US Bank 2003 Annual Report Download - page 25

interest-bearing deposits will moderate in 2004 as the was $1,254.0 million in 2003, compared with
economy continues to expand. $1,349.0 million and $2,528.8 million in 2002 and 2001,
Average net free funds increased $3.1 billion from a respectively.
year ago, including an increase in average noninterest- The decline in the provision for credit losses of
bearing deposits of $3.0 billion (10.4 percent) in 2003, $95.0 million in 2003 primarily reflected an improving
compared with 2002. The increase in noninterest-bearing credit risk profile resulting in lower nonperforming loans
deposits was primarily due to mortgage banking activities and commercial and retail loan losses. The decline in
during early 2003 and higher liquidity among corporate nonperforming loans and commercial loan net charge-offs
customers maintained in demand deposit balances year- was broad-based across most industries within the
over-year. commercial loan portfolio. Retail loan delinquency ratios
The increase in net interest income in 2002, compared have also continued to improve across most retail loan
with 2001, was related to an improvement in the net portfolios reflecting improving economic conditions and the
interest margin as well as growth in earning assets. The 19 Company’s ongoing collection efforts and risk management
basis point improvement in the 2002 net interest margin, activities. These are also the principal factors resulting in
compared with 2001, reflected the funding benefits of the lower levels of retail net charge-offs during the year.
declining interest rate environment, a more favorable The decline in the provision for credit losses of
funding mix and improving spreads due to product $1,179.8 million in 2002 was primarily related to specific
repricing dynamics, growth in net free funds and a shift in credit actions taken in 2001. Included in the provision for
mix toward retail loans, partially offset by lower yields on credit losses in 2001 was a $1,025 million incremental
the investment portfolio. The $3.9 billion (2.7 percent) provision recognized in the third quarter of 2001 and a
increase in average earning assets for 2002, compared with $160 million charge during the first quarter of 2001 in
2001, was primarily driven by increases in the investment connection with an accelerated loan workout strategy. The
portfolio and retail loan growth, partially offset by a decline third quarter of 2001 provision for credit losses was
in commercial and commercial real estate loans. The significantly above the level anticipated earlier in that
$3.7 billion decrease in total average loans for 2002, quarter and was taken after extensive review of the
compared with 2001, reflected strong growth in average Company’s commercial loan portfolio in light of the events
retail loans of $3.1 billion which was more than offset by of September 11, 2001, declining economic conditions, and
an overall decline in average commercial and commercial company-specific trends. The action reflected the Company’s
real estate loans of $6.6 billion. Average investment expectations, at that time, of a prolonged economic
securities were $6.9 billion (31.5 percent) higher in 2002, slowdown and recovery. In addition to these actions, the
compared with 2001, reflecting reinvestment of proceeds provision for credit losses in 2001 included a merger and
from loan sales, declines in commercial and commercial real restructuring-related provision of $382.2 million. The
estate loan balances and growth in deposits. Average merger and restructuring-related provision consisted of a
interest-bearing deposits of $76.4 billion in 2002 were $201.3 million provision for losses related to the disposition
lower by $3.4 billion, compared with 2001. Growth in of an unsecured small business product; a $90.0 million
average savings products (5.4 percent) for 2002 was more charge to align risk management practices, align charge-off
than offset by reductions in the average balances of higher policies and expedite the transition out of a specific segment
cost time certificates of deposit (17.3 percent) and time of the health care industry not meeting the lower risk
certificates of deposit greater than $100,000 (13.2 percent). appetite of the combined company; a $76.6 million
The decline in time certificates and time deposits greater provision for losses related to the sales of high loan-to-value
than $100,000 reflected funding decisions toward more home equity loans and the indirect automobile loan
favorably priced wholesale funding sources given the rate portfolio of USBM; and a $14.3 million charge related to
environment and customers’ desire to maintain liquidity. the restructuring of a co-branding credit card relationship.
The increase in average net free funds was driven by an Refer to Note 5 of the Notes to Consolidated Financial
increase in average noninterest-bearing deposits of Statements for further information on merger and
$3.6 billion (14.4 percent) in 2002, compared with 2001. restructuring-related items.
Refer to ‘‘Corporate Risk Profile’’ for further
Provision for Credit Losses The provision for credit losses information on the provision for credit losses, net charge-
is recorded to bring the allowance for credit losses to a level offs, nonperforming assets and other factors considered by
deemed appropriate by management based on factors the Company in assessing the credit quality of the loan
discussed in the ‘‘Analysis and Determination of Allowance portfolio and establishing the allowance for credit losses.
for Credit Losses’’ section. The provision for credit losses
U.S. Bancorp 23