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 September 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 October 31, 2006
1,757,859,766 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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Nine Months Ended | |
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September 30, | |
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September 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 | |
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Change | |
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Condensed Income Statement
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Net interest income (taxable-equivalent basis)(a)
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$1,673 |
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|
$1,791 |
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(6.6 |
)% |
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$5,095 |
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|
$5,303 |
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(3.9 |
)% |
Noninterest income
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|
1,748 |
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|
1,575 |
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11.0 |
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5,114 |
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4,556 |
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12.2 |
|
Securities gains (losses), net
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1 |
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* |
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3 |
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(57 |
) |
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* |
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Total net revenue
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3,421 |
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3,367 |
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1.6 |
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10,212 |
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9,802 |
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4.2 |
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Noninterest expense
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1,538 |
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|
1,473 |
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4.4 |
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4,568 |
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4,399 |
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3.8 |
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Provision for credit losses
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135 |
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145 |
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(6.9 |
) |
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375 |
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461 |
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(18.7 |
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Income before taxes
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1,748 |
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1,749 |
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(.1 |
) |
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5,269 |
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4,942 |
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6.6 |
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Taxable-equivalent adjustment
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13 |
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9 |
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44.4 |
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34 |
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23 |
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47.8 |
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Applicable income taxes
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532 |
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586 |
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(9.2 |
) |
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1,678 |
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1,573 |
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6.7 |
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Net income
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$1,203 |
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$1,154 |
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4.2 |
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$3,557 |
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$3,346 |
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6.3 |
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Net income applicable to common equity
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$1,187 |
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$1,154 |
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2.9 |
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$3,524 |
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$3,346 |
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5.3 |
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Per Common Share
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Earnings per share
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$.67 |
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$.63 |
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6.3 |
% |
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$1.98 |
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$1.82 |
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8.8 |
% |
Diluted earnings per share
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.66 |
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.62 |
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6.5 |
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1.95 |
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1.80 |
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8.3 |
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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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.99 |
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.90 |
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10.0 |
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Book value per share
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11.30 |
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10.93 |
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3.4 |
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Market value per share
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33.22 |
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28.08 |
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18.3 |
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Average common shares outstanding
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1,771 |
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1,823 |
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(2.9 |
) |
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1,784 |
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1,836 |
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(2.8 |
) |
Average diluted common shares outstanding
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1,796 |
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1,849 |
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(2.9 |
) |
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1,809 |
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1,862 |
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(2.8 |
) |
Financial Ratios
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Return on average assets
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2.23 |
% |
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2.23 |
% |
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2.24 |
% |
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2.22 |
% |
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Return on average common equity
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23.6 |
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22.8 |
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23.7 |
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22.5 |
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Net interest margin (taxable-equivalent basis)(a)
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3.56 |
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3.95 |
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3.68 |
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4.00 |
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Efficiency ratio(b)
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45.0 |
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43.8 |
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44.7 |
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44.6 |
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Average Balances
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Loans
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$142,894 |
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$135,283 |
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5.6 |
% |
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$141,059 |
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$131,432 |
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7.3 |
% |
Loans held for sale
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2,448 |
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2,038 |
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20.1 |
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2,062 |
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1,723 |
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19.7 |
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Investment securities
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39,806 |
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41,782 |
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(4.7 |
) |
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39,858 |
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42,308 |
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(5.8 |
) |
Earning assets
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187,190 |
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180,452 |
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3.7 |
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185,075 |
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176,851 |
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4.7 |
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Assets
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214,089 |
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205,667 |
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4.1 |
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212,188 |
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201,505 |
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5.3 |
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Noninterest-bearing deposits
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28,220 |
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29,434 |
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(4.1 |
) |
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28,666 |
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29,003 |
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(1.2 |
) |
Deposits
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119,975 |
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120,984 |
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(.8 |
) |
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120,456 |
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120,552 |
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(.1 |
) |
Short-term borrowings
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23,601 |
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22,248 |
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6.1 |
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23,398 |
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18,313 |
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27.8 |
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Long-term debt
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41,892 |
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35,633 |
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17.6 |
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40,462 |
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36,016 |
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12.3 |
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Shareholders equity
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20,917 |
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20,106 |
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4.0 |
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20,543 |
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19,911 |
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3.2 |
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September 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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$144,408 |
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$137,806 |
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4.8 |
% |
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Allowance for credit losses
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2,256 |
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2,251 |
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.2 |
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Investment securities
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39,520 |
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39,768 |
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(.6 |
) |
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Assets
|
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216,855 |
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|
209,465 |
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3.5 |
|
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Deposits
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120,961 |
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|
124,709 |
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(3.0 |
) |
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Long-term debt
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41,230 |
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37,069 |
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11.2 |
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Shareholders equity
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20,926 |
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20,086 |
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4.2 |
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Regulatory capital ratios
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Tier 1 capital
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8.8 |
% |
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8.2 |
% |
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Total risk-based capital
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13.0 |
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12.5 |
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Leverage
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8.3 |
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7.6 |
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Tangible common equity
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5.4 |
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5.9 |
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* |
|
Not meaningful. |
(a) |
|
Presented on a fully taxable-equivalent basis utilizing a tax
rate of 35 percent. |
(b) |
|
Computed as noninterest expense divided by the sum of net
interest income on a taxable-equivalent basis and noninterest
income excluding securities gains (losses), net. |
Managements Discussion and Analysis
OVERVIEW
Earnings Summary
U.S. Bancorp and its
subsidiaries (the Company) reported net income of
$1,203 million for the third quarter of 2006, compared with
$1,154 million for the third quarter of 2005. Net income of
$.66 per diluted common share in the third quarter of 2006
was higher than the same period of 2005 by $.04
(6.5 percent). Return on average assets and return on
average common equity were 2.23 percent and
23.6 percent, respectively, for the third quarter of 2006,
compared with returns of 2.23 percent and
22.8 percent, respectively, for the third quarter of 2005.
The Companys results for the third quarter of 2006
improved over the same period of 2005, as net income increased
by $49 million (4.2 percent), primarily due to strong
growth in fee-based revenues and the benefit of a lower
effective tax rate from a year ago. This was offset somewhat by
lower net interest income and the additional operating costs of
acquired businesses.
Total net revenue, on a taxable-equivalent basis, for the third
quarter of 2006, was $54 million (1.6 percent) higher
than the third quarter of 2005, primarily reflecting a
10.9 percent increase in noninterest income, partially
offset by a 6.6 percent decline in net interest income.
Noninterest income growth was driven by organic business growth
and expansion in trust and payment processing businesses.
Noninterest income also included a gain related to the sale of
equity interests in a card 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.
Total noninterest expense in the third quarter of 2006 was
$65 million (4.4 percent) higher than the third
quarter of 2005, primarily reflecting incremental operating and
business integration costs associated with recent acquisitions,
increased pension costs and higher operating costs 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. The efficiency ratio (the ratio of noninterest
expense to taxable-equivalent net revenue excluding net
securities gains or losses) was 45.0 percent for the third
quarter of 2006, compared with 43.8 percent for the third
quarter of 2005.
The provision for credit losses for the third quarter of 2006
decreased $10 million (6.9 percent), compared with the
third 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 third
quarter of 2006 were $135 million, compared with
$156 million in the third 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 $3,557 million for the
first nine months of 2006, compared with $3,346 million for
the first nine months of 2005. Net income of $1.95 per
diluted common share in the first nine months of 2006 was higher
than the same period of 2005 by $.15 (8.3 percent). Return
on average assets and return on average common equity were
2.24 percent and 23.7 percent, respectively, for the
first nine months of 2006, compared with returns of
2.22 percent and 22.5 percent, respectively, for the
first nine months of 2005. The Companys results for the
first nine months of 2006 improved over the same period of 2005,
as net income rose by $211 million (6.3 percent),
primarily due to strong growth in fee-based revenues and lower
credit-related costs. This was offset somewhat by lower net
interest income and incremental operating and integration costs
of acquired businesses.
Total net revenue, on a taxable-equivalent basis, for the first
nine months of 2006, was $410 million (4.2 percent)
higher than the first nine months of 2005, primarily reflecting
a 13.7 percent increase in noninterest income, partially
offset by a 3.9 percent decline in net interest income.
Noninterest income growth was driven by organic business growth,
expansion in trust and payment processing businesses, higher
trading income, and equity gains from the initial public
offering and subsequent sale of the equity interest of a card
association during the second and third quarters of 2006,
respectively. These favorable changes in noninterest income
categories were partially offset by
lower mortgage banking revenue due to the impact of adopting
SFAS 156, effective in the first quarter of 2006. In
addition, there was a $60 million favorable change in net
securities gains (losses) as compared with the first nine months
of 2005.
Total noninterest expense in the first nine months of 2006 was
$169 million (3.8 percent) higher than the first nine
months of 2005, primarily reflecting incremental operating and
business integration costs associated with recent acquisitions,
increased pension costs and higher operating costs related to
certain investments. This was partially offset by lower
intangible expense due to the adoption of SFAS 156 and
lower debt prepayment expense. The efficiency ratio was
44.7 percent for the first nine months of 2006, compared
with 44.6 percent for the first nine months of 2005.
The provision for credit losses for the first nine months of
2006 decreased $86 million (18.7 percent), compared
with the first nine months of 2005. The decrease in the
provision for credit losses year-over-year primarily reflected
strong credit quality and lower net charge-offs relative to
2005. Net charge-offs in the first nine months of 2006 were
$375 million, compared with $472 million in the first
nine 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 offset somewhat by lower commercial loan recoveries
relative to the first nine months 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
$1,673 million in the third quarter of 2006, compared with
$1,791 million in the third quarter of 2005. Net interest
income, on a taxable-equivalent basis, was $5,095 million
in the first nine months of 2006, compared with
$5,303 million in the first nine months of 2005. Average
earning assets increased $6.7 billion (3.7 percent)
and $8.2 billion (4.7 percent) in the third quarter
and first nine months of 2006, respectively, compared with the
same periods of 2005. The increases in average earning assets
were primarily driven by growth in total average 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 third quarter and first
nine months of 2006 was 3.56 percent and 3.68 percent,
respectively, compared with 3.95 percent and
4.00 percent, respectively, for the same periods of 2005.
The year-over-year decline in the net interest margin for the
third quarter and first nine months of 2006 reflected the
competitive lending environment, 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 24 basis points in the
third quarter and 22 basis points in the first nine months
of 2006 across most lending products due to competitive pricing
and a change in mix reflecting growth in lower-spread,
fixed-rate credit products and noninterest-bearing corporate
card balances. 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. Beginning in the
third quarter of 2006, the Federal Reserve Bank paused from its
policies of increasing interest rates and tightening the money
supply. If the Federal Reserve Bank leaves rates unchanged over
the next several quarters, the Company expects net interest
margin to stabilize as asset repricing occurs and funding costs
moderate. 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 third quarter and first nine months of
2006 were higher by $7.6 billion (5.6 percent) and
$9.6 billion (7.3 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 third quarter and first
nine months of 2006 were $2.0 billion (4.7 percent)
and $2.5 billion (5.8 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 prepayments and maturities of securities and a reduced
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. 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 third quarter and
first nine months of 2006 decreased $1.2 billion
(4.1 percent) and $337 million (1.2 percent),
respectively, compared with the same periods of 2005, reflecting
a decline in business demand deposits as these customers reduce
excess liquidity to fund business growth. The change also
reflects a migration of customers to interest-bearing products
given rising interest rates.
Average total savings products declined year-over-year by
$1.7 billion (3.0 percent) in the third quarter and
$2.4 billion (4.2 percent) in the first nine months of
2006, compared with the same periods of 2005, due to reductions
in average money market savings and other savings accounts,
partially offset by an increase in interest checking balances.
Average money market savings 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. A
portion of branch-based money market savings accounts have
migrated to fixed-rate time certificates to take advantage of
higher interest rates for these products.
Average time certificates of deposit less than $100,000 were
higher by $604 million (4.6 percent) and
$556 million (4.2 percent) in the third quarter and
first nine months of 2006, respectively, compared with the same
periods of 2005. Average time deposits greater than $100,000
grew $1.3 billion (6.2 percent) and $2.1 billion
(10.5 percent) in the third quarter and first nine months
of 2006, respectively, compared with the same periods of 2005.
This growth was broad-based across most areas of the Company
including: branch banking, commercial 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 third quarter and first nine months of 2006
decreased $10 million (6.9 percent) and
$86 million (18.7 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 third quarter and first nine months of 2006 were
$135 million and $375 million, respectively, compared
with $156 million and $472 million in the third
quarter and first nine 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.
|
|
|
Table 2 |
|
Noninterest Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
September 30, | |
|
|
|
|
|
|
|
|
|
|
Percent | |
|
|
|
|
Percent | |
(Dollars in Millions) |
|
2006 | |
|
2005 | |
|
Change | |
|
|
2006 | |
|
2005 | |
|
Change | |
|
|
|
|
Credit and debit card revenue
|
|
|
$206 |
|
|
|
$185 |
|
|
|
11.4 |
% |
|
|
|
$590 |
|
|
|
$516 |
|
|
|
14.3 |
% |
Corporate payment products revenue
|
|
|
150 |
|
|
|
135 |
|
|
|
11.1 |
|
|
|
|
416 |
|
|
|
362 |
|
|
|
14.9 |
|
ATM processing services
|
|
|
63 |
|
|
|
64 |
|
|
|
(1.6 |
) |
|
|
|
183 |
|
|
|
168 |
|
|
|
8.9 |
|
Merchant processing services
|
|
|
253 |
|
|
|
200 |
|
|
|
26.5 |
|
|
|
|
719 |
|
|
|
576 |
|
|
|
24.8 |
|
Trust and investment management fees
|
|
|
305 |
|
|
|
251 |
|
|
|
21.5 |
|
|
|
|
916 |
|
|
|
751 |
|
|
|
22.0 |
|
Deposit service charges
|
|
|
268 |
|
|
|
246 |
|
|
|
8.9 |
|
|
|
|
764 |
|
|
|
690 |
|
|
|
10.7 |
|
Treasury management fees
|
|
|
111 |
|
|
|
109 |
|
|
|
1.8 |
|
|
|
|
334 |
|
|
|
333 |
|
|
|
.3 |
|
Commercial products revenue
|
|
|
100 |
|
|
|
103 |
|
|
|
(2.9 |
) |
|
|
|
311 |
|
|
|
299 |
|
|
|
4.0 |
|
Mortgage banking revenue
|
|
|
68 |
|
|
|
111 |
|
|
|
(38.7 |
) |
|
|
|
167 |
|
|
|
323 |
|
|
|
(48.3 |
) |
Investment products fees and commissions
|
|
|
34 |
|
|
|
37 |
|
|
|
(8.1 |
) |
|
|
|
114 |
|
|
|
115 |
|
|
|
(.9 |
) |
Securities gains (losses), net
|
|
|
|
|
|
|
1 |
|
|
|
* |
|
|
|
|
3 |
|
|
|
(57 |
) |
|
|
* |
|
Other
|
|
|
190 |
|
|
|
134 |
|
|
|
41.8 |
|
|
|
|
600 |
|
|
|
423 |
|
|
|
41.8 |
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
$1,748 |
|
|
|
$1,576 |
|
|
|
10.9 |
% |
|
|
|
$5,117 |
|
|
|
$4,499 |
|
|
|
13.7 |
% |
|
|
|
|
Noninterest Income
Noninterest income in the
third quarter and first nine months of 2006 was
$1,748 million and $5,117 million, respectively,
compared with $1,576 million and $4,499 million in the
same periods of 2005. The $172 million (10.9 percent)
increase during the third quarter and $618 million
(13.7 percent) increase during the first nine months of
2006, compared with the same periods in 2005, were driven by
favorable variances in the majority of fee income categories and
a gain on the sale of equity interests in a card association
included in other income. The increase in noninterest income for
the first nine months of 2006 also reflected the impact of
higher trading income related to certain derivatives and a gain
from the initial public offering of a card association recorded
in the current year, and a favorable variance in securities
gains (losses) of $60 million related to net securities
losses recorded in the prior year. This strong growth in
fee-based 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 and acquired business expansion. ATM
processing services revenue for the first nine months of 2006
was higher due to the acquisition of an ATM business in May of
2005. Merchant processing services revenue growth reflected an
increase in sales volume driven by acquisitions, higher same
store sales, rates and equipment fees. Trust and investment
management fees increased in the third quarter and first nine
months year-over-year, primarily due to the acquisition of the
corporate and institutional trust business of a large national
bank, account growth and favorable equity market conditions.
Deposit service charges grew year-over-year due to increased
transaction-related fees and the impact of net new checking
accounts. Other income for the third quarter and first nine
months of 2006 was higher than the same periods of 2005 due to a
$32 million gain on the sale of equity interests in a card
association and an increase in other equity investment revenue.
In addition, other income for the first nine months of 2006 was
higher due to a $44 million gain on certain interest rate
swaps, a $35 million gain from the initial public offering
of a card association,
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
(MSRs) under SFAS 156.
Noninterest Expense
Noninterest expense was
$1,538 million and $4,568 million, respectively, in
the third quarter and first nine months of 2006, an increase of
$65 million (4.4 percent) and $169 million
(3.8 percent), respectively, from the same periods of 2005.
Compensation expense was higher
year-over-year in the
third quarter and first nine months of 2006, primarily due to
the corporate and institutional trust and payments processing
acquisitions and other growth initiatives. Employee benefits
increased year-over-year primarily as a result of higher pension
costs. Net occupancy and equipment expense increased from the
same periods of 2005 primarily due to business expansion.
Professional services expense was higher year-over-year
primarily due to business development initiatives, regulatory
and legal costs. Technology and communications expense rose due
to higher outside data
|
|
|
Table 3 |
|
Noninterest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
September 30, | |
|
|
|
|
|
|
|
|
Percent | |
|
|
|
|
Percent | |
(Dollars in Millions) |
|
2006 | |
|
2005 | |
|
Change | |
|
|
2006 | |
|
2005 | |
|
Change | |
|
|
|
|
Compensation
|
|
|
$632 |
|
|
|
$603 |
|
|
|
4.8 |
% |
|
|
|
$1,892 |
|
|
|
$1,782 |
|
|
|
6.2 |
% |
Employee benefits
|
|
|
123 |
|
|
|
106 |
|
|
|
16.0 |
|
|
|
|
379 |
|
|
|
330 |
|
|
|
14.8 |
|
Net occupancy and equipment
|
|
|
168 |
|
|
|
162 |
|
|
|
3.7 |
|
|
|
|
494 |
|
|
|
475 |
|
|
|
4.0 |
|
Professional services
|
|
|
54 |
|
|
|
44 |
|
|
|
22.7 |
|
|
|
|
130 |
|
|
|
119 |
|
|
|
9.2 |
|
Marketing and business development
|
|
|
58 |
|
|
|
61 |
|
|
|
(4.9 |
) |
|
|
|
156 |
|
|
|
171 |
|
|
|
(8.8 |
) |
Technology and communications
|
|
|
128 |
|
|
|
118 |
|
|
|
8.5 |
|
|
|
|
372 |
|
|
|
337 |
|
|
|
10.4 |
|
Postage, printing and supplies
|
|
|
66 |
|
|
|
64 |
|
|
|
3.1 |
|
|
|
|
198 |
|
|
|
190 |
|
|
|
4.2 |
|
Other intangibles
|
|
|
89 |
|
|
|
125 |
|
|
|
(28.8 |
) |
|
|
|
263 |
|
|
|
377 |
|
|
|
(30.2 |
) |
Debt prepayment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
54 |
|
|
|
(79.6 |
) |
Other
|
|
|
220 |
|
|
|
190 |
|
|
|
15.8 |
|
|
|
|
673 |
|
|
|
564 |
|
|
|
19.3 |
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
$1,538 |
|
|
|
$1,473 |
|
|
|
4.4 |
% |
|
|
|
$4,568 |
|
|
|
$4,399 |
|
|
|
3.8 |
% |
|
|
|
|
|
|
Efficiency ratio (a)
|
|
|
45.0 |
% |
|
|
43.8 |
% |
|
|
|
|
|
|
|
44.7 |
% |
|
|
44.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
(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. |
processing expense principally associated with expanding a
prepaid gift card program and the corporate and institutional
trust acquisition. Other expense increased in the third quarter
and first nine months of 2006 from the same periods of 2005,
primarily due to the increased investments in tax-advantaged
projects relative to a year ago. Offsetting these expense
increases was a year-over-year decline in other intangibles
expense, reflecting the elimination of MSR amortization and
impairment due to the adoption of SFAS 156. Debt prepayment
expense was also lower in the first nine months of 2006,
compared with the same period of 2005.
Income Tax Expense The
provision for income taxes was $532 million (an effective
rate of 30.7 percent) for the third quarter and
$1,678 million (an effective rate of 32.1 percent) for
the first nine months of 2006, compared with $586 million
(an effective rate of 33.7 percent) and $1,573 million
(an effective rate of 32.0 percent) for the same periods of
2005. The effective rate for the third quarter of 2006 reflected
an expected increase in income tax credits from tax-advantaged
investments through the remainder of the year. 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 $144.4 billion at
September 30, 2006, compared with $137.8 billion at
December 31, 2005, an increase of $6.6 billion
(4.8 percent). The increase in total loans was driven by
growth in commercial loans, retail loans, commercial real estate
loans and residential mortgages. The $3.7 billion
(8.5 percent) increase in commercial loans was primarily
driven by new customer relationships and growth in corporate
payment card and commercial leasing balances.
Commercial real estate loans were $29.0 billion at
September 30, 2006, an increase of $.5 billion
(1.8 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
$21.2 billion at September 30, 2006, an increase of
$.5 billion (2.3 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, were $47.6 billion at September 30,
2006, an increase of $2.0 billion (4.3 percent)
compared with December 31, 2005. The increase was primarily
driven by growth in installment, credit card and home equity and
second mortgage loans, partially offset by decreases in retail
leasing balances.
Investment Securities
Investment securities, both
available-for-sale and
held-to-maturity,
totaled $39.5 billion at September 30, 2006, compared
with $39.8 billion at December 31, 2005, reflecting
purchases of $5.6 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
September 30, 2006, approximately 39 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, asset-backed securities and floating-rate
preferred stock.
|
|
|
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 | |
September 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
|
|
|
$71 |
|
|
|
$72 |
|
|
|
.5 |
|
|
|
5.27 |
% |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
% |
|
Maturing after one year through five years
|
|
|
29 |
|
|
|
29 |
|
|
|
2.5 |
|
|
|
7.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing after five years through ten years
|
|
|
24 |
|
|
|
24 |
|
|
|
6.8 |
|
|
|
6.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing after ten years
|
|
|
331 |
|
|
|
324 |
|
|
|
13.9 |
|
|
|
5.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$455 |
|
|
|
$449 |
|
|
|
10.7 |
|
|
|
5.99 |
% |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
Mortgage-backed securities (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing in one year or less
|
|
|
$346 |
|
|
|
$345 |
|
|
|
.9 |
|
|
|
5.33 |
% |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
% |
|
Maturing after one year through five years
|
|
|
17,496 |
|
|
|
17,038 |
|
|
|
3.5 |
|
|
|
4.58 |
|
|
|
|
7 |
|
|
|
7 |
|
|
|
3.1 |
|
|
|
5.75 |
|
|
Maturing after five years through ten years
|
|
|
12,623 |
|
|
|
12,289 |
|
|
|
7.0 |
|
|
|
5.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing after ten years
|
|
|
4,513 |
|
|
|
4,535 |
|
|
|
13.1 |
|
|
|
6.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$34,978 |
|
|
|
$34,207 |
|
|
|
6.0 |
|
|
|
5.06 |
% |
|
|
|
$7 |
|
|
|
$7 |
|
|
|
3.1 |
|
|
|
5.75 |
% |
|
|
|
|
|
|
Asset-backed securities (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing in one year or less
|
|
|
$7 |
|
|
|
$7 |
|
|
|
.2 |
|
|
|
5.32 |
% |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
% |
|
Maturing after one year through five years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing after five years through ten years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing after ten years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$7 |
|
|
|
$7 |
|
|
|
.2 |
|
|
|
5.32 |
% |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
Obligations of state and political subdivisions (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing in one year or less
|
|
|
$53 |
|
|
|
$53 |
|
|
|
.3 |
|
|
|
6.94 |
% |
|
|
|
$3 |
|
|
|
$3 |
|
|
|
.4 |
|
|
|
6.94 |
% |
|
Maturing after one year through five years
|
|
|
42 |
|
|
|
43 |
|
|
|
2.2 |
|
|
|
6.83 |
|
|
|
|
20 |
|
|
|
21 |
|
|
|
3.0 |
|
|
|
6.24 |
|
|
Maturing after five years through ten years
|
|
|
3,276 |
|
|
|
3,332 |
|
|
|
8.9 |
|
|
|
6.76 |
|
|
|
|
14 |
|
|
|
16 |
|
|
|
7.9 |
|
|
|
7.18 |
|
|
Maturing after ten years
|
|
|
324 |
|
|
|
330 |
|
|
|
11.1 |
|
|
|
6.74 |
|
|
|
|
34 |
|
|
|
37 |
|
|
|
15.4 |
|
|
|
6.54 |
|
|
|
|
|
|
|
|
|
Total
|
|
|
$3,695 |
|
|
|
$3,758 |
|
|
|
8.9 |
|
|
|
6.76 |
% |
|
|
|
$71 |
|
|
|
$77 |
|
|
|
9.8 |
|
|
|
6.59 |
% |
|
|
|
|
|
|
Other debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing in one year or less
|
|
|
$210 |
|
|
|
$210 |
|
|
|
.2 |
|
|
|
4.46 |
% |
|
|
|
$2 |
|
|
|
$2 |
|
|
|
.8 |
|
|
|
6.94 |
% |
|
Maturing after one year through five years
|
|
|
1 |
|
|
|
1 |
|
|
|
3.8 |
|
|
|
10.31 |
|
|
|
|
10 |
|
|
|
10 |
|
|
|
2.9 |
|
|
|
5.75 |
|
|
Maturing after five years through ten years
|
|
|
15 |
|
|
|
15 |
|
|
|
9.8 |
|
|
|
6.19 |
|
|
|
|
1 |
|
|
|
1 |
|
|
|
5.5 |
|
|
|
6.09 |
|
|
Maturing after ten years
|
|
|
627 |
|
|
|
626 |
|
|
|
20.9 |
|
|
|
6.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$853 |
|
|
|
$852 |
|
|
|
15.6 |
|
|
|
5.89 |
% |
|
|
|
$13 |
|
|
|
$13 |
|
|
|
2.8 |
|
|
|
5.96 |
% |
|
|
|
|
|
|
Other investments
|
|
|
$151 |
|
|
|
$156 |
|
|
|
|
|
|
|
5.20 |
% |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
Total investment securities (c)
|
|
|
$40,139 |
|
|
|
$39,429 |
|
|
|
6.5 |
|
|
|
5.25 |
% |
|
|
|
$91 |
|
|
|
$97 |
|
|
|
8.2 |
|
|
|
6.44 |
% |
|
|
|
|
|
|
|
(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. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 | |
|
|
December 31, 2005 | |
|
|
|
|
|
|
Amortized | |
|
Percent | |
|
|
Amortized | |
|
Percent | |
(Dollars in Millions) |
|
Cost | |
|
of Total | |
|
|
Cost | |
|
of Total | |
|
|
|
|
U.S. Treasury and agencies
|
|
|
$455 |
|
|
|
1.1 |
% |
|
|
|
$496 |
|
|
|
1.2 |
% |
Mortgage-backed securities
|
|
|
34,985 |
|
|
|
87.0 |
|
|
|
|
38,169 |
|
|
|
94.4 |
|
Asset-backed securities
|
|
|
7 |
|
|
|
|
|
|
|
|
12 |
|
|
|
.1 |
|
Obligations of state and political subdivisions
|
|
|
3,766 |
|
|
|
9.4 |
|
|
|
|
724 |
|
|
|
1.8 |
|
Other debt securities and investments
|
|
|
1,017 |
|
|
|
2.5 |
|
|
|
|
1,029 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
$40,230 |
|
|
|
100.0 |
% |
|
|
|
$40,430 |
|
|
|
100.0 |
% |
|
|
|
|
Deposits Total deposits
were $121.0 billion at September 30, 2006, compared
with $124.7 billion at December 31, 2005, a decrease
of $3.7 billion (3.0 percent). The decrease in total
deposits was primarily the result of decreases in
noninterest-bearing deposits, money market savings accounts and
time deposits greater than $100,000, partially offset by
increases in interest checking and time certificates of deposits
less than $100,000. The $1.7 billion (5.2 percent)
decrease in noninterest-bearing deposits primarily reflected a
decline in business demand deposits as these customers reduce
excess liquidity to fund business growth. The change also
reflected a migration of customers to interest-bearing products
given rising interest rates. The $2.5 billion
(8.8 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
to take advantage of higher interest rates for these products.
Time deposits greater than $100,000 decreased $1.2 billion
(5.2 percent) at September 30, 2006, compared with
December 31, 2005, due to a decrease in corporate banking
balances, partially offset by increases in consumer and private
banking balances due to customer migration of deposit balances.
Time deposits greater than $100,000 are largely viewed as
purchased funds and are managed at levels deemed appropriate
given alternative lending sources. Time certificates of deposit
less than $100,000 increased $.6 billion (4.2 percent)
at September 30, 2006, compared with December 31,
2005. Interest checking accounts increased $1.1 billion
(4.6 percent) due to an increase in trust and custody and
government 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 $24.8 billion at
September 30, 2006, compared with $20.2 billion at
December 31, 2005. Short-term funding is managed within
approved liquidity policies. The increase of $4.6 billion
in short-term borrowings reflected wholesale funding associated
with the Companys earning asset growth and asset/liability
management activities. Long-term debt was $41.2 billion at
September 30, 2006, compared with $37.1 billion at
December 31, 2005, reflecting the issuances of
$8.0 billion of medium-term and bank notes,
$2.5 billion of junior subordinated debentures and the
addition of $2.8 billion of Federal Home Loan Bank
advances, partially offset by $8.2 billion of medium-term
and bank note maturities and repayments, 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.
|
|
|
Table 5 |
|
Delinquent Loan Ratios as a Percent of Ending Loan Balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
90 days or more past due excluding nonperforming loans |
|
2006 | |
|
2005 | |
|
Commercial
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
.07 |
% |
|
|
.06 |
% |
|
Lease financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
.06 |
|
|
|
.05 |
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
.01 |
|
|
|
|
|
|
Construction and development
|
|
|
.01 |
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
.01 |
|
|
|
|
|
Residential mortgages
|
|
|
.36 |
|
|
|
.32 |
|
Retail
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
|
1.59 |
|
|
|
1.26 |
|
|
Retail leasing
|
|
|
.03 |
|
|
|
.04 |
|
|
Other retail
|
|
|
.19 |
|
|
|
.22 |
|
|
|
|
|
|
Total retail
|
|
|
.40 |
|
|
|
.36 |
|
|
|
|
|
|
|
Total loans
|
|
|
.20 |
% |
|
|
.18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
90 days or more past due including nonperforming loans |
|
2006 | |
|
2005 | |
|
Commercial
|
|
|
.55 |
% |
|
|
.69 |
% |
Commercial real estate
|
|
|
.54 |
|
|
|
.55 |
|
Residential mortgages (a)
|
|
|
.53 |
|
|
|
.55 |
|
Retail
|
|
|
.51 |
|
|
|
.50 |
|
|
|
|
|
Total loans
|
|
|
.53 |
% |
|
|
.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 2.78 percent at September 30, 2006,
and 4.35 percent at December 31, 2005. |
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 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 third quarter and first nine 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. Through the second quarter of 2006, 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. Beginning in the
third quarter of 2006, the Federal Reserve Bank paused from its
policies of increasing interest rates and tightening the money
supply.
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 increased $42 million to $295 million
at September 30, 2006, compared with $253 million at
December 31, 2005, due to the seasoning of the residential
mortgage portfolio originated by the consumer finance division
and the continued return to normalized delinquency levels after
the bankruptcy legislation change that occurred in the fourth
quarter of 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 .20 percent at September 30, 2006,
compared with .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 | |
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
|
September 30, | |
|
December 31, | |
(Dollars in Millions) |
|
2006 | |
|
2005 | |
|
|
2006 | |
|
2005 | |
|
|
|
|
Residential mortgages
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 days
|
|
|
$129 |
|
|
|
$112 |
|
|
|
|
.61 |
% |
|
|
.55 |
% |
|
|
90 days or more
|
|
|
76 |
|
|
|
67 |
|
|
|
|
.36 |
|
|
|
.32 |
|
|
|
Nonperforming
|
|
|
36 |
|
|
|
48 |
|
|
|
|
.17 |
|
|
|
.23 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$241 |
|
|
|
$227 |
|
|
|
|
1.14 |
% |
|
|
1.10 |
% |
|
|
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 days
|
|
|
$168 |
|
|
|
$147 |
|
|
|
|
2.14 |
% |
|
|
2.06 |
% |
|
|
90 days or more
|
|
|
125 |
|
|
|
90 |
|
|
|
|
1.59 |
|
|
|
1.26 |
|
|
|
Nonperforming
|
|
|
37 |
|
|
|
49 |
|
|
|
|
.47 |
|
|
|
.69 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$330 |
|
|
|
$286 |
|
|
|
|
4.20 |
% |
|
|
4.01 |
% |
|
Retail leasing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 days
|
|
|
$30 |
|
|
|
$43 |
|
|
|
|
.42 |
% |
|
|
.59 |
% |
|
|
90 days or more
|
|
|
2 |
|
|
|
3 |
|
|
|
|
.03 |
|
|
|
.04 |
|
|
|
Nonperforming
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$32 |
|
|
|
$46 |
|
|
|
|
.45 |
% |
|
|
.63 |
% |
|
Other retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 days
|
|
|
$187 |
|
|
|
$206 |
|
|
|
|
.57 |
% |
|
|
.66 |
% |
|
|
90 days or more
|
|
|
62 |
|
|
|
70 |
|
|
|
|
.19 |
|
|
|
.22 |
|
|
|
Nonperforming
|
|
|
16 |
|
|
|
17 |
|
|
|
|
.05 |
|
|
|
.06 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$265 |
|
|
|
$293 |
|
|
|
|
.81 |
% |
|
|
.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 September 30, 2006, total
nonperforming assets were $575 million, compared with
$644 million at December 31, 2005. The ratio of total
nonperforming assets to total loans and other real estate
decreased to .40 percent at September 30, 2006,
compared with .47 percent at December 31, 2005.
Included in nonperforming loans were restructured loans of
$43 million at September 30, 2006, compared with
$75 million at December 31, 2005. At
September 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) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
(Dollars in Millions) |
|
2006 | |
|
2005 | |
|
Commercial
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
$192 |
|
|
|
$231 |
|
|
Lease financing
|
|
|
39 |
|
|
|
42 |
|
|
|
|
|
|
Total commercial
|
|
|
231 |
|
|
|
273 |
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
114 |
|
|
|
134 |
|
|
Construction and development
|
|
|
40 |
|
|
|
23 |
|
|
|
|
|
|
Total commercial real estate
|
|
|
154 |
|
|
|
157 |
|
Residential mortgages
|
|
|
36 |
|
|
|
48 |
|
Retail
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
|
37 |
|
|
|
49 |
|
|
Retail leasing
|
|
|
|
|
|
|
|
|
|
Other retail
|
|
|
16 |
|
|
|
17 |
|
|
|
|
|
|
Total retail
|
|
|
53 |
|
|
|
66 |
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
474 |
|
|
|
544 |
|
Other real estate (b)
|
|
|
79 |
|
|
|
71 |
|
Other assets
|
|
|
22 |
|
|
|
29 |
|
|
|
|
|
|
|
Total nonperforming assets
|
|
|
$575 |
|
|
|
$644 |
|
|
|
|
Accruing loans 90 days or more past due
|
|
|
$295 |
|
|
|
$253 |
|
Nonperforming loans to total loans
|
|
|
.33 |
% |
|
|
.39 |
% |
Nonperforming assets to total loans plus other real estate (b)
|
|
|
.40 |
% |
|
|
.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
|
|
|
334 |
|
|
|
41 |
|
|
|
375 |
|
|
|
Advances on loans
|
|
|
30 |
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
Total additions
|
|
|
364 |
|
|
|
41 |
|
|
|
405 |
|
|
Reductions in nonperforming assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paydowns, payoffs
|
|
|
(210 |
) |
|
|
(41 |
) |
|
|
(251 |
) |
|
|
Net sales
|
|
|
(21 |
) |
|
|
|
|
|
|
(21 |
) |
|
|
Return to performing status
|
|
|
(92 |
) |
|
|
(6 |
) |
|
|
(98 |
) |
|
|
Charge-offs (c)
|
|
|
(93 |
) |
|
|
(11 |
) |
|
|
(104 |
) |
|
|
|
|
|
|
Total reductions
|
|
|
(416 |
) |
|
|
(58 |
) |
|
|
(474 |
) |
|
|
|
|
|
|
|
Net additions to (reductions in) nonperforming assets
|
|
|
(52 |
) |
|
|
(17 |
) |
|
|
(69 |
) |
|
|
|
Balance September 30, 2006
|
|
|
$405 |
|
|
|
$170 |
|
|
|
$575 |
|
|
|
|
|
(a) |
|
Throughout this document, nonperforming assets and related
ratios do not include accruing loans 90 days or more past
due. |
(b) |
|
Excludes $85 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 | |
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
|
September 30, | |
|
December 31, | |
(Dollars in Millions) |
|
2006 | |
|
2005 | |
|
|
2006 | |
|
2005 | |
|
|
|
|
Commercial
|
|
|
$19 |
|
|
|
$5 |
|
|
|
|
.04 |
% |
|
|
.01 |
% |
Commercial real estate
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
76 |
|
|
|
59 |
|
|
|
|
.36 |
|
|
|
.28 |
|
Credit card
|
|
|
236 |
|
|
|
218 |
|
|
|
|
3.00 |
|
|
|
3.05 |
|
Other retail
|
|
|
37 |
|
|
|
32 |
|
|
|
|
.09 |
|
|
|
.08 |
|
|
|
|
|
|
|
|
Total
|
|
|
$369 |
|
|
|
$315 |
|
|
|
|
.26 |
% |
|
|
.23 |
% |
|
|
|
|
Restructured loans that continue to accrue interest were higher
at September 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
$135 million and $375 million during the third quarter
and first nine months of 2006, respectively, compared with net
charge-offs of $156 million and $472 million,
respectively, for the same periods of 2005. The ratio of total
loan net charge-offs to average loans in the third quarter and
first nine months of 2006 was .37 percent and
..36 percent, respectively, compared with .46 percent
and .48 percent, respectively, for the same periods of 2005.
Commercial and commercial real estate loan net charge-offs for
the third quarter of 2006 were $21 million
(.11 percent of average loans outstanding), compared with
$23 million (.13 percent of average loans outstanding)
for the third quarter of 2005. Commercial and commercial real
estate loan net charge-offs for the first nine months of 2006
were $55 million (.10 percent of average loans
outstanding), compared with $69 million (.13 percent
of average loans outstanding) for the first nine months of 2005.
The decrease in net charge-offs reflected lower gross
charge-offs, partially offset by a lower level of recoveries as
compared with the same periods of the prior year. The Company
expects commercial net charge-offs to increase somewhat over the
next several quarters due to an increase in gross chargeoffs
from cyclical lows and declining commercial loan recoveries.
Retail loan net charge-offs for the third quarter of 2006 were
$103 million (.87 percent of average loans
outstanding), compared with $124 million (1.09 percent
of average loans outstanding) for the third quarter of 2005.
Retail loan net charge-offs for the first nine months of 2006
were $291 million (.84 percent of average loans
outstanding), compared with $377 million (1.14 percent
of average loans outstanding) for the first nine 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 and improved retail portfolio performance. The
Company anticipates that bankruptcy charge-offs will return to
more normalized levels during the next several quarters.
The Companys retail lending business utilizes several
distinct business processes and channels to
|
|
|
Table 7 |
|
Net Charge-offs as a Percent of Average Loans Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
September 30, | |
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
2006 | |
|
2005 | |
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
.18 |
% |
|
|
.07 |
% |
|
|
|
.12 |
% |
|
|
.11 |
% |
|
Lease financing
|
|
|
.23 |
|
|
|
1.29 |
|
|
|
|
.44 |
|
|
|
.95 |
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
.18 |
|
|
|
.21 |
|
|
|
|
.16 |
|
|
|
.21 |
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
|
|
|
|
.04 |
|
|
|
|
.01 |
|
|
|
.05 |
|
|
Construction and development
|
|
|
|
|
|
|
(.10 |
) |
|
|
|
.02 |
|
|
|
(.05 |
) |
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
.01 |
|
|
|
.02 |
|
Residential mortgages
|
|
|
.21 |
|
|
|
.19 |
|
|
|
|
.18 |
|
|
|
.20 |
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
|
2.85 |
|
|
|
3.74 |
|
|
|
|
2.74 |
|
|
|
3.92 |
|
|
Retail leasing
|
|
|
.22 |
|
|
|
.27 |
|
|
|
|
.19 |
|
|
|
.33 |
|
|
Home equity and second mortgages
|
|
|
.31 |
|
|
|
.37 |
|
|
|
|
.33 |
|
|
|
.42 |
|
|
Other retail
|
|
|
.72 |
|
|
|
1.04 |
|
|
|
|
.74 |
|
|
|
1.05 |
|
|
|
|
|
|
|
|
|
Total retail
|
|
|
.87 |
|
|
|
1.09 |
|
|
|
|
.84 |
|
|
|
1.14 |
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
.37 |
% |
|
|
.46 |
% |
|
|
|
.36 |
% |
|
|
.48 |
% |
|
|
|
|
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 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 September 30, | |
|
|
Nine Months Ended September 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
|
|
|
$7,627 |
|
|
|
$6,292 |
|
|
|
.52 |
% |
|
|
.50 |
% |
|
|
|
$7,245 |
|
|
|
$5,734 |
|
|
|
.48 |
% |
|
|
.51 |
% |
|
Home equity and second mortgages
|
|
|
1,939 |
|
|
|
2,363 |
|
|
|
1.43 |
|
|
|
1.68 |
|
|
|
|
1,993 |
|
|
|
2,523 |
|
|
|
1.48 |
|
|
|
1.64 |
|
|
Other retail
|
|
|
397 |
|
|
|
400 |
|
|
|
5.00 |
|
|
|
4.96 |
|
|
|
|
401 |
|
|
|
390 |
|
|
|
4.67 |
|
|
|
4.80 |
|
Traditional Branch
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
$13,491 |
|
|
|
$12,449 |
|
|
|
.03 |
% |
|
|
.03 |
% |
|
|
|
$13,747 |
|
|
|
$11,532 |
|
|
|
.03 |
% |
|
|
.05 |
% |
|
Home equity and second mortgages
|
|
|
13,227 |
|
|
|
12,621 |
|
|
|
.15 |
|
|
|
.13 |
|
|
|
|
13,054 |
|
|
|
12,421 |
|
|
|
.15 |
|
|
|
.17 |
|
|
Other retail
|
|
|
16,575 |
|
|
|
15,563 |
|
|
|
.62 |
|
|
|
.94 |
|
|
|
|
16,313 |
|
|
|
14,935 |
|
|
|
.64 |
|
|
|
.95 |
|
Total Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
$21,118 |
|
|
|
$18,741 |
|
|
|
.21 |
% |
|
|
.19 |
% |
|
|
|
$20,992 |
|
|
|
$17,266 |
|
|
|
.18 |
% |
|
|
.20 |
% |
|
Home equity and second mortgages
|
|
|
15,166 |
|
|
|
14,984 |
|
|
|
.31 |
|
|
|
.37 |
|
|
|
|
15,047 |
|
|
|
14,944 |
|
|
|
.33 |
|
|
|
.42 |
|
|
Other retail
|
|
|
16,972 |
|
|
|
15,963 |
|
|
|
.72 |
|
|
|
1.04 |
|
|
|
|
16,714 |
|
|
|
15,325 |
|
|
|
.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 September 30, 2006, the allowance for credit losses was
$2,256 million (1.56 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 476 percent at
September 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 421 percent
at September 30, 2006, compared with 329 percent at
December 31, 2005.
|
|
|
Table 8 |
|
Summary of Allowance for Credit Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
September 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
|
|
|
34 |
|
|
|
37 |
|
|
|
|
86 |
|
|
|
111 |
|
|
|
Lease financing
|
|
|
12 |
|
|
|
24 |
|
|
|
|
37 |
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
46 |
|
|
|
61 |
|
|
|
|
123 |
|
|
|
173 |
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
1 |
|
|
|
5 |
|
|
|
|
7 |
|
|
|
15 |
|
|
|
Construction and development
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
1 |
|
|
|
5 |
|
|
|
|
8 |
|
|
|
18 |
|
|
Residential mortgages
|
|
|
12 |
|
|
|
10 |
|
|
|
|
31 |
|
|
|
28 |
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
|
65 |
|
|
|
71 |
|
|
|
|
178 |
|
|
|
217 |
|
|
|
Retail leasing
|
|
|
6 |
|
|
|
8 |
|
|
|
|
19 |
|
|
|
27 |
|
|
|
Home equity and second mortgages
|
|
|
14 |
|
|
|
19 |
|
|
|
|
46 |
|
|
|
59 |
|
|
|
Other retail
|
|
|
51 |
|
|
|
55 |
|
|
|
|
141 |
|
|
|
160 |
|
|
|
|
|
|
|
|
|
|
Total retail
|
|
|
136 |
|
|
|
153 |
|
|
|
|
384 |
|
|
|
463 |
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
195 |
|
|
|
229 |
|
|
|
|
546 |
|
|
|
682 |
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
16 |
|
|
|
30 |
|
|
|
|
50 |
|
|
|
81 |
|
|
|
Lease financing
|
|
|
9 |
|
|
|
8 |
|
|
|
|
20 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
25 |
|
|
|
38 |
|
|
|
|
70 |
|
|
|
108 |
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
1 |
|
|
|
3 |
|
|
|
|
6 |
|
|
|
8 |
|
|
|
Construction and development
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
1 |
|
|
|
5 |
|
|
|
|
6 |
|
|
|
14 |
|
|
Residential mortgages
|
|
|
1 |
|
|
|
1 |
|
|
|
|
2 |
|
|
|
2 |
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
|
9 |
|
|
|
8 |
|
|
|
|
26 |
|
|
|
25 |
|
|
|
Retail leasing
|
|
|
2 |
|
|
|
3 |
|
|
|
|
9 |
|
|
|
9 |
|
|
|
Home equity and second mortgages
|
|
|
2 |
|
|
|
5 |
|
|
|
|
9 |
|
|
|
12 |
|
|
|
Other retail
|
|
|
20 |
|
|
|
13 |
|
|
|
|
49 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
Total retail
|
|
|
33 |
|
|
|
29 |
|
|
|
|
93 |
|
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
60 |
|
|
|
73 |
|
|
|
|
171 |
|
|
|
210 |
|
Net Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
18 |
|
|
|
7 |
|
|
|
|
36 |
|
|
|
30 |
|
|
|
Lease financing
|
|
|
3 |
|
|
|
16 |
|
|
|
|
17 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
21 |
|
|
|
23 |
|
|
|
|
53 |
|
|
|
65 |
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
|
|
|
|
2 |
|
|
|
|
1 |
|
|
|
7 |
|
|
|
Construction and development
|
|
|
|
|
|
|
(2 |
) |
|
|
|
1 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
4 |
|
|
Residential mortgages
|
|
|
11 |
|
|
|
9 |
|
|
|
|
29 |
|
|
|
26 |
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
|
56 |
|
|
|
63 |
|
|
|
|
152 |
|
|
|
192 |
|
|
|
Retail leasing
|
|
|
4 |
|
|
|
5 |
|
|
|
|
10 |
|
|
|
18 |
|
|
|
Home equity and second mortgages
|
|
|
12 |
|
|
|
14 |
|
|
|
|
37 |
|
|
|
47 |
|
|
|
Other retail
|
|
|
31 |
|
|
|
42 |
|
|
|
|
92 |
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
Total retail
|
|
|
103 |
|
|
|
124 |
|
|
|
|
291 |
|
|
|
377 |
|
|
|
|
|
|
|
|
|
|
|
Total net charge-offs
|
|
|
135 |
|
|
|
156 |
|
|
|
|
375 |
|
|
|
472 |
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
135 |
|
|
|
145 |
|
|
|
|
375 |
|
|
|
461 |
|
Acquisitions and other changes
|
|
|
5 |
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
$2,256 |
|
|
|
$2,258 |
|
|
|
|
$2,256 |
|
|
|
$2,258 |
|
|
|
|
|
|
|
Components
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
$2,034 |
|
|
|
$2,055 |
|
|
|
|
|
|
|
|
|
|
|
Liability for unfunded credit commitments
|
|
|
222 |
|
|
|
203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for credit losses
|
|
|
$2,256 |
|
|
|
$2,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses as a percentage of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-end loans
|
|
|
1.56 |
% |
|
|
1.65 |
% |
|
|
|
|
|
|
|
|
|
|
Nonperforming loans
|
|
|
476 |
|
|
|
413 |
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets
|
|
|
392 |
|
|
|
351 |
|
|
|
|
|
|
|
|
|
|
|
Annualized net charge-offs
|
|
|
421 |
|
|
|
365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Several factors were taken into consideration in evaluating the
allowance for credit losses at September 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
September 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 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
|
|
|
1.14% |
|
|
|
(1.10)% |
|
|
|
2.35% |
|
|
|
(2.85)% |
|
|
|
|
.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 September 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 September 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 September 30, 2006. The
up 200 basis point scenario resulted in a 5.4 percent
decrease in the market value of equity at September 30,
2006, compared with a 6.8 percent decrease at
December 31, 2005. The down 200 basis point scenario
resulted in a 4.2 percent decrease in the market value of
equity at September 30, 2006, compared with a
4.1 percent decrease at December 31, 2005. At
September 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
1.8 years at September 30, 2006, compared with
1.6 years at December 31, 2005. The duration of
liabilities was 2.0 years at September 30, 2006,
compared with 1.6 years at December 31, 2005. At
September 30, 2006, the duration of equity was
..9 years, compared with 1.8 years at December 31,
2005. The 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, credit 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 $32.6 billion
of total notional amount of asset and liability management
derivative positions at September 30, 2006,
$23.5 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 $1.6 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.
At September 30, 2006, the Company had $95 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 loss of $7 million and $32 million,
respectively.
Gains or losses on customer-related derivative positions were
not material for the third quarter and first nine months of
2006. The change in fair value of forward commitments attributed
to hedge ineffectiveness recorded in noninterest income was a
decrease of $2 million and $3 million for the third
quarter and first nine months of 2006, respectively. 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 third
quarter and first nine 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 third quarter and first nine months of 2006
was not material.
|
|
|
Table 9 |
|
Derivative Positions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 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
|
|
|
$6,610 |
|
|
|
$13 |
|
|
|
22.36 |
|
|
|
|
$16,370 |
|
|
|
$(82 |
) |
|
|
7.79 |
|
|
|
Pay fixed/receive floating swaps
|
|
|
11,998 |
|
|
|
4 |
|
|
|
2.42 |
|
|
|
|
9,163 |
|
|
|
139 |
|
|
|
1.33 |
|
|
|
Futures and forwards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy
|
|
|
3 |
|
|
|
|
|
|
|
.11 |
|
|
|
|
104 |
|
|
|
|
|
|
|
.07 |
|
|
|
|
Sell
|
|
|
6,469 |
|
|
|
(49 |
) |
|
|
.15 |
|
|
|
|
2,669 |
|
|
|
(15 |
) |
|
|
.09 |
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
|
|
|
7,007 |
|
|
|
7 |
|
|
|
.12 |
|
|
|
|
1,086 |
|
|
|
3 |
|
|
|
.08 |
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency swaps
|
|
|
403 |
|
|
|
27 |
|
|
|
8.87 |
|
|
|
|
387 |
|
|
|
11 |
|
|
|
9.61 |
|
|
|
Forwards
|
|
|
16 |
|
|
|
|
|
|
|
.07 |
|
|
|
|
404 |
|
|
|
7 |
|
|
|
.05 |
|
|
Equity contracts
|
|
|
74 |
|
|
|
4 |
|
|
|
3.38 |
|
|
|
|
42 |
|
|
|
3 |
|
|
|
3.29 |
|
|
Credit default swaps
|
|
|
25 |
|
|
|
|
|
|
|
4.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related Positions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive fixed/pay floating swaps
|
|
|
$10,499 |
|
|
|
$(47 |
) |
|
|
5.33 |
|
|
|
|
$9,753 |
|
|
|
$(69 |
) |
|
|
5.25 |
|
|
|
Pay fixed/receive floating swaps
|
|
|
10,468 |
|
|
|
104 |
|
|
|
5.42 |
|
|
|
|
9,707 |
|
|
|
121 |
|
|
|
5.25 |
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
1,877 |
|
|
|
4 |
|
|
|
2.00 |
|
|
|
|
1,453 |
|
|
|
6 |
|
|
|
2.26 |
|
|
|
|
Written
|
|
|
1,865 |
|
|
|
(3 |
) |
|
|
2.00 |
|
|
|
|
1,453 |
|
|
|
(5 |
) |
|
|
2.26 |
|
|
Risk participation agreements (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
177 |
|
|
|
|
|
|
|
7.05 |
|
|
|
|
143 |
|
|
|
|
|
|
|
8.02 |
|
|
|
Written
|
|
|
320 |
|
|
|
(1 |
) |
|
|
6.26 |
|
|
|
|
169 |
|
|
|
|
|
|
|
4.64 |
|
|
Foreign exchange rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forwards and swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy
|
|
|
1,954 |
|
|
|
47 |
|
|
|
.40 |
|
|
|
|
2,042 |
|
|
|
77 |
|
|
|
.43 |
|
|
|
|
Sell
|
|
|
1,918 |
|
|
|
(39 |
) |
|
|
.41 |
|
|
|
|
2,018 |
|
|
|
(73 |
) |
|
|
.46 |
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
104 |
|
|
|
(1 |
) |
|
|
.40 |
|
|
|
|
56 |
|
|
|
1 |
|
|
|
.24 |
|
|
|
|
Written
|
|
|
104 |
|
|
|
1 |
|
|
|
.40 |
|
|
|
|
56 |
|
|
|
(1 |
) |
|
|
.24 |
|
|
|
|
|
|
|
|
(a) |
|
At September 30, 2006, the credit equivalent amount was
$2 million and $45 million, compared with
$1 million and $18 million at December 31, 2005,
for purchased and written risk participation agreements,
respectively. |
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 items, 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
$25 million at September 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.
The Companys ability to raise negotiated funding at
competitive prices is influenced by rating agencies views
of the Companys credit quality, liquidity, capital and
earnings. On October 26, 2006, Dominion Bond Rating Service
upgraded the Companys senior and unsecured subordinated
debt ratings to AA and AA(low), respectively, from AA(low) and
A(high), respectively. On November 1, 2006,
Standard & Poors Ratings Services changed its
credit ratings outlook for the Company to Positive.
At November 1, 2006, the credit ratings outlook for the
Company was considered Positive by Fitch and
Stable by Moodys Investors Service and
Dominion Bond Ratings Service.
At September 30, 2006, parent company long-term debt
outstanding was $13.9 billion, compared with
$10.9 billion at December 31, 2005. The
$3.0 billion increase was primarily due to the issuances of
$2.5 billion of junior subordinated debentures and
$4.0 billion of medium-term notes, offset by long-term debt
maturities and repayments during the first nine months of 2006.
As of September 30, 2006, there was 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
$1.2 billion at September 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
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 $2.7 billion at
September 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 $13 million at September 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 $19 million at
September 30, 2006, and $28 million at
December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
(Dollars in Millions) |
|
2006 | |
|
2005 | |
|
Tier 1 capital
|
|
|
$17,042 |
|
|
|
$15,145 |
|
|
As a percent of risk-weighted assets
|
|
|
8.8 |
% |
|
|
8.2 |
% |
|
As a percent of adjusted quarterly average assets (leverage
ratio)
|
|
|
8.3 |
% |
|
|
7.6 |
% |
Total risk-based capital
|
|
|
$25,011 |
|
|
|
$23,056 |
|
|
As a percent of risk-weighted assets
|
|
|
13.0 |
% |
|
|
12.5 |
% |
Tangible common equity
|
|
|
$11,286 |
|
|
|
$11,873 |
|
|
As a percent of tangible assets
|
|
|
5.4 |
% |
|
|
5.9 |
% |
|
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.
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 nine months of
2006, the Company returned 120 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 $20.9 billion at
September 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
September 30, 2006, and December 31, 2005. Tier 1
capital at September 30, 2006, was positively affected by
the $1.0 billion issuance of preferred stock and the
$2.5 billion issuance of junior subordinated debentures
during the first nine 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. During
2006, the Company repurchased 62 million shares under this
authorization.
On August 3, 2006, the Company announced that the Board of
Directors approved an authorization to
repurchase 150 million shares of common stock through
December 31, 2008. This new authorization replaced the
December 21, 2004, share repurchase program. The Company
purchased 18 million shares under this authorization during
the third quarter of 2006.
The following table provides a detailed analysis of all shares
repurchased during the third quarter of 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of | |
|
|
|
Maximum Number | |
|
|
Shares Purchased as | |
|
|
|
of Shares that May | |
|
|
Part of Publicly | |
|
Average | |
|
Yet Be Purchased | |
|
|
Announced | |
|
Price Paid | |
|
Under the | |
Time Period |
|
Programs | |
|
per Share | |
|
Programs | |
|
July 1 July 31 (a)
|
|
|
8,755,561 |
|
|
|
$31.80 |
|
|
|
24,097,204 |
|
August 1 August 31 (b)
|
|
|
14,905,110 |
|
|
|
32.20 |
|
|
|
137,494,890 |
|
September 1 September 30 (c)
|
|
|
5,773,647 |
|
|
|
33.01 |
|
|
|
131,721,243 |
|
|
|
|
|
Total
|
|
|
29,434,318 |
|
|
|
$32.24 |
|
|
|
131,721,243 |
|
|
|
|
|
(a) |
|
All shares purchased during July of 2006 were purchased under
the publicly announced December 21, 2004, authorization. |
(b) |
|
During August of 2006, 2.4 million shares were purchased
under the publicly announced December 21, 2004,
authorization and 12.5 million shares were purchased under
the publicly announced August 3, 2006, authorization. |
(c) |
|
All shares purchased during September of 2006 were purchased
under the publicly announced August 3, 2006,
authorization. |
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 third
quarter and $907 million in the first nine months of 2006, or
increases of $11 million and $41 million,
respectively, compared with the same periods of 2005. The
increases were primarily driven by growth in total net revenue.
Total net revenue increased $15 million (2.2 percent)
in the third quarter and $60 million (2.9 percent) in
the first nine months of 2006, compared with the same periods of
2005. Net interest income, on a taxable-equivalent basis,
increased $2 million in the third quarter and
$40 million in the first nine 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 a wider
spread on total deposits due to their funding benefit during a
rising interest rate environment, partially offset by reduced
loan spreads due to competitive pricing. The increase in average
loans was due to stronger commercial loan and commercial real
estate loan demand in the first nine months of 2006.
Noninterest income increased $13 million (6.3 percent)
and $20 million (3.1 percent) in the third quarter and
first nine months of 2006, respectively, compared with the same
periods of 2005. The third quarter 2006 increase from a year ago
was due to higher revenue from equity investments. The increase
during the first nine months of 2006 was related to higher
commercial products revenue including improvement in equipment
leasing, partially offset by lower other commercial loan fees
and letter of credit fees.
Noninterest expense was flat in the third quarter of 2006,
compared with the third quarter of 2005. Noninterest expense
increased $2 million (.3 percent) in the first nine
months of 2006, compared with the same period of 2005. The
increase was primarily driven by higher personnel-related costs.
The provision for credit losses decreased $2 million in the
third quarter and $7 million in the first nine months of
2006, compared with the same periods of 2005. The decrease in
the provision for credit losses in the third quarter of 2006,
was due to lower net charge-offs compared with the third quarter
of 2005 caused by lower levels of nonperforming assets during
this growth stage of the business cycle and strong credit
underwriting. Nonperforming assets within Wholesale Banking were
$213 million at September 30, 2006, $218 million
at June 30, 2006, and $304 million at
September 30, 2005. Nonperforming assets as a percentage of
period-end loans were .42 percent at September 30,
2006, .43 percent at June 30, 2006, and
..62 percent at September 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
|
|
|
Table 11 |
|
Line of Business Financial Performance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale | |
|
|
Consumer | |
|
|
Banking | |
|
|
Banking | |
|
|
|
|
|
|
|
|
|
|
|
|
Percent | |
|
|
|
|
Percent | |
Three Months Ended September 30 (Dollars in Millions) |
|
2006 | |
|
2005 | |
|
Change | |
|
|
2006 | |
|
2005 | |
|
Change | |
|
|
|
|
Condensed Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (taxable-equivalent basis)
|
|
|
$478 |
|
|
|
$476 |
|
|
|
.4 |
% |
|
|
|
$986 |
|
|
|
$965 |
|
|
|
2.2 |
% |
Noninterest income
|
|
|
219 |
|
|
|
206 |
|
|
|
6.3 |
|
|
|
|
458 |
|
|
|
488 |
|
|
|
(6.1 |
) |
Securities gains (losses), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
697 |
|
|
|
682 |
|
|
|
2.2 |
|
|
|
|
1,444 |
|
|
|
1,453 |
|
|
|
(.6 |
) |
Noninterest expense
|
|
|
224 |
|
|
|
224 |
|
|
|
|
|
|
|
|
623 |
|
|
|
622 |
|
|
|
.2 |
|
Other intangibles
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
12 |
|
|
|
63 |
|
|
|
(81.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
228 |
|
|
|
228 |
|
|
|
|
|
|
|
|
635 |
|
|
|
685 |
|
|
|
(7.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision and income taxes
|
|
|
469 |
|
|
|
454 |
|
|
|
3.3 |
|
|
|
|
809 |
|
|
|
768 |
|
|
|
5.3 |
|
Provision for credit losses
|
|
|
1 |
|
|
|
3 |
|
|
|
(66.7 |
) |
|
|
|
59 |
|
|
|
65 |
|
|
|
(9.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
468 |
|
|
|
451 |
|
|
|
3.8 |
|
|
|
|
750 |
|
|
|
703 |
|
|
|
6.7 |
|
Income taxes and taxable-equivalent adjustment
|
|
|
170 |
|
|
|
164 |
|
|
|
3.7 |
|
|
|
|
273 |
|
|
|
256 |
|
|
|
6.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$298 |
|
|
|
$287 |
|
|
|
3.8 |
|
|
|
|
$477 |
|
|
|
$447 |
|
|
|
6.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
$33,764 |
|
|
|
$31,643 |
|
|
|
6.7 |
% |
|
|
|
$6,447 |
|
|
|
$6,283 |
|
|
|
2.6 |
% |
Commercial real estate
|
|
|
17,139 |
|
|
|
17,091 |
|
|
|
.3 |
|
|
|
|
10,805 |
|
|
|
10,385 |
|
|
|
4.0 |
|
Residential mortgages
|
|
|
61 |
|
|
|
68 |
|
|
|
(10.3 |
) |
|
|
|
20,592 |
|
|
|
18,263 |
|
|
|
12.8 |
|
Retail
|
|
|
44 |
|
|
|
31 |
|
|
|
41.9 |
|
|
|
|
35,586 |
|
|
|
34,710 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
51,008 |
|
|
|
48,833 |
|
|
|
4.5 |
|
|
|
|
73,430 |
|
|
|
69,641 |
|
|
|
5.4 |
|
Goodwill
|
|
|
1,329 |
|
|
|
1,329 |
|
|
|
|
|
|
|
|
2,131 |
|
|
|
2,108 |
|
|
|
1.1 |
|
Other intangible assets
|
|
|
51 |
|
|
|
69 |
|
|
|
(26.1 |
) |
|
|
|
1,490 |
|
|
|
1,193 |
|
|
|
24.9 |
|
Assets
|
|
|
56,359 |
|
|
|
53,809 |
|
|
|
4.7 |
|
|
|
|
82,164 |
|
|
|
78,059 |
|
|
|
5.3 |
|
Noninterest-bearing deposits
|
|
|
11,264 |
|
|
|
12,201 |
|
|
|
(7.7 |
) |
|
|
|
12,663 |
|
|
|
13,319 |
|
|
|
(4.9 |
) |
Interest checking
|
|
|
3,737 |
|
|
|
2,847 |
|
|
|
31.3 |
|
|
|
|
17,437 |
|
|
|
17,333 |
|
|
|
.6 |
|
Savings products
|
|
|
5,481 |
|
|
|
5,181 |
|
|
|
5.8 |
|
|
|
|
20,591 |
|
|
|
23,809 |
|
|
|
(13.5 |
) |
Time deposits
|
|
|
12,022 |
|
|
|
14,080 |
|
|
|
(14.6 |
) |
|
|
|
18,831 |
|
|
|
17,326 |
|
|
|
8.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
32,504 |
|
|
|
34,309 |
|
|
|
(5.3 |
) |
|
|
|
69,522 |
|
|
|
71,787 |
|
|
|
(3.2 |
) |
Shareholders equity
|
|
|
5,800 |
|
|
|
5,503 |
|
|
|
5.4 |
|
|
|
|
6,622 |
|
|
|
6,627 |
|
|
|
(.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale | |
|
|
Consumer | |
|
|
Banking | |
|
|
Banking | |
|
|
|
|
|
|
|
|
|
|
Percent | |
|
|
|
|
Percent | |
Nine Months Ended September 30 (Dollars in Millions) |
|
2006 | |
|
2005 | |
|
Change | |
|
|
2006 | |
|
2005 | |
|
Change | |
|
|
|
|
Condensed Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (taxable-equivalent basis)
|
|
|
$1,440 |
|
|
|
$1,400 |
|
|
|
2.9 |
% |
|
|
|
$2,903 |
|
|
|
$2,824 |
|
|
|
2.8 |
% |
Noninterest income
|
|
|
668 |
|
|
|
654 |
|
|
|
2.1 |
|
|
|
|
1,306 |
|
|
|
1,361 |
|
|
|
(4.0 |
) |
Securities gains (losses), net
|
|
|
2 |
|
|
|
(4 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
2,110 |
|
|
|
2,050 |
|
|
|
2.9 |
|
|
|
|
4,209 |
|
|
|
4,185 |
|
|
|
.6 |
|
Noninterest expense
|
|
|
678 |
|
|
|
676 |
|
|
|
.3 |
|
|
|
|
1,827 |
|
|
|
1,809 |
|
|
|
1.0 |
|
Other intangibles
|
|
|
12 |
|
|
|
12 |
|
|
|
|
|
|
|
|
37 |
|
|
|
189 |
|
|
|
(80.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
690 |
|
|
|
688 |
|
|
|
.3 |
|
|
|
|
1,864 |
|
|
|
1,998 |
|
|
|
(6.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision and income taxes
|
|
|
1,420 |
|
|
|
1,362 |
|
|
|
4.3 |
|
|
|
|
2,345 |
|
|
|
2,187 |
|
|
|
7.2 |
|
Provision for credit losses
|
|
|
(6 |
) |
|
|
1 |
|
|
|
* |
|
|
|
|
176 |
|
|
|
202 |
|
|
|
(12.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,426 |
|
|
|
1,361 |
|
|
|
4.8 |
|
|
|
|
2,169 |
|
|
|
1,985 |
|
|
|
9.3 |
|
Income taxes and taxable-equivalent adjustment
|
|
|
519 |
|
|
|
495 |
|
|
|
4.8 |
|
|
|
|
790 |
|
|
|
723 |
|
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$907 |
|
|
|
$866 |
|
|
|
4.7 |
|
|
|
|
$1,379 |
|
|
|
$1,262 |
|
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
$33,164 |
|
|
|
$31,020 |
|
|
|
6.9 |
% |
|
|
|
$6,381 |
|
|
|
$6,104 |
|
|
|
4.5 |
% |
Commercial real estate
|
|
|
17,262 |
|
|
|
16,779 |
|
|
|
2.9 |
|
|
|
|
10,691 |
|
|
|
10,252 |
|
|
|
4.3 |
|
Residential mortgages
|
|
|
61 |
|
|
|
62 |
|
|
|
(1.6 |
) |
|
|
|
20,478 |
|
|
|
16,808 |
|
|
|
21.8 |
|
Retail
|
|
|
43 |
|
|
|
36 |
|
|
|
19.4 |
|
|
|
|
35,247 |
|
|
|
33,859 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
50,530 |
|
|
|
47,897 |
|
|
|
5.5 |
|
|
|
|
72,797 |
|
|
|
67,023 |
|
|
|
8.6 |
|
Goodwill
|
|
|
1,329 |
|
|
|
1,329 |
|
|
|
|
|
|
|
|
2,115 |
|
|
|
2,109 |
|
|
|
.3 |
|
Other intangible assets
|
|
|
55 |
|
|
|
73 |
|
|
|
(24.7 |
) |
|
|
|
1,425 |
|
|
|
1,159 |
|
|
|
23.0 |
|
Assets
|
|
|
56,032 |
|
|
|
53,068 |
|
|
|
5.6 |
|
|
|
|
81,003 |
|
|
|
74,868 |
|
|
|
8.2 |
|
Noninterest-bearing deposits
|
|
|
11,784 |
|
|
|
12,144 |
|
|
|
(3.0 |
) |
|
|
|
12,686 |
|
|
|
13,067 |
|
|
|
(2.9 |
) |
Interest checking
|
|
|
3,346 |
|
|
|
3,216 |
|
|
|
4.0 |
|
|
|
|
17,614 |
|
|
|
17,236 |
|
|
|
2.2 |
|
Savings products
|
|
|
5,449 |
|
|
|
5,308 |
|
|
|
2.7 |
|
|
|
|
21,425 |
|
|
|
24,587 |
|
|
|
(12.9 |
) |
Time deposits
|
|
|
12,470 |
|
|
|
12,575 |
|
|
|
(.8 |
) |
|
|
|
18,471 |
|
|
|
16,865 |
|
|
|
9.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
33,049 |
|
|
|
33,243 |
|
|
|
(.6 |
) |
|
|
|
70,196 |
|
|
|
71,755 |
|
|
|
(2.2 |
) |
Shareholders equity
|
|
|
5,689 |
|
|
|
5,424 |
|
|
|
4.9 |
|
|
|
|
6,509 |
|
|
|
6,486 |
|
|
|
.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
$111 |
|
|
|
14.4 |
% |
|
|
|
$164 |
|
|
|
$154 |
|
|
|
6.5 |
% |
|
|
|
$(82 |
) |
|
|
$85 |
|
|
|
* |
% |
|
|
|
$1,673 |
|
|
|
$1,791 |
|
|
|
(6.6 |
)% |
|
|
|
354 |
|
|
|
301 |
|
|
|
17.6 |
|
|
|
|
672 |
|
|
|
579 |
|
|
|
16.1 |
|
|
|
|
45 |
|
|
|
1 |
|
|
|
* |
|
|
|
|
1,748 |
|
|
|
1,575 |
|
|
|
11.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
* |
|
|
|
|
|
|
|
|
1 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
481 |
|
|
|
412 |
|
|
|
16.7 |
|
|
|
|
836 |
|
|
|
733 |
|
|
|
14.1 |
|
|
|
|
(37 |
) |
|
|
87 |
|
|
|
* |
|
|
|
|
3,421 |
|
|
|
3,367 |
|
|
|
1.6 |
|
|
|
|
230 |
|
|
|
205 |
|
|
|
12.2 |
|
|
|
|
313 |
|
|
|
274 |
|
|
|
14.2 |
|
|
|
|
59 |
|
|
|
23 |
|
|
|
* |
|
|
|
|
1,449 |
|
|
|
1,348 |
|
|
|
7.5 |
|
|
|
|
20 |
|
|
|
15 |
|
|
|
33.3 |
|
|
|
|
53 |
|
|
|
45 |
|
|
|
17.8 |
|
|
|
|
|
|
|
|
(2 |
) |
|
|
* |
|
|
|
|
89 |
|
|
|
125 |
|
|
|
(28.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250 |
|
|
|
220 |
|
|
|
13.6 |
|
|
|
|
366 |
|
|
|
319 |
|
|
|
14.7 |
|
|
|
|
59 |
|
|
|
21 |
|
|
|
* |
|
|
|
|
1,538 |
|
|
|
1,473 |
|
|
|
4.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231 |
|
|
|
192 |
|
|
|
20.3 |
|
|
|
|
470 |
|
|
|
414 |
|
|
|
13.5 |
|
|
|
|
(96 |
) |
|
|
66 |
|
|
|
* |
|
|
|
|
1,883 |
|
|
|
1,894 |
|
|
|
(.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74 |
|
|
|
88 |
|
|
|
(15.9 |
) |
|
|
|
1 |
|
|
|
(11 |
) |
|
|
* |
|
|
|
|
135 |
|
|
|
145 |
|
|
|
(6.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231 |
|
|
|
192 |
|
|
|
20.3 |
|
|
|
|
396 |
|
|
|
326 |
|
|
|
21.5 |
|
|
|
|
(97 |
) |
|
|
77 |
|
|
|
* |
|
|
|
|
1,748 |
|
|
|
1,749 |
|
|
|
(.1 |
) |
|
|
|
84 |
|
|
|
70 |
|
|
|
20.0 |
|
|
|
|
144 |
|
|
|
119 |
|
|
|
21.0 |
|
|
|
|
(126 |
) |
|
|
(14 |
) |
|
|
* |
|
|
|
|
545 |
|
|
|
595 |
|
|
|
(8.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$147 |
|
|
|
$122 |
|
|
|
20.5 |
|
|
|
|
$252 |
|
|
|
$207 |
|
|
|
21.7 |
|
|
|
|
$29 |
|
|
|
$91 |
|
|
|
(68.1 |
) |
|
|
|
$1,203 |
|
|
|
$1,154 |
|
|
|
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1,847 |
|
|
|
$1,588 |
|
|
|
16.3 |
% |
|
|
|
$3,880 |
|
|
|
$3,570 |
|
|
|
8.7 |
% |
|
|
|
$130 |
|
|
|
$167 |
|
|
|
(22.2 |
)% |
|
|
|
$46,068 |
|
|
|
$43,251 |
|
|
|
6.5 |
% |
|
|
|
695 |
|
|
|
631 |
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62 |
|
|
|
86 |
|
|
|
(27.9 |
) |
|
|
|
28,701 |
|
|
|
28,193 |
|
|
|
1.8 |
|
|
|
|
460 |
|
|
|
405 |
|
|
|
13.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
5 |
|
|
|
|
|
|
|
|
21,118 |
|
|
|
18,741 |
|
|
|
12.7 |
|
|
|
|
2,408 |
|
|
|
2,315 |
|
|
|
4.0 |
|
|
|
|
8,927 |
|
|
|
7,993 |
|
|
|
11.7 |
|
|
|
|
42 |
|
|
|
49 |
|
|
|
(14.3 |
) |
|
|
|
47,007 |
|
|
|
45,098 |
|
|
|
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,410 |
|
|
|
4,939 |
|
|
|
9.5 |
|
|
|
|
12,807 |
|
|
|
11,563 |
|
|
|
10.8 |
|
|
|
|
239 |
|
|
|
307 |
|
|
|
(22.1 |
) |
|
|
|
142,894 |
|
|
|
135,283 |
|
|
|
5.6 |
|
|
|
|
1,379 |
|
|
|
874 |
|
|
|
57.8 |
|
|
|
|
2,477 |
|
|
|
2,061 |
|
|
|
20.2 |
|
|
|
|
1 |
|
|
|
|
|
|
|
* |
|
|
|
|
7,317 |
|
|
|
6,372 |
|
|
|
14.8 |
|
|
|
|
452 |
|
|
|
301 |
|
|
|
50.2 |
|
|
|
|
1,157 |
|
|
|
1,002 |
|
|
|
15.5 |
|
|
|
|
|
|
|
|
2 |
|
|
|
* |
|
|
|
|
3,150 |
|
|
|
2,567 |
|
|
|
22.7 |
|
|
|
|
7,808 |
|
|
|
6,640 |
|
|
|
17.6 |
|
|
|
|
17,850 |
|
|
|
15,475 |
|
|
|
15.3 |
|
|
|
|
49,908 |
|
|
|
51,684 |
|
|
|
(3.4 |
) |
|
|
|
214,089 |
|
|
|
205,667 |
|
|
|
4.1 |
|
|
|
|
4,020 |
|
|
|
3,735 |
|
|
|
7.6 |
|
|
|
|
334 |
|
|
|
163 |
|
|
|
* |
|
|
|
|
(61 |
) |
|
|
16 |
|
|
|
* |
|
|
|
|
28,220 |
|
|
|
29,434 |
|
|
|
(4.1 |
) |
|
|
|
2,418 |
|
|
|
2,325 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
23,595 |
|
|
|
22,508 |
|
|
|
4.8 |
|
|
|
|
5,595 |
|
|
|
5,491 |
|
|
|
1.9 |
|
|
|
|
20 |
|
|
|
17 |
|
|
|
17.6 |
|
|
|
|
27 |
|
|
|
19 |
|
|
|
42.1 |
|
|
|
|
31,714 |
|
|
|
34,517 |
|
|
|
(8.1 |
) |
|
|
|
3,249 |
|
|
|
1,656 |
|
|
|
96.2 |
|
|
|
|
3 |
|
|
|
7 |
|
|
|
(57.1 |
) |
|
|
|
2,341 |
|
|
|
1,456 |
|
|
|
60.8 |
|
|
|
|
36,446 |
|
|
|
34,525 |
|
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,282 |
|
|
|
13,207 |
|
|
|
15.7 |
|
|
|
|
357 |
|
|
|
187 |
|
|
|
90.9 |
|
|
|
|
2,310 |
|
|
|
1,494 |
|
|
|
54.6 |
|
|
|
|
119,975 |
|
|
|
120,984 |
|
|
|
(.8 |
) |
|
|
|
2,337 |
|
|
|
1,654 |
|
|
|
41.3 |
|
|
|
|
4,782 |
|
|
|
4,063 |
|
|
|
17.7 |
|
|
|
|
1,376 |
|
|
|
2,259 |
|
|
|
(39.1 |
) |
|
|
|
20,917 |
|
|
|
20,106 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$379 |
|
|
|
$316 |
|
|
|
19.9 |
% |
|
|
|
$483 |
|
|
|
$435 |
|
|
|
11.0 |
% |
|
|
|
$(110 |
) |
|
|
$328 |
|
|
|
* |
% |
|
|
|
$5,095 |
|
|
|
$5,303 |
|
|
|
(3.9 |
)% |
|
|
|
1,073 |
|
|
|
897 |
|
|
|
19.6 |
|
|
|
|
1,916 |
|
|
|
1,610 |
|
|
|
19.0 |
|
|
|
|
151 |
|
|
|
34 |
|
|
|
* |
|
|
|
|
5,114 |
|
|
|
4,556 |
|
|
|
12.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
(53 |
) |
|
|
* |
|
|
|
|
3 |
|
|
|
(57 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,452 |
|
|
|
1,213 |
|
|
|
19.7 |
|
|
|
|
2,399 |
|
|
|
2,045 |
|
|
|
17.3 |
|
|
|
|
42 |
|
|
|
309 |
|
|
|
(86.4 |
) |
|
|
|
10,212 |
|
|
|
9,802 |
|
|
|
4.2 |
|
|
|
|
705 |
|
|
|
616 |
|
|
|
14.4 |
|
|
|
|
908 |
|
|
|
768 |
|
|
|
18.2 |
|
|
|
|
187 |
|
|
|
153 |
|
|
|
22.2 |
|
|
|
|
4,305 |
|
|
|
4,022 |
|
|
|
7.0 |
|
|
|
|
64 |
|
|
|
46 |
|
|
|
39.1 |
|
|
|
|
150 |
|
|
|
129 |
|
|
|
16.3 |
|
|
|
|
|
|
|
|
1 |
|
|
|
* |
|
|
|
|
263 |
|
|
|
377 |
|
|
|
(30.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
769 |
|
|
|
662 |
|
|
|
16.2 |
|
|
|
|
1,058 |
|
|
|
897 |
|
|
|
17.9 |
|
|
|
|
187 |
|
|
|
154 |
|
|
|
21.4 |
|
|
|
|
4,568 |
|
|
|
4,399 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
683 |
|
|
|
551 |
|
|
|
24.0 |
|
|
|
|
1,341 |
|
|
|
1,148 |
|
|
|
16.8 |
|
|
|
|
(145 |
) |
|
|
155 |
|
|
|
* |
|
|
|
|
5,644 |
|
|
|
5,403 |
|
|
|
4.5 |
|
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
199 |
|
|
|
269 |
|
|
|
(26.0 |
) |
|
|
|
4 |
|
|
|
(13 |
) |
|
|
* |
|
|
|
|
375 |
|
|
|
461 |
|
|
|
(18.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
681 |
|
|
|
549 |
|
|
|
24.0 |
|
|
|
|
1,142 |
|
|
|
879 |
|
|
|
29.9 |
|
|
|
|
(149 |
) |
|
|
168 |
|
|
|
* |
|
|
|
|
5,269 |
|
|
|
4,942 |
|
|
|
6.6 |
|
|
|
|
248 |
|
|
|
200 |
|
|
|
24.0 |
|
|
|
|
416 |
|
|
|
320 |
|
|
|
30.0 |
|
|
|
|
(261 |
) |
|
|
(142 |
) |
|
|
(83.8 |
) |
|
|
|
1,712 |
|
|
|
1,596 |
|
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$433 |
|
|
|
$349 |
|
|
|
24.1 |
|
|
|
|
$726 |
|
|
|
$559 |
|
|
|
29.9 |
|
|
|
|
$112 |
|
|
|
$310 |
|
|
|
(63.9 |
) |
|
|
|
$3,557 |
|
|
|
$3,346 |
|
|
|
6.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1,624 |
|
|
|
$1,576 |
|
|
|
3.0 |
% |
|
|
|
$3,726 |
|
|
|
$3,401 |
|
|
|
9.6 |
% |
|
|
|
$134 |
|
|
|
$162 |
|
|
|
(17.3 |
)% |
|
|
|
$45,029 |
|
|
|
$42,263 |
|
|
|
6.5 |
% |
|
|
|
688 |
|
|
|
641 |
|
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63 |
|
|
|
90 |
|
|
|
(30.0 |
) |
|
|
|
28,704 |
|
|
|
27,762 |
|
|
|
3.4 |
|
|
|
|
449 |
|
|
|
389 |
|
|
|
15.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
7 |
|
|
|
(42.9 |
) |
|
|
|
20,992 |
|
|
|
17,266 |
|
|
|
21.6 |
|
|
|
|
2,411 |
|
|
|
2,302 |
|
|
|
4.7 |
|
|
|
|
8,589 |
|
|
|
7,895 |
|
|
|
8.8 |
|
|
|
|
44 |
|
|
|
49 |
|
|
|
(10.2 |
) |
|
|
|
46,334 |
|
|
|
44,141 |
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,172 |
|
|
|
4,908 |
|
|
|
5.4 |
|
|
|
|
12,315 |
|
|
|
11,296 |
|
|
|
9.0 |
|
|
|
|
245 |
|
|
|
308 |
|
|
|
(20.5 |
) |
|
|
|
141,059 |
|
|
|
131,432 |
|
|
|
7.3 |
|
|
|
|
1,377 |
|
|
|
874 |
|
|
|
57.6 |
|
|
|
|
2,410 |
|
|
|
2,010 |
|
|
|
19.9 |
|
|
|
|
1 |
|
|
|
|
|
|
|
* |
|
|
|
|
7,232 |
|
|
|
6,322 |
|
|
|
14.4 |
|
|
|
|
474 |
|
|
|
316 |
|
|
|
50.0 |
|
|
|
|
1,125 |
|
|
|
960 |
|
|
|
17.2 |
|
|
|
|
|
|
|
|
6 |
|
|
|
* |
|
|
|
|
3,079 |
|
|
|
2,514 |
|
|
|
22.5 |
|
|
|
|
7,589 |
|
|
|
6,642 |
|
|
|
14.3 |
|
|
|
|
17,210 |
|
|
|
15,038 |
|
|
|
14.4 |
|
|
|
|
50,354 |
|
|
|
51,889 |
|
|
|
(3.0 |
) |
|
|
|
212,188 |
|
|
|
201,505 |
|
|
|
5.3 |
|
|
|
|
3,778 |
|
|
|
3,601 |
|
|
|
4.9 |
|
|
|
|
308 |
|
|
|
146 |
|
|
|
* |
|
|
|
|
110 |
|
|
|
45 |
|
|
|
* |
|
|
|
|
28,666 |
|
|
|
29,003 |
|
|
|
(1.2 |
) |
|
|
|
2,395 |
|
|
|
2,432 |
|
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
7 |
|
|
|
(57.1 |
) |
|
|
|
23,358 |
|
|
|
22,891 |
|
|
|
2.0 |
|
|
|
|
5,565 |
|
|
|
5,466 |
|
|
|
1.8 |
|
|
|
|
19 |
|
|
|
15 |
|
|
|
26.7 |
|
|
|
|
31 |
|
|
|
17 |
|
|
|
82.4 |
|
|
|
|
32,489 |
|
|
|
35,393 |
|
|
|
(8.2 |
) |
|
|
|
2,730 |
|
|
|
1,234 |
|
|
|
* |
|
|
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
2,269 |
|
|
|
2,588 |
|
|
|
(12.3 |
) |
|
|
|
35,943 |
|
|
|
33,265 |
|
|
|
8.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,468 |
|
|
|
12,733 |
|
|
|
13.6 |
|
|
|
|
330 |
|
|
|
164 |
|
|
|
* |
|
|
|
|
2,413 |
|
|
|
2,657 |
|
|
|
(9.2 |
) |
|
|
|
120,456 |
|
|
|
120,552 |
|
|
|
(.1 |
) |
|
|
|
2,337 |
|
|
|
1,666 |
|
|
|
40.3 |
|
|
|
|
4,620 |
|
|
|
3,971 |
|
|
|
16.3 |
|
|
|
|
1,388 |
|
|
|
2,364 |
|
|
|
(41.3 |
) |
|
|
|
20,543 |
|
|
|
19,911 |
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
banking, student banking and
24-hour banking.
Consumer Banking contributed $477 million of the
Companys net income in the third quarter and
$1,379 million in the first nine months of 2006, or
increases of $30 million and $117 million,
respectively, compared with the same periods of 2005. While the
retail banking business grew net income 7.5 percent in the
third quarter and 10.4 percent in the first nine months of
2006, the contribution of the mortgage banking business
decreased 2.9 percent and 4.3 percent, respectively,
compared with the same periods of 2005.
Total net revenue decreased $9 million (.6 percent) in
the third quarter and increased $24 million
(.6 percent) in the first nine months of 2006, compared
with the same periods of 2005. Net interest income, on a
taxable-equivalent basis, increased $21 million in the
third quarter and $79 million in the first nine 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 residential mortgages, retail loans,
commercial loans and commercial real estate loans. Residential
mortgages, which include traditional residential mortgages, grew
12.8 percent in the third quarter and 21.8 percent in
the first nine months of 2006, compared with the same periods of
a year ago. Residential mortgage balances increased throughout
2005, reflecting the Companys retention of adjustable-rate
residential mortgages. However, during the first nine months of
2006, residential mortgage balances have increased only slightly
and 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 growth in retail
loans was principally driven by an increase in installment loans
which increased 10.1 percent in the third quarter and
13.6 percent in the first nine months of 2006, over the
same periods of 2005. The year-over-year decreases in average
deposits were primarily due to a reduction in savings and
noninterest-bearing deposit products, offset by growth in
interest checking and time deposits. Average time deposit
balances grew $1.5 billion in the third quarter and
$1.6 billion in the first nine months of 2006, compared
with the same periods of 2005, as a portion of
noninterest-bearing and money market balances migrated to
fixed-rate time deposit products. Average savings balances
declined $3.2 billion (13.5 percent) and
$3.2 billion (12.9 percent) in the third quarter and
first nine months of 2006, respectively, compared with the same
periods of 2005, principally related to money market accounts.
Fee-based noninterest income decreased $30 million in the
third quarter and $55 million in the first nine 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 an increase in
deposit service charges due to increased transaction-related
fees and net new checking accounts. The reduction in mortgage
banking revenue principally reflected the adoption of fair value
accounting for MSRs as of January 1, 2006.
Noninterest expense decreased $50 million
(7.3 percent) in the third quarter and $134 million
(6.7 percent) in the first nine 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 reflected the impact
of the net addition of 33 in-store and 33 traditional branches
at September 30, 2006, compared with September 30,
2005.
The provision for credit losses decreased $6 million and
$26 million in the third quarter and first nine 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 .32 percent in the third quarter of 2006,
compared with .37 percent in the third 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 $2 million in the third
quarter of 2006, compared with the third quarter of 2005. Retail
loan and residential mortgage net charge-offs declined by
$4 million in the third quarter of 2006, compared with the
third quarter of 2005, primarily due to lower bankruptcy losses
and slightly higher retail recoveries. Nonperforming assets
within Consumer Banking were $305 million at
September 30, 2006, $275 million at June 30,
2006, and $302 million at September 30, 2005.
Nonperforming assets as a percentage of period-end loans were
..43 percent at September 30, 2006, .39 percent at
June 30, 2006, and .45 percent at September 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, retail brokerage services, 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
$147 million of the Companys net income in the third
quarter and $433 million in the first nine months of 2006,
or increases of $25 million and $84 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 $69 million (16.7 percent)
in the third quarter and $239 million (19.7 percent)
in the first nine months of 2006, compared with the same periods
of 2005. Net interest income, on a taxable-equivalent basis,
increased $16 million in the third quarter and
$63 million in the first nine 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
$53 million in the third quarter and $176 million in
the first nine months of 2006, compared with the same periods of
2005, driven by account growth, favorable equity market
conditions and the acquisition of a corporate and institutional
trust business in late 2005.
Noninterest expense increased $30 million
(13.6 percent) in the third quarter and $107 million
(16.2 percent) in the first nine months of 2006, compared
with the same periods of 2005. The increases in noninterest
expense were primarily attributable to the acquisition of the
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 $252 million of the Companys net income
in the third quarter and $726 million in the first nine
months of 2006, or increases of $45 million and
$167 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 $103 million
(14.1 percent) in the third quarter and $354 million
(17.3 percent) in the first nine months of 2006, compared
with the same periods of 2005. Net interest income increased
$10 million in the third quarter and $48 million in
the first nine months of 2006, compared with the same periods of
2005. The increases were primarily due to growth in higher
yielding retail loan balances, partially offset by an increase
in non-earning assets resulting in higher funding expense.
Noninterest income increased $93 million in the third
quarter and $306 million in the first nine months of 2006,
compared with the same periods of 2005. The increases in
fee-based revenue were driven by strong growth in credit and
debit card revenue, corporate payment products 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 as well as the acquisition of a freight
payments company in July of 2006. 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 nine months of 2006 also
included the impact of a $10 million settlement in the
first quarter.
Noninterest expense increased $47 million
(14.7 percent) in the third quarter and $161 million
(17.9 percent) in the first nine months of 2006, compared
with the same periods of 2005. The increases in noninterest
expense were primarily attributable to the acquisition of
merchant acquiring and corporate payments 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 $14 million
(15.9 percent) in the third quarter and $70 million
(26.0 percent) in the first nine 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
2.29 percent in the third quarter of 2006, compared with
3.02 percent in the third 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 $29 million in the third quarter and
$112 million in the first nine months of 2006, or decreases
of $62 million and $198 million, respectively,
compared with the same periods of 2005.
Total net revenue decreased $124 million in the third
quarter and $267 million in the first nine 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, including reducing the
investment securities portfolio, changes in interest rate
derivative positions and the issuance of wholesale funding.
Noninterest income increased $43 million in the third
quarter and $171 million in the first nine months of 2006,
compared with the same periods of 2005. The increase in
noninterest income in the third quarter and first nine months of
2006 was driven by a gain on the sale of equity interests in a
card association. The increase during the first nine months of
2006 was also due to trading income from derivatives, a gain
from the initial public offering of a card association realized
in the second quarter of 2006 and securities losses incurred in
the first nine months of 2005.
Noninterest expense increased $38 million in the third
quarter and $33 million in the first nine months of 2006,
compared with the same periods of 2005. The increases in
noninterest expense were driven by higher business integration
costs related to recent acquisitions and amortization of
community development investments.
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
30.7 percent and 32.1 percent in the third quarter and
first nine months of 2006, respectively, compared with
33.7 percent and 32.0 percent in the same periods of
2005, respectively. The effective rate for the third quarter of
2006 reflected an expected increase in income tax credits from
tax-advantaged investments through the remainder of the year.
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.
U.S. Bancorp
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
(Dollars in Millions) |
|
2006 | |
|
2005 | |
| |
|
|
(Unaudited) | |
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
$6,355 |
|
|
|
$8,004 |
|
Investment securities
|
|
|
|
|
|
|
|
|
|
Held-to-maturity (fair value $97 and $113, respectively)
|
|
|
91 |
|
|
|
109 |
|
|
Available-for-sale
|
|
|
39,429 |
|
|
|
39,659 |
|
Loans held for sale
|
|
|
2,649 |
|
|
|
1,686 |
|
Loans
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
46,594 |
|
|
|
42,942 |
|
|
Commercial real estate
|
|
|
28,973 |
|
|
|
28,463 |
|
|
Residential mortgages
|
|
|
21,215 |
|
|
|
20,730 |
|
|
Retail
|
|
|
47,626 |
|
|
|
45,671 |
|
|
|
|
|
|
Total loans
|
|
|
144,408 |
|
|
|
137,806 |
|
|
|
|
Less allowance for loan losses
|
|
|
(2,034 |
) |
|
|
(2,041 |
) |
|
|
|
|
|
|
Net loans
|
|
|
142,374 |
|
|
|
135,765 |
|
Premises and equipment
|
|
|
1,835 |
|
|
|
1,841 |
|
Goodwill
|
|
|
7,444 |
|
|
|
7,005 |
|
Other intangible assets
|
|
|
3,171 |
|
|
|
2,874 |
|
Other assets
|
|
|
13,507 |
|
|
|
12,522 |
|
|
|
|
|
|
Total assets
|
|
|
$216,855 |
|
|
|
$209,465 |
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
|
$30,554 |
|
|
|
$32,214 |
|
|
Interest-bearing
|
|
|
69,095 |
|
|
|
70,024 |
|
|
Time deposits greater than $100,000
|
|
|
21,312 |
|
|
|
22,471 |
|
|
|
|
|
|
Total deposits
|
|
|
120,961 |
|
|
|
124,709 |
|
Short-term borrowings
|
|
|
24,783 |
|
|
|
20,200 |
|
Long-term debt
|
|
|
41,230 |
|
|
|
37,069 |
|
Other liabilities
|
|
|
8,955 |
|
|
|
7,401 |
|
|
|
|
|
|
Total liabilities
|
|
|
195,929 |
|
|
|
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: 9/30/06 40,000 shares
|
|
|
1,000 |
|
|
|
|
|
|
Common stock, par value $0.01 a share authorized:
4,000,000,000 shares; issued: 9/30/06 and
12/31/05 1,972,643,007 shares
|
|
|
20 |
|
|
|
20 |
|
|
Capital surplus
|
|
|
5,770 |
|
|
|
5,907 |
|
|
Retained earnings
|
|
|
20,770 |
|
|
|
19,001 |
|
|
Less cost of common stock in treasury: 9/30/06
209,488,841 shares; 12/31/05
157,689,004 shares
|
|
|
(6,093 |
) |
|
|
(4,413 |
) |
|
Other comprehensive income
|
|
|
(541 |
) |
|
|
(429 |
) |
|
|
|
|
|
Total shareholders equity
|
|
|
20,926 |
|
|
|
20,086 |
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
|
$216,855 |
|
|
|
$209,465 |
|
|
See Notes to Consolidated Financial Statements.
U.S. Bancorp
Consolidated Statement of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
September 30, | |
(Dollars and Shares in Millions, Except Per Share Data) |
|
|
|
(Unaudited) |
|
2006 | |
|
2005 | |
|
|
2006 | |
|
2005 | |
|
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
$2,569 |
|
|
|
$2,167 |
|
|
|
|
$7,350 |
|
|
|
$6,105 |
|
Loans held for sale
|
|
|
40 |
|
|
|
30 |
|
|
|
|
99 |
|
|
|
75 |
|
Investment securities
|
|
|
500 |
|
|
|
492 |
|
|
|
|
1,490 |
|
|
|
1,454 |
|
Other interest income
|
|
|
40 |
|
|
|
29 |
|
|
|
|
119 |
|
|
|
84 |
|
|
|
|
|
|
|
|
Total interest income
|
|
|
3,149 |
|
|
|
2,718 |
|
|
|
|
9,058 |
|
|
|
7,718 |
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
640 |
|
|
|
414 |
|
|
|
|
1,721 |
|
|
|
1,083 |
|
Short-term borrowings
|
|
|
321 |
|
|
|
205 |
|
|
|
|
861 |
|
|
|
460 |
|
Long-term debt
|
|
|
528 |
|
|
|
317 |
|
|
|
|
1,415 |
|
|
|
895 |
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
1,489 |
|
|
|
936 |
|
|
|
|
3,997 |
|
|
|
2,438 |
|
|
|
|
|
|
|
Net interest income
|
|
|
1,660 |
|
|
|
1,782 |
|
|
|
|
5,061 |
|
|
|
5,280 |
|
Provision for credit losses
|
|
|
135 |
|
|
|
145 |
|
|
|
|
375 |
|
|
|
461 |
|
|
|
|
|
|
|
Net interest income after provision for credit losses
|
|
|
1,525 |
|
|
|
1,637 |
|
|
|
|
4,686 |
|
|
|
4,819 |
|
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit and debit card revenue
|
|
|
206 |
|
|
|
185 |
|
|
|
|
590 |
|
|
|
516 |
|
Corporate payment products revenue
|
|
|
150 |
|
|
|
135 |
|
|
|
|
416 |
|
|
|
362 |
|
ATM processing services
|
|
|
63 |
|
|
|
64 |
|
|
|
|
183 |
|
|
|
168 |
|
Merchant processing services
|
|
|
253 |
|
|
|
200 |
|
|
|
|
719 |
|
|
|
576 |
|
Trust and investment management fees
|
|
|
305 |
|
|
|
251 |
|
|
|
|
916 |
|
|
|
751 |
|
Deposit service charges
|
|
|
268 |
|
|
|
246 |
|
|
|
|
764 |
|
|
|
690 |
|
Treasury management fees
|
|
|
111 |
|
|
|
109 |
|
|
|
|
334 |
|
|
|
333 |
|
Commercial products revenue
|
|
|
100 |
|
|
|
103 |
|
|
|
|
311 |
|
|
|
299 |
|
Mortgage banking revenue
|
|
|
68 |
|
|
|
111 |
|
|
|
|
167 |
|
|
|
323 |
|
Investment products fees and commissions
|
|
|
34 |
|
|
|
37 |
|
|
|
|
114 |
|
|
|
115 |
|
Securities gains (losses), net
|
|
|
|
|
|
|
1 |
|
|
|
|
3 |
|
|
|
(57 |
) |
Other
|
|
|
190 |
|
|
|
134 |
|
|
|
|
600 |
|
|
|
423 |
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
1,748 |
|
|
|
1,576 |
|
|
|
|
5,117 |
|
|
|
4,499 |
|
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
632 |
|
|
|
603 |
|
|
|
|
1,892 |
|
|
|
1,782 |
|
Employee benefits
|
|
|
123 |
|
|
|
106 |
|
|
|
|
379 |
|
|
|
330 |
|
Net occupancy and equipment
|
|
|
168 |
|
|
|
162 |
|
|
|
|
494 |
|
|
|
475 |
|
Professional services
|
|
|
54 |
|
|
|
44 |
|
|
|
|
130 |
|
|
|
119 |
|
Marketing and business development
|
|
|
58 |
|
|
|
61 |
|
|
|
|
156 |
|
|
|
171 |
|
Technology and communications
|
|
|
128 |
|
|
|
118 |
|
|
|
|
372 |
|
|
|
337 |
|
Postage, printing and supplies
|
|
|
66 |
|
|
|
64 |
|
|
|
|
198 |
|
|
|
190 |
|
Other intangibles
|
|
|
89 |
|
|
|
125 |
|
|
|
|
263 |
|
|
|
377 |
|
Debt prepayment
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
54 |
|
Other
|
|
|
220 |
|
|
|
190 |
|
|
|
|
673 |
|
|
|
564 |
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
1,538 |
|
|
|
1,473 |
|
|
|
|
4,568 |
|
|
|
4,399 |
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,735 |
|
|
|
1,740 |
|
|
|
|
5,235 |
|
|
|
4,919 |
|
Applicable income taxes
|
|
|
532 |
|
|
|
586 |
|
|
|
|
1,678 |
|
|
|
1,573 |
|
|
|
|
|
|
|
Net income
|
|
|
$1,203 |
|
|
|
$1,154 |
|
|
|
|
$3,557 |
|
|
|
$3,346 |
|
|
|
|
|
|
|
Net income applicable to common equity
|
|
|
$1,187 |
|
|
|
$1,154 |
|
|
|
|
$3,524 |
|
|
|
$3,346 |
|
|
|
|
|
|
|
Earnings per common share
|
|
|
$.67 |
|
|
|
$.63 |
|
|
|
|
$1.98 |
|
|
|
$1.82 |
|
Diluted earnings per common share
|
|
|
$.66 |
|
|
|
$.62 |
|
|
|
|
$1.95 |
|
|
|
$1.80 |
|
Dividends declared per common share
|
|
|
$.33 |
|
|
|
$.30 |
|
|
|
|
$.99 |
|
|
|
$.90 |
|
Average common shares outstanding
|
|
|
1,771 |
|
|
|
1,823 |
|
|
|
|
1,784 |
|
|
|
1,836 |
|
Average diluted common shares outstanding
|
|
|
1,796 |
|
|
|
1,849 |
|
|
|
|
1,809 |
|
|
|
1,862 |
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,346 |
|
|
|
|
|
|
|
|
|
|
|
3,346 |
|
Unrealized loss on securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(211 |
) |
|
|
(211 |
) |
Unrealized loss on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30 |
) |
|
|
(30 |
) |
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
8 |
|
Realized loss on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(197 |
) |
|
|
(197 |
) |
Reclassification adjustment for losses realized in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120 |
|
|
|
120 |
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118 |
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,154 |
|
Cash dividends declared on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,647 |
) |
|
|
|
|
|
|
|
|
|
|
(1,647 |
) |
Issuance of common and treasury stock
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
(62 |
) |
|
|
|
|
|
|
360 |
|
|
|
|
|
|
|
298 |
|
Purchase of treasury stock
|
|
|
(53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,549 |
) |
|
|
|
|
|
|
(1,549 |
) |
Stock option and restricted stock grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72 |
|
Shares reserved to meet deferred compensation obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
(3 |
) |
|
|
|
Balance September 30, 2005
|
|
|
1,818 |
|
|
|
$ |
|
|
|
$20 |
|
|
|
$5,913 |
|
|
|
$18,457 |
|
|
|
$(4,318 |
) |
|
|
$(208 |
) |
|
|
$19,864 |
|
|
Balance December 31, 2005
|
|
|
1,815 |
|
|
|
$ |
|
|
|
$20 |
|
|
|
$5,907 |
|
|
|
$19,001 |
|
|
|
$(4,413 |
) |
|
|
$(429 |
) |
|
|
$20,086 |
|
Change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,557 |
|
|
|
|
|
|
|
|
|
|
|
3,557 |
|
Unrealized loss on securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52 |
) |
|
|
(52 |
) |
Unrealized gain on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 |
|
|
|
39 |
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
5 |
|
Realized loss on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(199 |
) |
|
|
(199 |
) |
Reclassification adjustment for losses realized in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28 |
|
|
|
28 |
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,445 |
|
Cash dividends declared:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
|
(33 |
) |
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,759 |
) |
|
|
|
|
|
|
|
|
|
|
(1,759 |
) |
Issuance of common and treasury stock
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
(95 |
) |
|
|
|
|
|
|
812 |
|
|
|
|
|
|
|
717 |
|
Purchase of treasury stock
|
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,488 |
) |
|
|
|
|
|
|
(2,488 |
) |
Stock option and restricted stock grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
Shares reserved to meet deferred compensation obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
(3 |
) |
Issuance of preferred stock
|
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
948 |
|
|
|
|
Balance September 30, 2006
|
|
|
1,763 |
|
|
|
$1,000 |
|
|
|
$20 |
|
|
|
$5,770 |
|
|
|
$20,770 |
|
|
|
$(6,093 |
) |
|
|
$(541 |
) |
|
|
$20,926 |
|
|
See Notes to Consolidated Financial Statements.
U.S. Bancorp
Consolidated Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
(Dollars in Millions) |
|
|
|
|
(Unaudited) |
|
2006 | |
|
2005 | |
| |
Operating Activities
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
$4,512 |
|
|
|
$2,899 |
|
Investing Activities
|
|
|
|
|
|
|
|
|
Proceeds from sales of available-for-sale investment securities
|
|
|
1,132 |
|
|
|
3,065 |
|
Proceeds from maturities of investment securities
|
|
|
3,174 |
|
|
|
8,072 |
|
Purchases of investment securities
|
|
|
(5,094 |
) |
|
|
(10,430 |
) |
Net (increase) decrease in loans outstanding
|
|
|
(5,455 |
) |
|
|
(8,940 |
) |
Proceeds from sales of loans
|
|
|
1,394 |
|
|
|
1,150 |
|
Purchases of loans
|
|
|
(2,171 |
) |
|
|
(2,581 |
) |
Acquisitions, net of cash acquired
|
|
|
(587 |
) |
|
|
(279 |
) |
Other, net
|
|
|
(305 |
) |
|
|
(1,216 |
) |
|
|
|
|
Net cash used in investing activities
|
|
|
(7,912 |
) |
|
|
(11,159 |
) |
Financing Activities
|
|
|
|
|
|
|
|
|
Net increase (decrease) in deposits
|
|
|
(4,313 |
) |
|
|
54 |
|
Net increase (decrease) in short-term borrowings
|
|
|
4,462 |
|
|
|
9,977 |
|
Principal payments or redemption of long-term debt
|
|
|
(9,103 |
) |
|
|
(9,248 |
) |
Proceeds from issuance of long-term debt
|
|
|
13,379 |
|
|
|
11,002 |
|
Proceeds from issuance of preferred stock
|
|
|
948 |
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
613 |
|
|
|
246 |
|
Repurchase of common stock
|
|
|
(2,480 |
) |
|
|
(1,605 |
) |
Cash dividends paid on preferred stock
|
|
|
(17 |
) |
|
|
|
|
Cash dividends paid on common stock
|
|
|
(1,777 |
) |
|
|
(1,660 |
) |
|
|
|
|
Net cash provided by financing activities
|
|
|
1,712 |
|
|
|
8,766 |
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
(1,688 |
) |
|
|
506 |
|
Cash and cash equivalents at beginning of period
|
|
|
8,202 |
|
|
|
6,537 |
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
|
$6,514 |
|
|
|
$7,043 |
|
|
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 |
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans In
September 2006, the Financial Accounting Standards Board
(FASB) issued Statement No. 158
(SFAS 158), Employers Accounting
for Defined Benefit Pension and Other Postretirement
Plans an amendment of FASB Statements No. 87,
88, 106, and 132(R), effective for the Company for the
year ending December 31, 2006. This statement requires the
recognition of the overfunded or underfunded status of a defined
benefit postretirement plan as an asset or liability on the
balance sheet, and recognition of changes in that funded status
in the year in which the changes occur through other
comprehensive income. The adoption of SFAS 158 is not
expected to have a material impact on the Companys
financial statements.
Fair Value Measurements In
September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157 (SFAS 157),
Fair Value Measurements, effective for the Company
beginning on January 1, 2008, with earlier adoption
permitted. This Statement defines fair value, establishes a
framework for measuring fair value, and expands disclosures
about fair value measurements. This statement establishes a fair
value hierarchy that distinguishes between valuations obtained
from sources independent of the entity and those from the
entitys own unobservable inputs that are not corroborated
by observable market data. SFAS 157 expands disclosures
about the use of fair value to measure assets and liabilities in
interim and annual periods subsequent to initial recognition.
The disclosures focus on the inputs used to measure fair value
and for recurring fair value measurements using significant
unobservable inputs, the effect of the measurements on earnings
or changes in net assets for the period. This statement
encourages an entity to combine the fair value information
disclosed under this statement with the fair value information
disclosed under other accounting pronouncements, including
SFAS 107, Disclosures about Fair Value of Financial
Instruments, where practicable. The Company is currently
assessing the impact of this guidance on its financial
statements.
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.
Accounting for Servicing of Financial Assets
In March 2006, the 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).
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 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
|
|
|
$7 |
|
|
|
$ |
|
|
|
$ |
|
|
|
$7 |
|
|
|
|
$8 |
|
|
|
$ |
|
|
|
$ |
|
|
|
$8 |
|
|
Obligations of state and political subdivisions
|
|
|
71 |
|
|
|
6 |
|
|
|
|
|
|
|
77 |
|
|
|
|
84 |
|
|
|
5 |
|
|
|
(1 |
) |
|
|
88 |
|
|
Other debt securities
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
|
|
Total held-to-maturity securities
|
|
|
$91 |
|
|
|
$6 |
|
|
|
$ |
|
|
|
$97 |
|
|
|
|
$109 |
|
|
|
$5 |
|
|
|
$(1 |
) |
|
|
$113 |
|
|
|
|
|
Available-for-sale (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
|
|
$455 |
|
|
|
$1 |
|
|
|
$(7 |
) |
|
|
$449 |
|
|
|
|
$496 |
|
|
|
$2 |
|
|
|
$(9 |
) |
|
|
$489 |
|
|
Mortgage-backed securities
|
|
|
34,978 |
|
|
|
84 |
|
|
|
(855 |
) |
|
|
34,207 |
|
|
|
|
38,161 |
|
|
|
86 |
|
|
|
(733 |
) |
|
|
37,514 |
|
|
Asset-backed securities
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
Obligations of state and political subdivisions
|
|
|
3,695 |
|
|
|
63 |
|
|
|
|
|
|
|
3,758 |
|
|
|
|
640 |
|
|
|
3 |
|
|
|
(6 |
) |
|
|
637 |
|
|
Other securities and investments
|
|
|
1,004 |
|
|
|
9 |
|
|
|
(5 |
) |
|
|
1,008 |
|
|
|
|
1,012 |
|
|
|
2 |
|
|
|
(7 |
) |
|
|
1,007 |
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
|
$40,139 |
|
|
|
$157 |
|
|
|
$(867 |
) |
|
|
$39,429 |
|
|
|
|
$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 6.5 years at
September 30, 2006, compared with 6.1 years at
December 31, 2005. The corresponding weighted-average
yields were 5.25 percent and 4.89 percent,
respectively. The weighted-average maturity of the
held-to-maturity
investment securities was 8.2 years at September 30,
2006, compared with 7.2 years at December 31, 2005.
The corresponding weighted-average yields were 6.44 percent
at September 30, 2006, and December 31, 2005.
Securities carried at $37.8 billion
at September 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 $9.7 billion at September 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 | |
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
September 30, | |
|
|
|
|
(Dollars in Millions) |
|
2006 | |
|
2005 | |
|
|
2006 | |
|
2005 | |
|
|
|
|
Taxable
|
|
|
$465 |
|
|
|
$488 |
|
|
|
|
$1,416 |
|
|
|
$1,443 |
|
Non-taxable
|
|
|
35 |
|
|
|
4 |
|
|
|
|
74 |
|
|
|
11 |
|
|
|
|
|
|
|
|
Total interest income from investment securities
|
|
|
$500 |
|
|
|
$492 |
|
|
|
|
$1,490 |
|
|
|
$1,454 |
|
|
|
|
|
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 | |
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
September 30, | |
|
|
|
|
(Dollars in Millions) |
|
2006 | |
|
2005 | |
|
|
2006 | |
|
2005 | |
|
|
|
|
Realized gains
|
|
|
$ |
|
|
|
$1 |
|
|
|
|
$4 |
|
|
|
$13 |
|
Realized losses
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(70 |
) |
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
|
$ |
|
|
|
$1 |
|
|
|
|
$3 |
|
|
|
$(57 |
) |
|
|
|
|
|
|
Income tax (benefit) on realized gains (losses)
|
|
|
$ |
|
|
|
$ |
|
|
|
|
$1 |
|
|
|
$(22 |
) |
|
|
|
|
For amortized cost, fair value and yield
by maturity date of
held-to-maturity and
available-for-sale securities outstanding at September 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
September 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions
|
|
|
$10 |
|
|
|
$ |
|
|
|
|
$3 |
|
|
|
$ |
|
|
|
|
$13 |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$10 |
|
|
|
$ |
|
|
|
|
$3 |
|
|
|
$ |
|
|
|
|
$13 |
|
|
|
$ |
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
|
|
$ |
|
|
|
$ |
|
|
|
|
$332 |
|
|
|
$(7 |
) |
|
|
|
$332 |
|
|
|
$(7 |
) |
|
Mortgage-backed securities
|
|
|
5,726 |
|
|
|
(92 |
) |
|
|
|
23,806 |
|
|
|
(763 |
) |
|
|
|
29,532 |
|
|
|
(855 |
) |
|
Asset-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
Obligations of state and political subdivisions
|
|
|
44 |
|
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
|
79 |
|
|
|
|
|
|
Other securities and investments
|
|
|
70 |
|
|
|
|
|
|
|
|
330 |
|
|
|
(5 |
) |
|
|
|
400 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$5,840 |
|
|
|
$(92 |
) |
|
|
|
$24,510 |
|
|
|
$(775 |
) |
|
|
|
$30,350 |
|
|
|
$(867 |
) |
|
|
|
|
|
|
|
The Companys rationale, by
investment category, for determining if investments with
unrealized losses that are not deemed to be
other-than-temporarily impaired at September 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 September 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 September 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 the 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 September 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 September 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 September 30,
2006.
The composition of the loan portfolio was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 | |
|
|
December 31, 2005 | |
|
|
|
|
|
|
|
|
Percent | |
|
|
|
|
Percent | |
(Dollars in Millions) |
|
Amount | |
|
of Total | |
|
|
Amount | |
|
of Total | |
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
$41,237 |
|
|
|
28.5 |
% |
|
|
|
$37,844 |
|
|
|
27.5 |
% |
|
Lease financing
|
|
|
5,357 |
|
|
|
3.7 |
|
|
|
|
5,098 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
46,594 |
|
|
|
32.2 |
|
|
|
|
42,942 |
|
|
|
31.2 |
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
20,029 |
|
|
|
13.9 |
|
|
|
|
20,272 |
|
|
|
14.7 |
|
|
Construction and development
|
|
|
8,944 |
|
|
|
6.2 |
|
|
|
|
8,191 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
28,973 |
|
|
|
20.1 |
|
|
|
|
28,463 |
|
|
|
20.7 |
|
Residential mortgages
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
15,142 |
|
|
|
10.5 |
|
|
|
|
14,538 |
|
|
|
10.5 |
|
|
Home equity loans, first liens
|
|
|
6,073 |
|
|
|
4.2 |
|
|
|
|
6,192 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
Total residential mortgages
|
|
|
21,215 |
|
|
|
14.7 |
|
|
|
|
20,730 |
|
|
|
15.0 |
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card
|
|
|
7,864 |
|
|
|
5.4 |
|
|
|
|
7,137 |
|
|
|
5.2 |
|
|
Retail leasing
|
|
|
7,068 |
|
|
|
4.9 |
|
|
|
|
7,338 |
|
|
|
5.3 |
|
|
Home equity and second mortgages
|
|
|
15,258 |
|
|
|
10.6 |
|
|
|
|
14,979 |
|
|
|
10.9 |
|
|
Other retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit
|
|
|
2,601 |
|
|
|
1.8 |
|
|
|
|
2,504 |
|
|
|
1.8 |
|
|
|
Installment
|
|
|
4,369 |
|
|
|
3.0 |
|
|
|
|
3,582 |
|
|
|
2.6 |
|
|
|
Automobile
|
|
|
8,431 |
|
|
|
5.9 |
|
|
|
|
8,112 |
|
|
|
5.9 |
|
|
|
Student
|
|
|
2,035 |
|
|
|
1.4 |
|
|
|
|
2,019 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
Total other retail
|
|
|
17,436 |
|
|
|
12.1 |
|
|
|
|
16,217 |
|
|
|
11.7 |
|
|
|
|
|
|
|
|
|
Total retail
|
|
|
47,626 |
|
|
|
33.0 |
|
|
|
|
45,671 |
|
|
|
33.1 |
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
$144,408 |
|
|
|
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
September 30, 2006, and December 31, 2005.
|
|
|
Note 5 |
|
Mortgage Servicing Rights |
The Companys portfolio of residential mortgages serviced
for others was $79.2 billion and $69.0 billion at
September 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. Under this method, the Company records MSRs
initially at fair value and at each subsequent reporting date.
The Company records changes in fair value in noninterest income
in the period in which they occur. Prior to the adoption of
SFAS 156, the initial carrying value of MSRs was amortized
and recorded in noninterest expense as amortization of
intangible assets.
In March 2006, the Company began hedging
the change in fair value of the MSRs using U.S. Treasury
futures and options on U.S. Treasury futures contracts.
Fair value changes 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 net impact of fair
value changes related to MSRs and the futures and options
contracts included in mortgage banking revenue was a net gain of
$7 million and net loss of $3 million for the third
quarter and first nine months of 2006, respectively.
Servicing and other related fees revenue recorded in the third
quarter and first nine months of 2006, was $79 million and
$235 million, respectively.
Changes in fair value of capitalized MSRs are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
Nine Months Ended | |
(Dollars in Millions) |
|
September 30, 2006 | |
|
|
September 30, 2006 | |
| |
Balance at beginning of period
|
|
|
$1,323 |
|
|
|
|
$1,123 |
|
|
Rights purchased
|
|
|
3 |
|
|
|
|
50 |
|
|
Rights capitalized
|
|
|
108 |
|
|
|
|
278 |
|
|
Changes in fair value of MSRs:
|
|
|
|
|
|
|
|
|
|
|
|
Due to change in valuation assumptions (a)
|
|
|
(68 |
) |
|
|
|
3 |
|
|
|
Other changes in fair value (b)
|
|
|
(42 |
) |
|
|
|
(130 |
) |
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
$1,324 |
|
|
|
|
$1,324 |
|
|
|
|
|
|
|
|
|
(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
September 30, 2006, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Down Scenario | |
|
|
Up Scenario | |
|
|
|
|
(Dollars in Millions) |
|
50 bps | |
|
25 bps | |
|
|
25 bps | |
|
50 bps | |
|
|
Net fair value
|
|
|
$(31 |
) |
|
|
$(7 |
) |
|
|
|
$(16 |
) |
|
|
$(56 |
) |
|
|
|
|
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 September 30, 2006, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions) |
|
MRBP | |
|
Government | |
|
Conventional | |
|
Total | |
| |
Servicing portfolio
|
|
|
$7,519 |
|
|
|
$8,614 |
|
|
|
$63,100 |
|
|
|
$79,233 |
|
Fair market value
|
|
|
$149 |
|
|
|
$156 |
|
|
|
$1,019 |
|
|
|
$1,324 |
|
Value (bps) *
|
|
|
198 |
|
|
|
181 |
|
|
|
161 |
|
|
|
167 |
|
Weighted-average servicing fees (bps)
|
|
|
41 |
|
|
|
43 |
|
|
|
36 |
|
|
|
37 |
|
Multiple (value/servicing fees)
|
|
|
4.83 |
|
|
|
4.21 |
|
|
|
4.47 |
|
|
|
4.51 |
|
Weighted-average note rate
|
|
|
5.90 |
% |
|
|
6.11 |
% |
|
|
5.81 |
% |
|
|
5.85 |
% |
Age (in years)
|
|
|
3.4 |
|
|
|
3.0 |
|
|
|
2.3 |
|
|
|
2.5 |
|
Expected life (in years)
|
|
|
7.8 |
|
|
|
6.6 |
|
|
|
6.8 |
|
|
|
6.9 |
|
Discount rate
|
|
|
11.4 |
% |
|
|
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 | |
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
September 30, | |
|
|
|
|
(Dollars and Shares in Millions, Except Per Share Data) |
|
2006 | |
|
2005 | |
|
|
2006 | |
|
2005 | |
|
|
Net income
|
|
|
$1,203 |
|
|
|
$1,154 |
|
|
|
|
$3,557 |
|
|
|
$3,346 |
|
Preferred dividends
|
|
|
16 |
|
|
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common equity
|
|
|
$1,187 |
|
|
|
$1,154 |
|
|
|
|
$3,524 |
|
|
|
$3,346 |
|
Average common shares outstanding
|
|
|
1,771 |
|
|
|
1,823 |
|
|
|
|
1,784 |
|
|
|
1,836 |
|
Net effect of the assumed purchase of stock based on the
treasury stock method for options and stock plans
|
|
|
25 |
|
|
|
26 |
|
|
|
|
25 |
|
|
|
26 |
|
|
|
|
|
|
|
Average diluted common shares outstanding
|
|
|
1,796 |
|
|
|
1,849 |
|
|
|
|
1,809 |
|
|
|
1,862 |
|
|
|
|
|
|
|
Earnings per common share
|
|
|
$.67 |
|
|
|
$.63 |
|
|
|
|
$1.98 |
|
|
|
$1.82 |
|
Diluted earnings per common share
|
|
|
$.66 |
|
|
|
$.62 |
|
|
|
|
$1.95 |
|
|
|
$1.80 |
|
|
|
|
|
Options to purchase 3 million and 15 million
common shares for the three months ended September 30, 2006
and 2005, respectively, and 4 million and 16 million
common shares for the nine months ended September 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: