MINNEAPOLIS--(BUSINESS WIRE)--Jan. 21, 2009--U.S. Bancorp (NYSE: USB) today reported net income of $330 million for
the fourth quarter of 2008. Diluted earnings per common share of $.15 in
the current quarter were lower than the $.53 of diluted earnings per
common share reported for the fourth quarter of 2007. Included in fourth
quarter of 2008 results were securities and other market valuation
losses totaling $.09 per diluted common share and a provision for credit
losses in excess of net charge-offs equal to $.25 per diluted common
share. Results for the fourth quarter included strong year-over-year
growth in net interest income and average loans and deposits, as the
Company continued to benefit from the "flight to quality" by customers
seeking banks with strong capital and the ability to provide them with
financial products and services during this period of economic
uncertainty. Highlights for the fourth quarter of 2008 included:
-- Average loan growth of 17.0 percent (12.7 percent excluding
acquisitions) over the fourth quarter of 2007, driven by:
o Average total commercial loan growth of 14.7 percent, principally in
high quality corporate lending
o Average retail loan growth of 17.0 percent, led by credit card
balances, home equity lines and student loans
-- Average loan growth of 6.4 percent (3.1 percent excluding acquisitions,
12.4 percent annualized) over the third quarter of 2008, including:
o Average total commercial loan growth of 4.3 percent (17.2 percent
annualized)
o Average total commercial real estate growth of 2.9 percent (11.6
percent annualized)
o Average retail loan growth of 3.6 percent (14.4 percent annualized)
-- Average deposit growth of 15.2 percent (9.6 percent excluding
acquisitions) over the fourth quarter of 2007, including:
o Average noninterest-bearing deposits growth of 17.8 percent
o Average total savings deposits growth of 9.5 percent
o Total deposit growth of $19.8 billion, or 14.2 percent (5.8 percent
excluding acquisitions), from September 30, 2008, to December 31, 2008
-- Net interest income growth of 22.6 percent over the fourth quarter of
2007, driven by:
o Average earning assets growth of 12.8 percent
o Net interest margin expansion to 3.81 percent in the fourth quarter of
2008 compared with 3.51 percent in the fourth quarter of 2007
-- Credit costs, as expected, trended higher, but coverage ratios remained
strong:
o Provision for credit losses exceeded net charge-offs by $635 million,
resulting in an increase to the allowance for credit losses equal to
100 percent of net charge-offs for the quarter
o Allowance to period-end loans increased to 1.96 percent at December
31, 2008, compared with 1.71 percent at September 30, 2008
-- The Company acquired the majority of the operations of Downey Savings
and Loan and PFF Bank and Trust from the Federal Deposit Insurance
Corporation ("FDIC") on November 21, 2008. Combined, these acquisitions:
o Added 213 branches, primarily in California, resulting in the Company
now having the fourth largest branch network in that state and third
largest in the southern California region
o Increased loans $12.2 billion at December 31, 2008, and average loans
$5.5 billion in fourth quarter of 2008. Approximately $11.5 billion of
these loans are covered under loss sharing agreements with the FDIC
limiting the Company's credit loss exposure
o Increased deposits $11.8 billion at December 31, 2008, and average
deposit balances $5.2 billion in fourth quarter of 2008
-- Strong regulatory capital ratios at December 31, 2008, which included
the impact of the preferred stock issuance to the Department of the U.S.
Treasury in the fourth quarter of 2008:
o Tier 1 capital ratio of 10.6 percent
o Total risk-based capital ratio of 14.3 percent
EARNINGS Table 1
SUMMARY
($ in
millions,
except Percent Percent
per-share
data)
Change Change
4Q 3Q 4Q 4Q08 vs 4Q08 vs Full Full Percent
Year Year
2008 2008 2007 3Q08 4Q07 2008 2007 Change
Net income $ 330 $ 576 $ 942 (42.7 ) (65.0 ) $ 2,946 $ 4,324 (31.9 )
Diluted
earnings per .15 .32 .53 (53.1 ) (71.7 ) 1.61 2.43 (33.7 )
common share
Return on
average .51 .94 1.63 1.21 1.93
assets (%)
Return on
average 5.3 10.8 18.3 13.9 21.3
common
equity (%)
Net interest 3.81 3.65 3.51 3.66 3.47
margin (%)
Efficiency 50.6 48.1 55.1 47.4 49.7
ratio (%)
Tangible
efficiency 48.2 45.8 52.5 45.1 47.1
ratio (%)
(a)
Dividends
declared per $ .425 $ .425 $ .425 -- -- $ 1.700 $ 1.625 4.6
common share
Book value
per common 10.47 11.50 11.60 (9.0 ) (9.7 )
share
(period-end)
(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 $330 million for the fourth quarter
of 2008, compared with $942 million for the fourth quarter of 2007.
Diluted earnings per common share of $.15 in the fourth quarter of 2008
were lower than fourth quarter of 2007 by 71.7 percent, or $.38 per
diluted common share. Return on average assets and return on average
common equity were .51 percent and 5.3 percent, respectively, for the
fourth quarter of 2008, compared with 1.63 percent and 18.3 percent,
respectively, for the fourth quarter of 2007. Challenging market
conditions continued and had an impact on the fourth quarter of 2008
results. Significant items in the fourth quarter of 2008 results
included $253 million of securities losses, primarily impairment charges
on securities related to structured investment vehicles. In addition,
the Company increased the allowance for credit losses by recording $635
million of provision for credit losses in excess of net charge-offs. In
total, significant items reduced earnings per diluted common share by
approximately $.34. In the third quarter of 2008, the Company's results
were affected by similar items, including net securities impairments of
$411 million, market valuation losses related to the bankruptcy of an
investment banking firm and a $250 million provision for credit losses
in excess of net charge-offs. In total, those items reduced third
quarter of 2008 earnings per diluted common share by approximately $.28.
U.S. Bancorp Chairman, President and Chief Executive Officer Richard K.
Davis said, "Once again, the Company's results for the quarter reflected
both the strength of our banking franchise and business mix and the
challenges facing our industry today, including rising credit costs and
market valuation risk. The results were marked by outstanding growth in
loans and deposits and an expanded net interest margin, but tempered by
the unfavorable impact of higher credit losses and securities
impairments. Fourth quarter's earnings per diluted common share of $.15
were below both the same quarter of 2007 and the prior quarter of 2008.
Although we were able to absorb the increased cost of credit and
market-related write-downs, I am disappointed with the overall decline
in this quarter's earnings. I am, however, very proud of the fact that
our Company has profitably navigated through this difficult environment,
while continuing to build momentum for the future. For the full year
2008 our Company earned $2.9 billion, or $1.61 per diluted common share.
"As I have said many times over the past year, U.S. Bancorp is 'open for
business'. The Company's total average loans outstanding, excluding
acquisitions, grew year-over-year by $19.2 billion (12.7 percent) and
$5.2 billion (12.4 percent annualized) on a linked quarter basis.
Importantly, during the fourth quarter, our business lines originated
over $16 billion in new loans to businesses and consumers. This
double-digit growth in average loans, as well as new loan originations,
clearly demonstrates that we are 'open' and continue to provide our
current and newly acquired customers with access to the credit they
need. The growth in loans, and an outstanding increase in total average
deposits, excluding acquisitions, of $12.0 billion (9.6 percent)
year-over-year and $5.8 billion (17.2 percent annualized) over the third
quarter of 2008, also demonstrated that our Company is benefiting from
the 'flight-to-quality'. Coupled with an increase in the net interest
margin during the fourth quarter, this balance sheet growth led to a
22.6 percent increase in net interest income year-over-year and a 9.9
percent increase in net interest income over the prior quarter. This
growth helped to cushion the impact of higher credit costs,
market-related write-downs and the deceleration of growth in some of the
fee income categories tied to the economy and equity markets, once more
proving the advantage of our diversified business mix.
"Higher credit costs were a major contributor to the decline in net
income this quarter, and the costs were in the middle of the range we
communicated last December. Fourth quarter provision for credit losses
of $1,267 million, exceeded net charge-offs by $635 million, or 100%.
This incremental provision served to strengthen the ratio of allowance
to period-end loans (excluding assets covered by the loss agreement with
the FDIC) to 2.09 percent at December 31, 2008, from 1.71 percent at
September 30, 2008. As expected, nonperforming assets were also higher,
ending the quarter at $2,624 million, compared with $1,492 million at
September 30, 2008. Included in this increase, however, were $643
million of assets covered by the loss agreements with the FDIC. Without
the addition of the covered assets, nonperforming assets grew by $489
million, or 32.8 percent, quarter-over-quarter. Nonperforming assets to
loans plus other real estate owned, excluding covered assets, was 1.14
percent at December 31, 2008, moderately higher than the .88 percent the
Company recorded at September 30, 2008. We intend to maintain the
strength of our balance sheet throughout this credit cycle and beyond,
and will rely on our solid, core operating earnings to absorb the
higher, but manageable, credit-related costs that we expect in 2009.
"On November 3, 2008, we announced our participation in the U.S.
Treasury's Capital Purchase Program, and, subsequently, issued $6.6
billion of preferred stock and related warrants to the U.S. Treasury. As
our results and actions this quarter illustrated, we are actively
lending to credit-worthy borrowers, we are investing in our businesses,
we are supporting our communities and we are backing the efforts of the
U.S. Treasury to stabilize the financial markets and increase the flow
of credit to both consumers and businesses, all while creating long-term
value for our shareholders.
"Finally, I want to take this opportunity to thank all of our 56,000
employees, which includes our 3,000 new employees in California and
Arizona. On January 15th, we held our second annual 'all employee
meeting'. Over 34,000 employees across our franchise, including Europe,
gathered in 70 locations and on conference calls to celebrate their
collective hard work, adept decision-making, dedication to our customers
and communities, and loyalty to our Company. Our future is brighter
because of our employees' extraordinary efforts, and I look forward to
the coming year knowing that our employees are engaged and committed to
maintaining and enhancing our position as one of the leaders in the
financial services industry."
The Company's net income for the fourth quarter of 2008 decreased by
$612 million (65.0 percent) from the same period of 2007 and $246
million (42.7 percent) on a linked quarter basis. The reduction in net
income on both a year-over-year and linked quarter basis was principally
the result of an increase in the provision for credit losses. Total
revenue grew during these periods driven by strong growth in net
interest income, offset by securities impairments and lower fee based
revenue as consumers and businesses reduced spending.
Total net revenue on a taxable-equivalent basis for the fourth quarter
of 2008 was $3,624 million; $50 million (1.4 percent) higher than the
fourth quarter of 2007, reflecting a 22.6 percent increase in net
interest income and a 19.2 percent decrease in noninterest income. The
increase in net interest income year-over-year (22.6 percent) and on a
linked quarter basis (9.9 percent, 39.6 percent annualized) was a result
of growth in average earning assets and an increase in net interest
margin. Noninterest income declined from a year ago as payment services,
trust and investment management fees and deposit service charges were
affected by the impact of the slowing economy on equity valuations and
customer behavior. In addition, noninterest income was adversely
impacted by securities impairments, market-related valuation losses and
retail lease residual losses. Noninterest income on a linked quarter
basis increased modestly, as the reduction in securities impairments was
offset by lower fee income.
Total noninterest expense in the fourth quarter of 2008 was $1,960
million; $8 million (.4 percent) lower than the fourth quarter of 2007,
and $137 million (7.5 percent) higher than the third quarter of 2008.
Total noninterest expense was relatively flat year-over-year because
higher costs associated with business initiatives designed to expand the
Company's geographic presence and strengthen customer relationships,
including the Mellon 1st Business Bank, Downey Savings and
Loan and PFF Bank and Trust acquisitions and investments in relationship
managers, branch initiatives, and Payment Services' businesses, were
offset by the favorable variance associated with a $215 million charge
recognized in the fourth quarter of 2007 related to the Company's
proportionate share of contingent obligations to indemnify Visa Inc. for
certain litigation matters ("Visa Charge"). Operating expense also
included higher credit collection costs and incremental costs associated
with investments in tax-advantaged projects. The increase on a linked
quarter basis was principally the result of acquisitions, seasonally
higher expenses for marketing and business development campaigns, higher
professional service fees and investments in tax-advantaged projects, as
well as increased costs related to foreclosed real estate.
On November 21, 2008, the Company acquired substantially all of the
assets and assumed all of the deposits and most of the liabilities of
Downey Savings and Loan and PFF Bank and Trust ("Downey and PFF
acquisitions") from the FDIC. In connection with these acquisitions, the
Company entered into loss sharing agreements with the FDIC ("Loss
Sharing Agreements") providing for specified credit loss and asset yield
protection for all single family residential mortgages and a significant
portion of commercial and commercial real estate loans and foreclosed
real estate ("covered assets"). The Company estimated that the covered
assets would incur approximately $4.7 billion of cumulative credit
losses. These losses will be offset by an estimated $2.4 billion benefit
to be received by the Company under the Loss Sharing Agreements. Under
the terms of the Loss Sharing Agreements, the Company will incur the
first $1.6 billion of specified contractual losses ("First Loss
Position") on covered assets, which was approximately the amount of the
predecessors' net assets. The Company acquired these net assets for a
nominal amount of consideration. After the First Loss Position, the
Company will incur 20 percent of the next $3.1 billion of specified
contractual losses and only 5 percent of specified losses beyond that
limit. The Company estimates its share of those losses will be
approximately $.7 billion. The impact of estimated credit losses on
future cash flows from the acquired loan portfolios was included in the
determination of the estimated value of the loans at the date of the
acquisition.
As required by existing accounting standards, the Company identified the
acquired non-revolving loans experiencing credit deterioration,
representing the majority of the assets acquired, and recorded these
assets in the financial statements at their estimated fair market value
to reflect expected credit losses and the estimated impact of the Loss
Sharing Agreements. As a result, the Company will not record additional
provision for credit losses or report charge-offs on these loans unless
further credit deterioration occurs after the date of acquisition. The
Company recorded all other loans at the predecessors' book value, net of
fair value adjustments for any interest-rate related discount or
premium, and an allowance for credit losses. In an effort to enhance
information related to the Company's credit quality, the Company's
financial disclosures segregate acquired covered assets from assets not
subject to Loss Sharing Agreements.
The Company's provision for credit losses considers changes in credit
quality of the recorded value for the entire portfolio of loans net of
the credit loss protection available under the Loss Sharing Agreements
with the FDIC. The provision for credit losses for the fourth quarter of
2008 was $1,267 million, an increase of $519 million over the third
quarter of 2008 and $1,042 million over the fourth quarter of 2007. The
provision for credit losses exceeded net charge-offs by $635 million in
the fourth quarter of 2008 and $250 million in the third quarter of
2008. The increase in the provision for credit losses from a year ago
reflects continuing stress in residential real estate markets, driven by
declining home prices in most geographic regions. It also reflects
deteriorating economic conditions and the corresponding impact on the
commercial and consumer loan portfolios. Net charge-offs in the fourth
quarter of 2008 were $632 million, compared with net charge-offs of $498
million in the third quarter of 2008 and $225 million in the fourth
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 during 2009.
Nonperforming assets were $2,624 million at December 31, 2008, compared
with $1,492 million at September 30, 2008, and $690 million at December
31, 2007. This increase included $643 million of covered assets related
to the Downey and PFF acquisitions. The majority of these nonperforming
assets were subject to the Loss Sharing Agreements with the FDIC and
were recorded at their estimated fair value at the date of acquisition.
The remaining increase was driven by continuing 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 total loans not subject to loss sharing
was 2.09 percent at December 31, 2008, compared with 1.71 percent at
September 30, 2008, and 1.47 percent at December 31, 2007. The ratio of
the allowance for credit losses to total loans, including loans subject
to the FDIC Loss Sharing Agreements, was 1.96 percent at December 31,
2008. The Company anticipates that nonperforming assets will continue to
increase during 2009 as deteriorating economic conditions begin to
impact most commercial and consumer loan categories.
INCOME STATEMENT HIGHLIGHTS Table 2
(Taxable-equivalent
basis, $ in Percent Percent
millions,
except per-share Change Change
data)
4Q 3Q 4Q 4Q08 vs 4Q08 vs Full Full Percent
Year Year
2008 2008 2007 3Q08 4Q07 2008 2007 Change
Net interest income $ 2,161 $ 1,967 $ 1,763 9.9 22.6 $ 7,866 $ 6,764 16.3
Noninterest income 1,463 1,412 1,811 3.6 (19.2 ) 6,811 7,296 (6.6 )
Total net revenue 3,624 3,379 3,574 7.3 1.4 14,677 14,060 4.4
Noninterest expense 1,960 1,823 1,968 7.5 (.4 ) 7,414 6,986 6.1
Income before 1,664 1,556 1,606 6.9 3.6 7,263 7,074 2.7
provision and taxes
Provision for 1,267 748 225 69.4 nm 3,096 792 nm
credit losses
Income before taxes 397 808 1,381 (50.9 ) (71.3 ) 4,167 6,282 (33.7 )
Taxable-equivalent 40 34 22 17.6 81.8 134 75 78.7
adjustment
Applicable income 27 198 417 (86.4 ) (93.5 ) 1,087 1,883 (42.3 )
taxes
Net income $ 330 $ 576 $ 942 (42.7 ) (65.0 ) $ 2,946 $ 4,324 (31.9 )
Net income
applicable to $ 260 $ 557 $ 927 (53.3 ) (72.0 ) $ 2,823 $ 4,264 (33.8 )
common equity
Diluted earnings $ .15 $ .32 $ .53 (53.1 ) (71.7 ) $ 1.61 $ 2.43 (33.7 )
per common share
Net Interest Income
Fourth quarter net interest income on a taxable-equivalent basis was
$2,161 million, compared with $1,763 million in the fourth quarter of
2007, an increase of $398 million (22.6 percent). The increase was a
result of growth in average earning assets, as well as a higher net
interest margin than a year ago. Average earning assets for the period
increased compared with the fourth quarter of 2007 by $25.7 billion
(12.8 percent, 9.4 percent excluding acquisitions), primarily driven by
an increase of $25.8 billion (17.0 percent) in average loans. During the
fourth quarter of 2008, the net interest margin increased to 3.81
percent compared with 3.51 percent in the fourth quarter of 2007. The
net interest margin increased because of growth in average loans at
higher credit spreads, asset/liability re-pricing in a declining rate
environment, wholesale funding mix during a period of significant
volatility in short-term funding markets and the benefit of net free
funds.
Net interest income increased $194 million (9.9 percent) over the prior
quarter of 2008. This increase was a result of growth in average earning
assets of $11.0 billion (5.1 percent, 2.5 percent without the impact of
acquisitions) and an increase in the net interest margin from 3.65
percent in the third quarter of 2008 to 3.81 percent in the current
quarter.
NET INTEREST INCOME Table 3
(Taxable-equivalent
basis; $ in
millions)
Change Change
4Q 3Q 4Q 4Q08 vs 4Q08 vs Full Year Full Year
2008 2008 2007 3Q08 4Q07 2008 2007 Change
Components of net
interest income
Income on earning $ 3,195 $ 3,110 $ 3,431 $ 85 $ (236 ) $ 12,630 $ 13,309 $ (679 )
assets
Expense on
interest-bearing 1,034 1,143 1,668 (109 ) (634 ) 4,764 6,545 (1,781 )
liabilities
Net interest income $ 2,161 $ 1,967 $ 1,763 $ 194 $ 398 $ 7,866 $ 6,764 $ 1,102
Average yields and
rates paid
Earning assets 5.63 % 5.77 % 6.81 % (.14 )% (1.18 )% 5.87 % 6.84 % (.97 )%
yield
Rate paid on
interest-bearing 2.16 2.45 3.83 (.29 ) (1.67 ) 2.58 3.91 (1.33 )
liabilities
Gross interest 3.47 % 3.32 % 2.98 % .15 % .49 % 3.29 % 2.93 % .36 %
margin
Net interest margin 3.81 % 3.65 % 3.51 % .16 % .30 % 3.66 % 3.47 % .19 %
Average balances
Investment $ 41,974 $ 42,548 $ 42,525 $ (574 ) $ (551 ) $ 42,850 $ 41,313 $ 1,537
securities
Loans 177,205 166,560 151,451 10,645 25,754 165,552 147,348 18,204
Earning assets 225,986 214,973 200,307 11,013 25,679 215,046 194,683 20,363
Interest-bearing 190,856 185,494 172,999 5,362 17,857 184,932 167,196 17,736
liabilities
Net free funds (a) 35,130 29,479 27,308 5,651 7,822 30,114 27,487 2,627
(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 Table 4
LOANS
($ in Percent Percent
millions)
Change Change
4Q 3Q 4Q 4Q08 vs 4Q08 vs Full Year Full Year Percent
2008 2008 2007 3Q08 4Q07 2008 2007 Change
Commercial $ 50,328 $ 48,137 $ 43,649 4.6 15.3 $ 47,903 $ 42,087 13.8
Lease 6,608 6,436 5,978 2.7 10.5 6,404 5,725 11.9
financing
Total 56,936 54,573 49,627 4.3 14.7 54,307 47,812 13.6
commercial
Commercial 22,967 22,302 19,775 3.0 16.1 21,705 19,650 10.5
mortgages
Construction
and 9,691 9,446 8,983 2.6 7.9 9,405 8,942 5.2
development
Total
commercial 32,658 31,748 28,758 2.9 13.6 31,110 28,592 8.8
real estate
Residential 23,430 23,309 22,670 .5 3.4 23,257 22,085 5.3
mortgages
Credit card 12,976 12,217 10,621 6.2 22.2 11,954 9,574 24.9
Retail 5,062 5,200 6,123 (2.7 ) (17.3 ) 5,395 6,512 (17.2 )
leasing
Home equity
and second 18,691 17,858 16,343 4.7 14.4 17,550 15,923 10.2
mortgages
Other retail 22,247 21,655 17,309 2.7 28.5 20,671 16,850 22.7
Total retail 58,976 56,930 50,396 3.6 17.0 55,570 48,859 13.7
Total loans,
excluding 172,000 166,560 151,451 3.3 13.6 164,244 147,348 11.5
covered
assets
Covered 5,205 -- -- nm nm 1,308 -- nm
assets
Total loans $ 177,205 $ 166,560 $ 151,451 6.4 17.0 $ 165,552 $ 147,348 12.4
Total average loans, excluding covered assets, for the fourth quarter of
2008 were $172.0 billion; 13.6 percent higher than the fourth quarter of
2007, driven by growth in the majority of loan categories. The increase
in total average loans included growth in average total retail loans of
$8.6 billion (17.0 percent), total commercial loans of $7.3 billion
(14.7 percent), total commercial real estate loans of $3.9 billion (13.6
percent) and residential mortgages of $760 million (3.4 percent). Retail
loan growth for the fourth quarter of 2008 over the same quarter of 2007
included a $4.0 billion increase in federally guaranteed student loan
balances resulting from a portfolio purchase, from the transfer of loans
held for sale to held for investment and from growth in the portfolio.
Total average loans, excluding covered assets, for the fourth quarter of
2008 were higher than the third quarter of 2008 by $5.4 billion (3.3
percent). Total commercial loans grew by $2.4 billion (4.3 percent) on a
linked quarter basis, driven primarily by increases in corporate banking
balances due to both customer account growth and increased line
utilization. Total commercial real estate loans increased by $910
million (2.9 percent). Consumer lending continues to experience strong
growth in installment products and home equity lines. In addition,
credit card balances continue to show solid growth.
Average covered assets of $5.2 billion consisted of loans and foreclosed
real estate acquired in the Downey and PFF acquisitions that were
covered under the Loss Sharing Agreements. Approximately 70 percent of
covered assets are single family residential mortgages.
Average investment securities in the fourth quarter of 2008 were $.6
billion (1.3 percent) lower than both the fourth quarter of 2007 and the
third quarter of 2008.
AVERAGE DEPOSITS Table 5
($ in millions) Percent Percent
Change Change
4Q 3Q 4Q 4Q08 vs 4Q08 vs Full Year Full Year Percent
2008 2008 2007 3Q08 4Q07 2008 2007 Change
Noninterest-bearing $ 31,639 $ 28,322 $ 26,869 11.7 17.8 $ 28,739 $ 27,364 5.0
deposits
Interest-bearing
savings deposits
Interest checking 29,467 32,304 27,458 (8.8 ) 7.3 31,137 26,117 19.2
Money market 27,009 26,167 25,996 3.2 3.9 26,300 25,332 3.8
savings
Savings accounts 7,657 5,531 5,100 38.4 50.1 5,929 5,306 11.7
Total of savings 64,133 64,002 58,554 .2 9.5 63,366 56,755 11.6
deposits
Time certificates
of deposit less 15,414 12,669 14,539 21.7 6.0 13,583 14,654 (7.3 )
than $100,000
Time deposits
greater than 33,283 28,546 25,461 16.6 30.7 30,496 22,302 36.7
$100,000
Total
interest-bearing 112,830 105,217 98,554 7.2 14.5 107,445 93,711 14.7
deposits
Total deposits $ 144,469 $ 133,539 $ 125,423 8.2 15.2 $ 136,184 $ 121,075 12.5
Average total deposits for the fourth quarter of 2008 increased $19.0
billion (15.2 percent) over the fourth quarter of 2007. Without the
impact of acquisitions (Mellon 1st Business Bank, Downey and
PFF), average total deposits increased $12.0 billion (9.6 percent).
Noninterest-bearing deposits increased $4.8 billion (17.8 percent)
year-over-year primarily related to Wealth Management & Securities
Services, Corporate Banking and the impact of acquisitions. Average
total savings deposits increased year-over-year by $5.6 billion (9.5
percent) due to an increase in average savings accounts of $2.6 billion
(50.1 percent), primarily in Consumer Banking, a $2.0 billion increase
(7.3 percent) in average interest checking balances, primarily the
result of higher Consumer Banking balances, broker-dealer and
institutional trust balances, and a $1.0 billion increase (3.9 percent)
in average money market savings balances driven by higher balances from
broker-dealers, Consumer Banking and the impact of acquisitions. Average
time certificates of deposit less than $100,000 were higher in the
fourth quarter of 2008 than in the fourth quarter of 2007 by $.9 billion
(6.0 percent), primarily due to acquisitions. Average time deposits
greater than $100,000 increased by $7.8 billion (30.7 percent) over the
same period of 2007 as a result of the business lines' ability to
attract larger customer deposits given current market conditions and the
impact of acquisitions, as well as the Company's wholesale funding
decisions.
Average total deposits increased $10.9 billion (8.2 percent) over the
third quarter of 2008. Without the impact of the Downey and PFF
acquisitions, average total deposits increased $5.8 billion (4.3
percent, 17.2 percent annualized). Average noninterest-bearing deposits
for the fourth quarter of 2008 increased $3.3 billion (11.7 percent)
over the prior quarter of 2008 due primarily to increases in
broker-dealer and corporate trust deposits. Total average savings
deposits increased modestly by $131 million (.2 percent) from the third
quarter of 2008, as a strong increase in average savings accounts
balances and an increase in average money market accounts were offset by
a decline in average interest checking deposits. The 38.4 percent
increase in average savings account balances on a linked quarter basis,
and the 50.1 percent increase year-over-year, was principally the result
of strong participation in a new savings product offered by Consumer
Banking. The increase in average money market savings over the third
quarter of 2008 was due primarily to higher broker-dealer and
institutional trust balances. The decline in average interest checking
deposits was primarily due to lower broker-dealer and institutional
trust balances. Average time certificates less than $100,000 increased
$2.7 billion (21.7 percent) over the prior quarter due to acquisitions,
and average time deposits greater than $100,000 increased by $4.7
billion (16.6 percent) from the prior quarter, reflecting acquisitions
and wholesale funding decisions.
NONINTEREST Table 6
INCOME
($ in Percent Percent
millions)
Change Change
4Q 3Q 4Q 4Q08 vs 4Q08 vs Full Year Full Percent
Year
2008 2008 2007 3Q08 4Q07 2008 2007 Change
Credit and
debit card $ 256 $ 269 $ 285 (4.8 ) (10.2 ) $ 1,039 $ 958 8.5
revenue
Corporate
payment 154 179 166 (14.0 ) (7.2 ) 671 638 5.2
products
revenue
ATM
processing 95 94 84 1.1 13.1 366 327 11.9
services
Merchant
processing 271 300 281 (9.7 ) (3.6 ) 1,151 1,108 3.9
services
Trust and
investment 300 329 344 (8.8 ) (12.8 ) 1,314 1,339 (1.9 )
management
fees
Deposit
service 260 286 277 (9.1 ) (6.1 ) 1,081 1,077 .4
charges
Treasury
management 128 128 117 -- 9.4 517 472 9.5
fees
Commercial
products 131 132 121 (.8 ) 8.3 492 433 13.6
revenue
Mortgage
banking 23 61 48 (62.3 ) (52.1 ) 270 259 4.2
revenue
Investment
products 37 37 38 -- (2.6 ) 147 146 .7
fees and
commissions
Securities
gains (253 ) (411 ) 4 38.4 nm (978 ) 15 nm
(losses),
net
Other 61 8 46 nm 32.6 741 524 41.4
Total
noninterest $ 1,463 $ 1,412 $ 1,811 3.6 (19.2 ) $ 6,811 $ 7,296 (6.6 )
income
Noninterest Income
Fourth quarter noninterest income was $1,463 million; $348 million (19.2
percent) lower than the same quarter of 2007 and $51 million (3.6
percent) higher than the third quarter of 2008. Noninterest income
declined from the fourth quarter of 2007, as fee-based revenue in a
number of revenue categories was lower as deteriorating economic
conditions adversely impacted consumer and business behavior. In
addition, total noninterest income was unfavorably impacted by
impairment charges related to structured investment securities and other
market valuation losses and higher retail lease residual losses from a
year ago, partially offset by a $59 million gain related to the
Company's ownership interests in Visa Inc ("Visa Gain"). Credit and
debit card revenue, corporate payment products revenue and merchant
processing services revenue were lower in the fourth quarter of 2008
than the same period of 2007 by $29 million (10.2 percent), $12 million
(7.2 percent) and $10 million (3.6 percent), respectively. All
categories were impacted by lower transaction volumes compared with the
prior year's quarter. Trust and investment management fees declined $44
million (12.8 percent) primarily due to the adverse impact of equity
market conditions. Deposit service charges decreased $17 million (6.1
percent) year-over-year, primarily due to lower overdraft fees as
customer spending declined. Mortgage banking revenue decreased $25
million (52.1 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 $257 million due to the impact of impairment charges
primarily related to structured investment securities. ATM processing
services increased by $11 million (13.1 percent), due to growth in
transaction volumes and business expansion. Treasury management fees
increased $11 million (9.4 percent), due primarily to the favorable
impact of declining rates on customer earnings credits and account
growth. Commercial products revenue increased $10 million (8.3 percent)
year-over-year due to higher foreign exchange revenue, letters of credit
and other commercial loan fees. Other income increased by $15 million
year-over-year, as the Visa Gain and the net change in market valuation
losses were partially offset by the adverse impact of higher retail
lease residual losses and lower equity investment revenue.
Noninterest income was higher by $51 million (3.6 percent) in the fourth
quarter of 2008 than the third quarter of 2008, reflecting the Visa Gain
and the favorable impact of lower securities impairments, partially
offset by a decline in fee-based revenue due principally to the ongoing
economic slowdown. Other income increased $53 million primarily due to
the Visa Gain. Credit and debit card revenue decreased $13 million (4.8
percent), corporate payment products revenue decreased $25 million (14.0
percent), and merchant processing services revenue was lower by $29
million (9.7 percent) all due to lower transaction volumes. Trust and
investment management fees were lower by $29 million (8.8 percent) on a
linked quarter basis primarily due to the impact of market conditions.
Deposit service charges decreased $26 million (9.1 percent) due to a
decline in overdraft transactions. Mortgage banking revenue decreased
$38 million (62.3 percent) from the third quarter of 2008, due to a
decline in the fair value of MSRs net of economic hedging activity and
lower production income, partially offset by an increase in servicing
revenue.
NONINTEREST Table 7
EXPENSE
($ in Percent Percent
millions)
Change Change
4Q 3Q 4Q 4Q08 vs 4Q08 vs Full Full Percent
Year Year
2008 2008 2007 3Q08 4Q07 2008 2007 Change
Compensation $ 770 $ 763 $ 690 .9 11.6 $ 3,039 $ 2,640 15.1
Employee 124 125 119 (.8 ) 4.2 515 494 4.3
benefits
Net occupancy 202 199 188 1.5 7.4 781 738 5.8
and equipment
Professional 73 61 71 19.7 2.8 240 233 3.0
services
Marketing and
business 90 75 69 20.0 30.4 310 260 19.2
development
Technology and 156 153 148 2.0 5.4 598 561 6.6
communications
Postage,
printing and 77 73 73 5.5 5.5 294 283 3.9
supplies
Other 93 88 93 5.7 -- 355 376 (5.6 )
intangibles
Other 375 286 517 31.1 (27.5 ) 1,282 1,401 (8.5 )
Total
noninterest $ 1,960 $ 1,823 $ 1,968 7.5 (.4 ) $ 7,414 $ 6,986 6.1
expense
Noninterest Expense
Fourth quarter noninterest expense totaled $1,960 million, a decrease of
$8 million (.4 percent) from the same quarter of 2007 and an increase of
$137 million (7.5 percent) over the third quarter of 2008. Compensation
expense increased $80 million (11.6 percent) over the same period of
2007 due to costs for acquired businesses, growth in ongoing bank
operations and other initiatives and the adoption of a new accounting
standard in 2008. Under this new accounting standard, compensation
expense is no longer deferred for the origination of mortgage loans held
for sale. Net occupancy and equipment expense increased $14 million (7.4
percent) over the fourth quarter of 2007, primarily due to acquisitions,
as well as branch-based and other business expansion initiatives.
Marketing and business development expense increased $21 million (30.4
percent) year-over-year due to the timing of Consumer Banking and retail
payment product marketing programs and a national advertising campaign.
Technology and communications expense increased $8 million (5.4 percent)
year-over-year, primarily due to increased processing volumes and
business expansion. These increases were offset by a decrease in other
expense of $142 million (27.5 percent), due primarily to the $215
million Visa Charge recognized in the fourth quarter of 2007, partially
offset by increased costs for other real estate owned, tax-advantaged
projects, acquisitions and litigation.
Noninterest expense in the fourth quarter of 2008 increased $137 million
(7.5 percent) compared with the third quarter of 2008. This increase
included costs for acquired businesses. In addition, professional
services expense was seasonally higher; $12 million (19.7 percent) on a
linked quarter basis. Marketing and business development expense
increased $15 million (20.0 percent) due primarily to the Company's
national advertising campaign and the timing of other product
promotional campaigns. Other intangibles expense was higher compared
with the third quarter of 2008 due to the Downey and PFF acquisitions.
Other expense increased $89 million (31.1 percent) on a linked quarter
basis due to increased litigation and other real estate owned-related
costs, and the timing of costs related to tax-advantaged projects.
Provision for Income Taxes
The provision for income taxes for the fourth quarter of 2008 resulted
in a tax rate on a taxable-equivalent basis of 16.9 percent (effective
tax rate of 7.6 percent) compared with 31.8 percent (effective tax rate
of 30.7 percent) in the fourth quarter of 2007 and 28.7 percent
(effective tax rate of 25.6 percent) in the third quarter of 2008. The
decline in the effective tax rate reflects the marginal impact of the
decline in pretax earnings. The Company expects the taxable-equivalent
tax rate to be approximately 30 percent in 2009.
Acquired Loans and Other Assets
Assets acquired in the Downey and PFF acquisitions are substantially
covered under Loss Sharing Agreements with the FDIC. In accordance with
current accounting standards, the Company identified non-revolving loans
with credit deterioration and recorded these assets in the financial
statements at their estimated fair market value to reflect expected
credit losses and the estimated impact of the Loss Sharing Agreements.
For all other acquired loans, the Company recorded the assets at the
predecessors' book value, net of fair value adjustments for any
interest-rate related discount or premium, and an allowance for credit
losses. The Company recorded foreclosed real estate at estimated fair
value. The following table provides an overview of the predecessors' net
asset values of the loans and other real estate acquired from the FDIC
("contract value"), the book value recorded as of December 31, 2008, and
the impact on average balances for the fourth quarter of 2008.
DOWNEY AND PFF ACQUISITIONS (a) Table 8
($ in millions)
12/31/08 12/31/08 4Q08 Average
Contract Value Book Value Book Value
Covered assets
Loans $ 13,347 $ 8,794 $ 3,947
Other real estate 465 274 150
Subtotal 13,812 9,068 4,097
Benefit of loss sharing agreement -- 2,382 1,108
Total covered assets 13,812 11,450 5,205
Other loans 825 715 250
Total loans and other real estate $ 14,637 $ 12,165 $ 5,455
acquired
(a) preliminary data
ALLOWANCE FOR CREDIT LOSSES Table 9
($ in millions) 4Q 3Q 2Q 1Q 4Q
2008 2008 2008 2008 2007
Balance, beginning of period $ 2,898 $ 2,648 $ 2,435 $ 2,260 $ 2,260
Net charge-offs
Commercial 108 57 51 39 23
Lease financing 31 22 18 16 13
Total commercial 139 79 69 55 36
Commercial mortgages 14 9 6 4 3
Construction and development 63 56 12 8 7
Total commercial real estate 77 65 18 12 10
Residential mortgages 84 71 53 26 17
Credit card 169 149 139 108 88
Retail leasing 11 9 8 7 6
Home equity and second 52 48 48 30 22
mortgages
Other retail 95 77 61 55 46
Total retail 327 283 256 200 162
Total net charge-offs, 627 498 396 293 225
excluding covered assets
Covered assets 5 -- -- -- --
Total net charge-offs 632 498 396 293 225
Provision for credit losses 1,267 748 596 485 225
Acquisitions and other changes 106 -- 13 (17 ) --
Balance, end of period $ 3,639 $ 2,898 $ 2,648 $ 2,435 $ 2,260
Components
Allowance for loan losses $ 3,514 $ 2,767 $ 2,518 $ 2,251 $ 2,058
Liability for unfunded credit 125 131 130 184 202
commitments
Total allowance for credit $ 3,639 $ 2,898 $ 2,648 $ 2,435 $ 2,260
losses
Gross charge-offs $ 678 $ 544 $ 439 $ 348 $ 287
Gross recoveries $ 46 $ 46 $ 43 $ 55 $ 62
Allowance for credit losses as
a percentage of
Period-end loans, excluding 2.09 1.71 1.60 1.54 1.47
covered assets
Nonperforming loans, excluding 206 222 273 358 406
covered assets
Nonperforming assets, excluding 184 194 233 288 328
covered assets
Period-end loans 1.96 1.71 1.60 1.54 1.47
Nonperforming loans 151 222 273 358 406
Nonperforming assets 139 194 233 288 328
Credit Quality
During the fourth quarter of 2008, credit losses and nonperforming
assets continued to trend higher. The allowance for credit losses was
$3,639 million at December 31, 2008, compared with $2,898 million at
September 30, 2008, and $2,260 million at December 31, 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 $1,379 million
during 2008. The credit stress is reflected in higher delinquencies,
nonperforming asset levels and net charge-offs relative to a year ago
and the third quarter of 2008. Total net charge-offs in the fourth
quarter of 2008 were $632 million, compared with the third quarter of
2008 net charge-offs of $498 million and the fourth quarter of 2007 net
charge-offs of $225 million. The increase in total net charge-offs from
a year ago was driven by factors affecting the residential housing
markets as well as homebuilding and related industries, and 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
$216 million in the fourth quarter of 2008 (.96 percent of average loans
outstanding) compared with $144 million (.66 percent of average loans
outstanding) in the third quarter of 2008 and $46 million (.23 percent
of average loans outstanding) in the fourth quarter of 2007. This
increasing trend in commercial and commercial real estate losses
reflected continuing stress within the portfolios, especially
residential homebuilding and related industry sectors.
Residential mortgage loan net charge-offs increased to $84 million in
the fourth quarter of 2008 (1.43 percent of average loans outstanding)
compared with $71 million (1.21 percent of average loans outstanding) in
the third quarter of 2008 and $17 million (.30 percent of average loans
outstanding) in the fourth 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 $327 million (2.21 percent of
average loans outstanding) in the fourth quarter of 2008 compared with
$283 million (1.98 percent of average loans outstanding) in the third
quarter of 2008 and $162 million (1.28 percent of average loans
outstanding) in the fourth 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. In addition, there were $5 million of
net-charge-offs on loans under the Loss Sharing Agreements with the FDIC.
The ratio of the allowance for credit losses to period-end loans not
subject to Loss Sharing Agreements was 2.09 percent (1.96 percent of
total period end loans) at December 31, 2008, compared with 1.71 percent
at September 30, 2008, and 1.47 percent at December 31, 2007. The ratio
of the allowance for credit losses to nonperforming loans was 151
percent (206 percent excluding covered assets) at December 31, 2008,
compared with 222 percent at September 30, 2008, and 406 percent at
December 31, 2007.
CREDIT RATIOS Table 10
(Percent) 4Q 3Q 2Q 1Q 4Q
2008 2008 2008 2008 2007
Net charge-offs ratios (a)
Commercial .85 .47 .43 .34 .21
Lease financing 1.87 1.36 1.14 1.03 .86
Total commercial .97 .58 .51 .43 .29
Commercial mortgages .24 .16 .11 .08 .06
Construction and development 2.59 2.36 .52 .35 .31
Total commercial real estate .94 .81 .24 .16 .14
Residential mortgages 1.43 1.21 .91 .46 .30
Credit card 5.18 4.85 4.84 3.93 3.29
Retail leasing .86 .69 .58 .49 .39
Home equity and second mortgages 1.11 1.07 1.13 .73 .53
Other retail 1.70 1.41 1.16 1.25 1.05
Total retail 2.21 1.98 1.86 1.58 1.28
Total net charge-offs, excluding 1.45 1.19 .98 .76 .59
covered assets
Covered assets .38 -- -- -- --
Total net charge-offs 1.42 1.19 .98 .76 .59
Delinquent loan ratios - 90 days or more past due excluding nonperforming
loans (b)
Commercial .13 .11 .09 .09 .07
Commercial real estate .11 .05 .09 .13 .02
Residential mortgages 1.55 1.34 1.09 .98 .86
Retail .82 .68 .63 .69 .68
Total loans, excluding covered .56 .46 .41 .43 .38
assets
Covered assets 5.13 -- -- -- --
Total loans .84 .46 .41 .43 .38
Delinquent loan ratios - 90 days or more past due including nonperforming
loans (b)
Commercial .82 .76 .71 .60 .43
Commercial real estate 3.34 2.25 1.57 1.18 1.02
Residential mortgages 2.44 2.00 1.55 1.24 1.10
Retail .97 .81 .74 .77 .73
Total loans, excluding covered 1.57 1.23 1.00 .86 .74
assets
Covered assets 10.74 -- -- -- --
Total loans 2.14 1.23 1.00 .86 .74
(a) annualized and calculated on average loan balances
(b) ratios are expressed as a percent of ending loan balances
ASSET QUALITY Table 11
($ in millions)
Dec 31 Sep 30 Jun 30 Mar 31 Dec 31
2008 2008 2008 2008 2007
Nonperforming loans
Commercial $ 290 $ 280 $ 265 $ 201 $ 128
Lease financing 102 85 75 64 53
Total commercial 392 365 340 265 181
Commercial mortgages 294 164 139 102 84
Construction and development 780 545 326 212 209
Total commercial real estate 1,074 709 465 314 293
Residential mortgages 210 155 108 59 54
Retail 92 74 58 42 29
Total nonperforming loans, 1,768 1,303 971 680 557
excluding covered assets
Covered assets 643 -- -- -- --
Total nonperforming loans 2,411 1,303 971 680 557
Other real estate 190 164 142 141 111
Other nonperforming assets 23 25 22 24 22
Total nonperforming assets (a) $ 2,624 $ 1,492 $ 1,135 $ 845 $ 690
Accruing loans 90 days or more
past due, excluding covered $ 967 $ 787 $ 687 $ 676 $ 584
assets
Accruing loans 90 days or more $ 1,554 $ 787 $ 687 $ 676 $ 584
past due
Restructured loans that continue $ 1,509 $ 1,180 $ 1,029 $ 695 $ 551
to accrue interest
Nonperforming assets to loans
plus ORE, excluding covered 1.14 .88 .68 .53 .45
assets (%)
Nonperforming assets to loans 1.42 .88 .68 .53 .45
plus ORE (%)
(a) does not include accruing loans 90 days or more past due or restructured
loans that continue to accrue interest
Nonperforming assets at December 31, 2008, totaled $2,624 million,
compared with $1,492 million at September 30, 2008, and $690 million at
December 31, 2007. The current period included $643 million of
nonperforming covered assets from the Downey and PFF acquisitions.
Nonperforming covered assets were primarily related to foreclosed real
estate and construction loans. The ratio of nonperforming assets to
loans and other real estate was 1.42 percent (1.14 percent excluding
covered assets) at December 31, 2008, compared with .88 percent at
September 30, 2008, and .45 percent at December 31, 2007. The increase
in nonperforming assets from a year ago including the Downey and PFF
acquisitions 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 $1,554 million ($967 million
excluding covered assets) at December 31, 2008, compared with $787
million at September 30, 2008, and $584 million at December 31, 2007.
The year-over-year increase in delinquent loans that continue to accrue
interest was primarily related to residential mortgages, credit cards
and home equity loans. Restructured loans that continue to accrue
interest have also increased from the fourth quarter of 2007 and the
third quarter of 2008, reflecting the impact of restructurings for
certain residential mortgage customers in light of current economic
conditions. The Company expects this trend to continue in the near term
as residential home valuations decline and certain borrowers take
advantage of the Company's mortgage loan restructuring programs.
CAPITAL POSITION Table 12
($ in millions) Dec 31 Sep 30 Jun 30 Mar 31 Dec 31
2008 2008 2008 2008 2007
Total
shareholders' $ 26,300 $ 21,675 $ 21,828 $ 21,572 $ 21,046
equity
Tier 1 capital 24,426 18,877 18,624 18,543 17,539
Total risk-based 32,894 27,403 27,502 27,207 25,925
capital
Tier 1 capital 10.6 % 8.5 % 8.5 % 8.6 % 8.3 %
ratio
Total risk-based 14.3 12.3 12.5 12.6 12.2
capital ratio
Leverage ratio 9.8 8.0 7.9 8.1 7.9
Common equity to 6.9 8.2 8.2 8.3 8.4
assets
Tangible common 4.5 5.3 5.2 5.3 5.1
equity to assets
On November 14, 2008, the Company issued to the U.S. Department of the
Treasury, 6.6 million shares of cumulative perpetual preferred stock and
warrants to purchase 32.7 million shares of the Company's common stock
at a price of $30.29 per common share for an aggregate purchase price of
$6.6 billion in cash. As a result of this transaction, the Company's
total shareholders' equity and capital ratios increased during the
fourth quarter of 2008. Total shareholders' equity was $26.3 billion at
December 31, 2008, compared with $21.7 billion at September 30, 2008,
and $21.0 billion at December 31, 2007. The Tier 1 capital ratio was
10.6 percent at December 31, 2008, compared with 8.5 percent at
September 30, 2008, and 8.3 percent at December 31, 2007. The total
risk-based capital ratio was 14.3 percent at December 31, 2008, compared
with 12.3 percent at September 30, 2008, and 12.2 percent at December
31, 2007. The leverage ratio was 9.8 percent at December 31, 2008,
compared with 8.0 percent at September 30, 2008, and 7.9 percent at
December 31, 2007. Tangible common equity to assets was 4.5 percent at
December 31, 2008, compared with 5.3 percent at September 30, 2008, and
5.1 percent at December 31, 2007. The decline in this ratio was
principally due to the Downey and PFF acquisitions. All regulatory
ratios continue to be in excess of stated "well-capitalized"
requirements.
COMMON SHARES Table 13
(Millions) 4Q 3Q 2Q 1Q 4Q
2008 2008 2008 2008 2007
Beginning shares outstanding 1,754 1,741 1,738 1,728 1,725
Shares issued for stock option
and stock purchase plans, 1 13 3 12 3
acquisitions and other corporate
purposes
Shares repurchased -- -- -- (2 ) --
Ending shares outstanding 1,755 1,754 1,741 1,738 1,728
LINE OF BUSINESS FINANCIAL PERFORMANCE (a) Table 14
($ in
millions)
Net Income Percent Change 4Q 2008
4Q 3Q 4Q 4Q08 vs 4Q08 vs Full Year Full Year Percent Earnings
Business 2008 2008 2007 3Q08 4Q07 2008 2007 Change Composition
Line
Wholesale $ 282 $ 235 $ 281 20.0 .4 $ 1,017 $ 1,094 (7.0 ) 86 %
Banking
Consumer 209 274 431 (23.7 ) (51.5 ) 1,203 1,830 (34.3 ) 63
Banking
Wealth
Management & 134 116 89 15.5 50.6 541 537 .7 41
Securities
Services
Payment 235 269 314 (12.6 ) (25.2 ) 1,068 1,068 -- 71
Services
Treasury and
Corporate (530 ) (318 ) (173 ) (66.7 ) nm (883 ) (205 ) nm (161 )
Support
Consolidated $ 330 $ 576 $ 942 (42.7 ) (65.0 ) $ 2,946 $ 4,324 (31.9 ) 100 %
Company
(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 $282 million of the
Company's net income in the fourth quarter of 2008, a .4 percent
increase from the same period of 2007 and a 20.0 percent increase
from the third quarter of 2008. Stronger net interest income
year-over-year and an increase in fee-based revenue were offset by a
$125 million increase in the provision for credit losses and an increase
in total noninterest expense, driven primarily by the Mellon 1st
Business Bank acquisition and other business initiatives. Net interest
income increased $154 million year-over-year due to strong growth in
average earning assets and deposits. Total noninterest income increased
$7 million (3.2 percent) as growth in treasury management, letter of
credit, commercial loan and foreign exchange fees was partially offset
by lower earnings from equity investments. Total noninterest expense
increased by $33 million (13.6 percent) over a year ago, primarily due
to higher compensation and employee benefits expense related to the
impact of an acquisition and other business initiatives. In addition,
there was an increase in expenses related to other real estate owned and
higher other intangibles expense. The provision for credit losses
increased $125 million due to continued credit deterioration in the
homebuilding, commercial home supplier and other commercial portfolios.
Wholesale Banking's contribution to net income in the fourth quarter of
2008 was $47 million (20.0 percent) higher than the third quarter of
2008. Strong growth in total net revenue (19.7 percent) was partially
offset by modestly higher total noninterest expense (5.3 percent) and a
$54 million increase in the provision for credit losses, reflecting
higher net charge-offs. Total net revenue was higher on a linked quarter
basis due to an increase in both net interest income (25.8 percent) and
total noninterest income (5.1 percent). The increase in net interest
income was due primarily to growth in average loan balances and a higher
net interest margin. Total noninterest income increased on a linked
quarter basis due to higher foreign exchange, letter of credit and
capital markets revenue and the impact of net securities impairments
recorded in the third quarter, partially offset by lower equity
investment income, including an investment in a commercial real estate
business. Total noninterest expense increased $14 million (5.3 percent)
due to increased costs related to other real estate owned and higher
processing costs. The provision for credit losses increased due to
higher net charge-offs.
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 $209 million of the
Company's net income in the fourth quarter of 2008, a 51.5 percent
decrease from the same period of 2007 and a 23.7 percent decrease from
the prior quarter. Within Consumer Banking, the retail banking division
accounted for $205 million of the total contribution, a 50.4 percent
decrease on a year-over-year basis and a 16.0 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,
including acquisitions, and an increase in the provision for credit
losses. Net interest income for the retail banking division increased
year-over-year as increases in average loan balances, average deposit
balances and yield-related loan fees were partially offset by a decline
in the margin benefit of deposits in a declining interest rate
environment. Total noninterest income for the retail banking division
decreased 20.0 percent from a year ago due to lower deposit service
charges and retail lease revenue related to higher retail lease residual
losses, partially offset by growth in revenue from ATM processing
services. Total noninterest expense in the fourth quarter of 2008
increased 11.5 percent for the division over the same quarter of 2007,
reflecting acquisitions, 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
$172 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 fourth
quarter of 2008, the mortgage banking division's contribution was $4
million, a $14 million (77.8 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 $13 million (15.7 percent) over a year
ago, reflecting an increase in net interest income and an increase in
mortgage servicing income, and the favorable impact of the adoption of a
new accounting standard in early 2008, 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 and balances, net interest income increased $36 million
year-over-year. Total noninterest expense for the mortgage banking
division increased $25 million (46.3 percent) over the fourth quarter of
2007, primarily due to the impact on compensation expense of the
adoption of a new accounting standard, higher production levels from a
year ago and servicing costs associated with other real estate owned and
foreclosures.
Consumer Banking's contribution in the fourth quarter of 2008 decreased
$65 million (23.7 percent) compared with the third quarter of 2008. The
retail banking division's contribution decreased 16.0 percent on a
linked quarter basis, primarily due to an increase in the provision for
credit losses, lower deposit service charges and an increase in total
noninterest expense, primarily driven by acquisitions. Total net revenue
for the retail banking division increased $40 million (3.0 percent) as
higher net interest income was partially offset by lower total
noninterest income. Net interest income increased by 8.1 percent on a
linked quarter basis due to growth in average loan and deposit balances.
The decrease in total noninterest income was driven by lower deposit
service charges. Total noninterest expense for the retail banking
division increased $48 million (6.5 percent) on a linked quarter basis.
This increase was due primarily to the impact of acquisitions on
compensation and employee benefits expense, net occupancy and equipment
expense and other intangibles expense. The provision for credit losses
for the division reflected a $54 million increase in net charge-offs
compared with the third quarter of 2008, reflecting higher consumer
delinquencies. The contribution of the mortgage banking division
decreased $26 million from the third quarter of 2008, driven primarily
by lower total net revenue. Total net revenue decreased by 26.7 percent,
principally due to an unfavorable net change in the valuation of MSRs
and related economic hedging activities, partially offset by increases
in mortgage servicing income and production revenue. Total noninterest
expense in the mortgage banking division increased modestly by $2
million (2.6 percent) from the third quarter of 2008. In addition, the
mortgage banking division's provision for credit losses increased $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 $134 million of the Company's net income
in the fourth quarter of 2008, a 50.6 percent increase compared with the
same period of 2007 and a 15.5 percent increase from the third quarter
of 2008. Total net revenue year-over-year increased $63 million (15.7
percent). Net interest income increased by $25 million (19.2 percent)
due primarily to the margin benefit of higher deposit balances, while
total noninterest income increased by $38 million (14.0 percent) due
primarily to the favorable impact of a $107 million market valuation
loss recognized in the fourth quarter of 2007, partially offset by
current quarter market valuation losses and the impact of unfavorable
equity market conditions compared with a year ago. Total noninterest
expense was 3.8 percent lower compared with the same quarter of 2007,
reflecting lower compensation and employee benefits expense and other
intangibles expense.
The increase in the business line's contribution in the fourth quarter
of 2008 compared with the linked quarter was the result of higher net
interest income and lower total noninterest expense, partially offset by
the unfavorable impact of equity market conditions on fees.
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
offerings 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 $235 million of the Company's net income in the fourth
quarter of 2008, a decrease of 25.2 percent from the same period of 2007
and a 12.6 percent decrease from the third 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 $99 million,
reflecting credit card portfolio growth, higher delinquency rates and
changing economic conditions from a year ago. In addition, total
noninterest expense increased $29 million (7.5 percent) year-over-year,
primarily due to business expansion and marketing programs. These
unfavorable variances were partially offset by an increase in total net
revenue year-over-year due to higher net interest income (25.9 percent),
partially offset by lower total noninterest income (7.4 percent). Net
interest income increased due to strong growth in credit card balances
and the timing of asset repricing. During the current quarter, all
payment processing revenue categories were impacted by lower transaction
volumes due to the economic climate.
Payment Services' contribution in the fourth quarter of 2008 decreased
$34 million (12.6 percent) from the third quarter of 2008 primarily due
to a decline in total net revenue (1.7 percent), an increase in total
noninterest expense (3.5 percent) due to the timing of marketing
programs and an increase in the provision for credit losses (12.4
percent) due to portfolio growth and changing economic conditions. Total
net revenue declined $17 million (1.7 percent) compared with the third
quarter of 2008. Net interest income increased $46 million (18.7
percent) on a linked quarter basis due to loan growth and higher credit
spreads. Total noninterest income declined 8.2 percent as the slowdown
in the economy resulted in lower transaction volumes in all categories.
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 $530 million in
the fourth quarter of 2008, compared with a net loss of $173 million in
the fourth quarter of 2007 and a net loss of $318 million in the third
quarter of 2008. Net interest income increased $100 million in the
current quarter over the fourth quarter of 2007, reflecting the impact
of the current rate environment, wholesale funding decisions and the
Company's asset/liability position. Total noninterest income decreased
$218 million, primarily reflecting the impairment charges for structured
investment securities. Total noninterest expense decreased $166 million
primarily due to the Visa Charge recognized in the fourth quarter of
2007. The provision for credit losses increased $634 million reflecting
incremental provision related to deterioration in credit quality within
the loan portfolios due to stress in the residential real estate
markets, including homebuilding and related industries, and the impact
of economic conditions on all loan portfolios.
Net income in the fourth quarter of 2008 was lower on a linked quarter
basis due to the increase in the incremental provision for credit losses
and higher acquisition and litigation expenses, partially offset by the
net favorable impact of the securities impairments.
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 8:00 AM (CT) ON
WEDNESDAY, JANUARY 21, 2009. 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 78901067. 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
Wednesday, January 21st, and will run through Wednesday, January 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 78901067. To access
the webcast go to usbank.com
and click on "About U.S. Bancorp" and then "Investor/Shareholder
Information". The webcast link can be found under "Webcasts and
Presentations".
Minneapolis-based U.S. Bancorp ("USB"), with $266 billion in assets, is
the parent company of U.S. Bank, the 6th largest commercial bank in the
United States as of September 30, 2008. The Company operates 2,791
banking offices and 4,897 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 U.S. Bancorp. 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, the actions taken
by the U.S. Treasury Department thereunder, or any other governmental
program, 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, by
changes in the creditworthiness and performance of our counterparties,
by changes in the competitive landscape, and by increased regulation or
other adverse effects of recently enacted legislation and FDIC actions.
For discussion of these and other risks that may cause actual results to
differ from expectations, refer to U.S. Bancorp's 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," and all subsequent filings with the
Securities and Exchange Commission under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934. 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
Three Months Ended Year Ended
(Dollars and Shares in Millions, December 31, December 31,
Except Per Share Data)
(Unaudited) 2008 2007 2008 2007
Interest Income
Loans $ 2,575 $ 2,730 $ 10,051 $ 10,627
Loans held for sale 53 72 227 277
Investment securities 477 541 1,984 2,095
Other interest income 36 36 156 137
Total interest income 3,141 3,379 12,418 13,136
Interest Expense
Deposits 392 722 1,881 2,754
Short-term borrowings 205 352 1,066 1,433
Long-term debt 423 564 1,739 2,260
Total interest expense 1,020 1,638 4,686 6,447
Net interest income 2,121 1,741 7,732 6,689
Provision for credit losses 1,267 225 3,096 792
Net interest income after provision 854 1,516 4,636 5,897
for credit losses
Noninterest Income
Credit and debit card revenue 256 285 1,039 958
Corporate payment products revenue 154 166 671 638
ATM processing services 95 84 366 327
Merchant processing services 271 281 1,151 1,108
Trust and investment management fees 300 344 1,314 1,339
Deposit service charges 260 277 1,081 1,077
Treasury management fees 128 117 517 472
Commercial products revenue 131 121 492 433
Mortgage banking revenue 23 48 270 259
Investment products fees and 37 38 147 146
commissions
Securities gains (losses), net (253 ) 4 (978 ) 15
Other 61 46 741 524
Total noninterest income 1,463 1,811 6,811 7,296
Noninterest Expense
Compensation 770 690 3,039 2,640
Employee benefits 124 119 515 494
Net occupancy and equipment 202 188 781 738
Professional services 73 71 240 233
Marketing and business development 90 69 310 260
Technology and communications 156 148 598 561
Postage, printing and supplies 77 73 294 283
Other intangibles 93 93 355 376
Other 375 517 1,282 1,401
Total noninterest expense 1,960 1,968 7,414 6,986
Income before income taxes 357 1,359 4,033 6,207
Applicable income taxes 27 417 1,087 1,883
Net income $ 330 $ 942 $ 2,946 $ 4,324
Net income applicable to common equity $ 260 $ 927 $ 2,823 $ 4,264
Earnings per common share $ .15 $ .54 $ 1.62 $ 2.46
Diluted earnings per common share $ .15 $ .53 $ 1.61 $ 2.43
Dividends declared per common share $ .425 $ .425 $ 1.700 $ 1.625
Average common shares outstanding 1,754 1,726 1,742 1,735
Average diluted common shares 1,764 1,746 1,757 1,758
outstanding
U.S. Bancorp
Consolidated Ending Balance Sheet
December 31, December 31,
(Dollars in Millions) 2008 2007
Assets
Cash and due from banks $ 6,859 $ 8,884
Investment securities
Held-to-maturity 53 74
Available-for-sale 39,468 43,042
Loans held for sale 3,210 4,819
Loans
Commercial 56,618 51,074
Commercial real estate 33,213 29,207
Residential mortgages 23,580 22,782
Retail 60,368 50,764
Total loans, excluding covered assets 173,779 153,827
Covered assets 11,450 --
Total loans 185,229 153,827
Less allowance for loan losses (3,514 ) (2,058 )
Net loans 181,715 151,769
Premises and equipment 1,790 1,779
Goodwill 8,571 7,647
Other intangible assets 2,834 3,043
Other assets 21,412 16,558
Total assets $ 265,912 $ 237,615
Liabilities and Shareholders' Equity
Deposits
Noninterest-bearing $ 37,494 $ 33,334
Interest-bearing 85,886 72,458
Time deposits greater than $100,000 35,970 25,653
Total deposits 159,350 131,445
Short-term borrowings 33,983 32,370
Long-term debt 38,359 43,440
Other liabilities 7,920 9,314
Total liabilities 239,612 216,569
Shareholders' equity
Preferred stock 7,931 1,000
Common stock 20 20
Capital surplus 5,830 5,749
Retained earnings 22,541 22,693
Less treasury stock (6,659 ) (7,480 )
Other comprehensive income (3,363 ) (936 )
Total shareholders' equity 26,300 21,046
Total liabilities and shareholders' equity $ 265,912 $ 237,615
CONTACT: U.S. Bancorp
Media
Steve Dale, 612-303-0784
or
Investors/Analysts
Judith T. Murphy, 612-303-0783
Source: U.S. Bancorp
