US Bank 2006 Annual Report Download - page 27

primarily due to increased investments in tax-advantaged expected return on plan assets based on an actuarially
projects and business integration costs relative to a year ago. derived market-related value and amortization of actuarial
The $78 million (1.3 percent) increase in noninterest gains and losses. The Company’s pension accounting policy
expenses in 2005, compared with 2004, was primarily driven follows generally accepted accounting standards and reflects
by expenses related to business investments, acquired the long-term nature of benefit obligations and the
businesses, and production-based incentives, offset by a investment horizon of plan assets. This accounting guidance
$99 million favorable change in MSR amortization and a has the effect of reducing earnings volatility related to short-
$101 million decrease in debt prepayment charges. term changes in interest rates and market valuations.
Compensation expense was higher year-over-year principally Actuarial gains and losses include the impact of plan
due to business expansion, including in-store branches, amendments and various unrecognized gains and losses
expanding the Company’s payment processing businesses and related to differences in actual plan experience compared
other product sales initiatives. Employee benefits increased with actuarial assumptions, which are deferred and amortized
primarily as a result of higher pension expense, medical costs, over the future service periods of active employees. The
payroll taxes and other benefits. Professional services expense actuarially derived market-related value utilized to determine
rose due to increases in legal and other professional services the expected return on plan assets is based on fair value
related to business initiatives, technology development and adjusted for the difference between expected returns and
integration costs of specific payment processing businesses. actual performance of plan assets. The unrealized difference
Marketing and business development expense increased due between actual experience and expected returns is included in
to marketing initiatives, principally related to brand the actuarially derived market-related value ratably over a
awareness and credit card and prepaid gift card programs. five-year period. At September 30, 2006, this accumulated
Technology and communications expense was higher, unrecognized gain approximated $249 million, compared
reflecting depreciation of technology investments, network with $206 million at September 30, 2005. The impact on
costs associated with the expansion of the payment pension expense of the unrecognized asset gains will
processing businesses, and higher outside data processing incrementally decrease pension costs in each year from 2007
expense associated with expanding a prepaid gift card to 2011, by approximately $18 million, $24 million,
program. Other expense declined primarily due to lower $16 million, $12 million and $3 million, respectively. This
operating and fraud losses and insurance costs, partially assumes that the performance of plan assets in 2007 and
offset by increased investments in affordable housing and beyond equals the assumed LTROR. Actual results will vary
other tax-advantaged projects and higher merchant depending on the performance of plan assets and changes to
processing costs due to the expansion of the payment assumptions required in the future. Refer to Note 1 of the
processing businesses relative to 2004. Notes to Consolidated Financial Statements for further
discussion of the Company’s accounting policies for pension
Pension Plans Because of the long-term nature of pension plans.
plans, the administration and accounting for pensions is In 2006, the Company recognized a pension cost of
complex and can be impacted by several factors, including $81 million compared with a pension cost of $33 million
investment and funding policies, accounting methods and and $9 million in 2005 and 2004, respectively. The
the plans’ actuarial assumptions. The Company and its $48 million increase in pension costs in 2006 was driven by
Compensation Committee have an established process for recognition of net deferred actuarial losses and the impact of
evaluating the plans, their performance and significant plan a lower discount rate. In 2005, pension costs increased by
assumptions, including the assumed discount rate and the $24 million, compared with 2004, also driven by recognition
long-term rate of return (‘‘LTROR’’). Annually the of deferred actuarial losses and the impact of a lower
Company’s Compensation Committee, assisted by outside discount rate.
consultants, evaluates plan objectives, funding policies and In 2007, the Company anticipates that pension costs
investment policies considering its long-term investment will decrease by approximately $27 million. The decrease
time horizon and asset allocation strategies. Note 16 of the will be primarily driven by utilizing a higher discount rate
Notes to Consolidated Financial Statements provides further given the rising interest rate environment and amortization
information on funding practices, investment policies and of unrecognized actuarial gains from prior years, accounting
asset allocation strategies. for approximately $13 million and $14 million of the
Periodic pension expense (or income) includes service anticipated decrease, respectively.
costs, interest costs based on the assumed discount rate, the
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