================================================================================
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 EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE 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)
DELAWARE 41-0255900
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
601 SECOND AVENUE SOUTH,
MINNEAPOLIS, MINNESOTA 55402-4302
(Address of principal executive offices and Zip Code)
612-973-1111
(Registrant's telephone number, including area code)
FIRST BANK SYSTEM, INC.
(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 Eexchange 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.
Class Outstanding as of July 31, 1997
Common Stock, $1.25 Par Value 133,920,465 shares
================================================================================
<PAGE>
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- -----------------------
June 30 June 30 June 30 June 30
(Dollars in Millions, Except Per Share Data) 1997 1996 1997 1996
==========================================================================================================
<S> <C> <C> <C> <C>
Income before nonrecurring items .................. $ 178.3 $ 167.1 $ 350.1 $ 327.2
Nonrecurring items ................................ -- 87.0 -- 103.7
---------------------------------------------------
Net income ........................................ $ 178.3 $ 254.1 $ 350.1 $ 430.9
===================================================
PER COMMON SHARE
Primary net income ................................ $ 1.32 $ 1.81 $ 2.59 $ 3.09
Fully diluted net income .......................... 1.31 1.78 2.57 3.04
Earnings on a cash basis (fully diluted)* ......... 1.46 1.92 2.87 3.51
Dividends paid .................................... .4650 .4125 .9300 .8250
Common shareholders' equity ....................... 23.64 22.68
PER COMMON SHARE BEFORE NONRECURRING ITEMS
Primary income .................................... 1.32 1.18 2.59 2.34
Fully diluted income .............................. 1.31 1.17 2.57 2.31
Earnings on a cash basis (fully diluted)* ......... 1.46 1.31 2.87 2.57
---------------------------------------------------
FINANCIAL RATIOS
Return on average assets .......................... 2.02% 2.85% 2.01% 2.44%
Return on average common equity ................... 23.4 32.4 23.3 27.9
Efficiency ratio .................................. 47.7 40.8 48.1 48.7
Net interest margin (taxable-equivalent basis) .... 4.91 4.91 4.94 4.89
SELECTED FINANCIAL RATIOS BEFORE NONRECURRING ITEMS
Return on average assets .......................... 2.02 1.87 2.01 1.85
Return on average common equity ................... 23.4 21.3 23.3 21.1
Efficiency ratio .................................. 47.7 50.1 48.1 50.4
===================================================
June 30 December 31
1997 1996
-----------------------
PERIOD END
Loans .............................................. $ 27,863 $ 27,128
Allowance for credit losses ........................ 508 517
Assets ............................................. 37,729 36,489
Total shareholders' equity ......................... 3,163 3,053
Tangible common equity to total assets** ........... 6.8% 6.7%
Tier 1 capital ratio ............................... 7.4 7.2
Total risk-based capital ratio ..................... 12.2 12.0
Leverage ratio ..................................... 7.2 6.8
================================================================================
</TABLE>
* Calculated by adding amortization of goodwill and other intangible assets to
net income.
** Defined as common equity less goodwill as a percentage of total assets less
goodwill.
Refer to Management's Discussion and Analysis on page 2 for a description of
nonrecurring items.
TABLE OF CONTENTS AND FORM 10-Q CROSS-REFERENCE INDEX
PART I -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 2).. 2
Financial Statements (Item 1)................................................................... 16
PART II -- OTHER INFORMATION
Changes in Securities (Item 2).................................................................. 29
Submission of Matters to a Vote of Security Holders (Item 4).................................... 29
Exhibits and Reports on Form 8-K (Item 6)....................................................... 29
Signature....................................................................................... 29
Exhibit 3(a) -- Restated Certificate of Incorporation........................................... 29
Exhibit 3(b) -- By-Laws, as amended............................................................. 29
Exhibit 4 -- Certificate of Designations for U.S. Bancorp 8 1/8% Cumulative Preferred Stock.... 29
Exhibit 11 -- Computation of Primary and Fully Diluted Net Income Per Common Share.............. 30
Exhibit 12 -- Computation of Ratio of Earnings to Fixed Charges................................. 31
Exhibit 27 -- Article 9 Financial Data Schedule................................................. ***
</TABLE>
***Copies of this exhibit will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the exhibit.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
On August 1, 1997, First Bank System, Inc. (the "Company") issued 109.9 million
shares to acquire U.S. Bancorp ("USBC") and amended its Certificate of
Incorporation to increase the number of common shares which it has authority to
issue from 200 million shares to 500 million shares. As of the acquisition date,
the combined institution, now known as U.S. Bancorp, had approximately $70
billion in assets, $49 billion in deposits and served nearly four million
households and 475,000 businesses in 17 contiguous states from Illinois to
Washington. The Company exchanged .755 shares of its common stock for each share
of USBC common stock. USBC's outstanding stock options were also converted into
stock options for the Company's common stock. In addition, each outstanding
share of USBC cumulative preferred stock was converted into one share of
preferred stock of the combined company, having substantially identical terms.
The transaction will be accounted for as a pooling-of-interests. For purposes of
this Management's Discussion and Analysis, the information relates only to the
former First Bank System, Inc. and does not reflect the impact of the merger
with USBC.
EARNINGS SUMMARY -- The Company reported second quarter 1997 operating earnings
(net income excluding nonrecurring items) of $178.3 million compared with $167.1
million in the second quarter of 1996. On a fully diluted per share basis,
operating earnings were $1.31 in the second quarter of 1997, compared with $1.17
in the second quarter of 1996, an increase of 12 percent. Return on average
assets and return on average common equity, excluding nonrecurring items, were
2.02 percent and 23.4 percent, respectively, in the second quarter of 1997,
compared with returns of 1.87 percent and 21.3 percent in the second quarter of
1996. Excluding nonrecurring items, the efficiency ratio (the ratio of expenses
to revenues) improved to 47.7 percent in the second quarter of 1997 from 50.1
percent in the second quarter of 1996.
Operating earnings for the second quarter of 1997 reflected growth in
noninterest income and a decrease in noninterest expense. Net interest income on
a taxable-equivalent basis was essentially flat at $389.6 million, compared with
the second quarter of 1997. Noninterest income, excluding nonrecurring items,
increased $15.9 million (7 percent) from the second quarter of 1996. The
increase was primarily the result of growth in credit card fee revenue and trust
fees. Second quarter noninterest expense decreased $8.1 million (3 percent) from
the second quarter of 1996, reflecting ongoing productivity improvement.
Several nonrecurring items affected operating results in the second quarter
of 1996. The impact of these items increased net income $87.0 million ($140.4
million on a pretax basis) or $.61 per share. Nonrecurring gains included a
final payment received for the termination of the First Interstate Bancorp
merger agreement, a refund of state income taxes and net securities gains.
Operating earnings for the first half of 1997 were $350.1 million compared
with $327.2 million in the first half of 1996. On a fully diluted per share
basis, operating earnings were $2.57 in the first half of 1997, compared with
$2.31 in the first half of 1996, an increase of 11 percent. Year-to-date return
on average assets and return on average common equity, excluding nonrecurring
items, were 2.01 percent and 23.3 percent, respectively, in the first six months
of 1997, compared with returns of 1.85 percent and 21.1 percent, in the first
half of 1996. Excluding nonrecurring items, the year-to-date efficiency ratio
improved to 48.1 percent from 50.4 percent in 1996.
Nonrecurring items totaled $103.7 million ($189.0 million on a pre-tax
basis), or $.73 per share for the first six months of 1996. Nonrecurring gains
in the first six months of 1996 included payment received for the termination of
the First Interstate Bancorp merger agreement, a refund of state income taxes, a
gain on the sale of the Company's mortgage banking operations, and net
securities gains. Nonrecurring charges occurring in the first six months of 1996
included merger and integration charges, branch distribution resizing expenses,
a valuation adjustment of cardholder and core deposit intangibles, a one-time
employee bonus, costs to acquire software and the write off of other
miscellaneous assets.
<PAGE>
TABLE 1 SUMMARY OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------------------------------
(Taxable-Equivalent Basis; June 30 June 30 June 30 June 30
Dollars In Millions, Except Per Share Data) 1997 1996 1997 1996
====================================================================================================================
<S> <C> <C> <C> <C>
Interest income ......................................... $ 681.0 $ 670.2 $ 1,342.0 $ 1,329.5
Interest expense ........................................ 291.4 278.4 567.6 558.4
-------------------------------------------------------
Net interest income ................................... 389.6 391.8 774.4 771.1
Provision for credit losses ............................. 39.0 35.0 76.0 66.0
-------------------------------------------------------
Net interest income after provision for credit losses . 350.6 356.8 698.4 705.1
Nonrecurring income ..................................... -- 140.4 -- 315.8
Other noninterest income ................................ 235.4 219.5 461.2 427.6
Nonrecurring charges .................................... -- -- -- 126.8
Other noninterest expense ............................... 298.1 306.2 594.1 603.8
-------------------------------------------------------
Income before income taxes ............................ 287.9 410.5 565.5 717.9
Taxable-equivalent adjustment ........................... 4.6 5.5 9.4 10.2
Income taxes ............................................ 105.0 150.9 206.0 276.8
-------------------------------------------------------
Net income ............................................ $ 178.3 $ 254.1 $ 350.1 $ 430.9
=======================================================
Return on average assets ................................ 2.02% 2.85% 2.01% 2.44%
Return on average common equity ......................... 23.4 32.4 23.3 27.9
Net interest margin ..................................... 4.91 4.91 4.94 4.89
Efficiency ratio ........................................ 47.7 40.8 48.1 48.7
Efficiency ratio before nonrecurring items .............. 47.7 50.1 48.1 50.4
=======================================================
Per Common Share:
Net income .............................................. $ 1.32 $ 1.81 $ 2.59 $ 3.09
Dividends paid .......................................... .4650 .4125 .9300 .8250
====================================================================================================================
</TABLE>
Credit quality remained strong during the second quarter of 1997.
Nonperforming assets totaled $130.6 million at June 30, 1997, down $7.1 million
(5 percent) from December 31, 1996, and $25.7 million (16 percent) from June 30,
1996. The ratio of allowance for credit losses to nonperforming assets continued
to indicate very strong reserve coverage at 389 percent, compared with 381
percent at March 31, 1997, and 339 percent at June 30, 1996.
Operating results reflect the following acquisition and divestiture
activity: the February 1997 securitization and sale of $420 million of corporate
charge card receivables; the January 1997 acquisition of the bond indenture
services and paying agency business of Comerica Incorporated; the February 1996
acquisition of Omaha-based FirsTier Financial, Inc. ("FirsTier"); and, the March
1996 sale of the Company's residential mortgage servicing and loan production
business.
LINE OF BUSINESS FINANCIAL REVIEW
Financial performance is measured by major lines of business which include:
Retail Banking, Payment Systems, Business Banking and Private Financial
Services, Commercial Banking, and Corporate Trust and Institutional Financial
Services. Business line results are derived from the Company's business unit
profitability reporting system. Designations, assignments, and allocations may
change from time to time as management accounting systems are enhanced or
product lines change. During 1997 certain organization and methodology changes
were made and 1996 results are presented on a consistent basis.
RETAIL BANKING -- Retail Banking delivers products and services to the broad
consumer market and small business through branch offices, telemarketing, direct
mail, and automated teller machines ("ATMs"). Operating earnings increased 7
percent in the second quarter and first six months of 1997 compared with the
same periods of 1996. Second quarter return on average assets increased to 1.81
percent from 1.61 percent in the same quarter a year ago. Net tangible return on
average common equity increased to 44.8 percent compared with 38.5 percent in
the second quarter of the prior year. Year-to-date profitability ratios showed
similar trends.
Net interest and noninterest income remained relatively flat in the second
quarter and first six months of 1997 as compared with the same periods in the
prior year, reflecting growth in core commercial and consumer assets
<PAGE>
TABLE 2 LINE OF BUSINESS FINANCIAL PERFORMANCE
<TABLE>
<CAPTION>
Retail Payment Business Banking and
Banking Systems Private Financial Services
--------------------------------------------------------------------------------------------
For the Three Months Ended June 30 Percent Percent Percent
(Dollars in Millions) 1997 1996 Change 1997 1996 Change 1997 1996 Change
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONDENSED INCOME STATEMENT:
Net interest income
(taxable-equivalent basis) ......... $ 192.7 $ 195.6 (1.5)% $ 32.9 $ 36.8 (10.6)% $ 97.6 $ 97.1 .5%
Provision for credit losses ......... 7.3 5.6 30.4 25.4 23.6 7.6 3.5 3.2 9.4
Noninterest income .................. 39.0 39.8 (2.0) 97.2 82.8 17.4 31.9 30.9 3.2
Noninterest expense ................. 132.7 144.0 (7.8) 56.9 53.1 7.2 52.2 52.2 --
Income taxes and
taxable-equivalent adjustment ...... 34.9 32.7 18.2 16.4 28.1 27.7
------------------- -------------------- -------------------
Operating earnings .................. $ 56.8 $ 53.1 7.0 $ 29.6 $ 26.5 11.7 $ 45.7 $ 44.9 1.8
=================== ==================== ===================
Net nonrecurring items (after-tax) ..
Net income ........................
AVERAGE BALANCE SHEET DATA:
Commercial loans .................... $ 576 $ 551 4.5 $ 1,035 $ 1,167 (11.3) $ 7,279 $ 6,930 5.0
Consumer loans, excluding
residential mortgage ............... 6,792 6,552 3.7 2,812 2,512 11.9 484 469 3.2
Residential mortgage loans .......... 2,758 3,301 (16.4) -- -- -- 145 124 16.9
Assets .............................. 12,557 13,283 (5.5) 4,536 4,497 .9 10,052 9,931 1.2
Deposits ............................ 15,654 17,182 (8.9) 40 45 (11.1) 3,774 3,728 1.2
Common equity ....................... 944 1,012 (6.7) 354 374 (5.3) 931 977 (4.7)
------------------- -------------------- -------------------
Return on average assets ............ 1.81% 1.61% 2.62% 2.37% 1.82% 1.82%
Return on average common equity
("ROCE") ........................... 24.1 21.1 33.5 28.5 19.7 18.5
Net tangible ROCE** ................. 44.8 38.5 53.5 48.9 37.1 34.8
Efficiency ratio .................... 57.3 61.2 43.7 44.4 40.3 40.8
Efficiency ratio on a cash basis** .. 54.5 58.6 42.0 42.5 38.0 38.4
==================================================================================================================================
Retail Payment Business Banking and
Banking Systems Private Financial Services
-------------------------------------------------------------------------------------------
For the Six Months Ended June 30 Percent Percent Percent
(Dollars in Millions) 1997 1996 Change 1997 1996 Change 1997 1996 Change
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONDENSED INCOME STATEMENT:
Net interest income
(taxable-equivalent basis) ......... $ 384.2 $ 387.0 (.7)% $ 68.8 $ 74.7 (7.9)% $ 191.9 $ 185.2 3.6%
Provision for credit losses ......... 11.5 11.7 (1.7) 52.3 42.8 22.2 6.8 6.3 7.9
Noninterest income .................. 79.0 79.8 (1.0) 183.0 151.4 20.9 64.9 58.7 10.6
Noninterest expense ................. 265.2 280.5 (5.5) 111.2 102.0 9.0 105.2 98.2 7.1
Income taxes and
taxable-equivalent adjustment ...... 71.1 66.6 33.6 31.0 55.1 53.2
------------------- -------------------- -------------------
Operating earnings .................. $ 115.4 $ 108.0 6.9 $ 54.7 $ 50.3 8.7 $ 89.7 $ 86.2 4.1
=================== ==================== ===================
Net nonrecurring items (after-tax)...
Net income ........................
AVERAGE BALANCE SHEET DATA:
Commercial loans .................... $ 569 $ 516 10.3 $ 1,082 $ 1,051 2.9 $ 7,137 $ 6,667 7.0
Consumer loans, excluding
residential mortgage ............... 6,731 6,391 5.3 2,794 2,507 11.4 479 456 5.0
Residential mortgage loans .......... 2,813 3,543 (20.6) -- -- -- 136 116 17.2
Assets .............................. 12,491 13,097 (4.6) 4,606 4,408 4.5 9,966 9,606 3.7
Deposits ............................ 15,777 16,974 (7.1) 42 44 (4.5) 3,727 3,530 5.6
Common equity ....................... 952 1,016 (6.3) 353 359 (1.7) 922 915 .8
------------------- -------------------- -------------------
Return on average assets ............ 1.86% 1.66% 2.39 2.29% 1.82% 1.80%
Return on average common equity
("ROCE") ........................... 24.4 21.4 31.2 28.2 19.6 18.9
Net tangible ROCE** ................. 45.6 38.0 50.2 46.5 37.0 33.4
Efficiency ratio .................... 57.3 60.1 44.2 45.1 41.0 40.3
Efficiency ratio on a cash basis** .. 54.4 57.5 42.4 42.9 38.6 38.3
=================================================================================================================================
</TABLE>
* Not meaningful
**Calculated by excluding goodwill and other intangibles and the related
amortization.
Note: The Company's mortgage banking operations, which were sold in first
quarter 1996, and nonrecurring items are included in "Other".
<PAGE>
[WIDE TABLE 2 CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
Corporate Trust and
Commercial Institutional Financial Consolidated
Banking Services Other Company
- ---------------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent
1997 1996 Change 1997 1996 Change 1997 1996 1997 1996 Change
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 51.7 $ 50.3 2.8% $ 14.7 $ 12.0 22.5% $ -- $ -- $ 389.6 $ 391.8 (.6)%
2.8 2.6 7.7 -- -- -- -- -- 39.0 35.0 11.4
14.1 15.2 (7.2) 53.2 50.8 4.7 -- -- 235.4 219.5 7.2
17.7 20.3 (12.8) 38.6 36.6 5.5 -- -- 298.1 306.2 (2.6)
17.2 16.2 11.2 10.0 -- -- 109.6 103.0
------------------ ----------------- -----------------------------------------
$ 28.1 $ 26.4 6.4 $ 18.1 $ 16.2 11.7 -- -- $ 178.3 $ 167.1 6.7
================== =================
-- 87.0 -- 87.0 *
-----------------------------------------
$ -- $ 87.0 $ 178.3 $ 254.1 (29.8)
=========================================
$ 5,593 $ 5,232 6.9 $ -- $ -- -- $ -- $ 1 $ 14,483 $ 13,881 4.3
-- -- -- -- -- -- -- -- 10,088 9,533 5.8
-- -- -- -- -- -- -- 93 2,903 3,518 (17.5)
7,052 6,759 4.3 1,238 1,223 1.2 -- 229 35,435 35,922 (1.4)
1,554 1,562 (.5) 1,551 1,269 22.2 -- 255 22,573 24,041 (6.1)
494 473 4.4 331 290 14.1 -- 6 3,054 3,132 (2.5)
------------------ ----------------- -----------------------------------------
1.60% 1.57% * * 2.02% 1.87%
22.8 22.4 21.9% 22.5% 23.4 21.3
23.7 23.4 40.4 43.7 38.4 35.4
26.9 31.0 56.8 58.3 47.7 50.1
26.4 30.5 49.3 50.8 44.5 46.8
=================================================================================================================================
Corporate Trust and
Commercial Institutional Financial Consolidated
Banking Services Other Company
- --------------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent
1997 1996 Change 1997 1996 Change 1997 1996 1997 1996 Change
================================================================================================================================
$ 101.6 $ 99.4 2.2% $ 27.9 $ 21.5 29.8% $ -- $ 3.3 $ 774.4 $ 771.1 .4%
5.4 5.2 3.8 -- -- -- -- -- 76.0 66.0 15.2
28.9 32.7 (11.6) 105.4 100.5 4.9 -- 4.5 461.2 427.6 7.9
37.1 39.8 (6.8) 75.4 71.4 5.6 -- 11.9 594.1 603.8 (1.6)
33.5 33.2 22.1 19.3 -- (1.6) 215.4 201.7
------------------ ----------------- -----------------------------------------
$ 54.5 $ 53.9 1.1 $ 35.8 $ 31.3 14.4 -- (2.5) $ 350.1 $ 327.2 7.0
================== =================
-- 103.7 -- 103.7 *
-----------------------------------------
$ -- $ 101.2 $ 350.1 $ 430.9 (18.8)
=========================================
$ 5,451 $ 5,227 4.3 $ -- $ -- -- $ -- $ 1 $ 14,239 $ 13,462 5.8
-- -- -- -- -- -- -- -- 10,004 9,354 6.9
-- -- -- -- -- -- -- 156 2,949 3,815 (22.7)
6,880 6,837 .6 1,235 1,224 .9 -- 311 35,178 35,483 (.9)
1,531 1,526 .3 1,500 1,177 27.4 -- 293 22,577 23,544 (4.1)
482 479 .6 324 286 13.3 -- 27 3,033 3,082 (1.6)
------------------ ---------------- -----------------------------------------
1.60% 1.59% * * 2.01% 1.85%
22.8 22.6 22.3% 22.0% 23.3 21.1
23.8 23.6 41.2 42.7 38.4 34.5
28.4 30.1 56.6 58.5 48.1 50.4
28.0 29.7 49.0 51.1 44.9 47.2
=================================================================================================================================
</TABLE>
<PAGE>
offset by runoff in the residential mortgage loan portfolio. Noninterest expense
decreased in 1997 compared with 1996, reflecting the benefits of continued
streamlining of branch operations, as well as the integration of recent
acquisitions. The second quarter 1997 efficiency ratio on a cash basis improved
to 54.5 percent from 58.6 percent in the second quarter of 1996 while the
year-to-date efficiency ratio improved to 54.4 percent from 57.5 percent in
1996.
PAYMENT SYSTEMS -- Payment Systems includes consumer and business credit cards,
corporate and purchasing card services, card-accessed secured and unsecured
lines of credit, ATM processing, and merchant processing. Operating earnings
increased 12 percent in the second quarter and 9 percent in the first six months
of 1997 compared with the same periods of 1996. Second quarter return on average
assets was 2.62 percent, compared with 2.37 percent in the second quarter of
1996, and net tangible return on average common equity was 53.5 percent compared
with 48.9 percent for the same quarter in the previous year.
Fee-based noninterest income increased 17 percent in the second quarter and
21 percent in the first six months of 1997 compared with the same periods of
1996. The increases were due to growth in the sales volume of the Corporate
Card, the Purchasing Card, and the FBS WorldPerks(R) VISA(R) card, partially
offset by the effect of the first quarter 1997 securitization. Net interest
income decreased due to the continued growth in noninterest bearing corporate
charge receivables, partially offset by the securitization. In addition, late
fees related to the consumer portfolio declined. Noninterest expense increased
due to higher variable transaction costs related to increased sales volume. The
efficiency ratio on a cash basis improved to 42.0 percent in the second quarter
and 42.5 percent in the first six months of 1997 from 42.4 percent and 42.9
percent in the same periods of 1996.
BUSINESS BANKING AND PRIVATE FINANCIAL SERVICES -- Business Banking and Private
Financial Services includes middle-market banking services, private banking, and
personal trust. Operating earnings increased 2 percent in the second quarter and
4 percent in the first six months of 1997, compared with the same periods of
1996. Second quarter and year-to-date return on average assets was 1.82 percent,
compared with returns of 1.82 percent and 1.80 percent in the same periods of
1996. Second quarter and year-to-date net tangible return on average common
equity were 37.1 percent and 37.0 percent, compared with 34.8 percent and 33.4
percent in the same periods of the prior year.
Second quarter and year-to-date net interest income increased over the same
periods in 1996 reflecting an increase in average loans. The increase in second
quarter and year-to-date noninterest income resulted primarily from core growth
in personal trust fees and acquisitions. Excluding gains on other real estate
owned, second quarter noninterest expense decreased 2 percent compared with
1996. The 1997 year-to-date increase in noninterest expense relates primarily to
acquisitions early in 1996. The efficiency ratio on a cash basis was 38.0
percent in the second quarter and 38.6 percent in the first six months of 1997,
compared with 38.4 percent and 38.3 percent in the same periods of 1996.
COMMERCIAL BANKING -- Commercial Banking provides lending, treasury management,
and other financial services to middle-market, large corporate and mortgage
banking companies. Operating earnings increased 6 percent in the second quarter
and remained relatively flat in the first six months of 1997 compared with the
same periods in the prior year. Second quarter return on average assets was 1.60
percent compared with 1.57 percent in 1996, and net tangible return on average
common equity was 23.7 percent compared with 23.4 percent in 1996.
Year-to-date noninterest income decreased 12 percent from the same period
of 1996 due to a $3.1 million gain on the sale of assets in the first half of
1996. The decrease in noninterest expense for both the second quarter and first
six months of 1997, compared with the same periods in 1996, reflected the
benefits of operational efficiencies. The efficiency ratio on a cash basis
improved to 26.4 percent in the second quarter and 28.0 percent in the first six
months of 1997, compared with 30.5 percent and 29.7 percent in 1996.
CORPORATE TRUST AND INSTITUTIONAL FINANCIAL SERVICES -- Corporate Trust and
Institutional Financial Services includes institutional and corporate trust
services, investment management services, and a full-service brokerage company.
Operating earnings increased 12 percent in the second quarter and 14 percent in
the first six months of 1997 compared with the same periods of the prior year.
The net tangible return on average common equity was 40.4 percent in the second
quarter and 41.2 percent in the first half of 1997 compared with 43.7 percent
and 42.7 percent in the same periods of the prior year.
Net interest income increased over 1996, reflecting the acquisitions of the
corporate trust businesses of BankAmerica Corporation and Comerica Incorporated.
The efficiency ratio on a cash basis improved to 49.3 percent in the second
quarter and 49.0 percent in the first half of 1997 from 50.8 percent in the
second quarter and 51.1 percent in the first half of 1996, reflecting the
effective integration of acquisitions, process re-engineering efforts, and
revenue growth.
<PAGE>
TABLE 3 NET INTEREST INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------------------------------
June 30 June 30 June 30 June 30
(Dollars In Millions) 1997 1996 1997 1996
========================================================================================================================
<S> <C> <C> <C> <C>
Net interest income (taxable-equivalent basis) .......... $ 389.6 $ 391.8 $ 774.4 $ 771.1
==========================================================
Average balances of earning assets supported by:
Interest-bearing liabilities ........................... $ 24,682 $ 24,972 $ 24,575 $ 24,816
Noninterest-bearing liabilities ........................ 7,154 7,133 7,021 6,922
----------------------------------------------------------
Total earning assets .................................. $ 31,836 $ 32,105 $ 31,596 $ 31,738
==========================================================
Average yields and weighted average rates
(taxable-equivalent basis):
Earning assets yield .................................. 8.58% 8.40% 8.57% 8.42%
Rate paid on interest-bearing liabilities ............. 4.74 4.48 4.66 4.53
----------------------------------------------------------
Gross interest margin ................................... 3.84% 3.92% 3.91% 3.89%
==========================================================
Net interest margin ..................................... 4.91% 4.91% 4.94% 4.89%
==========================================================
Net interest margin without taxable-equivalent increments 4.85% 4.84% 4.88% 4.82%
========================================================================================================================
</TABLE>
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME -- Net interest income on a taxable-equivalent basis was
$389.6 million in the second quarter of 1997, compared with $391.8 million in
the second quarter of 1996. The modest decline was the result of lower earning
asset volumes in the second quarter of 1997, resulting from planned reductions
in investment securities and residential mortgage loans. Average securities
decreased $905 million (21 percent) from the second quarter of 1996, reflecting
paydowns, maturities and sales. Average residential mortgage loans decreased
$615 million (17 percent) from the second quarter of 1996, as the Company
continues to shift its focus to other, more profitable, loan products. Excluding
mortgage-related loan balances and the effect of the $420 million first quarter
1997 corporate card securitization, average loans for the second quarter
increased $1.7 billion (8 percent) from the second quarter of 1996. This
increase reflected growth in both core commercial and consumer loans.
Net interest income on a taxable-equivalent basis for the first six months
of 1997 was $774.4 million, compared with $771.1 million in the first half of
1996. The increase was primarily attributable to an increase in loans fees and a
more favorable mix of earning assets, including an increase in average loans of
$561 million (2 percent) from the first half of 1996. Excluding mortgage-related
loan balances and the effect of the February 1997 corporate card securitization,
average loans for the first half of 1997 were higher by $1.7 billion (8 percent)
than the first half of 1996. The increase reflected growth in core commercial
and consumer loans, as well as the February 1996 FirsTier acquisition. Average
securities decreased $794 million from the first half of 1996 reflecting both
maturities and sales. The net interest margin in the second quarter and first
six months of 1997 was essentially unchanged at 4.91 percent and 4.94 percent
compared with 4.91 percent and 4.89 percent in 1996.
PROVISION FOR CREDIT LOSSES -- The provision for credit losses was $39.0 million
in the second quarter of 1997, up $4.0 million (11 percent) from the second
quarter of 1996. The provision for the first half of 1997 increased $10.0
million (15 percent) to $76.0 million, from the first half of 1996. Second
quarter and year-to-date net charge-offs totaled $43.1 million and $84.4
million, up from $36.0 million and $69.5 million in the same periods of 1996.
These increases resulted from increased loan volumes and higher consumer net
charge-offs. Refer to "Corporate Risk Management" for further information on
credit quality.
NONINTEREST INCOME -- Second quarter 1997 noninterest income was $235.4 million,
an increase of $15.9 million before nonrecurring items from the second quarter
of 1996. Noninterest income in the first half of 1997 was $461.2 million
compared with $427.6 million before nonrecurring items in 1996, an increase of
$33.6 million. The improvements resulted primarily from growth in trust fees and
credit card fee revenue.
Credit card fee revenue increased 18 percent in the second quarter and 20
percent in the first six months of 1997, compared with the same periods of 1996.
The increases were a result of higher sales volumes for Purchasing and Corporate
cards and the First Bank
<PAGE>
TABLE 4 NONINTEREST INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ------------------
June 30 June 30 June 30 June 30
(Dollars In Millions) 1997 1996 1997 1996
=======================================================================================
<S> <C> <C> <C> <C>
Credit card fee revenue ................... $ 86.4 $ 73.5 $163.7 $136.3
Trust fees ................................ 66.3 58.5 132.3 114.7
Service charges on deposit accounts ....... 34.0 34.7 70.4 68.6
Investment products fees and commissions .. 9.0 8.7 17.6 17.2
Trading account profits and commissions ... 3.1 3.8 6.2 6.5
Other ..................................... 36.6 40.3 71.0 84.3
---------------------------------------
Subtotal ................................. 235.4 219.5 461.2 427.6
Termination fee, net ...................... -- 75.0 -- 190.0
State income tax refund ................... -- 65.0 -- 65.0
Gain on sale of mortgage banking operations -- -- -- 45.8
Securities gains .......................... -- .4 -- 15.0
---------------------------------------
Nonrecurring gains ....................... -- 140.4 -- 315.8
---------------------------------------
Total noninterest income ............... $235.4 $359.9 $461.2 $743.4
=======================================================================================
</TABLE>
WorldPerks VISA card, partially offset by the effect of the first quarter 1997
securitization. Excluding the effect of the corporate card securitization,
credit card fee revenue would have increased 24 percent in the second quarter
and 25 percent in the first six months of 1997, compared with the same periods
of 1996. Trust fees were up due to core growth in personal, corporate and
institutional trust. Year-to-date other noninterest income decreased primarily
due to the divestiture of the Company's mortgage banking operations in the first
quarter of 1996.
Noninterest income in second quarter 1996 included nonrecurring gains of
$140.4 million including: $75 million received as a final payment for the
termination of the First Interstate Bancorp merger agreement; a $65 million
state income tax refund, including interest; and, $.4 million in net securities
gains. Nonrecurring gains included in noninterest income in the first half of
1996 totaled $315.8 million, including: $190 million, net of expenses, received
for the termination of the First Interstate Bancorp merger agreement; a $65
million refund of state income taxes, including interest; a $45.8 million gain
on the sale of the Company's mortgage banking operations; and, $15.0 million in
net securities gains.
NONINTEREST EXPENSE -- Second quarter noninterest expense was $298.1 million, a
decrease of $8.1 million (3 percent), from the second quarter of 1996.
Year-to-date noninterest expense was $594.1 million, a decrease of $9.7 million
before nonrecurring items from the first half of 1996. The reduction in
operating expenses was achieved as a result of ongoing productivity improvement.
Excluding nonrecurring items, the Company's efficiency ratio improved to 47.7
percent for the quarter and 48.1 percent year-to-date, compared with 50.1
percent and 50.4 percent for the same periods a year ago.
Total salaries and benefits expense, excluding nonrecurring charges for the
second quarter and first six months of 1997, remained relatively flat compared
with the same periods in the previous year. Average full-time equivalent
employees decreased 7 percent to 12,247 in second quarter 1997 from 13,140 in
second quarter 1996. Compared with the same periods in 1996, FDIC insurance
expense was lower in the second quarter and first six months of 1997 as a result
of a rate reduction. Second quarter and year-to-date other personnel costs
decreased, compared with the same periods of 1996, reflecting expenses
associated with 1996 technology projects that are now complete.
Nonrecurring charges recorded in the first quarter of 1996 totaled $126.8
million, including: merger and integration charges of $31.3 million for the
acquisitions of FirsTier and the BankAmerica corporate trust business; $38.6
million in branch distribution resizing expenses; a $29.5 million valuation
adjustment to reduce the carrying value of credit card and core deposit
intangibles to their estimated fair value; $10.1 million for a one-time $750
per-employee bonus; and, $17.3 million to acquire credit card and revolving
credit software and to write-off other miscellaneous assets.
PROVISION FOR INCOME TAXES -- The provision for income taxes was $105.0 million
in the second quarter and $206.0 million in the first half of 1997, compared
with $150.9 million and $276.8 million in the same periods of 1996. The
decreases were primarily the result of lower levels of taxable income due to
several nonrecurring items occurring
<PAGE>
TABLE 5 NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------------------------
June 30 June 30 June 30 June 30
(Dollars In Millions, Except Per Employee Data) 1997 1996 1997 1996
====================================================================================================================
<S> <C> <C> <C> <C>
Salaries** .............................................. $ 116.8 $ 114.5 $ 231.7 $ 228.7
Employee benefits** ..................................... 25.0 26.4 51.5 54.4
------------------------------------------------------
Total personnel expense ............................... 141.8 140.9 283.2 283.1
Net occupancy ........................................... 24.5 24.2 49.5 50.0
Furniture and equipment ................................. 22.3 22.1 44.0 45.9
Goodwill and other intangible assets** .................. 20.0 19.9 39.8 37.8
Professional services** ................................. 10.1 10.9 20.1 19.2
Other personnel costs ................................... 9.6 14.0 19.6 23.7
Advertising and marketing ............................... 9.3 10.2 17.8 17.0
Telephone ............................................... 6.2 6.9 12.1 12.7
Third party data processing ............................. 5.8 5.3 11.5 10.7
Postage ................................................. 5.4 5.5 11.0 11.7
Printing, stationery and supplies ....................... 5.0 5.9 10.1 11.9
FDIC insurance .......................................... 1.4 3.6 2.8 7.1
Other** ................................................. 36.7 36.8 72.6 73.0
------------------------------------------------------
Subtotal .............................................. 298.1 306.2 594.1 603.8
Merger-related .......................................... -- -- -- 31.3
Branch distribution resizing ............................ -- -- -- 38.6
Goodwill and other intangible assets valuation adjustment -- -- -- 29.5
Special employee bonus .................................. -- -- -- 10.1
Other ................................................... -- -- -- 17.3
------------------------------------------------------
Nonrecurring charges .................................. -- -- -- 126.8
------------------------------------------------------
Total noninterest expense ........................... $ 298.1 $ 306.2 $ 594.1 $ 730.6
======================================================
Efficiency ratio* ....................................... 47.7% 40.8% 48.1% 48.7%
Efficiency ratio before nonrecurring items .............. 47.7 50.1 48.1 50.4
Average number of full-time equivalent employees ........ 12,247 13,140 12,397 13,193
Annualized personnel expense per employee** ............. $ 46,313 $ 42,892 $ 45,688 $ 42,917
====================================================================================================================
</TABLE>
* Computed as noninterest expense divided by the sum of net interest income on
a taxable-equivalent basis and noninterest income net of securities gains and
losses.
**Before effect of nonrecurring items.
in the second quarter and first six months of 1996, as discussed above.
BALANCE SHEET ANALYSIS
LOANS -- The Company's loan portfolio was $27.9 billion at June 30, 1997
compared with $27.1 billion at December 31, 1996. The portfolio of commercial
loans totaled $14.8 billion at June 30, 1997, up $677 million from December 31,
1996, despite $420 million of corporate charge card receivables securitized and
sold in the first quarter of 1997. The increase was primarily attributable to
growth in large corporate and middle-market business lending. Total consumer
loan outstandings were essentially flat at $13.1 billion at June 30, 1997,
compared with $13.0 billion at December 31, 1996. Excluding residential mortgage
loan balances, consumer loans were $10.2 billion at June 30, 1997 compared with
$10.0 billion at December 31, 1996, reflecting growth in core consumer loans.
SECURITIES -- At June 30, 1997, securities were $3.3 billion compared with $3.6
billion at December 31, 1996, consistent with planned reductions in the
investment portfolio.
DEPOSITS -- Noninterest-bearing deposits were $9.4 billion at June 30, 1997,
compared with $7.9 billion at December 31, 1996, reflecting deposits received
for third quarter 1997 corporate bond payments. Second quarter and year-to-date
1997 average noninterest-bearing deposits were essentially flat at $6.5 billion
and $6.4 billion compared with $6.6 billion and $6.4 billion for the same
periods of 1996. Interest-bearing deposits totaled $15.9
<PAGE>
billion at June 30, 1997, compared with $16.5 billion at December 31, 1996. The
decrease in interest-bearing deposit balances reflects customers moving funds
into alternative investment vehicles. Saving certificate balances remained
relatively stable at $814 million at June 30, 1997, compared with $796 million
at December 31, 1996.
BORROWINGS -- Short-term borrowings, which include federal funds purchased,
securities sold under agreements to repurchase and other short-term borrowings,
were $2.0 billion at June 30, 1997, down from $4.1 billion at year-end 1996. The
change was primarily due to the net maturity of $980 million of short-term bank
notes during the first six months of 1997 and a large inflow of customer
deposits on June 30, 1997, which reduced federal funds purchased.
Long-term debt was $5.7 billion at June 30, 1997, up from $3.6 billion at
December 31, 1996. The Company issued $2.6 billion of debt during the first half
of 1997. The effect of these issuances was partially offset by the maturity of
approximately $315 million of Federal Home Loan Bank advances and $85 million of
other debt during the first half of 1997.
CORPORATE RISK MANAGEMENT
CREDIT MANAGEMENT -- The Company's strategy for credit risk management includes
stringent, centralized credit policies, and standard underwriting criteria for
specialized lending categories, such as mortgage banking, real estate
construction, and consumer credit. The strategy also emphasizes diversification
on both a geographic and customer level, regular credit examinations, and
quarterly management reviews of large loans and loans experiencing deterioration
of credit quality. The Company strives to identify potential problem loans
early, take any necessary charge-offs promptly, and maintain strong reserve
levels. In the Company's retail banking operations, a standard credit scoring
system is used to assess consumer credit risks and to price consumer products
accordingly. Commercial banking operations rely on a strong credit culture that
combines prudent credit policies and individual lender accountability. In
addition, commercial lenders generally focus on middle-market companies within
their regions.
In evaluating its credit risk, the Company considers its loan portfolio
composition, the level of allowance coverage, and macroeconomic factors. Most
economic indicators in the Company's primary operating region, which, during the
first six months of 1997 included Minnesota, Colorado, Nebraska, North Dakota,
Montana, South Dakota, Illinois, Wisconsin, Iowa, Kansas, and Wyoming, compare
favorably with national trends. Approximately 80 percent of the Company's loan
portfolio consists of credit to businesses and consumers in this operating
region.
NET CHARGE-OFFS AND ALLOWANCE FOR CREDIT LOSSES -- Net loan charge-offs totaled
$43.1 million and $84.4 million in the second quarter and first half of 1997,
compared with $36.0 million and $69.5 million in the same periods of 1996.
Commercial loan net recoveries for the quarter and year-to-date were $1.9
million and $8.7 million compared with $4.3 million and $7.8 million for the
same periods of 1996. Second quarter and year-to-date consumer loan net
charge-offs increased $4.7 million and $15.8 million from the second quarter and
first half of 1996, reflecting higher average nonmortgage loan balances and
higher loss ratios in several categories, including
TABLE 6 NET CHARGE-OFFS AS A PERCENTAGE OF AVERAGE LOANS OUTSTANDING
Three Months Ended Six Months Ended
---------------------------------------
June 30 June 30 June 30 June 30
1997 1996 1997 1996
========================================================================
COMMERCIAL:
Commercial ................. .17% (.15)% .10% (.14)%
Real estate:
Commercial mortgage ....... (.74) (.23) (.93) (.18)
Construction .............. (.27) .86 .20 .44
-------------------------------------
Total commercial .......... (.05) (.12) (.12) (.12)
CONSUMER:
Residential mortgage ....... .11 .09 .09 .08
Credit card ................ 3.52 3.56 3.69 3.29
Other ...................... 1.08 .96 1.14 1.00
-------------------------------------
Total consumer ............ 1.39 1.24 1.45 1.18
-------------------------------------
Total ..................... .63% .54% .63% .52%
========================================================================
<PAGE>
TABLE 7 SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------------------
June 30 June 30 June 30 June 30
(Dollars In Millions) 1997 1996 1997 1996
======================================================================================================
<S> <C> <C> <C> <C>
Balance at beginning of period .................. $ 512.2 $ 530.1 $ 516.5 $ 473.5
CHARGE-OFFS:
Commercial:
Commercial .................................... 8.4 13.4 13.7 19.1
Real estate:
Commercial mortgage .......................... .8 6.2 1.6 11.7
Construction ................................. -- 1.0 1.2 1.0
------------------------------------------------
Total commercial ............................. 9.2 20.6 16.5 31.8
Consumer:
Residential mortgage .......................... 1.0 1.1 1.6 2.1
Credit card ................................... 29.3 25.8 58.9 47.0
Other ......................................... 25.1 22.1 51.8 45.2
------------------------------------------------
Total consumer ............................... 55.4 49.0 112.3 94.3
------------------------------------------------
Total ........................................ 64.6 69.6 128.8 126.1
RECOVERIES:
Commercial:
Commercial .................................... 4.2 17.0 9.0 25.3
Real estate:
Commercial mortgage .......................... 6.4 7.9 15.7 14.3
Construction ................................. .5 -- .5 --
------------------------------------------------
Total commercial ............................. 11.1 24.9 25.2 39.6
Consumer:
Residential mortgage .......................... .2 .3 .3 .5
Credit card ................................... 4.6 2.8 7.8 5.3
Other ......................................... 5.6 5.6 11.1 11.2
------------------------------------------------
Total consumer ............................... 10.4 8.7 19.2 17.0
------------------------------------------------
Total ........................................ 21.5 33.6 44.4 56.6
NET CHARGE-OFFS:
Commercial:
Commercial .................................... 4.2 (3.6) 4.7 (6.2)
Real estate:
Commercial mortgage .......................... (5.6) (1.7) (14.1) (2.6)
Construction ................................. (.5) 1.0 .7 1.0
------------------------------------------------
Total commercial ............................. (1.9) (4.3) (8.7) (7.8)
Consumer:
Residential mortgage .......................... .8 .8 1.3 1.6
Credit card ................................... 24.7 23.0 51.1 41.7
Other ......................................... 19.5 16.5 40.7 34.0
------------------------------------------------
Total consumer ............................... 45.0 40.3 93.1 77.3
------------------------------------------------
Total ........................................ 43.1 36.0 84.4 69.5
Provision charged to operating expense .......... 39.0 35.0 76.0 66.0
Additions related to acquisitions and other ..... -- -- -- 59.1
------------------------------------------------
Balance at end of period ........................ $ 508.1 $ 529.1 $ 508.1 $ 529.1
================================================
Allowance as a percentage of period-end loans ... 1.82% 1.96%
Allowance as a percentage of nonperforming loans 440 418
Allowance as a percentage of nonperforming assets 389 339
======================================================================================================
</TABLE>
<PAGE>
TABLE 8 NONPERFORMING ASSETS*
<TABLE>
<CAPTION>
June 30 December 31
(Dollars In Millions) 1997 1996
===================================================================================
<S> <C> <C>
COMMERCIAL:
Commercial .............................................. $ 50.9 $ 44.5
Real estate:
Commercial mortgage .................................... 25.2 30.8
Construction ........................................... 3.3 10.2
--------------------
Total commercial ....................................... 79.4 85.5
CONSUMER:
Residential mortgage .................................... 32.6 31.2
Other ................................................... 3.4 3.7
--------------------
Total consumer ......................................... 36.0 34.9
--------------------
Total nonperforming loans .............................. 115.4 120.4
OTHER REAL ESTATE ........................................ 11.7 13.5
OTHER NONPERFORMING ASSETS ............................... 3.5 3.8
--------------------
Total nonperforming assets ............................. $ 130.6 $ 137.7
====================
Accruing loans 90 days or more past due ** ............... $ 40.2 $ 49.6
Nonperforming loans to total loans ....................... .41% .44%
Nonperforming assets to total loans plus other real estate .47 .51
===================================================================================
</TABLE>
* Throughout this document, nonperforming assets and related ratios do not
include loans more than 90 days past due and still accruing.
**These loans are not included in nonperforming assets and continue to accrue
interest because they are secured by collateral and/or are in the process of
collection and are reasonably expected to result in repayment or restoration
to current status.
bankruptcies. The ratio of total net charge-offs to average loans was .63
percent in the second quarter of 1997 compared with .54 percent in the second
quarter of 1996. Consumer loans 30 days or more past due declined to 1.75
percent of the portfolio at June 30, 1997, compared with 2.12 percent at
December 31, 1996.
NONPERFORMING ASSETS -- Nonperforming assets include all nonaccrual loans,
restructured loans, other real estate and other nonperforming assets owned by
the Company. At June 30, 1997, nonperforming assets totaled $130.6 million, down
$7.1 million (5 percent) from December 31, 1996 and $25.7 million (16 percent)
from June 30, 1996. The ratio of nonperforming assets to loans and other real
estate was .47 percent at June 30, 1997, down from .51 percent at December 31,
1996, and .58 percent at June 30, 1996. Consumer loans 30 days or more past due
were 1.75 percent of the consumer loan portfolio at June 30, 1997, compared with
2.12 percent at December 31, 1996. The percentage of consumer loans 90 days or
more past due of the total consumer loan portfolio totaled .57 percent at June
30, 1997, compared with .63 percent at December 31, 1996.
INTEREST RATE RISK MANAGEMENT -- The Company's policy is to maintain a low
interest rate risk position. The Company limits the exposure of net interest
income to risks associated with interest rate movements through asset/liability
management strategies. The Company's Asset and Liability Management Committee
("ALCO") uses three methods for measuring and managing interest rate
TABLE 9 DELINQUENT LOAN RATIOS*
June 30 December 31
90 days or more past due 1997 1996
=======================================================
COMMERCIAL:
Commercial ................... .52% .50%
Real estate:
Commercial mortgage ......... .88 1.00
Construction ................ .41 1.56
--------------------
Total commercial ............ .55 .63
CONSUMER:
Residential mortgage.......... 1.27 1.28
Credit card .................. .51 .61
Other ........................ .32 .35
---------------------
Total consumer .............. .57 .63
---------------------
Total ....................... .56% .63%
=======================================================
*Ratios include nonperforming loans and are expressed as a percent of ending
loan balances.
<PAGE>
risk: Net Interest Income Simulation Modeling, Market Value/Duration Analysis,
and Repricing Mismatch Analysis. The Company is in compliance with Board-
approved guidelines, established by ALCO, relating to the above methods for
measuring and managing interest rate risk.
NET INTEREST INCOME SIMULATION: The Company uses a net interest income
simulation model to measure near-term (next 12 months) risk due to changes in
interest rates. The model is particularly useful because it incorporates
substantially all the Company's assets and liabilities and off-balance sheet
instruments, together with forecasted changes in the balance sheet mix and
assumptions that reflect the current interest rate environment. The balance
sheet changes are based on forecasted prepayments of loans and securities, loan
and deposit growth, and historical pricing spreads. The model is updated monthly
with the current balance sheet structure and the current forecast of expected
balance sheet changes. ALCO uses the model to simulate the effect of immediate
and sustained parallel shifts in the yield curve of 1 percent, 2 percent and 3
percent as well as the effect of immediate and sustained flattening and
steepening of the yield curve. ALCO also calculates the sensitivity of the
simulation results to changes in the key assumptions, such as the Prime/LIBOR
spread. The results from the simulation are reviewed by ALCO monthly and are
used to guide ALCO's hedging strategies. ALCO guidelines, approved by the
Company's Board of Directors, limit the estimated change in net interest income,
over the succeeding 12 months to 2 percent of forecasted net interest income,
assuming static Prime/LIBOR spreads and modest changes in deposit pricing lags,
given a 1 percent change in interest rates.
MARKET VALUE/DURATION ANALYSIS: One of the limiting factors of the net interest
income simulation model is its dependence upon accurate forecasts of future
business activity and the resulting effect on balance sheet assets and
liabilities. As a result, its usefulness is greatly diminished for periods
beyond one to two years. The Company measures this longer-term component of
interest rate risk (referred to as market value or duration risk) by modeling
the effect of interest rate changes on the estimated discounted future cash
flows of the Company's assets, liabilities and off-balance sheet instruments.
The amount of market value risk is subject to limits approved by the Company's
Board of Directors.
REPRICING MISMATCH ANALYSIS: A traditional gap analysis provides a point-in-time
measurement of the relationship between the amounts of the interest rate
sensitive assets and liabilities repricing in a given time period. While the
analysis provides a useful snapshot of interest rate risk, it does not capture
all aspects of interest rate risk. As a result, ALCO uses the repricing mismatch
analysis primarily for managing interest rate risk beyond one year and has
established limits, approved by the Company's Board of Directors, for gap
positions in the one- to three-year time periods.
USE OF DERIVATIVES TO MANAGE INTEREST RATE RISK: While each of the interest rate
risk measurements has limitations, taken together they represent a comprehensive
view of the magnitude of the Company's interest rate risk over various time
intervals. The Company manages its interest rate risk by entering into
off-balance sheet transactions (primarily interest rate swaps), investing in
fixed rate assets or issuing variable rate liabilities. To a lesser degree, the
Company also uses interest rate caps and floors to hedge this risk. The Company
does not enter into derivative contracts for speculative purposes.
As of June 30, 1997, the Company received payments on $3.0 billion notional
amount of interest rate swap agreements based on fixed interest rates, and made
payments based on variable interest rates. These swaps had
TABLE 10 INTEREST RATE SWAP HEDGING PORTFOLIO NOTIONAL BALANCES AND YIELDS BY
MATURITY DATE
At June 30, 1997 (Dollars in Millions)
===============================================================================
Weighted Weighted
Average Average
Receive Fixed Swaps* Notional Interest Rate Interest Rate
Maturity Date Amount Received Paid
- -------------------------------------------------------------------------------
1997 (remaining six months ......... $ 125 7.45% 5.69%
1998 ............................... 681 5.97 5.70
1999 ............................... 630 6.41 5.71
2000 ............................... 335 6.60 5.73
2001 ............................... 245 6.61 5.69
After 2001** ....................... 990 6.94 5.73
------
Total .............................. $3,006 6.57% 5.72%
===============================================================================
* At June 30, 1997, the Company had no swaps in its hedging portfolio that
required it to pay fixed-rate interest.
**Of the amount maturing after the year 2001, $925 million hedges fixed-rate
subordinated notes.
<PAGE>
TABLE 11 CAPITAL RATIOS
June 30 December 31
(Dollars in Millions) 1997 1996
==================================================================
Tangible common equity* ............. $ 2,514 $ 2,385
As a percent of assets ............. 6.8% 6.7%
Tier 1 capital ...................... $ 2,472 $ 2,355
As a percent of risk-adjusted assets 7.4% 7.2%
Total risk-based capital ............ $ 4,107 $ 3,943
As a percent of risk-adjusted assets 12.2% 12.0%
Leverage ratio ...................... 7.2 6.8
==================================================================
*Defined as common equity less goodwill.
an average fixed rate of 6.57 percent and an average variable rate (tied to
various LIBOR rates) of 5.72 percent. The remaining maturity of these agreements
ranges from two months to 10 years with an average remaining maturity of 3.71
years. Swaps increased net interest income for the quarters ended June 30, 1997
and 1996 by $5.5 million and $8.0 million, respectively, and the six months
ended June 30, 1997 and 1996 by $11.9 million and $15.9 million, respectively.
The Company also purchases interest rate caps and floors to minimize the
impact of fluctuating interest rates on earnings. There were no caps outstanding
at June 30, 1997. To hedge against falling interest rates, the Company uses
interest rate floors. The total notional amount of floor agreements purchased as
of June 30, 1997, was $850 million. LIBOR-based floors totaled $550 million and
Constant Maturity Treasury floors totaled $300 million. The impact of caps and
floors on net interest income was not material for the six months ended June 30,
1997 and 1996.
CAPITAL MANAGEMENT -- At June 30, 1997, total tangible common equity was $2.5
billion, or 6.8 percent of assets, compared with 6.7 percent at December 31,
1996. Tier 1 and total risk-based capital ratios were 7.4 percent and 12.2
percent at June 30, 1997, compared with 7.2 percent and 12.0 percent at December
31, 1996. The June 30, 1997 leverage ratio increased to 7.2 percent from 6.8
percent at year-end 1996.
On February 21, 1996, the Board of Directors authorized the repurchase of
up to 25.4 million common shares through December 1997. The Company purchased
17.0 million shares under this authorization, including 1.9 million in the first
quarter of 1997. The Board of Directors rescinded this authorization on March
19, 1997, due to the announcement of the USBC acquisition.
ACCOUNTING CHANGES
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS -- Effective January
1, 1997, the Company adopted Statement of Financial Accounting Standards No.
("SFAS") 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The Statement uses a "financial components"
approach which focuses on control to determine whether the assets have been
sold. If the entity has surrendered control over the transferred assets, the
transaction is considered a sale. Control is considered surrendered only if the
seller has no legal rights to the assets, even in bankruptcy; the buyer has the
right to pledge or exchange the assets; and the seller does not maintain
effective control over the assets through an agreement to repurchase or redeem
them. If control is retained, the transaction is then considered to be a
financing. The adoption of SFAS 125 did not have a material effect on the
Company. SFAS 125 has been amended (SFAS 127), deferring for one year its
adoption in the accounting for securities lending, repurchase agreements and
other secured financing transactions. The eventual adoption of SFAS 125 relating
to these transaction types is not expected to have a material effect on the
Company.
EARNINGS PER SHARE -- SFAS 128, "Earnings per Share," supersedes APB Opinion 15
"Earnings per Share," by replacing the method currently used to compute earnings
per share with basic and diluted earnings per share. Under the new requirements,
the dilutive effect of stock options will be excluded from the calculation of
basic earnings per share. Diluted earnings per share will be calculated
similarly to the current fully diluted earnings per share. SFAS 128 is effective
for periods ending after December 15, 1997, with earlier application prohibited.
After the effective date, all prior period earnings per share data presented
shall be restated to conform to the provisions of this statement. The adoption
of SFAS 128 is not expected to have a material impact on the calculation of
earnings per share.
DERIVATIVE FINANCIAL INSTRUMENTS -- "Disclosure of Accounting Policies for
Derivative Financial Instruments," a final rule issued by the Securities and
Exchange Commission, is intended to clarify and expand existing
<PAGE>
disclosure requirements for derivative financial instruments, other financial
instruments and derivative commodity instruments. Specifically, the rule
requires descriptions of accounting policies for derivatives and quantitative
and qualitative information about market risk for derivatives that is to be
presented outside of the financial statements. These disclosure requirements are
effective with the 1997 year-end financial statements.
COMPREHENSIVE INCOME -- SFAS 130, "Reporting Comprehensive Income," establishes
standards for the reporting and display of comprehensive income and its
components in a full set of financial statements. The Statement requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed as prominently as other financial statements. The Statement requires
the classification of items of other comprehensive income by their nature in a
financial statement and the display of other comprehensive income separately
from retained earnings and capital surplus in the equity section of the
statement of financial position. SFAS 130 is effective January 1, 1998, with all
prior periods presented restated to conform to the provisions of this statement.
SEGMENT DISCLOSURE -- SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information," requires the disclosure of financial and descriptive
information about reportable operating segments. Operating segments are
components of an enterprise about which financial information is available and
is evaluated regularly in deciding how to allocate resources and assess
performance. The Statement requires the disclosure of profit or loss, certain
specific revenue and expense items, and assets of all operating segments, with
reconciliations to the financial statements. The Statement also requires the
disclosure of descriptive information about the way the operating segments were
determined, the products and services provided by the segments, differences
between measurements used in reporting segment information and those used in the
financial statements, and changes in the measurement of segment amounts from
period to period. SFAS 131 is effective with the 1998 year-end financial
statements, with comparative information for prior periods required.
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30 December 31
(In Millions, Except Shares) 1997 1996
=============================================================================================================
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks ...................................................... $ 2,291 $ 2,413
Federal funds sold ........................................................... 1,219 32
Securities purchased under agreements to resell .............................. 484 795
Trading account securities ................................................... 115 146
Available-for-sale securities ................................................ 3,301 3,555
Loans ........................................................................ 27,863 27,128
Less allowance for credit losses ............................................ 508 517
------------------------
Net loans .................................................................... 27,355 26,61
Bank premises and equipment .................................................. 388 404
Interest receivable .......................................................... 208 202
Customers' liability on acceptances .......................................... 369 169
Other assets ................................................................. 1,999 2,162
------------------------
Total assets .............................................................. $ 37,729 $ 36,489
========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing ......................................................... $ 9,356 $ 7,871
Interest-bearing ............................................................ 15,875 16,508
------------------------
Total deposits ............................................................ 25,231 24,379
Federal funds purchased ...................................................... 253 1,204
Securities sold under agreements to repurchase ............................... 517 819
Other short-term funds borrowed .............................................. 1,208 2,074
Long-term debt ............................................................... 5,744 3,553
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely the junior subordinated debentures of the parent
company ..................................................................... 300 300
Acceptances outstanding ...................................................... 369 169
Other liabilities ............................................................ 944 938
------------------------
Total liabilities ......................................................... 34,566 33,436
Shareholders' equity:
Common stock, par value $1.25 a share -- authorized 200,000,000 shares;
issued: 6/30/97 and 12/31/96 -- 141,747,738 shares ......................... 177 177
Capital surplus ............................................................. 1,164 1,154
Retained earnings ........................................................... 2,362 2,165
Unrealized gain on securities, net of tax ................................... 4 3
Less cost of common stock in treasury:
6/30/97 -- 7,950,947; 12/31/96 -- 6,877,497 shares ......................... (544) (446)
------------------------
Total shareholders' equity ................................................ 3,163 3,053
------------------------
Total liabilities and shareholders' equity ................................ $ 37,729 $ 36,489
=============================================================================================================
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------------------------------------
(In Millions, Except Per-Share Data) June 30 June 30 June 30 June 30
(Unaudited) 1997 1996 1997 1996
===================================================================================================================================
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans ............................................................. $ 607.4 $ 582.0 $ 1,193.6 $ 1,156.7
Securities:
Taxable .......................................................... 50.0 63.6 101.4 127.4
Exempt from federal income taxes ................................. 5.9 7.4 11.9 12.3
Other interest income ............................................. 13.1 11.7 25.7 22.9
-------------------------------------------------------------
Total interest income .......................................... 676.4 664.7 1,332.6 1,319.3
INTEREST EXPENSE
Deposits .......................................................... 161.3 170.9 319.9 337.9
Federal funds purchased and repurchase agreements ................. 31.5 27.6 62.5 59.0
Other short-term funds borrowed ................................... 20.2 28.5 44.1 60.6
Long-term debt .................................................... 72.4 51.4 129.0 100.9
Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely the junior subordinated debentures
of the parent company ............................................ 6.0 -- 12.1 --
-------------------------------------------------------------
Total interest expense ......................................... 291.4 278.4 567.6 558.4
-------------------------------------------------------------
Net interest income ............................................... 385.0 386.3 765.0 760.9
Provision for credit losses ....................................... 39.0 35.0 76.0 66.0
-------------------------------------------------------------
Net interest income after provision for credit losses ............. 346.0 351.3 689.0 694.9
NONINTEREST INCOME
Credit card fee revenue ........................................... 86.4 73.5 163.7 136.3
Trust fees ........................................................ 66.3 58.5 132.3 114.7
Service charges on deposit accounts ............................... 34.0 34.7 70.4 68.6
Securities gains .................................................. -- .4 -- 15.0
Termination fee ................................................... -- 75.0 -- 190.0
State income tax refund ........................................... -- 65.0 -- 65.0
Gain on sale of mortgage banking operations ....................... -- -- -- 45.8
Other ............................................................. 48.7 52.8 94.8 108.0
-------------------------------------------------------------
Total noninterest income ....................................... 235.4 359.9 461.2 743.4
NONINTEREST EXPENSE
Salaries .......................................................... 116.8 114.5 231.7 237.9
Employee benefits ................................................. 25.0 26.4 51.5 55.3
Net occupancy ..................................................... 24.5 24.2 49.5 50.0
Furniture and equipment ........................................... 22.3 22.1 44.0 45.9
Goodwill and other intangible assets .............................. 20.0 19.9 39.8 67.3
Professional services ............................................. 10.1 10.9 20.1 19.2
Other personnel costs ............................................. 9.6 14.0 19.6 23.7
Advertising and marketing ......................................... 9.3 10.2 17.8 17.0
Merger, integration, and resizing ................................. -- -- -- 69.9
Other ............................................................. 60.5 64.0 120.1 144.4
-------------------------------------------------------------
Total noninterest expense ...................................... 298.1 306.2 594.1 730.6
-------------------------------------------------------------
Income before income taxes ........................................ 283.3 405.0 556.1 707.7
Applicable income taxes ........................................... 105.0 150.9 206.0 276.8
-------------------------------------------------------------
Net income ........................................................ $ 178.3 $ 254.1 $ 350.1 $ 430.9
=============================================================
Net income applicable to common equity ............................ $ 178.3 $ 252.5 $ 350.1 $ 427.6
=============================================================
EARNINGS PER COMMON SHARE
Average common and common equivalent shares ....................... 135,288,401 139,774,503 135,408,151 138,382,903
Net income ........................................................ $ 1.32 $ 1.81 $ 2.59 $ 3.09
===================================================================================================================================
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Common Gains/(Losses)
(In Millions, Except Shares) Shares Preferred Common Capital Retained on Securities, Treasury
(Unaudited) Outstanding* Stock Stock Surplus Earnings Net of Tax Stock** Total
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1995 127,334,568 $ 103.2 $ 169.5 $ 909.3 $1,918.2 $ 22.5 $ (397.8) $2,724.9
Net income ............... 430.9 430.9
Dividends declared:
Preferred ............... (3.3) (3.3)
Common .................. (116.2) (116.2)
Purchase and retirement of
treasury stock .......... (9,081,111) (3.2) (152.5) (380.3) (536.0)
Issuance of common stock:
Acquisitions ............ 16,460,215 10.7 361.7 (44.4) 384.2 712.2
Dividend reinvestment ... 110,332 6.4 6.4
Stock option and stock
purchase plans ......... 1,540,817 .2 20.3 (60.5) 69.9 29.9
Conversion of preferred
stock ................... 502,129 (14.5) (14.8) 29.3 --
Change in unrealized
gains/(losses) .......... (56.1) (56.1)
------------------------------------------------------------------------------------------------------
BALANCE JUNE 30, 1996 .... 136,866,950 $ 88.7 $ 177.2 $1,138.8 $2,109.9 $ (33.6) $ (288.3) $3,192.7
======================================================================================================
BALANCE DECEMBER 31, 1996 134,870,241 $ -- $ 177.2 $1,153.9 $2,164.9 $ 2.5 $ (445.9) $3,052.6
Net income ............... 350.1 350.1
Common dividends declared (124.2) (124.2)
Purchase of treasury stock (1,914,700) (142.0) (142.0)
Issuance of common stock:
Dividend reinvestment ... 81,087 1.1 5.5 6.6
Stock option and stock
purchase plans ......... 760,163 9.0 (28.9) 38.8 18.9
Change in unrealized
gains/(losses) .......... 1.0 1.0
------------------------------------------------------------------------------------------------------
BALANCE JUNE 30, 1997 .... 133,796,791 $ -- $ 177.2 $1,164.0 $2,361.9 $ 3.5 $ (543.6) $3,163.0
===================================================================================================================================
</TABLE>
* Represents total common shares less common stock held in treasury.
**Ending treasury shares were 7,950,947 at June 30, 1997; 6,877,497 at December
31, 1996; 4,880,788 at June 30, 1996; and 8,297,756 at December 31, 1995.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
----------------------
June 30 June 30
(Unaudited, In Millions) 1997 1996
======================================================================================================
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities ............................... $ 653.3 $ 752.1
----------------------
INVESTING ACTIVITIES
Net cash (used) provided by:
Loans outstanding ........................................................ (1,189.2) 137.0
Securities purchased under agreements to resell .......................... 311.4 (159.7)
Available-for-sale securities:
Sales .................................................................... 288.9 1,032.2
Maturities ............................................................... 301.1 634.5
Purchases ................................................................ (335.4) (381.6)
Proceeds from sales of other real estate .................................. 11.5 23.0
Net purchases of bank premises and equipment .............................. (12.7) (29.9)
Securitization of corporate charge card balances .......................... 418.1 --
Cash and cash equivalents of acquired subsidiaries ........................ -- 116.5
Acquisitions, net of cash received ........................................ (23.3) (36.5)
Sales of subsidiary operations ............................................ -- 123.7
Other -- net .............................................................. (40.9) (70.9)
----------------------
Net cash (used) provided by investing activities ........................ (270.5) 1,388.3
----------------------
FINANCING ACTIVITIES
Net cash provided (used) by:
Deposits ................................................................. 851.9 (694.1)
Federal funds purchased and securities sold under agreements to repurchase (1,253.0) (815.1)
Short-term borrowings .................................................... (866.7) 160.0
Long-term debt transactions:
Proceeds ................................................................. 2,596.6 499.2
Principal payments ....................................................... (405.7) (347.3)
Proceeds from issuance of common stock .................................... 25.5 36.3
Purchase of treasury stock ................................................ (142.0) (536.0)
Cash dividends ............................................................ (124.2) (119.5)
----------------------
Net cash provided (used) by financing activities ........................ 682.4 (1,816.5)
----------------------
Change in cash and cash equivalients .................................... 1,065.2 323.9
Cash and cash equivalents at beginning of period .......................... 2,444.3 1,871.6
----------------------
Cash and cash equivalents at end of period .............................. $3,509.5 $2,195.5
======================================================================================================
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations, and cash flow activity required under generally
accepted accounting principles. In the opinion of management of the Company, all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of results have been made and the Company believes such
presentation is adequate to make the information presented not misleading. For
further information, refer to the consolidated financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996. Certain amounts in prior periods have been reclassified
to conform to the current presentation.
NOTE B ACCOUNTING CHANGES
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES -- Effective January 1, 1997, the Company adopted Statement of
Financial Accounting Standards No. ("SFAS") 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The Statement
uses a "financial components" approach which focuses on control to determine
whether assets have been sold. If the entity has surrendered control over the
transferred assets, the transaction is considered a sale. Control is considered
surrendered only if the seller has no legal right to the assets, even in
bankruptcy; the buyer has the right to pledge or exchange the assets; and the
seller does not maintain effective control over the assets through an agreement
to repurchase or redeem them. If control is retained, the transaction is then
considered a financing. The adoption of SFAS 125 did not have a material effect
on the Company. SFAS 125 has been amended (SFAS 127), deferring for one year its
adoption in the accounting for securities lending, repurchase agreements and
other secured financing transactions. The adoption of SFAS 125 relating to these
transaction types is not expected to have a material effect on the Company.
EARNINGS PER SHARE -- SFAS 128, "Earnings per Share," supersedes APB Opinion 15,
"Earnings per Share," by replacing the method currently used to compute earnings
per share with basic and diluted earnings per share. Under the new requirements,
the dilutive effect of stock options will be excluded from the calculation of
basic earnings per share. Diluted earnings per share will be calculated
similarly to the current fully diluted earnings per share. SFAS 128 is effective
for periods ending after December 15, 1997, with earlier application prohibited.
After the effective date, all prior period earnings per share data presented
shall be restated to conform to the provisions of this statement. The adoption
of SFAS 128 is not expected to have a material impact on the calculation of
earnings per share.
DERIVATIVE FINANCIAL INSTRUMENTS -- "Disclosure of Accounting Policies for
Derivative Financial Instruments," a final rule issued by the Securities and
Exchange Commission, is intended to clarify and expand existing disclosure
requirements for derivative financial instruments, other financial instruments
and derivative commodity instruments. Specifically, the rule requires
descriptions of accounting policies for derivatives and quantitative and
qualitative information about market risk for derivatives that is to be
presented outside of the financial statements. These disclosure requirements are
effective with the 1997 year-end financial statements.
COMPREHENSIVE INCOME -- SFAS 130, "Reporting Comprehensive Income," establishes
standards for the reporting and display of comprehensive income and its
components in a full set of financial statements. The Statement requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed as prominently as other financial statements. The Statement requires
the classification of items of other comprehensive income by their nature in a
financial statement and the display of other comprehensive income separately
from retained earnings and capital surplus in the equity section of the
statement of financial position. SFAS 130 is effective January 1, 1998, with all
prior periods presented restated to conform to the provisions of this statement.
<PAGE>
SEGMENT DISCLOSURE -- SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information," requires the disclosure of financial and descriptive
information about reportable operating segments. Operating segments are
components of an enterprise about which financial information is available and
is evaluated regularly in deciding how to allocate resources and assess
performance. The Statement requires the disclosure of profit or loss, certain
specific revenue and expense items, and assets of all operating segments, with
reconciliations to the financial statements. The Statement also requires the
disclosure of descriptive information about the way the operating segments were
determined, the products and services provided by the segments, differences
between measurements used in reporting segment information and those used in the
financial statements, and changes in the measurement of segment amounts from
period to period. SFAS 131 is effective with the 1998 year-end financial
statements, with comparative information for prior periods required.
NOTE C BUSINESS COMBINATIONS AND
DIVESTITURES
U. S. BANCORP -- On August 1, 1997, First Bank System, Inc. issued 109.9 million
shares to acquire U.S. Bancorp ("USBC") and amended its Certificate of
Incorporation to increase the number of common shares which it has authority to
issue from 200 million shares to 500 million shares. As of the acquisition date,
the combined institution, now known as U.S. Bancorp, had approximately $70
billion in assets, $49 billion in deposits and served nearly four million
households and 475,000 businesses in 17 contiguous states from Illinois to
Washington. The Company exchanged .755 shares of its common stock for for each
share of USBC common stock. USBC's outstanding stock options were also converted
into stock options for the Company's common stock.
In addition, each outstanding share of USBC cumulative preferred stock was
converted into one share of preferred stock of the combined company having
substantially identical terms. The transaction will be accounted for as a
pooling-of-interests.
The following pro forma operating results of the Company assume that the
USBC acquisition had occurred at the beginning of each period presented. The pro
forma information may not be indicative of the results that actually would have
occurred if the combination had been in effect on the dates indicated or which
may be obtained in the future.
<TABLE>
<CAPTION>
Three Months
Ended Six Months Ended
June 30 June 30
--------------------- -----------------------
(In Millions, Except Per-Share Amounts) 1997 1996 1997 1996
===========================================================================================
<S> <C> <C> <C> <C>
Net interest income ................... $ 778.3 $ 746.6 $ 1,535.1 $ 1,469.7
Net income ............................ 303.9 381.2 597.2 670.9
Net income per share .................. 1.21 1.47 2.38 2.60
===========================================================================================
</TABLE>
COMERICA CORPORATE TRUST BUSINESS -- On January 31, 1997, the Company completed
its acquisition of the bond indenture services and paying agency business of
Comerica Incorporated. This business serves approximately 860 municipal and
corporate clients with about 2,400 bond issues.
FIRSTIER FINANCIAL, INC. -- On February 16, 1996, the Company issued 16.5
million shares to complete its acquisition of Omaha-based FirsTier Financial,
Inc. ("FirsTier"). FirsTier had $3.7 billion in assets, $2.9 billion in
deposits, and 63 offices in Nebraska and Iowa. Under terms of the purchase
agreement, the Company exchanged .8829 shares of its common stock for each
common share of FirsTier. In addition, FirsTier's outstanding stock options were
converted into stock options for the Company's common stock.
The acquisition of FirsTier was accounted for under the purchase method of
accounting, and accordingly, the purchase price of $717 million was allocated to
assets acquired and liabilities assumed based on their fair market values at the
date of acquisition. The excess of the purchase price over the fair market
values of net assets acquired was recorded as goodwill. Goodwill of $286 million
is amortized over an average of 24 years and a core deposit intangible of $63
million is amortized over the estimated lives of the deposits of approximately
10 years. The results of operations of FirsTier have been included in the
Company's Consolidated Statement of Income since the date of acquisition.
<PAGE>
NOTE D SECURITIES
The detail of the amortized cost and fair value of available-for-sale securities
consisted of the following:
June 30, 1997 December 31, 1996
-------------------- --------------------
Amortized Fair Amortized Fair
(In Millions) Cost Value Cost Value
============================================================================
U.S. Treasury .............. $ 344 $ 335 $ 553 $ 545
Mortgage-backed ............ 2,433 2,440 2,454 2,464
Other U.S. agencies ........ 31 30 42 41
State and political ........ 455 457 466 465
Other ...................... 33 39 36 40
-------------------------------------------
Total .................... $3,296 $3,301 $3,551 $3,555
============================================================================
NOTE E LOANS
The composition of the loan portfolio was as follows:
June 30 December 31
(In Millions) 1997 1996
========================================================================
COMMERCIAL:
Commercial .............................. $10,063 $ 9,456
Financial institutions .................. 933 905
Real estate:
Commercial mortgage .................... 2,982 3,090
Construction ........................... 804 654
----------------------
Total commercial ...................... 14,782 14,105
----------------------
CONSUMER:
Residential mortgage ................... 2,781 3,019
Residential mortgage held for sale ..... 73 42
Home equity and second mortgage ........ 3,471 3,263
Credit card ............................ 2,903 2,858
Automobile ............................. 2,005 1,991
Revolving credit ....................... 747 737
Installment ............................ 559 607
Student * .............................. 542 506
----------------------
Total consumer ...................... 13,081 13,023
----------------------
Total loans ......................... $27,863 $27,128
========================================================================
*All or part of the student loan portfolio may be sold when the repayment period
begins.
At June 30, 1997, the Company had $79 million in loans considered impaired
under SFAS 114 included in its nonaccrual loans. The carrying value of the
impaired loans was less than or equal to the appraised collateral value or the
present value of expected future cash flows and, accordingly, no allowance for
credit losses was specifically allocated to impaired loans. For the quarter
ended June 30, 1997, the average recorded investment in impaired loans was
approximately $78 million. No interest income was recognized on these impaired
loans during the quarter as interest payments are generally applied against
principal.
<PAGE>
NOTE F LONG-TERM DEBT
Long-term debt (debt with original maturities of more than one year) consisted
of the following:
<TABLE>
<CAPTION>
June 30 December 31
(In Millions) 1997 1996
=========================================================================================================
<S> <C> <C>
Fixed-rate subordinated notes (6.00% to 8.35%) - maturities to September 2007 .. $1,050 $1,050
Step-up subordinated notes - due August 15, 2005 ............................... 100 100
Floating-rate subordinated notes - due November 30, 2010 ....................... 107 107
Federal Home Loan Bank advances (4.93% to 7.34%) - maturities to March 2011 .... 690 1,005
Medium-term notes (5.67% to 5.89%) - maturities to January 2001 ................ 542 406
Bank notes (5.57% to 6.38%) - maturities to June 2002 .......................... 3,175 800
Other .......................................................................... 80 85
--------------------
Total ....................................................................... $5,744 $3,553
=========================================================================================================
</TABLE>
NOTE G COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY THE JUNIOR SUBORDINATED DEBENTURES
OF THE PARENT COMPANY
On November 26, 1996, FBS Capital I (the "Trust"), a Delaware business
trust wholly-owned by the Company, completed the sale of $300 million Preferred
Securities (the "Preferred Securities"). The Trust used the net proceeds from
the offering to purchase $309 million aggregate principal amount of 8.09 percent
Junior Subordinated Deferrable Interest Debentures (the "Debentures") of the
Company. The Debentures are the sole assets of the Trust and are eliminated,
along with the related income statement effects, in the consolidated financial
statements. The Company used the proceeds from the sale of the Debentures for
general corporate purposes
The Preferred Securities accrue and pay distributions semi-annually at an
annual rate of 8.09 percent of the stated liquidation amount of $1,000 per
Preferred Security. The Company's obligations under the Debentures and related
documents, taken together, constitute a full and unconditional guarantee by the
Company of the obligations of the Trust. The guarantee covers the semi-annual
distributions and payments on liquidation or redemption of the Preferred
Securities, but only to the extent of funds held by the Trust.
The Preferred Securities are mandatorily redeemable upon the maturity of
the Debentures, on November 15, 2026, or upon earlier redemption as provided in
the Indenture. The Company has the right to redeem the Debentures, in whole (but
not in part), on or after November 15, 2006, at a redemption price specified in
the Indenture plus any accrued but unpaid interest to the redemption date.
NOTE H SHAREHOLDERS' EQUITY
On February 21, 1996, the Board of Directors authorized the repurchase of up to
25.4 million common shares through December 1997. The Company purchased 17.0
million shares under this authorization, including 1.9 million in the first
quarter of 1997. The Board of Directors rescinded this authorization on March
19, 1997, due to the announcement of the U.S. Bancorp acquisition. Refer to Note
C for further information about the U.S. Bancorp acquisition.
NOTE I MERGER, INTEGRATION AND
RESIZING CHARGES
In the first quarter of 1996, the Company recorded merger, integration and
resizing charges of $69.9 million. Merger and integration charges of $31.3
million were associated with the acquisitions of FirsTier and the BankAmerica
corporate trust business. Resizing charges of $38.6 million were associated with
the Company's streamlining of the branch distribution network and trust
operations as the Company expands its alternative distribution channels,
including telemarketing, automated teller machines and in-store branches.
<PAGE>
NOTE J INCOME TAXES
The components of income tax expense were:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------------
June 30 June 30 June 30 June 30
(In Millions) 1997 1996 1997 1996
=================================================================================
<S> <C> <C> <C> <C>
FEDERAL:
Current tax ......................... $ 82.1 $123.9 $162.2 $239.8
Deferred tax provision .............. 8.8 11.8 19.1 13.6
---------------------------------------
Federal income tax ................ 90.9 135.7 181.3 253.4
STATE:
Current tax ......................... 13.2 15.6 22.1 24.0
Deferred tax provision (credit) ..... .9 (.4) 2.6 (.6)
---------------------------------------
State income tax .................. 14.1 15.2 24.7 23.4
---------------------------------------
Total income tax provision ........ $105.0 $150.9 $206.0 $276.8
=================================================================================
</TABLE>
The reconciliation between income tax expense and the amount computed by
applying the statutory federal income tax rate was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------------------
June 30 June 30 June 30 June 30
(In Millions) 1997 1996 1997 1996
===============================================================================================================
<S> <C> <C> <C> <C>
Tax at statutory rate (35%) .................................... $ 99.1 $141.8 $194.6 $247.7
State income tax, at statutory rates, net of federal tax benefit 6.2 9.9 13.1 15.2
Tax effect of:
Tax-exempt interest:
Loans ........................................................ (.9) (1.2) (1.9) (2.4)
Securities ................................................... (2.1) (2.6) (4.2) (4.3)
Amortization of goodwill ...................................... 4.6 4.5 9.2 21.0
Other items ................................................... (1.9) (1.5) (4.8) (.4)
------------------------------------------
Applicable income taxes ........................................ $105.0 $150.9 $206.0 $276.8
===============================================================================================================
</TABLE>
The Company's net deferred tax asset was $193.9 million at June 30, 1997, and
$216.2 million at December 31, 1996.
<PAGE>
NOTE K COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS
In the normal course of business, the Company uses various off-balance sheet
financial instruments to meet the financing needs of its customers and to manage
its interest rate risk. These instruments carry varying degrees of credit,
interest rate or liquidity risk. The contract or notional amounts of these
financial instruments were as follows:
<TABLE>
<CAPTION>
June 30 December 31
(In Millions) 1997 1996
=====================================================================================================
<S> <C> <C>
Commitments to extend credit:
Commercial ............................................................... $ 9,160 $ 8,944
Corporate and purchasing cards ........................................... 16,787 13,820
Consumer credit card ..................................................... 10,717 10,245
Other consumer ........................................................... 3,137 3,066
Letters of credit:
Standby .................................................................. 1,471 1,447
Commercial ............................................................... 299 182
Interest rate swap contracts:
Hedges ................................................................... 3,006 2,656
Intermediated ............................................................ 214 174
Options contracts:
Hedge interest rate floors purchased ..................................... 850 1,250
Hedge interest rate caps purchased ....................................... -- 100
Intermediated interest rate and foreign exchange caps and floors purchased 126 122
Intermediated interest rate and foreign exchange caps and floors written . 126 122
Liquidity support guarantees .............................................. 61 81
Forward contracts ......................................................... 28 22
Commitments to sell loans ................................................. -- 3
Mortgages sold with recourse .............................................. 102 114
Foreign currency commitments:
Commitments to purchase .................................................. 822 870
Commitments to sell ...................................................... 827 867
=====================================================================================================
</TABLE>
Activity for the six months ended June 30, 1997, with respect to interest
rate swaps which the Company uses to hedge subordinated debt, bank notes,
certificates of deposit, deposit accounts, and savings certificates was as
follows:
(In Millions)
============================================================
Notional amount outstanding at December 31, 1996 $ 2,656
Additions ...................................... 500
Maturities ..................................... (150)
-------
Notional amount outstanding at June 30, 1997 .. $ 3,006
============================================================
Weighted average interest rates paid ........... 5.72%
Weighted average interest rates received ....... 6.57%
============================================================
The Company received fixed rate interest and paid floating rate interest on
all swap hedges as of June 30, 1997. Net unamortized deferred gains, which
amortize through the year 2000, were $5.4 million at June 30, 1997.
LIBOR-based interest rate floors totaling $550 million with an average
remaining maturity of 11 months at June 30, 1997, and $950 million with an
average remaining maturity of 12 months at December 31, 1996, hedged floating
rate commercial loans. The strike rate on these LIBOR-based floors ranged from
3.25 percent to 4.00 percent at June 30, 1997, and December 31, 1996. Constant
Maturity Treasury (CMT) interest rate floors totaling $300 million with an
average remaining maturity of 12 months at June 30, 1997, and 18 months at
December 31, 1996, hedged the pre-payment risk of fixed rate residential
mortgage loans. The strike rate on these CMT floors ranged from 5.60 percent to
5.70 percent at June 30, 1997, and December 31, 1996. The total notional amount
of interest rate cap agreements purchased was $100 million with a 3-month LIBOR
strike rate of 6.00 percent at December 31, 1996.
<PAGE>
NOTE L SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET -- Time certificates of deposit in denominations of
$100,000 or more totaled $883 million and $866 million at June 30, 1997, and
December 31, 1996, respectively.
CONSOLIDATED STATEMENT OF CASH FLOWS -- Listed below are supplemental
disclosures to the Consolidated Statement of Cash Flows.
<TABLE>
<CAPTION>
Six Months Ended
--------------------
June 30 June 30
(In Millions) 1997 1996
============================================================================================
<S> <C> <C>
Income taxes paid ................................................ $ 170.1 $ 192.3
Interest paid .................................................... 586.5 556.5
Net noncash transfers to foreclosed property ..................... 7.7 13.2
Change in unrealized gain (loss) on available-for-sale securities,
net of taxes of $.6 in 1997 and $34.3 in 1996 ................... 1.0 (56.1)
=====================
Cash acquisitions of businesses:
Fair value of noncash assets acquired ........................... $ 23.3 $ 36.5
Liabilities assumed ............................................. -- --
---------------------
Net ............................................................ $ 23.3 $ 36.5
=====================
Stock acquisitions of businesses:
Fair value of noncash assets acquired ........................... $ -- $3,627.9
Net cash acquired ............................................... -- 116.5
Liabilities assumed ............................................. -- (3,032.2)
---------------------
Net value of common stock issued ............................... $ -- $ 712.2
============================================================================================
</TABLE>
<PAGE>
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
<TABLE>
<CAPTION>
For the Three Months Ended June 30
1997 1996
- ------------------------------------------------------------------------------------ --------------------------------- ---------
Yields Yields % Change
(In Millions) and and Average
(Unaudited) Balance Interest Rates Balance Interest Rates Balance
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Securities:
U.S. Treasury .............................. $ 348 $ 5.1 5.88% $ 646 $ 9.9 6.16% (46.1)%
Mortgage-backed ............................ 2,490 43.6 7.02 2,828 49.3 7.01 (12.0)
State and political ........................ 457 9.5 8.34 522 11.5 8.86 (12.5)
U.S. agencies and other .................... 63 .9 5.73 267 4.1 6.18 (76.4)
---------------------- --------------------
Total securities .......................... 3,358 59.1 7.06 4,263 74.8 7.06 (21.2)
Unrealized loss on available-for-sale
securities ................................. (25) (34) 26.5
-------- --------
Net securities ........................... 3,333 4,229 (21.2)
Trading account securities .................. 98 1.4 5.73 91 1.3 5.75 7.7
Federal funds sold and resale agreements .... 544 7.6 5.60 482 6.2 5.17 12.9
Loans:
Commercial:
Commercial ................................ 9,820 198.1 8.09 9,412 184.0 7.86 4.3
Financial institutions .................... 882 9.8 4.46 981 10.3 4.22 (10.1)
Real estate:
Commercial mortgage ...................... 3,037 67.1 8.86 3,023 67.0 8.91 .5
Construction ............................. 744 17.8 9.60 465 10.3 8.91 60.0
---------------------- --------------------
Total commercial ......................... 14,483 292.8 8.11 13,881 271.6 7.87 4.3
Consumer:
Residential mortgage ...................... 2,848 55.1 7.76 3,358 66.7 7.99 (15.2)
Residential mortgage held for sale ........ 55 1.0 7.29 160 2.9 7.29 (65.6)
Home equity and second mortgage ........... 3,398 81.8 9.66 2,977 70.8 9.57 14.1
Credit card ............................... 2,814 83.6 11.92 2,597 78.7 12.19 8.4
Other ..................................... 3,876 94.5 9.78 3,959 93.0 9.45 (2.1)
---------------------- --------------------
Total consumer ........................... 12,991 316.0 9.76 13,051 312.1 9.62 (.5)
---------------------- --------------------
Total loans .............................. 27,474 608.8 8.89 26,932 583.7 8.72 2.0
Allowance for credit losses ................ 511 536 (4.7)
-------- --------
Net loans ................................. 26,963 26,396 2.1
Other earning assets ........................ 362 4.1 4.54 337 4.2 5.01 7.4
---------------------- --------------------
Total earning assets* .................... 31,836 681.0 8.58 32,105 670.2 8.40 (.8)
Cash and due from banks ..................... 1,748 1,846 (5.3)
Other assets ................................ 2,387 2,541 (6.1)
-------- --------
Total assets ............................. $ 35,435 $ 35,922 (1.4)%
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits ............... $ 6,494 $ 6,578 (1.3)%
Interest-bearing deposits:
Interest checking ......................... 2,861 9.6 1.35 3,169 10.6 1.35 (9.7)
Money market accounts ..................... 4,344 40.7 3.76 4,263 37.4 3.53 1.9
Other savings accounts .................... 1,518 8.1 2.14 1,683 8.9 2.13 (9.8)
Savings certificates ...................... 6,562 90.8 5.55 7,432 100.2 5.42 (11.7)
Certificates over $100,000 ................ 794 12.1 6.11 916 13.8 6.06 (13.3)
---------------------- --------------------
Total interest-bearing deposits .......... 16,079 161.3 4.02 17,463 170.9 3.94 (7.9)
Short-term borrowings ....................... 3,436 51.7 6.04 4,047 56.1 5.58 (15.1)
Long-term debt .............................. 4,867 72.4 5.97 3,462 51.4 5.97 40.6
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely the junior subordinated
debentures of the parent company ........... 300 6.0 8.09 -- -- -- **
---------------------- --------------------
Total interest-bearing liabilities ....... 24,682 291.4 4.74 24,972 278.4 4.48 (1.2)
Other liabilities ........................... 1,205 1,150 4.8
Preferred equity ............................ -- 90 **
Common equity ............................... 3,069 3,153 (2.7)
Unrealized loss on available-for-sale
securities, net of tax ..................... (15) (21) 28.6
-------- --------
Total liabilities and shareholders' equity $ 35,435 $ 35,922 (1.4)%
======== ======== ========
Net interest income ......................... $ 389.6 $ 391.8
======== ========
Gross interest margin ....................... 3.84% 3.92%
====== ======
Gross interest margin without
taxable-equivalent increments ............. 3.78% 3.85%
====== ======
Net interest margin ......................... 4.91% 4.91%
====== ======
Net interest margin without taxable-
equivalent increments ...................... 4.85% 4.84%
====================================================================================================================================
</TABLE>
Interest and rates are presented on a fully taxable-equivalent basis under a tax
rate of 35 percent.
Interest income and rates on loans include loan fees.
Nonaccrual loans are included in average loan balances.
* Before deducting the allowance for credit losses and excluding the unrealized
gain (loss) on available-for-sale securities.
**Not meaningful
<PAGE>
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
<TABLE>
<CAPTION>
For the Six Months Ended June 30
1997 1996
- ------------------------------------------------------------------------------------ --------------------------------- ---------
Yields Yields % Change
(In Millions) and and Average
(Unaudited) Balance Interest Rates Balance Interest Rates Balance
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Securities:
U.S. Treasury .............................. $ 394 $ 11.5 5.89% $ 771 $ 23.9 6.23% (48.9)%
Mortgage-backed ............................ 2,496 87.2 7.05 2,671 92.6 6.97 (6.6)
State and political ........................ 459 19.1 8.39 434 19.4 8.99 5.8
U.S. agencies and other .................... 64 1.9 5.99 331 10.2 6.20 (80.7)
Total securities .......................... 3,413 119.7 7.07 4,207 146.1 6.98 (18.9)
---------------------- --------------------
Unrealized loss on available-for-sale
securities ................................. (18) (1) **
-------- --------
Net securities ........................... 3,395 4,206 (19.3)
Trading account securities .................. 94 2.7 5.79 99 2.6 5.28 (5.1)
Federal funds sold and resale agreements .... 539 14.7 5.50 486 12.6 5.21 10.9
Loans:
Commercial:
Commercial ................................ 9,633 384.3 8.04 9,039 358.0 7.96 6.6
Financial institutions .................... 843 18.7 4.47 1,005 22.0 4.40 (16.1)
Real estate:
Commercial mortgage ...................... 3,056 134.2 8.86 2,964 133.2 9.04 3.1
Construction ............................. 707 32.2 9.18 454 20.7 9.17 55.7
---------------------- --------------------
Total commercial ......................... 14,239 569.4 8.06 13,462 533.9 7.98 5.8
Consumer:
Residential mortgage ...................... 2,906 113.3 7.86 3,625 140.8 7.81 (19.8)
Residential mortgage held for sale ........ 43 1.6 7.50 190 6.9 7.30 (77.4)
Home equity and second mortgage ........... 3,334 159.0 9.62 2,918 139.6 9.62 14.3
Credit card ............................... 2,795 166.7 12.03 2,548 157.2 12.41 9.7
Other ..................................... 3,875 186.6 9.71 3,888 182.1 9.42 (.3)
---------------------- --------------------
Total consumer ........................... 12,953 627.2 9.76 13,169 626.6 9.57 (1.6)
---------------------- --------------------
Total loans .............................. 27,192 1,196.6 8.87 26,631 1,160.5 8.76 2.1
Allowance for credit losses ................ 514 519 (1.0)
-------- --------
Net loans ................................. 26,678 26,112 2.2
Other earning assets ........................ 358 8.3 4.68 315 7.7 4.92 13.7
---------------------- --------------------
Total earning assets* .................... 31,596 1,342.0 8.57 31,738 1,329.5 8.42 (.4)
Cash and due from banks ..................... 1,754 1,786 (1.8)
Other assets ................................ 2,360 2,479 (4.8)
-------- --------
Total assets ............................. $ 35,178 $ 35,483 (.9)%
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits ............... $ 6,400 $ 6,363 .6%
Interest-bearing deposits:
Interest checking ......................... 2,865 18.9 1.33 3,085 20.8 1.36 (7.1)
Money market accounts ..................... 4,379 80.6 3.71 4,170 73.7 3.55 5.0
Other savings accounts .................... 1,536 16.2 2.13 1,666 17.8 2.15 (7.8)
Savings certificates ...................... 6,595 180.1 5.51 7,352 197.8 5.41 (10.3)
Certificates over $100,000 ................ 802 24.1 6.06 908 27.8 6.16 (11.7)
---------------------- --------------------
Total interest-bearing deposits .......... 16,177 319.9 3.99 17,181 337.9 3.96 (5.8)
Short-term borrowings ....................... 3,722 106.6 5.78 4,267 119.6 5.64 (12.8)
Long-term debt .............................. 4,376 129.0 5.94 3,368 100.9 6.02 29.9
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely the junior subordinated
debentures of the parent company ........... 300 12.1 8.09 -- -- -- **
---------------------- --------------------
Total interest-bearing liabilities ....... 24,575 567.6 4.66 24,816 558.4 4.53 (1.0)
Other liabilities ........................... 1,170 1,126 3.9
Preferred equity ............................ -- 96 **
Common equity ............................... 3,044 3,082 (1.2)
Unrealized loss on available-for-sale
securities, net of tax ..................... (11) -- **
-------- --------
Total liabilities and shareholders' equity $ 35,178 $ 35,483 (.9)%
======== ======== =======
Net interest income ......................... $ 774.4 $ 771.1
======== ========
Gross interest margin ....................... 3.91% 3.89%
====== ======
Gross interest margin without
taxable-equivalent increments ............. 3.85% 3.83%
====== ======
Net interest margin ......................... 4.94% 4.89%
====== ======
Net interest margin without taxable-
equivalent increments ...................... 4.88% 4.82%
====================================================================================================================================
</TABLE>
Interest and rates are presented on a fully taxable-equivalent basis under a tax
rate of 35 percent.
Interest income and rates on loans include loan fees. Nonaccrual loans are
included in average loan balances.
* Before deducting the allowance for credit losses and excluding the unrealized
gain (loss) on available-for-sale securities.
**Not meaningful
<PAGE>
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES -- On August 1, 1997, the Company's Certificate of
Incorporation was amended as described in Item 4 below. Such amendment affects
the voting requirements for certain actions requiring the vote of the holders of
the Company's common stock. The Certificate of Incorporation was also amended to
increase the total number of shares of all classes of stock which the Company
has the authority to issue from 210,000,000 (consisting of 200,000,000 shares of
common stock and 10,000,000 shares of preferred stock) to 510,000,000
(consisting of 500,000,000 shares of common stock and 10,000,000 shares of
preferred stock). The Company also amended its By-Laws in certain respects,
effective August 1, 1997, in connection with the merger described in Item 4
below.
Also on August 1, 1997 in connection with such merger, the Company issued
6,000,000 shares of its 8 1/8 % Cumulative Preferred Stock, Series A, par value
$1.00 per share, liquidation preference $25 per share (the "Preferred Stock").
The Preferred Stock was issued in exchange for shares of outstanding preferred
stock of U.S. Bancorp having substantially identical terms. The Preferred Stock
ranks prior to the Company's common stock with respect to the payment of
dividends and distribution of assets upon dissolution, liquidation or winding up
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- A Special Meeting
of Shareholders of First Bank System, Inc. was held on Thursday, July 31, 1997,
at the First Bank on Marquette Avenue, 10th Floor Auditorium, 90 South Sixth
Street, Minneapolis, Minnesota. John F. Grundhofer, Chairman, President and
Chief Executive Officer, presided.
The holders of 123,390,573 shares of common stock, 92.4 percent of the
133,606,498 outstanding shares entitled to vote as of the record date, were
represented at the meeting in person or by proxy. The proposal to approve and
adopt an Agreement and Plan of Merger dated as of March 19, 1997, pursuant to
which U. S. Bancorp merged with and into First Bank System, Inc. (and First Bank
System, Inc. was renamed "U.S. Bancorp") was approved. The proposal to approve
an amendment to the First Bank System, Inc. Certificate of Incorporation to
increase the maximum number of Directors to 30 and to exempt from the 80 percent
shareholder voting requirement any future amendment to the Certificate of
Incorporation to reduce the maximum number of Directors to not less than the
greater of (i) the number of Directors then in office and (ii) 24 (the "Board
Expansion Amendment"), was approved. The 1997 Stock Incentive Plan of new U.S.
Bancorp was approved. The tabulation for each proposal is listed in the table
below.
SUMMARY OF MATTERS VOTED UPON BY SHAREHOLDERS
<TABLE>
<CAPTION>
Number of Shares
---------------------------------------------------
For Against Abstain Non-Vote
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Approve and Adopt Agreement and Plan of Merger 115,115,935 687,117 694,208 6,893,313
Approve the Board Expansion Amendment 111,586,107 4,150,394 1,143,366 6,510,706
Approve the 1997 Stock Incentive Plan 105,085,834 16,114,805 1,807,027 382,907
</TABLE>
For a copy of the meeting minutes, please write to the Office of the Secretary,
U.S. Bancorp, P.O. Box 522, Minneapolis, Minnesota 55480.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3(a) Restated Certificate of Incorporation. Previously filed as Exhibit 3.1
to Form 8-K filed August 1, 1997 and incorporated herein by reference.
3(b) By-Laws, as amended. Previously filed as Exhibit 3.2 to Form 8-K filed
August 1, 1997 and incorporated herein by reference.
4 Certificate of Designations for U.S. Bancorp 8 1/8% Cumulative
Preferred Stock, Series A, par value $1.00 per share, liquidation
preference $25 per share. Previously filed as Exhibit B to Exhibit 3.1
to Form 8-K filed August 1, 1997 and incorporated herein by reference.
11 Computation of Primary and Fully Diluted Net Income Per Common Share
12 Computation of Ratio of Earnings to Fixed Charges
27 Article 9 Financial Data Schedule*
* Copies of this exhibit will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the exhibit.
(b) REPORTS ON FORM 8-K
During the three months ended June 30, 1997, the Company filed the
following Current Report on Form 8-K:
Form 8-K filed June 24, 1997, which includes U. S. Bancorp's financial
statements and pro forma financial information filed pursuant to
Item 7.
SIGNATURE
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
By: /s/ DAVID J. PARRIN
David J. Parrin
Senior Vice President and Controller
(Chief Accounting Officer and Duly Authorized
DATE: August 13, 1997 Officer)
<PAGE>
First Class
U.S. Postage
PAID
Permit No. 2440
Minneapolis, MN
[LOGO] U.S. BANCORP
P.O. Box 522
Minneapolis, Minnesota
55480
http://www.fbs.com
SHAREHOLDER INQUIRIES
COMMON STOCK TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York acts as transfer agent and registrar,
dividend paying agent, and dividend reinvestment plan agent for U.S. Bancorp,
formerly known as First Bank System, and maintains all shareholder records for
the corporation. For information about U.S. Bancorp stock, or if you have
questions regarding your stock certificates (including transfers), address or
name changes, lost dividend checks, lost stock certificates, or Form 1099s,
please call First Chicago's Shareholder Services Center at (800) 446-2617,
weekdays, 8:00 a.m. to 10:00 p.m. EST, and Saturdays, 8:00 a.m. to 3:30 p.m.
EST. The TDD telephone number for the hearing impaired is (201) 222-4955.
First Chicago Trust Company of New York, P.O. Box 2500, Jersey City, New Jersey
07303-2500.
Telephone: (201) 324-0498
Fax: (201) 222-4892
Internet address: http://www.fctc.com
E-mail address: [email protected]
COMMON STOCK LISTING AND TRADING
U.S. Bancorp Common Stock is listed and traded on the New York Stock Exchange
under the ticker symbol USB.
DIVIDENDS
U.S. Bancorp currently pays quarterly dividends on its Common Stock on or about
the 15th of March, June, September and December, subject to prior Board
approval. Shareholders may choose to have dividends electronically deposited
directly into their bank accounts. For enrollment information, please call First
Chicago at (800) 446-2617.
DIVIDEND REINVESTMENT PLAN
U.S. Bancorp shareholders can take advantage of a plan that provides automatic
reinvestment of dividends and/or optional cash purchases of additional shares of
U.S. Bancorp Common Stock up to $60,000 per calendar year. If you would like
more information, please contact First Chicago Trust Company of New York, P.O.
Box 2598, Jersey City, New Jersey 07303-2598, (800) 446-2617.
INVESTMENT COMMUNITY CONTACTS
John R. Danielson
Senior Vice President, Investor and Corporate Relations
(612) 973-2261
General Information, Investor and Corporate Relations
(612) 973-2263
U.S. Bancorp
P.O. Box 522
Minneapolis, MN 55480
FINANCIAL INFORMATION
U.S. Bancorp news and financial results are available by fax, mail and the
internet.
FAX. To access our fax-on-demand service, call (800) 758-5804. When asked, enter
USB's extension number, "312402." Enter "1" for the most current news release or
"2" for a menu of recent releases. Enter your fax and telephone numbers as
directed. The information will be faxed to you promptly.
MAIL. On your request we will mail to you our quarterly earnings news releases.
To be added to U.S. Bancorp's mailing list, please contact Investor and
Corporate Relations, U.S. Bancorp, 601 Second Avenue South, Minneapolis,
Minnesota 55402-4302, (612) 973-2434.
INTERNET. For information about U.S. Bancorp, including news and financial
results, product information, and service locations, access our home page on the
World Wide Web. The address is http://www.fbs.com. Additional information for
customers of our U.S. Bank affiliates is available at http://www.usbank.com.
EXHIBIT 11
COMPUTATION OF PRIMARY AND FULLY DILUTED NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
---------------------------- ----------------------------
(Dollars in Millions, Except Per Share Data) 1997 1996 1997 1996
===============================================================================================================================
<S> <C> <C> <C> <C>
PRIMARY:
Average shares outstanding ....................................... 133,165,814 137,725,350 133,275,817 136,155,737
Net effect of the assumed purchase of stock under the stock option
and stock purchase plans--based on the treasury stock method
using average market price ...................................... 2,122,587 2,049,153 2,132,334 2,227,166
----------------------------------------------------------
135,288,401 139,774,503 135,408,151 138,382,903
==========================================================
Net income ....................................................... $ 178.3 $ 254.1 $ 350.1 $ 430.9
Preferred dividends .............................................. -- (1.6) -- (3.3)
----------------------------------------------------------
Net income applicable to common equity ........................... $ 178.3 $ 252.5 $ 350.1 $ 427.6
==========================================================
Net income per common share ...................................... $ 1.32 $ 1.81 $ 2.59 $ 3.09
==========================================================
FULLY DILUTED: *
Average shares outstanding ....................................... 133,165,814 137,725,350 133,275,817 136,155,737
Net effect of the assumed purchase of stock under the stock option
and stock purchase plans--based on the treasury stock method
using average market price or period-end market price, whichever
is higher ....................................................... 2,647,406 2,051,711 2,790,550 2,325,038
Assumed conversion of Series 1991A Preferred Stock ............... -- 3,107,268 -- 3,275,485
----------------------------------------------------------
135,813,220 142,884,329 136,066,367 141,756,260
==========================================================
Net income ....................................................... $ 178.3 $ 254.1 $ 350.1 $ 430.9
Preferred dividends, excluding 1991A Preferred Stock ............. -- -- -- --
Net income applicable to common equity ........................... $ 178.3 $ 254.1 $ 350.1 $ 430.9
==========================================================
Net income per common share ...................................... $ 1.31 $ 1.78 $ 2.57 $ 3.04
===============================================================================================================================
</TABLE>
*This calculation is submitted in accordance with Regulation S-K item 601(b)(11)
although not required by footnote 2 to paragraph 17 of APB Opinion No. 15
because it results in dilution of less than 3%.
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Six Three
Months Months
Ended Ended
June 30 June 30
(Dollars in Millions) 1997 1997
=======================================================================================================
<S> <C> <C>
EARNINGS
1. Net income .............................................................. $ 350.1 $ 178.3
2. Applicable income taxes ................................................. 206.0 105.0
---------------------
3. Net income before taxes (1 + 2) $ 556.1 $ 283.3
=====================
4. Fixed charges:
a. Interest expense excluding interest on deposits .................... $ 247.7 $ 130.1
b. Portion of rents representative of interest and amortization of
debt expense ...................................................... 12.4 6.2
---------------------
c. Fixed charges excluding interest on deposits (4a + 4b) ............. 260.1 136.3
d. Interest on deposits ............................................... 319.9 161.3
---------------------
e. Fixed charges including interest on deposits (4c + 4d) ............. $ 580.0 $ 297.6
=====================
5. Amortization of interest capitalized .................................... $ -- $ --
6. Earnings excluding interest on deposits (3 + 4c + 5) .................... 816.2 419.6
7. Earnings including interest on deposits (3 + 4e + 5) .................... 1,136.1 580.9
8. Fixed charges excluding interest on deposits (4c) ....................... 260.1 136.3
9. Fixed charges including interest on deposits (4e) ....................... 580.0 297.6
RATIO OF EARNINGS TO FIXED CHARGES
10. Excluding interest on deposits (line 6/line 8) .......................... 3.14 3.08
11. Including interest on deposits (line 7/line 9) .......................... 1.96 1.95
=======================================================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE U.S.
BANCORP JUNE 30, 1997, 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,291,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,703,000
<TRADING-ASSETS> 115,000
<INVESTMENTS-HELD-FOR-SALE> 3,301,000
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 27,863,000
<ALLOWANCE> 508,100
<TOTAL-ASSETS> 37,729,000
<DEPOSITS> 25,231,000
<SHORT-TERM> 1,978,000
<LIABILITIES-OTHER> 944,000
<LONG-TERM> 5,744,000
0
0
<COMMON> 177,000
<OTHER-SE> 2,986,000
<TOTAL-LIABILITIES-AND-EQUITY> 37,729,000
<INTEREST-LOAN> 1,193,600
<INTEREST-INVEST> 113,300
<INTEREST-OTHER> 25,700
<INTEREST-TOTAL> 1,332,600
<INTEREST-DEPOSIT> 319,900
<INTEREST-EXPENSE> 567,600
<INTEREST-INCOME-NET> 765,000
<LOAN-LOSSES> 76,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 594,100
<INCOME-PRETAX> 556,100
<INCOME-PRE-EXTRAORDINARY> 350,100
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 350,100
<EPS-PRIMARY> 2.59
<EPS-DILUTED> 2.57
<YIELD-ACTUAL> 4.94
<LOANS-NON> 115,300
<LOANS-PAST> 40,200
<LOANS-TROUBLED> 100
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 516,500
<CHARGE-OFFS> 128,800
<RECOVERIES> 44,400
<ALLOWANCE-CLOSE> 508,100
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
