US Bank 2006 Annual Report Download - page 22

reflecting incremental operating and business integration from a year ago. The net interest margin in 2006 was
costs associated with recent acquisitions, increased pension 3.65 percent, compared with 3.97 percent and 4.25 percent
costs and higher expenses related to certain tax-advantaged in 2005 and 2004, respectively. The 32 basis point decline
investments. This increase was partially offset by lower in 2006 net interest margin, compared with 2005, reflected
intangible expense and debt prepayment charges in 2006 the competitive lending environment and the impact of a
compared with a year ago. The decline in intangible flatter yield curve from a year ago. Compared with 2005,
expense from 2005 was primarily due to the adoption of credit spreads tightened by approximately 17 basis points in
SFAS 156. The efficiency ratio was 45.4 percent in 2006, 2006 across most lending products due to competitive
compared with 44.3 percent in 2005. pricing and a change in mix reflecting growth in lower-
The provision for credit losses was $544 million for spread, fixed-rate credit products. The net interest margin
2006, a decrease of $122 million (18.3 percent) from 2005, also declined due to funding incremental asset growth with
principally due to strong credit quality reflected in the higher cost wholesale funding, share repurchases, and asset/
relatively low level of nonperforming assets and declining liability decisions. An increase in the margin benefit of net
net charge-offs compared with 2005. Net charge-offs were free funds and loan fees partially offset these factors.
$544 million in 2006, compared with $685 million in 2005. Beginning in the third quarter of 2006, the Federal Reserve
The decline in net charge-offs from a year ago was Bank paused from its policies of increasing interest rates
principally due to the impact of changes in bankruptcy and tightening the money supply that began in mid-2004.
legislation enacted in the fourth quarter of 2005. As of December 31, 2006, the yield curve was relatively flat
STATEMENT OF INCOME ANALYSIS and the current consensus in the market is that it will
remain flat or slightly inverted throughout much of 2007.
Net Interest Income Net interest income, on a taxable-
This market condition will continue to be challenging for
equivalent basis, was $6.8 billion in 2006, $7.1 billion in
the banking industry. If the Federal Reserve Bank leaves
2005 and $7.1 billion in 2004. The $298 million decline in
rates unchanged over the next several quarters, the
net interest income in 2006 reflected compression of the net
Company expects its net interest margin to remain relatively
interest margin, somewhat offset by growth in average
stable as asset repricing occurs and funding costs moderate.
earning assets. Average earning assets were $186.2 billion
Net interest income growth is primarily expected to be
for 2006, compared with $178.4 billion and $168.1 billion
driven by earning asset growth during this timeframe.
for 2005 and 2004, respectively. The $7.8 billion
Average loans in 2006 were $9.0 billion (6.8 percent)
(4.4 percent) increase in average earning assets for 2006,
higher than 2005, driven by growth in residential
compared with 2005, was primarily driven by growth in
mortgages, commercial loans and retail loans of $3.0 billion
total average loans of 6.8 percent, partially offset by a
(16.7 percent), $2.8 billion (6.6 percent) and $2.4 billion
decrease in average investment securities of 5.1 percent
ANALYSIS OF NET INTEREST INCOME
2006 2005
(Dollars in Millions) 2006 2005 2004 v 2005 v 2004
COMPONENTS OF NET INTEREST INCOME
Income on earning assets (taxable-equivalent basis) (a) *********** $ 12,351 $ 10,584 $ 9,215 $ 1,767 $ 1,369
Expense on interest-bearing liabilities ************************** 5,561 3,496 2,075 2,065 1,421
Net interest income (taxable-equivalent basis) ********************** $ 6,790 $ 7,088 $ 7,140 $ (298) $ (52)
Net interest income, as reported ********************************* $ 6,741 $ 7,055 $ 7,111 $ (314) $ (56)
AVERAGE YIELDS AND RATES PAID
Earning assets yield (taxable-equivalent basis) ******************* 6.63% 5.93% 5.48% .70% .45%
Rate paid on interest-bearing liabilities (taxable-equivalent basis) **** 3.55 2.37 1.53 1.18 .84
Gross interest margin (taxable-equivalent basis)********************* 3.08% 3.56% 3.95% (.48)% (.39)%
Net interest margin (taxable-equivalent basis)*********************** 3.65% 3.97% 4.25% (.32)% (.28)%
AVERAGE BALANCES
Investment securities *************************************** $ 39,961 $ 42,103 $ 43,009 $ (2,142) $ (906)
Loans *************************************************** 140,601 131,610 120,670 8,991 10,940
Earning assets ******************************************** 186,231 178,425 168,123 7,806 10,302
Interest-bearing liabilities ************************************ 156,613 147,295 136,055 9,318 11,240
Net free funds (b)****************************************** 29,618 31,130 32,068 (1,512) (938)
(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(b) 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.
20 U.S. BANCORP
Table 2