US Bank 2007 Annual Report Download - page 22

Total net revenue, on a taxable-equivalent basis for
2007, was $300 million (2.2 percent) higher than 2006,
primarily reflecting a 4.8 percent increase in noninterest
income, partially offset by a .4 percent decline in net interest
income from a year ago. Noninterest income growth was
driven primarily by organic growth in fee-based revenue of
8.6 percent, muted somewhat by $107 million of market
valuation losses related to securities purchased during 2007
from certain money market funds managed by an affiliate.
Refer to the “Market Risk Management” section for further
information on securities purchased from certain money
market funds managed by an affiliate. The fee-based revenue
growth was further offset by the net favorable impact in
2006 of $142 million from several previously reported items,
including a $50 million gain related to certain derivatives,
$67 million of gains from the initial public offering and
subsequent sale of equity interests in a cardholder
association, a $52 million gain from the sale of a 401(k)
defined contribution recordkeeping business and a
$10 million gain related to a favorable settlement in the
merchant processing business, offset by a $37 million
reduction in mortgage banking revenue due principally to
the adoption of fair value accounting for mortgage servicing
rights (“MSRs”). The modest decline in net interest income
reflected growth in average earning assets, more than offset
by a lower net interest margin. In 2007, average earning
assets increased $8.5 billion (4.5 percent), compared with
2006, primarily due to growth in total average loans of
$6.7 billion (4.8 percent) and investment securities of
$1.4 billion (3.4 percent). The net interest margin in 2007
was 3.47 percent, compared with 3.65 percent in 2006. The
year-over-year decline in net interest margin reflected lower
credit spreads given the competitive environment, a flat yield
curve during early 2007 and lower net free funds relative to
a year ago. In addition, funding costs were higher as rates
paid on interest-bearing deposits increased and the funding
mix continued to shift toward higher cost deposits and
wholesale funding sources. These adverse factors impacting
the net interest margin were offset somewhat by higher loan
fees.
Total noninterest expense in 2007 increased
$682 million (11.0 percent), compared with 2006,
representing an efficiency ratio of 49.3 percent in 2007,
compared with 45.4 percent in 2006. The increase included
$330 million of charges recognized in 2007 for the
Company’s proportionate share of a contingent obligation to
indemnify Visa Inc. for certain litigation matters, including
the settlement between Visa U.S.A. Inc. and American
Express (collectively “Visa Charge”). For more information
on the Visa Charge, refer to Note 21 of the Notes to
Consolidated Financial Statements. Additionally, the increase
in noninterest expense was caused by specific management
decisions to make further investments in revenue-enhancing
business initiatives designed to expand the Company’s
geographical presence, strengthen corporate and commercial
banking relationship management, capitalize on current
product offerings, further improve technology and support
innovation of products and services for customers. Growth
in expenses from a year ago also included costs related to
acquired payments businesses, investments in affordable
housing and other tax-advantaged products, an increase in
credit-related costs for other real estate owned and collection
activities, and an increase in merchant airline processing
expenses primarily due to sales volumes and business
expansion with a major airline. The increase in these costs
was partially offset by a $33 million debt prepayment charge
recorded in 2006.
The provision for credit losses was $792 million for
2007, an increase of $248 million (45.6 percent) from 2006,
reflecting growth in credit card accounts, increasing retail
loan delinquencies and higher commercial and consumer
credit losses from a year ago. In addition, the provision for
credit losses in 2006 partially reflected the favorable residual
impact on net charge-offs, principally for credit cards and
other retail charge-offs, resulting from changes in
bankruptcy laws enacted in the fourth quarter of 2005.
STATEMENT OF INCOME ANALYSIS
Net Interest Income Net interest income, on a taxable-
equivalent basis, was $6.8 billion in 2007, $6.8 billion in
2006 and $7.1 billion in 2005. Average earning assets were
$194.7 billion for 2007, compared with $186.2 billion and
$178.4 billion for 2006 and 2005, respectively. The
$8.5 billion (4.5 percent) increase in average earning assets
for 2007, compared with 2006, was primarily driven by
growth in total average loans of $6.7 billion (4.8 percent)
and average investment securities of $1.4 billion
(3.4 percent). The positive impact on net interest income
from growth in earning assets was more than offset by a
lower net interest margin from a year ago. The net interest
margin in 2007 was 3.47 percent, compared with
3.65 percent and 3.97 percent in 2006 and 2005,
respectively. The 18 basis point decline in 2007 net interest
margin, compared with 2006, reflected the competitive
business environment in 2007, the impact of a flat yield
curve during the first half of the year and declining net free
funds relative to a year ago. Compared with 2006, credit
spreads tightened by approximately 6 basis points across
most lending products due to competitive loan pricing. The
reduction in net free funds was primarily due to a decline in
non-interest bearing deposits, an investment in bank-owned
life insurance, share repurchases through mid-third quarter
2007 and the impact of acquisitions. In addition, funding
costs were higher as rates paid on interest-bearing deposits
20 U.S. BANCORP