US Bank 2007 Annual Report Download - page 23

increased and the funding mix continued to shift toward
higher cost deposits and other funding sources. An increase
in loan fees partially offset these factors. During the second
half of 2007, the financial markets experienced significant
turbulence as the impact of sub-prime mortgage
delinquencies, defaults and foreclosures adversely affected
investor confidence in a broad range of investment sectors
and asset classes. In response to certain liquidity disruptions,
the increasing risk of a credit crunch and other economic
factors, the Federal Reserve Bank began to reduce interest
rates beginning in September 2007, in an effort to stimulate
the economy and restore investor confidence in the financial
markets. Since that time, the target Federal Fund rate
declined 100 basis points through year-end and another
125 basis points during January 2008. If the Federal Reserve
Bank leaves rates unchanged from the current Federal Funds
rate of 3.00 percent, the Company would expect the net
interest margin to remain relatively stable at levels similar to
2007. This outlook is based on expectations that credit
spreads will improve slightly, higher yielding retail loans will
continue to grow, funding and liquidity in the overnight
financial markets will normalize and the Company will
resume its share repurchase program after the first quarter of
2008.
Average loans in 2007 were $6.7 billion (4.8 percent)
higher than 2006, driven by growth in retail loans,
commercial loans and residential mortgages of $3.5 billion
(7.7 percent), $2.4 billion (5.2 percent) and $1.0 billion
(4.9 percent), respectively, partially offset by a modest
decline in commercial real estate loans of $.2 billion
(.6 percent). The favorable change in average retail loans
included strong growth in credit card balances of
25.4 percent as a result of growth in branch originated, co-
branded and financial institution partner portfolios. Average
installment loans, including automobile loans, increased
11.2 percent from a year ago. Average home equity loans
increased at a more moderate growth rate of 5.1 percent,
impacted somewhat by the changing trends in residential
home valuations, while retail leasing balances declined
approximately 8.4 percent from a year ago. The increase in
average commercial loans was principally due to growth in
corporate and industrial lending, equipment leasing and
corporate payments product offerings. The decline in
average commercial real estate balances reflected customer
refinancing activities in the capital markets during the first
half of 2007, a decision by the Company to reduce
condominium construction financing and the impact of a
economic slowdown in residential homebuilding since 2006.
Average investment securities were $1.4 billion
(3.4 percent) higher in 2007, compared with 2006. The
increase principally reflected higher balances in the
municipal securities portfolio and the purchase in the fourth
quarter of 2007 of securities from certain money market
funds managed by an affiliate. This increase was partially
offset by a reduction in mortgage-backed assets due to
prepayments. Refer to the “Interest Rate Risk Management”
section for further information on the sensitivity of net
interest income to changes in interest rates.
Average noninterest-bearing deposits in 2007 were
$1.4 billion (4.8 percent) lower than 2006. The year-over-
U.S. BANCORP 21
Table 2 ANALYSIS OF NET INTEREST INCOME
(Dollars in Millions) 2007 2006 2005
2007
v 2006
2006
v 2005
Components of Net Interest Income
Income on earning assets (taxable-equivalent basis) (a) . . $ 13,309 $ 12,351 $ 10,584 $ 958 $ 1,767
Expense on interest-bearing liabilities (taxable-equivalent
basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,545 5,561 3,496 984 2,065
Net interest income (taxable-equivalent basis) . . . . . . . . . . . $ 6,764 $ 6,790 $ 7,088 $ (26) $ (298)
Net interest income, as reported . . . . . . . . . . . . . . . . . . . . $ 6,689 $ 6,741 $ 7,055 $ (52) $ (314)
Average Yields and Rates Paid
Earning assets yield (taxable-equivalent basis) . . . . . . . . 6.84% 6.63% 5.93% .21% .70%
Rate paid on interest-bearing liabilities (taxable-equivalent
basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.91 3.55 2.37 .36 1.18
Gross interest margin (taxable-equivalent basis) . . . . . . . . . 2.93% 3.08% 3.56% (.15)% (.48)%
Net interest margin (taxable-equivalent basis) . . . . . . . . . . . 3.47% 3.65% 3.97% (.18)% (.32)%
Average Balances
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,313 $ 39,961 $ 42,103 $ 1,352 $(2,142)
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,348 140,601 131,610 6,747 8,991
Earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194,683 186,231 178,425 8,452 7,806
Interest-bearing liabilities. . . . . . . . . . . . . . . . . . . . . . . 167,196 156,613 147,295 10,583 9,318
Net free funds (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,487 29,618 31,130 (2,131) (1,512)
(a) Interest and rates are presented on a fully taxable-equivalent basis utilizing a federal 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.