MINNEAPOLIS--(BUSINESS WIRE)--
U.S. Bancorp (NYSE: USB) today reported its financial results for
the third quarter of 2008. Diluted earnings per common share of $.32
in the current quarter were lower than the $.62 of diluted earnings
per common share reported for the third quarter of 2007. Included in
the results were securities valuation losses representing $.18 per
diluted common share and an incremental provision for credit losses
equal to $.10 per diluted common share. The Company's fundamental
business performance continues to be strong, despite the challenging
financial markets. Results for the third quarter included strong
growth year-over-year in net interest income, average loans and
deposits and fee revenue, as customers continued to seek banks with
strong capital and the ability to provide them with financial products
and services during this period of economic uncertainty. Highlights
for the third quarter of 2008 included:
-- Net interest income growth of 16.7 percent over the third quarter
of 2007, driven by:
-- Average earning assets growth of 10.3 percent
-- Net interest margin expansion: 3.65 percent in the third quarter
of 2008 versus 3.44 percent in the third quarter of 2007
-- Average loan growth of 12.9 percent over the third quarter of 2007,
driven by:
-- Average commercial loan growth of 15.2 percent, principally in
high quality corporate lending
-- Average retail loan growth of 15.2 percent, led by credit card
balances, home equity lines and student loans
-- Average deposit growth of 12.1 percent over the third quarter of
2007, including:
-- Average noninterest-bearing deposits growth of 5.1 percent
-- Average total savings deposit growth of 13.6 percent, led by
24.0 percent growth in interest checking balances
-- Total deposit growth of $4.4 billion, or 3.2 percent, June 30,
2008, to September 30, 2008
-- Credit costs, as expected, trended higher, but coverage ratios
remained strong:
-- Provision for credit losses exceeded net charge-offs by $250
million, resulting in provision expense equal to 150 percent of
net charge-offs
-- Allowance to period-end loans increased to 1.71 percent at
September 30, 2008, compared with 1.60 percent at June 30, 2008
-- Ratio of nonperforming assets to loans plus other real estate
equaled .88 percent at September 30, 2008, well below the
ratios posted by our peer banks-to-date
-- Regulatory capital ratios remained strong and on target at
September 30, 2008, with:
-- Tier 1 capital ratio of 8.5 percent
-- Total risk-based capital ratio of 12.3 percent
-- 89 percent of earnings returned to shareholders in the first
nine months of 2008
EARNINGS SUMMARY Table 1
----------------------------------------------------------------------
($ in millions, Percent Percent
except per- Change Change
share data) 3Q 2Q 3Q 3Q08 vs 3Q08 vs YTD YTD Percent
2008 2008 2007 2Q08 3Q07 2008 2007 Change
------------------------------------------------------
Net income $576 $950 $1,096 (39.4) (47.4) $2,616 $3,382 (22.6)
Diluted
earnings per
common share .32 .53 .62 (39.6) (48.4) 1.46 1.89 (22.8)
Return on
average assets
(%) .94 1.58 1.95 1.45 2.04
Return on
average common
equity (%) 10.8 17.9 21.7 16.6 22.4
Net interest
margin (%) 3.65 3.61 3.44 3.60 3.46
Efficiency
ratio (%) 48.1 47.5 50.0 46.3 47.9
Tangible
efficiency
ratio (%) (a) 45.8 45.2 47.3 44.1 45.2
Dividends
declared per
common share $.425 $.425 $.400 -- 6.3 $1.275 $1.200 6.3
Book value per
common share
(period-end) 11.50 11.67 11.41 (1.5) .8
(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 reported net income of $576 million for the third
quarter of 2008, compared with $1,096 million for the third quarter of
2007. Diluted earnings per common share of $.32 in the third quarter
of 2008 were lower than the same period of 2007 by 48.4 percent, or
$.30 per diluted common share. Return on average assets and return on
average common equity were .94 percent and 10.8 percent, respectively,
for the third quarter of 2008, compared with returns of 1.95 percent
and 21.7 percent, respectively, for the third quarter of 2007.
Challenging market conditions impacted the third quarter of 2008
results. Significant items included in the third quarter of 2008
results were $411 million of securities losses, which included
valuation impairments of structured investment securities, perpetual
preferred stock, including the stock of government sponsored
enterprises ("GSEs"), and certain non-agency mortgage-backed
securities. In addition, the Company recorded other market valuation
losses related to the bankruptcy of an investment banking firm and
continued to build the allowance for credit losses by recording $250
million of provision for credit losses expense in excess of net
charge-offs. These items reduced earnings per diluted common share by
approximately $.28. The Company's results for the second quarter of
2008 were also affected by similar items, including 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 second quarter of 2008 earnings per
diluted common share by approximately $.11.
U.S. Bancorp Chairman, President and Chief Executive Officer
Richard K. Davis said, "U.S. Bancorp's third quarter results reflected
the underlying strength of our banking franchise and business model,
as well as the challenges presented to us by the current operating
environment. Strong year-over-year growth in average loans and
deposits, an expanded net interest margin and higher fee-based
revenue, demonstrated our ability - and on-going opportunity - to
provide banking products and services to our growing customer base.
Although the Company's fundamental performance was solid, earnings per
diluted common share of $.32 were lower than both the previous quarter
of 2008 and the same quarter of 2007, as current market conditions led
to valuation losses on certain investments and higher credit costs.
"Throughout the quarter, our business lines remained focused on
revenue growth initiatives, while continuing to prudently manage risk.
An expansion of the net interest margin to 3.65 percent, along with
strong earning asset growth, resulted in a 16.7 percent increase in
net interest income over the third quarter of 2007. Our fee-based
products also posted strong growth, led by commercial products
revenue, treasury management fees and payments-related revenue. This
year-over-year growth in loans, deposits and fees specifically points
to the successful implementation of a number of revenue growth
initiatives, in addition to the Company's ability to attract new
business. We continue to be viewed as a strong and stable banking
partner.
"As expected, credit costs were higher this quarter, reflecting
stress in the residential mortgage portfolio and residential
homebuilding and related businesses, as well as the overall economy.
Net charge-offs of $498 million were higher than the previous quarter
by 25.8 percent and equal to 1.19 percent of average loans
outstanding. Nonperforming assets ended the quarter at $1,492 million,
an increase of 31.5 percent over the second quarter of this year, and
equal to .88 percent of outstanding loans plus other real estate.
Consistent with the prior two quarters, the Company recorded
incremental provision for credit losses. This $250 million incremental
provision increased the allowance to period-end loans coverage to 1.71
percent at September 30, 2008. Given the current economic conditions,
providing for credit losses over and above net charge-offs is prudent.
We began this credit cycle with a strong balance sheet and we intend
to keep that balance sheet strong throughout, and beyond, the end of
this cycle. Credit costs will continue to increase in the coming
quarter, but we expect that increase to be manageable given the
Company's capacity to produce solid, core operating earnings.
"During September, we publicly disclosed that the Company's third
quarter results would include valuation impairments related to certain
structured investment securities and the perpetual preferred stock of
two government sponsored enterprises. The Company's results for the
quarter included the losses as presented in September, along with
additional write-downs related to events that took place subsequent to
that disclosure, including a bankruptcy and certain financial
institution failures. In total, these market-related losses reduced
third quarter earnings per diluted common share by $.18.
"Our capital position remains strong. The Company's Tier 1 capital
ratio at September 30, 2008, was 8.5 percent, on target and equal to
the ratio at the end of the second quarter. Our strong capital
position has enabled us to grow our businesses, while still returning
a substantial portion of our earnings to shareholders, primarily
through dividends. Year-to-date, we have returned 89 percent of
earnings to shareholders.
"Finally, I want to take a moment to thank all of our employees
for their exceptional effort and dedication during this past year.
These historic times have presented challenges, but they have also
given our employees the opportunity to focus on building deeper
relationships with our customers, serving our communities and creating
value for our shareholders. Our employees have embraced this
opportunity and are now, and will be, a critical component in our
ability to grow, prosper and meet the challenges of the future. Our
54,000 employees are engaged, focused and dedicated to maintaining and
enhancing U.S. Bancorp's position of strength within our markets and
the financial services industry."
The Company's net income for the third quarter of 2008 decreased
by $520 million (47.4 percent) from the same period of 2007. The
reduction in net income year-over-year was the result of strong growth
in net interest income (16.7 percent), offset by securities
impairments and an increase in the provision for credit losses. On a
linked quarter basis, net income declined by $374 million (39.4
percent), as strong growth in net interest income was offset by
securities impairments and higher credit costs during the quarter.
Total net revenue on a taxable-equivalent basis for the third
quarter of 2008 was $3,379 million, $183 million (5.1 percent) lower
than the third quarter of 2007, reflecting a 16.7 percent increase in
net interest income and a 24.8 percent decrease in noninterest income.
The increase in net interest income year-over-year (16.7 percent) and
on a linked quarter basis (3.1 percent, 12.4 percent annualized) was
driven by growth in average earning assets and an improvement in the
net interest margin. Noninterest income declined from a year ago and
on a linked quarter basis, as strong growth in the majority of revenue
categories was offset by securities impairments, other market
valuation losses and higher retail lease residual losses.
Total noninterest expense in the third quarter of 2008 was $1,823
million, $47 million (2.6 percent) higher than the third quarter of
2007, and $12 million (.7 percent) lower 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
acquisitions and investments in relationship managers, branch
initiatives and Payment Services' businesses. The increase was
partially offset by the impact of a $115 million charge recognized in
the third quarter of 2007 related to Visa, Inc.'s settlement with
American Express ("Visa Charge"). 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 was relatively flat as increases
due to a bank acquisition, higher occupancy and equipment expense,
outside data processing costs and the impact of marketing and business
development campaigns were offset by lower merchant processing
expense, costs related to other real estate owned, employee benefits
expense and ongoing prudent expense control.
The provision for credit losses for the third quarter of 2008 was
$748 million, an increase of $152 million over the second quarter of
2008 and $549 million over the third quarter of 2007. This represented
an incremental increase of $250 million over net charge-offs in the
third quarter of 2008 and $200 million in the second quarter of 2008.
The increase in the provision for credit losses from a year ago
reflected continuing stress in the residential real estate markets, as
well as homebuilding and related 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 third quarter of 2008
were $498 million, compared with net charge-offs of $396 million in
the second quarter of 2008 and $199 million in the third 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 fourth quarter of 2008. Total nonperforming assets
were $1,492 million at September 30, 2008, compared with $1,135
million at June 30, 2008, and $641 million at September 30, 2007.
Nonperforming assets increased $357 million (31.5 percent) during the
third quarter of 2008 over the second quarter of 2008 as a result of
stress in residential home construction and related industries, as
well as the residential mortgage portfolio, an increase in foreclosed
properties and the impact of the economic slowdown on other commercial
customers. The ratio of the allowance for credit losses to
nonperforming loans was 222 percent at September 30, 2008, compared
with 273 percent at June 30, 2008, and 441 percent at September 30,
2007.
INCOME STATEMENT HIGHLIGHTS Table 2
----------------------------------------------------------------------
(Taxable-
equivalent
basis, $ in Percent Percent
millions, Change Change
except per- 3Q 2Q 3Q 3Q08 vs 3Q08 vs YTD YTD Percent
share data) 2008 2008 2007 2Q08 3Q07 2008 2007 Change
--------------------------------------------------------
Net interest
income $1,967 $1,908 $1,685 3.1 16.7 $5,705 $5,001 14.1
Noninterest
income 1,412 1,892 1,877 (25.4) (24.8) 5,348 5,485 (2.5)
-------------------- -------------
Total net
revenue 3,379 3,800 3,562 (11.1) (5.1) 11,053 10,486 5.4
Noninterest
expense 1,823 1,835 1,776 (.7) 2.6 5,454 5,018 8.7
-------------------- -------------
Income before
provision
and taxes 1,556 1,965 1,786 (20.8) (12.9) 5,599 5,468 2.4
Provision for
credit
losses 748 596 199 25.5 nm 1,829 567 nm
-------------------- -------------
Income before
taxes 808 1,369 1,587 (41.0) (49.1) 3,770 4,901 (23.1)
Taxable-
equivalent
adjustment 34 33 18 3.0 88.9 94 53 77.4
Applicable
income taxes 198 386 473 (48.7) (58.1) 1,060 1,466 (27.7)
-------------------- -------------
Net income $576 $950 $1,096 (39.4) (47.4) $2,616 $3,382 (22.6)
==================== =============
Net income
applicable
to common
equity $557 $928 $1,081 (40.0) (48.5) $2,563 $3,337 (23.2)
==================== =============
Diluted
earnings per
common share $.32 $.53 $.62 (39.6) (48.4) $1.46 $1.89 (22.8)
==================== =============
Net Interest Income
Third quarter net interest income on a taxable-equivalent basis
was $1,967 million, compared with $1,685 million in the third quarter
of 2007, an increase of $282 million (16.7 percent). The increase was
due to strong growth in average earning assets as well as an improved
net interest margin over a year ago. Average earning assets for the
period increased over the third quarter of 2007 by $20.1 billion (10.3
percent), primarily driven by an increase of $19.0 billion (12.9
percent) in average loans and $1.4 billion (3.5 percent) in average
investment securities. During the third quarter of 2008, the net
interest margin increased to 3.65 percent compared with 3.44 percent
in the third 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
repricing dynamics. Also, given current market conditions, short-term
funding rates were lower due to volatility and changing liquidity in
the overnight fed funds markets.
Net interest income increased by $59 million (3.1 percent) over
the prior quarter of 2008. This favorable variance was due to growth
in average earning assets of $2.9 billion (1.4 percent) and an
increase in the net interest margin from 3.61 percent in the second
quarter of 2008 to 3.65 percent in the current quarter.
NET INTEREST INCOME Table 3
----------------------------------------------------------------------
(Taxable-equivalent basis; $ in Change
millions) 3Q 2Q 3Q 3Q08 vs
2008 2008 2007 2Q08
-----------------------------------
Components of net interest income
Income on earning assets $3,110 $3,067 $3,379 $43
Expense on interest-bearing
liabilities 1,143 1,159 1,694 (16)
-----------------------------------
Net interest income $1,967 $1,908 $1,685 $59
===================================
Average yields and rates paid
Earning assets yield 5.77% 5.81% 6.90% (.04)%
Rate paid on interest-bearing
liabilities 2.45 2.53 4.01 (.08)
-----------------------------------
Gross interest margin 3.32% 3.28% 2.89% .04%
-----------------------------------
Net interest margin 3.65% 3.61% 3.44% .04%
-----------------------------------
Average balances
Investment securities $42,548 $42,999 $41,128 $(451)
Loans 166,560 163,070 147,517 3,490
Earning assets 214,973 212,089 194,886 2,884
Interest-bearing liabilities 185,494 183,855 167,805 1,639
Net free funds (a) 29,479 28,234 27,081 1,245
(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.
NET INTEREST INCOME Table 3
----------------------------------------------------------------------
(Taxable-equivalent basis; $ in Change
millions) 3Q08 vs YTD YTD
3Q07 2008 2007 Change
------------------------------------
Components of net interest income
Income on earning assets $(269) $9,435 $9,878 $(443)
Expense on interest-bearing
liabilities (551) 3,730 4,877 (1,147)
------------------------------------
Net interest income $282 $5,705 $5,001 $704
====================================
Average yields and rates paid
Earning assets yield (1.13)% 5.96% 6.85% (.89)%
Rate paid on interest-bearing
liabilities (1.56) 2.72 3.95 (1.23)
------------------------------------
Gross interest margin .43% 3.24% 2.90% .34%
------------------------------------
Net interest margin .21% 3.60% 3.46% .14%
------------------------------------
Average balances
Investment securities $1,420 $43,144 $40,904 $2,240
Loans 19,043 161,639 145,965 15,674
Earning assets 20,087 211,372 192,788 18,584
Interest-bearing liabilities 17,689 182,943 165,240 17,703
Net free funds (a) 2,398 28,429 27,548 881
(a) Represents noninterest-bearing deposits, allowance for loan
losses, unrealized gain (loss) on available-for-sale securities, non-
earning assets, other noninterest-bearing liabilities and equity.
AVERAGE LOANS Table 4
----------------------------------------------------------------------
($ in millions) Percent
Change
3Q 2Q 3Q 3Q08 vs
2008 2008 2007 2Q08
----------------------------------
Commercial $48,137 $47,648 $41,648 1.0
Lease financing 6,436 6,331 5,742 1.7
--------------------------
Total commercial 54,573 53,979 47,390 1.1
Commercial mortgages 22,302 21,192 19,592 5.2
Construction and development 9,446 9,281 8,870 1.8
--------------------------
Total commercial real estate 31,748 30,473 28,462 4.2
Residential mortgages 23,309 23,307 22,258 --
Credit card 12,217 11,559 9,895 5.7
Retail leasing 5,200 5,523 6,424 (5.8)
Home equity and second mortgages 17,858 17,106 16,048 4.4
Other retail 21,655 21,123 17,040 2.5
--------------------------
Total retail 56,930 55,311 49,407 2.9
--------------------------
Total loans $166,560 $163,070 $147,517 2.1
==========================
AVERAGE LOANS Table 4
----------------------------------------------------------------------
($ in millions) Percent
Change
3Q08 vs YTD YTD Percent
3Q07 2008 2007 Change
----------------------------------
Commercial 15.6 $47,089 $41,560 13.3
Lease financing 12.1 6,336 5,640 12.3
-----------------
Total commercial 15.2 53,425 47,200 13.2
Commercial mortgages 13.8 21,281 19,608 8.5
Construction and development 6.5 9,309 8,928 4.3
-----------------
Total commercial real estate 11.5 30,590 28,536 7.2
Residential mortgages 4.7 23,198 21,888 6.0
Credit card 23.5 11,611 9,221 25.9
Retail leasing (19.1) 5,507 6,643 (17.1)
Home equity and second mortgages 11.3 17,166 15,781 8.8
Other retail 27.1 20,142 16,696 20.6
-----------------
Total retail 15.2 54,426 48,341 12.6
-----------------
Total loans 12.9 $161,639 $145,965 10.7
=================
Average loans for the third quarter of 2008 were $19.0 billion
(12.9 percent) higher than the third quarter of 2007, driven by growth
in the majority of loan categories. This included growth in average
total retail loans of $7.5 billion (15.2 percent), total commercial
loans of $7.2 billion (15.2 percent), total commercial real estate
loans of $3.3 billion (11.5 percent) and residential mortgages of $1.1
billion (4.7 percent). Retail loan growth for the third quarter of
2008 over the third quarter of 2007 included a $3.4 billion increase
in federally guaranteed student loan balances due to both the transfer
of balances from loans held for sale and a portfolio purchase earlier
in 2008. Average loans for the third quarter of 2008 were higher than
the second quarter of 2008 by $3.5 billion (2.1 percent), again
reflecting growth in the majority of loan categories. Total commercial
loans grew by $594 million (1.1 percent) in the third quarter of 2008
over the second quarter of 2008, driven by increases in corporate and
commercial banking balances as business customers utilize bank credit
facilities, rather than the capital markets, to fund business growth
and liquidity requirements. Total commercial real estate loans also
increased $1.3 billion (4.2 percent) over the second quarter of 2008,
reflecting the acquisition of Mellon 1st Business Bank late in the
second quarter of 2008, as well as new business growth. Consumer
lending continues to experience strong growth in installment products,
home equity lines and credit card balances.
Average investment securities in the third quarter of 2008 were
$1.4 billion (3.5 percent) higher than the third 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 and
government agency securities. Average investment securities declined
by $451 million (1.0 percent) from the second quarter of 2008, due to
reductions in mortgage-backed and other asset-backed securities
including the impact of impairments.
AVERAGE DEPOSITS Table 5
----------------------------------------------------------------------
($ in millions) Percent
Change
3Q 2Q 3Q 3Q08 vs
2008 2008 2007 2Q08
----------------------------------
Noninterest-bearing deposits $28,322 $27,851 $26,947 1.7
Interest-bearing savings deposits
Interest checking 32,304 32,479 26,052 (.5)
Money market savings 26,167 26,426 25,018 (1.0)
Savings accounts 5,531 5,377 5,283 2.9
--------------------------
Total of savings deposits 64,002 64,282 56,353 (.4)
Time certificates of deposit less
than $100,000 12,669 12,635 14,590 .3
Time deposits greater than $100,000 28,546 31,041 21,255 (8.0)
--------------------------
Total interest-bearing deposits 105,217 107,958 92,198 (2.5)
--------------------------
Total deposits $133,539 $135,809 $119,145 (1.7)
==========================
AVERAGE DEPOSITS Table 5
----------------------------------------------------------------------
($ in millions) Percent
Change
3Q08 vs YTD YTD Percent
3Q07 2008 2007 Change
----------------------------------
Noninterest-bearing deposits 5.1 $27,766 $27,531 .9
Interest-bearing savings deposits
Interest checking 24.0 31,697 25,666 23.5
Money market savings 4.6 26,062 25,108 3.8
Savings accounts 4.7 5,348 5,375 (.5)
-----------------
Total of savings deposits 13.6 63,107 56,149 12.4
Time certificates of deposit less
than $100,000 (13.2) 12,969 14,693 (11.7)
Time deposits greater than $100,000 34.3 29,560 21,237 39.2
-----------------
Total interest-bearing deposits 14.1 105,636 92,079 14.7
-----------------
Total deposits 12.1 $133,402 $119,610 11.5
=================
Average total deposits for the third quarter of 2008 increased
$14.4 billion (12.1 percent) over the third quarter of 2007.
Noninterest-bearing deposits increased $1.4 billion (5.1 percent) due
primarily to Wealth Management & Security Services and Wholesale
Banking, which included the impact of the Mellon 1st Business Bank
acquisition. Average total savings deposits increased year-over-year
by $7.6 billion (13.6 percent) due to a $6.3 billion increase (24.0
percent) in interest checking balances, primarily the result of higher
broker-dealer and institutional trust balances, a $1.1 billion
increase (4.6 percent) in money market savings balances driven by
higher balances from broker-dealers, Consumer Banking and Mellon 1st
Business Bank customers, and a modest increase in savings accounts
balances. Average time certificates of deposit less than $100,000 were
lower in the third quarter of 2008 than in the third quarter of 2007
by $1.9 billion (13.2 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 $7.3 billion (34.3 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 current market conditions.
Average noninterest-bearing deposits for the third quarter of 2008
increased $471 million (1.7 percent) over the second quarter of 2008
due primarily to increases in business demand deposits, including the
impact of the Mellon 1st Business Bank acquisition, partially offset
by a seasonal decline in government deposits. Total average savings
deposits declined modestly by $280 million (.4 percent) from the
second quarter of 2008, as an increase in savings accounts balances
was offset by declines in interest checking and money market accounts.
The declines in interest checking and money market balances were
primarily due to seasonally lower corporate trust balances and a
reduction in government deposits, partially offset by the impact of
the acquisition. Average time certificates less than $100,000 were
slightly higher than the prior quarter, while average time deposits
greater than $100,000 decreased by $2.5 billion (8.0 percent) from the
prior quarter, primarily due to wholesale funding decisions. Total
deposits were $139.5 billion at September 30, 2008 an increase of $4.4
billion (3.2 percent, 12.8 percent annualized) from June 30, 2008.
This increase was driven by growth in Consumer Banking, Wealth
Management & Securities Services and Wholesale Banking, as well as
wholesale funding decisions.
NONINTEREST INCOME Table 6
----------------------------------------------------------------------
($ in Percent Percent
millions) Change Change
3Q 2Q 3Q 3Q08 vs 3Q08 vs YTD YTD Percent
2008 2008 2007 2Q08 3Q07 2008 2007 Change
----------------------------------------------------------
Credit and
debit card
revenue $269 $266 $237 1.1 13.5 $783 $673 16.3
Corporate
payment
products
revenue 179 174 166 2.9 7.8 517 472 9.5
ATM
processing
services 94 93 84 1.1 11.9 271 243 11.5
Merchant
processing
services 300 309 289 (2.9) 3.8 880 827 6.4
Trust and
investment
management
fees 329 350 331 (6.0) (.6) 1,014 995 1.9
Deposit
service
charges 286 278 276 2.9 3.6 821 800 2.6
Treasury
management
fees 128 137 118 (6.6) 8.5 389 355 9.6
Commercial
products
revenue 132 117 107 12.8 23.4 361 312 15.7
Mortgage
banking
revenue 61 81 76 (24.7) (19.7) 247 211 17.1
Investment
products
fees and
commissions 37 37 36 -- 2.8 110 108 1.9
Securities
gains
(losses),
net (411) (63) 7 nm nm (725) 11 nm
Other 8 113 150 (92.9) (94.7) 680 478 42.3
-------------------- -------------
Total
noninterest
income $1,412 $1,892 $1,877 (25.4) (24.8) $5,348 $5,485 (2.5)
==================== =============
Noninterest Income
Third quarter noninterest income was $1,412 million, $465 million
(24.8 percent) lower than the same quarter of 2007 and $480 million
(25.4 percent) lower than the second quarter of 2008. Noninterest
income declined from the third quarter of 2007, as strong fee-based
revenue growth in a majority of revenue categories was offset by
impairment charges related to structured investment securities,
perpetual preferred stock, including the stock of GSEs, and certain
non-agency mortgage-backed securities. In addition, retail lease
residual losses increased from a year ago. Credit and debit card
revenue, corporate payment products revenue, ATM processing services
and merchant processing services were higher in the third quarter of
2008 than the same period of 2007 by $32 million (13.5 percent), $13
million (7.8 percent), $10 million (11.9 percent) and $11 million (3.8
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 the prior year quarter.
Corporate payment products revenue growth reflected growth in sales
volumes and business expansion. The ATM processing services increase
was also due to growth in transaction volumes. Merchant processing
services revenue was higher in the third quarter of 2008 than the same
period of 2007 due to higher transaction volume and business
expansion. Deposit service charges increased $10 million (3.6 percent)
year-over-year, primarily due to account growth and higher
transaction-related fees. Treasury management fees increased $10
million (8.5 percent), due primarily to the favorable impact of
declining rates on customer earnings credits and account growth.
Commercial products revenue increased $25 million (23.4 percent)
year-over-year due to higher customer syndication fees, letters of
credit, capital markets and other commercial loan fees. Mortgage
banking revenue decreased $15 million (19.7 percent) due to an
unfavorable net change in the valuation of mortgage servicing rights
("MSRs") and related economic hedging activities, partially offset by
increases in mortgage servicing income and production revenue. Net
securities gains (losses) were lower than a year ago by $418 million
due to the impact of impairment charges on various investment
securities. Other income declined $142 million year-over-year, due to
the adverse impact of higher retail lease residual losses, lower
equity investment revenue and market valuation losses related to the
bankruptcy of an investment banking firm.
Noninterest income was lower by $480 million (25.4 percent) in the
third quarter of 2008 than the second quarter of 2008, reflecting the
unfavorable variance in net securities losses and higher retail lease
residual losses. Credit and debit card revenue increased $3 million
(1.1 percent) and corporate payment products revenue increased $5
million (2.9 percent) due to higher transaction volumes. Deposit
service charges increased $8 million (2.9 percent) due to account
growth and more business days in the current quarter. Commercial
products revenue increased over the second quarter of 2008 by $15
million (12.8 percent) due to higher syndication fees, stand-by letter
of credit fees and foreign exchange revenue, partially offset by lower
commercial leasing gains. These increases were offset by the several
unfavorable variances. Merchant processing services revenue was lower
in the third quarter of 2008 compared with the second quarter of 2008
by $9 million (2.9 percent) due to lower same store volumes and a
change in the volume mix to business sectors with narrower processing
margins. Trust and investment management fees decreased $21 million
(6.0 percent) on a linked quarter basis due to seasonally higher
second quarter tax filing fees and the impact of unfavorable equity
market conditions. Treasury management fees decreased by $9 million
(6.6 percent) on a linked quarter basis due primarily to seasonally
higher government lock box activity in the second quarter. Mortgage
banking revenue decreased by $20 million (24.7 percent) from the
second quarter of 2008 due primarily to lower production income,
partially offset by an increase in servicing revenue. The fair value
of MSRs net of economic hedging activity remained relatively flat on a
linked quarter basis. Net securities losses reflected a $348 million
unfavorable variance on a linked quarter basis, due to higher
impairment charges recorded on investment securities. Other income was
lower on a linked quarter basis due to higher retail lease residual
losses, lower equity investment revenue and market valuation losses,
including derivatives write-offs.
NONINTEREST EXPENSE Table 7
----------------------------------------------------------------------
($ in millions) Percent Percent
Change Change
3Q 2Q 3Q 3Q08 vs 3Q08 vs YTD YTD Percent
2008 2008 2007 2Q08 3Q07 2008 2007 Change
-------------------------------------------------------
Compensation $763 $761 $656 .3 16.3 $2,269 $1,950 16.4
Employee
benefits 125 129 119 (3.1) 5.0 391 375 4.3
Net occupancy
and equipment 199 190 189 4.7 5.3 579 550 5.3
Professional
services 61 59 56 3.4 8.9 167 162 3.1
Marketing and
business
development 75 66 71 13.6 5.6 220 191 15.2
Technology
and
communications 153 149 140 2.7 9.3 442 413 7.0
Postage,
printing and
supplies 73 73 70 -- 4.3 217 210 3.3
Other
intangibles 88 87 94 1.1 (6.4) 262 283 (7.4)
Other 286 321 381 (10.9) (24.9) 907 884 2.6
-------------------- -------------
Total
noninterest
expense $1,823 $1,835 $1,776 (.7) 2.6 $5,454 $5,018 8.7
==================== =============
Noninterest Expense
Third quarter noninterest expense totaled $1,823 million, an
increase of $47 million (2.6 percent) over the same quarter of 2007
and a decrease of $12 million (.7 percent) from the second quarter of
2008. Compensation expense increased $107 million (16.3 percent) over
the same period of 2007 due to growth in ongoing bank operations,
acquired businesses and other bank initiatives and the adoption of
Statement of Financial Accounting Standards No. 157, "Fair Value
Measurements" ("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
(5.0 percent) year-over-year as higher payroll taxes and medical costs
were partially offset by lower pension costs. Net occupancy and
equipment expense increased $10 million (5.3 percent) over the third
quarter of 2007, primarily due to acquisitions, as well as
branch-based and other business expansion initiatives. Professional
services expense increased $5 million (8.9 percent) from the third
quarter of 2007 due to increased litigation related costs. Marketing
and business development expense increased $4 million (5.6 percent)
year-over-year due to the timing of Consumer Banking product marketing
programs and a national advertising campaign. Technology and
communications expense increased $13 million (9.3 percent)
year-over-year, primarily due to increased processing volumes and
business expansion. These increases were partially offset by decreases
in other intangibles expense of $6 million (6.4 percent) and other
expense of $95 million (24.9 percent), due primarily to the $115
million Visa Charge recognized in the third quarter of 2007.
Noninterest expense in the third quarter of 2008 was relatively
flat compared with the second quarter of 2008. Other expense decreased
by $35 million (10.9 percent) from the second quarter of 2008 due to
lower merchant processing costs and a reduction in credit-related
costs for other real estate owned. Employee benefits expense decreased
$4 million (3.1 percent) on a linked quarter basis due to lower
employee recruitment expense, payroll taxes and other benefits. These
favorable variances were offset by increases in net occupancy and
equipment expense due to business expansion and other initiatives,
marketing and business development expense due primarily to the
national advertising campaign, and technology and communication
expense due to increased volumes and the impact of an acquisition.
Provision for Income Taxes
The provision for income taxes for the third quarter of 2008
resulted in a tax rate on a taxable-equivalent basis of 28.7 percent
(effective tax rate of 25.6 percent) compared with 30.9 percent
(effective tax rate of 30.1 percent) in the third quarter of 2007 and
30.6 percent (effective tax rate of 28.9 percent) in the second
quarter of 2008.
ALLOWANCE FOR CREDIT LOSSES Table 8
----------------------------------------------------------------------
($ in millions) 3Q 2Q 1Q 4Q 3Q
2008 2008 2008 2007 2007
-----------------------------------
Balance, beginning of period $2,648 $2,435 $2,260 $2,260 $2,260
Net charge-offs
Commercial 57 51 39 23 26
Lease financing 22 18 16 13 11
-----------------------------------
Total commercial 79 69 55 36 37
Commercial mortgages 9 6 4 3 1
Construction and development 56 12 8 7 1
-----------------------------------
Total commercial real
estate 65 18 12 10 2
Residential mortgages 71 53 26 17 17
Credit card 149 139 108 88 77
Retail leasing 9 8 7 6 3
Home equity and second
mortgages 48 48 30 22 20
Other retail 77 61 55 46 43
-----------------------------------
Total retail 283 256 200 162 143
-----------------------------------
Total net charge-offs 498 396 293 225 199
Provision for credit losses 748 596 485 225 199
Acquisitions and other changes -- 13 (17) -- --
-----------------------------------
Balance, end of period $2,898 $2,648 $2,435 $2,260 $2,260
===================================
Components
Allowance for loan losses $2,767 $2,518 $2,251 $2,058 $2,041
Liability for unfunded credit
commitments 131 130 184 202 219
-----------------------------------
Total allowance for
credit losses $2,898 $2,648 $2,435 $2,260 $2,260
===================================
Gross charge-offs $544 $439 $348 $287 $256
Gross recoveries $46 $43 $55 $62 $57
Allowance for credit losses as a
percentage of
Period-end loans 1.71 1.60 1.54 1.47 1.52
Nonperforming loans 222 273 358 406 441
Nonperforming assets 194 233 288 328 353
Credit Quality
During the third quarter of 2008, credit losses and nonperforming
assets continued to trend higher. The allowance for credit losses was
$2,898 million at September 30, 2008, compared with $2,648 million at
June 30, 2008, and $2,260 million at September 30, 2007. As a result
of the continued stress in the residential housing markets,
homebuilding and related industry sectors, and growth of the loan
portfolios, the Company has increased the allowance for credit losses
by $638 million during 2008. The credit stress is being reflected in
higher delinquencies, nonperforming asset levels and net charge-offs
relative to a year ago and the second quarter of 2008. Total net
charge-offs in the third quarter of 2008 were $498 million, compared
with the second quarter of 2008 net charge-offs of $396 million and
the third quarter of 2007 net charge-offs of $199 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
homebuilding and related industries, 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 $144 million in the third quarter of 2008 (.66 percent of
average loans outstanding) compared with $87 million (.41 percent of
average loans outstanding) in the second quarter of 2008 and $39
million (.20 percent of average loans outstanding) in the third
quarter of 2007. This increasing trend in commercial and commercial
real estate losses reflected the continuing stress within the
portfolios, especially residential homebuilding and related industry
sectors.
Residential mortgage loan net charge-offs increased to $71 million
in the third quarter of 2008 (1.21 percent of average loans
outstanding) compared with $53 million (.91 percent of average loans
outstanding) in the second quarter of 2008 and $17 million (.30
percent of average loans outstanding) in the third 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 $283 million (1.98 percent
of average loans outstanding) in the third quarter of 2008 compared
with $256 million (1.86 percent of average loans outstanding) in the
second quarter of 2008 and $143 million (1.15 percent of average loans
outstanding) in the third quarter of 2007. The increased retail loan
credit losses reflected the Company's growth in credit card and
consumer loan balances, 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 1.71 percent at September 30, 2008, compared with 1.60 percent at
June 30, 2008, and 1.52 percent at September 30, 2007. The ratio of
the allowance for credit losses to nonperforming loans was 222 percent
at September 30, 2008, compared with 273 percent at June 30, 2008, and
441 percent at September 30, 2007.
CREDIT RATIOS Table 9
----------------------------------------------------------------------
(Percent) 3Q 2Q 1Q 4Q 3Q
2008 2008 2008 2007 2007
----------------------------------
Net charge-offs ratios (a)
Commercial .47 .43 .34 .21 .25
Lease financing 1.36 1.14 1.03 .86 .76
Total commercial .58 .51 .43 .29 .31
Commercial mortgages .16 .11 .08 .06 .02
Construction and development 2.36 .52 .35 .31 .04
Total commercial real estate .81 .24 .16 .14 .03
Residential mortgages 1.21 .91 .46 .30 .30
Credit card 4.85 4.84 3.93 3.29 3.09
Retail leasing .69 .58 .49 .39 .19
Home equity and second mortgages 1.07 1.13 .73 .53 .49
Other retail 1.41 1.16 1.25 1.05 1.00
Total retail 1.98 1.86 1.58 1.28 1.15
Total net charge-offs 1.19 .98 .76 .59 .54
Delinquent loan ratios - 90 days or more past due excluding
nonperforming loans (b)
Commercial .11 .09 .09 .07 .07
Commercial real estate .05 .09 .13 .02 .04
Residential mortgages 1.34 1.09 .98 .86 .58
Retail .68 .63 .69 .68 .55
Total loans .46 .41 .43 .38 .30
Delinquent loan ratios - 90 days or more past due including
nonperforming loans (b)
Commercial .76 .71 .60 .43 .51
Commercial real estate 2.25 1.57 1.18 1.02 .83
Residential mortgages 2.00 1.55 1.24 1.10 .79
Retail .81 .74 .77 .73 .61
Total loans 1.23 1.00 .86 .74 .65
(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)
Sep 30 Jun 30 Mar 31 Dec 31 Sep 30
2008 2008 2008 2007 2007
----------------------------------
Nonperforming loans
Commercial $280 $265 $201 $128 $161
Lease financing 85 75 64 53 46
----------------------------------
Total commercial 365 340 265 181 207
Commercial mortgages 164 139 102 84 73
Construction and development 545 326 212 209 153
----------------------------------
Total commercial real estate 709 465 314 293 226
Residential mortgages 155 108 59 54 48
Retail 74 58 42 29 32
----------------------------------
Total nonperforming loans 1,303 971 680 557 513
Other real estate 164 142 141 111 113
Other nonperforming assets 25 22 24 22 15
----------------------------------
Total nonperforming assets (a) $1,492 $1,135 $845 $690 $641
==================================
Accruing loans 90 days or more past
due $787 $687 $676 $584 $451
==================================
Restructured loans that continue to
accrue interest $1,180 $1,029 $695 $551 $468
==================================
Nonperforming assets to loans plus
ORE (%) .88 .68 .53 .45 .43
(a) does not include accruing loans 90 days or more past due or
restructured loans that continue to accrue interest
Nonperforming assets at September 30, 2008, totaled $1,492
million, compared with $1,135 million at June 30, 2008, and $641
million at September 30, 2007. The ratio of nonperforming assets to
loans and other real estate was .88 percent at September 30, 2008,
compared with .68 percent at June 30, 2008, and .43 percent at
September 30, 2007. The increase in nonperforming assets from a year
ago was driven primarily by the residential construction portfolio and
related industries, as well as the residential mortgage portfolio, 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 $787 million at September 30, 2008, compared
with $687 million at June 30, 2008, and $451 million at September 30,
2007. The year-over-year increase in delinquent loans that continue to
accrue interest was primarily related to residential mortgages, credit
cards and home equity loans. Restructured loans that continue to
accrue interest have also increased from the third quarter of 2007 and
the second quarter of 2008, reflecting the impact of restructurings
for certain residential mortgage customers in light of current
economic conditions. The Company expects this trend to continue in the
near term as residential home valuations decline and certain borrowers
take advantage of the Company's mortgage loan restructuring programs.
CAPITAL POSITION Table 11
----------------------------------------------------------------------
($ in millions) Sep 30 Jun 30 Mar 31 Dec 31 Sep 30
2008 2008 2008 2007 2007
---------------------------------------
Total shareholders' equity $21,675 $21,828 $21,572 $21,046 $20,686
Tier 1 capital 18,877 18,624 18,543 17,539 17,288
Total risk-based capital 27,403 27,502 27,207 25,925 25,820
Tier 1 capital ratio 8.5% 8.5% 8.6% 8.3% 8.5%
Total risk-based capital ratio 12.3 12.5 12.6 12.2 12.7
Leverage ratio 8.0 7.9 8.1 7.9 8.0
Common equity to assets 8.2 8.2 8.3 8.4 8.6
Tangible common equity to
assets 5.3 5.2 5.3 5.1 5.3
Total shareholders' equity was $21.7 billion at September 30,
2008, compared with $21.8 billion at June 30, 2008, and $20.7 billion
at September 30, 2007. The Tier 1 capital ratio was 8.5 percent at
September 30, 2008, June 30, 2008, and September 30, 2007. The total
risk-based capital ratio was 12.3 percent at September 30, 2008,
compared with 12.5 percent at June 30, 2008, and 12.7 percent at
September 30, 2007. The leverage ratio was 8.0 percent at September
30, 2008, compared with 7.9 percent at June 30, 2008, and 8.0 percent
at September 30, 2007. Tangible common equity to assets was 5.3
percent at September 30, 2008, compared with 5.2 percent at June 30,
2008, and 5.3 percent at September 30, 2007. All regulatory ratios
continue to be in excess of stated "well-capitalized" requirements.
The Company does not plan to buy back shares during the remainder of
2008.
COMMON SHARES Table 12
----------------------------------------------------------------------
(Millions) 3Q 2Q 1Q 4Q 3Q
2008 2008 2008 2007 2007
-------------------------------
Beginning shares outstanding 1,741 1,738 1,728 1,725 1,728
Shares issued for stock option and
stock purchase plans, acquisitions and
other corporate purposes 13 3 12 3 3
Shares repurchased -- -- (2) -- (6)
-------------------------------
Ending shares outstanding 1,754 1,741 1,738 1,728 1,725
===============================
LINE OF BUSINESS FINANCIAL PERFORMANCE (a) Table 13
----------------------------------------------------------------------
($ in millions)
Net Income Percent Change
----------------- ----------------
3Q 2Q 3Q 3Q08 vs 3Q08 vs
Business Line 2008 2008 2007 2Q08 3Q07
----------------------------------
Wholesale Banking $237 $254 $265 (6.7) (10.6)
Consumer Banking 272 324 471 (16.0) (42.3)
Wealth Management & Securities
Services 116 149 151 (22.1) (23.2)
Payment Services 269 277 274 (2.9) (1.8)
Treasury and Corporate Support (318) (54) (65) nm nm
-----------------
Consolidated Company $576 $950 $1,096 (39.4) (47.4)
=================
(a) preliminary data
LINE OF BUSINESS FINANCIAL PERFORMANCE (a) Table 13
----------------------------------------------------------------------
($ in millions)
3Q 2008
YTD YTD Percent Earnings
Business Line 2008 2007 Change Composition
---------------------------------
Wholesale Banking $746 $809 (7.8) 41%
Consumer Banking 983 1,405 (30.0) 47
Wealth Management & Securities
Services 411 447 (8.1) 20
Payment Services 828 757 9.4 47
Treasury and Corporate Support (352) (36) nm (55)
--------------- -----------
Consolidated Company $2,616 $3,382 (22.6) 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 $237
million of the Company's net income in the third quarter of 2008, a
10.6 percent decrease from the same period of 2007 and a 6.7 percent
decrease from the second quarter of 2008. Stronger net interest income
year-over-year and an increase in fee-based revenue were offset by
securities valuation losses due to adverse market conditions and an
increase in total noninterest expense, driven primarily by the Mellon
1st Business Bank acquisition. Net interest income increased $50
million year-over-year due to strong growth in average earning assets
and deposits, partially offset by declining loan rates and a decrease
in the margin benefit of deposits. Total noninterest income increased
$9 million (4.4 percent) as growth in treasury management, letter of
credit, commercial loan and foreign exchange fees was partially offset
by securities valuation losses and lower earnings from equity
investments. Total noninterest expense increased by $20 million (8.4
percent) over a year ago, primarily due to higher compensation and
employee benefits expense related to merit increases and the impact of
an acquisition and other business initiatives. The provision for
credit losses increased $83 million due to continued credit
deterioration in the homebuilding and commercial home supplier
industries.
Wholesale Banking's contribution to net income in the third
quarter of 2008 was $17 million (6.7 percent) lower compared with the
second quarter of 2008. Growth in total net revenue (1.5 percent) and
modestly lower total noninterest expense (1.9 percent) were offset by
a $43 million increase in the provision for credit losses, due to
higher net charge-offs. Total net revenue was higher on a linked
quarter basis due to an increase in net interest income (5.2 percent),
partially offset by lower total noninterest income (6.1 percent). The
increase in net interest income was due primarily to growth in average
loan balances, partially offset by the effect of asset repricing.
Total noninterest income decreased on a linked quarter basis due
primarily to lower equity investment income, including an investment
in a commercial real estate business. Total noninterest expense
decreased $5 million (1.9 percent) due to lower processing costs
impacted by higher second quarter of 2008 government lock box volume.
The provision for credit losses increased due to higher net
charge-offs principally related to 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 $272 million of the
Company's net income in the third quarter of 2008, a 42.3 percent
decrease from the same period of 2007 and a 16.0 percent decrease from
the prior quarter. Within Consumer Banking, the retail banking
division accounted for $241 million of the total contribution, a 44.9
percent decrease on a year-over-year basis and a 17.2 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 increases in average loan balances and yield-related
loan fees were 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 16.1 percent from a year ago due to lower retail lease
revenue related to higher retail lease residual losses, partially
offset by growth in revenue from ATM processing services and higher
deposit service charges. Total noninterest expense in the third
quarter of 2008 increased 8.2 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 $120 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 third quarter of 2008, the mortgage banking
division's contribution was $31 million, a $3 million (8.8 percent)
decrease from the same period of 2007. The decrease in the mortgage
banking division's contribution was a result of higher total
noninterest expense and provision for credit losses, partially offset
by higher total net revenue. The division's total net revenue
increased by $27 million (25.7 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 MSRs and related economic hedging
activities. As a result of higher rates and increased loan production,
net interest income increased $38 million as average mortgage loans
and mortgage loans held for sale increased over a year ago. Total
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 $26 million (51.0 percent) over
the third quarter of 2007, primarily due to the impact of the adoption
of SFAS 157 on compensation expense, higher production levels from a
year ago and servicing costs associated with other real estate owned
and foreclosures.
Consumer Banking's contribution in the third quarter of 2008
decreased $52 million (16.0 percent) compared with the second quarter
of 2008. The retail banking division's contribution decreased 17.2
percent on a linked quarter basis, driven primarily by an increase in
the provision for credit losses and higher retail lease residual
losses. Total net revenue for the retail banking division decreased
$24 million (1.8 percent) due to lower total noninterest income,
partially offset by higher net interest income. Net interest income
increased by 2.7 percent on a linked quarter basis due to the
favorable impact of growth in average loan balances and loan fees. The
decrease in total noninterest income was driven by higher retail lease
residual losses, partially offset by higher deposit service charges.
Total noninterest expense for the retail banking division increased
$15 million (2.1 percent) on a linked quarter basis. This increase was
due to higher compensation and employee benefits expense due to the
branch expansion, higher processing costs and the timing of marketing
programs. The provision for credit losses for the division reflected a
$40 million increase in net charge-offs compared with the second
quarter of 2008, reflecting higher consumer delinquencies. The
contribution of the mortgage banking division decreased $2 million
from the second quarter of 2008, driven primarily by lower total net
revenue. Total net revenue decreased by 7.7 percent principally due to
lower production revenue, partially offset by higher servicing income.
The valuation of MSRs and related economic hedging activities was
relatively flat on a linked quarter basis. Total noninterest expense
in the mortgage banking division decreased $4 million (4.9 percent)
from the second quarter of 2008. In addition, the mortgage banking
division's provision for credit losses declined $3 million on a linked
quarter basis.
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 $116 million of the Company's net
income in the third quarter of 2008, a 23.2 percent decrease compared
with the same period of 2007 and a 22.1 percent decrease from the
second quarter of 2008. Total net revenue year-over-year decreased $38
million (7.8 percent) as net interest income declined by $7 million
(5.8 percent) due primarily to the lower margin benefit of deposits
while total noninterest income declined by $31 million (8.5 percent)
due to the impact of unfavorable equity market conditions compared
with a year ago, partially offset by core account growth. Total
noninterest expense was 6.5 percent higher compared with the same
quarter of 2007, primarily due to higher compensation and employee
benefits expense and legal related costs, partially offset by lower
other intangibles expense.
The decrease in the business line's contribution in the third
quarter of 2008 compared with the linked quarter was primarily due to
the unfavorable impact of equity market conditions on fees and
seasonally higher tax filing fees in the second quarter of 2008. This
decrease was partially offset by higher net interest income.
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 $269 million of the Company's net income
in the third quarter of 2008, a decrease of 1.8 percent from the same
period of 2007 and a 2.9 percent decrease compared with the second
quarter of 2008. The decline year-over-year was due primarily to an
increase in the provision for credit losses driven by an increase in
net charge-offs of $86 million which reflected credit card portfolio
growth, higher delinquency rates and changing economic conditions from
a year ago. In addition, total noninterest expense increased $36
million (9.8 percent) year-over-year, primarily due to business
expansion and increased transaction processing costs. These
unfavorable variances were partially offset by an increase in total
net revenue year-over-year due to higher net interest income (28.6
percent) and total noninterest income (8.4 percent). Net interest
income increased due to strong growth in 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.
Payment Services' contribution in the third quarter of 2008
decreased $8 million (2.9 percent) from the second quarter of 2008
primarily due to an increase in the provision for credit losses (10.7
percent) due to portfolio growth and changing economic conditions.
Total net revenue was relatively flat compared with the second quarter
of 2008. Net interest income increased $4 million (1.6 percent) on a
linked quarter basis, as loan volume growth was offset by declining
rates. Total noninterest income increased slightly (.4 percent) as
increases in credit and debit card revenue and corporate payment
products revenue due to volume growth were offset by a decline in
merchant processing services revenue due to lower same store volumes
and a change in the volume mix to business sectors with narrower
processing margins.
Treasury and Corporate Support includes the Company's investment
portfolios, funding, capital management, asset securitization,
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 $318 million in the third quarter of 2008, compared with a net loss
of $65 million in the third quarter of 2007 and a net loss of $54
million in the second quarter of 2008. Net interest income increased
$197 million in the current quarter over the third quarter of 2007,
reflecting the impact of the declining rate environment, wholesale
funding decisions and the Company's asset/liability position. Total
noninterest income decreased $411 million, primarily reflecting the
impairment charges for structured investment securities, perpetual
preferred stock, including the stock of GSEs, and certain non-agency
mortgage-backed securities. Total noninterest expense decreased $107
million primarily due to the Visa Charge recognized in the third
quarter of 2007. The provision for credit losses increased $252
million reflecting incremental provision, which exceeded
net-charge-offs, 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 industries, and the impact of economic
conditions on the loan portfolios.
Net income in the third quarter of 2008 was lower on a linked
quarter basis due to the net unfavorable impact of the securities
impairments and the incremental provision for credit losses.
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 6:30 AM (CT)
ON TUESDAY, OCTOBER 21, 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 67006722. 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, October 21st, and
will run through Tuesday, October 28th, at 11:00 PM (CT). 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
67006722. 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 as of June 30, 2008. The Company operates
2,556 banking offices and 4,903 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
continued deterioration in general business and economic conditions
and in the financial markets; 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.
A continuation of the recent turbulence in significant portions of
the global financial markets, particularly if it worsens, could impact
our performance, both directly by affecting our revenues and the value
of our assets and liabilities, and indirectly by affecting our
counterparties and the economy generally. Dramatic declines in the
housing market in the past year have resulted in significant
write-downs of asset values by financial institutions. Concerns about
the stability of the financial markets generally have reduced the
availability of funding to certain financial institutions, leading to
a tightening of credit, reduction of business activity, and increased
market volatility. There can be no assurance that the Emergency
Economic Stabilization Act of 2008 or the actions taken by the U.S.
Treasury Department thereunder will help to stabilize the U.S.
financial system or alleviate the industry or economic factors that
may adversely impact our business. In addition, our business and
financial performance could be impacted as the financial industry
restructures in the current environment, both by changes in the
creditworthiness and performance of our counterparties and by changes
in the competitive landscape.
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 Nine Months Ended
Except Per Share Data) September 30, September 30,
------------------ -----------------
(Unaudited) 2008 2007 2008 2007
----------------------------------------------------------------------
Interest Income
Loans $2,487 $2,703 $7,476 $7,897
Loans held for sale 52 76 174 205
Investment securities 478 522 1,507 1,554
Other interest income 40 33 120 101
------------------------------------
Total interest income 3,057 3,334 9,277 9,757
Interest Expense
Deposits 425 694 1,489 2,032
Short-term borrowings 276 374 861 1,081
Long-term debt 423 599 1,316 1,696
------------------------------------
Total interest expense 1,124 1,667 3,666 4,809
------------------------------------
Net interest income 1,933 1,667 5,611 4,948
Provision for credit losses 748 199 1,829 567
------------------------------------
Net interest income after
provision for credit losses 1,185 1,468 3,782 4,381
Noninterest Income
Credit and debit card revenue 269 237 783 673
Corporate payment products
revenue 179 166 517 472
ATM processing services 94 84 271 243
Merchant processing services 300 289 880 827
Trust and investment management
fees 329 331 1,014 995
Deposit service charges 286 276 821 800
Treasury management fees 128 118 389 355
Commercial products revenue 132 107 361 312
Mortgage banking revenue 61 76 247 211
Investment products fees and
commissions 37 36 110 108
Securities gains (losses), net (411) 7 (725) 11
Other 8 150 680 478
------------------------------------
Total noninterest income 1,412 1,877 5,348 5,485
Noninterest Expense
Compensation 763 656 2,269 1,950
Employee benefits 125 119 391 375
Net occupancy and equipment 199 189 579 550
Professional services 61 56 167 162
Marketing and business
development 75 71 220 191
Technology and communications 153 140 442 413
Postage, printing and supplies 73 70 217 210
Other intangibles 88 94 262 283
Other 286 381 907 884
------------------------------------
Total noninterest expense 1,823 1,776 5,454 5,018
------------------------------------
Income before income taxes 774 1,569 3,676 4,848
Applicable income taxes 198 473 1,060 1,466
------------------------------------
Net income $576 $1,096 $2,616 $3,382
====================================
Net income applicable to common
equity $557 $1,081 $2,563 $3,337
====================================
Earnings per common share $.32 $.63 $1.47 $1.92
Diluted earnings per common share $.32 $.62 $1.46 $1.89
Dividends declared per common
share $.425 $.400 $1.275 $1.200
Average common shares outstanding 1,743 1,725 1,738 1,737
Average diluted common shares
outstanding 1,757 1,745 1,754 1,762
----------------------------------------------------------------------
U.S. Bancorp
Consolidated Ending Balance Sheet
September 30, December 31, September 30,
(Dollars in Millions) 2008 2007 2007
----------------------------------------------------------------------
Assets (Unaudited) (Unaudited)
Cash and due from banks $7,118 $8,884 $6,636
Investment securities
Held-to-maturity 64 74 78
Available-for-sale 39,285 43,042 40,293
Loans held for sale 3,116 4,819 4,601
Loans
Commercial 56,454 51,074 48,012
Commercial real estate 32,177 29,207 28,517
Residential mortgages 23,341 22,782 22,563
Retail 57,891 50,764 49,947
----------------------------------------
Total loans 169,863 153,827 149,039
Less allowance for
loan losses (2,767) (2,058) (2,041)
----------------------------------------
Net loans 167,096 151,769 146,998
Premises and equipment 1,775 1,779 1,779
Goodwill 7,816 7,647 7,604
Other intangible assets 3,242 3,043 3,150
Other assets 17,543 16,558 16,489
----------------------------------------
Total assets $247,055 $237,615 $227,628
========================================
Liabilities and Shareholders' Equity
Deposits
Noninterest-bearing $35,476 $33,334 $28,272
Interest-bearing 76,697 72,458 70,916
Time deposits greater than
$100,000 27,331 25,653 23,560
----------------------------------------
Total deposits 139,504 131,445 122,748
Short-term borrowings 37,423 32,370 28,868
Long-term debt 40,110 43,440 45,241
Other liabilities 8,343 9,314 10,085
----------------------------------------
Total liabilities 225,380 216,569 206,942
Shareholders' equity
Preferred stock 1,500 1,000 1,000
Common stock 20 20 20
Capital surplus 5,646 5,749 5,748
Retained earnings 23,032 22,693 22,500
Less treasury stock (6,695) (7,480) (7,554)
Other comprehensive income (1,828) (936) (1,028)
----------------------------------------
Total shareholders'
equity 21,675 21,046 20,686
----------------------------------------
Total liabilities and
shareholders' equity $247,055 $237,615 $227,628
========================================
Source: U.S. Bancorp
