3
FORM 10-Q / SEPTEMBER 30, 1997
[LOGO] U.S. BANCORP
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM (NOT APPLICABLE)
COMMISSION FILE NUMBER 1-6880
U.S. BANCORP
(Exact name of registrant as specified in its charter)
DELAWARE 41-0255900
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 SECOND AVENUE SOUTH,
MINNEAPOLIS, MINNESOTA 55402-4302
(Address of principal executive offices and Zip Code)
612-973-1111
(Registrant's telephone number, including area code)
(NOT APPLICABLE)
(Former name, former address and former fiscal year,
if changed since last report).
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO _____
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding as of October 31, 1997
Common Stock, $1.25 Par Value 245,472,252 shares
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FINANCIAL SUMMARY
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) 1997 1996 1997 1996
============ ============ ============ ============
Income before nonrecurring items .................. $ 324.8 $ 290.6 $ 919.7 $ 850.3
Nonrecurring items ................................ (372.4) (34.9) (370.1) 76.3
--------- --------- --------- ---------
Net income (loss) ................................. $ (47.6) $ 255.7 $ 549.6 $ 926.6
========= ========= ========= =========
PER COMMON SHARE
Primary net income (loss) ......................... $ (.20) $ .98 $ 2.17 $ 3.59
Fully diluted net income (loss) ................... (.20) .98 2.16 3.55
Earnings (loss) on a cash basis (fully diluted)* .. (.09) 1.08 2.49 3.95
Dividends paid .................................... .4650 .4125 1.3950 1.2375
Common shareholders' equity ....................... 22.82 22.97
PER COMMON SHARE BEFORE NONRECURRING ITEMS
Primary income .................................... 1.30 1.12 3.66 3.29
Fully diluted income .............................. 1.29 1.11 3.64 3.26
Earnings on a cash basis (fully diluted)* ......... 1.41 1.22 3.97 3.54
--------- --------- --------- ---------
FINANCIAL RATIOS
Return on average assets .......................... (.28)% 1.50% 1.07% 1.84%
Return on average common equity ................... (3.5) 17.3 12.8 21.5
Efficiency ratio .................................. 84.3 56.8 61.7 53.3
Net interest margin (taxable-equivalent basis) .... 5.03 5.05 5.05 5.03
SELECTED FINANCIAL RATIOS BEFORE NONRECURRING ITEMS
Return on average assets .......................... 1.88 1.70 1.80 1.69
Return on average common equity ................... 22.3 19.7 21.5 19.7
Efficiency ratio .................................. 47.7 51.6 49.3 52.4
========= ========= ========= =========
September 30 December 31
1997 1996
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PERIOD END
Loans ............................................. $ 54,143 $ 52,355
Allowance for credit losses ....................... 1,020 993
Assets ............................................ 70,174 69,749
Total shareholders' equity ........................ 5,741 5,763
Tangible common equity to total assets** .......... 6.7% 6.7%
Tier 1 capital ratio .............................. 7.2 7.6
Total risk-based capital ratio .................... 11.4 11.9
Leverage ratio .................................... 7.3 7.5
========= =========
* CALCULATED BY ADDING AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS TO
NET INCOME.
** DEFINED AS COMMON EQUITY LESS GOODWILL AS A PERCENTAGE OF TOTAL ASSETS LESS
GOODWILL.
REFER TO MANAGEMENT'S DISCUSSION AND ANALYSIS ON PAGE 2 FOR A DESCRIPTION
OF NONRECURRING ITEMS.
TABLE OF CONTENTS AND FORM 10-Q CROSS-REFERENCE INDEX
PART I -- FINANCIAL INFORMATION
Management's Discussion and Analysis of Financial Condition and Results of Operations
(Item 2) .............................................................................. 2
Financial Statements (Item 1) ........................................................... 15
PART II -- OTHER INFORMATION
Exhibits and Reports on Form 8-K (Item 6) ............................................... 28
Signature ............................................................................... 28
Exhibit 10(a) -- Employment Agreement with John F. Grundhofer ........................... ***
Exhibit 10(b) -- Employment Agreement with Philip G. Heasley ............................ ***
Exhibit 10(c) -- Employment Agreement with Richard A. Zona .............................. ***
Exhibit 10(d) -- Employment Agreements with Gerry B. Cameron, Gary T. Duim and Robert D.
Sznewajs. Filed as Exhibits 10.1 - 10.3 to Registration Statement on
Form S-4, File No. 333-29409 and incorporated herein by reference ...... ***
Exhibit 11 -- Computation of Primary and Fully Diluted Net Income Per Common Share ...... 29
Exhibit 12 -- Computation of Ratio of Earnings to Fixed Charges ......................... 30
Exhibit 27 -- Article 9 Financial Data Schedule ......................................... ***
*** COPIES OF THIS EXHIBIT WILL BE FURNISHED UPON REQUEST AND PAYMENT OF THE
COMPANY'S REASONABLE EXPENSES IN FURNISHING THE EXHIBIT.
FORWARD-LOOKING STATEMENTS
This form 10-Q includes forward-looking statements that involve inherent
risks and uncertainties. U.S. Bancorp cautions readers that a number of
important factors could cause actual results to differ materially from those in
the forward-looking statements. These factors include economic conditions and
competition in the geographic and business areas in which the Company operates,
inflation, fluctuations in interest rates, legislation and governmental
regulation and the progress of integrating former U. S. Bancorp.
MANAGEMENT'S DISCUSSION AND ANALYSIS
U.S. Bancorp, formerly known as First Bank System, Inc. (the "Company"), is the
organization created by the merger of First Bank System, Inc. ("FBS") and U. S.
Bancorp ("USBC") of Portland, Oregon. The merger was completed on August 1,
1997 as a pooling-of-interests, and prior period financial statements have been
restated to reflect the merger.
EARNINGS SUMMARY -- The Company reported third quarter 1997 operating earnings
(net income excluding nonrecurring items) of $324.8 million, compared with
$290.6 million in the third quarter of 1996. On a fully diluted per share
basis, operating earnings were $1.29 in the third quarter of 1997, compared
with $1.11 in the third quarter of 1996, an increase of 16 percent. Return on
average assets and return on average common equity, excluding nonrecurring
items, were 1.88 percent and 22.3 percent, respectively, in the third quarter
of 1997, compared with returns of 1.70 percent and 19.7 percent in the third
quarter of 1996. Excluding nonrecurring items, the efficiency ratio (the ratio
of expenses to revenues) improved to 47.7 percent in the third quarter of 1997
from 51.6 percent in the third quarter of 1996.
Operating earnings for the third quarter of 1997 reflected growth in both
net interest income and noninterest income and a decrease in noninterest
expense from the third quarter of 1996. Third quarter net interest income on a
taxable-equivalent basis increased $9.8 million (1 percent) from the third
quarter of 1996 to $779.8 million, due primarily to an increase in earning
assets. Noninterest income, excluding nonrecurring items, increased $44.3
million (12 percent) from the third quarter of 1996. The increase was the
result of growth in all categories of fee revenue. Third quarter noninterest
expense, excluding nonrecurring items, decreased $18.1 million (3 percent) from
the third quarter of 1996, reflecting the initial benefits of the merger.
As a result of merger-related charges, the Company recorded a net loss
for the third quarter of 1997 of $47.6 million, or $.20 per fully diluted
share, compared with net income of $255.7 million, or $.98 per fully diluted
share, in the third quarter of 1996. Nonrecurring items decreased net income
$372.4 million ($525.8 million on a pretax basis) or $1.49 per share in the
third quarter of 1997. Nonrecurring pretax gains included a $9.4 million gain
on the sale of USBC's affinity credit card portfolio. Nonrecurring pretax
charges of $535.2 million consisted of $440.2 million of merger-related
expenses and a $95.0 million merger-related provision for credit losses.
Merger-related expenses included: $232.3 million of severance costs; $65.8
million of occupancy/equipment writedowns; $43.4 million of capitalized
software and other asset write-offs; $35.0 million of investment banking and
other transaction costs; $27.1 million of conversion expenses incurred; and,
$36.6 million of other merger-related expenses. Approximately $190.0 million of
additional merger-related expenses are expected to be incurred over the next
four quarters. The $95.0 million merger-related provision for credit losses and
a related $62.3 million of charge-offs were recorded as a result of efforts to
align the classification and charge-off practices of the former USBC with those
of the Company.
Nonrecurring items decreased net income $34.9 million ($56.2 million on a
pretax basis) or $.13 per share in the third quarter 1996. Nonrecurring pretax
gains included a $4.2 million gain on the sale of premises and $.9 million of
net securities gains. Nonrecurring pretax charges consisted of a $61.3 million
one-time special assessment by the Federal Deposit Insurance Corporation
("FDIC") on Savings Association Insurance Fund ("SAIF") deposits.
Operating earnings for the first nine months of 1997 were $919.7 million
compared with $850.3 million in the first nine months of 1996. On a fully
diluted per share basis, operating earnings were $3.64 in the first nine months
of 1997, compared with $3.26 in the first nine months of 1996, an increase of
12 percent. Year-to-date return on average assets and return on average common
equity, excluding nonrecurring items, were 1.80 percent and 21.5 percent,
respectively, in the first nine months of 1997, compared with returns of 1.69
percent and 19.7 percent, in the first nine months of 1996. Excluding
nonrecurring items, the year-to-date efficiency ratio improved to 49.3 percent
from 52.4 percent in 1996.
Net income for the first nine months of 1997 was $549.6 million, compared
with $926.6 million for the first nine months of 1996. Nonrecurring items
decreased net income $370.1 million ($522.2 million on a pre-tax basis), or
$1.48 per share for the first nine months of 1997. In addition to the third
quarter 1997 nonrecurring items discussed above, nonrecurring items in the first
nine months of 1997 included $3.6 million of pretax net securities gains.
Nonrecurring items increased net income $76.3 million ($144.6 million on a
pretax basis) or $.29 per share for the first nine months of 1996. For the nine
months ended September 30, 1996, nonrecurring gains included: $190 million, net
of expenses, received for the termination of the First Interstate Bancorp merger
agreement; a $65 million state income tax refund, including interest; a $45.8
million gain on the sale of the Company's mortgage banking operations; a $25.6
million gain on branch and credit card portfolio sales; a $4.2 million gain on
the sale of premises; and, $20.3 million in net securities gains.
TABLE 1 SUMMARY OF CONSOLIDATED INCOME
Three Months Ended Nine Months Ended
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(Taxable-Equivalent Basis; September 30 September 30 September 30 September 30
Dollars In Millions, Except Per Share Data) 1997 1996 1997 1996
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Interest income ...................................... $ 1,346.6 $ 1,310.5 $ 3,989.3 $ 3,859.4
Interest expense ..................................... 566.8 540.5 1,668.0 1,602.8
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Net interest income ................................. 779.8 770.0 2,321.3 2,256.6
Provision for credit losses .......................... 185.0 73.1 370.3 195.7
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Net interest income after provision for credit losses 594.8 696.9 1,951.0 2,060.9
Securities gains ..................................... -- .9 3.6 20.3
Other nonrecurring gains ............................. 9.4 4.2 9.4 330.6
Other noninterest income ............................. 400.3 356.0 1,181.7 1,071.4
Merger-related charges ............................... 440.2 -- 440.2 88.1
Other nonrecurring charges ........................... -- 61.3 -- 118.2
Other noninterest expense ............................ 562.9 581.0 1,727.9 1,744.9
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Income before income taxes .......................... 1.4 415.7 977.6 1,532.0
Taxable-equivalent adjustment ........................ 14.5 16.1 44.2 48.2
Income taxes ......................................... 34.5 143.9 383.8 557.2
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Net income (loss) ................................... $ (47.6) $ 255.7 $ 549.6 $ 926.6
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Return on average assets ............................. (.28)% 1.50% 1.07% 1.84%
Return on average common equity ...................... (3.5) 17.3 12.8 21.5
Net interest margin .................................. 5.03 5.05 5.05 5.03
Efficiency ratio ..................................... 84.3 56.8 61.7 53.3
Efficiency ratio before nonrecurring items ........... 47.7 51.6 49.3 52.4
=========== =========== =========== ===========
Per Common Share:
Net income (loss) .................................... $ (.20) $ .98 $ 2.17 $ 3.59
Dividends paid ....................................... .4650 .4125 1.3950 1.2375
=========== =========== =========== ===========
Nonrecurring charges in the first nine months of 1996 included: $49.5 million
of merger and integration charges; $38.6 million in branch distribution
resizing expenses; a $29.5 million valuation adjustment to reduce the carrying
value of credit card and core deposit intangibles to their estimated fair
value; $10.1 million for a one-time $750 per-employee bonus; $17.3 million to
acquire credit card and revolving credit software and to write-off other
miscellaneous assets; and, a $61.3 million one-time special assessment on SAIF
deposits.
Operating results reflect the following acquisition and divestiture
activity: the April 1997 acquisition of Business and Professional Bank of
Sacramento, California; the February 1997 securitization and sale of $420
million of corporate charge card receivables; the January 1997 acquisitions of
Sun Capital Bancorp of St. George, Utah and the bond indenture services and
paying agency business of Comerica Incorporated; the June 1996 acquisition of
California Bancshares, Inc.; and, the February 1996 acquisition of Omaha-based
FirsTier Financial, Inc.
On September 15, 1997, the Company announced that it would acquire Zappco,
Inc., a bank holding company headquartered in St. Cloud, Minnesota, with three
banks, six banking locations and total assets of $360 million. The acquisition
is subject to regulatory approval and is expected to close late in the fourth
quarter of 1997.
LINE OF BUSINESS FINANCIAL REVIEW
Financial performance is measured by major lines of business, which
include: Retail Banking, Payment Systems, Business Banking and Private Financial
Services, Commercial Banking, and Corporate Trust and Institutional Financial
Services. Business line results are derived from the Company's business unit
profitability reporting system. Designations, assignments, and allocations may
change from time to time as management accounting systems are enhanced or
product lines change. During 1997 certain organization and methodology changes
were made and 1996 results are presented on a consistent basis.
RETAIL BANKING -- Retail Banking delivers products and services to the broad
consumer market and small-business through branch offices, telemarketing, direct
mail, and automated teller machines ("ATM's"). Operating earnings
TABLE 2 LINE OF BUSINESS FINANCIAL PERFORMANCE
Retail Payment
Banking Systems
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For the Three Months Ended September 30 Percent Percent
(Dollars in Millions) 1997 1996 Change 1997 1996 Change
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CONDENSED INCOME STATEMENT:
Net interest income
(taxable-equivalent basis) $373.3 $384.9 (3.0)% $56.5 $60.2 (6.1)%
Provision for credit losses 39.8 27.3 45.8 35.4 37.4 (5.3)
Noninterest income 131.3 119.7 9.7 114.4 97.1 17.8
Noninterest expense 302.5 330.5 (8.5) 71.0 62.9 12.9
Income taxes and
taxable-equivalent adjustment 62.4 56.5 24.7 21.9
-------------------- -------------------
Income before nonrecurring items $99.9 $90.3 10.6 $39.8 $35.1 13.4
==================== ===================
Net nonrecurring items (after-tax)
Net income
AVERAGE BALANCE SHEET DATA:
Commercial loans $1,854 $1,795 3.3 $1,095 $1,234 (11.3)
Consumer loans, excluding
residential mortgage 10,933 10,481 4.3 4,320 4,137 4.4
Residential mortgage loans 4,676 5,232 (10.6) -- -- --
Assets 22,338 24,275 (8.0) 6,561 6,453 1.7
Deposits 36,180 37,728 (4.1) 42 37 13.5
Common equity 1,727 2,001 (13.7) 509 548 (7.1)
-------------------- -------------------
Return on average assets 1.77% 1.48% 2.41% 2.16 %
Return on average common equity
("ROCE") 22.9 18.0 31.0 25.5
Net tangible ROCE ** 39.5 30.1 50.4 40.3
Efficiency ratio 59.9 65.5 41.5 40.0
Efficiency ratio on a cash basis** 57.3 63.1 38.9 37.2
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*Not meaningful
**Calculated by excluding goodwill and other intangibles and the related
amortization.
Note: Nonrecurring items are not allocated to the business lines.
were $99.9 million in the third quarter of 1997 compared with $90.3 million in
the third quarter of 1996. Third quarter return on average assets increased to
1.77 percent from 1.48 percent in the same quarter a year ago. Net tangible
return on average common equity increased to 39.5 percent compared with 30.1
percent in the third quarter of the prior year.
Net interest income declined 3 percent from the third quarter of the prior
year, due primarily to the planned runoff of the residential mortgage loan
portfolio. Noninterest income increased 10 percent in the third quarter as
compared to the same period in the prior year, due primarily to increases in
service charges on deposits and investment products and fees. Noninterest
expense decreased, reflecting the benefits of continued streamlining of branch
operations, as well as the integration of recent business combinations. The
third quarter 1997 efficiency ratio on a cash basis improved to 57.3 percent
from 63.1 percent in the third quarter of 1996.
PAYMENT SYSTEMS -- Payment Systems includes consumer and business credit cards,
corporate and purchasing card services, card-accessed secured and unsecured
lines of credit, ATM processing, and merchant processing. Operating earnings
increased 13 percent in the third quarter of 1997 to $39.8 million compared with
$35.1 million in the third quarter of 1996. Third quarter return on average
assets was 2.41 percent compared with 2.16 percent in the third quarter of 1996,
and net tangible return on average common equity was 50.4 percent compared with
40.3 percent for the same quarter in the previous year.
Fee-based noninterest income increased 18 percent in the third quarter of
1997 compared with the same period in 1996. Excluding the reduction in fees
related to the first quarter 1997 Corporate Card securitization, fee-based
noninterest income increased 23 percent. The increase was due to growth in the
sales volume of the Corporate Card, the Purchasing Card, and the FBS
WorldPerks(R) VISA(R) card. Net interest income decreased 6 percent in the third
quarter of 1997 compared with the same period in 1996 due to a higher proportion
of retail customers who choose to pay off their credit card balance in full each
month and lower retail late fees. Noninterest expense increased due to increased
technology spending and higher variable transaction costs related to increased
sales volume.
BUSINESS BANKING AND PRIVATE FINANCIAL SERVICES -- Business Banking and Private
Financial Services includes middle-market banking services, private banking, and
personal trust. Operating earnings increased 9 percent to
Corporate Trust and
Business Banking and Commercial Institutional Financial Consolidated
Private Financial Services Banking Services Company
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Percent Percent Percent Percent
1997 1996 Change 1997 1996 Change 1997 1996 Change 1997 1996 Change
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$157.3 $147.1 6.9% $176.9 $165.8 6.7% $15.8 $12.0 31.7% $779.8 $770.0 1.3%
5.8 3.3 75.8 9.0 5.1 76.5 -- -- -- 90.0 73.1 23.1
44.7 42.8 4.4 40.3 34.0 18.5 69.6 62.4 11.5 400.3 356.0 12.4
80.4 80.0 .5 61.8 64.5 (4.2) 47.2 43.1 9.5 562.9 581.0 (3.1)
44.4 40.9 56.2 50.0 14.7 12.0 202.4 181.3
-------------------- --------------------- ------------------- ---------------------
$71.4 $65.7 8.7 $90.2 $80.2 12.5 $23.5 $19.3 21.8 324.8 290.6 11.8
==================== ===================== ===================
(372.4) (34.9) --
---------------------
($47.6) $255.7 --
=====================
$11,667 $10,736 8.7 $18,258 $16,742 9.1 $ -- $ -- -- $32,874 $30,507 7.8
562 551 2.0 -- -- -- -- -- -- 15,815 15,169 4.3
325 332 (2.1) -- -- -- -- -- -- 5,001 5,564 (10.1)
15,860 14,547 9.0 22,345 21,206 5.4 1,319 1,390 (5.1) 68,423 67,871 .8
5,531 5,227 5.8 3,785 3,273 15.6 1,497 1,308 14.4 47,035 47,573 (1.1)
1,448 1,424 1.7 1,662 1,484 12.0 390 332 17.5 5,736 5,789 (.9)
-------------------- --------------------- ------------------- ---------------------
1.79% 1.80% 1.60% 1.50% * * 1.88% 1.70%
19.6 18.4 21.5 21.5 23.9% 23.1% 22.3 19.7
33.3 30.0 21.9 21.9 38.9 42.1 32.0 28.4
39.8 42.1 28.5 32.3 55.3 57.9 47.7 51.6
37.1 39.1 28.2 32.1 49.2 51.6 45.2 49.2
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$71.4 million in the third quarter 1997. Third quarter 1997 return on average
assets was 1.79 percent compared with 1.80 percent in the third quarter of 1996.
Third quarter net tangible return on average common equity was 33.3 percent
compared with 30.0 percent in the third quarter of the prior year.
Net interest income increased 7 percent, reflecting growth in average loan
balances. The increase in noninterest income was primarily due to higher
personal trust fees. Noninterest expense was flat in the third quarter of 1997
compared with the third quarter of the prior year, helping the efficiency ratio
on a cash basis to improve to 37.1 percent in the third quarter of 1997 from
39.1 percent in the third quarter of 1996.
COMMERCIAL BANKING -- Commercial Banking provides lending, treasury management,
and other financial services to middle-market, large corporate and mortgage
banking companies. Operating earnings were $90.2 million in the third quarter of
1997 compared with $80.2 million in the third quarter of 1996. Third quarter
1997 return on average assets was 1.60 percent compared with 1.50 percent in
third quarter 1996, and third quarter 1997 net tangible return on average common
equity was 21.9 percent, unchanged from the third quarter of 1996.
Net interest income increased 7 percent, reflecting growth in average loan
balances. Third quarter noninterest income increased $6.3 million or 19 percent
from the same period in 1996, due partially to the recognition of a number of
transaction fees during the quarter which are recurring on an annual basis but
do not occur in a regular quarterly pattern. The efficiency ratio on a cash
basis remained low at 28.2 percent in the third quarter of 1997 compared with
32.1 percent in the third quarter of 1996.
CORPORATE TRUST AND INSTITUTIONAL FINANCIAL SERVICES -- Corporate Trust and
Institutional Financial Services includes institutional and corporate trust
services, investment management services, and a full-service brokerage company.
Operating earnings increased 22 percent to $23.5 million in the third quarter of
1997 compared with $19.3 million in the third quarter of 1996. The net tangible
return on average common equity was 38.9 percent in the third quarter of 1997
compared with 42.1 percent in the third quarter of the prior year.
Net interest income increased 32 percent over 1996, reflecting the
acquisitions of the corporate trust businesses of BankAmerica and Comerica
Incorporated. Noninterest income increased 12 percent from the third quarter of
the prior year due primarily to increases in mutual fund advisory fees and
corporate trust fees. The efficiency ratio on a cash basis improved to 49.2
percent in the third quarter of 1997 from 51.6 percent in the third quarter of
1996, reflecting the
TABLE 3 NET INTEREST INCOME
Three Months Ended Nine Months Ended
-------------------------- --------------------------
September 30 September 30 September 30 September 30
(Dollars In Millions) 1997 1996 1997 1996
========== ========== ========== ==========
Net interest income (taxable-equivalent basis) ...................... $ 779.8 $ 770.0 $ 2,321.3 $ 2,256.6
========== ========== ========== ==========
Average balances of earning assets supported by:
Interest-bearing liabilities ....................................... $ 47,764 $ 47,593 $ 47,954 $ 47,357
Noninterest-bearing liabilities .................................... 13,777 13,046 13,489 12,623
---------- ---------- ---------- ----------
Total earning assets .............................................. $ 61,541 $ 60,639 $ 61,443 $ 59,980
========== ========== ========== ==========
Average yields and weighted average rates (taxable-equivalent basis):
Earning assets yield ............................................... 8.68% 8.60% 8.68% 8.59%
Rate paid on interest-bearing liabilities .......................... 4.71 4.52 4.65 4.52
---------- ---------- ---------- ----------
Gross interest margin ............................................... 3.97% 4.08% 4.03% 4.07%
========== ========== ========== ==========
Net interest margin ................................................. 5.03% 5.05% 5.05% 5.03%
========== ========== ========== ==========
Net interest margin without taxable-equivalent increments ........... 4.93% 4.95% 4.95% 4.92%
========== ========== ========== ==========
effective integration of acquisitions, process re-engineering efforts, and
revenue growth.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME -- Net interest income on a taxable-equivalent basis
increased $9.8 million (1 percent) to $779.8 million in the third quarter of
1997, and $64.7 million (3 percent) to $2.32 billion in the first nine months of
1997, compared with $770.0 million and $2.26 billion in the third quarter and
first nine months of 1996. The increases were primarily the result of growth in
earning assets, driven by loan production, partially offset by reductions in
investment securities and residential mortgages. Third quarter and year-to-date
average loans were up $2.5 billion (5 percent) and $2.8 billion (6 percent) from
the same periods in the prior year. Excluding residential mortgage loans and the
effect of the $420 million first quarter corporate card securitization, average
loans for the third quarter and year-to-date were higher by $3.4 billion (8
percent) and $3.8 billion (9 percent), than the same periods of 1996. These
increases reflected growth in both core commercial and consumer loans. Average
securities for the third quarter and first nine months of 1997 were lower by
$942 million and $911 million compared with the same periods in 1996, reflecting
both maturities and sales of securities. The net interest margin in the third
quarter and first nine months of 1997 was essentially unchanged at 5.03 percent
and 5.05 percent compared with 5.05 percent and 5.03 percent in 1996.
PROVISION FOR CREDIT LOSSES -- The provision for credit losses, before the $95.0
million merger-related provision, was $90.0 million in the third quarter and
$275.3 million in the first nine months of 1997, up $16.9 million (23 percent)
and $79.6 million (41 percent) from the third quarter and first nine months of
1996. Third quarter and year-to-date net charge-offs, before merger-related net
charge-offs of $62.3 million, totaled $102.2 million and $284.1 million, up from
$69.9 million and $190.3 million in the same periods of 1996. These increases
resulted from increased loan volumes and higher commercial net charge-offs. The
$95.0 million merger-related provision and $62.3 million of charge-offs were
taken as a result of efforts to align the classification and charge-off
practices of former USBC with those of the Company. Refer to "Corporate Risk
Management" for further information on credit quality.
NONINTEREST INCOME -- Third quarter 1997 noninterest income was $409.7
million, an increase of $48.6 million (13 percent) from the third quarter of
1996. Noninterest income in the first nine months of 1997 was $1.19 billion,
compared with $1.42 billion in the first nine months of 1996. A number of
nonrecurring gains affected third quarter and year-to-date noninterest income
in 1997 and 1996 as summarized in Table 4. Nonrecurring gains in the third
quarter of 1997 consisted of a $9.4 million gain on the sale of USBC's $45
million affinity credit card portfolio. Nonrecurring gains recorded in the
first nine months of 1997 included $3.6 million in net securities gains, in
addition to the $9.4 million gain on the sale of the credit card portfolio,
discussed above. Nonrecurring gains in the third quarter of 1996 included a
$4.2 million gain on the sale of premises and $.9 million of net securities
gains. Year-to-date 1996 nonrecurring gains included: $190 million, net of
expenses, received for the
TABLE 4 NONINTEREST INCOME
Three Months Ended Nine Months Ended
------------------------- ----------------------------
September 30 September 30 September 30 September 30
(Dollars In Millions) 1997 1996 1997 1996
======== ======== ======== ========
Credit card fee revenue ...................... $ 106.2 $ 90.1 $ 295.7 $ 260.2
Service charges on deposit accounts .......... 102.2 96.4 295.0 279.8
Trust fees ................................... 87.4 74.2 259.2 225.0
Investment products fees and commissions ..... 16.5 13.1 49.0 44.9
Trading account profits and commissions ...... 6.5 8.4 23.8 22.4
Other ........................................ 81.5 73.8 259.0 239.1
-------- -------- -------- --------
Subtotal .................................... 400.3 356.0 1,181.7 1,071.4
Gain on branch and credit card portfolio sales 9.4 -- 9.4 25.6
Securities gains ............................. -- .9 3.6 20.3
Termination fee, net ......................... -- -- -- 190.0
State income tax refund ...................... -- -- -- 65.0
Gain on sale of mortgage banking operations... -- -- -- 45.8
Other ........................................ -- 4.2 -- 4.2
-------- -------- -------- --------
Nonrecurring gains .......................... 9.4 5.1 13.0 350.9
-------- -------- -------- --------
Total noninterest income ................... $ 409.7 $ 361.1 $1,194.7 $1,422.3
======== ======== ======== ========
termination of the First Interstate Bancorp merger agreement; a $65 million
state income tax refund, including interest; a $45.8 million gain on the sale of
the Company's mortgage banking operations; a $25.6 million gain on branch and
credit card portfolio sales; a $4.2 million gain on the sale of premises; and,
$20.3 million of net securities gains.
Excluding nonrecurring items, third quarter 1997 noninterest income was
$400.3 million, an increase of $44.3 million (12 percent), from the same quarter
of 1996 and year-to-date 1997 was $1.18 billion, an increase of $110.3 million
(10 percent) from year-to-date 1996. Excluding the reduction in fees related to
the first quarter corporate card securitization, noninterest income (before
nonrecurring items) increased by $49.4 million (14 percent) and $122.0 million
(11 percent) for the third quarter and year-to-date 1997, compared with the same
periods in 1996. Credit card fee revenue increased as a result of higher sales
volumes for Purchasing and Corporate cards and the First Bank WorldPerks VISA
card, partially offset by the first quarter corporate card securitization.
Excluding the effect of the corporate card securitization, credit card fee
revenue would have increased 24 percent in the third quarter and 18 percent in
the first nine months of 1997, compared with the same periods of 1996. Trust
fees were up due to growth in corporate, institutional and personal trust
businesses.
NONINTEREST EXPENSE -- Noninterest expense increased in 1997 as compared to 1996
as a result of nonrecurring charges. As summarized in Table 5, nonrecurring
items in 1997 consisted of merger-related charges of $440.2 million incurred in
connection with the USBC transaction, including: $232.3 million of severance
costs; $65.8 million of occupancy/equipment writedowns; $43.4 million of
capitalized software and other asset write-offs; $35.0 million of investment
banking and other transaction costs; $27.1 million of conversion expenses
incurred; and, $36.6 million of other merger-related expenses. Third quarter
1996 nonrecurring charges included a $61.3 million one-time special assessment
by the FDIC on SAIF deposits. Additional nonrecurring charges recorded in the
first nine months of 1996 totaled $145.0 million, including: merger and
integration charges of $49.5 million for the acquisitions of FirsTier, the
BankAmerica corporate trust business and West One Bancorp; $38.6 million in
branch distribution resizing expenses; a $29.5 million valuation adjustment to
reduce the carrying value of credit card and core deposit intangibles to their
estimated fair value; $10.1 million for a one-time $750 per-employee bonus; and,
$17.3 million to acquire credit card and revolving credit software and to
write-off other miscellaneous assets.
Excluding nonrecurring items, third quarter and year-to-date noninterest
expense was $562.9 million and $1.73 billion, compared with $581.0 million and
$1.74 billion in the same periods of 1996. Expense reductions in a number of
categories reflect the initial benefits of the merger with USBC. The reduction
in other personnel reflects lower contract labor expense associated with 1996
technology projects now complete. Offsetting a portion of the favorable
variance in contract labor was an increase in professional service expense
related to several 1997 technology initiatives which involve third party
consulting
TABLE 5 NONINTEREST EXPENSE
Three Months Ended Nine Months Ended
-------------------------- -------------------------
September 30 September 30 September 30 September 30
(Dollars In Millions, Except Per Employee Data) 1997 1996 1997 1996
=========== ========= =========== ==========
Salaries** ....................................................... $ 242.2 $ 238.1 $ 729.7 $ 715.3
Employee benefits** .............................................. 49.2 52.2 167.5 167.2
----------- --------- ----------- ----------
Total personnel expense ........................................ 291.4 290.3 897.2 882.5
Net occupancy .................................................... 45.3 44.6 136.3 133.9
Furniture and equipment .......................................... 40.4 42.1 127.4 131.4
Goodwill and other intangible assets** ........................... 29.1 27.1 82.3 73.2
Professional services** .......................................... 18.9 13.5 47.5 40.6
Other personnel costs ............................................ 14.3 23.8 47.1 61.1
Telephone ........................................................ 15.5 15.9 44.8 44.7
Advertising and marketing ........................................ 13.3 15.7 42.2 46.3
Postage .......................................................... 11.3 10.8 34.0 32.5
Printing, stationery and supplies ................................ 8.6 11.0 28.5 32.7
Third party data processing ...................................... 9.0 8.1 28.0 26.3
FDIC insurance ................................................... 2.4 2.5 6.9 11.4
Other** .......................................................... 63.4 75.6 205.7 228.3
----------- --------- ----------- ----------
Subtotal ....................................................... 562.9 581.0 1,727.9 1,744.9
Merger-related ................................................... 440.2 -- 440.2 49.5
SAIF special assessment .......................................... -- 61.3 -- 61.3
Branch distribution resizing ..................................... -- -- -- 38.6
Goodwill and other intangible assets valuation adjustment ........ -- -- -- 29.5
Special employee bonus ........................................... -- -- -- 10.1
Other ............................................................ -- -- -- 17.3
----------- --------- ----------- ----------
Nonrecurring charges ........................................... 440.2 61.3 440.2 206.3
----------- --------- ----------- ----------
Total noninterest expense ..................................... $ 1,003.1 $ 642.3 $ 2,168.1 $ 1,951.2
=========== ========= =========== ==========
Efficiency ratio* ................................................ 84.3% 56.8% 61.7% 53.3%
Efficiency ratio before nonrecurring items ....................... 47.7 51.6 49.3 52.4
Average number of full-time equivalent employees ................. 25,477 27,229 26,171 27,325
Annualized personnel expense per employee** ...................... $ 45,751 $ 42,646 $ 45,710 $ 43,062
=========== ========= =========== ==========
* COMPUTED AS NONINTEREST EXPENSE DIVIDED BY THE SUM OF NET INTEREST INCOME ON
A TAXABLE-EQUIVALENT BASIS AND NONINTEREST INCOME NET OF SECURITIES GAINS
AND LOSSES.
** BEFORE EFFECT OF NONRECURRING ITEMS IN 1996.
arrangements. Total salaries and benefits expense, before nonrecurring items,
increased due to acquisitions in the first quarter of 1997. However, average
full-time equivalent employees decreased 6 percent to 25,477 in third quarter
1997 from 27,229 in third quarter 1996. Excluding nonrecurring items, the
Company's efficiency ratio improved to 47.7 percent for the quarter and 49.3
percent year-to-date, compared with 51.6 percent and 52.4 percent for the same
periods a year ago.
The Company has incurred charges in connection with making its computer
systems year 2000 compliant and expects to continue to incur charges related to
this project through 1999. However, none of these costs are expected to have a
significant impact on the results of operations.
PROVISION FOR INCOME TAXES -- The provision for income taxes was $34.5 million
in the third quarter and $383.8 million in the first nine months of 1997,
compared with $143.9 million and $557.2 million in the same periods of 1996.
The decreases were primarily the result of lower levels of taxable income due
to several nonrecurring items occurring in the third quarter and first nine
months of 1997, as discussed above.
BALANCE SHEET ANALYSIS
LOANS -- The Company's loan portfolio was $54.1 billion at September 30, 1997,
compared with $52.4 billion at December 31, 1996. The portfolio of commercial
loans totaled $33.4 billion at September 30, 1997, up $1.8 billion from December
31, 1996, despite $420 million of
corporate charge card receivables securitized and sold in the first quarter of
1997. The increase was primarily attributable to growth in core commercial
loans. Excluding residential mortgage loan balances, consumer loans were $15.9
billion at September 30, 1997, compared with $15.4 billion at December 31, 1996,
reflecting growth in credit card, student, and home equity and second mortgage
loans.
SECURITIES -- At September 30, 1997, available-for-sale and held-to-maturity
securities were $6.8 billion compared with $7.3 billion at December 31, 1996,
reflecting both maturities and sales of securities.
DEPOSITS -- Noninterest-bearing deposits were $14.4 billion at September 30,
1997, compared with $14.3 billion at December 31, 1996. Interest-bearing
deposits totaled $33.9 billion at September 30, 1997, compared with $35.0
billion at December 31, 1996. The decrease in interest-bearing deposit balances
reflects customers moving funds into alternative investment vehicles and a
reduction in time certificates greater than $100,000 of $231 million.
BORROWINGS -- Short-term borrowings, which include federal funds purchased,
securities sold under agreements to repurchase and other short-term borrowings,
were $4.5 billion at September 30, 1997, down from $6.6 billion at year-end
1996. The decrease was due to the net maturity of $1.1 billion of short-term
bank notes and a $908 million reduction in federal funds purchased and
securities sold under agreements to repurchase.
Long-term debt was $8.7 billion at September 30, 1997, up from $5.4
billion at December 31, 1996. The Company issued $4.1 billion of debt, with an
average original maturity of 2.0 years, under its bank note program, during the
first nine months of 1997, as short-term borrowings were replaced with
long-term debt. These issuances were partially offset by net maturities of $368
million of Federal Home Loan Bank Advances and $445 million of other debt.
CORPORATE RISK MANAGEMENT
CREDIT MANAGEMENT -- The Company's strategy for credit risk management includes
stringent, centralized credit policies, and standard underwriting criteria for
specialized lending categories, such as mortgage banking, real estate
construction, and consumer credit. The strategy also emphasizes diversification
on both a geographic and customer level, regular credit examinations, and
quarterly management reviews of large loans and loans experiencing
deterioration of credit quality. The Company strives to identify potential
problem loans early, take any necessary charge-offs promptly, and maintain
strong reserve levels. In the Company's retail banking operations, a standard
credit scoring system is used to assess consumer credit risks and to price
consumer products accordingly. Commercial banking operations rely on a strong
credit culture that combines prudent credit policies and individual lender
accountability. In addition, commercial lenders generally focus on
middle-market companies within their regions.
In evaluating credit risk, the Company considers loan portfolio
composition, the level of allowance coverage, and macroeconomic factors. Most
economic indicators in the Company's seventeen state primary operating region
(Minnesota, Oregon, Washington, Colorado, California, Idaho, Nebraska, North
Dakota, Nevada, South Dakota, Montana, Iowa, Illinois, Utah, Wisconsin, Kansas,
and Wyoming) compare favorably with national trends. Approximately 85 percent
of the Company's loan portfolio
TABLE 6 ANNUALIZED NET CHARGE-OFFS AS A PERCENTAGE OF AVERAGE LOANS OUTSTANDING
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
September 30 September 30 September 30 September 30
1997 1996 1997 1996
============== ============== ============== =============
COMMERCIAL:
Commercial ................. 1.44% .20% .77% .12%
Real estate:
Commercial mortgage ....... .02 (.23) (.20) (.08)
Construction .............. .24 (.02) .20 .09
------ ----- ----- -----
Total commercial .......... 1.01 .08 .49 .07
CONSUMER:
Residential mortgage ....... .13 .06 .09 .05
Credit card ................ 4.23 4.18 4.20 3.83
Other ...................... 1.28 .88 1.24 .89
------ ----- ----- -----
Total consumer ............ 1.54 1.22 1.47 1.14
------ ----- ----- -----
Total ..................... 1.22% .54% .87% .50%
====== ===== ===== =====
TABLE 7 SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
Three Months Ended Nine Months Ended
------------------------- ----------------------------
September 30 September 30 September 30 September 30
(Dollars In Millions) 1997 1996 1997 1996
========= ========= ========= =========
Balance at beginning of period .................. $ 999.4 $ 984.2 $ 992.5 $ 908.0
CHARGE-OFFS:
Commercial:
Commercial .................................... 93.8 21.0 156.7 60.3
Real estate:
Commercial mortgage .......................... 3.8 2.1 8.6 16.8
Construction ................................. 1.5 .2 4.2 1.5
--------- --------- --------- ---------
Total commercial ............................. 99.1 23.3 169.5 78.6
Consumer:
Residential mortgage .......................... 1.9 1.6 4.4 4.2
Credit card ................................... 44.2 40.7 128.7 109.4
Other ......................................... 47.4 33.2 137.3 100.8
--------- --------- --------- ---------
Total consumer ............................... 93.5 75.5 270.4 214.4
--------- --------- --------- ---------
Total ........................................ 192.6 98.8 439.9 293.0
RECOVERIES:
Commercial:
Commercial .................................... 11.8 10.4 29.7 41.8
Real estate:
Commercial mortgage .......................... 3.4 6.5 20.8 21.5
Construction ................................. .1 .3 .8 .4
--------- --------- --------- ---------
Total commercial ............................. 15.3 17.2 51.3 63.7
Consumer:
Residential mortgage .......................... .2 .7 .9 2.0
Credit card ................................... 4.1 3.7 15.2 11.9
Other ......................................... 8.5 7.3 26.1 25.1
--------- --------- --------- ---------
Total consumer ............................... 12.8 11.7 42.2 39.0
--------- --------- --------- ---------
Total ........................................ 28.1 28.9 93.5 102.7
NET CHARGE-OFFS:
Commercial:
Commercial .................................... 82.0 10.6 127.0 18.5
Real estate:
Commercial mortgage .......................... .4 (4.4) (12.2) (4.7)
Construction ................................. 1.4 (.1) 3.4 1.1
--------- --------- --------- ---------
Total commercial ............................. 83.8 6.1 118.2 14.9
Consumer:
Residential mortgage .......................... 1.7 .9 3.5 2.2
Credit card ................................... 40.1 37.0 113.5 97.5
Other ......................................... 38.9 25.9 111.2 75.7
--------- --------- --------- ---------
Total consumer ............................... 80.7 63.8 228.2 175.4
--------- --------- --------- ---------
Total ........................................ 164.5 69.9 346.4 190.3
Provision charged to operating expense .......... 185.0 73.1 370.3 195.7
Additions related to acquisitions and other ..... -- -- 3.5 74.0
--------- --------- --------- ---------
Balance at end of period ........................ $ 1,019.9 $ 987.4 $ 1,019.9 $ 987.4
========= ========= ========= =========
Allowance as a percentage of period-end loans ... 1.88% 1.91%
Allowance as a percentage of nonperforming loans 343 357
Allowance as a percentage of nonperforming assets 302 286
========= =========
TABLE 8 NONPERFORMING ASSETS*
September 30 December 31
(Dollars In Millions) 1997 1996
============ ============
COMMERCIAL:
Commercial ...................................................... $ 176.2 $ 143.7
Real estate:
Commercial mortgage ............................................ 47.0 44.4
Construction ................................................... 15.4 18.8
-------- --------
Total commercial ............................................... 238.6 206.9
CONSUMER:
Residential mortgage ............................................ 53.7 57.6
Other ........................................................... 4.8 4.8
-------- --------
Total consumer ................................................. 58.5 62.4
-------- --------
Total nonperforming loans ...................................... 297.1 269.3
OTHER REAL ESTATE ................................................ 29.0 43.2
OTHER NONPERFORMING ASSETS ....................................... 12.1 7.5
-------- --------
Total nonperforming assets ..................................... $ 338.2 $ 320.0
======== ========
Accruing loans 90 days or more past due ** ....................... $ 79.5 $ 90.6
Nonperforming loans to total loans ............................... .55% .51%
Nonperforming assets to total loans plus other real estate ....... .62 .61
======== ========
* THROUGHOUT THIS DOCUMENT, NONPERFORMING ASSETS AND RELATED RATIOS DO NOT
INCLUDE LOANS MORE THAN 90 DAYS PAST DUE AND STILL ACCRUING.
** THESE LOANS ARE NOT INCLUDED IN NONPERFORMING ASSETS AND CONTINUE TO ACCRUE
INTEREST BECAUSE THEY ARE SECURED BY COLLATERAL AND/OR ARE IN THE PROCESS OF
COLLECTION AND ARE REASONABLY EXPECTED TO RESULT IN REPAYMENT OR RESTORATION
TO CURRENT STATUS.
consists of credit to businesses and consumers in this operating region.
NET CHARGE-OFFS AND ALLOWANCE FOR CREDIT LOSSES -- Net loan charge-offs totaled
$164.5 million and $346.4 million in the third quarter and first nine months of
1997, compared with $69.9 million and $190.3 million in the same periods of
1996. Included in third quarter and year-to-date net charge-offs was $62.3
million of merger-related charge-offs, taken to align the classification and
charge-off practices of the former USBC with those of the Company.
Commercial loan net charge-offs for the quarter and year-to-date,
excluding merger-related charge-offs of $55.3 million, were $28.5 million and
$62.9 million compared with $6.1 million in the third quarter of 1996 and $14.9
million in the first nine months of 1996. The majority of the third quarter
1997 charge-offs was attributable to one large credit.
Third quarter and year-to-date consumer loan net charge-offs, excluding
merger-related charge-offs of $7.0 million, were $73.7 million and $221.2
million compared with $63.8 million in the third quarter of 1996 and $175.4
million in the first nine of 1996. The increases over corresponding 1996 periods
reflect higher average nonmortgage loan balances and higher loss ratios in
several categories, including bankruptcies.
NONPERFORMING ASSETS -- Nonperforming assets include all nonaccrual loans,
restructured loans, other real estate and other nonperforming assets owned by
the Company. At September 30, 1997, nonperforming assets totaled
TABLE 9 DELINQUENT LOAN RATIOS*
September 30 December 31
90 days or more past due 1997 1996
============ ===========
COMMERCIAL:
Commercial ................. .78% .70%
Real estate:
Commercial mortgage ....... .58 .55
Construction .............. .66 .91
----- -----
Total commercial .......... .72 .68
CONSUMER:
Residential mortgage ....... 1.39 1.35
Credit card ................ .59 .88
Other ...................... .38 .35
----- -----
Total consumer ............ .66 .70
----- -----
Total ..................... .70% .69%
===== =====
* RATIOS INCLUDE NONPERFORMING LOANS AND ARE EXPRESSED AS A PERCENT OF ENDING
LOAN BALANCES.
$338.2 million, up $18.2 million (6 percent) from December 31, 1996. The ratio
of nonperforming assets to loans and other real estate was .62 percent at
September 30, 1997, compared with .61 percent at December 31, 1996, and .66
percent at September 30, 1996. Consumer loans 30 days or more past due were 2.56
percent of the consumer loan portfolio at September 30, 1997, compared with 2.57
percent at December 31, 1996. The percentage of consumer loans 90 days or more
past due of the total consumer loan portfolio totaled .65 percent at September
30, 1997, compared with .71 percent at December 31, 1996.
INTEREST RATE RISK MANAGEMENT -- The Company's policy is to maintain a low
interest rate risk position. The Company limits the exposure of net interest
income to risks associated with interest rate movements through asset/liability
management strategies. The Company's Asset and Liability Management Committee
("ALCO") uses three methods for measuring and managing interest rate risk: Net
Interest Income Simulation Modeling, Market Value/Duration Analysis, and
Repricing Mismatch Analysis.
NET INTEREST INCOME SIMULATION: The Company uses a net interest income
simulation model to measure near-term (next 12 months) risk due to changes in
interest rates. The model incorporates substantially all the Company's assets
and liabilities and off-balance sheet instruments, together with forecasted
changes in the balance sheet mix and assumptions that reflect the current
interest rate environment. Balance sheet changes are based on forecasted
prepayments of loans and securities, loan and deposit growth, and historical
pricing spreads. The model is updated monthly with the current balance sheet
structure and the current forecast of expected balance sheet changes. ALCO uses
the model to simulate the effect of immediate and sustained parallel shifts in
the yield curve of 1 percent, 2 percent and 3 percent as well as the effect of
immediate and sustained flattening and steepening of the yield curve. ALCO also
calculates the sensitivity of the simulation results to changes in the key
assumptions, such as the Prime/LIBOR spread. The results from the simulation
are reviewed by ALCO monthly and are used to guide ALCO's hedging strategies.
ALCO guidelines, approved by the Company's Board of Directors, limit the
estimated change in net interest income over the succeeding 12 months to 2
percent of forecasted net interest income, assuming static Prime/LIBOR spreads
and modest changes in deposit pricing lags, given a 1 percent change in
interest rates.
MARKET VALUE/DURATION ANALYSIS: The net interest income simulation model is
limited by its dependence upon accurate forecasts of future business activity
and the resulting effect on balance sheet assets and liabilities. As a result,
its usefulness is greatly diminished for periods beyond one to two years. The
Company measures this longer-term component of interest rate risk (referred to
as market value or duration risk) by modeling the effect of interest rate
changes on the estimated discounted future cash flows of the Company's assets,
liabilities and off-balance sheet instruments. The amount of market value risk
is subject to limits approved by the Company's Board of Directors.
REPRICING MISMATCH ANALYSIS: A traditional gap analysis provides a
point-in-time measurement of the relationship between the amounts of interest
rate sensitive assets and liabilities repricing in a given time period. While
the analysis provides a useful snapshot of interest rate risk, it does not
capture all aspects of interest rate risk. As a result, ALCO uses the repricing
mismatch analysis primarily for managing interest rate risk beyond one year and
has established limits, approved by the Company's Board of Directors, for gap
positions in the one-to three-year time periods.
TABLE 10 INTEREST RATE SWAP HEDGING PORTFOLIO NOTIONAL BALANCES AND YIELDS BY
MATURITY DATE
At September 30, 1997 (Dollars in Millions)
Weighted Weighted
Average Average
Receive Fixed Swaps* Notional Interest Rate Interest Rate
Maturity Date Amount Received Paid
---------- --------------- --------------
1997 (remaining three months) ............... $ 100 7.81% 5.66%
1998 ........................................ 813 6.03 5.68
1999 ........................................ 1,067 6.31 5.66
2000 ........................................ 388 6.57 5.68
2001 ........................................ 360 6.53 5.66
After 2001 .................................. 1,463 6.83 5.67
-------
Total ....................................... $ 4,191 6.51% 5.67%
======= ==== ====
* AT SEPTEMBER 30, 1997, THE COMPANY HAD NO SWAPS IN ITS HEDGING PORTFOLIO THAT
REQUIRED IT TO PAY FIXED-RATE INTEREST.
USE OF DERIVATIVES TO MANAGE INTEREST RATE RISK: While each of the interest rate
risk measurements has limitations, taken together they represent a comprehensive
view of the magnitude of the Company's interest rate risk over various time
intervals. The Company manages its interest rate risk by entering into
off-balance sheet transactions (primarily interest rate swaps), investing in
fixed rate assets or issuing variable rate liabilities. To a lesser degree, the
Company also uses interest rate caps and floors to hedge this risk. The Company
does not enter into derivative contracts for speculative purposes.
As of September 30, 1997, the Company received payments on $4.2 billion
notional amount of interest rate swap agreements based on fixed interest rates,
and made payments based on variable interest rates. These swaps had a weighted
average rate paid of 5.67 percent and a weighted average rate received of 6.52
percent. The remaining maturity of these agreements ranges from two months to
10 years with an average remaining maturity of 3.7 years. Swaps increased net
interest income for the quarters ended September 30, 1997 and 1996 by $6.2
million and $7.3 million, and the nine months ended September 30, 1997 and 1996
by $18.0 million and $24.4 million.
The Company also purchases interest rate caps and floors to minimize the
impact of fluctuating interest rates on earnings. There were no caps
outstanding at September 30, 1997. To hedge against falling interest rates, the
Company uses interest rate floors. The total notional amount of floor
agreements purchased as of September 30, 1997, was $850 million. LIBOR-based
floors totaled $550 million and Constant Maturity Treasury floors totaled $300
million. The impact of caps and floors on net interest income was not material
for the nine months ended September 30, 1997 and 1996.
CAPITAL MANAGEMENT -- At September 30, 1997, total tangible common equity was
$4.6 billion, or 6.7 percent of assets, compared with 6.7 percent at December
31, 1996. Tier 1 and total risk-based capital ratios were 7.2 percent and 11.4
percent at September 30, 1997 compared with 7.6 percent and 11.9 percent at
December 31, 1996. The September 30, 1997 leverage ratio was 7.3 percent
compared with 7.5 percent at year-end 1996.
On August 1, 1997, the Company issued 109.9 million common shares to
acquire USBC. The Company exchanged .755 shares of its common stock for each
share of USBC common stock. USBC's outstanding stock options were also
converted into stock options for the Company's common stock. In addition, each
outstanding share of USBC cumulative preferred stock was converted into one
share of preferred stock of the combined company, having substantially
identical terms.
Approximately 30.6 million common shares have been repurchased under 1996
Board authorizations, including 4.5 million during 1997. All authorizations
were either completed or rescinded prior to the USBC acquisition.
On November 14, 1997, the Company redeemed all outstanding shares of its
preferred stock at a redemption price of $25 per share, together with accrued
and unpaid dividends.
ACCOUNTING CHANGES
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS -- Effective January
1, 1997, the Company adopted Statement of Financial Accounting Standards No.
("SFAS") 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The Statement uses a "financial components"
approach which focuses on control to determine whether the assets have been
sold. If the entity has surrendered control over the transferred assets, the
transaction is considered a sale. Control is considered surrendered only if the
seller has no legal rights to the assets, even in bankruptcy; the buyer has the
right to pledge or exchange the assets; and, the seller does not maintain
effective control over the assets through an agreement to repurchase or redeem
them. If control is retained, the transaction is then considered to be a
financing. The adoption of SFAS 125 did not have a material effect on the
Company. SFAS 127 amended SFAS
TABLE 11 CAPITAL RATIOS
September 30 December 31
(Dollars in Millions) 1997 1996
============ ===========
Tangible common equity* ..................... $ 4,625 $ 4,625
As a percent of assets ..................... 6.7% 6.7%
Tier 1 capital .............................. $ 4,915 $ 4,983
As a percent of risk-adjusted assets ...... 7.2% 7.6%
Total risk-based capital .................. $ 7,753 $ 7,777
As a percent of risk-adjusted assets ...... 11.4% 11.9%
Leverage ratio .............................. 7.3 7.5
======== ========
* DEFINED AS COMMON EQUITY LESS GOODWILL.
125, deferring for one year its adoption in the accounting for securities
lending, repurchase agreements and other secured financing transactions. The
eventual adoption of SFAS 125 relating to these transaction types is not
expected to have a material effect on the Company.
EARNINGS PER SHARE -- SFAS 128, "Earnings per Share," supersedes APB Opinion 15
"Earnings per Share," by replacing the method currently used to compute
earnings per share with basic and diluted earnings per share. Under the new
requirements, the dilutive effect of stock options will be excluded from the
calculation of basic earnings per share. Diluted earnings per share will be
calculated similarly to the current fully diluted earnings per share. SFAS 128
is effective for the Company's 1997 year-end financial statements. All prior
period earnings per share data shall be restated to conform to the provisions
of this statement. The adoption of SFAS 128 will not have a material impact on
the calculation of the Company's earnings per share.
DERIVATIVE FINANCIAL INSTRUMENTS -- "Disclosure of Accounting Policies for
Derivative Financial Instruments," a final rule issued by the Securities and
Exchange Commission, clarifies and expands existing disclosure requirements for
derivative financial instruments, other financial instruments and derivative
commodity instruments. Specifically, the rule requires descriptions of
accounting policies for derivatives and quantitative and qualitative
information about market risk for derivatives that is to be presented outside
of the financial statements. The Company's derivative trading activities are
not material to the consolidated financial statements; the cash flows from
these activities are included in operating activities. The quantitative and
qualitative information about market risk disclosure requirements are effective
with the 1997 year-end financial statements.
COMPREHENSIVE INCOME -- SFAS 130, "Reporting Comprehensive Income," establishes
standards for the reporting and display of comprehensive income and its
components in a full set of financial statements. The Statement requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed as prominently as other financial statements. The statement requires
the classification of items of other comprehensive income by their nature in a
financial statement and the display of other comprehensive income separately
from retained earnings and capital surplus in the equity section of the
statement of financial position. SFAS 130 is effective January 1, 1998, with
all prior periods presented restated to conform to the provisions of this
statement.
SEGMENT DISCLOSURE -- SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information," requires the disclosure of financial and descriptive
information about reportable operating segments. Operating segments are
components of an enterprise about which financial information is available and
is evaluated regularly in deciding how to allocate resources and assess
performance. The Statement requires the disclosure of profit or loss, certain
specific revenue and expense items, and assets of all operating segments, with
reconciliations to the financial statements. The Statement also requires the
disclosure of descriptive information about the way the operating segments were
determined, the products and services provided by the segments, differences
between measurements used in reporting segment information and those used in
the financial statements, and changes in the measurement of segment amounts
from period to period. SFAS 131 is effective with the 1998 year-end financial
statements, with comparative information for prior periods required.
CONSOLIDATED BALANCE SHEET
September 30 December 31
(In Millions, Except Shares) 1997 1996
============ ===========
(Unaudited)
ASSETS
Cash and due from banks .......................................................... $ 4,342 $ 4,813
Federal funds sold ............................................................... 56 95
Securities purchased under agreements to resell .................................. 473 803
Trading account securities ....................................................... 156 231
Available-for-sale securities .................................................... 6,832 6,473
Held-to-maturity securities (fair value: 12/31/96 - $811) ........................ -- 797
Loans ............................................................................ 54,143 52,355
Less allowance for credit losses ................................................ 1,020 993
------- -------
Net loans ....................................................................... 53,123 51,362
Bank premises and equipment ...................................................... 885 1,018
Interest receivable .............................................................. 401 377
Customers' liability on acceptances .............................................. 591 497
Other assets ..................................................................... 3,315 3,283
------- -------
Total assets ................................................................... $70,174 $69,749
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing ............................................................. $14,433 $14,344
Interest-bearing ............................................................... 33,941 35,012
------- -------
Total deposits ................................................................. 48,374 49,356
Federal funds purchased .......................................................... 1,199 1,672
Securities sold under agreements to repurchase ................................... 1,294 1,729
Other short-term funds borrowed .................................................. 2,004 3,191
Long-term debt ................................................................... 8,710 5,369
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely the junior subordinated debentures of the parent company ......... 600 600
Acceptances outstanding .......................................................... 591 497
Other liabilities ................................................................ 1,661 1,572
------- -------
Total liabilities .............................................................. 64,433 63,986
Shareholders' equity:
Preferred stock ................................................................. 150 150
Common stock, par value $1.25 a share - authorized 500,000,000 shares;
issued: 9/30/97 - 245,029,789 shares; 12/31/96 - 252,883,487 shares ............ 306 316
Capital surplus ................................................................. 1,767 1,929
Retained earnings ............................................................... 3,472 3,809
Unrealized gain on securities, net of tax ....................................... 46 5
Less cost of common stock in treasury:
12/31/96 - 6,877,497 shares .................................................... -- (446)
------- -------
Total shareholders' equity ..................................................... 5,741 5,763
------- -------
Total liabilities and shareholders' equity ..................................... $70,174 $69,749
======== =======
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended
--------------------------------
(In Millions, Except Per Share Data) September 30 September 30
(Unaudited) 1997 1996
============ ============
INTEREST INCOME
Loans .......................................................................... $ 1,211.1 $ 1,149.3
Securities:
Taxable ....................................................................... 89.0 104.5
Exempt from federal income taxes .............................................. 16.8 18.0
Other interest income .......................................................... 15.2 22.6
------------ ------------
Total interest income ........................................................ 1,332.1 1,294.4
INTEREST EXPENSE
Deposits ....................................................................... 362.3 363.6
Federal funds purchased and repurchase agreements .............................. 41.9 51.2
Other short-term funds borrowed ................................................ 28.2 48.2
Long-term debt ................................................................. 122.1 77.5
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely the junior subordinated debentures of the parent company 12.3 --
------------ ------------
Total interest expense ....................................................... 566.8 540.5
------------ ------------
Net interest income ............................................................ 765.3 753.9
Provision for credit losses .................................................... 185.0 73.1
------------ ------------
Net interest income after provision for credit losses .......................... 580.3 680.8
NONINTEREST INCOME
Credit card fee revenue ........................................................ 106.2 90.1
Service charges on deposit accounts ............................................ 102.2 96.4
Trust fees ..................................................................... 87.4 74.2
Gain on sale of mortgage banking operations, branches and other assets ......... 9.4 --
Securities gains ............................................................... -- .9
Termination fee ................................................................ -- --
State income tax refund ........................................................ -- --
Other .......................................................................... 104.5 99.5
------------ ------------
Total noninterest income ..................................................... 409.7 361.1
NONINTEREST EXPENSE
Salaries ....................................................................... 242.2 238.1
Employee benefits .............................................................. 49.2 52.2
Net occupancy .................................................................. 45.3 44.6
Furniture and equipment ........................................................ 40.4 42.1
Goodwill and other intangible assets ........................................... 29.1 27.1
Professional services .......................................................... 18.9 13.5
Other personnel costs .......................................................... 14.3 23.8
Merger, integration, and resizing .............................................. 440.2 --
SAIF special assessment ........................................................ -- 61.3
Other .......................................................................... 123.5 139.6
------------ ------------
Total noninterest expense .................................................... 1,003.1 642.3
------------ ------------
Income (loss) before income taxes .............................................. (13.1) 399.6
Applicable income taxes ........................................................ 34.5 143.9
------------ ------------
Net income (loss) .............................................................. $ (47.6) $ 255.7
============ ============
Net income (loss) applicable to common equity .................................. $ (50.7) $ 251.1
============ ============
EARNINGS PER COMMON SHARE
Average common and common equivalent shares .................................... 248,459,568 254,981,925
Net income (loss) .............................................................. $ (.20) $ .98
============ ============
WIDE TABLE CONTINUED FROM ABOVE: CONSOLIDATED STATEMENT OF INCOME
Nine Months Ended
-----------------------------------
(In Millions, Except Per Share Data) September 30 September 30
(Unaudited) 1997 1996
=============== ===============
INTEREST INCOME
Loans .......................................................................... $ 3,561.9 $ 3,370.3
Securities:
Taxable ....................................................................... 281.0 319.4
Exempt from federal income taxes .............................................. 51.5 53.5
Other interest income .......................................................... 50.7 68.0
------------ ------------
Total interest income ........................................................ 3,945.1 3,811.2
INTEREST EXPENSE
Deposits ....................................................................... 1,077.7 1,078.7
Federal funds purchased and repurchase agreements .............................. 140.6 150.2
Other short-term funds borrowed ................................................ 98.2 149.2
Long-term debt ................................................................. 314.6 224.7
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely the junior subordinated debentures of the parent company 36.9 --
------------ ------------
Total interest expense ....................................................... 1,668.0 1,602.8
------------ ------------
Net interest income ............................................................ 2,277.1 2,208.4
Provision for credit losses .................................................... 370.3 195.7
------------ ------------
Net interest income after provision for credit losses .......................... 1,906.8 2,012.7
NONINTEREST INCOME
Credit card fee revenue ........................................................ 295.7 260.2
Service charges on deposit accounts ............................................ 295.0 279.8
Trust fees ..................................................................... 259.2 225.0
Gain on sale of mortgage banking operations, branches and other assets ......... 9.4 71.4
Securities gains ............................................................... 3.6 20.3
Termination fee ................................................................ -- 190.0
State income tax refund ........................................................ -- 65.0
Other .......................................................................... 331.8 310.6
------------ ------------
Total noninterest income ..................................................... 1,194.7 1,422.3
NONINTEREST EXPENSE
Salaries ....................................................................... 729.7 724.5
Employee benefits .............................................................. 167.5 168.1
Net occupancy .................................................................. 136.3 133.9
Furniture and equipment ........................................................ 127.4 131.4
Goodwill and other intangible assets ........................................... 82.3 102.7
Professional services .......................................................... 47.5 40.6
Other personnel costs .......................................................... 47.1 61.1
Merger, integration, and resizing .............................................. 440.2 88.1
SAIF special assessment ........................................................ -- 61.3
Other .......................................................................... 390.1 439.5
------------ ------------
Total noninterest expense .................................................... 2,168.1 1,951.2
------------ ------------
Income (loss) before income taxes .............................................. 933.4 1,483.8
Applicable income taxes ........................................................ 383.8 557.2
------------ ------------
Net income (loss) .............................................................. $ 549.6 $ 926.6
============ ============
Net income (loss) applicable to common equity .................................. $ 540.4 $ 912.6
============ ============
EARNINGS PER COMMON SHARE
Average common and common equivalent shares .................................... 248,819,246 254,385,569
Net income (loss) .............................................................. $ 2.17 $ 3.59
============ ============
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common
(In Millions, Except Shares) Shares Preferred Common Capital
(Unaudited) Outstanding* Stock Stock Surplus
=========== =========== =========== =============
BALANCE DECEMBER 31, 1995 ....... 241,031,881 $ 253.2 $ 311.6 $ 1,867.9
Net income ......................
Dividends declared:
Preferred ......................
Common .........................
Purchase and retirement of
treasury stock ................. (18,985,330) (13.1) (521.8)
Issuance of common stock:
Acquisitions ................... 23,751,183 19.8 677.2
Dividend reinvestment .......... 242,080 .1 4.3
Stock option and stock
purchase plans ................ 2,895,153 1.3 49.0
Redemption/conversion of
preferred stock ................ 549,061 (15.9)
Change in unrealized
gains/(losses) .................
----------- -------- -------- ----------
BALANCE SEPTEMBER 30, 1996 ...... 249,484,028 $ 237.3 $ 319.7 $ 2,076.6
============ ========= ========= ===========
BALANCE DECEMBER 31, 1996 ....... 246,005,990 $ 150.0 $ 316.1 $ 1,929.1
Net income ......................
Dividends declared:
Preferred ......................
Common .........................
Purchase and retirement of
treasury stock ................. (4,848,906) (13.6) (293.9)
Issuance of common stock:
Acquisitions ................... 302,352 .4 14.4
Dividend reinvestment .......... 165,946 .2 8.9
Stock option and stock
purchase plans ................ 3,404,407 3.2 108.7
Change in unrealized
gains/(losses) .................
----------- -------- -------- ----------
BALANCE SEPTEMBER 30, 1997 ...... 245,029,789 $ 150.0 $ 306.3 $ 1,767.2
============ ========= ========= ===========
WIDE TABLE CONTINUED FROM ABOVE: CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Unrealized
Gains/(Losses)
(In Millions, Except Shares) Retained on Securities, Treasury
(Unaudited) Earnings Net of Tax Stock** Total
========== ================ ============ =============
BALANCE DECEMBER 31, 1995 ....... $ 3,275.1 $ 31.9 $ (397.8) $ 5,341.9
Net income ...................... 926.6 926.6
Dividends declared:
Preferred ...................... (14.0) (14.0)
Common ......................... (306.1) (306.1)
Purchase and retirement of
treasury stock ................. (508.0) (1,042.9)
Issuance of common stock:
Acquisitions ................... (44.4) 384.2 1,036.8
Dividend reinvestment .......... 9.1 13.5
Stock option and stock
purchase plans ................ (78.6) 99.1 70.8
Redemption/conversion of
preferred stock ................ (16.1) 32.0 --
Change in unrealized
gains/(losses) ................. (58.7) (58.7)
---------- ------- --------- ----------
BALANCE SEPTEMBER 30, 1996 ...... $ 3,742.5 $ (26.8) $ (381.4) $ 5,967.9
========== ======= ========= ==========
BALANCE DECEMBER 31, 1996 ....... $ 3,809.4 $ 4.7 $ (445.9) $ 5,763.4
Net income ...................... 549.6 549.6
Dividends declared:
Preferred ...................... (9.2) (9.2)
Common ........................ (331.4) (331.4)
Purchase and retirement of
treasury stock ................. (514.5) 395.8 (426.2)
Issuance of common stock:
Acquisitions ................... 14.8
Dividend reinvestment .......... 5.6 14.7
Stock option and stock
purchase plans ................ (32.2) 44.5 124.2
Change in unrealized
gains/(losses) ................. 41.2 41.2
---------- ------- --------- ----------
BALANCE SEPTEMBER 30, 1997 ..... $ 3,471.7 $ 45.9 $ -- $ 5,741.1
========== ======= ========= ==========
* REPRESENTS TOTAL COMMON SHARES LESS COMMON STOCK HELD IN TREASURY.
** ENDING TREASURY SHARES WERE 6,877,497 AT DECEMBER 31, 1996; 6,300,788 AT
SEPTEMBER 30, 1996; AND 8,297,756 AT DECEMBER 31, 1995.
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended
---------------------------
September 30 September 30
(Unaudited, In Millions) 1997 1996
============ ============
OPERATING ACTIVITIES
Net cash provided by operating activities ................................ $ 1,075.0 $ 1,657.8
---------- ----------
INVESTING ACTIVITIES
Net cash provided (used) by:
Interest-bearing deposits with banks ...................................... 3.1 (1.1)
Loans outstanding ......................................................... (2,150.8) (1,278.1)
Securities purchased under agreements to resell ........................... 331.5 (163.8)
Available-for-sale securities:
Sales ..................................................................... 982.5 1,600.8
Maturities ................................................................ 1,130.9 1,633.0
Purchases ................................................................. (1,629.9) (1,172.2)
Maturities of held-to-maturity securities .................................. 37.4 86.0
Proceeds from sales of other real estate ................................... 52.2 94.2
Net purchases of bank premises and equipment ............................... (43.5) (86.6)
Securitization of corporate charge card balances ........................... 418.1 --
Cash and cash equivalents of acquired subsidiaries ......................... 4.5 245.8
Acquisitions, net of cash received ......................................... (23.6) (37.9)
Sales of subsidiary operations ............................................. -- (70.3)
Other-net .................................................................. (82.3) (26.4)
---------- ----------
Net cash (used) provided by investing activities ......................... (969.9) 823.4
---------- ----------
FINANCING ACTIVITIES
Net cash (used) provided by:
Deposits .................................................................. (1,226.9) 294.2
Federal funds purchased and securities sold under agreements to repurchase (908.6) (852.8)
Short-term borrowings ..................................................... (1,186.6) (126.5)
Long-term debt transactions:
Proceeds .................................................................. 4,524.7 1,310.9
Principal payments ........................................................ (1,189.5) (840.5)
Proceeds from issuance of common stock ..................................... 138.9 84.3
Purchase of treasury stock ................................................. (426.2) (1,042.9)
Cash dividends ............................................................. (340.6) (300.3)
---------- ----------
Net cash used by financing activities .................................... (614.8) (1,473.6)
---------- ----------
Change in cash and cash equivalents ...................................... (509.7) 1,007.6
Cash and cash equivalents at beginning of period ........................... 4,908.1 4,508.3
---------- ----------
Cash and cash equivalents at end of period ............................... $ 4,398.4 $ 5,515.9
========== ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include
all information and footnotes necessary for a complete presentation of
financial position, results of operations, and cash flow activity required
under generally accepted accounting principles. In the opinion of management of
the Company, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of results have been made and the Company
believes such presentation is adequate to make the information presented not
misleading. For further information, refer to the Company's Current Report on
Form 8-K dated September 30, 1997, which includes the Company's restated
supplemental financial statements and footnotes for the year ended December 31,
1996. The supplemental financial statements give effect to the merger of U. S.
Bancorp into First Bank System, Inc., as discussed in Note C below. Certain
amounts in prior periods have been reclassified to conform to the current
presentation.
NOTE B ACCOUNTING CHANGES
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES -- EFFECTIVE January 1, 1997, the Company adopted Statement of
Financial Accounting Standards No. ("SFAS") 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
Statement uses a "financial components" approach which focuses on control to
determine whether assets have been sold. If the entity has surrendered control
over the transferred assets, the transaction is considered a sale. Control is
considered surrendered only if the seller has no legal right to the assets,
even in bankruptcy; the buyer has the right to pledge or exchange the assets;
and the seller does not maintain effective control over the assets through an
agreement to repurchase or redeem them. If control is retained, the transaction
is then considered a financing. The adoption of SFAS 125 did not have a
material effect on the Company. SFAS 125 has been amended (SFAS 127), deferring
for one year its adoption in the accounting for securities lending, repurchase
agreements and other secured financing transactions. The adoption of SFAS 125
relating to these transaction types is not expected to have a material effect
on the Company.
EARNINGS PER SHARE -- SFAS 128, "Earnings per Share," supersedes APB Opinion
15, "Earnings per Share," by replacing the method currently used to compute
earnings per share with basic and diluted earnings per share. Under the new
requirements, the dilutive effect of stock options will be excluded from the
calculation of basic earnings per share. Diluted earnings per share will be
calculated similarly to the current fully diluted earnings per share. SFAS 128
is effective for the Company's 1997 year-end financial statements. All prior
period earnings per share data presented shall be restated to conform to the
provisions of this statement. The adoption of SFAS 128 will not have a material
impact on the calculation of the Company's earnings per share.
DERIVATIVE FINANCIAL INSTRUMENTS -- "Disclosure of Accounting Policies for
Derivative Financial Instruments," a final rule issued by the Securities and
Exchange Commission, is intended to clarify and expand existing disclosure
requirements for derivative financial instruments, other financial instruments
and derivative commodity instruments. Specifically, the rule requires
descriptions of accounting policies for derivatives and quantitative and
qualitative information about market risk for derivatives that is to be
presented outside of the financial statements. The Company's derivative trading
activities are not material to the consolidated financial statements; the
cashflows from these activities are included in operating activities. The
quantitative and qualitative information about market risk disclosure
requirements are effective with the 1997 year-end financial statements.
COMPREHENSIVE INCOME -- SFAS 130, "Reporting Comprehensive Income,"
establishes standards for the reporting and display of comprehensive income and
its components in a full set of financial statements. The Statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed as prominently as other financial statements. The Statement requires
the classification of items of other comprehensive income by their nature in a
financial statement and the display of other comprehensive
income separately from retained earnings and capital surplus in the equity
section of the statement of financial position. SFAS 130 is effective January
1, 1998, with all prior periods presented restated to conform to the provisions
of this statement.
SEGMENT DISCLOSURE -- SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information," requires the disclosure of financial and descriptive
information about reportable operating segments. Operating segments are
components of an enterprise about which financial information is available and
is evaluated regularly in deciding how to allocate resources and assess
performance. The Statement requires the disclosure of profit or loss, certain
specific revenue and expense items, and assets of all operating segments, with
reconciliations to the financial statements. The Statement also requires the
disclosure of descriptive information about the way the operating segments were
determined, the products and services provided by the segments, differences
between measurements used in reporting segment information and those used in
the financial statements, and changes in the measurement of segment amounts
from period to period. SFAS 131 is effective with the 1998 year-end financial
statements, with comparative information for prior periods required.
NOTE C BUSINESS COMBINATIONS AND DIVESTITURES
U. S. BANCORP -- On August 1, 1997, First Bank System, Inc. ("FBS") issued
109.9 million common shares to acquire U. S. Bancorp ("USBC"). As of the
acquisition date, the combined institution, now known as U.S. Bancorp, had
approximately $70 billion in assets, $49 billion in deposits and served nearly
four million households and 475,000 businesses in 17 contiguous states from
Illinois to Washington. The Company exchanged .755 shares of its common stock
for each share of USBC common stock. USBC's outstanding stock options were also
converted into stock options for the Company's common stock. In addition, each
outstanding share of USBC cumulative preferred stock was converted into one
share of preferred stock of the combined company having substantially identical
terms. The transaction was accounted for as a pooling-of-interests.
Accordingly, the Company's financial statements have been restated for all
periods prior to the acquisition to include the accounts and operations of
USBC.
Operating results of FBS and USBC individually, as previously reported,
and the combined company, reflecting certain reclassifications to conform to
the current presentation, for the three months ended June 30, 1997, were:
Three Months Ended
(In Millions) June 30, 1997
===================
FBS
Net interest income ........ $ 385.0
Net income ................. 178.3
USBC
Net interest income ........ 403.3
Net income ................. 125.6
Combined
Net interest income ........ 764.8
Net income ................. 303.9
========
ZAPPCO, INC. -- On September 15, 1997, The Company announced that it would
acquire Zappco, Inc., a bank holding company headquartered in St. Cloud,
Minnesota, with three banks, six banking locations, and total assets of $360
million. The acquisition is subject to regulatory approval and is expected to
close around year end 1997.
COMERICA CORPORATE TRUST BUSINESS -- On January 31, 1997, the Company completed
its acquisition of the bond indenture services and paying agency business of
Comerica Incorporated. This business serves approximately 860 municipal and
corporate clients with about 2,400 bond issues.
CALIFORNIA BANCSHARES, INC. -- On June 6, 1996, the Company acquired California
Bancshares, Inc. ("CBI"), a holding company for a multi-bank commercial banking
operation serving the East San Francisco Bay Area and the Central Valley of
Northern California. CBI had $1.6 billion in assets and $1.4 billion in
deposits. The total value of the transaction, accounted for as a purchase, was
approximately $325 million.
FIRSTIER FINANCIAL, INC. -- On February 16, 1996, the Company completed its
acquisition of Omaha-based FirsTier Financial, Inc. ("FirsTier"). FirsTier had
$3.7 billion in assets, $2.9 billion in deposits, and 63 offices in Nebraska
and Iowa. The total value of the transaction, accounted for as a purchase, was
approximately $717 million.
OTHER ACQUISITIONS -- Effective January 1, 1997, the Company completed its
acquisition of the $70 million Sun Capital Bancorp of St. George, Utah.
Effective April 30, 1997, the Company completed its acquisition of the $214
million Business and Professional Bank of Sacramento, California. These
transactions were accounted for as purchase acquisitions.
NOTE D SECURITIES
The detail of the amortized cost and fair value of available-for-sale securities
consisted of the following:
September 30, 1997 December 31, 1996
-------------------- ----------------------
Amortized Fair Amortized Fair
(In Millions) Cost Value Cost Value
======== ======== ========= =====
U.S. Treasury ............. $ 635 $ 631 $1,035 $1,028
Mortgage-backed ........... 4,304 4,335 4,097 4,104
Other U.S. agencies ....... 393 401 589 595
State and political ....... 1,322 1,349 574 573
Other ..................... 104 116 167 173
------ ------ ------ ------
Total ................... $6,758 $6,832 $6,462 $6,473
====== ====== ====== ======
NOTE E LOANS
The composition of the loan portfolio was as follows:
September 30 December 31
(In Millions) 1997 1996
============ ===========
COMMERCIAL:
Commercial ............................... $22,908 $21,393
Real estate:
Commercial mortgage ..................... 8,080 8,022
Construction ............................ 2,365 2,125
------- -------
Total commercial ....................... 33,353 31,540
------- -------
CONSUMER:
Residential mortgage ..................... 4,693 5,225
Residential mortgage held for sale ....... 193 148
Home equity and second mortgage .......... 5,268 4,798
Credit card .............................. 3,933 3,632
Automobile and other installment ......... 4,526 4,851
Revolving credit ......................... 1,552 1,581
Student * ................................ 625 580
------- -------
Total consumer ......................... 20,790 20,815
------- -------
Total loans ............................ $54,143 $52,355
======= =======
* ALL OR PART OF THE STUDENT LOAN PORTFOLIO MAY BE SOLD WHEN THE REPAYMENT
PERIOD BEGINS.
At September 30, 1997, the Company had $239 million in loans considered
impaired under SFAS 114 included in its nonaccrual loans. The carrying value of
the impaired loans was less than or equal to the appraised collateral value or
the present value of expected future cash flows and, accordingly, no allowance
for credit losses was specifically allocated to impaired loans. For the quarter
ended September 30, 1997, the average recorded investment in impaired loans was
approximately $249 million. No interest income was recognized on impaired loans
during the quarter.
NOTE F LONG-TERM DEBT
Long-term debt (debt with original maturities of more than one year) consisted
of the following:
September 30 December 31
(In Millions) 1997 1996
============ ===========
Fixed-rate subordinated notes (6.00%to 8.35%) - maturities to June 2026 ..... $1,850 $1,850
Step-up subordinated notes - due August 15, 2005 ............................ 100 100
Floating-rate notes - due February 27, 2000 ................................. 250 --
Floating-rate notes - due November 15, 2006 ................................. 200 200
Floating-rate subordinated notes - due November 30, 2010 .................... 107 107
Federal Home Loan Bank advances (5.05%to 9.11%) - maturities to October 2026 1,176 1,543
Medium-term notes (5.53% to 7.12%) - maturities to August 2001 .............. 935 671
Bank notes (5.53%to 6.38%) - maturities to September 2002 ................... 4,004 814
Other ....................................................................... 88 84
------- -------
Total ..................................................................... $8,710 $5,369
====== ======
NOTE G SHAREHOLDERS' EQUITY
Approximately 30.6 million common shares have been repurchased under 1996 Board
authorizations, including 4.5 million during 1997. All authorizations were
either completed or rescinded prior to the USBC acquisition. Refer to Note C
for further information about the USBC acquisition. On November 14, 1997, the
Company redeemed all outstanding shares of its preferred stock at a redemption
price of $25 per share, together with accrued and unpaid dividends.
NOTE H MERGER, INTEGRATION AND RESIZING CHARGES
The Company recorded merger and integration charges of $440.2 million in the
third quarter of 1997. The charges associated with the acquisition of USBC
included: $232.3 million in severance costs; $65.8 million of occupancy and
equipment writedowns; $43.4 million of capitalized software and other asset
writeoffs; $35.0 million of investment banking and other transaction costs;
$27.1 million of conversion expense incurred; and, $36.6 million of other
merger-related expenses. Merger and integration charges of $49.5 million
recorded in 1996 were associated with the acquisitions of FirsTier, the
BankAmerica corporate trust business, and West One Bancorp. Resizing charges of
$38.6 million were associated with the Company's streamlining of the branch
distribution network and trust operations as the Company expands its
alternative distribution channels, including telemarketing, automated teller
machines and in-store branches. The components of the charges are shown below:
Nine Months Ended
September 30
-----------------
1997 1996
========= =======
Severance ....................... $ 232.3 $ 27.4
Premises writedowns ............. 65.8 27.4
Systems conversions and other
merger-related expenses ........ 142.1 33.3
------- ------
Total merger, integration and
resizing charges ............... $ 440.2 $ 88.1
======= ======
Systems conversions and other merger-related expenses are recorded as
incurred and are associated with the preparation and mailing of numerous
customer communications for the acquisitions and conversion of customer
accounts, printing and distribution of training materials and policy and
procedure manuals, outside consulting fees, and similar expenses relating to
the conversions and integration of acquired branches and operations. Premise
writedowns represent write-offs for redundant office space, equipment and
branches. Severance charges include the cost of terminations, other benefits,
and outplacement costs associated with the elimination of employees primarily
in branch offices and centralized corporate support and data processing
functions. The following table presents a summary of activity with respect to
the Company's merger, integration and resizing accrual:
Nine Months Ended
September 30
(In Millions) 1997
=================
BALANCE AT DECEMBER 31, 1996 ................. $ 33.6
Provision charged to operating expense ....... 440.2
Cash outlays ................................. 115.1
Noncash writedowns ........................... 101.5
------
Balance at September 30, 1997 ................ $257.2
======
The Company expects to incur an additional $190.0 million of
merger-related expenses through the third quarter of 1998.
NOTE I INCOME TAXES
The components of income tax expense were:
Three Months Ended Nine Months Ended
--------------------------- ----------------------------
September 30 September 30 September 30 September 30
(In Millions) 1997 1996 1997 1996
============ ============ ============ ============
FEDERAL:
Current tax ........................... $ 16.8 $ 116.9 $ 293.8 $ 450.8
Deferred tax provision ................ 10.6 7.4 31.8 38.3
------- -------- -------- -------
Federal income tax ................... 27.4 124.3 325.6 489.1
STATE:
Current tax ........................... 10.1 18.5 58.6 64.4
Deferred tax (credit) provision ....... (3.0) 1.1 (.4) 3.7
------- -------- -------- ----------
State income tax ..................... 7.1 19.6 58.2 68.1
------- -------- -------- -------
Total income tax provision ........... $ 34.5 $ 143.9 $ 383.8 $ 557.2
======= ======== ======== =======
The reconciliation between income tax expense and the amount computed by
applying the statutory federal income tax rate was as follows:
Three Months Ended Nine Months Ended
---------------------------- --------------------------
September 30 September 30 September 30 September 30
(In Millions) 1997 1996 1997 1996
============ ============ ============ ============
Tax at statutory rate (35%) ............................................ $ (4.6) $ 139.9 $ 326.7 $ 519.3
State income tax, at statutory rates, net of federal tax benefit ....... 7.5 12.7 37.8 44.2
Tax effect of:
Tax-exempt interest:
Loans ................................................................ (9.8) (1.1) (11.7) (3.5)
Securities ........................................................... (3.6) (8.7) (18.2) (25.9)
Amortization of goodwill .............................................. 5.2 5.8 19.3 29.6
Merger and integration charges ........................................ 39.1 -- 39.1 --
Tax credits and other items ........................................... .7 (4.7) (9.2) (6.5)
-------- --------- --------- ---------
Applicable income taxes ................................................ $ 34.5 $ 143.9 $ 383.8 $ 557.2
======== ========= ========= =========
The Company's net deferred tax asset was $118.0 million at September 30, 1997,
and $174.0 million at December 31, 1996.
NOTE J COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS
In the normal course of business, the Company uses various off-balance sheet
financial instruments to meet the financing need of its customers and to manage
its interest rate risk. These instruments carry varying degrees of credit,
interest rate or liquidity risk. The contract or notional amounts of these
financial instruments were as follows:
September 30 December 31
(In Millions) 1997 1996
============ ===========
Commitments to extend credit:
Commercial ................................................................ $ 24,240 $ 24,482
Corporate and purchasing cards ............................................ 19,611 13,820
Consumer credit card ...................................................... 15,034 14,140
Other consumer ............................................................ 4,389 4,665
Letters of credit:
Standby ................................................................... 2,694 2,634
Commercial ................................................................ 453 355
Interest rate swap contracts:
Hedges .................................................................... 4,191 3,651
Intermediated ............................................................. 922 590
Options contracts:
Hedge interest rate floors purchased ...................................... 850 1,250
Hedge interest rate caps purchased ........................................ -- 100
Intermediated interest rate and foreign exchange caps and floors purchased 198 134
Intermediated interest rate and foreign exchange caps and floors written 199 169
Liquidity support guarantees ............................................... -- 81
Forward contracts ............................................................ 193 197
Commitments to sell loans .................................................... -- 3
Mortgages sold with recourse ................................................. 98 114
Foreign currency commitments:
Commitments to purchase ................................................... 834 952
Commitments to sell ....................................................... 830 953
======== ========
The Company received fixed rate interest and paid floating rate interest
on all swap hedges as of September 30, 1997. Activity for the nine months ended
September 30, 1997, with respect to interest rate swaps which the Company uses
to hedge loans, deposits and long-term debt was as follows:
(In Millions)
Notional amount outstanding at December 31, 1996 ......... 3,651
Additions ................................................ 1,684
Maturities ............................................... (336)
Terminations ............................................. (808)
------
Notional amount outstanding at September 30, 1997 ....... 4,191
======
Weighted average interest rates paid ..................... 5.67%
Weighted average interest rates received ................. 6.51
======
LIBOR-based interest rate floors totaling $550 million with an average
remaining maturity of eight months at September 30, 1997, and $950 million with
an average remaining maturity of 12 months at December 31, 1996, hedged floating
rate commercial loans. The strike rate on these LIBOR-based floors ranged from
3.25 percent to 4.00 percent at September 30, 1997, and December 31, 1996.
Constant Maturity Treasury (CMT) interest rate floors totaling $300 million with
an average remaining maturity of nine months at September 30, 1997, and 18
months at December 31, 1996, hedged the prepayment risk of fixed rate
residential mortgage loans. The strike rate on these CMT floors ranged from 5.60
percent to 5.70 percent at September 30, 1997, and December 31, 1996. The total
notional amount of interest rate cap agreements purchased was $100 million with
a 3-month LIBOR strike rate of 6.00 percent at December 31, 1996.
Net unamortized deferred gains relating to swaps, options and futures,
which amortize through the year 2006, were $3.5 million at September 30, 1997.
NOTE K SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET -- Time certificates of deposit in denominations of
$100,000 or more totaled $3,171 million and $3,402 million at September 30,
1997, and December 31, 1996, respectively.
CONSOLIDATED STATEMENT OF CASH FLOWS -- Listed below are supplemental
disclosures to the Consolidated Statement of Cash Flows.
Nine Months Ended
--------------------------
September 30 September 30
(In Millions) 1997 1996
============ ============
Income taxes paid .................................................. $ 441.6 $ 401.1
Interest paid ...................................................... 1,625.2 1,585.2
Net noncash transfers to foreclosed property ....................... 36.7 98.2
Change in unrealized gain (loss) on available-for-sale securities,
net of taxes of $24.6 in 1997 and $36.6 in 1996 ................. 41.2 (58.7)
========= ==========
Cash acquisitions of businesses:
Fair value of noncash assets acquired ........................... $ 194.6 $ 37.9
Liabilities assumed ............................................. (171.0) --
--------- ----------
Net ............................................................ $ 23.6 $ 37.9
========= ==========
Stock acquisitions of businesses:
Fair value of noncash assets acquired ........................... $ 77.2 $ 5,284.9
Net cash acquired ............................................... 4.5 245.8
Liabilities assumed ............................................. (66.9) (4,493.9)
--------- ----------
Net value of common stock issued ............................... $ 14.8 $ 1,036.8
========= ==========
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
For the Three Months Ended September 30
1997
---------------------------------------
Yields
(In Millions) and
(Unaudited) Balance Interest Rates
========= =========== ========
ASSETS
Securities:
U.S. Treasury ............................................ $ 664 $ 9.7 5.80%
Mortgage-backed .......................................... 4,166 71.1 6.77
State and political ...................................... 1,077 21.1 7.77
U.S. agencies and other .................................. 512 7.5 5.81
------ -------
Total securities ........................................ 6,419 109.4 6.76
Unrealized gain (loss) on available-for-sale securities ... 44
------
Net securities ......................................... 6,463
Held-to-maturity securities ............................... 254 5.0 7.81
Trading account securities ................................ 153 2.3 5.96
Federal funds sold and resale agreements .................. 515 6.8 5.24
Loans:
Commercial:
Commercial .............................................. 22,574 465.0 8.17
Real Estate:
Commercial Mortgage .................................... 8,006 183.0 9.07
Construction ........................................... 2,294 55.6 9.62
------ -------
Total Commercial ....................................... 32,874 703.6 8.49
Consumer:
Residential Mortgage .................................... 4,835 96.8 7.94
Residential mortgage held for sale ...................... 166 3.2 7.65
Home equity and second mortgage ......................... 5,204 127.6 9.73
Credit card ............................................. 3,764 117.9 12.43
Other ................................................... 6,847 167.8 9.72
------ -------
Total consumer ......................................... 20,816 513.3 9.78
------ -------
Total loans ............................................ 53,690 1,216.9 8.99
Allowance for credit losses .............................. 991
------
Net loans ............................................... 52,699
Other earning assets ...................................... 510 6.2 4.82
------ -------
Total earning assets* .................................. 61,541 1,346.6 8.68
Cash and due from banks ................................... 3,483
Other assets .............................................. 4,346
------
Total assets ........................................... $68,423
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits .............................. $12,620
Interest-bearing deposits:
Interest checking ........................................ 5,410 22.8 1.67
Money market accounts .................................... 10,453 102.0 3.87
Other savings accounts ................................... 2,736 14.9 2.16
Savings certificates ..................................... 12,265 169.4 5.48
Certificates over $100,000 ............................... 3,551 53.2 5.94
------ -------
Total interest-bearing deposits ......................... 34,415 362.3 4.18
Short-term borrowings ..................................... 4,741 70.1 5.87
Long-term debt ............................................ 8,008 122.1 6.05
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely the junior
subordinated debentures of the parent company ............ 600 12.3 8.18
------ -------
Total interest-bearing liabilities ..................... 47,764 566.8 4.71
Other liabilities ......................................... 2,153
Preferred equity .......................................... 150
Common equity ............................................. 5,709
Unrealized gain (loss) on available-for-sale
securities, net of tax ................................... 27
------
Total liabilities and shareholders' equity ............. $68,423
=======
Net interest income ....................................... $ 779.8
=======
Gross interest margin ..................................... 3.97%
=====
Gross interest margin without taxable-equivalent
increments ............................................... 3.88%
=====
Net interest margin ....................................... 5.03%
=====
Net interest margin without taxable-
equivalent increments .................................... 4.93%
=====
WIDE TABLE CONTINUED FROM ABOVE:
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
For the Three Months Ended September 30
1996
-----------------------------------
Yields % Change
(In Millions) and Average
(Unaudited) Balance Interest Rates Balance
--------- ----------- -------- ---------
ASSETS
Securities:
U.S. Treasury ............................................ $ 1,188 $ 17.4 5.83% (44.1)%
Mortgage-backed .......................................... 4,181 69.6 6.62 (.4)
State and political ...................................... 587 12.3 8.34 83.5
U.S. agencies and other .................................. 952 17.0 7.10 (46.2)
------- -------
Total securities ........................................ 6,908 116.3 6.70 (7.1)
Unrealized gain (loss) on available-for-sale securities ... (89) **
-------
Net securities ......................................... 6,819 (5.2)
Held-to-maturity securities ............................... 840 16.1 7.63 (69.8)
Trading account securities ................................ 188 2.7 5.71 (18.6)
Federal funds sold and resale agreements .................. 976 13.3 5.42 (47.2)
Loans:
Commercial:
Commercial .............................................. 21,009 432.0 8.18 7.4
Real Estate:
Commercial Mortgage .................................... 7,702 173.5 8.96 3.9
Construction ........................................... 1,796 43.8 9.70 27.7
------- -------
Total Commercial ....................................... 30,507 649.3 8.47 7.8
Consumer:
Residential Mortgage .................................... 5,344 108.9 8.11 (9.5)
Residential mortgage held for sale ...................... 220 3.9 7.05 (24.5)
Home equity and second mortgage ......................... 4,636 110.4 9.47 12.3
Credit card ............................................. 3,519 113.4 12.82 7.0
Other ................................................... 7,014 169.3 9.60 (2.4)
------- -------
Total consumer ......................................... 20,733 505.9 9.71 .4
------ -------
Total loans ............................................ 51,240 1,155.2 8.97 4.8
Allowance for credit losses .............................. 988 .3
-------
Net loans ............................................... 50,252 4.9
Other earning assets ...................................... 487 6.9 5.64 4.7
------- -------
Total earning assets* .................................. 60,639 1,310.5 8.60 1.5
Cash and due from banks ................................... 3,687 (5.5)
Other assets .............................................. 4,622 (6.0)
-------
Total assets ........................................... $67,871 .8%
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits .............................. $12,091 4.4%
Interest-bearing deposits:
Interest checking ........................................ 5,614 22.4 1.59 (3.6)
Money market accounts .................................... 10,164 95.6 3.74 2.8
Other savings accounts ................................... 3,211 18.0 2.23 (14.8)
Savings certificates ..................................... 13,039 177.1 5.40 (5.9)
Certificates over $100,000 ............................... 3,454 50.5 5.82 2.8
------- -------
Total interest-bearing deposits ......................... 35,482 363.6 4.08 (3.0)
Short-term borrowings ..................................... 7,091 99.4 5.58 (33.1)
Long-term debt ............................................ 5,020 77.5 6.14 59.5
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely the junior
subordinated debentures of the parent company ............ -- -- -- **
------- -------
Total interest-bearing liabilities ..................... 47,593 540.5 4.52 .4
Other liabilities ......................................... 2,160 (.3)
Preferred equity .......................................... 238 (37.0)
Common equity ............................................. 5,835 (2.2)
Unrealized gain (loss) on available-for-sale
securities, net of tax ................................... (46) **
-------
Total liabilities and shareholders' equity ............. $67,871 .8%
======= ===
Net interest income ....................................... $ 770.0
=======
Gross interest margin ..................................... 4.08%
=====
Gross interest margin without taxable-equivalent
increments ............................................... 3.97%
=====
Net interest margin ....................................... 5.05%
=====
Net interest margin without taxable-
equivalent increments .................................... 4.95%
=====
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
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
For the Nine Months Ended September 30
1997
-----------------------------------
Yields
(In Millions) and
(Unaudited) Balance Interest Rates
--------- ---------- --------
ASSETS
Securities:
U.S. Treasury ........................................... $ 776 $ 33.9 5.84%
Mortgage-backed ......................................... 4,207 216.8 6.89
State and political ..................................... 747 43.8 7.84
U.S. agencies and other ................................. 624 28.5 6.11
------- --------
Total securities ....................................... 6,354 323.0 6.80
Unrealized loss on available-for-sale securities ......... (23)
-------
Net securities ........................................ 6,331
Held-to-maturity securities .............................. 600 35.5 7.91
Trading account securities ............................... 167 7.2 5.76
Federal funds sold and resale agreements ................. 587 24.3 5.53
Loans:
Commercial:
Commercial ............................................. 22,194 1,358.0 8.18
Real estate:
Commercial mortgage ................................... 8,031 542.8 9.04
Construction .......................................... 2,222 159.9 9.62
------- --------
Total commercial ...................................... 32,447 2,060.7 8.49
Consumer:
Residential mortgage ................................... 4,985 298.2 8.00
Residential mortgage held for sale ..................... 160 9.1 7.60
Home equity and second mortgage ........................ 5,041 363.5 9.64
Credit card ............................................ 3,613 339.5 12.56
Other .................................................. 6,973 508.9 9.76
------- --------
Total consumer ........................................ 20,772 1,519.2 9.78
------- --------
Total loans ........................................... 53,219 3,579.9 8.99
Allowance for credit losses ............................. 991
-------
Net loans .............................................. 52,228
Other earning assets ..................................... 516 19.4 5.03
------- --------
Total earning assets* ................................ 61,443 3,989.3 8.68
Cash and due from banks .................................. 3,588
Other assets ............................................. 4,383
-------
Total assets ......................................... $68,400
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits ............................. $12,470
Interest-bearing deposits:
Interest checking ....................................... 5,534 68.7 1.66
Money market accounts ................................... 10,432 298.6 3.83
Other savings accounts .................................. 2,849 46.9 2.20
Savings certificates .................................... 12,310 500.2 5.43
Certificates over $100,000 .............................. 3,698 163.3 5.90
------- --------
Total interest-bearing deposits ........................ 34,823 1,077.7 4.14
Short-term borrowings .................................... 5,681 238.8 5.62
Long-term debt ........................................... 6,850 314.6 6.14
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely the junior
subordinated debentures of the parent company ........... 600 36.9 8.18
------- --------
Total interest-bearing liabilities ................... 47,954 1,668.0 4.65
Other liabilities ........................................ 2,169
Preferred equity ......................................... 150
Common equity ............................................ 5,671
Unrealized loss on available-for-sale
securities, net of tax .................................. (14)
-------
Total liabilities and shareholders' equity ........... $68,400
=======
Net interest income ...................................... $2,321.3
========
Gross interest margin .................................... 4.03%
=====
Gross interest margin without taxable-equivalent
increments .............................................. 3.93%
=====
Net interest margin ...................................... 5.05%
=====
Net interest margin without taxable-
equivalent increments ................................... 4.95%
=====
WIDE TABLES CONTINUED FROM ABOVE:
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
For the Nine Months Ended September 30
1996
-----------------------------------
Yields % Change
(In Millions) and Average
(Unaudited) Balance Interest Rates Balance
- ---------------------------------------------------------- ---------- ---------- -------- ---------
ASSETS
Securities:
U.S. Treasury ........................................... $ 1,310 $ 58.1 5.92 % (40.8)%
Mortgage-backed ......................................... 4,153 209.9 6.75 1.3
State and political ..................................... 548 35.1 8.56 36.3
U.S. agencies and other ................................. 1,036 51.4 6.63 (39.8)
-------- --------
Total securities ....................................... 7,047 354.5 6.72 (9.8)
Unrealized loss on available-for-sale securities ......... (27) 14.8
-------
Net securities ........................................ 7,020 (9.8)
Held-to-maturity securities .............................. 841 48.3 7.67 (28.7)
Trading account securities ............................... 252 10.6 5.62 (33.7)
Federal funds sold and resale agreements ................. 950 37.9 5.33 (38.2)
Loans:
Commercial:
Commercial ............................................. 20,738 1,271.0 8.19 7.0
Real estate:
Commercial mortgage ................................... 7,552 510.6 9.03 6.3
Construction .......................................... 1,592 116.5 9.77 39.6
------- --------
Total commercial ...................................... 29,882 1,898.1 8.48 8.6
Consumer:
Residential mortgage ................................... 5,561 336.6 8.09 (10.4)
Residential mortgage held for sale ..................... 276 14.4 6.97 (42.0)
Home equity and second mortgage ........................ 4,286 304.2 9.48 17.6
Credit card ............................................ 3,400 329.7 12.95 6.3
Other .................................................. 7,030 506.2 9.62 (.8)
------- --------
Total consumer ........................................ 20,553 1,491.1 9.69 1.1
------- --------
Total loans ........................................... 50,435 3,389.2 8.98 5.5
Allowance for credit losses ............................. 968 2.4
-------
Net loans .............................................. 49,467 5.6
Other earning assets ..................................... 455 18.9 5.55 13.4
--- --------
Total earning assets* ................................ 59,980 3,859.4 8.59 2.4
Cash and due from banks .................................. 3,704 (3.1)
Other assets ............................................. 4,467 (1.9)
-------
Total assets ......................................... $67,156 1.9%
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits ............................. $11,790 5.8%
Interest-bearing deposits:
Interest checking ....................................... 5,701 67.6 1.58 (2.9)
Money market accounts ................................... 9,971 280.9 3.76 4.6
Other savings accounts .................................. 3,210 54.0 2.25 (11.2)
Savings certificates .................................... 13,067 530.4 5.42 (5.8)
Certificates over $100,000 .............................. 3,335 145.8 5.84 10.9
------- --------
Total interest-bearing deposits ........................ 35,284 1,078.7 4.08 (1.3)
Short-term borrowings .................................... 7,237 299.4 5.53 (21.5)
Long-term debt ........................................... 4,836 224.7 6.21 41.6
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely the junior
subordinated debentures of the parent company ........... -- -- -- **
------- -------
Total interest-bearing liabilities ................... 47,357 1,602.8 4.52 1.3
Other liabilities ........................................ 2,090 3.8
Preferred equity ......................................... 243 (38.3)
Common equity ............................................ 5,695 (.4)
Unrealized loss on available-for-sale
securities, net of tax .................................. (19) 26.3
-------
Total liabilities and shareholders' equity ........... $67,156 1.9%
======= =====
Net interest income ...................................... $2,256.6
========
Gross interest margin .................................... 4.07%
=====
Gross interest margin without taxable-equivalent
increments .............................................. 3.97%
=====
Net interest margin ...................................... 5.03%
=====
Net interest margin without taxable-
equivalent increments ................................... 4.92%
=====
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
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10(a) Employment Agreement with John F. Grundhofer*
10(b) Employment Agreement with Philip G. Heasley*
10(c) Employment Agreement with Richard A. Zona*
10(d) Employment Agreements with Gerry B. Cameron, Gary T. Duim and Robert
D. Sznewajs. Filed as Exhibits 10.1 - 10.3 to Registration Statement on
Form S-4, File No. 333-29409 and incorporated herein by reference.*
11 Computation of Primary and Fully Diluted Net Income Per Common Share
12 Computation of Ratio of Earnings to Fixed Charges
27 Article 9 Financial Data Schedule*
* COPIES OF THIS EXHIBIT WILL BE FURNISHED UPON REQUEST AND PAYMENT OF THE
COMPANY'S REASONABLE EXPENSES IN FURNISHING THE EXHIBIT.
(b) REPORTS ON FORM 8-K
During the three months ended September 30, 1997, the Company filed the
following reports on Form 8-K:
Form 8-K filed August 1, 1997, announcing the completion of the merger of
First Bank System, Inc. and U.S. Bancorp of Portland, Oregon, the name
change of the registrant to U.S. Bancorp, and the increases in authorized
capitalization and the size of the Board of Directors.
Form 8-K filed October 1, 1997 (dated September 30, 1997), which includes
the Company's 1996 supplemental financial statements reflecting the merger
of U.S. Bancorp into First Bank System, Inc.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
U.S. BANCORP
/s/ DAVID J. PARRIN
By: ------------------------------------------
David J. Parrin
Senior Vice President and Controller
DATE: November 14, 1997 (Chief Accounting Officer and Duly
Authorized Officer)
[LOGO] U.S. BANCORP
P.O. Box 522
Minneapolis, Minnesota
55480
http://www.fbs.com
SHAREHOLDER INQUIRIES
COMMON STOCK TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York acts as transfer agent and registrar,
dividend paying agent, and dividend reinvestment plan agent for U.S. Bancorp,
and maintains all shareholder records for the corporation. For information about
U.S. Bancorp stock, or if you have questions regarding your stock certificates
(including transfers), address or name changes, lost dividend checks, lost stock
certificates, or Form 1099s, please call First Chicago's Shareholder Services
Center at (800) 446-2617, weekdays, 8:00 a.m. to 10:00 p.m. EST, and Saturdays,
8:00 a.m. to 3:30 p.m. EST. The TDD telephone number for the hearing impaired is
(201) 222-4955.
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, New Jersey 07303-2500.
Telephone: (201) 324-0498
Fax: (201) 222-4892
Internet address: http://www.fctc.com
E-mail address: fctc@em.fcnbd.com
COMMON STOCK LISTING AND TRADING
U.S. Bancorp Common Stock is listed and traded on the New York Stock Exchange
under the ticker symbol USB.
DIVIDENDS
U.S. Bancorp currently pays quarterly dividends on its Common Stock on or about
the 15th of March, June, September and December, subject to prior Board
approval. Shareholders may choose to have dividends electronically deposited
directly into their bank accounts. For enrollment information, please call First
Chicago at (800) 446-2617.
DIVIDEND REINVESTMENT PLAN
U.S. Bancorp shareholders can take advantage of a plan that provides automatic
reinvestment of dividends and/or optional cash purchases of additional shares of
U.S. Bancorp Common Stock up to $60,000 per calendar year. If you would like
more information, please contact First Chicago Trust Company of New York, P.O.
Box 2598, Jersey City, New Jersey 07303-2598, (800) 446-2617.
INVESTMENT COMMUNITY CONTACTS
John R. Danielson
Senior Vice President, Investor and Corporate Relations
(612) 973-2261
Judith T. Murphy
Vice President, Investor Relations
(612) 973-2264
General Information, Investor and Corporate Relations
(612) 973-2263
U.S. Bancorp
P.O. Box 522
Minneapolis, MN 55480
FINANCIAL INFORMATION
U.S. Bancorp news and financial results are available by fax, mail and the
Company's web site.
FAX. To access our fax-on-demand service, call (800) 758-5804. When asked, enter
U.S. Bancorp's extension number, "312402." Enter "1" for the most current news
release or "2" for a menu of releases. Enter your fax and telephone numbers as
directed. The information will be faxed to you promptly.
MAIL. At your request we will mail to you our quarterly earnings news releases.
To be added to U.S. Bancorp's mailing list, please contact Investor and
Corporate Relations, U.S. Bancorp, 601 Second Avenue South, Minneapolis,
Minnesota 55402-4302, (612) 973-2434.
WEB SITE. For information about U.S. Bancorp, including news and financial
results, product information, and service locations, access our home page on the
World Wide Web. The address is http://www.fbs.com. Additional information for
customers of our U.S. Bank affiliates is available at http://www.usbank.com.