US Bank 2008 Annual Report Download - page 26

$2,304 million increase in the provision for credit losses in
2008 reflected an increase in net charge-offs of
$1,027 million and $1,277 million provision in excess of
charge-offs. The increases in the provision and allowance for
credit losses from 2007 reflected continuing stress in the
residential real estate markets, including homebuilding and
related supplier industries, driven by declining home prices
in most geographic regions. The increases also reflected
deteriorating economic conditions and the corresponding
impact on the commercial and consumer loan portfolios.
Nonperforming loans increased $1,854 million
($1,211 million excluding covered assets) over December 31,
2007. The increase was driven primarily by weakening real
estate values and the impact of the economic slowdown on
other commercial customers, and included increases in
commercial real estate loans of $781 million, commercial
loans of $211 million and residential mortgages of
$156 million. Net charge-offs increased $1,027 million from
2007, primarily due to the factors affecting the residential
housing markets, including the impact on homebuilding and
related industries, and credit costs associated with credit
card and other consumer loan growth over the past year.
Accruing loans ninety days or more past due increased
$970 million ($383 million excluding covered assets),
primarily due to residential mortgages, credit cards and
home equity loans. Restructured loans that continue to
accrue interest increased $958 million, reflecting the impact
of restructurings for residential mortgage and credit card
customers as a result of current economic conditions. The
Company expects to restructure a substantial amount of the
covered assets over the next two years following guidelines
promulgated by the FDIC, which can include reductions in
the interest rate, deferral of principal, and extended
maturity. The economic loss associated with such
concessions on covered assets is part of the Loss Sharing
Agreements.
The $248 million (45.6 percent) increase in the
provision for credit losses in 2007, compared with 2006,
reflected growth in credit card accounts, increased loan
delinquencies and nonperforming loans, and higher
commercial and consumer credit losses. Nonperforming
loans increased $87 million (18.5 percent) in 2007, as a
result of stress in condominium and other residential home
construction. Accruing loans ninety days or more past due
increased $235 million (67.3 percent), primarily related to
residential mortgages, credit cards and home equity loans.
Restructured loans that continued to accrue interest
increased $127 million (31.3 percent), reflecting the impact
of programs for credit card and sub-prime residential
mortgage customers. Net charge-offs increased $248 million
(45.6 percent) over 2006, primarily due to an increase in
consumer charge-offs principally related to growth in credit
card balances, and somewhat higher commercial loan net
charge-offs. In addition, net charge-offs were lower during
2006, reflecting the beneficial impact of bankruptcy
legislation that went into effect during the fourth quarter of
2005.
Refer to “Corporate Risk Profile” for further
information on the provision for credit losses, net charge-
offs, nonperforming assets and other factors considered by
the Company in assessing the credit quality of the loan
portfolio and establishing the allowance for credit losses.
Noninterest Income Noninterest income in 2008 was
$6.8 billion, compared with $7.3 billion in 2007 and
$7.0 billion in 2006. The $485 million (6.6 percent)
decrease in 2008 from 2007, was driven by impairment
charges related to structured investment securities, perpetual
preferred stock (including the stock of GSEs), and certain
non-agency mortgage-backed securities, as well as higher
retail lease residual losses. These items were partially offset
by $551 million of Visa Gains and growth in fee income.
Noninterest income for 2008 was also reduced by the
adoption of Statement of Financial Accounting Standards
No. 157 (“SFAS 157”), “Fair Value Measurements”,
effective January 1, 2008. Upon adoption of SFAS 157,
trading revenue decreased $62 million, as principal market
and nonperformance risk is now required to be considered
when determining the fair value of customer derivatives. In
addition, under SFAS 157 mortgage production gains
increased, because direct origination costs are no longer
deferred on mortgage loans held for sale (“MLHFS”).
The growth in credit and debit card revenue of
8.5 percent was primarily driven by an increase in customer
accounts and higher customer transaction volumes from a
year ago. The corporate payment products revenue growth
of 5.2 percent reflected growth in sales volumes and business
expansion. ATM processing services revenue increased
11.9 percent over the prior year due primarily to growth in
transaction volumes, including the impact of additional
ATMs during 2008. Merchant processing services revenue
was 3.9 percent higher in 2008, compared with 2007,
reflecting higher transaction volume and business expansion.
Treasury management fees increased 9.5 percent over 2007
due primarily to the favorable impact of declining rates on
customer compensating balances. Commercial products
revenue increased 13.6 percent over the prior year due to
higher foreign exchange revenue, syndication fees, letter of
credit fees, fees on customer derivatives, and other
commercial loan fees. Mortgage banking revenue increased
4.2 percent in 2008, compared with 2007, due to an
increase in mortgage servicing income and production
revenue, partially offset by a net decrease in the valuation of
mortgage servicing rights (“MSRs”) and related economic
hedging instruments. Other income was 41.4 percent higher
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