US Bank 2003 Annual Report Download - page 52

The Company utilizes its credit risk management systems to The unsecured small business credit securitization held
evaluate the credit quality of underlying assets and regularly average assets of $571.4 million in 2003 and $700.6 million
forecasts cash flows to evaluate any potential impairment of in 2002.
retained interests. Also, regulatory guidelines require During 2003, the Company undertook several actions
consideration of asset securitizations in the determination of with respect to off-balance sheet structures. In January of
risk-based capital ratios. The Company does not rely 2003, the Company exercised a cleanup call option on an
significantly on off-balance sheet arrangements for liquidity indirect automobile loan securitization, with the remaining
or capital resources. assets from the securitization recorded on the Company’s
The Company sponsors an off-balance sheet conduit to balance sheet at fair value. The indirect automobile
which it transferred high-grade investment securities, funded securitization held $156.1 million in assets at December 31,
by the issuance of commercial paper. The conduit held assets 2002.
of $7.3 billion at December 31, 2003, and $9.5 billion at In June 2003, the Company terminated its involvement
December 31, 2002. These investment securities include with an operating lease arrangement involving third-party
primarily (i) private label asset-backed securities, which are lessors that acquired certain business assets, including real
insurance ‘‘wrapped’’ by AAA/Aaa-rated monoline insurance estate, through leveraged financing structures commonly
companies and (ii) government agency mortgage-backed referred to as ‘‘synthetic leases.’’ All assets previously leased
securities and collateralized mortgage obligations. The conduit through the synthetic lease structures were acquired and
had commercial paper liabilities of $7.3 billion at recorded by the Company at fair value. The termination of
December 31, 2003, and $9.5 billion at December 31, 2002. the synthetic lease structures did not have a material impact
The Company provides a liquidity facility to the on the Company’s financial statements.
conduit. Utilization of the liquidity facility would be During the third quarter of 2003, the Company elected
triggered by the conduit’s inability to issue commercial not to reissue more than 90 percent of the commercial
paper to fund its assets. The recorded fair value of the paper funding of Stellar Funding Group, Inc., the
Company’s liability for the liquidity facility included in commercial loan conduit. This action caused the conduit to
other liabilities was $47.3 million at December 31, 2003, lose its status as a ‘‘qualifying special purpose entity’’ as
and $37.7 million at December 31, 2002. Changes in fair defined below. As a result, the Company recorded all of
value of these liabilities are recorded in the income Stellar’s assets and liabilities at fair value and the results of
statement as other noninterest income or expense. In operations in the consolidated financial statements of the
addition, the Company recorded at fair value its retained Company. Given the floating rate nature and high credit
residual interest in the investment securities conduit of quality of the assets within the conduit, the impact to the
$89.5 million at December 31, 2003, and $93.4 million at Company’s financial statements was not significant. In the
December 31, 2002. third quarter of 2003, average commercial loan balances
The Company also has an asset-backed securitization increased by approximately $2 billion and the resulting
to fund an unsecured small business credit product. The increase in net interest income was offset by a similar
unsecured small business credit securitization trust held decline in conduit fee income within commercial products
assets of $497.5 million at December 31, 2003, of which revenue. Prior to December 31, 2003, the remaining
the Company retained $112.4 million of subordinated commercial paper borrowings held by third-party investors
securities, transferor’s interests of $12.4 million and a matured and the conduit was legally dissolved.
residual interest-only strip of $34.4 million. This compared In January 2003, the Financial Accounting Standards
with $652.4 million in assets at December 31, 2002, of Board issued Interpretation No. 46 (‘‘FIN 46’’),
which the Company retained $150.1 million of ‘‘Consolidation of Variable Interest Entities’’ (‘‘VIEs’’), an
subordinated securities, transferor’s interests of interpretation of Accounting Research Bulletin No. 51,
$16.3 million and a residual interest-only strip of ‘‘Consolidated Financial Statements,’’ to improve financial
$53.3 million. The securitization trust issued asset-backed reporting of special purpose and other entities. The
variable funding notes in various tranches. The Company interpretation requires the consolidation of entities in which
provides credit enhancement in the form of subordinated an enterprise absorbs a majority of the entity’s expected
securities and reserve accounts. The Company’s risk, losses, receives a majority of the entity’s expected residual
primarily from losses in the underlying assets, was returns, or both, as a result of ownership, contractual or
considered in determining the fair value of the Company’s other financial interests in the entity. Prior to the issuance
retained interests in this securitization. The Company of FIN 46, consolidation generally occurred when an
recognized income from subordinated securities, an interest- enterprise controlled another entity through voting interests.
only strip and servicing fees from this securitization of Certain VIEs that are qualifying special purpose entities
$29.8 million during 2003 and $52.8 million during 2002. (‘‘QSPEs’’) subject to the reporting requirements of
50 U.S. Bancorp