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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the quarterly period ended September 30, 2003
OR
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from (not applicable)
Commission file number 1-6880
U.S. BANCORP
(Exact name of registrant as specified in its
charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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41-0255900
(I.R.S. Employer
Identification Number)
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800 Nicollet Mall
Minneapolis, Minnesota 55402
(Address of principal executive offices and zip
code)
612-973-1111
(Registrant’s telephone number, including
area code)
(not applicable)
(Former name, former address and former fiscal
year,
if changed since last report)
Indicate by check
mark whether the registrant (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 twelve
months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate the number
of shares outstanding of each of the registrant’s classes
of common stock, as of the latest practicable date.
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Class
Common Stock, $.01 Par Value
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|
Outstanding as of October 31, 2003
1,928,745,593 shares
|
TABLE OF CONTENTS
Table of Contents and Form 10-Q Cross
Reference Index
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Part I — Financial
Information |
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1) Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Item 2)
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a)
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Overview
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3
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b)
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Statement of Income Analysis
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6
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c)
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Balance Sheet Analysis
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10
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d)
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Accounting Changes
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28
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e)
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Critical Accounting Policies
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29
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f)
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Disclosure Controls and Procedures (Item 4)
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31
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2) Quantitative and Qualitative Disclosures About
Market Risk / Corporate Risk Profile (Item 3)
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a)
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Overview
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11
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b)
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Credit Risk Management
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11
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c)
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Residual Risk Management
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16
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d)
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Operational Risk Management
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16
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e)
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Interest Rate Risk Management
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17
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f)
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Market Risk Management
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20
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g)
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Liquidity Risk Management
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20
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h)
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Capital Management
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22
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3) Line of Business Financial Review
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22
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4) Financial Statements (Item 1)
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32
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Part II — Other
Information |
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1) Exhibits and Reports on Form 8-K
(Item 6)
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50
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2) Signature
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50
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3) Exhibit 12 — Computation of
Ratio of Earnings to Fixed Charges
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51
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4) Exhibit 31.1 — Section 302 CEO
Certification
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52
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5) Exhibit 31.2 — Section 302 CFO
Certification
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53
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6) Exhibit 32 — Section 906 CEO
and CFO Certifications
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54
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Forward-Looking Statements
This Form 10-Q 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 (the “Company”).
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 the Company’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 the Company’s assets, or the availability and terms of
funding necessary to meet the Company’s liquidity needs;
(iv) changes in the extensive laws, regulations and
policies governing financial services companies could alter the
Company’s business environment or affect operations;
(v) the potential need to adapt to industry changes in
information technology systems, on which the Company is highly
dependent, could present operational issues or require
significant capital spending; (vi) competitive pressures could
intensify and affect the Company’s 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 saving habits could adversely affect the
Company’s results of operations; (viii) changes in the
financial performance and condition of the Company’s
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 the
Company’s 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 the Company undertakes no obligation to update them in
light of new information or future events.
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Table 1 |
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Selected Financial Data |
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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Percent | |
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|
Percent | |
| (Dollars and Shares in Millions, Except Per Share Data) |
|
2003 | |
|
2002 | |
|
Change | |
|
2003 | |
|
2002 | |
|
Change | |
|
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|
Condensed Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (taxable-equivalent
basis) (a)
|
|
$ |
1,832.6 |
|
|
$ |
1,741.1 |
|
|
|
5.3 |
% |
|
$ |
5,422.3 |
|
|
$ |
5,101.3 |
|
|
|
6.3 |
% |
|
Noninterest income
|
|
|
1,483.9 |
|
|
|
1,446.6 |
|
|
|
2.6 |
|
|
|
4,319.0 |
|
|
|
4,148.7 |
|
|
|
4.1 |
|
|
Securities gains (losses), net
|
|
|
(108.9 |
) |
|
|
119.0 |
|
|
|
* |
|
|
|
244.9 |
|
|
|
193.7 |
|
|
|
26.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
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|
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Total net revenue
|
|
|
3,207.6 |
|
|
|
3,306.7 |
|
|
|
(3.0) |
|
|
|
9,986.2 |
|
|
|
9,443.7 |
|
|
|
5.7 |
|
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Noninterest expense
|
|
|
1,397.3 |
|
|
|
1,647.6 |
|
|
|
(15.2) |
|
|
|
4,667.9 |
|
|
|
4,617.4 |
|
|
|
1.1 |
|
|
Provision for credit losses
|
|
|
310.0 |
|
|
|
330.0 |
|
|
|
(6.1) |
|
|
|
968.0 |
|
|
|
1,000.0 |
|
|
|
(3.2 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
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Income before taxes and cumulative effect of
change in accounting principles
|
|
|
1,500.3 |
|
|
|
1,329.1 |
|
|
|
12.9 |
|
|
|
4,350.3 |
|
|
|
3,826.3 |
|
|
|
13.7 |
|
|
Taxable-equivalent adjustment
|
|
|
8.0 |
|
|
|
9.3 |
|
|
|
(14.0) |
|
|
|
23.9 |
|
|
|
27.4 |
|
|
|
(12.8 |
) |
|
Applicable income taxes
|
|
|
507.4 |
|
|
|
459.5 |
|
|
|
10.4 |
|
|
|
1,476.7 |
|
|
|
1,322.3 |
|
|
|
11.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of change in
accounting principles
|
|
|
984.9 |
|
|
|
860.3 |
|
|
|
14.5 |
|
|
|
2,849.7 |
|
|
|
2,476.6 |
|
|
|
15.1 |
|
|
Cumulative effect of change in accounting
principles (after-tax)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(37.2 |
) |
|
|
* |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
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Net income
|
|
$ |
984.9 |
|
|
$ |
860.3 |
|
|
|
14.5 |
|
|
$ |
2,849.7 |
|
|
$ |
2,439.4 |
|
|
|
16.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share before cumulative effect of
change in accounting principles
|
|
$ |
.51 |
|
|
$ |
.45 |
|
|
|
13.3 |
% |
|
$ |
1.48 |
|
|
$ |
1.29 |
|
|
|
14.7 |
% |
|
Diluted earnings per share before cumulative
effect of change in accounting principles
|
|
|
.51 |
|
|
|
.45 |
|
|
|
13.3 |
|
|
|
1.47 |
|
|
|
1.29 |
|
|
|
14.0 |
|
|
Earnings per share
|
|
|
.51 |
|
|
|
.45 |
|
|
|
13.3 |
|
|
|
1.48 |
|
|
|
1.27 |
|
|
|
16.5 |
|
|
Diluted earnings per share
|
|
|
.51 |
|
|
|
.45 |
|
|
|
13.3 |
|
|
|
1.47 |
|
|
|
1.27 |
|
|
|
15.7 |
|
|
Dividends declared per share
|
|
|
.205 |
|
|
|
.195 |
|
|
|
5.1 |
|
|
|
.615 |
|
|
|
.585 |
|
|
|
5.1 |
|
|
Book value per share, period end
|
|
|
10.08 |
|
|
|
9.15 |
|
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value per share, period end
|
|
|
23.99 |
|
|
|
18.58 |
|
|
|
29.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding
|
|
|
1,926.0 |
|
|
|
1,915.0 |
|
|
|
.6 |
|
|
|
1,922.4 |
|
|
|
1,916.0 |
|
|
|
.3 |
|
|
Average diluted shares outstanding
|
|
|
1,940.8 |
|
|
|
1,923.3 |
|
|
|
.9 |
|
|
|
1,933.5 |
|
|
|
1,926.7 |
|
|
|
.4 |
|
| |
|
Financial Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
2.05 |
% |
|
|
1.97 |
% |
|
|
|
|
|
|
2.04 |
% |
|
|
1.92 |
% |
|
|
|
|
|
Return on average equity
|
|
|
20.5 |
|
|
|
19.8 |
|
|
|
|
|
|
|
20.2 |
|
|
|
19.6 |
|
|
|
|
|
|
Net interest margin (taxable-equivalent basis)
|
|
|
4.41 |
|
|
|
4.61 |
|
|
|
|
|
|
|
4.49 |
|
|
|
4.60 |
|
|
|
|
|
|
Efficiency ratio (b)
|
|
|
42.1 |
|
|
|
51.7 |
|
|
|
|
|
|
|
47.9 |
|
|
|
49.9 |
|
|
|
|
|
| |
|
Average Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
119,982 |
|
|
$ |
114,664 |
|
|
|
4.6 |
% |
|
$ |
118,046 |
|
|
$ |
114,135 |
|
|
|
3.4 |
% |
|
Loans held for sale
|
|
|
4,460 |
|
|
|
2,264 |
|
|
|
97.0 |
|
|
|
4,078 |
|
|
|
2,256 |
|
|
|
80.8 |
|
|
Investment securities
|
|
|
37,777 |
|
|
|
30,219 |
|
|
|
25.0 |
|
|
|
36,059 |
|
|
|
28,300 |
|
|
|
27.4 |
|
|
Earning assets
|
|
|
165,165 |
|
|
|
150,336 |
|
|
|
9.9 |
|
|
|
161,285 |
|
|
|
147,992 |
|
|
|
9.0 |
|
|
Assets
|
|
|
190,241 |
|
|
|
173,067 |
|
|
|
9.9 |
|
|
|
187,015 |
|
|
|
170,017 |
|
|
|
10.0 |
|
|
Noninterest-bearing deposits
|
|
|
31,907 |
|
|
|
28,838 |
|
|
|
10.6 |
|
|
|
32,412 |
|
|
|
27,872 |
|
|
|
16.3 |
|
|
Deposits
|
|
|
117,956 |
|
|
|
104,912 |
|
|
|
12.4 |
|
|
|
116,649 |
|
|
|
103,139 |
|
|
|
13.1 |
|
|
Short-term borrowings
|
|
|
12,584 |
|
|
|
9,641 |
|
|
|
30.5 |
|
|
|
10,854 |
|
|
|
11,934 |
|
|
|
(9.0 |
) |
|
Long-term debt
|
|
|
31,433 |
|
|
|
32,089 |
|
|
|
(2.0) |
|
|
|
31,214 |
|
|
|
29,584 |
|
|
|
5.5 |
|
|
Total shareholders’ equity
|
|
|
19,017 |
|
|
|
17,275 |
|
|
|
10.1 |
|
|
|
18,862 |
|
|
|
16,640 |
|
|
|
13.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
September 30,
2003 |
|
December 31,
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period End Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
119,882 |
|
|
$ |
116,251 |
|
|
|
3.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses
|
|
|
2,368 |
|
|
|
2,422 |
|
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
|
35,015 |
|
|
|
28,488 |
|
|
|
22.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
188,835 |
|
|
|
180,027 |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
115,043 |
|
|
|
115,534 |
|
|
|
(.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
31,603 |
|
|
|
28,588 |
|
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
19,426 |
|
|
|
18,101 |
|
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory capital ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Tangible common equity
|
|
|
6.4 |
% |
|
|
5.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Tier 1 capital
|
|
|
8.8 |
|
|
|
7.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total risk-based capital
|
|
|
13.3 |
|
|
|
12.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Leverage
|
|
|
7.8 |
|
|
|
7.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Not meaningful |
|
(a) |
|
Interest and rates are presented on a
fully-taxable equivalent basis utilizing a tax rate of
35 percent. |
|
(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. |
Management’s Discussion and Analysis
OVERVIEW
Earnings Summary
U.S. Bancorp and its subsidiaries (the
“Company”) reported net income of $984.9 million
for the third quarter of 2003, or $.51 per diluted share,
compared with $860.3 million, or $.45 per diluted share,
for the third quarter of 2002. Return on average assets and
return on average equity were 2.05 percent and
20.5 percent, respectively, for the third quarter of 2003,
compared with returns of 1.97 percent and
19.8 percent, respectively, for the third quarter of 2002.
The Company’s results for the third quarter of 2003
improved over the third 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.
Included in the third quarter of 2003 were losses on the sale of
securities of $108.9 million, a net reduction of
$227.9 million from securities gains (losses) realized in
the third quarter of 2002. The third quarter of 2003 also
included a $108.5 million reparation of mortgage servicing
rights (“MSR”), a $226.2 million favorable
variance over the third quarter of 2002. Higher interest rates
in the third quarter of 2003 drove the realization of the MSR
reparation and the Company’s decision to sell lower
yielding securities. Net income for the third quarter of 2003
also included after-tax merger and restructuring-related items
of $6.7 million ($10.2 million on a pre-tax basis),
compared with after-tax merger and restructuring-related items
of $45.9 million ($70.4 million on a pre-tax basis)
for the third quarter of 2002. The $60.2 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 (“Firstar”) and the
former U.S. Bancorp (“USBM”) at the end of 2002. Refer
to the “Merger and Restructuring-Related Items”
section for further discussion on merger and
restructuring-related items.
Total net revenue, on a taxable-equivalent basis,
was $3,207.6 million for the third quarter of 2003,
compared with $3,306.7 million for the third quarter of
2002, a decrease of $99.1 million (3.0 percent) from a
year ago. This decline primarily reflected the net reduction in
securities gains (losses) of $227.9 million. Otherwise,
favorable growth occurred in net interest income, capital
markets-related revenue, cash management fees and payment
systems revenue. Acquisitions, including the 57 branches of Bay
View Bank in northern California and the corporate trust
business of State Street Bank and Trust Company, contributed
approximately $46.7 million of the increase in net revenue
year-over-year. The Company experienced lower revenue levels in
commercial loan products and the mortgage banking business
during the period. With the rise in interest rates from the end
of the second quarter of 2003, mortgage originations slowed
resulting from lower refinancing activities. The
3.0 percent decline in net revenue was comprised of a
12.2 percent decline in noninterest income, partially
offset by a 5.3 percent increase in net interest income.
The 12.2 percent decline in noninterest income was driven
by a net reduction in gains (losses) on the sale of securities,
commercial loan products revenue and mortgage banking revenue,
partially offset by increases in investment banking revenue,
cash management fees, payment services revenue and acquisitions.
The sale of securities was due to the Company’s practice of
utilizing its securities portfolio as an interest rate risk
management tool to offset the economic impact of changes in MSR
valuation. Refer to the “Noninterest Income” section
for further discussion on the impact of changes in MSR
valuations. The 5.3 percent increase in net interest income
was driven by an increase of $14.8 billion (9.9 percent) in
average earning assets, primarily due to increases in investment
securities, residential mortgages, loans held for sale and
retail loans, partially offset by a decline in commercial loans.
The net interest margin for the third quarter of 2003 was
4.41 percent, compared with 4.61 percent in the third
quarter of 2002. The decline in net interest margin primarily
reflected growth in lower-yielding investment securities as a
percent of total earning assets, 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 Stellar Funding Group, Inc., a
commercial loan conduit, onto the Company’s balance sheet
during the third quarter of 2003. In anticipation of accounting
changes required under FASB Interpretation No. 46,
“Consolidation of Variable Interest Entities,” the
Company elected not to reissue more than 90 percent of the
commercial paper funding of Stellar, causing Stellar to lose its
status as a qualified special purpose entity and triggering the
consolidation.
The net impact from consolidating the commercial
loan conduit in the third quarter of 2003 was not significant.
Total noninterest expense was
$1,397.3 million in the third quarter of 2003, compared
with $1,647.6 million in the third quarter of 2002. The
decrease in noninterest expense of $250.3 million
(15.2 percent) primarily reflected the $226.2 million
favorable change in the valuation of mortgage servicing rights
caused by rising interest rates from late second quarter 2003.
Also contributing to the positive variance in expense
year-over-year was a $60.2 million reduction in merger and
restructuring-related charges. These positive variances were
partially offset by expense increases due to recent
acquisitions, which accounted for approximately
$28.1 million of expense growth year-over-year, and higher
incentive-based compensation related to capital markets-related
activities. Refer to the “Acquisition and Divestiture
Activity” section for further information on the timing of
acquisitions and the “Noninterest Expense” section for
further discussion of noninterest expense items. The efficiency
ratio (the ratio of noninterest expense to taxable-equivalent
net revenue excluding net securities gains or losses) was
42.1 percent for the third quarter of 2003, compared with
51.7 percent for the third quarter of 2002.
The provision for credit losses was
$310.0 million for the third quarter of 2003 and
$330.0 million for the third quarter of 2002, a decrease of
$20.0 million (6.1 percent). Net charge-offs in the
third quarter of 2003 were $309.9 million, compared with
net charge-offs of $329.0 million during the third quarter
of 2002. The decline from a year ago primarily reflected lower
retail losses, the result of collection efforts and an improving
credit risk profile. Refer to the “Corporate Risk
Profile” section 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.
Net income for the first nine months of 2003 was
$2,849.7 million, or $1.47 per diluted share, compared with
$2,439.4 million, or $1.27 per diluted share, for the first
nine months of 2002. Return on average assets and return on
average equity were 2.04 percent and 20.2 percent,
respectively, for the first nine months of 2003, compared with
returns of 1.92 percent and 19.6 percent,
respectively, for the first nine months of 2002. The
Company’s results for the first nine months of 2003
improved over the first nine months of 2002, primarily due to
growth in net revenue and a slight decline in credit costs,
offset somewhat by a modest increase in expense. A notable
favorable item in the first nine months of 2003 was gains on the
sale of securities of $244.9 million, an increase of
$51.2 million over the first nine months of 2002.
Offsetting this favorable item during the first nine months of
2003 was a year-over-year increase of $76.7 million of MSR
impairment, driven by changes in interest rates and related
prepayments. Net income for the first nine months of 2003 also
included after-tax merger and restructuring-related items of
$25.4 million ($38.6 million on a pre-tax basis),
compared with $141.0 million ($216.2 million on a
pre-tax basis) for the first nine months of 2002. The
$177.6 million decline in pre-tax merger and
restructuring-related charges was primarily due to the
completion at the end of 2002 of integration activities
associated with the Firstar/ USBM merger. During the first
quarter of 2002, the Company recognized 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 change in
accounting principles” in the income statement. Refer to
the “Merger and Restructuring-Related Items” and
“Accounting Changes” sections for further discussion
on merger and restructuring-related items and the earnings
impact of changes in accounting principles.
Total net revenue, on a taxable-equivalent basis,
was $9,986.2 million for the first nine months of 2003,
compared with $9,443.7 million for the first nine months of
2002, a 5.7 percent increase from a year ago. This growth
was primarily due to an increase in gains on the sale of
securities, net interest income, payment services revenue,
mortgage banking activities, growth in cash management fees and
deposit service charges and acquisitions. This growth was
comprised of a 6.3 percent increase in net interest income
and a 5.1 percent increase in noninterest income. The
6.3 percent increase in net interest income was driven by
an increase of $13.3 billion (9.0 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
and commercial real estate 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 for the first nine months of 2003 was
4.49 percent, compared with 4.60 percent in the first
nine months of 2002. The decline reflected the change in asset
mix towards lower-rate investment securities.
The 5.1 percent increase in noninterest
income growth was driven by net securities gains, payment
services, deposit service charges, mortgage banking activity and
acquisitions. Included in total net revenue were net securities
gains of $244.9 million and $193.7 million for the
first nine months of 2003 and 2002, respectively, an increase of
$51.2 million. Approximately $161.6 million of the
year-over-year increase in net revenue for the first nine months
of 2003 was due to acquisitions, including The Leader Mortgage
Company, LLC, the 57 branches of Bay View Bank in northern
California and the corporate trust business of State Street Bank
and Trust Company.
Total noninterest expense was
$4,667.9 million in the first nine months of 2003, compared
with $4,617.4 million in the first nine months of 2002. The
increase in total noninterest expense of $50.5 million
(1.1 percent) primarily reflected a year-over-year increase
of $76.7 million in MSR impairment coupled with
acquisitions, which accounted for approximately
$108.9 million of the expense growth in the first nine
months of 2003. Partially offsetting these increases in expense
over the first nine months of 2002 were a year-over-year
reduction in merger and restructuring-related charges of
$177.6 million and cost savings related to integration
efforts. Refer to the “Acquisition and Divestiture
Activity” section for further information on the timing of
acquisitions and the “Noninterest Expense” section for
further 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 47.9 percent for the first nine months of 2003,
compared with 49.9 percent for the first nine months of
2002.
The provision for credit losses was
$968.0 million for the first nine months of 2003 and
$1,000.0 million for the first nine months of 2002, a
decrease of $32.0 million (3.2 percent). Net
charge-offs in the first nine months of 2003 were
$966.6 million, compared with net charge-offs of
$994.5 million during the first nine months of 2002. Refer
to the “Corporate Risk Profile” section 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
The following 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 Bank and Trust Company in a cash
transaction. The transaction represented total assets acquired
of $682 million and total liabilities assumed of
$39 million at the closing date.
On November 1, 2002, the Company acquired 57
branches and a related operations facility in northern
California from Bay View Bank, 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 of $3.3 billion (primarily retail and
small business deposits).
On April 1, 2002, the Company acquired
Cleveland-based The Leader Mortgage Company, LLC, 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.
Refer to Notes 3 and 4 of the Notes to
Consolidated Financial Statements for additional information
regarding business combinations and divestitures and merger and
restructuring-related items.
Planned Spin-Off of Piper Jaffray Companies
On February 19, 2003, the Company
announced that its Board of Directors approved a plan to effect
a spin-off of its capital markets business unit, including the
investment banking and brokerage activities primarily conducted
by its wholly-owned subsidiary, U.S. Bancorp Piper Jaffray
Companies Inc. (“Piper Jaffray Companies”). As of
September 30, 2003, Piper Jaffray Companies had assets of
$2.6 billion. During the first nine months of 2003, Piper
Jaffray Companies generated revenue of $584.9 million
(5.9 percent of total consolidated revenue) and contributed
$29.3 million of net income, representing 1.0 percent
of the Company’s consolidated net income.
The Company intends to execute this plan as a
tax-free distribution of 100 percent of its ownership
interests in the capital markets business and plans to retain
approximately $180 million of subordinated debt of the
broker-dealer subsidiary, subject to regulatory approval. The
distribution is subject to certain conditions, including SEC
registration, regulatory review and approval and a determination
that the distribution will be tax-free to the Company and its
shareholders. While the spin-off is expected to be completed in
late 2003, the Company has no obligation to consummate the
distribution, whether or not these conditions are satisfied.
This distribution does not include brokerage,
financial advisory or asset management services offered to
customers through the Company’s other business units. The
Company will continue to provide asset
management services to its customers through the
Private Client, Trust and Asset Management business units 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 unit.
STATEMENT OF INCOME ANALYSIS
Net Interest Income
The third quarter of 2003 net interest
income, on a taxable-equivalent basis, was
$1,832.6 million, compared with $1,741.1 million for
the third quarter of 2002, which represented a
$91.5 million (5.3 percent) increase over 2002. Net
interest income for the first nine months of 2003, on a
taxable-equivalent basis, was $5,422.3 million, compared
with $5,101.3 million for the first nine months of 2002,
which represented a $321.0 million (6.3 percent)
increase from a year ago. Average earning assets in the third
quarter and first nine months of 2003 increased
$14.8 billion (9.9 percent) and $13.3 billion
(9.0 percent), respectively, over the comparable periods of
2002. The increase in net interest income for the third quarter
and first nine months of 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. The
increase in average earning assets in the third quarter and
first nine months of 2003, compared with the same periods of
2002, was primarily driven by increases in investment
securities, residential mortgages, loans held for sale and
retail loans, partially offset by a decline in commercial loans.
Also contributing to the year-over-year increase in net interest
income were recent acquisitions, including The Leader Mortgage
Company, LLC, State Street Corporate Trust and Bay View, which
accounted for approximately $19.6 million and
$63.2 million of the increase in net interest income during
the third quarter and first nine months of 2003, respectively.
The net interest margin for the third quarter of 2003 was
4.41 percent, compared with 4.61 percent for the third
quarter of 2002, while the year-to-date net interest margin
decreased from 4.60 percent for the first nine months of
2002 to 4.49 percent for the first nine months of 2003. The
year-over-year decline in the net interest margin for the third
quarter and the first nine months of 2003 primarily reflected
growth in lower-yielding investment securities as a percent of
total earning assets, 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 a commercial loan conduit onto the
Company’s balance sheet during the third quarter of 2003.
The Company expects the net interest margin to remain relatively
unchanged in the fourth quarter of 2003.
Total average loans for the third quarter of 2003
were $5.3 billion (4.6 percent) higher than the third
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Table 2 |
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Analysis of Net Interest Income |