[GRAPHIC] 1 FORM 10-Q / MARCH 31, 1998
[LOGO] US BANCORP(R)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM (NOT APPLICABLE)
COMMISSION FILE NUMBER 1-6880
U.S. BANCORP
(Exact name of registrant as specified in its charter)
DELAWARE 41-0255900
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
U.S. BANK PLACE,
601 SECOND AVENUE SOUTH,
MINNEAPOLIS, MINNESOTA 55402-4302
(Address of principal executive offices and Zip Code)
612-973-1111
(Registrant's telephone number, including area code)
(NOT APPLICABLE)
(Former name, former address and former fiscal year,
if changed since last report).
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO _____
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding as of April 30, 1998
Common Stock, $1.25 Par Value 247,633,747 shares
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FINANCIAL SUMMARY
Three Months Ended March 31
---------------------------
(Dollars in Millions, Except Per Share Data) 1998 1997
=============================================================================
Income before nonrecurring items ............... $ 350.0 $ 292.2
Nonrecurring items ............................. (21.5) 1.1
------------------------
Net income ..................................... $ 328.5 $ 293.3
========================
PER COMMON SHARE
Earnings per share ............................. $ .44 $ .39
Diluted earnings per share ..................... .44 .39
Earnings on a cash basis (diluted)* ............ .48 .43
Dividends paid ................................. .175 .155
Common shareholders' equity .................... 8.25 7.66
PER COMMON SHARE BEFORE NONRECURRING ITEMS
Earnings per share ............................. .47 .39
Diluted earnings per share ..................... .47 .39
Earnings on a cash basis (diluted)* ............ .51 .43
------------------------
FINANCIAL RATIOS
Return on average assets ....................... 1.91% 1.75%
Return on average common equity ................ 22.1 21.0
Efficiency ratio ............................... 49.9 50.6
Net interest margin (taxable-equivalent basis .. 4.98 5.07
SELECTED FINANCIAL RATIOS BEFORE NONRECURRING ITEMS
Return on average assets ....................... 2.03 1.75
Return on average common equity ................ 23.5 20.9
Efficiency ratio ............................... 46.1 50.6
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March 31 December 31
1998 1997
------------------------
PERIOD END
Loans .......................................... $ 54,969 $ 54,708
Allowance for credit losses .................... 996 1,009
Assets ......................................... 70,949 71,295
Total shareholders' equity ..................... 6,123 5,890
Tangible common equity to total assets** ....... 7.4% 7.0%
Tier 1 capital ratio ........................... 7.8 7.4
Total risk-based capital ratio ................. 12.4 11.6
Leverage ratio ................................. 7.7 7.3
=============================================================================
*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.
TABLE OF CONTENTS AND FORM 10-Q CROSS-REFERENCE INDEX
PART I -- FINANCIAL INFORMATION
Management's Discussion and Analysis of Financial Condition and Results of Operations
(Item 2) .............................................................................. 2
Quantitative and Qualitative Disclosures About Market Risk (Item 3) ..................... 10
Financial Statements (Item 1) ........................................................... 14
PART II -- OTHER INFORMATION
Changes in Securities (Item 2) .......................................................... 26
Submission of Matters to a Vote of Security Holders (Item 4) ............................ 26
Exhibits And Reports On Form 8-K (Item 6) ............................................... 26
Signature ............................................................................... 26
Exhibit 12 - Computation Of Ratio Of Earnings To Fixed Charges .......................... 27
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 the former U.S. Bancorp.
U.S. Bancorp 1
MANAGEMENT'S DISCUSSION AND ANALYSIS
U.S. Bancorp, formerly known as First Bank System, Inc. (the "Company"), is the
organization created by the acquisition by First Bank System, Inc. ("FBS") of
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.
On February 18, 1998, the Company's Board of Directors announced its
intention to declare a three-for-one split of the Company's common stock and to
increase the number of common and preferred shares which the Company has
authority to issue from 500 million shares and 10 million shares, respectively,
to 1.5 billion shares and 50 million shares, respectively. The increase in the
number of authorized shares was subsequently approved by the shareholders on
April 22, 1998. The stock split will be in the form of a 200 percent stock
dividend payable May 18, 1998 to shareholders of record on May 4, 1998. The
impact of the stock split has been reflected in the financial statements and all
share and per share data included herein.
EARNINGS SUMMARY -- The Company reported first quarter 1998 operating earnings
(net income excluding nonrecurring items) of $350.0 million, compared with
$292.2 million in the first quarter of 1997. On a diluted per share basis,
operating earnings were $.47 in the first quarter of 1998, compared with $.39 in
the first quarter of 1997, an increase of 21 percent. Return on average assets
and return on average common equity, excluding nonrecurring items, were 2.03
percent and 23.5 percent, respectively, in the first quarter of 1998, compared
with returns of 1.75 percent and 20.9 percent in the first quarter of 1997.
Excluding nonrecurring items, the efficiency ratio (the ratio of expenses to
revenues) improved to 46.1 percent in the first quarter of 1998 from 50.6
percent in the first quarter of 1997.
Operating earnings for the first quarter of 1998 reflected growth in
noninterest income and a decrease in noninterest expense from the first quarter
of 1997. Noninterest income, before nonrecurring items, for the quarter
increased $70.1 million (19 percent) from the first quarter of 1997, reflecting
growth in all categories of fee revenue. Noninterest expense, before
nonrecurring items, declined $16.4 million (3 percent) from the first quarter of
1997, reflecting benefits of the merger.
Net income was $328.5 million in the first quarter of 1998, or $.44 per
diluted share, compared with $293.3 million, or $.39 per diluted share, in the
first quarter of 1997. Return on average assets and return on average common
equity were 1.91 percent and 22.1 percent in the first quarter of 1998, compared
with returns of 1.75 percent and 21.0 percent in the first quarter of 1997. Net
nonrecurring items decreased net income by $21.5 million ($33.9 million on a
pre-tax basis) in the first quarter of 1998. First quarter 1998 nonrecurring
items included $12.6 million of net securities gains and $46.5 million of
merger-related charges. Approximately $65.0 million, after tax, of additional
merger-related expenses are expected to be incurred over the next two quarters.
Nonrecurring net securities gains increased first quarter 1997 net income $1.1
million ($1.7 million on a pre-tax basis).
Operating results reflect the following acquisition and divestiture
activity: the December 1997 acquisition of Zappco, Inc. of St. Cloud, Minnesota;
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; and, the January 1997 acquisitions of Sun
Capital Bancorp of St. George, Utah and the bond indenture services and paying
agency business of Comerica Incorporated.
On March 13, 1998, the Company announced an agreement to acquire Northwest
Bancshares, Inc., a privately held bank holding company headquartered in
Vancouver, Washington, with 10 banking locations and $344 million in deposits.
The acquisition is pending regulatory approval and is expected to close in the
third quarter of 1998.
2 U.S. Bancorp
TABLE 1 SUMMARY OF CONSOLIDATED INCOME
Three Months Ended
---------------------------
(Taxable-Equivalent Basis; March 31 March 31
Dollars in Millions, Except Per Share Data) 1998 1997
================================================================================================
Interest income ................................................. $ 1,338.2 $ 1,299.1
Interest expense ................................................ 570.2 537.2
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Net interest income ........................................... 768.0 761.9
Provision for credit losses ..................................... 90.0 84.2
--------------------------
Net interest income after provision for credit losses ......... 678.0 677.7
Securities gains ................................................ 12.6 1.7
Other noninterest income ........................................ 445.9 375.8
Merger-related charges .......................................... 46.5 --
Other noninterest expense ....................................... 559.1 575.5
--------------------------
Income before income taxes .................................... 530.9 479.7
Taxable-equivalent adjustment ................................... 13.1 14.9
Income taxes .................................................... 189.3 171.5
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Net income .................................................... $ 328.5 $ 293.3
==========================
Return on average assets ........................................ 1.91% 1.75%
Return on average common equity ................................. 22.1 21.0
Net interest margin ............................................. 4.98 5.07
Efficiency ratio ................................................ 49.9 50.6
Efficiency ratio before nonrecurring items ...................... 46.1 50.6
==========================
PER COMMON SHARE:
Earnings per share .............................................. $ .44 $ .39
Dividends paid .................................................. .175 .155
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On May 1, 1998, the Company completed its acquisition of Piper Jaffray
Companies Inc. ("Piper Jaffray"), a full-service investment banking and
securities brokerage firm. The acquisition allows the Company to offer
investment banking and institutional and retail brokerage services through a new
subsidiary to be known as U.S. Bancorp Piper Jaffray Inc. The acquisition of
Piper Jaffray was accounted for under the purchase method of accounting, and
accordingly, the purchase price of $739 million (including $721 million
aggregate cash consideration for Piper Jaffray shares outstanding) was allocated
to assets acquired and liabilities assumed based on their fair market values at
the date of acquisition.
LINE OF BUSINESS FINANCIAL REVIEW
Financial performance is measured by major lines of business, which include:
Commercial & Business Banking and Private Financial Services, Retail Banking,
Payment Systems, 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 first
quarter 1998, certain organization and methodology changes were made and 1997
results are presented on a consistent basis.
COMMERCIAL & BUSINESS BANKING AND PRIVATE FINANCIAL SERVICES -- Commercial &
Business Banking and Private Financial Services includes lending, treasury
management, and other financial services to middle-market, large corporate and
mortgage banking companies and private banking and personal trust clients.
Operating earnings increased 17 percent to $181.6 million in the first quarter
of 1998, compared with $155.5 million in the first quarter of 1997. Return on
average assets was 1.88 percent compared with 1.70 percent in the first quarter
of 1997. Net tangible return on average common equity increased to 27.5 percent
compared with 25.9 percent in the first quarter of the prior year.
U.S. Bancorp 3
TABLE 2 LINE OF BUSINESS FINANCIAL PERFORMANCE
Commercial & Business Banking
and Private Financial Services Retail Banking
----------------------------------------------------------------------------------
For the Three Months Ended March 31 Percent Percent
(Dollars in Millions) 1998 1997 Change 1998 1997 Change
===============================================================================================================================
CONDENSED INCOME STATEMENT:
Net interest income
(taxable-equivalent basis) ............ $ 342.1 $ 325.5 5.1% $ 348.7 $ 354.4 (1.6)%
Provision for credit losses ............ 8.6 8.9 (3.4) 40.3 37.4 7.8
Noninterest income ..................... 98.3 81.9 20.0 126.6 119.9 5.6
Noninterest expense .................... 138.7 144.0 (3.7) 285.2 311.9 (8.6)
Income taxes and
taxable-equivalent adjustment ......... 111.5 99.0 57.0 48.5
--------------------------- --------------------------
Income before nonrecurring items ....... $ 181.6 $ 155.5 16.8 $ 92.8 $ 76.5 21.3
=========================== ==========================
Net nonrecurring items (after-tax)......
Net income..............................
AVERAGE BALANCE SHEET DATA:
Commercial loans ....................... $ 30,730 $ 28,812 6.7 $ 2,139 $ 1,915 11.7
Consumer loans, excluding
residential mortgage .................. 554 536 3.4 10,697 10,639 .5
Residential mortgage loans ............. 293 278 5.4 4,253 5,000 (14.9)
Assets ................................. 39,136 37,197 5.2 21,210 22,588 (6.1)
Deposits ............................... 10,735 9,883 8.6 34,887 35,831 (2.6)
Common equity .......................... 3,449 3,144 9.7 1,578 1,551 1.7
--------------------------- --------------------------
Return on average assets ............... 1.88% 1.70% 1.77% 1.37%
Return on average common equity ("ROCE") 21.4 20.1 23.9 20.0
Net tangible ROCE** .................... 27.5 25.9 42.7 36.5
Efficiency ratio ....................... 31.5 35.3 60.0 65.8
Efficiency ratio on a cash basis** ..... 28.7 33.1 57.9 63.6
===============================================================================================================================
*NOT MEANINGFUL
**CALCULATED BY EXCLUDING GOODWILL AND OTHER INTANGIBLES AND THE RELATED
AMORTIZATION.
NOTE: PREFERRED DIVIDENDS AND NONRECURRING ITEMS ARE NOT ALLOCATED TO THE
BUSINESS LINES. ALL RATIOS ARE CALCULATED WITHOUT THE EFFECT OF NONRECURRING
ITEMS.
Net interest income increased 5 percent, reflecting growth in average loan and
deposit balances. Noninterest income increased $16.4 million or 20 percent in
the first quarter of 1998 compared with the same period of the prior year
primarily due to gains in the leasing portfolio, fees on letters of credit and
collection fees. The efficiency ratio on a cash basis improved to 28.7 percent
in the first quarter of 1998, compared with 33.1 percent in the first quarter of
1997.
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 were $92.8
million in the first quarter of 1998 compared with $76.5 million in the first
quarter of the prior year. First quarter return on assets increased to 1.77
percent from 1.37 percent in the same quarter a year ago. Net tangible return on
average common equity increased to 42.7 percent compared with 36.5 percent in
the first quarter of the prior year.
Net interest income declined 2 percent from the same quarter of the prior
year, due primarily to the planned runoff of the residential mortgage loan
portfolio offset by growth in home equity loans. Noninterest income increased 6
percent due primarily to increased 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
efficiency ratio on a cash basis improved to 57.9 percent in the first quarter
of 1998 from 63.6 percent in the first quarter of the prior year.
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.
4 U.S. Bancorp
Corporate Trust and Consolidated
Payment Systems Institutional Financial Services Company
- -------------------------------------------------------------------------------------------------------------
Percent Percent Percent
1998 1997 Change 1998 1997 Change 1998 1997 Change
=============================================================================================================
$ 59.2 $ 66.7 (11.2)% $ 18.0 $ 15.3 17.6% $ 768.0 $ 761.9 .8%
41.1 37.9 8.4 -- -- -- 90.0 84.2 6.9
144.6 103.7 39.4 76.4 70.3 8.7 445.9 375.8 18.7
84.8 69.0 22.9 50.4 50.6 (.4) 559.1 575.5 (2.8)
29.6 24.7 16.7 13.6 214.8 185.8
------------------ ------------------ ---------------------
$ 48.3 $ 38.8 24.5 $ 27.3 $ 21.4 27.6 350.0 292.2 19.8
================== ==================
(21.5) 1.1 *
---------------------
$ 328.5 $ 293.3 12.0
=====================
$1,200 $1,001 19.9 $ -- $ -- -- $34,069 $31,728 7.4
4,791 4,257 12.5 -- -- -- 16,042 15,432 4.0
-- -- -- -- -- -- 4,546 5,278 (13.9)
8,043 6,724 19.6 1,432 1,381 3.7 69,821 67,890 2.8
64 47 36.2 1,601 1,399 14.4 47,287 47,160 .3
596 517 15.3 413 403 2.5 6,036 5,615 7.5
------------------ ------------------ ---------------------
2.44% 2.34% * * 2.03% 1.75%
32.9 30.4 26.8% 21.5% 23.5 20.9
43.5 37.9 46.8 44.1 33.6 30.3
41.6 40.5 53.4 59.1 46.1 50.6
38.6 38.7 48.0 53.2 43.3 48.2
=============================================================================================================
Operating earnings increased 25 percent in the first quarter of 1998 to $48.3
million compared with $38.8 million in the first quarter of 1997. First quarter
return on average assets was 2.44 percent, compared with 2.34 percent in the
first quarter of 1997, and net tangible return on average common equity was 43.5
percent compared with 37.9 percent for the same quarter in the previous year.
Fee-based noninterest income increased 39 percent in the first quarter of
1998 compared with the same period in 1997. The increase was due to growth in
the sales volume of the Corporate Card, the Purchasing Card, and the Northwest
Airlines WorldPerks(R) credit card and an increase in commercial card
interchange rates, as well as the buyout of the third party interest in a
merchant processing alliance. Net interest income decreased $7.5 million, or 11
percent, due to the growth in Corporate Card and Purchasing Card non-earning
asset balances. Noninterest expense increased due to increased technology
spending, costs related to increased sales volume and the buyout of the third
party interest in a merchant processing alliance.
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 28 percent to $27.3 million in the first quarter of
1998 compared with $21.4 million in the same period of the prior year. The net
tangible return on average common equity was 46.8 percent in the first quarter
of 1998 compared with 44.1 percent in the first quarter of the prior year.
Noninterest income increased 9 percent from the first quarter of 1997 due
primarily to increases in mutual fund advisory fees. The efficiency ratio on a
cash basis improved to 48.0 percent in the first quarter of 1998 from 53.2
percent in the first quarter of 1997, reflecting the effective integration of
acquisitions, process re-engineering efforts, and revenue growth.
U.S. Bancorp 5
TABLE 3 NET INTEREST INCOME
Three Months Ended
-----------------------
March 31 March 31
(Dollars in Millions) 1998 1997
=========================================================================================
Net interest income (taxable-equivalent basis) ...................... $ 768.0 $ 761.9
===================
Average balances of earning assets supported by:
Interest-bearing liabilities ...................................... $48,670 $47,798
Noninterest-bearing liabilities ................................... 13,902 13,088
-------------------
Total earning assets ............................................. $62,572 $60,886
===================
Average yields and weighted average rates (taxable-equivalent basis):
Earning assets yield .............................................. 8.67% 8.65%
Rate paid on interest-bearing liabilities ......................... 4.75 4.56
-------------------
Gross interest margin ............................................... 3.92% 4.09%
===================
Net interest margin ................................................. 4.98% 5.07%
===================
Net interest margin without taxable-equivalent increments ........... 4.89% 4.98%
=========================================================================================
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME -- First quarter net interest income on a taxable-equivalent
basis was $768.0 million, an increase of $6.1 million (1 percent), from the
first quarter of 1997. The increase was primarily the result of an increase in
earning assets of $1.7 billion over the first quarter of 1997, driven by core
commercial and consumer loan growth, partially offset by reductions in
investment securities and residential mortgages. Average loans were up $2.2
billion (4 percent) from the first quarter of 1997. Excluding residential
mortgage loans and the effect of the $420 million first quarter 1997 corporate
card securitization, average loans for the first quarter were higher by $3.1
billion (7 percent) than the first quarter of 1997, reflecting growth in the
commercial, home equity and second mortgages and credit card portfolios. Other
consumer loans were lower on average than the first quarter of 1997, primarily
due to reductions in installment loans in the northwest region. Average
securities for the first quarter were lower by $588 million than the first
quarter of 1997, primarily reflecting both maturities and sales of securities.
The net interest margin in the first quarter of 1998 of 4.98 percent was below
the 1997 margin of 5.07 percent and the fourth quarter margin of 4.99 percent,
primarily due to growth in Payment Systems' noninterest-bearing assets,
including corporate and purchasing card loan balances.
PROVISION FOR CREDIT LOSSES -- The provision for credit losses was $90.0 million
in the first quarter of 1998, up $5.8 million (7 percent) from the first quarter
of 1997. Net charge-offs totaled $103.2 million, virtually unchanged from the
fourth quarter of 1997, and up $19.3 million (23 percent) from the same quarter
a year ago. A portion of the increase over the first quarter of 1997 reflects
higher charge-offs in the northwest region's portfolio of installment loans
originated in 1995 and 1996. Refer to "Corporate Risk Management" for further
information on credit quality.
NONINTEREST INCOME -- First quarter 1998 noninterest income was $458.5 million,
an increase of $81.0 million (21 percent), from $377.5 million in the first
quarter of 1997. Noninterest income in the first quarter of 1998 and 1997
included nonrecurring net securities gains of $12.6 million and $1.7 million,
respectively.
TABLE 4 NONINTEREST INCOME
Three Months Ended
--------------------
March 31 March 31
(Dollars in Millions) 1998 1997
=========================================================================================
Credit card fee revenue .............................................. $ 126.8 $ 90.7
Service charges on deposit accounts .................................. 97.9 95.4
Trust and investment management fees ................................. 94.9 84.6
Investment products fees and commissions ............................. 18.2 15.8
Securities gains ..................................................... 12.6 1.7
Trading account profits and commissions .............................. 7.1 10.5
Other ................................................................ 101.0 78.8
------------------
Total noninterest income .......................................... $ 458.5 $ 377.5
=========================================================================================
6 U.S. Bancorp
TABLE 5 NONINTEREST EXPENSE
Three Months Ended
-------------------
March 31 March 31
(Dollars in Millions, Except Per Employee Data) 1998 1997
=====================================================================================
Salaries ......................................................... $ 239.6 $ 240.6
Employee benefits ................................................ 54.1 61.1
------------------
Total personnel expense ....................................... 293.7 301.7
Net occupancy .................................................... 43.5 45.8
Furniture and equipment .......................................... 35.4 42.8
Goodwill and other intangible assets ............................. 33.4 27.4
Advertising and marketing ........................................ 15.7 12.3
Telephone ........................................................ 15.5 13.6
Third party data processing ...................................... 14.0 9.1
Other personnel costs ............................................ 13.1 16.4
Professional services ............................................ 11.3 13.5
Postage .......................................................... 10.8 11.6
Printing, stationery and supplies ................................ 9.1 10.2
FDIC insurance ................................................... 2.0 2.1
Merger-related ................................................... 46.5 --
Other ............................................................ 61.6 69.0
------------------
Total noninterest expense ...................................... $ 605.6 $ 575.5
==================
Efficiency ratio* ................................................ 49.9% 50.6%
Efficiency ratio before nonrecurring items ....................... 46.1 50.6
Average number of full-time equivalent employees ................. 24,815 26,831
Annualized personnel expense per employee ........................ $47,342 $44,978
=====================================================================================
*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.
First quarter 1998 noninterest income, before securities gains, was $445.9
million, an increase of $70.1 million (19 percent) from the first quarter of
1997. The increase resulted from growth in all categories of fee revenue. First
quarter 1998 credit card fee revenue increased $36.1 million (40 percent) over
first quarter 1997 as a result of higher volumes for purchasing and corporate
cards and the Northwest Airlines WorldPerks credit card, partially offset by the
effect of the first quarter 1997 corporate card securitization. First quarter
credit card fees were also enhanced by the renewal of the Northwest Airlines
WorldPerks program and the buyout of the third party interest in a merchant
processing alliance. Without these items, credit card fees would have increased
by $27.8 million (28 percent). First quarter 1998 trust and investment
management fees were up over the first quarter of 1997 by $10.3 million (12
percent) due to growth in the corporate, institutional, and personal trust
businesses. Other noninterest income was higher by $18.8 million (21 percent) in
the first quarter of 1998, compared with the first quarter of the prior year.
Substantially all of the growth in other fee income was due to distributions
from investment partnerships, which were higher than the first quarter of 1997
by $17.0 million.
NONINTEREST EXPENSE -- First quarter 1998 noninterest expense was $605.6
million, an increase of $30.1 million (5 percent), from $575.5 million in the
first quarter of 1997. Noninterest expense in the first quarter of 1998 included
nonrecurring merger-related charges of $46.5 million incurred in connection with
the USBC transaction.
First quarter 1998 noninterest expense, before nonrecurring items, was
$559.1 million, a decrease of $16.4 million (3 percent), from $575.5 million in
the first quarter of 1997. Expense reductions in a number of categories
reflected benefits of the merger with USBC, partially offset by incremental
expense related to revenue increases. First quarter 1998 goodwill and other
intangible expense was higher than the first quarter of 1997 by $6.0 million (22
percent), primarily as a result of several small bank and portfolio purchases
during 1997 and the buyout of a merchant processing alliance. Total salaries and
benefits expense decreased $8.0 million (3 percent) from the first quarter of
1997, reflecting an eight percent decrease in average full-time equivalent
employees to 24,815 in the first quarter of 1998 from 26,831 in the first
quarter of 1997. Excluding nonrecurring items, the Company's efficiency ratio
improved to 46.1 percent from 50.6 percent in the first quarter of 1997,
reflecting growing revenues and declining expenses.
The Company's efforts to address issues related to the turn of the century
("Year 2000") began with technology changes initiated in the early 1990's. Many
of the Company's principal data processing applications were replaced with
licensed software packages. In addition, a
U.S. Bancorp 7
Year 2000 project was initiated to ensure that appropriate modifications are
made to systems and applications to resolve Year 2000 issues. Programming
changes and testing of systems and software packages are expected to be
substantially completed by December 31, 1998. In addition, the Company's credit
risk assessment includes the consideration of incremental risk which may be
posed by customers' inability, if any, to address Year 2000 issues. The cost of
the project is not significant to the Company.
PROVISION FOR INCOME TAXES -- The provision for income taxes was $189.3 million
in the first quarter of 1998, compared with $171.5 million in the first quarter
of 1997. The increase was primarily the result of a higher level of taxable
income, as discussed above.
BALANCE SHEET ANALYSIS
LOANS -- The Company's loan portfolio was $55.0 billion at March 31, 1998,
compared with $54.7 billion at December 31, 1997. The portfolio of commercial
loans totaled $34.6 billion at March 31, 1998, up $786 million from December 31,
1997. The increase was primarily attributable to growth in core commercial
loans. Total consumer loan outstandings were $20.4 billion at March 31, 1998,
compared with $20.9 billion at December 31, 1997. Excluding residential mortgage
loan balances, consumer loans were $16.0 billion at March 31, 1998, compared
with $16.3 billion at December 31, 1997, reflecting seasonal reductions in
credit card outstandings. See Note E to the Consolidated Financial Statements
for the composition of the Company's loan portfolio at March 31, 1998 and
December 31, 1997.
SECURITIES -- At March 31, 1998, available-for-sale securities were $6.4 billion
compared with $6.9 billion at December 31, 1997, reflecting both maturities and
sales of securities.
Deposits -- Noninterest-bearing deposits remained relatively flat at $14.3
billion at March 31, 1998, compared with $14.5 billion at December 31, 1997.
Interest-bearing deposits also remained relatively flat and totaled $34.3
billion at March 31, 1998, compared with $34.5 billion at December 31, 1997.
BORROWINGS -- Short-term borrowings, which include federal funds purchased,
securities sold under agreements to repurchase and other short-term borrowings,
were $3.0 billion at March 31, 1998, down from $3.3 billion at December 31,
1997. The decrease was primarily due to a $255 million reduction in federal
funds purchased and securities sold under agreements to repurchase.
Long-term debt was $10.4 billion at March 31, 1998, up from $10.2 billion
at December 31, 1997. The Company issued $385 million of debt, with an average
original maturity of 3.3 years, under its medium term and bank note programs
during the first quarter of 1998. The Company also issued $300 million of 6.50
percent fixed rate subordinated notes due February 1, 2008 during the first
quarter of 1998. These issuances were partially offset by $400 million of bank
note maturities and net maturities of $112 million of Federal Home Loan Bank
Advances.
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. Commercial banking operations rely on a strong credit culture that
combines prudent credit policies and individual lender accountability. In
addition, the commercial lenders generally focus on middle-market companies
within their regions. In the Company's retail banking operations, a standard
credit scoring system is used to assess consumer credit risks and to price
consumer products accordingly.
In evaluating its credit risk, the Company considers loan portfolio
composition, the level of allowance coverage, and macroeconomic factors. Most
economic indicators in the Company's operating regions compare favorably with
national trends. Approximately 45 percent of the Company's loan portfolio
consists of credit to businesses and consumers in Minnesota, Oregon and
Washington.
NET CHARGE-OFFS AND ALLOWANCE FOR CREDIT LOSSES -- Net loan charge-offs totaled
$103.2 million in the first quarter of 1998, compared with $83.9 million in the
first quarter of 1997. Commercial loan net charge-offs were $14.1 million in the
first quarter of 1998 and $9.2 million in the first quarter of 1997. Consumer
loan net charge-offs increased $14.4 million from the first quarter of 1997,
reflecting higher average credit card balances and higher charge-offs in the
northwest region's portfolio of installment loans originated in 1995 and 1996.
Credit standards on this portfolio's new originations were tightened in 1997.
Consumer loans 30 days or more past due declined to 2.38 percent of the
portfolio at March 31, 1998, compared with 2.76 percent at December 31, 1997.
8 U.S. Bancorp
TABLE 6 SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
Three Months Ended
---------------------
March 31 March 31
(Dollars in Millions) 1998 1997
==================================================================================
Balance at beginning of period ............................. $ 1,008.7 $ 992.5
CHARGE-OFFS:
Commercial:
Commercial .............................................. 27.3 25.0
Real estate:
Commercial mortgage ................................... 4.3 1.4
Construction .......................................... 2.0 1.3
--------- -------
Total commercial ...................................... 33.6 27.7
Consumer:
Residential mortgage .................................... 2.8 1.7
Credit card ............................................. 46.9 42.5
Other ................................................... 57.9 44.4
--------- -------
Total consumer ........................................ 107.6 88.6
--------- -------
Total ................................................. 141.2 116.3
RECOVERIES:
Commercial:
Commercial .............................................. 13.1 8.3
Real estate:
Commercial mortgage ................................... 6.2 10.0
Construction .......................................... .2 .2
--------- -------
Total commercial ...................................... 19.5 18.5
Consumer:
Residential mortgage .................................... .3 .5
Credit card ............................................. 5.7 4.7
Other ................................................... 12.5 8.7
--------- -------
Total consumer ........................................ 18.5 13.9
--------- -------
Total ................................................. 38.0 32.4
NET CHARGE-OFFS:
Commercial:
Commercial .............................................. 14.2 16.7
Real estate:
Commercial mortgage ................................... (1.9) (8.6)
Construction .......................................... 1.8 1.1
---------------------
Total commercial ...................................... 14.1 9.2
CONSUMER:
Residential mortgage .................................... 2.5 1.2
Credit card ............................................. 41.2 37.8
Other ................................................... 45.4 35.7
---------------------
Total consumer ........................................ 89.1 74.7
---------------------
Total ................................................. 103.2 83.9
Provision charged to operating expense ..................... 90.0 84.2
Additions related to acquisitions and other ................ -- .6
---------------------
Balance at end of period ................................... $ 995.5 $ 993.4
=====================
Allowance as a percentage of:
Period-end loans ......................................... 1.81% 1.88%
Nonperforming loans ...................................... 340 308
Nonperforming assets ..................................... 306 274
==================================================================================
U.S. Bancorp 9
TABLE 7 NET CHARGE-OFFS AS A PERCENTAGE OF AVERAGE LOANS OUTSTANDING
Three Months Ended
-------------------
March 31 March 31
1998 1997
=========================================================================================
COMMERCIAL:
Commercial ......................................................... .25% .31%
Real estate:
Commercial mortgage ............................................... (.09) (.44)
Construction ...................................................... .30 .21
---------------
Total commercial .................................................. .17 .12
CONSUMER:
Residential mortgage ............................................... .22 .09
Credit card ........................................................ 4.20 4.35
Other .............................................................. 1.53 1.22
---------------
Total consumer .................................................... 1.76 1.46
---------------
Total ............................................................. .77% .65%
=========================================================================================
The ratio of total net charge-offs to average loans was .77 percent in the first
quarter of 1998 compared with .65 percent in the first quarter of 1997.
NONPERFORMING ASSETS -- Nonperforming assets include all nonaccrual loans,
restructured loans, other real estate and other nonperforming assets owned by
the Company. At March 31, 1998, nonperforming assets totaled $325.4 million,
down $14.1 million (4 percent) from December 31, 1997. The ratio of
nonperforming assets to loans and other real estate was .59 percent at March 31,
1998, compared with .62 percent at December 31, 1997. Consumer loans 30 days or
more past due were 2.38 percent of the consumer loan portfolio at March 31,
1997, compared with 2.76 percent at December 31, 1997. The percentage of
consumer loans 90 days or more past due of the total consumer loan portfolio
totaled .77 percent at March 31, 1998, compared with .70 percent at December 31,
1997.
INTEREST RATE RISK MANAGEMENT -- The Company's policy is to maintain a low
interest rate risk position. The Company limits the exposure of net interest
income associated with interest rate movements through asset/liability
management strategies. The Company's Asset and Liability Management Committee
("ALCO") uses three methods for measuring and managing interest rate risk: Net
Interest Income Simulation Modeling,
TABLE 8 NONPERFORMING ASSETS*
March 31 December 31
(Dollars in Millions) 1998 1997
=========================================================================================
COMMERCIAL:
Commercial .......................................................$ 161.5 $ 179.1
Real estate:
Commercial mortgage ............................................. 45.1 45.4
Construction .................................................... 16.2 14.9
--------------------
Total commercial ................................................ 222.8 239.4
CONSUMER:
Residential mortgage ............................................. 63.0 52.1
Other ............................................................ 7.1 5.6
--------------------
Total consumer .................................................. 70.1 57.7
--------------------
Total nonperforming loans ....................................... 292.9 297.1
OTHER REAL ESTATE .................................................. 21.6 30.1
OTHER NONPERFORMING ASSETS ......................................... 10.9 12.3
--------------------
Total nonperforming assets ...................................... $ 325.4 $ 339.5
====================
Accruing loans 90 days or more past due** .......................... $ 91.7 $ 93.8
Nonperforming loans to total loans ................................. .53% .54%
Nonperforming assets to total loans plus other real estate ......... .59 .62
=========================================================================================
*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.
10 U.S. Bancorp
TABLE 9 DELINQUENT LOAN RATIOS*
March 31 December 31
90 days or more past due 1998 1997
=================================================================================
COMMERCIAL:
Commercial ............................................... .69% .78%
Real estate:
Commercial mortgage ..................................... .56 .57
Construction ............................................ .67 .67
--------------------
Total commercial ........................................ .66 .72
CONSUMER:
Residential mortgage ..................................... 1.69 1.43
Credit card .............................................. .78 .69
Other .................................................... .43 .42
--------------------
Total consumer .......................................... .77 .70
--------------------
Total ................................................. .70% .71%
=================================================================================
*RATIOS INCLUDE NONPERFORMING LOANS AND ARE EXPRESSED AS A PERCENT OF ENDING
LOAN BALANCES.
Market Value Simulation Modeling, and Repricing Mismatch Analysis.
NET INTEREST INCOME SIMULATION MODELING: The Company uses a net interest income
simulation model to estimate near-term (next 12 months) risk due to changes in
interest rates. The model, which is updated monthly, incorporates substantially
all the Company's assets and liabilities and off-balance sheet instruments,
together with forecasted changes in the balance sheet and assumptions that
reflect the current interest rate environment. Balance sheet changes are based
on expected prepayments of loans and securities and forecasted loan and deposit
growth. ALCO uses the model to simulate the effect of immediate and sustained
parallel shifts in the yield curve of one percent, two percent and three percent
as well as the effect of immediate and sustained flattening or steepening of the
yield curve. ALCO also calculates the sensitivity of the simulation results to
changes in key assumptions, such as the Prime/LIBOR spread or core deposit
pricing. 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 two percent of forecasted net interest income
given a one percent change in interest rates. At March 31, 1998, the estimated
effect of an immediate 100 basis point parallel change in rates was an increase
in forecasted net interest income for twelve months of .62 percent (up 100 basis
points) and a decrease of .87 percent (down 100 basis points).
MARKET VALUE SIMULATION MODELING: The net interest income simulation model is
somewhat limited by its dependence upon accurate forecasts of future business
activity and the resulting effect on balance sheet assets and liabilities. As a
result, its usefulness is greatly diminished for periods beyond one or two
years. To better measure all interest rate risk, both short-term and long-term,
the Company uses a market value simulation model. This model estimates the
effect of one, two and three percent rate shocks on the present value of all
future cash flows of the Company's current assets, liabilities and off-balance
sheet instruments. The amount of market value risk is subject to limits,
approved by the Company's Board of Directors, of one percent of assets for an
immediate 100 basis point rate shock. Historically, the Company's market value
risk position has been substantially lower than its limits. The Company believes
the market risk inherent in its broker/dealer activities is immaterial.
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 intermediate term interest rate risk and has
established limits, approved by the Company's Board of Directors, for gap
positions in the one- to three-year time periods of five percent of assets.
USE OF DERIVATIVES TO MANAGE INTEREST RATE RISK: While each of the interest rate
risk measurements has limitations, taken together they represent a comprehensive
view of the magnitude of the Company's interest rate risk over various time
intervals. The Company manages its interest rate risk by entering into
off-balance sheet transactions (primarily interest rate swaps), investing in
fixed rate assets or issuing variable rate liabilities. To a lesser degree, the
Company also uses interest rate caps and floors to hedge this risk.
U.S. Bancorp 11
TABLE 10 INTEREST RATE SWAP HEDGING PORTFOLIO NOTIONAL BALANCES AND YIELDS BY
MATURITY DATE
At March 31, 1998 (Dollars in Millions)
=======================================================================================
Weighted Weighted
Average Average
Receive Fixed Swaps* Notional Interest Rate Interest Rate
Maturity Date Amount Received Paid
- ---------------------------------------------------------------------------------------
1998 (remaining nine months) .................... $ 1,058 5.94% 5.69%
1999 ............................................ 1,817 6.15 5.68
2000 ............................................ 388 6.57 5.67
2001 ............................................ 357 6.52 5.69
2002 ............................................ 519 6.21 5.68
After 2002 ...................................... 1,885 6.66 5.68
-------
TOTAL ........................................... $ 6,024 6.33% 5.68%
=======================================================================================
*AT MARCH 31, 1998, THE COMPANY HAD NO SWAPS IN ITS HEDGING PORTFOLIO THAT
REQUIRED IT TO PAY FIXED-RATE INTEREST.
In the first quarter of 1998, the Company added $865 million of interest
rate swaps to reduce its interest rate risk. Interest rate swap agreements
involve the exchange of fixed and floating rate payments without the exchange of
the underlying notional amount on which the interest payments are calculated. As
of March 31, 1998, the Company received payments on $6.0 billion notional amount
of interest rate swap agreements based on fixed interest rates, and made
payments based on variable interest rates. These swaps had a weighted average
fixed rate received of 6.33 percent and a weighted average variable rate paid of
5.68 percent. The remaining maturity of these agreements ranges from one month
to ten years with an average remaining maturity of 3.5 years. Swaps increased
net interest income for the quarters ended March 31, 1998 and 1997 by $7.6
million and $6.4 million, respectively.
To hedge against falling interest rates, the Company uses interest rate
floors. Floor counterparties pay the Company when specified rates fall below a
specified point or strike level. The payment is based on the difference in
current rates and strike rates and the notional amount. The total notional
amount of floor agreements purchased as of March 31, 1998, was $725 million.
LIBOR-based floors totaled $525 million and Constant Maturity Treasury floors
totaled $200 million. The impact of floors on net interest income was not
material for the quarters ended March 31, 1998 and 1997.
CAPITAL -- At March 31, 1998, total tangible common equity was $5.1 billion, or
7.4 percent of assets, compared with 7.0 percent at December 31, 1997. Tier 1
and total risk-based capital ratios were 7.8 percent and 12.4 percent at March
31, 1998, compared with 7.4 percent and 11.6 percent at December 31, 1997. The
March 31, 1998 leverage ratio was 7.7 percent compared with 7.3 percent at
December 31, 1997.
On August 1, 1997, the Company issued 329.7 million shares to acquire
USBC. The Company exchanged 2.265 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.
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.
TABLE 11 CAPITAL RATIOS
March 31 December 31
(Dollars in Millions) 1998 1997
===================================================================================
Tangible common equity* ...................................... $5,145 $ 4,897
As a percent of assets ..................................... 7.4% 7.0%
Tier 1 capital ............................................... $5,289 $ 5,028
As a percent of risk-adjusted assets ....................... 7.8% 7.4%
Total risk-based capital ..................................... $8,370 $ 7,859
As a percent of risk-adjusted assets ....................... 12.4% 11.6%
Leverage ratio ............................................... 7.7 7.3
===================================================================================
*DEFINED AS COMMON EQUITY LESS GOODWILL.
12 U.S. Bancorp
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," which
establishes criteria, based on legal control, to determine whether a transfer of
financial assets is considered a sale or secured borrowing. Effective January 1,
1998, and in accordance with SFAS 127 which amended SFAS 125, the Company
adopted the provisions of SFAS 125 relating to securities lending, repurchase
agreements and other secured financing transactions. The adoption of SFAS 125
did not have a material effect on the Company.
COMPREHENSIVE INCOME -- Effective January 1, 1998, the Company adopted SFAS 130,
"Reporting Comprehensive Income," which 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 balance sheet. All prior periods
presented have been 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 of amounts presented in the financial statements. The Statement
also requires the disclosure of how 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.
PENSIONS AND OTHER POSTRETIREMENT BENEFIT DISCLOSURE -- SFAS 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable. The Statement supersedes the disclosure requirements of:
SFAS 87, "Employers' Accounting for Pensions;" SFAS 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits;" and, SFAS 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." The Statement addresses disclosure only and not
measurement or recognition. SFAS 132 is effective for the Company's 1998
year-end financial statements. All prior period disclosures will be restated to
conform to the provisions of this statement.
INTERNAL USE COMPUTER SOFTWARE COSTS -- Effective January 1, 1998, the Company
adopted Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires the
capitalization of certain costs incurred in connection with developing or
obtaining software for internal use. Historically, the Company has expensed such
costs as incurred. Restatement of previously issued annual financial statements
or adoption by a cumulative catch-up adjustment is prohibited. The adoption of
SOP 98-1 did not have a material effect on the Company.
U.S. Bancorp 13
CONSOLIDATED BALANCE SHEET
March 31 December 31
(Dollars in Millions) 1998 1997
==========================================================================================================
(Unaudited)
ASSETS
Cash and due from banks .......................................................... $ 4,616 $ 4,739
Federal funds sold ............................................................... 267 62
Securities purchased under agreements to resell .................................. 448 630
Trading account securities ....................................................... 186 195
Available-for-sale securities .................................................... 6,351 6,885
Loans ............................................................................ 54,969 54,708
Less allowance for credit losses ............................................... 996 1,009
--------------------
Net loans ...................................................................... 53,973 53,699
Bank premises and equipment ...................................................... 864 860
Interest receivable .............................................................. 408 405
Customers' liability on acceptances .............................................. 315 535
Other assets ..................................................................... 3,521 3,285
--------------------
Total assets .................................................................. $70,949 $71,295
====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing ............................................................ $14,305 $14,544
Interest-bearing ............................................................... 34,253 34,483
--------------------
Total deposits ................................................................ 48,558 49,027
Federal funds purchased .......................................................... 746 800
Securities sold under agreements to repurchase ................................... 1,317 1,518
Other short-term funds borrowed .................................................. 940 974
Long-term debt ................................................................... 10,412 10,247
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely the junior subordinated debentures of the parent company ........ 600 600
Acceptances outstanding .......................................................... 315 535
Other liabilities ................................................................ 1,938 1,704
--------------------
Total liabilities ............................................................. 64,826 65,405
Shareholders' equity:
Common stock, par value $1.25 A share - authorized 1,500,000,000 shares;
issued: 3/31/98 - 742,456,059 shares; 12/31/97 - 739,933,014 shares ........... 928 925
Capital surplus ................................................................ 1,294 1,261
Retained earnings .............................................................. 3,844 3,645
Accumulated other comprehensive income ......................................... 57 59
--------------------
Total shareholders' equity ..................................................... 6,123 5,890
--------------------
Total liabilities and shareholders' equity ..................................... $70,949 $71,295
==========================================================================================================
14 U.S. Bancorp
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended
------------------------
(Dollars in Millions, Except Per Share Data) March 31 March 31
(Unaudited) 1998 1997
============================================================================================================
INTEREST INCOME
Loans ............................................................................ $ 1,204.2 $ 1,153.2
Securities:
Taxable ........................................................................ 85.8 96.6
Exempt from federal income taxes ............................................... 16.1 17.3
Other interest income ............................................................ 19.0 17.1
------------------------
Total interest income ......................................................... 1,325.1 1,284.2
INTEREST EXPENSE
Deposits ......................................................................... 355.1 351.8
Federal funds purchased and repurchase agreements ................................ 33.6 47.9
Other short-term funds borrowed .................................................. 12.8 36.9
Long-term debt ................................................................... 156.4 88.3
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely the junior subordinated debentures of the parent company ........ 12.3 12.3
------------------------
Total interest expense ........................................................ 570.2 537.2
------------------------
Net interest income .............................................................. 754.9 747.0
Provision for credit losses ...................................................... 90.0 84.2
------------------------
Net interest income after provision for credit losses ............................ 664.9 662.8
NONINTEREST INCOME
Credit card fee revenue .......................................................... 126.8 90.7
Service charges on deposit accounts .............................................. 97.9 95.4
Trust and investment management fees ............................................. 94.9 84.6
Investment products fees and commissions ......................................... 18.2 15.8
Securities gains ................................................................. 12.6 1.7
Other ............................................................................ 108.1 89.3
------------------------
Total noninterest income ...................................................... 458.5 377.5
NONINTEREST EXPENSE
Salaries ......................................................................... 239.6 240.6
Employee benefits ................................................................ 54.1 61.1
Net occupancy .................................................................... 43.5 45.8
Furniture and equipment .......................................................... 35.4 42.8
Goodwill and other intangible assets ............................................. 33.4 27.4
Merger-related ................................................................... 46.5 --
Other ............................................................................ 153.1 157.8
------------------------
Total noninterest expense ..................................................... 605.6 575.5
------------------------
Income before income taxes ....................................................... 517.8 464.8
Applicable income taxes .......................................................... 189.3 171.5
------------------------
Net income ....................................................................... $ 328.5 $ 293.3
========================
Net income applicable to common equity ........................................... $ 328.5 $ 290.3
========================
Earnings per share ............................................................... $ .44 $ .39
Diluted earnings per share ....................................................... $ .44 $ .39
============================================================================================================
U.S. Bancorp 15
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in Millions) Common Shares Preferred Common Capital
(Unaudited) Outstanding* Stock Stock Surplus
============================================================================================
BALANCE DECEMBER 31, 1996 .............. 738,017,970 $ 150.0 $ 948.3 $ 1,296.9
Dividends declared:
Preferred ............................
Common ...............................
Purchase and retirement of treasury
stock ................................ (5,993,250) (.3) (5.2)
Issuance of common stock:
Acquisitions ......................... 907,056 1.2 13.6
Dividend reinvestment ................ 217,464 2.3
Stock option and stock
purchase plans ...................... 2,477,454 1.8 21.2
-------------------------------------------------
735,626,694 150.0 951.0 1,328.8
Comprehensive income
Net income .............................
Other comprehensive income:
Unrealized losses on
securities of $54.1 (Net of
$31.1 tax credit) ....................
Total comprehensive income ..........
-------------------------------------------------
BALANCE MARCH 31, 1997 ................. 735,626,694 $ 150.0 $ 951.0 $ 1,328.8
============================================================================================
BALANCE DECEMBER 31, 1997 .............. 739,933,014 $ -- $ 924.9 $ 1,261.1
Common dividends declared ..............
Purchase of treasury stock ............. (33,411) --
Issuance of common stock:
Dividend reinvestment ................ 91,116 .1 3.4
Stock option and stock
purchase plans ...................... 2,465,340 3.1 29.5
-------------------------------------------------
742,456,059 -- 928.1 1,294.0
Comprehensive income
Net income .............................
Other comprehensive income:
Unrealized gain on securities
of $9.0 (Net of $5.1 tax expense)
net of reclassification adjustment
for gains included in net income
of $11.1 (Net of $6.4
tax expense) .........................
Total comprehensive income ..........
-------------------------------------------------
BALANCE MARCH 31, 1998 ................. 742,456,059 $ -- $ 928.1 $ 1,294.0
============================================================================================
[WIDE TABLE CONTINUED FROM ABOVE]
Accumulated
Other
(Dollars in Millions) Retained Comprehensive Treasury
(Unaudited) Earnings Income Stock** Total
===============================================================================================
BALANCE DECEMBER 31, 1996 .............. $ 3,809.4 $ 4.7 ($ 445.9) $ 5,763.4
Dividends declared:
Preferred ............................ (3.0) (3.0)
Common ............................... (110.0) (110.0)
Purchase and retirement of treasury
stock ................................ (142.0) (147.5)
Issuance of common stock:
Acquisitions ......................... 14.8
Dividend reinvestment ................ 2.8 5.1
Stock option and stock
purchase plans ...................... (19.2) 17.3 21.1
-----------------------------------------------------
3,677.2 4.7 (567.8) 5,543.9
Comprehensive income
Net income ............................. 293.3 293.3
Other comprehensive income:
Unrealized losses on
securities of $54.1 (Net of
$31.1 tax credit) .................... (54.1) (54.1)
----------
Total comprehensive income .......... 239.2
-----------------------------------------------------
BALANCE MARCH 31, 1997 ................. $ 3,970.5 $ (49.4) $ (567.8) $ 5,783.1
===============================================================================================
BALANCE DECEMBER 31, 1997 .............. $ 3,644.8 $ 59.3 $ -- $ 5,890.1
Common dividends declared .............. (129.8) (129.8)
Purchase of treasury stock ............. (1.2) (1.2)
Issuance of common stock:
Dividend reinvestment ................ 3.5
Stock option and stock
purchase plans ...................... 1.2 33.8
-----------------------------------------------------
3,515.0 59.3 -- 5,796.4
Comprehensive income
Net income ............................. 328.5 328.5
Other comprehensive income:
Unrealized gain on securities
of $9.0 (Net of $5.1 tax expense)
net of reclassification adjustment
for gains included in net income
of $11.1 (Net of $6.4
tax expense) ......................... (2.1) (2.1)
----------
Total comprehensive income .......... 326.4
-----------------------------------------------------
BALANCE MARCH 31, 1998 ................. $ 3,843.5 $ 57.2 $ -- $ 6,122.8
===============================================================================================
*DEFINED AS TOTAL COMMON SHARES LESS COMMON STOCK HELD IN TREASURY.
**ENDING TREASURY SHARES WERE 25,235,145 AT MARCH 31, 1997.
16 U.S. Bancorp
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended
----------------------
(Dollars in Millions) March 31 March 31
(Unaudited) 1998 1997
=======================================================================================================
OPERATING ACTIVITIES
Net cash provided by operating activities ................................ $ 521.0 $ 665.2
----------------------
INVESTING ACTIVITIES
Net cash (used) provided by:
Interest-bearing deposits with banks ..................................... -- (1.2)
Loans outstanding ........................................................ (249.7) (731.6)
Securities purchased under agreements to resell .......................... 181.9 258.5
Available-for-sale securities:
Sales .................................................................... 166.6 468.9
Maturities ............................................................... 352.1 425.3
Purchases ................................................................ (37.0) (813.2)
Maturities of held-to-maturity securities .................................. -- 20.8
Proceeds from sales of other real estate ................................... 13.8 18.9
Net purchases of bank premises and equipment ............................... (34.0) (22.5)
Securitization of corporate charge card balances ........................... -- 418.1
Cash and cash equivalents of acquired subsidiaries ......................... -- 4.5
Acquisitions, net of cash received ......................................... -- (23.3)
Other-net .................................................................. (145.8) (37.0)
----------------------
Net cash provided (used) by investing activities ......................... 247.9 (13.8)
----------------------
FINANCING ACTIVITIES
Net cash (used) provided by:
Deposits ................................................................. (469.1) (918.6)
Federal funds purchased and securities sold under agreements to repurchase (255.4) 274.9
Short-term borrowings .................................................... (33.8) (539.9)
Long-term debt transactions:
Proceeds ................................................................. 687.3 1,161.6
Principal payments ....................................................... (522.6) (319.3)
Proceeds from issuance of common stock ..................................... 37.3 26.2
Repurchase of common stock ................................................. (1.2) (147.5)
Cash dividends ............................................................. (129.8) (111.9)
----------------------
Net cash used by financing activities .................................... (687.3) (574.5)
----------------------
Change in cash and cash equivalents ...................................... 81.6 76.9
Cash and cash equivalents at beginning of period ........................... 4,801.0 4,908.1
----------------------
Cash and cash equivalents at end of period ................................ $4,882.6 $4,985.0
=======================================================================================================
U.S. Bancorp 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations, and cash flow activity required under generally
accepted accounting principles. In the opinion of management of the Company, all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of results have been made and the Company believes such
presentation is adequate to make the information presented not misleading. For
further information, refer to the consolidated financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997. 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," which
establishes criteria, based on legal control, to determine whether a transfer of
financial assets is considered a sale or secured borrowing. Effective January 1,
1998, and in accordance with SFAS 127 which amended SFAS 125, the Company
adopted the provisions of SFAS 125 relating to securities lending, repurchase
agreements and other secured financing transactions. The adoption of SFAS 125
did not have a material effect on the Company.
COMPREHENSIVE INCOME -- Effective January 1, 1998, the Company adopted SFAS 130,
"Reporting Comprehensive Income," which 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 balance sheet. All prior periods
presented have been 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 of amounts presented in the financial statements. The Statement
also requires the disclosure of how 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.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS DISCLOSURE -- SFAS 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable. The Statement supersedes the disclosure requirements of:
SFAS 87, "Employers' Accounting for Pensions;" SFAS 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits;" and, SFAS 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." The Statement addresses disclosure only and not
measurement or recognition. SFAS 132 is effective for the Company's 1998
year-end financial statements. All prior period disclosures will be restated to
conform to the provisions of this statement.
INTERNAL USE COMPUTER SOFTWARE COSTS -- Effective January 1, 1998, the Company
adopted Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires the
capitalization of certain costs
18 U.S. Bancorp
incurred in connection with developing or obtaining software for internal use.
Historically, the Company has expensed such costs as incurred. Restatement of
previously issued annual financial statements or adoption by a cumulative
catch-up adjustment is prohibited. The adoption of SOP 98-1 did not have a
material effect on the Company.
NOTE C BUSINESS COMBINATIONS AND DIVESTITURES
U.S. BANCORP -- On August 1, 1997, First Bank System, Inc. ("FBS") issued 329.7
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 2.265 shares of its common stock for each
share of USBC common stock. USBC's outstanding stock options also were 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.
NORTHWEST BANCSHARES, INC. -- On March 13, 1998, the Company announced an
agreement to acquire Northwest Bancshares, Inc., a privately held bank holding
company headquartered in Vancouver, Washington, with 10 banking locations and
$344 million in deposits. The acquisition is pending regulatory approval and is
expected to close in the third quarter of 1998.
PIPER JAFFRAY COMPANIES INC. -- On May 1, 1998, the Company completed its
acquisition of Piper Jaffray Companies Inc. ("Piper Jaffray"), a full-service
investment banking and securities brokerage firm. The acquisition allows the
Company to offer investment banking and institutional and retail brokerage
services through a new subsidiary to be known as U.S. Bancorp Piper Jaffray Inc.
The acquisition of Piper Jaffray was accounted for under the purchase method of
accounting, and accordingly, the purchase price of $739 million (including $721
million aggregate cash consideration for Piper Jaffray shares outstanding) was
allocated to assets acquired and liabilities assumed based on their fair market
values at the date of acquisition.
OTHER ACQUISITIONS -- Effective December 12, 1997, the Company completed its
acquisition of the $360 million Zappco, Inc., a bank holding company
headquartered in St. Cloud, Minnesota. Effective April 30, 1997, USBC completed
its acquisition of the $214 million Business and Professional Bank of
Sacramento, California. 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. Effective January 1, 1997, USBC
completed its acquisition of the $70 million Sun Capital Bancorp of St. George,
Utah. 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:
March 31, 1998 December 31, 1997
-------------------------------------------
Amortized Fair Amortized Fair
(Dollars in Millions) Cost Value Cost Value
=======================================================================================
U.S. Treasury ............................. $ 645 $ 646 $ 628 $ 628
Mortgage-backed ........................... 3,919 3,963 4,326 4,366
Other U.S. agencies ....................... 321 331 360 370
State and political ....................... 1,276 1,305 1,300 1,331
Other ..................................... 98 106 175 190
----------------------------------------
Total .................................... $6,259 $6,351 $6,789 $6,885
=======================================================================================
U.S. Bancorp 19
NOTE E LOANS
The composition of the loan portfolio was as follows:
March 31 December 31
(Dollars in Millions) 1998 1997
====================================================================================
COMMERCIAL:
Commercial ................................................. $23,949 $23,399
Real estate:
Commercial mortgage ...................................... 8,174 8,025
Construction ............................................. 2,446 2,359
--------------------
Total commercial ........................................ 34,569 33,783
--------------------
CONSUMER:
Residential mortgage ....................................... 4,213 4,480
Residential mortgage held for sale ......................... 220 193
Home equity and second mortgage ............................ 5,411 5,373
Credit card ................................................ 3,889 4,200
Automobile ................................................. 3,133 3,227
Revolving credit ........................................... 1,544 1,567
Installment ................................................ 1,211 1,199
Student* ................................................... 779 686
--------------------
Total consumer .......................................... 20,400 20,925
--------------------
Total loans ............................................. $54,969 $54,708
====================================================================================
* ALL OR PART OF THE STUDENT LOAN PORTFOLIO MAY BE SOLD WHEN THE REPAYMENT
PERIOD BEGINS.
At March 31, 1998, the Company had $223 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 March 31, 1998, the average recorded investment in impaired loans was
approximately $231 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:
March 31 December 31
(Dollars in Millions) 1998 1997
=======================================================================================================
Fixed-rate subordinated notes (6.00% To 8.35%) -- maturities to June 2026 ....... $ 2,150 $ 1,850
Step-up subordinated notes -- due August 15, 2005 ............................... 100 100
Floating-rate notes -- due November 15, 1999 .................................... 200 200
Floating-rate notes -- due February 27, 2000 .................................... 250 250
Floating-rate subordinated notes -- due November 30, 2010 ....................... 107 107
Federal Home Loan Bank advances (5.05% To 9.11%) -- maturities to October 2026... 1,279 1,392
Medium-term notes (5.53% To 6.93%) -- maturities to July 2002 ................... 1,007 652
Bank notes (5.56% To 6.38%) -- maturities to January 2003 ....................... 5,232 5,602
Other ........................................................................... 87 94
--------------------
Total .......................................................................... $10,412 $10,247
=======================================================================================================
20 U.S. Bancorp
NOTE G EARNINGS PER SHARE
The components of earnings per share were:
Three Months Ended March 31
---------------------------
(Dollars in Millions, Except Per Share Data) 1998 1997
==================================================================================================
EARNINGS PER SHARE:
Net income ........................................................... $ 328.5 $ 293.3
Preferred dividends .................................................. -- (3.0)
---------------------------
Net income to common stockholders .................................... $ 328.5 $ 290.3
===========================
Average shares outstanding ........................................... 738,708,228 735,232,950
===========================
Earnings per share ................................................... $ .44 $ .39
===========================
DILUTED EARNINGS PER SHARE:
Net income ........................................................... $ 328.5 $ 293.3
Preferred dividends, excluding 1991A Preferred Stock ................. -- (3.0)
---------------------------
Net income to common stockholders .................................... $ 328.5 $ 290.3
===========================
Average shares outstanding ........................................... 738,708,228 735,232,950
Net effect of the assumed purchase of stock under the stock option and
stock purchase plans -- based on the treasury stock method using
average market price ............................................... 10,927,311 8,261,106
---------------------------
Dilutive common shares outstanding ................................... 749,635,539 743,494,056
===========================
Diluted earnings per share ........................................... $ .44 $ .39
==================================================================================================
NOTE H SHAREHOLDERS' EQUITY
On February 18, 1998, the Company's Board of Directors announced its intention
to declare a three-for-one split of the Company's common stock and to increase
the number of common and preferred shares which the Company has authority to
issue from 500 million shares and 10 million shares, respectively, to 1.5
billion shares and 50 million shares, respectively. The increase in the number
of authorized shares was subsequently approved by the shareholders on April 22,
1998. The stock split will be in the form of a 200 percent stock dividend
payable May 18, 1998 to shareholders of record on May 4, 1998. The impact of the
stock split has been reflected in the financial statements and all share and per
share data included herein.
NOTE I MERGER, INTEGRATION AND RESIZING CHARGES
In the first quarter of 1998, the Company recorded merger, integration and
resizing charges of $46.5 million primarily related to conversion expenses
associated with the acquisition of USBC. Conversion expenses are recorded as
incurred and are associated with the conversion of customer accounts and similar
expenses relating to the conversions and integration of acquired branches and
operations. The following table presents a summary of activity with respect to
the Company's merger, integration and resizing accrual:
Three Months Ended
(Dollars in Millions) March 31, 1998
==================================================================================
Balance at December 31, 1997 ....................................... $ 204.6
Provision charged to operating expense ............................. 46.5
Cash outlays ....................................................... (96.4)
Noncash writedowns ................................................. (3.9)
-------------
Balance at March 31, 1998 .......................................... $ 150.8
==================================================================================
Additional merger-related expenses of approximately $65.0 million, after tax,
are expected to be incurred through the third quarter of 1998 related to the
USBC acquisition.
U.S. Bancorp 21
NOTE J INCOME TAXES
The components of income tax expense were:
Three Months Ended
--------------------
March 31 March 31
(Dollars in Millions) 1998 1997
================================================================================================
FEDERAL:
Current tax ............................................................... $ 167.1 $ 137.5
Deferred tax (credit) provision ........................................... (3.5) 9.9
-------------------
Federal income tax ...................................................... 163.6 147.4
STATE:
Current tax ............................................................... 20.0 22.4
Deferred tax provision .................................................... 5.7 1.7
-------------------
State income tax ........................................................ 25.7 24.1
-------------------
Total income tax provision .............................................. $ 189.3 $ 171.5
================================================================================================
The reconciliation between income tax expense and the amount computed by
applying the statutory federal income tax rate was as follows:
Three Months Ended
--------------------
March 31 March 31
(Dollars in Millions) 1998 1997
===============================================================================================
Tax at statutory rate (35%) .............................................. $ 181.2 $ 162.7
State income tax, at statutory rates, net of federal tax benefit ......... 16.7 15.7
Tax effect of:
Tax-exempt interest:
Loans ................................................................. (2.9) (1.0)
Securities ............................................................ (5.7) (8.6)
Amortization of nondeductible goodwill ................................. 6.7 7.0
Tax credits and other items ............................................ (6.7) (4.3)
-------------------
Applicable income taxes .................................................. $ 189.3 $ 171.5
===============================================================================================
The Company's net deferred tax asset was $211.8 million at March 31, 1998, and
$108.2 million at December 31, 1997.
22 U.S. Bancorp
NOTE K COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS
In the normal course of business, the Company uses various off-balance sheet
financial instruments to meet the needs of its customers and to manage its
interest rate 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:
March 31 December 31
(Dollars in Millions) 1998 1997
===================================================================================================
Commitments to extend credit:
Commercial ................................................................ $ 23,643 $ 24,170
Corporate and purchasing cards ............................................ 26,037 23,502
Consumer credit cards ..................................................... 14,764 14,236
Other consumer ............................................................ 4,858 4,661
Letters of credit:
Standby ................................................................... 2,868 2,773
Commercial ................................................................ 435 406
Interest rate swap contracts:
Hedges .................................................................... 6,024 5,315
Intermediated ............................................................. 824 855
Options contracts:
Hedge interest rate floors purchased ...................................... 725 750
Intermediated interest rate and foreign exchange caps and floors purchased 285 258
Intermediated interest rate and foreign exchange caps and floors written .. 285 258
Forward contracts ........................................................... 166 175
Mortgages sold with recourse ................................................ 70 74
Foreign currency commitments:
Commitments to purchase ................................................... 820 716
Commitments to sell ....................................................... 821 735
===================================================================================================
The Company received fixed rate interest and paid floating rate interest on
all swap hedges as of March 31, 1998. Activity for the three months ended March
31, 1998, with respect to interest rate swaps which the Company uses to hedge
loans, deposits and long-term debt was as follows:
(Dollars in Millions)
===================================================================================================
Notional amount outstanding at December 31, 1997.......................................... $ 5,315
Additions ................................................................................ 865
Maturities ............................................................................... (156)
--------
Notional amount outstanding at March 31, 1998 ............................................ $ 6,024
===================================================================================================
Weighted average interest rates paid ..................................................... 5.68%
Weighted average interest rates received ................................................. 6.33%
===================================================================================================
LIBOR-based interest rate floors totaling $525 million with an average
remaining maturity of 3 months at March 31, 1998, and $550 million with an
average remaining maturity of 5 months at December 31, 1997, hedged floating
rate commercial loans. The strike rate on these LIBOR- based floors ranged from
3.25 percent to 4.00 percent at March 31, 1998 and December 31, 1997. Constant
Maturity Treasury ("CMT") interest rate floors totaling $200 million with an
average remaining maturity of 9 months at March 31, 1998, and 12 months at
December 31, 1997, hedged the prepayment risk of fixed rate residential mortgage
loans. The strike rate on these CMT floors was 5.60 percent at March 31, 1998
and December 31, 1997.
Net unamortized deferred gains relating to swaps, options and futures were
immaterial at March 31, 1998.
U.S. Bancorp 23
NOTE L SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET -- Time certificates of deposit in denominations of
$100,000 or more totaled $3,293 million and $3,284 million at March 31, 1998,
and December 31, 1997, respectively.
CONSOLIDATED STATEMENT OF CASH FLOWS -- Listed below are supplemental
disclosures to the Consolidated Statement of Cash Flows.
Three Months Ended
-------------------
March 31 March 31
(Dollars in Millions) 1998 1997
===============================================================================
Income taxes (recovered) paid ............................. $ (52.4) $ 30.6
Interest paid ............................................. 540.1 540.0
Net noncash transfers to foreclosed property .............. 5.6 14.3
Change in unrealized gain on available-for-sale securities,
net of taxes of $1.3 in 1998 and $31.1 in 1997 .......... (2.1) (54.1)
==================
Cash acquisitions of businesses:
Fair value of noncash assets acquired ................... $ -- $ 23.3
Liabilities assumed ..................................... -- --
------------------
Net .................................................... $ -- $ 23.3
==================
Stock acquisitions of businesses:
Fair value of noncash assets acquired ................... $ -- $ 77.2
Net cash acquired ....................................... -- 4.5
Liabilities assumed ..................................... -- (66.9)
------------------
Net value of common stock issued ....................... $ -- $ 14.8
===============================================================================
24 U.S. Bancorp
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
For The Three Months Ended March 31
1998 1997
===============================================================================================================================
Yields
(Dollars in Millions) and
(Unaudited) Balance Interest Rates Balance Interest
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS
Securities:
U.S. Treasury ............................................... $ 632 $ 9.2 5.90% $ 910 $ 13.1
Mortgage-backed ............................................. 4,112 69.7 6.87 4,196 72.0
State and political ......................................... 1,284 25.2 7.96 574 11.2
U.S. agencies and other ..................................... 456 6.4 5.69 717 11.3
------------------- -------------------------
Total available-for-sale securities ........................ 6,484 110.5 6.91 6,397 107.6
Unrealized gain (loss) on available-for-sale securities ...... 97 (12)
------- -------
Net available-for-sale securities ......................... 6,581 6,385
Held-to-maturity securities .................................. -- -- -- 784 15.1
Trading account securities ................................... 149 1.8 4.90 170 2.4
Federal funds sold and resale agreements ..................... 719 9.7 5.47 602 8.1
Loans:
Commercial:
Commercial ................................................. 23,491 468.5 8.09 21,565 432.8
Real estate:
Commercial mortgage ....................................... 8,173 181.0 8.98 8,016 177.4
Construction .............................................. 2,405 56.5 9.53 2,147 50.7
------------------- -------------------------
Total commercial .......................................... 34,069 706.0 8.40 31,728 660.9
Consumer:
Residential mortgage ....................................... 4,363 86.8 8.07 5,130 100.5
Residential mortgage held for sale ......................... 183 3.1 6.87 148 2.7
Home equity and second mortgage ............................ 5,385 128.6 9.69 4,843 114.4
Credit card ................................................ 3,982 125.4 12.77 3,528 110.8
Other ...................................................... 6,675 158.7 9.64 7,061 170.0
------------------- -------------------------
Total consumer ............................................ 20,588 502.6 9.90 20,710 498.4
------------------- -------------------------
Total loans ............................................... 54,657 1,208.6 8.97 52,438 1,159.3
Allowance for credit losses ................................. 1,014 991
------- -------
Net loans .................................................. 53,643 51,447
Other earning assets ......................................... 563 7.6 5.47 495 6.6
------------------- -------------------------
Total earning assets* ..................................... 62,572 1,338.2 8.67 60,886 1,299.1
Cash and due from banks ...................................... 3,809 3,659
Other assets ................................................. 4,357 4,348
------- -------
Total assets .............................................. $69,821 $67,890
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits ................................. $12,954 $12,169
Interest-bearing deposits:
Interest checking ........................................... 5,766 24.8 1.74 5,649 22.4
Money market accounts ....................................... 10,695 104.3 3.96 10,470 97.6
Other savings accounts ...................................... 2,603 13.6 2.12 2,933 16.0
Savings certificates ........................................ 11,982 163.4 5.53 12,345 164.6
Certificates over $100,000................................... 3,287 49.0 6.05 3,594 51.2
------------------- -------------------------
Total interest-bearing deposits ............................ 34,333 355.1 4.19 34,991 351.8
Short-term borrowings ........................................ 3,203 46.4 5.88 6,456 84.8
Long-term debt ............................................... 10,534 156.4 6.02 5,751 88.3
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely the junior
subordinated debentures of the parent company ............... 600 12.3 8.18 600 12.3
------------------- -------------------------
Total interest-bearing liabilities ........................ 48,670 570.2 4.75 47,798 537.2
Other liabilities ............................................ 2,161 2,158
Preferred equity ............................................. -- 150
Common equity ................................................ 5,976 5,616
Accumulated other comprehensive income (loss) ................ 60 (1)
------- -------
Total liabilities and shareholders' equity ................ $69,821 $67,890
======= =======
Net interest income .......................................... $ 768.0 $ 761.9
======== ========
Gross interest margin ........................................ 3.92%
======
Gross interest margin without taxable-equivalent
increments .................................................. 3.84%
======
Net interest margin .......................................... 4.98%
======
Net interest margin without taxable-
equivalent increments ....................................... 4.89%
===============================================================================================================================
[WIDE TABLE CONTINUED FROM ABOVE]
For The Three
Months Ended
March 31
1997
=================================================================================
Yields % Change
(Dollars in Millions) And Average
(Unaudited) Rates Balance
- ---------------------------------------------------------------------------------
ASSETS
Securities:
U.S. Treasury ............................................... 5.84% (30.5)%
Mortgage-backed ............................................. 6.96 (2.0)
State and political ......................................... 7.91 **
U.S. agencies and other ..................................... 6.39 (36.4)
Total available-for-sale securities ........................ 6.82 1.4
Unrealized gain (loss) on available-for-sale securities ...... **
Net available-for-sale securities ......................... 3.1
Held-to-maturity securities .................................. 7.81 **
Trading account securities ................................... 5.73 (12.4)
Federal funds sold and resale agreements ..................... 5.46 19.4
Loans:
Commercial:
Commercial ................................................. 8.14 8.9
Real estate:
Commercial mortgage ....................................... 8.98 2.0
Construction .............................................. 9.58 12.0
Total commercial .......................................... 8.45 7.4
Consumer:
Residential mortgage ....................................... 7.95 (15.0)
Residential mortgage held for sale ......................... 7.40 23.6
Home equity and second mortgage ............................ 9.58 11.2
Credit card ................................................ 12.74 12.9
Other ...................................................... 9.76 (5.5)
Total consumer ............................................ 9.76 (0.6)
Total loans ............................................... 8.97 4.2
Allowance for credit losses ................................. 2.3
Net loans .................................................. 4.3
Other earning assets ......................................... 5.41 13.7
Total earning assets* ..................................... 8.65 2.8
Cash and due from banks ...................................... 4.1
Other assets ................................................. 0.2
Total assets .............................................. 2.8%
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits ................................. 6.5%
Interest-bearing deposits:
Interest checking ........................................... 1.61 2.1
Money market accounts ....................................... 3.78 2.1
Other savings accounts ...................................... 2.21 (11.3)
Savings certificates ........................................ 5.41 (2.9)
Certificates over $100,000................................... 5.78 (8.5)
Total interest-bearing deposits ............................ 4.08 (1.9)
Short-term borrowings ........................................ 5.33 (50.4)
Long-term debt ............................................... 6.23 83.2
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely the junior
subordinated debentures of the parent company ............... 8.18 **
Total interest-bearing liabilities ........................ 4.56 1.8
Other liabilities ............................................ .1
Preferred equity ............................................. **
Common equity ................................................ 6.4
Accumulated other comprehensive income (loss) ................ **
Total liabilities and shareholders' equity ................ 2.8%
=====
Net interest income ..........................................
Gross interest margin ........................................ 4.09%
=====
Gross interest margin without taxable-equivalent
increments .................................................. 3.99%
=====
Net interest margin .......................................... 5.07%
=====
Net interest margin without taxable-
equivalent increments ....................................... 4.98%
====================================================================
INTEREST AND RATES ARE PRESENTED ON A FULLY TAXABLE-EQUIVALENT BASIS UNDER A
TAX RATE OF 35 PERCENT.
INTEREST INCOME AND RATES ON LOANS INCLUDE LOAN FEES. NONACCRUAL LOANS ARE
INCLUDED IN AVERAGE LOAN BALANCES.
*BEFORE DEDUCTING THE ALLOWANCE FOR CREDIT LOSSES AND EXCLUDING THE UNREALIZED
GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES.
**NOT MEANINGFUL
U.S. Bancorp 25
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES -- On May 4, 1998, the Company's Certificate of
Incorporation was amended to increase the authorized capital stock of the
Company to 1,550,000,000 shares, consisting of 50,000,000 shares of Preferred
Stock and 1,500,000,000 shares of Common Stock, as described in Item 4 below, in
connection with the Company's three-for-one stock split. The Company also
amended its bylaws in certain respects, effective February 18, 1998, in
connection with the stock split.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- The 1998 Annual
Meeting of Shareholders of U.S. Bancorp was held on Wednesday, April 22, 1998,
at the Minneapolis Convention Center. John F. Grundhofer, President and Chief
Executive Officer, presided.
The holders of 209,955,797 shares (before giving effect to the stock split)
of common stock, 84.9 percent of the 247,339,682 outstanding shares entitled to
vote as of the record date, were represented at the meeting in person or by
proxy. The candidates for election as Class III Directors listed in the proxy
statement were elected to serve three-year terms expiring at the 2001 annual
shareholders' meeting. The proposal to ratify the appointment of Ernst & Young
LLP as the Company's independent auditors for the year ending December 31, 1998,
was approved. The proposal to amend the Company's Restated Certificate of
Incorporation to increase the authorized capital stock of the Company to
1,550,000,000 shares, consisting of 50,000,000 shares of Preferred Stock and
1,500,000,000 shares of Common Stock, was approved. The shareholder proposal for
the annual election of all Directors and the elimination of the Company's
classified Board of Directors, was not approved.
SUMMARY OF MATTERS VOTED UPON BY SHAREHOLDERS
Number of Shares
--------------------------------------------------
For Withheld
- --------------------------------------------------------------------------------
Election of Class III Directors:
Carolyn Silva Chambers 207,333,106 2,622,691
Arthur D. Collins, Jr. 207,359,260 2,596,537
John F. Grundhofer 207,315,627 2,640,170
Delbert W. Johnson 207,432,326 2,523,471
Jerry W. Levin 207,323,441 2,632,356
--------------------------------------------------
For Against Abstain Non-vote
- --------------------------------------------------------------------------------------------------------
Other matters:
Ratification of appointment of Ernst & Young LLP
as independent auditors 208,015,699 812,214 1,127,884 0
Amendment to restated certificate of incorporation 169,698,996 18,014,345 1,707,570 20,534,886
Proposal for the annual election of all directors 73,393,122 110,710,581 5,317,208 20,534,886
For a copy of the meeting minutes, please write to the Office of the Secretary,
U.S. Bancorp, P.O. Box 522, Minneapolis, Minnesota 55480.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 Restated Certificate of Incorporation, as amended.
3.2 Bylaws, as amended.
10.1 U.S. Bancorp Executive Deferral Plan, as amended.
10.2 U.S. Bancorp Nonqualified Supplemental Executive Retirement Plan, as
amended.
10.3 U.S. Bancorp Special Executive Deferral Plan, as amended.
10.4 U.S. Bancorp Independent Director Retirement and Death Benefit Plan,
as amended.
10.5 U.S. Bancorp Deferred Compensation Plan for Directors, as amended.
10.6 Form of Change-in-Control Agreement between U.S. Bancorp and certain
officers of the Company, as amended.
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 March 31, 1998, the Company filed the
following Current Reports on Form 8-K.
Form 8-K dated January 15, 1998, relating to the announcement of the
Company's fourth quarter and full year 1997 earnings.
Form 8-K dated March 30, 1998, relating to the Company entering into
distribution agreements with Morgan Stanley & Co. Incorporated, Piper
Jaffray Inc., Dain Rauscher Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation, Goldman Sachs & Co., Lehman Brothers, Merrill
Lynch & Co. and J.P. Morgan Securities Inc. for the public offering of
Medium-Term Notes.
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/ SUSAN E. LESTER
By: ------------------------------------------
Susan E. Lester
Executive Vice President and Chief
Financial Officer
DATE: May 13, 1998 (Principal Financial Officer and Duly
Authorized Officer)
26 U.S. Bancorp
[LOGO] US BANCORP
P.O. Box 522
Minneapolis, Minnesota
55480
http://www.usbank.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. Representatives are available weekdays, 8:30 a.m. to
7:00 p.m. EST, and the interactive voice response system is available 24 hours a
day, seven days a week. The TDD telephone number for the hearing impaired is
(201) 222-4955.
First Chicago Trust Company of New York, 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. For 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
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 news releases. Enter your fax and telephone numbers
as directed. The information will be faxed to you promptly.
MAIL. At your request, we will mail to you our quarterly earnings news releases,
quarterly financial data on Form 10-Q, and additional annual reports. To be
added to U.S. Bancorp's mailing list for quarterly earnings news releases, or to
request other information, please contact:
Investor and Corporate Relations
(612) 973-2263
U.S. Bancorp
601 Second Avenue South, MPFP1703
Minneapolis, Minnesota 55402-4302
WEB SITE. For information about U.S. Bancorp, including news and financial
results, product information, and service locations, access our home page on the
World Wide Web. The address is http://www.usbank.com.