FORM 10-Q/SEPTEMBER 30, 1999
[LOGO] US BANCORP(R)
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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, 1999
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.)
U.S. BANK PLACE,
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, 1999
Common Stock, $1.25 Par Value 727,649,911 shares
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FINANCIAL SUMMARY
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
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September 30 September 30 September 30 September 30
(Dollars in Millions, Except Per Share Data) 1999 1998 1999 1998
- - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before merger-related items ..................... $ 406.9 $ 370.3 $ 1,159.3 $ 1,086.3
Merger-related items ................................... (10.5) (41.2) (21.8) (108.1)
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Net income ............................................. $ 396.4 $ 329.1 $ 1,137.5 $ 978.2
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PER COMMON SHARE
Earnings per share ..................................... $ .55 $ .45 $ 1.57 $ 1.33
Diluted earnings per share ............................. .54 .44 1.56 1.31
Earnings on a cash basis (diluted)* .................... .60 .49 1.72 1.45
Dividends paid ......................................... .195 .175 .585 .525
Common shareholders' equity ............................ 9.20 8.13
PER COMMON SHARE BEFORE MERGER-RELATED ITEMS
Earnings per share ..................................... .56 .50 1.60 1.47
Diluted earnings per share ............................. .56 .50 1.59 1.45
Earnings on a cash basis (diluted)* .................... .61 .55 1.75 1.59
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FINANCIAL RATIOS
Return on average assets ............................... 2.02% 1.81% 1.99% 1.84%
Return on average common equity ........................ 23.9 21.4 24.0 21.4
Efficiency ratio ....................................... 50.2 55.1 50.6 53.2
Net interest margin (taxable-equivalent basis) ......... 4.84 4.83 4.84 4.91
SELECTED FINANCIAL RATIOS BEFORE MERGER-RELATED ITEMS
Return on average assets ............................... 2.08 2.04 2.03 2.04
Return on average common equity ........................ 24.5 24.1 24.5 23.8
Efficiency ratio ....................................... 49.2 50.3 49.8 48.8
Banking efficiency ratio** ............................. 42.3 43.3 42.7 44.5
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<CAPTION>
September 30 December 31
1999 1998
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PERIOD END
Loans .................................................. $ 60,265 $ 59,122
Allowance for credit losses ............................ 966 1,001
Assets ................................................. 77,036 76,438
Total shareholders' equity ............................. 6,719 5,970
Tangible common equity to total assets*** .............. 6.5% 6.0%
Tier 1 capital ratio ................................... 6.7 6.4
Total risk-based capital ratio ......................... 11.2 10.9
Leverage ratio ......................................... 7.1 6.8
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</TABLE>
* CALCULATED BY ADDING AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS TO
NET INCOME.
** WITHOUT INVESTMENT BANKING AND BROKERAGE ACTIVITY.
*** DEFINED AS COMMON EQUITY LESS GOODWILL AS A PERCENTAGE OF TOTAL ASSETS LESS
GOODWILL.
TABLE OF CONTENTS AND FORM 10-Q CROSS-REFERENCE INDEX
PART I -- FINANCIAL INFORMATION
Management's Discussion and Analysis of Financial Condition and Results
of Operations (Item 2) ...................................................... 2
Quantitative and Qualitative Disclosures About Market Risk (Item 3) ......... 12
Financial Statements (Item 1) ............................................... 17
PART II -- OTHER INFORMATION
Exhibits and Reports on Form 8-K (Item 6) ................................... 29
Signature ................................................................... 29
Exhibit 12 -- Computation of Ratio of Earnings to Fixed Charges ............. 30
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements. Statements that are not
historical or current facts, including statements about beliefs and
expectations, are forward-looking statements. Forward-looking statements involve
inherent risks and uncertainties, and important factors could cause actual
results to differ materially from those anticipated, including the following:
(i) general economic or industry conditions could be less favorable than
expected, resulting in a deterioration in credit quality or a reduced demand for
credit or fee-based products and services; (ii) changes in the domestic interest
rate environment could reduce net interest income; (iii) the conditions of the
securities markets could change, adversely affecting the availability and terms
of funding necessary to meet the Company's liquidity needs; (iv) changes in the
extensive laws, regulations and policies governing financial services companies,
particularly the adoption of proposed bank regulatory reform, could alter the
Company's business environment or affect operations; (v) the potential need to
adapt to industry changes in information technology systems, on which the
Company is highly dependent, could present operational issues or require
significant capital spending; (vi) competitive pressures could intensify and
affect the Company's profitability, including as a result of continued industry
consolidation, the increased availability of financial services from non-banks,
technological developments such as the Internet, or bank regulatory reform;
(vii) acquisitions may not produce revenue enhancements or cost savings at
levels or within time frames originally anticipated, or may result in unforeseen
integration difficulties; and (viii) third parties with which the Company does
business may fail to remedy their Year 2000 issues and other unforeseen Year
2000 complications may arise, affecting the Company's operations.
Forward-looking statements speak only as of the date they are made, and the
Company undertakes no obligation to update them in light of new information or
future events.
U.S. Bancorp 1
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MANAGEMENT'S DISCUSSION AND ANALYSIS
EARNINGS SUMMARY U.S. Bancorp (the "Company") reported third quarter 1999
operating earnings (net income excluding merger-related items) of $406.9
million, compared with $370.3 million in the third quarter of 1998. On a diluted
per share basis, operating earnings were $.56 in the third quarter of 1999,
compared with $.50 in the third quarter of 1998, an increase of 12 percent.
Operating earnings on a cash basis were $.61 per diluted share in the third
quarter of 1999, compared with $.55 per diluted share in the third quarter of
1998, an increase of 11 percent. Return on average assets and return on average
common equity, excluding merger-related items, were 2.08 percent and 24.5
percent, respectively, in the third quarter of 1999, compared with returns of
2.04 percent and 24.1 percent, respectively, in the third quarter of 1998.
Excluding merger-related items, the efficiency ratio (the ratio of expenses to
revenues) was 49.2 percent in the third quarter of 1999, compared with 50.3
percent in the third quarter of 1998.
Net interest income on a taxable-equivalent basis in the third quarter of
1999 was higher by $66.1 million (8 percent) than the third quarter of 1998.
Noninterest income increased by $95.7 million (16 percent), with growth in all
major sources of noninterest income. Noninterest expense, before merger-related
items, grew at a slower pace than revenue in the third quarter of 1999,
increasing by $65.0 million (9 percent), over the third quarter of 1998. The
banking efficiency ratio (the ratio of expenses to revenues without the impact
of investment banking and brokerage activity), before merger-related items, for
the third quarter of 1999 was 42.3 percent, compared with 43.3 percent in the
third quarter of 1998. Unusual items in the third quarter of 1999 operating
results included a $20 million gain-on-sale from the divestiture of 28 branches
in Kansas and Iowa and approximately $18.0 million of expense accruals,
primarily related to two contingencies. Third quarter results also included $3.4
million of securities losses.
Net income was $396.4 million in the third quarter of 1999, or $.54 per
diluted share, compared with $329.1 million, or $.44 per diluted share, in the
third quarter of 1998. Merger-related charges decreased net income in the third
quarter of 1999 by $10.5 million ($16.8 million on a pre-tax basis) compared to
a decrease of $41.2 million ($66.4 million on a pre-tax basis) in the third
quarter of 1998.
Comparisons to the first nine months of 1999 are affected by the May, 1998
acquisition of Piper Jaffray Companies Inc. ("Piper Jaffray") and several other
smaller acquisitions. Operating earnings for the first nine months of 1999 were
$1.16 billion compared with $1.09 billion in the first nine months of 1998. On a
diluted per share basis, year-to-date 1999 operating earnings were $1.59,
compared with $1.45 for the same period of 1998, an increase of 10 percent.
Operating earnings on a cash basis were $1.75 per diluted share in the first
nine months of 1999, compared with $1.59 per diluted share in the first nine
months of 1998. Year-to-date return on average assets and return on average
common equity, excluding merger-related items, were 2.03 percent and 24.5
percent, respectively, compared with returns of 2.04 percent and 23.8 percent,
respectively, in the first nine months of 1998. Excluding merger-related items,
the efficiency ratio was 49.8 percent in the first nine months of 1999, compared
with 48.8 percent in the first nine months of 1998, reflecting the impact of
acquired businesses. Excluding merger-related items, the banking efficiency
ratio was 42.7 percent in the first nine months of 1999, compared with 44.5
percent in the first nine months of 1998.
Net income for the first nine months of 1999 was $1.14 billion, or $1.56
per diluted share, compared with $978.2 million, or $1.31 per diluted share, for
the first nine months of 1998. Return on average assets and return on average
common equity were 1.99 percent and 24.0 percent, respectively, in the first
nine months of 1999, compared with returns of 1.84 percent and 21.4 percent,
respectively, for the same period of 1998. Merger-related items decreased net
income by $21.8 million ($34.7 million on a pre-tax basis) in the first nine
months of 1999 compared with $108.1 million ($172.4 million on a pre-tax basis)
in the first nine months of 1998.
ACQUISITION AND DIVESTITURE ACTIVITY Operating results for the first nine months
of 1999 reflect the following purchase and divestiture transactions. On
September 24, 1999, the Company completed the sale of 28 branches in Kansas and
Iowa with aggregate deposits of $364 million. On September 23, 1999, the Company
sold $1.8 billion of indirect automobile loans and is in the process of exiting
this business. On September 17, 1999, the Company completed its acquisition of
the investment banking
2 U.S. Bancorp
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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) 1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Interest income ................................................. $ 1,462.1 $ 1,382.3 $ 4,220.4 $ 4,083.0
Interest expense ................................................ 617.1 603.4 1,758.7 1,758.2
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Net interest income ........................................... 845.0 778.9 2,461.7 2,324.8
Provision for credit losses ..................................... 142.0 95.0 385.0 278.0
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Net interest income after provision for credit losses ......... 703.0 683.9 2,076.7 2,046.8
Available-for-sale securities gains (losses) .................... (3.4) -- (3.4) 12.6
Other noninterest income ........................................ 716.0 616.9 1,998.2 1,623.9
Merger-related charges .......................................... 16.8 66.4 34.7 172.4
Other noninterest expense ....................................... 767.4 702.4 2,221.1 1,926.6
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Income before income taxes .................................... 631.4 532.0 1,815.7 1,584.3
Taxable-equivalent adjustment ................................... 10.3 12.5 31.7 38.5
Income taxes .................................................... 224.7 190.4 646.5 567.6
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Net income .................................................... $ 396.4 $ 329.1 $ 1,137.5 $ 978.2
=======================================================
Return on average assets ........................................ 2.02% 1.81% 1.99% 1.84%
Return on average common equity ................................. 23.9 21.4 24.0 21.4
Net interest margin ............................................. 4.84 4.83 4.84 4.91
Efficiency ratio ................................................ 50.2 55.1 50.6 53.2
Efficiency ratio before merger-related items .................... 49.2 50.3 49.8 48.8
Banking efficiency ratio before merger-related items* ........... 42.3 43.3 42.7 44.5
=======================================================
PER COMMON SHARE:
Earnings per share .............................................. $ .55 $ .45 $ 1.57 $ 1.33
Diluted earnings per share ...................................... .54 .44 1.56 1.31
Dividends paid .................................................. .195 .175 .585 .525
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</TABLE>
*WITHOUT INVESTMENT BANKING AND BROKERAGE ACTIVITY.
division of The John Nuveen Company which became part of the U.S. Bancorp Piper
Jaffray Fixed Income Capital Markets division. On September 13, 1999, the
Company completed its acquisition of Voyager Fleet Systems, Inc. On July 15,
1999, the Company completed its acquisition of the San Diego-based Bank of
Commerce, one of the nation's largest U.S. Small Business Administration ("SBA")
lenders. On June 30, 1999, the Company completed its acquisition of Mellon
Network Services' electronic fund transfer processing unit. On March 16, 1999,
the Company completed its acquisition of Reliance Trust Company's corporate
trust business, which operates offices in Georgia, Florida and Tennessee. On
January 4, 1999, the Company acquired Libra Investments, Inc., a privately held
Los Angeles- and New York-based investment bank that specializes in underwriting
and trading high yield and mezzanine securities for middle market companies. In
December 1998, the Company completed its acquisition of Northwest Bancshares,
Inc. In May 1998, the Company completed its acquisition of Piper Jaffray, a
full-service investment banking and securities brokerage firm. These
transactions were all accounted for as purchase acquisitions.
On September 2, 1999, the Company announced an agreement to acquire
Peninsula Bank of San Diego. With $456 million in assets at June 30, 1999,
Peninsula Bank operates 11 branches in San Diego County. The acquisition is
pending regulatory approval and is expected to close in the first quarter of
2000. The acquisition will be accounted for as a purchase transaction.
On May 19, 1999, the Company announced an agreement to acquire Newport
Beach-based Western Bancorp. With $2.5 billion in assets at June 30, 1999,
Western Bancorp has 31 branches in southern California in Los Angeles, Orange
and San Diego counties. The acquisition is pending regulatory approval and is
expected to close during the fourth quarter of 1999. The acquisition will be
accounted for as a purchase transaction.
LINE OF BUSINESS FINANCIAL REVIEW
Within the Company, financial performance is measured by major lines of
business, which include: Wholesale and Private Financial Services, Retail
Banking, Payment Systems, Corporate Trust and Institutional Financial Services,
and Investment Banking and Brokerage. These segments are determined based on the
products and services provided to respond effectively to the needs of a diverse
customer base. Business line results are derived from the Company's business
unit profitability reporting
U.S. Bancorp 3
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TABLE 2 LINE OF BUSINESS FINANCIAL PERFORMANCE
<TABLE>
<CAPTION>
Wholesale and
Private Financial Services Retail Banking
------------------------------------- -------------------------------------
For the Three Months Ended September 30 Percent Percent
(Dollars in Millions) 1999 1998 Change 1999 1998 Change
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONDENSED INCOME STATEMENT:
Net interest income (expense)
(taxable-equivalent basis) ....................... $ 374.8 $ 334.6 12.0% $ 393.5 $ 375.7 4.7%
Provision for credit losses ....................... 27.4 11.6 * 73.7 45.6 61.6
Noninterest income ................................ 80.4 74.9 7.3 157.3 137.5 14.4
Noninterest expense ............................... 163.8 146.2 12.0 277.9 261.5 6.3
Income taxes and
taxable-equivalent adjustment .................... 98.3 95.9 74.1 78.6
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Income (loss) before merger-related items ......... $ 165.7 $ 155.8 6.4 $ 125.1 $ 127.5 (1.9)
======================== ========================
Merger-related items (after-tax) ..................
Net income ........................................
AVERAGE BALANCE SHEET DATA:
Commercial loans .................................. $ 36,353 $ 31,944 13.8 $ 2,263 $ 2,099 7.8
Consumer loans, excluding
residential mortgage ............................. 713 594 20.0 13,911 12,346 12.7
Residential mortgage loans ........................ 505 436 15.8 2,177 3,003 (27.5)
Assets ............................................ 45,319 40,618 11.6 22,062 21,360 3.3
Deposits .......................................... 12,239 11,080 10.5 33,633 34,086 (1.3)
Common equity ..................................... 3,258 3,138 3.8 1,598 1,471 8.6
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Return on average assets .......................... 1.45% 1.52% 2.25% 2.37%
Return on average common equity ("ROCE") .......... 20.2 19.7 31.1 34.4
Net tangible ROCE** ............................... 29.3 26.6 50.4 53.7
Efficiency ratio .................................. 35.9 35.7 50.4 51.0
Efficiency ratio on a cash basis** ................ 32.3 32.4 48.1 48.8
=================================================================================================================================
<CAPTION>
Wholesale and
Private Financial Services Retail Banking
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For the Nine Months Ended September 30 Percent Percent
(Dollars in Millions) 1999 1998 Change 1999 1998 Change
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONDENSED INCOME STATEMENT:
Net interest income (expense)
(taxable-equivalent basis) ....................... $1,079.1 $1,010.2 6.8% $1,160.6 $1,125.7 3.1%
Provision for credit losses ....................... 52.9 31.4 68.5 193.8 120.0 61.5
Noninterest income ................................ 241.1 236.1 2.1 430.5 416.4 3.4
Noninterest expense ............................... 468.2 441.9 6.0 802.5 809.6 (.9)
Income taxes and
taxable-equivalent adjustment .................... 298.5 295.0 222.2 233.8
------------------------ ------------------------
Income before merger-related items ................ $ 500.6 $ 478.0 4.7 $ 372.6 $ 378.7 (1.6)
======================== ========================
Merger-related items (after-tax) ..................
Net income ........................................
AVERAGE BALANCE SHEET DATA:
Commercial loans .................................. $ 35,250 $ 31,346 12.5 $ 2,255 $ 2,118 6.5
Consumer loans, excluding
residential mortgage ............................. 669 561 19.3 13,934 12,105 15.1
Residential mortgage loans ........................ 474 380 24.7 2,360 3,402 (30.6)
Assets ............................................ 44,108 40,161 9.8 22,314 21,918 1.8
Deposits .......................................... 12,074 11,073 9.0 33,867 34,470 (1.7)
Common equity ..................................... 3,152 3,216 (2.0) 1,510 1,584 (4.7)
------------------------ ------------------------
Return on average assets .......................... 1.52% 1.59% 2.23% 2.31%
Return on average common equity ("ROCE") .......... 21.2 19.9 33.0 32.0
Net tangible ROCE** ............................... 29.8 26.6 52.5 49.6
Efficiency ratio .................................. 35.4 35.5 50.4 52.6
Efficiency ratio on a cash basis** ................ 32.0 32.4 48.1 50.5
=================================================================================================================================
</TABLE>
* NOT MEANINGFUL.
** CALCULATED BY EXCLUDING GOODWILL AND OTHER INTANGIBLES AND THE RELATED
AMORTIZATION.
NOTE: MERGER-RELATED ITEMS ARE NOT ALLOCATED TO THE BUSINESS LINES. ALL
RATIOS ARE CALCULATED WITHOUT THE EFFECT OF MERGER-RELATED ITEMS.
4 U.S. Bancorp
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<TABLE>
<CAPTION>
Corporate Trust and Investment Banking Consolidated
Payment Systems Institutional Financial Services and Brokerage Company
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Percent Percent Percent Percent
1999 1998 Change 1999 1998 Change 1999 1998 Change 1999 1998 Change
- - - - - - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 60.1 $ 52.6 14.3% $ 16.8 $ 16.3 3.1% $ (.2) $ (.3) 33.3% $ 845.0 $ 778.9 8.5%
40.9 37.8 8.2 -- -- -- -- -- -- 142.0 95.0 49.5
179.6 155.1 15.8 84.7 78.2 8.3 210.6 171.2 23.0 712.6 616.9 15.5
79.3 74.6 6.3 50.7 48.2 5.2 195.7 171.9 13.9 767.4 702.4 9.3
44.5 36.3 18.9 17.7 5.5 (.4) 241.3 228.1
- - - - - - - - - - - - - - - - - ------------------- ------------------ ------------------- -----------------
$ 75.0 $ 59.0 27.1 $ 31.9 $ 28.6 11.5 $ 9.2 $ (.6) * 406.9 370.3 9.9
=================== ================== ===================
(10.5) (41.2) *
-----------------
$ 396.4 $ 329.1 20.4
=================
$ 1,386 $ 1,533 (9.6) $ -- $ -- -- $ -- $ -- -- $40,002 $35,576 12.4
4,041 4,219 (4.2) -- -- -- -- -- -- 18,665 17,159 8.8
-- -- -- -- -- -- -- -- -- 2,682 3,439 (22.0)
6,776 7,074 (4.2) 769 808 (4.8) 2,774 2,223 24.8 77,700 72,083 7.8
196 149 31.5 1,648 1,685 (2.2) -- -- -- 47,716 47,000 1.5
642 491 30.8 634 561 13.0 456 439 3.9 6,588 6,100 8.0
- - - - - - - - - - - - - - - - - ------------------- ------------------- ------------------- -----------------
4.39% 3.31% * * * * 2.08% 2.04%
46.3 47.7 20.0% 20.2% 8.0% (.5)% 24.5 24.1
91.3 76.6 44.3 51.5 39.2 12.9 41.0 38.4
32.9 35.9 49.7 51.0 93.0 100.6 49.2 50.3
29.8 33.2 46.8 48.0 92.0 98.4 46.5 47.7
===================================================================================================================================
<CAPTION>
Corporate Trust and Investment Banking Consolidated
Payment Systems Institutional Financial Services and Brokerage Company
- - - - - - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent
1999 1998 Change 1999 1998 Change 1999 1998 Change 1999 1998 Change
- - - - - - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------------------------
$ 173.7 $ 140.0 24.1% $ 49.3 $ 46.8 5.3% $ (1.0) $ 2.1 * $2,461.7 $2,324.8 5.9%
138.3 126.6 9.2 -- -- -- -- -- -- 385.0 278.0 38.5
459.8 441.7 4.1 235.0 226.8 3.6 628.4 315.5 99.2 1,994.8 1,636.5 21.9
217.5 222.4 (2.2) 147.0 142.2 3.4 585.9 310.5 88.7 2,221.1 1,926.6 15.3
103.7 88.8 51.2 50.1 15.5 2.7 691.1 670.4
- - - - - - - - - - - - - - - - - ------------------- ------------------ ------------------- ------------------
$ 174.0 $ 143.9 20.9 $ 86.1 $ 81.3 5.9 $ 26.0 $ 4.4 * 1,159.3 1,086.3 6.7
=================== ================== ===================
(21.8) (108.1) *
------------------
$1,137.5 $ 978.2 16.3
==================
$ 1,292 $ 1,415 (8.7) $ -- $ -- -- $ -- $ -- -- $ 38,797 $ 34,879 11.2
4,025 4,089 (1.6) -- -- -- -- -- -- 18,628 16,755 11.2
-- -- -- -- -- -- -- -- -- 2,834 3,782 (25.1)
6,529 6,901 (5.4) 757 670 13.0 2,595 1,476 75.8 76,303 71,126 7.3
157 103 52.4 1,674 1,591 5.2 -- -- -- 47,772 47,237 1.1
603 554 8.8 620 490 26.5 446 264 68.9 6,331 6,108 3.7
- - - - - - - - - - - - - - - - - ------------------- ------------------ ------------------- ------------------
3.56% 2.79% * * * * 2.03% 2.04%
38.6 34.7 18.6% 22.2% 7.8% 2.2% 24.5 23.8
62.0 54.8 42.9 47.4 44.8 21.0 39.6 36.0
34.3 38.5 51.6 52.4 93.4 97.8 49.8 48.8
31.5 35.1 48.6 49.3 92.1 95.8 47.2 46.1
===================================================================================================================================
</TABLE>
U.S. Bancorp 5
<PAGE>
system. Designations, assignments and allocations may change from time to time
as management accounting systems are enhanced or product lines change. During
1999 certain organization and methodology changes were made and 1998 results are
presented on a consistent basis.
WHOLESALE AND PRIVATE FINANCIAL SERVICES Wholesale and Private Financial
Services includes lending, treasury management, and other financial services to
middle market, large corporate and mortgage banking companies, and private
banking and personal trust clients. Operating earnings increased 6 percent in
the third quarter and 5 percent in the first nine months of 1999, compared with
the same periods in 1998. Net tangible return on average common equity increased
to 29.3 percent compared with 26.6 percent in the third quarter of the prior
year. Year-to-date profitability ratios showed similar trends.
Total revenue (net interest income and noninterest income) increased 11
percent and 6 percent in the third quarter and first nine months of 1999,
respectively, from the same periods of 1998, primarily reflecting growth in
average loan and deposit balances partially offset by margin compression in both
loans and deposits. The efficiency ratio on a cash basis was 32.3 percent in the
third quarter and 32.0 percent in the first nine months of 1999 compared with
32.4 percent in both of the same periods of 1998.
RETAIL BANKING Retail Banking delivers products and services to the broad
consumer market and small businesses through branch offices, telemarketing,
direct mail, and automated teller machines ("ATMs"). Operating earnings
decreased 2 percent in the third quarter and first nine months of 1999, compared
to the same periods of 1998. Third quarter and year-to-date net tangible return
on average common equity was 50.4 percent and 52.5 percent, respectively,
compared with 53.7 percent and 49.6 percent in the same periods of the prior
year.
Total revenue for the third quarter and first nine months of 1999 increased
7 percent and 3 percent, respectively, from the same periods of 1998, due
primarily to growth in home equity loans partially offset by the planned runoff
of the residential mortgage loan portfolio. Noninterest expense increased 6
percent in the third quarter and decreased 1 percent in the first nine months of
1999, compared to the same periods of 1998. The efficiency ratio on a cash basis
improved to 48.1 percent in the third quarter and first nine months of 1999,
compared with 48.8 percent and 50.5 percent in the same periods of 1998.
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 27 percent in the third quarter and 21 percent in the first nine
months of 1999, compared with the same periods of 1998. Third quarter and
year-to-date return on average assets was 4.39 percent and 3.56 percent,
respectively, compared with 3.31 percent and 2.79 percent in the same periods of
the prior year. Net tangible return on average common equity was 91.3 percent
and 62.0 percent in the third quarter and first nine months of 1999,
respectively, compared with 76.6 percent and 54.8 percent in the same periods of
1998.
Total revenue increased 15 percent and 9 percent in the third quarter and
first nine months of 1999, respectively, from the same periods of the prior year
due to lower corporate card and purchasing card non-earning asset balances,
increased fee revenue related to the acquired operations of Mellon Network
Services, as well as continued growth in card fee revenue. Noninterest expense
increased 6 percent in the third quarter and decreased 2 percent in the first
nine months of 1999, compared to the same periods in 1998. The efficiency ratio
on a cash basis improved to 29.8 percent in the third quarter and 31.5 percent
in the first nine months of 1999 from 33.2 percent and 35.1 percent for the same
periods of the prior year.
CORPORATE TRUST AND INSTITUTIONAL FINANCIAL SERVICES Corporate Trust and
Institutional Financial Services includes institutional and corporate trust
services, investment management services, and the former Piper Capital
Management. Operating earnings increased 12 percent and 6 percent in the third
quarter and first nine months of 1999, respectively, compared with the same
periods of 1998. Growth in investment management services in the third quarter
of 1999 was partially offset by a decline in corporate trust fees as a result of
fewer bond issuances attributable to market conditions.
Total revenue increased 7 percent and 4 percent in the third quarter and
first nine months of 1999, respectively, from the same periods of the prior year
due to growth in average deposit balances and higher fees in Institutional
Financial Services. The efficiency ratio on a cash basis improved to 46.8
percent in the third quarter and 48.6 percent in the first nine months of 1999,
compared with 48.0 percent and 49.3 percent in the same periods of 1998.
INVESTMENT BANKING AND BROKERAGE Investment Banking and Brokerage reflects the
results of U.S. Bancorp Piper Jaffray, a full-service broker/dealer that was
acquired as part of the acquisition of Piper Jaffray on May 1, 1998. Table 2
includes the amortization of intangible assets and employee retention programs
(totaling $9.0 million and
6 U.S. Bancorp
<PAGE>
TABLE 3 ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------------------------
September 30 September 30 September 30 September 30
(Dollars In Millions) 1999 1998 1999 1998
- - - - - - - - - - - - - - - - - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income, as reported ........................................ $ 834.7 $ 766.4 $2,430.0 $2,286.3
Taxable-equivalent adjustment ......................................... 10.3 12.5 31.7 38.5
------------------------------------------------------
Net interest income (taxable-equivalent basis) .......................... $ 845.0 $ 778.9 $2,461.7 $2,324.8
======================================================
Average yields and weighted average rates (taxable-equivalent basis):
Earning assets yield .................................................. 8.37% 8.57% 8.30% 8.62%
Rate paid on interest-bearing liabilities ............................. 4.45 4.79 4.35 4.76
------------------------------------------------------
Gross interest margin ................................................... 3.92% 3.78% 3.95% 3.86%
======================================================
Net interest margin ..................................................... 4.84% 4.83% 4.84% 4.91%
======================================================
Net interest margin without taxable-equivalent adjustment ............... 4.78% 4.75% 4.78% 4.82%
================================================================================================================================
</TABLE>
$25.7 million in the third quarter and first nine months of 1999, respectively).
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME Third quarter net interest income on a taxable-equivalent
basis was $845.0 million compared with $778.9 million in the third quarter of
1998. Year-to-date net interest income on a taxable-equivalent basis was $2.46
billion compared with $2.32 billion in the first nine months of 1998. The third
quarter and year-to-date average earning assets increased $5.3 billion (8
percent) and $4.6 billion (7 percent), respectively, from the same periods of
1998. The increase was driven by core commercial and consumer loan growth and
several consumer loan portfolio purchases, partially offset by reductions in
securities, indirect automobile loans and residential mortgages. The net
interest margin increased from 4.83 percent to 4.84 percent in the third quarter
and decreased from 4.91 percent to 4.84 percent in the first nine months of
1999.
Average loans for both the third quarter and first nine months of 1999 were
up 9 percent from the same periods of the previous year. Excluding indirect
automobile and residential mortgage loans, average loans for the third quarter
and first nine months of 1999 were higher by $6.3 billion (13 percent) and $5.9
billion (12 percent) than the third quarter and first nine months of 1998,
reflecting strong growth in commercial loans and home equity and second
mortgages, in addition to the several consumer loan portfolio purchases. Without
the loan portfolio purchases, average home equity and second mortgages were
higher than third quarter and first nine months of 1998 by 15 percent and 10
percent, respectively. Average available-for-sale securities for the third
quarter and first nine months of 1999 decreased by $378 million and $845
million, respectively, from the third quarter and first nine months of 1998,
reflecting prepayments, maturities and sales of securities.
PROVISION FOR CREDIT LOSSES The provision for credit losses was $142.0 million
in the third quarter of 1999, up $47.0 million (49 percent) from the third
quarter of 1998, reflecting the increase in net charge-offs and nonperforming
assets. The provision for the first nine months of 1999 increased $107.0 million
(38 percent) from the first nine months of 1998 to $385.0 million. Third quarter
and year-to-date net charge-offs totaled $141.8 million and $421.7 million,
respectively, up from $106.1 million and $316.0 million in the same periods of
1998. The increase in net charge-offs was due primarily to an expected increase
in losses on consumer portfolios purchased in 1998 and higher consumer fraud
losses. Refer to "Corporate Risk Management" for further information on credit
quality.
NONINTEREST INCOME Third quarter 1999 noninterest income was $712.6 million, an
increase of $95.7 million (16 percent), from the third quarter of 1998.
Noninterest income in the first nine months of 1999 was $1.99 billion, compared
with $1.64 billion in the first nine months of 1998.
Credit card fee revenue was up slightly year over year, reflecting
continued growth in the business, offset by the loss of a portion of the U.S.
Government purchasing card business. Service charges on deposit accounts
increased by $10.5 million (10 percent) in the third quarter of 1999, compared
with the third quarter of 1998 and $24.1 million (8 percent) for the first nine
months of 1999, compared to the same period of a year ago, reflecting
enhancements in pricing and additional deposit services. Trust and investment
management fees were up due to growth in the institutional and personal trust
businesses and Piper Jaffray. Investment products fees and commissions,
investment banking revenue and trading account profits and commissions were
higher, due to growth in U.S. Bancorp Piper Jaffray and U.S. Bancorp Libra. The
increase in other noninterest income included
U.S. Bancorp 7
<PAGE>
TABLE 4 NONINTEREST INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------------------------
September 30 September 30 September 30 September 30
(Dollars In Millions) 1999 1998 1999 1998
- - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Credit card fee revenue ................................ $ 161.3 $ 156.1 $ 436.8 $ 430.5
Trust and investment management fees ................... 113.8 104.8 343.2 307.7
Service charges on deposit accounts .................... 112.2 101.7 323.1 299.0
Investment products fees and commissions ............... 79.5 76.0 259.7 151.7
Investment banking revenue ............................. 60.1 38.3 156.6 67.3
Trading account profits and commissions ................ 48.4 42.8 150.4 77.9
Available-for-sale securities gains (losses) ........... (3.4) -- (3.4) 12.6
Other .................................................. 140.7 97.2 328.4 289.8
------------------------------------------------------
Total noninterest income ............................ $ 712.6 $ 616.9 $1,994.8 $1,636.5
================================================================================================================
</TABLE>
the $20 million gain-on-sale from the divestiture of 28 branches in Kansas and
Iowa ($364 million of deposits) and $11 million in fee income related to the
acquired operations of Bank of Commerce and Mellon Network Services.
NONINTEREST EXPENSE Third quarter of 1999 noninterest expense was $784.2
million, an increase of $15.4 million (2 percent), from $768.8 million in the
third quarter of 1998. Year-to-date noninterest expense was $2.26 billion, an
increase of $156.8 million (7 percent), from $2.10 billion in the first nine
months of 1998, reflecting the impact of acquired businesses. Noninterest
expense in the third quarter and first nine months of 1999 included
merger-related charges of $16.8 million and $34.7 million, compared with
merger-related charges of $66.4 million and $172.4 million in the third quarter
and first nine months of 1998.
Third quarter 1999 noninterest expense, before merger-related items, was
$767.4 million, an increase of $65.0 million (9 percent), from $702.4 million in
the third quarter of 1998. Year-to-date 1999 noninterest expense, before
merger-related items, increased $294.5 million (15 percent) to $2.22 billion
from $1.93 billion in the first nine months of 1998. The increase was
attributable to acquisitions and expense increases related to the growth in
investment banking activities, as well as approximately $18 million of expense
accruals primarily related to two contingencies.
Since 1996, the Company has undertaken efforts to address the "Year 2000"
computer problem as discussed in further detail under Corporate Risk Management.
In connection with its Year 2000 project, the Company has completed the
evaluation, replacement, renovation, installation and testing of its internal
computer hardware and software and embedded technologies. The Company incurred
approximately $9.1 million of direct costs associated with its Year 2000 project
during the first nine months of 1999. The Company estimates that the aggregate
cost of its Year 2000 project will be less than $40 million over the three-year
period ending December 31, 1999, of which approximately $33.1 million has been
incurred. The Company has not deferred any material information technology
projects as a consequence of its Year 2000 efforts.
PROVISION FOR INCOME TAXES The provision for income taxes was $224.7 million (an
effective rate of 36.2 percent) in the third quarter and $646.5 million (an
effective rate of 36.2 percent) in the first nine months of 1999, compared with
$190.4 million (an effective rate of 36.7 percent) and $567.6 million (an
effective rate of 36.7 percent) in the same periods of 1998. The increase in the
provision was primarily the result of higher levels of taxable income, as
discussed above.
BALANCE SHEET ANALYSIS
LOANS The Company's loan portfolio was $60.3 billion at September 30, 1999,
compared with $59.1 billion at December 31, 1998. Commercial loans totaled $40.9
billion at September 30, 1999, up $3.6 billion (10 percent) from December 31,
1998. The increase was primarily attributable to continued growth in core
commercial and commercial real estate loans. Total consumer loan outstandings
were $19.4 billion at September 30, 1999, compared with $21.9 billion at
December 31, 1998. The decline reflects the sale of $1.8 billion of indirect
automobile loans completed in September of 1999. Excluding indirect automobile
and residential mortgage loan balances, consumer loans increased by $282 million
from December 31, 1998. This reflects an increase in home equity and second
mortgage loans of $1.1 billion (14 percent) from December 31, 1998, offset by a
decrease in credit card loans of $179 million (4 percent), in installment loans
of $371 million (23 percent) and student loans of $336 million (41 percent) from
December 31, 1998. See Note E of the Notes to Consolidated Financial Statements
for the composition of the Company's loan portfolio at September 30, 1999, and
December 31, 1998.
8 U.S. Bancorp
<PAGE>
TABLE 5 NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------------------------
September 30 September 30 September 30 September 30
(Dollars In Millions) 1999 1998 1999 1998
- - - - - - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries ....................................................... $ 352.4 $ 339.6 $1,063.2 $ 882.5
Employee benefits .............................................. 59.8 55.7 183.4 168.6
------------------------------------------------------
Total personnel expense ..................................... 412.2 395.3 1,246.6 1,051.1
Net occupancy .................................................. 51.9 49.2 151.8 140.6
Furniture and equipment ........................................ 40.9 39.4 118.0 114.4
Goodwill and other intangible assets ........................... 41.6 37.1 116.0 106.5
Telephone ...................................................... 20.3 19.2 55.7 51.7
Other personnel costs .......................................... 16.7 10.4 49.2 40.3
Professional services .......................................... 17.0 18.3 47.6 44.9
Third party data processing .................................... 15.7 18.3 46.7 50.2
Advertising and marketing ...................................... 18.5 14.3 46.2 47.8
Postage ........................................................ 12.5 11.0 40.3 33.5
Printing, stationery and supplies .............................. 11.8 13.1 39.3 33.0
FDIC insurance ................................................. 1.9 2.0 5.9 6.1
Merger-related ................................................. 16.8 66.4 34.7 172.4
Other .......................................................... 106.4 74.8 257.8 206.5
------------------------------------------------------
Total noninterest expense .................................... $ 784.2 $ 768.8 $2,255.8 $2,099.0
======================================================
Efficiency ratio* .............................................. 50.2% 55.1% 50.6% 53.2%
Efficiency ratio before merger-related items ................... 49.2 50.3 49.8 48.8
Banking efficiency ratio before merger-related items** ......... 42.3 43.3 42.7 44.5
Average number of full-time equivalent employees ............... 26,907 27,552 26,871 26,408
=======================================================================================================================
</TABLE>
* COMPUTED AS NONINTEREST EXPENSE DIVIDED BY THE SUM OF NET INTEREST INCOME ON
A TAXABLE-EQUIVALENT BASIS AND NONINTEREST INCOME NET OF AVAILABLE-FOR-SALE
SECURITIES GAINS AND LOSSES.
** WITHOUT INVESTMENT BANKING AND BROKERAGE ACTIVITY.
SECURITIES At September 30, 1999, available-for-sale securities were $5.1
billion compared with $5.6 billion at December 31, 1998, reflecting prepayments,
maturities and sales of securities.
DEPOSITS Noninterest-bearing deposits were $14.3 billion at September 30, 1999,
compared with $16.4 billion at December 31, 1998. The decrease was primarily due
to seasonality of business deposits. Interest-bearing deposits remained
relatively unchanged at $33.6 billion at September 30, 1999, compared with $33.7
billion at December 31, 1998.
BORROWINGS Short-term borrowings, which include federal funds purchased,
securities sold under agreements to repurchase and other short-term borrowings,
decreased to $2.6 billion at September 30, 1999, compared with $3.4 billion at
December 31, 1998. This was primarily due to a decline in federal funds
purchased as a result of completing the $1.8 billion indirect automobile loan
sale offset by other loan growth during the year.
Long-term debt was $16.2 billion at September 30, 1999, up from $13.8
billion at December 31, 1998. The Company issued $4.1 billion of debt, with an
average original maturity of 2.2 years, under its medium-term note and bank note
programs during the first nine months of 1999. In April, the Company issued $400
million variable-rate Euro medium-term notes due April 13, 2004. These issuances
were partially offset by $1.9 billion of medium-term and bank note maturities
and $103 million of Federal Home Loan Bank advance maturities. Also, in May
1999, the Company called its $107 million subordinated floating-rate notes due
November, 2010.
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.
U.S. Bancorp 9
<PAGE>
TABLE 6 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
1999 1998 1999 1998
- - - - - - - - - - - - - - - - - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL:
Commercial ......................... .39% .39% .42% .32%
Real estate:
Commercial mortgage ............... .25 (.44) .03 (.21)
Construction ...................... .02 .18 .02 .18
------------------------------------------------------
Total commercial .................. .32 .19 .30 .18
CONSUMER:
Credit card ........................ 3.50 4.26 4.42 4.43
Other .............................. 1.97 1.35 1.83 1.37
------------------------------------------------------
Subtotal .......................... 2.30 2.04 2.39 2.10
Residential mortgage ............... .12 .14 .10 .19
------------------------------------------------------
Total consumer .................... 2.03 1.72 2.09 1.75
------------------------------------------------------
Total ................................ .92% .75% .94% .76%
============================================================================================
</TABLE>
The Company's commercial banking operations rely on a strong credit culture that
combines prudent credit policies and individual lender accountability. In
addition, the commercial lenders generally focus on middle market companies
within their regions. 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.
In evaluating its credit risk, the Company considers changes in
underwriting activities, the loan portfolio composition (including product mix
and geographic, industry or customer-specific concentrations), trends in loan
performance, assessments of a specific customer's Year 2000 readiness, the level
of allowance coverage and macroeconomic factors. Approximately 46 percent of the
Company's loan portfolio consists of credit to businesses and consumers in
Minnesota, Oregon and Washington.
NET CHARGE-OFFS AND ALLOWANCE FOR CREDIT LOSSES Net loan charge-offs totaled
$141.8 million and $421.7 million in the third quarter and first nine months of
1999, respectively, compared with $106.1 million and $316.0 million in the same
periods of 1998. Commercial loan net charge-offs were $32.7 million and $86.5
million in the third quarter and first nine months of 1999, respectively,
compared with $16.7 million and $47.5 million in the same periods of 1998.
Consumer loan net charge-offs for the quarter and year-to-date were $109.1
million and $335.2 million, respectively, compared with $89.4 million and $268.5
million for the same periods of 1998. The increases in consumer loan net
charge-offs from the prior year reflect higher credit card and overdraft fraud
losses in addition to expected losses associated with consumer portfolio
purchases, partially offset by a decrease in losses in the base portfolio.
During the third quarter of 1999, the Company modified its charge-off policy to
conform with recently issued regulatory guidelines for consumer loans. Although
the policy did not have an impact on total consumer charge-offs as a percent of
average loans outstanding, the change did affect individual consumer categories.
Without the change in policy, credit card and other consumer loan net
charge-offs as a percent of average loans outstanding would have been 4.13
percent and 1.81 percent, respectively. Consumer loans 30 days or more past due
increased to 2.43 percent of the portfolio at September 30, 1999, compared with
2.39 percent at December 31, 1998, primarily reflecting the sale of indirect
automobile loans. Without the effect of the $1.8 billion sale of indirect
automobile loans, consumer loans (excluding residential mortgage loans) 30 days
or more past due and 90 days or more past due were 2.09 percent and .53 percent
at September 30, 1999. The ratio of total net charge-offs to average loans was
.92 percent and .94 percent in the third quarter and first nine months of 1999,
respectively, compared with .75 percent and .76 percent in the same periods in
1998.
The allowance for credit losses declined slightly to $966.3 million at
September 30, 1999, from $1,000.9 million at December 31, 1998. The reduction
reflected the net change due to additions for acquisitions and a reduction
related to the $1.8 billion sale of indirect automobile loans. As a percentage
of nonperforming loans, the allowance was 327 percent at September 30, 1999,
compared to 359 percent at December 31, 1998.
10 U.S. Bancorp
<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) 1999 1998 1999 1998
- - - - - - - - - - - - - - - - - ------------------------------------------------------- -------------- -------------- -------------- ------
<S> <C> <C> <C> <C>
Balance at beginning of period ..................... $ 968.2 $ 981.8 $1,000.9 $1,008.7
CHARGE-OFFS:
Commercial:
Commercial ...................................... 38.8 40.6 132.2 100.5
Real estate:
Commercial mortgage ........................... 6.5 2.3 7.1 6.8
Construction .................................. .2 1.4 .6 4.3
--------------------------------------------------------
Total commercial .............................. 45.5 44.3 139.9 111.6
Consumer:
Credit card ..................................... 40.5 48.7 146.9 147.8
Other ........................................... 88.6 58.5 250.7 167.5
--------------------------------------------------------
Subtotal ...................................... 129.1 107.2 397.6 315.3
Residential mortgage ............................ .9 1.3 2.7 6.1
--------------------------------------------------------
Total consumer ................................ 130.0 108.5 400.3 321.4
--------------------------------------------------------
Total ........................................ 175.5 152.8 540.2 433.0
RECOVERIES:
Commercial:
Commercial ...................................... 11.8 16.1 47.9 43.4
Real estate:
Commercial mortgage ........................... 1.0 11.3 5.4 19.8
Construction .................................. -- .2 .1 .9
--------------------------------------------------------
Total commercial .............................. 12.8 27.6 53.4 64.1
Consumer:
Credit card ..................................... 5.1 4.9 14.6 15.2
Other ........................................... 15.7 14.1 50.0 36.9
--------------------------------------------------------
Subtotal ...................................... 20.8 19.0 64.6 52.1
Residential mortgage ............................ .1 .1 .5 .8
--------------------------------------------------------
Total consumer ................................ 20.9 19.1 65.1 52.9
--------------------------------------------------------
Total ........................................ 33.7 46.7 118.5 117.0
NET CHARGE-OFFS:
Commercial:
Commercial ...................................... 27.0 24.5 84.3 57.1
Real estate:
Commercial mortgage ........................... 5.5 (9.0) 1.7 (13.0)
Construction .................................. .2 1.2 .5 3.4
--------------------------------------------------------
Total commercial .............................. 32.7 16.7 86.5 47.5
Consumer:
Credit card ..................................... 35.4 43.8 132.3 132.6
Other ........................................... 72.9 44.4 200.7 130.6
--------------------------------------------------------
Subtotal ...................................... 108.3 88.2 333.0 263.2
Residential mortgage ............................ .8 1.2 2.2 5.3
--------------------------------------------------------
Total consumer ................................ 109.1 89.4 335.2 268.5
--------------------------------------------------------
Total ........................................ 141.8 106.1 421.7 316.0
Provision charged to operating expense ............. 142.0 95.0 385.0 278.0
Acquisitions and other additions (reductions) ...... (2.1) 9.4 2.1 9.4
--------------------------------------------------------
Balance at end of period ........................... $ 966.3 $ 980.1 $ 966.3 $ 980.1
========================================================
Allowance as a percentage of:
Period-end loans ................................. 1.60% 1.72%
Nonperforming loans .............................. 327 364
Nonperforming assets ............................. 297 336
Annualized net charge-offs ....................... 172 233
=============================================================================================================
</TABLE>
U.S. Bancorp 11
<PAGE>
TABLE 8 NONPERFORMING ASSETS*
<TABLE>
<CAPTION>
September 30 December 31
(Dollars In Millions) 1999 1998
- - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMERCIAL:
Commercial ......................................................... $ 170.6 $ 165.7
Real estate:
Commercial mortgage ............................................... 69.6 35.5
Construction ...................................................... 18.0 17.2
--------------------------
Total commercial .................................................. 258.2 218.4
CONSUMER:
Other .............................................................. 7.3 13.9
Residential mortgage ............................................... 29.7 46.6
--------------------------
Total consumer .................................................... 37.0 60.5
--------------------------
Total nonperforming loans ...................................... 295.2 278.9
OTHER REAL ESTATE .................................................... 19.7 14.3
OTHER NONPERFORMING ASSETS ........................................... 10.5 11.1
--------------------------
Total nonperforming assets ..................................... $ 325.4 $ 304.3
==========================
Accruing loans 90 days or more past due** ............................ $ 106.7 $ 106.8
Nonperforming loans to total loans ................................... .49% .47%
Nonperforming assets to total loans plus other real estate ........... .54 .51
=================================================================================================
</TABLE>
* THROUGHOUT THIS DOCUMENT, NONPERFORMING ASSETS AND RELATED RATIOS DO NOT
INCLUDE LOANS MORE THAN 90 DAYS PAST DUE AND STILL ACCRUING.
** THESE LOANS ARE NOT INCLUDED IN NONPERFORMING ASSETS AND CONTINUE TO ACCRUE
INTEREST BECAUSE THEY ARE SECURED BY COLLATERAL AND/OR ARE IN THE PROCESS OF
COLLECTION AND ARE REASONABLY EXPECTED TO RESULT IN REPAYMENT OR RESTORATION
TO CURRENT STATUS.
NONPERFORMING ASSETS Nonperforming assets include all nonaccrual loans,
restructured loans, other real estate and other nonperforming assets owned by
the Company. At September 30, 1999, nonperforming assets totaled $325.4 million,
an increase of $21.1 million (7 percent) from December 31, 1998. The increase in
nonperforming assets from the fourth quarter of 1998 was partially due to
continued stress in agricultural sectors given current commodity market prices.
The ratio of nonperforming assets to loans and other real estate was .54 percent
at September 30, 1999, compared with .51 percent at December 31, 1998. The
percentage of consumer loans 90 days or more past due of the total consumer loan
portfolio totaled .70 percent at September 30, 1999, compared with .75 percent
at December 31, 1998. This reflects expected improvements related to purchased
portfolios and seasonality.
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
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 consolidated interest rate risk: Net
Interest Income Simulation Modeling, Market Value Simulation Modeling, and
Repricing Mismatch Analysis.
NET INTEREST INCOME SIMULATION MODELING: The Company uses a net interest income
simulation model to estimate near-term (next 24 months) risk due to changes in
interest rates. The model, which is updated monthly, incorporates substantially
all the Company's assets and liabilities and off-balance sheet instruments,
together with forecasted changes in the balance sheet and assumptions that
reflect the current interest rate environment. 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 or steepening of the yield curve. ALCO also calculates the
sensitivity of the simulation results to changes in key assumptions, such as the
Prime/LIBOR spread or core deposit repricing. 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 1.5
percent of forecasted net interest income given a 1 percent change in interest
rates. At September 30, 1999, forecasted net interest income for the next 12
months would decrease $18.0 million from an immediate 100 basis point upward
parallel shift in rates and increase $5.3 million from a downward shift of
similar magnitude.
MARKET VALUE SIMULATION MODELING: The net interest income simulation model is
somewhat 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
12 U.S. Bancorp
<PAGE>
TABLE 9 DELINQUENT LOAN RATIOS*
<TABLE>
<CAPTION>
September 30 December 31
90 days or more past due 1999 1998
- - - - - - - - - - - - - - - - - -----------------------------------------------------------------------------------
<S> <C> <C>
COMMERCIAL:
Commercial ........................................... .63% .65%
Real estate:
Commercial mortgage ................................. .80 .44
Construction ........................................ .49 .56
--------------------------
Total commercial .................................... .65 .60
CONSUMER:
Credit card .......................................... .91 .74
Other ................................................ .49 .51
--------------------------
Subtotal ............................................ .59 .56
Residential mortgage ................................. 1.40 1.86
--------------------------
Total consumer ...................................... .70 .75
--------------------------
Total ............................................. .67% .65%
===================================================================================
</TABLE>
* RATIOS INCLUDE NONPERFORMING LOANS AND ARE EXPRESSED AS A PERCENT OF ENDING
LOAN BALANCES.
for periods beyond one or two years. To better measure all interest rate risk,
both short-term and long-term, the Company uses a market value simulation model.
This model estimates the effect of 1 percent, 2 percent and 3 percent rate
shocks on the present value of substantially all future cash flows of the
Company's outstanding 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, of .5 percent of assets for an immediate 100 basis point
rate shock. Historically, the Company's market value risk position has been
substantially lower than its limits.
REPRICING MISMATCH ANALYSIS: A traditional gap analysis provides a static
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 intermediate-term interest rate risk and has
established a limit, approved by the Company's Board of Directors, for the two-
to three-year gap position of 5 percent of assets.
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.
In the third quarter and first nine months of 1999, the Company added $1.9
billion and $4.1 billion, respectively, of interest rate swaps to reduce its
interest rate risk. This increase was partially offset by $1.8 billion of
interest rate swap maturities and $1.6 billion in swap terminations in the first
nine months of 1999. Interest rate swap agreements involve the exchange of fixed
and floating-rate payments without the exchange of the underlying notional
amount on which the interest payments are calculated. As of September 30, 1999,
the Company received payments on $8.0 billion notional amount of interest rate
swap agreements based on fixed interest rates, and made payments based on
variable interest rates. These swaps had a weighted average fixed-rate received
of 6.19 percent and a weighted average variable-rate paid of 5.39 percent. The
remaining maturity of these agreements ranged from 1 month to 15 years with an
average remaining maturity of 4.7 years. Swaps increased net interest income for
the quarters ended September 30, 1999, and 1998 by $15.2 million and $8.9
million, respectively, and the nine months ended September 30, 1999, and 1998 by
$52.3 million and $25.0 million, respectively.
The Company also purchases interest rate caps and floors to minimize the
impact of fluctuating interest rates on earnings. To hedge against rising
interest rates, the Company uses interest rate caps. Counterparties to these
interest rate cap agreements pay the Company when specified rates rise above a
specified point or strike level. The payment is based on the notional amount and
the difference between current rates and strike rates. There were no caps
outstanding at September 30, 1999. To hedge against falling interest rates, the
Company uses interest rate floors. Counterparties to interest rate floor
agreements pay the Company when specified rates fall below the strike level.
Like caps, the payment is based on
U.S. Bancorp 13
<PAGE>
TABLE 10 INTEREST RATE SWAP HEDGING PORTFOLIO NOTIONAL BALANCES AND YIELDS BY
MATURITY DATE
<TABLE>
<CAPTION>
At September 30, 1999 (Dollars in Millions)
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Receive Fixed Swaps* Notional Interest Rate Interest Rate
Maturity Date Amount Received Paid
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 (remaining three months) ..................... $ 370 6.25% 5.38%
2000 .............................................. 135 5.99 5.43
2001 .............................................. 429 6.26 5.38
2002 .............................................. 774 6.10 5.38
2003 .............................................. 2,707 6.01 5.41
After 2003 ........................................ 3,570 6.33 5.38
--------
Total ............................................. $7,985 6.19% 5.39%
=============================================================================================
</TABLE>
* AT SEPTEMBER 30, 1999, THE COMPANY HAD NO SWAPS IN ITS HEDGING PORTFOLIO THAT
REQUIRED IT TO PAY FIXED-RATE INTEREST.
the notional amount and the difference in current rates and strike rates. The
total notional amount of floor agreements purchased as of September 30, 1999,
all of which were LIBOR-indexed, was $500 million. The impact of floors on net
interest income was not material for the nine months ended September 30, 1999,
and 1998.
MARKET RISK MANAGEMENT The Company uses a value-at-risk ("VaR") model to measure
and manage market risk in its broker/dealer activities. The VaR model uses an
estimate of volatility appropriate to each instrument and a ninety-nine
percentile adverse move in the underlying markets. The Company believes the
market risk inherent in its broker/dealer activities, including equities, fixed
income, high yield securities and foreign exchange, is not significant.
YEAR 2000 RISK MANAGEMENT The Company is continuing efforts to address the "Year
2000" computer problem, which arose because many computer applications worldwide
will not properly recognize the date change from December 31, 1999, to January
1, 2000, potentially causing production of erroneous data, miscalculations,
system failures and other operational problems. In the early 1990s, the Company
implemented significant technology changes and replaced many of its principal
data processing applications with licensed software packages. The Company also
undertook an organization-wide initiative to address the Year 2000 issue,
including the formation in 1996 of a dedicated project team of employees to
evaluate the Year 2000 impact on the Company's critical computer hardware and
software and embedded technologies in its physical plant and automated equipment
(such as ATMs, check sorting machines, vaults and security systems), and on its
customers. In addition to evaluating the scope of the Year 2000 issue, the
project team prioritized tasks, developed implementation plans and established
completion and testing schedules. As a result, the Company has completed
evaluation, replacement, renovation, installation and testing of its internal
computer hardware and software (including software to be remediated by vendors)
and embedded technologies. Apart from the Company's project, federal banking
regulators are conducting special examinations of FDIC-insured banks and savings
associations to determine whether they are taking necessary steps to prepare for
the Year 2000 issue, and are closely monitoring the progress made by these
institutions in completing key steps required by their individual Year 2000
plans. The Company has met all applicable regulatory guidelines.
Ultimately, the potential impact of the Year 2000 issue will depend not
only on the success of the corrective measures the Company has undertaken, but
also on the way in which the Year 2000 issue is addressed by customers, vendors,
service providers, counterparties, clearing houses, utilities (e.g., power,
telecommunication, transportation), governmental agencies (including the Federal
Reserve, which provides services for processing and settling payments and
securities transactions between banks) and other entities with which the Company
does business. The Company is communicating with these parties to monitor their
efforts in addressing the Year 2000 issue and to evaluate and work to minimize
any likely impact on the Company. For example, the Company is conducting ongoing
Year 2000 surveys and evaluations of its corporate and middle market borrowing
customers and of other significant funds takers, funds providers and capital
markets/asset management counterparties, and has implemented in its lending
units uniform criteria for identifying, managing and underwriting Year 2000
credit risk. The Company continues to review its fiduciary activities for Year
2000 risk related to marketable securities, special assets and counterparties.
Necessary testing with critical service providers, as well as prioritized
testing with certain large customers, has been completed. In addition, the
Company
14 U.S. Bancorp
<PAGE>
TABLE 11 CAPITAL RATIOS
<TABLE>
<CAPTION>
September 30 December 31
(Dollars in Millions) 1999 1998
- - - - - - - - - - - - - - - - - --------------------------------------------------------------------------------------
<S> <C> <C>
Tangible common equity* .................................... $ 4,894 $ 4,465
As a percent of assets ................................... 6.5% 6.0%
Tier 1 capital ............................................. $ 5,387 $ 4,917
As a percent of risk-adjusted assets ..................... 6.7% 6.4%
Total risk-based capital ................................... $ 9,047 $ 8,343
As a percent of risk-adjusted assets ..................... 11.3% 10.9%
Leverage ratio ............................................. 7.1 6.8
======================================================================================
</TABLE>
* DEFINED AS COMMON EQUITY LESS GOODWILL.
has successfully participated in tests organized by major industry and
governmental organizations, including tests sponsored by the Federal Reserve,
the National Automated Clearing House Association and the Securities and
Exchange Commission.
Based on the Company's Year 2000 efforts, management presently believes
that the Year 2000 issue will not result in significant operational problems for
the Company. In addition, the Company's Year 2000 project has contingency plans
designed to mitigate the potential effects of system failures in the event of
foreseeable worst case scenarios. These contingency plans include back-up
solutions for mission-critical operations and business continuation plans for
significant vendors and other business partners. For example, the Company has
arranged for reserve power supplies for certain vital locations, and will have
available back-up account data and alternative manual processes for certain
business line functions. The Company also has developed a liquidity management
plan to address potential increased funding needs that may arise as the
millennium approaches, for example, if Year 2000 concerns cause consumers to
make significant withdrawals of deposits. In addition, the Company has
established an organization-wide event plan that identifies tasks,
responsibilities (including problem management processes) and schedules for the
period of time prior to, during and after the calendar rollover to 2000.
Notwithstanding the Company's efforts and such contingency planning, however,
given the unprecedented nature of the Year 2000 computer problem, there can be
no assurance that Year 2000 issues will not arise, or that any such issues will
be fully mitigated. Further, the Year 2000 efforts of third parties are not
within the Company's control, and their failure to remediate Year 2000 issues
successfully could result in, among other things, business disruption,
operational problems, financial loss, increased credit and liquidity risk and
legal liability for the Company. It is not possible at this time to identify all
of the potential adverse consequences of third party failures or to quantify the
potential negative effects of any such failures on the Company's operations and
financial condition, which effects could be material.
The discussions regarding Year 2000 in this Form 10-Q, including the
discussions of the timing and effectiveness of implementation and cost of the
Company's Year 2000 project, contain forward-looking statements, which are based
on management's best estimates derived using various assumptions. These
forward-looking statements involve inherent risks and uncertainties, and actual
results could differ materially from those contemplated by such statements.
Factors that might cause material differences include, but are not limited to,
the failure of third parties with which the Company does business to remedy
their own Year 2000 issues and the Company's ability to respond to unforeseen
Year 2000 complications. Such material differences could result in business
disruption, operational problems, financial loss, increased credit and liquidity
risk, legal liability and similar adverse effects on the Company, which effects
could be material.
CAPITAL MANAGEMENT At September 30, 1999, total tangible common equity was $4.9
billion, or 6.5 percent of assets, compared with 6.0 percent at December 31,
1998. Tier 1 and total risk-based capital ratios were 6.7 percent and 11.3
percent at September 30, 1999, compared with 6.4 percent and 10.9 percent at
December 31, 1998. The September 30, 1999 leverage ratio was 7.1 percent,
compared with 6.8 percent at December 31, 1998.
On June 8, 1998, the Company's Board of Directors authorized the repurchase
of up to $2.5 billion of the Company's common stock over the period ending March
31, 2000. The shares will be repurchased in the open market or through
negotiated transactions. Under this program, the Company repurchased 34.0
million shares for $1.3 billion, including 9.4 million shares for $310.6 million
in the first nine months of 1999.
U.S. Bancorp 15
<PAGE>
ACCOUNTING CHANGES
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Statement of
Financial Accounting Standards No. ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities," establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
certain defined conditions, a derivative may be specifically designated as a
hedge for a particular exposure. The accounting for changes in the fair value of
the derivative depends on the intended use of the derivative and the resulting
designation. The effective date was deferred for one year with the issuance of
SFAS 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133," which amended SFAS 133. SFAS
133, as amended, is effective for all fiscal years beginning after June 15,
2000, with earlier application permitted. The adoption of SFAS 133 is not
expected to have a material impact on the Company.
16 U.S. Bancorp
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30 December 31
(Dollars in Millions) 1999 1998
- - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks .............................................................................. $ 3,454 $ 4,772
Federal funds sold ................................................................................... 139 83
Securities purchased under agreements to resell ...................................................... 332 461
Trading account securities ........................................................................... 718 537
Available-for-sale securities ........................................................................ 5,058 5,577
Loans ................................................................................................ 60,265 59,122
Less allowance for credit losses ................................................................... 966 1,001
--------------------------
Net loans .......................................................................................... 59,299 58,121
Premises and equipment ............................................................................... 845 879
Interest receivable .................................................................................. 436 456
Customers' liability on acceptances .................................................................. 140 166
Goodwill and other intangible assets ................................................................. 2,355 1,975
Other assets ......................................................................................... 4,260 3,411
--------------------------
Total assets ...................................................................................... $ 77,036 $ 76,438
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing ................................................................................ $ 14,329 $ 16,377
Interest-bearing ................................................................................... 33,649 33,657
--------------------------
Total deposits .................................................................................... 47,978 50,034
Federal funds purchased .............................................................................. 550 1,255
Securities sold under agreements to repurchase ....................................................... 1,106 1,427
Other short-term funds borrowed ...................................................................... 937 683
Long-term debt ....................................................................................... 16,155 13,781
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely the junior subordinated debentures of the parent company ............................ 950 950
Acceptances outstanding .............................................................................. 140 166
Other liabilities .................................................................................... 2,501 2,172
--------------------------
Total liabilities ................................................................................. 70,317 70,468
Shareholders' equity:
Common stock, par value $1.25 a share - authorized 1,500,000,000 shares;
issued: 9/30/99 and 12/31/98 - 744,797,857 shares ................................................. 931 931
Capital surplus .................................................................................... 1,162 1,247
Retained earnings .................................................................................. 5,167 4,456
Accumulated other comprehensive income ............................................................. (28) 72
Less cost of common stock in treasury: 9/30/99 - 14,413,126 shares; 12/31/98 - 19,036,139 shares ... (513) (736)
--------------------------
Total shareholders' equity ........................................................................ 6,719 5,970
--------------------------
Total liabilities and shareholders' equity ........................................................ $ 77,036 $ 76,438
==================================================================================================================================
</TABLE>
U.S. Bancorp 17
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------------------------
(Dollars in Millions, Except Per Share Data) September 30 September 30 September 30 September 30
(Unaudited) 1999 1998 1999 1998
- - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans ....................................................................... $1,333.3 $1,246.8 $3,844.0 $3,676.6
Securities:
Taxable ................................................................... 64.2 71.4 188.6 235.4
Exempt from federal income taxes .......................................... 14.2 15.6 43.2 47.3
Other interest income ....................................................... 40.1 36.0 112.9 85.2
------------------------------------------------------
Total interest income .................................................... 1,451.8 1,369.8 4,188.7 4,044.5
INTEREST EXPENSE
Deposits .................................................................... 318.7 351.3 939.1 1,058.6
Federal funds purchased and repurchase agreements ........................... 48.4 41.9 131.4 117.3
Other short-term funds borrowed ............................................. 12.9 18.1 37.9 45.2
Long-term debt .............................................................. 217.8 171.8 592.3 486.0
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely the junior subordinated debentures of the parent
company ................................................................... 19.3 20.3 58.0 51.1
------------------------------------------------------
Total interest expense ................................................... 617.1 603.4 1,758.7 1,758.2
------------------------------------------------------
Net interest income ......................................................... 834.7 766.4 2,430.0 2,286.3
Provision for credit losses ................................................. 142.0 95.0 385.0 278.0
------------------------------------------------------
Net interest income after provision for credit losses ....................... 692.7 671.4 2,045.0 2,008.3
NONINTEREST INCOME
Credit card fee revenue ..................................................... 161.3 156.1 436.8 430.5
Trust and investment management fees ........................................ 113.8 104.8 343.2 307.7
Service charges on deposit accounts ......................................... 112.2 101.7 323.1 299.0
Investment products fees and commissions .................................... 79.5 76.0 259.7 151.7
Investment banking revenue .................................................. 60.1 38.3 156.6 67.3
Trading account profits and commissions ..................................... 48.4 42.8 150.4 77.9
Available-for-sale securities gains (losses) ................................ (3.4) -- (3.4) 12.6
Other ....................................................................... 140.7 97.2 328.4 289.8
------------------------------------------------------
Total noninterest income ................................................. 712.6 616.9 1,994.8 1,636.5
NONINTEREST EXPENSE
Salaries .................................................................... 352.4 339.6 1,063.2 882.5
Employee benefits ........................................................... 59.8 55.7 183.4 168.6
Net occupancy ............................................................... 51.9 49.2 151.8 140.6
Furniture and equipment ..................................................... 40.9 39.4 118.0 114.4
Goodwill and other intangible assets ........................................ 41.6 37.1 116.0 106.5
Merger-related .............................................................. 16.8 66.4 34.7 172.4
Other ....................................................................... 220.8 181.4 588.7 514.0
------------------------------------------------------
Total noninterest expense ................................................ 784.2 768.8 2,255.8 2,099.0
------------------------------------------------------
Income before income taxes .................................................. 621.1 519.5 1,784.0 1,545.8
Applicable income taxes ..................................................... 224.7 190.4 646.5 567.6
------------------------------------------------------
Net income .................................................................. $ 396.4 $ 329.1 $1,137.5 $ 978.2
======================================================
Earnings per share .......................................................... $ .55 $ .45 $ 1.57 $ 1.33
Diluted earnings per share .................................................. $ .54 $ .44 $ 1.56 $ 1.31
====================================================================================================================================
</TABLE>
18 U.S. Bancorp
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
(Dollars in Millions) Common Shares Common Capital Retained Comprehensive Treasury
(Unaudited) Outstanding* Stock Surplus Earnings Income Stock** Total
- - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1997 ....................... 739,933,014 $ 924.9 $1,261.1 $3,644.8 $ 59.3 $ -- $5,890.1
Common dividends declared ....................... (389.5) (389.5)
Purchase of treasury stock ...................... (17,991,970) (724.7) (724.7)
Issuance of common stock:
Dividend reinvestment ......................... 350,751 .3 9.9 3.8 14.0
Stock option and stock
purchase plans ............................... 8,421,807 5.8 (1.6) 151.7 155.9
---------------------------------------------------------------------------------
730,713,602 931.0 1,269.4 3,255.3 59.3 (569.2) 4,945.8
Comprehensive income
Net income ...................................... 978.2 978.2
Other comprehensive income:
Unrealized gain on securities of $27.1 (net of
$16.2 tax expense) net of reclassification
adjustment for gains included in net income
of $11.1 (net of $6.4 tax expense) ........... 16.0 16.0
--------
Total comprehensive income ................. 994.2
---------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 1998 ...................... 730,713,602 $ 931.0 $1,269.4 $4,233.5 $ 75.3 $ (569.2) $5,940.0
===================================================================================================================================
BALANCE DECEMBER 31, 1998 ....................... 725,761,718 $ 931.0 $1,247.2 $4,455.8 $ 71.8 $ (735.8) $5,970.0
Common dividends declared ....................... (426.0) (426.0)
Purchase of treasury stock ...................... (9,418,262) (310.6) (310.6)
Issuance of common stock:
Acquisitions .................................. 10,315,236 (33.0) 386.3 353.3
Dividend reinvestment ......................... 551,169 (2.9) 20.5 17.6
Stock option and stock
purchase plans ............................... 3,174,870 (49.7) 126.4 76.7
---------------------------------------------------------------------------------
730,384,731 931.0 1,161.6 4,029.8 71.8 (513.2) 5,681.0
Comprehensive income
Net Income ...................................... 1,137.5 1,137.5
Other comprehensive income:
Unrealized loss on securities of $100.3 (net of
$61.5 tax benefit) net of reclassification
adjustment for losses included in net income
of $.6 (net of $.3 tax benefit) .............. (99.7) (99.7)
--------
Total comprehensive income ................... 1,037.8
---------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 1999 ...................... 730,384,731 $ 931.0 $1,161.6 $5,167.3 $ (27.9) $ (513.2) $6,718.8
===================================================================================================================================
</TABLE>
* DEFINED AS TOTAL COMMON SHARES LESS COMMON STOCK HELD IN TREASURY.
** ENDING TREASURY SHARES WERE 14,413,126 AT SEPTEMBER 30, 1999; 19,036,139 AT
DECEMBER 31, 1998; AND 14,075,862 AT SEPTEMBER 30, 1998.
U.S. Bancorp 19
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
(Dollars in Millions) September 30 September 30
(Unaudited) 1999 1998
- - - - - - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities .............................................. $1,900.5 $1,094.4
---------------------------
INVESTING ACTIVITIES
Net cash provided (used) by:
Interest-bearing deposits with banks ................................................... 2.2 (10.0)
Loans outstanding ...................................................................... (3,060.5) (2,057.9)
Securities purchased under agreements to resell ........................................ 128.7 177.9
Available-for-sale securities:
Sales .................................................................................. 146.0 169.3
Maturities ............................................................................. 1,154.5 1,288.4
Purchases .............................................................................. (916.6) (66.3)
Proceeds from sales of other real estate ................................................. 25.9 37.3
Net purchases of bank premises and equipment ............................................. (69.3) (85.6)
Sales of loans ........................................................................... 1,720.0 4.9
Purchases of loans ....................................................................... (254.6) (513.3)
Divestitures of branches ................................................................. (352.0) --
Acquisitions, net of cash received ....................................................... (220.5) (685.2)
Cash and cash equivalents of acquired subsidiaries ....................................... 107.4 --
Other - net .............................................................................. (342.1) (18.2)
---------------------------
Net cash used by investing activities .................................................. (1,930.9) (1,758.7)
---------------------------
FINANCING ACTIVITIES
Net cash (used) provided by:
Deposits ............................................................................... (2,183.5) (531.2)
Federal funds purchased and securities sold under agreements to repurchase ............. (1,026.0) (253.1)
Short-term borrowings .................................................................. 246.9 (527.2)
Proceeds from long-term debt ............................................................. 4,465.1 4,583.0
Principal payments on long-term debt ..................................................... (2,091.7) (2,010.2)
Issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely the junior subordinated debentures of the parent company ......... -- 350.0
Proceeds from dividend reinvestment, stock option, and stock purchase plans .............. 94.3 169.9
Repurchase of common stock ............................................................... (310.6) (724.7)
Cash dividends ........................................................................... (426.0) (389.5)
---------------------------
Net cash (used) provided by financing activities ....................................... (1,231.5) 667.0
---------------------------
Change in cash and cash equivalents .................................................... (1,261.9) 2.7
Cash and cash equivalents at beginning of period ......................................... 4,855.3 4,801.0
---------------------------
Cash and cash equivalents at end of period ............................................. $3,593.4 $4,803.7
=======================================================================================================================
</TABLE>
20 U.S. Bancorp
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations and cash flow activity required under generally
accepted accounting principles. In the opinion of management of the Company, all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of results have been made, and the Company believes such
presentation is adequate to make the information presented not misleading. For
further information, refer to the consolidated financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998. Certain amounts in prior periods have been reclassified
to conform to the current presentation.
Accounting policies for the lines of business are the same as those used in
preparation of the consolidated financial statements with respect to activities
specifically attributable to each business line. However, the preparation of
business line results requires management to establish methodologies to allocate
funding costs and benefits, expenses and other financial elements to each line
of business. Table 2 "Line of Business Financial Performance" on pages 3 through
7 provides details of segment results. This information is incorporated by
reference into these Notes to Consolidated Financial Statements.
NOTE B ACCOUNTING CHANGES
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. In certain defined conditions, a derivative may be specifically
designated as a hedge for a particular exposure. The accounting for changes in
the fair value of the derivative depends on the intended use of the derivative
and the resulting designation. The effective date was deferred for one year with
the issuance of SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133," which
amended SFAS 133. SFAS 133, as amended, is effective for all fiscal years
beginning after June 15, 2000, with earlier adoption permitted. The adoption of
SFAS 133 is not expected to have a material impact on the Company.
NOTE C BUSINESS COMBINATIONS AND DIVESTITURES
PENINSULA BANK OF SAN DIEGO On September 2, 1999, the Company announced an
agreement to acquire Peninsula Bank of San Diego. With $456 million in assets at
June 30, 1999, Peninsula Bank operates 11 branches in San Diego County. The
acquisition, which is pending regulatory approval, will be accounted for as a
purchase and is expected to close in the first quarter of 2000.
WESTERN BANCORP On May 19, 1999, the Company announced an agreement to acquire
Newport Beach-based Western Bancorp. With $2.5 billion in assets at June 30,
1999, Western Bancorp has 31 branches in southern California in Los Angeles,
Orange and San Diego counties. The acquisition, which is pending regulatory
approval, will be accounted for as a purchase and is expected to close during
the fourth quarter of 1999.
BANK OF COMMERCE On July 15, 1999, the Company completed its acquisition of San
Diego-based Bank of Commerce, one of the nation's largest SBA lenders. The
transaction was accounted for as a purchase acquisition.
OTHER ACQUISITIONS AND DIVESTITURES On September 24, 1999, the Company completed
the sale of 28 branches in Kansas and Iowa representing $364 million of
deposits. On September 23, 1999, the Company sold $1.8 billion of indirect
automobile loans and is in the process of exiting this business.
On September 17, 1999, the Company completed its acquisition of the
investment banking division of The John Nuveen Company, based in Chicago. The
division, which focuses on fixed income investment banking, became part of the
U.S. Bancorp Piper Jaffray Fixed Income Capital Markets division. On September
13, 1999, the Company completed its acquisition of Voyager Fleet Systems, Inc.
U.S. Bancorp 21
<PAGE>
On June 30, 1999, the Company completed its acquisition of Mellon Network
Services' electronic funds transfer processing unit. On March 16, 1999, the
Company completed its acquisition of Reliance Trust Company's corporate trust
business, which operates offices in Georgia, Florida, and Tennessee. On January
4, 1999, the Company completed its acquisition of Libra Investments, Inc., a
privately held Los Angeles- and New York-based investment bank that specializes
in underwriting and trading high yield and mezzanine securities for middle
market companies. Effective December 15, 1998, the Company completed its
acquisition of Northwest Bancshares, Inc., a privately held bank holding company
headquartered in Vancouver, Washington, with 10 banking locations and $344
million in deposits. In May 1998, the Company completed its acquisition of Piper
Jaffray, a full-service investment banking and securities brokerage firm. These
transactions were accounted for as purchase acquisitions.
NOTE D SECURITIES
The detail of the amortized cost and fair value of available-for-sale securities
consisted of the following:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
---------------------------------------------
Amortized Fair Amortized Fair
(Dollars in Millions) Cost Value Cost Value
- - - - - - - - - - - - - - - - - -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury ........................... $ 391 $ 389 $ 489 $ 500
Mortgage-backed ......................... 3,062 3,025 3,395 3,438
Other U.S. agencies ..................... 206 206 252 259
State and political ..................... 1,119 1,131 1,219 1,255
Other ................................... 328 307 106 125
---------------------------------------------
Total .................................. $5,106 $5,058 $5,461 $5,577
=========================================================================================
</TABLE>
NOTE E LOANS
The composition of the loan portfolio was as follows:
<TABLE>
<CAPTION>
September 30 December 31
(Dollars in Millions) 1999 1998
- - - - - - - - - - - - - - - - - -----------------------------------------------------------------------------------------
<S> <C> <C>
COMMERCIAL:
Commercial .................................................. $28,378 $25,974
Real estate:
Commercial mortgage ........................................ 8,739 8,193
Construction ............................................... 3,748 3,069
-------------------------
Total commercial ......................................... 40,865 37,236
-------------------------
CONSUMER:
Home equity and second mortgage ............................. 8,477 7,409
Credit card ................................................. 4,042 4,221
Revolving credit ............................................ 1,786 1,686
Installment ................................................. 1,216 1,587
Student* .................................................... 493 829
-------------------------
Subtotal ................................................... 16,014 15,732
Indirect automobile ......................................... 741 2,994
Residential mortgage ........................................ 2,645 3,160
-------------------------
Total consumer ........................................... 19,400 21,886
-------------------------
Total loans ............................................. $60,265 $59,122
=========================================================================================
</TABLE>
* ALL OR PART OF THE STUDENT LOAN PORTFOLIO MAY BE SOLD WHEN THE REPAYMENT
PERIOD BEGINS.
At September 30, 1999, the Company had $258 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, 1999, the average recorded investment in impaired loans was
approximately $255 million. No interest income was recognized on impaired loans
during the quarter.
22 U.S. Bancorp
<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
(Dollars in Millions) 1999 1998
- - - - - - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed-rate subordinated notes (5.70% to 8.35%) -- maturities to June 2026 ....... $ 2,850 $ 2,850
Step-up subordinated notes -- due August 15, 2005 ............................... 100 100
Floating-rate notes -- due November 15, 1999 .................................... 200 200
Floating-rate notes -- due February 27, 2000 .................................... 250 250
Floating-rate subordinated notes -- due November 30, 2010 ....................... -- 107
Federal Home Loan Bank advances (5.25% to 9.11%) -- maturities to October 2026 .. 2,082 2,187
Medium-term notes (5.37% to 6.93%) -- maturities to June 2004 ................... 2,256 1,675
Bank notes (5.25% to 6.38%) -- maturities to November 2005 ...................... 7,814 6,209
Euro medium-term notes -- due April 13, 2004 .................................... 400 --
Other ........................................................................... 203 203
-------------------------
Total .......................................................................... $16,155 $13,781
===========================================================================================================
</TABLE>
In May 1999, the Company called $107 million of its floating-rate
subordinated notes due November 30, 2010, in accordance with its call
provisions.
In April, the Company issued $400 million variable-rate Euro medium-term
notes due April 13, 2004. The interest rate for each quarterly period is
three-month LIBOR plus .15 percent.
NOTE G SHAREHOLDERS' EQUITY
The Company issued 10,315,236 shares of common stock with an aggregate value of
$353.3 million in connection with acquisitions during the nine months ended
September 30, 1999.
On June 8, 1998, the Company's Board of Directors authorized the repurchase
of up to $2.5 billion of the Company's common stock over the period ending March
31, 2000. The shares will be repurchased in the open market or through
negotiated transactions. Under this program, the Company repurchased 34.0
million shares for $1.3 billion, including 9.4 million shares for $310.6 million
for the nine months ended September 30, 1999.
NOTE H EARNINGS PER SHARE
The components of earnings per share were:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ---------------------------
September 30 September 30 September 30 September 30
(Dollars in Millions, Except Per Share Data) 1999 1998 1999 1998
- - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EARNINGS PER SHARE:
Net income to common stockholders ...................................... $ 396.4 $ 329.1 $ 1,137.5 $ 978.2
==========================================================
Average shares outstanding ............................................. 726,506,673 734,577,075 724,141,996 737,623,506
==========================================================
Earnings per share ..................................................... $ .55 $ .45 $ 1.57 $ 1.33
==========================================================
DILUTED EARNINGS PER SHARE:
Net income to common stockholders ...................................... $ 396.4 $ 329.1 $ 1,137.5 $ 978.2
==========================================================
Average shares outstanding ............................................. 726,506,673 734,577,075 724,141,996 737,623,506
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 .................................................. 5,088,017 10,163,113 5,534,580 11,289,979
----------------------------------------------------------
Dilutive common shares outstanding ..................................... 731,594,690 744,740,188 729,676,576 748,913,485
==========================================================
Diluted earnings per share ............................................. $ .54 $ .44 $ 1.56 $ 1.31
===================================================================================================================================
</TABLE>
U.S. Bancorp 23
<PAGE>
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
(Dollars in Millions) 1999 1998 1999 1998
- - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERAL:
Current tax ..................................................... $177.9 $165.1 $492.4 $463.1
Deferred tax provision (credit) ................................. 18.5 (.3) 56.7 26.3
------------------------------------------------------
Federal income tax ............................................ 196.4 164.8 549.1 489.4
STATE:
Current tax ..................................................... 23.8 24.1 85.3 74.6
Deferred tax provision .......................................... 4.5 1.5 12.1 3.6
------------------------------------------------------
State income tax .............................................. 28.3 25.6 97.4 78.2
------------------------------------------------------
Total income tax provision .................................... $224.7 $190.4 $646.5 $567.6
========================================================================================================================
</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
(Dollars in Millions) 1999 1998 1999 1998
- - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax at statutory rate (35%) ...................................... $217.4 $181.8 $624.4 $541.0
State income tax, at statutory rates, net of federal tax benefit . 18.4 16.6 63.3 50.8
Tax effect of:
Tax-exempt interest:
Loans ......................................................... (2.2) (2.4) (6.8) (8.6)
Securities .................................................... (5.5) (5.8) (16.9) (17.2)
Amortization of nondeductible goodwill ......................... 10.3 8.9 29.1 23.6
Tax credits and other items .................................... (13.7) (8.7) (46.6) (22.0)
------------------------------------------------------
Applicable income taxes .......................................... $224.7 $190.4 $646.5 $567.6
========================================================================================================================
</TABLE>
The Company's net deferred tax asset was $145.4 million at September 30,
1999, and $261.3 million at December 31, 1998.
NOTE J MERGER AND INTEGRATION CHARGES
During 1999, the Company recorded $34.7 million of nonrecurring expense related
to the integration of the Company's various acquisitions. The following table
presents a summary of activity with respect to the Company's merger and
integration accrual:
<TABLE>
<CAPTION>
Nine Months Ended
(Dollars in Millions) September 30, 1999
- - - - - - - - - - - - - - - - - --------------------------------------------------------------------------------------
<S> <C>
Balance at December 31, 1998 ..................................... $ 126.7
Provision charged to operating expense ........................... 34.7
Cash outlays ..................................................... (59.9)
Transfer to tax liabilities* ..................................... (33.8)
Additions related to purchase acquisitions ....................... 14.2
Noncash writedowns ............................................... (17.6)
------------------
Balance at September 30, 1999 .................................... $ 64.3
======================================================================================
</TABLE>
* THE LIABILITY RELATES TO CERTAIN SEVERANCE RELATED ITEMS.
The components of the merger and integration accrual were as follows:
<TABLE>
<CAPTION>
September 30 December 31
(Dollars in Millions) 1999 1998
- - - - - - - - - - - - - - - - - --------------------------------------------------------------------------------------
<S> <C> <C>
Severance ................................................. $ 36.0 $ 98.1
Other employee related costs .............................. 9.0 7.2
Lease terminations and facility costs .................... 11.0 7.4
Contracts and system writeoffs ............................ 4.7 10.4
Other ..................................................... 3.6 3.6
------------------------
Total ..................................................... $ 64.3 $ 126.7
======================================================================================
</TABLE>
Employee termination plans were developed in connection with the
acquisitions of U.S. Bancorp of Portland, Oregon, Piper Jaffray Companies Inc.,
Northwest Bancshares, Inc., Zappco, Inc., Bank of Commerce and other
acquisitions. The severance amounts are determined based on the Company's
existing
24 U.S. Bancorp
<PAGE>
severance pay programs under which benefits are paid out over a period of up to
two years from the time of termination. With respect to completed acquisitions,
additional merger-related charges of approximately $15.0 million and $19.5
million on a pre-tax basis are expected to be incurred in 1999 and 2000,
respectively.
NOTE K COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS
In the normal course of business, the Company uses various off-balance sheet
financial instruments to meet the needs of its customers and to manage its
interest rate and market risk. These instruments carry varying degrees of
credit, interest rate and liquidity risk. The contract or notional amounts of
these financial instruments were as follows:
<TABLE>
<CAPTION>
September 30 December 31
(Dollars in Millions) 1999 1998
- - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit:
Commercial ................................................................... $26,530 $25,023
Corporate and purchasing cards ............................................... 17,371 24,758
Consumer credit cards ........................................................ 15,241 14,982
Other consumer ............................................................... 6,498 7,020
Letters of credit:
Standby ...................................................................... 3,225 3,241
Commercial ................................................................... 301 309
Interest rate swap contracts:
Hedges ....................................................................... 7,985 7,239
Intermediated ................................................................ 615 740
Options contracts:
Hedge interest rate floors purchased ......................................... 500 500
Intermediated interest rate and foreign exchange caps and floors purchased ... 304 360
Intermediated interest rate and foreign exchange caps and floors written ..... 304 360
Futures and forward contracts .................................................. 37 10
Recourse on assets sold ........................................................ 114 37
Foreign currency commitments:
Commitments to purchase ...................................................... 1,304 812
Commitments to sell .......................................................... 1,299 806
Commitments from securities lending ............................................ 507 342
==========================================================================================================
</TABLE>
The Company received fixed-rate interest and paid floating-rate interest on
all swap hedges as of September 30, 1999. Activity for the nine months ended
September 30, 1999, with respect to interest rate swaps which the Company uses
to hedge loans, deposits and long-term debt was as follows:
<TABLE>
<CAPTION>
(Dollars in Millions)
- - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------
<S> <C>
Notional amount outstanding at December 31, 1998 ............................................. $ 7,239
Additions .................................................................................... 4,111
Maturities ................................................................................... (1,772)
Terminations ................................................................................. (1,593)
-------
Notional amount outstanding at September 30, 1999 ............................................ $ 7,985
==========================================================================================================
Weighted average interest rates paid ......................................................... 5.39%
Weighted average interest rates received ..................................................... 6.19
==========================================================================================================
</TABLE>
LIBOR-based interest rate floors totaling $500 million with an average
remaining maturity of 1.95 years at September 30, 1999, and $500 million with an
average remaining maturity of 2.7 years at December 31, 1998, hedged
floating-rate commercial loans. The strike rate on these LIBOR-based floors was
4.63 percent at September 30, 1999, and December 31, 1998.
Net unamortized deferred losses relating to swaps, options and futures were
$10.5 million at September 30, 1999.
U.S. Bancorp 25
<PAGE>
NOTE L SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET Time certificates of deposit in denominations of
$100,000 or more totaled $4,722 million and $2,823 million at September 30,
1999, and December 31, 1998, 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
(Dollars in Millions) 1999 1998
- - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income taxes paid ........................................................................ $ 429.5 $ 372.8
Interest paid ............................................................................ 1,708.8 1,730.5
Net noncash transfers to foreclosed property ............................................. 26.7 18.4
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $61.2
in 1999 and $9.8 in 1998 ............................................................... (99.7) 16.0
===========================
Cash acquisitions of businesses:
Fair value of noncash assets acquired .................................................. $ 250.3 $ 1,802.8
Liabilities assumed .................................................................... (29.8) (1,117.6)
---------------------------
Net ................................................................................... $ 220.5 $ 685.2
===========================
Stock acquisitions of businesses:
Fair value of noncash assets acquired .................................................. $ 798.2 $ --
Net cash acquired ...................................................................... 107.4 --
Liabilities assumed .................................................................... (552.3) --
---------------------------
Net value of common stock issued ...................................................... $ 353.3 $ --
=======================================================================================================================
</TABLE>
26 U.S. Bancorp
<PAGE>
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
<TABLE>
<CAPTION>
For the Three Months Ended September 30
1999 1998
---------------------------------------------------------------------
Yields Yields % Change
(Dollars In Millions) and and Average
(Unaudited) Balance Interest Rates Balance Interest Rates Balance
- - - - - - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Available-for-sale securities:
U.S. Treasury ............................................. $ 397 $ 5.6 5.60% $ 532 $ 7.8 5.82% (25.4)%
Mortgage-backed ........................................... 3,173 53.1 6.64 3,432 57.8 6.68 (7.5)
State and political ....................................... 1,118 21.4 7.59 1,258 24.4 7.70 (11.1)
U.S. agencies and other ................................... 537 5.1 3.77 381 5.3 5.52 40.9
------------------ ------------------
Total available-for-sale securities ...................... 5,225 85.2 6.47 5,603 95.3 6.75 (6.7)
Unrealized gain (loss) on available-for-sale securities .. (36) 94 **
-------- --------
Net available-for-sale securities ........................ 5,189 5,697 (8.9)
Trading account securities ................................. 659 10.5 6.32 350 6.1 6.91 88.3
Federal funds sold and resale agreements ................... 501 5.6 4.43 622 9.0 5.74 (19.5)
Loans:
Commercial:
Commercial ............................................... 27,614 531.5 7.64 24,806 495.5 7.92 11.3
Real estate:
Commercial mortgage ..................................... 8,654 183.7 8.42 8,066 178.0 8.76 7.3
Construction ............................................ 3,734 83.3 8.85 2,704 61.1 8.96 38.1
------------------ ------------------
Total commercial ........................................ 40,002 798.5 7.92 35,576 734.6 8.19 12.4
Consumer:
Home equity and second mortgage .......................... 8,258 197.5 9.49 6,207 150.1 9.59 33.0
Credit card .............................................. 4,009 136.9 13.55 4,076 130.7 12.72 (1.6)
Other .................................................... 6,398 152.2 9.44 6,876 168.5 9.72 (7.0)
------------------ ------------------
Subtotal ................................................ 18,665 486.6 10.34 17,159 449.3 10.39 8.8
Residential mortgage ..................................... 2,682 51.1 7.56 3,439 66.5 7.67 (22.0)
------------------ ------------------
Total consumer .......................................... 21,347 537.7 9.99 20,598 515.8 9.93 3.6
------------------ ------------------
Total loans ............................................. 61,349 1,336.2 8.64 56,174 1,250.4 8.83 9.2
Allowance for credit losses ............................... 993 998 (.5)
-------- --------
Net loans ................................................ 60,356 55,176 9.4
Other earning assets ....................................... 1,537 24.6 6.35 1,245 21.5 6.85 23.5
------------------ ------------------
Total earning assets* ................................... 69,271 1,462.1 8.37 63,994 1,382.3 8.57 8.2
Other assets ............................................... 9,458 8,993 5.2
-------- --------
Total assets ............................................ $77,700 $72,083 7.8%
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits ............................... $13,655 $13,514 1.0%
Interest-bearing deposits:
Interest checking ......................................... 6,028 28.2 1.86 5,603 27.0 1.91 7.6
Money market accounts ..................................... 11,990 104.0 3.44 11,374 114.6 4.00 5.4
Other savings accounts .................................... 2,241 10.5 1.86 2,424 13.1 2.14 (7.5)
Savings certificates ...................................... 9,432 117.8 4.96 11,060 152.7 5.48 (14.7)
Certificates over $100,000 ................................ 4,370 58.2 5.28 3,025 43.9 5.76 44.5
------------------ ------------------
Total interest-bearing deposits .......................... 34,061 318.7 3.71 33,486 351.3 4.16 1.7
Short-term borrowings ...................................... 4,309 61.3 5.64 3,881 60.0 6.13 11.0
Long-term debt ............................................. 15,733 217.8 5.49 11,658 171.8 5.85 35.0
Company-obligated mandatorily redeemable preferred
securities ................................................ 950 19.3 8.06 950 20.3 8.48 --
------------------ ------------------
Total interest-bearing liabilities ...................... 55,053 617.1 4.45 49,975 603.4 4.79 10.2
Other liabilities .......................................... 2,404 2,494 (3.6)
Common equity .............................................. 6,611 6,041 9.4
Accumulated other comprehensive income ..................... (23) 59 **
-------- --------
Total liabilities and shareholders' equity .............. $77,700 $72,083 7.8%
======== ========
Net interest income ........................................ $ 845.0 $ 778.9
======== ========
Gross interest margin ...................................... 3.92% 3.78%
====== ======
Gross interest margin without taxable-equivalent
increments ................................................ 3.86% 3.70%
====== ======
Net interest margin ........................................ 4.84% 4.83%
====== ======
Net interest margin without taxable-equivalent
increments ................................................ 4.78% 4.75%
========================================================================================================================
</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.
U.S. Bancorp 27
<PAGE>
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
<TABLE>
<CAPTION>
For the Nine Months Ended September 30
1999 1998
---------------------------------------------------------------------
Yields Yields % Change
(Dollars In Millions) and and Average
(Unaudited) Balance Interest Rates Balance Interest Rates Balance
- - - - - - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Available-for-sale securities:
U.S. Treasury ............................................ $ 438 $ 18.6 5.68% $ 591 $ 25.8 5.84% (25.9)%
Mortgage-backed .......................................... 3,180 156.1 6.56 3,765 191.2 6.79 (15.5)
State and political ...................................... 1,146 65.1 7.59 1,268 74.0 7.80 (9.6)
U.S. agencies and other .................................. 430 13.0 4.04 415 17.0 5.48 3.6
------------------ -----------------
Total available-for-sale securities ..................... 5,194 252.8 6.51 6,039 308.0 6.82 (14.0)
Unrealized gain on available-for-sale securities ........ 45 92 (51.1)
-------- --------
Net available-for-sale securities ....................... 5,239 6,131 (14.5)
Trading account securities ................................ 600 29.5 6.57 239 11.3 6.32 **
Federal funds sold and resale agreements .................. 515 16.1 4.18 686 28.6 5.57 (24.9)
Loans:
Commercial:
Commercial .............................................. 26,841 1,510.1 7.52 24,192 1,454.8 8.04 10.9
Real estate:
Commercial mortgage .................................... 8,427 532.0 8.44 8,127 535.5 8.81 3.7
Construction ........................................... 3,529 232.2 8.80 2,560 177.5 9.27 37.9
------------------ -----------------
Total commercial ....................................... 38,797 2,274.3 7.84 34,879 2,167.8 8.31 11.2
Consumer:
Home equity and second mortgage ......................... 7,852 554.2 9.44 6,025 431.5 9.58 30.3
Credit card ............................................. 4,003 387.8 12.95 4,000 379.3 12.68 .1
Other ................................................... 6,773 473.0 9.34 6,730 488.7 9.71 .6
------------------ -----------------
Subtotal ............................................... 18,628 1,415.0 10.16 16,755 1,299.5 10.37 11.2
Residential mortgage .................................... 2,834 163.6 7.72 3,782 221.4 7.83 (25.1)
------------------ -----------------
Total consumer ......................................... 21,462 1,578.6 9.83 20,537 1,520.9 9.90 4.5
------------------ -----------------
Total loans ............................................ 60,259 3,852.9 8.55 55,416 3,688.7 8.90 8.7
Allowance for credit losses .............................. 994 1,002 (.8)
-------- --------
Net loans ............................................... 59,265 54,414 8.9
Other earning assets ...................................... 1,437 69.1 6.43 979 46.4 6.34 46.8
------------------ -----------------
Total earning assets* .................................. 68,005 4,220.4 8.30 63,359 4,083.0 8.62 7.3
Other assets .............................................. 9,247 8,677 6.6
-------- --------
Total assets ........................................... $76,303 $71,126 7.3%
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits .............................. $13,585 $13,285 2.3%
Interest-bearing deposits:
Interest checking ........................................ 6,051 80.3 1.77 5,733 78.0 1.82 5.5
Money market accounts .................................... 12,100 310.7 3.43 10,990 325.5 3.96 10.1
Other savings accounts ................................... 2,244 30.0 1.79 2,519 40.1 2.13 (10.9)
Savings certificates ..................................... 9,733 359.7 4.94 11,521 474.0 5.50 (15.5)
Certificates over $100,000 ............................... 4,059 158.4 5.22 3,189 141.0 5.91 27.3
------------------ -----------------
Total interest-bearing deposits ......................... 34,187 939.1 3.67 33,952 1,058.6 4.17 .7
Short-term borrowings ..................................... 4,224 169.3 5.36 3,654 162.5 5.95 15.6
Long-term debt ............................................ 14,712 592.3 5.38 10,942 486.0 5.94 34.5
Company-obligated mandatorily redeemable preferred
securities ............................................... 950 58.0 8.16 835 51.1 8.18 13.8
------------------ -----------------
Total interest-bearing liabilities ..................... 54,073 1,758.7 4.35 49,383 1,758.2 4.76 9.5
Other liabilities ......................................... 2,314 2,350 (1.5)
Common equity ............................................. 6,303 6,050 4.2
Accumulated other comprehensive income .................... 28 58 (51.7)
-------- --------
Total liabilities and shareholders' equity ............. $76,303 $71,126 7.3%
======== ========
Net interest income ....................................... $2,461.7 $2,324.8
======== ========
Gross interest margin ................................ 3.95% 3.86%
====== =====
Gross interest margin without taxable-equivalent
increments .......................................... 3.89% 3.77%
====== =====
Net interest margin .................................. 4.84% 4.91%
====== =====
Net interest margin without taxable-equivalent
increments .......................................... 4.78% 4.82%
=======================================================================================================================
</TABLE>
INTEREST AND RATES ARE PRESENTED ON A FULLY TAXABLE-EQUIVALENT BASIS UNDER A
TAX RATE OF 35 PERCENT.
INTEREST INCOME AND RATES ON LOANS INCLUDE LOAN FEES. NONACCRUAL LOANS ARE
INCLUDED IN AVERAGE LOAN BALANCES.
* BEFORE DEDUCTING THE ALLOWANCE FOR CREDIT LOSSES AND EXCLUDING THE UNREALIZED
GAIN ON AVAILABLE-FOR-SALE SECURITIES.
** NOT MEANINGFUL.
28 U.S. Bancorp
<PAGE>
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
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, 1999, the Company filed no
Current Reports on Form 8-K.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
U.S. BANCORP
By: /S/ TERRANCE R. DOLAN
------------------------------------------
Terrance R. Dolan
Senior Vice President and Controller
(Chief Accounting Officer and Duly
DATE: November 12, 1999 Authorized Officer)
U.S. Bancorp 29
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<PAGE>
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---------------
[LOGO] US BANCORP(R) First Class
U.S. Postage
U.S. Bank Place PAID
601 Second Avenue South Permit No. 2440
Minneapolis, Minnesota Minneapolis, MN
55402-4302 ---------------
www.usbank.com
SHAREHOLDER INQUIRIES
COMMON STOCK TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York, a division of EquiServe, 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 Trust's Shareholder Services Center at (800) 446-2617.
Representatives are available weekdays 8:30 a.m. to 7:00 p.m. Eastern time, and
the interactive voice response system is available 24 hours a day, seven days a
week. The TDD telephone number for the hearing impaired is (201) 222-4955.
First Chicago Trust Company of New York
c/o EquiServe
Mailing address: P.O. Box 2500,
Jersey City, New Jersey 07303-2500.
Telephone: (201) 324-0498
Fax: (201) 222-4892
Internet address: http://www.equiserve.com
E-mail address: [email protected]
If you own shares in a book-entry or plan account maintained by First Chicago
Trust, you can access your account information on the Internet through First
Chicago Trust's Web site. To obtain a password that provides you secured access
to your account, please call First Chicago Trust toll free at (877) THE-WEB7
(outside North America call (201) 536-8071).
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 Trust 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. For more information,
please contact First Chicago Trust Company of New York, c/o EquiServe, P.O. Box
2598, Jersey City, New Jersey, 07303-2598, (800) 446-2617.
INVESTMENT COMMUNITY CONTACTS
John R. Danielson
Senior Vice President, Investor Relations
(612) 973-2261
[email protected]
Judith T. Murphy
Vice President, Investor Relations
(612) 973-2264
[email protected]
FINANCIAL INFORMATION
U.S. Bancorp news and financial results are available through the Company's Web
site, fax, and mail.
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.usbank.com.
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 news 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,
quarterly financial data on Form 10-Q, and additional annual reports. To be
added to U.S. Bancorp's mailing list for quarterly earnings news releases, or to
request other information, please contact:
Investor Relations
(612) 973-2263
U.S. Bancorp
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Three Nine
Months Months
Ended Ended
September 30 September 30
----------------------------
(Dollars in Millions) 1999 1999
==================================================================================================================
<S> <C> <C>
EARNINGS
1. Net income .................................................................... $ 396.4 $ 1,137.5
2. Applicable income taxes ....................................................... 224.7 646.5
----------------------------
3. Net income before taxes (1 + 2) ............................................... $ 621.1 $ 1,784.0
============================
4. Fixed charges:
a Interest expense excluding interest on deposits ............................. $ 298.4 $ 819.6
b. Portion of rents representative of interest and amortization of debt expense 12.0 37.0
----------------------------
c. Fixed charges excluding interest on deposits (4a + 4b) ...................... 310.4 856.6
d. Interest on deposits ........................................................ 318.7 939.1
----------------------------
e. Fixed charges including interest on deposits (4c + 4d) ...................... $ 629.1 $ 1,795.7
============================
5. Amortization of interest capitalized .......................................... $ -- $ --
6. Earnings excluding interest on deposits (3 + 4c + 5) .......................... 931.5 2,640.6
7. Earnings including interest on deposits (3 + 4e + 5) .......................... 1,250.2 3,579.7
8. Fixed charges excluding interest on deposits (4c) ............................. 310.4 856.6
9. Fixed charges including interest on deposits (4e) ............................. 629.1 1,795.7
RATIO OF EARNINGS TO FIXED CHARGES
10. Excluding interest on deposits (line 6/line 8) ................................ 3.00 3.08
11. Including interest on deposits (line 7/line 9) ................................ 1.99 1.99
===================================================================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE U.S.
BANCORP SEPTEMBER 30, 1999, 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,454,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 471,000
<TRADING-ASSETS> 718,000
<INVESTMENTS-HELD-FOR-SALE> 5,058,000
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 60,265,000
<ALLOWANCE> 966,300
<TOTAL-ASSETS> 77,036,000
<DEPOSITS> 47,978,000
<SHORT-TERM> 2,593,000
<LIABILITIES-OTHER> 2,501,000
<LONG-TERM> 16,155,000
0
0
<COMMON> 931,000
<OTHER-SE> 5,788,000
<TOTAL-LIABILITIES-AND-EQUITY> 77,036,000
<INTEREST-LOAN> 3,844,000
<INTEREST-INVEST> 231,800
<INTEREST-OTHER> 112,900
<INTEREST-TOTAL> 4,188,700
<INTEREST-DEPOSIT> 939,100
<INTEREST-EXPENSE> 1,758,700
<INTEREST-INCOME-NET> 2,430,000
<LOAN-LOSSES> 385,000
<SECURITIES-GAINS> (3,400)
<EXPENSE-OTHER> 2,255,800
<INCOME-PRETAX> 1,784,000
<INCOME-PRE-EXTRAORDINARY> 1,784,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,137,500
<EPS-BASIC> 1.57
<EPS-DILUTED> 1.56
<YIELD-ACTUAL> 4.84
<LOANS-NON> 295,200
<LOANS-PAST> 106,700
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,000,900
<CHARGE-OFFS> 540,200
<RECOVERIES> 118,500
<ALLOWANCE-CLOSE> 966,300
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
