US Bank 2005 Annual Report Download - page 22

changes and the Company’s ability to generate operating STATEMENT OF INCOME ANALYSIS
leverage within its businesses. Net Interest Income Net interest income, on a taxable-
The provision for credit losses was $666 million for equivalent basis, was $7.1 billion in 2005, $7.1 billion in
2005, a decrease of $3 million (.4 percent) from 2004 due 2004 and $7.2 billion in 2003. Net interest income declined
to improving credit quality reflected in lower levels of $52 million in 2005, reflecting growth in average earning
nonperforming loans, somewhat offset by the effects of a assets, more than offset by lower net interest margins.
$56 million provision recorded in 2005 for charge-offs Average earning assets were $178.4 billion for 2005,
related to new bankruptcy legislation that became effective compared with $168.1 billion and $160.8 billion for 2004
in October, 2005. and 2003, respectively. The $10.3 billion (6.1 percent)
Significant Acquisitions On December 30, 2005, the increase in average earning assets for 2005, compared with
Company acquired the corporate trust and institutional 2004, was primarily driven by increases in residential
custody businesses of Wachovia Corporation in a cash mortgages, commercial loans and retail loans. The net
transaction valued at $720 million initially with an interest margin in 2005 was 3.97 percent, compared with
additional $80 million payable in one year based on 4.25 percent and 4.49 percent in 2004 and 2003,
business retention levels. As a result of this transaction, the respectively. The 28 basis point decline in the 2005 net
Company acquired approximately 14,100 new Corporate interest margin, compared with 2004, reflected the current
Trust client issuances with $410 billion in assets under competitive lending environment, asset/liability management
administration and approximately 1,700 new Institutional decisions and the impact of changes in the yield curve from
Trust and Custody clients with $570 billion in assets under a year ago. Compared with 2004, credit spreads have
administration. The transaction represented total assets tightened by approximately 19 basis points in 2005 across
acquired of $730 million and liabilities assumed of most lending products due to competitive pricing and a
$10 million at the closing date. Included in total assets were change in mix due to growth in lower-spread, fixed-rate
contract and other intangibles with an estimated fair value credit products. The net interest margin also declined due to
of $227 million and goodwill of $500 million. The goodwill the impact of share repurchases, funding incremental
reflected the strategic value of the combined organization’s growth of earning assets with higher cost wholesale
leadership position in the corporate trust and institutional funding, and asset/liability management decisions designed
custody businesses and economies of scale resulting from to minimize the Company’s rate sensitivity position,
the transaction. including issuing longer-term fixed-rate debt and a
Refer to Notes 3 and 4 of the Notes to Consolidated reduction in the Company’s net receive-fixed interest rate
Financial Statements for additional information regarding swap position of 18.3 percent since December 31, 2004.
business combinations and discontinued operations.
ANALYSIS OF NET INTEREST INCOME
2005 2004
(Dollars in Millions) 2005 2004 2003 v 2004 v 2003
Components of net interest income
Income on earning assets (taxable-equivalent basis) (a)******** $ 10,584 $ 9,215 $ 9,286 $ 1,369 $ (71)
Expense on interest-bearing liabilities *********************** 3,496 2,075 2,069 1,421 6
Net interest income (taxable-equivalent basis) ******************* $ 7,088 $ 7,140 $ 7,217 $ (52) $ (77)
Net interest income, as reported ****************************** $ 7,055 $ 7,111 $ 7,189 $ (56) $ (78)
Average yields and rates paid
Earning assets yield (taxable-equivalent basis) *************** 5.93% 5.48% 5.77% .45% (.29)%
Rate paid on interest-bearing liabilities ********************** 2.37 1.53 1.60 .84 (.07)
Gross interest margin (taxable-equivalent basis) ***************** 3.56% 3.95% 4.17% (.39)% (.22)%
Net interest margin (taxable-equivalent basis) ******************* 3.97% 4.25% 4.49% (.28)% (.24)%
Average balances
Investment securities ************************************* $ 42,103 $ 43,009 $ 37,248 $ (906) $5,761
Loans ************************************************** 133,105 122,141 118,362 10,964 3,779
Earning assets ****************************************** 178,425 168,123 160,808 10,302 7,315
Interest-bearing liabilities ********************************** 147,295 136,055 129,004 11,240 7,051
Net free funds (b) **************************************** 31,130 32,068 31,804 (938) 264
(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a federal tax rate of 35 percent.
(b) Represents noninterest-bearing deposits, allowance for loan losses, unrealized gain (loss) on available-for-sale securities, non-earning assets, other noninterest-bearing liabilities and equity.
20 U.S. BANCORP
Table 2