2 0 0 3 A N N U A L R E P O R T A N D F O R M 10 - K
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 uarantee.
S A CORP AT A LA CE
Ranking
Asset size
Deposits
Loans
8th largest bank in the U.S.
189 billion
119 billion
118 billion
Earnings per share diluted
1.93
Return on average assets
Return on average equity
Tangible common equity
Efficiency ratio
Customers
1.99
19.2
6.5
45.6
11.6 million
Primary banking region
24 states
Bank branches
ATMs
NYSE
At year-end 2003
2,243
4,425
USB
2
3
4
5
6
8
10
12
14
16
Graphs of Selected Financial Highlights pg. 2
3
3
0
0
2
2
0
0
t a b l e o f
c o n t e n t s
Financial Summary pg. 3
Letter to Shareholders pg. 4
Corporate Governance pg. 5
Service Excellence pg. 6
Lines of Business pg. 8
Investing in Distribution and Scale pg. 10
Attractive Business Mix pg. 12
High-Value National Businesses pg. 14
Community Partnerships pg. 16
f i n a n c i a l
s e c t i o n
Management’s 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
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
Net Income (Dollars in Millions)
03
3,732.6
02
3,168.1
01
1,478.8
00
99
2,752.1
2,240.4
Diluted Earnings
Per Common Share (In Dollars)
03
1.93
Dividends Declared
Per Common Share (a) (In Dollars)
.855
03
02
01
00
99
1.65
.76
1.43
1.16
02
01
00
99
.780
.750
.650
.460
Return on
Average Assets (In Percents)
03
1.99
Return on
Average Equity (In Percents)
03
02
01
00
99
.89
1.84
1.74
1.49
02
01
00
99
19.2
18.3
9.0
19.0
16.9
Dividend Payout Ratio (In Percents)
03
44.1
02
01
00
99
47.3
45.1
39.3
97.4
Net Interest Margin
(Taxable-Equivalent Basis) (In Percents)
03
4.49
Efficiency Ratio (b) (In Percents)
03
45.6
Tangible Common
Equity to Assets (In Percents)
03
6.5
02
01
00
99
4.65
4.46
4.38
4.43
02
01
00
99
48.8
57.2
49.7
54.7
02
01
00
99
*
Average Assets (Dollars In Millions)
03
187,630
Average Shareholders’
Equity (Dollars In Millions)
03
19,393
Average Equity to
Average Assets (In Percents)
03
02
01
00
99
171,948
165,944
158,481
150,167
02
01
00
99
17,273
16,426
14,499
13,273
02
01
00
99
*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.
5.7
5.9
6.4
10.3
10.0
9.9
9.1
8.8
f i n a n c i a l
s u m m a r y
Year Ended December 31
(Dollars and Shares in Millions, Except Per Share Data)
2003
2002
2001
Total net revenue (taxable-equivalent basis)
Noninterest expense
Provision for credit losses
Income taxes and taxable-equivalent adjustments
Income from continuing operations
Discontinued operations (after-tax)
Cumulative effect of accounting change (after-tax)
Net income
Per Common Share
Earnings per share from continuing operations
Diluted earnings per share from continuing operations
Earnings per share
Diluted earnings per share
Dividends declared per share
Book value per share
Market value per share
Average shares outstanding
Average diluted shares outstanding
Financial Ratios
Return on average assets
Return on average equity
Net interest margin (taxable-equivalent basis)
Efficiency ratio
Average Balances
Loans
Investment securities
Earning assets
Assets
Deposits
Total shareholders’ equity
Period End Balances
Loans
Allowance for credit losses
Investment securities
Assets
Deposits
Total shareholders’ equity
Regulatory capital ratios
Tangible common equity
Tier 1 capital
Total risk-based capital
Leverage
$12,530.5
5,596.9
1,254.0
1,969.5
$ 3,710.1
22.5
–
$ 3,732.6
$
1.93
1.92
1.94
1.93
.855
10.01
29.78
1,923.7
1,936.2
$12,057.9
5,740.5
1,349.0
1,740.4
$ 3,228.0
(22.7)
(37.2)
$ 3,168.1
$
1.68
1.68
1.65
1.65
.780
9.62
21.22
1,916.0
1,924.8
$11,074.6
6,149.0
2,528.8
872.8
$ 1,524.0
(45.2)
–
$ 1,478.8
$
.79
.79
.77
.76
.750
8.58
20.93
1,927.9
1,940.3
%
1.99
19.2
4.49
45.6
%
1.84
18.3
4.65
48.8
%
.89
9.0
4.46
57.2
$ 118,362
37,248
160,808
187,630
116,553
19,393
$ 118,235
2,369
43,334
189,286
119,052
19,242
$ 114,453
28,829
147,410
171,948
105,124
17,273
$ 116,251
2,422
28,488
180,027
115,534
18,436
$ 118,177
21,916
143,501
165,944
104,956
16,426
$ 114,405
2,457
26,608
171,390
105,219
16,745
%
6.5
9.1
13.6
8.0
%
5.7
8.0
12.4
7.7
%
5.9
7.8
11.9
7.9
2003
v 2002
3.9%
(2.5)
2002
v 2001
8.9%
(6.6)
14.9
111.8
17.8
114.2
14.9%
14.3
17.6
17.0
9.6
4.1
40.3
.4
.6
3.4%
29.2
9.1
9.1
10.9
12.3
1.7%
(2.2)
52.1
5.1
3.0
4.4
112.7%
112.7
114.3
117.1
4.0
12.1
1.4
(.6)
(.8)
(3.2)%
31.5
2.7
3.6
.2
5.2
1.6%
(1.4)
7.1
5.0
9.8
10.1
Forward-Looking Statements This Annual Report and Form 10-K contains forward-looking statements. Statements that are not historical or current facts, including statements about beliefs and expectations, are
forward-looking statements. These statements often include the words “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,”
“outlook” or similar expressions. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future prospects of U.S. Bancorp. Forward-looking statements involve
inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including the following, in addition to those contained in U.S. Bancorp’s reports on file with the
SEC: (i) general economic or industry conditions could be less favorable than expected, resulting in a deterioration in credit quality, a change in the allowance for credit losses, or a reduced demand for credit or fee-based
products and services; (ii) changes in the domestic interest rate environment could reduce net interest income and could increase credit losses; (iii) inflation, changes in securities market conditions and monetary
fluctuations could adversely affect the value or credit quality of our assets, or the availability and terms of funding necessary to meet our liquidity needs; (iv) changes in the extensive laws, regulations and policies
governing financial services companies could alter our business environment or affect operations; (v) the potential need to adapt to industry changes in information technology systems, on which we are highly dependent,
could present operational issues or require significant capital spending; (vi) competitive pressures could intensify and affect our profitability, including as a result of continued industry consolidation, the increased
availability of financial services from non-banks, technological developments or bank regulatory reform; (vii) changes in consumer spending and savings habits could adversely affect our results of operations; (viii)
changes in the financial performance and condition of our borrowers could negatively affect repayment of such borrowers’ loans; (ix) acquisitions may not produce revenue enhancements or cost savings at levels or
within time frames originally anticipated, or may result in unforeseen integration difficulties; (x) capital investments in our businesses may not produce expected growth in earnings anticipated at the time of the
expenditure; and (xi) acts or threats of terrorism, and/or political and military actions taken by the U.S. or other governments in response to acts or threats of terrorism or otherwise could adversely affect general economic
or industry conditions. Forward-looking statements speak only as of the date they are made, and U.S. Bancorp undertakes no obligation to update them in light of new information or future events.
R E C O R D E A R N I N G S ,
A N D I N D U S T R Y - L E A D I N G C A P I T A L G E N E R A T I O N R E F L E C T
T H E P O W E R O F O U R F R A N C H I S E
I N D U S T R Y - L E A D I N G P E R F O R M A N C E
“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.
(cid:157) Earnings per share increased 17.6% over 2002
(cid:127) Record net income increased 17.8% over 2002
(cid:127) Industry-leading Return on Assets of 1.99%
(cid:127) Industry-leading Return on Equity of 19.2%
(cid:127) Industry-leading Tangible Common
Equity of 6.5%
(cid:127) 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 corporation’s 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, Smith’s 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 Board’s confidence in this
corporation’s 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. It’s 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 today’s
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 today’s 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.
Management’s ownership commitment.
We understand clearly that U.S. Bancorp
shareholders are the primary beneficiaries of
management’s actions. All U.S. Bancorp executive
officers and directors own shares of company
stock, and in order to tightly align management’s
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; it’s 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
W E A R E F O C U S E D
O N D E L I V E R I N G T H E
H I G H E S T - Q U A L I T Y S E R V I C E
shareholder value. It is an environment where employees take ownership of their
business, where they are held accountable for the company’s 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 world’s 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. Bank’s
to quality service
clear commitment
is as strong
as our own and is
extremely important
to our company.
Gilbert de Cardenas
President
Cacique, Inc.
Los Angeles, CA
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
K E Y B U S I N E S S U N I T S
(cid:157)(cid:127) Commercial Banking
(cid:127) Commercial Real Estate
(cid:127) Corporate Banking
(cid:127) Correspondent Banking
(cid:127) Dealer Commercial Services
(cid:127) Equipment Leasing
(cid:127) Foreign Exchange
(cid:127) Government Banking
(cid:127) Government Banking
(cid:127)
International Banking
(cid:127) Specialized Industries
(cid:127) 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
(cid:157) 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.
(cid:127) 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.
(cid:127) 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.
(cid:127) 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.
(cid:127) 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.
Corporate Trust Services, we are
that our efforts
Working with U.S. Bank
confident
to provide housing for
the people of Washington
constant
receive the
personal attention
needed to succeed.
Kim Herman
Executive Director
Washington State Housing
Finance Commission
Seattle, WA
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.
D I V E R S I F I E D L I N E S O F B U S I N E S S
F O C U S O N C U S T O M E R S ,
D E L I V E R T O P - Q U A L I T Y P R O D U C T S A N D S E R V I C E S
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.
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
(cid:157) 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.
(cid:127) Introduced free U.S. Bank Internet Bill Pay, eliminating the monthly fee
and making online bill payment even easier for consumer checking
account customers.
(cid:127) 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.
(cid:127) 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.
(cid:127) 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.
(cid:127) 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.
(cid:127) 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.
S U C C E S S E S
(cid:127) Released AccountCommander, Voyager Fleet Systems’ newest online account
maintenance tool, to customers nationwide, marking the first phase of
Voyager’s FleetCommander Online, a web-based fuel management
program designed to provide complete, convenient online account access.
(cid:127) 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.
(cid:127) Expanded the Fastbank® ATM network through Elan Financial Services
to become the 12th largest ATM network in the nation.
(cid:127) 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.
(cid:127) Entered the health care payment segment through the MedAssist Advantage
Plan (MAP), offering a new solution for patient financing.
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 advisors 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
(cid:127) 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.
(cid:127) Expanded U.S. Bancorp Fund Services, LLC service offerings to include
private investment products, such as investment partnerships and separately
managed accounts.
(cid:127) 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.
(cid:127) 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.
(cid:127) 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.
K E Y B U S I N E S S U N I T S
(cid:127) Corporate Payment Systems
- Travel and entertainment, purchasing,
fleet, freight payment systems and
business-to-business payment
(cid:127) NOVA Information Systems, Inc.
- Merchant processing with top 3
market share
(cid:127) 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
(cid:127) Transaction Services
- ATM Banking
- Elan Financial Services, a single source
provider of transaction processing for
financial institutions nationwide
K E Y B U S I N E S S U N I T S
(cid:127) Corporate Trust Services
- Escrow
- Public Finance/Structured
Finance/Corporate Finance
- Document Custody
(cid:127)
Institutional Trust & Custody
- Retirement Plans
- Institutional Custody
- Master Trust
(cid:127) Private Client Group
- Private Banking
- Personal Trust
- Investment Management
- Financial and Estate Planning
(cid:127) U.S. Bancorp Asset Management, Inc.
- First American Funds™
- Private Asset Management
- Institutional Advisory
- Securities Lending
(cid:127) U.S. Bancorp Fund Services, LLC
- Mutual Fund Administration
and Compliance
- Transfer Agent
- Mutual Fund Accounting
- Fund Distribution
- Partnership Administration
- Offshore Trust Administration
K E Y B U S I N E S S U N I T S
(cid:157) 24-Hour Banking and Financial Sales
(cid:127) Business Equipment Finance Group
(cid:127) Community Banking
(cid:127) Consumer Lending
(cid:127) Group Sales and Student Banking
(cid:127) Home Mortgage
(cid:127)
(cid:127)
In-store and Corporate On-site Banking
Investments and Insurance
(cid:127) Metropolitan Branch Banking
(cid:127) SBA Division
(cid:127) Small Business Banking
s t r e n g t h i n n u m b e r s
(cid:157) Leading depository bank for federal,
state and municipal governments
(cid:127) Leading correspondent banking
depository for community banks
(cid:127) Top 2 agricultural lender
(cid:127) Top 6 bank-owned equipment
leasing company
(cid:127) Top 7 treasury management provider
(cid:127) Top 2 Small Business Administration
(SBA) bank lender by loan dollar volume
(cid:127) Top 3 small business lender
(cid:127) Top 4 Small Business Internet
Banking site as rated by Speer
and Associates
(cid:127) Top 3 merchant payment processor
(cid:127) #1 commercial card issuer
(cid:127) Top 2 corporate card provider
(cid:127) Top 2 fleet card provider
(cid:127) Top 2 freight payment provider
(cid:127) Top 2 bank-owned ATM network
(cid:127) Top 12 ATM network through
Fastbank, owned by Elan Financial
Services
(cid:127) Top 5 check processor
(cid:127) Top 7 U.S. credit and debit card
issuer in total sales volume
(cid:127) Top 8 worldwide credit and debit
card issuer in total sales volume
(cid:127) Processor of ATM/debit/credit
transactions for more than
21% of all banks in the U.S.
(cid:127) #1 municipal finance trustee
(cid:127) Top 5 in corporate, asset-backed
and mortgage-backed bond issues
(cid:127) Top 5 bank-affiliated U.S. mutual fund
family through First American Funds
(cid:127) Top 5 full-service, third-party
provider of mutual fund services
(cid:127) Top 6 bank provider of
recordkeeping by assets
(cid:127) Top 11 domestic bank securities
custodian
(cid:127) Private Client Group has $68.2
billion in assets under administration
(cid:127) U.S. Bancorp Asset Management
has more than $127.7 billion in
assets under management*;
ranks as the 37th largest asset
manager domiciled in the U.S.
(cid:127) First American Funds family
includes open-end funds with
assets of more than $57.6 billion*
(cid:127) A number of First American Funds
products have received notable
recognition from both third-party
rating and ranking agencies
(cid:127) #1 Retail Internet Banking site as
rated by Speer and Associates
(cid:127) #1 retail auto lessor
(cid:127) Top 3 in-store branch network
(cid:127) Top 4 branch network
(cid:127) Top 6 bank dealer indirect consumer
loan provider
(cid:127) Top 7 in ATM volume
(cid:127) Top 9 ATM processor
(cid:127) Processor of 7% of all ATM/debit
point of sale transactions in the U.S.
(cid:127) Top 9 student loan provider
(cid:127) Top 20 U.S. home mortgage lender
(cid:127) U.S. Bank Consumer Finance has
more than $6 billion in loan receivables
*Assets are as of December 31, 2003, and reflect U.S. Bancorp Asset Management, Inc., and its affiliated private asset management group within U.S. Bank
National Association. Investment products, including shares of mutual funds, are not obligations of, or guaranteed by, any bank, including U.S. Bank or any
U.S. Bancorp affiliate, nor are they insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other agency. An investment in
such products involves investment risk, including possible loss of principal. U.S. Bancorp Asset Management, Inc., serves as the investment advisor to
First American Funds. First American Funds are distributed by Quasar Distributors, LLC, an affiliate of the investment advisor.
W E A R E N O W F O C U S E D S O L E L Y O N G R O W I N G U . S . B A N C O R P
B Y L E V E R A G I N G T H E B R E A D T H A N D D E P T H O F
T H E P O W E R F U L F R A N C H I S E W E H A V E B U I L T
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 country’s 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.
Branch Banking and Specialized Services/Offices
Metropolitan Branch Banking
& Community Banking
CANADA
Commercial Banking
Consumer Banking
Corporate Banking
Payment Services
Private Client, Trust & Asset Management
U.S. Bancorp Operations and Support Centers
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 Smith’s Food & Drug Stores. Beginning with six new
Reno
Salt Lake
City
Sacramento
San
Francisco
Los
Angeles
Las Vegas
Nashville Publix branches in 2003, by the end of 2004, U.S. Bank
San Diego
Phoenix
Nashville
will have opened 15 new Smith’s 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 Development’s
business vision.
The business services offered by
U.S. Bank
allow us the
diversification
to satisfy each project’s requirements.
we need
Internet business banking
provides us with additional
convenient options, too.
Sandy Schwartz
General Manager
Millennium Development Corp.
Scottsdale, AZ
a t t r a c t i v e
b u s i n e s s m i x
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, cross-
servicing 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.
The sports, educational and cultural
programs of the Mathews-Dickey
Boys’ & Girls’ Club in St. Louis instill
“The Three R’s: Respect, Restraint &
Responsibility” within more than 40,000
deserving young men and women each
year. In 1982, President Ronald Reagan
recognized the Club’s 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 organization’s impact in
keeping more than one million youth
on the fields, in the classroom and off
the streets. We’ve 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. Bank’s
Private Client Group is
sor
a trusted advi
to our organization.
Their expert
endowment management
skills and understanding of our
invaluable asset
investment objectives are an
to our ongoing programs.
Martin L. Mathews
President, CEO & Co-Founder
Mathews-Dickey Boys’ & Girls’ Club
St. Louis, MO
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
Community Banking
In-store Banking
Insurance
Investments
Metropolitan Banking
Small Business Banking
Institutional Trust
Middle Market Banking
Private Client Group
O U R E X T E N S I V E B U S I N E S S M I X G E N E R A T E S
A S O U N D C O M B I N A T I O N O F I N T E R E S T A N D
N O N I N T E R E S T I N C O M E S T R E A M S
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.
T H E R E A C H O F O U R F R A N C H I S E E X T E N D S
F A R B E Y O N D O U R 2 4 - S T A T E
B R A N C H B A N K I N G A N D P R I M A R Y F O O T P R I N T
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
world’s 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.
U.S. Bank
Corporate Payment Systems
is a
Lockheed Martin Corporation, providing
strategic
customized
resource for
technology solutions.
National
Businesses
Asset Management
Commercial Real Estate
Consumer Lending
Corporate Banking
Corporate Payment Systems
Corporate Trust
Elan Financial Services
Equipment Financing
Fund Services
Government Banking
Institutional Custody
Mortgage Banking
NOVA Information Systems
Retail Payment Solutions
Transaction Services
Our Retail Payment Solutions business is unique among large card 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 industry’s 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 nation’s 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.
U . S . B A N C O R P H E L P S B U I L D S T R O N G , V I B R A N T C O M M U N I T I E S
T H R O U G H C H A R I T A B L E C O N T R I B U T I O N S ,
S P O N S O R S H I P S A N D V O L U N T E E R I S M
c o m m u n i t y
p a r t n e r s h i p s
Through the U.S. Bancorp
Foundation, we provide cash
contributions to non-profit
organizations for affordable
housing, economic
opportunities,
education and
artistic and cultural
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.
enrichment. Total charitable
Creating stronger communities for a stronger company.
contributions from the
U.S. Bancorp is not just part of the community — we’re a partner in all the
U.S. Bancorp Foundation
communities we serve across the country. Working with people, businesses and
topped $20 million in 2003.
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.
U.S. BANCORP FOUNDATION
2003 CHARITABLE CONTRIBUTIONS
BY PROGRAM AREA
32% Human Services and United Way
28% Economic Opportunity
17% Arts & Culture
16% Education
7% Matching Gifts
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 community’s 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 program’s 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
With the help of the
U.S. Bank
Teacher’s Edition gra
to
my students were given the tools
understand
the
courage
and the means to
science,
to use
excel.
Cynthia Welsh
Teacher
Cloquet High School
Cloquet, MN
U . S . B A N K B A C K 2 S C H O O L S
Management’s Discussion and Analysis
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
Company’s 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
Company’s results for 2003 reflect the achievement of this
objective.
The Company’s strong performance is also reflected in
our capital levels and the improving outlook by our credit
rating agencies relative to a year ago. Equity capital of the
Company has increased to 6.5 percent of tangible common
equity at December 31, 2003 from 5.7 percent at
December 31, 2002. Credit ratings assigned by various
credit rating agencies reflect the favorable rating agency
views of the direction of the Company’s credit quality, risk
management, liquidity and capital management practices
and our ability to generate earnings. Each of these factors is
considered important by management and discussed further
throughout this document.
In concert with achieving our stated financial
objectives, the Company took key steps to strategically
change the risk profile of the organization and enhance
shareholder value. The Company’s financial statements
reflect decisions by the Company to spin off Piper Jaffray
Companies (‘‘Piper Jaffray’’) and to adopt the fair value
method of accounting for stock-based compensation.
Additionally, in December 2003 we announced an
expanded share repurchase program and further increased
our cash dividend resulting in a 23.1 percent increase from
the dividend rate in the fourth quarter of 2002. The tax-
free distribution of Piper Jaffray strategically changed the
risk profile of the Company by reducing the earnings
volatility and business risks associated with investment
banking and resulted in the distribution to our shareholders
of an independent company with approximately
$880 million of market value shortly after the distribution.
18 U.S. Bancorp
In connection with the Piper Jaffray spin-off and the
change in our method of accounting for stock-based
compensation, the financial statements of the Company
have been restated for all prior periods. As such, historical
financial results related to Piper Jaffray have been
segregated and accounted for in the Company’s financial
statements as discontinued operations.
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.
In 2003, the Company had income from continuing
operations, net of tax, of $3.7 billion, or $1.92 per diluted
share, compared with $3.2 billion, or $1.68 per diluted
share, in 2002. The 14.9 percent increase in income from
continuing operations was primarily due to growth in net
revenue, lower expenses and decreased credit costs. Net
income from continuing operations included after-tax
merger and restructuring-related items of $30.4 million
($46.2 million on a pre-tax basis), compared with after-tax
merger and restructuring-related items of $209.3 million
($321.2 million on a pre-tax basis) in 2002. The
$275.0 million decline in pre-tax merger and restructuring-
related charges was primarily due to the completion of
integration activities associated with the merger of Firstar
Corporation and the former U.S. Bancorp of Minneapolis
(‘‘USBM’’) at the end of 2002. Partially offsetting this
favorable item in 2003 was a year-over-year decrease of
$55.1 million in net securities gains realized in 2002, and a
year-over-year increase in the level of mortgage servicing
rights (‘‘MSRs’’) impairment of $22.6 million, driven by
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.
Total net revenue, on a taxable-equivalent basis, was
$12.5 billion in 2003, compared with $12.1 billion in 2002,
a year-over-year increase of $472.6 million (3.9 percent).
This growth was primarily due to organic growth of
3.7 percent and the benefit of acquisitions, offset somewhat
by lower gains from asset sales. Revenue growth was
comprised of a 5.4 percent increase in net interest income
and a 2.0 percent net increase in noninterest income. The
Table 1
Selected Financial Data
Year Ended December 31
(Dollars and Shares in Millions, Except Per Share Data)
Condensed Income Statement
Net interest income (taxable-equivalent basis) (a) *************
Noninterest income ***************************************
Securities gains, net **************************************
Total net revenue **************************************
Noninterest expense **************************************
Provision for credit losses**********************************
Income from continuing operations before taxes ***********
Taxable-equivalent adjustment ******************************
Applicable income taxes ***********************************
Income from continuing operations **********************
Discontinued operations (after-tax) **************************
Cumulative effect of accounting change (after-tax) ************
Net income *******************************************
Per Common Share
Earnings per share from continuing operations ***************
Diluted earnings per share from continuing operations ********
Earnings per share****************************************
Diluted earnings per share *********************************
Dividends declared per share (b) ***************************
Book value per share *************************************
Market value per share ************************************
Average shares outstanding ********************************
Average diluted shares outstanding *************************
Financial Ratios
Return on average assets *********************************
Return on average equity **********************************
Net interest margin (taxable-equivalent basis) ****************
Efficiency ratio (c) *****************************************
Average Balances
Loans ***************************************************
Loans held for sale ***************************************
Investment securities **************************************
Earning assets *******************************************
Assets ***************************************************
Noninterest-bearing deposits *******************************
Deposits *************************************************
Short-term borrowings *************************************
Long-term debt *******************************************
Total shareholders’ equity **********************************
Period End Balances
Loans ***************************************************
Allowance for credit losses *********************************
Investment securities **************************************
Assets ***************************************************
Deposits *************************************************
Long-term debt *******************************************
Total shareholders’ equity **********************************
Regulatory capital ratios
Tangible common equity ********************************
Tier 1 capital ******************************************
Total risk-based capital *********************************
Leverage *********************************************
2003
2002
2001
2000
1999
$ 7,217.5
5,068.2
244.8
12,530.5
5,596.9
1,254.0
5,679.6
28.2
1,941.3
3,710.1
22.5
—
$ 6,847.2
4,910.8
299.9
12,057.9
5,740.5
1,349.0
4,968.4
32.9
1,707.5
3,228.0
(22.7)
(37.2)
$ 6,405.2
4,340.3
329.1
11,074.6
6,149.0
2,528.8
2,396.8
54.5
818.3
1,524.0
(45.2)
—
$ 6,072.4
3,958.9
8.1
10,039.4
4,982.9
828.0
4,228.5
82.0
1,422.0
2,724.5
27.6
—
$ 5,875.7
3,501.9
13.2
9,390.8
5,131.8
646.0
3,613.0
94.2
1,296.3
2,222.5
17.9
—
$ 3,732.6
$ 3,168.1
$ 1,478.8
$ 2,752.1
$ 2,240.4
$
1.93
1.92
1.94
1.93
.855
10.01
29.78
1,923.7
1,936.2
$
1.68
1.68
1.65
1.65
.780
9.62
21.22
1,916.0
1,924.8
$
.79
.79
.77
.76
.750
8.58
20.93
1,927.9
1,940.3
$
1.43
1.42
1.44
1.43
.650
8.06
23.25
1,906.0
1,918.5
$
1.16
1.15
1.17
1.16
.460
7.29
21.13
1,907.8
1,930.0
1.99%
19.2
4.49
45.6
1.84%
18.3
4.65
48.8
.89%
9.0
4.46
57.2
1.74%
19.0
4.38
49.7
1.49%
16.9
4.43
54.7
$118,362
3,616
37,248
160,808
187,630
31,715
116,553
10,503
30,965
19,393
$118,235
2,369
43,334
189,286
119,052
31,215
19,242
$114,453
2,644
28,829
147,410
171,948
28,715
105,124
10,116
29,268
17,273
$116,251
2,422
28,488
180,027
115,534
28,588
18,436
$118,177
1,911
21,916
143,501
165,944
25,109
104,956
11,679
24,133
16,426
$114,405
2,457
26,608
171,390
105,219
25,716
16,745
$118,317
1,303
17,311
138,636
158,481
23,820
103,426
11,008
21,916
14,499
$122,365
1,787
17,642
164,921
109,535
21,876
15,333
$109,638
1,450
19,271
132,685
150,167
23,556
99,920
10,883
19,873
13,273
$113,229
1,710
17,449
154,318
103,417
21,027
14,051
6.5%
9.1
13.6
8.0
5.7%
8.0
12.4
7.7
5.9%
7.8
11.9
7.9
6.4%
7.3
10.7
7.5
*%
7.4
11.1
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.
U.S. Bancorp 19
5.4 percent increase in net interest income resulted from an
increase of $13.4 billion (9.1 percent) in average earning
assets, primarily driven by increases in investment securities,
residential mortgages, retail loans and loans held for sale,
partially offset by an overall decline in commercial loans.
The impact of the increase in average earning assets was
offset in part by a lower net interest margin given the
current interest rate environment. The net interest margin in
2003 was 4.49 percent, compared with 4.65 percent in
2002. The decline reflected the change in asset mix among
loan products, reinvestment of loan proceeds into lower-
yielding investment securities and a reduction in the
marginal benefit of net free funds due to lower average
interest rates. The 2.0 percent net increase in noninterest
income was driven by increases in payment services revenue,
trust and investment management fees, deposit service
charges, treasury management fees, mortgage banking
activity, strong investment product sales and the impact of
acquisitions. Somewhat offsetting the growth in these fee-
based revenues was a year-over-year decline in net securities
gains of $55.1 million. Additionally, other revenues for
2002 included $67.4 million of gains related to the sales of
two co-branded credit card portfolios. Approximately
$194.6 million of the increase in net revenue in 2003,
compared with 2002, was due to acquisitions, including
The Leader Mortgage Company, LLC (‘‘Leader’’), the
57 branches of Bay View Bank (‘‘Bay View’’) in northern
California and the corporate trust business of State Street
Bank and Trust Company (‘‘State Street Corporate Trust’’).
Total noninterest expense was $5.6 billion in 2003,
compared with $5.7 billion in 2002. The decrease in total
noninterest expense of $143.6 million (2.5 percent)
primarily reflected a year-over-year reduction in merger and
restructuring-related charges of $275.0 million and cost
savings related to integration efforts. Partially offsetting this
decrease in expense during 2003 was a year-over-year
increase of $22.6 million in MSR impairments coupled with
the net impact of acquisitions, which accounted for
approximately $124.9 million of the expense growth in
2003. Refer to ‘‘Acquisition and Divestiture Activity’’ and
‘‘Merger and Restructuring-related Items’’ for further
information on the timing of acquisitions and discussion of
merger and restructuring-related items. The efficiency ratio
(the ratio of noninterest expense to taxable-equivalent net
revenue excluding net securities gains or losses) was
45.6 percent in 2003, compared with 48.8 percent in 2002.
The favorable change in the efficiency ratio reflects the
continuing improvement in the Company’s operating
leverage resulting from integrated operating systems across
all of our markets and business lines. In 2003, all business
and system integration activities were completed including
systems for our merchant processing business, Nova
Information Systems, Inc., and the recent acquisitions of the
corporate trust business of State Street Bank and Trust
Company and the 57 branches of Bay View Bank. The
Company anticipates no merger and restructuring-related
charges in 2004 relating to completed acquisitions.
The provision for credit losses was $1,254.0 million for
2003, compared with $1,349.0 million for 2002, a decrease
of $95.0 million (7.0 percent). Net charge-offs during 2003
were $1,251.7 million, compared with net charge-offs of
$1,373.0 million during 2002. The decline in net charge-
offs reflects an improving economy and the Company’s
ongoing efforts to reduce the overall credit risk profile of
the organization over the past three years. Refer to
‘‘Corporate Risk Profile’’ for further information on the
provision for credit losses, net charge-offs, nonperforming
assets and factors considered by the Company in assessing
the credit quality of the loan portfolio and establishing the
allowance for credit losses.
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 Company’s 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.
The following acquisition transactions were accounted
for as purchases from the date of completion. On
December 31, 2002, the Company acquired the corporate
trust business of State Street Corporate Trust in a cash
transaction valued at $725 million. State Street Corporate
Trust was a leading provider, particularly in the Northeast,
of corporate trust and agency services to a variety of
municipalities, corporations, government agencies and other
financial institutions serving approximately 20,000 client
issuances representing over $689 billion of assets under
administration. With this acquisition, the Company is
among the nation’s leading providers of a full range of
corporate trust products and services. The transaction
represented total assets acquired of $682 million and total
liabilities of $39 million at the closing date. Included in
total assets were contract and other intangibles with a fair
value of $218 million and the excess of purchase price over
the fair value of identifiable net assets (‘‘goodwill’’) of
20 U.S. Bancorp
$449 million. The goodwill reflected the strategic value of
the combined organization’s leadership position in the
corporate trust business and processing economies of scale
resulting from the transaction. As part of the purchase
price, $75 million was placed in escrow for up to eighteen
months with payment contingent on the successful
transition of business relationships.
On November 1, 2002, the Company acquired 57
branches and a related operations facility in northern
California from Bay View, a wholly-owned subsidiary of
Bay View Capital Corporation, in a cash transaction. The
transaction represented total assets acquired of $853 million
and total liabilities assumed (primarily retail and small
business deposits) of $3.3 billion. Included in total assets
were approximately $336 million of select loans primarily
with depository relationships, core deposit intangibles of
$56 million and goodwill of $427 million. The goodwill
reflected the strategic value of expanding the Company’s
market within the San Francisco Bay area.
On April 1, 2002, the Company acquired Cleveland-
based Leader, a wholly-owned subsidiary of First Defiance
Financial Corp., in a cash transaction. The transaction
represented total assets acquired of $531 million and total
liabilities assumed of $446 million. Included in total assets
were mortgage servicing rights and other intangibles of
$173 million and goodwill of $18 million. Leader
specializes in acquiring servicing of loans originated for
state and local housing authorities.
The following acquisitions were completed during the
year 2001. On September 7, 2001, the Company acquired
Pacific Century Bank (‘‘Pacific Century’’), which had 20
Table 2
Analysis of Net Interest Income
branches located in southern California and total assets of
$570 million. On July 24, 2001, the Company acquired
NOVA Corporation (‘‘NOVA’’), a merchant processor,
which had total assets of $2.9 billion.
Refer to Notes 3, 4 and 5 of the Notes to Consolidated
Financial Statements for additional information regarding
discontinued operations, business combinations and merger
and restructuring-related items.
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 Company’s 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
(Dollars in Millions)
2003
2002
2001
Components of net interest income
Income on earning assets (taxable-equivalent basis) (a)
Expense on interest-bearing liabilities *****************
$ 9,286.2
2,068.7
$ 9,526.8
2,679.6
$11,000.9
4,595.7
Net interest income (taxable-equivalent basis)*************
$ 7,217.5
$ 6,847.2
$ 6,405.2
Net interest income, as reported ************************
$ 7,189.3
$ 6,814.3
$ 6,350.7
2003
v 2002
2002
v 2001
$ (240.6)
(610.9)
$ 370.3
$ 375.0
$(1,474.1)
(1,916.1)
$
$
442.0
463.6
Average yields and rates paid
Earning assets yield (taxable-equivalent basis)*********
Rate paid on interest-bearing liabilities ****************
Gross interest margin (taxable-equivalent basis)***********
Net interest margin (taxable-equivalent basis) *************
Average balances
5.77%
1.60
4.17%
4.49%
6.46%
2.26
4.20%
4.65%
7.67%
3.91
3.76%
4.46%
(.69)%
(.66)
(.03)%
(.16)%
(1.21)%
(1.65)
.44%
.19%
Investment securities********************************
Loans *********************************************
Earning assets *************************************
Interest-bearing liabilities ****************************
Net free funds (b) **********************************
$ 37,248
118,362
160,808
129,004
31,804
$ 28,829
114,453
147,410
118,697
28,713
$ 21,916
118,177
143,501
117,614
25,887
$ 8,419
3,909
13,398
10,307
3,091
$
6,913
(3,724)
3,909
1,083
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.
U.S. Bancorp 21
growth in lower-yielding investment securities as a percent
of total earning assets, changes in loan mix and a decline in
the margin benefit from net free funds due to lower average
interest rates. In addition, the net interest margin declined
year-over-year as a result of consolidating high credit
quality, low margin loans from Stellar Funding Group, Inc.,
a commercial loan conduit, onto the Company’s balance
sheet in mid-2003.
Total average loans of $118.4 billion in 2003 were
$3.9 billion (3.4 percent) higher, compared with 2002,
reflecting growth in average residential mortgages, retail
loans and commercial real estate loans of $3.3 billion (39.0
percent), $1.7 billion (4.6 percent) and $1.4 billion
(5.5 percent), respectively. Growth in these categories was
offset somewhat by an overall decline in average
commercial loans of $2.5 billion (5.7 percent). The decline
in commercial loans was primarily driven by softness in
commercial loan demand, modestly offset by the
consolidation of loans from Stellar Funding Group, Inc. in
mid-2003. Despite recent economic growth, the Company
anticipates that commercial loan demand will continue to
be soft in early 2004 while business customers utilize
liquidity in deposit accounts to fund business activities.
Average investment securities were $8.4 billion
(29.2 percent) higher in 2003, compared with 2002,
reflecting the reinvestment of proceeds from loan sales,
declining commercial loan balances and deposits assumed in
connection with the Bay View transaction. During 2003, the
Company sold $15.3 billion of fixed-rate securities classified
as available-for-sale as part of the Company’s interest rate
risk management practices. During early 2003, sales of
fixed-rate securities offset much of the economic impact of
changes in MSR valuations. During the course of 2003, the
Company began repositioning the investment portfolio by
reinvesting proceeds from the sale of fixed-rate securities
into floating-rate instruments.
Average interest-bearing deposits of $84.8 billion in
2003 were higher by $8.4 billion (11.0 percent), compared
with 2002. Approximately $3.0 billion of the year-over-year
increase in average interest-bearing deposits was due to
acquisitions, while the remaining growth was driven by
increases in savings balances. The increase in savings
balances reflected product initiatives, increasing government
banking deposits and customer decisions to maintain
liquidity. The Company anticipates that the growth in
Table 3
Net Interest Income — Changes Due to Rate and Volume (a)
(Dollars in Millions)
Increase (decrease) in
Interest income
Investment securities*****************
Loans held for sale ******************
Commercial loans *******************
Commercial real estate***************
Residential mortgages ***************
Retail loans *************************
Total loans***********************
Other earning assets*****************
Total ****************************
Interest expense
Interest checking ********************
Money market accounts **************
Savings accounts ********************
Time certificates of deposit less than
$100,000 ************************
Time deposits greater than $100,000 **
Total interest-bearing deposits *****
Short-term borrowings****************
Long-term debt **********************
Company-obligated mandatorily
redeemable preferred securities ****
Total ****************************
Increase (decrease) in net interest
income ***************************
2003 v 2002
2002 v 2001
Volume
Yield/Rate
Total
Volume
Yield/Rate
Total
$ 428.4
62.7
(149.0)
90.2
232.5
134.9
308.6
6.4
806.1
22.6
87.7
3.5
(146.3)
26.3
(6.2)
8.5
48.4
(9.7)
41.0
$ (235.2)
(31.1)
(157.8)
(141.9)
(114.4)
(363.9)
(778.0)
(2.4)
(1,046.7)
(40.6)
(82.8)
(7.4)
(146.2)
(105.5)
(382.5)
(64.6)
(181.0)
(23.8)
(651.9)
$ 193.2
31.6
(306.8)
(51.7)
118.1
(229.0)
(469.4)
4.0
(240.6)
(18.0)
4.9
(3.9)
(292.5)
(79.2)
(388.7)
(56.1)
(132.6)
(33.5)
(610.9)
$ 403.7
56.4
(451.0)
(27.5)
(12.6)
288.2
(202.9)
(.8)
256.4
24.4
8.7
3.3
(215.2)
(83.1)
(261.9)
(63.6)
247.5
62.1
(15.9)
$ (235.2)
(32.7)
(536.1)
(338.9)
(50.3)
(543.6)
(1,468.9)
6.3
$
168.5
23.7
(987.1)
(366.4)
(62.9)
(255.4)
(1,671.8)
5.5
(1,730.5)
(1,474.1)
(125.7)
(406.9)
(20.7)
(282.8)
(244.8)
(1,080.9)
(189.1)
(576.9)
(101.3)
(398.2)
(17.4)
(498.0)
(327.9)
(1,342.8)
(252.7)
(329.4)
(53.3)
8.8
(1,900.2)
(1,916.1)
$ 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.
22 U.S. Bancorp
interest-bearing deposits will moderate in 2004 as the
economy continues to expand.
Average net free funds increased $3.1 billion from a
year ago, including an increase in average noninterest-
bearing deposits of $3.0 billion (10.4 percent) in 2003,
compared with 2002. The increase in noninterest-bearing
deposits was primarily due to mortgage banking activities
during early 2003 and higher liquidity among corporate
customers maintained in demand deposit balances year-
over-year.
The increase in net interest income in 2002, compared
with 2001, was related to an improvement in the net
interest margin as well as growth in earning assets. The 19
basis point improvement in the 2002 net interest margin,
compared with 2001, reflected the funding benefits of the
declining interest rate environment, a more favorable
funding mix and improving spreads due to product
repricing dynamics, growth in net free funds and a shift in
mix toward retail loans, partially offset by lower yields on
the investment portfolio. The $3.9 billion (2.7 percent)
increase in average earning assets for 2002, compared with
2001, was primarily driven by increases in the investment
portfolio and retail loan growth, partially offset by a decline
in commercial and commercial real estate loans. The
$3.7 billion decrease in total average loans for 2002,
compared with 2001, reflected strong growth in average
retail loans of $3.1 billion which was more than offset by
an overall decline in average commercial and commercial
real estate loans of $6.6 billion. Average investment
securities were $6.9 billion (31.5 percent) higher in 2002,
compared with 2001, reflecting reinvestment of proceeds
from loan sales, declines in commercial and commercial real
estate loan balances and growth in deposits. Average
interest-bearing deposits of $76.4 billion in 2002 were
lower by $3.4 billion, compared with 2001. Growth in
average savings products (5.4 percent) for 2002 was more
than offset by reductions in the average balances of higher
cost time certificates of deposit (17.3 percent) and time
certificates of deposit greater than $100,000 (13.2 percent).
The decline in time certificates and time deposits greater
than $100,000 reflected funding decisions toward more
favorably priced wholesale funding sources given the rate
environment and customers’ desire to maintain liquidity.
The increase in average net free funds was driven by an
increase in average noninterest-bearing deposits of
$3.6 billion (14.4 percent) in 2002, compared with 2001.
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.
The decline in the provision for credit losses of
$95.0 million in 2003 primarily reflected an improving
credit risk profile resulting in lower nonperforming loans
and commercial and retail loan losses. The decline in
nonperforming loans and commercial loan net charge-offs
was broad-based across most industries within the
commercial loan portfolio. Retail loan delinquency ratios
have also continued to improve across most retail loan
portfolios reflecting improving economic conditions and the
Company’s ongoing collection efforts and risk management
activities. These are also the principal factors resulting in
lower levels of retail net charge-offs during the year.
The decline in the provision for credit losses of
$1,179.8 million in 2002 was primarily related to specific
credit actions taken in 2001. Included in the provision for
credit losses in 2001 was a $1,025 million incremental
provision recognized in the third quarter of 2001 and a
$160 million charge during the first quarter of 2001 in
connection with an accelerated loan workout strategy. The
third quarter of 2001 provision for credit losses was
significantly above the level anticipated earlier in that
quarter and was taken after extensive review of the
Company’s commercial loan portfolio in light of the events
of September 11, 2001, declining economic conditions, and
company-specific trends. The action reflected the Company’s
expectations, at that time, of a prolonged economic
slowdown and recovery. In addition to these actions, the
provision for credit losses in 2001 included a merger and
restructuring-related provision of $382.2 million. The
merger and restructuring-related provision consisted of a
$201.3 million provision for losses related to the disposition
of an unsecured small business product; a $90.0 million
charge to align risk management practices, align charge-off
policies and expedite the transition out of a specific segment
of the health care industry not meeting the lower risk
appetite of the combined company; a $76.6 million
provision for losses related to the sales of high loan-to-value
home equity loans and the indirect automobile loan
portfolio of USBM; and a $14.3 million charge related to
the restructuring of a co-branding credit card relationship.
Refer to Note 5 of the Notes to Consolidated Financial
Statements for further information on merger and
restructuring-related items.
Refer to ‘‘Corporate Risk Profile’’ for further
information on the provision for credit losses, net charge-
offs, nonperforming assets and other factors considered by
the Company in assessing the credit quality of the loan
portfolio and establishing the allowance for credit losses.
U.S. Bancorp 23
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.
Credit and debit card revenue, corporate payment
products revenue and ATM processing services revenue were
higher in 2003, compared with 2002, by $43.7 million
(8.5 percent), $35.6 million (10.9 percent) and $5.3 million
(3.3 percent), respectively. Although credit and debit card
revenue increased year-over-year, revenue growth was
somewhat muted due to the impact of the settlement of the
antitrust litigation brought against VISA USA and
Mastercard by Wal-Mart Stores, Inc., Sears Roebuck & Co.
and other retailers. This settlement lowered interchange
rates that can be received by members of the associations
on signature debit transactions beginning in August 2003.
In 2003, the impact of the VISA settlement was to lower
debit card revenue by $19.4 million relative to 2002. In
2004, the incremental impact will be to lower debit card
revenue by approximately $15.0 million. This change in the
interchange rate in the third quarter of 2003, in addition to
higher customer loyalty rewards expenses, however, were
more than offset by increases in transaction volumes and
Table 4
Noninterest Income
other pricing enhancements. Corporate payment products
revenue and ATM processing services revenue were higher
in 2003, primarily reflecting growth in sales and card usage
during the year. Merchant processing services revenue was
lower in 2003 by $5.9 million (1.0 percent), compared with
2002, primarily due to lower processing spreads resulting
from pricing changes that occurred in late 2002 and
changes in the mix of merchants. Merchant acquiring sales
volumes increased by 7.1 percent relative to the fourth
quarter of 2002. The Company’s mix of merchants toward
smaller retailers and specialty shops often results in a lag in
the growth of sales volumes relative to improvements
experienced at larger retailers in late 2003. Assuming
economic conditions continue to improve, management
anticipates stronger merchant processing revenue growth in
2004. The favorable variance in trust and investment
management fees in 2003 of $61.8 million (6.9 percent),
compared with 2002, was driven by the acquisition of State
Street Corporate Trust, which contributed $83.7 million in
fees during 2003. Treasury management fees grew by
$49.4 million (11.8 percent) in 2003, compared with 2002,
with the majority of the increase occurring within the
Wholesale Banking line of business. The increase in treasury
management fees during 2003 was driven by growth in
product sales, pricing enhancements and the relatively low
earnings credit rates to customers. The growth was also
driven by a change in the Federal government’s payment
methodology for treasury management services from
compensating balances, reflected in net interest income, to
fees during the third quarter of 2003. During 2003,
commercial products revenue declined $78.7 million
(16.4 percent), principally reflecting lower commercial loan
conduit servicing fees resulting, in part, from consolidating
the Stellar commercial loan conduit. Mortgage banking
revenue had a year-over-year increase of $36.9 million
(11.2 percent) during 2003, principally due to higher
(Dollars in Millions)
2003
2002
2001
Credit and debit card revenue ***************************
Corporate payment products revenue *********************
ATM processing services********************************
Merchant processing services ***************************
Trust and investment management fees*******************
Deposit service charges ********************************
Treasury management fees******************************
Commercial products revenue ***************************
Mortgage banking revenue ******************************
Investment products fees and commissions ***************
Securities gains, net ************************************
Merger and restructuring-related gains********************
Other *************************************************
Total noninterest income *****************************
$ 560.7
361.3
165.9
561.4
953.9
715.8
466.3
400.5
367.1
144.9
244.8
—
370.4
$5,313.0
$ 517.0
325.7
160.6
567.3
892.1
690.3
416.9
479.2
330.2
132.7
299.9
—
398.8
$5,210.7
$ 465.9
297.7
153.0
308.9
887.8
644.9
347.3
437.4
234.0
130.8
329.1
62.2
370.4
$4,669.4
2003
v 2002
8.5%
10.9
3.3
(1.0)
6.9
3.7
11.8
(16.4)
11.2
9.2
(18.4)
—
(7.1)
2.0%
2002
v 2001
11.0%
9.4
5.0
83.7
.5
7.0
20.0
9.6
41.1
1.5
(8.9)
*
7.7
11.6%
* Not meaningful
24 U.S. Bancorp
mortgage originations, servicing and secondary market sales
and the acquisition of Leader, which contributed
$16.5 million of the favorable variance in 2003. Investment
products fees and commissions revenue increased in 2003
by $12.2 million (9.2 percent), compared with 2002,
primarily due to increased retail brokerage activity given
more favorable equity capital market conditions relative to
2002. Deposit service charges increased in 2003 by
$25.5 million (3.7 percent), compared with 2002, primarily
due to net new growth in checking accounts and fee
enhancements principally within the Consumer Banking line
of business. Other noninterest income decreased by
$28.4 million (7.1 percent) from 2002, which included
$67.4 million of gains on the sales of two co-branded credit
card portfolios.
In 2002, noninterest income increased $541.3 million
(11.6 percent), compared with 2001. Increases resulting
from acquisitions, including NOVA, Pacific Century, Leader
and Bay View, accounted for approximately $301.3 million
of the increase in noninterest income in 2002. Partially
offsetting this favorable variance in 2002 was $62.2 million
of merger and restructuring-related gains in connection with
the sale of 14 branches representing $771 million in
deposits recognized in 2001. Refer to Note 5 of the Notes
to Consolidated Financial Statements for further
information on merger and restructuring-related items.
Credit and debit card revenue, corporate payment products
revenue and ATM processing services revenue were higher
in 2002, compared with 2001, by $51.1 million
(11.0 percent), $28.0 million (9.4 percent) and $7.6 million
(5.0 percent), respectively, primarily reflecting growth in
sales and card usage. Merchant processing services revenue
grew by $258.4 million (83.7 percent), primarily due to the
acquisition of NOVA in July 2001. Deposit service charges
increased in 2002 by $45.4 million (7.0 percent), primarily
due to fee enhancements and new account growth. Cash
Table 5
Noninterest Expense
management fees and commercial products revenue grew by
$69.6 million (20.0 percent) and $41.8 million
(9.6 percent), respectively, primarily driven by changes in
the earnings credit rates for business deposits, growth in
commercial business activities, fees related to loan conduit
activities and product enhancements. Commercial product
revenue growth was offset somewhat by lease residual
impairments in 2002. In addition to the impact of the
acquisition of Leader, the $96.2 million (41.1 percent)
increase in mortgage banking revenue was also due to
higher levels of mortgage originations and sales and loan
servicing revenue in 2002, compared with 2001. Investment
products fees and commissions revenues slightly increased in
2002, by $1.9 million (1.5 percent), compared with 2001.
Included in noninterest income were net securities gains
(losses) of $299.9 million in 2002, compared with
$329.1 million in 2001, representing a decline of
$29.2 million (8.9 percent). Other fee income was higher in
2002, compared with 2001, by $28.4 million (7.7 percent).
The change was primarily due to $67.4 million in gains
from credit card portfolio sales in 2002 and a reduction in
retail leasing residual and other asset impairments from
2001, offset somewhat by lower official check revenue
which is sensitive to changes in interest rates.
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 Company’s 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
(Dollars in Millions)
2003
2002
2001
Compensation *****************************************
Employee benefits**************************************
Net occupancy and equipment***************************
Professional services ***********************************
Marketing and business development *********************
Technology and communications *************************
Postage, printing and supplies ***************************
Goodwill **********************************************
Other intangibles ***************************************
Merger and restructuring-related charges *****************
Other *************************************************
Total noninterest expense ****************************
$2,176.8
328.4
643.7
143.4
180.3
417.4
245.6
—
682.4
46.2
732.7
$5,596.9
$2,167.5
317.5
658.7
129.7
171.4
392.1
243.2
—
553.0
321.2
786.2
$5,740.5
$2,036.6
285.5
666.6
116.4
178.0
353.9
241.9
236.7
278.4
1,044.8
710.2
$6,149.0
Efficiency ratio (a) **************************************
45.6%
48.8%
57.2%
2003
v 2002
2002
v 2001
.4%
6.4%
3.4
(2.3)
10.6
5.2
6.5
1.0
—
23.4
(85.6)
(6.8)
11.2
(1.2)
11.4
(3.7)
10.8
.5
*
98.6
(69.3)
10.7
(2.5)%
(6.6)%
* 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.
U.S. Bancorp 25
expense of $39.9 million and expenses related to recent
acquisitions. Noninterest expense related to merger and
restructuring-related charges declined by $275.0 million
(85.6 percent) in 2003, compared with 2002. The decline in
merger and restructuring-related charges was primarily due
to the completion of integration activities associated with
the merger of Firstar and USBM. During 2003, noninterest
expense included an MSR impairment of $208.7 million, a
net increase of $22.6 million, compared with 2002. The
year-over-year changes in the valuation of MSRs were
caused by fluctuations in mortgage interest rates and related
prepayment speeds due to refinancing activities. Refer to
Note 11 of the Notes to Consolidated Financial Statements
for the sensitivity of the fair value of mortgage servicing
rights to future changes in interest rates. Recent
acquisitions, including Leader, Bay View and State Street
Corporate Trust, accounted for a year-over-year increase of
$124.9 million in noninterest expense.
The decline in noninterest expense of $408.5 million
(6.6 percent) in 2002, compared with 2001, was primarily
the result of a reduction in merger and restructuring-related
costs of $723.6 million, the elimination of $236.7 million of
goodwill amortization in connection with new accounting
principles adopted in 2002 and a reduction in asset write-
downs of $52.6 million related to commercial leasing
partnerships and tractor/trailer property repossessed in
2001. Offsetting these favorable trends were higher costs
associated with acquisitions, an increase in MSR
impairments and post-integration realignment costs.
Acquisitions, including NOVA, Pacific Century, Leader and
Bay View, accounted for an increase of approximately
$317.4 million in noninterest expense during 2002,
comprised primarily of increased intangible amortization
and personnel expenses. Included in noninterest expense in
2002 was $186.1 million in MSR impairments, compared
with $60.8 million in 2001, an increase of $125.3 million.
The increase in MSR impairments was related to increasing
mortgage prepayments driven by declining interest rates.
Another significant item impacting noninterest expense in
2002 was $46.4 million of personnel and related costs for
post-integration rationalization of technology, operations
and certain support functions.
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 plan’s 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. Bancorp’s
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.
Periodic pension expense (or credits) includes service
costs, interest costs based on the assumed discount rate, the
expected return on plan assets based on an actuarially
derived market-related value and amortization of actuarial
gains and losses. The Company’s pension accounting policy
follows guidance outlined in Statement of Financial
Accounting Standards No. 87, ‘‘Employer’s Accounting for
Pension Plans’’ (‘‘SFAS 87’’), and reflects the long-term
nature of benefit obligations and the investment horizon of
plan assets. This accounting guidance has the effect of
reducing earnings volatility related to short-term changes in
interest rates and market valuations. Actuarial gains and
losses include the impact of plan amendments and various
unrecognized gains and losses which are deferred and
amortized over the future service periods of active
employees. The market-related value utilized to determine
the expected return on plan assets is based on fair value
adjusted for the difference between expected returns and
actual performance of plan assets. The unrealized difference
between actual experience and expected returns is included
in the market-related value ratably over a five-year period.
At September 30, 2003, the accumulated unrecognized loss
approximated $369 million and will ratably impact the
actuarially derived market-related value of plan assets
through 2008. The impact to pension expense of the
unrecognized asset gains or losses will incrementally
increase (decrease) pension costs in each year from 2004 to
2008, by approximately $26.5 million, $33.0 million,
$43.3 million, $10.3 million and $(7.2) million,
respectively, during that timeframe. This assumes that the
performance of plan assets equals the assumed LTROR.
Actual results will vary depending on the performance of
plan assets and changes to assumptions required in the
future. Refer to Note 1 of the Notes to Consolidated
Financial Statements for further discussion of the
Company’s accounting policies for pension plans.
In 2003, the Company recognized a pension credit of
$23.9 million compared with pension credits of
$63.8 million in 2002 and $75.3 million in 2001. The
$39.9 million increase in pension costs in 2003 was driven
by a $46.4 million reduction in the expected return on
assets and a lower discount rate utilized to determine the
projected benefit obligation given the declining rate
environment. Also, contributing to the increase in pension
costs was a one-time curtailment gain in 2002 of
$9.0 million related to a nonqualified pension plan
compared with a settlement loss of $3.5 million related to
26 U.S. Bancorp
nonqualified pension payments in 2003. Somewhat
offsetting the increase in pension costs was an expected
benefit of approximately $19.0 million associated with
lower interest costs related to cash balance accounts and
actual changes in employee demographics, such as
retirement age. In 2002, pension costs increased by
approximately $11.5 million due to a $32.5 million
reduction of expected return on plan assets, utilizing a
lower discount rate to determine the projected benefit
obligation given the declining rate environment and the
impact of changes in employee demographics. Partially
offsetting this increase was a one-time curtailment gain of
$9.0 million related to freezing certain benefits of a
nonqualified pension plan and a reduction in service costs
of $11.9 million related to changes in the pension plans at
the time of the plan mergers.
In 2004, the Company anticipates that pension costs
will increase by approximately $14.1 million. The increase
will be driven by a reduction in the discount rate and
amortization of the unrecognized losses offset by the
expected benefit of investment returns from the pension
contributions made in 2003.
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:
LTROR
Incremental benefit (cost) *****************************************************
Percent of 2003 net income***************************************************
Discount rate
Incremental benefit (cost) *****************************************************
Percent of 2003 net income***************************************************
6.9%
7.9%
$(45.8)
$(22.9)
Base
8.9%
$ —
9.9%
$22.9
10.9%
$45.8
(.76)%
(.38)%
—%
.38%
.76%
4.2%
5.2%
$(51.6)
$(27.9)
Base
6.2%
$ —
7.2%
$31.6
8.2%
$52.2
(.86)%
(.46)%
—%
.52%
.87%
Due to the complexity of forecasting pension plan
activities, the accounting method utilized for pension plans,
management’s 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.
In 2003, the Company incurred pre-tax merger and
restructuring-related charges of approximately $33.5 million
in connection with the integration of merchant processing
platforms and business processes of U.S. Bank National
Association and NOVA. In addition, the Company incurred
pre-tax merger and restructuring-related expenses in 2003
of $12.7 million primarily for systems conversion costs
associated with the Bay View and State Street Corporate
Trust transactions. The integration of these acquisitions was
completed at the end of 2003, and the Company does not
anticipate any merger or restructuring-related expenses
in 2004 relating to completed acquisitions.
At December 31, 2002, the integration of Firstar and
USBM was completed. Total merger and restructuring-
related items associated with the Firstar/USBM merger were
approximately $1.6 billion. Merger and restructuring-related
items in 2002 included $269.0 million of net expense
associated with the Firstar/USBM merger and $52.2 million
associated with NOVA and other smaller acquisitions.
Merger and restructuring-related items in 2002 associated
with the Firstar/USBM merger were primarily related to
systems conversions and integration, asset write-downs and
lease terminations recognized at the completion of
conversions. Offsetting a portion of these costs in 2002 was
an asset gain related to the sale of a non-strategic
investment in a sub-prime lending business and a mark-to-
market recovery associated with the liquidation of U.S.
Bancorp Libra’s investment portfolio. The Company exited
this business in 2001 and the liquidation efforts were
substantially completed in the second quarter of 2002.
Merger and restructuring-related items in 2001
included $382.2 million in provision for credit losses, a
$62.2 million gain on the required sale of branches and
$1,044.8 million of noninterest expense. Total merger and
restructuring-related items in 2001 consisted of
$1,327.1 million related to the Firstar/USBM merger and
$37.7 million related to NOVA and other smaller
acquisitions. With respect to the Firstar/USBM merger, the
$1,327.1 million of merger and restructuring-related items
included $238.6 million for severance and employee-related
U.S. Bancorp 27
costs and $477.6 million of charges to exit business lines
and products, sell credit portfolios or otherwise realign
business practices in the new Company. The Company also
incurred $190.5 million related to the accelerated vesting of
certain stock options and restricted stock, $207.1 million of
systems conversion and business integration costs,
$48.7 million for lease cancellation and other building-
related costs, $226.8 million for transaction costs, funding a
charitable foundation to reaffirm a commitment to its
markets and other costs, and a $62.2 million gain related to
the required sale of branches.
Refer to Notes 3 and 5 of the Notes to Consolidated
Financial Statements for further information on these
acquired businesses and merger and restructuring-related
items.
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
Table 6
Loan Portfolio Distribution
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.
The Company’s net deferred tax liability was
$1,556.4 million at December 31, 2003, compared with
$1,329.4 million for the year ended 2002. The change in
2003 primarily relates to leasing activities and a decrease in
the net unrealized appreciation on available-for-sale
securities and financial instruments. For further information
on income taxes, refer to Note 20 of the Notes to
Consolidated Financial Statements.
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,
At December 31 (Dollars in Millions)
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
2003
2002
2001
2000
1999
Commercial
Commercial ********************** $ 33,536
Lease financing ******************
4,990
28.4% $ 36,584
5,360
4.2
31.5% $ 40,472
5,858
4.6
35.4% $ 47,041
5,776
5.1
38.5% $ 42,021
3,835
4.7
37.1%
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************
Construction and development *****
20,624
6,618
Total commercial real estate ****
27,242
Residential mortgages
Residential mortgages ************
Home equity loans, first liens ******
7,332
6,125
17.4
5.6
23.0
6.2
5.2
Total residential mortgages *****
13,457
11.4
Retail
Credit card***********************
Retail leasing ********************
Home equity and second
mortgages (a)*****************
Other retail
5,933
6,029
5.0
5.1
20,325
6,542
26,867
17.5
5.6
23.1
18,765
6,608
25,373
16.4
5.8
22.2
19,466
6,977
26,443
6,446
3,300
9,746
5,665
5,680
5.6
2.8
8.4
4.9
4.9
5,746
2,083
7,829
5,889
4,906
5.0
1.8
6.8
5.1
4.3
15.9
5.7
21.6
*
*
18,636
6,506
25,142
*
*
16.5
5.7
22.2
*
*
*
*
9,397
7.7
12,760
11.3
6,012
4,153
4.9
3.4
5,004
2,123
4.4
1.9
13,210
11.2
13,572
11.6
12,235
10.7
11,956
9.7
Revolving credit ***************
Installment********************
Automobile *******************
Student **********************
2,540
2,380
7,165
1,753
Total other retail (a)*********
13,838
Total retail ********************
39,010
2.1
2.0
6.1
1.5
11.7
33.0
2,650
2,258
6,343
1,526
12,777
37,694
2.3
1.9
5.5
1.3
11.0
32.4
2,673
2,292
5,660
1,218
11,843
34,873
2.3
2.0
5.0
1.1
10.4
30.5
2,750
2,186
5,609
1,042
11,587
2.2
1.8
4.6
.9
9.5
33,708
27.5
29,471
*
*
*
*
*
22,344
*
*
*
*
*
19.7
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
28 U.S. Bancorp
residential mortgages, loans held for sale and retail loans,
partially offset by a decline in commercial loans. The
increase in average earning assets was funded with an
increase in average interest-bearing liabilities of
$10.3 billion, consisting principally of higher savings
products balances and more favorably priced longer-term
wholesale funding, and an increase in net free funds,
including an increase in average noninterest-bearing deposits
of $3.0 billion.
For average balance information, refer to Consolidated
Daily Average Balance Sheet and Related Yields and Rates
on pages 110 and 111.
Loans The Company’s 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 Company’s
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)
Consumer products and services *************************************
Capital goods ******************************************************
Financial services***************************************************
Commercial services and supplies ************************************
Agriculture *********************************************************
Consumer staples **************************************************
Transportation ******************************************************
Property management and development*******************************
Private investors ****************************************************
Health care ********************************************************
Paper and forestry products, mining and basic materials ****************
Information technology **********************************************
Energy ************************************************************
Other**************************************************************
Total ***********************************************************
Geography
California **********************************************************
Colorado***********************************************************
Illinois *************************************************************
Minnesota *********************************************************
Missouri ***********************************************************
Ohio **************************************************************
Oregon ************************************************************
Washington ********************************************************
Wisconsin**********************************************************
Iowa, Kansas, Nebraska, North Dakota, South Dakota ******************
Arkansas, Indiana, Kentucky, Tennessee ******************************
Idaho, Montana, Wyoming *******************************************
Arizona, Nevada, Utah **********************************************
Total banking region *********************************************
Outside the Company’s banking region********************************
Loans
$ 6,858
4,598
4,469
3,785
2,907
1,817
1,758
1,653
1,629
1,532
1,415
729
708
4,668
$38,526
$ 4,091
1,820
2,121
6,527
2,742
2,361
1,500
2,767
2,874
3,760
1,549
744
829
33,685
4,841
Percent
17.8%
11.9
11.6
9.8
7.6
4.7
4.6
4.3
4.2
4.0
3.7
1.9
1.8
12.1
Loans
$ 7,206
5,486
5,769
3,853
3,153
1,924
2,231
1,266
1,759
1,475
1,664
797
575
4,786
Percent
17.2%
13.1
13.7
9.2
7.5
4.6
5.3
3.0
4.2
3.5
4.0
1.9
1.4
11.4
100.0%
$41,944
100.0%
10.6%
4.7
5.5
16.9
7.1
6.1
3.9
7.2
7.5
9.8
4.0
1.9
2.2
87.4
12.6
$ 4,127
1,796
2,214
6,605
2,895
2,455
1,604
3,129
3,052
4,421
1,865
996
986
36,145
5,799
9.8%
4.3
5.3
15.7
6.9
5.9
3.8
7.5
7.3
10.5
4.4
2.4
2.4
86.2
13.8
Total ***********************************************************
$38,526
100.0%
$41,944
100.0%
U.S. Bancorp 29
continued to be soft through year-end given the liquidity of
commercial customers. Average commercial loans in 2003
decreased by $2.5 billion (5.7 percent). The decline in
average commercial loans for 2003 was primarily due to the
run-off of corporate loans and continued softness in loan
demand, partially offset by the consolidation of loans from
the Stellar commercial loan conduit in mid-2003. Despite
recent economic growth, the Company anticipates soft
commercial loan demand will continue in early 2004 while
business customers utilize liquidity to fund business
activities.
Table 7 provides a summary of commercial loans by
industry and geographical locations.
Commercial Real Estate The Company’s 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.
The Company maintains the real estate construction
designation until the completion of the construction phase
and, if retained, the loan is reclassified to the commercial
mortgage category. Approximately $1.4 billion of
construction loans were permanently financed and
transferred to the commercial mortgage loan category in
2003. At year-end 2003, $205 million of tax-exempt
industrial development loans were secured by real estate.
The Company’s commercial real estate mortgages and
construction loans had unfunded commitments of
$7.3 billion at December 31, 2003, compared with
Table 8
Selected Loan Maturity Distribution
$7.9 billion at December 31, 2002. The Company also
finances the operations of real estate developers and other
entities with operations related to real estate. These loans
are not secured directly by real estate and are subject to
terms and conditions similar to commercial loans. These
loans were included in the commercial loan category and
totaled $364 million at December 31, 2003.
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 Company’s 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
December 31, 2003 (Dollars in Millions)
Commercial ***********************************************************
Commercial real estate*************************************************
Residential mortgages *************************************************
Retail ****************************************************************
Total loans*********************************************************
Total of loans due after one year with
Predetermined interest rates *****************************************
Floating interest rates ***********************************************
One Year
or Less
$19,028
7,162
914
11,977
$39,081
Over One
Through
Five Years
$17,008
13,699
2,382
17,373
$50,462
Over Five
Years
$ 2,490
6,381
10,161
9,660
$28,692
Total
$ 38,526
27,242
13,457
39,010
$118,235
$ 40,339
$ 38,815
30 U.S. Bancorp
Table 9
Commercial Real Estate by Property Type and Geography
December 31, 2003
December 31, 2002
Property Type (Dollars in Millions)
Business owner occupied ********************************************
Multi-family*********************************************************
Commercial property
Industrial *******************************************************
Office **********************************************************
Retail **********************************************************
Other **********************************************************
Homebuilders ******************************************************
Hotel/motel*********************************************************
Health care facilities*************************************************
Other (a)***********************************************************
Loans
$ 8,037
3,868
1,280
3,078
3,487
2,452
2,098
2,234
708
—
Percent
29.5%
14.2
Loans
$ 6,513
3,258
Percent
24.2%
12.1
4.7
11.3
12.8
9.0
7.7
8.2
2.6
—
1,227
3,564
3,832
1,447
2,142
2,585
1,290
1,009
4.6
13.3
14.3
5.4
8.0
9.6
4.8
3.7
Total ***********************************************************
$27,242
100.0%
$26,867
100.0%
Geography
California **********************************************************
Colorado***********************************************************
Illinois *************************************************************
Minnesota *********************************************************
Missouri ***********************************************************
Ohio **************************************************************
Oregon ************************************************************
Washington ********************************************************
Wisconsin**********************************************************
Iowa, Kansas, Nebraska, North Dakota, South Dakota ******************
Arkansas, Indiana, Kentucky, Tennessee ******************************
Idaho, Montana, Wyoming *******************************************
Arizona, Nevada, Utah **********************************************
Total banking region *********************************************
Outside the Company’s banking region********************************
$ 4,380
1,139
1,095
1,536
1,741
2,193
1,771
2,956
1,921
2,138
1,817
874
1,722
25,283
1,959
16.1%
4.2
4.0
5.6
6.4
8.0
6.5
10.9
7.1
7.8
6.7
3.2
6.3
92.8
7.2
$ 4,277
1,190
1,140
1,508
2,297
2,264
1,614
3,242
2,040
1,895
1,679
682
1,439
25,267
1,600
15.9%
4.4
4.2
5.6
8.6
8.4
6.0
12.1
7.6
7.1
6.2
2.5
5.4
94.0
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.
second mortgage home equity loans. Of the total retail
loans and residential mortgages outstanding, approximately
88.5 percent are to customers located in the Company’s
primary banking regions.
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.
At December 31, 2003, investment securities, both
available-for-sale and held-to-maturity, totaled
$43.3 billion, compared with $28.5 billion at December 31,
2002. The $14.8 billion (52.1 percent) year-over-year
increase reflected the reinvestment of proceeds from loan
sales and declining commercial loan balances due to the
continued softness in commercial loan demand and the
investment of cash inflows related to deposit growth.
During 2003, the Company sold $15.3 billion of fixed-rate
securities as part of an economic hedge of the MSR
portfolio. In the first and second quarters of 2003, securities
gains were taken to offset impairment recognized in the
MSR portfolio. When MSR reparation occurred in the third
quarter of 2003, the Company began repositioning the
investment securities portfolio by selling fixed-rate securities
with lower yields at a loss, with the proceeds being
reinvested at higher yields. At December 31, 2003,
approximately 19.5 percent of the investment securities
portfolio represented adjustable-rate financial instruments,
compared with 18.6 percent as of December 31, 2002.
The weighted-average yield of the available-for-sale
portfolio was 4.27 percent at December 31, 2003,
compared with 4.97 percent at December 31, 2002. The
average maturity of the available-for-sale portfolio rose to
U.S. Bancorp 31
5.1 years at December 31, 2003, up from 2.8 years at
December 31, 2002. The relative mix of the type of
investment securities maintained in the portfolio is provided
in Table 10. At December 31, 2003, the available-for-sale
portfolio included a $259 million net unrealized loss,
compared with a net unrealized gain of $714 million at
December 31, 2002. The change from 2002 reflected rising
interest rates in the later half of 2003 and the longer
duration of the portfolio relative to a year ago.
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
December 31, 2003 (Dollars in Millions)
Available-for-Sale
Held-to-Maturity
Amortized
Cost
Fair
Value
Weighted
Average
Maturity in
Years
Weighted
Average
Yield
Amortized
Cost
Fair
Value
Weighted
Average
Maturity in
Years
Weighted
Average
Yield
U.S. Treasury and agencies
Maturing in one year or less **********
Maturing after one year through
five years************************
Maturing after five years through
ten years ************************
Maturing after ten years **************
Total*************************
Mortgage-backed securities
Maturing in one year or less **********
Maturing after one year through
five years************************
Maturing after five years through
ten years ************************
Maturing after ten years **************
Total*************************
Asset-backed securities
Maturing in one year or less **********
Maturing after one year through
five years************************
Maturing after five years through
ten years ************************
Maturing after ten years **************
Total*************************
Obligations of states and political
subdivisions
Maturing in one year or less **********
Maturing after one year through
five years************************
Maturing after five years through
ten years ************************
Maturing after ten years **************
Total*************************
Other debt securities
Maturing in one year or less **********
Maturing after one year through
five years************************
Maturing after five years through
ten years ************************
Maturing after ten years **************
Total*************************
Other investments ******************
Total investment securities ***************
$
57
$
57
190
237
1,150
199
225
1,094
$ 1,634
$ 1,575
$ 2,355
$ 2,358
22,516
22,542
15,016
342
14,785
340
$40,229
$40,025
$
100
$
101
130
20
—
130
21
—
$
250
$
252
$
70
$
71
171
79
15
335
3
128
8
260
399
594
$
$
$
$
178
84
15
348
3
128
8
246
385
597
$
$
$
$
$43,441
$43,182
.57
2.66
9.08
19.50
15.37
.63
3.66
6.50
13.26
4.62
.70
2.54
5.08
—
2.00
.40
2.71
6.88
14.60
3.74
.42
2.51
6.09
23.45
16.21
—
5.12
2.88%
$ —
$ —
4.33
3.93
2.38
—
—
—
—
—
—
2.85%
$ —
$ —
3.15%
$ —
$ —
4.30
4.50
2.66
14
—
—
14
—
—
4.30%
$ 14
$ 14
4.74%
$ —
$ —
5.89
5.55
—
—
—
—
—
—
—
5.40%
$ —
$ —
7.32%
$ 33
$ 33
7.34
7.43
8.32
39
26
40
42
28
44
7.40%
$138
$147
3.35%
10.42
3.21
1.84
4.64%
—%
4.27%
$ —
$ —
—
—
—
$ —
$ —
$152
—
—
—
$ —
$ —
$161
—
—
—
—
—
—
3.08
—
—
3.08
—
—
—
—
—
.35
2.93
6.84
14.66
6.47
—
—
—
—
—
—
—%
—
—
—
—%
—%
5.38
—
—
5.38%
—%
—
—
—
—%
3.93%
6.54
6.92
6.97
6.12%
—%
—
—
—
—%
—%
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.
At December 31 (Dollars in Millions)
2003
2002
Amortized
Cost
Percent
of Total
Amortized
Cost
Percent
of Total
U.S. Treasury and agencies ********************************************************************* $ 1,634
Mortgage-backed securities *********************************************************************
40,243
Asset-backed securities*************************************************************************
250
Obligations of states and political subdivisions ****************************************************
473
Other securities and investments ****************************************************************
993
3.7%
92.3
.6
1.1
2.3
Total investment securities******************************************************************* $43,593
100.0%
$
421
24,987
646
771
949
$27,774
1.5%
90.0
2.3
2.8
3.4
100.0%
32 U.S. Bancorp
deposits was primarily the result of increases in all savings
deposit products, partially offset by declines in noninterest-
bearing deposits, time certificates of deposit less than
$100,000 and time deposits greater than $100,000.
Noninterest-bearing deposits were $32.5 billion at
December 31, 2003, compared with $35.1 billion at
December 31, 2002, a decrease of $2.6 billion (7.5 percent).
The decrease in noninterest-bearing deposits was primarily
attributable to a decline in deposits related to mortgage
banking businesses and lower government banking deposits
relative to a year ago. Mortgage banking declined
substantially in the third quarter directly related to the
upward movement in interest rates experienced since late
June, 2003. Government banking deposits declined
primarily due to a decision by the federal government to
pay fees for cash management services rather than maintain
compensating balances. Average noninterest-bearing deposits
were $31.7 billion in 2003, an increase of $3.0 billion
(10.4 percent), compared with 2002. The increase in
average noninterest-bearing deposits was primarily the result
of higher demand deposits of mortgage and government
banking customers during the first half of 2003, customer
decisions to maintain excess liquidity in demand deposit
balances, and acquisitions.
Interest-bearing savings deposits totaled $61.1 billion at
December 31, 2003, an increase of $10.8 billion
(21.5 percent) from December 31, 2002. Average interest-
bearing savings deposits were $57.0 billion in 2003, an
Table 11
Deposits
The composition of deposits was as follows:
increase of $11.2 billion (24.5 percent), compared with
2002. The increase in interest-bearing savings deposits from
December 31, 2002, to December 31, 2003, was primarily
driven by increases in money market accounts of
$6.3 billion (22.6 percent), along with increases in interest
checking of $3.9 billion (22.5 percent) and savings accounts
of $.6 billion (12.1 percent). The favorable change in
money market accounts was the result of product pricing
initiatives on high-impact money market products, the
continued desire by customers to maintain liquidity, specific
deposit gathering initiatives and the State Street Corporate
Trust acquisition, which contributed approximately
$.6 billion of the increase during 2003.
Interest-bearing time deposits were $25.5 billion at
December 31, 2003, compared with $30.2 billion at
December 31, 2002, a decrease of $4.7 billion
(15.5 percent). The decrease in interest-bearing time
deposits was driven by a decrease in the higher cost time
certificates of deposits less than $100,000 of $4.3 billion
(23.8 percent) and a decrease of $381 million (3.1 percent)
in time deposits greater than $100,000. Average time
deposits greater than $100,000 increased $1.0 billion
(8.7 percent) and average time certificates of deposit less
than $100,000 declined $3.8 billion (19.7 percent) during
2003. Time certificates of deposits are largely viewed as
purchased funds and are managed to levels deemed
appropriate given alternative funding sources. The decline in
time certificates of deposits less than $100,000 from a year
December 31 (Dollars in Millions)
2003
2002
2001
2000
1999
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Noninterest-bearing deposits ***************** $ 32,470
Interest-bearing deposits
27.3% $ 35,106
30.4% $ 31,212
29.7% $ 26,633
24.3% $ 26,350
25.5%
Interest checking ************************
Money market accounts******************
Savings accounts ***********************
Total of savings deposits**************
Time certificates of deposit less than $100,000***
Time deposits greater than $100,000
Domestic *******************************
Foreign ********************************
21,404
34,025
5,630
61,059
13,690
5,902
5,931
18.0
28.6
4.7
51.3
11.5
4.9
5.0
17,467
27,753
5,021
50,241
17,973
9,427
2,787
15.1
24.0
4.4
43.5
15.5
8.2
2.4
15,251
24,835
4,637
44,723
20,724
7,286
1,274
14.5
23.6
4.4
42.5
19.7
6.9
1.2
Total interest-bearing deposits *********
86,582
72.7
80,428
69.6
74,007
70.3
13,982
23,899
4,516
42,397
25,780
11,221
3,504
82,902
12.8
21.8
4.1
38.7
23.5
10.3
3.2
75.7
13,141
22,751
5,445
41,337
25,394
9,348
988
12.7
22.0
5.3
40.0
24.5
9.0
1.0
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:
December 31, 2003 (Dollars in Millions)
Three months or less ********************************************
Three months through six months *********************************
Six months through one year**************************************
One year through three years *************************************
Three years through five years ************************************
Thereafter ******************************************************
Total ********************************************************
Time Certificates of
Deposit Less Than $100,000
Time Deposits
Greater Than $100,000
$ 2,747
2,237
2,778
4,179
1,733
16
$13,690
$ 8,610
831
745
1,128
508
11
$11,833
Total
$11,357
3,068
3,523
5,307
2,241
27
$25,523
U.S. Bancorp 33
ago, and on average during 2003, reflected a shift in
product mix toward savings products and funding decisions
toward more favorably priced wholesale funding sources.
The increase in average time deposits greater than $100,000
was primarily due to a shift in short-term funding mix to
cover balance sheet growth, net of deposit growth.
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.
Long-term debt was $31.2 billion at December 31,
2003, up from $28.6 billion at December 31, 2002. The
$2.6 billion (9.2 percent) increase in long-term debt was
driven by the issuance of $11.5 billion of medium- and
long-term notes and bank notes during 2003. The issuance
of long-term debt was partially offset by maturities of
$8.6 billion during 2003. Refer to Note 14 of the Notes to
Consolidated Financial Statements for additional
information regarding long-term debt and the ‘‘Liquidity
Risk Management’’ section for discussion of liquidity
management of the Company.
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
Company’s stock value, customer base or revenue.
Credit Risk Management The Company’s 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
borrower’s 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 Company’s 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
34 U.S. Bancorp
purposes, foreign exchange transactions and interest rate
swap contracts for customers, settlement risk, including
Automated Clearing House transactions, and the processing
of credit card transactions for merchants. These activities
are also subject to credit review, analysis and approval
processes.
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 Board’s (‘‘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.
By the end of 2002, economic conditions had stabilized
somewhat, although the banking sector continued to
experience elevated levels of nonperforming assets and net
charge-offs, especially with respect to certain industry
segments. Unemployment rates had increased slightly and
consumer spending and confidence levels had declined
during that year. Economic conditions began to improve in
early to mid-2003 as evidenced by stronger earnings across
many corporate sectors, higher equity valuations, stronger
retail sales and consumer spending, and improving
economic indicators. While the economy has begun to
strengthen relative to a year ago, the banking industry
continues to have elevated levels of nonperforming assets
and net charge-offs compared with the late 1990’s.
Conditions within certain industries, including
manufacturing and airline transportation sectors, continue
to lag behind the growth in the broader economy. In
addition, certain segments within the agricultural industry
have experienced deterioration since late 2002.
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.
The commercial portfolio reflects the Company’s focus
on serving small business customers, middle market and
larger corporate businesses throughout its 24-state banking
region and large national customers within certain niche
industry groups. Table 7 provides a summary of the
significant industry groups and geographic locations of
commercial loans outstanding at December 31, 2003 and
2002. The commercial loan portfolio is diversified among
various industries with somewhat higher concentrations in
consumer products and services, capital goods (including
manufacturing and commercial construction-related
businesses), financial services, commercial services and
supplies, and agricultural industries. Additionally, the
commercial portfolio is diversified across the Company’s
geographical markets with 87.4 percent of total commercial
loans within the 24-state banking region. Credit
relationships outside of the Company’s banking region are
typically niche businesses including the mortgage banking
and the leasing businesses. Loans to mortgage banking
customers are primarily warehouse lines which are
collateralized with the underlying mortgages. The Company
regularly monitors its mortgage collateral position to
manage its risk exposure.
Certain industry segments within the commercial loan
portfolio, including telecommunications, transportation and
manufacturing experienced economic stress since 2001.
Additionally, highly leveraged enterprise-value financings
have under-performed. Over the past several years, the
telecommunications sector has been adversely impacted by
excess capacity. As a result of credit workout initiatives, the
Company’s outstandings to this industry declined in 2003
to only .7 percent of the commercial loan portfolio at
December 31, 2003. At December 31, 2003, the
transportation sector represented 4.6 percent of the total
U.S. Bancorp 35
commercial loan portfolio. Since 2001, the sector has been
impacted by reduced airline travel, slower economic activity
and changes in fuel prices. In general, the credit risk profile
of the trucking, railroad and shipping segments have
improved from a year ago; however, the airline segment
continues to be sluggish. At year-end 2003, the Company’s
transportation portfolio consisted of airline and airfreight
businesses (30.0 percent of the sector), trucking businesses
(48.4 percent of the sector) and the remainder in the
railroad and shipping businesses (21.6 percent of the
sector). Capital goods represented 11.9 percent of the total
commercial portfolio at December 31, 2003. Included in
this sector were approximately 34.0 percent of loans related
to building products while engineering and construction
equipment and machinery businesses were 32.5 percent and
21.3 percent, respectively. During 2003, economic
conditions improved and production levels increased
resulting in an improvement in the credit quality of the
capital goods sectors from a year ago. With respect to
certain construction and building-related businesses, the
recent changes in the interest rate environment may
somewhat hamper their future profitability. During 2003,
segments of the agricultural industry experienced
deterioration in credit quality due to depressed livestock
prices and excess production within the food processing
businesses. At December 31, 2003, approximately
7.6 percent of the commercial loan portfolio was
concentrated in the agricultural sector. Within the
agricultural sector, 37.9 percent of loans were to livestock
producers, 30.9 percent to crop producers, 20.4 percent to
food processors and 10.8 percent to wholesalers of
agricultural products. Wholesalers have been less affected
by commodity prices.
Within its commercial lending business, the Company
also provides financing to enable customers to grow their
businesses through acquisitions of existing businesses,
buyouts or other recapitalizations. During a business cycle
with slower economic growth, businesses with leveraged
capital structures may experience insufficient cash flows to
service their debt. The Company manages leveraged
enterprise-value financings by maintaining well-defined
underwriting standards, portfolio diversification and actively
managing the customer relationship. Regardless of these
actions, leveraged enterprise-value financings often exhibit
stress during a recession or period of slow economic
growth. Given this risk profile, the Company continued to
significantly de-emphasize and reduce the size of this
portfolio during the past year. The Company actively
monitors the credit quality of these customers and develops
action plans accordingly. Such leveraged enterprise-value
financings approximated $1.8 billion in loans outstanding at
December 31, 2003, compared with approximately
$2.9 billion outstanding at December 31, 2002. The decline
was primarily due to the Company’s decision to reduce its
exposure to these types of lending arrangements through
repayments, refinancing activities and loan sales. The sector
has also been reduced by charge-offs taken during the year.
The Company’s portfolio of leveraged financings is included
in Table 7 and is diversified among industry groups similar
to the total commercial loan portfolio, except for higher
concentrations in telecommunications and cable.
The commercial real estate portfolio reflects the
Company’s focus on serving business owners within its
footprint as well as regional investment-based real estate.
Table 9 provides a summary of the significant property
types and geographic locations of commercial real estate
loans outstanding at December 31, 2003 and 2002. At
December 31, 2003, approximately 29.5 percent of the
commercial real estate loan portfolio represented business
owner-occupied properties that tend to exhibit credit risk
characteristics similar to the middle market commercial loan
portfolio. Generally, the investment-based real estate
mortgages are diversified among various property types with
somewhat higher concentrations in multi-family, office and
retail properties. Additionally, the commercial real estate
portfolio is diversified across the Company’s geographical
markets with 92.8 percent of total commercial real estate
loans outstanding at December 31, 2003, within the
24-state banking region.
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.
The $225.4 million decrease in total nonperforming
assets in 2003 reflected a decrease of $204.9 million in
nonperforming commercial and commercial real estate
loans, a decrease of $11.5 million in nonperforming
residential mortgages and a $.9 million decrease in
nonperforming retail loans. The decrease in nonperforming
assets in 2003 was broad-based across most industry sectors
within the commercial loan portfolio including capital
goods, consumer-related sectors, manufacturing,
telecommunications, and certain segments of transportation.
While airline travel has increased from a year ago, the
36 U.S. Bancorp
industry continues to be economically stressed and has had
difficulty improving cash flows from operations. Also,
certain industries continue to experience financial stress.
Certain segments of livestock producers and food processors
within the agricultural sector continue to suffer from lower
prices. Certain health care facilities providers continue to
experience operational stress leading to some deterioration
in credit quality within that sector. Also, given the recent
slowdown in refinancing activities and housing starts, the
mortgage banking and real estate development sectors may
experience increased credit risk. While nonperforming assets
declined during 2003, the amount of nonperforming assets
is still at elevated levels relative to the 1990’s reflecting the
Table 12
Nonperforming Assets (a)
general impact of economic conditions during the past two
years. Given the Company’s ongoing efforts to reduce the
overall risk profile of the organization and the anticipation
that the economy will continue to improve, nonperforming
assets are expected to trend lower in 2004.
The $253.5 million increase in total nonperforming
assets in 2002 reflected an increase of $284.6 million in
nonperforming commercial and commercial real estate
loans, and a $17.5 million increase in other nonperforming
assets, partially offset by a decrease of $27.1 million in
nonperforming residential mortgages and a $21.5 million
decrease in nonperforming retail loans. The increase in
At December 31, (Dollars in Millions)
2003
2002
2001
2000
1999
Commercial
Commercial *****************************
Lease financing *************************
Total commercial *********************
Commercial real estate
Commercial mortgages*******************
Construction and development ************
Total commercial real estate ***********
Residential mortgages*******************
Retail
Credit card******************************
Retail leasing ***************************
Other retail *****************************
Total retail ***************************
Total nonperforming loans **********
Other real estate ************************
Other assets *****************************
Total nonperforming assets *********
Restructured loans accruing interest (b) *******
Accruing loans 90 days or more past due (c) ***
Nonperforming loans to total loans************
Nonperforming assets to total loans plus other
real estate *******************************
Net interest lost on nonperforming loans ******
Changes in Nonperforming Assets
(Dollars in Millions)
$ 623.5
113.3
736.8
$ 760.4
166.7
927.1
$ 526.6
180.8
707.4
177.6
39.9
217.5
40.5
—
.4
24.8
25.2
174.6
57.5
232.1
52.0
—
1.0
25.1
26.1
131.3
35.9
167.2
79.1
—
6.5
41.1
47.6
1,020.0
1,237.3
1,001.3
72.6
55.5
$1,148.1
$
18.0
$ 329.4
.86%
.97%
$
67.4
$
59.5
76.7
$1,373.5
$
1.4
$ 426.4
1.06%
1.18%
65.4
43.8
74.9
$1,120.0
$
—
$ 462.9
.88%
.98%
$
63.0
$470.4
70.5
540.9
105.5
38.2
143.7
56.9
8.8
—
15.0
23.8
765.3
61.1
40.6
$867.0
$ —
$385.2
.63%
.71%
$ 50.8
$219.0
31.5
250.5
138.2
31.6
169.8
72.8
5.0
.4
21.1
26.5
519.6
40.0
28.9
$588.5
$ —
$248.6
.46%
.52%
$ 29.5
Commercial and
Commercial Real Estate
Retail and
Residential Mortgages(e)
Total
Balance December 31, 2002 ******************************
Additions to nonperforming assets
New nonaccrual loans and foreclosed properties ***********
Advances on loans *************************************
Total additions **************************************
Reductions in nonperforming assets
Paydowns, payoffs**************************************
Net sales **********************************************
Return to performing status******************************
Charge-offs (d) *****************************************
Total reductions *************************************
Net additions (reductions) to nonperforming assets **
$ 1,295.4
1,303.5
58.9
1,362.4
(501.1)
(288.8)
(118.7)
(666.8)
(1,575.4)
(213.0)
$ 78.1
$ 1,373.5
41.4
—
41.4
(36.0)
—
(9.1)
(8.7)
(53.8)
(12.4)
1,344.9
58.9
1,403.8
(537.1)
(288.8)
(127.8)
(675.5)
(1,629.2)
(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.
U.S. Bancorp 37
Table 13
Delinquent Loan Ratios as a Percent of Ending Loan Balances
At December 31,
90 days or more past due excluding nonperforming loans
Commercial
Commercial ******************************
Lease financing***************************
Total commercial************************
Commercial real estate
Commercial mortgages*******************
Construction and development ************
Total commercial real estate ***********
Residential mortgages*******************
Retail
Credit card******************************
Retail leasing ***************************
Other retail *****************************
Total retail ***************************
Total loans ***********************
2003
2002
2001
2000
1999
.06%
.04
.14%
.10
.14%
.45
.11%
.02
.05%
—
.06
.02
.03
.02
.61
1.68
.14
.41
.56
.14
.03
.07
.04
.90
2.09
.19
.54
.72
.18
.03
.02
.02
.78
2.18
.11
.74
.90
.10
.07
.03
.06
.62
1.70
.20
.62
.76
.05
.08
.05
.07
.42
1.23
.12
.41
.53
.28%
.37%
.40%
.31%
.22%
At December 31,
90 days or more past due including nonperforming loans
Commercial *********************************
Commercial real estate ***********************
Residential mortgages ************************
Retail ***************************************
Total loans *******************************
2003
1.97%
.82
.91
.62
1.14%
nonperforming commercial and commercial real estate
assets was principally due to the Company’s exposure to
certain communications, cable, manufacturing and highly
leveraged enterprise-value financings. Nonperforming loans
in the capital goods sector also increased in 2002.
The Company had $58.5 million and $50.0 million of
restructured loans as of December 31, 2003 and 2002,
respectively. Commitments to lend additional funds under
restructured loans were $8.2 million and $1.7 million as of
December 31, 2003 and 2002, respectively. Restructured
loans performing under the restructured terms beyond a
specific timeframe are reported as accruing. Of the
Company’s total restructured loans at December 31, 2003,
$18.0 million were reported as accruing.
Accruing loans 90 days or more past due totaled
$329.4 million at December 31, 2003, compared with
$426.4 million at December 31, 2002, and $462.9 million
at December 31, 2001. These loans were 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. The
ratio of delinquent loans to total loans declined to
.28 percent at December 31, 2003, compared with .37
percent at December 31, 2002. Improving economic
conditions and the Company’s continued focus on credit
process are the primary factors for the favorable change
from a year ago.
2002
2.35%
.90
1.44
.79
1.43%
2001
1.71%
.68
1.79
1.03
1.28%
2000
1.13%
.60
1.23
.83
.94%
1999
.59%
.74
.99
.62
.68%
To monitor credit risk associated with retail loans, the
Company monitors delinquency ratios in the various stages
of collection including nonperforming status. The following
table provides summary delinquency information for
residential mortgages and retail loans:
December 31
(Dollars in Millions)
Residential Mortgages
Amount
As a Percent
of Loans
2003
2002
2003
2002
30-89 days *********
90 days or more ****
Nonperforming *****
$102.9
82.5
40.5
$137.5
87.9
52.0
.76%
.61
.30
1.41%
.90
.53
Total **********
$225.9
$277.4
1.68%
2.85%
Retail Loans
Credit Card
30-89 days *********
90 days or more ****
Nonperforming *****
$150.9
99.5
—
$145.7
118.3
—
2.54%
1.68
—
2.57%
2.09
—
Total **********
$250.4
$264.0
4.22%
4.66%
Retail Leasing
30-89 days *********
90 days or more ****
Nonperforming *****
$ 78.8
8.2
.4
$ 89.7
10.7
1.0
1.31%
.14
.01
1.58%
.19
.02
Total **********
$ 87.4
$101.4
1.45%
1.78%
Other Retail
30-89 days *********
90 days or more ****
Nonperforming *****
$311.9
110.2
24.8
$395.3
141.2
25.1
1.15%
.41
.09
1.50%
.54
.10
Total **********
$446.9
$561.6
1.65%
2.13%
38 U.S. Bancorp
The decline in residential mortgage delinquencies from
December 31, 2002, to December 31, 2003, reflected the
general improvement in economic conditions, collection
efforts and the effect of portfolio growth on delinquency
ratios reported on a concurrent basis. The decline in retail
loan delinquencies from a year ago, reflected improving
economic conditions as well as ongoing collection efforts
and risk management actions taken by the Company over
the past three years.
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 Company’s ongoing workout, collection
and risk management efforts and expected improvement in
the economy, net charge-offs are anticipated to trend lower
in 2004.
Commercial and commercial real estate loan net
charge-offs for 2003 were $608.7 million (.89 percent of
average loans outstanding), compared with $679.9 million
(.98 percent of average loans outstanding) in 2002 and
$884.6 million (1.16 percent of average loans outstanding)
in 2001. While commercial and commercial real estate loan
net charge-offs for 2003 continue at elevated levels
compared with the late 1990’s, improvement from 2002
was broad-based and extended across most industries
within the commercial portfolio. In addition, net charge-offs
related to the equipment-leasing portfolio declined to
1.65 percent of average leases outstanding from
2.67 percent in 2002. In 2002, higher levels of net charge-
offs related to the leasing portfolio included airline and
other transportation related losses. The decrease in
commercial and commercial real estate loan net charge-offs
in 2002, when compared with 2001, was driven by credit
actions taken in 2001. Commercial and commercial real
estate loan net charge-offs in 2001 included approximately
$312.2 million related to several factors including: a large
cattle fraud, collateral deterioration specific to
transportation equipment caused by the impact of higher
fuel prices and the weak economy, deterioration in the
manufacturing, communications and technology sectors and
specific management decisions to accelerate its workout
strategy for certain borrowers. Also included in 2001
commercial and commercial real estate loan net charge-offs
were $95 million in merger and restructuring-related
Table 14
Net Charge-offs as a Percent of Average Loans Outstanding
Year Ended December 31
Commercial
Commercial ********************************************
Lease financing*****************************************
Total commercial ************************************
Commercial real estate
Commercial mortgages **********************************
Construction and development ***************************
Total commercial real estate **************************
Residential mortgages **********************************
Retail
Credit card *********************************************
Retail leasing*******************************************
Home equity and second mortgages **********************
Other retail *********************************************
Total retail ******************************************
2003
2002
2001
2000
1999
1.34%
1.65
1.38
.14
.16
.14
.23
4.61
.86
.70
1.60
1.61
1.29%
2.67
1.46
.17
.11
.15
.23
4.98
.72
.74
2.10
1.85
1.62%
1.95
1.66
.21
.17
.20
.15
4.80
.65
.85
2.16
1.94
.56%
.46
.41%
.24
.55
.03
.11
.05
.11
4.18
.41
*
1.32
1.69
.40
.02
.03
.02
.11
4.00
.28
*
1.26
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
U.S. Bancorp 39
charge-offs to align risk management practices and net
charge-offs of $160 million associated with an accelerated
loan workout strategy in the first quarter of 2001.
Retail loan net charge-offs in 2003 were $616.1 million
(1.61 percent of average loans outstanding), compared with
$674.0 million (1.85 percent of average loans outstanding)
in 2002 and $649.3 million (1.94 percent of average loans
outstanding) in 2001. Lower levels of retail loan net charge-
offs in 2003, compared with 2002, were primarily due to
the implementation of uniform underwriting standards and
processes across the entire Company, improvement in
ongoing collection efforts and changes in other risk
management practices. The favorable change in credit card
losses also reflected the impact of two portfolio sales in late
2002. The improvement in the retail loan net charge-offs in
2002, compared with 2001, principally reflected changes in
the mix of the retail loan portfolio to auto loans and leases
and home equity products, and improvement in ongoing
collection efforts as a result of the successful completion of
the integration efforts.
The Company’s retail lending business utilizes several
distinct business processes and channels to originate retail
credit including traditional branch credit, indirect lending
and a consumer finance division. Each distinct underwriting
and origination activity manages unique credit risk
characteristics and prices its loan production commensurate
with the differing risk profiles. Within Consumer Banking,
U.S. Bank Consumer Finance (‘‘USBCF’’), participates in all
facets of the Company’s consumer lending activities. The
consumer finance division specializes in serving channel-
specific and alternative lending markets in residential
mortgages, home equity and installment loan financing. The
consumer finance division manages loans originated through
a broker network, correspondent relationships and U.S.
Bank branch offices. Generally, loans managed by the
Company’s consumer finance division exhibit higher credit
risk characteristics, but are priced commensurate with the
differing risk profile.
The following table provides an analysis of net charge-
offs as a percentage of average loans outstanding managed
by the consumer finance division, compared with traditional
branch-related loans:
Year Ended December 31
(Dollars in Millions)
Consumer finance (a)
Residential mortgages ****
Home equity and second
mortgages ************
Other retail **************
Traditional branch
Residential mortgages ****
Home equity and second
mortgages ************
Other retail **************
Total Company
Residential mortgages ****
Home equity and second
mortgages ************
Other retail **************
Average Loan
Amount
Percent of
Average Loans
2003
2002
2003
2002
$ 3,499
$ 2,447
.44% .57%
2,350
360
2,570
237
2.38
4.76
1.95
3.90
$ 8,197
$ 5,965
.14% .09%
10,889
13,270
10,662
12,010
.34
1.52
.44
2.07
$11,696
$ 8,412
.23% .23%
13,239
13,630
13,232
12,247
.70
1.60
.74
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 Company’s
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.
At December 31, 2003, the allowance for credit losses
was $2,368.6 million (2.00 percent of loans). This compares
with an allowance of $2,422.0 million (2.08 percent of
loans) at December 31, 2002, and $2,457.3 million
(2.15 percent of loans) at December 31, 2001. The ratio of
the allowance for credit losses to nonperforming loans was
232 percent at year-end 2003, compared with 196 percent
at year-end 2002 and 245 percent at year-end 2001. The
ratio of the allowance for credit losses to loan net charge-
offs was 189 percent at year-end 2003, compared with
176 percent at year-end 2002 and 159 percent at year-end
2001. Management determined that the allowance for credit
losses was adequate at December 31, 2003.
Several factors were taken into consideration in
evaluating the 2003 allowance for credit losses, including
improvements in the risk profile of the portfolios and loan
net charge-offs during the period, the lower level of
nonperforming assets, the decline in accruing loans 90 days
or more past due and the improvement in all delinquency
categories from December 31, 2002. Management also
40 U.S. Bancorp
considered the uncertainty related to certain industry
sectors, including the airline transportation sector, the
extent of credit exposure to highly leveraged enterprise-
value arrangements within the portfolio and the fact that
nonperforming assets remain at elevated levels despite recent
improvements. Finally, the Company considered improving
but somewhat mixed economic trends including improving
corporate earnings, lagging unemployment rates, the level of
bankruptcies and general economic indicators.
Management determines the allowance that is required
for specific loan categories based on relative risk
characteristics of the loan portfolio. Table 15 shows the
amount of the allowance for credit losses by loan category.
The allowance recorded for commercial and commercial
real estate loans is based on a regular review of individual
credit relationships. The Company’s risk rating process is an
integral component of the methodology utilized in
determining the allowance for credit losses. An analysis of
the migration of commercial and commercial real estate
loans and actual loss experience throughout the business
cycle is also conducted quarterly to assess reserves
established for credits with similar risk characteristics. An
allowance is established for pools of commercial and
commercial real estate loans based on the risk ratings
assigned. The amount is supported by the results of the
migration analysis that considers historical loss experience
by risk rating, as well as current and historical economic
conditions and industry risk factors. The Company
separately analyzes the carrying value of impaired loans to
determine whether the carrying value is less than or equal
to the appraised collateral value or the present value of
expected cash flows. Based on this analysis, an allowance
for credit losses may be specifically established for impaired
loans. The allowance established for commercial and
commercial real estate loan portfolios, including impaired
commercial and commercial real estate loans, was
$1,015.0 million at December 31, 2003, compared with
$1,090.4 million and $1,428.6 million at December 31,
2002 and 2001, respectively. The decline in the allowance
for commercial and commercial real estate loans of
$75.4 million reflected improvement in the risk
classifications of commercial and commercial real estate
portfolios, partially offset by higher loss severity rates from
the Company’s historical migration analysis.
The allowance recorded for the residential mortgages
and retail loan portfolios is based on an analysis of product
mix, credit scoring and risk composition of the portfolio,
loss and bankruptcy experiences, economic conditions and
historical and expected delinquency and charge-off statistics
for each homogenous group of loans. Based on this
information and analysis, an allowance was established
approximating a rolling twelve-month estimate of net
charge-offs. The allowance established for residential
mortgages was $33.3 million at December 31, 2003,
Table 15
Elements of the Allowance for Credit Losses (a)
December 31 (Dollars in Millions)
2003
2002
2001
2000
1999
2003
2002
2001
2000
1999
Allowance Amount
Allowance as a Percent of Loans
Commercial
Commercial****************************** $ 696.1
Lease financing **************************
90.4
$ 776.4
107.6
$1,068.1
107.5
$ 418.8
17.7
$ 408.3
20.2
2.08% 2.12% 2.64% .89% .97%
1.84
1.81
2.01
.53
.31
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 *******************
Construction and development *************
Total commercial real estate ************
Residential mortgages *******************
Retail
Credit card ******************************
Retail leasing ****************************
Home equity and second mortgages********
Other retail ******************************
Total retail *************************
169.7
58.8
228.5
33.3
267.9
47.1
100.5
234.8
650.3
152.9
53.5
206.4
34.2
272.4
44.0
114.7
268.6
699.7
176.6
76.4
253.0
21.9
295.2
38.7
88.6
282.8
705.3
42.7
17.7
60.4
11.6
265.6
27.2
107.7
250.3
650.8
110.4
22.5
132.9
18.6
320.8
18.6
*
389.2
.82
.89
.84
.25
4.52
.78
.76
1.70
.75
.82
.77
.35
4.81
.77
.85
2.10
.94
1.16
1.00
.28
5.01
.79
.72
2.39
.22
.25
.23
.12
4.42
.65
.90
2.16
.59
.35
.53
.15
6.41
.88
*
1.74
728.6
1.67
1.86
2.02
1.93
2.47
Total allocated allowance************
Available for other factors ***********
1,698.6
670.0
1,824.3
597.7
2,155.8
301.5
1,159.3
627.6
1,308.6
401.7
1.43
.57
1.57
.51
1.89
.26
.95
.51
1.16
.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
Company’s 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
*
U.S. Bancorp 41
compared with $34.2 million and $21.9 million at
December 31, 2002 and 2001, respectively. The slight
decrease in the allowance for the residential mortgage
portfolio year-over-year was primarily due to lower
expected loss severity resulting from the more uniform
underwriting processes and standards associated with the
portfolio, partially offset by losses due to incremental
growth in the first lien home equity portfolio during 2003.
The allowance established for retail loans was
$650.3 million at December 31, 2003, compared with
$699.7 million and $705.3 million at December 31, 2002
and 2001, respectively. The decline in the allowance for the
retail portfolio in 2003 reflected improved credit quality
and delinquency trends, partially offset by the impact of
portfolio growth and unemployment rates that continue to
lag other economic indicators.
Regardless of the extent of the Company’s analysis of
customer performance, portfolio trends or risk management
processes, certain inherent but undetected losses are
probable within the loan portfolios. This is due to several
factors, including inherent delays in obtaining information
regarding a customer’s financial condition or changes in
their unique business conditions, the judgmental nature of
individual loan evaluations, collateral assessments and the
interpretation of economic trends. Volatility of economic or
customer-specific conditions affecting the identification and
estimation of losses from larger non-homogeneous credits
and the sensitivity of assumptions utilized to establish
allowances for homogeneous groups of loans, loan portfolio
concentrations, and other subjective considerations are
among other factors. Because of the imprecision
surrounding these factors, the Company estimates a range
of inherent losses based on statistical analyses and
management judgment, and maintains an ‘‘allowance
available for other factors’’ that is not allocated to a specific
loan category. The amount of the allowance available for
other factors was $670.0 million at December 31, 2003,
compared with $597.7 million at December 31, 2002, and
$301.5 million at December 31, 2001.
Given the many subjective factors affecting the credit
portfolio, changes in the allowance for other factors may
not directly coincide with changes in the risk ratings of the
credit portfolio reflected in the risk rating process. This is,
in part, due to a lagging effect between changes in the
business cycle, the exposure and mix of loans within risk
rating categories, levels of nonperforming loans, and the
timing of charge-offs and recoveries. In 2001, management
conducted extensive reviews of its portfolios and enhanced
its commercial migration methods to better differentiate and
weight loss severity ratios by risk rating category to reflect
the adverse impact of loss experienced in 2001. The
$326.1 million decrease in the allowance for other factors
in 2001 reflected the impact of that change in loss severity
ratios, which led the Company to increase the allowance
established for commercial loans. In 2002, the Company
reduced the level of higher risk commercial credits and net
charge-off ratios improved by 20 basis points from 2001.
As a result, loss severity rates determined through historical
migration analysis had improved somewhat relative to
2001. This led the Company to reduce the level of the
allowance specifically allocated to commercial loans;
however, nonperforming assets continued to remain at
elevated levels, economic growth continued to be soft and
the ability to further reduce higher risk credits had
diminished as refinancing opportunities had tightened.
As such, volatility of loss rates remained higher relative to
prior periods and management increased the level of the
allowance for other factors. At December 31, 2003,
quantifiable factors supporting the level of the allowance for
other factors included $23.3 million related to imprecision
in risk ratings, $184.6 million for volatility of commercial
loss rates and $199.1 million for volatility of retail loss
forecasts. The remaining allowance for other factors of
$263.0 million was related to uncertainty in the economy
from lagging unemployment rates, concentration risk,
including risks associated with the sluggish airline industry
and highly leveraged enterprise-value credits, and other
qualitative factors.
Although the Company determines the amount of each
element of the allowance separately and this process is an
important credit management tool, the entire allowance for
credit losses is available for the entire loan portfolio. The
actual amount of losses incurred can vary significantly from
the recorded amounts. The Company’s methodology
included several factors intended to minimize the differences
in recorded and actual losses. These factors allowed the
Company to adjust its estimate of losses based on the most
recent information available. Refer to Note 1 of the Notes
to Consolidated Financial Statements for accounting policies
related to the allowance for credit losses.
42 U.S. Bancorp
Table 16
Summary of Allowance for Credit Losses
(Dollars in Millions)
Balance at beginning of year ****************************
2003
2002
2001
2000
1999
$2,422.0
$2,457.3
$1,786.9
$1,710.3
$1,705.7
Charge-offs
Commercial
Commercial *************************************
Lease financing**********************************
Total commercial *****************************
Commercial real estate
Commercial mortgages ***************************
Construction and development ********************
Total commercial real estate *******************
Residential mortgages *******************************
Retail
Credit card **************************************
Retail leasing************************************
Home equity and second mortgages ***************
Other retail**************************************
Total retail ***********************************
Total charge-offs **************************
Recoveries
Commercial
Commercial *************************************
Lease financing**********************************
Total commercial *****************************
Commercial real estate
Commercial mortgages ***************************
Construction and development ********************
Total commercial real estate *******************
Residential mortgages *******************************
Retail
Credit card **************************************
Retail leasing************************************
Home equity and second mortgages ***************
Other retail**************************************
Total retail ***********************************
Total recoveries ***************************
Net Charge-offs
Commercial
Commercial *************************************
Lease financing**********************************
Total commercial *****************************
Commercial real estate
Commercial mortgages ***************************
Construction and development ********************
Total commercial real estate *******************
Residential mortgages *******************************
Retail
Credit card **************************************
Retail leasing************************************
Home equity and second mortgages ***************
Other retail**************************************
Total retail ***********************************
Total net charge-offs ***********************
Provision for credit losses *******************************
Losses from loan sales/transfers (a) **********************
Acquisitions and other changes **************************
Balance at end of year**********************************
555.6
139.3
694.9
43.9
13.0
56.9
30.3
282.1
57.0
105.0
267.9
712.0
559.2
188.8
748.0
40.9
8.8
49.7
23.1
304.9
45.2
107.9
311.9
769.9
779.0
144.4
923.4
49.5
12.6
62.1
15.8
294.1
34.2
112.7
329.1
770.1
319.8
27.9
347.7
15.8
10.3
26.1
13.7
235.8
14.8
*
379.5
630.1
1,494.1
1,590.7
1,771.4
1,017.6
70.0
55.3
125.3
15.8
2.0
17.8
3.4
27.3
7.0
12.1
49.5
95.9
67.4
39.9
107.3
9.1
1.4
10.5
4.0
24.6
6.3
10.6
54.4
95.9
242.4
217.7
485.6
84.0
569.6
28.1
11.0
39.1
26.9
254.8
50.0
92.9
218.4
616.1
491.8
148.9
640.7
31.8
7.4
39.2
19.1
280.3
38.9
97.3
257.5
674.0
60.6
30.4
91.0
9.1
.8
9.9
3.2
23.4
4.5
12.9
80.0
120.8
224.9
718.4
114.0
832.4
40.4
11.8
52.2
12.6
270.7
29.7
99.8
249.1
649.3
1,251.7
1,254.0
—
(55.7)
1,373.0
1,349.0
—
(11.3)
1,546.5
2,528.8
(329.3)
17.4
64.0
7.2
71.2
10.8
2.6
13.4
1.3
27.5
2.0
*
76.8
106.3
192.2
255.8
20.7
276.5
5.0
7.7
12.7
12.4
208.3
12.8
*
302.7
523.8
825.4
828.0
—
74.0
250.1
12.4
262.5
19.1
2.6
21.7
16.2
220.2
6.2
*
376.0
602.4
902.8
84.8
4.0
88.8
15.1
1.0
16.1
1.4
34.6
1.1
*
88.2
123.9
230.2
165.3
8.4
173.7
4.0
1.6
5.6
14.8
185.6
5.1
*
287.8
478.5
672.6
646.0
—
31.2
$2,368.6
$2,422.0
$2,457.3
$1,786.9
$1,710.3
Allowance as a percent of
Period-end loans ************************************
Nonperforming loans ********************************
Nonperforming assets *******************************
Net charge-offs (a) **********************************
2.00%
232
206
189
2.08%
196
176
176
2.15%
245
219
159
1.46%
233
206
216
1.51%
329
291
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
U.S. Bancorp 43
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.
Included in the retail leasing portfolio was
approximately $3.3 billion of retail leasing residuals at
December 31, 2003, compared with $3.2 billion at
December 31, 2002. The Company monitors concentrations
of leases by manufacturer and vehicle ‘‘make and model.’’
At year-end 2003, no vehicle-type concentration exceeded
six percent of the aggregate portfolio. Because retail residual
valuations tend to be less volatile for longer-term leases,
relative to the estimated residual at inception of the lease,
the Company actively manages lease origination production
to achieve a longer-term portfolio. At December 31, 2003,
the weighted-average origination term of the portfolio was
53 months. Since 1998, the used vehicle market has
experienced pricing stress. Several factors have contributed
to this business cycle. Aggressive leasing programs by
automobile manufacturers and competitors within the
banking industry included a marketing focus on monthly
lease payments, enhanced residuals at lease inception,
shorter-term leases and low mileage leases. These practices
have created a cyclical oversupply of certain off-lease
vehicles causing significant declines in used vehicle prices.
Automobile manufacturers and others have retreated
somewhat from these marketing programs or exited the
leasing business. However, zero percent financing offered
with rebates continued to exert pressure on used car
pricing. Another factor impacting the used vehicle market
has been the deflation in new vehicle prices. This trend has
been driven by surplus automobile manufacturing capacity
and related production and highly competitive sales
programs. Economic factors are expected to moderate new
car production. Production levels have continued to decline
from record levels in 2000. Also, many Internet marketers
failed or transformed into distribution channels of dealers
rather than direct competitors. These trends are expected to
abate the deflationary pricing pressures of the past few
years. Another factor that has slowed the decline in residual
values is the growth of ‘‘certified’’ used car programs.
Certified cars are low mileage, newer model vehicles that
have been inspected, reconditioned, and usually have a
warranty program. The Company’s exposure to declining
valuation should benefit from certified car programs that
receive premium pricing from dealers at auction. Given the
current economic environment, it is difficult to assess the
timing and degree of changes in residual values that may
impact financial results over the next several quarters.
At December 31, 2003, the commercial leasing
portfolio had $816 million of residuals, compared with
$896 million at December 31, 2002. At year-end 2003,
lease residuals related to trucks and other transportation
equipment were 32 percent of the total residual portfolio.
Railcars represented 16 percent of the aggregate portfolio,
while aircraft and business and office equipment were
15 percent and 11 percent, respectively. No other significant
concentrations of more than 10 percent existed at
December 31, 2003. In 2003, reduced airline travel and
higher fuel costs adversely impacted aircraft and
transportation equipment lease residual values.
Operational Risk Management Operational risk represents
the risk of loss resulting from the Company’s 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.
The Company operates in many different businesses in
diverse markets and relies on the ability of its employees
and systems to process a high number of transactions.
Operational risk is inherent in all business activities, and the
management of this risk is important to the achievement of
44 U.S. Bancorp
the Company’s objectives. In the event of a breakdown in
the internal control system, improper operation of systems
or improper employees’ actions, the Company could suffer
financial loss, face regulatory action and suffer damage to
its reputation.
The Company manages operational risk through a risk
management framework and its internal control processes.
The framework involves the business lines, corporate risk
management personnel and executive management. Under
this framework, business lines have direct and primary
responsibility and accountability for identifying, controlling,
and monitoring operational risk. Clear structures and
processes with defined responsibilities are in place. Business
managers maintain a system of controls with the objective
of providing proper transaction authorization and
execution, proper system operations, safeguarding of assets
from misuse or theft, and ensuring the reliability of financial
and other data. Business managers ensure that the controls
are appropriate and are implemented as designed.
Each business line within the Company has designated
risk managers. These risk managers are responsible, among
other things, for coordinating the completion of ongoing
risk assessments and ensuring that operational risk
management is integrated into business decision-making
activities. Business continuation and disaster recovery
planning is also critical to effectively manage operational
risks. Each business unit of the Company is required to
develop, maintain and test these plans at least annually to
ensure that recovery activities, if needed, can support
mission critical functions including technology, networks
and data centers supporting customer applications and
business operations. The Company’s internal audit function
validates the system of internal controls through risk-based,
regular and ongoing audit procedures and reports on the
effectiveness of internal controls to executive management
and the Audit Committee of the Board of Directors.
Customer-related business conditions may also increase
operational risk or the level of operational losses in certain
transaction processing business units, including merchant
processing activities. Ongoing risk monitoring of customer
activities and their financial condition and operational
processes serve to mitigate customer-related operational
risk. Refer to Note 23 of the Notes to Consolidated
Financial Statements for further discussion on merchant
processing.
While the Company believes that it has designed
effective methods to minimize operational risks, there is no
absolute assurance that business disruption or operational
losses would not occur in the event of a disaster. On an
ongoing basis, management makes process changes and
investments to enhance its systems of internal controls and
business continuity and disaster recovery plans.
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 Company’s
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,
management’s 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
Immediate
Up 50
Immediate
Down 300
Gradual
Up 300
Gradual
Down 50
Immediate
Up 50
Immediate
Down 300
Gradual
Up 300
Gradual
Net interest income **************
Rate sensitive income ************
1.30%
.74%
.19%
.01%
*%
*%
(.02)%
(.54)%
.08%
.20%
(.34)%
(.55)%
*%
*%
(1.91)%
(2.57)%
* Given the current level of interest rates, a downward 300 basis point scenario can not be computed.
U.S. Bancorp 45
guide hedging strategies. ALPC policy guidelines limit the
estimated change in interest rate sensitive income to
5.0 percent of forecasted interest rate sensitive income over
the succeeding 12 months.
The table on page 45 summarizes the interest rate risk
of net interest income and rate sensitive income based on
forecasts over the succeeding 12 months. At December 31,
2003, the Company’s overall interest rate risk position was
substantively neutral to changes in interest rates. The
Company manages its interest rate risk position by holding
assets on the balance sheet with desired interest rate risk
characteristics, implementing certain pricing strategies for
loans and deposits and through the selection of derivatives
and various funding and investment portfolio strategies. The
Company plans to continue to manage the overall interest
rate risk profile within policy limits and towards a neutral
position. At December 31, 2003 and 2002, the Company
was within its policy guidelines.
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 Company’s 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.
The valuation analysis is dependent upon certain key
assumptions about the nature of indeterminate maturity of
assets and liabilities. Management estimates the average life
and rate characteristics of asset and liability accounts based
upon historical analysis and management’s expectation of
rate behavior. These assumptions are validated on a
periodic basis. A sensitivity analysis of key variables of the
valuation analysis is provided to the ALPC monthly and is
used to guide hedging strategies. The results of the
valuation analysis as of December 31, 2003, were well
within 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.
All interest rate derivatives that qualify for hedge
accounting are recorded at fair value as other assets or
liabilities on the balance sheet and are designated as either
‘‘fair value’’ or ‘‘cash flow’’ hedges. The Company performs
an assessment, both at inception and quarterly thereafter,
when required, to determine whether these derivatives are
highly effective in offsetting changes in the value of the
hedged items. Hedge ineffectiveness for both cash flow and
fair value hedges is immediately recorded in noninterest
income. Changes in the fair value of derivatives designated
as fair value hedges, and changes in the fair value of the
hedged items, are recorded in earnings. Changes in the fair
value of derivatives designated as cash flow hedges are
recorded in other comprehensive income until income from
the cash flows of the hedged items is realized. Customer-
related interest rate swaps, foreign exchange rate contracts,
and all other derivative contracts that do not qualify for
hedge accounting are recorded at fair value and resulting
gains or losses are recorded in trading account gains or
losses or mortgage banking revenue.
By their nature, derivative instruments are subject to
market risk. The Company does not utilize derivative
instruments for speculative purposes. Of the Company’s
$31.8 billion of total notional amount of asset and liability
management derivative positions at December 31, 2003,
$29.8 billion was designated as either fair value or cash
flow hedges. The cash flow hedge positions are interest rate
swaps that hedge the forecasted cash flows from the
underlying variable-rate LIBOR loans and floating-rate debt.
The fair value hedges are primarily interest rate contracts
that hedge the change in fair value related to interest rate
changes of underlying fixed-rate debt, trust preferred
securities and deposit obligations. In addition, the Company
uses forward commitments to sell residential mortgage loans
46 U.S. Bancorp
to hedge its interest rate risk related to residential mortgage
loans held for sale. The Company commits to sell the loans
at specified prices in a future period, typically within
90 days. The Company is exposed to interest rate risk
during the period between issuing a loan commitment and
the sale of the loan into the secondary market. Related to
its mortgage banking operations, the Company held
$1.0 billion of forward commitments to sell mortgage loans
and $1.0 billion of unfunded mortgage loan commitments
that were derivatives in accordance with the provisions of
the Statement of Financial Accounting Standards No. 133,
‘‘Accounting for Derivative Instruments and Hedge
Activities.’’ The unfunded mortgage loan commitments are
reported at fair value as options in Table 17.
Derivative instruments are also subject to credit risk
associated with counterparties to the derivative contracts.
Credit risk associated with derivatives is measured based on
the replacement cost should the counterparties with
contracts in a gain position to the Company fail to perform
under the terms of the contract. The Company manages this
risk through diversification of its derivative positions among
various counterparties, requiring collateral agreements with
credit-rating thresholds, entering into master netting
agreements in certain cases and entering into interest rate
swap risk participation agreements. These agreements are
credit derivatives that transfer the credit risk related to
interest rate swaps from the Company to an unaffiliated
third-party. The Company also provides credit protection to
Table 17
Derivative Positions
Asset and Liability Management Positions
December 31, 2003
(Dollars in Millions)
Interest rate contracts
Receive fixed/pay floating swaps
Notional amount*********************
Weighted-average
Receive rate *********************
Pay rate*************************
Pay fixed/receive floating swaps
Notional amount*********************
Weighted-average
Receive rate *********************
Pay rate*************************
Futures and forwards *******************
Options
Maturing
2004
2005
2006
2007
2008
Thereafter
Total
Weighted-
Average
Remaining
Maturity
In Years
Fair
Value
$13,073
$ — $ 500
$1,720
$3,750
$4,150
$23,193
$ 691
4.17
4.22%
1.19
—
—
2.37%
1.17
3.96%
1.20
3.90%
1.16
6.60%
1.67
4.54%
1.27
$ 2,700
$2,390
$ 250
$ — $ —
$ — $ 5,340
$ (60)
1.25
1.13%
3.15
$ 2,229
1.17%
2.56
—
—
$ — $ — $ — $ —
1.19%
2.73
—
—
—
—
1.15%
2.86
$ — $ 2,229
$ —
.16
Written *****************************
Equity contracts ************************
995
$
— $
—
3
20
—
—
—
1,015
1
$ — $ — $ —
$ — $
3
$ —
.21
1.92
Customer-related Positions
December 31, 2003
(Dollars in Millions)
Interest rate contracts
Receive fixed/pay floating swaps
Notional amount*********************
Pay fixed/receive floating swaps
Notional amount*********************
Basis swaps ***************************
Options
Purchased**************************
Written *****************************
Risk participation agreements
Purchased**************************
Written *****************************
Maturing
2004
2005
2006
2007
2008
Thereafter
Total
Weighted-
Average
Remaining
Maturity
in Years
Fair
Value
$
615
$ 871
$1,195
$ 628
$1,083
$1,434
$ 5,826
$ 155
4.50
615
1
30
30
15
—
871
—
1,195
—
628
—
1,083
—
1,434
—
5,826
1
(124)
—
40
40
62
17
42
42
1
22
62
62
3
—
161
161
11
25
42
42
35
—
377
377
127
64
9
(9)
—
—
Foreign exchange rate contracts
Swaps and forwards
Buy ********************************
Sell ********************************
$ 1,868
1,902
$ 104
106
Options
$ — $ — $ —
—
—
—
$ — $ 1,972
2,008
—
$ 95
(93)
Purchased**************************
Written *****************************
20
20
—
—
—
—
—
—
—
—
—
—
20
20
—
—
4.50
.67
3.75
3.75
7.08
3.14
.55
.55
.29
.29
U.S. Bancorp 47
third-parties with risk participation agreements, for a fee, as
part of a loan syndication transaction.
analysis, was $1.5 million at December 31, 2003, and
$8.8 million at December 31, 2002.
At December 31, 2003, the Company had
$174.9 million in accumulated other comprehensive income
related to unrealized gains on derivatives classified as cash
flow hedges. The unrealized gains will be reflected in
earnings when the related cash flows or hedged transactions
occur and will offset the related performance of the hedged
items. The estimated amount of gain to be reclassified from
accumulated other comprehensive income into earnings
during the next 12 months is $53.1 million.
Gains or losses on customer-related derivative positions
were not material in 2003. The change in fair value of
forward commitments attributed to hedge ineffectiveness
recorded in noninterest income was a decrease of
$6.8 million in 2003. The change in the fair value of all
other asset and liability management derivative positions
attributed to hedge ineffectiveness was not material in 2003.
Table 17 summarizes information on the Company’s
derivative positions at December 31, 2003. Refer to Notes 1
and 21 of the Notes to Consolidated Financial Statements
for significant accounting policies and additional
information regarding the Company’s use of derivatives.
Market Risk Management In addition to interest rate risk,
the Company is exposed to other forms of market risk as a
consequence of conducting normal trading activities.
Business activities that contribute to market risk include,
among other things, proprietary trading and foreign
exchange positions. Value at Risk (‘‘VaR’’) is a key measure
of market risk for the Company. Theoretically, VaR
represents the maximum amount that the Company has
placed at risk of loss, with a ninety-ninth percentile degree
of confidence, to adverse market movements in the course
of its risk taking activities.
VaR modeling of trading activities is subject to certain
limitations. Additionally, it should be recognized that there
are assumptions and estimates associated with VaR
modeling and actual results could differ from those
assumptions and estimates. The Company mitigates these
uncertainties through regular monitoring of trading
activities by management and other risk management
practices, including stop-loss and position limits related to
its trading activities. Stress-test models are used to provide
management with perspectives on market events that VaR
models do not capture.
The Company establishes market risk limits, subject to
approval by the Company’s Board of Directors. The
Company’s VaR limit was $40 million at December 31,
2003 and 2002. The market valuation risk inherent in its
customer-based derivative trading, mortgage banking
pipeline and foreign exchange, as estimated by the VaR
Liquidity Risk Management ALPC establishes policies, as
well as analyzes and manages liquidity, to ensure that
adequate funds are available to meet normal operating
requirements in addition to unexpected customer demands
for funds, such as high levels of deposit withdrawals or
loan demand, in a timely and cost-effective manner. The
most important factor in the preservation of liquidity is
maintaining public confidence that facilitates the retention
and growth of a large, stable supply of core deposits and
wholesale funds. Ultimately, public confidence is generated
through profitable operations, sound credit quality and a
strong capital position. The Company’s performance in
these areas has enabled it to develop a large and reliable
base of core funding within its market areas and in
domestic and global capital markets. Liquidity management
is viewed from long-term and short-term perspectives, as
well as from an asset and liability perspective. Management
monitors liquidity through a regular review of maturity
profiles, funding sources, and loan and deposit forecasts to
minimize funding risk.
The Company maintains strategic liquidity and
contingency plans that are subject to the availability of asset
liquidity in the balance sheet. Monthly, ALPC reviews the
Company’s ability to meet funding requirements due to
adverse business events. These funding needs are then
matched with specific asset-based sources to ensure
sufficient funds are available. Also, strategic liquidity
policies require diversification of wholesale funding sources
to avoid concentrations in any one market source.
Subsidiary banks are members of various Federal Home
Loan Banks (‘‘FHLB’’) that provide a source of funding
through FHLB advances. The Company maintains a Grand
Cayman branch for issuing eurodollar time deposits. The
Company also establishes relationships with dealers to issue
national market retail and institutional savings certificates
and short- and medium-term bank notes. Also, the
Company’s subsidiary banks have significant correspondent
banking networks and corporate accounts. Accordingly, it
has access to national fed funds, funding through
repurchase agreements and sources of more stable,
regionally based certificates of deposit.
The Company’s ability to raise negotiated funding at
competitive prices is influenced by rating agencies’ views of
the Company’s credit quality, liquidity, capital and
earnings. The debt ratings noted in Table 18 reflect the
rating agencies’ recognition of the strong, consistent
financial performance of the Company and the quality of
the balance sheet. At December 31, 2003, the credit ratings
outlook for the Company was considered ‘‘Positive’’ by
48 U.S. Bancorp
Table 18
Debt Ratings
At December 31, 2003
U.S. Bancorp
Moody’s
Standard &
Poors
Short-term borrowings ***************************************************************
Senior debt and medium-term notes **************************************************
Subordinated debt*******************************************************************
Preferred stock *********************************************************************
Commercial paper*******************************************************************
Aa3
A1
A2
P–1
A+
A
A–
A–1
U.S. Bank National Association
Short-term time deposits *************************************************************
Long-term time deposits *************************************************************
Bank notes *************************************************************************
Subordinated debt*******************************************************************
P–1
Aa2
Aa2/P–1
Aa3
A–1+
AA–
AA–/A–1+
A+
Fitch
F1
A+
A
A
F1
F1+
AA–
A+/F1+
A
both Moody’s Investors Services and Fitch and ‘‘Stable’’ by
Standard & Poors.
The parent company’s routine funding requirements
consist primarily of operating expenses, dividends to
shareholders, debt service, repurchases of common stock
and funds used for acquisitions. The parent company
obtains funding to meet its obligations from dividends
collected from its subsidiaries and the issuance of debt
securities. On April 1, 2003, USB Capital II, a subsidiary of
U.S. Bancorp, redeemed 100 percent, or $350 million, of its
7.20 percent Trust Preferred Securities.
At December 31, 2003, parent company long-term debt
outstanding was $5.2 billion, compared with $5.7 billion at
December 31, 2002. The change in long-term debt during
2003 was driven by medium-term note maturities of
$1.3 billion and $.3 billion of parent company subordinated
debt maturities, partially offset by the issuance of
$1.2 billion of fixed-rate medium-term notes. Total parent
company debt scheduled to mature in 2004 is $888 million.
These debt obligations may be met through medium-term
note issuances and dividends from subsidiaries, as well as
from parent company cash and cash equivalents. Federal
banking laws regulate the amount of dividends that may be
paid by banking subsidiaries without prior approval. The
amount of dividends available to the parent company from
its banking subsidiaries was approximately $828.5 million
at December 31, 2003. For further information, see
Note 24 of the Notes to Consolidated Financial Statements.
Table 19
Contractual Obligations
Refer to Table 19 for further information on significant
contractual obligations at December 31, 2003.
Off-Balance Sheet Arrangements Off-balance sheet
arrangements include any contractual arrangement to which
an unconsolidated entity is a party, under which the
Company has an obligation to provide credit or liquidity
enhancements or market risk support. Off-balance sheet
arrangements include certain defined guarantees, asset
securitization trusts and conduits. Off-balance sheet
arrangements also include any obligation under a variable
interest held by an unconsolidated entity that provides
financing, liquidity or credit enhancement or market risk
support to the Company.
In the ordinary course of business, the Company enters
into an array of commitments to extend credit, letters of
credit, lease commitments and various forms of guarantees
that may be considered off-balance sheet arrangements. The
nature and extent of these arrangements is provided in
Note 23 of the Notes to Consolidated Financial Statements.
Asset securitization and conduits represent a source of
funding for the Company through off-balance sheet
structures. Credit, liquidity, operational and legal structural
risks exist due to the nature and complexity of asset
securitizations and other off-balance sheet structures. ALPC
regularly monitors the performance of each off-balance
sheet structure in an effort to minimize these risks and
ensure compliance with the requirements of the structures.
(Dollars in Millions)
Contractual Obligations
Long-term debt (a)************
Trust preferred securities (a) ***
Capital leases ****************
Operating leases *************
Purchase obligations **********
Benefit obligations (b) *********
One Year
or Less
$9,989
—
9
182
166
47
Payments Due By Period
Over One
Through
Three Years
Over Three
Through
Five Years
$10,932
—
15
308
227
101
$5,876
—
13
242
36
109
Over Five
Years
$4,418
2,601
38
516
4
308
Total
$31,215
2,601
75
1,248
433
565
(a)
In the banking industry, interest-bearing obligations are principally utilized to fund interest-bearing assets. As such, interest charges on related contractual obligations were
excluded from reported amounts as the potential cash outflows would have corresponding cash inflows from interest-bearing assets.
(b) Amounts only include obligations related to the unfunded non-qualified pension plan and post-retirement medical plans.
U.S. Bancorp 49
The Company utilizes its credit risk management systems to
evaluate the credit quality of underlying assets and regularly
forecasts cash flows to evaluate any potential impairment of
retained interests. Also, regulatory guidelines require
consideration of asset securitizations in the determination of
risk-based capital ratios. The Company does not rely
significantly on off-balance sheet arrangements for liquidity
or capital resources.
The Company sponsors an off-balance sheet conduit to
which it transferred high-grade investment securities, funded
by the issuance of commercial paper. The conduit held assets
of $7.3 billion at December 31, 2003, and $9.5 billion at
December 31, 2002. These investment securities include
primarily (i) private label asset-backed securities, which are
insurance ‘‘wrapped’’ by AAA/Aaa-rated monoline insurance
companies and (ii) government agency mortgage-backed
securities and collateralized mortgage obligations. The conduit
had commercial paper liabilities of $7.3 billion at
December 31, 2003, and $9.5 billion at December 31, 2002.
The Company provides a liquidity facility to the
conduit. Utilization of the liquidity facility would be
triggered by the conduit’s inability to issue commercial
paper to fund its assets. The recorded fair value of the
Company’s liability for the liquidity facility included in
other liabilities was $47.3 million at December 31, 2003,
and $37.7 million at December 31, 2002. Changes in fair
value of these liabilities are recorded in the income
statement as other noninterest income or expense. In
addition, the Company recorded at fair value its retained
residual interest in the investment securities conduit of
$89.5 million at December 31, 2003, and $93.4 million at
December 31, 2002.
The Company also has an asset-backed securitization
to fund an unsecured small business credit product. The
unsecured small business credit securitization trust held
assets of $497.5 million at December 31, 2003, of which
the Company retained $112.4 million of subordinated
securities, transferor’s interests of $12.4 million and a
residual interest-only strip of $34.4 million. This compared
with $652.4 million in assets at December 31, 2002, of
which the Company retained $150.1 million of
subordinated securities, transferor’s interests of
$16.3 million and a residual interest-only strip of
$53.3 million. The securitization trust issued asset-backed
variable funding notes in various tranches. The Company
provides credit enhancement in the form of subordinated
securities and reserve accounts. The Company’s risk,
primarily from losses in the underlying assets, was
considered in determining the fair value of the Company’s
retained interests in this securitization. The Company
recognized income from subordinated securities, an interest-
only strip and servicing fees from this securitization of
$29.8 million during 2003 and $52.8 million during 2002.
The unsecured small business credit securitization held
average assets of $571.4 million in 2003 and $700.6 million
in 2002.
During 2003, the Company undertook several actions
with respect to off-balance sheet structures. In January of
2003, the Company exercised a cleanup call option on an
indirect automobile loan securitization, with the remaining
assets from the securitization recorded on the Company’s
balance sheet at fair value. The indirect automobile
securitization held $156.1 million in assets at December 31,
2002.
In June 2003, the Company terminated its involvement
with an operating lease arrangement involving third-party
lessors that acquired certain business assets, including real
estate, through leveraged financing structures commonly
referred to as ‘‘synthetic leases.’’ All assets previously leased
through the synthetic lease structures were acquired and
recorded by the Company at fair value. The termination of
the synthetic lease structures did not have a material impact
on the Company’s financial statements.
During the third quarter of 2003, the Company elected
not to reissue more than 90 percent of the commercial
paper funding of Stellar Funding Group, Inc., the
commercial loan conduit. This action caused the conduit to
lose its status as a ‘‘qualifying special purpose entity’’ as
defined below. As a result, the Company recorded all of
Stellar’s assets and liabilities at fair value and the results of
operations in the consolidated financial statements of the
Company. Given the floating rate nature and high credit
quality of the assets within the conduit, the impact to the
Company’s financial statements was not significant. In the
third quarter of 2003, average commercial loan balances
increased by approximately $2 billion and the resulting
increase in net interest income was offset by a similar
decline in conduit fee income within commercial products
revenue. Prior to December 31, 2003, the remaining
commercial paper borrowings held by third-party investors
matured and the conduit was legally dissolved.
In January 2003, the Financial Accounting Standards
Board issued Interpretation No. 46 (‘‘FIN 46’’),
‘‘Consolidation of Variable Interest Entities’’ (‘‘VIEs’’), an
interpretation of Accounting Research Bulletin No. 51,
‘‘Consolidated Financial Statements,’’ to improve financial
reporting of special purpose and other entities. The
interpretation requires the consolidation of entities in which
an enterprise absorbs a majority of the entity’s expected
losses, receives a majority of the entity’s expected residual
returns, or both, as a result of ownership, contractual or
other financial interests in the entity. Prior to the issuance
of FIN 46, consolidation generally occurred when an
enterprise controlled another entity through voting interests.
Certain VIEs that are qualifying special purpose entities
(‘‘QSPEs’’) subject to the reporting requirements of
50 U.S. Bancorp
Statement of Financial Accounting Standards No. 140
(‘‘SFAS 140’’), ‘‘Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities,’’ will not
be required to be consolidated under the provisions of
FIN 46. The consolidation provisions of FIN 46 apply to
VIEs created or entered into after January 31, 2003. For
VIEs created before February 1, 2003, the effective date of
applying the provisions of FIN 46 for entities that have
interests in structures that are special purpose entities was
for periods ending after December 15, 2003, and for all
other types of entities was deferred to periods ending after
March 15, 2004.
Because the Company’s investment securities conduit
and the asset-backed securitization are QSPEs, which are
exempt from consolidation under the provisions of FIN 46,
the consolidation of the conduit or securitizations in its
financial statements is not required at this time.
Capital Management The Company is committed to
managing capital for maximum shareholder benefit and
maintaining strong protection for depositors and creditors.
The Company continually assesses its business risks and
capital position. The Company also manages its capital to
exceed regulatory capital requirements for well-capitalized
bank holding companies. To achieve these capital goals, the
Company employs a variety of capital management tools
including dividends, common share repurchases, and the
issuance of subordinated debt and other capital instruments.
Total shareholders’ equity was $19.2 billion at
Table 20
Regulatory Capital Ratios
At December 31 (Dollars in millions)
December 31, 2003, compared with $18.4 billion at
December 31, 2002. The increase was the result of
corporate earnings, offset primarily by the payment of
dividends, including the special dividend of $685 million
related to the spin-off of Piper Jaffray, and the repurchase
of common stock.
On December 16, 2003, the Company increased its
dividend rate per common share by 17.1 percent, from
$.205 per quarter to $.24 per quarter. On March 12, 2003,
the Company increased its dividend rate per common share
by 5.1 percent, from $.195 per quarter to $.205 per
quarter. On March 12, 2002, the Company increased its
dividend rate per common share by 4.0 percent, from
$.1875 per quarter to $.195 per quarter.
On December 18, 2001, the Board of Directors
approved an authorization to repurchase 100 million shares
of common stock through 2003. In 2002, the Company
purchased 5.2 million shares of common stock under the
December 2001 plan. In 2003, the Company repurchased
7.0 million shares of common stock under the plan, which
expired in December of 2003. On December 16, 2003, the
Board of Directors approved an authorization to repurchase
150 million shares of common stock over the following
24 months. During 2003, the Company purchased
8.0 million shares under the December 2003 plan. There are
approximately 142.0 million shares remaining to be
purchased under this authorization. The average price paid
for the 15.0 million shares repurchased during 2003 was
U.S. Bancorp
Tangible common equity *********************************************************************************
As a percent of tangible assets ***********************************************************************
Tier 1 capital *******************************************************************************************
As a percent of risk-weighted assets*******************************************************************
As a percent of adjusted quarterly average assets (leverage ratio) ****************************************
Total risk-based capital **********************************************************************************
As a percent of risk-weighted assets*******************************************************************
Bank Subsidiaries (a)
U.S. Bank National Association
Tier 1 capital*************************************************************************************
Total risk-based capital****************************************************************************
Leverage ****************************************************************************************
U.S. Bank National Association ND
Tier 1 capital*************************************************************************************
Total risk-based capital****************************************************************************
Leverage ****************************************************************************************
Bank Regulatory Capital Requirements
Tier 1 capital*************************************************************************************
Total risk-based capital****************************************************************************
Leverage ****************************************************************************************
2003
2002
$11,858
$ 9,824
6.5%
5.7%
$14,623
$12,941
9.1%
8.0%
8.0%
7.7%
$21,710
$20,088
13.6%
12.4%
6.6%
10.8
6.3
13.1%
18.0
11.0
6.7%
10.8
6.7
13.4%
18.9
12.1
Minimum
Well-
Capitalized
4.0%
8.0
4.0
6.0%
10.0
5.0
(a) These balances and ratios were prepared in accordance with regulatory accounting principles as disclosed in the subsidiaries’ regulatory reports. 2002 ratios for the bank
subsidiaries were not restated for the adoption of SFAS 123.
U.S. Bancorp 51
$27.84 per share. For a complete analysis of activities
impacting shareholders’ equity and capital management
programs, refer to Note 16 of the Notes to Consolidated
Financial Statements.
Banking regulators define minimum capital
requirements for banks and financial services holding
companies. These requirements are expressed in the form of
a minimum Tier 1 capital ratio, total risk-based capital
ratio, and Tier 1 leverage ratio. The minimum required level
for these ratios is 4.0 percent, 8.0 percent, and 4.0 percent,
respectively. The Company targets its regulatory capital
levels, at both the bank and bank holding company level, to
exceed the ‘‘well-capitalized’’ threshold for these ratios of
6.0 percent, 10.0 percent, and 5.0 percent, respectively. As
of December 31, 2003, the Company’s Tier 1 capital, total
risk-based capital, and Tier 1 leverage ratio were
9.1 percent, 13.6 percent, and 8.0 percent, respectively.
These ratios compare to 8.0 percent, 12.4 percent, and
7.7 percent, respectively, as of December 31, 2002. All
regulatory ratios, at both the bank and bank holding
company level, continue to be in excess of stated ‘‘well-
capitalized’’ requirements.
Currently, mandatorily redeemable preferred securities
issued through subsidiary grantor trusts (‘‘Trust Preferred
Securities’’) qualify as Tier 1 capital of the Company for
regulatory purposes. Prior to the adoption of FIN 46, the
Company consolidated the grantor trusts, and the balance
sheet included the mandatorily redeemable preferred
securities of the grantor trusts. The Company has
determined that the provisions of FIN 46 may require
de-consolidation of the subsidiary grantor trusts and the
junior subordinated debentures of the Company owned by
the grantor trusts would be included in the consolidated
financial statements of the Company as long-term debt. The
banking regulatory agencies have issued guidance that
would continue the current capital treatment for Trust
Preferred Securities until further notice. As of December 31,
2003, management does not believe the adoption of
FIN 46, including the de-consolidation of Trust Preferred
Securities, if required, will have a material impact on the
Company’s results from operations, its financial condition
or regulatory capital ratios.
The Company uses tangible common equity expressed
as a percent of tangible common assets as an additional
measure of its capital. At December 31, 2003, the
Company’s tangible common equity ratio was 6.5 percent,
compared with 5.7 percent at year-end 2002. Table 20
provides a summary of capital ratios as of December 31,
2003 and 2002, including Tier 1 and total risk-based
capital ratios, as defined by the regulatory agencies.
FOURTH QUARTER SUMMARY
The Company reported net income of $977.0 million for
the fourth quarter of 2003, or $.50 per diluted share,
compared with $819.7 million, or $.43 per diluted share,
for the fourth quarter of 2002. Return on average assets
and return on average equity were 2.05 percent and
19.4 percent, respectively, for the fourth quarter of 2003,
compared with returns of 1.83 percent and 17.8 percent,
respectively, for the fourth quarter of 2002. The Company’s
results for the fourth quarter of 2003 improved over the
fourth quarter of 2002, primarily due to growth in net
interest income and fee-based products and services, as well
as controlled operating expense and lower credit costs. Net
income from continuing operations was $970.3 million, or
$.50 per diluted share, compared with $858.6 million, or
$.45 per diluted share for the fourth quarter of 2002,
representing an 11.1 percent annual growth rate. Net
income for the fourth quarter of 2003 also included after-
tax merger and restructuring-related items of $5.0 million
($7.6 million on a pre-tax basis), compared with after-tax
merger and restructuring-related items of $69.9 million
($107.3 million on a pre-tax basis) for the fourth quarter of
2002. The $99.7 million decline in pre-tax merger and
restructuring-related charges was primarily due to the
completion of integration activities associated with the
merger of Firstar and USBM at the end of 2002.
Total net revenue, on a taxable-equivalent basis, was
$3,113.3 million for the fourth quarter of 2003, compared
with $3,151.0 million for the fourth quarter of 2002,
a decrease of $37.7 million (1.2 percent) from a year ago.
This decline primarily reflected the net reduction in
securities gains (losses) of $106.3 million. Otherwise,
favorable growth occurred in net interest income, payment
services revenue, trust and investment management fees,
treasury management fees, mortgage banking revenue and
acquisitions, including Bay View and State Street Corporate
Trust, which contributed approximately $33.0 million of the
increase in net revenue year-over-year.
Fourth quarter net interest income, on a taxable-
equivalent basis was $1,816.7 million, compared with
$1,765.3 million in the fourth quarter of 2002. The
$51.4 million (2.9 percent) increase in net interest income
was driven by an increase of $12.6 billion (8.3 percent) in
average earning assets, primarily due to increases in
investment securities, residential mortgages and retail loans,
partially offset by a decline in commercial loans and loans
held for sale related to mortgage banking activities. The net
interest margin for the fourth quarter of 2003 was
4.42 percent, compared with 4.65 percent in the fourth
quarter of 2002. The year-over-year decline in net interest
margin primarily reflected growth in lower-yielding
investment securities as a percent of total earning assets,
52 U.S. Bancorp
a change in loan mix and a decline in the margin benefit
from net free funds due to lower average interest rates. In
addition, the net interest margin declined year-over-year as
a result of consolidating high credit quality, low margin
loans from the Stellar commercial loan conduit onto the
Company’s balance sheet during the third quarter of 2003.
Fourth quarter 2003 noninterest income declined
6.4 percent from the same period of a year ago. The decline
is primarily due to a net reduction in securities gains
(losses) of $106.3 million year-over-year. In addition,
included in fourth quarter of 2002 was a $46.5 million gain
on the sale of an out-of-market credit card portfolio. Credit
and debit card revenue and corporate payment products
revenue were higher in the fourth quarter of 2003 than the
fourth quarter of 2002 by $9.7 million (6.8 percent) and
$8.3 million (10.3 percent), respectively. Although credit
and debit card revenue grew year-over-year, the growth was
somewhat muted due to the impact of the settlement of the
antitrust litigation brought against VISA USA and
Mastercard by Wal-Mart Stores, Inc., Sears Roebuck & Co.
and other retailers, which lowered the interchange rate on
signature debit transactions beginning August 2003. The
year-over-year impact of the VISA settlement on credit and
debit card revenue for the quarter was a decline of
Table 21
Fourth Quarter Summary
approximately $12.6 million. This change in the interchange
rate, in addition to higher customer loyalty rewards
expenses, however, was more than offset by the impact of
increases in transaction volumes and other rate adjustments.
The corporate payment products revenue growth reflected
growth in sales and card usage. Merchant processing
services revenue was higher in the fourth quarter of 2003
than the same quarter of 2002 by $4.0 million
(2.8 percent), due to an increase in transaction volume,
which was partially offset by lower processing spreads
resulting from revenue-sharing associated with specific
banking alliances and changes in the mix of merchants. The
favorable variance in trust and investment management fees
of $33.0 million (15.4 percent) in the fourth quarter of
2003 over the same period of 2002 was principally driven
by the acquisition of State Street Corporate Trust, which
contributed approximately $21.1 million in fees during the
fourth quarter of 2003. In addition, trust and investment
management fees benefited from higher equity market
valuations and account growth year-over-year. Treasury
management fees grew by $13.7 million (13.4 percent) in
the fourth quarter of 2003 over the same period of 2002.
The increase in treasury management fees year-over-year
was driven, in part, by a change during the third quarter of
(In Millions, Except Per Share Data)
Condensed Income Statement
Net interest income (taxable-equivalent basis) (a) **********************************************************
Noninterest income *************************************************************************************
Securities gains (losses), net ****************************************************************************
Total net revenue ***********************************************************************************
Noninterest expense************************************************************************************
Provision for credit losses *******************************************************************************
Income from continuing operations before taxes ********************************************************
Taxable-equivalent adjustment ***************************************************************************
Applicable income taxes ********************************************************************************
Income from continuing operations ********************************************************************
Discontinued operations (after-tax) ***********************************************************************
Three Months Ended
December 31,
2003
2002
$1,816.7
1,296.7
(.1)
3,113.3
1,342.4
286.0
1,484.9
7.2
507.4
970.3
6.7
$1,765.3
1,279.5
106.2
3,151.0
1,486.6
349.0
1,315.4
7.7
449.1
858.6
(38.9)
Net income*****************************************************************************************
$ 977.0
$ 819.7
Per Common Share
Earnings per share *************************************************************************************
Diluted earnings per share ******************************************************************************
Dividends declared per share****************************************************************************
Average shares outstanding *****************************************************************************
Average diluted shares outstanding **********************************************************************
Financial Ratios
Return on average assets *******************************************************************************
Return on average equity *******************************************************************************
Net interest margin (taxable-equivalent basis) *************************************************************
Efficiency ratio (b) **************************************************************************************
$
.51
.50
.240
1,927.3
1,950.8
2.05%
19.4
4.42
43.1
$
.43
.43
.195
1,916.2
1,923.6
1.83%
17.8
4.65
48.8
Interest and rates are presented on a fully taxable-equivalent basis utilizing a tax rate of 35 percent.
(a)
(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.
U.S. Bancorp 53
2003 in the Federal government’s payment methodology for
treasury management services from compensating balances,
reflected in net interest income, to fees. Mortgage banking
revenue increased by $3.5 million (4.0 percent) over the
same period of 2002 due to higher loan servicing revenue,
which was slightly offset by a decline in origination and
sales revenue. Offsetting these favorable variances were
declines in other income and commercial products revenue
year-over-year. Other income declined primarily due to the
sale of the credit card portfolio in the fourth quarter of
2002. Commercial products revenue declined by
$9.8 million (9.0 percent) year-over-year, principally
reflecting lower commercial loan conduit servicing fees,
which resulted, in part, from unwinding the Stellar
commercial loan conduit.
Total noninterest expense was $1,342.4 million in the
fourth quarter of 2003, compared with $1,486.6 million in
the fourth quarter of 2002. The decrease in noninterest
expense of $144.2 million (9.7 percent) was primarily due to
a $99.7 million reduction in merger and restructuring-related
charges, the favorable change in MSR impairments of
$54.1 million and cost savings from merger and
restructuring-related activities. These positive variances were
partially offset by the impact of recent acquisitions, including
the branches of Bay View and State Street Corporate Trust.
The acquisitions contributed approximately $16.0 million of
expense growth to the quarter.
The provision for credit losses was $286.0 million for
the fourth quarter of 2003 and $349.0 million for the
fourth quarter of 2002, a decrease of $63.0 million
(18.1 percent). Net charge-offs in the fourth quarter of
2003 were $285.1 million, compared with net charge-offs
of $378.5 million during the fourth quarter of 2002. The
decline from a year ago primarily reflected lower retail and
commercial losses, the result of collection efforts and an
improving credit risk profile.
LINE OF BUSINESS FINANCIAL REVIEW
Within the Company, financial performance is measured by
major lines of business, which include Wholesale Banking,
Consumer Banking, Private Client, Trust and Asset
Management, Payment Services, and Treasury and
Corporate Support. These operating segments are
components of the Company about which financial
information is available and is evaluated regularly in
deciding how to allocate resources and assess performance.
Basis for Financial Presentation Business line results are
derived from the Company’s business unit profitability
reporting systems by specifically attributing managed
balance sheet assets, deposits and other liabilities and their
related income or expense. Funds transfer-pricing
methodologies are utilized to allocate a cost of funds used
or credit for funds provided to all business line assets and
liabilities using a matched funding concept. Also, the
business unit is allocated the taxable-equivalent benefit of
tax-exempt products. Noninterest income and expenses
directly managed by each business line, including fees,
service charges, salaries and benefits, and other direct costs
are accounted for within each segment’s financial results in
a manner similar to the consolidated financial statements.
Occupancy costs are allocated based on utilization of
facilities by the lines of business. Noninterest expenses
incurred by centrally managed operations or business lines
that directly support another business line’s operations are
not charged to the applicable business line. Goodwill and
other intangible assets are assigned to the lines of business
based on the mix of business of the acquired entity. The
provision for credit losses within the Wholesale Banking,
Consumer Banking, Private Client, Trust and Asset
Management and Payment Services lines of business is
based on net charge-offs while Treasury and Corporate
Support reflects the residual component of the Company’s
total consolidated provision for credit losses determined in
accordance with accounting principles generally accepted in
the United States. Income taxes are assessed to each line of
business at a standard tax rate with the residual tax
expense or benefit to arrive at the consolidated effective tax
rate included in Treasury and Corporate Support. Merger
and restructuring-related charges and cumulative effects of
changes in accounting principles are not identified by or
allocated to lines of business. Within the Company, capital
levels are evaluated and managed centrally; however, capital
is allocated to the operating segments to support evaluation
of business performance. Capital allocations to the business
lines are based on the amount of goodwill and other
intangibles, the extent of off-balance sheet managed assets
and lending commitments and the ratio of on-balance sheet
assets relative to the total Company. Certain lines of
business, such as trust, asset management and capital
markets, have no significant balance sheet components. For
these business units, capital is allocated taking into
consideration fiduciary and operational risk, capital levels of
independent organizations operating similar businesses, and
regulatory requirements.
Designations, assignments and allocations may change
from time to time as management systems are enhanced,
methods of evaluating performance or product lines change
or business segments are realigned to better respond to our
diverse customer base. During 2003, certain organization
and methodology changes were made and, accordingly,
2002 results were restated and presented on a comparable
basis. Due to organizational and methodology changes, the
Company’s basis of financial presentation differed in 2001.
The presentation of comparative business line results for
2001 is not practical and has not been provided.
54 U.S. Bancorp
Wholesale Banking offers lending, depository, treasury
management and other financial services to middle market,
large corporate and public sector clients. Wholesale Banking
contributed $1,195.3 million of the Company’s operating
earnings in 2003 and $1,115.7 million in 2002. The increase
in operating earnings in 2003 was driven by slightly higher
net revenue and reductions in noninterest expense and
provision for credit losses, compared with 2002.
Total net revenue increased $48.9 million (1.9 percent)
in 2003, compared with 2002. Net interest income, on a
taxable-equivalent basis, increased 1.5 percent, compared
with 2002, as average deposits increased $7.7 billion
(36.5 percent) in 2003, compared with 2002. The impact of
increasing average deposits on net interest income was
offset somewhat by the adverse impact of declining interest
rates on the funding benefits of customer deposits in
addition to the declines in average loans and loan spreads.
Loan spreads declined from a year ago due, in part, to the
consolidation of high credit quality, low margin commercial
loans from the loan conduit onto the balance sheet. The
decline in average loans in 2003 was driven in part by soft
customer loan demand given the current economic
environment, in addition to the Company’s decisions in
2001 to tighten credit availability to certain types of lending
products, industries and customers and reductions due to
asset workout strategies. Noninterest income increased
2.9 percent in 2003 to $753.0 million, compared to 2002
noninterest income of $731.8 million. The increase in
noninterest income in 2003 was due to growth in treasury
management-related fees, international banking, syndication
and customer derivative fees, and equipment leasing
revenue, partially offset by reductions in fee income related
to lower commercial loan volumes and the consolidation of
the commercial loan conduit, compared with 2002. The
increase in cash management-related fees was driven by
growth in product sales, pricing enhancements and lower
earnings credit rates to customers. The growth was also
driven by a change in the Federal government’s payment
methodology for treasury management services from
compensating balances, reflected in net interest income, to
fees during the third quarter of 2003.
Noninterest expense was $350.6 million in 2003,
compared with $383.5 million in 2002. The $32.9 million
decrease (8.6 percent) was primarily due to cost savings
initiatives that reduced personnel-related costs, legal
expenses and professional costs. Loan workout expenses
also declined in 2003 as the credit quality of the loan
portfolio has improved. In addition, noninterest expense for
the business segment in 2003 included $12.6 million of
equipment financing related residual value and inventory
write-downs.
The provision for credit losses was $401.1 million and
$444.5 million in 2003 and 2002, respectively, a decline of
$43.4 million (9.8 percent). The favorable change in the
provision for credit losses for Wholesale Banking business is
due to improving net charge-offs which declined to
.89 percent of average loans in 2003 from .96 percent of
average loans in 2002. The reduction in net charge-offs was
attributable to improvements in credit quality driven by
initiatives taken by the Company during the past three years
including asset workout strategies and reductions in
commitments to certain industries and customers.
Nonperforming assets within Wholesale Banking were
$744.2 million at December 31, 2003, compared with
$983.9 million at December 31, 2002. While nonperforming
asset levels continue to be elevated relative to the 1990’s,
significant improvement in credit quality has been achieved
with reductions being broad-based across most industry
sectors. The Company expects further improvements in
nonperforming asset levels through 2004. Refer to the
‘‘Corporate Risk Profile’’ section for further information on
factors impacting the credit quality of the loan portfolios.
Consumer Banking delivers products and services to the
broad consumer market and small businesses through
banking offices, telemarketing, on-line services, direct mail
and automated teller machines (‘‘ATMs’’). It encompasses
community banking, metropolitan banking, small business
banking, including lending guaranteed by the Small Business
Administration, small-ticket leasing, consumer lending,
mortgage banking, workplace banking, student banking,
24-hour banking and investment product and insurance sales.
Consumer Banking contributed $1,688.4 million of the
Company’s operating earnings for 2003 and $1,521.0 million
for 2002, an 11.0 percent increase over 2002. The increase in
operating earnings in 2003 was driven by higher net revenue
and reductions in provision for credit losses, offset by
increases in noninterest expense, compared with 2002.
Total net revenue increased $358.4 million (7.3 percent)
in 2003, compared with 2002. Net interest income, on a
taxable-equivalent basis, increased $230.4 million
(6.8 percent). Fee-based revenue increased $42.4 million
(3.0 percent) and securities gains (losses) increased
$85.6 million. The year-over-year increase in net interest
income was due to growth in average loan balances and
residential mortgages held for sale, improved spreads on
retail and commercial loans, lower funding costs on non-
earning asset balances, growth in interest-bearing and
noninterest-bearing deposit balances and acquisitions.
Partially offsetting these increases was the impact of declining
interest rates on the funding benefit of consumer deposits.
The increase in average loan balances of 10.1 percent
reflected retail loan growth of 6.9 percent and growth in
residential mortgages of 40.6 percent in 2003, compared
with 2002. Residential mortgages include first-lien home
equity loans, which accounted for 26.7 percent of the growth
U.S. Bancorp 55
in residential mortgages. Commercial and commercial real
estate loan balances increased 1.3 percent during the same
period. The year-over-year increase in average deposits
included growth in noninterest-bearing, interest checking,
savings and money market account balances, partially offset
by a reduction in balances associated with time deposits. The
decline in lower margin time deposits primarily reflected a
shift in product mix towards savings products.
Noninterest income excluding securities gains was
$1,460.1 million in 2003, $42.4 million (3.0 percent) higher
compared with 2002. This growth was driven by mortgage
banking revenue, deposit service charges, investment
products fees and commissions and acquisitions, partially
offset by higher end-of-term lease residual losses. The year-
over-year growth in mortgage banking revenue was partially
attributable to the acquisition of Leader in the second
quarter of 2002, which contributed $63.7 million in 2003,
compared with $47.2 million in 2002. Securities gains were
$193.4 million in 2003, a net increase of $85.6 million
from a year ago. The Company utilizes its investment
portfolio as an economic hedge to the valuation risk of the
portfolio of mortgage servicing rights caused by declining
interest rates and related increases in mortgage prepayments
due to mortgage refinancing activity.
Noninterest expense was $2,198.2 million in 2003,
compared with $2,074.7 million for 2002, an increase of
$123.5 million (6.0 percent). The year-over-year increase in
noninterest expense was attributable to an increase in MSR
amortization and impairment of $85.3 million, higher loan
origination and repossession costs and incremental
operating costs of $56.4 million related to the Bay View
Bank and Leader acquisitions.
Table 22
Line of Business Financial Performance
Year Ended December 31 (Dollars in Millions)
Wholesale
Banking
Consumer
Banking
2003
Percent
2002 Change
2003
Percent
2002 Change
Condensed Income Statement
Net interest income (taxable-equivalent basis) ************************************ $1,877.9 $1,850.2
Noninterest income************************************************************
731.8
Securities gains, net ***********************************************************
—
753.0
—
1.5% $3,634.7 $3,404.3
1,417.7
1,460.1
2.9
107.8
193.4
—
Total net revenue **********************************************************
Noninterest expense***********************************************************
Other intangibles **************************************************************
2,630.9
331.1
19.5
2,582.0
362.9
20.6
Total noninterest expense ***************************************************
350.6
383.5
Operating income (loss) *************************************************
Provision for credit losses ******************************************************
Operating earnings (loss), before income taxes ***********************************
Income taxes and taxable-equivalent adjustment **********************************
2,280.3
401.1
1,879.2
683.9
2,198.5
444.5
1,754.0
638.3
Operating earnings (loss) ****************************************************** $1,195.3 $1,115.7
1.9
(8.8)
(5.3)
(8.6)
3.7
(9.8)
7.1
7.1
7.1
Merger and restructuring-related items (after-tax) *********************************
Discontinued operations (after-tax) **********************************************
Cumulative effect of accounting change (after-tax) ********************************
Net income *******************************************************************
6.8%
3.0
79.4
7.3
1.7
27.7
5,288.2
1,765.4
432.8
4,929.8
1,735.7
339.0
2,198.2
2,074.7
6.0
3,090.0
435.8
2,654.2
965.8
2,855.1
463.8
2,391.3
870.3
8.2
(6.0)
11.0
11.0
$1,688.4 $1,521.0
11.0
Average Balance Sheet Data
Commercial ****************************************************************** $ 28,337 $ 30,015
Commercial real estate ********************************************************
15,908
Residential mortgages *********************************************************
160
Retail ************************************************************************
130
16,414
119
57
(5.6)% $ 8,100 $ 8,795
9,010
9,936
3.2
8,013
11,265
(25.6)
26,960
28,832
(56.2)
(7.9)%
10.3
40.6
6.9
Total loans ****************************************************************
Goodwill *********************************************************************
Other intangible assets ********************************************************
Assets ***********************************************************************
Noninterest-bearing deposits ***************************************************
Savings products**************************************************************
Time deposits ****************************************************************
Total deposits *************************************************************
Shareholders’ equity***********************************************************
44,927
1,227
107
51,775
14,738
10,227
3,901
28,866
5,058
46,213
1,226
127
52,572
12,993
5,556
2,592
21,141
5,049
(2.8)
.1
(15.7)
(1.5)
13.4
84.1
50.5
36.5
.2
58,133
2,242
928
67,831
13,748
40,769
18,587
73,104
6,022
52,778
1,892
946
61,403
12,939
35,803
22,632
71,374
5,128
10.1
18.5
(1.9)
10.5
6.3
13.9
(17.9)
2.4
17.4
* Not meaningful
56 U.S. Bancorp
The provision for credit losses decreased $28.0 million
in 2003, compared with 2002. The improvement in the
provision for credit losses in 2003 was primarily
attributable to lower net charge-offs. As a percentage of
average loans, net charge-offs declined to .75 percent in
2003, compared with .88 percent in 2002. The declines in
net charge-offs included the commercial, commercial real
estate and retail loan portfolios. The improvement in
commercial and commercial real estate loan net charge-offs
within Consumer Banking of $20.6 million was broad-
based across most industry and geographical regions. Retail
loan net charge-offs declined by $16.5 million primarily
resulting from ongoing collection efforts and risk
management. Nonperforming assets within Consumer
Banking were $367.1 million at December 31, 2003,
compared with $345.4 million at December 31, 2002. Refer
to the ‘‘Corporate Risk Profile’’ section for further
information on factors impacting the credit quality of the
loan portfolios.
Private Client, Trust and Asset Management provides trust,
private banking, financial advisory, investment management
and mutual fund and alternative investment product services
through five businesses: Private Client Group, Corporate
Trust, Asset Management, Institutional Trust and Custody
and Fund Services, LLC. Private Client, Trust and Asset
Management contributed $506.5 million of the Company’s
operating earnings in 2003, and increase of 10.9 percent
compared with 2002.
Total net revenue was $1,352.0 million in 2003, an
increase of 10.4 percent, compared with 2002. Net interest
income, on a taxable-equivalent basis, increased
$60.6 million (18.8 percent) in 2003, compared with 2002.
The increase in net interest income in 2003 was due to
growth in total deposits of 34.5 percent attributable to
Private Client, Trust
and Asset Management
Payment
Services
Treasury and
Corporate Support
Consolidated
Company
2003
2002
Percent
Change
2003
2002
Percent
Change
2003
2002
Percent
Change
2003
2002
Percent
Change
18.8% $ 624.4
1,692.3
—
7.4
—
2,316.7
593.9
158.1
$ 675.6
1,676.8
—
2,352.4
627.3
161.1
(7.6)% $ 696.9
194.4
51.4
.9
—
942.7
1,694.6
5.8
$ 594.1
183.0
192.1
969.2
1,675.9
1.2
17.3% $ 7,217.5
5,068.2
244.8
6.2
(73.2)
12,530.5
4,868.3
682.4
$ 6,847.2
4,910.8
299.9
12,057.9
4,866.3
553.0
$ 383.6
968.4
—
1,352.0
483.3
66.2
549.5
802.5
6.2
796.3
289.8
$ 323.0
901.5
—
1,224.5
464.5
31.1
495.6
728.9
11.0
717.9
261.2
$ 506.5
$ 456.7
10.4
4.0
*
10.9
10.1
(43.6)
10.9
10.9
10.9
(1.5)
(5.3)
(1.9)
(4.6)
—
(9.6)
4.0
4.0
4.0
752.0
788.4
1,564.7
412.7
1,152.0
419.2
1,564.0
456.4
1,107.6
403.0
$ 732.8
$ 704.6
(2.7)
1.1
*
1.4
(7.0)
93.3
(11.0)
(16.5)
1,700.4
1,677.1
(757.7)
(1.8)
(755.9)
(373.4)
(707.9)
(26.7)
(681.2)
(320.5)
5,550.7
5,419.3
6,979.8
1,254.0
5,725.8
1,985.3
6,638.6
1,349.0
5,289.6
1,852.3
$ (382.5)
$ (360.7)
(6.0)
3,740.5
3,437.3
(30.4)
(209.3)
22.5
—
(22.7)
(37.2)
$ 3,732.6
$ 3,168.1
$ 1,784
594
299
2,159
$ 1,819
591
231
2,056
(1.9)% $ 2,887
—
—
7,103
.5
29.4
5.0
$ 2,803
—
—
7,304
$
3.0% $
—
—
(2.8)
218
198
13
47
4,836
740
399
6,624
3,031
6,019
474
9,524
2,169
4,697
290
227
5,771
2,333
4,301
448
7,082
1,405
3.0
*
75.8
14.8
29.9
39.9
5.8
34.5
54.4
9,990
1,814
675
13,564
278
10
—
288
3,010
10,107
1,814
769
13,350
258
7
—
265
3,059
(1.2)
—
(12.2)
1.6
7.8
42.9
—
8.7
(1.6)
476
305
20
47,836
(80)
1
4,850
4,771
3,134
385
214
8
51
658
306
11
38,852
192
129
4,941
5,262
2,632
(43.4)% $ 41,326
27,142
11,696
38,198
(7.5)
62.5
(7.8)
$ 43,817
25,723
8,412
36,501
(27.7)
(.3)
81.8
23.1
*
(99.2)
(1.8)
(9.3)
19.1
118,362
6,328
2,129
187,630
31,715
57,026
27,812
116,553
19,393
114,453
5,528
2,080
171,948
28,715
45,796
30,613
105,124
17,273
5.4%
3.2
(18.4)
3.9
—
23.4
2.4
5.1
(7.0)
8.2
7.2
8.8
(5.7)%
5.5
39.0
4.6
3.4
14.5
2.4
9.1
10.4
24.5
(9.1)
10.9
12.3
U.S. Bancorp 57
growth in noninterest-bearing deposits, savings products,
time deposits and the State Street Corporate Trust
acquisition, partially offset by the impact of declining
interest rates on the funding benefit of deposits. The
acquisition of the corporate trust business from State Street
represented approximately $31.4 million of the 2003
increase in net interest income. Noninterest income
increased $66.9 million (7.4 percent) in 2003, compared
with 2002. The acquisition of the State Street Corporate
Trust business was the primary factor for this increase,
partially offset by a year-over-year decrease in the value of
assets under management due to adverse capital market
conditions in early 2003. During the second half of 2003,
equity capital market conditions improved significantly, and
the line of business experienced an increase in assets under
management and related fees.
Noninterest expense increased $53.9 million
(10.9 percent) in 2003, compared with 2002, primarily
attributable to the State Street Corporate Trust acquisition
($68.5 million), offset by cost savings from business
integration and other cost control initiatives.
The provision for credit losses decreased $4.8 million
(43.6 percent) in 2003, compared with 2002. The year-
over-year decrease in the provision for credit losses was
primarily due to lower retail loan net charge-offs.
Payment Services includes consumer and business credit
cards, corporate and purchasing card services, consumer
lines of credit, ATM processing, merchant processing and
debit cards. Payment Services contributed $732.8 million of
the Company’s operating earnings in 2003, a 4.0 percent
increase over 2002.
Total net revenue was $2,316.7 million in 2003,
a 1.5 percent decrease, compared with 2002. Net interest
income decreased 7.6 percent in 2003, compared with
2002, primarily due to a reduction in customer late fees and
lost interest revenue from the sale of two credit card
portfolios. During late 2002, the Company sold two
co-branded credit card portfolios, reducing year-over-year
net interest income for this business line by approximately
$29.3 million in 2003. Noninterest income increased
.9 percent in 2003, compared with 2002. The increase in
fee-based revenue in 2003 was driven by strong growth in
credit card and debit card revenue and corporate payment
product revenues, which was partially offset by a reduction
in merchant processing and other revenue. The growth in
credit and debit card revenue was muted somewhat by the
$19.4 million impact of the debit card antitrust settlement
by VISA USA and Mastercard which lowered interchange
rates on signature debit transactions. Merchant processing
revenue declined due to lower processing spreads resulting
from changes in revenue-sharing associated with specific
banking alliances and a change in the mix of merchants,
which offset the favorable impact of increased transaction
processing volumes. Other revenue in 2002 included
$67.4 million related to the credit card portfolio sales.
Noninterest expense was $752.0 million in 2003,
a decrease of $36.4 million (4.6 percent), compared with
2002. The decrease in noninterest expense was primarily
attributable to lower fraud losses and third-party merchant
processing costs partially offset by increased marketing costs.
Personnel cost increases attributable to higher processing
volumes were more than offset by business line cost savings.
The provision for credit losses was $412.7 million in
2003, a decrease of $43.7 million (9.6 percent), compared
with 2002 due to lower net charge-offs of the business line.
As a percentage of average loans, net charge-offs were
4.13 percent in 2003, compared with 4.52 percent of
average loans in 2002. The favorable change in credit losses
was due to improvements in ongoing collection efforts, risk
management and the sale of two co-branded credit card
portfolios during late 2002.
Treasury and Corporate Support includes the Company’s
investment portfolios, funding, capital management and
asset securitization activities, interest rate risk management,
the net effect of transfer pricing related to average balances
and business activities managed on a corporate basis,
including enterprise-wide operations and administrative
support functions. Treasury and Corporate Support
recorded operating losses of $382.5 million in 2003,
an increase of 6.0 percent, compared with 2002.
Total net revenue was $942.7 million in 2003,
compared with total net revenue of $969.2 million in 2002.
The year-over-year decline of $26.5 million (2.7 percent) in
total net revenue in 2003 was attributable to a reduction in
securities gains of $140.7 million partially offset by
increases in net interest income of $102.8 million
(17.3 percent) and noninterest income of $11.4 million
(6.2 percent). The increase in net interest income was
primarily attributable to the increase in average investment
securities of $8.4 billion. Investment securities increased in
2003 compared with 2002, reflecting the reinvestment of
proceeds from loan sales, declines in commercial loan
balances and additional deposits assumed from acquisitions.
Noninterest expense was $1,700.4 million in 2003,
compared with $1,677.1 million in 2002. The $23.3 million
increase (1.4 percent) year-over-year was primarily the
result of higher costs associated with employee pension
benefits, corporate insurance, postage, telecommunications
and charitable contributions.
The provision for credit losses for this business unit
represents the residual aggregate of the net credit losses
allocated to the reportable business units and the
Company’s recorded provision determined in accordance
with accounting principles generally accepted in the United
58 U.S. Bancorp
States. The provision for credit losses was a net recovery of
$1.8 million in 2003, compared with a net recovery of
$26.7 million in 2002. Refer to the ‘‘Corporate Risk
Profile’’ section for further information on the provision for
credit losses, nonperforming assets and factors considered
by the Company in assessing the credit quality of the loan
portfolio and establishing the allowance for credit losses.
ACCOUNTING CHANGES
Note 2 of the Notes to Consolidated Financial Statements
discusses accounting standards recently issued or proposed
but not yet required to be adopted and the expected impact
of the changes in accounting standards. To the extent the
adoption of new accounting standards affects the
Company’s financial condition, results of operations or
liquidity, the impacts are discussed in the applicable
section(s) of the Management’s Discussion and Analysis and
the Notes to Consolidated Financial Statements.
On January 8, 2004, the Company elected to adopt the
‘‘fair value’’ method of accounting for stock-based
compensation. The Company implemented this accounting
change utilizing the ‘‘retroactive restatement method,’’
requiring all prior periods to be restated to recognize
compensation expense for the estimated fair value of all
employee stock awards including stock options granted,
modified or settled in fiscal years beginning after
December 15, 1994.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company
comply with accounting principles generally accepted in the
United States and conform to general practices within the
banking industry. The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions.
The financial position and results of operations can be
affected by these estimates and assumptions, which are
integral to understanding the Company’s financial
statements. Critical accounting policies are those policies
that management believes are the most important to the
portrayal of the Company’s financial condition and results,
and require management to make estimates that are
difficult, subjective or complex. Most accounting policies
are not considered by management to be critical accounting
policies. Several factors are considered in determining
whether or not a policy is critical in the preparation of
financial statements. These factors include, among other
things, whether the estimates are significant to the financial
statements, the nature of the estimates, the ability to readily
validate the estimates with other information including
third-parties or available prices, and sensitivity of the
estimates to changes in economic conditions and whether
alternative accounting methods may be utilized under
generally accepted accounting principles. Management has
discussed the development and the selection of critical
accounting policies with the Company’s Audit Committee.
Significant accounting policies are discussed in Note 1
of the Notes to Consolidated Financial Statements. Those
policies considered to be critical accounting policies are
described below.
Allowance for Credit Losses The allowance for credit losses
is established to provide for probable losses inherent in the
Company’s credit portfolio. The methods utilized to
estimate the allowance for credit losses, key assumptions
and quantitative and qualitative information considered by
management in determining the adequacy of the allowance
for credit losses are discussed in the ‘‘Credit Risk
Management’’ section.
Management’s evaluation of the adequacy of the
allowance for credit losses is often the most critical of
accounting estimates for a banking institution. It is a highly
subjective process impacted by many factors as discussed
throughout the Management’s Discussion and Analysis
section of the Annual Report. Although risk management
practices, methodologies and other tools are utilized to
determine each element of the allowance, degrees of
imprecision exist in these measurement tools due in part to
subjective judgments involved and an inherent lagging of
credit quality measurements relative to the stage of the
business cycle. Even determining the stage of the business
cycle is highly subjective. As discussed in the ‘‘Analysis and
Determination of Allowance for Credit Losses’’ section,
management considers the effect of imprecision and many
other factors in determining the allowance for credit losses
by establishing an ‘‘allowance for other factors’’ that is not
specifically allocated to a category of loans. If not
considered, inherent losses in the portfolio related to
imprecision and other subjective factors could have a
dramatic adverse impact on the liquidity and financial
viability of a bank.
Given the many subjective factors affecting the credit
portfolio, changes in the allowance for other factors may
not directly coincide with changes in the risk ratings of the
credit portfolio reflected in the risk rating process. This is in
part due to the timing of the risk rating process in relation
to changes in the business cycle, the exposure and mix of
loans within risk rating categories, levels of nonperforming
loans and the timing of charge-offs and recoveries. For
example, the amount of loans within specific risk ratings
may change, providing a leading indicator of improving
credit quality, while nonperforming loans and net charge-
offs continue at elevated levels. Because the allowance
specifically allocated to commercial loans is primarily driven
by risk ratings and loss ratios determined through migration
U.S. Bancorp 59
analysis and historical performance, the amount of the
allowance for commercial and commercial real estate loans
might decline. However, it is likely that management would
maintain an adequate allowance for credit losses by
increasing the allowance for other factors at a stage in the
business cycle that is uncertain and when nonperforming
asset levels remain elevated.
Sensitivity analysis to the many factors impacting the
allowance for credit losses is difficult. Some factors are
quantifiable while other factors require qualitative
judgment. Management conducts analysis with respect to
the accuracy of risk ratings and the volatility of inherent
loss rates applied to risk categories and utilizes the results
of this analysis to determine retail loss projections. This
analysis is then considered in determining the level of the
allowance for credit losses. Refer to the ‘‘Analysis and
Determination of the Allowance for Credit Losses’’ section
for further information.
Asset Impairment In the ordinary course of business, the
Company evaluates the carrying value of its assets for
potential impairment. Generally, potential impairment is
determined based on a comparison of fair value to the
carrying value. The determination of fair value can be
highly subjective, especially for assets that are not actively
traded or when market-based prices are not available. The
Company estimates fair value based on the present value of
estimated future cash flows. The initial valuation and
subsequent impairment tests may require the use of
significant management estimates. Additionally, determining
the amount, if any, of an impairment may require an
assessment of whether or not a decline in an asset’s
estimated fair value below the recorded value is temporary
in nature. While impairment assessments impact most asset
categories, the following areas are considered to be critical
accounting matters in relation to the financial statements.
Mortgage Servicing Rights MSRs are capitalized as separate
assets when loans are sold and servicing is retained. The
total cost of loans sold is allocated between the loans sold
and the servicing assets retained based on their relative fair
values. MSRs that are purchased from others are initially
recorded at cost. The carrying value of the MSRs is
amortized in proportion to and over the period of estimated
net servicing revenue and recorded in noninterest expense as
amortization of intangible assets. The carrying value of
these assets is periodically reviewed for impairment using a
lower of carrying value or fair value methodology. For
purposes of measuring impairment, the servicing rights are
stratified based on the underlying loan type and note rate
and the carrying value for each stratum is compared to fair
value based on a discounted cash flow analysis, utilizing
current prepayment speeds and discount rates. Events that
may significantly affect the estimates used are changes in
interest rates and the related impact on mortgage loan
prepayment speeds and the payment performance of the
underlying loans. If the carrying value is greater than fair
value, impairment is recognized through a valuation
allowance for each impaired stratum and recorded as
amortization of intangible assets. The changes in the fair
value of MSRs at December 31, 2003, to immediate 25 and
50 basis point adverse changes in interest rates would be
approximately $78 million and $127 million, respectively.
An upward movement in interest rates at December 31,
2003, of 25 and 50 basis points would increase the value of
the MSRs by approximately $75 million and $133 million,
respectively. Refer to Note 11 of the Notes to Consolidated
Financial Statements for additional information regarding
MSRs.
Goodwill and Other Intangibles The Company records all
assets and liabilities acquired in purchase acquisitions,
including goodwill and other intangibles, at fair value as
required by Statement of Financial Accounting Standards
No. 141, ‘‘Goodwill and Other Intangible Assets.’’
Goodwill and indefinite-lived assets are no longer amortized
but are subject, at a minimum, to annual tests for
impairment. Under certain situations, interim impairment
tests may be required if events occur or circumstances
change that would more likely than not reduce the fair
value of a reporting segment below its carrying amount.
Other intangible assets are amortized over their estimated
useful lives using straight-line and accelerated methods and
are subject to impairment if events or circumstances indicate
a possible inability to realize the carrying amount.
The initial recognition of goodwill and other intangible
assets and subsequent impairment analysis require
management to make subjective judgments concerning
estimates of how the acquired assets will perform in the
future using valuation methods including discounted cash
flow analysis. Additionally, estimated cash flows may
extend beyond ten years and, by their nature, are difficult
to determine over an extended timeframe. Events and
factors that may significantly affect the estimates include,
among others, competitive forces, customer behaviors and
attrition, changes in revenue growth trends, cost structures
and technology, changes in discount rates and specific
industry and market conditions. In determining the
reasonableness of cash flow estimates, the Company reviews
historical performance of the underlying assets or similar
assets in an effort to assess and validate assumptions
utilized in its estimates.
In assessing the fair value of reporting units, the
Company may consider the stage of the current business
cycle and potential changes in market conditions in
estimating the timing and extent of future cash flows. Also,
management often utilizes other information to validate the
60 U.S. Bancorp
reasonableness of its valuations including public market
comparables, multiples of recent mergers and acquisitions of
similar businesses. Valuation multiples may be based on
revenue, price-to-earnings and tangible capital ratios of
comparable public companies and business segments. These
multiples may be adjusted to consider competitive
differences including size, operating leverage and other
factors. The carrying amount of a reporting unit is
determined based on the capital required to support the
reporting unit’s activities including its tangible and
intangible assets. The determination of a reporting unit’s
capital allocation requires management judgment and
considers many factors including the regulatory capital
regulations and capital characteristics of comparable public
companies in relevant industry sectors. In certain
circumstances, management will engage a third-party to
independently validate its assessment of the fair value of its
business segments.
The Company’s annual assessment of potential
goodwill impairment was completed during the second
quarter of 2003. Based on the results of this assessment, no
goodwill impairment was recognized.
DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of the
Company’s management, including its principal executive
officer and principal financial officer, the Company has
evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the ‘‘Exchange Act’’)). Based upon
this evaluation, the principal executive officer and principal
financial officer have concluded that, as of the end of the
period covered by this report, the Company’s disclosure
controls and procedures were effective to ensure that
information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange
Commission rules and forms.
During the most recently completed fiscal quarter, there
was no change made in the Company’s internal controls
over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) that has materially
affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
U.S. Bancorp 61
U.S. Bancorp
Consolidated Balance Sheet
At December 31 (Dollars in Millions)
Assets
Cash and due from banks ******************************************************************************
Investment securities
Held-to-maturity (fair value $161 and $240, respectively) ************************************************
Available-for-sale ***********************************************************************************
Loans held for sale ************************************************************************************
Loans
Commercial****************************************************************************************
Commercial real estate******************************************************************************
Residential mortgages ******************************************************************************
Retail *********************************************************************************************
Total loans *************************************************************************************
Less allowance for credit losses ***************************************************************
Net loans ***********************************************************************************
Premises and equipment *******************************************************************************
Customers’ liability on acceptances **********************************************************************
Goodwill **********************************************************************************************
Other intangible assets *********************************************************************************
Other assets ******************************************************************************************
2003
2002
$ 8,630
$ 10,758
152
43,182
1,433
38,526
27,242
13,457
39,010
118,235
(2,369)
115,866
1,957
121
6,025
2,124
9,796
233
28,255
4,159
41,944
26,867
9,746
37,694
116,251
(2,422)
113,829
1,697
140
6,325
2,321
12,310
Total assets ************************************************************************************
$189,286
$180,027
Liabilities and Shareholders’ Equity
Deposits
Noninterest-bearing *********************************************************************************
Interest-bearing ************************************************************************************
Time deposits greater than $100,000 *****************************************************************
Total deposits ***********************************************************************************
Short-term borrowings**********************************************************************************
Long-term debt ****************************************************************************************
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the junior
subordinated debentures of the parent company *******************************************************
Acceptances outstanding *******************************************************************************
Other liabilities ****************************************************************************************
$ 32,470
74,749
11,833
119,052
10,850
31,215
2,601
121
6,205
$ 35,106
68,214
12,214
115,534
7,806
28,588
2,994
140
6,529
Total liabilities ***********************************************************************************
170,044
161,591
Shareholders’ equity
Common stock, par value $0.01 a share — authorized: 4,000,000,000 shares
issued: 2003 — 1,972,643,007 shares; 2002 — 1,972,643,060 shares *********************************
Capital surplus *************************************************************************************
Retained earnings **********************************************************************************
Less cost of common stock in treasury: 2003 — 49,722,856 shares; 2002 — 55,686,500 shares*************
Other comprehensive income ************************************************************************
Total shareholders’ equity ************************************************************************
20
5,851
14,508
(1,205)
68
19,242
20
5,799
13,105
(1,272)
784
18,436
Total liabilities and shareholders’ equity ************************************************************
$189,286
$180,027
See Notes to Consolidated Financial Statements.
62 U.S. Bancorp
U.S. Bancorp
Consolidated Statement of Income
Year Ended December 31 (Dollars and Shares in Millions, Except Per Share Data)
2003
2002
2001
Interest Income
Loans*********************************************************************************
Loans held for sale *********************************************************************
Investment securities
Taxable ****************************************************************************
Non-taxable ************************************************************************
Other interest income *******************************************************************
Total interest income *************************************************************
Interest Expense
Deposits ******************************************************************************
Short-term borrowings ******************************************************************
Long-term debt ************************************************************************
Company-obligated mandatorily redeemable preferred securities*****************************
Total interest expense ************************************************************
Net interest income*********************************************************************
Provision for credit losses ***************************************************************
Net interest income after provision for credit losses ****************************************
Noninterest Income
Credit and debit card revenue ***********************************************************
Corporate payment products revenue *****************************************************
ATM processing services****************************************************************
Merchant processing services ***********************************************************
Trust and investment management fees***************************************************
Deposit service charges ****************************************************************
Treasury management fees**************************************************************
Commercial products revenue ***********************************************************
Mortgage banking revenue **************************************************************
Investment products fees and commissions ***********************************************
Securities gains, net ********************************************************************
Merger and restructuring-related gains****************************************************
Other *********************************************************************************
Total noninterest income **********************************************************
Noninterest Expense
Compensation *************************************************************************
Employee benefits**********************************************************************
Net occupancy and equipment***********************************************************
Professional services *******************************************************************
Marketing and business development *****************************************************
Technology and communications *********************************************************
Postage, printing and supplies ***********************************************************
Goodwill ******************************************************************************
Other intangibles ***********************************************************************
Merger and restructuring-related charges *************************************************
Other *********************************************************************************
Total noninterest expense *********************************************************
Income from continuing operations before income taxes ************************************
Applicable income taxes ****************************************************************
Income from continuing operations *******************************************************
Income (loss) from discontinued operations (after-tax) ***********************************
Cumulative effect of accounting change (after-tax) **************************************
Net income ****************************************************************************
Earnings Per Share
Income from continuing operations ****************************************************
Discontinued operations *************************************************************
Cumulative effect of accounting change ***********************************************
Net income*************************************************************************
Diluted Earnings Per Share
Income from continuing operations ****************************************************
Discontinued operations *************************************************************
Cumulative effect of accounting change ***********************************************
Net income*************************************************************************
Dividends declared per share************************************************************
Average common shares ****************************************************************
Average diluted common shares *********************************************************
See Notes to Consolidated Financial Statements.
$7,272.0
202.2
$7,743.0
170.6
1,654.6
29.4
99.8
9,258.0
1,096.6
166.8
702.2
103.1
2,068.7
7,189.3
1,254.0
5,935.3
560.7
361.3
165.9
561.4
953.9
715.8
466.3
400.5
367.1
144.9
244.8
—
370.4
1,438.2
46.1
96.0
9,493.9
1,485.3
222.9
834.8
136.6
2,679.6
6,814.3
1,349.0
5,465.3
517.0
325.7
160.6
567.3
892.1
690.3
416.9
479.2
330.2
132.7
299.9
—
398.8
$9,413.7
146.9
1,206.1
89.5
90.2
10,946.4
2,828.1
475.6
1,164.2
127.8
4,595.7
6,350.7
2,528.8
3,821.9
465.9
297.7
153.0
308.9
887.8
644.9
347.3
437.4
234.0
130.8
329.1
62.2
370.4
5,313.0
5,210.7
4,669.4
2,176.8
328.4
643.7
143.4
180.3
417.4
245.6
—
682.4
46.2
732.7
5,596.9
5,651.4
1,941.3
3,710.1
22.5
—
2,167.5
317.5
658.7
129.7
171.4
392.1
243.2
—
553.0
321.2
786.2
5,740.5
4,935.5
1,707.5
3,228.0
(22.7)
(37.2)
2,036.6
285.5
666.6
116.4
178.0
353.9
241.9
236.7
278.4
1,044.8
710.2
6,149.0
2,342.3
818.3
1,524.0
(45.2)
—
$3,732.6
$3,168.1
$1,478.8
$
$
$
$
$
1.93
.01
—
1.94
1.92
.01
—
1.93
.855
$
$
$
$
$
1.68
(.01)
(.02)
1.65
1.68
(.01)
(.02)
1.65
.780
$
$
$
$
$
.79
(.02)
—
.77
.79
(.03)
—
.76
.750
1,923.7
1,936.2
1,916.0
1,924.8
1,927.9
1,940.3
U.S. Bancorp 63
U.S. Bancorp
Consolidated Statement of Shareholders’ Equity
Common
Shares
Outstanding
Common
Stock
Capital
Surplus
Retained
Earnings
Other
Treasury Comprehensive
Income
Stock
Total
Shareholders’
Equity
1,902,083,434
$19
$4,275
430
$11,658
(265)
1,479
$ (880)
$ 96
(Dollars in Millions)
Balance December 31, 2000 ************
Cumulative impact of retroactive restatement***
Net income ********************************
Unrealized gain on securities available for sale ***
Unrealized gain on derivatives****************
Foreign currency translation adjustment *******
Realized gain on derivatives *****************
Reclassification adjustment for gains realized in
net income *******************************
Income taxes *******************************
Total comprehensive income ***********
Cash dividends declared on common stock ****
Issuance of common stock and treasury shares **
Purchase of treasury stock*******************
Retirement of treasury stock *****************
Stock option grants and restricted stock
amortization ******************************
Shares reserved to meet deferred
194
106
(4)
42
(333)
(6)
49
(468)
824
(3)
$15,168
165
1,479
194
106
(4)
42
(333)
(6)
1,478
(1,447)
1,434
(468)
—
415
—
69,502,689
(19,743,672)
1
1,384
(1,447)
(824)
415
3
compensation obligations ******************
(132,939)
Balance December 31, 2001 ************
1,951,709,512
$20
$5,683
$11,425
$ (478)
$ 95
$16,745
Net income ********************************
Unrealized gain on securities available for sale ***
Unrealized gain on derivatives****************
Foreign currency translation adjustment *******
Realized gain on derivatives *****************
Reclassification adjustment for gains realized in
net income *******************************
Income taxes *******************************
Total comprehensive income ***********
Cash dividends declared on common stock ****
Issuance of common stock and treasury shares **
Purchase of treasury stock*******************
Stock option grants and restricted stock
amortization ******************************
Shares reserved to meet deferred
10,589,034
(45,256,736)
compensation obligations ******************
(85,250)
3,168
(1,488)
(75)
188
3
249
(1,040)
(3)
1,048
324
7
64
(332)
(422)
3,168
1,048
324
7
64
(332)
(422)
3,857
(1,488)
174
(1,040)
188
—
Balance December 31, 2002 ************
1,916,956,560
$20
$5,799
$13,105
$(1,272)
$ 784
$18,436
Net income ********************************
Unrealized loss on securities available for sale ***
Unrealized loss on derivatives ****************
Foreign currency translation adjustment *******
Realized gain on derivatives *****************
Reclassification adjustment for gains realized in
net income *******************************
Income taxes *******************************
Total comprehensive income ***********
Cash dividends declared on common stock ****
Special dividend-Piper Jaffray spin-off *********
Issuance of common stock and treasury shares **
Purchase of treasury stock*******************
Stock option grants and restricted stock
amortization ******************************
Shares reserved to meet deferred
21,709,297
(14,971,000)
compensation obligations ******************
(774,706)
3,733
(1,645)
(685)
(51)
111
(8)
502
(417)
(18)
(716)
(373)
23
199
(288)
439
3,733
(716)
(373)
23
199
(288)
439
3,017
(1,645)
(685)
451
(417)
111
(26)
Balance December 31, 2003 ************
1,922,920,151
$20
$5,851
$14,508
$(1,205)
$ 68
$19,242
See Notes to Consolidated Financial Statements.
64 U.S. Bancorp
U.S. Bancorp
Consolidated Statement of Cash Flows
Year Ended December 31 (Dollars in Millions)
2003
2002
2001
Operating Activities
Net income **************************************************************************
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses **********************************************************
Depreciation and amortization of premises and equipment *****************************
Amortization of goodwill and other intangibles ****************************************
Provision for deferred income taxes *************************************************
(Gain) loss on sales of securities and other assets, net********************************
Mortgage loans originated for sale in the secondary market, net of repayments **********
Proceeds from sales of mortgage loans**********************************************
Stock-based compensation *********************************************************
Other, net ************************************************************************
$ 3,732.6
$ 3,168.1
$ 1,478.8
1,254.0
275.2
682.4
272.7
(300.4)
(27,665.8)
30,228.4
123.4
79.7
1,349.0
285.3
553.0
291.7
(411.1)
(22,567.9)
20,756.6
113.3
248.3
2,528.8
284.0
515.1
(296.1)
(428.7)
(15,500.2)
13,483.0
227.7
(110.5)
Net cash provided by (used in) operating activities *********************************
8,682.2
3,786.3
2,181.9
Investing Activities
Proceeds from sales of investment securities ********************************************
Proceeds from maturities of investment securities ****************************************
Purchases of investment securities *****************************************************
Net (increase) decrease in loans outstanding ********************************************
Proceeds from sales of loans **********************************************************
Purchases of loans *******************************************************************
Proceeds from sales of premises and equipment*****************************************
Purchases of premises and equipment**************************************************
Acquisitions, net of cash acquired ******************************************************
Divestitures **************************************************************************
Other, net ***************************************************************************
17,383.3
18,139.9
(51,127.3)
(4,193.3)
2,203.7
(944.3)
39.7
(670.1)
—
(381.8)
124.7
14,386.9
11,246.5
(26,469.8)
(4,111.3)
2,219.1
(240.2)
211.8
(429.8)
1,368.8
—
(126.1)
19,240.2
4,572.2
(32,278.6)
2,532.3
3,729.1
(87.5)
166.3
(299.2)
(741.4)
(340.0)
(143.9)
Net cash provided by (used in) investing activities *********************************
(19,425.5)
(1,944.1)
(3,650.5)
Financing Activities
Net increase (decrease) in deposits ****************************************************
Net increase (decrease) in short-term borrowings ****************************************
Principal payments on long-term debt***************************************************
Proceeds from issuance of long-term debt **********************************************
Proceeds from issuance of Company-obligated mandatorily redeemable preferred securities **
Redemption of Company-obligated mandatorily redeemable preferred securities *************
Proceeds from issuance of common stock***********************************************
Repurchase of common stock *********************************************************
Cash dividends paid ******************************************************************
Net cash provided by (used in) financing activities *********************************
Change in cash and cash equivalents ********************************************
Cash and cash equivalents at beginning of year *****************************************
3,449.0
3,869.5
(8,617.9)
11,467.5
—
(350.0)
398.4
(326.3)
(1,556.8)
8,333.4
(2,409.9)
11,192.1
7,002.3
(7,307.0)
(8,367.5)
10,650.9
—
—
147.0
(1,040.4)
(1,480.7)
(395.4)
1,446.8
9,745.3
(4,258.1)
5,244.3
(10,539.6)
11,702.3
1,500.0
—
136.4
(467.9)
(1,235.1)
2,082.3
613.7
9,131.6
Cash and cash equivalents at end of year ****************************************
$ 8,782.2
$ 11,192.1
$ 9,745.3
See Notes to Consolidated Financial Statements.
U.S. Bancorp 65
Notes to Consolidated Financial Statements
Note 1
Significant Accounting Policies
U.S. Bancorp and its subsidiaries (the ‘‘Company’’) is a
multi-state financial services holding company
headquartered in Minneapolis, Minnesota. The Company
provides a full range of financial services including lending
and depository services through banking offices principally
in 24 states. The Company also engages in credit card,
merchant, and ATM processing, mortgage banking,
insurance, trust and investment management, brokerage,
and leasing activities principally in domestic markets.
Basis of Presentation The consolidated financial statements
include the accounts of the Company and its subsidiaries.
The consolidation eliminates all significant intercompany
accounts and transactions. Certain items in prior periods
have been reclassified to conform to the current
presentation. The consolidated financial statements have
been retroactively restated due to the adoption of the fair
value method of accounting for stock-based compensation
as described in Note 2 and to report the results of Piper
Jaffray Companies as discontinued operations as described
in Note 4 of the Notes to Consolidated Financial
Statements.
Uses of Estimates The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions
that affect the amounts reported in the financial statements
and accompanying notes. Actual experience could differ
from those estimates.
Payment Services includes consumer and business credit
cards, corporate and purchasing card services, ATM
processing, merchant processing and debit cards.
Customized products and services, coupled with cutting-
edge technology are provided to consumer and business
customers, government clients, correspondent financial
institutions, merchants and co-brand partners.
Treasury and Corporate Support includes the Company’s
investment portfolios, funding, capital management and
asset securitization activities, interest rate risk management,
the net effect of transfer pricing related to average balances,
and the change in residual allocations associated with the
provision for loan losses. It also includes business activities
managed on a corporate basis, including income and
expense of enterprise-wide operations and administrative
support functions.
Segment Results Accounting policies for the lines of
business are the same as those used in preparation of the
consolidated financial statements with respect to activities
specifically attributable to each business line. However, the
preparation of business line results requires management to
establish methodologies to allocate funding costs and
benefits, expenses and other financial elements to each line
of business. For details of these methodologies and segment
results, see ‘‘Basis for Financial Presentation’’ and Table 22
‘‘Line of Business Financial Performance’’ included in
Management’s Discussion and Analysis which is
incorporated by reference into these Notes to Consolidated
Financial Statements.
BUSINESS SEGMENTS
SECURITIES
Within the Company, financial performance is measured by
major lines of business based on the products and services
provided to customers through its distribution channels.
The Company has five reportable operating segments:
Wholesale Banking offers lending, depository, treasury
management and other financial services to middle market,
large corporate and public sector clients.
Consumer Banking delivers products and services to the
broad consumer market and small businesses through
banking offices, telemarketing, on-line services, direct mail
and automated teller machines (‘‘ATMs’’).
Private Client, Trust and Asset Management provides trust,
private banking, financial advisory, investment management
and mutual fund processing services to affluent individuals,
businesses, institutions and mutual funds.
Realized gains or losses on securities are determined on a
trade date basis based on the specific carrying value of the
investments being sold.
Trading Securities Debt and equity securities held for resale
are classified as trading securities and reported at fair value.
Realized gains or losses are reported in noninterest income.
Available-for-sale Securities These securities are not
trading securities but may be sold before maturity in
response to changes in the Company’s interest rate risk
profile, funding needs or demand for collateralized deposits
by public entities. Available-for-sale securities are carried at
fair value with unrealized net gains or losses reported
within other comprehensive income in shareholders’ equity.
When sold, the amortized cost of the specific securities is
used to compute the gain or loss. Declines in fair value that
66 U.S. Bancorp
are deemed other than temporary, if any, are reported in
noninterest income.
are disclosed as off-balance sheet financial instruments in
Note 23 in the Notes to Consolidated Financial Statements.
Held-to-maturity Securities Debt securities for which the
Company has the positive intent and ability to hold to
maturity are reported at historical cost adjusted for
amortization of premiums and accretion of discounts.
Declines in fair value that are deemed other than
temporary, if any, are reported in noninterest income.
Securities Purchased Under Agreements to Resell and
Securities Sold Under Agreements to Repurchase
Securities purchased under agreements to resell and
securities sold under agreements to repurchase are generally
accounted for as collateralized financing transactions and
are recorded at the amounts at which the securities were
acquired or sold, plus accrued interest. Securities pledged as
collateral under these financing arrangements cannot be sold
or repledged by the secured party. The fair value of
collateral received is continually monitored and additional
collateral obtained or requested to be returned to the
Company as deemed appropriate.
EQUITY INVESTMENTS IN OPERATING ENTITIES
Equity investments in public entities in which ownership is
less than 20 percent are accounted for as available-for-sale
securities and carried at fair value. Similar investments in
private entities are accounted for using the cost method.
Investments in entities where ownership interest is between
20 percent and 50 percent are accounted for using the
equity method with the exception of limited partnerships
and limited liability companies where an ownership interest
of greater than 5 percent requires the use of the equity
method. If the Company has a voting interest greater than
50 percent, the consolidation method is used. All equity
investments are evaluated for impairment at least annually
and more frequently if certain criteria are met.
LOANS
Loans are reported net of unearned income. Interest income
is accrued on the unpaid principal balances as earned. Loan
and commitment fees and certain direct loan origination
costs are deferred and recognized over the life of the loan
and/or commitment period as yield adjustments.
Commitments to Extend Credit Unfunded residential
mortgage loan commitments entered into in connection with
mortgage banking activities are considered derivatives and
recorded on the balance sheet at fair value with changes in
fair value recorded in income. All other unfunded loan
commitments are generally related to providing credit
facilities to customers of the bank and are not actively
traded financial instruments. These unfunded commitments
Allowance for Credit Losses Management determines the
adequacy of the allowance based on evaluations of the loan
portfolio, recent loss experience, and other pertinent factors,
including economic conditions. This evaluation is inherently
subjective as it requires estimates, including amounts of
future cash collections expected on nonaccrual loans, which
may be susceptible to significant change. The allowance for
credit losses relating to impaired loans is based on the
loan’s observable market price, the collateral for certain
collateral-dependent loans, or the discounted cash flows
using the loan’s effective interest rate.
The Company determines the amount of the allowance
required for certain sectors based on relative risk
characteristics of the loan portfolio. The allowance recorded
for commercial loans is based on quarterly reviews of
individual credit relationships and an analysis of the
migration of commercial loans and actual loss experience.
The allowance recorded for homogeneous consumer loans is
based on an analysis of product mix, risk characteristics of
the portfolio, bankruptcy experiences, and historical losses,
adjusted for current trends, for each homogenous category
or group of loans. The allowance is increased through
provisions charged to operating earnings and reduced by net
charge-offs.
The Company also assesses the credit risk associated
with off-balance sheet loan commitments and letters of
credit and determines the appropriate amount of credit loss
liability that should be recorded. The liability for off-
balance sheet credit exposure related to loan commitments
is included in the allowance for loan losses.
Nonaccrual Loans Generally commercial loans (including
impaired loans) are placed on nonaccrual status when the
collection of interest or principal has become 90 days past
due or is otherwise considered doubtful. When a loan is
placed on nonaccrual status, unpaid interest is reversed.
Future interest payments are generally applied against
principal. Revolving consumer lines and credit cards are
charged off by 180 days past due and closed-end consumer
loans other than loans secured by 1-4 family properties are
charged off at 120 days past due and are, therefore,
generally not placed on nonaccrual status.
Impaired Loans A loan is considered to be impaired when,
based on current information and events, it is probable that
the Company will be unable to collect all amounts due
(both interest and principal) according to the contractual
terms of the loan agreement.
Restructured Loans In cases where a borrower experiences
financial difficulties and the Company makes certain
concessionary modifications to contractual terms, the loan is
U.S. Bancorp 67
classified as a restructured loan. Loans restructured at a rate
equal to or greater than that of a new loan with
comparable risk at the time the contract is modified may be
excluded from restructured loans in the calendar years
subsequent to the restructuring if they are in compliance
with the modified terms.
Generally, a nonaccrual loan that is restructured
remains on nonaccrual for a period of six months to
demonstrate that the borrower can meet the restructured
terms. However, performance prior to the restructuring, or
significant events that coincide with the restructuring, are
considered in assessing whether the borrower can meet the
new terms and may result in the loan being returned to
accrual status at the time of restructuring or after a shorter
performance period. If the borrower’s ability to meet the
revised payment schedule is not reasonably assured, the
loan remains classified as a nonaccrual loan.
Leases The Company engages in both direct and leveraged
lease financing. The net investment in direct financing leases
is the sum of all minimum lease payments and estimated
residual values, less unearned income. Unearned income is
added to interest income over the terms of the leases to
produce a level yield.
The investment in leveraged leases is the sum of all
lease payments (less nonrecourse debt payments) plus
estimated residual values, less unearned income. Income
from leveraged leases is recognized over the term of the
leases based on the unrecovered equity investment.
Residual values on leased assets are reviewed regularly
for other than temporary impairment. Residual valuations
for retail automobile leases are based on independent
assessments of expected used car sales prices at the end-of-
term. Impairment tests are conducted based on these
valuations considering the probability of the lessee returning
the asset to the Company, re-marketing efforts, insurance
coverage and ancillary fees and costs. Valuations for
commercial leases are based upon external or internal
management appraisals. When there is other than
temporary impairment in the estimated fair value of the
Company’s interest in the residual value of a leased asset,
the carrying value is reduced to the estimated fair value
with the writedown recognized in the current period in
commercial products revenue or other noninterest income.
Loans Held for Sale Loans held for sale (‘‘LHFS’’) represent
mortgage loan originations intended to be sold in the
secondary market and other loans that management has an
active plan to sell. LHFS are carried at the lower of cost or
market value as determined on an aggregate basis by type
of loan. In the event management decides to sell loans
receivable, the loans are transferred at the lower of cost or
fair value. The Interagency Guidance on Certain Loans
Held for Sale, dated March 26, 2001, requires loans
transferred to LHFS to be marked-to-market (‘‘MTM’’) at
the time of transfer. MTM losses related to the sale/transfer
of non-homogeneous loans that are predominantly credit-
related are reflected in charge-offs. With respect to
homogeneous loans, the amount of ‘‘probable’’ credit loss
determined in accordance with Statement of Financial
Accounting Standards No. 5 (‘‘SFAS 5’’), ‘‘Accounting for
Contingencies,’’ methodologies utilized to determine the
specific allowance allocation for the portfolio is also
included in charge-offs. Any incremental loss determined in
accordance with MTM accounting, that includes
consideration of other factors such as estimates of future
losses, is reported separately from charge-offs as a reduction
to the allowance for credit losses. Subsequent decreases in
fair value are recognized in noninterest income.
Other Real Estate Other real estate (‘‘ORE’’), which is
included in other assets, is property acquired through
foreclosure or other proceedings. ORE is carried at fair
value, less estimated selling costs. The property is evaluated
regularly and any decreases in the carrying amount are
included in noninterest expense.
DERIVATIVE FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company enters into
derivative transactions to manage its interest rate and
prepayment risk and to accommodate the business
requirements of its customers. All derivative instruments are
recorded as either assets or liabilities at fair value.
Subsequent changes in a derivative’s fair value are
recognized currently in earnings unless specific hedge
accounting criteria are met.
All derivative instruments that qualify for hedge
accounting are recorded at fair value and classified either as
a hedge of the fair value of a recognized asset or liability
(‘‘fair value’’ hedge) or as a hedge of the variability of cash
flows to be received or paid related to a recognized asset or
liability or a forecasted transaction (‘‘cash flow’’ hedge).
Changes in the fair value of a derivative that is highly
effective and designated as a fair value hedge and the
offsetting changes in the fair value of the hedged item are
recorded in income. Changes in the fair value of a
derivative that is highly effective and designated as a cash
flow hedge are recognized in other comprehensive income
until income from the cash flows of the hedged item is
recognized. The Company performs an assessment, both at
the inception of the hedge and on a quarterly basis
thereafter, when required, to determine whether these
derivatives are highly effective in offsetting changes in the
value of the hedged items. Any change in fair value
resulting from hedge ineffectiveness is immediately recorded
in noninterest income.
68 U.S. Bancorp
If a derivative designated as a hedge is terminated or
ceases to be highly effective, the gain or loss is amortized to
earnings over the remaining life of the hedged asset or
liability (fair value hedge) or over the same period(s) that
the forecasted hedged transactions impact earnings (cash
flow hedge). If the hedged item is disposed of, or the
forecasted transaction is no longer probable, the derivative
is recorded at fair value with any resulting gain or loss
included in the gain or loss from the disposition of the
hedged item or, in the case of a forecasted transaction that
is no longer probable, included in earnings immediately.
OTHER SIGNIFICANT POLICIES
Intangible Assets The price paid over the net fair value of
the acquired businesses (‘‘goodwill’’) is not amortized.
Other intangible assets are amortized over their estimated
useful lives, using straight-line and accelerated methods. The
recoverability of goodwill and other intangible assets is
evaluated annually, at a minimum, or on an interim basis if
events or circumstances indicate a possible inability to
realize the carrying amount. The evaluation includes
assessing the estimated fair value of the intangible asset
based on market prices for similar assets, where available,
and the present value of the estimated future cash flows
associated with the intangible asset.
Income Taxes Deferred taxes are recorded to reflect the tax
consequences on future years of differences between the tax
bases of assets and liabilities and the financial reporting
amounts at each year-end.
Mortgage Servicing Rights Mortgage servicing rights
(‘‘MSRs’’) are capitalized as separate intangible assets when
loans are sold and servicing is retained. The total cost of
loans sold is allocated between the loans sold and the
servicing assets retained based on their relative fair values.
MSRs that are purchased from others are initially recorded
at cost. The carrying value of the MSRs is amortized in
proportion to, and over the period of, estimated net
servicing revenue and recorded in noninterest expense as
amortization of intangible assets. The carrying value of
these assets is periodically reviewed for impairment using a
lower of carrying value or fair value methodology. For
purposes of measuring impairment, the servicing rights are
stratified based on the underlying loan type and note rate
and the carrying value of each stratum is compared to fair
value based on a discounted cash flow analysis, utilizing
current prepayment speeds and discount rates. Events that
may significantly affect the estimates used are changes in
interest rates and the related impact on mortgage loan
prepayment speed and the payment performance of the
underlying loans. If the carrying value is greater than fair
value, impairment is recognized through a valuation
allowance for each impaired stratum and recorded as
amortization of intangible assets. The valuation allowance is
adjusted each subsequent period to reflect any increase or
decrease in the indicated impairment. The Company reviews
mortgage servicing rights for other-than-temporary
impairment each quarter and recognizes a direct write-down
when the recoverability of a recorded valuation allowance is
determined to be remote. In determining whether other-
than-temporary impairment has taken place, the Company
considers both historical and projected trends in pay off
activity and the potential for impairment recovery. Unlike a
valuation allowance, a direct write-down permanently
reduces the carrying value of the mortgage servicing rights,
precluding subsequent reversals.
Pensions For purposes of its retirement plans, the Company
utilizes a measurement date of September 30. At the
measurement date, plan assets are determined based on fair
value, generally representing observable market prices. The
actuarial cost method used to compute the pension
liabilities and related expense is the projected unit credit
method. In essence, the projected benefit obligation is
determined based on the present value of projected benefit
distributions at an assumed discount rate. The discount rate
utilized is based on match-funding maturities and interest
payments of high quality corporate bonds available in the
market place to projected cash flows as of the measurement
date for future benefit payments. Periodic pension expense
(or credits) includes service costs, interest costs based on the
assumed discount rate, the expected return on plan assets
based on an actuarially derived market-related value and
amortization of actuarial gains and losses. Pension
accounting reflects the long-term nature of benefit
obligations and the investment horizon of plan assets and
can have the effect of reducing earnings volatility related to
short-term changes in interest rates and market valuations.
Actuarial gains and losses include the impact of plan
amendments and various unrecognized gains and losses
which are deferred and amortized over the future service
periods of active employees. The market-related value
utilized to determine the expected return on plan assets is
based on fair value adjusted for the difference between
expected returns and actual performance of plan assets. The
unrealized difference between actual experience and
expected returns is included in the market-related value
ratably over a five-year period.
Premises and Equipment Premises and equipment are
stated at cost less accumulated depreciation and depreciated
primarily on a straight-line basis over the estimated life of
the assets. Estimated useful lives range up to 40 years for
newly constructed buildings and from 3 to 20 years for
furniture and equipment.
Capitalized leases, less accumulated amortization, are
included in premises and equipment. The lease obligations
U.S. Bancorp 69
are included in long-term debt. Capitalized leases are
amortized on a straight-line basis over the lease term and
the amortization is included in depreciation expense.
Statement of Cash Flows For purposes of reporting cash
flows, cash and cash equivalents include cash and money
market investments, defined as interest-bearing amounts due
from banks, federal funds sold and securities purchased
under agreements to resell.
Stock-Based Compensation The Company grants stock
awards including restricted stock and options to purchase
common stock of the Company. Stock option grants are for
a fixed number of shares to employees and directors with
an exercise price equal to the fair value of the shares at the
date of grant. The Company recognizes stock-based
compensation in its results of operations utilizing the fair
value method under Statement of Financial Accounting
Standard No. 123, ‘‘Accounting for Stock-Based
Compensation’’ (‘‘SFAS 123’’). Stock-based compensation is
recognized using an accelerated method of amortization for
awards with graded vesting features and on a straight-line
basis for awards with cliff vesting. The amortization of
stock-based compensation reflects estimated forfeitures
adjusted for actual forfeiture experience. As compensation
expense is recognized, a deferred tax is recorded that
represents an estimate of the future tax deduction from
exercise or release of restrictions. At the time stock options
are exercised, cancelled or expire, the Company may be
required to recognize an adjustment to tax expense.
Per Share Calculations Earnings per share is calculated by
dividing net income by the weighted average number of
common shares outstanding during the year. Diluted
earnings per share is calculated by adjusting income and
outstanding shares, assuming conversion of all potentially
dilutive securities, using the treasury stock method. All per
share amounts have been restated for stock splits.
Note 2
Accounting Changes
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity In May 2003,
the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 150 (‘‘SFAS 150’’),
‘‘Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,’’ which
establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of
both liabilities and equity. The Company adopted SFAS 150
for financial instruments entered into or modified after
May 31, 2003, and adopted for all other financial
instruments as of July 1, 2003. The adoption of SFAS 150
did not have a material impact on the Company’s financial
instruments.
Derivative Instruments and Hedging Activities In April
2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 149
(‘‘SFAS 149’’), ‘‘Amendment of Statement 133 on Derivative
Instruments and Hedging Activities,’’ which amends and
clarifies accounting and reporting standards for derivative
instruments, including certain derivative instruments
embedded in other contracts and for hedging activities
under Statement of Financial Accounting Standards No. 133
(‘‘SFAS 133’’), ‘‘Accounting for Derivative Instruments and
Hedging Activities.’’ In particular, SFAS 149 clarifies under
what circumstances a contract with an initial net investment
meets the characteristic of a derivative and clarifies when a
derivative contains a financing component. SFAS 149 is
generally effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS 149 did not
have a material impact on the Company’s financial
statements.
Consolidation of Variable Interest Entities In January 2003,
the Financial Accounting Standards Board issued
Interpretation No. 46 (revised December 2003) (‘‘FIN 46’’),
‘‘Consolidation of Variable Interest Entities’’ (‘‘VIEs’’), an
interpretation of Accounting Research Bulletin No. 51,
‘‘Consolidated Financial Statements,’’ to improve financial
reporting of special purpose and other entities. The
interpretation requires the consolidation of entities in which
an enterprise absorbs a majority of the entity’s expected
losses, receives a majority of the entity’s expected residual
returns, or both, as a result of ownership, contractual or
other financial interests in the entity. Prior to the issuance
of FIN 46, consolidation generally occurred when an
enterprise controlled another entity through voting interests.
Certain VIEs that are qualifying special purpose entities
(‘‘QSPEs’’) subject to the reporting requirements of
Statement of Financial Accounting Standards No. 140
(‘‘SFAS 140’’), ‘‘Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities,’’ are not
required to be consolidated under the provisions of FIN 46.
The consolidation provisions of FIN 46 apply to VIEs
created or entered into after January 31, 2003. For VIEs
created before February 1, 2003, the provisions of FIN 46
were effective for entities commonly referred to as special
purpose entities (‘‘SPEs’’) for periods ending after
December 15, 2003, and for all other types of entities was
deferred to periods ending after March 15, 2004.
The Company has relationships with several SPEs.
Because the Company’s investment securities conduit and
the asset-backed securitizations are QSPEs, which are
exempt from consolidation under the provisions of FIN 46,
the Company does not believe that FIN 46 requires the
consolidation of the conduit or securitizations in its
financial statements. During the third quarter of 2003, the
70 U.S. Bancorp
Company elected not to reissue more than 90 percent of the
commercial paper funding of Stellar Funding Group, Inc.,
the commercial loan conduit. This action caused the conduit
to lose its status as a qualifying special purpose entity. As a
result, the Company recorded all of Stellar’s assets and
liabilities at fair value and the results of operations in the
consolidated financial statements of the Company. Given
the floating rate nature and high credit quality of the assets
within the conduit, the net impact to the Company’s
financial statements was not significant. Prior to
December 31, 2003, the remaining commercial paper
borrowings held by third-party investors matured and the
conduit was legally dissolved.
With respect to other interests in entities subject to FIN
46, including low-income housing investments, the adoption
of FIN 46 did not have a material impact on the
Company’s financial statements. The Company has
determined that the provisions of FIN 46 may require de-
consolidation of the subsidiary grantor trusts, which issue
mandatorily redeemable preferred securities (‘‘Trust
Preferred Securities’’). Currently, the Company consolidates
the grantor trusts and the balance sheet includes the
mandatorily redeemable preferred securities of the grantor
trusts. In the first quarter of 2004, the grantor trusts may
be de-consolidated and the junior subordinated debentures
of the Company owned by the grantor trusts would be
recorded. The Trust Preferred Securities currently qualify as
Tier 1 capital of the Company for regulatory capital
purposes. The banking regulatory agencies have issued
guidance that would continue the current regulatory capital
treatment for Trust Preferred Securities until further notice.
Stock-Based Compensation In December 2002, the
Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148 (‘‘SFAS 148’’),
‘‘Accounting for Stock-Based Compensation — Transition
and Disclosure,’’ an amendment of SFAS 123. SFAS 148
provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for
stock-based employee compensation. In previous years, the
Company accounted for stock-based employee
compensation under the intrinsic based method and
provided disclosure of the impact of the fair value based
method on reported income. For its 2003 financial
statements, the Company elected to adopt the fair value
method using the retroactive restatement approach. All
prior periods presented have been restated to reflect the
compensation cost that would have been recognized had the
recognition provisions of SFAS 123 been applied to all
awards granted to employees after January 1, 1995 that
remained unvested at the beginning of the first period
presented.
Guarantees In November 2002, the Financial Accounting
Standards Board issued Interpretation No. 45 (‘‘FIN 45’’),
‘‘Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness
of Others,’’ to clarify accounting and disclosure
requirements relating to a guarantor’s issuance of certain
types of guarantees. FIN 45 requires entities to disclose
additional information about certain guarantees, or group
of similar guarantees, even if the likelihood of the
guarantor’s having to make any payments under the
guarantee is remote. The disclosure provisions are effective
for interim and annual financial statements for the first
reporting period ending after December 15, 2002. For
certain guarantees, the interpretation also requires that
guarantors recognize a liability equal to the fair value of the
guarantee upon its issuance. The Company adopted the
initial recognition and measurement provision effective
January 1, 2003, which did not have a material impact on
the Company’s financial statements.
Business Combinations and Goodwill and Other Intangible
Assets In June 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 141 (‘‘SFAS 141’’), ‘‘Business Combinations,’’ and
Statement of Financial Accounting Standards No. 142
(‘‘SFAS 142’’), ‘‘Goodwill and Other Intangible Assets.’’
SFAS 141 mandates that the purchase method of accounting
be used for all business combinations initiated after
June 30, 2001, and established specific criteria for the
recognition of intangible assets separately from goodwill.
SFAS 142 addresses the accounting for goodwill and
intangible assets subsequent to their acquisition. The
Company adopted SFAS 142 on January 1, 2002. The most
significant changes made by SFAS 142 are that goodwill and
indefinite lived intangible assets are no longer amortized
and are to be tested for impairment at least annually. The
amortization provisions of SFAS 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect
to goodwill and intangible assets acquired prior to July 1,
2001, the amortization provisions of SFAS 142 were
effective upon adoption of SFAS 142.
Applying the provisions of SFAS 141 to recent
acquisitions and the provisions of SFAS 142 to purchase
acquisitions completed prior to July 1, 2001, increased
after-tax income for the year ended December 31, 2002, by
$205.6 million, or $.11 per diluted share. During the first
quarter of 2002, the Company completed its initial
impairment test as required by SFAS 142. As a result of this
initial impairment test, the Company recognized an after-tax
goodwill impairment charge of $37.2 million as a
‘‘cumulative effect of accounting change’’ in the income
statement in the first quarter of 2002. The impairment was
primarily related to the purchase of a transportation leasing
U.S. Bancorp 71
company in 1998 by the equipment leasing business.
Banking regulations exclude 100 percent of goodwill from
the determination of capital adequacy; therefore, the impact
of this impairment on the Company’s capital adequacy was
not significant.
Note 3
Business Combinations
On July 24, 2001, the Company acquired NOVA
Corporation (‘‘NOVA’’), a merchant processor, in a stock
and cash transaction valued at approximately $2.1 billion.
The transaction represented total assets acquired of
$2.9 billion and total liabilities assumed of $773 million.
Included in total assets were merchant contracts and other
intangibles of $650 million and the excess of purchase price
over the fair value of identifiable net assets (‘‘goodwill’’) of
$1.6 billion. The goodwill reflected NOVA’s leadership
position in the merchant processing market and its ability to
provide a technologically superior product that is enhanced
by a high level of customer service. The Company believes
that these factors, among others, will allow NOVA to
generate sufficient positive cash flows from new business in
future periods to support the goodwill recorded in
connection with the acquisition.
On December 31, 2002, the Company acquired the
corporate trust business of State Street Bank and Trust
Company (‘‘State Street Corporate Trust’’) in a cash
transaction valued at $725 million. State Street Corporate
Trust was a leading provider, particularly in the Northeast,
of corporate trust and agency services to a variety of
municipalities, corporations, government agencies and other
financial institutions serving approximately 20,000 client
issuances representing over $689 billion of assets under
administration. With this acquisition, the Company is
among the nation’s leading providers of a full range of
corporate trust products and services. The transaction
represented total assets acquired of $682 million and total
liabilities assumed of $39 million at the closing date.
Included in total assets were contract and other intangibles
with a fair value of $218 million and goodwill of
$449 million. The goodwill reflected the strategic value of
the combined organization’s leadership position in the
corporate trust business and processing economies of scale
resulting from the transaction. As part of the purchase
price, $75 million was placed in escrow for up to eighteen
months with payment contingent on the successful
transition of business relationships.
In addition to these mergers and business acquisitions,
the Company completed other strategic acquisitions to
enhance its presence in certain markets and businesses.
The following table summarizes acquisitions by the Company completed since January 1, 2001, treating Firstar Corporation
as the original acquiring company:
(Dollars and Shares in Millions)
Date
Assets (a)
Deposits
Corporate Trust business of State
Street Bank and Trust Company *****
Bay View Bank branches *************
The Leader Mortgage Company, LLC **
Pacific Century Bank *****************
NOVA Corporation *******************
U.S. Bancorp************************
December 2002
November 2002
April 2002
September 2001
July 2001
February 2001
$
13
362
517
570
949
86,602
$
—
3,305
—
712
—
51,335
(a) Assets acquired do not include purchase accounting adjustments.
Goodwill
and Other
Intangibles
$ 667
483
191
134
2,231
—
Cash Paid /
(Received) Shares Issued
Accounting
Method
$
643
(2,494)
85
(43)
842
—
—
—
—
—
57.0
952.4
Purchase
Purchase
Purchase
Purchase
Purchase
Pooling
72 U.S. Bancorp
Note 4
Discontinued Operations
On February 19, 2003, the Company announced that its
Board of Directors approved a plan to effect a distribution
of its capital markets business unit, including the investment
banking and brokerage activities primarily conducted by its
wholly-owned subsidiary, Piper Jaffray Companies. On
December 31, 2003, the Company completed the
distribution of all the outstanding shares of common stock
of Piper Jaffray Companies to its shareholders. This non-
cash distribution was tax-free to the Company, its
shareholders and Piper Jaffray Companies.
In connection with the December 31, 2003 distribution,
the results of Piper Jaffray Companies are reported in the
Company’s Consolidated Statement of Income separately as
discontinued operations.
The following table represents the condensed results of operations for discontinued operations:
Year Ended December 31 (Dollars in Millions)
Revenue ********************************************************************************
Noninterest expense *********************************************************************
Income (loss) from discontinued operations *************************************************
Costs of disposal (a) *********************************************************************
Income taxes (benefit) ********************************************************************
2003
$783.4
716.5
66.9
27.6
16.8
2002
$729.0
760.3
(31.3)
—
(8.6)
2001
$800.8
870.3
(69.5)
—
(24.3)
Discontinued operations, net of tax ******************************************************
$ 22.5
$ (22.7)
$ (45.2)
(a) The $27.6 million of disposal costs related to discontinued operations primarily represents legal, investment banking and other costs directly related to the distribution.
The distribution was treated as a dividend to
shareholders for accounting purposes and, as such, reduced
the Company’s retained earnings by $685 million. At
December 31, 2003, the Consolidated Balance Sheet reflects
the non-cash dividend and corresponding reduction in assets
and liabilities at that date. In accordance with accounting
principles generally accepted in the United States, the
Consolidated Balance Sheet for 2002 has not been restated.
A summary of the assets and liabilities of the discontinued
operations is as follows:
December 31 (Dollars in Millions)
2003
2002
Assets
Cash and cash equivalents *******************************************************************************
Trading securities ****************************************************************************************
Loans **************************************************************************************************
Goodwill ************************************************************************************************
Other assets (a) *****************************************************************************************
Total assets *******************************************************************************************
Liabilities
Deposits ************************************************************************************************
Short-term borrowings ************************************************************************************
Long-term debt ******************************************************************************************
Other liabilities (b) ***************************************************************************************
$ 382
656
—
306
1,025
$2,369
$
6
905
180
593
Total liabilities *****************************************************************************************
$1,684
$ 271
463
2
306
954
$1,996
$
7
707
215
458
$1,387
(a)
(b)
Includes customer margin account receivables, due from brokers/dealers and other assets.
Includes accrued expenses, due to brokers/dealers and other liabilities.
Following the distribution, the Company’s wholly-owned
subsidiary, USB Holdings, Inc. holds a $180 million
subordinated debt facility with Piper Jaffray & Co., a
broker-dealer subsidiary of Piper Jaffray Companies. In
addition, the Company provides an indemnification in an
amount up to $17.5 million with respect to certain specified
liabilities primarily resulting from third-party claims relating
to research analyst independence and from certain
regulatory investigations, as defined in the separation and
distribution agreement entered into with Piper Jaffray
Companies at the time of the distribution.
Note 5
Merger and Restructuring-Related Items
The Company recorded pre-tax merger and restructuring-
related items of $46.2 million, $321.2 million, and
$1,364.8 million, in 2003, 2002, and 2001, respectively. In
2003, merger-related items were primarily incurred in
connection with the NOVA acquisition and the Company’s
various other acquisitions including BayView and State
Street Corporate Trust. In 2002 and 2001, merger-related
items included costs associated with the Firstar/USBM
merger, NOVA and other smaller acquisitions noted below
and in Note 3 — Business Combinations.
U.S. Bancorp 73
The components of the merger and restructuring-related items are shown below:
(Dollars in Millions)
USBM
NOVA
Other (a)
Total
2003
Severance and employee-related ********************************
Systems conversions and integration*****************************
Asset write-downs and lease terminations ************************
Other merger-related items *************************************
Total 2003 ****************************************************
Noninterest expense *******************************************
Balance sheet recognition **************************************
Merger-related items — 2003 ********************************
2002
Severance and employee-related ********************************
Systems conversions and integration*****************************
Asset write-downs and lease terminations ************************
Balance sheet restructurings ************************************
Other merger-related items *************************************
Total 2002 ****************************************************
Noninterest expense *******************************************
Balance sheet recognition **************************************
Merger-related items — 2002 ********************************
2001
Severance and employee-related ********************************
Stock-based compensation *************************************
Systems conversions and integration*****************************
Asset write-downs and lease terminations ************************
Charitable contributions ****************************************
Balance sheet restructurings ************************************
Branch sale gain **********************************************
Branch consolidations ******************************************
Other merger-related items *************************************
$
$
$
$
$
—
—
—
—
—
—
—
—
4.1
194.9
104.0
(38.8)
4.8
$ 269.0
$ 269.0
—
$ 269.0
$ 238.6
190.5
207.1
130.4
76.0
457.6
(62.2)
20.0
69.1
Total 2001 ****************************************************
$1,327.1
Provision for credit losses **************************************
Noninterest income ********************************************
Noninterest expense *******************************************
Merger-related items ****************************************
Balance sheet recognition **************************************
Merger-related items — 2001 ********************************
$ 382.2
(62.2)
1,007.1
$1,327.1
—
$1,327.1
$
.8
25.9
6.8
—
$33.5
$33.5
—
$33.5
$ (3.8)
29.4
14.2
—
(1.1)
$38.7
$34.9
3.8
$38.7
$23.3
—
1.6
34.7
—
—
—
—
24.2
$83.8
$ —
—
1.6
$ 1.6
82.2
$83.8
$ —
6.9
3.0
1.4
$11.3
$12.7
(1.4)
$11.3
$ 9.1
17.3
6.0
—
3.5
$35.9
$17.3
18.6
$35.9
$17.8
—
15.2
5.7
—
—
—
—
4.8
$43.5
$ —
—
36.1
$36.1
7.4
$43.5
$
$
$
$
$
.8
32.8
9.8
1.4
44.8
46.2
(1.4)
44.8
9.4
241.6
124.2
(38.8)
7.2
$ 343.6
$ 321.2
22.4
$ 343.6
$ 279.7
190.5
223.9
170.8
76.0
457.6
(62.2)
20.0
98.1
$1,454.4
$ 382.2
(62.2)
1,044.8
$1,364.8
89.6
$1,454.4
(a)
In 2003 and 2002, ‘‘Other’’ primarily included merger and restructuring-related items pertaining to the Bay View acquisition, State Street Corporate Trust and the Lyon Financial
acquisition. In 2001, ‘‘Other’’ primarily included the 1999 merger of Firstar and Mercantile Bancorporation, Inc. and the 1998 acquisition of the former Firstar Corporation by Star
Banc. Star Banc was renamed Firstar Corporation.
The Company determines merger and restructuring-
related items and related accruals based on its integration
strategy and formulated plans. These plans are established
as of the acquisition date and are regularly evaluated during
the integration process.
Severance and employee-related charges include the cost
of severance, other benefits and outplacement costs
associated with the termination of employees primarily in
branch offices and centralized corporate support and data
processing functions. The severance amounts are determined
based on the Company’s existing severance pay programs
and are paid out over a benefit period of up to two years
from the time of termination. The total number of
employees included in severance amounts were
approximately 2,860 for USBM, and 400 for NOVA. In
2002, the Company recognized additional severance costs of
$13.1 million in connection with the USBM merger offset
by net curtailment and settlement gains of $9.0 million
related to changes in certain non-qualified pension plans.
Changes in severance costs for USBM and NOVA primarily
reflected a change in estimate in the liability given the mix
of employees terminated. Severance and employee-related
costs for identified groups of acquired employees are
included in the determination of goodwill at closing.
Severance and employee-related costs are recorded as
incurred for groups of employees not specifically identified
74 U.S. Bancorp
at the time of closing or acquired in business combinations
accounted for as ‘‘poolings.’’ In 2001, the company also
recognized $190.5 million of stock-based compensation
expense as a result of the accelerated vesting of certain
stock options and restricted stock due to the change of
control triggered by the USBM merger.
Systems conversions and integration costs are recorded
as incurred and are associated with the preparation and
mailing of numerous customer communications for the
acquisitions and conversion of customer accounts, printing
and distribution of training materials and policy and
procedure manuals, outside consulting fees, and other
expenses related to systems conversions and the integration
of acquired branches and operations.
Asset write-downs and lease terminations represent
lease termination costs and impairment of assets for
redundant office space, branches that will be vacated and
equipment disposed of as part of the integration plan. These
costs are recognized in the accounting period that contract
terminations occur or the asset becomes impaired and is
abandoned. In 2002, this category included $38.2 million of
signage write-offs, $26.9 million of software and equipment
write-offs, $32.0 million of lease and contract cancellations
and $6.9 million of leasehold and other related items
associated with the Firstar/USBM merger. In 2001, asset
write-downs and lease terminations included $45.7 million
of lease and contract cancellation costs, $36.2 million of
software and equipment write-offs and $48.5 million of
other assets deemed to be worthless due to integration
decisions in connection with the merger.
In connection with certain mergers, the Company has
made charitable contributions to reaffirm a commitment to
its markets or as part of specific conditions necessary to
achieve regulatory approval. These contributions were
funded up front and represent costs that would not have
been incurred had the merger not occurred. Charitable
contributions are charged to merger and restructuring
expenses or considered in determining the acquisition cost
at the applicable closing date.
Balance sheet restructurings primarily represent gains or
losses incurred by the Company related to the disposal of
certain businesses, products, or customer and business
relationships that no longer align with the long-term
strategy of the Company. It may also include charges to
realign risk management practices related to certain credit
portfolios. During 2002, the Company recognized asset
gains related to the sale of a non-strategic investment in a
sub-prime lending business of $28.7 million and a mark-to-
market recovery of $10.1 million associated with the
liquidation of U.S. Bancorp Libra’s investment portfolio.
During 2001, balance sheet restructuring costs incurred in
connection with the Firstar/USBM merger of $457.6 million
were comprised of a $201.3 million provision associated
with the Company’s integration of certain small business
products and management’s decision to discontinue an
unsecured small business product of USBM; $90.0 million
of charge-offs to align risk management practices, align
charge-off policies and to expedite the Company’s transition
out of a specific segment of the healthcare industry; and
$76.6 million of losses related to the sales of two higher
credit risk retail loan portfolios of USBM. Also, the amount
included $89.7 million related to the Company’s decision to
discontinue a high-yield investment banking business, to
restructure a co-branding credit card relationship of USBM,
and for the planned disposition of certain equity
investments that no longer aligned with the long-term
strategy of the Company. The alignment of risk
management practices included a write-down of several
large commercial loans originally held separately by both
Firstar and USBM, primarily to allow the Company to exit
or reduce these credits to conform with the credit risk
exposure policy of the combined entity.
Other merger-related items in 2002 of $7.2 million
primarily represented changes to conform accounting
policies implemented at the time of systems conversions
related to the Firstar/USBM merger and other acquired
entities. In 2001, other merger-related charges of
$98.1 million primarily included $69.1 million and
$24.2 million of investment banking fees, legal fees and
stock registration fees associated with the Firstar/USBM
merger and the acquisition of NOVA, respectively and
$4.8 million of other costs.
U.S. Bancorp 75
The following table presents a summary of activity with respect to the merger and restructuring-related accruals:
(Dollars in Millions)
Balance at December 31, 2000 ******************************************
Provision charged to operating expense *******************************
Additions related to purchase acquisitions *****************************
Cash outlays *******************************************************
Noncash write-downs and other **************************************
Balance at December 31, 2001 ******************************************
Provision charged to operating expense *******************************
Additions related to purchase acquisitions *****************************
Cash outlays *******************************************************
Noncash write-downs and others *************************************
Balance at December 31, 2002 ******************************************
Provision charged to operating expense *******************************
Additions (adjustments) related to purchase acquisitions*****************
Cash outlays *******************************************************
Noncash write-downs and others *************************************
USBM
$
—
1,327.1
—
(532.2)
(670.6)
124.3
269.0
—
(325.8)
(48.9)
18.6
—
—
(16.2)
—
NOVA
$ —
1.6
82.2
(32.4)
(3.0)
48.4
34.9
3.8
(36.2)
(35.8)
15.1
33.5
—
(29.1)
(1.4)
Other (a)
Total
$ 46.6
36.1
7.4
(66.3)
(11.0)
12.8
17.3
18.6
(24.6)
(5.7)
18.4
12.7
(1.4)
(14.1)
(11.5)
$
46.6
1,364.8
89.6
(630.9)
(684.6)
185.5
321.2
22.4
(386.6)
(90.4)
52.1
46.2
(1.4)
(59.4)
(12.9)
Balance at December 31, 2003 ******************************************
$
2.4
$ 18.1
$ 4.1
$
24.6
(a)
In 2003 and 2002, ‘‘Other’’ primarily included merger and restructuring-related items pertaining to the Bay View acquisition, State Street Corporate Trust and the Lyon Financial
acquisition. In 2001, ‘‘Other’’ primarily included the 1999 merger of Firstar and Mercantile Bancorporation, Inc. and the 1998 acquisition of the former Firstar Corporation by Star
Banc. Star Banc was renamed Firstar Corporation.
The adequacy of the accrued liabilities is reviewed
regularly taking into consideration actual and projected
payments. Adjustments are made to increase or decrease
these accruals as needed. Reversals of expenses can reflect a
lower utilization of benefits by affected staff, changes in
initial assumptions as a result of subsequent mergers and
alterations of business plans.
The components of the merger and restructuring-related accruals for all acquisitions were as follows:
(Dollars in Millions)
Severance****************************************************************************************
Other employee-related costs***********************************************************************
Lease termination and facility costs *****************************************************************
Contracts and system write-offs*********************************************************************
Other ********************************************************************************************
Total******************************************************************************************
December 31,
2003
December 31,
2002
$ 3.4
1.1
14.4
2.4
3.3
$24.6
$30.2
3.1
17.2
.5
1.1
$52.1
The merger and restructuring-related accruals by significant acquisition or business restructuring was as follows:
(Dollars in Millions)
NOVA********************************************************************************************
State Street Corporate Trust ************************************************************************
USBM *******************************************************************************************
Bay View *****************************************************************************************
Other acquisitions *********************************************************************************
Total******************************************************************************************
December 31,
2003
December 31,
2002
$18.1
4.1
2.4
—
—
$24.6
$15.1
7.8
18.6
5.8
4.8
$52.1
At December 31, 2002, the integration of Firstar and
USBM was completed, and no additional merger and
restructuring related charges occurred in 2003. The only
activity in the USBM accrual during 2003 was related to
severance costs that continue to be paid through the period
provided for in the Company’s severance plans. In 2003,
the integration of merchant processing platforms and
business processes of U.S. Bank National Association and
NOVA, as well as systems conversions for the acquisitions
of the State Street Corporate Trust business and Bay View
were completed. The Company does not anticipate any
merger or restructuring-related expenses in 2004 related to
completed acquisitions.
76 U.S. Bancorp
Note 6
Restrictions on Cash and Due from Banks
Bank subsidiaries are required to maintain minimum average reserve balances with the Federal Reserve Bank. The amount of
those reserve balances was approximately $243 million at December 31, 2003.
Note 7
Investment Securities
The detail of the amortized cost, gross unrealized holding gains and losses, and fair value of held-to-maturity and available-
for-sale securities at December 31 was as follows:
2003
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
Amortized
Cost
2002
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
Fair
Value
Fair
Value
Amortized
Cost
$
14
$ —
$ — $
14
$
20
$ —
$ — $
20
(Dollars in Millions)
Held-to-maturity (a)
Mortgage-backed securities **********
Obligations of state and political
subdivisions *********************
138
11
(2)
147
213
Total held-to-maturity securities *******
$
152
$ 11
$ (2)
$
161
$
233
Available-for-sale (b)
U.S. Treasury and agencies **********
Mortgage-backed securities **********
Asset-backed securities **************
Obligations of state and political
subdivisions *********************
Other securities and investments******
$ 1,634
40,229
250
335
993
$ 10
203
5
13
9
$ (69)
(407)
(3)
$ 1,575
40,025
252
$
421
24,967
646
—
(20)
348
982
558
949
14
$ 14
$ 15
699
28
22
2
(7)
220
$ (7)
$
240
$ — $
—
(4)
(1)
(47)
436
25,666
670
579
904
Total available-for-sale securities ******
$43,441
$240
$(499)
$43,182
$27,541
$766
$(52)
$28,255
(a) Held-to-maturity securities are carried at historical cost adjusted for amortization of premiums and accretion of discounts.
(b) Available-for-sale securities are carried at fair value with unrealized net gains or losses reported within other comprehensive income in shareholders’ equity.
The fair value of available-for-sale investments shown
above includes investments totaling $266.1 million with
unrealized losses of $19.8 million which have been in an
unrealized loss position for greater than 12 months. The
investments primarily represent 43 trust preferred securities
from 13 bank issuers. All principal and interest payments
are expected to be collected given the high credit quality of
the bank holding company issuers and the Company’s
ability and intent to hold the investments until such time as
the value recovers or maturity. All other available-for-sale
investments with unrealized losses have an aggregate fair
value of $27.3 billion and have been in an unrealized loss
position for less than 12 months and primarily represent
fixed-rate investments with temporary impairment resulting
from increases in interest rates since the purchase of the
investments. The Company has the ability to hold these
investments until such time as the value recovers or
maturity.
Securities carried at $31.0 billion at December 31,
2003, and $20.2 billion at December 31, 2002, were
pledged to secure public, private and trust deposits and for
other purposes required by law. Securities sold under
agreements to repurchase were collateralized by securities
and securities purchased under agreements to resell with an
amortized cost of $3.6 billion and $2.9 billion at
December 31, 2003, and 2002, respectively.
The following table provides information as to the amount of gross gains and losses realized through the sales of available-
for-sale investment securities.
(Dollars in Millions)
Realized gains **************************************************************************
Realized losses *************************************************************************
Net realized gains (losses) ************************************************************
Income tax (benefit) on realized gains (losses) *********************************************
2003
$ 363.9
(119.1)
$ 244.8
$ 93.0
2002
$316.5
(16.6)
$299.9
$114.0
2001
$333.0
(3.9)
$329.1
$115.2
For amortized cost, fair value and yield by maturity
date of held-to-maturity and available-for-sale securities
outstanding as of December 31, 2003, see Table 10
included in Management’s Discussion and Analysis which is
incorporated by reference into these Notes to Consolidated
Financial Statements.
U.S. Bancorp 77
Note 8
Loans and Allowance for Credit Losses
The composition of the loan portfolio at December 31 was as follows:
(Dollars in millions)
Commercial
2003
2002
Commercial****************************************************************************************
Lease financing ************************************************************************************
$ 33,536
4,990
$ 36,584
5,360
Total commercial ********************************************************************************
38,526
41,944
Commercial real estate
Commercial mortgages *****************************************************************************
Construction and development ***********************************************************************
Total commercial real estate **********************************************************************
Residential mortgages *****************************************************************************
Retail
Credit card ****************************************************************************************
Retail leasing **************************************************************************************
Home equity and second mortgage*******************************************************************
Other retail
Revolving credit *********************************************************************************
Installment *************************************************************************************
Automobile *************************************************************************************
Student ****************************************************************************************
Total other retail *****************************************************************************
Total retail **************************************************************************************
20,624
6,618
27,242
13,457
5,933
6,029
13,210
2,540
2,380
7,165
1,753
13,838
39,010
20,325
6,542
26,867
9,746
5,665
5,680
13,572
2,650
2,258
6,343
1,526
12,777
37,694
Total loans **********************************************************************************
$118,235
$116,251
Loans are presented net of unearned interest and
deferred fees and costs, which amounted to $1.5 billion and
$1.8 billion at December 31, 2003 and 2002, respectively.
The Company had loans of $28.7 billion at December 31,
2003, and $26.1 billion at December 31, 2002, pledged at
the Federal Home Loan Bank. Loans of $12.1 billion at
December 31, 2003, and $12.7 billion at December 31,
2002, were pledged at the Federal Reserve Bank.
The Company primarily lends to borrowers in the
24 states in which it has banking offices. Collateral for
commercial loans may include marketable securities,
accounts receivable, inventory and equipment. For details of
the Company’s commercial portfolio by industry group and
geography as of December 31, 2003 and 2002, see Table 7
included in Management’s Discussion and Analysis which is
incorporated by reference into these Notes to Consolidated
Financial Statements.
For detail of the Company’s commercial real estate
portfolio by property type and geography as of
December 31, 2003 and 2002, see Table 9 included in
Management’s Discussion and Analysis which is
incorporated by reference into these Notes to Consolidated
Financial Statements. Such loans are collateralized by the
related property.
Nonperforming assets include nonaccrual loans,
restructured loans not performing in accordance with
modified terms, other real estate and other nonperforming
assets owned by the Company. For details of the
Company’s nonperforming assets as of December 31, 2003,
2002 and 2001, see Table 12 included in Management’s
Discussion and Analysis which is incorporated by reference
into these Notes to Consolidated Financial Statements.
The following table lists information related to nonperforming loans as of December 31:
(Dollars in Millions)
2003
2002
Loans on nonaccrual status *****************************************************************************
Restructured loans *************************************************************************************
Total nonperforming loans *******************************************************************************
Interest income that would have been recognized at original contractual terms ********************************
Amount recognized as interest income********************************************************************
Forgone revenue ***************************************************************************************
$ 979.5
40.5
$1,020.0
$
$
94.1
26.7
67.4
$1,188.7
48.6
$1,237.3
$ 102.1
36.7
$
65.4
78 U.S. Bancorp
Activity in the allowance for credit losses was as follows:
(Dollars in Millions)
Balance at beginning of year ************************************************************
Add
2003
2002
2001
$2,422.0
$2,457.3
$1,786.9
Provision charged to operating expense (a) ********************************************
1,254.0
1,349.0
2,528.8
Deduct
Loans charged off*******************************************************************
Less recoveries of loans charged off **************************************************
Net loans charged off ***************************************************************
Losses from loan sales/transfers *********************************************************
Acquisitions and other changes **********************************************************
1,494.1
242.4
1,251.7
—
(55.7)
1,590.7
217.7
1,373.0
—
(11.3)
1,771.4
224.9
1,546.5
(329.3)
17.4
Balance at end of year******************************************************************
$2,368.6
$2,422.0
$2,457.3
(a) In 2001, $382.2 million of the provision for credit losses was incurred in connection with the Firstar/USBM merger.
A portion of the allowance for credit losses is allocated to loans deemed impaired. All impaired loans are included in
non-performing assets. A summary of these loans and their related allowance for loan losses is as follows:
(Dollars in Millions)
Impaired loans
Valuation allowance required*********
No valuation allowance required******
Total impaired loans *******************
Average balance of impaired loans during
the year ***************************
Interest income recognized on impaired
loans during the year ***************
2003
2002
2001
Recorded
Investment
Valuation
Allowance
Recorded
Investment
Valuation
Allowance
Recorded
Investment
Valuation
Allowance
$841
—
$841
$970
—
$108
—
$108
$157
—
$157
$992
—
$992
$839
—
$694
—
$694
$780
—
$125
—
$125
Commitments to lend additional funds to customers
whose loans were classified as nonaccrual or restructured at
December 31, 2003, totaled $107.9 million. During 2003
there were $18.0 million of loans that were restructured at
market interest rates and returned to an accruing status.
The allowance for credit losses includes credit loss
liability related to off-balance sheet loan commitments. At
December 31, 2003, the allowance for credit losses includes
an estimated $133.6 million credit loss liability related to
the Company’s $58.3 billion of commercial off-balance
sheet loan commitments and letters of credit.
Note 9
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
FINANCIAL ASSET SALES
When the Company sells financial assets, it may retain
interest-only strips, servicing rights, residual rights to a cash
reserve account, and/or other retained interests in the sold
financial assets. The gain or loss on sale depends in part on
the previous carrying amount of the financial assets
involved in the transfer and is allocated between the assets
sold and the retained interests based on their relative fair
values at the date of transfer. Quoted market prices are
used to determine retained interest fair values when readily
available. Since quotes are generally not available for
retained interests, the Company estimates fair value based
on the present value of future expected cash flows using
management’s best estimates of the key assumptions
including credit losses, prepayment speeds, forward yield
curves, and discount rates commensurate with the risks
involved. Retained interests and liabilities are recorded at
fair value using a discounted cash flow methodology at
inception and are evaluated at least quarterly thereafter.
Conduits and Securitization The Company sponsors an off-
balance sheet conduit to which it transferred high-grade
investment securities, funded by the issuance of commercial
paper. The conduit, a qualifying special purpose entity, held
assets of $7.3 billion at December 31, 2003, and $9.5 billion
in assets at December 31, 2002. These investment securities
include primarily (i) private label asset-backed securities, which
are insurance ‘‘wrapped’’ by AAA/Aaa-rated monoline
insurance companies and (ii) government agency mortgage-
backed securities and collateralized mortgage obligations. The
conduit had commercial paper liabilities of $7.3 billion at
December 31, 2003, and $9.5 billion at December 31, 2002.
The Company benefits by transferring the investment securities
into a conduit that provides diversification of funding sources
in a capital-efficient manner and the generation of income.
U.S. Bancorp 79
The Company provides a liquidity facility to the
conduit. Utilization of the liquidity facility would be
triggered by the conduit’s inability to issue commercial
paper to fund its assets. The recorded fair value of the
Company’s liability for the liquidity facility included in
other liabilities was $47.3 million at December 31, 2003,
and $37.7 million at December 31, 2002. Changes in fair
value of these liabilities are recorded in the income
statement as other noninterest income or expense. In
addition, the Company recorded at fair value its retained
residual interest in the investment securities conduit of
$89.5 million at December 31, 2003, and $93.4 million at
December 31, 2002. The Company recorded $30.5 million
from the conduit during 2003 and $63.0 million during
2002 in other noninterest income, for revenues related to
the conduit including fees for servicing, management,
administration and accretion income from retained interests.
The Company also has an asset-backed securitization
to fund an unsecured small business credit product. The
unsecured small business credit securitization trust held
assets of $497.5 million at December 31, 2003, of which
the Company retained $112.4 million of subordinated
securities, transferor’s interest of $12.4 million and a
residual interest-only strip of $34.4 million. This compared
with $652.4 million in assets at December 31, 2002, of
which the Company retained $150.1 million of
subordinated securities, transferor’s interest of $16.3 million
and a residual interest-only strip of $53.3 million. The
qualifying special purpose entity issued asset-backed
variable funding notes in various tranches. The Company
provides credit enhancement in the form of subordinated
securities and reserve accounts. The Company’s risk,
primarily from losses in the underlying assets, was
considered in determining the fair value of the Company’s
retained interests in this securitization. The Company
recognized income from subordinated securities, an interest-
only strip and servicing fees from this securitization of
$29.8 million during 2003 and $52.8 million during 2002.
The unsecured small business credit securitization held
average assets of $571.4 million in 2003, and
$700.6 million in 2002.
During 2003, the Company undertook several actions
with respect to off-balance sheet structures. In January
2003, the Company exercised a cleanup call option on an
indirect automobile loan securitization, with the remaining
assets from the securitization recorded on the Company’s
balance sheet at fair value. The indirect automobile
securitization held $156.1 million in assets at December 31,
2002. During the third quarter of 2003, the Company
elected not to reissue more than 90 percent of the
commercial paper funding of Stellar Funding Group, Inc.,
the commercial loan conduit. This action caused the conduit
to lose its status as a qualifying special purpose entity. As a
result, the Company recorded all of Stellar’s assets and
liabilities at fair value and the results of operations in the
consolidated financial statements of the Company. Given
the floating rate nature and high credit quality of the assets
within the conduit, the impact to the Company’s financial
statements was not significant. In the third quarter of 2003,
average commercial loan balances increased by
approximately $2 billion and the resulting increase in net
interest income was offset by a similar decline in conduit fee
income within commercial products revenue. Prior to
December 31, 2003, the remaining commercial paper
borrowings held by third-party investors matured and the
conduit was legally dissolved.
Sensitivity Analysis At December 31, 2003, key economic assumptions and the sensitivity of the current fair value of
residual cash flows to immediate 10 percent and 20 percent adverse changes in those assumptions were as follows:
December 31, 2003 (Dollars in Millions)
Current Economic Assumptions Sensitivity Analysis
Carrying value (fair value) of retained interests ****************************************************
Weighted average life (in years) *****************************************************************
Expected remaining life (a) ********************************************************************
Impact of 10% adverse change ******************************************************************
Impact of 20% adverse change ******************************************************************
Expected credit losses (annual) (b) ************************************************************
Impact of 10% adverse change ******************************************************************
Impact of 20% adverse change ******************************************************************
Residual cash flow discount rate **************************************************************
Impact of 10% adverse change ******************************************************************
Impact of 20% adverse change ******************************************************************
Interest rate on variable rate loans and bonds (c)(d)******************************************
Impact of 10% adverse change ******************************************************************
Impact of 20% adverse change ******************************************************************
Unsecured
Small
Business
Receivables
$146.8
.9
2.5 years
$ (2.6)
(5.6)
9.5%-11.4%
$ (3.0)
(13.6)
11.0%
(.5)
(2.2)
Prime
$ —
(1.4)
$
Investment
Securities
$ 89.5
2.6
4.9 years
$ (8.9)
(16.3)
NA
$ —
—
3.6%
$ (1.0)
(1.2)
LIBOR
$ —
—
(a) For the small business receivables a monthly principal payment rate assumption is used to value the residual interests.
(b) Credit losses are zero for the investment securities conduit as the investments are all AAA/Aaa rated or insured investments.
(c) For the small business receivables interest income is based on Prime + contractual spread.
(d) The investment securities conduit is mostly match funded. Therefore, interest rate movements create no material impact to the value of the residual interest.
80 U.S. Bancorp
These sensitivities are hypothetical and should be used
with caution. As the figures indicate, changes in fair value
based on a 10 percent variation in assumptions generally
cannot be extrapolated because the relationship of the change
in the assumptions to the change in fair value may not be
linear. Also, in this table the effect of a variation in a
particular assumption on the fair value of the retained
interest is calculated without changing any other
assumptions; in reality, changes in one factor may result in
changes in another (for example, increases in market interest
rates may result in lower prepayments and increased credit
losses), which might magnify or counteract the sensitivities.
Cash Flow Information The table below summarizes certain cash flows received from and paid to conduits or structured
entities for the asset sales described above:
Year Ended December 31 (Dollars in Millions)
2003
Commercial
Loans
Indirect
Automobile
Loans
Unsecured
Small
Business
Receivables (a)
Investment
Securities
Proceeds from
New sales and securitizations *******************************************
Collections used by trust to purchase new receivables in revolving
securitizations *****************************************************
Servicing and other fees received and cash flows on retained interests ********
Net cash flow from loan conduit consolidation *******************************
2002
Proceeds from
New sales and securitizations *******************************************
Collections used by trust to purchase new receivables in revolving
securitizations *****************************************************
Servicing and other fees received and cash flows on retained interests ********
$
—
$ —
$ —
$
—
—
23.9
(1,884.0)
—
24.3
—
420.6
85.3
—
—
51.8
—
$
—
$ —
$ —
$1,677.5
—
83.0
—
4.0
610.3
115.0
—
71.8
(a) The small business credit securitizations are revolving transactions where proceeds are reinvested until their legal terminations.
Other Information Quantitative information related to managed assets and loan securitizations was as follows:
At December 31
Year Ended December 31
Total Principal
Balance
Principal Amount
90 Days or More Past Due (a)
Average Balance
Net Credit Losses
2003
2002
2003
2002
2003
2002
2003
2002
$ 34,427
4,990
$ 41,861
5,360
39,417
47,221
$ 651
115
766
$ 819
172
991
$ 39,093
5,088
$ 45,192
5,573
44,181
50,765
$ 535
84
619
$ 543
149
692
20,624
6,618
27,242
13,457
5,933
6,029
27,048
39,010
20,325
6,542
26,867
9,746
5,665
5,680
26,505
37,850
181
42
223
123
100
8
135
243
181
62
243
140
118
12
167
297
20,166
6,976
27,142
11,696
5,525
5,804
26,876
38,205
19,212
6,511
25,723
8,412
5,633
5,389
25,756
36,778
28
11
39
27
255
50
311
616
32
7
39
19
280
39
360
679
$119,126
$121,684
$1,355
$1,671
$121,224
$121,678
$1,301
$1,429
50,679
37,999
—
—
45,633
38,689
—
—
$169,805
$159,683
$1,355
$1,671
$166,857
$160,367
$1,301
$1,429
8,236
14,944
$161,569
$144,739
11,247
17,085
$155,610
$143,282
$
— $ 4,151
156
—
490
406
636
485
9,511
7,345
$ 8,236
$ 14,944
$ —
—
—
6
—
$
6
$ —
1
—
6
—
$
7
$ 1,834
7
450
571
8,385
$ 5,715
277
532
701
9,860
$ 11,247
$ 17,085
$ —
—
—
49
—
$
49
$ —
5
—
51
—
$
56
(Dollars in Millions)
Commercial
Commercial ********************
Lease financing ****************
Total commercial ************
Commercial real estate
Commercial mortgages**********
Construction and development ***
Total commercial real estate **
Residential mortgages *********
Retail
Credit card*********************
Retail leasing ******************
Other retail ********************
Total retail ******************
Total managed loans *****
Investment securities **********
Total managed assets ***********
Less
Assets sold or securitized *******
Total assets held *********
Managed or securitized assets
Commercial loans **************
Indirect automobile loans (b) *****
Guaranteed SBA loans (c)*******
Small business credit lines (c) ***
Investment securities************
Total securitized assets ******
(a) Includes nonaccrual
(b) Reported in ‘‘other retail’’ loans.
(c) Reported in ‘‘commercial’’ loans.
U.S. Bancorp 81
Note 10
Premises and Equipment
Premises and equipment at December 31 consisted of the following:
(Dollars in Millions)
Land*******************************************************************************************************
Buildings and improvements**********************************************************************************
Furniture, fixtures and equipment *****************************************************************************
Capitalized building and equipment leases *********************************************************************
Construction in progress *************************************************************************************
Less accumulated depreciation and amortization ***************************************************************
2003
$ 311
2,226
2,092
175
7
4,811
2,854
Total****************************************************************************************************
$1,957
2002
$ 275
1,844
2,152
173
4
4,448
2,751
$1,697
Note 11
Mortgage Servicing Rights
The Company’s portfolio of residential mortgages serviced for others was $53.9 billion, $43.1 billion and $22.0 billion at
December 31, 2003, 2002, and 2001 respectively.
The net carrying value of capitalized mortgage servicing rights was as follows:
December 31 (Dollars in Millions)
Initial carrying value, net of amortization **********************************************************
Impairment valuation allowance******************************************************************
Net carrying value **************************************************************************
Changes in capitalized mortgage servicing rights are summarized as follows:
Year Ended December 31 (Dollars in Millions)
Balance at beginning of year**************************************************************
Rights purchased*********************************************************************
Rights capitalized*********************************************************************
Amortization *************************************************************************
Rights sold **************************************************************************
Impairment **************************************************************************
Balance at end of year *******************************************************************
2003
$ 830
(160)
$ 670
2003
$ 642
55
338
(156)
—
(209)
$ 670
2002
$ 849
(207)
$ 642
2002
$ 360
229
357
(94)
(24)
(186)
$ 642
The key economic assumptions used to estimate the value of the mortgage servicing rights portfolio were as follows:
December 31 (Dollars in Millions)
Fair value *************************************************************************************
Expected weighted-average life (in years) *********************************************************
Discount rate **********************************************************************************
2003
$670
5.2
9.9%
2002
$655
4.8
9.8%
The estimated sensitivity of the fair value of the mortgage servicing rights portfolio to changes in interest rates at
December 31, 2003, was as follows:
(Dollars in Millions)
Down Scenario
Up Scenario
50 bps
25 bps
25 bps
50 bps
Fair value************************************************************************************
$(127)
$(78)
$75
$133
The Company utilizes the investment securities
portfolio as an economic hedge against possible adverse
interest rate changes. The Company also, from time to time,
purchases principal-only securities that act as a partial
economic hedge. The Company is able to recognize
reparations from increases in fair value of servicing rights
when impairment reserves are released.
The fair value of mortgage servicing rights and its
sensitivity to changes in interest rates is influenced by the
mix of the servicing portfolio and characteristics of each
segment of the portfolio. In the current interest rate
environment, mortgage loans originated as part of
government agency and state loan programs tend to
experience slower prepayment speeds and better cash flows
than conventional mortgage loans. The Company’s servicing
portfolio consists of the distinct portfolios of The Leader
Mortgage Company, LLC (a wholly-owned subsidiary) and
U.S. Bank Home Mortgage.
82 U.S. Bancorp
A summary of the Company’s mortgage servicing rights and related characteristics by portfolio as of December 31, 2003, is
as follows:
(Dollars in Millions)
Servicing portfolio *******************************************************************
Fair market value *******************************************************************
Value (bps) *************************************************************************
Weighted-average servicing fees (bps) ************************************************
Multiple (value/servicing fees) ********************************************************
Weighted-average note rate **********************************************************
Age (in years) **********************************************************************
Expected life (in years) **************************************************************
Discount rate ***********************************************************************
Leader
Mortgage
$8,018
$ 119
148
44
3.36
6.49%
3.3
5.4
10.1%
U.S. Bank Home Mortgage
Conventional
Government
Total
$36,306
412
$
113
34
3.32
5.82%
1.3
5.1
9.5%
$9,597
$ 139
145
45
3.22
6.39%
2.0
5.1
11.1%
$53,921
670
$
124
37
3.35
6.02%
1.8
5.2
9.9%
The Leader Mortgage Company, LLC specializes in
servicing loans made under state and local housing
authority programs. These programs provide mortgages to
low and moderate income borrowers and are generally
under government insured programs with down payment or
closing cost assistance. As a result of the slower prepayment
characteristics of the state and local loan programs, the
Leader portfolio has a longer expected life relative to other
servicing portfolios.
The U.S. Bank Home Mortgage servicing portfolio is
predominantly comprised of fixed-rate agency loans
(FNMA, FHLMC, GNMA, FHLB and various housing
agencies) with limited adjustable-rate or jumbo mortgage
loans.
Note 12
Intangible Assets
The Company adopted SFAS 142 on January 1, 2002. The
most significant changes made by SFAS 142 are that
goodwill and other indefinite lived intangible assets are no
longer amortized and will be tested for impairment at least
annually. The amortization provisions of SFAS 142 apply to
goodwill and intangible assets acquired after June 30, 2001.
With respect to goodwill and intangible assets acquired
prior to July 1, 2001, the amortization provisions of
SFAS 142 were effective upon adoption of SFAS 142.
Prior to the adoption of SFAS 142, the Company
evaluated goodwill for impairment under a projected
undiscounted cash flow model. As a result of the initial
impairment test from the adoption of SFAS 142, the
Company recognized an impairment loss of $58.8 million
resulting in an after-tax loss of $37.2 million in the first
quarter of 2002. The impairment was primarily related to
the purchase of a transportation leasing company in 1998
by the equipment leasing business. This charge was
recognized as a ‘‘cumulative effect of accounting change’’ in
the income statement. The fair value of that reporting unit
was estimated using the present value of future expected
cash flows.
Net income and earnings per share adjusted for the exclusion of amortization expense (net of tax) and asset impairments
related to goodwill are as follows:
Year Ended December 31 (Dollars in Millions, Except Per Share Data)
2003
2002
2001
Reported net income *******************************************************************
Goodwill amortization, net of tax ******************************************************
Asset impairments, net of tax ********************************************************
Adjusted net income *************************************************************
Earnings per share
Reported net income ****************************************************************
Goodwill amortization, net of tax ******************************************************
Asset impairments, net of tax ********************************************************
Adjusted net income *************************************************************
Diluted earnings per share
Reported net income ****************************************************************
Goodwill amortization, net of tax ******************************************************
Asset impairments, net of tax ********************************************************
$3,732.6
—
—
$3,732.6
$
$
$
1.94
—
—
1.94
1.93
—
—
$3,168.1
—
37.2
$3,205.3
$
$
$
1.65
—
.02
1.67
1.65
—
.02
Adjusted net income *************************************************************
$
1.93
$
1.67
$1,478.8
236.7
—
$1,715.5
$
$
$
$
.77
.12
—
.89
.76
.12
—
.88
U.S. Bancorp 83
The following table reflects the changes in the carrying value of goodwill for the years ended December 31, 2002 and 2003:
(Dollars in Millions)
Balance at December 31, 2001 ********
Goodwill acquired*******************
Disposal ***************************
Balance at December 31, 2002 ********
Goodwill acquired*******************
Disposal ***************************
Balance at December 31, 2003 ********
Wholesale
Banking
Consumer
Banking
Private Client,
Trust and Asset
Management
$1,244
45
(59)
$1,230
—
(5)
$1,225
$1,810
431
—
$2,241
1
—
$2,242
$289
447
—
$736
6
—
$742
Payment
Services
$1,810
2
—
$1,812
4
—
$1,816
$ 306
—
—
$ 306
—
(306)
$ —
Capital
Markets (a)
Consolidated
Company
(a)
In 2003, the Company completed a tax-free distribution of Piper Jaffray Companies. The reduction represents goodwill associated with Piper Jaffray Companies.
Intangible assets consisted of the following:
December 31 (Dollars in Millions)
Goodwill ******************************************************
Merchant processing contracts **********************************
Core deposit benefits*******************************************
Mortgage servicing rights ***************************************
Trust relationships**********************************************
Other identified intangibles **************************************
Total ******************************************************
Estimated
Life (a)
Amortization
Method (b)
—
8 years
10 years/6 years
5 years
15 years/10 years
8 years/9 years
—
AC
SL/AC
AC
SL/AC
SL/AC
Balance
2003
$6,025
552
417
670
311
174
$8,149
$5,459
925
(59)
$6,325
11
(311)
$6,025
2002
$6,325
596
505
642
371
207
$8,646
(a) Estimated life represents the amortization period for assets subject to the straight line method and the weighted average amortization period for intangibles subject to accelerated
methods. If more than one amortization method is used for a category, the estimated life for each method is calculated and reported separately.
(b) Amortization methods: SL = straight line method
AC = accelerated methods generally based on cash flows
Aggregate amortization and impairment expense consisted of the following:
Year Ended December 31 (Dollars in Millions)
Goodwill (a) *****************************************************************************
Merchant processing contracts ************************************************************
Core deposit benefits*********************************************************************
Mortgage servicing rights *****************************************************************
Trust relationships************************************************************************
Other identified intangibles ****************************************************************
Total ********************************************************************************
2003
$ —
132.4
88.2
365.1
53.3
43.4
$682.4
2002
$ —
135.1
80.9
280.1
19.3
37.6
$553.0
2001
$236.7
15.3
80.9
106.1
19.3
56.8
$515.1
(a) The Company adopted SFAS 142 on January 1, 2002, resulting in the elimination of amortization of goodwill and other indefinite lived intangible assets.
Below is the estimated amortization expense for the next five years:
(Dollars in Millions)
2004***********************************************************************************************************************
2005***********************************************************************************************************************
2006***********************************************************************************************************************
2007***********************************************************************************************************************
2008***********************************************************************************************************************
$477.5
370.2
306.9
261.3
209.6
84 U.S. Bancorp
Note 13
Short-Term Borrowings
The following table is a summary of short-term borrowings for the last three years:
(Dollars in Millions)
At year-end
Federal funds purchased *****************************
Securities sold under agreements to repurchase ********
Commercial paper ***********************************
Treasury, tax and loan notes **************************
Other short-term borrowings **************************
Total ********************************************
Average for the year
Federal funds purchased *****************************
Securities sold under agreements to repurchase ********
Commercial paper ***********************************
Treasury, tax and loan notes **************************
Other short-term borrowings **************************
Total ********************************************
Maximum month-end balance
Federal funds purchased *****************************
Securities sold under agreements to repurchase ********
Commercial paper ***********************************
Treasury, tax and loan notes **************************
Other short-term borrowings **************************
2003
2002
2001
Amount
Rate
Amount
Rate
Amount
Rate
$ 5,098
3,586
699
809
658
$10,850
$ 4,966
3,374
681
634
848
$10,503
$ 6,658
4,173
952
4,223
2,676
.91%
.71
.88
.69
.65
$ 3,025
2,950
380
102
1,349
.98%
.97
1.20
.91
1.26
$ 1,146
3,001
452
4,038
6,033
.81%
$ 7,806
1.03%
$14,670
2.36%
.79
1.06
.95
1.13
$ 4,145
2,308
391
707
2,565
2.94%
1.14
1.74
1.50
2.23
$ 4,997
2,421
390
1,321
2,550
1.59%
$10,116
2.20%
$11,679
$ 7,009
2,950
452
4,164
6,172
$ 7,829
3,001
590
6,618
7,149
1.08%
1.10
1.85
1.27
2.54
1.75%
5.02%
2.89
3.85
3.53
3.65
4.07%
U.S. Bancorp 85
Note 14
Long-Term Debt
Long-term debt (debt with original maturities of more than one year) at December 31 consisted of the following:
(Dollars in Millions)
U.S. Bancorp (Parent Company)
Fixed-rate subordinated notes
2003
2002
7.00% due 2003*************************************************************************************
6.625% due 2003************************************************************************************
7.25% due 2003*************************************************************************************
8.00% due 2004*************************************************************************************
7.625% due 2005************************************************************************************
6.75% due 2005*************************************************************************************
6.875% due 2007************************************************************************************
7.30% due 2007*************************************************************************************
7.50% due 2026*************************************************************************************
Senior contingent convertible debt 1.50% due 2021 ********************************************************
Medium-term notes *************************************************************************************
Capitalized lease obligations, mortgage indebtedness and other *********************************************
Subtotal *****************************************************************************************
Subsidiaries
Fixed-rate subordinated notes
6.00% due 2003*************************************************************************************
6.375% due 2004************************************************************************************
6.375% due 2004************************************************************************************
7.55% due 2004*************************************************************************************
8.35% due 2004*************************************************************************************
7.30% due 2005*************************************************************************************
6.875% due 2006************************************************************************************
6.625% due 2006************************************************************************************
6.50% due 2008*************************************************************************************
6.30% due 2008*************************************************************************************
5.70% due 2008*************************************************************************************
7.125% due 2009************************************************************************************
7.80% due 2010*************************************************************************************
6.375% due 2011************************************************************************************
6.30% due 2014*************************************************************************************
4.80% due 2015*************************************************************************************
Federal Home Loan Bank advances **********************************************************************
Bank notes*********************************************************************************************
Euro medium-term notes due 2004 ***********************************************************************
Capitalized lease obligations, mortgage indebtedness and other *********************************************
Subtotal *****************************************************************************************
$
—
—
—
73
120
191
220
200
200
—
4,025
171
5,200
—
75
150
100
100
100
70
100
300
300
400
500
300
1,500
1,000
500
8,595
10,870
400
655
26,015
Total ********************************************************************************************
$31,215
$
150
100
32
73
120
191
220
200
200
57
4,127
225
5,695
79
75
150
100
100
100
70
100
300
300
400
500
300
1,500
1,000
—
9,255
7,302
400
862
22,893
$28,588
In April 2003, the Company’s subsidiary U.S. Bank
Federal Home Loan Bank (‘‘FHLB’’) advances
National Association issued $500 million of fixed-rate
subordinated notes due April 15, 2015. The interest rate is
4.80 percent per annum.
Medium-term notes (‘‘MTNs’’) outstanding at
December 31, 2003, mature from May 2004 through
March 2008. The MTNs bear fixed or floating interest rates
ranging from 1.28 percent to 7.05 percent. The weighted-
average interest rate of MTNs at December 31, 2003, was
3.87 percent.
outstanding at December 31, 2003, mature from February
2004 through October 2026. The advances bear fixed or
floating interest rates ranging from .50 percent to
8.25 percent. The Company has an arrangement with the
FHLB whereby based on collateral available (residential and
commercial mortgages), the Company could have borrowed
an additional $7.0 billion at December 31, 2003. The
weighted-average interest rate of FHLB advances at
December 31, 2003, was 2.25 percent.
86 U.S. Bancorp
Bank notes outstanding at December 31, 2003, mature
from January 2004 through November 2006. The Bank
notes bear fixed or floating interest rates ranging from
1.05 percent to 5.63 percent. The weighted-average interest
rate of Bank notes at December 31, 2003, was
1.36 percent. Euro medium-term notes outstanding at
December 31, 2003, bear floating rate interest at
three-month LIBOR plus .15 percent. The interest rate at
December 31, 2003, was 1.30 percent.
Maturities of long-term debt outstanding at December 31,
2003, are as follows:
(Dollars in Millions)
Consolidated
2004***************************
2005***************************
2006***************************
2007***************************
2008***************************
Thereafter **********************
Total ***************************
$ 9,989
9,074
1,858
1,574
4,302
4,418
$31,215
Parent
Company
$ 888
1,346
658
1,557
503
248
$5,200
Note 15
Company-obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding
Solely the Junior Subordinated Debentures of the Parent Company
The Company has issued $2.6 billion of company-obligated
mandatorily redeemable preferred securities of subsidiary
trusts holding solely the junior subordinated debentures of
the parent company (‘‘Trust Preferred Securities’’) through
eight separate issuances by eight wholly-owned subsidiary
grantor trusts (‘‘Trusts’’). The Trust Preferred Securities
accrue and pay distributions periodically at specified rates
as provided in the indentures. The Trusts used the net
proceeds from the offerings to purchase a like amount of
junior subordinated deferrable interest debentures (the
‘‘Debentures’’) of the Company. The Debentures are the
sole assets of the Trusts and are eliminated, along with the
related income statement effects, in the consolidated
financial statements.
The Trust Preferred Securities are mandatorily
redeemable upon the maturity of the Debentures, or upon
earlier redemption as provided in the indentures. The
Company has the right to redeem retail Debentures in
whole or in part, as well as on or after specific dates, at a
redemption price specified in the indentures plus any
accrued but unpaid interest to the redemption date. The
Company has the right to redeem institutional Debentures
in whole, (but not in part), on or after specific dates, at a
redemption price specified in the indentures plus any
accrued but unpaid interest to the redemption date. The
Trust Preferred Securities are redeemable in whole or in part
in 2006 and 2007 in the amounts of $2.3 billion and
$300 million, respectively.
The Company’s obligations under the Debentures and
The Trust Preferred Securities qualify as Tier I capital
related documents, taken together, constitute a full and
unconditional guarantee by the Company of the obligations
of the Trusts. The guarantee covers the distributions and
payments on liquidation or redemption of the Trust
Preferred Securities, but only to the extent of funds held by
the Trusts.
of the Company for regulatory capital purposes. The
Company used the proceeds from the sales of the
Debentures for general corporate purposes.
U.S. Bancorp 87
The following table is a summary of the Trust Preferred Securities as of December 31, 2003:
Issuance Trust (Dollars in Millions)
Retail
Trust
Preferred
Securities Debentures
Amount
Amount (a)
Issuance
Date
Rate
Type (b)
Rate
Maturity
Date
Redemption
Date (c)
USB Capital V ***************** December 2001
USB Capital IV ***************** November 2001
USB Capital III *****************
May 2001
Institutional
Star Capital I*******************
June 1997
Mercantile Capital Trust I ********
February 1997
USB Capital I ****************** December 1996
Firstar Capital Trust I************ December 1996
FBS Capital I ****************** November 1996
$300
500
700
150
150
300
150
300
$309
515
722
155
155
309
155
309
Fixed
Fixed
Fixed
Variable
Variable
Fixed
Fixed
Fixed
7.25% December 2031 December 7, 2006
November 2031 November 1, 2006
7.35
May 4, 2006
7.75
May 2031
June 2027
1.94(d)
2.01(e) February 2027
8.27
8.32
8.09
June 15, 2007
February 1, 2007
December 2026 December 15, 2006
December 2026 December 15, 2006
November 2026 November 15, 2006
(a) Company-obligated Mandatorily Redeemable Securities of Subsidiary Trusts which are designated in hedging relationships at December 31, 2003, are recorded on the balance
sheet at fair value. Carrying value includes a fair value adjustment of $56 million related to hedges on certain retail and institutional obligated trust securities, as well as
unamortized issuance costs of $(5) million.
(b) The variable-rate Trust Preferred Securities reprice quarterly.
(c) Earliest date of redemption.
(d) Three-month LIBOR +76.5 basis points
(e) Three-month LIBOR +85.0 basis points
On April 1, 2003, USB Capital II, a subsidiary
Refer to Note 2 with respect to the potential impact of
company of U.S. Bancorp, redeemed 100 percent, or
$350 million of its 7.20 percent Trust Preferred Securities.
On May 2, 2003, USB Capital II was legally dissolved.
Note 16
Shareholders’ Equity
At December 31, 2003 and 2002, the Company had
authority to issue 4 billion shares of common stock and
10 million shares of preferred stock. The Company had
1,922.9 million and 1,917.0 million shares of common
stock outstanding at December 31, 2003 and 2002,
respectively. At December 31, 2003, the Company had
208.0 million shares of common stock reserved for future
issuances, primarily under stock option plans.
The Company has a preferred share purchase rights
plan intended to preserve the long-term value of the
Company by discouraging a hostile takeover of the
Company. Under the plan, each share of common stock
carries a right to purchase one one-thousandth of a share of
preferred stock. The rights become exercisable in certain
limited circumstances involving a potential business
combination transaction or an acquisition of shares of the
Company and are exercisable at a price of $100 per right,
subject to adjustment. Following certain other events, each
right entitles its holder to purchase for $100 an amount of
common stock of the Company, or, in certain
circumstances, securities of the acquirer, having a then-
current market value of twice the exercise price of the right.
The dilutive effect of the rights on the acquiring company is
intended to encourage it to negotiate with the Company’s
Board of Directors prior to attempting a takeover. If the
Board of Directors believes a proposed acquisition is in the
best interests of the Company and its shareholders, the
the adoption of FIN 46 relative to Trust Preferred
Securities.
Board may amend the plan or redeem the rights for a
nominal amount in order to permit the acquisition to be
completed without interference from the plan. Until a right
is exercised, the holder of a right has no rights as a
shareholder of the Company. The rights expire on
February 27, 2011.
On July 17, 2001, the Company’s Board of Directors
authorized the repurchase of up to 56.4 million shares of
the Company’s common stock to replace shares issued in
connection with the acquisition of NOVA. During the first
quarter of 2002, the Company effectively completed the
July 17, 2001 authorization. On December 18, 2001, the
Board of Directors approved an authorization to repurchase
an additional 100 million shares of outstanding common
stock throughout 2003. On December 16, 2003, the Board
of Directors approved an authorization to repurchase an
additional 150 million shares of outstanding common stock
during the following 24 months. This repurchase program
replaced the Company’s December 18, 2001 program.
The following table summarizes the Company’s common
stock repurchased in each of the last three years:
(Dollars and Shares in Millions)
2003 *******************************
2002 *******************************
2001 *******************************
Shares
15.0
45.3
19.7
Value
$ 417
1,040
468
88 U.S. Bancorp
Shareholders’ equity is affected by transactions and valuations of asset and liability positions that require adjustments to
Other Comprehensive Income. The reconciliation of the transactions affecting Other Comprehensive Income included in
shareholders’ equity for the years ended December 31, is as follows:
(Dollars in Millions)
Transactions
Pre-tax
Tax-effect
Net-of-tax
Balance
Net-of-tax
2003
Unrealized loss on securities available-for-sale***********************************
Unrealized loss on derivatives *************************************************
Realized gain on derivatives ***************************************************
Reclassification adjustment for gains
realized in net income *****************************************************
Foreign currency translation adjustment *****************************************
$ (716)
(373)
199
(288)
23
Total *********************************************************************
$(1,155)
2002
Unrealized gain on securities available-for-sale **********************************
Unrealized gain on derivatives *************************************************
Realized gain on derivatives ***************************************************
Reclassification adjustment for gains
realized in net income *****************************************************
Foreign currency translation adjustment *****************************************
$ 1,048
324
64
(332)
7
Total *********************************************************************
$ 1,111
2001
Unrealized gain on securities available-for-sale **********************************
Unrealized gain on derivatives *************************************************
Realized gain on derivatives ***************************************************
Reclassification adjustment for gains
realized in net income *****************************************************
Foreign currency translation adjustment *****************************************
$
194
106
42
(333)
(4)
$ 272
142
(76)
110
(9)
$ 439
$(398)
(123)
(24)
126
(3)
$(422)
$ (78)
(40)
(16)
127
1
$(444)
(231)
123
(178)
14
$(123)
35
140
—
16
$(716)
$ 68
$ 650
201
40
(206)
4
$ 473
266
43
—
2
$ 689
$ 784
$ 116
66
26
(206)
(3)
$
9
65
24
—
(3)
Total *********************************************************************
$
5
$ (6)
$ (1)
$ 95
Note 17
Earnings Per Share
The components of earnings per share were:
(Dollars and Shares in Millions, Except Per Share Data)
Income from continuing operations *******************************************************
Income (loss) from discontinued operations (after-tax) ***********************************
Cumulative effect of accounting change (after-tax) **************************************
Net income *********************************************************************
2003
2002
2001
$3,710.1
22.5
—
$3,732.6
$3,228.0
(22.7)
(37.2)
$1,524.0
(45.2)
—
$3,168.1
$1,478.8
Weighted-average common shares outstanding ********************************************
Net effect of the assumed purchase of stock based on the treasury stock method for options
and stock plans **********************************************************************
Weighted-average diluted common shares outstanding *************************************
1,923.7
1,916.0
1,927.9
12.5
1,936.2
8.8
1,924.8
12.4
1,940.3
Earnings per share
Income from continuing operations ****************************************************
Discontinued operations **********************************************************
Cumulative effect of accounting change ********************************************
Net income ******************************************************************
Diluted earnings per share
Income from continuing operations ****************************************************
Discontinued operations **********************************************************
Cumulative effect of accounting change ********************************************
$
$
$
1.93
.01
—
1.94
1.92
.01
—
$
$
$
1.68
(.01)
(.02)
1.65
1.68
(.01)
(.02)
$
$
$
.79
(.02)
—
.77
.79
(.03)
—
Net income ******************************************************************
$
1.93
$
1.65
$
.76
For the years ended December 31, 2003, 2002 and 2001,
options to purchase 79 million, 140 million and 125 million
shares, respectively, were outstanding but not included in
the computation of diluted earnings per share because they
were antidilutive.
U.S. Bancorp 89
Note 18
Employee Benefits
Employee Investment Plan The Company has defined
contribution retirement savings plans which allow qualified
employees, at their option, to make contributions up to
certain percentages of pre-tax base salary through salary
deductions under Section 401(k) of the Internal Revenue
Code. Employee contributions are invested, at the
employees’ direction, among a variety of investment
alternatives. Employee contributions are 100 percent
matched by the Company, up to the first four percent of an
employee’s compensation. The Company’s matching
contribution vests immediately; however, a participant must
be employed on December 31st to receive that year’s
matching contribution. Although the matching contribution
is initially invested in the Company’s common stock, an
employee can reinvest the matching contributions among
various investment alternatives. Total expense was
$48.5 million, $50.5 million and $43.7 million in 2003,
2002 and 2001, respectively.
Pension Plans Pension benefits are provided to substantially
all employees based on years of service and employees’
compensation while employed with the Company.
Employees are fully vested after five years of service. Prior
to their acquisition dates, employees of certain acquired
companies were covered by separate, noncontributory
pension plans that provided benefits based on years of
service and compensation. Generally, the Company merges
plans of acquired companies into its existing pension plans
when it becomes practicable.
As of January 1, 2002, the Company’s two existing
pension plans were merged under a new final average-pay
benefit structure. During 2001, the Company had
maintained two different qualified pension plans, with three
different pension benefit structures: the former USBM’s cash
balance pension benefit structure, a final average pay benefit
structure for the former Firstar organization, and a cash
balance pension benefit structure related to the Mercantile
acquisition. The benefit structure of the new combined plan
did not become effective for the Mercantile acquisition until
January 1, 2003. Under the new plan’s benefit structure, a
participant’s future retirement benefits are based on a
participant’s highest five year average annual compensation
during his or her last 10 years before retirement or
termination from the Company. Generally, under the two
previous cash balance pension benefit structures, the
participant’s earned retirement benefits based on their
average compensation over their career. Retirement benefits
under the former Firstar benefit structure were earned based
on final average pay and years of service, similar to the new
plan. Plan assets primarily consist of various equity mutual
funds and other miscellaneous assets.
During 2001, the Company also maintained several
unfunded, non-qualified, supplemental executive retirement
programs that provided additional defined pension benefits
for senior managers and executive employees. As of
September 30, 2001, a supplemental executive retirement
plan of USBM was frozen for substantially all participants
but with service credit running through December 31, 2001.
Effective January 1, 2002, substantially all of these
programs were merged into one non-qualified retirement
plan. Because all the non-qualified plans were unfunded, the
aggregate accumulated benefit obligations exceeded the
assets. The assumptions used in computing the present value
of the accumulated benefit obligation, the projected benefit
obligation and net pension expense are substantially
consistent with those assumptions used for the funded
qualified plans. The Company recognized a settlement loss
of $3.5 million on this plan in 2003, related to the level of
payouts made from the plan. In 2002, the Company
recognized combined curtailment and settlement gains of
$11.7 million related to changes in the non-qualified
pension plans in connection with the mergers of the
prior plans.
In general, the Company’s pension plan objectives
include maintaining a funded status sufficient to meet
participant benefit obligations over time while reducing
long-term funding requirements and pension costs. The
Company has an established process for evaluating all 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. Bancorp’s Compensation
Committee in evaluating plan objectives, funding policies
and plan investment policies considering its long-term
investment time horizon and asset allocation strategies. The
process also evaluates significant plan assumptions.
Although plan assumptions are established annually, the
Company may update its analysis on an interim basis in
order to be responsive to significant events that occur
during the year, such as plan mergers and amendments.
Funding Practices The Company’s funding policy is to
contribute amounts to its plans sufficient to meet the
minimum funding requirements of the Employee Retirement
Income Security Act of 1974, plus such additional amounts
as the Company determines to be appropriate. During 2003
and 2002, the Company made contributions of
$310.8 million and $150.0 million, respectively, to the
qualified pension plan in accordance with this policy. In
2004, the Company anticipates no minimum funding
requirement and therefore does not expect to make any
contributions to the plan. Contributions made to the plan
were invested in accordance with established investment
policies and asset allocation strategies.
90 U.S. Bancorp
Investment Policies and Asset Allocation In establishing its
investment policies and asset allocation strategies, the
Company considers expected returns and the volatility
associated with different strategies. The independent
consultant performs modeling that projects numerous
outcomes using a broad range of possible scenarios,
including a mix of possible rates of inflation and economic
growth. Some of the scenarios included are: low inflation
and high growth (ideal growth), low inflation and low
growth (recession), high inflation and low growth
(stagflation) and high inflation and high growth
(inflationary growth). Starting with current economic
information, the model bases its projections on past
relationships between inflation, fixed income rates and
equity returns when these types of economic conditions
have existed over the previous 30 years, both in the U.S.
and in foreign countries.
Based on an analysis of historical performance by asset
class, over any 20-year period since the mid-1940’s,
investments in equities have outperformed other investment
classes but are subject to higher volatility. While an asset
allocation including bonds and other assets generally has
lower volatility and may provide protection in a declining
interest rate environment, it limits the pension plan’s long-
term up-side potential. Given the pension plan’s investment
horizon and the financial viability of the Company to meet
its funding objectives, the Committee has determined that
an asset allocation strategy investing in 100% equities
diversified among various domestic equity categories and
international equities is appropriate.
The following unaudited table provides a summary of asset allocations adopted by the Company compared with a typical
asset allocation alternative:
Asset Class
Domestic Equities
Large Cap *******************
Mid Cap *********************
Small Cap *******************
International Equities ********
Fixed Income *****************
Other *************************
Total mix or weighted rates **
LTROR assumed *************
Standard deviation************
Sharpe ratio (c) **************
Typical
Asset Mix
30%
15
15
10
30
—
100%
7.8%
13.9%
.399
Asset Allocation
December 2003
December 2002
2003
Expected Returns
Actual
Target (a)
Actual
Target
Compound
Average
Standard
Deviation
42%
15
19
21
—
3
55%
19
6
20
—
—
33%
18
27
18
—
4
100%
100%
100%
8.9% (b)
18.0%
.389
36%
18
26
20
—
—
100%
9.9%
18.8%
.382
8.3%
8.6
8.8
8.5
9.7%
10.6
11.3
10.6
18.0%
21.1
24.0
21.9
8.7
10.2
18.0
(a) The target asset allocation was modified in December 2003, effective January 1, 2004, to reduce the potential volatility of the portfolio without significantly reducing the expected
returns. The change in the allocation is not expected to be completed until the second quarter of 2004 and variations from the target allocation are a result of the recent change.
(b) The LTROR assumed for the target asset allocation strategy of 8.9 percent is based on a range of estimates evaluated by the Company including the compound expected return of
8.7 percent and the average expected return of 10.2 percent.
(c) The Sharpe ratio is a direct measure of reward-to-risk. The Sharpe ratio for these asset allocation strategies is considered to be within acceptable parameters.
In accordance with its existing practices, the
independent pension consultant utilized by the Company
updated the analysis of expected rates of return and
evaluated peer group data, market conditions and other
factors relevant to determining the LTROR assumptions for
pension costs for 2003 and 2004. The analysis performed
late in 2002 indicated that there had been a continued
deterioration in market performance of equities and as a
result of that independent analysis, the Company made a
decision to reduce the LTROR assumption from 9.9 percent
used in the second half of 2002, to 8.9 percent for 2003.
The analysis performed late in 2003 indicated a
stabilization of market performance with the potential for
better performance in 2004. As a result, the Company
expects to continue to use an LTROR of 8.9 percent in
2004. Regardless of the extent of the Company’s analysis of
alternative asset allocation strategies, economic scenarios
and possible outcomes, plan assumptions developed for the
LTROR are subject to imprecision and changes in economic
factors. As a result of the modeling imprecision and
uncertainty, the Company considers a range of potential
expected rates of return, economic conditions for several
scenarios, historical performance relative to assumed rates
of return and asset allocation and LTROR information for
a peer group in establishing its assumptions.
U.S. Bancorp 91
Post-Retirement Medical Plans In addition to providing
pension benefits, the Company provides health care and
death benefits to certain retired employees through several
retiree medical programs. As a result of the Firstar/USBM
merger, there were three major retiree medical programs in
place during 2001 with various terms and subsidy
schedules. Effective January 1, 2002, the Company adopted
one retiree medical program for all future retirees. For
certain eligible employees, the provisions of the USBM
retiree medical plan and the Mercantile retiree medical plan
remained in place until December 31, 2002. Generally, all
employees may become eligible for retiree health care
benefits by meeting defined age and service requirements.
The Company may also subsidize the cost of coverage for
employees meeting certain age and service requirements.
The medical plan contains other cost-sharing features such
as deductibles and coinsurance. The estimated cost of these
retiree benefit payments is accrued during the employees’
active service.
The following table summarizes benefit obligation and plan asset activity for the retirement plans:
(Dollars in Millions)
Projected benefit obligation
Benefit obligation at beginning of measurement period ****************
Service cost ******************************************************
Interest cost ******************************************************
Plan participants’ contributions**************************************
Actuarial loss *****************************************************
Benefit payments**************************************************
Curtailments ******************************************************
Settlements*******************************************************
Benefit obligation transferred to Piper Jaffray Companies **************
Termination benefits ***********************************************
Benefit obligation at end of measurement period (a) (b) ***************
Fair value of plan assets
Fair value at beginning of measurement period ***********************
Actual return on plan assets****************************************
Employer contributions *********************************************
Plan participants’ contributions**************************************
Settlements*******************************************************
Benefit payments**************************************************
Fair value at end of measurement period (c) *************************
Funded status
Funded status at end of measurement period ************************
Unrecognized transition (asset) obligation ****************************
Unrecognized prior service cost*************************************
Unrecognized net (gain) loss ***************************************
Fourth quarter contribution *****************************************
Net amount recognized ********************************************
Components of statement of financial position
Prepaid benefit cost ***********************************************
Accrued benefit liability ********************************************
Net amount recognized ********************************************
Pension Plans
Post-Retirement
Medical Plans
2003
2002
2003
2002
$1,671.1
56.5
107.7
—
161.7
(140.8)
—
(23.8)
(31.3)
—
$1,801.1
$1,442.7
351.7
346.0
—
(23.8)
(140.8)
$1,975.8
$ 174.7
—
(51.1)
854.7
4.8
$ 983.1
$1,123.8
(140.7)
$ 983.1
$1,656.4
49.9
115.1
—
—
(147.3)
(.7)
(5.0)
—
2.7
$ 282.5
3.4
18.5
14.9
38.9
(36.5)
—
—
(1.4)
—
$1,671.1
$ 320.3
$1,611.1
(193.2)
172.1
—
—
(147.3)
$ 30.2
.4
29.9
14.9
—
(36.5)
$1,442.7
$ 38.9
$ (228.4)
(.1)
(59.0)
867.8
4.3
$ 584.6
$ 763.9
(179.3)
$ 584.6
$(281.4)
6.6
(7.2)
80.0
5.4
$(196.6)
$ —
(196.6)
$(196.6)
$ 265.1
3.3
19.1
10.4
18.1
(33.5)
—
—
—
—
$ 282.5
$ 35.4
.7
17.2
10.4
—
(33.5)
$ 30.2
$(252.3)
7.4
(8.6)
41.0
13.7
$(198.8)
$ —
(198.8)
$(198.8)
(a) At December 31, 2003 and 2002, the accumulated benefit obligation for all qualified pension plans was $1.6 billion and $1.4 billion, respectively.
(b) U.S. Bancorp retained the qualified pension plan obligation for the inactive participants, relating to employees of Piper Jaffray Companies. Therefore, all liabilities and plan assets
related to inactive participants in the qualified pension plan associated with the Piper Jaffray Companies are included in the pension plans benefit obligation.
(c) At December 31, 2003 and 2002, the Company’s qualified pension plans held 799,803 shares of U.S. Bancorp common stock, with a fair value of $23.8 million and $17.0 million,
respectively. Dividends paid on the shares of U.S. Bancorp common stock held by the qualified pension plans totaled $.6 million for each of the years ended December 31, 2003
and 2002.
92 U.S. Bancorp
The following table sets forth the components of net periodic benefit cost (income) for the retirement plans:
(Dollars in Millions)
2003
2002
2001
2003
2002
2001
Pension Plans
Post-Retirement Medical Plans
Components of net periodic benefit cost (income)
Service cost*****************************************
Interest cost *****************************************
Expected return on plan assets************************
Net amortization and deferral**************************
Recognized actuarial (gain) loss ***********************
Net periodic benefit cost (income)*************************
Curtailment and settlement (gain) loss *****************
Cost of special or contractual termination
$ 56.5
107.7
(184.4)
(6.7)
(.5)
(27.4)
3.5
$ 49.9
115.1
(214.1)
(6.5)
.8
(54.8)
(11.7)
$ 50.5
118.7
(232.6)
(10.7)
(1.2)
(75.3)
—
benefits recognized *******************************
—
2.7
—
$ 3.4
18.5
(1.2)
(.2)
.5
21.0
—
—
$ 3.3
19.1
(1.6)
(.1)
—
20.7
—
—
$ 2.1
17.9
(1.0)
.2
(.1)
19.1
—
—
Net periodic benefit cost (income) after curtailment and
settlement (gain) loss, and cost of special or contractual
termination benefits recognized************************
$ (23.9)
$ (63.8)
$ (75.3)
$21.0
$20.7
$19.1
The following table sets forth the weighted-average plan assumptions and other data:
(Dollars in Millions)
Pension plan actuarial computations
Company
2003
2002
USBM
2001
Firstar
2001
Expected long-term return on plan assets (a) (b) ************************************
Discount rate in determining benefit obligations (c) **********************************
Rate of increase in future compensation *******************************************
Post-retirement medical plan actuarial computations
Expected long-term return on plan assets ******************************************
Discount rate in determining benefit obligations *************************************
Health care cost trend rate (d)
Prior to age 65 ***************************************************************
After age 65 *****************************************************************
Effect of one percent increase in health care cost trend rate
Service and interest costs ********************************************************
Accumulated post-retirement benefit obligation **************************************
Effect of one percent decrease in health care cost trend rate
Service and interest costs ********************************************************
Accumulated post-retirement benefit obligation **************************************
8.9%
6.2
3.5
3.5%
6.2
11.0%
13.0
$ 1.4
22.5
$ (1.3)
(20.0)
10.9%
6.8
3.5
5.0%
6.8
12.0%
14.0
$ 1.3
19.7
$ (1.2)
(17.5)
11.0%
7.5
3.5
5.0%
7.5
10.5%
13.0
$ 1.2
13.1
$ (1.0)
(13.6)
12.2%
7.5
3.5
*%
7.5
10.5%
13.0
$
.4
6.0
$ (.4)
(5.7)
(a)
(b)
In connection with the Firstar/USBM merger, the asset management practices and investment strategies of the plan were conformed. At December 31, 2001, the investment asset
allocation was weighted toward equities and diversified by industry and companies with varying market capitalization levels.
In light of the market performance and the results of the independent analysis, the Company made a decision to re-measure its pension plans effective in the third quarter of 2002
based on the current information at that time with respect to asset values, a reduction in the LTROR, discount rates, census data and other relevant factors. As a result of the
remeasurement, the LTROR was reduced to 9.9% for the last half of 2002.
(c) The discount rate at the measurement date approximated the Moody’s Aa corporate bond rating for projected benefit distributions with a duration of 12.2 and 11.6 years for 2003
and 2002, respectively.
(d) The pre-65 and post-65 rates are assumed to decrease gradually to 5.5% and 6.0% respectively by 2011 and remain at these levels thereafter.
The following table provides information for pension plans with benefit obligations in excess of plan assets:
(Dollars in Millions)
Benefit obligation******************************************************************************************
Accumulated benefit obligation******************************************************************************
Fair value of plan assets ***********************************************************************************
2003
2002
$188.7
179.6
—
$218.6
210.6
—
U.S. Bancorp 93
Note 19
Stock-based Compensation
As part of its employee and director compensation
programs, the Company may grant certain stock awards
under the provisions of the existing stock compensation
plans, including plans assumed in acquisitions. The plans
provide for grants of options to purchase shares of common
stock at a fixed price generally equal to the fair value of the
underlying stock at the date of grant. Option grants are
generally exercisable up to ten years from the date of grant.
In addition, the plans provide for grants of shares of
common stock or stock units that are subject to restriction
on transfer. Most stock awards vest over three to five years
and are subject to forfeiture if certain vesting requirements
are not met.
Stock incentive plans of acquired companies are
generally terminated at the merger closing dates. Option
holders under such plans receive the Company’s common
stock, or options to buy the Company’s stock, based on the
conversion terms of the various merger agreements. The
historical stock award information presented below reflects
awards originally granted under acquired companies’ plans.
At December 31, 2003, there were 41.8 million shares
(subject to adjustment for forfeitures) available for grant
under our current stock incentive plan.
The following is a summary of shares issuable under stock options outstanding and exercised under various stock option
plans of the Company:
Year Ended December 31
Stock option plans
Number outstanding at beginning
of year **********************
Granted *********************
Assumed/converted (a) ********
Exercised ********************
Cancelled********************
Number outstanding at end of year **
Exercisable at end of year ********
Restricted share plans
Number outstanding at beginning
of year **********************
Granted *********************
Assumed/converted ***********
Cancelled/vested *************
Number outstanding at end of year **
Weighted-average fair value of
shares granted ***************
2003
2002
2001
Stock Options
Weighted-Average
Exercise Price
Stock Options
Weighted-Average
Exercise Price
Stock Options
Weighted-Average
Exercise Price
206,252,590
1,872,653
1,116,884
(22,484,069)
(21,235,704)
165,522,354
116,427,321
2,280,057
58,481
—
(1,034,432)
1,304,106
$22.77
23.00
—
18.27
25.13
$22.93
$23.60
201,610,265
29,742,189
—
(9,594,213)
(15,505,651)
206,252,590
123,195,273
2,177,588
806,355
—
(703,886)
2,280,057
$22.58
21.81
—
13.26
24.18
$22.77
$23.63
153,396,226
65,144,310
8,669,285
(12,775,067)
(12,824,489)
201,610,265
117,534,343
6,377,137
1,021,887
298,988
(5,520,424)
2,177,588
$22.80
21.25
16.40
13.44
23.29
$22.58
$22.36
$ 6.82
$ 7.03
$ 6.76
(a) The number of shares subject to then-outstanding stock options have been multiplied by, and the exercise prices have been divided by, a factor of 1.0068 in order to maintain the
economic value of the options following the spin off of Piper Jaffray Companies.
Additional information regarding stock options outstanding as of December 31, 2003, is as follows:
Range of Exercise Prices
$.83 — $10.00 **************************************
$10.01 — $15.00************************************
$15.01 — $20.00************************************
$20.01 — $25.00************************************
$25.01 — $30.00************************************
$30.01 — $35.00************************************
$35.01 — $36.95************************************
94 U.S. Bancorp
Options Outstanding
Exercisable Options
Weighted-
Average
Remaining
Contractual
Life (Years)
1.4
3.8
7.1
7.1
5.0
3.4
3.0
6.3
Shares
2,893,745
4,120,299
34,269,234
78,525,163
40,092,423
5,138,138
483,352
165,522,354
Weighted-
Average
Exercise
Price
$ 5.90
11.72
18.79
22.43
28.43
32.65
35.81
Shares
2,890,211
3,561,885
20,441,742
45,944,620
37,967,373
5,138,138
483,352
$22.93
116,427,321
Weighted-
Average
Exercise
Price
$ 5.90
11.55
18.58
22.70
28.49
32.65
35.81
$23.60
Stock-based compensation expense was $158.1 million
in 2003, compared with $185.0 million and $168.7 million
in 2002 and 2001, respectively. In 2001, the Company also
recognized $190.5 million of stock-based compensation
expense as part of its merger and restructuring-related
charges as a result of accelerated vesting of certain stock
options and restricted stock due to change-in-control
provisions triggered by the Firstar/USBM merger. At the
time employee stock options expire or are exercised or
cancelled, the Company determines the tax benefit
associated with the stock award and under certain
circumstances may be required to recognize an adjustment
to tax expense. On an after-tax basis, the financial impact
of stock-based compensation expense was $123.4 million in
2003, compared with $113.3 million and $106.9 million in
2002 and 2001, respectively.
Stock-based compensation expense is based on the fair
value of the award at the date of grant or modification. The
fair value of options was estimated using the Black-Scholes
option-pricing model requiring the use of subjective
valuation assumptions. Because employee stock options
have characteristics that differ from those of traded options,
including vesting provisions and trading limitations that
impact their liquidity, the determined value used to measure
compensation expense may vary from their actual fair
value.
The following table provides a summary of the valuation assumptions utilized by the Company to determine the estimated
value of stock option grants:
Weighted-average assumptions in stock option valuation
Risk-free interest rates ***********************************************************************************
Dividend yields ******************************************************************************************
Stock volatility factor *************************************************************************************
Expected life of options (in years) *************************************************************************
2003
2002
2001
2.8%
3.0%
.40
5.3
3.3%
3.0%
.41
6.0
4.6%
3.0%
.42
4.5
Note 20
Income Taxes
The components of income tax expense were:
(Dollars in Millions)
2003
2002
2001
Federal
Current *******************************************************************************
Deferred ******************************************************************************
Federal income tax ******************************************************************
State
Current *******************************************************************************
Deferred ******************************************************************************
State income tax ********************************************************************
$1,528.8
222.9
1,751.7
139.8
49.8
189.6
$1,268.9
256.9
1,525.8
146.9
34.8
181.7
$ 982.2
(275.9)
706.3
132.2
(20.2)
112.0
Total income tax provision************************************************************
$1,941.3
$1,707.5
$ 818.3
A reconciliation of expected income tax expense at the federal statutory rate of 35% to the Company’s applicable income
tax expense follows:
(Dollars in Millions)
Tax at statutory rate (35%) **************************************************************
State income tax, at statutory rates, net of federal tax benefit *******************************
Tax effect of
Tax-exempt interest, net *************************************************************
Amortization of nondeductible goodwill ************************************************
Tax credits *************************************************************************
Nondeductible merger charges *******************************************************
Other items ************************************************************************
2003
2002
$1,978.0
123.2
$1,727.4
116.5
(21.7)
—
(109.6)
—
(28.6)
(24.9)
—
(85.5)
5.0
(31.0)
2001
$ 819.8
68.9
(37.4)
83.0
(69.4)
52.5
(99.1)
Applicable income taxes ****************************************************************
$1,941.3
$1,707.5
$ 818.3
The tax effects of fair value adjustments on securities
available-for-sale, derivative instruments in cash flow hedges
and certain tax benefits related to stock options are
recorded directly to shareholders’ equity as part of other
comprehensive income.
In preparing its tax returns, the Company is required to
interpret complex tax laws and regulations and utilize
income and cost allocation methods to determine its taxable
income. On an ongoing basis, the Company is subject to
examinations by federal and state taxing authorities that
U.S. Bancorp 95
may give rise to differing interpretations of these complex
laws, regulations and methods. Due to the nature of the
examination process, it generally takes years before these
examinations are completed and matters are resolved. At
December 31, 2003, the Company is in various stages of
the examination process for federal tax return matters of
U.S. Bancorp for periods dating back to 1995 and other
predecessor entities dating back to 1997. In addition,
examinations by various state taxing authorities date back
to 1997. At year-end, the Company believes the aggregate
amount of any additional tax liabilities that may result from
these examinations, if any, will not have a material adverse
effect on the financial condition, results of operations or
cash flows of the Company.
Deferred income tax assets and liabilities reflect the tax
effect of temporary differences between the carrying
amounts of assets and liabilities for financial reporting
purposes and the amounts used for the same items for
income tax reporting purposes.
The components of the Company’s net deferred tax liability as of December 31 were:
(Dollars in Millions)
2003
2002
Deferred tax assets
Allowance for credit losses *****************************************************************************
Stock compensation ***********************************************************************************
Federal AMT credits and capital losses ******************************************************************
Pension and postretirement benefits *********************************************************************
Deferred fees *****************************************************************************************
State and federal operating loss carryforwards ************************************************************
Real estate and other asset basis differences*************************************************************
Other deferred tax assets, net **************************************************************************
$
977.6
318.2
59.1
58.8
29.9
21.2
7.0
209.2
$
961.0
334.7
48.6
62.8
(70.6)
34.9
39.1
487.4
Gross deferred tax assets ***************************************************************************
1,681.0
1,897.9
Deferred tax liabilities
Leasing activities **************************************************************************************
Accrued severance, pension and retirement benefits*******************************************************
Accelerated depreciation *******************************************************************************
Securities available-for-sale and financial instruments ******************************************************
Other investment basis differences **********************************************************************
Other deferred tax liabilities, net *************************************************************************
Gross deferred tax liabilities *************************************************************************
Valuation allowance ************************************************************************************
(2,509.6)
(297.5)
(142.3)
(31.2)
(19.5)
(236.3)
(3,236.4)
(1.0)
(2,292.2)
(65.0)
(104.4)
(478.8)
(37.2)
(248.7)
(3,226.3)
(1.0)
Net deferred tax liability ***************************************************************************
$(1,556.4)
$(1,329.4)
The Company has established a valuation allowance to
offset deferred tax assets related to state net operating loss
carryforwards which are expected to expire unused. The
Company has approximately $252 million of state net
operating loss carryforwards, which expire at various times
through 2022.
Certain events covered by Internal Revenue Code
section 593(e), which was not repealed, will trigger a
recapture of base year reserves of acquired thrift
institutions. The base year reserves of acquired thrift
Note 21
Derivative Instruments
institutions would be recaptured if an entity ceases to
qualify as a bank for federal income tax purposes. The base
year reserves of thrift institutions also remain subject to
income tax penalty provisions that, in general, require
recapture upon certain stock redemptions of, and excess
distributions to, stockholders. At December 31, 2003,
retained earnings included approximately $101.8 million of
base year reserves for which no deferred federal income tax
liability has been recognized.
In the ordinary course of business, the Company enters into
derivative transactions to manage its interest rate and
prepayment risk and to accommodate the business
requirements of its customers. The Company does not enter
into derivative transactions for speculative purposes. Refer
to Note 1 ‘‘Significant Accounting Policies’’ in the Notes to
Consolidated Financial Statements for a discussion of the
Company’s accounting policies for derivative instruments.
For information related to derivative positions held for asset
and liability management purposes and customer-related
derivative positions, see Table 17 ‘‘Derivative Positions,’’
included in Management’s Discussion and Analysis, which
is incorporated by reference into these Notes to
Consolidated Financial Statements.
ASSET AND LIABILITY MANAGEMENT POSITIONS
Cash Flow Hedges The Company had $21.2 billion of
designated cash flow hedges at December 31, 2003. These
96 U.S. Bancorp
derivatives are interest rate swaps that are hedges of the
forecasted cash flows from the underlying variable-rate
LIBOR loans and floating-rate debt. All cash flow hedges
are highly effective for the year ended December 31, 2003,
and the change in fair value attributed to hedge
ineffectiveness was not material.
At December 31, 2003 and 2002, accumulated other
comprehensive income included a deferred after-tax net gain
of $174.9 million and $309.9 million, respectively, related
to derivatives used to hedge cash flows. The unrealized gain
will be reflected in earnings when the related cash flows or
hedged transactions occur and will offset the related
performance of the hedged items. The occurrence of these
related cash flows and hedged transactions remains
probable. The estimated amount of after-tax gain to be
reclassified from accumulated other comprehensive income
into earnings during 2004 is $53.1 million, which includes
gains related to hedges that were terminated early when the
forecasted transactions are still probable.
Fair Value Hedges The Company has $8.6 billion of
designated fair value hedges at December 31, 2003. These
derivatives are primarily interest rate contracts that hedge
the change in fair value related to interest rate changes of
underlying fixed-rate debt, trust preferred securities, and
deposit obligations. In addition, the Company uses forward
commitments to sell residential mortgage loans to hedge its
interest rate risk related to residential mortgage loans held
for sale. The Company commits to sell the loans at specified
prices in a future period, typically within 90 days. The
Company is exposed to interest rate risk during the period
between issuing a loan commitment and the sale of the loan
into the secondary market.
All fair value hedges are considered highly effective for
the year ended December 31, 2003. The change in fair
value attributed to hedge ineffectiveness was a loss of
$6.8 million, related to the Company’s mortgage loans held
for sale and its 2003 production volume of $29.9 billion.
Other Asset and Liability Management Derivative Positions
The Company has derivative positions that are used for
interest rate risk and other risk management purposes but are
not designated as cash flow hedges or fair value hedges in
accordance with the provisions of Statement of Financial
Accounting Standards No. 133, ‘‘Accounting for Derivative
Instruments and Hedge Activities.’’ At December 31, 2003, the
Company had $1.0 billion of forward commitments to sell
residential mortgage loans to hedge the Company’s interest
rate risk related to $1.0 billion of unfunded residential loan
commitments. Gains and losses on mortgage banking
derivatives and the unfunded loan commitments are included
in mortgage banking revenue on the income statement.
CUSTOMER-RELATED POSITIONS
The Company acts as a seller and buyer of interest rate
contracts and foreign exchange rate contracts on behalf of
customers. At December 31, 2003, the Company had
$16.6 billion of aggregate customer derivative positions,
including $12.6 billion of interest rate swaps, caps, and
floors and $4.0 billion of foreign exchange rate contracts.
The Company minimizes its market and liquidity risks by
taking similar offsetting positions. Gains or losses on
customer-related transactions were not significant for the
year ended December 31, 2003.
Note 22
Fair Values of Financial Instruments
Due to the nature of its business and its customers’ needs,
the Company offers a large number of financial instruments,
most of which are not actively traded. When market quotes
are unavailable, valuation techniques including discounted
cash flow calculations and pricing models or services are
used. The Company also uses various aggregation methods
and assumptions, such as the discount rate and cash flow
timing and amounts. As a result, the fair value estimates can
neither be substantiated by independent market comparisons,
nor realized by the immediate sale or settlement of the
financial instrument. Also, the estimates reflect a point in
time and could change significantly based on changes in
economic factors, such as interest rates. Furthermore, the
disclosure of certain financial and nonfinancial assets and
liabilities are not required. Finally, the fair value disclosure is
not intended to estimate a market value of the Company as
a whole. A summary of the Company’s valuation techniques
and assumptions follows.
Cash and Cash Equivalents The carrying value of cash,
amounts due from banks, federal funds sold and securities
purchased under resale agreements was assumed to
approximate fair value.
Securities Investment securities were valued using available
market quotes. In some instances, for securities that are not
widely traded, market quotes for comparable securities were
used.
Loans The loan portfolio consists of both floating and
fixed-rate loans, the fair value of which was estimated using
discounted cash flow analyses and other valuation
techniques. To calculate discounted cash flows, the loans
were aggregated into pools of similar types and expected
repayment terms. The expected cash flows of loans
considered historical prepayment experiences and estimated
credit losses for nonperforming loans and were discounted
using current rates offered to borrowers of similar credit
characteristics.
U.S. Bancorp 97
Deposit Liabilities The fair value of demand deposits,
savings accounts and certain money market deposits is
equal to the amount payable on demand at year-end. The
fair value of fixed-rate certificates of deposit was estimated
by discounting the contractual cash flow using the discount
rates implied by the high-grade corporate bond yield curve.
Short-term Borrowings Federal funds purchased, securities
sold under agreements to repurchase and other short-term
funds borrowed are at floating rates or have short-term
maturities. Their carrying value is assumed to approximate
their fair value.
Long-term Debt and Company-obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trusts
Holding Solely the Junior Subordinated Debentures of the
Parent Company The estimated fair value of medium-term
notes, bank notes, Federal Home Loan Bank Advances,
capital lease obligations and mortgage note obligations was
determined using a discounted cash flow analysis based on
current market rates of similar maturity debt securities to
discount cash flows. Other long-term debt instruments and
company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely the junior
subordinated debentures of the parent company were valued
using available market quotes.
Interest Rate Swaps, Basis Swaps and Options The interest
rate options and swap cash flows were estimated using a
third-party pricing model and discounted based on
appropriate LIBOR, eurodollar futures, swap and treasury
note yield curves.
Loan Commitments, Letters of Credit and Guarantees The
fair value of commitments, letters of credit and guarantees
represents the estimated costs to terminate or otherwise
settle the obligations with a third-party. Residential
mortgage commitments are actively traded and the fair
value is estimated using available market quotes. Other loan
commitments, letters of credit and guarantees are not
actively traded. Substantially all loan commitments have
floating rates and do not expose the Company to interest
rate risk assuming no premium or discount was ascribed to
loan commitments because funding could occur at market
rates. The Company estimates the fair value of loan
commitments, letters of credit and guarantees based on the
related amount of unamortized deferred commitment fees
adjusted for the probable losses for these arrangements.
The estimated fair values of the Company’s financial instruments at December 31 are shown in the following table:
December 31 (Dollars in Millions)
Financial Assets
2003
2002
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Cash and cash equivalents *******************************************
Investment securities *************************************************
Loans held for sale **************************************************
Loans **************************************************************
$ 8,782
43,334
1,433
115,866
$ 8,782
43,343
1,433
116,874
$ 11,192
28,488
4,159
113,829
$ 11,192
28,495
4,159
115,341
Total financial assets **********************************************
169,415
$170,432
157,668
$159,187
Nonfinancial assets ********************************************
19,871
Total assets ***********************************************
$189,286
Financial Liabilities
Deposits ************************************************************
Short-term borrowings************************************************
Long-term debt ******************************************************
Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely the junior subordinated debentures of
the parent company***********************************************
22,359
$180,027
$115,534
7,806
28,588
$116,039
7,806
29,161
$119,052
10,850
31,215
$119,120
10,850
31,725
2,601
2,700
2,994
3,055
Total financial liabilities ********************************************
163,718
$164,395
154,922
$156,061
Nonfinancial liabilities ******************************************
Shareholders’ equity *******************************************
6,326
19,242
Total liabilities and shareholders’ equity ***********************
$189,286
6,669
18,436
$180,027
Derivative Positions
Asset and liability management positions
Interest rate swaps ********************************************
Forward commitments to sell residential mortgages ***************
$
Customer-related positions
Interest rate contracts******************************************
Foreign exchange contracts ************************************
631
—
31
2
$
631
—
31
2
$ 1,438
(80)
$ 1,438
(80)
22
1
22
1
98 U.S. Bancorp
The fair value of unfunded commitments, standby
letters of credit and other guarantees is approximately equal
to their carrying value. The carrying value of unfunded
commitments and standby letters of credit was
$192 million. The carrying value of other guarantees was
$132 million.
Note 23
Guarantees and Contingent Liabilities
COMMITMENTS TO EXTEND CREDIT
Commitments to extend credit are legally binding and
generally have fixed expiration dates or other termination
clauses. The contractual amount represents the Company’s
exposure to credit loss, in the event of default by the
borrower. The Company manages this credit risk by using
the same credit policies it applies to loans. Collateral is
obtained to secure commitments based on management’s
credit assessment of the borrower. The collateral may
include marketable securities, receivables, inventory,
equipment and real estate. Since the Company expects many
of the commitments to expire without being drawn, total
commitment amounts do not necessarily represent the
Company’s future liquidity requirements. In addition, the
commitments include consumer credit lines that are
cancelable upon notification to the consumer.
LETTERS OF CREDIT
Standby letters of credit are conditional commitments the
Company issues to guarantee the performance of a customer
to a third-party. The guarantees frequently support public and
private borrowing arrangements, including commercial paper
issuances, bond financings and other similar transactions. The
Company issues commercial letters of credit on behalf of
customers to ensure payment or collection in connection with
trade transactions. In the event of a customer’s
nonperformance, the Company’s credit loss exposure is the
same as in any extension of credit, up to the letter’s
contractual amount. Management assesses the borrower’s
credit to determine the necessary collateral, which may include
marketable securities, real estate, accounts receivable and
inventory. Since the conditions requiring the Company to fund
letters of credit may not occur, the Company expects its
liquidity requirements to be less than the total outstanding
commitments. The maximum potential future payments
guaranteed by the Company under standby letter of credit
arrangements at December 31, 2003, were approximately
$9.7 billion with a weighted average term of approximately
24 months. The estimated fair value of standby letters of
credit was approximately $84.6 million at December 31, 2003.
The contract or notional amounts of commitments to
extend credit and letters of credit at December 31, 2003,
were as follows:
(Dollars in Millions)
Commitments to extend credit
Commercial**************
Corporate and purchasing
cards *****************
Consumer credit cards ****
Other consumer **********
Letters of credit
Standby *****************
Commercial**************
LEASE COMMITMENTS
Less Than
One Year
After
One Year
Total
$17,240
$30,902
$48,142
12,525
22,349
1,900
4,667
370
—
—
9,690
5,073
40
12,525
22,349
11,590
9,740
410
Rental expense for operating leases amounted to
$151.4 million in 2003, $148.0 million in 2002 and
$165.2 million in 2001. Future minimum payments, net of
sublease rentals, under capitalized leases and noncancelable
operating leases with initial or remaining terms of one year
or more, consisted of the following at December 31, 2003:
(Dollars in Millions)
2004 ****************************
2005 ****************************
2006 ****************************
2007 ****************************
2008 ****************************
Thereafter ***********************
Total minimum lease payments *****
Less amount representing interest **
Present value of net minimum
lease payments ***************
GUARANTEES
Operating
Leases
$ 181.9
161.7
146.2
131.3
110.9
516.1
$1,248.1
Capitalized
Leases
$ 8.9
7.9
7.0
6.6
6.2
38.7
75.3
28.5
$46.8
Guarantees are contingent commitments issued by the
Company to customers or other third-parties. The
Company’s guarantees primarily include parent guarantees
related to subsidiaries’ third-party borrowing arrangements;
third-party performance guarantees inherent in the
Company’s business operations such as indemnified
securities lending programs and merchant charge-back
guarantees; indemnification or buy-back provisions related
to certain asset sales; and contingent consideration
arrangements related to acquisitions. For certain guarantees,
the Company has recorded a liability related to the
potential obligation, or has access to collateral to support
U.S. Bancorp 99
the guarantee or through the exercise of other recourse
provisions can offset some or all of the maximum potential
future payments made under these guarantees. The
estimated fair value of guarantees, other than standby
letters of credit, was approximately $132 million at
December 31, 2003.
Third-Party Borrowing Arrangements The Company
provides guarantees to third-parties as a part of certain
subsidiaries’ borrowing arrangements, primarily representing
guaranteed operating or capital lease payments or other
debt obligations with maturity dates extending through
2014. The maximum potential future payments guaranteed
by the Company under these arrangements was
approximately $1.5 billion at December 31, 2003. The
Company’s recorded liabilities as of December 31, 2003,
included $40.7 million representing outstanding amounts
owed to these third-parties and required to be recorded on
balance sheet in accordance with generally accepted
accounting principles. The guaranteed operating lease
payments are also included in the disclosed minimum lease
obligations.
Commitments from Securities Lending The Company
participates in securities lending activities by acting as the
customer’s agent involving the loan or sale of securities. The
Company indemnifies customers for the difference between
the market value of the securities lent and the market value
of the collateral received. Cash collateralizes these
transactions. The maximum potential future payments
guaranteed by the Company under these arrangements was
approximately $13.2 billion at December 31, 2003, and
represented the market value of the securities lent to third-
parties. At December 31, 2003, the Company held assets
with a market value of $13.6 billion as collateral for these
arrangements.
Asset Sales The Company has provided guarantees to
certain third-parties in connection with the sale of certain
assets, primarily loan portfolios and low-income housing
tax credits. These guarantees are generally in the form of
asset buy-back or make-whole provisions that are triggered
upon a credit event or a change in the tax-qualifying status
of the related projects, as applicable, and remain in effect
until the loans are collected or final tax credits are realized,
respectively. The maximum potential future payments
guaranteed by the Company under these arrangements were
approximately $784.9 million at December 31, 2003, and
represented the total proceeds received from the buyer in
these transactions where the buy-back or make-whole
provisions have not yet expired. Recourse available to the
Company includes guarantees from the Small Business
Administration (for SBA loans sold), recourse against the
correspondent that originated the loan or to the private
mortgage issuer, the right to collect payments from the
100 U.S. Bancorp
debtors, and/or the right to liquidate the underlying
collateral, if any, and retain the proceeds. Based on its
established loan-to-value guidelines, the Company believes
the recourse available is sufficient to recover future
payments, if any, under the loan buy-back guarantees.
Merchant Processing The Company, through its subsidiary
NOVA Information Systems, Inc., provides merchant
processing services. Under the rules of credit card
associations, a merchant processor retains a contingent
liability for credit card transactions processed. This
contingent liability arises in the event of a billing dispute
between the merchant and a cardholder that is ultimately
resolved in the cardholder’s favor. In this situation, the
transaction is ‘‘charged back’’ to the merchant and the
disputed amount is credited or otherwise refunded to the
cardholder. If the Company is unable to collect this amount
from the merchant, it bears the loss for the amount of the
refund paid to the cardholder.
A cardholder, through its issuing bank, generally has
until the latter of up to four months after the date the
transaction is processed or the receipt of the product or
service to present a charge-back to the Company as the
merchant processor. The absolute maximum potential
liability is estimated to be the total volume of credit card
transactions that meet the associations’ requirements to be
valid charge-back transactions at any given time.
Management estimates that the maximum potential
exposure for charge-backs would approximate the total
amount of merchant transactions processed through the
credit card associations for the last four months. For the
last four months of 2003, this amount totaled
approximately $36.8 billion. In most cases, this contingent
liability is unlikely to arise, as most products and services
are delivered when purchased and amounts are refunded
when items are returned to merchants. However, where the
product or service is not provided until a future date
(‘‘future delivery’’), the potential for this contingent liability
increases. To mitigate this risk, the Company may require
the merchant to make an escrow deposit, may place
maximum volume limitations on future delivery transactions
processed by the merchant at any point in time, or may
require various credit policy enhancements (including letters
of credit and bank guarantees). Also, merchant processing
contracts may include event triggers to provide the
Company more financial and operational control in the
event of financial deterioration of the merchant. At
December 31, 2003, the Company held $28.6 million of
merchant escrow deposits as collateral.
The Company currently processes card transactions for
several of the largest airlines in the United States. In the
event of liquidation of these airlines, the Company could
become financially liable for refunding tickets purchased
through the credit card associations under the charge-back
provisions. Charge-back risk related to an airline is
evaluated in a manner similar to credit risk assessments and
merchant processing contracts consider the potential risk of
default. At December 31, 2003, the value of future delivery
airline tickets purchased was approximately $1.4 billion,
and the Company held collateral of $188.7 million in
escrow deposits and lines of credit related to airline
customer transactions.
In the normal course of business, the Company has
unresolved charge-backs that are in process of resolution.
The Company assesses the likelihood of its potential
liability based on the extent and nature of unresolved
charge-backs and its historical loss experience. At
December 31, 2003, the Company recorded a liability for
potential losses of $22.7 million.
Contingent Consideration Arrangements The Company has
contingent payment obligations related to certain business
combination transactions. Payments are guaranteed as long
as certain post-acquisition performance-based criteria are
met or customer relationships are maintained. At
December 31, 2003, the maximum potential future
payments required to be made by the Company under these
arrangements was approximately $75.5 million and
primarily represented contingent payments related to the
acquisition of the State Street Corporate Trust business on
December 31, 2002. If required, these contingent payments
would be payable within the next six months.
Other Guarantees The Company provides liquidity and
credit enhancement facilities to a Company-sponsored
conduit, as more fully described in the ‘‘Off-Balance Sheet
Arrangements’’ section within Management’s Discussion
and Analysis. Although management believes a draw against
these facilities is remote, the maximum potential future
payments guaranteed by the Company under these
arrangements was approximately $7.3 billion at
December 31, 2003. The recorded fair value of the
Company’s liability for the credit enhancement recourse
obligation and liquidity facilities was $47.3 million at
December 31, 2003, and was included in other liabilities.
The Company guarantees payments to certain
certificate holders of Company-sponsored investment trusts
with varying termination dates extending through
September 2004. The maximum potential future payments
guaranteed by the Company under these arrangements was
approximately $49.1 million at December 31, 2003. At
December 31, 2003, the Company had a recorded liability
of $44.1 million, held $15.0 million in cash collateral and
has other contractual sources of recourse available to it
including guarantees from third-parties and the underlying
assets held by the investment trusts.
OTHER CONTINGENT LIABILITIES
In connection with the spin-off of Piper Jaffray Companies,
the Company has agreed to indemnify Piper Jaffray
Companies against losses that may result from third-party
claims relating to certain specified matters. The Company’s
indemnification obligation related to these specified matters
is capped at $17.5 million and can be terminated by the
Company if there is a change in control event for Piper
Jaffray Companies.
The Company is subject to various other litigation,
investigations and legal and administrative cases and
proceedings that arise in the ordinary course of its
businesses. Due to their complex nature, it may be years
before some matters are resolved. While it is impossible to
ascertain the ultimate resolution or range of financial
liability with respect to these contingent matters, the
Company believes that the aggregate amount of such
liabilities will not have a material adverse effect on the
financial condition, results of operations or cash flows of
the Company.
U.S. Bancorp 101
Note 24
U.S. Bancorp (Parent Company)
Condensed Balance Sheet
December 31 (Dollars in Millions)
Assets
Deposits with subsidiary banks, principally interest-bearing **************************************************
Available-for-sale securities ******************************************************************************
Investments in
Bank and bank holding company subsidiaries***********************************************************
Nonbank subsidiaries (a) *****************************************************************************
Advances to
Bank and bank holding company subsidiaries***********************************************************
Nonbank subsidiaries (a) *****************************************************************************
Other assets *******************************************************************************************
Total assets**************************************************************************************
2003
2002
$ 4,726
127
22,628
605
—
16
676
$ 5,869
118
17,479
1,501
575
363
2,663
$28,778
$28,568
Liabilities and Shareholders’ Equity
Short-term funds borrowed*******************************************************************************
Advances from subsidiaries ******************************************************************************
Long-term debt *****************************************************************************************
Junior subordinated debentures issued to subsidiary trusts **************************************************
Other liabilities *****************************************************************************************
Shareholders’ equity ************************************************************************************
Total liabilities and shareholders’ equity *************************************************************
$
699
—
5,200
2,629
1,008
19,242
$28,778
$
380
117
5,695
2,990
950
18,436
$28,568
(a) December 31, 2002, included approximately $610 million of investment in and $316 million of advances to Piper Jaffray Companies.
Condensed Statement of Income
Year Ended December 31 (Dollars in Millions)
Income
Dividends from bank and bank holding company subsidiaries *******************************
Dividends from nonbank subsidiaries *****************************************************
Interest from subsidiaries ***************************************************************
Service and management fees from subsidiaries*******************************************
Other income **************************************************************************
Total income ********************************************************************
Expense
Interest on short-term funds borrowed ****************************************************
Interest on long-term debt ***************************************************************
Interest on junior subordinated debentures issued to subsidiary trusts ************************
Merger and restructuring-related charges *************************************************
Other expense *************************************************************************
Total expense *******************************************************************
Income (loss) before income taxes and equity in undistributed income of subsidiaries **********
Income tax credit***********************************************************************
Income (loss) of parent company ********************************************************
Equity in undistributed income of subsidiaries *********************************************
Net income *********************************************************************
$
2003
27.0
5.8
69.1
24.2
37.9
164.0
8.0
78.2
192.6
2.9
86.5
368.2
(204.2)
(37.1)
(167.1)
3,899.7
2002
2001
$3,140.0
15.2
96.9
38.5
16.0
3,306.6
8.9
126.8
214.1
6.7
76.0
432.5
2,874.1
(84.6)
2,958.7
209.4
$1,300.1
10.1
272.8
221.8
21.0
1,825.8
18.5
318.5
141.7
63.2
335.1
877.0
948.8
(112.0)
1,060.8
418.0
$3,732.6
$3,168.1
$1,478.8
102 U.S. Bancorp
Condensed Statement of Cash Flows
Year Ended December 31 (Dollars in Millions)
Operating Activities
Net income******************************************************************************
Adjustments to reconcile net income to net cash provided by operating activities
2003
2002
2001
$ 3,732.6
$ 3,168.1
$ 1,478.8
Equity in undistributed income of subsidiaries ********************************************
Other, net****************************************************************************
(3,899.7)
172.2
(209.4)
43.8
(418.0)
88.4
Net cash provided by (used in) operating activities ************************************
5.1
3,002.5
1,149.2
Investing Activities
Proceeds from sales and maturities of investment securities **********************************
Purchases of investment securities ********************************************************
Investments in subsidiaries ***************************************************************
Equity distributions from subsidiaries *******************************************************
Net (increase) decrease in short-term advances to subsidiaries *******************************
Long-term advances to subsidiaries ********************************************************
Principal collected on long-term advances to subsidiaries ************************************
Other, net *******************************************************************************
Net cash provided by (used in) investing activities*************************************
Financing Activities
Net increase (decrease) in short-term advances from subsidiaries *****************************
Net increase (decrease) in short-term borrowings *******************************************
Principal payments on long-term debt ******************************************************
Proceeds from issuance of long-term debt **************************************************
Proceeds from issuance of junior subordinated debentures to subsidiary trusts *****************
Redemption of junior subordinated debentures from subsidiary trusts **************************
Proceeds from issuance of common stock **************************************************
Repurchase of common stock *************************************************************
Cash dividends paid *********************************************************************
20.9
(73.0)
(283.9)
536.5
35.5
—
572.6
130.7
939.3
(117.2)
318.5
(1,593.5)
1,150.0
—
(360.8)
398.4
(326.3)
(1,556.8)
113.1
(52.9)
(536.4)
1,200.0
415.1
(410.0)
1,770.0
44.5
2,543.4
48.4
(72.3)
(2,537.5)
2,075.0
—
—
147.0
(1,040.4)
(1,480.7)
254.9
(73.5)
(1,941.0)
600.0
190.4
(1,144.0)
2,713.2
34.7
634.7
(10.6)
228.9
(1,612.8)
1,100.0
1,546.4
—
136.4
(467.9)
(1,235.1)
Net cash provided by (used in) financing activities*************************************
(2,087.7)
(2,860.5)
(314.7)
Change in cash and cash equivalents ***********************************************
Cash and cash equivalents at beginning of year *********************************************
(1,143.3)
5,869.0
2,685.4
3,183.6
1,469.2
1,714.4
Cash and cash equivalents at end of year********************************************
$ 4,725.7
$ 5,869.0
$ 3,183.6
Transfer of funds (dividends, loans or advances) from
bank subsidiaries to the Company is restricted. Federal law
prohibits loans unless they are secured and generally limits
any loan to the Company or individual affiliate to
10 percent of the bank’s equity. In aggregate, loans to the
Company and all affiliates cannot exceed 20 percent of the
bank’s equity.
Dividend payments to the Company by its subsidiary
banks are subject to regulatory review and statutory
limitations and, in some instances, regulatory approval. The
approval of the Comptroller of the Currency is required if
total dividends by a national bank in any calendar year
exceed the bank’s net income for that year combined with
its retained net income for the preceding two calendar years
or if the bank’s retained earnings are less than zero.
Furthermore, dividends are restricted by the Comptroller of
the Currency’s minimum capital constraints for all national
banks. Within these guidelines, all bank subsidiaries have
the ability to pay dividends without prior regulatory
approval. The amount of dividends available to the parent
company from the bank subsidiaries at December 31, 2003,
was approximately $828.5 million.
U.S. Bancorp 103
Note 25
Supplemental Disclosures to the Consolidated Financial Statements
Consolidated Statement of Cash Flows Listed below are supplemental disclosures to the Consolidated Statement of
Cash Flows:
Year Ended December 31 (Dollars in Millions)
2003
2002
2001
Income taxes paid**********************************************************************
Interest paid ***************************************************************************
Net noncash transfers to foreclosed property **********************************************
Acquisitions and divestitures
Assets acquired*********************************************************************
Liabilities assumed ******************************************************************
Net*****************************************************************************
$1,257.8
2,077.0
110.0
$
$
—
—
—
$ 1,129.5
2,890.1
89.5
$ 658.1
5,092.2
59.9
$ 2,068.9
(3,821.9)
$1,150.8
(509.0)
$(1,753.0)
$ 641.8
Money Market Investments Money market investments are included with cash and due from banks as part of cash and cash
equivalents. Money market investments consisted of the following at December 31:
(Dollars in Millions)
Interest-bearing deposits ****************************************************************************************
Federal funds sold **********************************************************************************************
Securities purchased under agreements to resell *******************************************************************
Total money market investments****************************************************************************
2003
$
4
109
39
$152
2002
$102
61
271
$434
Regulatory Capital The measures used to assess capital
include the capital ratios established by bank regulatory
agencies, including the specific ratios for the ‘‘well
capitalized’’ designation. For a description of the regulatory
capital requirements and the actual ratios as of
December 31, 2003 and 2002, for the Company and its
bank subsidiaries, see Table 20 included in Management’s
Discussion and Analysis which is incorporated by reference
into these Notes to Consolidated Financial Statements.
Net Gains on the Sale of Loans Included in noninterest
income, primarily in mortgage banking revenue, for the
years ended December 31, 2003, 2002 and 2001, the
Company had net gains on the sale of loans of $162.9
million, $243.4 million and $164.2 million, respectively.
104 U.S. Bancorp
Report of
Independent Auditors
Report of
Independent Accountants
To the Shareholders and Board of Directors of
U.S. Bancorp:
To the Shareholders and Board of Directors of
U.S. Bancorp:
We have audited the accompanying consolidated balance
sheet of U.S. Bancorp as of December 31, 2003, and the
related consolidated statements of income, shareholders’
equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing
standards generally accepted in the United States. Those
standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of U.S. Bancorp at December 31, 2003,
and the consolidated results of their operations and their
cash flows for the year then ended, in conformity with
accounting principles generally accepted in the
United States.
As discussed in Note 2 of the Notes to Consolidated
Financial Statements, in 2003 the Company changed its
method of accounting for stock-based employee
compensation.
In our opinion, the accompanying consolidated balance
sheet as of December 31, 2002 and the related consolidated
statements of income, shareholders’ equity and cash flows
for each of the two years in the period ended December 31,
2002 present fairly, in all material respects, the financial
position of U.S. Bancorp and its subsidiaries at
December 31, 2002, and the results of their operations and
their cash flows for each of the two years in the period
ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of
America. These financial statements are the responsibility of
the Company’s management; our responsibility is to express
an opinion on these financial statements based on our
audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in
the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for
our opinion.
As discussed in Note 12 of the Notes to Consolidated
Financial Statements, in 2002 the Company adopted the
provisions of Statement of Financial Accounting Standards
No. 142, ‘‘Goodwill and Other Intangible Assets.’’
Minneapolis, Minnesota
January 20, 2004
Minneapolis, Minnesota
January 21, 2003, except for the effects of the adoption of
the fair value provisions under Statement of Financial
Accounting Standards No. 123, ‘‘Accounting for Stock-
Based Compensation,’’ as discussed in Note 2 of the Notes
to Consolidated Financial Statements, and the effects of
presenting discontinued operations, as discussed in Note 4
of the Notes to Consolidated Financial Statements, as to
which the date of each is December 31, 2003.
U.S. Bancorp 105
U.S. Bancorp
Consolidated Balance Sheet — Five-Year Summary
December 31 (Dollars in Millions)
2003
2002
2001
2000
1999
Assets
Cash and due from banks ************************************
Held-to-maturity securities*************************************
Available-for-sale securities************************************
Loans held for sale*******************************************
Loans*******************************************************
Less allowance for credit losses ****************************
$ 8,630
152
43,182
1,433
118,235
(2,369)
$ 10,758
233
28,255
4,159
116,251
(2,422)
$ 9,120
299
26,309
2,820
114,405
(2,457)
$ 8,475
252
17,390
764
122,365
(1,787)
$ 7,324
194
17,255
670
113,229
(1,710)
Net loans ************************************************
Other assets ************************************************
115,866
20,023
113,829
22,793
111,948
20,894
120,578
17,462
111,519
17,356
% Change
2003 v 2002
(19.8)%
(34.8)
52.8
(65.5)
1.7
(2.2)
1.8
(12.2)
Total assets *******************************************
$189,286
$180,027
$171,390
$164,921
$154,318
5.1%
Liabilities and Shareholders’ Equity
Deposits
Noninterest-bearing ***************************************
Interest-bearing *******************************************
$ 32,470
86,582
$ 35,106
80,428
$ 31,212
74,007
$ 26,633
82,902
$ 26,350
77,067
Total deposits *****************************************
Short-term borrowings ****************************************
Long-term debt **********************************************
Company-obligated mandatorily redeemable preferred securities **
Other liabilities ***********************************************
Total liabilities *****************************************
Shareholders’ equity******************************************
119,052
10,850
31,215
2,601
6,326
170,044
19,242
115,534
7,806
28,588
2,994
6,669
161,591
18,436
105,219
14,670
25,716
2,826
6,214
154,645
16,745
109,535
11,833
21,876
1,400
4,944
149,588
15,333
103,417
10,558
21,027
1,400
3,865
140,267
14,051
Total liabilities and shareholders’ equity ******************
$189,286
$180,027
$171,390
$164,921
$154,318
(7.5)%
7.7
3.0
39.0
9.2
(13.1)
(5.1)
5.2
4.4
5.1%
106 U.S. Bancorp
U.S. Bancorp
Consolidated Statement of Income — Five-Year Summary
Year Ended December 31 (Dollars in Millions)
2003
2002
2001
2000
1999
% Change
2003 v 2002
Interest Income
Loans *******************************************************
Loans held for sale *******************************************
Investment securities
Taxable **************************************************
Non-taxable***********************************************
Other interest income *****************************************
Total interest income************************************
Interest Expense
Deposits *****************************************************
Short-term borrowings ****************************************
Long-term debt ***********************************************
Company-obligated mandatorily redeemable preferred securities ***
Total interest expense **********************************
Net interest income *******************************************
Provision for credit losses *************************************
Net interest income after provision for credit losses ***************
Noninterest Income
Credit and debit card revenue **********************************
Corporate payment products revenue ***************************
ATM processing services **************************************
Merchant processing services **********************************
Credit card and payment processing revenue ********************
Trust and investment management fees *************************
Deposit service charges ***************************************
Treasury management fees ************************************
Commercial products revenue**********************************
Mortgage banking revenue*************************************
Investment products fees and commissions **********************
Securities gains, net ******************************************
Merger and restructuring-related gains **************************
Other********************************************************
Total noninterest income ********************************
Noninterest Expense
Compensation************************************************
Employee benefits ********************************************
Net occupancy and equipment *********************************
Professional services *****************************************
Marketing and business development ***************************
Technology and communications *******************************
Postage, printing and supplies *********************************
Goodwill *****************************************************
Other intangibles *********************************************
Merger and restructuring-related charges************************
Other********************************************************
Total noninterest expense *******************************
Income from continuing operations before income taxes***********
Applicable income taxes ***************************************
Income from continuing operations *****************************
Income (loss) from discontinued operations (after-tax) *********
Cumulative effect of accounting change (after-tax) ************
Net income **************************************************
$7,272.0
202.2
$7,743.0
170.6
$ 9,413.7
146.9
$10,519.3
102.1
$ 9,078.0
103.9
(6.1)%
18.5
1,654.6
29.4
99.8
1,438.2
46.1
96.0
1,206.1
89.5
90.2
1,008.3
140.6
114.8
1,047.1
150.1
131.5
9,258.0
9,493.9
10,946.4
11,885.1
10,510.6
1,096.6
166.8
702.2
103.1
1,485.3
222.9
834.8
136.6
2,828.1
475.6
1,164.2
127.8
3,618.8
682.2
1,483.0
110.7
2,970.0
538.6
1,109.5
111.0
2,068.7
2,679.6
4,595.7
5,894.7
4,729.1
7,189.3
1,254.0
6,814.3
1,349.0
6,350.7
2,528.8
5,990.4
828.0
5,781.5
646.0
5,935.3
5,465.3
3,821.9
5,162.4
5,135.5
560.7
361.3
165.9
561.4
*
953.9
715.8
466.3
400.5
367.1
144.9
244.8
—
370.4
517.0
325.7
160.6
567.3
*
892.1
690.3
416.9
479.2
330.2
132.7
299.9
—
398.8
465.9
297.7
153.0
308.9
*
887.8
644.9
347.3
437.4
234.0
130.8
329.1
62.2
370.4
431.0
299.2
141.9
120.0
*
920.6
555.6
292.4
350.0
189.9
66.4
8.1
—
591.9
*
*
*
*
837.8
883.1
501.1
280.6
260.7
190.4
91.1
13.2
—
457.1
5,313.0
5,210.7
4,669.4
3,967.0
3,515.1
2,176.8
328.4
643.7
143.4
180.3
417.4
245.6
—
682.4
46.2
732.7
2,167.5
317.5
658.7
129.7
171.4
392.1
243.2
—
553.0
321.2
786.2
2,036.6
285.5
666.6
116.4
178.0
353.9
241.9
236.7
278.4
1,044.8
710.2
1,993.9
303.7
653.0
102.2
188.0
362.1
241.6
219.9
157.3
327.9
433.3
2,086.7
332.0
627.7
90.1
181.8
299.0
244.4
164.0
154.0
524.5
427.6
5,596.9
5,740.5
6,149.0
4,982.9
5,131.8
5,651.4
1,941.3
3,710.1
22.5
—
4,935.5
1,707.5
3,228.0
(22.7)
(37.2)
2,342.3
818.3
1,524.0
(45.2)
—
4,146.5
1,422.0
2,724.5
27.6
—
3,518.8
1,296.3
2,222.5
17.9
—
15.0
(36.2)
4.0
(2.5)
(26.2)
(25.2)
(15.9)
(24.5)
(22.8)
5.5
(7.0)
8.6
8.5
10.9
3.3
(1.0)
**
6.9
3.7
11.8
(16.4)
11.2
9.2
(18.4)
—
(7.1)
2.0
.4
3.4
(2.3)
10.6
5.2
6.5
1.0
—
23.4
(85.6)
(6.8)
(2.5)
14.5
13.7
14.9
**
**
$3,732.6
$3,168.1
$ 1,478.8
$ 2,752.1
$ 2,240.4
17.8%
* Information for 1999 was classified as credit card and payment processing revenue. The current classifications are not available.
** Not meaningful
U.S. Bancorp 107
U.S. Bancorp
Quarterly Consolidated Financial Data
(Dollars in Millions, Except Per Share Data)
Interest Income
Loans *************************************
Loans held for sale**************************
Investment securities
Taxable *********************************
Non-taxable *****************************
Other interest income ***********************
Total interest income ******************
Interest Expense
Deposits ***********************************
Short-term borrowings ***********************
Long-term debt *****************************
Company-obligated mandatorily redeemable
preferred securities **********************
Total interest expense *****************
Net interest income *************************
Provision for credit losses ********************
Net interest income after provision for credit
losses **********************************
Noninterest Income
Credit and debit card revenue ****************
Corporate payment products revenue *********
ATM processing services ********************
Merchant processing services ****************
Trust and investment management fees *******
Deposit service charges *********************
Treasury management fees ******************
Commercial products revenue ****************
Mortgage banking revenue *******************
Investment products fees and commissions ****
Securities gains (losses), net *****************
Other **************************************
Total noninterest income***************
Noninterest Expense
Compensation ******************************
Employee benefits **************************
Net occupancy and equipment ***************
Professional services ************************
Marketing and business development *********
Technology and communications**************
Postage, printing and supplies****************
Other intangibles****************************
Merger and restructuring-related charges ******
Other **************************************
Total noninterest expense *************
Income from continuing operations before
income taxes ****************************
Applicable income taxes *********************
Income from continuing operations ************
Income (loss) from discontinued operations
(after-tax) ****************************
Cumulative effect of accounting change
(after-tax) ****************************
Net income*********************************
Earnings per share**************************
Diluted earnings per share *******************
2003
2002
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$1,836.7
59.6
$1,821.0
51.8
$1,818.3
59.5
$1,796.0
31.3
$1,931.0
39.2
$1,936.8
36.6
$1,961.6
37.3
$1,913.6
57.5
396.1
8.9
29.9
422.4
7.5
25.1
403.6
6.7
23.2
432.5
6.3
21.6
347.8
13.2
16.7
346.1
11.7
29.6
372.2
10.9
21.8
372.1
10.3
27.9
2,331.2
2,327.8
2,311.3
2,287.7
2,347.9
2,360.8
2,403.8
2,381.4
306.6
39.5
184.3
31.4
561.8
288.5
38.9
184.0
24.5
535.9
256.4
44.9
167.9
23.6
492.8
245.1
43.5
166.0
23.6
478.2
395.5
72.9
189.9
34.8
693.1
375.8
57.3
214.5
33.9
681.5
370.3
51.1
225.1
34.7
681.2
343.7
41.6
205.3
33.2
623.8
1,769.4
335.0
1,791.9
323.0
1,818.5
310.0
1,809.5
286.0
1,654.8
335.0
1,679.3
335.0
1,722.6
330.0
1,757.6
349.0
1,434.4
1,468.9
1,508.5
1,523.5
1,319.8
1,344.3
1,392.6
1,408.6
127.4
86.0
42.4
127.3
228.6
163.2
112.0
104.2
95.4
35.1
140.7
103.8
142.3
90.9
41.9
141.8
238.9
179.0
111.8
100.0
90.3
38.1
213.1
84.8
137.6
95.7
41.3
146.3
239.8
187.0
126.2
97.8
89.5
35.5
(108.9)
89.6
153.4
88.7
40.3
146.0
246.6
186.6
116.3
98.5
91.9
36.2
(.1)
92.2
109.3
75.2
36.3
133.6
222.7
150.3
104.2
122.2
52.0
34.0
44.1
76.9
131.2
82.5
39.7
144.4
232.9
167.1
104.3
123.7
78.0
30.9
30.6
87.2
132.8
87.6
42.9
147.3
222.9
186.5
105.8
125.0
111.8
32.8
119.0
97.3
143.7
80.4
41.7
142.0
213.6
186.4
102.6
108.3
88.4
35.0
106.2
137.4
1,366.1
1,472.9
1,177.4
1,296.6
1,160.8
1,252.5
1,411.7
1,385.7
546.0
91.7
161.3
26.4
29.8
104.9
60.4
235.1
17.6
181.4
547.6
79.6
159.5
32.9
51.1
104.1
61.8
312.3
10.8
186.9
543.8
75.8
161.3
39.9
48.6
102.1
61.6
10.8
10.2
199.2
539.4
81.3
161.6
44.2
50.8
106.3
61.8
124.2
7.6
165.2
532.4
78.5
162.6
25.4
34.5
95.6
63.5
80.2
71.7
182.3
537.2
72.9
163.8
33.1
41.6
95.8
59.0
104.7
72.4
210.5
552.8
83.1
164.6
36.3
45.7
99.6
60.8
211.4
69.8
212.1
545.1
83.0
167.7
34.9
49.6
101.1
59.9
156.7
107.3
181.3
1,454.6
1,546.6
1,253.3
1,342.4
1,326.7
1,391.0
1,536.2
1,486.6
1,345.9
461.8
1,395.2
480.2
1,432.6
491.9
1,477.7
507.4
1,153.9
400.1
1,205.8
418.2
1,268.1
440.1
1,307.7
449.1
884.1
915.0
940.7
970.3
753.8
787.6
828.0
858.6
.7
—
4.9
—
10.2
—
6.7
—
9.8
(37.2)
4.8
—
1.6
—
(38.9)
—
$ 884.8
$ 919.9
$ 950.9
$ 977.0
$ 726.4
$ 792.4
$ 829.6
$ 819.7
$
$
.46
.46
$
$
.48
.48
$
$
.49
.49
$
$
.51
.50
$
$
.38
.38
$
$
.41
.41
$
$
.43
.43
$
$
.43
.43
108 U.S. Bancorp
U.S. Bancorp
Supplemental Financial Data
Earnings Per Share Summary
Earnings per share from continuing operations********************
Discontinued operations ****************************************
Cumulative effect of accounting change **************************
Earnings per share ********************************************
Diluted earnings per share from continuing operations *************
Discontinued operations ****************************************
Cumulative effect of accounting change **************************
Diluted earnings per share *************************************
Ratios
2003
$1.93
.01
—
$1.94
$1.92
.01
—
$1.93
2002
$1.68
(.01)
(.02)
$1.65
$1.68
(.01)
(.02)
$1.65
2001
$ .79
(.02)
—
$ .77
$ .79
(.03)
—
$ .76
2000
$1.43
.01
—
$1.44
$1.42
.01
—
$1.43
1999
$1.16
.01
—
$1.17
$1.15
.01
—
$1.16
Return on average assets **************************************
Return on average equity***************************************
Average total equity to average assets ***************************
Dividends per share to net income per share *********************
1.99%
19.2
10.3
44.1
1.84%
18.3
10.0
47.3
.89%
9.0
9.9
97.4
1.74%
19.0
9.1
45.1
1.49%
16.9
8.8
39.3
Other Statistics (Dollars and Shares in Millions)
Common shares outstanding (a) ********************************
Average common shares outstanding and common stock
equivalents
1,922.9
1,917.0
1,951.7
1,902.1
1,928.5
Earnings per share **************************************
Diluted earnings per share *******************************
Number of shareholders (b)*************************************
Common dividends declared ************************************
1,923.7
1,936.2
74,341
$1,645
1,916.0
1,924.8
74,805
$1,488
1,927.9
1,940.3
76,395
$1,447
1,906.0
1,918.5
46,052
$1,267
1,907.8
1,930.0
45,966
$1,091
(a) Defined as total common shares less common stock held in treasury at December 31.
(b) Based on number of common stock shareholders of record at December 31.
Stock Price Range and Dividends
First quarter *****************************
Second quarter **************************
Third quarter ****************************
Fourth quarter ***************************
2003
Sales Price
2002
Sales Price
High
Low
$23.47
24.99
25.82
30.00
$18.56
18.96
22.93
24.04
Closing
Price
$18.98
24.50
23.99
29.78
Dividends
Declared
$.205
.205
.205
.240
High
Low
$23.07
24.50
23.29
22.38
$19.02
22.08
17.09
16.05
Closing
Price
$22.57
23.35
18.58
21.22
Dividends
Declared
$.195
.195
.195
.195
The common stock of U.S. Bancorp is traded on the New York Stock Exchange, under the ticker symbol ‘‘USB.’’
Reconciliation of Quarterly Consolidated Financial Data
(Dollars in Millions and After-tax)
Income before cumulative effect of accounting change, as
previously reported ***********************************
Less
First
Quarter
2003
Second
Quarter
Third
Quarter
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2002
$911.2
$953.6
$984.9
$793.2
$823.1
$860.3
$849.8
Discontinued operations of Piper Jaffray Companies (a)***
Adoption of SFAS 123 for stock options (a) **************
.7
26.4
4.9
33.7
10.2
34.0
9.8
29.6
4.8
30.7
1.6
30.7
(38.9)
30.1
Income from continuing operations ***********************
$884.1
$915.0
$940.7
$753.8
$787.6
$828.0
$858.6
(a) The Company’s quarterly financial results previously filed on Form 10-Q with the Securities and Exchange Commission have been retroactively restated to give effect to the spin-
off of Piper Jaffray Companies on December 31, 2003, and the adoption of the fair value method of accounting for stock-based compensation. The accounting change was
adopted using the retroactive restatement method.
U.S. Bancorp 109
U.S. Bancorp
Consolidated Daily Average Balance Sheet and Related Yields
Year Ended December 31
2003
2002
(Dollars in Millions)
Average
Balances
Interest
Yields
and Rates
Average
Balances
Interest
Yields
and Rates
$ 36,647
601
3,616
$1,654.6
42.1
202.2
4.51%
7.01
5.59
$ 27,892
937
2,644
$1,438.2
65.3
170.6
5.16%
6.97
6.45
Assets
Taxable securities ******************************************
Non-taxable securities **************************************
Loans held for sale *****************************************
Loans (b)
Commercial*********************************************
Commercial real estate **********************************
Residential mortgages ***********************************
Retail **************************************************
Total loans ***************************************
Other earning assets****************************************
Total earning assets *******************************
Allowance for credit losses **********************************
Unrealized gain (loss) on available-for-sale securities ***********
Other assets (c) ********************************************
41,326
27,142
11,696
38,198
118,362
1,582
160,808
(2,467)
120
29,169
Total assets **************************************
$187,630
Liabilities and Shareholders’ Equity
Noninterest-bearing deposits*********************************
Interest-bearing deposits
Interest checking ****************************************
Money market accounts **********************************
Savings accounts ***************************************
Time certificates of deposit less than $100,000 *************
Time deposits greater than $100,000 **********************
Total interest-bearing deposits **********************
Short-term borrowings **************************************
Long-term debt*********************************************
Company-obligated mandatorily redeemable preferred securities ****
$ 31,715
19,104
32,310
5,612
15,493
12,319
84,838
10,503
30,965
2,698
Total interest-bearing liabilities **********************
Other liabilities (d) ******************************************
Shareholders’ equity ****************************************
129,004
7,518
19,393
Total liabilities and shareholders’ equity**************
$187,630
2,315.4
1,584.6
713.4
2,673.8
7,287.2
100.1
9,286.2
84.3
317.7
21.2
450.9
222.5
1,096.6
166.8
702.2
103.1
2,068.7
5.60
5.84
6.10
7.00
6.16
6.32
5.77
.44
.98
.38
2.91
1.81
1.29
1.59
2.27
3.82
1.60
2,622.2
1,636.3
595.3
2,902.8
7,756.6
96.1
9,526.8
102.3
312.8
25.1
743.4
301.7
1,485.3
222.9
834.8
136.6
2,679.6
43,817
25,723
8,412
36,501
114,453
1,484
147,410
(2,542)
409
26,671
$171,948
$ 28,715
15,631
25,237
4,928
19,283
11,330
76,409
10,116
29,268
2,904
118,697
7,263
17,273
$171,948
Net interest income *****************************************
$7,217.5
$6,847.2
Gross interest margin ***************************************
Gross interest margin without taxable-equivalent increments*****
Percent of Earning Assets
Interest income*********************************************
Interest expense********************************************
Net interest margin *****************************************
Net interest margin without taxable-equivalent increments *******
4.17%
4.15
5.77%
1.28
4.49
4.47%
(a)
(b)
(c)
(d)
Interest and rates are presented on a fully taxable-equivalent basis under a tax rate of 35 percent.
Interest income and rates on loans include loan fees. Nonaccrual loans are included in average loan balances.
Includes approximately $1,427 million, $1,733 million, $1,664 million, $1,970 million and $1,072 million of assets from discontinued operations in 2003, 2002, 2001, 2000 and 1999,
respectively.
Includes approximately $1,034 million, $1,524 million, $1,776 million, $2,072 million and $1,199 million of liabilities from discontinued operations in 2003, 2002, 2001, 2000 and
1999, respectively.
110 U.S. Bancorp
5.98
6.36
7.08
7.95
6.78
6.48
6.46
.65
1.24
.51
3.86
2.66
1.94
2.20
2.85
4.70
2.26
4.20%
4.18
6.46%
1.81
4.65
4.63%
and Rates (a)
2001
2000
1999
Average
Balances
Interest
Yields
and Rates
Average
Balances
Interest
Yields
and Rates
Average
Balances
Interest
Yields
and Rates
2003 v 2002
% Change
Average
Balances
$ 20,129
1,787
1,911
$ 1,206.1
128.9
146.9
5.99%
7.21
7.69
$ 14,567
2,744
1,303
$ 1,008.3
203.1
102.1
6.92%
7.40
7.84
$ 16,301
2,970
1,450
$ 1,047.1
220.6
103.9
6.42%
7.43
7.17
3,609.3
2,002.7
658.2
3,158.2
9,428.4
90.6
11,000.9
203.6
711.0
42.5
1,241.4
629.6
2,828.1
475.6
1,164.2
127.8
4,595.7
50,072
26,081
8,576
33,448
118,177
1,497
143,501
(1,979)
165
24,257
$165,944
$ 25,109
13,962
24,932
4,571
23,328
13,054
79,847
11,679
24,133
1,955
117,614
6,795
16,426
$165,944
7.21
7.68
7.67
9.44
7.98
6.05
7.67
1.46
2.85
.93
5.32
4.82
3.54
4.07
4.82
6.54
3.91
4,222.6
2,296.9
863.7
3,155.1
10,538.3
115.3
11,967.1
8.43
8.82
7.71
10.18
8.91
6.76
8.63
270.4
1,000.0
74.0
1,458.3
816.1
3,618.8
682.1
1,483.1
110.7
5,894.7
2.07
4.39
1.47
5.64
6.32
4.55
6.20
6.77
7.91
5.17
50,062
26,040
11,207
31,008
118,317
1,705
138,636
(1,781)
(247)
21,873
$158,481
$ 23,820
13,035
22,774
5,027
25,861
12,909
79,606
11,008
21,916
1,400
113,930
6,232
14,499
$158,481
3,261.1
1,922.8
1,056.3
2,860.8
9,101.0
132.2
10,604.8
231.0
842.2
111.9
1,322.6
462.3
2,970.0
538.6
1,109.5
111.0
4,729.1
43,328
23,076
13,890
29,344
109,638
2,326
132,685
(1,709)
54
19,137
$150,167
$ 23,556
12,898
22,534
5,961
26,296
8,675
76,364
10,883
19,873
1,400
108,520
4,818
13,273
$150,167
$ 6,405.2
$ 6,072.4
$ 5,875.7
3.76%
3.72
7.67%
3.21
4.46
4.43%
3.46%
3.40
8.63%
4.25
4.38
4.32%
7.53
8.33
7.60
9.75
8.30
5.68
7.99
1.79
3.74
1.88
5.03
5.33
3.89
4.95
5.58
7.93
4.36
3.63%
3.56
7.99%
3.56
4.43
4.36%
31.4%
(35.9)
36.8
(5.7)
5.5
39.0
4.6
3.4
6.6
9.1
(3.0)
(70.7)
9.4
9.1
10.4
22.2
28.0
13.9
(19.7)
8.7
11.0
3.8
5.8
(7.1)
8.7
3.5
12.3
9.1%
U.S. Bancorp 111
Annual Report on Form 10-K
Securities and Exchange Commission
Washington, D.C. 20549
The registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2).
Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended
December 31, 2003
Commission File Number 1-6880
U.S. Bancorp
Incorporated in the State of Delaware
IRS Employer Identification #41-0255900
Address: 800 Nicollet Mall
Minneapolis, Minnesota 55402-7014
Telephone: (651) 466-3000
Securities registered pursuant to Section 12(b) of the Act
(and listed on the New York Stock Exchange): Common
Stock, par value $.01.
Securities registered pursuant to section 12(g) of the
Act: None.
U.S. Bancorp (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained in this Form 10-K, and will
not be contained, to the best of the registrant’s knowledge,
in the registrant’s definitive proxy statement incorporated
by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of January 31, 2004, U.S. Bancorp had
1,927,407,105 shares of common stock outstanding and
74,249 registered holders of its common stock. The
aggregate market value of common stock held by non-
affiliates as of June 30, 2003, was approximately
$47.1 billion.
This report incorporates into a single document the
requirements of the Securities and Exchange Commission
with respect to annual reports on Form 10-K and annual
reports to shareholders. Only those sections of this report
referenced in the following cross-reference index and the
information under the caption ‘‘Forward-Looking
Statements’’ are incorporated in the Form 10-K.
Index
Part I
Item 1
Item 2
Item 3
Item 4
Part II
Item 5
Item 6
Item 7
Page
Business
General Business Description ************ 20-21, 113-114
Line of Business Financial Performance *********** 54-59
Website Access to SEC Reports ******************** 115
Properties **************************************** 114
Legal Proceedings ******************************* none
Submission of Matters to a Vote of
Security Holders ****************************** none
Market Price and Dividends for the Registrant’s Common
Equity and Related Stockholder Matters ***** 3, 51-52,
64, 87-89, 94-95, 109, 112
Selected Financial Data***************************** 19
Management’s Discussion and Analysis of
Financial Condition and Results of Operations*** 18-61
Item 7A Quantitative and Qualitative Disclosures About
Market Risk ********************************* 44-51
Financial Statements and Supplementary Data **** 62-111
Changes in and Disagreements with Accountants on
Item 8
Item 9
Accounting and Financial Disclosure ************* 115
Item 9A Disclosure Controls and Procedures****************** 61
Part III
Item 10 Directors and Executive Officers
of the Registrant ************************ 5, 122-123*
Item 11 Executive Compensation ****************************** *
Item 12 Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder
Matters ********************************** 114-115*
Item 13 Certain Relationships and Related Transactions ********* *
Item 14 Principal Accountant Fees and Services **************** *
Part IV
Item 15 Exhibits, Financial Statement Schedules and
Reports on Form 8-K *********************** 115-117
Signatures************************************************* 118
Certifications********************************************* 119-121
*U.S. Bancorp’s definitive proxy statement for the 2004 Annual Meeting of Shareholders
is incorporated herein by reference, other than the sections entitled ‘‘Report of the
Compensation Committee’’ and ‘‘Stock Performance Chart.’’
112 U.S. Bancorp
General Business Description U.S. Bancorp is a multi-state
financial services holding company headquartered in
Minneapolis, Minnesota. U.S. Bancorp was incorporated in
Delaware in 1929 and operates as a financial holding
company and a bank holding company under the Bank
Holding Company Act of 1956. U.S. Bancorp provides a
full range of financial services, including lending and
depository services, cash management, foreign exchange and
trust and investment management services. It also engages
in credit card services, merchant and automated teller
machine (‘‘ATM’’) processing, mortgage banking, insurance,
brokerage, leasing and investment banking.
U.S. Bancorp’s banking subsidiaries are engaged in the
general banking business, principally in domestic markets.
The subsidiaries range in size from $26 million to
$128 billion in deposits and provide a wide range of
products and services to individuals, businesses, institutional
organizations, governmental entities and other financial
institutions. Commercial and consumer lending services are
principally offered to customers within the Company’s
domestic markets, to domestic customers with foreign
operations and within certain niche national venues.
Lending services include traditional credit products as well
as credit card services, financing and import/export trade,
asset-backed lending, agricultural finance and other
products. Leasing products are offered through bank leasing
subsidiaries. Depository services include checking accounts,
savings accounts and time certificate contracts. Ancillary
services such as foreign exchange, treasury management and
receivable lock-box collection are provided to corporate
customers. U.S. Bancorp’s bank and trust subsidiaries
provide a full range of asset management and fiduciary
services for individuals, estates, foundations, business
corporations and charitable organizations.
U.S. Bancorp’s non-banking subsidiaries primarily offer
investment and insurance products to the Company’s
customers principally within its markets and mutual fund
processing services to a broad range of mutual funds.
Banking and investment services are provided through
a network of 2,243 banking offices principally operating in
24 states in the Midwest and West. The Company operates
a network of 4,425 branded ATMs and provides 24-hour,
seven day a week telephone customer service. Mortgage
banking services are provided through banking offices and
loan production offices throughout the Company’s markets.
Consumer lending products may be originated through
banking offices, indirect correspondents, brokers or other
lending sources, and a consumer finance division. The
Company is also one of the largest providers of Visa˛
corporate and purchasing card services and corporate trust
services in the United States. A wholly-owned subsidiary,
NOVA Information Systems, Inc., provides merchant
processing services directly to merchants and through a
network of banking affiliations.
On a full-time equivalent basis, employment during
2003 averaged a total of 51,377 employees.
Competition The commercial banking business is highly
competitive. Subsidiary banks compete with other
commercial banks and with other financial institutions,
including savings and loan associations, mutual savings
banks, finance companies, mortgage banking companies,
credit unions and investment companies. In recent years,
competition has increased from institutions not subject to
the same regulatory restrictions as domestic banks and bank
holding companies.
Government Policies The operations of the Company’s
various operating units are affected by state and federal
legislative changes and by policies of various regulatory
authorities, including those of the numerous states in which
they operate, the United States and foreign governments.
These policies include, for example, statutory maximum
legal lending rates, domestic monetary policies of the Board
of Governors of the Federal Reserve System, United States
fiscal policy, international currency regulations and
monetary policies, U.S. Patriot Act and capital adequacy
and liquidity constraints imposed by bank regulatory
agencies.
Supervision and Regulation As a registered bank holding
company and financial holding company under the Bank
Holding Company Act, U.S. Bancorp is subject to the
supervision of, and regulation by, the Board of Governors
of the Federal Reserve System.
Under the Bank Holding Company Act, a financial
holding company may engage in banking, managing or
controlling banks, furnishing or performing services for
banks it controls, and conducting other financial activities.
U.S. Bancorp must obtain the prior approval of the Federal
Reserve Board before acquiring more than 5 percent of the
outstanding shares of another bank or bank holding
company, and must provide notice to, and in some
situations obtain the prior approval of, the Federal Reserve
Board in connection with engaging in, or acquiring more
than 5 percent of the outstanding shares of a company
engaged in, a new financial activity.
Under the Bank Holding Company Act, U.S. Bancorp
may acquire banks throughout the United States, subject
only to state or federal deposit caps and state minimum age
requirements.
National banks are subject to the supervision of, and
are examined by, the Comptroller of the Currency. All
subsidiary banks of the Company are members of the
Federal Deposit Insurance Corporation and are subject to
U.S. Bancorp 113
examination by the FDIC. In practice, the primary federal
regulator makes regular examinations of each subsidiary
bank subject to its regulatory review or participates in joint
examinations with other federal regulators. Areas subject to
regulation by federal authorities include the allowance for
credit losses, investments, loans, mergers, issuance of
securities, payment of dividends, establishment of branches
and other aspects of operations.
Properties U.S. Bancorp and its significant subsidiaries
occupy headquarter offices under a long-term lease in
Minneapolis, Minnesota. The Company also leases eight
freestanding operations centers in St. Paul, Portland,
Milwaukee and Denver. The Company owns six principal
operations centers in Cincinnati, St. Louis, Fargo,
Milwaukee and St. Paul. At December 31, 2003, the
Company’s subsidiaries owned and operated a total of
1,449 facilities and leased an additional 1,361 facilities, all
of which are well maintained. The Company believes its
current facilities are adequate to meet its needs. Additional
information with respect to premises and equipment is
presented in Notes 10 and 23 of the Notes to Consolidated
Financial Statements.
Equity Compensation Plan Information The following table summarizes information regarding equity compensation plans in
effect as of December 31, 2003.
Plan Category
Equity compensation plans approved by
security holders (b) ****************
Equity compensation plans not
approved by security holders (c) *****
Total**************************
Number of securities to be issued
upon exercise of outstanding options,
warrants and rights
Weighted-average exercise
price of outstanding options,
warrants and rights
Number of securities remaining
available for future issuance under
equity compensation plans (excluding
securities reflected in the first column) (a)
91,603,009
12,259,923
103,862,932
$20.63
$22.45
$20.72
41,825,251
—
41,825,251
(a) No shares are available for the granting of future awards under the U.S. Bancorp 1998 Executive Stock Incentive Plan or the U.S. Bancorp 1991 Executive Stock Incentive plan.
The 41,825,251 shares available under the U.S. Bancorp 2001 Stock Incentive Plan may become the subject of future awards in the form of stock options, stock appreciation
rights, restricted stock, restricted stock units, performance awards or other stock-based awards, except that only 8,772,531 of these shares are available for future grants of awards
other than stock options or stock appreciation rights.
Includes shares underlying stock options and restricted stock units (convertible into shares of the Company’s common stock on a one-for-one basis) under the U.S. Bancorp 2001
Stock Incentive Plan, the U.S. Bancorp 1998 Executive Stock Incentive Plan and the U.S. Bancorp 1991 Executive Stock Incentive Plan. Excludes 62,277,981 shares underlying
outstanding stock options and warrants assumed by U.S. Bancorp in connection with acquisitions by U.S. Bancorp. Of the excluded shares, 54,776,567 underlie stock options
granted under equity compensation plans of the former U.S. Bancorp that were approved by the shareholders of the former U.S. Bancorp.
(b)
(c) All of the identified shares underlie stock options granted to a broad-based employee population pursuant to the U.S. Bancorp 2001 Employee Stock Incentive plan, the Firstar
Corporation 1999 Employee Stock Incentive Plan, the Firstar Corporation 1998 Employee Stock Incentive Plan and the Star Banc Corporation 1996 Starshare Stock Incentive Plan
for Employees.
Under the U.S. Bancorp 2001 Employee Stock Incentive
Plan (‘‘2001 Plan’’), 11,678,800 shares are authorized for
issuance pursuant to the grant of nonqualified stock options
to any full-time or part-time employee actively employed by
U.S. Bancorp on the grant date, other than individuals
eligible to participate in any of the Company’s executive
stock incentive plans or in U.S. Bancorp Piper Jaffray Inc.’s
annual option plan. As of December 31, 2003, options to
purchase an aggregate of 6,238,529 shares were outstanding
under the plan. All options under the plan were granted on
February 27, 2001.
As of December 31, 2003, options to purchase an
aggregate of 2,331,475 shares of the Company’s common
stock were outstanding under the Firstar Corporation 1999
Employee Stock Incentive Plan (‘‘1999 Plan’’). Under this
plan, stock options were granted to each full-time or part-
time employee actively employed by Firstar Corporation on
the grant date, other than managers who participated in an
executive stock incentive plan.
As of December 31, 2003, options to purchase an
aggregate of 3,278,230 shares of the Company’s common
stock were outstanding under the Firstar Corporation 1998
Employee Stock Incentive Plan (‘‘1998 Plan’’). Under this
plan, stock options were granted to each full-time or part-
time employee actively employed by Firstar Corporation on
the grant date, other than managers who participated in an
executive stock incentive plan.
As of December 31, 2003, options to purchase an
aggregate of 411,689 shares of the Company’s common
stock were outstanding under the Star Banc Corporation
1996 Starshare Stock Incentive Plan for Employees (‘‘1996
Plan’’). Under the plan, stock options were granted to each
employee of Star Banc Corporation, a predecessor company,
other than managers who participated in an executive stock
incentive plan.
No further options will be granted under any of these
plans. Under all of the plans, the exercise price of the
options equals the fair market value of the underlying
common stock on the grant date. All options granted under
the plan have a term of 10 years from the grant date and
become exercisable over a period of time set forth in the
plan or determined by the committee administering the
plan. Options granted under the plan are nontransferable
and, during the optionee’s lifetime, are exercisable only by
the optionee.
114 U.S. Bancorp
If an optionee is terminated as a result of his or her
gross misconduct or offense, all options terminate
immediately, whether or not vested. Under the 2001 Plan,
the 1999 Plan and the 1998 Plan, in the event an optionee
is terminated immediately following a change in control (as
defined in the plans) of U.S. Bancorp, and the termination is
due to business needs resulting from the change in control
and not as a result of the optionee’s performance or
conduct, all of the optionee’s outstanding options will
become immediately vested and exercisable as of the date of
such termination. Under the 1996 Plan, all outstanding
options vest and become exercisable immediately following
a change in control.
If the outstanding shares of common stock of
U.S. Bancorp are changed into or exchanged for a different
number or kind of shares of stock or other securities as a
result of a reorganization, recapitalization, stock dividend,
stock split, combination of shares, reclassification, merger,
consolidation or similar event, the number of shares
underlying outstanding options also may be adjusted. The
number of shares underlying the options shown in the table
have been adjusted to maintain the economic value of the
options following the special dividend paid to effect the
spin-off of our Piper Jaffray subsidiary. The plans may be
terminated, amended or modified by the Board of Directors
at any time.
Change in Certifying Accountants In response to the
Sarbanes-Oxley Act of 2002, the Audit Committee
determined on November 8, 2002, to segregate the internal
and external auditing functions performed for U.S. Bancorp
by PricewaterhouseCoopers LLP and appointed Ernst &
Young LLP to become the Company’s external auditors
following the filing of the Company’s 2002 Annual Report
on Form 10-K during the first quarter of 2003.
No report of PricewaterhouseCoopers LLP on the
financial statements of U.S. Bancorp for the years ended
December 31, 2002 and 2001 contained an adverse opinion
or a disclaimer of opinion, or was qualified or modified as
to uncertainty, audit scope or accounting principles. During
the two years ended December 31, 2002 and 2001, there
were no disagreements with PricewaterhouseCoopers LLP
on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or
procedure which, if not resolved to the satisfaction of
PricewaterhouseCoopers LLP, would have caused it to make
reference to the subject matter of the disagreement in
connection with its reports on the financial statements for
such years. U.S. Bancorp believes that during the two years
ended December 31, 2002 and 2001, there were no
‘‘reportable events,’’ as defined in Item 304(a)(1)(v) of
Regulation S-K of the Securities and Exchange Commission.
During the two years ended December 31, 2002 and
2001, the Company did not consult with Ernst & Young
LLP on any items regarding the application of accounting
principles, the type of audit opinion that might be rendered
on the Company’s financial statements, or the subject
matter of a disagreement or reportable event (as described
in Regulation S-K Item 304(a)(2)).
U.S. Bancorp reported the change in accountants on a
Form 8-K filed on November 14, 2002. The Form 8-K
contained a letter from PricewaterhouseCoopers LLP,
addressed to the Securities and Exchange Commission,
stating that it agreed with the statements concerning
PricewaterhouseCoopers LLP in such Form 8-K.
Website Access to SEC Reports U.S. Bancorp’s internet
website can be found at usbank.com. U.S. Bancorp makes
available free of charge on its website its annual reports on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13 or 15(d) of the
Exchange Act, as well as all other reports filed by U.S.
Bancorp with the SEC, as soon as reasonably practicable
after electronically filed with, or furnished to, the SEC.
Governance Documents Our Corporate Governance
Guidelines, Code of Ethics and Business Conduct and Board
of Directors committee charters are available free of charge
on our web site at usbank.com, by clicking on ‘‘About
U.S. Bancorp,’’ then ‘‘Investor/Shareholder Information.’’
Shareholders may request a free printed copy of any of
these documents from our investor relations department by
contacting them at Corporaterelations@usbank.com or
calling (612) 303-0799.
Exhibits
Financial Statements Filed
U.S. Bancorp and Subsidiaries
Consolidated Financial Statements ******************
Notes to Consolidated Financial Statements *************
Reports of Independent Auditors and Accountants *******
Page
62-65
66-104
105
Schedules to the consolidated financial statements
required by Regulation S-X are omitted since the required
information is included in the footnotes or is not applicable.
During the three months ended December 31, 2003,
and through the date of this report, the Company filed the
following Current Reports on Form 8-K:
) Form 8-K dated October 21, 2003, relating to third
quarter 2003 earnings;
) Form 8-K dated October 23, 2003, relating to the
announcement by the former U.S. Bancorp Piper Jaffray
of the composition of its Board of Directors;
U.S. Bancorp 115
) Form 8-K dated December 15, 2003, announcing the
declaration of the special dividend paid in order to effect
the spin-off of Piper Jaffray Companies;
(1)(2)10.4
) Form 8-K dated December 19, 2003, announcing the
effectiveness of the Form 10 registration statement of
Piper Jaffray Companies;
) Form 8-K dated December 31, 2003, announcing the
completion of the spin-off of Piper Jaffray Companies;
) Form 8-K dated January 9, 2004, announcing the
Company’s adoption of the ‘‘fair value’’ method of
accounting for stock-based compensation; and
) Form 8-K dated January 20, 2004, relating to fourth
quarter 2003 earnings.
The following Exhibit Index lists the Exhibits to the
Annual Report on Form 10-K.
(1)3.1 Restated Certificate of Incorporation, as
amended. Filed as Exhibit 3.1 to Form 10-K
for the year ended December 31, 2000.
(1)3.2 Restated bylaws, as amended. Filed as
4.1
Exhibit 3.2 to Form 10-K for the year ended
December 31, 2001.
[Pursuant to Item 601(b)(4)(iii)(A) of
Regulation S-K, copies of instruments defining
the rights of holders of long-term debt are not
filed. U.S. Bancorp agrees to furnish a copy
thereof to the Securities and Exchange
Commission upon request.]
(1)4.2 Warrant Agreement, dated as of October 2,
Summary of U.S. Bancorp 1991 Executive
Stock Incentive Plan. Filed as Exhibit 10.4 to
Form 10-K for the year ended December 31,
2002.
(1)(2)10.5 U.S. Bancorp 2001 Employee Stock Incentive
Plan. Filed as Exhibit 10.5 to Form 10-K for
the year ended December 31, 2002.
(1)(2)10.6
(1)(2)10.7
(1)(2)10.8
Firstar Corporation 1999 Employee Stock
Incentive Plan. Filed as Exhibit 10.6 to
Form 10-K for the year ended December 31,
2002.
Firstar Corporation 1998 Employee Stock
Incentive Plan. Filed as Exhibit 10.7 to
Form 10-K for the year ended December 31,
2002.
Star Banc Corporation 1996 Starshare Stock
Incentive Plan for Employees. Filed as
Exhibit 10.8 to Form 10-K for the year ended
December 31, 2002.
(1)(2)10.9 U.S. Bancorp Executive Incentive Plan. Filed as
Exhibit 10.2 to Form 10-K for the year ended
December 31, 2001.
(1)(2)10.10 U.S. Bancorp Executive Deferral Plan, as
amended. Filed as Exhibit 10.7 to Form 10-K
for the year ended December 31, 1999.
(1)(2)10.11 Summary of Nonqualified Supplemental
Executive Retirement Plan, as amended, of the
former U.S. Bancorp. Filed as Exhibit 10.4 to
Form 10-K for the year ended December 31,
2001.
1995, between U.S. Bancorp and First Chicago
Trust Company of New York, as Warrant
Agent and Form of Warrant. Filed as
Exhibits 4.18 and 4.19 to Registration
Statement on Form S-3, File No. 33-61667.
(1)(2)10.12 1991 Performance and Equity Incentive Plan
of the former U.S. Bancorp. Filed as
Exhibit 10.13 to Form 10-K for the year
ended December 31, 1997.
(1)(2)10.13 Form of Director Indemnification Agreement
(1)4.3 Amended and Restated Rights Agreement,
dated as of December 31, 2002, between U.S.
Bancorp and Mellon Investor Services LLC.
Filed as Exhibit 4.2 to Amendment No. 1 to
Registration Statement on Form 8-A (File
No. 001-06880) on December 31, 2002.
(1)(2)10.1 U.S. Bancorp 2001 Stock Incentive Plan. Filed
as Exhibit 10.1 to Form 10-K for the year
ended December 31, 2001.
(1)(2)10.2 Amendment No. 1 to U.S. Bancorp 2001
Stock Incentive Plan. Filed as Exhibit 10.2 to
Form 10-K for the year ended December 31,
2002.
(1)(2)10.3 U.S. Bancorp 1998 Executive Stock Incentive
Plan. Filed as Exhibit 10.3 to Form 10-K for
the year ended December 31, 2002.
entered into with former directors of the
former U.S. Bancorp. Filed as Exhibit 10.15 to
Form 10-K for the year ended December 31,
1997.
(1)(2)10.14 U.S. Bancorp Independent Director Retirement
and Death Benefit Plan, as amended. Filed as
Exhibit 10.17 to Form 10-K for the year
ended December 31, 1999.
(1)(2)10.15 U.S. Bancorp Deferred Compensation Plan for
Directors, as amended. Filed as Exhibit 10.18
to Form 10-K for the year ended
December 31, 1999.
(1)(2)10.16 U.S. Bancorp Non Qualified Executive
Retirement Plan. Filed as Exhibit 10.16 to
Form 10-K for the year ended December 31,
2002.
(2)10.17 Amendments No. 1, 2 and 3 to U.S. Bancorp
Non-Qualified Executive Retirement Plan.
116 U.S. Bancorp
(2)10.18 U.S. Bancorp Executive Employees Deferred
Compensation Plan.
(2)10.19 U.S. Bancorp Outside Directors Deferred
Compensation Plan.
(1)(2)10.20 Form of Change in Control Agreement,
effective November 16, 2001, between
U.S. Bancorp and certain executive officers of
U.S. Bancorp. Filed as Exhibit 10.12 to
Form 10-K for the year ended December 31,
2001.
(1)(2)10.21 Employment Agreement with Jerry A.
Grundhofer. Filed as Exhibit 10.13 to
Form 10-K for the year ended December 31,
2001.
(1)(2)10.22 Employment Agreement with Edward
Grzedzinski. Filed as Exhibit 10.22 to
Form 10-K for the year ended December 31,
2002.
12
Statement re: Computation of Ratio of
Earnings to Fixed Charges.
21
Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
31.1 Certification of Chief Executive Officer
pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer
pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.
32
Certification of Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C.
section 1350 as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of
2002.
(1) Exhibit has previously been filed with the Securities and Exchange Commission and
is incorporated herein as an exhibit by reference to the prior filing.
(2) Management contracts or compensatory plans or arrangements.
U.S. Bancorp 117
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on February 27, 2004, on its
behalf by the undersigned, thereunto duly authorized.
U.S. Bancorp
By: Jerry A. Grundhofer
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below on February 27,
2004, by the following persons on behalf of the registrant
and in the capacities indicated.
Jerry A. Grundhofer
Chairman, President and Chief Executive Officer
(principal executive officer)
David M. Moffett
Vice Chairman and Chief Financial Officer
(principal financial officer)
Terrance R. Dolan
Executive Vice President and Controller
(principal accounting officer)
Linda L. Ahlers
Director
Victoria Buyniski Gluckman
Director
Arthur D. Collins, Jr.
Director
Peter H. Coors
Director
John C. Dannemiller
Director
John F. Grundhofer
Director
Delbert W. Johnson
Director
Joel W. Johnson
Director
Jerry W. Levin
Director
David B. O’Maley
Director
O’dell M. Owens, M.D., M.P.H.
Director
Thomas E. Petry
Director
Richard G. Reiten
Director
Craig D. Schnuck
Director
Warren R. Staley
Director
Patrick T. Stokes
Director
John J. Stollenwerk
Director
118 U.S. Bancorp
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Jerry A. Grundhofer, Chief Executive Officer of U.S. Bancorp, a Delaware corporation, certify that:
(1) I have reviewed this annual report on Form 10-K of U.S. Bancorp;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation;
(c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
(5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
fulfilling the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: February 27, 2004
/s /
JERRY A. GRUNDHOFER
Jerry A. Grundhofer
Chairman, President and Chief Executive Officer
U.S. Bancorp 119
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, David M. Moffett, Chief Financial Officer of U.S. Bancorp, a Delaware corporation, certify that:
(1) I have reviewed this annual report on Form 10-K of U.S. Bancorp;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation;
(c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
(5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
fulfilling the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: February 27, 2004
/s / DAVID M. MOFFETT
David M. Moffett
Chief Financial Officer
120 U.S. Bancorp
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, the
undersigned, Chief Executive Officer and Chief Financial Officer of U.S. Bancorp, a Delaware corporation (the ‘‘Company’’),
do hereby certify that:
(1) The Annual Report on Form 10-K for the year ended December 31, 2003 (the ‘‘Form 10-K’’) of the Company fully
complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/
JERRY A. GRUNDHOFER
Jerry A. Grundhofer
Chief Executive Officer
Dated: February 27, 2004
/s / DAVID M. MOFFETT
David M. Moffett
Chief Financial Officer
U.S. Bancorp 121
Executive Officers
Jerry A. Grundhofer
William L. Chenevich
Edward Grzedzinski
Mr. Grundhofer is Chairman, President and
Mr. Chenevich is Vice Chairman of U.S.
Mr. Grzedzinski is Vice Chairman of U.S.
Chief Executive Officer of U.S. Bancorp.
Bancorp. Mr. Chenevich, 60, has served as
Bancorp. Mr. Grzedzinski, 48, has served as
Mr. Grundhofer, 59, has served as
Vice Chairman of U.S. Bancorp since the
Vice Chairman of U.S. Bancorp since July
President and Chief Executive Officer of
merger of Firstar Corporation and
2001. He is Chief Executive Officer of NOVA
U.S. Bancorp and Chairman, President and
U.S. Bancorp in February 2001, when he
Information Systems, Inc., which he co-
Chief Executive Officer of U.S. Bank
assumed responsibility for Technology and
founded in 1991 and which became a wholly-
National Association since the merger of
Operations Services. Previously, he served
owned subsidiary of U.S. Bancorp in
Firstar Corporation and U.S. Bancorp in
as Vice Chairman of Technology and
connection with the acquisition of NOVA
February 2001. Mr. Grundhofer assumed
Operations Services of Firstar Corporation
Corporation in July 2001. Mr. Grzedzinski
the additional title of Chairman of
from 1999 to 2001. Prior to joining Firstar
assumed additional responsibility for
U.S. Bancorp on December 30, 2002. Prior
he was Group Executive Vice President at
Transaction Services in 2003. Mr. Grzedzinski
to the merger, Mr. Grundhofer was
Visa International from 1994 to 1999.
served as Chairman of NOVA Corporation
President and Chief Executive Officer of
Firstar Corporation, having served as
Chairman, President and Chief Executive
Officer of Star Banc Corporation from
1993 until its merger with Firstar
Corporation in 1998.
Jennie P. Carlson
Richard K. Davis
from 1995 until July 2001.
Mr. Davis is Vice Chairman of U.S.
Joseph E. Hasten
Bancorp. Mr. Davis, 46, has served as Vice
Mr. Hasten is Vice Chairman of U.S.
Chairman of U.S. Bancorp since the merger
Bancorp. Mr. Hasten, 52, has served as
of Firstar Corporation and U.S. Bancorp in
Vice Chairman of U.S. Bancorp since the
February 2001, when he assumed
merger of Firstar Corporation and
responsibility for Consumer Banking,
U.S. Bancorp in February 2001, when he
Ms. Carlson is Executive Vice President of
including Retail Payment Solutions (card
assumed responsibility for Corporate
U.S. Bancorp. Ms. Carlson, 43, has served
services). Mr. Davis assumed additional
Banking. Mr. Hasten assumed additional
as Executive Vice President, Human
responsibility for Commercial Banking in
responsibility for Corporate Payment
Resources since January 2002. Until that
2003. Previously, he had been Vice
Systems in 2003. Previously, he had been
time, she served as Executive Vice
Chairman of Consumer Banking of Firstar
Vice Chairman of Wholesale Banking of
President, Deputy General Counsel and
Corporation from 1998 until 2001 and
Firstar Corporation, after joining
Corporate Secretary of U.S. Bancorp since
Executive Vice President, Consumer
Mercantile Bancorporation, a predecessor
the merger of Firstar Corporation and
Banking of Star Banc Corporation from
company, as President of its St. Louis bank
U.S. Bancorp in February 2001. From 1995
1993 until its merger with Firstar
and of Corporate Banking in 1995.
until the merger, she was General Counsel
Corporation in 1998.
Lee R. Mitau
and Secretary of Firstar Corporation and
Star Banc Corporation, a predecessor
company, as well as Senior Vice President
from 1994 to 1999 and Executive Vice
President from 1999 to 2001.
Michael J. Doyle
Mr. Mitau is Executive Vice President and
Mr. Doyle is Executive Vice President and
General Counsel of U.S. Bancorp.
Chief Credit Officer of U.S. Bancorp.
Mr. Mitau, 55, has served in these
Mr. Doyle, 47, has served in these positions
positions since 1995. Mr. Mitau also serves
since January 2003. Until that time, he
as Corporate Secretary. Prior to 1995 he
Andrew Cecere
served as Executive Vice President and
was a partner at the law firm of Dorsey &
Mr. Cecere is Vice Chairman of U.S.
Senior Credit Officer of U.S. Bancorp since
Whitney LLP.
Bancorp. Mr. Cecere, 43, has served as Vice
the merger of Firstar Corporation and
Chairman of U.S. Bancorp since the merger
U.S. Bancorp in February 2001. From 1999
of Firstar Corporation and U.S. Bancorp in
until the merger, he was Executive Vice
February 2001. He assumed responsibility
President and Chief Approval Officer of
for Private Client and Trust Services in
Firstar Corporation, and had served as
February 2001 and U.S. Bancorp Asset
Senior Vice President of Firstar Corporation
Management in November 2001.
and Star Banc Corporation, a predecessor
Previously, he had served as Chief Financial
company, since 1994.
Officer of U.S. Bancorp from May 2000
through February 2001. Additionally, he
served as Vice Chairman of U.S. Bank with
responsibility for Commercial Services from
1999 to 2001, having been a Senior Vice
President of Finance since 1992.
122 U.S. Bancorp
David M. Moffett
Mr. Moffett is Vice Chairman and Chief
Financial Officer of U.S. Bancorp.
Mr. Moffett, 52, has served in these
positions since the merger of Firstar
Corporation and U.S. Bancorp in February
2001. Prior to the merger, he was Vice
Chairman and Chief Financial Officer of
Firstar Corporation, and had served as
Chief Financial Officer of Star Banc
Corporation from 1993 until its merger
with Firstar Corporation in 1998.
United Medical Resources, Inc.
Chairman and Chief Executive Officer
Directors
Jerry A. Grundhofer1,6
Chairman, President and
Chief Executive Officer
U.S. Bancorp
Linda L. Ahlers1,2,3
President
Marshall Field’s
Minneapolis, Minnesota
Victoria Buyniski Gluckman3,4
Chairman, President and
Chief Executive Officer
Cincinnati, Ohio
Arthur D. Collins, Jr.1,5,6
Chairman and Chief Executive Officer
Medtronic, Inc.
Minneapolis, Minnesota
Peter H. Coors2,4
Chairman
Coors Brewing Company
Golden, Colorado
John C. Dannemiller4,5
Retired Chairman
Applied Industrial Technologies
Cleveland, Ohio
1. Executive Committee
2. Compensation Committee
3. Audit Committee
4. Community Outreach and Fair Lending Committee
5. Governance Committee
6. Credit and Finance Committee
John F. Grundhofer1,6
Chairman Emeritus
U.S. Bancorp
Delbert W. Johnson1,3,6
Vice President
Safeguard Scientifics, Inc.
Wayne, Pennsylvania
Joel W. Johnson4,5
Chairman, President and
Chief Executive Officer
Thomas E. Petry1,2,3
Retired Chairman and
Chief Executive Officer
Eagle-Picher Industries, Inc.
Cincinnati, Ohio
Richard G. Reiten1,3,6
Chairman
Northwest Natural Gas Company
Portland, Oregon
Craig D. Schnuck3,4
Hormel Foods Corporation
Chairman and Chief Executive Officer
Austin, Minnesota
Jerry W. Levin5,6
American Household, Inc.
Boca Raton, Florida
David B. O’Maley1,2,5
Chairman, President and
Chief Executive Officer
Schnuck Markets, Inc.
St. Louis, Missouri
Warren R. Staley1,3,6
Chairman and Chief Executive Officer
Cargill, Incorporated
Minneapolis, Minnesota
Patrick T. Stokes1,2,5
President and Chief Executive Officer
Ohio National Financial Services, Inc.
Anheuser-Busch Companies, Inc.
Cincinnati, Ohio
St. Louis, Missouri
O’dell M. Owens, M.D., M.P.H.4,6
John J. Stollenwerk2,3
Healthcare Consultant
Cincinnati, Ohio
President and Chief Executive Officer
Allen-Edmonds Shoe Corporation
Port Washington, Wisconsin
U.S. Bancorp 123
c o r p o r a t e i n f o r m a t i o n
Executive Offices
U.S. Bancorp
800 Nicollet Mall
Minneapolis, MN 55402
Common Stock Transfer Agent and Registrar
Mellon Investor Services acts as our transfer agent and
registrar, dividend paying agent and dividend reinvestment
plan administrator, and maintains all shareholder records for
the corporation. Inquiries related to shareholder records, stock
transfers, changes of ownership, lost stock certificates, changes
of address and dividend payment should be directed to the
transfer agent at:
Mellon Investor Services
P.O. Box 3315
South Hackensack, NJ 07606-1915
Phone: 888-778-1311 or 201-329-8660
Internet: melloninvestor.com
For Registered or Certified Mail:
Mellon Investor Services
85 Challenger Road
Ridgefield Park, NJ 07660-2104
Telephone representatives are available weekdays from
8:00 a.m. to 6:00 p.m. Central Time, and automated
support is available 24 hours a day, 7 days a week. Specific
information about your account is available on Mellon’s
Internet site by clicking on the Investor ServiceDirect® link.
Independent Auditors
Ernst & Young LLP serves as the independent auditors for
U.S. Bancorp’s financial statements.
Common Stock Listing and Trading
U.S. Bancorp common stock is listed and traded on the
New York Stock Exchange under the ticker symbol USB.
Dividends and Reinvestment Plan
U.S. Bancorp currently pays quarterly dividends on our
common stock on or about the 15th day of January, April,
July and October, subject to prior approval by our Board of
Directors. U.S. Bancorp shareholders can choose to participate
in a plan that provides automatic reinvestment of dividends
and/or optional cash purchase of additional shares of
U.S. Bancorp common stock. For more information, please
contact our transfer agent, Mellon Investor Services. See above.
Investor Relations Contacts
Howell D. McCullough
Senior Vice President,
Investor Relations
howell.mccullough@usbank.com
Phone: 612-303-0786
Judith T. Murphy
Vice President,
Investor Relations
judith.murphy@usbank.com
Phone: 612-303-0783
or 866-775-9668
Financial Information
U.S. Bancorp news and financial results are available through
our web site and by mail.
Web site. For information about U.S. Bancorp, including news,
financial results, annual reports and other documents filed with
the Securities and Exchange Commission, access our
home page on the Internet site at usbank.com and click on
Investor/Shareholder Information.
Mail. At your request, we will mail to you our quarterly
earnings, news releases, quarterly financial data reported
on Form 10-Q and additional copies of our annual reports.
Please contact:
U.S. Bancorp Investor Relations
800 Nicollet Mall
Minneapolis, MN 55402
corporaterelations@usbank.com
Phone: 612-303-0799 or 866-775-9668
Media Requests
Steven W. Dale
Senior Vice President, Media Relations
steve.dale@usbank.com
Phone: 612-303-0784
Privacy
U.S. Bancorp is committed to respecting the privacy of
our customers and safeguarding the financial and personal
information provided to us. To learn more about the
U.S. Bancorp commitment to protecting privacy, visit
usbank.com and click on Privacy Pledge.
Code of Ethics
U.S. Bancorp places the highest importance on honesty and
integrity. Each year, every U.S. Bancorp employee certifies
compliance with the letter and spirit of our Code of Ethics
and Business Conduct, the guiding ethical standards of our
organization. For details about our Code of Ethics and
Business Conduct, visit usbank.com and click on Ethics
at U.S. Bank.
Diversity
U.S. Bancorp and our subsidiaries are committed to developing
and maintaining a workplace that reflects the diversity of
the communities we serve. We support a work environment
where individual differences are valued and respected and
where each individual who shares the fundamental values of
the company has an opportunity to contribute and grow based
on individual merit.
Equal Employment Opportunity/
Affirmative Action
U.S. Bancorp and our subsidiaries are committed to providing
Equal Employment Opportunity to all employees and applicants
for employment. In keeping with this commitment, employment
decisions are made based upon performance, skill and abilities,
not race, color, religion, national origin or ancestry, gender, age,
disability, veteran status, sexual orientation or any other factors
protected by law. The corporation complies with municipal,
state and federal fair employment laws, including regulations
applying to federal contractors.
U.S. Bancorp, including each of our subsidiaries, is an
Equal Opportunity Employer committed to creating a
diverse workforce.
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U.S. Bank Member FDIC
U.S. Bancorp
800 Nicollet Mall
Minneapolis, MN 55402
usbank.com