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Building on...
Innovating more...
Expanding further...
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2008 Annual Report
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U.S. Bancorp:
Meeting the
challenges head on
U.S. Bancorp met the unprecedented challenges facing
our industry and the financial markets in 2008 with swift
and decisive actions to keep our company strong and
profitable. Our principles of financial discipline, balance
sheet strength and prudent risk administration allowed us
to manage the economic and industry turmoil of the past
year. We continue to build on our commitments of building
deeper customer relationships, investing in innovation for
the future, and expanding our capabilities and reach.
U.S. Bancorp
business scope
Regional
National
Consumer & Business Banking &
Wealth Management
Wholesale Banking &
Trust Services
Global
Payments
Corpora
Executive Offi ces
U.S. Bancorp
800 Nicollet Mall
Minneapolis, MN 5
Common Stock T
and Registrar
BNY Mellon Shareo
our transfer agent a
paying agent and di
plan administrator,
shareholder records
Inquiries related to
stock transfers, chan
lost stock certificate
and dividend payme
to the transfer agent
BNY Mellon Shareo
P.O. Box 358015
Pittsburgh, PA 1525
Phone: 888-778-131
201-680-6578 (inte
Internet: bnymellon
For Registered or C
BNY Mellon Shareo
500 Ross St., 6th Fl
Pittsburgh, PA 1521
Telephone represent
weekdays from 8:00
Central Time, and a
available 24 hours a
Specifi c information
available on BNY M
clicking on the Inve
Independent Aud
Ernst & Young LLP
independent auditor
financial statements
Common Stock L
U.S. Bancorp comm
traded on the New Y
under the ticker sym
The
repo
to th
cont
post
fi ber
fi nan
post
pape
Mission Statement
The U.S. Bancorp mission
statement is our employee’s
clear, strong commitment to
our customers, communities,
and shareholders.
Table of Contents
2 Selected Financial Highlights
3 Financial Summary
4 Letter to Shareholders
7 Building, Innovating, Expanding
15 Employee Engagement
16 Community Building
17 The Greening of USB
19 Management’s Discussion
and Analysis
66 Consolidated Financial Statements
70 Notes to Consolidated
Financial Statements
111 Reports of Management and
Independent Accountants
114 Five-year Consolidated
Financial Statements
116 Quarterly Consolidated Financial Data
117 Supplemental Financial Data
120 Company Information
127 Executive Offi cers
128 Directors
Inside Back Cover Corporate Information
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U.S. Bancorp At A Glance
Ranking
Asset size
Deposits
Loans
Customers
Payment services and
merchant processing
U.S. Bank is 6th largest
U.S. commercial bank
$266 billion
$159 billion
$185 billion
15.8 million
Global
Corporate Profi le
Wholesale banking and trust services National
U.S. Bancorp is a diversifi ed fi nancial services holding company
and the parent company of U.S. Bank, the sixth-largest commercial
Consumer and business banking
and wealth management
bank in the United States. At year-end 2008, U.S. Bancorp had
total assets of $266 billion. U.S. Bancorp offers regional consumer
and business banking and wealth management services, national
wholesale and trust services and global payments services to
more than 15.8 million customers. U.S. Bancorp is headquartered
Employees
Bank branches
ATMs
NYSE symbol
in Minneapolis, Minnesota and employs more than 57,000 people.
At year-end December 31, 2008
24 states
57,904
2,791
5,164
USB
Visit U.S. Bancorp online at usbank.com
2008 Revenue
27%
20%
13%
40%
Payment Services
Wholesale Banking
U.S Bancorp delivers an
From deposit services and
Wealth Management
& Securities Services
Consumer Banking
Convenience, choice, and
expansive range of fl exible
payments to fi nancing, capital
U.S. Bancorp provides industry-
accessibility — it’s why more than
payment solutions and services
for individuals and businesses
and leasing, investments and
international trade fi nancing,
leading services for individuals,
institutions, businesses and
14 million consumers and small
businesses choose U.S. Bank as
worldwide.
U.S. Bank brings the market
municipalities to build, manage,
their fi nancial partner.
(cid:129) Corporate Payment Systems
(cid:129) Elavon:
Credit, debit, electronic
check and gift card merchant
processing
(cid:129) Retail Payment Solutions:
Debit, Credit, Small Business,
Gift and Specialty card issuance
(cid:129) Healthcare Payment Solutions
(cid:129) Financial Institution services
knowledge, professionalism
preserve and protect wealth, as
and capacity companies need
well as provide superior custody,
in today’s turbulent climate.
delivery and obligation services.
(cid:129) National Corporate Banking
(cid:129) Middle Market
Commercial Banking
(cid:129) Commercial Real Estate
(cid:129) Correspondent Banking
Wealth Management:
(cid:129) The Private Client Reserve
(cid:129) U.S. Bancorp
Investments, Inc.
(cid:129) U.S. Bancorp
(cid:129) Dealer Commercial Services
Insurance Services, LLC
Securities Services:
(cid:129) Corporate Trust Services
(cid:129) Institutional Trust & Custody
(cid:129) FAF Advisors, Inc.
(cid:129) U.S. Bancorp
Fund Services, LLC
(cid:129) Community Banking
(cid:129) Foreign Exchange
(cid:129) Government Banking
(cid:129) International Banking
(cid:129) Treasury Management
(cid:129) Small Business
Equipment Finance
(cid:129) Small Business Administration
(SBA) Division
(cid:129) Specialized Industries
and Finance
(cid:129) Title Industry Banking
(cid:129) Homeowners Association Banking
(cid:129) Community Banking
(cid:129) Metropolitan Branch Banking
(cid:129) In-store and Corporate
On-site Banking
(cid:129) Small Business Banking
(cid:129) Consumer Lending
(cid:129) 24-Hour Banking & Financial Sales
(cid:129) Home Mortgage
(cid:129) Community Development
(cid:129) Workplace and Student Banking
(cid:129) Transactions Services:
ATM and Debit Processing
and Services
U.S. BANCORP
1
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Diluted Earnings
Per Common Share
(In Dollars)
Dividends Declared
Per Common Share
(In Dollars)
2.00
Selected fi nancial
highlights
Net Income
(Dollars in Millions)
1
5
7
4
,
9
8
4
4
,
4
2
3
4
,
7
6
1
4
,
6
4
9
,
2
04
05
06
07
0808
08
Return on
Average Assets
(In Percents)
7
1
2
.
1
2
2
.
3
2
2
.
3
9
1
.
3.00
1.50
0
25
1
2
.
1
12.5
04
05
06
07
0808
08
Net Interest Margin
(Taxable-Equivalent Basis)
(In Percents)
5
2
4
.
7
9
3
.
5
6
3
.
7
4
3
.
6
6
3
.
04
05
06
07
0808
08
0
50
25
0
5,000
2,500
0
2.4
1.2
0
5.00
2.50
0
1
6
2
.
3
4
2
.
2
4
8 2
1
2
.
.
04
05
06
07
0808
08
Return on Average
Common Equity
(In Percents)
.
6
3
2
5
.
2
2
.
3
1
2
.
4
1
2
04
05
06
07
0808
08
Efficiency Ratio (a)
(In Percents)
.
7
5
4
.
7
4
4
.
7
9
8 4
5
4
.
1
6
.
1
9
.
3
1
4
.
7
4
04
05
06
07
0808
08
Average Shareholders’
Equity
(Dollars in Millions)
Average Assets
(Dollars in Millions)
2
1
5
3
1
2
,
,
8
9
1
3
0
2
3
9
5
1
9
1
,
250,000
125,000
0
0
4
,
1
2
4
6
4
, 2
3
2
2
,
25,000
12,500
9
5
4
9
1
,
3
5
9
9
1
,
0
1
7
0
2
,
0
7
5
,
7
9
2
9
, 2
0
2
,
0
0
7
1
.
5
2
6
0 1
9
3
1
.
.
0
3
2
1
.
1.00
0
2
0
1
.
0
110
55
0
12
6
0
15
7.5
0
04
05
06
07
088
08
Dividend
Payout Ratio
(In Percents)
9
.
4
0
1
.
1
6
6
.
2
0
5
.
7
2
5
.
2
6
4
04
05
06
07
0808
08
Tier 1 Capital
(In Percents)
6
8
.
8
2 8
8
.
.
6
.
0
1
3
8
.
04
05
06
07
0808
08
Total Risk-Based
Capital
(In Percents)
.
1
3
1
.
5
2
1
.
6
2
1
.
2
2
1
3
.
4
1
04
05
06
07
0808
08
0
04
05
06
07
0808
08
0
04
05
06
07
0808
08
(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.
2
U.S. BANCORP
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F
Financial
summary
Year Ended December 31
(Dollars and Shares in Millions, Except Per Share Data)
2008
2007
2006
2008
v 2007
2007
v 2006
Total net revenue (taxable-equivalent basis) ...............................
$ 14,677
$ 14,060
$ 13,742
Noninterest expense ...................................................................
Provision for credit losses ...........................................................
Income taxes and taxable-equivalent adjustments ......................
7,414
3,096
1,221
6,986
792
1,958
6,286
544
2,161
Net income ..............................................................................
$ 2,946
$ 4,324
$ 4,751
Net income applicable to common equity ...............................
$ 2,823
$ 4,264
$ 4,703
4.4%
6.1
*
(37.6)
(31.9)
(33.8)
2.3%
11.1
45.6
(9.4)
(9.0)
(9.3)
Per Common Share
Earnings per share .......................................................................
$ 1.62
$ 2.46
$ 2.64
(34.1)%
(6.8)%
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 ..............................
1.61
1.700
10.47
25.01
1,742
1,757
2.43
1.625
11.60
31.74
1,735
1,758
2.61
1.390
11.44
36.19
1,778
1,804
(33.7)
4.6
(9.7)
(21.2)
.4
(.1)
(6.9)
16.9
1.4
(12.3)
(2.4)
(2.5)
Financial Ratios
Return on average assets.............................................................
1.21%
1.93%
2.23%
Return on average common equity ..............................................
Net interest margin (taxable-equivalent basis) .............................
Effi ciency ratio (a) ...........................................................................
Tangible common equity ..............................................................
Tangible common equity, excluding accumulated other
13.9
3.66
47.4
3.2
21.3
3.47
49.7
4.7
23.6
3.65
45.8
5.2
comprehensive income (loss) ...................................................
4.5
5.2
5.5
Average Balances
Loans ............................................................................................
$165,552
$147,348
$140,601
12.4%
4.8%
Investment securities ...................................................................
42,850
Earning assets ..............................................................................
215,046
Assets ...........................................................................................
244,400
Deposits .......................................................................................
136,184
Total shareholders’ equity ............................................................
22,570
41,313
194,683
223,621
121,075
20,997
39,961
186,231
213,512
120,589
20,710
3.7
10.5
9.3
12.5
7.5
3.4
4.5
4.7
.4
1.4
Period End Balances
Loans ............................................................................................
$185,229
$153,827
$143,597
20.4%
7.1%
Allowance for credit losses ..........................................................
Investment securities ...................................................................
3,639
39,521
Assets ...........................................................................................
265,912
Deposits .......................................................................................
159,350
Shareholders’ equity ....................................................................
26,300
2,260
43,116
237,615
131,445
21,046
2,256
40,117
219,232
124,882
21,197
61.0
(8.3)
11.9
21.2
25.0
.2
7.5
8.4
5.3
(.7)
Regulatory capital ratios
Tier 1 capital ............................................................................
Total risk-based capital ...........................................................
Leverage ...................................................................................
10.6%
14.3
9.8
8.3%
12.2
7.9
8.8%
12.6
8.2
(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
U.S. BANCORP
3
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Our business diversifi cation, strong balance sheet
and disciplined approach to credit and
risk management proved benefi cial in 2008, but could not completely shield our Company
from unprecedented uncertainty in the fi nancial markets and a weakening economy.
Fellow Shareholders:
Flight to quality
compared with $690 million at
2008 was an extremely challenging,
The Company continued to
December 31, 2007. This increase
and in many ways historic year for all
benefi t from the “fl ight to quality”
refl ected the continuing stress in the
companies in the fi nancial services
as customers sought banks with
residential real estate-related industries
industry — here and around the world.
strong capital and the ability to
and portfolios and the impact of a
While I am very disappointed that the
provide them with the fi nancial
weakening economy on other consumer
value of our shareholders’ investment
products and services they need during
and commercial sectors, as well as
in our Company declined during 2008,
this period of economic uncertainty.
recent acquisitions. Given the current
I am proud that our business model
and disciplined risk management
allowed U.S. Bancorp to fare better
than many others in the industry. Our
company continued to make a profi t,
to generate capital, to increase lending,
and to accept and safeguard deposits
throughout the year. We reported key
fi nancial results at or near the top of
our peer group of banks, including
Commercial and retail average loans
increased; deposits increased; net
interest income increased, and the net
interest margin widened. Regulatory
capital levels were strong, our capital
generation rate was the highest among
our peers, and we are serving a million
more customers than a year ago. Our
core business results in 2008 were solid.
economic environment, we expect
the upward trend in nonperforming
assets and net charge-offs, along
with additional market-related losses,
will continue in 2009, which makes
it imperative that we maintain the
strength of our balance sheet by
adequately providing for future loan
losses — and be assured we will.
Further, and more importantly, the
industry-leading returns on average
And yet, we saw an overall decline in
higher cost of credit was, and will be,
assets and average common equity.
earnings, principally due to signifi cantly
more than covered by the Company’s
We built new and deeper customer
higher credit costs and market-related
strong core operating earnings.
relationships, expanded our franchise,
write-downs as the economy
and created innovative new products
deteriorated throughout 2008. Given
and services. In other words, we
the more conservative risk profi le of
continued to create the catalysts for
U.S. Bancorp’s loan portfolio, the
long-term growth in core operating
Company’s overall credit quality was
earnings. In addition, we gave back to
relatively better than its peers. The cost
our communities in both money and
of credit, however, still had a sizeable
time, engaged, honored and rewarded
impact on 2008 results. The provision
Relative to the rest of the industry,
U.S. Bancorp performed very well in
2008. Still, the impact of higher credit
costs and market-related charges led
to overall 2008 fi nancial results that
were disappointing to both me and
our managing team.
our employees and focused on
for credit losses was higher in 2008
Capital Purchase Program
environmental sustainability. In fact,
than 2007 by $2,304 million. This
participation
our recent focus on employee
unfavorable change refl ected both
In November 2008, we announced
engagement is proving to be perfectly
an increase in net-charge-offs
that U.S. Bancorp would participate
timed, as their support and commitment
year-over-year of $1,027 million, as
in the U.S. Treasury Capital Purchase
are of utmost importance as we
well as a $1,277 million provision
Program. Subsequently, we issued
navigate this diffi cult environment.
expense to build the allowance for
$6.6 billion of preferred stock and
These are all reasons to be pleased
credit losses. Nonperforming assets
related warrants to the U.S. Treasury.
and proud of our Company.
ended the year at $2,624 million,
4
U.S. BANCORP
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“
The decision to participate in the
of Mellon 1st Business Bank in Los
program was made after a thoughtful
Angeles and Orange County, which
I believe that now, more than
and detailed evaluation of the impact
was announced in March 2008. These
ever, the conservative policies,
that the program would have on
three acquisitions strengthened our
essential values and integrity
our Company’s ability to serve our
geographic footprint in the attractive
of this Company will benefi t
customers, support the communities in
Western region of our franchise. We
our shareholders, customers,
communities and employees.”
which we operate, create long-term
believe that acquisitions like Downey
value for our shareholders and, overall,
Savings & Loan, PFF Bank & Trust
assist the U.S. Treasury in its quest to
and Mellon 1st Business Bank are an
stimulate the United States economy.
effi cient means of leveraging our
Although participation in the program
strong capital base and investing in
was not necessary from a capital
our Company. While adding over
adequacy perspective, as our capital
200 new branch locations in total,
position was strong, it was determined
these three acquisitions served to
to be fi nancially benefi cial and provided
elevate us to the position of the 4th
U.S. Bancorp with the on-going capacity
largest banking system in California.
for additional loan growth and for
funding growth initiatives. The fi nancial
benefi ts, including solidifying the
Company’s already strong capital posi-
tion and the ability to compete more
effectively with other banks that had
already announced their participation
in the program, were compelling.
As part of the Downey Savings &
Loan and PFF Bank & Trust
acquisitions, the Company agreed to
modify the terms of certain residential
mortgage loans in accordance with the
FDIC Mortgage Loan Modifi cation
Program. This program will allow us
to work closely with approximately
Strengthening western markets
35,000 homeowners in an effort to
On November 21, 2008, we
provide solutions for these potentially
announced that our Company’s lead
troubled borrowers to stay in their
bank, U.S. Bank National Association,
homes. We have had a similar loan
acquired the banking operations of
modifi cation program in place at
two separate California fi nancial
U.S. Bancorp since 2007 and have
institutions from the Federal Deposit
been very satisfi ed with the results.
Insurance Corporation; Downey
We believe that helping to keep
Savings & Loan Association, F.A., and
borrowers in their homes is one of the
PFF Bank & Trust. These transactions
key elements necessary to the eventual
followed the Company’s acquisition
stabilization of housing prices and
economic recovery.
U.S. BANCORP
5
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Lynne Gordon, M.F.A., Cincinnati artist,
is known for her sculptured fi ne jewelry
in precious metals, drawings and paintings.
She is also an architecture consultant,
supporter of countless fi ne art and civic
endeavors and has been a U.S. Bancorp
client and shareholder for more than 40
years. “The management of U.S. Bancorp
has always impressed me,” says Ms. Gordon.
“A long history of consistent earnings and
conservative policies has increased the value
of my investment in this quality company.”
Harry Bettis, Idaho cattle rancher and
generous philanthropist, knows the value
of a long-term investment, and he’s been
a U.S. Bancorp shareholder for more than
50 years. “I appreciate the prudent way
they run this bank,” says Mr. Bettis. “Steady
earnings and industry leadership over the
years have been an important reason I’ve
stayed with U.S. Bancorp stock. They
manage the company for their shareholders,
as well as for their customers.”
Baker joins board of directors
the fi nancial sector refl ect the very
We are managing through these critical
In February 2008, Douglas M. Baker, Jr.
historic nature of this time.
times, but are also operating with a
was appointed to its board of directors.
Mr. Baker, 49, is the chairman, president
and chief executive offi cer of
Ecolab Inc. Based in St. Paul, Minnesota,
Ecolab is a provider of cleaning,
sanitizing, food safety and infection
control products and services. Doug
brings extensive experience and insight
to the board and his leadership abilities
provide a valuable contribution.
I believe that now, more than ever, the
conservative policies, essential values
and integrity of this Company will
benefi t our shareholders, customers,
communities and employees. I am
extremely proud of our employees. They
have not been distracted by industry
turmoil; they have worked hard, achieved
goals, generated revenue, served
customers and ensured that U.S. Bancorp
clear view of the long-term future of
this Company and our fundamental
goal to deliver earnings and returns on
your investment that are consistent,
predictable and repeatable. I am more
confi dent than ever that our future is
bright and the special qualities that
make U.S. Bancorp distinctive among
its peers will become more evident
in the coming year.
Looking ahead
is always “open for business.”
Sincerely,
The disruption and uncertainty in the
fi nancial markets continues. And all
indications are that the challenges will
remain for most of 2009. The size,
scope and pace of change, government
intervention and other activities in
Throughout this report, you can read
more about their efforts and how
U.S. Bancorp continues to invest in the
future of this Company, connect with
Richard K. Davis
customers, engage our employees and
Chairman, President and
grow our business.
Chief Executive Offi cer
March 2, 2009
6
U.S. BANCORP
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Building
the Customer Experience
Now, more than ever, U.S. Bancorp is focusing on customer service, customer
relationships, customer convenience, and each customer’s experience with U.S. Bank.
On the following pages, you will read about the steps we are taking to ensure that
every customer in every line of business, in every market, is provided the very best
banking can deliver.
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U.S. BANCORP
7
Building
Building deeper relationships with our customers also builds customer
satisfaction and loyalty, resulting in opportunities to increase revenue.
The better we know our customers,
that we make it easy to bank
Our Wholesale Banking “Voice
the better we can anticipate their needs,
with U.S. Bank. These help us to
of the Customer” initiative is an
make the best recommendations and
communicate more frequently with
ongoing program that solicits
offer new products and services.
our customers and ensure that the
customers’ payment services
Every transaction is an opportunity
communication fl ows both ways and
feedback. Customer response allows
to better understand our customers’
that we are listening and responding.
us to gain insights into market
needs. Through our Enterprise
A primary focus of the ERO is to
direction of the payments business,
Revenue Offi ce (ERO), we have
create ways across the Company to
to develop market-driven new
developed 15 initiatives to ensure
deepen customer relationships.
product concepts and deepen
customer relationships. We survey
customers through a variety of
channels and have initiated
Customer Roundtable discussions
about our payments services with
corporate customers. In collaboration
with the Enterprise Revenue Offi ce,
we are evaluating expanding the
roundtable process to a number of
other customer segments in 2009.
National Ad Campaign
“The Future
Looks Brighter With US”
U.S. Bank launched its fi rst national
media advertising campaign in
August 2008. The national television
and print media campaign focused
on communicating our Company’s
strength and soundness. The campaign
kicked off with a full page ad in the
Wall Street Journal and expanded
to Barrons, Fortune, The Economist
and other fi nancial and consumer
publications. Television programming
included national sports, targeted
national cable stations and fi nancial
news networks. We credit the
effectiveness of this campaign with
helping drive the “fl ight to quality”
as customers brought new business
to U.S. Bank.
Getting to know customers better
Our new U.S. Bank Customer
Council is comprised of 27 senior
managers representing every major
business unit and support area.
These leaders are focused on
identifying new revenue growth
opportunities and identifying
ways to serve the customer and
grow revenue across business
lines through collaboration,
revenue sharing, enhanced
tracking and incentives.
We have created new bundled
packages of most-used accounts for
consumers and for small businesses.
Customers get better rates and
increased rewards when they choose
among several value-added packages
of key checking, savings and credit
products. The bundles were developed
Wholesale Relationship Reviews help us
with customer input, and nearly
half of new checking customers are
better understand our customers’ day-to-day
fi nancial operations, their needs and
challenges and find opportunities to be
selecting a Consumer Package.
better fi nancial partners and expand
relationships.
8
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Small business owners look to their bank to be a full fi nancial partner. In addition to the
new value-added Small Business Packages we introduced in 2008, we also offer a wide
variety of Small Business Administration (SBA) loan and fi nancing options, including SBA
Patriot Express for veteran and military personnel and SBA Real Estate Loans. By building
deeper relationships with small business owners, we can assure they have the products
and services best suited to their growth goals.
Great convenience
and service
“
U.S. Bank helped us choose the
accounts that would be the best
value for us and our growing family.
With our U.S. Bank Five Star Gold
Banking package, we also got
preferred rates, discounts on
other services and no monthly
service fee. As our family grows,
we think our partnership with
U.S. Bank will, too.”
In September, we debuted a long-
term formal Wholesale Banking
Relationship Review program in
80 U.S. Bank markets across the
country. Initiated by Relationship
Managers working with a
cross-functional team, customers in
Commercial Banking, Corporate
Banking, Community Banking and
Commercial Real Estate are
participating in the program with
Wealth Management and Payment
Services as critical partners in
the process.
Relationship reviews bring results
In our eight-market pilot program
early in 2008, we identified
opportunities for more than
$15 million in additional revenue
from existing customer relationships.
To date, more than 2,100 customer
meetings have been conducted and
opportunities have been identifi ed
to increase business totaling almost
$139 million in incremental annual
revenue potential.
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U.S. BANCORP
9
Innovating
We have created a climate that nurtures ideas throughout the corporation
and streamlines their evaluation and implementation.
At U.S. Bank, a new climate of
ideas from the fi eld. New ideas with
them time and offering the
revenue-generating innovation and
potential are assessed on a fast track.
opportunity to save money as well.
accelerated product development has
They move through fi lters of market
Every Five Star Package includes
been created through an exclusive
research fi ndings, technological
a U.S. Bank Five Star Checking
process developed by our Enterprise
capability, line-of-business ownership
Account and the customer’s choice
Revenue Offi ce. The process drives
and pilot programs or test marketing.
of a U.S. Bank Five Star Money
innovation from a wide range of
This new focus on innovation
Market Savings and/or U.S. Bank
sources. This approach results in an
overlays our historical emphasis on
Visa® Platinum Credit Card.
array of corporate-wide initiatives
basic traditional banking.
Additional services provide additional
with centralized oversight, as well
as market- and customer-driven
Innovation
with Financial and
Environmental Impact
Accurate, timely online payments for
businesses combined with integrated
trade fi nancing are just the beginning
when calculating value for U.S. Bank
PowerTrack clients. Global PowerTrack
Payables solutions enable clients to
increase control, accurately track expenses,
improve working capital — and virtually
eliminate paper invoices as well. Clients
eliminated more than 175 million paper
invoices from the payment cycle in 2008
for general payables, freight, utilities,
and global trade payments. PowerTrack
Utility Payment clients take innovation
one step further using robust data
collection and reporting tools to monitor
energy usage for the companies, facilitating
carbon footprint reporting for both
fi nancial and environmental savings.
Banking industry leads innovation
Home equity loans and money
market accounts in the 80s… free
checking, check cards and Internet
bill paying in the 90s… gift cards
and electronic payment devices
benefi ts. We have also introduced
Silver, Gold and Platinum Checking
Account packages to businesses.
These provide the convenience of
consolidating accounts, while saving
the business owner time and money.
since the year 2000. The banking
Customer access to account
industry has quietly led the world
information will be even more
in new products, delivery systems
convenient with new U.S. Bank
and payment methods. We build
Mobile Banking features. Mobile
on that legacy.
banking is available for all U.S. Bank
Internet banking customers.
U.S. Bank Mobile Banking allows
customers to securely and safely
check account balances, view
transaction history, transfer money
between accounts and locate
U.S. Bank branch and ATM locations
from their mobile phones.
The following are a few examples
of new products, packages and
services we are testing or have
launched. Every one is designed
to bring value-added benefi ts to
our customers and to generate
revenue for U.S. Bancorp.
To meet different fi nancial needs,
our new Silver, Gold and Platinum
Consumer Banking Packages offer
consumers the convenience of
combining accounts, while saving
10
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Enormous capability
of payments
“
When we looked for a payments
partner, we looked for speed,
accuracy, guidance, capacity —
and a very conspicuous attitude that
we would always be their favorite,
best customer. That’s what we found
in U.S. Bancorp Payments Services.”
Convenient, secure and
downright cool. A tiny
microchip makes it easy for
busy on-the-go U.S. Bank
customers to pay for
purchases with Visa payWave
debit cards or the tiny
payWave Micro Tag. And a
U.S. Bank online banking
customer’s cell phone can
be a payment “wave”
device as well.
Supporting innovative ideas, U.S. Bancorp
Community Development Corporation,
in collaboration with other partners, will
fi nance the building of Oregon’s largest
solar electric system. This 870 kilowatt
system will save a Portland-area non-
profi t industrial complex approximately
$75,000 a year in energy costs.
Banking on the go
No cashier, no swiping. Taking it
U.S. Bank has partnered with Visa
one step further, we also are testing
to make paying for goods and
payWave Stickers, another
services about as easy as it comes.
innovation in contactless payment
New debit cards with the payWave
devices. The customer can just wave
feature let customers make a
a sticker adhered to their mobile
purchase by simply holding their
phone instead of using a card. And
card near a card reader at checkout.
the ultimate — we are also piloting
the Visa Micro Tag, the smallest
VisapayWave-enabled device
currently available. The U.S. Bank
Visa Micro Tag easily attaches to
a key ring and allows Micro Tag
holders to simply wave and pay.
As our innovation process and
culture matures, you can expect to
hear about more new ideas, more
partnerships and more revenue.
U.S. BANCORP
11
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Expanding
Broader reach, wider scope of services, new markets, more locations,
more of what U.S. Bank does best.
Knowledge and
responsiveness
My U.S. Bank commercial team
knows me, knows my business,
knows what I’m going through right
now and is on my side every step
of the way.”
In 2008, U.S. Bank continued
markets of California. In June
its commitment to invest in the
we completed the acquisition of
Company for the future.
Mellon 1st Business Bank, acquiring
Three advantageous in-market
acquisitions during the year
expanded our presence in key
Payment Services —
growth
and expansion
for a global era
From world-wide credit and debit card
processing to electronic check and gift
card issuing... to corporate travel,
purchasing and fl eet and aviation fuel
payment systems... to new healthcare
payment solutions, our Payment
Services division sets new standards in
convenience, reliability and innovation.
Customers know our services will grow
with them, as we expand capabilities
and service to meet current and future
needs. Through acquisitions and
continued investment in existing operations,
our payments capabilities have grown
substantially at home and abroad.
In Fall 2008, U.S. Bank, as the
number one Visa Gift Card issuer in the
United States, issued our 25 millionth
Visa Gift Card.
$3.4 billion in assets and expanding
our middle market commercial
lending capabilities in those markets.
Then in November, we acquired the
majority of the banking operations
“
of Downey Savings and Loan and
PFF Bank & Trust from the FDIC,
with built-in conditions that limit
credit losses. The transactions
added 213 new banking locations,
primarily in California, and we now
have the fourth-largest branch
network in the state of California.
In-store branch network
largest in nation
In another branch expansion
initiative, in September we assumed
the leases of 49 full-service in-store
banking offi ces in Smith’s Food
and Drug Stores, a division of the
Kroger Co., in Nevada and Utah,
two targeted growth markets for
us. When all are opened, by the
end of March 2009, U.S. Bank
will have the nation’s largest
network of in-store and
on-site branches with over
12
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700 of these offi ces, giving us access
to more than 10 million prospects
weekly. More locations are
scheduled to open later in 2009.
Other expansions included the
2008 acquisition of Southern
DataComm, a payments software
and service provider, by our
wholly owned Elavon (formerly
NOVA Information Systems)
payments subsidiary. The addition
gives U.S. Bancorp true end-to-end
payments capability in our
international payments processing.
Expanded marketing and advertising accompanies the conversion of a U.S. Bank market
to a PowerBank market. TV commercials and newspaper advertisements communicate
longer hours and other PowerBank benefi ts.
U.S. Bank SBA services expand
to Mid-Atlantic
In February 2008, U.S. Bank opened
Other U.S. Bancorp lines of business
its fi rst offi ce on the East Coast in
expanded, too. In Wholesale Banking
Wilmington, Delaware, providing
we expanded our penetration of
Small Business Administration (SBA)
Fortune 500 customers, and we
guaranteed loans in six Mid-Atlantic
saw continued growth in Treasury
states, plus Washington, D.C. The
Management services with cutting
new presence expands our sizable
edge product introductions,
SBA business; U.S. Bank is the nation’s
including further enhancements to
third-largest SBA lender among
An important client benefi t of Wealth
our proprietary on-line management
banks by volume and operates
tool, SinglePoint. Wholesale rate
24 designated SBA business center
Management’s expanded service model
is having an entire team of dedicated
Personal Trust Specialists available to
of growth in Community Banking
offi ces nationwide. We provided
address any needs or questions.
markets doubled in the fourth
a record $504 million in SBA loans
quarter as customers continued a
in 2008.
“fl ight to quality,” seeking stability
and soundness in their banking
partner. We also expanded our
National Corporate Banking
services in Chicago.
In spite of turmoil in the housing
markets, our Mortgage Banking
business fl ourished in 2008, again
refl ecting the fl ight to quality. We
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U.S. BANCORP
13
561
branches+++++
75
branches
the acquisition of Mellon 1st
With the acquisition of Mellon 1st
acquisitio
Business Bank, Downey Savings and
Loan, and PFF Bank & Trust, we continue
to widen our distribution network and
branch offices in the growing California
and Arizona markets.
Disciplined
investment strategies
“
Over the years, the professionals
in Wealth Management have had
a reputation for making prudent
investment decisions on behalf of
their clients, like me. Some people
might have called that approach overly
cautious, but I call it taking a long-
term view and looking out for my
best interests.”
remain among the largest mortgage
Wealth Management expands
lenders in the nation and among the
service delivery
largest mortgage servicers. In addition,
During 2008, our Wealth
our customer satisfaction survey
Management line of business
scores showed that 98 percent
became a more integrated and
would recommend U.S. Bank Home
coordinated group to fully capture
Mortgage to others.
the signifi cant opportunities offered
The expansion of our signature
PowerBanking branch service model
continued in 2008 with new crucial
“stronghold” markets designated
PowerBank markets with service
enhancements for branch customers.
In 2008, the Twin Cities, Portland
and Cincinnati joined the 2007
PowerBank markets of Denver and
St. Louis. When we launch a
PowerBank market, we refurbish
offi ces, add branch staff, upgrade
ATMs, increase marketing support,
extend banking hours and install
such amenities as coin counters
and other customer conveniences.
Early PowerBank markets have
already seen market share increases
and higher customer satisfaction
survey scores.
by the impending retirement of
baby boomers and the growing
number of high net worth families.
Wealth Management expanded
and enhanced its service model
during 2008 to provide a unifi ed
team approach to meeting different
clients’ fi nancial needs and to
heighten the customer experience
overall. Four key client segments
were identifi ed and customized
service approaches created for each
segment, based on the common
needs and service preferences of
each. Each segment model is
designed to help serve clients better,
capture more business through
customer trust and satisfaction and
capitalize on market opportunities.
Response times have been shortened,
service hours lengthened and new
teams of experts formed. Further
refi nements to the new business
model continue throughout 2009.
14
U.S. BANCORP
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57,000 Strong
The importance of engaged employees to
performance, business development and supporting and executing
corporate strategies and policies cannot be overstated.
The best strategies, products and
New in 2009 for employees is
rates mean little without engaged,
Harvard ManageMentor, a new
motivated, high quality employees.
desktop-handy, at-your-fi ngertips
U.S. Bancorp is fortunate to have
interactive resource from the Harvard
such employees.
In 2008, we conducted our fi rst-ever
Business Library for new and
experienced managers at all levels.
all-employee survey. The response
Among the most satisfying initiatives
In January 2009, we held our second
rate was extraordinary and the
in 2008 was the launch of the fi rst
responses candid. We were especially
U.S. Bank Veterans and Military
all-employee meeting. Across the franchise,
including Europe, more than 34,000
employees gathered at 70 separate locations
pleased that employees gave high
Personnel Recognition program. Each
to celebrate our successes, discuss
scores to four key areas — respect
service person received a special
and trust for managers at all levels;
U.S. Bank “Proud to Serve” lapel
challenges and opportunities and learn
about new programs and policies for the
coming year from senior managers. Above,
understanding the role they play
pin and a certificate acknowledging
Pamela Joseph, Vice Chairman, Payment
in our success; feeling valued as
their service, and they participated in
an employee and knowing their role
a special recognition conference call.
Services, greets more than 900 employees
gathered in Knoxville, Tennessee.
in serving customers.
U.S. Bank holds regular events for
New development programs include
our “alumni,” retired and other
MentorConnect, a self-directed
former employees. We currently have
program that connects employees
10,000 active alumni, including 250
across the Company using an
who retired with more than 25 years
innovative web-based tool which
of service. These events help former
facilitates both distance and
employees reconnect with the bank
face-to-face interaction. Also,
and former colleagues and gives them
Leader Forums, regularly scheduled
another reason to act as ambassadors
On Day One of an acquisition, veteran
interactive conference calls, covering
for U.S. Bank. Our oldest known
“ambassador” employees from U.S. Bank
a wide variety of career development
alumnus attending events is
issues, were established to ensure
William Osterman, 98, who attends
that a new generation of U.S. Bank
Cincinnati events.
leaders is prepared.
travel to new branches to welcome new
employees and to share the corporate
culture of outstanding customer service,
peak performance and accountability.
Here, Sadegh Madjd-Sadjadi, right,
Branch Manager, U.S. Bank Sunnyvale
and U.S. Bank Ambassador for the
Downey Los Altos offi ce, and Rosie Ezrre’,
Branch Sales Manager, Downey Savings
Bank, show they’re confi dent about the
new partnership!
U.S. BANCORP
15
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Community Building
Giving back, getting out there, putting resources
to work for our communities.
U.S. Bank has a long and proud
tradition of dedication to the
communities we serve. We support
nonprofi t organizations in the arts,
education, health and human
services, economic development and
others through fi nancial grants and by
countless volunteer efforts and hours
of our 57,000 employees. In 2008,
When fl ood waters rose in Iowa in the
Summer of 2008, U.S. Bank was there to
help with fi nancial assistance and provide
customers access to their accounts.
U.S. Bancorp employees devote tens
of thousands of hours of time and effort
to their communities and a wide range
U.S. Bancorp Foundation distributed
of nonprofi t organizations. U.S. Bank
grants of $20,707,000 to nonprofi t
organizations and institutions in the
communities we serve.
U.S. Bank’s Five Star Volunteer
Award program marked four years
in 2008, recognizing more than 100
employees who provided exceptional
volunteer service in their
communities. As part of their
recognition, U.S. Bancorp awards
up to $1,000 to the nonprofit
organization of each Five Star
Volunteer Award winner employee.
encourages volunteer efforts through
recognition and paid time off.
Last June, one of our markets, Cedar
Rapids, was among the hardest hit
U.S. Bancorp Community Development
of Iowa communities during the
disastrous Midwestern fl oods. We
dispatched our fully self-suffi cient,
Corporation helped Habitat for Humanity
help Katrina victims.
generator-operated “mobile branch”
(NMTC) fi nancial assistance
to provide on-site banking and ATM
of U.S. Bancorp Community
services. The mobile branch served
Development Corporation
as a temporary offi ce when our
(USBCDC). USBCDC worked
traditional offi ces were closed due to
with Habitat for Humanity and
fl ooding and also served as a symbol
Smith NMTC Associates LLC to
In addition to the Five Star Volunteer
of our commitment to our customers
best utilize Habitat’s $25 million
Awards, U.S. Bancorp also encourages
and our communities.
its employees to volunteer through
its Five Star Volunteer Day program.
Introduced in 2008, Five Star
Volunteer Day gives all eligible
U.S. Bancorp employees eight
hours of paid time off each year to
volunteer in their community at
organizations such as nonprofi t or
civic agencies and schools.
Volunteer hours and grants are not
the only ways U.S. Bancorp helps
its communities. Our fi nancial
services can be brought to bear on
community needs. For example,
Habitat for Humanity was able to
build 294 new homes in communities
affected by Hurricane Katrina
through the New Markets Tax Credit
NMTC allocation granted by the
Community Development Financial
Institutions Fund (CDFI) of the
U.S. Department of the Treasury
for use in the Hurricane Katrina
Gulf Opportunity (GO) Zone.
16
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The Greening of USB
Expanding our efforts and renewing our focus on
environmental sustainability.
A year after establishing our
LEED certifi ed construction, energy
A U.S. Bank focus is on employee
Environmental Sustainability
effi cient upgrades in many low
engagement — from increased
Policy in January 2008, we have
income housing projects and many
communication and education about
made signifi cant strides towards
other opportunities.
the environment and U.S. Bank’s
approach to providing education
and resources for employees to
learn how they can make a personal
difference. Employees can locate
potential carpool partners online,
and the bank subsidizes mass
transit commuting.
With the ever increasing focus on
the environment, the changing
political landscape and increased
expectations from our partners,
customers and employees, we will
never be ‘done’ when it comes to
environmental stewardship.
We have upgraded equipment and
technology throughout our facilities
and business lines to reduce our
energy consumption, resulting in
ongoing cost savings for the bank,
as well as reduced carbon emissions.
In addition to improving our own
impact on the environment, U.S. Bank
is also a founding member of the
PayItGreen Alliance, a coalition of
fi nancial services companies, launched
in 2008 and led by NACHA —
The Electronic Payments Association,
formerly the National Automated
Clearing House Association.
PayItGreen is committed to educating
customers about the benefi ts of
going electronic.
implementing the policy and
developing a coordinated effort
across all business lines in our
national footprint to establish
U.S. Bank as an environmentally
responsible corporate citizen.
Our Environmental Stewardship
Council is comprised of senior
leaders in key business lines and
includes three members of the
Managing Committee. Our board
of directors is also engaged in
sustainability issues. The Council
ensures broad implementation of the
policy and provides input to general
sustainability issues and long-term
environmental stewardship strategy.
Our focus lies mainly in the areas
of climate change (reducing carbon
emissions), internal policies and
practices, our products and services
and employee engagement.
U.S. Bank established a goal to
invest $1 billion in environmentally
benefi cial, profitable business
opportunities by 2015. Already, we
are well on our way toward meeting
this goal. This investment has
come in the form of our investments
in renewable energy projects,
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U.S. BANCORP
17
Building
Innovating
Expanding
The following pages discuss in detail the fi nancial results we achieved during 2008
and how we achieved them. You will read about our prudent policies and decisions
about credit and risk, as well as our strategies and guiding principles for many other
decisions affecting your investment.
Financials
19 Management’s Discussion
and Analysis
66 Consolidated Financial
Statements
70 Notes to Consolidated
Financial Statements
111 Reports of Management and
Independent Accountants
114 Five-year Consolidated
Financial Statements
116 Quarterly Consolidated
Financial Data
117 Supplemental Financial Data
120 Company Information
127 Executive Offi cers
128 Directors
Inside Back Cover
Corporate Information
Forward-Looking Statements
The following information appears in accordance with the Private Securities Litigation
Reform Act of 1995:
This report contains forward-looking statements about U.S. Bancorp. 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 plans and prospects of U.S. Bancorp.
Forward-looking statements involve inherent risks and uncertainties. Investors are cautioned
against placing undue reliance on our forward-looking statements. Such statements are
based upon the current beliefs and expectations of management of U.S. Bancorp and the
information currently available to management. Such statements speak only as of the date
hereof, and the Company undertakes no obligation to update them in light of new
information or future events.
Important factors could cause actual results to differ materially from those anticipated,
including the risks discussed in the Management’s Discussion and Analysis section
that follows, as well as the risks discussed in detail in the “Risk Factors” section on
pages 121 – 126 of this report. However, factors other than these also could adversely
affect our results, and the reader should not consider these factors to be a complete
set of all potential risks or uncertainties.
18
U.S. BANCORP
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Management’s Discussion and Analysis
OVERVIEW
In 2008, U.S. Bancorp and its subsidiaries (the “Company”)
continued to demonstrate financial strength despite
significant weakness in the domestic and global economy.
Difficulties which began in the mortgage lending and
homebuilding industries in 2007 expanded to many other
sectors in 2008, as the impact of mortgage delinquencies,
defaults and foreclosures, and falling housing values affected
consumer confidence and led to a domestic recession in the
United States. Despite these challenges, the Company’s
comparative strength enabled it to attract significant new
customers, and invest in business initiatives that strengthen
its presence and product offerings for customers. While not
immune to current economic conditions, the Company’s well
diversified business has provided substantial resiliency to the
credit challenges faced by financial institutions in today’s
environment.
Despite the market challenges, the Company earned
$2.9 billion in 2008. Additionally, the Company’s balance
sheet is strong, reflecting prudent credit underwriting and
allowance for credit losses, and strong capital and liquidity.
In late 2008, the Company also increased its regulatory
capital through the sale of $6.6 billion in preferred stock
and warrants to the United States Treasury through the
Capital Purchase Program. At December 31, 2008, the
Company’s Tier 1 capital ratio was 10.6 percent and its total
risk-based capital ratio was 14.3 percent. Credit rating
organizations rate the Company’s debt among the highest of
the Company’s large domestic banking peers, demonstrating
the Company’s financial strength. At December 31, 2008,
the Company’s tangible common equity divided by tangible
assets was 3.2 percent (4.5 percent excluding accumulated
other comprehensive income (loss)).
In 2008, the Company grew its loan portfolio and
increased deposits significantly, both organically and through
acquisition, including operations acquired from the Federal
Deposit Insurance Corporation (“FDIC”). The Company’s
organic loan growth was $18.4 billion (12.0 percent) in
addition to $13.0 billion of acquired loans. Organic deposit
growth was $14.4 billion (11.0 percent) in addition to
$13.5 billion assumed in acquisitions. Although the balance
sheet grew, increasing net interest income, net income
decreased $1.4 billion from 2007, principally a result of
increased provisions for credit losses and impairment on
structured investment related securities because of lower
valuations driven by declining home prices and other
economic factors. As a result of the housing and overall
economic weaknesses, the Company’s level of nonperforming
assets as a percent of total loans and other real estate
increased to 1.42 percent at December 31, 2008 from
.45 percent at December 31, 2007.
The Company’s financial strength, business model,
credit culture and focus on efficiency have enabled it to
deliver solid financial performance. Given the current
economic environment, the Company will continue to focus
on managing credit losses and operating costs, while also
utilizing its financial strength to grow market share. The
Company believes it is well positioned for long-term growth
in earnings per common share and industry-leading return
on common equity. The Company intends to achieve these
financial objectives by providing high-quality customer
service, carefully managing costs, and where appropriate,
strategically investing in businesses that diversify and
generate fee-based revenues, enhance the Company’s
distribution network or expand its product offerings.
Earnings Summary The Company reported net income of
$2.9 billion in 2008, or $1.61 per diluted common share,
compared with $4.3 billion, or $2.43 per diluted common
share, in 2007. Return on average assets and return on
average common equity were 1.21 percent and 13.9 percent,
respectively, in 2008, compared with 1.93 percent and
21.3 percent, respectively, in 2007. The decline in the
Company’s net income in 2008 was principally a result of
higher provisions for credit loss and securities impairment
charges. Credit quality of the loan portfolios declined in
2008 as a result of declines in housing markets and overall
economic conditions. As a result, the Company recognized
$1.3 billion in provisions for credit losses in excess of net
charge-offs. Total net charge-offs were 1.10 percent of
average loans outstanding in 2008, compared with
.54 percent in 2007. The Company expects credit conditions
to continue to worsen in 2009 with some moderation in the
rate of deterioration late in the year if stimulus programs
begin to favorably impact economic conditions. The
Company also recorded $978 million of net securities losses,
which included valuation impairment charges on structured
investment securities, perpetual preferred stock (including
the stock of government-sponsored enterprises (“GSEs”))
and non-agency mortgage backed securities.
Total net revenue, on a taxable-equivalent basis, for
2008 was $617 million (4.4 percent) higher than 2007,
reflecting a 16.3 percent increase in net interest income,
partially offset by a 6.6 percent decrease in noninterest
income. Net interest income increased in 2008 as a result of
strong growth in average earning assets of 10.5 percent year-
over-year, as well as an improved net interest margin. The
U.S. BANCORP
19
net interest margin increased from 3.47 percent in 2007 to
3.66 percent in 2008, partially because of growth in higher-
spread loans, but also the result of the Company’s interest
rate sensitivity position benefiting from declining market
rates. Noninterest income declined from a year ago because
of the security impairment charges and increasing losses on
retail lease end-of-term values, which reflected the
weakening economy. The Company recorded $551 million
of gains related to its ownership position in Visa, Inc. (“Visa
Gains”), partially offsetting the decreases in noninterest
income.
The Company’s efficiency ratio (the ratio of noninterest
expense to taxable-equivalent net revenue excluding net
securities gains or losses) continues to be among the best in
the banking industry, decreasing to 47.4 percent in 2008
from 49.7 percent in 2007. Total noninterest expense in
2008 increased $428 million (6.1 percent), compared with
2007 as a result of continued investments in initiatives to
Table 1 SELECTED FINANCIAL DATA
Year Ended December 31
(Dollars and Shares in Millions, Except Per Share Data)
2008
2007
2006
2005
2004
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 before taxes. . . . . . . . . . . . . . . . . . . . . . . . . .
Taxable-equivalent adjustment . . . . . . . . . . . . . . . . . . . . .
Applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,866
7,789
(978)
$ 6,764
7,281
15
14,677
7,414
3,096
4,167
134
1,087
14,060
6,986
792
6,282
75
1,883
$ 6,790
6,938
14
13,742
6,286
544
6,912
49
2,112
$ 7,088
6,257
(106)
$ 7,140
5,714
(105)
13,239
5,969
666
6,604
33
2,082
12,749
5,875
669
6,205
29
2,009
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,946
Net income applicable to common equity . . . . . . . . . . . .
$ 2,823
$ 4,324
$ 4,264
$ 4,751
$ 4,703
$ 4,489
$ 4,489
$ 4,167
$ 4,167
Per Common Share
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 . . . . . . . . . . .
Financial Ratios
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . .
Return on average common equity . . . . . . . . . . . . . . . . . .
Net interest margin (taxable-equivalent basis) (a) . . . . . . . . .
Efficiency ratio (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible common equity . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible common equity, excluding accumulated other
$
1.62
1.61
1.700
10.47
25.01
1,742
1,757
1.21%
13.9
3.66
47.4
3.2
comprehensive income (loss). . . . . . . . . . . . . . . . . . . .
4.5
$
2.46
2.43
1.625
11.60
31.74
1,735
1,758
$
2.64
2.61
1.390
11.44
36.19
1,778
1,804
$
2.45
2.42
1.230
11.07
29.89
1,831
1,857
$
2.21
2.18
1.020
10.52
31.32
1,887
1,913
1.93%
21.3
3.47
49.7
4.7
5.2
2.23%
23.6
3.65
45.8
5.2
5.5
2.21%
22.5
3.97
44.7
5.6
5.8
2.17%
21.4
4.25
45.7
6.2
6.2
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
Tier 1 capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total risk-based capital . . . . . . . . . . . . . . . . . . . . . . . .
Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$165,552
3,914
42,850
215,046
244,400
28,739
136,184
38,237
39,250
22,570
$185,229
3,639
39,521
265,912
159,350
38,359
26,300
$147,348
4,298
41,313
194,683
223,621
27,364
121,075
28,925
44,560
20,997
$153,827
2,260
43,116
237,615
131,445
43,440
21,046
$140,601
3,663
39,961
186,231
213,512
28,755
120,589
24,422
40,357
20,710
$143,597
2,256
40,117
219,232
124,882
37,602
21,197
$131,610
3,290
42,103
178,425
203,198
29,229
121,001
19,382
36,141
19,953
$136,462
2,251
39,768
209,465
124,709
37,069
20,086
$120,670
3,079
43,009
168,123
191,593
29,816
116,222
14,534
35,115
19,459
$124,941
2,269
41,481
195,104
120,741
34,739
19,539
10.6%
14.3
9.8
8.3%
12.2
7.9
8.8%
12.6
8.2
8.2%
12.5
7.6
8.6%
13.1
7.9
(a) Presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net.
20
U.S. BANCORP
expand the Company’s geographical presence and strengthen
customer relationships, including acquisitions, investments in
relationship managers, branch initiatives and Payment
Services’ businesses. Growth in expenses from a year ago
also included costs related to investments in affordable
housing and other tax-advantaged products and an increase
in credit-related costs for other real estate owned and
collection activities.
Acquisitions On November 21, 2008, the Company
acquired the banking operations of Downey Savings & Loan
Association, F.A., and PFF Bank & Trust (“Downey” and
“PFF”, respectively) from the FDIC. The Company acquired
$13.7 billion of Downey’s assets and assumed $12.3 billion
of its liabilities, and acquired $3.7 billion of PFF’s assets and
assumed $3.5 billion of its liabilities. In connection with
these acquisitions, the Company entered into loss sharing
agreements with the FDIC (“Loss Sharing Agreements”)
providing for specified credit loss and asset yield protection
for all single family residential mortgages and a significant
portion of commercial and commercial real estate loans and
foreclosed real estate (“covered assets”). At the acquisition
date, the Company estimated the covered assets would incur
approximately $4.7 billion of cumulative losses, including
the present value of expected interest rate decreases on loans
the Company expects to modify. These losses, if incurred,
will be offset by an estimated $2.4 billion benefit to be
received by the Company from the FDIC under the Loss
Sharing Agreements. Under the terms of the Loss Sharing
Agreements, the Company will incur the first $1.6 billion of
specified losses (“First Loss Position”) on the covered assets,
which was approximately the predecessors’ carrying amount
of the net assets acquired. The Company acquired these net
assets for a nominal amount of consideration. After the First
Loss Position, the Company will incur 20 percent of the
next $3.1 billion of specified losses and only 5 percent of
specified losses beyond that amount. The Company
estimates its share of losses beyond the First Loss Position
will be approximately $.7 billion, which was approximately
the amount the Company considered in determining the
amount of its bid for the acquired operations.
The Company identified the acquired non-revolving
loans experiencing credit deterioration, representing the
majority of assets acquired, and recorded these assets in the
financial statements at their estimated fair value, reflecting
expected credit losses and the estimated impact of the Loss
Sharing Agreements. As a result, the Company will not
record additional provision for credit losses or report
charge-offs on these loans unless further credit deterioration
occurs after the date of acquisition. The Company recorded
all other loans at the predecessors’ carrying amount, net of
fair value adjustments for any interest rate related discount
or premium, and an allowance for credit losses. At
December 31, 2008, $11.5 billion of the Company’s assets
were covered by Loss Sharing Agreements. The Company’s
financial disclosures segregate acquired covered assets from
assets not subject to the Loss Sharing Agreements.
Refer to Note 3 of the Notes to Consolidated Financial
Statements for additional information regarding business
combinations.
STATEMENT OF INCOME ANALYSIS
Net Interest Income Net interest income, on a taxable-
equivalent basis, was $7.9 billion in 2008, compared with
$6.8 billion in 2007 and 2006. The $1.1 billion
(16.3 percent) increase in net interest income in 2008,
compared with 2007, was attributed to strong growth in
average earning assets, as well as an improved net interest
margin. Average earning assets were $215.0 billion for 2008,
compared with $194.7 billion and $186.2 billion for 2007
and 2006, respectively. The $20.3 billion (10.5 percent)
increase in average earning assets in 2008 over 2007 was
principally a result of growth in total average loans of
$18.2 billion (12.4 percent) and average investment
securities of $1.5 billion (3.7 percent). The net interest
margin in 2008 was 3.66 percent, compared with
3.47 percent in 2007 and 3.65 percent in 2006. The increase
in the net interest margin reflected growth in higher-spread
loans, asset/liability re-pricing in a declining interest rate
environment and wholesale funding mix during a period of
significant volatility in short-term funding markets. Refer to
the “Interest Rate Risk Management” section for further
information on the sensitivity of the Company’s net interest
income to changes in interest rates.
Average total loans were $165.6 billion in 2008,
compared with $147.3 billion in 2007. Average loans
increased $18.2 billion (12.4 percent) in 2008, driven by
growth in retail loans of $6.7 billion (13.7 percent),
commercial loans of $6.5 billion (13.6 percent), commercial
real estate loans of $2.5 billion (8.8 percent), residential
mortgages of $1.2 billion (5.3 percent) and covered assets of
$1.3 billion. The increase in average retail loans included
growth in credit card balances of 24.9 percent as a result of
growth in branch originated, co-branded and financial
institution partner portfolios. Average installment and home
equity loans included in retail loans increased 7.1 percent
and 10.2 percent, respectively, while average retail leasing
balances declined approximately 17.1 percent as the
Company adjusted its programs to reflect current market
conditions, reducing new lease production. Retail loan
growth in 2008 also included an increase of $2.6 billion in
average federally guaranteed student loan balances as a
result of the transfer of $1.7 billion of loans held for sale to
loans held for investment, and a portfolio purchase during
2008. The increase in average commercial loans was
U.S. BANCORP
21
Table 2 ANALYSIS OF NET INTEREST INCOME
(Dollars in Millions)
2008
2007
2006
2008
v 2007
2007
v 2006
Components of Net Interest Income
Income on earning assets (taxable-equivalent basis) (a) . .
Expense on interest-bearing liabilities (taxable-equivalent
$ 12,630
$ 13,309
$ 12,351
$ (679)
$
958
basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,764
Net interest income (taxable-equivalent basis) . . . . . . . . . . .
$ 7,866
Net interest income, as reported . . . . . . . . . . . . . . . . . . . .
$ 7,732
6,545
$ 6,764
$ 6,689
5,561
$ 6,790
$ 6,741
(1,781)
$ 1,102
$ 1,043
984
(26)
(52)
$
$
Average Yields and Rates Paid
Earning assets yield (taxable-equivalent basis) . . . . . . . .
Rate paid on interest-bearing liabilities (taxable-equivalent
basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross interest margin (taxable-equivalent basis) . . . . . . . . .
Net interest margin (taxable-equivalent basis) . . . . . . . . . . .
Average Balances
5.87%
6.84%
6.63%
(.97)%
.21%
2.58
3.29%
3.66%
3.91
2.93%
3.47%
3.55
3.08%
3.65%
(1.33)
.36%
.19%
.36
(.15)%
(.18)%
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing liabilities. . . . . . . . . . . . . . . . . . . . . . .
Net free funds (b) . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 42,850
165,552
215,046
184,932
30,114
$ 41,313
147,348
194,683
167,196
27,487
$ 39,961
140,601
186,231
156,613
29,618
$ 1,537
18,204
20,363
17,736
2,627
$ 1,352
6,747
8,452
10,583
(2,131)
(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a federal tax rate of 35 percent.
(b) Represents noninterest-bearing deposits, other noninterest-bearing liabilities and equity, allowance for loan losses, and unrealized gain (loss) on available-for-sale securities, less non-earning
assets.
principally a result of growth in corporate and commercial
banking balances as new and existing business customers
used bank credit facilities to fund business growth and
liquidity requirements. The growth in average commercial
real estate balances reflected new business growth, primarily
in business owner-occupied and commercial properties,
driven by capital market conditions and the acquisition of
Mellon 1st Business Bank. The increase in residential
mortgages reflected increased origination activity as a result
of current market interest rate declines. Average covered
assets of $1.3 billion consisted of loans and foreclosed real
estate acquired in the Downey and PFF acquisitions.
Approximately 70 percent of the covered assets are single
family residential mortgages.
Average investment securities were $1.5 billion
(3.7 percent) higher in 2008, compared with 2007. The
increase principally reflected the full year impact of holding
the structured investment securities the Company purchased
in the fourth quarter of 2007 from certain money market
funds managed by an affiliate, higher government agency
securities, maturities and sales of mortgage-backed securities,
and realized and unrealized losses on certain investment
securities recorded in 2008.
Average noninterest-bearing deposits in 2008 were
$1.4 billion (5.0 percent) higher than 2007. The increase
reflected higher business and other demand deposit balances,
impacted by customer flight to quality and the Mellon
1st Business Bank acquisition.
a result of a $5.0 billion (19.2 percent) increase in interest
checking balances from broker-dealer, institutional trust,
government and consumer banking customers, and a
$1.0 billion (3.8 percent) increase in money market savings
balances driven primarily by higher broker-dealer and
consumer banking balances.
Average time certificates of deposit less than $100,000
were lower in 2008 by $1.1 billion (7.3 percent), compared
with 2007. The decline in time certificates of deposit less than
$100,000 was due to the Company’s funding and pricing
decisions and competition for these deposits. Average time
deposits greater than $100,000 increased by $8.2 billion
(36.7 percent) in 2008, compared with 2007, as a result of the
Company’s wholesale funding decisions and the ability to
attract larger customer deposits as a result of the Company’s
relative strength given current market conditions.
The decline in net interest income in 2007, compared
with 2006, reflected growth in average earning assets, more
than offset by a lower net interest margin. The $8.5 billion
(4.5 percent) increase in average earning assets for 2007,
compared with 2006, was primarily driven by growth in
average loans and average investment securities. The
18 basis point decline in net interest margin in 2007,
compared with 2006, reflected the competitive business
environment in 2007, the impact of a flat yield curve during
the first half of the year and lower net free funds. In
addition, funding costs were higher because rates paid on
Average total savings products increased $6.6 billion
interest-bearing deposits increased and the funding mix
(11.6 percent) in 2008, compared with 2007, principally as
shifted toward higher cost deposits, as customers migrated
22
U.S. BANCORP
Table 3 NET INTEREST INCOME — CHANGES DUE TO RATE AND VOLUME (a)
(Dollars in Millions)
Increase (decrease) in
Interest Income
2008 v 2007
2007 v 2006
Volume
Yield/Rate
Total
Volume
Yield/Rate
Total
$ (162)
(25)
$
(79)
(50)
$ 70
41
$ 106
–
$176
41
Investment securities . . . . . . . . . . . . . . . . $
Loans held for sale . . . . . . . . . . . . . . . . .
Loans
Commercial loans . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . .
Residential mortgage . . . . . . . . . . . . . .
Retail loans . . . . . . . . . . . . . . . . . . . .
Total loans, excluding covered assets . . .
Covered assets. . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . .
Other earning assets . . . . . . . . . . . . . . . .
83
(25)
427
183
72
560
1,242
61
1,303
80
Total earning assets . . . . . . . . . . . .
1,441
Interest Expense
Interest-bearing deposits
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 . . . . . . . . . . . . . . . . . . . .
67
25
2
(47)
400
447
493
(269)
Total interest-bearing liabilities . . . . .
671
(868)
(491)
(7)
(506)
(1,872)
–
(1,872)
(61)
(2,120)
(167)
(346)
(1)
(125)
(681)
(1,320)
(880)
(252)
(2,452)
(441)
(308)
65
54
(630)
61
(569)
19
(679)
(100)
(321)
1
(172)
(281)
(873)
(387)
(521)
(1,781)
$ 1,102
155
(12)
60
279
–
–
482
(22)
571
25
(28)
(1)
34
2
32
229
201
462
19
(13)
70
199
–
–
275
6
387
93
110
1
86
43
333
60
129
522
174
(25)
130
478
–
–
757
(16)
958
118
82
–
120
45
365
289
330
984
$109
$(135)
$ (26)
Increase (decrease) in net interest income . . $ 770
$
332
(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.
to higher rate products, and other funding sources. An
increase in loan fees partially offset these factors.
Average loans in 2007 were higher by $6.7 billion
(4.8 percent), compared with 2006, driven by growth in
retail loans, commercial loans and residential mortgages.
Average investment securities were $1.4 billion (3.4 percent)
higher in 2007, compared with 2006, principally reflecting
higher balances in the municipal securities portfolio and the
purchase in the fourth quarter of 2007 of securities of
certain money market funds managed by an affiliate.
Average noninterest-bearing deposits in 2007 were
$1.4 billion (4.8 percent) lower than in 2006. The decrease
reflected a decline in personal and business demand deposits,
partially offset by higher trust deposits. Average total savings
products increased $.9 billion (1.7 percent) in 2007,
compared with 2006, as increases in interest checking
balances more than offset declines in money market and
savings balances. Average interest checking balances
increased from 2006 to 2007 by $2.6 billion (10.9 percent)
due to higher broker-dealer, government and institutional
trust balances. Average money market savings account
balances declined from 2006 to 2007 by $1.3 billion
(5.0 percent) as a result of the Company’s deposit pricing
decisions for money market products in relation to other
fixed-rate deposit products offered. Average time certificates
of deposit less than $100,000 grew $.9 billion (6.5 percent)
in 2007 compared with 2006, primarily driven by the
migration of money market balances to certificates of
deposit within the Consumer Banking and Wealth
Management & Securities Services business lines, as
customers migrated balances to higher rate deposits. Average
time deposits greater than $100,000 were approximately the
same in 2007 as in 2006.
Provision for Credit Losses The provision for credit losses
reflects changes in the credit quality of the entire portfolio of
loans, considering the credit loss protection from the Loss
Sharing Agreements with the FDIC, and is maintained at a
level considered appropriate by management for probable
and estimable incurred losses, based on factors discussed in
the “Analysis and Determination of Allowance for Credit
Losses” section.
In 2008, the provision for credit losses was
$3,096 million, compared with $792 million and
$544 million in 2007 and 2006, respectively. The
U.S. BANCORP
23
$2,304 million increase in the provision for credit losses in
2008 reflected an increase in net charge-offs of
$1,027 million and $1,277 million provision in excess of
charge-offs. The increases in the provision and allowance for
credit losses from 2007 reflected continuing stress in the
residential real estate markets, including homebuilding and
related supplier industries, driven by declining home prices
in most geographic regions. The increases also reflected
deteriorating economic conditions and the corresponding
impact on the commercial and consumer loan portfolios.
Nonperforming loans increased $1,854 million
($1,211 million excluding covered assets) over December 31,
2007. The increase was driven primarily by weakening real
estate values and the impact of the economic slowdown on
other commercial customers, and included increases in
commercial real estate loans of $781 million, commercial
loans of $211 million and residential mortgages of
$156 million. Net charge-offs increased $1,027 million from
2007, primarily due to the factors affecting the residential
housing markets, including the impact on homebuilding and
related industries, and credit costs associated with credit
card and other consumer loan growth over the past year.
Accruing loans ninety days or more past due increased
$970 million ($383 million excluding covered assets),
primarily due to residential mortgages, credit cards and
home equity loans. Restructured loans that continue to
accrue interest increased $958 million, reflecting the impact
of restructurings for residential mortgage and credit card
customers as a result of current economic conditions. The
Company expects to restructure a substantial amount of the
covered assets over the next two years following guidelines
promulgated by the FDIC, which can include reductions in
the interest rate, deferral of principal, and extended
maturity. The economic loss associated with such
concessions on covered assets is part of the Loss Sharing
Agreements.
The $248 million (45.6 percent) increase in the
provision for credit losses in 2007, compared with 2006,
reflected growth in credit card accounts, increased loan
delinquencies and nonperforming loans, and higher
commercial and consumer credit losses. Nonperforming
loans increased $87 million (18.5 percent) in 2007, as a
result of stress in condominium and other residential home
construction. Accruing loans ninety days or more past due
increased $235 million (67.3 percent), primarily related to
residential mortgages, credit cards and home equity loans.
Restructured loans that continued to accrue interest
increased $127 million (31.3 percent), reflecting the impact
of programs for credit card and sub-prime residential
mortgage customers. Net charge-offs increased $248 million
(45.6 percent) over 2006, primarily due to an increase in
consumer charge-offs principally related to growth in credit
24
U.S. BANCORP
card balances, and somewhat higher commercial loan net
charge-offs. In addition, net charge-offs were lower during
2006, reflecting the beneficial impact of bankruptcy
legislation that went into effect during the fourth quarter of
2005.
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 2008 was
$6.8 billion, compared with $7.3 billion in 2007 and
$7.0 billion in 2006. The $485 million (6.6 percent)
decrease in 2008 from 2007, was driven by impairment
charges related to structured investment securities, perpetual
preferred stock (including the stock of GSEs), and certain
non-agency mortgage-backed securities, as well as higher
retail lease residual losses. These items were partially offset
by $551 million of Visa Gains and growth in fee income.
Noninterest income for 2008 was also reduced by the
adoption of Statement of Financial Accounting Standards
No. 157 (“SFAS 157”), “Fair Value Measurements”,
effective January 1, 2008. Upon adoption of SFAS 157,
trading revenue decreased $62 million, as principal market
and nonperformance risk is now required to be considered
when determining the fair value of customer derivatives. In
addition, under SFAS 157 mortgage production gains
increased, because direct origination costs are no longer
deferred on mortgage loans held for sale (“MLHFS”).
The growth in credit and debit card revenue of
8.5 percent was primarily driven by an increase in customer
accounts and higher customer transaction volumes from a
year ago. The corporate payment products revenue growth
of 5.2 percent reflected growth in sales volumes and business
expansion. ATM processing services revenue increased
11.9 percent over the prior year due primarily to growth in
transaction volumes, including the impact of additional
ATMs during 2008. Merchant processing services revenue
was 3.9 percent higher in 2008, compared with 2007,
reflecting higher transaction volume and business expansion.
Treasury management fees increased 9.5 percent over 2007
due primarily to the favorable impact of declining rates on
customer compensating balances. Commercial products
revenue increased 13.6 percent over the prior year due to
higher foreign exchange revenue, syndication fees, letter of
credit fees, fees on customer derivatives, and other
commercial loan fees. Mortgage banking revenue increased
4.2 percent in 2008, compared with 2007, due to an
increase in mortgage servicing income and production
revenue, partially offset by a net decrease in the valuation of
mortgage servicing rights (“MSRs”) and related economic
hedging instruments. Other income was 41.4 percent higher
Table 4 NONINTEREST INCOME
(Dollars in Millions)
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008
$1,039
671
366
1,151
1,314
1,081
517
492
270
147
(978)
741
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . .
$6,811
* Not meaningful
2007
$ 958
638
327
1,108
1,339
1,077
472
433
259
146
15
524
$7,296
2006
$ 809
562
313
966
1,235
1,042
441
415
192
150
14
813
$6,952
2008
v 2007
8.5%
5.2
11.9
3.9
(1.9)
.4
9.5
13.6
4.2
.7
*
41.4
(6.6)%
2007
v 2006
18.4%
13.5
4.5
14.7
8.4
3.4
7.0
4.3
34.9
(2.7)
7.1
(35.5)
4.9%
due to the Visa Gains, partially offset by higher retail lease
residual losses, lower equity investment revenue, market
valuation losses and the $62 million unfavorable impact to
trading income from the adoption of SFAS 157.
The $344 million (4.9 percent) increase in 2007
noninterest income over 2006, was driven by fee-based
revenue growth in most fee categories, offset somewhat by
$107 million in valuation losses related to securities
purchased from certain money market funds managed by an
affiliate in the fourth quarter of 2007. Additionally, 2006
included several significant items representing approximately
$142 million of incremental revenue, including: higher
trading income related to gains from the termination of
certain interest rate swaps, equity gains from the initial
public offering and subsequent sale of the equity interests in
a cardholder association, a gain on the sale of a 401(k)
defined contribution recordkeeping business, and a favorable
settlement in the merchant processing business, offset by
lower mortgage banking revenue due to adopting fair value
accounting standards for MSRs. The growth in credit and
debit card revenue in 2007 was primarily driven by an
increase in customer accounts and higher customer
transaction volumes. The corporate payment products
revenue growth reflected growth in customer sales volumes
and card usage, and the impact of an acquired business.
Merchant processing services revenue was higher, reflecting
an increase in customers and sales volumes on both a
domestic and global basis. Trust and investment
management fees increased primarily due to core account
growth and favorable equity market conditions. Deposit
service charges were higher due primarily to increased
transaction-related fees and the impact of continued growth
in net new checking accounts. Treasury management fees
increased due to new product offerings and higher
transaction volumes. Commercial products revenue increased
due to higher syndication fees, foreign exchange and
commercial leasing revenue. Mortgage banking revenue
increased due to an increase in mortgage originations and
servicing income, partially offset by an adverse net change in
the valuation of MSRs and related economic hedging
activities given changing interest rates. Growth in these fee-
based revenue categories was partially offset by slightly
lower investment products fees and commissions and a
decline in other income. The reduction of other income
reflected the valuation losses recognized in 2007, related to
securities purchased from certain money market funds
managed by an affiliate and the 2006 asset gains previously
discussed.
Noninterest Expense Noninterest expense in 2008 was
$7.4 billion, compared with $7.0 billion in 2007 and
$6.3 billion in 2006. The Company’s efficiency ratio was
47.4 percent in 2008, compared with 49.7 percent in 2007.
The $428 million (6.1 percent) increase in noninterest
expense in 2008, compared with 2007, was principally due
to investments in business initiatives including acquisitions,
higher credit collection costs, and incremental expenses
associated with investments in tax-advantaged projects,
partially offset by the $330 million Visa Charge recognized
in 2007.
Compensation expense was 15.1 percent higher in 2008
due to growth in ongoing bank operations, acquired
businesses and other bank initiatives to increase the
Company’s banking presence and enhance customer
relationship management. The increase in compensation
expense was also due to the adoption of an accounting
standard in the first quarter of 2008, under which
compensation expense is no longer deferred for MLHFS.
Employee benefits expense increased 4.3 percent year-over-
year as higher payroll taxes and medical costs were partially
offset by lower pension costs, due to the utilization of a
higher discount rate and amortization of unrecognized
actuarial gains from prior years. Net occupancy and
U.S. BANCORP
25
Table 5 NONINTEREST EXPENSE
(Dollars in Millions)
Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . .
Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing and business development . . . . . . . . . . . . . . . . . .
Technology and communications . . . . . . . . . . . . . . . . . . . . .
Postage, printing and supplies . . . . . . . . . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008
$3,039
515
781
240
310
598
294
355
1,282
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . .
$7,414
2007
$2,640
494
738
233
260
561
283
376
1,401
$6,986
2006
$2,513
481
709
199
233
545
265
355
986
$6,286
2008
v 2007
2007
v 2006
15.1%
4.3
5.8
3.0
19.2
6.6
3.9
(5.6)
(8.5)
6.1%
5.1%
2.7
4.1
17.1
11.6
2.9
6.8
5.9
42.1
11.1%
Efficiency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47.4%
49.7%
45.8%
equipment expense increased 5.8 percent primarily due to
acquisitions and branch-based and other business expansion
initiatives. Marketing and business development expense
increased 19.2 percent over the prior year due to costs
incurred in 2008 for a national advertising campaign, as
well as a $25 million charitable contribution made to the
Company’s foundation. Technology and communications
expense increased 6.6 percent due to higher processing
volumes and business expansion. Other intangibles expense
decreased 5.6 percent from the prior year reflecting the
timing and relative size of recent acquisitions. Other expense
decreased 8.5 percent from the prior year, primarily due to
the $330 million Visa Charge recognized in 2007, partially
offset by increases in 2008 in credit-related costs for other
real estate owned and loan collection activities and
investments in tax-advantaged projects.
The $700 million (11.1 percent) increase in noninterest
expense in 2007, compared with 2006, was principally due
to the $330 million Visa Charge recognized in 2007, as well
as higher credit costs, incremental growth in tax-advantaged
projects and specific investment in revenue-enhancing
business initiatives. Compensation expense was higher
primarily due to investment in personnel within the branch
distribution network, enhancing relationship management
processes and supporting organic business growth and
acquired businesses. Employee benefits expense increased as
higher medical costs were partially offset by lower pension
costs. Net occupancy and equipment expense increased
primarily due to bank acquisitions and investments in
branches. Professional services expense was higher due to
revenue enhancing business initiatives, higher litigation-
related costs, and higher legal fees associated with the
establishment of a bank charter in Ireland to support pan-
European payment processing. Marketing and business
development expense increased due to higher customer
promotion, solicitation and advertising activities. Postage,
printing and supplies increased due to increasing customer
promotional mailings and changes in postal rates. Other
26
U.S. BANCORP
intangibles expense increased due to acquisitions. Other
expense increased primarily due to the $330 million Visa
Charge. These increases were partially offset by $33 million
of debt prepayment charges recorded during 2006.
Pension Plans Because of the long-term nature of pension
plans, the related accounting is complex and can be
impacted by several factors, including investment funding
policies, accounting methods, and actuarial assumptions.
The Company’s pension accounting reflects the long-
term nature of the benefit obligations and the investment
horizon of plan assets. Amounts recorded in the financial
statements reflect actuarial assumptions about participant
benefits and plan asset returns. Changes in actuarial
assumptions, and differences in actual plan experience
compared with actuarial assumptions, are deferred and
recognized in expense in future periods. Differences related
to participant benefits are recognized over the future service
period of the employees. Differences related to the expected
return on plan assets are included in expense over a twelve-
year period.
At December 31, 2008, the Company had an
$888 million cumulative difference between actuarially-
assumed returns on plan assets and actual experience. If the
performance of plan assets equals the actuarially-assumed
long-term rate of return (“LTROR”), this difference will
increase pension expense incrementally $35 million in 2009,
$37 million in 2010, $46 million in 2011, $49 million in
2012, and $61 million in 2013. In addition to the asset
return differences, the Company expects pension expense
will increase an additional $7 million in 2009 related to
other actuarial gains and losses. Because of the complexity
of forecasting pension plan activities, the accounting
methods utilized for pension plans, the Company’s ability to
respond to factors affecting the plans and the hypothetical
nature of actuarial assumptions, actual pension expense will
differ from these amounts.
Refer to Note 17 of the Notes to the Consolidated
Financial Statements for further information on the
Company’s pension plan funding practices, investment
Included in 2006 was a reduction of income tax
policies and asset allocation strategies, and accounting
expense of $61 million related to the resolution of federal
policies for pension plans.
The following table shows an analysis of hypothetical
changes in the LTROR and discount rate:
LTROR (Dollars in Millions)
Down 100
basis points
Incremental benefit (expense). . . . . .
Percent of 2008 net income . . . . . . .
$ (25)
(.53)%
Discount Rate (Dollars in Millions)
Down 100
basis points
Incremental benefit (expense). . . . . .
Percent of 2008 net income . . . . . . .
$ (60)
(1.26)%
Up 100
basis points
$ 25
.53%
Up 100
basis points
$ 48
1.01%
Income Tax Expense The provision for income taxes was
$1,087 million (an effective rate of 27.0 percent) in 2008,
compared with $1,883 million (an effective rate of
30.3 percent) in 2007 and $2,112 million (an effective rate
of 30.8 percent) in 2006. The decrease in the effective tax
rate from 2007 reflected the marginal impact of lower pre-
tax income and the relative amount of tax-exempt income
income tax examinations covering substantially all of the
Company’s legal entities for all years through 2004 and
$22 million related to certain state examinations.
For further information on income taxes, refer to
Note 19 of the Notes to Consolidated Financial Statements.
BALANCE SHEET ANALYSIS
Average earning assets were $215.0 billion in 2008,
compared with $194.7 billion in 2007. The increase in
average earning assets of $20.3 billion (10.5 percent) was
due to growth in total average loans of $18.2 billion
(12.4 percent), investment securities of $1.5 billion
(3.7 percent) and other earning assets of $1.0 billion
(58.4 percent), partially offset by lower loans held-for-sale.
The change in total average earning assets was principally
funded by increases of $13.7 billion in interest-bearing
deposits and $4.0 billion in wholesale funding.
from investment securities and insurance products, and
For average balance information, refer to Consolidated
incremental tax credits from affordable housing and other
Daily Average Balance Sheet and Related Yields and Rates
tax-advantaged investments.
on pages 118 and 119.
Table 6 LOAN PORTFOLIO DISTRIBUTION
At December 31 (Dollars in Millions)
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
2008
2007
2006
2005
2004
Commercial
Commercial . . . . . . . . . . . . . . $ 49,759
6,859
Lease financing. . . . . . . . . . . .
26.9% $ 44,832
6,242
3.7
29.1% $ 40,640
5,550
4.1
28.3% $ 37,844
5,098
3.9
27.7% $ 35,210
4,963
3.7
28.2%
4.0
Total commercial
. . . . . . . .
56,618
30.6
51,074
33.2
46,190
32.2
42,942
31.4
40,173
32.2
Commercial Real Estate
Commercial mortgages . . . . . .
Construction and development. .
23,434
9,779
12.6
5.3
20,146
9,061
13.1
5.9
19,711
8,934
13.7
6.2
20,272
8,191
14.9
6.0
20,315
7,270
16.3
5.8
Total commercial real
estate. . . . . . . . . . . . . .
33,213
17.9
29,207
19.0
28,645
19.9
28,463
20.9
27,585
22.1
Residential Mortgages
Residential mortgages . . . . . . .
Home equity loans, first liens. . .
18,232
5,348
9.8
2.9
Total residential mortgages . .
23,580
12.7
Retail
Credit card . . . . . . . . . . . . . . .
Retail leasing . . . . . . . . . . . . .
Home equity and second
13,520
5,126
7.3
2.8
17,099
5,683
22,782
10,956
5,969
11.1
3.7
14.8
7.1
3.9
15,316
5,969
21,285
8,670
6,960
10.7
4.1
14.8
6.0
4.9
14,538
6,192
20,730
7,137
7,338
10.7
4.5
15.2
5.2
5.4
9,722
5,645
7.8
4.5
15,367
12.3
6,603
7,166
5.3
5.7
mortgages . . . . . . . . . . . . .
19,177
10.3
16,441
10.7
15,523
10.8
14,979
11.0
14,851
11.9
Other retail
Revolving credit . . . . . . . . .
Installment . . . . . . . . . . . . .
Automobile . . . . . . . . . . . .
Student . . . . . . . . . . . . . . .
3,205
5,525
9,212
4,603
Total other retail . . . . . . .
22,545
Total retail . . . . . . . . . . . . .
60,368
Total loans, excluding
covered assets . . . . .
Covered assets . . . . . . . . . . . .
173,779
11,450
1.7
3.0
5.0
2.5
12.2
32.6
93.8
6.2
2,731
5,246
8,970
451
17,398
50,764
1.8
3.4
5.8
.3
11.3
33.0
2,563
4,478
8,693
590
16,324
47,477
1.8
3.1
6.1
.4
11.4
33.1
2,504
3,582
8,112
675
14,873
44,327
1.8
2.6
6.0
.5
10.9
32.5
2,541
2,767
7,419
469
13,196
41,816
2.0
2.2
5.9
.4
10.5
33.4
153,827
–
100.0
–
143,597
–
100.0
–
136,462
–
100.0
–
124,941
–
100.0
–
Total loans . . . . . . . . . . $185,229
100.0% $153,827
100.0% $143,597
100.0% $136,462
100.0% $124,941
100.0%
U.S. BANCORP
27
Loans The Company’s loan portfolio was $185.2 billion at
December 31, 2008, an increase of $31.4 billion
(20.4 percent) from December 31, 2007. The increase was
driven by growth in all major loan categories, including
retail loans (18.9 percent), commercial loans (10.9 percent),
commercial real estate loans (13.7 percent) and residential
mortgages (3.5 percent). The increase was also due to the
addition of $11.5 billion of covered assets, related to the
Downey and PFF acquisitions in the fourth quarter of 2008.
Table 6 provides a summary of the loan distribution by
product type, while Table 10 provides a summary of selected
loan maturity distribution by loan category. Average total
loans increased $18.2 billion (12.4 percent) in 2008,
compared with 2007. The increase was due to growth in all
major loan categories.
Commercial Commercial loans, including lease financing,
increased $5.5 billion (10.9 percent) as of December 31,
2008, compared with December 31, 2007. The growth in
commercial loans was primarily driven by new and existing
customers utilizing bank credit facilities to fund business
growth and liquidity requirements, as well as growth in
commercial leasing balances. Average commercial loans
increased $6.5 billion (13.6 percent) in 2008, compared with
2007, primarily due to an increase in commercial loan
demand driven by general economic conditions in 2008.
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, increased $4.0 billion
(13.7 percent) at December 31, 2008, compared with
December 31, 2007. The growth in commercial real estate
loans reflected changing market conditions that have limited
borrower access to the capital markets, and loans acquired
in 2008 business combinations. Table 8 provides a summary
of commercial real estate by property type and geographical
locations. The collateral for $.8 billion of commercial real
estate loans included in covered assets at December 31, 2008
was in California.
Table 7 COMMERCIAL LOANS BY INDUSTRY GROUP AND GEOGRAPHY, EXCLUDING COVERED ASSETS
Industry Group (Dollars in Millions)
December 31, 2008
December 31, 2007
Loans
Percent
Loans
Percent
Consumer products and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,706
6,669
Financial services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,945
Capital goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,420
Commercial services and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,896
Property management and development
. . . . . . . . . . . . . . . . . . . . . . . . . . .
3,614
Healthcare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,568
Consumer staples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,447
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,320
Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,308
Paper and forestry products, mining and basic materials . . . . . . . . . . . . . . . . .
1,910
Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,230
Information technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,194
Private investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,391
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18.9%
11.8
8.7
7.8
6.9
6.4
4.5
4.3
4.1
4.1
3.4
2.2
2.1
14.8
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $56,618
100.0%
Geography
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,638
2,825
Colorado. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,710
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,195
Minnesota . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,955
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,915
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,171
Oregon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,677
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,621
Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,755
Iowa, Kansas, Nebraska, North Dakota, South Dakota . . . . . . . . . . . . . . . . . .
2,075
Arkansas, Indiana, Kentucky, Tennessee . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,124
Idaho, Montana, Wyoming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,993
Arizona, Nevada, Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total banking region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outside the Company’s banking region . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,654
15,964
11.7%
5.0
6.6
10.9
3.5
5.2
3.8
4.7
4.6
6.6
3.7
2.0
3.5
71.8
28.2
$ 9,576
7,693
4,144
3,982
3,239
2,521
1,897
2,746
1,576
2,289
1,685
1,085
2,197
6,444
$51,074
$ 5,091
2,490
2,899
6,254
1,690
2,554
2,021
2,364
2,337
5,150
2,066
1,033
1,947
37,896
13,178
18.8%
15.1
8.1
7.8
6.3
4.9
3.7
5.4
3.1
4.5
3.3
2.1
4.3
12.6
100.0%
10.0%
4.9
5.7
12.2
3.3
5.0
4.0
4.6
4.6
10.1
4.0
2.0
3.8
74.2
25.8
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $56,618
100.0%
$51,074
100.0%
28
U.S. BANCORP
The Company classifies loans as construction until the
completion of the construction phase. Following
construction, if a loan is retained, the loan is reclassified to
the commercial mortgage category. In 2008, approximately
$327 million of construction loans were reclassified to the
commercial mortgage loan category for permanent financing
after completion of the construction phase. At December 31,
2008, $200 million of tax-exempt industrial development
loans were secured by real estate. The Company’s
commercial real estate mortgages and construction loans had
unfunded commitments of $8.0 billion and $8.9 billion at
December 31, 2008 and 2007, respectively. 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 $2.2 billion at December 31, 2008.
Residential Mortgages Residential mortgages held in the
loan portfolio at December 31, 2008, increased $.8 billion
(3.5 percent) from December 31, 2007. The growth was
principally the result of an increase in mortgage banking
activity and higher consumer finance originations. Most
loans retained in the portfolio are to customers with prime
or near-prime credit characteristics at the date of origination.
Retail Total retail loans outstanding, which include credit
card, retail leasing, home equity and second mortgages and
other retail loans, increased $9.6 billion (18.9 percent) at
December 31, 2008, compared with December 31, 2007.
Average retail loans increased $6.7 billion (13.7 percent) in
2008, compared with 2007. The increases included higher
student loans of $4.2 billion due to the purchase of a
portfolio during 2008 and the reclassification of federally
guaranteed student loans held for sale into the held for
investment portfolio as a result of a change in business
strategy. The increases also reflected growth in home equity,
credit card and installment loans. These increases were
partially offset by a decrease in retail leasing balances.
Of the total retail loans and residential mortgages
outstanding, approximately 79.3 percent were to customers
Table 8 COMMERCIAL REAL ESTATE BY PROPERTY TYPE AND GEOGRAPHY,
EXCLUDING COVERED ASSETS
Property Type (Dollars in Millions)
December 31, 2008
December 31, 2007
Loans
Percent
Loans
Percent
Business owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,259
Commercial property
33.9%
$10,340
35.4%
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other commercial
Homebuilders
Condominiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hotel/motel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health care facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,362
3,056
4,052
3,537
764
2,491
4,882
1,561
249
4.1
9.2
12.2
10.7
2.3
7.5
14.7
4.7
0.8
818
2,424
2,979
3,184
1,081
3,008
4,001
1,051
321
2.8
8.3
10.2
10.9
3.7
10.3
13.7
3.6
1.1
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $33,213
100.0%
$29,207
100.0%
Geography
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,975
1,661
Colorado. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,229
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,694
Minnesota . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,528
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,329
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,860
Oregon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,222
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,495
Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,225
Iowa, Kansas, Nebraska, North Dakota, South Dakota . . . . . . . . . . . . . . . . . .
1,528
Arkansas, Indiana, Kentucky, Tennessee . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,295
Idaho, Montana, Wyoming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,288
Arizona, Nevada, Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total banking region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outside the Company’s banking region . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,329
3,884
21.0%
5.0
3.7
5.1
4.6
4.0
5.6
9.7
4.5
6.7
4.6
3.9
9.9
88.3
11.7
$ 5,783
1,577
1,110
1,723
1,577
1,314
1,840
2,950
1,460
2,103
1,402
1,227
2,629
26,695
2,512
19.8%
5.4
3.8
5.9
5.4
4.5
6.3
10.1
5.0
7.2
4.8
4.2
9.0
91.4
8.6
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $33,213
100.0%
$29,207
100.0%
U.S. BANCORP
29
located in the Company’s primary banking region. Table 9
provides a geographic summary of residential mortgages and
retail loans outstanding as of December 31, 2008 and 2007.
The collateral for $7.1 billion of residential mortgages and
retail loans included in covered assets at December 31, 2008
was in California.
Loans Held for Sale Loans held for sale, consisting primarily
of residential mortgages and student loans to be sold in the
secondary market, were $3.2 billion at December 31, 2008,
compared with $4.8 billion at December 31, 2007. The
decrease in loans held for sale was principally a result of a
change in business strategy to discontinue selling federally
guaranteed student loans in the secondary market, and
instead, hold them in the loan portfolio.
Investment Securities The Company uses its investment
securities portfolio for several purposes. It serves as a vehicle
to manage enterprise interest rate 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 the balance sheet and
related interest rate risk and to meet liquidity requirements,
among other factors.
At December 31, 2008, investment securities totaled
$39.5 billion, compared with $43.1 billion at December 31,
2007. The $3.6 billion (8.3 percent) decrease reflected
securities purchases of $6.1 billion, more than offset by
sales, maturities, prepayments, securities impairments and
unrealized losses on the available-for-sale portfolio.
At December 31, 2008, adjustable-rate financial
instruments comprised 40 percent of the investment
securities portfolio, compared with 39 percent at
Table 9 RESIDENTIAL MORTGAGES AND RETAIL LOANS BY GEOGRAPHY,
EXCLUDING COVERED ASSETS
(Dollars in Millions)
December 31, 2008
December 31, 2007
Loans
Percent
Loans
Percent
Residential Mortgages
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,910
1,558
Colorado. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,458
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,221
Minnesota . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,488
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,608
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
966
Oregon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,298
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,099
Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,423
Iowa, Kansas, Nebraska, North Dakota, South Dakota . . . . . . . . . . . . . . . . . .
1,933
Arkansas, Indiana, Kentucky, Tennessee . . . . . . . . . . . . . . . . . . . . . . . . . . .
513
Idaho, Montana, Wyoming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,421
Arizona, Nevada, Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.1%
6.6
6.2
9.4
6.3
6.8
4.1
5.5
4.7
6.0
8.2
2.2
6.0
Total banking region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outside the Company’s banking region . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,896
4,684
80.1
19.9
$ 1,426
1,566
1,450
2,292
1,562
1,605
968
1,266
1,142
1,502
1,886
521
1,267
18,453
4,329
6.2%
6.9
6.3
10.1
6.9
7.0
4.2
5.6
5.0
6.6
8.3
2.3
5.6
81.0
19.0
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,580
100.0%
$22,782
100.0%
Retail Loans
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,705
3,000
Colorado. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,073
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,108
Minnesota . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,858
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,729
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,833
Oregon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,064
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,883
Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,609
Iowa, Kansas, Nebraska, North Dakota, South Dakota . . . . . . . . . . . . . . . . . .
4,199
Arkansas, Indiana, Kentucky, Tennessee . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,771
Idaho, Montana, Wyoming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,843
Arizona, Nevada, Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total banking region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outside the Company’s banking region . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47,675
12,693
12.7%
5.0
5.1
10.1
4.7
6.2
4.7
5.1
4.8
6.0
7.0
2.9
4.7
79.0
21.0
$ 6,261
2,427
2,614
5,247
2,522
3,276
2,244
2,492
2,529
3,203
3,748
1,564
2,231
40,358
10,406
12.3%
4.8
5.1
10.3
5.0
6.5
4.4
4.9
5.0
6.3
7.4
3.1
4.4
79.5
20.5
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60,368
100.0%
$50,764
100.0%
30
U.S. BANCORP
Table 10 SELECTED LOAN MATURITY DISTRIBUTION
December 31, 2008 (Dollars in Millions)
One Year
or Less
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,850
10,359
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,172
Residential mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,849
Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,870
Covered assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60,100
Total of loans due after one year with
Predetermined interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Floating interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over One
Through
Five Years
$29,753
15,735
2,665
22,518
959
$71,630
Over Five
Years
$ 4,015
7,119
19,743
16,001
6,621
$53,499
Total
$ 56,618
33,213
23,580
60,368
11,450
$185,229
$ 73,023
$112,206
December 31, 2007. Average investment securities were
$1.5 billion (3.7 percent) higher in 2008, compared with
2007. The increase principally reflected the full year impact
of holding the structured investment securities the Company
purchased in the fourth quarter of 2007 from certain money
market funds managed by an affiliate and higher
government agency securities, partially offset by sales,
maturities and prepayments, as well as realized and
unrealized losses on investment securities. The weighted-
average yield of the available-for-sale portfolio was
4.55 percent at December 31, 2008, compared with
5.51 percent at December 31, 2007. The average maturity of
the available-for-sale portfolio increased to 7.7 years at
December 31, 2008, from 7.4 years at December 31, 2007.
Investment securities by type are shown in Table 11.
The Company conducts a regular assessment of its
investment portfolios to determine whether any securities are
other-than-temporarily impaired. At December 31, 2008, the
available-for-sale securities portfolio included a $2.8 billion
net unrealized loss, compared with a net unrealized loss of
$1.1 billion at December 31, 2007. When assessing
impairment, the Company considers the nature of the
investment, the financial condition of the issuer, the extent
and duration of unrealized loss, expected cash flows of
underlying collateral or assets, market conditions, and the
Company’s ability and intent to hold securities until
recovery. The Company intends to hold available-for-sale
securities with unrealized losses until recovery. The majority
of securities with unrealized losses were either obligations of
state and political subdivisions or non-agency securities with
high investment grade credit ratings and limited credit
exposure. Some securities classified within obligations of
state and political subdivisions are supported by mono-line
insurers. Because mono-line insurers have experienced credit
rating downgrades, management continuously monitors the
underlying credit quality of the issuers and the support of
the mono-line insurers. As of December 31, 2008,
approximately 6 percent of the available-for-sale securities
portfolio represented perpetual preferred securities and trust
preferred securities, primarily issued by the financial services
sector, or structured investment securities. The unrealized
losses for these securities were approximately $941 million
at December 31, 2008.
There is limited market activity for the structured
investment securities and certain non-agency securities held
by the Company, so the Company’s valuation is determined
using estimates of expected cash flows, discount rates and
management’s assessment of various market factors, which
are judgmental in nature. As a result of the valuation of
these securities and impairment assessment, in 2008 the
Company recorded $232 million of other-than-temporary
impairment on certain investment securities, including
certain non-agency mortgage-backed securities, GSE
preferred stock and perpetual preferred stock of failed
institutions. The Company also recorded $788 million of
impairment charges on structured investment and related
securities during 2008. These impairment charges were a
result of wider market spreads for these types of securities
due to market illiquidity, as well as changes in expected cash
flows resulting from the continuing decline in housing prices
and an increase in foreclosure activity. Further adverse
changes in market conditions may result in additional
impairment charges in future periods. The Company expects
approximately $501 million of principal payments will not
be received for the structured investment-related and non-
agency securities it has impaired. During 2008, the
Company exchanged its interest in certain structured
investment securities and received its pro rata share of the
underlying investment securities as an in-kind distribution
according to the applicable restructuring agreements.
Refer to Note 5 in the Notes to Consolidated Financial
Statements for further information on investment securities.
U.S. BANCORP
31
Table 11 INVESTMENT SECURITIES
December 31, 2008 (Dollars in Millions)
U.S. Treasury and Agencies
Available-for-Sale
Held-to-Maturity
Amortized
Cost
Fair
Value
Weighted-
Average
Maturity in
Years
Weighted-
Average
Yield (d)
Amortized
Cost
Fair
Value
Weighted-
Average
Maturity in
Years
Weighted-
Average
Yield (d)
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. . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
517
112
29
6
664
Mortgage-Backed Securities (a)
Maturing in one year or less . . . . . . . . . . . . . . . . . .
Maturing after one year through five years . . . . . . . . .
Maturing after five years through ten years . . . . . . . .
Maturing after ten years . . . . . . . . . . . . . . . . . . . .
$ 1,969
25,028
3,826
443
$
$
529
114
32
7
682
$ 1,567
24,674
3,488
404
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . .
$31,266
$30,133
Asset-Backed Securities (a)(e)
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 (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 . . . . . . . . . . . . . . . . . . . .
$
$
$
2
505
108
1
616
20
160
347
6,693
$
$
$
2
498
109
1
610
20
160
347
5,889
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,220
$ 6,416
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 . . . . . . . . . . . . . . . . . . . .
$
434
44
96
1,546
$
434
24
54
882
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,120
$ 1,394
Other Investments . . . . . . . . . . . . . . . . . . . . . . . .
$
397
$
233
Total investment securities (c) . . . . . . . . . . . . . . . . . . .
$42,283
$39,468
.2
2.7
8.0
10.6
1.0
.6
2.7
6.4
11.1
3.2
.7
3.6
5.0
22.0
3.8
.3
2.0
6.8
22.6
21.3
.1
2.9
8.2
34.0
25.2
43.1
7.7
4.89%
3.43
4.90
4.72
4.64%
3.79%
4.23
3.07
2.42
4.04%
11.94%
4.22
6.95
7.79
4.73%
6.79%
3.78
6.09
6.83
6.73%
1.14%
4.96
6.32
5.48
4.62%
5.87%
4.56%
$ –
–
–
–
$ –
$ –
–
5
–
$ 5
$ –
–
–
–
$ –
$ 1
6
15
16
$38
$10
–
–
–
$10
$ –
$53
$ –
–
–
–
$ –
$ –
–
5
–
$ 5
$ –
–
–
–
$ –
$ 1
6
16
16
$39
$10
–
–
–
$10
$ –
$54
–
–
–
–
–
–
–
5.2
–
5.2
–
–
–
–
–
.6
2.7
7.4
17.9
10.9
1.6
–
–
–
1.6
–
8.5
–%
–
–
–
–%
–%
–
5.89
–
5.89%
–%
–
–
–
–%
6.41%
6.61
7.16
5.32
6.27%
3.92%
–
–
–
3.92%
–%
5.78%
(a)
(b)
Information related to asset and mortgage-backed securities included above is presented based upon weighted-average maturities anticipating future prepayments.
Information related to obligations of state and political subdivisions is presented based upon yield to first optional call date if the security is purchased at a premium, yield to maturity if
purchased at par or a discount.
(c) The weighted-average maturity of the available-for-sale investment securities was 7.4 years at December 31, 2007, with a corresponding weighted-average yield of 5.51 percent. The
weighted-average maturity of the held-to-maturity investment securities was 8.3 years at December 31, 2007, with a corresponding weighted-average yield of 5.92 percent.
(d) Average yields are presented on a fully-taxable equivalent basis under a tax rate of 35 percent. Yields on available-for-sale and held-to-maturity securities are computed based on historical
cost balances. Average yield and maturity calculations exclude equity securities that have no stated yield or maturity.
(e) Primarily includes investments in structured investment vehicles with underlying collateral that includes a mix of various mortgage and other asset-backed securities.
December 31 (Dollars in Millions)
U.S. Treasury and agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of state and political subdivisions. . . . . . . . . . . . . . . . . .
Other debt securities and investments . . . . . . . . . . . . . . . . . . . . . .
Total investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008
2007
Amortized
Cost
$
664
31,271
616
7,258
2,527
$42,336
Percent
of Total
1.6%
73.9
1.4
17.1
6.0
100.0%
Amortized
Cost
$
407
31,306
2,922
7,187
2,358
$44,180
Percent
of Total
.9%
70.9
6.6
16.3
5.3
100.0%
Deposits Total deposits were $159.3 billion at December 31,
2008, compared with $131.4 billion at December 31, 2007.
The $27.9 billion (21.2 percent) increase in total deposits
consisted of increases in all major deposit categories. The
Company assumed $13.5 billion of deposits in the 2008
acquisitions. Average total deposits increased $15.1 billion
32
U.S. BANCORP
(12.5 percent) from 2007, reflecting an increase in average
was primarily related to higher savings, interest checking
time deposits greater than $100,000, interest checking,
and money market savings balances. The $4.1 billion
noninterest-bearing deposits and money market savings
(81.4 percent) increase in savings account balances reflected
accounts, partially offset by a decrease in average time
higher personal interest savings balances, as a result of
certificates of deposit less than $100,000.
strong participation in a new savings product, and the
Noninterest-bearing deposits at December 31, 2008,
impact of the Downey and PFF acquisitions during the
increased $4.2 billion (12.5 percent) from December 31,
fourth quarter of 2008. The $3.3 billion (11.2 percent)
2007. The increase was primarily attributed to higher
increase in interest checking account balances was due to
business demand, personal demand and other demand
higher broker-dealer, government, consumer banking and
deposits. The increase in business demand deposits reflected
institutional trust balances. The $1.8 billion (7.6 percent)
higher broker-dealer balances due to customer flight to
increase in money market savings account balances reflected
quality and the impact of the Mellon 1st Business Bank
higher broker-dealer balances and the impact of acquisitions,
acquisition in the current year. The increase in personal
partially offset by lower branch-based and government
demand deposits was primarily due to acquisitions in the
balances. Average interest-bearing savings deposits in 2008
current year. Average noninterest-bearing deposits in 2008
increased $6.6 billion (11.6 percent), compared with 2007,
increased $1.4 billion (5.0 percent), compared with 2007,
primarily driven by higher interest checking account
due primarily to higher business demand and other demand
balances of $5.0 billion (19.2 percent) and money market
deposits.
savings account balances of $1.0 billion (3.8 percent).
Interest-bearing savings deposits increased $9.2 billion
Interest-bearing time deposits at December 31, 2008,
(15.7 percent) at December 31, 2008, compared with
increased $14.6 billion (36.6 percent), compared with
December 31, 2007. The increase in these deposit balances
December 31, 2007, driven by an increase in time
Table 12 DEPOSITS
The composition of deposits was as follows:
December 31 (Dollars in Millions)
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
2008
2007
2006
2005
2004
Noninterest-bearing deposits . . . . . $ 37,494
Interest-bearing deposits
Interest checking . . . . . . . . . . .
Money market savings . . . . . . .
Savings accounts . . . . . . . . . .
32,254
26,137
9,070
Total of savings deposits . . .
67,461
Time certificates of deposit less
23.5% $ 33,334
25.4% $ 32,128
25.7% $ 32,214
25.8% $ 30,756
25.5%
20.2
16.4
5.7
42.3
28,996
24,301
5,001
58,298
22.1
18.5
3.8
44.4
24,937
26,220
5,314
56,471
20.0
21.0
4.2
45.2
23,274
27,934
5,602
56,810
18.7
22.4
4.5
45.6
23,186
30,478
5,728
59,392
19.2
25.2
4.8
49.2
than $100,000 . . . . . . . . . . . .
18,425
11.7
14,160
10.8
13,859
11.1
13,214
10.6
12,544
10.4
Time deposits greater than
$100,000
Domestic . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . .
Total interest-bearing
20,791
15,179
13.0
9.5
15,351
10,302
11.7
7.8
14,868
7,556
11.9
6.1
14,341
8,130
11.5
6.5
11,956
6,093
9.9
5.0
deposits . . . . . . . . . . . .
121,856
76.5
98,111
74.6
92,754
74.3
92,495
74.2
89,985
74.5
Total deposits . . . . . . . . . . . . . $159,350
100.0% $131,445
100.0% $124,882
100.0% $124,709
100.0% $120,741
100.0%
The maturity of time deposits was as follows:
December 31, 2008 (Dollars in Millions)
Certificates
Less Than $100,000
Time Deposits
Greater Than $100,000
Three months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Three months through six months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Six months through one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,406
3,017
6,140
2,295
804
535
1,223
5
$18,425
$25,813
3,228
4,127
1,262
491
280
764
5
$35,970
Total
$30,219
6,245
10,267
3,557
1,295
815
1,987
10
$54,395
U.S. BANCORP
33
certificates of deposit less than $100,000 and time deposits
greater than $100,000. Time certificates of deposit less than
$100,000 increased $4.3 billion (30.1 percent) at
December 31, 2008, compared with December 31, 2007,
due primarily to the Downey and PFF acquisitions late in
2008, partially offset by a decrease within Consumer
Banking. The decrease within Consumer Banking reflected
the Company’s funding and pricing decisions and
competition for these deposits by other financial institutions.
Time deposits greater than $100,000 increased $10.3 billion
(40.2 percent), compared with December 31, 2007, as a
result of the Company’s wholesale funding decisions and the
business lines’ ability to attract larger customer deposits, as
a result of the Company’s relative strength given current
market conditions. Average time certificates of deposit less
than $100,000 decreased $1.1 billion (7.3 percent) and
average time deposits greater than $100,000 increased
$8.2 billion (36.7 percent), compared with 2007. Time
deposits greater than $100,000 are managed as an
alternative to other funding sources, such as wholesale
borrowing, based largely on relative pricing.
Borrowings The Company utilizes both short-term and long-
term borrowings to fund growth of assets in excess of
deposit growth. Short-term borrowings, which include
federal funds purchased, commercial paper, repurchase
agreements, borrowings secured by high-grade assets and
other short-term borrowings, were $34.0 billion at
December 31, 2008, compared with $32.4 billion at
December 31, 2007. Short-term funding is managed within
approved liquidity policies. The increase of $1.6 billion
(5.0 percent) in short-term borrowings reflected wholesale
funding associated with the Company’s asset growth and
asset/liability management activities.
Long-term debt was $38.4 billion at December 31,
2008, compared with $43.4 billion at December 31, 2007,
primarily reflecting repayments of $3.3 billion of convertible
senior debentures, and maturities of $7.2 billion of medium-
term notes and $.7 billion of subordinated debt, partially
offset by the issuance of $7.0 billion of medium-term notes
during 2008. Refer to Note 13 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.
CORPORAT E RISK PROFILE
Overview Managing risks is an essential part of successfully
operating a financial services company. The most prominent
risk exposures are credit, residual value, operational, interest
rate, market and liquidity risk. Credit risk is the risk of not
collecting the interest and/or the principal balance of a loan
34
U.S. BANCORP
or investment when it is due. Residual value risk is the
potential reduction in the end-of-term value of leased assets.
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,
which can affect the repricing of assets and liabilities
differently, as well as their market value. Market risk arises
from fluctuations in interest rates, foreign exchange rates,
and security prices that may result in changes in the values
of financial instruments, such as trading and available-for-
sale securities that are accounted for on a mark-to-market
basis. Liquidity risk is the possible inability to fund
obligations to depositors, investors or borrowers. In
addition, corporate strategic decisions, as well as the risks
described above, could give rise to reputation risk.
Reputation risk is the risk that negative publicity or press,
whether true or not, could result in costly litigation or cause
a decline in the Company’s stock value, customer base,
funding sources or revenue.
Credit Risk Management The Company’s strategy for credit
risk management includes well-defined, centralized credit
policies, uniform underwriting criteria, and ongoing risk
monitoring and review processes for all commercial and
consumer credit exposures. The strategy also emphasizes
diversification on a geographic, industry and customer level,
regular credit examinations and management reviews of
loans exhibiting deterioration of credit quality. The credit
risk management strategy also includes a credit risk
assessment process, independent of business line managers,
that performs assessments of compliance with commercial
and consumer credit policies, risk ratings, and other critical
credit information. The Company strives to identify
potential problem loans early, record any necessary charge-
offs promptly and maintain appropriate reserve levels for
probable incurred loan losses. Commercial banking
operations rely on prudent credit policies and procedures
and individual lender and business line manager
accountability. Lenders are assigned lending authority based
on their level of experience and customer service
requirements. Credit officers reporting to an independent
credit administration function have higher levels of lending
authority and support the business units in their credit
decision process. Loan decisions are documented as to the
borrower’s business, purpose of the loan, evaluation of the
repayment source and the associated risks, evaluation of
collateral, covenants and monitoring requirements, and risk
rating rationale. The Company utilizes a credit risk rating
system to measure the credit quality of individual
commercial loans, including the probability of default of an
obligor and the loss given default of credit facilities. The
Company uses the risk rating system for regulatory
reporting, determining the frequency of review of the credit
exposures, and evaluation and determination of the specific
allowance for commercial credit losses. The Company
regularly forecasts potential changes in risk ratings,
nonperforming status and potential for loss and the
estimated impact on the allowance for credit losses. In the
Company’s retail banking operations, standard credit scoring
systems are used to assess credit risks of consumer, small
business and small-ticket leasing customers and to price
products accordingly. The Company conducts the
underwriting and collections of its retail products in loan
underwriting and servicing centers specializing in certain
retail products. Forecasts of delinquency levels, bankruptcies
and losses in conjunction with projection of estimated losses
by delinquency categories and vintage information are
regularly prepared and are used to evaluate underwriting
and collection and determine the specific allowance for
credit losses for these products. Because business processes
and credit risks associated with unfunded credit
commitments are essentially the same as for loans, the
Company utilizes similar processes to estimate its liability
for unfunded credit commitments. The Company also
engages in non-lending activities that may give rise to credit
risk, including interest rate swap and option contracts for
balance sheet hedging purposes, foreign exchange
transactions, deposit overdrafts and interest rate swap
contracts for customers, and settlement risk, including
Automated Clearing House transactions, and the processing
of credit card transactions for merchants. These activities are
also subject to credit review, analysis and approval
processes.
Economic and Other Factors In evaluating its credit risk, the
Company considers changes, if any, in underwriting
activities, the loan portfolio composition (including product
mix and geographic, industry or customer-specific
concentrations), trends in loan performance, the level of
allowance coverage relative to similar banking institutions
and macroeconomic factors.
During 2006 and through mid-2007, economic
conditions were strong, with relatively low unemployment,
expanding retail sales, and favorable trends related to
corporate profits and consumer spending for retail goods
and services.
Since mid-2007, corporate profit levels have weakened,
unemployment rates have risen, vehicle and retail sales have
declined and credit quality indicators have deteriorated
substantially. In addition, the mortgage lending and
homebuilding industries experienced significant stress.
Residential home inventory levels approximated a 12.9
month supply at the end of 2008, up from 4.5 months in the
third quarter of 2005. Median home prices, which peaked in
mid-2006, have declined across most domestic markets with
severe price reductions in California and some parts of the
Southwest, Northeast and Southeast regions.
The decline in residential home values have had a
significant adverse impact on residential mortgage loans.
Residential mortgage delinquencies, which increased
dramatically in 2007 for sub-prime borrowers have begun to
increase in 2008 for other classes of borrowers.
Securitization markets have experienced significant liquidity
disruptions as investor confidence in the credit quality of
asset-backed securitization programs has declined. Since the
fourth quarter of 2007, certain asset-backed commercial
paper programs and other structured investment vehicles
have been unable to remarket their commercial paper
creating further deterioration in the capital markets. In
response to these economic factors, the Federal Reserve
Bank has dramatically decreased the target Federal Funds
interest rate to unprecedented levels.
The unfavorable conditions that have affected the
economy and capital markets since mid-2007, intensified in
2008, as did a global economic slowdown, resulting in sharp
declines in most equity markets that are expected to
continue into 2009. This led to an overall decrease in
confidence in the markets, resulting in liquidity pressures on
the short-term funding markets that has placed additional
stress on global banking systems and economies. In response
to these circumstances, the United States government,
particularly the United States Treasury Department and the
FDIC, working in cooperation with the Federal Reserve
Bank, foreign governments and other central banks, have
taken a variety of measures to restore confidence in the
financial markets and to strengthen financial institutions,
including capital injections, guarantees of bank liabilities
and the acquisition of illiquid assets from banks.
Currently, there is heightened concern that the domestic
and global economic environments will weaken further,
capital markets will remain under stress and domestic
housing prices will continue to decline. These factors have
affected, and may continue to adversely impact the
Company’s credit costs, overall business volumes and
earnings. As a result of the impact of these factors on the
Company’s loan portfolio, the Company recorded provision
for credit losses in excess of charge-offs during 2008 of
$1,277 million.
In addition to economic factors, changes in regulations
and legislation can have an impact on the credit
performance of the loan portfolios. Beginning in 2005, the
Company implemented higher minimum balance payment
requirements for its credit card customers in response to
industry guidance issued by the banking regulatory agencies.
This industry guidance was provided to minimize the
likelihood that minimum balance payments would not be
U.S. BANCORP
35
sufficient to cover interest, fees and a portion of the
principal balance of a credit card loan resulting in negative
amortization, or increasing account balances. Also, new
bankruptcy legislation was enacted in October 2005, making
it more difficult for borrowers to have their debts forgiven
during bankruptcy proceedings. In response to increased
mortgage defaults, regulators and legislators have
encouraged mortgage servicers to implement restructuring
programs to enable borrowers to continue loan payments.
Credit Diversification The Company manages its credit risk,
in part, through diversification of its loan portfolio. As part
of its normal business activities, the Company offers a broad
array of traditional commercial lending products and
specialized products such as asset-based lending, commercial
lease financing, agricultural credit, warehouse mortgage
lending, commercial real estate, health care and
correspondent banking. The Company also offers an array
of retail lending products including credit cards, retail leases,
home equity, revolving credit, lending to students and other
consumer loans. These retail credit products are primarily
offered through the branch office network, home mortgage
and loan production offices, indirect distribution channels,
such as automobile dealers, and a consumer finance division.
The Company monitors and manages the portfolio
diversification by industry, customer and geography. Table 6
provides information with respect to the overall product
diversification and changes in the mix during 2008.
The commercial portfolio reflects the Company’s focus
on serving small business customers, middle market and
larger corporate businesses throughout its 24-state banking
region, as well as large national customers. The commercial
loan portfolio is diversified among various industries with
somewhat higher concentrations in consumer products and
services, financial services, commercial services and supplies,
capital goods (including manufacturing and commercial
construction-related businesses), property management and
development and agricultural industries. Additionally, the
commercial portfolio is diversified across the Company’s
geographical markets with 71.8 percent of total commercial
loans within the 24-state banking region. Credit
relationships outside of the Company’s banking region are
reflected within the corporate banking, mortgage banking,
auto dealer and leasing businesses focusing on large national
customers and specifically targeted industries. Loans to
mortgage banking customers are primarily warehouse lines
which are collateralized with the underlying mortgages. The
Company regularly monitors its mortgage collateral position
to manage its risk exposure. Table 7 provides a summary of
significant industry groups and geographic locations of
commercial loans outstanding at December 31, 2008 and
2007.
36
U.S. BANCORP
The commercial real estate portfolio reflects the
Company’s focus on serving business owners within its
geographic footprint as well as regional and national
investment-based real estate owners and builders. At
December 31, 2008, the Company had commercial real
estate loans of $33.2 billion, or 17.9 percent of total loans,
compared with $29.2 billion at December 31, 2007. Within
commercial real estate loans, different property types have
varying degrees of credit risk. Table 8 provides a summary
of the significant property types and geographical locations
of commercial real estate loans outstanding at December 31,
2008 and 2007. At December 31, 2008, approximately
33.9 percent of the commercial real estate loan portfolio
represented business owner-occupied properties that tend to
exhibit credit risk characteristics similar to the middle
market commercial loan portfolio. Generally, the
investment-based real estate mortgages are diversified among
various property types with somewhat higher concentrations
in office and retail properties. During 2008, the Company
continued to reduce its level of exposure to homebuilders,
given the stress in the homebuilding industry sector. From a
geographical perspective, the Company’s commercial real
estate portfolio is generally well diversified. However, at
December 31, 2008, the Company had 21.0 percent of its
commercial real estate portfolio within California, which has
experienced higher delinquency levels and credit quality
deterioration due to excess home inventory levels and
declining valuations. During 2008, the Company recorded
$172 million of net charge-offs in this portfolio, and credit
losses are likely to continue. Included in commercial real
estate at year-end 2008 was approximately $1.1 billion in
loans related to land held for development and $2.5 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. The commercial real
estate portfolio is diversified across the Company’s
geographical markets with 88.3 percent of total commercial
real estate loans outstanding at December 31, 2008, within
the 24-state banking region.
The assets acquired from Downey and PFF included
nonperforming loans and other loans with characteristics
indicative of a high credit risk profile, including a substantial
concentration in California, loans with negative-amortization
payment options, and homebuilder and other construction
finance loans. Because most of these loans are covered under
Loss Sharing Agreements, the Company’s financial exposure
to losses from these assets is substantially limited. To the
extent actual losses exceed the Company’s estimates at
acquisition, the Company’s financial risk would only be its
share of those losses under the Loss Sharing Agreements (in
general, 5 percent of losses in excess of those estimated at
acquisition).
The Company’s retail lending business utilizes several
distinct business processes and channels to originate retail
credit, including traditional branch lending, indirect lending,
portfolio acquisitions and a consumer finance division. Each
distinct underwriting and origination activity manages
unique credit risk characteristics and prices its loan
production commensurate with the differing risk profiles.
Within Consumer Banking, the consumer finance division
specializes in serving channel-specific and alternative lending
markets in residential mortgages, home equity and
installment loan financing. The consumer finance division
manages loans originated through a broker network,
correspondent relationships and U.S. Bank branch offices.
Generally, loans managed by the Company’s consumer
finance division exhibit higher credit risk characteristics, but
are priced commensurate with the differing risk profile.
Residential mortgages represent an important financial
product for consumer customers of the Company and are
originated through the Company’s branches, loan production
offices, a wholesale network of originators and the consumer
finance division. With respect to residential mortgages
originated through these channels, the Company may either
retain the loans on its balance sheet or sell its interest in the
balances into the secondary market while retaining the
servicing rights and customer relationships. Utilizing the
secondary markets enables the Company to effectively
reduce its credit and other asset/liability risks. For residential
mortgages that are retained in the Company’s portfolio and
for home equity and second mortgages, credit risk is also
managed by diversifying geography and monitoring loan-to-
values during the underwriting process.
The following tables provide summary information of the
loan-to-values of residential mortgages and home equity and
second mortgages by distribution channel and type at
December 31, 2008 (excluding covered assets):
Residential mortgages
(Dollars in Millions)
Only Amortizing
Interest
Percent
of Total
Total
Consumer Finance
Less than or equal to 80% . . $ 981
729
Over 80% through 90% . . . .
759
Over 90% through 100% . . .
–
Over 100% . . . . . . . . . . . .
$ 2,737 $ 3,718
2,282
3,721
146
1,553
2,962
146
37.7%
23.1
37.7
1.5
Total . . . . . . . . . . . . . $2,469
$ 7,398 $ 9,867
100.0%
Other Retail
Less than or equal to 80% . . $2,323
88
Over 80% through 90% . . . .
163
Over 90% through 100% . . .
–
Over 100% . . . . . . . . . . . .
$10,017 $12,340
659
714
–
571
551
–
90.0%
4.8
5.2
–
Total . . . . . . . . . . . . . $2,574
$11,139 $13,713
100.0%
Total Company
Less than or equal to 80% . . $3,304
817
Over 80% through 90% . . . .
922
Over 90% through 100% . . .
–
Over 100% . . . . . . . . . . . .
$12,754 $16,058
2,941
4,435
146
2,124
3,513
146
68.1%
12.5
18.8
.6
Total . . . . . . . . . . . . . $5,043
$18,537 $23,580
100.0%
Note: loan-to-values determined as of the date of origination and consider mortgage
insurance, as applicable.
Home equity and second mortgages
(Dollars in Millions)
Consumer Finance (a)
Lines
Loans
Total
Percent
of Total
Less than or equal to 80% . . . $
Over 80% through 90% . . . . .
Over 90% through 100% . . . .
Over 100% . . . . . . . . . . . . .
391 $ 200 $
303
415
70
192
455
136
591
495
870
206
27.3%
22.9
40.3
9.5
Total . . . . . . . . . . . . . . $ 1,179 $ 983 $ 2,162
100.0%
Other Retail
Less than or equal to 80% . . . $11,274 $1,953 $13,227
2,278
Over 80% through 90% . . . . .
1,434
Over 90% through 100% . . . .
76
Over 100% . . . . . . . . . . . . .
1,730
905
54
548
529
22
77.7%
13.4
8.4
.5
Total . . . . . . . . . . . . . . $13,963 $3,052 $17,015
100.0%
Total Company
Less than or equal to 80% . . . $11,665 $2,153 $13,818
2,773
Over 80% through 90% . . . . .
2,304
Over 90% through 100% . . . .
282
Over 100% . . . . . . . . . . . . .
2,033
1,320
124
740
984
158
72.0%
14.5
12.0
1.5
Total . . . . . . . . . . . . . . $15,142 $4,035 $19,177
100.0%
(a) Consumer finance category included credit originated and managed by the consumer
finance division, as well as the majority of home equity and second mortgages with a
loan-to-value greater than 100 percent that were originated in the branches.
Note: Loan-to-values determined at current amortized loan balance, or maximum of current
commitment or current balance on lines.
Within the consumer finance division, at December 31,
2008 approximately $2.9 billion of residential mortgages
were to customers that may be defined as sub-prime
borrowers based on credit scores from independent credit
rating agencies at loan origination.
U.S. BANCORP
37
The following table provides further information on
residential mortgages for the consumer finance division:
and second mortgage loans and lines to customers that may
be defined as sub-prime borrowers.
(Dollars in Millions)
Only Amortizing
Total
Interest
Percent
of
Division
Sub-Prime Borrowers
Less than or equal to 80% . . . $
Over 80% through 90% . . . . .
Over 90% through 100% . . . .
Over 100% . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . $
3
7
20
–
30
$1,096 $1,099
716
1,013
95
709
993
95
11.1%
7.3
10.3
1.0
$2,893 $2,923
29.7%
Other Borrowers
Less than or equal to 80% . . . $ 978
722
Over 80% through 90% . . . . .
739
Over 90% through 100% . . . .
–
Over 100% . . . . . . . . . . . . .
$1,641 $2,619
1,566
2,708
51
844
1,969
51
26.5%
15.9
27.4
.5
Total . . . . . . . . . . . . . . $2,439
$4,505 $6,944
70.3%
Total Consumer Finance . . . . $2,469
$7,398 $9,867
100.0%
The following table provides further information on home
equity and second mortgages for the consumer finance
division:
(Dollars in Millions)
Lines Loans
Total
Percent
of Total
Sub-Prime Borrowers
Less than or equal to 80%. . . . . . $
Over 80% through 90% . . . . . . .
Over 90% through 100% . . . . . . .
Over 100% . . . . . . . . . . . . . . .
22 $131 $ 153
153
26
288
2
145
47
127
286
98
7.1%
7.1
13.3
6.7
Total . . . . . . . . . . . . . . . . . $
97 $642 $ 739
34.2%
Other Borrowers
Less than or equal to 80%. . . . . . $ 369 $ 69 $ 438
342
Over 80% through 90% . . . . . . .
582
Over 90% through 100% . . . . . . .
61
Over 100% . . . . . . . . . . . . . . .
277
413
23
65
169
38
20.3%
15.8
26.9
2.8
In addition to residential mortgages, at December 31, 2008,
the consumer finance division had $.7 billion of home equity
Total . . . . . . . . . . . . . . . . . $1,082 $341 $1,423
65.8%
Total Consumer Finance . . . . . . $1,179 $983 $2,162
100.0%
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
2008
2007
2006
2005
2004
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.15%
–
.08%
–
.06%
–
Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.13
Commercial Real Estate
Commercial mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and development . . . . . . . . . . . . . . . . . . . . . .
Total commercial real estate . . . . . . . . . . . . . . . . . . . . .
Residential Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail leasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total retail
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans, excluding covered assets . . . . . . . . . . . . .
–
.36
.11
1.55
2.20
.16
.45
.82
.56
Covered Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.13
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.84%
At December 31,
90 days or more past due including nonperforming loans
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgages (a)
Retail (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008
.82%
3.34
2.44
.97
Total loans, excluding covered assets . . . . . . . . . . . . . . . . . . . .
1.57
Covered assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.74
.07
.02
.02
.02
.86
1.94
.10
.37
.68
.38
–
.38%
2007
.43%
1.02
1.10
.73
.74
–
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.14%
.74%
.06%
–
.05
–
–
–
.32
1.26
.04
.23
.37
.19
–
.05%
.02
.05
–
–
–
.46
1.74
.08
.30
.49
.24
–
.05
.01
.01
.01
.42
1.75
.03
.24
.49
.24
–
.24%
.19%
.24%
2006
2005
2004
.57%
.53
.59
.59
.57
–
.57%
.69%
.55
.55
.52
.58
–
.58%
.99%
.73
.74
.53
.75
–
.75%
(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
including nonperforming loans was 6.95 percent, 3.78 percent, 3.08 percent, 4.35 percent and 5.19 percent at December 31, 2008, 2007, 2006, 2005 and 2004, respectively.
(b) Beginning in 2008, delinquent loan ratios exclude student loans that are guaranteed by the federal government. Including the guaranteed amounts, the ratio of retail loans 90 days or more
past due including nonperforming loans was 1.10 percent at December 31, 2008.
38
U.S. BANCORP
Including residential mortgages, and home equity and
second mortgage loans, the total amount of loans, other
than covered assets, to customers that may be defined as
sub-prime borrowers represented only 1.4 percent of total
assets of the Company at December 31, 2008, compared
with 1.7 percent at December 31, 2007. Covered assets
include $3.3 billion in loans with negative-amortization
payment options. Other than covered assets, the Company
does not have any residential mortgages with payment
schedules that would cause balances to increase over time.
The retail loan portfolio principally reflects the
Company’s focus on consumers within its footprint of
branches and certain niche lending activities that are
nationally focused. Within the Company’s retail loan
portfolio approximately 72.0 percent of the credit card
balances relate to cards originated through the bank
branches or co-branded and affinity programs that generally
experience better credit quality performance than portfolios
generated through other channels.
Table 9 provides a geographical summary of the
residential mortgage and retail loan portfolios.
Loan Delinquencies Trends in delinquency ratios represent
an indicator, among other considerations, of credit risk
within the Company’s loan portfolios. The entire balance of
an account is considered delinquent if the minimum payment
contractually required to be made is not received by the
specified date on the billing statement. The Company
measures delinquencies, both including and excluding
nonperforming loans, to enable comparability with other
companies. Advances made pursuant to servicing agreements
to Government National Mortgage Association (“GNMA”)
mortgage pools, for which repayments of principal and
interest are substantially insured by the Federal Housing
Administration or guaranteed by the Department of Veterans
Affairs, are excluded from delinquency statistics. In addition,
under certain situations, a retail customer’s account may be
re-aged to remove it from delinquent status. Generally, the
intent of a re-aged account is to assist customers who have
recently overcome temporary financial difficulties, and have
demonstrated both the ability and willingness to resume
regular payments. To qualify for re-aging, the account must
have been open for at least one year and cannot have been
re-aged during the preceding 365 days. An account may not
be re-aged more than two times in a five-year period. To
qualify for re-aging, the customer must also have made three
regular minimum monthly payments within the last 90 days.
In addition, the Company may re-age the retail account of a
customer who has experienced longer-term financial
difficulties and apply modified, concessionary terms and
conditions to the account. Such additional re-ages are
limited to one in a five-year period and must meet the
qualifications for re-aging described above. All re-aging
strategies must be independently approved by the Company’s
credit administration function. Commercial loans are not
subject to re-aging policies.
Accruing loans 90 days or more past due totaled
$1,554 million ($967 million excluding covered assets) at
December 31, 2008, compared with $584 million at
December 31, 2007, and $349 million at December 31,
2006. The increase in 90 day delinquent loans was primarily
related to residential mortgages, credit cards and home
equity loans. These loans were not included in
nonperforming assets and continue to accrue interest because
they are adequately secured by collateral, and/or are in the
process of collection and are reasonably expected to result in
repayment or restoration to current status. The ratio of
90 day delinquent loans to total loans was .84 percent
(.56 percent excluding covered assets) at December 31,
2008, compared with .38 percent at December 31, 2007.
The Company expects delinquencies to continue to increase
due to deteriorating economic conditions and continuing
stress in the housing markets.
The following table provides summary delinquency
information for residential mortgages and retail loans,
excluding covered assets:
December 31,
(Dollars in Millions)
Residential mortgages
Amount
As a Percent of
Ending
Loan Balances
2008
2007
2008
2007
30-89 days . . . . . . . . . . $ 536
366
90 days or more . . . . . .
210
Nonperforming . . . . . . .
Total . . . . . . . . . . . $1,112
Retail
Credit card
30-89 days . . . . . . . . . . $ 369
297
90 days or more . . . . . .
67
Nonperforming . . . . . . .
Total . . . . . . . . . . . $ 733
Retail leasing
30-89 days . . . . . . . . . . $
90 days or more . . . . . .
Nonperforming . . . . . . .
Total . . . . . . . . . . . $
Home equity and second
49
8
–
57
mortgages
30-89 days . . . . . . . . . . $ 170
106
90 days or more . . . . . .
14
Nonperforming . . . . . . .
Total . . . . . . . . . . . $ 290
Other retail
30-89 days . . . . . . . . . . $ 255
81
90 days or more . . . . . .
11
Nonperforming . . . . . . .
Total . . . . . . . . . . . $ 347
$233
196
54
$483
$268
212
14
$494
$ 39
6
–
$ 45
$107
64
11
$182
$177
62
4
$243
2.28% 1.02%
1.55
.89
.86
.24
4.72% 2.12%
2.73% 2.44%
2.20
.49
1.94
.13
5.42% 4.51%
.95% .65%
.16
–
.10
–
1.11% .75%
.89% .65%
.55
.07
.39
.07
1.51% 1.11%
1.13% 1.02%
.36
.05
.36
.02
1.54% 1.40%
U.S. BANCORP
39
balance. Generally, the borrower is experiencing financial
difficulties or is expected to experience difficulties in the
near-term so concessionary modification is granted to the
borrower that would otherwise not be considered.
Restructured loans, except those where the principal balance
has been reduced, accrue interest as long as the borrower
complies with the revised terms and conditions and has
demonstrated repayment performance at a level
commensurate with the modified terms over several payment
cycles.
The majority of the Company’s loan restructurings
occur on a case-by-case basis in connection with ongoing
loan collection processes. However, in late 2007, the
Company began implementing a mortgage loan restructuring
program for certain qualifying borrowers. In general, certain
borrowers in the consumer finance division facing an interest
rate reset that are current in their repayment status, are
allowed to retain the lower of their existing interest rate or
the market interest rate as of their interest reset date.
Covered assets acquired from Downey and PFF that had
been restructured prior to the acquisitions are not considered
restructured loans for purposes of the Company’s accounting
and disclosure because they reflect the terms in place at the
date of the Company’s investment. Covered loans
restructured after the date of acquisition are considered
restructured loans to the Company and are accounted for in
the same manner as the Company’s other restructured loans.
The Company expects to restructure a substantial amount of
the covered assets over the next two years.
The following table provides a summary of restructured
loans that are performing in accordance with the modified
terms, and therefore continue to accrue interest:
December 31
(Dollars in Millions)
Amount
As a Percent
of Ending
Loan Balances
2008
2007
2008
2007
Commercial . . . . . . . . . . . . $
Commercial real estate . . . .
Residential mortgages . . . . .
Credit card . . . . . . . . . . . .
. . . . . . . . . . . .
Other retail
35
138
813
450
73
Total . . . . . . . . . . . . . . $1,509
$ 21
–
157
324
49
$551
.06% .04%
.42
3.45
3.33
.16
–
.69
2.96
.12
.81% .36%
Restructured loans that continue to accrue interest were
$958 million higher at December 31, 2008, compared with
December 31, 2007, reflecting the impact of residential
mortgage restructurings. The Company expects this trend to
continue in the near term as difficult economic conditions
continue and borrowers seek alternative payment
arrangements.
Within these product categories, the following table provides
information on delinquent and nonperforming loans as a
percent of ending loan balances, by channel:
Consumer
Finance (a)
Other Retail
December 31,
2008
2007
2008
2007
Residential mortgages
30-89 days . . . . . . . . . . . . 3.96%
90 days or more . . . . . . . . . 2.61
Nonperforming . . . . . . . . . . 1.60
Total . . . . . . . . . . . . . 8.17%
1.58%
1.33
.31
3.22%
1.06% .61%
.79
.38
.51
.18
2.23% 1.30%
Retail
Credit card
30-89 days . . . . . . . . . . . .
90 days or more . . . . . . . . .
Nonperforming . . . . . . . . . .
Total . . . . . . . . . . . . .
Retail leasing
30-89 days . . . . . . . . . . . .
90 days or more . . . . . . . . .
Nonperforming . . . . . . . . . .
Total . . . . . . . . . . . . .
Home equity and second
–%
–
–
–%
–%
–
–
–%
mortgages
30-89 days . . . . . . . . . . . . 3.24%
90 days or more . . . . . . . . . 2.36
.14
Nonperforming . . . . . . . . . .
Total . . . . . . . . . . . . . 5.74%
Other retail
30-89 days . . . . . . . . . . . . 6.91%
90 days or more . . . . . . . . . 1.98
–
Nonperforming . . . . . . . . . .
Total . . . . . . . . . . . . . 8.89%
–%
–
–
–%
–%
–
–
–%
2.53%
1.78
.11
4.42%
6.38%
1.66
–
8.04%
2.73% 2.44%
2.20
.49
1.94
.13
5.42% 4.51%
.95% .65%
.16
–
.10
–
1.11% .75%
.59% .41%
.32
.07
.21
.06
.98% .68%
1.00% .88%
.32
.05
.33
.02
1.37% 1.23%
(a) Consumer finance category included credit originated and managed by the consumer
finance division, as well as the majority of home equity and second mortgages with a
loan-to-value greater than 100 percent that were originated in the branches.
Within the consumer finance division at December 31,
2008, approximately $467 million and $121 million of these
delinquent and nonperforming residential mortgages and
other retail loans, respectively, were to customers that may
be defined as sub-prime borrowers, compared with
$227 million and $89 million, respectively at December 31,
2007.
The following table provides summary delinquency
information for covered assets:
December 31,
(Dollars in Millions)
Amount
As a Percent of
Ending
Loan Balances
2008
2007
2008
2007
30-89 days . . . . . . . . . . . . . . $ 740
587
90 days or more . . . . . . . . . . .
643
Nonperforming . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . $1,970
–
–
–
–
6.46% –
–
5.13
–
5.62
17.21% –
Restructured Loans Accruing Interest In certain
circumstances, management may modify the terms of a loan
to maximize the collection of the loan balance. In most
cases, the modification is either a reduction in interest rate,
extension of the maturity date or a reduction in the principal
40
U.S. BANCORP
Table 14 NONPERFORMING ASSETS (a)
At December 31, (Dollars in Millions)
2008
2007
2006
2005
2004
Commercial
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 290
102
Lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . .
392
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, excluding covered assets . .
Covered assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonperforming loans . . . . . . . . . . . . . . . . . . . .
Other Real Estate (b)
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
294
780
1,074
210
67
–
25
92
1,768
643
2,411
190
23
Total nonperforming assets . . . . . . . . . . . . . . . . . . . $2,624
Accruing loans 90 days or more past due, excluding covered
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 967
Accruing loans 90 days or more past due . . . . . . . . . . . . . . . . $1,554
Nonperforming loans to total loans, excluding covered assets . . .
Nonperforming loans to total loans . . . . . . . . . . . . . . . . . . . . .
Nonperforming assets to total loans plus other real estate,
1.02%
1.30%
excluding covered assets (b)
. . . . . . . . . . . . . . . . . . . . . .
Nonperforming assets to total loans plus other real estate (b) . . .
Net interest foregone on nonperforming loans . . . . . . . . . . . . . $
1.14%
1.42%
80
$128
53
181
84
209
293
54
14
–
15
29
557
–
557
111
22
$690
$584
$584
.36%
.36%
.45%
.45%
$196
40
236
112
38
150
36
31
–
17
48
470
–
470
95
22
$587
$349
$349
.33%
.33%
.41%
.41%
$231
42
273
134
23
157
48
49
–
17
66
544
–
544
71
29
$644
$253
$253
.40%
.40%
.47%
.47%
$289
91
380
175
25
200
43
–
–
17
17
640
–
640
72
36
$748
$294
$294
.51%
.51%
.60%
.60%
$ 41
$ 39
$ 30
$ 42
Changes in Nonperforming Assets
(Dollars in Millions)
Commercial and
Commercial Real Estate
Retail and
Residential Mortgages (d)
Total
Balance December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . .
$ 485
$ 205
$ 690
Additions to nonperforming assets
New nonaccrual loans and foreclosed properties . . . . . . . . . . .
Advances on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired nonaccrual covered assets . . . . . . . . . . . . . . . . . . .
Total additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions in nonperforming assets
Paydowns, payoffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return to performing status . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net additions to nonperforming assets. . . . . . . . . . . . . .
Balance December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . .
1,769
37
369
2,175
(228)
(23)
(32)
(481)
(764)
1,411
$1,896
357
–
274
631
(37)
–
(8)
(63)
(108)
523
$ 728
2,126
37
643
2,806
(265)
(23)
(40)
(544)
(872)
1,934
$2,624
(a) Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due.
(b) Excludes $209 million, $102 million and $83 million at December 31, 2008, 2007 and 2006, respectively of foreclosed GNMA loans which continue to accrue interest.
(c) Charge-offs exclude actions for certain card products and loan sales that were not classified as nonperforming at the time the charge-off occurred.
(d) Residential mortgage information excludes changes related to residential mortgages serviced by others.
U.S. BANCORP
41
Nonperforming Assets The level of nonperforming assets
represents another indicator of the potential for future credit
losses. Nonperforming assets include nonaccrual loans,
restructured loans not performing in accordance with
modified terms, other real estate and other nonperforming
assets owned by the Company. Interest payments collected
from assets on nonaccrual status are typically applied
against the principal balance and not recorded as income.
At December 31, 2008, total nonperforming assets were
$2,624 million, compared with $690 million at year-end
2007 and $587 million at year-end 2006. Total
nonperforming assets at December 31, 2008, included
$643 million of covered assets acquired from the FDIC in
the Downey and PFF acquisitions. The nonperforming
covered assets are primarily related to foreclosed real estate
and construction loans, and are subject to the Loss Sharing
Agreements with the FDIC. The ratio of total nonperforming
assets to total loans and other real estate was 1.42 percent
(1.14 percent excluding covered assets) at December 31,
2008, compared with .45 percent and .41 percent at the end
of 2007 and 2006, respectively. The $1,934 million increase
in nonperforming assets was driven primarily by continuing
stress in the residential construction portfolio and related
industries, as well as the residential mortgage portfolio, an
increase in foreclosed properties and the impact of the
economic slowdown on other commercial customers.
Included in nonperforming loans were restructured
loans that are not accruing interest of $151 million at
December 31, 2008, compared with $17 million at
December 31, 2007.
Other real estate included in nonperforming assets was
$190 million at December 31, 2008, compared with
$111 million at December 31, 2007, and was primarily
related to foreclosed properties that previously secured
residential mortgages, home equity and second mortgage
loan balances. The increase in other real estate assets
reflected continuing stress in residential construction and
related supplier industries and higher residential mortgage
loan foreclosures.
42
U.S. BANCORP
The following table provides an analysis of other real estate
owned (“OREO”) as a percent of their related loan
balances, including further detail for residential mortgages
and home equity and second mortgage loan balances by
geographical location:
Amount
As a Percent of
Ending
Loan Balances
2008
2007
2008
2007
December 31,
(Dollars in Millions)
Residential
Minnesota . . . . . . . . $ 18
13
California . . . . . . . .
12
Michigan . . . . . . . . .
9
Florida . . . . . . . . . .
9
Ohio. . . . . . . . . . . .
84
All other states . . . . .
Total residential . .
. . . . . . .
Commercial
145
45
$ 12
5
22
6
10
55
110
1
.34%
.29
2.39
1.20
.37
.29
.34
.14
Total OREO . . . . $190
$111
.10%
.23%
.15
3.47
.70
.40
.21
.28
–
.07%
The Company anticipates nonperforming assets,
including OREO, will continue to increase due to general
economic conditions and continuing stress in the residential
mortgage portfolio and residential construction industry.
The $103 million increase in total nonperforming assets
in 2007, as compared with 2006, primarily reflected higher
levels of nonperforming loans resulting from stress in
residential construction, associated homebuilding industries
and financial services companies. Partially offsetting the
increase in total nonperforming loans, was a decrease in
nonperforming loans in the manufacturing and
transportation industry sectors within the commercial loan
portfolio. Other real estate assets were also higher in 2007
due to higher residential mortgage loan foreclosures as
consumers experienced financial difficulties given
inflationary factors, changing interest rates and other current
economic conditions.
Analysis of Loan Net Charge-Offs Total loan net charge-offs
were $1,819 million in 2008, compared with $792 million
in 2007 and $544 million in 2006. The ratio of total loan
net charge-offs to average loans was 1.10 percent in 2008,
compared with .54 percent in 2007 and .39 percent in 2006.
The increase in net charge-offs in 2008, compared with
2007, was driven by factors affecting the residential housing
markets as well as homebuilding and related industries,
credit costs associated with credit card and other consumer
loan growth over the past several quarters. Given current
economic conditions and the continuing decline in home and
other collateral values, the Company expects net charge-offs
to increase during 2009.
Commercial and commercial real estate loan net charge-
offs for 2008 were $514 million (.60 percent of average
loans outstanding), compared with $159 million (.21 percent
of average loans outstanding) in 2007 and $88 million
Table 15 NET CHARGE-OFFS AS A PERCENT OF AVERAGE LOANS OUTSTANDING
Year Ended December 31
Commercial
2008
2007
2006
2005
2004
Commercial
Lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.36
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.53%
.24%
.61
.15%
.46
Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.63
Commercial Real Estate
Commercial mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.15
Construction and development . . . . . . . . . . . . . . . . . . . . . . . 1.48
.55
Total commercial real estate . . . . . . . . . . . . . . . . . . . . . .
Residential Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.01
Retail
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.73
Retail leasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.65
Home equity and second mortgages . . . . . . . . . . . . . . . . . . . 1.01
Other retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.39
Total retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.92
Total loans, excluding covered assets . . . . . . . . . . . . . . . . . . . . 1.10
Covered assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.38
.29
.06
.11
.08
.28
3.34
.25
.46
.96
1.17
.54
–
.18
.01
.01
.01
.19
2.88
.20
.33
.85
.92
.39
–
.12%
.85
.20
.03
(.04)
.01
.20
4.20
.35
.46
1.33
1.30
.52
–
.29%
1.42
.43
.09
.13
.10
.20
4.14
.59
.54
1.35
1.36
.64
–
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.10%
.54%
.39%
.52%
.64%
(.12 percent of average loans outstanding) in 2006. The
increase in net charge-offs in 2008, compared with 2007 and
the increase in 2007, compared with 2006, reflected the
continuing stress within the portfolios, especially residential
homebuilding and related industry sectors.
Residential mortgage loan net charge-offs for 2008 were
$234 million (1.01 percent of average loans outstanding),
compared with $61 million (.28 percent of average loans
outstanding) in 2007 and $41 million (.19 percent of
average loans outstanding) in 2006. The increase in
residential mortgage losses in 2008 was primarily a result of
a domestic economic recession, combined with rapidly
decreasing residential real estate values in some markets.
Retail loan net charge-offs in 2008 were $1,066 million
(1.92 percent of average loans outstanding), compared with
$572 million (1.17 percent of average loans outstanding) in
2007 and $415 million (.92 percent of average loans
outstanding) in 2006. The increase in retail loan net charge-
offs in 2008 reflected the Company’s growth in credit card
and other consumer loan balances, as well as the adverse
impact of current economic conditions on consumers. The
increase in retail loan net charge-offs in 2007 reflected
growth in the credit card and installment loan portfolios. In
addition, net charge-offs for 2006 reflected the beneficial
impact of bankruptcy legislation changes that occurred in
the fourth quarter of 2005.
The following table provides an analysis of net charge-offs
as a percent of average loans outstanding managed by the
consumer finance division, compared with other retail
related loans:
Year Ended December 31
(Dollars in Millions)
Consumer Finance (a)
Average Loans
Percent of
Average
Loans
2008
2007
2008
2007
Residential mortgages . . . $ 9,923 $ 9,129
Home equity and second
1.96% .58%
mortgages . . . . . . . .
. . . . . . . . . .
Other retail
Other Retail
2,050
461
1,850
414
5.71
5.86
2.70
3.38
Residential mortgages . . . $13,334 $12,956
Home equity and second
.30% .06%
mortgages . . . . . . . .
. . . . . . . . . .
Other retail
Total Company
15,500
20,210
14,073
16,436
.39
1.29
.17
.90
Residential mortgages . . . $23,257 $22,085
Home equity and second
1.01% .28%
mortgages . . . . . . . .
. . . . . . . . . .
Other retail
17,550
20,671
15,923
16,850
1.01
1.39
.46
.96
(a) Consumer finance category included credit originated and managed by the consumer
finance division, as well as the majority of home equity and second mortgages with a
loan-to-value greater than 100 percent that were originated in the branches.
U.S. BANCORP
43
The following table provides further information on net
charge-offs as a percent of average loans outstanding for the
consumer finance division:
Year Ended December 31
(Dollars in Millions)
Residential mortgages
Average Loans
Percent of
Average
Loans
2008
2007
2008
2007
Sub-prime borrowers. . . . . $3,101 $3,158
5,971
Other borrowers . . . . . . . .
6,822
3.51% 1.17%
1.25
.27
Total. . . . . . . . . . . . . $9,923 $9,129
1.96% .58%
Home equity and second
mortgages
Sub-prime borrowers. . . . . $ 799 $ 908
942
Other borrowers . . . . . . . .
1,251
10.01% 3.41%
2.96
2.02
Total. . . . . . . . . . . . . $2,050 $1,850
5.71% 2.70%
Analysis and Determination of the Allowance for Credit
Losses The allowance for loan losses reserves for probable
and estimable losses incurred in the Company’s loan and lease
portfolio, considering credit loss protection from the Loss
Sharing Agreements with the FDIC. At December 31, 2008,
allowances for loan losses on covered assets were $74 million.
The majority of the credit risk of the covered assets was
recorded as a discount on the loans because they were
recorded at fair value at acquisition. Management evaluates
the allowance each quarter to determine it is sufficient to
cover incurred 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 and reported reserve ratios.
At December 31, 2008, the allowance for credit losses
was $3,639 million (1.96 percent of total loans and
2.09 percent of loans excluding covered assets), compared
with an allowance of $2,260 million (1.47 percent of loans)
at December 31, 2007, and $2,256 million (1.57 percent of
loans) at December 31, 2006. The ratio of the allowance for
credit losses to nonperforming loans was 151 percent
(206 percent excluding covered assets) at December 31,
2008, compared with 406 percent and 480 percent at
December 31, 2007 and 2006, respectively. The ratio of the
allowance for credit losses to loan net charge-offs at
December 31, 2008, was 200 percent (201 percent excluding
covered assets), compared with 285 percent and 415 percent
at December 31, 2007 and 2006, respectively. Management
determined the allowance for credit losses was appropriate
at December 31, 2008.
44
U.S. BANCORP
Several factors were taken into consideration in
evaluating the allowance for credit losses at December 31,
2008, including the risk profile of the portfolios, loan net
charge-offs during the period, the level of nonperforming
assets, accruing loans 90 days or more past due, delinquency
ratios and changes in restructured loan balances.
Management also considered the uncertainty related to
certain industry sectors, and the extent of credit exposure to
specific borrowers within the portfolio. In addition,
concentration risks associated with commercial real estate
and the mix of loans, including credit cards, loans originated
through the consumer finance division and residential
mortgages balances, and their relative credit risks were
evaluated. Finally, the Company considered current
economic conditions that might impact the portfolio.
Management determines the allowance that is required for
specific loan categories based on relative risk characteristics
of the loan portfolio. On an ongoing basis, management
evaluates its methods for determining the allowance for each
element of the portfolio and makes enhancements considered
appropriate. Table 17 shows the amount of the allowance
for credit losses by portfolio category.
Regardless of the extent of the Company’s analysis of
customer performance, portfolio trends or risk management
processes, certain incurred 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 additional
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 incurred losses in the portfolio based on
statistical analyses and management judgment. A statistical
analysis attempts to measure the extent of imprecision and
other uncertainty by determining the volatility of losses over
time, across loan categories. Also, management judgmentally
considers loan concentrations, risks associated with specific
industries, the stage of the business cycle, economic conditions
and other qualitative factors. Beginning in 2007, the
Company assigned this element of the allowance to each
portfolio type to better reflect the Company’s risk in the
specific portfolios. In years prior to 2007, this element of the
allowance was separately categorized as “allowance available
for other factors”.
Table 16 SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
(Dollars in Millions)
2008
2007
2006
2005
2004
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,260
Charge-Offs
$2,256
$2,251
$2,269
$2,369
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
282
113
395
34
139
173
236
630
41
185
344
Total retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,200
Covered assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
154
63
217
16
10
26
63
389
23
82
232
726
–
Recoveries
Total charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,009
1,032
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Covered assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
27
26
53
1
–
1
2
65
6
7
56
134
–
190
255
87
342
33
139
172
234
565
35
178
288
Total retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,066
Covered assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions and other changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
1,819
3,096
102
52
28
80
4
–
4
2
69
7
8
70
154
–
240
102
35
137
12
10
22
61
320
16
74
162
572
–
792
792
4
121
51
172
11
1
12
43
256
25
62
193
536
–
763
61
27
88
8
–
8
2
36
11
12
62
121
–
219
60
24
84
3
1
4
41
220
14
50
131
415
–
544
544
5
140
76
216
16
3
19
39
313
38
83
241
675
–
949
95
34
129
10
6
16
3
35
12
15
54
116
–
264
45
42
87
6
(3)
3
36
278
26
68
187
559
–
685
666
1
244
110
354
29
13
42
33
282
49
89
225
645
–
1,074
144
41
185
11
4
15
4
30
10
13
50
103
–
307
100
69
169
18
9
27
29
252
39
76
175
542
–
767
669
(2)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,639
$2,260
$2,256
$2,251
$2,269
Components
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,514
125
Liability for unfunded credit commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,639
$2,058
202
$2,260
$2,022
234
$2,256
$2,041
210
$2,251
$2,080
189
$2,269
Allowance for credit losses as a percentage of
Period-end loans, excluding covered assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming loans, excluding covered assets . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming assets, excluding covered assets . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs, excluding covered assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Period-end loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.09%
206
184
201
1.96%
151
139
200
1.47%
406
328
285
1.47%
406
328
285
1.57%
480
384
415
1.57%
480
384
415
1.65%
414
350
329
1.65%
414
350
329
1.82%
355
303
296
1.82%
355
303
296
U.S. BANCORP
45
Table 17 ELEMENTS OF THE ALLOWANCE FOR CREDIT LOSSES
December 31 (Dollars in Millions)
2008
2007
2006
2005
2004
2008
2007
2006
2005
2004
Allowance Amount
Allowance as a Percent of Loans
Commercial
Commercial . . . . . . . . . . . . . . . . .
Lease financing . . . . . . . . . . . . . .
$ 782
208
$ 860
146
$ 665
90
$ 656
105
$ 664
106
1.57% 1.92% 1.64% 1.73% 1.89%
1.62
3.03
2.34
2.06
2.14
Total commercial
Commercial Real Estate
. . . . . . . . . . .
Commercial mortgages . . . . . . . . .
. . . .
Construction and development
Total commercial real estate . . . .
Residential Mortgage . . . . . . . . . .
Retail
Credit card . . . . . . . . . . . . . . . . . .
Retail leasing . . . . . . . . . . . . . . . .
Home equity and second mortgages. .
Other retail. . . . . . . . . . . . . . . . . .
Total retail . . . . . . . . . . . . . . . .
Covered assets . . . . . . . . . . . . . . .
Total allocated allowance . . . . . .
Available for other factors. . . . . .
990
1,006
755
761
770
1.75
1.97
1.63
1.77
1.92
258
191
449
524
926
49
255
372
1,602
74
3,639
–
150
108
258
131
487
17
114
247
865
–
126
74
200
58
298
15
52
177
542
–
115
53
168
39
284
24
62
188
558
–
131
40
171
33
283
44
88
195
610
–
2,260
–
1,555
701
1,526
725
1,584
685
1.10
1.95
1.35
2.22
6.85
.96
1.33
1.65
2.65
.65
1.96
–
.74
1.19
.88
.58
4.45
.28
.69
1.42
1.70
–
1.47
–
.64
.83
.70
.27
3.44
.22
.33
1.08
1.14
–
1.08
.49
.57
.65
.59
.19
3.98
.33
.41
1.26
1.26
–
1.12
.53
.64
.55
.62
.21
4.29
.61
.59
1.48
1.46
–
1.27
.55
Total allowance . . . . . . . . . . . . . . . . .
$3,639
$2,260
$2,256
$2,251
$2,269
1.96% 1.47% 1.57% 1.65% 1.82%
The allowance recorded for commercial and commercial
real estate loans is based, in part, on a regular review of
individual credit relationships. The Company’s risk rating
process is an integral component of the methodology utilized
to determine these elements of the allowance for credit
losses. An allowance for credit losses is established for pools
of commercial and commercial real estate loans and
unfunded commitments based on the risk ratings assigned.
An analysis of the migration of commercial and commercial
real estate loans and actual loss experience throughout the
business cycle is conducted quarterly to assess the exposure
for credits with similar risk characteristics. In addition to its
risk rating process, the Company separately analyzes the
carrying value of impaired loans to determine whether the
carrying value is less than or equal to the appraised
collateral value or the present value of expected cash flows.
Based on this analysis, an allowance for credit losses may be
specifically established for impaired loans. The allowance
established for commercial and commercial real estate loan
portfolios, including impaired commercial and commercial
real estate loans, was $1,439 million at December 31, 2008,
compared with $1,264 million at December 31, 2007, and
$955 million at December 31, 2006. The increase in the
allowance for commercial and commercial real estate loans
of $175 million at December 31, 2008, compared with
December 31, 2007, reflected the increasing stress within the
portfolios, especially residential homebuilding and related
industry sectors.
The allowance recorded for the residential mortgages
and retail loan portfolios is based on an analysis of product
46
U.S. BANCORP
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 twelve-month estimate of net charge-offs.
The allowance established for residential mortgages was
$524 million at December 31, 2008, compared with
$131 million and $58 million at December 31, 2007 and
2006, respectively. The increase in the allowance for the
residential mortgages portfolio year-over-year was driven by
portfolio growth, rising foreclosures and current economic
conditions. The allowance established for retail loans was
$1,602 million at December 31, 2008, compared with
$865 million and $542 million at December 31, 2007 and
2006, respectively. The increase in the allowance for the
retail portfolio in 2008 reflected foreclosures in the home
equity portfolio, growth in the credit card and other retail
portfolios and the impact of current economic conditions on
customers.
Although the Company determines the amount of each
element of the allowance separately and this process is an
important credit management tool, the entire allowance for
credit losses is available for the entire loan portfolio. The
actual amount of losses incurred can vary significantly from
the estimated amounts.
Residual Value Risk Management The Company manages its
risk to changes in the residual value of leased assets through
disciplined residual valuation setting at the inception of a
lease, diversification of its leased assets, regular residual
asset valuation reviews and monitoring of residual value
gains or losses upon the disposition of assets. Commercial
lease originations are subject to the same well-defined
underwriting standards referred to in the “Credit Risk
Management” section which includes an evaluation of the
residual value risk. Retail lease residual value risk is
mitigated further by originating longer-term vehicle leases
and effective end-of-term marketing of off-lease vehicles.
Prior to 2008, the Company maintained residual value
insurance to reduce the financial risk of potential changes in
vehicle residual values. In 2008, the Company terminated
the residual value insurance and received a negotiated
settlement for insured residual value exposure which was not
material. The Company considered the lack of residual value
insurance in evaluating leased assets for impairment.
Included in the retail leasing portfolio was
approximately $3.2 billion of retail leasing residuals at
December 31, 2008, compared with $3.8 billion at
December 31, 2007. The Company monitors concentrations
of leases by manufacturer and vehicle “make and model.”
As of December 31, 2008, vehicle lease residuals related to
sport utility vehicles were 38.7 percent of the portfolio while
mid-range and upscale vehicle classes represented
approximately 19.7 percent and 18.7 percent, respectively.
At year-end 2008, the largest vehicle-type concentration
represented approximately 6.3 percent of the aggregate
residual value of the vehicles in the portfolio.
Because retail residual valuations tend to be less volatile
for longer-term leases, relative to the estimated residual at
inception of the lease, the Company actively manages lease
origination production to achieve a longer-term portfolio. At
December 31, 2008, the weighted-average origination term
of the portfolio was 47 months, compared with 49 months
at December 31, 2007. During the several years prior to
2008, new vehicle sales volumes experienced strong growth
driven by manufacturer incentives, consumer spending levels
and strong economic conditions. In 2008, sales of new cars
softened due to the overall weakening of the economy.
Current expectations are that sales of new vehicles will
continue to trend downward in 2009. The Company’s
portfolio has experienced deterioration in residual values in
2008 in all categories, most notably sport utility vehicles and
luxury models, as a result of higher fuel prices and a
declining economy. These conditions resulted in lower used
vehicle prices and higher end-of-term average losses. During
2008, the Company recognized residual value impairments
of approximately 7.0 percent of the residual portfolio. In the
fourth quarter of 2008, used vehicle values stabilized
somewhat as fuel prices began to decline. As a result of
current economic conditions, the Company expects residual
value losses will continue at a similar percentage to 2008,
but will decrease overall as the leasing portfolio decreases.
At December 31, 2008, the commercial leasing portfolio
had $690 million of residuals, compared with $660 million
at December 31, 2007. At year-end 2008, lease residuals
related to trucks and other transportation equipment were
30.5 percent of the total residual portfolio. Business and
office equipment represented 17.2 percent of the aggregate
portfolio, while railcars and aircraft were 16.6 percent and
10.0 percent, respectively. No other significant
concentrations of more than 10 percent existed at
December 31, 2008.
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.
U.S. BANCORP
47
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. 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.
Management also provides various operational risk related
reporting to the Risk 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 22 of the Notes to Consolidated Financial
Statements for further discussion on merchant processing.
Business continuation and disaster recovery planning is also
critical to effectively managing operational risks. Each
business unit of the Company is required to develop,
maintain and test these plans at least annually to ensure that
recovery activities, if needed, can support mission critical
functions including technology, networks and data centers
supporting customer applications and business operations.
While the Company believes that it has designed
effective methods to minimize operational risks, there is no
absolute assurance that business disruption or operational
losses would not occur in the event of a disaster. On an
ongoing basis, management makes process changes and
investments to enhance its systems of internal controls and
business continuity and disaster recovery plans.
Interest Rate Risk Management In the banking industry,
changes in interest rates are a significant risk that can
impact earnings, market valuations and safety and soundness
of an entity. To minimize the volatility of net interest income
and the market value of assets and liabilities, the Company
manages its exposure to changes in interest rates through
asset and liability management activities within guidelines
established by its Asset Liability Policy Committee
(“ALPC”) and approved by the Board of Directors. The
ALPC has the responsibility for approving and ensuring
compliance with the ALPC management policies, including
interest rate risk exposure. The Company uses net interest
SENSITIVIT Y OF NET INTEREST INCOME
income simulation analysis and market value of equity
modeling for measuring and analyzing consolidated interest
rate risk.
Net Interest Income Simulation Analysis One of the primary
tools used to measure interest rate risk and the effect of
interest rate changes on net interest income is simulation
analysis. The monthly analysis incorporates substantially all
of the Company’s assets and liabilities and off-balance sheet
instruments, together with forecasted changes in the balance
sheet and assumptions that reflect the current interest rate
environment. Through this simulation, management
estimates the impact on net interest income of a 200 basis
point upward or downward gradual change of market
interest rates over a one-year period. The simulation also
estimates the effect of immediate and sustained parallel
shifts in the yield curve of 50 basis points as well as the
effect of immediate and sustained flattening or steepening of
the yield curve. This simulation includes assumptions about
how the balance sheet is likely to be affected by changes in
loan and deposit growth. Assumptions are made to project
interest rates for new loans and deposits based on historical
analysis, management’s outlook and repricing strategies.
These assumptions are validated on a periodic basis. A
sensitivity analysis is provided for key variables of the
simulation. The results are reviewed by the ALPC monthly
and are used to guide asset/liability management strategies.
The table below summarizes the interest rate risk of net
interest income based on forecasts over the succeeding
12 months. At December 31, 2008, the Company’s overall
interest rate risk position was asset sensitive to changes in
interest rates. 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. The ALPC policy limits the
estimated change in net interest income to 4.0 percent of
forecasted net interest income over the succeeding
12 months. At December 31 2008 and 2007, the Company
was within policy.
Market Value of Equity Modeling The Company also utilizes
the market value of equity as a measurement tool in
managing interest rate sensitivity. The market value of equity
measures the degree to which the market values of the
Company’s assets and liabilities and off-balance sheet
December 31, 2008
December 31, 2007
Down 50
Immediate
Up 50
Immediate
Down 200
Gradual*
Up 200
Gradual
Down 50
Immediate
Up 50
Immediate
Down 200
Gradual
Up 200
Gradual
Net interest income . . . . . . . . .
*
.37%
*
1.05%
.54%
(1.01)%
1.28%
(2.55)%
* Given the current level of interest rates, a downward rate scenario can not be computed.
48
U.S. BANCORP
instruments will change given a change in interest rates. The
ALPC policy limits the change in market value of equity in a
200 basis point parallel rate shock to 15.0 percent of the
market value of equity assuming interest rates at
December 31, 2008. The up 200 basis point scenario
resulted in a 7.6 percent decrease in the market value of
equity at December 31, 2008, compared with a 7.6 percent
decrease at December 31, 2007. The down 200 basis point
scenario resulted in a 2.8 percent decrease in the market
value of equity at December 31, 2008, compared with a
3.5 percent decrease at December 31, 2007. At
December 31, 2008 and 2007, the Company was within
policy.
The valuation analysis is dependent upon certain key
assumptions about the nature of assets and liabilities with
non-contractual maturities. Management estimates the
average life and rate characteristics of asset and liability
accounts based upon historical analysis and management’s
expectation of rate behavior. These assumptions are
validated on a periodic basis. A sensitivity analysis of key
variables of the valuation analysis is provided to the ALPC
monthly and is used to guide asset/liability management
strategies. The Company also uses duration of equity as a
measure of interest rate risk. The duration of equity is a
measure of the net market value sensitivity of the assets,
liabilities and derivative positions of the Company. The
duration of assets was 1.6 years at December 31, 2008,
compared with 1.8 years at December 31, 2007. The
duration of liabilities was 1.7 years at December 31, 2008,
compared with 1.9 years at December 31, 2007. At
December 31, 2008, the duration of equity was 1.2 years,
unchanged from December 31, 2007.
Use of Derivatives to Manage Interest Rate and Other Risks
In the ordinary course of business, the Company enters into
derivative transactions to manage its interest rate,
prepayment, credit, price and foreign currency risks (“asset
and liability management positions”) and to accommodate
the business requirements of its customers (“customer-related
positions”). To manage its interest rate risk, the Company
may enter into interest rate swap agreements and interest
rate options such as caps and floors. Interest rate swaps
involve the exchange of fixed-rate and variable-rate
payments without the exchange of the underlying notional
amount on which the interest payments are calculated.
Interest rate caps protect against rising interest rates while
interest rate floors protect against declining interest rates. In
connection with its mortgage banking operations, the
Company enters into forward commitments to sell mortgage
loans related to fixed-rate mortgage loans held for sale and
fixed-rate mortgage loan commitments. The Company also
acts as a seller and buyer of interest rate contracts and
foreign exchange rate contracts on behalf of customers. The
Company minimizes its market and liquidity risks by taking
similar offsetting positions.
All interest rate derivatives that qualify for hedge
accounting are recorded at fair value as other assets or
liabilities on the balance sheet and are designated as either
“fair value” or “cash flow” hedges. The Company performs
an assessment, both at inception and quarterly thereafter,
when required, to determine whether these derivatives are
highly effective in offsetting changes in the value of the
hedged items. Hedge ineffectiveness for both cash flow and
fair value hedges is recorded in noninterest income. Changes
in the fair value of derivatives designated as fair value
hedges, and changes in the fair value of the hedged items,
are recorded in earnings. Changes in the fair value of
derivatives designated as cash flow hedges are recorded in
other comprehensive income (loss) until income from the
cash flows of the hedged items is realized. Customer-related
interest rate swaps, foreign exchange rate contracts, and all
other derivative contracts that do not qualify for hedge
accounting are recorded at fair value and resulting gains or
losses are recorded in other noninterest income or mortgage
banking revenue. Gains and losses on customer-related
derivative positions, net of gains and losses on related
offsetting positions entered into by the Company, were not
material in 2008.
By their nature, derivative instruments are subject to
market risk. The Company does not utilize derivative
instruments for speculative purposes. Of the Company’s
$55.9 billion of total notional amount of asset and liability
management positions at December 31, 2008, $17.4 billion
was designated as either fair value or cash flow hedges or
net investment hedges of foreign operations. The cash flow
hedge derivative positions are interest rate swaps that hedge
the forecasted cash flows from the underlying variable-rate
debt. The fair value hedges are primarily interest rate swaps
that hedge the change in fair value related to interest rate
changes of underlying fixed-rate debt and subordinated
obligations.
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, and in certain cases, entering into
master netting agreements and interest rate swap risk
participation agreements. These interest rate swap risk
participation agreements transfer the credit risk related to
U.S. BANCORP
49
Table 18 DERIVATIVE POSITIONS
ASSET AND LIABILITY MANAGEMENT POSITIONS
December 31, 2008 (Dollars in Millions)
2009
2010
2011
2012
2013 Thereafter
Total
Maturing
Weighted-
Average
Remaining
Maturity
In Years
Fair
Value
Interest Rate Contracts
Receive fixed/pay floating swaps
Notional amount
Weighted-average
. . . . . . . . . . . . . . . . . . $
–
$
–
$ –
$ –
$–
$2,750 $ 2,750
$
226
51.08
Receive rate . . . . . . . . . . . . . . . . . . .
Pay rate. . . . . . . . . . . . . . . . . . . . . .
–%
–
–%
–
–%
–
–%
–
–% 6.33% 6.33%
–
1.14
1.14
Pay fixed/receive floating swaps
Notional amount
Weighted-average
. . . . . . . . . . . . . . . . . . $ 4,000
$3,575
$ –
$ –
$–
$4,429 $12,004 $(1,049)
3.42
Receive rate . . . . . . . . . . . . . . . . . . .
Pay rate. . . . . . . . . . . . . . . . . . . . . .
1.43% 2.67%
4.49
3.40
–%
–
–%
–
–% 2.95% 2.36%
–
4.42
5.17
Futures and forwards
Buy . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,268
8,671
Sell . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options
Purchased . . . . . . . . . . . . . . . . . . . . . . $ 5,750
3,712
Written . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign Exchange Contract
$
$
Cross-currency swaps
Notional amount
Weighted-average
. . . . . . . . . . . . . . . . . . $
Receive rate . . . . . . . . . . . . . . . . . . .
Pay rate. . . . . . . . . . . . . . . . . . . . . .
Forwards . . . . . . . . . . . . . . . . . . . . . . . . . $
Equity Contracts . . . . . . . . . . . . . . . . . . . . $
Credit Default Swaps . . . . . . . . . . . . . . . . $
–
$
–%
–
878
37
13
$
$
$
CUSTOMER-RELATED POSITIONS
–
–
–
–
–
$ –
–
$ –
–
$ –
–
$ –
–
$
$
$–
–
$–
–
– $20,268
8,671
–
– $ 5,750
3,712
–
$
$
156
(75)
–
20
.08
.12
.07
.10
$ –
$ –
$–
$1,766 $ 1,766
$
122
7.84
.87
–% 4.26% 4.26%
–
$–
$–
$–
.87
878
56
64
– $
– $
– $
$
$
$
–%
–
–
–
18
–%
–
$ –
$19
$13
–%
–
$ –
$ –
$20
Maturing
$
$
$
(29)
(7)
6
.04
1.06
2.38
Weighted-
Average
Remaining
Maturity
In Years
Fair
Value
December 31, 2008 (Dollars in Millions)
2009
2010
2011
2012
2013 Thereafter
Total
Interest Rate Contracts
Receive fixed/pay floating swaps
Notional amount . . . . . . . . . . . . . . . . . . .
$2,775
$4,562
$2,773
$2,210
$3,117
$5,715 $21,152 $ 1,577
4.83
Pay fixed/receive floating swaps
Notional amount . . . . . . . . . . . . . . . . . . .
2,767
4,552
2,773
2,167
3,171
5,731
21,161
(1,556)
4.92
Options
Purchased . . . . . . . . . . . . . . . . . . . . . .
Written . . . . . . . . . . . . . . . . . . . . . . . . .
Risk participation agreements
Purchased . . . . . . . . . . . . . . . . . . . . . .
Written . . . . . . . . . . . . . . . . . . . . . . . . .
607
607
61
331
562
562
126
218
Foreign Exchange Rate Contracts
Forwards, spots and swaps
Buy . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sell . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,517
3,448
$ 168
171
$
Options
Purchased . . . . . . . . . . . . . . . . . . . . . .
Written . . . . . . . . . . . . . . . . . . . . . . . . .
324
324
117
117
514
514
114
147
26
28
61
61
75
75
151
230
6
5
1
1
$
133
133
141
389
3
4
–
–
$
64
64
116
137
1,955
1,955
709
1,452
(51)
51
2
(2)
$
– $ 3,720
3,656
–
$
285
(263)
–
–
503
503
28
(28)
1.92
1.92
4.43
3.33
.37
.37
.81
.81
50
U.S. BANCORP
interest rate swaps from the Company to an unaffiliated
third-party. The Company also provides credit protection to
third-parties with risk participation agreements.
At December 31, 2008, the Company had $650 million
of realized and unrealized losses on derivatives classified as
cash flow hedges recorded in accumulated other
comprehensive income (loss). Unrealized gains and losses are
reflected in earnings when the related cash flows or hedged
transactions occur and offset the related performance of the
hedged items. The estimated amount to be reclassified from
accumulated other comprehensive income (loss) into
earnings during the next 12 months is a loss of
$200 million.
The change in the fair value of all other asset and
liability management derivative positions attributed to hedge
ineffectiveness recorded in noninterest income was not
material for 2008. The impact of adopting SFAS 157 in the
first quarter of 2008 reduced 2008 noninterest income by
$62 million as it required the Company to consider the
principal market and nonperformance risk in determining
the fair value of derivative positions. On an ongoing basis,
the Company considers the risk of nonperformance in its
derivative asset and liability positions. In its assessment of
nonperformance risk, the Company considers its ability to
net derivative positions under master netting agreements, as
well as collateral received or provided under collateral
support agreements.
The Company enters into derivatives to protect its net
investment in certain foreign operations. The Company uses
forward commitments to sell specified amounts of certain
foreign currencies to hedge fluctuations in foreign currency
exchange rates. The net amount of gains or losses included
in the cumulative translation adjustment for 2008 was not
material.
The Company uses forward commitments to sell
residential mortgage loans to economically hedge its interest
rate risk related to residential MLHFS. The Company
commits to sell the loans at specified prices in a future
period, typically within 90 days. The Company is exposed to
interest rate risk during the period between issuing a loan
commitment and the sale of the loan into the secondary
market. In connection with its mortgage banking operations,
the Company held $8.4 billion of forward commitments to
sell mortgage loans and $9.2 billion of unfunded mortgage
loan commitments at December 31, 2008, that were
derivatives in accordance with the provisions of the
Statement of Financial Accounting Standards No. 133,
“Accounting for Derivative Instruments and Hedge
Activities.” The unfunded mortgage loan commitments are
reported at fair value as options in Table 18.
Fair Value Option for Financial Assets and Financial
Liabilities”, and elected to measure certain MLHFS
originated on or after January 1, 2008, at fair value. The
fair value election for MLHFS will reduce certain timing
differences and better match changes in the value of these
mortgage loans with changes in the value of the derivatives
used as economic hedges for these mortgage loans. The
Company also utilizes U.S. Treasury futures, options on
U.S. Treasury futures contracts, interest rate swaps and
forward commitments to buy residential mortgage loans to
economically hedge the change in fair value of its residential
MSRs.
Table 18 summarizes information on the Company’s
derivative positions at December 31, 2008. Refer to Notes 1
and 20 of the Notes to Consolidated Financial Statements
for significant accounting policies and additional
information regarding the Company’s use of derivatives.
Market Risk Management In addition to interest rate risk,
the Company is exposed to other forms of market risk as a
consequence of conducting normal trading activities. These
trading activities principally support the risk management
processes of the Company’s customers including their
management of foreign currency and interest rate risks. The
Company also manages market risk of non-trading business
activities, including its MSRs and loans held-for-sale. Value
at Risk (“VaR”) is a key measure of market risk for the
Company. Theoretically, VaR represents the maximum
amount that the Company has placed at risk of loss, with a
ninety-ninth percentile degree of confidence, to adverse
market movements in the course of its risk taking activities.
VaR modeling of trading activities is subject to certain
limitations. Additionally, it should be recognized that there
are assumptions and estimates associated with VaR
modeling, and actual results could differ from those
assumptions and estimates. The Company mitigates these
uncertainties through regular monitoring of trading activities
by management and other risk management practices,
including stop-loss and position limits related to its trading
activities. Stress-test models are used to provide management
with perspectives on market events that VaR models do not
capture.
The Company establishes market risk limits, subject to
approval by the Company’s Board of Directors. The
Company’s market valuation risk for trading and non-
trading positions, as estimated by the VaR analysis, was
$2 million and $10 million, respectively, at December 31,
2008, compared with $1 million and $15 million,
respectively, at December 31, 2007. The Company’s VaR
limit was $45 million at December 31, 2008.
Effective January 1, 2008, the Company adopted
Statement of Financial Accounting Standards No. 159, “The
Liquidity Risk Management The ALPC establishes policies,
as well as analyzes and manages liquidity, to ensure that
U.S. BANCORP
51
Table 19 DEBT RATINGS
Moody’s
Standard &
Poor’s
Fitch
Ratings
Dominion
Bond
Rating Service
U.S. Bancorp
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior debt and medium-term notes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aa2
Aa3
A1
P-1
U.S. Bank National Association
P-1
Short-term time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aa1
Bank notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aa1/P-1
Aa2
Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P-1
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA
AA-
A+
A-1+
A-1+
AA+
AA+/A-1+
AA
A-1+
F1+
AA-
A+
A+
F1+
R-1 (middle)
AA
AA (low)
R-1 (middle)
F1+
AA
AA-/F1+
A+
F1+
R-1 (high)
AA (high)
AA (high)
AA
R-1 (high)
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.
Unfavorable conditions that have affected the economy
and financial markets since mid-2007, further intensified in
2008, as did a global economic slowdown, resulting in an
overall decrease in the confidence in the markets. This has
led to liquidity pressures on the short-term funding markets
and additional stress on global banking systems and
economies. As a result of these challenging financial market
conditions, liquidity premiums have widened and many
banks have experienced certain liquidity constraints,
substantially increased pricing to retain deposit balances or
utilized the Federal Reserve System discount window to
secure adequate funding. In an effort to restore confidence in
the financial markets and strengthen financial institutions,
the FDIC instituted the Temporary Liquidity Guarantee
Program (“TLGP”) in the fourth quarter of 2008, in which
the Company has opted to participate. The TLGP is aimed
at unlocking credit markets, particularly inter-bank credit
markets, and gives healthy banks access to liquidity in two
ways. First, the FDIC has guaranteed new, senior unsecured
debt issued by a bank, thrift or holding company (“the debt
guarantee program”). Under the debt guarantee program,
new debt will be fully guaranteed by the FDIC until the
shorter of the maturity date or June 30, 2012. The second
part of the program gives unlimited insurance coverage for
noninterest-bearing deposit transaction accounts (“the
transaction account guarantee program”), which frequently
exceed the current maximum FDIC insurance limit of
$250,000. The transaction account guarantee program also
expands the definition of noninterest-bearing accounts to
52
U.S. BANCORP
include interest checking accounts with annual interest rates
of up to .5 percent. The transaction account guarantee
program is in effect through December 31, 2009.
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
deposit funding within its market areas and in domestic and
global capital markets. This has allowed the Company to
experience strong liquidity, as depositors and investors in the
wholesale funding markets seek strong financial institutions.
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, the ALPC reviews
the Company’s ability to meet funding requirements due to
adverse business events. These funding needs are then
matched with specific asset-based sources to ensure sufficient
funds are available. Also, strategic liquidity policies require
diversification of wholesale funding sources to avoid
concentrations in any one market source. Subsidiary
companies are members of various Federal Home Loan
Banks (“FHLB”) that provide a source of funding through
FHLB advances. The Company maintains a Grand Cayman
branch for issuing eurodollar time deposits. The Company
also issues commercial paper through its Canadian branch.
In addition, the Company establishes relationships with
dealers to issue national market retail and institutional
savings certificates and short-term and medium-term bank
notes. The Company’s subsidiary banks also have significant
correspondent banking networks and corporate accounts.
Accordingly, the Company has access to national fed funds,
funding through repurchase agreements and sources of
Table 20 CONTRACTUAL OBLIGATIONS
December 31, 2008 (Dollars in Millions)
Contractual Obligations (a)
Payments Due By Period
One Year
or Less
Over One
Through
Three Years
Over Three
Through
Five Years
Long-term debt (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,455
10
Capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
184
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
108
Purchase obligations . . . . . . . . . . . . . . . . . . . . . . . . . . .
38
Benefit obligations (c) . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,795
$9,454
19
320
104
81
$9,978
$3,961
17
244
51
86
$4,359
Over Five
Years
$14,489
27
337
5
229
$15,087
Total
$38,359
73
1,085
268
434
$40,219
(a) Unrecognized tax positions of $283 million at December 31, 2008, are excluded as the Company cannot make a reasonably reliable estimate of the period of cash settlement with the
respective taxing authority.
(b) In the banking industry, interest-bearing obligations are principally utilized to fund interest-bearing assets. As such, interest charges on related contractual obligations were excluded from
reported amounts as the potential cash outflows would have corresponding cash inflows from interest-bearing assets.
(c) Amounts only include obligations related to the unfunded non-qualified pension plans and post-retirement medical plan.
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.
At December 31, 2008, the credit ratings outlook for the
Company was considered “Positive” by Fitch Ratings and
“Stable” by Standard & Poor’s Ratings Services, Moody’s
Investors Service and Dominion Bond Ratings Service. Table
19 details the rating agencies’ most recent assessments.
The parent company’s routine funding requirements
consist primarily of operating expenses, dividends paid to
shareholders, debt service, repurchases of common stock and
funds used for acquisitions. The parent company obtains
funding to meet its obligations from dividends collected
from its subsidiaries and the issuance of debt securities.
Under United States Securities and Exchange
Commission rules, the parent company is classified as a
“well-known seasoned issuer,” which allows it to file a
registration statement that does not have a limit on issuance
capacity. “Well-known seasoned issuers” generally include
those companies with outstanding common securities with a
market value of at least $700 million held by non-affiliated
parties or those companies that have issued at least
$1 billion in aggregate principal amount of non-convertible
securities, other than common equity, in the last three years.
However, the parent company’s ability to issue debt and
other securities under a registration statement filed with the
United States Securities and Exchange Commission under
these rules is limited by the debt issuance authority granted
by the Company’s Board of Directors and/or the ALPC
policy.
At December 31, 2008, parent company long-term debt
outstanding was $10.8 billion, compared with $10.7 billion
at December 31, 2007. Long-term debt activity in 2008
included $3.8 billion of medium-term note issuances, offset
by $3.3 billion of convertible senior debenture payments and
$.5 billion of medium-term note maturities during 2008.
Total parent company debt scheduled to mature in 2009 is
$1.0 billion. These debt obligations may be met through
medium-term note and capital security issuances and
dividends from subsidiaries, as well as from parent company
cash and cash equivalents.
Federal banking laws regulate the amount of dividends
that may be paid by banking subsidiaries without prior
approval. The amount of dividends available to the parent
company from its banking subsidiaries after meeting the
regulatory capital requirements for well-capitalized banks
was approximately $1.3 billion at December 31, 2008. For
further information, see Note 23 of the Notes to
Consolidated Financial Statements.
Off-Balance Sheet Arrangements Off-balance sheet
arrangements include any contractual arrangement to which
an unconsolidated entity is a party, under which the
Company has an obligation to provide credit or liquidity
enhancements or market risk support. Off-balance sheet
arrangements include certain defined guarantees, asset
securitization trusts and conduits. Off-balance sheet
arrangements also include any obligation under a variable
interest held by an unconsolidated entity that provides
financing, liquidity, credit enhancement or market risk
support.
In the ordinary course of business, the Company enters
into an array of commitments to extend credit, letters of
credit and various forms of guarantees that may be
considered off-balance sheet arrangements. The nature and
extent of these arrangements are provided in Note 22 of the
Notes to Consolidated Financial Statements.
Asset securitizations and conduits may represent a
source of funding for the Company through off-balance
sheet structures. Credit, liquidity, operational and legal
structural risks exist due to the nature and complexity of
asset securitizations and other off-balance sheet structures.
The ALPC regularly monitors the performance of each off-
U.S. BANCORP
53
Table 21 REGULATORY CAPITAL RATIOS
At December 31 (Dollars in Millions)
2008
2007
U.S. Bancorp
Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,426
As a percent of risk-weighted assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As a percent of adjusted quarterly average assets (leverage ratio) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.6%
9.8%
$17,539
8.3%
7.9%
Total risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,897
$25,925
As a percent of risk-weighted assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14.3%
12.2%
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
6.6%
10.5
6.1
14.3%
17.8
12.6
6.5%
10.4
6.2
13.3%
16.8
11.7
Minimum
Well-
Capitalized
Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.0%
Total risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.0
4.0
6.0%
10.0
5.0
balance sheet structure in an effort to minimize these risks
and ensure compliance with the requirements of the
Company believes there is sufficient collateral to repay all of
the liquidity facility advances.
structures. The Company uses its credit risk management
processes to evaluate the credit quality of underlying assets
and regularly forecasts cash flows to evaluate any potential
impairment of retained interests. Also, regulatory guidelines
require consideration of asset securitizations in the
determination of risk-based capital ratios. The Company
does not rely significantly on off-balance sheet arrangements
for liquidity or capital resources.
The Company sponsors an off-balance sheet conduit to
which it transferred high-grade investment securities, initially
funded by the issuance of commercial paper. These
investment securities include primarily (i) private label asset-
backed securities, which are guaranteed by third-party
insurers, and (ii) collateralized mortgage obligations. The
Capital Management The Company is committed to
managing capital for maximum shareholder benefit and
maintaining strong protection for depositors and creditors.
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.
At December 31, 2008, the Company’s tangible
common equity divided by tangible assets was 3.2 percent
(4.5 percent excluding accumulated other comprehensive
income (loss)).
conduit held assets of $.8 billion at December 31, 2008, and
On November 14, 2008, the Company issued
$1.2 billion at December 31, 2007. In March 2008, the
conduit ceased issuing commercial paper and began to draw
upon a Company-provided liquidity facility to replace
outstanding commercial paper as it matured. The draws
upon the liquidity facility resulted in the conduit becoming a
non-qualifying special purpose entity. However, the
Company is not the primary beneficiary and, therefore, does
not consolidate the conduit. At December 31, 2008, the
amount advanced to the conduit under the liquidity facility
was $.9 billion, which is recorded on the Company’s balance
sheet in commercial loans. Proceeds from the conduit’s
investment securities, including any guarantee payments, will
be used to repay draws on the liquidity facility. The
6.6 million shares of cumulative perpetual preferred stock
and related warrants to the United States Treasury under the
Capital Purchase Program of the Emergency Economic
Stabilization Act of 2008, for which it received total
proceeds of $6.6 billion in cash. Under the program, the
cumulative perpetual preferred stock’s dividend rate is
5 percent per annum for five years, increasing to 9 percent
per annum, thereafter, if the cumulative perpetual preferred
shares are not redeemed by the Company. In addition to the
cumulative perpetual preferred stock, the United States
Treasury received warrants entitling it to purchase, during
the next ten years, approximately 33 million shares of
common stock of the Company, at a price per common
share of $30.29. Participation in this program restricts the
54
U.S. BANCORP
Company’s ability to increase its quarterly dividend and
repurchase its common stock for up to three years or for as
long as the preferred stock issued under the program
remains outstanding, if shorter. The American Recovery and
Reinvestment Act of 2009, requires the United States
Treasury, subject to consultation with appropriate banking
regulators, to permit participants in the Capital Purchase
Program to repay any amounts previously received without
regard to whether the recipient has replaced such funds from
any other sources or to any waiting period. Refer to Note 15
in the Notes to Consolidated Financial Statements for
further information.
During 2008 and 2007, the Company repurchased
2 million and 58 million shares, respectively, of its common
stock under various authorizations approved by its Board of
Directors. The average price paid for the shares repurchased
in 2008 was $33.59 per share, compared with $34.84 per
share in 2007. As of December 31, 2008, the Company had
approximately 20 million shares that may yet be purchased
under the current Board of Director approved authorization,
in connection with the administration of its employee benefit
plans in the ordinary course of business, to the extent
permitted under the Capital Purchase Program of the
Emergency Economic Stabilization Act of 2008. For a
complete analysis of activities impacting shareholders’ equity
and capital management programs, refer to Note 15 of the
Notes to Consolidated Financial Statements.
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. The
most recent notification from the Office of the Comptroller
of the Currency categorized each of the covered banks as
“well-capitalized”, under the FDIC Improvement Act
prompt corrective action provisions applicable to all banks.
There are no conditions or events since that notification that
management believes have changed the risk-based category
of any covered subsidiary banks.
As an approved mortgage seller and servicer, U.S. Bank
National Association, through its mortgage banking division,
is required to maintain various levels of shareholders’ equity,
as specified by various agencies, including the United States
Department of Housing and Urban Development,
Government National Mortgage Association, Federal Home
Loan Mortgage Corporation and the Federal National
Mortgage Association. At December 31, 2008, U.S. Bank
National Association met these requirements.
Table 21 provides a summary of capital ratios as of
December 31, 2008 and 2007, including Tier 1 and total
risk-based capital ratios, as defined by the regulatory
agencies.
FOURT H QUART ER SUMMA RY
The Company reported net income of $330 million for the
fourth quarter of 2008, or $.15 per diluted common share,
compared with $942 million, or $.53 per diluted common
share, for the fourth quarter of 2007. Return on average
assets and return on average common equity were
.51 percent and 5.3 percent, respectively, for the fourth
quarter of 2008, compared with returns of 1.63 percent and
18.3 percent, respectively, for the fourth quarter of 2007.
Challenging market conditions continued and had an impact
on the fourth quarter of 2008 results. Significant items
reflected in the fourth quarter of 2008 results included
$253 million of net securities losses, primarily on structured
investment-related securities. In addition, the Company
increased the allowance for credit losses by recording
$635 million of provision for credit losses expense in excess
of net charge-offs. The Company’s results for the fourth
quarter of 2007 were also impacted by significant items,
including a $215 million Visa Charge and $107 million of
valuation losses related to structured investment securities.
Total net revenue, on a taxable-equivalent basis for the
fourth quarter of 2008, was $50 million (1.4 percent) higher
than the fourth quarter of 2007, reflecting a 22.6 percent
increase in net interest income, offset by a 19.2 percent
decrease in noninterest income. The increase in net interest
income from a year ago, was driven by growth in average
earning assets and an increase in the net interest margin.
Noninterest income declined from a year ago, as payment
services, trust and investment management fees and deposit
service charges were affected by the impact of the slowing
economy on equity valuations and customer behavior. In
addition, noninterest income was adversely impacted by
securities impairments, market-related valuation losses and
retail lease residual losses.
Fourth quarter net interest income, on a taxable-
equivalent basis was $2,161 million, compared with
$1,763 million in the fourth quarter of 2007. Average
earning assets for the period increased over the fourth
quarter of 2007 by $25.7 billion (12.8 percent, 9.4 percent
excluding acquisitions), primarily driven by a $25.8 billion
(17.0 percent) increase in average loans. The net interest
margin in the fourth quarter of 2008 was 3.81 percent,
compared with 3.51 percent in the fourth quarter of 2007,
reflecting growth in higher-spread loans, asset/liability re-
pricing in a declining interest rate environment and
U.S. BANCORP
55
wholesale funding mix during a period of significant
volatility in short-term funding markets.
Noninterest income in the fourth quarter of 2008 was
$1,463 million, compared with $1,811 million in the same
period of 2007. Noninterest income declined $348 million
(19.2 percent) from the fourth quarter of 2007, as fee-based
revenue in a number of revenue categories was lower as
deteriorating economic conditions adversely impacted
consumer and business behavior. In addition, total
noninterest income was unfavorably impacted by
impairment charges related to structured investment
securities and other market valuation losses and higher retail
lease residual losses from a year ago, partially offset by a
$59 million Visa Gain in the fourth quarter of 2008. Credit
and debit card revenue, corporate payment products revenue
and merchant processing services revenue were lower in the
fourth quarter of 2008 than the fourth quarter of 2007 by
$29 million (10.2 percent), $12 million (7.2 percent) and
$10 million (3.6 percent), respectively. All categories were
impacted by lower transaction volumes compared with the
prior year’s quarter. Trust and investment management fees
declined $44 million (12.8 percent) primarily due to the
adverse impact of equity market conditions. Deposit service
charges decreased $17 million (6.1 percent) year-over-year,
primarily due to lower overdraft fees as overdraft
transactions declined. Mortgage banking revenue decreased
Table 22 FOURTH QUARTER RESULTS
(Dollars and Shares in Millions, Except Per Share Data)
$25 million (52.1 percent) due to an unfavorable net change
in the valuation of MSRs and related economic hedging
activities, partially offset by increases in mortgage servicing
income and production revenue. Net securities gains (losses)
were lower than a year ago by $257 million due to the
impact of impairment charges primarily related to structured
investment securities. ATM processing services increased by
$11 million (13.1 percent) due to growth in transaction
volumes and business expansion. Treasury Management fees
increased $11 million (9.4 percent) due primarily to the
favorable impact of declining rates on customer
compensating balances. Commercial products revenue
increased $10 million (8.3 percent) year-over-year due to
higher foreign exchange revenue, letters of credit and other
commercial loan fees. Other income increased $15 million
(32.6 percent) year-over-year, as the Visa Gain and the net
change in market valuation losses were partially offset by
the adverse impact of higher retail lease residual losses and
lower equity investment revenue.
Noninterest expense was $1,960 million in the fourth
quarter of 2008, a decrease of $8 million (.4 percent) from
the fourth quarter of 2007. Noninterest expense was
relatively flat year-over-year as higher costs associated with
business initiatives designed to expand the Company’s
geographical presence and strengthen customer relationships,
including acquisitions and investments in relationship
Three Months Ended
December 31,
2008
2007
Condensed Income Statement
Net interest income (taxable-equivalent basis) (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,161
1,716
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(253)
Securities gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxable-equivalent adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,624
1,960
1,267
397
40
27
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 330
Net income applicable to common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 260
Per Common Share
Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .15
.15
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.425
Dividends declared per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,754
Average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average diluted common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,764
Financial Ratios
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin (taxable-equivalent basis) (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.51%
5.3
3.81
50.6
(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
$1,763
1,807
4
3,574
1,968
225
1,381
22
417
$ 942
$ 927
$ .54
.53
.425
1,726
1,746
1.63%
18.3
3.51
55.1
56
U.S. BANCORP
managers, branch initiatives and Payment Services’
businesses, were offset by a $215 million Visa Charge
recognized in the fourth quarter of 2007. Compensation
expense increased $80 million (11.6 percent) over the same
period of 2007 due to costs for acquired businesses, growth
in ongoing bank operations and other initiatives, and the
adoption of SFAS 157 in 2008. Net occupancy and
equipment expense increased $14 million (7.4 percent) from
the fourth quarter of 2007, primarily due to acquisitions, as
well as branch-based and other business expansion
initiatives. Marketing and business development expense
increased $21 million (30.4 percent) year-over-year due to
the timing of Consumer Banking and retail payment product
marketing programs and a national advertising campaign.
Technology and communications expense increased
$8 million (5.4 percent) year-over-year, primarily due to
increased processing volumes and business expansion. These
increases were offset by a decrease in other expense of
$142 million (27.5 percent), due primarily to the
$215 million Visa Charge recognized in the fourth quarter of
2007, partially offset by increased costs for other real estate
owned, tax-advantaged projects, acquisitions and litigation.
The provision for credit losses for the fourth quarter of
2008 was $1,267 million, or an increase of $1,042 million
over the same period of 2007. The provision for credit losses
exceeded net charge-offs by $635 million in the fourth
quarter of 2008. The increase in the provision for credit
losses from a year ago reflected continuing stress in the
residential real estate markets, including homebuilding and
related supplier industries, driven by declining home prices
in most geographic regions. It also reflected deteriorating
economic conditions and the corresponding impact on the
commercial and consumer loan portfolios. Net charge-offs in
the fourth quarter of 2008 were $632 million, compared
with net charge-offs of $225 million during the fourth
quarter of 2007.
The provision for income taxes for the fourth quarter of
2008 decreased to an effective tax rate of 7.6 percent from
an effective tax rate of 30.7 percent in the fourth quarter of
2007. The decrease in the effective rate for the fourth
quarter of 2008, compared with the same period of the prior
year, reflected the marginal impact of lower pre-tax income,
higher tax-exempt income from investment securities and
insurance products, and incremental tax credits from
affordable housing and other tax-advantaged investments.
LINE OF BUSINESS FINANCIAL REVIEW
The Company’s major lines of business are Wholesale
Banking, Consumer Banking, Wealth Management &
Securities Services, Payment Services, and Treasury and
Corporate Support. These operating segments are
components of the Company about which financial
information is available and is evaluated regularly in
deciding how to allocate resources and assess performance.
Basis for Financial Presentation Business line results are
derived from the Company’s business unit profitability
reporting systems by specifically attributing managed
balance sheet assets, deposits and other liabilities and their
related income or expense. Goodwill and other intangible
assets are assigned to the lines of business based on the mix
of business of the acquired entity. Within the Company,
capital levels are evaluated and managed centrally; however,
capital is allocated to the operating segments to support
evaluation of business performance. Business lines are
allocated capital on a risk-adjusted basis considering
economic and regulatory capital requirements. Generally, the
determination of the amount of capital allocated to each
business line includes credit and operational capital
allocations following a Basel II regulatory framework
adjusted for regulatory Tier 1 leverage requirements. Interest
income and expense is determined based on the assets and
liabilities managed by the business line. Because funding and
asset liability management is a central function, funds
transfer-pricing methodologies are utilized to allocate a cost
of funds used or credit for funds provided to all business line
assets and liabilities, respectively, using a matched funding
concept. Also, each business unit is allocated the taxable-
equivalent benefit of tax-exempt products. The residual
effect on net interest income of asset/liability management
activities is included in Treasury and Corporate Support.
Noninterest income and expenses directly managed by each
business line, including fees, service charges, salaries and
benefits, and other direct revenues and costs are accounted
for within each segment’s financial results in a manner
similar to the consolidated financial statements. Occupancy
costs are allocated based on utilization of facilities by the
lines of business. Generally, operating losses are charged to
the line of business when the loss event is realized in a
manner similar to a loan charge-off. Noninterest expenses
incurred by centrally managed operations or business lines
that directly support another business line’s operations are
charged to the applicable business line based on its
utilization of those services primarily measured by the
volume of customer activities, number of employees or other
relevant factors. These allocated expenses are reported as net
shared services expense within noninterest expense. Certain
activities that do not directly support the operations of the
lines of business or for which the lines of business are not
considered financially accountable in evaluating their
performance are not charged to the lines of business. The
income or expenses associated with these corporate activities
is reported within the Treasury and Corporate Support line
of business. The provision for credit losses within the
Wholesale Banking, Consumer Banking, Wealth
U.S. BANCORP
57
Management & Securities Services and Payment Services
lines of business is based on net charge-offs, while Treasury
and Corporate Support reflects the residual component of
the Company’s total consolidated provision for credit losses
determined in accordance with accounting principles
generally accepted in the United States. Income taxes are
assessed to each line of business at a standard tax rate with
the residual tax expense or benefit to arrive at the
consolidated effective tax rate included in Treasury and
Corporate Support.
Designations, assignments and allocations change from
time to time as management systems are enhanced, methods
of evaluating performance or product lines change or
business segments are realigned to better respond to the
Company’s diverse customer base. During 2008, certain
organization and methodology changes were made and,
accordingly, 2007 results were restated and presented on a
comparable basis. Due to organizational and methodology
changes, the Company’s basis of financial presentation
differed in 2006. The presentation of comparative business
line results for 2006 is not practical and has not been
provided.
Wholesale Banking Wholesale Banking offers lending,
equipment finance and small-ticket leasing, depository,
treasury management, capital markets, foreign exchange,
international trade services and other financial services to
middle market, large corporate, commercial real estate and
public sector clients. Wholesale Banking contributed
Table 23 LINE OF BUSINESS FINANCIAL PERFORMANCE
Year Ended December 31 (Dollars in Millions)
Condensed Income Statement
Wholesale
Banking
Consumer
Banking
2008
2007
Percent
Change
2008
2007
Percent
Change
Net interest income (taxable-equivalent basis) . . . . . . . . . . . . . . . . . . . . $ 2,114
$ 1,846
14.5% $ 3,918
$ 3,912
.2%
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities gains (losses), net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
885
(22)
2,977
1,038
21
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,059
882
1
2,729
942
15
957
Income before provision and income taxes . . . . . . . . . . . . . . . . . .
1,918
1,772
Provision for credit losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
317
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,601
Income taxes and taxable-equivalent adjustment . . . . . . . . . . . . . . . . . .
584
51
1,721
627
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,017
$ 1,094
.3
*
9.1
10.2
40.0
10.7
8.2
*
(7.0)
(6.9)
(7.0)
2,007
2,196
(8.6)
–
5,925
3,181
63
3,244
2,681
790
1,891
688
2
*
6,110
2,836
68
(3.0)
12.2
(7.4)
2,904
11.7
3,206
(16.4)
327
2,879
1,049
*
(34.3)
(34.4)
$ 1,203
$ 1,830
(34.3)
Average Balance Sheet
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,257
$35,018
15.0% $ 6,689
$ 6,520
2.6%
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,231
16,769
Residential mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
89
76
74
67
Total loans, excluding covered assets . . . . . . . . . . . . . . . . . . . . . . .
59,653
51,928
Covered assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
–
–
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59,653
51,928
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,425
1,329
Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
66
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65,049
Noninterest-bearing deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,138
Interest checking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,265
6,614
38
57,074
10,561
5,318
5,546
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,515
11,352
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,532
32,777
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,616
5,790
14.7
20.3
13.4
14.9
–
14.9
7.2
73.7
14.0
5.5
55.4
19.3
36.7
26.7
14.3
11,253
22,718
40,405
11,137
21,585
36,073
81,065
75,315
1,308
–
82,373
75,315
2,485
1,718
93,400
12,025
18,157
20,352
18,886
2,416
1,688
86,565
12,070
17,826
19,454
20,100
69,420
69,450
1.0
5.2
12.0
7.6
*
9.4
2.9
1.8
7.9
(.4)
1.9
4.6
(6.0)
–
7,563
6,714
12.6
* Not meaningful
58
U.S. BANCORP
$1,017 million of the Company’s net income in 2008, or a
decrease of $77 million (7.0 percent), compared with 2007.
The decrease was primarily driven by an increase in the
provision for credit losses and higher noninterest expense,
partially offset by higher total net revenue.
Total net revenue increased $248 million (9.1 percent)
in 2008, compared with 2007. Net interest income, on a
taxable-equivalent basis, increased $268 million
(14.5 percent), driven by growth in earning assets and
deposits, partially offset by declining margins in the loan
portfolio and a decrease in the margin benefit of deposits.
Noninterest income decreased $20 million (2.3 percent)
primarily due to market-related valuation losses and lower
earnings from equity investments, including an investment in
a commercial real estate business, partially offset by higher
commercial lending-related and capital markets fees and
increases in treasury management and foreign exchange
revenue.
Total noninterest expense increased $102 million
(10.7 percent) in 2008, compared with 2007. The increase
was primarily due to higher compensation and employee
benefits expenses attributable to the expansion of the
business line’s national corporate banking presence,
investments to enhance customer relationship management,
and the Mellon 1st Business Bank acquisition. The provision
for credit losses increased $266 million in 2008, compared
Wealth Management &
Securities Services
Payment
Services
Treasury and
Corporate Support
Consolidated
Company
2008
2007
Percent
Change
2008
2007
Percent
Change
2008
2007
Percent
Change
2008
2007
Percent
Change
$
497
$
485
2.5% $ 1,034
$
764
35.3% $
1,398
1,369
—
–
1,895
1,854
955
77
914
92
1,032
1,006
863
9
854
313
848
4
844
307
$
541
$
537
2.1
–
2.2
4.5
(16.3)
2.6
1.8
*
1.2
2.0
.7
2,931
2,774
–
3,965
1,399
194
1,593
2,372
696
1,676
608
–
3,538
1,255
201
1,456
2,082
404
1,678
610
$ 1,068
$ 1,068
5.7
–
12.1
11.5
(3.5)
9.4
13.9
72.3
(.1)
(.3)
–
303
568
(956)
(85)
486
–
486
(571)
1,284
(1,855)
(972)
$ (243)
*% $ 7,866
$ 6,764
16.3%
60
12
(171)
663
–
*
*
50.3
(26.7)
–
663
(26.7)
(834)
31.5
6
(840)
(635)
*
*
(53.1)
7,789
(978)
7,281
15
14,677
14,060
7,059
355
7,414
7,263
3,096
4,167
1,221
6,610
376
6,986
7,074
792
6,282
1,958
7.0
*
4.4
6.8
(5.6)
6.1
2.7
*
(33.7)
(37.6)
$ (883)
$ (205)
*
$ 2,946
$ 4,324
(31.9)
$ 1,810
$ 1,959
(7.6)% $ 4,617
$ 4,179
10.5% $
934
$
136
*% $ 54,307
$ 47,812
13.6%
589
447
2,082
4,928
–
4,928
1,563
327
7,390
4,770
4,673
5,178
4,302
637
422
2,064
5,082
–
5,082
1,554
7,619
4,264
2,958
5,564
3,686
18,923
16,472
2,386
2,445
(7.5)
5.9
.9
–
–
–
–
12,972
10,616
(3.0)
17,589
14,795
–
(3.0)
.6
(3.0)
11.9
58.0
(6.9)
16.7
14.9
(2.4)
–
–
17,589
14,795
2,351
997
2,293
1,041
22,452
19,833
498
39
19
1
378
12
21
4
557
4,923
415
4,592
414
(21.0)
–
–
22.2
18.9
–
18.9
2.5
(4.2)
13.2
31.7
*
(9.5)
(75.0)
34.2
7.2
37
3
35
1,009
–
1,009
–
1
49
4
39
228
–
228
8
12
56,109
52,530
308
3
66
5,375
5,752
1,082
91
3
53
1,814
1,961
1,456
(24.5)
(25.0)
(10.3)
*
–
*
*
(91.7)
6.8
*
–
24.5
*
*
31,110
23,257
55,570
28,592
22,085
48,859
164,244
147,348
1,308
–
165,552
147,348
7,824
3,109
7,600
3,193
244,400
223,621
28,739
31,137
32,229
44,079
27,364
26,117
30,638
36,956
136,184
121,075
(25.7)
22,570
20,997
8.8
5.3
13.7
11.5
*
12.4
2.9
(2.6)
9.3
5.0
19.2
5.2
19.3
12.5
7.5
U.S. BANCORP
59
with 2007. The unfavorable change was primarily due to
continued credit deterioration in the homebuilding and
commercial home supplier industries. Nonperforming assets
were $1,250 million at December 31, 2008, compared with
$336 million at December 31, 2007. Nonperforming assets
as a percentage of period-end loans were 1.94 percent at
December 31, 2008, compared with .60 percent at
December 31, 2007. Refer to the “Corporate Risk Profile”
section for further information on factors impacting the
credit quality of the loan portfolios.
Consumer Banking Consumer Banking delivers products and
services through banking offices, telephone servicing and
sales, on-line services, direct mail and ATM processing. It
encompasses community banking, metropolitan banking, in-
store banking, small business banking, consumer lending,
mortgage banking, consumer finance, workplace banking,
student banking and 24-hour banking. Consumer Banking
contributed $1,203 million of the Company’s net income in
2008, or a decrease of $627 million (34.3 percent),
compared with 2007. Within Consumer Banking, the retail
banking division contributed $1,090 million of the total net
income in 2008, or a decrease of 36.8 percent, compared
with the prior year. Mortgage banking contributed
$113 million of the business line’s net income in 2008, or an
increase of 6.6 percent, compared with the prior year.
Total net revenue decreased $185 million (3.0 percent)
in 2008, compared with 2007. Net interest income, on a
taxable-equivalent basis, increased $6 million (.2 percent) in
2008, compared with 2007, as increases in average loan
balances were offset by slightly lower deposit balances and a
decline in the margin benefit of deposits, given the declining
interest rate environment. The increase in average loan
balances reflected core growth in most loan categories, with
the largest increases in residential mortgages and retail loans.
In addition, average loan balances increased due to the
Downey and PFF acquisitions, reflected primarily in covered
assets. Residential mortgages were higher due to an increase
in mortgage banking activity. The favorable change in retail
loans was principally driven by an increase in installment
products, home equity lines and federally guaranteed student
loan balances due to both the transfer of balances from
loans held for sale and a portfolio purchase. The year-over-
year decrease in average deposits primarily reflected a
reduction in time deposits, partially offset by higher interest
checking and savings products. Average time deposit
balances declined $1.2 billion (6.0 percent) in 2008,
compared with 2007, and reflected the Company’s funding
and pricing decisions and competition for these deposits by
other financial institutions that have more limited access to
the wholesale funding sources given the current market
environment. Fee-based noninterest income decreased
$191 million (8.7 percent) in 2008, compared with 2007.
60
U.S. BANCORP
The decline in fee-based revenue was driven by lower retail
lease revenue, related to higher retail lease residual losses,
partially offset by growth in revenue from ATM processing
services, mortgage banking revenue, and higher deposit
service charges.
Total noninterest expense increased $340 million
(11.7 percent) in 2008, compared with 2007. The increase
included the net addition, including the impact of recent
acquisitions, of 141 in-store branches, 126 traditional
branches and 6 on-site branches at December 31, 2008,
compared with December 31, 2007. In addition, the increase
was primarily attributable to higher compensation and
employee benefit expense, which reflected business
investments in customer service and various promotional
activities, including further deployment of the PowerBank
initiative, the adoption of SFAS 157 and higher credit-related
costs associated with other real estate owned and
foreclosures.
The provision for credit losses increased $463 million in
2008, compared with 2007. The increase was attributable to
higher net charge-offs, reflecting portfolio growth and credit
deterioration in residential mortgages, home equity and
other installment and consumer loan portfolios from a year
ago. As a percentage of average loans outstanding, net
charge-offs were .96 percent in 2008, compared with
.43 percent in 2007. Commercial and commercial real estate
loan net charge-offs increased $57 million in 2008,
compared with 2007. Retail loan and residential mortgage
net charge-offs increased $406 million in 2008, compared
with 2007. In addition, there were $5 million of net charge-
offs in 2008 related to covered assets. Nonperforming assets
were $1,277 million at December 31, 2008, compared with
$326 million at December 31, 2007. Nonperforming assets
as a percentage of period-end loans were 1.38 percent at
December 31, 2008, compared with .44 percent at
December 31, 2007. Refer to the “Corporate Risk Profile”
section for further information on factors impacting the
credit quality of the loan portfolios.
Wealth Management & Securities Services Wealth
Management & Securities Services provides trust, private
banking, financial advisory, investment management, retail
brokerage services, insurance, custody and mutual fund
servicing through five businesses: Wealth Management,
Corporate Trust, FAF Advisors, Institutional Trust &
Custody and Fund Services. Wealth Management &
Securities Services contributed $541 million of the
Company’s net income in 2008, an increase of $4 million
(.7 percent), compared with 2007.
Total net revenue increased $41 million (2.2 percent) in
2008, compared with 2007. Net interest income, on a
taxable-equivalent basis, increased $12 million (2.5 percent)
in 2008, compared with 2007. The increase in net interest
income was primarily due to deposit growth, partially offset
by the reduction in the margin benefit of deposits.
Noninterest income increased $29 million (2.1 percent) in
2008, compared with 2007, primarily driven by the
favorable impact of a $107 million market valuation loss
recorded in 2007 and core account growth, partially offset
by the impact of unfavorable equity market conditions
compared with a year ago.
Total noninterest expense increased $26 million
(2.6 percent) in 2008, compared with 2007. The increase in
noninterest expense was primarily due to higher
compensation and employee benefits expenses and legal-
related costs, partially offset by lower other intangibles
expense.
Payment Services Payment Services includes consumer and
business credit cards, stored-value cards, debit cards,
corporate and purchasing card services, consumer lines of
credit and merchant processing. Payment Services’ offerings
are highly inter-related with banking products and services
of the other lines of business and rely on access to the bank
subsidiary’s settlement network, lower cost funding available
to the Company, cross-selling opportunities and operating
efficiencies. Payment Services contributed $1,068 million of
the Company’s net income in 2008, unchanged from 2007.
Growth in total net revenue, driven by loan growth and
higher transaction volumes, was partially offset by an
increase in total noninterest expense and a higher provision
for credit losses.
Total net revenue increased $427 million (12.1 percent)
in 2008, compared with 2007. Net interest income, on a
taxable-equivalent basis, increased $270 million
(35.3 percent) in 2008, compared with 2007, primarily due
to strong growth in credit card balances and the timing of
asset re-pricing in a declining rate environment. Noninterest
income increased $157 million (5.7 percent) in 2008,
compared with 2007, as increases in fee-based revenue were
driven by account growth, higher transaction volumes and
business expansion initiatives.
Total noninterest expense increased $137 million
(9.4 percent) in 2008, compared with 2007, due primarily to
new business initiatives, including costs associated with
transaction processing and acquisitions.
The provision for credit losses increased $292 million
(72.3 percent) in 2008, compared with 2007, due to higher
net charge-offs, which reflected average retail credit card
portfolio growth, higher delinquency rates and changing
economic conditions from a year ago. As a percentage of
average loans outstanding, net charge-offs were 3.96 percent
in 2008, compared with 2.73 percent in 2007.
Treasury and Corporate Support Treasury and Corporate
Support includes the Company’s investment portfolios,
funding, capital management, asset securitization, interest
rate risk management, the net effect of transfer pricing
related to average balances and the residual aggregate of
those expenses associated with corporate activities that are
managed on a consolidated basis. Treasury and Corporate
Support recorded a net loss of $883 million in 2008,
compared with a net loss of $205 million the prior year.
Total net revenue increased $86 million in 2008,
compared with 2007. Net interest income, on a taxable-
equivalent basis, increased $546 million in 2008, compared
with 2007, reflecting the impact of the declining rate
environment, wholesale funding decisions and the
Company’s asset/liability position. Noninterest income
decreased $460 million in 2008, compared with 2007,
primarily due to the impairment charges for structured
investment securities, perpetual preferred stock (including
the stock of GSEs), and certain non-agency mortgage backed
securities, as well as the transition impact of adopting
SFAS 157 during the first quarter of 2008, partially offset by
the impact of the $551 million of Visa Gains recognized in
2008.
Total noninterest expense decreased $177 million
(26.7 percent) in 2008, compared with 2007, primarily due
to the $330 million Visa Charge recognized in 2007, offset
by higher compensation and employee benefits expense,
higher litigation costs, incremental costs associated with
investments in tax-advantaged projects and a charitable
contribution made to the U.S. Bancorp Foundation.
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 increased $1,278 million in
2008, compared with the prior year, driven by incremental
provision expense recorded in 2008, reflecting deterioration
in the credit quality within the loan portfolios related to
stress in the residential real estate markets, including
homebuilding and related supplier industries, and the impact
of economic conditions on the loan portfolios. Refer to the
“Corporate Risk Profile” section for further information on
the provision for credit losses, nonperforming assets and
factors considered by the Company in assessing the credit
quality of the loan portfolio and establishing the allowance
for credit losses.
Income taxes are assessed to each line of business at a
managerial tax rate of 36.4 percent with the residual tax
expense or benefit to arrive at the consolidated effective tax
rate included in Treasury and Corporate Support. The
consolidated effective tax rate of the Company was
27.0 percent in 2008, compared with 30.3 percent in 2007.
The decrease in the effective tax rate from 2007 reflected the
U.S. BANCORP
61
marginal impact of lower pre-tax income, higher tax-exempt
income from investment securities and insurance products,
and incremental tax credits from affordable housing and
other tax-advantaged investments.
ACCOUNTING CHA NGES
Note 2 of the Notes to Consolidated Financial Statements
discusses accounting standards adopted in the current year,
as well as accounting standards recently issued but not yet
required to be adopted, and the expected impact of these
changes in accounting standards. To the extent the adoption
of new accounting standards affects the Company’s financial
condition or results of operations, the impacts are discussed
in the applicable section(s) of the Management’s Discussion
and Analysis and the Notes to Consolidated Financial
Statements.
CRIT ICAL ACCOUNT ING POLICIES
The accounting and reporting policies of the Company
comply with accounting principles generally accepted in the
United States and conform to general practices within the
banking industry. The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions.
The Company’s 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
management believes are the most important to the
portrayal of the Company’s financial condition and results,
and require management to make estimates that are difficult,
subjective or complex. Most accounting policies are not
considered by management to be critical accounting policies.
Several factors are considered in determining whether or not
a policy is critical in the preparation of financial statements.
These factors include, among other things, whether the
estimates are significant to the financial statements, the
nature of the estimates, the ability to readily validate the
estimates with other information including third-parties or
available prices, and sensitivity of the estimates to changes in
economic conditions and whether alternative accounting
methods may be utilized under generally accepted
accounting principles. Management has discussed the
development and the selection of critical accounting policies
with the Company’s Audit Committee.
Significant accounting policies are discussed in Note 1
of the Notes to Consolidated Financial Statements. Those
policies considered to be critical accounting policies are
described below.
Allowance for Credit Losses The allowance for credit losses
is established to provide for probable losses incurred in the
62
U.S. BANCORP
Company’s credit portfolio. The methods utilized to estimate
the allowance for credit losses, key assumptions and
quantitative and qualitative information considered by
management in determining the adequacy of the allowance
for credit losses are discussed in the “Credit Risk
Management” section.
Management’s evaluation of the adequacy of the
allowance for credit losses is often the most critical of
accounting estimates for a banking institution. It is an
inherently subjective process impacted by many factors as
discussed throughout the Management’s Discussion and
Analysis section of the Annual Report. Although risk
management practices, methodologies and other tools are
utilized to determine each element of the allowance, degrees
of imprecision exist in these measurement tools due in part
to subjective judgments involved and an inherent lagging of
credit quality measurements relative to the stage of the
business cycle. Even determining the stage of the business
cycle is highly subjective. As discussed in the “Analysis and
Determination of Allowance for Credit Losses” section,
management considers the effect of imprecision and many
other factors in determining the allowance for credit losses.
If not considered, incurred losses in the portfolio related to
imprecision and other subjective factors could have a
dramatic adverse impact on the liquidity and financial
viability of a bank.
Given the many subjective factors affecting the credit
portfolio, changes in the allowance for credit losses may not
directly coincide with changes in the risk ratings of the
credit portfolio reflected in the risk rating process. This is in
part due to the timing of the risk rating process in relation
to changes in the business cycle, the exposure and mix of
loans within risk rating categories, levels of nonperforming
loans and the timing of charge-offs and recoveries. For
example, the amount of loans within specific risk ratings
may change, providing a leading indicator of improving
credit quality, while nonperforming loans and net charge-
offs continue at elevated levels. Also, inherent loss ratios,
determined through migration analysis and historical loss
performance over the estimated business cycle of a loan,
may not change to the same degree as net charge-offs.
Because risk ratings and inherent loss ratios primarily drive
the allowance specifically allocated to commercial loans, the
amount of the allowance for commercial and commercial
real estate loans might decline; however, the degree of
change differs somewhat from the level of changes in
nonperforming loans and net charge-offs. Also, management
would maintain an adequate allowance for credit losses by
increasing the allowance during periods of economic
uncertainty or changes in the business cycle.
Some factors considered in determining the adequacy of
the allowance for credit losses are quantifiable while other
factors require qualitative judgment. Management conducts
an analysis with respect to the accuracy of risk ratings and
the volatility of inherent losses, and utilizes this analysis
along with qualitative factors, including uncertainty in the
economy from changes in unemployment rates, the level of
bankruptcies and concentration risks, including risks
associated with the weakened housing market and highly
leveraged enterprise-value credits, in determining the overall
level of the allowance for credit losses. The Company’s
determination of the allowance for commercial and
commercial real estate loans is sensitive to the assigned
credit risk ratings and inherent loss rates at December 31,
2008. 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 $206 million at
December 31, 2008. 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
$126 million at December 31, 2008. The Company’s
determination of the allowance for residential and retail
loans is sensitive to changes in estimated loss rates. In the
event that estimated loss rates increased by 10 percent, the
allowance for residential mortgages and retail loans would
increase by approximately $176 million at December 31,
2008. 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.
Fair Value Estimates A portion of the Company’s assets and
liabilities are carried at fair value on the Consolidated
Balance Sheet, with changes in fair value recorded either
through earnings or other comprehensive income (loss) in
accordance with applicable accounting principles generally
accepted in the United States. These include all of the
Company’s trading securities, available-for-sale securities,
derivatives, MSRs and certain MLHFS. The estimation of
fair value also affects other loans held for sale, which are
recorded at the lower of cost or fair value. The
determination of fair value is important for certain other
assets that are periodically evaluated for impairment using
fair value estimates, including goodwill and other intangible
assets, assets acquired in business combinations, impaired
loans and securities, other real estate owned and other
repossessed assets.
Fair value is generally defined as the exit price at which
an asset or liability could be exchanged in a current
transaction between willing, unrelated parties, other than in
a forced or liquidation sale. Fair value is based on quoted
market prices in an active market, or if market prices are
not available, is estimated using models employing
techniques such as matrix pricing or discounting expected
cash flows. The significant assumptions used in the models,
which include assumptions for interest rates, discount rates,
prepayments and credit losses, are independently verified
against observable market data where possible. Where
observable market data is not available, the estimate of fair
value becomes more subjective and involves a high degree of
judgment. In this circumstance, fair value is estimated based
on management’s judgment regarding the value that market
participants would assign to the asset or liability. This
valuation process takes into consideration factors such as
market illiquidity. Imprecision in estimating these factors can
impact the amount recorded on the balance sheet for a
particular asset or liability with related impacts to earnings
or other comprehensive income (loss).
When available, trading and available-for-sale securities
are valued based on quoted market prices. However, certain
securities are traded less actively and therefore, may not be
able to be valued based on quoted market prices. The
determination of fair value may require benchmarking to
similar instruments or performing a discounted cash flow
analysis using estimates of future cash flows and
prepayment, interest and default rates. An example is
interests held in entities collateralized by mortgage and/or
debt obligations as part of a structured investment. For more
information on investment securities, refer to Note 5 of the
Notes to Consolidated Financial Statements.
As few derivative contracts are listed on an exchange,
the majority of the Company’s derivative positions are
valued using valuation techniques that use readily observable
market parameters. Certain derivatives, however, must be
valued using techniques that include unobservable
parameters. For these instruments, the significant
assumptions must be estimated and therefore, are subject to
judgment. These instruments are normally traded less
actively. An example includes certain long-dated interest rate
swaps. Table 18 provides a summary of the Company’s
derivative positions.
Refer to Note 21 of the Notes to Consolidated
Financial Statements for additional information regarding
estimations of fair value.
U.S. BANCORP
63
Mortgage Servicing Rights MSRs are capitalized as separate
assets when loans are sold and servicing is retained or may
be purchased from others. MSRs are initially recorded at fair
value and remeasured at each subsequent reporting date.
Because MSRs do not trade in an active market with readily
observable prices, the Company determines the fair value by
estimating the present value of the asset’s future cash flows
utilizing market-based prepayment rates, discount rates, and
other assumptions validated through comparison to trade
information, industry surveys and independent third party
appraisals. Changes in the fair value of MSRs are recorded
in earnings during the period in which they occur. Risks
inherent in the MSRs valuation include higher than expected
prepayment rates and/or delayed receipt of cash flows. The
Company may utilize derivatives, including futures and
options contracts to mitigate the valuation risk. The
estimated sensitivity to changes in interest rates of the fair
value of the MSRs portfolio and the related derivative
instruments at December 31, 2008, to an immediate 25 and
50 basis point downward movement in interest rates would
be a decrease of approximately $7 million and $4 million,
respectively. An upward movement in interest rates at
December 31, 2008, of 25 and 50 basis points would
increase the value of the MSRs and related derivative
instruments by approximately $6 million and $12 million,
respectively. Refer to Note 10 of the Notes to Consolidated
Financial Statements for additional information regarding
MSRs.
Goodwill and Other Intangibles The Company records all
assets and liabilities acquired in purchase acquisitions,
including goodwill and other intangibles, at fair value.
Goodwill and indefinite-lived assets are not amortized but
are subject, at a minimum, to annual tests for impairment.
Under certain situations, interim impairment tests may be
required if events occur or circumstances change that would
more likely than not reduce the fair value of a reporting
segment below its carrying amount. Other intangible assets
are amortized over their estimated useful lives using straight-
line and accelerated methods and are subject to impairment
if events or circumstances indicate a possible inability to
realize the carrying amount.
The initial recognition of goodwill and other intangible
assets and subsequent impairment analysis require
management to make subjective judgments concerning
estimates of how the acquired assets will perform in the
future using valuation methods including discounted cash
flow analysis. Additionally, estimated cash flows may extend
beyond ten years and, by their nature, are difficult to
determine over an extended timeframe. Events and factors
that may significantly affect the estimates include, among
others, competitive forces, customer behaviors and attrition,
changes in revenue growth trends, cost structures,
64
U.S. BANCORP
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
2008. Based on the results of this assessment, no goodwill
impairment was recognized. Because of current economic
conditions the Company continues to monitor goodwill and
other intangible assets for impairment indicators throughout
the year.
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 145 federal, state and local domestic
jurisdictions and 13 foreign jurisdictions. The estimated
income tax expense is reported in the Consolidated
Statement of Income. Accrued taxes represent the net
estimated amount due or to be received from taxing
jurisdictions either currently or in the future and are
reported in other assets or other liabilities on the
Consolidated Balance Sheet. In estimating accrued taxes, the
Company assesses the relative merits and risks of the
appropriate tax treatment considering statutory, judicial and
regulatory guidance in the context of the tax position.
Because of the complexity of tax laws and regulations,
interpretation can be difficult and subject to legal judgment
given specific facts and circumstances. It is possible that
others, given the same information, may at any point in time
reach different reasonable conclusions regarding the
estimated amounts of accrued taxes.
Changes in the estimate of accrued taxes occur
periodically due to changes in tax rates, interpretations of
tax laws, the status of examinations being conducted by
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 19 of the
Notes to Consolidated Financial Statements for additional
information regarding income taxes.
CONTROLS A ND PROCEDURES
Under the supervision and with the participation of the
Company’s management, including its principal executive
officer and principal financial officer, the Company has
evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934 (the “Exchange Act”)). Based upon this
evaluation, the principal executive officer and principal
financial officer have concluded that, as of the end of the
period covered by this report, the Company’s disclosure
controls and procedures were effective.
During the most recently completed fiscal quarter, there
was no change made in the Company’s internal controls over
financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that has materially
affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
The annual report of the Company’s management on
internal control over financial reporting is provided on
page 111. 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 113.
U.S. BANCORP
65
U.S. Bancorp
Consolidated Balance Sheet
At December 31 (Dollars in Millions)
2008
2007
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,859
Investment securities
Held-to-maturity (fair value $54 and $78, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale (2008 included $2,728 of mortgage loans carried at fair value) . . . . . . . . . . . . . . . . . . . . .
Loans
Commercial
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53
39,468
3,210
56,618
33,213
23,580
60,368
Total loans, excluding covered assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Covered assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
173,779
11,450
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
185,229
(3,514)
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
181,715
1,790
8,571
2,834
21,412
$ 8,884
74
43,042
4,819
51,074
29,207
22,782
50,764
153,827
–
153,827
(2,058)
151,769
1,779
7,647
3,043
16,558
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $265,912
$237,615
Liabilities and Shareholders’ Equity
Deposits
Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,494
85,886
Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35,970
Time deposits greater than $100,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
159,350
33,983
38,359
7,920
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
239,612
$ 33,334
72,458
25,653
131,445
32,370
43,440
9,314
216,569
Shareholders’ equity
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares; issued: 2008 and 2007 —
7,931
1,000
1,972,643,007 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less cost of common stock in treasury: 2008 — 217,610,679 shares; 2007 — 244,786,039 shares . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20
5,830
22,541
(6,659)
(3,363)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,300
20
5,749
22,693
(7,480)
(936)
21,046
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $265,912
$237,615
See Notes to Consolidated Financial Statements.
66
U.S. BANCORP
U.S. Bancorp
Consolidated Statement of Income
Year Ended December 31 (Dollars and Shares in Millions, Except Per Share Data)
2008
2007
2006
Interest Income
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,051
227
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,984
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
156
Other interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,418
Interest Expense
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,881
1,066
1,739
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,686
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,732
3,096
4,636
1,039
671
366
1,151
1,314
1,081
517
492
270
147
(978)
741
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,811
Noninterest Expense
Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net occupancy and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing and business development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technology and communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postage, printing and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,039
515
781
240
310
598
294
355
1,282
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,414
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,033
1,087
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,946
Net income applicable to common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,823
Per Common Share
Earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.62
Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.61
Dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.700
1,742
Average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,757
Average diluted common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
See Notes to Consolidated Financial Statements.
$10,627
277
2,095
137
13,136
$ 9,873
236
2,001
153
12,263
2,754
1,433
2,260
6,447
6,689
792
5,897
958
638
327
1,108
1,339
1,077
472
433
259
146
15
524
7,296
2,640
494
738
233
260
561
283
376
1,401
6,986
6,207
1,883
2,389
1,203
1,930
5,522
6,741
544
6,197
809
562
313
966
1,235
1,042
441
415
192
150
14
813
6,952
2,513
481
709
199
233
545
265
355
986
6,286
6,863
2,112
$ 4,324
$ 4,264
$ 2.46
$ 2.43
$ 1.625
1,735
1,758
$ 4,751
$ 4,703
$ 2.64
$ 2.61
$ 1.39
1,778
1,804
U.S. BANCORP
67
U.S. Bancorp
Consolidated Statement of Shareholders’ Equity
(Dollars and Shares in Millions)
Balance December 31, 2005 . . . . . . . . .
Change in accounting principle . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on securities available-for-
sale . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on derivative hedges . . . . .
Realized loss on derivative hedges . . . . . .
Foreign currency translation . . . . . . . . . .
Reclassification for realized losses . . . . . .
Change in retirement obligation . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . .
Total comprehensive income (loss) . . . .
Preferred stock dividends . . . . . . . . . . . .
Common stock dividends . . . . . . . . . . . .
Issuance of preferred 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
Preferred
Stock
Common
Stock
Capital
Surplus
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income
(Loss)
1,815
$
–
$20
$5,907
$19,001
4
4,751
$(4,413)
$ (429)
(237)
67
35
(199)
(30)
33
(18)
42
1,000
40
(90)
(48)
(2,466)
(52)
(99)
4
2
1,144
(2,817)
(5)
Total
Shareholders’
Equity
$20,086
(233)
4,751
67
35
(199)
(30)
33
(18)
42
4,681
(48)
(2,466)
948
1,045
(2,817)
4
(3)
Balance December 31, 2006 . . . . . . . . .
1,765
$1,000
$20
$5,762
$21,242
$(6,091)
$ (736)
$21,197
Net income . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on securities available-for-
sale . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on derivative hedges . . . . .
Foreign currency translation . . . . . . . . . .
Reclassification for realized losses . . . . . .
Change in retirement obligation . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . .
Total comprehensive income (loss) . . . .
Preferred stock dividends . . . . . . . . . . . .
Common stock dividends . . . . . . . . . . . .
Issuance of common and treasury stock . . .
Purchase of treasury stock . . . . . . . . . . .
Stock option and restricted stock grants . . .
Shares reserved to meet deferred
compensation obligations . . . . . . . . . .
21
(58)
4,324
(60)
(2,813)
(45)
32
627
(2,011)
(5)
(482)
(299)
8
96
352
125
4,324
(482)
(299)
8
96
352
125
4,124
(60)
(2,813)
582
(2,011)
32
(5)
Balance December 31, 2007 . . . . . . . . .
1,728
$1,000
$20
$5,749
$22,693
$(7,480)
$ (936)
$21,046
Change in accounting principle . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on securities available-for-
sale . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on derivative hedges . . . . .
Realized loss on derivative hedges . . . . . .
Foreign currency translation . . . . . . . . . .
Reclassification for realized losses . . . . . .
Change in retirement obligation . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . .
Total comprehensive income (loss) . . . .
Preferred stock dividends and discount
accretion . . . . . . . . . . . . . . . . . . . .
Common stock dividends . . . . . . . . . . . .
Issuance of preferred stock and related
warrants . . . . . . . . . . . . . . . . . . . .
Issuance of common and treasury stock . . .
Purchase of treasury stock . . . . . . . . . . .
Stock option and restricted stock grants . . .
Shares reserved to meet deferred
compensation obligations . . . . . . . . . .
4
6,927
29
(2)
(4)
2,946
(123)
(2,971)
163
(83)
1
917
(91)
(5)
3
(2,729)
(722)
(15)
(117)
1,020
(1,362)
1,495
(1)
2,946
(2,729)
(722)
(15)
(117)
1,020
(1,362)
1,495
516
(119)
(2,971)
7,090
834
(91)
1
(5)
Balance December 31, 2008 . . . . . . . . .
1,755
$7,931
$20
$5,830
$22,541
$(6,659)
$(3,363)
$26,300
See Notes to Consolidated Financial Statements.
68
U.S. BANCORP
U.S. Bancorp
Consolidated Statement of Cash Flows
Year Ended December 31 (Dollars in Millions)
2008
2007
2006
Operating Activities
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities
$ 2,946
$ 4,324
$ 4,751
Provision for credit losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization of premises and equipment . . . . . . . . . . . . . . . . . . .
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sales of securities and other assets, net . . . . . . . . . . . . . . . . . . . . . . . . .
Loans originated for sale in the secondary market, net of repayments . . . . . . . . . . .
Proceeds from sales of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,096
218
355
(1,045)
(804)
(32,563)
32,440
664
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,307
Investing Activities
Proceeds from sales of available-for-sale investment securities . . . . . . . . . . . . . . . . . .
Proceeds from maturities of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in loans outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
2,134
5,722
(6,075)
(14,776)
123
(3,577)
1,483
(1,353)
792
243
376
(97)
(570)
(27,395)
25,389
(158)
2,904
2,135
4,211
(9,816)
(8,015)
421
(2,599)
(111)
(1,367)
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(16,319)
(15,141)
Financing Activities
Net increase (decrease) in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments or redemption of long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid on preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,139
(891)
8,534
(16,546)
7,090
688
–
(68)
(2,959)
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,987
Change in cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and due from banks at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,025)
8,884
6,255
5,069
22,395
(16,836)
–
427
(1,983)
(60)
(2,785)
12,482
245
8,639
544
233
355
(3)
(575)
(22,231)
22,035
282
5,391
1,441
5,012
(7,080)
(5,003)
616
(2,922)
(600)
(281)
(8,817)
(392)
6,650
14,255
(13,120)
948
910
(2,798)
(33)
(2,359)
4,061
635
8,004
Cash and due from banks at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,859
$ 8,884
$ 8,639
Supplemental Cash Flow Disclosures
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net noncash transfers to foreclosed property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions
$ 1,965
4,891
307
Assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 19,474
(18,824)
Net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
650
See Notes to Consolidated Financial Statements.
$ 1,878
6,360
180
$
$
635
(393)
242
$ 2,263
5,339
145
$ 1,603
(899)
$
704
U.S. BANCORP
69
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
and all variable interest entities (“VIEs”) for which the
Company is the primary beneficiary. Consolidation
eliminates all significant intercompany accounts and
transactions. Certain items in prior periods have been
reclassified to conform to the current presentation.
Uses of Estimates The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions
that affect the amounts reported in the financial statements
and accompanying notes. Actual experience could differ
from those estimates.
BUSINESS SEGMENTS
Within the Company, financial performance is measured by
major lines of business based on the products and services
provided to customers through its distribution channels. The
Company has five reportable operating segments:
Wholesale Banking Wholesale Banking offers lending,
equipment finance and small-ticket leasing, depository,
treasury management, capital markets, foreign exchange,
international trade services and other financial services to
middle market, large corporate, commercial real estate and
public sector clients.
Consumer Banking Consumer Banking delivers products and
services through banking offices, telephone servicing and
sales, on-line services, direct mail and ATM processing. It
encompasses community banking, metropolitan banking, in-
store banking, small business banking, consumer lending,
mortgage banking, consumer finance, workplace banking,
student banking and 24-hour banking.
Wealth Management & Securities Services Wealth
Management & Securities Services provides trust, private
70
U.S. BANCORP
banking, financial advisory, investment management, retail
brokerage services, insurance, custody and mutual fund
servicing through five businesses: Wealth Management,
Corporate Trust, FAF Advisors, Institutional Trust &
Custody and Fund Services.
Payment Services Payment Services includes consumer and
business credit cards, stored-value cards, debit cards,
corporate and purchasing card services, consumer lines of
credit and merchant processing.
Treasury and Corporate Support Treasury and Corporate
Support includes the Company’s investment portfolios,
funding, capital management, asset securitization, interest
rate risk management, the net effect of transfer pricing
related to average balances and the residual aggregate of
those expenses associated with corporate activities that are
managed on a consolidated basis.
Segment Results Accounting policies for the lines of
business are the same as those used in preparation of the
consolidated financial statements with respect to activities
specifically attributable to each business line. However, the
preparation of business line results requires management to
allocate funding costs and benefits, expenses and other
financial elements to each line of business. For details of
these methodologies and segment results, see “Basis for
Financial Presentation” and Table 23 “Line of Business
Financial Performance” included in Management’s
Discussion and Analysis which is incorporated by reference
into these Notes to Consolidated Financial Statements.
SECURIT IES
Realized gains or losses on securities are determined on a
trade date basis based on the specific amortized cost of the
investments 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, demand for collateralized deposits by public entities
or other reasons. Available-for-sale securities are carried at
fair value with unrealized net gains or losses reported within
other comprehensive income (loss) in shareholders’ equity.
Declines in fair value considered 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 considered other-than-temporary, if
any, are reported in noninterest income.
Securities Purchased Under Agreements to Resell and
Securities Sold Under Agreements to Repurchase Securities
purchased under agreements to resell and securities sold
under agreements to repurchase are generally accounted for
as collateralized financing transactions and are recorded at
the amounts at which the securities were acquired or sold,
plus accrued interest. The fair value of collateral received is
continually monitored and additional collateral is obtained
or requested to be returned to the Company as deemed
appropriate.
EQUITY INVESTMENTS IN OPERATING ENT IT IES
Equity investments in public entities in which the Company’s
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 the Company has
a significant influence (generally between 20 percent and
50 percent ownership) but does not control the entity are
accounted for using the equity method. Limited partnerships
and limited liability companies where the Company’s
ownership interest is greater than 5 percent are accounted
for using the equity method. All equity investments are
evaluated for impairment at least annually and more
frequently if certain criteria are met.
LOANS
The Company’s accounting methods for loans differ
depending on whether the loans are originated or purchased,
and for purchased loans, whether the loans were acquired at
a discount related to evidence of credit deterioration since
date of origination.
Originated Loans Held for Investment Loans the Company
originates are reported at the principal amount outstanding,
net of unearned income, net deferred loan fees or costs, and
any direct principal charge-offs. 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.
Purchased Loans Loans acquired at a discount for which it
is probable all contractual payments will not be received are
accounted for under AICPA Statement of Position 03-3
(“SOP 03-3”), “Accounting for Certain Loans or Debt
Securities Acquired in a Transfer”. Under SOP 03-3, those
loans are recorded at fair value at acquisition. Credit
discounts are included in the determination of fair value,
therefore, an allowance for loan losses is not recorded at the
purchase date. Revolving loans, including lines of credit and
credit cards loans, and leases are excluded from SOP 03-3
accounting.
In determining the acquisition date fair value of loans
subject to SOP 03-3, and in subsequent accounting, the
Company generally aggregates purchased consumer loans
into pools of loans with common risk characteristics, while
accounting for commercial loans individually. Expected cash
flows at the purchase date in excess of the fair value of loans
are recorded as interest income over the life of the loans if
the timing and amount of the future cash flows is reasonably
estimable. Subsequent to the purchase date, increases in cash
flows over those expected at the purchase date are
recognized as interest income prospectively. Decreases in
expected cash flows after the purchase date are recognized
by recording an allowance for credit losses.
For purchased loans not subject to SOP 03-3,
differences between the purchase price and the unpaid
principal balance at the date of acquisition are recorded in
interest income over the life of the loan. Incurred credit
losses are recorded at the purchase date through an
allowance for credit losses. Decreases in expected cash flows
after the purchase date are recognized by recording an
additional allowance for credit losses.
Covered Assets Assets covered under loss sharing or similar
credit protection agreements with the Federal Deposit
Insurance Corporation (“FDIC”) are reported in loans
inclusive of the fair value of expected reimbursement cash
flows the Company expects to receive from the FDIC under
those agreements. Similarly, credit losses on those assets are
determined net of the expected reimbursement from the
FDIC.
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 Company and are not
considered derivatives. Reserves for credit exposure on
unfunded credit commitments are recorded in other
liabilities.
Allowance for Credit Losses Management determines the
adequacy of the allowance based on evaluations of credit
relationships, the loan portfolio, recent loss experience, and
other pertinent factors, including economic conditions. This
evaluation is inherently subjective as it requires estimates,
U.S. BANCORP
71
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 expected cash flows discounted using the
original effective interest rate, the observable market price,
or the fair value of the collateral for certain collateral-
dependent loans.
The Company determines the amount of the allowance
required for certain sectors based on relative risk
characteristics of the loan portfolio. The allowance recorded
for commercial loans is based on quarterly reviews of
individual credit relationships and an analysis of the
migration of commercial loans and actual loss experience.
The allowance recorded for homogeneous consumer loans is
based on an analysis of product mix, risk characteristics of
the portfolio, bankruptcy experiences, and historical losses,
adjusted for current trends, for each homogenous category
or group of loans. The allowance is increased through
provisions charged to operating earnings and reduced by net
charge-offs.
The Company also assesses the credit risk associated
with off-balance sheet loan commitments, letters of credit,
and derivatives. Credit risk associated with derivatives is
reflected in the fair values recorded for those positions. The
liability for off-balance sheet credit exposure related to loan
commitments and other credit guarantees is included in
other liabilities.
Nonaccrual Loans Generally, commercial loans (including
impaired loans) are placed on nonaccrual status when the
collection of interest or principal has become 90 days past
due or is otherwise considered doubtful. When a loan is
placed on nonaccrual status, unpaid accrued interest is
reversed. Future interest payments are generally applied
against principal. Revolving consumer lines and credit cards
are charged off by 180 days past due and closed-end
consumer loans other than loans secured by 1-4 family
properties are charged off at 120 days past due and are,
therefore, generally not placed on nonaccrual status. Certain
retail customers having financial difficulties may have the
terms of their credit card and other loan agreements
modified to require only principal payments and, as such,
are reported as nonaccrual.
Generally, all loans accounted for under SOP 03-3 are
considered accruing loans. However, the timing and amount
of future cash flows for some loans is not reasonably
estimable. Those loans are classified as nonaccrual loans and
the purchase price discount on those loans is not recorded as
interest income until the timing and amount of the future
cash flows can be reasonably estimated.
Company will be unable to collect all amounts due (both
interest and principal) according to the contractual terms of
the loan agreement.
Impaired loans include certain nonaccrual commercial
loans and loans for which a charge-off has been recorded
based upon the fair value of the underlying collateral.
Impaired loans also include loans that have been modified in
troubled debt restructurings as a concession to borrowers
experiencing financial difficulties. Purchased credit impaired
loans are not required to be reported as impaired loans as
long as they continue to perform at least as well as expected
at acquisition.
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. Modifications may include
rate reductions, principal forgiveness, forbearance and other
actions intended to minimize the economic loss and to avoid
foreclosure or repossession of collateral. For credit card loan
agreements, such modifications may include canceling the
customer’s available line of credit on the credit card,
reducing the interest rate on the card, and placing the
customer on a fixed payment plan not exceeding 60 months.
The allowance for credit losses on restructured loans is
determined by discounting the restructured cash flows by the
original effective rate. 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 loan disclosures in years subsequent to the
restructuring if they are in compliance with the modified
terms.
Generally, a nonaccrual loan that is restructured
remains on nonaccrual for a period of six months to
demonstrate 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’s lease portfolio consists of both direct
financing and leveraged leases. 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 recorded in interest income over the
terms of the leases to produce a level yield.
The investment in leveraged leases is the sum of all lease
Impaired Loans A loan is considered to be impaired when,
based on current information and events, it is probable the
payments (less nonrecourse debt payments) plus estimated
residual values, less unearned income. Income from
72
U.S. BANCORP
leveraged leases is recognized over the term of the leases
based on the unrecovered equity investment.
Residual values on leased assets are reviewed regularly
for other-than-temporary impairment. Residual valuations
for retail automobile leases are based on independent
assessments of expected used car sale prices at the end-of-
term. Impairment tests are conducted based on these
valuations considering the probability of the lessee returning
the asset to the Company, re-marketing efforts, insurance
coverage and ancillary fees and costs. Valuations for
commercial leases are based upon external or internal
management appraisals. When there is impairment 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.
Other Real Estate Other real estate (“OREO”), which is
included in other assets, is property acquired through
foreclosure or other proceedings on defaulted loans. OREO
is initially recorded at fair value, less estimated selling costs.
OREO is evaluated regularly and any decreases in value are
reported in noninterest expense.
LOANS HELD FO R SA LE
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 may be carried at the lower of cost or fair value as
determined on an aggregate basis by type of loan or carried
at fair value where the Company has elected fair value
accounting. The credit component of any writedowns upon
transfer of loans to LHFS is reflected in charge-offs.
Where an election is made to subsequently carry the
LHFS at fair value, any further decreases or subsequent
increases in fair value are recognized in noninterest income.
Where an election is made to subsequently carry LHFS at
lower of cost or fair value, any further decreases are
recognized in noninterest income and increases in fair value
are not recognized until the loans are sold.
DERIVATIVE FINANCIAL INSTRUMENT S
In the ordinary course of business, the Company enters into
derivative transactions to manage its interest rate,
prepayment, credit, price and foreign currency risk and to
accommodate the business requirements of its customers.
Derivative instruments are reported as other assets, other
liabilities or short-term borrowings at fair value. 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. Effective changes in the fair value of a
derivative designated as a cash flow hedge are recorded in
accumulated other comprehensive income (loss) until cash
flows of the hedged item are recognized in income. Any
change in fair value resulting from hedge ineffectiveness is
immediately recorded in noninterest income. The Company
performs an assessment, both at the inception of a hedge
and on a quarterly basis thereafter, to determine whether
derivatives designated as hedging instruments are highly
effective in offsetting changes in the value of the hedged
items.
If a derivative designated as a cash flow hedge is
terminated or ceases to be highly effective, the gain or loss
in accumulated other comprehensive income (loss) is
amortized to earnings over the period the forecasted hedged
transactions impact earnings. If a hedged forecasted
transaction is no longer probable, hedge accounting is ceased
and any gain or loss included in accumulated other
comprehensive income (loss) is reported in earnings
immediately.
REVENUE RECOGNITIO N
The Company recognizes revenue as it is earned based on
contractual terms, as transactions occur, or as services are
provided and collectibility is reasonably assured. In certain
circumstances, noninterest income is reported net of
associated expenses that are directly related to variable
volume-based sales or revenue sharing arrangements or
when the Company acts on an agency basis for others.
Certain specific policies include the following:
Credit and Debit Card Revenue Credit and debit card
revenue includes interchange income from credit and debit
cards, annual fees, and other transaction and account
management fees. Interchange income is a fee paid by a
merchant bank to the card-issuing bank through the
interchange network. Interchange fees are set by the credit
card associations and are based on cardholder purchase
volumes. The Company records interchange income as
transactions occur. Transaction and account management
fees are recognized as transactions occur or services are
provided, except for annual fees, which are recognized over
the applicable period. Volume-related payments to partners
and credit card associations and expenses for rewards
programs are also recorded within credit and debit card
revenue. Payments to partners and expenses related to
U.S. BANCORP
73
rewards programs are recorded when earned by the partner
or customer.
Merchant Processing Services Merchant processing services
revenue consists principally of transaction and account
management fees charged to merchants for the electronic
processing of transactions, net of interchange fees paid to
the credit card issuing bank, card association assessments,
and revenue sharing amounts, and are all recognized at the
time the merchant’s transactions are processed or other
services are performed. The Company may enter into
revenue sharing agreements with referral partners or in
connection with purchases of merchant contracts from
sellers. The revenue sharing amounts are determined
primarily on sales volume processed or revenue generated
for a particular group of merchants. Merchant processing
revenue also includes revenues related to point-of-sale
equipment recorded as sales when the equipment is shipped
or as earned for equipment rentals.
Trust and Investment Management Fees Trust and
investment management fees are recognized over the period
in which services are performed and are based on a
percentage of the fair value of the assets under management
or administration, fixed based on account type, or
transaction-based fees.
Deposit Service Charges Service charges on deposit
accounts primarily represent monthly fees based on
minimum balances or transaction-based fees. These fees are
recognized as earned or as transactions occur and services
are provided.
OTHER SIGNIFICANT PO LICIES
Intangible Assets The price paid over the net fair value of
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 their financial reporting
carrying amounts.
Mortgage Servicing Rights Mortgage servicing rights
(“MSRs”) are capitalized as separate assets when loans are
sold and servicing is retained or if they are purchased from
74
U.S. BANCORP
others. MSRs are recorded at fair value. The Company
determines the fair value by estimating the present value of
the asset’s future cash flows utilizing market-based
prepayment rates, discount rates, and other assumptions
validated through comparison to trade information, industry
surveys and independent third party appraisals. Changes in
the fair value of MSRs are recorded in earnings during the
period in which they occur. Risks inherent in the MSRs
valuation include higher than expected prepayment rates
and/or delayed receipt of cash flows. The Company utilizes
futures, forwards and options to mitigate MSR valuation
risk. Fair value changes related to the MSRs and the futures,
forwards and options, as well as servicing and other related
fees, are recorded in mortgage banking revenue.
Pensions For purposes of its retirement plans, beginning in
2008, the Company utilizes its fiscal year end as the
measurement date. Prior to 2008, the Company utilized
September 30 of each year as the measurement date. 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
the investment yield of high quality corporate bonds
available in the market place with maturities equal to
projected cash flows of future benefit payments as of the
measurement date. Periodic pension expense (or income)
includes service costs, interest costs based on the assumed
discount rate, the expected return on plan assets based on an
actuarially derived market-related value and amortization of
actuarial gains and losses. Pension accounting reflects the
long-term nature of benefit obligations and the investment
horizon of plan assets and can have the effect of reducing
earnings volatility related to short-term changes in interest
rates and market valuations. Actuarial gains and losses
include the impact of plan amendments and various
unrecognized gains and losses which are deferred and
amortized over the future service periods of active
employees. The market-related value utilized to determine
the expected return on plan assets is based on fair value
adjusted for the difference between expected returns and
actual performance of plan assets. The unrealized difference
between actual experience and expected returns is included
in expense over a twelve-year period. The overfunded or
underfunded status of the plans is recorded as an asset or
liability on the balance sheet, with changes in that status
recognized through other comprehensive income (loss).
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. Capitalized 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.
to reliably support fair value pricing models used for these
loans. These MLHFS loans are initially measured at fair
value, with subsequent changes in fair value recognized as a
component of mortgage banking revenue. Electing to
measure these MLHFS at fair value reduces certain timing
differences and better matches changes in fair value of these
assets with changes in the value of the derivative instruments
used to economically hedge them without the burden of
complying with the requirements for hedge accounting.
Stock-Based Compensation The Company grants stock-
based awards, including restricted stock and options to
purchase common stock of the Company. Stock option
grants are for a fixed number of shares to employees and
directors with an exercise price equal to the fair value of the
shares at the date of grant. Stock-based compensation for
awards is recognized in the Company’s results of operations
on a straight-line basis over the vesting period. The
Company immediately recognizes compensation cost of
awards to employees that meet retirement status, despite
their continued active employment. The amortization of
stock-based compensation reflects estimated forfeitures
adjusted for actual forfeiture experience. As compensation
expense is recognized, a deferred tax asset is recorded that
represents an estimate of the future tax deduction from
exercise or release of restrictions. At the time stock-based
awards are exercised, cancelled, expire, or restrictions are
released, the Company may be required to recognize an
adjustment to tax expense, depending on the market price of
the Company’s stock at that time.
Per Share Calculations Earnings per common share is
calculated by dividing net income applicable to common
equity by the weighted average number of common shares
outstanding. Diluted earnings per common share is
calculated by adjusting income and outstanding shares,
assuming conversion of all potentially dilutive securities.
Note 2 ACCOUNTING CHANGES
Fair Value Option In February 2007, the Financial
Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No. 159 (“SFAS 159”),
“The Fair Value Option for Financial Assets and Financial
Liabilities”, effective for the Company beginning on
January 1, 2008. SFAS 159 provides entities with an
irrevocable option to measure and report selected financial
assets and liabilities at fair value. The Company elected the
fair value option for certain mortgage loans held for sale
(“MLHFS”) originated on or after January 1, 2008. There
was no impact of adopting SFAS 159 on the Company’s
financial statements at the date of adoption. The Company
elected the fair value option for MLHFS for which an active
secondary market and readily available market prices exist
Fair Value Measurements In September 2006, the FASB
issued Statement of Financial Accounting Standards No. 157
(“SFAS 157”), “Fair Value Measurements”, effective for the
Company beginning on January 1, 2008. SFAS 157 defines
fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements.
SFAS 157 provides a consistent definition of fair value
focused on exit price, and prioritizes market-based inputs for
determining fair value. SFAS 157 also requires consideration
of nonperformance risk when determining fair value
measurements. The adoption of SFAS 157 reduced the
Company’s net income by approximately $62 million
($38 million after-tax) for the year ended December 31,
2008 as a result of the consideration of nonperformance risk
for certain financial instruments.
Written Loan Commitments In November 2007, the
Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin No. 109 (“SAB 109”), “Written Loan
Commitments Recorded at Fair Value Through Earnings”,
effective for the Company beginning on January 1, 2008.
SAB 109 expresses the SEC’s view that the expected net
future cash flows related to the associated servicing of a loan
should be included in the measurement of all written loan
commitments that are accounted for at fair value through
earnings.
Business Combinations In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 141
(revised 2007) (“SFAS 141R”), “Business Combinations”,
effective for the Company beginning on January 1, 2009.
SFAS 141R establishes principles and requirements for the
acquiror in a business combination, including the
recognition and measurement of the identifiable assets
acquired, the liabilities assumed and any noncontrolling
interest in the acquired entity as of the acquisition date; the
recognition and measurement of the goodwill acquired in the
business combination or gain from a bargain purchase as of
the acquisition date; and the determination of additional
disclosures needed to enable users of the financial statements
to evaluate the nature and financial effects of the business
combination. Under SFAS 141R, nearly all acquired assets
and liabilities assumed are required to be recorded at fair
value at the acquisition date, including loans. This will
U.S. BANCORP
75
eliminate recognition at the acquisition date of an allowance
for loan losses on acquired loans; rather, credit related
factors will be incorporated directly into the fair value of the
loans. Other significant changes include recognizing
transaction costs and most restructuring costs as expenses
when incurred. The accounting requirements of SFAS 141R
are applied on a prospective basis for all transactions
completed after the effective date and early adoption is not
permitted.
Noncontrolling Interests In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 160
(“SFAS 160”), “Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51”,
effective for the Company beginning on January 1, 2009.
SFAS 160 will change the accounting and reporting for
minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of
equity, separate from U.S. Bancorp’s own equity, in the
consolidated balance sheet. SFAS 160 also requires the
amount of net income attributable to the entity and to the
noncontrolling interests be shown separately on the
consolidated statement of income, and requires expanded
disclosures.
The Company expects to reclassify $733 million in
noncontrolling interests from other liabilities to equity upon
adoption of SFAS 160. Noncontrolling interests’ share of net
income was $69 million in 2008, $81 million in 2007 and
$58 million in 2006.
Note 3 BUSINESS COMBINATIONS
On November 21, 2008, the Company acquired the banking
operations of Downey Savings & Loan Association, F.A., the
primary subsidiary of Downey Financial Corp., and PFF
Bank & Trust (“Downey” and “PFF”, respectively), from
the FDIC. The Company acquired $13.7 billion of Downey’s
assets and assumed $12.3 billion of its liabilities, and
acquired $3.7 billion of PFF’s assets and assumed
$3.5 billion of its liabilities. In connection with these
acquisitions, the Company entered into loss sharing
agreements with the FDIC (“Loss Sharing Agreements”)
providing for specified credit loss and asset yield protection
for all single family residential mortgages and a significant
portion of commercial and commercial real estate loans and
foreclosed real estate (“covered assets”). At the acquisition
date, the Company estimated the covered assets would incur
approximately $4.7 billion of cumulative credit losses,
including the present value of expected interest rate
decreases on loans the Company expects to modify. These
losses, if incurred, will be offset by an estimated $2.4 billion
benefit to be received by the Company from the FDIC under
the Loss Sharing Agreements. Under the terms of the Loss
Sharing Agreements, the Company will incur the first
$1.6 billion of specified losses (“First Loss Position”) on the
covered assets, which was approximately the predecessors’
carrying amount of the net assets acquired. The Company
acquired these net assets for a nominal amount of
consideration. After the First Loss Position, the Company
will incur 20 percent of the next $3.1 billion of specified
losses and only 5 percent of specified losses beyond that
amount. The Company estimates that its share of those
losses will be approximately $.7 billion.
The Company identified the acquired non-revolving
loans experiencing credit deterioration, representing the
majority of assets acquired, and recorded these assets in the
financial statements at their estimated fair value, reflecting
expected credit losses and the estimated impact of the Loss
Sharing Agreements. The Company recorded all other loans
at the predecessors’ carrying amount, net of fair value
adjustments for any interest rate related discount or
premium, and an allowance for credit losses. At
December 31, 2008, $11.5 billion of the Company’s assets
were covered by the Loss Sharing Agreements. The Company
recorded $61 million of interest income on covered loans
acquired for the year ended December 31, 2008.
Note 4 RESTRICTIONS ON CASH AND DUE
FROM BANKS
The Federal Reserve Bank requires bank subsidiaries to
maintain minimum average reserve balances. Those reserve
balances were $.9 billion at December 31, 2008.
76
U.S. BANCORP
Note 5 INVESTMENT SECURITIES
The amortized cost, gross unrealized holding gains and losses, and fair value of held-to-maturity and available-for-sale securities
at December 31 was as follows:
December 31 (Dollars in Millions)
Held-to-maturity (a)
2008
2007
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Mortgage-backed securities . . . . . . . . . . . . . . .
Obligations of state and political subdivisions. . . .
Other debt securities . . . . . . . . . . . . . . . . . . .
$
Total held-to-maturity securities . . . . . . . . . .
$
5
38
10
53
Available-for-sale (b)
U.S. Treasury and agencies . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . .
Asset-backed securities (c) . . . . . . . . . . . . . . .
Obligations of state and political subdivisions. . . .
Other securities and investments . . . . . . . . . . .
$
664
31,266
616
7,220
2,517
Total available-for-sale securities . . . . . . . . .
$42,283
$ –
2
–
$ 2
$ 18
429
8
4
1
$460
$
$
–
(1)
–
(1)
$
$
5
39
10
54
$
–
(1,562)
(14)
(808)
(891)
$
682
30,133
610
6,416
1,627
$
$
6
56
12
74
$
407
31,300
2,922
7,131
2,346
$(3,275)
$39,468
$44,106
$ –
4
–
$ 4
$ 1
48
6
18
5
$78
$
$
$
–
–
–
–
(3)
(745)
–
(94)
(300)
$
$
$
6
60
12
78
405
30,603
2,928
7,055
2,051
$(1,142)
$43,042
(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 accumulated other comprehensive income (loss) in shareholders’ equity.
(c) Primarily includes investments in structured investment vehicles with underlying collateral that includes a mix of various mortgage and other asset-backed securities.
The weighted-average maturity of the available-for-sale
investment securities was 7.7 years at December 31, 2008,
and 7.4 years at December 31, 2007. The corresponding
weighted-average yields were 4.56 percent and 5.51 percent,
respectively. The weighted-average maturity of the held-to-
maturity investment securities was 8.5 years at
December 31, 2008, and 8.3 years at December 31, 2007.
The corresponding weighted-average yields were
5.78 percent and 5.92 percent, respectively.
For amortized cost, fair value and yield by maturity
date of held-to-maturity and available-for-sale securities
outstanding at December 31, 2008, refer to Table 11
included in Management’s Discussion and Analysis which is
incorporated by reference into these Notes to Consolidated
Financial Statements.
Securities with carrying amounts of $33.4 billion at
December 31, 2008, and $39.6 billion at December 31,
2007, were pledged to secure public, private and trust
deposits, repurchase agreements, derivative positions and for
other purposes required by law. Included in these amounts
were securities sold under agreements to repurchase where
the buyer/lender has the right to sell or pledge the securities
and which were collateralized by securities with a carrying
amount of $9.5 billion at December 31, 2008, and
$10.5 billion at December 31, 2007, respectively.
The following table provides information as to the amount of interest income from taxable and non-taxable investment
securities:
Year Ended December 31 (Dollars in Millions)
2008
2007
2006
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,666
318
Non-taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income from investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,984
$1,833
262
$2,095
$1,882
119
$2,001
U.S. BANCORP
77
The following table provides information as to the amount of gross gains and losses realized through the sales of available-for-
sale investment securities:
Year Ended December 31 (Dollars in Millions)
2008
Realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$43
(1)
Net realized gains (losses). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$42
Income tax (benefit) on realized gains (losses)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$16
2007
$15
–
$15
$ 6
2006
$15
(1)
$14
$ 5
Included in available-for-sale investment securities are
structured investment vehicle and related securities (“SIVs”)
purchased in the fourth quarter of 2007 from certain money
market funds managed by FAF Advisors, Inc., an affiliate of
the Company. During 2008, the Company exchanged its
interest in certain SIVs for a pro rata portion of the
underlying investment securities according to the applicable
restructuring agreements. The carrying amounts of
exchanged SIVs were allocated to the investment securities
received based on relative fair value. The SIVs and the
investment securities received are collectively referred to as
“SIV-related investments.” Some of these securities
evidenced credit deterioration at time of acquisition by the
Company. SOP 03-3 requires the difference between the
total expected cash flows for these securities and the initial
recorded investment to be recognized in earnings over the
life of the securities, using a level yield. If subsequent
decreases in the fair value of these securities are
accompanied by an adverse change in the expected cash
flows, an other-than-temporary impairment will be recorded
through earnings. Subsequent increases in the expected cash
flows will be recognized as income prospectively over the
remaining life of the securities by increasing the level yield.
During 2008 the Company recorded $550 million of
impairment charges on SIV-related investments subject to
SOP 03-3, primarily as a result of widening market spreads
and changes in expected cash flows.
Changes in the carrying amount and accretable yield of SIV-related investments subject to SOP 03-3 were as follows:
Years Ended December 31 (Dollars in Millions)
2008
2007
Carrying
Amount
of Debt
Securities
Accretable
Yield
Carrying
Amount
of Debt
Securities
Accretable
Yield
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$105
$ 2,427
$ –
$
–
Purchases (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment writedowns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers out (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
–
–
284
(15)
(25)
–
(274)
(550)
15
(1,110)
107
2,445
–
–
(2)
–
(20)
–
2
–
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$349
$
508
$105
$2,427
(a) Represents the fair value of the securities at acquisition.
(b) Represents investment securities not subject to SOP 03-3 received in exchange for SIVs.
The Company conducts a regular assessment of its
investment portfolios to determine whether any securities are
other-than-temporarily impaired considering, among other
factors, the nature of the securities, credit ratings or
financial condition of the issuer, the extent and duration of
the unrealized loss, expected cash flows of underlying
collateral, market conditions and the Company’s ability and
intent to hold the securities through the anticipated recovery
period. In addition to the other-than-temporary impairment
recorded on the SIV-related investments subject to SOP 03-3,
the Company recorded other-than-temporary impairment
charges of $470 million during 2008 on certain other SIV-
related investments and other investment securities.
78
U.S. BANCORP
At December 31, 2008, certain investment securities included in the held-to-maturity and available-for-sale categories had a fair
value that was below their amortized cost. The following table shows the gross unrealized losses and fair value of the
Company’s investments with unrealized losses, aggregated by investment category and length of time the individual securities
have been in a continuous unrealized loss position, at December 31, 2008:
(Dollars in Millions)
Held-to-maturity
Less Than 12 Months
12 Months or Greater
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Obligations of state and political subdivisions . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available-for-sale
U.S. Treasury and agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of state and political subdivisions . . . . . . . . . . . . . . . . . . .
Other securities and investments . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
8
8
$
10
7,190
241
2,280
200
$
$
$
(1)
(1)
$
$
6
6
–
(771)
(13)
(204)
(103)
$
1
4,941
3
3,739
965
–
–
$
$
14
14
$
$
(1)
(1)
–
(791)
(1)
(604)
(788)
$
11
12,131
244
6,019
1,165
$
–
(1,562)
(14)
(808)
(891)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9,921
$(1,091)
$9,649
$(2,184)
$19,570
$(3,275)
The Company does not consider these unrealized losses
to be other-than-temporary at December 31, 2008. The
unrealized losses within each investment category have
occurred as a result of changes in interest rates and market
credit spreads. The substantial portion of securities that have
unrealized losses are either obligations of state and political
subdivisions or non-agency securities with high investment
grade credit ratings and limited credit exposure. Unrealized
losses within other securities and investments are also the
result of a widening of market spreads since the initial
purchase date. In general, the issuers of the investment
securities are contractually prohibited from paying them off
at less than par and the Company did not have significant
purchase premiums. The Company has the intent and ability
to hold all of the securities that are in an unrealized loss
position at December 31, 2008, until their anticipated
recovery in value or maturity.
U.S. BANCORP
79
Note 6 LOANS AND ALLOWANCE FOR CREDIT LOSSES
The composition of the loan portfolio at December 31 was as follows:
(Dollars in millions)
Commercial
2008
2007
Commercial
Lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,759
6,859
$ 44,832
6,242
Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56,618
51,074
Commercial Real Estate
Commercial mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,434
9,779
Total commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33,213
Residential Mortgages
Residential mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity loans, first liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,232
5,348
Total residential mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,580
Retail
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail leasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity and second mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other retail
Revolving credit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Student . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,520
5,126
19,177
3,205
5,525
9,212
4,603
Total other retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,545
Total retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60,368
20,146
9,061
29,207
17,099
5,683
22,782
10,956
5,969
16,441
2,731
5,246
8,970
451
17,398
50,764
Total loans, excluding covered assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
173,779
153,827
Covered Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,450
–
Total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $185,229
$153,827
Loans are presented net of unearned interest and
deferred fees and costs of $1.5 billion and $1.4 billion at
December 31, 2008 and 2007, respectively. The Company
had loans of $45.4 billion at December 31, 2008, and
$44.5 billion at December 31, 2007, pledged at the Federal
Home Loan Bank (“FHLB”), and loans of $47.2 billion at
December 31, 2008, and $16.8 billion at December 31,
2007, 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, 2008 and 2007, 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, 2008 and 2007, see Table 8 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.
Covered assets represent assets acquired from the FDIC
subject to Loss Sharing Agreements and include expected
reimbursements from the FDIC of approximately
$2.4 billion.
80
U.S. BANCORP
The carrying amount of the covered assets at December 31, 2008, consisted of loans accounted for in accordance with
SOP 03-3 (“SOP 03-3 loans”), loans not subject to SOP 03-3 (“Non SOP 03-3 loans”) and other assets as shown in the
following table:
(Dollars in Millions)
SOP 03-3
Loans
Non SOP 03-3
Loans
Other
Total
Residential mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated loss reimbursement from the FDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,763
427
–
–
–
$2,022
455
127
–
–
$
–
–
–
274
2,382
$ 7,785
882
127
274
2,382
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,190
$2,604
$2,656
$11,450
On the acquisition date, the preliminary estimate of the
contractually required payments receivable for all SOP 03-3
loans acquired in the Downey and PFF transactions,
including those covered and not covered under Loss Sharing
Agreements with the FDIC, were $22.8 billion, the cash
flows expected to be collected were $9.2 billion including
interest, and the estimated fair value of the loans was
$6.5 billion. These amounts were determined based upon the
estimated remaining life of the underlying loans, which
include the effects of estimated prepayments. At
December 31, 2008, $309 million of these loans were
classified as nonperforming assets because the expected cash
flows are primarily based on the liquidation of underlying
collateral and the timing and amount of the cash flows
could not be reasonably estimated. Interest income, through
accretion of the difference between the carrying amount of
the SOP 03-3 loans and the expected cash flows, is expected
to be recognized on the remaining $6.0 billion of loans.
There was no allowance for credit losses related to these
SOP 03-3 loans at December 31, 2008. Because of the short
time period between the closing of the transaction and
December 31, 2008, certain amounts related to the
SOP 03-3 loans are preliminary estimates. The Company
expects to finalize its analysis of these loans during the first
six months of 2009 and, therefore, adjustments to the
estimated amounts may occur.
Changes in the carrying amount and accretable yield for loans subject to SOP 03-3 were as follows for the year ended
December 31, 2008:
(Dollars in Millions)
Accretable
Yield
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
–
2,774
–
(55)
Carrying
Amount
of Loans
$
–
6,453
(200)
55
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,719
$6,308
(a) Represents the fair value of the loans at acquisition.
Nonperforming assets include nonaccrual loans,
nonperforming assets as of December 31, 2008 and 2007,
restructured loans not performing in accordance with
see Table 14 included in Management’s Discussion and
modified terms, other real estate and other nonperforming
Analysis which is incorporated by reference into these Notes
assets owned by the Company. For details of the Company’s
to Consolidated Financial Statements.
The following table lists information related to nonperforming loans as of December 31:
(Dollars in Millions)
2008
Loans on nonaccrual status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructured loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,260
151
Total nonperforming loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,411
Interest income that would have been recognized at original contractual terms . . . . . . . . . . . . . . . . . . . . . . . . .
Amount recognized as interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 123
43
Forgone revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
80
2007
$540
17
$557
$ 60
19
$ 41
U.S. BANCORP
81
Activity in the allowance for credit losses was as follows:
(Dollars in Millions)
Balance at beginning of year
Add
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,260
$2,256
$2,251
2008
2007
2006
Provision charged to operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,096
792
Deduct
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans charged off
Less recoveries of loans charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loans charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions and other changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,009
(190)
1,819
102
1,032
(240)
792
4
544
763
(219)
544
5
Balance at end of year (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,639
$2,260
$2,256
Components
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,514
125
Liability for unfunded credit commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,639
$2,058
202
$2,260
$2,022
234
$2,256
(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 summary of impaired loans is as follows:
(Dollars in Millions)
Commercial and commercial real estate loans:
Period-end recorded investment
2008
2007
2006
Recorded
Investment
Valuation
Allowance
Recorded
Investment
Valuation
Allowance
Recorded
Investment
Valuation
Allowance
Valuation allowance required . . . . . . .
No valuation allowance required . . . . .
$1,023
514
Total . . . . . . . . . . . . . . . . . . . . .
$1,537
Average balance . . . . . . . . . . . . . . . . . .
Interest income recognized . . . . . . . . . . .
Commitments to lend additional funds . . .
Restructured accruing homogenous loans:
Period-end recorded investment . . . . .
Average balance . . . . . . . . . . . . . . .
Interest income recognized . . . . . . . .
Nonaccrual homogenous loans:
$1,006
6
107
$1,336
1,196
71
$115
–
$115
$223
Period-end recorded investment . . . . .
$ 302
$ 29
$314
107
$421
$366
–
12
$551
466
29
$ 82
$34
–
$34
$17
$ 1
$346
–
$346
$344
4
23
$405
379
35
$ 84
$44
–
$44
$10
$ 1
In connection with these joint ventures, the Company
may provide warehousing lines to support the operations.
Warehousing advances to the joint ventures are repaid when
the sale or securitization of loans is completed or the real
estate is permanently refinanced by others. At December 31,
2008 and 2007, the Company had $1.0 billion and
$2.3 billion, respectively, of outstanding advances to these
joint ventures.
For the years ended December 31, 2008, 2007 and
2006, the Company had net gains on the sale of loans of
$220 million, $163 million and $104 million, respectively,
which were included in noninterest income, primarily in
mortgage banking revenue.
The Company has equity interests in several joint
ventures that are accounted for utilizing the equity method.
The principal activities of these entities are to:
(cid:129) develop land, construct and sell residential homes.
(cid:129) provide commercial real estate financing for loans that
are subsequently sold or securitized.
(cid:129) provide senior or subordinated financing to customers
for the construction, rehabilitation or development of
commercial real estate.
82
U.S. BANCORP
Note 7 LEASES
The components of the net investment in sales-type and direct financing leases at December 31 were as follows:
(Dollars in Millions)
2008
2007
Aggregate future minimum lease payments to be received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unguaranteed residual values accruing to the lessor’s benefit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Initial direct costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,712
339
(1,693)
250
Total net investment in sales-type and direct financing leases (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,608
(a) The accumulated allowance for uncollectible minimum lease payments was $224 million and $120 million at December 31, 2008 and 2007, respectively.
$12,919
391
(1,636)
253
$11,927
The minimum future lease payments to be received from sales-type and direct financing leases were as follows at December 31,
2008:
(Dollars in Millions)
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,398
3,212
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,245
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,856
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
614
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
387
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 8 ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
VARIABLE INTEREST ENTITIES
FINANCIAL ASSET SAL ES
When the Company sells financial assets, it may retain
servicing rights and/or other beneficial interests in the
transferred financial assets. The gain or loss on sale depends,
in part, on the previous carrying amount of the transferred
financial assets and the consideration other than beneficial
interests in the transferred assets received in exchange. Upon
transfer, any servicing assets are initially recognized at fair
value. The remaining carrying amount of the transferred
financial asset is allocated between the assets sold and any
interest(s) that continues to be held by the Company based
on the relative fair values as of the date of transfer.
Conduit and Securitization The Company sponsors an off-
balance sheet conduit to which it transferred high-grade
investment securities, initially funded by the conduit’s
issuance of commercial paper. These investment securities
include primarily (i) private label asset-backed securities,
which are guaranteed by third-party insurers, and
(ii) collateralized mortgage obligations. The conduit held
assets of $.8 billion at December 31, 2008, and $1.2 billion
at December 31, 2007. In March 2008, the conduit ceased
issuing commercial paper and began to draw upon a
Company-provided liquidity facility to replace outstanding
commercial paper as it matured. The draws upon the
liquidity facility resulted in the conduit becoming a non-
qualifying special purpose entity. The Company has
determined the liquidity facility does not absorb the majority
of the variability of the conduit’s cash flows or fair value. As
a result, the Company is not the primary beneficiary of the
conduit and, therefore, does not consolidate the conduit. At
December 31, 2008, the amount advanced to the conduit
under the liquidity facility was $.9 billion, which is recorded
on the Company’s balance sheet in commercial loans.
Proceeds from the conduit’s investment securities will be
used to repay draws on the liquidity facility. The Company
believes there is sufficient collateral to repay all of the
liquidity facility advances.
VARIAB LE INTEREST ENTITIES
The Company is involved in various entities that are
considered to be VIEs as defined in Financial Interpretation
No. 46R, Consolidation of Variable Interest Entities.
Generally, a VIE is a corporation, partnership, trust or any
other legal structure that either does not have equity
investors with substantive voting rights or has equity
investors that do not provide sufficient financial resources
for the entity to support its activities. The Company’s
investments in VIEs primarily represent private investment
funds that make equity investments, provide debt financing
or partnerships to support community-based investments in
affordable housing, development entities that provide capital
for communities located in low-income districts and historic
rehabilitation projects that may enable the Company to
ensure regulatory compliance with the Community
Reinvestment Act.
The Company consolidates VIEs in which it is the
primary beneficiary. At December 31, 2008, approximately
U.S. BANCORP
83
$479 million of total assets related to various VIEs were
consolidated by the Company in its financial statements.
Creditors of these VIEs have no recourse to the general
credit of the Company. The Company is not required to
consolidate other VIEs as it is not the primary beneficiary. In
such cases, the Company does not absorb the majority of the
entities’ expected losses nor does it receive a majority of the
entities’ expected residual returns. At December 31, 2008,
the amounts of the Company’s investment in unconsolidated
VIEs ranged from less than $1 million to $55 million with
an aggregate amount of approximately $2.1 billion. While
the Company believes potential losses from these
investments is remote, the Company’s maximum exposure to
these unconsolidated VIEs, including any tax implications,
was approximately $3.9 billion at December 31, 2008,
assuming that all of the separate investments within the
individual private funds are deemed worthless and the
community-based business and housing projects, and related
tax credits, completely failed and did not meet certain
government compliance requirements.
Note 9 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2008
343
2,465
2,487
106
91
5,492
(3,702)
$
2007
335
2,432
2,463
164
8
5,402
(3,623)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,790
$ 1,779
Note 10 MORTGAGE SERVICING RIGHTS
The Company serviced $120.3 billion of residential
mortgage loans for others at December 31, 2008, and
$97.0 billion at December 31, 2007. The net impact of
assumption changes on the fair value of MSRs, and fair
value changes of derivatives used to offset MSR value
changes included in mortgage banking revenue and net
interest income was a loss of $122 million, $35 million and
$37 million for the years ended December 31, 2008, 2007
and 2006, respectively. Loan servicing fees, not including
valuation changes, included in mortgage banking revenue
were $404 million, $353 million and $319 million for the
years ended December 31, 2008, 2007 and 2006,
respectively.
Changes in fair value of capitalized MSRs are summarized as follows:
Year Ended December 31 (Dollars in Millions)
2008
2007
2006
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rights purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rights capitalized. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rights sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in fair value of MSRs:
$1,462
52
515
–
Due to change in valuation assumptions (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other changes in fair value (b)
(592)
(243)
$1,427
14
440
(130)
(102)
(187)
$1,123
52
398
–
26
(172)
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,194
$1,462
$1,427
(a) Principally reflects changes in discount rates and prepayment speed assumptions, primarily arising from interest rate changes.
(b) Primarily represents changes due to collection/realization of expected cash flows over time (decay).
The estimated sensitivity to changes in interest rates of the fair value of the MSRs portfolio and the related derivative
instruments at December 31, 2008, was as follows:
(Dollars in Millions)
Down Scenario
Up Scenario
50 bps
25 bps
25 bps
50 bps
Net fair value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(4)
$(7)
$6
$12
84
U.S. BANCORP
The fair value of MSRs and their sensitivity to changes
in interest rates is influenced by the mix of the servicing
portfolio and characteristics of each segment of the
portfolio. The Company’s servicing portfolio consists of the
distinct portfolios of Mortgage Revenue Bond Programs
(“MRBP”), government-insured mortgages and conventional
mortgages. The MRBP division specializes in servicing loans
made under state and local housing authority programs.
These programs provide mortgages to low-income and
moderate-income borrowers and are generally government-
insured programs with a favorable rate subsidy, down
payment and/or closing cost assistance. Mortgage loans
originated as part of government agency and state loans
programs tend to experience slower prepayment rates and
better cash flows than conventional mortgage loans. The
servicing portfolios are predominantly comprised of fixed-
rate agency loans (FNMA, FHLMC, GNMA, FHLB and
various housing agencies) with limited adjustable-rate or
jumbo mortgage loans.
A summary of the Company’s MSRs and related characteristics by portfolio as of December 31, 2008, was as follows:
(Dollars in Millions)
MRBP
Government
Conventional
Total
Servicing portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Value (bps) (a)
Weighted-average servicing fees (bps)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multiple (value/servicing fees)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average note rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Age (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,561
223
$
178
40
4.45
5.94%
3.2
7.3
11.5%
$14,746
166
$
113
40
2.83
6.23%
2.6
3.6
11.3%
$93,032
805
$
87
32
2.72
6.01%
2.8
3.5
10.3%
$120,339
$ 1,194
99
34
2.91
6.03%
2.8
3.9
10.5%
(a) Calculated as fair value divided by the unpaid principal balance of the loans serviced, expressed in hundredths.
Note 11 INTANGIBLE ASSETS
Intangible assets consisted of the following:
December 31 (Dollars in Millions)
Estimated
Life (a)
Amortization
Method (b)
Balance
2008
2007
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9 years/8 years
Merchant processing contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 years/6 years
Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 years/7 years
8 years/5 years
Other identified intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SL/AC
SL/AC
(c)
SL/AC
SL/AC
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,571
564
376
1,194
277
423
$11,405
$ 7,647
704
154
1,462
346
377
$10,690
(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
(c) Mortgage servicing rights are recorded at fair value, and are not amortized.
AC = accelerated methods generally based on cash flows
Aggregate amortization expense consisted of the following:
Year Ended December 31 (Dollars in Millions)
2008
Merchant processing contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $136
67
Core deposit benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
68
Trust relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84
Other identified intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $355
2007
$154
68
76
78
$376
2006
$149
65
71
70
$355
The estimated amortization expense for the next five years is as follows:
(Dollars in Millions)
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $353
289
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
234
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
188
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
157
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. BANCORP
85
The following table reflects the changes in the carrying value of goodwill for the years ended December 31, 2008 and 2007:
(Dollars in Millions)
Wholesale
Banking
Consumer
Banking
Wealth
Management
Payment
Services
Consolidated
Company
Balance at December 31, 2006 . . . . . . . . . . . . . . . . . . . . .
Goodwill acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2007 . . . . . . . . . . . . . . . . . . . . .
Goodwill acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,330
–
–
$1,330
145
–
Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . . . .
$1,475
(a) Other changes in goodwill include the effect of foreign exchange translation.
$2,379
41
–
$2,420
813
–
$3,233
$1,545
19
–
$1,564
(2)
–
$1,562
$2,284
24
25
$2,333
12
(44)
$2,301
$7,538
84
25
$7,647
968
(44)
$8,571
Note 12 SHORT-TERM BORROWINGS (a)
The following table is a summary of short-term borrowings for the last three years:
(Dollars in Millions)
At year-end
2008
2007
2006
Amount
Rate
Amount
Rate
Amount
Rate
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . $ 2,369
9,493
Securities sold under agreements to repurchase . . . . . . . .
10,061
Commercial paper. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,060
Other short-term borrowings . . . . . . . . . . . . . . . . . . . . . .
.17% $ 2,817
10,541
11,229
7,783
2.65
.22
1.87
1.88% $ 2,554
9,763
4.11
9,974
4.17
4,642
5.04
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $33,983
1.48% $32,370
4.16% $26,933
Average for the year
Federal funds purchased (b) . . . . . . . . . . . . . . . . . . . . . . $ 3,834
11,982
Securities sold under agreements to repurchase . . . . . . . .
10,532
Commercial paper. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,889
Other short-term borrowings . . . . . . . . . . . . . . . . . . . . . .
5.19% $ 2,731
10,939
3.07
9,265
1.91
5,990
3.16
9.63% $ 3,458
10,680
4.53
6,631
4.75
3,653
5.54
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $38,237
2.99% $28,925
5.29% $24,422
Maximum month-end balance
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . $ 9,681
15,198
Securities sold under agreements to repurchase . . . . . . . .
11,440
Commercial paper. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,642
Other short-term borrowings . . . . . . . . . . . . . . . . . . . . . .
(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) Average federal funds purchased rates include compensation expense for corporate card and corporate trust balances.
$ 4,419
12,181
11,229
7,783
$ 5,886
13,988
9,974
6,620
4.97%
4.57
4.90
3.95
4.62%
8.30%
4.24
4.72
5.17
5.08%
86
U.S. BANCORP
Note 13 LONG-TERM DEBT
Long-term debt (debt with original maturities of more than one year) at December 31 consisted of the following:
(Dollars in Millions)
Rate Type
Rate (a)
Maturity Date
2008
2007
U.S. Bancorp (Parent Company)
Subordinated notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed
Convertible senior debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Floating
Floating
Floating
Floating
Fixed
Floating
Fixed
Medium-term notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized lease obligations, mortgage indebtedness and other (b) . . . . . .
7.50%
.49%
.70%
–%
.96%
2026
2035
2035
2036
2037
4.50%-5.30% 2009-2010
.50%-3.43% 2009-2010
5.54%-10.20% 2031-2067
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subsidiaries
Subordinated notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized lease obligations, mortgage indebtedness and other (b) . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Floating
Fixed
Floating
Fixed
Floating
6.50%
6.30%
5.70%
7.125%
6.375%
6.30%
4.95%
4.80%
3.80%
4.375%
5.10%
2008
2008
2008
2009
2011
2014
2014
2015
2015
2017
2014
.50%-8.25% 2009-2026
.65%-4.77% 2009-2017
2.60%-5.92% 2009-2012
1.30%-2.56% 2009-2048
$
199
24
447
64
75
1,350
4,435
4,058
179
$
199
24
447
456
3,000
1,500
1,000
4,058
24
10,831
10,708
–
–
–
500
1,500
963
1,000
500
369
1,348
550
6,415
10,373
1,286
2,525
199
300
300
400
500
1,500
963
1,000
500
369
1,315
550
5,309
11,848
2,430
5,135
313
27,528
32,732
$38,359
$43,440
(a) Weighted-average interest rates of medium-term notes, Federal Home Loan Bank advances and bank notes were 2.99 percent, 3.06 percent and 2.64 percent, respectively.
(b) Other includes debt issuance fees and unrealized gains and losses and deferred fees relating to derivative instruments.
Convertible senior debentures issued by the Company pay
interest on a quarterly basis until a specified period of time
(five or nine years prior to the applicable maturity date).
After this date, the Company will not pay interest on the
debentures prior to maturity. On the maturity date or on
any earlier redemption date, the holder will receive the
original principal plus accrued interest. The debentures are
convertible at any time on or prior to the maturity date. If
the convertible senior debentures are converted, holders of
the debentures will generally receive cash up to the accreted
principal amount of the debentures plus, if the market price
of the Company’s stock exceeds the conversion price in
effect on the date of conversion, a number of shares of the
Company’s common stock, or an equivalent amount of cash
at the Company’s option, as determined in accordance with
specified terms. The convertible senior debentures are
callable by the Company and putable by the investors at a
price equal to 100 percent of the accreted principal amount
plus accrued and unpaid interest. During 2008, investors
elected to put debentures with a principal amount of
$3.3 billion back to the Company. At December 31, 2008,
the weighted average conversion price per share for all
convertible issuances was $36.39.
U.S. BANCORP
87
The table below summarizes the significant terms of floating-rate convertible senior debentures issued during 2007 at $1,000
per debenture:
(Dollars in millions)
Original face amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount outstanding at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Callable dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Putable dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conversion rate in shares per $1,000 debenture at December 31, 2008 . . . . . . . . . . . . . . . . . .
Conversion price per share at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(a) The interest rate index represents three month London Interbank Offered Rate (“LIBOR”)
$3,000
$75
February 6, 2007
LIBOR minus 1.75%
.96%
February 6, 2008, and thereafter
February 6, 2008, 2009, 2012, 2017 and
every five years, thereafter
24.4634
$40.88
February 6, 2037
During 2007, the Company issued $536 million of fixed-rate
junior subordinated debentures to a separately formed
wholly-owned trust for the purpose of issuing Company-
obligated mandatorily redeemable preferred securities at an
interest rate of 6.30 percent. In addition, the Company
elected to redeem $312 million of floating-rate junior
subordinated debentures. Refer to Note 14, “Junior
Subordinated Debentures” for further information on the
nature and terms of these debentures. There were no such
issuances or redemptions in 2008.
The Company has an arrangement with the Federal
Home Loan Bank whereby the Company could have
borrowed an additional $6.6 billion at December 31, 2008,
based on collateral available (residential and commercial
mortgages).
Maturities of long-term debt outstanding at December 31, 2008, were:
(Dollars in Millions)
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Parent
Company
$ 1,000
4,778
17
1
1
5,034
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,831
Consolidated
$10,455
6,466
2,988
3,479
482
14,489
$38,359
88
U.S. BANCORP
Note 14 JUNIOR SUBORDINATED DEBENTURES
As of December 31, 2008, the Company sponsored, and
In connection with the formation of USB Capital IX,
wholly owned 100 percent of the common equity of, nine
trusts that were formed for the purpose of issuing Company-
obligated mandatorily redeemable preferred securities
(“Trust Preferred Securities”) to third-party investors and
investing the proceeds from the sale of the Trust Preferred
Securities solely in junior subordinated debt securities of the
Company (the “Debentures”). The Debentures held by the
trusts, which totaled $4.1 billion, are the sole assets of each
trust. The Company’s obligations under the Debentures and
related documents, taken together, constitute a full and
unconditional guarantee by the Company of the obligations
of the trusts. The guarantee covers the distributions and
payments on liquidation or redemption of the
Trust Preferred Securities, but only to the extent of funds
held by the trusts. The Company has the right to redeem the
Debentures in whole or in part, on or after specific dates, at
a redemption price specified in the indentures plus any
accrued but unpaid interest to the redemption date. The
Company used the proceeds from the sales of the
Debentures for general corporate purposes.
the trust issued redeemable Income Trust Securities (“ITS”)
to third party investors, investing the proceeds in Debentures
issued by the Company and entered into stock purchase
contracts to purchase preferred stock to be issued by the
Company in the future. Pursuant to the stock purchase
contracts, the Company is required to make contract
payments of .65 percent, also payable semi-annually,
through a specified stock purchase date expected to be
April 15, 2011. Prior to the specified stock purchase date,
the trust is required to remarket and sell the Debentures to
third party investors to generate cash proceeds to satisfy its
obligation to purchase the Company’s Series A Non-
Cumulative Perpetual Preferred Stock (“Series A Preferred
Stock”) pursuant to the stock purchase contracts. The
Series A Preferred Stock, when issued pursuant to the stock
purchase contracts, is expected to pay quarterly dividends
equal to the greater of three-month LIBOR plus 1.02 percent
or 3.50 percent. In connection with this transaction, the
Company also entered into a replacement capital covenant
which restricts the Company’s rights to repurchase the ITS
and to redeem or repurchase the Series A Preferred Stock.
The following table is a summary of the Debentures included in long-term debt as of December 31, 2008:
Issuance Trust (Dollars in Millions)
Issuance Date
Securities
Amount
Debentures
Amount
Rate Type
Rate
Maturity Date
Earliest
Redemption Date
Retail
USB Capital XII . . . . . . . . . .
USB Capital XI
. . . . . . . . . .
USB Capital X . . . . . . . . . . .
USB Capital VIII
USB Capital VII . . . . . . . . . .
USB Capital VI
. . . . . . . . . .
Vail Banks Statutory Trust II . .
Vail Banks Statutory Trust I . .
February 2007
August 2006
April 2006
. . . . . . . . . December 2005
August 2005
March 2005
March 2001
February 2001
$ 535
765
500
375
300
275
7
17
$ 536
766
501
387
309
284
7
17
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
6.30
6.60
6.50
6.35
5.88
5.75
10.18
10.20
Institutional
April 2066
February 2067
February 15, 2012
September 2066 September 15, 2011
April 12, 2011
December 2065 December 29, 2010
August 15, 2010
March 9, 2010
June 8, 2011
February 22, 2011
August 2035
March 2035
June 2031
February 2031
USB Capital IX . . . . . . . . . .
March 2006
1,250
1,251
Fixed
5.54
April 2042
April 15, 2015
Total . . . . . . . . . . . . . . .
$4,024
$4,058
Note 15 SHAREHOLDERS’ EQUITY
At December 31, 2008 and 2007, the Company had
authority to issue 4 billion shares of common stock and
50 million shares of preferred stock. The Company had
1,755 million and 1,728 million shares of common stock
outstanding at December 31, 2008 and 2007, respectively,
and had 482 million shares reserved for future issuances,
primarily under stock option plans and shares that may be
issued in connection with the Company’s convertible senior
debentures, at December 31, 2008. At December 31, 2008,
the Company had 7 million shares of preferred stock
outstanding.
On March 27, 2006, the Company issued depositary
shares representing an ownership interest in 40,000 shares of
Series B Non-Cumulative Perpetual Preferred Stock with a
liquidation preference of $25,000 per share (the “Series B
Preferred Stock”), and on March 17, 2008, the Company
issued depositary shares representing an ownership interest
in 20,000 shares of Series D Non-Cumulative Perpetual
Preferred Stock with a liquidation preference of $25,000 per
share (the “Series D Preferred Stock”). The Series B
Preferred Stock and Series D Preferred Stock have no stated
maturity and will not be subject to any sinking fund or other
obligation of the Company. Dividends, if declared, will
accrue and be payable quarterly, in arrears, at a rate per
U.S. BANCORP
89
annum equal to the greater of three-month LIBOR plus
.60 percent, or 3.50 percent on the Series B Preferred Stock,
and 7.875 percent per annum on the Series D Preferred
Stock. Both series are redeemable at the Company’s option,
subject to the prior approval of the Federal Reserve Board,
at a redemption price equal to $25,000 per share, plus any
declared and unpaid dividends, without accumulation of any
undeclared dividends, with the redemption option beginning
April 15, 2011 for the Series B Preferred Stock and April 15,
2013 for the Series D Preferred Stock. In connection with
the issuance of each series, the Company also entered into
replacement capital covenants, which restrict the Company’s
rights to redeem or repurchase each series. Except in certain
limited circumstances, neither series will have any voting
rights.
On November 14, 2008, the Company issued
6.6 million shares of cumulative perpetual preferred stock to
the United States Treasury under the Capital Purchase
Program of the Emergency Economic Stabilization Act of
2008 (the “Series E Preferred Stock”) for proceeds of
$6.6 billion. Dividends on the Series E Preferred Stock will
accrue and be payable quarterly at a rate of 5 percent per
annum for five years. The rate will increase to 9 percent per
annum, thereafter, if shares of the Series E Preferred Stock
are not redeemed by the Company. Under its original terms,
the Series E Preferred Stock could be redeemed three years
following the date of issuance, or earlier if the Company
raised replacement regulatory capital. The American
Recovery and Reinvestment Act of 2009 (“ARRA”) requires
the United States Treasury, subject to consultation with
appropriate banking regulators, to permit participants in the
Capital Purchase Program to repay any amounts previously
received without regard to whether the recipient has
replaced such funds from any other source or to any waiting
period. All redemptions of the Series E Preferred Stock shall
be at 100 percent of the issue price, plus any accrued and
unpaid dividends. The Series E Preferred Stock is non-voting,
other than for class voting rights on any authorization or
issuance of senior ranking shares, any amendment to its
rights, or any merger, exchange or similar transaction which
would adversely affect its rights.
For as long as the Series E Preferred Stock is
outstanding, no dividends may be declared or paid on junior
preferred shares, preferred shares ranking equal to the
Series E Preferred Stock, or common shares, nor may the
Company repurchase or redeem any such shares, unless all
accrued and unpaid dividends for all past dividend periods
on the Series E Preferred Stock are fully paid. The consent of
the United States Treasury is required for any increase in the
quarterly dividends per share of the Company’s common
stock or for any share repurchases of junior preferred or
common shares, until the shorter of the third anniversary
date of the Series E Preferred Stock issuance or the date the
Series E Preferred Stock is redeemed in whole. Participation
in this program also subjects the Company to certain
restrictions with respect to the compensation of certain
executives.
In conjunction with the Series E Preferred Stock
issuance, the United States Treasury received warrants
entitling it to purchase 33 million shares of the Company’s
common stock at a price of $30.29 per common share. The
warrants were exercisable at issuance and expire on
November 13, 2018. The Company allocated $172 million
of the proceeds from the Series E Preferred Stock issuance to
the warrants. The resulting discount on the Series E
Preferred Stock is being accreted over five years and
reported as a reduction of income applicable to common
equity over that period. ARRA requires the United States
Treasury to liquidate these warrants if the Company repays
amounts received under the Capital Purchase Program.
During 2008, 2007 and 2006, the Company
repurchased shares of its common stock under various
authorizations approved by its Board of Directors. As of
December 31, 2008, the Company had approximately
20 million shares that may yet be purchased under the
current Board of Director approved authorization, in
connection with the administration of its employee benefit
plans in the ordinary course of business solely to the extent
permitted under the Capital Purchase Program of the
Emergency Economic Stabilization Act of 2008.
The following table summarizes the Company’s common stock repurchased in each of the last three years:
(Dollars and Shares in Millions)
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares
2
58
90
Value
$
91
2,011
2,817
90
U.S. BANCORP
Shareholders’ equity is affected by transactions and valuations of asset and liability positions that require adjustments to
accumulated other comprehensive income (loss). The reconciliation of the transactions affecting accumulated other
comprehensive income (loss) included in shareholders’ equity for the years ended December 31, is as follows:
(Dollars in Millions)
2008
Unrealized loss on securities available-for-sale . . . . . . . . . . . . . . . . .
Unrealized loss on derivative hedges . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized loss on derivative hedges . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification for realized losses . . . . . . . . . . . . . . . . . . . . . . . . .
Change in retirement obligation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pre-tax
$(2,729)
(722)
(117)
(15)
1,020
(1,357)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(3,920)
2007
Unrealized loss on securities available-for-sale . . . . . . . . . . . . . . . . .
Unrealized loss on derivative hedges . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized loss on derivative hedges . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification for realized losses . . . . . . . . . . . . . . . . . . . . . . . . .
Change in retirement obligation . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (482)
(299)
8
–
96
352
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (325)
2006
Unrealized gain on securities available-for-sale . . . . . . . . . . . . . . . . .
Unrealized gain on derivative hedges . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized loss on derivative hedges . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification for realized losses . . . . . . . . . . . . . . . . . . . . . . . . .
Change in retirement obligation . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
67
35
(30)
(199)
33
(398)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (492)
Transactions
Tax-effect
Net-of-tax
Balances
Net-of-Tax
$1,037
274
45
6
(388)
519
$1,493
$ 183
115
(3)
–
(38)
(132)
$ 125
$ (25)
(14)
11
75
(12)
150
$ 185
$(1,692)
(448)
(72)
(9)
632
(838)
$(2,427)
$ (299)
(184)
5
–
58
220
$ (200)
$
42
21
(19)
(124)
21
(248)
$ (307)
$(1,745)
(639)
(78)
(11)
–
(890)
$(3,363)
$ (659)
(191)
(6)
(28)
–
(52)
$ (936)
$ (370)
(6)
(12)
(77)
–
(271)
$ (736)
Regulatory Capital The measures used to assess capital by
bank regulatory agencies include two principal risk-based
ratios, Tier 1 and total risk-based capital. Tier 1 capital is
considered core capital and includes common shareholders’
equity plus qualifying preferred stock, trust preferred
securities and minority interests in consolidated subsidiaries
(included in other liabilities and subject to certain
limitations), and is adjusted for the aggregate impact of
certain items included in other comprehensive income (loss).
Total risk-based capital includes Tier 1 capital and other
items such as subordinated debt and the allowance for credit
losses. Both measures are stated as a percentage of risk-
adjusted assets, which are measured based on their perceived
credit risk and include certain off-balance sheet exposures,
such as unfunded loan commitments, letters of credit, and
derivative contracts. The Company is also subject to a
leverage ratio requirement, a non risk-based asset ratio,
which is defined as Tier 1 capital as a percentage of average
assets adjusted for goodwill and other non-qualifying
intangibles and other assets.
For a summary of the regulatory capital requirements
and the actual ratios as of December 31, 2008 and 2007, for
the Company and its bank subsidiaries, see Table 21
included in Management’s Discussion and Analysis, which is
incorporated by reference into these Notes to Consolidated
Financial Statements.
U.S. BANCORP
91
The following table provides the components of the
Company’s regulatory capital:
(Dollars in Millions)
Tier 1 Capital
December 31
2008
2007
Common shareholders’ equity . . . . . .
Qualifying preferred stock . . . . . . . . .
Qualifying trust preferred securities . .
Minority interests . . . . . . . . . . . . . . .
Less intangible assets
Goodwill . . . . . . . . . . . . . . . . . .
Other disallowed intangible
$ 18,369
7,931
4,024
693
$ 20,046
1,000
4,024
695
(8,153)
(7,534)
assets . . . . . . . . . . . . . . . . .
Other (a) . . . . . . . . . . . . . . . . . . . .
(1,479)
3,041
(1,421)
729
Total Tier 1 Capital . . . . . . . . .
24,426
17,539
Tier 2 Capital
Allowance for credit losses . . . . . . . .
Eligible subordinated debt . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . .
Total Tier 2 capital . . . . . . . . .
2,892
5,579
–
8,471
2,260
6,126
–
8,386
Total Risk Based Capital . . . . .
$ 32,897
$ 25,925
Risk-Weighted Assets . . . . . . . . . . .
$230,627
$212,592
(a) Includes the impact of items included in other comprehensive income (loss), such as
unrealized gains (losses) on available-for-sale securities, accumulated net gains on cash
flow hedges, pension liability adjustments, etc.
Minority interests principally represent preferred stock of
consolidated subsidiaries. During 2006, the Company’s
primary banking subsidiary formed USB Realty Corp., a real
estate investment trust, for the purpose of issuing
Note 16 EARNINGS PER SHARE
The components of earnings per share were:
(Dollars and Shares in Millions, Except Per Share Data)
5,000 shares of Fixed-to-Floating Rate Exchangeable Non-
cumulative Perpetual Series A Preferred Stock with a
liquidation preference of $100,000 per share (“Series A
Preferred Securities”) to third party investors, and investing
the proceeds in certain assets, consisting predominately of
mortgage-backed securities from the Company. Dividends on
the Series A Preferred Securities, if declared, will accrue and
be payable quarterly, in arrears, at a rate per annum of
6.091 percent from December 22, 2006 to, but excluding,
January 15, 2012. After January 15, 2012, the rate will be
equal to three-month LIBOR for the related dividend period
plus 1.147 percent. If USB Realty Corp. has not declared a
dividend on the Series A Preferred Securities before the
dividend payment date for any dividend period, such
dividend shall not be cumulative and shall cease to accrue
and be payable, and USB Realty Corp. will have no
obligation to pay dividends accrued for such dividend
period, whether or not dividends on the Series A Preferred
Securities are declared for any future dividend period.
The Series A Preferred Securities will be redeemable, in
whole or in part, at the option of USB Realty Corp. on the
dividend payment date occurring in January 2012 and each
fifth anniversary thereafter, or in whole but not in part, at
the option of USB Realty Corp. on any dividend date before
or after January 2012 that is not a five-year date. Any
redemption will be subject to the approval of the Office of
the Comptroller of the Currency.
2008
2007
2006
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of preferred stock discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,946
(119)
(4)
$4,324
(60)
–
$4,751
(48)
–
Net income applicable to common equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,823
$4,264
$4,703
Average common shares outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net effect of the exercise and assumed purchase of stock awards and conversion of outstanding
1,742
1,735
1,778
convertible notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
Average diluted common shares outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,757
Earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1.62
$ 1.61
23
1,758
$ 2.46
$ 2.43
26
1,804
$ 2.64
$ 2.61
For the years ended December 31, 2008, 2007 and 2006,
options and warrants to purchase 67 million, 13 million and
1 million shares, respectively, were outstanding but not
included in the computation of diluted earnings per share
because they were antidilutive. Convertible senior debentures
that could potentially be converted into shares of the
Company’s common stock pursuant to specified formulas,
were not included in the computation of diluted earnings per
share to the extent the conversions were antidilutive.
92
U.S. BANCORP
Note 17 EMPLOYEE BENEFITS
Employee Investment Plan The Company has a defined
contribution retirement savings plan which allows qualified
employees to make contributions up to 75 percent of their
annual compensation, subject to Internal Revenue Service
limits, through salary deductions under Section 401(k) of the
Internal Revenue Code. Employee contributions are invested,
at the employees’ direction, among a variety of investment
alternatives. Employee contributions are 100 percent
matched by the Company, up to four percent of an
employee’s eligible annual compensation. The Company’s
matching contribution vests immediately. Although the
matching contribution is initially invested in the Company’s
common stock, an employee can reinvest the matching
contributions among various investment alternatives. Total
expense was $76 million, $62 million and $58 million in
2008, 2007 and 2006, respectively.
Pension Plans Pension benefits are provided to substantially
all employees based on years of service, multiplied by a
percentage of their final average pay. Employees become
vested upon completing five years of vesting service. In
addition, two cash balance pension benefit plans exist and
only investment or interest credits continue to be credited to
participants’ accounts. Plan assets consist of various equities,
equity mutual funds and other miscellaneous assets.
In general, the Company’s pension plans’ objectives
include maintaining a funded status sufficient to meet
participant benefit obligations over time while reducing
long-term funding requirements and pension costs. The
Company has an established process for evaluating all the
plans, their performance and significant plan assumptions,
including the assumed discount rate and the long-term rate
of return (“LTROR”). Annually, the Company’s
Compensation Committee (“the Committee”), assisted by
outside consultants, evaluates plan objectives, funding
policies and plan investment policies considering its long-
term investment time horizon and asset allocation strategies.
The process also evaluates significant plan assumptions.
Although plan assumptions are established annually, the
Company may update its analysis on an interim basis in
order to be responsive to significant events that occur during
the year, such as plan mergers and amendments.
In addition to the funded qualified pension plans, the
Company maintains non-qualified plans that are unfunded.
The assumptions used in computing the present value of the
accumulated benefit obligation, the projected benefit
obligation and net pension expense are substantially
consistent with those assumptions used for the funded
qualified plans.
Funding Practices The Company’s funding policy is to
contribute amounts to its plans sufficient to meet the
minimum funding requirements of the Employee Retirement
Income Security Act of 1974, plus such additional amounts
as the Company determines to be appropriate. The
Company made no contributions to the qualified pension
plans in 2008 or 2007, and anticipates no contributions in
2009. Any contributions made to the plans are invested in
accordance with established investment policies and asset
allocation strategies.
Investment Policies and Asset Allocation In establishing its
investment policies and asset allocation strategies, the
Company considers expected returns and the volatility
associated with different strategies. The independent
consultant performs modeling that projects numerous
outcomes using a broad range of possible scenarios,
including a mix of possible rates of inflation and economic
growth. Starting with current economic information, the
model bases its projections on past relationships between
inflation, fixed income rates and equity returns when these
types of economic conditions have existed over the previous
30 years, both in the U.S. and in foreign countries.
Generally, based on historical performance of the
various investment asset classes, investments in equities have
outperformed other investment classes but are subject to
higher volatility. While an asset allocation including debt
securities and other assets generally has lower volatility and
may provide protection in a declining interest rate
environment, it limits the pension plan’s long-term up-side
potential. Given the pension plans’ investment horizon and
the financial viability of the Company to meet its funding
objectives, the Committee has determined that an asset
allocation strategy investing principally in equities diversified
among various domestic equity categories and international
equities is appropriate. Domestic and international equities
declined significantly in 2008, resulting in an under-funded
position for the qualified pension plans of $391 million. At
December 31, 2008 and 2007, plan assets of the qualified
pension plans included mutual funds that have asset
management arrangements with related parties totaling
$791 million and $1.3 billion, respectively.
U.S. BANCORP
93
The following table, which is unaudited, except for the actual asset allocations at December 31, 2008 and 2007, provides a
summary of asset allocations adopted by the Company compared with a typical asset allocation alternative:
Asset Class
Domestic Equity Securities
Large Cap . . . . . . . . . . . . . . . . . . .
Mid Cap . . . . . . . . . . . . . . . . . . . .
Small Cap . . . . . . . . . . . . . . . . . . .
International Equity Securities . . . .
Debt Securities . . . . . . . . . . . . . . . .
Real Estate . . . . . . . . . . . . . . . . . . .
Alternative Investments . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . .
Total Mix Or Weighted Rates . . . . .
LTROR assumed . . . . . . . . . . . . . .
Standard deviation . . . . . . . . . . . . .
Asset Allocation
December 2008
December 2007
Typical
Asset Mix (b)
Actual
Target
Actual
Target
Compound
2009
Expected Returns
Standard
Deviation
29%
3
6
14
30
2
13
3
100%
8.7%
13.3%
54%
17
6
20
–
2
–
1
55%
19
6
20
–
–
–
–
55%
17
5
20
–
2
–
1
100%
100%
100%
8.5% (a)
20.2%
55%
19
6
20
–
–
–
–
100%
8.9%
16.5%
9.3%
9.5
9.5
9.8
20.0%
24.0
24.0
24.0
9.7%
20.2%
(a) The LTROR assumed for the target asset allocation strategy of 8.5 percent is based on a range of estimates evaluated by the Company which were centered around the compound
expected return of 9.2 percent reduced for estimated asset management and administrative fees.
(b) Typical asset mix represents the median asset allocation percentages of plans advised by a third-party benefit consulting firm.
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. The Company
determined an LTROR assumption of 8.5 percent reflected
expected returns based on current economic conditions and
plan assets. Regardless of the extent of the Company’s
analysis of alternative asset allocation strategies, economic
scenarios and possible outcomes, plan assumptions
developed for the LTROR are subject to imprecision and
changes in economic factors. As a result of the modeling
imprecision and uncertainty, the Company considers a range
of potential expected rates of return, economic conditions
for several scenarios, historical performance relative to
assumed rates of return and asset allocation and LTROR
information for a peer group in establishing its assumptions.
Postretirement Welfare Plan In addition to providing
pension benefits, the Company provides health care and
death benefits to certain retired employees. Generally, all
active employees may become eligible for retiree health care
benefits by meeting defined age and service requirements.
The Company may also subsidize the cost of coverage for
employees meeting certain age and service requirements. The
medical plan contains other cost-sharing features such as
deductibles and coinsurance. The estimated cost of these
retiree benefit payments is accrued during the employees’
active service.
94
U.S. BANCORP
In accordance with Statement of Financial Accounting
Standards No. 158 (“SFAS 158”), “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement
Plans — an amendment of FASB Statements No. 87, 88,
106, and 132(R)”, the Company eliminated its early
measurement date for its retirement plans during 2008,
resulting in the Company recording a cumulative effect
accounting adjustment to decrease beginning retained
earnings by $4 million (net of tax) and increase accumulated
other comprehensive income (loss) by $3 million (net of
tax).
The following table summarizes benefit obligation and plan asset activity for the retirement plans:
Pension Plans
Postretirement Welfare Plan
(Dollars in Millions)
Projected Benefit Obligation
2008
2007
2008
Benefit obligation at beginning of measurement period . . . . . . . . . . . . . . . $ 2,225
26
Effect of eliminating early measurement date . . . . . . . . . . . . . . . . . . . . .
76
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
141
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
–
Plan participants’ contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(122)
Benefit payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
–
Acquisitions and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit obligation at end of measurement period (a). . . . . . . . . . . . . . . . . $ 2,368
Fair Value Of Plan Assets
Fair value at beginning of measurement period . . . . . . . . . . . . . . . . . . . . $ 2,943
32
Effect of eliminating early measurement date . . . . . . . . . . . . . . . . . . . . .
(1,173)
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
–
Plan participants’ contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(122)
Benefit payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value at end of measurement period . . . . . . . . . . . . . . . . . . . . . . . . $ 1,699
Funded Status
Funded status at end of measurement period . . . . . . . . . . . . . . . . . . . . . $ (669)
Fourth quarter contribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
–
Recognized amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (669)
Components Of The Consolidated Balance Sheet
Noncurrent benefit asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Current benefit liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent benefit liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
–
(22)
(647)
Recognized amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (669)
Accumulated Other Comprehensive Income (Loss)
Net actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,538
(18)
Prior service (credit) cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
–
Transition (asset) obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognized amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset (liability) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,520
581
Net recognized amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
939
$2,127
–
70
126
–
12
(122)
12
$2,225
$2,578
–
468
19
–
(122)
$2,943
$ 718
5
$ 723
$ 992
(21)
(248)
$ 723
$ 159
(26)
–
133
50
$
83
$206
(1)
6
12
14
(29)
(36)
4
$176
$177
(3)
5
1
14
(36)
$158
$ (18)
–
$ (18)
$ –
–
(18)
$ (18)
$ (79)
(3)
2
(80)
(31)
$ (49)
2007
$238
–
6
14
15
(34)
(35)
2
$206
$183
–
9
5
15
(35)
$177
$ (29)
–
$ (29)
$ –
–
(29)
$ (29)
$ (50)
(4)
4
(50)
(19)
$ (31)
(a) At December 31, 2008 and 2007, the accumulated benefit obligation for all pension plans was $2.2 billion and $2.1 billion, respectively.
The following table provides information for pension plans with benefit obligations in excess of plan assets:
(Dollars in Millions)
2008
2007
Pension Plans with Projected Benefit Obligations in Excess of Plan Assets
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,368
1,699
Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,207
1,669
$274
–
265
–
U.S. BANCORP
95
The following table sets forth the components of net periodic benefit cost and other amounts recognized in accumulated other
comprehensive income (loss) for the retirement plans:
Pension Plans
Postretirement Welfare Plan
(Dollars in Millions)
2008
2007
2006
2008
2007
2006
Components Of Net Periodic Benefit Cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Service cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . .
Prior service (credit) cost and transition (asset) obligation
76
141
(224)
amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss amortization. . . . . . . . . . . . . . . . . . . .
(6)
32
$ 70
126
(199)
(6)
63
$ 70
118
(191)
(6)
90
$ 6
12
(6)
–
(4)
$ 6
14
(6)
–
–
$ 5
13
(1)
–
–
Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
19
$ 54
$ 81
$ 8
$ 14
$ 17
Other Changes In Plan Assets And Benefit Obligations
Recognized In Accumulated Other Comprehensive
Income (Loss)
Current year actuarial (gain) loss. . . . . . . . . . . . . . . . . . . . $1,419
Actuarial (gain) loss amortization. . . . . . . . . . . . . . . . . . . .
(32)
Prior service (credit) cost and transition (asset) obligation
$(258)
(63)
$(154)
(90)
$(35)
4
$(37)
–
$(15)
–
amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
6
6
–
–
–
Total recognized in accumulated other comprehensive income
(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,393
$(315)
$(238)
$(31)
$(37)
$(15)
Total recognized in net periodic benefit cost and accumulated
other comprehensive income (loss) (a)(b) . . . . . . . . . . . . . . $1,412
$(261)
$(157)
$(23)
$(23)
$ 2
(a) The estimated net loss and prior service credit for the defined benefit pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost
in 2009 are $49 million and $(6) million, respectively.
(b) The estimated net gain for the postretirement welfare plan that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in 2009 is $7 million.
The following table sets forth weighted average assumptions used to determine end of year obligations:
(Dollars in Millions)
Pension Plans
Postretirement Welfare Plan
2008
2007
2008
2007
Discount rate(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase, determined on a liability weighted basis. . . . . . . . . . . . . . . .
6.4%
3.0
6.3%
3.2
Health care cost trend rate (b)
Prior to age 65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After age 65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect on accumulated postretirement benefit obligation
One percent increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
One percent decrease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.3%
*
7.0%
21.0
6.1%
*
8.0%
9.0
$ 11
(10)
$ 12
(11)
(a) For 2008, the discount rate was developed using Towers Perrin’s cash flow matching bond model with a modified duration for the pension plans and postretirement welfare plan of 12.5 and
8.1 years, respectively. For 2007, the discount rate was developed using Towers Perrin’s cash flow matching bond model with a modified duration for the pension plans and postretirement
welfare plan of 12.5 and 7.9 years, respectively.
(b) The pre-65 and post-65 rates are assumed to decrease gradually to 5.5 percent by 2011 and 6.0 percent by 2014, respectively, and remain at these levels thereafter.
* Not applicable
The following table sets forth weighted average assumptions used to determine net periodic benefit cost:
(Dollars in Millions)
2008
2007
2006
2008
2007
2006
Pension Plans
Postretirement Welfare Plan
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . .
6.3%
8.9
3.2
6.0%
8.9
3.5
5.7%
8.9
3.5
Health care cost trend rate (a)
Prior to age 65. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After age 65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect on total of service cost and interest cost
One percent increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
One percent decrease. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.1%
3.5
*
8.0%
9.0
6.0%
3.5
*
5.7%
3.5
*
8.0%
10.0
9.0%
11.0
$ 1
(1)
$
1
(1)
$
1
(1)
(a) The pre-65 and post-65 rates are assumed to decrease gradually to 5.5 percent by 2013 and 6.0 percent by 2014, respectively, and remain at these levels thereafter.
* Not applicable
96
U.S. BANCORP
In 2009, the Company expects to contribute $22 million to its non-qualified pension plans and to make no contributions to its
postretirement welfare plan.
The following benefit payments are expected to be paid from the retirement plans:
(Dollars in Millions)
Estimated Future Benefit Payments
Pension
Plans
Postretirement
Welfare Plan (a)
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 – 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$151
133
137
139
144
791
$ 15
18
19
21
22
125
(a) Net of participant contributions.
Federal subsidies expected to be received by the postretirement welfare plan are not significant to the Company.
Note 18 STOCK-BASED COMPENSATION
As part of its employee and director compensation
programs, the Company may grant certain stock awards
under the provisions of the existing stock compensation
plans, including plans assumed in acquisitions. The plans
provide for grants of options to purchase shares of common
stock at a fixed price equal to the fair value of the
underlying stock at the date of grant. Option grants are
generally exercisable up to ten years from the date of grant.
In addition, the plans provide for grants of shares of
common stock or stock units that are subject to restriction
on transfer prior to vesting. Most stock awards vest over
three to five years and are subject to forfeiture if certain
STOCK O PTIONS AWARDS
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, 2008, there were 45 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
Options/Shares
Weighted-
Average
Exercise Price
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic Value
(in millions)
2008
Number outstanding at beginning of period . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number outstanding at end of period (b) . . . . . . . . . . . . . . . . . . . . . . . .
Exercisable at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007
Number outstanding at beginning of period . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91,211,464
22,464,085
(28,528,238)
(2,854,300)
82,293,011
43,787,801
97,052,221
13,810,737
(17,595,906)
(2,055,588)
Number outstanding at end of period (b) . . . . . . . . . . . . . . . . . . . . . . . .
Exercisable at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
Number outstanding at beginning of period . . . . . . . . . . . . . . . . . . . . . . . 125,983,461
12,464,197
(38,848,953)
(2,546,484)
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91,211,464
62,701,270
Number outstanding at end of period (b) . . . . . . . . . . . . . . . . . . . . . . . .
Exercisable at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
97,052,221
71,747,675
$27.22
32.19
25.27
31.94
$29.08
$26.11
$25.42
35.81
23.66
30.59
$27.22
$24.82
$24.38
30.16
23.39
28.09
$25.42
$24.01
6.0
4.0
4.9
3.5
5.1
4.0
$ (335)
$ (48)
$ 413
$ 434
$1,045
$ 874
(a) Options cancelled includes both non-vested (i.e., forfeitures) and vested options.
(b) Outstanding options include stock-based awards that may be forfeited in future periods, however the impact of the estimated forfeitures is reflected in compensation expense.
U.S. BANCORP
97
Stock-based compensation expense is based on the estimated fair value of the award at the date of grant or modification. The
fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model, requiring the
use of subjective assumptions. Because employee stock options have characteristics that differ from those of traded options,
including vesting provisions and trading limitations that impact their liquidity, the determined value used to measure
compensation expense may vary from their actual fair value. The following table includes the weighted average estimated fair
value and assumptions utilized by the Company for newly issued grants:
Estimated fair value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.55
Risk-free interest rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock volatility factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life of options (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.4%
4.8%
.19
5.0
$5.38
$6.26
4.7%
4.3%
.20
5.0
4.3%
4.0%
.28
5.4
2008
2007
2006
Expected stock volatility is based on several factors
including the historical volatility of the Company’s stock,
implied volatility determined from traded options and other
factors. The Company uses historical data to estimate option
exercises and employee terminations to estimate the
expected life of options. The risk-free interest rate for the
expected life of the options is based on the U.S. Treasury
yield curve in effect on the date of grant. The expected
dividend yield is based on the Company’s expected dividend
yield over the life of the options.
The following summarizes certain stock option activity of the Company:
(Dollars in Millions)
2008
2007
2006
Fair value of options vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intrinsic value of options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received from options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit realized from options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$67
262
651
99
$61
192
400
73
$81
346
885
131
To satisfy option exercises, the Company predominantly uses treasury stock.
Additional information regarding stock options outstanding as of December 31, 2008, is as follows:
Range of Exercise Prices
Shares
122,199
$12.67 – $15.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,562,059
$15.01 – $20.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20.01 – $25.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,096,773
$25.01 – $30.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,022,906
$30.01 – $35.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,602,858
$35.01 – $37.99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,886,216
82,293,011
RESTRICTED STOCK AWARDS
Outstanding Options
Exercisable Options
Weighted-
Average
Remaining
Contractual
Life (Years)
1.6
2.7
3.0
4.9
8.1
7.9
6.0
Weighted-
Average
Exercise
Price
$13.30
18.87
22.13
29.24
31.76
36.06
$29.08
Shares
122,199
5,457,249
15,015,763
13,293,189
6,959,566
2,939,835
43,787,801
Weighted-
Average
Exercise
Price
$13.30
18.86
22.13
29.06
30.74
36.05
$26.11
A summary of the status of the Company’s restricted shares of stock is presented below:
Year Ended December 31
Shares
Nonvested Shares
Outstanding at beginning of period. . . . . 2,368,085
Granted . . . . . . . . . . . . . . . . . . . . . 1,132,239
(958,729)
Vested . . . . . . . . . . . . . . . . . . . . . .
(121,060)
Cancelled . . . . . . . . . . . . . . . . . . . .
Outstanding at end of period. . . . . . . . . 2,420,535
2008
2007
2006
Weighted-
Average Grant-
Date Fair Value
Weighted-
Average Grant-
Date Fair Value
Shares
Weighted-
Average Grant-
Date Fair Value
Shares
$31.45
32.24
29.78
32.69
$32.42
2,919,901
952,878
(1,292,748)
(211,946)
2,368,085
$27.32
35.69
25.31
31.05
$31.45
2,644,171
1,040,201
(493,730)
(270,741)
2,919,901
$26.73
30.22
28.91
29.75
$27.32
The total fair value of shares vested was $29 million,
$45 million, and $15 million for 2008, 2007 and 2006,
respectively.
Stock-based compensation expense was $85 million,
$77 million and $101 million for 2008, 2007 and 2006,
respectively. On an after-tax basis, stock-based compensation
98
U.S. BANCORP
was $53 million, $48 million and $64 million for 2008,
2007, and 2006, respectively. As of December 31, 2008,
there was $139 million of total unrecognized compensation
cost related to nonvested share-based arrangements granted
under the plans. That cost is expected to be recognized over
a weighted-average period of 3 years as compensation
expense.
Note 19 INCOME TAXES
The components of income tax expense were:
(Dollars in Millions)
2008
2007
2006
Federal
Current. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,832
(958)
Federal income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
874
State
Current. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
300
(87)
213
$1,732
(95)
1,637
248
(2)
246
$1,817
1
1,818
298
(4)
294
Total income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,087
$1,883
$2,112
A reconciliation of expected income tax expense at the federal statutory rate of 35 percent to the Company’s applicable income
tax expense follows:
(Dollars in Millions)
Tax at statutory rate (35 percent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income tax, at statutory rates, net of federal tax benefit
. . . . . . . . . . . . . . . . . . . .
Tax effect of
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resolution of federal and state income tax examinations . . . . . . . . . . . . . . . . . . . . . .
Other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008
$1,411
138
(301)
(173)
–
12
2007
$2,173
160
(245)
(130)
(57)
(18)
2006
$2,402
191
(231)
(91)
(83)
(76)
Applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,087
$1,883
$2,112
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 (loss).
In preparing its tax returns, the Company is required to
interpret complex tax laws and regulations and utilize
income and cost allocation methods to determine its taxable
income. On an ongoing basis, the Company is subject to
examinations by federal, state and local government taxing
authorities that may give rise to differing interpretations of
these complex laws, regulations and methods. Due to the
nature of the examination process, it generally takes years
before these examinations are completed and matters are
resolved. Included in 2007 and 2006 were reductions in
income tax expense and associated liabilities related to the
resolution of various federal and state income tax
examinations. The federal income tax examination
resolutions cover substantially all of the Company’s legal
entities for the years through 2004. The Company also
resolved several state income tax examinations which cover
varying years from 2001 through 2006 in different states.
The resolution of these cycles was the result of negotiations
held between the Company and representatives of various
taxing authorities throughout the examinations. During
2007 and 2008, the Internal Revenue Service examined the
Company’s tax returns for the years ended December 31,
2005 and 2006. The resolution of that examination was still
pending at December 31, 2008. The years open to
examination by state and local government authorities vary
by jurisdiction.
A reconciliation of the change in the federal, state and foreign unrecognized tax positions balances are summarized as follows:
Year Ended December 31 (Dollars in Millions)
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exam resolutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statute expirations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008
$296
57
(63)
(7)
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$283
2007
$364
21
(49)
(40)
$296
U.S. BANCORP
99
The total amount of unrecognized tax positions that, if
recognized would impact the effective income tax rate as of
December 31, 2008 and 2007, were $187 million and
$192 million, respectively. The Company classifies interest
and penalties related to unrecognized tax positions as a
component of income tax expense. During the years ended
December 31, 2008 and 2007, the Company recognized
approximately $19 million and $13 million, respectively, in
interest on unrecognized tax positions and had
approximately $41 million accrued at December 31, 2008.
While certain examinations may be concluded, statutes
may lapse or other developments may occur, the Company
does not believe a significant increase or decrease in the
uncertain tax positions will occur over the next twelve
months.
Deferred income tax assets and liabilities reflect the tax
effect of estimated temporary differences between the
carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for the same items
for income tax reporting purposes.
The significant components of the Company’s net deferred tax asset (liability) as of December 31 were:
(Dollars in Millions)
Deferred Tax Assets
Securities available-for-sale and financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investment basis differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension and postretirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued severance, pension and retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal, state and foreign net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other deferred tax assets, net
2008
$ 1,473
1,345
282
265
211
176
62
49
44
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,907
Deferred Tax Liabilities
Leasing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accelerated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible asset basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension and postretirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other deferred tax liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,996)
(328)
(140)
(57)
(40)
(35)
–
(142)
(2,738)
(49)
$
2007
538
879
111
184
–
232
67
66
25
2,102
(2,139)
(390)
(80)
(59)
(9)
(20)
(392)
(226)
(3,315)
(66)
Net Deferred Tax Asset (Liability)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,120
$(1,279)
The Company has established a valuation allowance to
offset deferred tax assets related to federal, state and foreign
net operating loss carryforwards which are subject to
various limitations under the respective income tax laws and
some of which may expire unused. The Company has
approximately $487 million of federal, state and foreign net
operating loss carryforwards which expire at various times
through 2024. Management has determined a valuation
reserve is not required for the remaining net deferred tax
assets because it is more likely than not these assets will be
realized through carry back to taxable income in prior years,
future reversals of existing taxable temporary differences and
future taxable income.
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 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, 2008, retained earnings
included approximately $102 million of base year reserves
for which no deferred federal income tax liability has been
recognized.
Note 20 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
100
U.S. BANCORP
positions held for asset and liability management purposes
and customer-related derivative positions, see Table 18
“Derivative Positions,” included in Management’s
Discussion and Analysis, which is incorporated by reference
in these Notes to Consolidated Financial Statements.
ASSET AND LIAB ILITY MANAGEMENT POSITIONS
Cash Flow Hedges The Company had $12.0 billion
notional amount of derivatives designated as cash flow
hedges at December 31, 2008. These derivatives are interest
rate swaps that are hedges of the forecasted cash flows from
the underlying variable-rate debt. All cash flow hedges were
highly effective for the year ended December 31, 2008, and
the change in fair value attributed to hedge ineffectiveness
was not material.
At December 31, 2008 and 2007, accumulated other
comprehensive income (loss) included a deferred after-tax
net loss of $650 million and $219 million, respectively,
related to cash flow hedges. The unrealized loss will be
reflected in earnings when the related cash flows or hedged
transactions occur and will offset the related performance of
the hedged items. The occurrence of the forecasted cash
flows and hedged transactions remains probable. The
estimated amount of after-tax loss to be reclassified from
accumulated other comprehensive income (loss) into
earnings during 2009 is $200 million. This includes gains
and losses related to hedges that were terminated early and
the forecasted transactions are still probable.
Fair Value Hedges The Company had $4.5 billion notional
amount of derivatives designated as fair value hedges at
December 31, 2008. These derivatives are primarily interest
rate swaps that hedge the change in fair value related to
interest rate changes of underlying fixed-rate debt, junior
subordinated debentures and deposit obligations. All fair
value hedges were highly effective for the year ended
December 31, 2008. The change in fair value attributed to
hedge ineffectiveness was a loss of $3 million for the year
ended December 31, 2008.
Net Investment Hedges The Company enters into
derivatives to protect its net investment in certain foreign
operations. The Company uses forward commitments to sell
specified amounts of certain foreign currencies and foreign
denominated debt to hedge its capital volatility risk
associated with fluctuations in foreign currency exchange
rates. The Company had $878 million notional amount of
derivatives designated as net investment hedges at
December 31, 2008. The net amount of gains or losses
included in the cumulative translation adjustment for 2008
was not significant.
Other Derivative Positions The Company has derivative
positions that are used for interest rate risk and other risk
management purposes but are not designated as cash flow
hedges or fair value hedges in accordance with the
provisions of Statement of Financial Accounting Standards
No. 133, “Accounting for Derivative Instruments and
Hedging Activities.”
At December 31, 2008, the Company had forward
commitments to sell $8.4 billion of residential mortgage
loans, intended to hedge the Company’s interest rate risk
related to $9.2 billion of unfunded residential mortgage loan
commitments and $2.7 billion of MLHFS. Gains and losses
on forward sale commitments and the unfunded loan
commitments are included in mortgage banking revenue. At
December 31, 2008, the Company also held $20.8 billion
notional amount of U.S. Treasury futures, options on U.S.
Treasury futures contracts and forward commitments to buy
residential mortgage loans to economically hedge the change
in fair value of its residential MSRs.
CUSTOMER-RELATED PO SIT IONS
The Company acts as a seller and buyer of interest rate
contracts and foreign exchange rate contracts on behalf of
customers. At December 31, 2008, the Company had
$56.8 billion notional amount of aggregate customer
derivative positions, including offsetting positions taken by
the Company to minimize its market and liquidity risks. The
positions include $48.4 billion of interest rate swaps, caps,
and floors and $8.4 billion of foreign exchange rate
contracts. Gains or losses on customer-related transactions
were not significant for the year ended December 31, 2008.
Note 21 FAIR VALUES OF ASSETS AND
LIABILITIES
The Company uses fair value measurements for the initial
recording of certain assets and liabilities, periodic
remeasurement of certain assets and liabilities, and
disclosures. Derivatives, investment securities, certain
MLHFS and MSRs are recorded at fair value on a recurring
basis. Additionally, from time to time, the Company may be
required to record at fair value other assets on a
nonrecurring basis, such as loans held for sale, loans held for
investment and certain other assets. These nonrecurring fair
value adjustments typically involve application of lower-of-
cost-or-fair value accounting or impairment write-downs of
individual assets.
Effective January 1, 2008, the Company adopted
SFAS 157 which defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair
value measurements. Fair value is defined under SFAS 157 as
the exchange price that would be received for an asset or
U.S. BANCORP
101
paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an
orderly transaction between market participants on the
measurement date. Under SFAS 157, a fair value
measurement should reflect assumptions market participants
would use in pricing the asset or liability, including
assumptions about the risk inherent in a particular valuation
technique, the effect of a restriction on the sale or use of an
asset, and the risk of nonperformance. Upon adoption of
SFAS 157, the Company considered the principal market
and nonperformance risk when determining the fair value
measurements for derivatives which reduced trading revenue
by $62 million. SFAS 157 no longer allows the deferral of
origination fees or compensation expense related to the
closing of MLHFS for which the fair value option is elected,
resulting in additional mortgage banking revenue and
compensation expense in the period the MLHFS are
originated.
SFAS 157 specifies a three level hierarchy for valuation
techniques used to measure financial assets and financial
liabilities at fair value. This hierarchy is based on whether
the valuation inputs are observable or unobservable. These
levels are:
(cid:129) Level 1 — Quoted prices in active markets for identical
assets or liabilities. Level 1 includes U.S. Treasury and
exchange-traded instruments.
(cid:129) Level 2 — Observable inputs other than Level 1 prices,
such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by
observable market data for substantially the full term of
the assets or liabilities. Level 2 includes debt securities
that are traded less frequently than exchange-traded
instruments and which are valued using third party
pricing services; derivative contracts whose value is
determined using a pricing model with inputs that are
observable in the market or can be derived principally
from or corroborated by observable market data; and
MLHFS whose values are determined using quoted prices
for similar assets or pricing models with inputs that are
observable in the market or can be corroborated by
observable market data.
(cid:129) Level 3 — Unobservable inputs that are supported by
little or no market activity and that are significant to the
fair value of the assets or liabilities. Level 3 assets and
liabilities include financial instruments whose values are
determined using pricing models, discounted cash flow
methodologies, or similar techniques, as well as
instruments for which the determination of fair value
requires significant management judgment or estimation.
102
U.S. BANCORP
This category includes residential MSRs, certain debt
securities, including the Company’s SIV-related
investments and certain of its non-agency mortgage-
backed securities, and certain derivative contracts.
The following section describes the valuation methodologies
used by the Company to measure financial assets and
liabilities at fair value and for estimating fair value for
financial instruments not recorded at fair value as required
under SFAS 107 (“SFAS 107”), “Disclosures about Fair
Value of Financial Instruments”. In addition, for financial
assets and liabilities measured at fair value, the following
section includes an indication of the level of the fair value
hierarchy in which the assets or liabilities are classified.
Where appropriate, the description includes information
about the valuation models and key inputs to those models.
Derivatives Exchange-traded derivatives are measured at fair
value based on quoted market (i.e. exchange) prices. Because
prices are available for the identical instrument in an active
market, these fair values are classified within Level 1 of the
fair value hierarchy.
The majority of derivatives held by the Company are
executed over-the-counter and are valued using standard
cash flow, Black-Scholes and Monte Carlo valuation
techniques. The models incorporate various inputs,
depending on the type of derivative, including interest rate
curves, foreign exchange rates and volatility. In addition, all
derivative values incorporate an assessment of the risk of
counterparty nonperformance which is measured based on
the Company’s evaluation of credit risk and incorporates
external assessments of credit risk, where available. In its
assessment of nonperformance risk, the Company considers
its ability to net derivative positions under master netting
agreements, as well as collateral received or provided under
collateral support agreements. The majority of these
derivatives are classified within Level 2 of the fair value
hierarchy as the significant inputs to the models are
observable. An exception to the Level 2 classification are
certain derivative transactions for which the risk of
nonperformance cannot be observed in the market. These
derivatives are classified within Level 3 of the fair value
hierarchy. In addition, commitments to sell, purchase and
originate mortgage loans that meet the requirements of a
derivative, are valued by pricing models that include market
observable and unobservable inputs. Due to the significant
unobservable inputs, these commitments are classified within
Level 3 of the fair value hierarchy.
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.
Investments When available, quoted market prices are used
that date. MLHFS are Level 2. Related interest income for
to determine the fair value of investment securities and such
MLHFS continues to be measured based on contractual
items are classified within Level 1 of the fair value hierarchy.
For other securities, the Company determines fair value
based on various sources and may apply matrix pricing with
observable prices for similar bonds where a price for the
identical bond is not observable. Prices are verified, where
possible, to prices of observable market trades as obtained
from independent sources. Securities measured at fair value
by such methods are classified as Level 2.
For securities for which there are no market trades, the
fair value is based on management’s best estimates. These
securities are categorized as Level 3. For the SIV-related
investments, the majority of the collateral is residential
mortgage-backed securities with the remaining collateral
interest rates and reported as interest income in the
Consolidated Statement of Income.
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. Generally loan fair values reflect Level 3
consisting of commercial mortgage-backed and asset-backed
information.
securities, collateralized debt obligations and collateralized
Mortgage servicing rights MSRs are valued using a cash
loan obligations.
The estimation process for Level 3 securities involves
flow methodology and third party prices, if available.
Accordingly, MSRs are classified in Level 3. Refer to
the use of a cash-flow methodology and other market
Note 10 in the Notes to Consolidated Financial Statements
valuation techniques involving management judgment. The
for further information on the methodology used by the
cash-flow methodology uses assumptions that reflect housing
Company in determining the fair value of its MSRs.
price changes, interest rates, borrower loan-to-value and
borrower credit scores. Inputs used for estimation are
refined and updated to reflect market developments. The fair
value of these securities are sensitive to changes in the
estimated cash flows and related assumptions used so these
variables are updated on a regular basis. The cash flows are
aggregated and passed through a distribution waterfall to
determine allocation to tranches. Cash flows are discounted
at an interest rate to estimate the fair value of the security
held by the Company. Discount rates reflect current market
conditions including the relative risk and market liquidity of
these investment securities. The primary drivers that impact
the valuations of these securities are the prepayment and
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 current rates for
deposits with similar maturities.
Short-term Borrowings Federal funds purchased, securities
sold under agreements to repurchase, commercial paper and
other short-term funds borrowed have floating rates or
short-term maturities. The fair value of short-term
borrowings was determined by discounting contractual cash
flows using current market rates.
default rates associated with the underlying collateral, as
Long-term Debt The fair value for most long-term debt was
well as the discount rate used to calculate the present value
determined by discounting contractual cash flows using
of the projected cash flows.
Certain mortgage loans held for sale MLHFS measured at
fair value are initially valued at the transaction price and are
subsequently valued by comparison to instruments with
similar collateral and risk profiles. Included in mortgage
banking revenue for the year ended December 31, 2008, was
$65 million of net losses from the initial measurement and
subsequent changes to fair value of the MLHFS under the
fair value option. Changes in fair value due to instrument
specific credit risk were immaterial. The fair value of
current market rates. Junior subordinated debt instruments
were valued using market quotes.
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. The fair value of
residential mortgage commitments is estimated based on
observable inputs. Other loan commitments, letters of credit
and guarantees are not actively traded, and the Company
estimates their fair value based on the related amount of
unamortized deferred commitment fees adjusted for the
MLHFS was $2.7 billion as of December 31, 2008, which
probable losses for these arrangements.
exceeded the unpaid principal balance by $79 million as of
U.S. BANCORP
103
The following table summarizes the balances of assets and liabilities measured at fair value on a recurring basis:
December 31, 2008 (Dollars in Millions)
Level 1
Level 2
Level 3
Investment securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$474
–
–
–
$37,150
2,728
–
814
$1,844
–
1,194
1,744
FIN 39
Netting (a)
$
–
–
–
(151)
Total
$39,468
2,728
1,194
2,407
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$474
$40,692
$4,782
$ (151)
$45,797
Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ –
$ 3,127
$
46
$(1,251)
$ 1,922
(a) Financial Accounting Standards Board Interpretation No. 39 (“FIN 39”), “Offsetting of Amounts Related to Certain Contracts”, permits the netting of derivative receivables and derivative
payables when a legally enforceable master netting agreement exists between the Company and a derivative counterparty. A master netting agreement is an agreement between two
counterparties who have multiple derivative contracts with each other that provide for the net settlement of contracts through a single payment, in a single currency, in the event of default on
or termination of any one contract.
(b) Represents primarily derivative receivables and trading securities.
The table below presents the changes in fair value for all assets and liabilities measured at fair value on a recurring basis using
significant unobservable inputs (Level 3). Level 3 instruments presented in the table include SIV-related investments, certain
non-agency mortgage-backed securities, certain trust-preferred securities investments, MSRs and derivatives:
Year Ended December 31, 2008 (Dollars in Millions)
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains (losses) included in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains (losses) included in other comprehensive income (loss)
. . . . . . . . . . . . . . . . . . . . .
Purchases, sales, principal payments, issuances and settlements . . . . . . . . . . . . . . . . . . . . . .
Transfers into Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in unrealized gains (losses) relating to assets still held at December 31, 2008 . . . . . . .
(a) Included in securities gains (losses)
(b) Included in mortgage banking revenue.
(c) Approximately $1,129 million included in other noninterest income and $167 million included in mortgage banking revenue.
(d) Approximately $1 million included in other noninterest income and $(93) million included in mortgage banking revenue.
Investment
Securities
Available-for-Sale
Mortgage
Servicing
Rights
Net Other
Assets and
Liabilities
$2,923
$1,462
$ 338
(781)(a)
(74)
(887)
663
(835)(b)
–
567
–
1,296(c)
–
58
6
$1,844
$ (397)
$1,194
$1,698
$ (835)(b) $ (92)(d)
The Company may also be required periodically to measure certain other financial assets at fair value on a nonrecurring
basis. These measurements of fair value usually result from the application of lower-of-cost-or-market accounting or impairment
write-downs of individual assets. The following table summarizes the adjusted carrying values and the level of valuation
assumptions for assets measured at fair value on a nonrecurring basis:
(Dollars in Millions)
Carrying Value at
December 31, 2008
Level 1
Level 2
Level 3
Total
Total Losses
Recognized For
Year Ended
December 31, 2008
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$–
–
–
–
$ 12
117
66
–
$–
–
–
1
$ 12
117
66
1
$ 7
100
71
1
(a) Represents carrying value and related write-downs of loans for which adjustments are based on the appraised value of the collateral, excluding loans fully charged-off.
(b) Represents the fair value and related losses of foreclosed properties that were remeasured at fair value subsequent to initial acquisition.
FA IR VALUE OPT IO N
The following table summarizes the differences between the aggregate fair value of MLHFS for which the fair value option has
been elected and the aggregate unpaid principal amount the Company is contractually obligated to receive at maturity:
December 31, 2008 (Dollars in Millions)
Fair Value
Carrying
Amount
Aggregate
Unpaid
Principal
Excess of
Carrying
Amount Over
(Under) Unpaid
Principal
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans 90 days or more past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,728
11
$2,649
13
$ 79
(2)
104
U.S. BANCORP
Disclosures about Fair Value of Financial Instruments The
table below summarizes the estimated fair value for financial
instruments as of December 31, 2008 and 2007, excluding
financial instruments where fair value approximates carrying
value. In accordance with SFAS 107, the Company did not
include assets and liabilities that are not financial
instruments in the disclosure, such as the value of the long-
term relationships with deposit, credit card and trust
customers, premises and equipment, goodwill and other
intangibles, deferred taxes and other liabilities. Additionally,
the amounts in the table have not been updated since
December 31, 2008, therefore the valuations may have
changed significantly since that point in time. For these
reasons, the total of the fair value calculations presented
does not represent, and should not be construed to
represent, the underlying value of the Company.
(Dollars in Millions)
Financial Assets
2008
2007
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Investment securities held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgages held for sale(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
53
14
468
181,715
$
54
14
470
180,311
$
74
3,281
1,538
151,769
$
78
3,281
1,538
151,512
Financial Liabilities
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
159,350
33,983
38,359
161,196
34,333
38,135
131,445
32,370
43,440
131,469
32,580
43,006
(a) Balance excludes mortgages held for sale for which the fair value option under FAS 159 was elected.
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 $238 million. The carrying value
of other guarantees was $302 million.
Note 22 GUARANTEES AND CONTINGENT
LIABILITIES
COMMITMENTS TO EXTEND CREDIT
Commitments to extend credit are legally binding and
generally have fixed expiration dates or other termination
clauses. The contractual amount represents the Company’s
exposure to credit loss, in the event of default by the
borrower. The Company manages this credit risk by using
the same credit policies it applies to loans. Collateral is
obtained to secure commitments based on management’s
credit assessment of the borrower. The collateral may
include marketable securities, receivables, inventory,
equipment and real estate. Since the Company expects many
of the commitments to expire without being drawn, total
commitment amounts do not necessarily represent the
Company’s future liquidity requirements. In addition, the
commitments include consumer credit lines that are
cancelable upon notification to the consumer.
LETTERS OF CREDIT
Standby letters of credit are commitments the Company
issues to guarantee the performance of a customer to a third-
party. The guarantees frequently support public and private
borrowing arrangements, including commercial paper
issuances, bond financings and other similar transactions.
The Company issues commercial letters of credit on behalf
of customers to ensure payment or collection in connection
with trade transactions. In the event of a customer’s
nonperformance, the Company’s credit loss exposure is the
same as in any extension of credit, up to the letter’s
contractual amount. Management assesses the borrower’s
credit to determine the necessary collateral, which may
include marketable securities, receivables, inventory,
equipment and real estate. Since the conditions requiring the
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, 2008, were
approximately $16.1 billion with a weighted-average term of
approximately 22 months. The estimated fair value of
standby letters of credit was approximately $85 million at
December 31, 2008.
U.S. BANCORP
105
The contract or notional amounts of commitments to extend
credit and letters of credit at December 31, 2008, were as
follows:
(Dollars in Millions)
Commitments to extend credit
Commercial . . . . . . . . . .
Corporate and purchasing
cards (a) . . . . . . . . .
Consumer credit cards . . .
Other consumer . . . . . . .
Letters of credit
Standby . . . . . . . . . . . .
Commercial . . . . . . . . . .
Term
Less Than
One Year
Greater Than
One Year
Total
$18,983
$37,998
$56,981
14,489
57,619
3,450
7,477
244
–
–
16,172
8,621
76
14,489
57,619
19,622
16,098
320
(a) Primarily cancelable at the Company’s discretion.
LEASE COMMITMENTS
Rental expense for operating leases totaled $226 million in
2008, $207 million in 2007 and $193 million in 2006.
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, 2008:
(Dollars in Millions)
2009. . . . . . . . . . . . . . . . . . . . . . . . . .
2010. . . . . . . . . . . . . . . . . . . . . . . . . .
2011. . . . . . . . . . . . . . . . . . . . . . . . . .
2012. . . . . . . . . . . . . . . . . . . . . . . . . .
2013. . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . .
Total minimum lease payments . . . . . . . .
Less amount representing interest . . . . . .
Capitalized
Leases
Operating
Leases
$ 184
170
150
135
109
337
$1,085
$10
10
9
9
8
27
$73
25
Present value of net minimum lease
payments . . . . . . . . . . . . . . . . . . . . .
$48
GUARANTEES
Guarantees are contingent commitments issued by the
Company to customers or other third-parties. The
Company’s guarantees primarily include parent guarantees
related to subsidiaries’ third-party borrowing arrangements;
third-party performance guarantees inherent in the
Company’s business operations, such as indemnified
securities lending programs and merchant charge-back
guarantees; indemnification or buy-back provisions related
to certain asset sales; and contingent consideration
arrangements related to acquisitions. For certain guarantees,
the Company has recorded a liability related to the potential
obligation, or has access to collateral to support the
guarantee or through the exercise of other recourse
provisions can offset some or all of the maximum potential
future payments made under these guarantees.
106
U.S. BANCORP
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
$312 million at December 31, 2008.
Commitments from Securities Lending The Company
participates in securities lending activities by acting as the
customer’s agent involving the loan of securities. The
Company indemnifies customers for the difference between
the market value of the securities lent and the market value
of the collateral received. Cash collateralizes these
transactions. The maximum potential future payments
guaranteed by the Company under these arrangements were
approximately $5.8 billion at December 31, 2008, and
represented the market value of the securities lent to third-
parties. At December 31, 2008, the Company held assets
with a market value of $6.0 billion as collateral for these
arrangements.
Assets Sales The Company has provided guarantees to
certain third-parties in connection with the sale of certain
assets, primarily loan portfolios and low-income housing tax
credits. These guarantees are generally in the form of asset
buy-back or make-whole provisions that are triggered upon
a credit event or a change in the tax-qualifying status of the
related projects, as applicable, and remain in effect until the
loans are collected or final tax credits are realized,
respectively. The maximum potential future payments
guaranteed by the Company under these arrangements were
approximately $503 million at December 31, 2008, and
represented the proceeds or the guaranteed portion received
from the buyer in these transactions where the buy-back or
make-whole provisions have not yet expired. Recourse
available to the Company includes guarantees from the
Small Business Administration (for SBA loans sold), recourse
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, 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
$66.2 billion. In most cases, this contingent liability is
unlikely to arise, as most products and services are delivered
when purchased and amounts are refunded when items are
returned to merchants. However, where the product or
service is not provided until a future date (“future
delivery”), the potential for this contingent liability
increases. To mitigate this risk, the Company may require
the merchant to make an escrow deposit, may place
maximum volume limitations on future delivery transactions
processed by the merchant at any point in time, or may
require various credit enhancements (including letters of
credit and bank guarantees). Also, merchant processing
contracts may include event triggers to provide the Company
more financial and operational control in the event of
financial deterioration of the merchant.
The Company’s primary exposure to future delivery is
related to merchant processing for airlines. The Company
currently processes card transactions in the United States,
Canada and Europe for airlines. In the event of liquidation
of these merchants, the Company could become financially
liable for refunding tickets purchased through the credit card
associations under the charge-back provisions. Charge-back
risk related to these merchants is evaluated in a manner
similar to credit risk assessments and, as such, merchant
processing contracts contain various provisions to protect
the Company in the event of default. At December 31, 2008,
the value of airline tickets purchased to be delivered at a
future date was $3.4 billion. The Company held collateral of
$885 million in escrow deposits, letters of credit and
indemnities from financial institutions, and liens on various
assets. With respect to future delivery risk for other
merchants, the Company held $83 million of merchant
escrow deposits as collateral. In addition to specific
collateral or other credit enhancements, the Company
maintains a liability for its implied guarantees associated
with future delivery. At December 31, 2008, the liability was
$38 million primarily related to these airline processing
arrangements.
In the normal course of business, the Company has
unresolved charge-backs that are in process of resolution.
The Company assesses the likelihood of its potential liability
based on the extent and nature of unresolved charge-backs
and its historical loss experience. At December 31, 2008, the
Company had a recorded liability for potential losses of
$18 million.
Contingent Consideration Arrangements The Company has
contingent payment obligations related to certain business
combination transactions. Payments are guaranteed as long
as certain post-acquisition performance-based criteria are
met or customer relationships are maintained. At
December 31, 2008, the maximum potential future
payments required to be made by the Company under these
arrangements was approximately $9.5 million. If required,
the majority of these contingent payments are payable
within the next 12 months.
Minimum Revenue Guarantees In the normal course of
business, the Company may enter into revenue share
agreements with third party business partners who generate
customer referrals or provide marketing or other services
related to the generation of revenue. In certain of these
agreements, the Company may guarantee that a minimum
amount of revenue share payments will be made to the third
party over a specified period of time. At December 31,
2008, the maximum potential future payments required to
be made by the Company under these agreements was
$16 million.
Other Guarantees On September 25, 2008, the Company
entered into a support agreement with a money market fund
managed by FAF Advisors, Inc., an affiliate of the Company.
Under the terms of this agreement, the Company will
provide a contribution to the fund upon the occurrence of
specified events related to certain assets held by the fund.
The Company is required to recognize the contingent
obligation to provide a contribution to the fund at the
estimated fair value in accordance with the Statement of
Financial Accounting Standards No. 133, “Accounting for
Derivatives and Hedge Activities,” and Financial Accounting
Standards Board Interpretation No. 45 (“FIN 45”),
“Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness
of Others.” The maximum potential payments under the
agreement are $68 million. While the estimation of any
potential losses related to this agreement requires judgment,
the Company recognized a derivative liability and related
charge of approximately $37 million at December 31, 2008.
U.S. BANCORP
107
The Company has also made financial performance
guarantees related to the operations of its subsidiaries. The
maximum potential future payments guaranteed by the
Company under these arrangements were approximately
$8.2 billion at December 31, 2008.
OTHER CONT INGENT LIABILITIES
Visa Restructuring and Card Association Litigation The
Company’s payment services business issues and acquires
credit and debit card transactions through the Visa U.S.A.
Inc. card association or its affiliates (collectively “Visa”). In
2007, Visa completed a restructuring and issued shares of
Visa Inc. common stock to its financial institution members
in contemplation of its initial public offering (“IPO”)
completed in 2008 (the “Visa Reorganization”). As part of
the Visa Reorganization, the Company received its
proportionate number of Class U.S.A. shares of Visa Inc.
common stock. In addition, the Company and certain of its
subsidiaries have been named as defendants along with Visa
U.S.A. Inc. and MasterCard International (collectively, the
“Card Associations”), as well as several other banks, in
antitrust lawsuits challenging the practices of the Card
Associations (the “Visa Litigation”). Visa U.S.A. member
banks have a contingent obligation to indemnify Visa, Inc.
under the Visa U.S.A. bylaws (which were modified at the
time of the restructuring in 2007) for potential losses arising
from the Visa Litigation. The Company has also entered into
judgment and loss sharing agreements with Visa U.S.A. and
certain other banks in order to apportion financial
responsibilities arising from any potential adverse judgment
or negotiated settlements related to the Visa Litigation.
In 2007, Visa announced the settlement of the portion
of the Visa Litigation involving American Express, and
accordingly, the Company recorded a $115 million charge in
2007 for its proportionate share of this settlement. In
addition to the liability related to the settlement with
American Express, Visa U.S.A. member banks remain
obligated to indemnify Visa Inc. for potential losses arising
from the remaining Visa Litigation. The contingent
obligation of member banks under the Visa U.S.A. bylaws
has no specific maximum amount. While the estimation of
any potential losses related to this litigation is highly
judgmental, the Company recognized a charge of
approximately $215 million in 2007 for its proportionate
share of the guarantee of these matters.
In 2008, Visa Inc. completed its IPO, redeemed a
portion of the Class U.S.A. shares, converted the remaining
Class U.S.A. shares to Class B shares, and set aside
$3.0 billion of the proceeds from the IPO in an escrow
account for the benefit of member financial institutions to
fund the expenses of the Visa Litigation, as well as the
members’ proportionate share of any judgments or
108
U.S. BANCORP
settlements that may arise out of the Visa Litigation. The
Company recorded a $339 million gain for the portion of its
shares that were redeemed for cash and a $153 million gain
for its proportionate share of the escrow account. The
receivable related to the escrow account is classified in other
liabilities as a direct offset to the related Visa Litigation
liabilities and will decline as amounts are paid out of the
escrow account.
Also in 2008, Visa announced the settlement of certain
litigation matters with Discover Financial Services. The
Company’s proportionate share of the guarantee of this
amount was not materially different than the amount
recorded in 2007.
On December 19, 2008, Visa Inc. deposited additional
shares directly into the escrow account thereby further
reducing the conversion ratio of the Class B shares held by
the Company. The deposit had the effect of repurchasing a
specified amount of Class A common share equivalents from
Class B shareholders. The Company recorded a $56 million
gain for its proportionate share of the additional escrow
funding. As of December 31, 2008, the carrying amount of
the Company’s liability related to the remaining Visa
Litigation, was $132 million. The remaining Visa Inc. shares
held by the Company will be eligible for conversion to
Class A shares three years after the IPO or upon settlement
of the Visa Litigation, whichever is later.
Other The Company is subject to various other litigation,
investigations and legal and administrative cases and
proceedings that arise in the ordinary course of its
businesses. Due to their complex nature, it may be years
before some matters are resolved. While it is impossible to
ascertain the ultimate resolution or range of financial
liability with respect to these contingent matters, the
Company believes that the aggregate amount of such
liabilities will not have a material adverse effect on the
financial condition, results of operations or cash flows of the
Company.
The Company accepts certain state and local
government deposits through participation in pooled public
funds programs. Those programs generally include
provisions requiring participating depository institutions to
post collateral in varying amounts. Under those programs,
participating depository institutions effectively indemnify the
state and local governments from losses that might be
incurred on uninsured deposits if other participating
depository institutions fail. Because the programs require
collateral, and because the deposits of failed institutions are
generally assumed by an acquiring institution, the Company
does not expect to incur significant losses under these
programs.
Note 23 U.S. BANCORP (PARENT COMPANY)
CONDENSED BALANCE SHEET
December 31 (Dollars in Millions)
2008
2007
Assets
Deposits with subsidiary banks, principally interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in bank subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in nonbank subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances to bank 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,082
1,842
21,305
703
700
745
2,161
$39,538
$ 1,234
10,831
1,173
26,300
$39,538
$ 5,948
3,735
21,204
650
100
726
1,594
$33,957
$ 1,148
10,708
1,055
21,046
$33,957
CONDENSED STATEMENT OF INCOME
Year Ended December 31 (Dollars in Millions)
2008
2007
2006
Income
Dividends from bank and bank holding company subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . $1,935
Dividends from nonbank subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
125
Interest from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(674)
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,392
Expense
Interest on short-term funds borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on long-term debt
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24
409
45
478
Income before income taxes and equity in undistributed income of subsidiaries . . . . . . . . . . . . . .
Applicable income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
914
(348)
Income of parent company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,262
1,684
$3,541
224
587
(27)
4,325
51
663
34
748
3,577
(63)
3,640
684
$4,205
–
538
43
4,786
54
630
59
743
4,043
(58)
4,101
650
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,946
$4,324
$4,751
U.S. BANCORP
109
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31 (Dollars in Millions)
2008
2007
2006
Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities
$ 2,946
$ 4,324
$ 4,751
Equity in undistributed income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
(1,684)
466
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,728
Investing Activities
Proceeds from sales and maturities of investment securities . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity distributions from subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in short-term advances to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term advances to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal collected on long-term advances to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing Activities
Net increase (decrease) in short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments or redemption of long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid on preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,408
(684)
(540)
61
(19)
(600)
–
(22)
(396)
86
3,784
(3,819)
7,090
688
–
(68)
(2,959)
4,802
6,134
5,948
(684)
4
3,644
31
(3,618)
(208)
663
(230)
–
1,000
(32)
(2,394)
(12)
3,536
(4,328)
–
427
(1,983)
(60)
(2,785)
(5,205)
(3,955)
9,903
(650)
(77)
4,024
11
(154)
(7)
107
(486)
(1,000)
–
(18)
(1,547)
273
6,550
(5,947)
948
910
(2,798)
(33)
(2,359)
(2,456)
21
9,882
Cash and cash equivalents at end of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,082
$ 5,948
$ 9,903
Transfer of funds (dividends, loans or advances) from
bank subsidiaries to the Company is restricted. Federal law
requires loans to the Company or its affiliates to be secured
and generally limits loans to the Company or an individual
affiliate to 10 percent of each bank’s unimpaired capital and
surplus. In the aggregate, loans to the Company and all
affiliates cannot exceed 20 percent of each bank’s
unimpaired capital and surplus.
Dividend payments to the Company by its subsidiary
banks are subject to regulatory review and statutory
limitations and, in some instances, regulatory approval. The
approval of the Comptroller of the Currency is required if
total dividends by a national bank in any calendar year
exceed the bank’s net income for that year combined with its
retained net income for the preceding two calendar years, or
if the bank’s retained earnings are less than zero.
Furthermore, dividends are restricted by the Comptroller of
the Currency’s minimum capital constraints for all national
banks. Within these guidelines, all bank subsidiaries have the
ability to pay dividends without prior regulatory approval.
The amount of dividends available to the parent company
from the bank subsidiaries at December 31, 2008, was
approximately $1.3 billion.
110
U.S. BANCORP
Report of Management
Responsibility for the financial statements and other information presented throughout this Annual Report rests with the
management of U.S. Bancorp. The Company believes that the consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States and present the substance of transactions based
on the circumstances and management’s best estimates and judgment.
In meeting its responsibilities for the reliability of the financial statements, management is responsible for establishing and
maintaining an adequate system of internal control over financial reporting as defined by Rules 13a-15(f) and 15d-15(f) under
the Securities Exchange Act of 1934. The Company’s system of internal control 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 system of internal control.
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 system of internal control over financial reporting as of December 31,
2008. 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, 2008.
The Company’s independent accountants, Ernst & Young LLP, have been engaged to render an independent professional
opinion on the financial statements and issue an attestation report on the Company’s internal control over financial reporting.
Their opinion on the financial statements appearing on page 112 and their attestation on internal control over financial
reporting appearing on page 113 are based on procedures conducted in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States).
U.S. BANCORP
111
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, 2008 and 2007, and the
related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2008. These financial statements are the responsibility of U.S. Bancorp’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, 2008 and 2007, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
U.S. Bancorp’s internal control over financial reporting as of December 31, 2008, 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 23, 2009 expressed an unqualified opinion thereon.
Minneapolis, Minnesota
February 23, 2009
112
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 U.S. Bancorp’s internal control over financial reporting as of December 31, 2008, based on criteria established
in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). U.S. Bancorp’s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the
accompanying Report of Management. Our responsibility is to express an opinion on U.S. Bancorp’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, U.S. Bancorp maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2008, 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, 2008 and 2007, and the related consolidated statements of
income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008 and our report
dated February 23, 2009 expressed an unqualified opinion thereon.
Minneapolis, Minnesota
February 23, 2009
U.S. BANCORP
113
U.S. Bancorp
Consolidated Balance Sheet — Five Year Summary (Unaudited)
December 31 (Dollars in Millions)
2008
2007
2006
2005
2004
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,859
53
Held-to-maturity securities . . . . . . . . . . . . . . . . . . . . . . . . .
39,468
Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . .
3,210
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
185,229
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,514)
Less allowance for loan losses . . . . . . . . . . . . . . . . . . .
$ 8,884
74
43,042
4,819
153,827
(2,058)
$ 8,639
87
40,030
3,256
143,597
(2,022)
$ 8,004
109
39,659
3,030
136,462
(2,041)
$ 6,336
127
41,354
2,813
124,941
(2,080)
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
181,715
34,607
151,769
29,027
141,575
25,645
134,421
24,242
122,861
21,613
% Change
2008 v 2007
(22.8)%
(28.4)
(8.3)
(33.4)
20.4
(70.7)
19.7
19.2
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $265,912
$237,615
$219,232
$209,465
$195,104
11.9%
Liabilities and Shareholders’ Equity
Deposits
Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,494
121,856
Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 33,334
98,111
$ 32,128
92,754
$ 32,214
92,495
$ 30,756
89,985
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
159,350
33,983
38,359
7,920
239,612
26,300
131,445
32,370
43,440
9,314
216,569
21,046
124,882
26,933
37,602
8,618
198,035
21,197
124,709
20,200
37,069
7,401
189,379
20,086
120,741
13,084
34,739
7,001
175,565
19,539
12.5%
24.2
21.2
5.0
(11.7)
(15.0)
10.6
25.0
Total liabilities and shareholders’ equity . . . . . . . . . . . $265,912
$237,615
$219,232
$209,465
$195,104
11.9%
114
U.S. BANCORP
U.S. Bancorp
Consolidated Statement of Income — Five Year Summary
Year Ended December 31 (Dollars in Millions)
2008
2007
2006
2005
2004
Interest Income
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,051
227
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,984
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
156
Other interest income . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,627
277
2,095
137
$ 9,873
236
2,001
153
$ 8,306
181
1,954
110
Total interest income . . . . . . . . . . . . . . . . . . . . . . .
12,418
13,136
12,263
10,551
Interest Expense
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,881
1,066
1,739
Total interest expense . . . . . . . . . . . . . . . . . . . . . . .
4,686
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,732
3,096
4,636
1,039
671
366
1,151
1,314
1,081
517
492
270
147
(978)
741
Total noninterest income . . . . . . . . . . . . . . . . . . . . .
6,811
Noninterest Expense
Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net occupancy and equipment
. . . . . . . . . . . . . . . . . . . . .
Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing and business development . . . . . . . . . . . . . . . . .
Technology and communications . . . . . . . . . . . . . . . . . . . .
Postage, printing and supplies . . . . . . . . . . . . . . . . . . . . . .
Other intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,039
515
781
240
310
598
294
355
1,282
Total noninterest expense . . . . . . . . . . . . . . . . . . . .
7,414
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . .
Applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
4,033
1,087
2,754
1,433
2,260
6,447
6,689
792
5,897
958
638
327
1,108
1,339
1,077
472
433
259
146
15
524
7,296
2,640
494
738
233
260
561
283
376
1,401
6,986
6,207
1,883
2,389
1,203
1,930
5,522
6,741
544
6,197
809
562
313
966
1,235
1,042
441
415
192
150
14
813
6,952
2,513
481
709
199
233
545
265
355
986
6,286
6,863
2,112
1,559
690
1,247
3,496
7,055
666
6,389
719
492
299
773
1,009
951
437
400
432
152
(106)
593
6,151
2,383
431
694
166
248
506
255
458
828
5,969
6,571
2,082
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,946
$ 4,324
$ 4,751
$ 4,489
Net income applicable to common equity . . . . . . . . . . . . . . $ 2,823
$ 4,264
$ 4,703
$ 4,489
* Not meaningful
$7,125
134
1,827
100
9,186
904
263
908
2,075
7,111
669
6,442
651
410
236
677
981
829
467
432
397
156
(105)
478
5,609
2,252
389
677
149
201
467
248
550
942
5,875
6,176
2,009
$4,167
$4,167
% Change
2008 v 2007
(5.4)%
(18.1)
(5.3)
13.9
(5.5)
(31.7)
(25.6)
(23.1)
(27.3)
15.6
*
(21.4)
8.5
5.2
11.9
3.9
(1.9)
.4
9.5
13.6
4.2
.7
*
41.4
(6.6)
15.1
4.3
5.8
3.0
19.2
6.6
3.9
(5.6)
(8.5)
6.1
(35.0)
(42.3)
(31.9)
(33.8)
U.S. BANCORP
115
U.S. Bancorp
Quarterly Consolidated Financial Data (Unaudited)
(Dollars in Millions, Except Per Share Data)
Interest Income
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . .
Other interest income . . . . . . . . . . . . . . . . . . . . . . . . .
2008
2007
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$2,560
73
535
37
$2,429
49
494
43
$2,487
52
478
40
$2,575
53
477
36
$2,578
59
516
34
$2,616
70
516
34
$2,703
76
522
33
$2,730
72
541
36
Total interest income . . . . . . . . . . . . . . . . . . . . .
3,205
3,015
3,057
3,141
3,187
3,236
3,334
3,379
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
606
322
474
1,402
1,803
485
1,318
248
164
84
271
335
257
124
112
105
36
(251)
559
458
263
419
1,140
1,875
596
1,279
266
174
93
309
350
278
137
117
81
37
(63)
113
425
276
423
1,124
1,933
748
1,185
269
179
94
300
329
286
128
132
61
37
(411)
8
392
205
423
1,020
2,121
1,267
854
256
154
95
271
300
260
128
131
23
37
(253)
61
675
328
535
1,538
1,649
177
1,472
206
147
77
252
322
247
111
100
67
34
1
159
663
379
562
1,604
1,632
191
1,441
230
159
82
286
342
277
126
105
68
38
3
169
694
374
599
1,667
1,667
199
1,468
237
166
84
289
331
276
118
107
76
36
7
150
722
352
564
1,638
1,741
225
1,516
285
166
84
281
344
277
117
121
48
38
4
46
Total noninterest income . . . . . . . . . . . . . . . . . .
2,044
1,892
1,412
1,463
1,723
1,885
1,877
1,811
Noninterest Expense
Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net occupancy and equipment . . . . . . . . . . . . . . . . . . .
Professional services . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing and business development . . . . . . . . . . . . . .
Technology and communications . . . . . . . . . . . . . . . . .
Postage, printing and supplies . . . . . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
745
137
190
47
79
140
71
87
300
761
129
190
59
66
149
73
87
321
763
125
199
61
75
153
73
88
286
770
124
202
73
90
156
77
93
375
635
133
177
47
52
135
69
94
230
659
123
184
59
68
138
71
95
273
656
119
189
56
71
140
70
94
381
690
119
188
71
69
148
73
93
517
Total noninterest expense. . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . .
Applicable income taxes . . . . . . . . . . . . . . . . . . . . . . .
1,796
1,566
476
1,835
1,336
386
1,823
1,960
774
198
357
27
1,572
1,623
493
1,670
1,656
500
1,776
1,569
473
1,968
1,359
417
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,090
$ 950
$ 576
$ 330
$1,130
$1,156
$1,096
$ 942
Net income applicable to common equity . . . . . . . . . . . .
$1,078
$ 928
$ 557
$ 260
$1,115
$1,141
$1,081
$ 927
Earnings per common share . . . . . . . . . . . . . . . . . . . .
Diluted earnings per common share . . . . . . . . . . . . . . .
$ .62
$ .62
$ .53
$ .53
$ .32
$ .32
$ .15
$ .15
$ .64
$ .63
$ .66
$ .65
$ .63
$ .62
$ .54
$ .53
116
U.S. BANCORP
U.S. Bancorp
Supplemental Financial Data (Unaudited)
Earnings Per Common Share Summary
2008
2007
2006
2005
2004
Earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per common share . . . . . . . . . . . . . . . . . . . .
Dividends declared per common share. . . . . . . . . . . . . . . . . . .
$ 1.62
1.61
1.700
$ 2.46
2.43
1.625
$ 2.64
2.61
1.390
$ 2.45
2.42
1.230
$ 2.21
2.18
1.020
Ratios
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average common equity . . . . . . . . . . . . . . . . . . . . .
Average total equity to average assets . . . . . . . . . . . . . . . . . . .
Dividends per common share to net income per common share . .
1.21%
13.9
9.2
104.9
1.93%
21.3
9.4
66.1
2.23%
23.6
9.7
52.7
2.21%
22.5
9.8
50.2
2.17%
21.4
10.2
46.2
Other Statistics (Dollars and Shares in Millions)
Common shares outstanding (a) . . . . . . . . . . . . . . . . . . . . . . .
Average common shares outstanding and common stock
equivalents
1,755
1,728
1,765
1,815
1,858
Earnings per common share . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per common share . . . . . . . . . . . . . . . . . .
Number of shareholders (b) . . . . . . . . . . . . . . . . . . . . . . . . . .
Common dividends declared . . . . . . . . . . . . . . . . . . . . . . . . .
1,742
1,757
61,611
$ 2,971
1,735
1,758
63,837
$ 2,813
1,778
1,804
66,313
$ 2,466
1,831
1,857
69,217
$ 2,246
1,887
1,913
71,492
$ 1,917
(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
2008
Sales Price
2007
Sales Price
High
Low
Closing
Price
Dividends
Declared
First quarter . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . .
$35.01
35.25
42.23
37.31
$27.86
27.78
20.57
20.22
$32.36
27.89
36.02
25.01
$.425
.425
.425
.425
High
Low
$36.84
35.18
34.17
34.21
$34.40
32.74
29.09
30.21
Closing
Price
$34.97
32.95
32.53
31.74
Dividends
Declared
$.400
.400
.400
.425
The common stock of U.S. Bancorp is traded on the New York Stock Exchange, under the ticker symbol “USB.” At
January 31, 2009, there were 61,556 holders of record of the Company’s common stock.
STOCK PERFORMANCE CHART
The following chart compares the cumulative total
shareholder return on the Company’s common stock during
the five years ended December 31, 2008, with the
cumulative total return on the Standard & Poor’s 500
Commercial Bank Index and the Standard & Poor’s 500
Index. The comparison assumes $100 was invested on
December 31, 2003, in the Company’s common stock and in
each of the foregoing indices and assumes the reinvestment
of all dividends.
150
125
100
100
75
50
2003
Total Return
139
135
135
142
128
104
115
111
110
117
116
110
107
90
66
2004
2005
2006
2007
2008
USB
S&P 500
S&P 500 Commercial Bank Index
U.S. BANCORP
117
Average
Balances
Interest
Yields
and Rates
Average
Balances
Interest
Yields
and Rates
$ 42,850
3,914
$ 2,160
227
5.04% $ 41,313
4,298
5.80
$ 2,239
277
5.42%
6.44
U.S. Bancorp
Consolidated Daily Average Balance Sheet and
Year Ended December 31
2008
2007
(Dollars in Millions)
Assets
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans (b)
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgages . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail
Total loans, excluding covered assets . . . . . . . . . .
Covered assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total earning assets . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain (loss) on available-for-sale securities . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54,307
31,110
23,257
55,570
164,244
1,308
165,552
2,730
215,046
(2,527)
(2,068)
33,949
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$244,400
Liabilities and Shareholders’ Equity
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits
Interest checking . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market savings . . . . . . . . . . . . . . . . . . . . . . . . .
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 interest-bearing liabilities. . . . . . . . . . . . . . . . . .
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity
$ 28,739
31,137
26,300
5,929
13,583
30,496
107,445
38,237
39,250
184,932
8,159
Preferred equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,246
20,324
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . .
22,570
Total liabilities and shareholders’ equity . . . . . . . . .
$244,400
2,702
1,771
1,419
4,134
10,026
61
10,087
156
12,630
251
330
20
472
808
1,881
1,144
1,739
4,764
4.98
5.69
6.10
7.44
6.10
4.68
6.09
5.71
5.87
.81
1.25
.34
3.47
2.65
1.75
2.99
4.43
2.58
3,143
2,079
1,354
4,080
10,656
–
10,656
137
13,309
351
651
19
644
1,089
2,754
1,531
2,260
6,545
47,812
28,592
22,085
48,859
147,348
–
147,348
1,724
194,683
(2,042)
(874)
31,854
$223,621
$ 27,364
26,117
25,332
5,306
14,654
22,302
93,711
28,925
44,560
167,196
8,064
1,000
19,997
20,997
$223,621
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,866
$ 6,764
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 . . . .
* Not meaningful
(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances.
3.29%
3.23
5.87%
2.21
3.66%
3.60%
118
U.S. BANCORP
6.57
7.27
6.13
8.35
7.23
–
7.23
7.95
6.84
1.34
2.57
.35
4.40
4.88
2.94
5.29
5.07
3.91
2.93%
2.89
6.84%
3.37
3.47%
3.43%
Related Yields and Rates (a) (Unaudited)
2006
2005
2004
Average
Balances
Interest
Yields
and Rates
Average
Balances
Interest
Yields
and Rates
Average
Balances
Interest
Yields
and Rates
2008 v 2007
% Change
Average
Balances
$39,961
3,663
$ 2,063
236
5.16% $ 42,103
3,290
6.45
$ 1,962
181
4.66% $ 43,009
3,079
5.49
$1,836
134
4.27%
4.35
3.7%
(8.9)
2,969
2,104
1,224
3,602
9,899
–
9,899
153
12,351
233
569
19
524
1,044
2,389
1,242
1,930
5,561
6.53
7.32
5.81
7.94
7.04
–
7.04
7.64
6.63
.99
2.13
.35
3.81
4.69
2.60
5.08
4.78
3.55
45,440
28,760
21,053
45,348
140,601
—
140,601
2,006
186,231
(2,052)
(1,007)
30,340
$213,512
$28,755
23,552
26,667
5,599
13,761
22,255
91,834
24,422
40,357
156,613
7,434
767
19,943
20,710
$213,512
2,501
1,804
1,001
3,025
8,331
–
8,331
110
10,584
135
358
15
389
662
1,559
690
1,247
3,496
42,641
27,964
18,036
42,969
131,610
–
131,610
1,422
178,425
(2,098)
(368)
27,239
$203,198
$ 29,229
22,785
29,314
5,819
13,199
20,655
91,772
19,382
36,141
147,295
6,721
–
19,953
19,953
$203,198
2,213
1,543
812
2,577
7,145
–
7,145
100
9,215
71
235
15
341
242
904
263
908
2,075
5.87
6.45
5.55
7.04
6.33
–
6.33
7.77
5.93
.59
1.22
.26
2.95
3.20
1.70
3.56
3.45
2.37
39,348
27,267
14,322
39,733
120,670
–
120,670
1,365
168,123
(2,303)
(346)
26,119
$191,593
$ 29,816
20,933
32,854
5,866
13,074
13,679
86,406
14,534
35,115
136,055
6,263
–
19,459
19,459
$191,593
$ 6,790
$ 7,088
$7,140
3.08%
3.05
6.63%
2.98
3.65%
3.62%
3.56%
3.54
5.93%
1.96
3.97%
3.95%
13.6
8.8
5.3
13.7
11.5
*
12.4
58.4
10.5
(23.8)
*
6.6
9.3
5.0
19.2
3.8
11.7
(7.3)
36.7
14.7
32.2
(11.9)
10.6
1.2
*
1.6
7.5
9.3%
5.62
5.66
5.67
6.49
5.92
–
5.92
7.33
5.48
.34
.72
.26
2.61
1.77
1.05
1.81
2.59
1.53
3.95%
3.93
5.48%
1.23
4.25%
4.23%
U.S. BANCORP
119
Company Information
General Business Description U.S. Bancorp is a multi-state
financial services holding company headquartered in
Minneapolis, Minnesota. U.S. Bancorp was incorporated in
Delaware in 1929 and operates as a financial holding
company and a bank holding company under the Bank
Holding Company Act of 1956. U.S. Bancorp provides a full
range of financial services, including lending and depository
services, cash management, foreign exchange and trust and
investment management services. It also engages in credit
card services, merchant and ATM processing, mortgage
banking, insurance, brokerage and leasing.
U.S. Bancorp’s banking subsidiaries are engaged in the
general banking business, principally in domestic markets.
The subsidiaries range in size from $52 million to
$172 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 2,791 banking offices principally operating in
24 states in the Midwest and West. The Company operates a
network of 4,897 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,
120
U.S. BANCORP
Elavon, Inc. (“Elavon”), provides merchant processing
services directly to merchants and through a network of
banking affiliations. Affiliates of Elavon 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,
2008, U.S. Bancorp employed 57,904 people.
Competition The commercial banking business is highly
competitive. Subsidiary banks compete with other
commercial banks and with other financial institutions,
including savings and loan associations, mutual savings
banks, finance companies, mortgage banking companies,
credit unions and investment companies. In recent years,
competition has increased from institutions not subject to
the same regulatory restrictions as domestic banks and bank
holding companies.
Government Policies The operations of the Company’s
various operating units are affected by state and federal
legislative changes and by policies of various regulatory
authorities, including those of the numerous states in which
they operate, the United States and foreign governments.
These policies include, for example, statutory maximum
legal lending rates, domestic monetary policies of the Board
of Governors of the Federal Reserve System, United States
fiscal policy, international currency regulations and
monetary policies, U.S. Patriot Act and capital adequacy and
liquidity constraints imposed by bank regulatory agencies.
Supervision and Regulation As a registered bank holding
company and financial holding company under the Bank
Holding Company Act, U.S. Bancorp is subject to the
supervision of, and regulation by, the Board of Governors of
the Federal Reserve System.
Under the Bank Holding Company Act, a financial
holding company may engage in banking, managing or
controlling banks, furnishing or performing services for
banks it controls, and conducting other financial activities.
U.S. Bancorp must obtain the prior approval of the Federal
Reserve Board before acquiring more than 5 percent of the
outstanding shares of another bank or bank holding
company, and must provide notice to, and in some situations
obtain the prior approval of, the Federal Reserve Board in
connection with engaging in, or acquiring more than
5 percent of the outstanding shares of a company engaged
in, a new financial activity.
Under the Bank Holding Company Act, U.S. Bancorp
may acquire banks throughout the United States, subject
only to state or federal deposit caps and state minimum age
requirements.
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 (“FDIC”) and are
subject to examination by the FDIC. In practice, the primary
federal regulator makes regular examinations of each
subsidiary bank subject to its regulatory review or
participates in joint examinations with other federal
regulators. Areas subject to regulation by federal authorities
include the allowance for credit losses, investments, loans,
mergers, issuance of securities, payment of dividends,
establishment of branches and other aspects of operations.
Website Access to SEC Reports U.S. Bancorp’s internet
website can be found at usbank.com. U.S. Bancorp makes
available free of charge on its website its annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13 or 15(d) of the Exchange
Act, as well as all other reports filed by U.S. Bancorp with
the SEC, as soon as reasonably practicable after
electronically filed with, or furnished to, the SEC.
Certifications U.S. Bancorp has filed as exhibits to its annual
report on Form 10-K the Chief Executive Officer and Chief
Financial Officer certifications required by Section 302 of
the Sarbanes-Oxley Act. U.S. Bancorp has also submitted the
required annual Chief Executive Officer certification to the
New York Stock Exchange.
Risk Factors There are a number of factors, including those
specified below, that may adversely affect the Company’s
business, financial results or stock price. Additional risks
that the Company currently does not know about or
currently views as immaterial may also impair the
Company’s business or adversely impact its financial results
or stock price.
Industry Risk Factors
The Company’s business and financial results are
significantly affected by general business and economic
conditions The Company’s business activities and earnings
are affected by general business conditions in the United
States and abroad. The domestic and global economies have
seen a dramatic downturn during the past year or more,
with negative effects on the business, financial condition and
results of operations of financial institutions in the United
States and other countries. Dramatic declines in the housing
market over the past two years, with falling home prices and
increasing foreclosures and unemployment, have negatively
impacted the credit performance of real estate related loans
and resulted in significant write-downs of asset values by
financial institutions. These write-downs, initially of asset-
backed securities but spreading to other securities and loans,
have caused many financial institutions to seek additional
capital, to reduce or eliminate dividends, to merge with
larger and stronger institutions and, in some cases, to fail.
Reflecting concern about the stability of the financial
markets generally and the strength of counterparties, many
lenders and institutional investors have reduced or ceased
providing funding to borrowers, including to other financial
institutions. This market turmoil and tightening of credit
have led to an increased level of commercial and consumer
delinquencies, lack of consumer confidence, increased
market volatility and widespread reduction of business
activity generally. Market developments may further erode
consumer confidence levels and may cause adverse changes
in payment patterns, causing increases in delinquencies and
default rates, which may impact the Company’s charge-offs
and provision for credit losses. Continuing economic
deterioration that affects household and/or corporate
incomes could also result in reduced demand for credit or
fee-based products and services. In addition, changes in
securities market conditions and monetary fluctuations could
adversely affect the availability and terms of funding
necessary to meet the Company’s liquidity needs. A
worsening of these conditions would likely exacerbate the
adverse effects of these difficult market conditions on the
Company and others in the financial institutions industry.
The Company could experience an unexpected inability to
obtain needed liquidity The Company’s liquidity could be
constrained by an unexpected inability to access the capital
markets due to a variety of market dislocations or
interruptions. If the Company is unable to meet its funding
needs on a timely basis, its business would be adversely
affected.
Current levels of market volatility are unprecedented The
market for certain investment securities has become highly
volatile or inactive, and may not stabilize or resume in the
near term. This volatility has resulted in significant
fluctuations in the prices of those securities, and additional
market volatility may continue to adversely affect the
Company’s results of operations.
Changes in the domestic interest rate environment could
reduce the Company’s net interest income The operations
of financial institutions such as the Company are dependent
to a large degree on net interest income, which is the
difference between interest income from loans and
investments and interest expense on deposits and
borrowings. An institution’s net interest income is
significantly affected by market rates of interest, which in
turn are affected by prevailing economic conditions, by the
fiscal and monetary policies of the federal government and
by the policies of various regulatory agencies. Like all
financial institutions, the Company’s balance sheet is
U.S. BANCORP
121
affected by fluctuations in interest rates. Volatility in interest
rates can also result in the flow of funds away from financial
institutions into direct investments. Direct investments, such
as U.S. Government and corporate securities and other
investment vehicles (including mutual funds) generally pay
higher rates of return than financial institutions, because of
the absence of federal insurance premiums and reserve
requirements.
There can be no assurance that recently enacted
legislation will stabilize the U.S. financial markets The
Emergency Economic Stabilization Act of 2008 (the
“EESA”) was signed into law in October 2008 for the
purpose of stabilizing and providing liquidity to the
U.S. financial markets. Shortly thereafter, the
U.S. Department of the Treasury announced a program
under the EESA pursuant to which it would make senior
preferred stock investments in participating financial
institutions (the “TARP Capital Purchase Program”). In
February 2009, the American Recovery and Reinvestment
Act of 2009 (the “Stimulus Bill”) was passed, which is
intended to stabilize the financial markets and slow or
reverse the downturn in the U.S. economy, and which
revised certain provisions of the EESA. The FDIC has also
commenced a guarantee program under which the FDIC
would offer a guarantee of certain financial institution
indebtedness in exchange for an insurance premium to be
paid to the FDIC by issuing financial institutions.
There can be no assurance, however, that the EESA and
its implementing regulations, the Stimulus Bill, the FDIC
programs, or any other governmental program will have a
positive impact on the financial markets. The failure of the
EESA, the Stimulus Bill, the FDIC programs, or any other
actions of the U.S. government to stabilize the financial
markets and a continuation or worsening of current
financial market conditions could materially and adversely
affect the Company’s business, financial condition, results of
operations, access to credit or the trading price of the
Company’s common stock.
The Company may be adversely affected by recently
enacted or contemplated legislation and rulemaking The
programs established or to be established under the EESA
and Troubled Asset Relief Program, as well as restrictions
contained in current or future rules implementing or related
to them and those contemplated by the Stimulus Bill, may
adversely affect the Company. In specific, any governmental
or regulatory action having the effect of requiring the
Company to obtain additional capital, whether from
governmental or private sources, could have a material
dilutive effect on current shareholders. The Company faces
increased regulation of the Company’s business and
increased costs associated with these programs. The EESA,
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U.S. BANCORP
as amended by the Stimulus bill, contains, among other
things, significant restrictions on the payment of executive
compensation, which may have an adverse effect on the
retention or recruitment of key members of senior
management. Also, the Company’s participation in the
TARP Capital Purchase Program limits (without the consent
of the Department of Treasury) the Company’s ability to
increase the Company’s dividend and to repurchase the
Company’s common stock for up to three years. Similarly,
programs established by the FDIC may have an adverse
effect on the Company, due to the costs of participation.
Other changes in the laws, regulations and policies
governing financial services companies could alter the
Company’s business environment and adversely affect
operations The Board of Governors of the Federal Reserve
System regulates the supply of money and credit in the
United States. Its fiscal and monetary policies determine in a
large part the Company’s cost of funds for lending and
investing and the return that can be earned on those loans
and investments, both of which affect the Company’s net
interest margin. Federal Reserve Board policies can also
materially affect the value of financial instruments that the
Company holds, such as debt securities and mortgage
servicing rights.
The Company and its bank subsidiaries are heavily
regulated at the federal and state levels. This regulation is to
protect depositors, federal deposit insurance funds and the
banking system as a whole. Congress and state legislatures
and federal and state agencies continually review banking
laws, regulations and policies for possible changes. Changes
in statutes, regulations or policies could affect the Company
in substantial and unpredictable ways, including limiting the
types of financial services and products that the Company
offers and/or increasing the ability of non-banks to offer
competing financial services and products. The Company
cannot predict whether any of this potential legislation will
be enacted, and if enacted, the effect that it or any
regulations would have on the Company’s financial
condition or results of operations.
The soundness of other financial institutions could
adversely affect the Company The Company’s ability to
engage in routine funding transactions could be adversely
affected by the actions and commercial soundness of other
financial institutions. Financial services institutions are
interrelated as a result of trading, clearing, counterparty or
other relationships. The Company has exposure to many
different counterparties, and the Company routinely
executes transactions with counterparties in the financial
industry, including brokers and dealers, commercial banks,
investment banks, mutual and hedge funds, and other
institutional clients. As a result, defaults by, or even rumors
or questions about, one or more financial services
institutions, or the financial services industry generally, have
led to market-wide liquidity problems and could lead to
losses or defaults by the Company or by other institutions.
Many of these transactions expose the Company to credit
risk in the event of default of the Company’s counterparty or
client. In addition, the Company’s credit risk may be
exacerbated when the collateral held by the Company
cannot be realized upon or is liquidated at prices not
sufficient to recover the full amount of the financial
instrument exposure due the Company. There is no
assurance that any such losses would not materially and
adversely affect the Company’s results of operations.
The financial services industry is highly competitive, and
competitive pressures could intensify and adversely affect
the Company’s financial results The Company operates in a
highly competitive industry that could become even more
competitive as a result of legislative, regulatory and
technological changes and continued consolidation. The
Company competes with other commercial banks, savings
and loan associations, mutual savings banks, finance
companies, mortgage banking companies, credit unions and
investment companies. In addition, technology has lowered
barriers to entry and made it possible for non-banks to offer
products and services traditionally provided by banks. Many
of the Company’s competitors have fewer regulatory
constraints and some have lower cost structures. Also, the
potential need to adapt to industry changes in information
technology systems, on which the Company and financial
services industry are highly dependent, could present
operational issues and require capital spending.
Changes in consumer use of banks and changes in
consumer spending and saving habits could adversely
affect the Company’s financial results Technology and other
changes now allow many consumers to complete financial
transactions without using banks. For example, consumers
can pay bills and transfer funds directly without going
through a bank. This “disintermediation” could result in the
loss of fee income, as well as the loss of customer deposits
and income generated from those deposits. In addition,
changes in consumer spending and saving habits could
adversely affect the Company’s operations, and the
Company may be unable to timely develop competitive new
products and services in response to these changes that are
accepted by new and existing customers.
Acts or threats of terrorism and political or military actions
taken by the United States or other governments could
adversely affect general economic or industry conditions
Geopolitical conditions may also affect the Company’s
earnings. Acts or threats of terrorism and political or
military actions taken by the United States or other
governments in response to terrorism, or similar activity,
could adversely affect general economic or industry
conditions.
Company Risk Factors
The Company’s allowance for loan losses may not be
adequate to cover actual losses Like all financial
institutions, the Company maintains an allowance for loan
losses to provide for loan defaults and non-performance.
The Company’s allowance for loan losses is based on its
historical loss experience as well as an evaluation of the
risks associated with its loan portfolio, including the size
and composition of the loan portfolio, current economic
conditions and geographic concentrations within the
portfolio. The stress on the United States economy and the
local economies which the Company does business may be
greater or last longer than expected, resulting in, among
other things, greater than expected deterioration in credit
quality of our loan portfolio, or in the value of collateral
securing those loans. The recent increases in the Company’s
allowance for loan losses may not be adequate to cover
actual loan losses, and future provisions for loan losses
could continue to materially and adversely affect its financial
results.
The Company may continue to suffer increased losses in
its loan portfolio despite its underwriting practices The
Company seeks to mitigate the risks inherent in its loan
portfolio by adhering to specific underwriting practices.
These practices often include: analysis of a borrower’s credit
history, financial statements, tax returns and cash flow
projections; valuation of collateral based on reports of
independent appraisers; and verification of liquid assets.
Although the Company believes that its underwriting criteria
are, and historically have been, appropriate for the various
kinds of loans it makes, the Company has already incurred
high levels of losses on loans that have met these criteria,
and may continue to experience higher than expected losses
depending on economic factors and consumer behavior.
The Company’s investment portfolio values may be
adversely impacted by changing interest rates and
deterioration in the credit quality of underlying collateral
within a structured investment The Company generally
invests in government securities, securities issued by
government-backed agencies or privately issued securities
highly rated by credit rating agencies that may have limited
credit risk, but, are subject to changes in market value due
to changing interest rates and implied credit spreads.
However, certain securities represent beneficial interests in
structured investments which are collateralized by residential
mortgages, collateralized debt obligations and other similar
asset-backed assets. While these structured investments are
U.S. BANCORP
123
highly rated by credit rating agencies at the time of initial
investment, these credit ratings are subject to change due to
deterioration in the credit quality of the underlying
collateral. During recent months, these structured securities
have been subject to significant market volatility due to the
uncertainty of the credit ratings, deterioration in credit losses
occurring within certain types of residential mortgages,
changes in prepayments and the lack of transparency related
to the structures and the collateral underlying the structured
investment vehicles. Given recent market conditions and
changing economic factors, the Company may continue to
have valuation losses or recognize impairment related to
structured investments.
Maintaining or increasing the Company’s market share may
depend on lowering prices and market acceptance of new
products and services The Company’s success depends, in
part, on its ability to adapt its products and services to
evolving industry standards. There is increasing pressure to
provide products and services at lower prices. Lower prices
can reduce the Company’s net interest margin and revenues
from its fee-based products and services. In addition, the
widespread adoption of new technologies, including internet
services, could require the Company to make substantial
expenditures to modify or adapt the Company’s existing
products and services. Also, these and other capital
investments in the Company’s businesses may not produce
expected growth in earnings anticipated at the time of the
expenditure. The Company might not be successful in
introducing new products and services, achieving market
acceptance of its products and services, or developing and
maintaining loyal customers.
Because the nature of the financial services business
involves a high volume of transactions, the Company faces
significant operational risks The Company operates in many
different businesses in diverse markets and relies on the
ability of its employees and systems to process a high
number of transactions. Operational risk is the risk of loss
resulting from the Company’s operations, including, but not
limited to, the risk of fraud by employees or persons outside
of the Company, the execution of unauthorized transactions
by employees, errors relating to transaction processing and
technology, breaches of the internal control system and
compliance requirements and business continuation and
disaster recovery. This risk of loss also includes the potential
legal actions that could arise as a result of an operational
deficiency or as a result of noncompliance with applicable
regulatory standards, adverse business decisions or their
implementation, and customer attrition due to potential
negative publicity. In the event of a breakdown in the
internal control system, improper operation of systems or
improper employee actions, the Company could suffer
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U.S. BANCORP
financial loss, face regulatory action and suffer damage to its
reputation.
The change in residual value of leased assets may have an
adverse impact on the Company’s financial results The
Company engages in leasing activities and is subject to the
risk that the residual value of the property under lease will
be less than the Company’s recorded asset value. Adverse
changes in the residual value of leased assets can have a
negative impact on the Company’s financial results. The risk
of changes in the realized value of the leased assets
compared to recorded residual values depends on many
factors outside of the Company’s control, including supply
and demand for the assets, collecting insurance claims,
condition of the assets at the end of the lease term, and
other economic factors.
Negative publicity could damage the Company’s reputation
and adversely impact its business and financial results
Reputation risk, or the risk to the Company’s earnings and
capital from negative publicity, is inherent in the Company’s
business. Negative publicity can result from the Company’s
actual or alleged conduct in any number of activities,
including lending practices, corporate governance and
acquisitions, and actions taken by government regulators
and community organizations in response to those activities.
Negative publicity can adversely affect the Company’s ability
to keep and attract customers and can expose the Company
to litigation and regulatory action. Because most of the
Company’s businesses operate under the “U.S. Bank” brand,
actual or alleged conduct by one business can result in
negative publicity about other businesses the Company
operates. Although the Company takes steps to minimize
reputation risk in dealing with customers and other
constituencies, the Company, as a large diversified financial
services company with a high industry profile, is inherently
exposed to this risk.
The Company’s reported financial results depend on
management’s selection of accounting methods and
certain assumptions and estimates The Company’s
accounting policies and methods are fundamental to how the
Company records and reports its financial condition and
results of operations. The Company’s management must
exercise judgment in selecting and applying many of these
accounting policies and methods so they comply with
generally accepted accounting principles and reflect
management’s judgment of the most appropriate manner to
report the Company’s financial condition and results. In
some cases, management must select the accounting policy
or method to apply from two or more alternatives, any of
which might be reasonable under the circumstances, yet
might result in the Company’s reporting materially different
results than would have been reported under a different
alternative.
required by regulatory authorities in acquisitions or business
combinations may be greater than expected.
Certain accounting policies are critical to presenting the
The Company must generally receive federal regulatory
Company’s financial condition and results. They require
management to make difficult, subjective or complex
judgments about matters that are uncertain. Materially
different amounts could be reported under different
conditions or using different assumptions or estimates. These
critical accounting policies include: the allowance for credit
losses; estimations of fair value; the valuation of mortgage
servicing rights; the valuation of goodwill and other
intangible assets; and income taxes. Because of the
uncertainty of estimates involved in these matters, the
Company may be required to do one or more of the
following: significantly increase the allowance for credit
losses and/or sustain credit losses that are significantly
higher than the reserve provided; recognize significant
impairment on its goodwill and other intangible asset
balances; or significantly increase its accrued taxes liability.
For more information, refer to “Critical Accounting
Policies” in this Annual Report.
approval before it can acquire a bank or bank holding
company. In determining whether to approve a proposed
bank acquisition, federal bank regulators will consider,
among other factors, the effect of the acquisition on the
competition, financial condition, and future prospects. The
regulators also review current and projected capital ratios
and levels, the competence, experience, and integrity of
management and its record of compliance with laws and
regulations, the convenience and needs of the communities
to be served (including the acquiring institution’s record of
compliance under the Community Reinvestment Act) and
the effectiveness of the acquiring institution in combating
money laundering activities. In addition, the Company
cannot be certain when or if, or on what terms and
conditions, any required regulatory approvals will be
granted. The Company may be required to sell banks or
branches as a condition to receiving regulatory approval.
If new laws were enacted that restrict the ability of the
Changes in accounting standards could materially impact
Company and its subsidiaries to share information about
the Company’s financial statements From time to time, the
Financial Accounting Standards Board changes the financial
accounting and reporting standards that govern the
preparation of the Company’s financial statements. These
changes can be hard to predict and can materially impact
how the Company records and reports its financial condition
and results of operations. In some cases, the Company could
be required to apply a new or revised standard retroactively,
resulting in the Company’s restating prior period financial
statements.
Acquisitions may not produce revenue enhancements or
cost savings at levels or within timeframes originally
anticipated and may result in unforeseen integration
difficulties The Company regularly explores opportunities to
acquire financial services businesses or assets and may also
consider opportunities to acquire other banks or financial
institutions. The Company cannot predict the number, size
or timing of acquisitions.
Difficulty in integrating an acquired business or
company may cause the Company not to realize expected
revenue increases, cost savings, increases in geographic or
product presence, and/or other projected benefits from the
acquisition. The integration could result in higher than
expected deposit attrition (run-off), loss of key employees,
disruption of the Company’s business or the business of the
acquired company, or otherwise adversely affect the
Company’s ability to maintain relationships with customers
and employees or achieve the anticipated benefits of the
acquisition. Also, the negative effect of any divestitures
customers, the Company’s financial results could be
negatively affected The Company’s business model depends
on sharing information among the family of companies
owned by U.S. Bancorp to better satisfy the Company’s
customer needs. Laws that restrict the ability of the
companies owned by U.S. Bancorp to share information
about customers could negatively affect the Company’s
revenue and profit.
The Company’s business could suffer if the Company fails
to attract and retain skilled people The Company’s success
depends, in large part, on its ability to attract and retain key
people. Competition for the best people in most activities the
Company engages in can be intense. The Company may not
be able to hire the best people or to keep them.
The Company relies on other companies to provide key
components of the Company’s business infrastructure
Third party vendors provide key components of the
Company’s business infrastructure such as internet
connections, network access and mutual fund distribution.
While the Company has selected these third party vendors
carefully, it does not control their actions. Any problems
caused by these third parties, including as a result of their
not providing the Company their services for any reason or
their performing their services poorly, could adversely affect
the Company’s ability to deliver products and services to the
Company’s customers and otherwise to conduct its business.
Replacing these third party vendors could also entail
significant delay and expense.
U.S. BANCORP
125
Significant legal actions could subject the Company to
substantial uninsured liabilities The Company is from time
to time subject to claims related to its operations. These
claims and legal actions, including supervisory actions by the
Company’s regulators, could involve large monetary claims
and significant defense costs. To protect itself from the cost
of these claims, the Company maintains insurance coverage
in amounts and with deductibles that it believes are
appropriate for its operations. However, the Company’s
insurance coverage may not cover all claims against the
Company or continue to be available to the Company at a
reasonable cost. As a result, the Company may be exposed
to substantial uninsured liabilities, which could adversely
affect the Company’s results of operations and financial
condition.
The Company is exposed to risk of environmental liability
when it takes title to properties In the course of the
Company’s business, the Company may foreclose on and
take title to real estate. As a result, the Company could be
subject to environmental liabilities with respect to these
properties. The Company may be held liable to a
governmental entity or to third parties for property damage,
personal injury, investigation and clean-up costs incurred by
these parties in connection with environmental
contamination or may be required to investigate or clean up
hazardous or toxic substances or chemical releases at a
property. The costs associated with investigation or
remediation activities could be substantial. In addition, if the
Company is the owner or former owner of a contaminated
site, it may be subject to common law claims by third
parties based on damages and costs resulting from
environmental contamination emanating from the property.
If the Company becomes subject to significant
environmental liabilities, its financial condition and results
of operations could be adversely affected.
A natural disaster could harm the Company’s business
Natural disasters could harm the Company’s operations
through interference with communications, including the
interruption or loss of the Company’s websites, which would
prevent the Company from gathering deposits, originating
loans and processing and controlling its flow of business, as
well as through the destruction of facilities and the
Company’s operational, financial and management
information systems.
The Company faces systems failure risks as well as
security risks, including “hacking” and “identity theft” The
computer systems and network infrastructure the Company
and others use could be vulnerable to unforeseen problems.
These problems may arise in both our internally developed
systems and the systems of our third-party service providers.
Our operations are dependent upon our ability to protect
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U.S. BANCORP
computer equipment against damage from fire, power loss
or telecommunication failure. Any damage or failure that
causes an interruption in our operations could adversely
affect our business and financial results. In addition, our
computer systems and network infrastructure present
security risks, and could be susceptible to hacking or identity
theft.
The Company relies on dividends from its subsidiaries for
its liquidity needs The Company is a separate and distinct
legal entity from its bank subsidiaries and non-bank
subsidiaries. The Company receives substantially all of its
cash from dividends paid by its subsidiaries. These dividends
are the principal source of funds to pay dividends on the
Company’s stock and interest and principal on its debt.
Various federal and state laws and regulations limit the
amount of dividends that our bank subsidiaries and certain
of our non-bank subsidiaries may pay to the Company. Also,
the Company’s right to participate in a distribution of assets
upon a subsidiary’s liquidation or reorganization is subject
to prior claims of the subsidiary’s creditors.
The Company has non-banking businesses that are subject
to various risks and uncertainties The Company is a
diversified financial services company, and the Company’s
business model is based on a mix of businesses that provide
a broad range of products and services delivered through
multiple distribution channels. In addition to banking, the
Company provides payment services, investments, mortgages
and corporate and personal trust services. Although the
Company believes its diversity helps lessen the effect of
downturns in any one segment of its industry, it also means
the Company’s earnings could be subject to various specific
risks and uncertainties related to these non-banking
businesses.
The Company’s stock price can be volatile The Company’s
stock price can fluctuate widely in response to a variety of factors,
including: actual or anticipated variations in the Company’s
quarterly operating results; recommendations by securities analysts;
significant acquisitions or business combinations; strategic
partnerships, joint ventures or capital commitments by or involving
the Company or the Company’s competitors; operating and stock
price performance of other companies that investors deem
comparable to the Company; new technology used or services
offered by the Company’s competitors; news reports relating to
trends, concerns and other issues in the financial services industry;
and changes in government regulations. General market
fluctuations, industry factors and general economic and political
conditions and events have recently caused a significant decline in
the Company’s stock price, and these factors as well as interest rate
changes, continued unfavorable credit loss trends, currency
fluctuations, or unforeseen events such as terrorist attacks could
cause the Company’s stock price to continue to decrease regardless
of the Company’s operating results.
Executive Officers
Richard K. Davis
Mr. Davis is Chairman, President and Chief Executive Officer of U.S. Bancorp.
Mr. Davis, 51, has served as Chairman of U.S. Bancorp since December 2007,
Chief Executive Officer since December 2006 and President since October 2004.
He also served as Chief Operating Officer from October 2004 until December
2006. From the time of the merger of Firstar Corporation and U.S. Bancorp in
February 2001 until October 2004, Mr. Davis served as Vice Chairman of
U.S. Bancorp. From the time of the merger, Mr. Davis was responsible for
Consumer Banking, including Retail Payment Solutions (card services), and he
assumed additional responsibility for Commercial Banking in 2003. Mr. Davis
has held management positions with our Company since joining Star Banc
Corporation, one of our predecessors, in 1993 as Executive Vice President.
Jennie P. Carlson
Ms. Carlson is Executive Vice President of U.S. Bancorp. Ms. Carlson, 48, has
served as Executive Vice President, Human Resources since January 2002. Until
that time, she served as Executive Vice President, Deputy General Counsel and
Corporate Secretary of U.S. Bancorp since the merger of Firstar Corporation and
U.S. Bancorp in February 2001. From 1995 until the merger, she was General
Counsel and Secretary of Firstar Corporation and Star Banc Corporation.
Andrew Cecere
Mr. Cecere is Vice Chairman and Chief Financial Officer of U.S. Bancorp. Mr.
Cecere, 48, has served as Chief Financial Officer of U.S. Bancorp since February
2007, and Vice Chairman since the merger of Firstar Corporation and
U.S. Bancorp in February 2001. From February 2001 until February 2007 he
was responsible for Wealth Management & Securities Services. Previously, he
had served as an executive officer of the former U.S. Bancorp, including as
Chief Financial Officer from May 2000 through February 2001.
William L. Chenevich
Mr. Chenevich is Vice Chairman of U.S. Bancorp. Mr. Chenevich, 65, has
served as Vice Chairman of U.S. Bancorp since the merger of Firstar
Corporation and U.S. Bancorp in February 2001, when he assumed
responsibility for Technology and Operations Services. Previously, he served as
Vice Chairman of Technology and Operations Services of Firstar Corporation
from 1999 to 2001.
Richard C. Hartnack
Mr. Hartnack is Vice Chairman of U.S. Bancorp. Mr. Hartnack, 63, has served in
this position since April 2005, when he joined U.S. Bancorp to assume
responsibility for Consumer Banking. Prior to joining U.S. Bancorp, he served as
Vice Chairman of Union Bank of California from 1991 to 2005 with
responsibility for Community Banking and Investment Services.
Richard J. Hidy
Mr. Hidy is Executive Vice President and Chief Risk Officer of U.S. Bancorp.
Mr. Hidy, 46, has served in these positions since 2005. From 2003 until 2005,
he served as Senior Vice President and Deputy General Counsel of
U.S. Bancorp, having served as Senior Vice President and Associate General
Counsel of U.S. Bancorp and Firstar Corporation since 1999.
Joseph C. Hoesley
Mr. Hoesley is Vice Chairman of U.S. Bancorp. Mr. Hoesley, 54, has served as
Vice Chairman of U.S. Bancorp since June 2006. From June 2002 until June
2006, he served as Executive Vice President and National Group Head of
Left to right:
Joseph M. Otting, Vice Chairman, Commercial Banking
P.W. (Bill) Parker, Executive Vice President and
Chief Credit Officer
Howell (Mac) McCullough, III, Executive Vice President and
Chief Strategy Officer
Jennie P. Carlson, Executive Vice President,
Human Resources
Richard C. Hartnack, Vice Chairman, Consumer Banking
Richard B. Payne, Jr., Vice Chairman, Corporate Banking
Andrew Cecere, Vice Chairman and Chief Financial Officer
Diane L. Thormodsgard, Vice Chairman,
Wealth Management & Securities Services
Joseph C. Hoesley, Vice Chairman, Commercial Real Estate
William L. Chenevich, Vice Chairman, Technology and
Operations Services
Richard K. Davis, Chairman, President and Chief Executive
Officer
Richard J. Hidy, Executive Vice President and Chief Risk Officer
Pamela A. Joseph, Vice Chairman, Payment Services
Lee R. Mitau, Executive Vice President and General Counsel
Commercial Real Estate at U.S. Bancorp, having previously served as Senior
Vice President and Group Head of Commercial Real Estate at U.S. Bancorp
since joining U.S. Bancorp in 1992.
Pamela A. Joseph
Ms. Joseph is Vice Chairman of U.S. Bancorp. Ms. Joseph, 50, has served as
Vice Chairman of U.S. Bancorp since December 2004. Since November 2004,
she has been Chairman and Chief Executive Officer of Elavon Inc., a wholly
owned subsidiary of U.S. Bancorp. Prior to that time, she had been President
and Chief Operating Officer of Elavon Inc. since February 2000.
Howell D. McCullough III
Mr. McCullough is Executive Vice President and Chief Strategy Officer of
U.S. Bancorp and Head of U.S. Bancorp’s Enterprise Revenue Office.
Mr. McCullough, 52, has served in these positions since September 2007.
From July 2005 until September 2007, he served as Director of Strategy and
Acquisitions of the Payment Services business of U.S. Bancorp. He also served
as Chief Financial Officer of the Payment Services business from October
2006 until September 2007. From March 2001 until July 2005, he served as
Senior Vice President and Director of Investor Relations at U.S. Bancorp.
Lee R. Mitau
Mr. Mitau is Executive Vice President and General Counsel of U.S. Bancorp.
Mr. Mitau, 60, has served in these positions since 1995. Mr. Mitau also serves
as Corporate Secretary. Prior to 1995 he was a partner at the law firm of
Dorsey & Whitney LLP.
Joseph M. Otting
Mr. Otting is Vice Chairman of U.S. Bancorp. Mr. Otting, 51, has served in this
position since April 2005, when he assumed responsibility for Commercial
Banking. Previously, he served as Executive Vice President, East Commercial
Banking Group of U.S. Bancorp from June 2003 to April 2005. He served as
Market President of U.S. Bank in Oregon from December 2001 until June 2003.
P.W. Parker
Mr. Parker is Executive Vice President and Chief Credit Officer of U.S. Bancorp.
Mr. Parker, 52, has served in this position since October 2007. From March
2005 until October 2007, he served as Executive Vice President of Credit
Portfolio Management of U.S. Bancorp, having served as Senior Vice President
of Credit Portfolio Management of U.S. Bancorp since January 2002.
Richard B. Payne, Jr.
Mr. Payne is Vice Chairman of U.S. Bancorp. Mr. Payne, 61, has served in
this position since July 2006, when he joined U.S. Bancorp to assume
responsibility for Corporate Banking. Prior to joining U.S. Bancorp, he served
as Executive Vice President for National City Corporation in Cleveland, with
responsibility for Capital Markets, since 2001.
Diane L. Thormodsgard
Ms. Thormodsgard is Vice Chairman of U.S. Bancorp. Ms. Thormodsgard, 58,
has served as Vice Chairman of U.S. Bancorp since April 2007, when she assumed
responsibility for Wealth Management & Securities Services. From 1999 until
April 2007, she served as President of Corporate Trust and Institutional Trust &
Custody services of U.S. Bancorp, having previously served as Chief Administrative
Officer of Corporate Trust at U.S. Bancorp from 1995 to 1999.
U.S. BANCORP
127
Directors
Richard K. Davis1,6
Chairman, President and Chief Executive Officer
U.S. Bancorp
Minneapolis, Minnesota
Douglas M. Baker, Jr.3,4
Chairman, President and Chief Executive Officer
Ecolab Inc.
St. Paul, Minnesota
Victoria Buyniski Gluckman4,6
Retired Chairman and Chief Executive Officer
United Medical Resources, Inc.,
a wholly owned subsidiary of
UnitedHealth Group Incorporated
Cincinnati, Ohio
Arthur D. Collins, Jr.1,2,5
Retired Chairman and Chief Executive Officer
Medtronic, Inc.
Minneapolis, Minnesota
Joel W. Johnson3,6
Retired Chairman and Chief Executive Officer
Hormel Foods Corporation
Austin, Minnesota
Olivia F. Kirtley 1,3,5
Business Consultant
Louisville, Kentucky
Jerry W. Levin1,2,5
Chairman and Chief Executive Officer
JW Levin Partners LLC
New York, New York
David B. O’Maley5,6
Chairman, President and Chief Executive Officer
Ohio National Financial Services, Inc.
Cincinnati, Ohio
O’dell M. Owens, M.D., M.P.H.1,3,4
Independent Consultant and Hamilton County Coroner
Cincinnati, Ohio
Richard G. Reiten2,3
Retired Chairman and Chief Executive Officer
Northwest Natural Gas Company
Portland, Oregon
Craig D. Schnuck4,6
Former Chairman and Chief Executive Officer
Schnuck Markets, Inc.
St. Louis, Missouri
Patrick T. Stokes1,2,6
Retired Chairman and Chief Executive Officer
Anheuser-Busch Companies, Inc.
St. Louis, Missouri
1. Executive Committee
2. Compensation and Human Resources Committee
3. Audit Committee
4. Community Reinvestment and Public Policy Committee
5. Governance Committee
6. Risk Management Committee
128
U.S. BANCORP
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Corporate Information
Executive Offi ces
U.S. Bancorp
800 Nicollet Mall
Minneapolis, MN 55402
Common Stock Transfer Agent
and Registrar
BNY Mellon Shareowner Services acts as
our transfer agent and registrar, dividend
paying agent and dividend reinvestment
plan administrator, and maintains all
shareholder records for the corporation.
Inquiries related to shareholder records,
stock transfers, changes of ownership,
lost stock certificates, changes of address
and dividend payment should be directed
to the transfer agent at:
BNY Mellon Shareowner Services
P.O. Box 358015
Pittsburgh, PA 15252-8015
Phone: 888-778-1311 or
201-680-6578 (international calls)
Internet: bnymellon.com/shareowner
For Registered or Certified Mail:
BNY Mellon Shareowner Services
500 Ross St., 6th Floor
Pittsburgh, PA 15219
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 BNY Mellon’s internet site by
clicking on the Investor ServiceDirect® link.
Independent Auditor
Ernst & Young LLP serves as the
independent auditor for U.S. Bancorp’s
financial 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 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, BNY Mellon Shareowner Services.
Investor Relations Contacts
Judith T. Murphy
Executive Vice President
Corporate Investor and Public Relations
judith.murphy@usbank.com
Phone: 612-303-0783 or 866-775-9668
Financial Information
U.S. Bancorp news and financial results are
available through our website and by mail.
Website For information about
U.S. Bancorp, including news, financial
results, annual reports and other
documents filed 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 financial data reported on
Form 10-Q, Form 10-K, and additional
copies of our annual reports. Please contact:
U.S. Bancorp Investor Relations
800 Nicollet Mall
Minneapolis, MN 55402
investorrelations@usbank.com
Phone: 866-775-9668
Media Requests
Steven W. Dale
Senior Vice President, Media Relations
steve.dale@usbank.com
Phone: 612-303-0784
The paper utilized in this annual
report is certifi ed by SmartWood
to the FSC standards and
contains a minimum of 10%
post-consumer recycled paper
fi bers. The narrative and
fi nancial sections contain 30%
post-consumer recycled
paper fi bers.
U.S. Bank, Member FDIC
Privacy
U.S. Bancorp is committed to respecting
the privacy of our customers and
safeguarding the financial and personal
information 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 certifies compliance
with the letter and spirit of our Code of
Ethics and Business Conduct, the guiding
ethical standards of our organization.
For details about our Code of Ethics and
Business Conduct, visit usbank.com and
click on About U.S. Bancorp, then Ethics
at U.S. Bank.
Diversity
U.S. Bancorp and our subsidiaries are
committed to developing and maintaining
a workplace that reflects the diversity of
the communities we serve. We support
a work environment where individual
differences are valued and respected and
where each individual who shares the
fundamental values of the Company has
an opportunity to contribute and grow
based on individual merit.
Equal Employment Opportunity/
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.
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U.S. Bancorp
800 Nicollet Mall
Minneapolis, MN 55402
usbank.com
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