US Bank 2009 Annual Report Download - page 59

communications expense increased $30 million
(19.2 percent), primarily due to payments-related initiatives.
Other intangibles expense increased $14 million
(15.1 percent) due to acquisitions. Other expense increased
$151 million (42.8 percent) due to higher FDIC deposit
insurance expense, costs related to investments in affordable
housing and other tax-advantaged projects, higher merchant
processing expenses, growth in mortgage servicing expenses
and costs associated with OREO.
The provision for credit losses for the fourth quarter of
2009 was $1.4 billion, an increase of $121 million
(9.6 percent) over the same period of 2008. The provision
for credit losses exceeded net charge-offs by $278 million in
the fourth quarter of 2009, compared with $635 million in
the fourth quarter of 2008. The increase in the provision for
credit losses from 2008 reflected deterioration in economic
conditions during most of the year and the corresponding
impact on the commercial, commercial real estate and
consumer loan portfolios. Net charge-offs in the fourth
quarter of 2009 were $1.1 billion, compared with net
charge-offs of $632 million during the fourth quarter of
2008.
The provision for income taxes for the fourth quarter of
2009 resulted in an effective tax rate of 15.2 percent
compared with an effective tax rate of 7.1 percent in the
fourth quarter of 2008. The increase in the effective rate for
the fourth quarter of 2009, compared with the same period
of the prior year, principally reflected the marginal impact of
higher pre-tax earnings year-over-year.
Line of Business Financial Review
The Company’s major lines of business are Wholesale
Banking, Consumer Banking, Wealth Management &
Securities Services, Payment Services, and Treasury and
Corporate Support. These operating segments are
components of the Company about which financial
information is prepared and is evaluated regularly by
management in deciding how to allocate resources and
assess performance.
Basis for Financial Presentation Business line results are
derived from the Company’s business unit profitability
reporting systems by specifically attributing managed
balance sheet assets, deposits and other liabilities and their
related income or expense. Goodwill and other intangible
assets are assigned to the lines of business based on the mix
of business of the acquired entity. Within the Company,
capital levels are evaluated and managed centrally; however,
capital is allocated to the operating segments to support
evaluation of business performance. Business lines are
allocated capital on a risk-adjusted basis considering
economic and regulatory capital requirements. Generally, the
determination of the amount of capital allocated to each
business line includes credit and operational capital
allocations following a Basel II regulatory framework.
Interest income and expense is determined based on the
assets and liabilities managed by the business line. Because
funding and asset liability management is a central function,
funds transfer-pricing methodologies are utilized to allocate
a cost of funds used or credit for funds provided to all
business line assets and liabilities, respectively, using a
matched funding concept. Also, each business unit is
allocated the taxable-equivalent benefit of tax-exempt
products. The residual effect on net interest income of asset/
liability management activities is included in Treasury and
Corporate Support. Noninterest income and expenses
directly managed by each business line, including fees,
service charges, salaries and benefits, and other direct
revenues and costs are accounted for within each segment’s
financial results in a manner similar to the consolidated
financial statements. Occupancy costs are allocated based on
utilization of facilities by the lines of business. Generally,
operating losses are charged to the line of business when the
loss event is realized in a manner similar to a loan charge-
off. Noninterest expenses incurred by centrally managed
operations or business lines that directly support another
business line’s operations are charged to the applicable
business line based on its utilization of those services
primarily measured by the volume of customer activities,
number of employees or other relevant factors. These
allocated expenses are reported as net shared services
expense within noninterest expense. Certain activities that
do not directly support the operations of the lines of
business or for which the lines of business are not considered
financially accountable in evaluating their performance are
not charged to the lines of business. The income or expenses
associated with these corporate activities is reported within
the Treasury and Corporate Support line of business. Income
taxes are assessed to each line of business at a standard tax
rate with the residual tax expense or benefit to arrive at the
consolidated effective tax rate included in Treasury and
Corporate Support.
Designations, assignments and allocations change from
time to time as management systems are enhanced, methods
of evaluating performance or product lines change or
business segments are realigned to better respond to the
Company’s diverse customer base. During 2009, certain
organization and methodology changes were made,
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