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c o r p o r a t e
p r o f i l e
U.S. Bancorp, headquartered in Minneapolis, is the 8th largest financial services holding company in the United States with total assets exceeding $189 billion at year-end 2003.
Through U.S. Bank® and other subsidiaries, U.S. Bancorp serves 11.6 million customers, primarily through 2,243 full-service branch offices in 24 states. Customers also access their accounts and conduct all or part of their banking transactions through 4,425 U.S. Bank ATMs, U.S. Bank Internet Banking and telephone banking. In addition, a network of specialized U.S. Bancorp offices and representatives across the nation serves customers inside and outside our 24-state footprint through comprehensive product sets that meet the financial needs of customers beyond basic core banking. Backed by expertise and advanced technology, these sophisticated U.S. Bancorp products and services include large corporate services, payment services, private banking, personal and institutional trust services, corporate trust services, specialized large-scale government banking services, mortgage, commercial credit vehicles, and financial and asset management services.
Major lines of business provided by U.S. Bancorp through U.S. Bank and other subsidiaries include Consumer Banking; Payment Services; Private Client, Trust & Asset Management; and Wholesale Banking. U.S. Bank is home of the exclusive U.S. Bank Five Star Service Guarantee.
U.S. BANCORP AT A GLANCE | ||
Ranking |
8th largest bank in the U.S. | |
Asset size |
$189 billion | |
Deposits |
$119 billion | |
Loans |
$118 billion | |
Earnings per share (diluted) |
$1.93 | |
Return on average assets |
1.99% | |
Return on average equity |
19.2% | |
Tangible common equity |
6.5% | |
Efficiency ratio |
45.6% | |
Customers |
11.6 million | |
Primary banking region |
24 states | |
Bank branches |
2,243 | |
ATMs |
4,425 | |
NYSE |
USB | |
At year-end 2003 |
t a b l e o f c o n t e n t s |
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f i n a n c i a l s e c t i o n |
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Managements Discussion and Analysis |
pg. 18 | |||||||
Consolidated Financial Statements |
pg. 62 | |||||||
Notes to Consolidated Financial Statements |
pg. 66 | |||||||
Reports of Independent Auditors and Accountants |
pg. 105 | |||||||
Five-Year Consolidated Financial Statements |
pg. 106 | |||||||
Quarterly Consolidated Financial Data |
pg. 108 | |||||||
Supplemental Financial Data |
pg. 109 | |||||||
Annual Report on Form 10-K |
pg. 112 | |||||||
CEO and CFO Certifications |
pg. 119 | |||||||
Executive Officers |
pg. 122 | |||||||
Directors |
pg. 123 | |||||||
Corporate Information inside |
back cover | |||||||
Amendments to Non-Qualified Exec. Retirement Plan | ||||||||
Executive Employees Deferred Compensation Plan | ||||||||
Form of Change in Control Agreement | ||||||||
Computation of Ratio of Earnings to Fixed Charges | ||||||||
Subsidiaries of the Registrant | ||||||||
Consent of Ernst & Young LLP | ||||||||
Consent of PricewaterhouseCoopers LLP | ||||||||
Certification of CEO Pursuant to Rule 13a-14(a) | ||||||||
Certification of CFO Pursuant to Rule 13a-14(a) | ||||||||
Certification of CEO and CFO Pursuant to Sec. 906 |
g r a p h s o f s e l e c t e d
f i n a n c i a l h i g h l i g h t s
* Information was not available to compute pre-merger proforma percentage. | |||
(a) | Dividends per share have not been restated for the 2001 Firstar/USBM merger. | ||
(b) | Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net. |
f i n a n c i a l s u m m a r y
Year Ended December 31 | 2003 | 2002 | ||||||||||||||||||
(Dollars and Shares in Millions, Except Per Share Data) | 2003 | 2002 | 2001 | v 2002 | v 2001 | |||||||||||||||
Total net revenue (taxable-equivalent basis) |
$ | 12,530.5 | $ | 12,057.9 | $ | 11,074.6 | 3.9 | % | 8.9 | % | ||||||||||
Noninterest expense |
5,596.9 | 5,740.5 | 6,149.0 | (2.5 | ) | (6.6 | ) | |||||||||||||
Provision for credit losses |
1,254.0 | 1,349.0 | 2,528.8 | |||||||||||||||||
Income taxes and taxable-equivalent adjustments |
1,969.5 | 1,740.4 | 872.8 | |||||||||||||||||
Income from continuing operations |
$ | 3,710.1 | $ | 3,228.0 | $ | 1,524.0 | 14.9 | 111.8 | ||||||||||||
Discontinued operations (after-tax) |
22.5 | (22.7 | ) | (45.2 | ) | |||||||||||||||
Cumulative effect of accounting change (after-tax) |
| (37.2 | ) | | ||||||||||||||||
Net income |
$ | 3,732.6 | $ | 3,168.1 | $ | 1,478.8 | 17.8 | 114.2 | ||||||||||||
Per Common Share |
||||||||||||||||||||
Earnings per share from continuing operations |
$ | 1.93 | $ | 1.68 | $ | .79 | 14.9 | % | 112.7 | % | ||||||||||
Diluted earnings per share from continuing operations |
1.92 | 1.68 | .79 | 14.3 | 112.7 | |||||||||||||||
Earnings per share |
1.94 | 1.65 | .77 | 17.6 | 114.3 | |||||||||||||||
Diluted earnings per share |
1.93 | 1.65 | .76 | 17.0 | 117.1 | |||||||||||||||
Dividends declared per share |
.855 | .780 | .750 | 9.6 | 4.0 | |||||||||||||||
Book value per share |
10.01 | 9.62 | 8.58 | 4.1 | 12.1 | |||||||||||||||
Market value per share |
29.78 | 21.22 | 20.93 | 40.3 | 1.4 | |||||||||||||||
Average shares outstanding |
1,923.7 | 1,916.0 | 1,927.9 | .4 | (.6 | ) | ||||||||||||||
Average diluted shares outstanding |
1,936.2 | 1,924.8 | 1,940.3 | .6 | (.8 | ) | ||||||||||||||
Financial Ratios |
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Return on average assets |
1.99 | % | 1.84 | % | .89 | % | ||||||||||||||
Return on average equity |
19.2 | 18.3 | 9.0 | |||||||||||||||||
Net interest margin (taxable-equivalent basis) |
4.49 | 4.65 | 4.46 | |||||||||||||||||
Efficiency ratio |
45.6 | 48.8 | 57.2 | |||||||||||||||||
Average Balances |
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Loans |
$ | 118,362 | $ | 114,453 | $ | 118,177 | 3.4 | % | (3.2 | )% | ||||||||||
Investment securities |
37,248 | 28,829 | 21,916 | 29.2 | 31.5 | |||||||||||||||
Earning assets |
160,808 | 147,410 | 143,501 | 9.1 | 2.7 | |||||||||||||||
Assets |
187,630 | 171,948 | 165,944 | 9.1 | 3.6 | |||||||||||||||
Deposits |
116,553 | 105,124 | 104,956 | 10.9 | .2 | |||||||||||||||
Total shareholders equity |
19,393 | 17,273 | 16,426 | 12.3 | 5.2 | |||||||||||||||
Period End Balances |
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Loans |
$ | 118,235 | $ | 116,251 | $ | 114,405 | 1.7 | % | 1.6 | % | ||||||||||
Allowance for credit losses |
2,369 | 2,422 | 2,457 | (2.2 | ) | (1.4 | ) | |||||||||||||
Investment securities |
43,334 | 28,488 | 26,608 | 52.1 | 7.1 | |||||||||||||||
Assets |
189,286 | 180,027 | 171,390 | 5.1 | 5.0 | |||||||||||||||
Deposits |
119,052 | 115,534 | 105,219 | 3.0 | 9.8 | |||||||||||||||
Total shareholders equity |
19,242 | 18,436 | 16,745 | 4.4 | 10.1 | |||||||||||||||
Regulatory capital ratios |
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Tangible common equity |
6.5 | % | 5.7 | % | 5.9 | % | ||||||||||||||
Tier 1 capital |
9.1 | 8.0 | 7.8 | |||||||||||||||||
Total risk-based capital |
13.6 | 12.4 | 11.9 | |||||||||||||||||
Leverage |
8.0 | 7.7 | 7.9 |
We are pleased to tell you
that in 2003, we reported
record earnings and also
achieved the financial results
to which we had committed.
f e l l o w
s h a r e h o l d e r s :
Strong financial results. U.S. Bancorp delivered strong financial results in 2003, the culmination of five years of transformation and integration, during which we forged a company uniquely positioned to generate consistent earnings and revenue growth.
| Earnings per share increased 17.6% over 2002 | ||
| Record net income increased 17.8% over 2002 | ||
| Industry-leading Return on Assets of 1.99% | ||
| Industry-leading Return on Equity of 19.2% | ||
| Industry-leading Tangible Common Equity of 6.5% | ||
| Positive debt rating changes by the rating agencies |
Growing U.S. Bancorp. With virtually all integration and merger-related activities behind us, we are now focused solely on growing U.S. Bancorp by leveraging the breadth and depth of the powerful franchise we have built. Our five-year transformation allowed us to gain access to high-growth markets, to solidify strong regional positions and to build a national platform. During our integration process, we accelerated our cost control leadership. We are now extending that cost and execution leadership, as well as making significant strategic investments in our highest-potential businesses, and reaffirming our focus on delivering high-quality service.
Achieving our goals to build a stronger corporation. I am pleased to tell you that U.S. Bancorp accomplished the performance, credit quality and other goals we had previously committed to achieving. We met financial objectives in particular, revenue growth, expense management, net interest margin and earnings per share.
In addition, and perhaps most importantly, we continue to show improvement in overall credit quality, a direct result of all we have done in the past two years to reduce this corporations risk profile. We also completed the spin-off of Piper Jaffray, further reducing risk and volatility in our business. Finally, we began a major expansion of our distribution channels in fast-growing markets within our franchise through the previously announced in-store branch partnerships with Safeway/Vons, Smiths and Publix.
140 years of creating value for shareholders. We have targeted returning 80 percent of our earnings to shareholders through a combination of dividends and share repurchases.
The 17 percent common stock dividend increase approved by our Board of Directors and announced in December 2003 is a continuation of a long history of paying significant dividends, as well as a reflection of the Boards confidence in this corporations future success.
U.S. Bancorp, through its predecessor companies, has increased its dividend in each of the past 32 years and has paid a dividend for 140 consecutive years.
In addition to the common stock dividend discussed above, as part of the December 2003 spin-off of Piper Jaffray, U.S. Bancorp distributed common shares of the new Piper Jaffray Companies in the form of a special dividend to eligible U.S. Bancorp shareholders.
Also in December 2003, our Board of Directors approved authorization to repurchase 150 million shares of outstanding U.S. Bancorp common stock during the next two years.
These specific steps were undertaken to increase the value of your shares; in addition, we manage this corporation with the long-term value of your investment as our paramount objective. Its the reason we come to work each day.
Sincerely,
Jerry A. Grundhofer
Chairman, President and Chief Executive Officer
U.S. Bancorp
February 27, 2004
c o r p o r a t e
g o v e r n a n c e
Good corporate governance promotes ethical business practices, demands meticulous accounting policies and procedures and includes a structure with effective checks and balances. Corporate governance is vital to the continued success of U.S. Bancorp and the entire financial services industry. Our ethical standards have rewarded us with an enviable reputation in todays marketplace a marketplace where trust is hard to earn. Our shareholders, customers, communities and employees demand and deserve to do business with companies they can trust. U.S. Bancorp operates with uncompromising honesty and integrity. Our Board of Directors has had a Corporate Governance Committee for many years. We have implemented Corporate Governance Guidelines in response to todays heightened concern. Our Corporate Governance Guidelines are available for you to view on our Internet web site at usbank.com. Following are some of the important elements of our Corporate Governance practices.
Independent oversight. Each of our Audit Committee, Compensation Committee and Governance Committee is composed entirely of independent outside directors. In fact, following our annual meeting, our Chairman, President and Chief Executive Officer will be the only member of our Board of Directors who is not independent. In addition, our Board of Directors and the committees of the Board meet in executive session without management in attendance at every meeting. The presiding director at every executive session of the Board is an independent director. The Board and each committee also have express authority to engage outside advisors to provide additional independent expertise for their deliberations.
Board of Directors focus on U.S. Bancorp. To ensure that our directors are able to focus effectively on our business, we limit the number of other public company boards a director may serve on to three. The Chairman, President and Chief Executive Officer of U.S. Bancorp serves on only two other public company boards. Audit Committee members may serve on no more than three other public company audit committees, and the chairman of the Audit Committee serves on no other audit committees.
Board of Directors knowledge and expertise. All of our directors are skilled business leaders. Directors are encouraged to attend continuing director education seminars in order to keep a sharp focus on current good governance practices. In addition, the Board and each committee may use outside advisors to add expertise on specific issues. Our directors have full and
unrestricted access to our management and employees. Additionally, key members of management attend Board meetings from time to time to present information about the results, plans and operations of their business segments. The Board and each committee perform annual self-evaluations in order to assess their performance and to ensure that the Board and committee structure is providing effective oversight of corporate management. You may review the charters of each of our Board committees on our Internet web site at usbank.com.
Managements ownership commitment. We understand clearly that U.S. Bancorp shareholders are the primary beneficiaries of managements actions. All U.S. Bancorp executive officers and directors own shares of company stock, and in order to tightly align managements interests with those of our shareholders, we have established stock ownership guidelines for our executive officers.
Disclosure controls. We have established rigorous procedures to ensure that we provide complete and accurate disclosure in our publicly filed documents. We have also established a telephone hotline for employees to anonymously submit any concern they may have regarding corporate controls or ethical breaches. Management investigates all complaints and directs to our Audit Committee any issues relating to concerns about our financial statements or public disclosures.
U.S. Bancorp Code of Ethics and Business Conduct. Each year, we reiterate the vital importance of our Code of Ethics and Business Conduct. The Code applies to directors, officers and all employees, who must certify annually their compliance with the standards of the Code. The content of the Code is based not solely on what we have the right to do, but, even more importantly, on what is the right thing to do. Our standards are higher than any legal minimum because our business is built on trust. You may review our Code of Ethics and Business Conduct on our Internet web site at usbank.com.
Communications with our Board of Directors. Shareholders can communicate with our Board of Directors by sending a letter addressed to the Board of Directors, the independent outside directors or specified individual directors, to:
The Office of the Corporate Secretary
U.S. Bancorp
800 Nicollet Mall
Minneapolis, MN 55402
s e r v i c e
e x c e l l e n c e
Great service is more than our goal; its the way we do business. Every U.S. Bancorp employee in every U.S. Bancorp line of business is committed to providing responsive, prompt and helpful service - every transaction, every relationship, every day. And our exclusive Five Star Service Guarantee backs up our promise to deliver the outstanding service our customers expect and deserve.
Five Star Service Guarantee ensures highest level of service. Exceptional service is the single most important thing U.S. Bank offers our customers. We make a promise to deliver the highest level of customer service and we boldly back up this pledge with the U.S. Bank Five Star Service Guarantee, which ensures the core service standards most important to our customers such as availability, accuracy, timeliness and responsiveness are met and exceeded. Every U.S. Bank customer is covered by one or more guarantees. If we fall short in keeping our service guarantees, and our customer tells us they did not get the service they expected and deserved, we pay the customer for the inconvenience.
Taking ownership of our business one employee at a time. Each line of business has developed and adapted its own Five Star Service Guarantee, defining the quality standards that are expected and demanded of every employee standards that are based on meeting the diverse financial needs of all our customers. U.S. Bank has created an environment in which employees understand how their individual service and sales performance contributes to revenue growth and
shareholder value. It is an environment where employees take ownership of their business, where they are held accountable for the companys success and where they are compensated for measurable performance results.
Service is foundation of success. U.S. Bank employees are recognized and rewarded for their outstanding service. Our Pay for Performance compensation program rewards employees financially and personally for their achievements in meeting service and sales goals and for their contributions to company earnings. Customized line of business incentive programs drive employees to generate revenue while fulfilling customers needs. Each quarter, 20 selected employees who exemplify our high service standards are inducted into the prestigious Circle of Service Excellence.
The Service Advantage puts customers at center of everything we do. To deepen our commitment to superior service, in 2003, we launched The Service Advantage, an innovative internal initiative designed to increase customer access and convenience; simplify customer issue solutions; make quality service central to hiring, orientation and training; and improve the common customer experience. Our Service Council is the driving force behind The Service Advantage; it is comprised of senior managers from every line of business who identify areas of improvement, analyze customer satisfaction measurements and implement resolutions that create greater customer satisfaction and loyalty. We are enhancing existing and creating new internal service techniques and processes, as well, so that our frontline employees have the tools and support they need to better meet customer expectations. By the end of first quarter 2004, every U.S. Bank employee will have received personalized training on the core principles of The Service Advantage.
Cacique® is the #1 selling brand of Hispanic-style cheeses and creams in the
world. For over three decades, the family owned and operated company has
produced authentic cheeses, creams and chorizos, growing from a small,
abandoned facility to one of the worlds most sophisticated cheese
manufacturing facilities. Cacique is committed to quality, heritage and
tradition, sharing this legacy with the community through a long history of
philanthropy, including Fighting
Diabetes Together, a recent collaboration with City of Hope®. U.S. Bank
Commercial Banking partners with Cacique to provide flexible, competitive
products to meet the financial needs of this unique company.
U.S. Bancorp meets the diverse financial needs of our customers by providing innovative, creative answers through specialized lines of business. Across 24 states and beyond, our experienced bankers share ideas, best practices, capabilities and cross-sell opportunities, supported by advanced technology and operating systems. The results are competitive benefits for our customers and competitive advantages for U.S. Bancorp.
l i n e s o f
b u s i n e s s
KEY BUSINESS UNITS
| Commercial Banking | ||
| Commercial Real Estate | ||
| Corporate Banking | ||
| Correspondent Banking | ||
| Dealer Commercial Services | ||
| Equipment Leasing | ||
| Foreign Exchange | ||
| Government Banking | ||
| International Banking | ||
| Specialized Industries | ||
| Treasury Management |
Wholesale Banking offers strategic lending, depository, treasury management and other financial services to middle market, large corporate, financial institution and public sector customers. Experienced, accessible relationship managers serve as our customers link to all the products, credit, support and resources that the extensive scope of U.S. Bancorp provides.
S U C C E S S E S
| Launched U.S. Bank Returned Check Management, providing customers the capability to consolidate all returned items to one location, convert them to electronic items and monitor collection on a state-of-the-art web-based reporting system. | |
| Introduced Global Trade Works, an industry-leading web-based Trade Finance Product Suite; delivers increased customer productivity by providing secure online access to real-time data and extensive reporting capabilities, and allows customers to initiate letters of credit via the Internet. | |
| Introduced enhancements to U.S. Bank ONLINE BANKER services, a web-based cash management solution; provides a single point of access to information reporting, plus the initiation of wire transfers, ACH, book transfers, stop payments and data export functions. | |
| Expanded U.S. Bank FIRSTLook Now, a new wholesale lockbox image service that offers same-day, online customer access to wholesale lockbox checks and invoices, plus added CD-ROM archive capabilities. | |
| Developed a new remittance processing system for government banking customers that integrates payment and remittance information received over the Internet via a newest generation image-based lockbox system; speeds processing, provides more valuable incoming payment information, enhances service quality and is scalable and upgradable as customer needs change. |
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The Washington State Housing Finance Commission seeks partnerships that create greater access to housing and community services throughout the state of Washington. U.S. Bank Corporate Trust Services provides the continuous, personalized service and customized administration capabilities that are vital to the success and growth of the Housing Finance Commission. |
KEY BUSINESS UNITS
| Corporate Payment Systems |
| Travel and entertainment, purchasing, fleet, freight payment systems and business-to-business payment |
| NOVA Information Systems, Inc. |
| Merchant processing with top 3 market share |
| Retail Payment Solutions |
| Relationship-based retail payment solutions; includes credit, debit and stored value cards through U.S. Bank, Elan financial institutions and co-brand partners |
| Transaction Services |
| ATM Banking | ||
| Elan Financial Services, a single source provider of transaction processing for financial institutions nationwide |
Our unique Payment Services business specializes in credit and debit cards, commercial card services, business-to-business payment and ATM and merchant processing. Customized products delivered through leading-edge technology channels equip consumers, small businesses, merchants of every size, government entities, large corporations, financial institutions and co-brand partners with the most advanced payment services tools available.
S U C C E S S E S
| Released AccountCommander, Voyager Fleet Systems newest online account maintenance tool, to customers nationwide, marking the first phase of Voyagers FleetCommander Online, a web-based fuel management program designed to provide complete, convenient online account access. | |
| Introduced eQuest, an Internet-based application that allows financial institution customers to analyze and report on daily ATM and debit transaction activity; eQuest generates a suite of informational reports with customized selection criteria. | |
| Expanded the Fastbank® ATM network through Elan Financial Services to become the 12th largest ATM network in the nation. | |
| Launched Electronic Check Service and Electronic Gift Card programs through NOVA Information Systems; these value-added products enhance the payment services offerings for bank partners, and improve cash flow and point-of-sale operations for merchant customers. | |
| Entered the health care payment segment through the MedAssist Advantage Plan (MAP), offering a new solution for patient financing. |
KEY BUSINESS UNITS
| Corporate Trust Services |
| Escrow | ||
| Public Finance/Structured Finance/Corporate Finance | ||
| Document Custody |
| Institutional Trust & Custody |
| Retirement Plans | ||
| Institutional Custody | ||
| Master Trust |
| Private Client Group |
| Private Banking | ||
| Personal Trust | ||
| Investment Management | ||
| Financial and Estate Planning |
| U.S. Bancorp Asset Management, Inc. |
| First American Funds | ||
| Private Asset Management | ||
| Institutional Advisory | ||
| Securities Lending |
| U.S. Bancorp Fund Services, LLC |
| Mutual Fund Administration and Compliance | ||
| Transfer Agent | ||
| Mutual Fund Accounting | ||
| Fund Distribution | ||
| Partnership Administration | ||
| Offshore Trust Administration |
Private Client, Trust & Asset Management meets diverse wealth management needs through best-in-class personal trust, corporate trust, institutional trust and custody, private banking, financial advisory, investment management and mutual fund and alternative investment product services. Expert advisers and relationship managers offering sophisticated knowledge and personalized service give U.S. Bank a competitive advantage.
S U C C E S S E S
| Launched a number of new products to meet individual and institutional investors needs, including the First American Stable Asset Advisor Fund - designed for investors who seek preservation of principal and competitive returns; new institutional-class money market shares; and a unique alliance with Coast Asset Management to provide qualified investors with absolute-return hedge-fund-of-fund products. | |
| Expanded U.S. Bancorp Fund Services, LLC service offerings to include private investment products, such as investment partnerships and separately managed accounts. | |
| Unveiled the U.S. Bank Trust Investor Reporting web site usbank.com/abs, providing investors in public and private corporate trust transactions the ability to assign entitlements for access to private deals; offers a customized portfolio, improved factor and payment searching and a simplified navigational flow for excellent customer usability. | |
| Expanded TrustNow Essentials, a new comprehensive online reporting system allowing Corporate Trust Services, Institutional Trust & Custody and Private Client Group customers to view, print and download trust statements and reports via the Internet 24 hours a day, seven days a week. | |
| Successfully completed purchase of State Street Corporate Trust and resulting systems conversions, seamlessly integrating approximately 20,000 new client issuances, 365,000 bondholders and $689 billion in assets to the U.S. Bank Corporate Trust Services platform. |
Our industry-leading Consumer Banking delivers a full range of products and services to the broad consumer market and small businesses through full-service banking offices, ATMs, telephone customer service and telesales, online banking and direct mail. A disciplined sales culture, optimal distribution channel convenience and a mandate for quality service are the hallmarks of Consumer Banking.
S U C C E S S E S
| Enhanced our unique Checking That Pays® program, giving customers who use their U.S. Bank Visa® Check Card the choice of four different reward options. In August 2003, rewarded more than one million Checking That Pays customers with an annual cash rebate. Expanded Checking That Pays to business check card customers, too. | |
| Introduced free U.S. Bank Internet Bill Pay, eliminating the monthly fee and making online bill payment even easier for consumer checking account customers. | |
| Enhanced usbank.com with a host of new features, including free online account statements through U.S. Bank Internet Banking, instant application decisions for U.S. Bank Cash Rewards Cards and U.S. Bank Student Checking Account, direct enrollment in the online security program Verified by Visa®, and Spanish-language additions to usbank.com/espanol. | |
| Introduced U.S. Bank Home Mortgage Payment Buster, a new mortgage loan program that reduces monthly payments and eliminates the need to purchase mortgage insurance. | |
| Partnered with the United States Hispanic Chamber of Commerce to create ¡Capital!, a first-of-its-kind, strategic loan program designed to meet small business lending needs in high-growth Hispanic markets nationwide. | |
| Reached the $1 billion milestone in outstanding recreation finance loans just two years after inception of our Recreation Finance Division; announced the creation of the U.S. Bank manufactured housing finance business, modeled after our successful recreation finance strategies and partnerships. | |
| Expanded Student Banking Campus Card relationships with Bellarmine University, Creighton University, Gonzaga University, John Carroll University, Minnesota State University Moorhead and San Diego State University; multi-purpose campus ID card provides students with official campus identification and ATM access, plus convenient access to laundry facilities, vending machines, health services, computer labs and more. |
KEY BUSINESS UNITS
| 24-Hour Banking and Financial Sales | ||
| Business Equipment Finance Group | ||
| Community Banking | ||
| Consumer Lending | ||
| Group Sales and Student Banking | ||
| Home Mortgage | ||
| In-store and Corporate On-site Banking | ||
| Investments and Insurance | ||
| Metropolitan Branch Banking | ||
| SBA Division | ||
| Small Business Banking |
U.S. Bancorp strategically invests in the distribution channels, lines of business and markets with high potential for growth. These investments take full advantage of the existing resources, capabilities and national platforms we have built, enhancing our core geography and increasing customer convenience with moderate expenditure and low risk to the company.
i n v e s t i n g i n
d i s t r i b u t i o n a n d s c a l e
Distribution channels deliver anytime access. Our distribution channels including 2,243 branch banking offices in 24 states, 4,425 U.S. Bank ATMs, 24-hour call center service, U.S. Bank Internet Banking and specialized trust, brokerage and home mortgage offices form the foundation of our powerful presence in many of the countrys high-growth, diversified markets. Our growing branch network operates in three strategically segmented formats. Community Banking delivers our full range of products and services in smaller, non-urban communities through the local office. Metropolitan Banking serves branch customers in larger and urban locations as a separate line of business through partnerships with all businesses of the bank. Our highly successful In-store Banking operates branches inside grocery stores, colleges and universities, workplaces, retirement centers and other high-traffic locations.
Expanding in-store banking office distribution. In 2003, we began a major expansion of our in-store network the third largest in the country by partnering with supermarket retailers Safeway Inc., Publix and Smiths Food & Drug Stores. Beginning with six new Nashville Publix branches in 2003, by the end of 2004, U.S. Bank will have opened 15 new Smiths in-store branches in Utah, and by the end of 2005 we will have opened a total of 163 new full-service in-store locations in Safeway and Vons stores throughout California, Arizona and Nevada.
Strategic investments solidify our position in high-growth markets and businesses. In 2003, U.S. Bank completed system conversions resulting from the 2002 purchase and deposit assumption of 57 Bay View Bank branches in California. This transaction strengthened the U.S. Bank geographic footprint in California, adding to existing U.S. Bank branches to create an integrated network offering complete coverage of the fast-growing Greater Bay area- San Francisco, San Jose, Alameda County, Contra Costa County, Santa Rosa, Vallejo-Fairfield-Sonoma and Santa Cruz.
In 2003, U.S. Bank also completed system conversions resulting from the purchase of State Street Corporate Trust in 2002. This transaction strongly complemented our existing corporate trust business, making U.S. Bank the leading corporate trust provider in New England in addition to our current lead status in the Northwest, West and Central regions of the country.
With over thirty-five years of experience, Millennium Development Corp. has invested in and developed a wide variety of real estate projects ranging from agricultural land to office buildings to shopping centers. As an equity participant in each project, Millennium Development Corp. is committed to preserving capital and producing an attractive return on investment. For more than 10 years, U.S. Bank Small Business Banking has provided the cash flow management, credit and financing resources that support Millennium Developments business vision.
a t t r a c t i v e
b u s i n e s s m i x
The sports, educational and cultural
programs of the Mathews-Dickey
Boys & Girls Club in St. Louis instill
The Three Rs: Respect, Restraint &
Responsibility within more than 40,000
deserving young men and women each
year. In 1982, President Ronald Reagan
recognized the Clubs neighbor-helping neighbor
concept by declaring it a
model for the country. Numerous
other government, media, sports and
civic luminaries have applauded the
44-year-old organizations impact in
keeping more than one million youth
on the fields, in the classroom and off
the streets. Weve enjoyed a successful
relationship with Mathews-Dickey, a
long-time client of the U.S. Bank Private
Client Group. We are proud to manage
the Endowment Fund for Mathews-
Dickey to support its youth-enrichment
programs for years to come.
U.S. Bancorp serves multiple customer segments in our 24-state footprint through a broad, attractive business mix with scale, resulting in competitive advantages, operating economies, reduced risk, diversified revenue streams and a wide range of ways to satisfy every customer.
U.S. Bancorp has a very attractive growth franchise. Our core regional businesses operate in our 24-state footprint and benefit from the geographic density of our banking locations and franchise support in terms of cross-sell, crossservicing and back-office support. Our top-performing regional businesses, combined with our specialized national-scale businesses, create a diversified and advantaged revenue mix of both spread and fee income from discrete sources. With challenge, opportunity, risk and reward spread across all geographic markets and a wide range of customer and business segments, we are positioned to capitalize on a recovering economy, while tolerating individual market or industry weaknesses.
Improving business unit trends. We see strong business momentum in Consumer Banking; we opened nearly a quarter of a million more checking accounts than were closed in 2003. A checking account is our retail customers primary link to U.S. Bank and is the basis for our 11.7 percent compound annual growth rate in branch-generated average low-cost core deposits. More importantly, checking is the starting point for expanded consumer relationships, reflected in a 12 percent compound annual growth rate in branch-generated average retail loans. Small business loans and branch-based investment product fee income also showed double-digit growth rates.
Our investment in distribution in high-growth markets continues, most particularly our current in-store branch expansion and our extension of mortgage banking origination capabilities in western markets.
In our Wholesale Banking business, the timing of commercial loan growth is still uncertain; however, we expect credit improvement trends to continue, a key driver of future growth. Along with loan generation, our relationship managers are putting renewed focus on providing appropriate supplementary services and deposit products to our commercial customers.
Improving equity markets are driving growth in our Private Client, Trust & Asset Management business units, as are outstanding service and our exceptional personal attention to each customer. Deposits, total loans and noninterest income are on upward trends. We strive to increase the level and breadth of services we provide to corporate executives, business owners, legal and healthcare professionals, professional athletes and non-profit organizations with their specialized and complex financial needs. Private Client Group earns an increasing share of wallet through expert investment management, financial planning, personal trust and private banking services. Institutional investment needs are met with high-performing securities lending, equity, fixed income and cash products.
Revenue by
Business Segment
15.1% Metropolitan Banking
11.9% Community Banking
10.3% Retail Payment Solutions
6.7% Corporate Banking
6.2% NOVA Information Systems
5.5% Middle Market Banking
4.9% Mortgage Banking
4.3% Consumer Lending
3.9% Private Client Group
3.4% Commercial Real Estate
2.5% Corporate Trust
2.0% Government Banking
1.9% Asset Management
1.9% Corporate Payment Systems
1.1% Institutional Trust
.7% Fund Services
Diversified
Regional Businesses
Consumer Banking
Institutional Trust
Middle Market Banking
Private Client Group
With top-ranked payment services, expertise in highly specialized businesses, advanced technological capabilities and financial products and services not limited by location, U.S. Bancorp has built a national standing in a number of high-growth businesses.
h i g h v a l u e n a t i o n a l
b u s i n e s s e s
Lockheed Martin Corporation, the
worlds premier advanced technology
systems integrator, has partnered with
U.S. Bank Corporate Payment Systems
for ten years, adopting a full range of
Corporate Payment Systems services,
including corporate travel card and
purchasing card programs. As a result
of U.S. Bank Corporate Payment
Systems flexibility and client-focus,
Lockheed Martin recently extended
its purchasing card commitment with
a new five-year contract
Connie Mearkle (left), Assistant Treasurer,
and Molly Chung (right), Director,
Global Treasury Operations
Lockheed Martin Corporation
Bethesda, MD
Payment Services is a high-value, growth business without boundaries. U.S. Bank has developed innovative payment services to meet the rapidly expanding needs of consumers, businesses, financial institutions, government entities and millions of merchants throughout the world. This line of business has unlimited potential, and we utilize our expertise, technology and reputation for service to seize a growing share of business within this burgeoning arena.
We are the Number 3 merchant processor (NOVA), the Number 1 Visa commercial card issuer, the Number 2 small business card issuer, the Number 7 Visa and MasterCard® consumer card issuer, the Number 2 bank-owned ATM network, the Number 2 universal fleet card (Voyager) and the Number 2 freight payment provider (PowerTrack®).
Through NOVA Information Systems, recognized for superlative customer service and technical proficiency, our Merchant Processing business ranks third in the nation and serves more than 600,000 merchant locations in the United States and in Europe. We continue to expand this business through penetration of the U.S. Bank customer base of merchants and through ongoing activities, backed by the full resources of U.S. Bancorp, to gain additional merchant customers.
Our Retail Payment Solutions business is unique among large issuers in that we build this business in large part on relationship-based efforts among our retail and small business customers, among our growing network of correspondent financial institutions and with a star-studded roster of co-brand partners. There is enormous potential in the further penetration of our existing customer base and in our ability to stay at the leading edge of new product introductions.
Corporate Payment Systems is at the forefront of payment providers, using leading technology and expertise to automate the entire payment continuum for commercial buyers and sellers. Card solutions like One Card, Corporate Card, Purchasing Card and Fleet Card provide flexible solutions for classic payables, while PowerTrack adds increased control and sophisticated pre-payment audits for complex business-to-business procurement processes.
With a compelling investment in the industrys best technology, our Transaction Services is the hub of electronic payments transactions for all U.S. Bancorp ATMs, as well as ATMs, credit and debit cards, merchant processing, and the electronic funds transfer network gateway for other financial institutions, through Elan Financial Services. With expertise, technology, economy of scale and existing potential still within our markets, this is a full-service, start-to-finish business with growth expectation.
Diverse U.S. Bancorp national businesses serve customers coast to coast. U.S. Bank is a leading financial resource for local and state government, political sub-divisions and the federal government through our Government Banking business. We are one of the largest tax payment processors for the U.S. Government, and we provide a wide range of financial services for the Department of Defense, as well as web and lockbox collection services for the U.S. Department of Homeland Security. Mortgage Banking originates loans in all 50 states. We are targeting becoming a Top 10 mortgage provider through expanded sales efforts nationally and also the extension of our Mortgage Banking as a primary line of business into our western markets.
With expertise to support the nations largest corporations, specialized industries and our middle market customers, Corporate Banking provides services to meet the most complex transactional, credit, financial management, international financing and exchange, and risk mitigation needs. We are also a national leader in treasury management services. Our relationship-based model succeeds on the experience of our managers, the economies of scope and scale derived from our size and geography and our commitment to cost management. As the leading provider of municipal trust services and a top provider of corporate, escrow and structured finance services, Corporate Trust Services brings an unrelenting commitment to exceeding expectations by providing the right solutions at the right time for customers nationwide.
U.S. Bancorp Asset Management leverages the multiple distribution channels and broad geographic range of U.S. Bank to deliver the First American family of mutual funds, which encompasses a full range of equity and fixed income investment strategies. We are a performance-driven culture of expanding non-proprietary distribution, and we continue to promote U.S. Bancorp Asset Management to prospective customers nationwide.
National
Businesses
c o m m u n i t y
p a r t n e r s h i p s
Our commitment to helping build strong communities begins with local market leadership and dedicated community involvement. U.S. Bancorp and our employees are committed to giving and volunteerism in the markets we serve. We make this investment proudly, promoting powerful partnerships and fostering economic development in communities, small and large, across the country.
Creating stronger communities for a stronger company. U.S. Bancorp is not just part of the community were a partner in all the communities we serve across the country. Working with people, businesses and non-profit organizations in these local markets, we assist with economic, educational and cultural development. As an active partner, U.S. Bancorp provides superior, competitive products and services to every customer we serve, while offering customized financial solutions to customers and businesses who need assistance overcoming challenging financial situations. By helping to create strong, vibrant communities, U.S. Bancorp is building a healthy marketplace for our company - one community at a time.
Sponsorships support quality of life. The enduring vitality of a community is ultimately in the hands of its artists, athletes, performers, scholars, musicians and the institutions that train, educate, nurture and promote them. We extend sponsorship support to a variety of music, arts, sports and education programs, in addition to many other civic and cultural activities. From county fairs to the performing arts to professional, minor league, collegiate and high school sports, U.S. Bancorp supports a diverse range of opportunities and interests of our customers.
Empowering local leaders. To meet the unique needs of the communities we serve, local leaders are empowered with the autonomy to customize all the resources of U.S. Bancorp for their individual markets. Coupled with the valuable insight of local market leaders, local boards provide further knowledge, expertise and insight into each communitys businesses, industries and important causes. Together, this leadership team is equipped with the first-hand knowledge needed to make strategic pricing and business development decisions that strengthen both U.S. Bancorp and the community.
Investing in our employees. The U.S. Bancorp Development Network promotes the personal and professional development of our employees by enhancing leadership, management and communication skills; organizing networking opportunities; providing community involvement opportunities; and encouraging and capitalizing on the diversity of our employees. The Development Network is composed of 42 geographically based chapters, which share these objectives and fulfill the programs mission by organizing professional and community service activities, such as financial and leadership seminars for employees, mentoring opportunities, charitable fundraising drives and more.
U.S. Bank gives Back 2 Schools in Minnesota. U.S. Bank is investing
nearly $500,000 in programs that support Minnesota teachers, high
schools and students during the 2003-2004 school year. Designed to enrich
student learning, recognize outstanding high school students and assist school
athletic programs, Back 2 Schools is part of the ongoing investment
U.S. Bank makes in Minnesota schools. Cynthia Welsh, teacher at
Cloquet High School, has developed an interactive science discovery class
using the funds she received from a U.S. Bank Back 2 Schools grant.
Cynthia and her students collaborate with the Fond du Lac Band of Lake
Superior Chippewa and other local scientists conducting environmental
research that benefits the entire community.
OVERVIEW
In 2003, U.S. Bancorp and its subsidiaries (the Company) achieved each of the goals outlined for the year despite challenging economic conditions in early 2003. We began the year with several specific financial objectives. The first goal was to focus on organic revenue growth. In 2003, the Companys revenue growth of 3.9 percent included 3.7 percent growth in revenue from baseline business products and services. The second goal was to continue improving our operating leverage. During 2003, our efficiency ratio improved to 45.6 percent compared with 48.8 percent in 2002. Third, the Company was determined to continue improving its credit quality and reduce the overall risk profile of the organization. Nonperforming assets have declined 16.4 percent from a year ago and total net charge-offs decreased to 1.06 percent of average loans outstanding in 2003 compared with 1.20 percent in 2002. Finally, despite the challenges of 2003, the Company always desires to grow revenues faster than expenses. The Companys results for 2003 reflect the achievement of this objective.
Earnings Summary The Company reported net income of $3.7 billion in 2003, or $1.93 per diluted share, compared with $3.2 billion, or $1.65 per diluted share, in 2002. Return on average assets and return on average equity were 1.99 percent and 19.2 percent, respectively, in 2003, compared with returns of 1.84 percent and 18.3 percent, respectively, in 2002. Net income in 2003 included after-tax income from discontinued operations of $22.5 million, or $.01 per diluted share, compared with an after-tax loss of $22.7 million, or $.01 per diluted share, in 2002. Included in net income for 2002 was an after-tax goodwill impairment charge of $37.2 million, or $.02 per diluted share, primarily related to the purchase of a transportation leasing company in 1998 by the equipment leasing business. This charge was taken at the time of adopting new accounting standards related to goodwill and other intangible assets and was recognized as a cumulative effect of accounting change in the income statement. Refer to Note 2 of the Notes to Consolidated Financial Statements for further discussion of the impact of changes in accounting principles.
changes in interest rates and related prepayments. Refer to Merger and Restructuring-Related Items for further discussion on merger and restructuring-related items and the related earnings impact.
Table 1 | Selected Financial Data |
Year Ended December 31 | |||||||||||||||||||||
(Dollars and Shares in Millions, Except Per Share Data) | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||
|
|||||||||||||||||||||
Condensed Income Statement
|
|||||||||||||||||||||
Net interest income (taxable-equivalent
basis) (a)
|
$ | 7,217.5 | $ | 6,847.2 | $ | 6,405.2 | $ | 6,072.4 | $ | 5,875.7 | |||||||||||
Noninterest income
|
5,068.2 | 4,910.8 | 4,340.3 | 3,958.9 | 3,501.9 | ||||||||||||||||
Securities gains, net
|
244.8 | 299.9 | 329.1 | 8.1 | 13.2 | ||||||||||||||||
Total net revenue
|
12,530.5 | 12,057.9 | 11,074.6 | 10,039.4 | 9,390.8 | ||||||||||||||||
Noninterest expense
|
5,596.9 | 5,740.5 | 6,149.0 | 4,982.9 | 5,131.8 | ||||||||||||||||
Provision for credit losses
|
1,254.0 | 1,349.0 | 2,528.8 | 828.0 | 646.0 | ||||||||||||||||
Income from continuing operations before taxes
|
5,679.6 | 4,968.4 | 2,396.8 | 4,228.5 | 3,613.0 | ||||||||||||||||
Taxable-equivalent adjustment
|
28.2 | 32.9 | 54.5 | 82.0 | 94.2 | ||||||||||||||||
Applicable income taxes
|
1,941.3 | 1,707.5 | 818.3 | 1,422.0 | 1,296.3 | ||||||||||||||||
Income from continuing operations
|
3,710.1 | 3,228.0 | 1,524.0 | 2,724.5 | 2,222.5 | ||||||||||||||||
Discontinued operations (after-tax)
|
22.5 | (22.7 | ) | (45.2 | ) | 27.6 | 17.9 | ||||||||||||||
Cumulative effect of accounting change (after-tax)
|
| (37.2 | ) | | | | |||||||||||||||
Net income
|
$ | 3,732.6 | $ | 3,168.1 | $ | 1,478.8 | $ | 2,752.1 | $ | 2,240.4 | |||||||||||
Per Common Share
|
|||||||||||||||||||||
Earnings per share from continuing operations
|
$ | 1.93 | $ | 1.68 | $ | .79 | $ | 1.43 | $ | 1.16 | |||||||||||
Diluted earnings per share from continuing
operations
|
1.92 | 1.68 | .79 | 1.42 | 1.15 | ||||||||||||||||
Earnings per share
|
1.94 | 1.65 | .77 | 1.44 | 1.17 | ||||||||||||||||
Diluted earnings per share
|
1.93 | 1.65 | .76 | 1.43 | 1.16 | ||||||||||||||||
Dividends declared per share (b)
|
.855 | .780 | .750 | .650 | .460 | ||||||||||||||||
Book value per share
|
10.01 | 9.62 | 8.58 | 8.06 | 7.29 | ||||||||||||||||
Market value per share
|
29.78 | 21.22 | 20.93 | 23.25 | 21.13 | ||||||||||||||||
Average shares outstanding
|
1,923.7 | 1,916.0 | 1,927.9 | 1,906.0 | 1,907.8 | ||||||||||||||||
Average diluted shares outstanding
|
1,936.2 | 1,924.8 | 1,940.3 | 1,918.5 | 1,930.0 | ||||||||||||||||
Financial Ratios
|
|||||||||||||||||||||
Return on average assets
|
1.99 | % | 1.84 | % | .89 | % | 1.74 | % | 1.49 | % | |||||||||||
Return on average equity
|
19.2 | 18.3 | 9.0 | 19.0 | 16.9 | ||||||||||||||||
Net interest margin (taxable-equivalent basis)
|
4.49 | 4.65 | 4.46 | 4.38 | 4.43 | ||||||||||||||||
Efficiency ratio (c)
|
45.6 | 48.8 | 57.2 | 49.7 | 54.7 | ||||||||||||||||
Average Balances
|
|||||||||||||||||||||
Loans
|
$ | 118,362 | $ | 114,453 | $ | 118,177 | $ | 118,317 | $ | 109,638 | |||||||||||
Loans held for sale
|
3,616 | 2,644 | 1,911 | 1,303 | 1,450 | ||||||||||||||||
Investment securities
|
37,248 | 28,829 | 21,916 | 17,311 | 19,271 | ||||||||||||||||
Earning assets
|
160,808 | 147,410 | 143,501 | 138,636 | 132,685 | ||||||||||||||||
Assets
|
187,630 | 171,948 | 165,944 | 158,481 | 150,167 | ||||||||||||||||
Noninterest-bearing deposits
|
31,715 | 28,715 | 25,109 | 23,820 | 23,556 | ||||||||||||||||
Deposits
|
116,553 | 105,124 | 104,956 | 103,426 | 99,920 | ||||||||||||||||
Short-term borrowings
|
10,503 | 10,116 | 11,679 | 11,008 | 10,883 | ||||||||||||||||
Long-term debt
|
30,965 | 29,268 | 24,133 | 21,916 | 19,873 | ||||||||||||||||
Total shareholders equity
|
19,393 | 17,273 | 16,426 | 14,499 | 13,273 | ||||||||||||||||
Period End Balances
|
|||||||||||||||||||||
Loans
|
$ | 118,235 | $ | 116,251 | $ | 114,405 | $ | 122,365 | $ | 113,229 | |||||||||||
Allowance for credit losses
|
2,369 | 2,422 | 2,457 | 1,787 | 1,710 | ||||||||||||||||
Investment securities
|
43,334 | 28,488 | 26,608 | 17,642 | 17,449 | ||||||||||||||||
Assets
|
189,286 | 180,027 | 171,390 | 164,921 | 154,318 | ||||||||||||||||
Deposits
|
119,052 | 115,534 | 105,219 | 109,535 | 103,417 | ||||||||||||||||
Long-term debt
|
31,215 | 28,588 | 25,716 | 21,876 | 21,027 | ||||||||||||||||
Total shareholders equity
|
19,242 | 18,436 | 16,745 | 15,333 | 14,051 | ||||||||||||||||
Regulatory capital ratios
|
|||||||||||||||||||||
Tangible common equity
|
6.5 | % | 5.7 | % | 5.9 | % | 6.4 | % | * | % | |||||||||||
Tier 1 capital
|
9.1 | 8.0 | 7.8 | 7.3 | 7.4 | ||||||||||||||||
Total risk-based capital
|
13.6 | 12.4 | 11.9 | 10.7 | 11.1 | ||||||||||||||||
Leverage
|
8.0 | 7.7 | 7.9 | 7.5 | 7.6 | ||||||||||||||||
* | Information was not available to compute pre-merger proforma percentage. |
(a) | Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent. |
(b) | Dividends per share have not been restated for the 2001 Firstar/ USBM merger. |
(c) | Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net. |
Acquisition and Divestiture Activity On December 31, 2003, the Company announced that it had completed the tax-free distribution of Piper Jaffray Companies representing substantially all of the Companys capital markets business line. The Company distributed to our shareholders one share of Piper Jaffray common stock for every 100 shares of U.S. Bancorp common stock, by means of a special dividend of $685 million. This distribution did not include brokerage, financial advisory or asset management services offered to customers through other business units. The Company will continue to provide asset management services to its customers through the Private Client, Trust and Asset Management business segment and access to investment products and services through its extensive network of licensed financial advisors within the retail brokerage platform of the Consumer Banking business segment.
STATEMENT OF INCOME ANALYSIS
Net Interest Income Net interest income, on a taxable-equivalent basis, was $7.2 billion in 2003, compared with $6.8 billion in 2002 and $6.4 billion in 2001. The increase in net interest income in 2003 was driven by an increase in average earning assets, growth in average net free funds and favorable changes in the Companys average funding mix. Also contributing to the year-over-year increase in net interest income were recent acquisitions, including Leader, State Street Corporate Trust and Bay View, which accounted for approximately $71.9 million of the increase during 2003. Average earning assets were $160.8 billion for 2003, compared with $147.4 billion and $143.5 billion for 2002 and 2001, respectively. The $13.4 billion (9.1 percent) increase in average earning assets for 2003, compared with 2002, was primarily driven by increases in investment securities, loans held for sale, residential mortgages and retail loans, partially offset by a decline in commercial loans. The net interest margin in 2003 was 4.49 percent, compared with 4.65 percent and 4.46 percent in 2002 and 2001, respectively. The 16 basis point decline in 2003 net interest margin, compared with 2002, primarily reflected
Table 2 | Analysis of Net Interest Income |
2003 | 2002 | ||||||||||||||||||||
(Dollars in Millions) | 2003 | 2002 | 2001 | v 2002 | v 2001 | ||||||||||||||||
|
|||||||||||||||||||||
Components of net interest income
|
|||||||||||||||||||||
Income on earning assets (taxable-equivalent
basis) (a)
|
$ | 9,286.2 | $ | 9,526.8 | $ | 11,000.9 | $ | (240.6 | ) | $ | (1,474.1 | ) | |||||||||
Expense on interest-bearing liabilities
|
2,068.7 | 2,679.6 | 4,595.7 | (610.9 | ) | (1,916.1 | ) | ||||||||||||||
Net interest income (taxable-equivalent basis)
|
$ | 7,217.5 | $ | 6,847.2 | $ | 6,405.2 | $ | 370.3 | $ | 442.0 | |||||||||||
Net interest income, as reported
|
$ | 7,189.3 | $ | 6,814.3 | $ | 6,350.7 | $ | 375.0 | $ | 463.6 | |||||||||||
Average yields and rates paid
|
|||||||||||||||||||||
Earning assets yield (taxable-equivalent basis)
|
5.77 | % | 6.46 | % | 7.67 | % | (.69 | )% | (1.21 | )% | |||||||||||
Rate paid on interest-bearing liabilities
|
1.60 | 2.26 | 3.91 | (.66 | ) | (1.65 | ) | ||||||||||||||
Gross interest margin (taxable-equivalent basis)
|
4.17 | % | 4.20 | % | 3.76 | % | (.03 | )% | .44% | ||||||||||||
Net interest margin (taxable-equivalent basis)
|
4.49 | % | 4.65 | % | 4.46 | % | (.16 | )% | .19% | ||||||||||||
Average balances
|
|||||||||||||||||||||
Investment securities
|
$ | 37,248 | $ | 28,829 | $ | 21,916 | $ | 8,419 | $ | 6,913 | |||||||||||
Loans
|
118,362 | 114,453 | 118,177 | 3,909 | (3,724 | ) | |||||||||||||||
Earning assets
|
160,808 | 147,410 | 143,501 | 13,398 | 3,909 | ||||||||||||||||
Interest-bearing liabilities
|
129,004 | 118,697 | 117,614 | 10,307 | 1,083 | ||||||||||||||||
Net free funds (b)
|
31,804 | 28,713 | 25,887 | 3,091 | 2,826 | ||||||||||||||||
(a) | Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent. |
(b) | Represents noninterest-bearing deposits, allowance for credit losses, unrealized gain (loss) on available-for-sale securities, non-earning assets, other noninterest-bearing liabilities and equity. |
Table 3 | Net Interest Income Changes Due to Rate and Volume (a) |
2003 v 2002 | 2002 v 2001 | ||||||||||||||||||||||||||
(Dollars in Millions) | Volume | Yield/Rate | Total | Volume | Yield/Rate | Total | |||||||||||||||||||||
Increase (decrease) in
|
|||||||||||||||||||||||||||
Interest income
|
|||||||||||||||||||||||||||
Investment securities
|
$ | 428.4 | $ | (235.2 | ) | $ | 193.2 | $ | 403.7 | $ | (235.2 | ) | $ | 168.5 | |||||||||||||
Loans held for sale
|
62.7 | (31.1 | ) | 31.6 | 56.4 | (32.7 | ) | 23.7 | |||||||||||||||||||
Commercial loans
|
(149.0 | ) | (157.8 | ) | (306.8 | ) | (451.0 | ) | (536.1 | ) | (987.1 | ) | |||||||||||||||
Commercial real estate
|
90.2 | (141.9 | ) | (51.7 | ) | (27.5 | ) | (338.9 | ) | (366.4 | ) | ||||||||||||||||
Residential mortgages
|
232.5 | (114.4 | ) | 118.1 | (12.6 | ) | (50.3 | ) | (62.9 | ) | |||||||||||||||||
Retail loans
|
134.9 | (363.9 | ) | (229.0 | ) | 288.2 | (543.6 | ) | (255.4 | ) | |||||||||||||||||
Total loans
|
308.6 | (778.0 | ) | (469.4 | ) | (202.9 | ) | (1,468.9 | ) | (1,671.8 | ) | ||||||||||||||||
Other earning assets
|
6.4 | (2.4 | ) | 4.0 | (.8 | ) | 6.3 | 5.5 | |||||||||||||||||||
Total
|
806.1 | (1,046.7 | ) | (240.6 | ) | 256.4 | (1,730.5 | ) | (1,474.1 | ) | |||||||||||||||||
Interest expense
|
|||||||||||||||||||||||||||
Interest checking
|
22.6 | (40.6 | ) | (18.0 | ) | 24.4 | (125.7 | ) | (101.3 | ) | |||||||||||||||||
Money market accounts
|
87.7 | (82.8 | ) | 4.9 | 8.7 | (406.9 | ) | (398.2 | ) | ||||||||||||||||||
Savings accounts
|
3.5 | (7.4 | ) | (3.9 | ) | 3.3 | (20.7 | ) | (17.4 | ) | |||||||||||||||||
Time certificates of deposit less than $100,000
|
(146.3 | ) | (146.2 | ) | (292.5 | ) | (215.2 | ) | (282.8 | ) | (498.0 | ) | |||||||||||||||
Time deposits greater than $100,000
|
26.3 | (105.5 | ) | (79.2 | ) | (83.1 | ) | (244.8 | ) | (327.9 | ) | ||||||||||||||||
Total interest-bearing deposits
|
(6.2 | ) | (382.5 | ) | (388.7 | ) | (261.9 | ) | (1,080.9 | ) | (1,342.8 | ) | |||||||||||||||
Short-term borrowings
|
8.5 | (64.6 | ) | (56.1 | ) | (63.6 | ) | (189.1 | ) | (252.7 | ) | ||||||||||||||||
Long-term debt
|
48.4 | (181.0 | ) | (132.6 | ) | 247.5 | (576.9 | ) | (329.4 | ) | |||||||||||||||||
Company-obligated mandatorily redeemable
preferred securities
|
(9.7 | ) | (23.8 | ) | (33.5 | ) | 62.1 | (53.3 | ) | 8.8 | |||||||||||||||||
Total
|
41.0 | (651.9 | ) | (610.9 | ) | (15.9 | ) | (1,900.2 | ) | (1,916.1 | ) | ||||||||||||||||
Increase (decrease) in net interest income
|
$ | 765.1 | $ | (394.8 | ) | $ | 370.3 | $ | 272.3 | $ | 169.7 | $ | 442.0 | ||||||||||||||
(a) | This table shows the components of the change in net interest income by volume and rate on a taxable-equivalent basis utilizing a tax rate of 35 percent. This table does not take into account the level of noninterest-bearing funding, nor does it fully reflect changes in the mix of assets and liabilities. The change in interest not solely due to changes in volume or rates has been allocated on a pro-rata basis to volume and yield/rate. |
Provision for Credit Losses The provision for credit losses is recorded to bring the allowance for credit losses to a level deemed appropriate by management based on factors discussed in the Analysis and Determination of Allowance for Credit Losses section. The provision for credit losses was $1,254.0 million in 2003, compared with $1,349.0 million and $2,528.8 million in 2002 and 2001, respectively.
Noninterest Income Noninterest income in 2003 was $5.3 billion, compared with $5.2 billion in 2002 and $4.7 billion in 2001. The increase in noninterest income of $102.3 million (2.0 percent) in 2003, compared with 2002, was driven by strong growth in payment services revenue, trust and investment management fees, deposit service charges, treasury management fees, mortgage banking revenue and investment products fees and commissions attributable to both organic growth and acquisitions. Partially offsetting the increase in noninterest income in 2003 was a year-over-year decrease in net securities gains of $55.1 million. Noninterest income in 2002 also included $67.4 million of gains recognized in connection with the sale of two co-branded credit card portfolios. The favorable impact on noninterest income from acquisitions, which included Leader, Bay View and State Street Corporate Trust, was approximately $122.7 million during 2003.
Table 4 | Noninterest Income |
2003 | 2002 | ||||||||||||||||||||
(Dollars in Millions) | 2003 | 2002 | 2001 | v 2002 | v 2001 | ||||||||||||||||
|
|||||||||||||||||||||
Credit and debit card revenue
|
$ | 560.7 | $ | 517.0 | $ | 465.9 | 8.5 | % | 11.0 | % | |||||||||||
Corporate payment products revenue
|
361.3 | 325.7 | 297.7 | 10.9 | 9.4 | ||||||||||||||||
ATM processing services
|
165.9 | 160.6 | 153.0 | 3.3 | 5.0 | ||||||||||||||||
Merchant processing services
|
561.4 | 567.3 | 308.9 | (1.0 | ) | 83.7 | |||||||||||||||
Trust and investment management fees
|
953.9 | 892.1 | 887.8 | 6.9 | .5 | ||||||||||||||||
Deposit service charges
|
715.8 | 690.3 | 644.9 | 3.7 | 7.0 | ||||||||||||||||
Treasury management fees
|
466.3 | 416.9 | 347.3 | 11.8 | 20.0 | ||||||||||||||||
Commercial products revenue
|
400.5 | 479.2 | 437.4 | (16.4 | ) | 9.6 | |||||||||||||||
Mortgage banking revenue
|
367.1 | 330.2 | 234.0 | 11.2 | 41.1 | ||||||||||||||||
Investment products fees and commissions
|
144.9 | 132.7 | 130.8 | 9.2 | 1.5 | ||||||||||||||||
Securities gains, net
|
244.8 | 299.9 | 329.1 | (18.4 | ) | (8.9 | ) | ||||||||||||||
Merger and restructuring-related gains
|
| | 62.2 | | * | ||||||||||||||||
Other
|
370.4 | 398.8 | 370.4 | (7.1 | ) | 7.7 | |||||||||||||||
Total noninterest income
|
$ | 5,313.0 | $ | 5,210.7 | $ | 4,669.4 | 2.0 | % | 11.6 | % | |||||||||||
* Not meaningful
Noninterest Expense Noninterest expense in 2003 was $5.6 billion, compared with $5.7 billion and $6.1 billion in 2002 and 2001, respectively. The Companys efficiency ratio improved to 45.6 percent in 2003, compared with 48.8 percent in 2002 and 57.2 percent in 2001. The improved operating leverage resulting from the decrease in noninterest expense in 2003 of $143.6 million (2.5 percent) was primarily the result of business initiatives, cost savings from integration activities and lower merger and restructuring-related charges, partially offset by an increase in MSR impairments, incremental pension and retirement
Table 5 | Noninterest Expense |
2003 | 2002 | ||||||||||||||||||||
(Dollars in Millions) | 2003 | 2002 | 2001 | v 2002 | v 2001 | ||||||||||||||||
|
|||||||||||||||||||||
Compensation
|
$ | 2,176.8 | $ | 2,167.5 | $ | 2,036.6 | .4 | % | 6.4 | % | |||||||||||
Employee benefits
|
328.4 | 317.5 | 285.5 | 3.4 | 11.2 | ||||||||||||||||
Net occupancy and equipment
|
643.7 | 658.7 | 666.6 | (2.3 | ) | (1.2 | ) | ||||||||||||||
Professional services
|
143.4 | 129.7 | 116.4 | 10.6 | 11.4 | ||||||||||||||||
Marketing and business development
|
180.3 | 171.4 | 178.0 | 5.2 | (3.7 | ) | |||||||||||||||
Technology and communications
|
417.4 | 392.1 | 353.9 | 6.5 | 10.8 | ||||||||||||||||
Postage, printing and supplies
|
245.6 | 243.2 | 241.9 | 1.0 | .5 | ||||||||||||||||
Goodwill
|
| | 236.7 | | * | ||||||||||||||||
Other intangibles
|
682.4 | 553.0 | 278.4 | 23.4 | 98.6 | ||||||||||||||||
Merger and restructuring-related charges
|
46.2 | 321.2 | 1,044.8 | (85.6 | ) | (69.3 | ) | ||||||||||||||
Other
|
732.7 | 786.2 | 710.2 | (6.8 | ) | 10.7 | |||||||||||||||
Total noninterest expense
|
$ | 5,596.9 | $ | 5,740.5 | $ | 6,149.0 | (2.5 | )% | (6.6 | )% | |||||||||||
Efficiency ratio (a)
|
45.6 | % | 48.8 | % | 57.2 | % | |||||||||||||||
* | Not meaningful |
(a) | Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income excluding securities gains (losses), net. |
Pension Plans Because of the long-term nature of pension plans, the administration and accounting for pensions is complex and can be impacted by several factors, including investment and funding policies, accounting methods and the plans actuarial assumptions. The Company and its Compensation Committee have an established process for evaluating the plans, their performance and significant plan assumptions, including the assumed discount rate and the long-term rate of return (LTROR). At least annually, an independent consultant is engaged to assist U.S. Bancorps Compensation Committee in evaluating plan objectives, funding policies and investment policies considering its long-term investment time horizon and asset allocation strategies. Note 18 of the Notes to Consolidated Financial Statements provides further information on funding practices, investment policies and asset allocation strategies.
Note 18 of the Notes to Consolidated Financial Statements provides a summary of the significant pension plan assumptions. Because of the subjective nature of plan assumptions, a sensitivity analysis to hypothetical changes in the LTROR and the discount rate is provided below:
Base | ||||||||||||||||||||
LTROR | 6.9% | 7.9% | 8.9% | 9.9% | 10.9% | |||||||||||||||
Incremental benefit (cost)
|
$ | (45.8 | ) | $ | (22.9 | ) | $ | | $ | 22.9 | $ | 45.8 | ||||||||
Percent of 2003 net income
|
(.76 | )% | (.38 | )% | | % | .38 | % | .76 | % | ||||||||||
Base | ||||||||||||||||||||
Discount rate | 4.2% | 5.2% | 6.2% | 7.2% | 8.2% | |||||||||||||||
Incremental benefit (cost)
|
$ | (51.6 | ) | $ | (27.9 | ) | $ | | $ | 31.6 | $ | 52.2 | ||||||||
Percent of 2003 net income
|
(.86 | )% | (.46 | )% | | % | .52 | % | .87 | % | ||||||||||
Due to the complexity of forecasting pension plan activities, the accounting method utilized for pension plans, managements ability to respond to factors impacting the plans and the hypothetical nature of this information, the actual changes in periodic pension costs could be significantly different than the information provided in the sensitivity analysis.
Merger and Restructuring-Related Items The Company incurred merger and restructuring-related items in each of the last three years in conjunction with its acquisitions. Merger and restructuring-related items included in pre-tax earnings were $46.2 million ($30.4 million after-tax) in 2003, compared with $321.2 million ($209.3 million after-tax) and $1,364.8 million ($904.5 million after-tax) for 2002 and 2001, respectively.
Income Tax Expense The provision for income taxes was $1,941.3 million (an effective rate of 34.4 percent) in 2003, compared with $1,707.5 million (an effective rate of 34.6 percent) in 2002 and $818.3 million (an effective rate of 34.9 percent) in 2001. The improvement in the effective tax rate in 2003, compared with 2002, primarily reflected a change in unitary state tax apportionment factors driven by a shift in business mix as a result of the impact of acquisitions, market demographics, the mix of product revenue and an increase in federal and state tax credits. The improvement in the effective tax rate in 2002, compared with 2001, was primarily driven by a change in unitary state tax apportionment factors, a decrease in non-deductible merger and restructuring-related charges and the change in accounting for goodwill.
BALANCE SHEET ANALYSIS
Average earning assets were $160.8 billion in 2003, compared with $147.4 billion in 2002. The increase in average earning assets of $13.4 billion (9.1 percent) was primarily driven by growth in investment securities,
Table 6 | Loan Portfolio Distribution |
2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||||||||||||||||||||||||
Percent | Percent | Percent | Percent | Percent | |||||||||||||||||||||||||||||||||||||||
At December 31 (Dollars in Millions) | Amount | of Total | Amount | of Total | Amount | of Total | Amount | of Total | Amount | of Total | |||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||
Commercial
|
|||||||||||||||||||||||||||||||||||||||||||
Commercial
|
$ | 33,536 | 28.4 | % | $ | 36,584 | 31.5 | % | $ | 40,472 | 35.4 | % | $ | 47,041 | 38.5 | % | $ | 42,021 | 37.1 | % | |||||||||||||||||||||||
Lease financing
|
4,990 | 4.2 | 5,360 | 4.6 | 5,858 | 5.1 | 5,776 | 4.7 | 3,835 | 3.4 | |||||||||||||||||||||||||||||||||
Total commercial
|
38,526 | 32.6 | 41,944 | 36.1 | 46,330 | 40.5 | 52,817 | 43.2 | 45,856 | 40.5 | |||||||||||||||||||||||||||||||||
Commercial real estate
|
|||||||||||||||||||||||||||||||||||||||||||
Commercial mortgages
|
20,624 | 17.4 | 20,325 | 17.5 | 18,765 | 16.4 | 19,466 | 15.9 | 18,636 | 16.5 | |||||||||||||||||||||||||||||||||
Construction and development
|
6,618 | 5.6 | 6,542 | 5.6 | 6,608 | 5.8 | 6,977 | 5.7 | 6,506 | 5.7 | |||||||||||||||||||||||||||||||||
Total commercial real estate
|
27,242 | 23.0 | 26,867 | 23.1 | 25,373 | 22.2 | 26,443 | 21.6 | 25,142 | 22.2 | |||||||||||||||||||||||||||||||||
Residential mortgages
|
|||||||||||||||||||||||||||||||||||||||||||
Residential mortgages
|
7,332 | 6.2 | 6,446 | 5.6 | 5,746 | 5.0 | * | * | * | * | |||||||||||||||||||||||||||||||||
Home equity loans, first liens
|
6,125 | 5.2 | 3,300 | 2.8 | 2,083 | 1.8 | * | * | * | * | |||||||||||||||||||||||||||||||||
Total residential mortgages
|
13,457 | 11.4 | 9,746 | 8.4 | 7,829 | 6.8 | 9,397 | 7.7 | 12,760 | 11.3 | |||||||||||||||||||||||||||||||||
Retail
|
|||||||||||||||||||||||||||||||||||||||||||
Credit card
|
5,933 | 5.0 | 5,665 | 4.9 | 5,889 | 5.1 | 6,012 | 4.9 | 5,004 | 4.4 | |||||||||||||||||||||||||||||||||
Retail leasing
|
6,029 | 5.1 | 5,680 | 4.9 | 4,906 | 4.3 | 4,153 | 3.4 | 2,123 | 1.9 | |||||||||||||||||||||||||||||||||
Home equity and second mortgages (a)
|
13,210 | 11.2 | 13,572 | 11.6 | 12,235 | 10.7 | 11,956 | 9.7 | * | * | |||||||||||||||||||||||||||||||||
Other retail
|
|||||||||||||||||||||||||||||||||||||||||||
Revolving credit
|
2,540 | 2.1 | 2,650 | 2.3 | 2,673 | 2.3 | 2,750 | 2.2 | * | * | |||||||||||||||||||||||||||||||||
Installment
|
2,380 | 2.0 | 2,258 | 1.9 | 2,292 | 2.0 | 2,186 | 1.8 | * | * | |||||||||||||||||||||||||||||||||
Automobile
|
7,165 | 6.1 | 6,343 | 5.5 | 5,660 | 5.0 | 5,609 | 4.6 | * | * | |||||||||||||||||||||||||||||||||
Student
|
1,753 | 1.5 | 1,526 | 1.3 | 1,218 | 1.1 | 1,042 | .9 | * | * | |||||||||||||||||||||||||||||||||
Total other retail (a)
|
13,838 | 11.7 | 12,777 | 11.0 | 11,843 | 10.4 | 11,587 | 9.5 | 22,344 | 19.7 | |||||||||||||||||||||||||||||||||
Total retail
|
39,010 | 33.0 | 37,694 | 32.4 | 34,873 | 30.5 | 33,708 | 27.5 | 29,471 | 26.0 | |||||||||||||||||||||||||||||||||
Total loans
|
$ | 118,235 | 100.0 | % | $ | 116,251 | 100.0 | % | $ | 114,405 | 100.0 | % | $ | 122,365 | 100.0 | % | $ | 113,229 | 100.0 | % | |||||||||||||||||||||||
(a) | Home equity and second mortgages are included in the total other retail category in 1999. |
* | Information not available |
Loans The Companys total loan portfolio was $118.2 billion at December 31, 2003, an increase of $2.0 billion (1.7 percent) from December 31, 2002. The increase in total loans was driven by growth in residential mortgages and retail loans, partially offset by a decline in commercial loans due to soft commercial loan demand. The increase in residential mortgages reflects the Companys decision to retain adjustable-rate mortgage production in connection with asset/liability management activities and strong growth in first lien home equity loans within the branch network and consumer finance. Table 6 provides a summary of the loan distribution by product type. Average total loans increased $3.9 billion (3.4 percent) in 2003, compared with 2002. The increase in total average loans in 2003, compared with 2002, was driven by similar factors discussed above including the growth of residential mortgages, retail loans and commercial real estate loans, partially offset by the decline in commercial loans.
Commercial Commercial loans, including lease financing, totaled $38.5 billion at December 31, 2003, compared with $41.9 billion at December 31, 2002, a decrease of $3.4 billion (8.1 percent). Although the consolidation of loans from the Stellar commercial loan conduit in mid-2003 had a positive impact on commercial loan balances year-over-year, current credit markets and soft economic conditions during early 2003 led to the decline in total commercial loans. Although economic growth occurred in the second half of 2003, commercial loan demand
Table 7 | Commercial Loans by Industry Group and Geography |
December 31, 2003 | December 31, 2002 | ||||||||||||||||
Industry Group (Dollars in Millions) | Loans | Percent | Loans | Percent | |||||||||||||
|
|||||||||||||||||
Consumer products and services
|
$ | 6,858 | 17.8 | % | $ | 7,206 | 17.2 | % | |||||||||
Capital goods
|
4,598 | 11.9 | 5,486 | 13.1 | |||||||||||||
Financial services
|
4,469 | 11.6 | 5,769 | 13.7 | |||||||||||||
Commercial services and supplies
|
3,785 | 9.8 | 3,853 | 9.2 | |||||||||||||
Agriculture
|
2,907 | 7.6 | 3,153 | 7.5 | |||||||||||||
Consumer staples
|
1,817 | 4.7 | 1,924 | 4.6 | |||||||||||||
Transportation
|
1,758 | 4.6 | 2,231 | 5.3 | |||||||||||||
Property management and development
|
1,653 | 4.3 | 1,266 | 3.0 | |||||||||||||
Private investors
|
1,629 | 4.2 | 1,759 | 4.2 | |||||||||||||
Health care
|
1,532 | 4.0 | 1,475 | 3.5 | |||||||||||||
Paper and forestry products, mining and basic
materials
|
1,415 | 3.7 | 1,664 | 4.0 | |||||||||||||
Information technology
|
729 | 1.9 | 797 | 1.9 | |||||||||||||
Energy
|
708 | 1.8 | 575 | 1.4 | |||||||||||||
Other
|
4,668 | 12.1 | 4,786 | 11.4 | |||||||||||||
Total
|
$ | 38,526 | 100.0 | % | $ | 41,944 | 100.0 | % | |||||||||
Geography
|
|||||||||||||||||
California
|
$ | 4,091 | 10.6 | % | $ | 4,127 | 9.8 | % | |||||||||
Colorado
|
1,820 | 4.7 | 1,796 | 4.3 | |||||||||||||
Illinois
|
2,121 | 5.5 | 2,214 | 5.3 | |||||||||||||
Minnesota
|
6,527 | 16.9 | 6,605 | 15.7 | |||||||||||||
Missouri
|
2,742 | 7.1 | 2,895 | 6.9 | |||||||||||||
Ohio
|
2,361 | 6.1 | 2,455 | 5.9 | |||||||||||||
Oregon
|
1,500 | 3.9 | 1,604 | 3.8 | |||||||||||||
Washington
|
2,767 | 7.2 | 3,129 | 7.5 | |||||||||||||
Wisconsin
|
2,874 | 7.5 | 3,052 | 7.3 | |||||||||||||
Iowa, Kansas, Nebraska, North Dakota, South Dakota
|
3,760 | 9.8 | 4,421 | 10.5 | |||||||||||||
Arkansas, Indiana, Kentucky, Tennessee
|
1,549 | 4.0 | 1,865 | 4.4 | |||||||||||||
Idaho, Montana, Wyoming
|
744 | 1.9 | 996 | 2.4 | |||||||||||||
Arizona, Nevada, Utah
|
829 | 2.2 | 986 | 2.4 | |||||||||||||
Total banking region
|
33,685 | 87.4 | 36,145 | 86.2 | |||||||||||||
Outside the Companys banking region
|
4,841 | 12.6 | 5,799 | 13.8 | |||||||||||||
Total
|
$ | 38,526 | 100.0 | % | $ | 41,944 | 100.0 | % | |||||||||
Commercial Real Estate The Companys portfolio of commercial real estate loans, which includes commercial mortgages and construction loans, was $27.2 billion at December 31, 2003, compared with $26.9 billion at December 31, 2002, a slight increase of $375 million (1.4 percent). Specifically, commercial mortgages outstanding and real estate construction and development loans increased modestly by $299 million (1.5 percent) and $76 million (1.2 percent), respectively, as business owners and real estate investors continued to take advantage of the current interest rate environment. Average commercial real estate loans increased by $1.4 billion (5.5 percent) in 2003, compared with 2002, primarily driven by increased commercial mortgage activity. Table 9 provides a summary of commercial real estate by property type and geographical locations.
Residential Mortgages Residential mortgages held in the loan portfolio were $13.5 billion at December 31, 2003, an increase of $3.7 billion (38.1 percent) from December 31, 2002. The increase in residential mortgages was primarily the result of an increase in consumer finance originations and branch originated home equity loans with first liens driven by refinancing activities in 2003. The increase in residential mortgages also reflects the Companys asset/liability management decisions to retain adjustable-rate mortgage loan production. This growth was partially offset by approximately $1.0 billion in residential loan sales during 2003 primarily representing fixed-rate mortgage loans. Average residential mortgages increased $3.3 billion (39.0 percent) to $11.7 billion in 2003, primarily due to the increases in first lien home equity loans and adjustable-rate mortgages.
Retail Total retail loans outstanding, which include credit card, retail leasing, home equity and second mortgages and other retail loans, were $39.0 billion at December 31, 2003, compared with $37.7 billion at December 31, 2002. The increase of $1.3 billion (3.5 percent) was driven by an increase in automobile loans, retail leasing, credit card lending and student loans, which increased $822 million, $349 million, $268 million and $227 million, respectively, during 2003. This growth was partially offset by declines in home equity and second mortgage loans as consumers refinanced with first lien home equity products classified as residential mortgages. Average retail loans increased $1.7 billion (4.6 percent) to $38.2 billion in 2003, reflecting growth in retail leasing, installment loans and home equity lines. Growth in these retail products was offset somewhat by a 1.9 percent decline in average credit card balances primarily due to portfolio sales in late 2002 and lower
Table 8 | Selected Loan Maturity Distribution |
Over One | |||||||||||||||||
One Year | Through | Over Five | |||||||||||||||
December 31, 2003 (Dollars in Millions) | or Less | Five Years | Years | Total | |||||||||||||
|
|||||||||||||||||
Commercial
|
$ | 19,028 | $ | 17,008 | $ | 2,490 | $ | 38,526 | |||||||||
Commercial real estate
|
7,162 | 13,699 | 6,381 | 27,242 | |||||||||||||
Residential mortgages
|
914 | 2,382 | 10,161 | 13,457 | |||||||||||||
Retail
|
11,977 | 17,373 | 9,660 | 39,010 | |||||||||||||
Total loans
|
$ | 39,081 | $ | 50,462 | $ | 28,692 | $ | 118,235 | |||||||||
Total of loans due after one year with
|
|||||||||||||||||
Predetermined interest rates
|
$ | 40,339 | |||||||||||||||
Floating interest rates
|
$ | 38,815 | |||||||||||||||
Loans Held for Sale At December 31, 2003, loans held for sale, consisting of residential mortgages to be sold in the secondary markets, were $1.4 billion. The $2.7 billion (65.5 percent) decrease from December 31, 2002, despite strong mortgage banking activities in early 2003, was the result of a 56.3 percent decline in mortgage production volumes during the fourth quarter of 2003 relative to the same period of 2002.
Investment Securities The Company uses its investment securities portfolio for several purposes. It serves as a vehicle to manage interest rate and prepayment risk, generates interest and dividend income from the investment of excess funds depending on loan demand, provides liquidity and is used as collateral for public deposits and wholesale funding sources.
Table 9 | Commercial Real Estate by Property Type and Geography |
December 31, 2003 | December 31, 2002 | ||||||||||||||||
Property Type (Dollars in Millions) | Loans | Percent | Loans | Percent | |||||||||||||
|
|||||||||||||||||
Business owner occupied
|
$ | 8,037 | 29.5 | % | $ | 6,513 | 24.2 | % | |||||||||
Multi-family
|
3,868 | 14.2 | 3,258 | 12.1 | |||||||||||||
Commercial property
|
|||||||||||||||||
Industrial
|
1,280 | 4.7 | 1,227 | 4.6 | |||||||||||||
Office
|
3,078 | 11.3 | 3,564 | 13.3 | |||||||||||||
Retail
|
3,487 | 12.8 | 3,832 | 14.3 | |||||||||||||
Other
|
2,452 | 9.0 | 1,447 | 5.4 | |||||||||||||
Homebuilders
|
2,098 | 7.7 | 2,142 | 8.0 | |||||||||||||
Hotel/motel
|
2,234 | 8.2 | 2,585 | 9.6 | |||||||||||||
Health care facilities
|
708 | 2.6 | 1,290 | 4.8 | |||||||||||||
Other (a)
|
| | 1,009 | 3.7 | |||||||||||||
Total
|
$ | 27,242 | 100.0 | % | $ | 26,867 | 100.0 | % | |||||||||
Geography
|
|||||||||||||||||
California
|
$ | 4,380 | 16.1 | % | $ | 4,277 | 15.9 | % | |||||||||
Colorado
|
1,139 | 4.2 | 1,190 | 4.4 | |||||||||||||
Illinois
|
1,095 | 4.0 | 1,140 | 4.2 | |||||||||||||
Minnesota
|
1,536 | 5.6 | 1,508 | 5.6 | |||||||||||||
Missouri
|
1,741 | 6.4 | 2,297 | 8.6 | |||||||||||||
Ohio
|
2,193 | 8.0 | 2,264 | 8.4 | |||||||||||||
Oregon
|
1,771 | 6.5 | 1,614 | 6.0 | |||||||||||||
Washington
|
2,956 | 10.9 | 3,242 | 12.1 | |||||||||||||
Wisconsin
|
1,921 | 7.1 | 2,040 | 7.6 | |||||||||||||
Iowa, Kansas, Nebraska, North Dakota, South Dakota
|
2,138 | 7.8 | 1,895 | 7.1 | |||||||||||||
Arkansas, Indiana, Kentucky, Tennessee
|
1,817 | 6.7 | 1,679 | 6.2 | |||||||||||||
Idaho, Montana, Wyoming
|
874 | 3.2 | 682 | 2.5 | |||||||||||||
Arizona, Nevada, Utah
|
1,722 | 6.3 | 1,439 | 5.4 | |||||||||||||
Total banking region
|
25,283 | 92.8 | 25,267 | 94.0 | |||||||||||||
Outside the Companys banking region
|
1,959 | 7.2 | 1,600 | 6.0 | |||||||||||||
Total
|
$ | 27,242 | 100.0 | % | $ | 26,867 | 100.0 | % | |||||||||
(a) | In 2003, enhancements in loan system reporting enabled the Company to reclassify loans classified as other in 2002 to the applicable category. |
Deposits Total deposits were $119.1 billion at December 31, 2003, an increase of $3.5 billion (3.0 percent) from December 31, 2002. The increase in total
Table 10 | Investment Securities |
Available-for-Sale | Held-to-Maturity | |||||||||||||||||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||||||||||||||||
Average | Weighted | Average | Weighted | |||||||||||||||||||||||||||||||
Amortized | Fair | Maturity in | Average | Amortized | Fair | Maturity in | Average | |||||||||||||||||||||||||||
December 31, 2003 (Dollars in Millions) | Cost | Value | Years | Yield | Cost | Value | Years | Yield | ||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||
U.S. Treasury and agencies
|
||||||||||||||||||||||||||||||||||
Maturing in one year or less
|
$ | 57 | $ | 57 | .57 | 2.88 | % | $ | | $ | | | | % | ||||||||||||||||||||
Maturing after one year through five years
|
190 | 199 | 2.66 | 4.33 | | | | | ||||||||||||||||||||||||||
Maturing after five years through ten years
|
237 | 225 | 9.08 | 3.93 | | | | | ||||||||||||||||||||||||||
Maturing after ten years
|
1,150 | 1,094 | 19.50 | 2.38 | | | | | ||||||||||||||||||||||||||
Total
|
$ | 1,634 | $ | 1,575 | 15.37 | 2.85 | % | $ | | $ | | | | % | ||||||||||||||||||||
Mortgage-backed securities
|
||||||||||||||||||||||||||||||||||
Maturing in one year or less
|
$ | 2,355 | $ | 2,358 | .63 | 3.15 | % | $ | | $ | | | | % | ||||||||||||||||||||
Maturing after one year through five years
|
22,516 | 22,542 | 3.66 | 4.30 | 14 | 14 | 3.08 | 5.38 | ||||||||||||||||||||||||||
Maturing after five years through ten years
|
15,016 | 14,785 | 6.50 | 4.50 | | | | | ||||||||||||||||||||||||||
Maturing after ten years
|
342 | 340 | 13.26 | 2.66 | | | | | ||||||||||||||||||||||||||
Total
|
$ | 40,229 | $ | 40,025 | 4.62 | 4.30 | % | $ | 14 | $ | 14 | 3.08 | 5.38 | % | ||||||||||||||||||||
Asset-backed securities
|
||||||||||||||||||||||||||||||||||
Maturing in one year or less
|
$ | 100 | $ | 101 | .70 | 4.74 | % | $ | | $ | | | | % | ||||||||||||||||||||
Maturing after one year through five years
|
130 | 130 | 2.54 | 5.89 | | | | | ||||||||||||||||||||||||||
Maturing after five years through ten years
|
20 | 21 | 5.08 | 5.55 | | | | | ||||||||||||||||||||||||||
Maturing after ten years
|
| | | | | | | | ||||||||||||||||||||||||||
Total
|
$ | 250 | $ | 252 | 2.00 | 5.40 | % | $ | | $ | | | | % | ||||||||||||||||||||
Obligations of states and political
subdivisions
|
||||||||||||||||||||||||||||||||||
Maturing in one year or less
|
$ | 70 | $ | 71 | .40 | 7.32 | % | $ | 33 | $ | 33 | .35 | 3.93 | % | ||||||||||||||||||||
Maturing after one year through five years
|
171 | 178 | 2.71 | 7.34 | 39 | 42 | 2.93 | 6.54 | ||||||||||||||||||||||||||
Maturing after five years through ten years
|
79 | 84 | 6.88 | 7.43 | 26 | 28 | 6.84 | 6.92 | ||||||||||||||||||||||||||
Maturing after ten years
|
15 | 15 | 14.60 | 8.32 | 40 | 44 | 14.66 | 6.97 | ||||||||||||||||||||||||||
Total
|
$ | 335 | $ | 348 | 3.74 | 7.40 | % | $ | 138 | $ | 147 | 6.47 | 6.12 | % | ||||||||||||||||||||
Other debt securities
|
||||||||||||||||||||||||||||||||||
Maturing in one year or less
|
$ | 3 | $ | 3 | .42 | 3.35 | % | $ | | $ | | | | % | ||||||||||||||||||||
Maturing after one year through five years
|
128 | 128 | 2.51 | 10.42 | | | | | ||||||||||||||||||||||||||
Maturing after five years through ten years
|
8 | 8 | 6.09 | 3.21 | | | | | ||||||||||||||||||||||||||
Maturing after ten years
|
260 | 246 | 23.45 | 1.84 | | | | | ||||||||||||||||||||||||||
Total
|
$ | 399 | $ | 385 | 16.21 | 4.64 | % | $ | | $ | | | | % | ||||||||||||||||||||
Other investments
|
$ | 594 | $ | 597 | | | % | $ | | $ | | | | % | ||||||||||||||||||||
Total investment securities
|
$ | 43,441 | $ | 43,182 | 5.12 | 4.27 | % | $ | 152 | $ | 161 | 6.16 | 6.05 | % | ||||||||||||||||||||
Note: | Information related to asset and mortgage-backed securities included above is presented based upon weighted average maturities anticipating future prepayments. Average yields are presented on a fully-taxable equivalent basis. Yields on available-for-sale and held-to-maturity securities are computed based on historical cost balances. Average yield and maturity calculations exclude equity securities that have no stated yield or maturity. |
2003 | 2002 | ||||||||||||||||
Amortized | Percent | Amortized | Percent | ||||||||||||||
At December 31 (Dollars in Millions) | Cost | of Total | Cost | of Total | |||||||||||||
|
|||||||||||||||||
U.S. Treasury and agencies
|
$ | 1,634 | 3.7 | % | $ | 421 | 1.5 | % | |||||||||
Mortgage-backed securities
|
40,243 | 92.3 | 24,987 | 90.0 | |||||||||||||
Asset-backed securities
|
250 | .6 | 646 | 2.3 | |||||||||||||
Obligations of states and political subdivisions
|
473 | 1.1 | 771 | 2.8 | |||||||||||||
Other securities and investments
|
993 | 2.3 | 949 | 3.4 | |||||||||||||
Total investment securities
|
$ | 43,593 | 100.0 | % | $ | 27,774 | 100.0 | % | |||||||||
Table 11 | Deposits |
The composition of deposits was as follows:
2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||||||||||||||||||||||
Percent | Percent | Percent | Percent | Percent | ||||||||||||||||||||||||||||||||||||||
December 31 (Dollars in Millions) | Amount | of Total | Amount | of Total | Amount | of Total | Amount | of Total | Amount | of Total | ||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||
Noninterest-bearing deposits
|
$ | 32,470 | 27.3 | % | $ | 35,106 | 30.4 | % | $ | 31,212 | 29.7 | % | $ | 26,633 | 24.3 | % | $ | 26,350 | 25.5 | % | ||||||||||||||||||||||
Interest-bearing deposits
|
||||||||||||||||||||||||||||||||||||||||||
Interest checking
|
21,404 | 18.0 | 17,467 | 15.1 | 15,251 | 14.5 | 13,982 | 12.8 | 13,141 | 12.7 | ||||||||||||||||||||||||||||||||
Money market accounts
|
34,025 | 28.6 | 27,753 | 24.0 | 24,835 | 23.6 | 23,899 | 21.8 | 22,751 | 22.0 | ||||||||||||||||||||||||||||||||
Savings accounts
|
5,630 | 4.7 | 5,021 | 4.4 | 4,637 | 4.4 | 4,516 | 4.1 | 5,445 | 5.3 | ||||||||||||||||||||||||||||||||
Total of savings deposits
|
61,059 | 51.3 | 50,241 | 43.5 | 44,723 | 42.5 | 42,397 | 38.7 | 41,337 | 40.0 | ||||||||||||||||||||||||||||||||
Time certificates of deposit less than $100,000
|
13,690 | 11.5 | 17,973 | 15.5 | 20,724 | 19.7 | 25,780 | 23.5 | 25,394 | 24.5 | ||||||||||||||||||||||||||||||||
Time deposits greater than $100,000
|
||||||||||||||||||||||||||||||||||||||||||
Domestic
|
5,902 | 4.9 | 9,427 | 8.2 | 7,286 | 6.9 | 11,221 | 10.3 | 9,348 | 9.0 | ||||||||||||||||||||||||||||||||
Foreign
|
5,931 | 5.0 | 2,787 | 2.4 | 1,274 | 1.2 | 3,504 | 3.2 | 988 | 1.0 | ||||||||||||||||||||||||||||||||
Total interest-bearing deposits
|
86,582 | 72.7 | 80,428 | 69.6 | 74,007 | 70.3 | 82,902 | 75.7 | 77,067 | 74.5 | ||||||||||||||||||||||||||||||||
Total deposits
|
$ | 119,052 | 100.0 | % | $ | 115,534 | 100.0 | % | $ | 105,219 | 100.0 | % | $ | 109,535 | 100.0 | % | $ | 103,417 | 100.0 | % | ||||||||||||||||||||||
The maturity of time certificates of deposit less than $100,000 and time deposits greater than $100,000 was as follows:
Time Certificates of | Time Deposits | ||||||||||||
December 31, 2003 (Dollars in Millions) | Deposit Less Than $100,000 | Greater Than $100,000 | Total | ||||||||||
|
|||||||||||||
Three months or less
|
$ | 2,747 | $ | 8,610 | $ | 11,357 | |||||||
Three months through six months
|
2,237 | 831 | 3,068 | ||||||||||
Six months through one year
|
2,778 | 745 | 3,523 | ||||||||||
One year through three years
|
4,179 | 1,128 | 5,307 | ||||||||||
Three years through five years
|
1,733 | 508 | 2,241 | ||||||||||
Thereafter
|
16 | 11 | 27 | ||||||||||
Total
|
$ | 13,690 | $ | 11,833 | $ | 25,523 | |||||||
Borrowings The Company utilizes both short-term and long-term borrowings to fund growth of earning assets in excess of deposit growth. Short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings, were $10.9 billion at December 31, 2003, up $3.1 billion (39.0 percent) from $7.8 billion at year-end 2002. Short-term funding is managed to levels deemed appropriate given alternative funding sources. The increase in short-term borrowings reflected the impact of funding growth in earning assets, partially offset by the growth in deposits.
CORPORATE RISK PROFILE
Overview Managing risks is an essential part of successfully operating a financial services company. The most prominent risk exposures are credit, residual, operational, interest rate, market and liquidity risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Residual risk is the potential reduction in the end-of-term value of leased assets or the residual cash flows related to asset securitization and other off-balance sheet structures. Operational risk includes risks related to fraud, legal and compliance risk, processing errors, technology, breaches of internal controls and business continuation and disaster recovery risk. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates. Rate movements can affect the repricing of assets and liabilities differently, as well as their market value. Market risk arises from fluctuations in interest rates, foreign exchange rates, and equity prices that may result in changes in the values of financial instruments, such as trading and available-for-sale securities that are accounted for on a mark-to-market basis. Liquidity risk is the possible inability to fund obligations to depositors, investors or borrowers. In addition, corporate strategic decisions, as well as the risks described above, could give rise to reputation risk. Reputation risk is the risk that negative publicity or press, whether true or not, could result in costly litigation or cause a decline in the Companys stock value, customer base or revenue.
Credit Risk Management The Companys strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. The strategy also emphasizes diversification on a geographic, industry and customer level, regular credit examinations and management reviews of loans experiencing deterioration of credit quality. The Company strives to identify potential problem loans early, take any necessary charge-offs promptly and maintain adequate reserve levels for probable loan losses inherent in the portfolio. Commercial banking operations rely on a strong credit culture that combines prudent credit policies and individual lender accountability. Lenders are assigned lending grades based on their level of experience and customer service requirements. Lending grades represent the level of approval authority for the amount of credit exposure and level of risk. Credit officers reporting independently to Credit Administration have higher levels of lending grades and support the business units in their credit decision process. Loan decisions are documented as to the borrowers business, purpose of the loan, evaluation of the repayment source and the associated risks, evaluation of collateral, covenants and monitoring requirements, and risk rating rationale. The Company utilizes a credit risk rating system to measure the credit quality of individual commercial loan transactions. The Company uses the risk rating system for regulatory reporting, determining the frequency of review of the credit exposures, and evaluation and determination of the adequacy of the allowance for credit losses. The Company regularly forecasts potential changes in risk ratings, nonperforming status and potential for loss and the estimated impact on the allowance for credit losses. In the Companys retail banking operations, standard credit scoring systems are used to assess consumer credit risks and to price consumer products accordingly. The Company conducts the underwriting and collections of its retail products in loan underwriting and servicing centers specializing in certain retail products. Forecasts of delinquency levels, bankruptcies and losses in conjunction with projection of estimated losses by delinquency categories and vintage information are regularly prepared and are used to evaluate underwriting and collection and determine the adequacy of the allowance for credit losses for these products. The Company also engages in non-lending activities that may give rise to credit risk, including interest rate swap contracts for balance sheet hedging
Economic Overview In evaluating its credit risk, the Company considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, the level of allowance coverage and macroeconomic factors. Since late 2000, the domestic economy experienced slower growth. During 2001, corporate earnings weakened and credit quality indicators among certain industry sectors deteriorated. The stagnant economic growth was evidenced by the Federal Reserve Boards (FRB) actions to stimulate economic growth through a series of interest rate reductions from mid-2001 through late 2002. In addition, events of September 11, 2001, had a profound impact on credit quality due to changes in consumer confidence and related spending, governmental priorities and business activities. In response to declining economic conditions, company-specific portfolio trends, and the Firstar/ USBM merger, the Company initiated several actions during 2001 including aligning the risk management practices and charge-off policies of the companies and restructuring and disposing of certain portfolios that did not align with the credit risk profile of the combined company. The Company also implemented accelerated loan workout strategies for certain commercial credits and increased the provision for credit losses above anticipated levels by approximately $1,025 million in the third quarter of 2001.
Credit Diversification The Company manages its credit risk, in part, through diversification of its loan portfolio. As part of its normal business activities, it offers a broad array of traditional commercial lending products and specialized products such as asset-based lending, commercial lease financing, agricultural credit, warehouse mortgage lending, commercial real estate, health care and correspondent banking. The Company also offers an array of retail lending products including credit cards, retail leases, home equity, revolving credit, lending to students and other consumer loans. These retail credit products are primarily offered through the branch office network, specialized trust, home mortgage and loan production offices, indirect distribution channels, such as automobile dealers and a consumer finance division. The Company monitors and manages the portfolio diversification by industry, customer and geography. Table 6 provides information with respect to the overall product diversification and changes in the mix during 2003.
Analysis of Nonperforming Assets Nonperforming assets represents a key indicator, among other considerations, of the potential for future credit losses. Nonperforming assets include nonaccrual loans, restructured loans not performing in accordance with modified terms and other real estate and other nonperforming assets owned by the Company. Interest payments collected from assets on nonaccrual status are typically applied against the principal balance and not recorded as income. At December 31, 2003, total nonperforming assets were $1,148.1 million, compared with $1,373.5 million at year-end 2002 and $1,120.0 million at year-end 2001. The ratio of total nonperforming assets to total loans and other real estate decreased to .97 percent at December 31, 2003, compared with 1.18 percent and .98 percent at the end of 2002 and 2001, respectively.
Table 12 | Nonperforming Assets (a) |
At December 31, (Dollars in Millions) | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||
|
|||||||||||||||||||||||
Commercial
|
|||||||||||||||||||||||
Commercial
|
$ | 623.5 | $ | 760.4 | $ | 526.6 | $ | 470.4 | $ | 219.0 | |||||||||||||
Lease financing
|
113.3 | 166.7 | 180.8 | 70.5 | 31.5 | ||||||||||||||||||
Total commercial
|
736.8 | 927.1 | 707.4 | 540.9 | 250.5 | ||||||||||||||||||
Commercial real estate
|
|||||||||||||||||||||||
Commercial mortgages
|
177.6 | 174.6 | 131.3 | 105.5 | 138.2 | ||||||||||||||||||
Construction and development
|
39.9 | 57.5 | 35.9 | 38.2 | 31.6 | ||||||||||||||||||
Total commercial real estate
|
217.5 | 232.1 | 167.2 | 143.7 | 169.8 | ||||||||||||||||||
Residential mortgages
|
40.5 | 52.0 | 79.1 | 56.9 | 72.8 | ||||||||||||||||||
Retail
|
|||||||||||||||||||||||
Credit card
|
| | | 8.8 | 5.0 | ||||||||||||||||||
Retail leasing
|
.4 | 1.0 | 6.5 | | .4 | ||||||||||||||||||
Other retail
|
24.8 | 25.1 | 41.1 | 15.0 | 21.1 | ||||||||||||||||||
Total retail
|
25.2 | 26.1 | 47.6 | 23.8 | 26.5 | ||||||||||||||||||
Total nonperforming loans
|
1,020.0 | 1,237.3 | 1,001.3 | 765.3 | 519.6 | ||||||||||||||||||
Other real estate
|
72.6 | 59.5 | 43.8 | 61.1 | 40.0 | ||||||||||||||||||
Other assets
|
55.5 | 76.7 | 74.9 | 40.6 | 28.9 | ||||||||||||||||||
Total nonperforming assets
|
$ | 1,148.1 | $ | 1,373.5 | $ | 1,120.0 | $ | 867.0 | $ | 588.5 | |||||||||||||
Restructured loans accruing interest (b)
|
$ | 18.0 | $ | 1.4 | $ | | $ | | $ | | |||||||||||||
Accruing loans 90 days or more past
due (c)
|
$ | 329.4 | $ | 426.4 | $ | 462.9 | $ | 385.2 | $ | 248.6 | |||||||||||||
Nonperforming loans to total loans
|
.86 | % | 1.06 | % | .88 | % | .63 | % | .46 | % | |||||||||||||
Nonperforming assets to total loans plus other
real estate
|
.97 | % | 1.18 | % | .98 | % | .71 | % | .52 | % | |||||||||||||
Net interest lost on nonperforming loans
|
$ | 67.4 | $ | 65.4 | $ | 63.0 | $ | 50.8 | $ | 29.5 | |||||||||||||
Changes in Nonperforming Assets
Commercial and | Retail and | |||||||||||||||
(Dollars in Millions) | Commercial Real Estate | Residential Mortgages(e) | Total | |||||||||||||
|
||||||||||||||||
Balance December 31, 2002
|
$ | 1,295.4 | $ | 78.1 | $ | 1,373.5 | ||||||||||
Additions to nonperforming assets
|
||||||||||||||||
New nonaccrual loans and foreclosed properties
|
1,303.5 | 41.4 | 1,344.9 | |||||||||||||
Advances on loans
|
58.9 | | 58.9 | |||||||||||||
Total additions
|
1,362.4 | 41.4 | 1,403.8 | |||||||||||||
Reductions in nonperforming assets
|
||||||||||||||||
Paydowns, payoffs
|
(501.1 | ) | (36.0 | ) | (537.1 | ) | ||||||||||
Net sales
|
(288.8 | ) | | (288.8 | ) | |||||||||||
Return to performing status
|
(118.7 | ) | (9.1 | ) | (127.8 | ) | ||||||||||
Charge-offs (d)
|
(666.8 | ) | (8.7 | ) | (675.5 | ) | ||||||||||
Total reductions
|
(1,575.4 | ) | (53.8 | ) | (1,629.2 | ) | ||||||||||
Net additions (reductions) to nonperforming assets
|
(213.0 | ) | (12.4 | ) | (225.4 | ) | ||||||||||
Balance December 31, 2003
|
$ | 1,082.4 | $ | 65.7 | $ | 1,148.1 | ||||||||||
(a) | Throughout this document, nonperforming assets and related ratios do not include accruing loans 90 days or more past due. |
(b) | Nonaccrual restructured loans are included in the respective nonperforming loan categories and excluded from restructured loans accruing interest. |
(c) | These loans are not included in nonperforming assets and continue to accrue interest because they are adequately secured by collateral and/or are in the process of collection and are reasonably expected to result in repayment or restoration to current status. |
(d) | Charge-offs exclude actions for certain card products and loan sales that were not classified as nonperforming at the time the charge-off occurred. |
(e) | Residential mortgage information excludes changes related to residential mortgages serviced by others. |
As a Percent | |||||||||||||||||||
Amount | of Loans | ||||||||||||||||||
December 31 | |||||||||||||||||||
(Dollars in Millions) | 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Residential Mortgages
|
|||||||||||||||||||
30-89 days
|
$ | 102.9 | $ | 137.5 | .76 | % | 1.41 | % | |||||||||||
90 days or more
|
82.5 | 87.9 | .61 | .90 | |||||||||||||||
Nonperforming
|
40.5 | 52.0 | .30 | .53 | |||||||||||||||
Total
|
$ | 225.9 | $ | 277.4 | 1.68 | % | 2.85 | % | |||||||||||
Retail Loans
|
|||||||||||||||||||
Credit Card
|
|||||||||||||||||||
30-89 days
|
$ | 150.9 | $ | 145.7 | 2.54 | % | 2.57 | % | |||||||||||
90 days or more
|
99.5 | 118.3 | 1.68 | 2.09 | |||||||||||||||
Nonperforming
|
| | | | |||||||||||||||
Total
|
$ | 250.4 | $ | 264.0 | 4.22 | % | 4.66 | % | |||||||||||
Retail Leasing
|
|||||||||||||||||||
30-89 days
|
$ | 78.8 | $ | 89.7 | 1.31 | % | 1.58 | % | |||||||||||
90 days or more
|
8.2 | 10.7 | .14 | .19 | |||||||||||||||
Nonperforming
|
.4 | 1.0 | .01 | .02 | |||||||||||||||
Total
|
$ | 87.4 | $ | 101.4 | 1.45 | % | 1.78 | % | |||||||||||
Other Retail
|
|||||||||||||||||||
30-89 days
|
$ | 311.9 | $ | 395.3 | 1.15 | % | 1.50 | % | |||||||||||
90 days or more
|
110.2 | 141.2 | .41 | .54 | |||||||||||||||
Nonperforming
|
24.8 | 25.1 | .09 | .10 | |||||||||||||||
Total
|
$ | 446.9 | $ | 561.6 | 1.65 | % | 2.13 | % | |||||||||||
Table 13 | Delinquent Loan Ratios as a Percent of Ending Loan Balances |
At December 31, | |||||||||||||||||||||||
90 days or more past due excluding nonperforming loans | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||
|
|||||||||||||||||||||||
Commercial
|
|||||||||||||||||||||||
Commercial
|
.06 | % | .14 | % | .14 | % | .11 | % | .05 | % | |||||||||||||
Lease financing
|
.04 | .10 | .45 | .02 | | ||||||||||||||||||
Total commercial
|
.06 | .14 | .18 | .10 | .05 | ||||||||||||||||||
Commercial real estate
|
|||||||||||||||||||||||
Commercial mortgages
|
.02 | .03 | .03 | .07 | .08 | ||||||||||||||||||
Construction and development
|
.03 | .07 | .02 | .03 | .05 | ||||||||||||||||||
Total commercial real estate
|
.02 | .04 | .02 | .06 | .07 | ||||||||||||||||||
Residential mortgages
|
.61 | .90 | .78 | .62 | .42 | ||||||||||||||||||
Retail
|
|||||||||||||||||||||||
Credit card
|
1.68 | 2.09 | 2.18 | 1.70 | 1.23 | ||||||||||||||||||
Retail leasing
|
.14 | .19 | .11 | .20 | .12 | ||||||||||||||||||
Other retail
|
.41 | .54 | .74 | .62 | .41 | ||||||||||||||||||
Total retail
|
.56 | .72 | .90 | .76 | .53 | ||||||||||||||||||
Total loans
|
.28 | % | .37 | % | .40 | % | .31 | % | .22 | % | |||||||||||||
At December 31, | |||||||||||||||||||||
90 days or more past due including nonperforming loans | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||
|
|||||||||||||||||||||
Commercial
|
1.97 | % | 2.35 | % | 1.71 | % | 1.13 | % | .59 | % | |||||||||||
Commercial real estate
|
.82 | .90 | .68 | .60 | .74 | ||||||||||||||||
Residential mortgages
|
.91 | 1.44 | 1.79 | 1.23 | .99 | ||||||||||||||||
Retail
|
.62 | .79 | 1.03 | .83 | .62 | ||||||||||||||||
Total loans
|
1.14 | % | 1.43 | % | 1.28 | % | .94 | % | .68 | % | |||||||||||
Analysis of Loan Net Charge-Offs Total loan net charge-offs decreased $121.3 million to $1,251.7 million in 2003, compared with $1,373.0 million in 2002 and $1,546.5 million in 2001. The ratio of total loan net charge-offs to average loans was 1.06 percent in 2003, compared with 1.20 percent in 2002 and 1.31 percent in 2001. The improvement in net charge-offs in 2003 was due to credit risk management initiatives taken by the Company during the past two years that have improved the credit risk profile of the loan portfolio. These initiatives along with better economic conditions resulted in improving credit risk classifications and lower levels of nonperforming assets. The level of loan net charge-offs during 2002 reflected the impact of soft economic conditions at that time and weakness in the communications, transportation and manufacturing sectors, as well as the impact of the economy on highly leveraged enterprise-value financings. The decline during 2002 reflected net charge-offs taken in 2001 related to several credit initiatives taken by management in that year. Due to the Companys ongoing workout, collection and risk management efforts and expected improvement in the economy, net charge-offs are anticipated to trend lower in 2004.
Table 14 | Net Charge-offs as a Percent of Average Loans Outstanding |
Year Ended December 31 | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||
|
|||||||||||||||||||||||
Commercial
|
|||||||||||||||||||||||
Commercial
|
1.34 | % | 1.29 | % | 1.62 | % | .56 | % | .41 | % | |||||||||||||
Lease financing
|
1.65 | 2.67 | 1.95 | .46 | .24 | ||||||||||||||||||
Total commercial
|
1.38 | 1.46 | 1.66 | .55 | .40 | ||||||||||||||||||
Commercial real estate
|
|||||||||||||||||||||||
Commercial mortgages
|
.14 | .17 | .21 | .03 | .02 | ||||||||||||||||||
Construction and development
|
.16 | .11 | .17 | .11 | .03 | ||||||||||||||||||
Total commercial real estate
|
.14 | .15 | .20 | .05 | .02 | ||||||||||||||||||
Residential mortgages
|
.23 | .23 | .15 | .11 | .11 | ||||||||||||||||||
Retail
|
|||||||||||||||||||||||
Credit card
|
4.61 | 4.98 | 4.80 | 4.18 | 4.00 | ||||||||||||||||||
Retail leasing
|
.86 | .72 | .65 | .41 | .28 | ||||||||||||||||||
Home equity and second mortgages
|
.70 | .74 | .85 | * | * | ||||||||||||||||||
Other retail
|
1.60 | 2.10 | 2.16 | 1.32 | 1.26 | ||||||||||||||||||
Total retail
|
1.61 | 1.85 | 1.94 | 1.69 | 1.63 | ||||||||||||||||||
Total loans (a)
|
1.06 | % | 1.20 | % | 1.31 | % | .70 | % | .61 | % | |||||||||||||
(a) | In accordance with guidance provided in the Interagency Guidance on Certain Loans Held for Sale, loans held with the intent to sell are transferred to the Loans Held for Sale category based on the lower of cost or fair value. At the time of transfer, the portion of the mark-to-market losses representing probable credit losses determined in accordance with policies and methods utilized to determine the allowance for credit losses is included in net charge-offs. The remaining portion of the losses was reported separately as a reduction of the allowance for credit losses under Losses from loan sales/transfers. Had the entire amount of the loss been reported as charge-offs, total net charge-offs would have been $1,875.8 million (1.59 percent of average loans) for the year ended December 31, 2001. |
* | Information not available |
Average Loan | Percent of | ||||||||||||||||
Amount | Average Loans | ||||||||||||||||
Year Ended December 31 | |||||||||||||||||
(Dollars in Millions) | 2003 | 2002 | 2003 | 2002 | |||||||||||||
Consumer finance (a)
|
|||||||||||||||||
Residential mortgages
|
$ | 3,499 | $ | 2,447 | .44 | % | .57 | % | |||||||||
Home equity and second mortgages
|
2,350 | 2,570 | 2.38 | 1.95 | |||||||||||||
Other retail
|
360 | 237 | 4.76 | 3.90 | |||||||||||||
Traditional branch
|
|||||||||||||||||
Residential mortgages
|
$ | 8,197 | $ | 5,965 | .14 | % | .09 | % | |||||||||
Home equity and second mortgages
|
10,889 | 10,662 | .34 | .44 | |||||||||||||
Other retail
|
13,270 | 12,010 | 1.52 | 2.07 | |||||||||||||
Total Company
|
|||||||||||||||||
Residential mortgages
|
$ | 11,696 | $ | 8,412 | .23 | % | .23 | % | |||||||||
Home equity and second mortgages
|
13,239 | 13,232 | .70 | .74 | |||||||||||||
Other retail
|
13,630 | 12,247 | 1.60 | 2.10 | |||||||||||||
(a) | Consumer finance category included credit originated and managed by USBCF, as well as home equity loans and second mortgages with a loan-to-value greater than 100 percent that were originated in the branches. |
Analysis and Determination of the Allowance for Credit Losses The allowance for credit losses provides coverage for probable and estimable losses inherent in the Companys loan and lease portfolio. Management evaluates the allowance each quarter to determine that it is adequate to cover inherent losses. The evaluation of each element and the overall allowance is based on a continuing assessment of problem loans and related off-balance sheet items, recent loss experience and other factors, including regulatory guidance and economic conditions.
Table 15 | Elements of the Allowance for Credit Losses (a) |
Allowance Amount | Allowance as a Percent of Loans | ||||||||||||||||||||||||||||||||||||||||||
December 31 (Dollars in Millions) | 2003 | 2002 | 2001 | 2000 | 1999 | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||
Commercial
|
|||||||||||||||||||||||||||||||||||||||||||
Commercial
|
$ | 696.1 | $ | 776.4 | $ | 1,068.1 | $ | 418.8 | $ | 408.3 | 2.08 | % | 2.12 | % | 2.64 | % | .89 | % | .97 | % | |||||||||||||||||||||||
Lease financing
|
90.4 | 107.6 | 107.5 | 17.7 | 20.2 | 1.81 | 2.01 | 1.84 | .31 | .53 | |||||||||||||||||||||||||||||||||
Total commercial
|
786.5 | 884.0 | 1,175.6 | 436.5 | 428.5 | 2.04 | 2.11 | 2.54 | .83 | .93 | |||||||||||||||||||||||||||||||||
Commercial real estate
|
|||||||||||||||||||||||||||||||||||||||||||
Commercial mortgages
|
169.7 | 152.9 | 176.6 | 42.7 | 110.4 | .82 | .75 | .94 | .22 | .59 | |||||||||||||||||||||||||||||||||
Construction and development
|
58.8 | 53.5 | 76.4 | 17.7 | 22.5 | .89 | .82 | 1.16 | .25 | .35 | |||||||||||||||||||||||||||||||||
Total commercial real estate
|
228.5 | 206.4 | 253.0 | 60.4 | 132.9 | .84 | .77 | 1.00 | .23 | .53 | |||||||||||||||||||||||||||||||||
Residential mortgages
|
33.3 | 34.2 | 21.9 | 11.6 | 18.6 | .25 | .35 | .28 | .12 | .15 | |||||||||||||||||||||||||||||||||
Retail
|
|||||||||||||||||||||||||||||||||||||||||||
Credit card
|
267.9 | 272.4 | 295.2 | 265.6 | 320.8 | 4.52 | 4.81 | 5.01 | 4.42 | 6.41 | |||||||||||||||||||||||||||||||||
Retail leasing
|
47.1 | 44.0 | 38.7 | 27.2 | 18.6 | .78 | .77 | .79 | .65 | .88 | |||||||||||||||||||||||||||||||||
Home equity and second mortgages
|
100.5 | 114.7 | 88.6 | 107.7 | * | .76 | .85 | .72 | .90 | * | |||||||||||||||||||||||||||||||||
Other retail
|
234.8 | 268.6 | 282.8 | 250.3 | 389.2 | 1.70 | 2.10 | 2.39 | 2.16 | 1.74 | |||||||||||||||||||||||||||||||||
Total retail
|
650.3 | 699.7 | 705.3 | 650.8 | 728.6 | 1.67 | 1.86 | 2.02 | 1.93 | 2.47 | |||||||||||||||||||||||||||||||||
Total allocated allowance
|
1,698.6 | 1,824.3 | 2,155.8 | 1,159.3 | 1,308.6 | 1.43 | 1.57 | 1.89 | .95 | 1.16 | |||||||||||||||||||||||||||||||||
Available for other factors
|
670.0 | 597.7 | 301.5 | 627.6 | 401.7 | .57 | .51 | .26 | .51 | .35 | |||||||||||||||||||||||||||||||||
Total allowance
|
$ | 2,368.6 | $ | 2,422.0 | $ | 2,457.3 | $ | 1,786.9 | $ | 1,710.3 | 2.00 | % | 2.08 | % | 2.15 | % | 1.46 | % | 1.51 | % | |||||||||||||||||||||||
(a) | During 2001, the Company changed its methodology for determining the specific allowance for elements of the loan portfolio. Table 15 has been restated for 2000. Due to the Companys inability to gather historical loss data on a combined basis for 1999, the methodologies and amounts assigned to each element of the loan portfolio for that year has not been conformed. Utilizing the prior methods, the total assigned to the allocated allowance for 2000 was $1,397.3 million and the allowance available for other factors portion was $389.6 million. |
* | Information not available |
Table 16 | Summary of Allowance for Credit Losses |
(Dollars in Millions) | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||||
Balance at beginning of year
|
$ | 2,422.0 | $ | 2,457.3 | $ | 1,786.9 | $ | 1,710.3 | $ | 1,705.7 | ||||||||||||||
Charge-offs
|
||||||||||||||||||||||||
Commercial
|
||||||||||||||||||||||||
Commercial
|
555.6 | 559.2 | 779.0 | 319.8 | 250.1 | |||||||||||||||||||
Lease financing
|
139.3 | 188.8 | 144.4 | 27.9 | 12.4 | |||||||||||||||||||
Total commercial
|
694.9 | 748.0 | 923.4 | 347.7 | 262.5 | |||||||||||||||||||
Commercial real estate
|
||||||||||||||||||||||||
Commercial mortgages
|
43.9 | 40.9 | 49.5 | 15.8 | 19.1 | |||||||||||||||||||
Construction and development
|
13.0 | 8.8 | 12.6 | 10.3 | 2.6 | |||||||||||||||||||
Total commercial real estate
|
56.9 | 49.7 | 62.1 | 26.1 | 21.7 | |||||||||||||||||||
Residential mortgages
|
30.3 | 23.1 | 15.8 | 13.7 | 16.2 | |||||||||||||||||||
Retail
|
||||||||||||||||||||||||
Credit card
|
282.1 | 304.9 | 294.1 | 235.8 | 220.2 | |||||||||||||||||||
Retail leasing
|
57.0 | 45.2 | 34.2 | 14.8 | 6.2 | |||||||||||||||||||
Home equity and second mortgages
|
105.0 | 107.9 | 112.7 | * | * | |||||||||||||||||||
Other retail
|
267.9 | 311.9 | 329.1 | 379.5 | 376.0 | |||||||||||||||||||
Total retail
|
712.0 | 769.9 | 770.1 | 630.1 | 602.4 | |||||||||||||||||||
Total charge-offs
|
1,494.1 | 1,590.7 | 1,771.4 | 1,017.6 | 902.8 | |||||||||||||||||||
Recoveries
|
||||||||||||||||||||||||
Commercial
|
||||||||||||||||||||||||
Commercial
|
70.0 | 67.4 | 60.6 | 64.0 | 84.8 | |||||||||||||||||||
Lease financing
|
55.3 | 39.9 | 30.4 | 7.2 | 4.0 | |||||||||||||||||||
Total commercial
|
125.3 | 107.3 | 91.0 | 71.2 | 88.8 | |||||||||||||||||||
Commercial real estate
|
||||||||||||||||||||||||
Commercial mortgages
|
15.8 | 9.1 | 9.1 | 10.8 | 15.1 | |||||||||||||||||||
Construction and development
|
2.0 | 1.4 | .8 | 2.6 | 1.0 | |||||||||||||||||||
Total commercial real estate
|
17.8 | 10.5 | 9.9 | 13.4 | 16.1 | |||||||||||||||||||
Residential mortgages
|
3.4 | 4.0 | 3.2 | 1.3 | 1.4 | |||||||||||||||||||
Retail
|
||||||||||||||||||||||||
Credit card
|
27.3 | 24.6 | 23.4 | 27.5 | 34.6 | |||||||||||||||||||
Retail leasing
|
7.0 | 6.3 | 4.5 | 2.0 | 1.1 | |||||||||||||||||||
Home equity and second mortgages
|
12.1 | 10.6 | 12.9 | * | * | |||||||||||||||||||
Other retail
|
49.5 | 54.4 | 80.0 | 76.8 | 88.2 | |||||||||||||||||||
Total retail
|
95.9 | 95.9 | 120.8 | 106.3 | 123.9 | |||||||||||||||||||
Total recoveries
|
242.4 | 217.7 | 224.9 | 192.2 | 230.2 | |||||||||||||||||||
Net Charge-offs
|
||||||||||||||||||||||||
Commercial
|
||||||||||||||||||||||||
Commercial
|
485.6 | 491.8 | 718.4 | 255.8 | 165.3 | |||||||||||||||||||
Lease financing
|
84.0 | 148.9 | 114.0 | 20.7 | 8.4 | |||||||||||||||||||
Total commercial
|
569.6 | 640.7 | 832.4 | 276.5 | 173.7 | |||||||||||||||||||
Commercial real estate
|
||||||||||||||||||||||||
Commercial mortgages
|
28.1 | 31.8 | 40.4 | 5.0 | 4.0 | |||||||||||||||||||
Construction and development
|
11.0 | 7.4 | 11.8 | 7.7 | 1.6 | |||||||||||||||||||
Total commercial real estate
|
39.1 | 39.2 | 52.2 | 12.7 | 5.6 | |||||||||||||||||||
Residential mortgages
|
26.9 | 19.1 | 12.6 | 12.4 | 14.8 | |||||||||||||||||||
Retail
|
||||||||||||||||||||||||
Credit card
|
254.8 | 280.3 | 270.7 | 208.3 | 185.6 | |||||||||||||||||||
Retail leasing
|
50.0 | 38.9 | 29.7 | 12.8 | 5.1 | |||||||||||||||||||
Home equity and second mortgages
|
92.9 | 97.3 | 99.8 | * | * | |||||||||||||||||||
Other retail
|
218.4 | 257.5 | 249.1 | 302.7 | 287.8 | |||||||||||||||||||
Total retail
|
616.1 | 674.0 | 649.3 | 523.8 | 478.5 | |||||||||||||||||||
Total net charge-offs
|
1,251.7 | 1,373.0 | 1,546.5 | 825.4 | 672.6 | |||||||||||||||||||
Provision for credit losses
|
1,254.0 | 1,349.0 | 2,528.8 | 828.0 | 646.0 | |||||||||||||||||||
Losses from loan sales/transfers (a)
|
| | (329.3 | ) | | | ||||||||||||||||||
Acquisitions and other changes
|
(55.7 | ) | (11.3 | ) | 17.4 | 74.0 | 31.2 | |||||||||||||||||
Balance at end of year
|
$ | 2,368.6 | $ | 2,422.0 | $ | 2,457.3 | $ | 1,786.9 | $ | 1,710.3 | ||||||||||||||
Allowance as a percent of
|
||||||||||||||||||||||||
Period-end loans
|
2.00 | % | 2.08 | % | 2.15 | % | 1.46 | % | 1.51 | % | ||||||||||||||
Nonperforming loans
|
232 | 196 | 245 | 233 | 329 | |||||||||||||||||||
Nonperforming assets
|
206 | 176 | 219 | 206 | 291 | |||||||||||||||||||
Net charge-offs (a)
|
189 | 176 | 159 | 216 | 254 | |||||||||||||||||||
(a) | In accordance with guidance provided in the Interagency Guidance on Certain Loans Held for Sale, loans held with the intent to sell are transferred to the Loans Held for Sale category based on the lower of cost or fair value. At the time of the transfer, the portion of the mark-to-market losses representing probable credit losses determined in accordance with policies and methods utilized to determine the allowance for credit losses is included in net charge-offs. The remaining portion of the losses was reported separately as a reduction of the allowance for credit losses under Losses from loan sales/ transfers. Had the entire amount of the loss been reported as charge-offs, total net charge-offs would have been $1,875.8 million for the year ended 2001. Additionally, the allowance as a percent of net charge-offs would have been 131 percent for the year ended December 31, 2001. |
* | Information not available |
Residual Risk Management The Company manages its risk to changes in the value of lease residual assets through disciplined residual valuation setting at the inception of a lease, diversification of its leased assets, regular asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. Commercial lease originations are subject to the same well-defined underwriting standards referred to in the Credit Risk Management section which includes an evaluation of the residual risk. Retail lease residual risk is mitigated further by originating longer-term vehicle leases and effective end-of-term marketing of off-lease vehicles. Also, to reduce the financial risk of potential changes in vehicle residual values, the Company maintains residual value insurance. The catastrophic insurance maintained by the Company provides for the potential recovery of losses on individual vehicle sales in an amount equal to the difference between: (a) 105 percent or 110 percent of the average wholesale auction price for the vehicle at the time of sale and (b) the vehicle residual value specified by the Automotive Lease Guide (an authoritative industry source) at the inception of the lease. The potential recovery is calculated for each individual vehicle sold in a particular policy year and is reduced by any gains realized on vehicles sold during the same period. The Company will receive claim proceeds if, in the aggregate, there is a net loss for such period. To reduce the risk associated with collecting insurance claims, the Company monitors the financial viability of the insurance carrier based on insurance industry ratings and available financial information.
Operational Risk Management Operational risk represents the risk of loss resulting from the Companys operations, including, but not limited to, the risk of fraud by employees or persons outside the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the internal control system and compliance requirements and business continuation and disaster recovery. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity.
Interest Rate Risk Management In the banking industry, a significant risk exists related to changes in interest rates. To minimize the volatility of net interest income and of the market value of assets and liabilities, the Company manages its exposure to changes in interest rates through asset and liability management activities within guidelines established by its Asset Liability Policy Committee (ALPC) and approved by the Board of Directors. ALPC has the responsibility for approving and ensuring compliance with ALPC management policies, including interest rate risk exposure. The Company uses Net Interest Income Simulation Analysis and Market Value of Equity Modeling for measuring and analyzing consolidated interest rate risk.
Net Interest Income Simulation Analysis One of the primary tools used to measure interest rate risk and the effect of interest rate changes on rate sensitive income and net interest income is simulation analysis. The monthly analysis incorporates substantially all of the Companys assets and liabilities and off-balance sheet instruments, together with forecasted changes in the balance sheet and assumptions that reflect the current interest rate environment. Through these simulations, management estimates the impact on interest rate sensitive income of a 300 basis point upward or downward gradual change of market interest rates over a one-year period. The simulations also estimate the effect of immediate and sustained parallel shifts in the yield curve of 50 basis points as well as the effect of immediate and sustained flattening or steepening of the yield curve. These simulations include assumptions about how the balance sheet is likely to be affected by changes in loan and deposit growth. Assumptions are made to project interest rates for new loans and deposits based on historical analysis, managements outlook and repricing strategies. These assumptions are validated on a periodic basis. A sensitivity analysis is provided for key variables of the simulation. The results are reviewed by ALPC monthly and are used to
Sensitivity of Net Interest Income and Rate Sensitive Income:
December 31, 2003 | December 31, 2002 | |||||||||||||||||||||||||||||||
Down 50 | Up 50 | Down 300 | Up 300 | Down 50 | Up 50 | Down 300 | Up 300 | |||||||||||||||||||||||||
Immediate | Immediate | Gradual | Gradual | Immediate | Immediate | Gradual | Gradual | |||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Net interest income
|
1.30 | % | .19% | * | % | (.02 | )% | .08 | % | (.34 | )% | * | % | (1.91 | )% | |||||||||||||||||
Rate sensitive income
|
.74 | % | .01% | * | % | (.54 | )% | .20 | % | (.55 | )% | * | % | (2.57 | )% | |||||||||||||||||
* | Given the current level of interest rates, a downward 300 basis point scenario can not be computed. |
Market Value of Equity Modeling The Company also utilizes the market value of equity as a measurement tool in managing interest rate sensitivity. The market value of equity measures the degree to which the market values of the Companys assets and liabilities and off-balance sheet instruments will change given a change in interest rates. ALPC guidelines limit the change in market value of equity in a 200 basis point parallel rate shock to 15 percent of the market value of equity assuming interest rates at December 31, 2003. Given the low level of current interest rates, the down 200 basis point scenario cannot be computed. The up 200 basis point scenario resulted in a 3.1 percent decrease in the market value of equity at December 31, 2003, compared with a 2.5 percent decrease at December 31, 2002. ALPC reviews other down rate scenarios to evaluate the impact of falling interest rates. The down 100 basis point scenario resulted in a 1.3 percent increase at December 31, 2003, and a 1.0 percent decrease at December 31, 2002. At December 31, 2003 and 2002, the Company was within its policy guidelines.
Use of Derivatives to Manage Interest Rate Risk In the ordinary course of business, the Company enters into derivative transactions to manage its interest rate and prepayment risk (asset and liability management positions) and to accommodate the business requirements of its customers (customer-related positions). To manage its interest rate risk, the Company may enter into interest rate swap agreements and interest rate options such as caps and floors. Interest rate swaps involve the exchange of fixed-rate and variable-rate payments without the exchange of the underlying notional amount on which the interest payments are calculated. Interest rate caps protect against rising interest rates while interest rate floors protect against declining interest rates. In connection with its mortgage banking operations, the Company enters into forward commitments to sell mortgage loans related to fixed-rate mortgage loans held for sale and fixed-rate mortgage loan commitments. The Company also acts as a seller and buyer of interest rate contracts and foreign exchange rate contracts on behalf of customers. The Company minimizes its market and liquidity risks by taking similar offsetting positions.
Table 17 | Derivative Positions |
Asset and Liability Management Positions
Weighted- | |||||||||||||||||||||||||||||||||||||||
Maturing | Average | ||||||||||||||||||||||||||||||||||||||
Remaining | |||||||||||||||||||||||||||||||||||||||
December 31, 2003 | Fair | Maturity | |||||||||||||||||||||||||||||||||||||
(Dollars in Millions) | 2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | Total | Value | In Years | ||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||
Interest rate contracts
|
|||||||||||||||||||||||||||||||||||||||
Receive fixed/pay floating swaps
|
|||||||||||||||||||||||||||||||||||||||
Notional amount
|
$ | 13,073 | $ | | $ | 500 | $ | 1,720 | $ | 3,750 | $ | 4,150 | $ | 23,193 | $ | 691 | 4.17 | ||||||||||||||||||||||
Weighted-average
|
|||||||||||||||||||||||||||||||||||||||
Receive rate
|
4.22 | % | |