US Bank 2002 Annual Report Download - page 18

Management’s Discussion and Analysis
OVERVIEW credit losses associated with the Firstar/USBM merger.
Merger and restructuring-related items in 2001 also
U.S. Bancorp and its subsidiaries (the ‘‘Company’’) comprise included $50.7 million of expense for restructuring
the organization created by the acquisition by Firstar operations of U.S. Bancorp Piper Jaffray, and $48.5 million
Corporation of the former U.S. Bancorp of Minneapolis, related to the acquisition of NOVA and other smaller
Minnesota (‘‘USBM’’). The merger was completed on acquisitions. Refer to the ‘‘Merger and Restructuring-
February 27, 2001, as a pooling-of-interests, and accordingly Related Items’’ section for further discussion.
all financial information has been restated to include the The Company reported operating earnings (net income
historical information of both companies. Each share of excluding merger and restructuring-related items and
Firstar stock was exchanged for one share of the Company’s cumulative effect of change in accounting principles) of
common stock while each share of USBM stock was $3.5 billion in 2002, or $1.84 per diluted share, compared
exchanged for 1.265 shares of the Company’s common with $2.6 billion, or $1.32 per diluted share in 2001.
stock. The new company retained the U.S. Bancorp name. Return on average assets and return on average equity,
The Company began 2002 with several specific goals. The excluding merger and restructuring-related items and
first goal was to successfully complete the integration of Firstar cumulative effect of change in accounting principles, were
and the former U.S. Bancorp. The second goal was to reduce 2.06 percent and 20.9 percent in 2002, respectively,
the overall risk profile of the Company. Third, the Company compared with returns of 1.54 percent and 15.7 percent in
was determined to improve customer service throughout the 2001. Operating earnings in 2002 reflected total net revenue
franchise in an effort to enhance customer retention and growth, on a taxable-equivalent basis, excluding merger and
longer-term revenue growth opportunities. Finally, despite the restructuring-related gains, of 8.4 percent. This growth was
efforts to complete these goals, the Company had an driven by strong core growth in consumer and payment
additional objective, to grow revenues faster than expenses. processing revenues, cash management fees, and mortgage
The Company’s results for 2002 largely reflected the banking as well as the impact of acquisitions. This revenue
achievement of these goals and improved significantly over growth was offset somewhat by growth of 4.8 percent in
2001 despite the current economic conditions. noninterest expense, excluding merger and restructuring-
Earnings Summary The Company reported net income of related charges. The change in noninterest expense,
$3.3 billion in 2002, or $1.71 per diluted share, compared excluding merger and restructuring-related charges, reflected
with $1.7 billion, or $.88 per diluted share, in 2001. Return the impact of acquired businesses and a higher level of
on average assets and return on average equity were impairments of mortgage servicing rights (‘‘MSRs’’), offset
1.91 percent and 19.4 percent in 2002, compared with by cost savings and the elimination of goodwill
returns of 1.03 percent and 10.5 percent in 2001. The amortization upon adopting new accounting principles for
increase in earnings per diluted share, return on average business combinations. As a result, the efficiency ratio on an
assets and return on average equity was primarily due to operating basis was 47.7 percent in 2002, compared with
total net revenue growth, lower noninterest expense and a 49.5 percent in 2001. The banking efficiency ratio (the ratio
reduction in the provision for credit losses. Net income in of expenses to revenues without the impact of investment
2002 included after-tax merger and restructuring-related banking and brokerage activity), on an operating basis, was
items of $211.3 million ($324.1 million on a pre-tax basis) 44.0 percent in 2002, compared with 45.2 percent in 2001.
and a cumulative effect of change in accounting principles The change in the banking efficiency ratio reflected the
of $37.2 million, or $0.2 per diluted share, compared with favorable impact in 2002 of adopting new accounting
after-tax merger and restructuring-related items of principles and cost savings from ongoing integration efforts,
$844.3 million ($1.3 billion on a pre-tax basis) in 2001. partially offset by an increase in MSR impairments and the
Refer to the ‘‘Accounting Changes’’ section for further impact of acquisitions of fee-based businesses that have
discussion of the earnings impact of changes in accounting higher efficiency ratios than the core banking business. The
principles. Merger and restructuring-related items in 2002, provision for credit losses, on an operating basis, declined
on a pre-tax basis, included $271.1 million of net expenses by $797.6 million from a year ago primarily reflecting
associated with the Firstar/USBM merger and $53.0 million credit related actions taken in 2001.
associated with the acquisition of NOVA Corporation and While net income and operating earnings for 2002 and
other smaller acquisitions. In 2001, merger and 2001 included a number of significant items, core growth
restructuring-related items, on a pre-tax basis, included a was strong. Notable items in 2002 included net gains on
$62.2 million gain on the sale of branches, $847.2 million the sale of securities of $299.9 million, a decrease of
of noninterest expense and $382.2 million of provision for
16 U.S. Bancorp