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| CMA > SEC Filings for CMA > Form 10-Q on 31-Oct-2008 | All Recent SEC Filings |
31-Oct-2008
Quarterly Report
Summary
Net income for the three months ended September 30, 2008 was $28 million, a decrease of $153 million, or 84 percent, from $181 million reported for the three months ended September 30, 2007. Quarterly diluted net income per share decreased 84 percent to $0.19 in the third quarter 2008, compared to $1.18 in the same period one year ago. Return on average common shareholders' equity was 2.25 percent and return on average assets was 0.18 percent for the third quarter 2008, compared to 14.41 percent and 1.23 percent, respectively, for the comparable quarter of the prior year. The decrease in net income in the three months ended September 30, 2008 from the comparable prior year quarter reflected a $129 million increase in the provision for credit losses ($120 million increase in the provision for loan losses and $9 million increase in the provision for credit losses on lending-related commitments), from $45 million for the three months ended September 30, 2007. Net securities gains increased $23 million from $4 million in the third quarter 2007 to $27 million in the third quarter 2008. In addition, third quarter 2008 results reflected a pre-tax charge of $96 million ($61 million after-tax, or $0.40 per diluted share) related to an offer to repurchase, at par, auction-rate securities (ARS) held by certain customers. For further information regarding ARS, refer to Note 16 to these consolidated financial statements. Third quarter 2008 also reflected net after-tax charges of $7 million related to pending settlements with the Internal Revenue Service on disallowed foreign tax credits related to a series of loans to foreign borrowers and certain structured leasing transactions, and other adjustments to tax reserves.
Net income for the first nine months of 2008 was $193 million, a decrease of $374 million, or 66 percent, from $567 million reported for the nine months ended September 30, 2007. Diluted net income per share for the first nine months of 2008 decreased 65 percent to $1.28 per diluted share, compared to $3.63 per diluted share, for the comparable prior year period. Return on average common shareholders' equity was 5.00 percent and return on average assets was 0.40 percent for the first nine months of 2008, compared to 14.92 percent and 1.30 percent, respectively, for the first nine months of 2007. The decrease in net income in the nine months ended September 30, 2008 from the comparable period last year reflected a $414 million increase in the provision for credit losses ($390 million increase in the provision for loan losses and $24 million increase in the provision for credit losses on lending-related commitments), from $100 million for the nine months ended September 30, 2007. Net securities gains increased $59 million, to $63 million for the nine months ended September 30, 2008, from $4 million in the comparable prior year period. In addition to the third quarter 2008 items cited above, net income for the first nine months of 2008 also reflected second quarter 2008 pre-tax charges of $50 million ($32 million after-tax, or $0.21 per diluted share) related to an updated assessment of the timing of tax deductions on certain structured leasing transactions.
Full-year 2008 Outlook.
For full-year 2008, management expects the following compared to full-year 2007 from continuing operations:
† Low to mid single-digit full-year average loan growth, with loans declining in the fourth quarter 2008.
† Mortgage-backed FNMA and FHLMC securities (AAA-rated) averaging about $8 billion for the fourth quarter 2008. In addition, about $1.4 billion of ARS (net of $96 million pre-tax charge) will be repurchased in the fourth quarter 2008.
† Average full-year net interest margin about 3.05 percent (3.10 percent excluding the second and third quarter lease income charges), with a net interest margin in the low 2.90 percent range in the fourth quarter 2008. The fourth quarter net interest margin reflects the three basis point negative impact of ARS repurchases and the two 50 basis point reductions in the federal funds rate announced on October 8, 2008 and October 29, 2008.
† Full-year net credit-related charge-offs of about $450 million. The provision for credit losses is expected to exceed net charge-offs.
† Mid single-digit growth in noninterest income. † Low single-digit increase in noninterest expenses (low single-digit decrease excluding the charge related to the offer to repurchase ARS). † Effective tax rate of about 27 percent for the full year, with a rate of about 20 percent for the fourth quarter 2008. |
On October 27, 2008, the Corporation announced it had received preliminary approval from the U.S. Treasury to participate in the Capital Purchase Program for the maximum amount of $2.25 billion of senior preferred shares. These shares would qualify as Tier 1 capital and are expected to increase the Corporation's Tier 1 risk-based capital ratio from an estimated 7.35 percent at September 30, 2008, to an estimated 10.35 percent. For additional information regarding the Capital Purchase Program see page 47.
Results of Operations
Net Interest Income
The rate-volume analysis in Table I details the components of the change in net interest income on a fully taxable equivalent (FTE) basis for the three months ended September 30, 2008 compared to the same period in the prior year. On a FTE basis, net interest income decreased $37 million to $467 million for the three months ended September 30, 2008, from $504 million for the comparable period in 2007. The decrease in net interest income in the third quarter 2008, compared to the same period in 2007, resulted primarily from a competitive loan and deposit pricing environment, a decrease in noninterest-bearing deposits in the Financial Services Division, a continued shift in funding sources toward higher-cost funds and the impact of a higher level of nonaccrual loans, partially offset by growth in investment securities and loans. In addition, the third quarter 2008 net interest income reflected an $8 million tax-related non-cash charge to lease income. The lease income charge reflected the reversal of previously recognized income, resulting from a projected change in the timing of income tax cash flows on certain structured leasing transactions. The charge will fully reverse over the remaining lease terms (up to 19 years). Further information about the charge can be found in the "Provision for Income Taxes and Tax-related Interest" in this financial review and Note 6 to these consolidated financial statements. Average earning assets increased $5.3 billion, or 10 percent, to $59.9 billion in the third quarter 2008, compared to $54.6 billion in the third quarter 2007, due to a $3.7 billion increase in average investment securities available-for-sale to $8.1 billion and a $1.6 billion, or three percent, increase in average loans to $51.5 billion in the third quarter 2008. The net interest margin (FTE) for the three months ended September 30, 2008 was 3.11 percent, compared to 3.66 percent for the comparable period in 2007. The decrease in the net interest margin (FTE) resulted primarily from the reduced contribution of noninterest-bearing funds in a lower rate environment, the change in earning assets noted above and changes in the mix of interest-bearing sources of funds. The third quarter 2008 lease income charge discussed above reduced the net interest margin by six basis points.
Table II provides an analysis of net interest income for the first nine months of 2008 compared to the same period in the prior year. On a FTE basis, net interest income for the nine months ended September 30, 2008 was $1.4 billion, compared to $1.5 billion for the same period in 2007, a decrease of $130 million. The decline in net interest income was primarily due to the reasons cited in the quarterly discussion above. The nine months ended September 30, 2008 included $38 million of tax-related non-cash charges to lease income as described in the quarterly discussion above. Average earning assets increased $6.2 billion, or 11 percent, to $60.2 billion, in the nine months ended September 30, 2008, compared to $54.0 billion in the same period in the prior year, due to a $3.8 billion increase in average investment securities available-for-sale to $7.9 billion and a $2.4 billion, or five percent, increase in average loans to $51.9 billion in the nine months ended September 30, 2008. The net interest margin (FTE) for the nine months ended September 30, 2008 decreased to 3.08 percent from 3.75 percent for the same period in 2007, primarily for the reasons cited in the quarterly discussion above. The lease income charge discussed above reduced the net interest margin by eight basis points for the nine months ended September 30, 2008.
The Financial Services Division serves title and escrow companies that facilitate residential mortgage transactions and benefits from customer deposits related to mortgage escrow balances. Financial Services Division customers deposit large balances (primarily noninterest-bearing) and the Corporation pays certain expenses on behalf of such customers ("customer services" expense included in "noninterest expenses" on the consolidated statements of income) and/or makes low-rate loans (included in "net interest income" on the consolidated statements of income) to such customers. Footnote (1) to Tables I and II displays average Financial Services Division loans and deposits, with related interest income/expense and average rates. As shown in footnote (2) to Tables I and II, the impact of Financial Services Division loans (primarily low-rate) on net interest margin (assuming the loans were funded by Financial Services Division noninterest-bearing deposits) was a decrease of one basis point and two basis points in the three and nine month periods ended September 30, 2008, respectively, compared to a decrease of seven basis points and nine basis points for the comparable periods in the prior year. Deposits in the Financial Services Division declined due to cooling of the California housing market, combined with destabilization of the mortgage market.
For further discussion of the effects of market rates on net interest income, refer to "Item 3. Quantitative and Qualitative Disclosures about Market Risk."
Management currently expects average full-year 2008 net interest margin about 3.05 percent (3.10 percent excluding the second and third quarter lease income charges), with a net interest margin in the low 2.90 percent range in the fourth quarter 2008. The fourth quarter net interest margin reflects the three basis point negative impact of ARS repurchases and the two 50 basis point reductions in the federal funds rate announced on October 8, 2008 and October 29, 2008.
Table I - Quarterly Analysis of Net Interest Income & Rate/Volume - Fully
Taxable Equivalent (FTE)
Three Months Ended
September 30, 2008 September 30, 2007
Average Average Average Average
(dollar amounts in millions) Balance Interest Rate Balance Interest Rate
Commercial loans (1) (2) $ 28,521 $ 347 4.85 % $ 28,052 $ 520 7.37 %
Real estate construction loans 4,675 55 4.65 4,607 97 8.33
Commercial mortgage loans 10,511 142 5.38 9,829 181 7.30
Residential mortgage loans 1,870 28 5.92 1,865 29 6.12
Consumer loans 2,599 31 4.83 2,320 41 7.06
Lease financing (3) 1,365 4 1.07 1,319 11 3.25
International loans 1,967 24 4.85 1,882 33 6.98
Business loan swap income
(expense) - 4 - - (16 ) -
Total loans (2) 51,508 635 4.91 49,874 896 7.13
Investment securities
available-for-sale 8,146 99 4.85 4,405 52 4.60
Federal funds sold and
securities purchased under
agreements to resell 70 - 1.87 99 1 5.25
Other short-term investments 222 2 3.49 263 4 5.27
Total earning assets 59,946 736 4.89 54,641 953 6.91
Cash and due from banks 1,228 1,351
Allowance for loan losses (723 ) (521 )
Accrued income and other assets 4,412 3,075
Total assets $ 64,863 $ 58,546
Money market and NOW deposits
(1) $ 14,204 45 1.26 $ 14,996 119 3.14
Savings deposits 1,350 1 0.42 1,380 3 0.97
Customer certificates of
deposit 7,690 53 2.73 7,702 87 4.48
Institutional certificates of
deposit 5,209 37 2.81 5,170 72 5.49
Foreign office time deposits 814 5 2.51 1,028 13 4.96
Total interest-bearing deposits 29,267 141 1.92 30,276 294 3.85
Short-term borrowings 5,413 30 2.20 2,278 29 5.15
Medium- and long-term debt 12,880 98 3.02 8,852 126 5.61
Total interest-bearing sources 47,560 269 2.25 41,406 449 4.29
Noninterest-bearing deposits
(1) 10,646 10,840
Accrued expenses and other
liabilities 1,582 1,285
Shareholders' equity 5,075 5,015
Total liabilities and
shareholders' equity $ 64,863 $ 58,546
Net interest income/rate spread
(FTE) $ 467 2.64 $ 504 2.62
FTE adjustment $ 1 $ 1
Impact of net
noninterest-bearing sources of
funds 0.47 1.04
Net interest margin (as a
percentage of average earning
assets) (FTE) (2) (3) 3.11 % 3.66 %
N/M - Not meaningful
(1) FSD balances included
above:
Loans (primarily low-rate) $ 401 $ 2 1.74 % $ 1,191 $ 2 0.71 %
Interest-bearing deposits 907 4 1.65 1,214 12 4.06
Noninterest-bearing deposits 1,542 2,575
(2) Impact of FSD loans
(primarily low-rate) on the
following:
Commercial loans (0.05 )% (0.30 )%
Total loans (0.02 ) (0.16 )
Net interest margin (FTE)
(assuming loans were funded by
noninterest-bearing deposits) (0.01 ) (0.07 )
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(3) Third quarter 2008 net interest income declined $8 million and the net interest margin declined six basis points, due to a tax-related non-cash lease income charge. Excluding this charge, the net interest margin would have been 3.17% in the third quarter 2008.
Table I - Quarterly Analysis of Net Interest Income & Rate/Volume - Fully Taxable Equivalent (FTE) (continued)
Three Months Ended
September 30, 2008/September 30, 2007
Increase Increase Net
(Decrease) (Decrease) Increase
(in millions) Due to Rate Due to Volume* (Decrease)
Loans $ (281 ) $ 20 $ (261 )
Investment securities available-for-sale 2 45 47
Federal funds sold and securites purchased
under agreements to repurchase (1 ) - (1 )
Other short-term investments (1 ) (1 ) (2 )
Total earning assets (281 ) 64 (217 )
Interest-bearing deposits (149 ) (4 ) (153 )
Short-term borrowings (17 ) 18 1
Medium- and long-term debt (58 ) 30 (28 )
Total interest-bearing sources (224 ) 44 (180 )
Net interest income/rate spread (FTE) $ (57 ) $ 20 $ (37 )
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* Rate/Volume variances are allocated to variances due to volume.
Table II - Year-to-date Analysis of Net Interest Income & Rate/Volume - Fully
Taxable Equivalent (FTE)
Nine Months Ended
September 30, 2008 September 30, 2007
Average Average
(dollar amounts in millions) Balance Interest Average Rate Balance Interest Average Rate
Commercial loans (1) (2) $ 28,992 $ 1,135 5.23 % $ 28,046 $ 1,538 7.33 %
Real estate construction loans 4,776 184 5.16 4,454 282 8.47
Commercial mortgage loans 10,343 442 5.71 9,713 534 7.35
Residential mortgage loans 1,898 85 5.99 1,788 82 6.12
Consumer loans 2,532 100 5.29 2,351 125 7.12
Lease financing (3) 1,354 (4 ) N/M 1,293 32 3.26
International loans 2,013 79 5.24 1,880 99 7.07
Business loan swap income
(expense) - 19 - - (61 ) -
Total loans (2) 51,908 2,040 5.25 49,525 2,631 7.10
Investment securities
available-for-sale 7,889 288 4.88 4,080 140 4.47
Federal funds sold and securities
purchased under agreements to
resell 100 2 2.40 189 8 5.36
Other short-term investments 286 8 3.93 242 10 5.73
Total earning assets 60,183 2,338 5.19 54,036 2,789 6.89
Cash and due from banks 1,228 1,390
Allowance for loan losses (661 ) (513 )
Accrued income and other assets 4,167 3,010
Total assets $ 64,917 $ 57,923
Money market and NOW deposits (1) $ 14,774 170 1.54 $ 14,858 344 3.09
Savings deposits 1,371 5 0.50 1,393 9 0.91
Customer certificates of deposit 8,003 200 3.35 7,505 250 4.46
Institutional certificates of
deposit 6,719 176 3.49 5,490 224 5.45
Foreign office time deposits 1,064 25 3.09 1,001 37 4.92
Total interest-bearing deposits 31,931 576 2.41 30,247 864 3.82
Short-term borrowings 4,084 78 2.54 1,919 75 5.24
Medium- and long-term debt 11,597 297 3.42 7,865 333 5.65
Total interest-bearing sources 47,612 951 2.67 40,031 1,272 4.25
Noninterest-bearing deposits (1) 10,638 11,540
Accrued expenses and other
liabilities 1,514 1,287
Shareholders' equity 5,153 5,065
Total liabilities and
shareholders' equity $ 64,917 $ 57,923
Net interest income/rate spread
(FTE) $ 1,387 2.52 $ 1,517 2.64
FTE adjustment $ 3 $ 3
Impact of net noninterest-bearing
sources of funds 0.56 1.11
Net interest margin (as a
percentage of average earning
assets) (FTE) (2) (3) 3.08 % 3.75 %
N/M - Not meaningful
(1) FSD balances included above:
Loans (primarily low-rate) $ 557 $ 6 1.36 % $ 1,445 $ 7 0.63 %
Interest-bearing deposits 998 16 2.11 1,230 36 3.95
Noninterest-bearing deposits 1,752 3,097
(2) Impact of FSD loans (primarily
low-rate) on the following:
Commerical loans (0.07 )% (0.36 )%
Total loans (0.04 ) (0.20 )
Net interest margin (FTE)
(assuming loans were funded by
noninterest-bearing deposits) (0.02 ) (0.09 )
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(3) Year-to-date 2008 net interest income declined $38 million and the net interest margin declined eight basis points due to tax-related non-cash lease income charges. Excluding these charges, the net interest margin would have been 3.16%.
Table II - Year-to-date Analysis of Net Interest Income & Rate/Volume -Fully Taxable Equivalent (FTE) (continued)
Nine Months Ended
September 30, 2008/September 30, 2007
Increase Increase Net
(Decrease) (Decrease) Increase
(in millions) Due to Rate Due to Volume* (Decrease)
Loans $ (684 ) $ 93 $ (591 )
Investment securities available-for-sale 9 139 148
Federal funds sold and securites purchased
. . .
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