3
FORM 10-Q / SEPTEMBER 30, 1997
[LOGO] U.S. BANCORP
<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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)
(NOT APPLICABLE)
(Former name, former address and former fiscal year,
if changed since last report).
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 October 31, 1997
Common Stock, $1.25 Par Value 245,472,252 shares
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<PAGE>
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
September 30 September 30 September 30 September 30
(Dollars in Millions, Except Per Share Data) 1997 1996 1997 1996
============ ============ ============ ============
<S> <C> <C> <C> <C>
Income before nonrecurring items .................. $ 324.8 $ 290.6 $ 919.7 $ 850.3
Nonrecurring items ................................ (372.4) (34.9) (370.1) 76.3
--------- --------- --------- ---------
Net income (loss) ................................. $ (47.6) $ 255.7 $ 549.6 $ 926.6
========= ========= ========= =========
PER COMMON SHARE
Primary net income (loss) ......................... $ (.20) $ .98 $ 2.17 $ 3.59
Fully diluted net income (loss) ................... (.20) .98 2.16 3.55
Earnings (loss) on a cash basis (fully diluted)* .. (.09) 1.08 2.49 3.95
Dividends paid .................................... .4650 .4125 1.3950 1.2375
Common shareholders' equity ....................... 22.82 22.97
PER COMMON SHARE BEFORE NONRECURRING ITEMS
Primary income .................................... 1.30 1.12 3.66 3.29
Fully diluted income .............................. 1.29 1.11 3.64 3.26
Earnings on a cash basis (fully diluted)* ......... 1.41 1.22 3.97 3.54
--------- --------- --------- ---------
FINANCIAL RATIOS
Return on average assets .......................... (.28)% 1.50% 1.07% 1.84%
Return on average common equity ................... (3.5) 17.3 12.8 21.5
Efficiency ratio .................................. 84.3 56.8 61.7 53.3
Net interest margin (taxable-equivalent basis) .... 5.03 5.05 5.05 5.03
SELECTED FINANCIAL RATIOS BEFORE NONRECURRING ITEMS
Return on average assets .......................... 1.88 1.70 1.80 1.69
Return on average common equity ................... 22.3 19.7 21.5 19.7
Efficiency ratio .................................. 47.7 51.6 49.3 52.4
========= ========= ========= =========
September 30 December 31
1997 1996
--------- ---------
PERIOD END
Loans ............................................. $ 54,143 $ 52,355
Allowance for credit losses ....................... 1,020 993
Assets ............................................ 70,174 69,749
Total shareholders' equity ........................ 5,741 5,763
Tangible common equity to total assets** .......... 6.7% 6.7%
Tier 1 capital ratio .............................. 7.2 7.6
Total risk-based capital ratio .................... 11.4 11.9
Leverage ratio .................................... 7.3 7.5
========= =========
</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
<TABLE>
<S> <C>
PART I -- FINANCIAL INFORMATION
Management's Discussion and Analysis of Financial Condition and Results of Operations
(Item 2) .............................................................................. 2
Financial Statements (Item 1) ........................................................... 15
PART II -- OTHER INFORMATION
Exhibits and Reports on Form 8-K (Item 6) ............................................... 28
Signature ............................................................................... 28
Exhibit 10(a) -- Employment Agreement with John F. Grundhofer ........................... ***
Exhibit 10(b) -- Employment Agreement with Philip G. Heasley ............................ ***
Exhibit 10(c) -- Employment Agreement with Richard A. Zona .............................. ***
Exhibit 10(d) -- Employment Agreements with Gerry B. Cameron, Gary T. Duim and Robert D.
Sznewajs. Filed as Exhibits 10.1 - 10.3 to Registration Statement on
Form S-4, File No. 333-29409 and incorporated herein by reference ...... ***
Exhibit 11 -- Computation of Primary and Fully Diluted Net Income Per Common Share ...... 29
Exhibit 12 -- Computation of Ratio of Earnings to Fixed Charges ......................... 30
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.
FORWARD-LOOKING STATEMENTS
This form 10-Q includes forward-looking statements that involve inherent
risks and uncertainties. U.S. Bancorp cautions readers that a number of
important factors could cause actual results to differ materially from those in
the forward-looking statements. These factors include economic conditions and
competition in the geographic and business areas in which the Company operates,
inflation, fluctuations in interest rates, legislation and governmental
regulation and the progress of integrating former U. S. Bancorp.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
U.S. Bancorp, formerly known as First Bank System, Inc. (the "Company"), is the
organization created by the merger of First Bank System, Inc. ("FBS") and U. S.
Bancorp ("USBC") of Portland, Oregon. The merger was completed on August 1,
1997 as a pooling-of-interests, and prior period financial statements have been
restated to reflect the merger.
EARNINGS SUMMARY -- The Company reported third quarter 1997 operating earnings
(net income excluding nonrecurring items) of $324.8 million, compared with
$290.6 million in the third quarter of 1996. On a fully diluted per share
basis, operating earnings were $1.29 in the third quarter of 1997, compared
with $1.11 in the third quarter of 1996, an increase of 16 percent. Return on
average assets and return on average common equity, excluding nonrecurring
items, were 1.88 percent and 22.3 percent, respectively, in the third quarter
of 1997, compared with returns of 1.70 percent and 19.7 percent in the third
quarter of 1996. Excluding nonrecurring items, the efficiency ratio (the ratio
of expenses to revenues) improved to 47.7 percent in the third quarter of 1997
from 51.6 percent in the third quarter of 1996.
Operating earnings for the third quarter of 1997 reflected growth in both
net interest income and noninterest income and a decrease in noninterest
expense from the third quarter of 1996. Third quarter net interest income on a
taxable-equivalent basis increased $9.8 million (1 percent) from the third
quarter of 1996 to $779.8 million, due primarily to an increase in earning
assets. Noninterest income, excluding nonrecurring items, increased $44.3
million (12 percent) from the third quarter of 1996. The increase was the
result of growth in all categories of fee revenue. Third quarter noninterest
expense, excluding nonrecurring items, decreased $18.1 million (3 percent) from
the third quarter of 1996, reflecting the initial benefits of the merger.
As a result of merger-related charges, the Company recorded a net loss
for the third quarter of 1997 of $47.6 million, or $.20 per fully diluted
share, compared with net income of $255.7 million, or $.98 per fully diluted
share, in the third quarter of 1996. Nonrecurring items decreased net income
$372.4 million ($525.8 million on a pretax basis) or $1.49 per share in the
third quarter of 1997. Nonrecurring pretax gains included a $9.4 million gain
on the sale of USBC's affinity credit card portfolio. Nonrecurring pretax
charges of $535.2 million consisted of $440.2 million of merger-related
expenses and a $95.0 million merger-related provision for credit losses.
Merger-related expenses included: $232.3 million of severance costs; $65.8
million of occupancy/equipment writedowns; $43.4 million of capitalized
software and other asset write-offs; $35.0 million of investment banking and
other transaction costs; $27.1 million of conversion expenses incurred; and,
$36.6 million of other merger-related expenses. Approximately $190.0 million of
additional merger-related expenses are expected to be incurred over the next
four quarters. The $95.0 million merger-related provision for credit losses and
a related $62.3 million of charge-offs were recorded as a result of efforts to
align the classification and charge-off practices of the former USBC with those
of the Company.
Nonrecurring items decreased net income $34.9 million ($56.2 million on a
pretax basis) or $.13 per share in the third quarter 1996. Nonrecurring pretax
gains included a $4.2 million gain on the sale of premises and $.9 million of
net securities gains. Nonrecurring pretax charges consisted of a $61.3 million
one-time special assessment by the Federal Deposit Insurance Corporation
("FDIC") on Savings Association Insurance Fund ("SAIF") deposits.
Operating earnings for the first nine months of 1997 were $919.7 million
compared with $850.3 million in the first nine months of 1996. On a fully
diluted per share basis, operating earnings were $3.64 in the first nine months
of 1997, compared with $3.26 in the first nine months of 1996, an increase of
12 percent. Year-to-date return on average assets and return on average common
equity, excluding nonrecurring items, were 1.80 percent and 21.5 percent,
respectively, in the first nine months of 1997, compared with returns of 1.69
percent and 19.7 percent, in the first nine months of 1996. Excluding
nonrecurring items, the year-to-date efficiency ratio improved to 49.3 percent
from 52.4 percent in 1996.
Net income for the first nine months of 1997 was $549.6 million, compared
with $926.6 million for the first nine months of 1996. Nonrecurring items
decreased net income $370.1 million ($522.2 million on a pre-tax basis), or
$1.48 per share for the first nine months of 1997. In addition to the third
quarter 1997 nonrecurring items discussed above, nonrecurring items in the first
nine months of 1997 included $3.6 million of pretax net securities gains.
Nonrecurring items increased net income $76.3 million ($144.6 million on a
pretax basis) or $.29 per share for the first nine months of 1996. For the nine
months ended September 30, 1996, nonrecurring gains included: $190 million, net
of expenses, received for the termination of the First Interstate Bancorp merger
agreement; a $65 million state income tax refund, including interest; a $45.8
million gain on the sale of the Company's mortgage banking operations; a $25.6
million gain on branch and credit card portfolio sales; a $4.2 million gain on
the sale of premises; and, $20.3 million in net securities gains.
<PAGE>
TABLE 1 SUMMARY OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
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(Taxable-Equivalent Basis; September 30 September 30 September 30 September 30
Dollars In Millions, Except Per Share Data) 1997 1996 1997 1996
=========== =========== =========== ===========
<S> <C> <C> <C> <C>
Interest income ...................................... $ 1,346.6 $ 1,310.5 $ 3,989.3 $ 3,859.4
Interest expense ..................................... 566.8 540.5 1,668.0 1,602.8
----------- ----------- ----------- -----------
Net interest income ................................. 779.8 770.0 2,321.3 2,256.6
Provision for credit losses .......................... 185.0 73.1 370.3 195.7
----------- ----------- ----------- -----------
Net interest income after provision for credit losses 594.8 696.9 1,951.0 2,060.9
Securities gains ..................................... -- .9 3.6 20.3
Other nonrecurring gains ............................. 9.4 4.2 9.4 330.6
Other noninterest income ............................. 400.3 356.0 1,181.7 1,071.4
Merger-related charges ............................... 440.2 -- 440.2 88.1
Other nonrecurring charges ........................... -- 61.3 -- 118.2
Other noninterest expense ............................ 562.9 581.0 1,727.9 1,744.9
----------- ----------- ----------- -----------
Income before income taxes .......................... 1.4 415.7 977.6 1,532.0
Taxable-equivalent adjustment ........................ 14.5 16.1 44.2 48.2
Income taxes ......................................... 34.5 143.9 383.8 557.2
----------- ----------- ----------- -----------
Net income (loss) ................................... $ (47.6) $ 255.7 $ 549.6 $ 926.6
=========== =========== =========== ===========
Return on average assets ............................. (.28)% 1.50% 1.07% 1.84%
Return on average common equity ...................... (3.5) 17.3 12.8 21.5
Net interest margin .................................. 5.03 5.05 5.05 5.03
Efficiency ratio ..................................... 84.3 56.8 61.7 53.3
Efficiency ratio before nonrecurring items ........... 47.7 51.6 49.3 52.4
=========== =========== =========== ===========
Per Common Share:
Net income (loss) .................................... $ (.20) $ .98 $ 2.17 $ 3.59
Dividends paid ....................................... .4650 .4125 1.3950 1.2375
=========== =========== =========== ===========
</TABLE>
Nonrecurring charges in the first nine months of 1996 included: $49.5 million
of merger and integration charges; $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; $17.3 million to
acquire credit card and revolving credit software and to write-off other
miscellaneous assets; and, a $61.3 million one-time special assessment on SAIF
deposits.
Operating results reflect the following acquisition and divestiture
activity: the April 1997 acquisition of Business and Professional Bank of
Sacramento, California; the February 1997 securitization and sale of $420
million of corporate charge card receivables; the January 1997 acquisitions of
Sun Capital Bancorp of St. George, Utah and the bond indenture services and
paying agency business of Comerica Incorporated; the June 1996 acquisition of
California Bancshares, Inc.; and, the February 1996 acquisition of Omaha-based
FirsTier Financial, Inc.
On September 15, 1997, the Company announced that it would acquire Zappco,
Inc., a bank holding company headquartered in St. Cloud, Minnesota, with three
banks, six banking locations and total assets of $360 million. The acquisition
is subject to regulatory approval and is expected to close late in the fourth
quarter of 1997.
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 ("ATM's"). Operating earnings
<PAGE>
TABLE 2 LINE OF BUSINESS FINANCIAL PERFORMANCE
<TABLE>
<CAPTION>
Retail Payment
Banking Systems
-------------------------------------------------------------
For the Three Months Ended September 30 Percent Percent
(Dollars in Millions) 1997 1996 Change 1997 1996 Change
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<S> <C> <C> <C> <C> <C> <C>
CONDENSED INCOME STATEMENT:
Net interest income
(taxable-equivalent basis) $373.3 $384.9 (3.0)% $56.5 $60.2 (6.1)%
Provision for credit losses 39.8 27.3 45.8 35.4 37.4 (5.3)
Noninterest income 131.3 119.7 9.7 114.4 97.1 17.8
Noninterest expense 302.5 330.5 (8.5) 71.0 62.9 12.9
Income taxes and
taxable-equivalent adjustment 62.4 56.5 24.7 21.9
-------------------- -------------------
Income before nonrecurring items $99.9 $90.3 10.6 $39.8 $35.1 13.4
==================== ===================
Net nonrecurring items (after-tax)
Net income
AVERAGE BALANCE SHEET DATA:
Commercial loans $1,854 $1,795 3.3 $1,095 $1,234 (11.3)
Consumer loans, excluding
residential mortgage 10,933 10,481 4.3 4,320 4,137 4.4
Residential mortgage loans 4,676 5,232 (10.6) -- -- --
Assets 22,338 24,275 (8.0) 6,561 6,453 1.7
Deposits 36,180 37,728 (4.1) 42 37 13.5
Common equity 1,727 2,001 (13.7) 509 548 (7.1)
-------------------- -------------------
Return on average assets 1.77% 1.48% 2.41% 2.16 %
Return on average common equity
("ROCE") 22.9 18.0 31.0 25.5
Net tangible ROCE ** 39.5 30.1 50.4 40.3
Efficiency ratio 59.9 65.5 41.5 40.0
Efficiency ratio on a cash basis** 57.3 63.1 38.9 37.2
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</TABLE>
*Not meaningful
**Calculated by excluding goodwill and other intangibles and the related
amortization.
Note: Nonrecurring items are not allocated to the business lines.
were $99.9 million in the third quarter of 1997 compared with $90.3 million in
the third quarter of 1996. Third quarter return on average assets increased to
1.77 percent from 1.48 percent in the same quarter a year ago. Net tangible
return on average common equity increased to 39.5 percent compared with 30.1
percent in the third quarter of the prior year.
Net interest income declined 3 percent from the third quarter of the prior
year, due primarily to the planned runoff of the residential mortgage loan
portfolio. Noninterest income increased 10 percent in the third quarter as
compared to the same period in the prior year, due primarily to increases in
service charges on deposits and investment products and fees. Noninterest
expense decreased, reflecting the benefits of continued streamlining of branch
operations, as well as the integration of recent business combinations. The
third quarter 1997 efficiency ratio on a cash basis improved to 57.3 percent
from 63.1 percent in the third quarter of 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 13 percent in the third quarter of 1997 to $39.8 million compared with
$35.1 million in the third quarter of 1996. Third quarter return on average
assets was 2.41 percent compared with 2.16 percent in the third quarter of 1996,
and net tangible return on average common equity was 50.4 percent compared with
40.3 percent for the same quarter in the previous year.
Fee-based noninterest income increased 18 percent in the third quarter of
1997 compared with the same period in 1996. Excluding the reduction in fees
related to the first quarter 1997 Corporate Card securitization, fee-based
noninterest income increased 23 percent. The increase was due to growth in the
sales volume of the Corporate Card, the Purchasing Card, and the FBS
WorldPerks(R) VISA(R) card. Net interest income decreased 6 percent in the third
quarter of 1997 compared with the same period in 1996 due to a higher proportion
of retail customers who choose to pay off their credit card balance in full each
month and lower retail late fees. Noninterest expense increased due to increased
technology spending and higher variable transaction costs related to increased
sales volume.
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 9 percent to
<PAGE>
<TABLE>
<CAPTION>
Corporate Trust and
Business Banking and Commercial Institutional Financial Consolidated
Private Financial Services Banking Services Company
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Percent Percent Percent Percent
1997 1996 Change 1997 1996 Change 1997 1996 Change 1997 1996 Change
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$157.3 $147.1 6.9% $176.9 $165.8 6.7% $15.8 $12.0 31.7% $779.8 $770.0 1.3%
5.8 3.3 75.8 9.0 5.1 76.5 -- -- -- 90.0 73.1 23.1
44.7 42.8 4.4 40.3 34.0 18.5 69.6 62.4 11.5 400.3 356.0 12.4
80.4 80.0 .5 61.8 64.5 (4.2) 47.2 43.1 9.5 562.9 581.0 (3.1)
44.4 40.9 56.2 50.0 14.7 12.0 202.4 181.3
-------------------- --------------------- ------------------- ---------------------
$71.4 $65.7 8.7 $90.2 $80.2 12.5 $23.5 $19.3 21.8 324.8 290.6 11.8
==================== ===================== ===================
(372.4) (34.9) --
---------------------
($47.6) $255.7 --
=====================
$11,667 $10,736 8.7 $18,258 $16,742 9.1 $ -- $ -- -- $32,874 $30,507 7.8
562 551 2.0 -- -- -- -- -- -- 15,815 15,169 4.3
325 332 (2.1) -- -- -- -- -- -- 5,001 5,564 (10.1)
15,860 14,547 9.0 22,345 21,206 5.4 1,319 1,390 (5.1) 68,423 67,871 .8
5,531 5,227 5.8 3,785 3,273 15.6 1,497 1,308 14.4 47,035 47,573 (1.1)
1,448 1,424 1.7 1,662 1,484 12.0 390 332 17.5 5,736 5,789 (.9)
-------------------- --------------------- ------------------- ---------------------
1.79% 1.80% 1.60% 1.50% * * 1.88% 1.70%
19.6 18.4 21.5 21.5 23.9% 23.1% 22.3 19.7
33.3 30.0 21.9 21.9 38.9 42.1 32.0 28.4
39.8 42.1 28.5 32.3 55.3 57.9 47.7 51.6
37.1 39.1 28.2 32.1 49.2 51.6 45.2 49.2
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</TABLE>
$71.4 million in the third quarter 1997. Third quarter 1997 return on average
assets was 1.79 percent compared with 1.80 percent in the third quarter of 1996.
Third quarter net tangible return on average common equity was 33.3 percent
compared with 30.0 percent in the third quarter of the prior year.
Net interest income increased 7 percent, reflecting growth in average loan
balances. The increase in noninterest income was primarily due to higher
personal trust fees. Noninterest expense was flat in the third quarter of 1997
compared with the third quarter of the prior year, helping the efficiency ratio
on a cash basis to improve to 37.1 percent in the third quarter of 1997 from
39.1 percent in the third quarter 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 were $90.2 million in the third quarter of
1997 compared with $80.2 million in the third quarter of 1996. Third quarter
1997 return on average assets was 1.60 percent compared with 1.50 percent in
third quarter 1996, and third quarter 1997 net tangible return on average common
equity was 21.9 percent, unchanged from the third quarter of 1996.
Net interest income increased 7 percent, reflecting growth in average loan
balances. Third quarter noninterest income increased $6.3 million or 19 percent
from the same period in 1996, due partially to the recognition of a number of
transaction fees during the quarter which are recurring on an annual basis but
do not occur in a regular quarterly pattern. The efficiency ratio on a cash
basis remained low at 28.2 percent in the third quarter of 1997 compared with
32.1 percent in the third quarter of 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 22 percent to $23.5 million in the third quarter of
1997 compared with $19.3 million in the third quarter of 1996. The net tangible
return on average common equity was 38.9 percent in the third quarter of 1997
compared with 42.1 percent in the third quarter of the prior year.
Net interest income increased 32 percent over 1996, reflecting the
acquisitions of the corporate trust businesses of BankAmerica and Comerica
Incorporated. Noninterest income increased 12 percent from the third quarter of
the prior year due primarily to increases in mutual fund advisory fees and
corporate trust fees. The efficiency ratio on a cash basis improved to 49.2
percent in the third quarter of 1997 from 51.6 percent in the third quarter of
1996, reflecting the
<PAGE>
TABLE 3 NET INTEREST INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
September 30 September 30 September 30 September 30
(Dollars In Millions) 1997 1996 1997 1996
========== ========== ========== ==========
<S> <C> <C> <C> <C>
Net interest income (taxable-equivalent basis) ...................... $ 779.8 $ 770.0 $ 2,321.3 $ 2,256.6
========== ========== ========== ==========
Average balances of earning assets supported by:
Interest-bearing liabilities ....................................... $ 47,764 $ 47,593 $ 47,954 $ 47,357
Noninterest-bearing liabilities .................................... 13,777 13,046 13,489 12,623
---------- ---------- ---------- ----------
Total earning assets .............................................. $ 61,541 $ 60,639 $ 61,443 $ 59,980
========== ========== ========== ==========
Average yields and weighted average rates (taxable-equivalent basis):
Earning assets yield ............................................... 8.68% 8.60% 8.68% 8.59%
Rate paid on interest-bearing liabilities .......................... 4.71 4.52 4.65 4.52
---------- ---------- ---------- ----------
Gross interest margin ............................................... 3.97% 4.08% 4.03% 4.07%
========== ========== ========== ==========
Net interest margin ................................................. 5.03% 5.05% 5.05% 5.03%
========== ========== ========== ==========
Net interest margin without taxable-equivalent increments ........... 4.93% 4.95% 4.95% 4.92%
========== ========== ========== ==========
</TABLE>
effective integration of acquisitions, process re-engineering efforts, and
revenue growth.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME -- Net interest income on a taxable-equivalent basis
increased $9.8 million (1 percent) to $779.8 million in the third quarter of
1997, and $64.7 million (3 percent) to $2.32 billion in the first nine months of
1997, compared with $770.0 million and $2.26 billion in the third quarter and
first nine months of 1996. The increases were primarily the result of growth in
earning assets, driven by loan production, partially offset by reductions in
investment securities and residential mortgages. Third quarter and year-to-date
average loans were up $2.5 billion (5 percent) and $2.8 billion (6 percent) from
the same periods in the prior year. Excluding residential mortgage loans and the
effect of the $420 million first quarter corporate card securitization, average
loans for the third quarter and year-to-date were higher by $3.4 billion (8
percent) and $3.8 billion (9 percent), than the same periods of 1996. These
increases reflected growth in both core commercial and consumer loans. Average
securities for the third quarter and first nine months of 1997 were lower by
$942 million and $911 million compared with the same periods in 1996, reflecting
both maturities and sales of securities. The net interest margin in the third
quarter and first nine months of 1997 was essentially unchanged at 5.03 percent
and 5.05 percent compared with 5.05 percent and 5.03 percent in 1996.
PROVISION FOR CREDIT LOSSES -- The provision for credit losses, before the $95.0
million merger-related provision, was $90.0 million in the third quarter and
$275.3 million in the first nine months of 1997, up $16.9 million (23 percent)
and $79.6 million (41 percent) from the third quarter and first nine months of
1996. Third quarter and year-to-date net charge-offs, before merger-related net
charge-offs of $62.3 million, totaled $102.2 million and $284.1 million, up from
$69.9 million and $190.3 million in the same periods of 1996. These increases
resulted from increased loan volumes and higher commercial net charge-offs. The
$95.0 million merger-related provision and $62.3 million of charge-offs were
taken as a result of efforts to align the classification and charge-off
practices of former USBC with those of the Company. Refer to "Corporate Risk
Management" for further information on credit quality.
NONINTEREST INCOME -- Third quarter 1997 noninterest income was $409.7
million, an increase of $48.6 million (13 percent) from the third quarter of
1996. Noninterest income in the first nine months of 1997 was $1.19 billion,
compared with $1.42 billion in the first nine months of 1996. A number of
nonrecurring gains affected third quarter and year-to-date noninterest income
in 1997 and 1996 as summarized in Table 4. Nonrecurring gains in the third
quarter of 1997 consisted of a $9.4 million gain on the sale of USBC's $45
million affinity credit card portfolio. Nonrecurring gains recorded in the
first nine months of 1997 included $3.6 million in net securities gains, in
addition to the $9.4 million gain on the sale of the credit card portfolio,
discussed above. Nonrecurring gains in the third quarter of 1996 included a
$4.2 million gain on the sale of premises and $.9 million of net securities
gains. Year-to-date 1996 nonrecurring gains included: $190 million, net of
expenses, received for the
<PAGE>
TABLE 4 NONINTEREST INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- ----------------------------
September 30 September 30 September 30 September 30
(Dollars In Millions) 1997 1996 1997 1996
======== ======== ======== ========
<S> <C> <C> <C> <C>
Credit card fee revenue ...................... $ 106.2 $ 90.1 $ 295.7 $ 260.2
Service charges on deposit accounts .......... 102.2 96.4 295.0 279.8
Trust fees ................................... 87.4 74.2 259.2 225.0
Investment products fees and commissions ..... 16.5 13.1 49.0 44.9
Trading account profits and commissions ...... 6.5 8.4 23.8 22.4
Other ........................................ 81.5 73.8 259.0 239.1
-------- -------- -------- --------
Subtotal .................................... 400.3 356.0 1,181.7 1,071.4
Gain on branch and credit card portfolio sales 9.4 -- 9.4 25.6
Securities gains ............................. -- .9 3.6 20.3
Termination fee, net ......................... -- -- -- 190.0
State income tax refund ...................... -- -- -- 65.0
Gain on sale of mortgage banking operations... -- -- -- 45.8
Other ........................................ -- 4.2 -- 4.2
-------- -------- -------- --------
Nonrecurring gains .......................... 9.4 5.1 13.0 350.9
-------- -------- -------- --------
Total noninterest income ................... $ 409.7 $ 361.1 $1,194.7 $1,422.3
======== ======== ======== ========
</TABLE>
termination of the First Interstate Bancorp merger agreement; a $65 million
state income tax refund, including interest; a $45.8 million gain on the sale of
the Company's mortgage banking operations; a $25.6 million gain on branch and
credit card portfolio sales; a $4.2 million gain on the sale of premises; and,
$20.3 million of net securities gains.
Excluding nonrecurring items, third quarter 1997 noninterest income was
$400.3 million, an increase of $44.3 million (12 percent), from the same quarter
of 1996 and year-to-date 1997 was $1.18 billion, an increase of $110.3 million
(10 percent) from year-to-date 1996. Excluding the reduction in fees related to
the first quarter corporate card securitization, noninterest income (before
nonrecurring items) increased by $49.4 million (14 percent) and $122.0 million
(11 percent) for the third quarter and year-to-date 1997, compared with the same
periods in 1996. Credit card fee revenue increased as a result of higher sales
volumes for Purchasing and Corporate cards and the First Bank WorldPerks VISA
card, partially offset by the first quarter corporate card securitization.
Excluding the effect of the corporate card securitization, credit card fee
revenue would have increased 24 percent in the third quarter and 18 percent in
the first nine months of 1997, compared with the same periods of 1996. Trust
fees were up due to growth in corporate, institutional and personal trust
businesses.
NONINTEREST EXPENSE -- Noninterest expense increased in 1997 as compared to 1996
as a result of nonrecurring charges. As summarized in Table 5, nonrecurring
items in 1997 consisted of merger-related charges of $440.2 million incurred in
connection with the USBC transaction, including: $232.3 million of severance
costs; $65.8 million of occupancy/equipment writedowns; $43.4 million of
capitalized software and other asset write-offs; $35.0 million of investment
banking and other transaction costs; $27.1 million of conversion expenses
incurred; and, $36.6 million of other merger-related expenses. Third quarter
1996 nonrecurring charges included a $61.3 million one-time special assessment
by the FDIC on SAIF deposits. Additional nonrecurring charges recorded in the
first nine months of 1996 totaled $145.0 million, including: merger and
integration charges of $49.5 million for the acquisitions of FirsTier, the
BankAmerica corporate trust business and West One Bancorp; $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.
Excluding nonrecurring items, third quarter and year-to-date noninterest
expense was $562.9 million and $1.73 billion, compared with $581.0 million and
$1.74 billion in the same periods of 1996. Expense reductions in a number of
categories reflect the initial benefits of the merger with USBC. The reduction
in other personnel reflects lower contract labor expense associated with 1996
technology projects now complete. Offsetting a portion of the favorable
variance in contract labor was an increase in professional service expense
related to several 1997 technology initiatives which involve third party
consulting
<PAGE>
TABLE 5 NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- -------------------------
September 30 September 30 September 30 September 30
(Dollars In Millions, Except Per Employee Data) 1997 1996 1997 1996
=========== ========= =========== ==========
<S> <C> <C> <C> <C>
Salaries** ....................................................... $ 242.2 $ 238.1 $ 729.7 $ 715.3
Employee benefits** .............................................. 49.2 52.2 167.5 167.2
----------- --------- ----------- ----------
Total personnel expense ........................................ 291.4 290.3 897.2 882.5
Net occupancy .................................................... 45.3 44.6 136.3 133.9
Furniture and equipment .......................................... 40.4 42.1 127.4 131.4
Goodwill and other intangible assets** ........................... 29.1 27.1 82.3 73.2
Professional services** .......................................... 18.9 13.5 47.5 40.6
Other personnel costs ............................................ 14.3 23.8 47.1 61.1
Telephone ........................................................ 15.5 15.9 44.8 44.7
Advertising and marketing ........................................ 13.3 15.7 42.2 46.3
Postage .......................................................... 11.3 10.8 34.0 32.5
Printing, stationery and supplies ................................ 8.6 11.0 28.5 32.7
Third party data processing ...................................... 9.0 8.1 28.0 26.3
FDIC insurance ................................................... 2.4 2.5 6.9 11.4
Other** .......................................................... 63.4 75.6 205.7 228.3
----------- --------- ----------- ----------
Subtotal ....................................................... 562.9 581.0 1,727.9 1,744.9
Merger-related ................................................... 440.2 -- 440.2 49.5
SAIF special assessment .......................................... -- 61.3 -- 61.3
Branch distribution resizing ..................................... -- -- -- 38.6
Goodwill and other intangible assets valuation adjustment ........ -- -- -- 29.5
Special employee bonus ........................................... -- -- -- 10.1
Other ............................................................ -- -- -- 17.3
----------- --------- ----------- ----------
Nonrecurring charges ........................................... 440.2 61.3 440.2 206.3
----------- --------- ----------- ----------
Total noninterest expense ..................................... $ 1,003.1 $ 642.3 $ 2,168.1 $ 1,951.2
=========== ========= =========== ==========
Efficiency ratio* ................................................ 84.3% 56.8% 61.7% 53.3%
Efficiency ratio before nonrecurring items ....................... 47.7 51.6 49.3 52.4
Average number of full-time equivalent employees ................. 25,477 27,229 26,171 27,325
Annualized personnel expense per employee** ...................... $ 45,751 $ 42,646 $ 45,710 $ 43,062
=========== ========= =========== ==========
</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 1996.
arrangements. Total salaries and benefits expense, before nonrecurring items,
increased due to acquisitions in the first quarter of 1997. However, average
full-time equivalent employees decreased 6 percent to 25,477 in third quarter
1997 from 27,229 in third quarter 1996. Excluding nonrecurring items, the
Company's efficiency ratio improved to 47.7 percent for the quarter and 49.3
percent year-to-date, compared with 51.6 percent and 52.4 percent for the same
periods a year ago.
The Company has incurred charges in connection with making its computer
systems year 2000 compliant and expects to continue to incur charges related to
this project through 1999. However, none of these costs are expected to have a
significant impact on the results of operations.
PROVISION FOR INCOME TAXES -- The provision for income taxes was $34.5 million
in the third quarter and $383.8 million in the first nine months of 1997,
compared with $143.9 million and $557.2 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 in the third quarter and first nine
months of 1997, as discussed above.
BALANCE SHEET ANALYSIS
LOANS -- The Company's loan portfolio was $54.1 billion at September 30, 1997,
compared with $52.4 billion at December 31, 1996. The portfolio of commercial
loans totaled $33.4 billion at September 30, 1997, up $1.8 billion from December
31, 1996, despite $420 million of
<PAGE>
corporate charge card receivables securitized and sold in the first quarter of
1997. The increase was primarily attributable to growth in core commercial
loans. Excluding residential mortgage loan balances, consumer loans were $15.9
billion at September 30, 1997, compared with $15.4 billion at December 31, 1996,
reflecting growth in credit card, student, and home equity and second mortgage
loans.
SECURITIES -- At September 30, 1997, available-for-sale and held-to-maturity
securities were $6.8 billion compared with $7.3 billion at December 31, 1996,
reflecting both maturities and sales of securities.
DEPOSITS -- Noninterest-bearing deposits were $14.4 billion at September 30,
1997, compared with $14.3 billion at December 31, 1996. Interest-bearing
deposits totaled $33.9 billion at September 30, 1997, compared with $35.0
billion at December 31, 1996. The decrease in interest-bearing deposit balances
reflects customers moving funds into alternative investment vehicles and a
reduction in time certificates greater than $100,000 of $231 million.
BORROWINGS -- Short-term borrowings, which include federal funds purchased,
securities sold under agreements to repurchase and other short-term borrowings,
were $4.5 billion at September 30, 1997, down from $6.6 billion at year-end
1996. The decrease was due to the net maturity of $1.1 billion of short-term
bank notes and a $908 million reduction in federal funds purchased and
securities sold under agreements to repurchase.
Long-term debt was $8.7 billion at September 30, 1997, up from $5.4
billion at December 31, 1996. The Company issued $4.1 billion of debt, with an
average original maturity of 2.0 years, under its bank note program, during the
first nine months of 1997, as short-term borrowings were replaced with
long-term debt. These issuances were partially offset by net maturities of $368
million of Federal Home Loan Bank Advances and $445 million of other debt.
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 credit risk, the Company considers loan portfolio
composition, the level of allowance coverage, and macroeconomic factors. Most
economic indicators in the Company's seventeen state primary operating region
(Minnesota, Oregon, Washington, Colorado, California, Idaho, Nebraska, North
Dakota, Nevada, South Dakota, Montana, Iowa, Illinois, Utah, Wisconsin, Kansas,
and Wyoming) compare favorably with national trends. Approximately 85 percent
of the Company's loan portfolio
TABLE 6 ANNUALIZED NET CHARGE-OFFS AS A PERCENTAGE OF AVERAGE LOANS OUTSTANDING
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
September 30 September 30 September 30 September 30
1997 1996 1997 1996
============== ============== ============== =============
<S> <C> <C> <C> <C>
COMMERCIAL:
Commercial ................. 1.44% .20% .77% .12%
Real estate:
Commercial mortgage ....... .02 (.23) (.20) (.08)
Construction .............. .24 (.02) .20 .09
------ ----- ----- -----
Total commercial .......... 1.01 .08 .49 .07
CONSUMER:
Residential mortgage ....... .13 .06 .09 .05
Credit card ................ 4.23 4.18 4.20 3.83
Other ...................... 1.28 .88 1.24 .89
------ ----- ----- -----
Total consumer ............ 1.54 1.22 1.47 1.14
------ ----- ----- -----
Total ..................... 1.22% .54% .87% .50%
====== ===== ===== =====
</TABLE>
<PAGE>
TABLE 7 SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- ----------------------------
September 30 September 30 September 30 September 30
(Dollars In Millions) 1997 1996 1997 1996
========= ========= ========= =========
<S> <C> <C> <C> <C>
Balance at beginning of period .................. $ 999.4 $ 984.2 $ 992.5 $ 908.0
CHARGE-OFFS:
Commercial:
Commercial .................................... 93.8 21.0 156.7 60.3
Real estate:
Commercial mortgage .......................... 3.8 2.1 8.6 16.8
Construction ................................. 1.5 .2 4.2 1.5
--------- --------- --------- ---------
Total commercial ............................. 99.1 23.3 169.5 78.6
Consumer:
Residential mortgage .......................... 1.9 1.6 4.4 4.2
Credit card ................................... 44.2 40.7 128.7 109.4
Other ......................................... 47.4 33.2 137.3 100.8
--------- --------- --------- ---------
Total consumer ............................... 93.5 75.5 270.4 214.4
--------- --------- --------- ---------
Total ........................................ 192.6 98.8 439.9 293.0
RECOVERIES:
Commercial:
Commercial .................................... 11.8 10.4 29.7 41.8
Real estate:
Commercial mortgage .......................... 3.4 6.5 20.8 21.5
Construction ................................. .1 .3 .8 .4
--------- --------- --------- ---------
Total commercial ............................. 15.3 17.2 51.3 63.7
Consumer:
Residential mortgage .......................... .2 .7 .9 2.0
Credit card ................................... 4.1 3.7 15.2 11.9
Other ......................................... 8.5 7.3 26.1 25.1
--------- --------- --------- ---------
Total consumer ............................... 12.8 11.7 42.2 39.0
--------- --------- --------- ---------
Total ........................................ 28.1 28.9 93.5 102.7
NET CHARGE-OFFS:
Commercial:
Commercial .................................... 82.0 10.6 127.0 18.5
Real estate:
Commercial mortgage .......................... .4 (4.4) (12.2) (4.7)
Construction ................................. 1.4 (.1) 3.4 1.1
--------- --------- --------- ---------
Total commercial ............................. 83.8 6.1 118.2 14.9
Consumer:
Residential mortgage .......................... 1.7 .9 3.5 2.2
Credit card ................................... 40.1 37.0 113.5 97.5
Other ......................................... 38.9 25.9 111.2 75.7
--------- --------- --------- ---------
Total consumer ............................... 80.7 63.8 228.2 175.4
--------- --------- --------- ---------
Total ........................................ 164.5 69.9 346.4 190.3
Provision charged to operating expense .......... 185.0 73.1 370.3 195.7
Additions related to acquisitions and other ..... -- -- 3.5 74.0
--------- --------- --------- ---------
Balance at end of period ........................ $ 1,019.9 $ 987.4 $ 1,019.9 $ 987.4
========= ========= ========= =========
Allowance as a percentage of period-end loans ... 1.88% 1.91%
Allowance as a percentage of nonperforming loans 343 357
Allowance as a percentage of nonperforming assets 302 286
========= =========
</TABLE>
<PAGE>
TABLE 8 NONPERFORMING ASSETS*
<TABLE>
<CAPTION>
September 30 December 31
(Dollars In Millions) 1997 1996
============ ============
<S> <C> <C>
COMMERCIAL:
Commercial ...................................................... $ 176.2 $ 143.7
Real estate:
Commercial mortgage ............................................ 47.0 44.4
Construction ................................................... 15.4 18.8
-------- --------
Total commercial ............................................... 238.6 206.9
CONSUMER:
Residential mortgage ............................................ 53.7 57.6
Other ........................................................... 4.8 4.8
-------- --------
Total consumer ................................................. 58.5 62.4
-------- --------
Total nonperforming loans ...................................... 297.1 269.3
OTHER REAL ESTATE ................................................ 29.0 43.2
OTHER NONPERFORMING ASSETS ....................................... 12.1 7.5
-------- --------
Total nonperforming assets ..................................... $ 338.2 $ 320.0
======== ========
Accruing loans 90 days or more past due ** ....................... $ 79.5 $ 90.6
Nonperforming loans to total loans ............................... .55% .51%
Nonperforming assets to total loans plus other real estate ....... .62 .61
======== ========
</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.
consists of credit to businesses and consumers in this operating region.
NET CHARGE-OFFS AND ALLOWANCE FOR CREDIT LOSSES -- Net loan charge-offs totaled
$164.5 million and $346.4 million in the third quarter and first nine months of
1997, compared with $69.9 million and $190.3 million in the same periods of
1996. Included in third quarter and year-to-date net charge-offs was $62.3
million of merger-related charge-offs, taken to align the classification and
charge-off practices of the former USBC with those of the Company.
Commercial loan net charge-offs for the quarter and year-to-date,
excluding merger-related charge-offs of $55.3 million, were $28.5 million and
$62.9 million compared with $6.1 million in the third quarter of 1996 and $14.9
million in the first nine months of 1996. The majority of the third quarter
1997 charge-offs was attributable to one large credit.
Third quarter and year-to-date consumer loan net charge-offs, excluding
merger-related charge-offs of $7.0 million, were $73.7 million and $221.2
million compared with $63.8 million in the third quarter of 1996 and $175.4
million in the first nine of 1996. The increases over corresponding 1996 periods
reflect higher average nonmortgage loan balances and higher loss ratios in
several categories, including bankruptcies.
NONPERFORMING ASSETS -- Nonperforming assets include all nonaccrual loans,
restructured loans, other real estate and other nonperforming assets owned by
the Company. At September 30, 1997, nonperforming assets totaled
TABLE 9 DELINQUENT LOAN RATIOS*
September 30 December 31
90 days or more past due 1997 1996
============ ===========
COMMERCIAL:
Commercial ................. .78% .70%
Real estate:
Commercial mortgage ....... .58 .55
Construction .............. .66 .91
----- -----
Total commercial .......... .72 .68
CONSUMER:
Residential mortgage ....... 1.39 1.35
Credit card ................ .59 .88
Other ...................... .38 .35
----- -----
Total consumer ............ .66 .70
----- -----
Total ..................... .70% .69%
===== =====
* RATIOS INCLUDE NONPERFORMING LOANS AND ARE EXPRESSED AS A PERCENT OF ENDING
LOAN BALANCES.
<PAGE>
$338.2 million, up $18.2 million (6 percent) from December 31, 1996. The ratio
of nonperforming assets to loans and other real estate was .62 percent at
September 30, 1997, compared with .61 percent at December 31, 1996, and .66
percent at September 30, 1996. Consumer loans 30 days or more past due were 2.56
percent of the consumer loan portfolio at September 30, 1997, compared with 2.57
percent at December 31, 1996. The percentage of consumer loans 90 days or more
past due of the total consumer loan portfolio totaled .65 percent at September
30, 1997, compared with .71 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 risk: Net
Interest Income Simulation Modeling, Market Value/Duration Analysis, and
Repricing Mismatch Analysis.
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 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. 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: The net interest income simulation model is
limited by 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 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.
TABLE 10 INTEREST RATE SWAP HEDGING PORTFOLIO NOTIONAL BALANCES AND YIELDS BY
MATURITY DATE
<TABLE>
<CAPTION>
At September 30, 1997 (Dollars in Millions)
Weighted Weighted
Average Average
Receive Fixed Swaps* Notional Interest Rate Interest Rate
Maturity Date Amount Received Paid
---------- --------------- --------------
<S> <C> <C> <C>
1997 (remaining three months) ............... $ 100 7.81% 5.66%
1998 ........................................ 813 6.03 5.68
1999 ........................................ 1,067 6.31 5.66
2000 ........................................ 388 6.57 5.68
2001 ........................................ 360 6.53 5.66
After 2001 .................................. 1,463 6.83 5.67
-------
Total ....................................... $ 4,191 6.51% 5.67%
======= ==== ====
</TABLE>
* AT SEPTEMBER 30, 1997, THE COMPANY HAD NO SWAPS IN ITS HEDGING PORTFOLIO THAT
REQUIRED IT TO PAY FIXED-RATE INTEREST.
<PAGE>
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 September 30, 1997, the Company received payments on $4.2 billion
notional amount of interest rate swap agreements based on fixed interest rates,
and made payments based on variable interest rates. These swaps had a weighted
average rate paid of 5.67 percent and a weighted average rate received of 6.52
percent. The remaining maturity of these agreements ranges from two months to
10 years with an average remaining maturity of 3.7 years. Swaps increased net
interest income for the quarters ended September 30, 1997 and 1996 by $6.2
million and $7.3 million, and the nine months ended September 30, 1997 and 1996
by $18.0 million and $24.4 million.
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 September 30, 1997. To hedge against falling interest rates, the
Company uses interest rate floors. The total notional amount of floor
agreements purchased as of September 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 nine months ended September 30, 1997 and 1996.
CAPITAL MANAGEMENT -- At September 30, 1997, total tangible common equity was
$4.6 billion, or 6.7 percent of assets, compared with 6.7 percent at December
31, 1996. Tier 1 and total risk-based capital ratios were 7.2 percent and 11.4
percent at September 30, 1997 compared with 7.6 percent and 11.9 percent at
December 31, 1996. The September 30, 1997 leverage ratio was 7.3 percent
compared with 7.5 percent at year-end 1996.
On August 1, 1997, the Company issued 109.9 million common shares to
acquire USBC. 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.
Approximately 30.6 million common shares have been repurchased under 1996
Board authorizations, including 4.5 million during 1997. All authorizations
were either completed or rescinded prior to the USBC acquisition.
On November 14, 1997, the Company redeemed all outstanding shares of its
preferred stock at a redemption price of $25 per share, together with accrued
and unpaid dividends.
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 127 amended SFAS
TABLE 11 CAPITAL RATIOS
September 30 December 31
(Dollars in Millions) 1997 1996
============ ===========
Tangible common equity* ..................... $ 4,625 $ 4,625
As a percent of assets ..................... 6.7% 6.7%
Tier 1 capital .............................. $ 4,915 $ 4,983
As a percent of risk-adjusted assets ...... 7.2% 7.6%
Total risk-based capital .................. $ 7,753 $ 7,777
As a percent of risk-adjusted assets ...... 11.4% 11.9%
Leverage ratio .............................. 7.3 7.5
======== ========
* DEFINED AS COMMON EQUITY LESS GOODWILL.
<PAGE>
125, 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 the Company's 1997 year-end financial statements. All prior
period earnings per share data shall be restated to conform to the provisions
of this statement. The adoption of SFAS 128 will not have a material impact on
the calculation of the Company's earnings per share.
DERIVATIVE FINANCIAL INSTRUMENTS -- "Disclosure of Accounting Policies for
Derivative Financial Instruments," a final rule issued by the Securities and
Exchange Commission, clarifies and expands 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. The Company's derivative trading activities are
not material to the consolidated financial statements; the cash flows from
these activities are included in operating activities. The quantitative and
qualitative information about market risk 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>
September 30 December 31
(In Millions, Except Shares) 1997 1996
============ ===========
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks .......................................................... $ 4,342 $ 4,813
Federal funds sold ............................................................... 56 95
Securities purchased under agreements to resell .................................. 473 803
Trading account securities ....................................................... 156 231
Available-for-sale securities .................................................... 6,832 6,473
Held-to-maturity securities (fair value: 12/31/96 - $811) ........................ -- 797
Loans ............................................................................ 54,143 52,355
Less allowance for credit losses ................................................ 1,020 993
------- -------
Net loans ....................................................................... 53,123 51,362
Bank premises and equipment ...................................................... 885 1,018
Interest receivable .............................................................. 401 377
Customers' liability on acceptances .............................................. 591 497
Other assets ..................................................................... 3,315 3,283
------- -------
Total assets ................................................................... $70,174 $69,749
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing ............................................................. $14,433 $14,344
Interest-bearing ............................................................... 33,941 35,012
------- -------
Total deposits ................................................................. 48,374 49,356
Federal funds purchased .......................................................... 1,199 1,672
Securities sold under agreements to repurchase ................................... 1,294 1,729
Other short-term funds borrowed .................................................. 2,004 3,191
Long-term debt ................................................................... 8,710 5,369
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely the junior subordinated debentures of the parent company ......... 600 600
Acceptances outstanding .......................................................... 591 497
Other liabilities ................................................................ 1,661 1,572
------- -------
Total liabilities .............................................................. 64,433 63,986
Shareholders' equity:
Preferred stock ................................................................. 150 150
Common stock, par value $1.25 a share - authorized 500,000,000 shares;
issued: 9/30/97 - 245,029,789 shares; 12/31/96 - 252,883,487 shares ............ 306 316
Capital surplus ................................................................. 1,767 1,929
Retained earnings ............................................................... 3,472 3,809
Unrealized gain on securities, net of tax ....................................... 46 5
Less cost of common stock in treasury:
12/31/96 - 6,877,497 shares .................................................... -- (446)
------- -------
Total shareholders' equity ..................................................... 5,741 5,763
------- -------
Total liabilities and shareholders' equity ..................................... $70,174 $69,749
======== =======
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
(In Millions, Except Per Share Data) September 30 September 30
(Unaudited) 1997 1996
============ ============
<S> <C> <C>
INTEREST INCOME
Loans .......................................................................... $ 1,211.1 $ 1,149.3
Securities:
Taxable ....................................................................... 89.0 104.5
Exempt from federal income taxes .............................................. 16.8 18.0
Other interest income .......................................................... 15.2 22.6
------------ ------------
Total interest income ........................................................ 1,332.1 1,294.4
INTEREST EXPENSE
Deposits ....................................................................... 362.3 363.6
Federal funds purchased and repurchase agreements .............................. 41.9 51.2
Other short-term funds borrowed ................................................ 28.2 48.2
Long-term debt ................................................................. 122.1 77.5
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely the junior subordinated debentures of the parent company 12.3 --
------------ ------------
Total interest expense ....................................................... 566.8 540.5
------------ ------------
Net interest income ............................................................ 765.3 753.9
Provision for credit losses .................................................... 185.0 73.1
------------ ------------
Net interest income after provision for credit losses .......................... 580.3 680.8
NONINTEREST INCOME
Credit card fee revenue ........................................................ 106.2 90.1
Service charges on deposit accounts ............................................ 102.2 96.4
Trust fees ..................................................................... 87.4 74.2
Gain on sale of mortgage banking operations, branches and other assets ......... 9.4 --
Securities gains ............................................................... -- .9
Termination fee ................................................................ -- --
State income tax refund ........................................................ -- --
Other .......................................................................... 104.5 99.5
------------ ------------
Total noninterest income ..................................................... 409.7 361.1
NONINTEREST EXPENSE
Salaries ....................................................................... 242.2 238.1
Employee benefits .............................................................. 49.2 52.2
Net occupancy .................................................................. 45.3 44.6
Furniture and equipment ........................................................ 40.4 42.1
Goodwill and other intangible assets ........................................... 29.1 27.1
Professional services .......................................................... 18.9 13.5
Other personnel costs .......................................................... 14.3 23.8
Merger, integration, and resizing .............................................. 440.2 --
SAIF special assessment ........................................................ -- 61.3
Other .......................................................................... 123.5 139.6
------------ ------------
Total noninterest expense .................................................... 1,003.1 642.3
------------ ------------
Income (loss) before income taxes .............................................. (13.1) 399.6
Applicable income taxes ........................................................ 34.5 143.9
------------ ------------
Net income (loss) .............................................................. $ (47.6) $ 255.7
============ ============
Net income (loss) applicable to common equity .................................. $ (50.7) $ 251.1
============ ============
EARNINGS PER COMMON SHARE
Average common and common equivalent shares .................................... 248,459,568 254,981,925
Net income (loss) .............................................................. $ (.20) $ .98
============ ============
</TABLE>
WIDE TABLE CONTINUED FROM ABOVE: CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------
(In Millions, Except Per Share Data) September 30 September 30
(Unaudited) 1997 1996
=============== ===============
<S> <C> <C>
INTEREST INCOME
Loans .......................................................................... $ 3,561.9 $ 3,370.3
Securities:
Taxable ....................................................................... 281.0 319.4
Exempt from federal income taxes .............................................. 51.5 53.5
Other interest income .......................................................... 50.7 68.0
------------ ------------
Total interest income ........................................................ 3,945.1 3,811.2
INTEREST EXPENSE
Deposits ....................................................................... 1,077.7 1,078.7
Federal funds purchased and repurchase agreements .............................. 140.6 150.2
Other short-term funds borrowed ................................................ 98.2 149.2
Long-term debt ................................................................. 314.6 224.7
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely the junior subordinated debentures of the parent company 36.9 --
------------ ------------
Total interest expense ....................................................... 1,668.0 1,602.8
------------ ------------
Net interest income ............................................................ 2,277.1 2,208.4
Provision for credit losses .................................................... 370.3 195.7
------------ ------------
Net interest income after provision for credit losses .......................... 1,906.8 2,012.7
NONINTEREST INCOME
Credit card fee revenue ........................................................ 295.7 260.2
Service charges on deposit accounts ............................................ 295.0 279.8
Trust fees ..................................................................... 259.2 225.0
Gain on sale of mortgage banking operations, branches and other assets ......... 9.4 71.4
Securities gains ............................................................... 3.6 20.3
Termination fee ................................................................ -- 190.0
State income tax refund ........................................................ -- 65.0
Other .......................................................................... 331.8 310.6
------------ ------------
Total noninterest income ..................................................... 1,194.7 1,422.3
NONINTEREST EXPENSE
Salaries ....................................................................... 729.7 724.5
Employee benefits .............................................................. 167.5 168.1
Net occupancy .................................................................. 136.3 133.9
Furniture and equipment ........................................................ 127.4 131.4
Goodwill and other intangible assets ........................................... 82.3 102.7
Professional services .......................................................... 47.5 40.6
Other personnel costs .......................................................... 47.1 61.1
Merger, integration, and resizing .............................................. 440.2 88.1
SAIF special assessment ........................................................ -- 61.3
Other .......................................................................... 390.1 439.5
------------ ------------
Total noninterest expense .................................................... 2,168.1 1,951.2
------------ ------------
Income (loss) before income taxes .............................................. 933.4 1,483.8
Applicable income taxes ........................................................ 383.8 557.2
------------ ------------
Net income (loss) .............................................................. $ 549.6 $ 926.6
============ ============
Net income (loss) applicable to common equity .................................. $ 540.4 $ 912.6
============ ============
EARNINGS PER COMMON SHARE
Average common and common equivalent shares .................................... 248,819,246 254,385,569
Net income (loss) .............................................................. $ 2.17 $ 3.59
============ ============
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common
(In Millions, Except Shares) Shares Preferred Common Capital
(Unaudited) Outstanding* Stock Stock Surplus
=========== =========== =========== =============
<S> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1995 ....... 241,031,881 $ 253.2 $ 311.6 $ 1,867.9
Net income ......................
Dividends declared:
Preferred ......................
Common .........................
Purchase and retirement of
treasury stock ................. (18,985,330) (13.1) (521.8)
Issuance of common stock:
Acquisitions ................... 23,751,183 19.8 677.2
Dividend reinvestment .......... 242,080 .1 4.3
Stock option and stock
purchase plans ................ 2,895,153 1.3 49.0
Redemption/conversion of
preferred stock ................ 549,061 (15.9)
Change in unrealized
gains/(losses) .................
----------- -------- -------- ----------
BALANCE SEPTEMBER 30, 1996 ...... 249,484,028 $ 237.3 $ 319.7 $ 2,076.6
============ ========= ========= ===========
BALANCE DECEMBER 31, 1996 ....... 246,005,990 $ 150.0 $ 316.1 $ 1,929.1
Net income ......................
Dividends declared:
Preferred ......................
Common .........................
Purchase and retirement of
treasury stock ................. (4,848,906) (13.6) (293.9)
Issuance of common stock:
Acquisitions ................... 302,352 .4 14.4
Dividend reinvestment .......... 165,946 .2 8.9
Stock option and stock
purchase plans ................ 3,404,407 3.2 108.7
Change in unrealized
gains/(losses) .................
----------- -------- -------- ----------
BALANCE SEPTEMBER 30, 1997 ...... 245,029,789 $ 150.0 $ 306.3 $ 1,767.2
============ ========= ========= ===========
</TABLE>
WIDE TABLE CONTINUED FROM ABOVE: CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Gains/(Losses)
(In Millions, Except Shares) Retained on Securities, Treasury
(Unaudited) Earnings Net of Tax Stock** Total
========== ================ ============ =============
<S> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1995 ....... $ 3,275.1 $ 31.9 $ (397.8) $ 5,341.9
Net income ...................... 926.6 926.6
Dividends declared:
Preferred ...................... (14.0) (14.0)
Common ......................... (306.1) (306.1)
Purchase and retirement of
treasury stock ................. (508.0) (1,042.9)
Issuance of common stock:
Acquisitions ................... (44.4) 384.2 1,036.8
Dividend reinvestment .......... 9.1 13.5
Stock option and stock
purchase plans ................ (78.6) 99.1 70.8
Redemption/conversion of
preferred stock ................ (16.1) 32.0 --
Change in unrealized
gains/(losses) ................. (58.7) (58.7)
---------- ------- --------- ----------
BALANCE SEPTEMBER 30, 1996 ...... $ 3,742.5 $ (26.8) $ (381.4) $ 5,967.9
========== ======= ========= ==========
BALANCE DECEMBER 31, 1996 ....... $ 3,809.4 $ 4.7 $ (445.9) $ 5,763.4
Net income ...................... 549.6 549.6
Dividends declared:
Preferred ...................... (9.2) (9.2)
Common ........................ (331.4) (331.4)
Purchase and retirement of
treasury stock ................. (514.5) 395.8 (426.2)
Issuance of common stock:
Acquisitions ................... 14.8
Dividend reinvestment .......... 5.6 14.7
Stock option and stock
purchase plans ................ (32.2) 44.5 124.2
Change in unrealized
gains/(losses) ................. 41.2 41.2
---------- ------- --------- ----------
BALANCE SEPTEMBER 30, 1997 ..... $ 3,471.7 $ 45.9 $ -- $ 5,741.1
========== ======= ========= ==========
</TABLE>
* REPRESENTS TOTAL COMMON SHARES LESS COMMON STOCK HELD IN TREASURY.
** ENDING TREASURY SHARES WERE 6,877,497 AT DECEMBER 31, 1996; 6,300,788 AT
SEPTEMBER 30, 1996; AND 8,297,756 AT DECEMBER 31, 1995.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
September 30 September 30
(Unaudited, In Millions) 1997 1996
============ ============
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities ................................ $ 1,075.0 $ 1,657.8
---------- ----------
INVESTING ACTIVITIES
Net cash provided (used) by:
Interest-bearing deposits with banks ...................................... 3.1 (1.1)
Loans outstanding ......................................................... (2,150.8) (1,278.1)
Securities purchased under agreements to resell ........................... 331.5 (163.8)
Available-for-sale securities:
Sales ..................................................................... 982.5 1,600.8
Maturities ................................................................ 1,130.9 1,633.0
Purchases ................................................................. (1,629.9) (1,172.2)
Maturities of held-to-maturity securities .................................. 37.4 86.0
Proceeds from sales of other real estate ................................... 52.2 94.2
Net purchases of bank premises and equipment ............................... (43.5) (86.6)
Securitization of corporate charge card balances ........................... 418.1 --
Cash and cash equivalents of acquired subsidiaries ......................... 4.5 245.8
Acquisitions, net of cash received ......................................... (23.6) (37.9)
Sales of subsidiary operations ............................................. -- (70.3)
Other-net .................................................................. (82.3) (26.4)
---------- ----------
Net cash (used) provided by investing activities ......................... (969.9) 823.4
---------- ----------
FINANCING ACTIVITIES
Net cash (used) provided by:
Deposits .................................................................. (1,226.9) 294.2
Federal funds purchased and securities sold under agreements to repurchase (908.6) (852.8)
Short-term borrowings ..................................................... (1,186.6) (126.5)
Long-term debt transactions:
Proceeds .................................................................. 4,524.7 1,310.9
Principal payments ........................................................ (1,189.5) (840.5)
Proceeds from issuance of common stock ..................................... 138.9 84.3
Purchase of treasury stock ................................................. (426.2) (1,042.9)
Cash dividends ............................................................. (340.6) (300.3)
---------- ----------
Net cash used by financing activities .................................... (614.8) (1,473.6)
---------- ----------
Change in cash and cash equivalents ...................................... (509.7) 1,007.6
Cash and cash equivalents at beginning of period ........................... 4,908.1 4,508.3
---------- ----------
Cash and cash equivalents at end of period ............................... $ 4,398.4 $ 5,515.9
========== ==========
</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 Company's Current Report on
Form 8-K dated September 30, 1997, which includes the Company's restated
supplemental financial statements and footnotes for the year ended December 31,
1996. The supplemental financial statements give effect to the merger of U. S.
Bancorp into First Bank System, Inc., as discussed in Note C below. 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 the Company's 1997 year-end financial statements. All prior
period earnings per share data presented shall be restated to conform to the
provisions of this statement. The adoption of SFAS 128 will not have a material
impact on the calculation of the Company's 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. The Company's derivative trading
activities are not material to the consolidated financial statements; the
cashflows from these activities are included in operating activities. The
quantitative and qualitative information about market risk 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
<PAGE>
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.
NOTE C BUSINESS COMBINATIONS AND DIVESTITURES
U. S. BANCORP -- On August 1, 1997, First Bank System, Inc. ("FBS") issued
109.9 million common shares to acquire U. S. Bancorp ("USBC"). 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 was accounted for as a pooling-of-interests.
Accordingly, the Company's financial statements have been restated for all
periods prior to the acquisition to include the accounts and operations of
USBC.
Operating results of FBS and USBC individually, as previously reported,
and the combined company, reflecting certain reclassifications to conform to
the current presentation, for the three months ended June 30, 1997, were:
Three Months Ended
(In Millions) June 30, 1997
===================
FBS
Net interest income ........ $ 385.0
Net income ................. 178.3
USBC
Net interest income ........ 403.3
Net income ................. 125.6
Combined
Net interest income ........ 764.8
Net income ................. 303.9
========
ZAPPCO, INC. -- On September 15, 1997, The Company announced that it would
acquire Zappco, Inc., a bank holding company headquartered in St. Cloud,
Minnesota, with three banks, six banking locations, and total assets of $360
million. The acquisition is subject to regulatory approval and is expected to
close around year end 1997.
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.
CALIFORNIA BANCSHARES, INC. -- On June 6, 1996, the Company acquired California
Bancshares, Inc. ("CBI"), a holding company for a multi-bank commercial banking
operation serving the East San Francisco Bay Area and the Central Valley of
Northern California. CBI had $1.6 billion in assets and $1.4 billion in
deposits. The total value of the transaction, accounted for as a purchase, was
approximately $325 million.
FIRSTIER FINANCIAL, INC. -- On February 16, 1996, the Company completed 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. The total value of the transaction, accounted for as a purchase, was
approximately $717 million.
OTHER ACQUISITIONS -- Effective January 1, 1997, the Company completed its
acquisition of the $70 million Sun Capital Bancorp of St. George, Utah.
Effective April 30, 1997, the Company completed its acquisition of the $214
million Business and Professional Bank of Sacramento, California. These
transactions were accounted for as purchase acquisitions.
<PAGE>
NOTE D SECURITIES
The detail of the amortized cost and fair value of available-for-sale securities
consisted of the following:
September 30, 1997 December 31, 1996
-------------------- ----------------------
Amortized Fair Amortized Fair
(In Millions) Cost Value Cost Value
======== ======== ========= =====
U.S. Treasury ............. $ 635 $ 631 $1,035 $1,028
Mortgage-backed ........... 4,304 4,335 4,097 4,104
Other U.S. agencies ....... 393 401 589 595
State and political ....... 1,322 1,349 574 573
Other ..................... 104 116 167 173
------ ------ ------ ------
Total ................... $6,758 $6,832 $6,462 $6,473
====== ====== ====== ======
NOTE E LOANS
The composition of the loan portfolio was as follows:
September 30 December 31
(In Millions) 1997 1996
============ ===========
COMMERCIAL:
Commercial ............................... $22,908 $21,393
Real estate:
Commercial mortgage ..................... 8,080 8,022
Construction ............................ 2,365 2,125
------- -------
Total commercial ....................... 33,353 31,540
------- -------
CONSUMER:
Residential mortgage ..................... 4,693 5,225
Residential mortgage held for sale ....... 193 148
Home equity and second mortgage .......... 5,268 4,798
Credit card .............................. 3,933 3,632
Automobile and other installment ......... 4,526 4,851
Revolving credit ......................... 1,552 1,581
Student * ................................ 625 580
------- -------
Total consumer ......................... 20,790 20,815
------- -------
Total loans ............................ $54,143 $52,355
======= =======
* ALL OR PART OF THE STUDENT LOAN PORTFOLIO MAY BE SOLD WHEN THE REPAYMENT
PERIOD BEGINS.
At September 30, 1997, the Company had $239 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 September 30, 1997, the average recorded investment in impaired loans was
approximately $249 million. No interest income was recognized on impaired loans
during the quarter.
<PAGE>
NOTE F LONG-TERM DEBT
Long-term debt (debt with original maturities of more than one year) consisted
of the following:
<TABLE>
<CAPTION>
September 30 December 31
(In Millions) 1997 1996
============ ===========
<S> <C> <C>
Fixed-rate subordinated notes (6.00%to 8.35%) - maturities to June 2026 ..... $1,850 $1,850
Step-up subordinated notes - due August 15, 2005 ............................ 100 100
Floating-rate notes - due February 27, 2000 ................................. 250 --
Floating-rate notes - due November 15, 2006 ................................. 200 200
Floating-rate subordinated notes - due November 30, 2010 .................... 107 107
Federal Home Loan Bank advances (5.05%to 9.11%) - maturities to October 2026 1,176 1,543
Medium-term notes (5.53% to 7.12%) - maturities to August 2001 .............. 935 671
Bank notes (5.53%to 6.38%) - maturities to September 2002 ................... 4,004 814
Other ....................................................................... 88 84
------- -------
Total ..................................................................... $8,710 $5,369
====== ======
</TABLE>
NOTE G SHAREHOLDERS' EQUITY
Approximately 30.6 million common shares have been repurchased under 1996 Board
authorizations, including 4.5 million during 1997. All authorizations were
either completed or rescinded prior to the USBC acquisition. Refer to Note C
for further information about the USBC acquisition. On November 14, 1997, the
Company redeemed all outstanding shares of its preferred stock at a redemption
price of $25 per share, together with accrued and unpaid dividends.
NOTE H MERGER, INTEGRATION AND RESIZING CHARGES
The Company recorded merger and integration charges of $440.2 million in the
third quarter of 1997. The charges associated with the acquisition of USBC
included: $232.3 million in severance costs; $65.8 million of occupancy and
equipment writedowns; $43.4 million of capitalized software and other asset
writeoffs; $35.0 million of investment banking and other transaction costs;
$27.1 million of conversion expense incurred; and, $36.6 million of other
merger-related expenses. Merger and integration charges of $49.5 million
recorded in 1996 were associated with the acquisitions of FirsTier, the
BankAmerica corporate trust business, and West One Bancorp. 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. The components of the charges are shown below:
Nine Months Ended
September 30
-----------------
1997 1996
========= =======
Severance ....................... $ 232.3 $ 27.4
Premises writedowns ............. 65.8 27.4
Systems conversions and other
merger-related expenses ........ 142.1 33.3
------- ------
Total merger, integration and
resizing charges ............... $ 440.2 $ 88.1
======= ======
<PAGE>
Systems conversions and other merger-related expenses are recorded as
incurred and are associated with the preparation and mailing of numerous
customer communications for the acquisitions and conversion of customer
accounts, printing and distribution of training materials and policy and
procedure manuals, outside consulting fees, and similar expenses relating to
the conversions and integration of acquired branches and operations. Premise
writedowns represent write-offs for redundant office space, equipment and
branches. Severance charges include the cost of terminations, other benefits,
and outplacement costs associated with the elimination of employees primarily
in branch offices and centralized corporate support and data processing
functions. The following table presents a summary of activity with respect to
the Company's merger, integration and resizing accrual:
Nine Months Ended
September 30
(In Millions) 1997
=================
BALANCE AT DECEMBER 31, 1996 ................. $ 33.6
Provision charged to operating expense ....... 440.2
Cash outlays ................................. 115.1
Noncash writedowns ........................... 101.5
------
Balance at September 30, 1997 ................ $257.2
======
The Company expects to incur an additional $190.0 million of
merger-related expenses through the third quarter of 1998.
NOTE I INCOME TAXES
The components of income tax expense were:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ----------------------------
September 30 September 30 September 30 September 30
(In Millions) 1997 1996 1997 1996
============ ============ ============ ============
<S> <C> <C> <C> <C>
FEDERAL:
Current tax ........................... $ 16.8 $ 116.9 $ 293.8 $ 450.8
Deferred tax provision ................ 10.6 7.4 31.8 38.3
------- -------- -------- -------
Federal income tax ................... 27.4 124.3 325.6 489.1
STATE:
Current tax ........................... 10.1 18.5 58.6 64.4
Deferred tax (credit) provision ....... (3.0) 1.1 (.4) 3.7
------- -------- -------- ----------
State income tax ..................... 7.1 19.6 58.2 68.1
------- -------- -------- -------
Total income tax provision ........... $ 34.5 $ 143.9 $ 383.8 $ 557.2
======= ======== ======== =======
</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 Nine Months Ended
---------------------------- --------------------------
September 30 September 30 September 30 September 30
(In Millions) 1997 1996 1997 1996
============ ============ ============ ============
<S> <C> <C> <C> <C>
Tax at statutory rate (35%) ............................................ $ (4.6) $ 139.9 $ 326.7 $ 519.3
State income tax, at statutory rates, net of federal tax benefit ....... 7.5 12.7 37.8 44.2
Tax effect of:
Tax-exempt interest:
Loans ................................................................ (9.8) (1.1) (11.7) (3.5)
Securities ........................................................... (3.6) (8.7) (18.2) (25.9)
Amortization of goodwill .............................................. 5.2 5.8 19.3 29.6
Merger and integration charges ........................................ 39.1 -- 39.1 --
Tax credits and other items ........................................... .7 (4.7) (9.2) (6.5)
-------- --------- --------- ---------
Applicable income taxes ................................................ $ 34.5 $ 143.9 $ 383.8 $ 557.2
======== ========= ========= =========
</TABLE>
The Company's net deferred tax asset was $118.0 million at September 30, 1997,
and $174.0 million at December 31, 1996.
<PAGE>
NOTE J 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 need 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>
September 30 December 31
(In Millions) 1997 1996
============ ===========
<S> <C> <C>
Commitments to extend credit:
Commercial ................................................................ $ 24,240 $ 24,482
Corporate and purchasing cards ............................................ 19,611 13,820
Consumer credit card ...................................................... 15,034 14,140
Other consumer ............................................................ 4,389 4,665
Letters of credit:
Standby ................................................................... 2,694 2,634
Commercial ................................................................ 453 355
Interest rate swap contracts:
Hedges .................................................................... 4,191 3,651
Intermediated ............................................................. 922 590
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 198 134
Intermediated interest rate and foreign exchange caps and floors written 199 169
Liquidity support guarantees ............................................... -- 81
Forward contracts ............................................................ 193 197
Commitments to sell loans .................................................... -- 3
Mortgages sold with recourse ................................................. 98 114
Foreign currency commitments:
Commitments to purchase ................................................... 834 952
Commitments to sell ....................................................... 830 953
======== ========
</TABLE>
The Company received fixed rate interest and paid floating rate interest
on all swap hedges as of September 30, 1997. Activity for the nine months ended
September 30, 1997, with respect to interest rate swaps which the Company uses
to hedge loans, deposits and long-term debt was as follows:
(In Millions)
Notional amount outstanding at December 31, 1996 ......... 3,651
Additions ................................................ 1,684
Maturities ............................................... (336)
Terminations ............................................. (808)
------
Notional amount outstanding at September 30, 1997 ....... 4,191
======
Weighted average interest rates paid ..................... 5.67%
Weighted average interest rates received ................. 6.51
======
LIBOR-based interest rate floors totaling $550 million with an average
remaining maturity of eight months at September 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 September 30, 1997, and December 31, 1996.
Constant Maturity Treasury (CMT) interest rate floors totaling $300 million with
an average remaining maturity of nine months at September 30, 1997, and 18
months at December 31, 1996, hedged the prepayment risk of fixed rate
residential mortgage loans. The strike rate on these CMT floors ranged from 5.60
percent to 5.70 percent at September 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.
Net unamortized deferred gains relating to swaps, options and futures,
which amortize through the year 2006, were $3.5 million at September 30, 1997.
<PAGE>
NOTE K SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET -- Time certificates of deposit in denominations of
$100,000 or more totaled $3,171 million and $3,402 million at September 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>
Nine Months Ended
--------------------------
September 30 September 30
(In Millions) 1997 1996
============ ============
<S> <C> <C>
Income taxes paid .................................................. $ 441.6 $ 401.1
Interest paid ...................................................... 1,625.2 1,585.2
Net noncash transfers to foreclosed property ....................... 36.7 98.2
Change in unrealized gain (loss) on available-for-sale securities,
net of taxes of $24.6 in 1997 and $36.6 in 1996 ................. 41.2 (58.7)
========= ==========
Cash acquisitions of businesses:
Fair value of noncash assets acquired ........................... $ 194.6 $ 37.9
Liabilities assumed ............................................. (171.0) --
--------- ----------
Net ............................................................ $ 23.6 $ 37.9
========= ==========
Stock acquisitions of businesses:
Fair value of noncash assets acquired ........................... $ 77.2 $ 5,284.9
Net cash acquired ............................................... 4.5 245.8
Liabilities assumed ............................................. (66.9) (4,493.9)
--------- ----------
Net value of common stock issued ............................... $ 14.8 $ 1,036.8
========= ==========
</TABLE>
<PAGE>
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
<TABLE>
<CAPTION>
For the Three Months Ended September 30
1997
---------------------------------------
Yields
(In Millions) and
(Unaudited) Balance Interest Rates
========= =========== ========
<S> <C> <C> <C>
ASSETS
Securities:
U.S. Treasury ............................................ $ 664 $ 9.7 5.80%
Mortgage-backed .......................................... 4,166 71.1 6.77
State and political ...................................... 1,077 21.1 7.77
U.S. agencies and other .................................. 512 7.5 5.81
------ -------
Total securities ........................................ 6,419 109.4 6.76
Unrealized gain (loss) on available-for-sale securities ... 44
------
Net securities ......................................... 6,463
Held-to-maturity securities ............................... 254 5.0 7.81
Trading account securities ................................ 153 2.3 5.96
Federal funds sold and resale agreements .................. 515 6.8 5.24
Loans:
Commercial:
Commercial .............................................. 22,574 465.0 8.17
Real Estate:
Commercial Mortgage .................................... 8,006 183.0 9.07
Construction ........................................... 2,294 55.6 9.62
------ -------
Total Commercial ....................................... 32,874 703.6 8.49
Consumer:
Residential Mortgage .................................... 4,835 96.8 7.94
Residential mortgage held for sale ...................... 166 3.2 7.65
Home equity and second mortgage ......................... 5,204 127.6 9.73
Credit card ............................................. 3,764 117.9 12.43
Other ................................................... 6,847 167.8 9.72
------ -------
Total consumer ......................................... 20,816 513.3 9.78
------ -------
Total loans ............................................ 53,690 1,216.9 8.99
Allowance for credit losses .............................. 991
------
Net loans ............................................... 52,699
Other earning assets ...................................... 510 6.2 4.82
------ -------
Total earning assets* .................................. 61,541 1,346.6 8.68
Cash and due from banks ................................... 3,483
Other assets .............................................. 4,346
------
Total assets ........................................... $68,423
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits .............................. $12,620
Interest-bearing deposits:
Interest checking ........................................ 5,410 22.8 1.67
Money market accounts .................................... 10,453 102.0 3.87
Other savings accounts ................................... 2,736 14.9 2.16
Savings certificates ..................................... 12,265 169.4 5.48
Certificates over $100,000 ............................... 3,551 53.2 5.94
------ -------
Total interest-bearing deposits ......................... 34,415 362.3 4.18
Short-term borrowings ..................................... 4,741 70.1 5.87
Long-term debt ............................................ 8,008 122.1 6.05
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely the junior
subordinated debentures of the parent company ............ 600 12.3 8.18
------ -------
Total interest-bearing liabilities ..................... 47,764 566.8 4.71
Other liabilities ......................................... 2,153
Preferred equity .......................................... 150
Common equity ............................................. 5,709
Unrealized gain (loss) on available-for-sale
securities, net of tax ................................... 27
------
Total liabilities and shareholders' equity ............. $68,423
=======
Net interest income ....................................... $ 779.8
=======
Gross interest margin ..................................... 3.97%
=====
Gross interest margin without taxable-equivalent
increments ............................................... 3.88%
=====
Net interest margin ....................................... 5.03%
=====
Net interest margin without taxable-
equivalent increments .................................... 4.93%
=====
</TABLE>
WIDE TABLE CONTINUED FROM ABOVE:
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
<TABLE>
<CAPTION>
For the Three Months Ended September 30
1996
-----------------------------------
Yields % Change
(In Millions) and Average
(Unaudited) Balance Interest Rates Balance
--------- ----------- -------- ---------
<S> <C> <C> <C> <C>
ASSETS
Securities:
U.S. Treasury ............................................ $ 1,188 $ 17.4 5.83% (44.1)%
Mortgage-backed .......................................... 4,181 69.6 6.62 (.4)
State and political ...................................... 587 12.3 8.34 83.5
U.S. agencies and other .................................. 952 17.0 7.10 (46.2)
------- -------
Total securities ........................................ 6,908 116.3 6.70 (7.1)
Unrealized gain (loss) on available-for-sale securities ... (89) **
-------
Net securities ......................................... 6,819 (5.2)
Held-to-maturity securities ............................... 840 16.1 7.63 (69.8)
Trading account securities ................................ 188 2.7 5.71 (18.6)
Federal funds sold and resale agreements .................. 976 13.3 5.42 (47.2)
Loans:
Commercial:
Commercial .............................................. 21,009 432.0 8.18 7.4
Real Estate:
Commercial Mortgage .................................... 7,702 173.5 8.96 3.9
Construction ........................................... 1,796 43.8 9.70 27.7
------- -------
Total Commercial ....................................... 30,507 649.3 8.47 7.8
Consumer:
Residential Mortgage .................................... 5,344 108.9 8.11 (9.5)
Residential mortgage held for sale ...................... 220 3.9 7.05 (24.5)
Home equity and second mortgage ......................... 4,636 110.4 9.47 12.3
Credit card ............................................. 3,519 113.4 12.82 7.0
Other ................................................... 7,014 169.3 9.60 (2.4)
------- -------
Total consumer ......................................... 20,733 505.9 9.71 .4
------ -------
Total loans ............................................ 51,240 1,155.2 8.97 4.8
Allowance for credit losses .............................. 988 .3
-------
Net loans ............................................... 50,252 4.9
Other earning assets ...................................... 487 6.9 5.64 4.7
------- -------
Total earning assets* .................................. 60,639 1,310.5 8.60 1.5
Cash and due from banks ................................... 3,687 (5.5)
Other assets .............................................. 4,622 (6.0)
-------
Total assets ........................................... $67,871 .8%
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits .............................. $12,091 4.4%
Interest-bearing deposits:
Interest checking ........................................ 5,614 22.4 1.59 (3.6)
Money market accounts .................................... 10,164 95.6 3.74 2.8
Other savings accounts ................................... 3,211 18.0 2.23 (14.8)
Savings certificates ..................................... 13,039 177.1 5.40 (5.9)
Certificates over $100,000 ............................... 3,454 50.5 5.82 2.8
------- -------
Total interest-bearing deposits ......................... 35,482 363.6 4.08 (3.0)
Short-term borrowings ..................................... 7,091 99.4 5.58 (33.1)
Long-term debt ............................................ 5,020 77.5 6.14 59.5
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely the junior
subordinated debentures of the parent company ............ -- -- -- **
------- -------
Total interest-bearing liabilities ..................... 47,593 540.5 4.52 .4
Other liabilities ......................................... 2,160 (.3)
Preferred equity .......................................... 238 (37.0)
Common equity ............................................. 5,835 (2.2)
Unrealized gain (loss) on available-for-sale
securities, net of tax ................................... (46) **
-------
Total liabilities and shareholders' equity ............. $67,871 .8%
======= ===
Net interest income ....................................... $ 770.0
=======
Gross interest margin ..................................... 4.08%
=====
Gross interest margin without taxable-equivalent
increments ............................................... 3.97%
=====
Net interest margin ....................................... 5.05%
=====
Net interest margin without taxable-
equivalent increments .................................... 4.95%
=====
</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 Nine Months Ended September 30
1997
-----------------------------------
Yields
(In Millions) and
(Unaudited) Balance Interest Rates
--------- ---------- --------
<S> <C> <C> <C>
ASSETS
Securities:
U.S. Treasury ........................................... $ 776 $ 33.9 5.84%
Mortgage-backed ......................................... 4,207 216.8 6.89
State and political ..................................... 747 43.8 7.84
U.S. agencies and other ................................. 624 28.5 6.11
------- --------
Total securities ....................................... 6,354 323.0 6.80
Unrealized loss on available-for-sale securities ......... (23)
-------
Net securities ........................................ 6,331
Held-to-maturity securities .............................. 600 35.5 7.91
Trading account securities ............................... 167 7.2 5.76
Federal funds sold and resale agreements ................. 587 24.3 5.53
Loans:
Commercial:
Commercial ............................................. 22,194 1,358.0 8.18
Real estate:
Commercial mortgage ................................... 8,031 542.8 9.04
Construction .......................................... 2,222 159.9 9.62
------- --------
Total commercial ...................................... 32,447 2,060.7 8.49
Consumer:
Residential mortgage ................................... 4,985 298.2 8.00
Residential mortgage held for sale ..................... 160 9.1 7.60
Home equity and second mortgage ........................ 5,041 363.5 9.64
Credit card ............................................ 3,613 339.5 12.56
Other .................................................. 6,973 508.9 9.76
------- --------
Total consumer ........................................ 20,772 1,519.2 9.78
------- --------
Total loans ........................................... 53,219 3,579.9 8.99
Allowance for credit losses ............................. 991
-------
Net loans .............................................. 52,228
Other earning assets ..................................... 516 19.4 5.03
------- --------
Total earning assets* ................................ 61,443 3,989.3 8.68
Cash and due from banks .................................. 3,588
Other assets ............................................. 4,383
-------
Total assets ......................................... $68,400
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits ............................. $12,470
Interest-bearing deposits:
Interest checking ....................................... 5,534 68.7 1.66
Money market accounts ................................... 10,432 298.6 3.83
Other savings accounts .................................. 2,849 46.9 2.20
Savings certificates .................................... 12,310 500.2 5.43
Certificates over $100,000 .............................. 3,698 163.3 5.90
------- --------
Total interest-bearing deposits ........................ 34,823 1,077.7 4.14
Short-term borrowings .................................... 5,681 238.8 5.62
Long-term debt ........................................... 6,850 314.6 6.14
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely the junior
subordinated debentures of the parent company ........... 600 36.9 8.18
------- --------
Total interest-bearing liabilities ................... 47,954 1,668.0 4.65
Other liabilities ........................................ 2,169
Preferred equity ......................................... 150
Common equity ............................................ 5,671
Unrealized loss on available-for-sale
securities, net of tax .................................. (14)
-------
Total liabilities and shareholders' equity ........... $68,400
=======
Net interest income ...................................... $2,321.3
========
Gross interest margin .................................... 4.03%
=====
Gross interest margin without taxable-equivalent
increments .............................................. 3.93%
=====
Net interest margin ...................................... 5.05%
=====
Net interest margin without taxable-
equivalent increments ................................... 4.95%
=====
</TABLE>
WIDE TABLES CONTINUED FROM ABOVE:
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
<TABLE>
<CAPTION>
For the Nine Months Ended September 30
1996
-----------------------------------
Yields % Change
(In Millions) and Average
(Unaudited) Balance Interest Rates Balance
- ---------------------------------------------------------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
ASSETS
Securities:
U.S. Treasury ........................................... $ 1,310 $ 58.1 5.92 % (40.8)%
Mortgage-backed ......................................... 4,153 209.9 6.75 1.3
State and political ..................................... 548 35.1 8.56 36.3
U.S. agencies and other ................................. 1,036 51.4 6.63 (39.8)
-------- --------
Total securities ....................................... 7,047 354.5 6.72 (9.8)
Unrealized loss on available-for-sale securities ......... (27) 14.8
-------
Net securities ........................................ 7,020 (9.8)
Held-to-maturity securities .............................. 841 48.3 7.67 (28.7)
Trading account securities ............................... 252 10.6 5.62 (33.7)
Federal funds sold and resale agreements ................. 950 37.9 5.33 (38.2)
Loans:
Commercial:
Commercial ............................................. 20,738 1,271.0 8.19 7.0
Real estate:
Commercial mortgage ................................... 7,552 510.6 9.03 6.3
Construction .......................................... 1,592 116.5 9.77 39.6
------- --------
Total commercial ...................................... 29,882 1,898.1 8.48 8.6
Consumer:
Residential mortgage ................................... 5,561 336.6 8.09 (10.4)
Residential mortgage held for sale ..................... 276 14.4 6.97 (42.0)
Home equity and second mortgage ........................ 4,286 304.2 9.48 17.6
Credit card ............................................ 3,400 329.7 12.95 6.3
Other .................................................. 7,030 506.2 9.62 (.8)
------- --------
Total consumer ........................................ 20,553 1,491.1 9.69 1.1
------- --------
Total loans ........................................... 50,435 3,389.2 8.98 5.5
Allowance for credit losses ............................. 968 2.4
-------
Net loans .............................................. 49,467 5.6
Other earning assets ..................................... 455 18.9 5.55 13.4
--- --------
Total earning assets* ................................ 59,980 3,859.4 8.59 2.4
Cash and due from banks .................................. 3,704 (3.1)
Other assets ............................................. 4,467 (1.9)
-------
Total assets ......................................... $67,156 1.9%
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits ............................. $11,790 5.8%
Interest-bearing deposits:
Interest checking ....................................... 5,701 67.6 1.58 (2.9)
Money market accounts ................................... 9,971 280.9 3.76 4.6
Other savings accounts .................................. 3,210 54.0 2.25 (11.2)
Savings certificates .................................... 13,067 530.4 5.42 (5.8)
Certificates over $100,000 .............................. 3,335 145.8 5.84 10.9
------- --------
Total interest-bearing deposits ........................ 35,284 1,078.7 4.08 (1.3)
Short-term borrowings .................................... 7,237 299.4 5.53 (21.5)
Long-term debt ........................................... 4,836 224.7 6.21 41.6
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely the junior
subordinated debentures of the parent company ........... -- -- -- **
------- -------
Total interest-bearing liabilities ................... 47,357 1,602.8 4.52 1.3
Other liabilities ........................................ 2,090 3.8
Preferred equity ......................................... 243 (38.3)
Common equity ............................................ 5,695 (.4)
Unrealized loss on available-for-sale
securities, net of tax .................................. (19) 26.3
-------
Total liabilities and shareholders' equity ........... $67,156 1.9%
======= =====
Net interest income ...................................... $2,256.6
========
Gross interest margin .................................... 4.07%
=====
Gross interest margin without taxable-equivalent
increments .............................................. 3.97%
=====
Net interest margin ...................................... 5.03%
=====
Net interest margin without taxable-
equivalent increments ................................... 4.92%
=====
</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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10(a) Employment Agreement with John F. Grundhofer*
10(b) Employment Agreement with Philip G. Heasley*
10(c) Employment Agreement with Richard A. Zona*
10(d) Employment Agreements with Gerry B. Cameron, Gary T. Duim and Robert
D. Sznewajs. Filed as Exhibits 10.1 - 10.3 to Registration Statement on
Form S-4, File No. 333-29409 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 September 30, 1997, the Company filed the
following reports on Form 8-K:
Form 8-K filed August 1, 1997, announcing the completion of the merger of
First Bank System, Inc. and U.S. Bancorp of Portland, Oregon, the name
change of the registrant to U.S. Bancorp, and the increases in authorized
capitalization and the size of the Board of Directors.
Form 8-K filed October 1, 1997 (dated September 30, 1997), which includes
the Company's 1996 supplemental financial statements reflecting the merger
of U.S. Bancorp into First Bank System, Inc.
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
/s/ DAVID J. PARRIN
By: ------------------------------------------
David J. Parrin
Senior Vice President and Controller
DATE: November 14, 1997 (Chief Accounting Officer and Duly
Authorized Officer)
<PAGE>
[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,
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
Judith T. Murphy
Vice President, Investor Relations
(612) 973-2264
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
Company's web site.
FAX. To access our fax-on-demand service, call (800) 758-5804. When asked, enter
U.S. Bancorp's extension number, "312402." Enter "1" for the most current news
release or "2" for a menu of releases. Enter your fax and telephone numbers as
directed. The information will be faxed to you promptly.
MAIL. At 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.
WEB SITE. 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 10(a)
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated as of August 1, 1997, by and between U.S. Bancorp
(formerly First Bank System, Inc.), a Delaware corporation (as further defined
in Section 8.13.11 hereof, "Employer"), and John F. Grundhofer ("Executive"),
replacing the Amended and Restated Employment Agreement by and between Executive
and Employer dated as of August 15, 1996 (the "Prior Agreement").
In consideration of the respective undertakings of Employer and
Executive set forth below, Employer and Executive agree as follows:
1. Employment. Employer hereby employs Executive, and Executive accepts
such employment and agrees to perform services for the Employer, for the period
and upon the other terms and conditions set forth in this Agreement.
2. Term of Employment. The term of Executive's employment pursuant to
this Agreement will commence on August 1, 1997 (the "Commencement Date") and,
unless terminated at an earlier date in accordance with Section 5 of this
Agreement, shall continue in effect until the fifth anniversary of the
Commencement Date; and, commencing on the first anniversary of the Commencement
Date and on each anniversary thereafter, the term of this Agreement shall
automatically be extended for one additional year unless, not later than 30 days
prior to any such date of automatic extension of this Agreement, Employer or
Executive shall have given the other party to this Agreement written notice that
the Agreement will not be so extended. The term of Executive's employment
commencing on the Commencement Date and ending pursuant to the terms hereof is
hereinafter referred to as the "Period of Employment."
3. Position and Duties.
3.01 Service with Employer. During the Period of Employment,
Executive agrees to perform such reasonable executive employment duties as
Employer shall assign to him from time to time and shall have the title of
President and Chief Executive Officer and upon the earlier of (x) the retirement
of Gerry B. Cameron, and (y) January 1, 1999, the Executive shall have the
additional title of Chairman of the Board of Directors of the Employer;
provided, however, that Employer may name another executive President during the
Period of Employment so long as Executive retains the other titles as herein
provided. Executive also agrees to serve, for any period for which he is
elected, as a director on the Board of Directors of Employer
<PAGE>
and to serve as a member of any committee of the Board of Directors of Employer
to which Executive may be elected or appointed.
3.02 Performance of Duties. Executive agrees to serve Employer
faithfully and to the best of his ability and to devote his full business time,
attention and efforts to the business and affairs of Employer during the Period
of Employment; provided, however, that Executive may engage in other activities,
such as activities involving charitable, educational, religious and similar
types of organizations, speaking engagements, membership on the boards of
directors of other organizations (as Employer may from time to time approve),
management of Executive's personal investments, and similar types of activities
to the extent that such other activities do not inhibit in any material way or
prohibit the performance of Executive's duties under this Agreement, or inhibit
in any material way or conflict with the business of Employer and its
subsidiaries.
4. Compensation.
4.01 Base Salary. As base compensation for all services to be
rendered by Executive under this Agreement, Employer will pay to Executive
during the Period of Employment a base annual salary ("Annual Salary") to be
paid in substantially equal installments in accordance with Employer's standard
payroll procedures and policies. The Annual Salary will be at least $840,000,
but the Annual Salary may be increased (but not reduced) from time to time in
the sole discretion of Employer; provided, however, that for any of the three
years beginning after a Change in Control, as defined in Section 8.13, during
the Period of Employment Executive's Annual Salary shall be increased by a
percentage not less than the average percentage increase in the base annual
salary for each of the next five highest paid officers of Employer for such
year.
4.02 Annual Bonus. During the Period of Employment, Executive
will be entitled to participate in the Employer's Executive Incentive Plan (or,
if such Plan shall cease to exist, Employer's annual bonus award program, if
any, for Employer's executives at Executive's grade level) with a target bonus
opportunity at least as great as that provided to the Executive immediately
prior to the Commencement Date. The award of an annual bonus is highly
discretionary and is subject to the terms and provisions of the Executive
Incentive Plan (or, if such Plan shall cease to exist, Employer's annual bonus
award program, if any, for Employer's executives at Executive's grade level).
<PAGE>
4.03 Options and Restricted Stock. During the Period of
Employment, Executive will be eligible to receive grants of Employer's stock
options and restricted stock, or other awards pursuant to equity-based plans of
Employer. Such grants are highly discretionary and would be subject to the terms
of the applicable agreements prescribed by Employer from time to time.
Notwithstanding the foregoing, the Executive shall be granted
on the date hereof 50,000 shares of restricted common stock of the Employer (the
"Restricted Stock"). The Restricted Stock shall vest in five equal installments
on each of the first through fifth anniversaries of the date of grant but shall
vest immediately upon the Executive's death or Disability (as defined in the
Employer's Disability Program) or upon a termination of the Executive's
employment by the Employer without Cause or by the Executive for Good Reason, or
upon a Full Change in Control. The Executive shall be granted as of the date
hereof an option (the "Option") to acquire 150,000 shares of the Employer's
common stock at their Fair Market Value on the date of grant (as defined in the
Employer's 1997 Stock Incentive Plan). The Option shall have a term of 10 years
and shall vest and become exercisable in full on the fifth anniversary of the
date of grant, subject to acceleration in the event of achievement of
performance targets set forth in the grant of the Option, and shall be subject
to all other terms and conditions currently applicable to options granted under
such Plan to other executive officers of the Employer. The Option shall vest and
become immediately exercisable upon the Executive's death or Disability (as
defined in the Employer's Disability Program) or upon a termination of the
Executive's employment by the Employer without Cause or by the Executive for
Good Reason, or upon a Full Change in Control.
4.04 Participation in Other Benefit Plans. During the Period
of Employment, Executive will be entitled to participate in such retirement
plans, major medical, hospital, surgical and dental plans, executive disability
plans and other Employer benefits not described elsewhere in this Section 4 as
are being provided by Employer to executives at Executive's grade level from
time to time to the extent that Executive's age, positions and other factors
qualify him for such benefits. If, for any period during the Period of
Employment, Executive is not eligible by reason of length of service to
participate in such plans maintained by Employer, Employer shall provide
Executive with benefits equivalent to those provided under such plans and, with
respect to benefits provided by Employer equivalent to those provided under
Employer's major medical, hospital, surgical and dental plans, shall compensate
Executive on an after-tax basis for any additional income taxes payable by
<PAGE>
Executive by reason of Employer providing such benefits directly rather than
through such plans. Upon a termination of employment for any reason and for the
remainder of the Executive's life and that of his current spouse, the Employer
shall continue to provide medical and dental benefits in the aggregate to the
Executive and his current spouse pursuant to the Employer's Retiree Health Care
Program at a subsidized cost on the same basis as the Employer subsidizes
premiums for retirees of the Employer who retired prior to January 1, 1993
(collectively "Medical Benefits"). The Executive and his current spouse's
entitlement to Medical Benefits shall survive the termination of this Agreement.
4.05 Long-Term Disability Benefits. During the Period of
Employment, Executive's annual benefit under Employer's long-term disability
plan not be less than 60% of the total of (i) Executive's base annual salary at
the date of disability plus (ii) the annual average of bonuses received by
Executive during the three prior Executive Incentive Plan years (or, if such
Plan shall cease to exist, such other annual bonus award program, if any,
pursuant to which Executive received annual bonus payments), and Employer agrees
to pay Executive (at the time benefits are payable under the long-term
disability plan) the excess, if any, of such annual benefit over the annual
benefit provided by Employer's long-term disability plan.
4.06 Survivor Benefit Programs; Life Insurance. During the
Period of Employment, Executive will be entitled to participate in survivor
benefit programs covering Employer's executives at Executive's grade level in
effect on the Commencement Date or as modified or supplemented by Employer from
time to time. If, for any period during the Period of Employment, Executive is
not eligible to participate in such survivor benefit programs, Employer shall
provide Executive with benefits equivalent to those provided under such
programs. In addition, during the Period of Employment Employer shall continue
to provide a life insurance policy with a face value of at least $1 million for
the benefit of a beneficiary designated by Executive (or, if no beneficiary is
designated, for the benefit of Executive's spouse). Such insurance policy shall
be in addition to the amount of group term insurance, if any, provided to
Executive under an insurance plan maintained by Employer for its employees
generally. Executive hereby represents to Employer that Executive is insurable
on normal terms and conditions.
4.07 Retirement Benefits. The Executive shall be entitled to a
retirement benefit pursuant to the Employer's Non-Qualified Supplemental
Executive Retirement Plan in effect
<PAGE>
as of the date hereof (the "NQSRP"), with the following modifications: (i) the
Executive's lifetime annual pension benefit commencing at age 65 shall be 57.5%
of his final three year's average compensation, (ii) the Executive shall be
fully vested in this benefit at age 60, with no actuarial or other reduction for
retirement prior to age 65 but after age 60 but with a reduction for
commencement of benefits prior to age 65, (iii) the Prior Plans' Offset (as
defined in the NQSRP) shall be fixed at $270,000 per year, and (iv) the
Executive's minimum actual pension from all Employer qualified plans and the
NQSRP shall not be less than $1 million per year, commencing at age 65 and, if
the joint and survivor form of benefit is elected, his spouse's minimum total
survivor benefit from all sources upon executive's death at or after age 65
shall not be less than $500,000 per year. In the event of any conflict between
the terms of this Section 4.07 and the NQSRP, the provisions of this Section
4.07 shall prevail.
4.08 Vacation and Sick Leave. During the Period of Employment,
Executive will be entitled to reasonable paid vacation periods each year, will
be entitled to carry over to subsequent years unused vacation periods, and upon
termination of employment will be entitled to be paid for unused vacation
periods, in each case in accordance with Employer's policy for executives at
Executive's grade level from time to time. Executive will also be entitled to
reasonable sick leave in accordance with Employer's policy for executives at
Executive's grade level from time to time.
4.09 Perquisites. During the Period of Employment, Employer
will provide Executive with such perquisites as Employer from time to time
provides to executives at Executive's grade level including, without limitation,
(a) an automobile or automobile allowance consistent with Employer's policies
for an executive at Executive's grade level, (b) reimbursement of initiation
fees, if any, and dues for one country club and one business club of Executive's
choice, and (c) the reimbursement of the cost of financial and tax counseling
(subject to an annual limit of two percent of current base annual salary).
Additionally, during the Period of Employment, Employer will reimburse Executive
for the difference between (i) interest payments made by Executive on
Executive's real estate mortgage loan for his personal residence (with the loan
amount not to exceed 80% of the purchase price for such residence) and (ii) the
interest payments that would apply to such loan if the interest rate on such
loan were one percentage point less than the interest rate generally prevailing
in the market at the time the loan was entered into.
<PAGE>
4.10 Expenses. Employer will reimburse Executive for all
expenses and disbursements reasonably incurred by Executive in the performance
of his duties during the Period of Employment, and such other facilities or
services as Employer and Executive may, from time to time, agree are
reimbursable, subject to the presentment of appropriate vouchers in accordance
with the Employer's normal policies for expense verification.
4.11 Indemnity and Hold Harmless. Except to the extent
inconsistent with Employer's charter or bylaws, Employer will indemnify
Executive and hold Executive harmless to the fullest extent permitted by law
with respect to acts of Executive as an officer and director of Employer during
the Period of Employment. Employer further agrees that if and to the extent
Employer in its sole discretion maintains directors' and officers' insurance
policies, Executive will be covered by such policies with respect to acts of
Executive as an officer and director of Employer during the Period of Employment
to the same extent as all other officers and directors of Employer under such
policies.
4.12 Payments on Account of Restricted Stock Relating to
Former Employment. Employer has established and is maintaining a bookkeeping
account for Executive (the "Bookkeeping Account"), which account was initially
credited with $305,074, representing the amount agreed to be paid to Executive
and not paid to date in respect of shares of Wells Fargo & Company ("Wells
Fargo") Common Stock transferred by Wells Fargo to Executive, but not vested, as
of January 30, 1990. The amount credited to the Bookkeeping Account shall be
deemed to have been invested in such stock, bonds or other securities as
Executive shall, from time to time, designate in writing to Employer's Executive
Vice President, Human Resources, or such other individual as Employer shall
designate, which deemed investments must be reasonably acceptable to Employer
and must be of a type that Employer would be permitted to make under applicable
laws and regulations. The Bookkeeping Account shall be credited or debited, as
the case may be, with gains or losses deemed incurred as a result of such
designated, deemed investments.
Certain debits have been made to the Bookkeeping Account as
provided in the Employment Agreement dated December 30, 1992 by and between
Employer and Executive (the "1992 Employment Agreement"). The balance of the
Bookkeeping Account shall become payable to, or with respect to, Executive upon
the earliest of the following events (i) January 30, 2003, (ii) Executive's
death or (iii) Executive's termination of employment for any reason within 24
months after a Change in Control.
<PAGE>
In the event the balance of the Bookkeeping Account becomes payable upon
Executive's termination of employment for any reason other than death within 24
months after a Change in Control, the entire balance shall be paid within 30
days of such event. In the event the balance of the Bookkeeping Account becomes
payable upon Executive's death, the entire balance shall be paid by December 31
of the calendar year in which Executive dies. Upon the occurrence of any other
event giving rise to Employer's obligation to pay Executive the balance of the
Bookkeeping Account, on January 30 of each year beginning in the year 2003 and
for each of the next nine consecutive years, after taking into account any
amount credited or debited to the Bookkeeping Account as a result of the deemed
investment thereof or otherwise pursuant to the terms of this Section 4.12, the
following proportions of the Bookkeeping Account shall be paid to Executive:
1/10, 1/9, 1/8, 1/7, 1/6, 1/5, 1/4, 1/3, 1/2 and the entire remaining balance
thereof.
Employer, in its sole and absolute discretion, may alter the
timing or manner of payment of the balance of the Bookkeeping Account in the
event that Executive establishes to the satisfaction of Employer severe
financial hardship. Severe financial hardship will be deemed to have occurred in
the event of Executive's impending bankruptcy, a dependent's long and serious
illness or other events of similar magnitude. Executive may designate a
beneficiary or beneficiaries who, upon his death, are to receive distributions
that otherwise would have been paid to Executive. All designations shall be in
writing and shall be effective only if and when delivered to Employer during the
lifetime of Executive.
Employer shall have the right to deduct from all payments made
pursuant to this Section 4.12 any federal, state or local taxes required by law
to be withheld with respect to such payments. Executive and Employer understand
and agree that the timetable set forth above with respect to the payment of the
balance of the Bookkeeping Account is irrevocable and shall not be subject to
any amendment or modification. Further, Executive and Employer understand and
agree that Employer is under a contractual obligation to make payments to
Executive in accordance with this Section 4.12. Such payments shall not be
financed from any trust fund, insurance or otherwise and shall be paid solely
out of the general funds of Employer, and Executive shall have no interest
whatsoever in any investments made by Employer on account of Executive's request
with respect to deemed investments of the Bookkeeping Account. Executive will
not have any interest whatsoever in any specific asset of Employer as a result
of this Agreement, and Executive's rights to payments hereunder shall be no
greater than the right of any other general, unsecured creditor of Employer. In
no event
<PAGE>
shall Employer make any payment hereunder to any assignee or creditor of
Executive or a beneficiary. Prior to the time of payment hereunder, Executive or
a beneficiary thereof shall have no rights by way of anticipation or otherwise
to assign or otherwise dispose of any interest under this Section 4.12, nor
shall such rights be assigned or transferred by operation of law.
5. Termination.
5.01 Grounds for Termination. The Period of Employment will
terminate prior to the expiration of the term set forth in Section 2 of this
Agreement in the event that:
(a) Executive shall die.
(b) Executive shall qualify for and accrue payments under
Employer's Disability Program for a period covering 90
consecutive days.
(c) Employer shall terminate the Period of Employment for Cause.
"Cause" means termination upon (i) the willful and continued
failure by Executive to substantially perform his duties with
Employer (other than any such failure resulting from his
disability or from termination by Executive for Good Reason),
after a written demand for substantial performance is
delivered to Executive that specifically identifies the manner
in which Employer believes that Executive has not
substantially performed his duties, and Executive has failed
to resume substantial performance of his duties on a
continuous basis within 14 days of receiving such demand, (ii)
the willful engaging by Executive in conduct which is
demonstrably and materially injurious to Employer, monetarily
or otherwise, (iii) Executive's conviction of a felony which
impairs his ability substantially to perform his duties with
Employer or (iv) the issuance of an order under Section
8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act
("FDIC") by which Executive is removed and/or permanently
prohibited from participating in the conduct of the affairs of
Employer and/or any other Affiliate of Employer. For purposes
of this paragraph, no act, or failure to act, on Executive's
part will be deemed "willful" unless done, or omitted to be
done, by Executive not in good faith and without reasonable
belief that his action or
<PAGE>
omission was in the best interest of Employer. Failure to
perform Executive's duties with Employer during any period of
disability shall not constitute Cause.
(d) Executive shall terminate the Period of Employment for Good
Reason. "Good Reason" means termination by Executive upon the
occurrence, without Executive's consent, of any one or more of
the following: (i) the assignment to Executive of any duties
inconsistent in any respect with Executive's position
(including status, offices, titles, and reporting
requirements), authorities, duties, or other responsibilities
as in effect immediately prior to such assignment or any other
action of Employer which results in a diminishment in such
position, authority, duties, or responsibilities, other than
an insubstantial and inadvertent action which is remedied by
Employer promptly after receipt of notice thereof given by
Executive, and other than the Employer's providing the title
of President of the Employer to another executive, provided
that the Executive continues as Chairman of the Board (if he
is then Chairman of the Board) and Chief Executive Officer of
the Employer; (ii) a reduction by Employer in Executive's base
salary as in effect on the Commencement Date or as the same
shall be increased from time to time; (iii) Employer's
requiring Executive to be based at a location in excess of 30
miles from the location of Executive's principal office as of
the Commencement Date; (iv) the failure by Employer to provide
Executive with compensation and benefits at least equal (in
terms of benefit levels and/or reward opportunities) to those
provided for under each compensation or benefit plan, program,
policy and practice as in effect at the Commencement Date (or
as in effect following the Commencement Date, if greater); (v)
the failure of Employer to obtain a satisfactory agreement
from the Resulting Corporation (as hereinafter defined) or any
other successor to Employer to assume and agree to perform
this Agreement; (vi) a material breach by Employer of its
obligations under this Agreement after notice in writing from
Executive and a reasonable opportunity for Employer to correct
such conduct; (vii) any purported termination by Employer of
Executive's employment that is not effected pursuant to a
Notice of Termination (as hereinafter defined); (viii) for the
24 month period following a Full Change in Control (as
hereinafter defined) (or prior to a Full Change in Control in
the event of an
<PAGE>
Anticipatory Termination (as hereinafter defined)), the
failure by the Employer to provide Executive total cash
compensation (consisting of base salary plus cash bonus) with
respect to any fiscal year or portion thereof at least equal
to the greater of (x) actual total cash compensation paid to
Executive with respect to the prior fiscal year or (y) the
average annual total cash compensation paid to Executive with
respect to the prior two fiscal years (total cash compensation
with respect to any fiscal year or portion thereof shall be
determined at the time the bonus with respect to such fiscal
year or portion thereof is determined, even if such bonus is
determined after the 24-month period following a Full Change
in Control, and the bonus portion of cash compensation for
services rendered in any portion of a fiscal year within 24
months following a Full Change in Control shall be determined
by reference to the pro-rata portion of any annual bonus for
such fiscal year) and (ix) within 24 months following a
Partial Change in Control (as hereinafter defined) (or prior
to a Partial Change in Control in the event of an Anticipatory
Termination), a reduction by Employer in Executive's annual
target bonus or maximum bonus award opportunities as in effect
in the prior fiscal year Executive's right to terminate the
Period of Employment for Good Reason shall not be affected by
Executive's incapacity due to physical or mental illness.
Executive's continued employment shall not constitute consent
to, or a waiver of rights with respect to, any circumstance
constituting Good Reason. Termination by Executive of the
Period of Employment for Good Reason shall constitute
termination for Good Reason for all purposes of this
Agreement, notwithstanding that Executive may also thereby be
deemed to have "retired" under any applicable retirement
programs of Employer.
(e) Employer terminates the Period of Employment other than for
"Cause."
(f) Executive terminates the Period of Employment for any reason
not constituting Good Reason.
Notwithstanding any termination of the Period of Employment, Executive, in
consideration of his employment hereunder to the date of such termination, will
remain bound by the provisions of this Agreement that specifically relate to
periods, activities or obligations upon or subsequent to the termination of
Executive's employment.
<PAGE>
5.02 Effect of Termination.
(a) In the event of termination of the Period of Employment
pursuant to the provisions of Section 5.01(a) above,
Executive's trust estate or estate, as the case may be (as
determined in accordance with Section 8.02 of this Agreement),
will be entitled to be paid the base annual salary otherwise
payable to Executive pursuant to Section 4.01 of this
Agreement only through the date of such termination.
Additionally, Executive's survivors will be entitled to any
benefits provided under Employer's survivor benefit program.
If the joint and survivor form of benefit is elected, the
Executive's current spouse, should she survive the Executive,
shall be entitled to a survivor benefit based on a 50% joint
and survivor annuity pursuant to the Executive's retirement
benefits described in Section 4.07, commencing on what would
have been the Executive's 65th birthday. In addition, the
Restricted Stock shall vest immediately and the Option shall
vest and become immediately exercisable. The Executive's
current spouse shall also be entitled to the provision of
Medical Benefits.
(b) In the event of termination of the Period of Employment
pursuant to the provisions of Section 5.01(b) above, Executive
will be entitled to be paid the base annual salary otherwise
payable to Executive pursuant to Section 4.01 of this
Agreement only through the date of such termination. Executive
will be entitled to benefits under Employer's Disability
Program and to the benefits provided for in Section 4.05 in
connection with Employer's Disability Plan. If Executive shall
cease to be eligible for long-term disability payments
pursuant to the Disability Plan within three years following
the date of such termination, Employer will pay Executive a
lump sum payment in the amount of Executive's annual base
salary at the time of such termination. The Executive shall
receive the retirement benefits described in Section 4.07
commencing on his 65th birthday. In addition, the Restricted
Stock shall vest immediately and the Option shall vest and
become immediately exercisable. The Executive and his current
spouse shall also be entitled to the provision of Medical
Benefits.
(c) In the event of termination of the Period of Employment
pursuant to the provisions of Section 5.01(c) or (f) above,
Employer will have no further obligations hereunder except
that Employer will pay Executive his
<PAGE>
base salary, at the rate then in effect, and continue to
provide Executive and his current spouse Medical Benefits.
Executive will not be paid any annual bonus pursuant to
Section 4.02 of this Agreement for the calendar year in which
the termination occurs or any subsequent calendar year.
(d) In the event of termination of the Period of Employment
pursuant to the provisions of Sections 5.01(d) or 5.01(e)
above, Employer will (i) pay Executive his full base salary
through the date of termination at the rate in effect at the
time Notice of Termination is given; (ii) pay as damages to
Executive, not later than 30 days following the date of
termination, a lump sum payment equal to three times the sum
of (A) Executive's annual base salary in effect at the time
Notice of Termination is given and (B) the annual target bonus
potential available to Executive at the time Notice of
Termination is given (or, in the event of termination within
24 months following a Change in Control or in the event of an
Anticipatory Termination, if either of the following amounts
is greater, the bonus earned in the last fiscal year prior to
the date of termination or the average bonus earned in the
last three fiscal years prior to the date of termination,
whichever is larger), (iii) continue to provide the employee
benefits described in Sections 4.04, 4.05 (with disability
benefits to be calculated as of the date of termination), and
4.06 to which Executive was entitled on the date of such
termination for a period of three years from the date of such
termination and thereafter, to provide the Executive and his
current spouse with Medical Benefits, (iv) continue to provide
the perquisites described in Section 4.09 to which Executive
was entitled on the date of such termination for a period of
three years from the date of such termination, (v) cause the
acceleration of the exercisability of any stock option or the
vesting of any restricted stock grants (other than those
pursuant to Employer's Restricted Stock and Performance Plan)
that would have become exercisable or vested, as the case may
be, during the remaining Period of Employment had no such
termination occurred, and cause the Restricted Stock and the
Option to become immediately vested and exercisable, as the
case may be, (vi) cause the acceleration of vesting of
restrcted stock grants under Employer's Restricted Stock and
Performance Plan if the vesting schedule has been determined
at the time of such termination and such vesting would have
occurred during
<PAGE>
the remaining Period of Employment had no such termination
occurred, (vii) give Executive credit for three additional
years of age and service (or five additional years in the
event of termination within 24 months following a Change in
Control or in the event of an Anticipatory Termination) for
all purposes in determining Executive's retirement benefits
pursuant to Section 4.07 and the NQSRP, (viii) in the event of
termination within 24 months following a Change in Control or
in the event of an Anticipatory Termination, pay Executive the
full amount of any long-term cash incentive award for any plan
periods then in progress to the extent not provided for in any
Employer long-term cash incentive plan or plans, (ix) in the
event of termination within 24 months following a Change in
Control or in the event of an Anticipatory Termination, pay
Executive the year-to-date pro-rata amount of any annual cash
incentive award for any plan as in effect immediately prior to
the Change in Control to the extent not provided for in such
plan or plans, and (x) pay for individual outplacement
counseling services to Executive up to a maximum of $60,000.
Except as otherwise provided in clause (ix) of this Section
5.02(d), Executive will not be paid any annual bonus pursuant
to Section 4.02 of this Agreement for the calendar year in
which the termination occurs.
5.03 Notice of Termination. Any purported termination by
Employer or Executive of the Period of Employment shall be communicated by
written Notice of Termination to the other party hereto. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which indicates the
specific termination provision in Section 5.01 above relied upon.
5.04 Offsets. Executive shall have no duty to seek other
employment. However, in the event of termination of the Period of Employment
pursuant to the provisions of Sections 5.01(d) or 5.01(e), the following offsets
will apply to reduce the payments and benefits which Executive shall be entitled
to receive pursuant to Section 5.02(d): (i)(A) in the event of termination
within 24 months following a Change in Control or in the event of an
Anticipatory Termination, the amount payable to Executive pursuant to Section
5.02(d)(ii) will be offset by any salary, cash bonus and other earned income
(within the meaning of Section 911(d)(2)(A) of the Internal Revenue Code of
1986, as amended (the "Code")) received by Executive for services rendered by
Executive to persons or entities other than the Employer during or with respect
to the 36-month period after the date of termination, or (B) in the event of
termination
<PAGE>
at any time not within 24 months following a Change in Control and that is not
an Anticipatory Termination, one-third of the amount payable to Executive
pursuant to Section 5.02(d)(ii)(A) and the entire amount payable to Executive
pursuant to Section 5.02(d)(ii)(B) shall be offset by amounts received by
Executive which are described in subparagraph (A) above; (ii) the benefits
payable to Executive pursuant to Section 5.02(d)(iii) and (iv) shall be
discontinued if Executive obtains full-time employment providing welfare
benefits during the 36-month period following the date of termination; and (iii)
in the event of termination at any time within 24 months following a Change in
Control or in the event of an Anticipatory Termination, any additional benefits
under Employer's SERP pursuant to Section 5.02(d) will be reduced by the amount
of vested defined benefit pension benefits and vested defined benefit
non-qualified supplemental retirement benefits actually payable to Executive
without any risk of forfeiture from persons or entities other than Employer
which are attributable to services rendered by Executive to such other persons
or entities during the 36 months following the date of termination of
Executive's employment. Such reduction shall be calculated based on the vested
benefits payable at age 65 under the single life annuity form of payment under
the applicable plans which are accrued by Executive during such period. The
foregoing calculations for a particular plan shall be made by the actuary for
such plan in accordance with generally accepted actuarial principles. The amount
of such reduction at age 65 shall be actuarially reduced if Executive's benefits
under the Employer's NQSRP, as modified by Section 4.07, commence before
Executive attains age 65.
Not less frequently than annually (by December 31 of each
year), Executive shall account to Employer with respect to all payments and
benefits received by Executive which are required hereunder to be offset against
payments or benefits received by Executive from Employer. If the Employer has
paid amounts in excess of those to which Executive is entitled (after giving
effect to the offsets provided above), Executive shall reimburse Employer for
such excess by December 31 of such year. The requirements imposed under this
paragraph shall terminate on December 31 of the calendar year which includes the
third anniversary of the date of termination.
5.05 Additional Payments. In the event any payment or
distribution of any type by Employer to Executive or for his benefit, whether
paid or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise (the "Total Payments"), would be subject to the excise
tax imposed by Section 4999 of the Code, or any interest or penalties with
respect to such excise tax (such excise tax, together with any such interest and
penalties, are collectively referred to as
<PAGE>
the "Excise Tax"), then Executive shall be entitled to receive an additional
cash payment (a "Gross-Up Payment") equal to an amount such that after payment
by Executive of all taxes (including any interest or penalties imposed with
respect to such taxes), including any Excise Tax, imposed upon the Gross-Up
Payment, Executive would retain an amount of the Gross-Up Payment equal to the
Excise Tax imposed upon the Total Payments. For purposes of determining the
amount of the Gross-Up Payment, which determination shall be made by the
Employer's independent auditors, at the Employer's sole expense, Executive's tax
rate shall be deemed to be the highest statutory marginal state and Federal tax
rate (on a combined basis) (including Executive's share of F.I.C.A. and Medicare
taxes) then in effect. If no determination by Employer's auditors is made prior
to the time a tax return reflecting the Total Payments is required to be filed
by Executive, Executive will be entitled to receive a Gross-Up Payment
calculated on the basis of the Total Payments reported by Executive in such tax
return, within 30 days of the filing of such tax return. In all events, if any
tax authority determines that a greater Excise Tax should be imposed upon the
Total Payments than is determined by the Employer's independent auditors or
reflected in Executive's tax return pursuant to this Section 5.05, Executive
shall be entitled to receive the full Gross-Up Payment calculated on the basis
of the amount of Excise Tax determined to be payable by such tax authority from
Employer within 30 days of such determination.
5.06 Nonexclusivity of Rights. Nothing in this Agreement shall
prevent or limit Executive from continuing or future participation in any
benefit, bonus, incentive, retirement or other plan or program provided by
Employer and for which Executive may qualify, nor, except as expressly provided
in this Agreement, shall anything herein limit or reduce such rights as
Executive may have under any other agreement with, or plan, program, policy or
practice of, Employer. Amounts which are vested benefits or which Executive is
otherwise entitled to receive under any agreement with, or plan, program, policy
or practice of, Employer (including, without limitation, the cash-out of unused
vacation days upon termination of employment) shall be payable in accordance
with such agreement, plan, program, policy or practice, except as explicitly
modified by this Agreement. Notwithstanding the foregoing, if Executive becomes
entitled to benefits under Article 5 of this Agreement, Executive shall not be
entitled to receive payments under any other severance pay plan or program
sponsored or maintained by Employer or any of its Affiliates.
<PAGE>
6. Non-Competition and Unfair Competition.
6.01 Agreement Not to Compete. Without the approval by
resolution of the Board of Directors of Employer, upon termination of
Executive's employment with Employer by Employer for Cause pursuant to Section
5.01(c) or by Executive without Good Reason pursuant to Section 5.01(f),
Executive will not, for a period of three years thereafter, become an officer,
employee, agent, partner, director or substantial stockholder (holding more than
5% of the voting securities), of any bank, savings bank, trust company, bank and
trust company, savings and loan association or holding company thereof, in each
case if such entity conducts business in the State of California, the State of
Colorado, the State of Idaho, the State of Illinois, the State of Iowa, the
State of Kansas, the State of Minnesota, the State of Montana, the State of
Nebraska, the State of Nevada, the State of North Dakota, the State of Oregon,
the State of South Dakota, the State of Utah, the State of Washington, the State
of Wisconsin, the State of Wyoming or any other State in which Employer has
substantial operations.
6.02 Agreement Not to Solicit. Without the approval by
resolution of the Board of Directors of Employer, upon termination of
Executive's employment with Employer for any reason whatsoever, Executive will
not, for the remainder of the Period of Employment if no termination had
occurred (or, if longer, for the one-year period following such termination),
(i) solicit or aid in soliciting as a customer or client of banking or related
financial services (including, without limitation trust, credit card and
investment management services) any person, firm, corporation, association or
other entity (A) that was a customer or client of Employer or any other
Affiliate of Employer, and for which Executive or anyone under Executive's
supervision performed any services or with which substantial business relations
were maintained by Employer or any other Affiliate of Employer at any time
during the five years prior to the termination of the Period of Employment or
(B) whose identity or particular needs Executive otherwise discovered as a
result of his employment with Employer, or (ii) solicit or aid in soliciting any
employees of Employer or any other Affiliate of Employer to leave their
employment. Without the approval by resolution of the Board of Directors of
Employer, upon termination of Executive's Employment with Employer for any
reason whatsoever, Executive agrees never to copy, remove from Employer or its
Affiliates, dispose or make any use of any confidential customer list,
confidential business information with respect to customers, confidential
materials relating to the practices or procedures of Employer or its Affiliates,
or any other proprietary information.
<PAGE>
7. Taxes. All payments to be made to Executive under this Agreement
will be net of required withholding of federal, state and local income and
employment taxes. Whenever under this Agreement Executive is to be compensated
or reimbursed on an "after-tax basis," Executive will be assumed to be subject
to federal income taxes at the highest marginal rate applicable to individuals
and to state income taxes at the highest marginal effective rate for residents
of Minneapolis, Minnesota.
8. Miscellaneous.
8.01 Governing Law. This Agreement is made under and shall be
governed by and construed in accordance with the laws of the State of Minnesota.
8.02 Successor. This Agreement shall be binding upon and inure
to the benefit of Employer and its successors. This Agreement will inure to the
benefit of, be enforceable by, and any amounts and benefits owed to Executive at
the time of Executive's death, unless otherwise provided herein, will be paid
to, the Trustee under the John F. and Beverly J. Grundhofer Living Trust
Agreement, or, if such Trust is not then in existence, the personal
representative or personal representatives of Executive's estate. Reference to
the "John F. and Beverly J. Grundhofer Living Trust Agreement" means that
certain Declaration of Trust, John F. and Beverly J. Grundhofer Living Trust,
dated February 22, 1988, by and between John F. and Beverly J. Grundhofer, as
donors and as original Trustees, as amended and existing at John F. Grundhofer's
death. Reference to the Trustee under the John F. and Beverly J. Grundhofer
Living Trust Agreement means the then acting Trustee or Trustees under the John
F. and Beverly J. Grundhofer Living Trust Agreement and any successor Trustees.
Employer will require the Resulting Corporation or any other
successor (whether direct or indirect, by purchase, merger, consolidation, or
otherwise) to all or substantially all of the business and/or consolidated
assets of Employer and its subsidiaries to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Employer would
be required to perform if no such succession had taken place. Failure of
Employer to obtain such assumption and agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle
Executive to compensation from Employer in the same amount and on the same terms
as Executive would be entitled to hereunder if Executive terminated his
employment for Good Reason following a Change in Control, except that for
purposes of implementing the
<PAGE>
foregoing, the date on which any such succession becomes effective shall be
deemed the date of termination and Notice of Termination shall be deemed to have
been given on such date. In any case where a successor assumes the Employer's
obligations under this Agreement by operation of law, the requirements imposed
in this paragraph will be satisfied if the successor acknowledges to Executive
in writing that it has assumed the Employer's obligations under this Agreement
by operation of law within 30 days of receipt of a written notice from Executive
requesting such acknowledgment.
8.03 Prior Agreements. This Agreement contains the entire
agreement of the parties relating to the employment of Executive by Employer and
the other matters discussed herein and supersedes all prior agreements and
understandings with respect to such subject matter, and the parties hereto have
made no agreements, representations or warranties relating to the subject matter
of this Agreement which are not set forth herein. The Prior Agreement is hereby
terminated and shall have no further force or effect. The Change in Control
Severance Pay Agreement entered into between Employer and Executive on March 16,
1992, which was attached as Exhibit A to the 1992 Employment Agreement with
Employer, remains terminated and of no force or effect.
8.04 Amendments. No amendment or modification of this
Agreement will be deemed effective unless made in writing and signed by each
party hereto.
8.05 No Waiver. No term or condition of this Agreement will be
deemed to have been waived, nor will there be any estoppel to enforce any
provisions of this Agreement, except by a statement in writing signed by the
party against whom enforcement of the waiver or estoppel is sought. Any written
waiver will not be deemed a continuing waiver unless specifically stated, will
operate only as to the specific term or condition waived and will not constitute
a waiver of such term or condition for the future or as to any act other than
that specifically waived.
8.06 Assignment. This Agreement is not assignable, in whole or
in part, by any party without the written consent of the other party.
8.07 Injunctive Relief. Executive agrees that it would be
difficult to compensate Employer fully for damages for any violation of the
provisions of this Agreement, including without limitation the provisions of
Section 6. Accordingly, Executive specifically agrees that Employer will be
entitled to
<PAGE>
temporary and permanent injunctive relief to enforce the provisions of this
Agreement and that such relief may be granted without the necessity of proving
actual damages. This provision with respect to injunctive relief will not,
however, diminish the right of Employer to claim and recover damages in addition
to injunctive relief.
8.08 Disputes and Legal Fees.
(a) Before a Change in Control. Any controversy or claim arising
out of or relating to this Agreement, or the breach thereof,
which is not resolved by the parties will not sooner than 30
days after the dispute shall arise, be settled by arbitration
before three arbitrators in accordance with the rules of the
American Arbitration Association, and judgment upon an award
rendered by the arbitrators, or at least a majority of them,
may be entered in any court having jurisdiction thereof;
provided, however, that Employer will be entitled to seek
injunctive or other equitable relief in a court of law to
enforce the provisions of Section 6. Such arbitration shall be
conducted in Minneapolis, Minnesota. The expenses incurred in
connection with any arbitration, including but not limited to
each party's legal fees and the arbitrators' fees and
expenses, will be allocated between the parties according to
the relative fault of each, as determined by the arbitrators.
(b) After a Change in Control. Subparagraph (a) above shall not
apply after a Change in Control, and the provisions of this
subparagraph (b) shall apply instead. If Executive so elects,
any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction. If
Executive does not elect arbitration, Executive may pursue
any and all legal remedies available to him. Employer shall
pay to Executive any legal fees and expenses reasonably
incurred by him after a Change in Control. If Executive elects
arbitration, Employer will pay all fees and expenses of the
arbitrator.
8.09 Severability. To the extent that any provision of this
Agreement shall be determined to be invalid or unenforceable, the invalid or
unenforceable portion of such provision will be deleted from this Agreement, and
the validity and
<PAGE>
enforceability of the remainder of such provision and of this Agreement will be
unaffected. In furtherance of and not in limitation of the foregoing, it is
expressly agreed that should the duration of or geographical extent of, or
business activities covered by, the noncompetition covenant contained in Section
6 be determined to be in excess of that which is valid or enforceable under
applicable law, then such provision will be construed to cover only that
duration or extent, or those activities which may validly or enforceably be
covered. Executive acknowledges the uncertainty of the law in this respect and
expressly stipulates that this Agreement will be construed in a manner which
renders its provisions valid and enforceable to the maximum extent (not
exceeding its express terms) possible under applicable law.
8.10 Notices. All notices under this Agreement will be in
writing and will be deemed effective when delivered in person (in Employer's
case, to its Secretary) or twenty-four (24) hours after deposit thereof in the
U.S. mails, postage prepaid, for delivery as registered or certified mail --
addressed, the case of Executive, to him at his last residential address known
by Employer and, in the case of Employer, to its corporate headquarters
attention of its Secretary, or to such other address as Executive or Employer
may designate in writing at any time or from time to time to the other party. In
lieu of notice by deposit in the U.S. mails, a party may give notice by
telegram, telex or telecopy, in which case such notice will be deemed effective
upon receipt.
8.11 Counterparts. This Agreement may be executed by the
parties hereto in counterparts, each of which will be deemed to be an original,
but all such counterparts will together constitute one and the same instrument.
8.12 Headings. The headings of paragraphs herein are included
solely for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
8.13 Change in Control. For purposes of this Agreement, the
following additional definitions shall apply:
8.13.1 "Acquiring Person" shall mean any Person who or which, together
with all Affiliates and Associates of such person, is the Beneficial
Owner, directly or indirectly, of securities of Employer representing
20% or more of the combined voting power of Employer's then outstanding
securities, but shall not include any Company Entity.
<PAGE>
8.13.2 "Affiliate" shall have the meaning ascribed to such term in Rule
12b-2 promulgated under the Exchange Act.
8.13.3 "Announcement Date" shall mean the date of the public
announcement of the transaction, event or course of action that results
in a Change in Control.
8.13.4 "Anticipatory Termination" shall mean a termination of
employment pursuant to Section 5.01(d) or 5.01(e) hereof as a result of
an act or event that occurs prior to a Change in Control and after the
Announcement Date and either (i) at the request of any other party to a
transaction, or any Person associated with the event or course of
events (other than Employer or a Company Entity), that results in a
Change in Control, or (ii) otherwise in contemplation of a Change in
Control; provided, that no termination shall be deemed an Anticipatory
Termination unless the Change in Control to which it relates actually
occurs.
8.13.5 "Associate" shall have the meaning ascribed to such term in Rule
12b-2 promulgated under the Exchange Act.
8.13.6 "Beneficial Owner" shall have the meaning ascribed to such term
in Rule 13d-3 promulgated under the Exchange Act.
8.13.7 "Board of Directors" shall mean the board of directors of
Employer.
8.13.8 "Change in Control" shall mean a Full Change in Control or a
Partial Change in Control.
8.13.9 "Company Entity" shall mean Employer, any subsidiary of
Employer or any employee benefit plan of Employer or of any subsidiary
of Employer or any entity holding shares of the voting capital stock of
Employer organized, appointed or established for, or pursuant to the
terms of, any such plan.
8.13.10 "Continuing Director" shall mean any person who is a member of
the Board of Directors, while such person is a member of the Board of
Directors, who is not an Acquiring Person or an Affiliate or Associate
of an Acquiring Person, or a representative of an Acquiring Person or
of any such Affiliate or Associate, and who (x) was a member of the
Board of Directors as of the date of this Agreement or (y) subsequently
becomes a member of the
<PAGE>
Board of Directors, if such person's initial nomination for election or
initial election to the Board of Directors has been approved in advance
by the Continuing Directors; provided that any director designated by
or on behalf of a Person who has entered into an agreement with
Employer (or who is contemplating entering into such an agreement) to
effect a consolidation or merger of Employer or a Company Entity, or
other reorganization, with or into one or more entities which are not
Company Entities, and any director that serves in connection with the
act of the Board of Directors of increasing the number of directors and
filling vacancies in connection with, or in contemplation of, any such
transaction, shall not be deemed to have received such advance approval
for initial nomination or election, and any such director shall not be
deemed to be a Continuing Director; provided, further, that any such
director shall subsequently become a Continuing Director at such time
as a new term of office as a director is approved by Employer's
shareholders at an annual meeting of shareholders occurring subsequent
to the completion of any such transaction (and excluding any annual
meeting at which the shareholders approve any such transaction), and,
provided, further, that in the case of a Permitted Transaction, any
such director shall not become a Continuing Director until the later of
(i) the end of the three-year period following consummation of such
Permitted Transaction or (ii) such time as a new term of office as a
director is approved by Employer's shareholders at an annual meeting of
shareholders occurring subsequent to the completion of such Permitted
Transaction.
8.13.11 "Employer" shall mean U.S Bancorp (formerly First Bank System,
Inc.), a Delaware corporation, or any successor thereto pursuant to
Section 8.02 hereof (including a Resulting Corporation) or by
operation of law.
8.13.12 "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
8.13.13 "Full Change In Control" shall mean:
(A) the public announcement (which, for purposes of this
definition, shall include, without limitations a report filed pursuant
to Section 13(d) of the Exchange Act) by Employer or any Person that a
Person (other than a Company Entity) has become the Beneficial Owner,
directly or indirectly, of securities of Employer (x) representing 20%
or more, but not more than 50% of the combined voting power of
Employer's then outstanding securities unless the transaction resulting
in such ownership has been approved
<PAGE>
in advance by the Continuing Directors or (y) representing more than
50% of the combined voting power of Employer's then outstanding
securities (regardless of any approval by the Continuing Directors); or
(B) the Continuing Directors cease to constitute a majority of
the Board of Directors of Employer or the Resulting Corporation, except
in accordance with the terms of a Permitted Transaction and except as a
result of the death, retirement or disability of one or more Continuing
Directors (unless any such death, retirement or disability occurs
following a Permitted Transaction and any vacancies created thereby are
not filled in accordance with the terms of the written agreement
governing such Permitted Transaction); or
(C) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or
substantially all of the consolidated assets of Employer and its
subsidiaries or the adoption of any plan of liquidation or dissolution
of Employer.
8.13.14 "Partial Change in Control" shall mean:
(A) a consolidation or merger of Employer or a Company Entity,
or other reorganization, with or into one or more entities which are
not Company Entities, as a result of which less than 60% of the
outstanding voting securities of the Resulting Corporation are, or are
to be, owned by former shareholders of Employer as determined
immediately prior to consummation of such transaction (excluding voting
securities of the Resulting Corporation owned, or to be owned, by such
shareholders by reason of their ownership prior to such transaction of
securities of any entity other than Employer) and as a result of which
the Continuing Directors constitute (i) more than 50% of the Board of
Directors of the Resulting Corporation or (ii) exactly 50% of the Board
of Directors of the Resulting Corporation if the transaction resulting
in such event is a Permitted Transaction;
(B) the public announcement (which, for purposes of this
definition, shall include, without limitation, a report filed pursuant
to Section 13(d) of the Exchange Act) by Employer or any Person that a
Person (other than a Company Entity) has become the Beneficial Owner,
directly or indirectly, of securities of Employer representing 20% or
more, but not more than 50% of the combined voting power
<PAGE>
of Employer's then outstanding securities if the transaction resulting
in such ownership has been approved in advance by the Continuing
Directors; or
(C) the effective date of the merger of First Bank System,
Inc. and U.S. Bancorp.
8.13.15 "Permitted Transaction" shall mean a transaction in which,
pursuant to a written agreement between Employer and all Persons who
have entered into an agreement with Employer to effect a transaction
described in paragraph (A) of the definition of Partial Change in
Control, it is agreed that (w) the Chief Executive Officer of Employer
immediately prior to the consummation of such transaction shall be the
Chief Executive Officer of the Resulting Corporation for not less than
three years following consummation of such transaction, (x) upon
termination of service of any Continuing Director for any reason,
including upon death, disability or retirement, prior to the expiration
of such director's term during such three-year period, the vacancy
thereby created shall be filled by a nominee selected solely by the
Continuing Directors, (y) upon expiration of the term of any such
director during such three-year period, the nominee to succeed such
director shall be selected solely by the Continuing Directors and (z)
the parties will take other appropriate steps to ensure that the Board
of Directors of the Resulting Corporation will be evenly divided
between Continuing Directors and all directors designated by other
parties to the transaction during such three-year period.
8.13.16 "Person" shall have the meaning ascribed to such term as such
term is used in Sections 13(d) and l4(d) of the Exchange Act.
8.13.17 "Resulting Corporation" shall mean the surviving corporation in
any consolidation, merger or other reorganization to which Employer is
a party; provided, however, that if the surviving corporation in any
such transaction is a subsidiary of another corporation, then the
Resulting Corporation is the ultimate parent corporation of such
surviving corporation; and provided, further, that in the event of a
consolidation, merger or other reorganization to which a Company Entity
(other than Employer) is a party, then Employer shall be deemed the
Resulting Corporation.
8.14 Code Section 162(m). Notwithstanding any other provision
of this Agreement to the contrary, to the extent that Employer's tax deduction
for remuneration in respect of the
<PAGE>
payment of any amount under Sections 5.02, 5.05 or 8.02 of this Agreement would
be disallowed under Code Section 162(m) by reason of the fact that Executive's
applicable employee remuneration, as defined in Code Section 162(m)(4), either
exceeds or, if such amount were paid, would exceed the $1,000,000 limitation in
Code Section 162(m)(1), Employer may, in its sole discretion, defer the payment
of such amount, but only to the extent that, and for so long as, Employer's tax
deduction in respect of the payment thereof would be so disallowed under Code
Section 162(m); provided that no payment may be deferred beyond three months
after the end of Employer's fiscal year in which Executive's termination of
employment occurs, and Employer may accelerate the payment of previously
deferred amounts if it determines that the amount of the tax deduction that
would be disallowed is not significant. Amounts which are deferred under this
Section 8.14 will be credited with interest at a rate determined by Employer
from time to time, but in no event less than the long-term applicable federal
rate under Code Section 1274(d) in effect from time to time.
IN WITNESS WHEREOF, Executive and Employer have executed this
Agreement as of the date set forth in the first paragraph hereof.
U.S. BANCORP
By /s/ Lee R. Mitau
-------------------------------------
Its Executive Vice President,
General Counsel and Secretary
/s/ John F. Grundhofer
---------------------------------------
John F. Grundhofer
Exhibit 10(b)
EMPLOYMENT AGREEMENT
AGREEMENT by and between First Bank System, Inc., a Delaware
corporation (the "Company") and Philip G. Heasley (the "Executive") dated as of
the 24th day of July, 1997.
The Board of Directors of the Company (the "Board") has determined that
it is in the best interests of the Company and its shareholders to assure that
the Company will have the continued dedication of the Executive pending the
merger (the "Merger") of the Company and U.S. Bancorp, an Oregon corporation
("USB") pursuant to the Agreement and Plan of Merger dated as of March 19, 1997
and to provide the surviving corporation after the Merger with continuity of
management. Therefore, in order to accomplish these objectives, the Board has
caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Effective Date. The "Effective Date" shall mean the effective date
of the Merger.
2. Employment Period. The Company hereby agrees to employ the
Executive, and the Executive hereby agrees to enter into the employ of the
Company subject to the terms and conditions of this Agreement, for the period
commencing on the Effective Date and ending on the third anniversary thereof
(the "Employment Period").
3. Terms of Employment. (a) Position and Duties. (i) (A) During the
Employment Period, the Executive shall serve as Vice Chairman of the Company,
the Executive shall be the head of Retail Product Group, Payment Systems, the
Business Technology Center and the Business Operations Center, reporting
directly to the Chief Executive Officer of the Company with such other
authority, duties and responsibilities as are commensurate with such position
and as may be consistent with such position and (B) the Executive's services
shall be performed in Minneapolis, Minnesota.
(ii) During the Employment Period, and excluding any periods
of vacation and sick leave to which the Executive is entitled, the
Executive agrees to devote substantially all of his attention and time
during normal business hours to the business and affairs of the Company
and, to the extent necessary to discharge the responsibilities assigned
to the Executive hereunder, to use the Executive's reasonable best
efforts to perform faithfully and efficiently such responsibilities.
During the Employment Period it shall not be a violation of this
Agreement for the Executive to (A) serve on corporate, civic or
charitable boards or committees, (B)
<PAGE>
deliver lectures, fulfill speaking engagements or teach at educational
institutions and (C) manage personal investments, so long as such
activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in
accordance with this Agreement. It is expressly understood and agreed
that to the extent that any such activities have been conducted by the
Executive prior to the Effective Date, the continued conduct of such
activities (or the conduct of activities similar in nature and scope
thereto) subsequent to the Effective Date shall not thereafter be
deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation. (i) Base Salary. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate at least equal to the highest rate paid to any
other Vice Chairman of the Company. During the Employment Period, the Annual
Base Salary shall be reviewed no more than 12 months after the last salary
increase awarded to the Executive prior to the Effective Date and thereafter at
least annually. Any increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this Agreement. Annual Base
Salary shall not be reduced after any such increase and the term Annual Base
Salary as utilized in this Agreement shall refer to Annual Base Salary as so
increased. As used in this Agreement, the term "affiliated companies" shall
include any company controlled by, controlling or under common control with the
Company.
(ii) Annual Bonus. During the Employment Period, the Executive
shall receive an annual cash bonus ("Annual Bonus") in an amount at
least equal to the highest annual cash bonus paid to any other Vice
Chairman of the Company.
(iii) Other Employee Benefit Plans. During the Employment
Period, the Executive shall be entitled to participate in all
incentive, employee benefit, pension, retirement, major medical,
hospital, surgical, dental, disability, other welfare and other plans,
practices, policies and programs on a basis no less favorable than that
provided to the Chief Executive Officer of the Company.
(iv) Expenses. During the Employment Period, the Executive
shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by the Executive in accordance with the Company's
policies.
(v) Fringe Benefits. During the Employment Period, the
Executive shall be entitled to fringe benefits, including, without
limitation, payment of club dues, and, if applicable, an automobile
allowance, to the extent applicable to the Vice Chairmen of the
Company.
(vi) Office and Support Staff. During the Employment Period,
the Executive shall be entitled to an office or offices of a size and
with furnishings
<PAGE>
and other appointments as provided generally at any time thereafter
with respect to other Vice Chairmen of the Company.
(vii) Vacation. During the Employment Period, the Executive
shall be entitled to paid vacation in accordance with the plans,
policies, programs and practices of the Company and its affiliated
companies as in effect with respect to the Vice Chairmen of the
Company.
4. Termination of Employment. (a) Death or Disability. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 11(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Executive shall not have returned to
full-time performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment during
the Employment Period for Cause. For purposes of this Agreement, "Cause" shall
mean:
(i) the continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of its
affiliates (other than any such failure resulting from incapacity due
to physical or mental illness), after a written demand for substantial
performance is delivered to the Executive by the Board or the Chief
Executive Officer of the Company which specifically identifies the
manner in which the Board or Chief Executive Officer believes that the
Executive has not substantially performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct
or gross misconduct which is materially and demonstrably injurious to
the Company, or
(iii) conviction of a felony or guilty or nolo contendere plea
by the Executive with respect thereto.
<PAGE>
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a resolution
duly adopted by the affirmative vote of not less than two-thirds of the entire
membership of the Board at a meeting of the Board called and held for such
purpose (after reasonable notice is provided to the Executive and the Executive
is given an opportunity, together with counsel, to be heard before the Board),
finding that, in the good faith opinion of the Board, the Executive is guilty of
the conduct described in subparagraph (i) or (ii) above, and specifying the
particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean in the absence of a written consent of the Executive:
(i) subject to the following provisos, (A) the assignment to
the Executive of any duties inconsistent in any material respect with
the Executive's position (including status, offices, titles and
reporting requirements), authority, duties or responsibilities as
contemplated by Section 3(a) of this Agreement, or any other action by
the Company which results in a material diminution in such position,
authority, duties or responsibilities, excluding for this purpose an
isolated, insubstantial and inadvertent action not taken in bad faith
and which is remedied by the Company promptly after receipt of notice
thereof given by the Executive; or (B) the Company's requiring the
Executive to be based at any office or location more than 35 miles from
that provided in Section 3(a)(i)(B) hereof, provided, however, that
this paragraph 4(c)(i) shall apply only in the event that John F.
Grundhofer shall no longer be the Chief Executive Officer of the
Company; and, in addition, clause 4(c)(i)(B) shall apply only in the
third year of the Employment Period;
(ii) any material failure by the Company to comply with any of
the provisions of Section 3(b) of this Agreement, other than an
isolated, insubstantial and inadvertent failure not occurring in bad
faith and which is remedied by the Company promptly after receipt of
notice thereof given by the Executive;
<PAGE>
(iii) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by this
Agreement; or
(iv) any failure by the Company to comply with and satisfy
Section 10(c) of this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause, or
by the Executive for Good Reason, shall be communicated by Notice of Termination
to the other party hereto given in accordance with Section 11(b) of this
Agreement. For purposes of this Agreement, a "Notice of Termination" means a
written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the Executive's employment under the provision so indicated, and (iii) if the
Date of Termination (as defined below) is other than the date of receipt of such
notice, specifies the termination date (which date shall be not more than thirty
days after the giving of such notice). The failure by the Executive or the
Company to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause shall not waive any right of
the Executive or the Company, respectively, hereunder or preclude the Executive
or the Company, respectively, from asserting such fact or circumstance in
enforcing the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein within 30 days of such notice, as the case may
be, (ii) if the Executive's employment is terminated by the Company other than
for Cause or Disability, the Date of Termination shall be the date on which the
Company notifies the Executive of such termination and (iii) if the Executive's
employment is terminated by reason of death or Disability, the Date of
Termination shall be the date of death of the Executive or the Disability
Effective Date, as the case may be.
5. Obligations of the Company upon Termination. (a) Good Reason; Other
Than for Cause, Death or Disability. If, during the Employment Period, the
Company shall terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in
cash within 30 days after the Date of Termination the aggregate of the
following amounts:
<PAGE>
A. the sum of (1) the Executive's Annual Base Salary
through the Date of Termination to the extent not theretofore
paid, and (2) the product of (x) the highest annual bonus paid
to the Executive for any of the three years prior to the
Effective Date (the "Recent Annual Bonus") and (y) a fraction,
the numerator of which is the number of days in the fiscal
year in which the Date of Termination occurs through the Date
of Termination, and the denominator of which is 365, in each
case to the extent not therefore paid (the sum of the amounts
described in clauses (1) and (2), shall be hereinafter
referred to as the "Accrued Obligations"); and
B. the amount equal to three times the sum of (x) the
Executive's Annual Base Salary and (y) the Recent Annual
Bonus; and
C. an amount equal to the excess of (a) the actuarial
equivalent of the benefit under the qualified defined benefit
retirement plan in which the Executive participates at the
Date of Termination (the "Retirement Plan") (utilizing
actuarial assumptions no less favorable to the Executive than
those in effect under the Retirement Plan immediately prior to
the Effective Date), and any excess or supplemental retirement
plan in which the Executive participates (together, the
"SERP") which the Executive would receive if the Executive's
employment continued for three years after the Date of
Termination assuming for this purpose that all accrued
benefits are fully vested, and, assuming that the Executive's
compensation in each of the three years is that required by
Section 3(b)(i) and Section 3(b)(ii), over (b) the actuarial
equivalent of the Executive's actual benefit (paid or
payable), if any, under the Retirement Plan and the SERP as of
the Date of Termination;
(ii) all unvested stock-based awards shall vest immediately;
and
(iii) to the extent not theretofore paid or provided, the
Company shall timely pay or provide to the Executive any other amounts
or benefits required to be paid or provided or which the Executive is
eligible to receive under any plan, program, policy or practice or
contract or agreement of the Company and its affiliated companies on
the Date of Termination (such other amounts and benefits shall be
hereinafter referred to as the "Other Benefits").
(b) Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. In addition, all unvested stock-based awards
shall vest immediately. Accrued Obligations shall be paid to the Executive's
estate or beneficiary, as applicable, in a lump sum in cash within 30 days of
the Date of Termination. With respect to the provision of Other Benefits, the
term Other Benefits as utilized in this Section 5(b) shall include death
benefits as in
<PAGE>
effect on the date of the Executive's death with respect to the Vice Chairmen of
the Company and his beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason
of the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations and the timely payment or provision of Other Benefits. In
addition, the Option and the Restricted Stock shall vest immediately. Accrued
Obligations shall be paid to the Executive in a lump sum in cash within 30 days
of the Date of Termination. With respect to the provision of Other Benefits, the
term Other Benefits as utilized in this Section 5(c) shall include, and the
Executive shall be entitled after the Disability Effective Date to receive,
disability and other benefits as in effect at any time thereafter generally with
respect to the Vice Chairmen of the Company.
(d) Cause; Other than for Good Reason. If the Executive's employment
shall be terminated for Cause or the Executive terminates his employment without
Good Reason during the Employment Period, this Agreement shall terminate without
further obligations to the Executive other than the obligation to pay to the
Executive (x) his Annual Base Salary through the Date of Termination, and (y)
Other Benefits, in each case to the extent theretofore unpaid.
6. Non-exclusivity of Rights. Except as specifically provided, nothing
in this Agreement shall prevent or limit the Executive's continuing or future
participation in any plan, program, policy or practice provided by the Company
or any of its affiliated companies and for which the Executive may qualify, nor,
subject to Section 11(f), shall anything herein limit or otherwise affect such
rights as the Executive may have under any contract or agreement with the
Company or any of its affiliated companies. Amounts which are vested benefits or
which the Executive is otherwise entitled to receive under any plan, policy,
practice or program of or any contract or agreement with the Company or any of
its affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program or contract or
agreement except as explicitly modified by this Agreement.
7. Full Settlement. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement and, such amounts
shall not be reduced whether or not the Executive obtains other employment. The
Company agrees to pay as incurred, to the full extent permitted by law, all
legal fees and expenses which the Executive may reasonably incur as a result of
any
<PAGE>
contest (regardless of the outcome thereof) by the Company, the Executive or
others of the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof (including as a result
of any contest by the Executive about the amount of any payment pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code
of 1986, as amended (the "Code").
8. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary not withstanding and
except as set forth below, in the event it shall be determined that any payment
or distribution by the Company to or for the benefit of the Executive (whether
paid or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise, but determined without regard to any additional payments
required under this Section 8) (a "Payment") would be subject to the excise tax
imposed by Section 4999 of the Code or any interest or penalties are incurred by
the Executive with respect to such excise tax (such excise tax, together with
any such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including, without limitation, any income taxes (and any
interest and penalties imposed with respect thereto) and Excise Tax imposed upon
the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing
provisions of this Section 8(a), if it shall be determined that the Executive is
entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the
greatest amount (the "Reduced Amount") that could be paid to the Executive such
that the receipt of Payments would not give rise to any Excise Tax, then no
Gross-Up Payment shall be made to the Executive and the Payments, in the
aggregate, shall be reduced to the Reduced Amount.
(b) Subject to the provisions of Section 8(c), all determinations
required to be made under this Section 8, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by Ernst & Young
LLP or such other certified public accounting firm reasonably acceptable to the
Company as may be designated by the Executive (the "Accounting Firm") which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the Executive
that there has been a Payment, or such earlier time as is requested by the
Company. All fees and expenses of the Accounting Firm shall be borne solely by
the Company. Any Gross-Up Payment, as determined pursuant to this Section 8,
shall be paid by the Company to the Executive within five days of (i) the later
of the due date for the
<PAGE>
payment of any Excise Tax, and (ii) the receipt of the Accounting Firm's
determination. Any determination by the Accounting Firm shall be binding upon
the Company and the Executive. As a result of the uncertainty in the application
of Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made ("Underpayment"), consistent
with the calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to Section 8(c) and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by
the Company relating to such claim,
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 8(c),
<PAGE>
the Company shall control all proceedings taken in connection with such contest
and, at its sole option, may pursue or forgo any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect of
such claim and may, at its sole option, either direct the Executive to pay the
tax claimed and sue for a refund or contest the claim in any permissible manner,
and the Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided, however, that if the
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and further provided
that any extension of the statute of limitations relating to payment of taxes
for the taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 8(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 8(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 8(c), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
9. Confidential Information. (a) The Executive shall hold in a
fiduciary capacity for the benefit of the Company all secret or confidential
information, knowledge or data relating to the Company or any of its affiliated
companies, and their respective businesses, which shall have been obtained by
the Executive during the Executive's employment by the Company or any of its
affiliated companies and which shall not be or become public knowledge (other
than by acts by the Executive or representatives of the Executive in violation
of this Agreement). After termination of the Executive's employment with the
Company, the Executive shall not, without the prior written consent of the
<PAGE>
Company or as may otherwise be required by law or legal process, communicate or
divulge any such information, knowledge or data to anyone other than the Company
and those designated by it. In no event shall an asserted violation of the
provisions of this Section 9 constitute a basis for deferring or withholding any
amounts otherwise payable to the Executive under this Agreement.
(b) In the event the Executive terminates his employment for Good
Reason or the Company terminates the Executive's employment other than for
Cause, in consideration of the obligations of the Company pursuant to Section 5
of this Agreement, the Executive agrees that he shall not, for a period of three
years following the Date of Termination, directly or directly, become an
employee with, partner or holder of more than 20% of the voting securities of,
or serve as a consultant or independent contractor for, any business entity or
individual, or an affiliate thereof, that is engaged in the banking or other
financial services business in the states where the Company then conducts any of
its banking business through a physical branch location.
(c) In the event of a breach or threatened breach of this Section 9,
the Executive agrees that the Company shall be entitled to injunctive relief in
a court of appropriate jurisdiction to remedy any such breach or threatened
breach, the Executive acknowledges that damages would be inadequate and
insufficient.
(d) Any termination of the Executive's employment or of this Agreement
shall have no effect on the continuing operation of this Section 9.
10. Successors. (a) This Agreement is personal to the Executive and
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to assume expressly and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
11. Miscellaneous. (a) This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without
reference
<PAGE>
to principles of conflict of laws. The captions of this Agreement are not part
of the provisions hereof and shall have no force or effect. This Agreement may
not be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal
(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
Philip G. Heasley
18085 Breezy Point Road
Woodland, Minnesota 55391
If to the Company:
First Bank Place
601 Second Avenue South
Minneapolis, Minnesota 55402
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason
pursuant to Section 4(c)(i)(v) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will",
<PAGE>
and prior to the Effective Date, the Executive's employment may be terminated by
either the Executive or the Company at any time, in which case the Executive
shall have no further rights under this Agreement. From and after the Effective
Date this Agreement shall supersede any other employment, severance or change of
control agreement between the parties with respect to the subject matter hereof;
except that certain Executive Change in Control Agreement between the Company
and Executive dated August 15, 1996 which shall survive this Agreement and shall
remain in effect, provided, however, that cash payments under the Change in
Control Agreement shall be offset against any payments due under this Agreement
and all other terms of this Agreement and the Change in Control Agreement shall
be interpreted to provide the maximum benefit provided under either of such
agreements but not to cumulate benefits under such agreements.
(g) Notwithstanding any provision of this Agreement, the Company shall
have no obligation to make any payments to Executive if or to the extent such
payments are prohibited by any applicable law or regulation, including, without
limitation, the FDIC's regulation regarding golden parachute and indemnification
payments promulgated under the Comprehensive Thrift and Bank Fraud Prosecution
and Taxpayer Recovery Act of 1990.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
EXECUTIVE:
/s/ Philip G. Heasley
Philip G. Heasley
FIRST BANK SYSTEM, INC.
By /s/ John F. Grundhofer
Its __________________
Exhibit 10(c)
EMPLOYMENT AGREEMENT
AGREEMENT by and between First Bank System, Inc., a Delaware
corporation (the "Company") and Richard A. Zona (the "Executive") dated as of
23rd day of July, 1997.
The Board of Directors of the Company (the "Board") has determined that
it is in the best interests of the Company and its shareholders to assure that
the Company will have the continued dedication of the Executive pending the
merger (the "Merger") of the Company and U.S. Bancorp, an Oregon corporation
("USB") pursuant to the Agreement and Plan of Merger dated as of March 19, 1997
and to provide the surviving corporation after the Merger with continuity of
management. Therefore, in order to accomplish these objectives, the Board has
caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Effective Date. The "Effective Date" shall mean the effective date
of the Merger.
2. Employment Period. The Company hereby agrees to employ the
Executive, and the Executive hereby agrees to enter into the employ of the
Company subject to the terms and conditions of this Agreement, for the period
commencing on the Effective Date and ending on the third anniversary thereof
(the "Employment Period").
3. Terms of Employment. (a) Position and Duties. (i) (A) During the
Employment Period, the Executive shall serve as Vice Chairman of the Company,
the Executive shall be the head of Commercial and Business Banking and Private
Financial Services in the Company's pre-Merger geographical region, Corporate
Trust, Finance, Investor and Corporate Relations, reporting directly to the
Chief Executive Officer of the Company with such other authority, duties and
responsibilities as are commensurate with such position and as may be consistent
with such position and (B) the Executive's services shall be performed in
Minneapolis, Minnesota.
(ii) During the Employment Period, and excluding any periods
of vacation and sick leave to which the Executive is entitled, the
Executive agrees to devote substantially all of his attention and time
during normal business hours to the business and affairs of the Company
and, to the extent necessary to discharge the responsibilities assigned
to the Executive hereunder, to use the Executive's reasonable best
efforts to perform faithfully and efficiently such responsibilities.
During the Employment Period it shall not be a violation of this
Agreement for the Executive to (A) serve on corporate, civic or
charitable boards or committees, (B)
<PAGE>
deliver lectures, fulfill speaking engagements or teach at educational
institutions and (C) manage personal investments, so long as such
activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in
accordance with this Agreement. It is expressly understood and agreed
that to the extent that any such activities have been conducted by the
Executive prior to the Effective Date, the continued conduct of such
activities (or the conduct of activities similar in nature and scope
thereto) subsequent to the Effective Date shall not thereafter be
deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation. (i) Base Salary. For the period ending on the third
anniversary of the Effective Date, the Executive shall receive an annual base
salary ("Annual Base Salary"), which shall be paid at a monthly rate at least
equal to the highest rate paid to any other Vice Chairman of the Company. During
the Employment Period, the Annual Base Salary shall be reviewed no more than 12
months after the last salary increase awarded to the Executive prior to the
Effective Date and thereafter at least annually. Any increase in Annual Base
Salary shall not serve to limit or reduce any other obligation to the Executive
under this Agreement. Annual Base Salary shall not be reduced after any such
increase and the term Annual Base Salary as utilized in this Agreement shall
refer to Annual Base Salary as so increased. As used in this Agreement, the term
"affiliated companies" shall include any company controlled by, controlling or
under common control with the Company.
(ii) Annual Bonus. During the Employment Period, the Executive
shall receive an annual cash bonus ("Annual Bonus") in an amount at
least equal to the highest annual cash bonus paid to any other Vice
Chairman of the Company.
(iii) Other Employee Benefit Plans. During the Employment
Period, the Executive shall be entitled to participate in all
incentive, employee benefit, pension, retirement, life insurance, major
medical, hospital, surgical, dental, disability, other welfare and
other plans, practices, policies and programs not described elsewhere
in this Section 3(b) on a basis no less favorable than that provided to
the other senior executives of the Company who do not have written
employment agreements.
(iv) Expenses. During the Employment Period, the Executive
shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by the Executive in accordance with the Company's
policies.
(v) Fringe Benefits. During the Employment Period, the
Executive shall be entitled to fringe benefits, including, without
limitation, payment of club dues, and, if applicable, an automobile
allowance, to the extent applicable to the Vice Chairmen of the
Company.
<PAGE>
(vi) Office and Support Staff. During the Employment Period,
the Executive shall be entitled to an office or offices of a size and
with furnishings and other appointments as provided generally at any
time thereafter with respect to other Vice Chairmen of the Company.
(vii) Vacation. During the Employment Period, the Executive
shall be entitled to paid vacation in accordance with the plans,
policies, programs and practices of the Company and its affiliated
companies as in effect with respect to the Vice Chairmen of the
Company.
4. Termination of Employment. (a) Death or Disability. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 11(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Executive shall not have returned to
full-time performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment during
the Employment Period for Cause. For purposes of this Agreement, "Cause" shall
mean:
(i) the continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of its
affiliates (other than any such failure resulting from incapacity due
to physical or mental illness), after a written demand for substantial
performance is delivered to the Executive by the Board or the Chief
Executive Officer of the Company which specifically identifies the
manner in which the Board or Chief Executive Officer believes that the
Executive has not substantially performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct
or gross misconduct which is materially and demonstrably injurious to
the Company, or
<PAGE>
(iii) conviction of a felony or guilty or nolo contendere plea
by the Executive with respect thereto.
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a resolution
duly adopted by the affirmative vote of not less than two-thirds of the entire
membership of the Board at a meeting of the Board called and held for such
purpose (after reasonable notice is provided to the Executive and the Executive
is given an opportunity, together with counsel, to be heard before the Board),
finding that, in the good faith opinion of the Board, the Executive is guilty of
the conduct described in subparagraph (i) or (ii) above, and specifying the
particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean in the absence of a written consent of the Executive:
(i) subject to the following proviso, (A) the assignment to
the Executive of any duties inconsistent in any material respect with
the Executive's position (including status, offices, titles and
reporting requirements), authority, duties or responsibilities as
contemplated by Section 3(a) of this Agreement, or any other action by
the Company which results in a material diminution in such position,
authority, duties or responsibilities, excluding for this purpose an
isolated, insubstantial and inadvertent action not taken in bad faith
and which is remedied by the Company promptly after receipt of notice
thereof given by the Executive; or (B) the Company's requiring the
Executive to be based at any office or location more than 35 miles from
that provided in Section 3(a)(i)(B) hereof; provided, however, that
this Section 4(c)(i) shall apply only in the event that John F.
Grundhofer shall no longer be the Chief Executive Officer of the
Company; and, in addition, clause 4(c)(i) (B) shall apply only in the
third year of the Employment Period.
(ii) any material failure by the Company to comply with any of
the provisions of Section 3(b) of this Agreement, other than an
isolated, insubstantial and inadvertent failure not occurring in bad
faith and which is remedied by the Company promptly after receipt of
notice thereof given by the Executive;
<PAGE>
(iii) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by this
Agreement; or
(iv) any failure by the Company to comply with and satisfy
Section 10(c) of this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause, or
by the Executive for Good Reason, shall be communicated by Notice of Termination
to the other party hereto given in accordance with Section 11(b) of this
Agreement. For purposes of this Agreement, a "Notice of Termination" means a
written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the Executive's employment under the provision so indicated, and (iii) if the
Date of Termination (as defined below) is other than the date of receipt of such
notice, specifies the termination date (which date shall be not more than thirty
days after the giving of such notice). The failure by the Executive or the
Company to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause shall not waive any right of
the Executive or the Company, respectively, hereunder or preclude the Executive
or the Company, respectively, from asserting such fact or circumstance in
enforcing the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein within 30 days of such notice, as the case may
be, (ii) if the Executive's employment is terminated by the Company other than
for Cause or Disability, the Date of Termination shall be the date on which the
Company notifies the Executive of such termination and (iii) if the Executive's
employment is terminated by reason of death or Disability, the Date of
Termination shall be the date of death of the Executive or the Disability
Effective Date, as the case may be.
5. Obligations of the Company upon Termination. (a) Good Reason; Other
Than for Cause, Death or Disability. If, during the Employment Period, the
Company shall terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in
cash within 30 days after the Date of Termination the aggregate of the
following amounts:
<PAGE>
A. the sum of (1) the Executive's Annual Base Salary
through the Date of Termination to the extent not theretofore
paid, and (2) the product of (x) the highest annual bonus paid
to the Executive for any of the three years prior to the
Effective Date (the "Recent Annual Bonus") and (y) a fraction,
the numerator of which is the number of days in the fiscal
year in which the Date of Termination occurs through the Date
of Termination, and the denominator of which is 365, in each
case to the extent not therefore paid (the sum of the amounts
described in clauses (1) and (2), shall be hereinafter
referred to as the "Accrued Obligations"); and
B. the amount equal to three times the sum of (x) the
Executive's Annual Base Salary and (y) the Recent Annual
Bonus; and
C. an amount equal to the excess of (a) the actuarial
equivalent of the benefit under the qualified defined benefit
retirement plan in which the Executive participates at the
Date of Termination (the "Retirement Plan") (utilizing
actuarial assumptions no less favorable to the Executive than
those in effect under the Retirement Plan immediately prior to
the Effective Date), and any excess or supplemental retirement
plan in which the Executive participates (together, the
"SERP") which the Executive would receive if the Executive's
employment continued for three years after the Date of
Termination assuming for this purpose that all accrued
benefits are fully vested, and, assuming that the Executive's
compensation in each of the three years is that required by
Section 3(b)(i) and Section 3(b)(ii), over (b) the actuarial
equivalent of the Executive's actual benefit (paid or
payable), if any, under the Retirement Plan and the SERP as of
the Date of Termination;
(ii) all unvested stock-based awards shall vest immediately;
and
(iii) to the extent not theretofore paid or provided, the
Company shall timely pay or provide to the Executive any other amounts
or benefits required to be paid or provided or which the Executive is
eligible to receive under any plan, program, policy or practice or
contract or agreement of the Company and its affiliated companies on
the Date of Termination (such other amounts and benefits shall be
hereinafter referred to as the "Other Benefits").
(b) Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. In addition, all unvested stock-based awards
shall vest immediately. Accrued Obligations shall be paid to the Executive's
<PAGE>
estate or beneficiary, as applicable, in a lump sum in cash within 30 days of
the Date of Termination. With respect to the provision of Other Benefits, the
term Other Benefits as utilized in this Section 5(b) shall include death
benefits as in effect on the date of the Executive's death with respect to the
Vice Chairmen of the Company and his beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason
of the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations and the timely payment or provision of Other Benefits. In
addition, all unvested stock-based awards shall vest immediately. Accrued
Obligations shall be paid to the Executive in a lump sum in cash within 30 days
of the Date of Termination. With respect to the provision of Other Benefits, the
term Other Benefits as utilized in this Section 5(c) shall include, and the
Executive shall be entitled after the Disability Effective Date to receive,
disability and other benefits as in effect at any time thereafter generally with
respect to the Vice Chairmen of the Company.
(d) Cause; Other than for Good Reason. If the Executive's employment
shall be terminated for Cause or the Executive terminates his employment without
Good Reason during the Employment Period, this Agreement shall terminate without
further obligations to the Executive other than the obligation to pay to the
Executive (x) his Annual Base Salary through the Date of Termination, and (y)
Other Benefits, in each case to the extent theretofore unpaid.
6. Non-exclusivity of Rights. Except as specifically provided, nothing
in this Agreement shall prevent or limit the Executive's continuing or future
participation in any plan, program, policy or practice provided by the Company
or any of its affiliated companies and for which the Executive may qualify, nor,
subject to Section 11(f), shall anything herein limit or otherwise affect such
rights as the Executive may have under any contract or agreement with the
Company or any of its affiliated companies. Amounts which are vested benefits or
which the Executive is otherwise entitled to receive under any plan, policy,
practice or program of or any contract or agreement with the Company or any of
its affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program or contract or
agreement except as explicitly modified by this Agreement.
7. Full Settlement. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement and, such amounts
shall
<PAGE>
not be reduced whether or not the Executive obtains other employment. The
Company agrees to pay as incurred, to the full extent permitted by law, all
legal fees and expenses which the Executive may reasonably incur as a result of
any contest (regardless of the outcome thereof) by the Company, the Executive or
others of the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof (including as a result
of any contest by the Executive about the amount of any payment pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code
of 1986, as amended (the "Code").
8. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary not withstanding and
except as set forth below, in the event it shall be determined that any payment
or distribution by the Company to or for the benefit of the Executive (whether
paid or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise, but determined without regard to any additional payments
required under this Section 8) (a "Payment") would be subject to the excise tax
imposed by Section 4999 of the Code or any interest or penalties are incurred by
the Executive with respect to such excise tax (such excise tax, together with
any such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including, without limitation, any income taxes (and any
interest and penalties imposed with respect thereto) and Excise Tax imposed upon
the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing
provisions of this Section 8(a), if it shall be determined that the Executive is
entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the
greatest amount (the "Reduced Amount") that could be paid to the Executive such
that the receipt of Payments would not give rise to any Excise Tax, then no
Gross-Up Payment shall be made to the Executive and the Payments, in the
aggregate, shall be reduced to the Reduced Amount.
(b) Subject to the provisions of Section 8(c), all determinations
required to be made under this Section 8, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by Ernst & Young
LLP or such other certified public accounting firm reasonably acceptable to the
Company as may be designated by the Executive (the "Accounting Firm") which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the Executive
that there has been a Payment, or such earlier time as is requested by the
Company. All fees and
<PAGE>
expenses of the Accounting Firm shall be borne solely by the Company. Any
Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the
Company to the Executive within five days of (i) the later of the due date for
the payment of any Excise Tax, and (ii) the receipt of the Accounting Firm's
determination. Any determination by the Accounting Firm shall be binding upon
the Company and the Executive. As a result of the uncertainty in the application
of Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made ("Underpayment"), consistent
with the calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to Section 8(c) and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by
the Company relating to such claim,
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax
<PAGE>
basis, for any Excise Tax or income tax (including interest and penalties with
respect thereto) imposed as a result of such representation and payment of costs
and expenses. Without limitation on the foregoing provisions of this Section
8(c), the Company shall control all proceedings taken in connection with such
contest and, at its sole option, may pursue or forgo any and all administrative
appeals, proceedings, hearings and conferences with the taxing authority in
respect of such claim and may, at its sole option, either direct the Executive
to pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such advance;
and further provided that any extension of the statute of limitations relating
to payment of taxes for the taxable year of the Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
the Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 8(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 8(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 8(c), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
9. Confidential Information; Noncompete. (a) The Executive shall hold
in a fiduciary capacity for the benefit of the Company all secret or
confidential information, knowledge or data relating to the Company or any of
its affiliated companies, and their respective businesses, which shall have been
obtained by the Executive during the Executive's employment by the Company or
any of its affiliated companies and which shall not be or become public
knowledge (other
<PAGE>
than by acts by the Executive or representatives of the Executive in violation
of this Agreement). After termination of the Executive's employment with the
Company, the Executive shall not, without the prior written consent of the
Company or as may otherwise be required by law or legal process, communicate or
divulge any such information, knowledge or data to anyone other than the Company
and those designated by it. In no event shall an asserted violation of the
provisions of this Section 9 constitute a basis for deferring or withholding any
amounts otherwise payable to the Executive under this Agreement.
(b) In the event the Executive terminates his employment for Good
Reason or the Company terminates the Executive's employment other than for
Cause, in consideration of the obligations of the Company pursuant to Section 5
of this Agreement, the Executive agrees that he shall not, for a period of three
years following the Date of Termination, directly or directly, become an
employee with, partner or holder of more than 20% of the voting securities of,
or serve as a consultant or independent contractor for, any business entity or
individual, or an affiliate thereof, that is engaged in the banking or other
financial services business in the states where the Company then conducts any of
its banking business through a physical branch location.
(c) In the event of a breach or threatened breach of this Section 9,
the Executive agrees that the Company shall be entitled to injunctive relief in
a court of appropriate jurisdiction to remedy any such breach or threatened
breach, the Executive acknowledges that damages would be inadequate and
insufficient.
(d) Any termination of the Executive's employment or of this Agreement
shall have no effect on the continuing operation of this Section 9.
10. Successors. (a) This Agreement is personal to the Executive and
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to assume expressly and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
<PAGE>
11. Miscellaneous. (a) This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without
reference to principles of conflict of laws. The captions of this Agreement are
not part of the provisions hereof and shall have no force or effect. This
Agreement may not be amended or modified otherwise than by a written agreement
executed by the parties hereto or their respective successors and legal
representatives.
(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
Richard A. Zona
55 Arbor Court
Tonka Bay, Minnesota 55331
If to the Company:
First Bank Place
601 Second Avenue South
Minneapolis, Minnesota 55402
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason
pursuant to Section 4(c)(i)(v) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
<PAGE>
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will",
and prior to the Effective Date, the Executive's employment may be terminated by
either the Executive or the Company at any time, in which case the Executive
shall have no further rights under this Agreement. From and after the Effective
Date this Agreement shall supersede any other employment, severance or change of
control agreement between the parties with respect to the subject matter hereof;
except that certain Executive Change in Control Agreement between the Company
and Executive dated August 15, 1996 which shall survive this Agreement and shall
remain in effect, provided, however, that cash payments under the Change in
Control Agreement shall be offset against any payments due under this Agreement
and all other terms of this Agreement and the Change in Control Agreement shall
be interpreted to provide the maximum benefit provided under either of such
agreements but not to cumulate benefits under such agreements.
(g) Notwithstanding any provision of this Agreement, the Company shall
have no obligation to make any payments to Executive if or to the extent such
payments are prohibited by any applicable law or regulation, including, without
limitation, the FDIC's regulation regarding golden parachute and indemnification
payments promulgated under the Comprehensive Thrift and Bank Fraud Prosecution
and Taxpayer Recovery Act of 1990.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
EXECUTIVE:
/s/ Richard A. Zona
Richard A. Zona
FIRST BANK SYSTEM, INC.
By /s/ John F. Grundhofer
Its __________________
EXHIBIT 11
COMPUTATION OF PRIMARY AND FULLY DILUTED NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended September 30
----------------------------------
(Dollars in Millions, Except Per Share Data) 1997 1996
=============== ===============
<S> <C> <C>
PRIMARY:
Average shares outstanding 243,823,676 251,483,750
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 ........................................ 4,635,892 3,498,175
--------------- ---------------
248,459,568 254,981,925
=============== ===============
Net income (loss) $ (47.6) $ 255.7
Preferred dividends ................................................ (3.1) (4.6)
--------------- ---------------
Net income (loss) applicable to common equity ...................... $ (50.7) $ 251.1
=============== ===============
Net income (loss) per common share ................................. $ (.20) $ .98
=============== ===============
FULLY DILUTED:*
Average shares outstanding 243,823,676 251,483,750
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 ............................................................ 5,184,626 3,871,924
Assumed conversion of Series 1991A Preferred Stock -- 3,032,761
--------------- ---------------
249,008,302 258,388,435
=============== ===============
Net income (loss) $ (47.6) $ 255.7
Preferred dividends, excluding 1991A Preferred Stock ............... (3.1) (3.0)
--------------- ---------------
Net income (loss) applicable to common equity ...................... $ (50.7) $ 252.7
=============== ===============
Net income (loss) per common share ................................. $ (.20) $ .98
=============== ===============
</TABLE>
WIDE TABLE CONTINUED FROM ABOVE:
COMPUTATION OF PRIMARY AND FULLY DILUTED NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Nine Months Ended September 30
----------------------------------
(Dollars in Millions, Except Per Share Data) 1997 1996
=============== ===============
<S> <C> <C>
PRIMARY:
Average shares outstanding 244,380,679 250,783,722
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 ........................................ 4,438,567 3,601,847
--------------- ---------------
248,819,246 254,385,569
=============== ===============
Net income (loss) $ 549.6 $ 926.6
Preferred dividends ................................................ (9.2) (14.0)
--------------- ---------------
Net income (loss) applicable to common equity ...................... $ 540.4 $ 912.6
=============== ===============
Net income (loss) per common share ................................. $ 2.17 $ 3.59
=============== ===============
FULLY DILUTED:*
Average shares outstanding 244,380,679 250,783,722
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 ............................................................ 5,644,026 4,325,824
Assumed conversion of Series 1991A Preferred Stock -- 3,193,986
--------------- ---------------
250,024,705 258,303,532
=============== ===============
Net income (loss) $ 549.6 $ 926.6
Preferred dividends, excluding 1991A Preferred Stock ............... (9.2) (9.1)
--------------- ---------------
Net income (loss) applicable to common equity ...................... $ 540.4 $ 917.5
=============== ===============
Net income (loss) per common share ................................. $ 2.16 $ 3.55
=============== ===============
</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>
Nine
Months
Ended
September 30
------------
(Dollars in Millions) 1997
============
<S> <C>
EARNINGS
1. Net income .................................................................... $ 549.6
2. Applicable income taxes ....................................................... 383.8
---------
3. Net income before taxes (1 + 2) ............................................... $ 933.4
=========
4. Fixed charges:
a Interest expense excluding interest on deposits ............................. $ 590.3
b. Portion of rents representative of interest and amortization of debt expense 26.0
---------
c. Fixed charges excluding interest on deposits (4a + 4b) ...................... 616.3
d. Interest on deposits ........................................................ 1,077.7
---------
e. Fixed charges including interest on deposits (4c + 4d) ...................... $ 1,694.0
=========
5. Amortization of interest capitalized .......................................... $ --
6. Earnings excluding interest on deposits (3 + 4c + 5) .......................... 1,549.7
7. Earnings including interest on deposits (3 + 4e + 5) .......................... 2,627.4
8. Fixed charges excluding interest on deposits (4c) ............................. 616.3
9. Fixed charges including interest on deposits (4e) ............................. 1,694.0
RATIO OF EARNINGS TO FIXED CHARGES
10. Excluding interest on deposits (line 6/line 8) ................................ 2.51
11. Including interest on deposits (line 7/line 9) ................................ 1.55
=========
</TABLE>
NOTE: DUE TO $532.2 MILLION OF NONRECURRING CHARGES FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1997, EARNINGS ARE DEFICIENT IN COVERING FIXED CHARGES BY
$13.1 MILLION.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE U.S.
BANCORP SEPTEMBER 30, 1997, 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,342,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 529,000
<TRADING-ASSETS> 156,000
<INVESTMENTS-HELD-FOR-SALE> 6,832,000
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 54,143,000
<ALLOWANCE> 1,019,900
<TOTAL-ASSETS> 70,174,000
<DEPOSITS> 48,374,000
<SHORT-TERM> 4,497,000
<LIABILITIES-OTHER> 1,661,000
<LONG-TERM> 8,710,000
<COMMON> 306,000
0
150,000
<OTHER-SE> 5,285,000
<TOTAL-LIABILITIES-AND-EQUITY> 70,174,000
<INTEREST-LOAN> 3,561,900
<INTEREST-INVEST> 332,500
<INTEREST-OTHER> 50,700
<INTEREST-TOTAL> 3,945,100
<INTEREST-DEPOSIT> 1,077,700
<INTEREST-EXPENSE> 1,668,000
<INTEREST-INCOME-NET> 2,277,100
<LOAN-LOSSES> 370,300
<SECURITIES-GAINS> 3,600
<EXPENSE-OTHER> 2,168,100
<INCOME-PRETAX> 933,400
<INCOME-PRE-EXTRAORDINARY> 549,600
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 549,600
<EPS-PRIMARY> 2.17
<EPS-DILUTED> 2.16
<YIELD-ACTUAL> 5.05
<LOANS-NON> 293,200
<LOANS-PAST> 79,500
<LOANS-TROUBLED> 3,900
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 992,500
<CHARGE-OFFS> 439,900
<RECOVERIES> 93,500
<ALLOWANCE-CLOSE> 1,019,900
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
