e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
OR
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from (not applicable)
Commission File Number 1-6880
U.S. BANCORP
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization) |
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41-0255900
(I.R.S. Employer
Identification No.) |
800 Nicollet Mall
Minneapolis, Minnesota 55402
(Address of principal executive offices, including zip code)
651-466-3000
(Registrants telephone number, including area code)
(not applicable)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the
registrant is a shell company (as defined in
Rule 12b-2 of the
Exchange Act).
YES o NO þ
Indicate the number of shares
outstanding of each of the issuers classes of common
stock, as of the latest practicable date.
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Class
Common Stock, $.01 Par Value
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Outstanding as of July 31, 2006
1,777,189,374 shares |
Table of Contents and
Form 10-Q Cross
Reference Index
Safe Harbor Statement under the Private
Securities Litigation Reform Act of 1995.
This Form 10-Q
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 the Company. Forward-looking statements
involve inherent risks and uncertainties, and important factors
could cause actual results to differ materially from those
anticipated, including changes in general business and economic
conditions, changes in interest rates, legal and regulatory
developments, increased competition from both banks and
non-banks, changes in customer behavior and preferences, effects
of mergers and acquisitions and related integration, and effects
of critical accounting policies and judgments. For discussion of
these and other risks that may cause actual results to differ
from expectations, refer to our Annual Report on
Form 10-K for the
year ended December 31, 2005, on file with the Securities
and Exchange Commission, including the sections entitled
Risk Factors and Corporate Risk Profile.
Forward-looking statements speak only as of the date they are
made, and the Company undertakes no obligation to update them in
light of new information or future events.
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Table 1 |
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Selected Financial Data |
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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Percent | |
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Percent | |
(Dollars and Shares in Millions, Except Per Share Data) |
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2006 | |
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2005 | |
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Change | |
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2006 | |
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2005 | |
|
Change | |
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Condensed Income Statement
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Net interest income (taxable-equivalent basis) (a)
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$1,697 |
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$1,761 |
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(3.6 |
)% |
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$3,422 |
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|
$3,512 |
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(2.6 |
)% |
Noninterest income
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1,752 |
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|
1,540 |
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13.8 |
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|
3,366 |
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2,981 |
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12.9 |
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Securities gains (losses), net
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3 |
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1 |
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* |
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3 |
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(58 |
) |
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* |
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Total net revenue
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3,452 |
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3,302 |
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4.5 |
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6,791 |
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6,435 |
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5.5 |
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Noninterest expense
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1,530 |
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|
1,595 |
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(4.1 |
) |
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|
3,030 |
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2,926 |
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3.6 |
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Provision for credit losses
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125 |
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144 |
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(13.2 |
) |
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240 |
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316 |
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(24.1 |
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Income before taxes
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1,797 |
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1,563 |
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15.0 |
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3,521 |
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3,193 |
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10.3 |
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Taxable-equivalent adjustment
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11 |
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|
7 |
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57.1 |
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21 |
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|
14 |
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50.0 |
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Applicable income taxes
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585 |
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|
435 |
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34.5 |
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1,146 |
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|
987 |
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16.1 |
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Net income
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$1,201 |
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$1,121 |
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7.1 |
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$2,354 |
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$2,192 |
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7.4 |
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Net income applicable to common equity
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$1,184 |
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$1,121 |
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5.6 |
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$2,337 |
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$2,192 |
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6.6 |
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Per Common Share
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Earnings per share
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$.66 |
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$.61 |
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8.2 |
% |
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$1.30 |
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$1.19 |
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9.2 |
% |
Diluted earnings per share
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.66 |
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.60 |
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10.0 |
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1.29 |
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1.17 |
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10.3 |
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Dividends declared per share
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.33 |
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.30 |
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10.0 |
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.66 |
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.60 |
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10.0 |
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Book value per share
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10.89 |
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10.88 |
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.1 |
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Market value per share
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30.88 |
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29.20 |
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5.8 |
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Average common shares outstanding
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1,781 |
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1,833 |
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(2.8 |
) |
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1,791 |
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1,842 |
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(2.8 |
) |
Average diluted common shares outstanding
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1,805 |
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1,857 |
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(2.8 |
) |
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1,816 |
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1,869 |
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(2.8 |
) |
Financial Ratios
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Return on average assets
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2.27 |
% |
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2.23 |
% |
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2.25 |
% |
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2.22 |
% |
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Return on average common equity
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24.3 |
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22.7 |
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23.8 |
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22.3 |
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Net interest margin (taxable-equivalent basis)
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3.68 |
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3.99 |
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3.74 |
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4.03 |
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Efficiency ratio (b)
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44.4 |
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48.3 |
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44.6 |
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45.1 |
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Average Balances
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Loans
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$140,863 |
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$131,275 |
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7.3 |
% |
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$140,125 |
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$129,474 |
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8.2 |
% |
Loans held for sale
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2,062 |
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1,697 |
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21.5 |
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1,866 |
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1,564 |
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19.3 |
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Investment securities
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40,087 |
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42,341 |
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(5.3 |
) |
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39,885 |
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42,576 |
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(6.3 |
) |
Earning assets
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184,890 |
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176,730 |
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4.6 |
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184,000 |
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175,022 |
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5.1 |
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Assets
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212,407 |
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201,818 |
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5.2 |
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211,222 |
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199,390 |
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5.9 |
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Noninterest-bearing deposits
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28,949 |
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29,148 |
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(.7 |
) |
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28,893 |
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28,784 |
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.4 |
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Deposits
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121,233 |
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121,232 |
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120,701 |
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120,332 |
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.3 |
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Short-term borrowings
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22,246 |
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17,013 |
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30.8 |
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23,295 |
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16,313 |
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42.8 |
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Long-term debt
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41,225 |
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36,973 |
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11.5 |
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39,735 |
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36,211 |
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9.7 |
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Shareholders equity
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20,556 |
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19,820 |
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3.7 |
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20,353 |
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19,812 |
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2.7 |
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June 30, 2006 |
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December 31, 2005 |
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Period End Balances
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Loans
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$141,382 |
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$137,806 |
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2.6 |
% |
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Allowance for credit losses
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2,251 |
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2,251 |
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Investment securities
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38,462 |
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|
39,768 |
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(3.3 |
) |
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Assets
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213,405 |
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|
209,465 |
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1.9 |
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Deposits
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|
122,719 |
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|
124,709 |
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(1.6 |
) |
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Long-term debt
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|
41,952 |
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|
37,069 |
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13.2 |
|
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Shareholders equity
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|
20,415 |
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|
20,086 |
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1.6 |
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Regulatory capital ratios
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Tier 1 capital
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8.9 |
% |
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8.2 |
% |
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Total risk-based capital
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13.1 |
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12.5 |
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Leverage
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8.2 |
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7.6 |
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Tangible common equity
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5.6 |
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5.9 |
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* |
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Not meaningful. |
(a) |
|
Interest and rates are presented on a fully
taxable-equivalent basis utilizing a tax rate of
35 percent. |
(b) |
|
Computed as noninterest expense divided by the sum of net
interest income on a taxable-equivalent basis and noninterest
income excluding securities gains (losses), net. |
Managements Discussion and Analysis
OVERVIEW
Earnings Summary
U.S. Bancorp and its
subsidiaries (the Company) reported net income of
$1,201 million for the second quarter of 2006, compared
with $1,121 million for the second quarter of 2005. Net
income of $.66 per diluted common share in the second
quarter of 2006 was higher than the same period of 2005 by $.06
(10.0 percent). Return on average assets and return on
average common equity were 2.27 percent and
24.3 percent, respectively, for the second quarter of 2006,
compared with returns of 2.23 percent and
22.7 percent, respectively, for the second quarter of 2005.
The Companys results for the second quarter of 2006
improved over the same period of 2005, as net income increased
by $80 million (7.1 percent), primarily due to strong
growth in a majority of fee-based products.
Total net revenue, on a taxable-equivalent basis, for the second
quarter of 2006, was $150 million (4.5 percent) higher
than the second quarter of 2005, primarily reflecting a
13.9 percent increase in noninterest income, partially
offset by a 3.6 percent decline in net interest income
reflecting the impact of rising interest rates during the past
several quarters. Noninterest income growth was driven by
organic business growth and recent expansion in trust and
payment processing businesses. Noninterest income also included
a gain related to the initial public offering of a cardholder
association. These favorable changes in noninterest income were
partially offset by lower mortgage banking revenue due to the
impact of adopting the fair value method of accounting under
Statement of Financial Accounting Standards No. 156
Accounting for Servicing of Financial Assets
(SFAS 156) in the first quarter of 2006.
Mortgage banking revenue in the second quarter of 2006 included
the effect of principal repayments on the valuation of servicing
rights that were previously recognized as part of intangible
expense.
Total noninterest expense in the second quarter of 2006 was
$65 million (4.1 percent) lower than the second
quarter of 2005, primarily reflecting lower intangible expense
due to the adoption of SFAS 156 and lower debt prepayment
expense. This was partially offset by incremental operating and
business integration costs principally associated with recent
acquisitions, increased pension costs and higher expenses
related to investments in tax-advantaged projects from a year
ago. The efficiency ratio (the ratio of noninterest expense to
taxable-equivalent net revenue excluding net securities gains or
losses) was 44.4 percent for the second quarter of 2006,
compared with 48.3 percent for the second quarter of 2005.
The provision for credit losses for the second quarter of 2006
decreased $19 million (13.2 percent), compared with
the second quarter of 2005. The decrease in the provision for
credit losses year-over-year primarily reflected strong credit
quality and the near-term favorable impact of changes in
bankruptcy law in the fourth quarter of 2005. Net charge-offs in
the second quarter of 2006 were $125 million, compared with
$144 million in the second quarter of 2005. The decline in
credit losses from a year ago was principally due to the impact
of changes in 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 factors
considered by the Company in assessing the credit quality of the
loan portfolio and establishing the allowance for credit losses.
The Company reported net income of $2,354 million for the
first six months of 2006, compared with $2,192 million for
the first six months of 2005. Net income of $1.29 per
diluted common share in the first six months of 2006 was higher
than the same period of 2005 by $.12 (10.3 percent). Return
on average assets and return on average common equity were
2.25 percent and 23.8 percent, respectively, for the
first six months of 2006, compared with returns of
2.22 percent and 22.3 percent, respectively, for the
first six months of 2005. The Companys results for the
first six months of 2006 improved over the same period of 2005,
as net income rose by $162 million (7.4 percent),
primarily due to strong revenue growth in
fee-based products.
Total net revenue, on a taxable-equivalent basis, for the first
six months of 2006, was $356 million (5.5 percent)
higher than the first six months of 2005, primarily reflecting a
15.3 percent increase in noninterest income, partially
offset by a 2.6 percent decline in net interest income,
reflecting the impact of rising interest rates during the past
several quarters. Noninterest income growth was driven by
organic business growth, recent expansion in trust and payment
processing businesses, trading income related to certain
derivatives, a favorable settlement during the first quarter of
2006 and the gain from the initial public offering of a
cardholder association during the second quarter of 2006. These
favorable changes in noninterest
income categories were partially offset by lower mortgage
banking revenue due to the impact of adopting SFAS 156 in
the first quarter of 2006. In addition, there was a
$61 million favorable variance in net securities gains
(losses) in the first six months of 2006 as compared with
the same period of 2005.
Total noninterest expense in the first six months of 2006 was
$104 million (3.6 percent) higher than the first six
months of 2005, primarily reflecting incremental operating and
business integration costs principally associated with recent
acquisitions, increased pension costs and higher expenses
related to investments in tax-advantaged projects from a year
ago. This was partially offset by lower intangible expense due
to the adoption of SFAS 156 and lower debt prepayment
expense. The efficiency ratio was 44.6 percent for the
first six months of 2006, compared with 45.1 percent for
the first six months of 2005.
The provision for credit losses for the first six months of 2006
decreased $76 million (24.1 percent), compared with
the first six months of 2005. The decrease in the provision for
credit losses year-over-year primarily reflected strong credit
quality and the near-term favorable impact of changes in
bankruptcy law in the fourth quarter of 2005. Net charge-offs in
the first six months of 2006 were $240 million, compared
with $316 million in the first six months of 2005. The
decline in losses from a year ago was principally due to the
impact of changes in 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 factors considered by the Company in assessing the
credit quality of the loan portfolio and establishing the
allowance for credit losses.
STATEMENT OF INCOME ANALYSIS
Net Interest Income Net
interest income, on a taxable-equivalent basis, was
$1,697 million in the second quarter of 2006, compared with
$1,761 million in the second quarter of 2005. Net interest
income, on a taxable-equivalent basis, was $3,422 million
in the first six months of 2006, compared with
$3,512 million in the first six months of 2005. Average
earning assets increased $8.2 billion (4.6 percent)
and $9.0 billion (5.1 percent) in the second quarter
and first six months of 2006, respectively, compared with the
same periods of 2005. The increases were primarily driven by
growth in residential mortgages, commercial loans, retail loans
and commercial real estate loans, partially offset by a decrease
in investment securities. The positive impact to net interest
income from the growth in earning assets was more than offset by
a lower net interest margin. The net interest margin for the
second quarter and first six months of 2006 was
3.68 percent and 3.74 percent, respectively, compared
with 3.99 percent and 4.03 percent, respectively, for
the same periods of 2005. The year-over-year decline in the net
interest margin for the second quarter and first six months of
2006 reflected the competitive lending environment during 2005
and the first half of 2006, asset/liability management decisions
and the impact of changes in the yield curve from a year ago.
Compared with the same periods of 2005, credit spreads have
tightened by approximately 23 basis points in the second
quarter and 21 basis points in the first six months of 2006
across most lending products due to competitive pricing and a
change in mix due to growth in lower-spread, fixed-rate credit
products. The net interest margin also declined due to funding
incremental asset growth with higher cost wholesale funding,
share repurchases and asset/liability decisions designed to
reduce the Companys interest rate sensitivity position. An
increase in the margin benefit of net free funds and loan fees
partially offset these factors. Refer to the Consolidated
Daily Average Balance Sheet and Related Yields and Rates
table for further information on net interest income.
Average loans for the second quarter and first six months of
2006 were higher by $9.6 billion (7.3 percent) and
$10.7 billion (8.2 percent), respectively, compared
with the same periods of 2005, reflecting growth in the majority
of loan categories. During the first quarter of 2006, the
Company began selling an increased proportion of its residential
mortgage loan production and anticipates that residential
mortgage loan balances will remain essentially flat in future
periods.
Average investment securities in the second quarter and first
six months of 2006 were $2.3 billion (5.3 percent) and
$2.7 billion (6.3 percent) lower, respectively, than
the same periods of 2005. The change in the balance of the
investment securities portfolio from a year ago principally
reflected asset/liability management decisions to reduce the
focus on residential mortgage assets given the changing interest
rate environment and mix of loan growth. Additionally, the
Company reclassified approximately $460 million of
principal-only securities to its trading account effective
January 1, 2006, in connection with the adoption of
SFAS 156. During the second quarter and first six months of
2006, the Company maintained a mix of approximately
40 percent variable-rate securities. Refer to the
Interest Rate Risk Management section for further
information on the sensitivity of net interest income to changes
in interest rates.
Average noninterest-bearing deposits for the second quarter and
first six months of 2006 remained relatively flat compared with
the same periods of the prior year. The average balances for the
second quarter and first six months of 2006 decreased
$199 million (.7 percent) and increased
$109 million (.4 percent), respectively, compared with
the same periods of 2005, despite a reduction of excess
liquidity in the markets.
Average total savings products declined year-over-year by
$2.4 billion (4.2 percent) in the second quarter and
$2.8 billion (4.8 percent) in the first six months of
2006, compared with the same periods of 2005, due to reductions
in average money market savings and other savings account
balances. Average money market savings balances declined
year-over-year primarily due to a decline in balances within the
branches. This decrease was partially offset by increases in
broker dealer and corporate trust balances. The overall decrease
in average money market savings balances year-over-year was
primarily the result of the Companys deposit pricing
decisions for money market products in relation to
fixed-rate deposit
products offered. As a result, a portion of
branch-based money market savings accounts have migrated to
fixed-rate time certificates, while larger customer money market
savings accounts have migrated to time deposits greater than
$100,000 as rates increased on the time deposit products.
Average time certificates of deposit less than $100,000 were
higher by $537 million (4.1 percent) and
$532 million (4.1 percent) in the second quarter and
first six months of 2006, respectively, compared with the same
periods of 2005. Average time deposits greater than $100,000
grew $2.1 billion (10.3 percent) and $2.5 billion
(12.9 percent) in the second quarter and first six months
of 2006, respectively, compared with the same periods of 2005.
This growth was broad-based across most areas of the Company
including: corporate, commercial, branch banking, private client
and corporate trust, as customers migrated balances to higher
rate deposits.
Provision for Credit Losses
The provision for credit
losses for the second quarter and first six months of 2006
decreased $19 million (13.2 percent) and
$76 million (24.1 percent), respectively, compared
with the same periods of 2005. The decrease in the provision for
credit losses year-over-year primarily reflected stronger credit
quality and the near-term favorable impact of changes in
bankruptcy law in the fourth quarter of 2005. Net charge-offs in
the second quarter and first six months of 2006 were
$125 million and $240 million, respectively, compared
with $144 million and $316 million in the second
quarter and first six months of 2005, respectively. The decline
in losses from a year ago was principally due to the impact of
changes in 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 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 the
second quarter and first six months of 2006 was
$1,755 million and $3,369 million, respectively,
compared with $1,541 million and $2,923 million in the
same periods of 2005. The $214 million (13.9 percent)
increase during the second quarter and $446 million
(15.3 percent) increase during the first six months of
2006, compared with the same periods in
|
|
|
Table 2 |
|
Noninterest Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
|
|
|
|
|
Percent | |
|
|
|
Percent | |
(Dollars in Millions) |
|
2006 | |
|
2005 | |
|
Change | |
|
2006 | |
|
2005 | |
|
Change | |
|
Credit and debit card revenue
|
|
|
$202 |
|
|
|
$177 |
|
|
|
14.1 |
% |
|
|
$384 |
|
|
|
$331 |
|
|
|
16.0 |
% |
Corporate payment products revenue
|
|
|
139 |
|
|
|
120 |
|
|
|
15.8 |
|
|
|
266 |
|
|
|
227 |
|
|
|
17.2 |
|
ATM processing services
|
|
|
61 |
|
|
|
57 |
|
|
|
7.0 |
|
|
|
120 |
|
|
|
104 |
|
|
|
15.4 |
|
Merchant processing services
|
|
|
253 |
|
|
|
198 |
|
|
|
27.8 |
|
|
|
466 |
|
|
|
376 |
|
|
|
23.9 |
|
Trust and investment management fees
|
|
|
314 |
|
|
|
253 |
|
|
|
24.1 |
|
|
|
611 |
|
|
|
500 |
|
|
|
22.2 |
|
Deposit service charges
|
|
|
264 |
|
|
|
234 |
|
|
|
12.8 |
|
|
|
496 |
|
|
|
444 |
|
|
|
11.7 |
|
Treasury management fees
|
|
|
116 |
|
|
|
117 |
|
|
|
(.9 |
) |
|
|
223 |
|
|
|
224 |
|
|
|
(.4 |
) |
Commercial products revenue
|
|
|
107 |
|
|
|
100 |
|
|
|
7.0 |
|
|
|
211 |
|
|
|
196 |
|
|
|
7.7 |
|
Mortgage banking revenue
|
|
|
75 |
|
|
|
110 |
|
|
|
(31.8 |
) |
|
|
99 |
|
|
|
212 |
|
|
|
(53.3 |
) |
Investment products fees and commissions
|
|
|
42 |
|
|
|
39 |
|
|
|
7.7 |
|
|
|
80 |
|
|
|
78 |
|
|
|
2.6 |
|
Securities gains (losses), net
|
|
|
3 |
|
|
|
1 |
|
|
|
* |
|
|
|
3 |
|
|
|
(58 |
) |
|
|
* |
|
Other
|
|
|
179 |
|
|
|
135 |
|
|
|
32.6 |
|
|
|
410 |
|
|
|
289 |
|
|
|
41.9 |
|
|
|
|
|
Total noninterest income
|
|
$ |
1,755 |
|
|
$ |
1,541 |
|
|
|
13.9 |
% |
|
$ |
3,369 |
|
|
$ |
2,923 |
|
|
|
15.3 |
% |
|
2005, were driven by favorable variances in the majority of fee
income categories and a $35 million gain from the initial
public offering of a cardholder association included in other
income. The increase in noninterest income for the first six
months of 2006 also reflected the impact of additional trading
income related to certain derivatives recorded in the current
year and a favorable variance in securities gains (losses) of
$61 million related to net securities losses recorded in
the prior year. This strong growth in revenue was partially
offset by the accounting impact of SFAS 156 on mortgage
banking revenue.
The growth in credit and debit card revenue was primarily driven
by higher customer transaction volumes. The corporate payment
products revenue growth reflected organic growth in sales
volumes and card usage. ATM processing services revenue for the
first six months of 2006 was higher due to the acquisition of an
ATM business in May of 2005. Merchant processing services
revenue growth reflects an increase in sales volume driven by
acquisitions, higher same store sales and equipment fees. Trust
and investment management fees increased in the second quarter
and first six months year-over-year, primarily due to improved
equity market conditions, incremental account growth and
customer balances and the acquisition of the corporate and
institutional trust business of a large national bank. Deposit
service charges grew year-over-year due to increased
transaction-related fees and growth in net checking accounts.
Other income for the second quarter and first six months of 2006
was higher than the same periods of 2005 due to a
$35 million gain from the initial public offering of a
cardholder association. In addition, other income for the first
six months of 2006 was higher due to a $44 million gain on
certain interest rate swaps,
end-of-term lease
residual value improvement, higher student loan sales gains and
the receipt of a favorable settlement within the merchant
processing business. These favorable changes in fee-based
revenue were partially offset by the decline in mortgage banking
revenue, principally driven by the adoption of the fair value
method of accounting for mortgage servicing rights
(MSR) under SFAS 156.
Noninterest Expense
Noninterest expense was
$1,530 million and $3,030 million, respectively, in
the second quarter and first six months of 2006, a decrease of
$65 million (4.1 percent) and an increase of
$104 million (3.6 percent), respectively, from the
same periods of 2005. The decrease in expense in the second
quarter of 2006, compared with the second quarter of 2005,
reflected the impact of adopting SFAS 156 on other
intangible expense and lower debt prepayment expense. The
increase in expense in the first six months of 2006, compared
with the same period of the prior year, reflected the impact of
business acquisitions and related integration costs, partially
offset by lower other intangible and debt prepayment expense.
Compensation expense was higher year-over-year in the second
quarter and first six months of 2006, primarily due to business
expansion, including the Companys payment processing
businesses, the acquisition of a large national banks
corporate and institutional trust business and other growth
initiatives. Employee benefits increased year-over-year
primarily as a result of higher pension costs. Net occupancy and
equipment expense increased in the first six months of 2006 from
the same period of 2005 primarily due to business expansion.
Technology and communications expense rose due to increased
software expense and higher outside data processing expense
principally associated with expanding a prepaid gift card
program and the acquisition of a large national
|
|
|
Table 3 |
|
Noninterest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
|
|
|
|
|
Percent | |
|
|
|
Percent | |
(Dollars in Millions) |
|
2006 | |
|
2005 | |
|
Change | |
|
2006 | |
|
2005 | |
|
Change | |
|
Compensation
|
|
|
$627 |
|
|
|
$612 |
|
|
|
2.5 |
% |
|
|
$1,260 |
|
|
|
$1,179 |
|
|
|
6.9 |
% |
Employee benefits
|
|
|
123 |
|
|
|
108 |
|
|
|
13.9 |
|
|
|
256 |
|
|
|
224 |
|
|
|
14.3 |
|
Net occupancy and equipment
|
|
|
161 |
|
|
|
159 |
|
|
|
1.3 |
|
|
|
326 |
|
|
|
313 |
|
|
|
4.2 |
|
Professional services
|
|
|
41 |
|
|
|
39 |
|
|
|
5.1 |
|
|
|
76 |
|
|
|
75 |
|
|
|
1.3 |
|
Marketing and business development
|
|
|
58 |
|
|
|
67 |
|
|
|
(13.4 |
) |
|
|
98 |
|
|
|
110 |
|
|
|
(10.9) |
|
Technology and communications
|
|
|
127 |
|
|
|
113 |
|
|
|
12.4 |
|
|
|
244 |
|
|
|
219 |
|
|
|
11.4 |
|
Postage, printing and supplies
|
|
|
66 |
|
|
|
63 |
|
|
|
4.8 |
|
|
|
132 |
|
|
|
126 |
|
|
|
4.8 |
|
Other intangibles
|
|
|
89 |
|
|
|
181 |
|
|
|
(50.8 |
) |
|
|
174 |
|
|
|
252 |
|
|
|
(31.0) |
|
Debt prepayment
|
|
|
11 |
|
|
|
54 |
|
|
|
(79.6 |
) |
|
|
11 |
|
|
|
54 |
|
|
|
(79.6) |
|
Other
|
|
|
227 |
|
|
|
199 |
|
|
|
14.1 |
|
|
|
453 |
|
|
|
374 |
|
|
|
21.1 |
|
|
|
|
|
Total noninterest expense
|
|
|
$1,530 |
|
|
|
$1,595 |
|
|
|
(4.1 |
)% |
|
|
$3,030 |
|
|
|
$2,926 |
|
|
|
3.6 |
% |
|
|
|
Efficiency ratio (a)
|
|
|
44.4 |
% |
|
|
48.3 |
% |
|
|
|
|
|
|
44.6 |
% |
|
|
45.1 |
% |
|
|
|
|
|
|
|
|
(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. |
banks corporate and institutional trust business. Other
expense increased in the second quarter and first
six months of 2006 from the same periods of 2005, primarily
due to the increased investments in tax-advantaged projects
relative to a year ago and business integration costs. These
expense increases were offset by a year-over-year decline in
other intangibles expense, reflecting the elimination of MSR
amortization and impairment due to the adoption of
SFAS 156, and lower debt prepayment expense.
Income Tax Expense The
provision for income taxes was $585 million (an effective
rate of 32.8 percent) for the second quarter and
$1,146 million (an effective rate of 32.7 percent) for
the first six months of 2006, compared with $435 million
(an effective rate of 28.0 percent) and $987 million
(an effective rate of 31.0 percent) for the same periods of
2005. The second quarter of 2005 included a $94 million
reduction in income tax expense related to the resolution of
federal income tax examinations covering substantially all of
the Companys legal entities for the years 2000 through
2002. For further information on income taxes, refer to
Note 9 of the Notes to Consolidated Financial Statements.
BALANCE SHEET ANALYSIS
Loans The Companys
total loan portfolio was $141.4 billion at June 30,
2006, compared with $137.8 billion at December 31,
2005, an increase of $3.6 billion (2.6 percent). The
increase in total loans was driven primarily by growth in
commercial loans, residential mortgages and retail loans. The
$2.4 billion (5.7 percent) increase in commercial
loans was primarily driven by new customer relationships,
utilization under lines of credit, growth in commercial leasing
and corporate payment card balances.
Commercial real estate loans were $28.6 billion at
June 30, 2006, an increase of $.1 billion
(.3 percent) compared with December 31, 2005. The
increase was driven by growth in construction loans, partially
offset by a decrease in commercial mortgage balances.
Residential mortgages held in the loan portfolio were
$21.1 billion at June 30, 2006, an increase of
$.3 billion (1.6 percent) compared with
December 31, 2005. The growth was the result of an increase
in consumer finance originations, partially offset by the
Company selling an increased proportion of its residential
mortgage loan production in 2006.
Total retail loans outstanding, which include credit card,
retail leasing, home equity and second mortgages and other
retail loans, increased $.7 billion (1.6 percent) at
June 30, 2006, compared with December 31, 2005. The
increase was primarily driven by growth in installment, credit
card and home equity loans, partially offset by decreases in
retail leasing, home equity lines and student loan balances.
Investment Securities
Investment securities, both
available-for-sale and
held-to-maturity,
totaled $38.5 billion at June 30, 2006, compared with
$39.8 billion at December 31, 2005, reflecting
purchases of $3.7 billion of securities, which were more
than offset by maturities and prepayments and the
reclassification of $.5 billion of principal-only
securities to the trading account effective January 1,
2006, in connection with the adoption of SFAS 156. As of
June 30, 2006, approximately 40 percent of the
investment securities portfolio represented adjustable-rate
financial instruments, compared with 41 percent at
December 31, 2005. Adjustable-rate financial instruments
include variable-rate collateralized mortgage obligations,
mortgage-backed securities, agency securities, adjustable-rate
money market accounts and asset-backed securities.
|
|
|
Table 4 |
|
Investment Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale | |
|
Held-to-Maturity | |
|
|
| |
|
|
|
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
|
|
|
Average | |
|
Weighted- | |
|
|
|
Average | |
|
Weighted- | |
|
|
Amortized | |
|
Fair | |
|
Maturity in | |
|
Average | |
|
Amortized | |
|
Fair | |
|
Maturity in | |
|
Average | |
June 30, 2006 (Dollars in Millions) |
|
Cost | |
|
Value | |
|
Years | |
|
Yield (d) | |
|
Cost | |
|
Value | |
|
Years | |
|
Yield (d) | |
| |
U.S. Treasury and agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing in one year or less
|
|
|
$119 |
|
|
|
$119 |
|
|
|
.3 |
|
|
|
4.70 |
% |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
% |
|
Maturing after one year through five years
|
|
|
37 |
|
|
|
37 |
|
|
|
2.4 |
|
|
|
6.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing after five years through ten years
|
|
|
14 |
|
|
|
14 |
|
|
|
6.9 |
|
|
|
7.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing after ten years
|
|
|
338 |
|
|
|
324 |
|
|
|
14.1 |
|
|
|
5.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$508 |
|
|
|
$494 |
|
|
|
9.8 |
|
|
|
5.73 |
% |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
% |
|
|
|
Mortgage-backed securities (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing in one year or less
|
|
|
$140 |
|
|
|
$138 |
|
|
|
.6 |
|
|
|
5.18 |
% |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
% |
|
Maturing after one year through five years
|
|
|
17,298 |
|
|
|
16,463 |
|
|
|
3.8 |
|
|
|
4.53 |
|
|
|
8 |
|
|
|
8 |
|
|
|
3.1 |
|
|
|
5.75 |
|
|
Maturing after five years through ten years
|
|
|
12,622 |
|
|
|
11,847 |
|
|
|
7.5 |
|
|
|
5.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing after ten years
|
|
|
5,793 |
|
|
|
5,715 |
|
|
|
15.1 |
|
|
|
6.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$35,853 |
|
|
|
$34,163 |
|
|
|
7.0 |
|
|
|
5.02 |
% |
|
|
$8 |
|
|
|
$8 |
|
|
|
3.1 |
|
|
|
5.75 |
% |
|
|
|
Asset-backed securities (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing in one year or less
|
|
|
$8 |
|
|
|
$8 |
|
|
|
.3 |
|
|
|
5.33 |
% |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
% |
|
Maturing after one year through five years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing after five years through ten years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing after ten years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$8 |
|
|
|
$8 |
|
|
|
.3 |
|
|
|
5.33 |
% |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
% |
|
|
|
Obligations of state and political subdivisions (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing in one year or less
|
|
|
$52 |
|
|
|
$52 |
|
|
|
.4 |
|
|
|
7.00 |
% |
|
|
$2 |
|
|
|
$2 |
|
|
|
.5 |
|
|
|
6.04 |
% |
|
Maturing after one year through five years
|
|
|
40 |
|
|
|
41 |
|
|
|
2.3 |
|
|
|
7.01 |
|
|
|
20 |
|
|
|
21 |
|
|
|
3.2 |
|
|
|
6.31 |
|
|
Maturing after five years through ten years
|
|
|
1,967 |
|
|
|
1,925 |
|
|
|
9.2 |
|
|
|
6.83 |
|
|
|
14 |
|
|
|
15 |
|
|
|
7.9 |
|
|
|
7.22 |
|
|
Maturing after ten years
|
|
|
742 |
|
|
|
720 |
|
|
|
14.3 |
|
|
|
6.44 |
|
|
|
37 |
|
|
|
38 |
|
|
|
15.8 |
|
|
|
6.54 |
|
|
|
|
|
|
Total
|
|
|
$2,801 |
|
|
|
$2,738 |
|
|
|
10.3 |
|
|
|
6.73 |
% |
|
|
$73 |
|
|
|
$76 |
|
|
|
10.4 |
|
|
|
6.59 |
% |
|
|
|
Other debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing in one year or less
|
|
|
$256 |
|
|
|
$256 |
|
|
|
.1 |
|
|
|
4.57 |
% |
|
|
$5 |
|
|
|
$5 |
|
|
|
.4 |
|
|
|
6.44 |
% |
|
Maturing after one year through five years
|
|
|
9 |
|
|
|
9 |
|
|
|
1.5 |
|
|
|
4.52 |
|
|
|
11 |
|
|
|
11 |
|
|
|
3.0 |
|
|
|
5.44 |
|
|
Maturing after five years through ten years
|
|
|
15 |
|
|
|
15 |
|
|
|
10.0 |
|
|
|
6.25 |
|
|
|
1 |
|
|
|
1 |
|
|
|
5.8 |
|
|
|
5.15 |
|
|
Maturing after ten years
|
|
|
627 |
|
|
|
625 |
|
|
|
21.2 |
|
|
|
6.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$907 |
|
|
|
$905 |
|
|
|
14.8 |
|
|
|
5.63 |
% |
|
|
$17 |
|
|
|
$17 |
|
|
|
2.3 |
|
|
|
5.74 |
% |
|
|
|
Other investments
|
|
|
$54 |
|
|
|
$56 |
|
|
|
|
|
|
|
|
% |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
% |
|
|
|
Total investment securities (c)
|
|
|
$40,131 |
|
|
|
$38,364 |
|
|
|
7.4 |
|
|
|
5.17 |
% |
|
|
$98 |
|
|
|
$101 |
|
|
|
8.4 |
|
|
|
6.37 |
% |
|
|
|
(a) |
Information related to asset and mortgage-backed securities
included above is presented based upon weighted-average
maturities anticipating future prepayments. |
|
|
(b) |
Information related to obligations of state and political
subdivisions is presented based upon yield to first optional
call date if the security is purchased at a premium, yield to
maturity if purchased at par or a discount. |
(c) |
The weighted-average maturity of the available for sale
investment securities was 6.1 years at December 31,
2005, with a corresponding weighted-average yield of
4.89 percent. The weighted-average maturity of the
held-to-maturity
investment securities was 7.2 years at December 31,
2005, with a corresponding weighted-average yield of
6.44 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. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 | |
|
December 31, 2005 | |
|
|
| |
|
|
Amortized | |
|
Percent | |
|
Amortized | |
|
Percent | |
(Dollars in Millions) |
|
Cost | |
|
of Total | |
|
Cost | |
|
of Total | |
|
U.S. Treasury and agencies
|
|
|
$508 |
|
|
|
1.3 |
% |
|
|
$496 |
|
|
|
1.2 |
% |
Mortgage-backed securities
|
|
|
35,861 |
|
|
|
89.1 |
|
|
|
38,169 |
|
|
|
94.4 |
|
Asset-backed securities
|
|
|
8 |
|
|
|
|
|
|
|
12 |
|
|
|
.1 |
|
Obligations of state and political subdivisions
|
|
|
2,874 |
|
|
|
7.1 |
|
|
|
724 |
|
|
|
1.8 |
|
Other debt securities and investments
|
|
|
978 |
|
|
|
2.5 |
|
|
|
1,029 |
|
|
|
2.5 |
|
|
|
|
|
Total investment securities
|
|
|
$40,229 |
|
|
|
100.0 |
% |
|
|
$40,430 |
|
|
|
100.0 |
% |
|
Deposits Total deposits
were $122.7 billion at June 30, 2006, compared with
$124.7 billion at December 31, 2005, a decrease of
$2.0 billion (1.6 percent). The decrease in total
deposits was primarily the result of decreases in
noninterest-bearing deposits and money market savings accounts,
partially offset by increases in interest checking, time
certificates of deposits less than $100,000 and time deposits
greater than $100,000. The $1.5 billion (4.6 percent)
decrease in noninterest-bearing deposits reflected lower
balances in most business lines, partially offset by an increase
in corporate trust balances due to seasonality. The
$1.3 billion (4.7 percent) decrease in money market
savings account balances reflected the Companys deposit
pricing decisions for money market products in relation to other
fixed-rate deposit products offered. A portion of branch-based
money market savings accounts have migrated to fixed-rate time
certificates, while larger customer money market savings
accounts have migrated to time deposits greater than $100,000 as
rates increased on the time deposit products. Time deposits
greater than $100,000 increased $.2 billion
(1.0 percent) and time certificates of deposit less than
$100,000 increased $.3 billion (2.1 percent) at
June 30, 2006, compared with December 31, 2005.
Interest checking accounts increased $.2 billion
(1.0 percent) due to an increase in trust and custody
balances, partially offset by decreases in consumer and private
banking balances.
Borrowings The Company
utilizes both short-term and long-term borrowings to fund growth
of earning assets in excess of deposit growth. Short-term
borrowings, which include federal funds purchased, commercial
paper, securities sold under agreements to repurchase and other
short-term borrowings, were $20.6 billion at June 30,
2006, compared with $20.2 billion at December 31,
2005. Short-term funding is managed within approved liquidity
policies. The increase of $.4 billion in short-term
borrowings reflected wholesale funding associated with the
Companys earning asset growth and asset/liability
management activities. Long-term debt was $42.0 billion at
June 30, 2006, compared with $37.1 billion at
December 31, 2005, reflecting the issuances of
$2.0 billion of bank notes, $1.5 billion of
medium-term notes and $1.8 billion of junior subordinated
debentures and the addition of $2.2 billion of Federal Home
Loan Bank (FHLB) advances, partially offset by
$1.6 billion of medium-term note maturities and
$.7 billion of junior subordinated debentures repayments.
Refer to the Liquidity Risk Management section for
discussion of liquidity management of the Company.
CORPORATE RISK PROFILE
Overview Managing risks is
an essential part of successfully operating a financial services
company. The most prominent risk exposures are credit, residual,
operational, interest rate, market and liquidity risk. Credit
risk is the risk of not collecting the interest and/or the
principal balance of a loan or investment when it is due.
Residual risk is the potential reduction in the
end-of-term value of
leased assets or the residual cash flows related to asset
securitization and other off-balance sheet structures.
Operational risk includes risks related to fraud, legal and
compliance risk, processing errors, technology, breaches of
internal controls and business continuation and disaster
recovery risk. Interest rate risk is the potential reduction of
net interest income as a result of changes in interest rates.
Rate movements can affect the repricing of assets and
liabilities differently, as well as their market value. Market
risk arises from fluctuations in interest rates, foreign
exchange rates, and equity prices that may result in changes in
the values of financial instruments, such as trading and
available-for-sale securities that are accounted for on a
mark-to-market basis.
Liquidity risk is the possible inability to fund obligations to
depositors, investors or borrowers. In addition, corporate
strategic decisions, as well as the risks described above, could
give rise to reputation risk. Reputation risk is the risk that
negative publicity or press, whether true or not, could result
in costly litigation or cause a decline in the Companys
stock value, customer base or revenue.
Credit Risk Management The
Companys strategy for credit risk management includes
well-defined, centralized credit policies, uniform underwriting
criteria, and ongoing risk monitoring and review processes for
all commercial and consumer credit exposures. The strategy also
emphasizes diversification on a geographic, industry and
customer level, regular credit examinations and management
reviews of loans experiencing deterioration of credit quality.
The credit risk management strategy also includes a credit risk
assessment process, independent of business line managers, that
performs assessments of compliance with commercial and consumer
credit policies, risk ratings, and other critical credit
information. The Company strives to identify potential problem
loans early, take any necessary charge-offs promptly and
maintain adequate reserve levels for probable loan losses
inherent in the portfolio.
In evaluating its credit risk, the Company considers changes, if
any, in underwriting activities, the loan portfolio composition
(including product mix and
|
|
|
Table 5 |
|
Delinquent Loan Ratios as a Percent of Ending Loan Balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
90 days or more past due excluding nonperforming loans |
|
2006 | |
|
2005 | |
|
Commercial
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
.06 |
% |
|
|
.06 |
% |
|
Lease financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
.05 |
|
|
|
.05 |
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
|
|
|
|
|
|
|
Construction and development
|
|
|
.01 |
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
.30 |
|
|
|
.32 |
|
Retail
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
|
1.56 |
|
|
|
1.26 |
|
|
Retail leasing
|
|
|
.03 |
|
|
|
.04 |
|
|
Other retail
|
|
|
.18 |
|
|
|
.22 |
|
|
|
|
|
|
Total retail
|
|
|
.38 |
|
|
|
.36 |
|
|
|
|
|
|
|
Total loans
|
|
|
.19 |
% |
|
|
.18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
90 days or more past due including nonperforming loans |
|
2006 | |
|
2005 | |
|
Commercial
|
|
|
.58 |
% |
|
|
.69 |
% |
Commercial real estate
|
|
|
.40 |
|
|
|
.55 |
|
Residential mortgages (a)
|
|
|
.49 |
|
|
|
.55 |
|
Retail
|
|
|
.50 |
|
|
|
.50 |
|
|
|
|
|
Total loans
|
|
|
.51 |
% |
|
|
.58 |
% |
|
|
|
|
(a) |
|
Delinquent loan ratios exclude advances made pursuant to
servicing agreements to Government National Mortgage Association
(GNMA) mortgage pools whose repayments are insured
by the Federal Housing Administration or guaranteed by the
Department of Veterans Affairs. Including the guaranteed
amounts, the ratio of residential mortgages 90 days or
more past due was 3.06 percent at June 30, 2006, and
4.35 percent at December 31, 2005. |
geographic, industry or customer-specific concentrations),
trends in loan performance, the level of allowance coverage
relative to similar banking institutions and macroeconomic
factors. Economic conditions during the second quarter and first
six months of 2006 have improved from the same periods of 2005,
as reflected in strong expansion of the gross domestic product
index, lower unemployment rates, favorable trends related to
corporate profits and consumer spending for retail goods and
services. Current economic conditions are relatively unchanged
from December 31, 2005. The Federal Reserve Bank continued
increasing short-term interest rates in an effort to prevent an
acceleration of inflation and maintain the current rate of
economic growth.
Refer to Managements Discussion and
Analysis Credit Risk Management in the
Companys Annual Report on
Form 10-K for the
year ended December 31, 2005, for a more detailed
discussion on credit risk management processes.
Loan Delinquencies
Trends in delinquency
ratios represent an indicator, among other considerations, of
credit risk within the Companys loan portfolios. The
entire balance of the 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. Accruing loans 90 days or more past due totaled
$264 million at June 30, 2006, compared with
$253 million at December 31, 2005. These loans are not
included in nonperforming assets and continue to accrue interest
because they are adequately secured by collateral, and/or are in
the process of collection and are reasonably expected to result
in repayment or restoration to current status. The ratio of
delinquent loans to total loans was .19 percent at
June 30, 2006, and .18 percent at December 31,
2005.
To monitor credit risk associated with retail loans, the Company
monitors delinquency ratios in the various stages of collection
including nonperforming status.
The following table provides summary delinquency information for
residential mortgages and retail loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a Percent of Ending | |
|
|
Amount | |
|
Loan Balances | |
|
|
| |
|
|
June 30, | |
|
December 31, | |
|
June 30, | |
|
December 31, | |
(Dollars in Millions) | |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
Residential mortgages
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 days
|
|
|
$105 |
|
|
|
$112 |
|
|
|
.50 |
% |
|
|
.55 |
% |
90 days or more
|
|
|
64 |
|
|
|
67 |
|
|
|
.30 |
|
|
|
.32 |
|
Nonperforming
|
|
|
|
39 |
|
|
|
48 |
|
|
|
.19 |
|
|
|
.23 |
|
|
|
|
|
Total
|
|
|
$208 |
|
|
|
$227 |
|
|
|
.99 |
% |
|
|
1.10 |
% |
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 days
|
|
|
$153 |
|
|
|
$147 |
|
|
|
2.06 |
% |
|
|
2.06 |
% |
90 days or more
|
|
|
116 |
|
|
|
90 |
|
|
|
1.56 |
|
|
|
1.26 |
|
Nonperforming
|
|
|
41 |
|
|
|
49 |
|
|
|
.55 |
|
|
|
.69 |
|
|
|
|
|
Total
|
|
|
$310 |
|
|
|
$286 |
|
|
|
4.17 |
% |
|
|
4.01 |
% |
Retail leasing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 days
|
|
|
$26 |
|
|
|
$43 |
|
|
|
.36 |
% |
|
|
.59 |
% |
90 days or more
|
|
|
2 |
|
|
|
3 |
|
|
|
.03 |
|
|
|
.04 |
|
Nonperforming
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$28 |
|
|
|
$46 |
|
|
|
.39 |
% |
|
|
.63 |
% |
Other retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 days
|
|
|
$162 |
|
|
|
$206 |
|
|
|
.51 |
% |
|
|
.66 |
% |
90 days or more
|
|
|
58 |
|
|
|
70 |
|
|
|
.18 |
|
|
|
.22 |
|
Nonperforming
|
|
|
16 |
|
|
|
17 |
|
|
|
.05 |
|
|
|
.06 |
|
|
|
|
|
Total
|
|
|
$236 |
|
|
|
$293 |
|
|
|
.74 |
% |
|
|
.94 |
% |
|
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
June 30, 2006, total nonperforming assets were
$550 million, compared with $644 million at
December 31, 2005. The ratio of total nonperforming assets
to total loans and other real estate decreased to
..39 percent at June 30, 2006, compared with
..47 percent at December 31, 2005.
Included in nonperforming loans were restructured loans of
$50 million at June 30, 2006, compared with
$75 million at December 31, 2005. At June 30,
2006, the Company had no commitments to lend additional funds
under restructured loans, compared to commitments of
$9 million at December 31, 2005.
|
|
|
Table 6 |
|
Nonperforming Assets (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
(Dollars in Millions) |
|
2006 | |
|
2005 | |
|
Commercial
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
$203 |
|
|
|
$231 |
|
|
Lease financing
|
|
|
38 |
|
|
|
42 |
|
|
|
|
|
|
Total commercial
|
|
|
241 |
|
|
|
273 |
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
88 |
|
|
|
134 |
|
|
Construction and development
|
|
|
25 |
|
|
|
23 |
|
|
|
|
|
|
Total commercial real estate
|
|
|
113 |
|
|
|
157 |
|
Residential mortgages
|
|
|
39 |
|
|
|
48 |
|
Retail
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
|
41 |
|
|
|
49 |
|
|
Retail leasing
|
|
|
|
|
|
|
|
|
|
Other retail
|
|
|
16 |
|
|
|
17 |
|
|
|
|
|
|
Total retail
|
|
|
57 |
|
|
|
66 |
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
450 |
|
|
|
544 |
|
Other real estate (b)
|
|
|
77 |
|
|
|
71 |
|
Other assets
|
|
|
23 |
|
|
|
29 |
|
|
|
|
|
|
|
Total nonperforming assets
|
|
|
$550 |
|
|
|
$644 |
|
|
|
|
Accruing loans 90 days or more past due
|
|
|
$264 |
|
|
|
$253 |
|
Nonperforming loans to total loans
|
|
|
.32 |
% |
|
|
.39 |
% |
Nonperforming assets to total loans plus other real estate (b)
|
|
|
.39 |
% |
|
|
.47 |
% |
|
Changes in Nonperforming Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and | |
|
Retail and | |
|
|
|
|
Commercial | |
|
Residential | |
|
|
(Dollars in Millions) |
|
Real Estate | |
|
Mortgages (d) | |
|
Total | |
|
Balance December 31, 2005
|
|
|
$457 |
|
|
|
$187 |
|
|
|
$644 |
|
|
Additions to nonperforming assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New nonaccrual loans and foreclosed properties
|
|
|
139 |
|
|
|
34 |
|
|
|
173 |
|
|
|
Advances on loans
|
|
|
18 |
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
Total additions
|
|
|
157 |
|
|
|
34 |
|
|
|
191 |
|
|
Reductions in nonperforming assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paydowns, payoffs
|
|
|
(125 |
) |
|
|
(36 |
) |
|
|
(161 |
) |
|
|
Net sales
|
|
|
(21 |
) |
|
|
|
|
|
|
(21 |
) |
|
|
Return to performing status
|
|
|
(30 |
) |
|
|
(4 |
) |
|
|
(34 |
) |
|
|
Charge-offs (c)
|
|
|
(61 |
) |
|
|
(8 |
) |
|
|
(69 |
) |
|
|
|
|
|
|
Total reductions
|
|
|
(237 |
) |
|
|
(48 |
) |
|
|
(285 |
) |
|
|
|
|
|
|
|
Net additions to (reductions in) nonperforming assets
|
|
|
(80 |
) |
|
|
(14 |
) |
|
|
(94 |
) |
|
|
|
Balance June 30, 2006
|
|
|
$377 |
|
|
|
$173 |
|
|
|
$550 |
|
|
|
|
|
(a) |
|
Throughout this document, nonperforming assets and related
ratios do not include accruing loans 90 days or more past
due. |
(b) |
|
Excludes $87 million 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. |
Restructured Loans Accruing Interest
On a case-by-case basis,
management determines whether an account that experiences
financial difficulties should be modified as to its interest
rate or repayment terms to maximize the Companys
collection of its balance.
Loans restructured at a rate equal to or greater than that of a
new loan with comparable risk at the time the contract is
modified are excluded from restructured loans once repayment
performance, in accordance with the modified agreement, has been
demonstrated over several payment cycles. Loans that have
interest rates reduced below comparable market rates remain
classified as restructured loans; however, interest income is
accrued at the reduced rate as long as the customer complies
with the revised terms and conditions.
The following table provides a summary of restructured loans
that continue to accrue interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a Percent of Ending | |
|
|
Amount | |
|
Loan Balances | |
|
|
| |
|
|
June 30, | |
|
December 31, | |
|
June 30, | |
|
December 31, | |
(Dollars in Millions) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
Commercial
|
|
|
$ 16 |
|
|
|
$ 5 |
|
|
|
.04 |
% |
|
|
.01 |
% |
Commercial real estate
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
65 |
|
|
|
59 |
|
|
|
.31 |
|
|
|
.28 |
|
Credit card
|
|
|
252 |
|
|
|
218 |
|
|
|
3.39 |
|
|
|
3.05 |
|
Other retail
|
|
|
36 |
|
|
|
32 |
|
|
|
.09 |
|
|
|
.08 |
|
|
|
|
Total
|
|
|
$370 |
|
|
|
$315 |
|
|
|
.26 |
% |
|
|
.23 |
% |
|
Restructured loans that continue to accrue interest were higher
at June 30, 2006, compared with December 31, 2005,
reflecting the impact of the Company implementing higher minimum
balance payment requirements for credit card customers in
response to industry guidance issued by the banking regulatory
agencies.
Analysis of Loan Net Charge-Offs
Total loan net charge-offs were
$125 million and $240 million during the second
quarter and first six months of 2006, respectively, compared
with net charge-offs of $144 million and $316 million,
respectively, for the same periods of 2005. The ratio of total
loan net charge-offs to average loans in the second quarter and
first six months of 2006 was .36 percent and
..35 percent, respectively, compared with .44 percent
and .49 percent, respectively, for the same periods of 2005.
Commercial and commercial real estate loan net charge-offs for
the second quarter of 2006 were $20 million
(.11 percent of average loans outstanding), compared with
$13 million (.07 percent of average loans outstanding)
in the second quarter of 2005. The increase in net charge-offs
reflected lower gross charge-offs, more than offset by a lower
level of recoveries as compared with the same quarter of the
prior year. Commercial and commercial real estate loan net
charge-offs for the first six months of 2006 were
$34 million (.09 percent of average loans
outstanding), compared with $46 million (.13 percent
of average loans outstanding) in the first six months of 2005.
Retail loan net charge-offs for the second quarter of 2006 were
$94 million (.82 percent of average loans
outstanding), compared with $123 million (1.12 percent
of average loans outstanding) for the second quarter of 2005.
Retail loan net charge-offs for the first six months of 2006
were $188 million (.82 percent of average loans
outstanding), compared with $253 million (1.17 percent
of average loans outstanding) for the first six months of 2005.
The decrease in retail loan net charge-offs reflected the impact
of the bankruptcy legislation change that occurred in the fourth
quarter of 2005. The Company anticipates that bankruptcy
charge-offs will return to more normalized levels in future
quarters.
The Companys retail lending business utilizes several
distinct business processes and channels to originate retail
credit including traditional branch lending, indirect lending
and a consumer finance division. Each distinct underwriting and
origination activity manages unique credit risk characteristics
and prices its loan production commensurate with the differing
risk profiles. Within Consumer Banking, U.S. Bank Consumer
Finance (USBCF) participates in
|
|
|
Table 7 |
|
Net Charge-offs as a Percent of Average Loans Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
.13 |
% |
|
|
.10 |
% |
|
|
.09 |
% |
|
|
.13 |
% |
|
Lease financing
|
|
|
.54 |
|
|
|
.49 |
|
|
|
.55 |
|
|
|
.78 |
|
|
|
|
|
|
Total commercial
|
|
|
.18 |
|
|
|
.14 |
|
|
|
.15 |
|
|
|
.20 |
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
(.02 |
) |
|
|
.02 |
|
|
|
.01 |
|
|
|
.05 |
|
|
Construction and development
|
|
|
.05 |
|
|
|
(.16 |
) |
|
|
.02 |
|
|
|
(.03 |
) |
|
|
|
|
|
Total commercial real estate
|
|
|
|
|
|
|
(.03 |
) |
|
|
.01 |
|
|
|
.03 |
|
Residential mortgages
|
|
|
.21 |
|
|
|
.19 |
|
|
|
.17 |
|
|
|
.21 |
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
|
2.72 |
|
|
|
3.93 |
|
|
|
2.67 |
|
|
|
4.02 |
|
|
Retail leasing
|
|
|
.11 |
|
|
|
.27 |
|
|
|
.17 |
|
|
|
.36 |
|
|
Home equity and second mortgages
|
|
|
.35 |
|
|
|
.43 |
|
|
|
.34 |
|
|
|
.45 |
|
|
Other retail
|
|
|
.70 |
|
|
|
1.01 |
|
|
|
.74 |
|
|
|
1.05 |
|
|
|
|
|
|
Total retail
|
|
|
.82 |
|
|
|
1.12 |
|
|
|
.82 |
|
|
|
1.17 |
|
|
|
|
|
|
|
Total loans
|
|
|
.36 |
% |
|
|
.44 |
% |
|
|
.35 |
% |
|
|
.49 |
% |
|
substantially all facets of the Companys consumer lending
activities. USBCF specializes in serving channel-specific and
alternative lending markets in residential mortgages, home
equity and installment loan financing. USBCF manages loans
originated through a broker network, correspondent relationships
and U.S. Bank branch offices. Generally, loans managed by
the Companys consumer finance division exhibit higher
credit risk characteristics, but are priced commensurate with
the differing risk profile.
The following table provides an analysis of net charge-offs as a
percent of average loans outstanding managed by the consumer
finance division, compared with traditional branch related loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30 | |
|
Six Months Ended June 30 | |
|
|
| |
|
|
Average Loan | |
|
Percent of | |
|
Average Loan | |
|
Percent of | |
|
|
Amount | |
|
Average Loans | |
|
Amount | |
|
Average Loans | |
|
|
| |
(Dollars in Millions) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
Consumer Finance (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
$7,295 |
|
|
|
$5,788 |
|
|
|
.49 |
% |
|
|
.49 |
% |
|
|
$7,055 |
|
|
|
$5,455 |
|
|
|
.46 |
% |
|
|
.52 |
% |
Home equity and second mortgages
|
|
|
1,984 |
|
|
|
2,548 |
|
|
|
1.62 |
|
|
|
1.57 |
|
|
|
2,021 |
|
|
|
2,603 |
|
|
|
1.50 |
|
|
|
1.63 |
|
Other retail
|
|
|
402 |
|
|
|
387 |
|
|
|
3.99 |
|
|
|
4.15 |
|
|
|
403 |
|
|
|
385 |
|
|
|
4.50 |
|
|
|
4.71 |
|
Traditional Branch
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
$13,573 |
|
|
|
$11,410 |
|
|
|
.06 |
% |
|
|
.04 |
% |
|
|
$13,872 |
|
|
|
$11,062 |
|
|
|
.03 |
% |
|
|
.05 |
% |
Home equity and second mortgages
|
|
|
13,051 |
|
|
|
12,455 |
|
|
|
.15 |
|
|
|
.19 |
|
|
|
12,964 |
|
|
|
12,321 |
|
|
|
.16 |
|
|
|
.20 |
|
Other retail
|
|
|
16,218 |
|
|
|
14,747 |
|
|
|
.62 |
|
|
|
.92 |
|
|
|
16,180 |
|
|
|
14,616 |
|
|
|
.65 |
|
|
|
.95 |
|
Total Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
$20,868 |
|
|
|
$17,198 |
|
|
|
.21 |
% |
|
|
.19 |
% |
|
|
$20,927 |
|
|
|
$16,517 |
|
|
|
.17 |
% |
|
|
.21 |
% |
Home equity and second mortgages
|
|
|
15,035 |
|
|
|
15,003 |
|
|
|
.35 |
|
|
|
.43 |
|
|
|
14,985 |
|
|
|
14,924 |
|
|
|
.34 |
|
|
|
.45 |
|
Other retail
|
|
|
16,620 |
|
|
|
15,134 |
|
|
|
.70 |
|
|
|
1.01 |
|
|
|
16,583 |
|
|
|
15,001 |
|
|
|
.74 |
|
|
|
1.05 |
|
|
|
|
|
(a) |
|
Consumer finance category included credit originated and
managed by USBCF, as well as home equity and second mortgages
with a loan-to-value
greater than 100 percent that were originated in the
branches. |
Analysis and Determination of the Allowance for Credit
Losses The allowance for
loan losses provides coverage for probable and estimable losses
inherent in the Companys loan and lease portfolio.
Management evaluates the allowance each quarter to determine
that it is adequate to cover these inherent losses. The
evaluation of each element and the overall allowance is based on
a continuing assessment of problem loans, recent loss experience
and other factors, including regulatory guidance and economic
conditions. Because business processes and credit risks
associated with unfunded credit commitments are essentially the
same as for loans, the Company utilizes similar processes to
estimate its liability for unfunded credit commitments, which is
included in other liabilities in the Consolidated Balance Sheet.
Both the allowance for loan losses and the liability for
unfunded credit commitments are included in the Companys
analysis of the allowance for credit losses.
At June 30, 2006, the allowance for credit losses was
$2,251 million (1.59 percent of loans), compared with
an allowance of $2,251 million (1.63 percent of loans)
at December 31, 2005. The ratio of the allowance for credit
losses to nonperforming loans was 500 percent at
June 30, 2006, compared with 414 percent at
December 31, 2005. The ratio of the allowance for credit
losses to annualized loan net charge-offs was 449 percent
at June 30, 2006, compared with 329 percent at
December 31, 2005.
|
|
|
Table 8 |
|
Summary of Allowance for Credit Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
(Dollars in Millions) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
Balance at beginning of period
|
|
|
$2,251 |
|
|
|
$2,269 |
|
|
|
$2,251 |
|
|
|
$2,269 |
|
Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
24 |
|
|
|
42 |
|
|
|
52 |
|
|
|
74 |
|
|
|
Lease financing
|
|
|
13 |
|
|
|
15 |
|
|
|
25 |
|
|
|
38 |
|
|
|
|
|
|
|
Total commercial
|
|
|
37 |
|
|
|
57 |
|
|
|
77 |
|
|
|
112 |
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
3 |
|
|
|
4 |
|
|
|
6 |
|
|
|
10 |
|
|
|
Construction and development
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
4 |
|
|
|
5 |
|
|
|
7 |
|
|
|
13 |
|
|
Residential mortgages
|
|
|
11 |
|
|
|
8 |
|
|
|
19 |
|
|
|
18 |
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
|
59 |
|
|
|
73 |
|
|
|
113 |
|
|
|
146 |
|
|
|
Retail leasing
|
|
|
6 |
|
|
|
8 |
|
|
|
13 |
|
|
|
19 |
|
|
|
Home equity and second mortgages
|
|
|
16 |
|
|
|
19 |
|
|
|
32 |
|
|
|
40 |
|
|
|
Other retail
|
|
|
43 |
|
|
|
52 |
|
|
|
90 |
|
|
|
105 |
|
|
|
|
|
|
|
Total retail
|
|
|
124 |
|
|
|
152 |
|
|
|
248 |
|
|
|
310 |
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
176 |
|
|
|
222 |
|
|
|
351 |
|
|
|
453 |
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
11 |
|
|
|
33 |
|
|
|
34 |
|
|
|
51 |
|
|
|
Lease financing
|
|
|
6 |
|
|
|
9 |
|
|
|
11 |
|
|
|
19 |
|
|
|
|
|
|
|
Total commercial
|
|
|
17 |
|
|
|
42 |
|
|
|
45 |
|
|
|
70 |
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
4 |
|
|
|
3 |
|
|
|
5 |
|
|
|
5 |
|
|
|
Construction and development
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
4 |
|
|
|
7 |
|
|
|
5 |
|
|
|
9 |
|
|
Residential mortgages
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
|
9 |
|
|
|
9 |
|
|
|
17 |
|
|
|
17 |
|
|
|
Retail leasing
|
|
|
4 |
|
|
|
3 |
|
|
|
7 |
|
|
|
6 |
|
|
|
Home equity and second mortgages
|
|
|
3 |
|
|
|
3 |
|
|
|
7 |
|
|
|
7 |
|
|
|
Other retail
|
|
|
14 |
|
|
|
14 |
|
|
|
29 |
|
|
|
27 |
|
|
|
|
|
|
|
Total retail
|
|
|
30 |
|
|
|
29 |
|
|
|
60 |
|
|
|
57 |
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
51 |
|
|
|
78 |
|
|
|
111 |
|
|
|
137 |
|
Net Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
13 |
|
|
|
9 |
|
|
|
18 |
|
|
|
23 |
|
|
|
Lease financing
|
|
|
7 |
|
|
|
6 |
|
|
|
14 |
|
|
|
19 |
|
|
|
|
|
|
|
Total commercial
|
|
|
20 |
|
|
|
15 |
|
|
|
32 |
|
|
|
42 |
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
(1 |
) |
|
|
1 |
|
|
|
1 |
|
|
|
5 |
|
|
|
Construction and development
|
|
|
1 |
|
|
|
(3 |
) |
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
|
|
Total commercial real estate
|
|
|
|
|
|
|
(2 |
) |
|
|
2 |
|
|
|
4 |
|
|
Residential mortgages
|
|
|
11 |
|
|
|
8 |
|
|
|
18 |
|
|
|
17 |
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
|
50 |
|
|
|
64 |
|
|
|
96 |
|
|
|
129 |
|
|
|
Retail leasing
|
|
|
2 |
|
|
|
5 |
|
|
|
6 |
|
|
|
13 |
|
|
|
Home equity and second mortgages
|
|
|
13 |
|
|
|
16 |
|
|
|
25 |
|
|
|
33 |
|
|
|
Other retail
|
|
|
29 |
|
|
|
38 |
|
|
|
61 |
|
|
|
78 |
|
|
|
|
|
|
|
Total retail
|
|
|
94 |
|
|
|
123 |
|
|
|
188 |
|
|
|
253 |
|
|
|
|
|
|
|
|
Total net charge-offs
|
|
|
125 |
|
|
|
144 |
|
|
|
240 |
|
|
|
316 |
|
|
|
|
Provision for credit losses
|
|
|
125 |
|
|
|
144 |
|
|
|
240 |
|
|
|
316 |
|
|
|
|
Balance at end of period
|
|
|
$2,251 |
|
|
|
$2,269 |
|
|
|
$2,251 |
|
|
|
$2,269 |
|
|
|
|
Components
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
$2,039 |
|
|
|
$2,082 |
|
|
|
|
|
|
|
|
|
|
Liability for unfunded credit commitments
|
|
|
212 |
|
|
|
187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for credit losses
|
|
|
$2,251 |
|
|
|
$2,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses as a percentage of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-end loans
|
|
|
1.59 |
% |
|
|
1.70 |
% |
|
|
|
|
|
|
|
|
|
Nonperforming loans
|
|
|
500 |
|
|
|
441 |
|
|
|
|
|
|
|
|
|
|
Nonperforming assets
|
|
|
409 |
|
|
|
372 |
|
|
|
|
|
|
|
|
|
|
Annualized net charge-offs
|
|
|
449 |
|
|
|
393 |
|
|
|
|
|
|
|
|
|
|
Several factors were taken into consideration in evaluating the
allowance for credit losses at June 30, 2006, including the
risk profile of the portfolios and 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 compared with December 31, 2005.
Management also considered the uncertainty related to certain
industry sectors, including the airline industry, and the extent
of credit exposure to other 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, and their relative credit risk were evaluated.
Finally, the Company considered current economic conditions that
might impact the portfolio.
Residual Risk Management
The Company manages its risk to
changes in the residual value of leased assets through
disciplined residual valuation setting at the inception of a
lease, diversification of its leased assets, regular residual
asset valuation reviews and monitoring of residual value gains
or losses upon the disposition of assets. As of June 30,
2006, no significant change in the amount of residuals or
concentration of the portfolios has occurred since
December 31, 2005. Refer to Managements
Discussion and Analysis Residual Risk
Management in the Companys Annual Report on
Form 10-K for the
year ended December 31, 2005, for further discussion on
residual risk management.
Operational Risk Management
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
operational 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. Refer to Managements Discussion
and Analysis Operational Risk Management in
the Companys Annual Report on
Form 10-K for the
year ended December 31, 2005, for further discussion on
operational risk management.
Interest Rate Risk Management
In the banking industry,
changes in interest rates is a significant risk that can impact
earnings, market valuations and safety and soundness of the
entity. To minimize the volatility of net interest income and
the market value of assets and liabilities, the Company manages
its exposure to changes in interest rates through asset and
liability management activities within guidelines established by
its Asset Liability Policy Committee (ALPC) and
approved by the Board of Directors. ALPC has the responsibility
for approving and ensuring compliance with ALPC management
policies, including interest rate risk exposure. The Company
uses Net Interest Income Simulation Analysis and Market Value of
Equity Modeling for measuring and analyzing consolidated
interest rate risk.
Net Interest Income Simulation Analysis
One of the primary tools used to
measure interest rate risk and the effect of interest rate
changes on net interest income is simulation analysis. 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. This
represents a change, effective in the first quarter of 2006,
from a previous policy of estimating the effect of a
300 basis point upward or downward gradual change on net
interest income. 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.
Refer to Managements Discussion and
Analysis Net Interest Income Simulation
Analysis in the Companys Annual Report on
Form 10-K for the
year ended December 31, 2005, for further discussion on net
interest income simulation analysis.
Sensitivity of Net Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
December 31, 2005 |
|
|
| |
|
|
Down 50 | |
|
Up 50 | |
|
Down 200 | |
|
Up 200 | |
|
Down 50 | |
|
Up 50 | |
|
Down 200 | |
|
Up 200 | |
|
|
Immediate | |
|
Immediate | |
|
Gradual | |
|
Gradual | |
|
Immediate | |
|
Immediate | |
|
Gradual* | |
|
Gradual* | |
| |
Net interest income
|
|
|
1.17% |
|
|
|
(1.39)% |
|
|
|
2.55% |
|
|
|
(2.94)% |
|
|
|
.66% |
|
|
|
(.73)% |
|
|
|
1.19% |
|
|
|
(2.60)% |
|
|
|
|
|
* |
|
As of January 31, 2006, due to the change to a
200 basis point gradual change policy during the first
quarter of 2006. |
The table above summarizes the interest rate risk of net
interest income based on forecasts over the succeeding
12 months. At June 30, 2006, the Companys
overall interest rate risk position was liability sensitive to
changes in interest rates. The Company manages the overall
interest rate risk profile within policy limits. ALPC policy
guidelines limit the estimated change in net interest income to
3.0 percent of forecasted net interest income over the
succeeding 12 months. At June 30, 2006, and
December 31, 2005, the Company was within its policy
guidelines.
Market Value of Equity Modeling
The Company also utilizes the
market value of equity as a measurement tool in managing
interest rate sensitivity. The market value of equity measures
the degree to which the market values of the Companys
assets and liabilities and off-balance sheet instruments will
change given a change in interest rates. ALPC guidelines limit
the change in market value of equity in a 200 basis point
parallel rate shock to 15 percent of the market value of
equity assuming interest rates at June 30, 2006. The up
200 basis point scenario resulted in a 6.2 percent
decrease in the market value of equity at June 30, 2006,
compared with a 6.8 percent decrease at December 31,
2005. The down 200 basis point scenario resulted in a
1.1 percent decrease in the market value of equity at
June 30, 2006, compared with a 4.1 percent decrease at
December 31, 2005. At June 30, 2006, and
December 31, 2005, the Company was within its policy
guidelines.
The Company also uses duration of equity as a measure of
interest rate risk. The duration of equity is a measure of the
net market value sensitivity of the assets, liabilities and
derivative positions of the Company. The duration of assets was
1.9 years at June 30, 2006, compared with
1.6 years at December 31, 2005. The duration of
liabilities was 1.8 years at June 30, 2006, compared
with 1.6 years at December 31, 2005. At June 30,
2006, the duration of equity was 1.9 years, compared with
1.8 years at December 31, 2005. The increased duration
of equity measure shows that sensitivity of the market value of
equity of the Company was liability sensitive to changes in
interest rates. Refer to Managements Discussion and
Analysis Market Value of Equity Modeling in
the Companys Annual Report on
Form 10-K for the
year ended December 31, 2005, for further discussion on
market value of equity modeling.
Use of Derivatives to Manage Interest Rate Risk
In the ordinary course of
business, the Company enters into derivative transactions to
manage its interest rate, prepayment and foreign currency risks
(asset and liability management positions) and to
accommodate the business requirements of its customers
(customer-related positions). Refer to
Managements Discussion and Analysis Use
of Derivatives to Manage Interest Rate Risk in the
Companys Annual Report on
Form 10-K for the
year ended December 31, 2005, for further discussion on the
use of derivatives to manage interest rate risk.
By their nature, derivative instruments are subject to market
risk. The Company does not utilize derivative instruments for
speculative purposes. Of the Companys $24.4 billion
of total notional amount of asset and liability management
derivative positions at June 30, 2006, $19.2 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 LIBOR
loans and floating-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.
In addition, the Company uses forward commitments to sell
residential mortgage loans to hedge its interest rate risk
related to residential mortgage loans held for sale. Related to
its mortgage banking operations, the Company held
$2.3 billion of forward commitments to sell mortgage loans
and $1.7 billion of unfunded mortgage loan commitments that
were derivatives in accordance with the provisions of the
Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedge
Activities. The unfunded mortgage loan commitments are
reported at fair value as options in Table 9. Beginning in March
2006, the Company entered into U.S. Treasury futures and
options on U.S. Treasury futures contracts to hedge the
change in fair value related to the election of fair value
measurement for its residential MSRs.
|
|
|
Table 9 |
|
Derivative Positions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 | |
|
December 31, 2005 | |
|
|
| |
|
|
|
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
|
Average | |
|
|
|
Average | |
|
|
|
|
|
|
Remaining | |
|
|
|
Remaining | |
|
|
Notional | |
|
Fair | |
|
Maturity | |
|
Notional | |
|
Fair | |
|
Maturity | |
(Dollars in Millions) |
|
Amount | |
|
Value | |
|
In Years | |
|
Amount | |
|
Value | |
|
In Years | |
| |
|
Asset and Liability Management Positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive fixed/pay floating swaps
|
|
|
$5,810 |
|
|
|
$(106 |
) |
|
|
17.73 |
|
|
|
$16,370 |
|
|
|
$(82 |
) |
|
|
7.79 |
|
|
|
Pay fixed/receive floating swaps
|
|
|
8,398 |
|
|
|
123 |
|
|
|
2.00 |
|
|
|
9,163 |
|
|
|
139 |
|
|
|
1.33 |
|
|
|
Futures and forwards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy
|
|
|
53 |
|
|
|
|
|
|
|
.11 |
|
|
|
104 |
|
|
|
|
|
|
|
.07 |
|
|
|
|
Sell
|
|
|
5,625 |
|
|
|
(2 |
) |
|
|
.14 |
|
|
|
2,669 |
|
|
|
(15 |
) |
|
|
.09 |
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
|
|
|
4,046 |
|
|
|
(4 |
) |
|
|
.12 |
|
|
|
1,086 |
|
|
|
3 |
|
|
|
.08 |
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency swaps
|
|
|
403 |
|
|
|
19 |
|
|
|
9.12 |
|
|
|
387 |
|
|
|
11 |
|
|
|
9.61 |
|
|
|
Forwards
|
|
|
10 |
|
|
|
|
|
|
|
.08 |
|
|
|
404 |
|
|
|
7 |
|
|
|
.05 |
|
|
Equity contracts
|
|
|
46 |
|
|
|
1 |
|
|
|
2.79 |
|
|
|
42 |
|
|
|
3 |
|
|
|
3.29 |
|
|
Customer-related Positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive fixed/pay floating swaps
|
|
|
$10,218 |
|
|
|
$(264 |
) |
|
|
5.33 |
|
|
|
$9,753 |
|
|
|
$(69 |
) |
|
|
5.25 |
|
|
|
Pay fixed/receive floating swaps
|
|
|
10,189 |
|
|
|
318 |
|
|
|
5.42 |
|
|
|
9,707 |
|
|
|
121 |
|
|
|
5.25 |
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
1,611 |
|
|
|
14 |
|
|
|
2.25 |
|
|
|
1,453 |
|
|
|
6 |
|
|
|
2.26 |
|
|
|
|
Written
|
|
|
1,597 |
|
|
|
(13 |
) |
|
|
2.25 |
|
|
|
1,453 |
|
|
|
(5 |
) |
|
|
2.26 |
|
|
Risk participation agreements (a)
|
|
|
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Purchased
|
|
|
147 |
|
|
|
|
|
|
|
7.49 |
|
|
|
143 |
|
|
|
|
|
|
|
8.02 |
|
|
|
Written
|
|
|
224 |
|
|
|
|
|
|
|
5.89 |
|
|
|
169 |
|
|
|
|
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|
|
4.64 |
|
|
Foreign exchange rate contracts
|
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Forwards and swaps
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Buy
|
|
|
2,265 |
|
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|
67 |
|
|
|
.39 |
|
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|
2,042 |
|
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|
77 |
|
|
|
.43 |
|
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|
Sell
|
|
|
2,212 |
|
|
|
(59 |
) |
|
|
.41 |
|
|
|
2,018 |
|
|
|
(73 |
) |
|
|
.46 |
|
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|
Options
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Purchased
|
|
|
134 |
|
|
|
(1 |
) |
|
|
.46 |
|
|
|
56 |
|
|
|
1 |
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|
.24 |
|
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Written
|
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|
134 |
|
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|
1 |
|
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|
.46 |
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|
56 |
|
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|
(1 |
) |
|
|
.24 |
|
|
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|
(a) |
|
At June 30, 2006, the credit equivalent amount was
$1 million and $32 million, compared with
$1 million and $18 million at December 31, 2005,
for purchased and written risk participation agreements,
respectively. |
At June 30, 2006, the Company had $36 million in
accumulated other comprehensive income related to realized and
unrealized losses on derivatives classified as cash flow hedges.
Unrealized gains and losses are reflected in earnings when the
related cash flows or hedged transactions occur and offset the
related performance of the hedged items. The estimated amount to
be reclassified from accumulated other comprehensive income into
earnings during the remainder of 2006 and the next
12 months is a gain of $21 million and
$39 million, respectively.
Gains or losses on customer-related derivative positions were
not material for the second quarter and first six months of
2006. The change in fair value of forward commitments attributed
to hedge ineffectiveness recorded in noninterest income was not
significant for the second quarter of 2006 and was a decrease of
$1 million for the first six months of 2006. 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 the second quarter and first six months of 2006.
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 its capital volatility risk associated with
fluctuations in foreign currency exchange rates. The net amount
of gains or losses included in the cumulative translation
adjustment for the second quarter and first six months of 2006
was not material.
Market Risk Management In
addition to interest rate risk, the Company is exposed to other
forms of market risk as a consequence of conducting normal
trading activities. Business activities that contribute to
market risk include primarily residential mortgage related
risks, but also other things, such as proprietary trading and
foreign exchange positions. Value at Risk (VaR) is a
key measure of market risk for the Company. Theoretically, VaR
represents the maximum amount that the Company has placed at
risk of loss, with a ninety-ninth percentile degree of
confidence, to adverse market movements in the course of its
risk taking activities. Due to the election of fair value
measurement of its residential MSRs and related hedging strategy
in the first quarter of 2006, the Company increased its VaR
limit to $40 million at March 31, 2006, compared with
$20 million at December 31, 2005. The Companys
market valuation risk, as estimated by the VaR analysis, was
$16 million at June 30, 2006, compared with
$1 million at December 31, 2005. Refer to
Managements Discussion and Analysis
Market Risk Management in the Companys Annual Report
on Form 10-K for
the year ended December 31, 2005, for further discussion on
market risk management.
Liquidity Risk Management
ALPC establishes policies, as
well as analyzes and manages liquidity, to ensure that adequate
funds are available to meet normal operating requirements in
addition to unexpected customer demands for funds, such as high
levels of deposit withdrawals or loan demand, in a timely and
cost-effective manner. 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. Refer to
Managements Discussion and Analysis
Liquidity Risk Management in the Companys Annual
Report on
Form 10-K for the
year ended December 31, 2005, for further discussion on
liquidity risk management.
At June 30, 2006, parent company long-term debt outstanding
was $12.6 billion, compared with $10.9 billion at
December 31, 2005. The $1.7 billion increase was
primarily due to the issuances of $1.8 billion of junior
subordinated debentures and $1.5 billion of medium-term
notes, offset by long-term debt maturities and repayments during
the first six months of 2006. As of June 30, 2006, there is
no parent company debt scheduled to mature in the remainder of
2006.
Federal banking laws regulate the amount of dividends that may
be paid by banking subsidiaries without prior approval. The
amount of dividends available to the parent company from its
banking subsidiaries after meeting the regulatory capital
requirements for well-capitalized banks was approximately
$1.1 billion at June 30, 2006.
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 extent of these arrangements is provided
in Note 10 of the Notes to Consolidated Financial
Statements.
Asset securitizations and conduits represent a source of funding
for the Company through off-balance sheet structures. The
Company sponsors an off-balance sheet conduit to which it
transferred high-grade investment securities, funded by the
issuance of commercial paper. The conduit held assets and
related commercial paper liabilities of $3.0 billion at
June 30, 2006, and $3.8 billion at December 31,
2005. The Company provides a liquidity facility to the conduit.
A liability for the estimate of the potential risk of loss for
the Company as the liquidity facility provider is recorded on
the balance sheet in other liabilities and was $15 million
at June 30, 2006, and $20 million at December 31,
2005. In addition, the Company recorded at fair value its
retained residual interest in the investment securities conduit
of $21 million at June 30, 2006, and $28 million
at December 31, 2005.
The Company does not rely significantly on
off-balance sheet
arrangements for liquidity or capital resources. Refer to
Managements Discussion and Analysis
Off-Balance Sheet Arrangements in the Companys
Annual Report on
Form 10-K for the
year ended December 31, 2005, for further discussion on
off-balance sheet
arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
(Dollars in Millions) |
|
2006 | |
|
2005 | |
|
Tier 1 capital
|
|
|
$16,841 |
|
|
|
$15,145 |
|
|
As a percent of risk-weighted assets
|
|
|
8.9 |
% |
|
|
8.2 |
% |
|
As a percent of adjusted quarterly average assets (leverage
ratio)
|
|
|
8.2 |
% |
|
|
7.6 |
% |
Total risk-based capital
|
|
|
$24,893 |
|
|
|
$23,056 |
|
|
As a percent of risk-weighted assets
|
|
|
13.1 |
% |
|
|
12.5 |
% |
Tangible common equity
|
|
|
$11,535 |
|
|
|
$11,873 |
|
|
As a percent of tangible assets
|
|
|
5.6 |
% |
|
|
5.9 |
% |
|
Capital Management The
Company is committed to managing capital for maximum shareholder
benefit and maintaining strong protection for depositors and
creditors. The Company has targeted returning 80 percent of
earnings to its common shareholders through a combination of
dividends and share repurchases. In the first six months of
2006, the Company returned 116 percent of earnings. The
Company continually assesses its business risks and capital
position. The Company also manages its capital to exceed
regulatory capital requirements for well-capitalized bank
holding companies. To achieve these capital goals, the Company
employs a variety of capital management tools including
dividends, common share repurchases, and the issuance of
subordinated debt and other capital instruments. Total
shareholders equity was $20.4 billion at
June 30, 2006, compared with $20.1 billion at
December 31, 2005. The increase was the result of corporate
earnings and the issuance of $1.0 billion of
non-cumulative, perpetual preferred stock on March 27,
2006, partially offset by share repurchases and dividends.
Table 10 provides a summary of capital ratios as of
June 30, 2006, and December 31, 2005. Tier 1
capital at June 30, 2006, was positively affected by the
$1.0 billion issuance of preferred stock and the
$1.8 billion issuance of junior subordinated debentures
during the first six months of 2006. All regulatory ratios
continue to be in excess of regulatory
well-capitalized requirements.
On December 21, 2004, the Board of Directors approved and
announced an authorization to repurchase 150 million
shares of common stock during the next 24 months.
The following table provides a detailed analysis of all shares
repurchased under this program during the second quarter of 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number of | |
|
|
Total Number of | |
|
Average | |
|
Shares that May Yet | |
|
|
Shares Purchased as | |
|
Price Paid | |
|
Be Purchased | |
Period |
|
Part of the Program | |
|
per Share | |
|
Under the Program | |
|
April
|
|
|
6,588,329 |
|
|
|
$30.64 |
|
|
|
35,948,635 |
|
May
|
|
|
2,284,831 |
|
|
|
31.17 |
|
|
|
33,663,804 |
|
June
|
|
|
811,039 |
|
|
|
30.89 |
|
|
|
32,852,765 |
|
|
|
|
Total
|
|
|
9,684,199 |
|
|
|
$30.78 |
|
|
|
32,852,765 |
|
|
On August 3, 2006, the Company announced that the Board of
Directors approved an authorization to repurchase
150 million shares of common stock through December 2008.
This new authorization replaces the December 21, 2004,
share repurchase program.
LINE OF BUSINESS FINANCIAL REVIEW
Within the Company, financial performance is measured by major
lines of business, which include Wholesale Banking, Consumer
Banking, Wealth Management, 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 Companys business unit profitability
reporting systems by specifically attributing managed balance
sheet assets, deposits and other liabilities and their related
income or expense. Refer to Managements Discussion
and Analysis Line of Business Financial Review
in the Companys Annual Report on
Form 10-K for the
year ended December 31, 2005, for further discussion on the
business lines basis for financial presentation.
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 Companys diverse
customer base. During 2006, certain organization and methodology
changes were made and, accordingly, 2005 results were restated
and presented on a comparable basis, including a change in the
allocation of risk adjusted capital to the business lines.
Business lines are allocated risk adjusted capital based upon
economic capital requirements, regulatory capital requirements,
goodwill and intangibles. The allocations to the business lines
are equal to the capital that is held by the Company. The
capital allocations include credit and operational capital
allocations which are performed using a Basel II
approach with adjustments for regulatory Tier I
leverage requirements.
Wholesale Banking offers
lending, depository, treasury management and other financial
services to middle market, large corporate, commercial real
estate, equipment finance, small-ticket leasing and public
sector clients, along with lending guaranteed by the Small
Business Administration. Wholesale Banking contributed
$298 million of the Companys net income in the second
quarter and $598 million in the first six months of 2006,
or increases of $6 million and $27 million,
respectively, compared with the same periods of 2005. The
increases were primarily driven by growth in total net revenue.
Total net revenue increased $21 million (3.1 percent)
in the second quarter and $46 million (3.4 percent) in
the first six months of 2006, compared with the same periods of
2005. Net interest income, on a taxable-equivalent basis,
increased $15 million in the second quarter and
$39 million in the first six months of 2006, compared with
the same periods of 2005. The increases in net interest income
were driven by growth in average loan balances and wider spreads
on total deposits due to the funding benefit associated with the
impact of rising interest rates, partially offset by reduced
loan spreads due to competitive pricing. The increase in average
loans was driven by stronger commercial loan and commercial real
estate loan demand in 2005 and the first six months of 2006.
Total deposits increased year-over-year driven by growth in
fixed-rate time deposits, partially offset by a decrease in
interest checking deposits.
The $6 million (2.7 percent) and $7 million
(1.6 percent) increases in noninterest income in the second
quarter and first six months of 2006, respectively, compared
with the same periods of 2005, were due to higher commercial
products revenue and equipment leasing revenue, partially offset
by lower other commercial loan fees and treasury
management-related fees. Treasury management-related fees were
lower due to higher earnings credits on customers
compensating balances, partially offset by growth in treasury
management-related services activity.
Noninterest expense was relatively flat in the second quarter of
2006, compared with the second quarter of 2005. Noninterest
expense increased $8 million (1.7 percent) in the
first six months of 2006, compared with the same period of 2005.
The increase was primarily driven by higher personnel-related
costs and net shared services expense.
The provision for credit losses increased $12 million in
the second quarter and decreased $5 million in the first
six months of 2006, compared with the same periods of 2005. The
increase in the provision for credit losses in the second
quarter of 2006 was due to lower net recoveries compared to the
second quarter of 2005. Nonperforming assets within Wholesale
Banking were $218 million at June 30, 2006,
$260 million at March 31, 2006, and $298 million
at June 30, 2005. Nonperforming assets as a percentage of
period-end loans were .43 percent at June 30, 2006,
..52 percent at March 31, 2006, and .63 percent at
June 30, 2005. Refer to the Corporate Risk
Profile section for further information on factors
impacting the credit quality of the loan portfolios.
Consumer Banking delivers
products and services through banking offices, telephone
servicing and sales, on-line services, direct mail and ATMs. It
encompasses community banking, metropolitan banking, in-store
banking, small business banking, consumer lending, mortgage
banking, consumer finance, workplace banking, student banking
and 24-hour banking.
Consumer Banking contributed $488 million of the
Companys net income in the second quarter and
$899 million in the first six months of 2006, or
increases of $59 million and $83, respectively, compared
with the same periods of 2005. While the retail banking business
grew net income 13.9 percent in the second quarter and
11.2 percent in the first six months of 2006, the
contribution of the mortgage banking business increased
12.5 percent and decreased 3.4 percent, respectively,
compared with the same periods of 2005.
Total net revenue increased $22 million (1.6 percent)
in the second quarter and $31 million (1.1 percent) in
the first six months of 2006, compared with the same periods of
2005. Net interest income, on a taxable-equivalent basis,
increased $19 million in the second quarter and
$56 million in the first six months of 2006, compared with
the same periods of 2005. The year-over-year increases in net
interest income were due to strong growth in average loans and
the funding benefit of total deposits due to rising interest
rates. Partially offsetting these increases were reduced spreads
on commercial and retail loans due to competitive pricing. The
increases in average loan balances reflected growth in retail
loans, residential mortgages, commercial loans and commercial
real estate loans. The growth in retail loans was principally
driven by an increase in installment loans which increased
15.8 percent in the second quarter and 15.5 percent in
the first six months of 2006 over the same periods of 2005.
Residential mortgages, which include traditional residential
mortgages, grew 21.6 percent in the second
quarter and 27.1 percent in the first six months of 2006,
compared with the same periods of a year ago, reflecting the
Companys retention of adjustable-rate residential
mortgages during 2005. Average balances of residential mortgages
are expected to remain essentially flat in future periods due to
the Companys decision in the first quarter of 2006 to
package and sell the majority of its residential mortgage loan
production in the secondary markets. The year-over-year
decreases in average deposits were primarily due to a reduction
in saving products, offset by growth in interest checking and
time deposits. The year-over-year increases in interest checking
balances reflected strong branch-based new account deposit
growth. On a combined basis, the Consumer Banking line of
business generated growth of $90 million (.3 percent)
in average checking account balances in the second quarter of
2006, compared with the second quarter of 2005, driven by
5.7 percent growth in net new checking accounts. Offsetting
this growth was a decline in average savings balances of
$3.2 billion (13.0 percent) from second quarter of
2005, principally related to money market accounts. Average time
deposit balances grew $1.6 billion in the second quarter
and $1.7 billion in the first six months of 2006, compared
with the same periods of 2005, as a portion of money market
balances migrated to fixed-rate time deposit products.
Fee-based noninterest income increased $3 million in the
second quarter and decreased $25 million in the first six
months of 2006, compared with the same periods of 2005. The
year-over-year decline in fee-based revenue was driven by a
reduction in mortgage banking revenue, partially offset by
increases in deposit service charges, retail leasing revenue,
and other revenue. The increase in other revenue reflected
higher gains from the sales of student loans. The reduction in
mortgage banking revenue reflected the adoption of fair value
accounting for MSRs as of January 1, 2006.
Noninterest expense decreased $61 million
(9.1 percent) in the second quarter and $78 million
(5.9 percent) in the first six months of 2006, compared
with the same periods of 2005. The decreases were primarily
attributable to the elimination of MSR amortization under
SFAS 156 which resulted in a reduction of other intangible
expense. Partially offsetting this decrease were increases in
compensation and employee benefit expenses. The increases in
compensation and employee benefit expenses reflect the impact of
the net addition of 38 in-store and 13 traditional branches at
June 30, 2006, compared with June 30, 2005.
The provision for credit losses decreased $9 million and
$20 million in the second quarter and first six months of
2006, respectively, compared with the same periods of 2005. The
improvements were attributable to lower net charge-offs. As a
percentage of average loans outstanding, net charge-offs
declined to .30 percent in the second quarter of 2006,
compared with .38 percent in the second quarter of 2005.
The decline in net charge-offs included both the commercial and
retail loan portfolios. Commercial and commercial real estate
loan net charge-offs declined $3 million in the second
quarter of 2006, compared with the second quarter of 2005.
Retail loan and residential mortgage net charge-offs declined by
$6 million in the second quarter of 2006, compared with the
second quarter of 2005. Nonperforming assets within Consumer
Banking were $275 million at June 30, 2006,
$291 million at March 31, 2006, and $304 million
at June 30, 2005. Nonperforming assets as a percentage of
period-end loans were .39 percent at June 30, 2006,
..42 percent at March 31, 2006, and .49 percent at
June 30, 2005. Refer to the Corporate Risk
Profile section for further information on factors
impacting the credit quality of the loan portfolios.
Wealth Management provides
trust, private banking, financial advisory, investment
management, insurance, custody and mutual fund servicing through
six businesses: Private Client Group, Corporate Trust,
U.S. Bancorp Investments and Insurance, FAF Advisors,
Institutional Trust and Custody and Fund Services. Wealth
Management contributed $148 million of the Companys
net income in the second quarter and $282 million in the
first six months of 2006, or increases of $32 million and
$55 million, respectively, compared with the same periods
of 2005. The growth was primarily attributable to higher total
net revenue, partially offset by an increase in noninterest
expense.
Total net revenue increased $88 million (21.6 percent)
in the second quarter and $170 million (21.2 percent)
in the first six months of 2006, compared with the same periods
of 2005. Net interest income, on a taxable-equivalent basis,
increased $21 million in the second quarter and
$47 million in the first six months of 2006, compared with
the same periods of 2005. The increases in net interest income
were due to growth in total average deposits and the favorable
impact of rising interest rates on the funding benefit of
customer deposits, partially offset by a decline in loan
spreads. The increase in total deposits was attributable to
growth in noninterest-bearing deposits and time deposits
principally in Corporate Trust. Noninterest income increased
$67 million in the second quarter and $123 million in
the first six months of 2006, compared with the same periods of
2005, primarily driven by the acquisition of the corporate and
institutional trust
business of a large national bank, growth in core revenue, and
favorable equity market valuations.
Noninterest expense increased $39 million
(17.5 percent) in the second quarter and $84 million
(19.0 percent) in the first six months of 2006, compared
with the same periods of 2005. The increases in noninterest
expense were primarily attributable to the acquisition of a
large national banks corporate and institutional trust
business.
Payment Services includes
consumer and business credit cards, stored-value cards, debit
cards, corporate and purchasing card services, consumer lines of
credit, ATM processing and merchant processing. Payment Services
contributed $251 million of the Companys net income
in the second quarter and $474 in the first six months of 2006,
or increases of $68 million and $123 million,
respectively, compared with the same periods of 2005. The
increases were due to growth in total net revenue driven by
higher transaction volumes and a lower provision for credit
losses, partially offset by increases in total noninterest
expense.
Total net revenue increased $128 million
(18.8 percent) in the second quarter and $251 million
(19.1 percent) in the first six months of 2006, compared
with the same periods of 2005. Net interest income increased
$21 million in the second quarter and $38 million in
the first six months of 2006, compared with the same periods of
2005. The increases were primarily due to increases in retail
credit card balances and customer late fees, partially offset by
an increase in nonearning assets resulting in higher funding
expense. Noninterest income increased $107 million in the
second quarter and $213 million in the first six months of
2006, compared with the same periods of 2005. The increases in
fee-based revenue were driven by strong growth in credit card
and debit card revenue, corporate payment products revenue, ATM
processing services revenue and merchant processing revenue.
Credit and debit card revenue increased due to higher customer
transaction volume. Corporate payment products revenue reflected
organic growth in sales volumes and card usage. ATM processing
services revenue increased primarily due to the acquisition of
an ATM business in May of 2005. Merchant processing revenue also
grew from a year ago due to an increase in sales volume driven
by acquisitions, higher same store sales and equipment fees.
Noninterest income for the first six months of 2006 also
included the impact of a $10 million settlement in the
first quarter.
Noninterest expense increased $48 million
(15.8 percent) in the second quarter and $113 million
(19.5 percent) in the first six months of 2006, compared
with the same periods of 2005. The increases in noninterest
expense were primarily attributable to the acquisition of
merchant acquiring businesses, higher compensation and employee
benefit costs for processing associated with increased credit
and debit card transaction volumes, higher corporate payment
products and merchant processing sales volumes, and higher ATM
processing services volumes.
The provision for credit losses decreased $27 million
(29.3 percent) in the second quarter and $56 million
(30.9 percent) in the first six months of 2006, compared
with the same periods of 2005, due to lower net charge-offs. As
a percentage of average loans outstanding, net charge-offs were
2.16 percent in the second quarter of 2006, compared with
3.26 percent in the second quarter of 2005. The favorable
change in credit losses reflected the near-term impact of
changes in bankruptcy legislation in the fourth quarter of 2005.
Treasury and Corporate Support
includes the Companys
investment portfolios, funding, capital management and asset
securitization activities, interest rate risk management, the
net effect of transfer pricing related to average balances and
the residual aggregate of those expenses associated with
corporate activities that are managed on a consolidated basis.
In addition, prior to the adoption of SFAS 156, changes in
MSR valuations due to interest rate changes were managed at a
corporate level and, as such, reported within this business
unit. Treasury and Corporate Support recorded net income of
$16 million in the second quarter and $101 million in
the first six months of 2006, or decreases of
$85 million and $126 million, respectively, compared
with the same periods of 2005.
Total net revenue decreased $109 million
(92.4 percent) in the second quarter and $142 million
(61.2 percent) in the first six months of 2006,
compared with the same periods of 2005. The year-over-year
decreases in total net revenue were primarily due to unfavorable
variances in net interest income, partially offset by higher
noninterest income. The decrease in net interest income
reflected the impact of a flatter yield curve and
asset/liability management decisions during the past year,
including reducing the investment securities portfolio, changes
in interest rate derivative positions and the issuance of higher
cost wholesale funding. Noninterest income increased
$31 million in the second quarter and $128 million in
the first six months of 2006, compared with the same
periods of 2005. The increase in noninterest income in the
second quarter and first six months of 2006 was driven by
a gain from an initial public offering of a cardholder
association. The increase during the first six months of
2006 was also due to a gain on derivatives that did not
qualify as hedges, realized in the first quarter of 2006, and
securities losses incurred in the first six months of 2005.
|
|
|
Table 11 |
|
Line of Business Financial Performance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale | |
|
Consumer | |
|
|
Banking | |
|
Banking | |
|
|
| |
|
|
|
|
|
|
Percent | |
|
|
|
Percent | |
Three Months Ended June 30 (Dollars in Millions) |
|
2006 | |
|
2005 | |
|
Change | |
|
2006 | |
|
2005 | |
|
Change | |
|
Condensed Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (taxable-equivalent basis)
|
|
|
$478 |
|
|
|
$463 |
|
|
|
3.2 |
% |
|
|
$968 |
|
|
|
$949 |
|
|
|
2.0 |
% |
Noninterest income
|
|
|
224 |
|
|
|
220 |
|
|
|
1.8 |
|
|
|
465 |
|
|
|
462 |
|
|
|
.6 |
|
Securities gains (losses), net
|
|
|
2 |
|
|
|
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
704 |
|
|
|
683 |
|
|
|
3.1 |
|
|
|
1,433 |
|
|
|
1,411 |
|
|
|
1.6 |
|
Noninterest expense
|
|
|
230 |
|
|
|
231 |
|
|
|
(.4 |
) |
|
|
600 |
|
|
|
609 |
|
|
|
(1.5 |
) |
Other intangibles
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
12 |
|
|
|
64 |
|
|
|
(81.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
234 |
|
|
|
235 |
|
|
|
(.4 |
) |
|
|
612 |
|
|
|
673 |
|
|
|
(9.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision and income taxes
|
|
|
470 |
|
|
|
448 |
|
|
|
4.9 |
|
|
|
821 |
|
|
|
738 |
|
|
|
11.2 |
|
Provision for credit losses
|
|
|
1 |
|
|
|
(11 |
) |
|
|
* |
|
|
|
54 |
|
|
|
63 |
|
|
|
(14.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
469 |
|
|
|
459 |
|
|
|
2.2 |
|
|
|
767 |
|
|
|
675 |
|
|
|
13.6 |
|
Income taxes and taxable-equivalent adjustment
|
|
|
171 |
|
|
|
167 |
|
|
|
2.4 |
|
|
|
279 |
|
|
|
246 |
|
|
|
13.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$298 |
|
|
|
$292 |
|
|
|
2.1 |
|
|
|
$488 |
|
|
|
$429 |
|
|
|
13.8 |
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
$33,292 |
|
|
|
$31,187 |
|
|
|
6.7 |
% |
|
|
$6,380 |
|
|
|
$6,143 |
|
|
|
3.9 |
% |
Commercial real estate
|
|
|
17,346 |
|
|
|
16,630 |
|
|
|
4.3 |
|
|
|
10,699 |
|
|
|
10,226 |
|
|
|
4.6 |
|
Residential mortgages
|
|
|
59 |
|
|
|
57 |
|
|
|
3.5 |
|
|
|
20,365 |
|
|
|
16,742 |
|
|
|
21.6 |
|
Retail
|
|
|
40 |
|
|
|
28 |
|
|
|
42.9 |
|
|
|
35,112 |
|
|
|
33,710 |
|
|
|
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
50,737 |
|
|
|
47,902 |
|
|
|
5.9 |
|
|
|
72,556 |
|
|
|
66,821 |
|
|
|
8.6 |
|
Goodwill
|
|
|
1,329 |
|
|
|
1,329 |
|
|
|
|
|
|
|
2,108 |
|
|
|
2,108 |
|
|
|
|
|
Other intangible assets
|
|
|
55 |
|
|
|
73 |
|
|
|
(24.7 |
) |
|
|
1,453 |
|
|
|
1,168 |
|
|
|
24.4 |
|
Assets
|
|
|
56,934 |
|
|
|
53,886 |
|
|
|
5.7 |
|
|
|
80,774 |
|
|
|
74,795 |
|
|
|
8.0 |
|
Noninterest-bearing deposits
|
|
|
12,107 |
|
|
|
12,303 |
|
|
|
(1.6 |
) |
|
|
12,720 |
|
|
|
13,035 |
|
|
|
(2.4 |
) |
Interest checking
|
|
|
3,164 |
|
|
|
3,189 |
|
|
|
(.8 |
) |
|
|
17,789 |
|
|
|
17,384 |
|
|
|
2.3 |
|
Savings products
|
|
|
5,569 |
|
|
|
5,469 |
|
|
|
1.8 |
|
|
|
21,393 |
|
|
|
24,581 |
|
|
|
(13.0 |
) |
Time deposits
|
|
|
13,020 |
|
|
|
12,267 |
|
|
|
6.1 |
|
|
|
18,669 |
|
|
|
17,034 |
|
|
|
9.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
33,860 |
|
|
|
33,228 |
|
|
|
1.9 |
|
|
|
70,571 |
|
|
|
72,034 |
|
|
|
(2.0 |
) |
Shareholders equity
|
|
|
5,554 |
|
|
|
5,308 |
|
|
|
4.6 |
|
|
|
6,436 |
|
|
|
6,457 |
|
|
|
(.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale | |
|
Consumer | |
|
|
Banking | |
|
Banking | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
Six Months Ended June 30 (Dollars in Millions) |
|
2006 | |
|
2005 | |
|
Change | |
|
2006 | |
|
2005 | |
|
Change | |
|
Condensed Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (taxable-equivalent basis)
|
|
|
$950 |
|
|
|
$911 |
|
|
|
4.3 |
% |
|
|
$1,918 |
|
|
|
$1,862 |
|
|
|
3.0 |
% |
Noninterest income
|
|
|
449 |
|
|
|
448 |
|
|
|
.2 |
|
|
|
848 |
|
|
|
873 |
|
|
|
(2.9 |
) |
Securities gains (losses), net
|
|
|
2 |
|
|
|
(4 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
1,401 |
|
|
|
1,355 |
|
|
|
3.4 |
|
|
|
2,766 |
|
|
|
2,735 |
|
|
|
1.1 |
|
Noninterest expense
|
|
|
459 |
|
|
|
451 |
|
|
|
1.8 |
|
|
|
1,211 |
|
|
|
1,188 |
|
|
|
1.9 |
|
Other intangibles
|
|
|
8 |
|
|
|
8 |
|
|
|
|
|
|
|
25 |
|
|
|
126 |
|
|
|
(80.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
467 |
|
|
|
459 |
|
|
|
1.7 |
|
|
|
1,236 |
|
|
|
1,314 |
|
|
|
(5.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision and income taxes
|
|
|
934 |
|
|
|
896 |
|
|
|
4.2 |
|
|
|
1,530 |
|
|
|
1,421 |
|
|
|
7.7 |
|
Provision for credit losses
|
|
|
(7 |
) |
|
|
(2 |
) |
|
|
* |
|
|
|
117 |
|
|
|
137 |
|
|
|
(14.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
941 |
|
|
|
898 |
|
|
|
4.8 |
|
|
|
1,413 |
|
|
|
1,284 |
|
|
|
10.0 |
|
Income taxes and taxable-equivalent adjustment
|
|
|
343 |
|
|
|
327 |
|
|
|
4.9 |
|
|
|
514 |
|
|
|
468 |
|
|
|
9.8 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$598 |
|
|
|
$571 |
|
|
|
4.7 |
|
|
|
$899 |
|
|
|
$816 |
|
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
$32,866 |
|
|
|
$30,709 |
|
|
|
7.0 |
% |
|
|
$6,345 |
|
|
|
$6,010 |
|
|
|
5.6 |
% |
Commercial real estate
|
|
|
17,312 |
|
|
|
16,615 |
|
|
|
4.2 |
|
|
|
10,650 |
|
|
|
10,194 |
|
|
|
4.5 |
|
Residential mortgages
|
|
|
61 |
|
|
|
60 |
|
|
|
1.7 |
|
|
|
20,420 |
|
|
|
16,069 |
|
|
|
27.1 |
|
Retail
|
|
|
42 |
|
|
|
38 |
|
|
|
10.5 |
|
|
|
35,075 |
|
|
|
33,425 |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
50,281 |
|
|
|
47,422 |
|
|
|
6.0 |
|
|
|
72,490 |
|
|
|
65,698 |
|
|
|
10.3 |
|
Goodwill
|
|
|
1,329 |
|
|
|
1,329 |
|
|
|
|
|
|
|
2,107 |
|
|
|
2,109 |
|
|
|
(.1 |
) |
Other intangible assets
|
|
|
57 |
|
|
|
76 |
|
|
|
(25.0 |
) |
|
|
1,392 |
|
|
|
1,141 |
|
|
|
22.0 |
|
Assets
|
|
|
56,287 |
|
|
|
53,248 |
|
|
|
5.7 |
|
|
|
80,405 |
|
|
|
73,251 |
|
|
|
9.8 |
|
Noninterest-bearing deposits
|
|
|
12,049 |
|
|
|
12,125 |
|
|
|
(.6 |
) |
|
|
12,747 |
|
|
|
12,937 |
|
|
|
(1.5 |
) |
Interest checking
|
|
|
3,139 |
|
|
|
3,397 |
|
|
|
(7.6 |
) |
|
|
17,722 |
|
|
|
17,198 |
|
|
|
3.0 |
|
Savings products
|
|
|
5,427 |
|
|
|
5,351 |
|
|
|
1.4 |
|
|
|
21,877 |
|
|
|
25,027 |
|
|
|
(12.6 |
) |
Time deposits
|
|
|
12,536 |
|
|
|
11,660 |
|
|
|
7.5 |
|
|
|
18,422 |
|
|
|
16,760 |
|
|
|
9.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
33,151 |
|
|
|
32,533 |
|
|
|
1.9 |
|
|
|
70,768 |
|
|
|
71,922 |
|
|
|
(1.6 |
) |
Shareholders equity
|
|
|
5,474 |
|
|
|
5,296 |
|
|
|
3.4 |
|
|
|
6,424 |
|
|
|
6,445 |
|
|
|
(.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wealth | |
|
Payment | |
|
Treasury and | |
|
Consolidated | |
|
|
Management | |
|
Services | |
|
Corporate Support | |
|
Company | |
|
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
Percent | |
|
|
2006 | |
|
2005 | |
|
Change | |
|
2006 | |
|
2005 | |
|
Change | |
|
2006 | |
|
2005 | |
|
Change | |
|
2006 | |
|
2005 | |
|
Change | |
|
|
|
|
|
|
|
|
|
|
$127 |
|
|
|
$106 |
|
|
|
19.8 |
% |
|
|
$156 |
|
|
|
$135 |
|
|
|
15.6 |
% |
|
|
$(32 |
) |
|
|
$108 |
|
|
|
* |
% |
|
|
$1,697 |
|
|
|
$1,761 |
|
|
|
(3.6 |
)% |
|
|
|
369 |
|
|
|
302 |
|
|
|
22.2 |
|
|
|
654 |
|
|
|
547 |
|
|
|
19.6 |
|
|
|
40 |
|
|
|
9 |
|
|
|
* |
|
|
|
1,752 |
|
|
|
1,540 |
|
|
|
13.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
3 |
|
|
|
1 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
496 |
|
|
|
408 |
|
|
|
21.6 |
|
|
|
810 |
|
|
|
682 |
|
|
|
18.8 |
|
|
|
9 |
|
|
|
118 |
|
|
|
(92.4 |
) |
|
|
3,452 |
|
|
|
3,302 |
|
|
|
4.5 |
|
|
|
|
240 |
|
|
|
208 |
|
|
|
15.4 |
|
|
|
300 |
|
|
|
260 |
|
|
|
15.4 |
|
|
|
71 |
|
|
|
106 |
|
|
|
(33.0 |
) |
|
|
1,441 |
|
|
|
1,414 |
|
|
|
1.9 |
|
|
|
|
22 |
|
|
|
15 |
|
|
|
46.7 |
|
|
|
51 |
|
|
|
43 |
|
|
|
18.6 |
|
|
|
|
|
|
|
55 |
|
|
|
* |
|
|
|
89 |
|
|
|
181 |
|
|
|
(50.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
262 |
|
|
|
223 |
|
|
|
17.5 |
|
|
|
351 |
|
|
|
303 |
|
|
|
15.8 |
|
|
|
71 |
|
|
|
161 |
|
|
|
(55.9 |
) |
|
|
1,530 |
|
|
|
1,595 |
|
|
|
(4.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234 |
|
|
|
185 |
|
|
|
26.5 |
|
|
|
459 |
|
|
|
379 |
|
|
|
21.1 |
|
|
|
(62 |
) |
|
|
(43 |
) |
|
|
(44.2 |
) |
|
|
1,922 |
|
|
|
1,707 |
|
|
|
12.6 |
|
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
65 |
|
|
|
92 |
|
|
|
(29.3 |
) |
|
|
3 |
|
|
|
(2 |
) |
|
|
* |
|
|
|
125 |
|
|
|
144 |
|
|
|
(13.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232 |
|
|
|
183 |
|
|
|
26.8 |
|
|
|
394 |
|
|
|
287 |
|
|
|
37.3 |
|
|
|
(65 |
) |
|
|
(41 |
) |
|
|
(58.5 |
) |
|
|
1,797 |
|
|
|
1,563 |
|
|
|
15.0 |
|
|
|
|
84 |
|
|
|
67 |
|
|
|
25.4 |
|
|
|
143 |
|
|
|
104 |
|
|
|
37.5 |
|
|
|
(81 |
) |
|
|
(142 |
) |
|
|
43.0 |
|
|
|
596 |
|
|
|
442 |
|
|
|
34.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$148 |
|
|
|
$116 |
|
|
|
27.6 |
|
|
|
$251 |
|
|
|
$183 |
|
|
|
37.2 |
|
|
|
$16 |
|
|
|
$101 |
|
|
|
(84.2 |
) |
|
|
$1,201 |
|
|
|
$1,121 |
|
|
|
7.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1,520 |
|
|
|
$1,582 |
|
|
|
(3.9 |
)% |
|
|
$3,758 |
|
|
|
$3,433 |
|
|
|
9.5 |
% |
|
|
$120 |
|
|
|
$172 |
|
|
|
(30.2 |
)% |
|
|
$45,070 |
|
|
|
$42,517 |
|
|
|
6.0 |
% |
|
|
|
689 |
|
|
|
639 |
|
|
|
7.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61 |
|
|
|
87 |
|
|
|
(29.9 |
) |
|
|
28,795 |
|
|
|
27,582 |
|
|
|
4.4 |
|
|
|
|
440 |
|
|
|
393 |
|
|
|
12.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
6 |
|
|
|
(33.3 |
) |
|
|
20,868 |
|
|
|
17,198 |
|
|
|
21.3 |
|
|
|
|
2,422 |
|
|
|
2,313 |
|
|
|
4.7 |
|
|
|
8,512 |
|
|
|
7,878 |
|
|
|
8.0 |
|
|
|
44 |
|
|
|
49 |
|
|
|
(10.2 |
) |
|
|
46,130 |
|
|
|
43,978 |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,071 |
|
|
|
4,927 |
|
|
|
2.9 |
|
|
|
12,270 |
|
|
|
11,311 |
|
|
|
8.5 |
|
|
|
229 |
|
|
|
314 |
|
|
|
(27.1 |
) |
|
|
140,863 |
|
|
|
131,275 |
|
|
|
7.3 |
|
|
|
|
1,378 |
|
|
|
874 |
|
|
|
57.7 |
|
|
|
2,463 |
|
|
|
2,030 |
|
|
|
21.3 |
|
|
|
1 |
|
|
|
|
|
|
|
* |
|
|
|
7,279 |
|
|
|
6,341 |
|
|
|
14.8 |
|
|
|
|
473 |
|
|
|
316 |
|
|
|
49.7 |
|
|
|
1,165 |
|
|
|
972 |
|
|
|
19.9 |
|
|
|
|
|
|
|
3 |
|
|
|
* |
|
|
|
3,146 |
|
|
|
2,532 |
|
|
|
24.2 |
|
|
|
|
7,487 |
|
|
|
6,647 |
|
|
|
12.6 |
|
|
|
17,294 |
|
|
|
15,163 |
|
|
|
14.1 |
|
|
|
49,918 |
|
|
|
51,327 |
|
|
|
(2.7 |
) |
|
|
212,407 |
|
|
|
201,818 |
|
|
|
5.2 |
|
|
|
|
3,668 |
|
|
|
3,616 |
|
|
|
1.4 |
|
|
|
297 |
|
|
|
134 |
|
|
|
* |
|
|
|
157 |
|
|
|
60 |
|
|
|
* |
|
|
|
28,949 |
|
|
|
29,148 |
|
|
|
(.7 |
) |
|
|
|
2,379 |
|
|
|
2,445 |
|
|
|
(2.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
6 |
|
|
|
(83.3 |
) |
|
|
23,333 |
|
|
|
23,024 |
|
|
|
1.3 |
|
|
|
|
5,677 |
|
|
|
5,368 |
|
|
|
5.8 |
|
|
|
19 |
|
|
|
15 |
|
|
|
26.7 |
|
|
|
43 |
|
|
|
16 |
|
|
|
* |
|
|
|
32,701 |
|
|
|
35,449 |
|
|
|
(7.8 |
) |
|
|
|
2,900 |
|
|
|
1,102 |
|
|
|
* |
|
|
|
3 |
|
|
|
1 |
|
|
|
* |
|
|
|
1,658 |
|
|
|
3,207 |
|
|
|
(48.3 |
) |
|
|
36,250 |
|
|
|
33,611 |
|
|
|
7.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,624 |
|
|
|
12,531 |
|
|
|
16.7 |
|
|
|
319 |
|
|
|
150 |
|
|
|
* |
|
|
|
1,859 |
|
|
|
3,289 |
|
|
|
(43.5 |
) |
|
|
121,233 |
|
|
|
121,232 |
|
|
|
|
|
|
|
|
2,349 |
|
|
|
1,663 |
|
|
|
41.3 |
|
|
|
4,747 |
|
|
|
4,011 |
|
|
|
18.3 |
|
|
|
1,470 |
|
|
|
2,381 |
|
|
|
(38.3 |
) |
|
|
20,556 |
|
|
|
19,820 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wealth | |
|
Payment | |
|
Treasury and | |
|
Consolidated | |
|
|
Management | |
|
Services | |
|
Corporate Support | |
|
Company | |
|
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
Percent | |
|
|
2006 | |
|
2005 | |
|
Change | |
|
2006 | |
|
2005 | |
|
Change | |
|
2006 | |
|
2005 | |
|
Change | |
|
2006 | |
|
2005 | |
|
Change | |
|
|
|
|
|
|
|
|
|
|
$252 |
|
|
|
$205 |
|
|
|
22.9 |
% |
|
|
$319 |
|
|
|
$281 |
|
|
|
13.5 |
% |
|
|
$(17 |
) |
|
|
$253 |
|
|
|
* |
% |
|
|
$3,422 |
|
|
|
$3,512 |
|
|
|
(2.6 |
)% |
|
|
|
719 |
|
|
|
596 |
|
|
|
20.6 |
|
|
|
1,244 |
|
|
|
1,031 |
|
|
|
20.7 |
|
|
|
106 |
|
|
|
33 |
|
|
|
* |
|
|
|
3,366 |
|
|
|
2,981 |
|
|
|
12.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
(54 |
) |
|
|
* |
|
|
|
3 |
|
|
|
(58 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
971 |
|
|
|
801 |
|
|
|
21.2 |
|
|
|
1,563 |
|
|
|
1,312 |
|
|
|
19.1 |
|
|
|
90 |
|
|
|
232 |
|
|
|
(61.2 |
) |
|
|
6,791 |
|
|
|
6,435 |
|
|
|
5.5 |
|
|
|
|
482 |
|
|
|
411 |
|
|
|
17.3 |
|
|
|
596 |
|
|
|
496 |
|
|
|
20.2 |
|
|
|
108 |
|
|
|
128 |
|
|
|
(15.6 |
) |
|
|
2,856 |
|
|
|
2,674 |
|
|
|
6.8 |
|
|
|
|
44 |
|
|
|
31 |
|
|
|
41.9 |
|
|
|
97 |
|
|
|
84 |
|
|
|
15.5 |
|
|
|
|
|
|
|
3 |
|
|
|
* |
|
|
|
174 |
|
|
|
252 |
|
|
|
(31.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
526 |
|
|
|
442 |
|
|
|
19.0 |
|
|
|
693 |
|
|
|
580 |
|
|
|
19.5 |
|
|
|
108 |
|
|
|
131 |
|
|
|
(17.6 |
) |
|
|
3,030 |
|
|
|
2,926 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
445 |
|
|
|
359 |
|
|
|
24.0 |
|
|
|
870 |
|
|
|
732 |
|
|
|
18.9 |
|
|
|
(18 |
) |
|
|
101 |
|
|
|
* |
|
|
|
3,761 |
|
|
|
3,509 |
|
|
|
7.2 |
|
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
125 |
|
|
|
181 |
|
|
|
(30.9 |
) |
|
|
3 |
|
|
|
(2 |
) |
|
|
* |
|
|
|
240 |
|
|
|
316 |
|
|
|
(24.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
443 |
|
|
|
357 |
|
|
|
24.1 |
|
|
|
745 |
|
|
|
551 |
|
|
|
35.2 |
|
|
|
(21 |
) |
|
|
103 |
|
|
|
* |
|
|
|
3,521 |
|
|
|
3,193 |
|
|
|
10.3 |
|
|
|
|
161 |
|
|
|
130 |
|
|
|
23.8 |
|
|
|
271 |
|
|
|
200 |
|
|
|
35.5 |
|
|
|
(122 |
) |
|
|
(124 |
) |
|
|
1.6 |
|
|
|
1,167 |
|
|
|
1,001 |
|
|
|
16.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$282 |
|
|
|
$227 |
|
|
|
24.2 |
|
|
|
$474 |
|
|
|
$351 |
|
|
|
35.0 |
|
|
|
$101 |
|
|
|
$227 |
|
|
|
(55.5 |
) |
|
|
$2,354 |
|
|
|
$2,192 |
|
|
|
7.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1,508 |
|
|
|
$1,568 |
|
|
|
(3.8 |
)% |
|
|
$3,647 |
|
|
|
$3,315 |
|
|
|
10.0 |
% |
|
|
$135 |
|
|
|
$159 |
|
|
|
(15.1 |
)% |
|
|
$44,501 |
|
|
|
$41,761 |
|
|
|
6.6 |
% |
|
|
|
681 |
|
|
|
642 |
|
|
|
6.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63 |
|
|
|
92 |
|
|
|
(31.5 |
) |
|
|
28,706 |
|
|
|
27,543 |
|
|
|
4.2 |
|
|
|
|
442 |
|
|
|
380 |
|
|
|
16.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
8 |
|
|
|
(50.0 |
) |
|
|
20,927 |
|
|
|
16,517 |
|
|
|
26.7 |
|
|
|
|
2,412 |
|
|
|
2,295 |
|
|
|
5.1 |
|
|
|
8,417 |
|
|
|
7,846 |
|
|
|
7.3 |
|
|
|
45 |
|
|
|
49 |
|
|
|
(8.2 |
) |
|
|
45,991 |
|
|
|
43,653 |
|
|
|
5.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,043 |
|
|
|
4,885 |
|
|
|
3.2 |
|
|
|
12,064 |
|
|
|
11,161 |
|
|
|
8.1 |
|
|
|
247 |
|
|
|
308 |
|
|
|
(19.8 |
) |
|
|
140,125 |
|
|
|
129,474 |
|
|
|
8.2 |
|
|
|
|
1,376 |
|
|
|
874 |
|
|
|
57.4 |
|
|
|
2,375 |
|
|
|
1,986 |
|
|
|
19.6 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
* |
|
|
|
7,188 |
|
|
|
6,297 |
|
|
|
14.1 |
|
|
|
|
484 |
|
|
|
323 |
|
|
|
49.8 |
|
|
|
1,111 |
|
|
|
940 |
|
|
|
18.2 |
|
|
|
|
|
|
|
8 |
|
|
|
* |
|
|
|
3,044 |
|
|
|
2,488 |
|
|
|
22.3 |
|
|
|
|
7,466 |
|
|
|
6,638 |
|
|
|
12.5 |
|
|
|
16,882 |
|
|
|
14,818 |
|
|
|
13.9 |
|
|
|
50,182 |
|
|
|
51,435 |
|
|
|
(2.4 |
) |
|
|
211,222 |
|
|
|
199,390 |
|
|
|
5.9 |
|
|
|
|
3,649 |
|
|
|
3,527 |
|
|
|
3.5 |
|
|
|
295 |
|
|
|
137 |
|
|
|
* |
|
|
|
153 |
|
|
|
58 |
|
|
|
* |
|
|
|
28,893 |
|
|
|
28,784 |
|
|
|
.4 |
|
|
|
|
2,376 |
|
|
|
2,482 |
|
|
|
(4.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
8 |
|
|
|
(87.5 |
) |
|
|
23,238 |
|
|
|
23,085 |
|
|
|
.7 |
|
|
|
|
5,527 |
|
|
|
5,430 |
|
|
|
1.8 |
|
|
|
19 |
|
|
|
15 |
|
|
|
26.7 |
|
|
|
33 |
|
|
|
15 |
|
|
|
* |
|
|
|
32,883 |
|
|
|
35,838 |
|
|
|
(8.2 |
) |
|
|
|
2,487 |
|
|
|
1,035 |
|
|
|
* |
|
|
|
3 |
|
|
|
|
|
|
|
* |
|
|
|
2,239 |
|
|
|
3,170 |
|
|
|
(29.4 |
) |
|
|
35,687 |
|
|
|
32,625 |
|
|
|
9.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,039 |
|
|
|
12,474 |
|
|
|
12.5 |
|
|
|
317 |
|
|
|
152 |
|
|
|
* |
|
|
|
2,426 |
|
|
|
3,251 |
|
|
|
(25.4 |
) |
|
|
120,701 |
|
|
|
120,332 |
|
|
|
.3 |
|
|
|
|
2,351 |
|
|
|
1,671 |
|
|
|
40.7 |
|
|
|
4,557 |
|
|
|
3,941 |
|
|
|
15.6 |
|
|
|
1,547 |
|
|
|
2,459 |
|
|
|
(37.1 |
) |
|
|
20,353 |
|
|
|
19,812 |
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
Noninterest expense decreased $90 million in the second
quarter and $23 million in the first six months of 2006,
compared with the same periods of 2005. The decreases in
noninterest expense were driven by lower debt prepayment expense
and the elimination of MSR impairment or reparation due to the
adoption of SFAS 156 in the first quarter of 2006.
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
Companys recorded provision determined in accordance with
accounting principles generally accepted in the United States.
Refer to the Corporate Risk Profile section for
further information on the provision for credit losses,
nonperforming assets and factors considered by the Company in
assessing the credit quality of the loan portfolio and
establishing the allowance for credit losses.
Income taxes are assessed to each line of business at a
managerial tax rate of 36.4 percent with the residual tax
expense or benefit to arrive at the consolidated effective tax
rate included in Treasury and Corporate Support. The
consolidated effective tax rate of the Company was
32.8 percent and 32.7 percent in the second quarter
and first six months of 2006, respectively, compared with
28.0 percent and 31.0 percent in the same periods of
2005, respectively. The second quarter of 2005 included a
$94 million reduction in income tax expense related to the
resolution of federal income tax examinations covering
substantially all of the Companys legal entities for the
years 2000 through 2002.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company comply with
accounting principles generally accepted in the United States
and conform to general practices within the banking industry.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions. The financial position and
results of operations can be affected by these estimates and
assumptions, which are integral to understanding the
Companys financial statements. Critical accounting
policies are those policies that management believes are the
most important to the portrayal of the Companys 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. Those policies considered to be critical
accounting policies relate to the allowance for credit losses,
MSRs, goodwill and other intangibles and income taxes.
Management has discussed the development and the selection of
critical accounting policies with the Companys Audit
Committee. These accounting policies are discussed in detail in
Managements Discussion and Analysis
Critical Accounting Policies and the Notes to Consolidated
Financial Statements in the Companys Annual Report on
Form 10-K for the
year ended December 31, 2005. Refer to Note 2 of the
Notes to Consolidated Financial Statements for discussion of the
change in accounting for MSRs implemented in the first quarter
of 2006.
CONTROLS AND PROCEDURES
Under the supervision and with the participation of the
Companys 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 Companys
disclosure controls and procedures were effective.
During the most recently completed fiscal quarter, there was no
change made in the Companys 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 Companys internal control
over financial reporting.
(This page intentionally left blank)
U.S. Bancorp
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
(Dollars in Millions) |
|
2006 | |
|
2005 | |
| |
|
|
(Unaudited) | |
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
$7,234 |
|
|
|
$8,004 |
|
Investment securities
|
|
|
|
|
|
|
|
|
|
Held-to-maturity (fair value $101 and $113, respectively)
|
|
|
98 |
|
|
|
109 |
|
|
Available-for-sale
|
|
|
38,364 |
|
|
|
39,659 |
|
Loans held for sale
|
|
|
2,589 |
|
|
|
1,686 |
|
Loans
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
45,369 |
|
|
|
42,942 |
|
|
Commercial real estate
|
|
|
28,562 |
|
|
|
28,463 |
|
|
Residential mortgages
|
|
|
21,063 |
|
|
|
20,730 |
|
|
Retail
|
|
|
46,388 |
|
|
|
45,671 |
|
|
|
|
|
|
Total loans
|
|
|
141,382 |
|
|
|
137,806 |
|
|
|
|
Less allowance for loan losses
|
|
|
(2,039 |
) |
|
|
(2,041 |
) |
|
|
|
|
|
|
Net loans
|
|
|
139,343 |
|
|
|
135,765 |
|
Premises and equipment
|
|
|
1,817 |
|
|
|
1,841 |
|
Goodwill
|
|
|
7,283 |
|
|
|
7,005 |
|
Other intangible assets
|
|
|
3,158 |
|
|
|
2,874 |
|
Other assets
|
|
|
13,519 |
|
|
|
12,522 |
|
|
|
|
|
|
Total assets
|
|
|
$213,405 |
|
|
|
$209,465 |
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
|
$30,730 |
|
|
|
$32,214 |
|
|
Interest-bearing
|
|
|
69,302 |
|
|
|
70,024 |
|
|
Time deposits greater than $100,000
|
|
|
22,687 |
|
|
|
22,471 |
|
|
|
|
|
|
Total deposits
|
|
|
122,719 |
|
|
|
124,709 |
|
Short-term borrowings
|
|
|
20,570 |
|
|
|
20,200 |
|
Long-term debt
|
|
|
41,952 |
|
|
|
37,069 |
|
Other liabilities
|
|
|
7,749 |
|
|
|
7,401 |
|
|
|
|
|
|
Total liabilities
|
|
|
192,990 |
|
|
|
189,379 |
|
Shareholders equity
|
|
|
|
|
|
|
|
|
|
Preferred stock, par value $1.00 a share (liquidation preference
of $25,000 per share) authorized:
50,000,000 shares;
issued and outstanding: 6/30/06 40,000 shares
|
|
|
1,000 |
|
|
|
|
|
|
Common stock, par value $0.01 a share authorized:
4,000,000,000 shares;
issued: 6/30/06 and 12/31/05
1,972,643,007 shares
|
|
|
20 |
|
|
|
20 |
|
|
Capital surplus
|
|
|
5,789 |
|
|
|
5,907 |
|
|
Retained earnings
|
|
|
20,164 |
|
|
|
19,001 |
|
|
Less cost of common stock in treasury: 6/30/06
189,672,491 shares; 12/31/05
157,689,004 shares
|
|
|
(5,421 |
) |
|
|
(4,413 |
) |
|
Other comprehensive income
|
|
|
(1,137 |
) |
|
|
(429 |
) |
|
|
|
|
|
Total shareholders equity
|
|
|
20,415 |
|
|
|
20,086 |
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
|
$213,405 |
|
|
|
$209,465 |
|
|
See Notes to Consolidated Financial Statements.
U.S. Bancorp
Consolidated Statement of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
(Dollars and Shares in Millions, Except Per Share Data) |
|
| |
(Unaudited) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
$2,449 |
|
|
|
$2,027 |
|
|
|
$4,781 |
|
|
|
$3,938 |
|
Loans held for sale
|
|
|
33 |
|
|
|
24 |
|
|
|
59 |
|
|
|
45 |
|
Investment securities
|
|
|
500 |
|
|
|
486 |
|
|
|
990 |
|
|
|
962 |
|
Other interest income
|
|
|
36 |
|
|
|
28 |
|
|
|
79 |
|
|
|
55 |
|
|
|
|
Total interest
income
|
|
|
3,018 |
|
|
|
2,565 |
|
|
|
5,909 |
|
|
|
5,000 |
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
578 |
|
|
|
361 |
|
|
|
1,081 |
|
|
|
669 |
|
Short-term borrowings
|
|
|
270 |
|
|
|
143 |
|
|
|
540 |
|
|
|
255 |
|
Long-term debt
|
|
|
484 |
|
|
|
307 |
|
|
|
887 |
|
|
|
578 |
|
|
|
|
Total interest
expense
|
|
|
1,332 |
|
|
|
811 |
|
|
|
2,508 |
|
|
|
1,502 |
|
|
|
|
Net interest income
|
|
|
1,686 |
|
|
|
1,754 |
|
|
|
3,401 |
|
|
|
3,498 |
|
Provision for credit losses
|
|
|
125 |
|
|
|
144 |
|
|
|
240 |
|
|
|
316 |
|
|
|
|
Net interest income after provision for credit losses
|
|
|
1,561 |
|
|
|
1,610 |
|
|
|
3,161 |
|
|
|
3,182 |
|
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit and debit card revenue
|
|
|
202 |
|
|
|
177 |
|
|
|
384 |
|
|
|
331 |
|
Corporate payment products revenue
|
|
|
139 |
|
|
|
120 |
|
|
|
266 |
|
|
|
227 |
|
ATM processing services
|
|
|
61 |
|
|
|
57 |
|
|
|
120 |
|
|
|
104 |
|
Merchant processing services
|
|
|
253 |
|
|
|
198 |
|
|
|
466 |
|
|
|
376 |
|
Trust and investment management fees
|
|
|
314 |
|
|
|
253 |
|
|
|
611 |
|
|
|
500 |
|
Deposit service charges
|
|
|
264 |
|
|
|
234 |
|
|
|
496 |
|
|
|
444 |
|
Treasury management fees
|
|
|
116 |
|
|
|
117 |
|
|
|
223 |
|
|
|
224 |
|
Commercial products revenue
|
|
|
107 |
|
|
|
100 |
|
|
|
211 |
|
|
|
196 |
|
Mortgage banking revenue
|
|
|
75 |
|
|
|
110 |
|
|
|
99 |
|
|
|
212 |
|
Investment products fees and commissions
|
|
|
42 |
|
|
|
39 |
|
|
|
80 |
|
|
|
78 |
|
Securities gains (losses), net
|
|
|
3 |
|
|
|
1 |
|
|
|
3 |
|
|
|
(58 |
) |
Other
|
|
|
179 |
|
|
|
135 |
|
|
|
410 |
|
|
|
289 |
|
|
|
|
Total
noninterest income
|
|
|
1,755 |
|
|
|
1,541 |
|
|
|
3,369 |
|
|
|
2,923 |
|
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
627 |
|
|
|
612 |
|
|
|
1,260 |
|
|
|
1,179 |
|
Employee benefits
|
|
|
123 |
|
|
|
108 |
|
|
|
256 |
|
|
|
224 |
|
Net occupancy and equipment
|
|
|
161 |
|
|
|
159 |
|
|
|
326 |
|
|
|
313 |
|
Professional services
|
|
|
41 |
|
|
|
39 |
|
|
|
76 |
|
|
|
75 |
|
Marketing and business development
|
|
|
58 |
|
|
|
67 |
|
|
|
98 |
|
|
|
110 |
|
Technology and communications
|
|
|
127 |
|
|
|
113 |
|
|
|
244 |
|
|
|
219 |
|
Postage, printing and supplies
|
|
|
66 |
|
|
|
63 |
|
|
|
132 |
|
|
|
126 |
|
Other intangibles
|
|
|
89 |
|
|
|
181 |
|
|
|
174 |
|
|
|
252 |
|
Debt prepayment
|
|
|
11 |
|
|
|
54 |
|
|
|
11 |
|
|
|
54 |
|
Other
|
|
|
227 |
|
|
|
199 |
|
|
|
453 |
|
|
|
374 |
|
|
|
|
Total
noninterest expense
|
|
|
1,530 |
|
|
|
1,595 |
|
|
|
3,030 |
|
|
|
2,926 |
|
|
|
|
Income before income taxes
|
|
|
1,786 |
|
|
|
1,556 |
|
|
|
3,500 |
|
|
|
3,179 |
|
Applicable income taxes
|
|
|
585 |
|
|
|
435 |
|
|
|
1,146 |
|
|
|
987 |
|
|
|
|
Net income
|
|
|
$1,201 |
|
|
|
$1,121 |
|
|
|
$2,354 |
|
|
|
$2,192 |
|
|
|
|
Net income applicable to common equity
|
|
|
$1,184 |
|
|
|
$1,121 |
|
|
|
$2,337 |
|
|
|
$2,192 |
|
|
|
|
Earnings per common share
|
|
|
$.66 |
|
|
|
$.61 |
|
|
|
$1.30 |
|
|
|
$1.19 |
|
Diluted earnings per common share
|
|
|
$.66 |
|
|
|
$.60 |
|
|
|
$1.29 |
|
|
|
$1.17 |
|
Dividends declared per common share
|
|
|
$.33 |
|
|
|
$.30 |
|
|
|
$.66 |
|
|
|
$.60 |
|
Average common shares outstanding
|
|
|
1,781 |
|
|
|
1,833 |
|
|
|
1,791 |
|
|
|
1,842 |
|
Average diluted common shares outstanding
|
|
|
1,805 |
|
|
|
1,857 |
|
|
|
1,816 |
|
|
|
1,869 |
|
|
See Notes to Consolidated Financial Statements.
U.S. Bancorp
Consolidated Statement of Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other | |
|
Total | |
(Dollars and Shares in Millions) |
|
Common Shares | |
|
Preferred | |
|
Common | |
|
Capital | |
|
Retained | |
|
Treasury | |
|
Comprehensive | |
|
Shareholders | |
(Unaudited) |
|
Outstanding | |
|
Stock | |
|
Stock | |
|
Surplus | |
|
Earnings | |
|
Stock | |
|
Income | |
|
Equity | |
| |
Balance December 31, 2004
|
|
|
1,858 |
|
|
|
$ |
|
|
|
$20 |
|
|
|
$5,902 |
|
|
|
$16,758 |
|
|
|
$(3,125 |
) |
|
|
$(16 |
) |
|
|
$19,539 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,192 |
|
|
|
|
|
|
|
|
|
|
|
2,192 |
|
Unrealized gain on securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
246 |
|
|
|
246 |
|
Unrealized loss on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56 |
) |
|
|
(56 |
) |
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
3 |
|
Realized loss on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90 |
) |
|
|
(90 |
) |
Reclassification adjustment for losses
realized in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104 |
|
|
|
104 |
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78 |
) |
|
|
(78 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,321 |
|
Cash dividends declared on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,101 |
) |
|
|
|
|
|
|
|
|
|
|
(1,101 |
) |
Issuance of common and treasury stock
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
(51 |
) |
|
|
|
|
|
|
236 |
|
|
|
|
|
|
|
185 |
|
Purchase of treasury stock
|
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,092 |
) |
|
|
|
|
|
|
(1,092 |
) |
Stock option and restricted stock grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51 |
|
Shares reserved to meet deferred compensation obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
Balance June 30, 2005
|
|
|
1,829 |
|
|
|
$ |
|
|
|
$20 |
|
|
|
$5,903 |
|
|
|
$17,849 |
|
|
|
$(3,984 |
) |
|
|
$113 |
|
|
|
$19,901 |
|
|
Balance December 31, 2005
|
|
|
1,815 |
|
|
|
$ |
|
|
|
$20 |
|
|
|
$5,907 |
|
|
|
$19,001 |
|
|
|
$(4,413 |
) |
|
|
$(429 |
) |
|
|
$20,086 |
|
Change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,354 |
|
|
|
|
|
|
|
|
|
|
|
2,354 |
|
Unrealized loss on securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,105 |
) |
|
|
(1,105 |
) |
Unrealized gain on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153 |
|
|
|
153 |
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
4 |
|
Realized loss on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(199 |
) |
|
|
(199 |
) |
Reclassification adjustment for losses
realized in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
6 |
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
433 |
|
|
|
433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,646 |
|
Cash dividends declared:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
(17 |
) |
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,178 |
) |
|
|
|
|
|
|
|
|
|
|
(1,178 |
) |
Issuance of common and treasury stock
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
(79 |
) |
|
|
|
|
|
|
533 |
|
|
|
|
|
|
|
454 |
|
Purchase of treasury stock
|
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,538 |
) |
|
|
|
|
|
|
(1,538 |
) |
Stock option and restricted stock grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
Shares reserved to meet deferred compensation obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
(2 |
) |
Issuance of preferred stock
|
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
948 |
|
|
|
|
Balance June 30, 2006
|
|
|
1,783 |
|
|
|
$1,000 |
|
|
|
$20 |
|
|
|
$5,789 |
|
|
|
$20,164 |
|
|
|
$(5,421 |
) |
|
|
$(1,137 |
) |
|
|
$20,415 |
|
|
See Notes to Consolidated Financial Statements.
U.S. Bancorp
Consolidated Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
June 30, | |
(Dollars in Millions) |
|
| |
(Unaudited) |
|
2006 | |
|
2005 | |
| |
Operating Activities
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
$1,861 |
|
|
|
$1,813 |
|
Investing Activities
|
|
|
|
|
|
|
|
|
Proceeds from sales of available-for-sale investment securities
|
|
|
859 |
|
|
|
2,992 |
|
Proceeds from maturities of investment securities
|
|
|
2,573 |
|
|
|
5,011 |
|
Purchases of investment securities
|
|
|
(3,649 |
) |
|
|
(7,637 |
) |
Net (increase) decrease in loans outstanding
|
|
|
(3,217 |
) |
|
|
(6,182 |
) |
Proceeds from sales of loans
|
|
|
1,089 |
|
|
|
849 |
|
Purchases of loans
|
|
|
(1,563 |
) |
|
|
(1,814 |
) |
Other, net
|
|
|
(736 |
) |
|
|
(1,394 |
) |
|
|
|
|
Net cash used in investing activities
|
|
|
(4,644 |
) |
|
|
(8,175 |
) |
Financing Activities
|
|
|
|
|
|
|
|
|
Net increase (decrease) in deposits
|
|
|
(1,990 |
) |
|
|
1,082 |
|
Net increase (decrease) in short-term borrowings
|
|
|
370 |
|
|
|
7,350 |
|
Principal payments or redemption of long-term debt
|
|
|
(2,384 |
) |
|
|
(6,472 |
) |
Proceeds from issuance of long-term debt
|
|
|
7,538 |
|
|
|
6,558 |
|
Proceeds from issuance of preferred stock
|
|
|
948 |
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
383 |
|
|
|
153 |
|
Repurchase of common stock
|
|
|
(1,528 |
) |
|
|
(1,149 |
) |
Cash dividends paid on common stock
|
|
|
(1,188 |
) |
|
|
(1,111 |
) |
|
|
|
|
Net cash provided by financing activities
|
|
|
2,149 |
|
|
|
6,411 |
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
(634 |
) |
|
|
49 |
|
Cash and cash equivalents at beginning of period
|
|
|
8,202 |
|
|
|
6,537 |
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
|
$7,568 |
|
|
|
$6,586 |
|
|
See Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
(Unaudited)
|
|
|
Note 1 |
|
Basis of Presentation |
The accompanying consolidated financial statements have been
prepared in accordance with the instructions to
Form 10-Q and,
therefore, do not include all information and notes necessary
for a complete presentation of financial position, results of
operations and cash flow activity required in accordance with
accounting principles generally accepted in the United States.
In the opinion of management of U.S. Bancorp (the
Company), all adjustments (consisting only of normal
recurring adjustments) necessary for a fair statement of results
for the interim periods have been made. For further information,
refer to the consolidated financial statements and notes
included in the Companys Annual Report on
Form 10-K for the
year ended December 31, 2005. Certain amounts in prior
periods have been reclassified to conform to the current
presentation.
Accounting policies for the lines of business are generally the
same as those used in preparation of the consolidated financial
statements with respect to activities specifically attributable
to each business line. However, the preparation of business line
results requires management to establish methodologies to
allocate funding costs and benefits, expenses and other
financial elements to each line of business. Table 11 Line
of Business Financial Performance provides details of
segment results. This information is incorporated by reference
into these Notes to Consolidated Financial Statements.
|
|
|
Note 2 |
|
Accounting Changes |
Accounting for Servicing of Financial Assets
In March 2006, the Financial
Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 156, Accounting
for Servicing of Financial Assets
(SFAS 156), that amends accounting and
reporting standards for servicing assets and liabilities under
Statement of Financial Accounting Standards No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. Specifically,
SFAS 156 requires that all separately recognized servicing
assets and servicing liabilities be initially measured at fair
value, if practicable. For subsequent measurement purposes,
SFAS 156 permits an entity to choose to measure servicing
assets and liabilities either based on fair value or lower of
cost or market (LOCOM). The Company elected to adopt
SFAS 156 effective January 1, 2006, utilizing the fair
value measurement option for residential mortgage servicing
rights (MSRs) and continuing the LOCOM method for
all other servicing assets and liabilities. Adopting the fair
value measurement method resulted in the Company recording a
cumulative-effect accounting adjustment to increase beginning
retained earnings by $4 million (net of tax). Approximately
$3 million represented the difference between the fair
value and the carrying amount of the Companys MSRs as of
January 1, 2006, and the additional $1 million
represented the reclassification of unrealized gains in
accumulated other comprehensive income at adoption, for certain
available-for-sale securities reclassified to trading securities
upon the adoption of the provisions of this statement.
Additional information regarding MSRs is disclosed in
Note 5 in the Notes to Consolidated Financial Statements.
Other-Than-Temporary Impairment
In November 2005, the FASB
issued FASB Staff Position FAS 115-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments
(FSP 115-1),
effective for the Company beginning on January 1, 2006.
FSP 115-1 provides
clarification on when an investment is considered impaired,
whether that impairment is other than temporary, and the
measurement of an impairment loss.
FSP 115-1 also
requires certain disclosures for unrealized losses that have not
been recognized as other-than-temporary impairments. The
adoption of
FSP 115-1 did not
have a material impact on the Companys financial
statements.
Stock-Based Compensation
In December 2004, the FASB
issued Statement of Financial Accounting Standards No. 123
(revised 2004) (SFAS 123R), Share-Based
Payment, a revision of Statement of Financial Accounting
Standards No. 123 (SFAS 123),
Accounting for Stock-Based Compensation.
SFAS 123R requires companies to measure the cost of
employee services in exchange for an award of equity instruments
based on the grant-date fair value of the award. This statement
eliminates the use of the alternative intrinsic value method of
accounting that was allowed when SFAS 123 was originally
issued. The provisions of this statement were effective for the
Company beginning on January 1, 2006. The Company adopted
SFAS 123R using the modified retrospective method. Because
the Company retroactively adopted the fair value method in 2003,
the impact of expensing stock-based awards was
already recorded in the Companys financial results. In
conjunction with the adoption of SFAS 123R, the Company
recognized $13 million of incremental stock-based
compensation expense due to certain provisions that require
immediate recognition of the value of stock awards to employees
that meet retirement status, despite their continued active
employment. Upon adoption, the Company also changed its method
of expensing all new awards from an accelerated to a
straight-line attribution method. This methodology change for
expensing stock awards is expected to reduce expenses in 2006 by
approximately $33 million ($20 million after tax).
Accounting for Uncertainty in Income Taxes
In June 2006, the FASB issued
Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109, Accounting for
Income Taxes, effective for the Company beginning on
January 1, 2007. FIN 48 clarifies the accounting for
income taxes by prescribing the minimum recognition threshold a
tax position is required to meet before being recognized in the
financial statements. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. The Company is currently assessing the impact of
this guidance on its financial statements.
|
|
|
Note 3 |
|
Investment Securities |
The detail of the amortized cost, gross unrealized holding gains
and losses, and fair value of
held-to-maturity and
available-for-sale securities was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 | |
|
December 31, 2005 | |
|
|
| |
|
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Fair | |
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Fair | |
(Dollars in Millions) | |
|
Cost | |
|
Gains | |
|
Losses | |
|
Value | |
|
Cost | |
|
Gains | |
|
Losses | |
|
Value | |
|
Held-to-maturity (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
$8 |
|
|
|
$ |
|
|
|
$ |
|
|
|
$8 |
|
|
|
$8 |
|
|
|
$ |
|
|
|
$ |
|
|
|
$8 |
|
|
Obligations of state and political subdivisions
|
|
|
73 |
|
|
|
4 |
|
|
|
(1 |
) |
|
|
76 |
|
|
|
84 |
|
|
|
5 |
|
|
|
(1 |
) |
|
|
88 |
|
|
Other debt securities
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
|
|
Total held-to-maturity securities
|
|
|
$98 |
|
|
|
$4 |
|
|
|
$(1 |
) |
|
|
$101 |
|
|
|
$109 |
|
|
|
$5 |
|
|
|
$(1 |
) |
|
|
$113 |
|
|
Available-for-sale (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
|
|
$508 |
|
|
|
$1 |
|
|
|
$(15 |
) |
|
|
$494 |
|
|
|
$496 |
|
|
|
$2 |
|
|
|
$(9 |
) |
|
|
$489 |
|
|
Mortgage-backed securities
|
|
35,853 |
|
|
|
48 |
|
|
|
(1,738 |
) |
|
|
34,163 |
|
|
|
38,161 |
|
|
|
86 |
|
|
|
(733 |
) |
|
|
37,514 |
|
|
Asset-backed securities
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
Obligations of state and political subdivisions
|
|
|
2,801 |
|
|
|
1 |
|
|
|
(64 |
) |
|
|
2,738 |
|
|
|
640 |
|
|
|
3 |
|
|
|
(6 |
) |
|
|
637 |
|
|
Other securities and investments
|
|
|
961 |
|
|
|
5 |
|
|
|
(5 |
) |
|
|
961 |
|
|
|
1,012 |
|
|
|
2 |
|
|
|
(7 |
) |
|
|
1,007 |
|
|
|
|
|
Total available-for-sale securities
|
|
|
$40,131 |
|
|
|
$55 |
|
|
|
$(1,822 |
) |
|
|
$38,364 |
|
|
|
$40,321 |
|
|
|
$93 |
|
|
|
$(755 |
) |
|
|
$39,659 |
|
|
|
|
|
(a) |
|
Held-to-maturity
securities are carried at historical cost adjusted for
amortization of premiums and accretion of discounts. |
(b) |
|
Available-for-sale securities are carried at fair value with
unrealized net gains or losses reported within other
comprehensive income in shareholders equity. |
The weighted-average maturity of the available-for-sale
investment securities was 7.4 years at June 30, 2006,
compared with 6.1 years at December 31, 2005. The
corresponding weighted-average yields were 5.17 percent and
4.89 percent, respectively. The weighted-average maturity
of the held-to-maturity
investment securities was 8.4 years at June 30, 2006,
compared with 7.2 years at December 31, 2005. The
corresponding weighted-average yields were 6.37 percent and
6.44 percent, respectively.
Securities carried at $33.9 billion at June 30, 2006,
and $36.9 billion at December 31, 2005, were pledged
to secure public, private and trust deposits, repurchase
agreements and for other purposes required by law. Securities
sold under agreements to repurchase, where the buyer/lender has
the right to sell or pledge the securities, were collateralized
by securities with an amortized cost of $6.7 billion at
June 30, 2006, and $10.9 billion at December 31,
2005, respectively.
The following table provides information as to the amount of
interest income from taxable and non-taxable investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
(Dollars in Millions) | |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
Taxable
|
|
|
$475 |
|
|
|
$482 |
|
|
|
$951 |
|
|
|
$955 |
|
Non-taxable
|
|
|
25 |
|
|
|
4 |
|
|
|
39 |
|
|
|
7 |
|
|
|
|
Total interest income from investment securities
|
|
|
$500 |
|
|
|
$486 |
|
|
|
$990 |
|
|
|
$962 |
|
|
The following table provides information as to the amount of
gross gains and losses realized through the sales of
available-for-sale investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
(Dollars in Millions) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
Realized gains
|
|
|
$4 |
|
|
|
$1 |
|
|
|
$4 |
|
|
|
$12 |
|
Realized losses
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(70 |
) |
|
|
|
Net realized gains (losses)
|
|
|
$3 |
|
|
|
$1 |
|
|
|
$3 |
|
|
|
$(58 |
) |
|
|
|
Income tax (benefit) on realized gains (losses)
|
|
|
$1 |
|
|
|
$ |
|
|
|
$1 |
|
|
|
$(22 |
) |
|
For amortized cost, fair value and yield by maturity date of
held-to-maturity and
available-for-sale securities outstanding at June 30, 2006,
refer to Table 4 included in Managements Discussion and
Analysis which is incorporated by reference into these Notes to
Consolidated Financial Statements.
The following table shows the gross unrealized losses and fair
value of the Companys investments with unrealized losses
that are not deemed to be other-than-temporarily impaired which
have been in a continuous unrealized loss position at
June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months | |
|
12 Months or Greater | |
|
Total | |
|
|
| |
|
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
(Dollars in Millions) | |
|
Value | |
|
Losses | |
|
Value | |
|
Losses | |
|
Value | |
|
Losses | |
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Obligations of state and political subdivisions
|
|
|
16 |
|
|
|
(1 |
) |
|
|
2 |
|
|
|
|
|
|
|
18 |
|
|
|
(1 |
) |
|
Other debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$16 |
|
|
|
$(1 |
) |
|
|
$2 |
|
|
|
$ |
|
|
|
$18 |
|
|
|
$(1 |
) |
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
|
|
$447 |
|
|
|
$(15 |
) |
|
|
$5 |
|
|
|
$ |
|
|
|
$452 |
|
|
|
$(15 |
) |
|
Mortgage-backed securities
|
|
|
15,938 |
|
|
|
(768 |
) |
|
|
15,149 |
|
|
|
(970 |
) |
|
|
31,087 |
|
|
|
(1,738 |
) |
|
Asset-backed securities
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
Obligations of state and political subdivisions
|
|
|
2,615 |
|
|
|
(63 |
) |
|
|
28 |
|
|
|
(1 |
) |
|
|
2,643 |
|
|
|
(64 |
) |
|
Other securities and investments
|
|
|
86 |
|
|
|
|
|
|
|
312 |
|
|
|
(5 |
) |
|
|
398 |
|
|
|
(5 |
) |
|
|
|
|
Total
|
|
|
$19,094 |
|
|
|
$(846 |
) |
|
|
$15,494 |
|
|
|
$(976 |
) |
|
|
$34,588 |
|
|
|
$(1,822 |
) |
|
The Companys rationale, by investment category, for
determining if investments with unrealized losses that are not
deemed to be other-than-temporarily impaired at June 30,
2006, was as follows:
Held-to-Maturity
Obligations of state and political subdivisions
During the second quarter of
2006, the Company recorded an impairment of $1 million on a
municipal security with a balance of $2 million as it was
determined that the revenues supporting the security may not be
sufficient to make all contractual principal and interest
payments. The remaining unrealized losses were caused by
increases in interest rates. The issuers of these securities do
not have the contractual ability to pay off these securities at
less than par. The Company has the ability and intent to hold
these investments until maturity which is consistent with their
designation as held-to-maturity. Consequently, the Company does
not consider these investments to be other-than-temporarily
impaired as of June 30, 2006.
Available-for-Sale
U.S. Treasury and agencies
The unrealized losses on these
securities were caused solely by rising interest rates since
credit quality is not an issue for these types of securities.
None of these securities can be paid off for less than par at
maturity or any earlier call date. Because the Company has the
ability and intent to hold these securities until a recovery to
adjusted book value, they are not considered to be
other-than-temporarily impaired as of June 30, 2006.
Mortgage-backed securities
Substantially all of these
securities were issued by GNMA, FNMA and FHLMC, and the
remainder were privately issued with high investment grade
credit ratings. The unrealized losses for these securities were
caused by rising interest rates over the past few years. Given
the high credit quality of these investments, the Company fully
expects to receive all contractual cash flows. Because the
Company has the ability and intent to hold
these securities until a recovery to adjusted book value, they
are not considered to be other-than-temporarily impaired as of
June 30, 2006.
Obligations of state and political subdivisions
The unrealized losses were caused
by rising interest rates. These municipal securities are
investment grade credit quality with substantially all rated
AAA. None of these securities can be paid off for less than par
at maturity or any earlier call date. Because the Company has
the ability and intent to hold these securities until a recovery
to adjusted book value, they are not considered to be
other-than-temporarily impaired as of June 30, 2006.
Other securities and investments
The securities in this category
consist primarily of debt issued by major U.S. banks. The
losses are a result of a modest widening of credit spreads since
the initial purchase dates. Given the high credit quality of
these issuers, the Company expects to receive all contractual
cash flows. None of these securities can be paid off for less
than par at maturity or any earlier call date. Because the
Company has the ability and intent to hold these securities
until a recovery to adjusted book value, they are not considered
to be other-than-temporarily impaired as of June 30, 2006.
The composition of the loan portfolio was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 | |
|
December 31, 2005 | |
|
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
(Dollars in Millions) |
|
Amount | |
|
of Total | |
|
Amount | |
|
of Total | |
| |
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
$40,055 |
|
|
|
28.3 |
% |
|
|
$37,844 |
|
|
|
27.5 |
% |
|
Lease financing
|
|
|
5,314 |
|
|
|
3.8 |
|
|
|
5,098 |
|
|
|
3.7 |
|
|
|
|
|
|
Total commercial
|
|
|
45,369 |
|
|
|
32.1 |
|
|
|
42,942 |
|
|
|
31.2 |
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
19,966 |
|
|
|
14.1 |
|
|
|
20,272 |
|
|
|
14.7 |
|
|
Construction and development
|
|
|
8,596 |
|
|
|
6.1 |
|
|
|
8,191 |
|
|
|
6.0 |
|
|
|
|
|
|
Total commercial real estate
|
|
|
28,562 |
|
|
|
20.2 |
|
|
|
28,463 |
|
|
|
20.7 |
|
Residential mortgages
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
14,902 |
|
|
|
10.5 |
|
|
|
14,538 |
|
|
|
10.5 |
|
|
Home equity loans, first liens
|
|
|
6,161 |
|
|
|
4.4 |
|
|
|
6,192 |
|
|
|
4.5 |
|
|
|
|
|
|
Total residential mortgages
|
|
|
21,063 |
|
|
|
14.9 |
|
|
|
20,730 |
|
|
|
15.0 |
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
|
7,432 |
|
|
|
5.3 |
|
|
|
7,137 |
|
|
|
5.2 |
|
|
Retail leasing
|
|
|
7,092 |
|
|
|
5.0 |
|
|
|
7,338 |
|
|
|
5.3 |
|
|
Home equity and second mortgages
|
|
|
15,124 |
|
|
|
10.7 |
|
|
|
14,979 |
|
|
|
10.9 |
|
|
Other retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit
|
|
|
2,505 |
|
|
|
1.8 |
|
|
|
2,504 |
|
|
|
1.8 |
|
|
|
Installment
|
|
|
4,090 |
|
|
|
2.9 |
|
|
|
3,582 |
|
|
|
2.6 |
|
|
|
Automobile
|
|
|
8,257 |
|
|
|
5.8 |
|
|
|
8,112 |
|
|
|
5.9 |
|
|
|
Student
|
|
|
1,888 |
|
|
|
1.3 |
|
|
|
2,019 |
|
|
|
1.4 |
|
|
|
|
|
|
|
Total other retail
|
|
|
16,740 |
|
|
|
11.8 |
|
|
|
16,217 |
|
|
|
11.7 |
|
|
|
|
|
|
Total retail
|
|
|
46,388 |
|
|
|
32.8 |
|
|
|
45,671 |
|
|
|
33.1 |
|
|
|
|
|
|
|
Total loans
|
|
|
$141,382 |
|
|
|
100.0 |
% |
|
|
$137,806 |
|
|
|
100.0 |
% |
|
Loans are presented net of unearned interest and deferred fees
and costs, which amounted to $1.3 billion at June 30,
2006, and December 31, 2005.
|
|
|
Note 5 |
|
Mortgage Servicing Rights |
The Companys portfolio of residential mortgages serviced
for others was $76.4 billion and $69.0 billion at
June 30, 2006, and December 31, 2005, respectively.
Effective January 1, 2006, the Company early adopted
SFAS 156 and elected the fair value measurement method for
MSRs. The fair value measurement method requires MSRs to be
recorded initially at fair value, if practicable, and at each
subsequent reporting date. In accordance with SFAS 156 the
changes in fair value are to be recorded in earnings in the
period in which they occur. Prior to the adoption of
SFAS 156, the initial carrying value of MSRs was amortized
in proportion to, and over the period of, estimated net
servicing revenue and recorded in noninterest expense as
amortization of intangible assets.
Beginning in March 2006, the Company began entering into
U.S. Treasury futures and options on U.S. Treasury
futures contracts to offset the change in fair value of the
MSRs. Changes in fair value related to the MSRs and the futures
and options contracts, as well as, servicing and other related
fees are recorded in mortgage banking revenue. The Company
recorded $80 million and $156 million of servicing and
other related fees revenue in the second quarter and first six
months of 2006, respectively. Changes in fair value of
capitalized MSRs are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
(Dollars in Millions) |
|
June 30, 2006 | |
|
June 30, 2006 | |
| |
Balance at beginning of period
|
|
|
$1,228 |
|
|
|
$1,123 |
|
|
Rights purchased
|
|
|
1 |
|
|
|
47 |
|
|
Rights capitalized
|
|
|
99 |
|
|
|
170 |
|
|
Changes in fair value of MSRs:
|
|
|
|
|
|
|
|
|
|
|
Due to change in valuation assumptions (a)
|
|
|
38 |
|
|
|
71 |
|
|
|
Other changes in fair value (b)
|
|
|
(43 |
) |
|
|
(88 |
) |
|
|
|
Balance at end of period
|
|
|
$1,323 |
|
|
|
$1,323 |
|
|
|
|
|
(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. |
The Company determines fair value by estimating the present
value of the assets future cash flows utilizing
market-based prepayment rates, discount rates, and other
assumptions validated through comparison to trade information,
industry surveys, and independent third party appraisals. Risks
inherent in the MSRs valuation include higher than expected
prepayment rates and/or delayed receipt of cash flows. In March
2006, the Company implemented a program utilizing 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
June 30, 2006, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Down Scenario | |
|
Up Scenario | |
|
|
| |
(Dollars in Millions) |
|
50 bps | |
|
25 bps | |
|
25 bps | |
|
50 bps | |
| |
Net fair value
|
|
|
$(22 |
) |
|
|
$(6 |
) |
|
|
$(2 |
) |
|
|
$(15 |
) |
|
The fair value of MSRs and its sensitivity to changes in
interest rates is influenced by the mix of the servicing
portfolio and characteristics of each segment of the portfolio.
The Companys 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 loan
programs tend to experience slower prepayment speeds 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 Companys MSRs and related characteristics
by portfolio as of June 30, 2006, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions) |
|
MRBP | |
|
Government | |
|
Conventional | |
|
Total | |
| |
Servicing portfolio
|
|
|
$7,034 |
|
|
|
$8,603 |
|
|
|
$60,738 |
|
|
|
$76,375 |
|
Fair market value
|
|
|
$138 |
|
|
|
$163 |
|
|
|
$1,022 |
|
|
|
$1,323 |
|
Value (bps)*
|
|
|
196 |
|
|
|
189 |
|
|
|
168 |
|
|
|
173 |
|
Weighted-average servicing fees (bps)
|
|
|
41 |
|
|
|
44 |
|
|
|
35 |
|
|
|
37 |
|
Multiple (value/servicing fees)
|
|
|
4.78 |
|
|
|
4.30 |
|
|
|
4.80 |
|
|
|
4.68 |
|
Weighted-average note rate
|
|
|
5.94 |
% |
|
|
6.07 |
% |
|
|
5.77 |
% |
|
|
5.82 |
% |
Age (in years)
|
|
|
3.6 |
|
|
|
2.9 |
|
|
|
2.3 |
|
|
|
2.5 |
|
Expected life (in years)
|
|
|
7.8 |
|
|
|
7.3 |
|
|
|
7.9 |
|
|
|
7.8 |
|
Discount rate
|
|
|
11.5 |
% |
|
|
11.3 |
% |
|
|
10.6 |
% |
|
|
10.8 |
% |
|
|
|
|
* |
|
Value is calculated as fair market value divided by the
servicing portfolio. |
|
|
|
Note 6 |
|
Earnings Per Common Share |
The components of earnings per common share were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
(Dollars and Shares in Millions, Except Per Share Data) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Net income
|
|
|
$1,201 |
|
|
|
$1,121 |
|
|
|
$2,354 |
|
|
|
$2,192 |
|
Preferred dividends
|
|
|
(17 |
) |
|
|
|
|
|
|
(17 |
) |
|
|
|
|
|
|
|
Net income applicable to common equity
|
|
|
$1,184 |
|
|
|
$1,121 |
|
|
|
$2,337 |
|
|
|
$2,192 |
|
Average common shares outstanding
|
|
|
1,781 |
|
|
|
1,833 |
|
|
|
1,791 |
|
|
|
1,842 |
|
Net effect of the assumed purchase of stock based on the
treasury stock method for options and
stock plans
|
|
|
24 |
|
|
|
24 |
|
|
|
25 |
|
|
|
27 |
|
|
|
|
Average diluted common shares outstanding
|
|
|
1,805 |
|
|
|
1,857 |
|
|
|
1,816 |
|
|
|
1,869 |
|
|
|
|
Earnings per common share
|
|
|
$.66 |
|
|
|
$.61 |
|
|
|
$1.30 |
|
|
|
$1.19 |
|
Diluted earnings per common share
|
|
|
$.66 |
|
|
|
$.60 |
|
|
|
$1.29 |
|
|
|
$1.17 |
|
|
Options to purchase 4 million and 38 million
common shares for the three months ended June 30, 2006 and
2005, respectively, and 4 million and 17 million
common shares for the six months ended June 30, 2006 and
2005, respectively, were outstanding but not included in the
computation of diluted earnings per common share because they
were antidilutive.
The components of net periodic benefit cost (income) for the
Companys retirement plans were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
|
|
|
Post Retirement | |
|
|
|
Post Retirement | |
|
|
Pension Plans | |
|
Medical Plans | |
|
Pension Plans | |
|
Medical Plans | |
|
|
| |
(Dollars in Millions) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Components of net periodic benefit cost (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
|
$18 |
|
|
|
$16 |
|
|
|
$1 |
|
|
|
$1 |
|
|
|
$36 |
|
|
|
$32 |
|
|
|
$2 |
|
|
|
$2 |
|
|
Interest cost
|
|
|
29 |
|
|
|
28 |
|
|
|
4 |
|
|
|
4 |
|
|
|
59 |
|
|
|
56 |
|
|
|
7 |
|
|
|
8 |
|
|
Expected return on plan assets
|
|
|
(47 |
) |
|
|
(48 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(95 |
) |
|
|
(97 |
) |
|
|
|
|
|
|
(1 |
) |
|
Net amortization and deferral
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
Recognized actuarial loss
|
|
|
22 |
|
|
|
14 |
|
|
|
|
|
|
|
1 |
|
|
|
45 |
|
|
|
29 |
|
|
|
|
|
|
|
1 |
|
|
|
|
Net periodic benefit cost (income)
|
|
|
$21 |
|
|
|
$9 |
|
|
|
$5 |
|
|
|
$5 |
|
|
|
$42 |
|
|
|
$17 |
|
|
|
$9 |
|
|
|
$10 |
|
|
|
|
|
Note 8 |
|
Stock-based Compensation |
As part of its employee and director compensation programs, the
Company may grant certain stock awards under the provisions of
the existing stock compensation plans, including plans assumed
in acquisitions. The plans provide for grants of options to
purchase shares of common stock at a fixed price equal to the
fair value of the underlying stock at the date of grant. Option
grants are generally exercisable up to ten years from the date
of grant. In addition, the plans provide for grants of shares of
common stock or stock units that are subject to restriction on
transfer prior to vesting. Most stock awards vest over three to
five years and are subject to forfeiture if certain vesting
requirements are not met. At June 30, 2006, there were
13 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
|
|
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
|
|
|
Weighted- | |
|
Average | |
|
Aggregate | |
|
|
|
Weighted- | |
|
Average | |
|
Aggregate | |
|
|
|
|
Average | |
|
Remaining | |
|
Intrinsic | |
|
|
|
Average | |
|
Remaining | |
|
Intrinsic | |
|
|
Stock | |
|
Exercise | |
|
Contractual | |
|
Value | |
|
Stock | |
|
Exercise | |
|
Contractual | |
|
Value | |
Three Months Ended June 30, |
|
Options/Shares | |
|
Price | |
|
Term | |
|
(in millions) | |
|
Options/Shares | |
|
Price | |
|
Term | |
|
(in millions) | |
| |
Stock option plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number outstanding at beginning of period
|
|
|
128,459,228 |
|
|
|
$25.08 |
|
|
|
|
|
|
|
|
|
|
|
140,842,422 |
|
|
|
$24.03 |
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
678,767 |
|
|
|
31.16 |
|
|
|
|
|
|
|
|
|
|
|
909,032 |
|
|
|
29.13 |
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(9,440,942 |
) |
|
|
22.52 |
|
|
|
|
|
|
|
|
|
|
|
(3,131,672 |
) |
|
|
20.70 |
|
|
|
|
|
|
|
|
|
|
Cancelled (a)
|
|
|
(982,713 |
) |
|
|
27.52 |
|
|
|
|
|
|
|
|
|
|
|
(639,170 |
) |
|
|
24.44 |
|
|
|
|
|
|
|
|
|
|
|
|
Number outstanding at end of period (b)
|
|
|
118,714,340 |
|
|
|
$25.30 |
|
|
|
5.2 |
|
|
|
$663 |
|
|
|
137,980,612 |
|
|
|
$24.14 |
|
|
|
5.5 |
|
|
|
$930 |
|
Exercisable at end of period
|
|
|
88,362,876 |
|
|
|
$24.32 |
|
|
|
4.0 |
|
|
|
$580 |
|
|
|
100,363,009 |
|
|
|
$23.74 |
|
|
|
4.6 |
|
|
|
$717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
|
|
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
|
|
|
Weighted- | |
|
Average | |
|
Aggregate | |
|
|
|
Weighted- | |
|
Average | |
|
Aggregate | |
|
|
|
|
Average | |
|
Remaining | |
|
Intrinsic | |
|
|
|
Average | |
|
Remaining | |
|
Intrinsic | |
|
|
Stock | |
|
Exercise | |
|
Contractual | |
|
Value | |
|
Stock | |
|
Exercise | |
|
Contractual | |
|
Value | |
Six Months Ended June 30, |
|
Options/Shares | |
|
Price | |
|
Term | |
|
(in millions) | |
|
Options/Shares | |
|
Price | |
|
Term | |
|
(in millions) | |
| |
Stock option plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number outstanding at beginning of period
|
|
|
125,983,461 |
|
|
|
$24.38 |
|
|
|
|
|
|
|
|
|
|
|
134,727,285 |
|
|
|
$23.41 |
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
12,000,109 |
|
|
|
30.05 |
|
|
|
|
|
|
|
|
|
|
|
12,191,833 |
|
|
|
30.15 |
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(17,801,534 |
) |
|
|
21.82 |
|
|
|
|
|
|
|
|
|
|
|
(7,397,036 |
) |
|
|
20.72 |
|
|
|
|
|
|
|
|
|
|
Cancelled (a)
|
|
|
(1,467,696 |
) |
|
|
27.41 |
|
|
|
|
|
|
|
|
|
|
|
(1,541,470 |
) |
|
|
24.46 |
|
|
|
|
|
|
|
|
|
|
|
|
Number outstanding at end of period (b)
|
|
|
118,714,340 |
|
|
|
$25.30 |
|
|
|
5.2 |
|
|
|
$663 |
|
|
|
137,980,612 |
|
|
|
$24.14 |
|
|
|
5.5 |
|
|
|
$930 |
|
Exercisable at end of period
|
|
|
88,362,876 |
|
|
|
$24.32 |
|
|
|
4.0 |
|
|
|
$580 |
|
|
|
100,363,009 |
|
|
|
$23.74 |
|
|
|
4.6 |
|
|
|
$717 |
|
|
|
|
|
(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. |
The weighted-average grant-date fair value of options granted
was $6.00 and $6.35 for the three months ended June 30,
2006 and 2005, respectively, and was $6.32 and $6.68 for the six
months ended June 30, 2006 and 2005, respectively. The
total intrinsic value of options exercised was $82 million
and $27 million for the three months ended June 30,
2006 and 2005, respectively, and was $162 million and
$68 million for the six months ended June 30, 2006 and
2005, respectively. The total fair value of option shares vested
was $9 million and $8 million for the three months
ended June 30, 2006 and 2005, respectively, and was
$49 million and $53 million for the six months ended
June 30, 2006 and 2005, respectively.
Cash received from option exercises under all share-based
payment arrangements was $212 million and $65 million
for the three months ended June 30, 2006 and 2005,
respectively, and was $388 million and $153 million
for the six months ended June 30, 2006 and 2005,
respectively. The tax benefit realized for the tax deductions
from option exercises of the share-based payment arrangements
totaled $31 million and $10 million for the three
months ended June 30, 2006 and 2005, respectively, and
totaled $61 million and $25 million for the six
months ended June 30, 2006 and 2005, respectively. To
satisfy share option exercises, the Company predominantly uses
treasury stock.
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. The following table includes
the assumptions utilized by the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Risk-free interest rate
|
|
|
4.3 |
% |
|
|
3.6 |
% |
|
|
4.3 |
% |
|
|
3.6 |
% |
Dividend yield
|
|
|
4.0 |
% |
|
|
3.5 |
% |
|
|
4.0 |
% |
|
|
3.5 |
% |
Stock volatility factor
|
|
|
.28 |
|
|
|
.29 |
|
|
|
.28 |
|
|
|
.29 |
|
Expected life of options (in years)
|
|
|
5.4 |
|
|
|
5.4 |
|
|
|
5.4 |
|
|
|
5.4 |
|
|
Expected stock volatility is based on several factors including
the historical volatility of the Companys 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
Companys expected dividend yield over the life of the
options.
Additional information regarding stock options outstanding as of
June 30, 2006, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Exercisable Options | |
|
|
| |
|
|
|
|
Weighted- | |
|
|
|
|
|
|
Average | |
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
|
Remaining | |
|
Average | |
|
|
|
Average | |
|
|
|
|
Contractual | |
|
Exercise | |
|
|
|
Exercise | |
Range of Exercise Prices |
|
Shares | |
|
Life (Years) | |
|
Price | |
|
Shares | |
|
Price | |
| |
$5.05 - $10.00
|
|
|
31,469 |
|
|
|
.7 |
|
|
|
$8.05 |
|
|
|
31,469 |
|
|
|
$8.05 |
|
$10.01 - $15.00
|
|
|
739,936 |
|
|
|
2.3 |
|
|
|
12.14 |
|
|
|
739,936 |
|
|
|
12.14 |
|
$15.01 - $20.00
|
|
|
16,047,010 |
|
|
|
4.7 |
|
|
|
18.80 |
|
|
|
15,745,797 |
|
|
|
18.79 |
|
$20.01 - $25.00
|
|
|
44,171,250 |
|
|
|
4.7 |
|
|
|
22.35 |
|
|
|
38,473,296 |
|
|
|
22.47 |
|
$25.01 - $30.00
|
|
|
42,701,863 |
|
|
|
5.4 |
|
|
|
29.02 |
|
|
|
26,756,634 |
|
|
|
28.71 |
|
$30.01 - $35.00
|
|
|
14,746,285 |
|
|
|
6.6 |
|
|
|
30.93 |
|
|
|
6,339,217 |
|
|
|
31.74 |
|
$35.01 - $36.95
|
|
|
276,527 |
|
|
|
.9 |
|
|
|
35.89 |
|
|
|
276,527 |
|
|
|
35.89 |
|
|
|
|
|
|
|
118,714,340 |
|
|
|
5.2 |
|
|
|
$25.30 |
|
|
|
88,362,876 |
|
|
|
$24.32 |
|
|
A summary of the status of the Companys restricted shares
of stock is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, | |
|
Six Months Ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
|
|
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
|
Average | |
|
|
|
Average | |
|
|
|
Average | |
|
|
|
Average | |
|
|
|
|
Grant- | |
|
|
|
Grant- | |
|
|
|
Grant- | |
|
|
|
Grant- | |
|
|
|
|
Date | |
|
|
|
Date | |
|
|
|
Date | |
|
|
|
Date | |
|
|
Shares | |
|
Fair Value | |
|
Shares | |
|
Fair Value | |
|
Shares | |
|
Fair Value | |
|
Shares | |
|
Fair Value | |
| |
Nonvested shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number outstanding at beginning of period
|
|
|
3,037,250 |
|
|
|
$27.26 |
|
|
|
2,817,001 |
|
|
|
$26.45 |
|
|
|
2,644,171 |
|
|
|
$26.73 |
|
|
|
2,265,625 |
|
|
|
$25.06 |
|
|
Granted
|
|
|
138,758 |
|
|
|
31.04 |
|
|
|
82,276 |
|
|
|
29.14 |
|
|
|
990,250 |
|
|
|
30.13 |
|
|
|
990,618 |
|
|
|
30.04 |
|
|
Cancelled/vested
|
|
|
(57,189 |
) |
|
|
26.33 |
|
|
|
(50,540 |
) |
|
|
26.62 |
|
|
|
(480,581 |
) |
|
|
28.89 |
|
|
|
(385,956 |
) |
|
|
26.78 |
|
|
Forfeited
|
|
|
(100,505 |
) |
|
|
29.19 |
|
|
|
(22,321 |
) |
|
|
29.27 |
|
|
|
(135,526 |
) |
|
|
29.25 |
|
|
|
(43,871 |
) |
|
|
29.04 |
|
|
|
|
Number outstanding at end of period
|
|
|
3,018,314 |
|
|
|
$27.39 |
|
|
|
|