MINNEAPOLIS, Jul 15, 2008 (BUSINESS WIRE) -- U.S. Bancorp (NYSE: USB):
EARNINGS SUMMARY Table 1
----------------------------------------------------------------------
($ in
millions,
except per-
share data) Percent Percent
Change Change
2Q 1Q 2Q 2Q08 vs 2Q08 vs YTD YTD Percent
2008 2008 2007 1Q08 2Q07 2008 2007 Change
---------------------------------------------------------
Net income $950 $1,090 $1,156 (12.8) (17.8) $2,040 $2,286 (10.8)
Diluted
earnings
per common
share .53 .62 .65 (14.5) (18.5) 1.14 1.27 (10.2)
Return on
average
assets (%) 1.58 1.85 2.09 1.71 2.09
Return on
average
common
equity (%) 17.9 21.3 23.0 19.6 22.7
Net interest
margin (%) 3.61 3.55 3.44 3.58 3.47
Efficiency
ratio (%) 47.5 43.5 47.3 45.5 46.8
Tangible
efficiency
ratio (%)
(a) 45.2 41.4 44.6 43.3 44.1
Dividends
declared
per common
share $.425 $.425 $.400 -- 6.3 $.850 $.800 6.3
Book value
per common
share
(period-
end) 11.67 11.55 11.19 1.0 4.3
(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 and intangible amortization.
U.S. Bancorp (NYSE: USB) today reported net income of $950 million
for the second quarter of 2008, compared with $1,156 million for the
second quarter of 2007. Diluted earnings per common share of $.53 in
the second quarter of 2008 were lower than the same period of 2007 by
18.5 percent, or $.12 per diluted common share. Return on average
assets and return on average common equity were 1.58 percent and 17.9
percent, respectively, for the second quarter of 2008, compared with
returns of 2.09 percent and 23.0 percent, respectively, for the second
quarter of 2007. Significant items included in the second quarter of
2008 results were net securities losses of $63 million, which
primarily reflected impairment charges on structured investment
securities, and an incremental provision for credit losses, which
exceeded net-charge-offs by $200 million. Together, these items
reduced earnings per diluted common share by approximately $.11. The
Company's results for the first quarter of 2008 were also affected by
several significant items, including a $492 million gain related to
the Visa Inc. initial public offering that occurred in March of 2008
("Visa Gain"), $253 million of impairment charges on structured
investment securities purchased in the fourth quarter of 2007, a $62
million reduction in pretax income related to the adoption of a new
accounting standard, a $25 million contribution to the U.S. Bancorp
Foundation and a $22 million accrual for certain litigation matters.
In addition, in the first quarter of 2008 the Company's provision for
credit losses exceeded net charge-offs by $192 million. The net impact
from significant items in the first quarter of 2008 was a reduction of
approximately $.02 per diluted common share.
U.S. Bancorp Chairman, President and Chief Executive Officer
Richard K. Davis said, "U.S. Bancorp's earnings for the second quarter
of 2008, although lower than the previous quarter and the same quarter
of 2007, reflected our Company's core strengths and momentum,
including our diversified business mix, prudent approach to credit and
operational risk management, strong balance sheet and capital
position, and commitment to investing for future growth.
"Historically, revenue growth in the second quarter of each year
is seasonally the strongest, particularly for our fee-based
businesses. This seasonal trend was evident again this year, as the
majority of our fee revenue lines posted strong linked quarter
increases, as well as year-over-year growth. Excellent growth in
earning assets, coupled with a higher net interest margin, led to an
increase in net interest income on both a linked quarter and
year-over-year basis of 4.3 percent and 15.6 percent, respectively.
Although the revenue growth rates were reduced overall by several
significant first quarter items, the core revenue growth trends were
favorable and point to the initial success of a number of our revenue
growth initiatives, as well as our advantageous mix of businesses.
"These revenue growth initiatives, in addition to our focus and
capacity to fulfill the needs of both current and new customers, also
led to strong balance sheet growth this quarter. Average earning
assets grew by approximately 10 percent on an annualized basis over
the first quarter of 2008 and slightly above 10 percent
year-over-year. The Company also posted strong growth in average
deposits on a linked quarter annualized basis and year-over-year.
"As predicted, credit costs continued to climb this quarter. Net
charge-offs of $396 million for the quarter were .98 percent of
average loans outstanding, while total nonperforming assets at the end
of the quarter totaled $1,135 million, a 34 percent increase over the
balance at March 31, 2008. In addition to providing for the $396
million of net charge-offs, the Company recorded an incremental
provision for credit losses of $200 million, bringing the allowance to
period end loans coverage ratio to 1.60 percent at June 30, 2008.
Given the continued stress in the economy, we believe this action is
prudent and expect to see net charge-offs increase in the coming
quarter. Despite this upward trend, credit costs are expected to be
manageable for our Company, as we continue to produce solid core
operating results.
"Our capital position remains strong, with the Tier 1 capital
ratio at June 30, 2008, on target at 8.5 percent. Although we have
capacity in our current authorization, we do not anticipate buybacks
between now and the end of the year. We will utilize our strong
internal capital generation to support our growth initiatives, and
rely on our earnings capacity to sustain our dividend and maintain our
well-capitalized position.
"I am very proud of the exceptional efforts of the U.S. Bank team
and, notwithstanding the need to very carefully manage risk during
this challenging economic environment, our Company remains focused on
business growth initiatives, deepening our current customer
relationships and acquiring new customers. As I have said before, we
are "open for business" and are cognizant of the fact that this
environment has created an opportunity for our Company to both
solidify and grow our position in the markets we serve for the benefit
of our customers, communities, employees and shareholders. Our
business model and prudent approach to risk management will enable us
to successfully manage this Company through this stressed period in
the economic cycle."
The Company's net income for the second quarter of 2008 decreased
by $206 million (17.8 percent) from the same period of 2007. The
reduction in net income year-over-year was the net result of a 5.4
percent increase in operating income (income before provision and
taxes), offset by an increase in the provision for credit losses. On a
linked quarter basis, net income declined by $140 million (12.8
percent), as strong growth in net interest income and seasonally
higher fee-based operating revenues were offset by higher credit
losses during the quarter and the net impact of the other significant
items recorded in the first quarter of 2008.
Total net revenue on a taxable-equivalent basis for the second
quarter of 2008 was $3,800 million, $265 million (7.5 percent) higher
than the second quarter of 2007, reflecting a 15.6 percent increase in
net interest income and a modest increase in noninterest income. The
increase in net interest income year-over-year was driven by growth in
earning assets and an improvement in the net interest margin.
Noninterest income from a year ago was relatively flat as strong
growth in the majority of revenue categories was muted by securities
impairments related to certain structured investments and higher
retail lease residual losses. On a linked quarter basis, total net
revenue on a taxable equivalent basis decreased $74 million (1.9
percent). Strong growth in net interest income of 4.3 percent (17.2
percent annualized), seasonally higher fee-based revenue and a
favorable change in net securities losses were more than offset by a
reduction in other noninterest income. The reduction in other
noninterest income primarily reflected the $430 million net favorable
impact on the first quarter of 2008 from the Visa Gain and the
adoption of a new accounting standard.
Total noninterest expense in the second quarter of 2008 was $1,835
million, $165 million (9.9 percent) higher than the second quarter of
2007, and $39 million (2.2 percent) higher than the prior quarter. The
increase year-over-year was principally due to higher costs associated
with business initiatives designed to expand the Company's
geographical presence and strengthen customer relationships, including
investments in relationship managers, branch initiatives, Wealth
Management and Payment Services businesses. The increase in operating
expense also included higher credit collection costs and incremental
costs associated with investments in tax-advantaged projects. On a
linked quarter basis, noninterest expense increased 2.2 percent (8.8
percent annualized), due primarily to higher credit collection costs
and seasonally higher compensation and professional services fees,
offset somewhat by the impact of two expense items in the first
quarter that included a contribution to the Company's foundation and
litigation costs.
Provision for credit losses for the second quarter of 2008 was
$596 million, an increase of $111 million over the first quarter of
2008 and $405 million over the second quarter of 2007. This
represented an incremental increase to the allowance for credit losses
of $200 million in the second quarter of 2008 and $192 million in the
first quarter of 2008. The increase in the provision for credit losses
from a year ago reflected continuing stress in the residential real
estate markets, including homebuilding and related supplier
industries, driven by declining home prices in most geographic
regions. It also reflected the current economic conditions and the
corresponding impact on the commercial and consumer loan portfolios.
Net charge-offs in the second quarter of 2008 were $396 million,
compared with net charge-offs of $293 million in the first quarter of
2008 and $191 million in the second quarter of 2007. Given current
economic conditions and the continuing decline in home and other
collateral values, the Company expects net charge-offs to increase in
the third quarter of 2008. Total nonperforming assets were $1,135
million at June 30, 2008, compared with $845 million at March 31,
2008, and $565 million at June 30, 2007. Nonperforming assets
increased $290 million (34.3 percent) during the second quarter of
2008 over the first quarter of 2008 as a result of stress in
residential home construction and related industries and the impact of
the economic slowdown on other commercial customers. The ratio of the
allowance for credit losses to nonperforming loans was 273 percent at
June 30, 2008, compared with 358 percent at March 31, 2008, and 503
percent at June 30, 2007.
INCOME STATEMENT HIGHLIGHTS Table 2
----------------------------------------------------------------------
(Taxable-
equivalent
basis, $
in
millions,
except
per-share
data) Percent Percent
Change Change
2Q 1Q 2Q 2Q08 vs 2Q08 vs YTD YTD Percent
2008 2008 2007 1Q08 2Q07 2008 2007 Change
----------------------------------------------------------
Net
interest
income $1,908 $1,830 $1,650 4.3 15.6 $3,738 $3,316 12.7
Noninterest
income 1,892 2,044 1,885 (7.4) .4 3,936 3,608 9.1
-------------------- -------------
Total
net
revenue 3,800 3,874 3,535 (1.9) 7.5 7,674 6,924 10.8
Noninterest
expense 1,835 1,796 1,670 2.2 9.9 3,631 3,242 12.0
-------------------- -------------
Income
before
provision
and taxes 1,965 2,078 1,865 (5.4) 5.4 4,043 3,682 9.8
Provision
for credit
losses 596 485 191 22.9 nm 1,081 368 nm
-------------------- -------------
Income
before
taxes 1,369 1,593 1,674 (14.1) (18.2) 2,962 3,314 (10.6)
Taxable-
equivalent
adjustment 33 27 18 22.2 83.3 60 35 71.4
Applicable
income
taxes 386 476 500 (18.9) (22.8) 862 993 (13.2)
-------------------- -------------
Net income $950 $1,090 $1,156 (12.8) (17.8) $2,040 $2,286 (10.8)
-------------------- -------------
Net income
applicable
to common
equity $928 $1,078 $1,141 (13.9) (18.7) $2,006 $2,256 (11.1)
-------------------- -------------
Diluted
earnings
per common
share $.53 $.62 $.65 (14.5) (18.5) $1.14 $1.27 (10.2)
-------------------- -------------
Net Interest Income
Second quarter net interest income on a taxable-equivalent basis
was $1,908 million, compared with $1,650 million in the second quarter
of 2007, an increase of $258 million (15.6 percent). The increase was
due to strong growth in average earning assets as well as an improving
net interest margin from a year ago. Average earning assets for the
period increased over the second quarter of 2007 by $19.8 billion
(10.3 percent), primarily driven by an increase of $17.4 billion (12.0
percent) in average loans and $2.3 billion (5.6 percent) in average
investment securities. During the second quarter of 2008, the net
interest margin increased to 3.61 percent compared with 3.44 percent
in the second quarter of 2007. The improvement in the net interest
margin was due to several factors, including growth in higher spread
assets, the benefit of the Company's current asset/liability position
in a declining interest rate environment and related asset/liability
re-pricing dynamics. Also, short-term funding rates were lower due to
market volatility and changing liquidity in the overnight fed fund
markets given current market conditions.
Net interest income in the second quarter of 2008 increased by $78
million (4.3 percent) compared with the first quarter of 2008. This
favorable variance was due to growth in average earning assets of $5.1
billion (2.5 percent) and an increase in the net interest margin from
3.55 percent in the first quarter of 2008 to 3.61 percent in the
current quarter. Given the current rate environment, asset re-pricing
dynamics and yield curve, the Company expects the net interest margin
to remain relatively stable or decline slightly during the remainder
of 2008.
NET INTEREST INCOME Table 3
----------------------------------------------------------------------
(Taxable-equivalent basis; $ in millions)
Change Change
2Q 1Q 2Q 2Q08 vs 2Q08 vs
2008 2008 2007 1Q08 2Q07
--------------------------------------------------
Components of net
interest income
Income on
earning assets $ 3,067 $ 3,258 $ 3,276 $ (191) $ (209)
Expense on
interest-
bearing
liabilities 1,159 1,428 1,626 (269) (467)
--------------------------------------------------
Net interest income $ 1,908 $ 1,830 $ 1,650 $ 78 $ 258
--------------------------------------------------
Average yields and
rates paid
Earning assets
yield 5.81% 6.32% 6.83% (.51)% (1.02)%
Rate paid on
interest-
bearing
liabilities 2.53 3.20 3.95 (.67) (1.42)
--------------------------------------------------
Gross interest
margin 3.28% 3.12% 2.88% .16% .40%
--------------------------------------------------
Net interest margin 3.61% 3.55% 3.44% .06% .17%
--------------------------------------------------
Average balances
Investment
securities $ 42,999 $ 43,891 $ 40,704 $ (892) $ 2,295
Loans 163,070 155,232 145,653 7,838 17,417
Earning assets 212,089 207,014 192,301 5,075 19,788
Interest-bearing
liabilities 183,855 179,451 165,177 4,404 18,678
Net free funds
(a) 28,234 27,563 27,124 671 1,110
YTD YTD
2008 2007 Change
------------------------------
Components of net interest income
Income on earning assets $ 6,325 $ 6,499 $ (174)
Expense on interest-bearing
liabilities 2,587 3,183 (596)
------------------------------
Net interest income $ 3,738 $ 3,316 $ 422
------------------------------
Average yields and rates paid
Earning assets yield 6.06% 6.82% (.76)%
Rate paid on interest-bearing
liabilities 2.86 3.91 (1.05)
------------------------------
Gross interest margin 3.20% 2.91% .29%
------------------------------
Net interest margin 3.58% 3.47% .11%
------------------------------
Average balances
Investment securities $ 43,446 $ 40,791 $ 2,655
Loans 159,151 145,176 13,975
Earning assets 209,552 191,721 17,831
Interest-bearing liabilities 181,653 163,937 17,716
Net free funds (a) 27,899 27,784 115
(a) 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.
AVERAGE LOANS
----------------------------------------------------------------------
($ in millions) Percent Percent
Change Change
2Q 1Q 2Q 2Q08 vs 2Q08 vs
2008 2008 2007 1Q08 2Q07
-------------------------------------------
Commercial $47,648 $45,471 $41,572 4.8 14.6
Lease financing 6,331 6,238 5,625 1.5 12.6
--------------------------
Total commercial 53,979 51,709 47,197 4.4 14.4
Commercial mortgages 21,192 20,337 19,562 4.2 8.3
Construction and
development 9,281 9,199 8,941 .9 3.8
-------- -------- --------
Total commercial real
estate 30,473 29,536 28,503 3.2 6.9
Residential mortgages 23,307 22,978 21,831 1.4 6.8
Credit card 11,559 11,049 9,120 4.6 26.7
Retail leasing 5,523 5,802 6,662 (4.8) (17.1)
Home equity and second
mortgages 17,106 16,527 15,735 3.5 8.7
Other retail 21,123 17,631 16,605 19.8 27.2
-------- -------- --------
Total retail 55,311 51,009 48,122 8.4 14.9
-------- -------- --------
Total loans $163,070 $155,232 $145,653 5.0 12.0
-------- -------- --------
AVERAGE LOANS Table 4
----------------------------------------------------------------------
($ in millions)
YTD YTD Percent
2008 2007 Change
-------------------------
Commercial $46,559 $41,515 12.1
Lease financing 6,285 5,588 12.5
-------- --------
Total commercial 52,844 47,103 12.2
Commercial mortgages 20,765 19,617 5.9
Construction and development 9,240 8,956 3.2
-------- --------
Total commercial real estate 30,005 28,573 5.0
Residential mortgages 23,142 21,700 6.6
Credit card 11,304 8,879 27.3
Retail leasing 5,662 6,753 (16.2)
Home equity and second mortgages 16,817 15,646 7.5
Other retail 19,377 16,522 17.3
-------- --------
Total retail 53,160 47,800 11.2
-------- --------
Total loans $159,151 $145,176 9.6
-------- --------
Average loans for the second quarter of 2008 were $17.4 billion
(12.0 percent) higher than the second quarter of 2007, driven by
growth in the majority of loan categories. This included growth in
average total retail loans of $7.2 billion (14.9 percent), total
commercial loans of $6.8 billion (14.4 percent), total commercial real
estate loans of $2.0 billion (6.9 percent) and residential mortgages
of $1.5 billion (6.8 percent). Average loans for the second quarter of
2008 were higher than the first quarter of 2008 by $7.8 billion (5.0
percent), again reflecting growth in the majority of loan categories.
Total commercial loans grew by $2.3 billion (4.4 percent) in the
second quarter of 2008 over the first quarter of 2008, driven by
growth in corporate and commercial banking balances as business
customers utilized bank credit facilities, rather than the capital
markets, to fund business growth and liquidity requirements. Total
commercial real estate loans also increased over the first quarter of
2008, primarily reflecting changing market conditions that have
limited borrower access to the capital markets and the impact of an
acquisition. Consumer lending continues to experience strong growth in
installment products, home equity lines and credit card balances.
Retail loan growth in the second quarter of 2008 included a $2.9
billion increase in federally guaranteed student loan balances due to
both the transfer of balances from loans held for sale and a portfolio
purchase.
Average investment securities in the second quarter of 2008 were
$2.3 billion (5.6 percent) higher than the second quarter of 2007. The
increase was driven by the purchase in the fourth quarter of 2007 of
structured investment securities from certain money market funds
managed by an affiliate and an increase in tax exempt municipal
securities, partially offset by a reduction in mortgage-backed
securities. Average investment securities declined by $ .9 billion
(2.0 percent) from the first quarter of 2008 principally due to a
reduction in mortgage-backed securities.
AVERAGE DEPOSITS
----------------------------------------------------------------------
($ in millions) Percent Percent
Change Change
2Q 1Q 2Q 2Q08 vs 2Q08 vs
2008 2008 2007 1Q08 2Q07
-------------------------------------------
Noninterest-bearing
deposits $27,851 $27,119 $27,977 2.7 (.5)
Interest-bearing savings
deposits
Interest checking 32,479 30,303 25,858 7.2 25.6
Money market savings 26,426 25,590 24,603 3.3 7.4
Savings accounts 5,377 5,134 5,443 4.7 (1.2)
--------------------------
Total of savings
deposits 64,282 61,027 55,904 5.3 15.0
Time certificates of
deposit less than
$100,000 12,635 13,607 14,716 (7.1) (14.1)
Time deposits greater than
$100,000 31,041 29,105 20,378 6.7 52.3
--------------------------
Total interest-
bearing deposits 107,958 103,739 90,998 4.1 18.6
--------------------------
Total deposits $135,809 $130,858 $118,975 3.8 14.1
--------------------------
AVERAGE DEPOSITS Table 5
----------------------------------------------------------------------
($ in millions)
YTD YTD Percent
2008 2007 Change
-------------------------
Noninterest-bearing deposits $27,485 $27,828 (1.2)
Interest-bearing savings deposits
Interest checking 31,390 25,470 23.2
Money market savings 26,008 25,154 3.4
Savings accounts 5,256 5,422 (3.1)
-----------------
Total of savings deposits 62,654 56,046 11.8
Time certificates of deposit less than
$100,000 13,121 14,745 (11.0)
Time deposits greater than $100,000 30,073 21,228 41.7
-----------------
Total interest-bearing deposits 105,848 92,019 15.0
-----------------
Total deposits $133,333 $119,847 11.3
-----------------
Average noninterest-bearing deposits for the second quarter of
2008 decreased modestly, $126 million (.5 percent), from the second
quarter of 2007. Average total savings deposits increased
year-over-year by $8.4 billion (15.0 percent) due to a $6.6 billion
increase (25.6 percent) in interest checking balances and a $1.8
billion increase (7.4 percent) in money market savings balances,
driven by higher balances from broker dealer, government and
institutional trust customers. This increase was partially offset by a
modest decline of $66 million (1.2 percent) in average savings
accounts. Average time certificates of deposit less than $100,000 were
lower in the second quarter of 2008 than in the second quarter of 2007
by $2.1 billion (14.1 percent), reflecting the Company's funding and
pricing decisions and competition for these deposits by other
financial institutions that have more limited access to wholesale
funding sources given the current market environment. Time deposits
greater than $100,000 increased by $10.7 billion (52.3 percent) over
the same period of 2007 as a result of both the Company's wholesale
funding decisions and the business lines' ability to attract larger
customer deposits given the current market conditions.
Average noninterest-bearing deposits for the second quarter of
2008 increased modestly compared with the first quarter of 2008. Total
average savings deposits increased $3.3 billion (5.3 percent) from the
first quarter of 2008, primarily due to higher broker dealer and
institutional trust balances. Average time certificates less than
$100,000 declined by $972 million (7.1 percent) from the prior quarter
reflecting competition for these funding sources given current market
conditions. Average time deposits greater than $100,000 increased by
$1.9 billion (6.7 percent) over the prior quarter, primarily due to
wholesale funding decisions and growth in customer time deposits.
NONINTEREST INCOME
----------------------------------------------------------------------
($ in millions) Percent Percent
Change Change
2Q 1Q 2Q 2Q08 vs 2Q08 vs
2008 2008 2007 1Q08 2Q07
-------------------------------------
Credit and debit card revenue $266 $248 $230 7.3 15.7
Corporate payment products
revenue 174 164 159 6.1 9.4
ATM processing services 93 84 82 10.7 13.4
Merchant processing services 309 271 286 14.0 8.0
Trust and investment management
fees 350 335 342 4.5 2.3
Deposit service charges 278 257 277 8.2 .4
Treasury management fees 137 124 126 10.5 8.7
Commercial products revenue 117 112 105 4.5 11.4
Mortgage banking revenue 81 105 68 (22.9) 19.1
Investment products fees and
commissions 37 36 38 2.8 (2.6)
Securities gains (losses), net (63) (251) 3 74.9 nm
Other 113 559 169 (79.8) (33.1)
--------------------
Total noninterest income $1,892 $2,044 $1,885 (7.4) .4
--------------------
NONINTEREST INCOME Table 6
----------------------------------------------------------------------
($ in millions)
YTD YTD Percent
2008 2007 Change
---------------------
Credit and debit card revenue $514 $436 17.9
Corporate payment products revenue 338 306 10.5
ATM processing services 177 159 11.3
Merchant processing services 580 538 7.8
Trust and investment management fees 685 664 3.2
Deposit service charges 535 524 2.1
Treasury management fees 261 237 10.1
Commercial products revenue 229 205 11.7
Mortgage banking revenue 186 135 37.8
Investment products fees and commissions 73 72 1.4
Securities gains (losses), net (314) 4 nm
Other 672 328 nm
-------------
Total noninterest income $3,936 $3,608 9.1
-------------
Noninterest Income
Second quarter noninterest income was $1,892 million, $7 million
(.4 percent) higher than the same quarter of 2007 and $152 million
(7.4 percent) lower than the first quarter of 2008. Noninterest income
compared with the second quarter of 2007 was relatively flat, as
strong fee-based revenue growth in several revenue categories was
muted by impairment charges on certain structured investments and
higher retail lease residual losses from a year ago. Credit and debit
card revenue, corporate payment products revenue, ATM processing
services and merchant processing services were higher in the second
quarter of 2008 than the same period of 2007 by $36 million (15.7
percent), $15 million (9.4 percent), $11 million (13.4 percent) and
$23 million (8.0 percent), respectively. The strong growth in credit
and debit card revenue was primarily driven by an increase in customer
accounts and higher customer transaction volumes over a year ago.
Corporate payment products revenue growth reflected growth in sales
volumes, card usage and business expansion. The ATM processing
services increase was also due to growth in transaction volumes.
Merchant processing services revenue was higher in the second quarter
of 2008 than the same quarter of a year ago due to higher core
transaction volume and business expansion. Trust and investment
management fees increased $8 million (2.3 percent) year-over-year due
to core account growth, partially offset by unfavorable equity market
conditions. Deposit service charges remained relatively flat
year-over-year, partially due to deposit account-related revenue
traditionally reflected in this fee category continuing to migrate to
yield-related loan fees as customers utilized new consumer products.
Treasury management fees increased $11 million (8.7 percent), due
primarily to the favorable impact of declining rates on customer
earnings credits and account growth. Commercial products revenue
increased $12 million (11.4 percent) year-over-year due to higher
commercial loan, syndication and other capital markets fees and
commercial leasing revenue. Mortgage banking revenue increased $13
million (19.1 percent) due to an increase in mortgage servicing income
and production revenue, partially offset by the unfavorable net change
in the valuation of mortgage servicing rights ("MSRs") and related
economic hedging activities. Securities gains (losses) were lower from
a year ago by $66 million due to the impact of the impairment charges
on structured investment securities. Other income declined $56 million
year-over-year, primarily due to the approximate $42 million adverse
impact of higher retail lease residual losses compared with the second
quarter of 2007.
Noninterest income was lower by $152 million (7.4 percent) in the
second quarter of 2008 than the first quarter of 2008, reflecting the
impact of the Visa Gain, partially offset by seasonally higher
fee-based revenue and a favorable variance in securities losses.
Credit and debit card revenue increased $18 million (7.3 percent),
corporate payment products revenue increased $10 million (6.1 percent)
and ATM processing services increased $9 million (10.7 percent) on a
linked quarter basis due to seasonally higher transaction volumes.
Merchant processing services were higher in the second quarter of 2008
compared with the first quarter of 2008 by $38 million (14.0 percent)
due to seasonally strong sales volumes, pricing initiatives and
business expansion. Trust and investment management fees increased $15
million (4.5 percent) on a linked quarter basis, primarily due to
seasonal tax filing fees. Deposit service charges increased $21
million (8.2 percent) compared with seasonally lower transaction fees
in the first quarter of 2008. Treasury management fees increased by
$13 million (10.5 percent) on a linked quarter basis due to higher
government lock box activity and the favorable impact of declining
rates on customer earnings credits. Commercial products revenue
increased from the first quarter of 2008 by $5 million (4.5 percent)
due to higher syndication fees, stand-by letter of credit fees and
commercial leasing gains, partially offset by lower foreign exchange
revenue. In addition, net securities losses reflected a $188 million
favorable variance on a linked quarter basis, due primarily to the
change in the impairment charges recorded on structured investment
securities. These increases were offset by several unfavorable
variances. Other income was lower on a linked quarter basis due to the
$492 million Visa Gain in first quarter of 2008 and due to higher
retail lease residual losses, partially offset by a $62 million
unfavorable impact in first quarter of 2008 related to the adoption of
Statement of Financial Accounting Standard No. 157 "Fair Value
Measurements" ("SFAS 157") on the valuation of certain derivatives.
Mortgage banking revenue decreased by $24 million (22.9 percent) from
the first quarter of 2008 due to an unfavorable change in the
valuation of MSRs and related economic hedging activities and lower
production income, partially offset by an increase in servicing
revenue.
NONINTEREST EXPENSE
----------------------------------------------------------------------
($ in millions) Percent Percent
Change Change
2Q 1Q 2Q 2Q08 vs 2Q08 vs
2008 2008 2007 1Q08 2Q07
-------------------------------------
Compensation $761 $745 $659 2.1 15.5
Employee benefits 129 137 123 (5.8) 4.9
Net occupancy and equipment 190 190 184 -- 3.3
Professional services 59 47 59 25.5 --
Marketing and business
development 66 79 68 (16.5) (2.9)
Technology and communications 149 140 138 6.4 8.0
Postage, printing and supplies 73 71 71 2.8 2.8
Other intangibles 87 87 95 -- (8.4)
Other 321 300 273 7.0 17.6
--------------------
Total noninterest expense $1,835 $1,796 $1,670 2.2 9.9
--------------------
NONINTEREST EXPENSE Table 7
----------------------------------------------------------------------
($ in millions)
YTD YTD Percent
2008 2007 Change
----------------------
Compensation $1,506 $1,294 16.4
Employee benefits 266 256 3.9
Net occupancy and equipment 380 361 5.3
Professional services 106 106 --
Marketing and business development 145 120 20.8
Technology and communications 289 273 5.9
Postage, printing and supplies 144 140 2.9
Other intangibles 174 189 (7.9)
Other 621 503 23.5
--------------
Total noninterest expense $3,631 $3,242 12.0
--------------
Noninterest Expense
Second quarter noninterest expense totaled $1,835 million, an
increase of $165 million (9.9 percent) over the same quarter of 2007
and an increase of $39 million (2.2 percent) over the first quarter of
2008. Compensation expense increased $102 million (15.5 percent) over
the same period of 2007 due to growth in ongoing bank operations,
acquired businesses and other bank initiatives and the adoption of
SFAS 157. Under this new accounting standard, compensation expense is
no longer deferred for origination of mortgage loans held for sale.
Employee benefits expense increased $6 million (4.9 percent)
year-over-year as higher payroll taxes and medical costs were
partially offset by lower pension costs. Net occupancy and equipment
expense increased $6 million (3.3 percent) over the second quarter of
2007, primarily due to acquisitions and branch-based and other
business expansion initiatives. Technology and communications expense
increased $11 million (8.0 percent) year-over-year, primarily due to
increased processing volumes and business expansion. Other expense
increased $48 million (17.6 percent) year-over-year, due primarily to
credit-related costs for other real estate owned and loan collection
activities, investments in tax-advantaged projects, and higher
litigation and fraud costs. These increases were partially offset by a
decrease in other intangibles expense of $8 million (8.4 percent).
Noninterest expense in the second quarter of 2008 was higher than
the first quarter of 2008 by $39 million (2.2 percent). Compensation
expense increased $16 million (2.1 percent) due to continued focus on
business expansion and operations, acquisitions and the timing of
merit increases. Professional services expense increased $12 million
(25.5 percent) on a linked quarter basis, due to the seasonal timing
of legal costs and other consulting projects. Technology and
communications expense increased $9 million (6.4 percent) due to
increased processing volumes and the impact of a vendor credit
received in the first quarter of 2008. Other expense increased by $21
million (7.0 percent) as compared with the first quarter of 2008 due
to credit-related costs for other real estate owned and loan
collection activities, higher fraud losses, and increased investments
in tax-advantaged projects, partially offset by the favorable impact
from $22 million in litigation costs recorded in the prior quarter.
These increases were partially offset by favorable variances in
employee benefits and marketing and business development expenses.
Employee benefits decreased $8 million (5.8 percent) on a linked
quarter basis, due primarily to seasonally lower payroll taxes.
Marketing and business development expense decreased $13 million (16.5
percent) on a linked quarter basis due to a $25 million charitable
contribution in the first quarter of 2008, partially offset by the
timing of Payment Services and Consumer Banking promotions.
Provision for Income Taxes
The provision for income taxes for the second quarter of 2008
resulted in a tax rate on a taxable equivalent basis of 30.6 percent
(effective tax rate of 28.9 percent) compared with 30.9 percent
(effective tax rate of 30.2 percent) in the second quarter of 2007 and
31.6 percent (effective tax rate of 30.4 percent) in the first quarter
of 2008.
ALLOWANCE FOR CREDIT LOSSES Table 8
----------------------------------------------------------------------
($ in millions) 2Q 1Q 4Q 3Q 2Q
2008 2008 2007 2007 2007
----------------------------------
Balance, beginning of period $2,435 $2,260 $2,260 $2,260 $2,260
Net charge-offs
Commercial 51 39 23 26 21
Lease financing 18 16 13 11 8
----------------------------------
Total commercial 69 55 36 37 29
Commercial mortgages 6 4 3 1 7
Construction and development 12 8 7 1 2
----------------------------------
Total commercial real estate 18 12 10 2 9
Residential mortgages 53 26 17 17 15
Credit card 139 108 88 77 81
Retail leasing 8 7 6 3 4
Home equity and second mortgages 48 30 22 20 16
Other retail 61 55 46 43 37
----------------------------------
Total retail 256 200 162 143 138
----------------------------------
Total net charge-offs 396 293 225 199 191
Provision for credit losses 596 485 225 199 191
Acquisitions and other changes 13 (17) -- -- --
----------------------------------
Balance, end of period $2,648 $2,435 $2,260 $2,260 $2,260
----------------------------------
Components
Allowance for loan losses $2,518 $2,251 $2,058 $2,041 $2,028
Liability for unfunded credit
commitments 130 184 202 219 232
----------------------------------
Total allowance for
credit losses $2,648 $2,435 $2,260 $2,260 $2,260
----------------------------------
Gross charge-offs $439 $348 $287 $256 $252
Gross recoveries $43 $55 $62 $57 $61
Allowance for credit losses as a
percentage of
Period-end loans 1.60 1.54 1.47 1.52 1.55
Nonperforming loans 273 358 406 441 503
Nonperforming assets 233 288 328 353 400
Credit Quality
During the second quarter of 2008, credit losses and nonperforming
assets continued to trend higher. The allowance for credit losses was
$2,648 million at June 30, 2008, compared with $2,435 million at March
31, 2008, and $2,260 million at June 30, 2007. As a result of the
continued stress in the residential housing markets, homebuilding and
related industry sectors, and due to the growth of the loan
portfolios, the Company has increased the allowance for credit losses
in the first and second quarters of 2008 by $192 million and $200
million, respectively. The credit stress is being reflected in higher
delinquencies, nonperforming asset levels and net charge-offs relative
to a year ago and the first quarter of 2008. Total net charge-offs in
the second quarter of 2008 were $396 million, compared with the first
quarter of 2008 net charge-offs of $293 million and the second quarter
of 2007 net charge-offs of $191 million. The increase in total net
charge-offs from a year ago was driven by the factors affecting the
residential housing markets as well as credit costs associated with
credit card and other consumer loan growth over the past several
quarters.
Commercial and commercial real estate loan net charge-offs
increased to $87 million in the second quarter of 2008 (.41 percent of
average loans outstanding) compared with $67 million (.33 percent of
average loans outstanding) in the first quarter of 2008 and $38
million (.20 percent of average loans outstanding) in the second
quarter of 2007. This increasing trend in commercial and commercial
real estate net charge-offs reflected increases in nonperforming loans
and delinquencies within the portfolios, especially residential
homebuilding and related industry sectors.
Residential mortgage loan net charge-offs increased to $53 million
in the second quarter of 2008 (.91 percent of average loans
outstanding) compared with $26 million (.46 percent of average loans
outstanding) in the first quarter of 2008 and $15 million (.28 percent
of average loans outstanding) in the second quarter of 2007. The
increased residential mortgage losses were primarily related to loans
originated within the consumer finance division and reflected the
impact of rising foreclosures on sub-prime mortgages and current
economic conditions.
Total retail loan net charge-offs were $256 million (1.86 percent
of average loans outstanding) in the second quarter of 2008 compared
with $200 million (1.58 percent of average loans outstanding) in the
first quarter of 2008 and $138 million (1.15 percent of average loans
outstanding) in the second quarter of 2007. The increased retail loan
credit losses reflected the Company's growth in credit card and
consumer loan balances, seasonally higher losses related to credit
cards, as well as the adverse impact of current economic conditions on
consumers.
The ratio of the allowance for credit losses to period-end loans
was 1.60 percent at June 30, 2008, compared with 1.54 percent at March
31, 2008, and 1.55 percent at June 30, 2007. The ratio of the
allowance for credit losses to nonperforming loans was 273 percent at
June 30, 2008, compared with 358 percent at March 31, 2008, and 503
percent at June 30, 2007.
CREDIT RATIOS Table 9
----------------------------------------------------------------------
(Percent) 2Q 1Q 4Q 3Q 2Q
2008 2008 2007 2007 2007
------------------------
Net charge-offs ratios (a)
Commercial .43 .34 .21 .25 .20
Lease financing 1.14 1.03 .86 .76 .57
Total commercial .51 .43 .29 .31 .25
Commercial mortgages .11 .08 .06 .02 .14
Construction and development .52 .35 .31 .04 .09
Total commercial real estate .24 .16 .14 .03 .13
Residential mortgages .91 .46 .30 .30 .28
Credit card 4.84 3.93 3.29 3.09 3.56
Retail leasing .58 .49 .39 .19 .24
Home equity and second mortgages 1.13 .73 .53 .49 .41
Other retail 1.16 1.25 1.05 1.00 .89
Total retail 1.86 1.58 1.28 1.15 1.15
Total net charge-offs .98 .76 .59 .54 .53
Delinquent loan ratios - 90 days or more past due excluding
nonperforming loans (b)
Commercial .09 .09 .07 .07 .07
Commercial real estate .09 .13 .02 .04 --
Residential mortgages 1.09 .98 .86 .58 .46
Retail .63 .69 .68 .55 .50
Total loans .41 .43 .38 .30 .26
Delinquent loan ratios - 90 days or more past due including
nonperforming loans (b)
Commercial .71 .60 .43 .51 .44
Commercial real estate 1.57 1.18 1.02 .83 .69
Residential mortgages 1.55 1.24 1.10 .79 .65
Retail .74 .77 .73 .61 .58
Total loans 1.00 .86 .74 .65 .57
(a) annualized and calculated on average loan balances
(b) ratios are expressed as a percent of ending loan balances
ASSET QUALITY Table 10
----------------------------------------------------------------------
($ in millions)
Jun 30 Mar 31 Dec 31 Sep 30 Jun 30
2008 2008 2007 2007 2007
----------------------------------
Nonperforming loans
Commercial $265 $201 $128 $161 $128
Lease financing 75 64 53 46 44
----------------------------------
Total commercial 340 265 181 207 172
Commercial mortgages 139 102 84 73 90
Construction and development 326 212 209 153 107
----------------------------------
Total commercial real estate 465 314 293 226 197
Residential mortgages 108 59 54 48 41
Retail 58 42 29 32 39
----------------------------------
Total nonperforming loans 971 680 557 513 449
Other real estate 142 141 111 113 103
Other nonperforming assets 22 24 22 15 13
----------------------------------
Total nonperforming assets (a) $1,135 $845 $690 $641 $565
----------------------------------
Accruing loans 90 days or more past
due $687 $676 $584 $451 $376
----------------------------------
Restructured loans that continue
to accrue interest $1,029 $695 $551 $468 $435
----------------------------------
Nonperforming assets to loans
plus ORE (%) .68 .53 .45 .43 .39
(a) does not include accruing loans 90 days or more past due or
restructured loans that continue to accrue interest
Nonperforming assets at June 30, 2008, totaled $1,135 million,
compared with $845 million at March 31, 2008, and $565 million at June
30, 2007. The ratio of nonperforming assets to loans and other real
estate was .68 percent at June 30, 2008, compared with .53 percent at
March 31, 2008, and .39 percent at June 30, 2007. The increase in
nonperforming assets from a year ago was driven primarily by the
residential construction portfolio and related industries, an increase
in foreclosed residential properties and the impact of the economic
slowdown on other commercial customers. The Company expects
nonperforming assets to continue to increase due to general economic
conditions and continuing stress in the residential mortgage portfolio
and residential construction industry. Accruing loans 90 days or more
past due increased to $687 million at June 30, 2008, compared with
$676 million at March 31, 2008, and $376 million at June 30, 2007.
Similar to nonperforming assets, the increase year-over-year in
delinquent loans that continue to accrue interest was primarily
related to residential mortgages, credit cards and home equity loans.
However, the increase on a linked quarter basis moderated.
Restructured loans that continue to accrue interest have also
increased from the second quarter of 2007 and the first quarter of
2008, reflecting the impact of restructurings for certain residential
mortgage customers in light of current economic conditions. The
Company expects this trend to continue during 2008 as residential home
valuations continue to decline and certain borrowers take advantage of
the Company's mortgage loan restructuring programs.
CAPITAL POSITION Table 11
----------------------------------------------------------------------
($ in millions) Jun 30 Mar 31 Dec 31 Sep 30 Jun 30
2008 2008 2007 2007 2007
-------------------------------------------
Total shareholders'
equity $21,828 $21,572 $21,046 $20,686 $20,330
Tier 1 capital 18,624 18,543 17,539 17,288 16,876
Total risk-based capital 27,502 27,207 25,925 25,820 25,709
Tier 1 capital ratio 8.5% 8.6% 8.3% 8.5% 8.5%
Total risk-based capital
ratio 12.5 12.6 12.2 12.7 13.0
Leverage ratio 7.9 8.1 7.9 8.0 7.9
Common equity to assets 8.2 8.3 8.4 8.6 8.7
Tangible common equity to
assets 5.2 5.3 5.1 5.3 5.2
Total shareholders' equity was $21.8 billion at June 30, 2008,
compared with $21.6 billion at March 31, 2008, and $20.3 billion at
June 30, 2007. The Tier 1 capital ratio was 8.5 percent at June 30,
2008, compared with 8.6 percent at March 31, 2008, and 8.5 percent at
June 30, 2007. The total risk-based capital ratio was 12.5 percent at
June 30, 2008, compared with 12.6 percent at March 31, 2008, and 13.0
percent at June 30, 2007. The leverage ratio was 7.9 percent at June
30, 2008, compared with 8.1 percent at March 31, 2008, and 7.9 percent
at June 30, 2007. Tangible common equity to assets was 5.2 percent at
June 30, 2008, compared with 5.3 percent at March 31, 2008, and 5.2
percent at June 30, 2007. All regulatory ratios continue to be in
excess of stated "well-capitalized" requirements.
COMMON SHARES Table 12
----------------------------------------------------------------------
(Millions) 2Q 1Q 4Q 3Q 2Q
2008 2008 2007 2007 2007
-----------------------------
Beginning shares outstanding 1,738 1,728 1,725 1,728 1,742
Shares issued for stock option and stock
purchase
plans, acquisitions and other corporate
purposes 3 12 3 3 4
Shares repurchased -- (2) -- (6) (18)
-----------------------------
Ending shares outstanding 1,741 1,738 1,728 1,725 1,728
-----------------------------
On August 3, 2006, the Company announced that the Board of
Directors approved an authorization to repurchase 150 million shares
of common stock through December 31, 2008. As of June 30, 2008, there
were approximately 62 million shares remaining to be repurchased under
the authorization.
LINE OF BUSINESS FINANCIAL PERFORMANCE (a)
----------------------------------------------------------------------
($ in millions)
Net Income Percent Change
------------------ ---------------
2Q 1Q 2Q 2Q08 vs 2Q08 vs YTD YTD
Business Line 2008 2008 2007 1Q08 2Q07 2008 2007
--------------------------------------------------
Wholesale Banking $255 $254 $278 .4 (8.3) $509 $545
Consumer Banking 321 387 478 (17.1) (32.8) 708 927
Wealth Management &
Securities
Services 149 147 153 1.4 (2.6) 296 298
Payment Services 278 282 253 (1.4) 9.9 560 481
Treasury and
Corporate Support (53) 20 (6) nm nm (33) 35
------------------ -------------
Consolidated
Company $950 $1,090 $1,156 (12.8) (17.8) $2,040 $2,286
------------------ -------------
(a) preliminary data
LINE OF BUSINESS FINANCIAL PERFORMANCE (a) Table 13
----------------------------------------------------------------------
($ in millions)
2Q 2008
Percent Earnings
Business Line Change Composition
---------------------
Wholesale Banking (6.6) 27%
Consumer Banking (23.6) 34
Wealth Management &
Securities Services (.7) 16
Payment Services 16.4 29
Treasury and Corporate Support nm (6)
-----------
Consolidated Company (10.8) 100%
-----------
(a) preliminary data
Lines of Business
Within the Company, financial performance is measured by major
lines of business, which include Wholesale Banking, Consumer Banking,
Wealth Management & Securities Services, 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. Noninterest expenses incurred by
centrally managed operations or business lines that directly support
another business line's operations are charged to the applicable
business line based on its utilization of those services primarily
measured by the volume of customer activities, number of employees or
other relevant factors. These allocated expenses are reported as net
shared services expense within noninterest expense. 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 Company's diverse customer base. During 2008, certain organization
and methodology changes were made and, accordingly, prior period
results were restated and presented on a comparable basis.
Wholesale Banking offers lending, equipment finance and
small-ticket leasing, depository, treasury management, capital
markets, foreign exchange, international trade services and other
financial services to middle market, large corporate, commercial real
estate, and public sector clients. Wholesale Banking contributed $255
million of the Company's net income in the second quarter of 2008, an
8.3 percent decrease from the same period of 2007 and a .4 percent
increase from the first quarter of 2008. Stronger net interest income
year-over-year and growth in fee-based revenues was offset by
valuation losses due to adverse market conditions, an increase in
total noninterest expense driven by incremental investments in the
wholesale banking business and higher credit costs. Net interest
income increased $30 million year-over-year due to strong growth in
earning assets, partially offset by declining loan rates and a
decrease in the margin benefit of deposits. The decline in total
noninterest income was primarily due to security valuation losses and
lower earnings from equity investments, offset somewhat by growth in
treasury management fees, syndication, commercial loan and other
capital markets fees and higher commercial leasing revenue. Total
noninterest expense increased by $22 million (9.1 percent) over a year
ago, primarily due to higher compensation and employee benefits
expense related to merit increases, expanding the business line's
national corporate banking presence, investments to enhance customer
relationship management, and an acquisition. The provision for credit
losses increased $35 million due to continued credit deterioration in
the homebuilding and commercial home supplier industries.
Wholesale Banking's contribution to net income in the second
quarter of 2008 was relatively flat compared with the first quarter of
2008. Growth in total net revenue (4.9 percent) was offset by a $12
million increase in the provision for credit losses primarily due to
higher net charge-offs, and higher total noninterest expense (7.8
percent). Total net revenue was higher on a linked quarter basis due
to an increase in total noninterest income, while net interest income
was essentially flat to the first quarter of 2008. Growth in average
loans and interest-bearing deposit balances was offset by the effect
of asset repricing and the lower margin benefit of deposits given the
declining rate environment. Total noninterest income increased on a
linked quarter basis due to an increase in treasury management fees,
an increase in commercial products revenue due to higher commercial
leasing gains, stand-by letter of credit and syndication fees, and a
favorable variance in other revenue from an investment in a commercial
real estate business. This was partially offset by security valuation
losses driven by recent market conditions. Total noninterest expense
increased $19 million (7.8 percent) due to a seasonal increase in
compensation expense and higher credit collection-related costs. The
provision for credit losses increased due to higher net charge-offs
principally related to commercial construction lending.
Consumer Banking delivers products and services through banking
offices, telephone servicing and sales, on-line services, direct mail
and ATM processing. It encompasses community banking, metropolitan
banking, in-store banking, small business banking, consumer lending,
mortgage banking, consumer finance, workplace banking, student banking
and 24-hour banking. Consumer Banking contributed $321 million of the
Company's net income in the second quarter of 2008, a 32.8 percent
decrease from the same period of 2007 and a 17.1 percent decrease from
the prior quarter. Within Consumer Banking, the retail banking
division accounted for $285 million of the total contribution, a 36.7
percent decrease on a year-over-year basis and a 16.4 percent decrease
from the prior quarter. The decrease in the retail banking division
from the same period of 2007 was due to lower total net revenue,
growth in total noninterest expense related to incremental business
investments and an increase in the provision for credit losses. Net
interest income for the retail banking division declined
year-over-year as an increase in average loan balances and
yield-related loan fees was more than offset by lower deposit
balances, as customers utilized balances to fund higher living costs,
and a decline in the margin benefit of deposits given the declining
interest rate environment. Total noninterest income for the retail
banking division decreased 7.2 percent from a year ago due to lower
retail lease revenue related to higher retail lease residual losses,
which were partially offset by growth in revenue from ATM processing
services. Total noninterest expense in the second quarter of 2008
increased 9.3 percent for the division over the same quarter of 2007,
reflecting branch expansion initiatives, geographical promotional
activities and customer service initiatives. In addition, the division
experienced higher fraud losses and credit-related costs associated
with other real estate owned and foreclosures. The provision for
credit losses for the retail banking division was higher due to a $97
million year-over-year increase in net charge-offs, reflecting
portfolio growth and credit deterioration in residential mortgages,
home equity and other installment and consumer loan portfolios. In the
second quarter of 2008 the mortgage banking division's contribution
was $36 million, an $8 million increase from the same period of 2007.
The increase for the mortgage banking division's contribution was a
result of higher total net revenue, partially offset by higher
noninterest expense and provision for credit losses. The division's
total net revenue increased by $54 million (59.3 percent) over a year
ago, reflecting an increase in net interest income and an increase in
mortgage servicing income and production revenue, partially offset by
an unfavorable net change in the valuation of mortgage servicing
rights ("MSRs") and related economic hedging activities. As a result
of higher rates and increased loan production, net interest income
increased $40 million as average mortgage loans and loans held for
sale increased over a year ago. Noninterest income was favorably
impacted by loan production and the adoption of SFAS 157 in early
2008. Total noninterest expense for the mortgage banking division
increased $31 million (66.0 percent) over the second quarter of 2007,
primarily due to the impact of the adoption of SFAS 157 on
compensation expense of $18 million, higher production levels from a
year ago and servicing costs associated with other real estate owned
and foreclosures.
Consumer Banking's contribution in the second quarter of 2008
decreased $66 million (17.1 percent) compared with the first quarter
of 2008. The retail banking division's contribution decreased 16.4
percent on a linked quarter basis, driven primarily by an increase in
the provision for credit losses. Total net revenue for the retail
banking division decreased $9 million (.7 percent) due to lower net
interest income, partially offset by an increase in total noninterest
income. Net interest income declined by 2.4 percent on a linked
quarter basis, as the favorable impact of growth in average loan
balances was more than offset by lower deposit balances and changing
credit spreads due to the current yield curve. The increase in total
noninterest income was driven by seasonally higher deposit service
charges and ATM processing services revenue, partially offset by
higher retail lease residual losses. Total noninterest expense for the
retail banking division increased $30 million (4.3 percent) on a
linked quarter basis. This increase was due to higher compensation and
employee benefits expense due to the timing of merit increases, higher
fraud losses and processing costs and the timing of marketing
programs. The provision for credit losses for the division reflected a
$50 million increase in net charge-offs compared with the first
quarter of 2008 reflecting higher consumer delinquencies within these
portfolios. The contribution of the mortgage banking division
decreased $10 million from the first quarter of 2008, driven primarily
by an increase in provision for credit losses. Total net revenue
decreased by 1.4 percent principally due to the net impact of an
unfavorable change in the valuation of MSRs and related economic
hedging activities. Total noninterest expense in the mortgage banking
division increased $3 million (4.0 percent) over the first quarter of
2008, primarily driven by higher processing costs.
Wealth Management & Securities Services provides trust, private
banking, financial advisory, investment management, retail brokerage
services, insurance, custody and mutual fund servicing through five
businesses: Wealth Management, Corporate Trust, FAF Advisors,
Institutional Trust & Custody and Fund Services. Wealth Management &
Securities Services contributed $149 million of the Company's net
income in the second quarter of 2008, a 2.6 percent decrease compared
with the same period of 2007 and a 1.4 percent increase over the first
quarter of 2008. Total net revenue year-over-year remained relatively
flat. Total noninterest income increased (2.4 percent) due to core
account growth, partially offset by unfavorable equity market
conditions from a year ago. Net interest income declined (6.0 percent)
due to a reduction in the margin benefit of deposits. Total
noninterest expense was 3.6 percent higher compared with the same
quarter of 2007, primarily due to higher compensation and employee
benefits expense, partially offset by lower other intangibles expense.
The increase in the business line's contribution in the second
quarter of 2008 compared with the first quarter of 2008 was primarily
due to seasonally higher tax filing fees. This increase was partially
offset by lower net interest income due to the margin impact of
declining rates on deposits and a 2.0 percent increase in total
noninterest expense as compared with the first quarter of 2008.
Payment Services includes consumer and business credit cards,
stored-value cards, debit cards, corporate and purchasing card
services, consumer lines of credit and merchant processing. Payment
Services are highly inter-related with banking products and services
of the other lines of business and rely on access to the bank
subsidiary's settlement network, lower cost funding available to the
Company, cross-selling opportunities and operating efficiencies.
Payment Services contributed $278 million of the Company's net income
in the second quarter of 2008, a 9.9 percent increase over the same
period of 2007 and a 1.4 percent decrease compared with the first
quarter of 2008. Total net revenue increased year-over-year due to
higher net interest income (43.8 percent) and total noninterest income
(10.6 percent). Net interest income increased due to strong growth in
higher spread credit card balances and the timing of asset repricing
in a declining rate environment. During the past year, all payment
processing revenue categories benefited from account growth, higher
transaction volumes and business expansion initiatives. Growth in
total noninterest expense (11.4 percent) year-over-year primarily
reflected new business initiatives, including costs associated with
transaction processing and recent acquisitions. An increase in the
provision for credit losses was driven by an increase in net
charge-offs of $67 million year-over-year, which reflected credit card
portfolio growth, higher delinquency rates and changing economic
conditions from a year ago.
Payment Services' contribution in the second quarter of 2008
decreased slightly (1.4 percent) compared with the first quarter of
2008, as total net revenue growth was offset by an increase in total
noninterest expense (6.7 percent) and in the provision for credit
losses (25.4 percent) due to portfolio growth and changing economic
conditions. Total net revenue was higher due to a 9.2 percent increase
in total noninterest income, partially offset by a 4.3 percent
decrease in net interest income. Total noninterest income increased
due to seasonally higher transaction volumes and changes in rates,
driven by the mix of sales volume. Net interest income decreased as
the benefit from strong growth in retail credit card balances was
offset by declining rates as these assets repriced with the recent
declines in interest rates. The increase in total noninterest expense
was primarily due to an increase in compensation and employee
benefits, including the impact of business expansion initiatives,
increased fraud losses and the timing of marketing programs.
Treasury and Corporate Support includes the Company's investment
portfolios, funding, capital management, 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. Treasury and Corporate Support recorded a net
loss of $53 million in the second quarter of 2008, compared with a net
loss of $6 million in the second quarter of 2007 and net income of $20
million in the first quarter of 2008. Net interest income increased
$185 million in the current quarter over the second quarter of 2007,
reflecting a steepening yield curve, wholesale funding decisions and
the Company's asset/liability position. Total noninterest income
decreased $44 million, primarily reflecting the impairment charges for
certain structured investment securities. Total noninterest expense
was flat year-over-year, reflecting higher compensation and employee
benefits expense, incremental costs associated with investments in
tax-advantaged projects and litigation costs, partially offset by a
reduction in business integration expense and net shared services
expense. The provision for credit losses increased $196 million
representing the incremental charge taken this quarter. This
incremental provision, reflected deterioration in credit quality
within the loan portfolios related to stress in the residential real
estate markets, including homebuilding and related supplier
industries, and the impact of economics conditions on the loan
portfolios.
Net income in the second quarter of 2008 was lower on a linked
quarter basis due to the impact of several significant items
recognized by the Company in the first quarter of 2008. The net change
in operating results, on a linked quarter basis was primarily due to
the $492 million Visa Gain, net of the $62 million for adoption of
SFAS 157 recorded in the first quarter of 2008, partially offset by a
favorable variance on the structured investment securities impairment
charges and the first quarter of 2008 foundation contribution.
Additional schedules containing more detailed information about
the Company's business line results are available on the web at
usbank.com or by calling Investor Relations at 612-303-0781.
RICHARD K. DAVIS, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
AND ANDREW CECERE, VICE CHAIRMAN AND CHIEF FINANCIAL OFFICER, WILL
HOST A CONFERENCE CALL TO REVIEW THE FINANCIAL RESULTS AT 1:00 PM
(CDT) ON TUESDAY, JULY 15, 2008. The conference call will be available
by telephone or on the Internet. To access the conference call from
locations within the United States and Canada, please dial
866-316-1409. Participants calling from outside the United States and
Canada, please dial 706-634-9086. The conference ID number for all
participants is 52522493. For those unable to participate during the
live call, a recording of the call will be available approximately two
hours after the conference call ends on Tuesday, July 15th, and will
run through Tuesday, July 22nd, at 11:00 p.m. (CDT). To access the
recorded message within the United States and Canada, dial
800-642-1687. If calling from outside the United States and Canada,
please dial 706-645-9291 to access the recording. The conference ID is
52522493. Find the recorded call via the Internet at usbank.com.
Minneapolis-based U.S. Bancorp ("USB"), with $247 billion in
assets, is the parent company of U.S. Bank, the 6th largest commercial
bank in the United States. The Company operates 2,542 banking offices
and 4,895 ATMs in 24 states, and provides a comprehensive line of
banking, brokerage, insurance, investment, mortgage, trust and payment
services products to consumers, businesses and institutions. Visit
U.S. Bancorp on the web at usbank.com.
Forward-Looking Statements
The following information appears in accordance with the Private
Securities Litigation Reform Act of 1995:
This press release 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, deterioration in the credit quality of our loan
portfolios or in the value of the collateral securing those loans,
deterioration in the value of securities held in our investment
securities portfolio, 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, effects of critical accounting policies and
judgments, and management's ability to effectively manage credit risk,
market risk, operational risk, legal risk, and regulatory and
compliance risk. 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, 2007, 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.
U.S. Bancorp
Consolidated Statement of Income
(Dollars and Shares in Millions, Three Months Ended Six Months Ended
Except Per Share Data) June 30, June 30,
-----------------------------------
(Unaudited) 2008 2007 2008 2007
----------------------------------------------------------------------
Interest Income
Loans $2,429 $2,616 $4,989 $5,194
Loans held for sale 49 70 122 129
Investment securities 494 516 1,029 1,032
Other interest income 43 34 80 68
-----------------------------------
Total interest income 3,015 3,236 6,220 6,423
Interest Expense
Deposits 458 663 1,064 1,338
Short-term borrowings 263 379 585 707
Long-term debt 419 562 893 1,097
-----------------------------------
Total interest expense 1,140 1,604 2,542 3,142
-----------------------------------
Net interest income 1,875 1,632 3,678 3,281
Provision for credit losses 596 191 1,081 368
-----------------------------------
Net interest income after
provision for credit losses 1,279 1,441 2,597 2,913
Noninterest Income
Credit and debit card revenue 266 230 514 436
Corporate payment products revenue 174 159 338 306
ATM processing services 93 82 177 159
Merchant processing services 309 286 580 538
Trust and investment management
fees 350 342 685 664
Deposit service charges 278 277 535 524
Treasury management fees 137 126 261 237
Commercial products revenue 117 105 229 205
Mortgage banking revenue 81 68 186 135
Investment products fees and
commissions 37 38 73 72
Securities gains (losses), net (63) 3 (314) 4
Other 113 169 672 328
-----------------------------------
Total noninterest income 1,892 1,885 3,936 3,608
Noninterest Expense
Compensation 761 659 1,506 1,294
Employee benefits 129 123 266 256
Net occupancy and equipment 190 184 380 361
Professional services 59 59 106 106
Marketing and business development 66 68 145 120
Technology and communications 149 138 289 273
Postage, printing and supplies 73 71 144 140
Other intangibles 87 95 174 189
Other 321 273 621 503
-----------------------------------
Total noninterest expense 1,835 1,670 3,631 3,242
-----------------------------------
Income before income taxes 1,336 1,656 2,902 3,279
Applicable income taxes 386 500 862 993
-----------------------------------
Net income $950 $1,156 $2,040 $2,286
-----------------------------------
Net income applicable to common
equity $928 $1,141 $2,006 $2,256
-----------------------------------
Earnings per common share $.53 $.66 $1.16 $1.29
Diluted earnings per common share $.53 $.65 $1.14 $1.27
Dividends declared per common
share $.425 $.400 $.850 $.800
Average common shares outstanding 1,740 1,736 1,735 1,744
Average diluted common shares
outstanding 1,756 1,760 1,752 1,770
----------------------------------------------------------------------
U.S. Bancorp
Consolidated Ending Balance Sheet
June 30, December 31, June 30,
(Dollars in Millions) 2008 2007 2007
----------------------------------------------------------------------
Assets (Unaudited) (Unaudited)
Cash and due from banks $7,956 $8,884 $6,534
Investment securities
Held-to-maturity 64 74 81
Available-for-sale 41,058 43,042 39,433
Loans held for sale 3,788 4,819 4,552
Loans
Commercial 55,138 51,074 46,459
Commercial real estate 31,247 29,207 28,421
Residential mortgages 23,301 22,782 21,992
Retail 56,204 50,764 48,836
------------------------------------
Total loans 165,890 153,827 145,708
Less allowance for
loan losses (2,518) (2,058) (2,028)
====================================
Net loans 163,372 151,769 143,680
Premises and equipment 1,811 1,779 1,798
Goodwill 7,851 7,647 7,593
Other intangible assets 3,313 3,043 3,352
Other assets 17,325 16,558 15,507
------------------------------------
Total assets $246,538 $237,615 $222,530
------------------------------------
Liabilities and Shareholders'
Equity
Deposits
Noninterest-bearing $33,970 $33,334 $29,545
Interest-bearing 76,300 72,458 70,216
Time deposits greater than
$100,000 24,861 25,653 19,941
------------------------------------
Total deposits 135,131 131,445 119,702
Short-term borrowings 41,107 32,370 27,160
Long-term debt 39,943 43,440 45,946
Other liabilities 8,529 9,314 9,392
------------------------------------
Total liabilities 224,710 216,569 202,200
Shareholders' equity
Preferred stock 1,500 1,000 1,000
Common stock 20 20 20
Capital surplus 5,682 5,749 5,748
Retained earnings 23,220 22,693 22,110
Less treasury stock (7,075) (7,480) (7,476)
Other comprehensive income (1,519) (936) (1,072)
------------------------------------
Total shareholders' equity 21,828 21,046 20,330
------------------------------------
Total liabilities and
shareholders' equity $246,538 $237,615 $222,530
----------------------------------------------------------------------
SOURCE: U.S. Bancorp
U.S. Bancorp
Media Relations
Steve Dale, 612-303-0784
or
Investor Relations
Judith T. Murphy, 612-303-0783
