- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
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)
<Table>
DELAWARE 41-0255900
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification Number)
</Table>
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)
---------------------------
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.
<Table>
Class Outstanding as of October 31, 2001
Common Stock, $.01 Par Value 1,950,887,907 shares
</Table>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS AND FORM 10-Q CROSS-REFERENCE INDEX
<Table>
PART I -- FINANCIAL INFORMATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Item 2)......................... 3
Quantitative and Qualitative Disclosures About Market Risk
(Item 3)................................................... 21
Financial Statements (Item 1)............................... 25
PART II -- OTHER INFORMATION
Exhibits and Reports on Form 8-K (Item 6)................... 41
Signature................................................... 41
Exhibit 12 -- Computation of Ratio of Earnings to Fixed
Charges.................................................... Inside Back Cover
</Table>
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements. Statements that are not
historical or current facts, including statements about beliefs and
expectations, are forward-looking statements. These forward-looking statements
cover, among other things, projected earnings growth, anticipated future
expenses and revenues, and the future prospects of the Company. Forward-looking
statements involve inherent risks and uncertainties, and important factors could
cause actual results to differ materially from those anticipated, including the
following, in addition to those contained in the Company's reports on file with
the SEC: (i) general economic or industry conditions could be less favorable
than expected, resulting in a deterioration in credit quality, a change in the
allowance for credit losses, or a reduced demand for credit or fee-based
products and services; (ii) changes in the domestic interest rate environment
could reduce net interest income and could increase credit losses; (iii) the
conditions of the securities markets could change, adversely affecting revenues
from capital markets businesses, the value or credit quality of the Company's
on-balance sheet and off-balance sheet assets, or the availability and terms of
funding necessary to meet the Company's liquidity needs; (iv) changes in the
extensive laws, regulations and policies governing financial services companies
could alter the Company's business environment or affect operations; (v) the
potential need to adapt to industry changes in information technology systems,
on which the Company is highly dependent, could present operational issues or
require significant capital spending; (vi) competitive pressures could intensify
and affect the Company's profitability, including as a result of continued
industry consolidation, the increased availability of financial services from
non-banks, technological developments such as the Internet, or bank regulatory
reform; and (vii) acquisitions may not produce revenue enhancements or cost
savings at levels or within time frames originally anticipated, or may result in
unforeseen integration difficulties. Forward-looking statements speak only as of
the date they are made, and the Company undertakes no obligation to update them
in light of new information or future events.
U.S. Bancorp 1
FINANCIAL SUMMARY
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------
(Dollars in Millions, Except Per Share Data) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------
Operating earnings*......................................... $ 149.7 $ 788.8 $1,765.6 $2,282.7
Merger and restructuring-related items (after-tax).......... (111.0) (78.5) (754.5) (175.8)
--------------------------------------------
Net income............................................... $ 38.7 $ 710.3 $1,011.1 $2,106.9
============================================
PER COMMON SHARE
Basic earnings per share.................................... $ .02 $ .37 $ .53 $ 1.10
Diluted earnings per share.................................. .02 .37 .52 1.10
Dividends declared**........................................ .1875 .1625 .5625 .4875
Book value per share........................................ 8.54 7.58
Market value per share...................................... 22.18 22.38
============================================
FINANCIAL RATIOS
Return on average assets.................................... .09% 1.77% .82% 1.79%
Return on average equity.................................... .9 19.6 8.4 19.7
Net interest margin (taxable-equivalent basis).............. 4.42 4.32 4.40 4.38
Efficiency ratio............................................ 54.6 52.5 58.3 52.3
============================================
FINANCIAL RATIOS EXCLUDING MERGER AND RESTRUCTURING-RELATED
ITEMS*
Return on average assets.................................... .35% 1.97% 1.43% 1.94%
Return on average equity.................................... 3.5 21.8 14.7 21.4
Efficiency ratio............................................ 49.5 48.2 49.2 49.1
Banking efficiency ratio***................................. 45.7 42.8 44.7 44.1
============================================
AVERAGE BALANCE SHEET DATA
Loans....................................................... $117,414 $119,390 $119,535 $116,992
Earning assets.............................................. 145,828 141,684 145,001 139,470
Assets...................................................... 167,451 159,252 165,148 157,129
Deposits.................................................... 105,231 104,050 105,663 102,911
Total shareholders' equity.................................. 16,945 14,408 16,012 14,257
============================================
</Table>
<Table>
<Caption>
September 30, December 31,
2001 2000
-----------------------------
PERIOD END
Loans....................................................... $114,567 $122,365
Allowance for credit losses................................. 2,458 1,787
Assets...................................................... 167,830 164,921
Deposits.................................................... 103,805 109,535
Total shareholders' equity.................................. 16,817 15,168
Tangible common equity ratio................................ 5.9% 6.3%
Tier 1 capital ratio........................................ 7.2 7.2
Total risk-based capital ratio.............................. 11.5 10.6
Leverage ratio.............................................. 7.4 7.4
=====================================================================================================================
</Table>
*The Company analyzes its performance on a net income basis in accordance with
accounting principles generally accepted in the United States, as well as on
an operating basis before merger and restructuring-related items referred to
as "operating earnings." Operating earnings are presented as supplemental
information to enhance the readers' understanding of, and highlight trends in,
the Company's financial results excluding the impact of merger and
restructuring-related items of specific business acquisitions and
restructuring activities. Operating earnings should not be viewed as a
substitute for net income and earnings per share as determined in accordance
with accounting principles generally accepted in the United States.
**Dividends per share have not been restated for the Company's 2001 merger with
the former U.S. Bancorp ("USBM").
***Without investment banking and brokerage activity.
2 U.S. Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
EARNINGS SUMMARY U.S. Bancorp (the "Company") reported net income of $38.7
million in the third quarter of 2001, or $.02 per diluted share, compared with
$710.3 million, or $.37 per diluted share, in the third quarter of 2000. Return
on average assets and return on average common equity were .09 percent and .9
percent in the third quarter of 2001, compared with 1.77 percent and 19.6
percent for the same period of 2000. Net income includes after-tax merger and
restructuring-related charges of $111.0 million ($163.1 million on a pretax
basis) in the third quarter of 2001 compared with $78.5 million ($117.7 on a
pre-tax basis) in the third quarter of 2000. Merger and restructuring-related
items, on a pre-tax basis, included $125.6 million of noninterest expenses and
$14.3 million of provision for credit losses associated with the merger of
Firstar Corporation ("Firstar") and the former U.S. Bancorp ("USBM"). Merger and
restructuring-related items also included $17.6 million of expense for
restructuring operations of U.S. Bancorp Piper Jaffray, and $5.6 million related
to the acquisition of NOVA Corporation ("NOVA") and other recent acquisitions.
The Company reported operating earnings (net income excluding merger and
restructuring-related charges) of $149.7 million for the third quarter of 2001,
compared with $788.8 million for the third quarter of 2000. Operating earnings
of $.08 per diluted share in the third quarter of 2001 were $.33, or 80.5
percent, lower than the same period of 2000. Return on average common equity and
return on average assets, excluding merger and restructuring-related charges,
were 3.5 percent and .35 percent, respectively, in the third quarter of 2001,
compared with returns of 21.8 percent and 1.97 percent in the third quarter of
2000. Excluding merger and restructuring-related charges, the efficiency ratio
(the ratio of expenses to revenues) was 49.5 percent in the third quarter of
2001, compared with 48.2 percent in the third quarter of 2000. The banking
efficiency ratio (the efficiency ratio without the impact of investment banking
and brokerage activity) before merger and restructuring-related charges was 45.7
percent in third quarter of 2001 compared with 42.8 percent for the same period
in 2000.
Net income and operating earnings for third quarter of 2001 included a
number of significant items (summarized in Table 2). The Company's third quarter
results included an incremental provision for credit losses of $1,025 million,
or approximately $655 million after tax. Results for the third quarter of 2001
also reflect the impact of a $36.0 million impairment of commercial and retail
leasing residuals, recognition of $24.7 million of mortgage servicing rights
("MSR") impairment, and approximately $14.0 million of writedowns of commercial
leasing partnerships and repossessed tractor/trailer property, partially offset
by gains on the sale of securities of $59.8 million. In addition, the Company's
level of third quarter earnings was less than expected due to a slowdown in
capital markets activity and payment processing volumes during the last three
weeks of September 2001.
Total net revenue on a taxable-equivalent basis was $2.9 billion for the
third quarter of 2001 compared with $2.8 billion in the third quarter of 2000,
an $160.3 million (5.8 percent) increase from a year ago. The increase reflected
a 5.6 percent growth in net interest income and a 6.1 percent increase in
fee-based revenues. Excluding securities gains of $59.8 million, total net
revenue on a taxable-equivalent basis for the third quarter of 2001 grew by
$101.6 million, or 3.7 percent, over the third quarter of 2000. Revenue growth,
relative to the third quarter of 2000, continued to be adversely impacted by
economic conditions affecting the capital markets. Total noninterest expense was
$1.6 billion in the third quarter of 2001 compared with $1.5 billion in the
third quarter of 2000. Total noninterest expense, excluding merger and
restructuring-related charges of $148.8 million, was $1.4 billion, an increase
over the third quarter of 2000 of $85.0 million, or 6.4 percent. The increase
primarily reflects acquisitions, mortgage servicing rights impairment, and the
write-down of commercial lease assets, partially offset by a reduction in
compensation expense related to capital markets activity and cost savings from
the integration of recent acquisitions. Refer to "Acquisition and Divestiture
Activity" for further information on the timing of acquisitions and "Noninterest
Expenses" for further discussion of merger and restructuring-related charges.
Provision for credit losses was $1,289.3 million in the third quarter of 2001
compared with $214.0 million in the third quarter of 2000. The provision for
credit losses included a $14.3 million merger-related charge due to the release
of certain credit quality indemnifications in connection with restructuring a
co-branding relationship. Provision for credit losses,
U.S. Bancorp 3
excluding merger and restructuring-related items, for the third quarter of 2001
was $1,275.0 million, an increase of $1,061.0 million over the third quarter of
2000. The change reflects an increase in charge-offs quarter over quarter and a
$712 million net addition to the allowance for credit losses. The increase to
the allowance recognized the impact of recent world events and the increasing
probability that the current economic slowdown will accelerate or be more
prolonged as a result of these events. Refer to "Corporate Risk Profile" for
further information on provision for credit losses, net charge-offs,
nonperforming assets and factors considered by the Company in assessing the
credit quality of the loan portfolio and establishing the allowance for credit
losses.
Net income for the first nine months of 2001 was $1,011.1 million, or $.52
per diluted share, compared with $2,106.9 million, or $1.10 per diluted share,
for the first nine months of 2000. Return on average common equity and return on
average assets were 8.4 percent and .82 percent, respectively, for the first
nine months of 2001, compared with returns of 19.7 percent and 1.79 percent, for
the same period of 2000. Net income reflected merger and restructuring-related
items of $754.5 million ($1,125.8 million on a pre-tax basis) in the first nine
months of 2001, compared with $175.8 million ($264.6 million on pre-tax basis)
in the first nine months of 2000. Operating earnings for the first nine months
of 2001 were $1,765.6 million compared with $2,282.7 million for the first nine
months of 2000. On a diluted per share basis, operating earnings were $.91 for
the first nine months of 2001, compared with $1.19 for the first nine months of
2000. Year-to-date return on average common equity and return on average assets,
excluding merger and restructuring-related charges, were 14.7 percent and 1.43
percent, respectively, compared with returns of 21.4 percent and 1.94 percent,
respectively, in the first nine months of 2000. Excluding merger and
restructuring-related items, the efficiency ratio (the ratio of expenses to
revenues) was 49.2 percent for the first nine months of 2001, compared with 49.1
percent for the first nine months of 2000. The banking efficiency ratio (the
efficiency ratio without the impact of investment banking and brokerage
activity) before merger and restructuring-related items was 44.7 percent for the
first nine months of 2001, compared with 44.1 percent for the same period in
2000.
Net income and operating earnings for the first nine months of 2001 included
a number of significant items (summarized in Table 2). The Company's results for
the nine months ended September 30, 2001, included $1.2 billion of provision for
credit losses representing the incremental third quarter provision of $1,025
million and a $160.0 million increase in the first quarter of 2001 in connection
with the acceleration of certain workout strategies. Results for the first nine
months of 2001 also reflect $34.5 million of MSR impairments, $36.0 million of
leasing residual impairments, $40.2 million of writedowns of commercial leasing
partnerships and $22.2 million of asset writedowns of tractor/trailer inventory
and other items. These losses were offset somewhat by $307.1 million of gains on
the sale of securities.
Total net revenue on a taxable-equivalent basis was $8.8 billion for the
nine months ended September 30, 2001 compared with $8.2 billion in the same
period of 2000, a 6.9 percent increase from a year ago. Total net revenue,
excluding merger and restructuring-related items, on a taxable-equivalent basis
for the nine months ended September 30, 2001 was $8,753.5 million compared with
$8,191.1 million, a 6.1 percent increase from a year ago. The increase reflected
core business growth, the impact of acquisitions and securities gains of $307.1
million in 2001 compared with approximately $46.9 million of unusual gains in
2000 including gains on the disposal of two office buildings. These net gains
are somewhat offset by adverse capital markets conditions during the first nine
months of 2001 relative to the same period of a year ago. As a result of these
conditions, capital markets revenues and trust and asset management-related
revenues declined approximately $127 million from a year ago. Total noninterest
expense was $5.0 billion in the first nine months of 2001 compared with $4.3
billion in the same period of 2000. Total noninterest expense, excluding merger
and restructuring-related charges of $805.8 million, was $4.2 billion, an
increase over the same period of 2000 of $134.4 million, or 3.3 percent. The
increase in noninterest expense was primarily the result of core business growth
and approximately $85 million related to recent acquisitions, including NOVA,
Scripps Financial Corporation, Lyon Financial Services, Inc. and 41 branches in
Tennessee, MSR impairment related to the declining rate environment, and asset
write-downs including lease residuals of commercial leasing partnerships and
repossessed tractor/trailer property, partially offset by cost savings related
to merger integration and restructuring activities and a reduction in expense
related to capital markets activity. Provision for credit losses was $2,263.0
million in the first nine months of 2001 compared with $598.5 million in the
same period of 2000. Provision for credit losses, excluding merger and
restructuring-related items of $382.2 million, for the first nine months of 2001
was $1,880.8, an increase of $1,282.3 million over the same
4 U.S. Bancorp
TABLE 1
SUMMARY OF CONSOLIDATED INCOME
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
(Taxable-Equivalent Basis; --------------------------------------------
Dollars in Millions, Except Per Share Data) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------
CONDENSED INCOME STATEMENT
Interest income............................................. $2,729.1 $3,114.8 $8,610.2 $8,978.2
Interest expense............................................ 1,109.3 1,580.6 3,830.3 4,405.4
--------------------------------------------
Net interest income...................................... 1,619.8 1,534.2 4,779.9 4,572.8
Securities gains, net....................................... 59.8 1.1 307.1 1.1
Noninterest income.......................................... 1,248.5 1,232.5 3,666.5 3,617.2
--------------------------------------------
Net revenue.............................................. 2,928.1 2,767.8 8,753.5 8,191.1
Noninterest expense......................................... 1,418.7 1,333.7 4,154.9 4,020.5
Provision for credit losses................................. 1,275.0 214.0 1,880.8 598.5
--------------------------------------------
Income before taxes and merger and restructuring-related
items................................................... 234.4 1,220.1 2,717.8 3,572.1
Taxable-equivalent adjustment............................... 10.7 21.2 46.0 64.7
Income taxes................................................ 74.0 410.1 906.2 1,224.7
--------------------------------------------
Operating earnings*......................................... 149.7 788.8 1,765.6 2,282.7
Merger and restructuring-related items (after-tax).......... (111.0) (78.5) (754.5) (175.8)
--------------------------------------------
Net income in accordance with GAAP....................... $ 38.7 $ 710.3 $1,011.1 $2,106.9
============================================
PER COMMON SHARE
Basic earnings per share.................................... $ .02 $ .37 $ .53 $ 1.10
Diluted earnings per share.................................. .02 .37 .52 1.10
Dividends declared**........................................ .1875 .1625 .5625 .4875
============================================
FINANCIAL RATIOS
Return on average assets.................................... .09% 1.77% .82% 1.79%
Return on average equity.................................... .9 19.6 8.4 19.7
Net interest margin (taxable-equivalent basis).............. 4.42 4.32 4.40 4.38
Efficiency ratio............................................ 54.6 52.5 58.3 52.3
============================================
FINANCIAL RATIOS EXCLUDING MERGER AND RESTRUCTURING-RELATED
ITEMS*
Return on average assets.................................... .35% 1.97% 1.43% 1.94%
Return on average equity.................................... 3.5 21.8 14.7 21.4
Efficiency ratio............................................ 49.5 48.2 49.2 49.1
Banking efficiency ratio***................................. 45.7 42.8 44.7 44.1
============================================
RECONCILIATION OF OPERATING EARNINGS* TO NET INCOME IN
ACCORDANCE WITH GAAP
Operating earnings.......................................... $ 149.7 $ 788.8 $1,765.6 $2,282.7
Merger and restructuring-related items
Merger and restructuring-related gains................... -- -- 62.2 --
Merger and restructuring-related charges................. (148.8) (117.7) (805.8) (264.6)
Provision for credit losses.............................. (14.3) -- (382.2) --
Applicable tax benefit................................... 52.1 39.2 371.3 88.8
--------------------------------------------
Net income in accordance with GAAP.......................... $ 38.7 $ 710.3 $1,011.1 $2,106.9
============================================================================================================
</Table>
*The Company analyzes its performance on a net income basis in accordance with
accounting principles generally accepted in the United States, as well as on
an operating basis before merger and restructuring-related items referred to
as "operating earnings." Operating earnings are presented as supplemental
information to enhance the readers' understanding of, and highlight trends in,
the Company's financial results excluding the impact of merger and
restructuring-related items of specific business acquisitions and
restructuring activities. Operating earnings should not be viewed as a
substitute for net income and earnings per share as determined in accordance
with accounting principles generally accepted in the United States.
**Dividends per share have not been restated for the Company's 2001 merger with
USBM.
***Without investment banking and brokerage activity.
period of 2000. The change reflects an increasing level of nonperforming assets
and charge-offs from a year ago, the third quarter net addition to the allowance
for credit losses of $712 million, and the first quarter of 2001 provision of
$160.0 million related to the Company's previously announced accelerated loan
workout strategy.
The Company analyzes its performance on a net income basis determined in
accordance with accounting principles generally accepted in the United States,
as well as on an operating basis before merger and restructuring-related items
referred to in this analysis as "operating earnings". Operating earnings and
related discussions are presented as supplementary information
U.S. Bancorp 5
TABLE 2
SIGNIFICANT ITEMS IN OPERATING EARNINGS*
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------
(Dollars in Millions) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Securities gains, net....................................... $ 53.1 $ 1.1 $ 292.7 $ 1.1
Sale of principal-only residuals............................ 6.7 -- 14.4 --
Disposal of office buildings................................ -- -- -- 45.8
------------------------------------------------
Total significant gains............................... $ 59.8 $ 1.1 $ 307.1 $ 46.9
------------------------------------------------
Credit provision and portfolio realignment**................ $ 1,025.0 $ -- $ 1,185.0 $ --
Mortgage servicing rights impairment........................ 24.7 -- 34.5 --
Leasing residual impairment................................. 36.0 -- 36.0 --
Tractor/trailer inventory................................... 10.6 -- 10.6 --
Partnership and equity investment losses.................... 3.4 -- 40.2 --
Other, net.................................................. -- -- 11.6 --
------------------------------------------------
Total significant losses.............................. $ 1,099.7 $ -- $ 1,317.9 $ --
================================================================================================================
</Table>
*Table 2 is provided as supplemental information to enhance the reader's
understanding of, and highlight trends in, the Company's financial results.
The presentation of these items should not be construed as a representation of
their recurring or non-recurring nature.
**Represents an amount of provision in excess of management's best estimate of a
baseline level of net charge-offs or losses related to specific events or
realignment actions.
in this analysis to enhance the readers' understanding of, and highlight trends
in, the Company's core financial results excluding the non-recurring effects of
discrete business acquisitions and restructuring activities. Operating earnings
should not be viewed as a substitute for net income and earnings per share as
determined in accordance with accounting principles generally accepted in the
United States. Merger and restructuring-related items excluded from net income
to derive operating earnings may be significant and may not be comparable to
other companies.
ACQUISITION AND DIVESTITURE ACTIVITY The Company is the organization created by
the merger of Firstar Corporation of Milwaukee, Wisconsin and the former U.S.
Bancorp of Minneapolis, Minnesota. The merger was completed on February 27,
2001, as a pooling-of-interests transaction and accordingly all financial
information has been restated to include the historical information of both
companies.
Operating results for the first nine months of 2001 reflect the following
transactions accounted for as purchases in 2000. On October 13, 2000, the
Company acquired Scripps Financial Corporation of San Diego, California, which
had 10 branches in San Diego county and total assets of $650 million. On
September 28, 2000, the Company acquired Lyon Financial Services, Inc., a wholly
owned subsidiary of the privately held Schwan's Sales Enterprises Inc. in
Marshall, Minnesota. Lyon Financial Services, Inc. specializes in small-ticket
lease transactions and had $1.3 billion in assets. On April 7, 2000, the Company
acquired Oliver-Allen Corporation, a privately held information technology
leasing company with total assets of $280 million. On January 14, 2000, the
Company acquired Peninsula Bank of San Diego, California, which had 11 branches
in San Diego county and total assets of $491 million. In addition to these
business combinations, the Company purchased 41 branches in Tennessee from First
Union National Bank on December 8, 2000 representing approximately $450 million
in assets and $1.78 billion in deposits.
On May 7, 2001, the Company announced an agreement to acquire NOVA in a
stock and cash transaction valued at approximately $2.1 billion. The transaction
was completed on July 24, 2001 and was accounted for as a purchase. On June 5,
2001, the Company announced an agreement to purchase 20 branches in southern
California from Pacific Century Bank in a cash transaction. The acquisition,
accounted for as a purchase, included approximately $712 million in deposits,
and $570 million in assets and was completed on September 7, 2001. Refer to Note
3 and Note 4 of the Notes to Consolidated Financial Statements for additional
information regarding business combinations.
LINE OF BUSINESS FINANCIAL REVIEW
Within the Company, financial performance is measured by major lines of
business which include: Wholesale Banking, Consumer Banking, Private Client,
Trust and Asset Management, Payment Services, Capital Markets and Treasury and
Corporate Support. Business line results are derived from the Company's
profitability reporting systems. Designations, assignments and allocations may
change from time to time as management accounting systems are enhanced, product
lines change or business segments are realigned to better respond to our diverse
customer base. During the first nine months of 2001, certain organizational and
methodology changes were made to reflect the recent
6 U.S. Bancorp
merger. All results for 2001 and 2000 have been restated to present consistent
methodologies for all business lines.
Wholesale Banking offers lending, depository, treasury management and other
financial services to middle market, large corporate and public sector clients.
Wholesale Banking contributed $158.4 million of the Company's pre-tax income in
the third quarter of 2001 and $930.3 million in the first nine months of 2001, a
61.4 percent and 24.8 percent decrease from the same periods of 2000. The
decline is primarily driven by an increase in the provision for credit losses
and certain asset write-downs taken by the Company. The line of business
generated operating income of $483.3 million in the third quarter of 2001 and
$1,471.9 million in the first nine months of the year, a 5.8 percent and 8.6
percent increase from the same periods of 2000. Total revenue grew by 7.9
percent and 9.8 percent from the third quarter and first nine months of 2000 to
the third quarter and first nine months of 2001. Net interest income on a tax
equivalent basis increased 3.8 percent for the third quarter and 7.5 percent for
the first nine months of 2001 primarily due to core deposit growth, as well as
the impact of banking and equipment finance leasing acquisitions. The increase
is offset somewhat by the transfer of lower margin, higher quality commercial
loans to Stellar Funding Group, Inc. ("loan conduit") and the impact of
declining rates on funding benefit of deposits. Noninterest income increased
21.7 percent in the third quarter and 17.5 percent in the first nine months of
2001 reflecting revenue related to the leasing acquisition, core growth in
syndication and cash management-related fees and growth in securitization fee
income related to the loan conduit. Net fee income growth includes a $6.0
million impairment of commercial leasing residuals. Offsetting the net growth in
revenue was an increase in noninterest expenses (18.6 percent in the third
quarter and 15.9 percent in the first nine months of 2001), primarily due to the
bank and lease acquisitions, planned growth in targeted markets and certain
asset write-downs. This expense growth is partially offset by cost savings from
integration activities. Included in expenses during the third quarter and the
first nine months of 2001 are asset write-downs of repossessed tractor/trailer
and other related property of $14.0 million. Additionally, the provision for
credit losses increased $278.9 million during the third quarter of 2001 compared
with the same period of a year ago and $423.4 million during the first nine
months of 2001. The increase reflects increasing net chargeoffs due to the
deterioration in credit quality reflected by an increase in nonperforming
commercial loans. Refer to "Corporate Risk Profile" for further information of
factors impacting the credit quality of the loan portfolios.
Consumer Banking delivers products and services to the broad consumer market
and small businesses through banking offices, telemarketing, on-line services,
direct mail and automated teller machines ("ATMs"). It encompasses community
banking, metropolitan banking, small business banking, consumer lending,
mortgage banking and investment product sales. Consumer Banking contributed
$447.2 million and $1,428.1 million of the Company's pre-tax income in the third
quarter and first nine months of 2001, a 14.6 percent and 6.7 percent decrease
from the same periods of 2000. The decline is, in part, driven by an increase in
the provision for credit losses and certain asset write-downs taken by the
Company. The line of business generated operating income of $554.4 million in
the third quarter of 2001 and $1,747.3 million in the first nine months of the
year, a 9.5 percent and 1.8 percent decline from the same periods of 2000. Total
revenue declined by 1.1 percent in the third quarter of 2001 and grew by 2.4
percent in the first nine months of 2001 over the same periods of 2000. Fee
based revenue increased 13.7 percent for the third quarter and 21.3 percent for
the first nine months of 2001 as compared with the same periods of 2000, while
net interest income declined 6.2 percent and 3.9 percent, in the third quarter
and first nine months of 2001, respectively. The decline in net interest income
reflects the impact of declining interest rates on the funding benefit of
consumer deposits. It also reflects the sale of approximately $1.3 billion of
home equity and indirect automobile loans in the first quarter of 2001, and the
divestiture of branches with $771 million of deposits during the second quarter
of 2001 in connection with the merger of Firstar and USBM. The decline was
partially offset by a funding benefit of deposits related to the acquisition of
41 branches in Tennessee. Growth in fee-based revenue is primarily attributed to
an increase in retail deposit and cash management fees, mortgage banking
originations, core retail loan and deposit growth, the alignment and re-design
of products and features in connection with the merger, and fee revenue related
to the Tennessee branch acquisition. Fee income growth for the third quarter and
first nine months of 2001 is tempered somewhat by the recognition of an
impairment of retail leasing residuals of $30.0 million during the third
quarter. Consumer Banking results reflect an increase in noninterest expense
(11.2 percent for the third quarter and 8.4 percent for the first nine months)
primarily related to asset impairments of mortgage servicing rights ("MSR") and
the Tennessee branch acquisition.
U.S. Bancorp 7
TABLE 3
LINE OF BUSINESS FINANCIAL PERFORMANCE
<Table>
<Caption>
Wholesale Consumer Private Client, Trust
Banking Banking and Asset Management
------------------------------------------------------------------------------------
For the Three Months Ended September 30 Percent Percent Percent
(Dollars in Millions) 2001 2000 Change 2001 2000 Change 2001 2000 Change
- ---------------------------------------------------------------------------------------------------------------------------------
CONDENSED INCOME STATEMENT
Net interest income (taxable-equivalent
basis)..................................... $ 436.1 $ 420.2 3.8% $ 718.6 $ 766.0 (6.2%) $ 61.2 $ 60.4 1.3%
Noninterest income.......................... 151.7 124.7 21.7 302.0 265.7 13.7 219.8 228.3 (3.7)
---------------- ------------------ ---------------
Total revenue......................... 587.8 544.9 7.9 1,020.6 1,031.7 (1.1) 281.0 288.7 (2.7)
Noninterest expense......................... 101.0 86.1 17.3 415.3 402.9 3.1 112.7 115.2 (2.2)
Other intangible amortization............... .3 .3 -- 47.6 14.0 ** 5.1 4.9 4.1
Goodwill amortization....................... 3.2 1.7 88.2 3.3 2.5 32.0 .3 .3 --
---------------- ------------------ ---------------
Total noninterest expense............. 104.5 88.1 18.6 466.2 419.4 11.2 118.1 120.4 (1.9)
---------------- ------------------ ---------------
Operating income................... 483.3 456.8 5.8 554.4 612.3 (9.5) 162.9 168.3 (3.2)
Provision for credit losses................. 324.9 46.0 ** 107.2 88.5 21.1 2.7 3.3 (18.2)
---------------- ------------------ ---------------
Income before income taxes.................. 158.4 410.8 (61.4) 447.2 523.8 (14.6) 160.2 165.0 (2.9)
Income taxes and taxable-equivalent
adjustment................................. 57.6 149.4 (61.4) 162.7 193.3 (15.8) 58.3 60.1 (3.0)
---------------- ------------------ ---------------
Operating earnings, before merger and
restructuring-related items................ $ 100.8 $ 261.4 (61.4) $ 284.5 $ 330.5 (13.9) $101.9 $104.9 (2.9)
================== ================== ===============
Merger and restructuring-related items
(after-tax)*...............................
Net income..................................
AVERAGE BALANCE SHEET DATA
Loans....................................... $ 53,907 $ 55,475 (2.8) $ 42,755 $ 42,266 1.2 $4,254 $3,813 11.6
Assets...................................... 59,744 60,556 (1.3) 50,497 48,116 4.9 5,286 4,819 9.7
Noninterest-bearing deposits................ 10,367 9,073 14.3 12,210 11,872 2.8 2,277 2,103 8.3
Interest-bearing deposits................... 6,730 4,860 38.5 60,905 61,529 (1.0) 4,843 4,669 3.7
---------------- ------------------ ---------------
Total deposits........................ $ 17,097 $ 13,933 22.7 $ 73,115 $ 73,401 (.4) $7,120 $6,772 5.1
=================================================================================================================================
</Table>
<Table>
<Caption>
Wholesale Consumer Private Client, Trust
Banking Banking and Asset Management
-------------------------------------------------------------------------------------
For the Nine Months Ended September 30 Percent Percent Percent
(Dollars in Millions) 2001 2000 Change 2001 2000 Change 2001 2000 Change
- ---------------------------------------------------------------------------------------------------------------------------------
CONDENSED INCOME STATEMENT
Net interest income (taxable-equivalent
basis).................................... $1,344.1 $1,249.8 7.5% $2,189.2 $2,277.9 (3.9%) $176.0 $163.8 7.4%
Noninterest income......................... 429.6 365.6 17.5 928.2 765.3 21.3 663.1 679.9 (2.5)
---------------- ------------------ ---------------
Total revenue........................ 1,773.7 1,615.4 9.8 3,117.4 3,043.2 2.4 839.1 843.7 (.5)
Noninterest expense........................ 291.5 254.5 14.5 1,260.3 1,214.6 3.8 339.6 341.6 (.6)
Other intangible amortization.............. .9 .9 -- 99.2 37.8 ** 15.0 14.9 .7
Goodwill amortization...................... 9.4 4.9 91.8 10.6 11.9 (10.9) .8 .9 (11.1)
---------------- ------------------ ---------------
Total noninterest expense............ 301.8 260.3 15.9 1,370.1 1,264.3 8.4 355.4 357.4 (.6)
---------------- ------------------ ---------------
Operating income.................. 1,471.9 1,355.1 8.6 1,747.3 1,778.9 (1.8) 483.7 486.3 (.5)
Provision for credit losses................ 541.6 118.2 ** 319.2 247.6 28.9 8.8 1.9 **
---------------- ------------------ ---------------
Income before income taxes................. 930.3 1,236.9 (24.8) 1,428.1 1,531.3 (6.7) 474.9 484.4 (2.0)
Income taxes and taxable-equivalent
adjustment................................ 338.5 450.1 (24.8) 519.7 565.0 (8.0) 172.8 176.3 (2.0)
---------------- ------------------ ---------------
Operating earnings, before merger and
restructuring-related items............... $ 591.8 $ 786.8 (24.8) $ 908.4 $ 966.3 (6.0) $302.1 $308.1 (1.9)
================== ================== ================
Merger and restructuring-related items
(after-tax)*..............................
Net income.................................
AVERAGE BALANCE SHEET DATA
Loans...................................... $ 55,398 $ 54,014 2.6 $ 43,012 $ 41,962 2.5 $4,158 $3,722 11.7
Assets..................................... 61,425 59,088 4.0 49,631 47,644 4.2 5,190 5,169 .4
Noninterest-bearing deposits............... 10,205 9,227 10.6 11,875 11,882 (.1) 2,081 2,134 (2.5)
Interest-bearing deposits.................. 6,417 4,591 39.8 61,855 62,098 (.4) 4,980 4,703 5.9
---------------- ------------------ ---------------
Total deposits....................... $ 16,622 $ 13,818 20.3 $ 73,730 $ 73,980 (.3) $7,061 $6,837 3.3
=================================================================================================================================
</Table>
*Merger and restructuring-related items are not allocated to the business
lines.
**Not meaningful.
8 U.S. Bancorp
<Table>
<Caption>
Payment Capital Treasury and Consolidated
Services Markets Corporate Support Company
------------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent
2001 2000 Change 2001 2000 Change 2001 2000 Change 2001 2000 Change
------------------------------------------------------------------------------------------------------------------------------
$ 103.0 $ 105.3 (2.2%) $ .5 $ 4.7 (89.4%) $ 300.4 $ 177.6 69.1% $1,619.8 $1,534.2 5.6%
353.2 287.3 22.9 190.6 255.5 (25.4) 91.0 72.1 26.2 1,308.3 1,233.6 6.1
----------------- --------------- ------------------- ------------------
456.2 392.6 16.2 191.1 260.2 (26.6) 391.4 249.7 56.7 2,928.1 2,767.8 5.8
139.8 106.2 31.6 171.1 220.8 (22.5) 331.7 304.8 8.8 1,271.6 1,236.0 2.9
18.7 6.2 ** -- -- -- 10.5 11.9 (11.8) 82.2 37.3 **
2.9 3.5 (17.1) -- .2 ** 55.2 52.2 5.7 64.9 60.4 7.5
----------------- --------------- ------------------- ------------------
161.4 115.9 39.3 171.1 221.0 (22.6) 397.4 368.9 7.7 1,418.7 1,333.7 6.4
----------------- --------------- ------------------- ------------------
294.8 276.7 6.5 20.0 39.2 (49.0) (6.0) (119.2) ** 1,509.4 1,434.1 5.3
113.9 91.2 24.9 15.9 -- ** 710.4 (15.0) ** 1,275.0 214.0 **
----------------- --------------- ------------------- ------------------
180.9 185.5 (2.5) 4.1 39.2 (89.5) (716.4) (104.2) ** 234.4 1,220.1 (80.8)
65.8 67.5 (2.5) 1.5 14.3 (89.5) (261.2) (53.3) ** 84.7 431.3 (80.4)
----------------- --------------- ------------------- ------------------
$ 115.1 $ 118.0 (2.5) $ 2.6 $ 24.9 (89.6) $(455.2) $ (50.9) ** 149.7 788.8 (81.0)
================== =============== =================== ==================
(111.0) (78.5)
------------------
$ 38.7 $ 710.3
==================
$ 10,031 $ 9,802 2.3 $ 493 $ 243 ** $ 5,974 $ 7,791 (23.3) $117,414 $119,390 (1.7)
13,031 10,997 18.5 3,555 3,444 3.2 35,338 31,320 12.8 167,451 159,252 5.1
164 250 (34.4) 176 150 17.3 (88) 174 ** 25,106 23,622 6.3
-- -- -- -- -- -- 7,647 9,370 (18.4) 80,125 80,428 (.4)
----------------- --------------- ------------------- ------------------
$ 164 $ 250 (34.4) $ 176 $ 150 17.3 $ 7,559 $ 9,544 (20.8) $105,231 $104,050 1.1
==============================================================================================================================
</Table>
<Table>
<Caption>
Payment Capital Treasury and Consolidated
Services Markets Corporate Support Company
---------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent
2001 2000 Change 2001 2000 Change 2001 2000 Change 2001 2000 Change
---------------------------------------------------------------------------------------------------------------------------
$ 348.7 $ 320.4 8.8% $ 11.0 $ 21.2 (48.1%) $ 710.9 $ 539.7 31.7% $4,779.9 $4,572.8 4.5%
901.3 793.7 13.6 632.6 829.7 (23.8) 418.8 184.1 ** 3,973.6 3,618.3 9.8
----------------- -------------- ------------------- ------------------
1,250.0 1,114.1 12.2 643.6 850.9 (24.4) 1,129.7 723.8 56.1 8,753.5 8,191.1 6.9
355.2 305.6 16.2 555.0 683.6 (18.8) 979.2 930.3 5.3 3,780.8 3,730.2 1.4
31.1 17.6 76.7 -- -- -- 31.3 40.5 (22.7) 177.5 111.7 58.9
9.7 8.0 21.3 .1 .6 (83.3) 166.0 152.3 9.0 196.6 178.6 10.1
----------------- -------------- ------------------- ------------------
396.0 331.2 19.6 555.1 684.2 (18.9) 1,176.5 1,123.1 4.8 4,154.9 4,020.5 3.3
----------------- -------------- ------------------- ------------------
854.0 782.9 9.1 88.5 166.7 (46.9) (46.8) (399.3) 88.3 4,598.6 4,170.6 10.3
313.2 258.2 21.3 21.2 -- ** 676.8 (27.4) ** 1,880.8 598.5 **
----------------- -------------- ------------------- ------------------
540.8 524.7 3.1 67.3 166.7 (59.6) (723.6) (371.9) ** 2,717.8 3,572.1 (23.9)
196.8 191.0 3.0 24.5 60.7 (59.6) (300.1) (153.7) ** 952.2 1,289.4 (26.2)
----------------- -------------- ------------------- ------------------
$ 344.0 $ 333.7 3.1 $ 42.8 $106.0 (59.6) $ (423.5) $ (218.2) ** 1,765.6 2,282.7 (22.7)
================== ============== =================== ==================
(754.5) (175.8)
------------------
$1,011.1 $2,106.9
==================
$ 9,963 $ 9,374 6.3 $ 488 $ 246 98.4 $ 6,516 $ 7,674 (15.1) $119,535 $116,992 2.2
11,707 10,485 11.7 3,435 3,374 1.8 33,760 31,369 7.6 165,148 157,129 5.1
162 187 (13.4) 166 153 8.5 (81) 209 ** 24,408 23,792 2.6
-- -- -- -- -- -- 8,003 7,727 3.6 81,255 79,119 2.7
----------------- -------------- ------------------- ------------------
$ 162 $ 187 (13.4) $ 166 $ 153 8.5 $ 7,922 $ 7,936 (.2) $105,663 $102,911 2.7
===========================================================================================================================
</Table>
U.S. Bancorp 9
Noninterest expenses included MSR impairments of $24.7 million for the third
quarter of 2001 and $34.5 million for the first nine months of 2001. The branch
acquisition increased expenses during the third quarter and first nine months of
2001 by approximately 2.4 percent and 2.7 percent, compared with the same
periods of a year ago. Additionally, the provision for credit losses increased
$18.7 million, or 21.1 percent, during the third quarter of 2001 compared with
the same period of a year ago and $71.6 million, or 28.9 percent during the
first nine months of 2001. The increase reflects deterioration in nonperforming
loans, higher consumer bankruptcies and economic trends impacting the business
unit's loan and retail leasing portfolios.
Private Client, Trust and Asset Management provides mutual fund processing
services, trust, private banking and financial advisory services through four
businesses, including: the Private Client Group, Corporate Trust, Institutional
Trust and Custody, and Mutual Fund Services, LLC. The business segment also
offers investment management services to several client segments including
mutual funds, institutional customers, and private asset management. Private
Client, Trust and Asset Management contributed $160.2 million of the Company's
pre-tax income in the third quarter of 2001 and $474.9 million for the first
nine months of 2001, a 2.9 percent and 2.0 percent decline, respectively, from
the same periods of 2000. Growth in net interest income in the third quarter and
first nine months of 2001 compared with the same periods of 2000, was driven by
core loan and deposit growth partially offset by the impact of declining rates
on the funding benefit of deposits. Noninterest income declined during the third
quarter and for the first nine months of 2001 compared with a year ago primarily
due to lower trust and investment management fees being adversely affected by
the current capital markets conditions. Noninterest expense decreased 1.9
percent and .6 percent in the third quarter and first nine months of 2001 from
the same periods of 2000. Cost savings related to integration activities
primarily drove the decline in noninterest expense.
Payment Services includes consumer and business credit cards, corporate and
purchasing card services, consumer lines of credit, ATM processing and merchant
processing. Payment Services contributed $180.9 million of the Company's pre-tax
income in the third quarter of 2001, a 2.5 percent decline from the third
quarter of 2000. For the nine months ended September 30, 2001, the business unit
contributed $540.8 million, representing a 3.1 percent increase over the same
period of 2000. The business unit's financial results were, in part, driven by
an increase in the provision for credit losses and the impact of the NOVA
acquisition completed during the third quarter of 2001. The line of business
generated operating income of $294.8 million in the third quarter of 2001 and
$854.0 million in the first nine months of the year, a 6.5 percent and 9.1
percent increase from the same periods of 2000. Total revenue growth was 16.2
percent and 12.2 percent for the third quarter and first nine months
respectively. Third quarter 2001 growth was primarily driven by the impact of
the NOVA acquisition. Total revenue growth for Payment Services, excluding the
NOVA acquisition, was approximately 2.3 percent and 7.3 percent for the third
quarter and first nine months of 2001, respectively. Total revenue growth was
partially offset by an increase in noninterest expense (39.3 percent for the
third quarter and 19.6 percent for the first nine months of 2001), primarily
driven by the NOVA acquisition. Excluding the impact of the NOVA acquisition,
noninterest expenses for the division were essentially flat relative to a year
ago. Additionally, the provision for credit losses increased $22.7 million, or
24.9 percent, during the third quarter of 2001 compared with the same period of
a year ago and $55.0 million, or 21.3 percent during the first nine months of
2001. The increase in provision reflects deterioration in delinquencies, higher
bankruptcies and credit losses in the credit card portfolio and the economic
slowdown impacting consumers.
Capital Markets engages in equity and fixed income trading activities,
offers investment banking and underwriting services for corporate and public
sector customers and provides financial advisory services and securities, mutual
funds, annuities and insurance products to consumers and regionally-based
businesses through a network of brokerage offices. Capital Markets contributed
$4.1 million of the Company's pre-tax income in the third quarter and $67.3
million for the first nine months of 2001, compared with $39.2 million and
$166.7 million, respectively, for the third quarter and first nine months of
2000. The unfavorable variances in pre-tax income from the third quarter of 2000
were due to significant decreases in fees related to trading, investment product
fees and commissions and investment banking revenues reflecting the recent
adverse capital markets conditions. In response to significant changes in the
securities markets including increased volatility, changes in equity valuations,
a slow-down in the market for new and secondary issuances of equity and the
increasingly competitive environment for the industry, U.S. Bancorp Piper
Jaffray began restructuring its operations during 2001. Additionally, in June
2001, the Company decided
10 U.S. Bancorp
to discontinue its U.S. Bancorp Libra operations, a business unit that
specializes in underwriting and trading high-yield debt and mezzanine
securities. These restructuring activities are expected to improve operating
efficiency of the business unit by removing excess capacity from the product
distribution system and brokerage operations.
Treasury and Corporate Support includes the Company's investment and
residential mortgage portfolios, funding, capital management and asset
securitization activities, interest rate risk management, the net effect of
transfer pricing related to loan and deposit balances, and the change in
residual allocations associated with the provision for loan losses. It also
includes business activities managed on a corporate basis, including income and
expense of enterprise-wide operations and administrative support functions.
Treasury and Corporate Support recorded pre-tax losses of $716.4 million in the
third quarter of 2001 and $723.6 million in the first nine months of 2001,
compared to losses of $104.2 million in the third quarter of 2000 and $371.9
million in the first nine months of 2000. The decline was driven by an increase
in the provision for credit losses and certain asset write-downs taken by the
Company. During the third quarter, total revenue was $391.4 million compared
with $249.7 million a year ago. The $141.7 million increase was primarily due to
an increase in average investments from a year ago related to net purchases
during the first nine months of 2001 and the benefit of declining interest rates
given the existing interest rate risk management position. Included in the third
quarter 2001 were $59.8 million of securities gains compared with $1.1 million
in the third quarter of 2000. Noninterest expenses were $397.4 million in the
third quarter of 2001 compared with $368.9 million for the same period of 2000.
The increase of $28.5 million from third quarter of 2000 was primarily due to
business growth. Noninterest expenses for the nine months ended September 30,
2001 were $1,176.5 million compared with $1,123.1 million for the first nine
months of 2000. The increase of $53.4 million was primarily related to $36.8
million of partnership and equity investment losses recognized in the first nine
months of 2001. Provision for credit losses for this business unit represents
the residual aggregate of the credit losses allocated to the reportable business
units (based on net chargeoffs for the accounting period) and the Company's
recorded provision determined in accordance with generally accepted accounting
principles in the United States. Provision for credit losses for the nine months
ended September 30, 2001 was $676.8 million compared with a net recovery of
$27.4 million in 2000. The change in the provision reflects the Company's
decision in the third quarter of 2001 to recognize an incremental provision for
credit losses in light of recent events, declining economic conditions and
deterioration in the credit quality of the loan portfolios from a year ago.
Refer to "Corporate Risk Profile" for further information on provision for
credit losses, nonperforming assets and factors considered by the Company in
assessing the credit quality of the loan portfolio and establishing the
allowance for credit losses.
STATEMENT OF INCOME ANALYSIS
NET INTEREST INCOME Third quarter net interest income on a taxable-equivalent
basis was $1,619.8 million, compared with $1,534.2 million recorded in the third
quarter of 2000. Year-to-date net interest income on a taxable-equivalent basis
was $4,779.9 million, compared with $4,572.8 million for the first nine months
of 2000. The third quarter and year-to-date average earning assets increased
$4.1 billion or 2.9 percent, and $5.5 billion or 4.0 percent, over the
comparable periods of 2000. These increases were primarily driven by increases
in the investment portfolio, core commercial and retail loan growth, and the
impact of acquisitions. This growth is partially offset by a $2.3 billion
decline in lower margin residential mortgages and a $1.8 billion reduction
related to transfers of low margin, higher quality, commercial loans to Stellar
Funding Group, Inc. ("loan conduit"). The net interest margin in the third
quarter of 2001 was 4.42 percent, compared with 4.32 percent in the third
quarter of 2000 while the year-to-date net interest margin increased from 4.38
percent in 2000 to 4.40 percent in 2001. The improvement in the net interest
margin reflects the funding benefit of the declining rate environment and
improving spreads due to product re-pricing dynamics and loan conduit
activities, offset by the first quarter 2001 sale of the high loan-to-value home
equity and indirect automobile portfolios and lower yields on the investment
portfolio. Total average loans for the third quarter of 2001 were $2.0 billion
lower, or 1.7 percent, than the third quarter of 2000 and year-to-date average
loans were $2.5 billion higher, or 2.2 percent, than the first nine months of
2000. Year-over-year loan growth was impacted by several management actions,
including the first quarter of 2001 sale of the home equity and indirect
automobile loan portfolios, recent acquisitions, branch divestitures, and
transfers of short-term, high quality, commercial loans to the loan conduit. In
addition, the Company continued to reduce its lower margin residential
U.S. Bancorp 11
mortgage portfolio. Excluding residential mortgage loans, average loans for the
third quarter were higher by $361 million, or .3 percent, than the third quarter
of 2000.
Investment securities at September 30, 2001, were $8.9 billion more than at
September 30, 2000, and $4.5 billion higher than at June 30, 2001, reflecting
net purchases of securities. Average investment securities for the third quarter
and first nine months of 2001 were $5.9 billion higher (35.0 percent) and $3.3
billion higher (18.7 percent), respectively, than the same periods of 2000.
Average noninterest-bearing deposits in the third quarter of 2001 were
higher than the third quarter of 2000 by $1.5 billion, or 6.3 percent. Average
interest-bearing deposits declined by $303 million, or .4 percent, from the
third quarter of 2000. Growth in average interest checking and money market
deposits was more than offset by reductions in the average balances of higher
cost savings and time deposits. The reduction in savings certificates and time
deposits primarily reflects pricing decisions during the declining rate
environment.
PROVISION FOR CREDIT LOSSES The provision for credit losses is recorded to bring
the allowance for credit losses to a level deemed appropriate by management.
During the third quarter of 2001, the provision was $1,289.3 million, compared
with $214.0 million for the third quarter of 2000. Included in the provision for
credit losses for the third quarter of 2001 is an incremental provision of
approximately $1,025 million and a merger-related provision of $14.3 million
related to the restructuring of an existing co-branding relationship of USBM.
The restructuring included the release of certain credit quality
indemnifications from the original contract. Excluding the merger-related
provision, the provision for credit losses increased $1,061.0 million from a
year ago. The provision for credit losses in the first nine months of 2001 was
$2,263.0 million, an increase of $1,664.5 million from $598.5 million in the
same period of 2000. Included in the provision for credit losses for the first
nine months of 2001 were merger-related provisions totaling $382.2 million
consisting of: a $90.0 million charge to align risk management practices, align
chargeoff policies and to expedite the transition out of a specific segment of
the health care industry not meeting the risk appetite of the combined company;
a $76.6 million provision for losses related to the sale of high loan-to-value
home equity loans and the indirect automobile loan portfolio of USBM; a $201.3
million provision associated with management's decision to discontinue an
unsecured small business product of USBM; and a $14.3 million charge related to
restructuring the co-branding relationship. Excluding the merger and
restructuring-related provision of $382.2 million, the provision for credit
losses for the first nine months of 2001 increased by $1,282.3 million over the
first nine months of 2000 primarily due to a $1,025.0 million incremental
provision recognized in the third quarter of 2001 and a $160.0 million charge
during the first quarter of 2001
TABLE 4
ANALYSIS OF NET INTEREST INCOME
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------
(Dollars in Millions) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------
Components of net interest income
Income on earning assets................................. $2,729.1 $3,114.8 $8,610.2 $8,978.2
Expenses on interest-bearing liabilities................. 1,109.3 1,580.6 3,830.3 4,405.4
--------------------------------------------
Net interest income (taxable-equivalent basis).............. $1,619.8 $1,534.2 $4,779.9 $4,572.8
============================================
Net interest income, as reported............................ $1,609.1 $1,513.0 $4,773.9 $4,508.1
============================================
Average yields and rates paid (taxable-equivalent basis)
Earning assets yield..................................... 7.44% 8.76% 7.93% 8.59%
Rate paid on interest-bearing liabilities................ 3.67 5.38 4.28 5.11
--------------------------------------------
Gross interest margin....................................... 3.77% 3.38% 3.65% 3.48%
============================================
Net interest margin......................................... 4.42% 4.32% 4.40% 4.38%
============================================
Average balances
Investment securities.................................... $ 22,951 $ 17,005 $ 20,712 $ 17,448
Loans.................................................... 117,414 119,390 119,535 116,992
Earning assets........................................... 145,828 141,684 145,001 139,470
Interest-bearing liabilities............................. 119,933 117,009 119,626 115,124
Net free funds*.......................................... 25,895 24,675 25,375 24,346
============================================================================================================
</Table>
*Represents noninterest-bearing deposits, allowance for credit losses,
non-earning assets, other liabilities and equity.
12 U.S. Bancorp
TABLE 5
NONINTEREST INCOME
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------
(Dollars in Millions) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------
Credit card fee revenue..................................... $ 192.2 $ 208.2 $ 588.9 $ 569.0
Merchant and ATM processing revenue......................... 138.5 53.0 252.1 158.4
Trust and investment management fees........................ 226.2 231.1 679.2 692.4
Deposit service charges..................................... 168.7 144.3 491.9 405.7
Cash management fees........................................ 89.7 74.7 251.4 220.6
Mortgage banking revenue.................................... 60.3 44.7 165.5 135.5
Trading account profits and commissions..................... 43.6 50.9 171.3 196.0
Investment products fees and commissions.................... 108.0 107.8 347.9 357.7
Investment banking revenue.................................. 56.9 100.6 188.2 267.5
Insurance product revenue................................... 42.5 37.4 123.4 104.0
Commercial product revenue.................................. 96.2 86.0 266.1 219.2
Retail product revenue...................................... (17.2) 17.9 20.8 54.3
Securities gains, net....................................... 59.8 1.1 307.1 1.1
Other....................................................... 42.9 75.9 119.8 236.9
-----------------------------------------------
Total operating noninterest income....................... 1,308.3 1,233.6 3,973.6 3,618.3
Merger and restructuring-related gains...................... -- -- 62.2 --
-----------------------------------------------
Total noninterest income................................. $1,308.3 $1,233.6 $4,035.8 $3,618.3
===============================================================================================================
</Table>
in connection with an accelerated workout strategy. The additional provision for
credit losses were taken after extensive reviews of the Company's commercial
portfolio in light of recent world events, declining economic conditions, and
company-specific trends. This action recognized an increasing probability that
the current economic slowdown will accelerate or be more prolonged as a result
of recent events.
Refer to "Corporate Risk Profile" for further information on factors
considered by the Company in assessing the credit quality of the loan portfolio
and establishing the allowance for credit losses.
NONINTEREST INCOME Third quarter 2001 noninterest income was $1,308.3 million,
an increase of $74.7 million from the third quarter of 2000. For the nine months
ended September 30, 2001, noninterest income was $4,035.8 million compared with
$3,618.3 million in 2000. During the first nine months, noninterest income
included $62.2 million of merger and restructuring-related gains in connection
with the sale of 14 branches representing $771 million in deposits. Year-
to-date noninterest income, excluding merger and restructuring-related items,
was $3,973.6 million, an increase of $355.3 million, or 9.8 percent, from
$3,618.3 million in the first nine months of 2000.
Noninterest income during the third quarter and first nine months of 2001
included $59.8 million and $307.1 million, respectively, of gains related to the
sale of investment securities and principal-only residuals. The first nine
months of 2000 included a total of $46.9 million of securities gains and gains
associated with the disposal of two office buildings. Excluding the impact of
securities gains, merger and restructuring-related items and the building gains,
noninterest income increased in the third quarter and for the first nine months
of 2001 by $16.0 million, or 1.3 percent, and $68.3 million, or 1.4 percent,
respectively, compared with the same periods of 2000. Credit card fee revenue
declined $16.0 million, or 7.7 percent, in the third quarter of 2001 and
increased $19.9 million, or 3.5 percent, in first nine months of 2001 over the
same periods of 2000. The decline during the third quarter of 2001 is primarily
due to lower corporate, purchasing and retail card transaction volumes that, in
part, reflects lower charge volumes during the last three weeks of September.
Merchant and ATM processing revenue was higher in the third quarter and first
nine months of 2001 over the same period of 2000 by $85.5 million, or 161.3
percent, and $93.7 million, or 59.2 percent, principally due to the NOVA
acquisition. Deposit service charges, commercial product revenue, cash
management fees, and mortgage banking revenue improved $65.2 million (18.6
percent) in the third quarter and $193.9 million (19.8 percent) for the first
nine months of 2001 over the same periods of 2000. The increase in deposit
service charges was primarily due to the alignment and re-design of products and
features following the Firstar/USBM merger and pricing enhancements during 2000.
The increase in cash management fees and commercial product revenue was
primarily driven by growth in core business, the impact of fees generated by the
loan conduit, and product fee enhancements during 2000. Mortgage banking revenue
U.S. Bancorp 13
TABLE 6
NONINTEREST EXPENSE
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------
(Dollars in Millions) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------
Salaries.................................................... $ 580.3 $ 602.4 $1,741.3 $1,833.4
Employee benefits........................................... 85.4 89.4 284.2 301.6
Net occupancy............................................... 102.5 99.8 314.0 292.7
Furniture and equipment..................................... 74.9 79.6 226.7 232.0
Professional services....................................... 23.6 28.0 84.8 80.2
Advertising and marketing................................... 28.3 33.4 93.3 94.8
Travel and entertainment.................................... 19.5 25.7 69.2 77.0
Software.................................................... 33.9 27.5 97.2 81.6
Data processing............................................. 17.6 37.2 58.9 108.1
Communication............................................... 49.4 35.7 138.4 103.1
Postage..................................................... 44.7 43.1 135.4 130.3
Printing.................................................... 17.8 20.7 57.2 64.5
Goodwill.................................................... 64.9 60.4 196.6 178.6
Other intangible assets..................................... 82.2 37.3 177.5 111.7
Other....................................................... 193.7 113.5 480.2 330.9
-----------------------------------------------
Total operating noninterest expense...................... 1,418.7 1,333.7 4,154.9 4,020.5
Merger and restructuring-related charges.................... 148.8 117.7 805.8 264.6
-----------------------------------------------
Total noninterest expense................................ $1,567.5 $1,451.4 $4,960.7 $4,285.1
===============================================
Efficiency ratio*........................................... 54.6% 52.5% 58.3% 52.3%
Efficiency ratio, before merger and restructuring-related
items...................................................... 49.5 48.2 49.2 49.1
Banking efficiency ratio, before merger and
restructuring-related items**.............................. 45.7 42.8 44.7 44.1
===============================================================================================================
</Table>
*Computed as noninterest expense divided by the sum of net interest income on a
taxable-equivalent basis and noninterest income excluding securities gains
(losses), net.
**Without investment banking and brokerage activity.
increased in the third quarter of 2001 compared with the third quarter of 2000
due to increases in origination and sales fees and loan servicing revenue,
partially offset by a decrease in gain on sale of servicing rights. Partially
offsetting the increases in these items year-over-year was a reduction in
capital markets revenues (primarily U.S. Bancorp Piper Jaffray and U.S. Bancorp
Libra) and trust and investment management fees of $127.0 million (8.4 percent).
Declines in capital markets revenues and asset management fees reflected the
adverse market conditions since late 2000. Other income, including insurance and
retail product revenues, declined $63.0 million for the third quarter and $131.2
million for the first nine months from a year ago. The decline in other revenue
primarily reflected growth in insurance fees offset by a $36.0 million
impairment of commercial and retail leasing residuals in the third quarter of
2001 and a decline in the level of gains on equity investments compared with the
third quarter of 2000. Lower other income for the nine months ended September
30, 2001, also reflected a decline in building gains of $45.8 million from a
year ago.
NONINTEREST EXPENSE Third quarter 2001 noninterest expense was $1,567.5 million,
an increase of $116.1 million, or 8.0 percent, from the third quarter of 2000.
During the third quarter of 2001, noninterest expense included $148.8 of merger
and restructuring-related charges compared with $117.7 million in the third
quarter of 2000. Year-to-date noninterest expense was $4,960.7 million, an
increase of $675.6 million, or 15.8 percent, from the first nine months of 2000.
Year-to-date noninterest expense included $805.8 million of merger and
restructuring-related charges compared with $264.6 million for the same period
of 2000.
Third quarter 2001 noninterest expense, excluding merger and
restructuring-related charges, totaled $1,418.7 million, an increase of $85.0
million, or 6.4 percent, from the third quarter of 2000. During the first nine
months of 2001, noninterest expense, excluding merger and restructuring-related
charges, totaled $4,154.9 million, an increase of $134.4 million, or 3.3
percent, from the first nine months of 2000. The third quarter increase in
noninterest expense, on an operating basis, was primarily the result of core
business growth and approximately $85 million related to recent acquisitions,
including NOVA, Scripps Financial Corporation, Lyon Financial Service, Inc. and
41 branches in Tennessee, $24.7 million of MSR impairment related to the
declining rate environment, and asset write-downs of $14.0 million of commercial
leasing partnerships and repossessed tractor/trailer
14 U.S. Bancorp
property. These items were partially offset by cost savings related to merger
integration and restructuring activities and a reduction in expenses related to
capital markets activity. The increase in noninterest expenses, on an operating
basis, for the nine months ended September 30, 2001 was primarily the result of
the impact of the NOVA acquisition, the MSR impairment and the asset
write-downs. The increase was partially offset by integration cost savings and a
reduction in expenses related to capital markets activity. Net occupancy,
goodwill and other intangible expenses increased primarily due to the NOVA
acquisition and the purchase of 41 branches in Tennessee completed in the fourth
quarter of 2000.
In the third quarter of 2001, merger and restructuring-related items were
$163.1 million, including $148.8 million of noninterest expenses and a $14.3
million charge to the provision for credit losses. The total merger and
restructuring items consisted of $139.9 million of expenses associated with the
merger of Firstar and USBM, $17.6 million of restructuring expenses for U.S.
Bancorp Piper Jaffray and $5.7 million for other recent acquisitions. Other
acquisitions primarily represent NOVA, Mercantile Bancorporation, the Tennessee
branch purchase and Scripps Financial Corporation.
With respect to the Firstar/USBM merger, the $139.9 million of merger and
restructuring-related charges included $51.9 million to restructure a co-
branding relationship of USBM. The restructuring charge primarily consisted of a
$14.3 million provision for credit losses related to the release of certain
credit quality indemnifications in the original contract and $35.7 million for
the impairment of intangibles. Merger and restructuring-related charges also
included $22.5 million of severance and employee-related costs, $4.6 million of
building and equipment costs, $51.9 million of conversion and integration costs,
and $9.0 million of other restructuring expenses. Total merger and
restructuring-related charges associated with the Firstar and USBM merger are
expected to reach $1,400.5 million, exceeding the original estimate of $800
million by $600.5 million. The majority of the increase is due to risk
management policy conformance, the restructuring of the credit portfolio and
discontinuing products or exiting businesses that do not correspond with the
newly combined Company's strategic direction. These actions were not anticipated
at the time the merger was announced. The actions are expected, however, to
reduce the overall risk profile of the Company, as well as lead to higher cost
savings than originally anticipated. In response to significant changes in the
securities market during the past nine months and the increasingly competitive
environment for the industry, U.S. Bancorp Piper Jaffray is restructuring its
operations. The restructuring is expected to improve the operating efficiency of
the business by removing the excess capacity from the product distribution
system and by implementing new, more effective operating models. Of the
estimated $45.6 million of restructuring expense to be incurred, $17.6 million
and $45.6 million was expensed in the third quarter of 2001 and the first nine
months of 2001, respectively. In connection with the acquisition of NOVA, the
Company anticipates total merger and restructuring-related charges of $100
million to be incurred primarily in late 2001 and 2002.
INCOME TAX EXPENSE The provision for income taxes was $21.9 million (an
effective rate of 33.1 percent) for the third quarter of 2001 and $534.9 million
(an effective rate of 34.6 percent) for the first nine months of 2001, compared
with $370.9 million (an effective rate of 34.3 percent) and $1,135.9 million (an
effective rate of 35.0 percent) for the same periods of 2000. On an operating
basis (excluding impact of merger and restructuring items), the provision for
income taxes was $74.0 million (an effective rate of 31.6 percent) in the third
quarter of 2001 and $906.2 million (an effective rate of 33.3 percent) for the
first nine months of 2001, compared with $410.1 million (an effective rate of
33.6 percent) and $1,224.7 million (an effective rate of 34.3 percent) for the
same periods of 2000.
BALANCE SHEET ANALYSIS
LOANS The Company's loan portfolio was $114.6 billion at September 30, 2001, a
decrease of $7.8 billion from $122.4 billion at December 31, 2000. Commercial
loans, including lease financing, totaled $47.3 billion at September 30, 2001, a
decline of $5.5 billion (10.4 percent) from year-end 2000. This change in
commercial loans reflects the impact of equipment lease acquisitions offset by
the Company's transfer of $4.8 billion of short term, high quality, low
yielding, commercial loans into the loan conduit in the first nine months of
2001 and the second quarter transfer of $680 million in unsecured small business
product to loans held for sale. The Company's portfolio of commercial real
estate mortgages and construction loans was $25.5 billion at September 30, 2001,
a decline of $908 million from December 31, 2000. Residential mortgages, held in
the loan portfolio, continued to decline in the third quarter of 2001,
decreasing to $6.3 billion at September 30, 2001, from $7.8 billion at December
31, 2000. The decline reflected management's decision to reduce portfolio
balances in this loan
U.S. Bancorp 15
category. Total retail loan outstandings, which includes credit card, retail
leasing, home equity and other retail loans, increased $142 million to $35.5
billion at September 30, 2001, from $35.4 billion at December 31, 2000.
LOANS HELD FOR SALE At September 30, 2001, loans held for sale, primarily
comprising an unsecured small business product and residential mortgage loans to
be sold in the secondary markets, were $2.4 billion compared with $764 million
at December 31, 2000. The increase reflected the surge in residential mortgage
production volume in 2001 due to declining interest rates as well as the second
quarter transfer of approximately $680 million of unsecured small business loans
of the USBM. As part of realigning its small business products, management has
decided to discontinue this specific product offering. Residential mortgage
production increased to $3.9 billion in the third quarter 2001 compared with
$1.8 billion in the fourth quarter of 2000.
SECURITIES At September 30, 2001, investment securities, both available-for-sale
and held-to-maturity, totaled $25.6 billion, compared with $17.6 billion at
December 31, 2000, primarily reflecting net purchases of available-for-sale
securities. During the first nine months, the Company has sold $18.5 billion of
securities and purchased $28.5 billion of investment securities. Securities sold
in the third quarter primarily represented tax exempt municipal securities.
DEPOSITS Total deposits were $103.8 billion at September 30, 2001, down $5.7
billion (5.2 percent) from December 31, 2000. Noninterest-bearing deposits were
$27.1 billion at September 30, 2001, compared with $26.6 billion at December 31,
2000. Interest-bearing deposits, including time deposits greater than $100,000,
totaled $76.7 billion at September 30, 2001, compared with $82.9 billion at
December 31, 2000. The increase in noninterest-bearing deposit balances was
primarily attributable to core business growth offset somewhat by branch
divestitures. The change in interest-bearing deposits was primarily due to the
impact of branch divestitures and pricing decisions related to savings
certificates within the Company's markets and lower foreign deposits.
BORROWINGS Short-term borrowings, which include federal funds purchased,
securities sold under agreements to repurchase and other short-term borrowings,
were $12.6 billion at September 30, 2001, up from $11.8 billion at year-end
2000. The slight increase reflected funding requirements associated with
investment portfolio purchases and a reduction in foreign deposits. Long-term
debt was $26.9 billion at September 30, 2001, up from $21.9 billion at December
31, 2000. The increase reflected the issuance of $1.5 billion of fixed-rate
subordinated notes and $1.1 billion of senior contingent convertible debt as
well as funding decisions given the declining rate environment during the year.
CORPORATE RISK PROFILE
CREDIT MANAGEMENT The Company's strategy for credit risk management includes
stringent, centralized credit policies, and uniform underwriting criteria for
all loans including 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 adequate reserve levels. Commercial banking operations rely on a strong
credit culture that combines prudent credit policies and individual lender
accountability. In addition, the Company's commercial lenders generally focus on
middle market companies within their regions. The Company utilizes a credit risk
rating system in order to measure the credit quality of individual commercial
loan transactions. The risk rating system is intended to identify and measure
the credit quality of lending relationships. In the Company's retail banking
operations, standard credit scoring systems are used to assess consumer credit
risks and to price consumer products accordingly. The Company also engages in
nonlending activities that may give rise to credit risk, including interest rate
swap contracts for balance sheet hedging purposes, foreign exchange transactions
and interest rate swap contracts for customers, and the processing of credit
card transactions for merchants. These activities are subject to the same credit
review, analysis and approval processes as those applied to commercial loans.
In evaluating its credit risk, the Company considers changes, if any, in
underwriting activities, the loan portfolio composition (including product mix
and geographic, industry or customer-specific concentrations), trends in loan
performance, the level of allowance coverage, and macroeconomic factors.
Generally, the domestic economy experienced slower growth in 2000. During 2001,
corporate earnings have continued to weaken and credit quality indicators among
certain industry sectors have continued to
16 U.S. Bancorp
TABLE 7
SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------
(Dollars in Millions) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------
Balance at beginning of period.............................. $1,715.7 $1,757.0 $1,786.9 $1,710.3
CHARGE-OFFS
Commercial
Commercial............................................ 323.8 79.9 693.2 228.0
Lease financing....................................... 84.9 5.6 129.3 15.9
-----------------------------------------------
Total commercial................................... 408.7 85.5 822.5 243.9
Commercial real estate
Commercial mortgages.................................. 8.7 1.8 44.2 7.5
Construction and development.......................... 3.4 6.1 7.5 6.2
-----------------------------------------------
Total commercial real estate....................... 12.1 7.9 51.7 13.7
Residential mortgages.................................... 4.5 3.0 12.7 10.6
Retail
Credit card........................................... 77.1 58.2 216.3 173.5
Retail leasing........................................ 8.2 4.2 23.3 9.5
Other retail.......................................... 110.1 94.1 320.7 281.4
-----------------------------------------------
Total retail....................................... 195.4 156.5 560.3 464.4
-----------------------------------------------
Total charge-offs............................... 620.7 252.9 1,447.2 732.6
RECOVERIES
Commercial
Commercial............................................ 16.6 11.0 40.2 41.2
Lease financing....................................... 6.7 .8 22.4 2.4
-----------------------------------------------
Total commercial................................... 23.3 11.8 62.6 43.6
Commercial real estate
Commercial mortgages.................................. 1.8 1.1 9.0 9.3
Construction and development.......................... -- .3 .8 2.4
-----------------------------------------------
Total commercial real estate....................... 1.8 1.4 9.8 11.7
Residential mortgages.................................... .9 .7 2.6 1.2
Retail
Credit card........................................... 5.6 5.8 18.5 19.6
Retail leasing........................................ 1.1 .5 3.0 1.3
Other retail.......................................... 24.7 18.8 70.0 59.3
-----------------------------------------------
Total retail....................................... 31.4 25.1 91.5 80.2
-----------------------------------------------
Total recoveries................................ 57.4 39.0 166.5 136.7
NET CHARGE-OFFS
Commercial
Commercial............................................ 307.2 68.9 653.0 186.8
Lease financing....................................... 78.2 4.8 106.9 13.5
-----------------------------------------------
Total commercial................................... 385.4 73.7 759.9 200.3
Commercial real estate
Commercial mortgages.................................. 6.9 .7 35.2 (1.8)
Construction and development.......................... 3.4 5.8 6.7 3.8
-----------------------------------------------
Total commercial real estate....................... 10.3 6.5 41.9 2.0
Residential mortgages.................................... 3.6 2.3 10.1 9.4
Retail
Credit card........................................... 71.5 52.4 197.8 153.9
Retail leasing........................................ 7.1 3.7 20.3 8.2
Other retail.......................................... 85.4 75.3 250.7 222.1
-----------------------------------------------
Total retail....................................... 164.0 131.4 468.8 384.2
-----------------------------------------------
Total net charge-offs........................... 563.3 213.9 1,280.7 595.9
-----------------------------------------------
Provision for credit losses................................. 1,289.3 214.0 2,263.0 598.5
Losses from loan sales/transfers............................ (1.3) -- (329.3) --
Acquisitions and other changes.............................. 17.6 19.5 18.1 63.7
-----------------------------------------------
Balance at end of period.................................... $2,458.0 $1,776.6 $2,458.0 $1,776.6
===============================================
Allowance as a percentage of:
Period-end loans......................................... 2.15% 1.46%
Nonperforming loans...................................... 243 267
Nonperforming assets..................................... 217 240
Annualized net charge-offs............................... 110 209
===============================================================================================================
</Table>
U.S. Bancorp 17
deteriorate. Large corporate and middle-market commercial businesses have
announced or continue to implement restructuring activities in an effort to
improve operating margins. The stagnant economic growth is evidenced by the
Federal Reserve Board's recent actions during late 2000 and 2001 to stimulate
economic growth through a series of interest rate reductions. In response to
declining economic conditions, company-specific portfolio trends, and the
Firstar/USBM merger, the Company undertook an extensive review of its commercial
and consumer loan portfolios in early 2001. As a result of this review, the
Company initiated several actions during the first six months of 2001 including
aligning the risk management practices and chargeoff policies of the companies,
restructuring a specific segment of its healthcare portfolio, selling certain
consumer loan portfolios of USBM and discontinuing an unsecured small business
product that does not align with the product offerings of the combined company.
The Company also implemented an accelerated loan workout strategy for certain
commercial credits. By the end of the second quarter of 2001, economic stimulus
by the Federal Reserve Board as well as management's actions appeared to have
reduced the rate of credit quality deterioration. However, recent events during
the third quarter of 2001 have resulted in an increasing probability that the
current economic slowdown will accelerate or be more prolonged than previously
estimated by management. As a result, the Company conducted an additional review
of its credit portfolios and recognized the need to address the impact that
these events are expected to have on its credit portfolios. As a result, the
Company recorded an incremental provision for credit losses of approximately
$1,025 million in the third quarter of 2001. The impact of these actions is
discussed throughout the following sections.
ANALYSIS OF NET CHARGE-OFFS Total net loan charge-offs were $563.3 million and
$1,280.7 million in the third quarter and first nine months of 2001,
respectively, compared with $213.9 million and $595.9 in the same periods of
2000. The increase in net charge-offs for the quarter compared with third
quarter of 2000 is primarily due to $313.2 million of commercial charge-offs
related to specific events or credit initiatives taken by management during the
third quarter. The increase in year-to-date net charge-offs of $684.8 million
was due to deterioration in economic conditions affecting the commercial loan
portfolio, actions taken by the Company during the first nine months of 2001,
and an increase in credit card net charge-offs. Also, included in year-to-date
net charge-offs are $90.0 million of write-offs to conform risk management
practices, align charge-off policies and expedite the transition out a specific
segment of the health care portfolio not meeting the risk profile of the
combined company.
Commercial and commercial real estate loan net charge-offs were $395.7
million for the third quarter of 2001, or 2.07 percent of average loans
outstanding, compared with $80.2 million, or .40 percent, of average loans
outstanding, in the third quarter of 2000. Approximately $313.2 million of the
increase in charge-offs reflected several factors including: a large cattle
TABLE 8
NET CHARGE-OFFS AS A PERCENTAGE OF AVERAGE LOANS OUTSTANDING
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------
2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------
COMMERCIAL
Commercial............................................... 2.79% .59% 1.92% .55%
Lease financing.......................................... 5.24 .43 2.44 .43
-------------------------------------------
Total commercial...................................... 3.08 .57 1.98 .54
COMMERCIAL REAL ESTATE
Commercial mortgages..................................... .14 .01 .25 (.01)
Construction and development............................. .19 .33 .12 .07
-------------------------------------------
Total commercial real estate.......................... .16 .10 .21 .01
RESIDENTIAL MORTGAGES....................................... .22 .10 .19 .13
RETAIL
Credit card.............................................. 4.97 4.16 4.67 4.23
Retail leasing........................................... .61 .43 .61 .38
Other retail............................................. 1.37 1.22 1.35 1.22
-------------------------------------------
Total retail........................................... 1.85 1.58 1.80 1.60
-------------------------------------------
Total loans.......................................... 1.90% .71% 1.43% .68%
===========================================================================================================
</Table>
18 U.S. Bancorp
TABLE 9
NONPERFORMING ASSETS*
<Table>
<Caption>
September 30, December 31,
(Dollars in Millions) 2001 2000
- ---------------------------------------------------------------------------------------------
COMMERCIAL
Commercial............................................... $ 580.8 $ 470.4
Lease financing.......................................... 136.6 70.5
-----------------------------
Total commercial...................................... 717.4 540.9
COMMERCIAL REAL ESTATE
Commercial mortgages..................................... 124.7 105.5
Construction and development............................. 55.5 38.2
-----------------------------
Total commercial real estate.......................... 180.2 143.7
RESIDENTIAL MORTGAGES....................................... 76.7 56.9
RETAIL
Credit card.............................................. -- 8.8
Retail leasing........................................... 5.3 --
Other retail............................................. 31.7 15.0
-----------------------------
Total retail.......................................... 37.0 23.8
-----------------------------
Total nonperforming loans....................... 1,011.3 765.3
OTHER REAL ESTATE........................................... 55.4 61.1
OTHER ASSETS................................................ 65.7 40.6
-----------------------------
Total nonperforming assets...................... $ 1,132.4 $ 867.0
-----------------------------
Accruing loans 90 days or more past due**................... $ 483.8 $ 385.2
Nonperforming loans to total loans.......................... .88% .63%
Nonperforming assets to total loans plus other real
estate..................................................... .99 .71
=============================================================================================
DELINQUENT LOAN RATIOS***
September 30, December 31,
90 days or more past due 2001 2000
- ---------------------------------------------------------------------------------------------
COMMERCIAL
Commercial............................................... 1.60% 1.11%
Lease financing.......................................... 2.83 1.24
-----------------------------
Total commercial...................................... 1.76 1.13
COMMERCIAL REAL ESTATE
Commercial mortgages..................................... .73 .61
Construction and development............................. 1.32 .57
-----------------------------
Total commercial real estate.......................... .88 .60
RESIDENTIAL MORTGAGES....................................... 2.07 1.49
RETAIL
Credit card.............................................. 2.08 1.85
Retail leasing........................................... .25 .20
Other retail............................................. .71 .64
-----------------------------
Total retail.......................................... .87 .79
-----------------------------
Total........................................... 1.31% .94%
=============================================================================================
</Table>
*Throughout this document, nonperforming assets and related ratios do not
include accruing loans 90 days or more past due.
**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.
***Ratios include nonperforming loans and are expressed as a percent of ending
loan balances.
fraud, recent collateral deterioration specific to transportation equipment
caused by the impact of fuel prices and the economy, further deterioration in
the manufacturing, communications and technology sectors and specific management
decisions to accelerate its workout strategy for certain borrowers. Commercial
and commercial real estate loan net charge-offs for the first nine months of
2001 were $801.8 million, or 1.38 percent of average loans outstanding, compared
with $202.3 million, or .36 percent, of average loans outstanding for the first
nine months of 2000. In addition to specific actions taken in the third quarter,
U.S. Bancorp 19
commercial and commercial real estate loan net charge-offs for the first nine
months of 2001 included $255.0 million in merger and restructuring-related
charge-offs and $160.0 million of charge-offs associated with accelerated loan
workout strategy announced in the first quarter.
Retail loan net charge-offs of $164.0 million in the third quarter of 2001
were higher than the same period of 2000 by $32.6 million, or 24.8 percent. For
the nine months ended September 30, 2001, retail loan net charge-offs of $468.8
million were higher by $84.6 million, or 22.0 percent, than the same period of
2000. Included in the first quarter of 2001 net retail charge-offs were $21.3
million of charge-offs associated with portfolios sold at the end of the
quarter. Retail loan net charge-offs as a percent of average loans outstanding
were 1.85 percent in the third quarter and 1.80 percent in the first nine months
of 2001, compared with 1.58 percent and 1.60 percent in the third quarter and
first nine months of 2000, respectively. The increase in retail chargeoffs
during the third quarter and the first nine months of 2001 was primarily due to
higher bankruptcies and consumer delinquencies, reflecting the continuing
downturn in economic conditions.
In assessing the impacts of specific events and credit initiatives,
management attempts to determine the level of net chargeoffs on a "normalized"
basis. Excluding net chargeoffs associated with specific events or credit
initiatives, management estimates that normalized net chargeoffs would be
approximately $250.1 million during the third quarter of 2001. Given the
increasing probability that the current economic slowdown will accelerate or be
more prolonged by recent events, there is still significant uncertainty as to
the level and timing of commercial charge-offs over the next several quarters.
ANALYSIS OF NONPERFORMING ASSETS Nonperforming assets at September 30, 2001,
totaled $1,132.4 million, compared with $867.0 million at December 31, 2000. The
$265.4 million increase in nonperforming assets from December 31, 2000, to
September 30, 2001, was primarily due to merger and restructuring-related and
risk management actions taken during the year, credits being reduced to
secondary market valuations and placed on nonperforming status, and continuing
stress in sectors of the economy, particularly in manufacturing, automobile and
transportation. The increase was partially offset by the disposition of
nonperforming assets identified as part of the Company's accelerated workout
program in the first quarter of 2001 and commercial charge-offs taken during the
third quarter of 2001. The ratio of nonperforming assets to loans and other real
estate owned was .99 percent at September 30, 2001, compared with .71 percent at
December 31, 2000. Given continued economic stress in various industry sectors,
the Company may experience higher levels of nonperforming assets during the next
several quarters.
Accruing loans 90 days or more past due at September 30, 2001, totaled
$483.8 million, compared with $385.2 million at December 31, 2000. These loans
were not included in nonperforming assets because they were secured by
collateral and/or are in the process of collection and are reasonably expected
to result in repayment or be returned to current status. Retail loans 30 to 89
days past due were 1.99 percent of the retail loan portfolio at September 30,
2001, compared with 2.02 percent at December 31, 2000. The percentage of retail
loans 90 days or more past due was .87 percent of total retail loans at
September 30, 2001, compared with .79 percent at December 31, 2000.
ANALYSIS AND DETERMINATION OF THE ALLOWANCE FOR CREDIT LOSSES The allowance for
credit losses provides coverage for probable losses inherent in the Company's
loan portfolio. Management evaluates the allowance each quarter to determine
that it is adequate to cover inherent losses. The evaluation of each element and
the overall allowance is based on a continuing assessment of problem loans and
related off-balance sheet items, recent loss experience, and other factors,
including regulatory guidance and economic conditions.
The allowance for credit losses was $2,458.0 million at September 30, 2001,
$671.1 million higher than the allowance for credit losses of $1,786.9 million
at December 31, 2000. Several factors impacted the allowance for credit losses
during the first nine months of 2001 including merger and restructuring-related
credit actions, management's extensive review of the commercial loans portfolio
in light of current economic conditions, risk rating changes by regulators of
shared national credits agented by other banks, Company-specific portfolio
trends, and the transfer of the unsecured small business line of credit
portfolio to loans held for sale. During the third quarter of 2001, the Company
recognized an incremental provision for credit losses to strengthen allowance
coverage ratios. This action recognizes an increasing probability that the
current economic slowdown will accelerate or be more prolonged as a result of
recent events. This action also reflects increasing uncertainties surrounding
the timing of an economic recovery and its impact on the credit quality of the
loan portfolio. Given recent events, deterioration in the manufacturing and
transportation sectors is now expected to continue. Uncertainty with respect to
the airline industry, travel and entertainment and consumer-related businesses
also
20 U.S. Bancorp
TABLE 10
INTEREST RATE SWAP HEDGING PORTFOLIO NOTIONAL BALANCES AND YIELDS BY
MATURITY DATE
<Table>
<Caption>
At September 30, 2001 (Dollars in Millions)
- ----------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Notional Interest Rate Interest Rate
Maturity Date Amount Received Paid
- ----------------------------------------------------------------------------------------------------------------
2001........................................................ $ 15 6.22% 2.61%
2002........................................................ 3,295 4.57 3.31
2003........................................................ 2,516 4.97 3.18
2004........................................................ 2,975 5.35 3.28
2005........................................................ 1,984 6.07 3.46
Thereafter.................................................. 5,355 6.43 3.54
-------
Total....................................................... $16,140 5.58% 3.38%
================================================================================================================
</Table>
*At September 30, 2001, the Company received fixed-rate interest and paid
variable-rate interest on substantially all swaps in its hedging portfolio. The
Company had $1.0 billion in basis swaps maturing in 2002.
has been considered by management in determining the allowance for credit losses
as of September 30, 2001. The ratio of allowance for credit losses to
nonperforming loans was 243 percent at September 30, 2001, up from the ratio of
233 percent at December 31, 2000. The ratio of allowance for credit losses to
period-end loans was 2.15 percent of loans at September 30, 2001, compared with
the ratio of 1.46 percent at December 31, 2000. Management has determined that
the allowance for credit losses is adequate.
INTEREST RATE RISK MANAGEMENT The Company manages its exposure to adverse
changes in interest rates through asset and liability management activities
within guidelines established by its Asset/Liability Policy Committee ("ALPC").
The Company limits the exposure of net interest income associated with interest
rate movements through asset/liability management strategies. The ALPC uses net
interest income simulation modeling and market value of equity as the primary
methods for measuring and managing consolidated interest rate risk.
NET INTEREST INCOME SIMULATION MODELING: The Company uses a net interest income
simulation model to estimate the impact on net interest income and net interest
margin due to changes in interest rates. The model, which is updated monthly,
incorporates substantially all of 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. ALPC
also calculates the sensitivity of the simulation results to changes in key
assumptions, such as the Prime/LIBOR spread or core deposit repricing. The
results from the simulation are reviewed by ALPC monthly and are used to guide
ALPC's hedging strategies. ALPC guidelines, approved by the Company's Board of
Directors, limit the estimated change in net interest income to 7.5 percent of
forecasted net interest income given a 3 percent change in interest rates
occurring over a 12 month time period. Forecasted net interest income for the
next 12 months would decrease approximately .33 percent from an upward parallel
shift in rates and would increase approximately .15 percent from a downward
shift of similar magnitude.
MARKET VALUE OF EQUITY The Company also uses market value of equity as an
interest rate risk management tool. The market value of equity measures the
changes in the value of the Company's assets and liabilities to changes in
interest rates. This model estimates the effect of 1 percent, 2 percent and 3
percent rate shocks on the present value of substantially all future cash flows
of the Company's outstanding assets, liabilities and off-balance sheet
instruments. ALPC also calculates the sensitivity of the simulation results to
changes in key assumptions, such as core deposit repricing and core deposit
life. The amount of market value risk is subject to a limit, approved by the
Company's Board of Directors, of 15 percent change for an immediate 200 basis
point rate shock. The Company's market value risk position continues to be
substantially lower than its limits.
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 risk by entering into derivative contracts,
primarily receive fixed interest rate swaps and to a lesser degree basis swaps
and interest rate caps and floors.
Interest rate swap agreements involve the exchange of fixed and variable
rate payments without the exchange of the underlying notional amount on which
the interest payments are calculated. As of September 30, 2001, the Company
received and made payments on $16.1 billion notional amount of interest
U.S. Bancorp 21
TABLE 11
CAPITAL RATIOS
<Table>
<Caption>
September 30, December 31,
(Dollars in Millions) 2001 2000
- ---------------------------------------------------------------------------------------------
Tangible common equity...................................... $ 9,524 $ 10,045
As a percent of tangible assets.......................... 5.9% 6.3%
Tier 1 capital.............................................. $ 11,802 $ 11,602
As a percent of risk-weighted assets..................... 7.2% 7.2%
As a percent of adjusted quarterly average assets
(leverage ratio)........................................ 7.4% 7.4%
Total risk-based capital.................................... $ 18,687 $ 17,038
As a percent of risk-weighted assets..................... 11.5% 10.6%
=============================================================================================
</Table>
rate swap agreements. These swaps had a weighted average interest rate received
of 5.58 percent and a weighted average interest rate paid of 3.38 percent. The
remaining maturity of these agreements ranges from 2 months to 25.2 years with
an average remaining maturity of 5.0 years.
The Company also purchases interest rate caps, floors, and basis swaps to
minimize the impact of fluctuating interest rates on earnings. To reduce its
exposure to rising interest rates, the Company may use interest rate caps.
Counterparties to these interest rate cap agreements pay the Company based on
the notional amount and the difference between current rates and strike rates.
There were no caps outstanding at September 30, 2001. To reduce its exposure to
declining interest rates, the Company uses interest rate floors. Like caps,
counterparties to interest rate floor agreements pay the Company based on the
notional amount and the difference between current rates and strike rates. There
were no floors outstanding at September 30, 2001. Basis swaps help the Company
manage the interest income risk associated with LIBOR-based funding of prime
based lending relationships. At September 30, 2001, the notional amount of the
Company's basis swaps totaled $1.0 billion. The impact of basis swaps, and
interest rate caps and floors was not significant to the results of operations
for the third quarters of 2001 and 2000.
All derivative transactions that qualify for hedge accounting are recorded
at fair value as other assets or liabilities on the balance sheet. The
derivatives are classified as either a hedge of the fair value of a recognized
fixed rate asset or liability ("fair value" hedge) or as a hedge of the
variability of cash flows related to a recognized asset or liability or a
forecasted transaction ("cash flow" hedge).
Changes in the fair value of derivatives designated as fair value hedges and
the offsetting changes in the fair value of the hedged items are recorded in
income. Changes in the fair value of derivatives designated as cash flow hedges
are recorded in other comprehensive income until income from the cash flows of
the hedged items are recorded. The Company performs an assessment, both at the
inception of the hedge and on an ongoing basis, to determine whether these
derivatives are highly effective in offsetting changes in the hedged items.
Hedge ineffectiveness for both cash flow and fair value hedges is immediately
recorded in noninterest income.
For a fair value hedge, if the swap or contract is terminated, or ceases to
be highly effective, the gain or loss recorded as an adjustment to the carrying
amount of the hedged item is amortized to earnings over the remaining life of
the hedged asset or liability. If the hedged item is disposed of, the swap or
contract agreement is marked to market with any resulting gain or loss included
in the gain or loss from the disposition.
For a cash flow hedge, if the swap or contract is terminated, or ceases to
be highly effective, the gain or loss recorded in other comprehensive income is
amortized into income during the same period(s) that the forecasted hedged
transaction impacts earnings. If the hedged item is disposed of, or a forecasted
transaction is no longer probable, the swap or contract agreement is marked to
market with any resulting gain or loss included in the gain or loss from the
disposition.
Intermediated swaps and all other derivative contracts are marked to market
and resulting gains or losses are recorded in trading account profits and
commissions. The Company's derivative trading activities are not material to the
consolidated financial statements.
The Company's interest rate swaps designated as fair value hedges of
underlying fixed rate debt, trust preferred securities, and deposit obligations
have a fair value of $478.4 million at September 30, 2001, which includes the
addition of $2.2 billion notional amount of interest rate swaps that are
designated as a hedge of fixed rate debt issued in third quarter 2001. In
addition, the Company enters into forward commitments to sell groups of
residential mortgage loans that it originates or purchases as part of its
mortgage banking activities. The fair value of the forward commitments at
September 30, 2001 was ($6.5) million.
22 U.S. Bancorp
The Company has interest rate swaps designated as cash flow hedges linked to
the cash flows of variable rate loans. The swaps have a fair value of $170.3
million at September 30, 2001, which includes $1.5 billion notional amount of
interest rate swaps added as a hedge of variable rate loans during the third
quarter of 2001. No significant changes have occurred in the Company's
derivatives not treated as hedges for accounting purposes in the third quarter
of 2001.
MARKET RISK MANAGEMENT Market risk is subject to regular monitoring by
management. The Company uses a value-at-risk ("VaR") model to measure and manage
market risk in its trading activities. The VaR model uses an estimate of
volatility appropriate to each instrument and a ninety-ninth percentile adverse
move in the underlying markets. Market risk limits are established subject to
approval by the Company's Board of Directors. The Company's VaR limit was $40
million at September 30, 2001. The market valuation risk inherent in its
broker/dealer activities, including equities, fixed income, high yield
securities and foreign exchange, as estimated by the VaR analysis, was $12.3
million at September 30, 2001.
In addition to the VaR analysis, the Company imposes stop loss limits and
position limits. A stress-test model is used to provide management with
perspective on market events that a VaR model does not capture. In each case,
the historical worst performance of each asset class is observed and applied to
current trading positions.
CAPITAL MANAGEMENT Total shareholders' equity was $16.8 billion at September 30,
2001, compared with $15.2 billion at December 31, 2000. The increase was the
result of corporate earnings, including merger and restructuring-related items,
offset by common stock dividends declared.
Tangible common equity to assets was 5.9 percent at September 30, 2001,
compared with 6.3 percent at December 31, 2000. The Tier 1 capital ratio was 7.2
percent at September 30, 2001, remaining flat compared to December 31, 2000. The
total risk-based capital ratio was 11.5 percent at September 30, 2001, compared
with 10.6 percent at December 31, 2000. The improvement in the total risk-based
capital ratio during 2001 primarily reflected the changes in the mix of
investment securities in addition to the issuance of trust preferred securities.
The leverage ratio was 7.4 percent at September 30, 2001, and December 31, 2000.
All regulatory ratios continue to be in excess of stated "well capitalized"
requirements.
The stock repurchase programs of Firstar and USBM were rescinded on October
4, 2000, and January 17, 2001, respectively, in connection with the planned
merger of the two companies.
On July 17, 2001, the Company's Board of Directors authorized the repurchase
of up to 56.4 million shares of the Company's common stock in connection with
the July 24, 2001 acquisition of NOVA. During the third quarter of 2001, the
Company repurchased 1.3 million shares of common stock in both public and
private transactions. The Company also entered into forward contracts to
repurchase the majority of the remaining shares authorized for repurchase. These
contracts include agreements to repurchase 18.4 million shares in the fourth
quarter of 2001, 17.8 million shares in the first quarter of 2002 and 8.9
million shares in the second quarter of 2002.
ACCOUNTING CHANGES
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," as amended, establishes accounting and
reporting standards for all derivative instruments and criteria for designation
and effectiveness of hedging activities. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities on the balance sheet
and measure those instruments at fair value. The changes in the fair value of
the derivatives are recognized currently in earnings unless specific hedge
accounting criteria are met. If the derivative qualifies as a hedge, the
accounting treatment varies based on the type of risk being hedged. On January
1, 2001, the Company adopted SFAS 133. Transition adjustments related to
adoption resulted in an after-tax loss of approximately $4.1 million recorded in
net income and an after-tax increase of $5.2 million to other comprehensive
income. The transition adjustments related to adoption were not material to the
Company's financial statements; and, although recorded, were not separately
reported in the consolidated statement of income.
ACCOUNTING FOR BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS In
June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations" and
Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and
Other Intangible Assets". SFAS 141 mandates the purchase method of accounting be
used for all business combinations initiated after June 30, 2001 and establishes
specific criteria for the recognition of intangible assets separately from
goodwill. SFAS 142 addresses the accounting for goodwill and intangible
U.S. Bancorp 23
assets subsequent to their acquisition. The Company is required to adopt SFAS
142 on January 1, 2002. The most significant changes made by SFAS 142 are that
goodwill and indefinite lived intangible assets will no longer be amortized and
will be tested for impairment at adoption and at least annually, thereafter. Any
impairment changes resulting from the initial adoption would be recognized as a
"cumulative effect of accounting change" in the income statement. The
amortization provisions of SFAS 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the amortization provisions of SFAS 142 are
effective upon adoption of SFAS 142. The Company has not yet fully determined
the impact these standards may have on its financial position or results of
operations.
24 U.S. Bancorp
CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
September 30, December 31,
(Dollars in Millions) 2001 2000
- ---------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Cash and due from banks..................................... $ 7,570 $ 8,475
Money market investments.................................... 763 657
Trading account securities.................................. 746 753
Investment securities
Held-to-maturity (fair value $291 and $257,
respectively)........................................... 279 252
Available-for-sale....................................... 25,349 17,390
Loans held for sale......................................... 2,407 764
Loans
Commercial............................................... 47,259 52,817
Commercial real estate................................... 25,535 26,443
Residential mortgages.................................... 6,279 7,753
Retail................................................... 35,494 35,352
-----------------------------
Total loans........................................... 114,567 122,365
Less allowance for credit losses................... 2,458 1,787
-----------------------------
Net loans.......................................... 112,109 120,578
Premises and equipment...................................... 1,773 1,836
Customers' liability on acceptances......................... 150 183
Goodwill and other intangible assets........................ 7,448 5,309
Other assets................................................ 9,236 8,724
-----------------------------
Total assets.......................................... $ 167,830 $ 164,921
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing...................................... $ 27,074 $ 26,633
Interest-bearing......................................... 65,874 68,177
Time deposits greater than $100,000...................... 10,857 14,725
-----------------------------
Total deposits........................................ 103,805 109,535
Short-term borrowings....................................... 12,614 11,833
Long-term debt.............................................. 26,881 21,876
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely the junior
subordinated debentures of the parent company............ 2,115 1,400
Acceptances outstanding..................................... 150 183
Other liabilities........................................... 5,448 4,926
-----------------------------
Total liabilities..................................... 151,013 149,753
Shareholders' equity
Common stock, par value $0.01 a share
authorized: 9/30/01 -- 4,000,000,000 shares;
12/31/00 -- 2,000,000,000 shares
issued: 9/30/01 -- 1,972,454,062 shares;
12/31/00 -- 1,943,541,593 shares....................... 20 19
Capital surplus.......................................... 4,918 4,276
Retained earnings........................................ 11,585 11,658
Less cost of common stock in treasury:
9/30/01 -- 3,488,518 shares; 12/31/00 -- 41,458,159
shares................................................ (62) (880)
Other comprehensive income............................... 356 95
-----------------------------
Total shareholders' equity............................ 16,817 15,168
-----------------------------
Total liabilities and shareholders' equity............ $ 167,830 $ 164,921
=============================================================================================
</Table>
See Notes to Consolidated Financial Statements.
U.S. Bancorp 25
CONSOLIDATED STATEMENT OF INCOME
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars and Shares in Millions, Except Per Share Data) -----------------------------------------------
(Unaudited) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans....................................................... $2,285.6 $2,710.7 $7,384.4 $7,774.6
Loans held for sale......................................... 53.9 32.7 96.4 79.9
Investment securities
Taxable.................................................. 321.2 250.4 862.3 757.0
Non-taxable.............................................. 15.9 34.8 74.9 107.2
Money market investments.................................... 6.3 14.5 22.6 43.1
Trading securities.......................................... 11.2 12.8 41.2 39.7
Other interest income....................................... 24.3 37.7 82.4 112.0
-----------------------------------------------
Total interest income................................. 2,718.4 3,093.6 8,564.2 8,913.5
INTEREST EXPENSE
Deposits.................................................... 670.0 954.0 2,336.7 2,643.1
Short-term borrowings....................................... 122.9 191.2 433.5 561.0
Long-term debt.............................................. 276.7 403.9 957.4 1,112.1
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely the junior
subordinated debentures of the parent company.............. 39.7 31.5 102.7 89.2
-----------------------------------------------
Total interest expense................................ 1,109.3 1,580.6 3,830.3 4,405.4
-----------------------------------------------
Net interest income......................................... 1,609.1 1,513.0 4,733.9 4,508.1
Provision for credit losses................................. 1,289.3 214.0 2,263.0 598.5
-----------------------------------------------
Net interest income after provision for credit losses....... 319.8 1,299.0 2,470.9 3,909.6
NONINTEREST INCOME
Credit card fee revenue..................................... 192.2 208.2 588.9 569.0
Merchant and ATM processing revenue......................... 138.5 53.0 252.1 158.4
Trust and investment management fees........................ 226.2 231.1 679.2 692.4
Deposit service charges..................................... 168.7 144.3 491.9 405.7
Cash management fees........................................ 89.7 74.7 251.4 220.6
Mortgage banking revenue.................................... 60.3 44.7 165.5 135.5
Trading account profits and commissions..................... 43.6 50.9 171.3 196.0
Investment products fees and commissions.................... 108.0 107.8 347.9 357.7
Investment banking revenue.................................. 56.9 100.6 188.2 267.5
Commercial product revenue.................................. 96.2 86.0 266.1 219.2
Securities gains, net....................................... 59.8 1.1 307.1 1.1
Merger and restructuring-related gains...................... -- -- 62.2 --
Other....................................................... 68.2 131.2 264.0 395.2
-----------------------------------------------
Total noninterest income.............................. 1,308.3 1,233.6 4,035.8 3,618.3
NONINTEREST EXPENSE
Salaries.................................................... 580.3 602.4 1,741.3 1,833.4
Employee benefits........................................... 85.4 89.4 284.2 301.6
Net occupancy............................................... 102.5 99.8 314.0 292.7
Furniture and equipment..................................... 74.9 79.6 226.7 232.0
Communication............................................... 49.4 35.7 138.4 103.1
Postage..................................................... 44.7 43.1 135.4 130.3
Goodwill.................................................... 64.9 60.4 196.6 178.6
Other intangible assets..................................... 82.2 37.3 177.5 111.7
Merger and restructuring-related charges.................... 148.8 117.7 805.8 264.6
Other....................................................... 334.4 286.0 940.8 837.1
-----------------------------------------------
Total noninterest expense............................. 1,567.5 1,451.4 4,960.7 4,285.1
-----------------------------------------------
Income before income taxes.................................. 60.6 1,081.2 1,546.0 3,242.8
Applicable income taxes..................................... 21.9 370.9 534.9 1,135.9
-----------------------------------------------
Net income.................................................. $ 38.7 $ 710.3 $1,011.1 $2,106.9
-----------------------------------------------
Earnings per share.......................................... $ .02 $ .37 $ .53 $ 1.10
Diluted earnings per share.................................. $ .02 $ .37 $ .52 $ 1.10
===============================================
Average common shares....................................... 1,952.7 1,895.6 1,919.9 1,909.5
Average diluted common shares............................... 1,965.4 1,907.1 1,932.9 1,922.1
===============================================================================================================
</Table>
See Notes to Consolidated Financial Statements.
26 U.S. Bancorp
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<Table>
<Caption>
Other Total
(Dollars in Millions) Common Shares Common Capital Retained Treasury Comprehensive Shareholders'
(Unaudited) Outstanding Stock Surplus Earnings Stock Income Equity
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1999..... 1,928,509,178 $ 19.4 $4,258.6 $10,049.4 $ (224.3) $ (156.6) $ 13,946.5
Net income.................... 2,106.9 2,106.9
Unrealized loss on securities
available for sale........... 123.5 123.5
Reclassification of losses
realized in net income....... (.6) (.6)
Tax benefit................... (44.7) (44.7)
-------------
Total other
comprehensive income... 78.2
Cash dividends declared on
common stock................. (950.4) (950.4)
Issuance of common stock and
treasury shares.............. 20,430,293 1.5 331.3 332.8
Purchase of treasury stock.... (58,633,923) (1,182.2) (1,182.2)
Shares reserved to meet
deferred compensation
obligations.................. 6.8 (6.8) --
Amortization of restricted
stock........................ 1.7 1.7
-----------------------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 2000.... 1,890,305,548 $ 19.4 $4,268.6 $11,205.9 $(1,082.0) $ (78.4) $ 14,333.5
=================================================================================================================================
BALANCE DECEMBER 31, 2000..... 1,902,083,434 $ 19.4 $4,275.6 $11,658.0 $ (880.1) $ 95.5 $ 15,168.4
Net income.................... 1,011.1 1,011.1
Unrealized gain on securities
available for sale........... 530.5 530.5
Unrealized gain on
derivatives.................. 189.7 189.7
Reclassification of gains
realized in net income....... (307.1) (307.1)
Foreign currency translation
adjustment................... (4.1) (4.1)
Tax cost...................... (148.4) (148.4)
-------------
Total other
comprehensive income... 260.6
Cash dividends declared on
common stock................. (1,084.1) (1,084.1)
Issuance of common stock and
treasury shares.............. 68,215,250 .7 1,402.4 27.5 1,430.6
Retirement of treasury
stock........................ (.4) (823.2) 823.6 --
Purchase of treasury stock.... (1,333,140) (32.3) (32.3)
Shares reserved to meet
deferred compensation
obligations.................. .4 (.4) --
Amortization of restricted
stock........................ 62.2 62.2
-----------------------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 2001.... 1,968,965,544 $ 19.7 $4,917.4 $11,585.0 $ (61.7) $ 356.1 $ 16,816.5
=================================================================================================================================
</Table>
See Notes to Consolidated Financial Statements.
U.S. Bancorp 27
CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
Nine Months Ended
September 30,
(Dollars in Millions) -----------------------
(Unaudited) 2001 2000
- ---------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net cash provided by operating activities................ $ 2,324.5 $ 3,667.4
-----------------------
INVESTING ACTIVITIES
Securities
Sales.................................................... 18,491.5 9,228.6
Maturities............................................... 2,701.3 1,587.0
Purchases................................................ (28,454.7) (9,678.2)
Loans
Sales.................................................... 2,599.4 2,268.2
Purchases................................................ (44.0) (592.9)
Net decrease (increase) in loans outstanding................ 3,286.7 (9,520.9)
Net purchases of bank premises and equipment................ (104.2) (117.9)
Acquisitions, net of cash acquired.......................... (740.4) (272.0)
Divestitures of branches.................................... (340.0) (78.2)
Other - net................................................. (125.6) (362.6)
-----------------------
Net cash used in investing activities.................... (2,730.0) (7,538.9)
-----------------------
FINANCING ACTIVITIES
Net change in
Deposits................................................. (5,671.6) 940.3
Short-term borrowings.................................... 3,188.1 1,594.3
Principal payments on long-term debt........................ (6,540.8) (3,853.2)
Proceeds from long-term debt................................ 8,704.3 5,540.5
Issuance of Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts holding solely
the junior subordinated debentures of the parent
company.................................................. 700.0 --
Proceeds from issuance of common stock...................... 127.9 156.6
Repurchase of common stock.................................. (32.3) (1,182.2)
Cash dividends paid......................................... (869.4) (955.1)
-----------------------
Net cash (used in) provided by financing activities...... (393.8) 2,241.2
-----------------------
Change in cash and cash equivalents...................... (799.3) (1,630.3)
Cash and cash equivalents at beginning of period............ 9,131.6 9,257.5
-----------------------
Cash and cash equivalents at end of period............... $ 8,332.3 $ 7,627.2
=======================================================================================
</Table>
See Notes to Consolidated Financial Statements.
28 U.S. Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
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 in accordance
with accounting principles generally accepted in the United States. In the
opinion of management of U.S. Bancorp (the "Company"), all adjustments
(consisting 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
Current Report on Form 8-K dated April 17, 2001, which includes the Company's
restated financial statements and footnotes for the year ended December 31,
2000. The financial statements give effect to the merger of the former U.S.
Bancorp ("USBM") and Firstar Corporation ("Firstar") as discussed in Note 3.
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
Accounting policies for the lines of business are generally the same as
those used in preparation of the consolidated financial statements with respect
to activities specifically attributable to each business line. However, the
preparation of business line results requires management to establish
methodologies to allocate funding costs and benefits, expenses and other
financial elements to each line of business. Table 3 "Line of Business Financial
Performance" on pages 8 and 9 provides details of segment results. This
information is incorporated by reference into these Notes to Consolidated
Financial Statements.
NOTE 2
ACCOUNTING CHANGES
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," as amended, establishes accounting and
reporting standards for all derivative instruments and criteria for designation
and effectiveness of hedging activities. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities on the balance sheet
and measure those instruments at fair value. The changes in the fair value of
the derivatives are recognized currently in earnings unless specific hedge
accounting criteria are met. If the derivative qualifies as a hedge, the
accounting treatment varies based on the type of risk being hedged. The Company
adopted SFAS 133 as of January 1, 2001. Transition adjustments related to
adoption resulted in an after-tax loss of approximately $4.1 million recorded in
net income and an after-tax increase of $5.2 million recorded in other
comprehensive income. The transition adjustments related to adoption were not
material to the Company's financial statements; and although recorded, were not
separately reported in the consolidated statement of income.
ACCOUNTING FOR BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS In
June, 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations" and
Statement of Financial Accounting Standards No. 142, ("SFAS 142") "Goodwill and
Other Intangible Assets" SFAS 141 mandates the purchase method of accounting be
used for all business combinations initiated after June 30, 2001 and establishes
specific criteria for the recognition of intangible assets separately from
goodwill. SFAS 142 addresses the accounting for goodwill and intangible assets
subsequent to their acquisition. The Company is required to adopt SFAS 142 on
January 1, 2002. The most significant changes made by SFAS 142 are that goodwill
and indefinite lived intangible assets will no longer be amortized and will be
tested for impairment at adoption and at least annually, thereafter. Any
impairment changes resulting from the initial adoption would be recognized as a
"cumulative effect of accounting changes" in the income statement. The
amortization provisions of SFAS 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the amortization provisions of SFAS 142 are
effective upon adoption of SFAS 142. The Company has not yet fully determined
the impact that these standards may have on its financial position or results of
operations.
U.S. Bancorp 29
NOTE 3
BUSINESS COMBINATIONS
On February 27, 2001, Firstar and USBM merged in a pooling-of-interests
transaction and accordingly all financial information has been restated to
include the historical information of both companies. Each share of Firstar
stock was converted into and exchanged for one share of the Company's common
stock while each share of USBM stock was converted into and exchanged for 1.265
shares of the Company's common stock. The new Company retained the U.S. Bancorp
name.
On September 20, 1999, Firstar and Mercantile Bancorporation, Inc.,
("Mercantile") merged in a pooling-of-interests transaction and accordingly all
financial information has been restated to include the historical information of
both companies. Each share of Mercantile stock was converted into and exchanged
for 2.091 shares of Firstar common stock.
On July 24, 2001, the Company acquired NOVA Corporation ("NOVA"), a merchant
processor, in a stock and cash transaction valued at approximately $2.1 billion.
The transaction representing total assets of $2.9 billion and total liabilities
of $773 million, was accounted for as a purchase. Included in total assets are
merchant contracts and other intangibles of $650 million and the excess of the
purchase price over identifiable assets ("goodwill") of $1.6 billion.
On September 7, 2001, the Company acquired 20 branches in Southern
California from Pacific Century Bank in a cash transaction. The transaction was
accounted for as a purchase.
In addition to these mergers, the Company has completed several strategic
acquisitions to enhance its presence in certain growth markets and businesses.
The following table summarizes acquisitions by the Company and its acquirees
completed since January 1, 1999, treating Firstar as the original acquiring
company:
<Table>
<Caption>
Goodwill &
Other Cash Paid/ Accounting
(Dollars and Shares in Millions) Date Assets Deposits Intangibles (Received) Shares Issued Method
- --------------------------------------------------------------------------------------------------------------------------------
Pacific Century Bank Branches....... September 2001 $ 570 $ 712 $ 138 $ (40) -- Purchase
NOVA Corporation.................... July 2001 949 -- 1,932 842 56.9 Purchase
U.S. Bancorp........................ February 2001 86,602 51,335 -- -- 952.4 Pooling
First Union Branches................ December 2000 450 1,779 347 (1,123) -- Purchase
Scripps Financial Corporation....... October 2000 650 618 113 -- 9.4 Purchase
Lyon Financial Services, Inc........ September 2000 1,289 -- 124 307 -- Purchase
Oliver-Allen Corporation............ April 2000 280 -- 34 -- 3.3 Purchase
Peninsula Bank...................... January 2000 491 452 71 -- 5.1 Purchase
Western Bancorp..................... November 1999 2,508 2,105 773 -- 35.1 Purchase
Mercantile Bancorporation........... September 1999 35,520 24,334 -- -- 331.8 Pooling
Voyager Fleet Systems, Inc.......... September 1999 43 -- 25 27 -- Purchase
Bank of Commerce.................... July 1999 638 529 269 -- 11.8 Purchase
Mellon Network Services' Electronic
Funds Transfer Processing Unit... June 1999 -- -- 78 170 -- Purchase
Libra Investments, Inc.............. January 1999 33 -- 4 -- 1.3 Purchase
================================================================================================================================
</Table>
30 U.S. Bancorp
Separate results of operations as originally reported on a condensed basis of
Firstar and USBM, for the period prior to the merger were as follows:
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------
(Dollars in Millions) 2000 2000
- -------------------------------------------------------------------------------------------------------
NET INTEREST INCOME
Firstar.................................................. $ 679 $ 2,023
USBM..................................................... 866 2,573
---------------------------------------
Total................................................. $ 1,545 $ 4,596
=======================================
NET INCOME
Firstar.................................................. $ 309 $ 934
USBM..................................................... 401 1,173
---------------------------------------
Total................................................. $ 710 $ 2,107
=======================================
<Caption>
September 30,
2000
-----------------
TOTAL ASSETS AT PERIOD END
Firstar.................................................. $ 74,506
USBM..................................................... 86,349
-----------------
Total................................................. $ 160,855
=======================================================================================================
</Table>
NOTE 4
MERGER AND RESTRUCTURING-RELATED ITEMS
The Company recorded merger and restructuring-related items of $1,125.8 million
in the first nine months of 2001. These charges were primarily related to the
merger of Firstar and USBM. Other merger and restructuring-related charges in
2001 were related to both companies various prior acquisitions and included
primarily system conversion costs and integration costs associated with
consolidating redundant operations.
The components of the merger and restructuring-related items are shown below:
<Table>
<Caption>
Nine Months Ended
September 30, 2001
----------------------------------------------------
Piper
(Dollars in Millions) USBM NOVA Restructuring Other* Total
- --------------------------------------------------------------------------------------------------------------------
Severance................................................... $ 244.2 $21.5 $ 25.0 $22.1 $ 312.8
Systems conversions......................................... 124.1 3.0 -- 21.4 148.5
Asset writedowns and lease terminations..................... 97.8 39.3 20.6 6.2 163.9
Charitable contributions.................................... 76.0 -- -- -- 76.0
Balance sheet restructurings................................ 480.2 -- -- -- 480.2
Branch sale gain............................................ (62.2) -- -- -- (62.2)
Other merger-related charges................................ 75.2 21.4 -- 4.6 101.2
----------------------------------------------------
Total....................................................... $1,035.3 $85.2 $ 45.6 $54.3 $1,220.4
====================================================================================================================
</Table>
<Table>
<Caption>
Piper
(Dollars in Millions) USBM NOVA Restructuring Other* Total
- --------------------------------------------------------------------------------------------------------------------
Provision for credit losses................................. $ 382.2 $ -- $ -- $ -- $ 382.2
Non-interest income......................................... (62.2) -- -- -- (62.2)
Non-interest expenses....................................... 715.3 3.0 45.6 41.9 805.8
----------------------------------------------------
Merger-related charges................................ 1,035.3 3.0 45.6 41.9 1,125.8
Balance sheet recognition................................... -- 82.2 -- 12.4 94.6
----------------------------------------------------
Merger-related items.................................. $1,035.3 $85.2 $ 45.6 $54.3 $1,220.4
====================================================================================================================
</Table>
*Other includes merger and restructuring items related to the merger of Firstar
and Mercantile, the First Union branch acquisition, and the Pacific Century
Bank branch acquisition.
The Company determines merger-related charges and related accruals based on
its integration strategy and formulated plans. These plans are established as of
the acquisition date and regularly evaluated during the integration process.
U.S. Bancorp 31
Severance charges include the cost of severance, other benefits and
outplacement costs associated with the termination of employees primarily in
branch offices and centralized corporate support and data processing functions.
The severance amounts are determined based on the Company's existing severance
pay programs and are paid out over a benefit period of up to two years from the
time of termination. It is anticipated that approximately 2,770 employees will
be included in the Firstar and USBM merger and restructuring-related severance
charges. The adequacy of the accrued severance liability is reviewed
periodically taking into consideration actual payments and remaining projected
payment liabilities. Adjustments are made to increase or decrease these accruals
as needed. Reversals of expenses can reflect a lower utilization of benefits by
affected staff, changes in initial assumptions as a result of subsequent mergers
and alterations of business plans.
Systems conversion costs are recorded as incurred and are associated with
the preparation and mailing of numerous customer communications for the
acquisitions and conversion of customer accounts, printing and distribution of
training materials and policy and procedure manuals, outside consulting fees,
and other expenses related to the system conversions and the integration of
acquired branches and operations.
Asset writedowns and lease terminations represent lease termination costs
and impairment of assets for redundant office space, branches that will be
vacated and equipment disposed of as part of the integration plan.
In connection with the merger of Firstar and USBM, the Company made
charitable contributions of $76.0 million to reaffirm the Company's commitment
to its markets or as part of specific conditions necessary to achieve regulatory
approval. These contributions were funded up-front and represent costs that
would not have been incurred had the merger not occurred. Charitable
contributions are charged to merger and restructuring expenses or considered in
determining the acquisition cost at the applicable closing date.
Balance sheet restructuring charges of $480.2 million are comprised of a
$201.3 million provision associated with the Company's integration of certain
small business products and management's decision to discontinue an unsecured
small business product of USBM; $90.0 million of charge-offs to align risk
management practices, align charge-off policies and to expedite the Company's
transition out of a segment of the health care industry; $76.6 million of losses
related to retail loan portfolio sales of USBM; $45.4 million of charges
associated with the Company's decision to discontinue business operations of
U.S. Bancorp Libra; $15.0 million of charges related to the planned disposition
of certain equity investments that no longer align with the long-term strategy
of the Company; and, $51.9 million to restructure a co-branding relationship of
USBM. The alignment of risk management practice included a write-down of several
large commercial loans, loans (originally held separately by both Firstar and
USBM), primarily taken to allow the Company to exit or reduce these credits to
conform with the credit exposure policy of the combined entity.
Other merger-related expenses of $101.2 million primarily include investment
banking fees, legal fees, and stock registration fees associated with the merger
of Firstar and USBM and the acquisition of NOVA Corporation.
The following table presents a summary of activity with respect to the
Company's significant acquisition and restructuring related accruals:
<Table>
<Caption>
Piper
(Dollars in Millions) USBM NOVA Jaffray Other Total
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000................................ $ -- $ -- $ 15.0 $ 34.8 $ 49.8
Provision charged to operations.......................... 1,035.3 3.0 45.6 41.9 1,125.8
Additions related to purchase acquisitions............... -- 82.2 -- 12.4 94.6
Cash outlays............................................. (413.3) (14.2) (14.5) (55.0) (497.0)
Non-cash writedowns and other............................ (497.4) -- (9.3) 8.7 (498.0)
-----------------------------------------------
Balance at September 30, 2001............................... $ 124.6 $ 71.0 $ 36.8 $ 42.8 $ 275.2
===============================================================================================================
</Table>
32 U.S. Bancorp
The following table presents a summary of activity with respect to the
merger of Firstar and USBM:
<Table>
<Caption>
Severance
and other Lease
employee- cancellation
related Investment and related Total Systems
(Dollars in Millions) costs banker fees writeoffs Other* accruable costs Total
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000........... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Provision charged to operating
expense............................ 123.6 60.6 23.6 296.0 503.8 19.3 523.1
Cash outlays........................ (61.4) (37.5) (.2) (76.0) (175.1) (19.3) (194.4)
Noncash writedowns and other........ -- -- (9.2) (220.0) (229.2) -- (229.2)
--------------------------------------------------------------------------------------
Balance at March 31, 2001.............. $ 62.2 $ 23.1 $ 14.2 $ -- $ 99.5 $ -- $ 99.5
Provision charged to operating
expense............................ 98.1 1.0 7.4 212.5 319.0 53.3 372.3
Cash outlays........................ (32.1) (23.3) (.6) -- (56.0) (53.3) (109.3)
Noncash writedowns and other........ -- -- (.8) (139.9) (140.7) -- (140.7)
--------------------------------------------------------------------------------------
Balance at June 30, 2001............... $ 128.2 $ .8 $ 20.2 $ 72.6 $ 221.8 $ -- $ 221.8
Provision charged to operating
expense............................ 22.5 1.3 4.6 59.6 88.0 51.9 139.9
Cash outlays........................ (52.8) (1.3) (1.7) (1.9) (57.7) (51.9) (109.6)
Noncash writedowns and other........ -- -- (0.2) (127.3) (127.5) -- (127.5)
--------------------------------------------------------------------------------------
Balance at September 30, 2001.......... $ 97.9 $ .8 $ 22.9 $ 3.0 $ 124.6 $ -- $ 124.6
=================================================================================================================================
</Table>
*Other accruable merger and restructuring-related charges included charitable
contributions of $76.0 million, balance sheet restructuring of $418.0 million
and other of $74.1 million.
The components of the merger and restructuring-related accrual were as follows:
<Table>
<Caption>
September 30, December 31,
(Dollars in Millions) 2001 2000
- ---------------------------------------------------------------------------------------------
Severance................................................... $ 143.7 $ 13.8
Other employee-related costs................................ 8.7 6.8
Lease termination and facility costs........................ 69.0 8.4
Contracts and system writeoffs.............................. 25.2 7.4
Investment banker fees...................................... 16.0 --
Other....................................................... 12.6 13.4
-----------------------------
Total................................................. $ 275.2 $ 49.8
=============================================================================================
</Table>
The merger and restructuring-related accrual by significant acquisition or
business restructuring was as follows:
<Table>
<Caption>
September 30, December 31,
(Dollars in Millions) 2001 2000
- ------------------------------------------------------------------------------------------
USBM........................................................ $ 124.6 $ --
NOVA Corporation............................................ 71.0 --
Piper Jaffray............................................... 36.8 15.0
Pacific Century Bank Branches............................... 11.8 --
Scripps Financial Corporation............................... 4.8 4.6
Western Bancorp............................................. 3.3 5.1
Peninsula Bank.............................................. 2.8 3.0
Lyon Financial Services, Inc. .............................. 2.5 2.7
Northwest Bancshares, Inc. ................................. 1.7 2.3
Bank of Commerce............................................ 1.0 4.1
Other acquisitions.......................................... 14.9 13.0
----------------------------
Total................................................. $ 275.2 $ 49.8
==========================================================================================
</Table>
In connection with the merger of Firstar and USBM, management estimates the
Company will incur additional pre-tax merger-related charges of $365.2 million,
including approximately $134.6 million in 2001 and $230.6 million in 2002. These
are currently estimated to include $222.4 million for conversions of systems and
consolidations of operations, $71.1 million in occupancy and equipment charges
related to the elimination of duplicate facilities and write-off of equipment,
and $71.7 million related to branch sales and other merger-related charges.
U.S. Bancorp 33
In addition to the estimated expenses of the Firstar and USBM merger, the
Company expects to incur an additional $130.5 million, pretax, of merger and
restructuring-related expenses, primarily in 2002, in connection with its other
acquisitions and business restructurings.
NOTE 5
SECURITIES
The detail of the amortized cost and fair value of held-to-maturity and
available-for-sale securities consisted of the following:
<Table>
<Caption>
September 30, 2001 December 31, 2000
--------------------------------------------
Amortized Fair Amortized Fair
(Dollars in Millions) Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------
Held-to-maturity
Mortgage-backed securities............................... $ 27 $ 27 $ 36 $ 36
Obligations of state and political subdivisions.......... 252 264 216 221
--------------------------------------------
Total held-to-maturity securities........................ $ 279 $ 291 $ 252 $ 257
============================================================================================================
Available-for-sale
U.S. Treasuries and agencies............................. $ 1,537 $ 1,563 $ 1,600 $ 1,624
Mortgage-backed securities............................... 21,611 21,972 11,800 11,893
Obligations of state and political subdivisions.......... 996 1,024 2,370 2,409
Other.................................................... 827 790 1,472 1,464
--------------------------------------------
Total available-for-sale securities...................... $24,971 $25,349 $17,242 $17,390
============================================================================================================
</Table>
NOTE 6
LOANS
The composition of the loan portfolio was as follows:
<Table>
<Caption>
September 30, December 31,
(Dollars in Millions) 2001 2000
- -------------------------------------------------------------------------------------------
COMMERCIAL
Commercial............................................... $ 41,333 $ 47,041
Lease financing.......................................... 5,926 5,776
-----------------------------
Total commercial...................................... 47,259 52,817
COMMERCIAL REAL ESTATE
Commercial mortgages..................................... 18,861 19,466
Construction and development............................. 6,674 6,977
-----------------------------
Total commercial real estate.......................... 25,535 26,443
RESIDENTIAL MORTGAGES....................................... 6,279 7,753
RETAIL
Credit card.............................................. 5,700 6,012
Retail leasing........................................... 4,708 4,153
Other retail............................................. 25,086 25,187
-----------------------------
Total retail.......................................... 35,494 35,352
-----------------------------
Total loans........................................... $ 114,567 $ 122,365
===========================================================================================
</Table>
Loans are presented net of unearned interest which amounted to $1.7 billion
at September 30, 2001, and December 31, 2000.
34 U.S. Bancorp
NOTE 7
DEPOSITS
The composition of deposits was as follows:
<Table>
<Caption>
September 30, December 31,
(Dollars in Millions) 2001 2000
- ---------------------------------------------------------------------------------------------
Non interest-bearing deposits............................... $ 27,074 $ 26,633
Interest-bearing deposits
Savings accounts......................................... 4,631 4,516
Interest checking........................................ 13,881 13,982
Money market accounts.................................... 25,192 23,899
Time certificates of deposit less than $100,000............. 22,170 25,780
Time deposits greater than $100,000
Domestic................................................. 9,454 11,221
Foreign.................................................. 1,403 3,504
-----------------------------
Total deposits........................................ $ 103,805 $ 109,535
=============================================================================================
<Caption>
Percent of deposits
- ---------------------------------------------------------------------------------------------
Non interest-bearing deposits............................... 26.1% 24.3%
Interest-bearing deposits
Savings accounts......................................... 4.4 4.1
Interest checking........................................ 13.4 12.8
Money market accounts.................................... 24.3 21.8
Time certificates of deposit less than $100,000............. 21.4 23.5
Time deposits greater than $100,000
Domestic................................................. 9.1 10.3
Foreign.................................................. 1.3 3.2
-----------------------------
Total deposits........................................ 100.0% 100.0%
=============================================================================================
</Table>
NOTE 8
LONG-TERM DEBT
Long-term debt (debt with original maturities of more than one year) consisted
of the following:
<Table>
<Caption>
September 30, December 31,
(Dollars in Millions) 2001 2000
- ---------------------------------------------------------------------------------------------
Fixed-rate subordinated notes (5.70% to 8.35%) -- maturities
to June 2026............................................... $ 5,921 $ 4,458
Medium-term notes (3.45% to 7.50%) -- maturities to December
2004....................................................... 3,349 4,634
Senior contingent convertible debt -- due August 6, 2021.... 1,100 --
Federal Home Loan Bank advances (primarily 2.51% to
8.25%) -- maturities to October 2026....................... 9,177 2,753
Bank notes (2.74% to 6.57%) -- maturities to November
2005....................................................... 6,251 9,300
Euro medium-term notes -- due April 13, 2004................ 400 400
Other....................................................... 683 331
-----------------------------
Total.................................................... $ 26,881 $ 21,876
=============================================================================================
</Table>
In July 2001, the Company issued $1.5 billion of fixed-rate subordinated
notes due August 1, 2011. The interest rate is 6.375% per annum.
In August 2001, the Company issued $1.1 billion of senior contingent
convertible debt due August 6, 2021. The interest rate is 1.50% per annum. The
debt would be convertible into the Company's common stock only if the Company's
stock price increases to the contractual price. The convertible strike price
decreases over the term of the bond. The notes are callable on August 6, 2003
and putable in August 2002 and specified dates thereafter.
U.S. Bancorp 35
NOTE 9
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY THE JUNIOR SUBORDINATED DEBENTURES OF
THE PARENT COMPANY
The following table is a summary of the Trust Preferred Securities as of
September 30, 2001:
<Table>
<Caption>
Trust
Preferred
Issuance Securities Debentures Rate Rate at Maturity Redemption
Issuance Trust (Dollars in Millions) Date Amount Amount Type* 9/30/01 Date Date**
- ---------------------------------------------------------------------------------------------------------------------------------
USB Capital III........................................ 05/2001 $ 700 $ 722 Fixed 7.75% 05/2031 05/04/2006
USB Capital II......................................... 03/1998 350 361 Fixed 7.20% 04/2028 04/01/2003
USB Capital I.......................................... 12/1996 300 309 Fixed 8.27% 12/2026 12/15/2006
FBS Capital I.......................................... 11/1996 300 309 Fixed 8.09% 11/2026 11/15/2006
Star Capital I......................................... 06/1997 150 155 Variable 3.92% 06/2027 06/15/2007
Firstar Capital Trust I................................ 12/1996 150 155 Fixed 8.32% 12/2026 12/15/2006
Mercantile Capital Trust I............................. 02/1997 150 155 Variable 4.53% 02/2027 02/01/2007
=================================================================================================================================
</Table>
*The variable rate Trust Preferred Securities re-price quarterly.
**Earliest date of redemption.
On November 1, 2001, the Company issued an additional $500 million of Trust
Preferred Securities through an issuance by USB Capital IV, a wholly owned
subsidiary grantor trust. The debentures, in the amount of $515 million, bear
interest at an annual rate of 7.35%, have a redemption date of November 1, 2006
and mature on November 1, 2031.
NOTE 10
INCOME TAXES
The components of income tax expense were:
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------
(Dollars in Millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------
FEDERAL
Current..................................................... $(71.6) $271.1 $253.5 $ 773.7
Deferred.................................................... 89.2 42.8 210.3 204.0
---------------------------------------
Federal income tax....................................... 17.6 313.9 463.8 977.7
STATE
Current..................................................... (7.9) 49.5 43.4 131.8
Deferred.................................................... 12.2 7.5 27.7 26.4
---------------------------------------
State income tax......................................... 4.3 57.0 71.1 158.2
---------------------------------------
Total income tax expense................................. $ 21.9 $370.9 $534.9 $1,135.9
=====================================================================================================
</Table>
The reconciliation between income tax expense and the amount computed by
applying the statutory federal income tax rate was as follows:
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------
(Dollars in Millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------
Tax at statutory rate (35%)................................. $ 21.2 $378.5 $541.1 $1,135.0
State income tax, at statutory rates, net of federal tax
benefit.................................................... 2.9 28.8 46.3 102.8
Tax effect of
Tax-exempt interest, net................................. (8.3) (19.8) (31.5) (48.9)
Amortization of nondeductible goodwill................... 19.5 23.1 65.1 68.0
Tax credits.............................................. (17.5) (14.3) (52.5) (41.1)
Nondeductible merger charges............................. 10.5 -- 59.5 .5
Sale of preferred minority interest...................... -- -- -- (50.0)
Other items.............................................. (6.4) (25.4) (93.1) (30.4)
---------------------------------------
Applicable income taxes..................................... $ 21.9 $370.9 $534.9 $1,135.9
=====================================================================================================
</Table>
The Company's net deferred tax liability was $990.6 million at September 30,
2001, and $512.8 million at December 31, 2000.
36 U.S. Bancorp
NOTE 11
SHAREHOLDERS' EQUITY
At December 31, 2000, the Company had authority to issue 2 billion shares of
common stock and 10 million shares of preferred stock. In connection with the
merger of Firstar and USBM, on February 27, 2001, the number of authorized
common shares for the Company was increased to 4 billion. Additionally, on
February 27, 2001, in connection with the merger of Firstar and USBM, the par
value of the Company's common stock was reduced from $1.25 per share to $.01 per
share. The Company had 1,969.0 million and 1,902.1 million shares of common
stock outstanding at September 30, 2001, and December 31, 2000, respectively.
All treasury shares, except those acquired to meet obligations arising from
deferred compensation plans, were retired effective February 27, 2001.
The stock repurchase programs of Firstar and USBM were rescinded on October
4, 2000, and January 17, 2001, respectively, in connection with their merger. No
shares were repurchased by Firstar or USBM from those dates to February 27,
2001, nor were any shares repurchased by the Company from February 27, 2001, to
June 30, 2001. On July 17, 2001, the Company's Board of Directors authorized the
repurchase of up to 56.4 million shares of the Company's common stock to replace
shares issued in connection with the July 24, 2001, acquisition of NOVA
Corporation. The stock repurchase authorization will expire on July 23, 2003.
Under this program the Company has repurchased 1.3 million shares for $32.3
million in the third quarter of 2001. The Company also entered into forward
contracts to repurchase the majority of remaining shares authorized for
repurchase. These contracts include agreements to repurchase 18.4 million shares
in the fourth quarter of 2001, 17.8 million shares in the first quarter of 2002
and 8.9 million shares in the second quarter of 2002.
NOTE 12
MORTGAGE SERVICING RIGHTS
Changes in capitalized mortgage servicing rights are summarized as follows:
<Table>
<Caption>
Nine Months Ended Year Ended
September 30, December 31,
---------------------------------
(Dollars in Millions) 2001 2000
- -------------------------------------------------------------------------------------------------
Balance at beginning of period.............................. $ 229 $ 213
Rights purchased............................................ 25 16
Rights capitalized.......................................... 211 137
Amortization................................................ (31) (35)
Rights sold................................................. (73) (101)
Impairment.................................................. (35) (1)
---------------------------------
Balance at end of period.................................... $ 326 $ 229
=================================================================================================
</Table>
The fair value of capitalized mortgage servicing rights was $326 million at
September 30, 2001, and $245 million at December 31, 2000. At September 30,
2001, the reduction in the current fair value of mortgage servicing rights to
immediate 25 and 50 basis point adverse interest rate changes would be
approximately $36 million and $67 million, respectively. The Company has
purchased principal-only securities that act as a partial economic hedge to this
possible adverse interest rate change. The Company serviced $20.8 billion and
$17.0 billion of mortgage loans for other investors as of September 30, 2001,
and December 31, 2000, respectively.
U.S. Bancorp 37
NOTE 13
EARNINGS PER SHARE
The components of earnings per share were:
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------
(Dollars and Shares in Millions, Except Per Share Data) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------
Net income.................................................. $ 38.7 $ 710.3 $1,011.1 $2,106.9
============================================
Weighted average common shares outstanding.................. 1,952.7 1,895.6 1,919.9 1,909.5
Net effect of the assumed purchase of stock based on the
treasury stock method for options and stock plans........ 12.7 11.5 13.0 12.6
--------------------------------------------
Dilutive common shares outstanding.......................... 1,965.4 1,907.1 1,932.9 1,922.1
============================================
Earnings per share
Basic.................................................... $.02 $.37 $.53 $1.10
Diluted.................................................. $.02 $.37 $.52 $1.10
============================================================================================================
</Table>
NOTE 14
SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CASH FLOWS Listed below are supplemental disclosures
to the Consolidated Statement of Cash Flows:
<Table>
<Caption>
Nine Months Ended
September 30,
---------------------
(Dollars in Millions) 2001 2000
- -------------------------------------------------------------------------------------
Acquisitions and divestitures
Assets acquired.......................................... $1,150.5 $ 1,732.6
Liabilities assumed...................................... (508.9) (1,202.4)
---------------------
Net................................................... $ 641.6 $ 530.2
=====================================================================================
</Table>
MONEY MARKET INVESTMENTS are included with cash and due from banks as part of
cash and cash equivalents. Money market investments consisted of the following:
<Table>
<Caption>
September 30, December 31,
(Dollars in Millions) 2001 2000
- ---------------------------------------------------------------------------------------------
Interest-bearing deposits................................... $ 101 $ 82
Federal funds sold.......................................... 180 203
Securities purchased under agreements to resell............. 482 372
-----------------------------
Total money market investments........................... $ 763 $ 657
=============================================================================================
</Table>
TRANSFERS AND SERVICING OF FINANCIAL ASSETS The Company transferred $50 billion
of short-term, high quality, low yielding commercial loans into the conduit,
(Stellar Funding Group, Inc.), in the first nine months of 2001. The amount of
these transfers are reported on a gross basis representing new participations
and the renewal of participations. The amount of loan transfers net of
repayments was approximately $4.8 billion.
38 U.S. Bancorp
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
<Table>
<Caption>
For the Three Months Ended September 30,
2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Yields Yields % Change
(Dollars in Millions) and and Average
(Unaudited) Balance Interest Rates Balance Interest Rates Balance
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Money market investments.............. $ 659 $ 6.4 3.80% $ 895 $ 14.5 6.45% (26.4)%
Trading account securities............ 703 11.5 6.58 866 14.0 6.46 (18.8)
Taxable securities.................... 21,661 321.2 5.93 14,236 249.4 7.01 52.2
Nontaxable securities................. 1,290 22.7 7.02 2,769 51.0 7.37 (53.4)
Loans held for sale................... 2,482 53.9 8.69 1,623 32.7 8.06 52.9
Loans
Commercial......................... 49,623 865.1 6.95 51,137 1,116.3 8.70 (3.0)
Commercial real estate............. 26,058 495.5 7.50 26,214 582.0 8.83 (.6)
Residential mortgages.............. 6,634 120.3 7.36 8,971 171.3 7.64 (26.1)
Retail............................. 35,099 808.2 9.16 33,068 845.8 10.18 6.1
------------------ --------------------
Total loans..................... 117,414 2,289.1 7.75 119,390 2,715.4 9.06 (1.7)
------- --------
Other earning assets.................. 1,619 24.3 5.97 1,905 37.8 7.90 (15.0)
Allowance for credit losses........ 1,798 1,795 .2
------------------ --------------------
Total earning assets*........... 145,828 2,729.1 7.44 141,684 3,114.8 8.76 2.9
Other assets.......................... 23,421 19,363 21.0
------- --------
Total assets.................... $167,451 $159,252 5.1
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits.......... $ 25,106 $ 23,622 6.3
Interest-bearing deposits
Interest checking.................. 13,842 44.7 1.28 12,834 68.9 2.13 7.9
Money market accounts.............. 25,168 164.3 2.59 22,518 256.0 4.52 11.8
Savings accounts................... 4,587 10.5 .91 4,886 17.5 1.42 (6.1)
Time certificates of deposit less
than $100,000..................... 22,641 295.9 5.18 25,826 376.5 5.80 (12.3)
Time deposits greater than
$100,000.......................... 13,887 154.6 4.42 14,364 235.1 6.51 (3.3)
------------------ --------------------
Total interest-bearing
deposits....................... 80,125 670.0 3.32 80,428 954.0 4.72 (.4)
Short-term borrowings................. 12,662 122.9 3.85 11,837 191.2 6.42 7.0
Long-term debt........................ 25,058 276.7 4.39 23,344 403.9 6.88 7.3
Company-obligated mandatorily
redeemable preferred securities.... 2,088 39.7 7.53 1,400 31.5 8.95 49.1
------------------ --------------------
Total interest-bearing
liabilities.................... 119,933 1,109.3 3.67 117,009 1,580.6 5.38 2.5
Other liabilities..................... 5,467 4,213 29.8
Shareholders' equity.................. 16,945 14,408 17.6
------- --------
Total liabilities and
shareholders' equity........... $167,451 $159,252 5.1%
======== ======== =============
Net interest income................... $1,619.8 $1,534.2
======== ========
Gross interest margin................. 3.77% 3.38%
====== ======
Gross interest margin without
taxable-equivalent increments...... 3.74 3.32
====== ======
PERCENT OF EARNING ASSETS
Interest income....................... 7.44% 8.76%
Interest expense...................... 3.02 4.44
====== ======
Net interest margin................... 4.42 4.32
====== ======
Net interest margin without
taxable-equivalent increments........ 4.39% 4.26%
=============================================================================================================
</Table>
Interest and rates are presented on a fully taxable-equivalent basis under a tax
rate of 35 percent.
Interest income and rates on loans include loan fees. Nonaccrual loans are
included in average loan balances.
*Before deducting the allowance for credit losses and excluding the unrealized
gain (loss) on available-for-sale securities.
U.S. Bancorp 39
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
<Table>
<Caption>
For the Nine Months Ended September 30,
2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Yields Yields % Change
(Dollars in Millions) and and Average
(Unaudited) Balance Interest Rates Balance Interest Rates Balance
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Money market investments.............. $ 676 $ 22.6 4.46% $ 983 $ 43.1 5.86% (31.2)%
Trading account securities............ 736 42.7 7.74 774 43.0 7.40 (4.9)
Taxable securities.................... 18,725 862.3 6.14 14,697 753.8 6.84 27.4
Nontaxable securities................. 1,987 108.1 7.25 2,751 157.7 7.64 (27.8)
Loans held for sale................... 1,634 96.4 7.87 1,376 80.0 7.75 18.8
Loans
Commercial......................... 51,235 2,907.0 7.60 49,276 3,126.3 8.49 4.0
Commercial real estate............. 26,287 1,570.1 7.99 25,850 1,686.6 8.72 1.7
Residential mortgages.............. 7,143 403.9 7.54 9,857 559.0 7.56 (27.5)
Retail............................. 34,870 2,514.7 9.64 32,009 2,416.5 10.08 8.9
------------------ --------------------
Total loans..................... 119,535 7,395.7 8.27 116,992 7,788.4 8.89 2.2
------- --------
Other earning assets.................. 1,708 82.4 6.45 1,897 112.2 7.91 (10.0)
Allowance for credit losses........ 1,794 1,767 1.5
------------------ --------------------
Total earning assets*........... 145,001 8,610.2 7.93 139,470 8,978.2 8.59 4.0
Other assets.......................... 21,941 19,426 12.9
------- --------
Total assets.................... $165,148 $157,129 5.1
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits.......... $ 24,408 $ 23,792 2.6
Interest-bearing deposits
Interest checking.................. 13,805 170.3 1.65 13,029 199.1 2.04 6.0
Money market accounts.............. 24,815 609.2 3.28 22,561 728.3 4.31 10.0
Savings accounts................... 4,539 34.8 1.02 5,160 58.0 1.50 (12.0)
Time certificates of deposit less
than $100,000..................... 23,959 985.6 5.50 25,905 1,075.0 5.54 (7.5)
Time deposits greater than
$100,000.......................... 14,137 536.8 5.08 12,464 582.7 6.24 13.4
------------------ --------------------
Total interest-bearing
deposits....................... 81,255 2,336.7 3.84 79,119 2,643.1 4.46 2.7
Short-term borrowings................. 12,293 433.5 4.72 12,192 561.0 6.15 .8
Long-term debt........................ 24,304 957.4 5.26 22,413 1,112.1 6.63 8.4
Company-obligated mandatorily
redeemable preferred securities.... 1,774 102.7 7.74 1,400 89.2 8.51 26.7
------------------ --------------------
Total interest-bearing
liabilities.................... 119,626 3,830.3 4.28 115,124 4,405.4 5.11 3.9
Other liabilities..................... 5,102 3,956 29.0
Shareholders' equity.................. 16,012 14,257 12.3
------- --------
Total liabilities and
shareholders' equity........... $165,148 $157,129 5.1%
======== ======== =============
Net interest income................... $4,779.9 $4,572.8
======== ========
Gross interest margin................. 3.65% 3.48%
====== ======
Gross interest margin without
taxable-equivalent increments...... 3.61 3.42
====== ======
PERCENT OF EARNING ASSETS
Interest income....................... 7.93% 8.59%
Interest expense...................... 3.53 4.21
====== ======
Net interest margin................... 4.40 4.38
====== ======
Net interest margin without
taxable-equivalent increments........ 4.36% 4.32%
=============================================================================================================
</Table>
Interest and rates are presented on a fully taxable-equivalent basis under a tax
rate of 35 percent.
Interest income and rates on loans include loan fees. Nonaccrual loans are
included in average loan balances.
*Before deducting the allowance for credit losses and excluding the unrealized
gain (loss) on available-for-sale securities.
40 U.S. Bancorp
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
3.1 Restated Certificate of Incorporation. Filed as Exhibit 3.1 to report on
Form 10-K for the year end December 31, 2000.
3.2 Restated Bylaws. Filed as Exhibit 3.2 to report on Form 10-K for the
year end December 31, 2000.
12 Computation of Ratio of Earnings to Fixed Charges
(B) REPORTS ON FORM 8-K
During the three months ended September 30, 2001, the Company filed the
following Current Reports on Form 8-K:
- Form 8-K dated July 17, 2001, relating to the Company's second quarter,
2001 earning results.
- Form 8-K dated July 24, 2001, relating to the registrant's announced plan
to repurchase 56.4 million shares and closure of the NOVA transaction.
- Form 8-K dated July 31, 2001, relating to the Company raising $1.1 billion
through the offering of the registrant's zero-coupon convertible senior
notes.
- Form 8-K dated October 17, 2001, relating to the Company's third quarter,
2001 earning results.
- Form 8-K dated October 31, 2001, relating to the public offering of
$500,000,000 of Trust Preferred Securities.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
U.S. BANCORP
By: /s/ TERRANCE R. DOLAN
------------------------------------------
Terrance R. Dolan
Executive Vice President and Controller
(Chief Accounting Officer and Duly
DATE: November 14, 2001 Authorized Officer)
U.S. Bancorp 41
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------
(Dollars in Millions) 2001 2001
- -------------------------------------------------------------------------------------------------------
EARNINGS
1. Net income.............................................. $ 38.7 $ 1,011.1
2. Applicable income taxes................................. 21.9 534.9
---------------------------------------
3. Net income before taxes (1 + 2)......................... $ 60.6 $ 1,546.0
=======================================
4. Fixed charges:
a. Interest expense excluding interest on deposits...... $ 439.3 $ 1,493.6
b. Portion of rents representative of interest and
amortization of debt expense.............................. 20.9 66.2
---------------------------------------
c. Fixed charges excluding interest on deposits (4a +
4b)....................................................... 460.2 1,559.8
d. Interest on deposits................................. 670.0 2,336.7
---------------------------------------
e. Fixed charges including interest on deposits (4c +
4d)....................................................... $ 1,130.2 $ 3,896.5
=======================================
5. Amortization of interest capitalized.................... $ -- $ --
6. Earnings excluding interest on deposits (3 + 4c + 5).... 520.8 3,105.8
7. Earnings including interest on deposits (3 + 4e + 5).... 1,190.8 5,442.5
8. Fixed charges excluding interest on deposits (4c)....... 460.2 1,559.8
9. Fixed charges including interest on deposits (4e)....... 1,130.2 3,896.5
RATIO OF EARNINGS TO FIXED CHARGES
10. Excluding interest on deposits (line 6/line 8).......... 1.13 1.99
11. Including interest on deposits (line 7/line 9).......... 1.05 1.40
=======================================================================================================
</Table>
- --------------------------------------------------------------------------------
First Class
U.S. Postage
PAID
Permit No. 2440
Minneapolis, MN
- --------------------------------------------------------------------------------
CORPORATE INFORMATION
EXECUTIVE OFFICES
U.S. Bancorp
U.S. Bank Place
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
COMMON STOCK TRANSFER AGENT AND REGISTRAR
U.S. Bank, N.A., a subsidiary of U.S. Bancorp, 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. Inquiries
related to shareholder records, stock transfers, changes of ownership, changes
of address and dividend payment should be sent to the transfer agent at the
following address:
U.S. Bank, N.A.
1555 North River Center Drive, Suite 301
Milwaukee, WI 53212
Phone: 1-800-637-7549
Fax: 414-276-4226
Email: firstarinvestorservice@firstar.com
INDEPENDENT PUBLIC ACCOUNTANTS
The independent public accountants of U.S. Bancorp are
PricewaterhouseCoopers LLP.
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.
DIVIDEND REINVESTMENT PLAN
U.S. Bancorp shareholders can take advantage of a plan that provides automatic
reinvestment of dividends and/or optional cash purchase of additional shares of
U.S. Bancorp common stock. For more information, please contact:
U.S. Bank, N.A.
Dividend Reinvestment Department
1555 North River Center Drive, Suite 301
Milwaukee, WI 53212
or call 1-800-637-7549
INVESTMENT COMMUNITY CONTACTS
Howell D. McCullough
Senior Vice President, Investor Relations
612-973-2261
howell.mccullough@usbank.com
Judith T. Murphy
Vice President, Investor Relations
612-973-2264
judith.murphy@usbank.com
[US BANCORP LOGO(R)]
For product and service information, locations and other information about our
U.S. Bank and Firstar banks and lines of business:
www.usbank.com
www.firstar.com
FINANCIAL INFORMATION
U.S. Bancorp news and financial results are available through the company's web
site and mail.
Web site. For information about U.S. Bancorp, including news and financial
results and online annual reports, access our home page on the Internet at
www.usbank.com
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:
U.S. Bancorp Investor Relations
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
612-973-2263
corporaterelations@usbank.com
MEDIA REQUESTS
Steve Dale
Senior Vice President, Media Relations
612-973-0898
steve.dale@firstar.com
DIVERSITY
U.S. Bancorp and its subsidiaries are committed to developing and maintaining a
workplace that reflects the diversity of the communities we serve. We support a
work environment where individual differences are valued and respected and where
each individual who shares the fundamental values of the company has an
opportunity to contribute and grow based on individual merit.
EQUAL EMPLOYMENT OPPORTUNITY/AFFIRMATIVE ACTION
U.S. Bancorp and its subsidiaries are committed to providing Equal Employment
Opportunity to all employees and applicants for employment. In keeping with
this, employment decisions are made based upon job-related knowledge, skills and
abilities rather that race, color, religion, national origin, gender, age,
marital status, disability, veteran status, sexual orientation, gender identity
or any other characteristic protected by law. The corporation complies with
municipal, state, and federal Fair Employment Laws, including regulations
applying to federal contractors.
COMMUNITY ANNUAL REPORT
To request copies of the U.S. Bancorp Community Annual Report, published
separately from our U.S. Bancorp Annual Report and Form 10-K, please call U.S.
Bancorp Community Development at 612-973-4996. To request copies of the Firstar
Community Partnership Report, please call Firstar Community Development at
513-632-4030.
U.S. Bancorp, including each of its subsidiaries, is an Equal Opportunity
Employer and a Drug-Free Workplace.
This report has been produced on recycled paper.(RECYCLING LOGO)