held in treasury at
December 31.
(b)
Based
on number of common stock shareholders of record at
December 31.
STOCK
PRICE RANGE AND DIVIDENDS
2007
2006
Sales Price
Sales Price
Closing
Dividends
Closing
Dividends
High
Low
Price
Declared
High
Low
Price
Declared
First quarter
$
36.84
$
34.40
$
34.97
$
.400
$
31.31
$
28.99
$
30.50
$
.330
Second quarter
35.18
32.74
32.95
$
.400
31.89
30.17
30.88
$
.330
Third quarter
34.17
29.09
32.53
$
.400
33.42
30.54
33.22
$
.330
Fourth quarter
34.21
30.21
31.74
$
.425
36.85
32.96
36.19
$
.400
The common stock of U.S. Bancorp is traded on the New York Stock
Exchange, under the ticker symbol “USB.” At
January 31, 2008, there were 63,721 holders of record
of the Company’s common stock.
STOCK PERFORMANCE
CHART
The following chart compares the cumulative total shareholder
return on the Company’s common stock during the five years
ended December 31, 2007, with the cumulative total return
on the Standard & Poor’s 500 Commercial Bank
Index and the Standard & Poor’s 500 Index. The
comparison assumes $100 was invested on December 31, 2002,
in the Company’s common stock and in each of the foregoing
indices and assumes the reinvestment of all dividends.
General Business
Description
U.S. Bancorp is a
multi-state financial services holding company headquartered in
Minneapolis, Minnesota. U.S. Bancorp was incorporated in
Delaware in 1929 and operates as a financial holding company and
a bank holding company under the Bank Holding Company Act of
1956. U.S. Bancorp provides a full range of financial
services, including lending and depository services, cash
management, foreign exchange and trust and investment management
services. It also engages in credit card services, merchant and
ATM processing, mortgage banking, insurance, brokerage and
leasing.
U.S. Bancorp’s banking subsidiaries are engaged in the
general banking business, principally in domestic markets. The
subsidiaries range in size from $39 million to
$139 billion in deposits and provide a wide range of
products and services to individuals, businesses, institutional
organizations, governmental entities and other financial
institutions. Commercial and consumer lending services are
principally offered to customers within the Company’s
domestic markets, to domestic customers with foreign operations
and within certain niche national venues. Lending services
include traditional credit products as well as credit card
services, financing and import/export trade, asset-backed
lending, agricultural finance and other products. Leasing
products are offered through bank leasing subsidiaries.
Depository services include checking accounts, savings accounts
and time certificate contracts. Ancillary services such as
foreign exchange, treasury management and receivable lock-box
collection are provided to corporate customers.
U.S. Bancorp’s bank and trust subsidiaries provide a
full range of asset management and fiduciary services for
individuals, estates, foundations, business corporations and
charitable organizations.
U.S. Bancorp’s non-banking subsidiaries primarily
offer investment and insurance products to the Company’s
customers principally within its markets and mutual fund
processing services to a broad range of mutual funds.
Banking and investment services are provided through a network
of 2,518 banking offices principally operating in 24 states
in the Midwest and West. The Company operates a network of 4,867
branded ATMs and provides
24-hour,
seven day a week telephone customer service. Mortgage banking
services are provided through banking offices and loan
production offices throughout the Company’s markets.
Consumer lending products may be originated through banking
offices, indirect correspondents, brokers or other lending
sources, and a consumer finance division. The Company is also
one of the largest providers of
Visa®
corporate and purchasing card services and corporate trust
services in the United States. A wholly-owned subsidiary, NOVA
Information Systems, Inc. (“NOVA”), provides merchant
processing services directly to merchants and through a network
of banking affiliations. Affiliates of NOVA provide similar
merchant services in Canada and segments of Europe. These
foreign operations are not significant to the Company.
On a full-time equivalent basis, as of December 31, 2007
U.S. Bancorp employed 52,277 people.
Competition
The commercial banking
business is highly competitive. Subsidiary banks compete with
other commercial banks and with other financial institutions,
including savings and loan associations, mutual savings banks,
finance companies, mortgage banking companies, credit unions and
investment companies. In recent years, competition has increased
from institutions not subject to the same regulatory
restrictions as domestic banks and bank holding companies.
Government
Policies The operations
of the Company’s various operating units are affected by
state and federal legislative changes and by policies of various
regulatory authorities, including those of the numerous states
in which they operate, the United States and foreign
governments. These policies include, for example, statutory
maximum legal lending rates, domestic monetary policies of the
Board of Governors of the Federal Reserve System, United States
fiscal policy, international currency regulations and monetary
policies, U.S. Patriot Act and capital adequacy and
liquidity constraints imposed by bank regulatory agencies.
Supervision and
Regulation As a
registered bank holding company and financial holding company
under the Bank Holding Company Act, U.S. Bancorp is subject
to the supervision of, and regulation by, the Board of Governors
of the Federal Reserve System.
Under the Bank Holding Company Act, a financial holding company
may engage in banking, managing or controlling banks, furnishing
or performing services for banks it controls, and conducting
other financial activities. U.S. Bancorp must obtain the
prior approval of the Federal Reserve Board before acquiring
more than 5 percent of the outstanding shares of another
bank or bank holding company, and must provide notice to, and in
some situations obtain the prior approval of, the Federal
Reserve Board in connection with engaging in, or acquiring more
than 5 percent of the outstanding shares of a company
engaged in, a new financial activity.
Under the Bank Holding Company Act, U.S. Bancorp may
acquire banks throughout the United States, subject only to
state or federal deposit caps and state minimum age requirements.
114 U.S. BANCORP
National banks are subject to the supervision of, and are
examined by, the Comptroller of the Currency. All subsidiary
banks of the Company are members of the Federal Deposit
Insurance Corporation and are subject to examination by the
FDIC. In practice, the primary federal regulator makes regular
examinations of each subsidiary bank subject to its regulatory
review or participates in joint examinations with other federal
regulators. Areas subject to regulation by federal authorities
include the allowance for credit losses, investments, loans,
mergers, issuance of securities, payment of dividends,
establishment of branches and other aspects of operations.
Properties
U.S. Bancorp and
its significant subsidiaries occupy headquarter offices under a
long-term lease in Minneapolis, Minnesota. The Company also
leases seven freestanding operations centers in Cincinnati,
Denver, Milwaukee, Minneapolis, Portland and St. Paul. The
Company owns ten principal operations centers in Cincinnati,
Coeur d’Alene, Fargo, Milwaukee, Owensboro, Portland,
St. Louis and St. Paul. At December 31, 2007, the
Company’s subsidiaries owned and operated a total of 1,485
facilities and leased an additional 1,429 facilities, all of
which are well maintained. The Company believes its current
facilities are adequate to meet its needs. Additional
information with respect to premises and equipment is presented
in Notes 8 and 21 of the Notes to Consolidated Financial
Statements.
Risk Factors
There are a number of
factors, including those specified below, that may adversely
affect the Company’s business, financial results or stock
price. Additional risks that the Company currently does not know
about or currently views as immaterial may also impair the
Company’s business or adversely impact its financial
results or stock price.
Industry Risk
Factors
The
Company’s business and financial results are significantly
affected by general business and economic conditions
The Company’s
business activities and earnings are affected by general
business conditions in the United States and abroad. These
conditions include short-term and long-term interest rates,
inflation, monetary supply, fluctuations in both debt and equity
capital markets, and the strength of the United States economy
and the local economies in which the Company operates. For
example, an economic downturn, an increase in unemployment, a
decline in real estate values or other events that affect
household
and/or
corporate incomes could result in a deterioration of credit
quality, a change in the allowance for credit losses, or reduced
demand for credit or fee-based products and services. Changes in
the financial performance and condition of the Company’s
borrowers could negatively affect repayment of those
borrowers’ loans. In addition, changes in securities market
conditions and monetary fluctuations could adversely affect the
availability and terms of funding necessary to meet the
Company’s liquidity needs.
Changes in the
domestic interest rate environment could reduce the
Company’s net interest income
The operations of
financial institutions such as the Company are dependent to a
large degree on net interest income, which is the difference
between interest income from loans and investments and interest
expense on deposits and borrowings. An institution’s net
interest income is significantly affected by market rates of
interest, which in turn are affected by prevailing economic
conditions, by the fiscal and monetary policies of the federal
government and by the policies of various regulatory agencies.
Like all financial institutions, the Company’s balance
sheet is affected by fluctuations in interest rates. Volatility
in interest rates can also result in the flow of funds away from
financial institutions into direct investments. Direct
investments, such as U.S. Government and corporate
securities and other investment vehicles (including mutual
funds) generally pay higher rates of return than financial
institutions, because of the absence of federal insurance
premiums and reserve requirements.
Changes in the
laws, regulations and policies governing financial services
companies could alter the Company’s business environment
and adversely affect operations
The Board of
Governors of the Federal Reserve System regulates the supply of
money and credit in the United States. Its fiscal and monetary
policies determine in a large part the Company’s cost of
funds for lending and investing and the return that can be
earned on those loans and investments, both of which affect the
Company’s net interest margin. Federal Reserve Board
policies can also materially affect the value of financial
instruments that the Company holds, such as debt securities and
mortgage servicing rights.
The Company and its bank subsidiaries are heavily regulated at
the federal and state levels. This regulation is to protect
depositors, federal deposit insurance funds and the banking
system as a whole. Congress and state legislatures and federal
and state agencies continually review banking laws, regulations
and policies for possible changes. Changes in statutes,
regulations or policies could affect the Company in substantial
and unpredictable ways, including limiting the types of
financial services and products that the Company offers
and/or
increasing the ability of non-banks to offer competing financial
services and products. The Company cannot predict whether any of
this potential legislation will be enacted, and if enacted, the
effect that it or any regulations would have on the
Company’s financial condition or results of operations.
U.S. BANCORP 115
The financial
services industry is highly competitive, and competitive
pressures could intensify and adversely affect the
Company’s financial results
The Company operates
in a highly competitive industry that could become even more
competitive as a result of legislative, regulatory and
technological changes and continued consolidation. The Company
competes with other commercial banks, savings and loan
associations, mutual savings banks, finance companies, mortgage
banking companies, credit unions and investment companies. In
addition, technology has lowered barriers to entry and made it
possible for non-banks to offer products and services
traditionally provided by banks. Many of the Company’s
competitors have fewer regulatory constraints and some have
lower cost structures. Also, the potential need to adapt to
industry changes in information technology systems, on which the
Company and financial services industry are highly dependent,
could present operational issues and require capital spending.
Changes in
consumer use of banks and changes in consumer spending and
saving habits could adversely affect the Company’s
financial results
Technology and other
changes now allow many consumers to complete financial
transactions without using banks. For example, consumers can pay
bills and transfer funds directly without going through a bank.
This “disintermediation” could result in the loss of
fee income, as well as the loss of customer deposits and income
generated from those deposits. In addition, changes in consumer
spending and saving habits could adversely affect the
Company’s operations, and the Company may be unable to
timely develop competitive new products and services in response
to these changes that are accepted by new and existing customers.
Acts or
threats of terrorism and political or military actions taken by
the United States or other governments could adversely affect
general economic or industry conditions
Geopolitical
conditions may also affect the Company’s earnings. Acts or
threats of terrorism and political or military actions taken by
the United States or other governments in response to terrorism,
or similar activity, could adversely affect general economic or
industry conditions.
Company Risk
Factors
The
Company’s allowance for loan losses may not be adequate to
cover actual losses
Like all financial
institutions, the Company maintains an allowance for loan losses
to provide for loan defaults and non-performance. The
Company’s allowance for loan losses is based on its
historical loss experience as well as an evaluation of the risks
associated with its loan portfolio, including the size and
composition of the loan portfolio, current economic conditions
and geographic concentrations within the portfolio. The strength
of the United States economy and the local economies which the
Company does business may be different than expected, resulting
in, among other things, an increased deterioration in credit
quality of our loan portfolio, or in the value of collateral
securing those loans. The Company’s allowance for loan
losses may not be adequate to cover actual loan losses, and
future provisions for loan losses could materially and adversely
affect its financial results.
The Company
may suffer losses in its loan portfolio despite its underwriting
practices The
Company seeks to mitigate the risks inherent in its loan
portfolio by adhering to specific underwriting practices. These
practices often include: analysis of a borrower’s credit
history, financial statements, tax returns and cash flow
projections; valuation of collateral based on reports of
independent appraisers; and verification of liquid assets.
Although the Company believes that its underwriting criteria are
appropriate for the various kinds of loans it makes, the Company
may incur losses on loans that meet these criteria.
The
Company’s investment portfolio values may be adversely
impacted by changing interest rates and deterioration in the
credit quality of underlying collateral within a structured
investment The
Company generally invests in government securities, securities
issued by government-backed agencies or privately issued
securities highly rated by credit rating agencies that may have
limited credit risk, but, are subject to changes in market value
due to changing interest rates and implied credit spreads.
However, certain securities represent beneficial interests in
structured investments which are collateralized by residential
mortgages, collateralized debt obligations and other similar
asset-backed assets. While these structured investments are
highly rated by credit rating agencies at the time of initial
investment, these credit ratings are subject to change due to
deterioration in the credit quality of the underlying
collateral. During recent months, these structured securities
have been subject to significant market volatility due to the
uncertainty of the credit ratings, deterioration in credit
losses occurring within certain types of residential mortgages,
changes in prepayments and the lack of transparency related to
the structures and the collateral underlying the structured
investment vehicles. Given recent market conditions and changing
economic factors, the Company may have valuation losses or
recognize impairment related to structured investments.
Maintaining or
increasing the Company’s market share may depend on
lowering prices and market acceptance of new products and
services The
Company’s success depends, in part, on its ability to adapt
its products and services to evolving industry standards. There
is increasing pressure to provide products and services at lower
prices. Lower prices
116 U.S. BANCORP
can reduce the Company’s net interest margin and revenues
from its fee-based products and services. In addition, the
widespread adoption of new technologies, including internet
services, could require the Company to make substantial
expenditures to modify or adapt the Company’s existing
products and services. Also, these and other capital investments
in the Company’s businesses may not produce expected growth
in earnings anticipated at the time of the expenditure. The
Company might not be successful in introducing new products and
services, achieving market acceptance of its products and
services, or developing and maintaining loyal customers.
Because the
nature of the financial services business involves a high volume
of transactions, the Company faces significant operational risks
The Company operates
in many different businesses in diverse markets and relies on
the ability of its employees and systems to process a high
number of transactions. Operational risk is the risk of loss
resulting from the Company’s operations, including, but not
limited to, the risk of fraud by employees or persons outside of
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. In the event of a breakdown in the internal control
system, improper operation of systems or improper employee
actions, the Company could suffer financial loss, face
regulatory action and suffer damage to its reputation.
The change in
residual value of leased assets may have an adverse impact on
the Company’s financial results
The Company engages
in leasing activities and is subject to the risk that the
residual value of the property under lease will be less than the
Company’s recorded asset value. Adverse changes in the
residual value of leased assets can have a negative impact on
the Company’s financial results. The risk of changes in the
realized value of the leased assets compared to recorded
residual values depends on many factors outside of the
Company’s control, including supply and demand for the
assets, collecting insurance claims, condition of the assets at
the end of the lease term, and other economic factors.
Negative
publicity could damage the Company’s reputation and
adversely impact its business and financial results
Reputation risk, or
the risk to the Company’s earnings and capital from
negative publicity, is inherent in the Company’s business.
Negative publicity can result from the Company’s actual or
alleged conduct in any number of activities, including lending
practices, corporate governance and acquisitions, and actions
taken by government regulators and community organizations in
response to those activities. Negative publicity can adversely
affect the Company’s ability to keep and attract customers
and can expose the Company to litigation and regulatory action.
Because most of the Company’s businesses operate under the
“U.S. Bank” brand, actual or alleged conduct by
one business can result in negative publicity about other
businesses the Company operates. Although the Company takes
steps to minimize reputation risk in dealing with customers and
other constituencies, the Company, as a large diversified
financial services company with a high industry profile, is
inherently exposed to this risk.
The
Company’s reported financial results depend on
management’s selection of accounting methods and certain
assumptions and estimates
The Company’s
accounting policies and methods are fundamental to how the
Company records and reports its financial condition and results
of operations. The Company’s management must exercise
judgment in selecting and applying many of these accounting
policies and methods so they comply with generally accepted
accounting principles and reflect management’s judgment of
the most appropriate manner to report the Company’s
financial condition and results. In some cases, management must
select the accounting policy or method to apply from two or more
alternatives, any of which might be reasonable under the
circumstances, yet might result in the Company’s reporting
materially different results than would have been reported under
a different alternative.
Certain accounting policies are critical to presenting the
Company’s financial condition and results. They require
management to make difficult, subjective or complex judgments
about matters that are uncertain. Materially different amounts
could be reported under different conditions or using different
assumptions or estimates. These critical accounting policies
include: the allowance for credit losses; estimations of fair
value; the valuation of mortgage servicing rights; the valuation
of goodwill and other intangible assets; and income taxes.
Because of the uncertainty of estimates involved in these
matters, the Company may be required to do one or more of the
following: significantly increase the allowance for credit
losses
and/or
sustain credit losses that are significantly higher than the
reserve provided; recognize significant impairment on its
goodwill and other intangible asset balances; or significantly
increase its accrued taxes liability.
For more information, refer to “Critical Accounting
Policies” in this Annual Report.
Changes in
accounting standards could materially impact the Company’s
financial statements
From time to time,
the
U.S. BANCORP 117
Financial Accounting Standards Board changes the financial
accounting and reporting standards that govern the preparation
of the Company’s financial statements. These changes can be
hard to predict and can materially impact how the Company
records and reports its financial condition and results of
operations. In some cases, the Company could be required to
apply a new or revised standard retroactively, resulting in the
Company’s restating prior period financial statements.
Acquisitions
may not produce revenue enhancements or cost savings at levels
or within timeframes originally anticipated and may result in
unforeseen integration difficulties
The Company
regularly explores opportunities to acquire financial services
businesses or assets and may also consider opportunities to
acquire other banks or financial institutions. The Company
cannot predict the number, size or timing of acquisitions.
Difficulty in integrating an acquired business or company may
cause the Company not to realize expected revenue increases,
cost savings, increases in geographic or product presence,
and/or other
projected benefits from the acquisition. The integration could
result in higher than expected deposit attrition (run-off), loss
of key employees, disruption of the Company’s business or
the business of the acquired company, or otherwise adversely
affect the Company’s ability to maintain relationships with
customers and employees or achieve the anticipated benefits of
the acquisition. Also, the negative effect of any divestitures
required by regulatory authorities in acquisitions or business
combinations may be greater than expected.
The Company must generally receive federal regulatory approval
before it can acquire a bank or bank holding company. In
determining whether to approve a proposed bank acquisition,
federal bank regulators will consider, among other factors, the
effect of the acquisition on the competition, financial
condition, and future prospects. The regulators also review
current and projected capital ratios and levels, the competence,
experience, and integrity of management and its record of
compliance with laws and regulations, the convenience and needs
of the communities to be served (including the acquiring
institution’s record of compliance under the Community
Reinvestment Act) and the effectiveness of the acquiring
institution in combating money laundering activities. In
addition, the Company cannot be certain when or if, or on what
terms and conditions, any required regulatory approvals will be
granted. The Company may be required to sell banks or branches
as a condition to receiving regulatory approval.
If new laws
were enacted that restrict the ability of the Company and its
subsidiaries to share information about customers, the
Company’s financial results could be negatively affected
The Company’s
business model depends on sharing information among the family
of companies owned by U.S. Bancorp to better satisfy the
Company’s customer needs. Laws that restrict the ability of
the companies owned by U.S. Bancorp to share information
about customers could negatively affect the Company’s
revenue and profit.
The
Company’s business could suffer if the Company fails to
attract and retain skilled people
The Company’s
success depends, in large part, on its ability to attract and
retain key people. Competition for the best people in most
activities the Company engages in can be intense. The Company
may not be able to hire the best people or to keep them.
The Company
relies on other companies to provide key components of the
Company’s business infrastructure
Third party vendors
provide key components of the Company’s business
infrastructure such as internet connections, network access and
mutual fund distribution. While the Company has selected these
third party vendors carefully, it does not control their
actions. Any problems caused by these third parties, including
as a result of their not providing the Company their services
for any reason or their performing their services poorly, could
adversely affect the Company’s ability to deliver products
and services to the Company’s customers and otherwise to
conduct its business. Replacing these third party vendors could
also entail significant delay and expense.
Significant
legal actions could subject the Company to substantial uninsured
liabilities The
Company is from time to time subject to claims related to its
operations. These claims and legal actions, including
supervisory actions by the Company’s regulators, could
involve large monetary claims and significant defense costs. To
protect itself from the cost of these claims, the Company
maintains insurance coverage in amounts and with deductibles
that it believes are appropriate for its operations. However,
the Company’s insurance coverage may not cover all claims
against the Company or continue to be available to the Company
at a reasonable cost. As a result, the Company may be exposed to
substantial uninsured liabilities, which could adversely affect
the Company’s results of operations and financial condition.
The Company is
exposed to risk of environmental liability when it takes title
to properties In the
course of the Company’s business, the Company may foreclose
on and take title to real estate. As a result, the Company could
be subject to environmental liabilities with respect to these
properties. The Company may be held liable to a governmental
entity or to third parties for property damage, personal injury,
investigation and
clean-up
costs incurred by these parties in connection with environmental
contamination or may be required to investigate or clean up
118 U.S. BANCORP
hazardous or toxic substances or chemical releases at a
property. The costs associated with investigation or remediation
activities could be substantial. In addition, if the Company is
the owner or former owner of a contaminated site, it may be
subject to common law claims by third parties based on damages
and costs resulting from environmental contamination emanating
from the property. If the Company becomes subject to significant
environmental liabilities, its financial condition and results
of operations could be adversely affected.
A natural
disaster could harm the Company’s business
Natural disasters
could harm the Company’s operations through interference
with communications, including the interruption or loss of the
Company’s websites, which would prevent the Company from
gathering deposits, originating loans and processing and
controlling its flow of business, as well as through the
destruction of facilities and the Company’s operational,
financial and management information systems.
The Company
faces systems failure risks as well as security risks, including
“hacking” and “identity theft”The computer systems
and network infrastructure the Company and others use could be
vulnerable to unforeseen problems. These problems may arise in
both our internally developed systems and the systems of our
third-party service providers. Our operations are dependent upon
our ability to protect computer equipment against damage from
fire, power loss or telecommunication failure. Any damage or
failure that causes an interruption in our operations could
adversely affect our business and financial results. In
addition, our computer systems and network infrastructure
present security risks, and could be susceptible to hacking or
identity theft.
The Company
relies on dividends from its subsidiaries for its liquidity
needs The Company is
a separate and distinct legal entity from its bank subsidiaries
and non-bank subsidiaries. The Company receives substantially
all of its cash from dividends paid by its subsidiaries. These
dividends are the principal source of funds to pay dividends on
the Company’s stock and interest and principal on its debt.
Various federal and state laws and regulations limit the amount
of dividends that our bank subsidiaries and certain of our
non-bank subsidiaries may pay to the Company. Also, the
Company’s right to participate in a distribution of assets
upon a subsidiary’s liquidation or reorganization is
subject to prior claims of the subsidiary’s creditors.
The Company
has non-banking businesses that are subject to various risks and
uncertainties The
Company is a diversified financial services company, and the
Company’s business model is based on a mix of businesses
that provide a broad range of products and services delivered
through multiple distribution channels. In addition to banking,
the Company provides payment services, investments, mortgages
and corporate and personal trust services. Although the Company
believes its diversity helps lessen the effect of downturns in
any one segment of its industry, it also means the
Company’s earnings could be subject to various specific
risks and uncertainties related to these non-banking businesses.
The
Company’s stock price can be volatile
The Company’s
stock price can fluctuate widely in response to a variety of
factors, including: actual or anticipated variations in the
Company’s quarterly operating results; recommendations by
securities analysts; significant acquisitions or business
combinations; strategic partnerships, joint ventures or capital
commitments by or involving the Company or the Company’s
competitors; operating and stock price performance of other
companies that investors deem comparable to the Company; new
technology used or services offered by the Company’s
competitors; news reports relating to trends, concerns and other
issues in the financial services industry; and changes in
government regulations.
General market fluctuations, industry factors and general
economic and political conditions and events, including
terrorist attacks, economic slowdowns or recessions, interest
rate changes, credit loss trends or currency fluctuations, could
also cause the Company’s stock price to decrease regardless
of the Company’s operating results.
Website Access to
SEC Reports
U.S. Bancorp’s
internet website can be found at usbank.com. U.S. Bancorp
makes available free of charge on its website its annual reports
on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13 or 15(d) of the Exchange Act, as well as all
other reports filed by U.S. Bancorp with the SEC, as soon
as reasonably practicable after electronically filed with, or
furnished to, the SEC.
Certifications
U.S. Bancorp has
filed as exhibits to its annual report on
Form 10-K
the Chief Executive Officer and Chief Financial Officer
certifications required by Section 302 of the
Sarbanes-Oxley Act. U.S. Bancorp has also submitted the
required annual Chief Executive Officer certification to the New
York Stock Exchange.
Governance
Documents The
Company’s Corporate Governance Guidelines, Code of Ethics
and Business Conduct and Board of Directors committee charters
are available free of charge on the Company’s web site at
usbank.com, by clicking on “About U.S. Bancorp,”
then “Corporate Governance.” Shareholders may request
a free printed copy of any of these documents from the
Company’s investor relations department by contacting them
at investorrelations@usbank.com or calling
(866) 775-9668.
U.S. BANCORP 119
Executive
Officers
Richard
K. Davis
Mr. Davis is Chairman,
President and Chief Executive Officer of U.S. Bancorp.
Mr. Davis, 50, has served as Chairman of U.S. Bancorp
since December 2007, Chief Executive Officer since December 2006
and President since October 2004. He also served as Chief
Operating Officer from October 2004 until December 2006. From
the time of the merger of Firstar Corporation and
U.S. Bancorp in February 2001 until October 2004,
Mr. Davis served as Vice Chairman of U.S. Bancorp.
From the time of the merger, Mr. Davis was responsible for
Consumer Banking, including Retail Payment Solutions (card
services), and he assumed additional responsibility for
Commercial Banking in 2003. Mr. Davis has held management
positions with our Company since joining Star Banc Corporation,
one of our predecessors, in 1993 as Executive Vice President.
Jennie
P. Carlson
Ms. Carlson is Executive Vice
President of U.S. Bancorp. Ms. Carlson, 47, has served
as Executive Vice President, Human Resources since January 2002.
Until that time, she served as Executive Vice President, Deputy
General Counsel and Corporate Secretary of U.S. Bancorp
since the merger of Firstar Corporation and U.S. Bancorp in
February 2001. From 1995 until the merger, she was General
Counsel and Secretary of Firstar Corporation and Star Banc
Corporation.
Andrew
Cecere
Mr. Cecere is Vice Chairman
and Chief Financial Officer of U.S. Bancorp.
Mr. Cecere, 47, has served as Chief Financial Officer of
U.S. Bancorp since February 2007, and Vice Chairman since
the merger of Firstar Corporation and U.S. Bancorp in
February 2001. From February 2001 until February 2007 he was
responsible for Wealth Management & Securities
Services. Previously, he had served as an executive officer of
the former U.S. Bancorp, including as Chief Financial
Officer from May 2000 through February 2001.
William
L. Chenevich
Mr. Chenevich is Vice Chairman
of U.S. Bancorp. Mr. Chenevich, 64, has served as Vice
Chairman of U.S. Bancorp since the merger of Firstar
Corporation and U.S. Bancorp in February 2001, when he
assumed responsibility for Technology and Operations Services.
Previously, he served as Vice Chairman of Technology and
Operations Services of Firstar Corporation from 1999 to 2001.
Richard
C. Hartnack
Mr. Hartnack is Vice Chairman
of U.S. Bancorp. Mr. Hartnack, 62, has served in this
position since April 2005, when he joined U.S. Bancorp to
assume responsibility for Consumer Banking. Prior to joining
U.S. Bancorp, he served as Vice Chairman of Union Bank of
California from 1991 to 2005 with responsibility for Community
Banking and Investment Services.
Richard
J. Hidy
Mr. Hidy is Executive Vice
President and Chief Risk Officer of U.S. Bancorp.
Mr. Hidy, 45, has served in these positions since 2005.
From 2003 until 2005, he served as Senior Vice President and
Deputy General Counsel of U.S. Bancorp, having served as
Senior Vice President and Associate General Counsel of
U.S. Bancorp and Firstar Corporation since 1999.
Joseph
C. Hoesley
Mr. Hoesley is Vice Chairman
of U.S. Bancorp. Mr. Hoesley, 53, has served as Vice
Chairman of U.S. Bancorp since June 2006. From June 2002
until June 2006, he served as Executive Vice President and
National Group Head of Commercial Real Estate at
U.S. Bancorp, having previously served as Senior Vice
President and Group Head of Commercial Real Estate at
U.S. Bancorp since joining U.S. Bancorp in 1992.
Pamela
A. Joseph
Ms. Joseph is Vice Chairman of
U.S. Bancorp. Ms. Joseph, 48, has served as Vice
Chairman of U.S. Bancorp since December 2004. Since
November 2004, she has been Chairman and Chief Executive Officer
of NOVA Information Systems, Inc., a wholly owned subsidiary of
U.S. Bancorp. Prior to that time, she had been President
and Chief Operating Officer of NOVA Information Systems, Inc.
since February 2000.
Lee
R. Mitau
Mr. Mitau is Executive Vice
President and General Counsel of U.S. Bancorp.
Mr. Mitau, 59, has served in these positions since 1995.
Mr. Mitau also serves as Corporate Secretary. Prior to 1995
he was a partner at the law firm of Dorsey & Whitney
LLP.
Joseph
M. Otting
Mr. Otting is Vice Chairman
of U.S. Bancorp. Mr. Otting, 50, has served in this
position since April 2005, when he assumed responsibility for
Commercial Banking. Previously, he served as Executive Vice
President, East Commercial Banking Group of U.S. Bancorp
from June 2003 to April 2005. He served as Market President of
U.S. Bank in Oregon from December 2001 until June 2003.
P.W.
Parker
Mr. Parker is Executive Vice
President and Chief Credit Officer of U.S. Bancorp.
Mr. Parker, 51, has served in this position since October
2007. From March 2005 until October 2007, he served as Executive
Vice President of Credit Portfolio Management of
U.S. Bancorp, having served as Senior Vice President of
Credit Portfolio Management of U.S. Bancorp since January
2002.
Richard
B. Payne, Jr.
Mr. Payne is Vice Chairman of
U.S. Bancorp. Mr. Payne, 60, has served in this
position since July 2006, when he joined U.S. Bancorp to
assume responsibility for Corporate Banking. Prior to joining
U.S. Bancorp, he served as Executive Vice President for
National City Corporation in Cleveland, with responsibility for
Capital Markets, since 2001.
Diane
L. Thormodsgard
Ms. Thormodsgard is Vice
Chairman of U.S. Bancorp. Ms. Thormodsgard, 57, has
served as Vice Chairman of U.S. Bancorp since April 2007,
when she assumed responsibility for Wealth
Management & Securities Services. From 1999 until
April 2007, she served as President of Corporate Trust and
Institutional Trust & Custody services of
U.S. Bancorp, having previously served as Chief
Administrative Officer of Corporate Trust at U.S. Bancorp
from 1995 to 1999.
120 U.S. BANCORP
Directors
Richard
K.
Davis1,6
Chairman, President and Chief
Executive Officer
U.S. Bancorp
Minneapolis, Minnesota
Douglas M.
Baker, Jr.
Chairman, President and Chief
Executive Officer
Ecolab Inc.
St. Paul, Minnesota
Victoria
Buyniski
Gluckman4,6
President and Chief Executive
Officer
United Medical Resources, Inc.,
a wholly owned subsidiary of
UnitedHealth Group Incorporated
Cincinnati, Ohio
Arthur
D.
Collins, Jr.1,2,5
Chairman and Retired Chief
Executive Officer
Medtronic, Inc.
Minneapolis, Minnesota
Peter
H.
Coors2,5
Vice Chairman
Molson Coors Brewing Company
Golden, Colorado
Joel
W.
Johnson3,6
Retired Chairman and Chief
Executive Officer
Hormel Foods Corporation
Austin, Minnesota
Olivia
F.
Kirtley3,5
Business Consultant
Louisville, Kentucky
Jerry
W.
Levin1,2,5
Chairman and Chief Executive
Officer
JW Levin Partners LLC
New York, New York
David
B.
O’Maley5,6
Chairman, President and Chief
Executive Officer
Ohio National Financial Services,
Inc.
Cincinnati, Ohio
O’dell
M. Owens, M.D.,
M.P.H.1,3,4
Independent Consultant and
Hamilton County Coroner
Cincinnati, Ohio
Richard
G.
Reiten3,4
Chairman and Retired Chief
Executive Officer
Northwest Natural Gas Company
Portland, Oregon
Craig
D.
Schnuck4,6
Former Chairman and Chief
Executive Officer
Schnuck Markets, Inc.
St. Louis, Missouri
Warren
R.
Staley1,2,3
Retired Chairman and Chief
Executive Officer
Cargill, Incorporated
Minneapolis, Minnesota
Patrick
T.
Stokes1,2,6
Chairman and Retired Chief
Executive Officer
Anheuser-Busch Companies, Inc.
St. Louis, Missouri
1.
Executive
Committee
2.
Compensation
Committee
3.
Audit
Committee
4.
Community
Reinvestment and Public Policy Committee
5.
Governance
Committee
6.
Credit and
Finance Committee
Securities
Disclosures:
Investors should carefully consider the fund’s
investment objectives, risks, charges, and expenses before
investing. The prospectus contains this and other information;
call 800.677.FUND or visit firstamericanfunds.com for a copy.
Please read it carefully before investing.
Mutual fund investing involves risk; principal loss is
possible.
Investing in specific sectors such as infrastructure-related
securities may involve greater risk and volatility than more
diversified investments. Risks include greater exposure to
potential adverse economic, regulatory, political, and other
changes affecting such securities. Foreign investing, especially
in emerging markets, entails additional risks, including
currency fluctuations, political and economic instability,
accounting changes, and foreign taxation.
FAF Advisors, Inc., a registered investment advisor and
subsidiary of U.S. Bank National Association, serves as an
investment advisor to First American Funds. First American Funds
are distributed by Quasar Distributors, LLC, an affiliate of the
investment advisor.
Investment products, including shares of mutual funds, are
not obligations of, or guaranteed by, any bank, including
U.S. Bank or any U.S. Bancorp affiliate, nor are they
insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board, or any other agency. An investment in
such products involves investment risk, including possible loss
of principal. (1/2008)
U.S. BANCORP 121
Dates Referenced Herein and Documents Incorporated by Reference
