<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
COMMISSION FILE NO. 0-3505
U. S. BANCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OREGON 93-0571730
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
111 S.W. FIFTH AVENUE 97204
PORTLAND, OREGON (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(503) 275-6111
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares of Common Stock, par value $5, outstanding at October 31, 1996:
151,074,989 shares.
1
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U. S. BANCORP
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
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Page
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet ................................... 3
Consolidated Statement of Income ............................. 5
Consolidated Statement of Cash Flows ......................... 7
Consolidated Statement of Changes in Shareholders' Equity .... 9
Notes to Consolidated Financial Statements ................... 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................ 12
</TABLE>
PART II - OTHER INFORMATION
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Page
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Item 6. Exhibits and Reports on Form 8-K................................ 29
Signatures ................................................................... 30
Exhibit Index ................................................................ 31
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U. S. BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, December 31, September 30,
(In Thousands) 1996 1995 1995
------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 2,112,175 $ 2,416,209 $ 2,007,933
Federal funds sold and security resale agreements 505,723 506,408 408,885
Other short-term investments 11,170 10,111 9,819
Trading account securities 131,241 279,656 173,770
Loans held for sale 171,918 160,473 146,387
Securities available for sale, at fair value (amortized cost:
$3,103,576, $3,259,095 and $2,376,121, respectively) 3,089,827 3,276,723 2,402,687
Securities held to maturity, at amortized cost (fair value:
$836,213, $885,695 and $1,789,978, respectively) 825,265 865,126 1,776,083
Loans and lease financing, net of unearned income
Commercial 11,983,403 11,413,953 11,322,776
Lease financing 1,370,128 1,187,373 1,078,598
Foreign 20,258 56,293 57,538
Real estate construction 1,352,473 833,013 880,855
Real estate mortgage 4,156,364 3,808,773 3,702,489
Consumer 5,700,587 5,485,383 5,485,978
----------- ----------- -----------
Total loans and lease financing 24,583,213 22,784,788 22,528,234
Allowance for credit losses (466,018) (434,508) (401,355)
----------- ----------- -----------
Net loans and lease financing 24,117,195 22,350,280 22,126,879
Premises, furniture and equipment 612,077 633,836 638,311
Other real estate and equipment owned 32,143 32,679 34,343
Customers' liability on acceptances 382,332 306,648 295,825
Goodwill and core deposit intangible assets 384,975 190,746 194,587
Other assets 837,349 765,388 629,781
----------- ----------- -----------
$33,213,390 $31,794,283 $30,845,290
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
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U. S. BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(CONTINUED)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
(In Thousands) 1996 1995 1995
-------------- ------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
LIABILITIES
Deposits
Noninterest-bearing deposits $ 6,293,510 $ 6,009,728 $ 5,508,713
NOW accounts and interest checking 2,749,134 2,709,155 2,599,909
Savings 1,488,542 1,583,656 1,739,792
Money market deposit accounts 5,795,955 5,544,479 5,465,688
Consumer time 5,778,609 5,685,290 5,505,209
----------- ----------- -----------
22,105,750 21,532,308 20,819,311
Time - $100,000 or more 2,457,428 1,732,321 1,797,580
----------- ----------- -----------
Total deposits 24,563,178 23,264,629 22,616,891
Federal funds purchased and security
repurchase agreements 2,273,058 2,731,116 2,489,478
Commercial paper 198,888 176,125 217,819
Other short-term borrowings 766,518 692,105 796,233
Long-term debt 1,626,289 1,377,021 1,136,402
Acceptances outstanding 382,332 306,648 295,825
Other liabilities 616,665 629,586 582,381
----------- ----------- -----------
Total liabilities 30,426,928 29,177,230 28,135,029
SHAREHOLDERS' EQUITY
Preferred stock 150,000 150,000 150,000
Common stock 755,212 752,962 762,932
Capital surplus 318,453 347,836 408,884
Retained earnings 1,572,515 1,356,907 1,373,498
Net unrealized gain (loss) on securities
available for sale, net of tax (9,718) 9,348 14,947
----------- ----------- -----------
Total shareholders' equity 2,786,462 2,617,053 2,710,261
----------- ----------- -----------
$33,213,390 $31,794,283 $30,845,290
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
4
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U. S. BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
September 30, September 30,
-------------------------- -----------------------------
(In Thousands, Except Per Share Data) 1996 1995 1996 1995
---------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans and lease financing, including fees $563,768 $536,950 $1,633,096 $1,569,650
Securities available for sale 47,616 35,711 141,235 105,013
Securities held to maturity 10,968 26,785 32,955 83,641
Loans held for sale 3,128 3,102 9,848 10,205
Trading account securities 1,475 2,384 6,615 7,259
Other interest income 6,565 3,881 19,012 10,791
-------- -------- ---------- ----------
Total interest income 633,520 608,813 1,842,761 1,786,559
-------- -------- ---------- ----------
INTEREST EXPENSE
Deposits 194,418 181,804 571,572 521,505
Short-term borrowings 37,212 50,507 114,480 156,768
Long-term debt 26,823 19,690 73,135 60,043
-------- -------- ---------- ----------
Total interest expense 258,453 252,001 759,187 738,316
-------- -------- ---------- ----------
NET INTEREST INCOME 375,067 356,812 1,083,574 1,048,243
Provision for credit losses 38,095 23,984 94,737 72,719
-------- -------- ---------- ----------
Net interest income after
provision for credit losses 336,972 332,828 988,837 975,524
NONINTEREST REVENUES
Service charges on deposit accounts 49,858 47,512 144,920 143,592
Bank card revenue, net 12,132 20,054 45,219 56,322
Trust and investment management 17,117 16,008 53,222 49,768
Exchange fees 9,925 10,082 30,173 31,444
Insurance revenue 6,144 5,276 17,964 16,123
Mortgage banking income, net 5,065 4,035 18,364 12,082
Other operating revenue 26,696 26,661 79,352 71,126
Gain on sale of operations and loans -- 2,976 25,619 8,083
Equity investment income 7,169 2,795 25,264 3,270
Gain on sale of securities
available for sale 882 728 5,277 2,270
Gain on sale of premises 4,187 272 4,202 5,335
-------- -------- ---------- ----------
Total noninterest revenues $139,175 $136,399 $ 449,576 $ 399,415
-------- -------- ---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
5
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U. S. BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
(In Thousands, Except Per Share Data) 1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NONINTEREST EXPENSES
Employee compensation and benefits $151,432 $151,494 $461,529 $450,510
Net occupancy expense 20,561 21,421 60,288 63,939
Equipment rentals, depreciation
and maintenance 28,156 30,835 88,937 95,567
Stationery, supplies and postage 16,218 15,250 46,767 46,415
Regulatory agency fees 2,880 3,445 8,242 30,732
Advertising and marketing 7,996 6,630 24,144 24,947
Telecommunications 8,586 8,555 24,706 25,268
Amortization of goodwill and core
deposit intangibles 7,403 4,903 15,417 12,713
Other operating expense 42,024 43,832 125,430 145,763
Merger and integration costs -- 4,798 18,178 8,548
SAIF assessment 10,343 -- 10,343 --
-------- -------- -------- --------
Total noninterest expenses 295,599 291,163 883,981 904,402
-------- -------- -------- --------
Income before income taxes 180,548 178,064 554,432 470,537
Provision for income taxes 62,305 64,005 196,213 162,941
-------- -------- -------- --------
Net income $118,243 $114,059 $358,219 $307,596
======== ======== ======== ========
Net income applicable to
common shareholders $115,196 $111,012 $349,078 $298,455
Per common share:
Net income $ .75 $ .73 $ 2.30 $ 1.96
Cash dividends declared .31 .28 .87 .78
Average number of common
shares outstanding 153,053 151,264 151,926 151,535
</TABLE>
See Notes to Consolidated Financial Statements.
6
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U. S. BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
(In Thousands) 1996 1995
------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 358,219 $ 307,596
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, amortization and accretion 123,249 95,922
Provision for credit losses 94,737 72,719
Equity investment income (23,713) (3,270)
Gain on sales of securities available for sale (5,277) (2,220)
Gain on sales of securities held to maturity -- (50)
Gain on sales of trading securities (12,686) (12,577)
Net gain on sales of loans and property (4,047) (30,279)
Net gain on sales of mortgage loan servicing rights (3,533) --
Change in loans held for sale (10,804) 12,146
Change in trading account securities 162,966 (21,956)
Change in deferred loan fees, net of amortization 5,738 5,538
Change in accrued interest receivable 10,890 (12,730)
Change in accrued interest payable (8,421) 25,651
Change in other assets and liabilities, net (90,579) 144,758
---------- -----------
Net cash provided by (used in) operating activities 596,739 581,248
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of interest-earning
deposits of nonbank subsidiaries 8,620 9,918
Purchase of interest-earning deposits by nonbank subsidiaries (13,064) (10,026)
Net decrease in investments in interest-
earning deposits by banking subsidiaries 3,385 1,778
Proceeds from maturities of securities held to maturity 85,999 254,975
Proceeds from sales of securities held to maturity -- 3,894
Purchase of securities held to maturity -- (51,402)
Proceeds from maturities of securities available for sale 831,658 425,432
Purchase of securities available for sale (755,858) (1,105,408)
Proceeds from sale of securities available for sale 375,083 861,916
Proceeds from sales of equity investments 36,991 3,851
Purchase of equity investments (9,780) (25,659)
Principal collected on loans by nonbank subsidiaries 1,050,250 756,754
Loans made to customers by nonbank subsidiaries (1,223,754) (895,887)
Net increase in loans by banking subsidiaries (1,146,511) (826,663)
Proceeds from sales of loans -- 14,660
Proceeds from sales of premises and equipment 34,899 28,925
Purchase of premises and equipment (78,393) (53,587)
Proceeds from sale of foreclosed assets 56,188 36,477
Proceeds from sale of mortgage loan servicing rights 686 --
Purchase of mortgage loan servicing rights -- (6,517)
Acquisitions/dispositions, net of cash and cash equivalents (131,911) 15,731
---------- -----------
Net cash provided by (used in) investing activities (875,512) (560,838)
---------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
7
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U. S. BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
(In Thousands) 1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 568,269 753,147
Net change in short-term borrowings (360,882) (919,831)
Proceeds from issuance of long-term debt 661,576 359,538
Repayment of long-term debt (412,697) (267,555)
Proceeds from issuance of stock 20,945 8,424
Common stock repurchased (380,259) (93,248)
Dividends paid (122,898) (106,607)
----------- -----------
Net cash used in financing activities (25,946) (266,132)
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (304,719) (245,722)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,922,617 2,662,540
----------- -----------
CASH AND CASH EQUIVALENTS AT PERIOD END $ 2,617,898 $ 2,416,818
=========== ===========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 767,608 $ 752,753
Income taxes 149,528 134,002
Non-cash investing activities:
Transfer from loans to loans held for sale -- 264,884
Transfer from loans held for sale to loans 12,392 24,715
Fair value adjustment to securities available for sale 31,377 89,967
Income tax effect related to fair value adjustment 12,311 36,299
Transfer from loans to other real estate owned 63,356 48,162
Transfer from premises to other real estate owned 15,604 3,038
</TABLE>
See Notes to Consolidated Financial Statements.
8
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U. S. BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
(In Thousands) 1996 1995
----------- -----------
<S> <C> <C>
Shareholders' equity at beginning of period $2,617,053 $2,493,054
Net income 358,219 307,596
Common stock
Issued in acquisition 324,535 --
Repurchased (380,259) (93,248)
Issued to redeem subordinated debt -- 49,443
Stock options exercised, dividends
reinvested and other transactions 28,598 9,345
Dividends declared
Preferred (9,141) (9,141)
Common (133,604) (100,456)
Foreign currency translation adjustment, net of tax 127 --
Change in net unrealized gain (loss)
on securities, net of tax (19,066) 53,668
---------- ----------
Shareholders' equity at end of period $2,786,462 $2,710,261
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
9
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U. S. BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The consolidated financial statements of U. S. Bancorp include the
accounts of U. S. Bancorp and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated. These statements are unaudited
and should be read in conjunction with the 1995 Annual Report on Form 10-K of
U. S. Bancorp. A summary of U. S. Bancorp's significant accounting policies is
set forth in Note 1 to the Consolidated Financial Statements in U. S. Bancorp's
1995 Annual Report on Form 10-K. In the opinion of management, all adjustments
(comprised of normal recurring accruals) necessary for a fair presentation of
the interim financial statements have been included.
Certain reclassifications of 1995 amounts were made in order to conform
to the 1996 presentation, none of which affect previously reported net income.
The major banking subsidiaries of U. S. Bancorp include United States
National Bank of Oregon (U. S. Bank of Oregon), U. S. Bank of Washington,
National Association, U. S. Bank of Idaho, U. S. Bank of California, U. S. Bank
of Nevada and U.S. Bank of Utah.
2. Acquisitions and Dispositions
On September 25, 1996, U. S. Bancorp announced the signing of a
definitive agreement for U. S. Bancorp to acquire Sun Capital Bancorp (Sun
Capital) and its subsidiary bank, Sun Capital Bank, a three-branch banking
operation with approximately $70 million in assets based in St. George, Utah.
Under the terms of the agreement, which is subject to regulatory approval, Sun
Capital will be merged into U. S. Bancorp, and .95 shares of U. S. Bancorp
common stock will be issued for each share of Sun Capital stock. U. S. Bancorp
anticipates purchasing in the open market approximately 400,000 of its common
shares, the number of shares expected to be issued in the merger. The
transaction will be accounted for as a purchase.
On June 6, 1996, U. S. Bancorp acquired California Bankshares, Inc.
(CBI), a $1.6 billion bank holding company headquartered in the San Francisco
east bay area. In a transaction accounted for as a purchase, U. S. Bancorp
issued 9.7 million common shares to CBI shareholders. U. S. Bancorp purchased an
equal number of its common shares in the open market around the time of the
acquisition.
In May 1996, as part of the regulatory approval process for the merger
of West One Bancorp (West One) with U. S. Bancorp in 1995, 31 branches, mainly
in Oregon, with deposits of approximately $700 million and loans of
approximately $400 million were divested. A pre-tax gain of $29 million was
recognized in the second quarter of 1996.
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3. Accounting Pronouncements
Effective January 1, 1996, U. S. Bancorp adopted three recently issued
Statements of Financial Accounting Standards (SFAS).
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," addresses accounting for the
impairment of long-lived assets, such as premises, furniture and equipment,
certain identifiable intangibles and goodwill related to those assets.
SFAS No. 122, "Accounting for Mortgage Servicing Rights, " an amendment
of SFAS No. 65, requires that companies recognize as separate assets rights to
service mortgage loans for others, however those servicing rights are acquired.
SFAS No. 123, "Accounting for Stock-Based Compensation," prescribes
accounting and reporting standards for all stock-based compensation plans,
including employee stock options, restricted stock and stock appreciation
rights. U. S. Bancorp will disclose the relevant pro forma effect on net income
and earnings per share in its 1996 Annual Report on Form 10-K, in conformance
with SFAS No. 123.
These statements did not have a material effect on U.S. Bancorp's
financial condition, results of operations, cash flows or related disclosures as
of September 30, 1996 and for the nine months ended September 30, 1996.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," was issued in June 1996. This
statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996 and is not
expected to have a significant impact on U. S. Bancorp's financial condition,
results of operations, cash flows or related disclosures.
4. Commitments and Contingent Liabilities
In the normal course of business there are various commitments and
contingent liabilities to extend credit and guarantees, which are not reflected
in the financial statements. Management does not anticipate any material loss as
a result of these transactions. Such commitments and contingent liabilities
include commitments to extend credit of $18.4 billion, $15.9 billion and $13.8
billion and standby letters of credit of $1.2 billion, $1.1 billion and $1.1
billion at September 30, 1996, December 31, 1995 and September 30, 1995,
respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The focus of the following discussion is on U. S. Bancorp's financial
condition, changes in financial condition and results of operations. It is a
supplement to the consolidated financial statements and footnotes presented
elsewhere, and should be read in conjunction therewith.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
September 30, September 30,
-------------------------- Percent ------------------------------- Percent
(In Millions, Except Per Share Data) 1996 1995 Change 1996 1995 Change
----------- ------------ ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net interest income(1) $ 385.7 $ 369.5 4% $1,116.1 $1,086.4 3%
Noninterest revenues - core(2) 126.9 129.6 (2) 389.2 380.8 2
Noninterest expenses - core(2) 288.1 289.0 -- 857.3 890.3 (4)
Operating income(1) 224.6 210.1 7 648.0 576.9 12
Provision for credit losses 38.1 24.0 59 94.7 72.7 30
Noncore/nonrecurring noninterest revenues 12.2 6.8 79 60.4 18.6 225
Noncore/nonrecurring noninterest expenses 10.3 4.8 115 28.5 16.9 69
Net income 118.2 114.1 4 358.2 307.6 16
PER COMMON SHARE
Net income $ .75 $ .73 3% $ 2.30 $ 1.96 17%
Cash dividends declared .31 .28 11 .87 .78 12
Book value 17.46 16.78 4 17.46 16.78 4
Average common shares outstanding,(000's) 153,053 151,264 1 151,926 151,535 --
Period-end shares outstanding,(000's) 151,042 152,586 (1) 151,042 152,586 (1)
FINANCIAL RATIOS
Return on average common equity 17.11% 17.75% 18.04% 16.44%
Return on average assets 1.45 1.50 1.51 1.37
Overhead ratio 56.31 57.56 56.46 60.87
Net interest margin(1) 5.32 5.44 5.27 5.42
Leverage capital ratio 7.50 8.34 7.50 8.34
Risk based capital ratios:
Tier 1 capital 7.46 9.03 7.46 9.03
Total capital 11.19 11.39 11.19 11.39
</TABLE>
(1) Tax-equivalent basis.
(2) Excludes noncore/nonrecurring items.
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SELECTED FINANCIAL DATA, (CONTINUED)
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
September 30, September 30,
--------------------- Percent --------------------- Percent
(In Millions, Except Per Share Data) 1996 1995 Change 1996 1995 Change
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE BALANCES
Loans $24,286 $22,367 9% $23,568 $22,023 7%
Interest-earning assets 28,897 27,037 7 28,244 26,795 5
Assets 32,504 30,263 7 31,712 30,003 6
Deposits 24,163 22,082 9 23,574 21,788 8
Common shareholders' equity 2,679 2,482 8 2,585 2,427 7
PERIOD-END BALANCES
Loans $24,583 $22,528 9%
Interest-earning assets 29,318 27,446 7
Assets 33,213 30,845 8
Deposits 24,563 22,617 9
Long-term debt 1,626 1,136 43
</TABLE>
RESULTS OF OPERATIONS
OVERVIEW
To facilitate the discussion of its results of operations, in the table
which appears below, U. S. Bancorp presents an additional analysis of
performance to supplement the accompanying consolidated statement of income and
balance sheet. This additional analysis of performance should not be viewed as a
substitute for the generally accepted accounting principle-based financial
statements previously presented. There are three primary differences between the
consolidated statement of income and the operating income analysis that follows.
First, the operating income analysis presents the line items in a slightly
different order. Second, certain transactions that are nonrecurring or that are
not related to what management believes are core businesses are not included in
noninterest revenues and noninterest expenses in determining operating income.
Finally, operating income is also before the provision for credit losses, other
real estate owned transactions (OREO) and income taxes. The provision for credit
losses is excluded from operating income as its amount is based on the analysis
of the required level of the allowance for credit losses and can be subject to
fluctuation due to the prevailing level of charge-offs. Management has presented
the additional analysis in the belief that it is meaningful to understand the
results and trends in operating income separately from nonrecurring
transactions, noncore activities, certain provisions and other real estate owned
transactions. Due to the format of this presentation, not all line items agree
directly to the consolidated financial statements.
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For the third quarter of 1996, net income was $118.2 million, compared
with net income of $114.1 million in the third quarter of 1995. Operating
income, as defined and presented in the following table, increased 7 percent
over the same period a year ago, primarily due to an increase in net interest
income, a slight reduction in core noninterest revenues and a minor reduction in
core noninterest expenses. The following key highlights compare the third
quarter of 1996 with the same period of 1995 unless otherwise noted:
-Net income totaled $118.2 million, or $.75 per share, an increase of 4
percent from $114.1 million, or $.73 per share.
-Operating income (income on a tax-equivalent basis before the provision
for credit losses, other real estate owned transactions, items
determined to be noncore or nonrecurring, and income taxes) of $224.6
million was up 7 percent from $210.1 million.
-Net interest income was $385.7 million, a 4% increase from $369.5
million in 1995. The increase was attributable to growth in earning
assets and the acquisition of CBI.
-Noninterest revenue (before items determined to be noncore or
nonrecurring) was $126.9 million, a 2 percent decrease from $129.6
million. Increases in service charges, trust and mortgage banking
income were offset by a decrease in bankcard revenues as the result of
the sale of an interest in the merchant processing business.
-Noninterest expenses (before OREO transactions and items determined to
be noncore or nonrecurring) of $288.1 million decreased slightly from
$289.0 million.
-The provision for credit losses was $38.1 million, compared with $24.0
million. The net charge-off ratios were .45 percent in the third
quarter of 1996 compared with .34 percent in the third quarter of 1995,
mainly the result of higher losses in the commercial, consumer and
bankcard portfolios.
-The overhead ratio, excluding OREO and noncore/nonrecurring
transactions, improved to 56.2 percent from 57.9 percent.
Net income per share for the first nine months of 1996 improved to
$2.30 in 1996 compared with $1.96 for the same period in 1995.
Noncore/nonrecurring transactions contributed $.10 per share after tax in 1996.
Noncore/nonrecurring revenues and expenses in 1995 effectively offset each
other, with minimal impact to net income per share.
For the first nine months of 1996, net income was $358.2 million
compared with $307.6 million for the first nine months of 1995. Return on
average assets for the first nine months of 1996 was 1.51 percent, an
improvement from 1.37 percent for the same period of 1995. Return on average
common equity for the first nine months of 1996 was 18.04 percent, compared with
16.44 percent for the same period of 1995.
14
<PAGE> 15
The table below presents U. S. Bancorp's operating income analysis for
the third quarter and nine month periods. A discussion of the major changes in
each key component follows.
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
September 30, Percent September 30, Percent
(In Thousands) 1996 1995 Change 1996 1995 Change
--------- --------- ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Net interest income (1) $385,747 $369,463 4% $1,116,089 $1,086,413 3%
Noninterest revenues-core (2) 126,937 129,628 (2) 389,214 380,777 2
Noninterest expenses-core (2) 288,104 289,020 857,264 890,274 (4)
-------- -------- ---------- ----------
Operating income (1) 224,580 210,071 7 648,039 576,916 12
Provision for credit losses (38,095) (23,984) 59 (94,737) (72,719) 30
OREO transactions 2,848 2,630 8 1,804 2,805 (36)
-------- -------- ---------- ----------
189,333 188,717 555,106 507,002 9
Noncore/nonrecurring items:
Gain on sale of
operations and loans -- 2,976 25,619 8,083
Equity investment income 7,169 2,795 25,264 3,270
Gain on sale of securities
available for sale 882 728 5,277 2,270
Other nonrecurring noninterest
revenue items 4,187 272 4,202 5,015
Merger and integration costs -- (4,798) (18,178) (8,548)
Business consolidation costs -- -- -- (4,000)
SAIF assessment (10,343) -- (10,343) --
Other nonrecurring noninterest
expense items -- 25 -- (4,385)
-------- -------- ---------- ----------
Income before income taxes (1) 191,228 190,715 586,947 508,707
Less tax-equivalent
adjustment included above 10,680 12,651 32,515 38,170
Provision for income taxes 62,305 64,005 196,213 162,941
-------- -------- ---------- ----------
Net income $118,243 $114,059 4% $ 358,219 $ 307,596 16%
======== ======== == ========== ========== ===
</TABLE>
(1) Tax-equivalent basis.
(2) Excludes noncore and nonrecurring items.
For detailed information on the items presented as noncore or nonrecurring,
refer to the respective discussions of "Noninterest Revenues" and "Noninterest
Expenses" that follow.
15
<PAGE> 16
NET INTEREST INCOME - TAX-EQUIVALENT BASIS
Net interest income, the principal source of U. S. Bancorp's operating
income, includes interest income and fees generated by interest-earning assets,
primarily loans and securities portfolios, less interest expense on
interest-bearing liabilities, primarily deposits, purchased funds and short-and
long-term debt. Net interest income is affected by the volume and relative mix
of both earning assets and interest-bearing and noninterest-bearing liabilities,
and related interest yields and rates paid on these assets and liabilities.
ANALYSIS OF NET INTEREST INCOME (TAX-EQUIVALENT BASIS)
<TABLE>
<CAPTION>
Net
Interest Interest Interest
(In Millions) Income Expense Income
-------- -------- --------
<S> <C> <C> <C>
Third quarter 1995 as reported $ 621.5 $252.0 $ 369.5
Increase (decrease) due to:
Changes in balances 41.0 16.6 24.4
Changes in rates (18.3) (10.1) (8.2)
-------- ------ --------
Third quarter 1996 as reported $ 644.2 $258.5 $ 385.7
======== ====== ========
Nine months ended 1995 as reported $1,824.7 $738.3 $1,086.4
Increase (decrease) due to:
Changes in balances 94.8 34.9 59.9
Changes in rates (49.1) (16.5) (32.6)
Change due to one more day in 1996 4.9 2.5 2.4
-------- ------ --------
Nine months ended 1996 as reported $1,875.3 $759.2 $1,116.1
======== ====== ========
</TABLE>
Third Quarter Ended September 30, 1996 Compared With Third Quarter Ended
September 30, 1995
Net interest income on a tax-equivalent basis for the third quarter of 1996
was $385.7 million, an increase of $16.2 million over the third quarter of 1995.
The net interest margin in the third quarter of 1996 was 5.32 percent compared
with 5.44 percent in the same quarter a year ago, and 5.31 percent in the second
quarter of 1996.
The spread between the yield on interest-earning assets and rates paid on
interest-bearing liabilities decreased in the third quarter of 1996 compared
with third quarter 1995 mainly because the decline in the yields on
interest-earning assets exceeded the reduction in rates paid on interest-bearing
liabilities. The increase in net interest income was mainly due to the increase
in earning assets.
Average loans were $24.3 billion in the third quarter of 1996, an increase
of $1.9 billion, or 9 percent, compared with the third quarter a year ago.
Excluding the impact of the CBI acquisition and divestitures, average loans
increased 6 percent to $23.6 billion in the third quarter of 1996 compared with
the third quarter of 1995. Average commercial loans increased $696 million,
average real estate construction loans increased $395 million and average real
estate mortgage loans were up $381 million. Average securities were $3.8 billion
during the third quarter of 1996, a 6 percent decrease from $4.1 billion in
third quarter 1995.
Average noninterest-bearing deposits increased $508 million, or 10 percent,
in the third quarter of 1996 compared with the third quarter of 1995. Average
interest-bearing deposits in the third quarter of
16
<PAGE> 17
1996 increased $1.6 billion, or 9 percent, over the same period in 1995
primarily due to increases in NOW and interest checking, money market accounts,
other time deposits and time deposits of $100,000 or more, which offset
decreases in savings accounts. Excluding the impact of the CBI acquisition and
divestitures, average total deposits increased 6 percent in the third quarter of
1996 compared with the same period in 1995.
Average short-term borrowings, comprised of federal funds purchased and
security repurchase agreements, commercial paper and other short-term
borrowings, decreased $635 million. Average long-term debt increased $483
million in the third quarter of 1996 compared to the same period last year. The
increase in long-term debt was the result of the issuance of $200 million in
subordinated debentures in June 1996 and the issuance of $300 million of
subordinated debt in October 1995.
Nine Months Ended September 30, 1996 Compared With Nine Months Ended
September 30, 1995
Net interest income on a tax-equivalent basis was $1.1 billion, a $29.7
million increase over the first nine months of 1995. The net interest margin was
5.27 percent in the first nine months of 1996 compared with 5.42 percent in the
first nine months of 1995. The increase in net interest income was due primarily
to an increase in earning assets.
Average total loans were $23.6 billion in the first nine months of 1996, an
increase of $1.5 billion, or 7 percent, compared with the same period a year
ago. Excluding the impact of the CBI acquisition and divestitures, average total
loans increased 6 percent in the first nine months of 1996 compared with the
first nine months in 1995. Average commercial loans increased $829 million with
smaller increases in real estate mortgage and real estate construction loans,
and lease financing. Average total securities portfolios were $3.9 billion
during the first nine months of 1996, an 8 percent decrease from $4.2 billion in
the first nine months of 1995. The decrease resulted primarily from the use of
maturities of securities to fund loan growth.
Average noninterest-bearing deposits increased $419 million, or 8 percent,
in the first nine months of 1996 compared with the first nine months of 1995.
Average interest-bearing deposits in the first nine months of 1996 increased
$1.4 billion, or 8 percent, over the same period in 1995 primarily due to
increases in NOW and interest checking, money market accounts, time deposits of
$100,000 or more and other time deposits, exceeding the decrease in average
savings. Excluding the impact of the CBI acquisition and divestitures, average
total deposits increased 7 percent for the first nine months of 1996 compared
with the same period a year ago.
Average short-term borrowings, as defined above, decreased $666 million
while average long-term debt increased $313 million in the first nine months of
1996 compared to the same period last year.
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
Net Interest Margin Analysis September 30, September 30,
--------------------- ---------------------
(Tax-equivalent Basis) 1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Average rate earned on interest-earning assets 8.88% 9.14% 8.86% 9.10%
Average rate paid on interest-bearing liabilities 4.46 4.62 4.48 4.56
---- ---- ---- ----
Rate spread 4.42% 4.52% 4.38% 4.54%
==== ==== ==== ====
Net interest margin 5.32% 5.44% 5.27% 5.42%
==== ==== ==== ====
</TABLE>
17
<PAGE> 18
NONINTEREST REVENUES
Noninterest revenues, excluding revenues associated with
noncore/nonrecurring activities identified below, increased $8.4 million, or 2
percent in the first nine months of 1996, and decreased $2.7 million, or 2
percent, in the third quarter of 1996 compared with the same periods of 1995.
Excluding the impact of the CBI acquisition, noninterest revenues increased 2
percent in the first nine months of 1996 and declined 3 percent in the third
quarter of 1996 compared with the same periods in 1995. The principal components
of noninterest revenues are shown in the table below.
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
September 30, September 30,
------------------------ Percent ----------------------- Percent
(In Thousands) 1996 1995 Change 1996 1995 Change
-------- --------- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Noninterest revenues:
Service charges on deposit accounts $ 49,858 $ 47,512 5% $144,920 $143,592 1%
Bank card revenue, net 12,132 20,054 (40) 45,219 56,322 (20)
Trust and investment management 17,117 16,008 7 53,222 49,768 7
Exchange fees 9,925 10,082 (2) 30,173 31,444 (4)
Insurance revenue 6,144 5,276 16 17,964 16,123 11
ATM revenue 5,772 5,702 1 16,272 16,134 1
Brokerage and other commissions 3,434 3,558 (3) 12,195 9,334 31
Trading account 5,253 5,771 (9) 12,686 14,319 (11)
Mortgage banking income, net 5,065 4,035 26 18,364 10,402 77
Other revenue 12,237 11,630 5 38,199 33,339 15
-------- --------- -------- --------
126,937 129,628 (2) 389,214 380,777 2
Noncore/nonrecurring items:
Gain on sale of
operations and loans -- 2,976 25,619 8,083
Equity investment income 7,169 2,795 25,264 3,270
Gain on sale of securities
available for sale 882 728 5,277 2,270
Other noncore/nonrecurring
noninterest revenue items 4,187 272 4,202 5,015
-------- --------- -------- --------
Total noninterest revenues $139,175 $ 136,399 2% $449,576 $399,415 13%
======== ========= ==== ======== ======== ===
</TABLE>
Service charges increased 5 percent in the third quarter of 1996 compared
with the third quarter of 1995 and increased 1 percent in the first nine months
of 1996 compared with the first nine months of 1995.
Trust and investment management fees and insurance revenues increased in
the third quarter and first nine months of 1996 compared to the same periods in
1995 due mainly to increased emphasis on fee-based sources of revenue and the
corresponding increases in sales volumes of related product and services.
Brokerage and other commissions increased $2.9 million in the first nine
months of 1996 compared to the same period last year. Funds under management
in Qualivest Funds, U. S. Bancorp's proprietary mutual funds, grew 38 percent
to $9.4 billion in the first nine months of 1996 from year-end 1995.
18
<PAGE> 19
The decline in bankcard revenues in 1996 reflected the September 1995 sale
of an interest in the merchant processing service business and the allocation of
the merchant contract base to a co-owned business alliance. Certain expenses
also declined as the result of this transaction, as discussed in the analysis of
noninterest expense following.
Mortgage banking income increased in the third quarter and first nine
months of 1996 as compared to the same periods in 1995, and was due primarily to
a higher level of mortgage loan originations and related mortgage banking
activities. In addition, the implementation of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights," in 1996 resulted in the
recognition of approximately $2.8 million in income related to originated
mortgage servicing rights.
Included in other revenue in the table above for the first nine months of
1996 is $3.2 million of servicing income attributable to a portfolio of affinity
credit card receivables sold in the second quarter of 1995 under an interim
servicing agreement which ended during the second quarter of 1996 .
In 1996, the gain on sale of operations and loans consisted primarily of a
$28.8 million gain on sale of branches divested in May 1996 in conjunction with
the West One acquisition. Also included in this line item was $3.0 million of
net losses on credit card portfolio sales. Equity investment income is mainly
derived from U. S. Bancorp's investment as a limited partner in several limited
partnerships and, to a lesser degree, in venture capital investments. U. S.
Bancorp has no control over investment sales activities by the general partners,
and realized gains of $20.2 million in the first nine months of 1996 and $7.2
million in the third quarter of 1996 related to sales of limited partnership
investments by the general partners. Gains of $4.5 million in the first nine
months of 1996 were realized on disposition of venture capital investments.
Other noncore/nonrecurring revenue items in 1996 included primarily a gain of
$4.2 million recognized on the sale of idle facilities.
Noncore/nonrecurring items in 1995 included gains on sale of affinity
credit card and mortgage loan portfolios of $7.6 million and a $500 thousand
branch sale gain. Other noncore/nonrecurring revenue items in 1995 included a
$5.3 million gain on sale of a former bank headquarters building, a $1.7 million
gain on sale of servicing rights, and $2.0 million of losses related to U. S.
Bancorp's import/export financing subsidiary that was closed in 1995.
The available for sale securities gains in the first nine months of 1996
primarily reflected the sale of mortgage-backed securities, with subsequent
reinvestment of the proceeds in additional available-for-sale securities.
19
<PAGE> 20
NONINTEREST EXPENSES
Several categories of expenses have been affected by the cost savings
achieved as the result of the West One merger; branch divestitures; purchase
acquisitions in 1996; and investments in technology. Noninterest expenses,
before noncore/nonrecurring items, were level in the third quarter of 1996
compared with the third quarter of 1995 and decreased 4 percent in the first
nine months of 1996 compared with the nine months ended September 30, 1995.
Excluding the impact of the CBI acquisition, noninterest expenses declined 4
percent in the third quarter of 1996 and 5 percent in the first nine months of
1996 compared with the same periods in 1995. The principal components of
noninterest expense are shown in the following table.
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
September 30, Percent September 30, Percent
-------------------- ---------------------
(In Thousands) 1996 1995 Change 1996 1995 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Noninterest expenses:
Employee compensation
and benefits $151,432 $151,494 -% $461,529 $450,510 2%
Net occupancy expense 20,561 21,421 (4) 60,288 63,939 (6)
Equipment rentals,
depreciation and
maintenance 28,156 30,835 (9) 88,937 95,567 (7)
Stationery, supplies and
postage 16,218 15,250 6 46,767 46,415 1
Regulatory agency fees 2,880 3,445 (16) 8,242 30,732 (73)
Advertising and marketing 7,996 6,630 21 24,144 24,947 (3)
Telecommunications 8,586 8,555 -- 24,706 25,268 (2)
Amortization of goodwill and core
deposit intangibles 7,403 4,903 51 15,417 12,713 21
Contract personnel 4,510 3,256 39 13,041 8,254 58
Other taxes and licenses 3,884 3,838 1 11,987 11,627 3
Legal and accounting 1,633 2,432 (33) 6,560 8,991 (27)
Travel 3,713 2,878 29 9,765 8,924 9
All other 31,132 34,083 (9) 85,881 102,387 (16)
-------- -------- -------- --------
288,104 289,020 -- 857,264 890,274 (4)
Noncore/nonrecurring expense items:
OREO transactions (2,848) (2,630) (1,804) (2,805)
Merger and integration costs -- 4,798 18,178 8,548
Business consolidation costs -- -- -- 4,000
SAIF assessment 10,343 -- 10,343 --
Other noncore/nonrecurring
noninterest expense items -- (25) -- 4,385
-------- -------- -------- --------
Total noninterest expenses $295,599 $291,163 2% $883,981 $904,402 (2)%
======== ======== ==== ======== ======== ===
</TABLE>
20
<PAGE> 21
The acquisition of CBI, accounted for as a purchase in June 1996,
added $6.9 million to employee compensation and benefits in the third quarter of
1996, and $8.8 million in the first nine months of 1996. The following
discussion of employee compensation and benefits excludes the impact of CBI.
Employee compensation, composed of salaries and incentive payments, decreased
$6.9 million in the third quarter of 1996 compared with 1995 and increased $2.2
million in the first nine months of 1996 compared with the comparable prior
period. While salary totals declined due to reductions in the numbers of
employees as the consolidation of West One operations and branches approached
completion, incentive and commission payments, mainly related to retail deposit
origination and retention programs, increased, for a net increase of $4.4
million in the first nine months of 1996 as compared with the first nine months
of 1995. Employee benefits decreased $2.2 million in the first nine months of
1996 compared with the same period of 1995 mainly due to lower medical plan
expenses.
Contract personnel expenses increased in the first nine months and
third quarter of 1996 compared with the same periods in 1995. U. S. Bancorp uses
contract personnel to provide flexibility in addressing business consolidation
and integration-related activities, as well as technology upgrades and
enhancements.
Regulatory agency fees were down 73 percent in the first nine months of
1996 and 16 percent in the third quarter of 1996 compared to the same periods in
1995 due to the reduction in FDIC deposit insurance premiums. The rate assessed
for well-capitalized banks decreased from $.23 to $.04 of FDIC insured deposits
at June 30, 1995, and the rate was zero for the third quarter of 1996 for
deposits insured by the Bank Insurance Fund. Included in noncore/nonrecurring
expense is a one time expense for the recapitalization of the Savings
Association Insurance Fund of $10.3 million recorded in the third quarter of
1996.
Net occupancy and equipment related expenses have been reduced
reflecting back office and branch consolidations and divestitures. Amortization
of goodwill and core deposit intangibles increased $2.5 million in the first
nine months of 1996 and $2.7 million in the third quarter of 1996 compared to
the same periods in 1995, as a result of the goodwill and core deposit
intangible assets related to the CBI acquisition. The net-of-tax impact of
goodwill and core deposit intangible amortization was $.09 per share in the
first nine months of 1996 and $.04 in the third quarter of 1996. In the first
nine months of 1995 the net-of-tax impact of goodwill and core deposit
amortization was $.06 per share and $.03 in the third quarter of 1995.
The decreases in legal and accounting expenses and the all other
expense category were mainly reflective of the integration efforts and business
consolidations. The all other expense category decreased $3.0 million in the
third quarter of 1996 compared with the third quarter of 1995, and decreased
$16.5 million in the first nine months of 1996 compared with the prior year.
Following is a discussion of selected items included in the expense category all
other. On a year-to-date basis, expenses decreased significantly related to the
merchant processing service business and the affinity card portfolio sold in
1995. In addition, consulting expenses decreased $3.2 million in the first nine
months of 1996 compared with the same period in 1995 as certain merger
integration activity declined.
The overhead ratio (defined as noninterest expenses as a percentage of
tax-equivalent net interest income and noninterest revenues) improved to 56.3
percent in the third quarter of 1996 compared with 57.6 percent in the third
quarter of 1995. The overhead ratio decreased to 56.5 percent for the first nine
months of 1996 compared to 60.9 percent for the same period in 1995.
21
<PAGE> 22
In connection with the West One merger in the fourth quarter of 1995, U. S.
Bancorp recorded a pre-tax merger and integration cost provision of $98.9
million. An additional $18.2 million of merger-related expenses were incurred
during the first and second quarters of 1996. The merger and integration
activity is summarized in the table below.
<TABLE>
<CAPTION>
Severance, Facilities
Retention and and
Other Employee Account Professional
(In Millions) Related Costs Conversions Fees Other Total
------------ ----------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Provision for merger and integration costs, 1995 $29.4 $39.6 $13.9 $16.0 $98.9
Utilization for the period
Cash -- .2 10.6 .5 11.3
Noncash -- -- -- -- --
----- ----- ----- ----- -----
Total -- .2 10.6 .5 11.3
----- ----- ----- ----- -----
Balance, December 31, 1995 29.4 39.4 3.3 15.5 87.6
Provision for merger and integration costs, 1996 13.2 1.4 .7 2.9 18.2
Utilization for the period
Cash 29.8 21.4 3.5 6.8 61.5
Noncash -- 6.0 -- 8.1 14.1
----- ----- ----- ----- -----
Total 29.8 27.4 3.5 14.9 75.6
----- ----- ----- ----- -----
Balance, September 30, 1996 $12.8 $13.4 $ .5 $ 3.5 $30.2
===== ===== ===== ===== =====
</TABLE>
INCOME TAXES
The effective tax rates for the nine months ended September 30, 1996 and
1995 were 35.4 percent and 34.6 percent, respectively. The increase in the
effective tax rate in 1996 was mainly due to the higher level of earnings
leading to a corresponding decrease in the proportion of tax-exempt income
compared with 1995.
FINANCIAL CONDITION
SECURITIES PORTFOLIOS
Securities available for sale totaled $3.1 billion at September 30, 1996
compared with $3.3 billion at December 31, 1995 and $2.4 billion at September
30, 1995. Securities held to maturity totaled $825 million at September 30,
1996, compared with $865 million at December 31, 1995 and $1.8 billion at
September 30, 1995. Securities in both portfolios may decline moderately in the
future as the cash received from maturities may be used to fund loan growth. The
year-over-year changes in the securities portfolio balances mainly reflect the
impact of the reclassification of $800 million of held-to-maturity securities to
available-for-sale securities in the fourth quarter of 1995.
22
<PAGE> 23
LOAN PORTFOLIO
Loans outstanding were $24.6 billion, $22.8 billion and $22.5 billion
at September 30, 1996, December 31, 1995 and September 30, 1995, respectively.
Loan balances at September 30, 1996 included $1.0 billion of loans related to
the CBI purchase. Average loans increased at an annualized rate of 14 percent to
$24.3 billion in the third quarter of 1996 from $23.5 billion in the second
quarter of 1996. Excluding the impact of the CBI purchase and loans sold in
conjunction with divested branches, annualized loan growth from the second
quarter of 1996 to the third quarter of 1996 was approximately 5 percent.
LIQUIDITY
Liquidity is the ability to raise adequate and reasonably priced funds,
including deposits, purchased funds, varying maturities of notes, long-term debt
and equity capital, and is determined based on the mix and maturities of assets
and liabilities.
Core deposits, defined as deposits other than time deposits of $100,000
or more, are U. S. Bancorp's primary source of funding and provide a sizable
source of relatively stable, low-cost funds. Average core deposits increased to
$21.5 billion in the third quarter of 1996, an increase of $493 million from the
second quarter of 1996.
Other sources of liquidity include purchased funds, comprised of time
deposits over $100,000, federal funds purchased and security repurchase
agreements, commercial paper and short-term borrowings. Average purchased funds
were $5.5 billion and $5.4 billion in the third and second quarters of 1996,
respectively. A portion of the remaining funding of average total assets came
from long-term debt, which averaged $1.6 billion and $1.4 billion in the third
and second quarters of 1996, respectively.
U. S. Bancorp's liquidity is enhanced by its accessibility to a
diversity of national market sources of funds. At September 30, 1996, U. S.
Bancorp had available a total of $600 million in uncommitted borrowing
capacities for medium-term notes and preferred stock and a $500 million general
liquidity line of credit.
On November 4, 1996, U.S. Bancorp filed with the Securities and
Exchange Commission a registration statement for $1.0 billion of unsecured
senior and subordinated debt securities. U.S. Bancorp plans to use this funding
source for general corporate purposes.
The following table summarizes U. S. Bancorp's ratings by major
statistical rating agencies at September 30, 1996; such ratings are subject to
revision or withdrawal at anytime.
<TABLE>
<CAPTION>
Standard Duff Thomson
& Poor's Moody's & Phelps BankWatch
-------- ------- -------- ---------
<S> <C> <C> <C> <C>
Commercial paper .......................... A-1 P-1 DUFF1+ TBW-1
Senior debt ............................... A A2 AA- A+
Subordinated debt ......................... A- A3 A+ A
Preferred stock ........................... BBB+ a2 A A-
</TABLE>
In the third quarter of 1996, U. S. Bancorp completed the repurchase
of 9.7 million shares of its common stock, equal to the shares issued to former
shareholders of CBI. On October 17, 1996, U. S. Bancorp announced the
authorization by the Board of Directors to repurchase up to 7.5 million shares
of its common stock, approximately five percent, subject to market conditions
and necessary regulatory approvals. The funds for the purchase of such shares
are obtained from a variety of sources, including, but not limited to, issuance
of debt and asset maturities and sales.
23
<PAGE> 24
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
The provision for credit losses was $38.1 million for the third quarter
of 1996 and $94.7 million for the first nine months of 1996. This compares with
$24.0 million for the third quarter of 1995 and $72.7 million for the first nine
months of 1995. The higher provision reflected the growth in the loan portfolio,
the increase in the ratio of the allowance for credit losses to 1.90 percent of
loans from 1.78 percent at September 30, 1995, and a higher level of net
charge-offs in 1996. The provision for credit losses for the first nine months
also includes approximately $5.2 million related to the merger with CBI and the
integration of the combined loan portfolios, as well as the impact of the
reduction in loans related to branch divestitures.
Management performs a quarterly analysis to establish the appropriate
level of the allowance, taking into consideration such factors as loan loss
experience, an evaluation of potential losses in the portfolio, credit
concentrations and trends in portfolio volume, maturity, delinquencies and
nonaccruals, risks associated with standby letters of credit which guarantee the
debt of others and other off-balance sheet commitments, and prevailing and
anticipated economic conditions. U. S. Bancorp closely monitors credit risk in
its loan portfolio and believes that its credit approval and review processes
are effective and operating in accordance with sound banking policy, and that
the allowance for credit losses at September 30, 1996 was adequate to absorb
potential credit losses inherent in loans, leases, loan commitments and standby
letters of credit outstanding at that date.
U. S. Bancorp continues to evaluate its loan portfolio for impairment
as defined by SFAS No. 114, "Accounting for Creditors for Impairment of a Loan,"
as amended. The total recorded investment in impaired loans was $122.5 million
at September 30, 1996, compared with $104.0 million at December 31, 1995. Any
associated valuation allowance was not material.
24
<PAGE> 25
The table below presents the change in the allowance for credit
losses for the periods indicated.
ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Year Ended Ended
September 30, December 31, September 30,
(In Thousands) 1996 1995 1995
----------- ------------ ------------
<S> <C> <C> <C>
Loans (net of unearned income) $24,583,213 $22,784,788 $22,528,234
=========== =========== ===========
Daily average loans
(net of unearned income) $23,567,735 $22,162,751 $22,023,259
=========== =========== ===========
Balance of allowance for credit
losses at beginning of period $ 434,508 $ 387,559 $ 387,559
Acquisitions (dispositions) 14,855 (3,137) (3,190)
Charge-offs
Commercial 31,831 25,912 17,494
Lease financing 655 716 474
Real estate construction 458 538 314
Real estate mortgage 1,931 6,829 6,357
Consumer 35,062 44,804 32,812
Bank card 35,151 38,094 29,795
----------- ----------- -----------
105,088 116,893 87,246
----------- ----------- -----------
Recoveries
Commercial 9,573 17,710 12,569
Lease financing 346 593 422
Real estate construction 428 1,955 1,915
Real estate mortgage 2,519 2,969 1,837
Consumer 9,662 13,469 9,856
Bank card 4,478 6,190 4,914
----------- ----------- -----------
27,006 42,886 31,513
----------- ----------- -----------
Net charge-offs 78,082 74,007 55,733
Provision for credit losses 94,737 124,093 72,719
----------- ----------- -----------
Balance of allowance for credit
losses at end of period $ 466,018 $ 434,508 $ 401,355
=========== =========== ===========
Net charge-offs to average loans
and leases .44% .33% .34%
Allowance for credit losses to
period-end loans and leases 1.90 1.91 1.78
Allowance as a % of
nonperforming loans 299 336 264
</TABLE>
25
<PAGE> 26
ASSET QUALITY
As presented in the table below, nonperforming assets as a percentage
of loans and foreclosed assets was .81 percent at September 30, 1996, .73
percent at December 31, 1995 and .84 percent at September 30, 1995.
Nonperforming assets totaled $199 million at September 30, 1996, compared to
$167 million at December 31, 1995 and $189 million a year ago. U. S. Bancorp
anticipates normal fluctuations in the balance of nonaccrual loans as it
increases its lending activity and resolves loans currently in the nonaccrual
portfolio.
The increase in nonaccrual loans at September 30, 1996 compared with
year-end 1995 was due primarily to the addition of two commercial credits in the
third quarter of 1996. Total bank properties pending disposition at September
30, 1996 resulted from the consolidation of branches in Oregon and Washington
related to the West One acquisition. The majority of the properties have sales
transactions pending. The increase in accruing loans past due 90 days or more
at September 30, 1996 compared with December 31, 1996, was due primarily to
the increase in consumer loans past due 90 days or more.
In addition to the loans classified as nonperforming, U. S. Bancorp has
other loans which it has internally classified, largely due to weakening
financial condition of the borrowers or concern about specific industries. These
loans, although currently performing in accordance with contractual terms, are
monitored closely by management and have been considered in establishing the
level of the allowance for credit losses. U. S. Bancorp's lending procedures and
loan portfolio, including internally classified loans, are examined by
regulatory agencies as part of their supervisory activities.
The following table summarizes U. S. Bancorp's nonperforming assets and
past due loans. Past due loans are defined as loans contractually past due as to
interest or principal 90 days or more.
<TABLE>
<CAPTION>
September 30, December 31, September 30,
(In Thousands) 1996 1995 1995
-------- -------- --------
<S> <C> <C> <C>
Nonaccrual loans $150,263 $118,436 $140,923
Restructured loans 5,433 10,996 11,010
Other real estate and equipment owned 32,143 32,679 34,343
-------- -------- --------
187,839 162,111 186,276
Bank properties pending disposition
(included in other assets) 11,175 4,533 2,768
-------- -------- --------
Total nonperforming assets $199,014 $166,644 $189,044
======== ======== ========
Accruing loans past due 90 days or more $ 41,789 $ 29,968 $ 22,124
======== ======== ========
Total nonaccrual and restructured loans as
a percentage of total loans .63% .57% .67%
Total nonperforming assets as a percentage
of loans and foreclosed assets .81 .73 .84
</TABLE>
26
<PAGE> 27
CAPITAL AND DIVIDENDS
The federal bank regulatory agencies jointly issued rules which
implemented a system of prompt corrective action for financial institutions
required by FDICIA. The rules define the relevant capital levels for the five
categories, ranging from "well-capitalized" to "critically undercapitalized". An
insured depository institution is generally deemed to be "well-capitalized" if
it has a total risk-based capital ratio of at least 10 percent, a Tier 1
risk-based capital ratio of at least six percent, and a leverage ratio of at
least five percent.
Risk-based capital guidelines issued by the Federal Reserve Board establish
a risk-adjusted ratio relating capital to different categories of assets and
off-balance sheet exposures for bank holding companies. The guidelines require a
minimum total risk-based capital ratio of eight percent, with half of the total
in the form of Tier 1 capital. U. S. Bancorp's Tier 1 capital is comprised
primarily of common equity and perpetual preferred stock, less goodwill and
certain other intangibles, and excludes the equity impact of adjusting available
for sale securities to market value. Total capital also includes qualifying
subordinated debt and a portion of the allowance for credit losses, as defined.
The risk-based capital rules have been supplemented by a leverage ratio,
defined as Tier 1 capital to adjusted quarterly average total assets. Banking
organizations other than those which are most highly rated are expected to
maintain ratios at least 100 to 200 basis points above the minimum three percent
level, depending on their financial condition.
Each subsidiary bank is subjected to capital requirements similar to the
requirements for bank holding companies. At September 30, 1996, all of U. S.
Bancorp's banking subsidiaries met the risk-based capital ratio and leverage
ratio requirements for "well-capitalized" banks. The banking subsidiaries'
ratios are expected to be maintained at such levels by the retention of earnings
and, if necessary, the issuance of additional capital-qualifying securities.
The risk-based capital and capital leverage ratios for U. S. Bancorp and
its significant bank subsidiaries at September 30, 1996 are presented in the
table below:
<TABLE>
<CAPTION>
Risk-based
Capital Ratios
------------------------
Total Total Leverage
(In Millions) Assets Tier 1 Capital Ratio
------- ----- ----- -----
<S> <C> <C> <C> <C>
U.S. Bancorp (Consolidated) $33,213 7.46% 11.19% 7.50%
Bank Subsidiaries
U.S. Bank of Oregon 14,029 6.73 10.41 7.49
U.S. Bank of Washington 9,506 7.45 11.13 7.87
U.S. Bank of Idaho 3,816 10.68 11.94 8.80
U.S. Bank of California 1,921 10.63 12.93 8.23
U.S. Bank of Nevada 1,083 9.21 11.72 6.96
U.S. Bank of Utah 781 9.23 10.48 7.79
</TABLE>
27
<PAGE> 28
At September 30, 1996, common shareholders' equity was $2.6 billion. For
the third quarter of 1996, average common equity to average total assets
increased to 8.24 percent from 8.20 percent in the third quarter of 1995. The
quarterly dividend rates were $.31 and $.28 for the third quarters of 1996 and
1995, respectively.
FORWARD-LOOKING INFORMATION
Statements appearing in this report which are not historical in nature,
including the discussions of the effects of recent mergers and the adequacy of
U. S. Bancorp's capital resources, are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are subject to risks and uncertainties that may cause actual future
results to differ materially. Such risks and uncertainties with respect to U. S.
Bancorp include those related to the economic environment, particularly in the
region in which U. S. Bancorp operates, competitive products and pricing, fiscal
and monetary policies of the U. S. government, changes in government regulations
affecting financial institutions, including regulatory fees and capital
requirements, changes in prevailing interest rates, acquisitions and the
integration of acquired businesses, credit risk management and asset/liability
management, the financial and securities markets, and the availability of and
costs associated with sources of liquidity.
28
<PAGE> 29
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits filed herewith are listed in the Exhibit Index on
page 31 of this report.
(b) During the quarter ended September 30, 1996, no reports on
Form 8-K were filed.
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U. S. BANCORP
(Registrant)
Date: November 13, 1996 By: /s/ STEVEN P. ERWIN
----------------------------
Steven P. Erwin
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
30
<PAGE> 31
EXHIBIT INDEX
Exhibit
-------
12.1 U. S. Bancorp and Subsidiaries - Computation of Ratios of Consolidated
Earnings to Fixed Charges.
12.2 U. S. Bancorp and Subsidiaries - Capital Ratios.
27 Financial Data Schedule.
31
<PAGE> 1
EXHIBIT 12.1
U.S. BANCORP AND SUBSIDIARIES
COMPUTATION OF RATIOS OF CONSOLIDATED
EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
(In Thousands) 1996
-------------
<S> <C>
Considering Interest on Deposits as an Operating Expense
Net income $ 358,219
Income taxes 196,213
----------
Earnings before income taxes 554,432
----------
Add fixed charges
Interest on borrowed funds 187,615
Interest income from federal funds sold (A) (4,677)
Interest component of leases (B) 11,321
----------
Total fixed charges 194,259
----------
Earnings before income taxes and fixed charges $ 748,691
==========
Ratio of earnings to total fixed charges 3.85 x
==========
Considering Interest on Deposits as Fixed Charges
Fixed charges as shown above $ 194,259
Interest on deposits 571,572
----------
Total fixed charges 765,831
Add earnings before income taxes 554,432
----------
Earnings before income taxes and fixed charges $1,320,263
==========
Ratio of earnings to total fixed charges 1.72 x
==========
</TABLE>
- -----------------
(A) Approximates interest expense related to federal funds purchased
transactions for purposes other than the funding of banking
subsidiaries' operations.
(B) Interest component of leases includes imputed interest on capitalized
leases and approximately one-third of rental expense, which
approximates the interest component of operating leases.
32
<PAGE> 1
EXHIBIT 12.2
U.S. BANCORP AND SUBSIDIARIES
CAPITAL RATIOS
<TABLE>
<CAPTION>
September 30,
--------------------------------------
(In Thousands) 1996 1995
---------------- ----------------
<S> <C> <C>
Total assets as reported $33,213,390 $30,845,290
Shareholders' equity as reported 2,786,462 2,710,261
Tier 1 capital 2,410,254 2,501,790
Total capital 3,617,748 3,157,066
Weighted risk assets 32,297,560 27,708,045
Adjusted quarterly average assets 32,121,724 29,994,645
Ratios
Tier 1 capital to weighted risk assets 7.46% 9.03%
Total capital to weighted risk assets 11.19 11.39
Tier 1 capital to adjusted average assets (leverage ratio) 7.50 8.34
</TABLE>
33
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,112,175
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 505,723
<TRADING-ASSETS> 131,241
<INVESTMENTS-HELD-FOR-SALE> 3,089,827
<INVESTMENTS-CARRYING> 825,265
<INVESTMENTS-MARKET> 836,213
<LOANS> 24,583,213
<ALLOWANCE> 466,018
<TOTAL-ASSETS> 33,213,390
<DEPOSITS> 24,563,178
<SHORT-TERM> 3,238,464
<LIABILITIES-OTHER> 616,665
<LONG-TERM> 1,626,289
150,000
0
<COMMON> 755,212
<OTHER-SE> 1,881,250
<TOTAL-LIABILITIES-AND-EQUITY> 33,213,390
<INTEREST-LOAN> 1,633,096
<INTEREST-INVEST> 174,190
<INTEREST-OTHER> 35,475
<INTEREST-TOTAL> 1,842,761
<INTEREST-DEPOSIT> 571,572
<INTEREST-EXPENSE> 759,187
<INTEREST-INCOME-NET> 1,083,574
<LOAN-LOSSES> 94,737
<SECURITIES-GAINS> 5,277
<EXPENSE-OTHER> 883,981
<INCOME-PRETAX> 554,432
<INCOME-PRE-EXTRAORDINARY> 358,219
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 358,219
<EPS-PRIMARY> 2.30
<EPS-DILUTED> 2.30
<YIELD-ACTUAL> 5.27
<LOANS-NON> 150,263
<LOANS-PAST> 43,318
<LOANS-TROUBLED> 5,433
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 434,508
<CHARGE-OFFS> 105,088
<RECOVERIES> 27,006
<ALLOWANCE-CLOSE> 466,018
<ALLOWANCE-DOMESTIC> 466,018
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
