US Bank 2005 Annual Report Download - page 23

Slightly higher loan fees and the increasing margin benefit approximately $210 million (1.8 percent), over 2004.
of deposits and net free funds partially offset these factors. Average noninterest-bearing deposits in other areas,
Average loans in 2005 were higher by $11.0 billion including commercial banking and Private Client, Trust and
(9.0 percent), compared with 2004, driven by growth in Asset Management, also increased year-over-year. These
residential mortgages, commercial loans and retail loans of favorable variances were offset somewhat by expected
$3.7 billion (25.9 percent), $3.3 billion (8.4 percent) and declines in average noninterest-bearing deposits in corporate
$3.3 billion (7.9 percent), respectively. The significant banking as these customers utilized their excess liquidity to
growth in residential mortgages was, in part, due to an fund their operations.
asset/liability management decision to retain adjustable-rate Average total savings products declined $1.7 billion
mortgage production over the last several quarters. Total (2.9 percent) year-over-year, compared with 2004, due to
average commercial real estate loans increased only reductions in average money market savings account
2.6 percent, relative to 2004, principally due to higher balances and savings accounts, partially offset by higher
refinancing activities during the past two years given the interest checking balances. During 2005, average branch-
interest rate environment. based interest checking deposits increased by $2.2 billion
Average investment securities were $906 million (14.7 percent) due to strong new account growth of 9.0
(2.1 percent) lower in 2005, compared with 2004. The percent, as well as the $1.3 billion migration of the Silver
Company utilizes the investment portfolio as part of its Elite Checking product. This positive variance in branch-
liquidity and asset/liability management practices to based interest checking account deposits was partially offset
minimize structural interest rate and market valuation risks by reductions in other business units. Average money
associated with changing interest rates. The reduction in market savings account balances declined year-over-year by
average investment securities in 2005 principally reflected $3.5 billion (10.8 percent), with declines in both the
maturities and prepayments utilized to fund earning asset branches and other business lines. The decline was primarily
growth. It also reflected the net impact of repositioning the the result of deposit pricing by the Company for money
investment portfolio as part of asset/liability risk market products in relation to other fixed-rate deposit
management decisions to acquire primarily variable-rate products offered. A portion of the money market balances
securities to minimize the Company’s rate sensitivity have migrated to time deposits greater than $100,000 as
position given the changing rate environment and mix of rates increased on the time deposit products. Average time
loan growth. During 2005, the Company received proceeds deposits greater than $100,000 grew $7.0 billion
from prepayments and maturities of securities of (51.0 percent) in 2005, compared with 2004, most notably
$10.3 billion. In response to structural interest rate risk due in corporate banking, as customers migrated balances to
to changing interest rates and the mix of loan growth, the higher rate deposits.
Company also made decisions to sell $4.3 billion of The decline in net interest income in 2004, compared
securities, classified as available-for-sale, recognizing net with 2003, reflected modest growth in average earning
securities losses of $106 million. In 2005, approximately assets, more than offset by lower net interest margins. Also
$13.2 billion was reinvested in principally adjustable-rate contributing to the year-over-year decline was a $38 million
securities, giving consideration to the Company’s reduction in loan fees, the result of fewer loan prepayments
asset/liability position. At December 31, 2005, the in a rising rate environment. The $7.3 billion (4.5 percent)
Company’s investment portfolio consisted of approximately increase in average earning assets for 2004, compared with
41 percent variable-rate securities. Refer to the ‘‘Interest 2003, was primarily driven by increases in residential
Rate Risk Management’’ section for further information on mortgages, retail loans and investment securities, partially
the sensitivity of net interest income to changes in interest offset by a decline in commercial loans and loans held for
rates. sale related to mortgage banking activities. The decline in
Average noninterest-bearing deposits in 2005 were average commercial loans reflected soft loan demand in 2003
lower by $587 million (2.0 percent), compared with 2004. and through the third quarter of 2004. The 24 basis point
The year-over-year change in the average balances of decline in 2004 net interest margin, compared with 2003,
noninterest-bearing deposits was impacted by product primarily reflected the competitive credit pricing environment,
changes in the Consumer Banking business line. In late a preference to acquire adjustable-rate securities which have
2004, the Company migrated approximately $1.3 billion of lower yields and a decline in prepayment fees. The net
noninterest-bearing deposit balances to interest checking interest margin was also impacted by a modest increase in
accounts as an enhancement to its Silver Elite Checking the percent of total earning assets funded by wholesale
product. Average branch-based noninterest-bearing deposits sources of funding and higher interest rates paid on
in 2005, excluding the migration of certain high-value wholesale funding due to the impact of rising rates. In
customers to Silver Elite Checking, were higher by addition, the net interest margin declined year-over-year as a
U.S. BANCORP 21