US Bank 2013 Annual Report Download - page 63

2012. Given the current economic conditions, the Company
expects the level of net charge-offs to increase modestly and
total nonperforming assets to be relatively stable in the first
quarter of 2014.
The provision for income taxes for the fourth quarter of
2013 resulted in an effective tax rate of 21.5 percent,
reflecting the reduction in income tax expense due to the
accounting presentation changes related to investments in
tax-advantaged projects and the favorable resolution of
certain state tax matters. The effective tax rate was
28.6 percent in the fourth quarter of 2012.
Line of Business Financial Review
The Company’s major lines of business are Wholesale
Banking and Commercial Real Estate, Consumer and Small
Business Banking, Wealth Management and Securities
Services, Payment Services, and Treasury and Corporate
Support. These operating segments are components of the
Company about which financial information is prepared and
is evaluated regularly by management in deciding how to
allocate resources and assess performance.
Basis for Financial Presentation Business line results
are derived from the Company’s business unit profitability
reporting systems by specifically attributing managed
balance sheet assets, deposits and other liabilities and their
related income or expense. The allowance for credit losses
and related provision expense are allocated to the lines of
business based on the related loan balances managed.
Goodwill and other intangible assets are assigned to the
lines of business based on the mix of business of the
acquired entity. Within the Company, capital levels are
evaluated and managed centrally; however, capital is
allocated to the operating segments to support evaluation of
business performance. Business lines are allocated capital
on a risk-adjusted basis considering economic and
regulatory capital requirements. Generally, the determination
of the amount of capital allocated to each business line
includes credit and operational capital allocations following a
Basel II regulatory framework. Interest income and expense
is determined based on the assets and liabilities managed
by the business line. Because funding and asset liability
management is a central function, funds transfer-pricing
methodologies are utilized to allocate a cost of funds used or
credit for funds provided to all business line assets and
liabilities, respectively, using a matched funding concept.
Also, each business unit is allocated the taxable-equivalent
benefit of tax-exempt products. The residual effect on net
interest income of asset/liability management activities is
included in Treasury and Corporate Support. Noninterest
income and expenses directly managed by each business
line, including fees, service charges, salaries and benefits,
and other direct revenues and costs are accounted for within
each segment’s financial results in a manner similar to the
consolidated financial statements. Occupancy costs are
allocated based on utilization of facilities by the lines of
business. Generally, operating losses are charged to the line
of business when the loss event is realized in a manner
similar to a loan charge-off. 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.
Certain activities that do not directly support the operations
of the lines of business or for which the lines of business are
not considered financially accountable in evaluating their
performance are not charged to the lines of business. The
income or expenses associated with these corporate
activities is reported within the Treasury and Corporate
Support line of business. Income taxes are assessed to each
line of business at a standard tax rate with the residual tax
expense or benefit to arrive at the consolidated effective tax
rate included in Treasury and Corporate Support.
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 2013, certain
organization and methodology changes were made and,
accordingly, 2012 results were restated and presented on a
comparable basis.
Wholesale Banking and Commercial Real Estate
Wholesale Banking and Commercial Real Estate offers
lending, equipment finance and small-ticket leasing,
depository services, treasury management, capital markets,
international trade services and other financial services to
middle market, large corporate, commercial real estate,
financial institution, non-profit and public sector clients.
Wholesale Banking and Commercial Real Estate contributed
$1.3 billion of the Company’s net income in 2013, or a
decrease of $22 million (1.7 percent) compared with 2012.
The decrease was primarily driven by lower net revenue,
partially offset by a lower provision for credit losses and a
decrease in noninterest expense.
Net revenue decreased $158 million (4.7 percent) in
2013, compared with 2012. Net interest income, on a
taxable-equivalent basis, decreased $16 million
(.8 percent) in 2013, compared with 2012, driven by lower
rates on loans and the impact of lower rates on the margin
benefit from deposits, partially offset by higher average loan
and deposit balances and higher loan fees. Noninterest
income decreased $142 (11.5 percent) in 2013, compared
with 2012, driven by lower commercial products revenue,
primarily due to lower standby letters of credit and other
loan-related fees and capital markets revenue. In addition,
equity investment revenue was lower year-over-year.
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