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FIVE STAR SERVICE IN ACTION
2004 ANNUAL REPORT AND FORM 10-K
U.S. Bancorp
800 Nicollet Mall
Minneapolis, MN 55402
usbank.com
CORPORATE INFORMATION
Executive Offi ces
U.S. Bancorp
800 Nicollet Mall
Minneapolis, MN 55402
Common Stock Transfer Agent and Registrar
Mellon Investor Services acts as our transfer agent and registrar,
dividend paying agent and dividend reinvestment plan adminis-
trator, and maintains all shareholder records for the corporation.
Inquiries related to shareholder records, stock transfers, changes
of ownership, lost stock certifi cates, changes of address and
dividend payment should be directed to the transfer agent at:
Financial Information
U.S. Bancorp news and fi nancial results are available through
our website and by mail.
Website. For information about U.S. Bancorp, including news,
fi nancial results, annual reports and other documents fi led with
the Securities and Exchange Commission, access our home page
on the internet at usbank.com, click on About U.S. Bancorp,
then Investor/Shareholder Information.
Mail. At your request, we will mail to you our quarterly earnings,
news releases, quarterly fi nancial data reported on Form 10-Q
and additional copies of our annual reports. Please contact:
Mellon Investor Services
P.O. Box 3315
South Hackensack, NJ 07606-1915
Phone: 888-778-1311 or 201-329-8660
Internet: melloninvestor.com
For Registered or Certifi ed Mail:
Mellon Investor Services
85 Challenger Road
Ridgefi eld Park, NJ 07660-2104
Telephone representatives are available weekdays from 8:00 a.m.
to 6:00 p.m. Central Time, and automated support is available
24 hours a day, 7 days a week. Specifi c information about your
account is available on Mellon’s internet site by clicking on
For Investors and then the Investor ServiceDirect® link.
Independent Auditor
Ernst & Young LLP serves as the independent auditor for
U.S. Bancorp’s fi nancial statements.
Common Stock Listing and Trading
U.S. Bancorp common stock is listed and traded on the
New York Stock Exchange under the ticker symbol USB.
Dividends and Reinvestment Plan
U.S. Bancorp currently pays quarterly dividends on our
common stock on or about the 15th day of January, April,
July and October, subject to prior approval by our Board of
Directors. U.S. Bancorp shareholders can choose to participate
in a plan that provides automatic reinvestment of dividends
and/or optional cash purchase of additional shares of
U.S. Bancorp common stock. For more information, please
contact our transfer agent, Mellon Investor Services. See above.
Investor Relations Contacts
Howell D. McCullough
Senior Vice President,
Investor Relations
Judith T. Murphy
Vice President,
Investor Relations
howell.mccullough@usbank.com
Phone: 612-303-0786
judith.murphy@usbank.com
Phone: 612-303-0783 or
866-775-9668
U.S. Bank Member FDIC
This report printed on recycled paper containing a minimum
of 10 percent post-consumer waste.
U.S. Bancorp Investor Relations
800 Nicollet Mall
Minneapolis, MN 55402
investorrelations@usbank.com
Phone: 612-303-0799 or 866-775-9668
Media Requests
Steven W. Dale
Senior Vice President, Media Relations
steve.dale@usbank.com
Phone: 612-303-0784
Privacy
U.S. Bancorp is committed to respecting the privacy of our
customers and safeguarding the fi nancial and personal infor-
mation provided to us. To learn more about the U.S. Bancorp
commitment to protecting privacy, visit usbank.com and click
on Privacy Pledge.
Code of Ethics
U.S. Bancorp places the highest importance on honesty and
integrity. Each year, every U.S. Bancorp employee certifi es
compliance with the letter and spirit of our Code of Ethics
and Business Conduct, the guiding ethical standards of our
organization. For details about our Code of Ethics and Business
Conduct, visit usbank.com and click on About U.S. Bancorp,
then Ethics at U.S. Bank.
Diversity
U.S. Bancorp and our subsidiaries are committed to developing
and maintaining a workplace that refl ects the diversity of the
communities we serve. We support a work environment where
individual differences are valued and respected and where each
individual who shares the fundamental values of the company has
an opportunity to contribute and grow based on individual merit.
Equal Employment Opportunity/Affi rmative Action
U.S. Bancorp and our subsidiaries are committed to providing
Equal Employment Opportunity to all employees and applicants
for employment. In keeping with this commitment, employment
decisions are made based upon performance, skill and abilities,
not race, color, religion, national origin or ancestry, gender, age,
disability, veteran status, sexual orientation or any other factors
protected by law. The corporation complies with municipal,
state and federal fair employment laws, including regulations
applying to federal contractors.
U.S. Bancorp, including each of our subsidiaries, is an Equal
Opportunity Employer committed to creating a diverse workforce.
At U.S. Bancorp, we value and recognize
the expertise and energy of our employees,
especially their commitment to providing
outstanding customer service and contributing
to the corporation’s fi nancial results. Each
employee wears a U.S. Bank lapel pin signifying
our customer service guarantee. This year, we
will acknowledge employees’ milestone service
anniversaries with special gemstone lapel pins
for service at fi ve, 10, 15, 20 and 25 years.
U.S. BANCORP AT A GLANCE
At year-end 2004
Ranking
Asset size
Deposits
Total loans
Earnings per share (diluted)
Return on average assets
Return on average equity
Tangible common equity
Effi ciency ratio
Customers
Primary banking region
Bank branches
ATMs
NYSE symbol
6th largest fi nancial
holding company
$195 billion
$121 billion
$126 billion
$2.18
2.17%
21.4%
6.4%
45.3%
13.1 million
24 states
2,370
4,620
USB
CONTENTS
Selected Financial Highlights 2
3
Financial Summary
4
Letter to Shareholders
FEATURES
FINANCIALS
6
Five Star Service
in Action
U.S. Bancorp employees
deliver on our promise
to provide the outstanding
service our customers
expect and deserve.
10
Advantageous
Business Mix
We help our customers
achieve their fi nancial goals
by offering an extensive scope
of strategic services through
specialized lines of business.
14
Initiatives for Success
We are increasing our ability
to provide the highest quality
service and the most innova-
tive products through new
investments and initiatives for
future growth and service.
18
Management’s Discussion and Analysis
64
Consolidated Financial Statements
Notes to Consolidated Financial Statements
68
Reports of Management and Independent Accountants 105
108
Five-Year Consolidated Financial Statements
110
Quarterly Consolidated Financial Data
111
Supplemental Financial Data
114
Annual Report on Form 10-K
121
CEO and CFO Certifi cations
124
Executive Offi cers
Directors
125
inside back cover
Corporate Information
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995:
Statements in this report regarding U.S. Bancorp’s business which are not historical facts are
“forward-looking statements” that involve risks and uncertainties. For a discussion of such risks
and uncertainties, which could cause actual results to differ from those contained in the forward-
looking statements, see the “Forward-Looking Statements” disclosure on page 17 of this report.
CORPORATE PROFILE
U.S. Bancorp, headquartered in Minneapolis, is the
6th largest fi nancial holding company in the United States,
with total assets exceeding $195 billion at year-end 2004.
U.S. Bancorp, the parent company of U.S. Bank, serves
13.1 million customers and operates 2,370 branch offi ces
in 24 states. U.S. Bancorp customers also access their
accounts through 4,620 U.S. Bank ATMs, U.S. Bank
Internet Banking and telephone banking. A network of
specialized U.S. Bancorp offi ces across the nation, inside and
outside our 24-state footprint, provides a comprehensive
line of banking, brokerage, insurance, investment, mortgage,
trust and payment services products to consumers, businesses,
governments and institutions.
Major lines of business provided by U.S. Bancorp through
U.S. Bank and other subsidiaries include Wholesale Banking;
Payment Services; Private Client, Trust & Asset Management;
and Consumer Banking. U.S. Bank is home of the exclusive
Five Star Service Guarantee. Visit U.S. Bancorp on the web
at usbank.com.
U.S. BANCORP 1
SELECTED FINANCIAL HIGHLIGHTS
Diluted Earnings
Per Common Share
(In Dollars)
Dividends Declared
Per Common Share (a)
(In Dollars)
2.40
1.20
8
1
.
2
3
9
.
1
1.20
3
4
.
1
5
6
.
1
6
7
.
0
2
0
.
1
5
5
8
.
.60
0
5
6
.
0
5
7
.
0
8
7
.
0
24
12
0
60
30
0
00
01
02
03
04
00
01
02
03
04
0
Return on
Average Equity
(In Percents)
0
.
9
1
3
.
8
1
2
.
9
1
4
.
1
2
0
.
9
Dividend Payout Ratio
(In Percents)
4
.
7
9
1
.
5
4
3
.
7
4
1
.
4
4
2
.
6
4
100
50
0
00
01
02
03
04
00
01
02
03
04
Efficiency Ratio (b)
(In Percents)
2
.
7
7 5
.
9
4
8
.
8
4
6
.
5
4
3
.
5
4
Tangible Common
Equity to Assets
(In Percents)
4
.
6
9
.
5
7
.
5
5
.
6
4
.
6
7.0
3.5
0
Net Income
(Dollars in Millions)
4,500
2,250
1
.
2
5
7
,
2
0
00
8
.
6
6
1
,
4
6
.
2
3
7
,
3
1
.
8
6
1
,
3
02
03
04
8
.
8
7
4
,
1
01
Return on
Average Assets
(In Percents)
4
7
.
1
4
8
.
1
9
8
.
7
1
.
9 2
9
.
1
00
01
02
03
04
Net Interest Margin
(Taxable-Equivalent Basis)
(In Percents)
8
3
.
4
6
4
.
4
5
6
.
4
9
4
.
4
5
2
.
4
2.4
1.2
0
5.00
2.50
0
200,000
100,000
0
00
01
02
03
04
00
01
02
03
04
00
01
02
03
04
Average Assets
(Dollars in Millions)
1
8
4
,
8
5
1
4
4
9
,
5
6
1
8
4
9
,
1
7
1
0
3
6
,
7
8
1
3
9
5
,
1
9
1
Average Shareholders’
Equity
(Dollars in Millions)
Average Equity to
Average Assets
(In Percents)
3
9
3
,
9
1
9
5
4
,
9
1
3
7
2
,
7
1
6
2
4
,
6
1
20,000
9
9
4
,
4
1
10,000
0
12
6
0
9
.
1 9
.
9
0
.
0
1
3
.
0
1
2
.
0
1
00
01
02
03
04
00
01
02
03
04
00
01
02
03
04
(a) Dividends per share have not been restated for the 2001 Firstar/USBM merger.
(b) Computed as noninterest expense divided by the sum of net interest income on a
taxable-equivalent basis and noninterest income excluding securities gains (losses), net.
2 U.S. BANCORP
FINANCIAL SUMMARY
Year Ended December 31
(Dollars and Shares in Millions, Except Per Share Data)
2004
2003
2002
Total net revenue (taxable-equivalent basis) ..........................
$12,659.1
$12,530.5
$12,057.9
Noninterest expense ..............................................................
5,784.5
Provision for credit losses ......................................................
669.6
Income taxes and taxable-equivalent adjustments .................
2,038.2
Income from continuing operations ....................................
4,166.8
Discontinued operations (after-tax) .........................................
Cumulative effect of accounting change (after-tax) ................
—
—
5,596.9
1,254.0
1,969.5
3,710.1
22.5
—
5,740.5
1,349.0
1,740.4
3,228.0
(22.7)
(37.2)
2004
v 2003
1.0%
3.4
2003
v 2002
3.9%
(2.5)
12.3
14.9
Net income ..........................................................................
$ 4,166.8
$ 3,732.6
$ 3,168.1
11.6
17.8
Per Common Share
Earnings per share from continuing operations ......................
$ 2.21
$ 1.93
$ 1.68
14.5%
14.9%
Diluted earnings per share from continuing operations ..........
Earnings per share ..................................................................
Diluted earnings per share ......................................................
Dividends declared per share ..................................................
Book value per share ...............................................................
Market value per share ............................................................
Average common shares outstanding .....................................
Average diluted common shares outstanding .........................
2.18
2.21
2.18
1.020
10.52
31.32
1,887.1
1,912.9
1.92
1.94
1.93
.855
10.01
29.78
1,923.7
1,936.2
1.68
1.65
1.65
.780
9.62
21.22
1,916.0
1,924.8
Financial Ratios
Return on average assets .......................................................
2.17%
1.99%
1.84%
Return on average equity ........................................................
Net interest margin (taxable-equivalent basis) ........................
Effi ciency ratio .........................................................................
21.4
4.25
45.3
19.2
4.49
45.6
18.3
4.65
48.8
Average Balances
Loans .......................................................................................
$ 122,141
$ 118,362
$ 114,453
Investment securities ..............................................................
43,009
Earning assets .........................................................................
168,123
Assets ......................................................................................
191,593
Deposits ..................................................................................
116,222
Shareholders’ equity ...............................................................
19,459
37,248
160,808
187,630
116,553
19,393
28,829
147,410
171,948
105,124
17,273
13.5
13.9
13.0
19.3
5.1
5.2
(1.9)
(1.2)
3.2%
15.5
4.5
2.1
(.3)
.3
Period End Balances
Loans .......................................................................................
$ 126,315
$ 118,235
$ 116,251
6.8%
Allowance for credit losses .....................................................
Investment securities ..............................................................
2,269
41,481
Assets ......................................................................................
195,104
Deposits ..................................................................................
120,741
Shareholders’ equity ...............................................................
19,539
2,369
43,334
189,471
119,052
19,242
2,422
28,488
180,027
115,534
18,436
(4.2)
(4.3)
3.0
1.4
1.5
Regulatory capital ratios
Tangible common equity ....................................................
6.4%
6.5%
5.7%
Tier 1 capital .......................................................................
Total risk-based capital ......................................................
Leverage ..............................................................................
8.6
13.1
7.9
9.1
13.6
8.0
8.0
12.4
7.7
14.3
17.6
17.0
9.6
4.1
40.3
.4
.6
3.4%
29.2
9.1
9.1
10.9
12.3
1.7%
(2.2)
52.1
5.2
3.0
4.4
U.S. BANCORP 3
LETTER TO SHAREHOLDERS
2004 was a year that it all came together for U.S. Bancorp.
Service quality levels have never been higher. Financial results
are strong and lead the industry in key measurements. All lines
of business are contributing to revenue and growth.
Fellow Shareholders:
I am pleased to tell you that in 2004, U.S. Bancorp
achieved its goals for the year and delivered on its
promises to you.
STRONG FINANCIAL RESULTS WITH
A FOCUS ON REVENUE GROWTH
We reported record net income of $4.2 billion, a
13 percent increase in diluted earnings per share,
and industry-leading returns on assets and equity of
2.17 percent and 21.4 percent, respectively. Credit
quality trends continued to improve as credit losses
decreased signifi cantly from a year ago. And refl ecting
our priority to grow revenue, we achieved solid fee
income growth.
During the coming year, we will act to sustain those suc-
cesses. Revenue growth is our primary focus, particularly
net interest income from improved commercial lending
results. Our consumer lending business continues to grow,
and we have made a number of changes surrounding our
commercial banking and small business banking lines
of business to increase commercial loan growth. We saw
middle market commercial loan balances move upward in
fourth quarter 2004.
We are very disciplined in our acquisitions, focusing
only on those which will enhance revenue growth, create
operating scale, build a more profi table business line or
strengthen a critical competitive advantage. This strategy
has proved very successful, most notably in our payments
business, which reported 10.6 percent net revenue growth
in 2004.
Our capital position remains strong, and we repurchased
93.8 million shares during 2004.
4 U.S. BANCORP
INVESTING FOR GROWTH AND SERVICE
We are investing more in our core businesses to drive
revenue growth. Our investments and expertise in new
technology have delivered a new generation of electronic
options for customers—check imaging, processing,
payments, account management, collections and other
service delivery systems. Of particular note is the expansion
of our merchant processing capabilities in Europe; there
are further details of that expansion on page 16 of this
report. And, we continue to invest in our branch offi ce
network in higher-growth markets. There are further
details of our in-store and traditional branch expansion
program on page 13 of this report.
We continue to support our pledge of guaranteed high
levels of customer service. Investments in delivery and
operational systems allowed us to unify systems, simplify
procedures, streamline processes and increase the ease
of numerous customer transactions and communications.
These investments improved customer service and
increased customer satisfaction and loyalty, contributing
signifi cantly to our ability to attract and retain customers.
We have also improved hiring and training practices,
and service quality is an integral part of our employees’
performance evaluation and incentive programs.
RATING AGENCIES VIEW
U.S. BANK FAVORABLY
We are pleased that on January 18, 2005, Moody’s rating
agency upgraded U.S. Bank’s ratings. Long-term senior
debt at the holding company, U.S. Bancorp, was upgraded
to Aa2 from Aa3 while long-term senior ratings of its
subsidiary bank, U.S. Bank National Association, were
upgraded to Aa1 from Aa2. The main driver behind the
U.S. Bancorp Total Shareholder Return
U.S. Bancorp Dividends Per Share
A $100 investment in U.S. Bancorp in 1994 was worth $1,037 at year-end 2004.
$1,100
850
600
350
100
$1,037
$1.10
94
95
96
97
98
99
00
01
02
03
04
$529
$313
.55
6
1
0 .
94
8
1
.
95
1
2
.
96
2
0
1
.
6
8
8 .
7
.
5
7
5 .
6
.
6
4
.
3
3
.
7
2
.
97
98
99
00
01
02
03
04
U.S. Bancorp
S&P 500 Commercial Bank Index
S&P 500 Index
12/31/94+100
Commercial Bank Index Average Compound Annual Growth Rate (CAGR) 13.2%, 21 banks.
Source: FactSet and Bloomberg
U.S. Bancorp CAGR 20.4%
Source: FactSet
upgrade was Moody’s view that the corporation’s
business model will generate strong profi tability, and the
consistency of that profi tability performance is supported
by improving risk management and maintenance of very
good liquidity.
We were also pleased that on September 27, 2004,
Fitch’s rating agency upgraded U.S. Bank’s ratings.
Long- and short-term senior debt at the holding company,
U.S. Bancorp, were upgraded to AA- and F1+, respectively,
from A+ and F1, respectively. The long-term ratings of
its subsidiary bank, U.S. Bank National Association,
were upgraded to AA from AA-. The main driver behind
the upgrade was Fitch’s view of the corporation’s solid
net interest margin, diverse sources of non-interest
income, disciplined expense management and improved
asset quality.
The debt ratings established for U.S. Bank by Moody’s,
Standard and Poor’s, and Fitch refl ect the ratings agencies’
recognition of the strong, consistent fi nancial performance
of the company and the quality of the balance sheet.
U.S. BANCORP IS A CORPORATION
BUILT ON INTEGRITY
We recognize that our fi nancial results are only as good
as the respect and confi dence of the public and our
reputation in the industry and in the marketplace. We
operate with the highest levels of honesty and integrity,
and we have the controls and monitors in place to
ensure that is always true. Our Corporate Governance
Guidelines, our Privacy Pledge, and our Code of Ethics
and Business Conduct can all be found on our internet
website at usbank.com. I urge you to visit the site.
CREATING SHAREHOLDER VALUE
IS OUR PRIORITY
We delivered on our commitment to return at least
80 percent of earnings to shareholders, returning
virtually all excess capital to shareholders, 109 percent
of earnings in 2004, in the form of dividends and share
repurchases. We reaffi rmed that commitment with our
December 2004 announcement of a 25 percent dividend
increase and the authorization of a new 150-million share
repurchase program.
This corporation has paid a cash dividend for
142 consecutive years, and we have increased the
dividend for 33 consecutive years. That long-time
record of dividend increases earned U.S. Bancorp the
designation of one of the S&P’s 58 “Dividend Aristocrats.”
Only nine other issues have paid a dividend longer than
U.S. Bancorp, which fi rst paid a dividend in 1863.
We manage this corporation to increase the value of
your investment in U.S. Bancorp. It’s the reason we come
to work each day.
Sincerely,
Jerry A. Grundhofer
Chairman and Chief Executive Offi cer
U.S. Bancorp
February 28, 2005
U.S. BANCORP 5
FIVE STAR SERVICE IN ACTION
THE VALUES OF
FIVE STAR SERVICE
Take Ownership
Make it Personal
Add Value to Every Interaction
Make Customer Courtesy Common
Share Knowledge
SHE TAKES
OWNERSHIP.
May Li, Manager
Factoria Offi ce, Bellevue, WA
When Terrie Nixdorff needed help obtaining a debit card after
experiencing an unsettling fraud situation, May Li stepped right in.
With unyielding determination and extensive follow-through,
May Li ensured that Terrie’s situation was completely resolved.
6 U.S. BANCORP
Teshan Lewis, Account Coordinator
Corporate Payment Systems, Minneapolis, MN
Teshan Lewis went above and beyond to secure a Government Purchase
Card for a staff member of the United States Air Force who was preparing
for a short-notice deployment to Iraq. Teshan’s personal commitment and
persistence ensured the staff member received the card in time to carry out
his mission. Teshan is pictured with Lt. Col. Todd Pospisil and Government
Purchase Card Program Managers Laura Ball and Marie D’Angelo.
HE MAKES IT
PERSONAL.
U.S. BANCORP 7
SHE ADDS VALUE.
Pam Paley, Relationship Manager
The Private Client Group, Cincinnati, OH
Pam Paley partners with Frederic H. Mayerson,
Chairman and Managing General Partner of The
Walnut Group, a diversifi ed private equity investment
company. Pam adds value to every interaction by
consistently fi nding the right specialized, competitive
products and services designed to meet the needs
of The Walnut Group’s principals.
Ann Vazquez, Manager
Broker Dealer Division, St. Louis, MO
Since 1989, Ann Vazquez has provided unparalleled expertise and professional,
courteous service to Rodger Riney, Founder, President and CEO of Scottrade.
Recently, Ann was instrumental in fi nding a creative credit facility solution.
Coupled with her consistently personalized attention, Ann makes sure that
what matters most to Scottrade matters most to U.S. Bank.
SHE MAKES
CUSTOMER COURTESY
COMMON.
8 U.S. BANCORP
Andrew Eberhardy, Project Manager
Elan Financial Services, Milwaukee, WI
Andrew Eberhardy’s skilled support made
all the difference to Oregon-based Umpqua
Bank during a recent credit card portfolio
conversion. Drawing on his vast knowledge
of conversion processes, Andrew offered
Umpqua fl exible, effi cient and reliable
options to guarantee their satisfaction.
Andrew is pictured with Susie McEuin
and Laura Schaeffer of Umpqua.
HE SHARES
HIS KNOWLEDGE.
U.S. BANCORP 9
ADVANTAGEOUS BUSINESS MIX
13.1 million customers rely on U.S. Bancorp
as their fi nancial partner. From a simple personal
checking account to sophisticated corporate
transactions, U.S. Bancorp has the products
and services, the talent, the technologies and the
expertise to help our customers achieve their goals.
WHOLESALE
BANKING
KEY BUSINESS UNITS
(cid:127) Middle Market
Commercial Banking
(cid:127) Commercial Real Estate
(cid:127) Corporate Banking
(cid:127) Correspondent Banking
(cid:127) Dealer Commercial
Services
(cid:127) Equipment Leasing
(cid:127) Foreign Exchange
(cid:127) Government Banking
(cid:127) International Banking
(cid:127) Specialized Industries
(cid:127) Specialized Lending
(cid:127) Treasury Management
With relationship managers who understand
the companies, the markets and the
industries of our commercial, corporate and
correspondent customers, no bank brings
more to the table than U.S. Bank.
Whether it’s fi nding the right fi nancing and capital for
growth and expansion, accelerating receivables, expediting
transactions, managing employee benefi ts programs or
structuring transactions to fi nance foreign trade, U.S. Bank
has the business solutions that build businesses and futures.
After several years of lackluster demand, in 2004 we saw
an increase, albeit modest, in commercial and corporate
lending, particularly in the areas of commercial and
industrial lending and commercial real estate. Economic
trends across most markets are positive overall and we
expect to see continued improvement in 2005. Interest rates,
while rising, are affordable, and companies appear more
ready than at any time in the past several years to invest in
their businesses.
Signifi cant changes within our organization position us
well to be more visible and active in every market, with
more streamlined procedures and more competitive pricing.
These changes augment the high level of customer service
and industry expertise already provided to our customers.
10 U.S. BANCORP
PAYMENT
SERVICES
U.S. Bancorp is a recognized leader in
the rapidly growing payments business,
with customers ranging from individual
credit and debit cardholders and ATM
users to local and global merchants, fl eet
enterprises and multinational corporations
with complex payment and payment
processing needs.
We provide innovative card-based programs, internet-based
reporting tools, fully integrated payment solutions and
electronic payments settlement answers across the country
and around the world.
Payment Services is a higher growth, higher return line
of business for U.S. Bancorp. We will continue to invest
in the technology, acquisitions, product development and
sales promotion needed to support its continued growth.
There is strong momentum in merchant processing,
especially related to our new NOVA processing
capabilities in Europe. Both our retail payments and
corporate payments businesses are focusing on the
expansion of existing relationships with current
KEY BUSINESS UNITS
(cid:127) Corporate Payment Systems
(cid:127) Merchant Payment Services
(cid:127) NOVA Information Systems, Inc.
(cid:127) Retail Payment Solutions (card services)
(cid:127) Transaction Services
customers. Additionally, corporate payment products
and merchant processing can provide valuable benefi ts
to middle market and small business companies, and
we are increasing penetration of those customer segments
for payments and processing services.
We are also investing in the hardware and technology
to expand and enhance our network of U.S. Bank ATMs.
Our newest generation of ATMs are among the most
highly functional in the industry, with vivid, striking
graphics and transaction screens and customization
capabilities so that customers’ transactions are faster,
easier and individualized.
U.S. BANCORP 11
THE PRIVATE CLIENT GROUP,
TRUST & ASSET MANAGEMENT
U.S. Bancorp understands what it
takes to build, manage and preserve our
clients’ wealth. From sensitive and
personalized family fi nancial management
and estate planning to sophisticated
corporate trust transactions to expert
advice on investments, we prepare clients
for today’s realities and tomorrow’s goals.
The Private Client Group works with affl uent
individuals and families, professional service corporations
and non-profi t organizations as a bank within a bank,
providing tailored programs to meet specialized needs.
Recognizing that many more U.S. Bank customers
could benefi t from the fi nancial planning, investment
management, personal trust and private banking expertise
of The Private Client Group, this group is building
stronger bank-wide partnerships with other U.S. Bank
lines of business to identify Private Client Group
referral opportunities.
Built on our strong technology platform and superior
management, Corporate Trust Services is leveraging its
distribution and scale following our two most recent
acquisitions. We reported to you last year about our
acquisition of the State Street corporate trust business, and
in June 2004 we completed the acquisition of National
City’s corporate trust division, a transaction that brought
12 U.S. BANCORP
KEY BUSINESS UNITS
(cid:127) The Private Client Group
(cid:127) Corporate Trust Services
(cid:127) Institutional Trust & Custody
(cid:127) U.S. Bancorp Asset Management, Inc.
(cid:127) U.S. Bancorp Fund Services, LLC
the bank $34 billion in assets under administration
and 3,800 corporate clients throughout the Midwest.
It is our sixth corporate trust acquisition since 1999,
refl ecting our approach of acquisitions to grow revenue
and businesses capable of competing with anyone.
U.S. Bancorp Asset Management, Inc., a subsidiary of
U.S. Bank National Association, serves as the investment
advisor to the First American Funds. It provides investment
management services to individuals and institutions
including corporations, foundations, pension funds,
public funds, and retirement plans. The fi rm has offi ces
in 24 states. Asset Management distribution is expanding
through increased penetration of the Institutional Market
and third-party distribution. In 2004, U.S. Bancorp Asset
Management launched two new mutual funds— the
First American Infl ation Protected Securities Fund and
the First American U.S. Treasury Money Market Fund.
A retirement (R) share class was also added to a number
of funds in the fund family.
CONSUMER
BANKING
Our customers want convenience,
accessibility, quality products and
outstanding service. Our distribution
channels—full-service banking offi ces,
ATMs, telephone banking, and internet
banking—deliver the deposit, credit,
mortgage, investment and insurance
products that support the goals and visions
of personal and small business customers.
Business momentum in Consumer Banking is strong, and
we continue to invest in technologies and initiatives that
enhance distribution and deliver on customer expectations.
Customer satisfaction remains our top priority, and new
Consumer Banking product initiatives are positively
impacting customer satisfaction. Enhancements to internet
banking on usbank.com, again ranked number one by
Speer and Associates, provide even greater fl exibility,
customization and functionality.
Signifi cant investment in innovative image technology
enables U.S. Bank Internet Banking customers to instantly
view more than 3.5 million check and deposit slip
images per month on their computer screens. A wide
range of operational procedures have also been simplifi ed
and streamlined.
KEY BUSINESS UNITS
(cid:127) 24-Hour Banking &
Financial Sales
(cid:127) Investments and
Insurance
(cid:127) Business Equipment
(cid:127) Metropolitan Branch
Finance
Banking
(cid:127) Community Banking
(cid:127) Small Business Banking
(cid:127) Consumer Lending
(cid:127) SBA Division
(cid:127) Home Mortgage
(cid:127) In-store and Corporate
On-site Banking
(cid:127) Workplace and
Student Banking
We continue to expand our unique Checking That Pays®
rewards program, which gives customers who use their
U.S. Bank Visa® Check Card the choice of four different
reward options. In 2004, U.S. Bank rewarded customers
more than $26 million in annual cash rebates, fi ve times
the $5 million rewarded in 2000.
OUR IN-STORE BANKING
NETWORK CONTINUES TO GROW
Our in-store branch network—the third largest in the
industry—delivers all the access of traditional branches to
our customers inside grocery and convenience stores. Build-
ing on the tremendous success of this lower cost distribution
channel, last year U.S. Bank began a major expansion of
in-store branches in fast-growing markets such as Arizona,
California, Nevada and Utah. These new branches continue
to exceed expectations for profi tability.
In 2003, we opened six new Nashville Publix and 32 new
Safeway, Vons, Smith’s, Pak N Save and Pavilion branches,
plus additional branches with other valued partners. We
continued to grow in 2004, opening 112 new in-store branches.
By the end of 2005, U.S. Bank will have opened 185 new
in-store branches as part of the newest expansion initiative,
for a total overall of 478 in-store branches in 19 states.
U.S. BANCORP 13
Minneapolis/
St. Paul
Madison
Cedar Rapids
Des Moines
Omaha
Milwaukee
Chicago
Dayton
Cleveland
Columbus
Cincinnati
Kansas City
St. Louis
Louisville
Nashville
Seattle
Spokane
Portland
Boise
Reno
Sacramento
San Francisco
Salt Lake City
Denver
Las Vegas
Los Angeles
San Diego
Phoenix
Tucson
U.S. Bank operates full-service
in-store branches in these states
U.S. Bank’s current in-store branch
expansion initiative focuses on these
higher-growth markets
INITIATIVES FOR SUCCESS
INVESTING
IN OUR COMPANY
FOR GROWTH AND SERVICE
Increasing our ability to provide better customer
service, offer new customer options, and develop
and deliver new products keeps us ahead of the
curve and ahead of the competition.
MARKET PENETRATION
In Consumer Banking, we have improved our automated
capability to identify product recommendation and
customer service opportunities at the individual customer
level so we can provide more personalized service and
recommend the most appropriate products.
In Corporate Payment Systems, we are dedicating resources
to build middle market relationships. We have redesigned
and simplifi ed processes, applications and contracts and
have been pursuing new client categories among companies
with annual sales between $20 and $500 million. Our new
One Card for the middle market combines the best features
from our corporate and purchasing cards into one easy-to-
manage program.
NOVA’s new Electronic Check Service processing
streamlines check acceptance and mitigates risk for our
customers so they can accept checks as safely and easily
as card payment alternatives.
Gift card industry sales reached $45 billion in 2003
and are forecast to double by 2007. NOVA’s growing
gift card program meets the needs of merchants in a
cost-effective manner, and NOVA gift cards are processed
using the same point-of-sale systems used for credit and
debit card processing, further controlling costs.
14 U.S. BANCORP
The Private Client Group has several initiatives in
progress which leverage the franchise to develop new client
relationships. Our focus is on building stronger internal
partnerships with other U.S. Bancorp lines of business.
We recognize that many customers already doing business
with U.S. Bank could benefi t from the comprehensive and
specialized expertise of our Financial Planning, Private
Banking, Personal Trust, Investment and Insurance experts
in The Private Client Group.
Retail Payment Solutions has increased penetration of
personal and small business checking account customers
with U.S. Bank-branded credit and debit cards by
investing in sales and training opportunities with our
expanded branch network.
PRODUCT DEVELOPMENT
Treasury Management will launch SinglePointSM, a unifi ed
customer workstation in 2005, providing a single point
of access for our core U.S. Bank Treasury Management
services. SinglePointSM allows business customers to
access information and reports, initiate and manage
ACH transactions and wires, view check and deposit
images and manage check fraud programs at one source.
We have upgraded and image-enabled key lockbox sites
for both wholesale and retail payment processing, and
introduced a suite of check conversion products and
services including On-Site Electronic Deposit and
Electronic Cash Letter.
Institutional Trust has launched Health Savings Accounts
(HSA) to client companies. HSAs are tax-exempt trust
or custodial accounts to be used exclusively for future
medical expenses. Similar to IRAs, they are special tax-
sheltered savings accounts for medical bills for those
employees who qualify.
Our new generation of ATMs integrates customization and
information delivery with ATM transactions. Customers
will have access to personalized messages, customized
“fast cash” preferences, and more. These ATMs provide
a faster, easier to use, and more personal experience.
U.S. BANCORP 15
We are leveraging our expertise in Commercial Real
Estate fi nancing and capitalizing on an improving
economy by opening new Commercial Real Estate
offi ces in Phoenix, Dallas and Washington, D.C.
Offering our clients greater investment choice, The Private
Client Group launched Mutual Fund Open Architecture
in 2004, allowing clients to access investments that
complement our proprietary funds. We will continue to
strategically expand Open Architecture.
Retail Payment Solutions successfully entered the affi nity
debit and credit card market in June 2004. With a potential
partner base of 7,000 or more across the country, growth
prospects are excellent.
U.S. Bancorp’s Elan Financial Services division now offers
prepaid card processing for its fi nancial institution clients,
providing the ability for these clients to offer payroll cards
and to offer or purchase gifts cards.
MARKET DEVELOPMENT
Our Asset Management business is performance driven,
and on this foundation, we have created investment
products attractive not only to our own investors, but also
products that will be competitive and attractive in third
party retail and institutional distribution. We will expand
into these new distribution channels in 2005.
U.S. Bancorp Fund Services (USBFS), long a recognized
administrator for U.S.-based mutual funds, is gaining
name recognition and reputation as a third party
outsourcing administrator in the alternative investment
industry as well. USBFS has made investments in the
specialized technology and accounting systems to support
servicing both the simple and complex investments held
by hedge funds.
NOVA continues its merchant processing expansion in
Europe through its EuroConex business, headquartered
in Ireland. Growing through acquisitions and alliances,
EuroConex now supports more than 100,000 merchants
across eight European countries. As a specialized business
with notable competitive advantages, and one that benefi ts
from economies of scale, we see considerable potential
for further European expansion. NOVA also launched
a Canadian merchant processing product in October 2004.
We anticipate that many current U.S. customers will
consolidate their U.S. and Canadian merchant processing
with NOVA and that Canadian merchants will switch
from fragmented processing systems to NOVA as a single
source of top-rated processing and customer service.
16 U.S. BANCORP
On the preceding pages, you have seen some examples of
our customer service in action, read about the goals and
achievements of our lines of business and learned how we
expect our investments and initiatives to generate revenue
growth and strengthen U.S. Bancorp. Now, we invite you to
examine more closely management’s discussion and analysis
of our ongoing operations and U.S. Bancorp’s fi nancial
results for the year 2004.
U.S. BANCORP
FINANCIAL REVIEW 2004
18
Management’s Discussion and Analysis
64
Consolidated Financial Statements
Notes to Consolidated Financial Statements
68
Reports of Management and Independent Accountants 105
108
Five-Year Consolidated Financial Statements
110
Quarterly Consolidated Financial Data
111
Supplemental Financial Data
114
Annual Report on Form 10-K
121
CEO and CFO Certifi cations
124
Executive Offi cers
Directors
125
inside back cover
Corporate Information
FORWARD-LOOKING STATEMENTS This Annual Report and Form 10-K contains forward-looking statements. Statements that are not historical or current facts, including statements about beliefs and
expectations, are forward-looking statements. These statements often include the words “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,”
“potentially,” “probably,” “projects,” “outlook” or similar expressions. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future prospects of U.S.
Bancorp. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including the following, in addition
to those contained in U.S. Bancorp’s reports on fi le with the SEC: (i) general economic or industry conditions could be less favorable than expected, resulting in a deterioration in credit quality, a change
in the allowance for credit losses, or a reduced demand for credit or fee-based products and services; (ii) changes in the domestic interest rate environment could reduce net interest income and could
increase credit losses; (iii) infl ation, changes in securities market conditions and monetary fl uctuations could adversely affect the value or credit quality of our assets, or the availability and terms of funding
necessary to meet our liquidity needs; (iv) changes in the extensive laws, regulations and policies governing fi nancial services companies could alter our business environment or affect operations; (v) the
potential need to adapt to industry changes in information technology systems, on which we are highly dependent, could present operational issues or require signifi cant capital spending; (vi) competitive
pressures could intensify and affect our profi tability, including as a result of continued industry consolidation, the increased availability of fi nancial services from non-banks, technological developments or
bank regulatory reform; (vii) changes in consumer spending and savings habits could adversely affect our results of operations; (viii) changes in the fi nancial performance and condition of our borrowers
could negatively affect repayment of such borrowers’ loans; (ix) acquisitions may not produce revenue enhancements or cost savings at levels or within time frames originally anticipated, or may result in
unforeseen integration diffi culties; (x) capital investments in our businesses may not produce expected growth in earnings anticipated at the time of the expenditure; and (xi) acts or threats of terrorism,
and/or political and military actions taken by the U.S. or other governments in response to acts or threats of terrorism or otherwise could adversely affect general economic or industry conditions. Forward-
looking statements speak only as of the date they are made, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.
U.S. BANCORP 17
040361 USB AR04 pp17.indd 17
040361 USB AR04 pp17.indd 17
2/28/05 2:29:34 PM
2/28/05 2:29:34 PM
MANAGEMENT’S DISCUSSION AND ANALYSIS
O V E RV I E W
In 2004, U.S. Bancorp and its subsidiaries (the ‘‘Company’’)
continued to demonstrate its financial strength and
shareholder focus. We began the year with several specific
financial objectives. The first goal was a focus on organic
revenue growth. While growth in net interest income has
been challenging for the banking industry due to rising
interest rates and sluggish commercial loan growth, the
Company experienced strong growth in its fee-based
revenues, particularly in payment processing services. The
Company generated fee-based revenue growth of
11.0 percent in 2004. By year-end, commercial loan
balances also displayed encouraging trends as the Company
experienced its first year-over-year growth in quarterly
average balances since mid-2001. Retail loans continued to
display strong growth in 2004. In 2005, the Company will
continue to focus on revenue growth driven by disciplined
strategic business initiatives, customer service and an
emphasis on payment processing, retail banking and
commercial lending. The second goal was to continue
improving the credit quality of our loan portfolios. During
the year nonperforming assets declined 34.8 percent from a
year ago and total net charge-offs decreased to .63 percent
of average loans outstanding in 2004, compared with
1.06 percent in 2003. By year end 2004, the credit risk
profile of the Company had improved to pre-2001 levels. In
2005, the Company will continue to focus on credit quality
and minimizing volatility of credit-related losses. Finally,
effectively managing costs is always a goal for the
Company. During 2004, our efficiency ratio (the ratio of
noninterest expense to taxable-equivalent net revenue
excluding net securities gains or losses) improved to
45.3 percent, compared with 45.6 percent in 2003, and
continues to be a leader in the banking industry. The
Company’s results for 2004 reflect the achievement of these
operating objectives and help to position the Company to
achieve its long-term goal of 10 percent or greater growth
in earnings per diluted share.
The Company’s strong performance is also reflected in
our capital levels and the improving outlook by our credit
rating agencies relative to a year ago. Equity capital of the
Company continued to be strong at 6.4 percent of tangible
common assets at December 31, 2004, compared with
6.5 percent at December 31, 2003. Credit ratings for the
Company were upgraded by Fitch Ratings in September
2004 and Moody’s Investors Service in January 2005.
Credit ratings assigned by various credit rating agencies
reflect the favorable rating agency views of the direction of
the Company’s credit quality, risk management, liquidity
18 U.S. BANCORP
and capital management practices and our ability to
generate capital through earnings.
In concert with achieving our stated financial
objectives, the Company exceeded its objective to return at
least 80 percent of earnings to shareholders in the form of
dividends and share repurchases by returning 109 percent of
2004 earnings to shareholders. In December 2004, we
announced an expanded share repurchase program and
further increased our cash dividend resulting in a
25.0 percent increase from the dividend rate in the fourth
quarter of 2003. We continue to affirm our goal of
returning at least 80 percent of earnings to shareholders.
Earnings Summary The Company reported net income of
$4.2 billion in 2004, or $2.18 per diluted share, compared
with $3.7 billion, or $1.93 per diluted share, in 2003. The
13.0 percent increase in earnings per diluted share
principally reflected growth in fee-based revenues and lower
credit costs. Return on average assets and return on average
equity were 2.17 percent and 21.4 percent, respectively, in
2004, compared with returns of 1.99 percent and
19.2 percent, respectively, in 2003. Net income in 2003
included after-tax income from discontinued operations of
$22.5 million, or $.01 per diluted share.
In 2004, the Company had income from continuing
operations, net of tax, of $4.2 billion, or $2.18 per diluted
share, compared with $3.7 billion, or $1.92 per diluted
share, in 2003. The Company’s results from continuing
operations in 2004 reflected slightly lower net interest
income, strong fee-based revenue growth and lower credit
costs. During 2004, certain elements of the Company’s
operating results included the impact of management
actions or specific events. In 2004, the Company undertook
several asset/liability management actions in response to
changing interest rates, including sales of investment
securities and the prepayment of certain long-term debt.
These actions enabled the Company to maintain an interest
rate risk position that is relatively neutral to rising interest
rates; however, the Company incurred $104.9 million of net
securities losses in 2004, a net reduction of $349.7 million
from 2003, and debt prepayment costs of $154.8 million in
2004. Also resulting from changes in interest rates, the
Company incurred a $56.8 million impairment of its
portfolio of mortgage servicing rights (‘‘MSR’’), a favorable
reduction in other intangibles expenses of $151.9 million
relative to 2003. Included in the provision for credit losses
in 2004 was a reduction in the allowance for credit losses
of $98.5 million, reflecting continued improvement in credit
quality and economic conditions. In addition, the
Company’s effective income tax rate declined to
32.5 percent in 2004, from 34.4 percent in 2003,
principally due to changes in estimated tax liabilities related
to the resolution of certain federal and state tax
examinations. Year-over-year results were also impacted by
a reduction in merger and restructuring-related charges of
$46.2 million, reflecting the completion of all significant
business integration activities in 2003.
Total net revenue, on a taxable-equivalent basis, was
$12.7 billion in 2004, compared with $12.5 billion in 2003,
a year-over-year increase of $128.6 million (1.0 percent).
The increase in net revenue was comprised of a 3.9 percent
increase in noninterest income and a 1.1 percent decline in
net interest income. The 3.9 percent net increase in
noninterest income was driven by strong growth in fee-
Table 1
Selected Financial Data
Year Ended December 31
(Dollars and Shares in Millions, Except Per Share Data)
Condensed Income Statement
Net interest income (taxable-equivalent basis) (a) ****************
Noninterest income******************************************
Securities gains (losses), net **********************************
Total net revenue ****************************************
Noninterest expense*****************************************
Provision for credit losses ************************************
Income from continuing operations before taxes *************
Taxable-equivalent adjustment ********************************
Applicable income taxes *************************************
Income from continuing operations *************************
Discontinued operations (after-tax)*****************************
Cumulative effect of accounting change (after-tax) ***************
Net income *********************************************
2004
2003
2002
2001
2000
$ 7,139.9
5,624.1
(104.9)
12,659.1
5,784.5
669.6
6,205.0
28.6
2,009.6
4,166.8
—
—
$ 7,217.5
5,068.2
244.8
12,530.5
5,596.9
1,254.0
5,679.6
28.2
1,941.3
3,710.1
22.5
—
$ 6,847.2
4,910.8
299.9
12,057.9
5,740.5
1,349.0
4,968.4
32.9
1,707.5
3,228.0
(22.7)
(37.2)
$ 6,405.2
4,340.3
329.1
11,074.6
6,149.0
2,528.8
2,396.8
54.5
818.3
1,524.0
(45.2)
—
$ 6,072.4
3,958.9
8.1
10,039.4
4,982.9
828.0
4,228.5
82.0
1,422.0
2,724.5
27.6
—
$ 4,166.8
$ 3,732.6
$ 3,168.1
$ 1,478.8
$ 2,752.1
Per Common Share
Earnings per share from continuing operations ******************
Diluted earnings per share from continuing operations ***********
Earnings per share ******************************************
Diluted earnings per share ***********************************
Dividends declared per share (b) ******************************
Book value per share ****************************************
Market value per share **************************************
Average common shares outstanding **************************
Average diluted common shares outstanding *******************
$
2.21
2.18
2.21
2.18
1.020
10.52
31.32
1,887.1
1,912.9
$
1.93
1.92
1.94
1.93
.855
10.01
29.78
1,923.7
1,936.2
$
1.68
1.68
1.65
1.65
.780
9.62
21.22
1,916.0
1,924.8
$
.79
.79
.77
.76
.750
8.58
20.93
1,927.9
1,940.3
$
1.43
1.42
1.44
1.43
.650
8.06
23.25
1,906.0
1,918.5
Financial Ratios
Return on average assets ************************************
Return on average equity ************************************
Net interest margin (taxable-equivalent basis) *******************
Efficiency ratio (c) *******************************************
Average Balances
Loans *****************************************************
Loans held for sale ******************************************
Investment securities ****************************************
Earning assets**********************************************
Assets*****************************************************
Noninterest-bearing deposits *********************************
Deposits ***************************************************
Short-term borrowings ***************************************
Long-term debt *********************************************
Shareholders’ equity*****************************************
Period End Balances
Loans *****************************************************
Allowance for credit losses ***********************************
Investment securities ****************************************
Assets*****************************************************
Deposits ***************************************************
Long-term debt *********************************************
Shareholders’ equity*****************************************
Regulatory capital ratios
Tangible common equity **********************************
Tier 1 capital ********************************************
Total risk-based capital ***********************************
Leverage ***********************************************
2.17%
21.4
4.25
45.3
1.99%
19.2
4.49
45.6
1.84%
18.3
4.65
48.8
.89%
9.0
4.46
57.2
1.74%
19.0
4.38
49.7
$122,141
1,608
43,009
168,123
191,593
29,816
116,222
14,534
35,115
19,459
$126,315
2,269
41,481
195,104
120,741
34,739
19,539
$118,362
3,616
37,248
160,808
187,630
31,715
116,553
10,503
33,663
19,393
$118,235
2,369
43,334
189,471
119,052
33,816
19,242
$114,453
2,644
28,829
147,410
171,948
28,715
105,124
10,116
32,172
17,273
$116,251
2,422
28,488
180,027
115,534
31,582
18,436
$118,177
1,911
21,916
143,501
165,944
25,109
104,956
11,679
26,088
16,426
$114,405
2,457
26,608
171,390
105,219
28,542
16,745
$118,317
1,303
17,311
138,636
158,481
23,820
103,426
11,008
23,316
14,499
$122,365
1,787
17,642
164,921
109,535
23,276
15,333
6.4%
8.6
13.1
7.9
6.5%
9.1
13.6
8.0
5.7%
8.0
12.4
7.7
5.9%
7.8
11.9
7.9
6.4%
7.3
10.7
7.5
(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) Dividends per share have not been restated for the 2001 Firstar/former U.S. Bancorp of Minneapolis merger.
(c) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.
U.S. BANCORP 19
based products and services (11.0 percent), particularly in
payment processing revenue, offset by a $349.7 million
reduction in gains (losses) on sales of securities. The
1.1 percent decline in net interest income reflected modest
growth in average earning assets, offset by lower net
interest margins. Also contributing to the year-over-year
decline in net interest income was a reduction in loan fees,
the result of fewer loan prepayments during a rising rate
environment. In 2004, average earning assets increased
$7.3 billion (4.5 percent), compared with 2003, primarily
due to growth in residential mortgages, retail loans and
investment securities, partially offset by a decline in
commercial loans and loans held for sale related to
mortgage banking activities. The net interest margin in
2004 was 4.25 percent, compared with 4.49 percent in
2003. The decline in net interest margin primarily reflected
the competitive credit pricing environment, a preference to
acquire adjustable-rate securities for asset/liability
management purposes, lower prepayment fees, a modest
increase in the percent of total earning assets funded by
wholesale sources of funding and higher rates paid on
wholesale funding due to the impact of rising rates. In
addition, the net interest margin declined year-over-year as
a result of consolidating high credit quality, low margin
loans from Stellar, a commercial loan conduit, onto the
Company’s balance sheet beginning in the third quarter
of 2003.
Total noninterest expense was $5.8 billion in 2004,
compared with $5.6 billion in 2003. The increase in total
noninterest expense of $187.6 million (3.4 percent),
primarily reflected a $154.8 million charge related to the
prepayment of a portion of the Company’s long-term debt.
The expense growth also reflected increases in
compensation, employee benefits, professional services,
marketing and business development, technology and
communications and other operating expense, as well as
expenses related to the expansion of the merchant acquiring
business in Europe. These unfavorable variances were
partially offset by a favorable change in impairment charges
related to the MSR portfolio of $151.9 million and a
$46.2 million reduction in merger and restructuring-related
charges. Refer to ‘‘Acquisition and Divestiture Activity’’ for
further information on the timing of acquisitions. The
efficiency ratio (the ratio of noninterest expense to taxable-
equivalent net revenue excluding net securities gains or
losses) was 45.3 percent in 2004, compared with
45.6 percent in 2003.
The provision for credit losses was $669.6 million for
2004, compared with $1,254.0 million for 2003, a decrease
of $584.4 million (46.6 percent). The decrease in the
provision for credit losses reflected improving credit quality
and economic conditions relative to 2003. Net charge-offs
during 2004 were $767.1 million, compared with net
20 U.S. BANCORP
charge-offs of $1,251.7 million during 2003, a reduction of
$484.6 million. The decline in net charge-offs was primarily
the result of declining levels of stressed and nonperforming
loans, continuing collection efforts and improving economic
conditions. In response to improving credit conditions, the
Company made a decision in 2004 to reduce the allowance
for credit losses. Refer to ‘‘Corporate Risk Profile’’ for
further information on the provision for credit losses, net
charge-offs, nonperforming assets and factors considered by
the Company in assessing the credit quality of the loan
portfolio and establishing the allowance for credit losses.
Acquisition and Divestiture Activity On December 31,
2003, the Company announced that it had completed the
tax-free distribution of Piper Jaffray Companies representing
substantially all of the Company’s capital markets business
line. The Company distributed to our shareholders one
share of Piper Jaffray common stock for every 100 shares of
U.S. Bancorp common stock, by means of a special dividend
of $685 million. This distribution did not include
brokerage, financial advisory or asset management services
offered to customers through other business units. The
Company continues to provide asset management services
to its customers through the Private Client, Trust and Asset
Management business segment and access to investment
products and services through its extensive network of
licensed financial advisors within the retail brokerage
platform of the Consumer Banking business segment. In
connection with the spin-off of Piper Jaffray, historical
financial results related to Piper Jaffray have been
segregated and accounted for in the Company’s financial
statements as discontinued operations.
On June 29, 2004, the Company purchased the
remaining 50 percent ownership interest in EuroConex
Technologies Ltd (‘‘EuroConex’’) from the Bank of Ireland.
In addition, during the second and fourth quarters of 2004,
the Company completed three separate transactions to
acquire merchant processing businesses in Poland, the
United Kingdom and Norway. In connection with these
transactions, EuroConex and its affiliates provide debit and
credit card processing services to merchants, directly and
through alliances with banking partners in these European
markets. These transactions represented total assets acquired
of $377 million and total liabilities assumed of $115 million
at the closing date. Included in total assets were contract
and other intangibles with a fair value of $163 million and
goodwill of $105 million. The goodwill reflected the
strategic value of these businesses to the Company’s
European merchant processing business and anticipated
economies of scale that will result from these transactions.
On December 31, 2002, the Company acquired the
corporate trust business of State Street Bank and Trust
Company (‘‘State Street Corporate Trust’’) in a cash
transaction valued at $720 million. State Street Corporate
Trust was a leading provider, particularly in the Northeast,
of corporate trust and agency services to a variety of
municipalities, corporations, government agencies and other
financial institutions serving approximately 20,000 client
issuances representing over $689 billion of assets under
administration. The transaction represented total assets
acquired of $677 million and total liabilities assumed of
$39 million. Included in total assets were contract and other
intangibles with a fair value of $218 million and goodwill
of $520 million. The goodwill reflected the strategic value
of the combined organization’s leadership position in the
corporate trust business and processing economies of scale
resulting from the transaction.
On November 1, 2002, the Company acquired
57 branches and a related operations facility in northern
California from Bay View Bank (‘‘Bay View’’), a wholly-
owned subsidiary of Bay View Capital Corporation, in a
cash transaction. The transaction represented total assets
acquired of $853 million and total liabilities assumed
(primarily retail and small business deposits) of $3.3 billion.
Included in total assets were approximately $336 million of
select loans primarily with depository relationships, core
deposit intangibles of $56 million and goodwill of
$427 million. The goodwill reflected the strategic value of
expanding the Company’s market within the San Francisco
Bay area.
On April 1, 2002, the Company acquired Cleveland-
based The Leader Mortgage Company, LLC (‘‘Leader’’), a
wholly-owned subsidiary of First Defiance Financial Corp.,
in a cash transaction. The transaction represented total
assets acquired of $531 million and total liabilities assumed
Table 2
Analysis of Net Interest Income
of $446 million. Included in total assets were mortgage
servicing rights and other intangibles of $173 million and
goodwill of $18 million. Leader specializes in acquiring
servicing of loans originated for state and local housing
authorities.
Refer to Notes 3, 4 and 5 of the Notes to Consolidated
Financial Statements for additional information regarding
discontinued operations, business combinations and merger
and restructuring-related items.
S TAT E M E N T O F I N C O M E A N A LY S I S
Net Interest Income Net interest income, on a taxable-
equivalent basis, was $7.1 billion in 2004, compared with
$7.2 billion in 2003 and $6.8 billion in 2002. The decline
in net interest income in 2004 reflected modest growth in
average earning assets, more than offset by lower net
interest margins. Also contributing to the year-over-year
decline in net interest income was a $37.6 million reduction
in loan fees, the result of fewer loan prepayments in a rising
rate environment. Average earning assets were
$168.1 billion for 2004, compared with $160.8 billion and
$147.4 billion for 2003 and 2002, respectively. The
$7.3 billion (4.5 percent) increase in average earning assets
for 2004, compared with 2003, was primarily driven by
increases in residential mortgages, retail loans and
investment securities, partially offset by a decline in
commercial loans and loans held for sale related to
mortgage banking activities. The decline in average
commercial loans from a year ago reflected soft loan
demand in 2003 and through the third quarter of 2004.
The Company began to experience growth in commercial
(Dollars in Millions)
2004
2003
2002
Components of net interest income
Income on earning assets (taxable-equivalent basis) (a) ****
Expense on interest-bearing liabilities ********************
$ 9,215.1
2,075.2
$ 9,286.2
2,068.7
$ 9,526.8
2,679.6
Net interest income (taxable-equivalent basis) ****************
$ 7,139.9
$ 7,217.5
$ 6,847.2
Net interest income, as reported ***************************
$ 7,111.3
$ 7,189.3
$ 6,814.3
Average yields and rates paid
Earning assets yield (taxable-equivalent basis) ************
Rate paid on interest-bearing liabilities *******************
Gross interest margin (taxable-equivalent basis) **************
Net interest margin (taxable-equivalent basis) ****************
Average balances
5.48%
1.53
3.95%
4.25%
5.77%
1.60
4.17%
4.49%
6.46%
2.26
4.20%
4.65%
Investment securities **********************************
Loans ***********************************************
Earning assets ***************************************
Interest-bearing liabilities *******************************
Net free funds (b) *************************************
$ 43,009
122,141
168,123
136,055
32,068
$ 37,248
118,362
160,808
129,004
31,804
$ 28,829
114,453
147,410
118,697
28,713
2004
v 2003
2003
v 2002
$ (71.1)
6.5
$ (77.6)
$ (78.0)
(.29)%
(.07)
(.22)%
(.24)%
$5,761
3,779
7,315
7,051
264
$ (240.6)
(610.9)
$ 370.3
$ 375.0
(.69)%
(.66)
(.03)%
(.16)%
$ 8,419
3,909
13,398
10,307
3,091
(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) Represents noninterest-bearing deposits, allowance for loan losses, unrealized gain (loss) on available-for-sale securities, non-earning assets, other noninterest-bearing liabilities and equity.
U.S. BANCORP 21
loans in late 2004 as economic conditions continued to
improve. The net interest margin in 2004 was 4.25 percent,
compared with 4.49 percent and 4.65 percent in 2003 and
2002, respectively. The 24 basis point decline in 2004 net
interest margin, compared with 2003, primarily reflected the
competitive credit pricing environment, a preference to
acquire adjustable-rate securities which have lower yields
and a decline in prepayment fees. The net interest margin
was also impacted by a modest increase in the percent of
total earning assets funded by wholesale sources of funding
and higher rates paid on wholesale funding due to the
impact of rising rates. The shift towards wholesale funding
reflects, in part, slower growth in deposits as growth in
mortgage banking escrows and government-related deposits
declined. It also reflects asset/liability decisions to issue
longer-term fixed-rate borrowings given the rising rate
environment. In addition, the net interest margin declined
year-over-year as a result of consolidating high credit
quality, low margin loans from the Stellar commercial loan
conduit onto the Company’s balance sheet beginning in the
third quarter of 2003.
Total average loans of $122.1 billion in 2004 were
$3.8 billion (3.2 percent) higher, compared with 2003,
reflecting growth in average residential mortgages, average
retail loans and average commercial real estate loans of
$2.6 billion (22.5 percent), $3.0 billion (7.9 percent) and
$.1 billion (.5 percent), respectively. Growth in these
categories was offset somewhat by an overall decline in
average commercial loans of $2.0 billion (4.8 percent).
Although the consolidation of loans from the Stellar
commercial loan conduit had a positive impact on average
loan balances year-over-year, excess liquidity and improving
cash flows among corporate borrowers led to the overall
decrease in total commercial loans. The Company began to
experience growth in average commercial loans in the
fourth quarter of 2004.
Average investment securities were $5.8 billion
(15.5 percent) higher in 2004, compared with 2003,
reflecting the reinvestment of proceeds from declining
average commercial loan balances and loans held for sale.
The Company utilizes the investment portfolio as part of its
overall asset/liability management practices to minimize
structural interest rate and market valuation risks associated
with changes in interest rates. During 2004, the Company
received proceeds from prepayments and maturities of
investment securities of $12.3 billion. Also, the Company
made a decision to sell $8.2 billion of fixed-rate securities,
classified as available-for-sale, as part of interest rate risk
management actions given changes in rates during the year,
recognizing a $104.9 million loss on the sale of securities.
Table 3
Net Interest Income — Changes Due to Rate and Volume (a)
(Dollars in Millions)
Increase (decrease) in
Interest income
Investment securities *******************
Loans held for sale *********************
Commercial loans **********************
Commercial real estate******************
Residential mortgage *******************
Retail loans****************************
Total loans *************************
Other earning assets *******************
Total ******************************
Interest expense
Interest checking ***********************
Money market accounts ****************
Savings accounts **********************
Time certificates of deposit less than
$100,000 **************************
Time deposits greater than $100,000 *****
Total interest-bearing deposits ********
Short-term borrowings ******************
Long-term debt ************************
Total ******************************
2004 v 2003
2003 v 2002
Volume
Yield/Rate
Total
Volume
Yield/Rate
Total
$ 254.3
(112.2)
(110.8)
7.3
160.2
210.4
267.1
(13.7)
395.5
8.0
5.3
1.0
(70.4)
24.6
(31.5)
64.1
34.7
67.3
$(115.5)
1.5
8.3
(48.6)
(61.5)
(264.5)
(366.3)
13.7
(466.6)
(21.5)
(87.8)
(6.8)
(39.2)
(5.5)
(160.8)
31.8
68.2
(60.8)
$ 138.8
(110.7)
(102.5)
(41.3)
98.7
(54.1)
(99.2)
—
(71.1)
(13.5)
(82.5)
(5.8)
(109.6)
19.1
(192.3)
95.9
102.9
6.5
$ 428.4
62.7
(149.0)
90.2
232.5
134.9
308.6
6.4
806.1
22.6
87.7
3.5
(146.3)
26.3
(6.2)
8.5
45.0
47.3
$ (235.2)
(31.1)
(157.8)
(141.9)
(114.4)
(363.9)
(778.0)
(2.4)
(1,046.7)
(40.6)
(82.8)
(7.4)
(146.2)
(105.5)
(382.5)
(64.6)
(211.1)
(658.2)
$ 193.2
31.6
(306.8)
(51.7)
118.1
(229.0)
(469.4)
4.0
(240.6)
(18.0)
4.9
(3.9)
(292.5)
(79.2)
(388.7)
(56.1)
(166.1)
(610.9)
Increase (decrease) in net interest income
$ 328.2
$(405.8)
$ (77.6)
$ 758.8
$ (388.5)
$ 370.3
(a) This table shows the components of the change in net interest income by volume and rate on a taxable-equivalent basis utilizing a tax rate of 35 percent. This table does not take into
account the level of noninterest-bearing funding, nor does it fully reflect changes in the mix of assets and liabilities. The change in interest not solely due to changes in volume or rates has
been allocated on a pro-rata basis to volume and yield/rate.
22 U.S. BANCORP
Given the soft commercial loan demand in early 2004, the
Company acquired $19.6 billion of investment securities,
representing principally adjustable and shorter-term fixed-
rate mortgage-backed securities, giving consideration to the
Company’s overall asset/liability position. 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 of $29.8 billion in
2004 were lower by $1.9 billion (6.0 percent), compared
with 2003. While average branch-based noninterest-bearing
deposits increased by 2.7 percent from a year ago,
mortgage-related escrow balances and business-related
noninterest-bearing deposits, including corporate banking,
mortgage banking and government deposits, declined.
Average interest-bearing deposits of $86.4 billion in 2004
were higher by $1.6 billion (1.8 percent), compared with
2003. The year-over-year increase in average interest-
bearing deposits included increases in average savings
products deposits of $2.6 billion (4.6 percent) and time
deposits greater than $100,000 of $1.4 billion
(11.0 percent), partially offset by a decrease in time
certificates of deposit less than $100,000 of $2.4 billion
(15.6 percent). The decrease in time certificates of deposit
less than $100,000 was primarily due to pricing decisions
by management in connection with the Company’s overall
funding and risk management activities.
Average net free funds increased $.3 billion from a year
ago, including a decrease in average noninterest-bearing
deposits, other liabilities and other assets of $1.9 billion
(6.0 percent), $1.3 billion (16.7 percent) and $3.1 billion
(10.5 percent), respectively, in 2004, compared with 2003.
The decrease in other assets and liabilities principally
reflects the impact of the spin-off of Piper Jaffray
Companies.
The increase in net interest income in 2003, compared
with 2002, was driven by an increase in average earning
assets, growth in average net free funds and favorable
changes in the Company’s average funding mix. Also
contributing to the year-over-year increase in net interest
income were various acquisitions, including Leader, State
Street Corporate Trust and Bay View, which accounted for
approximately $71.9 million of the increase during 2003.
Average earning assets were $160.8 billion for 2003,
compared with $147.4 billion for 2002. The $13.4 billion
(9.1 percent) increase in average earning assets for 2003,
compared with 2002, was primarily driven by increases in
investment securities, loans held for sale, residential
mortgages and retail loans, partially offset by a decline in
commercial loans. The 16 basis point decline in 2003 net
interest margin, compared with 2002, primarily reflected
growth in lower-yielding investment securities as a percent
of total earning assets, changes in loan mix and a decline in
the margin benefit from net free funds due to lower average
interest rates. In addition, the net interest margin declined
year-over-year as a result of consolidating high credit
quality, low margin loans from Stellar, a commercial loan
conduit, onto the Company’s balance sheet in the third
quarter of 2003. The $3.9 billion (3.4 percent) increase in
total average loans for 2003, compared with 2002, reflected
growth in average residential mortgages, retail loans and
commercial real estate loans of $3.3 billion (39.0 percent),
$1.7 billion (4.6 percent) and $1.4 billion (5.5 percent),
respectively, offset somewhat by an overall decline in
average commercial loans of $2.5 billion (5.7 percent).
Average investment securities were $8.4 billion
(29.2 percent) higher in 2003, compared with 2002,
reflecting the reinvestment of proceeds from loan sales,
declining commercial loan balances and deposits assumed in
connection with the Bay View transaction. Average interest-
bearing deposits of $84.8 billion in 2003 were higher by
$8.4 billion (11.0 percent), compared with 2002.
Approximately $3.0 billion of the year-over-year increase in
average interest-bearing deposits was due to acquisitions,
while the remaining growth was driven by increases in
savings balances. The increase in savings balances reflected
product initiatives, increasing government banking deposits
and customer decisions to maintain liquidity. Average net
free funds increased $3.1 billion from the prior year,
including an increase in average noninterest-bearing deposits
of $3.0 billion (10.4 percent) in 2003, compared with 2002.
The increase in noninterest-bearing deposits was primarily
due to mortgage banking activities during early 2003 and
higher liquidity among corporate customers maintained in
demand deposit balances year-over-year.
Provision for Credit Losses The provision for credit losses
is recorded to bring the allowance for credit losses to a level
deemed appropriate by management based on factors
discussed in the ‘‘Analysis and Determination of Allowance
for Credit Losses’’ section. The provision for credit losses
was $669.6 million in 2004, compared with
$1,254.0 million and $1,349.0 million in 2003 and 2002,
respectively.
The decline in the provision for credit losses of
$584.4 million in 2004 reflected continuing improvement in
the credit quality of the loan portfolio and changing
economic conditions. The changes in credit quality
continued to be broad-based across most industries resulting
in improving credit risk ratings, a decline in nonperforming
assets and lower total net charge-offs. While general
economic conditions improved somewhat in 2003,
commercial loan demand continued to be soft in most
markets within the banking footprint during much of 2004.
In the fourth quarter of 2004, the Company began to
experience growth in commercial loans, indicating that
U.S. BANCORP 23
economic conditions within the Company’s markets were
expanding. In response to improving credit performance
and economic conditions, the Company made a decision to
reduce the allowance for credit losses.
The decline in the provision for credit losses of
$95.0 million in 2003 primarily reflected an improving
credit risk profile resulting in lower nonperforming loans
and commercial and retail loan losses. The decline in
nonperforming loans and commercial loan net charge-offs
was broad-based across most industries within the
commercial loan portfolio. Retail loan delinquency ratios
continued to improve across most retail loan portfolios,
reflecting improving economic conditions and the
Company’s ongoing collection efforts and risk management
activities. These were also the principal factors resulting in
lower levels of retail net charge-offs during 2003.
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 2004 was
$5.5 billion, compared with $5.3 billion in 2003 and
$5.2 billion in 2002. The increase in noninterest income of
$206.2 million (3.9 percent) in 2004, compared with 2003,
was driven by strong organic growth in most fee-based
products and services categories (11.0 percent), particularly
in payment processing revenue. Partially offsetting the
increase in fee-based revenue growth in 2004 was a year-
over-year reduction in net securities gains (losses) of
$349.7 million.
Credit and debit card revenue, corporate payment
products revenue and ATM processing services revenue were
higher in 2004, compared with 2003, by $88.6 million
(15.8 percent), $45.5 million (12.6 percent) and
$9.4 million (5.7 percent), respectively. Although credit and
Table 4
Noninterest Income
debit card revenue increased year-over-year, the growth was
somewhat muted due to the impact of the settlement of the
antitrust litigation brought against VISA USA and
MasterCard by Wal-Mart Stores, Inc., Sears Roebuck & Co.
and other retailers, which lowered interchange rates on
signature debit transactions beginning in August 2003. The
year-over-year impact of VISA’s settlement on debit card
revenue for 2004 was approximately $32.8 million. This
change in the interchange rate, in addition to higher
customer loyalty rewards expenses, however, were more
than offset by growth in transaction volumes and other rate
changes. The corporate payment products revenue growth
reflected growth in sales, card usage and rate changes. The
favorable variance in ATM processing services revenue was
also due to increases in transaction volumes and sales.
Merchant processing services revenue was higher in 2004 by
$113.2 million (20.2 percent), compared with 2003,
reflecting an increase in same store sales volume, new
business and the recent expansion of the Company’s
merchant acquiring business in Europe. These recent
European acquisitions accounted for approximately
$58.6 million of the total increase. Deposit service charges
increased in 2004 by $90.6 million (12.7 percent), primarily
due to account growth, revenue enhancement initiatives and
transaction-related fees. Trust and investment management
fees increased by $27.3 million (2.9 percent), compared
with 2003, as gains from equity market valuations were
partially offset by lower fees, partially due to a change in
mix of fund balances and customers’ migration from money
market mutual funds to interest-bearing deposits with
marginally better pricing. Treasury management fees were
relatively flat from a year ago. Increased fees driven by a
change in the Federal government’s payment methodology
for treasury management services to fees for services rather
than maintaining compensating balances in the third quarter
of 2003 were offset by higher interest earnings credit on
customers’ compensating balances and the impact of an
(Dollars in Millions)
2004
2003
2002
Credit and debit card revenue******************************
Corporate payment products revenue ***********************
ATM processing services **********************************
Merchant processing services ******************************
Trust and investment management fees *********************
Deposit service charges ***********************************
Treasury management fees ********************************
Commercial products revenue******************************
Mortgage banking revenue ********************************
Investment products fees and commissions ******************
Securities gains (losses), net *******************************
Other ***************************************************
Total noninterest income *******************************
$ 649.3
406.8
175.3
674.6
981.2
806.4
466.7
432.2
397.3
156.0
(104.9)
478.3
$5,519.2
$ 560.7
361.3
165.9
561.4
953.9
715.8
466.3
400.5
367.1
144.9
244.8
370.4
$5,313.0
$ 517.0
325.7
160.6
567.3
892.1
690.3
416.9
479.2
330.2
132.7
299.9
398.8
$5,210.7
2004
v 2003
15.8%
12.6
5.7
20.2
2.9
12.7
.1
7.9
8.2
7.7
*
29.1
3.9%
2003
v 2002
8.5%
10.9
3.3
(1.0)
6.9
3.7
11.8
(16.4)
11.2
9.2
(18.4)
(7.1)
2.0%
* Not meaningful
24 U.S. BANCORP
industry-wide shift of payments from paper-based to
electronic and card-based transactions. During 2004,
commercial products revenue increased $31.7 million
(7.9 percent), primarily due to syndication fees and
commercial leasing revenue. An increase in loan servicing
revenues from a year ago contributed to an increase of
$30.2 million (8.2 percent) in mortgage banking revenue
during 2004. The growth in mortgage servicing revenues
was offset somewhat by lower gains from the sale of
mortgage loan production. Investment products fees and
commissions revenue increased in 2004 by $11.1 million
(7.7 percent), compared with 2003, primarily due to higher
sales activity in the Consumer Banking business line. The
increase in sales activities reflected improving equity market
conditions in late 2003 and 2004. Other noninterest income
increased by $107.9 million (29.1 percent) from 2003,
principally due to improving retail lease residual values
resulting in lower end-of-term residual losses, a residual
value insurance recovery of $17.2 million during the third
quarter of 2004 and improving equity investment
valuations.
In 2003, noninterest income increased $102.3 million
(2.0 percent), compared with 2002, driven by strong growth
in payment services revenue, trust and investment
management fees, deposit service charges, treasury
management fees, mortgage banking revenue and investment
products fees and commissions attributable to both organic
growth and acquisitions. Partially offsetting the increase in
noninterest income in 2003 was a year-over-year decrease in
net securities gains of $55.1 million. The favorable impact
on noninterest income from acquisitions, which included
Leader, Bay View and State Street Corporate Trust, was
approximately $122.7 million during 2003. Credit and
debit card revenue, corporate payment products revenue
and ATM processing services revenue were higher in 2003,
compared with 2002, by $43.7 million (8.5 percent),
$35.6 million (10.9 percent) and $5.3 million (3.3 percent),
respectively. Credit and debit card revenue growth in 2003
was somewhat muted ($19.4 million) due to the impact of
the settlement of the antitrust litigation brought against
VISA USA and MasterCard by Wal-Mart Stores, Inc., Sears
Roebuck & Co. and other retailers beginning in August
2003. This change in the interchange rate in the third
quarter of 2003, in addition to higher customer loyalty
rewards expenses, however, were more than offset by
increases in transaction volumes and other pricing
enhancements. Corporate payment products revenue and
ATM processing services revenue were higher in 2003,
primarily reflecting growth in sales and card usage during
the year. Merchant processing services revenue was lower in
2003 by $5.9 million (1.0 percent), compared with 2002,
primarily due to lower processing spreads resulting from
pricing changes that occurred in late 2002 and changes in
the mix of merchants. The favorable variance in trust and
investment management fees in 2003 of $61.8 million
(6.9 percent), compared with 2002, was driven by the
acquisition of State Street Corporate Trust, which
contributed $83.7 million in fees during 2003. Treasury
management fees grew by $49.4 million (11.8 percent) in
2003, compared with 2002, with the majority of the
increase occurring within the Wholesale Banking line of
business. The increase in treasury management fees during
2003 was driven by growth in product sales, pricing
enhancements and the relatively low earnings credit rates to
customers. The growth was also driven by a change in the
Federal government’s payment methodology for treasury
management services from compensating balances, reflected
in net interest income, to fees during the third quarter of
2003. During 2003, commercial products revenue declined
$78.7 million (16.4 percent), principally reflecting lower
commercial loan conduit servicing fees resulting, in part,
from consolidating the Stellar commercial loan conduit.
Mortgage banking revenue had a year-over-year increase of
$36.9 million (11.2 percent) during 2003, principally due to
higher mortgage originations, servicing and secondary
market sales and the acquisition of Leader, which
contributed $16.5 million of the favorable variance in 2003.
Investment products fees and commissions revenue increased
in 2003 by $12.2 million (9.2 percent), compared with
2002, primarily due to increased retail brokerage activity
given more favorable equity capital market conditions
relative to 2002. Deposit service charges increased in 2003
by $25.5 million (3.7 percent), compared with 2002,
primarily due to net new growth in checking accounts and
fee enhancements principally within the Consumer Banking
line of business. Other noninterest income decreased by
$28.4 million (7.1 percent) from 2002, which included
$67.4 million of gains on the sales of two co-branded credit
card portfolios.
Noninterest Expense Noninterest expense in 2004 was
$5.8 billion, compared with $5.6 billion and $5.7 billion in
2003 and 2002, respectively. The increase of $187.6 million
(3.4 percent) in 2004, compared with 2003, principally
reflected a $154.8 million charge related to the prepayment
of a portion of the Company’s long-term debt, costs related
to business initiatives and incremental expenses of
$62.8 million due to the expansion of EuroConex. These
increases were offset somewhat by a net reduction in MSR
impairments of $151.9 million and lower merger and
restructuring-related charges. In 2003, noninterest expense
included $46.2 million of merger and restructuring-related
costs related to acquisitions completed in prior years.
Compensation expense increased in 2004, compared with
2003, due to increases in salaries and stock-based
compensation. The increase in salaries reflected business
U.S. BANCORP 25
Table 5
Noninterest Expense
(Dollars in Millions)
2004
2003
2002
Compensation *******************************************
Employee benefits ****************************************
Net occupancy and equipment*****************************
Professional services**************************************
Marketing and business development ***********************
Technology and communications ***************************
Postage, printing and supplies *****************************
Other intangibles *****************************************
Merger and restructuring-related charges ********************
Debt prepayment*****************************************
Other ***************************************************
Total noninterest expense ******************************
$2,252.2
389.4
630.8
148.9
193.5
429.6
248.4
550.1
—
154.8
786.8
$5,784.5
$2,176.8
328.4
643.7
143.4
180.3
417.4
245.6
682.4
46.2
—
732.7
$5,596.9
$2,167.5
317.5
658.7
129.7
171.4
392.1
243.2
553.0
321.2
(.2)
786.4
$5,740.5
Efficiency ratio (a)*****************************************
45.3%
45.6%
48.8%
2004
v 2003
2003
v 2002
3.5%
.4%
18.6
(2.0)
3.8
7.3
2.9
1.1
(19.4)
*
*
7.4
3.4
(2.3)
10.6
5.2
6.5
1.0
23.4
(85.6)
*
(6.8)
3.4%
(2.5)%
(a) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.
* Not meaningful
expansion of in-store branches, the expansion of the
Company’s merchant acquiring business in Europe and
other initiatives. Stock-based compensation was higher due
to lower employee stock-award forfeitures relative to prior
years. Employee benefits increased primarily as a result of
higher payroll taxes and pension expense; pension and
retirement expense increased $34.6 million in 2004,
principally reflecting recognition of actuarial losses resulting
from lower expected returns in prior years. Marketing and
business development increased $13.2 million in 2004,
compared with 2003, related to corporate brand advertising
and an increase in product marketing campaigns.
Technology and communications expense was higher year-
over-year by $12.2 million in 2004, compared with 2003,
reflecting technology investments that increased software
amortization and the write-off of capitalized software being
replaced. Included in 2004 results were charges of
$154.8 million related to the prepayment of a portion of
the Company’s long-term debt. Other expense increased
$54.1 million in 2004, compared with 2003. The increase
was related to higher fraud and operating losses, insurance
costs, operating costs associated with affordable housing
investments and merchant processing costs for payment
services products, the result of the EuroConex expansion
and increases in transaction volume year-over-year.
The decrease in noninterest expense in 2003, compared
with 2002, of $143.6 million (2.5 percent) was primarily
the result of business initiatives, cost savings from
integration activities and lower merger and restructuring-
related charges, partially offset by an increase in MSR
impairments, incremental pension and retirement expense of
$39.9 million and expenses related to acquisitions.
Noninterest expense related to merger and restructuring-
related charges declined by $275.0 million (85.6 percent) in
2003, compared with 2002. The decline in merger and
restructuring-related charges was primarily due to the
26 U.S. BANCORP
completion of integration activities in 2002 associated with
the merger of Firstar and the former U.S. Bancorp of
Minneapolis (‘‘USBM’’). During 2003, noninterest expense
included an MSR impairment of $208.7 million, a net
increase of $22.6 million, compared with 2002. The year-
over-year changes in the valuation of MSRs were caused by
fluctuations in mortgage interest rates and related
prepayment speeds due to refinancing activities. Acquisitions
in 2002, including Leader, Bay View and State Street
Corporate Trust, accounted for an increase of
$124.9 million in noninterest expense from 2002 to 2003.
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 plan’s actuarial assumptions. The Company and its
Compensation Committee have an established process for
evaluating the plans, their performance and significant plan
assumptions, including the assumed discount rate and the
long-term rate of return (‘‘LTROR’’). At least annually, an
independent consultant is engaged to assist U.S. Bancorp’s
Compensation Committee in evaluating plan objectives,
funding policies and investment policies considering its
long-term investment time horizon and asset allocation
strategies. Note 19 of the Notes to Consolidated Financial
Statements provides further information on funding
practices, investment policies and asset allocation strategies.
Periodic pension expense (or credits) 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. The Company’s pension accounting policy
follows guidance outlined in Statement of Financial
Accounting Standards No. 87, ‘‘Employer’s Accounting for
Pension Plans’’ (‘‘SFAS 87’’), and reflects the long-term
nature of benefit obligations and the investment horizon of
plan assets. This accounting guidance has 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 ratably over a five-year period.
At September 30, 2004, the accumulated unrecognized loss
approximated $139 million and will ratably impact the
actuarially derived market-related value of plan assets
through 2009. The impact to pension expense of the
unrecognized asset gains or losses will incrementally
increase (decrease) pension costs in each year from 2005 to
2009, by approximately $28.9 million, $39.4 million,
$6.3 million, $(11.4) million and $(4.1) million,
respectively. This assumes that the performance of plan
assets equals the assumed 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 2004, the Company recognized a pension cost of
$9.0 million compared with pension credits of $23.9 million
in 2003 and $63.8 million in 2002. The $32.9 million
increase in pension costs in 2004 was driven by a
recognition of deferred actuarial (gains) losses and the
impact of a lower discount rate, partially offset by the
benefit of higher investment income related to the pension
contributions made in 2003. In 2003, pension costs
increased by $39.9 million, compared with 2002, driven by
a $46.4 million reduction in the expected return on assets
and a lower discount rate utilized to determine the
projected benefit obligation given the declining rate
environment. Also, contributing to the increase in pension
costs was a one-time curtailment gain in 2002 of
$9.0 million related to a nonqualified pension plan
compared with a settlement loss of $3.5 million related to
nonqualified pension payments in 2003. Somewhat
offsetting the increase in pension costs was an expected
benefit of approximately $19.0 million associated with
lower interest costs related to cash balance accounts and
actual changes in employment demographics, such as
retirement age.
In 2005, the Company anticipates that pension costs
will increase by approximately $23.5 million. The increase
will be driven by the lower discount rate and amortization
of unrecognized actuarial losses from prior years.
Note 19 of the Notes to Consolidated Financial Statements provides a summary of the significant pension plan assumptions.
Because of the subjective nature of plan assumptions, a sensitivity analysis to hypothetical changes in the LTROR and the
discount rate is provided below:
LTROR
Incremental benefit (cost) ********************************************************
Percent of 2004 net income *****************************************************
Discount rate
Incremental benefit (cost) ********************************************************
Percent of 2004 net income *****************************************************
6.9%
7.9%
$(43.8)
$(21.9)
Base
8.9%
$ —
9.9%
$21.9
10.9%
$43.7
(.65)%
(.33)%
—%
.33%
.65%
4.0%
5.0%
$(57.0)
$(30.9)
Base
6.0%
$ —
7.0%
$35.4
8.0%
$73.5
(.85)%
(.46)%
—%
.53%
1.09%
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
Income Tax Expense The provision for income taxes was
$2,009.6 million (an effective rate of 32.5 percent) in 2004,
compared with $1,941.3 million (an effective rate of
34.4 percent) in 2003 and $1,707.5 million (an effective
rate of 34.6 percent) in 2002. The improvement in the
effective tax rate in 2004, compared with 2003, was
primarily due to changes in estimated tax liabilities of
$90.0 million related to the resolution of federal tax
examinations covering substantially all of the Company’s
legal entities for the years 1995 through 1999 and
actual changes in periodic pension costs could be
significantly different than the information provided in the
sensitivity analysis.
$16.3 million related to the resolution of a state tax
examination for tax years through 2000. The improvement
in the effective tax rate in 2003, compared with 2002, was
primarily driven by a change in unitary state tax
apportionment factors driven by a shift in business mix as a
result of the impact of acquisitions, market demographics,
the mix of product revenue and an increase in federal and
state tax credits.
For further information on income taxes, refer to
Note 21 of the Notes to Consolidated Financial Statements.
U.S. BANCORP 27
B A L A N C E S H E E T A N A LY S I S
Average earning assets were $168.1 billion in 2004,
compared with $160.8 billion in 2003. The increase in
average earning assets of $7.3 billion (4.5 percent) was
primarily driven by growth in residential mortgages, retail
loans and investment securities, partially offset by a decline
in commercial loans and loans held for sale related to
mortgage banking activities. The increase in average earning
assets was principally funded by increases of $1.6 billion in
interest-bearing deposits and $5.5 billion in wholesale
funding.
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 total loan portfolio was
$126.3 billion at December 31, 2004, an increase of
Table 6
Loan Por tfolio Distribution
$8.1 billion (6.8 percent) from December 31, 2003. The
increase in total loans was driven by strong growth in retail
loans (10.7 percent) and residential mortgages
(14.2 percent) and to a lesser extent by commercial loans
(4.3 percent) and commercial real estate loans (1.3 percent).
The increase in retail loans was across most loan categories
while the increase in residential mortgages was primarily the
result of asset/liability management decisions to retain a
greater portion of the Company’s adjustable-rate loan
production. Table 6 provides a summary of the loan
distribution by product type. Table 8 provides a summary
of selected loan maturity distribution by loan category.
Average total loans increased $3.8 billion (3.2 percent) in
2004, compared with 2003. Growth in average retail loans
and residential mortgages, compared to 2003, was partially
offset by a decline in average commercial loans.
At December 31 (Dollars in Millions)
Commercial
2004
2003
2002
2001
2000
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Commercial ************************* $ 35,210
Lease financing**********************
4,963
27.9% $ 33,536
4,990
3.9
28.4% $ 36,584
5,360
4.2
31.5% $ 40,472
5,858
4.6
35.4% $ 47,041
5,776
5.1
38.5%
4.7
Total commercial *****************
40,173
31.8
38,526
32.6
41,944
36.1
46,330
40.5
52,817
43.2
Commercial real estate
Commercial mortgages ***************
Construction and development ********
20,315
7,270
Total commercial real estate********
27,585
16.1
5.7
21.8
20,624
6,618
27,242
17.4
5.6
23.0
Residential mortgages
Residential mortgages ****************
Home equity loans, first liens **********
9,722
5,645
7.7
4.5
7,332
6,125
6.2
5.2
Total residential mortgages *********
15,367
12.2
13,457
11.4
Retail
Credit card**************************
Retail leasing ************************
Home equity and second mortgages ***
Other retail
Revolving credit ******************
Installment ***********************
Automobile **********************
Student *************************
6,603
7,166
14,851
2,541
2,767
7,419
1,843
Total other retail ***************
14,570
Total retail ***********************
43,190
5.2
5.7
11.8
2.0
2.2
5.9
1.4
11.5
34.2
5,933
6,029
13,210
2,540
2,380
7,165
1,753
13,838
39,010
5.0
5.1
11.2
2.1
2.0
6.1
1.5
11.7
33.0
20,325
6,542
26,867
6,446
3,300
9,746
5,665
5,680
13,572
2,650
2,258
6,343
1,526
12,777
37,694
17.5
5.6
23.1
5.6
2.8
8.4
4.9
4.9
11.6
2.3
1.9
5.5
1.3
11.0
32.4
18,765
6,608
25,373
5,746
2,083
7,829
5,889
4,906
12,235
2,673
2,292
5,660
1,218
11,843
34,873
16.4
5.8
22.2
5.0
1.8
6.8
5.1
4.3
10.7
2.3
2.0
5.0
1.1
10.4
30.5
19,466
6,977
26,443
15.9
5.7
21.6
*
*
*
*
9,397
7.7
6,012
4,153
11,956
2,750
2,186
5,609
1,042
11,587
4.9
3.4
9.7
2.2
1.8
4.6
.9
9.5
33,708
27.5
Total loans******************** $126,315
100.0% $118,235
100.0% $116,251
100.0% $114,405
100.0% $122,365
100.0%
* Information not available
28 U.S. BANCORP
Commercial Commercial loans, including lease financing,
totaled $40.2 billion at December 31, 2004, compared with
$38.5 billion at December 31, 2003, an increase of
$1.6 billion (4.3 percent). The increase in commercial loans
was driven by new customer relationships, increases in
corporate card balances and to a lesser extent, increased
utilization under lines of credit by commercial customers.
The growth of corporate and industrial and corporate card
loan categories was tempered somewhat by lower mortgage
loans held for sale from a year ago due to declining
mortgage banking volume. Although general economic
conditions experienced some improvement in 2003,
commercial loan demand continued to be soft in the
Company’s markets throughout the first half of 2004. As a
result, average commercial loans in 2004 decreased by
$2.0 billion (4.8 percent) from 2003, despite the positive
impact on average balances from the consolidation of loans
from the Stellar commercial loan conduit in the third
Table 7
Commercial Loans by Industr y Group and Geography
December 31, 2004
December 31, 2003
Industry Group (Dollars in Millions)
Consumer products and services ***************************************
Financial services *****************************************************
Commercial services and supplies***************************************
Capital goods ********************************************************
Agriculture ***********************************************************
Property management and development *********************************
Paper and forestry products, mining and basic materials *******************
Consumer staples*****************************************************
Health care **********************************************************
Private investors ******************************************************
Transportation ********************************************************
Energy **************************************************************
Information technology ************************************************
Other ***************************************************************
Total *************************************************************
Geography
California ************************************************************
Colorado ************************************************************
Illinois ***************************************************************
Minnesota ***********************************************************
Missouri *************************************************************
Ohio ****************************************************************
Oregon **************************************************************
Washington **********************************************************
Wisconsin ***********************************************************
Iowa, Kansas, Nebraska, North Dakota, South Dakota *********************
Arkansas, Indiana, Kentucky, Tennessee *********************************
Idaho, Montana, Wyoming *********************************************
Arizona, Nevada, Utah*************************************************
Total banking region************************************************
Outside the Company’s banking region **********************************
Loans
$ 8,073
4,784
3,870
3,825
2,601
2,334
1,905
1,887
1,826
1,630
1,592
730
644
4,472
$40,173
$ 3,786
2,064
2,549
6,649
2,525
2,528
1,441
2,695
2,604
3,455
1,747
830
926
33,799
6,374
Percent
20.1%
11.9
9.6
9.5
6.5
5.8
4.7
4.7
4.6
4.1
4.0
1.8
1.6
11.1
Loans
$ 6,858
4,469
3,785
4,598
2,907
1,653
1,415
1,817
1,532
1,629
1,758
708
729
4,668
Percent
17.8%
11.6
9.8
11.9
7.6
4.3
3.7
4.7
4.0
4.2
4.6
1.8
1.9
12.1
100.0%
$38,526
100.0%
9.4%
5.1
6.3
16.6
6.3
6.3
3.6
6.7
6.5
8.6
4.3
2.1
2.3
84.1
15.9
$ 4,091
1,820
2,121
6,527
2,742
2,361
1,500
2,767
2,874
3,760
1,549
744
829
33,685
4,841
10.6%
4.7
5.5
16.9
7.1
6.1
3.9
7.2
7.5
9.8
4.0
1.9
2.2
87.4
12.6
Total *************************************************************
$40,173
100.0%
$38,526
100.0%
Table 8
Selected Loan Matur ity Distr ibution
December 31, 2004 (Dollars in Millions)
Commercial *************************************************************
Commercial real estate ***************************************************
Residential mortgages ****************************************************
Retail *******************************************************************
Total loans ***********************************************************
Total of loans due after one year with
Predetermined interest rates ********************************************
Floating interest rates**************************************************
One Year
or Less
$19,283
7,378
974
13,312
$40,947
Over One
Through
Five Years
$18,141
14,280
2,698
19,619
$54,738
Over Five
Years
$ 2,749
5,927
11,695
10,259
$30,630
Total
$ 40,173
27,585
15,367
43,190
$126,315
$ 40,042
$ 45,326
U.S. BANCORP 29
Table 9
Commercial Real Estate by Proper ty Type and Geography
December 31, 2004
December 31, 2003
Property Type (Dollars in Millions)
Business owner occupied **********************************************
Multi-family***********************************************************
Commercial property
Industrial *********************************************************
Office ************************************************************
Retail ************************************************************
Other ************************************************************
Homebuilders ********************************************************
Hotel/motel **********************************************************
Health care facilities ***************************************************
Loans
$ 8,551
3,903
1,103
2,676
3,586
2,359
2,952
1,848
607
Percent
31.0%
14.1
Loans
$ 8,037
3,868
4.0
9.7
13.0
8.6
10.7
6.7
2.2
1,280
3,078
3,487
2,452
2,098
2,234
708
Percent
29.5%
14.2
4.7
11.3
12.8
9.0
7.7
8.2
2.6
Total *************************************************************
$27,585
100.0%
$27,242
100.0%
Geography
California ************************************************************
Colorado ************************************************************
Illinois ***************************************************************
Minnesota ***********************************************************
Missouri *************************************************************
Ohio ****************************************************************
Oregon **************************************************************
Washington **********************************************************
Wisconsin ***********************************************************
Iowa, Kansas, Nebraska, North Dakota, South Dakota *********************
Arkansas, Indiana, Kentucky, Tennessee *********************************
Idaho, Montana, Wyoming *********************************************
Arizona, Nevada, Utah*************************************************
Total banking region************************************************
Outside the Company’s banking region **********************************
$ 5,252
1,181
996
1,721
1,525
1,975
1,730
2,855
1,768
2,003
1,710
880
1,948
25,544
2,041
19.0%
4.3
3.6
6.2
5.5
7.2
6.3
10.3
6.4
7.3
6.2
3.2
7.1
92.6
7.4
$ 4,380
1,139
1,095
1,536
1,741
2,193
1,771
2,956
1,921
2,138
1,817
874
1,722
25,283
1,959
16.1%
4.2
4.0
5.6
6.4
8.0
6.5
10.9
7.1
7.8
6.7
3.2
6.3
92.8
7.2
Total *************************************************************
$27,585
100.0%
$27,242
100.0%
quarter of 2003. Commercial loans began to display
encouraging trends in the Company’s markets during the
fourth quarter of 2004 with quarterly average commercial
loan balances increasing for the first time since the second
quarter of 2001.
Table 7 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 $27.6 billion at
December 31, 2004, compared with $27.2 billion at
December 31, 2003, a modest increase of $343 million
(1.3 percent). Specifically, construction and development
loans increased by $652 million (9.9 percent) as developers
continued to take advantage of relatively low interest rates.
Commercial mortgages outstanding decreased modestly by
$309 million (1.5 percent) as growth in Small Business
Administration (‘‘SBA’’) real estate mortgages was more
than offset by reductions in traditional commercial real
estate mortgages. Average commercial real estate loans
increased by $125 million (.5 percent) in 2004, compared
with 2003, primarily driven by growth in SBA commercial
real estate mortgage loans. Table 9 provides a summary of
30 U.S. BANCORP
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 $638 million of
construction loans were permanently financed and
reclassified to the commercial mortgage loan category in
2004. At year-end 2004, $202 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
$7.9 billion at December 31, 2004, compared with
$7.3 billion at December 31, 2003. 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 $1.1 billion at December 31, 2004.
Residential Mortgages Residential mortgages held in the
loan portfolio were $15.4 billion at December 31, 2004, an
increase of $1.9 billion (14.2 percent) from December 31,
2003. The increase in residential mortgages was primarily
the result of asset/liability risk management decisions to
retain a greater portion of the Company’s adjustable-rate
loan production. This growth was partially offset by
approximately $.5 billion in residential loan sales during
2004 primarily representing fixed-rate mortgage loans.
Average residential mortgages increased $2.6 billion
(22.5 percent) to $14.3 billion in 2004, primarily due to
retaining adjustable-rate residential mortgages throughout
2004 and growth in first-lien home equity loans of
20.0 percent.
Retail Total retail loans outstanding, which include credit
card, retail leasing, home equity and second mortgages and
other retail loans, were $43.2 billion at December 31, 2004,
compared with $39.0 billion at December 31, 2003. The
increase of $4.2 billion (10.7 percent) was driven by an
increase in home equity lines of credit, credit cards, retail
leasing, automobile loans and installment loans, which
increased $2,275 million, $670 million, $1,137 million,
$254 million and $387 million, respectively, during 2004.
The increases in these loan categories were offset somewhat
by a reduction in home equity loans of $634 million during
the year. Average retail loans increased $3.0 billion
(7.9 percent) to $41.2 billion in 2004, reflecting growth in
home equity lines, retail leasing, installment loans and credit
card. Of the total retail loans and residential mortgages
outstanding, approximately 87.4 percent are to customers
located in the Company’s primary banking regions.
Loans Held for Sale At December 31, 2004, loans held for
sale, consisting of residential mortgages to be sold in the
secondary market, were $1.4 billion. This asset category
was essentially unchanged relative to loans held for sale at
December 31, 2003, despite $4.4 billion of mortgage loan
production during the fourth quarter of 2004, compared
with $3.9 billion in fourth quarter 2003. Average loans held
for sale declined to $1.6 billion in 2004, compared with
$3.6 billion in 2003, due to the impact of rising interest
rates on mortgage loan production.
Investment Securities The Company uses its investment
securities portfolio for several purposes. It serves as a
vehicle to manage interest rate and prepayment risk,
generates interest and dividend income from the investment
of excess funds depending on loan demand, provides
liquidity and is used as collateral for public deposits and
wholesale funding sources. While it is the Company’s intent
to hold its investment securities indefinitely, the Company
may take actions in response to structural changes in
interest rate risks and to meet liquidity requirements.
At December 31, 2004, investment securities, both
available-for-sale and held-to-maturity, totaled
$41.5 billion, compared with $43.3 billion at December 31,
2003. The $1.9 billion (4.3 percent) year-over-year decrease
primarily reflected the sale of $8.2 billion of fixed-rate
investment securities, along with maturities and
prepayments of $12.3 billion, partially offset by purchases
of $19.6 billion of securities. Investment securities purchases
were principally adjustable and shorter-term fixed-rate
mortgage-backed securities, giving consideration to the
Company’s overall asset/liability position, actual and
projected changes in the mix and characteristics of the
balance sheet and in interest rates. At December 31, 2004,
approximately 38.9 percent of the investment securities
portfolio represented adjustable-rate financial instruments,
compared with 22.2 percent as of December 31, 2003.
Adjustable-rate financial instruments include variable-rate
collateralized mortgage obligations, mortgage-backed
securities, agency securities, adjustable-rate money market
accounts and asset-backed securities. Average investment
securities were $43.0 billion in 2004, compared with
$37.2 billion in 2003. The increase principally reflects the
timing of securities transactions in early 2004 as proceeds
from loan repayments and deposit growth were reinvested
in this asset category.
The weighted-average yield of the available-for-sale
portfolio was 4.43 percent at December 31, 2004,
compared with 4.27 percent at December 31, 2003. The
average maturity of the available-for-sale portfolio declined
to 4.5 years at December 31, 2004, down from 5.1 years at
December 31, 2003. The relative mix of the type of
investment securities maintained in the portfolio is provided
in Table 10. At December 31, 2004, the available-for-sale
portfolio included a $271 million net unrealized loss,
compared with a net unrealized loss of $259 million at
December 31, 2003.
Deposits Total deposits were $120.7 billion at
December 31, 2004, an increase of $1.7 billion
(1.4 percent) from December 31, 2003. The increase in total
deposits was primarily the result of an increase in time
deposits greater than $100,000, partially offset by decreases
in noninterest-bearing deposits, savings deposits and time
certificates of deposit less than $100,000. Average total
deposits were $116.2 billion in 2004, declining
$331 million from $116.6 billion in 2003. The decline in
average total deposits was primarily due to lower average
noninterest-bearing deposits and time certificates of deposit
less than $100,000. The reductions in these categories were
offset somewhat by growth in average savings deposits and
time deposits greater than $100,000.
Noninterest-bearing deposits were $30.8 billion at
December 31, 2004, compared with $32.5 billion at
December 31, 2003, a decrease of $1.7 billion (5.3 percent).
The decrease in noninterest-bearing deposits was primarily
attributable to declining deposits related to corporate
business deposits, mortgage banking businesses and
U.S. BANCORP 31
government banking deposits in the Wholesale Banking
business line relative to a year ago. The decline also
included certain product changes to migrate high-value
customers with balances of $1.3 billion to the Company’s
Silver Elite interest checking product to further enhance
customer retention. Corporate business deposits are
declining as business customers utilize their deposit liquidity
to fund business growth. Mortgage banking activities
continue to decline directly related to the upward movement
in interest rates since mid-2003. Government banking
deposits have also declined. Average noninterest-bearing
deposits were $29.8 billion in 2004, a decrease of
$1.9 billion (6.0 percent), compared with 2003. While
average branch-based noninterest-bearing deposits increased
2.7 percent from a year ago, business-related noninterest-
bearing deposits, including government, corporate banking
and mortgage banking deposits, and mortgage-related
escrow balances declined.
Interest-bearing savings deposits totaled $59.4 billion at
December 31, 2004, a decrease of $1.7 billion (2.7 percent)
Table 10
Investment Secur ities
Available-for-Sale
Held-to-Maturity
December 31, 2004 (Dollars in Millions)
U.S. Treasury and agencies
Maturing in one year or less (a)***********
Maturing after one year through five years
Maturing after five years through ten years
Maturing after ten years (a) **************
Total ***************************
Mortgage-backed securities (b)
Maturing in one year or less *************
Maturing after one year through five years
Maturing after five years through ten years
Maturing after ten years *****************
Total ***************************
Asset-backed securities (b)
Maturing in one year or less *************
Maturing after one year through five years
Maturing after five years through ten years
Maturing after ten years *****************
Total ***************************
Obligations of state and political
subdivisions
Maturing in one year or less *************
Maturing after one year through five years
Maturing after five years through ten years
Maturing after ten years *****************
Total ***************************
Other debt securities
Maturing in one year or less *************
Maturing after one year through five years
Maturing after five years through ten years
Maturing after ten years *****************
Total ***************************
Other investments ********************
Total investment securities (c)****************
Amortized
Cost
$
$
601
56
27
—
684
$ 1,716
24,849
12,742
502
$39,809
$
$
$
$
$
$
$
39
25
—
—
64
101
97
6
1
205
8
86
—
499
593
270
Fair
Value
593
58
28
—
679
$
$
$ 1,721
24,724
12,588
504
$39,537
$
$
$
$
$
$
$
39
25
—
—
64
102
101
7
1
211
8
86
—
490
584
279
$41,625
$41,354
Weighted-
Average
Maturity in
Years
Weighted-
Average
Yield (d)
Amortized
Cost
.19
3.09
7.52
—
.72
.57
3.25
6.51
14.06
4.31
.65
2.36
—
—
1.31
.39
2.49
6.38
16.77
1.65
1.11
2.35
—
22.35
19.16
—
4.45
3.24%
4.98
4.47
—
3.43%
4.01%
4.34
4.70
3.85
4.43%
5.61%
5.26
—
—
5.47%
7.38%
7.24
7.82
5.33
7.32%
3.10%
11.00
—
2.98
4.15%
—%
4.43%
$ —
—
—
—
$ —
$ —
11
—
—
$ 11
$ —
—
—
—
$ —
$ 10
35
19
34
$ 98
$ —
18
—
—
$ 18
$ —
$127
Weighted-
Average
Maturity in
Years
Weighted-
Average
Yield (d)
—
—
—
—
—
—
3.07
—
—
3.07
—
—
—
—
—
.25
2.66
6.90
13.66
7.09
—
3.23
—
—
3.23
—
6.19
—%
—
—
—
—%
—%
5.30
—
—
5.30%
—%
—
—
—
—%
6.44%
6.55
6.57
6.68
6.59%
—%
5.20
—
—
5.20%
—%
6.28%
Fair
Value
$ —
—
—
—
$ —
$ —
11
—
—
$ 11
$ —
—
—
—
$ —
$ 10
37
20
36
$103
$ —
18
—
—
$ 18
$ —
$132
(a) In January 2005, approximately $450 million of floating-rate agency notes with an original maturity of June 2023 were called by the issuer. These notes are classified in the table as
maturing in one year or less.
(b) Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities anticipating future prepayments.
(c) The weighted-average maturity of the available-for-sale investment securities was 5.12 years at December 31, 2003 with a corresponding weighted-average yield of 4.27%. The weighted-
average maturity of the held-to-maturity investment securities was 6.16 years at December 31, 2003 with a corresponding weighted-average yield of 6.05%.
(d) Average yields are presented on a fully-taxable equivalent basis. Yields on available-for-sale and held-to-maturity securities are computed based on historical cost balances. Average yield
and maturity calculations exclude equity securities that have no stated yield or maturity.
At December 31 (Dollars in Millions)
2004
2003
Amortized
Cost
Percent
of Total
Amortized
Cost
Percent
of Total
U.S. Treasury and agencies************************************************************************ $
Mortgage-backed securities ***********************************************************************
Asset-backed securities ***************************************************************************
Obligations of state and political subdivisions ********************************************************
Other securities and investments *******************************************************************
684
39,820
64
303
881
1.6%
95.4
.2
.7
2.1
Total investment securities ********************************************************************* $41,752
100.0%
$ 1,634
40,243
250
473
993
$43,593
3.7%
92.3
.6
1.1
2.3
100.0%
32 U.S. BANCORP
from December 31, 2003. The decrease in interest-bearing
savings deposits was primarily due to decreases in money
market accounts of $3.5 billion (10.4 percent), partially
offset by an increase of $1.8 billion (8.3 percent) in interest
checking. The increase in interest checking reflects the
migration of noninterest-bearing deposits to the Silver Elite
interest checking product. The decrease in money market
savings account balances, in part, reflects pricing decisions
by the Company given the profitability of certain business
accounts and modest commercial loan growth and business
customer decisions to utilize deposit liquidity during 2004.
A portion of money market balances migrated to time
deposits greater than $100,000 as interest rates increased
for these products. Average interest-bearing savings deposits
were $59.7 billion in 2004, an increase of $2.6 billion
(4.6 percent), compared with 2003. The increase in average
interest-bearing savings deposits from 2003 to 2004 was
primarily driven by increases in interest checking of
$1.8 billion (9.6 percent), along with increases in money
market accounts of $.5 billion (1.7 percent) and savings
accounts of $.3 billion (4.5 percent).
Interest-bearing time deposits were $30.6 billion at
December 31, 2004, compared with $25.5 billion at
December 31, 2003, an increase of $5.1 billion
(19.9 percent). The increase in interest-bearing time deposits
was driven by an increase of $6.2 billion (52.5 percent) in
time deposits greater than $100,000, partially offset by a
Table 11
Deposits
The composition of deposits was as follows:
decrease in the higher cost time certificates of deposits less
than $100,000 of $1.1 billion (8.4 percent). Changes in
these deposit categories were principally due to pricing
decisions based on the relative cost of funding. Time
certificates of deposit less than $100,000 were essentially
unchanged in the fourth quarter and represent a source of
fixed-rate funding in a rising rate environment. Average
time deposits greater than $100,000 increased $1.4 billion
(11.0 percent) and average time certificates of deposit less
than $100,000 declined $2.4 billion (15.6 percent) during
2004. 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 earning assets in
excess of deposit growth. Short-term borrowings, which
include federal funds purchased, securities sold under
agreements to repurchase and other short-term borrowings,
were $13.1 billion at December 31, 2004, compared with
$10.9 billion at December 31, 2003. Short-term funding is
managed to levels deemed appropriate given alternative
funding sources. The increase of $2.2 billion in short-term
borrowings reflected wholesale funding associated with the
Company’s earning asset growth.
Long-term debt was $34.7 billion at December 31,
2004, compared with $33.8 billion at December 31, 2003,
an increase of $.9 billion. The increase in long-term debt
December 31 (Dollars in Millions)
2004
2003
2002
2001
2000
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Noninterest-bearing deposits ******************* $ 30,756
Interest-bearing deposits
25.5% $ 32,470
27.3% $ 35,106
30.4% $ 31,212
29.7% $ 26,633
24.3%
Interest checking **************************
Money market accounts ********************
Savings accounts**************************
Total of savings deposits ****************
Time certificates of deposit less than $100,000 *****
Time deposits greater than $100,000
Domestic *********************************
Foreign***********************************
23,186
30,478
5,728
59,392
12,544
11,956
6,093
19.2
25.2
4.8
49.2
10.4
9.9
5.0
21,404
34,025
5,630
61,059
13,690
5,902
5,931
18.0
28.6
4.7
51.3
11.5
4.9
5.0
17,467
27,753
5,021
50,241
17,973
9,427
2,787
15.1
24.0
4.4
43.5
15.5
8.2
2.4
15,251
24,835
4,637
44,723
20,724
7,286
1,274
14.5
23.6
4.4
42.5
19.7
6.9
1.2
Total interest-bearing deposits ***********
89,985
74.5
86,582
72.7
80,428
69.6
74,007
70.3
13,982
23,899
4,516
42,397
25,780
11,221
3,504
82,902
12.8
21.8
4.1
38.7
23.5
10.3
3.2
75.7
Total deposits ***************************** $120,741
100.0% $119,052
100.0% $115,534
100.0% $105,219
100.0% $109,535
100.0%
The maturity of time certificates of deposit less than $100,000 and time deposits greater than $100,000 was as follows:
December 31, 2004 (Dollars in Millions)
Three months or less ***********************************************
Three months through six months************************************
Six months through one year ****************************************
2006 *************************************************************
2007 *************************************************************
2008 *************************************************************
2009 *************************************************************
Thereafter*********************************************************
Total **********************************************************
Time Certificates of
Deposit Less Than $100,000
Time Deposits
Greater Than $100,000
$ 2,324
1,961
2,536
2,998
1,579
614
521
11
$12,544
$14,097
1,325
940
825
445
188
220
9
$18,049
Total
$16,421
3,286
3,476
3,823
2,024
802
741
20
$30,593
U.S. BANCORP 33
was primarily driven by the issuance of $12.2 billion of
bank notes and $1.0 billion of subordinated notes, partially
offset by maturities of $8.0 billion and prepayments of
$4.7 billion of Federal Home Loan Bank (‘‘FHLB’’)
advances. The prepayments of FHLB advances during the
first and fourth quarters of 2004 and the issuance of
predominantly fixed-rate funding were principally done in
connection with asset/liability management activities. Refer
to Note 15 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.
C O R P O R AT E R I S K P R O F I L E
Overview Managing risks is an essential part of successfully
operating a financial services company. The most prominent
risk exposures are credit, residual, operational, interest rate,
market and liquidity risk. Credit risk is the risk of not
collecting the interest and/or the principal balance of a loan
or investment when it is due. Residual risk is the potential
reduction in the end-of-term value of leased assets or the
residual cash flows related to asset securitization and other
off-balance sheet structures. Operational risk includes risks
related to fraud, legal and compliance risk, processing
errors, technology, breaches of internal controls and
business continuation and disaster recovery risk. Interest
rate risk is the potential reduction of net interest income as
a result of changes in interest rates. Rate movements can
affect the repricing of assets and liabilities differently, as
well as their market value. Market risk arises from
fluctuations in interest rates, foreign exchange rates, and
equity prices that may result in changes in the values of
financial instruments, such as trading and available-for-sale
securities that are accounted for on a mark-to-market basis.
Liquidity risk is the possible inability to fund obligations to
depositors, investors or borrowers. In addition, corporate
strategic decisions, as well as the risks described above,
could give rise to reputation risk. Reputation risk is the risk
that negative publicity or press, whether true or not, could
result in costly litigation or cause a decline in the
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 experiencing deterioration of credit quality. The credit
risk management strategy also includes a credit risk
assessment process, independent of business line managers,
that performs assessments of compliance with commercial
34 U.S. BANCORP
and consumer credit policies, risk ratings, and other critical
credit information. The Company strives to identify
potential problem loans early, take any necessary charge-
offs promptly and maintain adequate reserve levels for
probable loan losses inherent in the portfolio. Commercial
banking operations rely on a strong credit culture that
combines prudent credit policies and individual lender
accountability. Lenders are assigned lending grades based
on their level of experience and customer service
requirements. Lending grades represent the level of approval
authority for the amount of credit exposure and level of
risk. Credit officers reporting to an independent credit
administration function have higher levels of lending grades
and support the business units in their credit decision
process. Loan decisions are documented as to the
borrower’s business, purpose of the loan, evaluation of the
repayment source and the associated risks, evaluation of
collateral, covenants and monitoring requirements, and risk
rating rationale. The Company utilizes a credit risk rating
system to measure the credit quality of individual
commercial loan transactions. The Company uses the risk
rating system for regulatory reporting, determining the
frequency of review of the credit exposures, and evaluation
and determination of 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 Overview In evaluating its credit risk, the
Company considers changes, if any, in underwriting
activities, the loan portfolio composition (including product
mix and geographic, industry or customer-specific
concentrations), trends in loan performance, the level of
allowance coverage relative to similar banking institutions
and macroeconomic factors. Beginning in 2000, the
domestic economy experienced slower growth. During
2001, corporate earnings weakened and credit quality
indicators among certain industry sectors deteriorated. The
stagnant economic growth was evidenced by the Federal
Reserve Board’s (‘‘FRB’’) actions to stimulate economic
growth through a series of interest rate reductions from
mid-2001 through late 2002. In addition, events of
September 11, 2001, had a profound impact on credit
quality due to changes in consumer confidence and related
spending, governmental priorities and business activities. In
response to declining economic conditions, company-specific
portfolio trends, and the Firstar/USBM merger, the
Company initiated several actions during 2001 including
aligning the risk management practices and charge-off
policies of the companies and restructuring and disposing of
certain portfolios that did not align with the credit risk
profile of the combined company. The Company also
implemented accelerated loan workout strategies for certain
commercial credits and increased the provision for credit
losses in 2001.
By the end of 2002, economic conditions had stabilized
somewhat, although the banking sector continued to
experience elevated levels of nonperforming assets and net
charge-offs, especially with respect to certain industry
segments. Unemployment rates had increased slightly and
consumer spending and confidence levels had declined
during that year. Economic conditions began to improve in
early to mid-2003 as evidenced by stronger earnings across
many corporate sectors, higher equity valuations, stronger
retail sales and consumer spending, and improving
economic indicators. Also, unemployment rates stabilized
and began to decline in late 2003. However, the banking
industry continued to have elevated levels of nonperforming
assets and net charge-offs compared with the late 1990’s.
Conditions within certain industries, including
manufacturing and airline transportation sectors, lagged
behind the growth in the broader economy especially in
some markets served by the Company.
During 2004, unemployment rates and bankruptcy
levels continued to improve. The trends related to consumer
spending for retail goods and services continued to expand
throughout the year. While corporate profits continued to
be strong, the index of corporate profits retreated somewhat
in the second quarter of 2004. As a result, equity markets
stalled in the second and third quarters of 2004 due to
uncertainty related to corporate profits and world events.
Within the Company’s customer base, commercial loan
demand continued to be somewhat soft through mid-2004.
In the fourth quarter of 2004, most economic indicators
again began to expand and commercial loan balances for
the Company displayed year-over-year quarterly growth for
the first time since mid-2001.
Credit Diversification The Company manages its credit risk,
in part, through diversification of its loan portfolio. As part
of its normal business activities, it offers a broad array of
traditional commercial lending products and specialized
products such as asset-based lending, commercial lease
financing, agricultural credit, warehouse mortgage lending,
commercial real estate, health care and correspondent
banking. The Company also offers an array of retail lending
products including credit cards, retail leases, home equity,
revolving credit, lending to students and other consumer
loans. These retail credit products are primarily offered
through the branch office network, specialized trust, home
mortgage and loan production offices, indirect distribution
channels, such as automobile dealers and a consumer
finance division. The Company monitors and manages the
portfolio diversification by industry, customer and
geography. Table 6 provides information with respect to the
overall product diversification and changes in the mix
during 2004.
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 and large national customers within certain niche
industry groups. Table 7 provides a summary of the
significant industry groups and geographic locations of
commercial loans outstanding at December 31, 2004 and
2003. 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) and agricultural industries. Additionally, the
commercial portfolio is diversified across the Company’s
geographical markets with 84.1 percent of total commercial
loans within the 24-state banking region. Credit
relationships outside of the Company’s banking region are
specifically targeted industries including the mortgage
banking and the leasing businesses. 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.
Certain industry segments within the commercial loan
portfolio, including transportation and manufacturing have
experienced economic stress since 2001. Additionally, highly
leveraged enterprise-value financings have under-performed
U.S. BANCORP 35
due to changes in cash flows during softer economic
conditions. At December 31, 2004, the transportation sector
represented 4.0 percent of the total commercial loan
portfolio. Since 2001, the sector has been impacted by
airline travel, slower economic activity and changes in fuel
prices. In general, the credit risk profile of the trucking,
railroad and shipping segments have improved from a year
ago; however, the airline segment continues to be sluggish.
At year-end 2004, the Company’s transportation portfolio
consisted of airline and airfreight businesses (28.2 percent
of the sector), trucking businesses (46.4 percent of the
sector) and the remainder in the railroad and shipping
businesses (25.4 percent of the sector). Capital goods
represented 9.5 percent of the total commercial portfolio at
December 31, 2004. Included in this sector were
approximately 21.5 percent of loans related to building
products while engineering and construction equipment and
machinery businesses were 34.8 percent and 30.2 percent,
respectively. During 2004, economic conditions improved
and production levels increased resulting in an improvement
in the credit quality of the manufacturing sectors from a
year ago. With respect to certain construction and building-
related businesses, the recent changes in the interest rate
environment may somewhat hamper their future
profitability; however, these credits continued to perform
well as of December 31, 2004.
Within its commercial lending business, the Company
also provides financing to enable customers to grow their
businesses through acquisitions of existing businesses,
buyouts or other recapitalizations. During a business cycle
with slower economic growth, businesses with leveraged
capital structures may experience insufficient cash flows to
service their debt. The Company manages leveraged
enterprise-value financings by maintaining well-defined
underwriting standards, portfolio diversification and actively
managing the customer relationship. Regardless of these
actions, leveraged enterprise-value financings often exhibit
stress during a recession or period of slow economic growth
and will have higher inherent loss rates than other
commercial loans. The Company actively monitors the
credit quality of these customers and develops action plans
accordingly. Such leveraged enterprise-value financings
approximated $1.7 billion in loans outstanding at
December 31, 2004, compared with approximately
$1.8 billion outstanding at December 31, 2003. The
Company’s portfolio of highly leveraged enterprise-value
financings is included in Table 7 and is diversified among
industry groups similar to the total commercial loan
portfolio, except for higher concentrations in
telecommunications and cable.
The commercial real estate portfolio reflects the
Company’s focus on serving business owners within its
footprint as well as regional and national investment-based
36 U.S. BANCORP
real estate. At December 31, 2004, the Company had
commercial real estate loans of $27.6 billion, or
21.8 percent of total loans, compared with $27.2 billion at
December 31, 2003. 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 geographic locations of commercial real estate
loans outstanding at December 31, 2004 and 2003. At
December 31, 2004, approximately 31.0 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 multi-family, office and
retail properties. While investment-based commercial real
estate continues to perform with relatively strong occupancy
levels and cash flows, these categories of loans can be
adversely impacted during a rising rate environment.
Included in commercial real estate at year end 2004 was
approximately $.4 billion in land held for development and
$1.4 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 with
strong market conditions; however, these loans can be
adversely impacted by 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 92.6 percent of total commercial real estate
loans outstanding at December 31, 2004, within the
24-state banking region.
Analysis of Nonperforming Assets The level of
nonperforming assets represents a key indicator, among
other considerations, of the potential for future credit
losses. Nonperforming assets include nonaccrual loans,
restructured loans not performing in accordance with
modified terms and other real estate and other
nonperforming assets owned by the Company. Interest
payments collected from assets on nonaccrual status are
typically applied against the principal balance and not
recorded as income. At December 31, 2004, total
nonperforming assets were $748.4 million, compared with
$1,148.1 million at year-end 2003 and $1,373.5 million at
year-end 2002. The ratio of total nonperforming assets to
total loans and other real estate decreased to .59 percent at
December 31, 2004, compared with .97 percent and
1.18 percent at the end of 2003 and 2002, respectively.
The $399.7 million decrease in total nonperforming
assets in 2004 reflected a decrease of $374.3 million in
nonperforming commercial and commercial real estate loans
and a $8.0 million decrease in nonperforming retail loans,
partially offset by an increase of $2.8 million in
nonperforming residential mortgages. The decrease in
nonperforming assets in 2004 was broad-based across most
industry sectors within the commercial loan portfolio
including capital goods, consumer-related sectors,
manufacturing and certain segments of transportation.
While airline travel has increased from a year ago, the
industry continues to be economically stressed and has had
difficulty improving cash flows from operations. Certain
health care facilities providers continue to experience
operational stress leading to some deterioration in credit
quality within that sector. While nonperforming assets are
expected to continue to decline slightly during the next few
Table 12
Nonperfor ming Assets (a)
quarters, the ongoing level of nonperforming assets is not
expected to decline much further after mid-2005.
The $225.4 million decrease in total nonperforming
assets in 2003, as compared with 2002, reflected a decrease
of $204.9 million in nonperforming commercial and
commercial real estate loans, a decrease of $11.5 million in
nonperforming residential mortgages and a $.9 million
decrease in nonperforming retail loans. The decrease in
nonperforming assets in 2003 was also broad-based across
most industry sectors within the commercial loan portfolio
including capital goods, consumer-related sectors,
manufacturing, telecommunications, and certain segments of
transportation.
At December 31, (Dollars in Millions)
2004
2003
2002
2001
2000
Commercial
Commercial ********************************
Lease financing *****************************
Total commercial *************************
Commercial real estate
Commercial mortgages **********************
Construction and development ****************
Total commercial real estate ***************
Residential mortgages **********************
Retail
Credit card *********************************
Retail leasing *******************************
Other retail *********************************
Total retail *******************************
Total nonperforming loans **************
Other real estate****************************
Other assets ********************************
Total nonperforming assets *************
Restructured loans accruing interest (b) ************
Accruing loans 90 days or more past due *********
Nonperforming loans to total loans ****************
Nonperforming assets to total loans plus other real
estate *************************************
Net interest lost on nonperforming loans ***********
Changes in Nonperforming Assets
(Dollars in Millions)
$289.5
90.6
380.1
174.6
25.3
199.9
43.3
—
—
17.2
17.2
640.5
72.2
35.7
$748.4
$ 10.2
$294.0
.51%
.59%
$ 623.5
113.3
736.8
$ 760.4
166.7
927.1
$ 526.6
180.8
707.4
177.6
39.9
217.5
40.5
—
.4
24.8
25.2
174.6
57.5
232.1
52.0
—
1.0
25.1
26.1
131.3
35.9
167.2
79.1
—
6.5
41.1
47.6
1,020.0
1,237.3
1,001.3
72.6
55.5
$1,148.1
$
18.0
$ 329.4
.86%
.97%
59.5
76.7
$1,373.5
$
1.4
$ 426.4
1.06%
1.18%
65.4
43.8
74.9
$1,120.0
$
—
$ 462.9
.88%
.98%
$
63.0
$470.4
70.5
540.9
105.5
38.2
143.7
56.9
8.8
—
15.0
23.8
765.3
61.1
40.6
$867.0
$ —
$385.2
.63%
.71%
$ 50.8
$ 42.1
$
67.4
$
Commercial and
Commercial Real Estate
Retail and
Residential Mortgages (d)
Total
Balance December 31, 2003 **********************************
$ 1,013.3
$134.8
$ 1,148.1
Additions to nonperforming assets
New nonaccrual loans and foreclosed properties ****************
Advances on loans *****************************************
Total additions ******************************************
Reductions in nonperforming assets
Paydowns, payoffs******************************************
Net sales **************************************************
Return to performing status **********************************
Charge-offs (c) *********************************************
Total reductions *****************************************
Net reductions in nonperforming assets *****************
Balance December 31, 2004 **********************************
650.7
39.0
689.7
(498.3)
(132.0)
(106.1)
(347.3)
(1,083.7)
(394.0)
$ 619.3
(a) Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due.
(b) Nonaccrual restructured loans are included in the respective nonperforming loan categories and excluded from restructured loans accruing interest.
(c) Charge-offs exclude actions for certain card products and loan sales that were not classified as nonperforming at the time the charge-off occurred.
(d) Residential mortgage information excludes changes related to residential mortgages serviced by others.
41.5
—
41.5
(24.1)
—
(15.3)
(7.8)
(47.2)
(5.7)
692.2
39.0
731.2
(522.4)
(132.0)
(121.4)
(355.1)
(1,130.9)
(399.7)
$129.1
$ 748.4
U.S. BANCORP 37
Table 13
Delinquent Loan Ratios as a Percent of Ending Loan Balances
At December 31,
90 days or more past due excluding nonperforming loans
Commercial
Commercial *******************************
Lease financing****************************
Total commercial ***********************
Commercial real estate
Commercial mortgages *********************
Construction and development **************
Total commercial real estate**************
Residential mortgages ********************
Retail
Credit card *******************************
Retail leasing******************************
Other retail********************************
Total retail *****************************
2004
2003
2002
2001
2000
.05%
.02
.05
—
—
—
.46
1.74
.08
.29
.47
.06%
.04
.06
.02
.03
.02
.61
1.68
.14
.41
.56
.14%
.10
.14
.03
.07
.04
.90
2.09
.19
.54
.72
.14%
.45
.18
.03
.02
.02
.78
2.18
.11
.74
.90
.11%
.02
.10
.07
.03
.06
.62
1.70
.20
.62
.76
Total loans *************************
.23%
.28%
.37%
.40%
.31%
At December 31,
90 days or more past due including nonperforming loans
Commercial ***********************************
Commercial real estate**************************
Residential mortgages (a)************************
Retail *****************************************
Total loans *********************************
2004
.99%
.73
.74
.51
.74%
2003
1.97%
.82
.91
.62
1.14%
2002
2.35%
.90
1.44
.79
1.43%
2001
1.71%
.68
1.79
1.03
1.28%
2000
1.13%
.60
1.23
.83
.94%
(a) Delinquent loan ratios exclude advances made pursuant to servicing agreements to Government National Mortgage Association (‘‘GNMA’’) mortgage pools whose repayments are insured
by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. Including the guaranteed amounts, the ratio of residential mortgages 90 days or more past due
was 5.19 percent and 6.07 percent at December 31, 2004 and 2003, respectively. Information prior to 2003 is not available.
The Company had $68.2 million and $58.5 million of
restructured loans as of December 31, 2004 and 2003,
respectively. Commitments to lend additional funds under
restructured loans were $11.9 million and $8.2 million as of
December 31, 2004 and 2003, respectively. Restructured
loans performing under the restructured terms beyond a
specific timeframe are reported as accruing. Of the
Company’s total restructured loans at December 31, 2004,
$10.2 million were reported as accruing.
Accruing loans 90 days or more past due totaled
$294.0 million at December 31, 2004, compared with
$329.4 million at December 31, 2003, and $426.4 million
at December 31, 2002. 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 delinquent loans to total loans declined to
.23 percent at December 31, 2004, compared with
.28 percent at December 31, 2003. Improving economic
conditions and the Company’s continued focus on
improving the credit process were the primary factors for
the favorable change from a year ago. Given the relative
level of loans 90 days or more past due, the Company does
not anticipate significant reductions in future periods.
To monitor credit risk associated with retail loans, the
Company monitors delinquency ratios in the various stages
of collection including nonperforming status.
38 U.S. BANCORP
The following table provides summary delinquency
information for residential mortgages and retail loans:
December 31
(Dollars in Millions)
Residential Mortgages
Amount
As a Percent
of Ending Loan
Balances
2004
2003
2004
2003
30-89 days *********
90 days or more ****
Nonperforming ******
$108.3
70.2
43.3
$102.9
82.5
40.5
.70%
.46
.28
.76%
.61
.30
Total **************
$221.8
$225.9
1.44%
1.68%
Retail
Credit Card
30-89 days *********
90 days or more ****
Nonperforming ******
$142.4
114.8
—
$150.9
99.5
—
2.16%
1.74
—
2.54%
1.68
—
Total **********
$257.2
$250.4
3.90%
4.22%
Retail Leasing
30-89 days *********
90 days or more ****
Nonperforming ******
$ 59.4
5.6
—
$ 78.8
8.2
.4
.83%
.08
—
1.31%
.14
.01
Total **********
$ 65.0
$ 87.4
.91%
1.45%
Other Retail
30-89 days *********
90 days or more ****
Nonperforming ******
$223.6
84.3
17.2
$311.9
110.2
24.8
.76%
.29
.05
1.15%
.41
.09
Total **********
$325.1
$446.9
1.10%
1.65%
The decline in residential mortgage delinquencies from
December 31, 2003, to December 31, 2004, reflected the
general improvement in economic conditions, collection
efforts and the effect of portfolio growth on delinquency
ratios reported on a concurrent basis. The decline in retail
loan delinquencies from a year ago, reflected improving
economic conditions as well as ongoing collection efforts,
risk management actions taken by the Company and the
effect of portfolio growth on delinquency ratios reported on
a concurrent basis.
Analysis of Loan Net Charge-Offs Total loan net charge-offs
decreased $484.6 million to $767.1 million in 2004,
compared with $1,251.7 million in 2003 and
$1,373.0 million in 2002. The ratio of total loan net
charge-offs to average loans was .63 percent in 2004,
compared with 1.06 percent in 2003 and 1.20 percent in
2002. The overall level of net charge-offs in 2004 reflected
the Company’s ongoing efforts to reduce the overall risk
profile of the organization, improved economic conditions,
higher commercial loan recoveries, refinancing by higher
risk customers with other companies and higher asset
valuations. Net charge-offs are expected to increase
modestly as the level of commercial loan recoveries declines
to more normalized levels in 2005. The improvement in net
charge-offs in 2003, compared with 2002, was due to credit
risk management initiatives taken by the Company that
improved the credit risk profile of the loan portfolio. These
initiatives along with better economic conditions resulted in
improving credit risk classifications and lower levels of
nonperforming assets and consumer loan delinquencies.
Commercial and commercial real estate loan net
charge-offs for 2004 were $195.7 million (.29 percent of
average loans outstanding), compared with $608.7 million
Table 14
Net Charge-offs as a Percent of Average Loans Outstanding
Year Ended December 31
Commercial
Commercial **********************************************
Lease financing *******************************************
Total commercial***************************************
Commercial real estate
Commercial mortgages ************************************
Construction and development******************************
Total commercial real estate *****************************
Residential mortgages ***********************************
Retail
Credit card ***********************************************
Retail leasing *********************************************
Home equity and second mortgages ************************
Other retail ***********************************************
Total retail*********************************************
2004
2003
2002
2001
2000
.29%
1.42
.43
.09
.13
.10
.20
4.14
.59
.54
1.22
1.32
1.34%
1.65
1.38
.14
.16
.14
.23
4.61
.86
.70
1.60
1.61
1.29%
2.67
1.46
.17
.11
.15
.23
4.98
.72
.74
2.10
1.85
1.62%
1.95
1.66
.21
.17
.20
.15
4.80
.65
.85
2.16
1.94
.56%
.46
.55
.03
.11
.05
.11
4.18
.41
*
1.32
1.69
Total loans (a) **************************************
.63%
1.06%
1.20%
1.31%
.70%
(a) In accordance with guidance provided in the Interagency Guidance on Certain Loans Held for Sale, loans held with the intent to sell are transferred to the Loans Held for Sale category
based on the lower of cost or fair value. At the time of transfer, the portion of the mark-to-market losses representing probable credit losses determined in accordance with policies and
methods utilized to determine the allowance for credit losses is included in net charge-offs. The remaining portion of the losses was reported separately as a reduction of the allowance for
credit losses under ‘‘Losses from loan sales /transfers.’’ Had the entire amount of the loss been reported as charge-offs, total net charge-offs would have been $1,875.8 million
(1.59 percent of average loans) for the year ended December 31, 2001.
Information not available
*
U.S. BANCORP 39
(.89 percent of average loans outstanding) in 2003 and
$679.9 million (.98 percent of average loans outstanding) in
2002. The improvement from 2003 was broad-based and
extended across most industries within the commercial loan
portfolio and reflected higher levels of commercial loan
recoveries principally within the Wholesale Banking line of
business. These higher levels of recoveries are not expected
to continue throughout 2005. The decrease in commercial
and commercial real estate loan net charge-offs in 2003,
when compared with 2002, was experienced within most
industries in the commercial portfolio. In addition, net
charge-offs related to the equipment-leasing portfolio
declined to 1.65 percent of average leases outstanding from
2.67 percent in 2002. In 2002, higher levels of net charge-
offs related to the leasing portfolio included airline and
other transportation related losses.
Retail loan net charge-offs in 2004 were $542.7 million
(1.32 percent of average loans outstanding), compared with
$616.1 million (1.61 percent of average loans outstanding)
in 2003 and $674.0 million (1.85 percent of average loans
outstanding) in 2002. Lower levels of retail loan net charge-
offs in 2004, compared with 2003, principally reflected
changes by the Company in underwriting, ongoing
collection efforts and other risk management activities. The
decline also reflected lower delinquency ratios from a year
ago as the economy continued to improve. Lower levels of
retail loan net charge-offs in 2003, compared with 2002,
were primarily due to the implementation of uniform
underwriting standards and processes across the entire
Company, improvement in ongoing collection efforts and
changes in other risk management practices. The favorable
change in credit card losses also reflected the impact of two
portfolio sales in late 2002.
The Company’s retail lending business utilizes several
distinct business processes and channels to originate retail
credit including traditional branch credit, indirect lending
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’’) participates in 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.
The following table provides an analysis of net charge-
offs as a percentage of average loans outstanding managed
by the consumer finance division, compared with traditional
branch related loans:
Year Ended December 31
(Dollars in Millions)
Consumer finance (a)
Residential mortgages ****
Home equity and second
mortgages ***********
Other retail **************
Traditional branch
Residential mortgages ****
Home equity and second
mortgages ***********
Other retail **************
Total Company
Residential mortgages ****
Home equity and second
mortgages ***********
Other retail **************
Average Loan
Amount
Percent of
Average Loans
2004
2003
2004
2003
$ 4,531
$ 3,499
.44%
.44%
2,412
414
2,350
360
2.07
5.04
2.38
4.76
$ 9,791
$ 8,197
.09%
.14%
11,628
14,007
10,889
13,270
.22
1.10
.34
1.52
$14,322
$11,696
.20%
.23%
14,040
14,421
13,239
13,630
.54
1.22
.70
1.60
(a) Consumer finance category included credit originated and managed by USBCF, as well
as home equity loans and second mortgages with a loan-to-value greater than 100
percent that were originated in the branches.
Analysis and Determination of the Allowance for Credit
Losses The allowance for loan losses provides coverage for
probable and estimable losses inherent in the 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.
40 U.S. BANCORP
Table 15
Summar y of Allowance for Credit Losses
(Dollars in Millions)
Balance at beginning of year *******************************
Charge-offs
Commercial
Commercial ***************************************
Lease financing ************************************
Total commercial *******************************
Commercial real estate
Commercial mortgages *****************************
Construction and development **********************
Total commercial real estate **********************
Residential mortgages *********************************
Retail
Credit card****************************************
Retail leasing **************************************
Home equity and second mortgages *****************
Other retail ****************************************
Total retail *************************************
Total charge-offs ****************************
Recoveries
Commercial
Commercial ***************************************
Lease financing ************************************
Total commercial *******************************
Commercial real estate
Commercial mortgages *****************************
Construction and development **********************
Total commercial real estate **********************
Residential mortgages *********************************
Retail
Credit card****************************************
Retail leasing **************************************
Home equity and second mortgages *****************
Other retail ****************************************
Total retail *************************************
Total recoveries *****************************
Net Charge-offs
Commercial
Commercial ***************************************
Lease financing ************************************
Total commercial *******************************
Commercial real estate
Commercial mortgages *****************************
Construction and development **********************
Total commercial real estate **********************
Residential mortgages *********************************
Retail
Credit card****************************************
Retail leasing **************************************
Home equity and second mortgages *****************
Other retail ****************************************
Total retail *************************************
Total net charge-offs *************************
Provision for credit losses *********************************
Losses from loan sales /transfers (a)*************************
Acquisitions and other changes ****************************
Balance at end of year ************************************
2004
$2,368.6
2003
$2,422.0
2002
$2,457.3
2001
$1,786.9
2000
$1,710.3
243.5
110.6
354.1
29.1
12.5
41.6
32.5
281.5
49.0
89.6
225.2
645.3
555.6
139.3
694.9
43.9
13.0
56.9
30.3
282.1
57.0
105.0
267.9
712.0
559.2
188.8
748.0
40.9
8.8
49.7
23.1
304.9
45.2
107.9
311.9
769.9
779.0
144.4
923.4
49.5
12.6
62.1
15.8
294.1
34.2
112.7
329.1
770.1
319.8
27.9
347.7
15.8
10.3
26.1
13.7
235.8
14.8
*
379.5
630.1
1,073.5
1,494.1
1,590.7
1,771.4
1,017.6
143.9
41.5
185.4
11.1
3.5
14.6
3.8
29.6
9.6
13.8
49.6
102.6
306.4
99.6
69.1
168.7
18.0
9.0
27.0
28.7
251.9
39.4
75.8
175.6
542.7
767.1
669.6
—
(1.8)
70.0
55.3
125.3
15.8
2.0
17.8
3.4
27.3
7.0
12.1
49.5
95.9
67.4
39.9
107.3
9.1
1.4
10.5
4.0
24.6
6.3
10.6
54.4
95.9
242.4
217.7
485.6
84.0
569.6
28.1
11.0
39.1
26.9
254.8
50.0
92.9
218.4
616.1
1,251.7
1,254.0
—
(55.7)
491.8
148.9
640.7
31.8
7.4
39.2
19.1
280.3
38.9
97.3
257.5
674.0
1,373.0
1,349.0
—
(11.3)
60.6
30.4
91.0
9.1
.8
9.9
3.2
23.4
4.5
12.9
80.0
120.8
224.9
718.4
114.0
832.4
40.4
11.8
52.2
12.6
270.7
29.7
99.8
249.1
649.3
1,546.5
2,528.8
(329.3)
17.4
64.0
7.2
71.2
10.8
2.6
13.4
1.3
27.5
2.0
*
76.8
106.3
192.2
255.8
20.7
276.5
5.0
7.7
12.7
12.4
208.3
12.8
*
302.7
523.8
825.4
828.0
—
74.0
$2,269.3
$2,368.6
$2,422.0
$2,457.3
$1,786.9
Components
Allowance for loan losses ******************************
Liability for unfunded credit commitments (b)**************
Total allowance for credit losses ******************
Allowance for credit losses as a percentage of
Period-end loans **************************************
Nonperforming loans **********************************
Nonperforming assets *********************************
Net charge-offs (a) ************************************
$2,080.4
188.9
$2,269.3
$2,183.6
185.0
$2,368.6
1.80%
354
303
296
2.00%
232
206
189
2.08%
196
176
176
2.15%
245
219
159
1.46%
233
206
216
(a) In accordance with guidance provided in the Interagency Guidance on Certain Loans Held for Sale, loans held with the intent to sell are transferred to the Loans Held for Sale category
based on the lower of cost or fair value. At the time of the transfer, the portion of the mark-to-market losses representing probable credit losses determined in accordance with policies
and methods utilized to determine the allowance for credit losses is included in net charge-offs. The remaining portion of the losses was reported separately as a reduction of the
allowance for credit losses under ‘‘Losses from loan sales /transfers.’’ Had the entire amount of the loss been reported as charge-offs, total net charge-offs would have been
$1,875.8 million for the year ended 2001. Additionally, the allowance as a percent of net charge-offs would have been 131 percent for the year ended December 31, 2001.
(b) During 2004, the Company reclassified the portion of its allowance for credit losses related to commercial off-balance sheet loan commitments and letters of credit to a separate liability
account included in other liabilities in the Consolidated Balance Sheet. Amounts for 2003 have been restated.
Information not available
*
U.S. BANCORP 41
Table 16
Elements of the Allowance for Credit Losses
December 31 (Dollars in Millions)
2004
2003
2002
2001
2000
2004
2003
2002
2001
2000
Allowance Amount
Allowance as a Percent of Loans
Commercial
Commercial******************************** $ 663.6
Lease financing ****************************
105.8
$ 696.1
90.4
$ 776.4
107.6
$1,068.1
107.5
$ 418.8
17.7
1.88% 2.08% 2.12% 2.64% .89%
2.01
2.13
1.81
1.84
.31
Total commercial ************************
769.4
786.5
884.0
1,175.6
436.5
1.92
2.04
2.11
2.54
.83
Commercial real estate
Commercial mortgages**********************
Construction and development ***************
Total commercial real estate **************
Residential mortgages *********************
Retail
Credit card ********************************
Retail leasing*******************************
Home equity and second mortgages **********
Other retail ********************************
Total retail ******************************
131.1
40.2
171.3
33.1
283.2
43.8
87.9
195.4
610.3
169.7
58.8
228.5
33.3
267.9
47.1
100.5
234.8
650.3
152.9
53.5
206.4
34.2
272.4
44.0
114.7
268.6
699.7
176.6
76.4
253.0
21.9
295.2
38.7
88.6
282.8
705.3
42.7
17.7
60.4
11.6
265.6
27.2
107.7
250.3
.65
.55
.62
.22
4.29
.61
.59
1.34
.82
.89
.84
.25
4.52
.78
.76
1.70
.75
.82
.77
.35
4.81
.77
.85
2.10
.94
1.16
1.00
.28
5.01
.79
.72
2.39
.22
.25
.23
.12
4.42
.65
.90
2.16
650.8
1.41
1.67
1.86
2.02
1.93
Total allocated allowance *****************
Available for other factors*****************
1,584.1
685.2
1,698.6
670.0
1,824.3
597.7
2,155.8
301.5
1,159.3
627.6
1.25
.54
1.43
.57
1.57
.51
1.89
.26
.95
.51
Total allowance ******************************** $2,269.3
$2,368.6
$2,422.0
$2,457.3
$1,786.9
1.80% 2.00% 2.08% 2.15% 1.46%
At December 31, 2004, the allowance for credit losses
was $2,269.3 million (1.80 percent of loans). This compares
with an allowance of $2,368.6 million (2.00 percent of
loans) at December 31, 2003, and $2,422.0 million
(2.08 percent of loans) at December 31, 2002. The ratio of
the allowance for credit losses to nonperforming loans was
354 percent at year-end 2004, compared with 232 percent
at year-end 2003 and 196 percent at year-end 2002. The
ratio of the allowance for credit losses to loan net charge-
offs was 296 percent at year-end 2004, compared with
189 percent at year-end 2003 and 176 percent at year-end
2002. Management determined that the allowance for credit
losses was adequate at December 31, 2004.
Several factors were taken into consideration in
evaluating the allowance for credit losses in 2004, including
the improving credit risk profile of the portfolios and
declining net charge-offs during the period, the lower level
of nonperforming assets and relative size of accruing loans
90 days or more past due and improving delinquency ratios
in most loan categories compared with December 31, 2003.
Management also considered the uncertainty related to
certain industry sectors, including the transportation sector,
the extent of credit exposure to highly leveraged enterprise-
value borrowers within the portfolio. In addition,
concentration risks associated with commercial real estate
and the mix of loans, including credit cards, loans
originated through the consumer finance division and lower
residential mortgages balances, and their relative credit risk
was evaluated compared with other banks. Finally, the
Company considered the improving economic trends,
including improving corporate earnings, changes in
42 U.S. BANCORP
unemployment rates, the level of bankruptcies and general
economic indicators. 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 16 shows the
amount of the allowance for credit losses by portfolio
category.
The allowance recorded for commercial and
commercial real estate loans is based on a regular review of
individual credit relationships. The Company’s risk rating
process is an integral component of the methodology
utilized in determining 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 also conducted quarterly to
assess the exposure for credits with similar risk
characteristics. During 2004, the Company enhanced the
process of determining specific allowances for commercial
and commercial real estate credit facilities by further
segmenting these portfolios based upon risk characteristics
and historical performance. Additionally, the Company
reassessed the historical timeframe considered in developing
inherent loss ratios to more effectively consider the
implications of the last business cycle. These enhancements
had the effect of increasing inherent loss ratios for higher
risk leveraged financings and transportation leases while
reducing inherent loss rates for commercial real estate and
traditional corporate lending. On a composite basis,
inherent loss rates for commercial credit facilities increased
slightly for most risk rating categories relative to a year ago.
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 and
commercial real estate loan portfolios, including impaired
commercial and commercial real estate loans, was
$940.7 million at December 31, 2004, compared with
$1,015.0 million and $1,090.4 million at December 31,
2003 and 2002, respectively. The decline in the allowance
for commercial and commercial real estate loans of
$74.3 million reflected a $143.1 million reduction due to
improvements in the risk classifications, offset somewhat by
the impact of growth in the portfolios and a $68.8 million
increase related to changes in loss severity rates. The
increase in loss severity rates is driven by enhancements to
the Company’s migration analysis offset somewhat by
recent loss experience.
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 $33.1 million at December 31, 2004,
compared with $33.3 million and $34.2 million at
December 31, 2003 and 2002, respectively. The slight
decrease in the allowance for the residential mortgage
portfolio year-over-year was primarily due to lower
expected loss severity resulting from the more uniform
underwriting processes and standards associated with the
portfolio, partially offset by inherent losses due to growth
in the first lien home equity portfolio during 2004. The
allowance established for retail loans was $610.3 million at
December 31, 2004, compared with $650.3 million and
$699.7 million at December 31, 2003 and 2002,
respectively. The decline in the allowance for the retail
portfolio in 2004 reflected improved credit quality favorably
impacting inherent loss ratios and declining delinquency
trends, partially offset by the impact of portfolio growth.
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, and maintains an ‘‘allowance
available for other factors’’ that is not allocated to a specific
loan category. The statistical analysis attempts to measure
the extent of imprecision 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. Based on
this process, the amount of the allowance available for
other factors was $685.2 million at December 31, 2004
compared with $670.0 million at December 31, 2003 and
$597.7 million at December 31, 2002. At December 31,
2004, approximately $500 million was related to estimated
imprecision as described above. Of this amount, commercial
and commercial real estate represented approximately
72 percent while residential and retail loans represented
approximately 28 percent. The remaining allowance
available for other factors of $185 million was related to
concentration risk, including risks associated with the
sluggish airline industry, relative size of the consumer
finance and commercial real estate portfolios and highly
leveraged enterprise-value credits and other qualitative
factors. Given the many subjective factors affecting the
credit portfolio, changes in the allowance for other factors
may not directly coincide with changes in the risk ratings or
the credit portfolio.
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. Refer to Note 1 of the Notes to
Consolidated Financial Statements for accounting policies
related to the allowance for credit losses.
Residual Risk Management The Company manages its risk
to changes in the residual value of leased assets through
disciplined residual valuation setting at the inception of a
U.S. BANCORP 43
lease, diversification of its leased assets, regular asset
valuation reviews and monitoring of residual value gains or
losses upon the disposition of assets. Commercial lease
originations are subject to the same well-defined
underwriting standards referred to in the ‘‘Credit Risk
Management’’ section which includes an evaluation of the
residual risk. Retail lease residual risk is mitigated further
by originating longer-term vehicle leases and effective
end-of-term marketing of off-lease vehicles. Also, to reduce
the financial risk of potential changes in vehicle residual
values, the Company maintains residual value insurance.
The catastrophic insurance maintained by the Company
provides for the potential recovery of losses on individual
vehicle sales in an amount equal to the difference between:
(a) 105 percent or 110 percent of the average wholesale
auction price for the vehicle at the time of sale and (b) the
vehicle residual value specified by the Automotive Lease
Guide (an authoritative industry source) at the inception of
the lease. The potential recovery is calculated for each
individual vehicle sold in a particular policy year and is
reduced by any gains realized on vehicles sold during the
same period. The Company will receive claim proceeds
under this insurance program if, in the aggregate, there is a
net loss for such period. In addition, the Company obtains
separate residual value insurance for all vehicles at lease
inception where end of lease term settlement is based solely
on the residual value of the individual leased vehicles.
Under this program, the potential recovery is computed for
each individual vehicle sold and does not allow the
insurance carrier to offset 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 $4.0 billion of retail leasing residuals at
December 31, 2004, compared with $3.3 billion at
December 31, 2003. The Company monitors concentrations
of leases by manufacturer and vehicle ‘‘make and model.’’
At year-end 2004, no vehicle-type concentration exceeded
five percent of the aggregate 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, 2004, the weighted-average origination term
of the portfolio was 52 months. During the period from
1998 through 2002, the used vehicle market experienced
pricing stress that adversely impacted lease residual
valuations. Several factors contributed to this competitive
44 U.S. BANCORP
business cycle. Aggressive leasing programs by automobile
manufacturers and competitors within the banking industry
included a marketing focus on monthly lease payments,
enhanced residuals at lease inception, shorter-term leases
and low mileage leases. These practices created a cyclical
oversupply of certain off-lease vehicles causing significant
declines in used vehicle prices during that period. Since late
2002, residual values for used cars have improved.
Economic pressures during 2001 and 2002 moderated new
car sales volumes to some degree. As a result, production
levels declined from record levels in 2000, reducing the
supply of newer model years. Another factor that has
affected residual values is the growth of ‘‘certified’’ used car
programs. Certified cars are low mileage, newer model
vehicles that have been inspected, reconditioned, and
usually have a warranty program. The Company’s exposure
to residual values has benefited from certified car programs
that receive premium pricing from dealers at auction. In
addition, competition within the new car market continues
to cause manufacturers to offer a record number of
different makes and models in an attempt to target smaller
segments of the consumer market. Also, consumers are
purchasing vehicles with more content as former optional
equipment becomes standard on more vehicles. These trends
tend to favorably impact vehicle prices. Within the new car
market, higher levels of incentive spending continue to exist.
While this supports higher sales volumes, certain vehicle
models will continue to see some downward pressure on the
initial residual values of new leases, reducing the risk of
end-of-term residual valuation losses as lessees purchase off-
lease vehicles. Within vehicle categories, residual values for
automobiles have performed better than trucks,
experiencing an increase in average wholesale prices of
5.2% during 2004, while trucks have seen a decline of
1.6%. The decline in truck values is attributed to a market
decline in demand for full size sport utility vehicles. These
models have experienced price declines due to increased
competition in the segment as well as the impact of higher
gas prices on consumer buying patterns. These factors,
along with the mix of the Company’s lease residual
portfolio have reduced the exposure to retail lease residual
impairments relative to a year ago.
At December 31, 2004, the commercial leasing
portfolio had $769 million of residuals, compared with
$816 million at December 31, 2003. At year-end 2004,
lease residuals related to trucks and other transportation
equipment were 29.8 percent of the total residual portfolio.
Railcars represented 16.5 percent of the aggregate portfolio,
while aircraft and business and office equipment were
16.3 percent and 12.7 percent, respectively. No other
significant concentrations of more than 10 percent existed
at December 31, 2004. In 2004, reduced airline travel and
higher fuel costs continued to adversely impact aircraft and
transportation equipment lease residual values.
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 manage 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 24 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, a
significant risk exists related to changes in interest rates. To
minimize the volatility of net interest income and of the
market value of assets and liabilities, the Company manages
its exposure to changes in interest rates through asset and
liability management activities within guidelines established
by its Asset Liability Policy Committee (‘‘ALPC’’) and
approved by the Board of Directors. ALPC has the
responsibility for approving and ensuring compliance with
ALPC management policies, including interest rate risk
exposure. The Company uses Net Interest Income
Simulation Analysis and Market Value of Equity Modeling
for measuring and analyzing consolidated interest rate risk.
Net Interest Income Simulation Analysis One of the
primary tools used to measure interest rate risk and the
effect of interest rate changes on rate sensitive income and
net interest income is simulation analysis. The monthly
analysis incorporates substantially all of the Company’s
assets and liabilities and off-balance sheet instruments,
together with forecasted changes in the balance sheet and
assumptions that reflect the current interest rate
environment. Through these simulations, management
estimates the impact on interest rate sensitive income of a
300 basis point upward or downward gradual change of
market interest rates over a one-year period. The
simulations also estimate the effect of immediate and
sustained parallel shifts in the yield curve of 50 basis points
as well as the effect of immediate and sustained flattening
U.S. BANCORP 45
Sensitivity of Net Interest Income and Rate Sensitive Income
December 31, 2004
December 31, 2003
Down 50
Immediate
Up 50
Immediate
Down 300
Gradual
Up 300
Gradual
Down 50
Immediate
Up 50
Immediate
Down 300
Gradual
Up 300
Gradual
Net interest income ******************
Rate sensitive income ****************
(.49)%
(.40)%
.04%
(.13)%
*%
*%
(.19)%
(.69)%
1.30%
.74%
.19%
.01%
*%
*%
(.02)%
(.54)%
* Given the current level of interest rates, a downward 300 basis point scenario can not be computed.
or steepening of the yield curve. These simulations include
assumptions about how the balance sheet is likely to be
affected by changes in loan and deposit growth.
Assumptions are made to project interest rates for new
loans and deposits based on historical analysis,
management’s outlook and repricing strategies. These
assumptions are validated on a periodic basis. A sensitivity
analysis is provided for key variables of the simulation. The
results are reviewed by ALPC monthly and are used to
guide hedging strategies. ALPC policy guidelines limit the
estimated change in interest rate sensitive income to
5.0 percent of forecasted interest rate sensitive income over
the succeeding 12 months.
The table above summarizes the interest rate risk of net
interest income and rate sensitive income based on forecasts
over the succeeding 12 months. At December 31, 2004, the
Company’s overall interest rate risk position was
substantively neutral to changes in interest rates. Rate
sensitive income includes net interest income as well as
other income items that are sensitive to interest rates,
including asset management fees, mortgage banking and the
impact from compensating deposit balances. 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. At December 31, 2004 and 2003, the
Company was within its policy guidelines.
Market Value of Equity Modeling The Company also utilizes
the market value of equity as a measurement tool in
managing interest rate sensitivity. The market value of
equity measures the degree to which the market values of
the Company’s assets and liabilities and off-balance sheet
instruments will change given a change in interest rates.
ALPC guidelines limit the change in market value of equity
in a 200 basis point parallel rate shock to 15 percent of the
market value of equity assuming interest rates at
December 31, 2004. The up 200 basis point scenario
resulted in a 2.7 percent decrease in the market value of
equity at December 31, 2004, compared with a 3.1 percent
decrease at December 31, 2003. The down 200 basis point
scenario resulted in a 4.2 percent decrease in the market
value of equity at December 31, 2004. Given the low level
46 U.S. BANCORP
of interest rates, the down 200 basis point scenario was not
computed for December 31, 2003. ALPC reviews other
down rate scenarios to evaluate the impact of falling
interest rates. The down 100 basis point scenario resulted in
a .7 percent decrease at December 31, 2004, and a
1.3 percent increase at December 31, 2003. At
December 31, 2004 and 2003, the Company was within its
policy guidelines.
The valuation analysis is dependent upon certain key
assumptions about the nature of indeterminate maturity of
assets and liabilities. 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 hedging strategies. The results of the valuation
analysis as of December 31, 2004, were well within policy
guidelines. 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 1.68 years at December 31, 2004,
compared with 1.91 years at December 31, 2003. The
duration of liabilities was 2.02 years at December 31, 2004,
compared with 2.18 years at December 31, 2003. After
giving effect to the Company’s derivative positions, the
estimated duration of equity was .12 years at December 31,
2004, compared with 1.35 years at December 31, 2003.
The duration of equity measure shows that sensitivity of the
market value of equity of the Company was relatively
neutral to changes in interest rates.
Use of Derivatives to Manage Interest Rate Risk In the
ordinary course of business, the Company enters into
derivative transactions to manage its interest rate,
prepayment and foreign currency risks (‘‘asset and liability
management positions’’) and to accommodate the business
requirements of its customers (‘‘customer-related
positions’’). To manage its interest rate risk, the Company
may enter into interest rate swap agreements and interest
rate options such as caps and floors. Interest rate swaps
involve the exchange of fixed-rate and variable-rate
payments without the exchange of the underlying notional
amount on which the interest payments are calculated.
Interest rate caps protect against rising interest rates while
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,
Table 17
Derivative Positions
Asset and Liability Management Positions
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
December 31, 2004
(Dollars in Millions)
Interest rate contracts
Receive fixed/pay floating swaps
Notional amount ********************
Weighted-average
Receive rate ********************
Pay rate ************************
Pay fixed/receive floating swaps
Notional amount ********************
Weighted-average
Receive rate ********************
Pay rate ************************
Futures and forwards *******************
Options
Written ****************************
Maturing
2005
2006
2007
2008
2009
Thereafter
Total
Weighted-
Average
Remaining
Maturity
In Years
Fair
Value
$2,750
$2,750
$3,520
$5,000
$1,750
$4,300
$20,070
$379
5.25
3.75%
2.28
3.67%
2.36
3.76%
2.39
3.78%
2.31
4.62%
2.39
6.29%
2.74
4.37%
2.42
$5,425
$2,950
$2,400
$ — $ —
$ —
$10,775
$ 56
1.42
2.38%
2.21
$2,262
2.24%
2.64
—%
—
$ — $ — $ — $ —
2.47%
3.36
—%
—
—%
—
$ —
2.36%
2.58
$ 2,262
$ (4)
1,039
20
—
—
—
—
1,059
$
1
Foreign exchange forward contracts**
$ 314
$ — $ — $ — $ —
Equity contracts ***********************
$ — $ — $ — $ — $
53
$ —
$ —
$
$
314
53
$ (12)
$
4
.12
.15
.04
4.29
Customer-related Positions
December 31, 2004
(Dollars in Millions)
Interest rate contracts
Receive fixed/pay floating swaps
Notional amount***********************
Pay fixed/receive floating swaps
Notional amount***********************
Options
Purchased****************************
Written *******************************
Risk participation agreements
Purchased****************************
Written *******************************
Foreign exchange rate contracts
Swaps and forwards
Buy**********************************
Sell **********************************
$1,957
1,917
$
Options
Purchased****************************
Written *******************************
77
77
Maturing
2005
2006
2007
2008
2009
Thereafter
Total
Weighted-
Average
Remaining
Maturity
In Years
Fair
Value
$ 671
$1,069
$1,018
$1,171
$613
$2,166
$6,708
$ 76
4.67
671
1,067
1,006
1,159
613
2,166
6,682
(40)
4.67
91
91
27
16
242
242
5
22
47
54
—
—
362
362
32
—
34
35
—
—
$
157
157
9
25
7
8
—
—
$
72
72
21
17
2
1
—
—
$
175
175
43
4
1,099
1,099
137
84
$ — $2,047
2,015
—
—
—
77
77
7
(7)
—
—
$ 80
(76)
1
(1)
3.00
3.00
7.13
2.93
.31
.33
.59
.59
U.S. BANCORP 47
losses are recorded in trading account gains or losses or
mortgage banking revenue.
accumulated other comprehensive income into earnings
during the next 12 months is $65.8 million.
By their nature, derivative instruments are subject to
Gains or losses on customer-related derivative positions
market risk. The Company does not utilize derivative
instruments for speculative purposes. Of the Company’s
$34.5 billion of total notional amount of asset and liability
management derivative positions at December 31, 2004,
$32.1 billion was designated as either fair value or cash
flow hedges. The cash flow hedge positions are interest rate
swaps that hedge the forecasted cash flows from the
underlying variable-rate LIBOR loans and floating-rate debt.
The fair value hedges are primarily interest rate contracts
that hedge the change in fair value related to interest rate
changes of underlying fixed-rate debt and subordinated
obligations. In addition, 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. Related to its mortgage banking
operations, the Company held $1.1 billion of forward
commitments to sell mortgage loans and $1.0 billion of
unfunded mortgage loan commitments 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 17.
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 are
credit derivatives that 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, 2004, the Company had
$113.4 million in accumulated other comprehensive income
related to unrealized gains on derivatives classified as cash
flow hedges. The unrealized gains 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 estimated amount of gain to be reclassified from
48 U.S. BANCORP
were not material in 2004. The change in fair value of
forward commitments attributed to hedge ineffectiveness
recorded in noninterest income was an increase of
$.7 million in 2004. The change in the fair value of all
other asset and liability management derivative positions
attributed to hedge ineffectiveness was not material in 2004.
Beginning in the second quarter of 2004, the Company
entered 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 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 2004 was not material.
Table 17 summarizes information on the Company’s
derivative positions at December 31, 2004. Refer to Notes 1
and 22 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.
Business activities that contribute to market risk include,
among other things, proprietary trading and foreign
exchange positions. Value at Risk (‘‘VaR’’) is a key measure
of market risk for the Company. Theoretically, VaR
represents the maximum amount that the Company has
placed at risk of loss, with a ninety-ninth percentile degree
of confidence, to adverse market movements in the course
of its risk taking activities.
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 VaR limit was $20 million at December 31,
2004 and $40 million at December 31, 2003. The market
valuation risk inherent in its customer-based derivative
trading, mortgage banking pipeline and foreign exchange, as
estimated by the VaR analysis, was $1.8 million at
Table 18
Debt Ratings
U.S. Bancorp
Short-term borrowings *****************************************************************
Senior debt and medium-term notes *****************************************************
Subordinated debt*********************************************************************
Preferred stock************************************************************************
Commercial paper *********************************************************************
U.S. Bank National Association
Short-term time deposits ***************************************************************
Long-term time deposits ***************************************************************
Bank notes ***************************************************************************
Subordinated debt*********************************************************************
Commercial paper *********************************************************************
Moody’s
Standard &
Poor’s
Aa2
Aa3
A1
P–1
P–1
Aa1
Aa1/P–1
Aa2
P–1
A+
A
A–
A–1
A–1+
AA–
AA–/A–1+
A+
A–1+
Fitch
F1+
AA–
A+
A+
F1+
F1+
AA
AA–/F1+
A+
F1+
December 31, 2004, and $1.5 million at December 31,
2003.
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 banks are members of various Federal Home
Loan Banks (‘‘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- 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 more 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 September 27, 2004, Fitch Ratings upgraded
the Company’s senior long-term debt rating to ‘‘AA-’’ and
raised the Company’s short-term debt rating to ‘‘F1+’’. The
long-term ratings of U.S. Bank National Association were
upgraded to ‘‘AA’’ from ‘‘AA-’’. On January 18, 2005,
Moody’s Investors Service upgraded the Company’s senior
long-term debt rating to ‘‘Aa2’’ and U.S. Bank National
Association’s long-term debt and deposit ratings to ‘‘Aa1’’.
At January 18, 2005, the credit ratings outlook for the
Company was considered ‘‘Stable’’ by Moody’s Investors
Service, Standard & Poor’s and Fitch Ratings. The debt
ratings noted in Table 18, updated for the Moody’s January
of 2005 upgrade, reflect the rating agencies’ recognition of
the strong, consistent financial performance of the Company
and the quality of its balance sheet.
The parent company’s routine funding requirements
consist primarily of operating expenses, dividends 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. On April 1, 2003, USB Capital II, a subsidiary of
U.S. Bancorp, redeemed 100 percent, or $350 million, of its
7.20 percent Trust Preferred Securities.
At December 31, 2004, parent company long-term debt
outstanding was $6.9 billion, compared with $7.9 billion at
December 31, 2003. The change in long-term debt during
2004 was driven by medium-term note maturities of
$.8 billion and fixed-rate subordinated note prepayments of
$.1 billion. Total parent company debt scheduled to mature
U.S. BANCORP 49
in 2005 is $1.3 billion. These debt obligations may be met
through medium-term note 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 was
approximately $1.2 billion at December 31, 2004. For
further information, see Note 25 of the Notes to
Consolidated Financial Statements.
Refer to Table 19 for further information on significant
contractual obligations at December 31, 2004.
Off-Balance Sheet Arrangements Off-balance sheet
arrangements include any contractual arrangement to which
an unconsolidated entity is a party, under which the
Company has an obligation to provide credit or liquidity
enhancements or market risk support. Off-balance sheet
arrangements include certain defined guarantees, asset
securitization trusts and conduits. Off-balance sheet
arrangements also include any obligation under a variable
interest held by an unconsolidated entity that provides
financing, liquidity, credit enhancement or market risk
support.
In the ordinary course of business, the Company enters
into an array of commitments to extend credit, letters of
credit, lease commitments and various forms of guarantees
that may be considered off-balance sheet arrangements. The
nature and extent of these arrangements are provided in
Note 24 of the Notes to Consolidated Financial Statements.
Asset securitization and conduits 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 utilizes its credit risk management systems to
evaluate the credit quality of underlying assets and regularly
forecasts cash flows to evaluate any potential impairment of
Table 19
Contractual Obligations
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 to
which it transferred high-grade investment securities, funded
by the issuance of commercial paper. The conduit held
assets of $5.7 billion at December 31, 2004, and
$7.3 billion at December 31, 2003. These investment
securities include primarily (i) private label asset-backed
securities, which are insurance ‘‘wrapped’’ by AAA/Aaa-
rated monoline insurance companies and (ii) government
agency mortgage-backed securities and collateralized
mortgage obligations. The conduit had commercial paper
liabilities of $5.7 billion at December 31, 2004, and
$7.3 billion at December 31, 2003. 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
$32.4 million and $47.3 million at December 31, 2004 and
2003, respectively. In addition, the Company recorded at
fair value its retained residual interest in the investment
securities conduit of $56.8 million and $89.5 million at
December 31, 2004 and 2003, respectively.
The Company also has an asset-backed securitization
to fund an unsecured small business credit product. The
unsecured small business credit securitization trust held
assets of $375.3 million at December 31, 2004, of which
the Company retained $85.0 million of subordinated
securities and a residual interest-only strip of $36.1 million.
This compared with $497.5 million in assets at
December 31, 2003, of which the Company retained
$112.4 million of subordinated securities and a residual
(Dollars in Millions)
Contractual Obligations
Long-term debt (a) **************
Capital leases ******************
Operating leases****************
Purchase obligations ************
Benefit obligations (b) ***********
One Year
or Less
$11,932
8
198
146
43
Over One
Through
Three Years
$12,128
14
351
125
85
Payments Due By Period
Over Three
Through
Five Years
$3,239
12
273
28
89
Over Five
Years
$7,440
33
596
—
223
Total
$34,739
67
1,418
299
440
(a) 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.
(b) Amounts only include obligations related to the unfunded non-qualified pension plan and post-retirement medical plans.
50 U.S. BANCORP
interest-only strip of $34.4 million. The securitization trust
issued asset-backed variable funding notes in various
tranches. The Company provides credit enhancement in the
form of subordinated securities and reserve accounts. The
Company’s risk, primarily from losses in the underlying
assets, was considered in determining the fair value of the
Company’s retained interests in this securitization. The
Company recognized income from subordinated securities,
an interest-only strip and servicing fees from this
securitization of $33.2 million during 2004 and
$29.8 million during 2003. The unsecured small business
credit securitization held average assets of $438.9 million
and $571.4 million in 2004 and 2003, 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 our shareholders through a combination of dividends and
share repurchases. In keeping with this target, the Company
returned 109 percent of earnings in 2004. 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 $19.5 billion at December 31,
2004, compared with $19.2 billion at December 31, 2003.
The increase was the result of corporate earnings and
Table 20
Regulator y Capital Ratios
At December 31 (Dollars in Millions)
option exercises, offset primarily by the payment of
dividends and the repurchase of common stock.
On December 21, 2004, the Company increased its
dividend rate per common share by 25.0 percent, from
$.24 per quarter to $.30 per quarter. On December 16,
2003, the Company increased its dividend rate per common
share by 17.1 percent, from $.205 per quarter to $.24 per
quarter. On March 12, 2003, the Company increased its
dividend rate per common share by 5.1 percent, from
$.195 per quarter to $.205 per quarter.
On December 18, 2001, the Board of Directors
approved an authorization to repurchase 100 million shares
of common stock through 2003. In 2003, the Company
repurchased 7.0 million shares of common stock under the
plan, which expired in 2003. On December 16, 2003, the
Board of Directors approved an authorization to
repurchase 150 million shares of common stock over the
following 24 months. During 2003, the Company
purchased 8.0 million shares under the December 2003
plan. The average price paid for the 15.0 million shares
repurchased during 2003 was $27.84 per share. In 2004,
the Company repurchased 88.8 million shares of common
stock under the December 2003 plan. On December 21,
2004, the Board of Directors approved an authorization to
repurchase 150 million shares of common stock during the
next 24 months. This new authorization replaces the
December 16, 2003 authorization. In 2004, the Company
purchased 5.0 million shares of common stock under the
plan. The average price paid for the 93.8 million shares
repurchased during 2004 was $28.34 per share. For a
complete analysis of activities impacting shareholders’
U.S. Bancorp
Tangible common equity ***********************************************************************************
As a percent of tangible assets **************************************************************************
Tier 1 capital *********************************************************************************************
As a percent of risk-weighted assets *********************************************************************
As a percent of adjusted quarterly average assets (leverage ratio) ********************************************
Total risk-based capital ************************************************************************************
As a percent of risk-weighted assets *********************************************************************
Bank Subsidiaries
U.S. Bank National Association
Tier 1 capital***************************************************************************************
Total risk-based capital ******************************************************************************
Leverage ******************************************************************************************
U.S. Bank National Association ND
Tier 1 capital***************************************************************************************
Total risk-based capital ******************************************************************************
Leverage ******************************************************************************************
Bank Regulatory Capital Requirements
Tier 1 capital***************************************************************************************
Total risk-based capital ******************************************************************************
Leverage ******************************************************************************************
2004
2003
$11,950
$11,858
6.4%
6.5%
$14,720
$14,623
8.6%
7.9%
$22,352
13.1%
9.1%
8.0%
$21,710
13.6%
6.5%
10.9
5.9
12.7%
17.2
10.8
6.6%
10.8
6.3
13.1%
18.0
11.0
Minimum
Well-
Capitalized
4.0%
8.0
4.0
6.0%
10.0
5.0
U.S. BANCORP 51
equity and capital management programs, refer to Note 17
of the Notes to Consolidated Financial Statements.
The following table provides a detailed analysis of all
shares repurchased during the fourth quarter of 2004:
Time Period
Number of
Shares
Purchased
Average
Price Paid
per Share
Remaining Shares
Available to be
Purchased
October (a) ***********
November (a) *********
December (b) *********
4,316,098
6,044,285
9,345,786
$28.74
29.74
30.53
Total *************
19,706,169
$29.90
63,615,584
57,571,299
144,959,788
144,959,788
(a) All shares purchased during October and November of 2004 were purchased under
the publicly announced December 16, 2003 repurchase authorization.
(b) For the month of December 5.0 million shares were purchased under the publicly
announced December 21, 2004 authorization and 4.3 million shares were purchased
under the publicly announced December 16, 2003 authorization.
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. As
of December 31, 2004, the Company’s Tier 1 capital, total
risk-based capital, and Tier 1 leverage ratio were
8.6 percent, 13.1 percent, and 7.9 percent, respectively.
These ratios compare to 9.1 percent, 13.6 percent, and
8.0 percent, respectively, as of December 31, 2003. All
regulatory ratios, at both the bank and bank holding
company level, continue to be in excess of stated ‘‘well-
capitalized’’ requirements.
The Company uses tangible common equity expressed
as a percent of tangible common assets as an additional
measure of its capital. At December 31, 2004, the
Company’s tangible common equity ratio was 6.4 percent,
compared with 6.5 percent at year-end 2003. Table 20
provides a summary of capital ratios as of December 31,
2004 and 2003, including Tier 1 and total risk-based
capital ratios, as defined by the regulatory agencies.
F O U RT H Q U A RT E R S U M M A RY
The Company reported net income of $1,056.0 million for
the fourth quarter of 2004, or $.56 per diluted share,
compared with $977.0 million, or $.50 per diluted share,
for the fourth quarter of 2003. Return on average assets
and return on average equity were 2.16 percent and
21.2 percent, respectively, for the fourth quarter of 2004,
compared with returns of 2.05 percent and 19.4 percent,
respectively, for the fourth quarter of 2003. The Company’s
results for the fourth quarter of 2004 improved over the
fourth quarter of 2003, primarily due to lower credit costs
52 U.S. BANCORP
and growth in fee-based products and services. Net income
from continuing operations was $1,056.0 million, or
$.56 per diluted share, compared with $970.3 million, or
$.50 per diluted share for the fourth quarter of 2003,
representing an 8.8 percent annual growth rate. Net income
for the fourth quarter of 2003 also included after-tax
merger and restructuring-related items of $5.0 million
($7.6 million on a pre-tax basis).
Total net revenue, on a taxable-equivalent basis, was
$3,235.0 million for the fourth quarter of 2004, compared
with $3,113.3 million for the fourth quarter of 2003, an
increase of $121.7 million (3.9 percent) from a year ago.
The increase reflected growth in the majority of fee-based
revenue categories, particularly in payment processing
revenue. The expansion of the Company’s merchant
acquiring business in Europe, including the purchase of the
remaining 50 percent shareholder interest in EuroConex
and the acquisition of several European merchant acquiring
businesses, accounted for approximately $24.2 million of
the favorable variance in total net revenue year-over-year.
Fee-based revenue growth was offset somewhat by the
unfavorable variance in securities gains (losses) of
$20.4 million and net interest income.
Fourth quarter net interest income, on a taxable-
equivalent basis was $1,799.8 million, compared with
$1,816.7 million in the fourth quarter of 2003. The
$16.9 million (.9 percent) decrease in net interest income
was driven by lower net interest margins, partially offset by
growth in average earning assets. Average earning assets
increased by $7.2 billion (4.4 percent), primarily driven by
continued strong growth in retail loans, as well as increases
in residential mortgages, investment securities, commercial
and commercial real estate loans. The growth in earning
assets contributed approximately $83.8 million of net
interest income relative to a year ago. The positive impact
of earning asset growth was more than offset by an
unfavorable rate variance, which reduced net interest
income by $89.0 million, primarily driven by the higher
cost of wholesale funding relative to the fourth quarter of
2003. Also contributing to the year-over-year decline was
an $11.6 million reduction in loan fees, the result of fewer
loan prepayments. The net interest margin for the fourth
quarter of 2004 was 4.20 percent, compared with
4.42 percent in the fourth quarter of 2003. The year-over-
year decline in net interest margin primarily reflected
competitive credit pricing, a preference to acquire lower
yielding, adjustable rate securities, lower prepayment fees
and the higher cost of wholesale funding relative to the
fourth quarter of 2003 due to rising interest rates.
Fourth quarter 2004 noninterest income increased
10.7 percent from the same period of a year ago. The
increase was driven by favorable variances in the majority
of fee income categories, slightly offset by an increase in
losses on the sales of securities of $20.4 million. Credit and
debit card revenue and corporate payment products revenue
were higher in the fourth quarter of 2004 than the fourth
quarter of 2003 by $31.0 million (20.2 percent) and
$12.1 million (13.6 percent), respectively. The growth in
credit and debit card revenue reflected increases in
transaction volumes and other rate adjustments, partially
offset by higher customer loyalty reward expenses. The
corporate payment products revenue growth reflected
growth in sales, card usage and rate changes. ATM
processing services revenue was higher by $2.7 million
(6.7 percent), compared with 2003, due to increases in
transaction volumes and sales. Merchant processing services
revenue was higher in the fourth quarter of 2004 than the
same quarter of 2003 by $34.9 million (23.9 percent),
reflecting an increase in same store sales volume, new
business and the recent expansion of the Company’s
merchant acquiring business in Europe. The recent
European acquisitions accounted for approximately
$25.5 million of the total increase. Deposit service charges
were higher year-over-year by $25.1 million (13.5 percent)
due to account growth, revenue enhancement initiatives and
transaction-related fees. Commercial products revenue
increased by $9.2 million (9.3 percent) over the fourth
quarter of 2003, primarily due to syndication fees and
commercial leasing revenue. The favorable variance year-
over-year in mortgage banking revenue of $4.1 million
(4.5 percent) was primarily due to higher loan servicing
Table 21
Four th Quar ter Summar y
revenue. The $1.2 million (3.3 percent) increase in
investment product fees and commissions reflected higher
sales activity in the Consumer Banking business line. Other
income was higher year-over-year by $51.1 million
(55.4 percent), primarily due to a favorable change in
end-of-term lease residual gains (losses) and revenue from
equity investments relative to the same quarter of 2003.
Partially offsetting these positive variances were trust and
investment management fees, which declined by
$5.9 million (2.4 percent) in the fourth quarter of 2004
from the same period of 2003, and treasury management
fees, which declined by $6.5 million (5.6 percent) year-over-
year. Trust and investment management fees declined as
gains from equity market valuations were more than offset
by lower fees, partially due to a change in the mix of fund
balances and customers’ migration from paying for services
with fees to paying with compensating balances. The
decrease in treasury management fees was primarily due to
higher earnings credit on customers’ compensating balances
and the impact of an industry-wide shift of payments from
paper-based to electronic and card-based transactions.
Total noninterest expense was $1,578.0 million in the
fourth quarter of 2004, compared with $1,342.4 million in
the fourth quarter of 2003. The increase in noninterest
expense of $235.6 million (17.6 percent) was primarily
driven by a $112.5 million charge related to the prepayment
of the Company’s long-term debt and a $31.9 million
unfavorable change in the valuation of mortgage servicing
(In Millions, Except Per Share Data)
Condensed Income Statement
Net interest income (taxable-equivalent basis) (a)**************************************************************
Noninterest income ***************************************************************************************
Securities gains (losses), net *******************************************************************************
Total net revenue**************************************************************************************
Noninterest expense **************************************************************************************
Provision for credit losses *********************************************************************************
Income from continuing operations before taxes ***********************************************************
Taxable-equivalent adjustment******************************************************************************
Applicable income taxes***********************************************************************************
Income from continuing operations **********************************************************************
Discontinued operations (after-tax) **************************************************************************
Net income ******************************************************************************************
Per Common Share
Earnings per share ***************************************************************************************
Diluted earnings per share *********************************************************************************
Dividends declared per share ******************************************************************************
Average common shares outstanding ***********************************************************************
Average diluted common shares outstanding*****************************************************************
Financial Ratios
Return on average assets *********************************************************************************
Return on average equity**********************************************************************************
Net interest margin (taxable-equivalent basis)*****************************************************************
Efficiency ratio (b) ****************************************************************************************
Three Months Ended
December 31,
2004
2003
$1,799.8
1,455.7
(20.5)
3,235.0
1,578.0
65.0
1,592.0
7.3
528.7
1,056.0
—
$1,816.7
1,296.7
(.1)
3,113.3
1,342.4
286.0
1,484.9
7.2
507.4
970.3
6.7
$1,056.0
$ 977.0
$
.57
.56
.30
1,865.0
1,893.8
2.16%
21.2
4.20
48.5
$
.51
.50
.24
1,927.3
1,950.8
2.05%
19.4
4.42
43.1
(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.
U.S. BANCORP 53
rights, as well as operating expenses related to the
expansion of the Company’s merchant acquiring business in
Europe of $24.2 million. The MSR impairment results from
a flattening yield curve despite recent increases in short-term
interest rates. The expense growth also reflected increases in
compensation, employee benefits, technology and
communications and postage, printing and supplies.
Compensation expense was higher year-over-year by
$39.8 million (7.4 percent) due to increases in salaries and
stock-based compensation. The increase in salaries reflected
business expansion of in-store branches, the expansion of
the Company’s merchant acquiring business in Europe and
other initiatives. Stock-based compensation was higher due
to lower forfeitures relative to prior years. Employee
benefits increased year-over-year by $16.7 million
(20.5 percent), primarily as a result of a $13.5 million
increase in pension expense and higher payroll taxes.
Technology and communications expense rose by
$9.4 million (8.8 percent), reflecting technology investments
that increased software expense amortization and the write-
off of capitalized software being replaced. Postage, printing
and supplies expense was higher by $3.1 million
(5.0 percent), primarily due to new consumer credit card
accounts. The fourth quarter of 2004 included
$112.5 million of charges related to the prepayment of a
portion of the Company’s long-term debt. Other expense
was higher in the fourth quarter than the same quarter of
2003 by $25.1 million (15.2 percent). The year-over-year
increase reflected increases in loan-related expense,
affordable housing operating costs and processing costs for
payment services products, the result of increases in
transaction volume year-over-year. Slightly offsetting these
unfavorable variances was marketing and business
development expense, which was lower by $1.9 million
(3.7 percent), reflecting the timing of marketing campaigns.
The provision for credit losses was $65.0 million for
the fourth quarter of 2004 and $286.0 million for the
fourth quarter of 2003, a decrease of $221.0 million
(77.3 percent). Net charge-offs in the fourth quarter of
2004 were $163.6 million, compared with net charge-offs
of $285.1 million during the fourth quarter of 2003. The
decline from a year ago primarily reflected the release of the
allowance for credit losses of $98.5 million, improving
credit quality and changing economic conditions.
L I N E O F B U S I N E S S F I N A N C I A L R E V I E W
Within the Company, financial performance is measured by
major lines of business, which include Wholesale Banking,
Consumer Banking, Private Client, Trust and Asset
Management, Payment Services, and Treasury and
Corporate Support. These operating segments are
components of the Company about which financial
54 U.S. BANCORP
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. Funds transfer-pricing
methodologies are utilized to allocate a cost of funds used
or credit for funds provided to all business line assets and
liabilities using a matched funding concept. Also, the
business unit is allocated the taxable-equivalent benefit of
tax-exempt products. Noninterest income and expenses
directly managed by each business line, including fees,
service charges, salaries and benefits, and other direct costs
are accounted for within each segment’s financial results in
a manner similar to the consolidated financial statements.
Occupancy costs are allocated based on utilization of
facilities by the lines of business. Noninterest expenses
incurred by centrally managed operations or business lines
that directly support another business line’s operations are
charged to the applicable business line based on its
utilization of those services primarily measured by the
volume of customer activities. These allocated expenses are
reported as net shared services expense. Certain corporate
activities that do not directly support the operations of the
lines of business are not charged to the lines of business.
Goodwill and other intangible assets are assigned to the
lines of business based on the mix of business of the
acquired entity. The provision for credit losses within the
Wholesale Banking, Consumer Banking, Private Client,
Trust and Asset Management and Payment Services lines of
business is based on net charge-offs, while Treasury and
Corporate Support reflects the residual component of the
Company’s total consolidated provision for credit losses
determined in accordance with accounting principles
generally accepted in the United States. Income taxes are
assessed to each line of business at a standard tax rate with
the residual tax expense or benefit to arrive at the
consolidated effective tax rate included in Treasury and
Corporate Support. Merger and restructuring-related
charges, discontinued operations and cumulative effects of
changes in accounting principles are not identified by or
allocated to lines of business. Within the Company, capital
levels are evaluated and managed centrally; however, capital
is allocated to the operating segments to support evaluation
of business performance. Capital allocations to the business
lines are based on the amount of goodwill and other
intangibles, the extent of off-balance sheet managed assets
and lending commitments and the ratio of on-balance sheet
assets relative to the total Company. Certain lines of
business, such as Trust and Asset Management, have no
significant balance sheet components. For these business
units, capital is allocated taking into consideration fiduciary
and operational risk, capital levels of independent
organizations operating similar businesses, and regulatory
requirements.
Designations, assignments and allocations change from
time to time as management systems are enhanced, methods
of evaluating performance or product lines change or
business segments are realigned to better respond to our
diverse customer base. During 2004, certain organization
and methodology changes were made and, accordingly,
2003 results were restated and presented on a comparable
basis. Due to organizational and methodology changes, the
Company’s basis of financial presentation differed in 2002.
The presentation of comparative business line results for
2002 is not practical and has not been provided.
Wholesale Banking offers lending, depository, treasury
management and other financial services to middle market,
large corporate and public sector clients. Wholesale Banking
contributed $1,079.6 million of the Company’s operating
earnings in 2004 and $850.3 million in 2003. The increase
in operating earnings in 2004 was driven by reductions in
the provision for credit losses and total noninterest expense,
partially offset by a decline in total net revenue, compared
with 2003.
Total net revenue decreased $65.2 million (2.7 percent)
in 2004, compared with 2003. Net interest income, on a
taxable-equivalent basis, decreased $55.9 million
(3.4 percent), compared with 2003, as average loans
decreased $2.0 billion (4.6 percent) in 2004, average non-
interest bearing deposits decreased $2.1 billion
(13.9 percent) and average savings products declined
$1.2 billion, compared with 2003. The decline in average
loans in 2004 was driven in part by soft commercial loan
demand through mid 2004, in addition to the Company’s
decisions to tighten credit availability to certain types of
lending products, industries and customers and reductions
due to asset workout strategies. This decline was partially
offset by the consolidation of the commercial loan conduit
onto the Company’s balance sheet during the third quarter
of 2003. Loan spreads declined from a year ago due in part
to competitive pricing and the consolidation of the high
credit quality, low margin loans from the commercial loan
conduit during 2003, partially offset by higher interest
recoveries in 2004 on previously charged-off loans. While
average noninterest-bearing deposits decreased 13.9 percent
in 2004, compared with 2003, due to reductions in
government and mortgage-related deposits, the net interest
spread on total deposits increased due to the funding benefit
associated with the impact of rising interest rates over the
second half of 2004. The decline in mortgage-related
deposits reflected lower production of mortgage banking
businesses while the decline in government deposits was
primarily due to a decision by the Federal government to
pay fees for treasury management services rather than
maintain compensating balances. Noninterest income
decreased $10.8 million (1.4 percent) in 2004 to
$750.1 million, compared to 2003 noninterest income of
$760.9 million. The decrease in noninterest income in 2004
was principally due to lower commercial products revenue
resulting from the consolidation of the commercial loan
conduit in 2003. This revenue reduction was partially offset
by growth in treasury management-related fees,
international banking, syndication and customer derivative
fees, equipment leasing and foreign exchange revenue.
Treasury management-related fees were higher primarily due
to a change in the Federal government’s payment
methodology for treasury management services to fees for
services rather than maintaining compensating balances in
the third quarter of 2003, partially offset by higher interest
earnings credit on customers’ compensating balances and
the impact of an industry-wide shift of payments from
paper-based to electronic and card-based transactions.
Noninterest expense was $643.5 million in 2004,
compared with $686.1 million in 2003. The $42.6 million
decrease (6.2 percent) was primarily driven by lower
personnel-related costs, software expenses, loan workout
expenses and net shared services expense. Loan workout
expenses declined in 2004 as the credit quality of the loan
portfolio has improved. Net shared services expenses were
lower due to changes in transaction volumes related to
customer accounts.
The provision for credit losses was $22.6 million and
$405.5 million in 2004 and 2003, respectively, a decline of
$382.9 million (94.4 percent). The favorable change in the
provision for credit losses for Wholesale Banking business is
due to improving net charge-offs, which declined to
.05 percent of average loans in 2004 from .91 percent of
average loans in 2003. The reduction in net charge-offs was
attributable, in part, to increased levels of commercial loan
recoveries, in addition to improvements in credit quality
driven by initiatives taken by the Company during the past
three years, including asset workout strategies and
reductions in commitments to certain industries and
customers. Commercial loan recoveries are anticipated to
return to more normalized levels during future periods.
Nonperforming assets within Wholesale Banking were
$391.1 million at December 31, 2004, compared with
$743.6 million at December 31, 2003. Nonperforming
assets as a percentage of end-of-period loans were
.90 percent at December 31, 2004 and 1.76 percent at
December 31, 2003. Refer to the ‘‘Corporate Risk Profile’’
section for further information on factors impacting the
credit quality of the loan portfolios.
U.S. BANCORP 55
Consumer Banking delivers products and services to the
broad consumer market and small businesses through
banking offices, telemarketing, on-line services, direct mail
and automated teller machines (‘‘ATMs’’). It encompasses
community banking, metropolitan banking, small business
banking, including lending guaranteed by the Small Business
Administration, small-ticket leasing, consumer lending,
mortgage banking, workplace banking, student banking,
24-hour banking and investment product and insurance
sales. Consumer Banking contributed $1,465.0 million of
the Company’s operating earnings for 2004 and
$1,333.7 million for 2003, a 9.8 percent increase over
2003. The increase in operating earnings in 2004 was
driven by strong fee-based revenues, lower noninterest
expense and reductions in the provision for credit losses,
compared with 2003. Within Consumer Banking, the retail
banking business grew operating earnings by 23.1 percent,
offset somewhat by a lower contribution from the mortgage
banking business, compared with the same periods of 2003.
Total net revenue increased $24.4 million (.5 percent)
in 2004, compared with 2003, as growth in net interest
income and noninterest income was partially offset by a
reduction in securities gains (losses) associated with the
mortgage banking business. Net interest income, on a
taxable-equivalent basis, increased $57.8 million
(1.6 percent). Fee-based revenue increased $243.8 million
(15.7 percent) and securities gains (losses) decreased
$277.2 million. The year-over-year increase in net interest
income was due to growth in average loan balances,
improved spreads on commercial and commercial real estate
loans, growth in noninterest-bearing and savings product
deposit balances and the funding benefit of total deposits
due to rising interest rates. Partially offsetting these
increases was the decline in average mortgage loans held for
sale, reduced spreads on retail loans due to the competitive
Table 22
Line of Business Financial Perfor mance
Year Ended December 31 (Dollars in Millions)
Wholesale
Banking
Consumer
Banking
2004
Percent
2003 Change
2004
Percent
2003 Change
1.6%
15.7
*
.5
.1
(29.7)
Condensed Income Statement
Net interest income (taxable-equivalent basis)**************************************** $1,611.6 $1,667.5
Noninterest income **************************************************************
760.9
Securities gains (losses), net ******************************************************
—
750.1
1.5
(3.4)% $3,636.5 $3,578.7
1,550.4
1,794.2
(1.4)
193.4
(83.8)
*
Total net revenue *************************************************************
Noninterest expense *************************************************************
Other intangibles ****************************************************************
2,363.2
625.2
18.3
2,428.4
666.6
19.5
Total noninterest expense ******************************************************
643.5
686.1
(2.7)
(6.2)
(6.2)
(6.2)
5,346.9
2,364.4
304.4
5,322.5
2,361.9
432.7
2,668.8
2,794.6
(4.5)
Operating earnings before provision and income taxes *************************
Provision for credit losses *********************************************************
1,719.7
22.6
1,742.3
405.5
(1.3)
(94.4)
2,678.1
375.1
2,527.9
431.1
5.9
(13.0)
Operating earnings before income taxes ********************************************
Income taxes and taxable-equivalent adjustment *************************************
1,697.1
617.5
1,336.8
486.5
Operating earnings*************************************************************** $1,079.6 $ 850.3
27.0
26.9
27.0
2,303.0
838.0
2,096.8
763.1
$1,465.0 $1,333.7
9.8
9.8
9.8
Merger and restructuring-related items (after-tax) *************************************
Discontinued operations (after-tax) *************************************************
Net income *********************************************************************
Average Balance Sheet Data
Commercial ********************************************************************* $ 26,674 $ 28,195
Commercial real estate ***********************************************************
16,393
Residential mortgages ************************************************************
116
Retail **************************************************************************
52
15,918
72
52
(5.4)% $ 7,774 $ 8,220
9,974
10,603
(2.9)
11,315
13,918
(37.9)
29,005
31,327
—
(5.4)%
6.3
23.0
8.0
Total loans*******************************************************************
Goodwill************************************************************************
Other intangible assets ***********************************************************
Assets *************************************************************************
Noninterest-bearing deposits ******************************************************
Savings products ****************************************************************
Time deposits *******************************************************************
Total deposits ****************************************************************
Shareholders’ equity *************************************************************
42,716
1,225
88
49,045
12,722
9,830
7,518
30,070
5,081
44,756
1,227
107
51,696
14,775
11,057
3,976
29,808
5,046
(4.6)
(.2)
(17.8)
(5.1)
(13.9)
(11.1)
89.1
.9
.7
63,622
2,242
1,073
71,581
13,977
41,929
16,010
71,916
6,225
58,514
2,242
936
68,373
13,756
40,107
18,512
72,375
5,878
8.7
—
14.6
4.7
1.6
4.5
(13.5)
(.6)
5.9
* Not meaningful
56 U.S. BANCORP
pricing for consumer loans and lower loan fees. The
increase in average loan balances of 8.7 percent reflected
retail loan growth of 8.0 percent and growth in residential
mortgages of 23.0 percent in 2004, compared with 2003.
Included within the retail loan category are second-lien
home equity loans that had a growth rate of 5.3 percent.
The category of residential mortgages includes first-lien
home equity loans, which had a growth rate of 19.1 percent
in 2004, compared with 2003. On a combined basis, first
and second-lien home equity products increased
$1.5 billion, or 9.2 percent, compared with a year ago. The
year-over-year growth of traditional residential mortgages
was $1.7 billion, or 25.8 percent reflecting the Company’s
decisions to retain adjustable-rate residential mortgages.
Commercial real estate loan balances increased 6.3 percent
while commercial loans decreased 5.4 percent in 2004,
compared with 2003. The year-over-year decrease in
average deposits (.6 percent) was due to a reduction in time
deposit balances (13.5 percent), offset by growth in
noninterest-bearing deposits (1.6 percent), interest checking
(11.3 percent), savings (4.5 percent) and money market
account (.3 percent) balances. The decline in lower margin
time deposits primarily reflected a shift in product mix
towards savings products.
Fee-based noninterest income was $1,794.2 million in
2004, $243.8 million (15.7 percent) higher compared with
2003. The year-over-year growth in fee-based revenue was
driven by deposit service charges, mortgage banking
revenue, commercial products revenue, investment products
fees and commissions, lower end-of-term lease residual
losses and a residual value insurance recovery, partially
offset by lower treasury management revenue. Securities
gains (losses) were $(83.8) million in 2004, a net decrease
of $277.2 million from a year ago. The Company utilizes its
investment portfolio as a balance sheet economic hedge
against the valuation risk of the portfolio of mortgage
servicing rights.
Private Client, Trust
and Asset Management
Payment
Services
Treasury and
Corporate Support
Consolidated
Company
2004
2003
Percent
Change
2004
2003
Percent
Change
2004
2003
Percent
Change
2004
2003
Percent
Change
$ 361.0
987.1
—
1,348.1
585.0
62.0
647.0
701.1
10.2
690.9
251.4
$ 311.9
957.0
—
1,268.9
585.3
66.2
651.5
617.4
6.5
610.9
222.3
$ 439.5
$ 388.6
15.7% $ 573.1
1,873.2
—
3.1
—
2,446.3
797.3
159.9
$ 605.1
1,606.9
—
2,212.0
704.1
158.2
957.2
862.3
1,489.1
362.6
1,126.5
410.0
1,349.7
412.7
937.0
341.0
$ 716.5
$ 596.0
6.2
(.1)
(6.3)
(.7)
13.6
56.9
13.1
13.1
13.1
(5.3)% $ 957.7
219.5
16.6
(22.6)
—
1,154.6
862.5
5.5
868.0
286.6
(100.9)
387.5
(78.7)
10.6
13.2
1.1
11.0
10.3
(12.1)
20.2
20.2
20.2
$1,054.3
193.0
51.4
1,298.7
550.4
5.8
556.2
742.5
(1.8)
744.3
172.4
$ 466.2
$ 571.9
(9.2)% $ 7,139.9
5,624.1
13.7
(104.9)
*
12,659.1
5,234.4
550.1
$ 7,217.5
5,068.2
244.8
12,530.5
4,868.3
682.4
5,784.5
5,550.7
6,874.6
669.6
6,205.0
2,038.2
6,979.8
1,254.0
5,725.8
1,985.3
(11.1)
56.7
(5.2)
56.1
(61.4)
*
(47.9)
*
(18.5)
(1.1)%
11.0
*
1.0
7.5
(19.4)
4.2
(1.5)
(46.6)
8.4
2.7
4,166.8
3,740.5
11.4
—
—
(30.4)
22.5
$ 4,166.8
$ 3,732.6
$ 1,641
611
322
2,224
$ 1,804
576
252
1,990
(9.0)% $ 3,068
—
6.1
—
27.8
7,548
11.8
$ 2,898
—
—
7,103
5.9% $
—
—
6.3
191
135
10
53
$
209
199
13
48
(8.6)% $ 39,348
27,267
14,322
41,204
(32.2)
(23.1)
10.4
$ 41,326
27,142
11,696
38,198
(4.8)%
.5
22.5
7.9
4,798
818
352
6,563
3,251
7,861
591
11,703
2,077
4,622
740
399
6,407
3,006
5,852
474
9,332
1,991
3.8
10.5
(11.8)
2.4
8.2
34.3
24.7
25.4
4.3
10,616
1,868
776
13,764
108
11
—
119
3,198
10,001
1,814
675
13,397
276
10
—
286
3,008
6.1
3.0
15.0
2.7
(60.9)
10.0
—
(58.4)
6.3
389
—
7
50,640
(242)
22
2,634
2,414
2,878
469
305
12
47,757
(98)
—
4,850
4,752
3,470
(17.1)
*
(41.7)
6.0
*
*
(45.7)
(49.2)
(17.1)
122,141
6,153
2,296
191,593
29,816
59,653
26,753
116,222
19,459
118,362
6,328
2,129
187,630
31,715
57,026
27,812
116,553
19,393
3.2
(2.8)
7.8
2.1
(6.0)
4.6
(3.8)
(.3)
.3
U.S. BANCORP 57
Noninterest expense was $2,668.8 million in 2004,
compared with $2,794.6 million for 2003, a decrease of
$125.8 million (4.5 percent). The year-over-year decrease in
noninterest expense was primarily attributable to lower
levels of MSR impairment, reductions in intangible
amortization, depreciation and software expense and net
shared services expense, partially offset by increases in
compensation and occupancy costs related to new in-store
branch expansion along with higher amortization costs
from growth in the mortgage servicing portfolio. MSR
impairment was $56.8 million in 2004, compared with
$208.7 million in 2003, a decrease of $151.9 million year-
over-year. The change in MSR valuations was driven by
declining interest rates and refinancing activities in early
2004, partially offset by rising interest rates and slower
prepayment speeds in late 2004, compared with the
declining interest rates and refinancing activities of 2003.
The provision for credit losses decreased $56.0 million
(13.0 percent) in 2004, compared with 2003. The
improvement in the provision for credit losses in 2004 was
primarily attributable to lower net charge-offs. As a
percentage of average loans, net charge-offs declined to
.59 percent in 2004, compared with .74 percent in 2003.
The decline in net charge-offs included the commercial,
commercial real estate and retail loan portfolios. The
improvement in commercial and commercial real estate loan
net charge-offs within Consumer Banking of $19.7 million
was broad-based across most industry and geographical
regions. Retail loan net charge-offs declined by
$40.3 million, primarily resulting from ongoing collection
efforts and risk management activities. Nonperforming
assets within Consumer Banking were $348.9 million at
December 31, 2004, compared with $393.4 million at
December 31, 2003. Nonperforming assets as a percentage
of end-of-period loans were .56 percent at December 31,
2004 and .69 percent at December 31, 2003. Refer to the
‘‘Corporate Risk Profile’’ section for further information on
factors impacting the credit quality of the loan portfolios.
Private Client, Trust and Asset Management provides trust,
private banking, financial advisory, investment management
and mutual fund servicing through five businesses: Private
Client Group, Corporate Trust, Asset Management,
Institutional Trust and Custody and Fund Services, LLC.
Private Client, Trust and Asset Management contributed
$439.5 million of the Company’s operating earnings in
2004 and $388.6 million in 2003, an increase of
$50.9 million (13.1 percent) compared with 2003. The
growth was attributable to higher total net revenue and
lower noninterest expense, partially offset by an increase in
the provision for credit losses.
Total net revenue was $1,348.1 million in 2004, an
increase of 6.2 percent, compared with 2003. Net interest
58 U.S. BANCORP
income, on a taxable-equivalent basis, increased
$49.1 million (15.7 percent) in 2004, compared with 2003.
The increase in net interest income in 2004 was due to
growth in total average deposits of 25.4 percent attributable
to growth in noninterest-bearing deposits, savings products
and time deposits primarily within corporate trust and
private banking, the favorable impact of rising interest rates
on the funding benefit of customer deposits and higher
average loans (3.8 percent), partially offset by a decline in
loan spreads. Noninterest income increased $30.1 million
(3.1 percent) in 2004, compared with 2003. The increase in
noninterest income was primarily attributable to
improvement in equity capital market conditions and
related fees, partially offset by a change in customer
payment methodology for certain corporate trust services
clients from fees to compensating balances.
Noninterest expense decreased $4.5 million (.7 percent)
in 2004, compared with 2003, primarily attributable to
reductions in personnel-related costs, lower intangible
amortization and net shared services expense partially offset
by higher losses and outside data processing costs.
The provision for credit losses increased $3.7 million
(56.9 percent) in 2004, compared with 2003. The year-
over-year increase in the provision for credit losses was
primarily due to higher commercial loan net charge-offs in
2004 partially offset by lower retail loan net charge-offs.
Net charge-offs as a percentage of average loans were
.21 percent in 2004, compared with .14 percent in 2003.
Payment Services includes consumer and business credit
cards, debit cards, corporate and purchasing card services,
consumer lines of credit, ATM processing and merchant
processing. Payment Services contributed $716.5 million of
the Company’s operating earnings in 2004 and
$596.0 million in 2003, a 20.2 percent increase over 2003.
The increases were due to growth in total net revenue
driven by higher transaction volumes and reductions in the
provision for credit losses, partially offset by increases in
total noninterest expense.
Total net revenue was $2,446.3 million in 2004, a
10.6 percent increase, compared with 2003. Net interest
income decreased 5.3 percent in 2004, compared with
2003, primarily due to higher corporate payment card
balances, higher corporate card rebates, a reduction in
customer late fees and a lower percentage of revolving
credit card balances relative to a year ago. The impact of
these factors was partially offset by total average consumer
loan growth of 6.3 percent in 2004, compared with 2003.
Noninterest income increased 16.6 percent in 2004,
compared with 2003. The increase in fee-based revenue in
2004 was driven by strong growth in credit card and debit
card revenue (16.0 percent), corporate payment product
revenues (12.6 percent), ATM processing services revenue
(8.7 percent) and merchant processing revenue
(20.1 percent). The $89.0 million growth in credit and debit
card revenue was muted somewhat by the impact of the
settlement of the debit card antitrust litigation brought
against VISA USA and MasterCard by Wal-Mart stores,
Sears Roebuck and Co. and other retailers, which lowered
interchange rates on signature debit transactions beginning
in August 2003. The change in interchange rate, in addition
to higher customer loyalty rewards expense, was more than
offset by higher transaction volumes and rate changes.
Corporate payment products revenue increased
$45.5 million due to increases in sales volume and pricing
enhancements. ATM processing services revenue increased
$9.5 million due to transaction growth and new product
sales. Merchant processing revenue increased $113.1 million
due to increases in sales and transaction processing volumes
and the expansion of the merchant acquiring business in
Europe, which accounted for approximately $58.6 million
of the revenue growth. Other revenue increased $8.1 million
in 2004, compared with 2003, due to increases in insurance
product revenue and EuroConex.
Noninterest expense was $957.2 million in 2004, an
increase of $94.9 million (11.0 percent), compared with
2003. The increase in noninterest expense was primarily
attributable to higher compensation and employee benefit
costs for processing associated with increased credit and
debit card transaction volumes, corporate payment products
and merchant processing sales volumes, in addition to
higher merchant acquiring costs resulting from the
expansion of the merchant acquiring business in Europe,
which accounted for approximately $56.8 million of the
increase in 2004.
The provision for credit losses was $362.6 million in
2004, a decrease of $50.1 million (12.1 percent), compared
with 2003, due to lower net charge-offs of the business line.
As a percentage of average loans, net charge-offs were
3.42 percent in 2004, compared with 4.13 percent of
average loans in 2003. The favorable change in credit losses
was due to improvements in ongoing collection efforts and
risk management activities, as well as improvements in
economic conditions from a year ago.
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 expenses associated with
business activities managed on a corporate basis, including
enterprise-wide operations and administrative support
functions. Operational expenses incurred by Treasury and
Corporate Support on behalf of the other business lines are
allocated back primarily based on customer transaction
volume and account activities to the appropriate business
unit and are identified as net shared services expense.
Treasury and Corporate Support recorded operating
earnings of $466.2 million in 2004, a decrease of
18.5 percent, compared with 2003.
Total net revenue was $1,154.6 million in 2004,
compared with total net revenue of $1,298.7 million in
2003. The year-over-year decline of $144.1 million
(11.1 percent) in total net revenue in 2004 was attributable
to reductions in net interest income of $96.6 million
(9.2 percent) and securities gains (losses) of $74.0 million,
partially offset by increases in fee-based noninterest income
of $26.5 million (13.7 percent). The decrease in net interest
income was primarily attributable to the Company’s
asset/liability management decisions to invest in adjustable-
rate securities and utilize higher-cost fixed-rate funding
given the current rising interest rate environment. It also
reflects the residual effect of transfer pricing caused by
changes in the mix of earning assets and the yield curve
from a year ago. The increase in fee-based noninterest
income was primarily attributable to higher equity
investment revenue. Net securities losses of $22.6 million in
2004 were principally related to asset/liability decisions,
compared with net securities gains of $51.4 million in 2003.
Noninterest expense was $868.0 million in 2004,
compared with $556.2 million in 2003, a $311.8 million
increase (56.1 percent). The increase in noninterest expense
was principally driven by several factors. Stock-based
compensation was higher by $33.8 million primarily due to
lower employee stock-award forfeitures relative to a year
ago. Pension expenses increased $35.5 million reflecting
recognition of deferred actuarial (gains) losses resulting
from lower asset returns in prior years. Debt prepayment
costs of $154.8 million were incurred as a result of
prepaying borrowings in connection with asset/liability
management activities during 2004. Corporate insurance
costs increased by $17.0 million from a year ago primarily
due to premium increases by insurance carriers.
Additionally, operating costs associated with incremental
investments in affordable housing increased $20.4 million
from a year ago. Finally, the residual in costs associated
with centralized support functions that were not allocated
to other business lines increased by $27.7 million.
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. The provision for credit losses was a net recovery of
$100.9 million in 2004, compared with a net recovery of
$1.8 million in 2003. The favorable variance is primarily
due to the Company’s decision to reduce the allowance for
credit losses by approximately $98.5 million in 2004,
reflecting the continued improvement in credit quality and
U.S. BANCORP 59
economic conditions. 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
standard tax rate with the residual tax expense or benefit to
arrive at the consolidated effective tax rate included in
Treasury and Corporate Support.
A C C O U N T I N G C H A N G E S
Note 2 of the Notes to Consolidated Financial Statements
discusses accounting standards recently issued but not yet
required to be adopted and the expected impact of the
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.
On January 8, 2004, the Company elected to adopt the
‘‘fair value’’ method of accounting for stock-based
compensation. The Company implemented this accounting
change utilizing the ‘‘retroactive restatement method,’’
requiring all prior periods to be restated to recognize
compensation expense for the estimated fair value of all
employee stock awards including stock options granted,
modified or settled in fiscal years beginning after
December 15, 1994.
C R I T I C A L A C C O U N T I N G P O L I C I E S
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
60 U.S. BANCORP
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
by establishing an ‘‘allowance for other factors’’ that is not
specifically allocated to a category of loans. 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 for other factors during period 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
analysis with respect to the accuracy of risk ratings and the
volatility of inherent losses, and utilizes this analysis along
with qualitative factors including uncertainty in the
economy from changes in unemployment rates, the level of
bankruptcies, concentration risks, including risks associated
with the transportation sector 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,
2004. 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 $250 million at
December 31, 2004. 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, 2004. 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%, the
allowance for residential and retail loans would increase by
approximately $65 million at December 31, 2004. 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.
Mortgage Servicing Rights MSRs are capitalized as separate
assets when loans are sold and servicing is retained. The
total cost of loans sold is allocated between the loans sold
and the servicing assets retained based on their relative fair
values. MSRs that are purchased from others are initially
recorded at cost. The carrying value of the MSRs is
amortized in proportion to and over the period of estimated
net servicing revenue and recorded in noninterest expense as
amortization of intangible assets. The carrying value of
these assets is periodically reviewed for impairment using a
lower of carrying value or fair value methodology. For
purposes of measuring impairment, the servicing rights are
stratified based on the underlying loan type and note rate
and the carrying value for each stratum is compared to fair
value based on a discounted cash flow analysis, utilizing
current prepayment speeds and discount rates. Events that
may significantly affect the estimates used are changes in
interest rates and the related impact on mortgage loan
prepayment speeds and the payment performance of the
underlying loans. If the carrying value is greater than fair
value, impairment is recognized through a valuation
allowance for each impaired stratum and recorded as
amortization of intangible assets. The reduction in the fair
value of MSRs at December 31, 2004, to immediate 25 and
50 basis point adverse changes in interest rates would be
approximately $133 million and $258 million, respectively.
An upward movement in interest rates at December 31,
2004, of 25 and 50 basis points would increase the value of
the MSRs by approximately $109 million and $177 million,
respectively. Refer to Note 12 of the Notes to Consolidated
Financial Statements for additional information regarding
MSRs.
Goodwill and Other Intangibles The Company records all
assets and liabilities acquired in purchase acquisitions,
including goodwill and other intangibles, at fair value as
required by Statement of Financial Accounting Standards
No. 141, ‘‘Goodwill and Other Intangible Assets.’’
Goodwill and indefinite-lived assets are no longer amortized
but are subject, at a minimum, to annual tests for
impairment. Under certain situations, interim impairment
tests may be required if events occur or circumstances
change that would more likely than not reduce the fair
value of a reporting segment below its carrying amount.
Other intangible assets are amortized over their estimated
useful lives using straight-line and accelerated methods and
are subject to impairment if events or circumstances indicate
a possible inability to realize the carrying amount.
The initial recognition of goodwill and other intangible
assets and subsequent impairment analysis require
U.S. BANCORP 61
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 2004. 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 140 federal, state and local domestic
jurisdictions and 6 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
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 21 of the
Notes to Consolidated Financial Statements for additional
information regarding income taxes.
C O N T R O L S A N D P R O C E D U R E S
Under the supervision and with the participation of the
Company’s management, including its principal executive
officer and principal financial officer, the Company has
evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the ‘‘Exchange Act’’)). Based upon
this evaluation, the principal executive officer and principal
financial officer have concluded that, as of the end of the
period covered by this report, the Company’s disclosure
controls and procedures were effective to ensure that
information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange
Commission rules and forms.
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 106. 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 107.
62 U.S. BANCORP
(This page intentionally left blank)
U.S. BANCORP 63
U.S. BANCORP
CONSOLIDATED BALANCE SHEET
At December 31 (Dollars in Millions)
Assets
Cash and due from banks ********************************************************************************
Investment securities
Held-to-maturity (fair value $132 and $161, respectively) ***************************************************
Available-for-sale *************************************************************************************
Loans held for sale***************************************************************************************
Loans
Commercial******************************************************************************************
Commercial real estate ********************************************************************************
Residential mortgages*********************************************************************************
Retail ***********************************************************************************************
Total loans****************************************************************************************
Less allowance for loan losses *******************************************************************
Net loans *************************************************************************************
Premises and equipment *********************************************************************************
Customers’ liability on acceptances ************************************************************************
Goodwill ************************************************************************************************
Other intangible assets ***********************************************************************************
Other assets ********************************************************************************************
2004
2003
$ 6,336
$ 8,630
127
41,354
1,439
40,173
27,585
15,367
43,190
126,315
(2,080)
124,235
1,890
95
6,241
2,387
11,000
152
43,182
1,433
38,526
27,242
13,457
39,010
118,235
(2,184)
116,051
1,957
121
6,025
2,124
9,796
Total assets***************************************************************************************
$195,104
$189,471
Liabilities and Shareholders’ Equity
Deposits
Noninterest-bearing ***********************************************************************************
Interest-bearing **************************************************************************************
Time deposits greater than $100,000 *******************************************************************
Total deposits *************************************************************************************
Short-term borrowings************************************************************************************
Long-term debt******************************************************************************************
Acceptances outstanding *********************************************************************************
Other liabilities*******************************************************************************************
Total liabilities *************************************************************************************
Shareholders’ equity
Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares issued: 2004 and 2003 —
1,972,643,007 shares******************************************************************************
Capital surplus ***************************************************************************************
Retained earnings ************************************************************************************
Less cost of common stock in treasury: 2004 — 115,020,064 shares; 2003 — 49,722,856 shares **************
Other comprehensive income **************************************************************************
Total shareholders’ equity***************************************************************************
$ 30,756
71,936
18,049
120,741
13,084
34,739
95
6,906
175,565
20
5,902
16,758
(3,125)
(16)
19,539
$ 32,470
74,749
11,833
119,052
10,850
33,816
121
6,390
170,229
20
5,851
14,508
(1,205)
68
19,242
Total liabilities and shareholders’ equity ***************************************************************
$195,104
$189,471
See Notes to Consolidated Financial Statements.
64 U.S. BANCORP
U.S. BANCORP
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31 (Dollars and Shares in Millions, Except Per Share Data)
2004
2003
2002
Interest Income
Loans **********************************************************************************
Loans held for sale ***********************************************************************
Investment securities**********************************************************************
Other interest income *********************************************************************
Total interest income ***************************************************************
Interest Expense
Deposits ********************************************************************************
Short-term borrowings ********************************************************************
Long-term debt **************************************************************************
Total interest expense **************************************************************
Net interest income ***********************************************************************
Provision for credit losses *****************************************************************
Net interest income after provision for credit losses *******************************************
Noninterest Income
Credit and debit card revenue**************************************************************
Corporate payment products revenue *******************************************************
ATM processing services ******************************************************************
Merchant processing services **************************************************************
Trust and investment management fees *****************************************************
Deposit service charges *******************************************************************
Treasury management fees ****************************************************************
Commercial products revenue**************************************************************
Mortgage banking revenue ****************************************************************
Investment products fees and commissions **************************************************
Securities gains (losses), net ***************************************************************
Other ***********************************************************************************
Total noninterest income ************************************************************
Noninterest Expense
Compensation ***************************************************************************
Employee benefits ************************************************************************
Net occupancy and equipment*************************************************************
Professional services**********************************************************************
Marketing and business development *******************************************************
Technology and communications ***********************************************************
Postage, printing and supplies *************************************************************
Other intangibles *************************************************************************
Merger and restructuring-related charges ****************************************************
Debt prepayment*************************************************************************
Other ***********************************************************************************
Total noninterest expense ***********************************************************
Income from continuing operations before income taxes ***************************************
Applicable income taxes*******************************************************************
Income from continuing operations *********************************************************
Income (loss) from discontinued operations (after-tax) *****************************************
Cumulative effect of accounting change (after-tax) ********************************************
Net income******************************************************************************
Earnings Per Share
Income from continuing operations ******************************************************
Discontinued operations****************************************************************
Cumulative effect of accounting change **************************************************
Net income **************************************************************************
Diluted Earnings Per Share
Income from continuing operations ******************************************************
Discontinued operations****************************************************************
Cumulative effect of accounting change **************************************************
Net income **************************************************************************
Dividends declared per share **************************************************************
Average common shares outstanding *******************************************************
Average diluted common shares outstanding*************************************************
See Notes to Consolidated Financial Statements.
$7,168.1
91.5
1,827.1
99.8
9,186.5
904.3
262.7
908.2
2,075.2
7,111.3
669.6
6,441.7
649.3
406.8
175.3
674.6
981.2
806.4
466.7
432.2
397.3
156.0
(104.9)
478.3
$7,272.0
202.2
1,684.0
99.8
9,258.0
1,096.6
166.8
805.3
2,068.7
7,189.3
1,254.0
5,935.3
560.7
361.3
165.9
561.4
953.9
715.8
466.3
400.5
367.1
144.9
244.8
370.4
$7,743.0
170.6
1,484.3
96.0
9,493.9
1,485.3
222.9
971.4
2,679.6
6,814.3
1,349.0
5,465.3
517.0
325.7
160.6
567.3
892.1
690.3
416.9
479.2
330.2
132.7
299.9
398.8
5,519.2
5,313.0
5,210.7
2,252.2
389.4
630.8
148.9
193.5
429.6
248.4
550.1
—
154.8
786.8
5,784.5
6,176.4
2,009.6
4,166.8
—
—
2,176.8
328.4
643.7
143.4
180.3
417.4
245.6
682.4
46.2
—
732.7
5,596.9
5,651.4
1,941.3
3,710.1
22.5
—
2,167.5
317.5
658.7
129.7
171.4
392.1
243.2
553.0
321.2
(.2)
786.4
5,740.5
4,935.5
1,707.5
3,228.0
(22.7)
(37.2)
$4,166.8
$3,732.6
$3,168.1
$
$
$
$
2.21
—
—
2.21
2.18
—
—
2.18
$
$
$
$
1.93
.01
—
1.94
1.92
.01
—
1.93
$ 1.020
1,887.1
1,912.9
$ .855
1,923.7
1,936.2
$
$
$
1.68
(.01)
(.02)
1.65
1.68
(.01)
(.02)
$
1.65
$ .780
1,916.0
1,924.8
U.S. BANCORP 65
U.S. BANCORP
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Dollars in Millions)
(Unaudited)
Balance December 31, 2001 **************
Net income **********************************
Unrealized gain on securities available-for-sale*******
Unrealized gain on derivatives ******************
Foreign currency translation adjustment **********
Realized gain on derivatives ********************
Reclassification adjustment for gains realized in net
income ***********************************
Income taxes*********************************
Total comprehensive income *************
Cash dividends declared on common stock ******
Issuance of common and treasury stock *********
Purchase of treasury stock *********************
Stock option and restricted stock grants *********
Shares reserved to meet deferred compensation
obligations ********************************
Common
Shares
Outstanding
Common
Stock
Capital
Surplus
Retained
Earnings
Treasury
Stock
Other
Comprehensive
Income
Total
Shareholders’
Equity
1,951,709,512
$20
$5,683
$11,425
3,168
$ (478)
$
95
1,048
324
7
64
(332)
(422)
10,589,034
(45,256,736)
(85,250)
(1,488)
(75)
188
3
249
(1,040)
(3)
$16,745
3,168
1,048
324
7
64
(332)
(422)
3,857
(1,488)
174
(1,040)
188
—
Balance December 31, 2002 **************
1,916,956,560
$20
$5,799
$13,105
$(1,272)
$ 784
$18,436
Net income **********************************
Unrealized loss on securities available-for-sale ****
Unrealized loss on derivatives*******************
Foreign currency translation adjustment **********
Realized gain on derivatives ********************
Reclassification adjustment for gains realized in net
income ***********************************
Income taxes*********************************
Total comprehensive income *************
Cash dividends declared on common stock ******
Special dividends declared on common stock ****
Issuance of common and treasury stock *********
Purchase of treasury stock *********************
Stock option and restricted stock grants *********
Shares reserved to meet deferred compensation
obligations ********************************
3,733
(1,645)
(685)
21,709,297
(14,971,000)
(774,706)
(51)
111
(8)
502
(417)
(18)
(716)
(373)
23
199
(288)
439
3,733
(716)
(373)
23
199
(288)
439
3,017
(1,645)
(685)
451
(417)
111
(26)
Balance December 31, 2003 **************
1,922,920,151
$20
$5,851
$14,508
$(1,205)
$
68
$19,242
Net income **********************************
Unrealized loss on securities available-for-sale ****
Unrealized loss on derivatives*******************
Foreign currency translation adjustment **********
Realized gain on derivatives ********************
Reclassification adjustment for losses realized in
net income *******************************
Income taxes*********************************
Total comprehensive income *************
Cash dividends declared on common stock ******
Issuance of common and treasury stock *********
Purchase of treasury stock *********************
Stock option and restricted stock grants *********
Shares reserved to meet deferred compensation
29,758,496
(93,773,487)
obligations ********************************
(1,282,217)
4,167
(1,917)
(96)
116
31
772
(2,656)
(36)
(123)
(43)
(17)
16
32
51
4,167
(123)
(43)
(17)
16
32
51
4,083
(1,917)
676
(2,656)
116
(5)
Balance December 31, 2004 **************
1,857,622,943
$20
$5,902
$16,758
$(3,125)
$
(16)
$19,539
See Notes to Consolidated Financial Statements.
66 U.S. BANCORP
U.S. BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31 (Dollars in Millions)
2004
2003
2002
Operating Activities
Net income ****************************************************************************
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses*************************************************************
Depreciation and amortization of premises and equipment ********************************
Amortization of intangibles ************************************************************
Provision for deferred income taxes ****************************************************
(Gain) loss on sales of securities and other assets, net************************************
Mortgage loans originated for sale in the secondary market, net of repayments **************
Proceeds from sales of mortgage loans ************************************************
Stock-based compensation ***********************************************************
Other, net **************************************************************************
$ 4,166.8
$ 3,732.6
$ 3,168.1
669.6
244.4
550.1
281.3
(104.0)
(16,007.2)
15,777.8
138.5
(492.5)
1,254.0
275.2
682.4
272.7
(300.4)
(27,665.8)
30,228.4
123.4
79.7
1,349.0
285.3
553.0
291.7
(411.1)
(22,567.9)
20,756.6
113.3
248.3
Net cash provided by (used in) operating activities ************************************
5,224.8
8,682.2
3,786.3
Investing Activities
Proceeds from sales of available-for-sale investment securities ********************************
Proceeds from maturities of investment securities *******************************************
Purchases of investment securities ********************************************************
Net (increase) decrease in loans outstanding ***********************************************
Proceeds from sales of loans*************************************************************
Purchases of loans**********************************************************************
Proceeds from sales of premises and equipment********************************************
Purchases of premises and equipment ****************************************************
Acquisitions, net of cash acquired*********************************************************
Divestitures ****************************************************************************
Other, net *****************************************************************************
8,216.2
12,260.8
(19,623.9)
(7,680.1)
1,803.5
(2,718.8)
50.6
(192.0)
(322.1)
—
(309.8)
17,383.3
18,139.9
(51,127.3)
(4,193.3)
2,203.7
(944.3)
39.7
(670.1)
—
(381.8)
124.7
14,386.9
11,246.5
(26,469.8)
(4,111.3)
2,219.1
(240.2)
211.8
(429.8)
1,368.8
—
(126.1)
Net cash provided by (used in) investing activities*************************************
(8,515.6)
(19,425.5)
(1,944.1)
Financing Activities
Net increase (decrease) in deposits********************************************************
Net increase (decrease) in short-term borrowings********************************************
Principal payments or redemption of long-term debt *****************************************
Proceeds from issuance of long-term debt *************************************************
Proceeds from issuance of common stock *************************************************
Repurchase of common stock************************************************************
Cash dividends paid ********************************************************************
Net cash provided by (used in) financing activities*************************************
Change in cash and cash equivalents ***********************************************
Cash and cash equivalents at beginning of year ********************************************
1,688.8
2,234.3
(12,682.8)
13,704.3
580.6
(2,659.6)
(1,820.5)
1,045.1
(2,245.7)
8,782.2
3,449.0
3,869.5
(8,967.9)
11,467.5
398.4
(326.3)
(1,556.8)
8,333.4
(2,409.9)
11,192.1
7,002.3
(7,307.0)
(8,367.5)
10,650.9
147.0
(1,040.4)
(1,480.7)
(395.4)
1,446.8
9,745.3
Cash and cash equivalents at end of year *******************************************
$ 6,536.5
$ 8,782.2
$ 11,192.1
Supplemental Cash Flow Disclosures
Cash paid for income taxes **************************************************************
Cash paid for interest *******************************************************************
Net noncash transfers to foreclosed property ***********************************************
Acquisitions
Assets acquired *********************************************************************
Liabilities assumed*******************************************************************
Net*****************************************************************************
See Notes to Consolidated Financial Statements.
$ 1,767.7
2,029.8
104.5
$
$
436.9
(113.9)
323.0
$ 1,257.8
2,077.0
110.0
$
$
—
—
—
$ 1,129.5
2,890.1
89.5
$ 2,068.9
(3,821.9)
$ (1,753.0)
U.S. BANCORP 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Significant Accounting Policies
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.
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 customers, government clients, correspondent
financial institutions, merchants and co-brand partners.
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 expenses associated with
business activities managed on a corporate basis, including
enterprise-wide operations and administrative support
functions.
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 22
‘‘Line of Business Financial Performance’’ included in
Management’s Discussion and Analysis which is
incorporated by reference into these Notes to Consolidated
Financial Statements.
B U S I N E S S S E G M E N T S
S E C U R I T I E S
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 offers lending, depository, treasury
management and other financial services to middle market,
large corporate and public sector clients.
Consumer Banking delivers products and services to the
broad consumer market and small businesses through
banking offices, telemarketing, on-line services, direct mail
and automated teller machines (‘‘ATMs’’).
Private Client, Trust and Asset Management provides trust,
private banking, financial advisory, investment management
and mutual fund servicing to affluent individuals,
businesses, institutions and mutual funds.
Payment Services includes consumer and business credit
cards, debit cards, corporate and purchasing card services,
consumer lines of credit, ATM processing and merchant
processing. Customized products and services, coupled with
cutting-edge technology are provided to consumer and
68 U.S. BANCORP
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 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. Securities pledged as
collateral under these financing arrangements cannot be sold
or repledged by the secured party. The fair value of
collateral received is continually monitored and additional
collateral obtained or requested to be returned to the
Company as deemed appropriate.
E Q U I T Y I N V E S T M E N T S I N O P E R AT I N G
E N T I T I E S
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.
L O A N S
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 24 in the Notes to Consolidated Financial Statements.
Allowance for Credit Losses Management determines the
adequacy of the allowance based on evaluations of 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 and letters of
credit 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
is included in the allowance for credit losses.
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.
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.
U.S. BANCORP 69
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 sales 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 in
commercial products revenue or other noninterest income.
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. The Interagency Guidance on Certain Loans
Held for Sale, dated March 26, 2001, requires loans
transferred to LHFS to be 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
70 U.S. BANCORP
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.
D E R I VAT I V E F I N A N C I A L I N S T R U M E N T S
In the ordinary course of business, the Company enters into
derivative transactions to manage its interest rate, foreign
currency and prepayment 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 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.
O T H E R S I G N I F I C A N T P O L I C I E S
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. The total cost of loans sold is
allocated between the loans sold and the servicing assets
retained based on their relative fair values. MSRs that are
purchased from others are initially recorded at cost. The
carrying value of the MSRs is amortized in proportion to,
and over the period of, estimated net servicing revenue and
recorded in noninterest expense as amortization of
intangible assets. The carrying value of these assets is
periodically reviewed for impairment using a lower of
carrying value or fair value methodology. For purposes of
measuring impairment, the servicing rights are stratified
based on the underlying loan type and note rate and the
carrying value of each stratum is compared to fair value
based on a discounted cash flow analysis, utilizing current
prepayment speeds and discount rates. Events that may
significantly affect the estimates used are changes in interest
rates and the related impact on mortgage loan prepayment
speed and the payment performance of the underlying
loans. If the carrying value is greater than fair value,
impairment is recognized through a valuation allowance for
each impaired stratum and recorded as amortization of
intangible assets. The valuation allowance is adjusted each
subsequent period to reflect any increase or decrease in the
indicated impairment. The Company reviews mortgage
servicing rights for other-than-temporary impairment each
quarter and recognizes a direct write-down when the
recoverability of a recorded valuation allowance is
determined to be remote. In determining whether other-
than-temporary impairment has taken place, the Company
considers historical trends in pay off activity and the
potential for impairment recovery. Unlike a valuation
allowance, a direct write-down permanently reduces the
carrying value of the mortgage servicing rights, precluding
subsequent reversals.
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 credits) 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
ratably over a five-year period.
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
U.S. BANCORP 71
from banks, federal funds sold and securities purchased
under agreements to resell.
Stock-Based Compensation The Company grants stock
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. The Company recognizes stock-based
compensation in its results of operations utilizing the fair
value method under Statement of Financial Accounting
Standard No. 123, ‘‘Accounting for Stock-based
Compensation’’ (‘‘SFAS 123’’). Stock-based compensation is
recognized using an accelerated method of amortization for
awards with graded vesting features and on a straight-line
basis for awards with cliff vesting. 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 options
are exercised, cancelled or expire, the Company may be
required to recognize an adjustment to tax expense.
Per Share Calculations Earnings per share is calculated by
dividing net income 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. All per
share amounts have been restated for stock splits.
Note 2
Accounting Changes
Stock-Based Compensation In December 2002, the
Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148 (‘‘SFAS 148’’),
‘‘Accounting for Stock-Based Compensation — Transition
and Disclosure,’’ an amendment of SFAS 123. SFAS 148
provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for
stock-based employee compensation. In previous years, the
Company accounted for stock-based employee
compensation under the intrinsic based method and
provided disclosure of the impact of the fair value based
method on reported income. For its 2003 financial
statements, the Company elected to adopt the fair value
method using the retroactive restatement approach. All
prior periods presented have been restated to reflect the
compensation cost that would have been recognized had the
recognition provisions of SFAS 123 been applied to all
awards granted to employees after January 1, 1995, that
remained unvested at the beginning of the first period
presented.
72 U.S. BANCORP
In December 2004, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 123 (revised 2004) (‘‘SFAS 123R’’), ‘‘Share-Based
Payment’’ a revision of SFAS 123. SFAS 123R requires
companies to measure the cost of employee services in
exchange for an award of equity instruments based on the
grant-date fair value of the award. This statement eliminates
the use of the alternative intrinsic value method of
accounting that was allowed when SFAS 123 was originally
issued. The provisions of this statement are effective in the
first interim reporting period beginning after June 15, 2005.
Because the Company retroactively adopted the fair value
method in 2003, the revised statement will not have a
significant impact on the Company’s financial statements.
Loan Commitments On March 9, 2004, the Securities and
Exchange Commission staff issued Staff Accounting Bulletin
No. 105 (‘‘SAB 105’’), ‘‘Application of Accounting
Principles to Loan Commitments,’’ which provides guidance
regarding loan commitments accounted for as derivative
instruments and is effective for commitments entered into
after March 31, 2004. The guidance clarifies that expected
future cash flows related to the servicing of the loan may be
recognized only when the servicing asset has been
contractually separated from the underlying loan by sale
with servicing retained. The adoption of SAB 105 did not
have a material impact on the Company’s financial
statements.
Note 3
Business Combinations
On June 29, 2004, the Company purchased the remaining
50 percent ownership interest of EuroConex Technologies
Ltd (‘‘EuroConex’’) from the Bank of Ireland. In addition,
during the second and fourth quarter of 2004, the
Company completed three separate transactions to acquire
merchant processing businesses in Poland, the United
Kingdom and Norway. In connection with these
transactions, EuroConex and its affiliates provide debit and
credit card processing services to merchants, directly and
through alliances with banking partners in these European
markets. These transactions represented total assets acquired
of $377 million and total liabilities assumed of $115 million
at the closing date. Included in total assets were contract
and other intangibles with a fair value of $163 million and
goodwill of $105 million. The goodwill reflected the
strategic value of these businesses to the Company’s
European merchant processing business and anticipated
economies of scale that will result from these transactions.
On December 31, 2002, the Company acquired the
corporate trust business of State Street Bank and
Trust Company (‘‘State Street Corporate Trust’’) in a cash
transaction valued at $720 million. State Street Corporate
Trust was a leading provider, particularly in the Northeast,
of corporate trust and agency services to a variety of
municipalities, corporations, government agencies and other
financial institutions serving approximately 20,000 client
issuances representing over $689 billion of assets under
administration. With this acquisition, the Company is
among the nation’s leading providers of a full range of
corporate trust products and services. The transaction
represented total assets acquired of $677 million and total
liabilities assumed of $39 million at the closing date.
Included in total assets were contract and other intangibles
with a fair value of $218 million and goodwill of
$520 million. The goodwill reflected the strategic value of
the combined organization’s leadership position in the
corporate trust business and processing economies of scale
resulting from the transaction.
In addition to these business acquisitions, the Company
completed other strategic acquisitions to enhance its
presence in certain markets and businesses.
The following table summarizes significant acquisitions by the Company completed since January 1, 2002:
(Dollars in Millions)
Date
Assets (a)
Deposits
Goodwill
and Other
Intangibles
Cash Paid /
(Received)
Accounting
Method
Nova European acquisitions ***************************
Corporate trust business of State Street Bank and
Trust Company***********************************
Bay View Bank branches *****************************
The Leader Mortgage Company, LLC ******************
(a) Assets acquired do not include purchase accounting adjustments.
April 2004-
November 2004
December 2002
November 2002
April 2002
$109
$ —
$268
$ 259
Purchase
13
362
517
—
3,305
—
738
483
191
638
(2,494)
85
Purchase
Purchase
Purchase
Note 4
Discontinued Operations
On December 31, 2003, the Company completed the
distribution of all the outstanding shares of common stock
of Piper Jaffray Companies to its shareholders. This non-
cash distribution was tax-free to the Company, its
shareholders and Piper Jaffray Companies. In connection
with the December 31, 2003 distribution, the results of
Piper Jaffray Companies are reported in the Company’s
Consolidated Statement of Income separately as
discontinued operations.
The following table represents the condensed results of operations for discontinued operations:
Year Ended December 31 (Dollars in Millions)
Revenue **************************************************************************************************
Noninterest expense****************************************************************************************
Income (loss) from discontinued operations ********************************************************************
Costs of disposal (a)****************************************************************************************
Income taxes (benefit) **************************************************************************************
2003
$783.4
716.5
66.9
27.6
16.8
2002
$729.0
760.3
(31.3)
—
(8.6)
Discontinued operations, net of tax************************************************************************
$ 22.5
$ (22.7)
(a) The $27.6 million of disposal costs related to discontinued operations primarily represents legal, investment banking and other costs directly related to the distribution.
U.S. BANCORP 73
The distribution was treated as a dividend to
shareholders for accounting purposes and, as such, reduced
the Company’s retained earnings by $685 million. At
December 31, 2003, the Consolidated Balance Sheet reflects
the non-cash dividend and corresponding reduction in assets
and liabilities at that date. A summary of the assets and
liabilities of the discontinued operations is as follows:
December 31 (Dollars in Millions)
Assets
Cash and cash equivalents **************************************************************************************************
Trading securities **********************************************************************************************************
Goodwill ******************************************************************************************************************
Other assets (a)************************************************************************************************************
Total assets ************************************************************************************************************
Liabilities
Deposits ******************************************************************************************************************
Short-term borrowings ******************************************************************************************************
Long-term debt ************************************************************************************************************
Other liabilities (b) **********************************************************************************************************
2003
$ 382
656
306
1,025
$2,369
$
6
905
180
593
Total liabilities **********************************************************************************************************
$1,684
(a) Includes customer margin account receivables, due from brokers /dealers and other assets.
(b) Includes accrued expenses, due to brokers /dealers and other liabilities.
Following the distribution, the Company’s wholly-owned
subsidiary, USB Holdings, Inc. holds a $180 million
subordinated debt facility with Piper Jaffray & Co., a
broker-dealer subsidiary of Piper Jaffray Companies. In
addition, the Company provides an indemnification in an
amount up to $17.5 million with respect to certain specified
liabilities resulting from third-party claims relating to
research analyst independence and from certain regulatory
investigations, as defined in the separation and distribution
agreement entered into with Piper Jaffray Companies at the
time of the distribution. Through December 31, 2004, the
Company has paid approximately $3.3 million to Piper
Jaffray Companies under this indemnification agreement.
Note 5
Merger and Restr ucturing-Related
Items
The Company recorded pre-tax merger and restructuring-
related charges of $46.2 million and $321.2 million in 2003
and 2002, respectively. In 2003, merger-related items were
incurred in connection with the NOVA Corporation
acquisition and the Company’s various other acquisitions,
primarily Bay View and State Street Corporate Trust. In
2002, merger-related items included costs associated with
the Firstar/former U.S. Bancorp of Minneapolis (‘‘USBM’’)
merger, NOVA and other smaller acquisitions.
74 U.S. BANCORP
The components of the merger and restructuring-related items are shown below:
(Dollars in Millions)
USBM
NOVA
Other (a)
Total
2003
Severance and employee-related ************************************
Systems conversions and integration *********************************
Asset write-downs and lease terminations ****************************
Other merger-related items *****************************************
Total 2003 ********************************************************
Noninterest expense ***********************************************
Balance sheet recognition ******************************************
Merger-related items — 2003 ************************************
2002
Severance and employee-related ************************************
Systems conversions and integration *********************************
Asset write-downs and lease terminations ****************************
Other merger-related items *****************************************
Total 2002 ********************************************************
Noninterest expense ***********************************************
Balance sheet recognition ******************************************
Merger-related items — 2002 ************************************
$ —
—
—
—
$ —
$ —
—
$ —
$ 4.1
194.9
104.0
(34.0)
$269.0
$269.0
—
$269.0
$
.8
25.9
6.8
—
$33.5
$33.5
—
$33.5
$ (3.8)
29.4
14.2
(1.1)
$38.7
$34.9
3.8
$38.7
$ —
6.9
3.0
1.4
$11.3
$12.7
(1.4)
$11.3
$ 9.1
17.3
6.0
3.5
$35.9
$17.3
18.6
$35.9
$
.8
32.8
9.8
1.4
$ 44.8
$ 46.2
(1.4)
$ 44.8
$ 9.4
241.6
124.2
(31.6)
$343.6
$321.2
22.4
$343.6
(a) In 2003 and 2002, ‘‘Other’’ primarily included merger and restructuring-related items pertaining to the Bay View acquisition, State Street Corporate Trust and the Lyon Financial acquisition.
The Company determines merger and restructuring-
related items and related accruals based on its integration
strategy and formulated plans. These plans are established
as of the acquisition date and are regularly evaluated during
the integration process.
Severance and employee-related charges include the cost
of severance, other benefits and outplacement costs
associated with the termination of employees primarily in
branch offices and centralized corporate support and data
processing functions. The severance amounts are determined
based on the Company’s existing severance pay programs
and are paid out over a benefit period of up to two years
from the time of termination. In 2002, the Company
recognized additional severance costs of $13.1 million in
connection with the USBM merger offset by net curtailment
and settlement gains of $9.0 million related to changes in
certain non-qualified pension plans. Changes in severance
costs for NOVA primarily reflected a change in estimate in
the liability given the mix of employees terminated.
Severance and employee-related costs for identified groups
of acquired employees are included in the determination of
goodwill at closing. Severance and employee-related costs
are recorded as incurred for groups of employees not
specifically identified at the time of closing or acquired in
business combinations accounted for as ‘‘poolings.’’
Systems conversions and integration costs are recorded
as incurred and are associated with the preparation and
mailing of numerous customer communications for the
acquisitions and conversion of customer accounts, printing
and distribution of training materials and policy and
procedure manuals, outside consulting fees, and other
expenses related to systems conversions and the integration
of acquired branches and operations.
Asset write-downs and lease terminations represent
lease termination costs and impairment of assets for
redundant office space, branches that will be vacated and
equipment disposed of as part of the integration plan. These
costs are recognized in the accounting period that contract
terminations occur or the asset becomes impaired and is
abandoned. In 2002, this category included $38.2 million of
signage write-offs, $26.9 million of software and equipment
write-offs, $32.0 million of lease and contract cancellations
and $6.9 million of leasehold and other related items
associated with the Firstar/USBM merger.
Other merger-related items in 2002 of $(31.6) million
primarily represented asset gains and changes to conform
accounting policies implemented at the time of systems
conversions related to the Firstar/USBM merger and other
acquired entities. During 2002, the Company recognized
asset gains related to the sale of a non-strategic investment
in a sub-prime lending business of $28.7 million and a
mark-to-market recovery of $10.1 million associated with
the liquidation of U.S. Bancorp Libra’s investment portfolio.
The adequacy of the accrued liabilities is reviewed
regularly taking into consideration actual and projected
payments. Adjustments are made to increase or decrease
these accruals as needed. Reversals of expenses can reflect a
lower utilization of benefits by affected staff, changes in
initial assumptions as a result of subsequent mergers and
alterations of business plans.
U.S. BANCORP 75
The components of the merger and restructuring-related accruals for all acquisitions were as follows:
(Dollars in Millions)
Severance ***********************************************************************************************************
Other employee-related costs*******************************************************************************************
Lease termination and facility costs**************************************************************************************
Contracts and system write-offs ****************************************************************************************
Other ***************************************************************************************************************
Total *************************************************************************************************************
The merger and restructuring-related accruals by significant acquisition or business restructuring was as follows:
(Dollars in Millions)
NOVA ***************************************************************************************************************
State Street Corporate Trust********************************************************************************************
USBM***************************************************************************************************************
Total *************************************************************************************************************
December 31,
2003
$ 3.4
1.1
14.4
2.4
3.3
$24.6
December 31,
2003
$18.1
4.1
2.4
$24.6
At December 31, 2002, the integration of Firstar and
USBM was completed. The only activity in the USBM
liability during 2004 was related to the payout of severance
costs. In 2003, the integration of merchant processing
platforms and business processes of U.S Bank National
Association and NOVA, as well as systems conversions for
the acquisitions of the State Street Corporate Trust business
and Bay View were completed.
Note 6
Restrictions on Cash and Due from Banks
Bank subsidiaries are required to maintain minimum average reserve balances with the Federal Reserve Bank. The amount of
those reserve balances was approximately $169 million at December 31, 2004.
Note 7
Investment Secur ities
The detail of 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:
(Dollars in Millions)
Held-to-maturity (a)
Mortgage-backed securities *************
Obligations of state and political
subdivisions ***********************
Other debt securities *******************
2004
2003
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
$
11
$ —
$ — $
11
$
14
$ —
$ — $
14
98
18
7
—
(2)
—
103
18
138
—
11
—
(2)
—
147
—
Total held-to-maturity securities *******
$
127
$ 7
$
(2)
$
132
$
152
$ 11
$
(2)
$
161
Available-for-sale (b)
U.S. Treasury and agencies *************
Mortgage-backed securities *************
Asset-backed securities ****************
Obligations of state and political
subdivisions ***********************
Other securities and investments*********
$
684
39,809
64
205
863
Total available-for-sale securities ******
$41,625
$ 3
65
—
6
11
$85
$
(8)
(337)
—
$
679
39,537
64
$ 1,634
40,229
250
—
(11)
211
863
335
993
$ 10
203
5
13
9
$ (69)
(407)
(3)
$ 1,575
40,025
252
—
(20)
348
982
$(356)
$41,354
$43,441
$240
$(499)
$43,182
(a) Held-to-maturity securities are carried at historical cost adjusted for amortization of premiums and accretion of discounts.
(b) Available-for-sale securities are carried at fair value with unrealized net gains or losses reported within other comprehensive income in shareholders’ equity.
The fair value of available-for-sale securities shown
above includes securities totaling $4.8 billion with
unrealized losses of $148.8 million which have been in an
unrealized loss position for greater than 12 months. All
principal and interest payments on available-for-sale debt
securities in an unrealized loss position for greater than
12 months are expected to be collected given the high credit
quality of the U.S. government agency debt securities and
76 U.S. BANCORP
bank holding company issuers and the Company’s ability
and intent to hold the securities until such time as the value
recovers or maturity. All other available-for-sale securities
with unrealized losses have an aggregate fair value of
$26.1 billion and have been in an unrealized loss position
for less than 12 months and represent both fixed-rate
securities and adjustable-rate securities with temporary
impairment resulting from increases in interest rates since
the purchase of the securities.
The weighted average maturity of the available-for-sale
investment securities was 4.45 years at December 31, 2004,
compared with 5.12 years at December 31, 2003. The
corresponding weighted average yields were 4.43 percent
and 4.27 percent, respectively. The weighted average
maturity of the held-to-maturity investment securities was
6.19 years at December 31, 2004, compared with
6.16 years at December 31, 2003.
Securities carried at $28.0 billion at December 31,
2004, and $31.0 billion at December 31, 2003, were
pledged to secure public, private and trust deposits and for
other purposes required by law. Securities sold under
agreements to repurchase were collateralized by securities
with an amortized cost of $4.8 billion at December 31,
2004, and $3.6 billion at December 31, 2003.
The following table provides information as to the amount of interest income from taxable and non-taxable investment
securities:
(Dollars in Millions)
Taxable *********************************************************************************
Non-taxable *****************************************************************************
Total interest income from investment securities *******************************************
2004
2003
2002
$1,808.6
18.5
$1,827.1
$1,654.6
29.4
$1,684.0
$1,438.2
46.1
$1,484.3
The following table provides information as to the amount of gross gains and losses realized through the sales of available-for-
sale investment securities.
(Dollars in Millions)
Realized gains ****************************************************************************
Realized losses****************************************************************************
Net realized gains (losses) ***************************************************************
Income tax (benefit) on realized gains (losses) *************************************************
2004
$ 104.5
(209.4)
$(104.9)
$ (39.9)
2003
$ 363.9
(119.1)
$ 244.8
$ 93.0
2002
$316.5
(16.6)
$299.9
$114.0
For amortized cost, fair value and yield by maturity
date of held-to-maturity and available-for-sale securities
outstanding at December 31, 2004, refer to Table 10
included in Management’s Discussion and Analysis which is
incorporated by reference into these Notes to Consolidated
Financial Statements.
U.S. BANCORP 77
Note 8
Loans and Allowance for Credit Losses
The composition of the loan portfolio at December 31 was as follows:
(Dollars in Millions)
Commercial
2004
2003
Commercial******************************************************************************************
Lease financing **************************************************************************************
$ 35,210
4,963
$ 33,536
4,990
Total commercial **********************************************************************************
40,173
38,526
Commercial real estate
Commercial mortgages ********************************************************************************
Construction and development *************************************************************************
Total commercial real estate ************************************************************************
Residential mortgages *******************************************************************************
Retail
Credit card ******************************************************************************************
Retail leasing*****************************************************************************************
Home equity and second mortgages ********************************************************************
Other retail
Revolving credit ***********************************************************************************
Installment****************************************************************************************
Automobile ***************************************************************************************
Student ******************************************************************************************
Total other retail ********************************************************************************
Total retail ****************************************************************************************
20,315
7,270
27,585
15,367
6,603
7,166
14,851
2,541
2,767
7,419
1,843
14,570
43,190
20,624
6,618
27,242
13,457
5,933
6,029
13,210
2,540
2,380
7,165
1,753
13,838
39,010
Total loans ************************************************************************************
$126,315
$118,235
Loans are presented net of unearned interest and
deferred fees and costs, which amounted to $1.4 billion and
$1.5 billion at December 31, 2004 and 2003, respectively.
The Company had loans of $38.3 billion at December 31,
2004, and $28.7 billion at December 31, 2003, pledged at
the Federal Home Loan Bank. Loans of $10.3 billion at
December 31, 2004, and $12.1 billion at December 31,
2003, 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, 2004 and 2003, see Table 7
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, 2004 and 2003, 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, 2004,
2003 and 2002, see Table 12 included in Management’s
Discussion and Analysis which is incorporated by reference
into these Notes to Consolidated Financial Statements.
The following table lists information related to nonperforming loans as of December 31:
(Dollars in Millions)
Loans on nonaccrual status *********************************************************************************
Restructured loans *****************************************************************************************
Total nonperforming loans ***********************************************************************************
Interest income that would have been recognized at original contractual terms *************************************
Amount recognized as interest income ************************************************************************
Forgone revenue *******************************************************************************************
2004
$582.5
58.0
$640.5
$ 64.4
22.3
$ 42.1
2003
$ 979.5
40.5
$1,020.0
$
$
94.1
26.7
67.4
78 U.S. BANCORP
Activity in the allowance for credit losses was as follows:
(Dollars in Millions)
Balance at beginning of year ***************************************************************
Add
2004
2003
2002
$2,368.6
$2,422.0
$2,457.3
Provision charged to operating expense **************************************************
669.6
1,254.0
1,349.0
Deduct
Loans charged off*********************************************************************
Less recoveries of loans charged off *****************************************************
Net loans charged off******************************************************************
Acquisitions and other changes ************************************************************
1,073.5
306.4
767.1
(1.8)
1,494.1
242.4
1,251.7
(55.7)
1,590.7
217.7
1,373.0
(11.3)
Balance at end of year (a) *****************************************************************
$2,269.3
$2,368.6
$2,422.0
Components
Allowance for loan losses **************************************************************
Liability for unfunded credit commitments*************************************************
Total allowance for credit losses******************************************************
$2,080.4
188.9
$2,269.3
$2,183.6
185.0
$2,368.6
(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 loans deemed impaired. All impaired loans are included in
nonperforming assets. A summary of these loans and their related allowance for credit losses is as follows:
(Dollars in Millions)
Impaired loans
Valuation allowance required ***********
No valuation allowance required ********
Total impaired loans **********************
Average balance of impaired loans during the
year*********************************
Interest income recognized on impaired loans
during the year ***********************
2004
2003
2002
Recorded
Investment
Valuation
Allowance
Recorded
Investment
Valuation
Allowance
Recorded
Investment
Valuation
Allowance
$489
—
$489
$600
1
$64
—
$64
$841
—
$841
$970
—
$108
—
$108
$992
—
$992
$839
—
$157
—
$157
Commitments to lend additional funds to customers
whose loans were classified as nonaccrual or restructured at
December 31, 2004, totaled $61.2 million. During 2004
there were $10.2 million of loans that were restructured at
market interest rates and returned to an accruing status.
Included in noninterest income, primarily in mortgage
banking revenue, for the years ended December 31, 2004,
2003 and 2002, the Company had net gains on the sale of
loans of $171.0 million, $162.9 million and $243.4 million,
respectively.
Note 9
Leases
The components of the net investment in sales-type and direct financing leases at December 31 were as follows:
(Dollars in Millions)
Aggregate future minimum lease payments to be received ******************************************************
Unguaranteed residual values accruing to the lessor’s benefit ***************************************************
Unearned income *****************************************************************************************
Initial direct costs *****************************************************************************************
Total net investment in sales-type and direct financing leases ************************************************
The amount of future minimum lease payments included the following at December 31:
(Dollars in Millions)
Accumulated allowance for uncollectible minimum lease payments *************************************************
2004
2003
$12,436
615
(1,560)
264
$11,755
$11,293
652
(1,533)
226
$10,638
2004
$141
2003
$131
U.S. BANCORP 79
The minimum future lease payments to be received from sales-type and direct financing leases were as follows at
December 31, 2004:
(Dollars in Millions)
2005 *********************************************************************************************************************
2006 *********************************************************************************************************************
2007 *********************************************************************************************************************
2008 *********************************************************************************************************************
2009 *********************************************************************************************************************
Thereafter *****************************************************************************************************************
$2,272
2,468
3,192
2,893
1,394
217
Note 10
Accounting for Transfers and
Ser vicing of Financial Assets and
Extinguishments of Liabilities
F I N A N C I A L A S S E T S A L E S
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.
Conduits and Securitization The Company sponsors an off-
balance sheet conduit to which it transferred high-grade
investment securities, funded by the issuance of commercial
paper. The conduit, a qualifying special purpose entity, held
assets of $5.7 billion at December 31, 2004 and
$7.3 billion in assets at December 31, 2003. These
investment securities include primarily (i) private label asset-
backed securities, which are insurance ‘‘wrapped’’ by
AAA/Aaa-rated monoline insurance companies and
(ii) government agency mortgage-backed securities and
collateralized mortgage obligations. The conduit had
commercial paper liabilities of $5.7 billion at December 31,
2004 and $7.3 billion at December 31, 2003. 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.
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
80 U.S. BANCORP
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 $32.4 million at December 31, 2004
and $47.3 million at December 31, 2003. In addition, the
Company recorded at fair value its retained residual interest
in the investment securities conduit of $56.8 million at
December 31, 2004 and $89.5 million at December 31,
2003. The Company recorded $24.9 million from the
conduit during 2004 and $30.5 million during 2003, for
revenues related to the conduit including fees for servicing,
management, administration and accretion income from
retained interests.
The Company also has an asset-backed securitization
to fund an unsecured small business credit product. The
unsecured small business credit securitization trust held
assets of $375.3 million at December 31, 2004, of which
the Company retained $85.0 million of subordinated
securities and a residual interest-only strip of $36.1 million.
This compared with $497.5 million in assets at
December 31, 2003, of which the Company retained
$112.4 million of subordinated securities and a residual
interest-only strip of $34.4 million. The qualifying special
purpose entity issued asset-backed variable funding notes in
various tranches. The Company provides credit
enhancement in the form of subordinated securities and
reserve accounts. The Company’s risk, primarily from losses
in the underlying assets, was considered in determining the
fair value of the Company’s retained interests in this
securitization. The Company recognized income from
subordinated securities, an interest-only strip and servicing
fees from this securitization of $33.2 million during 2004
and $29.8 million during 2003. The unsecured small
business credit securitization held average assets of
$438.9 million in 2004, and $571.4 million in 2003.
During 2003, the Company undertook several actions
with respect to off-balance sheet structures. In January
2003, the Company exercised a cleanup call option on an
indirect automobile loan securitization, with the remaining
assets from the securitization recorded on the Company’s
balance sheet at fair value. The indirect automobile
securitization held $156.1 million in assets at December 31,
2002.
During the third quarter of 2003, the Company did not
reissue more than 90 percent of the commercial paper
funding of Stellar Funding Group, Inc. (‘‘Stellar’’), a
commercial loan conduit. This action caused the conduit to
lose its status as a qualifying special purpose entity. As a
result, the Company recorded all of Stellar’s assets and
liabilities at fair value and the results of operations in the
consolidated financial statements of the Company. Given
the floating-rate nature and high credit quality of the assets
within the conduit, the impact to the Company’s financial
statements was not significant. In the third quarter of 2003,
average commercial loan balances increased by
approximately $2 billion and the resulting increase in net
interest income was offset by a similar decline in conduit fee
income within commercial products revenue. Prior to
December 31, 2003, the remaining commercial paper
borrowings held by third-party investors matured and the
conduit was legally dissolved.
Sensitivity Analysis At December 31, 2004, 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 were as follows:
December 31, 2004 (Dollars in Millions)
Current economic assumptions sensitivity analysis
Carrying value (fair value) of retained interests ********************************************************
Weighted average life (in years) ********************************************************************
Expected remaining life (a) **********************************************************************
Impact of 10% adverse change ********************************************************************
Impact of 20% adverse change ********************************************************************
Expected credit losses (annual) (b)**************************************************************
Impact of 10% adverse change ********************************************************************
Impact of 20% adverse change ********************************************************************
Residual cash flow discount rate ***************************************************************
Impact of 10% adverse change ********************************************************************
Impact of 20% adverse change ********************************************************************
Interest rate on variable rate loans and bonds (c)(d) *******************************************
Impact of 10% adverse change ********************************************************************
Impact of 20% adverse change ********************************************************************
Unsecured
Small
Business
Receivables
$121.0
.9
2.3 years
(.7)
(3.0)
$
6.3%-9.5%
$ (1.4)
(3.9)
$
11.0%
(.2)
(1.5)
Prime
$ —
(1.1)
Investment
Securities
$ 56.8
2.1
4.1 years
$ (5.6)
(10.3)
NA
$ —
—
7.5%
$ (.4)
(.7)
LIBOR
$ —
—
(a) For the small business receivables a monthly principal payment rate assumption is used to value the residual interests.
(b) Credit losses are zero for the investment securities conduit as the investments are all AAA/Aaa rated or insured investments.
(c) For the small business receivables interest income is base on Prime + contractual spread.
(d) The investment securities conduit is mostly match funded. Therefore, interest rate movements create no material impact to the value of the residual interest.
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 The table below summarizes certain cash flows received from and paid to conduit or structured entities
for the asset sales described above:
Unsecured
Small
Business
Receivables (a)
Year Ended December 31 (Dollars in Millions)
2004
Proceeds from
Commercial
Loans
Indirect
Automobile
Loans
New sales and securitizations **********************************************
Collections used by trust to purchase new receivables in revolving securitizations ****
Servicing and other fees received and cash flows on retained interests****************
$
—
—
—
2003
Proceeds from
New sales and securitizations **********************************************
Collections used by trust to purchase new receivables in revolving securitizations ****
Servicing and other fees received and cash flows on retained interests****************
Net cash flow from loan conduit consolidation ************************************
$
—
—
23.9
(1,884.0)
(a) The small business credit securitization is a revolving transaction where proceeds are reinvested until their legal terminations.
$ —
—
—
$ —
—
24.3
—
$ —
328.7
73.7
$ —
420.6
85.3
—
Investment
Securities
$ —
—
35.5
$ —
—
51.8
—
U.S. BANCORP 81
Other Information Quantitative information related to managed assets and loan sales was as follows:
Asset Type (Dollars in Millions)
2004
2003
2004
2003
2004
2003
2004
2003
At December 31
Year Ended December 31
Total Principal
Balance
Principal Amount
90 Days or More Past Due (a)
Average Balance
Net Credit Losses
Residential mortgages ***********
15,367
13,457
Commercial
Commercial **********************
Lease financing*******************
Total commercial **************
Commercial real estate
Commercial mortgages ************
Construction and development *****
Total commercial real estate*****
Retail
Credit card **********************
Retail leasing*********************
Other retail***********************
Total retail ********************
Total managed loans********
Investment securities ************
Total managed assets *************
Less
$ 35,891
4,963
$ 34,427
4,990
40,854
39,417
$311
92
403
$ 651
115
766
$ 35,274
4,866
$ 39,079
5,088
40,140
44,167
$129
69
198
$ 535
84
619
20,315
7,270
27,585
20,624
6,618
27,242
6,603
7,166
29,421
43,190
5,933
6,029
27,048
39,010
126,996
119,126
47,191
50,679
175
26
201
114
115
6
101
222
940
—
181
42
223
123
100
8
135
243
20,386
6,881
27,267
20,166
6,976
27,142
14,322
11,696
6,090
6,653
28,461
41,204
5,525
5,804
26,876
38,205
1,355
122,933
121,210
—
49,452
45,574
18
9
27
29
252
39
251
542
796
—
28
11
39
27
255
50
311
616
1,301
—
$174,187
$169,805
$940
$1,355
$172,385
$166,784
$796
$1,301
Assets sold or securitized**********
Total assets held ***********
6,391
8,236
$167,796
$161,569
7,235
11,174
$165,150
$155,610
Sold or securitized assets
Commercial loans ****************
Indirect automobile loans (b) *******
Guaranteed SBA loans (c) *********
Small business credit lines (c) ******
Investment securities **************
Total securitized assets*********
(a) Includes nonaccrual
(b) Reported in ‘‘other retail’’ loans.
(c) Reported in ‘‘commercial’’ loans.
$
— $
—
315
366
5,710
—
—
406
485
7,345
$ 6,391
$ 8,236
$ —
—
—
4
—
$
4
$ —
—
—
6
—
$
6
$
— $ 1,834
—
7
450
364
557
428
8,326
6,443
$ 7,235
$ 11,174
$ —
—
—
29
—
$ 29
$ —
—
—
49
—
$
49
Note 11
Premises and Equipment
Premises and equipment at December 31 consisted of the following:
(Dollars in Millions)
Land ********************************************************************************************************
Buildings and improvements ***********************************************************************************
Furniture, fixtures and equipment *******************************************************************************
Capitalized building and equipment leases ***********************************************************************
Construction in progress ***************************************************************************************
Less accumulated depreciation and amortization ******************************************************************
2004
$ 311
2,288
2,105
138
5
4,847
(2,957)
Total *****************************************************************************************************
$ 1,890
2003
$ 311
2,226
2,092
175
7
4,811
(2,854)
$ 1,957
Note 12
Mor tgage Ser vicing Rights
The Company’s portfolio of residential mortgages serviced for others was $63.2 billion, $53.9 billion and $43.1 billion at
December 31, 2004, 2003 and 2002 respectively.
82 U.S. BANCORP
Changes in the valuation allowance for capitalized mortgage servicing rights are summarized as follows:
Year Ended December 31 (Dollars in Millions)
Balance at beginning of year ************************************************
Additions charged to operations ******************************************
Direct write-downs charged against the allowance **************************
Balance at end of year *****************************************************
2004
$160
57
(45)
$172
Changes in net carrying value of capitalized mortgage servicing rights are summarized as follows:
Year Ended December 31 (Dollars in Millions)
Balance at beginning of year ************************************************
Rights purchased*******************************************************
Rights capitalized*******************************************************
Amortization ***********************************************************
Rights sold ************************************************************
Impairment ************************************************************
Balance at end of year *****************************************************
Impairment valuation allowance*******************************************
Initial carrying value, net of amortization***************************************
2004
$ 670
139
300
(186)
—
(57)
866
172
$1,038
2003
$ 207
209
(256)
$ 160
2003
$ 642
55
338
(156)
—
(209)
670
160
$ 830
2002
$ 53
186
(32)
$207
2002
$ 360
229
357
(94)
(24)
(186)
642
207
$ 849
The key economic assumptions used to estimate the value of the mortgage servicing rights portfolio were as follows:
December 31 (Dollars in Millions)
Fair value ***************************************************************************************
Expected weighted-average life (in years) ************************************************************
Discount rate ************************************************************************************
2004
$872
5.5
9.9%
2003
$670
5.2
9.9%
The estimated sensitivity of the fair value of the mortgage servicing rights portfolio to changes in interest rates at
December 31, 2004, was as follows:
(Dollars in Millions)
Down Scenario
Up Scenario
50 bps
25 bps
25 bps
50 bps
Fair value**************************************************************************************
$(258)
$(133)
$109
$177
The fair value of mortgage servicing rights and its
sensitivity to changes in interest rates is influenced by the
mix of the servicing portfolio and characteristics of each
segment of the portfolio. In the current interest rate
environment, mortgage loans originated as part of
government agency and state loan programs tend to
experience slower prepayment speeds and better cash flows
than conventional mortgage loans. The Company’s servicing
portfolio consists of the distinct portfolios of Mortgage
Revenue Bond Programs (‘‘MRBP’’), government-related
mortgages and conventional mortgages. The MRBP division
specializes in servicing loans made under state and local
housing authority programs. These programs provide
mortgages to low and moderate income borrowers and are
generally under government insured programs with down
payment or closing cost assistance. The conventional and
government servicing portfolios are predominantly
comprised of fixed-rate agency loans (FNMA, FHLMC,
GNMA, FHLB and various housing agencies) with limited
adjustable-rate or jumbo mortgage loans.
A summary of the Company’s mortgage servicing rights and related characteristics by portfolio as of December 31, 2004, was
as follows:
(Dollars in Millions)
MRBP
Government
Conventional
Total
Servicing portfolio ************************************************************************** $7,524
Fair market value *************************************************************************** $ 126
Value (bps) ********************************************************************************
167
Weighted-average servicing fees (bps)*********************************************************
43
Multiple (value/servicing fees)*****************************************************************
3.88
Weighted-average note rate******************************************************************
6.24%
Age (in years) ******************************************************************************
3.6
Expected life (in years) **********************************************************************
6.3
Discount rate ******************************************************************************
10.1%
$9,204
$ 136
148
46
3.22
6.04%
2.2
5.1
11.0%
$46,435
610
$
131
34
3.85
5.71%
1.7
5.4
9.6%
$63,163
872
$
138
37
3.73
5.82%
2.0
5.5
9.9%
U.S. BANCORP 83
Note 13
Intangible Assets
The Company adopted Statement of Financial Accounting
Standards No. 142 (‘‘SFAS 142’’), ‘‘Goodwill and Other
Intangible Assets’’ on January 1, 2002. The most significant
changes made by SFAS 142 are that goodwill and other
indefinite lived intangible assets are no longer amortized
and will be tested for impairment at least annually. The
amortization provisions of SFAS 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect
to goodwill and intangible assets acquired prior to July 1,
2001, the amortization provisions of SFAS 142 were
effective upon adoption of SFAS 142.
Prior to the adoption of SFAS 142, the Company
evaluated goodwill for impairment under a projected
undiscounted cash flow model. As a result of the initial
impairment test from the adoption of SFAS 142, the
Company recognized an impairment loss of $58.8 million
resulting in an after-tax loss of $37.2 million in the first
quarter of 2002. The impairment was primarily related to
the purchase of a transportation leasing company in 1998
by the equipment leasing business. This charge was
recognized as a ‘‘cumulative effect of accounting change’’ in
the income statement. The fair value of that reporting unit
was estimated using the present value of future expected
cash flows.
Net income and earnings per share adjusted for the exclusion of asset impairments related to goodwill are as follows:
Year Ended December 31 (Dollars in Millions, Except Per Share Data)
2004
2003
2002
Reported net income *********************************************************************
Asset impairments, net of tax ***********************************************************
Adjusted net income ***************************************************************
Earnings per share
Reported net income ******************************************************************
Asset impairments, net of tax ***********************************************************
Adjusted net income ***************************************************************
Diluted earnings per share
Reported net income ******************************************************************
Asset impairments, net of tax ***********************************************************
Adjusted net income ***************************************************************
$4,166.8
—
$4,166.8
$
$
$
$
2.21
—
2.21
2.18
—
2.18
$3,732.6
—
$3,732.6
$
$
$
$
1.94
—
1.94
1.93
—
1.93
$3,168.1
37.2
$3,205.3
$
$
$
$
1.65
.02
1.67
1.65
.02
1.67
The following table reflects the changes in the carrying value of goodwill for the years ended December 31, 2003 and 2004:
(Dollars in Millions)
Balance at December 31, 2002 ***********
Goodwill acquired *********************
Other (a) *****************************
Balance at December 31, 2003 ***********
Goodwill acquired *********************
Other (a) *****************************
Balance at December 31, 2004 ***********
Wholesale
Banking
Consumer
Banking
Private Client,
Trust and Asset
Management
$1,230
—
(5)
$1,225
—
—
$1,225
$2,241
1
—
$2,242
—
—
$2,242
$736
6
—
$742
101
—
$843
Payment
Services
$1,812
4
—
$1,816
105
10
$1,931
Capital
Markets
Consolidated
Company
$ 306
—
(306)
$ —
—
—
$ —
$6,325
11
(311)
$6,025
206
10
$6,241
(a) In 2003, the Company completed a tax-free distribution of Piper Jaffray Companies. Other changes in goodwill include goodwill associated with Piper Jaffray Companies and foreign
exchange effects on non-dollar-denominated goodwill.
84 U.S. BANCORP
Intangible assets consisted of the following:
December 31 (Dollars in Millions)
Goodwill ********************************************************
Merchant processing contracts*************************************
Core deposit benefits *********************************************
Mortgage servicing rights******************************************
Trust relationships ************************************************
Other identified intangibles*****************************************
Total ********************************************************
Estimated
Life (a)
Amortization
Method (b)
—
9 years/8 years
10 years /6 years
6 years
15 years /8 years
8 years /4 years
—
SL/AC
SL/AC
AC
SL/AC
SL/AC
2004
$6,241
714
336
866
297
174
$8,628
Balance
2003
$6,025
552
417
670
311
174
$8,149
(a) Estimated life represents the amortization period for assets subject to the straight line method and the weighted average amortization period for intangibles subject to accelerated methods.
If more than one amortization method is used for a category, the estimated life for each method is calculated and reported separately.
(b) Amortization methods: SL = straight line method
AC = accelerated methods generally based on cash flows
Aggregate amortization expense consisted of the following:
Year Ended December 31 (Dollars in Millions)
Merchant processing contracts **************************************************************
Core deposit benefits ***********************************************************************
Mortgage servicing rights (a) *****************************************************************
Trust relationships **************************************************************************
Other identified intangibles ******************************************************************
Total **********************************************************************************
2004
$131.6
80.7
242.6
49.4
45.8
$550.1
2003
$132.4
88.2
365.1
53.3
43.4
$682.4
2002
$135.1
80.9
280.1
19.3
37.6
$553.0
(a) Includes mortgage servicing rights impairment of $56.8 million, $208.7 million and $186.1 million for the years ended December 31, 2004, 2003 and 2002, respectively.
Below is the estimated amortization expense for the next five years:
(Dollars in Millions)
2005 ************************************************************************************************************************
2006 ************************************************************************************************************************
2007 ************************************************************************************************************************
2008 ************************************************************************************************************************
2009 ************************************************************************************************************************
$458.9
389.4
334.0
273.8
225.2
Note 14
Shor t-Ter m Borrowings
The following table is a summary of short-term borrowings for the last three years:
(Dollars in Millions)
At year-end
Federal funds purchased *******************************
Securities sold under agreements to repurchase ***********
Commercial paper *************************************
Treasury, tax and loan notes ****************************
Other short-term borrowings ****************************
Total **********************************************
Average for the year
Federal funds purchased *******************************
Securities sold under agreements to repurchase ***********
Commercial paper *************************************
Treasury, tax and loan notes ****************************
Other short-term borrowings ****************************
Total **********************************************
Maximum month-end balance
Federal funds purchased *******************************
Securities sold under agreements to repurchase ***********
Commercial paper *************************************
Treasury, tax and loan notes ****************************
Other short-term borrowings ****************************
2004
2003
2002
Amount
Rate
Amount
Rate
Amount
Rate
$ 3,379
4,848
2,634
251
1,972
$13,084
$ 3,823
6,144
1,144
804
2,619
$14,534
$ 6,342
8,972
2,687
7,867
3,856
1.25%
1.95
2.11
1.72
2.20
$ 5,098
3,586
699
809
658
.91%
.71
.88
.69
.65
$ 3,025
2,950
380
102
1,349
1.84%
$10,850
.81%
$ 7,806
3.10%
1.19
.91
1.01
2.01
$ 4,966
3,374
681
634
848
2.36%
.79
1.06
.95
1.13
$ 4,145
2,308
391
707
2,565
1.81%
$10,503
1.59%
$10,116
$ 6,658
4,173
952
4,223
2,676
$ 7,009
2,950
452
4,164
6,172
.98%
.97
1.20
.91
1.26
1.03%
2.94%
1.14
1.74
1.50
2.23
2.20%
U.S. BANCORP 85
Note 15
Long-Ter m Debt
Long-term debt (debt with original maturities of more than one year) at December 31 consisted of the following:
(Dollars in Millions)
U.S. Bancorp (Parent Company)
Fixed-rate subordinated notes
2004
2003
8.00% due 2004 **************************************************************************************
7.625% due 2005 *************************************************************************************
6.75% due 2005 **************************************************************************************
6.875% due 2007 *************************************************************************************
7.30% due 2007 **************************************************************************************
7.50% due 2026 **************************************************************************************
Medium-term notes ***************************************************************************************
Junior subordinated debentures*****************************************************************************
Capitalized lease obligations, mortgage indebtedness and other *************************************************
Subtotal*******************************************************************************************
Subsidiaries
Fixed-rate subordinated notes
6.375% due 2004 *************************************************************************************
6.375% due 2004 *************************************************************************************
7.55% due 2004 **************************************************************************************
8.35% due 2004 **************************************************************************************
7.30% due 2005 **************************************************************************************
6.875% due 2006 *************************************************************************************
6.625% due 2006 *************************************************************************************
6.50% due 2008 **************************************************************************************
6.30% due 2008 **************************************************************************************
5.70% due 2008 **************************************************************************************
7.125% due 2009 *************************************************************************************
7.80% due 2010 **************************************************************************************
6.375% due 2011 *************************************************************************************
6.30% due 2014 **************************************************************************************
4.95% due 2014 **************************************************************************************
4.80% due 2015 **************************************************************************************
Floating-rate subordinated notes
2.34% due 2014 **************************************************************************************
Federal Home Loan Bank advances *************************************************************************
Bank notes **********************************************************************************************
Euro medium-term notes due 2004 *************************************************************************
Capitalized lease obligations, mortgage indebtedness and other *************************************************
Subtotal*******************************************************************************************
$
—
120
186
220
171
200
3,225
2,669
108
6,899
—
—
—
—
100
70
100
300
300
400
500
300
1,500
963
650
500
350
3,629
17,624
—
554
27,840
$
73
120
191
220
200
200
4,025
2,601
171
7,801
75
150
100
100
100
70
100
300
300
400
500
300
1,500
1,000
—
500
—
8,595
10,870
400
655
26,015
Total **********************************************************************************************
$34,739
$33,816
In April 2003, the Company’s subsidiary U.S. Bank
National Association (‘‘USBNA’’) issued $500 million of
fixed-rate subordinated notes due April 15, 2015. The
interest rate is 4.80 percent, per annum. In October of
2004, USBNA issued floating-rate subordinated notes of
$350 million, due October 14, 2014. These notes bear
floating-rate interest of three-month LIBOR plus
.28 percent. The interest rate at December 31, 2004 was
2.34 percent. In October of 2004, USBNA also issued
$650 million of fixed-rate subordinated notes due
October 30, 2014. The interest rate is 4.95 percent, per
annum.
Medium-term notes (‘‘MTNs’’) outstanding at
December 31, 2004, mature from March 2005 through
March 2008. The MTNs bear fixed or floating interest rates
86 U.S. BANCORP
ranging from 2.63 percent to 5.10 percent. The weighted-
average interest rate of MTNs at December 31, 2004, was
3.51 percent.
Federal Home Loan Bank (‘‘FHLB’’) advances
outstanding at December 31, 2004, mature from February
2005 through October 2026. The advances bear fixed or
floating interest rates ranging from .50 percent to
8.25 percent. The Company has an arrangement with the
FHLB whereby based on collateral available (residential and
commercial mortgages), the Company could have borrowed
an additional $19.3 billion at December 31, 2004. The
weighted-average interest rate of FHLB advances at
December 31, 2004, was 2.64 percent. The Euro medium-
term notes matured on April 13, 2004.
Bank notes outstanding at December 31, 2004, mature
During 2004 the Company prepaid long-term debt,
from January 2005 through March 2009. The bank notes
bear fixed or floating interest rates ranging from 1.20 percent
to 5.63 percent. The weighted-average interest rate of Bank
notes at December 31, 2004, was 2.47 percent.
principally representing FHLB advances, of $4.8 billion in
connection with asset/liability management decisions,
incurring $154.8 million in prepayment charges.
Maturities of long-term debt outstanding at December 31, 2004, were:
(Dollars in Millions)
2005 *************************************************************************************************
2006 *************************************************************************************************
2007 *************************************************************************************************
2008 *************************************************************************************************
2009 *************************************************************************************************
Thereafter *********************************************************************************************
Total *************************************************************************************************
Consolidated
$11,932
6,309
5,819
2,221
1,018
7,440
$34,739
Parent
Company
$1,320
655
1,501
503
5
2,915
$6,899
Note 16
Junior Subordinated Debentures
The Company sponsors and wholly owns 100% of the
common equity of eight 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
total $2.6 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 used the proceeds from
the sales of the Debentures for general corporate purposes.
The Company has the right to redeem retail 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 has the right to redeem institutional Debentures
in whole, (but not 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
Debentures are redeemable in 2006 and 2007 in the
amounts of $2.3 billion and $310 million, respectively.
In March 2004, as a result of adopting the provisions
of Interpretation No. 46 (revised December 2003),
‘‘Consolidation of Variable Interest Entities’’, an
interpretation of Accounting Research Bulletin No. 51,
‘‘Consolidated Financial Statements’’, the Company was
required to de-consolidate these subsidiary trusts from its
financial statements. The de-consolidation of the net assets
and results of operations of the trusts had an insignificant
impact on the Company’s financial statements and liquidity
position since the Company continues to be obligated to
repay the Debentures held by the trusts and guarantees
repayment of the Trust Preferred Securities issued by the
trusts. The consolidated debt obligation related to the trusts
increased $79 million upon de-consolidation with the
increase representing the Company’s common equity
ownership in the trusts. The Trust Preferred Securities held
by the trusts qualify as Tier 1 capital for the Company
under the Federal Reserve Board guidelines. The banking
regulatory agencies have issued guidance that would
continue the current regulatory capital treatment for
Trust Preferred Securities.
U.S. BANCORP 87
The following table is a summary of the Debentures included in long-term debt as of December 31, 2004:
Issuance Trust (Dollars in Millions)
Retail
Trust
Preferred
Securities
Amount
Issuance
Date
Debentures
Amount (a)
Rate
Type (b)
Rate
Maturity
Date
Earliest
Redemption
Date
USB Capital V ******************** December 2001
USB Capital IV ******************** November 2001
USB Capital III ********************
May 2001
Institutional
Star Capital I**********************
June 1997
Mercantile Capital Trust I ***********
February 1997
USB Capital I ********************* December 1996
Firstar Capital Trust I *************** December 1996
FBS Capital I ********************* November 1996
$300
500
700
150
150
300
150
300
$309
515
722
155
155
309
155
309
Fixed
Fixed
Fixed
Variable
Variable
Fixed
Fixed
Fixed
7.25% December 2031 December 7, 2006
November 2031 November 1, 2006
7.35
May 4, 2006
7.75
May 2031
3.26
3.01
8.27
8.32
8.09
June 2027
February 2027
June 15, 2007
February 1, 2007
December 2026 December 15, 2006
December 2026 December 15, 2006
November 2026 November 15, 2006
(a) Junior subordinated debentures issued to unconsolidated subsidiary trusts that are designated in fair value hedges at December 31, 2004, are recorded on the balance sheet at fair value.
Carrying value includes a fair value adjustment of $43 million related to hedges on certain junior subordinated debentures, as well as prepaid issuance fees of $(3) million.
(b) The variable-rate Trust Preferred Securities and Debentures reprice quarterly based on three-month LIBOR.
Note 17
Shareholders’ Equity
At December 31, 2004 and 2003, the Company had
authority to issue 4 billion shares of common stock and
10 million shares of preferred stock. The Company had
1,857.6 million and 1,922.9 million shares of common
stock outstanding at December 31, 2004 and 2003,
respectively. At December 31, 2004, the Company had
170.5 million shares of common stock reserved for future
issuances, primarily under stock option plans.
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 18, 2001, the Board of Directors
approved an authorization to repurchase 100 million shares
of common stock through 2003. In 2003, the Company
repurchased 7.0 million shares of common stock under the
plan, which expired in December of 2003. On
December 16, 2003, the Board of Directors approved an
authorization to repurchase 150 million shares of common
stock during the following 24 months. During 2003, the
Company repurchased 8.0 million shares of common stock
under the December 2003 plan. In 2004, the Company
repurchased 88.8 million shares of common stock under the
plan. On December 21, 2004, the Board of Directors
approved an authorization to repurchase 150 million shares
of common stock during the following 24 months. This new
repurchase program replaces the Company’s December 16,
2003 program. In 2004, the Company repurchased
5.0 million shares of common stock under the plan.
The following table summarizes the Company’s common
stock repurchased in each of the last three years:
(Dollars and Shares in Millions)
2004 *******************************
2003 *******************************
2002 *******************************
Shares
93.8
15.0
45.3
Value
$2,656
417
1,040
88 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:
(Dollars in Millions)
2004
Unrealized loss on securities available-for-sale **************************************
Unrealized loss on derivatives ****************************************************
Foreign currency translation adjustment********************************************
Realized gain on derivatives******************************************************
Reclassification adjustment for losses realized in net income**************************
Total***********************************************************************
2003
Unrealized loss on securities available-for-sale **************************************
Unrealized loss on derivatives ****************************************************
Foreign currency translation adjustment********************************************
Realized gain on derivatives******************************************************
Reclassification adjustment for gains realized in net income **************************
Total***********************************************************************
2002
Unrealized gain on securities available-for-sale **************************************
Unrealized gain on derivatives ****************************************************
Foreign currency translation adjustment********************************************
Realized gain on derivatives******************************************************
Reclassification adjustment for gains realized in net income **************************
Total***********************************************************************
Transactions
Pre-tax
Tax-effect
Net-of-tax
Balances
Net-of-tax
$ (123)
(43)
(17)
16
32
$ (135)
$ (716)
(373)
23
199
(288)
$(1,155)
$ 1,048
324
7
64
(332)
$ 1,111
$ 47
16
6
(6)
(12)
$ 51
$ 272
142
(9)
(76)
110
$ 439
$(398)
(123)
(3)
(24)
126
$(422)
$ (76)
(27)
(11)
10
20
$ (84)
$(444)
(231)
14
123
(178)
$(716)
$ 650
201
4
40
(206)
$ 689
$(135)
9
5
105
—
$ (16)
$(123)
35
16
140
—
$ 68
$ 473
266
2
43
—
$ 784
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. For a description of the regulatory
capital requirements and the actual ratios as of
December 31, 2004 and 2003, for the Company and its
bank subsidiaries, see Table 20 included in Management’s
Discussion and Analysis, which is incorporated by reference
into these Notes to Consolidated Financial Statements.
Note 18
Ear nings Per Share
The components of earnings per share were:
(Dollars and Shares in Millions, Except Per Share Data)
2004
2003
2002
Income from continuing operations *********************************************************
Income (loss) from discontinued operations (after-tax) **************************************
Cumulative effect of accounting change (after-tax) *****************************************
Net income ***********************************************************************
Average common shares outstanding *******************************************************
Net effect of the assumed purchase of stock based on the treasury stock method for options and
stock plans***************************************************************************
Average diluted common shares outstanding*************************************************
Earnings per share
Income from continuing operations ******************************************************
Discontinued operations ************************************************************
Cumulative effect of accounting change ***********************************************
$4,166.8
—
—
$4,166.8
1,887.1
25.8
1,912.9
$
2.21
—
—
$3,710.1
22.5
—
$3,732.6
1,923.7
12.5
1,936.2
$
1.93
.01
—
$3,228.0
(22.7)
(37.2)
$3,168.1
1,916.0
8.8
1,924.8
$
1.68
(.01)
(.02)
Net income ********************************************************************
$
2.21
$
1.94
$
1.65
Diluted earnings per share
Income from continuing operations ******************************************************
Discontinued operations ************************************************************
Cumulative effect of accounting change ***********************************************
$
2.18
—
—
$
1.92
.01
—
$
1.68
(.01)
(.02)
Net income ********************************************************************
$
2.18
$
1.93
$
1.65
U.S. BANCORP 89
For the years ended December 31, 2004, 2003 and 2002,
options to purchase 36 million, 79 million and 140 million
shares, respectively, were outstanding but not included in
the computation of diluted earnings per share because they
were antidilutive.
Note 19
Employee Benefits
Employee Investment Plan The Company has a defined
contribution retirement savings plan which allows qualified
employees, at their option, to make contributions up to
50 percent of pre-tax base salary 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 the first four percent of an employee’s
compensation. The Company’s matching contribution vests
immediately; however, a participant must be employed on
December 31st to receive that year’s matching contribution.
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 $49.1 million, $48.5 million
and $50.5 million in 2004, 2003 and 2002, respectively.
Pension Plans Pension benefits are provided to substantially
all employees based on years of service and employees’
compensation while employed with the Company.
Employees are fully vested after five years of service. Under
the plan’s benefit structure, a participant’s future retirement
benefits are based on a participant’s highest five-year
average annual compensation during his or her last 10 years
before retirement or termination from the Company. Plan
assets primarily consist of various equity mutual funds and
other miscellaneous assets.
In addition to the funded qualified retirement plan, the
Company maintains a non-qualified plan that is 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 plan. The Company recognized a settlement loss of
$3.5 million on this plan in 2003, related to the level of
payouts made from the plan. In 2002, the Company
recognized combined curtailment and settlement gains of
$11.7 million related to changes in the non-qualified
pension plans in connection with the mergers of the prior
plans.
In general, the Company’s pension plan objectives
include maintaining a funded status sufficient to meet
participant benefit obligations over time while reducing
long-term funding requirements and pension costs. The
90 U.S. BANCORP
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’’). At least annually, an independent
consultant is engaged to assist U.S. Bancorp’s Compensation
Committee in evaluating 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.
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. In 2003, the
Company made a contribution of $310.8 million to the
qualified pension plan in accordance with this policy. No
contributions were made in 2004. In 2005, the Company
anticipates no minimum funding requirement and therefore
does not expect to make any contributions to the plan.
Contributions made to the plan were 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. Some of the scenarios included are: low inflation
and high growth (ideal growth), low inflation and low
growth (recession), high inflation and low growth
(stagflation) and high inflation and high growth
(inflationary 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.
Based on an analysis of historical performance by asset
class, over any 20-year period since the mid-1940’s,
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 plan’s 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.
The following unaudited table provides a summary of asset allocations adopted by the Company compared with a typical
asset allocation alternative:
Asset Class
Typical
Asset Mix
Asset Allocation
December 2004
December 2003
2004
Expected Returns
Actual
Target
Actual
Target (a)
Compound
Average
Standard
Deviation
Domestic equities
Large Cap *********************
Mid Cap **********************
Small Cap *********************
International equities **********
Fixed income *******************
Other ***************************
Total mix or weighted rates****
LTROR assumed ***************
Standard deviation**************
Sharpe ratio (c)*****************
30%
15
15
10
30
—
100%
7.8%
13.9%
.409
53%
16
7
22
—
2
55%
19
6
20
—
—
42%
15
19
21
—
3
100%
100%
100%
8.9% (b)
18.0%
.386
55%
19
6
20
—
—
100%
8.9%
18.0%
.389
8.0%
8.4
8.6
8.3
9.5%
10.4
11.1
10.4
18.0%
21.1
24.0
21.9
8.5
10.0
18.0
(a) The target asset allocation was modified in December 2003, effective January 1, 2004, to reduce the potential volatility of the portfolio without significantly reducing the expected returns.
The change in the allocation was completed by the second quarter of 2004 and the year end variations from the target allocation were a result of that change.
(b) The LTROR assumed for the target asset allocation strategy of 8.9 percent is based on a range of estimates evaluated by the Company including the compound expected return of
8.5 percent and the average expected return of 10.0 percent.
(c) The Sharpe ratio is a direct measure of reward-to-risk. The Sharpe ratio for these asset allocation strategies is considered to be within acceptable parameters.
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 2003 and 2004. The analysis performed
late in 2004 indicated that the LTROR assumption of
8.9 percent, used in both 2003 and 2004, continued to be
in line with expected returns based on current economic
conditions and the Company expects to continue using this
LTROR in 2005. The LTROR was first reduced to the
current LTROR of 8.9 percent in 2003 to reflect the longer
impact of the poor market performance of equities in 2001
and 2002. 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.
Post-Retirement Medical Plans In addition to providing
pension benefits, the Company provides health care and
death benefits to certain retired employees through several
retiree medical programs. The Company adopted one retiree
medical program for all future retirees on January 1, 2002.
For certain eligible employees, the provisions of the USBM
retiree medical plan and the Mercantile retiree medical plan
remained in place until December 31, 2002. Generally, all
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.
In December 2003, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) was
enacted. The Act established a prescription drug benefit
under Medicare, known as ‘‘Medicare Part D’’, and a
federal subsidy to sponsors of retiree health care benefit
plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. As a result, the Company
recognized the expected benefit of the Act on its retiree
medical plan on a prospective basis in 2004 and reduced
the liability by $34.6 million.
U.S. BANCORP 91
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:
(Dollars in Millions)
Projected benefit obligation
Benefit obligation at beginning of measurement period *******************
Service cost ********************************************************
Interest cost ********************************************************
Plan participants’ contributions ****************************************
Actuarial (gain) loss **************************************************
Benefit payments****************************************************
Curtailments ********************************************************
Settlements ********************************************************
Benefit obligation transferred to Piper Jaffray Companies *****************
Benefit obligation at end of measurement period (a)(b)********************
Fair value of plan assets
Fair value at beginning of measurement period **************************
Actual return on plan assets ******************************************
Employer contributions ***********************************************
Plan participants’ contributions ****************************************
Settlements ********************************************************
Benefit payments****************************************************
Fair value at end of measurement period (c)*****************************
Funded status
Funded status at end of measurement period ***************************
Unrecognized transition (asset) obligation *******************************
Unrecognized prior service cost ***************************************
Unrecognized net (gain) loss ******************************************
Fourth quarter contribution *******************************************
Net amount recognized **********************************************
Components of statement of financial position
Prepaid benefit cost *************************************************
Accrued benefit liability ***********************************************
Net amount recognized **********************************************
Pension Plans
Post-Retirement
Medical Plans
2004
2003
2004
2003
$1,801.1
58.5
109.5
—
150.3
(162.6)
—
(5.7)
—
$1,951.1
$1,975.8
298.7
20.8
—
(5.7)
(162.6)
$2,127.0
$ 175.9
—
(44.8)
840.8
4.5
$ 976.4
$1,155.6
(179.2)
$ 976.4
$1,671.1
56.5
107.7
—
161.7
(140.8)
—
(23.8)
(31.3)
$1,801.1
$1,442.7
351.7
346.0
—
(23.8)
(140.8)
$1,975.8
$ 174.7
—
(51.1)
854.7
4.8
$ 983.1
$1,123.8
(140.7)
$ 983.1
$ 320.3
3.7
18.1
16.2
(40.2)
(36.7)
—
—
—
$ 281.4
$ 38.9
.2
20.2
16.2
—
(36.7)
$ 38.8
$(242.6)
5.9
(6.3)
38.6
3.8
$(200.6)
$ —
(200.6)
$(200.6)
$ 282.5
3.4
18.5
14.9
38.9
(36.5)
—
—
(1.4)
$ 320.3
$ 30.2
.4
29.9
14.9
—
(36.5)
$ 38.9
$(281.4)
6.6
(7.2)
80.0
5.4
$(196.6)
$ —
(196.6)
$(196.6)
(a) At December 31, 2004 and 2003, the accumulated benefit obligation for all qualified pension plans was $1.7 billion and $1.6 billion, respectively.
(b) U.S. Bancorp retained the qualified pension plan obligation for the inactive participants, relating to employees of the Piper Jaffray Companies. Therefore, all liabilities and plan assets related
to inactive participants in the qualified pension plan associated with the Piper Jaffray Companies are included in the pension plans benefit obligation.
(c) At December 31, 2004, the Company’s qualified pension plans held no company stock, and at December 31, 2003, the Company’s qualified pension plans held 799,803 shares of
U.S. Bancorp common stock with a fair value of $23.8 million. Dividends paid on the shares of U.S. Bancorp common stock held by the qualified pension plans totaled $.2 million and
$.6 million for the years ended December 31, 2004 and 2003, respectively.
The following table sets forth the components of net periodic benefit cost (income) for the retirement plans:
(Dollars in Millions)
2004
2003
2002
2004
2003
2002
Pension Plans
Post-Retirement Medical Plans
Components of net periodic benefit cost (income)
Service cost*******************************************
Interest cost*******************************************
Expected return on plan assets **************************
Net amortization and deferral ****************************
Recognized actuarial (gain) loss **************************
Net periodic benefit cost (income) ***************************
Curtailment and settlement (gain) loss*********************
Cost of special or contractual termination benefits recognized
Net periodic benefit cost (income) after curtailment and
settlement (gain) loss, and cost of special or contractual
termination benefits recognized **************************
92 U.S. BANCORP
$ 58.5
109.5
(203.1)
(6.3)
50.4
9.0
—
—
$ 56.5
107.7
(184.4)
(6.7)
(.5)
(27.4)
3.5
—
$ 49.9
115.1
(214.1)
(6.5)
.8
(54.8)
(11.7)
2.7
$ 3.7
18.1
(1.4)
(.1)
2.4
22.7
—
—
$ 3.4
18.5
(1.2)
(.2)
.5
21.0
—
—
$ 3.3
19.1
(1.6)
(.1)
—
20.7
—
—
$
9.0
$ (23.9)
$ (63.8)
$22.7
$21.0
$20.7
The following table sets forth the weighted-average plan assumptions and other data:
(Dollars in Millions)
Pension plan actuarial computations
Expected long-term return on plan assets (c) *******************************************************
Discount rate in determining benefit obligations (a) **************************************************
Rate of increase in future compensation ***********************************************************
Post-retirement medical plan actuarial computations
Expected long-term return on plan assets**********************************************************
Discount rate in determining benefit obligations *****************************************************
Health care cost trend rate (b)
Prior to age 65 *****************************************************************************
After age 65 ********************************************************************************
Effect of one percent increase in health care cost trend rate
Service and interest costs ***********************************************************************
Accumulated post-retirement benefit obligation *****************************************************
Effect of one percent decrease in health care cost trend rate
Service and interest costs ***********************************************************************
Accumulated post-retirement benefit obligation *****************************************************
Company
2004
2003
2002
8.9%
6.0
3.5
3.5%
6.0
8.9%
6.2
3.5
3.5%
6.2
10.0%
12.0
11.0%
13.0
$ 1.4
21.1
$ (1.3)
(18.8)
$ 1.4
22.5
$ (1.3)
(20.0)
10.9%
6.8
3.5
5.0%
6.8
12.0%
14.0
$ 1.3
19.7
$ (1.2)
(17.5)
(a) The discount rate at the measurement date approximated the Moody’s Aa corporate bond rating for projected benefit distributions with a duration of 11.9 and 12.2 years for 2004 and
2003, respectively.
(b) The pre-65 and post-65 rates are assumed to decrease gradually to 5.5% and 6.0% respectively by 2011 and remain at these levels thereafter
(c) In light of the market performance and the results of the independent analysis, the Company made a decision to re-measure its pension plans effective in the third quarter of 2002 based
on the current information at that time with respect to asset values, a reduction in the LTROR, discount rates, census data and other relevant factors. As a result of the remeasurement, the
LTROR was reduced to 9.9% for the last half of 2002.
The following table provides information for pension plans with benefit obligations in excess of plan assets:
(Dollars in Millions)
Benefit obligation ********************************************************************************************
Accumulated benefit obligation ********************************************************************************
Fair value of plan assets**************************************************************************************
2004
2003
$233.9
222.6
—
$183.9
174.8
—
The following benefit payments (net of participant contributions) are expected to be paid from the retirement plans:
(Dollars in Millions)
Estimated Future Benefit Payments
Pension
Plans
Post-Retirement
Medical Plans
2005 ************************************************************************************************
2006 ************************************************************************************************
2007 ************************************************************************************************
2008 ************************************************************************************************
2009 ************************************************************************************************
2010 — 2014 ****************************************************************************************
$158.6
132.9
130.9
127.3
125.9
606.3
$ 24.8
21.9
22.6
23.2
23.7
119.6
U.S. BANCORP 93
Note 20
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 generally 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. 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, 2004, there were 35.2 million shares
(subject to adjustment for forfeitures) available for grant
under various plans.
The following is a summary of stock options outstanding and exercised under various stock options plans of the Company:
Year Ended December 31
Stock option plans
Number outstanding at beginning of
year***************************
Granted ***********************
Assumed/converted (a) **********
Exercised **********************
Cancelled (b) *******************
Number outstanding at end of year***
Exercisable at end of year***********
Weighted-average fair value of options
granted************************
Restricted share plans
Number outstanding at beginning of
year***************************
Granted ***********************
Cancelled/vested ***************
Number outstanding at end of year***
Weighted-average fair value of shares
granted************************
2004
2003
2002
Options /Shares
Stock Weighted-Average
Exercise Price
Options /Shares
Stock Weighted-Average
Exercise Price
Options /Shares
Stock Weighted-Average
Exercise Price
165,522,354
8,741,521
—
(27,319,242)
(12,217,348)
134,727,285
101,027,155
1,304,106
1,338,054
(376,535)
2,265,625
$22.93
28.46
—
21.59
24.56
$23.41
$23.51
$ 8.75
206,252,590
1,872,653
1,116,884
(22,484,069)
(21,235,704)
165,522,354
116,427,321
2,280,057
58,481
(1,034,432)
1,304,106
$22.77
23.00
—
18.27
25.13
$22.93
$23.60
$ 6.82
201,610,265
29,742,189
—
(9,594,213)
(15,505,651)
206,252,590
123,195,273
2,177,588
806,355
(703,886)
2,280,057
$22.58
21.81
—
13.26
24.18
$22.77
$23.63
$ 7.03
$28.42
$24.43
$20.51
(a) In connection with the December 31, 2003, tax-free distribution of Piper Jaffray Companies, stock options were adjusted in accordance with provisions of the contracts based on an
exchange ratio of 1.0068 representing the relative stock price adjustment at the time of distribution.
(b) Options cancelled includes both non-vested (i.e., forfeitures) and vested shares.
94 U.S. BANCORP
Additional information regarding stock options outstanding as of December 31, 2004, is as follows:
Range of Exercise Prices
$3.28 — $10.00 **************************************
$10.01 — $15.00 *************************************
$15.01 — $20.00 *************************************
$20.01 — $25.00 *************************************
$25.01 — $30.00 *************************************
$30.01 — $35.00 *************************************
$35.01 — $36.95 *************************************
Options Outstanding
Exercisable Options
Weighted-
Average
Remaining
Contractual
Life (Years)
1.0
2.7
6.1
6.1
5.1
2.4
2.4
5.6
Shares
726,431
3,072,352
26,115,430
63,059,643
37,433,500
4,020,322
299,607
134,727,285
Weighted-
Average
Exercise
Price
$ 7.06
11.51
18.81
22.39
28.55
32.73
35.89
Shares
724,664
2,835,094
19,671,582
45,466,324
28,066,483
3,963,401
299,607
$23.41
101,027,155
Weighted-
Average
Exercise
Price
$ 7.05
11.39
18.71
22.54
28.66
32.75
35.89
$23.51
Stock-based compensation was $175.6 million in 2004,
compared with $158.1 million and $185.0 million in 2003
and 2002, 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 $138.5 million in 2004, compared
with $123.4 million and $113.3 million in 2003 and 2002,
respectively.
Stock-based compensation expense is based on the fair
value of the award at the date of grant or modification. The
fair value of options was estimated using the Black-Scholes
option-pricing model requiring the use of subjective
valuation 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 provides a summary of the valuation assumptions utilized by the Company to determine the estimated
value of stock option grants:
Weighted-average assumptions in stock option valuation
Risk-free interest rates**************************************************************************************
Dividend yields ********************************************************************************************
Stock volatility factor ***************************************************************************************
Expected life of options (in years) ****************************************************************************
2004
2003
2002
3.5%
3.5%
.40
5.9
2.8%
3.0%
.40
5.3
3.3%
3.0%
.41
6.0
U.S. BANCORP 95
Note 21
Income Taxes
The components of income tax expense were:
(Dollars in Millions)
2004
2003
2002
Federal
Current *********************************************************************************
Deferred ********************************************************************************
Federal income tax ********************************************************************
State
Current *********************************************************************************
Deferred ********************************************************************************
State income tax **********************************************************************
$1,530.9
260.2
1,791.1
197.4
21.1
218.5
$1,528.8
222.9
1,751.7
139.8
49.8
189.6
$1,268.9
256.9
1,525.8
146.9
34.8
181.7
Total income tax provision **************************************************************
$2,009.6
$1,941.3
$1,707.5
A reconciliation of expected income tax expense at the federal statutory rate of 35% to the Company’s applicable income tax
expense follows:
(Dollars in Millions)
Tax at statutory rate (35%)*****************************************************************
State income tax, at statutory rates, net of federal tax benefit **********************************
Tax effect of
Tax credits ***************************************************************************
Resolution of federal and state income tax examinations************************************
Tax-exempt interest, net****************************************************************
Other items **************************************************************************
2004
2003
2002
$2,161.7
142.0
$1,978.0
123.2
$1,727.4
116.5
(145.6)
(106.3)
(21.4)
(20.8)
(109.6)
—
(21.7)
(28.6)
(85.5)
—
(24.9)
(26.0)
Applicable income taxes*******************************************************************
$2,009.6
$1,941.3
$1,707.5
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 and state 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.
During 2004 the Company resolved federal income tax
examinations covering substantially all of the Company’s
legal entities for the years 1995 through 1999 and certain
state tax examinations for the years 1995 through 2000.
These examinations were resolved through a series of
negotiations held between the Company and representatives
of the various taxing authorities at both the examination
and appellate levels. The resolution of these matters and the
taxing authorities’ acceptance of submitted claims and tax
return adjustments resulted in a reduction of accrued
income tax expense of $106.3 million. At December 31,
2004, the Company is in various stages of the examination
process for federal tax return matters of U.S. Bancorp and
its predecessor companies for periods dating back to 2000.
In addition, examinations by various state taxing authorities
date back to 1997. At year-end, the Company believes the
aggregate amount of any additional tax liabilities that may
result from these examinations, if any, will not have a
material adverse effect on the financial condition, results of
operations or cash flows of the Company.
Deferred income tax assets and liabilities reflect the tax
effect of 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.
96 U.S. BANCORP
The significant components of the Company’s net deferred tax liability as of December 31 were:
(Dollars in Millions)
2004
2003
Deferred tax assets
Allowance for credit losses ********************************************************************************
Stock compensation *************************************************************************************
Accrued expenses ***************************************************************************************
Intangible asset basis*************************************************************************************
Federal AMT credits and capital losses *********************************************************************
Accrued severance, pension and retirement benefits **********************************************************
Securities available-for-sale and financial instruments *********************************************************
Federal and state net operating loss carryforwards ***********************************************************
Other deferred tax assets, net *****************************************************************************
$ 924.4
303.3
148.9
146.1
59.1
16.3
13.1
9.2
84.5
$ 977.6
318.2
140.1
133.1
59.1
69.3
(31.2)
21.2
62.0
Gross deferred tax assets******************************************************************************
1,704.9
1,749.4
Deferred tax liabilities
Leasing activities*****************************************************************************************
Pension and postretirement benefits ************************************************************************
Mortgage servicing rights *********************************************************************************
Other investment basis differences *************************************************************************
Deferred fees********************************************************************************************
Loans **************************************************************************************************
Accelerated depreciation **********************************************************************************
Other deferred tax liabilities, net****************************************************************************
Gross deferred tax liabilities ****************************************************************************
Valuation allowance **************************************************************************************
(2,770.7)
(272.2)
(93.8)
(80.4)
(77.8)
(59.0)
(55.7)
(193.2)
(3,602.8)
(1.0)
(2,509.6)
(308.0)
(60.0)
(60.2)
29.9
(59.0)
(142.3)
(195.6)
(3,304.8)
(1.0)
Net deferred tax liability *****************************************************************************
$(1,898.9)
$(1,556.4)
The Company has established a valuation allowance to
offset deferred tax assets related to state net operating loss
carryforwards which are expected to expire unused. The
Company has approximately $134 million of net operating
loss carryforwards which expire at various times through
2009.
Certain events covered by Internal Revenue Code
section 593(e), which was not repealed, will trigger a
recapture of base year reserves of acquired thrift
institutions. The base year reserves of acquired thrift
Note 22
Derivative Instruments
In the ordinary course of business, the Company enters into
derivative transactions to manage its interest rate,
prepayment 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 17
‘‘Derivative Positions,’’ included in Management’s
Discussion and Analysis, which is incorporated by reference
in these Notes to Consolidated Financial Statements.
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, 2004,
retained earnings included approximately $101.8 million of
base year reserves for which no deferred federal income tax
liability has been recognized.
A S S E T A N D L I A B I L I T Y M A N A G E M E N T
P O S I T I O N S
Cash Flow Hedges The Company has $24.3 billion of
designated cash flow hedges at December 31, 2004. These
derivatives are interest rate swaps that are hedges of the
forecasted cash flows from the underlying variable-rate
LIBOR loans and floating-rate debt. All cash flow hedges
are highly effective for the year ended December 31, 2004,
and the change in fair value attributed to hedge
ineffectiveness was not material.
At December 31, 2004 and 2003, accumulated other
comprehensive income included a deferred after-tax net gain
of $113.4 million and $174.9 million, respectively, related
to derivatives used to hedge cash flows. The unrealized gain
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
U.S. BANCORP 97
related cash flows and hedged transactions remains
probable. The estimated amount of after-tax gain to be
reclassified from accumulated other comprehensive income
into earnings during 2005 is $65.8 million, which includes
gains related to hedges that were terminated early when the
associated forecasted transactions were still probable.
Fair Value Hedges The Company has $7.8 billion of
designated fair value hedges at December 31, 2004. These
derivatives are primarily interest rate contracts that hedge
the change in fair value related to interest rate changes of
underlying fixed-rate debt and trust preferred securities. In
addition, 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.
All fair value hedges are considered highly effective for
the year ended December 31, 2004. The change in fair
value attributed to hedge ineffectiveness was a gain of
$.7 million, related to the Company’s mortgage loans held
for sale and its 2004 production volume of $17.4 billion.
Net Investment Hedges In 2004, the Company entered 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 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 2004
was not significant.
Other Asset and Liability Management 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,
2004, the Company had $1.1 billion of forward
commitments to sell residential mortgage loans to hedge the
Company’s interest rate risk related to $1.0 billion of
unfunded residential loan commitments. Gains and losses
on mortgage banking derivatives and the unfunded loan
commitments are included in mortgage banking revenue on
the Consolidated Statement of Income.
C U S T O M E R - R E L AT E D P O S I T I O N S
The Company acts as a seller and buyer of interest rate
contracts and foreign exchange rate contracts on behalf of
customers. At December 31, 2004, the Company had
98 U.S. BANCORP
$20.0 billion of aggregate customer derivative positions,
including $15.8 billion of interest rate swaps, caps, and
floors and $4.2 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, 2004.
Note 23
Fair Values of Financial Instr uments
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 are 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 floating-rate loans are
assumed to be equal to their carrying 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 the high-grade corporate bond yield curve.
based on appropriate LIBOR, eurodollar futures, swap,
treasury note yield curves and equity market prices.
Short-term Borrowings Federal funds purchased, securities
sold under agreements to repurchase, commercial paper and
other short-term funds borrowed are at floating rates or
have short-term maturities. Their carrying value is assumed
to approximate their fair value.
Long-term Debt The estimated fair value of medium-term
notes, bank notes, Federal Home Loan Bank advances,
capital lease obligations and mortgage note obligations was
determined using a discounted cash flow analysis based on
current market rates of similar maturity debt securities to
discount cash flows. Other long-term debt instruments were
valued using available market quotes.
Interest Rate Swaps, Equity Contracts, Basis Swaps and
Options The interest rate options and swap cash flows were
estimated using a third-party pricing model and discounted
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.
The estimated fair values of the Company’s financial instruments at December 31 are shown in the table below.
(Dollars in Millions)
Financial Assets
2004
2003
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Cash and cash equivalents *************************************************************
Investment securities ******************************************************************
Loans held for sale ********************************************************************
Loans *******************************************************************************
$ 6,537
41,481
1,439
124,235
$ 6,537
41,486
1,439
124,611
$ 8,782
43,334
1,433
116,051
$ 8,782
43,343
1,433
117,058
Total financial assets****************************************************************
173,692
$174,073
169,600
$170,616
Nonfinancial assets *************************************************************
21,412
Total assets *****************************************************************
$195,104
19,871
$189,471
Financial Liabilities
Deposits *****************************************************************************
Short-term borrowings *****************************************************************
Long-term debt ***********************************************************************
$120,741
13,084
34,739
$120,788
13,084
35,160
$119,052
10,850
33,816
$119,120
10,850
34,425
Total financial liabilities **************************************************************
168,564
$169,032
163,718
$164,395
Nonfinancial liabilities ************************************************************
Shareholders’ equity ************************************************************
7,001
19,539
Total liabilities and shareholders’ equity *****************************************
$195,104
6,511
19,242
$189,471
Derivative Positions
Asset and liability management positions
Interest rate swaps *****************************************************************
Forward commitments to sell residential mortgages *************************************
Foreign exchange forward contracts **************************************************
Equity contracts *******************************************************************
$
Customer related positions
Interest rate contracts **************************************************************
Foreign exchange contracts *********************************************************
$
$
435
(4)
(12)
4
36
4
$
435
(4)
(12)
4
36
4
631
—
—
—
31
2
631
—
—
—
31
2
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 $253.8 million. The carrying
value of other guarantees was $74.9 million.
U.S. BANCORP 99
Note 24
Guarantees and Contingent
Liabilities
C O M M I T M E N T S T O E X T E N D C R E D I T
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.
L E T T E R S O F C R E D I T
Standby letters of credit are commitments the Company
issues to guarantee the performance of a customer to a
third-party. The guarantees frequently support public and
private borrowing arrangements, including commercial
paper issuances, bond financings and other similar
transactions. The Company issues commercial letters of
credit on behalf of customers to ensure payment or
collection in connection with trade transactions. In the
event of a customer’s nonperformance, the Company’s
credit loss exposure is the same as in any extension of
credit, up to the letter’s contractual amount. Management
assesses the borrower’s credit to determine the necessary
collateral, which may include marketable securities,
receivables, inventory, equipment and real estate. Since the
conditions requiring the Company to fund letters of credit
may not occur, the Company expects its liquidity
requirements to be less than the total outstanding
commitments. The maximum potential future payments
guaranteed by the Company under standby letter of credit
arrangements at December 31, 2004, were approximately
$10.6 billion with a weighted-average term of
approximately 22 months. The estimated fair value of
standby letters of credit was approximately $75.5 million at
December 31, 2004.
100 U.S. BANCORP
The contract or notional amounts of commitments to
extend credit and letters of credit at December 31, 2004,
were as follows:
(Dollars in Millions)
Commitments to extend credit
Commercial *************
Corporate and purchasing
cards****************
Consumer credit cards****
Other consumer *********
Letters of credit
Standby ****************
Commercial *************
Less Than
One Year (a)
After
One Year
Total
$ 23,453
$33,771
$57,224
12,941
28,074
2,100
5,083
327
25
—
11,355
5,515
36
12,966
28,074
13,455
10,598
363
(a) Discretionary facilities are included in less than one year.
L E A S E C O M M I T M E N T S
Rental expense for operating leases amounted to
$184.6 million in 2004, $205.0 million in 2003 and
$201.5 million in 2002. 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, 2004:
(Dollars in Millions)
2005 ****************************
2006 ****************************
2007 ****************************
2008 ****************************
2009 ****************************
Thereafter ************************
Total minimum lease payments ******
Less amount representing interest ***
Present value of net minimum lease
payments **********************
G U A R A N T E E S
Operating
Leases
$ 197.9
183.7
167.6
146.6
125.8
596.0
$1,417.6
Capitalized
Leases
$ 7.9
7.4
6.6
6.2
6.1
32.4
66.6
24.6
$42.0
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 $1.9 billion at December 31, 2004. The
Company’s recorded liabilities as of December 31, 2004,
included $10.7 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 lending 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 $11.4 billion at December 31, 2004, and
represented the market value of the securities lent to third-
parties. At December 31, 2004, the Company held assets
with a market value of $11.7 billion as collateral for these
arrangements.
Asset 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 $487.5 million at December 31, 2004, and
represented the total proceeds received from the buyer in
these transactions where the buy-back or make-whole
provisions have not yet expired. Recourse available to the
Company includes guarantees from the Small Business
Administration (for SBA loans sold), recourse against the
correspondent that originated the loan or to the private
mortgage issuer, the right to collect payments from the
debtors, and/or the right to liquidate the underlying
collateral, if any, and retain the proceeds. Based on its
established loan-to-value guidelines, the Company believes
the recourse available is sufficient to recover future
payments, if any, under the loan buy-back guarantees.
Merchant Processing The Company, through its
subsidiaries NOVA Information Systems, Inc. and NOVA
European Holdings Company, provides merchant processing
services. Under the rules of credit card associations, a
merchant processor retains a contingent liability for credit
card transactions processed. This contingent liability arises
in the event of a billing dispute between the merchant and a
cardholder that is ultimately resolved in the cardholder’s
favor. In this situation, the transaction is ‘‘charged back’’ to
the merchant and the disputed amount is credited or
otherwise refunded to the cardholder. If the Company is
unable to collect this amount from the merchant, it bears
the loss for the amount of the refund paid to the
cardholder.
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
$51.5 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 policy 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. At
December 31, 2004, the Company held $35.7 million of
merchant escrow deposits as collateral.
The Company currently processes card transactions for
several of the largest airlines in the United States. In the
event of liquidation of these airlines, 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 an airline is
evaluated in a manner similar to credit risk assessments and
merchant processing contracts consider the potential risk of
default. At December 31, 2004, the value of future delivery
airline tickets purchased was approximately $1.9 billion,
and the Company held collateral of $191.9 million in
escrow deposits and letters of credit related to airline
customer transactions.
U.S. BANCORP 101
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, 2004, the Company had a recorded liability
for potential losses of $31.8 million. In addition, the
Company had a $53.8 million liability for obligations
associated with its airline processing business.
Other Guarantees The Company provides liquidity and
credit enhancement facilities to a Company-sponsored
conduit, as more fully described in the Note 10. Although
management believes a draw against these facilities is
remote, the maximum potential future payments guaranteed
by the Company under these arrangements were
approximately $5.7 billion at December 31, 2004. The
recorded fair value of the Company’s liability for the credit
enhancement recourse obligation and liquidity facility was
$32.4 million at December 31, 2004, and was included in
other liabilities.
O T H E R C O N T I N G E N T L I A B I L I T I E S
In connection with the spin-off of Piper Jaffray Companies,
the Company has agreed to indemnify Piper Jaffray
Companies against losses that may result from third-party
claims relating to certain specified matters. The Company’s
indemnification obligation related to these specified matters
is capped at $17.5 million and can be terminated by the
Company if there is a change in control event for Piper
Jaffray Companies. Through December 31, 2004, the
Company has paid approximately $3.3 million to Piper
Jaffray Companies under this agreement.
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.
102 U.S. BANCORP
Note 25
U.S. Bancor p (Parent Company)
Condensed Balance Sheet
December 31 (Dollars in Millions)
2004
2003
Assets
Deposits with subsidiary banks, principally interest-bearing *****************************************************
Available-for-sale securities *********************************************************************************
Investments in bank and bank holding company subsidiaries ***************************************************
Investments in nonbank subsidiaries *************************************************************************
Advances to nonbank subsidiaries **************************************************************************
Other assets *********************************************************************************************
Total assets****************************************************************************************
Liabilities and Shareholders’ Equity
Short-term funds borrowed*********************************************************************************
Long-term debt*******************************************************************************************
Other liabilities ********************************************************************************************
Shareholders’ equity***************************************************************************************
Total liabilities and shareholders’ equity ****************************************************************
$ 6,806
126
20,082
371
5
690
$28,080
$
683
6,899
959
19,539
$28,080
$ 4,726
127
22,628
605
16
676
$28,778
$
699
7,880
957
19,242
$28,778
Condensed Statement of Income
Year Ended December 31 (Dollars in Millions)
2004
2003
2002
Income
Dividends from bank and bank holding company subsidiaries **********************************
Dividends from nonbank subsidiaries ********************************************************
Interest from subsidiaries ******************************************************************
Other income ****************************************************************************
Total income **********************************************************************
Expense
Interest on short-term funds borrowed ******************************************************
Interest on long-term debt *****************************************************************
Merger and restructuring-related charges ****************************************************
Other expense ***************************************************************************
Total expense *********************************************************************
Income (loss) before income taxes and equity in undistributed income of subsidiaries **************
Income tax credit*************************************************************************
Income (loss) of parent company ***********************************************************
Equity (deficiency) in undistributed income of subsidiaries **************************************
$4,900.0
229.0
54.1
20.9
5,204.0
7.5
256.4
—
46.9
310.8
4,893.2
(52.9)
4,946.1
(779.3)
$
27.0
5.8
69.1
62.1
164.0
8.0
270.8
2.9
86.5
368.2
(204.2)
(37.1)
(167.1)
3,899.7
$3,140.0
15.2
96.9
54.5
3,306.6
8.9
340.9
6.7
76.0
432.5
2,874.1
(84.6)
2,958.7
209.4
Net income ***********************************************************************
$4,166.8
$3,732.6
$3,168.1
U.S. BANCORP 103
Condensed Statement of Cash Flows
Year Ended December 31 (Dollars in Millions)
2004
2003
2002
Operating Activities
Net income ********************************************************************************
Adjustments to reconcile net income to net cash provided by operating activities
$ 4,166.8
$ 3,732.6
$ 3,168.1
(Equity) deficiency in undistributed income of subsidiaries *************************************
Other, net ******************************************************************************
779.3
43.6
(3,899.7)
172.2
(209.4)
43.8
Net cash provided by (used in) operating activities ****************************************
4,989.7
5.1
3,002.5
Investing Activities
Proceeds from sales and maturities of investment securities **************************************
Purchases of investment securities ************************************************************
Investments in subsidiaries*******************************************************************
Equity distributions from subsidiaries **********************************************************
Net (increase) decrease in short-term advances to subsidiaries ***********************************
Long-term advances to subsidiaries ***********************************************************
Principal collected on long-term advances to subsidiaries ****************************************
Other, net *********************************************************************************
Net cash provided by (used in) investing activities ****************************************
Financing Activities
Net increase (decrease) in short-term advances from subsidiaries *********************************
Net increase (decrease) in short-term borrowings ***********************************************
Principal payments or redemptions of long-term debt********************************************
Proceeds from issuance of long-term debt *****************************************************
Proceeds from issuance of common stock *****************************************************
Repurchase of common stock ***************************************************************
Cash dividends paid ************************************************************************
76.1
(76.4)
(.1)
1,915.9
10.8
—
—
(11.5)
1,914.8
—
(15.8)
(909.0)
—
580.6
(2,659.6)
(1,820.5)
20.9
(73.0)
(283.9)
536.5
35.5
—
572.6
130.7
939.3
(117.2)
318.5
(1,954.3)
1,150.0
398.4
(326.3)
(1,556.8)
113.1
(52.9)
(536.4)
1,200.0
415.1
(410.0)
1,770.0
44.5
2,543.4
48.4
(72.3)
(2,537.5)
2,075.0
147.0
(1,040.4)
(1,480.7)
Net cash provided by (used in) financing activities ****************************************
(4,824.3)
(2,087.7)
(2,860.5)
Change in cash and cash equivalents ***************************************************
Cash and cash equivalents at beginning of year ************************************************
2,080.2
4,725.7
(1,143.3)
5,869.0
2,685.4
3,183.6
Cash and cash equivalents at end of year ***********************************************
$ 6,805.9
$ 4,725.7
$ 5,869.0
Transfer of funds (dividends, loans or advances) from
bank subsidiaries to the Company is restricted. Federal law
prohibits loans unless they are secured and generally limits
any loan to the Company or individual affiliate to
10 percent of each bank’s unimpaired capital and surplus.
In 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, 2004,
was approximately $1.2 billion.
104 U.S. BANCORP
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, 2004 and 2003,
and the related consolidated statements of income,
shareholders’ equity, and cash flows for each of the two
years in the period ended December 31, 2004. 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, 2004
and 2003, and the consolidated results of its operations and
cash flows for each of the two years in the period ended
December 31, 2004, 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),
the effectiveness of U.S. Bancorp’s internal control over
financial reporting as of December 31, 2004, 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 18,
2005 expressed an unqualified opinion thereon.
REPORT OF
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
U.S. Bancorp:
In our opinion, the accompanying consolidated statements
of income, shareholders’ equity and cash flows of U.S.
Bancorp and its subsidiaries present fairly, in all material
respects, the results of their operations and their cash flows
for the year ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States
of America. 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 audit. We conducted our audit of these statements 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,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
As discussed in Note 13 of the Notes to Consolidated
Financial Statements, in 2002 the Company adopted the
provisions of Statement of Financial Accounting Standards
No. 142, ‘‘Goodwill and Other Intangible Assets.’’
Minneapolis, Minnesota
January 21, 2003, except for the effects of the adoption of
the fair value provisions under Statement of Financial
Accounting Standards No. 123, ‘‘Accounting for Stock-
Based Compensation,’’ as discussed in Note 2 of the Notes
to Consolidated Financial Statements, and the effects of
presenting discontinued operations, as discussed in Note 4
of the Notes to Consolidated Financial Statements, as to
which the date is December 31, 2003.
Minneapolis, Minnesota
February 18, 2005
U.S. BANCORP 105
REPORT OF MANAGEMENT
Responsibility for the financial statements and other information presented throughout the Annual Report on Form 10-K 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, 2004.
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,
2004.
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 management’s assessment of the Company’s system of
internal control over financial reporting. Their opinion on the financial statements appearing on page 105 and their attestation
on the system of internal controls over financial reporting appearing on page 107 are based on procedures conducted in
accordance with auditing standards of the Public Company Accounting Oversight Board (United States).
106 U.S. BANCORP
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 management’s assessment, included in the accompanying Report of Management, that U.S. Bancorp
maintained effective internal control over financial reporting as of December 31, 2004, 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. Our responsibility is to express an
opinion on management’s assessment and an opinion on the effectiveness of 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, evaluating management’s assessment, testing and evaluating the design and operating
effectiveness of internal control, 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, management’s assessment that U.S. Bancorp maintained effective internal control over financial reporting as of
December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, U.S. Bancorp
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, 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, 2004 and 2003, and the related consolidated statements
of income, shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2004 and our
report dated February 18, 2005 expressed an unqualified opinion thereon.
Minneapolis, Minnesota
February 18, 2005
U.S. BANCORP 107
U.S. BANCORP
CONSOLIDATED BALANCE SHEET — FIVE-YEAR SUMMARY
December 31 (Dollars in Millions)
2004
2003
2002
2001
2000
Assets
Cash and due from banks***************************************
Held-to-maturity securities ***************************************
Available-for-sale securities **************************************
Loans held for sale *********************************************
Loans ********************************************************
Less allowance for loan losses ********************************
$ 6,336
127
41,354
1,439
126,315
(2,080)
$ 8,630
152
43,182
1,433
118,235
(2,184)
$ 10,758
233
28,255
4,159
116,251
(2,422)
$ 9,120
299
26,309
2,820
114,405
(2,457)
$ 8,475
252
17,390
764
122,365
(1,787)
Net loans **************************************************
Other assets **************************************************
124,235
21,613
116,051
20,023
113,829
22,793
111,948
20,894
120,578
17,462
Total assets *********************************************
$195,104
$189,471
$180,027
$171,390
$164,921
% Change
2004 v 2003
(26.6)%
(16.4)
(4.2)
.4
6.8
(4.8)
7.1
7.9
3.0%
Liabilities and Shareholders’ Equity
Deposits
Noninterest-bearing *****************************************
Interest-bearing *********************************************
$ 30,756
89,985
$ 32,470
86,582
$ 35,106
80,428
$ 31,212
74,007
$ 26,633
82,902
(5.3)%
3.9
Total deposits *******************************************
Short-term borrowings ******************************************
Long-term debt ************************************************
Other liabilities *************************************************
Total liabilities *******************************************
Shareholders’ equity ********************************************
120,741
13,084
34,739
7,001
175,565
19,539
119,052
10,850
33,816
6,511
170,229
19,242
115,534
7,806
31,582
6,669
161,591
18,436
105,219
14,670
28,542
6,214
154,645
16,745
109,535
11,833
23,276
4,944
149,588
15,333
1.4
20.6
2.7
7.5
3.1
1.5
Total liabilities and shareholders’ equity *********************
$195,104
$189,471
$180,027
$171,390
$164,921
3.0%
108 U.S. BANCORP
U.S. BANCORP
CONSOLIDATED STATEMENT OF INCOME — FIVE-YEAR SUMMARY
Year Ended December 31 (Dollars in Millions)
2004
2003
2002
2001
2000
Interest Income
Loans *********************************************************
Loans held for sale *********************************************
Investment securities ********************************************
Other interest income *******************************************
$7,168.1
91.5
1,827.1
99.8
$7,272.0
202.2
1,684.0
99.8
$7,743.0
170.6
1,484.3
96.0
$9,413.7
146.9
1,295.6
90.2
$10,519.3
102.1
1,148.9
114.8
Total interest income **************************************
9,186.5
9,258.0
9,493.9
10,946.4
11,885.1
Interest Expense
Deposits*******************************************************
Short-term borrowings ******************************************
Long-term debt ************************************************
904.3
262.7
908.2
1,096.6
166.8
805.3
1,485.3
222.9
971.4
2,828.1
475.6
1,292.0
3,618.8
682.2
1,593.7
Total interest expense ****************************************
2,075.2
2,068.7
2,679.6
4,595.7
5,894.7
Net interest income *********************************************
Provision for credit losses ****************************************
7,111.3
669.6
7,189.3
1,254.0
6,814.3
1,349.0
6,350.7
2,528.8
5,990.4
828.0
Net interest income after provision for credit losses ******************
6,441.7
5,935.3
5,465.3
3,821.9
5,162.4
Noninterest Income
Credit and debit card revenue ************************************
Corporate payment products revenue *****************************
ATM processing services ****************************************
Merchant processing services ************************************
Trust and investment management fees****************************
Deposit service charges *****************************************
Treasury management fees***************************************
Commercial products revenue ************************************
Mortgage banking revenue ***************************************
Investment products fees and commissions ************************
Securities gains (losses), net *************************************
Merger and restructuring-related gains *****************************
Other *********************************************************
649.3
406.8
175.3
674.6
981.2
806.4
466.7
432.2
397.3
156.0
(104.9)
—
478.3
560.7
361.3
165.9
561.4
953.9
715.8
466.3
400.5
367.1
144.9
244.8
—
370.4
517.0
325.7
160.6
567.3
892.1
690.3
416.9
479.2
330.2
132.7
299.9
—
398.8
465.9
297.7
153.0
308.9
887.8
644.9
347.3
437.4
234.0
130.8
329.1
62.2
370.4
431.0
299.2
141.9
120.0
920.6
555.6
292.4
350.0
189.9
66.4
8.1
—
591.9
Total noninterest income***********************************
5,519.2
5,313.0
5,210.7
4,669.4
3,967.0
Noninterest Expense
Compensation**************************************************
Employee benefits **********************************************
Net occupancy and equipment ***********************************
Professional services ********************************************
Marketing and business development******************************
Technology and communications**********************************
Postage, printing and supplies************************************
Goodwill*******************************************************
Other intangibles ***********************************************
Merger and restructuring-related charges **************************
Debt prepayment ***********************************************
Other *********************************************************
2,252.2
389.4
630.8
148.9
193.5
429.6
248.4
—
550.1
—
154.8
786.8
2,176.8
328.4
643.7
143.4
180.3
417.4
245.6
—
682.4
46.2
—
732.7
2,167.5
317.5
658.7
129.7
171.4
392.1
243.2
—
553.0
321.2
(.2)
786.4
2,036.6
285.5
666.6
116.4
178.0
353.9
241.9
236.7
278.4
1,044.8
6.8
703.4
1,993.9
303.7
653.0
102.2
188.0
362.1
241.6
219.9
157.3
327.9
—
433.3
Total noninterest expense**********************************
5,784.5
5,596.9
5,740.5
6,149.0
4,982.9
Income from continuing operations before income taxes *************
Applicable income taxes *****************************************
Income from continuing operations ********************************
Income (loss) from discontinued operations (after-tax)*************
Cumulative effect of accounting change (after-tax)****************
6,176.4
2,009.6
4,166.8
—
—
5,651.4
1,941.3
3,710.1
22.5
—
4,935.5
1,707.5
3,228.0
(22.7)
(37.2)
2,342.3
818.3
1,524.0
(45.2)
—
4,146.5
1,422.0
2,724.5
27.6
—
Net income ****************************************************
$4,166.8
$3,732.6
$3,168.1
$1,478.8
$ 2,752.1
* Not meaningful
% Change
2004 v 2003
(1.4)%
(54.7)
8.5
—
(.8)
(17.5)
57.5
12.8
.3
(1.1)
(46.6)
8.5
15.8
12.6
5.7
20.2
2.9
12.7
.1
7.9
8.2
7.7
*
—
29.1
3.9
3.5
18.6
(2.0)
3.8
7.3
2.9
1.1
—
(19.4)
*
*
7.4
3.4
9.3
3.5
12.3
*
—
11.6
U.S. BANCORP 109
U.S. BANCORP
QUARTERLY CONSOLIDATED FINANCIAL DATA
(Dollars in Millions, Except Per Share Data)
Interest Income
Loans ***************************************
Loans held for sale ****************************
Investment securities **************************
Other interest income**************************
2004
2003
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$1,747.0
19.9
469.3
21.9
$1,740.0
27.3
443.4
25.5
$1,802.8
21.1
453.2
25.7
$1,878.3
23.2
461.2
26.7
$1,836.7
59.6
405.0
29.9
$1,821.0
51.8
429.9
25.1
$1,818.3
59.5
410.3
23.2
$1,796.0
31.3
438.8
21.6
Total interest income ********************
2,258.1
2,236.2
2,302.8
2,389.4
2,331.2
2,327.8
2,311.3
2,287.7
Interest Expense
Deposits *************************************
Short-term borrowings *************************
Long-term debt *******************************
Total interest expense *******************
227.0
49.9
209.4
486.3
205.3
58.9
199.6
463.8
221.4
74.5
232.3
528.2
250.6
79.4
266.9
596.9
306.6
39.5
215.7
561.8
288.5
38.9
208.5
535.9
256.4
44.9
191.5
492.8
245.1
43.5
189.6
478.2
Net interest income ***************************
Provision for credit losses **********************
1,771.8
235.0
1,772.4
204.5
1,774.6
165.1
1,792.5
65.0
1,769.4
335.0
1,791.9
323.0
1,818.5
310.0
1,809.5
286.0
Net interest income after provision for credit losses
1,536.8
1,567.9
1,609.5
1,727.5
1,434.4
1,468.9
1,508.5
1,523.5
Noninterest Income
Credit and debit card revenue ******************
Corporate payment products revenue ************
ATM processing services ***********************
Merchant processing services*******************
Trust and investment management fees **********
Deposit service charges************************
Treasury management fees *********************
Commercial products revenue ******************
Mortgage banking revenue *********************
Investment products fees and commissions ******
Securities gains (losses), net ********************
Other****************************************
141.8
94.8
42.2
141.1
248.6
185.2
117.5
110.4
94.2
39.3
—
103.2
158.8
102.7
44.9
165.1
251.7
202.1
121.5
107.4
109.9
42.2
(171.7)
107.1
164.3
108.5
45.2
187.5
240.2
207.4
117.9
106.7
97.2
37.1
87.3
124.7
184.4
100.8
43.0
180.9
240.7
211.7
109.8
107.7
96.0
37.4
(20.5)
143.3
127.4
86.0
42.4
127.3
228.6
163.2
112.0
104.2
95.4
35.1
140.7
103.8
142.3
90.9
41.9
141.8
238.9
179.0
111.8
100.0
90.3
38.1
213.1
84.8
137.6
95.7
41.3
146.3
239.8
187.0
126.2
97.8
89.5
35.5
(108.9)
89.6
153.4
88.7
40.3
146.0
246.6
186.6
116.3
98.5
91.9
36.2
(.1)
92.2
Total noninterest income *****************
1,318.3
1,241.7
1,524.0
1,435.2
1,366.1
1,472.9
1,177.4
1,296.6
Noninterest Expense
Compensation ********************************
Employee benefits*****************************
Net occupancy and equipment *****************
Professional services **************************
Marketing and business development ************
Technology and communications ****************
Postage, printing and supplies ******************
Other intangibles ******************************
Merger and restructuring-related charges *********
Debt prepayment *****************************
Other****************************************
535.8
100.2
155.7
32.4
35.3
101.7
61.6
226.1
—
35.4
170.7
572.6
91.2
153.4
34.7
48.7
102.4
60.5
(47.6)
—
1.3
215.4
564.6
100.0
159.2
37.2
60.6
109.8
61.4
210.2
—
5.6
210.4
579.2
98.0
162.5
44.6
48.9
115.7
64.9
161.4
—
112.5
190.3
546.0
91.7
161.3
26.4
29.8
104.9
60.4
235.1
17.6
—
181.4
547.6
79.6
159.5
32.9
51.1
104.1
61.8
312.3
10.8
—
186.9
543.8
75.8
161.3
39.9
48.6
102.1
61.6
10.8
10.2
—
199.2
539.4
81.3
161.6
44.2
50.8
106.3
61.8
124.2
7.6
—
165.2
Total noninterest expense ****************
1,454.9
1,232.6
1,519.0
1,578.0
1,454.6
1,546.6
1,253.3
1,342.4
Income from continuing operations before income
taxes*************************************
Applicable income taxes ***********************
Income from continuing operations **************
Income from discontinued operations (after-tax) ***
1,400.2
391.8
1,008.4
—
1,577.0
540.1
1,036.9
—
1,614.5
549.0
1,065.5
—
1,584.7
528.7
1,056.0
—
1,345.9
461.8
884.1
.7
1,395.2
480.2
915.0
4.9
1,432.6
491.9
940.7
10.2
1,477.7
507.4
970.3
6.7
Net income **********************************
$1,008.4
$1,036.9
$1,065.5
$1,056.0
$ 884.8
$ 919.9
$ 950.9
$ 977.0
Earnings per share ****************************
Diluted earnings per share**********************
$
$
.53
.52
$
$
.55
.54
$
$
.57
.56
$
$
.57
.56
$
$
.46
.46
$
$
.48
.48
$
$
.49
.49
$
$
.51
.50
110 U.S. BANCORP
U.S. BANCORP
SUPPLEMENTAL FINANCIAL DATA
Earnings Per Share Summary
Earnings per share from continuing operations***********************
Discontinued operations ******************************************
Cumulative effect of accounting change ****************************
Earnings per share***********************************************
Diluted earnings per share from continuing operations ****************
Discontinued operations ******************************************
Cumulative effect of accounting change ****************************
Diluted earnings per share ****************************************
Ratios
2004
$2.21
—
—
$2.21
$2.18
—
—
$2.18
2003
$1.93
.01
—
$1.94
$1.92
.01
—
$1.93
2002
$1.68
(.01)
(.02)
$1.65
$1.68
(.01)
(.02)
$1.65
2001
$ .79
(.02)
—
$ .77
$.79
(.03)
—
$ .76
2000
$1.43
.01
—
$1.44
$1.42
.01
—
$1.43
Return on average assets*****************************************
Return on average equity *****************************************
Average total equity to average assets******************************
Dividends per share to net income per share ************************
2.17%
21.4
10.2
46.2
1.99%
19.2
10.3
44.1
1.84%
18.3
10.0
47.3
.89%
9.0
9.9
97.4
1.74%
19.0
9.1
45.1
Other Statistics (Dollars and Shares in Millions)
Common shares outstanding (a) ***********************************
Average common shares outstanding and common stock equivalents
Earnings per share*******************************************
Diluted earnings per share ************************************
Number of shareholders (b) ***************************************
Common dividends declared **************************************
(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
1,857.6
1,922.9
1,917.0
1,951.7
1,902.1
1,887.1
1,912.9
71,492
$1,917
1,923.7
1,936.2
74,341
$1,645
1,916.0
1,924.8
74,805
$1,488
1,927.9
1,940.3
76,395
$1,447
1,906.0
1,918.5
46,052
$1,267
First quarter *******************************
Second quarter ****************************
Third quarter*******************************
Fourth quarter *****************************
2004
Sales Price
2003
Sales Price
High
Low
$29.70
28.65
30.00
31.65
$26.41
24.89
27.42
27.52
Closing
Price
$27.65
27.56
28.90
31.32
Dividends
Declared
$.240
.240
.240
.300
High
Low
$23.47
24.99
25.82
30.00
$18.56
18.96
22.93
24.04
Closing
Price
$18.98
24.50
23.99
29.78
Dividends
Declared
$.205
.205
.205
.240
The common stock of U.S. Bancorp is traded on the New York Stock Exchange, under the ticker symbol ‘‘USB.’’
Reconciliation of Quarterly Consolidated Financial Data
(Dollars in Millions and After-tax)
Income before cumulative effect of accounting change, as previously reported*********************************
Less
First
Quarter
2003
Second
Quarter
Third
Quarter
$911.2
$953.6
$984.9
Discontinued operations of Piper Jaffray Companies (a)***************************************************
Adoption of SFAS 123 for stock options (a) *************************************************************
.7
26.4
4.9
33.7
10.2
34.0
Income from continuing operations **********************************************************************
$884.1
$915.0
$940.7
(a) The Company’s quarterly financial results previously filed on Form 10-Q with the Securities and Exchange Commission have been retroactively restated to give effect to the spin-off of Piper
Jaffray Companies on December 31, 2003, and the adoption of the fair value method of accounting for stock-based compensation. The accounting change was adopted using the
retroactive restatement method.
U.S. BANCORP 111
U.S. BANCORP
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND
Year Ended December 31
2004
2003
(Dollars in Millions)
Average
Balances
Interest
Yields
and Rates
Average
Balances
Interest
Yields
and Rates
$ 43,009
1,608
$1,835.5
91.5
4.27%
5.69
$ 37,248
3,616
$1,696.7
202.2
4.56%
5.59
Assets
Investment securities ******************************************
Loans held for sale ********************************************
Loans (b)
Commercial ***********************************************
Commercial real estate *************************************
Residential mortgages **************************************
Retail*****************************************************
Total loans ******************************************
Other earning assets ******************************************
Total earning assets**********************************
Allowance for credit losses *************************************
Unrealized gain (loss) on available-for-sale securities ***************
Other assets (c) ***********************************************
39,348
27,267
14,322
41,204
122,141
1,365
168,123
(2,303)
(346)
26,119
Total assets *****************************************
$191,593
Liabilities and Shareholders’ Equity
Noninterest-bearing deposits************************************
Interest-bearing deposits
$ 29,816
Interest checking*******************************************
Money market accounts ************************************
Savings accounts ******************************************
Time certificates of deposit less than $100,000 ****************
Time deposits greater than $100,000 *************************
Total interest-bearing deposits *************************
Short-term borrowings *****************************************
Long-term debt ***********************************************
20,933
32,854
5,866
13,074
13,679
86,406
14,534
35,115
Total interest-bearing liabilities *************************
Other liabilities (d) *********************************************
Shareholders’ equity *******************************************
136,055
6,263
19,459
Total liabilities and shareholders’ equity *****************
$191,593
2,212.9
1,543.3
812.1
2,619.7
7,188.0
100.1
9,215.1
70.8
235.2
15.4
341.3
241.6
904.3
262.7
908.2
2,075.2
5.62
5.66
5.67
6.36
5.89
7.33
5.48
.34
.72
.26
2.61
1.77
1.05
1.81
2.59
1.53
2,315.4
1,584.6
713.4
2,673.8
7,287.2
100.1
9,286.2
84.3
317.7
21.2
450.9
222.5
1,096.6
166.8
805.3
2,068.7
41,326
27,142
11,696
38,198
118,362
1,582
160,808
(2,467)
120
29,169
$187,630
$ 31,715
19,104
32,310
5,612
15,493
12,319
84,838
10,503
33,663
129,004
7,518
19,393
$187,630
Net interest income********************************************
$7,139.9
$7,217.5
Gross interest margin ******************************************
Gross interest margin without taxable-equivalent increments*********
Percent of Earning Assets
Interest income ***********************************************
Interest expense **********************************************
Net interest margin ********************************************
Net interest margin without taxable-equivalent increments***********
3.95%
3.93
5.48%
1.23
4.25%
4.23%
* Not meaningful.
(a) Interest and rates are presented on a fully taxable-equivalent basis under a tax rate of 35 percent.
(b) Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances.
(c) Includes approximately $1,427 million, $1,733 million, $1,664 million, and $1,970 million of earning assets from discontinued operations in 2003, 2002, 2001, and 2000, respectively.
(d) Includes approximately $1,034 million, $1,524 million, $1,776 million, and $2,072 million of interest-bearing liabilities from discontinued operations in 2003, 2002, 2001, and 2000,
respectively.
112 U.S. BANCORP
5.60
5.84
6.10
7.00
6.16
6.32
5.77
.44
.98
.38
2.91
1.81
1.29
1.59
2.39
1.60
4.17%
4.15
5.77%
1.28
4.49%
4.47%
RELATED YIELDS AND RATES (a)
2002
2001
2000
Average
Balances
Interest
Yields
and Rates
Average
Balances
Interest
Yields
and Rates
Average
Balances
Interest
Yields
and Rates
2004 v 2003
% Change
Average
Balances
$ 28,829
2,644
$ 1,503.5
170.6
5.22%
6.45
$ 21,916
1,911
$ 1,335.0
146.9
6.09%
7.69
$ 17,311
1,303
$ 1,211.4
102.1
7.00%
7.84
15.5%
(55.5)
4,222.6
2,296.9
863.7
3,155.1
10,538.3
115.3
11,967.1
8.43
8.82
7.71
10.18
8.91
6.76
8.63
2,622.2
1,636.3
595.3
2,902.8
7,756.6
96.1
9,526.8
102.3
312.8
25.1
743.4
301.7
1,485.3
222.9
971.4
2,679.6
43,817
25,723
8,412
36,501
114,453
1,484
147,410
(2,542)
409
26,671
$171,948
$ 28,715
15,631
25,237
4,928
19,283
11,330
76,409
10,116
32,172
118,697
7,263
17,273
$171,948
5.98
6.36
7.08
7.95
6.78
6.48
6.46
.65
1.24
.51
3.86
2.66
1.94
2.20
3.02
2.26
3,609.3
2,002.7
658.2
3,158.2
9,428.4
90.6
11,000.9
203.6
711.0
42.5
1,241.4
629.6
2,828.1
475.6
1,292.0
4,595.7
50,072
26,081
8,576
33,448
118,177
1,497
143,501
(1,979)
165
24,257
$165,944
$ 25,109
13,962
24,932
4,571
23,328
13,054
79,847
11,679
26,088
117,614
6,795
16,426
$165,944
7.21
7.68
7.67
9.44
7.98
6.05
7.67
1.46
2.85
.93
5.32
4.82
3.54
4.07
4.95
3.91
50,062
26,040
11,207
31,008
118,317
1,705
138,636
(1,781)
(247)
21,873
$158,481
$ 23,820
13,035
22,774
5,027
25,861
12,909
79,606
11,008
23,316
113,930
6,232
14,499
$158,481
270.4
1,000.0
74.0
1,458.3
816.1
3,618.8
682.1
1,593.8
5,894.7
$ 6,847.2
$ 6,405.2
$ 6,072.4
4.20%
4.18
6.46%
1.81
4.65%
4.63%
3.76%
3.72
7.67%
3.21
4.46%
4.43%
2.07
4.39
1.47
5.64
6.32
4.55
6.20
6.84
5.17
3.46%
3.40
8.63%
4.25
4.38%
4.32%
(4.8)
.5
22.5
7.9
3.2
(13.7)
4.5
(6.6)
*
(10.5)
2.1
(6.0)
9.6
1.7
4.5
(15.6)
11.0
1.8
38.4
4.3
5.5
(16.7)
.3
2.1%
U.S. BANCORP 113
ANNUAL REPORT ON FORM 10-K
Securities and Exchange Commission
Washington, D.C. 20549
Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended
December 31, 2004
Index
Part I
Item 1
Commission File Number 1-6880
U.S. Bancorp
Incorporated in the State of Delaware
IRS Employer Identification #41-0255900
Address: 800 Nicollet Mall
Minneapolis, Minnesota 55402-7014
Telephone: (651) 466-3000
Securities registered pursuant to Section 12(b) of the Act
(and listed on the New York Stock Exchange): Common
Stock, par value $.01.
Securities registered pursuant to section 12(g) of the
Act: None.
U.S. Bancorp (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is contained in this Form 10-K and in the
registrant’s definitive proxy statement incorporated by
reference in Part III of this Form 10-K.
As of January 31, 2005, U.S. Bancorp had
1,855,858,980 shares of common stock outstanding and
71,196 registered holders of its common stock. The
aggregate market value of common stock held by non-
affiliates as of June 30, 2004, was approximately
$51.9 billion.
This report incorporates into a single document the
requirements of the Securities and Exchange Commission
with respect to annual reports on Form 10-K and annual
reports to shareholders. Only those sections of this report
referenced in the following cross-reference index and the
information under the caption ‘‘Forward-Looking
Statements’’ are incorporated in the Form 10-K.
The registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2).
114 U.S. BANCORP
Page
Business
General Business Description ************ 20-21, 115-116
Line of Business Financial Performance *********** 54-60
Website Access to SEC Reports ******************** 117
Item 2
Properties **************************************** 116
Item 3
Legal Proceedings ******************************* none
Item 4
Submission of Matters to a Vote of
Security Holders ****************************** none
Part II
Item 5
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities ********3, 51-52, 66, 87-89, 94-95, 111, 114
Item 6
Selected Financial Data***************************** 19
Item 7
Management’s Discussion and Analysis of
Financial Condition and Results of Operations*** 18-62
Item 7A Quantitative and Qualitative Disclosures About
Market Risk ********************************* 43-51
Item 8
Financial Statements and Supplementary Data **** 64-113
Item 9
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ************ none
Item 9A Controls and Procedures**************************** 62
Item 9B Other Information ******************************** none
Part III
Item 10 Directors and Executive Officers
of the Registrant ********************************** *
Item 11 Executive Compensation ****************************** *
Item 12 Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder
Matters *********************************** 116-117
Item 13 Certain Relationships and Related Transactions ********* *
Item 14 Principal Accountant Fees and Services **************** *
Part IV
Item 15 Exhibits and Financial Statement Schedules****** 117-119
Signatures************************************************* 120
Certifications********************************************* 121-123
* U.S. Bancorp’s definitive proxy statement for the 2005 Annual Meeting of Shareholders
is incorporated herein by reference, other than the sections entitled ‘‘Report of the
Compensation Committee’’ and ‘‘Stock Performance Chart.’’
General Business Description U.S. Bancorp is a multi-state
financial 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 automated teller machine (‘‘ATM’’)
processing, mortgage banking, insurance, brokerage, leasing
and investment banking.
U.S. Bancorp’s banking subsidiaries are engaged in the
general banking business, principally in domestic markets.
The subsidiaries range in size from $25 million to
$128 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 2,370 banking offices principally operating in
24 states in the Midwest and West. The Company operates
a network of 4,620 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,
2004, U.S. Bancorp employed 48,831 persons.
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.
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
U.S. BANCORP 115
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 eight
freestanding operations centers in St. Paul, Portland,
Milwaukee and Denver. The Company owns six principal
operations centers in Cincinnati, St. Louis, Fargo,
Milwaukee and St. Paul. At December 31, 2004, the
Company’s subsidiaries owned and operated a total of
1,484 facilities and leased an additional 1,462 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 11 and 24 of the Notes to Consolidated
Financial Statements.
Equity Compensation Plan Information The following table summarizes information regarding equity compensation plans in
effect as of December 31, 2004.
Plan Category
Equity compensation plans approved by
security holders (b) ******************
Equity compensation plans not approved
by security holders (c)(d)**************
Total ***************************
Number of securities to be issued
upon exercise of outstanding options,
warrants and rights
Weighted-average exercise
price of outstanding options,
warrants and rights
Number of securities remaining
available for future issuance under
equity compensation plans (excluding
securities reflected in the first column) (a)
83,464,408
11,777,683
95,242,091
$21.83
$22.62
$21.90
35,154,782
—
35,154,782
(a) No shares are available for the granting of future awards under the U.S. Bancorp 1998 Executive Stock Incentive Plan or the U.S. Bancorp 1991 Executive Stock Incentive plan. The
35,154,782 shares available under the U.S. Bancorp 2001 Stock Incentive Plan may become the subject of future awards in the form of stock options, stock appreciation rights, restricted
stock, restricted stock units, performance awards or other stock-based awards, except that only 7,476,383 of these shares are available for future grants of awards other than stock
options or stock appreciation rights.
(b) Includes shares underlying stock options and restricted stock units (convertible into shares of the Company’s common stock on a one-for-one basis) under the U.S. Bancorp 2001 Stock
Incentive Plan, the U.S. Bancorp 1998 Executive Stock Incentive Plan and the U.S. Bancorp 1991 Executive Stock Incentive Plan. Excludes 43,728,386 shares underlying outstanding stock
options and warrants assumed by U.S. Bancorp in connection with acquisitions by U.S. Bancorp. Of the excluded shares, 39,283,290 underlie stock options granted under equity
compensation plans of the former U.S. Bancorp that were approved by the shareholders of the former U.S. Bancorp.
(c) Includes 3,585,410 shares of common stock issuable pursuant to the U.S. Bancorp Deferred Compensation Plan. All of the remaining identified shares underlie stock options granted to a
broad-based employee population pursuant to the U.S. Bancorp 2001 Employee Stock Incentive plan, the Firstar Corporation 1999 Employee Stock Incentive Plan, the Firstar Corporation
1998 Employee Stock Incentive Plan and the Star Banc Corporation 1996 Starshare Stock Incentive Plan for Employees.
(d) The weighted-average exercise price does not include any assumed price at issuance of shares that may be issuable pursuant to the Deferred Compensation Plan.
The U.S. Bancorp Deferred Compensation Plan allows
non-employee directors and members of our senior
management, including all of our executive officers, to defer
all or part of their compensation until retirement or earlier
termination of employment. The deferred compensation is
deemed to be invested in one of several investment
alternatives at the option of the participant, including shares
of U.S. Bancorp common stock. Deferred compensation
deemed to be invested in U.S. Bancorp stock may be
received at the time of distribution at the election of the
participant, in the form of shares of U.S. Bancorp common
stock. The 3,585,410 shares included in the table assumes
that participants in the plan whose deferred compensation
had been deemed to be invested in U.S. Bancorp common
stock had elected to receive all of that deferred
compensation in shares of U.S. Bancorp common stock on
December 31, 2004.
Under the U.S. Bancorp 2001 Employee Stock Incentive
Plan (‘‘2001 Plan’’), 11,678,800 shares are authorized for
issuance pursuant to the grant of nonqualified stock options
to any full-time or part-time employee actively employed by
U.S. Bancorp on the grant date, other than individuals
eligible to participate in any of the Company’s executive
116 U.S. BANCORP
stock incentive plans or in U.S. Bancorp Piper Jaffray Inc.’s
annual option plan. As of December 31, 2004, options to
purchase an aggregate of 4,506,987 shares were outstanding
under the plan. All options under the plan were granted on
February 27, 2001.
As of December 31, 2004, options to purchase an
aggregate of 1,355,214 shares of the Company’s common
stock were outstanding under the Firstar Corporation 1999
Employee Stock Incentive Plan (‘‘1999 Plan’’). Under this
plan, stock options were granted to each full-time or part-
time employee actively employed by Firstar Corporation on
the grant date, other than managers who participated in an
executive stock incentive plan.
As of December 31, 2004, options to purchase an
aggregate of 2,041,696 shares of the Company’s common
stock were outstanding under the Firstar Corporation 1998
Employee Stock Incentive Plan (‘‘1998 Plan’’). Under this
plan, stock options were granted to each full-time or part-
time employee actively employed by Firstar Corporation on
the grant date, other than managers who participated in an
executive stock incentive plan.
As of December 31, 2004, options to purchase an
aggregate of 288,376 shares of the Company’s common
stock were outstanding under the Star Banc Corporation
1996 Starshare Stock Incentive Plan for Employees (‘‘1996
Plan’’). Under the plan, stock options were granted to each
employee of Star Banc Corporation, a predecessor company,
other than managers who participated in an executive stock
incentive plan.
No further options will be granted under any of these
plans. Under all of the plans, the exercise price of the
options equals the fair market value of the underlying
common stock on the grant date. All options granted under
the plan have a term of 10 years from the grant date and
become exercisable over a period of time set forth in the
plan or determined by the committee administering the
plan. Options granted under the plan are nontransferable
and, during the optionee’s lifetime, are exercisable only by
the optionee.
If an optionee is terminated as a result of his or her
gross misconduct or offense, all options terminate
immediately, whether or not vested. Under the 2001 Plan,
the 1999 Plan and the 1998 Plan, in the event an optionee
is terminated immediately following a change in control (as
defined in the plans) of U.S. Bancorp, and the termination is
due to business needs resulting from the change in control
and not as a result of the optionee’s performance or
conduct, all of the optionee’s outstanding options will
become immediately vested and exercisable as of the date of
such termination. Under the 1996 Plan, all outstanding
options vest and become exercisable immediately following
a change in control.
If the outstanding shares of common stock of
U.S. Bancorp are changed into or exchanged for a different
number or kind of shares of stock or other securities as a
result of a reorganization, recapitalization, stock dividend,
stock split, combination of shares, reclassification, merger,
consolidation or similar event, the number of shares
underlying outstanding options also may be adjusted. The
plans may be terminated, amended or modified by the
Board of Directors at any time.
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 We have filed as exhibits to this annual
report on Form 10-K the Chief Executive Officer and Chief
Financial Officer certifications required by Section 302 of
the Sarbanes-Oxley Act. We have also submitted the
required annual Chief Executive Officer certification to the
New York Stock Exchange.
Governance Documents Our Corporate Governance
Guidelines, Code of Ethics and Business Conduct and Board
of Directors committee charters are available free of charge
on our 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 our investor relations department by contacting them
at investorrelations@usbank.com or calling (866) 775-9668.
Exhibits
Financial Statements Filed
U.S. Bancorp and Subsidiaries
Consolidated Financial Statements *******************
Notes to Consolidated Financial Statements **************
Reports of Independent Auditors and Accountants ********
Page
64-67
68-104
105
Schedules to the consolidated financial statements
required by Regulation S-X are omitted since the required
information is included in the footnotes or is not applicable.
The following Exhibit Index lists the Exhibits to the
Annual Report on Form 10-K.
(1)3.1 Restated Certificate of Incorporation, as
amended. Filed as Exhibit 3.1 to Form 10-K
for the year ended December 31, 2000.
(1)3.2 Restated bylaws, as amended. Filed as
4.1
Exhibit 3.2 to Form 10-K for the year ended
December 31, 2001.
[Pursuant to Item 601(b)(4)(iii)(A) of
Regulation S-K, copies of instruments defining
the rights of holders of long-term debt are not
filed. U.S. Bancorp agrees to furnish a copy
thereof to the Securities and Exchange
Commission upon request.]
(1)4.2 Warrant Agreement, dated as of October 2,
1995, between U.S. Bancorp and First Chicago
Trust Company of New York, as Warrant
Agent and Form of Warrant. Filed as
Exhibits 4.18 and 4.19 to Registration
Statement on Form S-3, File No. 33-61667.
(1)4.3 Amended and Restated Rights Agreement,
dated as of December 31, 2002, between U.S.
Bancorp and Mellon Investor Services LLC.
Filed as Exhibit 4.2 to Amendment No. 1 to
Registration Statement on Form 8-A (File
No. 001-06880) on December 31, 2002.
(1)(2)10.1 U.S. Bancorp 2001 Stock Incentive Plan. Filed
as Exhibit 10.1 to Form 10-K for the year
ended December 31, 2001.
(1)(2)10.2 Amendment No. 1 to U.S. Bancorp 2001
Stock Incentive Plan. Filed as Exhibit 10.2 to
Form 10-K for the year ended December 31,
2002.
U.S. BANCORP 117
(1)(2)10.3 U.S. Bancorp 1998 Executive Stock Incentive
Plan. Filed as Exhibit 10.3 to Form 10-K for
the year ended December 31, 2002.
(1)(2)10.4
Summary of U.S. Bancorp 1991 Executive
Stock Incentive Plan. Filed as Exhibit 10.4 to
Form 10-K for the year ended December 31,
2002.
(1)(2)10.5 U.S. Bancorp 2001 Employee Stock Incentive
Plan. Filed as Exhibit 10.5 to Form 10-K for
the year ended December 31, 2002.
(1)(2)10.6
(1)(2)10.7
(1)(2)10.8
Firstar Corporation 1999 Employee Stock
Incentive Plan. Filed as Exhibit 10.6 to
Form 10-K for the year ended December 31,
2002.
Firstar Corporation 1998 Employee Stock
Incentive Plan. Filed as Exhibit 10.7 to
Form 10-K for the year ended December 31,
2002.
Star Banc Corporation 1996 Starshare Stock
Incentive Plan for Employees. Filed as
Exhibit 10.8 to Form 10-K for the year ended
December 31, 2002.
(1)(2)10.9 U.S. Bancorp Executive Incentive Plan. Filed as
Exhibit 10.2 to Form 10-K for the year ended
December 31, 2001.
(1)(2)10.10 U.S. Bancorp Executive Deferral Plan, as
amended. Filed as Exhibit 10.7 to Form 10-K
for the year ended December 31, 1999.
(1)(2)10.11 Summary of Nonqualified Supplemental
Executive Retirement Plan, as amended, of the
former U.S. Bancorp. Filed as Exhibit 10.4 to
Form 10-K for the year ended December 31,
2001.
(1)(2)10.12 1991 Performance and Equity Incentive Plan
of the former U.S. Bancorp. Filed as
Exhibit 10.13 to Form 10-K for the year
ended December 31, 1997.
(1)(2)10.13 Form of Director Indemnification Agreement
entered into with former directors of the
former U.S. Bancorp. Filed as Exhibit 10.15 to
Form 10-K for the year ended December 31,
1997.
(1)(2)10.14 U.S. Bancorp Independent Director Retirement
and Death Benefit Plan, as amended. Filed as
Exhibit 10.17 to Form 10-K for the year
ended December 31, 1999.
(1)(2)10.15 U.S. Bancorp Deferred Compensation Plan for
Directors, as amended. Filed as Exhibit 10.18
to Form 10-K for the year ended
December 31, 1999.
(1)(2)10.16 U.S. Bancorp Non Qualified Executive
Retirement Plan. Filed as Exhibit 10.16 to
Form 10-K for the year ended December 31,
2002.
118 U.S. BANCORP
(1)(2)10.17 Amendments No. 1, 2 and 3 to U.S. Bancorp
Non-Qualified Executive Retirement Plan.
Filed as Exhibit 10.17 to Form 10-K for the
year ended December 31, 2003.
(1)(2)10.18 Amendment No. 4 to U.S. Bancorp Non-
Qualified Executive Retirement Plan. Filed as
Exhibit 10.1 to Form 8-K filed on
December 23, 2004.
(1)(2)10.19 U.S. Bancorp Executive Employees Deferred
Compensation Plan. Filed as Exhibit 10.18 to
Form 10-K for the year ended December 31,
2003.
(1)(2)10.20 U.S. Bancorp Outside Directors Deferred
Compensation Plan. Filed as Exhibit 10.19 to
Form 10-K for the year ended December 31,
2003.
(1)(2)10.21 Form of Change in Control Agreement,
effective November 16, 2001, between
U.S. Bancorp and certain executive officers of
U.S. Bancorp. Filed as Exhibit 10.12 to
Form 10-K for the year ended December 31,
2001.
(1)(2)10.22 Form of Executive Officer Stock Option
Agreement with cliff and performance vesting
under U.S. Bancorp 2001 Stock Incentive Plan.
Filed as Exhibit 10.1 to Form 10-Q for the
quarterly period ended September 30, 2004.
(1)(2)10.23 Form of Executive Officer Stock Option
Agreement with annual vesting under
U.S. Bancorp 2001 Stock Incentive Plan. Filed
as Exhibit 10.2 to Form 10-Q for the
quarterly period ended September 30, 2004.
(1)(2)10.24 Form of Executive Officer Restricted Stock
Award Agreement under U.S. Bancorp 2001
Stock Incentive Plan. Filed as Exhibit 10.3 to
Form 10-Q for the quarterly period ended
September 30, 2004.
(1)(2)10.25 Form of Director Stock Option Agreement
under U.S. Bancorp 2001 Stock Incentive Plan.
Filed as Exhibit 10.4 to Form 10-Q for the
quarterly period ended September 30, 2004.
(1)(2)10.26 Form of Director Restricted Stock Unit
Agreement under U.S. Bancorp 2001 Stock
Incentive Plan. Filed as Exhibit 10.5 to
Form 10-Q for the quarterly period ended
September 30, 2004.
(1)(2)10.27 Form of Executive Officer Restricted Stock
Unit Agreement under U.S. Bancorp 2001
Stock Incentive Plan. Filed as Exhibit 10.6 to
Form 10-Q for the quarterly period ended
September 30, 2004.
(1)(2)10.28 Employment Agreement with Jerry A.
Grundhofer. Filed as Exhibit 10.13 to
Form 10-K for the year ended December 31,
2001.
(1)(2)10.29 Amendment of Employment Agreement with
Jerry A. Grundhofer. Filed as Exhibit 10.1 to
Form 10-Q for the quarterly period ended
June 30, 2004.
(1)(2)10.30 Amendment No. 2 of Employment Agreement
with Jerry A. Grundhofer. Filed as
Exhibit 10.8 to Form 10-Q for the quarterly
period ended September 30, 2004.
(1)(2)10.31 Restricted Stock Unit Award Agreement with
Jerry A. Grundhofer dated January 2, 2002.
Filed as Exhibit 10.7 to Form 10-Q for the
quarterly period ended September 30, 2004.
(1)(2)10.32 Employment Agreement with Edward
Grzedzinski. Filed as Exhibit 10.22 to
Form 10-K for the year ended December 31,
2002.
(2)10.33 Information Regarding the 2005
Compensation of the Non-Employee Members
of the Board of Directors of U.S. Bancorp.
12
Statement re: Computation of Ratio of
Earnings to Fixed Charges.
21
Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
31.1 Certification of Chief Executive Officer
pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer
pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.
32
Certification of Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C.
section 1350 as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of
2002.
(1) Exhibit has previously been filed with the Securities and Exchange Commission and is
incorporated herein as an exhibit by reference to the prior filing.
(2) Management contracts or compensatory plans or arrangements.
U.S. BANCORP 119
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on February 28, 2005, on its
behalf by the undersigned, thereunto duly authorized.
U.S. Bancorp
By: Jerry A. Grundhofer
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below on February 28,
2005, by the following persons on behalf of the registrant
and in the capacities indicated.
Jerry A. Grundhofer
Chairman and Chief Executive Officer
(principal executive officer)
David M. Moffett
Vice Chairman and Chief Financial Officer
(principal financial officer)
Terrance R. Dolan
Executive Vice President and Controller
(principal accounting officer)
Linda L. Ahlers
Director
Victoria Buyniski Gluckman
Director
Arthur D. Collins, Jr.
Director
Peter H. Coors
Director
Joel W. Johnson
Director
Jerry W. Levin
Director
David B. O’Maley
Director
O’dell M. Owens, M.D., M.P.H.
Director
Thomas E. Petry
Director
Richard G. Reiten
Director
Craig D. Schnuck
Director
Warren R. Staley
Director
Patrick T. Stokes
Director
John J. Stollenwerk
Director
120 U.S. BANCORP
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Jerry A. Grundhofer, Chief Executive Officer of U.S. Bancorp, a Delaware corporation, certify that:
(1) I have reviewed this Annual Report on Form 10-K of U.S. Bancorp;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
(5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: February 28, 2005
/s /
JERRY A. GRUNDHOFER
Jerry A. Grundhofer
Chief Executive Officer
U.S. BANCORP 121
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, David M. Moffett, Chief Financial Officer of U.S. Bancorp, a Delaware corporation, certify that:
(1) I have reviewed this Annual Report on Form 10-K of U.S. Bancorp;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
(5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
/s / DAVID M. MOFFETT
David M. Moffett
Chief Financial Officer
Dated: February 28, 2005
122 U.S. BANCORP
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the
undersigned, Chief Executive Officer and Chief Financial Officer of U.S. Bancorp, a Delaware corporation (the ‘‘Company’’),
do hereby certify that:
(1) The Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (the ‘‘Form 10-K’’) of the Company
fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/
JERRY A. GRUNDHOFER
Jerry A. Grundhofer
Chief Executive Officer
Dated: February 28, 2005
/s / DAVID M. MOFFETT
David M. Moffett
Chief Financial Officer
U.S. BANCORP 123
EXECUTIVE OFFICERS
Jerry A. Grundhofer
William L. Chenevich
Joseph E. Hasten
Mr. Grundhofer is Chairman and Chief
Mr. Chenevich is Vice Chairman of
Mr. Hasten is Vice Chairman of
Executive Officer of U.S. Bancorp.
U.S. Bancorp. Mr. Chenevich, 61, has
U.S. Bancorp. Mr. Hasten, 53, has served
Mr. Grundhofer, 60, has served as Chief
served as Vice Chairman of U.S. Bancorp
as Vice Chairman of U.S. Bancorp since the
Executive Officer of U.S. Bancorp since the
since the merger of Firstar Corporation and
merger of Firstar Corporation and
merger of Firstar Corporation and
U.S. Bancorp in February 2001, when he
U.S. Bancorp in February 2001, when he
U.S. Bancorp in February 2001 and as
assumed responsibility for Technology and
assumed responsibility for Corporate
Chairman since December 30, 2002. He
Operations Services. Previously, he served
Banking. Mr. Hasten assumed additional
also served as President from the time of
as Vice Chairman of Technology and
responsibility for Corporate Payment
the merger until October 2004. Prior to the
Operations Services of Firstar Corporation
Systems in 2003. Previously, he had been
merger, Mr. Grundhofer was President and
from 1999 to 2001. Prior to joining Firstar
Vice Chairman of Wholesale Banking of
Chief Executive Officer of Firstar
he was Group Executive Vice President at
Firstar Corporation, after joining
Corporation, having served as Chairman,
Visa International from 1994 to 1999.
Mercantile Bancorporation, a predecessor
President and Chief Executive Officer of
Star Banc Corporation from 1993 until its
merger with Firstar Corporation in 1998.
Richard K. Davis
Mr. Davis is President and Chief Operating
company, as President of its St. Louis bank
and of Corporate Banking in 1995.
Officer of U.S. Bancorp. Mr. Davis, 47, has
Richard J. Hidy
Jennie P. Carlson
served in these capacities since October
Mr. Hidy is Executive Vice President and
Ms. Carlson is Executive Vice President of
2004. From the time of the merger of
Chief Risk Officer of U.S. Bancorp.
U.S. Bancorp. Ms. Carlson, 44, has served
Firstar Corporation and U.S. Bancorp in
Mr. Hidy, 42, has served in these positions
as Executive Vice President, Human
February 2001 until October 2004,
since February 2005. From January 2003
Resources since January 2002. Until that
Mr. Davis served as Vice Chairman of
until February 2005, he served as Senior
time, she served as Executive Vice
U.S. Bancorp. From the time of the merger,
Vice President and Deputy General Counsel
President, Deputy General Counsel and
Mr. Davis was responsible for Consumer
of U.S. Bancorp, having served as Senior
Corporate Secretary of U.S. Bancorp since
Banking, including Retail Payment
Vice President and Associate General
the merger of Firstar Corporation and
Solutions (card services), and he assumed
Counsel of U.S. Bancorp and Firstar
U.S. Bancorp in February 2001. From 1995
additional responsibility for Commercial
Corporation, a predecessor company, since
until the merger, she was General Counsel
Banking in 2003. Previously, he had been
1999.
and Secretary of Firstar Corporation and
Vice Chairman of Consumer Banking of
Star Banc Corporation, a predecessor
Firstar Corporation from 1998 until 2001
company, as well as Senior Vice President
and Executive Vice President, Consumer
from 1994 to 1999 and Executive Vice
Banking of Star Banc Corporation from
President from 1999 to 2001.
1993 until its merger with Firstar
Andrew Cecere
Corporation in 1998.
Mr. Cecere is Vice Chairman of
Michael J. Doyle
Pamela A. Joseph
Ms. Joseph is Vice Chairman of
U.S. Bancorp. Ms. Joseph, 45, has served
as Vice Chairman of U.S. Bancorp since
December 2004. Since November 2004, she
has been Chairman, President and Chief
Executive Officer of NOVA Information
U.S. Bancorp. Mr. Cecere, 44, has served as
Mr. Doyle is Executive Vice President and
Systems, Inc., which became a wholly
Vice Chairman of U.S. Bancorp since the
Chief Credit Officer of U.S. Bancorp.
owned subsidiary of U.S. Bancorp in
merger of Firstar Corporation and
Mr. Doyle, 48, has served in these positions
connection with the acquisition of NOVA
U.S. Bancorp in February 2001. He
since January 2003. Until that time, he
Corporation in July 2001. Prior to that
assumed responsibility for Private Client
served as Executive Vice President and
time, she had been President and Chief
and Trust Services in February 2001 and
Senior Credit Officer of U.S. Bancorp since
Operating Officer of NOVA Information
U.S. Bancorp Asset Management in
the merger of Firstar Corporation and
Systems, Inc. since February 2004. She
November 2001. Previously, he had served
U.S. Bancorp in February 2001. From 1999
served as Senior Executive Vice President
as Chief Financial Officer of U.S. Bancorp
until the merger, he was Executive Vice
of Business Development of NOVA
from May 2000 through February 2001.
President and Chief Approval Officer of
Corporation from 2001 to 2004, after
Additionally, he served as Vice Chairman of
Firstar Corporation, and had served as
serving as its Chief Information Officer
U.S. Bank with responsibility for
Senior Vice President of Firstar Corporation
from 1997 to 2001.
Commercial Services from 1999 to 2001,
and Star Banc Corporation, a predecessor
having been a Senior Vice President of
company, since 1994.
Finance since 1992.
124 U.S. BANCORP
Lee R. Mitau
David M. Moffett
Mr. Mitau is Executive Vice President and General Counsel of U.S.
Mr. Moffett is Vice Chairman and Chief Financial Officer of
Bancorp. Mr. Mitau, 56, has served in these positions since 1995.
U.S. Bancorp. Mr. Moffett, 53, has served in these positions since
Mr. Mitau also serves as Corporate Secretary. Prior to 1995 he was
the merger of Firstar Corporation and U.S. Bancorp in February
a partner at the law firm of Dorsey & Whitney LLP.
2001. Prior to the merger, he was Vice Chairman and Chief
Financial Officer of Firstar Corporation, and had served as Chief
Financial Officer of Star Banc Corporation from 1993 until its
merger with Firstar Corporation in 1998.
DIRECTORS
Jerry A. Grundhofer1,6
Chairman and
Chief Executive Officer
U.S. Bancorp
Linda L. Ahlers1,2,3
Retired President
Marshall Field’s
Minneapolis, Minnesota
Victoria Buyniski Gluckman4,6
Chairman, President and Chief Executive Officer
United Medical Resources, Inc.
Cincinnati, Ohio
Arthur D. Collins, Jr.1,5,6
Chairman and Chief Executive Officer
Medtronic, Inc.
Minneapolis, Minnesota
Peter H. Coors2,4
Vice Chairman
Molson Coors Brewing Company
Golden, Colorado
Joel W. Johnson4,5
Chairman and Chief Executive Officer
Hormel Foods Corporation
Austin, Minnesota
Jerry W. Levin5,6
Retired Chairman and
Chief Executive Officer
American Household, Inc.
Boca Raton, Florida
1. Executive Committee
2. Compensation Committee
3. Audit Committee
4. Community Outreach and Fair Lending Committee
5. Governance Committee
6. Credit and Finance Committee
David B. O’Maley1,2,5
Chairman, President and
Chief Executive Officer
Ohio National Financial Services, Inc.
Cincinnati, Ohio
O’dell M. Owens, M.D., M.P.H.4,6
Independent Consultant and
Hamilton County Coroner
Cincinnati, Ohio
Thomas E. Petry1,2,5
Retired Chairman and
Chief Executive Officer
Eagle-Picher Industries, Inc.
Cincinnati, Ohio
Richard G. Reiten1,3,6
Retired Chairman and
Chief Executive Officer
Northwest Natural Gas Company
Portland, Oregon
Craig D. Schnuck3,4
Chairman and Chief Executive Officer
Schnuck Markets, Inc.
St. Louis, Missouri
Warren R. Staley1,3,6
Chairman and Chief Executive Officer
Cargill, Incorporated
Minneapolis, Minnesota
Patrick T. Stokes1,2,5
President and Chief Executive Officer
Anheuser-Busch Companies, Inc.
St. Louis, Missouri
John J. Stollenwerk2,3
President and Chief Executive Officer
Allen-Edmonds Shoe Corporation
Port Washington, Wisconsin
U.S. BANCORP 125
CORPORATE INFORMATION
Executive Offi ces
U.S. Bancorp
800 Nicollet Mall
Minneapolis, MN 55402
Common Stock Transfer Agent and Registrar
Mellon Investor Services acts as our transfer agent and registrar,
dividend paying agent and dividend reinvestment plan adminis-
trator, and maintains all shareholder records for the corporation.
Inquiries related to shareholder records, stock transfers, changes
of ownership, lost stock certifi cates, changes of address and
dividend payment should be directed to the transfer agent at:
Financial Information
U.S. Bancorp news and fi nancial results are available through
our website and by mail.
Website. For information about U.S. Bancorp, including news,
fi nancial results, annual reports and other documents fi led with
the Securities and Exchange Commission, access our home page
on the internet at usbank.com, click on About U.S. Bancorp,
then Investor/Shareholder Information.
Mail. At your request, we will mail to you our quarterly earnings,
news releases, quarterly fi nancial data reported on Form 10-Q
and additional copies of our annual reports. Please contact:
Mellon Investor Services
P.O. Box 3315
South Hackensack, NJ 07606-1915
Phone: 888-778-1311 or 201-329-8660
Internet: melloninvestor.com
For Registered or Certifi ed Mail:
Mellon Investor Services
85 Challenger Road
Ridgefi eld Park, NJ 07660-2104
Telephone representatives are available weekdays from 8:00 a.m.
to 6:00 p.m. Central Time, and automated support is available
24 hours a day, 7 days a week. Specifi c information about your
account is available on Mellon’s internet site by clicking on
For Investors and then the Investor ServiceDirect® link.
Independent Auditor
Ernst & Young LLP serves as the independent auditor for
U.S. Bancorp’s fi nancial statements.
Common Stock Listing and Trading
U.S. Bancorp common stock is listed and traded on the
New York Stock Exchange under the ticker symbol USB.
Dividends and Reinvestment Plan
U.S. Bancorp currently pays quarterly dividends on our
common stock on or about the 15th day of January, April,
July and October, subject to prior approval by our Board of
Directors. U.S. Bancorp shareholders can choose to participate
in a plan that provides automatic reinvestment of dividends
and/or optional cash purchase of additional shares of
U.S. Bancorp common stock. For more information, please
contact our transfer agent, Mellon Investor Services. See above.
Investor Relations Contacts
Howell D. McCullough
Senior Vice President,
Investor Relations
Judith T. Murphy
Vice President,
Investor Relations
howell.mccullough@usbank.com
Phone: 612-303-0786
judith.murphy@usbank.com
Phone: 612-303-0783 or
866-775-9668
U.S. Bank Member FDIC
This report printed on recycled paper containing a minimum
of 10 percent post-consumer waste.
U.S. Bancorp Investor Relations
800 Nicollet Mall
Minneapolis, MN 55402
investorrelations@usbank.com
Phone: 612-303-0799 or 866-775-9668
Media Requests
Steven W. Dale
Senior Vice President, Media Relations
steve.dale@usbank.com
Phone: 612-303-0784
Privacy
U.S. Bancorp is committed to respecting the privacy of our
customers and safeguarding the fi nancial and personal infor-
mation provided to us. To learn more about the U.S. Bancorp
commitment to protecting privacy, visit usbank.com and click
on Privacy Pledge.
Code of Ethics
U.S. Bancorp places the highest importance on honesty and
integrity. Each year, every U.S. Bancorp employee certifi es
compliance with the letter and spirit of our Code of Ethics
and Business Conduct, the guiding ethical standards of our
organization. For details about our Code of Ethics and Business
Conduct, visit usbank.com and click on About U.S. Bancorp,
then Ethics at U.S. Bank.
Diversity
U.S. Bancorp and our subsidiaries are committed to developing
and maintaining a workplace that refl ects the diversity of the
communities we serve. We support a work environment where
individual differences are valued and respected and where each
individual who shares the fundamental values of the company has
an opportunity to contribute and grow based on individual merit.
Equal Employment Opportunity/Affi rmative Action
U.S. Bancorp and our subsidiaries are committed to providing
Equal Employment Opportunity to all employees and applicants
for employment. In keeping with this commitment, employment
decisions are made based upon performance, skill and abilities,
not race, color, religion, national origin or ancestry, gender, age,
disability, veteran status, sexual orientation or any other factors
protected by law. The corporation complies with municipal,
state and federal fair employment laws, including regulations
applying to federal contractors.
U.S. Bancorp, including each of our subsidiaries, is an Equal
Opportunity Employer committed to creating a diverse workforce.
At U.S. Bancorp, we value and recognize
the expertise and energy of our employees,
especially their commitment to providing
outstanding customer service and contributing
to the corporation’s fi nancial results. Each
employee wears a U.S. Bank lapel pin signifying
our customer service guarantee. This year, we
will acknowledge employees’ milestone service
anniversaries with special gemstone lapel pins
for service at fi ve, 10, 15, 20 and 25 years.
U.S. BANCORP AT A GLANCE
At year-end 2004
Ranking
Asset size
Deposits
Total loans
Earnings per share (diluted)
Return on average assets
Return on average equity
Tangible common equity
Effi ciency ratio
Customers
Primary banking region
Bank branches
ATMs
NYSE symbol
6th largest fi nancial
holding company
$195 billion
$121 billion
$126 billion
$2.18
2.17%
21.4%
6.4%
45.3%
13.1 million
24 states
2,370
4,620
USB
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FIVE STAR SERVICE IN ACTION
2004 ANNUAL REPORT AND FORM 10-K
U.S. Bancorp
800 Nicollet Mall
Minneapolis, MN 55402
usbank.com