US Bank 2008 Annual Report Download - page 23

expand the Company’s geographical presence and strengthen
customer relationships, including acquisitions, investments in
relationship managers, branch initiatives and Payment
Services’ businesses. Growth in expenses from a year ago
also included costs related to investments in affordable
housing and other tax-advantaged products and an increase
in credit-related costs for other real estate owned and
collection activities.
Acquisitions On November 21, 2008, the Company
acquired the banking operations of Downey Savings & Loan
Association, F.A., and PFF Bank & Trust (“Downey” and
“PFF”, respectively) from the FDIC. The Company acquired
$13.7 billion of Downey’s assets and assumed $12.3 billion
of its liabilities, and acquired $3.7 billion of PFF’s assets and
assumed $3.5 billion of its liabilities. 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”). At the acquisition
date, the Company estimated the covered assets would incur
approximately $4.7 billion of cumulative losses, including
the present value of expected interest rate decreases on loans
the Company expects to modify. These losses, if incurred,
will be offset by an estimated $2.4 billion benefit to be
received by the Company from the FDIC under the Loss
Sharing Agreements. Under the terms of the Loss Sharing
Agreements, the Company will incur the first $1.6 billion of
specified losses (“First Loss Position”) on the covered assets,
which was approximately the predecessors’ carrying amount
of the net assets acquired. 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 losses and only 5 percent of
specified losses beyond that amount. The Company
estimates its share of losses beyond the First Loss Position
will be approximately $.7 billion, which was approximately
the amount the Company considered in determining the
amount of its bid for the acquired operations.
The Company identified the acquired non-revolving
loans experiencing credit deterioration, representing the
majority of assets acquired, and recorded these assets in the
financial statements at their estimated fair value, reflecting
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’ carrying amount, net of
fair value adjustments for any interest rate related discount
or premium, and an allowance for credit losses. At
December 31, 2008, $11.5 billion of the Company’s assets
were covered by Loss Sharing Agreements. The Company’s
financial disclosures segregate acquired covered assets from
assets not subject to the Loss Sharing Agreements.
Refer to Note 3 of the Notes to Consolidated Financial
Statements for additional information regarding business
combinations.
STATEMENT OF INCOME ANALYSIS
Net Interest Income Net interest income, on a taxable-
equivalent basis, was $7.9 billion in 2008, compared with
$6.8 billion in 2007 and 2006. The $1.1 billion
(16.3 percent) increase in net interest income in 2008,
compared with 2007, was attributed to strong growth in
average earning assets, as well as an improved net interest
margin. Average earning assets were $215.0 billion for 2008,
compared with $194.7 billion and $186.2 billion for 2007
and 2006, respectively. The $20.3 billion (10.5 percent)
increase in average earning assets in 2008 over 2007 was
principally a result of growth in total average loans of
$18.2 billion (12.4 percent) and average investment
securities of $1.5 billion (3.7 percent). The net interest
margin in 2008 was 3.66 percent, compared with
3.47 percent in 2007 and 3.65 percent in 2006. The increase
in the net interest margin reflected growth in higher-spread
loans, asset/liability re-pricing in a declining interest rate
environment and wholesale funding mix during a period of
significant volatility in short-term funding markets. Refer to
the “Interest Rate Risk Management” section for further
information on the sensitivity of the Company’s net interest
income to changes in interest rates.
Average total loans were $165.6 billion in 2008,
compared with $147.3 billion in 2007. Average loans
increased $18.2 billion (12.4 percent) in 2008, driven by
growth in retail loans of $6.7 billion (13.7 percent),
commercial loans of $6.5 billion (13.6 percent), commercial
real estate loans of $2.5 billion (8.8 percent), residential
mortgages of $1.2 billion (5.3 percent) and covered assets of
$1.3 billion. The increase in average retail loans included
growth in credit card balances of 24.9 percent as a result of
growth in branch originated, co-branded and financial
institution partner portfolios. Average installment and home
equity loans included in retail loans increased 7.1 percent
and 10.2 percent, respectively, while average retail leasing
balances declined approximately 17.1 percent as the
Company adjusted its programs to reflect current market
conditions, reducing new lease production. Retail loan
growth in 2008 also included an increase of $2.6 billion in
average federally guaranteed student loan balances as a
result of the transfer of $1.7 billion of loans held for sale to
loans held for investment, and a portfolio purchase during
2008. The increase in average commercial loans was
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